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JESSICA PALMER[*]
In quite breathtaking fashion, the Privy Council has resurrected the objective test of dishonesty for liability for dishonest assistance. It had been common opinion amongst legal commentators that the effect of the House of Lords’ judgment in Twinsectra Ltd v Yardley[1] (‘Twinsectra’) was to reject a solely objective test in favour of a combined test of objective and subjective dishonesty required for liability. However, according to the Privy Council in Barlow Clowes International Ltd v Eurotrust International Ltd,[2] (‘Barlow Clowes’) the speeches of the majority in Twinsectra did no such thing. By some judicial sleight of hand, the Privy Council has returned the law on liability for dishonest assistance to its pre-Twinsectra state while nevertheless purporting to uphold Twinsectra.
In Barlow Clowes,[3] Mr Clowes and his associates, through the plaintiff company, operated a fraudulent off-shore investment scheme involving some £140 million. They squandered much of the money on their own extravagant living. In 1988, the scheme collapsed and Mr Clowes was imprisoned for his part. As part of the scheme, some of the funds had been dissipated by making transfers through another off-shore financial services company, International Trust Corporation (‘ITC’). ITC and its two directors were accused of dishonestly assisting Mr Clowes and one of his principal associates to misappropriate investors’ funds. The company and its directors were found liable at trial.
One of the directors, Mr Henwood, successfully appealed to the Staff of Government Division of the High Court on the ground that the evidence did not support a finding that he had given dishonest assistance to Mr Clowes. Barlow Clowes appealed to the Privy Council against that decision.
In the Privy Council, Mr Henwood, relying upon the so-called combined test of dishonesty from Twinsectra, submitted that he could not be considered dishonest for the purpose of liability unless he was subjectively aware that his conduct would be regarded as objectively dishonest, as determined by reference to ordinary standards of honesty.[4]
In Twinsectra, the House of Lords, by a majority of four to one, appeared to amend the test for dishonest assistance set down by Lord Nicholls in Royal Brunei Airlines Sdn Bhd v Tan[5] (‘Royal Brunei’) to require more than merely objective dishonesty on the part of the defendant in assisting a breach of trust. Their Lordships imported a subjective knowledge requirement into the test. Not only must the defendant’s conduct have been dishonest by the ordinary standards of reasonable and honest people, but the defendant must also have known himself that his conduct was dishonest by those standards. Lord Hutton’s own words in Twinsectra cannot be put any clearer as authority for the combined test:
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.[6]
On the facts, the trial judge had found that Mr Henwood had strongly suspected the funds passing through ITC from Barlow Clowes were misappropriated and that he had consciously decided not to make enquiries. However, noting that Mr Henwood’s devotion to carrying out his clients’ instructions was improperly exaggerated, the judge said, ‘Mr Henwood may well have thought this to be an honest attitude, but, if so, he was wrong’. While it was abundantly clear that Mr Henwood’s actions were, in the circumstances, objectively dishonest, the judge’s comments had essentially exonerated Mr Henwood from any finding of subjective dishonesty. If the Twinsectra combined dishonesty test applied, Mr Henwood could not be liable because it had not been proved that he knew his actions were dishonest.
On the other side, Barlow Clowes’ argument was based on the facts of the case: that there was sufficient evidence to show that Mr Henwood had grounds for suspicion that the payments were fraudulent, which he consciously ignored, and that in so doing he dishonestly assisted Mr Clowes and his associates in misappropriating investors’ money. This argument thus proceeded on the presumption that objective dishonesty alone is adequate to found accessorial liability.
The Committee dealt first with the argument advanced for Mr Henwood regarding the substantive test for dishonesty and it is on this issue that the Committee’s advice is most important. Given the House of Lords’ speeches in Twinsectra, it was no surprise that counsel for Mr Henwood argued that the current test of dishonesty required that Mr Henwood himself know that he had acted dishonestly by ordinary standards and that the judge’s finding of fact on this point was clearly in his favour. The following extract from Lord Hutton’s speech in Twinsectra was cited in support and reproduced (in greater length) in the Privy Council’s advice, delivered by Lord Hoffmann:[7]
36. 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.
