The Case of Twinsectra

This essay looks at the case of Twinsectra, most particularly Lord Millet’s views as articulated in the obiter judgement of that case. It analyses to what extent Lord Millet was accurate in describing the interrelationship of the two issues of creation of a Quistclose trust and conduct of breach of a trust and his substantive legal examination of the two questions.

Issues of contention surrounding Quistclose trusts

The case of Twinsectra centred on third party liability in aiding breach of a Quistclose trust. At first glance, one might question why what is often otherwise a relatively simply issue in cases was of such a disputed matter in this case – the case passed through several appeal stages and eventually to the House of Lords, where even there the Lords disagreed as to the determination of trust creation requirements.

One can better appreciate the contention that lay in the case when looking briefly at the facts of it. The appellant in Twinsectra was a solicitor who had refused to provide a personal undertaking required by a lender for the financing of the client. The appellant’s client had therefore approached a second solicitor who gave the undertaking that loan monies would be retained by him until used by the client in the acquisition of property, utilised solely for that purpose. However, in granting this undertaking, the second solicitor had in fact obtained assurances to the same effect from the first solicitor, and only then released the money to the appellant. Subsequently, the client had instructed his first solicitor, the appellant, to release the monies which the appellant duly followed, failing to question the client as to the purpose the monies would be utilised for. The client had in fact used a substantial portion of the monies for purposes other than the acquisition of property, and did not repay the loan, following which the lender commenced proceedings against the first solicitor for acting as an accessory in breach of trust. [1]

The matter can therefore be seen to be far from a usual course of events normally associated with Quistclose trusts. In most cases, the lender would have pursued the actual person who provided the undertaking, in this case the second solicitor, for breach of a said trust. That solicitor had however announced bankruptcy and so the lender chose to pursue the appellant alleging that he had acted dishonestly and therefore assisted in the breach of trust that had occurred. [2]

Indeed it is to be noted that the courts at first instance regarded the matter as relatively simple: The judge in the first instance had therefore stated that no such trust had been created, the appellant had not acted dishonestly and adjudged that to be the end of the matter.The Court of Appeal however had gone against this finding and controversially found that the appellant’s undertaking had in fact created a trust and he had acted dishonestly thus rendering him liable for the proportion of the loan that had been used for purposes other than the acquisition of property. [3]

Lord Millet’s views in the case of Twinsectra dissented from the majority finding in the case. In evaluating Lord Millet’s views, it is essential to look at this majority view to evaluate the different legal analyses that were adopted towards the several legal issues that arose in the case. [4]

The first issue considered in the case was the inter-relationship between the two questions, namely, creation of a Quistclose trust and third party liability for breach of it. The assenting Lords considered that the issues to be determined were consecutive in nature. Thus determination of whether the appellant had acted dishonestly in acting as an accessory to a breach of trust was reliant upon the question of whether there had been a Quistclose trust created in the first place (Quistclose trusts being derived from the nature of trusts found to arise in the well-cited case of Quistclose Investments Ltd v Rolls Razor Ltd) [5] . As such, Lord Millet can be seen to be in agreement with the assenting Lords in how the different questions of the case were to be approached. It therefore seems a sensible conclusion –that a trust must be in existence before one can be described as an accessory to or charged with acting in an unconscionable way. [6]

Lord Millet and the assenting Lords regarded that matters of intention, in creation of a trust were of no relevance to a Quistclose formation, despite the fact that the second solicitor had not been aware of creating a trust, his undertaking to the lender will provide to be sufficient evidence that a Quistclose trust to has arisen even if it was not inteneded. [7]

Elements of dishonesty

Where particular contention arose between the judges however was with regards to the second question, namely what conduct was required to be found for the applicant to be liable for breach of trust. Was actual dishonesty required to be found? If so, how was such dishonesty to be defined, according to an objective or a subjective standard? More particularly, could failure to ascertain what particular objects of trusts were being utilised for – ‘shutting your eyes’ to use a more common phrase – amount to dishonesty? [8]

