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This case concerned a trust created in July 2006 and several dispositions of trust funds to one of the beneficiaries. Although the Defendant Trustee (‘the Trustee’) characterised the dispositions as loans, which were permitted by the terms of the trust, the Claimant, another of the beneficiaries under the trust (‘the Beneficiary’), alleged that they were in reality gifts expressly prohibited by other terms of the trust.
Proceedings were issued on 25 September 2018 for breach of trust. On 3 December 2018, the Trustee responded by way of a strike-out application on the basis that the relevant trust deed contained a trustee exoneration clause which, insofar as material, provided that the Defendant shall not be liable for or responsible for any loss or damage:
“except where the same shall be proved to have been caused by acts done or omissions made in personal conscious and fraudulent bad faith by the Trustee charged to be so liable”.
Accordingly, the Trustee alleged that the clause provided a complete answer to the claim in circumstances where the Particulars of Claim contained no properly pleaded allegation of dishonest breach of trust. In the alternative, the Defendant applied for reverse summary judgment on the basis that the claim was barred by two Deeds of Indemnity signed by the Claimant. By an application noticed dated 16 May 2019, the Claimant applied to amend the Particulars of Claim.
Before HHJ Paul Matthews sitting as a Judge of the High Court (“the Judge”), it was common ground that the burden was on the Claimant to establish a dishonest breach of trust, and that the relevant test was set out by Lewison J (as he then was) in Fattal v Walbrook Trustees (Jersey) Ltd  EWHC 2767 (Ch) at :
“what is required to show dishonesty in the case of a professional trustee is:
Having considered the various draft amended Particulars of Claim, by an order dated 14 August 2019, the Judge struck out the claim. He considered that the proposed amendments addressed only the first limb of Fattal v Walbrook, not the second. In his judgment dated 2 August 2019 ( EWHC 2071 (Ch)) the Judge further held that, if the claim had not been struck out, he would have granted reverse summary judgment dismissing part (but not all) of the claim. The Beneficiary appealed.
Arnold LJ, with whom Patten and David Richards LJ agreed, considered the applicable legal principles and relevant version of the amended pleadings, and allowed the appeal. Although the Court of Appeal accepted that the Amended Particulars were “not well drafted” it held that they did contain sufficient particulars to sustain a case of dishonest breach of trust.
The decision serves as a useful reminder of the relevant principles governing pleadings where dishonesty is alleged:
(i) Fraud or dishonesty must be specifically alleged and sufficiently particularised, and will not be sufficiently particularised if the facts alleged are consistent with innocence (Three Rivers District Council v Governor and Company of the Bank of England (No.3)  2 AC 10.
(ii) Dishonesty can be inferred from primary facts, provided that those primary facts are themselves pleaded. There must be some fact which tilts the balance and justifies an inference of dishonesty, and this fact must be pleaded (Three Rivers,  (Lord Millett)).
(iii) The claimant does not have to plead primary facts which are only consistent with dishonesty. The correct test is whether or not, on the basis of the primary facts pleaded, an inference of dishonesty is more likely than one of innocence or negligence (JSC Bank of Moscow v Kekhman  EWHC 3073 (Comm) at - (Flaux J, as he then was).
Particulars of dishonesty must be read as a whole and in context (Walker v Stones  QB 902, 944B (Sir Christopher Slade)).
Noteworthy points arising from the decision provide guidance as to pleadings generally and pleading where dishonesty is alleged in the context of an application to strike out:
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