← The hardest concepts in Australian law
In one breath
A person who is not a trustee or fiduciary can still be liable in equity if they receive trust property knowing it was transferred in breach of trust, or if they knowingly help a trustee or fiduciary in a dishonest and fraudulent breach. These are the two limbs of the rule in Barnes v Addy, and Australian courts keep it as the test, with knowledge, not carelessness, as the trigger.
The picture
The pawnbroker and the courier
A trustee is like someone entrusted with a valuable watch to look after for another. A pawnbroker who is offered that watch by the trustee, and who knows it is not the trustee’s to sell, can be made to answer for it: that is the first limb, receiving property with knowledge. A courier hired to carry the watch across town, who knows the trustee means to sell it dishonestly in breach of trust and carries it anyway, helps with the wrong: that is the second limb, knowing assistance.
Neither the pawnbroker nor the courier is a trustee, which is why they are called strangers. The law reaches them not because they owed duties, but because conscience will not let them profit from, or help in, a known wrong. Knowledge is therefore the heart of both limbs. Honest dealing, mistake and carelessness do not engage them; what does is knowledge in a real sense, which includes deliberately shutting one’s eyes to the obvious. The remedies are tailored: the recipient may hold the property on constructive trust or account for it, and the assistant may be ordered to compensate for the loss.
Where the picture stops working
Pawnbrokers and couriers are ordinary people, whereas strangers in equity are often banks, accountants, lawyers and directors, and the argument is about what they must have known. The picture also compresses a complicated area: courts have debated how much knowledge the first limb requires, and other common law countries have adopted different formulations, so the Australian authorities for the limb in question must be checked.
How it really works
- 1Place the rule. It is general law (equity) and is the same in every State and Territory. Some statutes, for example in company law, create separate liabilities.
- 2Find the primary wrong. Was there a breach of trust or fiduciary duty? Without one, a stranger has nothing to be accessory to. For the second limb the breach must also be part of a dishonest and fraudulent design by the trustee or fiduciary.
- 3First limb, receipt. Did the stranger receive trust property or its traceable proceeds, for their own benefit, with the knowledge required?
- 4Second limb, assistance. Did the stranger knowingly participate in or assist the dishonest and fraudulent design? Actual knowledge or deliberately shutting one’s eyes suffices; carelessness does not.
- 5Choose the remedy: a constructive trust over the property or its proceeds, or an order to account or pay compensation for the loss.
Why people get it wrong
- Treating everyone who deals with a trustee as a stranger liable for losses. Ordinary carelessness is not enough.
- Thinking the stranger must have been paid or must have profited. The second limb needs no receipt at all.
- Confusing the two limbs: receipt is about property, assistance is about help.
- Assuming a professional adviser who acts honestly and in the ordinary course is liable because something went wrong.
- Forgetting that there must be a breach of trust or fiduciary duty in the first place.
A worked example
The facts are invented
Marcus is trustee of a family trust for his niece. He secretly takes trust money and sells trust shares to buy a boat for himself. An accountant, Priya, helps him structure the sale knowing exactly what he intends. That is the second limb, and she may be liable to compensate the trust. The boat dealer, who accepts payment out of the trust money knowing that it is trust money, may be liable to account under the first limb.
Change the facts: a different dealer accepts the payment with no reason to suspect anything. Without knowledge there is no liability on either limb, although the money may still be traced. Change them again: Priya processed the sale honestly, believing it authorised, although a more careful accountant would have asked to see the trust deed. Carelessness is not knowledge, and the second limb is not made out.
Try it
A solicitor handles a sale for a trustee, honestly believing it is authorised, although a more careful solicitor would have asked to see the trust deed. The sale was in fact a breach of trust. Is the solicitor liable as an accessory under the second limb of Barnes v Addy?
Landmark authorities
Read the sources themselves; this list is a starting point.
- Barnes v Addy, (1874) LR 9 Ch App 244
- Consul Development Pty Ltd v DPC Estates Pty Ltd, (1975) 132 CLR 373
- Farah Constructions Pty Ltd v Say-Dee Pty Ltd, (2007) 230 CLR 89
Where to go next
Courses
More hard concepts in Australia law
- Equitable estoppel (Equity)
- Unconscionable conduct (Equity)
- The duty of care and salient features (Tort law)
This page is an educational overview. It is not legal advice and not a substitute for the sources: the statute, the rule, the case itself. Australia is a federation: the Commonwealth, the six States and the Territories each make law, and the High Court is the final court for all of it. The common law, by contrast, is one law across the country. Each page says whether the rule is constitutional, federal or common law shared by every jurisdiction, or State-by-State legislation that varies, and flags where the States and Territories differ. Each page states the usual formulation of the rule and names landmark decisions; check the primary sources of your own jurisdiction before relying on any rule.