I have blogged twice this week on the fascinating recent judgment of the Court of Appeal for Ontario in DBDC Spadina Ltd. v. Walton, 2018 ONCA 60 (Ont. C.A.). This case arises from a complex multi-million dollar commercial real estate fraud and raises issues to do with the equitable doctrine of knowing assistance; both in respect of the determination of knowledge and participation in a “dishonest and fraudulent design” by a fiduciary in breach of his or her obligations.

The case is an interesting one in that it is not centred on the direct liability of the fraudsters. Rather, the theory of liability explored in the judgment is in respect of the liability of certain corporations in which other victims of the fraud invested and which were used to further the fraud – hence, a competition between the victims in respect of priority over assets fought out through the application of notoriously difficult equitable principles.

“Dishonest Assistance”

English equity has revised the Barnes v. Addy model in two respects: “knowing receipt” has now become “unconscionable receipt” foreswearing questions of knowledge to link liability to the same sorts of considerations that drive the autonomous action and unjust enrichment to consider whether retention of the property would be unconscionable. The departure from unjust enrichment is in the necessity for fault or something else to be present to make out unconscionability, rather than merely putting the third party to the task of proving a valid juristic reason to retain.

In respect of the second limb of Barnes v. Addy, English equity has embraced “dishonest assistance.” Royal Brunei Airlines Sdn Bhd v. Tan, [1995] 2 A.C. 378 (P.C.), is an important case in this area. In Royal Brunei, the claim was brought against the principal director and shareholder of a travel agency who collected fares for the claimant airline and did not pay over the money. The claim was framed in equity as one in breach of trust, the theory being that the defendant was an accessory to the breach by the travel agency and ought to suffer a remedy on that basis. The Court of Appeal of Brunei Darussalem had allowed the defendant’s appeal accepting that the trustee had itself not acted dishonestly, and, therefore, there could be no liability as against a dishonest accessory independently. This was consistent with the position of the Court of Appeal for England and Wales.

Lord Nicholls, in delivering the advice of the Privy Council, said that it would be wrong in principle to allow a stranger who procures or assists in the breach causing the loss to the beneficiary to escape liability merely because he or she acted through the trustee as an innocent agent. The practical reality is that the trustee may not be liable, with the equally practical effect that the beneficiaries are left without a remedy. Thus, rather than considering the fault of the stranger as parasitic on the fraud of the trustee, the accessory’s liability arises precisely because of his or her dishonesty in interfering with the trust obligation. The principle that emerges is a succinct one: in order to make good a loss suffered by the beneficiary, and, to deter conduct that would cause such a loss, the dishonest interference with the obligations of the trustee may provoke a personal remedy against the third party defendant. That there is no proprietary remedy available against such a defendant is immaterial; the public interest that is satisfied is protecting that which belongs to another from those that seek to appropriate it improperly. Hence, liability is in essence that of a wrong. The standard of liability that describes the fault of the defendant-accessory, dishonesty, has been a matter of some considerable controversy. Lord Nicholls said:

Before considering this issue further it will be helpful to define the terms being used by looking more closely at what dishonesty means in this context. Whatever may be the position in some criminal or other contexts… in the context of the accessory liability principle acting dishonestly, or with a lack of probity, which is synonymous, means simply not acting as an honest person would in the circumstances. This is an objective standard. At first sight this may seem surprising. Honesty has a connotation of subjectivity, as distinct from the objectivity of negligence. Honesty, indeed, does have a strong subjective element in that it is a description of a type of conduct assessed in the light of what a person actually knew at the time, as distinct from what a reasonable person would have known or appreciated. Further, honesty and its counterpart dishonesty are mostly concerned with advertent conduct, not inadvertent conduct. Carelessness is not dishonesty. Thus for the most part dishonesty is to be equated with conscious impropriety. However, these subjective characteristics of honesty do not mean that individuals are free to set their own standards of honesty in particular circumstances. The standard of what constitutes honest conduct is not subjective. Honesty is not an optional scale, with higher or lower values according to the moral standards of each individual. If a person knowingly appropriates another’s property, he will not escape a finding of dishonesty simply because he sees nothing wrong in such behaviour.

