The High Court decision in Farah Constructions v Say-Dee Pty Ltd handed down on 24 May 2007 is, we think, good news for banks.
Where there has been a breach of fiduciary duty the key target of subsequent litigation will often be not the fiduciary, but third parties who have received assets or (though tracing) their proceeds from the fiduciary (knowing receipt) or who can be said to have knowingly assisted in the breach (knowing assistance).
Most obviously this occurs where the fiduciary is insolvent.
Banks are an obvious target since they are often the facilitators of the movement of the proceeds of breach of fiduciary duty.
In Farah Constructions Pty Ltd and Ors v Say-Dee [2007] HCA 22, the High Court reined in what was a worryingly expansive approach of the Court of Appeal in regard to knowing receipt and has provided some clarity in regard to the knowledge required for knowing assistance.
Knowing receipt: must the bank have ‘notice’ to be liable?
In respect of knowing receipt, the traditional view was (as the name suggests) that it was necessary for the defendant to have some notice (the extent of that notice being a matter of controversy – discussed further below) of the facts constituting the breach of the fiduciary’s duty.
There has long been a push, however, to abandon the requirement for notice and impose strict liability (referred to as liability in ‘unjust enrichment’ or restitution-based liability) subject to defences (of bona fide purchaser for value without notice or change of position). The main proponent of this approach has been English scholar the late Professor Peter Birks.
Such an approach is obviously undesirable for banks – not least because it would shift the onus to them to establish a defence.
The Court of Appeal in Farah Constructions adopted the Birks approach and took this radical step, at least as an alternative argument.
The High Court indicated that it was a grave error for the Court of Appeal to have taken this step.
At least for the foreseeable future then, notice remains a requirement and the onus of proving such notice rests with the plaintiff.
Knowing assistance: is assistance ‘in a dishonest and fraudulent design required’ or will assistance in any breach of fiduciary duty do?
Breaches of fiduciary duty can take many forms – ranging from a flagrant misappropriation of trust property to a technical oversight of a clause in a trust deed – with no improper purpose.
The High Court confirmed that for a bank or other third party to be liable for knowing assistance in a breach of fiduciary duty the primary breach must be ‘dishonest and fraudulent’.1
It will be a question of fact whether the dereliction of duty is sufficient to merit the description ‘dishonest and fraudulent’.
The High Court also provided some much needed clarity on the nature of the ‘knowledge’ of the dishonest primary breach that was required. The High Court indicated that the following forms of knowledge would suffice:
- actual knowledge
- wilfully shutting one’s eyes to the obvious
- wilfully or recklessly failing to make such inquiries as an honest and reasonable man would make, and
- knowledge of circumstances which would indicate the facts to an honest and reasonable man.
The High Court indicated that the present law in Australia did not go as far as saying that the following fifth form of knowledge would suffice:
v. knowledge of circumstances which would put an honest and reasonable man on inquiry.
Endnotes
1. Though note that the primary breach need not be dishonest or fraudulent where the bank dishonestly procures or assists in the breach of trust or fiduciary obligation.
This article was written by David Scully, Solicitor, Sydney.
More information
For information regarding possible implications for your business, contact a member of the Litigation & Dispute Resolution team.