TOPIC 1: EQUITY AND INTRODUCTION TO TRUSTS

“Both common law and equity must be looked at for a complete answer to any legal questions”

Part A: History and Modern Application of Equity

1. The relevance of equity

 When someone seeks to rely on their strict rights in circumstances under which they can be
considered to be acting unfairly, Equity might be available to ensure a just result.

2. What is equity?
 A body of law which has the following characteristics:

Common Law Equity*

 Common Law courts  Court of Chancery

 King’s bench
 The court of common peace
 The court of Exchequer
 Rule-based, formalistic body of law  More flexible, remedy through discretion of
King or Lord Chancellor, by reference to
his conscience1
 Remedy:  Remedy2:
 Damages from breach of contract or tort (1) Claims based on undue influence
 (2) specific performance, rescission,
injunction, etc.

 Advantages of equity:
(1) Flexible, modifies the harshness and rigidity of common law (per Lord Chancellor
Ellesmere and Lord Chancellor Cowper)
(2) A jurisdiction grounded on fairness, justice, and morality
(3) Restrains injustice by stopping the unconscionable conduct of a particular person
 Later became more rule-based and principled, with identifiable doctrines because the jurisdiction
is transferred from the Chancellor to judges
 A good example is always the strict requirement of consideration vs. promissory estoppel

1
In the past, equity was applied without reasoning. Nowadays where there are doctrines and principles, backward
reasoning is usually adopted. Do the same in exams: you intuitively reach a just result in your mind before you make
up the reasoning.
2
There is no damages in equity. A similar concept in equity would be the equitable compensation, but it is
inaccurate to say it is the equity counterpart of damages in common law. You will learn this soon in later lectures.

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3. A Brief History of Equity
 Restrictive common law system leads to petition to King and eventually the Lord Chancellor -
rigidity of the common law
 The Lord Chancellor was an ecclesiastical figure who upholds biblical notions of fairness and
justice, but who at the same time influenced by Greek and Roman authors. Ultimately, his
decision rests on his discretion.
 Too many petitions, establish a separate Court of Chancery
 Problem: claimants have to choose the right court and if not, have to start it all over, resulting
in lengthy delays and inordinate costs in pursuing litigation
 Earl of Oxford’s case (1615): equity prevails over common law
 The Judicature Acts of 1873 and 1875 replaced the separate Common Law and Chancery courts
with a single High Court, which was divided into the Chancery Division, Queen’s Bench
Division, and Family Division  a person can now claim for both SP and damages in a single
proceeding

4. The procedural fusion of equity and common law

 Fusion: e.g.
 CL: Duress is a CL doctrine, the contract will be void in CL
 Equity: If the contract is induced by undue influence  may be set aside in equity
  You bring both cases to court at once
 The nature of fusion is only procedural: you need not bring separate claims anymore**
 It is WRONG to say that there are no substantive differences between Equity and CL
 The characteristics of proprietary rights are dependent on whether they are classified as legal
or equitable
 E.g., if a person steals a car, in common law, pecuniary remedy will be awarded; in
equity, I can claim my car back
 See also the equity maxims (below), e.g., “equity is imaginative”

5. Should equity and the common law be assimilated?

 View 1: Professor Peter Birks: possible to have a scheme that makes no reference to Equity at all
 There is a distinction between events and responses
 4 types of events that trigger responses in private law: consent, wrongs, unjust enrichment,
and other events
 Equity operates within each event, but not separately
 Note: this should be rejected because “other events”, e.g., the principle of unconscionability,
will definitely trigger an equitable response (not a “private law response).
 View 2: Lord Millett: the existence of 2 systems is alright
 Jewish law, roman law and English law have similar dual systems of laws
 The common law is a complete system of law, but equity isn’t and is not independent
 The separation is essential, e.g., complete assimilation would not result in the abolition of the
trust, but would render its analysis much more complex, and the subtleties and nuances of the
law would be lost.

6. Is equity important in the modern world?

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  Equitable principles infiltrate into numerous areas of law, especially commercial law
 The trust is an important legal institution for the fiduciary management of properties
 Millett LJ: (1) much commerce today is based on trust; (2) commerce today demands high
standards of conduct which equity can impose loyalty, fidelity integrity, respect for
confidentiality.

Part B: Characteristics of Equity

1. Fundamental principles
 All maxims are merely guidelines rather than rules and not to be literally applied
 **Careful analysis of what the maxim means
 Could be rejected or changed
 E.g., “Equity will not suffer a wrong without a remedy”
 Interpretation 1: “we don’t want anyone to suffer a wrong without a remedy” – false –
does not say anything special about Equity
 Interpretation 2: “where wrongdoing has occurred that could not be remedied at law, it is
possible to resort to Equity for a remedy” – false – ‘it is an old mistake to suppose that
because there is no effectual remedy at law, there must be one in equity” (Holmes v
Milage) – maxim rejected in the end.
 E.g., “He who seeks equity must do equity” is with prerequisite: “Equity will only intervene
if the remedy does not cause hardship to the defendant”

2. Equity is discretionary
 Much of equity can be characterized as doctrinal, in the sense that it is made up of identifiable
rules that are to be applied strictly without any role for judicial discretion (e.g., Re Diplock (CA))
 BUT the award of equitable remedies lies in the discretion of the court, and it is entirely
appropriate that questions of justice and fairness arise at that stage

3. Equity is triggered by unconscionability3

 In England there has been a tendency to treat unconscionability as a rule of substance/strict
doctrine (i.e., clearly defined), but even this is open to criticism since there is a danger that its
inherent vagueness means that it readily becomes only a guiding principle (principle of justice)
 e.g. (unconscionability) to prevent D from relying on his strict statutory rights where D has
induced the claimant to act to his or her detriment (Rochefoucauld v Bousted)
 Not agreed on whose conscience should be considered – the court or objective reasonable person?
Or a subjective test to be adopted regarding D’s own thought process?

4. Those who seek equity must do equity (future conduct)

 When granting an equitable equity, the judge should ensure that the claimant is willing to act
fairly towards the defendant in the future

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Note: it is important to learn that unconsciousness is the beginning of everything in equity. A trust operates on a
trustee’s conscience. Equity does not help against an Equity’s Darling, because he has clean conscience.

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  E.g., an injunction was denied to employee who wished to restrain their employer from
dismissing them because they had refused to undertake that they would not strike in future
(Chappel v Times Newspapers Ltd)
 To ensure that the claimant does indeed ‘do’ Equity, the judge can attach conditions to the grant
of an equitable remedy (e.g., Ramsden v Dyson; Re Berkeley Applegate)

5. Those who come to equity must come with clean hands (past conduct)
 Equitable relief will be denied to a claimant whose conduct can be considered improper in some
way (Dunbar v Plant)
 The improper conduct must relate to the relief to the relief that is sought
 Improper conduct involves impropriety in a legal, not a moral sense (Dering v Earl of
Winchelsea)
 Restriction: it is possible to obtain an equitable remedy despite the claimant having unclean
hands if it is not necessary for the claimant to rely on the improper conduct to obtain the remedy.
(Tinsley v Milligan)
 Note: Lord Goff dissented, but: (a) doubt: is it true that the claimant must clean their hands
by repenting of their illegality? (b) the dirt in this case is too remote from the claim.

6. Equity treats as done that which ought to be done

 Where the parties have entered into a contract that is specifically enforceable, Equity will treat the
contract as having been performed (Re Anstis)
 E.g. if D has agreed to transfer property to P but has not done so, where the contract is
specifically enforceable, D will retain the legal title (CL) while the equitable title (equity) is
transferred to P, meaning that the property is held on trust by the D for P
 Restriction: the maxim will operate only when that which ought to be done can be done (NB the
future property case)

7. Equity protects the weak and vulnerable4

 E.g., the undue influence doctrine
 E.g., where there is inequality of bargaining power
 Fiduciary relationships

8. Equity is cynical (about human nature)

 Not formally recognized by courts
 E.g., Gifts - equity usually presumes that a donor did not intend to make a gift, and the recipient
will hold the putative “gift” on trust (e.g., Tinsley v Milligan)
 E.g., Relationships – a parent over his minor child (Lancashire Loans v Black); doctor over
patient (Mitchell v Homfray), lawyer over client (Wright v Carter) and fiduciary relationships

9. Equity is imaginative
 E.g., P’s money mixed with D or T’s money, CL treats money unidentifiable in mixture, so that P
no longer has any property rights in the money (Taylor v Plumer). Whereasin equity, the mixture
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This is also important. This is exactly why equity protects the beneficiary in a fiduciary relationship.

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 is a fund, so long as it is possible to know or presume the plaintiff’s proportionate contribution to
the fund is, equity will recognize that the claimant continues to have a proprietary interest in that
proportion of the fund.
 E.g., Equity is willing to value benefit in kind hence not invoking restitutio in integram

10. Equity follows the law (but not slavishly nor always, per Cardozo J)
 Equity recognizes legal rules e.g. rights, interests, titles, unless rebutted by contrary intention

11. Equity looks to substance rather than form

 E.g., Equitable remedy for rectification – where the words of a contract do not reflect the
common intentions of the parties, Equity is willing to rewrite the document to reflect those
intentions (The Olympic Pride)
 E.g., Equity will identify a trust, even though the settlor has not explicitly stated the intention to
create a trust; or Equity will conclude that a purported trust a sham
 But at times equity is concerned with the process of decision making rather than the substance
e.g. discretionary trust – equity concerns whether it is excercised than how it is exercised

12. Equity will not assist a volunteer5

 A volunteer = someone who has not provided consideration for a particular transaction
 Extended: “equity will not perfect an imperfect gift”
 Numerous exceptions, e.g., “equity treats as done that which ought to be done”, also the principle
of unconscionability

13. Equity assists the diligent

 The claimant may be prevented from obtaining an equitable remedy if there has been delay in
seeking the remedy – equitable doctrines of laches and acquiescence

14. Equity is equality

 Where there are equitable interests in property, Equity presumes that they are equal interests and
will be treated equally
 Doubted in the law of trust because it would rarely accord with the intention of the person
who created the trust
 May sometimes mean “proportionate equality” – distribution in accordance with existing
proportions (Re Steel, per Megarry VC)

15. Equity acts in personam (directed towards a particular person)

 Interpretation 1: Equity operates to create personal interests and not proprietary rights (in rem)
 Doubt – Equity clearly operates to create property rights, being the essence of trust
 Interpretation 2: distinguishing between in rem (the right is good against the world) and in
personam (good against a particular person); in this sense, equitable rights are always in
personam, because equitable property rights are defeated if the property is obtained by a bona
fide purchaser for value

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Important. Especially its extension “equity will not perfect an imperfect gift”.

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Part C: Introduction to trusts

1. Definition of the trust

 The 2 fundamental features of the trust:
(1) Property component: a person holds property rights for a person or purpose
 **Property is what distinguishes a trustee from a fiduciary
(2) Obligation component: the person is obliged in Equity to exercise those rights for that person
or purpose

*The contractarian account of trusts*

There are 2 components of trusts: property and obligation.

Focusing on the obligation component:
Langbein has developed the contractarian account of the trust, by virtue of which he concludes
that the trust should be considered to be a bargain concerning how the trust assets should be
managed and distributed:
o Trust is a hybrid of contract and property
o Trusts embody a contract about how property is to be deployed.
Commentary:
  Does not undermine the significance of the property component to the trust
  The nature of duties and discretions of trustees and the particular function of the trust are
typically dependent on the terms of the document that governs the trust.

  His argument based on bargains is inconsistent with the nature of equity that it was used in a
family context where there is little bargain. Equity concerns primarily loyalty, fidelity,
confidence etc. These concept generally guides decisions in courts on trusts, but they are
nowhere to find in a contractarian account.
  Also, the trustee has one single primary duty only: administer the trust. If he fails to
administer it properly, e.g., if he misapplies the trust fund, the remedy to this is to reconstitute
the trust fund, which is a reinforcement of his primary duty. Whereas in contract, a person’s
primary duty is to perform the contract. Had he failed, his secondary duty is to pay damages.
  we should reject this argument for 3 other reasons:
(1) Privity and consideration. Once a trust is created, the settlor drops out from the picture.
He cannot enforce the bargain, and has no rights relating to the trust, except that he
reserved for himself different powers. Enforcement of the trust is left to beneficiaries, who
are no party to the bargain, and who are volunteers, who provide no consideration.
(2) In cases of testimonial trusts, whereby a trust will only become effective upon the settlor’s
death, it is impossible to derive a contract between the testator and trustee.
(3) It is possible to declare oneself as a trustee, while it is impossible to form a contract with
oneself.

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  The significance of this contractarian account is only that it pointed out the nature of a trustee’s
obligations: that they can be defined by the trust instrument.

 The subject of a trust is usually conveniently referred to as the property, but “property” is
actually a reference to the rights relating to particular things
 Tripartite relationship: Trustor (settlor)(Tr) – Trustee (Te) – Beneficiary (B)
 A trust is an equity device:
 At common law, transfer of property gives transferee full right (full ownership) to enjoy the
property. The privity rule precludes any TP from enjoying his rights.
 In equity, Te is considered unconscionable. If he ignores his obligations to B, he is unjustly
enriched. He will also abuse the trust reposed upon him by Tr.
 As a result, B has a correlative right against Te that Te performs these duties.
 The obligation is also (eventually) enforceable against the world except the Equity’s darling:
(1) bona fide (2) purchaser of (3) legal interest (4) without notice, because they have a clean
conscience.
 This makes B’s right an ownership right over the trust property, which is known as the
beneficial/equitable ownership
 Note: essay: can the trust be considered in the contractarian account? (P.42 bottom – 44)

 4 fundamental principles (identified in Westdeutsche v Islington by Lord Browne-Wilkinson)

(1) Conscience: equity operates on the conscience of the owner of the legal interest
(2) Awareness of facts that affect conscience: the holder of legal interest must be aware that he is
intended to hold the property for the benefit of others
(3) Identifiable property: the trustee is obliged to keep the trust property segregated from his own
property
(4) Equitable proprietary interest (of beneficiary, enforceable against the world except Equity’s
Darling)

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2. Nature of the equitable right (essay)
Choose a theory from the following: what is an equitable right?
a) Right in rem
 Does not explain why the equitable right is weaker than the full right in rem:
 Tort of Conversion and physical damage rules: tort of conversion, property damage or
economic loss is only available to people with legal proprietary right or possessory right
 NB.: a claim can be brought if the trustee is made a party to the proceedings, but not
if the trustee consented to the interference with the property
 This is because tort claims are common law claims based on interference with legal
property and possessory rights
 If the trustee refuses to sue, the beneficiary can sue the trustee for breach of trust or
going through the Vandepitte procedure
 The equitable right could defeated by the Equity’s Darling
 NB.: If Te misappropriates shares held for B, and uses the proceeds to buy a car, B can assert
an equitable proprietary right against the car.

b) Rights in personam
 Beneficiaries do have personal rights against the trustee
 Maitland: there is no property right. This should be rejected since it does not explain:
(1) Third party could be bound even if unaware of the right
(2) If trustee goes bankrupt, trustee cannot claim property in priority to B’s rights
(3) If the trust property is a personal right, e.g., value credited to bank account, when trustee
goes bankrupt, beneficiary can claim the money.

c) Right against rights

 McFarlane/ Stevens: B’s right against the trustee’s [rights of ownership]/[personal rights]
 Rejects the idea of dual ownership & replaces equitable ownership with equitable rights
 Is useful for exporting notions of equitable rights to countries with no tradition of equity
 Explains: right against the world; tort of conversion and physical damage; personal rights +
bankruptcy
 Nonetheless, should be rejected because of artificial and unnecessarily complex analysis:
(1) This concept is alien to equity jurisprudence, courts, and statutes
(2) The thesis fails to explain adequately the essentially proprietary nature of a beneficiary’s
interest under a trust. Despite consistent with the right against right analysis, it would be
much easier to understand by treating it as a proprietary right.
(3) A trust will not fail for want of a trustee. A beneficiary has a right to apply to the court to
have a trustee appointed, and this is not a right against the trustee’s right of ownership
because there is not trustee.
(4) Does not explain the Equity’s darling exception

d) Modified proprietary rights

 Equitable rights are proprietary rights in that they can persist against third parties, but only
modified to be weaker than (see above) and subsidiary to legal proprietary rights.

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  If the trust property is a right, e.g., trustee’s personal right to a value credited to bank
account, the beneficiary’s personal right against trustee’s right, who if becomes insolvent,
will be transformed into a proprietary right. This is because equity is able to identify property
in a fund (“equity is imaginative”).

e) Choosing theories
 Shell UK v Total UK: modified proprietary right:
(1) Court: the claimant had an equitable proprietary interest (right in rem)
(2) But the beneficiary had to join the trustee in order to bring a claim in tort (modified)
 Alternatively, rights against rights: the beneficiary would have had a right to the damages that
would be obtained by the trustee suing the tortfeasor for the interference with the trustee’s
legal property right. Should be rejected:
(1) Artificial: trustee had no right to obtain damages, since he suffered no loss

3. Functions of the trust

 Segregation of assets: Protects trust property from settler or trustee’s insolvency
 Asset partitioning
 E.g., family level application: family settlements to preserve family estates, succession,
discretionary family trusts to mitigate tax
 Shiu Wing v Commissioner of Estate Duty:
o Hong Kong no longer has Estate Duty, whoever passes away, the estate left is not
subject to estate duties. A device used to avoid tax- S transfers properties to trustee
over some offshore trust. Transfer was in a circular way – he pays for the transaction,
but money goes in a circular flow and goes back to himself
 Tam Mei Kam v HSBC: example of use of discretionary trust
o Anita Mui thought her mother could not deal with huge amount of assets should she
passed away, so she set up a trust with HSBC as the trustee and made specific
provisions about who the beneficiaries are and how much they get. Mui Ma got a
monthly allowance in the region of 20k per month. There were also provisions that
after the mother passed away, rest of assets go to a specific charitable cause
o Settlor can do whatever he likes subject to certain restrictions –much flexibility of
who gets what and when.
o Trust is something that is commonly in place.
 Kan Lai Kwan v Otto Poon & HSBC International Trustee Ltd : high-profile divorce of a
wealthy couple and the ramifications for the family business
o F: Otto Poon divorce with ex-wife. He is an engineer and founder of a successful
engineering company in Hong Kong. Shares of the company put in a discretionary
offshore trust – (trustee is given power to decide who the beneficiaries are and how
much they are entitled to).
o Under the trust, himself and his children are potential beneficiaries. At the time the
trust was established, he indicated his wishes to the Trustee about how the shares will
be dealt with.
o I: In the divorce, should the value of those shares be taken into account for ancillary
relief?

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  Property management: the trustee is experienced, or sophisticated, or grown-up
 Convenient property holding: it is convenient for a person to hold property for a group of people
with common interest (e.g., pension funds)
 E.g., Commercial level: for collective investment or to facilitate commercial transactions
 Unit trusts: e.g., REIT: a collective investment scheme; investors subscribe to units of the
trust to invest collectively
 Pension trusts: e.g., MPF
 Nominee holdings/bare trust, structured financing (e.g., asset securitization), etc.
 E.g., For raising and managing public funds: charitable trusts
 Tax avoidance: transfer of property may result in a lower rate of tax being charged, but if a trust
is created solely to avoid tax liability, it could be illegitimate and invalid: Ramsay v IRC

4. Classification of trusts (by context)

a) Express trusts: are trusts voluntarily created
i) For the benefit of persons
 Classified according to the time when the trust is to take effect into
 Inter vivos trusts: trusts created whilst the settler remains alive
 Testamentary trusts/ will trusts: if a testator does not leave his will to his beneficiary
(devisee or legatee) absolutely but created a testamentary trust, once the estate has been
administered, the trust property will be transferred to the trustee to hold on the trusts
identified in the will. This could be a discretionary trust or a fixed trust.

 Classified according to the strictness of the instructions on the trustee into

 Bare trusts: A bare trust arise where property is vested in the trustee for the sole benefit
of the beneficiary, who is of full age. The trustee has no discretion and must follow the
instructions of B. A bare trustee has no active duties relating to the trust property.
 Fixed trust: the interest of the beneficiary is identified in the trust instrument, and can be
successive over time:
e.g., “for my children in equal shares for life, remainder to my grandchildren”
 Discretionary trust: trustees have discretion to distribute the property as they wish to
people from a particular class of potential Bs – the “objects”. The objects of a
discretionary trust have no equitable proprietary right, but a mere equity – “hope”

ii) For the benefit of purposes

 Private purpose trust, usually VOID as there is no beneficiary to enforce the trust
 Public/ charitable purpose trust: In HK, there are six heads of charitable trusts

b) Trusts that arise by operation of law (resulting and constructive trusts)

i) Imposed by common law (equitable principles)
 Resulting trusts (see later chapters)
 Constructive trusts (see later chapters)
 Institutional constructive trusts (ICT)
 Remedial constructive trusts (RCT)

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 ii) Imposed by statute

Miscellaneous
Trust
 If the legal title is vested in the man, the equitable title is vested in him too.
 If the W has made contributions to the purchase of the land, the court may decide that the man
will be holding the land on trust for W, W will get a separate equitable title. (Rosset v Rosset)

 Authorization to transfer: In another case, if the legal owner of the property is authorized to
transfer that property to a TP, the equitable interest in that property will be overreached and
dissipated, but an equitable interest will be transferred to any substitute property. E.g. The trustee
may sell shares held on trust for A to B, B will then have the legal title and A will no longer have
an equitable interest in the shares, but the purchase money for the shares.

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 Topic 2: Establishing a trust I

Step 1: Declaration of a Trust

Introduction

 2 necessary steps for setting up express trusts

(1) Declaration: The settlor must declare the trust (declaration of trust)
 Declaration can be performed privately and alone; in this case the problem is on proof
(2) Constitution: The settlor must transfer the legal title to the trustee (vesting of title in trustee)
 If the settlor is the trustee himself, the title of the trust property is already vested in himself
and there is no need for transferral
 Both declaration and the transfer of legal title have to be formally and substantially valid

 Implications of a valid trust: S (settlor) - T (trustee) – B (beneficiary)

 Separation of titles (legal/equitable)
 B would have rights arising then and there under the trust, and those rights are only enforceable
by him
 B’s rights would only arise when both (declaration + constitution) has been satisfied
 After the creation of the trust, S drops out from the scene and the trust becomes irrevocable.

Step 1: Declaration of Trust (Satisfy both formal and substantive requirements)

1. Formal validity of declaring a trust, depending on what the trust matter is

 If inter vivos trust (for the settlor’s lifetime)
 Land: evidenced in writing (s5(1)(a),CPO) (does not have to be a deed, can be a memo in
writing)
 Other properties: no formal requirement – oral declaration suffices
 If testamentary trust, the declaration must be in writing, signed by the testator in the presence of
two witnesses (s5, Wills Ordinance)

2. Substantive validity of declaring a trust (not exhaustive)

 The requirements are the same whether the trust is inter vivos or testamentary
 The settlor must have legal capacity and is of sound mind
 The trust must not be a sham (a party saying one thing but intending something else). It must be a
real trust.
 On the face of it, the documentation is fine; but the settlor and trust do not intend a trust to
take effect. Indeed, they intend something else to happen.  sham (a. matrimonial
proceedings, b. hide assets from creditors)
 E.g. there may be an invalid trust if the purpose of the trust is tax evasion
 The trust must either be for the benefit of persons, or for public purposes (charitable-purpose
trust)
 Private purpose trusts
 The trust must not infringe the rules of perpetuities (details not covered in the course)
 Generally, trust in HK is allowed a period of 80 years (Perpetuities and Accumulation Ord)

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  The trust is free from vitiating factors like illegality, fraud, and is not contrary to public policy, or
is not set up to defraud creditors.
 The trust must satisfy 3 certainty requirements:
(a) Certainty of subject matter
(b) Certainty of intention (to create a trust)
(c) Certainty of objects (beneficiaries)

a) Certainty of subject matter

 A trust is valid only if the subject matter of the trust has been described with sufficient
clarity, it involves considering whether the description of the subject matter enables the
property to be identified clearly

Examples
(1)  “My watch/phone” (specific object, usually no problem, unless one has many
phones/watches)

(2)  “Bulk” of my residuary estate

 NOT certain as it is unclear as to which part of the residue is to be held on trust: Palmers
v Simmonds

(3)  1 of my 10 vases [Chattel] (clear but unidentified)

 *Re London Wine: (see case notes); A contract for the sale of certain bottles of the wine
(to the particular vintage, year and number). Subsequently, the four bottles of wine were
delivered to the buyer, the company went bankrupted. Held, not segregate the particular
chattel from that bulk of properties = no sufficient certainty.

(4)  50 of my 950 shares in HSBC holdings [Intangible]

 *Hunter v Moss: (see case notes, reapplied in Re CA Pacific (1999)); the basic idea is that
for intangible, identical property, segregation is unnecessary, and it would be sufficient to
see that the proportion is certain.

(5)  Trust of 222000 of 1.5 million shares

 White v Shortall (Australian)(see case notes), affirmed in Pearson v Lehmann Bros
(UKHC): the idea is that: (1) the distinction is not one of tangible vs. intangible; Deals
with the ownership of the “bulk” (look at the entire bulk of shares, i.e. 950 shares in
question.) To say 950 shares are held on trust, but there is equitable co-ownership.
Equity would see 50 of the share belong to the beneficiaries and the rest would belong to
settlor. T would hold the entire bulk of shares both for beneficiaries and himself, in which
he does not have to identify which 50 shares.

 Different approaches: English/UK position?  Re Lehman Brothers International

(Europe) [2010]: collapse of Lehman Brothers. Concerned to securities that has been held
to LBIE. Commercial bankruptcy. No segregation of assets.

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  F: The group is dividing up into different regions, there is one particular company that
holds on the securities to each region. LBIE holds the securities for all the companies in
the European region (i.e. buys securities on companies’ behalf).
 LBIE would enter into re-purchase contract with the relevant bodies. The affiliate
would sell these purchases to LBIE, which in turn would sell it back to the affiliate to
earn the interest. LBIE can deal with these securities in however way they like (i.e. short
term on market)
 LBIE had sold equivalent securities to the affiliate. LBIE had in its hands quite some bits
of the securities which held on trust of different affiliates in some unsegregated form.
After the collapse, the question arises in whose security is it, LBIE or Affiliates? Was
there sufficient trust, certainty as to subject matter?
 High Court: sufficient certainty by applying White v Shortall. Does not matter whether
the shares are segregated as long as LBIE had co-ownership to the shares. LBIE had in
meanwhile dealt with securities as it liked. Does not matter as LBIE would not holding
whatever right it holds =sufficient certainty.
 UK Supreme Court: affirmed on appeal

(6) Other examples

  “anything that is left of the testator’s estate”: clear (Re Last) – life interest in the estate
while residue goes to other people; could be unclear
  “reasonable income”: clear (Re Golay’s Will Trusts) – determinable by reference to the
beneficiary’s previous standard of living
 Future property? (E.g. trust of the properties that Settlor will inherit from his
mother after her death)
o The trust would not come into being when the declaration is made, but sometime
after.
o Subject does not exist: NOT CERTAIN
o BUT If consideration is given by the trustee, it may nevertheless be enforceable
when the property comes into the trustee’s hands

* Absence of certainty of subject matter

(1) If the identity of the subject matter is uncertain, but the gift is valid
 There is nothing a trust can attach to  no trust.
 S transfers property to T, with intention that part of it (unidentified) be held on trust
 T takes the property absolutely (uncertain which part be on trust)

(2) If the subject matter is certain but the individual entitlement is not,
 i.e., It can be ascertained that a beneficiary is entitled to 50 shares, but we don’t know
which 50 is his (e.g., Hunter; White above)
 Provided that the transfer is valid, the property will be held on resulting trust for the
settlor, because it is clear that T was not intended to have any of that property
beneficially

14
  In Boyce v Boyce, a testator devised “all his houses” on trust to convey one to the
elder daughter “whichever she thinks proper to choose”, and the rest goes to the other
daughter. The elder daughter died before making a choice. The individual
entitlement is unclear. Properties were held on RT for the testator’s heir.

(3) The proportionate amount of each beneficiary’s share is unclear, but the gift is valid:
 If the proportion is unclear, the trust will be void for uncertainty (Boyce v Boyce)
 It becomes an outright (徹底的) gift
 It may, however, be possible to resolve the uncertainty:
(a) The trustee may have been given a discretion to divide the shares as they
consider appropriate
(b) Court to apply the maxim “equality is Equity” and divide the property equally
between the beneficiaries6

 Present uncertainty will not defeat a trust

 If the terms of the trust are sufficient to identify the subject matter in the future
 Recognized only in the specific context of secret trusts7
 E.g. subject matter of the trust relates to what’s left of the property after the legatee’s
death (the subject will crystallize only on the death)
 NB.: such present uncertainty is different from a future property, i.e., property that has
not come into existence

6
Remember you should always consider the intention of the settlor. Equal division is surely the last thing the settlor
ever intended: equal division among all may, probably would, produce a result beneficial to none. Lord Wilberforce
in McPhail v Doulton commented that equal division is a “whimsical execution”. Equal division may be sensible
and has been decreed, in cases of family trusts, for a limited class. It has occurred only a limited time in cases.
7
Secret trust arises in the situation where a settlor communicates to the intended trustee that the settlor would pass
property to him for his holding on trust for the intended beneficiary after death of settlor even if there is no formal
mention of the trust in the will.

15
 b) Certainty of intention
 There must be a clear intention to set up a trust as opposed to other forms of legal
relationships (e.g., a gift or a contract for 3rd party)
 The distinguishing feature of trust is the duty to dispose of the property for the
beneficiary.

 2 questions to be asked:
(i) Is a trust intended?
(ii) What sort of trust or disposition is intended?

(i) Is a trust intended?

(1) Test: whether the creator of the trust wanted somebody to hold property for the benefit of
another person, so that he is under a duty to do so. It does not matter whether the creator
of the trust did not understand such an effect. (Paul v Constance)

(2) Substance (of intention) over language (intention stated in the trust document)
 Precatory words not sufficient: the creator ‘desires’ or ‘wishes’, ‘requests’, ‘trusts’
or ‘is confident’ that the party receiving property will hold it for somebody else, this
lacks the necessary element of requiring the other party to do so and is not evidence
of a sufficiently certain intent to create a trust –
 The word “trust” is usually indecisive.
 Unless expressly intended or expressed by the documents

(3) Objective assessment

 Look at what the reasonable person would conclude that the creator of the trust
intended, rather than looking at what he actually intended, by reference to (a) the
terms of any agreement or (b) relationship between the parties
 Subjective intent is unnecessary. It is sufficient even if the settlor does not know the
effect of what he is doing.

Adams v Kensington Vestry

 Facts: Testator left estate to his wife “in full confidence” that she “will do
what is right as to the disposal thereof (i.e. of the estate) between my
children…”; The estate later disposed to someone else rather than the children
 Held: no trust imposed on W; it was an absolute gift to W was created and did
not impose any legal but merely moral obligation on her
 The court may infer an intent to create a trust from the circumstances of the
case, the conduct of the parties, and careful construction of the whole of the
document

 In case of ambiguity, the court will need to make sense of the expressed word
 (Gold v Hill – ask the lawyer to “look after” his mistress and children, court
construed it as a trust for them)

16
 Self-declaration of trust
 Family context
 Where the language is ambiguous, the court is less inclined to create a trust unless the
intention is clear.

Jones v Lock
 Facts: a father produced a cheque payable to himself and said it was a gift to the
baby. He did not endorse the cheque to the baby by adding his own signature.
 Held: it would be dangerous if ‘loose conversations of this sort’ were sufficient to
declare a trust  it remains to be the father’s (deceased) estate.

Paul v Constance
 Facts: a deceased (husband) confirming that the money in his own account “was
the claimant’s (wife) as much as it was his own”, and they used the account
together.
 Held: The statement and the conduct in this situation were conclusive of it being a
trust.

Rowe v Prance
Facts:
 D said he would divorce wife, sell house and buy a yacht as home for D & P
 D did buy a yacht, but in the name of D. He claimed that this is because P did not
have the Ocean Master’s certificate.
 D did not divorce wife, nor sell home
Held: valid trust
 A trust for both P and D as D often refers the yacht as “ours”

 Commercial context
 Courts are usually reluctant to find a trust relationship
 Segregating property is a positive sign of intention of creating a trust: R v Clowes
(No.2); Re Lewis’s of Leicester

 Intention to make a gift: if there is an intent to make a gift, but legal title to the property
is not transferred, this is neither a gift (by definition) nor a trust (failed intent). The
transferor is entitled to keep his “gift”.
 An invalid gift cannot be saved by treating it a trust – ‘equity does not perfect an
imperfect gift.”

 Consequence of uncertainty:
 The trustee might be free to use the property as an outright gift to him
 Cannot be proved that the settlor intended the trustee to hold the property on trust

17
 (ii) What sort of trust or disposition is intended?
 Trust (imperative 命令的) vs Power (Discretionary whether to distribute at all)
 Trust: impose obligation to dispose property, no discretion
 Power: Given the discretion to do sth (Allow to do sth instead of compelling to do sth)
(e.g. may do sth)

Trusts (or “trust powers”, or “powers in the nature of a trust”)

 Fixed trust: the interest of the beneficiary is identified in the fixed trust and the trustees have
no discretion as to how to distribute.
 Discretionary trusts: trustees have discretion to decide:
(1) who are to be benefited by distribution of trust property, and
(2) in what proportion
 The objects of a discretionary trust have no equitable right, but only a mere equity, i.e.,
hope.

Powers
 A settlor may authorize another to help him distribute assets to a class of objects. The
authorized person is called the donee of power. The power received by the donee is the
power of appointment. A donee of power may be given just a bare power of fiduciary power.
 Bare power: donee of power receives complete freedom in exercising discretion.
 Fiduciary power: similarly, the donee here has no obligation to distribute the property.
Nonetheless, it is required that he deal with the discretion in a responsible manner.

Examples
a. “I give $1000 to T1 and T2 to be held upon trust for A, B and C in equal shares”
 If it is a trust, trustee has to dispose of the property for the benefit of A, B and C
 A, B and C will receive equal shares  a fixed trust

b. “I give 1000 to my trustees T1 and T2, upon trust to be distributed among such of my
students and ex-students in such proportions as my trustees shall think fit”
 It is a trust:
 There is a duty for T1 and T2 to distribute the trust fund
 1000 is upon trust to be distributed  discretionary trust

c. “I give 1000 to my trustees T1 and T2, for such of my students as my trustees may in their
discretion appoint (distribute), and in default of appointment to A, B, C in equal shares”
 NOT a trust:
 T1 and T2 are not under a duty to distribute to the students (if they do not distribute to
the students, the 1000 would still go to A, B and C in default of appointment; also, the
trustees may or may not appoint in their discretion)
 T1 and T2 simply have a (fiduciary) power to appoint any student (i.e. there is no
obligation on the trustee to distribute among the objects, although because the trustee is a
fiduciary, he must consider the exercise of the power).
 *A gift over and in default of appointment to A, B and C

d. I give 1000 to my trustees, T1 and T2, for such friends of mine as my wife, X may in her

18
 absolute discretion, appoint. In default of appointment, the 1000 shall be distributed to A, B
and C in equal shares)
 Not a trust, but power:
 The wife who gets the bare power to appoint (wife is the donee of the power)

Fixed trust Discretionary trust Fiduciary Bare power

power
Example (a) (b) (c) (d)
Trustee’s Follow 1.Obligation to make the Same as (b), Flexible;
duties instructions distribution except that the less rules
of the trustee does
2.before making the If the wife
settlor not have a
distribution, have to exercises
duty to
decide who entitle the power,
distribute.
she cannot
3. consider the objects that
do it ultra
is provided in the trust 
vires
make a survey on who are If the trustees
the objects exercise the e.g. cannot
discretion, distribute to
4. what are the criteria for
need to make people
the distribution? Take into
a survey, take unknown if
account relevant
into account objects are
consideration
relevant “friends”
considerations

Beneficiary’ Proprietary No proprietary interest in Same as None

s rights interest the asset, all that they discretionary (except
have is some kind of trust right
equitable right that T challenge if
should administer the trust power
property. exercised
ultra vires)
The significance of distinguishing trusts from powers
(1) If a mere power is not exercised within the time stipulated (expressly or by implication)
the property goes to those entitled in default of appointment. Their identity may be
indicated by a gift over. On the other hand, if the benefits accruing under a discretionary
trust are not allocated amongst the beneficiaries within the time and in the manner
stipulated, the trustees are in breach of trust and the court can itself even take over the
task of allocating benefit.
(2) The validity of an instrument could depend on whether the language created a trust or a
power because the certainty of objects requirement was considered stricter for trusts than
for powers.

19
 c) Certainty of objects
 The settlor must define clearly who the beneficiary or what the purpose is
 Recall: there can be no private purpose trust. Any such trust would be void.
 An exception for the need of a clear purpose would be charitable trust, so long as it is
certain the trust’s purpose is for charitable use.

(i) Fixed trust

 Essential test: the complete list test (IRC v Broadway) – it must be possible to identify
who all the beneficiaries at the time when the trust property is to be distributed.

 Trust will be void if objects are unclear:

(1) Conceptual uncertainty: definition of object unclear – impossible to determine who
the objects are and also impossible to compile a complete list (e.g. settlor’s friends)
(2) Evidential uncertainty: if definition is clear but evidence cannot locate the
beneficiaries

Demonstration
 Fixed trust
 E.g. $100000 to be “divided equally” between “Equity students in 2013-2014”
 Trust property divided in proportions identified by the trust document
 Complete list test satisfied: conceptually (such “students” are identifiable) and
evidentially certain (e.g., the school has record)
 Power
 “If my wife feels that I have forgotten any friend, I direct my executors to pay to
such friends as are “nominated by my wife” a sum not exceeding $25 per friend”
 The duty test (certainty of intention) failed. This is a bare power only, no duty to
distribute, wife will not be in breach of trust even if no distribution
 For powers, we need NOT go through the complete list test
 But still the complete list test fails in this case.

 It is unnecessary to consider the beneficiaries’ locations, the size of class, or the

capriciousness in establishing the fixed trust. They are strictly irrelevant.

(ii) Fixed trust subject to conditions

Validity of conditions:
 Condition precedent needs to be satisfied before the property being distributed
 Condition valid so long as one person (object) satisfies the condition
 Condition subsequent: if satisfied, a vested interest in trust property is defeated by a
subsequent event; beneficiary will no longer be entitled to the trust property
 A condition subsequent need to be known with certainty from the start; otherwise, the
condition (not the trust) will be void.
 E.g., “marry a person not of the Jewish faith”: condition void, unclear what is “of
Jewish faith”

20
  Sometimes it’s hard to distinguish between a condition precedent and subsequent
 Follows “fixed trust” (above) in terms of tests, conceptual and evidential certainty etc.

(iii) Discretionary trust

 Test 1: complete list test (IRC; overruled by McPhail (below)) (obiter); REJECTED
 NB. Before McPhail, this was the prevalent test. After McPhail, I think it is
appropriate that we ignore it completely for discretionary trusts.
 It is suggested that this test could be applied to discretionary trust if it appears that
the settlor’s intent is that if the trustee does not make a selection from the objects,
there will be division among them all, whether equally or in different proportions

 Test 2: “is or is not” test (key test) (also known as the “given postulant test”)
 Is/is not test: it is sufficient that it could be said with certainty that any given
individual “was or was not” a member of the relevant class; it was not necessary to
ascertain everybody who was in that class (Lord Wilberforce @ McPhail v Doulton
(HL)
 For details on McPhail, refer to case notes.

 Conceptual certainty and evidential certainty

 These concepts are dealt with in Re Baden (No.2), the McPhail case transferred from
UKHL to UKHC (Ch). For more, refer to case notes.

 Administrative workability is necessary

 If the size of the class of objects for a discretionary trust is too large, the trust will be
considered administratively unworkable and will be void
 e.g. McPhail v Doulton: if the definition of beneficiaries is so wide as residents of
greater London, then this class is too wide to form a class and the trust will fail on the
ground of not being administrative workable by the trustee

Why a discretionary trust should be void because the class is too wide?
(1) The trustees will not be able to perform their duty to ascertain the range of objects
(McPhail)
(2) If trustees fail to exercise their discretion, the court would not be able to execute a trust
with a very large class of objects (Morice v Bishop of Durham)
 But unclear why this is the case, as there are other mechanisms than judicial execution
of the trust
(3) There is no criterion for the exercise of the discretion where the class is large, so it is
not possible to ascertain what the settlor’s intention is
(4) The principle of administrative workability might reflect a policy against excessive
delegation to the trustees by the settlor, the trustees being expected to describe the
objects with sufficient certainty
(5) the trustee may have a duty, under a discretionary trust, to survey the view (examine
the class size of the trust)

21
 BUT
Virgo thinks the rule that the trust should be void should be rejected:
(1) There is no consistent rationale for the size of the class rule
(2) The rule is inconsistent with the fundamental principle of respecting the settlor’s
intention
(3) There is a sufficient filter to deal with the administrative workability problem: If an
object cannot be proved to be within a class, he should be considered to be outside it

The law on administrative unworkability

 Arguable the concept may be, “administrative unworkability” is undeniably the law
and is applied in various cases subsequent to McPhail in the UK.
 In HK, the concept was considered in Re Estate of Mui Yim Fong (2008) HKCFI
 I think administrative workability should be a 4 th element further to the 3
uncertainties, as opposed to a parameter of the certainty of object.

 Capriciousness
 Trust would be capricious and void if the class is too large since:
 The terms of the power negative any sensible intention by settlor
 No connection established between settlor and beneficiaries

 Should the trustees fail to exercise their discretion, there could be three ways other than
judicial execution of the trust by the court
(1) Appointing a new trustee to exercise his discretion
(2) Authorize a member of the class of beneficiaries to prepare a scheme of distribution
(3) Directing the current trustees to distribute the trust property if there appears to be a
proper basis of distribution

 NB.: the is/is not test is the test for fiduciary power as well.

Summary

Failure of certainty of: Consequence?

Subject Gift or Resulting trust for the settlor8
8
NB. Certain subject matter with uncertain personal entitlement, e.g., I know I am entitled to 50 shares but I don’t
know which 50 I should get, as discussed in the London Wines-Hunter-White complexity above, are cases of certain

22
 Object Resulting trust for the settlor
Intention Gift

Fixed Trust Discretionary Trust Fiduciary Power Bare Power

Trustee’s duties Duty to distribute Duty to distribute No duty to distribute on None
the trust property the trust property the part of the trustee
in the
predetermined Survey the view But as fiduciaries, they
manner (need to know who must consider the
the students and exercise of the power
ex-students are)
Beneficiary’s A would have a A personal right No in riem interest in
rights proprietary (in (in personem right) the trust property
riem) interest in against the trustees
the trust property: to exercise theNot even the class as a
1/3 of the $1000 discretion whole might require the
trustee to transfer the
A particular property to them (as
student might not against discretionary
be able to get rights)
anything out of the
property, but the
class (students and
ex-students) as a
whole is entitled to
the property (in
riem right)
Certainty of  Conceptual  Conceptual  Conceptual Is/ is not
objects  Evidential –  X Evidential  X Evidential (?) test
complete list (?) – Is/Is not - is/is not test
test test
 Size of class

subject matter. I put this case under this summary just to remind you that certainty does not necessarily lead to an
express trust.

