Facts

• Henry Barnes appointed William Crush, John Lugar and John Addy to be testators and executors of his will.
• Barnes’ money would be invested and then used as a £100 annuity for his widow, Ann, and his three daughters and son.
• John Addy, the sole remaining trustee, appointed another trustee, with an indemnity.
• Addy’s solicitors, including Mr William Duffield, had advised against appointing a sole trustee, but drew up the deeds of appointment and indemnity, introduced him to a stockbroker, and the broker transferred the trustee money.
• This trustee misapplied the trust property and became bankrupt.
• The children sued Addy and the solicitors.

Held

• The claim against the solicitors was rejected by the court, with Lord Selbourne delivering judgment.
• Lord Selborne held that there were two types of third party liability (the ‘rule in Barnes v Addy‘):
  • Knowing receipt of property in breach of trust or fiduciary duty (‘first limb’ of Barnes v Addy); and
  • Knowing assistance of a breach of fiduciary duty (‘second limb’).

What kind of knowledge?

• Based on the five point scaled developed in Baden:
  • Actual knowledge;
  • Wilfully shutting one’s eyes to the obvious;
  • Wilfully and recklessly failing to make such inquiries as an honest and reasonable person would make;
  • Knowledge of circumstances which would indicate the facts to an honest and reasonable person; and
  • Knowledge of circumstances which would out an honest and reasonable person on inquiry.
• In Australia, Farah Constructions v Say-Dee Pty Ltd has established that a party will have sufficient knowledge if it falls under any of the first four points.

Quotes

“The responsibility of a trustee] may no doubt be extended in equity to others who are not properly trustees, if they are found … actually participating in any fraudulent conduct of the trustee to the injury of the cestui que trust. But … strangers are not to be made constructive trustees merely because they act as the agents of trustees in transactions within their legal powers, transactions, perhaps of which a court of equity may disapprove, 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.”

(Lord Selborne at pages 251 & 252)

Full Text

The full text is available here:  https://jade.io/citation/4417755

-- Download Barnes v Addy (1874) LR 9 Ch App 244 as PDF --

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