Professional Documents
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Page 1 of 118
Equity & Trusts Revision Notes
Express Trusts
Once constituted, (i) cant be revoked unless S reserves such power [even before constitution if B
provided consideration for declaration of trust, (ii) enforceable only by B against T, (iii) S no longer
owns any interest (iv) trust property would be segregated from Ts general assets
Substantive validity
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Equity & Trusts Revision Notes
Not a sham e.g. for tax evasion; For the benefit of human beneficiaries, or for charitable
purposes but not private purpose; Must not infringe rules of perpetuities (fixed period of 80
years in Hong Kong)
S must have legal capacity and is of sound mind
Trust free from vitiating factors e.g. illegality, fraud, public policy, set up to defraud creditors
Three certainties
1. Certainty of intention (a) whether he intends to create trust (cf other relationships eg
bailment, agency, loans and equitable charges), and (ii) if so, type of disposition
o On (a) whether he will be required to distribute the property for Bs benefit
o Even if (the unsophisticated) settlor is not aware of effects of his word Paul v
Constance (the money is as much yours as mine; both paid joint winnings into acc)
o Should take into account the background and circumstances
o Requires an objective construction of words;
o Use of precatory words eg trust, desire, wish is not conclusive
o Inclined against it in domestic cases in the absence of unambiguous language
o Not sufficient to find intention to impose legally enforceable obligation in Adams
v Kensington (to the absolute use of wifein full confidence that she will do
whats right; found only moral obligation); Jones v Lock (handed cheque to baby
son saying I give this to the baby for himself; no actual endorsement of the cheque
found outright gift and rejected argument on self declaration)
o C.f. Paul v Constance (post- Jones) but Jones principles remain good law
More strained and court more likely to follow Jones v Lock
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Equity & Trusts Revision Notes
Hunter v Moss (trust over 50 of 950 shares)
C.f. Re London Wines for involving intangible assets here
Found identification or segregation not required for all of the shares are identical
hence no uncertainty hence sufficient to declare trust over a specified number of
shares seems to be based on in/tangible distinction
On appeal same conclusion reached but on the basis of analogies drawn with gift by
will which is possible over part of shareholding seriously criticised
No issue of blended fund
Directly applied in Re CA Pacific Finance (No. 2) [HK] before White/ Lehman i.e. still
open to argument on HKs approach
White v Shortall (Aus SC of NSW, 2006) ( declared trust over x of 1.5m shares)
Found a trust of the entire shareholding for 2 different beneficiaries with powers of
management and where duties on Ts would arise
So long as theres one trust and T has the power to elect which assets are
subject to trust
In light of type of rights involved in holding shares, the absence of need to
identify in certain contexts e.g. trust over entire shareholding
Need not identify specifically the individual shares held on trust
Pearson v Lehman Brothers Finance SA (UK) (found securities acquired for LBFs
account, though mixed with others, held on trust by LBIE, which is at liberty to deal)
Found co-ownership with T; immaterial that segregated fund is a constantly changing
fund beneficially co-owned by a constantly changing class of clients as in CA Pacific
Trust of part of a fungible mass w/o appropriation is valid if the mass itself is
sufficiently identified + Bs proportionate share is not of itself uncertain H v M
o Affirms its the reasoning but not conclusion in Hunter thats challenged
o Adopting White trust works by creating beneficial co-ownership share in
the identified fund; not the more diff notion of identifying a particular part
subject to trust - UK law hence open to another construction of Hv M
Considered scope of rights covered a matter of intention instead
Tweaked the in/tangible property distinction by setting the dividing line as non/
fungible property
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Parkinson
Distinction in that there is a fluctuating mass
Should suffice if the source of trust fund is ascertained and trustees obligations are
sufficiently clear
B. Vesting of title
1. Trust by declaration property already with T
Need only to affirm intention to make himself trustee Middleton v Pollock
2. Trust by transfer
Formalities in transferring title
Conveyance by deed for land CPO s.4
Transfer of shares require (i) Execution of share transfer form, attachment to share
certificates, (ii) delivery of both documents to the company and (iii) registration of
transfer in the company
Chose in action statutory assignment for legal CIA pursuant to LARCO s.9, or equitable
assignment for equitable CIA e.g. interest under another trust
Would generally require some acts by the assignor showing that he is passing
the chose in action tot eh supposed assignee Tjio/ Yeo citing
Mere taking of (constructive) possession for money and ordinary chattels delivery
The fact of legal title vesting in T is sufficient regardless of the reason for transfer Re
Rallis Will Trusts (T is trustee for both marriage settlement and subsequent testators
will; found constitution of former when property passed to T in his latter capacity)
C.f. Re Brooks ST in which court held that there is no constitution of earlier trust
as it would only be a voluntary covenant to transfer after-acquired property not
supported by consideration and no obligation/ duty for S to transfer property
Milroy v Lord (S purported to transfer shares by deed to be held on trust for C, handed to T
share certificates but e.g. registration required; T with power of attorney which would
allow transfer of shares to himself but didnt exercise it)
1. S must have done everything required by the nature of trust property to ensure
effective transfer
2. Equity will not perfect an imperfect gift and give effect by a mode different from that
intended and reinterpret intention of S
3. Here clear intention of trust by transfer (as opposed to self declaration of trust)
4. No legal transfer of title and though T does have power of attorney court would not
force personal rep to transfer
Noted distinction between trust/ gift, donor/ trustee
Considered Ts power of attorney but found court not in the position to compel T to
transfer property when it could not compel S; absence of intention as T
Should be seen as a case where the inappropriate instrument is used to effect the
transfer in light of Re Rose Tjio/ Yeo
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Transfer of shares require (i) execution, (ii) delivery, (iii) registration [which may not be
mere technicality; construed as form of consent to novation Tjio/Yeo], (iv) possible
additional requirements under cos M&A
Milroy v Lord requiring (i) (iii)
Re Rose requiring (i) (ii) [nothing more needs to be done by donor to perfect title]
which is not applicable if theres decisive intervening factor e.g. Treasurys consent
Pennington v Waine requiring only (i)
Neither execution nor delivery where B provides consideration
N.B. in none of the above did the donor intend to resile from the gift
b. Where S does everything necessary in his power for him to transfer property to T and
failure to constitute is not due to S fault Rule in Re Rose
Would give rise to a constructive trust on transferor in favour of the trustee and
enforceable by trustee to compel actual legal transfer
o Remains a constructive trust until actual transfer of legal title but it cannot
be revoked or withdrawn
o N.B. the consequent imposition on FD and e.g. trust over prop derived
For equity treats as done what ought to be done
Re Rose (1952, CA) (purported to transfer shares with one intended as gift to wife and the
other to be held on trust; completed relevant documentation and delivered to company for
registration which was completed 3m later)
Issue on effective date of the trust to determine liability to pay estate tax
Found effective in equity upon delivery (i.e. step ii) for he has done everything
necessary for him and in his power to effect the transfer
o Adding to M v L judgment such that its sufficient if S does everything
necessary in his power by the nature of trust property
Inability to interpret intention to make a gift as intention to declare trust does not
prevent recognition of a constructive trust
C.f. essentially validating an invalid gift by construing as declaration of trust Moffat
Re Rose (Midland Bank Executor and Trustee v Rose; 1949) (bequeathed shares in will
but executed transfer documents in acc with companys regulation and transferred
certificates but had not been registered in transferees name) upheld
Applied in the context of gift of house Mascall v Mascall (father handed land cert +
executed transfer doc, son to submit for stamping and registration; found effective
usual for donnee to seek registration)
Re Paradise Motor Co (did everything except having the transfer doc signed) found
effective for signature was mere irregularly and not essential
Should be sufficient that transferor has done everything essential for effecting the
transfer and without which the transfer cant take place on the basis that there is
also something more that can be done Virgo, Clarke LJ
o Noting that e.g. Re Rose transfer still pending directors consent which may
depend on provision of further info
Does not apply where theres decisive intervening factor Re Fry (applied for
consent from Treasury as required for transfer of shares but didnt obtain it; found
insufficient for Treasury might require further info and hence hasnt done
everything necessary to effect transfer)
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o Perhaps better construction as whether donee has been put in a position to
complete the transfer Tjio/ Yeo, drawn where donee doesnt require
further assistance from donor in Re Rose
Effective so long as he has done everything only he can do even if actions remain
undone that sb else can equally do Corin v Patton (obiter), cited in White
o Must not merely leave matters In the hands of his agent can easily revoke
instructions noted in Penington
c. D had done enough to effect transfer that its unconscionable to deny its validity
Pennington v Waine (D told nephew she would give him 400 shares and wanted him to
become director, for which he needed >1 share; both signed share transfer form delivered
to cos auditor but donor died before auditor delivered to co)
Issue whether equitable interest in the shares had passed to the nephew (not whether
they are held on trust for aunt intended transfer by way of gift)
1. (i) Execution of share transfer form, (ii) reg, (iii) delivery to transfer legal title
here incomplete; equity not to perfect an imperfect gift
2. But recognized exceptions of (i) Re Rose, (ii) CT under Choithram doesnt fall
foul of Milroy v Lord as not finding express trust, and (iii) benevolent
interpretation
3. Transfer contravenes the articles, which provide for pre-emption rights c.f. pre-
emption rights contractual and do not bind TP hence effective despite breach of
the articles; unless it has matured into option/ TP has notice Arden LJ
Arden LJ applied all 3 exceptions but ruled on the basis of exception to Re Rose;
tempered the wind to the shorn lam by (i) Re Rose exception (ii) utilising CT (iii)
applying benevolent construction to words of gift
(i) Re Rose not directly applicable for it requires delivery but it affirms existence of
exceptions to Milroy v Lord
Auditor an agent and failed to do everything in his power to effect transfer; D
could demand return of form anytime before delivery to co
(ii) Notwithstanding failure to deliver, found here delivery dispensed with as a
requirement because it is unconscionable for S to deny upon execution of share
transfers where N was informed of Ds instructions and told he neednt do anything
Here nephew already told of the gift and already made director
No comprehensive list of factors but included intention to make an immediate
gift voluntarily, informing donee of the gift, A telling donee that he need not do
anything and donee agreeing to become director
(iii) Alternatively benevolent construction such that words used by donor and agent
mean that they become donees agents for submitting transfer to company to
satisfy Re Rose
Reading Choithram as indicating that a court may benevolently construe a
trust if it is permissible as a matter of construction c.f. strict app of Milroy v
Lord (Tjio/ Yeo)
(iv) CT (primarily) which is more in line with the principle of unconscionability
Critique on the courts reasoning issue not on whether the equitable maxim of not
perfecting an imperfect gift is undermined but whether such is justified
Arden LJ focusing on unfairness for donees who have relied on the appearances of
gift c.f. Clarke LJ seeking to give effect to donative intentions
2. Reliance on Choithram
a. Whether its right to rely on Choithram for reference to unconscionability
Choithram because S declared express trust, duty on S to transfer shares
and failure to do so would be unconscionable c.f. Pennington because it is
unconscionable to recall the gift, theres a trust
o i.e. used to justify perfection of trust after finding one in C v P
o Here used to convert a donor into T contrary to Ds wishes (Jones v
Lock on gift/ trust, donor/ trustee distinction)
o In fact in Choithram construed the apparent intent to make gift
Better interpreted as estoppel making revocation unconscionableVi, Tjio
Generally conscience affected because of an equitable assignment but not
merely by virtue of resiling from incomplete gift Tjio
c. Finding of unconscionability
No actual detriment (c.f. Briggs J in Curtis by agreeing to become director)
and only indication of reliance is in accepting office Virgo
Giving court unfettered discretion Moffatt
May undermine policy of safeguarding Ds interests and allowing D to resile
from voluntary acts Arden LJ
Choithram should arguably be narrowly applied as there the court wanted
to encourage transfers for charitable purposes
Note that at least theres signature on execution docs is satisfied here which
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is a very low threshold
3. Unconscionability as a test
Vague (c.f. list of factors) factors do not clearly point to unconscionability; no
requirement on detrimental reliance which is absent unless here nephew
incurred detriment from becoming director or he was looking for other alternative
sources for qualification shares
o (i) look at factors considered by court (ii) how unconscionability can be
found, and (iii) how it can be applied in arguing vagueness
In fact list of factors only indicate that donor had made a representation to the
nephew on which he relied, albeit not to his detriment Virgo
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Equity & Trusts Revision Notes
Case note Re Rose Revisited Tjio and Yeo
Transfer of shares is based on novation, for which cos consent is reflected upon
registration the issue is whether the equitable interest has passed nonetheless
Discussed Re Rose and Treasurys consent focus is perhaps on whether the done is
put in a position to complete the transfer, rather than just on the acts of donor
Arden LJ
b. (i) Re Rose as applying when S has done everything necessary for him to transfer
the absolute title, hence (ii) issue was whether assignment of beneficial interest
arose out of an incomplete transfer of absolute interest in shares (iii) Re Rose
envisaged delivery of the relevant documents to done
c. (i) there should be clear ascertainable point in time on completion of the gift in the
interests of legal certainty (ii) not limited to delivery but rather if it is
unconscionable for the donor to withdraw from the gift
Cited Choithram but unconscionability there arose from donors declaration of
trust whereas Arden LJ used it as the reason for equitable assignment even
though it is generally not unconscionable merely to resile from an incomplete
gift but only bound because of an equitable assignment - perhaps better
explained using estoppel principles further gives rise to uncertainty
d. Alternatively found Ss agent as Bs agent for submitting the share transfer forms to
satisfy the delivery requirement which appears to go further from Lord BWs view
that equity will not strive officiously to defeat a gift
Arden LJ construed Choithrams construction of words of gift tot the foundation
to mean gift on trust for it being the only possible meaningful construction in the
context, as a sign that a court can benevolently construe trust if it is permissible
as a matter of construction but she did not then find declaration of trust but
used it to make finding of fact
Clarke LJ
a. It is almost always possible to argue that the donor could have done more
b. Agreed there was unconsiconability but didnt go as far as to agree with it as a test
c. (i) Saw it as a perfected equitable assignment of beneficial interest c.f. failed transfer
of absolute interest which has to be saved at equity (ii) strong indications in Re Rose
that delivery is not required and that the critical moment is the execution of the
instrument of transfers bypassing all diff with failed transfers of absolute interest
d. Problem with (i) shouldnt be separation of equitable interest without prior
declaration of trust and (ii) Milroy would not recognize latter without clear evidence
it was the intended mode of transfer (iii) otherwise all failed absolute gifts can be
re-characterised as perfect gift of beneficial interest (iv) mere execution of doc
cannot allow done to secure interest
Curtis v Pullbrook (purported to transfer shares by issuing share certificates [as director of
the company but without actual authority to do so] and without providing transferees with
the executed share transfer forms)
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Applied the three ways of tempering the wind to shorn lamb by Arden LJ
Rejected (i) benevolent construction not possible here to construe as trust where S
clearly intended to make an outright gift and transfer legal and equitable title, (ii) Re
Rose failing to send executed share transfer forms to transferees/ company, share
certs issued w/o cos authority etc (iii) no act or omission in reliance of the transfer,
let alone detrimental reliance
Marriage consideration (i) B falls within marriage consideration i.e. spouse/ issue of
the marriage and (ii) the covenant is made in consideration of marriage
Not available to next of kins Re Plumptres Marriage Settlement even though they
are intended beneficiaries
Must be made before marriage unless it contains a true recital that it is made in
pursuance of an ante-nuptial promise to create the trust Re Hollande
Re Kays Settlement (executed settlement when unmarried over her properties in favour
of future children; subsequently got married and gave birth)
Settlement not enforceable by children who are volunteers as the trust is not made
in consideration of the marriage
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Pullan v Koe (wife covenanted to settle on trust property acquired after marriage;
received a present which was used to buy bonds)
Found bonds trust property for being acquired using the trust asset of gift
Court enforced the covenant in favour of those within marriage consideration
Treated as done that which ought to be done by imposing a CT
Alternative solutions
1. Construction of the covenant as a declaration of trust which would be fully
constituted upon subsequent transfer of property automatic if self declared
o E.g. Re Rallis Will Trust where the property came to the covenantor in a
different capacity uncertainty for depending on wholly fortuitous situation
2. Covenant contained in deed with B but would only give rise to damages
3. Action for damages brought by Ts at law damages only to compensate Ts loss,
unless covenant is for a stated sum
o T would hold covenant on trust for B for either his own benefit or on
resulting trust for S due to absence of intention to benefit him
o Ts may be under duty to do so c.f. court unwilling to direct Ts to sue under
covenant for e.g. it would bypass the rule that equity will not assist
volunteers - Re Pryce, Re Kays Settlement, Re Cooks Settlement Trust
o Arguably should only be enforceable by volunteers where S has irrevocable
intention to create promises Moffat
4. Action for SP by covenantee would require consideration
Beswick v Beswick (coal merchant covenanted with nephew to transfer his business to
him, who in turn promised to employ S as consultant and pay S widow)
Widow could not sue at law as a volunteer; but could seek SP in her capacity as
administratix of S estate as S provided consideration
Re Cooks Settlement Trusts (covenanted to settle future proceeds from sale of assets; all
Bs were mere volunteers)
Classified as an executor contract to settle a particular fund which did not exist at the
date of covenant and which might not come into existence i.e. analogous to covenant
to settle after-acquired property
Distinguished from Fletcher for here the covenant did not create an enforceable
debt (albeit bearing fruit only in the future and upon contingency in Fletcher)
Distinguished also from Re Cavendish for the property was not belonging to S
Unclear whether rejected for lack of intention to create a trust for the benefit of the
covenant or covenant couldnt be subject matter for being a mere expectancy; appears to
be based on a likelihood of acquisition Virgo
Seems to have based judgment on absence of debt but should be sufficient if theres any
enforceable promise which is a chose in action not limited to debt
C.f. flawed reasoning as the subject matter is the existing covenant not underlying asset
o C.f. RL artificial to say S intends to set up a trust of a covenant though Re
Cook is decided on the wrong ground
Rejected also in Re Kay future property cannot be the subject matter of a trust
The Rule in Saunders v Vautier (S declared shares on trust for B until he reached 25 when
accumulated dividends would be given; he claimed fund when he reached majority)
" Where a legacy is directed to accumulate for a period, or if payment is postponed, legatee, if he has an
absolute indefeasible interest in the legacy, is not bound to wait until expiration of that period, but may
require payment the moment he is competent to give a valid discharge"
i.e. An adult beneficiary of sound mind, and entitled to the whole beneficial interest (absolute
indefeasible interest in the trust), can direct Ts to transfer trust property to him
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Would result in termination of the trust; fund may be transferred to TP if so directed but does
not allow qualification or amendment of operation of trust e.g. appointment of T, direction on
how to invest the trust property
o Transfer to TP need not be in writing as required for disposition of equitable interest as
it would be destroyed upon termination of the trust
Depends on whether Bs interest is in fact contingent upon the condition in question which
would mean B does not have an absolute interest in the property
o Found in Saunders immediate vesting of interest which has only been postponed
Applicable if there are >1 B if it is possible to sever parties interests for each holds an absolute
right to that part Re Sandermans Will Trusts
Applicable also if Bs are entitled in succession, i.e. one as life tenant and other the
remainderman, so long as (i) both are of full capacity, and (ii) both agree in the direction to Ts
for transferral of trust fund Anson v Potter
o Even if S seeks to exclude the application of the rule Stokes v Cheek
Supplemented in Hong Kong by the Trustee Ordinance s.40A allowing Bs to give written
direction to a T directing him to retire under s.40A(2)
o Provided that trust deed does not nominate someone for appointing new trustees
(1)(a), and B(s) under the trust is/are absolutely entitled to the property and of full age
and capacity (b)
o T would be required to make a deed declaring retirement if (a) reasonable arrangements
have been made for protection of his rights, (b) there will be > 2 trustees after his
retirement, and (c) there will be newly appointed trustee or remaining trustees consent
to the retirement s.40A(3)
Extra notes
May involve protector commonly one who gives permission to Ts before new Ts can be
appointed though it cannot be taken up by the settlor himself for his administration of the trust
may result in court holding the trust as a sham
o Appointment and distinction from trustees discussed in Review of the Trustee
Ordinance and Related Matters Consultation Paper/ Consultation Conclusions (June
09/ Feb 10)
Note one cannot declare himself as T for his own benefit responsibility and benefit vested in
the same person
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Nature of duties
Inc strict liability for duty to abide by terms of the trust, exercise discretion properly and in
good faith, keep account and be ready with them, of impartiality, to act personally subject to
powers to delegate etc
Note statutory rules beneficial in providing concise, concrete and easily accessible statement of
laws as guidance c.f. need for case-to-case analysis, potential conflict with CL and further
complication of resolution of disputes
N.b. S may still influence execution of trust by (i) LoW, (ii) protector, and (iii) trust deed
(revocation of trust or reservation of powers)
A. Duty to notify sui juris (legally competent) beneficiary that he is a beneficiary Brittlebank v
Goodwin
Name and add of trustee Re Murphys ST; existence of settlement and Bs interest
Only to take reasonable steps in all circumstances and may only apply to primary objections
if theres >1 group of objects Re Manistys Settlements
Trust deed expressed as confidential is inconsistent with Bs irreducible core of rights and
may suggest that the trust is a sham HM, citing Armitage v Nurse
No bright-line distinction between Bs under discretionary trusts and objects of discretionary
powers of appointment by extension of the Schmidt rule
o A question of fact and degree on strength of claimants claim to be determined in
light of all circumstances inc. letter of wishes
General views (n.b. docs marked with tick now only prima facie discloseable)
Suggestions circulated among trustees and enquiries made in writing as to the
circumstances of a member of the class RL
Correspondence on admin of trust property between Ts/ appointers, TA/ Bs RL
Docs relating to business of underlying companies even if wholly owned by T Re
Rabaiotti (New Jersey)
Aide-memoire on state of fund, past distributions and future possibilities RL
Correspondence between Ts solicitors and Ts Re Londonderry
Title deeds Snells; Statements on state,past distributions, future possibilities
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Trust Accounts Duty to keep proper accounts and produce on demand along with
supporting oral or documentary information
Generally entitled for trust docs showing financial position of the trust, assets
included and how they have been dealt with Rabaiotti; but not an absolute right
Not excluded from courts discretion under Schmidt
Except (i) When T himself gives reasons, in which case court can consider soundness (ii)
Case concerns lack of bona fide or with improper motive RL
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Letter of wishes generally subject to RL principle - Breakspear (in the context of
substantially contemporaneous LoW for a discretionary family trust)
Should never draft it such that it forms part of trust deed may infer sham trust since
settlor should drop out of the picture once constituted
General approach
1. Basis for ordering disclosure proprietary or otherwise
2. Jurisdictional issue i.e. grounds for courts intervention (i) identify context (ii) grounds
for alleging unfairness/ mala fide Breakspear v Ackland
Not if its within range of reasonable+ rational decisions which T might make
3. Disclosure issue
a. Generally (i) nature of doc (ii) whether it falls within Re Londonderry confidentiality
rule (and whether it stands) RL c.f. Hartigan c.f. Schmidt)
b. Exercise of overriding discretion (i) nature of applicants interest in the trust
[remote/ theoretical/ defeasible?] (ii) Balance competing interests of diff Bs, Ts, and
TPs esp. personal (e.g. Bs needs as drug addict) or commercial (e.g. if rival purchases
interest under a trust to discover more about the trust properties) confidentiality
4. Disclosure of documents in full or redacted form, and other safeguards limiting use
should assess objective effect instead of subjective purpose for disclosure
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Acknowledge the remaining issue of what constitutes trust docs, and disclosure may cause
trouble in the family out of all proportion only Salmon J adopted the proprietary basis and
attempted at defining the term
Hartigan Nominees Pty v Rydge (Australian CA) majority rejected disclosure of LoW
Proprietary basis favoured by Maloney J.A., but found sufficient though not necessary by Kirby J
(who criticised the test) and not helpful by Sheller J.A.
