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Session 2001- 02
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| Judgments - Twinsectra Limited v Yardley and Others
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HOUSE OF LORDSLord Slynn of Hadley Lord Steyn Lord Hoffmann Lord Hutton Lord Millett OPINIONS OF THE LORDS OF APPEAL FOR JUDGMENTIN THE CAUSETWINSECTRA LIMITED (RESPONDENTS) v YARDLEY AND OTHERS (APPELLANTS) ON 21 MARCH 2002 [2002] UKHL 12 LORD SLYNN OF HADLEY My Lords, 1. My noble and learned friend Lord Hoffmann has referred to the facts relevant to the issues which arise on this appeal and I gratefully adopt them. 2. The first main issue is whether the monies received by Sims and Roper were held in trust. The judge found that they were not; the Court of Appeal held that they were. For the reasons given by Lord Hoffmann I agree firmly with the Court of Appeal. 3. The second issue I have found more difficult. The judge found that Mr Leach had shut his eyes to the problems or the implications of what happened, yet he acquitted him of dishonesty. The Court of Appeal in a careful analysis by Potter LJ concluded that deliberately shutting his eyes in this way was dishonesty within the valuable analysis by Lord Nicholls of Birkenhead in Royal Brunei Airlines Sdn Bhd v Tan [1995] 2 AC 378. 4. There are conflicting arguments. Prima facie shutting one's eyes to problems or implications and not following them up may well indicate dishonesty; on the other hand prima facie it needs a strong case to justify the Court of Appeal reversing the finding as to dishonesty of the trial judge who has heard the witness and gone in detail into all the facts. 5. The real difficulty it seems to me is whether in view of these two conflicting arguments the case should go for a retrial with all the disadvantages that entails or whether one of the arguments was sufficiently strong for your Lordships to accept it and to conclude the question. In the end I am not satisfied that the Court of Appeal were entitled to substitute their assessment for that of the trial judge. Despite my doubts as to the implications to be drawn on a finding of "shutting one's eyes" it seems to me clear that the judge was very conscious of Lord Nicholls' analysis and I do not think he can possibly have left out of account the question whether Mr Leach knew or realised that what he was doing fell below the required standards when he deliberately shut his eyes eg to the implications of the undertaking given by Mr Sims. Mr Leach may have been naïve or misguided but I accept that the judge after hearing lengthy evidence from Mr Leach was entitled to conclude that he had not been dishonest. 6. Accordingly it would be wrong to send the matter for retrial and for these brief reasons and the reasons given by Lord Hutton I would allow the appeal. LORD STEYN My Lords, 7. I agree that the law is as stated in the judgments of my noble and learned friends Lord Hoffmann and Lord Hutton. In particular I agree with their interpretation of the decision in Royal Brunei Airlines Sdn Bhd v Tan [1995] 2 AC 378. In other words, I agree that a finding of accessory liability against Mr Leach was only permissible if, applying what Lord Hutton has called the combined test, it were established on the evidence that Mr Leach had been dishonest. 8. After a trial Carnwath J was not satisfied that Mr Leach had been dishonest. I agree with Lord Hutton's reasons for concluding that the Court of Appeal was not entitled to reverse the judge on the central issue of dishonesty. I too would allow the appeal. LORD HOFFMANN My Lords, 9. Paul Leach is a solicitor practising in Godalming under the name Paul Leach & Co. Towards the end of 1992 he acted for a Mr Yardley in a transaction which included the negotiation of a loan of £1m from Twinsectra Limited. Mr Leach did not deal directly with Twinsectra. Another firm of solicitors, Sims and Roper of Dorset ("Sims"), represented themselves as acting on behalf of Mr Yardley. They received the money in return for the following undertaking:
10. Contrary to the terms of the undertaking, Sims did not retain the money until it was applied in the acquisition of property by Mr Yardley. On being given an assurance by Mr Yardley that it would be so applied, they paid it to Mr Leach. He in turn did not take steps to ensure that it was utilised solely for the acquisition of property on behalf of Mr Yardley. He simply paid it out upon Mr Yardley's instructions. The result was that £357.720.11 was used by Mr Yardley for purposes other than the acquisition of property. 11. The loan was not repaid. Twinsectra sued all the parties involved including Mr Leach. The claim against him was for the £357,720.11 which had not been used to buy property. The basis of the claim was that the payment by Sims to Mr Leach in breach of the undertaking was a breach of trust and that he was liable for dishonestly assisting in that breach of trust in accordance with the principles stated by Lord Nicholls of Birkenhead in Royal Brunei Airlines Sdn Bhd v Tan [1995] 2 AC 378. 12. The trial judge (Carnwath J) did not accept that the monies were "subject to any form of trust in Sims and Roper's hands". I do not imagine that the judge could have meant this to be taken literally. Money in a solicitor's client account is held on trust. The only question is the terms of that trust. I should think that what Carnwath J meant was that Sims held the money on trust for Mr Yardley absolutely. That is the way it was put by Mr Oliver QC, who appeared for Mr Leach. But, like the Court of Appeal, I must respectfully disagree. The terms of the trust upon which Sims held the money must be found in the undertaking which they gave to Twinsectra as a condition of payment. Clauses 1 and 2 of that undertaking made it clear that the money was not to be at the free disposal of Mr Yardley. Sims were not to part with the money to Mr Yardley or anyone else except for the purpose of enabling him to acquire property. 13. In my opinion the effect of the undertaking was to provide that the money in the Sims client account should remain Twinsectra's money until such time as it was applied for the acquisition of property in accordance with the undertaking. For example, if Mr Yardley went bankrupt before the money had been so applied, it would not have formed part of his estate, as it would have done if Sims had held it in trust for him absolutely. The undertaking would have ensured that Twinsectra could get it back. It follows that Sims held the money in trust for Twinsectra, but subject to a power to apply it by way of loan to Mr Yardley in accordance with the undertaking. No doubt Sims also owed fiduciary obligations to Mr Yardley in respect of the exercise of the power, but we need not concern ourselves with those obligations because in fact the money was applied wholly for Mr Yardley's benefit. 14. The judge gave two reasons for rejecting a trust. The first was that the terms of the undertaking were too vague. It did not specify any particular property for which the money was to be used. The second was that Mr Ackerman, the moving spirit behind Twinsectra, did not intend to create a trust. He set no store by clauses 1 and 2 of the undertaking and was content to rely on the guarantee in clause 3 as Twinsectra's security for repayment. 15. I agree that the terms of the undertaking are very unusual. Solicitors acting for both lender and borrower (for example, a building society and a house buyer) commonly give an undertaking to the lender that they will not part with the money save in exchange for a duly executed charge over the property which the money is being used to purchase. The undertaking protects the lender against finding himself unsecured. But Twinsectra was not asking for any security over the property. Its security was clause 3 of the Sims undertaking. So the purpose of the undertaking was unclear. There was nothing to prevent Mr Yardley, having acquired a property in accordance with the undertaking, from mortgaging it to the hilt and spending the proceeds on something else. So it is hard to see why it should have mattered to Twinsectra whether the immediate use of the money was to acquire property. The judge thought it might have been intended to give some protective colour to a claim against the Solicitors Indemnity Fund if Sims failed to repay the loan in accordance with the undertaking. A claim against the fund would depend upon showing that the undertaking was given in the context of an underlying transaction within the usual business of a solicitor: United Bank of Kuwait Ltd v Hammoud [1988] 1 WLR 1051. Nothing is more usual than for solicitors to act on behalf of clients in the acquisition of property. On the other hand, an undertaking to repay a straightforward unsecured loan might be more problematic. 16. However, the fact that the undertaking was unusual does not mean that it was void for uncertainty. The charge of uncertainty is levelled against the terms of the power to apply the funds. "The acquisition of property" was said to be too vague. But a power is sufficiently certain to be valid if the court can say that a given application of the money does or does not fall within its terms: see In re Baden's Deed Trusts [1971] AC 424. And there is no dispute that the £357,720.11 was not applied for the acquisition of property. 