23
 Topic 2: Establishing a trust II

Step 2: Constitution of a Trust

1. Nature:
 Necessary to ensure the vesting of title in the trustee; declaring the trust alone is insufficient.
 BUT where a trust is not effectively constituted, equity may be able to validate the trust


2. Timing
 Declaring a trust and its constitution (vesting/transferring title) need not be contemporaneous.
 The settlor can change his mind after the declaration, but not before it has been constituted. Once
constituted, the settlor cannot recover the property that has been transferred.
 In other words, constitution is irrevocable; declaration is revocable.
 Except B has provided consideration, in which case there is a contract (see below)
 Declaration must come first (i.e., before constitution)
 Cf.: transfer of title followed by declaration: an absolute gift
 Except: constitution by declaration, which comes at the same time (below)

3. 2 modes of formal validity of the transfer of legal title: Milroy v Lord

(1) Constitution by declaration: If the settlor declares himself alone (but not others) as trustee, there
is no need to take extra steps to vest title in the trustee.
 Intention is provided by the declaration
 The settlor retains legal interest but no beneficial interest
 In case the settlor declares himself as one of many trustees, it could become extremely
complicated (e.g., T Choithram International, see below).
 Two general ways of making gift:
o By actually transferring the property to the persons for whom he intends to provide
 An outright gift
o He transfers the property to a trustee for the purposes of the settlement, or declares
that he himself holds it in trust for those purposes  A trust

(2) Constitution by transfer: the intending settlor declared the trusts and actually transferred the
legal title to the trustee, or transferred title to trustee for a beneficiary.
 Milroy v Lord [1862] (UKHC): the settlor will need to do everything, according to the nature
of the property, that is necessary to be done in order to transfer the property and render the
settlement binding on him (Turner LJ).
 Excepted by Re Rose, T Choithram, and Pennington v Waine (see below)

24
4. Basic principles
 For an incompletely constituted trust, the court will not re-interpret the intended transfer (which
failed for whatever reasons) as a self-declaration of trust (Milroy v Lord) because
(1) The donee has not provided consideration (equity will not assist a volunteer, thus Equity will
not perfect an imperfect gift)
 This equitable maxim is based on the premise that a one-sided nature of a gift cannot
impose an obligation.
 Cf.: if consideration provided, likely to be a contract, if there is still a failure to deliver,
the transferee can sue for breach of contract, and Equity may even compel specific
performance
(2) a trust and a gift have important differences
 Gift: the donor has divested all its interest
 Trust: a trustee owes the settlor duties, the court does not want to impose onerous duties
of a trustee on a persons
(3) If the donor had acted unwisely in agreeing to make a gift and regrets doing so, then it is not
for Equity to intervene and compel the gift to be made (Pennington v Waine), rather, the
donor should be allowed to change his or her mind about the gift.

Milroy v Lord [1862]

Facts
 S purported to transfer shares to L by deed to be held on trust for the claimant
 S handed L the share certificates, but this was not sufficient to vest the legal title in him, since
more formalities were to be completed
 The shares remained registered in the name of the settlor

Held: invalid transfer

 The laws:
(1) Equity will not assist a volunteer beneficiary to save an incompletely constituted trust
(2) Equity will not perfect an imperfect gift
(3) Equity will not construe donor’s words so that an intention to make a gift is treated as a
self-declaration of trust***
 Since legal title to the shares had not been vested in L, trust not constituted and invalid
(settlor needed to have done everything required by the nature of the trust property to ensure
that the property was transferred to the transferee, but he failed)

Note:
This is the starting point of all analysis in this topic. The decision was pinned on the well-
established maxims in equity, and presents the strictest requirement of all cases you will see
here and below. Later cases interprets, distorts or relax this principle, with which you may
agree or disagree.

25
 Jones v Lock (1865) (HC (Ch.))
Facts
 Father was the payee of a cheque of 900 pounds. He handed the cheque to his infant son and
said “I give this to Baby for himself”, and placed the cheque in a safe.

Held
 The laws:
(1) The court would not perfect an imperfect gift by treating an unsuccessful outright
transfer (to the baby) as an effective declaration of trust (by self-declaration)
(2) Because an intention to make a gift (transfer property absolutely) and the intention to
create a trust (impose obligations) are contradictory (declaration)
 Application
(1) Declaration was not effective (see topic 2, part 1): certainty of intention is required.
(2) Cheque remains estate of father (not a gift, not a trust)
(3) No property declaration of trust – Court: very dangerous to say that there is a trust

Part A: Constitution by declaration

1. Basic principles
 The law. Once the settlor declares himself as trustee, there is no need to take extra steps to vest
title in the trustee. This is because the title is already with the trustee (i.e., himself).
 But problems will arise when:
(1) Paul v Constance (F: money in the bank account of the man’s name but told his girlfriend
“the money is as much yours as mine”): perfecting an imperfect gift? (vs. Jones v Lock)
(2) There are multiple trustees involving the settlor himself. When the settlor declares himself as
trustee, does he need to vest property in others?  Choithram International v Pagarani
[2001]
 For these 2 cases, see case note.

EXAM
 These cases really concern intention, rather than constitution. Subsume them under the
intention analysis in topic II notes_1.
 First, you determine whether the language or conduct implies any intention to create a trust.
You may refer to Paul v Constance. You may distinguish Jones v Lock.
 If it is a trust + self-declaration  straightforwardly a trust (just like Paul v Constance)
 If it is a gift  cite the Milroy v Lord (principle 3, above); try to use Pagarani (benevolent
construction)

T Choithram v Pagarani: how to use this case

 There are 2 significance of this case:
(1) Benevolent construction: which interprets a “gift” as a “gift on trust” (viz. trust);
“although equity will not aid a volunteer, it will not strive officiously to defeat a gift”
(2) Self-declaration of trust: if settlor is one of the trustees, self-declaration is good enough
and no further constitution is required.

26
27
 Part B: Constitution by transfer

1. Definition
 S declares a person (other than himself) to be the trustee, S needs to transfer effectively the
relevant property to the trustee; this is usually called constitution by transfer; the trust is hence
known as “trust by transfer”.

2. Formalities in transferring the title:

 Chattels (e.g. phone, water bottle): S needs to have:
(1) an intention to give and
(2) delivery in possession
 Land: S needs to have
(1) the intention to give,
(2) conveyed in deed signed sealed and delivered (s4 CPO), and
(3) registration with the Land Registry
 Shares: S needs to have
(1) the intention to give,
(2) execution a the transfer (fill out the share transfer form, attach it to share certs)
(3) delivery of share certificates to the transferee, and
(4) registration of the name of the transferee
 Chose in action: statutory assignment (if legal) (s.9, LARCO) & equitable assignment (if
equitable)
 Money: no formality is required, unless it is in the bank accounts  need to satisfy rules of bank

 As a general rule, the law will not help S if he fails in his chosen mode (equity will not perfect an
imperfect gift) (Jones v Lock), but there are some exceptions in the form of ineffective transfers
taking effect in equity.
 The questions are whether they are justified and how far should they go?

3. We start with the rigorous traditional position in Milroy v Lord that everything must be done should
be done to have a valid transfer.

4. Exception 1: settlor/donor has done everything within his power to transfer title to trustee
 Re Rose [1952] (UKCA): (see case note); The transferor wanted to make a gift of some shares to
a company. He executed and delivered the transfer form to the recipient, but before the company
completed the registration process, he passed away. At the time when he passed away, the legal
title has not been transferred to the recipient. Held, valid as the settlor has executed and delivered
the transfer form, that there is nothing more that he can do to effect the transfer.

5. Exception 2: Self-declaration of trust involving multiple trustees

 Choithram v Pagarani: See case notes
 NB. Full exception! TCP did NOTHING AT ALL to transfer the shares

28
6. Exception 3: Unconscionability test (based on detrimental reliance) (even if the settlor/donor has not
done everything within his power)
 Pennington v Waine [2002] (UK CA): see case notes
o F: Aunt wanted to make her nephew to be directorship of the company. She signed
certain share transfer forms intended to transfer some shares to nephew. The registration
did not take place before she passed away.
o Arden LJ: unconscionable for aunt to recall the gift  the nephew actually became the
director
o Clark LJ: slightly different line of reasoning – turn on an interpretation of share transfer
form and some of the relevant legislations  equitable assignment as a matter of law

 Curtis v Pulbrook [2011] (UKHC (Ch.): Pennington should have just been estoppel based on
detrimental reliance! Not true. Promissory estoppel shield not sword.
o Considers Pennington v Waine as proprietary estoppel: 3 requirements
 Representation of D
 Reliance on the representation
 Unconscionable to go back to D’s own words

Question
 Transfer of shares in HK does not observe those formalities. Things are done electronically, except
for bearer shares. Do we observe the above principles? If we do, what interest is transferred?
 RL: I don’t have enough knowledge in company law to answer this question. But I think they do
apply for the purposes of this course and its exam.

Summary

Intention Execution? Delivery? Changed

Registry?
Milroy v Lord Outright gift No (use deed poll) No No

Re Rose Outright gift Yes (March) Yes (March)

Choithram Express trust No, deathbed declaration No No

Pennington Outright gift Yes No (only delivered to No

auditor)

Curtis v Pulbrook Outright gift Yes re child No (ultra vires share)

No re wife
Kept form

NB.

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 As can be seen, most of these are gift cases, rather than trust cases. Therefore, “equity does not
perfect an imperfect gift” applies in at least 2 situations:
(1) An intention to make a gift
 Re Rose and Pennington perfected an imperfect gift by creating a constructive trust
(2) An intention to create a trust by transfer
 Pagarani perfected the imperfect ‘transfer’ by the “trust by declaration” principle and
created an express trust.

A summary of the law: quick takeaway

 Milroy v Lord: always start with this position

 Re Rose: if the transferor had done all he should do, it would be inequitable for him to renege on
his promise. Equity treats as done that which ought to be done. Equitable interest transferred, legal
interest retained. A constructive trust is created, the transferee being the beneficiary.
 Pagarani: If the transferor makes himself one of the many trustees, although equity will not assist a
volunteer, it will not strive officiously to defeat a gift. The trust on his part must therefore be valid.
And where it would be unconscionable (assessed on facts) for him to resile from his gift (pass to
his co-trustees), the other nominated trustees would also become co-trustees.
 Pennington: even if the transferor had not done everything he ought to do, so far as it is
unconscionable (due to “detrimental reliance”) for him to renege on his promise, there should be
a constructive trust like one in Re Rose.

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7. Voluntary covenant
 Settlor having entered into a voluntary covenant (contract under seal) with the trustee to transfer
property to the latter to establish a trust at some future point of time: 2 possibilities:
(1) There was transfer of property  a completely constituted trust is created  B sues T. done.
(2) There hasn’t been transfer of property, and settlor reneges on his promise  see below

a) Can B sue S?
 Common law: No. There must be consideration to enforce a promise (also, B is a TP). Not a
party to the contract. Does not have privity of contract. Does not have a standing to sue.
 Equity: No. Equity does not assist a volunteer.

 BUT the notion of consideration is kind of extended in equity:

The doctrine of marriage consideration
 Marriage provided consideration for a trust where the spouses agreed to settle in all
property received after marriage (“the doctrine of marriage consideration”)
 The husband, wife, and the issue of marriage (children and grandchildren (Pullan v Koe))
are within marriage consideration, but not next of kin, illegitimate son. They can claim.
 NB.: this is a very narrow exception. Contemplated + Actual marriage must be in place.
A promise to marriage alone does not give rise marriage consideration.

Pullan v Koe [1913] (HC (Ch.))

Facts
 A marriage settlement contained a covenant 9 by H&W settle W’s after-acquired
property10 of the value of £100 or upwards. The beneficiaries of the marriage settlement
are their children.
 W received £285, and gave $ to H who used it to invest in bonds in his name.
 H & W died and money went into executive’s hands  children wanted to claim the
bonds
 Trustees tried to claim the bonds from H’s executives for the children

Held
 The property hadn’t been transferred to the trustees legally so there was no proper legally
created trust – there only was a covenant to create a trust
 From the moment when the wife received the £285 it was specifically bound by the
covenant and was consequently subject in equity to a trust enforceable in favour of all
persons within marriage consideration
 The children were within marriage consideration (or has provided consideration) and are
therefore eligible to claim. They can sue for breach of covenant.
 “Equity treats as done what ought to be done” defeats “equity does not assist a volunteer”
 Equity compels specific performance  bonds returned to children

9
A covenant is a promise in deed. A promise in deed is enforceable in contract by the covenanting parties. The
consideration would be the formalities in creating the deed. Nonetheless, in this case, the children are not
covenanting parties so this would not succeed.
10
“After-acquired property” refers to property acquired after marriage

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 Marriage consideration (continued)
 If “intended B” has not provided consideration (i.e., marriage), he cannot sue as he is a
volunteer (confirmed by Re Pryce, and Re Kay’s Settlement)
 Re Pryce: covenant was not made in consideration of the marriage, children were
then barred by the privity of contract rule
 Re Kay: If B cannot claim specific performance, they would also not be able to get
any damages
o Exception (per Lord Denning (minority)): If B, though as a TP, is
specifically intended to benefit from the contract, he should be able to
enforce the right from the contract, despite the absence of consideration
(Beswick v Beswick)
o HK is likely to follow this English model in the future as the government
has issued the consultation paper of the bill of contracts of third party’s right

Commentary on marriage consideration

 Antenuptial 婚前 marriage contracts originated in the 19 th century to tie up funds for
the support of the spouse and the benefit of their children, while being protected from
alienation by the spouse and from diligence by creditors. Marriage itself is the
consideration for the covenant.
 Problem 1: Creditors may found themselves to be tricked. At the time where these
covenants are prevalent as an essential form of protection of the vulnerable (viz. wife
and children), the preservation of a potentially unfair rule against the creditors may
have been justified. This must be reviewed.
 Problem 2: Women are no longer vulnerable. The rise of ideas of gender equality and
feminism and evidence that women are capable of being independent in every way
should falsify the rationale of the principle.
 Considerations: (1) changes should not affect existing marriage contracts; (2) real
considerations should not be overlooked.

b) Can T sue S? Can B enforce indirectly the covenant through T?

 Yes. Trustee can sue the settlor at common law because he is a party to the covenant
 Criticisms: Re Pryce:
(1) The trustees should not bring any claim against the settlor, as, if the trustee is directed to
sue, then this would indirectly give the beneficiaries a right to enforce the covenant that
they could not obtain themselves.
 False! If they have a right to sue, the right should not simply be denied because other
parties are going to benefit from the action
(2) If trustees sue the settlor, then they will get damages. Because the beneficiaries cannot
claim specific performance themselves, they should also not be able to get damages
 False! The availability of common law damages should not depend on the
availability of specific performance, therefore the reason does not stand
 A better reason is perhaps that if the trustee is allowed to sue, he will only receive
nominal damages because he suffers no loss, therefore suing doesn’t help.

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  If the court allows the trustee to sue for substantial damages, should T be directed to sue?
 No! The beneficiaries would only be able to get substantial damages if they are held on
trust by the trustee in favor of them. But since there is no completely constituted trust yet,
any damages awarded would be held on resulting trust for the settlor. There is no point
for B to sue.

 Re Pryce is followed by Re Kay’s Statement & Re Cook’s Settlement Trusts;

Re Cook’s ST [1965]
Facts:
 Cook covenanted with his father and trustees that if he did sell some certain paintings, the
proceeds would be paid to the trust to be held for the children.
 Cook then gave the paintings to the wife and she wished to sell it
 Trustee wanted to know whether they ought to take actions to enforce the covenants – i.e.
the proceeds received by W would need to be paid into the trust
Held:
 Children NOT in marriage consideration because they were illegitimate children.
 The children were NOT entitled to require the trustees to sue to enforce the covenant as a
trust cannot be created with after-acquired property (the sales proceeds here)
 This is because such after-acquired property is a future property. 11

 In all 3 cases (Re Pryce; Re Kay; Re Cook’s ST):

(1) No trust was created on either the future property or the benefit of the covenant.
(2) B cannot enforce the covenants indirectly by means of action by a trustee.
(3) The covenant between S and T entitles S to sue, but T is not allowed to use such right for
the benefit of B even if they wish so.

 To get round with this difficulty, see (c) below:

c) Other possibilities: trust of the covenant

 While after-acquired property or future property are non-existent property are not-yet-
existing property which there is nothing a trust can “bite on”, a covenant for future benefits is
a present property of a chose in action12 which can be the subject matter of a trust.
 There’s a covenant between the settlor and the trustee
 The beneficiary is not a party to a covenant, so he cannot enforce the covenant directly.
But If you view the trustee is holding the right to enforce the covenant on trust for the
beneficiary, then the trustee can enforce the covenant on behalf of the beneficiaries.

Example
 S covenanted with T to transfer a watch to Y

11
A future property is property not-yet-existent. At law, an assignment of future property is void as an assignment of
nothing, though in equity if valuable consideration is given, equity will treat the assignment as a contract to assign
the property when received if received. Examples include possibility of receiving property upon a will and royalties
on a book
12
A personal property right which can only be enforced by action, not enforced by taking physical possession. E.g.
the right to receive $1000 upon the sale of a mobile phone

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 T has a right to enforce the covenant (the right is a chose in action, capable of
being the subject matter of the trust)
 Can say that T is holding that right (vis-à-vis the property) on trust for Y, there
will be a completely constituted trust of the covenant (in that the property right to
sue is already in the hands of the trustee
 Vs the situation where the watch itself is not transferred to the trustee, that there
cannot be a completely constituted trust

Fletcher v Fletcher (1844) (Ch.)

Facts
 Settlor covenanted with trustees that his executor would pay the trustee 60000 to be held on
trust for his son if his son survived him and reach 21. Son sought to enforce covenant against
settlor.
Held:
 Trustees had the right to sue the executor for the money, the right is held on trust for the son
 A completely constituted trust of the benefit of the covenant, which could be enforced by the
son

COMMENTARY
Re Kay [1939], Re Cook’s ST [1965]:
 There cannot be a trust of a covenant to create a trust of future property, as there is the
absence of certainty of subject matter, and therefore Fletcher is not correct.
 False! In this case, there is only the trust of covenant, the contractual right to enforce
the covenant is a present, NOT a future property. And it can be the subject matter of a
trust. Although it is not possible to create a trust on future property, it is possible to
create a trust on a (present) covenant on future property. Hence, reason given by Re
Cook is not correct.
 Also, Re Cook’s ST is quite clear in the judgment. Does it mean that the covenant is a
mere expectancy such that no trust could be created on it? Or does it mean there was
no intention to create a trust on the covenant? But there is one thing we are sure of: Re
Cook’s ST does not undermine the proposition that a trust can be created on a covenant
for future benefit.

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 COMMENTARY
 What remains more questionable is the identification of the necessary intention. In the
early case of Fletcher v Fletcher (1844), evidence of intention was very thin, assuming that
the intention in question is that of the covenantor and not the covenantee.
 Point of distinction: it is significant that Fletcher was decided at a time when courts were
quite eager to construe precatory words as revealing an intention to create a trust. This
was also before the full development of privity by involving a "trust of a promise". It must
be doubted whether a modern court would reach the same result about the relevant
intention.

SUMMARY
 When S covenants to create a trust for the benefit of B, S could not sue. T should not sue.
 S could sue if and only if he has provided consideration, e.g., marriage consideration:
Pullan
 To get around this, one may argue there is a trust created on the covenant: Fletcher.
Nonetheless, it might not be good argument because (1) it is hard to find the intention to
create a trust on the covenant; (2) the “point of distinction” mentioned above; (3) more
recent cases, e.g., Re Pryce; Re Cook’s ST etc refused the idea.

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 Part C: Effect, persons, and characteristics

1. Effect of constitution

Once both of the two necessary steps (declaration and constitution) are done, a trust is completely
constituted, and:

 A completely constituted trust cannot be revoked by the settlor (who drops out from the scene)
 The covenant to create a trust is enforced by the trustee, not the beneficiary.
 The only exception to this is when the beneficiaries have provided consideration to the settlor for
declaring a trust. In this situation, specific performance is available to compel the settlor to take
steps to constitute the trust. Therefore even before constitution, the settlor cannot revoke the
declaration (because it is unconscionable for him to do so).
 To guard against abuses by the trustees, stringent duties are to be imposed on the trustees by the
law. You will see this in chapter 3 and 4.

2. Persons involved
 Settlor – Trustee – Beneficiaries
 Protector
 A person appointed by the settlor to oversee the trustee (e.g. a clause stating that before the T
can nominate new beneficiaries, the protectors’ consent must be obtained)
 Trustees might want to change the investment portfolio, settlor might provide that the
protectors’ approval is required [a veto power]
 Protectors usually are not settlors themselves, otherwise would be a sham considered by the
court, usually someone closely related to the protectors
 Protectors are not trustees (in HK law, only a person who holds trust property will be
regarded as a trustee)
 Statutory control of protectors – considerations:
 Protectors should be allowed to be a precaution against incompetent trustees
 Sham trusts (trustees feel inhibited; settlors appointing “puppet protectors”)
 Concerns: Not desirable to establish the idea of protectors: concerns that protectors are
given the broad statutory powers, who are the monitors to these protectors?

3. Legal effects of a validly established express trust

 S (in his capacity as a settlor) no longer owns any interest in the property: his legal interest has
already been transferred to the trustee
 A trust once made is irrevocable
 The relevant parties to the trust relationship are T and B. S drops out from the scene once the trust
is established
 NB.: Breakdown of trusts
 Cf.: Kan Lai Kwan v Otto Poon & HSBC International Trustee [2014] HKCFA
Facts:
 H set up a discretionary trust for the benefit of his family and he transferred to the
trustee a single asset: an 84.63% shareholding in a company, Analogue. At the time of a
divorce (after a marriage lasting over 40 years), there were 3 potential beneficiaries of the

36
 trust which had a value of approx. HK$1.5 billion: H, his wife (“W”) and his daughter
(“K”))
 H is a settlor, protector, and an object of the discretionary trust
 H argued that the trust over the shares was necessarily divided into 3 parts (1 for each
beneficiary), and so only 2/3s (H&W’s) was a “matrimonial asset” (which isn’t quite
right)
 There is a particular class of documents, known as “letters of wishes”. They are
certain documents written by the settlor and given to the trustee, and settlor would
explain his wishes about the trust property would be distributed. Not binding on
trustee, as he has the discretion to exercise by himself. But the wishes letters are a
very special/important consideration for the trustee.
 In reality, the trustee would follow exactly the wishes in the letters by the settlor.
Settlor might nevertheless influence the direction of the trust. W argued that H’s very
high level of influence over access to the funds in the trust meant that in fact the
whole amount was a matrimonial asset for the purposes of the divorce
Issue
 Whether the trust property remains any “matrimonial asset”;
 The portion of property W is entitled to; particularly, in light of the fact that the factual
separation was in 2001, while after that the trust property has increased significantly in
value, and their divorce happened in 2008

Held:
 HSBC has acted properly and fulfilled its duty as a trustee and it is not a sham.
 But the High Court was wrong to assume that it is necessary for the Trust to be shown to
be a sham before the court could treat Trust assets are resources likely available to the
Husband.
  **Applying the “likelihood test”: whether when H asked the trustee to advance to
H the whole part of the capital and/or income of the trust the trustee would, having
regard to all the relevant circumstances, be likely to do so  Yes  the whole of the
property in the discretionary trust was a matrimonial asset
 Breakdown of a trust: while the trust in question is not a sham, the asset protection
benefits of a trust can fall away if the settlor has too much influence over the trust
and/or the trustee.
 Where a party adduces evidence as to a date of factual separation, in normal
circumstances that party is estopped from denying that fact later in the proceedings.
However, if the Court, having regard to all the circumstances of the case feels it is
necessary to intervene to achieve a fair and just outcome, it may override that estoppel.
 The Principle of Equality in the division of assets following a divorce can be applied to
assets accrued after the date of factual separation where fairness requires this. This
will be particularly relevant where years of hard work and input from both parties
begin to produce increased profits in the last years of the marriage.

 Reservation of powers by settlors? (See Otto Poon case; S41X, Trustee Ordinance: in
2013, the settlor can reserve some powers of himself, i.e. broad and general powers. It
would not invalidate the trust if these powers were entrusted. Given these very general

37
 powers, there may be a risk that the settlor would be the one to direct the affairs of the
trust, and so, what is the point of the trust established? Some questions about whether
these kinds of residential powers were valid?)

4. 2 Characteristics of a trust
(1) The trust property is segregated from the general assets of the trustee. It is not available for the
trustee’s creditors in the event of his bankruptcy, not for his successors in the event of his death.
a. In fact, all recipients of the trust property are subordinated to the interest of B, except
Equity’s Darling, i.e. a bona fide purchaser for value without notice (only here that B’s
interest would be gone).
(2) To counter possible abuses by the trustee, a full range of stringent duties (including fiduciary
duties) and remedies are imposed on the trustee

5. The rule in Saunders v Vautier (1841)

 Facts
 V was 21 (full age), whereas shares were held on trust for him until he attained 25.
 Held that (1) he was an adult and (2) had an absolute infeasible interest in the trust, so he
could claim the property even if he had not attained the age of 25.
 As beneficial interest has already been vested, yet the enjoyment of the property is postponed
till the age of 25, the trust can be terminated.  Could beneficiaries override the terms of
the trust?
 *Vautier was absolutely entitled to the trust property, he was of full age and of sound mind,
he could petition to the court to put an end to the trust and ask the trustee to transfer the
property to him

 Rule:
 If all beneficiaries are of full capacity, if they are entitled to the whole beneficial interest of
the trust, then all these beneficiaries, acting together, can be able to put an end to the trust by
requesting the transfer of property to them. [Beneficiaries wishes prevail over settlor’s
wishes]
 Court prefers property not to be tied up

 Application:*****
 The trust must be carefully construed to determine whether the beneficiary’s interest is vested
or is contingent upon a particular condition.
 If the beneficiary interest is already vested in him, then the rule is applicable.
 Cf.: If the beneficiary interest is contingent upon a particular condition, the rule will not
be applicable
 Transfer to a third party
 If B wishes that the trust fund to be transferred to a TP, no writing is required if the
rule in SvV comes into operation.
 Equitable interest will be destroyed on the termination of the trust (as the property is
transferred to B already), and it will thus not involve the disposition of an equitable
interest in the trust to the TP.

38
 COMMENTARIES
  The rule effectively acknowledges that the property that is held on trust for B is their property
in Equity, so that they should be able to decide what to do with it
  the settlor’s or testator’s intention can be defeated, as occurred in SvV itself since B obtained
the benefit of the trust property before he attained the age of 25.
 Cf.: why would should the will of the settlor prevail once the trust has been validly created,
bearing in mind that the property belongs to B in Equity and the rule requires that B must be
of full capacity, so that he does not need to be protected by Equity by virtue of age or mental
incapacity?
 Trustee Ordinance already gives effect to SvV by codifying the position at law at s.40A
(Appointment and retirement of trustees on beneficiaries’ directions)

(1) This section applies in relation to a trust if—

(a) no person is nominated for the purpose of appointing new trustees by the instrument creating the
trust or an enactment; and
(b) either—
(i) the sole beneficiary under the trust is absolutely entitled to the property subject to the
trust and—
(A) is an individual of full age and capacity; or
(B) is a body corporate whose constitution does not prohibit it from exercising the power
under this section; or
(ii) all the beneficiaries under the trust (taken together) are absolutely entitled to the property
subject to the trust and each of whom is either—
(A) an individual of full age and capacity; or
(B) a body corporate whose constitution does not prohibit it from exercising the power
under this section.

(1) The sole beneficiary or all the beneficiaries may give either or both of the following directions—
(a) a written direction to a trustee directing the trustee to retire from the trust;
(b) a written direction to a sole trustee or all the trustees for the time being or, if there is none, to the
personal representative of the last person who was a trustee, directing the sole trustee, trustees or
the personal representative to appoint by writing a person specified in the direction as a trustee.

(2) A trustee to whom a direction under subsection (2)(a) has been given must make a deed declaring the
trustee’s retirement if—
(a) reasonable arrangements have been made for the protection of any rights of the trustee in
connection with the trust;
(b) after the trustee has retired, there will be either a trust corporation or at least 2 persons to act as
trustees of the trust; and
(c) either—
(i) another person is to be appointed as a new trustee on the trustee’s retirement (whether in
compliance with a direction given under subsection (2)(b) or otherwise); or

39
 (ii) the continuing trustees by deed consent to the retirement.

(3) When the deed declaring the trustee’s retirement is made—

(a) the retirement takes effect and the trustee is discharged from the trust; and
(b) the trustee and the continuing trustees (together with any new trustee) must (subject to any
arrangement for the protection of the rights of the retiring trustee) do anything necessary to vest
the property subject to the trust in—
(i) the continuing trustees; or
(ii) the continuing trustees and new trustees.

(4) This section has effect subject to the restrictions imposed by section 36 on the number of trustees.

40
 Topic 3 Duties and powers of trustees
Part I an overview of a trustee’s duties and powers

1. Overview of trustee’s duties

(1) Duty to abide by the terms of the trust
(2) Duty to provide information
(3) Duty to exercise a reasonable prudence (= equitable duty of care)
(4) Duty to exercise discretion properly and in good faith
(5) Fiduciary duty of loyalty (e.g. avoidance of conflict of interests)
(6) There might also be other duties, e.g.,
 duty to keep account and be ready with his accounts (semester 2)
 duty of impartiality, subject to individual trustee’s delegation by power of attorney (e.g.,
s.27 Trustee Ordinance)
 duty of sufficient deliberation (Futter v Futter; Pitt v Holt) (judicial control)
 duty to act personally, subject to individual trustee’s delegation by power of attorney (e.g.
s27 of the Trustee Ordinance (as amended by the Trust Law (Amendment) Ordinance 2013)

2. Overview of trustee’s powers/ discretions

 By trust deeds: trustee has dispositive or administrative powers by the trust deeds.
 Administrative powers are the powers to manage a trust
 Dispositive powers is the power to dispose of the trust assets; also known as the power of
appointment.
 E.g. “T1 and T2 shall hold the trust fund to distribute amongst such of my students and
ex-students in such proportions as my trustees shall think fit (discretionary trust)”
 + a bunch of administrative powers given by the Trustee Ordinance to facilitate the
administration of the trust:
(1) s.4 + Sch.2: general power to invest in authorized investments (since 2013)
(2) s.13: power of sale in a trust for sale
(3) s.15: power to give receipts in a trust for sale:
(4) s.17: power to renew leases
(5) s.21: power to insure (since 2013)
(6) s.33: power to apply income for maintenance and to accumulate surplus income during a
minority
(7) s.34: power of advancement:
(8) ss.41A-41P: power to appoint agents, nominees and custodians (since 2013)
(9) s.56: Power to seek order form court to deal with trust property

Part II Non-fiduciary duties of trustees (Trustee Duty)

1. Introduction
 These are duties imposed on trustees and the performance of their administrative duty in dealing
with the trustee property/ exercise of their positive discretions if the trustee involved is a trustee
under discretionary trust

41
2. Duty to abide by the terms of the trust (strict liability)
 A trustee is bound to give effect to the intention of the creation of the trust instrument
 E.g. if the trustee is only allowed to invest in HSBC shares according to the terms of the trust,
he can only invest in those shares.
 Strict liability: does not depend on whether the trustee has exercised care/ prudence or not

3. Duty to provide information (to beneficiaries)

Introduction
 Beneficiaries have prima facie right of access to documents and information in relation to the
trust
 If the beneficiaries are to monitor the trustee’s performance of their duties, it is important that
they have access to documents relating to the management and administration of the trust,
and the powers of the trustee to distribute trust assets
 The ability to obtain trust documents forms one part of the court’s inherent jurisdiction to
supervise the administration of trusts and depends on the exercise of the court’s discretion
o No right to inspect the trust documents, but entitled to see them

  Now rules relating to this duty have been refined to suit family settlements/ modern day trusts
 See, for example, Tam Mei Kam v HSBC (2011) HKCFA:
 Ms. Tam is Anita Mui’s13 mother. The discretionary trust states that Ms. Tam could
receive HK$70,000 maintenance per month.
 There was a trust memorandum/ letter of wishes, which is non-binding in nature, written
by Anita.
 Ms. Tam asked the court to disclose the letter of wishes, but the trustee was unwilling to
disclose the content of this memorandum as it does not want Ms. Tam to know the
identity of other beneficiaries.
 The court rejected the request, considering primarily:
(1) Secrecy, both from the public and beneficiaries
(2) Accumulation by trustee and distribution
(3) The status of letter of wishes
 For a modern trust deed, see attachment – ABCD case study

 The usual case nowadays is that trustees do not disclose letter of wishes to beneficiaries.

(i) Why is it important for beneficiaries to obtain information?

 Without information, B would not know their status or enforce their demands
 B should be given some sort of info, as recognized by the law

(ii) Legal Basis for claiming information

 View 1: traditionally, the beneficiaries’ right to inspect documents was regarded as
proprietary on the basis that trust documents are in equity the property of the beneficiaries. 14

13
Anita Mui Yim Fong 梅艷芳, singer, Cantopop diva of Hong Kong.
14
E.g., O’Rourke v Derbishire [1920]; Breen v Williams [1996]

42
   as beneficiaries have equitable interest in the property, they should be entitled to see
the trust documents.
 View 2: the right is based on the fiduciary duty of trustees to account to beneficiaries for the
administration of trusts.15

 Therefore, apparently, if the claimant is just an object, not a beneficiary, he has no legal
basis for claiming information, regardless of the view you take.

(iii) What information are the beneficiaries entitled to?

(1) Notify B of their status as B/potential B, whether the trust is fixed or discretionary
 Whether it is possible to modify this duty: Tam Mei Kam v HSBC
 Clause 33 (quite unusual): “trustees shall not be obliged to make known to any
potential B that this trust exists or that they are named as such.” (trustees are not
bound to disclose existence of the trust to any beneficiary who has not taken an
absolute and indefeasible interest under the trust)
 Anita’s mother tried to attack the validity of this trust by saying “if trustees were
entitled to keep the existence of the trust from B, B would not have any enforceable
rights against the trustee, then the trust will not be valid”
 CFA held that the purpose of the clause is to preserve confidentiality and since it was
a discretionary trust, the trustees are given wide discretionary power and would not
exercise discretion in favor of a particular B  ***Only necessary for him to inform
any B the existence of the trust once discretion is exercised by the T.
 The clause will not invalidate the whole trust.
 Left open whether the clause itself would be invalid

(2) Identity of trustee

 Trustee needs to disclose contact details and identity of himself to B

(3) Other information about the trust? Letter of wishes?

 Balance of interests – a balance between:
(1) ensure that B has sufficient info to hold the T accountable
(2) the independent powers and confidentiality of their reason of decision of T should be
respected

The law***************

(1) Re Londonderry’s Settlement [1965] Ch 918 – meeting minutes

(2) Hartigan Nominees Pty Ltd v Rydge NSW CA – letter of wishes
(3) Re Rabaiotti’s Settlement [2000] WLTR 953 – letter of wishes + trust documents
(4) Schmidt v Rosewood Trust Ltd [2003] (PC) – trust accounts and other information
(5) Breakspear v Ackland [2008] EWHC 220 (Ch) – letter of wishes

15
E.g., Hartigan Nominees Pty Ltd v Rydge (1992), per Kirby P and Sheller JA; Gummow J in Re Simersall and
Blackwell v Bray; Schmidt v Rosewood [2003] UKPC; Re Rabaoitti

43
  Only 3 cases are of prominent importance in exam

(1) Re Londonderry Settlement

 This case is the authority for proprietary basis of disclosure
 Although it is of decreasing significance because of the disapprovals in more recent cases
(Schmidt and Breakspear),
 It was not overruled or rejected because Schmidt (PC) and Breakspear (HC(Ch.)) are not
capable of overruling or rejecting Londonderry (CA)
 Therefore, these 3 cases are only persuasive, despite Londonderry is weaker because of
later disapprovals and it being old in time.

(2) Schmidt v Rosewood

 This case is the authority of absolute discretion of court. There is no pre-existing
preference of disclosure or non-disclosure.
 Interests must be carefully balanced: whether the interest is real or remote, what class of
document, is it complete or redacted; any safeguards available; accountability vs.
confidentiality.
 If relied on this case, it is more likely that the court will order disclosure than Breakspear.

(3) Breakspear v Ackland

 The starting point of this case is that letter of wishes contains the decision-making
process and is presumably confidential, therefore it is NOT disclosable.
 4 cases that follows:
(1) T surrenders discretion to disclose  no issue
(2) T asks the court to bless refusal  it is on T to give reasons
(3) B challenges T’s refusal  T is entitled to not give disclosure (based on
Londonderry principles), unless the disappointed beneficiary is able to raise a point
of unfairness or dishonesty.
(4) B goes to court directly  B must raise reasons of mala fide or unfairness. Of
course, if the trustee volunteers their reason, the court may investigate those reasons,
and call for further material if it thinks fit.
 Therefore, it is harder to seek disclosure under Breakspear principles because it is hard
to prove these elements in (3) and (4).

For the following cases, refer to case notes:

 Re Londonderry’s Settlement*
o Fact: The daughter of the settlor was dissatisfied with the provision that the trustees had
made for her and her children, she asked to see various documents relating to the
administration of the trust, including the minutes of meetings of the trustees

44
 o Held: Entitled to look at the trust’s documents as the trust documents are owned by the
beneficiaries except such document discloses the reasons of trustee in exercising their
discretion (or leading to family strive?)
 Trust documents are defined as those documents that contained information that
the beneficiaries entitled to know
 But the court did not give any indication as to what beneficiaries are
entitled to know, making it very difficult to be certain which documents
the beneficiaries had the right to see
 Reasoning of such decision
 If a trustee needs to disclose all documents, including those disclosing
the reason of them exercising the discretion, probably no one would be
trustee
 As the trust involved is a family trust, disclosure of reasons may lead to
family strive

 Hartigan Nominees v Rydge

o Fact: The beneficiaries sought disclosure of memorandum of wishes, which the
memorandum itself states that such memorandum is confidential
o Held: Court of Appeal considered two questions: 1) Is it a trust document? 2) Does it fall
within the Londonderry exception?
 *Kirby P: It is a trust document, and the Londonderry exception is a bit
outdated, professional trustee should be subject to a higher level of
accountability, so the court should allow the disclosure of certain documents to
hold them accountable
 Sheller JA: It is a trust document and it shall not fall within the exception.
However, the letter of wishes is confidential it should not be disclosed
 Mahoney JA: The memorandum should not be disclosed as it is confidential

 West v Lazard Brothers (Jersey case)

o Fact: Beneficiaries sought disclosure of the trust documents, there is hostility between the
trustee and the beneficiaries
o Held: The court adopted a wide construction of accounts to include not just the account,
but also other documents and correspondence related to the administration of the trust

 Re Rabaiotti’s Settlement
o Fact: The beneficiary sought disclosure of the letter of wishes and the accounting
documents for divorce proceedings in English Courts
o Held: The accounting documents are disclosable, but the letter of wish should not be
disclosed unless it is essential to do so

 Schmidt v Rosewood ***

45
 o Fact: Mr. Schmidt wanted disclosure of accounts and information from a trust set up,
managed by Rosewood Trust Ltd, by his father, who had died without a will. He had a
discretionary interest under the settlement, demonstrated by a letter of wishes from the
father to the trustees
 Rosewood Trust Ltd contended that Schmidt was not entitled to information
because he was not a true beneficiary, and the father had not even been a settlor
since he was ‘a mere object of a power who as such had no entitlement to trust
documents or information’. They said the right to information depends on having
a proprietary interest in the trust
o Held: Favor accountability
 There is no distinction between rights of beneficiaries of discretionary trust
and objects of a power
 Basis of disclosure is court’s inherent supervisory jurisdiction, to supervise the
administration of the trust. The court has a discretion to determine whether
documents relating to the trust should be released to the beneficiaries, who
consequently have no absolute right to the disclosure of such documents
 Before this case, the court would consider the nature of the documents, nature of
the interest of the beneficiaries and whether the information is confidential or
not. But now, these factors are all replaced by court’s discretion
 In exercising such discretion, there are a number of key considerations for the
court to consider
 The classes of document that should be released – whether the document
should be released completely or in a redacted form where certain parts
of the document should be hidden
 The safeguards that should be imposed to limit the use that might be
made of the documents or the information that is disclosed to the
beneficiaries
 When there are issues of personal or commercial confidentiality, the
court may have to balance the competing interests of different
beneficiaries, the trustees, and third parties when determining whether to
disclose the documents
 Strength of each applicant’s case for disclosure
o The court will be less likely to exercise its discretion to disclose
trust documents in favor of an object under a discretionary trust,
since the objects have only a theoretical possibility of benefiting
under the trust
 Comment:
 Such way of granting disclosure of document might create uncertainty as the
party would no longer have absolute right to disclosure, but everything would be
decided in court’s discretion. But this modern approach to disclosure is actually
clearer and more principled as the court no longer needs to speculate as to
whether a particular document is a trust document or not. Rather, the judge has a
structured discretion to determine, in light of all relevant circumstances, whether
it is appropriate to authorize disclosure

46
  There are comments that the court should not compel disclosure of trust
documents that reveal why the trustees exercised their discretion as they did. This
is to protect the principle of confidentiality. Yet, the fundamental principle that
trustees are not required to give reasons for the exercise of their discretion has
been criticized on the grounds that it is not especially onerous for them to give
reasons, especially where they are professional trustees, and that providing
reasons for a decision may avoid problems from arising in the future.

 Breakspear v Ackland*
o Fact: The settlor had settled property on a discretionary trust for himself and his family.
At the same time, he wrote a non-binding ‘wish letter’ that requested the trustees to take
certain matters into account when exercising their discretionary powers to appoint trust
property. Three of the objects of the trust sought disclosure of this letter so that they
could evaluate their expectations under the trust. The trustees did not want to disclose the
letter, because it was confidential, and disclosure would cause discord in the family
o Held:
 Following Schmidt v Rosewood, recognized that disclosure depends on the
exercise of his discretion rather than whether the objects had any proprietary
rights to the letter
 ReLondonderry exception remains good law
 In determining whether the letter should be disclosed, he recognized the trustees
were not required to disclose their reasons for exercising a power so the
reasons were consequently confidential and since the wish letter existed to
further that confidential process, the letter should be treated as confidential as
well
 However, the trustee or the court COULD DISCLOSE the letter if it were
considered to be in the best interests of the beneficiaries and the
administration of the trust to do so
 The key question in exercising this discretion was that the objective
consequences of disclosure might be, rather than with regard to the subjective
purpose for which disclosure was sought. In this case the judge decided that the
letter should be disclosed because the risk of family division following disclosure
was outweighed by the fact that the trustees would be seeking the approval of the
court to a scheme of distribution of the trust fund
 The decision whether to release the letter of wishes to the objects involves a
finely balanced exercise of judicial discretion
 Letter of wishes is prima facie non-disclosable; the letter should be confidential
and should not be disclosed
 Unless
o The disclosure is in the sound administration of the trust; or
o Disclosure is in the interest of the discharge of the power of the
trustee

47
  4 ways that the disclosure issue might be presented to the court:
 The trustees may seek to surrender their discretion to the court
o The court is exercising its own discretion to afresh, rather than
reviewing ant negative exercise of discretion by the trustees
 Trustees may, without surrendering their discretion, invite the court in
effect to bless their refusal
 The case may be brought by disappointed beneficiary by way of a
challenge to the trustee’s negative exercise of their discretion to disclose
o Both second and third type involves the court’s reviewing the
trustee’s negative exercise of their discretion to disclose
o If trustees themselves apply, they will have to disclose their
reasons
o If disappointed beneficiary applies, then re Londonderry
principle will entitle the trustees to decline to gives reasons and
to defend the challenge upon the basis that, if it be the case, the
disappointed beneficiary has disclosed no grounds for impugning
either the fairness or the honesty of their decision
 The beneficiary may seek simply to invoke an original discretion in the
court, as part of its jurisdiction in the administration of trust
o It will be incumbent upon him to demonstrate that an occasion
has arisen which calls for the interference of the court
o Mere refusal to disclose a wish letter, unaccompanied by reasons
or evidence of mala fides or unfairness, would not ordinarily
justify such intervention

 Murphy v Murphy (not important)

 The objects of a beneficiary trust are entitled to ask the trustees for information as to the
nature and value of the trust property, the amount of trust income, and how the trustees had
been investing and distributing it
 It was also recognized that the court has a discretion to require a third party to disclose to the
objects of a discretionary trust the names and addresses of the trustees, where this would
enable the objects to enforce their rights against the trustee

 Position in HK?
 No court has applied Breakspear
 Tam Mei Kam case: Rosewood was cited but not discussing whether the letter of wishes
should be disclosed
 Whether we should codify the common law principles (recently considered by HK Govt in
the review of Trustee’s ordinance)
 Disclosure to whom, of what, possibility of contracting out

48
  So far disclosure is based on common law

(iv) Trustees often would follow the letter of wishes:

 They receive remuneration by settlor e.g. HSBC
 Protector can dismiss the trustees if they do not follow the intention
 Settlor often makes the trust a revocable one (even though no protector, possible for the
settlor to reserve power to remove the trustee himself, but by reserving power there will be
risk that the trust will be attacked as a sham trust)

 NB1: Trustee Ordinance has been amended to give settlors such power, but it is still not
advisable for settlor to reserve power
 NB2: the settlor’s creditors will also try to revoke the trust

(v) Why trust from offshore jurisdictions?