Maloney J.A. held not discloseable for confidential and within Re Londonderry scope
a. LoW is not trust property
b. Inferred that the LOW was given on a confidential basis and wrong to breach that
c. LoW is a doc relating to reasons for exercise of Ts discretion approved Re Lond.
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Re Rabaiottis Settlement [2000, Jersey] (i) basis for disclosure (ii) letter of wishes
Disclosure to Bs of accounting docs and LoW in relation to discretionary settlement
Strong presumption in favour for accounting docs but against for LoWs
Approach of (ii) applicant, (ii) type of document, (iii) nature
a. Held that the court has discretion to refuse disclosure if it would be prejudicial to the interests
of Bs as a whole for court to balance competing interests
Only strong presumption in favour of ordering disclosure for Bs (inc. contingent Bs and
objects of discretionary trust) but overriding discretion on the part of court
Rejecting the proprietary basis for involving the difficult issue of classification, offering
too much protection for non-trust docs but too little for trust docs
b. On disclosing LoW strong presumption that its within Londonderry and confidential anyways;
it is for B to show good reason not to respect it
Affirmed rationale for Re Londonderry and found LoW within its scope for being closely
related to the decision-making process and reasons though not binding on Ts; likely to be
material upon which reasons were/ might have been based
o Though not ancillary to trust deed informal doc which may be ignored by Ts and
only an expression of S preferences
o Should generally cover materials on which reasons may have been based rejecting
Sheller J.A.s proposition
o Basically held (i) covered by Londonderry wording, and in any case (ii) would
undermine the principle in Re Londonderry if disclosed
Also endorsed Hartigan that it need not be disclosed on ground of confidentiality
Should ordinarily respect confidentiality either where strongly implied or expressly
stipulated unless there are good reasons not to respect that
Nonetheless ordered disclosure for being in the interests of Bs as a whole and that of
applicant here relating to separate divorce proceedings and ascertainment of applicants
interest is needed for assessing financial provision
Schmidt v Rosewood Trust Ltd [2003] Privy Council cited in Tam Mei Kam but not on LoW
Son of mere object of power seeking disclosure of trust documents [adopting Sheller Js in H v R]
a. Found to be as a matter of construction (c.f. rectification) that the court could conjecture that
the gap in distribution for such purposes as are acc to the laws be filled with charitable
especially in view of a contemporaneous and simultaneous trust deed executed
b. Presumption that beneficiary is entitled to see trust documents but court has an overriding
discretion to withhold if satisfied that this is in the best interest of Bs
c. Disclosure of trust docs an aspect of the courts inherent jurisdiction to supervise, and if
necessary, to intervene in the administration of trusts
Rejected the proprietary basis not an issue in ORourke v Darbshire and not explicitly
adopted except by Salmon J in Re Londonderry
o Virtually incomprehensive distinctions, casting doubt on rights of Bs with no
equitable proprietary interest, protection not where its needed citing H v R
No distinction between objects of mere power/ DT, or those with fixed interest though
generally not ordered for those with no more than theoretical possibility of benefit
o Proprietary interest neither sufficient nor necessary c.f. Kirby P: sufficient
More flexibility c.f. greater uncertainty; basis of holding Ts accountable
d. Determinations on (i) nature of beneficial interest e.g. whether discretionary object should be
granted relief (ii) classes of docs falling within rule on disclosure (iii) safeguards to limit use
Factor (i) may be important; Competing interests to be balanced esp where there are issues
as to personal/ commercial confidentiality
Safeguards inc. only showing it to professional, redacted etc
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LOW can be revealed though weight given to confidentiality and possible prejudice
Granted for personal rep which has strong claim on disclosure standalone and as relevant to
whether more funds would be available but for breach; and possible object
N.B. change of approach from considering whether its a trust doc and if so, whether it falls within
an exception, to whether it should be disclosed in the courts inherent jurisdiction
Comment Fox
May be explained by the content of non-reducible duties on the trustee obligated to comply
with terms of trust hence access to trust docs is necessary for enforcement c.f. free to exercise
discretion with no further duty as long as they do so in good faith, for proper purpose and not
taking into account irrelevant matters hence nth else accountable for
Alternative grounds for Re Londonderry principle relevance of the private donative trust
where Ts own the assets managed, and Bs are mere donees receiving gratuitous benefits
For discovery in civil proceedings if a genuine issue as to construction of trust deed becomes
subject of litigation likely illuminated by background material evidenced by LoW
Standard disclosure would normally be granted where B can make out a properly particuarlised
claim i.e. not a mere fishing expedition to see if docs support a claim
Document may be irrelevant if it does no more than illuminate Ts reasons, unless Ts by partial
disclosure of their reasons put into play the issue as to their rationality
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Trustees may be compelled to disclose substance of reasons for decisions, legally through
discovery or subpoena, or practically to avoid inferences Scott v National Trust
Covers where e.g. background info in LOW helps construing trust deeds
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Fiduciary duty of loyalty consider common law principles first before statute
A. No unauthorised remuneration except with prior authorisation or subsequent ratification
B. No conflict rule Tito v Waddell (No 2) [real danger of conflict between P/Bs interests]
Liability depends on whether B has given fully informed consent Conaglen
Starting to shift away from the traditional concept of disabling rules but rather interpreting
e.g. liability to account for unauthorised profits as wrong-based
a. No self dealing honesty, fair price and open market sale irrelevant; voidable by B
Liability to account for profits if P rescinds sale of trust property to himself or his property
to trust which are voidable Pitt v Holt; unless
Excluded by terms Sargeant v National Westminster Bank plc; or
o Wright v Morgan (son/ T had right to purchase land held on trust under terms
which he assigned to another who was also T) court set aside purchase despite
at fair price
F has fully informed consent of P or court may depend on fairness of transaction
Even if T holds an auction (risk of discouraging bidders) or for sale by mortgagee, or
after retirement unless he planned the purchase beforehand/ used info acquired as T;
but allowed to buy from TP to whom he sold
Extending to companies of which Ts principal shareholder, MD or principal office= Re
Thompsons; or a partnership to which he is member Colgates
Holder v Holder (testators son appointed as executor for estate which was to be divided
equally between wife and kids; D sought to renounce executorship to purchase farms)
Restates the rule as that purchase of trust property is voidable within reasonable time
at the instance of any B subject to courts discretion but not that T may not purchase
trust property
Held D (i) never assumed duties of executor/acquired knowledge on the deal, everyone
concerned knew of his interest; purchased BF at public auction at good prices hence
no actual conflict of duties (ii) if he had resigned, he did no act that constitutes
intermeddling with the estate, and (iii) in any case, the issue is not one of resignation by
T to avoid conflict but whether B acquiesced (Danckwerts LJ)
b. Fair dealing rule i.e. Sale of Bs beneficial interest to T transaction upheld if full disclosure,
fair and honest transaction and no advantage of B has been taken
Also with independent legal advice; Fair price indicates consent is fully informed
Both negotiations and final agreement must be completely above board and reasonable
with no hint of fraud, concealment or advantage being taken
Rescission barred by the same equitable principles
More relaxed (chance to establish fairness) genuinely two parties in the deal c.f.
Conaglen- fid often with more bargaining power both rules operating in the same way
i.e. fairness only to show informed consent removing distinction (Virgo)
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C. No unauthorised profits
D. No competition with B
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Learoyd v Whiteley (1886) investment (cf general management) of trust property; investing on
brickfield as security for trust money diminishing value and in any case value depends on
circumstances of the speculative and fluctuating business i.e. very risky
Standard of an ordinary prudent man of business, having regard to the present and future
interests of Bs in the context of making investments
o Qualifying the rule in Speight v Gaunt in highlighting need to consider nature of
business in investing $ for benefit of persons entitled to it at some future time
o In this context, to preserve money for those entitled to the corpus in remainder and
invest to produce reasonable income for present Bs
o Considered not justified in investing trust funds in property where active and
exceptional vigilance and diligence is needed for T to prevent loss Lopes LJ
Immaterial whether T has special skill and ability must be dealt with as an ordinary man of
ordinary intelligence i.e. purely objective
Not to act harshly against Ts so far as to deter honest reasonable man from acting as T
Not sufficient that T has acted BF, obtained and acted on the advice of professionals apparently
competent in their professions must act with prudence on such advice
Liable only for part of the investment which was found risky
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C.f. statutory requirements replacing the common law principles unless excluded
a. UK Trustee Act 2000 s.1 must exercise such care and skill as is reasonable in the
circumstances, having regard any special knowledge/ exp that he has/ holds himself out as
having, and (ii) if he is a professional T, to any special knowledge/ experience that it is
reasonable to expect from sb acting in the course of that kind of business
b. Hong Kong Trustee Ordinance s. 3A codifying CL with subjective + obj elements
Applicable to power of investment, appointing agents, nominees and custodians, powers
relating to trust property, insurance, dealing with reversionary interests, valuations and
audit Schedule 3
NOTE potential argument that s.3A doesnt apply to omission s.3A(2)
Would not be responsible for loss if they have discharged statutory duty of care s.11(4)
(1) To exercise care and skill that is reasonable in the circumstances, having regard to
(a) Any special knowledge/ experience T has or holds out as having, and
(b) If acting as T in the course of business/ profession, any special knowledge/ exp
reasonably expected of person acting in the course of that kind of business
(2) If applicable to T when exercising a power or doing an act, the statutory duty if applicable
has effect in place of CL rules/ equitable principle
(3) Statutory duty of care may be excluded by the instrument creating the trust
(4) Not applicable for trusts created before commencement date in so far as S (jointly if >1) of
full capacity, or B(s) absolutely entitled to the property whos either a company with power
or an individual of full age and capacity, executes deed providing that ss (1) should not
apply
N.B. TO.27 on delegation where T is temporarily unable to exercise powers and discretions;
s.41V on remuneration
Relief from liability prima facie by (i) express provision in trust deed, (ii) statutory relief under
TO s.60 (iii) Bs prior consent or subsequent acquiescence/ release
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Armitage v Nurse [1997], Millett J, CA (then) found not void for being too wide
No trustee shall be liable for any loss or damageunlesscaused by his own actual fraud
A. Construction
1. The reference to actual fraud excludes constructive or equitable fraud (which refers to
unconscionable use of power) e.g. undue influence
2. Fraud is defined in the Derry v Peek sense i.e. nothing short of fraudulent intention and
requires proof of dishonesty; but must be more than gross and culpable negligence
(gross neg c.f. reckless indifference)
3. Actual fraud is found if T (i) knows that action pursued is contrary to Bs interests or (ii)
being recklessly indifferent whether its contrary to their interests
o Regardless of whether he stands to gain personally
o So long as he doesnt have honest belief in promotion of Bs interests
o Noting that a deliberate breach of trust is not necessarily fraudulent may be in
good faith and honest belief though could be reckless in taking the risk
nonetheless (classified as fraudulent Lord Nicholls in Royal Brunei v Tan)
o In determining whether T is recklessly indifferent or negligent, court has to
consider whether T has in mind and intentionally disregards Bs interests
o The definition is a subjective one looking at what T subjectively believes is in
Bs best interest
4. Hence the exemption clause is intended to exempt liability for, inter alia, (i) wilful
default and (ii) negligence
B. Whether the exclusion is void for being repugnant to the trust or contrary to public policy
1. There is an irreducible core of obligations inc. duty to perform trust honestly, in good
faith for the benefit of Bs which cannot be exempted
2. Such irreducible core does not include duties of skill, care, prudence and diligence
3. Negligence, or gross negligence (the distinction is only a matter of degree) is not equated
with mala fide hence possible to be exempted
4. Wilful default is defined as a deliberate breach of trust, nothing short of conscious and
wilful misconduct i..e that he is conscious or recklessly careless that he is committing a
breach of duty (Re Vickery) and in doing so he consciously takes the risk of loss resulting
from breach or is recklessly indifferent to the outcome
But nonetheless may be done in good faith, with best intentions and honest belief
that the risk ought to be taken in Bs interests in which case he can be protected
5. Not material as to whether the clause can exempt equitable fraud because a claim
alleging such is usually for setting aside contract which does not relate to/ depend on
loss or damage (dicta)
6. It is for the legislature to decide on applicability of exclusion clauses for professional Ts
Criticism by H/M
There should be different standards for professional Ts
Criticised the exemption of liabiltiyw here the breach is deliberate but honest (see also
Walker v Stones disctum)
Walker v Stones [2001] not liable for loss or damage other than for wilful fraud or dishonesty
CA found dishonesty in Ts deliberate act that no reasonable solicitor trustee would consider
to be in Bs interests i.e. an objective test
Confined judgment to solicitor trustees unclear on applicability
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Spread Trustee Company v Sarah Ann Hutcheson [2011] UKPC on Guernsey law
Exempting liability for loss made in good faithexcept wilful and individual fraud and
wrongdoing issue of whether liability for gross negligence can be exempted
Approving Armitage v Nurse English law does not allow exemption of liability only for
wilful misconduct in the sense that the misconduct must be wilful
Acknowledged distinction drawn between breach of fid duties and of duty of care
o Noting that former has no relevance where the latter is impeached for former
doesnt alter the standard of the duty of care
o Though in any case former likely breached if latters committed in the absence of
good faith and honesty
Irreducible obligations of a fiduciary do not include duty of care and skills which is not a
fiduciary duty Lord Clarke (3:2) [c.f. arguable but customary to allow exc.]
