The UK Supreme Court has decided (in a somewhat long judgment which is worth reading to appreciate some of its subtleties) that the indefinite limitation period for actions under s 21(1)(a) Limitation Act 1980 in cases of “any fraud or fraudulent breach of trust to which the trustee was party or privy” does not apply to secondary liability claims for dishonest assistance and knowing receipt. (Video feed click here)

This decision is significant in two respects:

1) because there is often a substantial time gap before a beneficiary becomes aware of a fraudulent breach of trust. Even when the fraud has been discovered, there may be a number of reasons why the beneficiary decides to delay in commencing proceedings; and

2) In future, when considering claims for a fraudulent breach of trust, beneficiaries will have to pay close attention to the limitation period that applies to third party assistants or recipients in light of this decision.

The Court has confirmed that secondary claims for dishonest assistance and knowing receipt are subject to the statutory six-year limitation period, marking a significant curtailment on the ability to bring claims that often accompany claims for a fraudulent breach of trust.

Beneficiaries may still take advantage of s32 Limitation Act 1980, which suspends limitation in cases of fraud or deliberate concealment. In other words, where the secondary claims are piggy-backed onto a fraudulent breach of trust that has been concealed from the Claimant; time will not begin to run until then the claimant has (or could with reasonable diligence have) discovered the fraud or concealment.

21     Time limit for actions in respect of trust property.

(1)    No period of limitation prescribed by this Act shall apply to an action by a beneficiary under a trust, being an action—

(a)    in respect of any fraud or fraudulent breach of trust to which the trustee was a party or privy

Limitation Act 1980

Key Facts

Dr Williams claimed he was the victim of a fraud perpetrated by the Nigerian State Security Service, having agreed to act as guarantor of a transaction importing foodstuffs into Nigeria.

In connection with this transaction, Dr Williams had paid $6,520,000 (“the Funds“) to an English solicitor, Mr Gale. The Funds were to be held by Mr Gale on trust for Dr Williams on terms that they should not be released until other funds had been made available to Dr Williams in Nigeria.

It was alleged Mr Gale subsequently paid out a significant portion of the Funds to an account held by Central Bank of Nigeria in London, pocketing the remainder for himself. It was claimed that Mr Gale acted in fraudulent breach of trust in that he knew the other funds would not be available for Dr Williams in Nigeria.

The case against Central Bank of Nigeria was advanced on the basis it was a party to Mr Gale’s fraud and therefore liable to account as a constructive trustee, either for the full amount of the Funds on the basis of its dishonest assistance of Mr Gale’s fraud, or for the portion of the Funds that Central Bank of Nigeria received in London on the basis of its knowing receipt of trust property obtained in fraudulent breach of trust.

Dr Williams was given permission to serve on proceedings on Central Bank of Nigeria in Nigeria, but Central Bank of Nigeria applied to have the order set aside on grounds that there was no serious issue to be tried and therefore the English court lacked jurisdiction.

Limitation

The alleged transactions occurred in 1986 so prima facie the claims were limitation barred.

The limitation period for claims by beneficiaries to recover trust property or for breach of trust is six years from the date on which the right of action arose; s21(3) Limitation Act 1980.

However in a claim by a beneficiary in respect of “any fraud or fraudulent breach of trust to which the trustee was party or privy” s21(1)(a)  provides that no limitation period under the Limitation Act applies, in effect the Limitation period is indefinite and will never become limitation barred.

Issues

The issues before the Supreme Court were:

Could a stranger to a trust who dishonestly assists the trustee in, or knowingly receives trust assets from a fraudulent breach of trust count as a “trustee” for the purposes of the s21(1)(a) limitation exception?

If the answer to the first question was yes, then Dr Williams’ action against Central Bank of Nigeria had an indefinite limitation period, falling under s.21(1)(a)

If the answer to (1) above was no, then:

Was there some other mechanism by which s21(1)(a) could nonetheless apply to an action against a stranger to a trust for dishonest assistance or knowing receipt?

The Decision

The Supreme Court, by a majority (Lord Mance dissenting with Lord Clarke dissenting in part) allowed Central Bank of Nigeria’s appeal holding that the English court had no jurisdiction over the claims on the basis that limitation was an effective and absolute bar to Williams’ claim.
The majority held that in light of its legislative history s 21(1)(a) applied only to actions against “true trustees”. This was consistent with the purpose of the six-year limitation period, which was intended to provide some statutory protection for trustees from their liability in equity. The position in equity is that claims against trustees can never be time barred because equity treats trustees as having acted always in accordance with their duties: there is nothing against which time can run (although certain equitable defences such as acquiescence or laches may be available to the trustee).

Who is a constructive trustee?