 Jurisdictions like Cook Islands has better trust regime (e.g. allow trustee to make more risky
investments; allow reservation of power by the settlor; shorter limitation period to claim
against the trust fund)

49
The law: a quick summary

 Re Londonderry
 Though losing significance, is not yet overruled. The law is that a beneficiary of a trust has a
proprietary right to access trust documents, with the exception that it reveals the reasoning of
the trustee’s decision.
Issues:
(1) It follows that an object (not beneficiary) has no such proprietary right.
(2) Determine whether the [letter of wishes] is a trust document
 Re Rabaiotti: no; Hartigan nominees (Mahoney JA): no
 Sheller JA: yes – ancillary/subordinate to the trust deed
(3) Does the [letter of wishes] reveal the reasoning?
 Hartigan: Mahoney JA: yes; Sheller JA: no
 Re Rabaiotti: yes
(4) Later courts have emphasized the confidentiality aspect of the Londonderry exception. Is the
letter of wishes confidential?
 Hartigan Nominees: Mahoney and Sheller JJA: inferred confidentiality
 Agreed by Re Rabaiotti

 Schmidt v Rosewood
 The basis of the court’s disclosure is its inherent jurisdiction. The court will order disclosure if it
is appropriate to intervene in the administration of trusts. The court would have to weigh up all
relevant factors before making the decision (balance of reasons).
Reasons for disclosure:
 If beneficiary, accountability and T’s fiduciary duty to B
 If object, if he has more than a theoretical possibility of benefitting
Reasons for non-disclosure
 Confidentiality, family strife etc.
Other considerations
 Whether a discretionary object should be granted relief at all
 What classes of documents should be disclosed?
 What safeguards should be imposed

 Breakspear
 The trustee’s reasoning process is inherent confidential which should not be disclosed.
Nonetheless, this is subject to being overridden as a matter of discretion by the court. 4 cases:
(1) T voluntarily discloses  no problem
(2) T seeks directions of court  full disclosure
(3) B challenges T’s refusal  must prove unfairness or dishonesty
(4) B goes to court directly  proof of mala fides or unfairness
 But special facts of this case made the court disclose the documents.
 It is harder to seek disclosure in Breakspear than Schmidt because the former requires proof of bad
faith while the latter requires only a balance of reasons.

50
 (vi) Should trustees be subject to a statutory duty to provide information to beneficiaries in HK?
(essay)

Review of the Trustee Ordinance and Related Matters – Consultation Paper (June 2009), paras. 4.8-
4.10
4.9 In order to provide a degree of certainty and to assist in the development of a principled
approach, we are in favour of providing some basic rules for disclosure. We however wish to avoid
prematurely codifying all the common law principles in this area. The first option is to follow clause 8
of the proposed Trustee Act of British Columbia. This approach in British Columbia proposes an
additional duty, over and above the common law duty, to provide information to beneficiaries who
are vested in possession or who makes a request for information. The type of information to be
disclosed mainly concerns the trust’s assets and liabilities. This duty is subject to any express
contrary intention in the trust instrument. Exceptions are provided so that trustees still retain a wide
discretion.
4.10 A second option is that trustees should on request be required to inform beneficiaries of their
interests in the trust, whether those beneficiaries are vested in interest, in possession or with the right to
be considered as discretionary objects, unless exceptional circumstances (similar to those set out in
clause 8 of the draft bill prepared by British Columbia mentioned in paragraph 4.7 above) apply. This
duty is additional to any common law duty of disclosure and is subject to any express contrary
intention in the trust instrument.

Detailed legislative proposals on trust law reform – consultation paper (March 2012) paras 1.14-1.19
1.16… There are no imminent or compelling reasons to introduce legislation on beneficiaries’ right
to information in HK
1.17… Due to the divergent policies involved in disclosure and the versatile and evolving nature
of trust, it is appropriate to treat each case individually rather than by hard-and-fast rules. Any
attempt to provide statutory rules would only result in very general principles regarding the claims of
disclosure. The lack of specific guidelines may also render such rules difficult to be enforced, hence
defeating the purpose of making the rules.
 If we introduce statutory rules to replace common law rules, there is a risk that we may
inadvertently deprive ourselves of the opportunity to take account of the development of new
rules that suit the needs of modern-day trusts. On the other hand, if the statutory rules are in
addition to common law rules, the trustees may face additional burden in tackling not just one set
of rules, but two. This may create compliance problem for trustees because it is possible that an
unwary trustee may be lulled into a false sense of security by following the statutory rules and
overlooking their common law counterparts.

 So far there is no statutory duty to provide information under the Hong Kong Trust Law

51
4. Duty to exercise reasonable prudence (= equitable duty of care)16
 *Use statutory position in HK now for a trust created after 1 Dec 2013
 Just ignore the common law position for trusts created after 1 Dec 2013

a) Common Law position (trust created before 1 Dec 2013)

(i) General Trust management: Ordinary Man Business Test (For amateur or gratuitous
(“laymen” Trustees)
Speight v Gaunt

Facts:
 On the advice of the beneficiaries, T selected a broker to purchase stocks. The broker
showed the T a forged note as evidence that the securities have been purchased then
absconded after cashing the cheque.
 The issue is whether T breached his duty of prudence?
Held:
 Ordinary man business test: No breach if T has conducted the business of the trust in
the same manner as an ordinary man of business would conduct on his own

(1) Whether an ordinary man of business would employ an Agent/broker to purchase

stocks?
 Yes.
 And not bound to ascertain the existence of securities to be bought. The trustee
discussed with agent and indicated his preference for particular securities. The broker
claimed he got them.

(2) Whether an ordinary man of business would employ the Agent in question?
 Yes. He was of good repute.

(3) Whether an ordinary man of business would-be put-on inquiry by virtue of the
irregularities on the bought note?
 To an ordinary prudent man of business, absence of name, settlement date, and
charge for stamps or commission on the note did not point to any irregularity in
the transaction itself.
 The date was given personally by the Agent
 No breach of prudence in spite of such irregularity

(4) Whether an ordinary man of business would pay the cheque to the broker
 Yes
 Complied with standards of business practice at that time to transfer the payment
before the securities were executed (Virgo)
 The misappropriation took place very shortly after the handing over of the cheque,
little that T can do to prevent the matter.

16
Causation, remoteness, novus actus interveniens issues follow common law duty of care.

52
  T was himself misled. Even if the securities were asked for after handing in the
cheque, the loss would still have occurred because it happened shortly after handing
over the cheque.
Commentaries: (Virgo)
 This is a purely objective test that pays no regard to the particular skills or experience
of the trustee to vary the standard of care

(ii) Investment of Trust Property (For laymen trustees)

Learoyd v Whiteley (1886) HL
Facts
 T made 2 investments in 2 pieces of property.
 1st: found to be a wasting, unprofitable asset, court held that it is too risky. A prudent
man …  breached duty
 2nd: an independent valuation report was made to assess the investment – the rental
income was satisfactory for that piece of property. Although the investment failed, it was
not particularly risky  X breached duty
 NB. Delegating the trust to any competent persons alone does not automatically
terminate the trustee’s responsibility.
Held
 The standard in SvG was slightly modified such that:
 Test: T has to exercise such care as an ordinary prudent man would take, minding that
he is making an investment (not for himself) but for other people for whom he feels
morally bound to provide
 Morally bound = trustee should have the interest of beneficiaries in mind, should not
make very risky investments.
Commentary
 Virgo: “morally bound to provide” – might be interpreted to mean that even greater care
might be expected of the trustee in handling investments than in managing private or
business affairs
 Application of the test (from judgment of Lindley L.J.): the trustees cannot just delegate
their trust to any competent persons and terminate their own responsibility. They may and
must seek advice on matters they do not themselves understand; but in acting on the
advice given to them they must act with that prudence stated in the test.
 NB.: Policy considerations: the court ought not to encourage laxity and want of care,
whereas on the other hand not to prevent people from becoming trustees by converting
honest trustees into insurers of the moneys committed to their care.

(iii) Professional paid Ts: more stringent test (general management and investment)
Bartlett v Barclay’s Bank Trust [1980] (Ch.)

Facts:
 A professional T (trustee, a bank) was hired to manage the family settlement. One of the
assets comprised 99.8% of shares in a particular company.
 T was not represented in the Board of Directors of that company.

53
  The company decided to make “imprudent and hazardous and wholly unsuitable
investments” in that property but the Trustee was not consulted, nor did the Trustee
request to be consulted
 One of the two projects made by the company was unsuccessful and the family settlement
suffered a loss
 The trustee was alleged to have breached his duty to exercise reasonable prudence in
neglecting to ensure that it received an adequate flow of information concerning the
intentions and activities of the boards of the companies.

Held

 Standard of care:
 where a trustee, such as a trust corporation, held itself out as having the skill and
expertise to carry on the specialized business of trust management, the duty of care of
such a trustee was higher than the standard of care of the ordinary prudent man
of business as demanded of a trustee without specialized knowledge
 Reasons:
(1) Professional trustees have held himself out in possessing professional
knowledge and expertise as above ordinary mortals
(2) Professional Ts are usually paid.

 Since the trustee had a controlling interest in the company, he should have:
 Enquired what was going on in that company . He should not have been content with
receipt of such info on the affairs of the company as a shareholder at an AGM, but as
he has the power, ensure sufficient information to let him get involved in the direct
management (responsibly decide to intervene whenever appropriate)
 Received an adequate flow of info in time concerning the intention and activities of
the board of the companies, to enable itself to safeguard the interest of beneficiaries.
 Not proper for the bank to limit itself to the receipt of annual B/S P/L account,
financial statements and chairman’s report and statement, and to attendance at the
AGM and luncheons that followed.
 The bank should have received frequent information
 Even without frequent information, according to the facts, the bank knew enough
to put it on enquiry. There were enough obvious points that the bank should have
intervened and questioned  if answered truthfully the bank would have
discovered the gamble

 Causation
 Yes, if the bank had intervened as it could and should have, the depreciation in
market value of the company would not have been incurred

54
 b) Statutory position
Cf.: the English Trustee Act 2000, s.1 - replaces the common law principles (IGNORE)17

A trustee “must exercise such care and skill as is reasonable in the circumstances, having
regard in particular –
(i) To any special knowledge or experience that he has or holds out as having, and
(subjective)
(ii) If he acts as a trustee in the course of a business or profession, to any special knowledge
or experience that the trustee has or holds himself out as having, and if the trustee is
acting in the course of business or is a professional trustee, having regard to any special
knowledge or experience that it is reasonable to expect of a person acting in the course of
that kind of business or profession. (objective)
HM: In (ii), there is a distinction between a trustee who carries on trust business in the course
of practicing generally as a solicitor or accountant, and a trustee who specializes in trust
work in the course of the specific business of being a trustee: the latter will be subject to a
higher standard.
 Single statutory duty of care in the course of administration of trust affairs  does not
imply one standard applicable to all Ts
 The standard of care depends upon the circumstances of the trust  for the reason that
trusts vary to a large extent
 The statute codifies the position in common law

 Hong Kong: Trustee Ordinance (amended in 2013) *****

 There is a single statutory duty of care that T must comply to administer trust assets,
including the exercise the power of investment: s.3A
 Court will take account of the nature of the trust and special knowledge of the T
 Applies to both laymen trustees and professional trustees.18

(1) …the trustee “must exercise such care and skill as is reasonable in the circumstances,
having regard to –
(a) Any special knowledge or experience (i.e., subjective) that he has or holds out as
having, and
(b) If the trustee is acting in that capacity in the course of a business or profession, any
special knowledge or experience that is reasonably expected of a person acting in the
course of that kind of business or profession (objective)
(3) The statutory duty of care does NOT apply to a trustee if, or in so far as, it appears from
the instrument creating the trust or an enactment that the duty is not meant to apply.
(4) The statutory duty of care does NOT apply in relation to a trust created before the
commencement date of this section (1/12/2013) in so far as provision to the effect that
subsection (1) does not apply is made by a deed executed –
(a) if the trust was created by a person who is of fully capacity, by that person;

17
Ignored because it’s UK ordinance, as simple as that. Don’t overthink.
18
http://www.step.org/sites/default/files/Branches/hongkong/newsletters/oct14/hk-newsletter-oct-2014-2.pdf

55
 (b) if the trust was created by more than one person, by all the persons who are of fully
capacity; or…”
Topic 3 Part 2 Judicial control/review of trustee’s powers

1. Introduction
 Recall powers/discretions (not duties!) conferred on trustees by Ordinance or trust deed in
03_1_duties and powers of trustees.
 There are circumstances in which the court would impugn the exercise of trustee’s discretions
(i.e. judicial review of trustee’s powers).

Why would the court want to review the trustee’s exercise of power?
 If there is a failure in understanding the relevant tax implication and the power was exercised
on that basis, why the court wants to interfere is because the court wants to put things right
 The beneficiary can avoid, e.g., potentially huge tax burden
 The trustee can avoid, e.g., potential claim for breach of trust
 Trust advisor can avoid, e.g., potential claim of negligence
e.g., Abacus v Barr (before Sieff, not in outline):
 The trust advisor relayed incorrect information about settlor’s wishes to trustees
 As a result, trustee exercised power of appointment on the incorrect information about the
settlor’s wishes
 Discretionary trust – trustee has a power of appointment to appoint certain income and
capital of trustees to the object
 The trustees want to take into account the settlor’s wishes in the exercise of his power.
 Subsequently, there is an issue whether the court can set aside the exercise of his power.

Should trustees be able to invoke judicial review and get away from his decision which turned
out to have unfortunate consequences?
 It involves a balance of interest’s exercise.
 A policy consideration would be that if easily invoked, trustees can easily escape from bad
decisions.

The court would need to consider the following questions in deciding whether the trustee’s
exercise of power should be impugned
(1) Is a fundamental mistake on the part of trustee necessary?
(2) Is breach of fiduciary duty necessary?
(3) Should the effect of impugnation be making the trust void or voidable?
(4) What is the standard of proof required?
 A trustees would have made or might have made a different decision had he taken the
ir/relevant information into account – which should be the test?
(5) What are the limits of the rule?

 The series of cases Hastings-Bass, Sieff, and Pitt and Holt answers these questions.

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2. Development of case laws on how these questions have been addressed

In what circumstances would the court scrutinize/ impugn the trustee’s exercise of discretion?

 Re Hastings-Bass [1975] (Ch.)

 Duty to take into account relevant information and ignore irrelevant information
 The court would not interfere unless the trustee has taken into account irrelevant consideration or
failed to take into account relevant consideration
 Principle: Where a trustee is given discretion as to some matter under which he acts in good
faith, the court should not interfere with his action, notwithstanding that it does not have the full
effect which he intended unless
(1) what he has achieved is unauthorized by the power conferred on him or where he has acted
outside of the power conferred on him (“ultra vires”) or
(2) it is clear that he would not have acted as he did
(a) had he not taken into account considerations which he should not have taken into account
or
(b) had he not failed to take account considerations which he ought to have taken into
account.

COMMENTARY
 NB. The scope of this test covers trustee acting ultra vires. It was not until later ( Pitt; Futter) that
the test was limited to only the second limb (taking into account ir/relevant factors).
 The Hastings-Bass rule is a rule which governs decision-making by trustees. When trustees
decide to exercise a power or discretion vested in them, or decide in what manner to exercise it,
they have an obligation to consider the appropriateness of this exercise.
 The beneficiaries have no entitlement to a particular outcome, but they are entitled to proper
conduct on the part of their trustee. For this reason, causation is irrelevant because outcome is
not in consideration.

 Abacus v Barr [2003]

Facts
 Trustee of a discretionary trust exercised a power of appointment relying on incorrect info.
 The tax advisor to the trust was responsible for relaying the settlor’s wishes to the trustee. The
settlor wanted to appoint 40% of the trust fund to those objects. The advisor instead told the
trustee 60%.
 Issue arises as to whether the court could set aside the exercise of the power.
Held, per Lightman J
 Whether the mistake of 20% was serious is irrelevant. A fundamental mistake is not necessary.
 But it must be sufficiently serious as to amount to a breach of duty.
 The Re Hastings rule on considerations does not apply where it was the trustee’s bona fide
mistake, BUT there was still a breach of duty since the tax adviser was an agent to the trustee and
the trustee did not consider the true wishes of the settlor  the trustee failed to take adequate
measures to ensure that he received correct information.
 The exercise of the power was voidable.

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 COMMENTARY
 *It is debatable whether, to show a breach of FD, it must be shown that the trustee did not use
all proper care and diligence in obtaining information and advice relating to the consideration
in question. There is no authority for this.
 This case is departed from Hastings-Bass in 2 aspects: (1) exercise of power was held
voidable; (2) the rule to apply the trustees’ failure to take into account a relevant consideration
had to be a result of a breach of the fiduciary duty.

 Sieff v Fox [2005] UKCA

Facts:
 This case concerns a family discretionary trust.
 The advisers to trustees wrongly advised the trustees about the tax consequences of exercising a
power of appointment in a certain way. As a result, a large unforeseen tax liability arose.
  The trustees sought to set aside the appointment in reliance on the rule in Hastings-Bass. It
was also sought to avoid the transaction on account of a mistake by an individual personally.
 Issue: whether the exercise of power could be set aside
Held, per Lloyd LJ
 Appointment was not effective on the application of the rule in Hastings.
 “Where a trustee acts under a discretion gives to him by the terms of the trust, but the effect of
the exercise is different from that which is intended, the court will interfere with his action if it
is clear that he would not have acted as he did had he not failed to take into account
considerations which he ought to have taken into account, or take into account considerations
which he ought not to have taken into account.”
 Lloyd LJ acknowledged that the trustees did take into account relevant considerations, but
they failed to give proper considerations because their legal advice was wrong.

 Had the trustees been aware of the tax implication of the exercise of the power of appointment,
they would not have exercised appointment  appointment ineffective.
 Questioned Abacus that the disposition would be voidable. He took the view that it was voidable
in that case because the pragmatic reason of that case. But he did not conclude whether a
successful application of the rule render the appointment void or voidable.
 There were some previous cases such as Standard v Fisons which held that a “might” test would
be sufficient. But he disagreed and held that in cases which involve trustees exercising their
power voluntarily the more demanding “would test” is justified in deciding whether the trustee’s
action could be set aside.

Sieff: answering questions (1) – (5)

(1) Fundamental mistake is NOT necessary. All that is required is that the unconsidered
relevant considerations would/might have affected the T’s decision and T would/might
have made a different appointment/ no appointment at all.
(2) Breach of FD by the trustee is NOT required
(3) Questioned Abacus v Barr that that case was held voidable only because of the
pragmatic decision in that case.

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  Lloyd LJ did not decide whether void or voidable is the correct consequence.
(4) Might vs Would test
 In T acted under an obligation, and an act by T is set aside, then B can require T to
start again on the correct basis, then a lower test of might is appropriate in such
cases.  court more likely to intervene
 In cases when the exercise of power is voluntary, then the more demanding
“would” test is justified in deciding whether T’s actions can be set aside.  court
less likely to intervene
(5) No limits of the rule is discussed

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 COMMENTARY
 This case is a restatement of Hastings-Bass. It could be considered a “strong” rule of Hastings-
Bass. Rather than being concerned with flawed decision-making, the new rule now concerns
unexpected outcomes:
 While Lloyd LJ made repeated reference to the ‘relevant considerations’ basis for the rule, he
also emphasized the requirement that when the trustee exercises a power ‘the effect of the
exercise is different from that which he intended’. This was not relevant in Hastings-Bass.
 The trustees did in fact took into account relevant considerations. They acted in good faith on the
strength of erroneous legal advice, in circumstances where they had no way of knowing that
the advice was erroneous, and in which any reasonable or responsible trustee would likely have
acted in the same manner.

Scope of application
 The rule applies only to powers that are exercisable in respect of trust property in favour of
beneficiaries or objects of powers of appointment, as opposed to administrative or management
powers. Thus, the power to appoint new trustees and transfer legal title fall outside the scope of
the Hastings-Bass rule.

Mistake
 Whether the rule in Hastings-Bass should be aligned with the equitable rules governing the
rescission of deeds executed by mistake:
 There are authorities which suggest that a causative mistake as to the fiscal consequences of a
transaction should suffice to entitle an appointer to ask for rescission, which would be
consistent with the findings made in Sieff and other cases that such a mistake can also bring
the rule in Hastings-Bass into play.
 Lloyd LJ was right to reject Lightman J’s finding in Abacus v Barr that the rule applies only
where it was a breach of the trustee’s duties that led him to ignore a relevant consideration or to
act upon an irrelevant consideration

On the would/might test

 As a matter of principle there must be a high degree of flexibility in the range of the court’s
possible responses
 To lay down a rigid rule of either “would not” or “might not” would inhibit the court in seeking
the best practical solution in the application of the Hastings-Bass rule in a variety of different
factual situations (Lord Walker @ Pitt v Pitt; Futter v Futter)

Policy reasons: balancing interests

 Advantages
 To beneficiary: If the court interferes to set aside the exercise of power, then the beneficiaries
would avoid a potentially huge tax burden
 Trustee: can avoid a potential claim for breach of trust
 Tax advisors and solicitors: can avoid a claim for professional negligence

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 NB.
 It should be noted that, since Pitt and Futter, Hastings-Bass and Sieff v Fox have lost
significance because they have been re-interpreted by the Supreme Court. We need not think
too much about these cases.

 Turning to the new era: Pitt v Holt + Futter v Futter (consolidated judgment) [2013] UKSC
Background
 This is the most important authority since it is the first case the scope of Bass is considered in the
Supreme Court. Previous cases reached highest at only High Court.
 CA reviewed all the case law and said that all previous cases had misinterpreted the scope of Bass
(should not be that wide)
 Hastings-Bass should not be the authority for the court to undo what the trustees have/have not
done. The application should be narrower
 A consolidated appeal heard by the Court of Appeal as well as the Supreme Court.

 Question to consider:
 1) Basis in the rule in Re Hastings-Bass?
 2)Is breach of duty required?
 3) Effect of this rule is void or voidable?
 4)Standard of the test, is it a might test or a would test? – Would have acted differently or might
have acted differently?

Pitt v Holt
Facts:
 Husband suffered serious damage in accident. He received large compensations for his injuries.
 Wife settled money with discretionary trust with herself as one of the trustees.
 When executing the settlement, neither W nor her advisors considered tax liability upon the
transfer of discretionary trust. When H died, substantial inheritance tax liability arose.
Ground to set aside:
(1) W argued that the settlement should be set aside because she failed to take into account
inheritance tax consequences and tax was a material consideration that she should have taken into
account (Hastings-Barr). Had she taken into account the tax implications; she would not have
executed the settlement that way.
(2) Mistake

Futter v Futter
Facts
 There was a discretionary trust, under which T had power of advancement. 19
 The trustees went to solicitors to seek advice. One of the trustees was a solicitor advising the
other trustees, but most advice came from his assistant solicitor.

19
Power of advancement enables trustees to pay or apply capital to, or for the benefit of, a beneficiary. Trustees may
apply capital for the benefit of a beneficiary by creating new trusts for him.

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  The solicitors gave wrong advice and they misinterpreted the tax statute. The exercise of those
powers in the belief that tax liability could be avoided but the advice was not correct.
Grounds to set aside:
 T sought to set aside the distribution on the basis of Bass principle (but not by mistake as in Pitt)

The decision in the Supreme Court

1. Basis of the Re Hastings-Bass rule:

 Lord Walker confirmed CA decisions. Held that 3 situations in which a disposition may be set
aside
(1) Ultra vires: trustee acted beyond power (= situation 1 in the CA judgment)
(2) Fraud: trustee acted fraudulently in disposing the asset
(3) Trustee acted within their power, but without sufficient deliberation (failed to take into
account R considerations/ took acct of IR considerations), in breach of “fiduciary duty” (=
situation 2 in CA judgment)  voidable
 Hastings Bass concerns only (3).
 NB.  use of “fiduciary” inaccurate because insufficient deliberation does not mean
breach of the duty of loyalty

Consequences
 In (1), void (apparently)
 In (2), unclear
 There was CA authority Cloutte v Storey which held that fraudulent appointment is void,
but Lord Walker in SC and Lloyd LJ in CA had reservations.
 In (3), voidable (Hastings–Bass)

On fundamental mistake
 “A fundamental mistake was not necessary. A fundamental, or at least serious mistake may
be necessary for rescission on the ground of mistake, but for the rule which Abacus was
involving…”

2. Is breach of duty necessary?

 Yes. It is foundation of the jurisdiction for the court to interfere in the trustees’ action
 “Establishing a breach of duty is necessary but not sufficient in having the decision set aside
under Bass, because there is some flexibility in the court’s responses to the trustee’s exercise
of power in a particular manner.”
 What amounts to breach of duty?
o Breach of duty concerns with the decision-making process, not only about whether
the decision / result is bad or not
o Breach of duty example: failure to exercise reasonable prudence
o If you have taken professional advice, then there is no breach of duty. So, you cannot
invoke the rule in Hastings-Bass

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 o The trustee would not be considered to have breached his duty merely because the
advice turns out to be wrong
o Inadequate deliberation would be considered as breach of fiduciary duty
 **Even if the trustees have acted in breach of their duties, the court has a discretion not to set
aside their decision, taking into account, for example, the effect on third parties and
beneficiaries

3. Would vs. Might test?

 The court left the “would vs. might” debate open. “But as a matter of principle there must be
a high degree of flexibility in the range of the court’s possible responses” (para.92)
 Would: If the trustees would have made a different decision had they not breached the duty
 there is likely that the court would set it aside.
 Might: If the trustees simply might have made a different decision. There may still be special
circumstances in which the court may set it aside.
 Did not go on whether “might” test was sufficient because not necessary in Pitt/ Futter
(where there was not breach of duty of the T, the relevant parties had sought professional
advice)
Application
 Pitt v Holt failed on the first ground  the court then considers mistake
 Futter failed on the first ground + no second ground  appeal dismissed.

Ground 2: Mistake (Pitt v Holt only)

 The correct approach is to invoke the court’s inherent jurisdiction when dealing with
mistakes
 Court’s consideration: causative mistake of sufficient gravity
(1) Causative – there must be a causal link
(2) Mistake
 Distinguish between mistake and mere ignorance: forgetfulness, inadvertence or
ignorance is not, as such a mistake, but can lead to a false belief or assumption which
the law will recognize as a mistake
 What a fine and no-good distinction (criticize it!)
 In Pitt v Holt, the mistake ground was satisfied: held that her ignorance can be
inferred as a positive belief that there is no tax burden which the court held is not a
mistake
(3) Sufficient gravity
 In deciding whether the mistake was of sufficient gravity there should be a close
examination of the facts, as it also needed to be decided objectively whether it would
be unjust or unconscionable to leave the mistake uncorrected.
 Unconscionable  a matter of court’s discretion

 Policy reasons: Tax avoidance is hardly an exercise in good citizenship. There has been
increasingly strong and general recognition that artificial tax avoidance is a social evil which
puts an unfair burden on the shoulders of those who do not adopt such measures

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  Mistake is more difficult to raise in case of tax avoidance

The law: a quick takeaway (From Hastings-Bass to Futter)

 The rule in Hastings-Bass is narrowed down to apply to cases where the trustee acts within his
power but he failed to take into account a relevant factor or took into account a relevant factor.
 A fundamental mistake was not necessary. To act within powers without sufficient deliberation
is a breach of fiduciary duty. A breach of fiduciary duty is essential to invoke the rule, but the
court retains some flexibility.
 The “would vs. might” debate is left open. But if the trustee would otherwise have acted
differently, it is more likely that the court will intervene.
 But even if the above is proved, it is not necessary that the court will set aside. There could be
other limitations such as third party’s positions or lapse of time.
 NB. Note also the distinctions (below) between the 2 cases.

COMMENTARY
On distinction from Hastings-Bass/ Significance of the case
 It narrowed down the test from including ultra vires to only sufficient deliberation.
 The consequence becomes voidable, not void.
 The nature of the claim is changed. It changes from “a trustee seeking to set aside his own
decision” (power-based: impugn a power) to “a beneficiary seeking to set aside a trustee’s
decision on the basis of breach of fiduciary duty” (duty-based: remedy for breach of duty).
 Therefore, the claimant becomes the beneficiaries.
 The SC did not go so far to prohibit a T to raise an action. However, it is clear that Lord
Walker did not want to allow Ts to use this doctrine as a 'get out of jail free card' (RL).
 It might be more difficult to set aside trustee’s decision.
 If Hastings-Bass fails, B might then need to seek remedies from Trustees and professional
advisors (solicitors). The B will face other difficulties to claim against these other parties.
 E.g., if against trustees, trust deed might contain exemption clauses
 E.g., professional advisors: need to establish professional negligence
 Voidable  cannot be set aside if too great a time has elapsed or if third party rights have
interfered
  Those who are concerned that the Hastings-Bass rule is too broad would like the CA to resolve
the question by holding that it merely renders transactions voidable
 Cf.: it can be argued that the rule holds that a trustee is only authorized to exercise his
distributive powers if he is adequately informed of all relevant considerations, and that if he
is not so informed then his exercise of such power amounts to a fraud on the power and is
accordingly void (view taken in Futter v Futter)

On “fiduciary duty”
 As is apparent, the duty of sufficient deliberation is not a fiduciary duty.

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  But why emphasize “fiduciary duty”  I think it’s just his intention that this should apply to
fiduciaries as well.

On mistake
 Pitt v Holt raised the long-debated question on what the test for mistake should be, in relation to
the restitution of gifts and other voluntary dispositions.
 Uncertainty: Lord Walker suggested that something more serious (“causative mistake of
sufficient gravity”) than a mere ‘but for’ test is required to rescind gifts and voluntary
dispositions, but it does not explain what that more serious test is other than by a resort to the
justice of the case on the facts.
 Uncertainty: the distinction between mistake and ignorance is not sound.
 Scope of application: Lord Walker confined himself to talking of rescission in equity and trusts
law. He said nothing about the restitution of gifts at common law.
 If a claimant brings an action for money had and received for a mistakenly paid gift of
money, does the Pitt v Holt test apply, or are we to apply a wider ‘but for’ test? If so, how can
such a distinction be justified?
 It has been suggested that the narrower test in Pitt v Holt is best rationalized as applying only
where the restitution is proprietary. It is inapplicable to a standard personal claim for
restitution, especially where no trust is involved.
 The decision on mistake is likely to mean that cases that would previously have been framed as
Hastings-Bass cases may now be brought on the grounds of mistake where the facts permit this.

On policy reasons
 Lord Walker's remarks as to the propriety of the court assisting in extricating claimants from a
tax-avoidance scheme that had gone wrong. He mused that in future such cases, the court might
choose to refuse relief on the ground that claimants, acting on supposedly expert advice, must be
taken to have accepted the risk that the scheme would prove ineffective.
 Alternative grounds for refusal might be public policy – that is, "that artificial tax avoidance
is a social evil which puts an unfair burden on the shoulders of those who do not adopt such
measures".
 These comments contrast strongly with previous commentary from the courts to the effect
that an individual is entitled to arrange his or her affairs in a tax-efficient manner.
 They also appear to make it less likely that applications for transactions to be overturned will
be successful where tax avoidance is involved.

Application: case not yet applied in HK. But it is very persuasive. Note also that Lord Walker 華學佳
勳爵 is a HKCFA NPJ.

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 Part II: Relief from liability

1. Exemption clauses
a) Forms of clauses
(1) Exemption of liability for breach of duty* (most common)
 T be excused from having to compensate B in the event of breach
 e.g. failure to exercise reasonable prudence  breach  if the clause covers that
particular breach  exemption of liability
(2) Indemnity of loss
 T may be indemnified for loss occasioned by breach of duty
 e.g. T breached duty to exercise reasonable prudence – T will need to compensate but the
trust would indemnify the trustee
(3) Exclusion of duty
 No duty of care will be imposed on the trustee
 e.g. failure to excise reasonable prudence  no breach at all

b) Why do we allow exemption clauses?

(1) Freedom for the settlor to insert clauses he prefers in the trust deeds
(2) Encourage trusteeship by avoiding onerous role of the trustee

c) Why might they be objectionable?

 Might deprive B of what they would otherwise be able claim against the trustees

d) How far can liability be exempted?

 In Hong Kong, s41W of the Trustee Ordinance sets out the ambit of the exemption clause.
Case law remains relevant, as it will continue to apply if s41W does not apply.

(i) Armitage v Nurse* (dishonesty test - subjective)

Facts
 Trust deed states “no trustee shall be liable for any loss/damage unless loss/damage was
caused by his own actual fraud”
 Counsel argued that the clause is void due to contradiction to public policy
Held, per Lord Millett20
(1) We need to construe the clause (“actual fraud”) to see what it covers
 “Actual fraud” does not include constructive or equitable fraud 21 which is too wide to
cover a series of breaches.

20
Again, god of equity, adored by Lusina Ho. Pay special attention to his judgments.
21
While common law fraud requires a subjective state of mind of dishonesty, equitable fraud does not. Equitable
fraud is no real fraud at all; in equity, it means only “any breach of duty which attracts sanction of equity”. It
includes breaches of equitable duty and fiduciary duty, abuse of confidence, unconscionable bargains, and frauds on
powers. This is because the equity jurisdiction does not usually tread on common law jurisdiction except when the
matter is exceptionally serious, e.g., fraud, but equity would like to expand its jurisdiction, hence giving fraud a very
broad interpretation. A similar term you will see in later topics would be “wilful default”, which means only “breach
of duty”; there is no “wilful” element in proof whatever.

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  “Actual fraud” means only “dishonesty” [subjective mind]; its meaning does
not encompass constructive or equitable fraud or negligence (includes gross
negligence_
 Dishonesty: An intention of T to pursue a particular course of action, with
knowledge that it would be contrary to the best interests of B OR recklessly
indifferent as to whether a particular course of action would be contrary to the
interest of B or not (cannot be exempted)
 I.e. Able to exempt liability for all breaches except for dishonesty. If T breached on
ground of negligence, he can still be exempted so long as there is no dishonesty
 Gross and culpable negligence is not enough to constitute fraud. (Derry v Peek)
 Gross negligence may be evidence of mala fides, but is not the same thing (per Lord
Denman CJ in Goodman v Harvey)
 Fraud is different from negligence. Regarded the difference between negligence and
gross negligence as merely one of degree, and gross negligence isn’t fraud. (Lord
Millett)

(2) whether the exemption clause is void for repugnancy to the trust/ for contravention with
public policy (whether it will impede irreducible core obligations of trustee)?
 Would not be void for repugnancy to the trust
 The core obligations on T are only the fiduciary duties to perform the trust honestly
and in good faith of the beneficiaries’ interest.
 The clause in question does not exclude this. It is a valid exemption clause within the
permissible scope of exemption clauses.
 As long as the exemption clauses do not seek to exclude these obligations, it would
not be void
 Implication of the case
o Unlike s41W of the Trustee Ordinance, there is no distinction between lay
and professional trustee

(3) On “irreducible core duties” of a trustee

 “I accept that… there is an irreducible core of obligations owed by the trustees to the
beneficiaries and enforceable by them which is fundamental to the concept of a
trust.”
 “But I do not accept that… these core obligations include the duties of skill and care,
prudence and diligence.”
 “The duty of the trustees to perform the trusts honestly and in good faith for the
benefit of the beneficiaries is the minimum necessary to give substance to the trusts,
but in my opinion it is sufficient.”
 Negligence, however gross, is different from fraud, bad faith, and willful misconduct.

COMMENTARY
 No distinction between lay and professional trustees
 Simply look at the clause to see if it is within the permitted scope or not
  may seem too lenient for professional trustees

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  T can be exempted if he commits an honest but deliberate breach (i.e. not considered a
fraud)
 E.g. an unauthorized investment (breach) on the basis that it will bring higher returns
to the trust (honest for benefit of B)
 Millett made a dictim in Armitage v Nurse on subjective mind of T: if the trustee acts
in the belief that he is acting in the best interest of the trust  he is NOT acting
dishonestly  T can be protected if breach is honest but deliberate  [criticized by
Hayton]
 Cf.: Lord Nicholls considered it to be fraudulent because the trustees are taking a
risk to the prejudice of another person’s rights, which they know to be a risk
which they have no right to take
  Standard seems to be too subjective – hard to distinguish negligence, gross negligence,
or breach of fiduciary duty

(ii) Walker v Stones (UKCA) (objective test of dishonesty – professional trustee case)
Facts
 An exemption clause in trust deed: “no liability other than willful fraud and
dishonesty”
 T was a solicitor who argued that he had (subjective) genuine belief that he was acting in
the best interest of beneficiaries in his breach
Held, per Slade LJ
 Meaning of dishonesty: a solicitor trustee who deliberately did something that no
reasonable solicitor (objective test) T could consider to be in the interest of the
beneficiaries was dishonest
 BUT this is a CA decision, cannot overrule previous CA decision, therefore the judge
tried to be cautious in saying that the test is confined to this particular case
 Seems that the test may only apply when the trustee is a professional with a higher
standard of care expected (lay trustee cannot)

(iii) Spread Trustee v Hutcheson [2007] (CA)(gross negligence – irreducible core obligation)
Facts:
 Clause provided that not liable except for “willful and individual fraud and
wrongdoing on the part of T”.
 T had been grossly negligent
Held: 3:2  OK to exempt gross negligence
Per Lord Clarke:
 The irreducible core obligation of a trustee is the duty to act honestly and in good faith
(viz., fiduciary duty, the duty of loyalty) in the interest of beneficiaries
 So long as the exemption clause does not try to exempt this duty  valid
 The irreducible core obligations do NOT include duty of care and skill, prudence
and diligence

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  Affirmed Millett’s view in Armitage: No distinction between ordinary negligence and
gross negligence – any difference is only a matter of degree - liability for (any)
negligence can be exempted
 T describe negligence as gross does not change its nature so as to make it fraudulent
 B argued that the irreducible core obligation should also include duty to act not
negligently, but disagreed by Clarke, due to the distinction between fiduciary and
non-fiduciary obligations – exemption of negligence not detrimental to his fiduciary
duty. - But still sympathetic towards B

 On the meaning of “Willful default” in the context of trustee exclusion clause (para 54)
 Willful default can be interpreted in two ways: either a trustee consciously takes a
risk that loss will result, or is recklessly indifferent whether it will or not.
 Can be either honest and dishonest
(1) Honest: if he consciously takes the risk in good faith and with the best intentions,
honestly believing that the risk is one which ought to be taken in the interest of
beneficiaries  cannot be exempted
(2) Dishonest: consciously takes a risk that a loss will result, or is recklessly
indifferent whether it will or not  can be exempted
 A clause exempting “willful default” is valid
 Only that it cannot exempt a dishonest willful default.

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 (iv) Citibank v MBIA [2007] (CA) (commercial trust – irreducible core obligation)
Facts
 Company tried to raise money by securitizing debts. An SPV 22 was formed to acquire
such debt. The SPV issued securities to investors, classified into different level of risks
involved. Level one securities was guaranteed by MBIA (“guarantor”)
 Citibank was the trustee of the notes and should act in the interest of all the noteholders
(beneficiaries)).
 While MBIA had the right to give Citibank the instructions concerning the exercise of
powers and instructions as a trustee
 The trust deed provided that instructions by MBIA need not have regard to the
interests of the noteholders. The trustee was subject to a mandatory duty to comply with
MBIA’s instructions. This was coupled with a broad exemption clause absolving the
trustee of all liability to the beneficiaries (noteholders).
 MBIA gave Citibank an instruction, QVT (noteholders, beneficiaries) considered it
contrary to interests of them
 QVT’s argument: MBIA’s right to control Citi (trustee) will reduce the irreducible core
obligation of the trustee
 Citi applied to court for directions on whether to comply with MBIA

Held, per Arden LJ

(1) The court is reluctant to unset commercial arrangements reached by sophisticated parties
 valid trust
(2) Rejected QVT’s argument:
“In my judgment, the trustee continues at all times to have an obligation of good
faith, and in addition, as Mr. Adkins submits, there are other clauses in the trust deed
where the trustee has a real discretion to exercises, e.g., clause 8 of the trustee deed
which confers a discretion on the trustee to give authorizations or waivers.” (Fact-
sensitive!)
 “Not true in the present case that the powers of the trustee are so reduced so the trustee
ceases to be a trustee at all  there is no risk of re-characterizing the office of trustee as
something else”

COMMENTARY
  This case shows that to the extent that parties in the commercial environment are free
to bargain in their own terms. It can be anticipated that this will have a distorting effect
on equitable doctrine  irreducible core obligations can be reduced by contractual
obligations. And the court is generally unwilling to intervene in the commercial setting.
 Sir Peter Millet remarked: Resistance to the intrusion of equity into the business
world is justified by concern for the certainty and security of commercial
transactions.23

22
Special purpose vehicle, a legal entity created (usually by a company) to fulfil narrow, specific, or temporary
activities.
23
Again, reading 01: equity’s place in the world of commerce, Lord Millett.

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  For professional men: the view is widely held that these clauses have gone too far, and
that trustees who charge for their services and who, as professional men, would not
dream of excluding liability for ordinary professional negligence, should not be able to
rely on a trustee exemption clause which excludes liability for gross negligence. Jersey
introduced a law in 1989 which denies effect to a trustee exemption clause which
purports to absolve a trustee from liability for his own “fraud, wilful misconduct or gross
negligence”. The subject is presently under consideration in UK by the Trust Law
Committee under the chairmanship of Sir John Vinelott and its proposals will be awaited
with interest (see below).
  Surrender of trustee’s discretion to guarantor is inconsistent with the fundamental
obligation of a trustee; The role of T became a mere agent
 This decision seems to be inconsistent to what Millett said “honestly and good faith” but
here reduced to only good faith

(v) The way forward - whether the current situation is desirable?

 Options for exemption clause (considered by English Law Commission, but concluded
that no reforms are necessary, just follow the existing case laws)
(1) Absolute prohibition – strict liability in case of any breach   too stringent
(2) Reasonableness requirement – e.g. when professional trustees are involved, only
permitted to rely on exemption clauses when the reasonable test is satisfied
  uncertainty
(3) Differentiate between professional and lay trustees

(vi) HK’s position

 S.41W – scope of permissible exemption clauses (below)
 Distinction drawn between lay and professional trustees
 No exemption for fraud/ willful misconduct (the meaning?)  invalidated by s.41W
 Is it possible to have exemption for gross negligence? NO.

 How does the position in HK defer from the UK position?

S41W – Trustee is not exempted from liability for breach of trust
(1) Subject to subsection (2), this section applies to a trustee who –
(a) acts in a professional capacity
(b) receives remuneration for the trustee’s services provided to, or on behalf of, the trust
…
(3) The terms of a trust must not –
(a) relieve, release or exonerate a trustee from liability for a breach of trust arising from the
trustee’s own fraud, wilful misconduct or gross negligence; or
(b) grant the trustee any indemnity against the trust property for the liability
(4) A term of a trust is invalid to the extent to which it purports to –
(a) relieve, release or exonerate a trustee from liability for a breach of trust arising from the
trustee’s own fraud, wilful misconduct or gross negligence or
(b) grant the trustee any indemnity against the trust property for the liability
(5) The section has effect in respect of a trust created on/ after the commencement date (2013) of the

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 Ordinance
(6) For a trust created before the commencement date of the 2013 amending Ordinance, this section –
(a) has effect in respect of the trust on the expiry of 1 year after that date; and
(b) does not affect the liability for anything done by a trustee of the trust within that 1 year period
  in other words, apply to trusts created before or after commencement of Ordinance; this is
different from the duty of care we looked at last week
(7) In this section, a reference to a trustee who acts in a professional capacity is to be construed in
accordance with section 41R(1).