Dissenting judgment suggesting wilful default covers gross negligence wilful default in Re
Vickery includes lack of ordinary prudence or negligence though even there it required
consciousness/ recklessness as to committing a wrong
Comments Trukhtanov
Evinces liberal approach for being commercial arrangements between sophisticated parties
of comparable bargaining power, entered into in sophisticated environment
Reduced the irreducible core of obligations in duty to act in Bs interests duties liable to
circumvention by MBIAs instructions and effectively removing T altogether
MBIAs similar to protector case of treating it as fid depends on scope of powers
Had in fact made Citibank its agent here and making it immune
Prompted Arden LJ to state that the court will interpret against construction that would
reduce Ts powers to an extent that it would cease being T not reached here as T continues
to have duty of good faith and retains certain unfettered discretions
C.f. implicitly recognizing Ts not acting as T for some powers; good faith not a standalone
duty but referring to the exercise of duties which are absent here
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(1) Applicable to T who (a) acts in a professional capacity, and (b) receives remuneration for
services provided to or on behalf the trust
(3) Terms of trust must not (a) relieve, release or exonerate T from liability for breach arising
from Ts own fraud, wilful misconduct or gross negligence (c.f. reckless act in consultation),
or (b) grant T indemnity against the trust property for the liability
(4) A term is invalid to the extent of purporting [to achieve (3)]
(5) Section applicable for trust created on or after commencement date of 2013
(6) Where created before applicable on the expiry of 1 year after commencement date, Ts
liability within which is not affected
(7) Professional capacity construed under s.41R(1) providing that if
(a) T acts in the course of profession/ business that consists of, or includes, the provision of
services in connection with management/ admin of trusts (generally or of that
particular kind), or any particular aspect of such; and
(b) Services T provides to/ on behalf of the trust falls within (a)
N.B. s.41R(2) lay person if he is not a trust corp and doesnt act in pro capacity
On the interpretation of s.41R(1) (a) covering those who provide professional services inc.
solicitors, bankers and accountants regardless of whether they are holding out as trustees (b)
covering those who actually serve as professional Ts
TO s.60
The court may wholly or partly relieve T from personal liability for breach of trust committed
despite T having acted (i) honestly and (ii) reasonably, and (iii) ought fairly be excused for the
breach of trust and for omitting to apply to court for directions
Judicial review of Ts exercise of discretionary powers by trust deed or TO e.g. s.4 on power to
invest, s.13 on power of sale, s.15 on giving receipts in a trust for sale, s.17 renewing leases, s.21
power to insure, s.34 power of advancement, s.56 seeking courts order
TO provisions apply in addition to terms of the trust TO s.3(2); unless excluded by trust
instrument or qualified (3)
N.B. T may give binding and conclusive decisions on matters of fact assuming that the specified
factual circumstances are conceptually certain, or even incidental question of construction for sb
with expert knowledge in the relevant factual area
Other ways of reviewing discretionary decision inc (i) formal/ procedural defect (ii) manner
used not authorised (iii) violations of rules of law (iv) improper purpose etc
The rule in Re Hastings Bass N.B. difficult to argue if T advances the Re Londonderry rule
The court may in its discretion set aside a disposition by T, if (i) despite exercising discretion in acc
with terms of trust, (ii) trustee fails to give proper consideration to relevant matters which ought to
have been taken into account Mettoy, affirmed in Pitt v Holt, Futter
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Linked with the distributive rule (c.f. managerial) i.e. must exercise discretionary powers for
purposes intended by S, and not capriciously/ contrary to any sensible expectation of S
Only for disposition of trust property; X admin/management power
In re Hastings Bass (advancing capital to B for life, and remainder to family) Buckley LJ
Court may not interfere with discretionary decision by T under which he acts in good faith even if it
doesnt have intended effects, unless (i) what he has achieved is unauthorised, or (ii) he wouldnt
have acted as he did had he considered irrelevant matters or failed to take into account relevant
matters (purported summary of HB rule)
Sieff v Fox [2005], per Lloyd LJ (T relied on incorrect legal advice to exercise discretion on
appointment of property, which turned out to give rise to substantial capital tax implications)
1. Restated the HB rule Where a trustee acts under a discretion..., but the effect of the exercise is
different from that which he intended, the court will interfere with his action if it is clear that he
would not have acted as he did had he not failed to take into account considerations which he
ought to have taken into account or taken into account considerations which he ought not to have
taken into consideration
Rejected Buckley LJs summary as the true ratio CA had already decided the case on
grounds that the advancement must stand unless it could not reasonably be regarded as
beneficial to the advance, so far as not struck down by the rule against perpetuities
o Buckley LJ saw it as a wholly objective matter (i) whether what was done is
capable of being regarded as beneficial to the intended object, and (ii) if not, it would
be outside the scope of that power, not an exercise of it at all and cant take effect
o i.e. limb (i) of Buckley LJs judgment says it all
2. Does not require breach of fiduciary duty though did not delineate limits of application
Court to take a critical and not over-exigent approach to limit the breadth but substantial
delay in raising the point with knowledge of the problem might be relevant
3. Fiscal consequences may be relevant considerations
May be irrelevant for mistakes distinguished for Ts are not dealing with assets of their
own, owe duties to B, and fiscal treatment of trust property being more complex
4. Questioned Abacus v Barri which held the transaction voidable because its being set aside
resulted from breach by trustees but questionable whether the doctrine is based on breach of
duty with same consequences; did find it attractive though
Does not however go so far as to say it should have been void - need not decide on the
point; found appointment here ineffective
5. On standard of proof, suggested that
The might test should only be applicable where B is entitled to require trustee to act
since B can still require T to start again on the correct basis e.g. Vestey allocating income
for minor Bs for a trust for applying income to support Bs
Would where Ts are not under a duty to exercise the power but do so voluntarily i.e. they
cannot be compelled to act again
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Pitt v Holt; Futter v Futter [2013] UKSC
Futter distributing capital to Bs in the exercise of power of enlargement, and advancement while
overlooking amendment in law giving rise to large capital gains tax liability for Bs; Pitt creation of
discretionary settlement for deceaseds accident damages imposed inheritance tax
1. Upheld distinction on (i) excessive execution i.e. Ts going beyond the scope of power (void), and
(ii) inadequate deliberation i.e. failing to give proper consideration (voidable under HB)
2. Failure to give proper consideration to relevant matters/ taking into acc irrelevant matter
Does not require fundamental mistake (such that it wouldve made fundamental diff to the
facts perceived) but merely that it would/ might have affected Ts decisions
o Declines to resolve the would or might debate to allow flexibility in dealing with
the specific circumstances though recognizing that the might test may be more
applicable for pension trust cases for Bs would have contractual rights c.f. family
trusts where Bs are often volunteers
May cover fiscal consequence for private trusts if theres material diff; may depend on
subtlety/ foreseeability; unlikely app if the law is changed by subsequent decision (Sieff)
Incorporating public law concepts of Wednesbury unreasonableness but in line with
traditional view that its for T to exercise discretion, and frauds on power cases Sieff
4. T would/ might not have acted the way he did had he considered those matters higher
likelihood of setting aside for the former
Considered a high degree of flexibility is warranted for the rule is centered on the failure of
Ts to perform their decision-making function which founds the courts jurisdiction to
intervene if it thinks it is just to do so
Acknowledged the suggestion hat the would test is appropriate for family trusts c.f.
pension trusts which members are not volunteers but with contractual rights
Rescission by mistake
Distinguished HB restricted to decisions by Ts and fids and not necessarily require positive
misapprehension (absence of thought may suffice) c.f. generally requires operative mistake and
applicable to wider range of situations
1. Mistake excludes forgetfulness, inadvertence or ignorance as such but can cover false belief or
assumption arising from it
o Noting distinction between misprediction and mistake as to the present matter
2. Traditionally requires (i) mistake on the part of donor as to the legal effect of the disposition
(c.f. consequence) and (ii) the mistake as to effect has to be sufficiently serious
3. But upheld abolition of distinction in Pitt v Holt in that it would normally be satisfied if there is a
mistake either as to the legal character or nature of the transaction, ro some matter of fact or
law basic to the transaction
Managing a trust
T may be appointed by (i) S on creation of trust, (ii) persons given express power by the trust
instrument either in circumstances contemplated by the trust deed, or under TO s.37, (iii)
surviving or continuing trustees under s.37(i) to replace Ts or existing trustees under s.37(6) to
add new Ts, or (iv) court under TO s.42 or in its inherent jurisdiction
Appointee may at any time disclaim office provided that he has not accepted it by words/
conduct, upon which he can only retire (i) acc to express terms of trust, (ii) if he has appointed
replacement under TO s. 37 or 42, or (iii) TO s.40/ courts inherent jurisdiction
B may remove Ts by (i) express terms of trust, (ii) terminating the trust and re-settling the
assets if all Bs are of full age and legal capacity, and are absolutely entitled ot the trust property,
or (iii) by courts inherent jurisdiction or power under TO s.42
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Duties of fiduciaries
N.B. liability of F widened to cover all gains earned from the breach of duty (c.f. only loss)
a. Conflict of duties Not to place himself in a situation where he owes a duty to another
which may be, or is inconsistent with the undivided duty of loyalty owed to employer
Bristol and West Building Society v Mothew (acted for purchasers and lender; No breach of
fid duty (i) no actual conflict (ii) no breach of duty of good faith omission had nth to
indicate inhibition; but he had fully informed consent [misrep only going to subsequent act)]
and at most in breach of duty of care and skill)
For actual conflicts i.e. Where he cannot fulfil obligations to one w/o failing for another
should cease acting for at least one and preferably two
May test by considering Ds position if he had acted only for one client
Clear breach if he knowingly prefers interests of one to another; or if F undertakes to
advice one on merits of deal while acting for both Nocton v Lord Ashburton
No actual conflict found in Bristol on the same side and in any case no allegation of bad
faith or deliberate withholding of information for the interests of purchasers
b. Duty to avoid conflict of interests i.e. not to place himself in a position where his/ anyone
elses interests would or possibly may conflict with Bs
Objective test of whether a reasonable man looking at relevant facts would think there to
be a real sensible possibility of conflict Kao, citing Boardman
Would be accountable for all profits made while acting within scope of fid duties
Existence of undisclosed interests is sufficient
Duties include (i) No unauthorised remuneration except with prior authorisation e.g.
M&A or subsequent ratification Re Duke of Norfolks Settlement Trusts c.f. English
Trustee Act 2000 s.29 (ii) No self-dealing except affirmative proof on fairness of
transaction and full disclosure of conflict of interests Aberdeen Railway v Blaikie (iii)
fair dealing, (iv) loans by fiduciaries Swindle v Harrison (v) no competition with P
Codification of fid duties owed by directors HK Consultation Paper c.f. UK Companies
Act 2006 s.172, 175-177
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No secret bribes or commission A-G for Hong Kong v Reid [1994] Privy Council
No unauthorised profits
Strictly applied regardless of whether F has acted in good faith, whether it has resulted
in loss or even if it has left principal better off
o Justified (i) incentive for F to resist misconduct (ii) evidential diff to prove bad
faith c.f. incorporating public principle of deterrence, not effective in deterring
by only taking away profits Lionel Smith, may be over-detrerrent, evidential
argument not as strong now John Langbein
o C.f. suggestion against a harsh application Murad v Al-Saraj (CA)
Mitigated by providing allowances for honest F who have contributed time skill and
effort for the gains Phipps v Boardman
o Only if it wouldnt encourage F from breaching rule - Guiness v Saunders
Must account for any gains obtained or received in circumstances where conflict/ significant
possibility of conflict existed between his fiduciary duty and personal interest, and profits
made by use/ reason of his fiduciary position or of opportunity/ knowledge resulting from it
Info may be used if in public domain and theres no reasonably foreseeability possibility
of his needing to use it for original principal; may otherwise have sufficient property
nature to be placed in constructive trust as trust asset
1. Breach
Derived from the strict rule of Keech v Sanford wherever a lease is renewed by T it
is for the benefit of the cestui que use despite express proof that TP would refuse to
renew (T renewing lease for himself; B wouldnt have got it)
Applicable whether T obtains renewal by virtue of provision in the lease or from
position as sitting tenant; nb distinction between renewal/ reversion (Protheroe)
Regal Hastings v Gulliver [1942] (directors applying for shares in a sub for which it had
been the original intention of the board to be subscribed by co but it was ultra vires)
Liability rises from mere fact of profiting and not dependent on e..g absence of bona
fide, P would/ could have got it etc so long as he has/ can have conflicting personal
interest Viscount Sankey
C.f. to be accountable for shares acquired by reason only of their position and in the
course of execution of the office Lord Russell of Killowen
N.B. case affirms that liability does not depend on actual conflict
Milletts LQR controversial ruling but outcome in line with orthodox principles
Info not property as such but bears characteristics of trust property cannot be used for
Fs ulterior purpose; should be restricted to if use is FD breach
Peso Silver Mines v Cropper (1966] Can did not have opportunity to read Boardman
Director decided in the BOD not to go ahead with the mine investment for financial and
risk reasons; later set up own company and took it up no breach
a. When the fiduciary as directors in BOD decided not to go ahead, they acted bona fide
C.f. Phipps irrelevant so long as theres possibility of risk/undue influence on BOD
b. After the company decided not ot go ahead, the directors acted in the personal
capacity as the person of public to be approached and did not use any personal
information to their advantage as it was publicly accessible
C.f. they were approached because they were directors and had the knowledge
Canadian Aero Service Ltd v O Malley (1973) Canadian Supreme Court (former
directors taking fruits of a corporate opp in which P had prior and continuing interest)
Prohibited from usurping for himself/ diverting to another with which he is
associated, a maturing business opportunity which his co is actively pursuing even
after resignation if prompted or influenced by wish to acquire for himself the
opportunity without disclosure, or if it was his position with the company rather
than fresh initiative that got him the opp
Justified for the degree of control entailed by their positions
Rejected conflict test, or accountability for profits acquired by reason only of being
directors and in the course of execution of office, in Regal as exclusive tests not
right to e.g. limit Regal to benefits acquired by reason of and during holding of office
Regardless of (legal) incapacity to take advantage/ if gain not at its expense
Should consider individual circumstances inc. position held, nature of corp opp and
its ripeness, specificness, defaulting fids relation to it, amount of knowledge
possessed, circumstances in which it was obtained, whether it was special or
private, factor of time, circumstances of termination of relationship
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Kao, Lee & Yip v Koo Hoi Yan & Others [2003] Hong Kong
Breached no conflict and no profit rules for advising the establishment of law centre by
BOC though only giving rise to nominal damages, failing to inform firm of the
business opportunities and even diverted it to himself; however no duty for other
partners to inform P on D1s acts unless stipulated in contract
1. Generally entitled to make use of acquired skills, general knowledge, know-how, exp;
or cultivated commercial relationships upon termination of relationship Kishimoto
2. Must however account for profits deriving from position of trust and confidence - by
reason/ use of his fiduciary position, or of opportunity/ knowledge resulting from it
Even if the opp wouldnt have been available to B Regal, Cooley
3. Would clearly be in breach for taking advantage of opp while relationship subsists
But permissible to take prep steps so long as theres no actual competition
4. If he has resigned, may still be liable if
a. Resignation prompted or influenced by wish to acquire for himself the
opportunity sought by the company Canadian Aero, Cooley
b. Diverted an opportunity which had originally negotiated by P, regardless of
whether P would have got the opp Canadian Aero
o Maturing business opportunity test i.e. whether it is actively pursued by
B in the first place and what stage it has reached
Not the sole test but in any case must be tangible c.f. embryonic
(Kishi) when F is still in position of trust and confidence Kao
Not if its so remote that eventual obtaining of it cannot
realistically be said to be linked to any position of trust/
confidence that F was in
Check if opp results from prolonged fresh initiative+timing Kao
May ultimately only be a question of causation i.e. that the profits
made are caused by the breach Kao, Lee & Yip
o Where it was his position with the company rather than a fresh initiative
that led him to the opportunity
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2. Causation between gain and the breach of fiduciary duty satisfied so long as it is one
cause of the gain Barton v Armstrong
For F to prove that he has received the gains exclusively from activities legitimately
undertaken in his own interests
Regardless of whether the gain would have been obtained
But for test rejected in Murad v Al-Saraj [2005] (F used Bs JV assets supposedly for
purchase of hotel to set off a loan owed to hotel owner and received commission; B
argued it would have insisted on higher profit share c.f. F arguing that he would have
been allowed to keep that portion of profits
Not for the court to investigate hypothetical situations and no defence for F to
say that he would have profited anyways Arden LJ
3. Defence
a. Authorisation expressly or by necessary implication by contract
b. Informed consent of al Bs being of full capacity and between them absolutely entitled
to the trust property Phipps v Boardman
Or of independent Ts for if F is someone employed by Ts or B acquiring
special information while purportedly representing trust Regal
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Item Software (UK) Ltd v Fassihi and others (director helped co negotiate a contract,
encouraged a hard line approach while secretly approaching TP and offered similar terms)
Applied but for test would have still taken hard line approach if not so advised i.e. no
causation between the loss from diversion of opportunity and the duty
As a fall-back position where the action on maturing business opp fails due to lack of
causation ought to have disclosed that he is engaging in a conflict of interests
The single overriding touchstone is the fundamental duty to act in good faith and in the
best interests of B; found breach and Bd have taken another approach hence awarded
claim for compensation of loss suffered (cf account of profits)
This is not a distinct duty but only a part of that fundamental duty though in
proscriptive formulation but considered that FD is not limited to proscriptive or
prescriptive duty; disclosure here confined to ones misconduct
No issue on causation, no defence (reasonable belief that it is not in the interests of the
company to know of his breach)
Appreciating Equitys dynamic app c.f. couldnt work in GF cases doubtful authority
Policy argument economic efficiency concern for company to investigate conduct of
employees which is difficult to detect; possibly erroneous business decisions
By reason of position
Regal Ps ability to obtain is irrelevant
Boardman possibility of conflict suffices and satisfied by use of info/ opportunity
Bhullar capacity irrelevant; need no pre-existing proprietary right in the matter
Setting up business
Shepherds irrevocable intention; Kao
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Basic principles
Generally, personal remedy against T may be available where the trustee commits
(a) Breach of duty of care resulting in losses
(b) Breach of duty of loyalty/ fiduciary duty (c.f. breach of duty by trustee) resulting in gains or
losses (which is less often)
(c) Breach of term of the trust/ contract i.e. any act or neglect on part of a trustee which is contrary
to the duties imposed, and which is not excused by law, or terms of the trust instrument
resulting mostly in losses
N.B. it often does not matter which duty has been breached for most remedies do not require proof
of wrongdoing; note possible liability also for standing by with knowledge of breach or taking no
steps to redress, or resigning to assist with other Ts breach
Further that express trustees are always under personal liability c.f. CT which depends on whether
his conscience is affected
Personal vs. proprietary right determine the preferred remedy in each case
N.B. to say something is exigible against A, it is against A whom one can enforce the right
In personam right only exigible against the person who owes a duty towards you
C.f. proprietary right i.e. can be enforced against anyone who happens to be holding that
particular piece of property subject to priority contest
Preferred Situations
Proprietary a. If the value of the property has gone up
b. If original wrongdoer who took the property is not worth pursuing e.g. T has
stolen the trust fund and passed it on to a mistress who then purchases a ring, or
where T has absconded and left the jurisdiction
c. Whoever is holding the property himself has gone bankrupt only assets which
are beneficially owned by the bankrupt or insolvent party will be shared by
creditors i.e. property held on trust for another would not fall within the
bankrupts estate so such beneficiarys claim is even stronger than SC
Personal a. Destruction of the piece of property i.e. damaged, extinguished, or
b. The value of the property has gone down and the incumbent/ relevant wrongdoer
is not insolvent
Monetary
A. Disgorgement/ Account of profits
Not dependent on allegations of misconduct, ID of breach or quantification of loss D
deemed to have implicitly undertaken to account for gains received under the fictional
concept that F never does anything wrong
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B. Compensation for loss
I. General accounts/ Taking of accounts/ Equitable compensation Exclusively for trustees as
fiduciaries dont necessarily keep accounts
Based on Ts core duty to account for management of the trust property; hence to
provide accounts to Bs, who have a correlative right to take account
o Taking account per se is not remedy for a wrong, but enforcement of
performance of an obligation Millett in Libertarian
Only procedural requiring production of account to be reviewed by B, who can then
require T to make good the deficit by making payments, described in modern cases as
equitable compensation [though not compensation for loss/ restorative]
II. Equitable compensation for fiduciaries, and trustees if taking of accounts is not appropriate
(McLachlin J, Canson Enterprises; endorsed by Libertarian v Hall)
First recognized in Nocton v Lord Ashburton in the context of breach of FD as an order for
D to make restitution, or to compensate the plaintiff by putting him in as good a position
pecuniary as that in which he was before that injury
Distinguished from equitable damages under HCO s.17 which provides for statutory
discretionary jurisdiction to grant damages in lieu of injunction or sp
o Traditionally to fill in the gaps of the lack of compensatory awards at c/l but
considered redundant now in light of the development LH
Arising from Fs duty who has misappropriated assets or caused loss or damage in breach
of duty to restore the lost property Libertarian, per Ribeiro J
Required to restore the financial position of the trust fund to what it would have been if
the trustee had not been guilty of wilful default.to compensate the trust for
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consequential losses that follow from the trustees breach in the context of accounting
on a wilful default basis Snells Equity
o Considered an equitable debt owed to the plaintiff so the action is more akin to
that for debt as opposed to claim for common law damages
o Not necessarily involving wrongdoing, and not in terms of expectance or reliance
measure again distinguished from common law remedies
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Election of remedy may be alternatives, or sue for both/ switch depending on nature of breach
and the position of the person in breach (assuming that the breach causes losses)
Avoid double recovery e.g. where loss + profits are claimed, to give credit for overlap
Trustee Fiduciary
Taking common accounts
Taking accounts on the
basis of wilful default
Equitable compensation When taking accounts becomes unfruitful as a result of
uncooperative attitude Libertarian; questionable
whether one can directly claim equitable compensation
Tang Man Sit v Capacious Investments (1996, PC) (vendor/ CT rented property out in breach of
trust after signing S&P [giving rise to the CT] but before the actual conveyancing i.e. misapp)
Issue of whether claimant is confined to one/ any of the remedies Landlord made a profit and
the purchaser suffered loss of rent i.e. the same misconduct giving rise to two effects which are
the flipside of each other
Held C cant claim equitable compensation for loss of rent + additionally account of profits
Would have been different if the flat is rented out and e.g. there is some tear and wear in the
property leading to further losses, in which case one can claim compensation for such losses in
addition to claim for account of profits, for consequential loss is not merely flipside of the
misconduct here