In similar fashion, Lord Hoffmann had said in Twinsectra that the principles of dishonest assistance 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.’ [8]
The Privy Council’s response to what seemed an orthodox argument, given that it was consistent with contemporary precedent, was quite breathtaking:
15. Their Lordships accept that there is an element of ambiguity in these remarks which may have encouraged a belief, expressed in some academic writing, that Twinsectra had departed from the law as previously understood and invited inquiry not merely into the defendant’s mental state about the nature of the transaction in which he was participating but also into his views about generally acceptable standards of honesty. But they do not consider that this is what Lord Hutton meant. The reference to ‘what he knows would offend normally accepted standards of honest conduct’ meant only that his knowledge of the transaction had to be such as to render his participation contrary to normally acceptable standards of honest conduct. It did not require that he should have had reflections about what those normally acceptable standards were.
16. Similarly in the speech of Lord Hoffmann, the statement (in para 20) that a dishonest state of mind meant ‘consciousness that one is transgressing ordinary standards of honest behaviour’ was in their Lordships’ view intended to require consciousness of those elements of the transaction which make participation transgress ordinary standards of honest behaviour. It did not also require him to have thought about what those standards were.
The Committee went on to say that the principles of liability laid down in Twinsectra were no different from those laid down earlier by Lord Nicholls in Royal Brunei after all.[9] Liability for dishonest assistance arises, therefore, where the assistor has acted dishonestly according to normally acceptable standards of dishonesty. In determining that acceptable standard in each case, the court will consider ‘all the circumstances known to the [assistor] at the time’ and will ‘have regard to the personal attributes of the [assistor], such as his experience and intelligence, and the reason why he acted as he did’.[10] This is the extent of any subjective element in the standard of liability for dishonest assistance and it is not itself the test of dishonesty. The appropriate question to ask in cases of alleged dishonest assistance is thus: was the defendant’s knowledge of the facts such that his actions were, judged on the basis of that knowledge, objectively dishonest? There is no requirement that the defendant must subjectively know that his actions are objectively dishonest and Mr Henwood’s argument accordingly fell away.
The Privy Council’s ‘clarification’ of Twinsectra has, at the very least, corrected the majority’s mistaken reading of Lord Nicholl’s exposition of dishonest assistance (as it became known following his rejection of knowledge as the basis of liability) in Royal Brunei. Analysis of the majority’s flawed approach has been undertaken elsewhere[11] and it is adequate to record here that the subjective element in Lord Nicholls’ test was simply that the defendant must have acted deliberately or advertently, having knowledge of the relevant surrounding facts and circumstances giving rise to a breach of trust. The defendant’s awareness that his conduct breached normally accepted standards of honest conduct is, although often present, irrelevant.[12] The original standard of dishonesty as devised by Lord Nicholls was never intended to include a requirement that the dishonest assistor must know he is acting dishonestly. The majority in Twinsectra misconstrued this aspect of the test and Barlow Clowes has, fortunately, corrected that. The presence of Lord Nicholls on the Committee in Barlow Clowes makes this current declaration on the standard of dishonesty all the more resolute, given that it purports to be consistent with his original exposition in Royal Brunei. On the other hand, the presence of two of the majority in Twinsectra, Lords Steyn and Hoffmann, perhaps explains the Privy Council’s apparent and unfortunate disinclination to openly depart from Twinsectra altogether.