The law: a quick takeaway

Professionals
 For trusts created after 2013 – apply statute
 For trusts created before 2013 + trustee acts after 1 December 2014 – apply statute
 For trusts created before 2013 + trustee acts before 1 December 2014 – apply common law

Non-professionals
 Always apply common law

Common law
Issue 1: interpretation
 “actual fraud” = dishonesty, not equitable fraud (Armitage)
 “willful default” = can be honest or dishonest
Issue 2: what can or cannot be exempted:
 The irreducible core obligation of a trustee is to act honestly and in good faith: Armitage;;
Spread v Hutcheson)
 Therefore, only dishonesty cannot be exempted.
 Negligence, gross negligence, and honest willful default can be exempted
 Actual fraud, dishonesty, and dishonest willful default CANNOT be exempted
 What amounts to dishonesty
 Lay trustees: subjective state of mind; [intention + knowledge] OR recklessness (Armitage)
 Professional Ts: objective test: what a reasonable pro. would consider as dishonest (Walker
v Stones)
Issue 3: whether the clause is void:
 Is it against policy reasons?
 If the clause is a broad exemption clause, can be valid if discretion is allowed (Citibank v
MBIA (very controversial)).

Statute
 Nothing can be exempted except negligence (not including gross negligence).

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 Question:
 What about a continuous breach which spans through the periods covered and not covered by the
statute?
 Answer: RL: See s.41W(6)(b). “I think if parts of that continuous breach are outside the 1-year
transition period, the Ordinance will apply.”

Question:
 When we have a broad exemption clause which excludes all liabilities, is it valid? Or does it
remain valid, simply not excluding certain liabilities?
 Answer: See s.41W(4). It must be invalid.

2. Statutory relief of trustee’s liabilities (on application by T)

 S.60 of the Trustee Ordinance

If it appears to the court that a trustee, whether appointed by the court or otherwise, is or may
be personally liable for any breach of trust, whether the transaction alleged to be a breach of
trust occurred before or after the commencement of this Ordinance, but has acted (1) honestly
and (2) reasonably, and (3) ought fairly to be excused for the breach of trust and for omitting
to obtain the directions of the court in the matter in which he committed such breach, then the
court may relieve him either wholly or partly from personal liability for the same.

 An innocent trustee may seek relief under this section.

 The burden of proof is on the trustee.
 Point (3) is an element of discretion of the court - the general attitude is that the court is more
lenient to a lay trustee.
 1) Honesty
o the appropriate test should depend on whether or not the trustee is a professional,
with an objective standard of honesty applied to professionals and a subjective
standard for other trustees
 2) Reasonableness
o It means negligent trustee could not be relived of liability, since a negligent trustee
must by definition have acted unreasonably
o Where a trustee is doubtful as to whether his or her decision might involve a breach
of trust, he or she should obtain legal advice. If the trustee relies on such advice and
still commits a breach of trust, it is likely that the court would relieve him or her from
liability
 3) Fairness
o Higher standards are expected from professional trustees than amateurs, but it will
sometimes be appropriate to relieve even professionals of liability

 Relationship of statutory relief with the trustee exemption clause

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 o Even though the trustee can rely on the exemption clause, it does not follow that he
satisfies the conditions in s60 of the Trustee Ordinance
Re Clapham
 Facts:
(1) Executor misread the will of testator, but a wide exemption clause effective to exempt the
executor’s liability for mistaken distribution
(2) As the clause already exempted trustee from liability, not necessary for the court to
consider statutory relief
(3) But the judge remarked that the executor made a serious mistake, court held that
executor was grossly negligent, if it were to exercise discretion to grant statutory relief,
the executor could not be excused
 Held:
(1) The judge remarked that because the executor made a very serious mistake, the court was
of the opinion that he was grossly negligent. If it were to exercise discretion to award
statutory relief, it would not do so.  Gross negligence cannot benefit from statutory
relief
(2) Relief from trustee exemption clause does not mean he can get statutory relief.

3. Doctrines of concurrence, release, or acquiescence (to T’s relief) – not very common
 Re Pauling’s Settlement Trust
 3 criteria:
(1) Free and informed consent from all beneficiaries
(2) Either before or after the breach occurs
(3) Bar from claimed unless B can show that it is fair and equitable to bring such claim (If B
has given consent, the B would have been barred from claiming against T, unless there
are other circumstances that would show that it is fair and equitable to do so)

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 Part III: managing a trust (self-study)

Even assuming that the trustee complies with his duties diligently, circumstances unforeseen at the time
of the creation of the trust may arise such that the effective management of a trust will be rendered
extremely difficult. This happens often in trusts, which usually last a long time.

Ideally a properly drafted trust deed should provide sufficient powers to the trustees to deal with these
contingencies. However, if the trust deed is silent, the relevant parties may nonetheless rely on certain
provisions in the Trustee Ordinance. In this class, we shall consider such contingencies and the relevant
powers.

Appointment and retirement of trustees

Appointment of trustees
Trustees may be appointed by
 The settlor, on creation of the trust
 Persons expressly given them power to do so by the trust instrument, either in the
circumstances contemplated by the trust instrument, or under the Trustee Ordinance s.37
 Surviving or continuing trustees under the Trustee Ordinance, s.37(i) (to replace another
trustee) or by existing trustees under s.37(6) (to add new trustees);
 By a court, exercising statutory powers under the trustee ordinance s.42, or
 By a court, exercising its inherent jurisdiction

Retirement of trustees
No one is compelled to act as a trustee. An appointee may disclaim the office provided that he has not by
his words or conduct accepted the trust. Thereafter, he can only retire:
 In accordance with any express powers in the trust deed;
 If a replacement is appointed under ss.37 or 42 of Trustee Ordinance; or
 Without any replacement, under s.40 Trustee Ordinance by or by order of the court in its inherent
jurisdiction

NB.: The Trust Law (amendment) Ordinance 2013 allows beneficiaries who are of full age and capacity
and together absolutely entitled to the trust property to appoint and retire trustee without the involvement
of the court and without the requirement of terminating the trust: see s.40A, Trustee Ordinance.

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 Part III Fiduciary duties of trustees

1. Fiduciary duties
 Who is a fiduciary?
 A fiduciary is someone who has undertaken to act for or on behalf of another in a particular
matter in circumstances which give rise to a relationship of trust and confidence. (Bristol v
Mothew)
 No need to prove “trust and confidence” as it is already accepted by the law
 Trustees are fiduciaries, they therefore owe the beneficiary fiduciary duties 24

 What is fiduciary duty?25

 The distinguishing obligation of a fiduciary is the obligation of loyalty (Bristol v Mothew)
 Loyalty: acting in the exclusive interests of beneficiaries
 The law imposes duties to ensure that the trustees/fiduciaries will be loyal.
 Function of FD: To prevent or reduce the incidence of the trustees not acting in the
exclusive interest of beneficiaries (prophylactic (preventive) approach)
 Negative duties (recall BA)
(1) The no profit rule (no secret profit)
(2) The no conflict rule (no conflict of interest/duty)

Breach of fiduciary duties and remedies

Breach of “no-conflict” duty Personal Proprietary
No unauthorized remuneration
No self-dealing Rescind Sinclair
- Misappropriation of pre-
existing property of P ???
Fair-dealing Rescind X
No unauthorized profit Account of profit Secret commission case??
(=disgorgement) T5)
No competition Account of profit (KLY) X
Subject to time limit

2. Sub-rules of avoiding conflicts of interest

a) No unauthorized remuneration: trustees should not profit from their positions
(1) Ok if prior authorization or subsequent ratification
(2) Court’s inherent jurisdiction to authorize payments to trustees:
Re Duke of Norfolk’s ST [1982] (Ch.)
(a) The court must be careful to protect the beneficiaries interest
(b) But it is also important to recognize that the trust should be well-administered and
incentives should be given, especially to professional trustees.
(3) S.41S Trustee Ordinance – entitles T to receive remuneration

24
Recall: difference between fiduciary and trustee: a trustee holds a property on trust.
25
NB. Lord Millett provided an excellent account of what fiduciary is. Refer to reading 01.

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  A trustee who is a trust corporation, or
 A trustee who is NOT a trust corporation but is acting in a professional capacity as a
trustee of a non-charitable trust, or
 A trustee who is NOT trust corporation but is acting in a professional capacity as one of
many trustees of a charitable trust but only to the extent to which the majority of other
trustees of the charitable trust have agreed and
 Provided that the instrument creating such trust gives such effect, subject to any
limitation provisions in that document
 Trustee entitled to remuneration even a layman can handle that trust as well

b) The self-dealing rule (sale of trust property to trustee/ fiduciary)

 The rule. The rule is if a trustee sells his property to the trust or buys a trust property for
himself; the transaction is voidable ex debito justitiae (out of a debt to justice) by any
beneficiary
 The basis of the rule is the clear conflict of interest: it is impossible to determine from the
evidence whether or not the purchase has been made on advantageous terms and so the court
has no option but to set aside the purchase at the instance upon any beneficiary’s request.

 A few points to note

(1) Whether the transaction was with good faith and in fair price is irrelevant
(2) If the arrangement is that the trust property will be sold to a trustee after he retires, the
sale may also be set aside (Wright v Morgan (below)), unless the sale takes place long
after his retirement (e.g., 12 years in Re Boles)
(3) A sale of trust property may be set aside where a trustee is in effect indirectly buying it
through another person (Delves v Gray), or to a partnership of which he is a member, or
through a company in which he has a substantial shareholding (Re Thompson [1985]26)
 NB. One has to be very careful to ensure that your case actually falls within the
ambits of the rule in question. In the following cases the self-dealing rule does not
apply, provided that the fair-dealing rule (below) is satisfied:
(a) A sale by a trustee to his wife27
(b) A sale by a trustee to a company which he has interest 28
(c) A sale by a corporate trustee to another corporation which has a common
director29

Exceptions
(i) Transaction with consent of court or fully informed consent of principal
 The fairness of the transaction may then be relevant when assessing whether the
consent was indeed fully informed.
26
Two cases bear the similar name: Re Thompson’s Settlement [1985] and Re Thompson [1934] (Ch.). Both will be
marked as “Re Thompson” in my notes. The 1985 case concerns self-dealing and leases of farm land. The 1934 case
concerns non-competition and a yacht business.
27
E.g., Burrell v Burrell; Tito v Wasddell (No.2)
28
E.g., Farrar v Farrar
29
E.g., Hillsdown v Pensions Ombudsman

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 (ii) Where the purchaser is a bare trustee with no active duties to perform: Parkes v
White
(iii) Where the relevant instrument that governs the fiduciary relationship provides
otherwise, e.g., contract

 Once the transaction has been rescinded, the F is liable to account to the beneficiary for any
profits that were made from the transaction30
 Reasons:
(1) If the trustee is allowed to purchase trust property. He may place his personal interest
(purchase the property at the lowest property price), over that of B (duty to sell at the
highest possible price)
(2) In purchasing the trust property, T would have knowledge of the property, an
advantage over that of TP.
 Cases:
Aberdeen Railway v Blaikie Bros (1854) 31
 Facts: Partners of a firm sold chairs to a company in which he was the director without
disclosure
 Held: conflict of interest, purchase was voidable at the instance of beneficiary as of right.

Wright v Morgan
 Facts. Two trustees. One T was given right of purchase and expressly allowed to
purchase trust property under the will of the testator. T did not purchase but assigned the
right to T2, but T2 was in fact not authorized to purchase trust property under the terms
of the will. T2 retired from trusteeship and purchased the trust property.
 Held:
 There was conflict of interest despite the transaction had been fair
 Even the price is set by an independent valuer is insufficient because the trustee has
discretion to decide when to sell.
 Sale set aside.

Cf.: Holder v Holder (CA)

 Facts
 D was one of the testator’s sons, who was tenant of one of the testator’s farms and
who was responsible for farming the remainder of the testator’s lands
 On testator’s death, D was appointed one of the 3 executors and started to administer
the estate. Testator had left his estate to be divided equally between his widow and
children.
 D sought to renounce his executorship and then purchase the farms at an auction for a
fair price but his renouncement was ineffective technically (i.e. still an executive)
 He later purchased the property of the estate at fair value at a public auction.
 Held
 Sale NOT set aside.

30
Disgorgement of profits (remedy)!!!! You will learn this in later lectures.
31
To be revisited in lecture 4. Do not remove.

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  Court had discretion not to set transaction aside if it is fair and the trustee had acted
honestly.
 One judge held that Executer did not take any part in preparing the property for
sale. Therefore the property was sold at a fair price at the auction. Therefore, the
strict self-dealing rule did not apply.
(i) He had not assumed any duties of the executor
(ii) He had not acquired special knowledge relating to the transaction while
acting as an executor
(iii) He had never made any secret of the fact that he intended to purchase those
farms
(iv) Price paid was well above market price
 Two other judges: Should not apply self-dealing rule automatically to a sale
which takes place at a public auction, and that the sale is arranged by a trustee
OTHER THAN the purchasing trustee.
 There was also acquiescence as all the beneficiaries were aware of this and had no
objections.

COMMENTARY
 Hard to justify the decision because it appears to undermine the strict interpretation of
fiduciary duties (self-dealing rule)
 D was a fiduciary as an executor and he had purchased property from the estate that he was
administering, in what happened to be a clear breach of the self-dealing rule – the result would
have been easier to justify had he successfully renounced his executorship, for then he would
cease to have been a fiduciary and would no longer be bound by the self-dealing rule
 The case may simply have involved a benevolent interpretation of the rule because of the
concession that he had failed to renounce his executorship – a concession that was probably
made incorrectly. + Since the B had not looked to the D to protect their interests and there
were two other executors who could sell the property to the defendant, so that he did not need
to be considered both the purchaser and vendor of the farms.
 The result has subsequently been defended on the ground that the D had never acted as an
executor in such a way as to amount to an acceptance of a duty to act in the interest of B. But
this still does not explain why the strict fiduciary duty was qualified at all on the facts of the
case.
 Alternative explanation of the result in Holder:
 B who sought to have the transaction set aside had previously affirmed the transaction
with full knowledge of the facts
 The affirmation bars rescission so that the transaction could not then be set aside
 Potentially the most significant part of the decision:
 Recognized by Danckwerts LJ that the court has a discretion to sanction a transaction
even though it was made in breach of the self-dealing rule
  if this discretion is recognized generally, it has the potential to undermine the strict
application of F duties generally and the self-dealing rule particularly

Cf.: Re Thompson [1985]

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  The application of self-dealing rule is not confined to the sale of property to the fiduciary
– e.g. set aside the assignment of leases
 Facts:
 Land was held on trust for the settlor’s grandchildren
 The land had been leased to companies, the directors of which included the trustees
 Some of these leases were assigned to another company, of which one of the trustees
was the managing director and in which he had a majority shareholding
 The remaining leases were assigned to a partnership that had been formed by another
trustee
 Held:
 The assignment of the leases was voidable by virtue of the self-dealing rule, because
all of the trustees needed to agree to assign the leases, and some of them were the
assignees and so personally interested in the transaction.
 Court restated that the rule against self-dealing is the application of the wide principle
that the T should not put himself in a position with a conflict of interest
 Holder should be limited to its own facts

b) Fair-dealing rule
 The rule (Tito v Wadell). The fair dealing rule is if a trustee purchases the beneficial interest
of his beneficiary, the transaction is not voidable ex debito justitae, if he can show that
(1) He had taken no advantage of his fiduciary position and that the beneficiary exercised an
independent judgment and was not subject to undue influence,
(2) He has made full disclosure to the beneficiary, and
(3) The transaction was fair and honest (fair price)

COMMENTARY
 Fairness: (commentary)
 Conaglen argues that “fairness” here does not relate to the substantive fairness of the
transaction, but is simply an evidential factor that assists the court in determining whether
the fiduciary did indeed give his fully informed consent to the transaction – if the
transaction can be considered to be fair, it is legitimate to infer that the P’s consent was
fully informed, or vice versa
 Remedy:
 If the fair-dealing rule is breached, any transaction into which the fiduciary has entered is
liable to be rescinded by the beneficiary and the fiduciary is liable to account for any
profits made from the transaction
 Rescission will be barred by usual elements, such as affirmation, or lapse of time before
the principal seeks rescission
 Not applied as stringently as the self-dealing rule because the F is given the option of
establishing the fairness of the transaction and establishing that he had not taken advantage of
the principal
 The more flexible nature of the fair-dealing rule might be considered to be justified by the
fact that there are genuinely two parties (a genuine contract of 2 independent parties) to the
transaction (F and P), whereas the self-dealing rule involves the F dealing with himself.

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 c) No unauthorized/secret profits
 Topic 4 (because more to do with non-trustee fiduciaries)

d) No competition with beneficiary

 Topic 4 (more to with non-trustee fiduciaries)

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 Topic 4 Fiduciary duties
Part I Definition of a fiduciary and content of fiduciary duties
1. Introduction
 Trustees owe both fiduciary and non-fiduciary duties. The former cannot be found in the common
law in contract or tort. It is also an equitable duty.
 In the context of trust, the trustee has physical control over the trust property. He has full range of
power to decide how that property has to be applied.
 Fiduciary duty imposes on the trustee that he has to hold the property properly. Fiduciary duties
of trustees are transplanted to fiduciaries who are not trustees.

2. Who are fiduciaries?

 A fiduciary relationship arises by virtue of the position and power of one in respect of the other
and the principal/beneficiaries’ reasonably induced expectation that the fiduciaries/trustees will
act exclusively in the interests of the former or of their joint interest (HM)
 Trustees are under a duty to act exclusively in the interests of trust beneficiaries, who are
vulnerable, if the trustees seek to abuse their position, because T have the rights and powers that
are capable of being exercised so as to detrimentally affect the beneficiaries (HM)
 A fiduciary relation arises from 2 contexts:
(1) Status based
 Recognized categories of relationships to be presumed to be fiduciaries
 E.g. company directors/company; solicitor/client; doctor/patient; agent/principal, partners
between each other, personal representatives of the estate, agents, certain joint ventures,
employees in a relationship of confidentiality, certain bailees, certain public officials and
trustee/beneficiary
 All trustees are fiduciary? Exercise of discretionary power in managing another’s affairs
is an essential feature of a fiduciary relationship, so bare trustee and custodian trustee
would not be considered as a fiduciary
 What about resulting trustee and constructive trustee? Trustee should be considered to be
subject to these distinct fiduciary duties only if he or she voluntarily assumed the position
of trustee

(2) Fact based (evidence): relationship of trust and confidence etc.

 Identifying such fact may suggest that the relationship is fiduciary.
 If one can show that on the facts, a party can unilaterally affect the other’s legal position,
and in the interests of justice a duty should be imposed because of Principal’s particular
vulnerability to be taken advantage of by the fiduciary, upon whose loyalty he is
reasonably relying, fiduciary duty will be imposed.
 Re Goldcorp Exchange plc
o The courts have generally refused to recognize that a commercial relationship
that has been entered into at arm’s length and on an equal footing is a fiduciary
relationship, because it lacks the hallmarks of trust and confidence
 Galambos v Perez
o Key test would be whether the defendant has voluntarily undertaken to act for
another

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 o Held that, ad hoc fiduciary relationship should be recognized if two conditions
are satisfied:
 1) There is an express or implied undertaking by one party that he or she
will act in the best interest of the other; and
 2) That person has a discretionary power to affect the principal’s legal or
practical interests

 What about employees?

 NOT a recognized fiduciary relationship: Canadian Aero; Nottingham v Fishel
 Employees owe to the company generally a duty of fidelity (good faith). They should
not follow a course of action that harms or places at risk the interest of the employer.
 It has become common, in the employment context, to assert the existence of a duty
of fidelity distinct from fiduciary duties.
 Cf. 32: the duty of fidelity is an invention and “faith, good faith, fidelity and
loyalty arguably are too closely associated with conventional fiduciary
responsibility to serve usefully as sharp descriptors of other functions”. Fiduciary
duty and the duty of fidelity is somehow inseparable.
 It is argued that the duty of fidelity is a “conceptual malformation”. By looking at
the jurisprudential roots of the duty of fidelity, the orthodoxy that the duty of
fidelity is distinct from a fiduciary duty of loyalty has only come about as a result
of “truncated citation of authority”

 BUT special facts can point to a fiduciary relationship between the parties:

Canadian Aero v O’Malley [1973] Supreme Court of Canada

Facts will be revisited in Case notes: no-profit rule
Held:
 The court distinguished the role of employees (servants) and fiduciaries (agents)
 “Although they were subject to supervision of the officers of the controlling company,
their positions as senior officers of a subsidiary, which was a working organization,
charged them with initiatives and with responsibilities far removed from the obedient role
of servants.”
 Junior employees only have a duty to respect for trade secrets and for confidentiality of
customer list, do not owe fiduciary duties.
 Senior employees who are in a supervisory or controlling role of a company has a fiduciary
duty towards the company which includes the duties of "loyalty, good faith and avoidance of
a conflict of duty and self-interest"
 Generally, employer-employee relationship is not fiduciary

Nottingham University v Fishel [2001] (UKHC)

Facts
 A doctor employed by University undertook work of a private clinic outside.

See readings 08: R Flannigan, the fiduciary duty of fidelity. Despite his arguments, do you think it is good to
32

make all employees fiduciaries?

83
 Held, in breach of fiduciary duty:
 In employment, a relationship is contractual, not fiduciary. Fiduciary duties can arise but they
do not arise as a result of the mere fact that there is an employment relationship.
 One must first identify the duties undertaken by the fiduciary, and ask whether in all
circumstances he had put placed himself in a position where he must act solely in the interests
of his employer.
 A person may be in a fiduciary position quod a part of his activities but not quod other
parts. Each transaction must be looked at.
 There are 3 circumstances in which the court will impose FD:
(1) Obligation arise out of the fact that a party is in a position to influence the other
(2) One is in receipt of information imparted in confidence by the other
(3) One party undertakes to act in the interest of another, or place himself in a position where
he is obligated to act in the interest of another.
 Fiduciary duty imposed (by law) must accommodate to the terms of the contract. 33
 Test: whether in all circumstances he has placed himself in a position where he must
act solely in the interests of the employer. *subject his own interest under the
principal*
Application
 By accepting work for the private clinic which he was directly benefitting, he was
clearly putting himself where there was a potential conflict between his specific duty
to the University to direct the embryologists to working the interests of the University
and his own financial interest in directing them abroad (by virtue of specific
contractual obligations)
o One can be fiduciary for some employment, but not for the others. For other
purposes, they are just normal employees.
 Also, he used his position to further his interest. It is only because of the position that
he could have access to a ready supply of embryologists to assist him in the work.

Summary of the law – quick takeaway:

 Issue: whether the person in issue is a fiduciary? If not straightforward director/trustee
cases:
 The key case you use should be Fishel: remember the test: placed himself in a position
and the 3 situations in which he places himself in such a position
 Support your argument with the agent-servant distinction in Canadian Aero

3. Contents of the fiduciary duties

 A duty of loyalty: a fiduciary must perform his duty for the exclusive interest of the beneficiary
 Prophylactic (preventive) approach
 Duty is imposed to prevent or reduce fiduciaries from not acting loyally/for the exclusive
interest of the beneficiary
 There are 2 aspects of fiduciary duties: (1) no conflict of duty; (2) no conflict of interest

33
Equity follows the law. Since equity cannot alter the terms of the contract validly undertaken.

84
 a) No conflict of duty
 The rule regulates conflicts between a fiduciary’s duties owed towards two principals
 Concerns essentially the problem of divided loyalty – the dilemma in which being loyal to a
principal would mean breaching the duty of loyalty to another
 E.g., a solicitor cannot work for both sides of, e.g., lender and borrower. There should be
no double employment. If there is double employment without authorization, then there
might be a breach of duty to avoid conflict of interests. If actual conflict takes place, the
fiduciary needs to be ceased to act.

Bristol v Mothew [1998] HC(Ch.)

 Facts
 Solicitor acted for lender and the purchasers in the mortgage transaction. He failed to
notify the bank of the second charge on the property which the bank was proposing to
fund. The purchaser defaulted in the payment of the loan.

 Held, per Millett LJ

 Causation is not required
 Breach of duty of care is not a breach of fiduciary duty
 Not every breach by the fiduciary is a breach of fiduciary duty, the distinguishing
obligation of fiduciary is obligation of loyalty. This core liability has several facets:
o A fiduciary must act in good faith
o He must not make profit out of his trust
o He must not place himself in a position where his duty and his interest may
conflict
o He may not act for his own benefit or the benefit of a third person without the
informed consent of the principal

 The fiduciary will not be liable for breach of fiduciary duty in two circumstances:
o Fully informed consent was obtained (Mothew)
o Contractual term
 Such term can be express or implied but such a contractual term will not
be allowed where it does not reflect the expectations of the parties

Summary of the law – quick takeaway:

 The no conflict of duty rule refers to 3 obligations:
(1) Double employment rule:  serve 2 principals of (1) conflicting interest (2) without
consent
(2) No-inhibition rule: be in good faith for both; not further one’s interest at another’s
expense
(3) Avoid actual conflict, unless with consent

85
 b) No conflict of interest
 The rule governs conflicts between a fiduciary’s own interests and the duties he owes towards
his principal.
 Aberdeen Railway v Blaikie
o No need to establish actual conflict of interest, potential conflict of interest suffices

 Test of conflict of interest: Board v Phipps

o The test is an objective one, whether a reasonable man looking at the relevant facts
would think there to be a real sensible possibility of conflict

Keech v Sanford (1726) (UKHC Ch.) – orthodox position

Facts
 Landlord refused to renew lease in favour of the infant beneficiary.
 Trustee renewed the lease for his own benefit.
Held
 T would hold the renewed lease on constructive trust for B, cannot benefit from it himself
 The rule that a trustee should not place himself in a conflict of interests must be strictly
enforced. He should not place himself in a position where personal interest may conflict
with beneficiary’s interest.
Implication
 The prophylactic approach is very strict.
 Trustee is the only person in the world who cannot get the lease.
 Influenced decisions in Regal Hastings and Boardman v Phipps (below)

The strict rule can also be used to derive the following specific rules:
(1) No unauthorized remuneration
a. Re Duke of Norfolk’s Settlement Trusts
i. ‘The court has an inherent jurisdiction to authorize the payment of
remuneration of trustees and that that jurisdiction extends to increasing
the remuneration authorized by the trust instrument. In exercising that
jurisdiction, the court has to balance two influences which are to some
extent in conflict. The first is that the office of trustee is, as such,
gratuitous; the court will accordingly be careful to protect the interests of
the beneficiaries against claims by the trustees. The second is that it is of
great importance to the beneficiaries that the trust should be well
administered. If therefore the court concludes, having regard to the
nature of the trust, the experience and skill of a particular trustee and to
the amounts which he seeks to charge when compared with what other
trustees might require to be paid for their services and to all the other
circumstances of the case, that it would be in the interests of the
beneficiaries to increase the remuneration, then the court may properly
do so.’

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 b. Otherwise, the trustee would have a conflict of interest
i. Remuneration would be okay if there is prior authorization or subsequent
ratification
c. Position now (under s41S of Trustee Ordinance)
i. Trustees may receive remuneration for services, especially for
professional trustees

(2) No self-dealing – sale of trust property to trustee/ fiduciary

a. *Aberdeen Railway v Blaikie
i. Fact
1. The plaintiff needed a large quantity of iron chairs (rail sockets)
and contracted for their supply over an 18-month period with
Blaikie Bros a partnership
2. Thomas Blaikie was the managing partner of Blaikie Bros and a
director and the chairman of the Aberdeen Railway Company.
The contract was partly performed but, having taken delivery of
about two-thirds of the iron chairs, the Aberdeen Railway
Company refused to accept anymore. The defendant sought to
enforce the contract or for damages for breach
ii. Held
1. Accountability of directors is not limited to cases in which there
is a maturing business opportunity but extends to cases in which
the director either has or can have a personal interest conflicting,
or which possibly may conflict, with the interests of whose
whom he is bound to protect
2. Self-dealing render the contract voidable (another case might
be Pitt v Holt)
3. Fiduciary should not be allowed to enter into engagements in
which he has, or can have, a personal interest conflicting, or
which possibly may conflict, with the interests of those he is
bound to protect

b. Ex p James
i. The transaction will not be voidable where the fiduciary has obtained the
consent of the court or the fully informed consent of the principal to the
transaction

c. Wright v Morgan
i. Fact
1. A testator had left land on trust for ale and provided that it
should be offered to one of his sons, who was also a trustee, at a
price to be fixed by valuers. If this son had purchased the land,
this would not have involved a breach of the self-dealing rule,

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 even though he was also a trustee, because the option to
purchaser was specifically provided for by the will.
2. However, the son assigned his right of purchase to his brother,
who later became a trustee, but who was not authorized to
purchase the land by the terms of the will. The brother then
purchased the land at a price set by the valuers
ii. Held
1. The self-dealing rule has been infringed, even though the
transaction had been fair.

(3) Fair-dealing rule

a. Sale of beneficiary’s beneficial interest to the trustee
b. Although a purchase from the beneficiary can be valid, therefore, it remains a
hazardous transaction because the negotiations and the final agreement must be
completely above board and reasonable, with no hint of fraud, concealment, or
advantage of the principal taken by the fiduciary (Coles v Trecothick)
c. Remedies and consequences of the breach
i. Any transaction which the fiduciary has entered is liable to be rescinded
by the principal and the fiduciary is liable to account for any profits
that he or she made from the transactions. Rescission will be barred if
any of the usual bars apply
d. The fact that the price for the purchase of the property is a good price from the
principal’s perspective will suggest that the consent was indeed fully informed
e. Possible argument regarding the fair-dealing rule
i. If the transaction can be considered to be fair, it is legitimate to infer that
the principal’s consent was fully informed. If there has not been full and
frank disclosure, and the price was not a fair price, this will suggest that
the principal’s consent to the transaction was not fully informed

(4) Loans by fiduciaries

 The law is clear. A fiduciary cannot make loans to his principal and try to make
profit. The authority for this is Swindle v Harrison [1997] CA.34
o Facts
 Mrs Harrison was trying to purchase a hotel and she failed to obtain
the loan. Her solicitor took out a loan himself at a lower interest rate
and loan the money to Mrs Harrison at a slightly higher interest rate
so that he could obtain little profit from a mark-up
o Held
 Stringent test of causation is not relevant, unless it amounts to fraud.
So a ‘but-for’ test in Mothew will apply
 Target Holdings applies to all breaches of trust

34
This case will be revisited in topic 5, which will then be an important case on remedies for breach of trust and
causation. We can save some effort for now.

88
  It amounts to breach of fiduciary duty as the solicitor did not disclose
his interest. Mrs Harrison suffered a loss and tried to seek equitable
compensation for the loss, the issue would be the extent and the
amount of the equitable loss
(5) No secret bribe or commission35
 Situation: fiduciary obtains benefits in exchange for doing something for the briber
that is in conflict with his duty of loyalty, in relation to a transaction between the
principal and the briber.
 A fiduciary is in breach of fiduciary duty if he receives secret bribe or commission.
 Reading v AG [1951] HL
o Facts
 Mr. Reading was stationed in Egypt as an army sergeant. Smugglers
paid him to ride in their lorries, while they were doing their
smuggling of illegal spirits, while visibly wearing his army uniform,
hence making a search less likely. Mr Reading got between £1000
and £4000 each time, but was caught. The Crown seized the money
he was paid, £19,325 4s 8d in total, and put him in prison. Mr.
Reading claimed that the money should be returned under an action
for money had and received. The Crown argued it was entitled to
retain the sums, which must have been received in ‘trust’ for the
Crown
o Held
 Mr. Reading (the army officer) has breached his fiduciary duty. He
was required to give up all unauthorized profits to his principal, the
Crown
 The money had been earned by his misuse of his official position,
and therefore his employer was entitled to keep the money even
though it had been earned unlawfully
 AG v Reid [1993] HK
o Facts
 Mr Charles Warwick Reid was a New Zealand national and the Hong
Kong Deputy Crown Prosecutor and then Acting Director of Public
Prosecutions, so in a fiduciary relationship with the Hong Kong
government. He took bribes to obstruct prosecution of some
criminals, and used the money to buy land in New Zealand. Some
was kept by Mr Reid and his wife, Mrs Judith Margaret Reid, some
conveyed to Reid’s solicitor. The Hong Kong government argued the
land was held on trust for them.
o Held
 The bribe money received by Reid, and the land acquired after, was
held on constructive trust for the Hong Kong government This
meant that the land bought by Reid and his wife and was held on

35
NB. Jargon: “bribe” is used for civil servants; “secret commission” is used for company directors.

89
 trust, and had to be given over to the Hong Kong government. This
was held to be necessary to ensure that people in positions of trust
could in no way profit from their wrongdoing. If the property was
badly invested, the fiduciary in breach would still be under a duty to
make good the shortfall.
 FHR European Ventures v Cedar Capital Partners [2014] UKSC36
 Facts
o Defendant were agents giving consultancy services and their clients were
potential purchaser of the hotel. The purchaser then purchased the hotel at
some £200m, the purchaser then learned that the defendant actually signed
some agreement with the hotel vendor to assist the vendor. So there is a
secret bribes without disclosure.
 Held
o Defendants were liable without proper disclosure and secret bribes obtained
from his fiduciary position.

(6) No competition with the beneficiary

 Re Thompson [1934]37
Facts
 Trust asset was a yacht business carried on by the Ts.
 T opened the same business across the road.
Held
 Court granted injunction restraining T from doing so.
 Applies when one is still a serving fiduciary.
 There is dicta which says that a breach of trust would be committed only if in
carrying on the business, T practised deception or solicited the customers from
the old shop. But in this case the yacht business was so specialized that setting
up the same business in the same town = competing with the trust business.

 For competition with principal post-resignation, see the no-profit rule (below).

(7) Not to obtain secret/unauthorized profits (see below)

 Strict approach
 Keech v Sandford
o King LC: The trustee is the only person of all mankind who might not have
the lease
o Such strict rule has been applied to fiduciaries other than trustee
 Regal (Hastings) Ltd v Gulliver
o Fact
 Regal owned a cinema in Hastings. They took out leases on two
more, through a new subsidiary, to make the whole lot an attractive
sale package. However, the landlord first wanted them to give
36
We will have this topic revisited in semester 2. Ignore for now.
37
If I may remind you, this is the yacht business Re Thompson [1934] case.

90
 personal guarantees. They did not want to do that. Instead the
landlord said they could up share capital to £5,000.Regal itself put in
£2,000, but could not afford more. Four directors each put in £500,
the Chairman, Mr Gulliver, got outside subscribers to put in £500
and the board asked the company solicitor, Mr Garten, to put in the
last £500. They sold the business and made a profit of nearly £3 per
share. But then the buyers brought an action against the directors,
saying that his profit was in breach of their fiduciary duty to the
company. The had not gained full informed consent from the
shareholders.
o Held
 If fiduciary makes use of his position to make profit, liability will be
imposed and the rule is very strict. Liability would be imposed
merely because it is made without consent. It does not matter
whether the plaintiff could otherwise obtain the money or whether
the fiduciary is bona fide or not.
 Lord Russell of Killowen: The rule of equity which insists on those
who by use of a fiduciary position make a profit, being liable to
account for that profit, in no way depends on fraud, or absence of
bona fides; or upon questions or considerations as whether the
property would or should otherwise have gone to the plaintiff, or
whether he took a risk or acted as he did for the benefit of the
plaintiff, or whether the plaintiff has in fact been damaged or
benefited by his action. The liability arises from the mere fact of a
profit having in the stated circumstances been made.
 Boardman v Phipps
o Fact
 Mr Tom Boardman was solicitor of a family trust. The trust assets
include a 27% holding in a company. Boardman was concerned
about the accounts of the company, and thought that to protect the
trust a majority shareholding is required. He and a beneficiary, Tom
Phipps, went to a shareholders’ general meeting of the company.
They realised together that they could turn the company around.
They suggested to a trustee (Mr Fox)that it would be desirable to
acquire a majority shareholding, but Fox said it was completely out
of the question for the trustees to do so. With the knowledge of the
trustees, Boardman and Phipps decided to purchase the shares
themselves. They bought a majority stake. But they did not obtain
the fully informed consent of all the beneficiaries. By capitalizing
some of the assets, the company made a distribution of capital
without reducing the values of the shares. The trust benefited by this
distribution £47,000, while Boardman and Phipps made £75,000. But
then John Phipps, another beneficiary, sued for their profits, alleging
a conflict of interest.

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 o Held
 There is a potential conflict of interest
  Liability to account for profits made by virtue of a
 fiduciary relationship is strict and does not depend on fraud
 or absence of bona fides
  Majority: information can be regarded as a property
  Minority: information is not a property (cited in later case
 There is a potential conflict of interest
  Liability to account for profits made by virtue of a
 fiduciary relationship is strict and does not depend on fraud
 or absence of bona fides
  Majority: information can be regarded as a property
  Minority: information is not a property (cited in later case
 There is a potential conflict of interest
 Liability to account for profits made by virtue of a fiduciary
relationship is strict and does not depend on fraud or absence of
bona fides
 Majority: information can be regarded as a property
 Minority: information is not a property (cited in later case)
 Justification of the strict approach
o In the interests of efficiency to provide an incentive to all fiduciaries to resist
the temptation to conduct themselves improperly
o More just to commend the defendant for what he or she had done rather than
to hold him or her accountable to the claimant

 Concerning the use of claimant’s property

o Brown v IRC
 The defendant solicitor received client’s money, which he deposited
in a bank account. The defendant then used the interest from this
account for his own purposes. This constituted a breach of the no-
profit rule because the defendant had used income that belonged to
the clients for himself and without the authority of the clients and the
principal
o What about information, would it be considered as a property?
 The better view is that information lacks the key hallmarks of
property and so cannot be misappropriated (Boardman v Phipps),
and so the fiduciary will consequently not be liable to account for
profit obtained from the exploitation of such information

 Exploitation of business opportunities cases – less strict approach

o Canadian approach – Peso Silver Mines v Cropper
 Fact

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  Directors took up a mining proposal opportunity after the
Board rejected it
 Held:
 There is no breach of fiduciary duty. An account of profits
would not be awarded where the fiduciary had exploited
an opportunity after it had been declined by the principal
 For diverting business opportunity, there is a few factors that
the court might take into consideration, including: position
or office held, the nature of the corporate opportunity, its
ripeness, its specificness and the director’s or managerial
officer’s relation to it, the amount of knowledge possessed,
the circumstances in which it was obtained and whether it
was special or, indeed, even private, the factor of time in the
continuation of fiduciary duty where the alleged breach
occurs after termination of the relationship with the
company, and the circumstances under which the
relationship was terminated, that is whether by retirement or
resignation or discharge

o Australian approach – Queensland Mines Ltd v Hudson

 Fact
 The claimant company had been interested in developing a
mining operation and the defendant managing director
successfully obtained the licences to enable it to do so. The
company had been unable to proceed with the transaction
because of financial difficulties. The defendant resigned as
managing director and, with the knowledge of the board of
directors, developed the mines himself.
 Held
 He was not liable to account for the profits that he had
made because the company had rejected the opportunity
and the defendant had acted with the full knowledge of
the board of directors, so they should be considered to have
given a fully informed consent to the activities

 Resignation in order to take the corporate opportunity – Canadian Aero

o Distinguish senior and junior employee
o First we need to see whether the duty survives resignation
 Resignation is prompted or influenced by the desire to acquire a
maturing business opportunity. It was his position rather than afresh
initiative that led him to the opportunity
o Second: is the business opportunity a mature business opportunity?

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  Questions concerned: Was the business one that was actively being
pursued by the beneficiary in the first place and what stage had this
business opportunity reached?

 Position in Hong Kong – Kao Lee & Yip – diverting company opportunity
o Issue 1: Whether there is a breach or whether the business opportunity is a
mature one?
 In general terms, a fiduciary who has taken advantage of an
opportunity made available to him in the course of a fiduciary
relationship to secure for himself a business opportunity, will be in
breach of fiduciary duty
 Less strict approach: Mature business opportunity as adopted in
Canadian Aero
 The business opportunity must be tangible (or mature) at the time
the fiduciary was in the position of trust and confidence
 Where the opportunity is so remote that the eventual obtaining of it
by the fiduciary cannot realistically be said to be linked to any
position of trust and confidence that the fiduciary was in regarding
that opportunity, there is no breach

 Whether the business opportunity is sufficiently mature will be

often a question of degree for the Court to decide.
Relevant factors (not exhaustive) includes:
 Whether the business opportunity that eventually accrued to
the fiduciary was one that resulted from a prolonged fresh
initiative on his part (Kishimoto)
 Stage reached in any discussions regarding the business
 Time gap between the fiduciary resignation and the ultimate
business
 The Not-to-Profit Duty does not prevent a fiduciary from making use
of such acquired skills, general knowledge, know-how or experience
upon the termination of the fiduciary relationship

o Issue 2: Whether there is a breach of fiduciary duty in taking preparatory

steps to set up a rival business?
 A fiduciary must not use ‘company’ other than for ‘company’
purpose
 A fiduciary is entitled to use his spare time for whatever activities he
chooses to indulge in, as long as these are not inconsistent with the
fiduciary duties he owes to the beneficiary or in direct competition
with the beneficiary’s interest

94
  The making of arrangements in his spare time during a person’s
employment to compete with the employer after termination of
employment does not necessarily always involve a breach of duty
 Taking of some prepartory steps is permissble (Balston Ltd v
Headline Filters Ltd)
 Solicitation as such when he is still working for the old firm or
employers is not permitted

 More recent approach in UK

o IDC v Cooley
 Fact
 Mr. Cooley was an architect employed as managing director
of IDC. The Easten Gas Board had a lucrative project
pending, to design a depot in Letchworth. Mr Cooley was
told that the gas board did not want to contract with a firm,
but directly with him. Mr Cooley then told the board of IDC
group that he was unwell and requested he be allowed to
resign from his job on early notice. They acquiesced and
accepted his resignation. He then undertook the Letchworth
design work for the as board on his own account
 Held
 Even though there was no chance of IDC getting the
contract, if they had been told they would not have
released him. Still accountable for the benefit he received
o CMS Dolphin
 Fact
 Mr Simonent resigned from his position as managing
director of CMS and he set up a new company. CMS’s staff
followed and so did the major clients. CMS sued Mr
Simonet for the profits he made, alleging that he had
breached his duty of loyalty to the company. Mr Simonet
contended that he owed no duty because he had left the
company
 Held
 The power to resign is not itself a fiduciary power. A
resigning director could not take to himself a business
opportunity maturing within the first company. He
became constructive trustee of that business opportunity.
o Bhullar – failure to pass information
 Fact
 The company operated grocery stores, but also owned a
commercial property which it let to tenant. The tenants used
part of an adjacent property as a car park. One of the
company’s directors a ‘fore sale’ sign on the adjacent

95
 property. He caused a company which he controlled to buy
the land without telling the other directors
 Held
 He is under a duty to communicate the opportunity to the
company because it would have been a
‘worthwhile’opportunity for the company
 Whether the Company could or would have taken that
opportunity, and it been made aware of it, is not to the
point: the existence of the opportunity was information
which it was relevant for the company to know and it
follows that the appellants were under a duty to
communicate

 UK: Pre-resignation preparatory activities – Shepherds Investments (Contrast with

Kao, Lee & Yip)
o Fact
 This case involves an asset management company trading in
insurance policy. The company was investigating a new investment
product in insurance policies. While the company was doing so,
directors set up a competing business while still being employed by
the company
o Held
 There was a breach of fiduciary duty in pre-setting up / by taking
steps of setting up a competing business whilst still serving as
directors
 Once a director had formed an irrevocable intention to establish
a competing business, and continued to take steps to bring into
existence of the competing business, knowing that it is contrary
to the best interests of the company, and without obtaining the
consents of the principal company, then he would be considered
as having breached his duty
 Duty to disclose irrevocable intention to compete
 The court draws distinction between permissible and legitimate
competitive activities, and the court would also look in a broader
context to see whether there was an irrevocable intention to establish
a competing business
 On fact
 Directors prepared a company for incorporation whilst they
were still acting as directors of the principal company is
impermissible
 Directors contacted lawyers of their details of the proposal is
impermissible
o Comment

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  If the activity is not directly competitive with the company’s
business, or that does not involve the undermining of it
(badmouthing company, or solicitating clients and employees), it
would not be intrinsically disloyal or inconsistent with the director’s
express or implied undertaking
 Prior to this case, courts focus on positive acts of the
fiduciaries
 But after this case, it seems that the court would also takes
into account the fiduciary’s deliberate omission in disclosing
activities (e.g. irrevocable intention)

c) (7) The no-profit rule

 A fiduciary has a duty to account for unauthorized profits and if necessary a constructive
trust will be imposed to capture those profits for B or P.
 A number of approaches has been made available.
 Regal Hastings, *Boardman v Phipps, *Canadian Aero, *Kao Lee & Yip, IDC v Cooley,
CMS Dolphin, *Bhullar, and *Shepherds.