Libertarian Investments v Hall (2013, HKCFA) (P gave D money in a trust handed into solicitors
trust account for buying shares, which were misappropriated by D purporting to buy the shares when
he failed to do so; represented otherwise but couldnt produce certificates)
Allowed plaintiff to drop the taking of accounts and asked instead of direct immediate award of
money as it would not be fruitful to require further accounting uncooperative attitude of the
trustees and account of profits would be difficult
No question of election as the remedies are not mutually inconsistent account only a admin
procedure aimed at ascertaining the deficit and after which one has to falsify/ surcharge and
require reconstitution with Ts own $, and failure to do so would in any case result in an order
for immediate payments Ribeiro PJ
P may elect not to call for account or further inquiry if it is unnecessary or unlikely to be fruitful
but court will always have the last word Lord Millett
o May be misleading to say that the primary remedy for breach of trust/ fiduciary duty is
an order for an account (i) itself an entitlement as of right once trust or fiduciary
relationship is established (ii) not a remedy in itself but first step in proc
Pragmatic approach justified for not wasting courts resources; but not to be interpreted as
allowing all Cs to avert need to ascertain deficiencies after initiating it LH/Lee
Phipps v Boardman (1965, HL) (using info acquired as trustee to purchase shares; found real
sensible possibility of conflict of interests)
A. Granted personal liability to account for profits
B. Declaration of constructive trust which is applicable where a gift emanates from property
entrusted to the fiduciary
o Dissenting 3 held that info obtained qua fiduciaries is not trust property hence shares
obtained using those info arent under CT; 2 relied on the (further) contention that there
is no real sensible possibility of conflict
o C.f. majority CT applicable for D had acquired the knowledge and opportunity to
purchase the shares while purporting to represent the trust
Under strict application of fiduciary duties
o Suggesting that the use of position as opposed to use of trust property is equally capable
of generating proprietary constructive trust c.f. Lister v Stubbs (1890, CA) (bribe
obtained from abuse of position), overruled in Reid
Arguably easier to justify CT over bribe for incontrovertible assumption that the
victim ahs lost property at the value of bribe and unjust enrichment for F if allowed
to retain it c.f. profit in Boardman not made at the expense of B (except from risk of
harm where F cannot give disinterested advice) + in GF
Limitation of disgorgement
a. But-for causation need not be established Arden LJ, Murad v Al Saraj
Need only show that the breach was a cause of the gain controversial reasoning (LH)
b. Equitable allowance taking into account Ds care and skill Boardman v Phipps
Careful in not encouraging F to place themselves in conflicts Lord Goff, Guinness
c. Extent of accounting Warman International v Dwyer, Kao, Lee & Yip (for business opp)
Only accountable for profits properly and reasonably attributable Kao, Lee
Warman International (Aus HC) (no prior understanding; diverted business opp)
Will not be required to account for all profits made where the breach results in profits not in
the form of specific assets but operation of business
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Kao, Lee & Yip applying Warman and limited accounting to 1 year
Implicit but for reasoning for reference to had he not committed breach and resigned
properly, it would have taken them [period] before they could take the business away;
Causation wordings not explicitly used but requires proximity with gain
1. Establish link liable for whole of profits arising from breach regardless of whether he
chooses to share them with another by transferring to a jointly-owned company
Delay in seeking relief mitigates against the granting of relief
2. If a cap is needed (where profits made are so remotely linked with the opp)
3. E.g. how long would P have retained the opp, headstart
Re Dawson (misappropriated NZD when it was on parity with AUSD i.e. 1:1 EX rate; B falsified acc and
requested reconstitution when AUSD had appreciated i.e. more AUSD for the same NZD)
Note context of traditional family trusts traditional principle applicable to all cases
Duty of reconstitution to original position arises from the date of breach i.e. D owes an
immediate duty to restore the trust fund and which continues up to the date of judgment
o Remedy is to take common accounts and falsify the disbursement of NZD, such that T
has to reconstitute trust fund in NZD as quantified at the date of judgment c.f. of breach;
if in specie is not possible, substitutive payment on same basis
o To put Bs in a situation where they would have been in had there not been breach
o Irrespective of whether the currency depreciated/ appreciated
o Basically stopped the clock at date of breach for quantifying liability
NAI (referred to as causation in the judgment), remoteness and foreseeability irrelevant which
by extension would rule out contributory negligence and mitigation LH
Misapp of trust fund requires only performance of primary obligation i.e. to make good the
disbursed amount, as opposed to secondary/remedial obligation arising from breach
Target Holdings v Redferns (1996, HL) * remains the authority though controversial
Solicitor released loan purchase money prematurely before execution of mortgage as required in
breach of trust [misappropriation of trust fund or unauthorised disbursement] mortgage executed
anyways, transaction completed but purchaser defaulted; there was a big fall in the market when P
had to realise security i.e shortfall between loan released and proceeds from sale
N.B. the breach committed left P in exactly the same position as if there was no breach
Arguments
a. (i) Once there is misapplication, duty to reconstitute the trust fund arises immediately
applying Re Dawson (ii) As duty arises immediately, one does not take into account subsequent
events; causation and remoteness being irrelevant under Re Dawson
b. (i) The same debit would have been made had there been no breach i.e. same shortfall would
have been suffered even if $ released after mortgage (ii) Imposition of liability on the trustee
would give beneficiary something that he would not have obtained anyways
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A. Duty to reconstitute the trust fund accepts its to put Bs to position theyd be in
B. Drew distinction between traditional family trusts (defined as for passing family wealth) and
bare commercial trusts latter often involve sole B and S, esp. in conveyancing, where it is inapt
to talk about reconstituting the fund for the sole B would get all trust assets anyways and should
simply award compensation (c.f. former where T has to put money back into the account for
later distribution); to not make trust commercially useless
Considered that B who has become absolutely entitled wouldnt have automatic entitlement
to reconstitution of the trust even under traditional principles
C. For bare commercial trusts
1. Loss arises at breach and immediate liability to restore, but quantified at date of judgment
but taking into account all subsequent events running up till then
In fact in line with Re Dawson only that this doesnt require reconstitution
2. D ought to be liable for loss which, with the benefit of hindsight and common sense, can be
seen to flow from the breach
Endorsing McLachlin J in Canson Enterprise (on breach of fiduciary duty)
Essentially incorporating a modified but-for test for misapp of trust fund in bare
commercial trust not satisfied as lender suffered loss from insufficient security not
solicitors breach; subsequent event of completion of transaction taken into account
Hindsight referring to taking into account subsequent events showing that the event did
not actually result from the breach whether subsequent events would have caused the
loss without the breach (here would have resulted in loss anyways)
o Noting that but for practically means the breach is a necessary cause
N.B. bare commercial trusts seem only applicable for falsification for breach of trust by trustee
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CF. Lord Milletts LQR article same conclusion (in line with intuitive judgment that the solicitor
should not be liable to give P windfall) but different reasoning
Criticised the distinction between bare commercial trusts and traditional family trusts
1. Primary duty to account for trust property hence misapplication of trust fund gives rise to
primary duty to reconstitute (in specie, or in a substitutive manner if impossible) hence
common law rules of causation and remoteness have no place ie no Q of stopping the clock
2. Ts obligation to restore the property is not an obligation to restore it in the very form but any
form authorised by the trust achieved here by subsequent execution of mortgage hence breach
effectively remedied and no unauthorised application by date of judgement
Breach not in parting with the money but in not obtaining title deeds in return
unauthorised disbursement when paid out money hence duty to reconstitute and trust
money notionally restored; subsequent authorised application when mortgage was
acquired hence discharged primary duty; no need to quantify loss
Adopted by academic authorities e.g. Mitchells article (2013)
Youyang v Minter Ellison (Aus HC) (wrongful disbursement of T fund; intended as instructed to
purchase security which turned out to be defective and failed to obtain banker deposit cert)
Investor co went bust and Youyang who invested in the former suffered loss w/o protection
Essentially unauthorised disbursement for failing to obtain the right security (X DOC/ FD)
May be used to confine Targets application to cases where transactions were ultimately
completed with merely a technical and temporary breach in line with Milletts
1. Distinguished from Target the underlying commercial transaction at present was never
properly completed for the solicitor never managed to get the right security c.f. mortgage being
executed in Target so ultimately the breach was only technical and temporary
Here there has been no rectification or completion of transaction and plaintiff wasnt left
in the same situation had there been no breach
HL in Target stating that the D was obliged to restore clients account until the
underlying transaction had completed no such right thereupon
Hence not bound by Target; sought to distinguish it though appears to be rejecting it as
convincing authority
Rejecting the argument that the co would have gone bust anyways
2. Applied the traditional principle i.e. stopping the clock w/o causation test in Target reference
to loss arising by reason of breach (a broader test than but for)
3. (dicta) doubted application of common law principles to fiduciaries parties in neg/ contract
cases are taken as independent and equal actors CF fiduciary relationships, which essentially
involve one party pledging itself to act in the best interests of the other and thus with trust at
its core the balance should in this case favour the party wronged
Summary on falsification (and surcharging within taking of accounts) [note Target BCT]
Causation But for Dawson (only implicit by ref on duty to reconstitute the fund to the
position it would have been had there been no breach), by reason Youyang
Remoteness/ Irrelevant Dawson, Target, Millett LQR (principles have no place given that you
foreseeability only perform your primary duty to account for trust property)
NAI Irrelevant Dawson
Con neg Irrelevant by extension of logic in Dawson
Mitigation Irrelevant by extension of logic in Dawson
Approach
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1. Establish trustee relationship (n.b. all cases referring to breach of trust)
2. Falsification not dependent on breach or wrongdoing as an admin procedure for enforcement of
primary obligation
3. But for causation Re Dawson, Target
4. Re Dawson imposing duty to reconstitute on date of breach which continues to the date of
judgment but disregarding remoteness, causation etc c.f. Target quantifying liability as for loss,
which with the benefit of common sense and hindsight, flows from the breach, thereby covering
subsequent events
5. Discussion Target distinction between forms of trust, which may confine the case to that
particular context (link with present cases facts); may be further confined by Youyang dictum
on whether the transaction has in fact been completed; other Target controversies
6. Conclusion on preferred approach (+ why) Target remains good authority so unless c.f.
Surcharging
a. Surcharging within common accounts e.g. where fund is received but not entered into account no
proof of misconduct required
b. Surcharging for loss on the basis of wilful default i.e. T shouldve received the fund
By ref to loss suffered, inc. loss of chance to avoid detriment/ make gain Bank of NZ
Requires proof of WD defined only as passive breach of trust, omission to do something he
ought to have done (Bartlett); lack of prudence/due diligence (Millett); doing what he
ought not do or omitting to do what its his duty to do Re Owen
Applicable e.g. for breach of duty in negligently making authorised investment which
subsequently declines in value, Ts failure to do positive act etc
May take the highest intermediate value rather than as at the date when it ought to have
bene acquired/ when account is taken if D is T with power to sell the property or if he is
fiduciary who ought to have kept P informed and sought instructions(Lib, M)
Relevant Not settled though more likely in the context of duty of care
Surcharging is different quantification on what B wouldve made had T not been in breach
(cf falsification only treating as though no disbursement; common law rules of causation
and remoteness should apply Lord Milletts LQR article (1998)
Substance of claim analogous to c/l duty of care claim for loss occasioned by want
of skill and care; duty of care is not FD despite him being a F
Which is in line with principles not every duty of a fiduciary is fid duty
Only refers to the need to quantify but no discussion on e.g. test of causation
Endorsed in Bristol v Mothew (1998, per Lord Millett) but in the context of fiduciarys
breach of duty of care and skill (itself applying its reasoning to fid+T [obiter]) applied in
Bank of NZ (Canadian) [see Libertarian quote] though proof of factual but for is still
required regardless of nature of breach, and Libertarian (obiter); other Ca authorities
finding NAI and mitigation also relevant
Bristol citing duty of care arising from assumption of responsibility for affairs/
property for others; not description of the trade/ position they hold
Libertarian cited Bristol for trustees breach of duty of care as well
C.f. Duty of care being a common law concept and should not apply in trust where Ts are
held to higher standards; essence of fid relationship being that F pledged to act in the
interests of B Youyang (obiter, citing Canson Enterprise) [nb didnt discuss nai]
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Should set a different standard of care at equity esp. when most trustees are
remunerated these days Getzler
But unnecessary to refer to the higher moral duty if breach is one of duty of care
C.f. may depend on type of trust e.g. management less complex for Target type of trust
Libertarian Investments v Hall ***** (2013, HKCFA per Justice Ribeiro) (Breach of trust by
misappropriating trust fund; further breach of FD in wilful default)
Money put on trust to purchase shares; misappropriated 5.5m purporting to buy shares but
didnt do so; P couldve resold at a higher price for there was subsequently a company
interested in the purchase and P already had some shares; loss of 19m profits
Surcharging preferred for one would only obtain 5.5m on falsification subject to
considerations on remoteness and foreseeability depending on authorities followed
Only on misappropriation and fiduciary duties
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3. Classified the case as surcharging on the basis of wilful default but taking of accounts and
enquiries unlikely to be fruitful because of Ts obstructive attitude
4. Since the evidential gap (on the price at which hypothetical remainder of shares could be
sold) was the consequence of Fs own breach of duty, the court can resolve against D (i)
take F at his word regardless of truth in it (ii) make assumptions against D, and (iii) do
rough and ready justice without precise justification for amount of award hence presumes
that the loss quantified by P can be attributed to Ds own wrongdoing
Summary on surcharging on the basis of wilful default (usually not for breach of trust)
Causation But for Libertarian (obiter for DOC); But for Bartlett c.f. only to show material:
for D to disprove if its breach of FD; or Canson test if deliberate Libertarian
Remoteness/ Relevant Millett LQR (noting diff from falsification)
foreseeability For breach of duty of care and skill yes - Bristol, Bank of NZ (Canadian),
Liberatarian (obiter) c.f. Irrelevant Youyang (obiter, citing Canson Enterprise)
c.f. criticism on it;
For misapplication irrelevant Libertarian (obiter, citing Target, BNZ)
Fiduciary duty Irrelevant if its deliberate wilful default Libertarian
NAI For breach of duty of care may be relevant by extension of reasoning in Millett
LQR, Libertarian (obiter)
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For breach of FD relevant if Ts breach didnt permit wrongful./ negligent act of
TP Canson and cited in Libertarian (obiter for not at issue and note)
For misapplication irrelevant (Libertarian obiter, citing Target, BNZ)
Con neg Should not be required to look after own interests (implicitly in Youyang); for
breach of duty of care Common law principles (Bristol) may be by extension of
reasoning in Millett LQR
Mitigation Relevant if B acted clearly unreasonably Canson (but on Fs breach of fid duty)
cited obiter in Libertarian; for breach of duty of care may be by extension of
reasoning in Millett LQR
Approach
1. Establish trusteeship, nature of breach, and claim in surcharging on the basis of WD
2. To quantify the quantum of equitable compensation generally
a. Breach of trust but for causation test required but remoteness and foreseeability
irrelevant because analogous to claim in deceit (Libertarian, Ribeiro J);
b. Breach of duty of loyalty only that breach is material and then for D to disprove causation
i.e. foreseeability and remonteness not relevant (Libertarian)
c. Breach of duty of care common law principles should apply given the analogy with
common law claim (Millett in LQR, Bristol v Mothew, BNZ, Libertarian [dicta]) and
remoteness, foreseeability etc relevant c.f. not appropriate for Ts moral duty (Youyang
dictum)
3. But if it involves deliberate and actual wrongdoing in breach of fiduciary duty strict principles
should apply i.e. Target test of loss which with the benefit of common sense and hindsight,
flows from the breach Liberatarian, Ribeiro
Controversial for the novel distinction on forms of breach, and adoption of Target without
discussion on the controversy and difference in nature of case etc
The outcome may be alternatively deduced by resolving evidential gap against T provided
that he caused the evidentiary gap Milletts judgment in Libertarian
4. Conclusion on preferred approach (+ why)
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b. Modern approach ie liability for loss which, with the benefit of hindsight and common sense,
flows from the breach (modified but for test) McLachlin J
For the fiduciary to disprove causal link Libertarian (obiter), Canson
NAI but for test proved but real loss attributable to neg of TP in Canson Enterprises
Canson Enterprises Ltd v Broughton & Co (1991, Can) (helped P with conveyancing w/o
disclosing conflict of interest; because of which P purchased piece of land and built special
warehouse; loss from neg of structural engineers engaged by P)
Majority adopted nai and applied tort law concepts and limited the award to the extent that
was caused by TP
Parties are expected to look after their own interests under c/l hence con neg/ mitigation
are relevant c.f. equity where Bs are not expected to do the same given the difference in the
core of relationship hence foreseeability [con neg/ mitigation should also be irrelevant by
the same token (obiter)] McLachlin J, minority
Instead devised the test of loss with benefit of hindsight
Will only be liable for the loss if Ds breach permits TPs act which ultimately results
in the loss in which case causal link found
Swindle v Harrison (UK) (old lady who had signed S&P for a hotel was unable to obtain sufficient
fund for the transaction and obtained loan from solicitor who was making a secret profit)
Mummery LJ held that the solicitor was not liable (i) P was too happy to take it, (ii) would
still have suffered loss even if there was no breach applying McLachlins test i.e. yes on
breach but no liability for she wouldve taken it
(i)scope of duty breached (ii) nexis with loss (iii) Target and Canson
Contributory negligence irrelevant in Pilmer v Duke as Bs not supposed to look after own
interests; same for mitigation LH: no authority but same logic should apply
Punitive damages rejected in Harris v Digital Pulse Pty Ltd (NSW CA)
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Same principles as in c/l should apply for they are substantially the same Millett, Bristol &
West Building Society v Mothew, endorsed in Bank of New Zealand v New Zealnad
Guardian Trust Co Ltd; dictum in Libertarian Investments v Hall (in the context of breach
of duty of care by Ts)
C.f. Youyang dictum not appropriate given the difference in relationships
Approach
1. Establish fiduciary relationship and nature of breach
2. For breach of fiduciary duty
a. Causation test loss, with the benefit of hindsight and common sense, flowing from the
breach (Canson Enterprise, adopted in BNZ)
b. But liability limited to the extent to which TP is liable under NAI Canson (majority)
c. In any case mitigation and con neg shouldnt be irrelevant as Bs are not required to look
after own interests McLachlin J (minority in dictum)
3. For breach of duty of care analogous to common law claim so same principles should apply
(Bristol v Mothew, BNZ, Libertarian [obiter]) c.f. Youyang on impropriety
Falsification
1. Re Dawson duty to reconstitute upon breach and to be assessed at the date of judgment for
substitutive performance claim
2. Target bare commercial trusts; applied Canson Enterprise i.e. to have it assessed at the date of
judgment taking into account subsequent events
3. Limitation on Target (i) whether facts concern a B/C/T and how it should be defined (ii) or
limiting it to the situation where the transaction is ultimately completed (Youyang) (iii)
shouldnt be followed
Surcharging
1. Traditional debate Millett LQR; Bristol v Mothew (cited by Libertarian); BNZ v NZ Guardian
(cases on duty of care)
2. Youyang dictum
3. Libertarian v Hall deliberate wrongdoing allowing equitable compensation on the basis of
wilful default
4. Limiting Libertarian (i) whether it involves here deliberate wrongdoing (ii) whether it is
confined to the award of equitable compensation on WD basis (RL/LH c.f. only awarded E/C for
unfruitful accounting) (iii) only where there is deliberate wrongdoing and evidential gap (iv)
only for surcharging on the basis of wD for breach of fiduciary duties
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Resulting trust and Constructive trust in Land Law (the matrimonial home context)
If failed to express an intention in writing (requirement in s.3 CPO) that both man and woman
were to share the beneficial ownership in the property, and the property was conveyed to the
mans name only, the woman can rely on (i) resulting trust or (ii) constructive trust
o Can invoke RT if she has contributed to the purchase price
o Can invoke CT if there was common intention and that she had acted detrimentally in
reliance upon the intention
More recently in Stack v Dowden the CT solution is to be preferred
General principles
Requires always an effective disposition of interest Re Vandervells Trust (No 2)
There must be some expression of an intention on the part of owner mere existence of some
unexpressed intention is not sufficient Re Vandervells
Resulting trusts
Arising where there is (i) transfer of property, and (ii) a recognized trigger for trust occurs, as a
result of which beneficial interest results back to the transferor
Can occur at the time of transfer or subsequently
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1. (i) voluntary payment or transfer, (ii) purchase in the name of another, [together as apparent
gifts] and (iii) incomplete disposal of beneficial interest [failing trusts] Lord Millett
extrajudicially
2. (i) Automatic resulting trust, and (ii) presumed resulting trust Re Vandervells Trusts, per
Megarry J
Automatic resulting trust for incomplete disposal of beneficial interest or failing trusts
automatic consequence and does not depend on any intention/ presumption
(i) Initial failure i.e. where S transfers property upon trust but fails to effectively declare a
trust e.g. lack of certainty, informality etc (intention to create trust )
Requires purported express trust
Affirmed in Hodgson v Marks (express trust to lodger of house which was then sold
and mortgaged; didnt comply with statutory formalities)
(ii) Subsequent failure i.e. where some/all beneficial interest has not been exhausted, such
that there is failure to dispose of the whole beneficial interest in the property
(intention to create trust may/ not have to be presumed)
o Surplus would automatically result back to S as RT; unless S has abandoned the
property (Westdeutsche)
o Interest would be rateably in proportion to amounts they subscribed Re British
Red Cross Balkan Fund
Example Vandervell v IRC [1967] HL (V transferred shares to charity with option granted to T
to purchase back the sahres at nominal price to avoid tax obligation)
Held that trust of the option failed for lack of certainty of objects i.e. V didnt successfully
divest himself of the equitable interest despite transfer of legal title i.e. automatic resulting
trust hence continued liability to pay tax
Significance in that automatic RT can be imposed irrespective of intention of S
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Specifically rejecting Megarrys argument that ART does not depend on intention and
operate automatically
C.f. cant account for cases where RT has been imposed though there is clearly no intention
on the part of transferor for transferee to be trustee
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c.f. Vandervell v IRC, Lord Wilberforce and Lord Upjohn
There is no place for presumptions where all the facts have been proved by evidence,
and in the case of failed trust resulting trust there is no fact left outstanding
o But Chambers explanation thats framed in terms of proof of a non-beneficial
transfer should fail on the same reason that a presumption of non-benefiical
transfer cannot be the explanation for presumed RT
Though the courts proposition there did not work for the settlor retains nothing when
making such a transfer
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On presumption Swadling
Classified as (i) voluntary conveyance RT (ii) purchase money RT (iii) failed trust RT
o Noting that the (i)/(ii) do not arise when presumption of advancement applies, in a will
context, wehre right transferred is an interest under trust, and additionally for (i)
where the interest conveyed is sth diff from that held
Referring to proof of one fact giving benefit of secondary fact unless rebutted
Presumption is depositive of result in the absence of contrary evidence Fowkes v Pascoe,
evidence that investment was not for purpose of trust e.g. that it was a gift can rebut
presumption Mellish, not relevant if theres no gap in the evidence Goodman v Gallant
o Presumption rebutted by evidence of any intention inconsistent with such a trust and
not only evidence of intention to make a gift West.