The resurrection of the objective test of dishonesty is, in my view, the principal strength of the Privy Council’s advice. There are several reasons why liability for dishonest assistance should be determined objectively. Lord Millett, in his dissenting speech in Twinsectra, argued that consciousness of wrongdoing is the criminal standard of culpability and is not appropriately imposed in civil claims.[13] Civil liability should instead be concerned with whether the conduct is itself wrongful.[14] Ormsby has suggested that this emphasis on dishonest conduct rather than a dishonest state of mind provides a response to Lord Hutton’s objection in Twinsectra that to declare a professional man as having acted (objectively) dishonestly could have disastrous consequences for him. Ormsby states that ‘[a] decision maker in relation to the professional man can take the finding for what it is; a finding of dishonest conduct but not of a dishonest state of mind’.[15]
Given also that subjective dishonesty in the equitable action of dishonest assistance would carry a lower standard of conduct than that required in its common law counterpart, the tort of wrongful interference with the performance of a contract, Lord Millett said that subjective dishonesty gave rise to an unnecessary and unjustified distinction that did not exist if objective dishonesty was the adopted standard. [16]
A further argument in favour of the objective standard is that it provides a degree of certainty in the law that a subjective one cannot. Dishonesty must be ascertained objectively so as to give it a legal meaning that can be applied universally and not one subject to the diverse morals and beliefs of individual defendants.[17]
Finally, a reply is given to those who suggest that an objective standard of honesty should only be required in knowing receipt and not in assistance-based liability on the basis that the defendant only gains in the former and not the latter. ‘Although equitable intervention is justified on an objective assessment where the defendant has personally benefited from involvement in a dishonest scheme; it is quite another to impute liability without proof of actual dishonesty where the defendant has received no benefit from the perpetration of fraud by another.’[18] Unlike the action in knowing receipt, arguably based on the receipt itself (either as an action arising in unjust enrichment or in direct response to an interference with the plaintiff’s property right), the action in dishonest assistance is not concerned with any enrichment or gain made by the defendant. The focus of dishonest assistance is a wrong committed by the defendant against the plaintiff. The cause of action is principally concerned not to strip the defendant of any benefit received but to compensate the plaintiff for loss suffered as a result of the defendant’s wrongdoing. In that regard, whether the defendant has coincidentally benefited from the wrong is neither here nor there and, as such, has no role in determining the appropriate standard of conduct which the defendant must comply with. Whether dishonesty should be judged subjectively or objectively depends on which of these standards is appropriate to use in causes of action that concern wrongdoing, not receipt of an enrichment. Both at common law (for example, tortious actions) and in equity, liability for wrongdoing is judged objectively.
Having defined the appropriate test for dishonesty, the Privy Council then applied it to the facts of the case in response to the plaintiff’s appeal from the High Court’s ruling of no liability. In restoring the ruling of the trial judge that the defendant was liable for dishonest assistance, the Committee made several helpful points about the application of the objective honesty standard.
First, the defendant’s knowledge of the circumstances may be determined by inference. ‘Since there is no window into another mind, the only way to form a view on these matters is to draw inferences from what Mr Henwood knew, said and did, both then and later, including what he said in evidence.’[19] Secondly, it is not necessary that the defendant must know that he is assisting a breach of trust. It is sufficient ‘if he should have entertained a clear suspicion that this was the case’ and did not subsequently make enquiries to satisfy himself that it was not.[20] Finally, the defendant need not know all the details of the breach of trust before he can reasonably have grounds to suspect misappropriation. ‘Someone can know, and can certainly suspect, that he is assisting in a misappropriation of money without knowing that the money is held on trust or what a trust means’.[21]
These additional points made by the Privy Council on the application of the objective dishonesty test are also to be welcomed. There is surely nothing controversial about the first point, that the defendant’s knowledge of the circumstances may be inferred from the evidence. Given that the defendant’s state of mind—whether he knows of or suspects a breach of trust – is a fact, it can, like any other fact, be inferred. Likewise, the inclusion of suspicion in the scope of a defendant’s knowledge and the absence of any requirement to know details of the breach of trust are also appropriate. Accessorial liability arises in equity and, as such, is concerned with liability for actions that contravene good conscience. A defendant’s conscience is bound, objectively, both when he knows of a breach of trust and when he suspects a breach of trust but fails to enquire about it. Further, conscience can be bound even in the absence of details of the breach. It is appropriate, given the jurisdictional basis of dishonest assistance, that it can arise in cases of suspicion as well as knowledge and, indeed, even where detailed knowledge is lacking.
