|Judgments - Twinsectra Limited v Yardley and Others
37. In cases subsequent to Royal Brunei there has been some further consideration of the test to be applied to determine dishonesty (the cases being helpfully discussed in an article by Mr Andrew Stafford QC on "Solicitors' liability for knowing receipt and dishonest assistance in breach of trust" in (2001) 17 Professional Negligence 3. For the reasons which I have given I consider that in Abbey National PLC v Solicitors Indemnity Fund Ltd  PNLR 306 Steel J applied the correct test. In that case, at p 310, she referred to the test set out in R v Ghosh  QB 1053 and to Lord Nicholl's judgment in Royal Brunei  2 AC 378 and observed that it was to the effect that honesty is to be judged objectively, and she continued:
38. Therefore I turn to consider the judgment of Carnwath J and the Court of Appeal on the basis that a finding of accessory liability can only be made against Mr Leach if, applying the combined test, it were established on the evidence that he was dishonest.
39. At the trial Mr Leach was cross-examined very closely and at length about his state of mind when he paid to Mr Yardley the monies transferred to him by Mr Sims. The tenor of his replies was that he paid the monies to his client because his client instructed him to do so. Thus in the course of that cross-examination counsel for Twinsectra put the following questions to him (page 55 of the transcript):
40. Carnwath J stated, at pp 50, 51 and 52 of his judgment:
Later in the judgment after holding that the undertaking given by Mr Sims did not create a trust the judge stated, at p 73:
41. It would have been open to the judge to hold that Mr Leach was dishonest, in that he knew that he was transferring to Mr Yardley or to one of his companies monies which were subject to an undertaking that they would be applied solely for the acquisition of property and that the monies would not be so applied. But the experienced judge who was observing Mr Leach being cross-examined at length found that Mr Leach, although misguided, was not dishonest in carrying out his client's instructions.
42. The judge did not give reasons for this finding or state what test he applied to determine dishonesty, but I think it probable that he applied the combined test and I infer that he considered that Mr Leach did not realise that in acting on his client's instructions in relation to the monies he was acting in a way which a responsible and honest solicitor would regard as dishonest. The judge may also have been influenced by the consideration that as he did not find that Mr Sims' undertaking created a trust Mr Leach would not have realised that he was dealing with trust property.
43. It is only in exceptional circumstances that an appellate court should reverse a finding by a trial judge on a question of fact (and particularly on the state of mind of a party) when the judge has had the advantage of seeing the party giving evidence in the witness box. Therefore I do not think that it would have been right for the Court of Appeal in this case to have come to a different conclusion from the judge and to have held that Mr Leach was dishonest in that when he transferred the monies to Mr Yardley he knew that his conduct was dishonest by the standards of responsible and honest solicitors.
44. This was the view taken by the Court of Appeal in Mortgage Express Ltd v Newman & Co  Lloyds Rep PN 745 where the issue before the court was not dissimilar to the issue in the present case. In that case it was alleged that the defendant, a solicitor, had dishonestly taken part in a mortgage fraud. In the High Court  PNLR 298 the judge found that the defendant had not consciously suspected a mortgage fraud. Nevertheless he found that she had deliberately refrained from making enquiries and giving advice which an ordinary honest and competent solicitor would have made and given in all the circumstances, and that she had no excuse for doing so other than the fact that she had taken a highly restricted and blinkered view of the duties that she owed to her clients. The judge considered that the explanation for this behaviour was to be found in what she had been told by an insurance and mortgage broker, Mr Baruch, at the outset of the whole transaction, which was that a particular client was not the kind of client who required to be advised of the matters of which a purchaser would normally be advised. The judge found that the solicitor had not been dishonest. He said, at pp 321 and 322:
45. The Court of Appeal held that the judge's finding that the defendant's conduct was explained by instructions given to her by Mr Baruch was not one which he could have come to on the pleadings and the evidence and that therefore his judgment must be set aside. The plaintiff had submitted that in the absence of a conclusion as to the Baruch instructions, it was clear that the judge would have held that the defendant had been dishonest. Therefore the plaintiff submitted that the Court of Appeal should so hold. The Court of Appeal acknowledged the logic of this submission but observed that it did not take into account the important fact that the judge had concluded that the defendant had not been dishonest after having seen her cross-examined over one and a half days, and Aldous LJ (with whose judgment Tuckey and Mance LLJ agreed) stated, at p 752, para 38:
46. However, in the present case, the Court of Appeal considered that it was entitled to differ from the judge and to find that Mr Leach had been dishonest on the ground that the judge had deliberately refrained from considering a particular aspect of the case, namely "Nelsonian" dishonesty. In his judgment, at p 68, Carnwath J cited the following passage from the judgment of Lord Nicholls in Royal Brunei  2 AC 378, 389:
Later in his judgment at page 73 after holding that the undertaking did not create a trust the judge continued with the passage which I have already set out under the heading:
47. Delivering the judgment of the Court of Appeal and after referring to the passage in the judgment of Carnwath J, at p 68 citing Lord Nicholls, Potter LJ stated  Lloyd's Rep Bank 438, 462 para 102:
48. At the conclusion of a detailed and careful consideration of the submissions advanced by the respective counsel Potter LJ concluded the portion of the judgment relating to Mr Leach by stating, at p 465, para 109,:
49. I agree with Lord Hoffmann that it is unfortunate that Carnwath J referred to Mr Leach deliberately shutting his eyes to the problems and to the implications of the undertaking, but like Lord Hoffmann I do not think it probable that having cited the passage from the judgment of Lord Nicholls at  2 AC 378, 389 F the judge then overlooked the issue of Nelsonian dishonesty in finding that Mr Leach was not dishonest. I also consider, as Lord Millett has observed, that this was not a case where Mr Leach deliberately closed his eyes and ears, or deliberately did not ask questions, lest he learned something he would rather not know - he already knew all the facts, but the judge concluded that nevertheless he had not been dishonest. I also think that Potter LJ applied too strict a test when he stated at page 465:
This test does not address the vital point whether Mr Leach realised that his action was dishonest by the standards of responsible and honest solicitors. In the light of the judge's finding, based as it clearly was, on an assessment of Mr Leach's evidence in cross-examination in the witness box before him, I consider the Court of Appeal should not have substituted its own finding of dishonesty.
50. As I have stated, Carnwath J did not give reasons for his finding that Mr Leach was not dishonest and did not state the test which he applied to determine dishonesty. Therefore the question arises whether a new trial should be ordered. An argument of some force can be advanced that there should be a retrial, and in Mortgage Express Ltd v Newman & Co  Lloyd's Rep PN 745 the Court of Appeal ordered a new trial, although with considerable reluctance. However the present case can be distinguished from Mortgage Express on the ground that in that case the judge appears to have based his decision on a factual matter (Mr Baruch's instructions) which was not before him in evidence. In the present case the evidence was fully deployed before the judge and he saw Mr Leach rigorously cross-examined at length as to his state of mind. Whilst the judge did not define the test of dishonesty which he applied, I think it probable, as I have stated, that he applied the right test, ie the combined test, and did not apply a purely subjective test. In these circumstances I consider that it would not be right to order a retrial. Whilst the decision whether a new trial should be ordered will largely depend on the facts of the particular case, I find support for this view in the judgment of the House in Automatic Wood-Turning Co Ltd v Stringer  AC 544, 555. In that case the Court of Appeal had ordered a new trial on the issue of negligence, but the order was set aside and Lord Morton of Henryton stated:
51. For the reasons which I have given I would allow Mr Leach's appeal and set aside the judgment of the Court of Appeal.
52. There are two issues in this appeal. The first is concerned with the nature of the so-called "Quistclose trust" and the requirements for its creation. The second arises only if the first is answered adversely to the appellant. It is whether his conduct rendered him liable for having assisted in a breach of trust. This raises two questions of some importance. One concerns the extent of the knowledge of the existence of a trust which is required before a person can be found civilly liable for having assisted in its breach. In particular, is it sufficient that he was aware of the arrangements which created the trust or must he also have appreciated that they did so? The other, which has led to a division of opinion among your Lordships, is whether, in addition to knowledge, dishonesty is required and, if so, the meaning of dishonesty in this context. For reasons which will appear a third question, concerned with the ingredients of the equitable claim tendentiously described as being in respect of the "knowing receipt" of trust property, is no longer alive. The much needed rationalisation of this branch of the law must, therefore, await another occasion.(1) The facts
53. The appellant Mr Leach is a solicitor. At the material time he was in sole practice. In October 1992 he was instructed by a Mr Yardley to act in the purchase of residential land at Apperley Bridge, Bradford. The terms of the sale required the payment of £950,000 on exchange of contracts. Exchange took place on 23 December 1992 with the use of moneys obtained from Barclay's Bank.