C.f. mere indication of burden of proof, irrebutable presumptions of law, ones which dont
compel tribunals to find in favour of any party in the absence of contrary evidence, those which
are a matter of statutory construction
Re Abbott fund subscribed for the maintenance and support of 2 deaf women
Held that the surplus was held on resulting trust for subscribers
C.f. Re Andrews Trust fund subscribed solely for the education of a clergymans children
Held the children were entitled to balance equally upon completion of formal education
Where a special purpose be assigned for the gift this court [rebuttably] regards the gift as
absolute and the purpose merely be the motive of the gift
o If he has given the whole of the fund, he is regarded in the absence of contrary indication as
having manifested intention to benefit the person to the full extent of SM
o Construed education in the broadest sense and found ref only a motive
Followed in Re Osoba by CA (bequest to wife upon trust for the maintenance and training of
daughter for up to university and maintenance of aged mother) held to be a trust for the 3
women absolutely as joint tenants hence no interest to result back
N.B. distinction from Quistclose intention on finding of explicit intention on exclusivity
2. Primary express trust for creditors, secondary resulting trust for lender from failure to exhaust
beneficial interest Lord BW in Westdeutsche (rejected that there was a RT because there is no
express trust i.e. doesnt fit within recognized categories of RT (referring to RT at the outset); and
intention for it to become intended Bs absolute property)
Referring to the instance of automatic RT where A transfers property to B on express trust
but the trust fails to exhaust the whole beneficial interest
C.f. requirements on 3 certainties (i) certainty of intention is it desirable to infer one in the
commercial context (ii) certainty of objects
Difficult to reconcile with principle that trust for private purpose would be void HM
Lord Millett
Referred to QT as illusory trust in extrajudicial article because the beneficial interest
remained in S and revocable at any time though taking form of an express trust
Modified his analysis later in Twinsectra in that the trust did not take the form of an
express trust but rather resulting trust though still illusory in that the recipient was not
intended to receive full interest i.e. beneficial title still remains in the lender/ settlor when
the purpose fails and thus arises by operation of law
4. Loan subject to contractual undertaking giving only contractual right to lender that is
specifically enforceable in equity to prevent misapplication Chambers
RT would only arise if the purpose for which the money was lent had failed, for the claimant
wouldnt have intended the recipient of the property to have the benefit of the property
C.f. Millett it doesnt address non-contractual payments, recognition of fiduciary duties,
evidential significance on keeping accounts separate, explanation on conjuring proprietary
rights out of contractual relationship
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Commentaries
Virgo
Lord Hoffmans express trust for lender approach is inconsistent with the orthodox approach
that the beneficiary can revoke the trust anytime or compel exercise of powers
Lord Milletts approach is consistent with his idea that RT responds to transferors absence of
intention to pass the entire beneficial interest
C.f. he appears to be considering this a case of ART from holding retention of equitable interest
but that only arises where the property has been transferred on an express trust which has
failed inconsistent with judgment as (i) Millett did not try establish such at all and merely
based it on the absence of intention to transfer beneficial interest (ii) fact of insolvency means
the reason for lending money has failed and enables lender to revoke mandate held by the
borrower even though there is no failure of trust as in Quistclose under Milletts approach as
title is always with L
o Virgos interpretation ART problematic because it is only possible if theres failed
express trust c.f. PRT for absence of intention to benefit
Reinterpreted as an express trust form the start, with intention inferred from arrangements, but
if its for an abstract purpose where there is no identifiable Bs, then it would fail initially and
give rise to RT for the lender while trustee continues to have power to use the fund until it is
exhausted
o If its purpose trust with identified Bs, it would be valid until borrower goes into
insolvency in which case the purpose can no longer be performed; RT then arises
o In which case Bs cannot terminate trust at any time
JA Glister
Questioned the extent of equitable right to see funds applied for the primary designated
purpose e.g. where A sets up a trust and gives property to B on trust in favour of C by
instalments and C seeks to invoke Saunders
Issue on proprietary interest where part of the trust is delivered such that C has gained
beneficiary interest in some property, and then becomes impossible
Chambers view cannot assist settlors in compelling performance of positive obligations
imposed on the trustee to do something and; would also not have proprietary basis to get the
money but only injunction to prevent misuse
Trustees of RT generally not subject to fiduciary duties unlike ET hence separation of legal and
equitable ownership while creating a trust does not necessarily create fiduciary relationship
but in QT trustee would be sufficiently aware of transferors intention and motiviation so as to
make him subject to fiduciary duties
o Moreover RT and ET are different in the beneficiarys control over T (Saunders)
o Does recognize that RT is more readily available in non-contractual transfers for being
based on absence of intention to pass full beneficial ownership
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TM Yeo and H Tjio, Case Comment The Quistclose Trust, LQR 2003 on Twinsectra
QT may not be distinct, analysis applicable to other deals and full range of obligations and
remedies likely available; implicit even in Milletts
Theoretical difference between Hoffman and Millett on nature of QT but not inconsistent;
merely that no need to resort to RT if ET found noting Hoffmans simplistic and in line with
contractual understanding
Milletts actually adds to the controversy on Birks/ Chambers debate though case here relates
to failure to exhaust entire beneficial interest hence RT used as a gap filling mechanism [easy
since Sims was never intended to retain beneficial interest] but taking it further, he views that
QT is applicable whenever lender does not part with the entire beneficial interest in the money;
in which case debate on intention to retain/ lack of intention to pass becomes illusory
Noted difference in significance of mutual intention but practically absence of intention is
difficult to prove so L likely to give evidence on actual intention
Milletts analysis offers a lower threshold for proving trust further extension of benevolent
construction in finding a trust in what would have been an ordinary loan
Following which, the lender who specifies purpose for a loan theoretically has at least three
strings to his bow (a) express trust with L as B (b) intended express trust but failure of
certainty of object hence money on RT for L (c) no express trust but nonetheless RT from lack of
intention to benefit borrower
Possible social value in justifying preference for lenders c.f. too easy to bypass
Summary of requirements on Quistclose trust essentially a question of whether the transfer is for
specific purpose such that the recipient cannot mix the assets with general funds
For Virgo (i) particular purpose (ii)exclusive use for that stated purpose (iii) separation of
property (iv) failure of purpose c.f. LH shouldnt be a req for QT arises from the start
1. Generally, only requires that S intends to enter into arrangements that have effect of creating
trust i.e. S possess the necessary intention as objectively assessed to create trust Twinsectra
c.f. mutual intention of the parties in Barclays v Quistclose
2. Will be impressed with QT if the transfer must be for an exclusive specific purpose test of
whether the payors objective intention is for the asset to be at recipients free disposal Tw,
affirmed in Re Goldcorp (* note sequence)
a. Requires more than just specific purpose; must be an exclusive purpose such that the
recipient cannot mix the assets with general funds or dispose of them freely
Requires a legal duty/ undertaking of segregation from general assets
Factual physical segregation neither sufficient nor necessary though it can be strong
evidence that the money is not at recipients free disposal
o In line with requirements for express trust for which there is only a duty to keep
separate account for trust assets
o Would however require strong evidence to show that the asset is not at the
borrowers free disposal if the assets are not segregated
o N.B. Would require separate accounts to identify trust $ (nb tracing)
Generally not satisfied for normal loan where B only owes contractual duty to return an
equivalent amount, deposit/ earnest money (to show sincerity in performing contract),
or payments in advance for goods or services
o Normally intended for the transfer to be absolute and at the free disposal of the
recipient as part of its general cashflow
b. In order to ascertain parties intention look at terms of the arrangement and circumstances
TW; eg loan used only and exclusively for payment of dividends in Quistclose; indication of
one specific purpose only in Tw
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Ls s intention is paramount mutual intention for (i) showing Ls intention and Ts
consent Hoffman, and (ii) only for scope/nature of duties Millett
Ultimately the same as obj assessment of Ss intention requires drawing inferences as a
reasonable person would from the circumstances and the agreement
3. This would give rise to a Quistclose trust, which is a resulting trust in favour of S, at the time of
payment and subject to borrowers duty/ right (depending on terms) to apply it for specific
purpose Twinsectra, Lord Millett c.f. Quistclose
RT for the absence of intention to transfer beneficial interest
Beneficial interest remains with L until and unless applied in acc with directions
B only with a mere power to apply money not a purpose trust
o Requires only that the power is stated with sufficient clarity to enable enforcement
B loses authority to use the money at all if uncertain
Analysis on the basis of resulting trust Lord Millett **, adopted in Hong Kong
Requirements
1. Generally does requires necessary intention on the part of transferor to create a trust but subj.
intention is not relevant; merely requires that he intends to enter into a particular arrangement
with the effect of creating a trust
The fact that T relied for its security exclusively on Sims personal liability is merely subjective
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and therefore irrelevant, but in any case not inconsistent with QT since QT arrangements are
not intended to provide security for repayment of loan but rather to prevent money from
misapplication otherwise than in acc with Ls wishes
Mutual intention only relevant as to nature and scope of borrowers undertaking but the
incidence of trust arises purely from lenders lack of intention
o But here must consider borrowers undertaking to ascertain gap in the beneficial
ownership since its a case on failure to exhaust beneficial in.
2. Not only that money is paid for a particular purpose, but whether the transferor, objectively
assessed, intended the money to be at the free disposal of the recipient
Necessarily excluded by arrangements that money is to be exclusively used for specified
purpose here found in Sims undertaking
3. It is unconscionable to obtain money on terms as to app and then disregard them (Gibert v
Gonard, North J) therefore Sims breach is beyond mere breach of contract
Undertaking that the money is used solely for acquisition of property and not simply to the
order of Yardley release for any other purpose is breach of trust
A fiduciary duty (instead of contractual) to apply property on stipulated purpose and not for
any other purpose undertaking giving rise to fid duty for the lender places his trust and
confidence in the recipient to ensure that it is properly applied
o A classic situation in which a fiduciary relationship arises, and since it arises in
respect of a specific fund, it gives rise to a trust
Hence may exist despite absence of contractual relationship as in Rose v Rose, and binds
third parties as in Quistclose *not the other way round
Nature of the Quistclose trust - Money held on RT for the lender from the start (i.e. retains beneficial
interest), subject only to the borrowers right to apply it for the specific purpose
In response to arguments that (i) there lacks certainty of object, and (ii) no trust in favour of T
could arise prior to the failure of stated purpose
Rejecting all alternative analysis [held to be] an entirely orthodox example ofRT
o Doubting the two successive trust analysis by Lord Wilberforce problematic where the
specific purpose is abstract with no identifiable Bs
Beneficial interest remains with L pending application/ failure of purpose, rejecting
a. Borrower
Would defeat the whole purpose of QT in preventing the money from passing to borrowers
trustee in bankruptcy in the event of his insolvency
B only with minimal interest pending application of the money e.g. must keep the money
separated, not to apply it except for stated purpose, not to refuse to return to lender if
the purpose fails
b. Contemplated beneficiary of the loan rej.
re Northern Development (Holdings Ltd) $ was advanced for express purpose of payment
to unsecured creditors by co which was in financial difficulties; found purpose trust
enforceable by creditors as whom trust was created for
o Doubted for there the loan was intended to keep company trading by providing
working capital with which to incur fresh liabilities (c.f. to avoid bankruptcy by
paying off existing creditors) should not have been held a Quistclose trust at
all; moreover case there only concerned with negative injunction to restrain
improper application of the money rather than a mandatory order to compel
specific performance
o Only benefiting creditors indirectly; if its for purpose, should be void
Hence problem and potential distinction where the intended beneficiary is unspecified
or if the transfer is for abstract purpose
Questioned Wilberforce in Quistclose nature of primary trust was not at issue
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c. In suspense with entire ownership passed to B subject only to Ls contractual right enforceable
by injunction to prevent misapplication until and unless that purpose fails, in which case RT
springs into being CA, Chambers for latter; rejected by Millet
No scope for RT to arise if absolute title was intended and did pass at outset
Difficulty to reconcile with CAs grant of proprietary remedy, non-contractual payment
cases, fiduciary nature of borrowers obligations as held by Wilberforce in Quistclose
which necessitates status as B for otherwise cant enforce contract as TP even at equity,
the evidential significance of having to keep the money in a separate account, priority
over SCs (citing Ho and Smart)
In fact sit comfortably with Chambers theory that RT responds to lack of intention to
benefit RT fills the gap when beneficial interest is not exhausted and leaves no room
for suspense
Issues remain on (i) allowing lender to enforce not as B since there wont be secondary trust if
there is primary one, and not as S who does not retain beneficial interest (ii) explaining failure of
primary trust a trust would only fail if it becomes illegal or impossible to perform, which may not
be the case even if Ss purpose is frustrated (i.e. distinction Ss motives/ purpose of trust)
Milletts approach that beneficial interest remains with the lender from the start
(i) circumvented and (ii) Allowing S to revoke mandate and demand return of money which is
his so long as his object in advancing the loan is frustrated
Considered the only analysis consistent with orthodox trust law and commercial liability
simple commercial arrangement akin to retention of title clause enabling the borrower to have
recourse to lenders money for particular purpose
In line with his view that RT responds to an absence of intention to benefit recipient
Most importantly evaded the difficulty in reconciling Quistclose with the principle that a primary
trust for private purpose is unenforceable R Chambers, Swadling
Best in (i) no party can claim absolute interest to enable Saunders rule (ii) just the right amount of
legal principles all parties want is security for L which only needs contract principles to enforce;
the legal characterisation corresponds with the deal intended (iii) would require segregation of
funds upon transfer as intended and enforcement of the term on exclusive use by contract LH
o Minor problem: fits neither in automatic/presumed purchase money RT (better as latter)
but already least infringement with existing principles
Unjust enrichment (i) mistaken payment (ii) void payment (iii) voidable payment e..g undue
influence or fraudulent misrepresentation
Basis for invoking trust principles is always to get equitable proprietary right in the property
which will bind TPs except Equitys Darling and allow the asset to be taken out of the assets
available for distribution for unsecured creditors pari passu
Can be recovered under c/l claim in money had and received gives personal rights
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C.f. (LH) argument that the property still belongs to A begs the question; and transfers are
often intended as outright absolute transfers
3 schools of thought
A. Swadlings view of no proprietary interest (minority)
Undue influence and mistake only affect the motive but intention remains valid
B. Birks/ Chambers view that an immediate RT arises (extreme view)
Might make sense to say that the trusts imposed to reverse UE are always RT given that RT
are always restitutionary in pattern c.f. CT Hayton & Mitchell
RT should arise when money is paid under a mistake for it vitiates the actual intention or
where money is paid on a condition which is not subsequently satisfied e.g. total failure of
consideration Birks
Criticised for (i) eliding rights in property into rights in the value transferred by applying
restitution principles contrary to the principle that there has to be defined trust
property (ii) presuming that trusts arise upon receipt irrespective of legal title holders
knowledge even when his conscience is not affected(iii) arbitrary distinction between
failure to perform contract and total failure of consid. (iv) injustice to third parties esp.
creditors in insolvency Lord B-W
RT to arise for there is no intention to benefit recipient (here intention is defective) hence
legal title is passed but the recipient holds it on RT upon payment Chambers
Remedy only withheld for policy reasons
C. Lord B-W in Westdeutsche preference for remedial CT (halfway house)
RT is not justified on the basis of unjust enrichment which would otherwise lead to unjust
results
No immediate beneficial interest but should only give rise to power to revest property e.g.
