Bank liability under constructive trust: implications of the Twinsectra case

Rhett Martin, Australian Banking and Finance Law Bulletin, (2003) 19(5) BLB 73

A recent House of Lords decision1 has narrowed the test for third party liability for breach of trust and is, therefore, good news for banks that assist in the transfer of trust property through bank accounts.

Where a bank has knowingly assisted in bringing about a transfer of trust property in breach of trust, it may be liable for assisting the breach of trust. In order to assist a breach of trust, the bank (or its employee) must act dishonestly.

Previously, the leading English case in this area2 established an objective standard for dishonesty. However, the majority in this case introduced a new combined test of both subjective and objective standards. Under this new test, dishonesty arises where:

• the person's conduct was dishonest by the ordinary standards of reasonable and honest people; and
  
  
• they realised that, by those standards, their conduct was dishonest.

Constructive notice

The author considers that this case removes the risk that banks could be found liable for knowing assistance of breach of trust on the basis of constructive notice because, subject to the overriding caveat below, banks can now defend themselves against such claims if they were not actually aware that an action was dishonest.

Honest conduct

However, equally, a bank will not be able to escape a finding of dishonesty if it has offended generally accepted standards of honest conduct. A bank should always have regard to industry standards.

1 Twinsectra Ltd v Yardley [2002] 2 All ER 377

2 Royal Brunei Airlines v Tan [1995] 2 AC 378

Enquiries and information

For more information on any of the cases, articles and features in Financial Services Quarterly, please email Rachel Gowing or call on 64 9 916 8825.