Equity and Trusts: Barnes V Addy Second Limb

Topics: Common law, Royal Brunei Airlines, Equitable remedy Pages: 11 (3483 words) Published: November 11, 2012

This paper examines the development and scope of accessory liability under the second limb of Barnes v Addy as it stands in both England and Australia. As to the law in England, the focus will be on the rearticulation of the principle of accessory liability under the second limb as stated in Royal Brunei Airlines Sdn Bhd v Tan. In particular, it will consider the extent to which the decision has reconciled inconsistencies in earlier authority and remedied those issues propounded to be inherent in the traditional formulation of the principle. At this stage, this traditional principle remains good law in Australia. However, as suggested in Farah Constructions Pty Ltd v Say-Dee Pty Ltd, there is potential for the English approach to be adopted in the Australian context. Such an adoption may be advisable in light of the judicial and extra-judicial commentary suggesting that the orthodox approach is in fact not properly aligned with equitable principles. The discussion of this possibility involves not only an assessment of the advantages and disadvantages of each approach, but also a determination as to the extent to which the separate application of each approach could result in a divergent outcome.

The development of the second limb of Barnes v Addy in Australia- ‘knowing assistance’
The classic authority on the circumstances in which third parties will be held accountable for their involvement in a breach of trust or fiduciary duty is the English case of Barnes v Addy. It was in this case that Lord Selbourne LC articulated the much cited and analysed statement of principle that has come to form the modern law: ...strangers are not to be made constructive trustees merely because they act as the agents of trustees…unless those agents receive and become chargeable with some part of the trust property, or unless they assist with knowledge in a dishonest and fraudulent design on the part of the trustees. This statement has come to be understood as allowing liability to be imputed on a party in two distinct circumstances, where the third party either knowingly receives trust property, or assists with knowledge in a breach of trust or fiduciary duty. This paper seeks only to consider the latter. In what ostensibly remains the authoritative case on this second limb of Barnes v Addy in Australia, the High Court in Consul Development Pty Ltd v DPC Estates Pty Ltd, (‘Consul Development v DPC’) not unlike other cases at the time, focussed predominantly on the level of knowledge which would be sufficient to attract accessory liability in the circumstances before them. The primary question was not one of the dishonesty or otherwise of the actions of the third party, but of that third party’s knowledge of the dishonesty of the fiduciary. The majority, it seems, realised that the terms ‘constructive notice’ and ‘actual notice’ did not in themselves comprise the requisite sophistication for dealing with the matter of the knowledge of the third party. They instead expressed the required degree of knowledge within particular parameters, with neither Stephen J nor Gibbs J willing to extend these parameters to include a negligent failure to inquire on behalf of the third party. In Equiticorp Finance Ltd v Bank of New Zealand, Kirby P (in dissent) indicated support for the Consul test of knowledge, and attempted to clarify the judgement in Consul Development v DPC with reference to the decision in Baden, Delvaxs & Lecuit v Societe Generale pour Favoriser le Development du Commerce et de L’Industrie en France SA (‘Baden’). He equated the degrees of knowledge set out by the High Court in Consul Development v DPC with the first four categories as stated in Baden thereby confirming that both actual and constructive knowledge, but not constructive notice, would constitute the requisite degree of knowledge necessary to render a third party liable under the second limb of Barnes v Addy. Similar findings...
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