rescinding contract or making a claim upon which the trust arises
Remedial CT to protect innocent third parties
C.f. Institutional constructive trusts (C.f. remedial constructive trusts which operate
retrospectively at the courts discretion)
Imposing a trust not to give effect to purported intention but to prevent unconscionability
o C.f. resulting trust which gives effect to what the transferor must have intended which
may be ascertained or presumed eg where payor has done sth but there is a gap in
evidence on whether a trust should be raised
Will be treated as if he is an express trustee
A tool for reconveyance of legal title and simply refers to an order to pay money or reconvey
specific rights to the claimant; fictional Swadling
Desirable esp. in the commercial context for (i) priority in insolvency (ii) reaping of increase in
the property value, and (iii) better interest rates [with compound interest]
Unconscionability recognized as the underpinning principle in Westdeutsche (B-W)
Not possible to prescribe exhaustively the circumstances under which CT will be created (Cobbe
v Yeomans) broadly requires wrongs for being a means to capture profits from breach of
confidence and crime proceeds, detrimental reliance
o To prefect/ give effect to original intention that beneficial ownership of property should
pass c.f. arising not because of intention Virgo
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Sinclair v Brougham [1914] UKHL (took in deposits under ultra vires banking services and hence
debts owed to depositors were also void for ultra vires; on issue of priorities)
Criticised in Westdeutsche for the absence of ratio decidendi, objectionable reasoning,
intended to deal with cases with no trade creditors in competition
1. No personal claim (i) no recovery under express contract which is void (ii) no recovery
under implied contract for it would equally be void since the company had no authority to
enter into such a contract with the depositors
Unjust enrichment was not developed yet and court dismissed this claim on the basis of
claim in quasi contract
Bad reasoning LH; Overruled in Westdeutsche majority judgment
2. Found equitable proprietary rights - deposits held on trust
Not satisfactorily elaborated and could only be explained by the practical realities of the
case since depositors are innocent parties LH
Westdeutsche Landesbank Girozentrale v Islington HL, 1996 (sued for payment under an
interest rate swap agreement which was ultra vires of the Council hence void)
P wants to recover compound interest which is only available where it has proprietary
interest (otherwise only simple interest is granted for personal rights)
Majority judgment (3:2) (i) C had personal claim to recover in a common law action but (ii)
there is no proprietary equitable right
Problems that (i) recipient may be personally liable for disbursement despite being ignorant
of existence of trust (ii) equitable proprietary right would bind TPs in tracing other than
Equitys darling
Concerns over proprietary overkill (i) lack of moral/ legal justification for giving priority
to transferors right to obtain restitution over TPs e.g. general creditors who have
themselves not been enriched at formers expense or dealt with him, and (ii) commercial
uncertainty from wholesale importation into the commercial law of equitable principles
inconsistent with certainty and speed
Here D had clear conscience; innocent third parties would be affected; strong reasons
are needed to justify the proprietary overkill
Issue of whether the recipient of money under contract subsequently found to be void for
mistake or ultra vires hold the money on trust even when he had no knowledge at any relevant
time that the contract was void
General principles A person would only be bound as trustee if (i) his conscience is affected at
the time when property remains identifiable
1. Equity operates at the conscience of the owner of the legal interest upon acceptance of
office for express trusts, and unconscionable act for CT
2. Holder of legal interest cant be T as long as he is ignorant of facts alleged to affect his
conscience/ until he is aware that he is intended to hold property for others benefit
RT only arising upon discovery of circumstances giving rise to a resulting trust i.e. when
the party brings an action against legal title holder where he gets title w/o his
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knowledge or intention to give as gift by transferor
3. There must be an identifiable trust property with only exception being DA
4. Interest would be binding on TP except Equitys Darling from the moment of establishment
of proprietary interest
Application there was no identifiable trust property when the bank acquired knowledge of the
invalidity of contract because the account the money was paid into was overdrawn and went
into overdraft i.e. no longer traceable (since its with negative balance and hence anything paid
into it would be gone) (Bishopsgate Investment Management v Homan)
N.B. no issue with identifiability so long as the account is not overdrawn [see tracing]
Step 3 rejected argument that the trust must exist on title split
Overruled Sinclair
Possible to have equitable rights in B but legal title in A e.g. mortgage where borrower has
equity of redemption and legal title whereas lender has equitable title
Step 4 rejected argument that RT arises for recipient was not intended to be benefited
Adopted Swadling approach that RT gives effect to common intention doubting Re
Vandervell in which it was held RT arises automatically irrespective of Ss intention
RT arises in two circumstances and both of which give effect to common intention (a) PRT
where A makes voluntary payment to B but does not intend to make such a gift (b) ART
where A transfers property on express trust which does not exhaust the interest neither
are applicable here (i) no PRT for the parties had paid/received payment intending for it to
become the absolute property of the recipient despite labouring under a misapprehension
on validity of the contract (ii) no transfer under express trusts i.e. no ART
o Given that presumption of RT can be rebutted by evidence of any intention
inconsistent with such a trust (William Swadling)
Remedy granted personal liability for payment under a void and ultra vires contract for total
failure of consideration (in counter payments) but no proprietary right
Overruled Sinclair v Brougham (where court found that claim for money paid under void
contracts at common law is one in quasi-contract and rejected the c/l claim for an implied
contract with the same effect would equally be ultra vires) held that the proper basis is in
unjust enrichment for recovery under total failure of consideration but no proprietary
interest
Commentary on Westdeutsche
Ken Lee not universally accepted; on constructive trust and knowledge
Not necessarily require conscience to be affected for express trusts and even if conscience is
affected, it doesnt necessarily give rise to a trust
Absence of knowledge of mistake may be a defence for a claim of proprietary relief (bona
fide purchaser for value w/o notice of equitable interest of spouse in property will not be
bound) but the converse is not true i.e. that the fact he has knowledge only means he cannot
deny the beneficial owners interest but the trust is already there c.f. here knowledge of
mistake gives rise to the trust hence unconventional
A Burrows
Supports overruling of Sinclair for lack of justification for imposing proprietary restitution for
failure of consideration but noted exceptions e.g. Quistclose trust (an RT), a constructive trust
recognized in Neste Oy v Lloyds Bank plc
B. Mistaken payments CT arises when recipient retains transfer after conscience is affected
(Westdeutsche, applied in Re Farepak in rationalising Neste Oy v Lloyds Bank to find CT at
time of receipt; Chase Manhattan overruled on that point for no knowledge of mistake)
Note counter arguments in (i) time of notice/ verification (ii) knowledge of the payment
being for a particular purpose (e.g. only resolved to cease recruitment of members)
Chase Manhattan Bank NA v Israel-British Bank (London) Ltd [1981] Ch (paid the same sum
twice to the credit of a London bank due to clerical mistake; immediately informed recipient upon
discovery which was taken note of; recipient then went into liquidation)
Person paying under factual mistake retains equitable property in the asset and the
conscience of the recipient is subject to a FD in respect his proprietary right
o Expressed as the English law position which he equated with NY law
o Retention of beneficial interest suggesting that it occurs at point of payment
Appears to be talking about CT for that is the position under NY law though uncertain
N.B. may be justified on RT in that when money was paid over under factual mistake, there was
no valid intention to benefit transferee Birks/Chambers but note RT debate
Neste Oy v Lloyds Bank plc (1983) payment for discharge of function as shipowners agent was
made after company decided it should cease trading
Found constructive trusteeship arising at the time of receipt
1. Payment made under mistake since D had already resolved to cease trading and it is clear
that there would be total failure of consideration
2. Any reasonable and honest director wouldve arranged for immediate repayment; contrary
to fairness if recipients general creditors could profit
3. Hence inequitable and could not therefore in good conscience retain the payment
4. CT at the time of receipt
Re Farepak (2006, Ch) payments into before/ after directors of a Christmas savings scheme
decided to cease trading and went into administration
Didnt follow Neste Oy reasoning which suggests a remedial CT approach rejected by
Westdeutsche but reconciled its outcome with Westdeutsche reasoning
Basically that there would only be a CT at the time of receipt, adopting Westdeutsche
reasoning if (i) payment was made under a mistake for not knowing that the company had
ceased trading (ii) the company knew that it would not fulfil the contract and transferor
must understand otherwise at the time of receipt (iii) and its conscience was therefore
affected from that moment
o i.e. recipients conscience will be affected if knows of the mistaken payment
o Requiring more than mere pricking of the conscience
Distinction between the time of payment and receipt takes the latter and distinguished
from Neste Oy where payment and receipt were simultaneous; noted receipt by agent
constitutes receipt by principal
Hearing was expedited for being heard shortly before Christmas hence pressure on timing and
questionable status as good authority
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Since legal title remains, can alternatively sue for proceeds of sale of the stolen property
even against the trustee for bankruptcy of the person holding the proceeds for T/B is not
a bona fide purchaser and would be bound by the claim
Traceable only if kept separate but not after being mixed with other assets
At equity [Canada CT; LH somehow odd for trustees by definition are subject to duties
arising from a relationship of trust and confidence]
Generally just dealt with in common law which is well-developed on this matter
Main benefit is that C can seek to recover stolen property/ assets even if mixed
Residuary legal title in the stolen property and equitable proprietary interest in the
thiefs possessory title by virtue of his unconscionable retention Virgo
Westdeutsche, obiter CT from receipt; criticised from every angle; nth cited
Agreed that it would be traceable at equity; Equated with obtaining property by fraud in
which case a CT will be imposed on the fraudulent recipient no authority though Potter
LJ in Twinsectra agreed that property obtained fraudulently without a contract should be
subject to CT from moment of transfer
Criticisms
Unnecessary to impose CT for an original owner to recover property for common law
principles can go quite far in relation to stolen properties Victim retains title to the
property anyways even though he no longer has possession and can sue thief in tort of
conversion i.e. wrongfully handling property
Victim retains legal and equitable title hence the thief has no title to the property to
become a trustee
Shalson v Russo
No trust arising immediately upon payment but only when, upon discovery of fraud,
transferor elects to rescind
Criticised Westdeutsche Thief does not obtain any proprietary right in the stolen good
hence difficult to see why there would be immediate trust on CT
Tracing at equity generally requires pre-existing fiduciary relationship and it would not
be right to say that stolen property must necessarily be trust property to satisfy that
precondition
Contractual concepts
Total failure of consideration where you would have a claim for money had and received
under the lwa of unjust enrichment
Breach of contract giving damages, consequential losses and replacement costs
Vitiating factors giving right to rescind contract to revert to original position
Go for TFC and vitiating factors if its a bad bargain; or breach of contract otherwise for
the expectation measure will give you the market price
Case authorities RT upon transfer under El Ajou c.f. no proprietary right under Re
Goldcorp c.f. CT upon receipt under Westdeutsche c.f. CT upon actual/ implied rescission
under Sharlson unless TP rights have accrued
N.B. El Ajou is only dictum whereas Goldcorp is orthodox hence of greater weight
essentially difference in that El Ajou suggests a right to rescind is sufficient for tracing
whereas Re Goldcorp requires exercise of it to give proprietary claim
El Ajou v Dolloar Land Holdings, Millett [1993] on fraudulent misrep right to rescind is
sufficient for tracing (dictum); RT at time of rescission
1. P has right to rescind from moment of receipt of money paid on fraudulent misrep and
revest equitable title to purchase money in themselves, at least to the extent necessary
to support an equitable tracing claim only followed in dictum
Seems to be suggesting that mere equity to rescind suffices to support tracing
which is normally available only to Bs with proprietary interest
C.f. Not an equitable interest; merely an in personam right hence illegitimate, or
at least questionable to say that mere equity can justify equitable tracing and
justify proprietary right c.f. traditional rules LH
Though Millett is not saying that the right is an equitable ownership itself only
that the right to rescind justifies a tracing claim [which possibly has a lower
threshold]
2. Upon rescission, the trust created is RT not remedial CT seems to fit with Chambers
c.f. would not be ART (no express trust) or PRT (transfer is not voluntary gift) and
should instead by CT operating on unconscionability Virgo
1. Contract for unascertained goods, pursuant to which no legal title/ equitable title by
virtue of the simple contract, could pass only possible upon appropriation
Here not even an ex-bulk case for there is no fixed or predetermined source for
supply of bullion wouldnt suffice so long as S has the freedom to fulfil contract
from other sources even if quantity matches with stock of company at that time
London Wine
Unless S takes steps after conclusion of contract in which case purchaser may be
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found a tenant in common for the entire bulk in proportionate share
3. No Quistclose trust from payment for the specific purpose of purchasing gold bullions
nothing limiting companys freedom to spend purchase money as it chose i.e.
requirement 2 in Twinsectra was not satisfied
5. No CT arising from the voidable contract P arguing that it was induced by fraudulent
misrepresentation for co knew there was not sufficient reserve
a. Here an absolute payment transferring absolute ownership over the money
Not total failure of consideration for the monies paid were not ineffectual from
the start [distinguished from Sinclair]; or mistake customers did intend to
make payments [cf Chase]
b. Only with a right to rescind contract but no proprietary right would be vested back
into the transferor before rescission (sufficient to have taken reasonable steps e.g.
indication of intention) factually no rescission before insolvency
Proprietary right is based on personal claim for return of price, which cannot
exist so long as the sale contract remains in existence and enforced
c. Even if there was rescission, it doesnt necessarily give rise to proprietary rights
superior to those of third party creditors entitlement otherwise would be too
extreme and not supported by authority (El Ajou was not cited)
o cf El Ajou equitable tracing is justified by existence of right to rescind
Same for all voidable contracts eg mistake, total failure of consideration
6. No remedial CT not recognized in UK law any in any case may not actually tilt the
balance against the innocent TP creditor in commercial setting
Imposition of interest over banks charge is not justified despite having commercial
bank up against private citizens
No retention of equitable interest no initial interest to be retained; retention cant
co-exist with contract performed by delivery of goods
Critique
Reasoning compatible with orthodox principles
Though read together with other authorities mistaken payor would be in a better
position under Westdeutsche obiter than payors in Re Goldcorp situations
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Shalson v Russo, Rimer J [2005] (fraudulently induced into loan contract) CT upon
rescission enabling tracing so long as TP rights have not accrued before rescission
1. No immediate trust arising upon transfer and criticised Westdeutsche obiter (i) thief
cant be holding property on CT for he only gets factual possession i.e. no property right
obtained (ii) no satisfactory authority that property transferred under fraudulent misrep
would be immediately held on trust
2. Reconciled El Ajou and Goldcorp El Ajou affirming that transfer under fraud would be
put under RT upon rescission whereas Goldcorp says only personal right
Found no actual difference between the views expressed (i) El Ajou was qualified in
that the effect of revesting was at least to entitle the claimant to set up a tracing
claim and (ii) Goldcorp concerned property transferred (purchase price) became
subject to a floating charge which crystallised before rescission which makes sense
for property is vested in transferee upon rescission and TPs in good faith could
obtain an impeachable tile
Note that where the company goes into compulsory liquidation before
rescission, the only right is also just in personal claim as in Goldcorp
El Ajou not involving any grant of preferential rights over creditors
Followed El Ajou in that upon rescission, you will have equitable proprietary right
revested in you giving you the right to trace into the property
3. Found (i) property passed legally and beneficially (ii) with chose in action only in form of
right to claim repayment to transferor i.e. rescission (iii) making of the claims evinced
sufficient intention to rescind to give rise to implied rescission here referring to claims in
court c.f. Re Goldcorp in which there was no factual rescission and (iv) upon (implied)
rescission, transferor would become entitled to assert proprietary interest that would
entitle tracing
4. However limited and will be defeated by TP rights must rescind before interests of
bona fide purchasers arise, and before liquidation for properties would otherwise have
gone into statutory distribution regime
5. May be referring to resulting trust by citing El Ajou c.f. not consistent with traditional
principles on RT which only arise in 2 situations; should be CT
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b. Pure breach i.e. breach of fiduciary duty without misappropriation
1. Acquisition of property that should have been acquired on behalf of trust CT
Bhullar v Bhullar
Held the piece of land bought by the director was held on CT giving rise to duty to
reconvey the land to the company in exchange for purchase price paid
Whether or not P could have or would have obtained the opportunity
Courts reasoning
1. No pre-existing proprietary right for the bribes did not belong to B
2. Fiduciary owes duty to account for bribes from the date of receipt, which is an
equitable right
3. Equity treats as done what ought to be done
4. When the debt is incurred, equity treats it as already having been repaid even
though legal title was with F hence equitable title arises upon receipt
5. Hence bribes, whether in cash or kind, are held on CT upon receipt for B which
covers property here for being purchased with bribes
LH Apparent that court was motivated by the idea that bribery is an evil
practice that has rotten the foundations of civil societies and full disgorgement
of properties received is warranted
Critique
Appears to have decided the case on the basis of heavy policy reasons in deterring
bribery but arguably proprietary interest is not necessary
Proprietary overkill (Crilley) giving B too much proprietary protection over
general creditors if there is accrual of TPs right or insolvency subsequent to receipt
since first in time prevails
Lord Milletts 1998 LQR article supporting the outcome in Reid but based on
disability rule
Constructive trust is only another way of saying vendors promise to convey the land
to purchase is specifically enforceable
An implied trust, whether C/RT, is a true trust; there cannot be one where there is
no trust and there cannot be a trust where there is no property
Hence there can be no C/RT unless property is identifiable in hands of
recipient and its not freely available to the recipient as general assets
Justified the duty to account for bribes in specie (which Templeman failed to do) F
under disability to make any gains from breach of FD so gains made ought to belong
to B hence obliged to account for bribes in specie for proprietary interest has always
been with B; precluded to defend otherwise
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Commented that Reid does not decide that a breach of FD would inevitably give rise
to CT here only held obligation to pay over bribe upon receipt for he has no
authority to receive the payments for his employers account at all hence no
authority to mix them with own money and use for own purposes subject only to
duty to account; basically not authorised despite having received it to retain/ use it
himself hence not at his free disposal similar to QT
Sinclair Investments v Versailles Trade Finance Ltd (2011, CA), per Neuberger
Operation of a Ponzi scheme with director transferring money received by B from investors
to VGP to inflate its share price and mask absence of genuine business carried out by VGP
which was in fact the directors alter ego; made a gain by selling his shares in VGP which
later collapsed and the director became bankrupt
P was one of the investors and took assignment of all claims by other relevant Ps
Issue of whether P can claim proprietary claim over the ultimate profit (a yacht) in
the absence of proprietary link (no property belonged to the principal and not
deriving from opportunity from the principal)
1. Equated unauthorised secret profit with bribes both involving receipt of non-trust
asset deriving from fiduciary position and in breach of fiduciary duties
No distinction between profit taken out of trust and bribe Reid
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Reasoning of Templeman begs the question in asserting that a bribe paid to
fiduciary is vested in B though that is the issue of the case
Templeman Js concern that F would receive benefit from breach if the property
increases in value can be remedied by ordering equitable account
Bribe cannot be said to be an asset that D is under a duty to take for B
Insufficient weight given to the potential prejudice to creditors of B
3. Further reasoning
a. Distinguished between (i) F who deprives B of an asset e.g. Fossett, Keech, Phipps
and (ii) F who enriches himself by committing a wrong against B
b. No proprietary claim in gains acquired by fiduciary in breach of his duties unless
the property (a) is or has been beneficially Bs property, or (b) by taking
advantage of an opportunity/ right thats Bs
Even if the profit could not have been obtained if he wasnt fiduciary
would only give rise to a personal claim
Cited Phipps and Bhullar to support second exception
Implicit category (c) for all other cases in which theres no CT
4. Application Facts here fall within Milletts Paragon second category ; neither
category satisfied so only duty to account in personam because the gains obtained
were not subject to pre-existing fiduciary duties
5. Approach justified for (i) deterrence can be achieved by in personam remedies of
equitable compensation (ii) unnecessary to achieve deterrence at the expense of
general creditors unless the exceptions apply
6. Hence no proprietary claim/ CT on the proceeds of sale
Critique by LH
On policy
Deterrence is indeed quite irrelevant to the grant of proprietary rights but equitable
compensation would not be sufficient to deter either should instead have said
deterrence should be achieved by disgorgement of profits which focuses on Ds gain
rather than Ps loss and strip him of his gains
On exception (b)
a. Authorities cited do not support the categorisation
Boardman and Bhullar do not in fact provide justification for CT and in any case
no insolvency involved in the cases hence cannot be authority regarding grant of
proprietary rights when creditors interests are at stake
b. Imprecise scope as highlighted by Mankarious in re-characterising bribes as an
opportunity and arriving at a different result to give proprietary interest
c. Arbitrary distinction between certain types of bribes
E.g. bribes obtained in Reid cannot be reconstrued as opportunity belonging to
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the government for it cannot lawfully accept bribes for non-prosecution c.f.
