Home › Equity & Trusts › 11 · Barnes v Addy

Module 11 · Third parties: Barnes v Addy liability

What this module covers and why it matters. This module covers when a person who is not a trustee can be made liable for a trustee's breach of trust. Equity calls such a person a stranger to the trust, and it fixes them with liability in two situations only: where they receive trust property, or where they assist a dishonest breach. This is the point in a problem where the story stops being about the trustee and starts being about everyone who touched the money after the wrong. It sits after the breach modules and feeds straight into tracing in Module 12, because once you have found a liable stranger you still have to work out what the plaintiff can recover.

How to use this guide. The scaffold below is the order you run in an answer. Learn the two limbs as separate tests with separate elements, because the commonest mistake is to blur them. Revise from the scaffold and the table below.

Cases at a glance

The analytical scaffold

Barnes v Addy problems reward a fixed order. Establish the breach before you look at any stranger, then take each stranger in turn and ask which limb their conduct fits.

1. Establish the predicate breach and name the defaulting trustee. There is no stranger liability without a breach for the stranger to be connected to. Without this step no limb runs.
2. For each stranger, ask which limb fits. Did this person receive trust property for their own benefit, or did they assist the breach without receiving it? Receipt points to limb one and assistance to limb two.
3. Run limb one, knowing receipt, on its own elements. A breach that need not be dishonest, beneficial receipt of trust property, and knowledge within Baden categories one to four.
4. Run limb two, knowing assistance, on its own elements. A dishonest and fraudulent design on the trustee's part, assistance in that design, and knowledge within Baden categories one to four.
5. Where limb two fails on the threshold, run the alternatives. The assistant's own dishonesty standard in Royal Brunei as reform, and inducing breach of trust where the stranger procured the breach.
6. Fix the remedy. Liability under either limb is personal, an account as a constructive trustee. Any proprietary claim travels through tracing in Module 12.
7. Bar double recovery. Where several defendants answer for the same loss, conclude each separately and then bar recovery beyond the loss.

Having set the order we take the framework rule first because it defines the two gateways.

The framework rule

What this section covers and why it matters. Everything in the module descends from one sentence of Lord Selborne LC in Barnes v Addy, restated for Australia by the High Court in Farah. Fix the framework first, because it tells you there are two routes and only two.

The rule names the two limbs and rules out a general liability for anyone involved. A person who merely benefits from a breach is outside Barnes v Addy unless they fall within one of the two gateways. Farah is the binding Australian restatement and the case you cite for both limbs.

The second point is what the liability gives the plaintiff.

The label constructive trustee is misleading. The stranger is not holding identified property for the plaintiff by virtue of Barnes v Addy. They owe a personal money obligation measured as if they were a trustee accounting for the loss. If the plaintiff wants the asset itself they must trace to it under Module 12.

The knowledge scale

What this section covers and why it matters. Both limbs turn on what the stranger knew. Equity uses a graded scale of five categories drawn from the Baden case and received into Australian law through Farah. The whole contest in most problems is which rung the stranger reaches.

The Baden categories, as received in Australia, run from clear knowledge down to mere unease:

1. actual knowledge
2. wilfully shutting one's eyes to the obvious
3. wilfully and recklessly failing to make the inquiries an honest and reasonable person would make
4. knowledge of circumstances which would indicate the facts to an honest and reasonable person
5. knowledge of circumstances which would put an honest and reasonable person on inquiry

The line in Australia falls between category four and category five. Categories one to four qualify for both limbs. Category five does not. The examiner plants strangers who look suspicious but sit at category five. The teller who hesitates, the friend who is surprised, the relative who is uneasy. Surprise and unease are category five and do not ground liability. Language of shutting one's eyes to the obvious is category two and does. Put the facts against the scale and state which rung they reach, rather than concluding suspicion in the abstract.

Limb one · knowing receipt

What this section covers and why it matters. The first limb catches the stranger who took the trust property and kept the benefit of it. This is the favoured relative or friend handed the asset. The section sets out the three elements and how the knowledge scale bites.

Three features repay attention. First, the predicate breach need not be dishonest. An innocent trustee who distributes to the wrong person still commits the breach that grounds receipt liability in a recipient who knew. Second, the receipt must be beneficial. A bank or agent who takes the money as a mere conduit does not receive for their own benefit and is not a limb one figure. Their exposure, if any, is under limb two. Third, the knowledge can come at or after receipt so long as the property is still held.

One proprietary point sits beside this limb. A volunteer who still holds traceable trust property surrenders it regardless of knowledge. That is the proprietary claim in tracing, not Barnes v Addy. Knowledge decides only whether the volunteer is also personally liable once the property has gone.

Consolidation. Limb one asks a simple sequence. Was there a breach, did this defendant beneficially receive trust property, and did their knowledge reach category four or higher. If the property is gone the claim is personal. If it survives the plaintiff traces to it under Module 12.

