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Factual Backgroundryan_dolby-stevens_ph

Dr Williams alleges that he was the victim of a fraud, dating to 1986, in which he was induced to act as a guarantor of a fraudulent transaction to import food into Nigeria. Under this transaction, Williams paid $6,520,190 to Mr Reuben Gale (an English solicitor) that was to be held on trust pending the release of certain funds in Nigeria. It is alleged that Gale, in fraudulent breach of trust (knowing that the funds had not been released to Williams in Nigeria), transferred $6,020,190 to the Central Bank of Nigeria and personally retained the remaining $500,000.

Williams brought a claim against the Bank on the basis that the Bank was a constructive trustee, it dishonestly assisted with Gale’s fraud and it knowingly received funds in breach of trust. Williams also brought a claim seeking to trace the misappropriated sums into the Bank’s assets.

Williams was granted permission to serve the claim on the Bank out of the jurisdiction in Nigeria, but the Bank made an application to have this order set aside on the grounds that the English court lacked the jurisdiction to hear the matter. This application necessitated an examination of whether there was a ‘serious issue to be tried’, which in turn depended on whether Williams’ claims were time-barred under section 21 of the Limitation Act 1980.

Issues

The limitation period for a beneficiary to recover trust property is six years from when the cause of action arises. On the face of it therefore, Williams’ claim was time-barred. However, section 21 of the 1980 Act provides an exception to the normal rules on limitation for claims which are brought by the beneficiary of a trust “in respect of any fraud or fraudulent breach of trust to which the trustee was a party or privy”. In such circumstances the limitation period will not apply.

The two issues for the Supreme Court to consider were therefore as follows:

  1. Is a third party to a trust who is liable on the grounds of knowing receipt of trust assets and/or dishonest assistance in a breach of trust (such as the Bank), considered a “trustee” for the purposes of section 21(1)(a) of the 1980 Act?
  2. Failing that, does an action “in respect of” any fraud or fraudulent breach of trust under section 21(1)(a) to which the trustee was party or privy, include an action brought against a party which is not a trustee (such as the Bank)?

Appellate History

In the High Court[1], Supperstone J held that the Bank was not a trustee for the purposes of the 1980 Act but that it was “at least arguable” that section 21(1)(a) of the Act would extend to cover actions brought against third parties. On this basis, he refused to set aside the order granting Williams permission to serve proceedings on the Bank outside of the jurisdiction.

Only the second issue was argued in the Court of Appeal[2], on which Supperstone J’s decision was affirmed (with the leading judgment being given by Sir Andrew Morritt C).

On the Bank’s appeal to the Supreme Court, both issues were reinstated as live questions for the court, with Lord Sumption commenting that a proper understanding of section 21 of the 1980 Act required an examination of both issues.

Supreme Court Decision

The Supreme Court allowed the Bank’s appeal and held that claims for knowing receipt and dishonest assistance are therefore subject to a six year limitation period. The English courts did not therefore have jurisdiction over the issues on the basis that the claims were time-barred

1. The definition of “trustee” under section 21(1)(a) of the Act

The interpretation of the meaning of a “trustee” is dealt with in section 68(1)(17) of the Trustee Act 1925. The Court analysed the relevant case law and came to the conclusion that an orthodox interpretation should be taken – namely, “trustees” would include express trustees, trustees de son tort and constructive trustees.

The Court held that a constructive trust of the kind alleged against the Bank was not a “true trust” (which was covered under section 21(1)(a) of the 1980 Act), but rather a trust “imposed by equity on strangers to the trust in the exercise of its remedial jurisdiction” (per Lord Sumption at paragraph 26). No trust had been reposed in the Bank; the “constructive trust” was merely a basis for granting equitable relief and the Bank should therefore not be held to the same standards as a “true trustee” (per Lord Sumption at paragraph 13). On this basis, the Court held that the Bank was therefore not a “true trustee” for the purposes of the limitation exception at section 21(1)(a) of the 1980 Act.

2.  Application of section 21(1)(a) to an action against a non-trustee

The Supreme Court then considered whether the Bank was a party being sued “in respect of” a fraud or fraudulent breach of trust by the trustee (Gale). On this issue, the Court drew a narrow interpretation of section 21(1)(a) and held that it only applied to actions against “true trustees” in respect of a fraud or fraudulent breach of trust which was perpetrated by them (i.e. Gale would be covered but the Bank would not be).  The exception under section 21(1)(a) has nothing to do with third parties and the Court held that the Bank was therefore not covered. This is the right conclusion as, unlike true trustees, third parties do not have any pre-existing fiduciary duties towards claimants and, it is argued, they should therefore have the advantage of protection under the limitation period.

In reaching this decision, the Court found section 21(3) of the 1980 Act serves to relieve only “true trustees” from the consequences of section 21(1)(a), and so the exceptions must apply to the same persons as the rule. Further, section 21(1)(a) only applies in cases of fraud or fraudulent breach of trust, and since it is clear after Royal Brunei Airlines Sdn Bhd v Tan [1995] 2 AC 378 that knowing assisters are liable on the basis of their own dishonesty, it would be irrational to provide or withhold protection of the limitation to a third party on the basis of the honesty, or otherwise of the trustee. Lastly, the fact that section 21(1)(b) unquestionably applies only to actions against trustees and not third parties (per Lord Sumption at paragraph 36) supports the overall finding.

Comment

The Supreme Court’s decision has resolved a long-standing uncertainty regarding limitation periods for claims which involve dishonest assistance or knowing receipt. The court has also approved previous cases in confirming that dishonest assistants and knowing recipients – often described as “constructive trustees” – are not truly trustees.

On a practical point, trust beneficiaries should note that claims based on secondary liability must be brought promptly so as not to be caught by the six year limitation period. Finally, it is also worth noting that this decision does not affect the operation of section 32 of the 1980 Act, which provides that (in cases of fraud or deliberate concealment), the limitation period does not start to run until the claimant has (or ought with reasonable diligence to have) discovered the fraud.

[1] [2011] EWHC 876 (QB)

[2] [2013] QB 499