UK: To What Extent Can A Claim For Dishonest Assistance Be Made Against Banks When Receiving Fraudulent Bank Payments?

Last Updated: 9 January 2019
Article by Clare Stothard and Rupal Nathwani

Although claims for dishonest assistance are rare, as fraudulent bank payments have become increasingly common, is this now an area about which financial institutions need to be more savvy? For such a claim to succeed, a prospective claimant would need to show that the financial institution had a dishonest state of mind or the necessary knowledge. Proving such dishonesty is not easy. Similar to claims in conspiracy, the recent decision in Autogas (Europe) Ltd v. Ochocki and Others [2018] EWHC 2345 (Ch) shows the very high bar to prove such a claim. Nevertheless, it is unlikely that this would prevent claims of this nature being brought. In this alert, we consider the factors necessary to bring a claim for dishonest assistance with particular reference to the case of Autogas and its implications for banks.

Fraudulent bank payments

Fraudulent bank payments are becoming increasingly frequent and, as a result, banks continue to see high volumes of claims against them in respect of such payments. The most common source of claims is from their own customers: typically claims for breach of mandate, breach of duty not to facilitate fraud, or breach of advisory duty/duty to provide information. However, banks also face claims from third parties. A claim for dishonest assistance is one such claim.

Dishonest assistance

So what is dishonest assistance and what are its elements? The first point to note is that dishonest assistance is a claim in equity and is a secondary liability. That means it is an indirect liability, where a party assumes legal responsibility for the acts carried out by another party. The elements are: (1) existence of a trust; (2) breach of that trust; (3) assistance by a third party; and (4) dishonesty on the part of that assistant. 

Existence of a trust

For the purposes of a dishonest assistance claim, a trust can arise in multiple ways, although the basis of the claim is the existence of a fiduciary duty, i.e. an obligation to act in the best interest of another party. There is no need for an express trust or formal document and, in most cases, it will typically be argued that there is a constructive trust which has arisen informally on the basis of a particular set of facts. A constructive trust is one that arises by operation of law where it would be unconscionable for a person (A) who holds an asset to deny the beneficial interest of another person (B) in that asset.

Depending on the facts of the case, it may be argued that a specific type of constructive trust has arisen, such as a "Halley" trust (see Halley v. Law Society [2003] EWCA Civ 97) or a "Quistclose" trust (see Barclays Bank Ltd v. Quistclose Investments Ltd [1968] UKHL 4). With the former, money is paid by A to B under a contract which B knows is impossible to perform or has no intention of performing. In relation to the latter, money is paid by A to B for a specific purpose only.

Breach of that trust

The claimant must establish that there has been a breach of trust. Typically a breach would involve the misappropriation of the property subject to the trust. In a Halley trust, the existence of the trust and the breach are simultaneous, i.e. when B obtains the funds. In a Quistclose trust, the breach occurs when the money is used for an alternative purpose to that which was agreed. For a claim of dishonest assistance to succeed, there is no requirement for the defaulting trustee to be either dishonest or fraudulent.

Assistance by a third party

Assistance is a question of fact, but the key is that it must assist in the breach of trust. It does not need to be the sole cause of the breach, but can simply enable it. Further, a claimant will not need to show that the breach could not have happened without the assistance and it will not necessarily be a defence to say that the breach would have happened regardless of the assistance. For banks the assistance in the case of a Quistclose trust, for example, could be paying moneys representing the trust property for an alternative purpose, i.e. not for the specific purpose that was agreed, which gave rise to the Quistclose trust in the first place.

Dishonesty

The tricky part of the claim for any claimant is proving that the third party had a dishonest state of mind. What is the test for this? In short, it is an objective test in light of the actual knowledge of the defendant: "not acting as an honest person would act in the circumstance" (Royal Brunei v. Tan [1995] 2 AC 378).

There is some argument, following Twinsectra Limited v. Yardley and Others [2002] UKHL 12, that the test for dishonesty should be a combined test, i.e. not just an objective test but a subjective test as well – that the assistant should himself be aware that by those standards he was acting dishonestly. However, since Twinsectra the courts have generally reaffirmed the objective test: see Barlow Clowes International Ltd v. Eurotrust International Ltd [2005] UKPC 37. There is no requirement that the assistant must appreciate that what he has done is, by the standards of ordinary decent people, dishonest.

So what does this actually mean? Some key points are as follows:

  1. It is not necessary for the assistant to know that there is a trust, the purpose of that trust, or the details of the defaulting trustee's conduct. It is possible for someone to know or suspect that he is assisting in the misappropriation of money without knowing that the money is held on trust.
  2. An honest person would be deemed to be taken to make enquiries as soon as he/she is suspicious.
  3. A court will look at all the circumstances known to the third party at the time, which will include having regard to the personal attributes of the assistant such as his experience or intelligence, and what drove him to "assist" in the way he did.

Autogas (Europe) Ltd

Autogas (Europe) Ltd v. Ochocki and Others [2018] EWHC 2345 (Ch) is a recent example of a failed claim for dishonest assistance and highlights the difficulties that claimants will face when trying to prove fraud as an essential element of their claim. The claimant alleged that the defendants were involved in VAT fraud, whereby gas was sold on to other parties whilst avoiding VAT, which the defendants had dishonestly assisted.

The claimant successfully proved the first three elements, including assistance (which must be more than minimal), but failed to prove dishonesty. His Honour Judge Keyser QC considered the test for dishonesty, reaffirming that it is an objective test which includes assessing the assistant's state of mind: what was the actual state of the assistant's knowledge or belief as to the facts, and was it genuinely held? Only once that is established can you ask the question as to whether his conduct was dishonest as against the standards of ordinary people.

In Autogas, the claimant alleged "collusive dishonesty" on the part of the defendants, being an allegation that they were aware from the outset that there was a breach by a fiduciary and their assistance was required for it to succeed. The alternative allegation was that of "contingent dishonesty", whereby the defendant is alerted to facts which suggest there has been a breach but ignores them. A pleading of "collusive dishonesty" must be supported by evidence. Whilst the evidential burden to prove dishonest assistance is the civil balance of probability test i.e. the same as for allegations of negligence, given the seriousness of an allegation of dishonest assistance the requisite evidence must be more forceful.

HHJ Keyser QC highlighted the problems with a pleading of "collusive dishonesty", holding that there was an absence of direct evidence of collusion. Although it is not necessary to expressly plead dishonesty, it is necessary to plead the primary facts supporting an inference of dishonesty and the test is whether, on the primary facts pleaded, an inference of dishonesty is more likely than one of innocence or negligence.

Implications

As is the case with any allegation of fraud, allegations of dishonest assistance must be pleaded in some detail. Autogas demonstrates that the court will not infer dishonesty from matters that are not pleaded. In order to succeed in a claim for dishonest assistance, the stumbling block for most claimants will be the final hurdle of proving that the assistant was dishonest. The failure of the claim was down to the lack of direct evidence of primary facts to support the inference of dishonesty. Whilst this case may come as some relief, banks should remain cautious – by not recognising what an honest person would consider to be "red flags" indicating a fraudulent bank payment, they may face a claim for dishonest assistance even if the specific details about the underlying trust were unknown. With complex fraud increasingly being committed, banks should remain ever diligent.

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