Summary

The principle in Prudential Assurance Co Ltd v Newman Industries (1982) Ch 204 would not operate to deprive a claimant of an otherwise good cause of action in a case where: (i) the claimant could establish that the defendant's conduct had constituted a breach of some legal duty owed to him personally; and (ii) on its assessment of the facts, the court was satisfied that such breach of duty had caused him personal loss, separate and distinct from any loss that might have been occasioned to any corporate body in which he might be financially interested. * Leave to appeal to the House of Lords granted.

Facts

Two of the claimants, who were beneficiaries under a trust, appealed from the decision of Rattee J: (i) refusing their application to re-reamend their statement of claim; (ii) refusing their application to join the third and fourth respondents (Wiggin & Co and John Hemingway respectively) as parties; (iii) striking out the reamended statement of claim; and (iv) dismissing the action. The claimants' complaint was that the trustees (the first and second respondents, Stones ('S') and Osbourne ('O') respectively), had committed breaches of trust by applying assets of the trust or exercising their discretions thereunder for the benefit of the claimants' father ('GW'), his holding company ('BWG') and another Hong Kong company ('Birdcage Walk') whose assets consisted almost entirely of its shares in BWG, rather than the beneficiaries under the trust. Initially they complained about the trustees' actions in relation to a bond issue but they sought to re-reamend the statement of claim to introduce four other matters and introduce allegations of dishonesty on the part of S, (a solicitor) his partner 'G' and the fourth respondent, Hemingway ('H'), a director of BWG and Birdcage Walk. The issues in relation to the re-reamendments were: (a) delay; (b) inadequacy of pleading; and (c) the relevance of the doctrine in Prudential Assurance Co Ltd v Newman Industries (1982) Ch 204. The funds allegedly misappropriated did not constitute assets of the trust and a beneficiary could not sue a trustee for allowing damage to be caused to a company in which the trust had a controlling interest when the company itself had a cause of action entitling it to recover for the wrong done to it. However, in this case the claimant beneficiaries were not shareholders of the companies whose assets were alleged to have been misappropriated or of their parent company. The trust contained Clause 15, which exonerated and indemnified the trustees generally where they had acted in good faith but with an exception for "wilful fraud or dishonesty on the part of the trustee whom it is sought to make liable". There was an issue as to the scope of such clauses. The issue in relation to the third respondent, a firm of solicitors, was whether it could be vicariously liable for the activities of S. The issue in relation to H was whether the Prudential Assurance principle operated to bar the case against him.

Held

(1) The appellants had established at least a triable issue in their contention that, whether or not they equated the interests of the claimants with those of GW, the trustees entered into or cooperated in the bond issue transactions primarily with the intention of benefiting GW, Birdcage Walk and BWG and correspondingly did so in breach of trust because: (i) a clause in the trust deed precluded the trustees from exercising any power of discretion themselves in any manner that might benefit an excepted person (ie GW); and (ii) they did not exercise their power in a proper way with proper prudence as would a prudent man of business. This conclusion had to be subject to the effect of the two trustee-exemption clauses 14 and 15. (2) Having regard to the complexity of the matter, the explanation of the late introduction of the proposed pleas was credible. (3) The appellants had established, at the least, triable and sufficiently pleaded issues that the alleged wrongful diversions did take place and that S committed breaches of trust in relation to them, subject to the following matters. (4) The Prudential Assurance principle would not operate to deprive a claimant of an otherwise good cause of action in a case where: (i) the claimant could establish that the defendant's conduct had constituted a breach of some legal duty owed to him personally; and (ii) on its assessment of the facts, the court was satisfied that such breach of duty had caused him personal loss, separate and distinct from any loss that might have been occasioned to any corporate body in which he might be financially interested (Johnson v Gore Wood & Co (a firm) (1999) PNLR 426 considered). If these two conditions were satisfied, the mere fact that the defendant's conduct might also have given rise to a cause of action at the suit of a company in which the claimant was financially interested (whether directly or indirectly) would not deprive the claimant of his cause of action; in such a case, a plea of double jeopardy would not avail the defendant. (5) The appellants satisfied both conditions and the Prudential Assurance principle was therefore not a bar to their claims against the trustees. (6) Clause 15 on its true construction applied so as to exonerate the trustees save to the extent excluded by the clause, in particular dishonesty, for anything done by them in the purported execution of the trusts and powers of the trust deed, even though in fact not done in the exercise of such trusts or powers. (7) Since in the facts of the present case, the only relevant exclusion in clause 15 related to dishonesty, the appellants' action against O (against whom dishonesty was not alleged) could not succeed and should be dismissed. (8) The judge had applied a subjective test to the claim of dishonesty against S, relying on the Court of Appeal judgment in Armitage v Nurse (1997) 3 WLR 1046. However, that case had to be read in the light of Royal Brunei Airlines v Tan (1995) 3 WLR 64. The judge erred in his approach to the construction of the effect of clause 15, which did not exempt the trustees from liability for breaches of trust, even if committed in the genuine belief that the course taken by them was in the interests of the beneficiaries, if such belief was so unreasonable that no reasonable solicitor-trustee could have held that belief. (9) The court therefore considered the question of whether the claimants should be allowed to re-reamend their pleading so as to allege dishonesty against S. The claimants had on the pleadings and evidence shown sufficient foundation for a case against S based on dishonesty in the sense explained above. The court would exercise its discretion to allow their appeal against S and give them leave to re-reamend their statement of claim. (10) The legislature, in enacting s.10 Partnership Act 1890, treated breaches of trust committed by a trustee-partner as falling outside the ordinary business of any partnership and correspondingly incapable of giving rise to vicarious liability under that section. (Dubai Aluminium Co Ltd & Ors v Salaam & Ors (2000) LTL 7/4/2000 considered). Wiggin & Co could not therefore be vicariously liable for the activities of S. Alternatively the acts complained of were not committed in the ordinary course of business of the firm. The application to join Wiggin & Co was dismissed. (11) H's assumed conduct did not cause the claimants personal loss separate and distinct from any loss it caused to the companies. The position was quite different from that of the trustees, as the claimants would have to rely on the same causes of action as those on which the companies would rely. In H's case, the principle in Prudential Assurance (supra) would apply.

Appeal allowed in part as indicated above.

* The House of Lords received an application from Sarah Marchioness of Milford Haven, Romla Walker and James Nicholas Stones seeking leave to appeal in this case. The Appeal Committee was unable to reach a unanimous decision to grant leave following a consideration of the applicants' petition and after inviting objections from the respondent. On 8 March 2001 the matter was therefore referred to a hearing for determination.

* The petition of the appellants, praying that the appeal be restored and that the time for lodging the statement and appendix and setting down the cause for hearing might be extended to 20 December or to the third sitting day after the next ensuing meeting of the House was presented was heard and ordered on 5 December 2001.

* The appeal was set down for hearing and referred to an Appellate Committee on 31 January 2002.