Stranger liability is the personal liability (i.e. NOT proprietary liability) of people who are not express trustees → it is not their liability to acknowledge the property that they hold is trust property, but their liability to compensate the beneficiaries for trust property that has been misapplied
The first claim will generally be against the trustee. However, others (strangers) may be liable on the basis of two principles: ‘dishonest assistance’ and ‘knowing receipt’.
If a stranger dishonestly assists in a breach of trust, they will be personally liable to the same extent as the trustee, whether or not any trust property passes through their hands
Likewise, a person who receives property, knowing that the property is being transferred in breach of trust, may also be personally liable (although they may also have proprietary liability if they still have the property: see tracing)
If the property is no longer available, the stranger must compensate the trust fund.
Barnes v Addy (1874): strangers of a trust will not usually be liable, unless “those agents receive and become chargeable with some part of the trust property” (i.e. knowing receipt) or “unless they assist with knowledge in a dishonest and fraudulent design on the part of the trustees” (i.e. dishonest assistance)
When it comes to remedies or liability for breach of trust we can divide those people who might be involved into four categories:
- Express Trustees (explored in previous notes)
- Trustees de son tort (someone who acts as trustee but not been appointed)
- Persons who knowingly come into possession of trust property (i.e. knowing receipt)
- Person who assist with knowledge a dishonest breach of trust (i.e. dishonest assistance)
Trustees de son Tort
A person who ‘intermeddles’ with the trust property may be deemed to be a trustee de son tort. A Trustee de son Tort is one form of constructive trustee, and owes the same duties and bears the same liabilities as an express trustee.
Mara v Brown  → a trustee de son tort is a trustee in the eyes of the law
Williams v Central Bank of Nigeria  → Trustees de son tort “are true trustees” and “equity will enforce the obligations that they have assumed by virtue of their status exactly as if they had been appointed by deed”
Knowing receipt: if someone receives property knowing it was conveyed in breach of trust, they be liable to return the property and they may also be personally liable to compensate for any loss caused
El Ajou v Dollar Land Holdings  → Hoffman LJ said if property is conveyed in breach of a fiduciary relationship and the recipient knows that the property is conveyed to him in breach of that fiducariy relationship, the recipient will be liable as a constructive trustee
This doctrine (i.e. knowing receipt) does not require the trustee or the recipient to act dishonestly: breach of trust may be purely inadvertent or accidental (Montagu’s Settlement Trust )
NOTICE AND KNOWLEDGE
In Re Montagu’s Settlement Trust  and MCP Pension Trustees , the court considered the difference between ‘notice’ and ‘knowledge’. It was held that they were not the same thing.
Notice includes not only facts of which the purchaser was aware, but also facts of which (s)he should have been aware or might have discovered on inquiry.
It is important to know that the test in this area is one of ‘knowledge’ and not ‘notice’
- If the defendant is to be fixed with personal liability to account, then it is thought that the defendant must be demonstrated to know those factors which will attach liability to him/her
- Where there is evidence of dishonesty, the courts are more likely to find that the recipient knew or should have known that the property was subject to a trust.
