Twinsectra Ltd v Yardley and others

Lender remitting funds to solicitor A acting for borrower — Solicitor A undertaking that funds be applied only for certain purposes — Solicitor A passing funds to solicitor B also acting for borrower — Solicitor B applying funds in disregard of undertaking given by solicitor A — Solicitor B believing he was acting correctly — Whether solicitor A acting in breach of trust — Whether solicitor B guilty of dishonest complicityPursuant to an arrangement for financing property acquisitions by the first defendant (Y), the claimant (T) remitted the sum of £1m to a firm of solicitors (S&R) on receiving its undertakings that the loan moneys would be: (i) retained by S&R until applied in the acquisition of property on behalf of T’s client, Y; (ii) utilised solely for the purpose of such acquisition; and (iii) repaid, with interest, within four months of the remittance. On being assured by Y that the moneys would be so applied, S&R, acting in breach of its undertakings, paid the loan moneys to the second defendant, L, who was the solicitor then acting for Y in a number of property transactions. Over the following three months, the loan moneys were disbursed in accordance with instructions given to L by and on behalf of Y. Of those moneys, an amount of £357,720 (the misapplied sum) was applied for purposes unrelated to the acquisition of property. On failing to obtain repayment of the loan moneys, T claimed, inter alia, that L was accountable for the misapplied sum on the basis that he had dishonestly assisted S&R in committing a breach of trust, which had allegedly occurred when it paid the loan moneys to him. L’s first defence was that the arrangement between the claimant and S&R had not impressed the loan moneys with a trust. Alternatively, L contended that, although he had been aware of the undertakings given by S&R, he had not acted dishonestly because he believed that his sole concern had been to comply with the instructions given by his client Y (the dishonesty issue). Both defences were accepted by the trial judge, who ruled, inter alia, that without more, dishonesty could not be inferred from the fact that L had clearly been misguided as to his obligations towards T. T succeeded on both issues before the Court of Appeal. L appealed. Held: The appeal was allowed. 1. The Court of Appeal had correctly found that the moneys were subject to a trust, such trust being of the kind recognised and enforced by the House of Lords in Barclays Bank Ltd v Quistclose Investments Ltd [1970] AC 567. The duty imposed upon S&R was fiduciary in character because a person who makes moneys available, on terms that they are to be used solely for a particular purpose, thereby places his trust and confidence in the recipient to ensure that they are applied accordingly. On a proper analysis (a matter of much academic debate), a Quistclose trust was a species of resulting trust. The beneficial interest in the moneys remained in the lender throughout, subject only to the borrower’s power or duty to apply them in accordance with the lender’s instructions. When the purpose failed, the moneys were returnable to the lender, not under some new trust in his favour, but because the resulting trust was no longer subject to any power, on the part of the borrower, to make use of those moneys. Because it was a default trust, there was no question of the beneficial interest being “in suspense” when some part was undisposed of. 2. Applying the principles laid down by the Privy Council in Royal Brunei Airlines Sdn Bhd v Tan [1995] 3 All ER 97, an alleged accessory to a breach of trust could not be held accountable unless shown to be dishonest. Those principles required more than a knowledge of the facts that made the conduct wrongful. They required a dishonest state of mind, that is to say, consciousness that one was transgressing ordinary standards of honest behaviour*. Given the finding that L’s state of mind was no more than “misguided”, there was no reason for the Court of Appeal to disturb the ruling of the trial judge on the dishonesty issue: Mortgage Express Ltd v S Newman & Co (No 2) [2000] Lloyds Rep PN 745 considered. 3. Per Lord Millett, dissenting: An objective standard of dishonesty was appropriate, and a defendant was liable if an honest person would have appreciated that what they were doing was wrong, even if the defendant did not appreciate this: Grupo Torras SA v Al-Sabah [1999] CLC 1469 considered. Liability depended upon knowledge of the relevant facts. That standard was best described by the earlier concept of “knowing assistance”. It was sufficient that L had: (i) been aware of the arrangement by which S&R had gained control of the moneys (although he did not have to be aware that that arrangement created a trust) and that S&R’s authority to deal with the moneys was limited; and (ii) none the less participated in dealing with the moneys in a manner he knew to be unauthorised. * Editor’s note: The court took care to add that a defendant who was so conscious could not excuse himself on the ground that he did not consider himself to be morally in the wrong. Romie Tager QC and Tony Oakley (instructed by Wallace & Partners) appeared for the claimant; Justin Fenwick QC and Sue Carr (instructed by Barlowe Lyde & Gilbert) appeared for the first defendant; David Oliver QC and Sue Carr (instructed by Fairmays) appeared for the second defendant. Alan Cooklin, barrister