There had been long running disputes between the plaintiffs and a defendant in which the plaintiffs claimed that all of the defendant’s assets were held for the plaintiffs on trust. Before those claims had been resolved the plaintiff brought a separate claim against the defendant’s solicitors, Herbert Smith, contending that they were liable to account to the claimant for the fees paid by the defendant from the trust assets. The solicitors applied to strike out the claims. At first instance Pennycuick J decided that the proceedings were contrary to public policy in that they obstructed the due administration of justice.
Held: The appeal failed. t the claims did not give rise to a reasonably arguable claim that the solicitors were constructive trustees under the relevant legal tests. The Court of Appeal did not need to address the public policy argument, though it expressed some sympathy for the judge’s decision.
The court approved the statement in Snell’s Principles of Equity that: ‘A constructive trust is a trust which is imposed by equity in order to satisfy the demands of justice and good conscience without reference to any express or presumed intentions of the parties.’
Danckwerts LJ said that ‘knowledge of a claim being made against the solicitor’s client by the other party is not sufficient to amount to notice of a trust or notice of misapplication of the moneys’ and ‘[Counsel for the plaintiff’s] contention was that the defendant solicitors knew where the moneys that they received came from and knew that the source was trust funds. In my view this contention fails at the outset. What the defendant solicitors knew was that the moneys came from the West German foundation and they knew of the allegations contained in the proceedings brought against that foundation by the plaintiffs in which they were instructed to act as solicitors for the West German foundation. They knew that claims were being made against the West German foundation that all their property and assets belonged to the plaintiffs or were held on trust for them. But claims are not the same thing as facts. [The plaintiffs’ counsel] contended that for the purposes of the present issue all the allegations contained in the statements of claim in both the actions must be taken as true. That will not do. What we have to deal with is the state of the defendant solicitors’ knowledge (actual or imputed) at the date when they received payments of their costs and disbursements. At that date they cannot have had more than knowledge of the claims above mentioned. It was not possible for them to know whether they were well-founded or not. The claims depended upon most complicated facts still to be proved or disproved, and very difficult questions of German and English law. It is not a case where the West German foundation were holding property upon any express trust. They were denying the existence of any trust or any right of property in the assets claimed by the plaintiffs. Why should the solicitors of the West German foundation assume anything against their clients?’
Sachs LJ agreed: ‘Firstly, and to my mind decisively, whatever be the nature of the knowledge or notice required, cognisance of what has been termed ‘a doubtful equity’ is not enough. This phrase is to be found in Lewin on Trusts, 16th ed. (1964), p. 658, and Underhill’s Law Relating to Trusts and Trustees 11th ed (1959) p. 606: it appears first to have been used by Lord Grant M.R. in Parker v. Brooke (1804) 9 Ves. 583, 588. The rule, as I understand it, is that no stranger can become a constructive trustee merely because he is made aware of a disputed claim the validity of which he cannot properly assess. Here it has been rightly conceded that no one can foretell the result of the litigation even if the plaintiffs were to prove all the facts they allege.’ and ‘As to facts alleged in a statement of claim, [counsel for the defendants] was, to my mind, correct in submitting that a defendant’s solicitor is under no duty to the plaintiffs to inquire into their accuracy for the purposes urged by [counsel for the plaintiff], nor, where there is a likelihood of a conflict of evidence between his client’s witnesses and those of the plaintiffs is he under any such duty to assess the result.
Edmund Davies LJ agreeing said: ‘The law being reluctant to make a mere agent a constructive trustee, as Lord Selborne L.C put in in Barnes v. Addy, 9 Ch. App. 244, 251-252, mere notice of a claim asserted by a third party is insufficient to render the agent guilty of a wrongful act in dealing with property derived from his principal in accordance with the latter’s instructions unless the agent knows that the third party’s claim is well-founded and that the principal accordingly had no authority to give such instructions’.
Edmund Davies LJ, Danckwerts LJ, Sachs LJ
[1969] 2 WLR 427
England and Wales
Citing:
Adopted – La Roche v Armstrong KBD 1922
Lush J said: ‘Here the solicitor has received a sum of money from his client for the purpose of his resisting on her behalf a claim by A, who says it is trust money and that the client is under a duty to return it. Under such circumstances I should . .
Cited by:
Cited – Cobbe v Yeomans Row Management Ltd and Others ChD 25-Feb-2005
Principles for Proprietary Estoppel
A developer claimed to have agreed that upon obtaining necessary planning permissions for land belonging to the respondents, he would purchase the land at a price reflecting its new value. The defendant denied that any legally enforceable agreement . .
Still Good Law – XX and Others v YY and Others ChD 2-Jul-2021
The first defendant applies for an order that the claimants are not entitled to pursue legal action against his lawyers in respect of funds over which the claimants claim a proprietary interest and paid to the first defendant’s lawyers as legal fees . .
Cited – The Serious Fraud Office and Another v Litigation Capital Ltd and Others ComC 18-May-2021
. .
Cited – Sinclair Investments (UK) Ltd v Versailles Trade Finance Ltd and Others ChD 30-Jun-2010
Lord Neuberger MR said that Carl Zeiss ‘supports the proposition that notice of a claim is not the same as notice of a right’. . .
Lists of cited by and citing cases may be incomplete.
Updated: 30 October 2021; Ref: scu.223731