Who is counted as a “real” trustee matters. Different legal consequences follow depending on the correct categorisation of ‘constructive trustee’. Where the defendant is a “de facto” trustee, the claimant-beneficiary will have the rights and remedies equivalent to a beneficiary under an express trust, even though the defendant has not been formally appointed as a trustee. Equity fixes the defendant with the obligations necessary to make it a “true trustee”.

However, where the claim is based on a secondary liability in actions for Dishonest Assistance and Knowing Receipt the defendant is not a true trustee at all. The correct analysis is that, through its dishonest assistance and/or knowing receipt, the defendant exposes itself to equitable remedies which give rise to a liability to account; this liability is only on the basis that the defendant is a wrongdoer, rather than a real trustee.

As has been emphasised in Paragon Finance, to call this type of defendant a “constructive trustee” is potentially misleading, as it is only a formula used to grant equitable relief.

Central Bank of Nigeria was thus not a “true trustee” for the purposes of the s.21(1)(a) limitation exception.

Was Central Bank of Nigeria a party sued “in respect of” the trustee’s fraud?

Having held that Central Bank of Nigeria was not a “true trustee”, the majority applied a narrow construction to s21(1)(a), holding that it only extends to actions against true trustees on account of their own fraud or fraudulent breach of trust.

This interpretation was consistent with a purposive analysis of the clause and the rationale that claims for secondary liability arise independently of the trustee’s fraud, and should not therefore depend for limitation purposes on the nature of the trustee’s conduct.

Conclusions

The decision is to be welcomed in that it resolves what had been an uncertain issue concerning the limitation of claims for secondary liability for dishonest assistance and knowing receipt.

The decision resolves what had been a confusing distinction between the correct way to categories secondary liability claims based on the nature of the “true trustee’s” breach of trust. Previously, the availability a limitation defence to third-party defendants was thought to turn – not on the seriousness of their own conduct – but on whether or not the true trustee was party or privy to fraud.

Importantly, the decision draws together the limitation position for dishonest assistance and  knowing receipt. Dishonest assistants and knowing recipients are now in the same position for limitation purposes as those who are liable in common law for fraudulent or improper conduct.

The practical point is that claims based on secondary liability commonly accompany a claim for breach of trust. These must be made promptly: delay beyond the six-year limitation period will be a complete defence. Claimant-beneficiaries considering claims against the trustee, which would fall within s21(1)(a) need to be aware that the secondary claims have a shelf life.

Claimant beneficiaries will still have the benefit of s32 Limitation Act, which provides that in cases of fraud or deliberate concealment the clock will not start to run until the claimant has (or could with reasonable diligence have) discovered the fraud or concealment.

Lord Sumption also took the opportunity to approve previous authorities confirming that dishonest assistants and knowing recipients – while often labelled “constructive trustees” are not truly trustees at all.

The decision also provides an important summary of the categories of constructive trusteeship, which may have wider significance for the application of constructive trust principles in fraud and corruption claims (e.g. FHR European Ventures LLP. V Mankarious [2013] EWCA Civ 17 which is on its way to the Supreme Court and may resolve some of the issues arising from the controversial decision of the Court of Appeal in Sinclair v Versailles [2011] EWCA Civ 347.

The Position in Jersey

Having recent moved to Jersey to start a trust practice, it’s worth saying something about the position on limitation for secondary liability claims here.

Jersey’s limitation rules are largely a product of its ancient customary law rather than statute. While there is an indefinite limitation period for fraudulent breach of trust, enshrined in statute Trusts (Jersey) Law 1984, Article 57(1), the Island’s case law has not definitively settled the limitation period for claims in dishonest assistance and knowing receipt. However some recent case law has suggested that Jersey was half a step ahead of the UK Supreme Court on the issue in hand.

The case of Bagus Investments Ltd v Kastening (Royal Court) [2010 JLR 355]held that while Trusts (Jersey) Law 1984, Article 57(1), provided for no (i.e. an indefinite) prescription period for actions against trustees concerning fraud or to recover trust property, the provision was arguably not applicable to claims for knowing receipt. As per the classic classification in  Paragon Finance v Thackerar (No. 8), the term “trustee” in Article 57(1) may include a class 1 constructive trustee (i.e. persons who assumes de facto fiduciary obligations over trust property) but does not include a class 2 constructive trustee (i.e. strangers to trust liable in equity by dishonest act of interference, e.g. knowing receipt).

The Supreme Court’s decision is likely to taken as validation of the approach taken in Bagus Investments.

Precisely what the prescription period for secondary claims is in Jersey remains definitively unresolved but is very likely to be three years from the date of knowledge of the breach of trust with a long stop limitation of the claim after 21 years.