Equity and Trust

• Author: TAN SOOK YEE BA, LLB (Dub), Barrister (MT), Advocate & Solicitor (Singapore), Associate Professor, Faculty of Law, National University of Singapore TANG HANG WU LLB (NUS), LLM (Cantab), Advocate & Solicitor (Singapore), Solicitor (England & Wales), Assistant Professor, Faculty of Law, National University of Singapore
• Date: 01 December 2000
• Published date: 01 December 2000

Accessory liability

In Banque Nationale de Paris v Hew Keong Chan Gary & Ors[2001] 1 SLR 300, the High Court was confronted with the issue of the liability of an accessory to a breach of fiduciary duty. The plaintiff was a French bank with a substantial presence in Singapore. One of its vice-presidents, Gary Hew, misused his estranged wife”s and brother-in-law”s accounts with the plaintiff to make personal unauthorised speculative foreign exchange transactions. Substantial losses were incurred and the plaintiff brought a claim for, inter alia, accessory liability, tort of conspiracy and the tort of inducement of procuring a breach of contract against the wife and the brother-in-law.

Lai Kew Chai J decided the case premised on equity”s accessory liability to a breach of fiduciary duty rather than the tort of inducement of procuring a breach of contract. Lai J held that it would be highly artificial to say that the wife and the brother-in-law procured the breach as Gary Hew was the main initiator of every move. This case illustrates that in many such factual matrices, liability may attach both in common law and equity. However, the precise relationship between both causes of action remains an under-investigated area.

After a careful examination of the evidence, Lai J found that the wife did not know about the unauthorised transaction with regard to her account. He found that she signed various documents without understanding the contents of the documents because she had complete trust in Gary Hew who manipulated her into doing so. She had not opened the correspondence sent by the plaintiff to her on the various transactions incurred by Gary Hew. With regard to the brother-in-law, he knew of the irregularities in the account. However, the brother-in-law had not reported this to the authorities as Gary Hew had begged him for time to regularise the account. The wife also knew of the irregularities in her brother”s account due to Gary Hew”s misdeeds. She had provided security in the form of shares for the benefit of her brother”s account.

In considering whether the wife and brother-in-law were liable for assisting a breach of fiduciary duty, Lai J accepted the authority of the Privy Council in Royal Brunei Airlines v Tan[1995] 2 AC 378 (noted in Harpum, “Accessory Liability for Procuring or Assisting a Breach of Trust”(1995) 111 LQR 545; Berg, “Accessory Liability for Breach of Trust”(1996) 59 MLR 443; Birks, “Accessory Liability”(1996) LMCLQ 1; Podzebenko, “Redefining Accessory Liability: Royal Brunei Sdn Bhd v Tan”(1996) Sydney Law Review 234; Nolan, “From Knowing Assistance to Dishonest Facilitation”(1995) CLJ 505). He identified the four elements before liability attaches, namely: (a) existence of a trust or fiduciary obligation; (b) existence of a breach of trust or fiduciary obligation; (c) accessory to the breach; and (d) dishonestly assisting the fiduciary in his breach of his fiduciary duties. In assessing dishonesty, Lai J made the following points. Honesty was an objective standard. He accepted the Privy Council”s formulation that the standard is one that an honest person “should have little difficulty in knowing whether a proposed transaction, or his participation in it, would offend the normally accepted standards of honest conduct”. However, carelessness was not dishonesty. Lai J quoted the Privy Council”s acceptance of Knox J”s formulation in Cowan de Groot Properties Ltd v Eagle Trust[1992] 4 All ER 700 at 761 that a dishonest person in a commercial setting is “guilty of commercially unacceptable conduct in the particular context involved”. Lai J also accepted Lord Nicholls” reasoning in Royal Brunei Airlines v Tan (supra) where Lord Nicholls said (at 391):

“[W]hen called upon to decide whether a person was acting honestly, a court will look at all the circumstances known to the third party at the time. The court will also have regard to personal attributes of the third party, such as his experience and intelligence, and the reason why he acted as he did.”

On the facts of the case, it was found that the wife and brother-in-law were not dishonest. The learned judge was of the opinion that both of them were lay people and mere novices in the financial world. They were not motivated by any personal or pecuniary gain. They were at most imprudently optimistic and driven by ties of kinship, compassion, altruism or an exaggeratedly credulous or trusting nature or disposition. Such traits, while lamentable, did not make them dishonest (see also Bank of America v Arnell[1999] Lloyd”s Rep Bank 399 (noted in Fox, “A Bank”s Entitlement to Recover the Proceeds of a Forged Cheque”(2000) CLJ 28) where Aikens J did not find any liability against the fourth defendant who was characterised as naïve but not dishonest).