Limb two · knowing assistance

What this section covers and why it matters. The second limb catches the stranger who did not take the property but helped the breach along. This is the adviser, teller, bank manager or encourager. It is harder to make out than limb one because it carries an extra threshold about the trustee's own conduct.

The threshold element is the trustee's dishonest and fraudulent design, and this is where the limb most often fails. If the trustee acted honestly or naively, however shabby the stranger's conduct, the threshold is not met and limb two collapses. The order matters. State the threshold, test it on the trustee's conduct, and only then turn to the stranger. A student who assesses the stranger first and forgets the trustee reaches the wrong answer on facts built around an honest trustee.

What counts as a dishonest and fraudulent design is not fully settled. It has been described as requiring more than a trivial breach and as a transgression of ordinary standards of honest behaviour (Westpac Banking Corporation v Bell Group Ltd (No 3); Hasler v Singtel Optus). Use that description to test the conduct rather than asserting a conclusion.

Consolidation. Limb two runs on three elements but stands or falls on the first. No dishonest and fraudulent design, no limb two, whatever the stranger did or knew.

When the assistance limb fails

What this section covers and why it matters. Because limb two so often fails on the honest trustee, the top marks go to the student who knows what remains. There are two rescue arguments.

The first is the standard in Royal Brunei Airlines v Tan, where the Privy Council held that the assistant's own dishonesty is enough and the trustee's breach need not be dishonest. That is not the law in Australia after Farah. Raise it only as reform, as the standard the High Court might one day accept.

The second argument is inducing breach of trust. Where the stranger did not merely assist but actually procured the breach, Farah leaves that route open, reaching a stranger who caused the breach even where the assistance limb cannot be made out.

The two limbs side by side

This table is the frame to carry into an answer. Read the two limbs down the same features and pin the differences.

Consolidation. The two limbs share the knowledge standard and diverge on everything else. Limb one needs receipt but tolerates an innocent trustee. Limb two tolerates a stranger who received nothing but demands a dishonest trustee. Match the stranger to the limb their conduct fits.

Remedies and double recovery

What this section covers and why it matters. The liability decides what the plaintiff walks away with. This section fixes the character of the remedy and the bar that stops a plaintiff being paid twice.

Liability under either limb is personal. The stranger accounts as a constructive trustee for the loss, and limb two may also ground equitable compensation. A proprietary claim, meaning a claim to a specific asset that defeats the stranger's other creditors, does not come from Barnes v Addy. It comes from tracing while the property is still identifiable.

Where several defendants answer for the same loss the plaintiff cannot collect it more than once.

State this once you have found more than one liable stranger. Conclude each defendant on their own elements first, then note that the plaintiff's total recovery is capped at the loss.

How the examiners test this

The module is rarely the whole answer. It is a link in a chain that begins with a breach and ends in tracing. Establish the predicate breach and name the defaulting trustee before you reach for a limb, because a scaffold that starts with the stranger has skipped the step that makes it run.

The recurring trap is category five by stealth. The planted stranger is always suspicious and always short of knowledge. The teller who hesitates, the friend who is surprised, the sister who shuts her eyes. Only the shutting of eyes reaches a qualifying category. Name the rung rather than concluding that the stranger seemed to know.

The second trap is the innocent trustee that kills limb two. The papers plant a trustee who is honest or naive so that the dishonest design threshold fails whatever the stranger did. Test the threshold on the trustee first. When it fails, that is the cue for the rescue arguments.

The third discipline is remedial. Conclude each stranger separately with a figure and the character of the liability, keep the personal claim distinct from any proprietary claim, and bar double recovery where more than one defendant answers for the same loss. Any election among taking the asset, a constructive trust over it, or an account of profits secured by a lien (Scott v Scott) becomes a tracing question in Module 12.

Consolidation. Barnes v Addy is a filter with two gates. Find the breach, sort each stranger into receipt or assistance, apply the knowledge scale honestly, and remember the liability is personal until tracing makes it proprietary.

Case index

Barnes v Addy (1874) LR 9 Ch App 244 · Farah Constructions v Say-Dee (2007) 230 CLR 89 · Royal Brunei Airlines v Tan [1995] AC 379 · Grimaldi v Chameleon Mining (No 2) (2012) 200 FCR 296 · Consul Development v DPC Estates (1975) 132 CLR 373 · Westpac Banking Corporation v Bell Group Ltd (No 3) [2012] WASCA 157 · Hasler v Singtel Optus Pty Ltd [2014] NSWCA 266 · Scott v Scott (1964) 109 CLR 649 (remedies, cross module) · Boscawen v Bajwa [1996] 1 WLR 328 (subrogation, cross module)

Take it to the practice bank

This module is drilled in the Equity and Trusts practice bank. Every problem there carries a realistic Pass answer, an H1 model answer, and an examiner's comment explaining the decisive fact and where the marks are lost.