Practice and procedure – Strike out – Trusts – Appellants alleging breach of constructive trust and dishonest assistance against respondent solicitors – Master striking out claims on respondents’ application – Appellants appealing – Whether arguable that knowledge of restriction on office copy register of title sufficient to give knowledge or put respondents on enquiry as to existence of charging order – Appeal allowed in part
The respondents acted as conveyancing solicitors to R and his wife in the sale of their property in Croydon. They were no longer married but were joint legal owners of the property. Acting on instructions from R, the respondents transferred the net proceeds of sale following discharge of registered charges, to his wife. The appellants complained that they should not have done that when they were on notice, by means of a restriction noted on the Office Copy Register of Title (in a form known as a Form K restriction), recording that there was an interim charging order (ICO) over the beneficial interest of R in the property.
The appellants brought claims against the respondents contending that by paying the proceeds of sale to his wife knowing of the existence of the ICO, the respondents had assisted R in dealing with monies over which he did not have a right of free disposal and so frustrated the intended effect of the court order; in doing so the respondents were acting in a commercially dishonest manner; and equity would enforce an equitable interest, such as that arising under the ICO, against the respondents by holding them to account for dealing inconsistently with those monies since the conscience of the solicitor handling the matter ought to have been affected by notice of the appellants’ equitable interest.
On the respondents’ application, a master struck out both claims. The appellants appealed.
Held: The appeal was allowed in part.
(1) A solicitor or other agent who received money from his principal which belonged at law or in equity to a third party was not accountable as a constructive trustee to that third party unless he had been guilty of some wrongful act in relation to that money. To act “wrongfully” he had to be guilty of knowingly participating in a breach of trust by his principal; or intermeddling with the trust property otherwise than merely as an agent and thereby became a trustee de son tort; or receiving or dealing with the money knowing that his principal had no right to pay it over or to instruct him or to deal with it in the manner indicated; or some dishonest act relating to the money: Carl Zeiss Stiftung v Herbert Smith & Co [1969] 2 (Ch) 276 considered.
The “knowing” elements of the test would encompass “blind-eye knowledge” which occurred where a person deliberately abstained from enquiry in order to avoid certain knowledge of what they already suspected to be the case.
(2) The imputation of blind-eye knowledge required two conditions to be satisfied: (i) the existence of a suspicion that certain facts might exist; and (ii) a conscious decision to refrain from taking any step to confirm their existence. Suspicions which fell short of constituting blind-eye knowledge might nevertheless be relevant to the question whether an alleged accessory had acted dishonestly. The first stage of the test required the court to ascertain all the relevant facts, including the knowledge and beliefs of the defendant. Even though knowledge, in that context, was now taken to be confined to actual and blind eye knowledge, there was no reason in principle why a person’s beliefs might not include suspicions which he harboured, but which in and of themselves fell short of constituting blind-eye knowledge. The existence of such suspicions, and the weight (if any) to be attributed to them, were then matters to be taken into account at the objective second stage of the test: Group 7 Ltd and another v Nasir and others [2019] EWCA Civ 614 considered.
In the matter currently before the court, the knowledge that the respondents had was that there was a restriction on the register relating to an ICO. Therefore, there must have been a court order giving rise to the ICO. That was strong grounds for a suspicion that another party had an ownership interest in the monies than the mere fact of a claim. That knowledge fell short of certainty in that the equitable interest was still in existence, as the debt might have been repaid or the ICO otherwise discharged, or it might be the case that R had no equitable interest in the property to which the ICO could attach.
(3) The knowledge of the ICO might on further examination be sufficient for the court to conclude that the solicitor, faced with that knowledge, formed a reasonable suspicion that another party had an interest in part of the proceeds of sale such that he possessed either blind-eye knowledge or something short of blind-eye knowledge that nevertheless would create an argument that proceeding without checking further was not something that an honest person would have done. Conversely, it might be that the solicitor’s understanding of the facts was such that he did not form any such suspicion. The matter turned on the solicitor’s beliefs at the time, and those beliefs needed to be tested at trial.
The master was acting prematurely in accepting the argument that knowledge of the existence of the ICO by itself did not demonstrate any knowledge or blind-eye knowledge. The question of dishonesty was an arguable case, requiring evidence as to the knowledge and state of mind of the solicitor and should not have been struck out. Therefore, the appeal as regards the dishonest assistance strikeout order would be allowed.
(4) The appellants had no argument that the respondents in dealing with monies which were impressed with an equitable charge, in a manner that was incompatible with that charge, was of itself a breach of a constructive trust irrespective of any finding of dishonesty. The respondents would only be responsible if the conduct of the solicitor complained of in the points of claim could be shown to amount to dishonesty.
On the basis of the pleadings before the court, the only wrongful act alleged was that in relation to the dishonest assistance claim, and it was acknowledged on both sides that as a result, given that the respondents were no longer holding any of the relevant monies for anybody, considerations of a constructive trust in the hands of the respondents would add little or nothing to the dishonest assistance claim.
Adrian Davies (instructed by Amphlett Lissimore Solicitors) appeared for the appellants; Cecily Crampin (instructed by Ferns Solicitors) appeared for the respondents.
Eileen O’Grady, barrister
Click here to read a transcript of Dattani and another v Ferns Solicitors
