Establishing a Barnes v Addy claim

Table of Contents

Where there has been a breach of trust or fiduciary duty, the party who has suffered loss and damage may be able to pursue their claim against the party who has caused the breach; see Fraud, Business & White Collar Crime. However, the injured party may also potentially be able to pursue their claim against third parties who have knowingly received property acquired through the breach, or alternatively, third parties who have knowingly assisted in the breach.

Barnes v Addy: the two-limb test

‘Knowing receipt’ and ‘knowing assistance’ are commonly known as the ‘two limbs’ that may constitute third-party liability in relation to breach of trust or fiduciary duties. The most renowned case in relation to knowing receipt and knowing assistance was the case of Barnes v Addy (1874)1, where the Court set out a ‘two-limbed test’ for establishing whether knowing receipt or knowing assistance had occurred. This test was considered more recently by the High Court of Australia in the case of Farah Constructions Pty Limited v Say-Dee Pty Limited (2007).2

The principles relating to establishing ‘knowing receipt’ and ‘knowing assistance’ create an exception to the general principle that a person is not to be made constructive trustee simply because they act as the agent of a trustee. If this exception did not exist, then it would be difficult, if not impossible, to recover from someone who commits fraud and then gifts or sells the proceeds to their spouse or friend.

Where the elements of the two limbs identified in Barnes v Addy can be established, a third party will be imputed with the duties and responsibilities of a contrastive trustee and, importantly, the party bringing the claim against them will have the same remedies as they would have against a constructive trustee.

The First Limb – what are the elements of ‘knowing receipt’?

The ‘first limb’ of Barnes v Addy arises where a third party knowingly receives property in breach of trust or fiduciary duty (although the term ‘knowing receipt’ was itself not explicitly used in that case).

Barnes v Addy was certainly not the first instance of this cause of action being used, and it has long been held that wrongfully receiving trust property will grant the principal the same rights and remedies as those that would arise against a fraudulent trustee.3

In order to prove ‘knowing receipt’, the principal will have to establish the following elements:

  • Element 1 – There was receipt of trust property;
  • Element 2 – The receipt was in breach of the trustee’s duties; and
  • Element 3 – The recipient knew that the transfer to them would amount to a breach.

The concept of ‘knowledge’ for the purposes of this test will be considered in more detail below.

Where a person is the knowing recipient of trust property, remedies will arise against the recipient as a constructive trustee. However, that does not mean that the recipient will automatically have all of the powers or duties of a trustee; rather, their duty will be foremost to restore the assets to the trust.4 A wronged principal may also seek an account of profits against the constructive trustee where this is appropriate.

The Second Limb – what are the elements of ‘knowing assistance’?

The ‘second limb’ of Barnes v Addy arises where there has been a dishonest and fraudulent breach of the duty by the trustee or fiduciary to which a third party has knowledge of and assists in. The Court in Barnes v Addy considered whether two solicitors should be held liable for assisting in the appointment of a trustee who subsequently breached its requisite duties.

Knowing assistance is a very difficult cause of action to establish due, not only to the requirement for establishing knowledge on part of the third party, but also due to the necessity for establishing fraudulent conduct on part of the fiduciary.

In order to prove ‘knowing assistance’, the principal will have to establish the following two elements:

Element 1 – Dishonest and Fraudulent Design

The breach of fiduciary duty must amount to a ‘dishonest and fraudulent design’ on the part of the party who commits the breach.5 In essence, this means that the breach in question must amount to fraudulent conduct.6 As there is a higher standard of proof required in cases involving criminal allegations, this element creates an additional onus on the party bringing the claim.7

In the case of The Bell Group (In liq) v Westpac Banking Corporation [No 9,] 8 Owen J held, with reference to Farah Constructions, that in order for the first element of fraudulent design to be satisfied:

“…the impugned conduct must be attended by circumstances that would attract a degree of opprobrium raising it above the level of a simple breach of trust or breach of a fiduciary duty”.

Note: Opprobrium means “harsh criticism; disgrace from shameful conduct”.

Element 2 – Assistance

The second element of the second limb of Barnes v Addy states that liability arises through the third party’s assistance with the fraudulent breach. The concept of ‘assistance’ was considered by the Supreme Court of Queensland in Quince v McLaughlan as:

“…generally taken to mean any action by the stranger taken with the intention of furthering the trustee’s or fiduciary’s fraudulent and dishonest purpose”.9

For example, ‘standing by’ or not stopping the misuse of funds may be classified as assistance for the purpose of this test.”10

Where the principal is able to prove the above two elements, a successful claim for knowing assistance can be made.

The element of ‘knowledge’

The common element between the two limbs of Barnes v Addy is knowledge. Both knowing receipt and knowing assistance must occur with the knowledge of the third party. ‘Knowledge’ for the purposes of these tests can be either:

  • Actual knowledge – the third party has actual knowledge of the matter in question; or
  • Constructive knowledge – the third party could reasonably be expected to know of the matter in question.

In the case of Baden v Societe General pour Favoriser le Developpement du Commerce et de l’Industrie en France SA,11 the Court put forth five different mental states that may comprise knowledge:

  1. Actual knowledge;
  1. Wilfully shutting one’s eyes to the obvious;
  1. Wilfully and recklessly failing to make such inquiries as an honest and reasonable man would make;
  1. Knowledge of circumstances which would indicate the facts and circumstances to an honest and reasonable man; and
  1. Knowledge of circumstances which would put an honest and reasonable man on inquiry.

Of these categories (the ‘Baden’ categories, as they are often referred), points 1, 2, and 3 are described as ‘knowledge’, while points 4 and 5 are described as ‘notice’.

The High Court of Australia in Farah Constructions held that the first 4 points of the Baden categories will be sufficient to constitute knowledge for the purposes of the second limb of Barnes v Addy. There is still academic debate and some uncertainty as to the requisite test for how knowledge should be applied in relation to the first limb.

Legal Advice

If you require legal advice to pursue or defend a Barnes v Addy claim, or any claim relating to fraud, contact Gibbs Wright Litigation Lawyers for a no-cost, obligation free discussion about your matter and how we can assist.

[1] LR 9 Ch App 244

[2] 230 CLR 89

[3] Rolfe v Gregory (1865) 4 De G J & S 576; 46 ER 1042

[4] Williams v Central Bank of Nigeria [2014] 2 WLR 355

[5] Harstedt Pty Ltd v Tomanek [2018] VSCA 84 at [68]

[6] Farah Constructions Pty Limited v Say-Dee Pty Limited (2007) 230 CLR 89

[7] Briginshaw v Briginshaw (1938) 60 CLR 336

[8] [2008] WASC 239

[9] [2008] QSC 61, at [51]

[10] Quince v Varga & Anor [2008] QCA 376 [60]

[11] [1993] 1 WLR 509

The content of this publication is intended as general commentary only and may not be suitable or applicable to your personal circumstances. It is not intended to replace independent legal advice. You can contact us at our Brisbane Office for a free consultation on a range of litigation matters on (07) 3088 6364.
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