 The above cases concern the no-profit rule, primarily in the context of diverting business
opportunities. The key question to be asked is in what circumstances should profits be
stripped from the fiduciary? What is the scope of the fiduciary duty? Etc.

 Some other questions are also relevant:

(1) Whether pre-resignation preparatory activities for setting up a competing business/
making secret profits would render any breach of fiduciary duty?
(2) Whether fiduciary duty survives post-resignation?

A summary of the law: quick takeaway

 Issue: whether the director was in breach of duty for [this particular act]?
 NB. The director could have done various acts. Examine them one by one.
 The law:
 The orthodox position would be that in Keech v Sanford; Regal Hastings and Boardman v
Phipps (majority), which holds that a fiduciary holds a strict duty of loyalty so that there
can never be any possibility of conflict of interest.
 Application: if under this rule, most likely found in breach.
 Nonetheless, the most prominent and cogent authority has turned to the minority judgment
in Boardman, followed by IDC v Cooley, Bhullar v Bhullar etc. which requires a real
sensible possibility of conflict of interest.
 Irrelevant whether a business opportunity is passed; the only thing matters is whether
there is a possibility of conflict.
 The breach is usually found in fail to pass information (Bhullar and Cooley), rather
than diverting a corporate opportunity.
 Note in particular that there a director does not have any personal capacity.
 This should be compared to the maturing business test used in Commonwealth
jurisdictions (Canadian Aero; Peso Silver Mines), which involves also a balancing factor.

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  In Hong Kong, the position adopted in Kao Lee & Yip is the maturing business test, which
involves a requirement of remoteness, assessed on a consideration of various factors.
 Is it possible to reconcile the cases?
 Perhaps. Failure to pass information and diverting a corporate opportunity are really 2
acts of a director which could give rise to separate breaches of duty. In the former case
we just use Bhullar. In the latter we use Kao Lee Yip.
 You may also criticize that the maturing business test is based on the idea that
information or opportunity is a property of the asset and it is wrong to misappropriate
that asset. But apparently information and opportunity are not assets.
 Note also the possibility of relaxation in Murad  relaxed position  KLY wins 

Fact pattern: setting up a new company

 There could be a number of different breaches
 Failure to pass information: Shepherds – irrevocable intention to set up competing business
 Failure to disclose own misconduct: Item software (below) - “I’ve done these prohibited
preparatory steps”
 Taking prohibited preparatory steps: KLY; Shepherds
 Diverting corporate opportunity: KLY
 Non-competition: Re Thompson

NB.
 For the “failure to pass information” breaches, does it matter whether the fiduciary does not
know that he was in misconduct or in a conflict of interest?
 The fiduciary duty is a subjective duty. If a person in good faith believes that something he
does was right, he would be acting bona fides, subject to the limitation that a director who
asserts that he acted bona fides will not be tolerated if the facts suggest otherwise.
 Therefore, I think it is necessary that a director must (1) knows that he is in breach of duty;
(2) believes that disclosure of his misconduct would be in the best interest of the company.
 Neither Bhullar nor Fassihi discusses the subjective state of mind.
 Shepherds might have touched upon the subjective state of mind – once he forms an
irrevocable step.

d) The duty of disclosure

 A fiduciary has a duty to disclose his own misconduct
Item Software (UK) Ltd v Fassihi [2004] UKCA
Facts
 Mr Fassihi encouraged his company to take a hard line in negotiations with a customer,
while surreptitiously attempting to usurp the relevant business opportunity
 Alleged breach of duty
o (i) diversion- attempting to divert business opportunity;
o (ii) sabotage (deliberate destroy) – by pressing managing director to pursue a
hard line approach;
o (iii) disclosure – failed to disclose to company his wrongdoing
Held

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  Fassihi owed and breached a positive duty to disclose his own misconduct to the
company
o Breach of positive duty involves proof of subjective awareness of disloyalty
by the fiduciary
 It is not against policy to impose such positive duty
 The duty to disclose is no separate duty but part of the director’s fundamental duty of
loyalty to act in what he in good faith considers to be the best interests of his company
 Comment by Virgo: better view is that it is not a fiduciary duty, so the decision would
not undermine the fundamental principle that fiduciary duties are proscriptive

GHLM Trading v Maroo

Facts
 The company was experiencing financial difficulty
 Shareholders decided that the shops operated by this company will close down and
directors will be dismissed.
 Shortly before that, the directors sold the company’s shares in order to repay themselves
for an outstanding personal loan
Issues
 Whether selling the company’s shares is a breach of duty
 Whether the director failed to disclose this misconduct to the company is a breach of
duty.
Held
 There was a breach duty by selling the shares and repay themselves an outstanding debt.
 Affirmed that directors have duty to act in good faith (what is in the best interest of the
company). This duty requires him to disclose his own misconduct.
 Nonetheless, the duty to disclose one’s own misconduct is subjective. The complainant
must establish that the director subjectively concluded that disclosure of his wrongdoing
was in his company’s interests or, at least, the director would have concluded had he been
acting in good faith.

4. Nature and function of fiduciary duties (please revisit after semester 2 on remedies)
 The distinction between fiduciary duties and non-fiduciary duties is important because
different rules of causation and remoteness applies in determining liability.
 Fiduciary: no conflict and no profit rule
 Specifically equitable duty
 Equity has to decide whether to apply similar common law principles to determine the
extent of liability
 Remedy is usually the profit made by the fiduciary himself
 Non-fiduciary: e.g. equitable duty of care, obligation to use proper skill and care in the
discharge of their duties, duty to act in good faith, duty to act for proper purposes, duty to act
without exceeding their powers
 Similar to common law duty of care (tort)
 Similar laws of causation and remoteness will apply
 Remedy: equitable compensation for loss.

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5. An example of the application of fiduciary duties in solicitors
a) Existing client (same matter) conflicts
 Simultaneous representation of clients
 E.g., a lawyer acts for 2 clients with adverse interest, such as in Bristol v Mothew
 Informed consent is required. Otherwise, breach of fiduciary duty.
 This might happen if firms are merged.

b) Former client conflicts

 Successive representation
 Situation: a lawyer obtained confidential information previously in former client’s case
which is relevant in the present case.
 It is solicitor’s duty to protect former client’s confidential information only.
Re a firm of solicitors [1992] QB
 Held: solicitors who possessed confidential information cannot act against former
client

What sort of risk may be justified?

 Prince Jefri Bolkiah v KPMG [1999]
Facts
 This case concerns former client conflicts in the context of confidential information
 Prince Jefri was the chairman of BIA, which managed reserve fund of Brunei
 KPMG provides services for BIA
 Prince Jefri instructed KPMG to represent him personally in Project Lucy
 Later, BIA instructed KPMG on Project Gemma to investigate the location of substantial
fund that has been transferred during Prince Jefri’s period of employment as chairman of
BIA.
 KPMG had Chinese Wall policies between teams to isolate confidential information
possessed by the firm about Prince Jefri. Measures include:
(1) No one who possess confidential info about Prince Jefri could work on Project
Gemma
(2) Confidential info will not be disclosed in the future to staff working on Project
Gemma
 Prince Jefri sought injunction to restrain KPMG from acting for BIA
Held, CA
 Test: is there a real or appreciable risk that confidential information would be disclosed
to BIA or Project Gemma team?
 Considered a number of factors, e.g., the time scale between two projects, etc.
 Concluded that Prince Jefri is unlikely to suffer any prejudice if injunction was
discharged.
Held, HL, per Lord Millett
 If P want to seek an injunction, he will need to establish that:
(1) Solicitor is in possession of confidential information
(2) That confidential information is relevant to the new matter

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  Once proved, P will be entitled to injunction
 Because solicitor owed a duty to preserve confidentiality of all clients and this duty is
unqualified
 The court will intervene not because of just perception of possible improprietary, but also
to protect confidential information.
 When should the court intervene? What is the test?
 Should intervene unless there is no risk of disclosure
 The risk must be real but need not be substantial
 Any other more relaxed test will impose an unfair burden on former client and
undermine the duty of confidentiality that the solicitor is subject to.
 Whether a Chinese wall is sufficient to eliminate risk of disclosure?
 Chinese wall would be sufficient if it forms part of the organization
arrangement rather than just ad hoc arrangement.
 E.g., there is physical separation of various departments so that they are insulated
from each other  organizational arrangement
 Applying the test, the Chinese wall established by KPMG is insufficient.
 Many people work in both teams
 People rotate.

 Mark & Spencer v Freshfields

Facts
 Freshfields has earlier worked for M&S including the restructuring of one of the lines
 Later, Philip Green instructed Freshfields to act in a takeover bid over M&S
 BoD of M&S is against the takeover bid and M&S tried to apply for an injunction to stop
Freshfields from acting for Philip Green
 Freshfields argued that the principle in Bolkiah is limited to same-transaction cases.
Where there are different matters involved (takeover bid vs. restructuring), there could
not be conflict of interest and duty.
 Freshfields also had Chinese Walls.
Held, CA
 Grant injunction against Freshfields
 Scope of Bolkiah: not limited to same transaction cases.
 Inherent conflict where transactions between a present and former client had some degree
of relationship
 Adequate safeguards (Chinese Wall) should be put in place before Freshfields
commenced acting for Philip Green  not sufficient safeguard by Freshfields.
Implications
 Robust approach to protect the principals, notwithstanding it cause some inconvenience
to the solicitors
 By applying injunction, it caused inconvenience to Philip  distract them  media’s
attention  sway the mind and heart of shareholders whether to accept the takeover bid

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  Ultimately, takeover bid failed.
 Illustrates how legal tools might be used to defend hostile takeover bid
 Solicitors should be careful in deciding whether to act for parties

 PCCW-HKT Telephone Ltd v David Aitken [2009] HKCFA

Facts
 Mr. Aitken employed by PCCW as a general manager. He left PCCW to join CSL as
Head of Regulatory and Corporate Affairs.
 There was tension between PCCW and CSL because they take opposing stances in
relation to governmental proposal. Since Mr. Aitken has left PCCCW, he did not owe FD
to PCCW, but only to protect confidential information which he obtained during his work
with PCCW.
 Mr. Aitken had been privy to confidential and privileged information concerning
PCCW’s position.
 PCCW argued: Bolkiah’s principles have a genral application so applied to exx-employee
of PCCW who possessed confidential information (not limited to solicitor cases)
 Bolkiah principle depends not on the nature of relationship, but nature of
confidentiality.
Held
 Bolkiah’s principle is limited to solicitor-client relationship because of the protection of
confidentiality in that fiduciary relationship. As a solicitor, he is a fiduciary and has the
duty to protect confidentiality.
 Ex-employee (duty no to disclose trade secrets: Faccenda Chicken v Fowler) vs. Solicitor
(duty of confidentiality: Prince Jefri Boilkiah)
 The present case was not protecting confidentiality in the context of a fiduciary
relationship between solicitor and client. Therefore, Bolkiah cannot have general
application.
 The court considered different policy consideration
 Freedom of employment
 Confidentiality

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 Topic 5_Personal Liability for breaches of duties by trustees and fiduciaries
Part I: Introduction

Five questions to understand the nature of the liability for breach of trust and breach of fiduciary duty
1) Does the defendant owe an equitable duty to the claimant? (depends on whether the person is a
trustee /fiduciary or not)
2) Has that duty been breached?
3) Has the breach infringed any rights of the claimant?
4) Are there any defences, excuses, or bars to defeat the claim or to reduce the extent of liability?
5) If the defendant is liable, what remedies might be available to vindicate the claimant’s right?

**Without the commission of some breach of duty owed in Equity to the claimant, there will be no
equitable liability. Consequently, just because the trust or the principal suffers a loss, it does not follow
automatically that there will be liability; the loss must arise from an equitable breach of duty

Breach of trust
- Breach of trust consists of both breach of fiduciary duty and breach of non-fiduciary duty
o Fiduciary: which means breach of the no-conflict rule and no-profit rule
o Non-fiduciary: duties relate to the administration of trust and the exercise of powers of
appointment
  may trigger liability for breach of contract, or for commission of a tort, or for
unjust enrichment
- Breach of trust can be further divided into two categories
o Unauthorized action
 Ultra vires act, e.g. misapplication of the trust property, making an unauthorized
investment, or acting where there is a conflict between their personal interest and
duty to the beneficiaries
o Inadequate action
 Acting badly, or failing to act, liability for this type of breach of trust requires
proof of fault in the form of negligence

1. Introduction to remedies: the 2 types of remedies

(1) Personal remedy -
 Is compensation for loss in equity, which resembles damages in common law 38
 Is primarily available against the trustee (This topic)
 If against third-parties, it would be on the basis of either dishonest assistance or knowing
receipt (Topic 8)
(2) Proprietary remedy (Topics 6 and 7)
 The proprietary remedy dates back to Roman law. It is a very powerful remedy.
 Claimant seeks to recover property from the defendant or to obtain a security in the
defendant’s property
 It is available against trustees, beneficiaries or third parties.

38
This is not accurate. But it’s sufficient that you learn this for now; distinctions you will see later.

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  It allows beneficiaries to trace and claim the original property if it has underwent
substitutions or multiple substitutions.
 Only available in trusts.

 In exam, you should always consider (1) personal remedy against trustee and (2) third parties,
and (3) proprietary remedy.

 Which is the appropriate remedy?

 It is more advantageous to choose proprietary remedy when:
(1) The trustee has gone bankrupt
 When a beneficiary wins his case, the court orders the trustee to pay his money.
When you have such an order, you are a judgment creditor. The relationship between
the trustee and the beneficiary is creditor-debtor. But the beneficiary would only be a
general, or unsecured creditor.
 If a person goes bankrupt 39, secured creditors and government gets their claim first.
Then, judgment creditors rank pari passu with other unsecured creditors.
 That’s why the claimant should go for a proprietary remedy: by definition, bankrupt
estate includes only property of beneficial title held by a person. The claimant’s
misappropriated property or money derived from it does not fall into the pool of
bankruptcy assets to be claimed by or shared with other creditors.
 This is known as the insolvency protection function of trusts.
(2) When the property misappropriated increased in value.
(3) When the limitation period for personal remedy has passed.
 There is no limitation period for proprietary remedy.
 If you go for personal remedies, the time would be 6 years, unless there is
dishonesty in which case time will start to run since the dishonesty is discovered.
(4) You want the asset but not its value, e.g., antique, painting etc.
(5) You expand your possible defendants. While personal remedy can go against a third party
only when there is knowing receipt or assistance, property claims can go against any non-
Equity Darling.

 It is more advantageous to choose personal remedy when:

(1) When the property has gone down in value or is destroyed (under the assumption that the
trustee does not go bankrupt)
(2) no longer has property belonging to the claimant where breach did not involve the
defendant receiving any property
(3) Where the fiduciary has stolen property from his principal and principal have suffered a
loss from that, and that loss is greater than the value of the property or value derived from
the property stolen.

2. A breach of trust vs. [breach of fiduciary duty by a non-custodial fiduciary]

39
Just a matter of jargon: a person bankrupts, a company liquidates. People do this when their assets cannot meet
liabilities. 資不抵債

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  Breach of trust means a breach of any duty by a trustee (see topic 3). This includes fiduciary
duties.*
 On the other hand, we have breach of fiduciary duties by non-custodial fiduciaries.

 Breach of trust (overview)

 Monetary remedies
(1) Disgorgement of profits
 The name of the personal remedy is “account of profits”
 T owes a personal duty to account for profits if he has made a profit as a result of the
breach

 Arguably, this remedy is available only for breach of fiduciary duty, but not
breach of duty of care or other breaches. A person who is in breach of duty of care
but as a result profited from his negligence would automatically have breached his
fiduciary duty, since this is an unauthorized benefit from his fiduciary position.

(2) General accounts/ taking accounts

 Unique to trusts; not applicable to other fiduciaries
 There are 2 aspects of the general accounts remedy:
(a) “Taking accounts in administration in the common form” (“taking common
accounts”)
 Falsifying the account: point to an item that is disbursed falsely/unauthorized
(debit), and correct it by deleting the record.
 Surcharging the account: point to an omission to enter a credit and correct it by
entering the credit.
(b) Taking accounts in administration on the basis of wilful default
 Surcharging the account on the basis of wilful default.

(3) Award of equitable compensation

 Equitable compensation compels the defaulting trustee to give a sum of money to the
plaintiff beneficiary.
 Taking accounts is only the procedure. The award of money following taking accounts
is the equitable compensation.
 Includes both reparative (wilful default) and substitutive (common accounts) remedy.
 It is similar40 to damages in common law.

 Non-monetary remedies
(1) Injunctions: to prevent a trustee from an imminent breach (cf. Tort)
(2) Rescission: to set aside a voidable transaction (cf. contract law)
 Restores position of both parties.

40
It is only similar; they are not the same. It is inaccurate to say damages is the common law counterpart of
equitable compensation in equity.

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  Include restitution of benefits obtained by both sides.
 Loss is irrelevant
(3) Declaration: the court makes a declaration
 E.g., asking the court to declare a constructive trust over a property.

 Breach of fiduciary duty by a non-custodial (i.e., non-trustee) fiduciary

 General framework of personal liability of a defaulting fiduciary is the same as above, except:
 Where loss is incurred, taking common accounts is not available.
 Therefore, available personal remedies would be:
(1) Account of profits
(2) Equitable compensation (without accounting procedures)

Difference between account of profits and equitable compensation

 Account of profits: strips the fiduciary of profits; the principal not necessarily be at loss
 Equitable compensation: compensates loss of the principal.
 If it is taking accounts on the basis of wilful default, it compensates for the loss the
principal/ beneficiary suffered, but the fiduciary is not necessarily at gains.
 But where the fiduciary is at gains, e.g., he misappropriated the property for the benefit of
himself and made a profit, the 2 remedies overlap. To strip him of profit would be to ask
him to return the loss of profit. See Tang Man Sit below.

NB.
 You should be very clear about the concept of “taking accounts” here:
(1) The correct dichotomy is the 2 forms of accounts: (a) common account and (b) account on
the basis of wilful default.
(a) For common accounts, it is unnecessary to prove wrongdoing. The trustee will be
liable losses suffered by the beneficiary for unauthorized transactions.
(b) For accounting on the basis of wilful default, it is necessary to prove wrongdoing.
The trustee will be liable not only for all receipts and disbursements actually
made by him (debits, falsify), but also for all money he ought to have received
had there been no breach (credits, surcharge).
(2) Therefore, it is incorrect to say that the remedies are dichotomously falsification and
surcharging. There can be both falsification and surcharging by taking common accounts
and accounting on the basis of wilful default, although surcharging by common accounts
is usually rare. I think account of profits is probably equivalent to surcharging by
common accounts.
(3) It follows that the type of breach leads to differential treatment in the accounting process:
(a) For unauthorized disbursements, the process would be to take common accounts
(b) For authorized disbursements but breach of other duty, the process would be to take
account on the basis of wilful default.

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 (4) Scenario: A trustee is given a general duty to invest, but he invests negligently.
 The remedy here is to take account on the basis of wilful default. We need not
frustrate about whether it is a surcharging case or a falsification case, regardless of
whether the investment means a gains or loss to the beneficiary.

3. Election between inconsistent remedies

Account of profits vs. compensation for loss
 Tang Man Sit v Capacious [1996] PC
Facts
 Concerns T’s misappropriated use of trust property to make profits
 When the vendor of the real property has signed the S&P agreement and from the signing of
that agreement, a CT arises
 Before the actual completion, T rented the property out in breach of the trust
 From the same misconduct, the vendor (landlord) has made a profit. The purchaser has
suffered a loss of the rent and the vendor’s gain is the profits in the rent.
Held
 If there is potentially both a claim for account of profits (disgorgement of profit) and
equitable compensation (rent loss + any consequential loss) from the same misconduct, these
are alternative remedies, meaning that at the end of the day you can have only one of them.
 Practically, in a litigation, you will start with claiming both of them alternatives. During the trial,
the court will be able to reveal how much money you can get under each, then you will know
which one is better and you can make an election at that point.
 Therefore, in the pleadings, one will always put down both and make an election later when it
becomes clearer how much one can get under one or another.

Taking of account vs. equitable compensation

 Libertarian v Hall [2013]
Facts
 For substantive facts, see below.
 [Civil procedure] The claimant sued the respondent. The defendant was very obstructive and
uncooperative on providing the accounts. The plaintiff discontinued the account, and sought
an immediate assessment of equitable compensation. This was allowed.
Held, per Lord Millett NPJ and Ribeiro PJ
 Taking of account and equitable compensation are not conceptually inconsistent. Equitable
compensation was awarded in the circumstances that making further account was unfruitful.
 Where there are evidential difficulties in establishing the account to overcome, the well-
established principle is that where the defendant’s wrongdoing creates the evidential
difficulty, the facts will be presumed against him, unless he proves the contrary.
 NB. Lord Millett NPJ disposed of the case after reaching this stage and thought that
causation is unnecessary. Ribeiro continued to address causation and remoteness.

COMMENTARY

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  The mechanism for claiming reparative compensation of loss caused by a breach of trust has
long been mired in the technicalities of the accounting procedure, but it is not entirely clear
how they interact. This case is significant in a sense that the court allowed the claimant’s
claim.
 This is a very pragmatic approach.
 Nonetheless, the taking of accounts is a well-established but by no means exclusive process
to identify the deficiencies in the trust fund. On the unique facts in the present case, where the
defendant’s obstructive attitude would render further accounts and enquiries unfruitful, the
time and resources of the court and the parties should not be wasted. Given these special
circumstances, Lord Millett N.P.J.’s ruling should not be taken to mean that in every case
where a plaintiff has initiated the taking of accounts, he can avert the need to ascertain the
deficiencies by claiming for an immediate award of equitable compensation.

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 Part II: Breach of trust

1. Account of profits – disgorgement of profits = stripping profits

Introduction
 Profits can be disgorged in a number of ways. It could be by personal remedy and proprietary
remedy. This section deals only with the personal remedy “account of profits”.
 As mentioned, this remedy is probably available only for breach of fiduciary duties.

Legal principles
 Boardman v Phipps [1976]
Facts:
 Please refer to case notes 04_1b: no-profit rule for facts.
Held:
 Where a person in a fiduciary office earns unauthorized profits as a result of their position,
this money will be held on constructive trust.
 If the fiduciary makes any profit, it is assumed to be made for the beneficiary so there is
no need to prove any breach.
 2 justifications
(1) A strict rule that a fiduciary cannot allow for a conflict (actual or hypothetical) of
interest. As such, if a fiduciary does do so, he will be required to account to the
beneficiaries of his office, regardless of whether or not he is acting in bad faith.
(2) Confidential information is trust property. It would be misuse if used for personal gain.
 Although a trust is imposed, the court ordered account of profits (personal remedy ), on
the basis that the fiduciary should hold the property as if he was a constructive trustee. CT
was therefore a legal fiction. D was ordered to account of the profits he made, rather than
return the shares.

 This case is therefore considered a personal remedy case. Nonetheless, it could also
support the position that breaches of fiduciary duty without involving misappropriation
of assets could lead to a proprietary remedy, as a constructive trust is imposed in this
case. See further elaborations in topics 7 and 8.

 Account of profit (personal remedy) is not based on unjust enrichment

 Unjust enrichment needs correspondence of gains and the loss: i.e. A is unjustly enriched at
the expense of B
 The plaintiff principal does not have to show that he suffered any loss in account of profit
 Just need to show gains made as a result of infringement of no-conflict or no-profit rule.
 Therefore, it is about disgorgement of profit. It is like a debt that the defendant has to pay.

 No need to prove misconduct

 Account of profit does not assume any wrongdoing on the part of the fiduciary (no need to
prove misconduct), but D is treated as implicitly undertaken to account for the gain that he
receives in the course of fiduciary relationship.

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 Rationale
 “an incentive … to resist the temptation to misconduct themselves” (Murad)
 Evidential difficulty to prove the fiduciary had acted in bad faith and failed to do everything he
could have done (Regal (Hastings))
Limiting the amount for account of profit
 Warman International Ltd v Dwyer (1995) (HC of Australia)
Facts:
 Fiduciary set up a company as a diverting business and took over some employees from the
old company.
Held
 If the breach of FD gives rise to a business, it would not require the D to account for all
profits from the business. Rather, there are 2 options.
(1) It is a pro rata share between the fiduciary and the beneficiary to reflect their
contribution. This option will only be taken if there is some prior agreement or
undertaking.
(2) Equitable allowance: reflect fiduciary’s time, skills and effort between P and D.
 There is no prior agreement so only option 2 (equitable allowance) is available.
 Time limit of 2 years of profit for equitable allowance:
 1 year: length of time to resign and set himself out to compete
 1 year: benefit of well-trained staff.

 Kao Lee & Yip

Facts:
 Fiduciary set up a business and took the clients from the previous law firm.
Held
 Apply the approach in Warman
 Time limit of 1 year: length of time to resign and set himself out to compete
 Require a degree of approximation

 The time limit of a year for length of time to resign is not a fixed rule. The appropriate time
for remoteness is assessed on facts.

Causation and remoteness

 Murad v Al-Saraj [2005] UKCA
Facts
 The principal and the fiduciary entered into a JV to purchase a hotel, but the fiduciary did not
inform the principal about his commission for arranging the sale.
Held, per Arden LJ
 Fiduciary needs to disgorge all his profit, subject to an allowance for his services and
disbursement.
 Rejected but-for causation  whether the benefit would be obtained but for the breach is
irrelevant

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  There was no causation dimension in an account of profits for breach of FD and the
defaulting fiduciary was strictly liable for all the unauthorized gains.
 Arden LJ and Jonathan Parker envisage the possibility that fiduciary doctrine’s strict liability
to account for profits might be relaxed in the future, especially the fiduciary has acted in good
faith.
 On the facts, breach of FD is not the cause because the shares would have been allotted in any
event.

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 COMMENTARY
 M Conaglen: We should appreciate the benefits of protections that fiduciary doctrine has
provided. The courts risk undermining the protection function of fiduciary doctrine if they
allow a fiduciary to seek to avoid liability by arguing that the impugned transaction was in
the best interest of the beneficiaries.
 R Lee: HKCFA appreciated the relevance of causation
 Arden LJ might have misinterpreted Regal (Hastings) by equating the irrelevancy of “a party
would not have made a loss” to “there is no need for causation”.

 NB. A difference should be drawn between this case and KLY. KLY concerns a running
business; Murad concerns a profit received once and for all.

 Inferences drawn from KLY and Warman, on causation and remoteness:

 KLY: the Court said expressly that in deciding the extent of the account, it was necessary to
focus on causation and remoteness when examining the link between the breach and the gain.
 Warman: the Court did not use the language of causation or remoteness, and the limit on the
remedy may be seen merely as the court's exercise of its remedial discretion. But I think it's
definitely possible to suggest that part of the profits claimed was too remote.

Judicial discretion to award equitable allowance

 Boardman v Phipps:
 Moderate the law’s harshness by making allowance to honest fiduciaries who have
contributed time, skill and effort towards making the gains.
 If information is acquired by a fiduciary in the course of his duties and it is not classified as
confidential information he is free to use the information for the benefit of himself or of
another trust of which he is trustee if there is no reasonably foreseeable possibility of his
needing to use that information for his original principal.

The law: a quick takeaway

 After reaching the conclusion that a person has breached a fiduciary duty (topic 4)...
 If a person in breach of fiduciary duty made a profit, he is personally liable to disgorge that
profit as if he was a constructive trustee (Boardman v Phipps)
 While cases suggest that causation is irrelevant (Murad), the position in Hong Kong is that
causation and remoteness required (KLY). Nonetheless, the standard of causation is unclear.
 You should adopt KLY for 2 reasons: (1) it is a HK case; ((2) it concerns a running
business).
 I think a simple causal link between the breach and the gain is perhaps sufficient. But-for
might be too harsh a test.
 As regards remoteness, courts generally limit strips of profits up to a year or two.
 Consider also judicial discretion to give equitable allowance.

112
2. Taking common accounts – falsification and surcharging
 Mechanism
 Trustee owed a duty to account for trust management. The beneficiary exercises his right to
inspect the account.
 If the beneficiary alleges a misapplication/ an unauthorized disbursement of the trust fund,
this in and of itself gives rise to a loss or diminution of the trust property.
 The beneficiary can request the court to order an account of administration in the common
form41, and point to the particular disbursement as unauthorised/ erroneous and delete it, as if
the disbursement has never been made. This is to “falsify the account”.
 The trustee will then have to use his own assets to restore the trust property in specie or, if
impossible, in money.
 The award of money is known as substitutive compensation.
 The ultimate purpose of this relief is “compensation” of – in the sense of restoring or
reconstituting – the trust fund.42 It requires substitution of the “missing” asset.
 NB. The order is not fault-based. The claimant need not identify loss or prove breach or fault.
They only exercise their right to inspect the accounts. If any entry can be pointed out as false,
they cross it out, as simple as that. The court usually gives summary judgment.
 If the claimant successful falsifies the account, he will receive a summary judgment and
equitable compensation (reconstituting the fund) automatically follows.

 Re Dawson [1966] Supreme Court, NSW Australia

Facts
 This case concerns a family trust.43
 The trustee misapplied some NZ dollar in a trust fund. Later, NZ dollars appreciated.
 The beneficiary falsified the account and required the trustee to reconstitute the trust fund in
NZ dollar at a higher exchange rate.
Issue
 Should the value of NZ dollar be that at date of breach or date of judgment?
Held
 The loss is to be assessed at the date of judgment.44
 Reasoning: the duty is to reconstitute at the date of judgment the trust fund had the
unauthorized disbursement not occur. This duty continues up to the date of judgment.
 Beneficiary is entitled to recover in specie45. Only when impossible should monetary
equivalent be repaid.
 Causation is not necessary because it is implicit in the consideration.46
 Novus actus interveniens, remoteness and foreseeability are irrelevant.

41
Accounts can take many forms. Account in common form requires the trustees only to account for what has
actually been received and what has been disbursed.
42
In other words, this is not a “real compensation”. There was no loss, there was no breach or fault. The duty is
only to re/constitute the trust fund as it ought to be.
43
This is a basis for distinction in many Lord Browne-Wilkinson judgments. Pay attention.
44
Cf.: contract and tort: assessed at date of breach.
45
Recover in specie (latin): recover the original thing, specifically that thing.
46
Cf. Contract (Victoria Laundry) and Tort (Wagon Mound), causation is necessary.

113
 Why is causation not necessary?
 2 dimensions:
(1) Historical dimension: equity does not have jurisdiction to give damages. It developed
a remedial system differently and uses the concept of taking account and falsification.
(2) Duty dimension: in a trust, the duty of a trustee in relation to the trust fund is to be a
custodian to manage it. The duty is one of custodial management, to keep and preserve
the trust fund. That is why the logical duty is to make good the trust fund when you
failed to do so. Even there is anything, e.g., novus actus interveniens, the duty remains
strict. This is different from the common law (tort) duty of care.

New principles emerging – causation principles

 Target Holdings v Redferns [1996] HL
 Lord Millett’s extra-judicial comment: equity’s place in the law of commerce (1998) 114 LQR
214
 Canson Enterprise v Boughton [1991] Supreme Court of Canada (McLachlin J)
 Youyang v Minter Ellison [2003] HC Australia
 AIB Group v Mark Redler [2014] UKSC
  Please refer to case notes

Summary of the law: a quick takeaway

 Whilst the traditional approach to take common accounts and falsification is based on a
primary duty to administer the trust, and causation and remoteness issues are irrelevant so long
as the trust is made good,
 Recent cases suggest that there is a distinction between traditional trusts and commercial
trusts.
(a) For commercial trusts, trustees are only liable for a loss which, using hindsight in common
sense, can be seen to have been caused (but-for) by the breach (Target Holdings, Canson
(minority); AIB)
(b) For family trust, could resort to the Re Dawson principle.
 However, it is open for Hong Kong courts to adopt the view of Millett (extra-judicially),
Mitchell and Youyang, instead of Target Holdings and AIB.
 NAI, remoteness and foreseeability irrelevant (Re Dawson)

 Among the above cases, Target Holdings and AIB are breach of duty of care (negligence)
cases. Canson Enterprise concerns breach of fiduciary duty. This suggests that the type of
breach (fiduciary or negligence) is irrelevant for this remedy, unlike surcharging on the basis
of wilful default below.

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3. Surcharging the account on the basis of wilful default
 Mechanism
 As mentioned, the key to understanding this accounting process is to place the focus on
“wilful default”, not “surcharging”.
 “Wilful default” is fault-based. Proof of fault is necessary.
 It need not be deliberate wrongdoing.
 The defendant will be required to account not only for what he or she has received, but
also for what he or she might have received had it not been for the default
(surcharging).
 The award of money is known as reparative remedy. The remedy repairs the losses T suffers.

 Wilful default: meaning

 Partington v Reynolds [1858]
 If the trustee has been guilty of wilful default in failing to get the trust property in, then
the trustee will be liable for any property or value which might have accrued to the trust
but for her wilful default.

 Bartlett v Barclays Trust Co (No.2) [1980] Ch

 “Wilful default by trustee in this context means a passive breach of trust, an omission by
a trustee to do something which, as a prudent trustee, he ought to have done – as distinct
from an active breach of trust, that is to say, doing something which the trustee ought
not to have done... It is otherwise if the plaintiff has merely alleged and proved one or
more active breaches of trust. That does not necessarily entitle a plaintiff to a roving
commission, which would be afforded by an account on the footing of wilful default.’

 Lord Millett, extra judicially, commented that wilful default is just negligence. This is true
and applicable in both cases above. He argued further that if it is negligence, then common
law causation and remoteness should follow.

 Nonetheless, Ribeiro PJ in Libertarian seemed to have thought that a deliberate breach of

fiduciary duty could justify an award of damages based on surcharging on the basis of wilful
default.
 Note that this is probably incorrect. But given its authority, it does mean that equitable
(reparative) compensation is available for loss arising from deliberate breaches of trust.

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  Causation and remoteness
 The law is unclear
 Millett (extra-judicially): yes
 Willful default simply means negligence. Analogy could be drawn to breach of duty in
tort in which causation is required.
 Breach of the common law duty of care and equitable breach of trust should consider the
same principles. If the duty is the same, the same principle should apply; historical
development should be overlooked. This makes sense because when different areas of
law overlap, the same principle should apply to avoid claim-shopping.
 BNZ mentioned in Libertarian:
 Wilful defaults are mostly concerned about breach of duty of care. Therefore, causation,
remoteness, etc. ought to be relevant.
 This view is endorsed by CFA in Libertarian, but Libertarian is not about breach of duty
of care so endorsing BNZ is just a dictum.
 Youyang
 Disagreed with Millett’s view in Bristol v Mothew. Disagreed to assimilate equity and
CL measure of compensatory damages in tort and contract
 Dictum: The duty of care is a CL concept. We should hold trustee to a higher standard.
 Nonetheless, there is no case law on mitigation and contributory negligence; but it seems to
be in the court’s view that these would also apply.

 Equitable compensation for deliberate wrongdoing – surcharge without taking accounts?

 Libertarian Investments v Hall [2014] HKCFA
Facts
 P gave a lot of money to D on trust to buy some shares in a particular company.
 D misappropriate £5.5m of it to his own use. He kept telling lies to the plaintiff and P
kept believing him, until very much later the whole spam was discovered.
 If the P was able to get those shares in time, he will be able to sell those shares and reap a
great profit. It was estimated that he could make a £19m.
 P sought to surcharge the account to £19m.
 NB. Falsification only entitles a recovery of £5.5m. That’s why you don’t go for it.
Held, per Ribeiro PJ
 Ribeiro PJ has seized the momentous opportunity to reinforce 2 significant propositions:
(1) Common law rules of causation and remoteness apply to a negligent breach of trust
(2) Where a trustee deliberately breaches fiduciary duty, the court will apply reparative
principles laid down for breach of fiduciary duty by non-custodial fiduciaries (obiter)
 Therefore, in deliberate breach cases, the liability would be for loss arising with the
benefit of hindsight in common sense from the breach.
 Referred to Target Holdings and Canson Enterprise: a fiduciary is liable for all loss
arising from the breach with the benefit of hindsight after satisfying the but-for test.
 Common law rules of foreseeability and remoteness do not apply.
 Allowed surcharge to the loss assessed at £19m.

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 COMMENTARY
On categorization of breaches
 While Ribeiro PJ embraced the categorization of breaches, the facts of the case do not
necessitate such calibration.
 Besides, it is also unnecessary to give a new meaning to "wilful default" in order to
differentiate the measure of recovery for deliberate breaches of the duty of loyalty from
that for the duty of care. On his Lordship’s approach, wilful default now confusingly
bears different meanings in "accounting on the basis of wilful default", as opposed to
"equitable compensation on the basis of wilful default".

On consistency with common law

 The obiter observation on the application of common law principles of causation and
remoteness echoes the view of Lord Millett and BNZ, but it has not considered the
contrary view in Youyang.
 In cases of deliberate breaches, reparative principles would be applied. Nonetheless,
traditional wilful default footing does not differentially treat different types of breaches.
 It isn’t very clear what he meant by surcharging on the basis of wilful default. His
emphasis was on deliberate breach. But as mentioned, it is not necessary to show
deliberate breach for surcharging on wilful default.
 Ribeiro: this was deliberate breach and when we surcharge, the liability for this type of
surcharge is very strict. The trend is that they look at the nature of the breach. Since this
is a deliberate breach, should the common law tort of deceit principle be analogized?
What should the test be? But-for? Deceit? Remoteness? He didn’t say anything about
those. Does it mean they could be recovered as well? Questions like this remain
unanswered.

On theoretical bases
 Fiduciary duty were traditionally prophylactic. They are conceptualized as disabilities
which prohibits the fiduciaries from doing wrong. But now it is an imposition of a duty.
 In the past, it is one single fiduciary duty to administer the trust in good faith. Any
unauthorized profits is an extension of this principle. But now, seemingly the court is
imposing a secondary duty of compensation on top of the breach of trust.

117
 Part III: Breach of duties by a non-custodial (non-trustee) fiduciary

1. Account of profits (same as above)

(Repeat) The law: a quick takeaway
 After reaching the conclusion that a person has breached a fiduciary duty (topic 4)...
 If a person in breach of fiduciary duty made a profit, he is personally liable to disgorge that profit
as if he was a constructive trustee (Boardman v Phipps)
 While cases suggest that causation is irrelevant (Murad), the position in Hong Kong is that
causation and remoteness required (KLY). Nonetheless, the standard of causation is unclear.
 I think a simple causal link between the breach and the gain is perhaps sufficient. But-for
might be too harsh a test.
 As regards remoteness, courts generally limit strips of profits up to a year or two.
 Consider also judicial discretion to give equitable allowance.

2. Equitable compensation
(a) For breach of fiduciary duty
 Until very recently, it was thought that when there is breach of fiduciary duty, Boardman v
Phipps, for those breaches, the only remedy one can claim is either account of profits or
proprietary remedy for constructive trust.
 But it was recognized in Nocton v Lord Ashburton [1914] that a claimant could obtain
equitable compensation for breach of fiduciary duty.

Causation
 Brickendon v London Loan Savings [1934] Canada: the old test of causation
Held
 P needs to prove the breach was material and relevant to the loss but no need to show but-
for causation and D is not allowed to plead evidence for proving no but-for causation.
 The reason behind is that the D (fiduciary) should be in utter good faith and he should not
raise evidence against his master.

 Swindle v Harrison [1997] UKCA

Facts
 An old lady signed the S&P agreement for buying a hotel.
 She needed a loan and the solicitor who was acting for her conveyancing lent her money
without telling her that he earned an interest rate difference.
Held
 Liability is for loss with the benefit of hindsight and common sense, flowing from the
breach, taking into account what would have happened had there been no breach (= but-
for test)
 Who has the burden to proof but-for causation? Not clear.
 The but-for test failed in this case. The solicitor need not make equitable compensation.

 Canson Enterprise
 Please refer to case note 05_2: Target Holdings. Causation principles same as Swindle.

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 Controversies (only mentioned in passing)
 Pilmer [2001] HC, Australia
 CN is irrelevant for breach of FD because we do not expect beneficiary to be vigilant in
taking steps to negate.
 Harris [2003] CA, NSW, Australia (controversial)
 There is no jurisdiction in equity to award exemplary (punitive) damages
 Libertarian [2013]: endorsed BNZ that CL rule on foreseeability and remoteness are
irrelevant

(b) Equitable compensation for breach of duty of care

 Bristol v Mothew: analogy drawn to common law duty of care
 Youyang v Minter Ellison: disagreed. It should be strict liability.

Uncertainties
 Gross negligence? Punitive damages? Mitigation? Contributory fault?
 Suggestion: everything should follow common law rules

A big summary of everything

 Remedies are to pay for either profits of trustee/fiduciary or loss of beneficiary/principal:
(1) The principal/beneficiary suffered a loss (decrease in value or potential increase of value)
(2) The fiduciary/trustee profited from a breach of duty
 They can overlap. To resolve, see Tang Man Sit (above).

 For account of profits, it is available for both breach of fiduciary duty of fiduciary and trustee.
 Murad suggest that causation is irrelevant. KLY suggest that causation (causal link) and
remoteness (1 year) are required. (better to follow as 1) it is HK case; and 2) a running
business)
 The court can grant allowance.

 For falsifying or surcharging on the basis of common accounts,

 The orthodox approach should now be Target Holdings:
(a) Commercial trusts: but-for: benefit of hindsight + common sense
(b) Family trust: causation is irrelevant (Re Dawson)
 The distinction between family and commercial trusts is the number of beneficiaries.
 The type of breach is irrelevant.

Distinguishing the traditional trust from the commercial trust

In relation to a traditional trust where the fund is held in trust for a number of beneficiaries
having different, usually successive, equitable interests, (e.g. A for life with remainder to B),
the right of each beneficiary is to have the whole fund vested in the trustees so as to be
available to satisfy his equitable interest when, and if, it falls into possession.
  The principle should not change just because of this
  The concept of bare commercial trust is problematic because there could still be
multiple beneficiaries in a commercial trust

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 The approach for commercial trusts
The approach we follow for bare commercial trust: we would (1) quantify the loss at the date
of judgment; (2) trustee is only liable for loss which, using hindsight in common sense, can be
seen to have been caused (but-for) by the breach.

 For surcharging on the basis of wilful default

 Traditionally, wilful default does not include deliberate breach of fiduciary duty, but since
Libertarian, deliberate breaches could also be wilful default.
 The type of breach is relevant in assessing causation:
(a) Duty of care: common law negligence
(b) Fiduciary duty/ deliberate breach: but-for causation + benefit of hindsight + common sense

 For direct equitable compensation

 This remedy is clearly only available for non-custodial fiduciaries.
 It is uncertain whether trustees in breach of fiduciary duties can do this. Libertarian suggests
that it can, but that might not be the norm.
 The type of breach is relevant, just like that mentioned in (same as) wilful default.

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 Topic 6_Proprietary remedy I: Tracing

1. Nature of tracing
 The starting point of this topic is to understand the scope of trust assets: it comprises not only
property that are held on trust initially, but also property that is obtained from the trust fund from
time to time, lawfully or unlawfully. The catch is very wide.
 Following is the track of the physical movement of an object (trust asset).
 Tracing is to follow the misappropriated property’s substitution to a different asset.
 It concerns change of form of the property.
 E.g., a vase is misappropriated and exchanged for money.
 Tracing and following can be combined.
 E.g., a vase is purchased by a purchaser who gave it to his son. The son exchanged the vase
for a watch with a bona fide purchaser. To claim the watch would be a combination of both
tracing and following.
 The doctrine of relativity of title: Armory v Delamirie
 Since the legal title is transferred by the trustee, the title a beneficiary has is an equitable title.
An equitable title loses to a legal title if the purchaser is an Equity’s Darling.
 If it is an equitable vs. equitable title case, then the first in time wins.
 The doctrine of relativity of title is that a person has title to a property only if he could prove
better title than his competitor.

