Judgments - Twinsectra Limited v Yardley and Others

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    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 [1997] 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 [1982] QB 1053 and to Lord Nicholl's judgment in Royal Brunei [1995] 2 AC 378 and observed that it was to the effect that honesty is to be judged objectively, and she continued:

    "What in this case, did, Mr Fallon do, and was he acting as a reasonable and honest solicitor would do? In that case it was laid down that individuals are not free to set their own standards. Mr Fenwick on behalf of the defendant says that if I find that by those standards Mr Fallon was dishonest that would be enough. I need to consider what he did and ask the question: Was he acting as an honest person should? Was what he did dishonest by the standards of a reasonable and honest man or a reasonable and honest solicitor? Having read that case, however, it seems to me that the judgment does not set down a wholly objective test for civil cases. Lord Nicholls particularly refers to a conscious impropriety. The test there, it seems, does embrace a subjective approach, and I have to look at the circumstances to see whether they were such that Mr Fallon must have known that what he did was by the standards of ordinary decent people dishonest. I accept totally that individuals should not be free to set their own standards, but there is in my view a subjective element both in civil and in criminal cases."

    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):

    "Q.  That is not what you said in your pleading which is what I am putting to you. In your pleading you said that with the exception of the Glibbery payment every other payment was made by you in the belief that the money was going to be used for the acquisition of property by companies of Mr Yardley.

    A.  I had no reason to disbelieve that it was not. As I said, I believed my client. He borrowed the money. I followed his instructions.

    Q.  £200,000 was being transferred to Y C Sales, you did not believe for a moment that that company was going to use it to acquire property, did you?

    A.  My Lord, I merely followed my client's instructions.

    CARNWATH J: I think there is a difference. I mean I understand you are saying that, but there is a difference between saying: "I simply paid it in accordance with my client's instructions", and saying, as is said in the pleading: "I paid it in the belief it was going to be used on the acquisition of property". Now, if your evidence that the former was true and the latter was not then fair enough, but I think Mr Tager is entitled to ask you whether it is right positively to state that you paid the monies in the belief that they were being applied in the acquisition of property.

    A.  I merely believed in the sense that the monies my client had borrowed were being used for the purpose for which he borrowed them. I actually didn't consider the point.

    Q.  No, so it is probably that pleading goes rather farther than your own recollection?

    A.  Yes, I think it is probably ….

    MR TAGER: You were putting forward a case in your pleading that Mr Sims had confirmed with you on 23 December that it was going to be used for property. You asked your client if that was so and you got him to confirm the details. The money comes in, you pay it out and you believe each time that that is how the money was used.

    A.  I had no reason to disbelieve my client.

    CARNWATH J: I think I am clear what the witness is saying, Mr Tager."

    40. Carnwath J stated, at pp 50, 51 and 52 of his judgment:

    "I do not find Mr Leach to have been dishonest, but he was certainly misguided. He found himself in a difficult position. His retainer for Mr Yardley on the Apperley Bridge transaction was very important to his practice (at a time when large conveyancing jobs were few), and offered the prospect of similar work in the future. When asked to review the documentation on the Nigerian venture, he was understandably reluctant to prejudice his relationship with his client.

    I do not accept his evidence that he paid no regard to the details. He was specifically asked to review the terms. He must have realised that it was a very unusual venture, and that the returns of the kind offered were very unlikely to be associated with a wholly legitimate business transaction. ….

    His attitude to the Twinsectra loan was not dissimilar. When asked to give the undertaking himself, he regarded it as a very unusual request, and one outside the normal course of a solicitor's practice. This did not lead him to advise Mr Yardley against it, but rather to distance himself from any responsibility for its terms. He told Mr Sims that they were a matter for him. This unease ought to have put him on notice of the need for caution when dealing with the money received under the undertakings. He was clearly aware of their terms. Indeed, his pleaded defence asserts (paragraph 25(4)) that he believed their 'substance … to be that the advance would be applied in the acquisition of property' and that he had received them on the footing that they would be so applied. Yet, in evidence, he frankly admitted that he had regarded the money as held simply to the order of Mr Yardley, without restriction. Again, I have to conclude that he simply shut his eyes to the problems. As far as he was concerned, it was a matter solely for Mr Sims to satisfy himself whether he could release the money to Mr Yardley's account."

Later in the judgment after holding that the undertaking given by Mr Sims did not create a trust the judge stated, at p 73:

    "Were any of the defendants knowing recipients or accessories?

    The above conclusion makes it unnecessary to resolve the more difficult question whether any of the defendants (that is, the Yardley companies, or Mr Leach) had the necessary state of mind to make them liable under these headings. For these purposes the companies must realistically be taken to have had the same knowledge and state of mind as Mr Yardley. I have already given my views as to the extent to which I regard him as having acted dishonestly. In Mr Leach's case, I have found that he was not dishonest, but that he did deliberately shut his eyes to the implications of the undertaking. Whether in either case this would be sufficient to establish accessory liability depends on the application of the Royal Brunei principles to those facts. Although that case was concerned with "knowing assistance" rather than "knowing receipt", I would find it very difficult, in the light of the current state of the authorities to which I have referred, to define the difference in the mental states required; and I doubt if there is one."

