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Part 1: the Development of Knowing Assistance in Australia and England

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Part 1: the Development of Knowing Assistance in Australia and England Raunak Vallabhji - 11015322 Introduction: The equitable principle of ‘knowing assistance’ in the current day has different formulations in the jurisdictions of Australia and England. Interestingly however they developed and diverged from the historic 1874 judgement of Barnes v Addy1. Part one of this paper explores these developments through relevant case law and demonstrates how the current divergent positions came to be. At present time, the English position on knowing assistance established in Royal Brunei Airlines Sdn Bhd v Tan2 is the superior position as it is free of the strict formulations of Barnes v Addy and provides a more substantive, conscience based approach to determining accessory liability. Part two of this paper critically compares and contrasts the current positions in Australia and England and seeks to establish the above claims. Part 1: The development of knowing assistance in Australia and England. Barnes v Addy – the second limb: knowing assistance. In 1874, the English Court of Appeal handed down its judgment in Barnes v Addy3. The significance and implications of this decision are debated to this day.4 However, despite these advances in its interpretation, Barnes v Addy remains a key, historical jurisprudential framework in determining accessorial liability.5 1 Barnes v Addy (1874) 9 Ch App 214, 251. 2 Royal Brunei Airlines Sdn Bhd v Tan [1995] 2 AC 378. 3 Barnes v Addy (1874) 9 Ch App 214, 251. 4 Dan Butler, ‘Equitable Remedies for participation in a breach of directors’ fiduciary duties: the mega litigation in Bell v Westpac; Butler; (2013) 31 C&SLJ 307. Raunak Vallabhji - 11015322 Barnes v Addy defined two grounds or ‘limbs’ of accessorial liability for a breach of trust or fiduciary duty. The first limb, “knowing receipt”, refers to the situation in which a third party receives charge over trust property. The second limb, and the focus of this paper, “knowing assistance”, renders a third party liable if that third party assists with knowledge in a dishonest and fraudulent design on the part of the trustee6. It is important to note, the term assistance as defined by Jacobs’ Law of Trusts in Australia is not characterised as causation of the breach: “There is certainly assistance, if in the absence of steps being taken by the third party, the breach of duty by the fiduciary could not have occurred”.7 As such the key elements of the second limb are:8 A dishonest and fraudulent design by the trustee or fiduciary. An element of knowledge on the part of the defendant. Assistance by the defendant towards the dishonest and fraudulent design of the trustee or fiduciary. These three elements (in particular the first two) are the central themes in this paper and are key in demonstrating the subsequent, varying formulations of the second limb of Barnes v Addy in Australia9 and England.10 Consul Development – knowing assistance in Australia. The Australian High Court case of Consul Development Pty Ltd v DPC Estates Pty Ltd11 affirmed the second limb of knowing assistance in Barnes v 5 Pauline Ridge, ‘Equitable accessorial liability: Moving beyond Barnes v Addy’ (2014) 8 J Eq 28. 6 Barnes v Addy (1874) 9 Ch App 214, 251-2. 7 J D Heydon and M J Leeming, Jacobs’ Law of Trusts in Australia (LexisNexis Butterworths, 7th ed, 2006) 291 [1339]. 8 Barnes v Addy (1874) 9 Ch App 214, 251-2. 9 Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 230 CLR 89. 10 Royal Brunei Airlines Sdn Bhd v Tan [1995] 2 AC 378. 11 Consul Developments Pty Ltd v DPC Estates Pty Ltd (1975) 132 CLR 373. Raunak Vallabhji - 11015322 Addy. This was done in a very formulaic fashion12 with little departure from the elements of Barnes v Addy, in that a third parry must: “Assist with knowledge in a dishonest and fraudulent design on the part of the trustee.”13 In reaching this affirmation, Gibbs J and Barwick J, clarified the applicable level of knowledge required for a third party to be liable. In their judgement, they created what has been interpreted as a spectrum of additional categories of knowledge in furtherance of the broader categories of actual and constructive knowledge.14 More recent authorities15 reconcile this spectrum with the now well- established Baden scale of knowledge16 put forward in the case of Baden, Delvaux and Lecuit v Société Générale pour favoriser le Dévéloppement du Commerce et de l’Industrie en France.17 The scale consists of five categories of knowledge: 1. Actual knowledge. 2. Wilfully shutting one’s eyes to the obvious. 3. Wilfully and recklessly failing to make such inquiries as an honest and reasonable person would make. 4. Knowledge of circumstances, which would indicate the facts to an honest and reasonable person. 5. Knowledge of circumstances, which would out an honest and reasonable person on inquiry. 