Twinsectra Limited v Yardley and Others

The House of Lords held that the undertaking given by Sims created a Quistclose/resulting trust: money advanced for the specified purpose remained the lender's beneficial interest subject only to a limited power for the borrower to apply it for that purpose. The Lords rejected the Court of Appeal's view that the terms were too uncertain and that Twinsectra had no intention to create trust obligations.

On the accessory liability point the majority restored the trial judge's finding that Mr Leach was not dishonest. They held that liability for assisting in a breach of trust remains fault-based and that the appropriate test for dishonesty requires consideration of what an honest person would regard as dishonest in the circumstances together with the defendant's actual state of knowledge (the combined test). An appellate court should not lightly reverse a trial judge's assessment of credibility and state of mind where the judge has seen and heard the witness.

Background and parties. Twinsectra lent £1,000,000 on the basis of an undertaking from solicitors Sims and Roper that the loan monies would be retained and used solely for the acquisition of property. Sims paid the funds on to Mr Leach, a solicitor acting for Yardley, who then paid out substantial sums on Yardley's instructions for non-property purposes. Twinsectra sued, alleging the payments were held on trust (a Quistclose trust), seeking tracing and recovery, and alleging Mr Leach was liable for knowing receipt (for sums he had kept) and for assisting in breach of trust (for sums paid onwards).

Procedural history. After trial before Carnwath J (who found no trust and that Mr Leach was misguided but not dishonest), the Court of Appeal held that the undertaking created a Quistclose trust and that Mr Leach had acted dishonestly; the case came to the House of Lords on appeal.

Relief sought and issues for decision. (i) Whether paragraphs 1 and 2 of the solicitors' undertaking created a trust (often described as a Quistclose trust) entitling Twinsectra to proprietary remedies and tracing; (ii) whether Mr Leach was civilly liable for assisting in Sims' breach of trust, and if so whether liability required ‘dishonesty’ and, if so, what that test of dishonesty meant (objective, subjective, or a combined test), and whether the Court of Appeal was entitled to overturn the trial judge's factual finding.

Court's reasoning and conclusions. The majority held paragraphs 1 and 2 created a Quistclose-style trust (usefully analysed as a resulting trust in favour of the lender) so that the lender retained beneficial ownership until the funds were applied for the stated purpose. On accessory liability the House considered the jurisprudence in Royal Brunei Airlines v Tan and R v Ghosh. The majority concluded that liability for assisting in a breach of trust is fault-based and that the correct approach requires both objective assessment and regard to the defendant's actual knowledge and attributes (the combined test). Given the trial judge had seen and heard Mr Leach and had found him not dishonest (though misguided and having 'shut his eyes' to implications), the Court of Appeal should not have substituted its view: the finding of no dishonesty was restored. One Law Lord (Millett) dissented on the mental element, favouring liability where the defendant knew the facts which made dealing wrongful (an objective/knowledge-based standard).

Appeal allowed. The House of Lords held that (1) the undertaking created a Quistclose/resulting trust in favour of Twinsectra; but (2) the Court of Appeal was wrong to overturn the trial judge's factual finding that Mr Leach was not dishonest. Liability for assisting in a breach of trust is fault-based; the majority applied a combined test of dishonesty (objective standard informed by the defendant's actual knowledge and attributes) and concluded on the evidence and the judge's credibility findings that Mr Leach was not dishonest.

Trial before Carnwath J (High Court) — judgment at first instance (Carnwath J found no trust and that Mr Leach was misguided but not dishonest). Court of Appeal allowed Twinsectra's appeal and found a Quistclose trust and that Mr Leach had acted dishonestly [1999] Lloyd's Rep Bank 438. House of Lords: appeal allowed [2002] UKHL 12.