Mankarious
If deterrence is the underlying policy, bribes should at least be of the same level
of blameworthiness, if not more, than normal commercial bribes
d. Opportunities dont properly belong to P (Bhullar) needs more justification
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FHR European Venture LLP v Mankarious [2013] English CA (on appeal)
P hired agent to buy a hotel, agent received secret commission from seller of 10m
3. Hence determination as (ii) case not precluded by mere fact that F obtains a benefit
from TP or which could never be or would never be obtained by P, or that P had
obtained what he intended does not necessarily preclude CT
Which are all hallmarks of bribes and secret commission cases
5. Remarks (i) considerable difficulties to mark boundary of exception (b) (ii) should
revisit authorities and overhaul the entire area for a coherent legal framework
which can only be done by the SC bearing in mind competing policy concerns e.g.
stripping F of all gains inc. increase in value of benefits obtained vs. TP through
which the benefits may have channelled
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Lewison LJ (minority) applied Bhullar test
1. Felt bound by Sinclair and cases cited therein i.e. Heiron and Lister; but
distinguished the facts there profit was made from own property acquired before
breach of FD which only had value increased by reason of the breach
2. Categorised cases with health warning of Lord Upjohn in Phipps that equity can
only be stated in general terms
(i) P instructed agent to buy a specific property but A bought it for himself
o CT imposed established principle and not disputed
o Even though P had no pre-existing interest in the asset and A purchased
the asset with his own money
(ii) F acquired property which he knew would be of interest to P but the target is
not identified by P i.e. no pre-existing interest in the contract
o E.g. Bhullar F need not have carried out some improper dealing with
the property belonging to the principal to be accountable
o Should find proprietary interest
(iii) F made profit in breaching FD even though P did acquire the target property e.g.
present case
o Tyrell v Bank of London D was banks solicitor/ secretary; D
contracted with Read in which they would jointly have interest; did not
disclose to the bank and bank subsequently bought property from Read;
HL found lower court had gone too far in declaring T a trustee as regard
property that Bank didnt obtain
Policy arguments
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Bribes being an evil practice and fiduciaries should be discouraged from accepting
bribes for which full disgorgement may be deterrent (Reid) c.f. sufficiency for
personal liability to account (Sinclair)
Harm to general creditors c.f. they shouldnt have had the benefit of bribes in the
first place anyways c.f. its a competition between innocent parties
Hayton on Sinclair
a. Ignored the good man philosophy i.e. T obliged to act in accordance with core
fiduciary obligation to act in the best interests of the Bs to the exclusion of his own
and cannot deny such to retian unauthorised benefits under disability principle
Giving rise to primary duty for F to deliver it + any traceable product
Express or necessarily implied undertaking from the inherent core duty of F
which makes it impossible for Fs to assert beneficial interest
Lord Templeman in Reid in this regard influenced by Milletts LQR
b. Relied on doubtful authorities Gwembe and Halton did not disucss the Lister/ Reid
debate and in fact centred on the distinction between Paragon types of constructive
trusts which entail different limitation periods
c. Same rule should apply for properties which are not originally subject to fiduciary
obligations but acquired in the future by means of fiduciarys office
Case authorities e.g. Pullan show that anything purportedly acquired in Fs
interests will be held immediately for Bs
Hence there shouldnt be distinction between exploiting fiduciary office in
relation to properties/ mature opps subject to fiduciary obligations, or
exploitation so as to acquire property like bribe in the future
Distinciton on whehter it is already subject to fiduciary oblgiations
d. No injustice caused to creditors in their not sharing in an asset for which fiduciary
has not given value and which he shouldnt have had
e. Contrary to Lord Neubergers insistence that proprietary claim is based on property
law, equity permits property to be derived from an obligation affecting property,
existing or after-acquired
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Goode on Reid that its conceptually flawed and defensible as a matter of policy
Reid/ Sinclair similar for C has no pre-existing proprietary right to the profits
derived in fraud nor were they received on terms that they would be held for F (c.f.
receiving property for Bs account or which he ought to procure for B)
a. Use of equitable maxim presupposes the very question in issue i.e. whether bribe
does have duty to transfer bribe in specie
b. Arguments are against for such transfer (i) bribe was never destined for the C who
had neither bargained for or expected it (ii) no basis for elevating the personal
obligation to a proprietary right, considering that the beneficiary would never have
received the bribe in the first place and briber never intended to pass it to anyone
other than bribee (iii) Target held that claim for profits derived from breach of trust
is purely personal c.f. Keech
c. Argument that Fs creditors cannot be in a better position than F presupposes again
proprietary claim should look to policy for justifications but nothing from the
corrosive nature of bribery would justify preference of C to Ds general creditors; and
creditors are not in the shoes of F but independent third parties which claims are
based on the value given hence no justification for being subordinated to claimant
with no existing proprietary interest, who has given no value, suffered no loss or
even invoke reliance interest
o Policy on deterrence is not relevant to creditors
o Same applies to other benefits derived from fraudulent breach of duty
d. Overlooks the fact that institutional CT operates from the moment it arises i.e.
w=priority not only over unsecured creditors but also subsequent equitable interests
e.g. equitable charges (even if hes Equitys Darling)
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LHs comments Rebelling against Sinclair for not bound by it
Both judgments highlighting the unsatisfactory categorisation of exception (B) the
scope is too unstable
The court only applied Sinclair because it was bound but tried to circumvent it by
extending exception (B) to cover bribes by characterising it as a lost opportunity to
give C proprietary interest
Should look at the situation involved, policy reasons and whether as a matter of
policy in each situation proprietary remedy should be granted
a. Misappropriation of Ps property clear cut case for proprietary interest
b. P instructed agent to buy specific property who took it himself more reason for
D to account for it
c. P didnt ask D to buy a specific asset but it is one that P surely would be
interested had he known about it e.g. Bhullar stronger reason than pure secret
bribe
d. P may just be broadly interested in buying the property but D bought it himself
and sold to P at a profit
Proposition that the common thread is that the wrong involves interception of a
specific property that P would/ have wanted to get - which should require account
in specie of the property if the situation involves a specific piece
o Better distinction than that drawn by Neuberger
o C.f. Bhullar already ceased trading
Milletts comment
The money paid can in fact be considered part of the purchase price hence within
category 1 of Sinclair c.f. payment under sale is an out/out payment
Disability argument anything obtained would be received on behalf of B
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o Should in any case not impose it lightly despite customers seemingly being in a less
favourable position where the case involves commercial disputes Goldcorp
Noting that it was created as a measure of justice after the event and the balance
of justice may not always tilt towards private citizens
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R Goode Property and Unjust Enrihcment
CT is neither exclusively institutional nor exclusive remedial certain types of events trigger the
creation of a substantial property right in P while others merely provide grounds for the
imposition of a constructive trust in the discretion of the court
o Fundamental difference between the two former means there is a proprietary base in
property c.f. latters a remedy for a wrong which results in Deemed agency gains
activity undertaken by D for his own benefit which he was under an equitable duty, if he
undertook it at all, to pursue for P, si D acted as Ps constructive agent, and resulting
gains will be treated in equity as if they had in fact been procured for P
Ds use of Ps asset, info, etc, has no relevance to the creation or conferment of a restitutionary
interest what triggers the CT is not use of Ps assets or resources, but in breach of equitable
duty D acquires for himself a benefit which, if he acquired it at all, he ought to have acquired for
P (Equity treats as done ought to be done)
o No resitutionary proprietary interest should be recognized if the assets/ gains in Ds
hands constitute neither enrichment by subtraction nor deemed agency gains here only
$ judgment (disgorgement of profit/ compensation)
Scenarios
1. Enrichment by subtraction where Ps claim has a proprietary Base
o D gain at the expense of P in the sense of total or partial loss of proprietary base, but
does not require a fiduciary relationship institutional constructive trust
2. Enrichment by an equitable wrong producing deemed agency gains
o Not about deprivation of assets, but on diversion to D of an asset which is his duty in
equity to obtain not for himself but for P (use of knowledge, info, etc itself cannot be said
to be deprived of, so P has no loss) remedial constructive trust
3. Enrichment by an equitable wrong producing gains other than deemed agency gains
o E.g. Bribes, gains received unconnected to Ps existing business personal order, as P
has no pre-existing restitutionary interest, why should he not accept the same risk of Ds
insolvency as Ds general creditors?
o P has furnished none value, but Ds creditor has gave value, why should Ds creditor be
subordinated to P
o So should not distort rules of insolvency, and certainty of commercial dealings
4. Enrichment by a Wrong Producing Gains not resulting from breach of equitable obligation
o Personal obligation
5. Barriers for restitution
o Where restitutionary interest is not automatic (where right of election is involved), only
a right of mere equity until election has been made
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Overview on Following, tracing and claiming must show that he has proprietary interest at
some point of time and that interest subsists to show that he has proprietary interest in the
property
Following i.e. follows the physical location of the misappropriated tangible asset, in whose hands it
has been held and has reached
T steals trust property/ vase, gives it to mistress who passes to son still the same vase
Not possible if the case is in the hands of a bona fide purchaser
Claiming i.e. establishing the right C can assert after following or tracing
Essentially to claim in rem (e.g. right in the iPad and asking for specific delivery) but not a claim
in personam against the person holding the iPad
Allows vindication of property i.e. this ipad is mine rather than you owe me an iPad hence
claim is extinguished when that specific property e.g. explodes
May claim (a) constructive trust or alternatively (b) a charge
a. Declaration of constructive trust over the property by T for B suitable for assets which
have risen in value e.g. vase to iPad which would give B a windfall
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Would get pro rata interest even if the assets are mixed with Ts property
b. Charge over the asset B has been deprived for suitable for devalued assets
E.g. vase worth $100 was stolen and now value at $50 would give a charge of $100
over the vase hence T would either have to pay $100 or sell the vase for $50 and further
personal debt for the shortfall of $50
Hence use the asset as security, and shortfall to be paid as personal debt
Requirements
1. Separate equitable title requiring a fiduciary relationship between claimant and the person
misappropriating the asset to establish that there is a separation between legal and equitable
title and that the claimant has equitable proprietary interest in the asset
C.f. Tracing has nothing to do with whether there is a fiduciary relationship (c.f. claiming)
and the inquiry should merely be whether there is sufficient proprietary basis to allow the
original owner to trace the property into other forms
Re Diplock (1948)
S executed will to donate almost all his fortune for charitable or benevolent objects as T in their
absolute discretion may select; next of kin challenged validity to recover payments to charities
Charitable purposes interpreted narrowly under 4 categories at equity of (i) advancement
to education (ii) advancement of religion (iii) public purposes (iv) alleviation of poverty
Found to be void for not exclusively charitable issue on recovering disbursement
Requires a fiduciary or quasi-fiduciary relationship of a continuing righ to fporperty
recognized in Equity note ambiguity
Virgo the key element should be whether the claimant has a right of property
recognized in Equity that is either a continuing right, or one created as a result of breach
of FD/ other duty i.e. that theres equitable proprietary base instead of focusing on fid
relationship
Diplock in fact recognizes that equity may operate on the conscience of volunteers
provided that as a result of what has gone before some equitable proprietary interest
ahs been created and attaches to the property in the hands of volunteer
Here satisfied from a prior fiduciary relationship between the next of kin and executors of
the will and executors had transferred the assets in breach of fiduciary duties i.e. entitled to
trace in equity into the charities hands
Despite absence of initial equitable interest in the undistributed property as potential Bs
hence the only way to create equitable proprietary interest is by treating the executors
as owing a fiduciary duty to the next of kin
Chase Manhattan imposed fiduciary relationship for conscience of recipient was affected
If there isnt clear fiduciary relationship, the court is willing to establish one to allow tracing
process to be initiated under equitable tracing rules [for common law tracing rules dont allow
tracing into mixed funds)
C.f. Foskett v McKeown (2001), Lord Millett (obiter) challenged this requirement
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Argued for abolition of this requirement for people will full property rights stolen can only
rely on common law tracing rules which were developed too long ago disallowing tracing
once funds are mixed and based on physical assets e.g. rice and barley c.f. money
No logical justification for insisting on the existence of fiduciary relationship
Doubted in Shalson v Russo (obiter) held it should not be treated as authority abolishing
the requirement for being only obiter and the court there recognized it was not necessary to
decide because the traditional approach would equally entitle recovery
Millett in Agip (Africa) v Jackson fiduciary relationship is required to invoke equitable
jurisdiction but no further; not necessary to show that the fund has been subject of fid
obligations before it goes into the wrong hands and sufficient if the transfer creates the
fiduciary relationship
b. Mixed substitutions with other properties but not in a running bank account
Allowed to trace into a mixed bank account as equity treats the money in the account as
charged with the repayment El Ajou
If its a mixed fund, can ask for equitable charge to be impoed on the whole fund as
security for the equitable proprietary claim
Mixed with properties of innocent party e.g. T steals $1 from Bs trust and $1 from As then
used $2 to buy an apple
Proportionate sharing/ pro-rata contribution i.e. each with 50% interest in the apple
Court will grant CT on apple for B on condition that B gives A the value of half of the
apple
Mixed with Ts own money eg T steals $10, add $5 of his own to buy a $15 bottle thats now
worth $30 recovery is not limited to the misappropriated amount Foskett v McKeown
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Two general principles of (i) against the wrongdoing trustee (ii) the court will try to do
justice between the innocent parties if the mixed funds consist of trust property of
innocent parties only Bs allowed to pick either of the two rules since T is wrongdoer
Subject to the lowest intermediate balance rule - since rules of Re Hallets and Re
Oatway are designed to resolve evidential uncertainty, they are not applicable
when it is not evidentially uncertain
If withdrawals yield profits but account balance still exceeds the misappropriated amount
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Turner v Jacob [2006] English HC
$100 of trust fund paid into trust account, $100 of Ts fund then $100 withdrawn from the
account for profitable investment of $200; balance of account $100
1. Investments could be claimed in Re Oatway only since there was no remaining balance
2. If there is sufficient money in the remaining balance, Ps claim is limited to the balance in
the bank account but not profits from investment qualifying the earlier cases
3. Would not be able to claim a lien over the investment unless the sum expended is of
such a size that it must have included trust monies
4. If the exception is not satisfied, such as here where T maintains in the account an amount
equal to the remaining trust fund, the lien is only attached to the fund but not investment
Critique
The wrongdoing trustee may be able to benefit himself which is inconsistent with the
rationale of authorities Any inferences should be drawn against T and hence usually
plaintiff-friendly approach
HM prefers allowing the plaintiff to cherry-pick the best option, following Shalson v
Russo and approach taken in Foskett v McKeown
Doubtful if it would be followed; here claimant was going for double recovery hence
court didnt allow her to make a claim while there is sufficient remaining balance LH
Note do not apply where the funds belong to Bs rather than trustee
Subject to the lowest intermediate balance rule will be applied whenever money
withdrawn/ spent must contain some of the trust fund i.e. no evidential gap
Where the trust fund is mixed with other money and subsequently the balance of the
account is reduced to less than the amount of the claimants money that had been
deposited, the amount that can be recovered by C is limited to the maximum amount
that can be regarded as representing his;/ her money i.e.no more than the lowest
intermediate balance of the running account
Real rationale is that T would usually have gone bankrupt hence claim by B of the final
balance would be at the expense of creditors
Affirmed in Bishopsgate Investment v Homan
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Trust fund + funds of innocent volunteer/ parties None would have the benefit of
evidential presumptions
Note innocent volunteer i.e. TP who mixes claimants money with his own, gave no
consideration for the claimants property and who had no reason to suspect that
someone else has proprietary interest in the money c.f. wrongdoer who knew or did
have reasons to suspect for which the normal tracing rules would apply
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C. Example collective investment scheme, with each investor contributing $10; A pays $10
into the fund, followed by B with $10, then $10 is spent (remaining balance of $10), then
$10 by C, then further $10 is spent (ie remaining balance of $10)
FIFO A and B get nothing, C gets the remaining $10
Rolling charge A and B get $5 each from the first stage, then a further $2.5
(reflecting share of contribution to final sum) from second stage, whereas C gets $5
Pari passu all three share $10
d. Payment of Ts debts tracing ends when the value traced is dissipated e.g. payment of
debt, payment into overdrawn bank account, money used to repay existing mortgage
Exceptions
A. Subrogation Boscawen v Baiwa i.e. B may be subrogated to the secured liability
discharged by misappropriated trust fund if it is used to discharge a secured liability
E.g. where if B repays As debts, B would step into the shoes of the creditor and
becomes As creditor; hence B can claim subrogation and charge over property for
mortgage situations
It can only be against secured creditor because theres no point in subrogating to the
claim of an unsecured one
B. Backward tracing i.e. tracing into property acquired before trust property is received
Generally not allowed unless C can prove sufficient connection between the
misappropriation and acquisition though nature of intention required is unclear
o From intention of T when the acquisition took place that it would be repaid
by misappropriated trust fund - Foskett
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Bishopsgate Investment Management v Homan [1995] Eng CA
Pension money misappropriated in breach of trust and placed into overdraft account;
issue on whehter it was possible to trace into assets purchased beforehand
N.B. overdraft account hence not traceable
Federal Republic of Brazil and the Municipality of Sao Paulo v Durant International
Corporation and Kildare Finance Limited [2013] Jersey Court
Consequence doesnt matter so long as there is sufficient link between credit and
debit and the chronological order of events does not matter
Other authorities cases seem to be against the idea on balance in line with the
traditional position is that debt payment would extinguish right in money
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Ultimately a question on policy justifications for backward tracing include (i) giving
a just result but even if trust monies are used to discharge debt, that is satisfaction
of debt rather than payment for the value of goods; further fails to take into account
fairness to creditors in insolvency situations (ii) fairness and intuition are not strong
reasons to overrule general principles
Even if adopted, should limit establishment of links e.g. by reference to intention of T
at the time of acquisition though entails evidential problems
LH Conaglens argument less persuasive for resting purely on technical grounds which
shouldnt be the only consideration
Continuing proprietary link, though required, is often not clear in reality e.g. there
was actual mixing in Re Hallett
Tracing is a set of rules resolving evidential difficulties in holding wrongdoer liable;
in fact there to help attribute assets to P/ Bs hence originally driven by policy
The use of presumptions to resolve ambiguous evidential difficulties is not
controversial and used at both common law and equity cases show that the court
is willing to compromise on strict evidential requirements to reach fair results
At c/l e.g. Armory v Delamire involved wrongdoer refusing to produce the
stone stolen, and court held that it would resolve the evidential gap strongly
against the wrongdoer and presume it is the stone of the best kind because
he was at fault in refusing to produce evidence at trial
At equity, Armory was relied on in e.g. Milletts judgment in Libertarian
Re Diplock (wrongful distribution of Diplocks residual estates to charities who were innocent
volunteers, having received the money and used part of it to improve their land)
Held it would be inequitable to trace where the trust money has been used to improve
the innocent volunteers land would otherwise compel sale of houses on the land
It should not be inequitable to trace but inequitable to assert right against the
traceable asset at the claiming stage instead; should be treated as defence for claim
instead of judicial discretion on whether it is fair to award the remedy
d. Change of position available for c/l personal action for money had and received
Originally a defence for unjust enrichment claims (recognized in Lipkin Gorman)
E.g. If customer receives $10 of extra change by mistake, would be required to
make restitution unless he has spent the money on an extra meal
Requirements