12 Ridge, above n 8. 13Barnes v Addy (1874) 9 Ch App 214, 251-2. 14 Consul Developments Pty Ltd v DPC Estates Pty Ltd (1975) 132 CLR 373, [398] [412]. 15 Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 230 CLR 89 16 Baden, Delvaux and Lecuit v Société Générale pour favoriser le Dévéloppement du Commerce et de l’Industrie en France [1992] 4 All ER 279. 17 Ibid. Raunak Vallabhji - 11015322 As Consul pre-dated Baden, the degree of knowledge required was not considered in the exact terms of the Baden Scale. However this paper will show the spectrum of knowledge described by Gibb J and Stephens J was analogous. Stephens J can be interpreted in relation to the third Baden category when he stated that when a third party that has: “Conscientiously refrained from inquiry for fear lest he learn of fraud[,]”18 he or she would in fact fall into the scope of knowledge required. Gibb J is alluding to constructive knowledge i.e. the fourth Baden category in the following: “It would not be just that a person who had full knowledge of all the facts could escape liability because his own moral obtuseness prevented him from recognizing an impropriety that would have been apparent to an ordinary man.”19 Gibbs J can be said to be alluding to the fifth Baden category in the following: “it is going too far to say that a stranger will be liable if the circumstances would have put an honest and reasonable man on inquiry, when the stranger's failure to inquire has been innocent and he has not wilfully shut his eyes to the obvious.”20 As such, the judgements of Gibbs J and Stephen J are readily interpreted as accepting the first four elements of the Baden Scale and rejecting the last element, which alludes to constructive notice. 18 Consul Developments Pty Ltd v DPC Estates Pty Ltd (1975) 132 CLR 373, [412]. 19 Ibid., [398]. 20 Consul Developments Pty Ltd v DPC Estates Pty Ltd (1975) 132 CLR 373, [398]. Raunak Vallabhji - 11015322 Thus, at the time of Consul, the elements of knowing assistance established in Barnes v Addy held firm. Royal Brunei – English law’s step away from Barnes v Addy The English decision in Royal Brunei Airlines Sdn Bhd v Tan21 fundamentally altered the test for knowing assistance and directly challenged the elements set out in the second limb of Barnes v Addy.22 Knowledge On the subject of knowledge, Lord Nichols renounced the use of the Baden levels of knowledge and replaced the concept with an overarching test of dishonesty. This less formulaic test considered all the relevant circumstances of the case including the third parties knowledge of the circumstances to determine whether their actions could be categorised as objectively dishonest. Although knowledge is a crucial factor in this test of dishonesty, it is not the source of liability. Liability stems from an all-encapsulating, objective test of dishonest conduct.23 The objective nature of this test was deeply emphasised in Royal Brunei, his lordship stated: “The standard of what constitutes honest conduct is not subjective. Honesty is not an optional scale, with higher or lower values according to the moral standards of each individual.”24 21 Royal Brunei Airlines Sdn Bhd v Tan [1995] 2 AC 378. 22 Susan Barkerhall Thomas, ‘Knowing Receipt and Knowing Assistance: Where Do We Stand’ (1997) UNSW law journal 20(1). 23 Philip Podzebenko, ‘Redefining Accessory Liabitlity: Royal Brunei Airlines Sdn Bdh v Tan’ (1996) 18 Sydney L. Rev. 234. 24 Royal Brunei Airlines Sdn Bhd v Tan [1995] 2 AC 378 [389]. Raunak Vallabhji - 11015322 Despite this ruling, as well as precedent for an objective dishonesty test in England,25 it was challenged and deemed to contain a subjective element in the case of Twinsectra Limited v Yardley26 however it was re-instated as being purely objective with the Privy Council decision in the case of Barlow Clowes International Ltd v Eurotrust International Ltd.27 Dishonest and fraudulent design Royal Brunei also alleviated the requirement for a ‘dishonest and fraudulent design’ on the part of the trustee. Lord Nichols stated: “His [the trustee’s] state of mind is essentially irrelevant to the question of whether the third party should be made liable.”28 As an alternative, a fault-based29 methodology to liability was established. “What matters is the nature of his fault, not the trustees.”30 His Lordship held that the traditional rule provided inadequate protection in circumstances where the trustee was innocent but the assistant was dishonest.31 This paper agrees that it is rational that the liability of a third party is in fact greater when there is an innocent trustee. In these instances the third party possesses a closer causal connection32 to the liability and carries the entirety of fault.33 Although this is a rare occurrence, it would be unjust to deny a beneficiary the ability to impute liability onto a guilty third party because the trustee is innocent.
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