54. Mr Yardley was an entrepreneur with a number of irons in the fire. He was involved in several on-going property transactions besides the purchase of the site at Apperley Bridge, but his interests were not confined to the purchase and development of property. He carried on business through a series of one-man companies.
55. Delays occurred in securing the necessary finance from Barclay's Bank, and by December 1992 Mr Yardley was actively seeking an alternative source of funds. In due course he obtained an offer of a short term loan of £1 million from the respondent Twinsectra Ltd.
56. Twinsectra was only prepared to make the loan if repayment was secured by a solicitor's personal undertaking, a most unusual requirement. Mr Leach refused to give such an undertaking. Mr Yardley then approached another solicitor, a Mr Sims, who was a member of a two-partner firm. Mr Sims had been involved in some dealings on his own behalf with Mr Yardley as a result of which he owed Mr Yardley $1.5 million. He agreed to give the requisite undertaking.
57. By this time Barclays Bank had agreed to provide the finance for Apperley Bridge, and the loan from Twinsectra was no longer needed. Mr Yardley and Mr Sims decided to proceed with it nevertheless. They agreed between themselves that Mr Sims would take up the loan on his own account and use it to repay his personal indebtedness to Mr Yardley. Mr Sims' undertaking to repay the loan, originally intended to be by way of guarantee of Mr Yardley's liability to repay the money he was borrowing from Twinsectra, would (as between himself and Mr Yardley) be given by Mr Sims as principal debtor. Mr Yardley knew that if Twinsectra were told of the change the loan would be at risk. The judge found that his failure to tell Twinsectra was dishonest but that he was not liable in deceit for falsely holding Mr Sims out as his solicitor. In the judge's view the representation was essentially true, since Mr Sims had authority to act as Mr Yardley's agent to conclude the loan agreement on his behalf. The Court of Appeal reversed this finding because it did not meet the gravamen of Twinsectra's complaint. This was not that it was misled about the extent of Mr Sims' authority to bind Mr Yardley to the contract of loan. It was that it would not have made the loan if it had known that Mr Sims was no longer acting for Mr Yardley as his client in a property transaction, for in those circumstances he could not properly give a solicitor's undertaking: see United Bank of Kuwait Ltd v Hammoud  1 WLR 1051. The judge found that on this aspect of the case Mr Leach, too, was not dishonest, but that he was "certainly misguided."
58. The undertaking was drafted by Twinsectra's solicitors and was signed by Mr Sims on 24 December. It was in the following terms:
59. The judge found that the letter was fundamentally untrue. Mr Sims was not acting for any client in any relevant property transaction and there was no "underlying transaction on behalf of their clients" still less one which was "part of the usual business of solicitors". While Mr Sims obviously knew this, however, it cannot be assumed that Mr Leach did so. The judge found that Mr Leach "should have been aware" of it if he had thought about it at all (though even this seems somewhat speculative); but he did not find that he was.
60. Mr Sims had previously on 23 December forwarded a draft of the proposed undertaking to Mr Leach which Mr Leach placed on his file. It did not differ from the final version in any respect material to these proceedings, which are based exclusively on paragraphs 1 and 2 of the undertaking. Those paragraphs were unchanged in the final version, the only substantive amendments being to paragraph 3.
61. In the letter which accompanied the draft undertaking Mr Sims sought Mr Leach's confirmation on a number of points. These included the following:
Mr Sims' concern arose from the fact that, by pre-arrangement with Mr Leach, he intended to pay the money as soon as it was received to Mr Leach as Mr Yardley's solicitor, and realised that this would put him in breach of paragraph 1 of the undertaking. He evidently thought that this would not matter so long as the money was applied in the acquisition of property. Mr Leach clearly understood the reason for Mr Sims' concern, even if (as may be the case) he knew nothing of the arrangement by which Mr Sims had agreed with Mr Yardley that the payment would be treated as discharging his own personal debt.