17. As for Mr Ackerman's understanding of the matter, that seem to me irrelevant. Whether a trust was created and what were its terms must depend upon the construction of the undertaking. Clauses 1 and 2 cannot be ignored just because Mr Ackerman was not particularly interested in them. 18. The other question is whether Mr Leach, in receiving the money and paying it to Mr Yardley without concerning himself about its application, could be said to have acted dishonestly. The judge found that in so doing he was "misguided" but not dishonest. He had "shut his eyes" to some of the problems but thought he held the money to the order of Mr Yardley without restriction. The Court of Appeal reversed this finding and held that he had been dishonest. 19. My noble and learned friend Lord Millett considers that the Court of Appeal was justified in taking this view because liability as an accessory to a breach of trust does not depend upon dishonesty in the normal sense of that expression. It is sufficient that the defendant knew all the facts which made it wrongful for him to participate in the way in which he did. In this case, Mr Leach knew the terms of the undertaking. He therefore knew all the facts which made it wrongful for him to deal with the money to the order of Mr Yardley without satisfying himself that it was for the acquisition of property. 20. I do not think that it is fairly open to your Lordships to take this view of the law without departing from the principles laid down by the Privy Council in Royal Brunei Airlines Sdn Bhd v Tan [1995] 2 AC 378. For the reasons given by my noble and learned friend Lord Hutton, I consider that those principles require more than knowledge of the facts which make the conduct wrongful. They require a dishonest state of mind, that is to say, consciousness that one is transgressing ordinary standards of honest behaviour. I also agree with Lord Hutton that the judge correctly applied this test and that the Court of Appeal was not entitled, on the basis of the written transcript, to make a finding of dishonesty which the judge who saw and heard Mr Leach did not. 21. The ground upon which the Court of Appeal reversed the judge's finding was that he had misdirected himself in law. His finding about Mr Leach shutting his eyes to problems meant that he did not appreciate that a person may be dishonest without actually knowing all the facts if he suspects that he is about to do something wrongful and deliberately shuts his eyes to avoid finding out. As Lord Nicholls said in the Royal Brunei case, at p 389, an honest person does not:
So the Court of Appeal said that, when the judge said that Mr Leach was not dishonest, he meant that he was not "consciously dishonest". But the finding about shutting his eyes meant that in law he had nevertheless been dishonest. 22. I do not believe that the judge fell into such an elementary error. He had himself quoted the passage I have cited from the opinion of Lord Nicholls in the Royal Brunei case a little earlier in his judgment. He could not possibly have overlooked the principle. That said, I do respectfully think it was unfortunate that the judge three times used the expression "shut his eyes" to "the details", or "the problems", or "the implications". The expression produces in judges a reflex image of Admiral Nelson at Copenhagen and the common use of this image by lawyers to signify a deliberate abstinence from inquiry in order to avoid certain knowledge of what one suspects to be the case: see Manifest Shipping Co Ltd v Uni-Polaris Shipping Co Ltd [2001] 2 WLR 170, 179, per Lord Hobhouse of Woodborough, and Lord Scott of Foscote, at pp 207-210. But, as my noble and learned friend Lord Millett points out, there were in this case no relevant facts of which Mr Leach was unaware. What I think the judge meant was that he took a blinkered approach to his professional duties as a solicitor, or buried his head in the sand (to invoke two different animal images). But neither of those would be dishonest. 23. Mr Leach believed that the money was at the disposal of Mr Yardley. He thought that whether Mr Yardley's use of the money would be contrary to the assurance he had given Mr Sims or put Mr Sims in breach of his undertaking was a matter between those two gentlemen. Such a state of mind may have been wrong. It may have been, as the judge said, misguided. But if he honestly believed, as the judge found, that the money was at Mr Yardley's disposal, he was not dishonest. 