Third Party Liability for Dishonesty Extended

Published date01 March 1995
Date01 March 1995
AuthorRichard Harwood
Subject MatterAccounting & finance
Journal of Financial Crime Vol. 3 No. 2 Civil Recovery
Third Party Liability for Dishonesty Extended
Richard Harwood
The Privy Council in the recent Brunei decision
Royal Brunei Airlines
Sdn Bhd v Tan1 has widened
the liability of third parties who assist in a breach
of trust. They will now be liable if they have dis-
honestly facilitated an otherwise honest breach.
This decision is of fundamental importance to pro-
fessionals, such as bankers, lawyers and account-
who deal with other persons' financial or
business affairs.
The classic position was set out by Lord Sel-
bourne in
v Addy2 in 1874: strangers are not
to be made constructive trustees unless they
'receive and become chargeable with some part of
the trust property, or unless they assist with know-
ledge in a dishonest and fraudulent design on the
part of the trustees'. He could not see how sol-
icitors and bankers could operate if the principle
was widened.
This position was reaffirmed by the Court of
Appeal in Belmont Finance
v Williams
The design of which the stranger
had knowledge must be fraudulent and dishonest.
For these purposes 'dishonest' and 'fraudulent'
were synonymous.
The fraud requirement remained one of the few
certain principles as constructive trust liability
expanded in the 1980s and 1990s. Millett J in Agip
Jackson4 said:
'A stranger to the trust will also be liable to
account as a constructive trustee if he knowingly
assists in the furtherance of a fraudulent and
dishonest breach of trust the breach of trust
must have been fraudulent.'
Arguments then turned on the degree of know-
ledge required of the stranger.
This has been overturned by the Royal Brunei
Airlines case. The airline had appointed BLT to act
as its general travel agent for the sale of passenger
and cargo transportation. BLT was required to
account to the airline for all amounts received
from such sales, and BLT was a trustee for the
airline of the money. However, the money was
paid into BLT's current account and used for its
own purposes. BLT then became insolvent and the
airline sued its managing director and principal
shareholder, Mr Tan.
The Privy Council, in a judgment delivered by
Lord Nicholls, concluded:
Page 203

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