 Procedure, not claim:

 Tracing and following are only procedures. They are not claims or remedies 47
 Before you start the trace, the claimant must raise a propriety claim. This is usually done by
claiming that there is a trust or a charge.
 Trust: beneficiary claims he has equitable ownership over that asset.
 Charge: charges are equitable (except created on land). A chargee (creditor) has an
equitable proprietary interest, constituted by a right to take and sell the asset in the event
of a default. Nonetheless, enforcement must be by court order.
 When is it better to claim a trust vs. a charge?
 If the value of the trust asset increases, go for constructive trust because you reap a
windfall from 100% ownership of an asset of increased value.
 If otherwise, go for a charge because your debt will be repaid in full. But if the
trustee has gone bankrupt, this might not help.
 A key case for tracing is Foskett v McKeown
 Tracing protects property rights quite aggressively
 It is only available in common law. Civil law jurisdictions have no tracing.
 It’s a protection of a particular form of wealth. But why do we protect property interest, but
not other interests, so aggressively?

47
Foskett v McKeown [2001]

121
2. The 3 requirements of equitable tracing
a) The need for a separate equitable title to the original trust asset

 Traditionally, this term is coined as the requirement of a “fiduciary relationship between

the claimant and the defendant”. Although it sounds different from “a separate equitable
title”, they are essentially the same thing:
 If there is a pre-existing trust, or where a CT or RT is imposed by law at which
moment the fiduciary relationship arises, this requirement is satisfied.
 A person who is a fiduciary and who misappropriates an asset holds it on constructive
trust, and satisfies the separate equitable title requirement.
 Therefore, when Lord Millett opposes to the requirement of fiduciary relationship in
Foskett v McKeown, he is opposing to separate equitable title.

 Re Diplock [1948] HL
Facts
 This case concerns a purported charitable trust in Australia.
 A solicitor was engaged to set up a charitable trust fund for a settlor. He drafted “for such
charitable institutions… charitable and benevolent objects as they in their absolute
discretion select.”
 The secretary mistyped “and” as “or”. Since “benevolent” is a wider concept than
“charitable”48 in UK trust law, this mistake made the trust fund not exclusively charitable.
 In UK, rules are strict that a trust to be a charitable it must be exclusively charitable. The
trust fund became void.
 By the time they discovered it, the trustee had already made distribution to charity. There
is an issue of tracing property through the charity.
 The next of kin of the settlor (deceased) sought to invalidate and trace the distributions.
 NB. This is not misappropriation, but mistaken payment. Anyway it is still an
unauthorized payment and the tracing procedures should be applicable.
Held
 Key principle: To invoke equitable tracing which is equity’s jurisdiction, claimants have
to show distinct equitable title and not just full title/ownership49
 Issue 1: was the distribution valid?
 Declared that the gift is void for uncertainty because it is possible to distribute to
non-charitable but benevolent objects (benevolent is wider than charitable)
 Issue 2: can he trace?
 The executors stood in a fiduciary relationship to the settlor’s estate.

48
For your reference only: there are 4 categories of charitable purpose: advancement of education, advancement
of religion, public benefit, and relief of poverty.
49
NB. There are 2 sets of tracing rules: tracing in equity and tracing in common law.

122
  Whilst there is no fiduciary relationship between the claimant and the donee charities,
it is sufficient that the fiduciary (executors) who passes the property was an
intermediary between the claimant and the defendant.

COMMENTARY
 The difficulty with this concerns thievery. When a thief steals from me, there is no trust.
The victim cannot go for proprietary tracing. The thief does not have an equitable title.
He has only a possessory title. One can only pursue common law tracing, which is very
limited.50
 Response 1: it is exactly for this reason that there are voices suggesting discarding
this requirement (Foskett v McKeown)
 Response 2: even for thievery case, there is separate title. "Chase Manhattan Bank
and Westdeutsche (obiter) suggested that a proprietary interest in the form of a
constructive trust can arise upon theft or fraud, creating a fiduciary relationship
between thief and true owner.

 Chase Manhattan v Israeli-British Bank [1981] Ch.

 For facts, please refer to topic 7. This is a mistaken payment case.
 The court held that CT arises ( trustee!  fiduciary relationship)
 The court has demonstrated a general willingness in finding the existence of a fiduciary
relationship, even going so far as to recognize relationships that did not exist at the time
of transfer.
 The purpose is to justify tracing. Similar tendency can be seen in El Ajou.

 Cf.: Foskett v McKeown [2001] HL

Obiter, per Lord Millett
 This requirement ought to be abolished.
 Justification: the difficulty mentioned above in the thievery case.
 Nonetheless, it does not go so far as to overrule it: Rimer J @ Shalson v Russo

 Cf.: Virgo
 Virgo has also commented that as long as there is mere equity, it is sufficient for
equitable tracing.

50
Common law tracing relies on the claimant’s legal title. Equitable tracing relies on the claimant’s equitable title.
Common law tracing is very limited because a legal title could be lost easier. It fails when the property has been
mixed with other property, the legal title has been transferred to the defendant or to further parties. It will also fail
when it changes in form.

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 b) Property remains identifiable

 I think, the first thing about this rule is that there must be a property. A service is not a property:
(1) If money is misappropriated and it generates more money  claim all those money!! $.$
(2) If money is misappropriated to buy a property  claim that property
(3) If money is misappropriated to pay for a service/extinguish a debt  no property 

 There are a lot of presumptions to overcome evidential difficulty for this requirement
 These rules are, apparently, against trustees.
 Consider the following situations:
(1) Clean substitutions
 Meaning that substitutions are clean, traceable and not mixed – no difficulty

(2) Mixed substitutions not in a running bank account

 Where the trust property has been mixed with other property, but the mixing does not take place
in a running bank account.
Case 1: mixed with property of innocent party
 E.g., trustee misapplied $2 from one trust and $2 from another, and bought a bottle of water at $4.
 The assumption is that there is a proportionate share (pro rata) share between two innocent
parties. The court will declare a constructive trust.
 They are equitable owners in common of the property.
Case 2: mixed with property of trustee
 Foskett v McKeown [2001] HL
 “Where a trustee wrongfully uses trust money to provide part of the cost of acquiring an
asset, the beneficiary is entitled at his option either to claim a proportionate share of the
asset (trust) or to enforce a lien (or charge) upon it to secure his personal claim against the
trustee for the amount of the misapplied money”

(3) Mixed substitution (of money) in a running bank account with trustee’s assets
 Re Hallett’s Estate (1880) Ch.
Facts
 The trust fund has been put into the bank account ($100). The next deposit is the trustee’s
own money ($100).
 Then, there was withdrawal of $150 and dissipated. The balance is $50.
Issue
 Whose money was drawn out? Whose money remains?
Held
 The rule in Clayton is first-in, first-out. This is not followed.
 Trustees are presumed to act lawfully . If money is withdrawn, the presumption is hence he
withdrew his own money first.
 The remaining money in the bank account therefore goes to the claimant.
COMMENTARY
 Ultimately, it’s a policy decision – losses should be attributed to the trustee.
 This case must be compared side-to-side with Re Oatway

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  Re Oatway [1903] Ch.
Facts
 The trust fund has been put into the bank account ($100). The next deposit is the
trustee’s own money ($100).
 This is followed by a withdrawal of $100 and investment made profitably to
$200.
 The balance in the account was dissipated and becomes $0.
Held
 The fund first withdrawn was the trust’s money.
 The sequence of the payment is unimportant. The trustee should not have
benefitted. The underlying principle is that a trustee should not steal property,
and if he does, the court will infer all evidentiary gaps against him.
 Of course, this presumption is rebuttable.

Conclusion
 Cite both Re Hallett and Re Oatway for the presumption of court’s position against trustees. You
need to be flexible; try to manipulate the rules; use Hallett or Oatway to suit your needs.
 A few distinctions could be made though. First, whether the money withdrawn or dissipated made
a gain or the loss? Second, whether the claimant is seeking to claim the asset which remains in the
trust or the asset which is dissipated?
A further question:
 If there are multiple dissipations, some leading to gains and others to losses, can the court apply Re
Hallett principles for the losses-disbursements and Re Oatway principles for the gains-
disbursements?
 The law is unclear. I’d suggest it can, since as Hallett and Oatway does not present consistent
principles, and the only clear position is that the law is against trustees, then it should be the law.

 But both of these cases involve extremity: if the court attributes money to one party,
the other party will be left with no remedy. What if after the profit, there is still a
positive balance in the account that is sufficient to make good the trust fund?

Turner v Jacob [2006] HC

Facts
 Mother held some money on trust for the daughter.
 The mother paid the trust money to buy a house which went up in value, but she
replaced the trust fund with money, remedying the breach.
 Daughter wished to trace her money into the house that had gone up in value,
while at the same time keeping money on account, viz. double recovery.
Held
 Neither Re Hallett nor Re Oatway would apply.
 If the balance is already sufficient to compensate the beneficiary, he should be
confined to that balance in the account. The court would not go so far as to
attribute all windfall to the beneficiary/trust.

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126
 Application
 It is likely that the case is limited to its own facts. So far, this is the only case on
this point.
 Against: Shalson v Russo: suggests that the beneficiary is free to cherry-pick.
The beneficiary might be able to choose which asset to take, bank account
money or the traced assets, where the contest is only between the beneficiary and
the wrongdoer.
 This is consistent with Foskett: the beneficiary can claim the windfall, not
confined to the lower balance.
 For: Turner: if creditors are involved, beneficiary must take what is in the
account.
 For: Besides, wrongdoers should not take advantage of uncertainty.

 The general principal above is subject to the lowest intermediate balance rule.
Roscoe v Winder [1915] Ch.
Facts
 $455 was deposited into the bank account $430 was withdrawn. The balance was
$25 (a low intermediate point).
 Another $300 was deposited. The balance went up to $358.
Issue
 When the beneficiary tried to trace; should he recover from $25 or $358?
Held
 Once funds have been drawn out of an account, any subsequent payments into it
cannot be treated as trust property unless the trustee shows a clear intention that
it is e.g. borrowing trust money for a period with intention to pay it back as soon
as he gets more money. Claimant cannot claim charge over these monies.
 NB. Supposedly, Turner is not caught under this rule because the money was
intended to replenish the trust.
 Reason: the fund has been exhausted to that low level when it did. The court
cannot be sure whether the subsequent deposit is to replenish the trust fund.
There is no proof of intention for that. For the subsequent deposit, we need to
protect third party creditors.

Bishopsgate Investment Management v Homan [1995] Ch.

 Affirmed the rule in Roscoe v Winder

COMMENTARY
 Should it not be presumed that money deposited into the money is to restore the
trust funds, as a trustee should act in his utmost good faith?
 Response 1: this is nonsense. There is no such presumption that a trustee
should make good the trust fund with his own money when the trust asset
decreases in value.

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  Response 2: such presumption arises only when there is evidential
uncertainty. In most cases, there is no evidential difficulty that the monies are
deposited for trustee’s private purpose

(4) Mixed substitution (of money) in a running bank account with an innocent voluntary or
beneficiary’s asset
 The general rule is first-in, first-out.
Re Clayton’s case
 This case held that the money first drawn would be the money first deposited.

 NB. The Clayton rule is applied in a mixture of funds from innocent parties’
context. If the Oatway and Harlett fact pattern, Clayton should not be applied in
the first place.

 The difficulty with the first-in, first-out rule is that what an innocent party can get
depends on when the payment was made.
 E.g., 3 contributors: part A put in $100, followed by party B, $100, and
party C, $100. Then, $200 is withdrawn. C could recover in full; A & B gets
nothing.

 To mitigate such harshness, the Clayton rule is overruled.

Barlow Clowes International v Vaughan [1992] UKCA
Facts
 This case concerns a unit trust.51
Held
 Clayton is outdated and inappropriate. It could lead to injustice. If parties pool
funds together, the inference of intention is that they intend to share the risk
together. No way to do FIFO.
 There are 2 alternative ways to Clayton’s rule:
(i) Simple pro rata: but this might not be fair, because a person may be lucky
and withdraw one day before the fund goes bankrupt, while other people
remains uncompensated;
(ii) The American rolling charge method: each time when money is put in, at
that point, you share pro rata; for every next withdrawal or deposit, you also
share pro rata. The advantage of this is the accuracy in reflecting how much
money actually belongs to each of the B. But it could get mathematically
complicated.
 The American rolling charge method is too complicated and not applied.
  Adopted the simple pro rata rule.

COMMENTARY
 This case is not entirely satisfactory.
51
A fund which pools money from many people to make investments.

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  What if parties are just victims to a misappropriated fund? There is no “inference
of intention to share risks” and this case does not solve the problem. The
challenge to Clayton is insufficient.
 But this case is supported by cases below.

 Supported by
Russell-Cooke Trust Co v Prentis and others (no.1) [2003]
 If Clayton rule caused injustice, it won’t be followed.
 On the facts, no particular order in which money was paid in and out can be
found on examination of the actual sequence. So we cannot say that Clayton’s
case should apply. In that scenario, Clayton’s case was displaced.

Commerzbank AG v IMB morgan plc and others [2005]

 If Clayton rule caused injustice, it won’t be followed.
 Impractical and injustice to apply Clayton case because in the nature of the
corresponding bank account, the debit is not necessarily in accordance with the
payment out.

COMMENTARY
 Both cases: problems with account  Clayton rule is displaced
 NB. All these cases are unit trust cases.

(5) Tracing into property acquired before the trust property is received (backward tracing)
 Scenario: trustee incurred a debt/overdraft to buy asset, and misappropriates trust
funds to pay for debt. E.g. buying on creditmisappropriate trust fundpay the debt
 Difficulties of backward tracing – why were the courts so unwilling?
(1) The chronological reason. By principle, tracing requires substitution and it is
against principle to do backward tracing.
(2) In debt/ overdraft cases, when the wrongdoer first expends on credit, the right
created was a chose in action. Later, when he withdraws the money to repay the
debt, the right extinguishes. There is no property on which the beneficiary could
base on. Furthermore, other parties involved, e.g., bank or Credit Card Company
would be Equity’s Darling against whom one cannot pursue their claim.
(3) Policy reasons: creditors need protection as much as beneficiaries.

 The orthodox position is that backward tracing is impossible

Bishopsgate Investment Management Ltd v Homan [1994] UKCA
Facts
 Trustee misappropriated a pension fund to pay an overdraft (a debt).
Held, per Leggatt LJ
 The misappropriated money was paid into an overdrawn account. At that point
the mixed fund was exhausted. Unless there was evidence that payments were
made to the overdrawn account with the intention of benefiting the trust fund

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 from which monies had been withdrawn, which in the trustee’s case appeared
highly unlikely, no equitable charge could be imputed against the credit balance.
Held, per Dillon LJ (dissenting)
 It is at least arguable that where you incur an overdraft in order to buy an asset,
(i) at the time you obtain the overdraft you intend to pay the overdraft with
misappropriated trust money, or
(ii) if trust money is used to pay overdraft facility with a view to make the
overdraft available to buy some assets
 If there is a sufficient connection between the misappropriation and the
acquisition, it should be allowed.
 The sufficient connection – if you incur a debt with the intention to repay it, or
obtain an overdraft with an intention to pay it from the misappropriated trust,
then he found that the sufficient connection could be established.
 In other words, the key to his test is the finding of the intention at the time of the
incurrence of the debt, then there will be sufficient connection that justifies
backward tracing.
Henry LJ agreed with both.

 There are some judicial opinions against it.

Foskett v Mckeown [1998] CA
 Dictum, per Scott VC: do not think the mere fact that the asset was bought before
misappropriation is fatal. If there is clear intention to use the trust fund to pay
for the debt, it seems arguable

Federal Republic of Brazil & the Municipality of Sao Paulo v Durant International
Corporation and Kildare Finance Limited [2013] (Royal Court of Jersey)
 Backward tracing is possible in theory.
 Backward tracing should be allowed so long as there is a clear link of debit and
credit.

 But one should now see the latest authority on this

Relfo Limited (in liquidation) v Varsani [2014] UKCA
Facts
 A director stole money from his company. He engaged some black market
money launderers to do that for him.
 First, he transferred the money to a company called Mirren. One day later, the
same amount was transferred to a third party, a very obscure company (money
launderers), and then to his friend’s account, less 1 million (which was supposed
to be commission).
 Such transfer cannot be traced because it was not done by banks. All in all, some
money suddenly appeared after some undiscovered transfers and went to the
friend.
Held, per Arden LJ

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  An identified, chronological tracing was not possible in this case. Although one
may pursue in personam claims because of knowing receipt, in order to pursue
the claim one will still need to prove traceable property.
(1) It does not matter that there are evidential tracing gaps. The court will infer
from the facts whether the ultimate payment comes from the initial trust
fund. Step-by-step inference is unnecessary.
- Inference drawn here: there was only 1 day’s lapse between withdrawal
of money and the receipt; the money withdrawn and received were
similar in amount, the shortfall should just be commission for money
launderers.
- Intention is a relevant consideration, but Arden LJ did not mention to
what extent it is relevant.
(2) It was not necessary to have a chronological order.

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 COMMENTARY (Bishopsgate, Foskett, Brazil, Relfo)
 The most prominent case in this area of law is undoubtedly Bishopsgate, which is
against backward tracing. But even this case is not strong because of Dillon LJ’s
powerful dissent, followed by dictum in Foskett and Brazill.
 What is clear from the line of cases following the dissent of Dillon LJ is that a
link between the incurrence of debt and the misappropriation of asset is required.
A good link would be intention.
 Relfo, however, is not a very clear case on backward tracing. Its facts concern
“unidentifiable steps in forward tracing”. Hence, they are only obiter.
 Arden LJ did not clarify as to the requirement of intention. She simply said it was
a relevant factor to fill the evidentiary gap. She didn’t say whether it was
necessary or not. So there is a room of uncertainty there. But it was fair for her to
stay there because of the facts of the case.
 Probably, they do require a clear intention on the part of the trustee at the
time of incurring the debt that they had wanted to use the trust fund to pay
for it. That is a threshold that needs to be satisfied. Relfo itself does not fully
suggest that one can relax that requirement.
 In the end of the day, I think it really is a matter of evidence whether such
intention could be found.
 But this would present huge problem because in ordinary commercial
transactions, we won’t think about the trust first when we pay on credit. It is
only when we will need to repay for the credit would we think about getting
some money from the trust. Then it is likely that the intention could never be
satisfied.
 Arden LJ commented that chronology is not necessary. Then, at least Leggatt
LJ’s first opinion (the requirement of chronological order) could be disregarded.

Arguments for backward tracing

 An everyday example would be that you pay credit card first, and when the credit
card bill comes, you misappropriate some trust money. It makes great
commercial sense because if backward tracing is not allowed, trustees can easily
avoid duty by paying with credit card.

Arguments against backward tracing

 The 3 reasons mentioned above: chronological order, extinguish debts, policy
reasons.
 Nonetheless, the chronological order could be overcome. It is just technicality.
This is the easiest to overcome.
 Policy reasons (unfair to other general creditors) could be overcome in cases
where there are no general creditors.
 But it is extremely hard to overcome the debts argument:
(1) A person cannot trace into a service, because it is not a property
(2) A person cannot trace into a good, because the person who buys the good is
usually a bona fide purchaser

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 (3) A person cannot trace into the chose in action, because it is extinguished.
 As regards (3), while it could be argued that equity might be able to resurrect a
debt/ keep a debt alive, it is unclear how this could be done. The property in
question is the chose in action. It is impossible for the court to claim from the
bank to repay for a chose in action. Even if the court allows this in terms of
monetary compensation, it would be unfair to the bank, and against the principle
that whoever holds currency is its owner.
 Furthermore, it is hard to say the wrongful fiduciary was using the trust’s money.
The reality must be that he exchanged money with this chose in action, and
purchased with the loan money. Even he had the intention to misappropriate the
fund to later repay the debt, this does not make his misappropriation the trust’s
money.
 Lastly, there would be great evidential burden to overcome to prove the trustee’s
intention.
 For these reasons I am against backward tracing.

Some other arguments

For Against
Smith: Law of Tracing Conaglen (read 448-455)
- Buy on credit is part of commercial life - Point of authority

- More realistic approach (policy concern)  Authorities supporting backward

tracing are obiter
- The obstacle to backward tracing is that if
you pay a debt your right is extinguished, but - Policy
actually we can see it as a delay of payment
 Supporting backward tracing is just
of the price.
based on intuition that it is not fair.
- Allow tracing
 Should not overlook the technicality
L Ho
- Equity has been willing to compromise the strict evidential requirement to reach a fair result

- If you are the person who creates evidential ambiguity, the court can resolve it against him.

- Armory v Delamirie

 Held: if it is because of the wrongdoer’s own doing of failing to produce the stone in trial,
the court will resolve the evidential gap against the wrongdoer.

- These rules are tool for court to attribute losses.

- L Ho: Conaglen’s view is less persuasive since it only looks at technicality.

Ken
- Can have backward tracing

- Tracing is about eventual connection between the original asset and the substitute asset.

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 - So long as you can show a sufficient degree of connection, cannot see why you can’t have
backward tracing.

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 c) Unable to rely on defences
 Possible defences include:
(1) Bona fide purchaser for value without notice (Equity’s Darling)
(2) Inequitable to trace
Re Diplock [1948] Ch.
 Facts: distribution has been made to charity. The charity has used the payment to
renovate the premises.
 Held:
 There was indeed a breach of trust, but it would be inequitable to trace.
 When the charity innocently relied on that they have extra money and spent part
of the money which they otherwise would not have spent and which could not
be turned back, to require them to repay for the full amount would mean a loss to
them.
 It is different if the charity has just received a gift because the charity can then be
asked to return the asset, or some funds which has not been spent, or anything
that could be returned.

 Change of position
 We cannot be sure whether this is recognized as a defence yet.

 Before we start, learn a little history:

 Development of change of position occurred outside the context of equitable
tracing. It occurred in common law tracing. But they are closely relevant. Change of
position is also relevant to unjust enrichment.
 The law was around for a long time, e.g., quantam valebat, quantam meruit.
 In cases of mistaken payment, the principle relied by the courts used to be
indebidatus assumpsit – implied contract to return the payment. But this is
apparently wrong because there was no such intention to create contract. Very often,
the payment was made unknowingly.
 In 1960s, Goff wrote Goff & Jones, formally introducing the concept of unjust
enrichment.
 The idea is thus: when a recipient received money which he is not entitled to keep,
he should restore it. That’s a prima facie right. The right is not based on
wrongdoing. But if the recipient discovered that he had enough money and paid it
for something, and the payor comes and asked for money, that would be inequitable
to ask for a return would mean a loss to the payee.
 There are 4 sources of law in private law: tort, contract, equity, and unjust
enrichment is coming as the 4th.

Lipkin Gorman v Karpnale Ltd [1991]

Facts
 A person had gambling habits. He stole money from his clients and went to gamble
regularly.

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  Over the years, he had placed bets; sometimes he wins; sometimes he loses. Overall,
he made a net loss.
 The question is when the clients are able to trace the money into the casino because
they were able to show that the bets placed were actually the clients’ money.
 The issue was, when one traces and requires the casino to pay, should the casino pay
for the gross value, or net value won by the casino?

Held, per Lord Goff

 The defence of bona fide purchaser does not apply because it was a casino. Gaming
contracts were illegal. But the casino was innocent and relied on the fact that they
were entitled to the money and paid out his winnings.
 Lord Goff introduced “bona fide change of position”.
 The defence is available to a person whose position has so changed that it would be
inequitable in all the circumstances to require him to make restitution, or alternatively
to make restitution in full.
 NB. This rule is widely recognized throughout the common law world, but not
readily in equity.

DISCUSSION
 Is Re Diplock actually a case of change of position?
 There is no legal answer on this yet.
 I think it is. The reasoning in that case was that the charity innocently relied on
the position and spent the money. The position has changed, and if you require
him to restore the position, it would be inequitable.
 But the matter is not that simple. The more profound underlying argument is
the great debate between vindication of property right vs. unjust enrichment.
 The majority in Foskett v McKeown suggested that tracing was part of the law of
property, considerations of unjust enrichment were irrelevant in determining the
extent of the plaintiff’s right. Lord Millett, in particular, suggested that the
change of position defence would not be available in the context of proprietary
claims made in respect of traceable proceeds (obiter).

 Was change of position recognized in equitable tracing? Two views:

(i) Yes! Reversal of unjust enrichment (Peter Birks)
 Equitable tracing is based on law of unjust enrichment. The recipient is
someone who, when receiving property, has no legal justification to retain it,
therefore unjustly enriched. Tracing is just an evidential process.
 Reason 1: rights to property can only be generated by events. The events
could be by consensus (express trust), wrongdoing (unconscionableness 
CT), or unjust enrichment. Property right does not generate remedies because
it is a response, rather than an event or cause which generates remedy.
 Reason 2: unjust enrichment is very often the causative event to which the
property right responds.

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 Problems
 A defendant is never legally enriched by taking possession of an asset
belonging to the claimant in circumstances in which specific remedies are
available to provide for its recovery; for, such remedies reflect a
determination that the asset in question never forms part of the defendant’s
wealth. (Swadling)
 Response:
o This is only true it is impossible to envisage property rights that have the
effect of reversing unjust enrichment. But this is often possible where the
property rights is created by law, as opposed to existing property rights
(Goff and Jones). There are equitable interests created de novo.
o But Goff and Jones seems to suggest that existing property rights is a
matter of property law but new property rights created is a matter of
unjust enrichment.
o Counter-response: nonetheless, the creation of de novo rights is perhaps
not “vindication” of property rights. The argument is perhaps out of
focus.

 Once it has been shown that the defendant has received or retained property
in which the plaintiff has a proprietary interest, then nothing needs to be
proved to establish the plaintiff’s cause of action (Virgo).
o Unjust enrichment needs to show causation, but this is not required in
equity tracing.

(ii) No! Vindication of property rights? (Virgo, Foskett)

 “The law of unjust enrichment and the law of property … are totally distinct.
This is because the recognition and creation of property rights is a matter for
the law of property and has nothing to do with the unjust enrichment
principle.”
 Equitable tracing is part of property law but not part of unjust enrichment
law.
 Unjust enrichment has no role in proprietary claims and remedies, regardless
of how property rights in question came into existence.
 This view receives judicial support: Foskett v McKeown (below).

 His argument relied also on the state of judicial analysis. He said that none of
the cases requires the plaintiff to establish specifically that the defendant has
been unjustly enriched at the expense of the plaintiff.

Problems
 The reliance on the status of judicial position is empirically wrong. There are
cases which analyze the acquisition of proprietary rights by subrogation in
terms of unjust enrichment.

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  Furthermore, Chase Manhattan required the plaintiff to establish nothing
beyond the facts that give rise to a personal claim that we would now
describe on as based on unjust enrichment.

Foskett v McKeown
Facts
 The beneficiaries contributed towards an investment common fund, but the trustee
misappropriated the trust fund to pay for premium of life insurance.
 Two premiums were paid entirely by misappropriated fund.
 Trustee later killed himself so there is a huge death benefit to his children. If trace in
proportion, a small amount of fund was used to pay the premium, but it yields a large
profit.
Issue:
 Could the beneficiaries of the trust fund trace through the insurance policy into the
benefits?
 Note that children and wife are not bona fide purchasers.
 The more difficult issue is how much they can claim. Are they limited to the amount
that was paid into it? Or the death benefits?
 If a person supports that tracing is based on unjust enrichment, then trustees
could only claim for the amount they have lost. A payor is entitled only to the
amount he lost in unjust enrichment and is not entitled to windfall.
 If the proprietary right argument is supported, then the death benefits could be
traced into. By proprietary claim, the claimant has a % interest in the property,
and they just share pro rata. Windfall is an irrelevant consideration.
Held, Lords Millett, Browne-Wilkinson and Hoffmann
 This is not about unjust enrichment. This concerns hard-nosed equity rights. The case
falls entirely in the law of property.
 Allow for a pro rata share of the death benefit and held that the beneficiary is not just
limited to a charge.
 Argument was that once you attribute the payment toward the benefit, we will accept
the consequence of it.
 Rejected argument that, but-for the payment, the insurance policy would have gone
anyway. The law lords put aside the argument of causation.
 Judicial precedence in favour of the principle of unjust enrichment has no part to pay
in equitable tracing.

COMMENTARY
 It is an error for the court to suggest that unjust enrichment and proprietary rights are
exclusive positions. That tracing is part of the law of property and has nothing to do
with unjust enrichment is not necessarily true.

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 Conclusion
 Foskett: when you trace equitably, the B is not limited to the recovery of the
amount that they lost, even against innocent recipient. They can enjoy a pro rata
share with them.
 But this sits uncomfortably with Lipkin Gorman.
 Nonetheless, tracing in Lipkin Gorman was common law tracing.
 Therefore, authorities seemed to have suggested that common law tracing 
unjust enrichment; equitable tracing  proprietary rights
 But that cannot be right because the distinction between common law and
equitable law was just a separation of courts. Development of law should not
differ.

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 Topic 7_Proprietary Remedy II: RT and CT

1. Introduction
 Resulting and constructive trusts are created by events other than an intention to create a trust.
 They are therefore sometimes called trusts arising by operation of law.
 But as you will notice later, the intentions of parties are still relevant in this context.
 The benefit of having implied trust is that there is no need for formalities.
 E.g., land, no need for writing under CPO. Give vulnerable party a lot of protection.
 Neither does it need to be registered too, unlike a charge.
 Trusts are usually argued in insolvency cases to improve remedy.
 What we will look at here would be whether they are justified or not.

2. Traditional categories of resulting trusts

 “Resulting” comes from the Latin Resalire, means “jumping back”. An RT is one where the
interest in the trust assets jump back to the person who provided trust assets to the trustee.
 Two types of resulting trusts are traditionally recognized

 Vandervell v IRC [1967]

Facts
 Settlor wanted to save stamp duty. He did not want the remainder of the property to result to
him because it rendered him liable to the tax he sought to avoid. He does not want an RT.
Held
 Automatic RT is imposed; it can be imposed irrespective of the intention of the settlor.

 Re Vandervell’s Trusts (No.2) [1974]

Held, per Megarry J
 There are 2 categories of resulting trust:
(1) Automatic RT is created either by
(a) Initial failure – Where the settlor made a transfer on express trust but fails.
 [Recall (topic 2)]: upon failure of certainty of subject and object, while the
property has been transferred, it does not become an absolute gift. The equitable
title “jumps back” to the settlor. An RT arises and the settlor becomes the
beneficiary of the RT.
(b) Subsequent failure - When a settlor has established a valid express trust but that trust
failed to exhaust the trust fund i.e. it got residue/surplus trust fund. (Non-exhaustion
of the trust fund)
 E.g. Disaster fund – people donate for a specific purpose and there is a surplus
money. Unless it can be shown that the settlor has abandoned, the surplus fund
ought to go back to the settlor.
 These trusts do not depend on any intention/ presumed intention, but an
automatic consequence of the transferor’s failure to dispose of the interest

(2) Presumed (intention) RT (apparent gifts)

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  There was a voluntary transfer of property (viz. for no consideration + not on trust).
It is presumed that the transferee held the property on trust for the transferor, unless it
can be shown that the transferor intended a gift.52
 NB. Such intention could be a presumed intention, e.g., presumption of
advancement, which however is rebuttable. It rebuts the presumption of resulting
trust.

3. Explaining resulting trusts

 Lord Browne-Wilkinson in Westdeutsche [1996]

 He agreed there were 2 categories of resulting trusts, namely
(1) where A makes a voluntary payment to B or pays (wholly or in part) for the purchase of
property which is vested either in B alone or in the joint names of A and B.
  there is a presumption that A did not intend to make a gift to B. But this is only a
presumption and can be easily rebutted.
(2) where A transfers property to B on express trusts, but the trusts declared do not exhaust the
whole beneficial interest,
 But he believed that both classes involves a presumption of intent.
 “Both types of RT are traditionally regarded as examples of trusts giving effect to the
common intention of the parties. A resulting trust is not imposed by law against the
intentions of the trustee (as is a constructive trust) but gives effect to his presumed intention.”
 NB. It may sound very strange that there is any positive intention to create a trust in case (1),
but bear in mind that intention can be presumed, so his argument could be valid.
 He disagreed with Megarry J’s view on automatic RTs
 Megarry J said automatic RTs do not depend on intention but operates automatically. “I am
not convinced that this is right. If the settlor has expressly or by necessary implication
abandoned any beneficial interest in the trust property, there is no RT. The undisposed-of
equitable interest vests in the Crown as bona vacantia.”
 NB. Lord Browne-Wilkinson is a minority.

Pinpointing LBW’s theory:

 Resulting trust arises as giving effect to the common intention of the parties.
 Constructive trust arises as a result of affected conscience/ unconscionability (see below).

But let us put this aside, /

 And consider 2 questions about intention.
 The following is best understood in the context of presumed RT (orthodox Vandervall formulation):

 Question 1: what is the required intention?

 Intention to create a trust (Lord Browne-Wilkinson)
 Theory: RT arises from a positive intention (actual or presumed) to create a trust.

52
Recall topic 1 maxims: equity is cynical. When a person transfers a gift, equity presumes that it is not a gift.
Equity does not assist a volunteer – the donee would lose in equity.

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  Problem: it cannot account for cases in which RT has been imposed, but it is clear that X had
no intention that Y be his trustee, or even that X intended Y not to be his trustee. In
Vandervall v IRC, there is no room for a presumption where all the facts have been proved by
evidence, and it is clear that the donor does not want to create a trust for himself.

 Absence of intention to benefit (Peter Birks and Robert Chambers)

 Theory: RT is not imposed in response to an intention (actual or presumed) to create a trust,
but in response to the fact that the transferor did not intend to make a gift.
 Vandervell can be analyzed as such that although he did not wish the share option to
result to him, he did not wish to make an outright gift of it to the trustee company either.
 Reasoning: gratuitous transfer are apparent gifts. But equity tends to be suspicious of gifts
(equity is cynical), and presumes that such apparent gifts are not gifts. This leads to the
conclusion that the beneficial interest is not passed, which triggers a separation of beneficial
and legal title. A resulting trust there arises.

Criticism
 On the reasoning process:
(1) First, gratuitous transfers outside the relationships of advancement (husband and wife,
father and daughter etc.) are not “apparent gifts”, only ambiguous transfers.
(2) Suspicions are not the same things as presumptions, and in any case, equity is not
“suspicious” of gifts.
(3) It is not possible for equity to presume” that “apparent” gifts are not gifts, for “not-gift” is
at best a legal conclusion from proved facts, not a fact in itself.
(4) A “presumption” of “non-gift” cannot be a “presumption” of “non-beneficial transfer” for
the law does not recognize a notion of non-beneficial transfer distinct from transfers on
declared trusts or as security.
 NB. I consider this the strongest opposition. There are 2 points: first, a person who
has a full title to an asset does not mean he has both legal title and equitable title in
the asset. He only has one single unitary title. When he creates a trust, a new legal
title is created on the trustee and a new equitable title on the beneficiary. This sounds
legitimate to me.
 Second, “retention of beneficial interest” is inconsistent with the concept of RT. As
resulting means "jump back”, it is clearly not retention, unless this interpretation of
RT is really a re-interpretation. And, apparently, the jump back concept is more
consistent with the unitary title idea mentioned above (Siu, 2015 lol).
 Third, the causal relationship is reversed. A trust does not arise from a separation of
equitable and legal interests. Rather, it is upon the creation of a trust does the
equitable proprietary right arise. As LBW has mentioned (Westdetusche), a
separation does not necessarily imply a trust (e.g., mortgage, charges, etc.)
(5) There is no satisfactory explanation was given as to why, assuming there is such a thing
as a “non-beneficial transfer”, the law should respond to its “proof” by the raising of a
trust for the transferor.
 In simple words, it is unclear why a presumption of a non-beneficial transfer could be
the explanation of a presumed resulting trust.

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 Judicial Support
 Despite the criticisms, this theory gains support from Lord Millett
 Air Jamaica v Charlton, per Lord Millett
 Resulting trusts arises whether or not the transferor intended to retain a beneficial
interest - he almost always does not - since it responds to the absence of any
intention on his part to pass a beneficial interest to the recipient.
 RTs were intended to fill in the gap left by a veiled transfer, obeying the equitable
maxim that "equity will not suffer a wrong to be without a remedy".

 Problems with Air Jamaica

 Air Jamaica is a case of failed trust RT (automatic resulting trust)  it says nothing
of the content of the presumption operating in the other types of resulting trust

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 Question 2: whose intention is relevant?
 This question follows the above. A conclusion in question 1 is likely to answer question 2.

(1) The common intention is relevant

 This is Lord Browne-Wilkinson’s view: if it is a positive intention to create a trust, then
common intention must be relevant because a person cannot be subject to a trustee’s duties
had he not have the intention.

(2) Only the transferor’s intention is relevant

 If RTs respond only to a transferor’s lack of intention to benefit the trustee, then the common
intention argument must be denied.
 Argument: Lord BW confused resulting trusts with common intention constructive trusts,
and his view is inconsistent with cases where resulting trusts were imposed on property held
by transferees who had no intention of becoming trustees, e.g., a legally incapable trustee.

A summary?
 Which is the better theory to follow?
 There are 2 schools of thought. For the more conventional school, it’s Lord Browne-Wilkinson
and W Swadling. The other school comprises Peter Birks, Robert Chambers, Sir Peter Millett
etc.
 It appears to me that the only opposition to Lord Browne-Wilkinson’s theory is that his
formulation cannot explain Vandervall v IRC, in which it is very clear that he had no positive
intention to create a trust. And of course he cannot, because Vandervall concerns automatic
RT.
 Therefore, while the jurisprudential basis of LBW’s argument is strong, it is capable of
explaining presumed RT only.

The law – a quick takeaway

 The law which gives rise to resulting trust remains to be the Vandervall scenarios. Despite old,
it is still very good law.
 While LBW says automatic RTs depends on intention, it is only dictum in Westdeutsche. But it
is unclear whether courts should follow this approach.
 For presumed RTs, it is better to follow LBW’s argument in Westdeutsche that it is the mutual
intention that is required and it is an intention to create a positive trust, for the oppositions to
the “retention” theory mentioned above.

4. Expansion of categories?
 From the above cases, what we see is that a proprietary remedy would arise where property right
is affected. Property right in the above cases because property is transferred. It also happens when
a property is misappropriated.
 NB. You should also be able to recognize that the fact patterns which give rise to proprietary
remedy is entirely different from that of personal remedy. For personal remedy, whether it is
a breach of trust or breach of fiduciary matters a lot in considering causation. For proprietary
remedy, whether it arises depends on the fact patterns.

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  But proprietary remedy may also be expanded to cases where property right is not affected. For
resulting trusts,
 There are 2 examples of such expansion. Ask yourself: do they fit into the traditional categories?
(1) Quistclose trust (part A below)
(2) Using trust to give proprietary remedy to the restitution of unjust enrichment.

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Part A: Quistclose trusts

1. The puzzle of the Quistclose trust

 The Quistclose trust concerns money transferred to a transferee on the condition that it must be
used for a specified purpose, if otherwise the money must be returned to the transferor.

The cases
 Barclays Bank v Quistclose Investments [1970] HL
Facts
 Quistclose (lender) advanced a loan to a company called Rolls Razor (borrower), on the
condition that the latter can pay dividends to its shareholders.
 Loan monies were also deposited in a separate bank account with Barclays Bank (third party).
Barclays knew this arrangement.
 Rolls Razor also had an overdraft account with Barclays. When Rolls Razor went into
liquidation, Barclays wanted to use the funds in the bank account to pay for the overdraft
facility which RR used.
 Quistclose argued that this money was held on trust. Barclays knowing the arrangement is not
a bona fide purchaser.
Held, per Lord Wilberforce
 “The arrangements of this character for the payment of a person’s creditors by a third person
gives rise to a relationship of fiduciary character of a trust, in favour of the transferor."
 The “arrangements of the character for payment” = “The (1) mutual intention of the
respondents and Rolls Razor Ltd, and the essence of the bargain, was that the (2 ) sum
advanced should not become part of the assets of Rolls Razor Ltd, but should be used
exclusively for the payment of a particular class of its creditors, namely, those entitled to
the dividend.”
 Segregation of property would be evidence of intention that it was not at free disposal
of the transferee. This is the essence of a trust relationship.
 Not necessarily physical segregation, but intention to segregate the trust fund from
the general fund
 A Quistclose trust is established as thus:
(1) The loan had created a primary trust (express trust) in favor of the creditors who were
owed dividends, with an equitable right for the lender to ensure that the money was
applied for the purpose of paying these creditors.
(2) If the purpose (pay to dividends) was indeed fulfilled, the court thought that at the second
stage, the party’s relationship could revert to an ordinary contractual relationship.
(3) If the primary purpose failed, a secondary trust arises that the money would be held on
for the lender if it had been agreed expressly or impliedly. Otherwise, it would be
confined to its personal remedy for recovery of the loan from the borrower.
 Applying to the facts,
 The parties had intended to create a trust for the lender if the dividend was not paid.
 The bank was bound by it because it had notice of the primary trust because it knew that
the money was paid for a purpose to benefit 3rd parties rather than the borrower.
 Policy reason

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  Money that was paid for a particular purpose should not be available for the borrower’s
general creditors whom the lender had not intended to benefit.
 It is possible that we can have both a contract and a trust. But even this is not contrary to the
position that a contract and a trust cannot co-exist. There is no situation in which a purpose is
both fulfilled and unfulfilled.

COMMENTARY
Virgo’s formulation
 The money lent to the borrower was intended to be held on an express trust because the
money was not at the free disposal of the borrower.
 The Court identified that the purpose was to pay dividends so it is one that benefited
particular individuals and the creditors could enforce the trust.
 Once the borrower had become insolvent, the purpose trust could not be performed. At this
point, the express trust would have failed and the money would be held on RT for the lender.
 Clearly, the lender could not have retained any beneficial interest in the money once the
express trust was up and running, but that would not prevent a beneficial interest springing
back to the lender once the trust had failed subsequently.
 [NB. This is consistent with the structure of Lord Wilberforce’s analysis in Quistclose. It
is not contradicted by anything said by Lord Millett in Twinsectra, and is consistent with
the basic principles of RT (automatic trust (Vandervall)).]
 [NB. The difficulty with this argument is that it is unclear whether such express trust is
personal or purposive in nature. 53 It could be a trust for the beneficiaries, or a trust for a
purpose (distribute dividends). But both views have problems:
(1) Private purpose trusts are unenforceable. 54
(2) If it is a personal trust, beneficiaries could enforce a personal trust under Saunders v
Vautier absolutely, but allowing beneficiaries to ask for their dividends by way of S v
V is definitely not Lord Wilberforce’s intention.

Hudson
 The problem with this analysis is that the resulting trust comes in too late. If a resulting trust
arises only when the money is used for another purpose or insolvency, the equitable interest
only comes after the money is misused or the company is insolvent.

53
Only an express trust has such distinction. RT and CT are normally personal trusts.
54
Private purpose trusts are unenforceable because purposes are not persons who can enforce a trust. On the
other hand, attorney-generals on behalf of the crown can sue for public purposes.

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  Twinsectra v Yadley [2002] HL
Facts
 Twincestra (lender) lent money to Yardley (borrower) but the money was retained by Sims
(solicitor) on behalf of Yardley until it was used to acquire property. Sims gave the money to
another solicitor Leach and Leach gave the money to Yardley to be used for other purposes.
 Later Sims went bankrupt and Twincestra (lender) sued Leach for dishonestly assisting Sims
to breach the trust.
 The issue was whether Sims held the money on trust.

Held, unanimously that money was held on trust

Per Lord Hoffmann (majority in judgment, minority in this point)
 The money was held by Sims on an express trust for Twinsectra (lender), subject to the
power of Sims to apply the money for the agreed purpose, created through the terms of the
agreement between Twinsectra Ltd and Mr. Sims.
 The term of that trust made it clear that the money was not held on trust for Yardley, who did
not have the free use of the money, but was held for Twinsectra until the money was applied
for the acquisition of property.