The majority of judges found that while dishonesty was required for liability in aiding a breach of trust to be established, both an objective and a subjective standard was to be adopted, and that this ruled out the finding of dishonestly simply a result of ‘shutting one’s eyes’. Lord Hoffman relied on the principle set out by the Privy Council in Royal Brunei Airlines v Tan which stated that knowledge of facts was not sufficient to amount to wrongful conduct, and an extra element was required, namely that of finding that there had been dishonestly in mind. [9] Indeed, in Royal Brunei the Privy Council appears to have set the bar higher and stated that in order to attribute wrongful conduct to a person one is required to be conscious that he is transgressing what is considered by him to be ordinary standards of everyday behaviour. [10]

Lord Hutton approached the matter from a slightly different angle, but one that appears to accord well with Lord Hoffman’s judgement. Lord Hutton found that there should be a balance between third party liability for breach of trust – thus one should not consider that it was not at all possible for a third party to be liable for breach of trust, while one should also not come to the conclusion that a third party would be liable even if he was not aware that he was dealing with a trust. The key element, Lord Hutton verified, was that of ‘fault’, and it was this that would render a third party liable for a breach of trust. [11]

Lord Millet’s approach however can be seen to centre on the premise of ‘knowledge’ of breach of trust, rather than fault per se. One might consider that the two conceptions of knowledge and trust are highly inter-related, if not forming one and the same concept. Lord Millet however found otherwise. Constructive notice was to be sufficient to amount to a third party’s knowledge of potential breach of trust. He reasoned, basing his findings on previous case-law, that knowledge did not extend to having knowledge of actual breach of trust, or even the knowledge that one would act dishonestly in breaching a trust. [12]

Lord Millet’s views are to a certain extent justified by academic commentators and indeed by other propositions asserted by the law. The law of restitution for example imposes strict liability and does not necessarily require fault to be shown for breach to be found. The rationale behind doing so appears to be that greater importance is attached to the potential consequences for an innocent party in a restitution claim, than the relative level of attributable fault to one alleged of misfeasance. Lord Millet clearly views that the principles should be equivalent for the two parties. [13]

This seems however to be slightly problematic. Laws of restitution intrinsically limit the category of claims that can be brought under its principles. [14] Laws of trust however govern a much wider category. Lord Millet himself was in agreement that intention was not required to create a trust. [15] In that instance, even allowing for the possibility of a trust being created while also allowing for a third party to be liable for breach of trust, even without requiring an element of dishonesty to be shown, renders it a relatively simple exercise to claim breach of trust against a third party, a matter which can be considered to be highly unfair for that party, especially when taking into account that the party was not the intended trustee in the first place.

One must note however that the majority’s approach of requiring a particular element of dishonesty to be found might be considered to be lifting the burden, of ascertaining and investigating matters, off third parties that are associated with trusts to too large an extent. Indeed, in Twinsectra the finding of the majority resulted in the appellant being held to not be liable for any portion of the loan amount. While undoubtedly appreciated by the appellant, this effectively left the lender without a remedy, despite the fact that a wrong had clearly been committed. In this regard therefore the approach of the majority to the matter resulted in justice for one party rather than the other. [16] Such a factor is however a troubling aspect of all cases and may simply be regarded as an essential aspect of the law attempting to govern relations between parties and achieve objectives of justiciablity and legal certainty in outcomes. [17]

Conclusion

In conclusion, the approach of Lord Millet to issues in the case of Twinsectra can at the very least be described as reasoned and highly commendable. Indeed, to a large extent, Lord Millett agreed with the analysis undertaken by the majority of the House of Lords towards the issue. Thus Lord Millet found, as did the majority of the Lords, that a trust was required to be established before the question of liability of an accessory to breaching that trust was raised and that no intention was required for a trust to be established. Contention in Lord Millet’s views however lies in his approach towards the requirements of intention for third party liability in breach of trust to be established. Thus Lord Millet considered it sufficient for constructive notice of breach for a third party to be held liable, in line with restitution principles. While this approach is commendable for the justice it creates for objects of the trust, the fact is that such an approach when coupled with the consideration that a Quistclose trust is able to arise without intention leads to a situation where it is all too easy to find a third party liable for breach of trust, a situation which is clearly unconscionable and not one intended by the law. In conclusion therefore, Lord Millet’s views are commendable in achieving to seek justice for trustees although a finer balance must be sought and the majority Lord’s views may be preferred in this regard.