Equity 
Lecture Six.


Third Party Liability. 

Breach of Trust.
How much responsibility should be passed to an agent? Should responsibility be extended to third parties who act for or advise agents?

Note: When a person received trust property, they become a trustee in relation to that property and are therefore required to act in the best interests of the trust.

* Actual Knowledge
* Willfully shutting ones eyes to the obvious.
* Wilfully and recklessly failing to make such enquiries as an honest and reasonable person would make.
* Knowledge of circumstances that would indicate the facts to an honest and reasonable person.
* Knowledge of circumstances that would put a honest and reasonable person on enquiry.


Equity will construct a constructive trust :
* Where the third party has intermeddled in the trust. A person who has wrongfully intermeddled so that they usurp functions and assume the authority of the trustee will be liable as if they are the trustee. 

* Where a person has received trust property in breach of trust. 

* Where a person has received trust property and dealt with the property in a manner inconsistent with the trust. 

* Where a person has induced breach of trust.

* Where a person who has assisted in bringing about the disposition of trust property in breach of trust.

The court will look at the strangers knowledge, and the amount of knowledge required will depend on the case. There are three main categories.

1. Receipt of trust property.
The recipient may be personally liable as a constructive trustee and will be liable for the full amount received. Liability based on the assumption that any person who received trust property where they are not a bona-fide purchaser for value, without notice, becomes a trustee. This assumption arises from the notion that the trust continues although possession passes. The liability of the recipient depends upon liability of the person who transferred the property.

Actual Constructive Notice

Karak Rubber v Burden
A&B played round-robin with bank drafts and cheques to buy into the rubber company. Barclays was the bank used to draw cheques from Karak's account. As soon as the 1st bank cheque was used to purchase the shares, A was made a director of the company, and therefore able to continue the dealings. Karak sued Barclays for the amount of the cheque drawn on account. The bank did not know that the original cheque had been used by A to buy the interest and did not suspect and ill dealings. The bank was made liable a constructive trustee as they had knowledge of the facts which would put a normal person on alert. The bank was bound to make such enquiries as would have been reasonable and practicable, where the banker would have grounds for believing that the authorised signatories were using their authorisation to defraud people.


Actual Notice
The other approach is that actual notice is required. 
Carl Zeiss Stiftung v Herbert Smith (no 2)
CZS were a firm of solicitors who received money into their trust account from their client - a West German foundation. The plaintiffs were an East German firm seeking an account against the solicitors as they had received money into the trust account, knowing that it was allegedly owed to the plaintiff in equity. The defendants admitted receiving the money on account of fees and that they knew of the plaintiffs allegations/ Court Found that a solicitor acting honestly was in no different a position from any agent acting for a principal. He is no therefore to be imputed of knowledge of a trust just because they know that a trust was claimed against the client. The solicitors did not know that they were receiving trust funds and were not in a position to assess this.

In Re Montague Settlement the court considered whether the conscious of a recipient is sufficiently affected to require a constructive trust to be set up. 

Receipt and Inconsistent Dealings
 Applies to a situation where someone is innocent at the time of receipt but later acquires knowledge that the property was transferred in breach of trust, then deals with the property in a manner that is inconsistent with the trust.  Liability occurs from the moment the knowledge came, however things done before knowledge came about are O.K. Agents may be treated more favourably under these headings of liability as long as they are acting withing the scope of their usual authority, o on the instructions of the principal. 

Assisting in Breach of Trust.
A different degree of knowledge if the defendant is not alerted that they are dealing with someone else's trust. A stranger may be made personally liable whether or not they have received any trust property, if they have knowingly assisted someone to commit a breach of trust.
Elements:
* Existence of a trust.
* Dishonest and fraudulent design on the part of the trustee.
* Assistance by a stranger.
* Knowledge.

Selangor Rubber v Craddock

C purchased shares in SUR through the use of an agent company called Contaglo, but designed the transaction in a way that SUR's money was being used to purchase the shares. There was no question that C and Contaglo were liable as constructive trustees. Action was brought against barclays as the bank should have known from the facts apparant to the branch officials that SUR's money was being used to cover the purchase.  The knowledge required to hold liable is of dishonest and fraudulant design in circumstances that would indicate that a fraudulant design was being committed, or enough to put one on enquiry. The bank did enquire and was given fals answers. The court found that answers can be taken to be prima facea correct, and the bank was not liable.

Knowledge has been restricted to elements 1-3 of the scale. In Royal Brunei the court found that the true distinction should be between honestly and dishonesty. 

Breach of Fiduciary Duty
A stranger may be liable for a breach of FD where:
* There has been an assumption of the fiduciary office.
* Where they have received or dealt with property.

The knowledge required differs. In NZ, all 5 are used, while in england, some authorities use the first three, while others allow al five. In Australia decisions have imposed liability for the first two. In Lord v Spinelli the court held that a husband who had deliberately shut her eyes as to the source of funds stolen by his wife was also liable for deciet.

In Equity Corporation Finance v The Bank of New Zealand Kirby J (in dissent) found that a stranger who receives trust property will become liable as a constructive trustee, if any of the first four stated elements are fulfilled. Currently, no decision has imposed liability for knowledge in the fourth or fifth category. 

Knowingly Assisting a Fiduciary to commit a breach of Duty. 
(Covers where the assistance is given without property coming into the strangers hands)
In Consul Developments v DPC Estates (which predates Baden) the court had to consider if the clerk held the property as a constructive trustee. Required Actual Knowledge, Refraining to make enquiries for fear of discovering fraud or knowledge of facts that would for a reasonabel person indicate fraud. (1-4 of Baden) Note the contrast betwen wilfully failing to maek enquiries and innocently failing. The expression dishonest and fraudulent is understood with reference to equitable principle to include a breach of FD.

In Bank of NSW v Adams A solicitor received the proceeds of their client (a mortgagee) exercising the power of sale. Under the NSW real property act, a statutory trust is created forthe benefit of subsequent mortgagees. The Colicitor knew that there was a subsequent mortgage, but upon the cliets instructions payed the balance from the trust account to the client. Originally the solicitor was held liable on the basis that the solicitors actions were a participation in a breach of trust. This was overruled on appeal as the trial judg had erred in holding that the solicitor had knowledge that the client would act in breach of trust. The solicitor would be aware if there was a surplus, of improper acconting, that his client would hold the money only in statutory trust for the second mortgagee, but the client assured him that the funds would be properly expended. The solicitor was bound to pay the client as he was under instruction, and the mere knowledge of a suspicion regarding the clients course of conduct will not redner the solicitor liable. 

An obligation to make enquiries may be appropriate where the property is received, but inaprpriate where no property is received by the stranger.