See the case of MCP Pension Trustees 
THE BADEN CATEGORIES
In Baden v Société General , Gibson J set out 5 categories of knowledge (‘Baden categories’) to determine what knowledge is efficient to impose liability on a recipient of property:
- (i) actual knowledge;
- (ii) wilfully shutting one’s eyes to the obvious;
- (iii) wilfully and recklessly failing to make such inquiries as an honest and reasonable man would make (i.e. deliberately not asking questions you should ask);
- (iv) knowledge of circumstances that would indicate facts to an honest and reasonable man
- (v) knowledge of circumstances which would put an honest and reasonable man on inquiry
- First three categories (i-iii) constittues actual knowledge and the last two categories (iv and v) constitutes constructive knowledge
In Re Montagu’s Settlement Trust  it was held the 10th Duke was not liable as a constructive trustee as he had no knowledge that the chattels formed part of the trust property
- His Lordship held that liability should not be imposed unless the conscience of the recipient was affected; this required “want of probity”, which includes the actual knowledge grounds of the Baden categories (i)-(iii) and doubted that the accusations of (iv) and (v) is consistent with an accusation of ‘want of probity’
In Bank of Credit and Commerce International v Akindele  the court said there has been a move away from the formal exercise of determining which level of Baden knowledge the recipient had to a broader test of conscionability
- “All that is necessary is that the recipient’s state of knowledge should be such as to make it unconscionable for him to retain the benefit of the receipt.” (Nourse LJ)
- So the evolution of the doctrine of ‘knowing receipt’ into a doctrine predicated more generally on ‘unconscionability’ emeregd from the decision of the CA in this case
In Armstrong v Winnington Networks Ltd  it was held that although the true test was whether the receipt was unconscionable, rather than which of the Baden categories the knowledge came into, it was helpful to consider the Baden categories
- Baden 1-3 was considered automatically unconscionable (so will be knowing receipt)
- Baden 4 and 5 was considered not automatically unconscionable, but might be if a reasonable person would have known about the breach or a reasonable person would have made inquiries
Constructive knowledge is knowledge that a person is presumed to have: to found constructive knowledge, the person must have had the means of knowing, whether by making enquiries or otherwise → this does not mean, however, that there is automatic constructive knowledge just because the means of finding out were available
- Constructive knowledge may be found where, for example, a person might have acquired the information by asking the other party in a transaction, inspection of a property, reading his correspondence or the contracts that he has signed.
Imputed knowledge is the knowledge of an agent e.g. in Re Montagu’s Settlement Trust , the 10th Duke’s solicitor knew so 10th Duke had imputed knowledge; Megarry J, however, said imputed knowledge was not sufficient for knowing receipt
⇒ You cannot hold an agent (e.g. a solicitor) liable for receipt of property on the basis of their principal’s knowledge → likewise, if property is received by an agent, in knowing receipt, the principal is not automatically liable on basis of imputed knowledge e.g. in El Ajou v Dollar Land Holdings , the company was not liable for property received in breach of fiduciary duty by a person acting as their agent; the imputed knowledge was not sufficient to found a claim
Dishonest Assistance: if a trustee disposes of trust property in breach of trust and someone dishonestly assists in that, then the dishonest assister is personally liable for the loss caused
- The liability to account to the beneficiaries is effectively the same as though the Stanger had been an express trustee and required to account under Target Holdings
- The stranger is ’personally liable to account’ in that she does not hold any property on trust, and in that sense is not an ordinary, constructive trustee; rather, her liability is to compensate the beneficiaries of the trust for the loss which was caused by the breach of trust, with that compensation coming from her own personal property
In Eaves v Hickson (1861) there was a trust set up for the benefit of a man’s children, who could not benefit from the trust as they were illegitimate (i.e. born out of wedlock). He forged a marriage certificate so they could benefit from the trust. It was held that the father was to be personally liable for the loss occasion, so the children had to give the money back.
In Baden v Société General  it was said that “[T]here are four elements which must be established if a case is to be brought within the category of ‘knowing assistance’ (i.e. dishonest assistance):
- You need the existence of a trust (although, technically, a fiduciary obligation is sufficient)
- You need the existence of a dishonest and fraudulent design on the part of the trustee of the trust → but as we saw in Eaves v Hickson that is not strictly necessary
- The assistance by the stranger in that design; and,
- The knowledge of the stranger → that is, of course, not how it works nowadays
ROYAL BRUNEI AIRLINES V TAN : THE LEADING CASE
A travel agency sold flight tickets on behalf of Royal Brunei Airlines (the claimants). The agency agreed to hold proceeds of ticket sales on trust for Royal Brunei Airlines. The agency was in financial difficulty, so Tan (who owns the agency) took money from the trust account and used it to deal with the cash flow problems. The agency subsequently went into liquidation (so claiming against the agency would be a waste of time as it had no money), which meant Royal Brunei Airlines sued Tan as the owner of the agency. Tan was a stranger to the trust but he dishonestly assisted in taking money out the trust account.
The Court of Appeal, in an odd decision, held there was no dishonesty, just incompetence. The case went to the Privy Council who held that Tan was personally liable for dishonestly assisting in breach of the trust and it was unnecessary for the trustee itself to have been dishonest.