    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 [2000] 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 [2000] 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:

    "Her fault thus lay in her grossly defective appreciation of the nature of the duties she owed to Mortgage Express and a determination at the outset not to concern herself with any matters which were not strictly within the tunnel of her vision. If she honestly believed that it was proper for her to take such a restricted view of her duties, and did not in fact come to suspect that a mortgage fraud was being committed, then in my judgment, however gross the negligence she was not guilty of a dishonest or fraudulent omission within the meaning of rule 14(f). I have concluded that, unreasonable as it was for her to hold it, the view that she held of the very restricted ambit of her duties to Mortgage Express was honestly held ….

    My conclusion is that her whole approach to this problem was from the outset both naïve and well below the standards which should be expected of her profession, but was not dishonest."

    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:

    "It would not be right for this court to conclude that Ms Newman was dishonest when the judge had concluded to the contrary, albeit upon a basis which I have held to be flawed. A conclusion as to whether Ms Newman acted honestly can only be reached after seeing Ms Newman give her evidence."

    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 [1995] 2 AC 378, 389:

    "an honest person does not participate in a transaction if he knows it involves a misapplication of trust assets to the detriment of the beneficiaries. Nor does an honest person in such a case deliberately close his eyes and ears, or deliberately not ask questions, lest he learn something he would rather not know, and then proceed regardless."

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:

    "Were any of the defendants knowing recipients or accessories?"

    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 [1999] Lloyd's Rep Bank 438, 462 para 102:

    "Bearing in mind the inclusion within Lord Nicholl's definition of dishonesty of the position where a party deliberately closes his eyes and ears, it can only be assumed that at that point, when the judge referred to Mr Leach as 'not dishonest', he was referring to the state of conscious, as opposed to 'Nelsonian', dishonesty, and it is plain that he deliberately refrained from resolving the latter question on the basis that it was unnecessary to do so.

    103. Had the judge undertaken that task, Mr Tager submits that he could only have been driven to one conclusion, namely that Nelsonian dishonesty was established."

    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,:

    "It seems to me that, save perhaps in the most exceptional circumstances, it is not the action of an honest solicitor knowingly to assist or encourage another solicitor in a deliberate breach of his undertaking. At the very least it seems to me that Mr Leach's conduct amounted, in the words of Lord Nicholls to 'acting in reckless disregard of others' rights or possible rights [which] can be a tell-tale sign of dishonesty'.

    110. I do not consider that the points taken by Mr Jackson are sufficient to negative that tell-tale sign in this case. I have already dealt with his submissions (1) and (3). So far as his submission (2) is concerned, for reasons already given it does not seem to me that the fact that Mr Leach was acting for Mr Yardley can of itself excuse the former's refusal to consider the rights or possible rights of Twinsectra which came to his notice. Nor do I consider that the question whether Mr Leach acted dishonestly in the Nelsonian sense depends on whether he appreciated that what was anticipated was a 'mere' breach of undertaking or that it constituted a breach of trust. In such a case the vice seems to me to rest in deliberately closing his eyes to the rights of Twinsectra, whether legal or equitable, as the beneficiary of the undertaking, and his deliberate failure to follow matters up or take advice for fear of embarrassment or disadvantage."

    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 [1995] 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:

    "It seems to me that, save perhaps in the most exceptional circumstances, it is not the action of an honest solicitor knowingly to assist or encourage another solicitor in a deliberate breach of his undertaking."

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 [2000] 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 [1957] 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:

    "My Lords, I cannot think that this order would have been made if the Court of Appeal had fully appreciated that Oliver J, after hearing all the evidence, had expressed his view that the appellants had not been guilty of negligence at common law. There is no indication in the record that the learned judge had not fully considered the evidence when he expressed this view."

    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.

LORD MILLETT

    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 [1988] 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:

    "Dear Sirs,

    In consideration of your providing a loan in the sum of £1,000,000 (one million pounds) to a client of this firm for the purpose of temporary bridging finance in the acquisition of property to be acquired by such client, we hereby personally and irrevocably undertake that:

    1.  The loan monies will be retained by us until such time as they are applied in the acquisition of property on behalf of our client.

    2.  The loan monies will be utilised solely for the acquisition of property on behalf of our client and for no other purpose.

    3.  We will repay to you the said sum of £1,000,000.00 together with interest calculated at the rate of £657.53 per day from the date you instruct your bankers to transfer the loan monies to our client account, such repayment to be made on the earlier of: (a)  the expiry of four calendar months from the date upon which you instruct your bankers to transfer the loan monies to our client account or (b)  the seventh day following our giving written notice to your solicitors of intention to make such repayment.

    4.  We will pay to your solicitors upon receipt by us of the loan monies their charges in connection with the loan in the sum of £1,000.00 plus VAT and disbursements.

    We confirm that this undertaking is given by us in the course of our business as solicitors and in the context of an underlying transaction on behalf of our clients which is part of our usual business as solicitors." (Emphasis added).

    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:

    "The matter that concerns me is paragraph 1 which strictly means that my firm has to retain this sum until another property has been acquired. Is the £1,000,000 to be used for another purchase?"

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.

 
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