In the case at hand, the evidence showed that Mr Henwood had suspected misappropriation and his assistance, without making enquiries to allay the suspicion, was therefore objectively dishonest and rendered him liable.
In the course of a couple of paragraphs, the Privy Council effectively rewrote the majority judgments in Twinsectra while insisting that all it was doing was clearing away ‘an element of ambiguity’. The Privy Council has turned back the clock to the preferable pre-Twinsectra state of the law on dishonest assistance. Nevertheless, the unsatisfactory manner in which the Privy Council has dealt with Twinsectra, preferring to blame subsequent (academic) interpretation of it and in effect rewrite its crucial passages rather than to simply (and more honestly) reject it, leaves a sour taste in the mouth. The majority judgments in Twinsectra on the meaning of dishonesty were not, with respect, merely ambiguous, as the Privy Council would now have us believe. They were plainly wrong. To say, as the Committee has, that the principles of liability for dishonest assistance laid down in Twinsectra are ‘no different from the principles stated in Royal Brunei Airlines v Tan’ is confusing and unhelpful.
The members of the Privy Council wish to be understood as having merely pointed out what the rest of us failed to see. The test has apparently been objective dishonesty all along. How silly of us to think it was anything else! Yet, ironically, it seems they have embraced the role of the emperor’s courtiers in attempting to persuade us that the majority Twinsectra judgments stated something that they plainly did not. The emperor’s new suit was a fantasy. So too, with respect, is the Privy Council’s reading of Twinsectra.
[*] Faculty of Law, University of Otago.
[1] Twinsectra Ltd v Yardley [2002] UKHL 12; [2002] 2 AC 164 (‘Twinsectra’).
[2] Barlow Clowes International Ltd v Eurotrust International Ltd [2004] UKPC 38 (‘Barlow Clowes’). On appeal from the Isle of Man.
[3] The recent judgment arises out of the same chain of events that resulted in an important judgment on the rule in Clayton’s Case in the law of tracing given by the English Court of Appeal in Barlow Clowes International Ltd v Vaughan [1991] EWCA Civ 11; [1992] 4 All ER 22.
[4] Barlow Clowes [13].
[5]Royal Brunei Airlines Sdn Bhd v Tan [1995] UKPC 4; [1995] 2 AC 378 (‘Royal Brunei’).
[6] Twinsectra [35].
[7] Barlow Clowes [14].
[8] Twinsectra [20].
[9] Barlow Clowes [18].
[10] Royal Brunei, 391 (Lord Nicholls).
[11] See, for example, Thornton, ‘Dishonest Assistance: Guilty Conduct or a Guilty Mind?’ [2002] 61 Cambridge Law Journal 524; C Rickett, ‘Quistclose Trusts and Dishonest Assistance’ [2002] Restitution Law Review 112.
[12] This is what was meant by Lord Nicholls when he said, in Royal Brunei at 391: ‘Ultimately, in most cases, an honest person should have little difficulty in knowing whether a proposed transaction, or his participation in it, would offend the normally accepted standards of honest conduct.’ This was not a direction that the defendant must be aware that what he was doing would offend the normally accepted standards of honest conduct, as Lord Hutton took it to mean in Twinsectra at [32].
[13] [115]–[118] and [127].
[14] See further Yeo and Tjio, ‘Knowing What is Dishonesty’ (2002) 118 Law Quarterly Review 502, 509; Richardson, ‘Dishonesty in the Context of Knowing Assistance’ (2002) 16 Trust Law International 165, 180.
[15] Ormsby, ‘Whither dishonest assistance?’ [2004] New Zealand Law Journal 454, 455.
[16] Twinsectra [127]–[132].
[17] C Rickett, ‘Quistclose Trusts and Dishonest Assistance’ [2002] Restitution Law Review 112, 118.
[18] C Cato, ‘Bankers and Third Party Participation in Breaches of Trust’ [2004] New Zealand Law Journal 456, 459.
[19] Barlow Clowes [26].
[20] Barlow Clowes [28].
[21] Ibid.
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