24. I do not suggest that one cannot be dishonest without a full appreciation of the legal analysis of the transaction. A person may dishonestly assist in the commission of a breach of trust without any idea of what a trust means. The necessary dishonest state of mind may be found to exist simply on the fact that he knew perfectly well that he was helping to pay away money to which the recipient was not entitled. But that was not the case here. I would therefore allow the appeal and restore the decision of Carnwath J LORD HUTTON My Lords, 25. I have had the advantage of reading in draft the speeches of my noble and learned friends Lord Hoffmann and Lord Millett. For the reasons which they give I agree that the undertaking given by Mr Sims to Twinsectra Ltd ("Twinsectra") created a trust, and I turn to consider whether the Court of Appeal was right to hold that Mr Leach is liable for assisting in Mr Sims' breach of trust. Carnwath J held that the undertaking did not create a trust, but he also held that Mr Leach had not been dishonest. The Court of Appeal reversed his findings and held that the undertaking gave rise to a trust and that Mr Leach had acted dishonestly and was liable as an accessory to Mr Sims' breach of trust. 26. My Lords, in my opinion, the issue whether the Court of Appeal was right to hold that Mr Leach had acted dishonestly depends on the meaning to be given to that term in the judgment of Lord Nicholls of Birkenhead in Royal Brunei Airlines Snd Bhd v Tan [1995] 2 AC 378. In approaching this question it will be helpful to consider the place of dishonesty in the pattern of that judgment. Lord Nicholls considered, at pp 384 and 385, the position of the honest trustee and the dishonest third party and stated that dishonesty on the part of the third party was a sufficient basis for his liability notwithstanding that the trustee, although mistaken and in breach of trust, was honest. He then turned to consider the basis on which the third party, who does not receive trust property but who assists the trustee to commit a breach, should be held liable. He rejected the possibility that such a third party should never be liable and he also rejected the possibility that the liability of a third party should be strict so that he would be liable even if he did not know or had no reason to suspect that he was dealing with a trustee. Therefore Lord Nicholls concluded that the liability of the accessory must be fault-based and in identifying the touchstone of liability he stated, at p 387 H: "By common accord dishonesty fulfils this role." Then, at pp 388 and 389, he cited a number of authorities and the views of commentators and observed that the tide of authority in England had flowed strongly in favour of the test of dishonesty and that most, but not all, commentators also preferred that test. 27. Whilst in discussing the term "dishonesty" the courts often draw a distinction between subjective dishonesty and objective dishonesty, there are three possible standards which can be applied to determine whether a person has acted dishonestly. There is a purely subjective standard, whereby a person is only regarded as dishonest if he transgresses his own standard of honesty, even if that standard is contrary to that of reasonable and honest people. This has been termed the "Robin Hood test" and has been rejected by the courts. As Sir Christopher Slade stated in Walker v Stones [2000] Lloyds Rep PN 864, 877 para 164:
Secondly, there is a purely objective standard whereby a person acts dishonestly if his conduct is dishonest by the ordinary standards of reasonable and honest people, even if he does not realise this. Thirdly, there is a standard which combines an objective test and a subjective test, and which requires that before there can be a finding of dishonesty it must be established that the defendant's conduct was dishonest by the ordinary standards of reasonable and honest people and that he himself realised that by those standards his conduct was dishonest. I will term this "the combined test". 28. There is a passage in the earlier part of the judgment in Royal Brunei which suggests that Lord Nicholls considered that dishonesty has a subjective element. Thus in discussing the honest trustee and the dishonest third party at [1995] 2 AC 378, 385 A-C he stated:
29. However, after stating, at p 387 H, that the touchstone of liability is dishonesty, Lord Nicholls went on at page 389 B-C to discuss the meaning of dishonesty:
30. My noble and learned friend Lord Millett has subjected this passage and subsequent passages in the judgment to detailed analysis and is of the opinion that Lord Nicholls used the term "dishonesty" in a purely objective sense so that in this area of the law a person can be held to be dishonest even though he does not realise that what he is doing is dishonest by the ordinary standards of honest people. This leads Lord Millett on to the conclusion that in determining the liability of an accessory dishonesty is not necessary and that liability depends on knowledge. 31. In R v Ghosh [1982] QB 1053 Lord Lane CJ held that in the law of theft dishonesty required that the defendant himself must have realised that what he was doing was dishonest by the ordinary standards of reasonable and honest people. The three sentences in Lord Nicholl's judgment, at p 389 B-C, which appear to draw a distinction between the position in criminal law and the position in equity, do give support to Lord Millett's view. But considering those sentences in the context of the remainder of the paragraph and taking account of other passages in the judgment, I think that in referring to an objective standard Lord Nicholls was contrasting it with the purely subjective standard whereby a man sets his own standard of honesty and does not regard as dishonest what upright and responsible people would regard as dishonest. Thus after stating that dishonesty is assessed on an objective standard he continued, at p 389 C:
Further, at p 391 A-C, Lord Nicholls said:
32. The use of the word "knowing" in the first sentence would be superfluous if the defendant did not have to be aware that what he was doing would offend the normally accepted standards of honest conduct, and the need to look at the experience and intelligence of the defendant would also appear superfluous if all that was required was a purely objective standard of dishonesty. Therefore I do not think that Lord Nicholls was stating that in this sphere of equity a man can be dishonest even if he does not know that what he is doing would be regarded as dishonest by honest people. 33. Then, at p 392 F-G, Lord Nicholls stated the general principle that dishonesty is a necessary ingredient of accessory liability and that knowledge is not an appropriate test:
I consider that this was a statement of general principle and was not confined to the doubtful case when the propriety of the transaction in question was uncertain. 34. At p 387 B-C, Lord Nicholls stated that there is a close analogy between "knowingly" interfering with the due performance of a contract and interfering with the relationship between a trustee and a beneficiary. But this observation was made in considering and rejecting the possibility that a third party who did not receive trust property should never be liable for assisting in a breach of trust. I do not think that in referring to "knowingly" procuring a breach of contract Lord Nicholls was suggesting that knowingly assisting in a breach of trust was sufficient to give rise to liability. Such a view would be contrary to the later passage, at p 392 F-G, dealing directly with this point. 35. There is, in my opinion, a further consideration which supports the view that for liability as an accessory to arise the defendant must himself appreciate that what he was doing was dishonest by the standards of honest and reasonable men. A finding by a judge that a defendant has been dishonest is a grave finding, and it is particularly grave against a professional man, such as a solicitor. Notwithstanding that the issue arises in equity law and not in a criminal context, I think that it would be less than just for the law to permit a finding that a defendant had been "dishonest" in assisting in a breach of trust where he knew of the facts which created the trust and its breach but had not been aware that what he was doing would be regarded by honest men as being dishonest. 36. It would be open to your Lordships to depart from the principle stated by Lord Nicholls that dishonesty is a necessary ingredient of accessory liability and to hold that knowledge is a sufficient ingredient. But the statement of that principle by Lord Nicholls has been widely regarded as clarifying this area of the law and, as he observed, the tide of authority in England has flowed strongly in favour of the test of dishonesty. Therefore I consider that the courts should continue to apply that test and that your Lordships should state that dishonesty requires knowledge by the defendant that what he was doing would be regarded as dishonest by honest people, although he should not escape a finding of dishonesty because he sets his own standards of honesty and does not regard as dishonest what he knows would offend the normally accepted standards of honest conduct. |
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