Lord Hoffman explained the trust in para.13, not in great detail. In his analysis, the trust is
“one which arises by the manifestation of the intentions of the parties, albeit without using
the law’s word of trust”. This is known as a Monsieur Jourdain trust (Peter Birks), which
really is an express trust.
Therefore, although there may not have been words used to this effect, Lord Hoffman’s
theory was really that the primary trust was an express trust. Virgo was correct to comment
that Lord Hoffman proposed an express primary trust for the transferor (see below).

Per Lord Millett (majority (on this point), along with Lords Slynn, Steyn, and Hutton)
 The trust in this question was a resulting trust, with a power to apply the money in
accordance with the loan contract's terms.
 He viewed resulting trust as the proper characterisation of this and all Quistclose trusts.
 Quistclose trust as a resulting trust:
 RT arises because the lender has not disposed of the beneficial interest in the property.
 Since the beneficial interest in the money remains in the lender (subject only to the
borrower’s power or duty to apply the money in accordance with the lender’s
instructions), the money is held on RT in the outset, ever since the money was
transferred. (Millett’s retention of title argument)
 The requirement is that the money was not intended to be at the free disposal of the
borrower, but was to be used for the specific purpose. This is an objective intention.
 The borrower has no beneficial interest in the money, which remains throughout in the
lender, subject only to the borrower’s power or duty to apply the money in accordance
with the lender’s instructions.
 The power or duty, or “the purpose” of the fund, is a kind of authorization/ mandate.
 Whether it is a power or duty depends on the contractual arrangement.

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 NB. Lord Millett’s analysis here is consistent with his article in LQR 20 years before this
judgment. He suggested there are 4 possible answers to the question of the nature of a
Quistclose trust. The beneficial interest could lie with (1) the lender, (2) the borrower, (3) an
ultimate purpose, and (4) no-one, in the sense that the beneficial interest remains "in suspense".
The beneficial interest could not remain in suspense, a purpose trust would be void under
English law, and if the borrower held the beneficial interest the remaining money could not go
back to the lender. So, Lord Millett concluded that the beneficial interest must remain with the
lender, until the purpose for which the funds are lent is fulfilled on "resulting trust".

COMMENTARY
Virgo’s formulation
 The property was transferred to Sims to be held on an express trust because the money was
paid into the Sims’ client account or because the money was not at Sims’ free disposal (to be
applied for a particular purpose)
 It was a non-charitable purpose trust and it was void.
 Since the express trust failed, it was held on RT for Twinsectra.
 Sims had the power to apply the money for the agreed purpose. But until the power was
exercised it could be revoked by Twinsectra (it is the sole beneficiary so it can revoke the
trust) and it was so revoked once the money had been misapplied.
 [Siu: This is inconsistent with Millett’s argument in 3 ways: (1) no express trust was ever
intended in Millett’s argument; (2) failure of purpose is not a problem in Millett’s argument;
(3) according to this analysis, resulting trust arises as an automatic resulting trust, and there is
no need to rely on the vague notion that Twinsectra had retained a beneficial interest in the
money; but Millett relied on it and it is hard to put Millett’s resulting trust under either
traditional categories.]

The law: a quick takeaway

 The doctrine of Quistclose Trust first arises in Barclays v Quistclose. It concerns money
transferred to a transferee on the condition that it must be used for a specified purpose.
 In Quistclose, it is required that there be a mutual intention that the sum advanced should
not become part of the assets of the transferee and be used exclusively for a purpose.
 But the orthodox position has become Lord Millett’s judgment in Twinsectra. It requires
an objective intention on the part of the transferor that the money is not to be freely
disposed.
 Segregation is usually evidence of such objective intention.
 Multiple HKCFI cases has adopted Twinsectra.

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2. Now, let us go through a more detailed analysis.
(1) The general problem of finding a trust in favour of the beneficiary
 The effect of that is to give security interest to the lender without registration. When this is
done, the court is giving interest to one particular lender as opposed to many other lenders.
This is a policy reason that should be balanced against any other policy reason put forth by
courts in their analysis.

(2) The two-part analysis in Quistclose

 The two-part analysis carried out by Lord Wilberforce is unseen elsewhere.

(3) The difficulty of identifying the type of trust is important because it affects the rights the parties
might have.

The primary trust could be –

(a) Express trust for 3rd parties
 This is the orthodox approach adopted by Lord Wilberforce in Barclays v Quistclose.
 The money lent was held on trust for the creditors of the borrower. Once the primary
trust failed it would be replaced by the secondary RT.
  The transformation to the subsequent RT is consistent with orthodox automatic RT: if
an express trust failed, the property will be held on RT for the settlor.
 Lord Browne-Wilkinson in Westdeutsche (obiter) seemed to agree with this.

Problems
(1) Question on the nature of the primary trust. It cannot be appropriate to classify it either as
a trust for person or a trust for purpose.
 Saunders v Vautier (above)
 Private purpose trust (above)
 As regards the secondary trust, however, it is well accepted to be a resulting trust.

(b) Express trust for lenders

 Recognized by Lord Hoffmann in Twinsectra

Problems
 It does not fit with the orthodox analysis of the right of beneficiaries in respect of express
trust
 Since the lender can compel use of the money for the promised purpose, or to revoke
the loan even though the promise is still capable of being fulfilled (Saunders v
Vautier rule). Such rights of lenders would be inconsistent with the requirements of
Quistclose trust

(c) Beneficial interest in suspense

 Money was held on an express non-charitable purpose trust. The effect of this is that the
beneficial interest in the money would be suspended until the identified purpose had been
carried out or had failed.

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 Problems
 Rejected by Lord Millett in Twinsectra because it is the function of RT to fill the gap
where the transfer has not exhausted the entire beneficial interest, so there is no
possibility of that interest being in suspense.
 Difficulty seeing how the trustee can be monitored

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 (d) Purpose trust
 In Twinsectra, Lord Millett recognized that the loan was for a purpose not for a person,
and non-charitable purpose trusts are generally void.

(e) Resulting trust all along + dispositive power of trustee

 Endorsed by Lord Millett in Twinsectra
 Quistclose trust is a RT in favour of the lender that arises because the lender has not
disposed of the whole beneficial interest in the property transferred, subject to the
power or duty of the trustee/borrower to use the money for the intended purpose.
Since the beneficial interest in the money remains in the lender, the money is held on
RT immediately upon its transfer to borrower.
 When the purpose fails, the resulting trust remains there, only that the power of the
trustee to use it for the intended purpose is lost.
 Lord Millett’s analysis is consistent with his approach to RT, i.e. they respond to the
transferor’s absence of intention to pass the entire beneficial interest in property to the
transferee.

Advantages of the analysis

(1) Seeing it as a resulting trust all the way through, no other party can claim an absolute
interest in the trust fund. Neither the recipient nor the third party who is to receive the
dividends. This is what the contractual arrangement was meant to achieve. Keeping the
money in a separate account was in fact a means to provide solvency protection. The
legal effect of a resulting trust resembles closest to the intended commercial transaction.
(2) Avoids the private purpose trust and trust for person distinction for express trusts, but in
the same time a trust is involved which provides insolvency protection.
(3) Advantage 3: Good match between legal principles and commercial transaction the
parties really wanted. RT is used to achieve insolvency protection, while enforcement of
particular requirements are to be dealt with mandate, i.e., agency or contract. And
whether the mandate can be revoked depends on contractual interpretation of the
arrangement.
 Lusina: this solution offers the best fit between doctrines, and the practicality of
commercial transaction.

Problems
  Millett’s analysis did not fit into either category of resulting trusts:
(1)  Automatic RT: his reasoning did not seek to establish any express trust, being
content to assert that Twinsectra had not intended to transfer a beneficial interest to
Sims so that an RT arose immediately.
(2)  Presumed RT: according to the Vandervall formulation, a person does not retain
beneficial interest when he transfers a property. A person with full ownership to a
property does not mean that he owns both beneficial and legal ownership in that
property; he owns only one unitary ownership. It is upon the creation of trust does the
ownership separate. When he transfers the property, he transfers his unitary

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 ownership in full. When a trust created, the beneficial interest jumps back to him or
others.
(3) In fact, Millett has pointed out that this is an illusory trust, suggesting that it is not a
real trust at all, and is probably a third category. We can say that in a Quistclose trust
since the money did not belong to the borrower, so the borrower’s insolvency did not
prevent the creditors from getting back the money. However, we can also say that
since the purpose of saving the borrower from being insolvent failed, the lender can
revoke the mandate of the borrower to pay the money to its creditors.

Part B: Attempts to involve the resulting trusts in contractual relationships

1. There are 3 well-established situations in which proprietary remedies are available:

(1) Mistaken payment: payor mistakenly or inadvertently paid money to payee
(2) Voidable contract: payee unduly influenced or fraudulently misrepresented the payor to the effect
that he entered into a contract. Payor paid money pursuant to the voidable contract.
 Recall (contract): the remedy to a voidable contract is rescission: a person has a right to
rescind the contract/ render the contract void, and restore to the position ab initio.
 Nonetheless, rescission does not protect expectation interest
 The right to rescind a contract is a mere equity.
 A mere equity is NOT a proprietary right.
(3) Void contract: payor paid money to payee pursuant to a contract, which became void and null.
 An example of a void contract would be an ultra vires contract.
 Currency is passed from payor to payee. The rule of money is that whoever holds the
currency would have title over the money. Therefore, the title still passes.
 It would be different if the property passed is a chattel. Title only passes when the good is
delivered (commercial law). Therefore, no delivery, no passing title, no trust.

 NB. The remedy to these cases are traditionally personal in nature. In this section, we discuss
whether it is possible to elevate them to a proprietary remedy.
 It does not concern whether it is a CT or RT. Therefore, Chase Manhattan is a CT case;
Westdeutsche, while discussed a lot of RT, is a CT case. El Ajou suggests an RT.

2. Justifications for giving proprietary remedy for the above cases:

 In the past, when the doctrine of unjust enrichment was not discovered, the common law action
used to be “money had and received”.
 The basis of recovery is payee’s implied undertaking to return the money.
 But this is apparently wrong because it is impossible to have such implied undertaking!

 The big policy question is whether the payor should have priority over payee’s creditors.
Arguments for giving priority to payor:
(1) Unlike these creditors, payor did not take insolvency risk in his payment.

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  A creditor can relieve himself of risk by creating secured loans. But if it’s mistaken
payment, there is no such opportunity. Likewise in a voidable contract situation, a payor
was unduly influenced.
 Criticism. Judgment creditors are another class of people the court never protects despite
they have no insolvency risk, e.g., tort or contract victims.

(2) The money has always belonged to the payor. The payor’s money has swollen the payee’s
money, hence payee’s creditors would be unjustly enriched if they are allowed to have a
claim in the payor’s money. The creditors should be in no better position than the payee.
 Criticism. Rubbish argument. This argument presumes that the money has always
belonged to the payor, but this is exactly the question we want to solve.

(3) The combined arguments (1) and (2)

 Goff & Jones: these 2 arguments, independently, are not good; but when they add
together, they become sufficient.
 Criticism. How is it that the whole is better than the sum of its parts?

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 (4) The intention to transfer
 There are various views:
(a) The intention to transfer is not defective, just that the motive is affected by mistake or
undue influence (Will Swadling, against proprietary right)
 In a void transaction, people weren’t thinking of a trust, they were just thinking
of contractual payment. The typical contractual arrangement is the transfer of
unitary interest to the other party.
(b) The intention to transfer is defective, such that there is no intention to benefit the
recipient. This can invoke RT (Birks, Roberts, Millett). The legal title passes, the
beneficial title retains. Payor has the priority. If this is true, immediate interest arises
at the time of transfer.
(c) Half-way house: when there is a mistaken payment, the intent is defective but it does
not immediately give rise to a beneficial interest/trust, only the power to seek to
request the property (rescission). When this power is exercised, the trust arises at that
point of time.

3. Mistaken payment
 Chase Manhattan Bank v Israel-British Bank [1981] (HC Ch.)
Facts
 A payor bank (Chase Manhattan) transferred some money to a payee bank (I-B bank)
 Purely by computer error, twice the amount was paid.
 It was discovered quickly, the payor bank informed the payee bank, but it took a few days for
the payee bank to transfer the amount back.
 But before the backwards payment, the payee bank became insolvent.
 The issue is whether the payor can recover the payment on a proprietary basis.
Held, per Goulding J
 When the person pays money to another under a factual mistake,
(1) he retained equitable interest in it.;
(2) the conscience of that other is affected such that he subjects to a fiduciary duty to respect
his proprietary right
 What this means is that the recipient would be subject to the plaintiff’s proprietary interest.
At the date of payment, payor has retained the equitable interest/property. A trust arises.

COMMENTARY
General comments:
 The basis of claim is unjust enrichment (of course!) No breach, no tort.
 The judge did not say 2 things:
(1) What type of trust is it?
 The judge did not mention it. In the whole judgment it was only mentioned in the
counsel’s argument.
 Retain equitable interest  RT?
 Conscience affected  CT?
 Sarah Worthington thinks it’s a constructive trust, likely because of the NY law.

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 (2) When does the trust arise?
 Seemingly, Goulding J is suggesting that it arises when money is transferred because
money is “retained”. This is similar to what Lord Millett (minority) in Twinsectra.

 There is also other reason why Chase’s reasoning is wrong, e.g. confusion of New York and
English law, because New York law recognizes remedial CT but English law does not (Ken)

Comments in Westdeutsche (Lord Browne-Wilkinson)

 This case is not overruled, but is seriously criticized in Westdeutsche:
 The reasoning was based on the concept of retaining an equitable property in money,
however, prior to the payment to the recipient, there was no existing equitable interest.
Legal interest and equitable interest are inseparable before the creation of a trust.
 Also, the recipient’s conscience could not be affected at a time when he was not aware of
any mistake (at the point of receipt that he was still not told of the mistake?)
 The analogy between UK and NY law is also problematic: UK law only recognized
institutional CT, while US law recognized remedial CT. You will see the distinction
below.
 NB. Although the reasoning in Chase was not accepted by LBW, the decision was right: D
bank knew of the mistake made by the payor within 2 days of the receipt of moneys. The
judge treated this fact as IR, but in LBW’s judgment it provides as proper foundation for the
decision. Although the mere receipt of moneys, in ignorance of the mistake, gives rise to no
trust, the retention of the moneys after the recipient bank learned of the mistake may well
have given rise to a CT.

On unjust enrichment
 The correct idea of such payment should be that, if there is mistaken payment, the payor has
transferred full ownership of the money to the payee. While unjust enrichment demands the
payee to return the full amount, this is no basis for arguing that there is a proprietary interest
retained.
 Lord Millett extra-judicially commented that this case may be wrongly decided.

Application
 The judgment is unsatisfactory. His judgment was just an assertion; there was no
explanation, no legal reasoning, or no policy consideration.
 This is very weak authority because it is first instance decision and it’s just a dictum, etc.
 If this is used as authority, then it could be prejudicial in certain cases.

4. Void contract
 Sinclair v Brougham [1914] HL (overruled by Westdeutsche)
Facts
 A building society took deposits from its customers, just like a bank.
 Later, the customers realized it has no authority under the legislation to that. All money it
took was ultra vires and became void payments.
 The building society went into insolvency, the customers wanted to get their money back.

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  Issue: do they have the proprietary right to recover the money?
Held, unanimously
 There is no personal recovery on the basis of quasi contract or implied contract. The
customers could not recover in personam.
 Since the building society had no authority to enter into an express contract, there was
therefore no authority to enter into any implied contract; therefore, people cannot recover
on the basis of quasi contract.
 There is proprietary claim. One can have an equitable proprietary claim to recover the money
that was transferred on a void contract.
 NB. No explanation was provided at all.

COMMENTARY

 I can’t believe that the HL was delivering such rubbish judgment…

 On personal claim
 The implied contract was only a legal fiction. This judgment makes only the legal fiction
to block the claim. The claim itself ought to be meritorious by unjust enrichment.
 The HL was apparently muddled up. They wanted to protect the depositors, did not accept the
personam things, but granted proprietary claim. Very bad reasoning. Very bad authority.
 The case was overruled in Westdeutsche. This is significant because HL seldom overrules its
own decisions.
 “It follows that the depositors should have had a personal claim to recover the moneys at
law based on a total failure of consideration. The failure of consideration was not
partial: the depositors had paid over their money in consideration of a promise to pay, and
the promise turned out to be ultra vires and void, therefore the consideration for the
money wholly failed.”

 Westdeutsche Landesbank Girozentrale v Islington LBC [1996] HL (It’s time to fight the boss!)
Facts
 This case concerned interest-rate swap transactions 55. A lot of people were entering into
these contracts, until a HL decision decided these contracts were gaming contracts, and
hence, invalid.
 Westdeutsche was involved in such contracts. Once the contracts were declared void,
Westdeutsche sought to recover the void payments.
 LBC wasn’t insolvent, but the bank wanted to claim proprietary because they could get
compound interest (here you see another use of proprietary claim!)

Arguments put forth by Westdeutsche (plaintiff)

(1) Sinclair:
 Void contract can lead to equitable proprietary claims.
 When money was paid over, since money is cash, whoever who possessed currency has
legal title over the money. But since it is a void contact, the equitable title does not pass

55
Under this arrangement, a lender lends money to a borrower at a fixed interest rate, while the borrower lends
back the same money at a floating rate. One of the party will make a gain when the interest rate floats.

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 and is retained by the bank. When there is a split between legal and equitable title, there
has to be a trust.
 When you give, it is a voluntary transfer without consideration  they expect each party
will have to repay what they received. The way to do this is constructive trust.
(2) Chase Manhattan:
 Even it’s a void contract, one can get proprietary remedy. The basis is that the legal title
passes with the payment, but the beneficial interest is retained (Chase Manhattan).
 The bank argued that the beneficial interest is retained because the contract was void, and
money remain identifiable.
(3) Academic arguments: Birks and Chambers: lack of intention to benefit the recipient
 There is resulting trust in this case: (1) when people transferred legal title to the recipient,
(2) but does not intend the transferee to benefit from it; (3) and the property remains
identifiable; then a RT should arise, unless there are defences.
 The underlying rationale of a resulting trust, the basis of it is that someone transfers legal
title but did not intend the recipient to benefit from it. As long as the property is
identifiable, RT should be available.

Held, per Lord Browne-Wilkinson, rejecting the arguments:

(1) If proprietary right is given, there would be undesirable consequences and it is unfair to
general creditors.
 Whenever a person makes a payment, there might be a proprietary interest arising;
creditors will be seriously affected and be surprised by these hidden property rights. In
other words, the main undesirable consequence would be the surprise.

(2) There are cases in which separation of legal and equitable title gives no rise to trusts
  separation of title does not necessarily give rise to trust, e.g., mortgage
 This rebuts any argument that a separation of titles will give rise to a trust

(3) Criticizing Chase Manhattan

 Chase is correctly decided (there is a trust) but not agree with reasoning.
 The trust in Chase can be rationalized on the basis that the recipient bank’s conscience is
affected. It fits the facts because the recipient bank knows the mistake before it went into
liquidation.

(4) Rebutting the “retention of beneficial interest” argument:

 The orthodox position is that when a person transfers property to other people to create
trust, it is NOT that he retains the equitable interest and just transfer the legal interest
over.
 What really happens is that an owner with full ownership holds one single unitary
ownership. When he transfers the ownership on trust, the legal ownership is created on
the trustee, while a new equitable ownership arises on his part.

(5) Rebutting the absence of intention to benefit the recipient formulation:

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  A resulting trust requires more than “no intention to benefit the recipient”. One will need
to show the presence of a positive intention to create a trust.
 The orthodox rule is that RT is based on either automatic or presumption of RT, in which
a positive intention to create a trust is necessary.

(6) Establishing the rule:

 If one wants to impose a trust, whether express or implied, the conscience of the trustee
must be affected.
 NB. This is therefore a CT case!
 In other words, the trustee must know that he is intended to be a trustee. In a typical
contractual arrangement, the conscience of the trustee is not affected. He did not know he
was not entitled to it. He must have assumed that the contract was valid.
 It is never right to have equity operating on your conscience unless your conscience is
affected. Here, there is an intention to make an out-and-out payment. The intention is that
the money so paid should be the absolute property of the other party. It is true that the
bank had a misapprehension of what had to be paid, but that does not affect the intention
to make a gift.
 Referred to Swadling’s argument: in a void transaction, people weren’t thinking of a
trust, they were just thinking of contractual payment. The typical contractual arrangement
is the transfer of unitary interest to the other party.

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 (7) Therefore, applying to the facts,
 There is no retention of equitable interest (rejecting that RT arise from transfer).
 Neither is it possible to affect the conscience subsequently (upon the contract was found
void)
 Also, the money is mixed with LBC’s own account.
 If the recipient has received money and mixed with his own money, and his conscience is
later affected, property is no longer identifiable (tracing would fail).
 The claimants are not entitled to proprietary claim.

(8) Dictum: stolen bag of coins

 Stolen bag of coins by thief remains traceable so long as they are kept separate
 General proposition that “property transferred under voidable contract induced by fraud
be held on constructive trust for transferor”
 Remedial constructive trust may provide a more satisfactory road forward (for
proprietary restitutionary remedies on unjust enrichment)

Held, per Lord Goff (dissenting, recommended reading)

 Lord Goff dissented only on the point that he thought compound interests could be made
available by personal claims. He refused to pass judgment on unjust enrichment as he
considered it irrelevant. The rest he agreed with the majority. 2 things are worthy of mention:

(1) On resulting trusts

 Void contract cases do not fall into the RT category.
 The traditional category of presumed RT is a voluntary payment from A to B where there
is no presumption of advancement or evidence of intention to make an out-and-out gift.
 It’s plain that the present case falls into neither the traditional categories.

(2) The issue

 The question therefore arises whether RT should be extended beyond those cases… and
apply to the current “money is paid for a consideration that has failed” fact pattern.
 The answer is no:
 In policy terms, the consequences could not be right.
 And of course it does not fit the constructive trust box because he doesn’t know he
was holding this asset for the beneficiary (conscience not affected)

COMMENTARY
 Lord Browne-Wilkinson based his argument on conscience. This is a different approach from
Chase, in which the trust was held primarily to have arisen from transfer.
 Chase was rationalized by Westdeutsche so that the date the proprietary interest arises is that
the recipient’s conscience is affected, and for the trust to arise the paid property must remain
identifiable. The constructive trust arose when the receiving bank find out about the
beneficial interest while the money is still identifiable; its conscience was affected at that

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 point. It does not matter that the insolvency happened later because the conscience was
already affected.
 This case left open the question whether remedial CT should be introduced to English law.
 It is unclear to see why the claimant’s position relative to the defendant’s other creditors
should be improved by a change in the defendant’s state of mind at some time between the
day of receipt and the date of his insolvency.
 Virgo: the concept trustee under a constructive trust does not require conscience to be
affected.
 Nonetheless, the case isn’t showing consistency with the voidable contract cases: there are a
lot of voidable contract cases which after the right is exercised and the contract is void ab
initio, the innocent party gets a trust.

Summary:
 Since this case, it is confirmed that void contract cases gives rise to NO proprietary claim,
unless
(1) His conscience is affected by knowledge of the circumstances making his enrichment
unjust
(2) At a time when the property when he has received from the claimant is still identifiable
in his hands

5. Voidable payments
 Recall what is mentioned above: remedy to voidable payment is rescission, which is a right of
mere equity to restore the position before the contract was entered into. It is an in personam
remedy.

 El Ajou v Dollar Land Holdings [1993]

Dictum per Millett J (as he then was)
 For people who are induced to pay money in voidable situations, they are entitled to rescind
the contract, and re-vest the equitable title in themselves, when such entitlement is
sufficient to support an equitable tracing claim.
 When successfully traced and a trust is declared, it is a RT, not CT

COMMENTARY
 This is very weak authority because the facts did not concern even voidable contract.

On Point 1
 When a person goes for equity tracing and it is successful, the underlying claim is
proprietary. But in order to be able to trace, one requirement is that an initial beneficial
interest must exist.
 Lord Millett’s view is that once the right to rescind is exercised, the equitable interest re-vests
in itself. But it should be noted that mere equity is a right in personam, is he suggesting that a
mere equity is good enough to trace?

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 On point 2
 To say that the trust so found is an RT is apparently under the influence of Birks and
Chambers.
 An RT is different from the CT in a sense that there is a problem with the conduct on the
part of trustee.
 His position is that: before rescission – personal; after rescission – proprietary.

Ambiguity
 But it is uncertain whether what Lord Millett means was (1) once you successful trace in
equity, you get proprietary remedy; or (2) the mere equity is only sufficient to kick start that
procedure.
 If it’s the latter, it’s a weaker right; if it’s the former, it’s a stronger right, in effect he
would be saying that a mere equity would guarantee a proprietary remedy.

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  Re Goldcorp Exchange [1995] New Zealand  PC
Facts
 Goldcorp, a gold dealer, issued certificates of ownerships for gold ingots, in exchange for
cash. It guaranteed that there was enough gold in its vault to redeem all certificates.
 Many unsophisticated, lay investors paid for the certificates.
 It turned out that Goldcorp went insolvent, and found out that the gold was not enough to
reclaim the certificates.
The customers put forth 4 arguments and the court’s response
(1) When they entered a contract with Goldcorp exchange, there was an S&P agreement; the
legal title has passed to them; the certificates were evidence.
 PC: rejected. It is true that it was a sales and purchase agreement, but since it was
property ex bulk (unascertained goods in bulk) the transaction was not completed unless
and until the property was appropriated to the customers (London Wines).
(2) There was a fiduciary relationship between the claimants and Goldcorp. Goldcorp presented
themselves as someone trustworthy. As such, laypersons placed high trust on them.
 PC: rejected. It is necessary to look at the essential contract between parties. It was a
sales & purchase contract. There is nothing in this contract which suggested a fiduciary
relationship. The only duty that could be read from the contract is that the sale &
purchase of the gold ingots would be sale, purchase, delivery, and physical retention of
property.
(3) There was a Quistclose Trust. The money was paid for the purpose of trading gold.
 PC: rejected. When the customers gave money to the seller under a sales and purchase
agreement, there was no restriction on the use of money. The recipient is free to dispose
of the money, just like any other sales and purchase agreement.
(4) There should be a constructive trust arising from voidable contract.
 PC: rejected. What can be seen here is only a sales and purchase contract vitiated by
fraudulent misrepresentation. Obviously, Goldcorp claimed it will keep sufficient gold in
the vault but did not. There is arguably a contract voidable for fraud. The remedy for that
would be rescission.
 A rescission claim is one which is for the recipient to equivalent amount, but until then,
there is no proprietary right. The mere equity is no proprietary right. Even if the bullion
investors had rescinded their contracts, their rights would have been personal.
Rescission would not, by operation of law, have carried with it any proprietary
interest. [102-103]
 In this case, before the insolvency happens, such mere equity was not exercised, and
proprietary right has not arisen.
(5) The notion of a remedial construction trust is that it doesn’t matter whether I can prove a
continuing beneficial interest from the start; the court will just declare beneficial interest
discretionary because it is just.
 Not raised by P but considered by the court. There was no imbalance between the
positions of the parties (the bank and customers) that if orthodox methods fail a “new
equity” (remedial CT not applied in UK) should intervene.

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 The court’s general comment
 In this case, the actual fight was between the customers and a bank who gave Goldcorp a
floating charge. On insolvency, the floating charge crystallized. It might look very sad that
the big bank has won the legal battle over the small customers, but we mustn’t be tempted to
twist the law to protect the small customers.

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  Westdeutsche
Dictum, per Lord Browne-Wilkinson
 The argument is that when the thief steals a bag of coins and mixes the money, common law
tracing would fail. While equitable tracing requires breach of fiduciary duty, which may arise
under a trust during the time of theft or mixing of money, and it is for this reason there must
be a trust, for if otherwise the victim would be left uncompensated.
 Believed that property obtained in this case should be subject to CT, although no authority to
support. This includes thievery and fraud cases.
 It justifies why in relation to stolen good you can still use the trust to impose proprietary
remedy.

COMMENTARY
 It can be seen how the approaches are different in El Ajou and Goldcorp.
 El Ajou said mere equity might give rise to proprietary remedy. An RT will result as a
result of the re-vesting of equitable interest.
 Goldcorp said no it won’t, even if the right is exercised,
 Westdeutsche: yes, an immediate proprietary right at the outset.

 If you apply these cases, when will a trust arise?

 El Ajou: the trust arises at the time of rescission.
 Goldcorp: no right ever arises.
 Westdeutsche: since the fraud happened.

 Effective rescission: recall contract law: unequivocal communication.

 Shalson v Russo: When parties take steps to rescind, u can treat that as implied rescission, from
that moment onwards the equitable title revests in the plaintiff.

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Part C: Constructive trusts

1. The distinction between constructive and resulting trusts

 Usually, we explain a category by telling in what circumstances it arises.

Resulting Trusts Constructive Trusts

 Situations that give rise to a resulting trust  CTs impose a trust not to give effect to
have been depicted in Re Vandervall. any purported intention, but for other
 Lord Browne-Wilkinson purports that reasons:
RTs are to give effect to intention. It does (1) When it would be unconscionable for
not depend on wrongdoing. the defendant to insist that they have
 Although it is arguable: both the legal and beneficial interest
(1) Whether intention is relevant in in the asset.
automatic trusts; (2) The defendant is under an obligation
(2) Whose intention is relevant to transfer the asset back which the
(3) What the required intention is. law will specifically enforce.
 Usually, a CT is a technique used to
compel the legal title holder to transfer the
property to the victim – the idea is simply
a label used to justify ordering re-
conveyance of the legal title to the
beneficiary.

 NB. Both trusts may be applying the maxim “equity treats as done what ought to be done”:
 Resulting trust: “resultare” means simply “if something should belong to you, it should be
returned to you.” This is equity treats as done what ought to be done. Lord Brown-Wilkinson
explained what ought to be done as “giving effect to intention”, which is controversial.
 Constructive trust: unconscionability and “under an obligation to transfer an asset back” are
also “what ought to be done” cases.

 But the problem is: what ought to be done? Policy reasons have a lot to do with this question.
As is mentioned in the beginning of this notes, the common law protects property rights
aggressively. Why is it that the claimant in a given fact pattern should be entitled to
proprietary remedy? Why is his priority to the defendant’s available assets higher than other
general creditors?

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In the following, we will examine different fact patterns which might give rise to CT
1. Mistaken payments
 Chase Manhattan Bank v Israel-British Bank (London) [1981] HC Ch. (above)
 Facts (recall): a bank transfers extra money to another by mistake and is now demanding it
back.
 Goulding J held that there was a trust. Although it was not mentioned whether it was CT or
RT, Sarah thinks it’s a CT, arising from the outset (retaining beneficial interest).
 This case has not been overruled, but it was seriously criticized in Westdeutsche.

 Westdeutsche
 CT arises only when conscience is affected.

2. Breach of trust or fiduciary duty involving misappropriation of trust funds

 Foskett v McKeown
 Recall the case in which trust money was misappropriated to pay the premium of a life
policy.
 In this case, profits received based on misappropriation of trust fund was held to be disgorged
by trust (proprietary claim), as opposed to unjust enrichment (personal claim).
 Tracing is a matter of vindication of property rights, as opposed to unjust enrichment (topic
6).

 This is uncontroversial because misappropriation of trust assets infringe property rights and hence
proprietary remedy through CT could be allowed.

3. Breach of fiduciary duty without involving misappropriation of trust funds

 Examples include violation of the conflict of interest rule, and reception of bribes and secret
commission. These are known as “pure breaches”
 This is more controversial because pure breaches does not infringe property rights, and hence the
primary remedy should be in personam.
 Recall what we’ve learnt in topic 4, there are 2 primary difficulties:
(1) It’s not always easy to prove a breach/ conflict of interest or duty
 Especially in business opportunity cases in which various tests are available
(2) Identifying the property could also be difficult
 Note well that an opportunity or information is not property.

Recall: account of profits

 Recall what you’ve learnt in topic 5: account of profits. Boardman v Phipps say the
wrongful fiduciary is liable to account of his profits as if he was a constructive trustee.
 In this case, a CT was imposed, nonetheless, the defendants were not bankrupt; the court
allowed personal remedy less equitable allowance.
 Not bankrupt  it is therefore not a good case to demonstrate the tension between
proprietary and personal remedies.
 While the remedy may overlap, they do not conflict. As is stated clearly in Boardman, the
personal remedy is not based on unjust enrichment.

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  In other words, a fiduciary in a pure breach of fiduciary duty who has made a profit is both
personally liable and proprietarily liable. FHR allows a two-pronged attack (personal +
proprietary) for a claimant. In light of FHR, the effect of Boardman is clear: a constructive
trust would be imposed. The primary remedy is proprietary; the secondary remedy is
personal. For personal remedies, equitable allowance could be allowed for efforts and
diligence.

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 NB. “As if he was a constructive trustee” – the nature of constructive trusteeship (Virgo)
 Constructive Trust is a real trust but it does not follow that a constructive trustee is under
the same obligations as other types of trusts.
 Have legal title to property held on trust for the benefit of others and will be obliged to
convey the trust property to B
 But the duties of T will be less onerous than those of an express trustee
 E.g. a Constructive Trustee is under no obligation to invest, and neither is he required to
observe the usual duty of care
 Since a CT may not know that he is a trustee, it would be unreasonable to impose such
obligations, including the FD of loyalty to the trustee

Breach of fiduciary duty without misappropriation of assets – fact patterns (here we go!)
(1) Acquisition of property that should have been acquired on behalf of the trust:
 Keech v Sanford (1726)

(2) Usurpation of business opportunity or use of information

 Boardman v Phipps
 See discussions above, and notes 05_personal remedies

 Aas v Benham
Facts
 Benham was a partner in a firm in the business of acting in negotiations between the
Spanish and Portuguese Governments and ship builders.
 Benham had also approached for advice by a shipbuilding company. He received
information while acting for the firm suggesting that it could be reconstituted as a builder
of warships and acquire a yard he discovered in Bilbao.
 He used that information to help write a prospectus for the ship-building company’s
reconstruction, and made profits for himself as a result of the reconstruction.
Held, per Lindley LJ
 Mr Benham was not liable to account to his partners. It was no part of the firm’s business
to advise on corporate reconstructions or to build ships. Even though Mr Benham had
learnt of the information whilst on the firm’s business, he owed no fiduciary duty to his
partners which prevented him from making use of the information as he did.

 This case used the “line of business test”

 This case is the authority for the limitation of duties of a fiduciary when the benefit is
obtained outside the fiduciary relationship
 This case is probably applicable only to partnerships, but not corporations, as
fiduciary duties owed by a partner could be circumscribed by the contract of
partnership

 Bhullar v Bhullar [2003] UKCA

 For facts, see case notes: 04_1b_no-profit rule

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  The court imposed a constructive trust. The rule is that once the secret profit rule is
infringed, a constructive trust should be imposed. The director owes a duty to reconvey
the land to the company in exchange for the purchase price paid.
 NB. Neither is this a good test case because the defendant was not insolvent.
 NB. It is unclear whether it amounts to a proprietary remedy. Even a CT is imposed, it is
a tool used to reconvey the legal title to the beneficiary. This is known as “ the fiction of
CT”
 NB. Information or opportunity are not property. No asset is misappropriated by usurping
information or opportunities.

 Allied Business and Financial Consultants Ltd v Shanahan [2009] EWCA Civ 751
 This case is also known as “O’Donnell v Shanahan”
Facts
 Mr. Shanahan, director and shareholder of a small company, has diverted a business
opportunity which the company could have pursued.
 Ms. O’Donnell sued for unjust enrichment on behalf of the company qua shareholder.
Held, per Waller, Rimer, and Aiken LJJ
 Allowed the unfair prejudice petition to proceed. In this particular case it was clear that
Mr Shanahan had acted without the company's fully informed consent. The opportunity
had come to Mr Shanahan in his capacity as a director of Allied Business Ltd, and so
must in principle be accountable for any profit.
 Aas was distinguishable as a case of partnership, where the business relationship had
been circumscribed by contract.
 NB. This case adopted the “line of business” test, rejected in Bhullar.

 Murad v Al-Saraj [2005] EWCA Civ.959

 For more details, please refer to case notes 04_1b_no-profit rule
 The Court of Appeal held that a fiduciary had to give up his unauthorised gains.
 NB. It is unclear from the judgment whether such liability is personal or proprietary.

 FHR v Cedar Capital [2014] UKSC

 Facts: this is a bribery case, which does not involve usurpation of business opportunity.
For more details, please refer to the below and case notes 07_2_bribes
  whilst the fact pattern points to its direct application to bribery cases, Lord Neuberger
MR’s judgment seems to suggest it applies to any profits made by a fiduciary in breach
of his fiduciary duty.
 “where an agent acquires a benefit which came to his notice as a result of his
fiduciary position, or pursuant to an opportunity which results from his fiduciary
position, the equitable rule (“the rule”) is that he is to be treated as having acquired
the benefit on behalf of his principal, so that it is beneficially owned by the principal.
In such cases, the principal has a proprietary remedy in addition to his personal
remedy against the agent, and the principal can elect between the two remedies.”
[para.7]

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 (3) Bribes, secret commissions and other profits involving neither misappropriation use of business
opportunity or information
 Lister v Stubbs (1890), overruled by FHR
 AG for HK v Reid [1993] UKPC (from New Zealand)
 Sinclair Investments v Versailles Trade Finance Ltd [2011] EWCA56
 FHR European Ventures LLP v Mankarious & Ors [2014] UKSC
 Grimaldi v Chameleon Mining NL [2012] FCAFC (Australia)
  read these cases in case note

4. Unconscionability or fraud on the part of the defendant

 Westdeutsche
Dictum, per Lord Browne-Wilkinson
 Recall: a constructive trust arises when property is obtained by fraud (above).
 “Although it is difficult to find clear authority for the proposition, when property is obtained
by fraud equity imposes a constructive trust on the fraudulent recipient: the property is
recoverable and traceable in equity.”

 Shalson v Russo [2005]

Held, per Rimer J
 Criticising the dictum in Westdeutsche
 No CT in thievery. Westdeutsche was somewhat wrong in principle. The dictum is only
applicable to fraud, but not thievery. When property is stolen, the thief gets possession.
Factual possession is not a property right and cannot be held upon trust. Neither could
title be passed to any third party. The stolen money could not be traced. There could be
no CT.
 My responses:
(1) Factual possession gives rise to possessory title. Possessory title is a property
right and can be held upon trust.
(2) It is true that nemo dat non quod habet, however, it could be overcome by
Equity’s Darling and new legal interest could be created.
(3) Stolen money can be passed to third parties. The law which concerns money is
that the currency holder has legal title to the currency.
 False analogy. Theft is not an analogy to fraud as thievery is not voidable or be
rescinded.
 The dicta on fraud is not supported by authority.
 On fraud/ voidable contracts
 There can be no direct CT based on fraud . Rather, if the innocent party exercises the
right to rescind, the equitable title would re-vest to the original owner and there will be
CT in his favor, subject to (1) defence of Equity’s darling (2) rescind before the D went
bust.
 Payor has to rescind before the recipient went bust. If the recipient has gone bust, the
property has already gone into the statutory scheme for insolvency.
56
Sinclair v Versailles. This case is different from the Sinclair v Brougham case introduced above. Anyhow, both
cases are overruled lol

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  Upon rescission, the equitable title in the property will be re-vested and there is a trust.
But it is a CT not RT.

COMMENT
 What Rimer J says is basically that the contract does not automatically become void. The
proprietary right only arises when the right is exercised. This is a wait-and-see approach.
 Consistent with the approach of Lord Millet in El Ajou, except that the result is a CT, not RT.

5. Retention of payment after conscience affected

 Neste Oy v Lloyds Bank plc [1983]
Facts
 Company was not trading well, and one day comes to the decision that they should wind up.
 After that date, one of the parties on a long term periodic contract made a payment to Neste.
 Given that the payment was made after the decision was made. Does Neste Oy hold it on CT?
Held, per Bingham J
 The orthodox approach in common law is that where customers do not ask for security, all
recovery would be on contractual – in personam – basis.
 But yes, there should be a CT. There was a constructive trusteeship of the monies forming the
final payment (but not of the monies forming 5 earlier payments that pre-dated the decision to
cease trading)
 “Given the situation of [the recipient company] when the last payment was received, any
reasonable and honest directors of that company … would, I feel sure, have arranged for the
repayment of that sum to the plaintiffs without hesitation or delay. It would have seemed little
short of sharp practice for [the company] to take any benefit from the payment, and it would
have seemed contrary to any notion of fairness that the general body of creditors should
profit from the accident of a payment made at a time when there was bound to be a total
failure of consideration… It … seems to me that at the time of its receipt [the company]
could not in good conscience retain this payment and that accordingly a constructive trust is
to be inferred.”

COMMENTARY
 This case invoked Westdeutsche. The trust should arise so long as the conscience is affected.
The recipient’s conscience is affected from the start in this case, as they knowingly received
money without the intention to trade.
 LH: they pay under contractual arrangement. You can say that there is some sort of fraud,
but even so, that is fraudulent misrepresentation. If you have not rescinded before
liquidation, may not have proprietary interest.

 Re Farepak Food and Gifts Ltd [2006] HC (Ch.)

Facts
 Farepak was a Christmas Club which receives money from people (through agents) per
month to spend them all at once in Christmas.
 Farepak decided to cease trading on 11 October. Farepak went into administration on 13
October.

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  During the 3 days leading up to administration, the directors ring-fenced the money so that
they could be returned to customers.
 The directors also declared that monies received after 11 October will be held on trust in case
of insolvency.
Issue
 How (1) the ring-fenced money and (2) monies received during the administration period
should be treated.
Held, per Mann J
 Quistclose trust
 NO Quistclose trust because there was no suggestion that the money received by the
agents ought to have been put to one side by Farepak pending the transmutation of the
monies from credited money to goods or vouchers.
 Constructive trust
 It was contrary to the ordinary notion of fairness that the general body of creditors should
profit from the "accident" of a payment made to a company at a time when there was
bound to be a total failure of consideration and, therefore, a CT was inferred.
 BUT if it was to apply Neste Oy, it should be applied by reference to the time at which
the monies should be taken to have been paid and received by Farepak.
 In Neste Oy, payment and receipt of the monies by the company were effectively
simultaneous whilst, in contrast, in Farepak the date that the monies were paid to and
received by the company (through its agents) was not necessarily the same as the date
that the monies appeared as a credit in Farepak’s current account. The court felt that this
created sufficient uncertainty for the court to state that the monies did not come within a
constructive trust.
 [in other words, Neste Oy was distinguished on the basis of time of receipt and payment]
 Express trust
 Where monies had been paid to Farepak (via the agents), the relevant customers were
already creditors of the company. If the court were to declare an express trust in those
customers’ favour, those customers would be given a preference over other creditors.

 Cobbe v Yeoman’s Row Management [2008] HL

Facts
 Mr Cobbe (a property developer) had agreed with Yeoman’s Row Management Ltd (YRML)
that he would get planning permission for the development of a property owned by YRML.
When that had been achieved the property would be transferred to him. He would carry out
the development works and the profits from the sale of the property above an agreed sale
price would be shared between them according to a profit-sharing formula (an overage
arrangement). There was only oral agreement, but no formal contract.
 Mr. Cobbe spent time and money on the effort to obtain the planning permission and was
successful. YRML then refused to conclude a formal agreement on the basis of the earlier
negotiations, and proposed new terms that were more beneficial to it.
 Mr. Cobbe raised breach of contract, constructive trust, unjust enrichment, and proprietary
estoppel.
Held

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  No breach of contract, no proprietary estoppel.
 No constructive trust. Lord Scott forcefully rejected the idea that a constructive trust could
arise simply as a result of B showing that A had acted unconscionably.

COMMENTARY
 The position is easy to defend. YRML was holding the property all along. Whilst its conduct
is unconscionable, it is not unconscionable for him to hold on the property which had all
along belonged to him. This is different from the situation of mistaken payment or fraudulent
misrepresentation in which it would be unconscionable to keep the money which originally
belonged to the transferor.

 Thorner v Major [2009] UKHL

Facts
 Peter Thorner owned a farm. David Thorner worked for him for 30 years. David’s father was
a cousin of Peter.
 David was not paid for the work. David believed that, upon Peter’s death, he would inherit
Peter’s farm. But there was no express assurance, but his belief was developed over 15 years
and was encouraged by Peter’s conduct.
 Peter did in fact made a will to leave the farm to David, but the will also gave money to other
people. While Peter fell out with those people, he destroyed the will, and died without a new
will.