Quite apart from the generous finding of fact in favour of the brother-in-law, this decision is also significant for two other points. First, the suggestion that there must be the existence of trust property before accessory liability can attach to a defendant was rejected. The High Court accepted the Privy Council”s and Professor Birk”s rationalisation that

accessory liability is a cause of action in the realm of the law of wrongs. Therefore, Lai J reasoned that liability was not dependent on the existence of trust property. This is further than the English position (see Goose v Wilson & Sanford[2000] EWCA 50 where the English Court of Appeal left this point open).

Secondly, Lai J found that although Gary Hew”s fraudulent conduct was the primary cause of the losses sustained by the plaintiff, the chain of causation had been broken by the plaintiff”s systematic internal failure and serious lapses of control in preventing Gary Hew from making the unauthorised transactions. It is respectfully submitted that this finding of fact on causation was unnecessary in light of the finding that the brother-in-law and wife were not dishonest. The analysis taken by Lai J also differs from the decision of Carnwath J in Corporation National del Cobre de Chile v Sogemin Metals Ltd[1997] 1 WLR 1396 which did not seem to have been cited to the court. In this case, Carnwath J struck out paragraphs of a defence to a claim for accessory liability which alleged that the plaintiff was partly liable for its own losses in that it had not competently supervised or overseen its employee”s trading activities and that its senior executives knew or should have known of the terms of the contracts but failed to take the opportunity to investigate. Carnwath J adopted the analysis of the Supreme Court of Canada where McLachlin J in Canson Enterprises Ltd v Boughton & Co(1991) 85 DLR (4th) 129 said that for the defence to be successful there must be something more before the plaintiff is put on notice. For example, there must be conduct so egregious that the plaintiff is said to be the author of his own misfortune. On balance, it is respectfully submitted that Carnwath J”s approach is to be preferred as there is no reason why the law should lean so much in favour of a wrongdoer. It is odd if a person who had dishonestly assisted in a breach of fiduciary duty could avoid liability by saying to the claimant that: “You should have kept a better check on your fiduciary. If you did, I would not have been able to assist him in breaching his duty to you”.

Knowing receipt

While some semblance of order has been brought to the law with regard to accessory liability after Royal Brunei Airlines v Tan (supra), the law with regard to liability for knowing receipt continues to be intolerably unclear. At the moment, there are three competing theories to explain liability for knowing receipt of trust property:

1. (1) Recipient liability is premised upon the principle of unjust enrichment. “It would be confined to restoring an unjust gain. Change of position would be available as a defence accordingly” (per Lord Nicholls, “Knowing Receipt: The Need for a New Landmark” in Cornish (ed), Restitution Past Present and Future (1998) (hereinafter “A New Landmark”) at p 244).

1. (2) Recipient liability is premised on the concept of unconscionability. In the latest English Court of Appeal decision, Nourse LJ in BCCI v Akindele[2000] 3 WLR 1423 at 1439 said that “[a]ll that is necessary is that the recipient”s state of knowledge should be such as to make it unconscionable for him to retain the benefit of the receipt”.

2. (3) Knowing receipt is better viewed as equity”s cousin to the common law action of conversion. It is, in other words, a response to interference with the plaintiff”s equitable title (see Smith, “W(h)ither Knowing Receipt?”(1998) 114 LQR 394; Grantham and Rickett, Enrichment and Restitution in New Zealand (1st Ed, 2000) at pp 281—282; see also Smith, “Unjust Enrichment, Property and the Structure of Trusts”(2000) 116 LQR 412). However, since an equitable title is always susceptible to being defeated by a bona fide purchaser for value without notice, some degree of knowledge must be present before liability attaches.

There appears to be some judicial support albeit by way of obiter dicta in Singapore for the view that liability for knowing receipt is premised on the principle of unjust enrichment. In Hew Keong Chan Gary discussed above, Lai J quoted Professor Birks” view (in “Misdirected Funds: Destitution from the Recipient”[1989] LMCLQ 296 at 334) that knowing receipt is a cause of action in unjust enrichment. Lai J expressed similar sentiments in Tang Hsiu Lan v Pua Ai Seok (Originating Summons 423/2000, unreported judgment dated 7.8.2000) where he said that recipient liability was to reverse the defendant”s unjust enrichment. Lai J appears to have been persuaded by Lord Nicholls” powerful extra-judicial writing where Lord Nicholls argued that the “mischief is the receipt by a third party of property belonging in equity to another person” (“The New Landmark” (supra) at p 236). He argues that the law should be concerned...