Extension of the Second Limb of Barnes v Addy to other Equitable Duties?

Recently in 20 Trevis Court Pty Ltd v Emmapeel Holdings Pty Ltd & Ors [2023] QSC 254 (14 November 2023) the Supreme Court considered, when hearing a pleadings strike out application, the broader application of the second limb of Barnes v Addy in Australia – accessorial liability for breach of trust or fiduciary duty.

Applegarth J said at [17] – [39]:

Two issues

[17] Two issues, therefore, arise for determination:

(a) Is Trevis’ claim that each Gallery Defendant assisted in Emmapeel’s breach of its equitable duty of good faith with knowledge that the breach was a dishonest and fraudulent design open as a matter of law? Expressed differently, is such a claim for knowing participation in a breach of duty, confined to a breach of trust or a breach of fiduciary duty under the second limb in Barnes v Addy?

(b) Is Trevis’ claim that each of the Gallery Defendants knowingly assisted and participated in Kopps Road’s breach of fiduciary duty with knowledge of the dishonest and fraudulent design adequately pleaded?

Is a claim for assistance in a breach of the equitable duty of good faith, with knowledge that the breach was “a dishonest and fraudulent design”, not open as a matter of law?

[18] The Gallery Defendants acknowledge that a claim for having knowingly procured or induced a breach of an equitable duty as mortgagee is open as a matter of law. They submit, however, that Farah confined liability for knowing participation in a breach of equitable duty to breach of trust or breach of fiduciary duty. What is described as “a Barnes v Addy liability” is submitted to be not available because Kopps Road’s breach of equitable duty is not one for breach of trust or breach of fiduciary duty. Farah is submitted to be limited to participation in a dishonest and fraudulent design in cases of breach of trust or breach of fiduciary duty.

[19] Trevis responds that the “extension of the Barnes v Addy type claim” to breaches of other equitable duties is not precluded by Farah or any other authority, and is left open by academic articles.

[20] What do the lawyers mean when they speak about a liability under the second limb in Barnes v Addy? The phrase “the second limb of Barnes v Addy” means different things to different people.

[21] On one view, it is the category of accessorial liability for breaches of trust or fiduciary duty, and it makes no sense to apply it to other equitable duties or to extend it beyond its province.

[22] To others, the phrase refers to a broader category of accessorial liability that may apply, subject to the same requirements as apply to breaches of trust and fiduciary duty, to other breaches of equitable duty. These would include a duty of confidence or an equitable duty to act in good faith in the exercise of a power of sale as mortgagee.

[23] Because of the differences in usage and the scope for confusion, reference to liability under the second limb in Barnes v Addy may serve to confuse the present issue.

[24] The issue is not the extension of a principle that applies to breaches of trust and fiduciary duty. The issue is one concerning the arguable existence of accessorial liability for breach of an equitable duty of good faith. The issue is whether an analogous liability to that in Barnes v Addy may exist as a matter of legal principle or is precluded by authority.

Farah

[25] In Farah, the High Court authoritatively stated for the purposes of Australian law what has become known as the second limb of Barnes v Addy. This limb “makes a defendant liable if that defendant assists a trustee or fiduciary with knowledge of a dishonest and fraudulent design on the part of the trustee or fiduciary”.[3]

[26] The High Court observed in relation to the scope of the second limb that it was not expressed by Lord Selborne LC “as an exhaustive statement of the circumstances in which a third party who has not received trust property and who has not acted as a trustee de son tort nevertheless may be accountable as a constructive trustee”.[4] The High Court observed that before Barnes v Addy there was a line of cases that accepted that a third party might be treated as a participant in a breach of trust where the third party “had knowingly induced or immediately procured breaches of duty by a trustee where the trustee had acted with no improper purpose”.[5] These are not cases of a third party assisting the trustee in any dishonest and fraudulent design on the part of the trustee.