…

The individual is expected to attain the standard which would be observed by an honest person placed in those circumstances. It is impossible to be more specific. Knox J. captured the flavour of this, in a case with a commercial setting, when he referred to a person who is ‘guilty of commercially unacceptable conduct in the particular context involved:’ see Cowan de Groot Properties Ltd. v. Eagle Trust Plc. [1992] 4 All E.R. 700, 761.

In Twinsectra Ltd v Yardley, [2002] UKHL 12 (H.L.), Lord Hutton held that “dishonesty” as used in Royal Brunei might be interpreted in one of three ways:

Whilst in discussing the term ‘dishonesty’ the courts often draw a distinction between subjective dishonesty and objective dishonesty, there are three possible standards which can be applied to determine whether a person has acted dishonestly. There is a purely subjective standard, whereby a person is only regarded as dishonest if he transgresses his own standard of honesty, even if that standard is contrary to that of reasonable and honest people. This has been termed the ‘Robin Hood test’ and has been rejected by the courts… Secondly, there is a purely objective standard whereby a person acts dishonestly if his conduct is dishonest by the ordinary standards of reasonable and honest people, even if he does not realise this. Thirdly, there is a standard which combines an objective test and a subjective test, and which requires that before there can be a finding of dishonesty it must be established that the defendant’s conduct was dishonest by the ordinary standards of reasonable and honest people and that he himself realised that by those standards his conduct was dishonest. I will term this ‘the combined test’.

It is the ‘combined test’ that was accepted by the majority. This accords with Lord Nicholls’ position in Royal Brunei that the experience and intelligence of the individual defendant is relevant in determining conduct-based fault in this context and reflects the gravity of such a characterization of such a finding in respect of professional advisers for breach of trust as was the case in Twinsectra. Thus, and notwithstanding the fact that the action is one in equity and not in the criminal law, there is a higher threshold required for wrongdoing as a means of narrowing liability. In other words, though the root consideration may be equity’s conscience, a simple test of unconscionability would be too wide and hence a test of dishonesty better structures liability. However, to find dishonesty within the combined test still incorporates an evaluation of the defendant’s knowledge and thus is a weakness. Lord Hutton said:

… 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.

The Privy Council revisited the issue in Barlow Clowes International Ltd (In Liquidation) v Eurotrust International Ltd., [2005] UKPC 37 (P.C.) Here an offshore banker received funds from a customer who was in the midst of perpetrating an investment fraud and using the bank to allow some payments to be made. The employee of the defendant banker ‘strongly suspected’ that the money was tied to a breach of fiduciary duty but chose to make no inquiries. The Privy Council clarified the points set out in Twinsectra that it is objective dishonesty that is the touchstone of liability and that a ‘moral idiot’ has no defence; moreover, one need not know the exact details of the trust, merely that the money is subject to a trust obligation.

The test now seems to be whether the defendant’s conduct was dishonest by the ordinary standards of reasonable and honest people in acting as he did, taking account of relevant subjective considerations such as the defendant’s experience and intelligence and his actual state of knowledge at the relevant time.

I would suggest that this approach is note-worthy in at least two respects. First, the standard itself – dishonesty – seems an appropriate normative standard in the sense of reinforcing traditional equity as well as being known to that species more highly respected than lawyers and judges, ordinary people.

Second, the standard may be applied in a context-specific manner. For example, in a commercial trust the standards of conduct in a given industry tell us much about what honesty means for those in the industry; that is, what practices are considered as dishonest.

To my mind the utility of “dishonest assistance” is demonstrated by the very type of situation that arose in DBDC Spadina Ltd. v. Walton. Rather than relying upon abstractions to do with knowledge, one confronts the conduct itself. It will be interesting to see if the matter is appealed and, if it is, what the Supreme Court of Canada has to say on the point.

Have a great day,

David