1. Recipient must be in good faith mere negligence on the part of recipient is insufficient
to deprive him of the defence
2. Causal relationship i.e. mustve changed the recipients position in reliance on receipt
As a result of receipt, and but for it, he would not have incurred the expenditure
Authorities in the context of equitable tracing (and whether it was applied in Re Diplock)
Generally appears to be against the idea Foskett v McKeown though it depends on the
basis of the claim to traceable substitutes the defence should be available if its in UE
Page 99 of 118
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Foskett v McKeown
Issue of whether B was limited to a charge over the amount of misappropriated fund or
a proportionate amount in the death benefits court allowed pro-rata share of benefit
Beneficiaries had proprietary rights in the original trust money and the court was
just allowing the trust beneficiaries to vindicate their property rights
The transmission of a Cs property rights from one asset to its traceable proceed is
part of the law of property, not of the law of unjust enrichment Lord Millett
Operation of the rules may seem harsh or unjust and gives windfall to P but would
allow their full application if proprietary rights are established i.e. proprietary rights
are sufficient basis for tracing Lord BW
Not entirely convincing for being based on the assertion that this is property hence
part of property law and fails to explain why the application of rules cannot be
mitigated by rules of justice
Paragon Finance v Thakerar & Co (1991), per Lord Millett establishing 2 types of CT
a. Constructive trust arising because of pre-existing fiduciary relationship before the occurrence of
the impeached transaction (T becomes trustee breach CT imposed)
Not subject to limitation period for claim in breach of trust
b. Constructive trust arising in the absence of pre-existing fiduciary relationship, and only imposed
by wrongful behaviour not a proprietary type of trust
Generally subject to limitation period of 6y from classification as tort unless theres dishonesty
Stemming from Barnes v Addy if found making themselves trustees de son tort or participating
in fraudulent conduct of the trustee to the injury of the cestui qui trust, but not for mere agents
of the trustee in transactions within their legal powers unless they receive and become
chargeable with some part of the trust property, or assist with knowledge in a dishonest and
fraudulent design on the part of T
In personam action preferable where property is destroyed, or passed on to TP
Liability as constructive trustees only denoting that range of remedies available would
include those normally available against express T; here just personal
Nature of liability not settled; possibly UE, wrongful interference with beneficial rights, graded
extension of express trusteeship; main debate on whether it is based in UE or knowledge
Basis in UE or wrongdoing (as suggested by Akai which imposes liability for equitable
compensation) problematic
Akai Holdings
Facts
Director of plaintiff company executing an ultra vires loan to pay off debt on which the
debtor/another subsidiary of Akais PC was about to default person executing the loan was
the director of both companies
Using forged minutes of executive committee
Share certificates transferred to D, which were worth 50m and D subsequently sold part of
the shares for 20m upon default of repayment; co then went bust
Issues
1. Apparent authority found belief irrational and hence no apparent authority
Basically issue of whether the agreements were executed with authority (i) applied test
of apparent authority for no express (ii) ie irrationality test (iii) application to facts (iv)
void contract hence no valid title passed (v) sale of shares amounted to act inconsistent
with owners title (vi) hence conversion
Applied the test on irrationality i.e. actual impropriety or dishonesty; whether the belief
in the directors authority was dishonest or irrational
o Constructive knowledge is not sufficient do not use being put on inquiry
Considered factors (i) it was a substantial amount (ii) it was a one-sided loan with
liability from the loan and pledge incurred solely by Akai Holdings but no apparent
benefit derived (iii) there was a clear conflict of interests for the director was also
director for the debtor (iv) bank relied on forged minutes not of the board (which was
normal procedure) but only an executive committee and failed to ask further for it (v)
failed to take other normal procedures Akai was new client
Hence the contract was void for want of authority
Criticism on the second issue of knowing receipt [check RL/LH case note below]
a. /
b. On the issue of security interest giving rise to beneficial receipt
Underlying transaction is already void for want of authority hence there should be no
right to sell the shares; physical custody of share certificates doesnt suffice
On (i) looking at construction of the agreement c.f. it should fall out of the picture once
the contract is set aside for want of actual and apparent authority hence irrelevant LH/
RL (ii) possession does not give any legal or equitable interest in the shares hence all the
bank got was physical possession of share certificates with no interest in the shares
difficult to see therefore how there could be sufficient control LH/ RL
C.f. Gold v Rosenberg in which receipt of a contingent security interest over the trust
property would suffice for KR for encumbrance of trust property involves subtraction of
its value and conferment of corresponding benefit on TP c.f. the pledge was already void
Distinction from Criterion weak for there is similarly no valid transfer of assets under a
void contract Yap
o Should really be looking at the nature of arrangements or property and the
distinction on executed/ executor is not relevant
Gold v Rosenberg may give a higher yield (though may be capped at the value of the
loan) but in any case would be assessing it at date of judgment KL
c. On unconscionability The court considered (i) the irrationality test i.e. requires actual
misconduct or dishonesty and (ii) (traditional) unreasonableness test i.e. whether it was
unreasonable to rely on the authority i.e. what the bank should have known if it had
conducted inquiry
Critique on the equation of the test of unconscionability for KR and that for AA
The two tests serve different functions apparent authority looking at contractual
formation and whether there is a contract c.f. knowing receipt considers whether TP
should be subject to liability hence dealing with different issues
Different weight (should be) accorded to subjective state of mind latter deals with an
objective issue on formation depending on factual circumstances and not really relevant
to look at intention of parties c.f. KR looking at whether a TP who is not in pre-existing
fiduciary relationship is justified hence subjective culpable state of mind should be more
important and given more weight
Noting that the irrationality test is defined here as no other reasonable person
would have believed in the authority assessed using the factors in Akai which arent
on culpable state of mind
i.e. arguably inappropriate for (i) the tests are designed for different purposes and (ii)
weight given to subjective intentions
May be that it makes sense that the two claims (ie that on AA and KR) give rise to the
same conclusion in the commercial context for commercial certainty but that only refers
to the application but not the context of the tests is the same
2. Beneficial receipt of property disposed or its traceable product as recipient (cf agent)
i.e. receiving the legal title for himself and for his use rather than ministerially to goods over
which claiamtn holds equitable proprietary interest
Bottom line that one can only validly transfer property that is his own/ which he has
authority to dispose of (as trustee [which means he has title] or agent)
BCCI v Akindele (B paying off debts of F under latters personal contract with the
recipient i.e. property not transferred pursuant to the contract)
Note even if interest is transferred at conclusion of security agreement, would not allow
claim for full value of the property but to be capped at amount of loan i.e. value
realisable from the security interest RL/LH
Hence (i) whether the contract is void (apparent or actual authority) Akai, or executor
Criterion (ii) has property nonetheless passed
Gold v Rosenberg contingent interest conferred under security contract suffices;
found guarantee supported by collateral mortgage on trust property was not void
Where the contract with defaulting fid as agent is void e.g. for want of authority referring to
situations where the agent transfers assets of the principal
But traceable product from property transferred can still be subject to KE
b. (i) Depends on nature of interest obtained by construing agreement and (ii) whether
there is nonetheless sufficient control over property Akai, Neuberger
Akai Holdings (2010, HKCFA) concerning a pledge over shares supplemented with
physical transfer of share certificates but without registration as new owner
No legal title passed since contracts void
1. If Bank only had contractual right to sell the shares, protected by the pledge of certs,
then there may have been no receipt until sale of shares would depend on
construction of the agreement to ascertain right conferred
Recognizes that a benefit is received from the holding of certificates but it is
merely a protection of alleged right to sell the shares
2. Found arguable w/o deciding that when the bank actually purports to exercise its
right of sale ,the bank may have sufficient degree of control over the shares during
scintilla temporis before sale
In any case satisfied when the shares were sold and proceeds retained
Distinguished Criterion for involving an executory contract distinction between
executory contract and void contract doubted by LH/ RL, Yap
c. Depends on the nature of property i.e. whether its nature is such that title can pass
regardless of validity of contract e.g. funds and money c.f. shares LH/ RL, Yap*
If the underlying property is such that title cannot pass under a void contract, then
no title should pass under contract conferring security interest over it
o Noting for shares, transfer of title requires (i) execution of form of transfer,
(ii) attachment of form and delivery to company (iii) registration at the
Company Registry (Pennington v Waine)
a. Traditional approach of Baden scale distinguishing AK, which inc (i) wilfully shutting
ones eye to the obvious, (ii) wilfully and recklessly failing to make such inquiries as an
honest and reasonable person would make; and CK where one knows of facts/
circumstances which would give rise to a positive belief but honestly not having such
positive knowledge and failing the standard of a reasonable person in spotting the prob,
Inc. knowledge of circumstances which would indicate facts to an honest and reasonable
man, or put a reasonable man on inquiry
c. Unconscionability i.e. you must know something which makes it unconscionable for
you to keep the property Akindele; criticised for lack of specificity
Must know enough of the surrounding facts if basis for liability is that he fails to
make reasonable enquiries Snells
Quite high a threshold hence some degree of suspicion alone may not suffice
Essentially a debate between unreasonableness test and unconscionability test
Note constructive knowledge may still be relevant for unconscionability test; Akai
only equated the test with the test of irrationality under apparent authority in the
commercial context and agency scenario note relevance
Also note relevance of commercial context and general reluctance to subject
contracting parties to onerous duty
BCCI v Akindele (2001, CA) BCCI officers promosing Akindele (investor) that he would get
high interest rate for investment with the bank under Ponzi scheme
Adopted single test of unconscionability (c.f. Snells on gratuitous transactions)
Which requires actual knowledge; constructive knowledge not sufficient
Further that court should give commonsense approach in commercial context
C.f. distinction on knowledge inconsistent with Akindele rejecting need to distinguish
despite it also recognizing that actual knowledge is required Yap
N.B. not to be applied directly where lack of apparent authority is only found on
concession by counsels but not actually upon courts finding
4. Giving rise to remedy in equitable compensation for loss suffered by P - Akai Holdings;
essentially liability to account on the footing of knowing receipt Peconic
Subject to limitation period discussion Central Bank of Nigeria
Proprietary remedy would only arise from tracing rules but not by virtue of KR
Akai Holdings
a. Equitable compensation to be subject to the Target/ Canson test i.e. remoteness and
foreseeability do not count
b. Should be assessed at the date of sale, even if a claim of knowing receipt arises at the
time of receipt, applying Target test
Always open to the owner to recover the certificates from the bank until sale and
found Akai would have retained those shares anyways hence loss would only have
occurred upon sale
c.f. LH/ RL receipt should be the sale proceeds so no question should arise on
valuation of shares
NB if its security interest, its value may be capped at outstanding loan amount
c. Should in any case to equate with c.l. damages for commercial certainty
Criticism by LH/ RL
Suggesting that liability is loss-based i.e. not grounded in UE note debate above on the
nature of KR liability
Would have been justified if court endorsed concept of KR as imposing trustee-like
liability but without which may give rise to misimpression that measure of recovery is
exactly the same, and not less than that of an express trustee
Reference to equitable compensation is new
No reason for confining equitable compensation by common law principles
Requirements
1. Breach of trust/ FD by someone other than the defendant; a technical breach suffices and
need not be dishonest Royal Brunei v Tan c.f. apparent wording in Barnes v A
2. To which D assisted
Only requires minimal participation
Applying the but for test i.e. had D not helped, the fiduciary would not have been able to
commit the breach Brinks v Abu Saleh (No 3) (Issue of whether the wife of driver who
helped putting money misappropriated by fiduciary in the boot of a car and drove it across
the border was liable for merely accompanying him)
o May be distinguished where despite mere presence, it serves the purpose of
impliedly verifying authority of defaulting T/F
3. Dishonestly an objective test but taking into account the personal knowledge, experience
and circumstances of D without requiring subjective knowledge of the wrongful nature of
act Royal Brunei, Barlow Clowes
Need not know details of the trust or identify of the beneficiary so long as he knows that
the money is not at the free disposal of the principal Twinsectra
Suggesting that even if he did not know of the breach, there could be assistance if he
suspects that something was wrong, which does not depend on knowledge of the precise
involvement of the defaulting T in Bs affairs or existence of trust or facts giving rise to
the trust Barlow Clowes rejecting Brinks on this point
o Only that he knows the property is not at Ds free disposal Millett, Twin.
No longer based on mere knowledge for policy reasons since an onerous duty would be
imposed on professionals if standard for liability is low Royal Brunei
Basically requiring (i) actual knowledge of the wrongfulness or (ii) suspicion of it and
deliberately turning your eyes against it; and (iii) to determine latter, the court would
consider whether in light of Ds personal circumstances, he fails to act in compliance
with the objective standard; further (iv) D need not know full extent of the wrongful act
but mere knowledge of the wrongfulness suffices Barlow
Nature of the test settled as an objective test taking into account subjective elements
N.B. factual circumstances may indicate a lack of honest belief + unreasonableness
Cf Barlow Clowes v Eurotrust, per Lord Hoffman (majority in PC) obj, the law
D allegedly assisted with operation of a fraudulent off-shore investment scheme by providing
services In forming offshore companies and dealing with payments
Dishonest state of mind inc (i) actual knowledge that the transaction is not one in which
can honestly participate, and (ii) suspicion combined with conscious decision not to
make inquiries which may result in knowledge adopting Millett
Need not have knowledge of the full details of the breach of trust e.g. need only know
that you are helping with a wrongful act and not necessarily that it involves a breach of
trust for money laundering (c.f. Rimer J in Brinks) here satisfied if D suspected
misappropriation and that money was held on trust/ belonged to co
Retracted from earlier position upon finding an element of ambiguity in Twinsectra
reinterpreted as only requiring consciousness of the elements that make the
transaction dishonest, rather than consciousness of dishonesty
Need not have reflected on the acceptable standards of honest conduct
His own judgment referring to consciousness that one is transgressing ordinary
standards of honest behaviour only requires consciousness of the elements that
would make participation transgress those standards
Found here consciously refrained from making inquiries
Page 110 of 118
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Application
A-G of Zambia v Meer Care (solicitor helped client launder money stolen from Zambian
government by helping with setting up accounts with money from dubious source)
Exonerated by taking into account subjective competence, experience and knowledge
here solicitor didnt have much experience/ competence with international transactions
and money laundering
Rejected the use of a hypothetical comparator i.e. whether an honest solicitor would
have done what D did, given his knowledge of facts which entails wrong assumption of
Ds competence
Bearing in mind the need for cogent evidence for finding of fraud
Affirm that you take into account the subjective competence of D and only compare him
against an honest person but not an honest and competent person
Limitation Ordinance s. 20
(1) No limitation period shall apply to an action by a beneficiary under a trust,
(a) In respect of fraud/fraudulent breach of trust to which Ts party/privy;
(b) OR To recover from the trustee trust property or traceable proceeds in Ts
possession, or previously received by the trustee and converted to his use.
(2) Otherwise limitation period of 6 years for an action by a beneficiary to recover trust
property from the date on which the right of action accrued
Provided that the right of action shall not be deemed to have accrued to any beneficiary
entitled to a future interest in the trust property, until the interest fell into possession.
Issue of whether DA can be treated as trustee for these purposes since the case does not
necessarily involve a dishonest breach of trust by original trustee
Falls within Type II constructive trust in the absence of pre-existing fiduciary
relationship before wrongful act hence does not fall within s.20(1)(a) Pragona, per
Lord Millett; affirmed in Peconic Industrial (2009) per Lord Hoffman in HKCFA, and
Central Bank of Nigeria, per Lord Sumption in UKSC
Also construed in respect of merely as claim against the trustee on the grounds that he
committed a fraudulent breach of trust Peconic, Nigeria i.e. would not be satisfied
even if the original trustee commits a dishonest breach
o The rule only to protect co-trustees acting in good faith
But LO s.26(1) applies where fraud is involved i.e. time only starts to click after P
discovers the fraud, or could with reasonable diligence have discovered it Peconic
(Ponzi scheme for purported investment in property development)
o Though leaving open the question of whether the objective reasonableness test
would nonetheless take into account personal characteristics of P
o Hence issue of whether/ when P can discover with reasonable diligence to be
proved by P
o Requires only knowledge of facts to make out a prima facie case but not
necessarily evidence beyond reasonable doubt; though does need to know that
(i) D participated (ii) in a fraudulent scheme
Basically (i) not a trustee, (ii) not applicable as a claim in respect of fraud by T
Summary of articles
Ji Lian Yap on apparent authority and knowing receipt (Case note on Akai)
1. On finding of receipt
a. Would be contradictory to argue that the agent lacks authority and contract is void, while at
the same time there is receipt of shares for a claim in knowing receipt
Should depend on the nature of property e.g. fund transfers would not be affected by
issue on authority for there being merely a corresponding but separate adjustment of
choses in action (ie bank accounts); money is fully negotiable and good title would pass
if transferee receives in good faith and for value despite defect in title c.f. shares
b. Distinction on executed/ory for distinguishing Criterion is weak; Criterion may be
rationalised on basis that no KR for no receipt under contracts which are set aside hence
unconcioanbility is not relevant but this is not spelt out in Akai though noted this is not
necessarily the case
c. Adopted wider/more practical approach in finding receipt of proceeds nonetheless
2. On requisite knowledge
a. Unconscionability being criticised for lack of specificity, failing to ascertain standard
b. Irraitonality test may be misleading for TP acting opportunistically may be acting rationally
in a commercial sense
c. Rejection of constructive knowledge as being sufficient is not consistent with Akindeles
broad-brush rejection of the need to distinguish levels of knowledge
Knowing receipt
Rather liability is custodial and similar to that of express trustee (c.f. for unjust enrichment or
primary equitable wrongdoing similar to conversion)
Page 116 of 118
Equity & Trusts Revision Notes
o Liable to return the property immediately rather than on demand or substitutive
payment for his possession of that property is illegitimate and unauthorized (though
in fact its to restore the trustees to allow reconstitution of the trust rather than the Bs
unless its a bare trust)
o Should even be covered by TO s.60 allowing court to grant relief for Ts liability
Liable to further account for and disgorge any profits made Lord Walker extra-judicially,
Ultraframe v Fielding
o Rationalised on the basis of express Ts duty not to place himself in conflict of interest;
or primary liability to account for profits from duty to account for trust property (though
this doesnt explain why theres duty to disgorge non-traceable proceeds of trust
property)
On similarity with unjust enrichment similarly giving rise to liability to perform restorative
duty and not dependent on allegation of breach of duty c.f. UE claim means measure of liability
at value of property at time of receipt/ disposal but KR claim allows assessment at current
market value
On treating it as wrong based (i) argument that con neg should be an available defence c.f. not
available for every wrong case and would undermine fiduciarys core obligations, but the true
reason is because theres no room to argue such for need not allege breach of duty to claim
liability
Dishonest assistance
Distinguished from KRw which is not a secondary liability/ liability for a secondary wrongdoing;
rather owe primary duties and incur liabilities for such
o Example given T misappropriating shares, converted to cash and hands it to D who
knows transfers made in breach and value of shares then doubles; DA liable for the
money substitute of the shares but KR only liable for the cash received
Secondary/ attributed liability that duplicates the liability of primary wrongdoer hence (i)
same liability to account for the trust property and substitutive performance, (ii) reparation of
loss caused by the breach of duty (w/o need of proof on causation between the loss and DAs
act) (iii) duty to account for profits
o Which are attributed by a fiction
Liability for disgorgement of profits may be justified by (a) Dual characterization (Elliot and
Mitchell) interpreting DA as (i) a secondary civil liability and (ii) independent civil wrong
exposing him to primary obligation to pay over profits (b) DA gives rise to liability for wrong
(Ridge)
o Rejected (b) and re-formulated (a) as being liable for own wrongdoing (as if procuring
breach of contract) but with secondary wrong by reference to commission of a wrong by
another person