[27] The Court in Farah recognised that, on one reading of the Privy Council decision in Royal Brunei Airlines Sdn Bhd v Tan,[6] the distinction recognised in the Australian case law may have been displaced by a general principle of “accessory liability”. Despite this, a distinction exists between rendering liable a defendant participating with knowledge in a dishonest and fraudulent design, and rendering liable a defendant who dishonestly procures or assists in a breach of trust or fiduciary obligation where the trustee or fiduciary need not have engaged in a dishonest or fraudulent design. Until an occasion arises for the High Court to reconsider the matter, Australian courts should continue to observe the distinction and apply the formulation in the second limb of Barnes v Addy.[7]

[28] In Grimaldi v Chameleon Mining NL (No 2)[8] the Full Court of the Federal Court (Finn, Stone and Perram JJ) considered the applicable legal principles governing third party liability, including four quite distinct manifestations of third party participation in another’s breach of fiduciary duty or breach of trust that arose in that case. The categories were said to illustrate that “participatory liability as it evolved in equity in cases prior and subsequent to Barnes v Addy was not based on inflexible formulae”. The variety of circumstances in which a third party could be characterised as a wrongdoer in equity were said to vary in importance.[9] The court’s discussion concerned participation in a breach of trust or fiduciary duty. The court noted in passing third party participation in a breach of confidence or the abuse of a relationship of influence.[10]

[29] Presently it is unnecessary to explore the category of third party liability by which a party may be liable for knowingly inducing or procuring a breach of trust or breach of fiduciary duty. The Gallery Defendants no longer apply to strike out subparagraph (a) of the relevant paragraphs which plead that each Gallery Defendant “knowingly procured or induced” Emmapeel’s breach of an equitable duty of good faith. Therefore, it is sufficient to observe that in Pittmore Pty Ltd v Chan,[11] Leeming JA, with whom Bell P and Brereton JA agreed, considered this basis of liability in a case in which the defendant was alleged to have procured a breach of fiduciary duty. The court confirmed that Farah established that a third party who assists a breach of trust or a breach of fiduciary duty may only be made liable as an accessory pursuant to the second limb in Barnes v Addy if the breach by the fiduciary amounts to a “dishonest and fraudulent design”. In the separate context of a third party who procures or induces a breach of trust or fiduciary duty, it was sufficient if the inducer or procurer “knew of the facts which, to a reasonable person, would indicate a breach of trust or fiduciary duty”.[12] In addition, the inducer or procurer must have intended the trustee or fiduciary to do the thing which is a breach of trust or fiduciary duty.[13]

[30] These authorities, like Farah, were concerned with a breach of trust or breach of fiduciary duty. Farah did not need to consider breaches of other equitable duties. Farah neither endorses nor disapproves the recognition of a category of accessorial liability for breaches of other equitable duties. It restated Australian law in relation to the second limb of Barnes v Addy, being a liability that relates to breaches of trust and breaches of fiduciary duty. Farah did not consider whether an analogous category of accessorial liability might exist for breaches of other equitable duties, such as breaches of a duty of confidence or breaches of a duty of good faith.

Accessorial liability for breach of equitable duties apart from breaches of trust and breaches of fiduciary duty

[31] There seems no reason in principle why a form of accessorial liability that applies to breaches of trust or breaches of fiduciary duty should not apply to breaches of other equitable duties.

[32] In Vestergaard Frandsen A/S v Bestnet Europe Limited,[14] the Supreme Court of the United Kingdom considered accessorial liability for breach of confidence. The claim failed on the facts. However, Lord Neuberger recognised that, while the recipient of confidential information may be said to be primarily liable in a case of its misuse, “a person who assists her in the misuse can be liable, in a secondary sense”.[15] Consistently with the approach of equity, the person assisting would normally have to know that the recipient was abusing confidential information. Lord Neuberger went on to consider the possibility of liability for breach of confidence on the basis of “common design”. It was accepted that, in principle, common design may be invoked against a defendant in a claim based on misuse of confidential information. However, to be a party to a common design, the person must share with the other party, or parties, to the design, “each of the features of the design which make it wrongful”.[16]

[33] In a 2014 article,[17] Professor Ridge argued that the Barnes v Addy formulation of accessorial liability falls within a broader principle of liability that applies not only to breaches of trust and fiduciary duty, but which operates at various levels across equity. Particular consideration was given to breach of confidence and undue influence. Accessorial liability might attach to equitable wrongs other than breach of trust or fiduciary duty.