Held

 Lord Scott made the somewhat surprising suggestion that B could acquire a right under a
remedial constructive trust. The current position is that the remedial constructive trust is not
permitted in English law.

COMMENTARY
 Whilst Lord Scott’s advocacy of such a trust is interesting (in Westdeutsche, Lord Browne-
Wilkinson also floated the possibility of the future recognition of remedial constructive
trusts), it seems unnecessary, given that the remainder of HL based its decision on proprietary
estoppel.
 There is also a tension between Lord Scott’s rejection, in Yeoman’s Row, of
unconscionability as a sufficient grounds for B to acquire a right against A, and his support of
the remedial constructive trust in Thorner: an important reason for limiting unconscionability
is the need to promote certainty, and such certainty may be undermined by the recognition of
the remedial constructive trust, which is itself often seen as a means to remedy
unconscionability.

We now turn to remedial constructive trusts

2. Introduction
 Everywhere except UK has remedial CT.
 A point on terminology

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  [History] In the past, there was a distinction between institutional CT and remedial CT. But
“institutional CT” equals express trust (have all those powers duties etc.) and “remedial CT”
were simply trusts imposed by law.
 [Now] The terminology is now different. Both institutional and remedial CTs are used to
describe trusts imposed by law. They actually describe 2 philosophies rather than 2 different
situations:
(1) Institutional CT: the courts look at the facts in a particular case, and if the facts are such
that there is a constructive trust, then there is. There is no discretion and no assessment of
fairness (except policy concerns).
(2) Remedial CT: the courts look at the facts and decide whether a CT can be imposed, and
then decide as a matter of discretion, looking at the current situation and the facts that
currently stand, whether it’s appropriate to award a constructive trust. They look at
detriments to third parties, the particular position the litigating parties are in etc.

Institutional (UK) Remedial (UK and Aus)

Time at which CT  At the time of wrongdoing  Time of judgment
arises (conscience affected (Westdeutsche)
Court’s discretion  No discretion  Does not depend on
infringement of property
right. So long as any
breach is committed, and
the court finds in its
opinion just to impose
CT, it imposes CT.
Effect on CT  CT binds third parties  CT binds third parties,
but this factor will be
taken into account when
exercising discretion.

 Recognition in UK
 Westdeutsche:
 The remedial CT perhaps was a better mechanism to provide a restitution for unjust
enrichment (dictum)
 It would enable proprietary relief to be tailored to the particular circumstances of the case
 But refused to decide the point since it was not directly in issue

 Re Goldcorp: Lord Mustill in PC recognized the power of the court to create equitable
proprietary interests by virtue of the remedial constructive trust.
 Thorner v Major: the court imposed remedial CT (controversial)
 Re Polly Peck: the RCT approach is not good because it upsets the insolvency regime.
 London Allied Holdings [2007]: We should not be worried about discretion as long as we can
develop some guidelines. Draw reference to proprietary estoppel where the court has tried to
develop guidelines over the years in deciding when proprietary remedy should be given.

 HK: the position is still open

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  Argument against RCT (Virgo)
 If RCT is a form of remedy it must be triggered by a cause of action – what should this cause
of action be?
 Certainly it could be equitable wrongdoing BUT
 The CT which exceptionally recognized where there is a breach of FD is institutional,
arising by operation of law rather than judicial discretion
 unconscionable retention of property triggers a ICT rather than remedial CT
 The fact that D has been unjustly enriched at the claimant’s expense is not a sufficient reason
to recognize an equitable proprietary interest; the claimant should instead be confined to a
personal claim against the defendant
 A remedy without a cause of action is meaningless and for that reason, as well as the inherent
uncertainty of this unbridled judicial discretion, R CT should not be recognized in Eng law

 Another argument against remedial CT is that – in the absence of statutory authority, judicial
discretion is really undemocratic and beyond the legitimate role of the court.

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 Topic 8_Personal liability against third parties
Part I: Introduction

1. Third parties
 A person who is not himself a trustee or fiduciary is a stranger to a trust.
 He may be liable in personam for a breach of trust or fiduciary duty.

2. A historical account of liability

 In the past, these strangers are liable “as constructive trustees”

Barnes v Addy (1874) UKHC, per Lord Selborne LC

 “Those who create a trust clothe the trustee with a legal power and control over the trust
property, imposing on him a corresponding responsibility. That responsibility may no
doubt be extended in equity to others who are not properly trustees, if they are found
either making themselves trustees de son tort, or actually participating in any fraudulent
conduct of the trustee to the injury of the cestui que trust. But, on the other hand strangers
are not to be made constructive trustees merely because they act as the agents of the
trustees in transactions within their legal powers, transactions perhaps of which a court of
equity may disapprove, unless those agents receive and become chargeable with some
part of the trust property, or unless they assist with knowledge in a dishonest and
fraudulent design on the part of the trustees.

 But this has been abandoned. The modern approach is to acknowledge the nature/basis of the
stranger’s liability directly:

Paragon Finance v Thakerar & Co [1999] UKCA

Held, per Millett LJ:
 There are 2 types of constructive trusts and constructive trustees:
(1) Where the D though not expressly appointed as a trustee, has assumed the duties of a
trustee which was independent of and preceded the breach of trust and is not
impeached by the P (assumption of duty)
 NB. This type of trust arises before breach of duty.
(2) where the trust obligation arises as a direct consequence of the unlawful transaction
which is impeached by the plaintiff (misconduct, e.g., fraud)
 NB. This type of trust arises at the time of misconduct.
 “The 2nd class of case arises when D is implicated in a fraud. He is accountable in
equity. In such a case he is traditionally though I think unfortunately described as a
constructive trustee and said to be “liable to account as constructive trustee” such a
person is said to be “liable to account as constructive trustee”. Such a person is not in
fact a trustee at all, even though he may be liable to account as if he were. He never
assumes the position of a trustee and if he receives the trust property at all it is adversely
to the P by an unlawful transaction which is impugned by the P”

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  NB. The difference between these 2 types of constructive trusts lies in the limitation period:
(1) In the first type, the breach will give rise to proprietary CT. There will be no limitation
period. Breach of trust and misuse of trust property will enjoy a longer protection.
(2) In the second type, where there weren’t a prior trust, the court would classify it as if it
was a tort so the limitation period is 6 years
 NB. As in Boardman v Phipps, this type of trust does not necessarily refer to
constructive trusteeship, it was just a mechanism to impose an appropriate remedy.
 See also Dubai Aluminium v Salaam [2003] HL, per Lord Millett (unimportant).

3. Three types of liability

 As can be seen, Barnes v Addy introduced 3 types of liabilities:
(1) Trustee de son tort (just normal constructive trust)
 Concerns a stranger who takes upon himself to do acts characteristic of the office of the
trustee may be made liable as a trustee
 Based on estoppel. E.g. a person receives payment of the trust as if he is the trustee.
 Usually happen in family trust in the old days where someone is not a trustee but
manages the fund as if he is a trustee, so he is liable as a trustee.
 Liability: primary liability as a trustee (Mara v Browne [1986] UKHC (Ch.))

(2) Knowing receipt

 A stranger may be liable for receiving trust property or its traceable proceeds
 Liability: primary liability by knowing receipt, but unclear whether by:
(a) Unjust enrichment, or
(b) Imposition of trusteeship
 See discussions below

(3) Dishonest assistance (Twinsectra [2002] UKHL)

 A stranger who assists a trustee to commit a breach of trust
 Liability: unclear whether
(a) Primary liability by wrongdoing or
(b) Secondary liability?
 See discussions below

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 Part II: Knowing receipt

1. Introduction
 A stranger who receives trust property or its traceable proceeds may be personally liable in equity
to pay for the value of trust assets received.
 NB. The liability is personal although the courts often use the language of “constructive trust”.

1. The 3 requirements
 There are 3 requirements (El Ajou v Dollar Land Holdings [1994] UKCA, per Hoffman LJ):
(1) Disposition of property in breach of trust or fiduciary duty (viz. includes all fiduciaries!)
 This is largely uncontroversial and will be discussed no further.

(2) Beneficial receipt of property disposed of or its traceable product in breach of trust or FD,
and
 D obtained property that is the traceable property or the trust property
 D receives the property (beneficially) on his own account, as opposed to a ministerial
receipt or a receipt in the capacity of an agent.
 Nb. There are difficult situations. E.g., a wrongful fiduciary who deposits the money
into his own bank account. Do we sue the bank? We probably shouldn’t because the
bank is holding the money ministerially for the fiduciary. Nonetheless, the truth is
that when we deposit money in the bank, the bank gets the legal and beneficial title,
and I just get a debt in return. It is incorrect to say that the bank is the fiduciary’s
minister.
 Some clever lawyers say the practice of not suing the bank is to protect commercial
activities, and that banks are usually bona fide.

(3) Requisite knowledge by recipient

2. Requirement 2: receipt
 Thanakhorn v Akai Holdings [2010] HKCFA
 The law is that the test for receipt is whether there is sufficient control.
 Please refer to case notes: 08_2_knowing receipt
 Judgment – “on receipt”
 Commentary – “on the test of receipt”

 Pacific Electric Wire & Cable Company Ltd v Texan Management Ltd [2013] HKCFI
 I did not read this case. The judgment is long but the case is insignificant.

3. Requirement 3: knowledge
 The question is: what is the requisite level of knowledge?

(a) Traditional approach: distinguishing between different degrees of knowledge

 This is just history (in law); but it has theoretical significance.
 The Baden scale of knowledge:
(1) Actual knowledge (“real” actual knowledge)
(2) Wilful blindness (actual)
(3) Wilful and reckless failure to make such inquiries as an honest and reasonable person
would have made (actual)
(4) Knowledge of circumstances that would indicate the facts to an honest and
reasonable person (constructive)

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 (5) Knowledge of circumstances that would put an honest and reasonable person on
inquiry (constructive)

 View 1: actual knowledge is necessary:

 Re Montagu’s Settlement Trusts [1987] UKHC (Ch.):
 “…Knowledge is not confined to actual but at least knowledge of types (ii) and
(iii) in the Baden case… for in such cases there is a want of probity which
justifies imposing a constructive trust”
 Eagle Trust Plc v SBC Securities Ltd [1993]
 Vowan de Groot Properties v Eagle Trust Plc – “want of probity”

 View 2: constructive knowledge is sufficient:

 Karak Rubber v Burden (No.2) [1972] (unimportant)
 Belmont Finance v Williams Furniture (No.2) [1980] (unimportant)
 Rolled Steel Products (Holdings) Ltd v British Steel Corporation [1986]
(unimportant)
 Agip (Africa) Ltd v Jackson [1990] (unimportant)
 Houghton v Fayers [2000] (unimportant)

(b) Current approach (since 2001): unconscionability

 BCCI (Overseas) Ltd v Akindele [2001] UKHC (Ch.)
 Please refer to case notes
 This case imposed a single test: whether the recipient’s state of knowledge must be
such as to make it unconscionable for him to retain the benefit of the receipt,
although it is not entirely clear what it means.

 Cf. Criterion Properties plc v Stratford UK Properties LLC [2004]

 Please refer to case notes.
 This case believes that knowing receipt is irrelevant where apparent authority
arises:
(a) If the contract is valid, there is no claim. The assets are transferred completely.
(b) If the contract is void, the available remedies are proprietary and unjust
enrichment.
 *But I believe this is no good authority to oppose to the test of unconscionability in
knowing receipt because the judgment says knowing receipt is simply irrelevant.

 Thanakharn v Akai Holdings [2010] HKCFA

 Please refer to case notes:
 Judgment – “on the requisite statement of mind”
 Commentary – “on unconscionability”
 This case reaffirms the position in Akindele and held that the test is
unconscionability.
 Nonetheless, it sort of reformulated test as being whether the recipient is “irrational”
as to what he was told.
 But it remains arguable whether this has a general application or is it limited to
apparent authority cases only.

 Otkritie International Investment Management Ltd v Urumov [2014] UKSC

 Cited Snell’s in Equity:“Unconscionability is supposed to involve some higher
degree of wrongfulness than just constructive knowledge or failure to make enquiry
that an ordinary reasonable man would do”

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  There is a distinction between commercial transaction and gratuitous transaction
 Commercial transaction: there is a justification for higher requirement because
there is no established practice of checking title (like land law) and the speed of
commerce would mean that we do not expect the party to spend much time
checking things. The defendant may need to be subjectively aware that he is
receiving tainted property before his receipt could be stigmatized as
unconscionable.”
 Gratuitous transaction: people should not assume that the money comes from a
lawful source. It may be that it would still be unconscionable to fail to make
enquiry that an ordinary reasonable will do. If you fail to make enquiry that an
ordinary reasonable person will make in gratuitous transaction, which would be
enough to make him unconscionable.
 NB. The policy reason is that he did not provide consideration so it is not too
harsh to take the property away from you

(c) Alternative approach: strict liability subject to the defence of change of position:
 So far, this alternative approach is not the law, but there are various judicial and extra-
judicial opinions saying that recipient liability should be restitutionary in nature than
compensatory.
 In this section, I would discuss the jurisprudential basis of recipient liability.

DISCUSSIONS: NATURE OF RECIPIENT LIABILITY

(1) Preliminary:
 Note that I term the discussion “recipient liability” intentionally. It is not the same as
knowing receipt. Recipient liability has a broader coverage.

(2) Scope of discussion

 In order to grasp the concept of knowing receipt clearly, we need to sort out the
issues:
(1) “Knowing” receipt – is actual knowledge or constructive knowledge required?
(2) Is the liability fault-based or receipt-based?
(3) Is the remedy compensatory or restitutionary?
(4) Is the remedy restitutionary or compensatory in nature?

(3) Some ideas

 The equitable proprietary claim for misappropriated properties can fail by defence of
Equity’s Darling – bona fide purchaser without actual or constructive knowledge.
 Nonetheless, for the personal claim of knowing receipt, it is unclear what the level of
requisite knowledge is.
 The underlying problem is that the nature of the claim is insufficiently explained.
While Akindele explained the test in terms of unconscionability, it does not solve the
longstanding controversy.
 So what is the nature of the claim? Is it fault-based or receipt-based?
 It follows that if it is fault-based, the remedy would be compensatory in nature. If
it is receipt-based, the remedy would be restitutionary in nature.
 It follows that if it is restitutionary, the liability would be strict, as the core
function of restitution is to detach from the defendant the right of a gain, rather
than to give compensation for loss.
 Therefore, in simple words, restitutionary remedy = strict liability = receipt-
based

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  The position in Akindele and Thankhorn, which suggests that unconscionability
is necessary, might be a supporter of fault-based liability. Liability is not strict,
and causation must be proved. The remedy is compensatory in nature.
 The suggestion below suggest that knowing receipt is based on “strict liability”
subject to defences of changed position and bona fide purchaser. I find it difficult
because fault could be inherent in the defences, especially fault committed on good
faith.

(4) The suggestion

 Twinsectra v Yardley [2002] UKHL [para.105], dictum
 “Liability for "knowing receipt" is receipt-based. It does not depend on fault.
The cause of action is restitutionary and is available only where the defendant
received or applied the money in breach of trust for his own use and benefit: see
Agip; Royal v Tan. There is no basis for requiring actual knowledge of the breach
of trust, let alone dishonesty, as a condition of liability. Constructive notice is
sufficient, and may not even be necessary. There is powerful academic support
for the proposition that the liability of the recipient is the same as in other cases
of restitution, that is to say strict but subject to a change of position defence.”

 Criterion Properties plc v Stratford UK Properties LLC [2002]

 Please refer to case notes
 It says, where the agreement is set aside, the available remedies would be (1)
proprietary claim; (2) unjust enrichment. A claim of knowing receipt simply does
not arise.
 As can be seen, both claims are restitutionary in nature. Some people simply
interprets it as a suggestion that knowing receipt should also be restitutionary.
With respect, I disagree. I think it says knowing receipt is irrelevant in such cases
and therefore this case is irrelevant to our discussion.

 Lord Nicholls, extra-judicially:

 Recipient liability should be strict, and subject to the defence of change of
position.
 Recipient liability is founded on vindication of equitable property rights, the
exact counterpart of common law action for money had and received (i.e., unjust
enrichment (strict liability)). Where the D had received, but no longer retains,
property in which the claimant had an equitable proprietary right, then the fact
that D has interfered with the claimant’s equitable proprietary rights means that it
is appropriate that D’s liability should be strict.
 “The Diplock principle is at hand and available to be reshaped, by being extended
to all trusts but in a form modified to take proper account of the subsequent
decision of HL in Lipkin Gorman. The modification would make the Diplock
principle more acceptable, by softening its rigour with the defence arising from
change of position. At the same time the opportunity should be taken to decide
that this form of relief is no longer subject to a pre-condition that a P must first
exhaust his remedy against the trustees”

(5) Responses
 Smith: Equity should not simply reflect what occurs to law because equitable
proprietary rights are not protected in the same way as legal rights

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  E.g. Legal rights are not defeated by bona fide purchaser, and beneficiaries with
equitable right do not have direct claims in tort of conversion or negligence
 E.g., Legal rights are easy to detect, but not equitable rights. Therefore, equitable
property rights should be fault-based.
 Policy reasons: it is not appropriate for third party to be held strictly liable for the
value of property received because equitable interests tend to be hidden. It is
only where 3rd party knew or suspected that there might be such interest in the
property that it is appropriate to hold 3 rd party liable  strict liability place a lot
of burden on 3rd party, especially on banks
 Gardner: receipt-based liability derives from the failure to preserve trust property, for
such liability to arise, the recipient must have been aware of the need to preserve the
property, hence the need to prove unconscionability.
 Explanation: different from a trustee who pledges to preserve trust property, if
equity wishes a person to subject to the same duty, he must have knowledge that
what he’s receiving is not supposed to be entitled to him, or it would be
unconscionable for him to treat it as his.
 Therefore, it is reasonable for a trustee to account of his profits on a receipt-
based, but not for a recipient who might or might not know what he doing was
wrong.
 Response: what this guy’s saying is confusing. First, a failure to preserve trust
property is fault-based, not receipt-based. Second, the failure to preserve trust
property duty fails at the time when he actually converts the asset, not at the time
of receipt. But the “fault” in knowing receipt apparently isn’t referring to the
fault of failure of preservation of assets; it only refers to the unconscionability in
receiving the property. See my further comments below.

 No English authority has yet fully considered the strict liability approach

 Akindele, per Nourse LJ

 “While in general it may be possible to sympathize with a tendency to subsume a
further part of our law of restitution under the principles of unjust enrichment, I
beg leave to doubt whether strict liability coupled with a change of position
defence would be preferable to fault-based liability in many commercial
transactions, for example, where, as here, the receipt is of a company’s funds
which have been misapplied by its directors. Without having heard argument it is
unwise to be dogmatic, but in such a case, it would appear to be commercial
unworkable and contrary to the spirit to the rule in Royal British Bank v
Turquand that simply on proof of an internal misapplication of the company’s
funds, the burden should shift to the recipient to defend the receipt either by
a change of position or perhaps in some other way. Moreover, if the
circumstances of the receipt are such to make it unconscionable for the recipient
to retain the benefit of it, there is an obvious difficulty in saying that it is
equitable for a change of position to afford him a defence.”

 Say-Dee v Farah Constructions [2007]

 In any event, it would be a “grave error” to adopt a strict liability approach. It
would lead to injustice and cause great confusion, contrary to both principle and
authority.

 City Index v Gawler [2008] UKHC (Ch.)

Facts

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  An employee of a company had stolen 9 million in breach of fiduciary duty. The
money had been received by City Index, who knew the breach.
Held
 Knowing receipt concerns civil liability contribution
 Court adopted BCCI v Akindele test on unconscionability to compensate loss,
rather than liability to make restitutions

(6) My response
 First of all, it might be false to base knowing receipt is on vindication of property
rights. I think this might be due to its historical origins that the donee is “liable as a
constructive trustee”. If this is true, then it should be true that a receipt-based remedy
is based on vindication of property rights. But as the law has developed, we see that
this might not remain true. One may say the law has gone the wrong way, or say we
should depart from its historical origins.
 Nonetheless, well-recognized is that knowing receipt is a personal remedy, not
proprietary. The difference between vindication of property rights and unjust
enrichment has already been illustrated by Foskett v McKeown. Therefore, if unjust
enrichment, the alleged “common law counterpart” of knowing receipt, cannot be
consistent with any vindication of property rights, so cannot knowing receipt.
Therefore, knowing receipt is not restitutionary on the basis of vindication of
property rights.
 I think there are different cases of recipient of liability and they should be carefully
distinguished.
 For example, in Criterion and Akai Holdings, it involves an issue of apparent
authority. There was a contract between the company and the recipient. I do not
doubt that Lord Nicholls was right to hold that under a void contract, the person who
is not entitled to contracted benefits could be sued in unjust enrichment. Nonetheless,
I doubt it that the unjust enrichment claim is capable of replacing and prohibiting a
parallel knowing receipt claim.
 Anyhow, this does not help cases where the beneficiary/principal is not involved. If a
trustee simply transacts the misappropriated assets with the recipient knowing his
breach, and he traded fairly, it is hard to say he is “enriched” in any sense. And in this
situation, it is where knowing receipt could come to help. We need to prove that he is
at fault at the time when he received the asset, the test of which is the Akindele test: it
would be unconscionable for him to retain the benefit of the property.
 In other words, “while he is not unjustly enriched, it is still unconscionable for
him to retain the benefit of the property”.
 I would therefore conclude that 3 remedies are available: equitable property claim
(strict); unjust enrichment (strict, subject to defences), knowing receipt (fault-based).
I disagree with the new suggestion.

(7) Now, we turn to the final question: level of knowledge required

 It is hard to conclude from the above about anything about the requisite level of
knowledge. That’s why we say the unconscionability test is empty.
 So the above is actually irrelevant in determining what level of knowledge is required
(LOL)
 But I am in support of the actual level requirement, for 3 reasons:
(1) Akindele distinguished the cases which supports the sufficiency of constructive
notice and I find that distinction is valid.
(2) Akai Holdings imposed an irrational test, that actually is actual knowledge
(Baden scale case iii)

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 (3) See also Otkritie v Urumov:


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4. Remedies
 Thanakharn v Akai Holdings
 Please refer to case notes:
 Judgment – “on remedies”
 Commentary – “on remedies”.
 The remedy is equitable compensation, not restitution.
 Proof of causation is necessary, applying Target Holdings: but-for test, losses flowing from
the breach with the benefit of hindsight + common sense.

 This is a personal remedy to compensate losses. It follows that there is no disgorgement of profit,
unless the profit overlaps with the losses of the principal/beneficiary.
 NB. Obiter in Novoship below suggests it does, nevertheless.

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 Part III: Dishonest Assistance

2. Introduction
 Concerns a stranger who assists a trustee to commit a breach of trust. He may be personally liable
to compensate the trust beneficiaries for any losses and account of profits caused by that breach.

 Nature of dishonest assistance

 Twinsectra v Yardley, per Lord Millett [para.107]
 “The accessory's liability for having assisted in a breach of trust is quite different. It is
fault-based, not receipt-based. The defendant is not charged with having received trust
moneys for his own benefit, but with having acted as an accessory to a breach of trust.
The action is not restitutionary; the claimant seeks compensation for wrongdoing. The
cause of action is concerned with attributing liability for misdirected funds. Liability is
not restricted to the person whose breach of trust or fiduciary duty caused their original
diversion. His liability is strict. Nor is it limited to those who assist him in the original
breach. It extends to everyone who consciously assists in the continuing diversion of the
money. Most of the cases have been concerned, not with assisting in the original breach,
but in covering it up afterwards by helping to launder the money.
 But this is of course arguable. For example, there are commentators who say it is a primary
liability. See discussions below.

 The rule against dishonest assistance is justified purely by deterrence.

 But since people do and need to assist others in a commercial world, it should not be easy to
find liability for dishonest assistance since this discourages commercial transaction.
 Therefore, more stringent requirement of dishonesty is preferred

3. Requirements
 Grupo Torras v Al-Sabah [1999], per Mance J:
(1) A breach of trust or fiduciary duty (J D Wetherspoon v Van de berg [2009] UKHC (Ch.))
(2) In which the defendant assisted (Brinks v Abu Saleh (No.3) [1996], Cf. Barlow Clowes v
Eurotrust [2006])
(3) Dishonestly.
(4) Resulted in a loss.
 What about gains? Novoship [2014] says yes. See below.

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4. Requirement 1: breach of duty by fiduciary
 Any breach of trust or fiduciary duty may suffice. It does not need to be a dishonest breach.
 Royal Brunei Airlines v Tan [1995] UKHL
Facts
 Tan was the managing director of a travel agency. Royal Brunei Airlines employed the travel
agency for the sale of tickets. It is agreed that the travel agency will hold the sale proceeds on
trust for the airline. Nonetheless, the travel agency, with Tan’s full knowledge and assistance,
paid money into its general account and used it for its own business.
 The travel agency went into liquidation.
Held
 The trustee’s state of mind is irrelevant. The dishonesty requirement only points to the
assister.
 Affirmed in Twinsectra v Yardley

5. Requirement 2: assistance
(a) Procuring the breach
 It must be established that the accessory caused it. The test is the but-for test (Virgo, p.700)
 NB. Strictly speaking this is not the type of assistance we’re talking about.

(b) Assistance and encouragement

 For assistance and encouragement: The court emphasizes that there is a need to show some
connection between the assistance and the breach of trust/ fiduciary duty, but not necessary
to show a direct causation between the loss and assistance:

Brinks v Abu Saleh (No.3) [1996] UKHC

Facts
 The husband laundered the proceeds of a gold bullion theft, by driving to Switzerland
with cash hidden in the car, sometimes with his wife there with him.
 Wife thought her husband was probably avoiding taxes, but did not know it was assisting
in breach of trust. Brinks Ltd argued that she had dishonestly assisted in the breach of
trust.
Held, per Rimer J
 The husband is liable; the wife is not.
 The wife had not assisted her husband, because her accompaniment was merely ‘in the
capacity’ as his wife rather than providing cover for money laundering.
 She may have made it a more pleasant experience but it was not ‘assistance of a nature
sufficient to make her an accessory to the breach of trust.’
 It was not enough to be dishonest about one thing, if that was not the thing being done.

COMMENTARY
 Seemed to suggest that 3rd party must perform some positive act of assistance, and
passive acquiescence inside is not sufficient to establish liability – liability too narrow

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6. Requirement 3: dishonesty
 Before 1995, the requirement was of knowledge, and there was divergence of views as to whether
subjective knowledge was necessary or whether objective knowledge was sufficient.

Since 1995,
 Royal Brunei Airlines v Tan [1995] UKHL
Facts (see above)
Held, per Lord Nicholls,
 The test of dishonesty is an objective test with a subjective element:
 Whether an honest person would act the same in similar circumstances (objective),
 Taking into account the experience and intelligence of D (subjective)
 NB. The subjective element is subject to various interpretations.

2002
 Twinsectra v Yardley [2002] UKHL
Facts: see notes_07: RT & CT.
Held, per Lord Hutton (majority)
 Lord Nicholls’ test in Royal Brunei means:
(1) D’s conduct is dishonest by the ordinary standards of reasonable and honest person, and
(2) The defendant himself realizes that the conduct would be considered to be dishonest by
those objective standards
 In this case, the solicitor was not dishonest, because he genuinely believed that he was
receiving loans on behalf of Yardley and subject to his order.

 Lord Hutton proposed the requirement of both objective and subjective dishonesty.

Held, per Lord Millett (dissenting)

 Lord Nicholl’s test means an objective test taking into account the person’s personal
characteristics, his knowledge, and any other relevant special circumstances.
 Compared between civil and criminal liability. In civil law, we have objective tests for almost
everything. Subjective tests are only for criminal law. At the end of the day we are not
imposing criminal liability. In civil liability cases, a less stringent test will not lead to
injustice

 Lord Millett sticks with objective dishonesty with regards to subjective elements.
 He focuses more on the dishonest conduct rather than his mind.

APPLICATION
 Lord Hutton in Twinsectra was followed in Eng CA and HKCA, but doubted in NZ and
HKCFI.
 Twinsectra (majority) changes the test. People were pretty horrified by the outcome,
especially because he was a solicitor. It’s not good for the reputation for the law for a
solicitor to say “I don’t think I was not dishonest”. Fortunately, Lord Hoffmann seemed to
have rectified this in Barlow Clowes.

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 2005
 Barlow Clowes International Ltd v Eurotrust International Ltd [2006] PC
Facts
 Claimant (a company) had been used to perpetrate a fraudulent offshore investment scheme.
 Clowes, the perpetrator of the scheme, was convicted of fraud. Some of the investor’s money
had been paid through bank accounts maintained by the D company.
 The claimants alleged that the D company (isle of Man) and its director (Hanwood) had
dishonestly assisted Clowes to misappropriate the investors’ money in breach of trust.
Held, per Lord Hoffman
 Adopted Lord Millett’s view in Twinsectra on the interpretation of Lord Nicholl’s test:
 Lord Hutton did not mean that we must know what we did was wrong, but know some
facts and those facts would render the behavior dishonest.
 “Consciousness that one is transgressing ordinary standards of honest behaviour” equals
“consciousness of acts which amounts to transgressing ordinary standards of honest
behavior”.
 Henwood strongly suspected that the money had been paid by members of the public who
thought that they were investing in securities and knew that the money was being
transferred to Clowes for his personal use; he suspected that money was transferred in
breach of trust, and make no further inquiries
 It is sufficient, but not necessary to have actual knowledge of breach. As there was clear
suspicion of breach of trust/fiduciary duty, and there is no need to know precise
arrangement,
 He was found liable.

 Lord Hoffman re-interprets the judgment. He think both of them referred to an

objective test.

APPLICATION
 Followed in Abou-Rahmah v Abacha [2006] UKCA

2008
 AG of Zambia v Meer Care & Desai (a firm) and others [2008] UKCA
Facts
 A solicitor helped client (ex-president of Zambia and other government officials) to launder
money.
Held
 The test is an objective one which takes account of the individuals in questions characteristics
 This is a lawyer, although he had international transaction experience, he was not very
competent. He was keen to get business, and a person in that position might not consider it
dishonest to provide service to such a person.
 Not liable

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  Is knowledge necessary?
 Knowledge is not a defining ingredient of accessory liability: Royal Brunei
 BUT Lord Nicholls: the honesty of a defendant’s conduct can only be assessed in the
light of what he know when he acted
 Therefore: D need not know all the details of the primary breach, but he must have known in
broad terms what the design was, and, in light of D’s knowledge, experience and intelligence,
whether D’s conduct falls below ordinary standard of honesty
 E.g. D must have known ‘that the person he is assisting is not entitled to do what he is
doing’

7. Remedy
 There is a debate as to whether the remedy is accessory or primary.

Considerations: Primary liability (by wrongdoing) Secondary liability (by assistance)

Breach by fiduciary  Unclear whether it is required  Must be required as the
if the assistance is considered liability of assister is
an independent, primary tort secondary to the primary
 But it should be factually breach of the fiduciary.
relevant.
Knowledge?  As an independent tort, we  We expect knowledge
can expect that no knowledge requirement to be high.
is required.
What is the remedy?  Independently assessed,  Jointly and severally liable
assister liable for losses with the primary wrongdoer
resulted from the assistance. for the losses they have
caused

 Therefore, from the element required for dishonest assistance (breach and knowledge), the
remedy should be secondary and assessed jointly and severally with the primary defendant.
This is the orthodox and majority view.

 On the other hand, there are commentators who say (Ridge)

 The nature of the accessory’s wrong is distinct from, albeit parasitic on, that of the
primary wrongdoer (in other words, it is secondary in a sense that it derives from the
primary, but their liability should be separately accounted)
 This creates the conceptual space for the remedies to differ as between the primary
wrongdoer and accessory; only the former and not the latter has assumed fiduciary
obligations towards the claimant.
 Therefore, in the profits context, an accessory’s remedy would be assessed on a primary
basis.
 Novoship adopted this approach. See below.

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  REMEDY
 The liability of a dishonest assistant has been described as:
 “Accountable on the footing of dishonest assistance” or
 (Williams v Bank of Nigeria [2014] UKSC, per Lord Sumption)
 “Accountable in equity”
 Paragon Finance; Dubai Aluminium
 They’re just the same  But accountable for what? Losses? Gains?

 Novoship (UK) Ltd & Ors v Nitikin & Ors [2014] UKCA (must read)
Facts
 Mr. Mikhaylyuk (M) was the director of Novoship. He was involved in a series of
dishonest schemes, where bribes were paid to him in connection of chartering
Novoship’s vessels.
 In one scheme, M directed a third party (Ruperti) to pay substantial secret
commission both to himself and Amon, who was owned and controlled by Mr.
Nitiken.
 In the meantime, M negotiated charter contracts with Henriot (a company), which
also was owned and controlled by Mr. Nitiken. This charter was performed at
commercial (fair) rates.
Issues:
(1) Was Mr. Nitiken dishonestly assisting Mr. Mikhaylyuk in his breach of fiduciary
duties?
(2) Is the account of profit remedy available?

Held, per Longmore LJ

On breach of duty and dishonest assistance
 Clarke LJ in first instance that, although the Henriot Charters were negotiated at
commercial rates, there was nonetheless a breach of fiduciary duty because M was
negotiating the Henriot Charters with N at the same time as carrying out the Scheme
(which involved secret payments for the benefit of N). There was a realistic
possibility of a conflict between M’s duty of loyalty to NOUK and M’s personal
interest in favouring N in negotiating the Henriot Charters. M’s failure to seek
NOUK’s consent – fully informed with knowledge of what was occurring under the
Scheme – to negotiate the Henriot Charters with N was a further breach of M’s
fiduciary duties to the NOUK companies. Agreed by CA.
 While the bribery was not engineered by N but by a third party, there was
nevertheless a dishonest assistance because N in conducting such negotiations had
knowledge or belief that M had not informed his principals.

On remedies
 The way in which the liability of a dishonest assistant has been described as
“accountable in equity” [para.75]
 “The nature of the liability, as it seems to us, is that the knowing recipient or
dishonest assistant has, in principle, the responsibility of an express trustee.”
[para.83]
 Therefore, both losses and profits should be accounted for.

Causation
 A causation test is appropriate. [para.94]

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  “But for” entry into the charters, profits would not have been made. But the but for
test is insufficient. The real or effective cause of the profits was the unexpected
change in the market. [para.113]

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 Discretion
 Where a claim for an account of profits is made against one who is not a fiduciary,
and does not owe fiduciary duties, the court has a discretion to grant or withhold the
remedy.
 Therefore, the ordering of an account in a non-fiduciary case is not automatic.
 Here, to order an account of profit would be disproportionate in relation to the
particular form of the wrongdoing.

COMMENTARY*****
Significance
 (1) The significance of this case is that the court now recognizes that a dishonest
assister who caused no loss to the principal and no gains to the fiduciary will still be
stripped of profits if it is proved that his gains is a result of the breach.
 (2) The traditional language of "liability as a constructive trustee" is finally fading
from view—after all, the accessory does not necessarily hold any property on trust
 (3) The judgment in Novoship means that gain-based remedies need to be assessed
separately as regards the fiduciary and accessory.
 If the fiduciary makes a profit but not the accessory, the accessory is not liable to
account for the fiduciary’s profit.
 Reason 1: "There is no equity to compel someone who has not made a profit
from his breach, or dishonest assistance in that of another, to account for a profit
which he has not made and which does not represent a loss which the principal
has suffered". (Clarke J in HC)
 Reason 2: an order that the accessory account for profits made by the primary
wrongdoer seems to be a somewhat punitive measure. Although bribery invites
serious deterrence, punitive awards should be through overt recognition of the
principles and policies underpinning punitive remedies. Account of profits is not
a device for imposing punitive measures.

Causation
 In Murad v Al-Saraj [2005] UKCA, CA held that for breach of fiduciary duty, no
causation is required against wrongdoing fiduciary. The obiter was that this should
also apply to dishonest assisters. This was followed by Christopher Clarke J. in
Novoship.
 But CA in Novoship does not follow the obiter. It says that a dishonest assister is not
a fiduciary and has not undertaken to act in the principal’s best interests. A stricter
causal link between the accessory’s gain and the dishonest assistance is necessary.
 Agreed.
 The CA rejected the but for test, and used the direct causal connection test.
 This latter concept is ill-defined, although the result in Novoship seems
satisfactory.
 But it would be better to introduce principles of remoteness: some gains may be
irrecoverable if they do not derive directly from the commission of the wrong
 Here, Mr Nikitin’s gain was the opportunity to enter into the Henriot
charters, but these were at market rates and not especially advantageous. The
profit of $109 million was caused by market fluctuations, which were too
remote from the breach of duty.

On discretion
  Gain-based damages are not available in every instance of wrongdoing. It is right
to be cautious about their availability, especially where the defendant has not

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 voluntarily undertaken fiduciary duties. Disproportionate results might also be
avoided through granting an equitable allowance.
The future
 Clear principles of accessory liability still need to be enunciated. It has sometimes
been said that dishonest assistance is an "equitable tort", and Novoship is consistent
with the view of the Law Commission that gain-based damages be available for any
tort or equitable wrong where the defendant’s conduct showed a "deliberate and
outrageous disregard of the plaintiff’s rights".

Question:
 Is this decision correct or not? Should a dishonest assister be stripped of profits?
 The answer to that really depends on whether you think how these people are like
trustees. Constructive trustees? If you think that people belong to that box, you will
strip them of gains.
 Furthermore, the idea that these people are like trustees, if applicable to dishonest
assistance, should certainly apply to knowing receipt as well. Should knowing
recipients be disgorged of profits too? This case suggests it does, though it is obiter.
 By contrast, Williams (below) which suggest that dishonest assistance and knowing
receipt should be subject to limitation period restrictions, i.e., they’re not treated as
trustees.

8. Should accessory liability be a tort?

 The similarity between equitable liability for dishonest assistance and tortious liability at
common law tort has grown stronger with the recent acceptance by the HL that the partners of a
solicitor liable for dishonest assistance was rendered in the ordinary course of the firm’s business:

Dubai Aluminium Co v Salaam [2003] UKHL

Facts
 Mr. Salaam defrauded Dubai Aluminium. Mr. Salaam’s solicitor, Mr. Amhurst, was from the
law firm Amhurst Brown Martin & Nicholson. Dubai Aluminium sued the law firm and
settled for $10m.
 Then, the law firm sought contribution from Mr. Salaam under the Civil Liability
(Contribution) Act. This required showing that the law firm was vicariously liable for the
wrongful acts committed by Mr. Amhurst.
Held, per Lord Nicholls
 Firm was vicariously liable to compensate the claimant even though the acts of the solicitor
had not been authorized and had been done for a dishonest purpose, because the assistance to
the fraudulent scheme provided by the solicitor was closely connected with the acts that he
was authorized to do  draft commercial agreements, and so fell within the description of
being in the ordinary course of firm’s business.
 Contribution claim allowed.

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9. Does a claim for dishonest assistance fall within a 6 year limitation period?
 In the old law, there is no limitation period for express trust and CT was treated as an express
trust. Since we now know dishonest assistance is a personal liability, should the 6-year
limitation apply?

s.20 Limitation Ordinance

(1) No period of limitation prescribed by this ordinance shall apply to an action by a
beneficiary under trust, being an action-
(a) in respect of any fraud or fraudulent breach of trust to which the trustee was a party or
privy (fraud)
(b) to recover from the trustee trust property or the proceeds thereof in the possession of
the trustee, or previously received by the trustee and converted to his use.”
(proprietary remedy)

 Before Royal Brunei, which required dishonesty in dishonest assistance, fits into (1)(a), it was
thought that for dishonest assistance there is no time bar (see requirement 1 above).
 After Royal Brunei, the breach of trust does not require dishonesty/fraud; any breach is sufficient.
Therefore, we turn our eyes to the dishonest assister. Does s.20(1)(a) apply to dishonest assister,
especially when we say he is “liable as a constructive trustee”?

 Question: does “trustee” in (1)(a) refers to or include dishonest assistor? When we say a
dishonest assistor is liable as a constructive trustee, what that type of CT means?

 Paragon Finance v Thakerar (1999) UKCA

Held, per Millett LJ
 There are 2 types of CT
(1) Type 1: pre-existing trusts.
 Situation: where there is a pre-existing trust, and the trustee misappropriated the
asset. CT is imposed on the recipient of the asset.
 For this type of trust, the limitation period should not run.
(2) Type 2: pure breach
 Situation: there was no pre-existing trust; the CT only arises by reason of an
impugned transaction.
 For this type of trust, there should be a limitation period.

 Peconic Industrial Development Ltd v Lau Kwok Fai (2009) HKCFA

Facts
 Chio, by fraudulent misrepresentation, induced the Agricultural Bank of China to invest
in a Hong Kong land speculation
 The Bank jointly invested with another company called ‘Peconic’, which director was
Chio.
 The vendor of the purchase was Asiagreat, and turns out that Chio was the beneficial
owner
 The Bank sued Lau, a solicitor, for dishonestly assisting Chio for the breach of his FD
Issues
 Whether the claim is statute-barred by the Limitation Ordinance?
 If so, when does the limitation period start to run?
Held, per Lord Hoffmann
On issue 1
 The principle is that limitations are denied to fiduciaries. Dishonest assisters are not
fiduciaries.

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  Defendants of dishonest assistance are liable “as constructive trustees”
 Nonetheless, there are 2 types of constructive trustees, as stated in Paragon.
 Type 1 concerns trustee de son tort. Trustees are treated as if they are express
trustees.
 Type 2 concerns knowing receipt and dishonest assistance.
 This concerns strangers to the trust who interfered the trust with dishonest acts
 “Constructive trusteeship” here is just a fiction to impose equitable relief
 They are not trustees within the meaning of the law of limitation.
 The wording ‘in respect of’ in s.20(1)(a):
 Does not include an accessory to a trustee’s fraudulent breach of trust
 the ordinance simple means that the beneficiary must be claiming against the trustee
on the ground that he has committed a fraudulent breach of trust
 If it had been intended to include claims against dishonest assisters the language
would have a good deal clearer
 The defendant does benefit under s.20(1)(a). The limitation period for him would be 6-
years.
On issue 2
 Since fraud involved, s.26 is relevant:
 The limitation starts to run at the time they discovered the fraud, or the time when, with
reasonable diligence they would have discovered the fraud
 The court ruled that the claimant should have discovered the fraud when they knew the
facts which amounted to a prima facie case
 i.e. When the DA represented to the claimant that Poon was the beneficial owner but
referred Elsie Chan as her client in the documents  deliberate concealment
 Central Bank of Nigeria v Williams [2014] UKSC
Facts
 Dr. Williams paid money to the solicitor, who fraudulently misapplied the funds, and put
in an account of a bank (CBN)
 Dr. Williams now sued the bank on the basis of dishonest assistance.
Held, per Lord Sumption
 Agreed with Peconic and apply same test and analysis
 Limitation period does not apply to trust but apply to dishonest assistance. It goes to the
nature of fiduciary rules.
 In equity, law never treats fiduciary as committing a breach. Fiduciary rule is treated
as disability rule i.e. fiduciary/trustee is simply incapable of committing a wrong.
When commits wrong, law just treats it as for the benefit of beneficiary. Each time
you have trustee holding property, that possession is not inconsistent with
beneficiary’s right because he holds it on the account of the beneficiary. Therefore,
no trigger for limitation period to apply because limitation period apply only if there
is inconsistency or there is wrong.
 On the other hand, dishonest assistance should be subject to a limitation period.
 There is no pre-existing trust relationship, it is different from the type 1 pre-existing
trust relationship.
 Knowing receipt will also be subject to the limitation period. The possession of assets
under knowing receipt is adverse to the rights of both true trustees and beneficiaries.
No trust has been reposed in him and he does not have the power or duties of a
trustee.

 COMMENTARY
 From these cases we can see how the language of CT for type 2 is mere terminology. It is
similar to a tort action in reality. It therefore makes sense to say that limitation applies.

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  This is strengthened by the ruling in Novoship [2014] which assessed dishonest
assistance separately when seeking to disgorge of profits personally.

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