Lord Nicholls set out exactly what was meant by ‘dishonesty’:
He said there is an objective standard: it is not what the defendant thought personally, but rather what an honest person would have done if place in same circumstances as the defendant
- If the defendant did not act in the way that an honest person would have acted in those circumstances, then the defendant is deemed to have been dishonest
- He goes on to provide some guidance as to what is or is not dishonesty e.g. acting in reckless disregard of others’ rights or possible rights
An honest person will usually decline to be involved, ask further questions, insist on further advice being obtained, or many other things (Lord Nicholls)
“Ultimately, in most cases, an honest person should have little difficulty in knowing whether a proposed transaction, or his participation in it, would offend the normally accepted standards of honest conduct”
Lord Nicholls also seemed to introduced a semi-subjective element, by allowing the court to “have regard to personal attributes of the third party, such as his experience and intelligence” → nevertheless this is a primarily objective test
- It is commonly held that Lord Nicholls advocated a purely objective test, despite reference to a subjective element, otherwise it seems odd that Lord Nicholls would have clearly expressed that “this is an objective standard”
A SUBJECTIVE TEST?
The House of Lords, in the subsequent case of Twinsectra v Yardley , introduced a subjective test…
In this case, money was held on trust be a solicitor. It was transferred to another solicitor’s client account. The solicitor that received this money wasn’t in knowing receipt as he didn’t receive the money beneficially, but then he transferred the money to a 3rd party in breach of trust. The question was whether or not this was dishonest
The court found he wasn’t dishonest and the court appeared to introduce a subjective test
- The court said: “Dishonesty requires knowledge by the defendnt that what he was doing would be regarded as dishonest by honest people” (Lord Hutton)
- This is a subjective-objective test: it requires objectively dishonest behaviour AND that the defendant understands most reasonable people would regard his conduct as dishonest
- Note: the second limb of the test is whether or not the defendant realised that other people would have considered her actions to have been dishonest and not simply that the defendant herself thought that the action was dishonest
OBJECTIVE OR OBJECTIVE/SUBJECTIVE?
The test set out by Lord Nicholls in Royal Brunei Airlines v Tan is an objective test
The test set out by Lord Hutton in Twinsectra v Yardley appears to be drawn from the criminal test of honesty set out in Ghosh 
- The trouble with the objective test is that it could be very harsh, and the trouble with the subjective test is that it could be too lenient
- So Lord Hutton seemed to provide a similar test as set out in Ghosh whereby the conduct of the defendant has to be objectively dishonest, and that the defendant should appreciate that others would see his conduct as dishonest in the eyes of reasonable people
- To some extent, there is support for the view set out by Lord Hutton e.g. from Royal Brunei Airway v Tan: “an honest person should have little difficulty in knowing whether a proposed transaction, or his participation in it, would offend the normally accepted standards of honest conduct” (this looks like subjective part of Ghosh)
The Privy Council in Barlow Clowes International Ltd v Eurotrust  has suggested a movement back to a purely objective test → this, being a Privy Council decision, is of purely persuasive authority
- This case was approved in Abou-Ramah v Abacha 
FAILURE TO MAKE INQUIRIES
Failure to make inquiries may be an act of dishonesty
See the case of Agip (Africa) v Jackson 
LIMITATION AND STRANGER LIABILITY
Williams v Central Bank of Nigeria  → Williams paid $6m to a solicitor to hold on trust until funds were released in Nigeria. However, the solicitor released the $6m to the Central Bank of Nigeria (CBN) before the release of the funds. Willaims bought an action in knowing receipt and dishonest assistance against CBN
- Under the Limitation Act 1980 there are limitations of actions against a trustee who was in breach of trust → but one exception to this limitation is where a trustee has acted fraudulently: if a trustee acts fraudulent there is no time limitation on brining an action
- The Supreme Court considered whether a knowing recipient or dishonest assister fell within exception
- Trustees are defined in the Limitation Act 1980 by reference to the Trustee Act 1925, which includes constructive trustees
- Not so clear, however, in the circumstances of a knowing recipient → it had always been thought they are a constructive trustee, and therefore covered by the exception
- However, the Supreme Court held the bank could rely on the Act: it was not a constructive trustee within the meaning of the Limitation Act 1980/Trustee Act 1925
To many this decision looks wrong: although it seems fair to say dishonest assisters aren’t constructive trustees, it seems fairly settled that knowing recipients are
- This was largely based on Millett LJ’s judgment in Paragon Finance v Thakerar