[34] Professor Gummow in a 2013 article, Knowing Assistance,[18] remarked upon the tendency to take passages from decisions like Barnes v Addy and to apply them as if they were statutory enactments, without regard to the setting in which they arose. Professor Gummow observed that over‑refinement in case law of the two “limbs” of Barnes v Addy “obstructs an appreciation that they do not occupy the conceptual universe of accessorial or participatory liabilities for breaches of duty by trustees and other fiduciaries, particularly company directors”. The article did not specifically discuss accessorial liability for other equitable wrongs but argued that accessorial or participatory liability is “fault based” in the sense of “responding to what in the eye of a court of equity is unconscientious conduct”.[19]

[35] Counsel for Trevis also relied upon Professor Austin’s Constructive Trusts in Essays in Equity.[20] Professor Austin remarked upon three overlapping categories of liability. One area of liability was where no property of any kind was received by the third party. Its ingredients were said to be “assistance, dishonest and fraudulent design and knowledge”.[21] He recognised that the categorisation could apply to analogous topics, including the liability of a third party who benefits from wrongful disclosure of confidential information, and the liability of a third party who benefits from an abuse of power by a mortgagee.[22]

[36] Professor Dietrich agreed about the scope to develop participatory or accessorial liability in equity in areas that are “at least closely analogous” to accessorial liability for breaches of trust or fiduciary duty.[23]

[37] I refer to academic commentary on this topic as recognising that the kind of liability pleaded by Trevis, and which the Gallery Defendants wish to strike out, is arguable and not apparently foreclosed by authority.

[38] It is sufficient on an application of this kind to conclude that it is arguable that a party may be liable for assisting another’s breach of the equitable duty of good faith as a mortgagee, in circumstances where the third party does so with knowledge that the breach was “a dishonest and fraudulent design”.

[39] Such a liability is not precluded by Farah or any other authority that binds me. It is unnecessary on a strike-out application to discuss whether such a liability should be viewed as an application of a broader principle of accessorial liability in equity or, the application by analogy of an existing category of accessorial liability for breach of trust or breach of fiduciary duty to a different equitable duty. There may be arguments that differences between equitable duties should make a difference, such that there is some point of distinction or that the breaches are not closely analogous. However, that is an argument for another day and not one which was developed on this application.

[3] Farah at 159 [160].

[4] At 159 [161].

[5] Ibid.

[6] [1995] UKPC 4; [1995] 2 AC 378 at 392.

[7] Farah at 160 [163].

[8] [2012] FCAFC 6; (2012) 200 FCR 296.

[9] At 358 [247].

[10] Ibid.

[11] [2020] NSWCA 344; (2020) 104 NSWLR 62.

[12] At 102 [192].

[13] At 102 [193].

[14] [2013] UKSC 31; [2013] 1 WLR 1556.

[15] At [26].

[16] At [34].

[17] Equitable accessorial liability: Moving beyond Barnes v Addy (2014) 8 Journal of Equity 28.

[18] (2013) 87 ALJ 311.

[19] At 319.

[20] R P Austin, ‘Constructive Trusts’ in P D Finn (ed), Essays in Equity (Law Book Co, 1985), 196.

[21] At 201.

[22] At 200.

[23] The Liability of Accessories Under Statute, in Equity, and in Common Law: Some Common Problems and (Perhaps) Some Common Solutions [2010] MelbULawRw 4; (2010) 34 Melbourne University Law Review 106 at 122‑123.

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The SCL link to this case is: 20 Trevis Court Pty Ltd v Emmapeel Holdings Pty Ltd & Ors [2023] QSC 254 (sclqld.org.au)