Lord Slynn of Hadley Lord Steyn Lord Hoffmann Lord Hutton Lord Millett
YARDLEY AND OTHERS
ON 21 MARCH 2002
 UKHL 12
LORD SLYNN OF HADLEY
So the Court of Appeal said that, when the judge said that Mr Leach was not dishonest, he meant that he was not "consciously dishonest". But the finding about shutting his eyes meant that in law he had nevertheless been dishonest.
Secondly, there is a purely objective standard whereby a person acts dishonestly if his conduct is dishonest by the ordinary standards of reasonable and honest people, even if he does not realise this. Thirdly, there is a standard which combines an objective test and a subjective test, and which requires that before there can be a finding of dishonesty it must be established that the defendant's conduct was dishonest by the ordinary standards of reasonable and honest people and that he himself realised that by those standards his conduct was dishonest. I will term this "the combined test".
Thus in discussing the honest trustee and the dishonest third party at  2 AC 378, 385 A-C he stated:
Further, at p 391 A-C, Lord Nicholls said:
I consider that this was a statement of general principle and was not confined to the doubtful case when the propriety of the transaction in question was uncertain.
Later in the judgment after holding that the undertaking given by Mr Sims did not create a trust the judge stated, at p 73:
Later in his judgment at page 73 after holding that the undertaking did not create a trust the judge continued with the passage which I have already set out under the heading:
This test does not address the vital point whether Mr Leach realised that his action was dishonest by the standards of responsible and honest solicitors. In the light of the judge's finding, based as it clearly was, on an assessment of Mr Leach's evidence in cross-examination in the witness box before him, I consider the Court of Appeal should not have substituted its own finding of dishonesty.
Mr Sims' concern arose from the fact that, by pre-arrangement with Mr Leach, he intended to pay the money as soon as it was received to Mr Leach as Mr Yardley's solicitor, and realised that this would put him in breach of paragraph 1 of the undertaking. He evidently thought that this would not matter so long as the money was applied in the acquisition of property. Mr Leach clearly understood the reason for Mr Sims' concern, even if (as may be the case) he knew nothing of the arrangement by which Mr Sims had agreed with Mr Yardley that the payment would be treated as discharging his own personal debt.
(2) The judgments below
(3) Was there a Quistclose trust?
The effect of the undertaking
In the Quistclose case a public quoted company in financial difficulties had declared a final dividend. Failure to pay the dividend, which had been approved by the shareholders, would cause a loss of confidence and almost certainly drive the company into liquidation. Accordingly the company arranged to borrow a sum of money "on condition that it is used to pay the forthcoming dividend". The money was paid into a special account at the company's bank, with which the company had an overdraft. The bank confirmed that the money
The House held that the circumstances were sufficient to create a trust of which the bank had notice, and that when the company went into liquidation without having paid the dividend the money was repayable to the lender.
The duty is not contractual but fiduciary. It may exist despite the absence of any contract at all between the parties, as in Rose v Rose (1986) 7 NSWLR 679; and it binds third parties as in the Quistclose case itself. The duty is fiduciary in character because a person who makes money available on terms that it is to be used for a particular purpose only and not for any other purpose thereby places his trust and confidence in the recipient to ensure that it is properly applied. This is a classic situation in which a fiduciary relationship arises, and since it arises in respect of a specific fund it gives rise to a trust.
The nature of the trust
Later, at p 581, he said:
The Quistclose case  AC 567 was among the cases he cited as examples. He rejected the argument that there was a resulting trust in the case before him because, unlike the situation in the present case, there was no transfer of money on express trusts. But he also rejected the argument on a wider and, in my respectful opinion, surer ground that the money was paid and received with the intention that it should become the absolute property of the recipient.
This analysis, with respect, is difficult to reconcile with the court's actual decision insofar as it granted Twinsectra a proprietary remedy against Mr Yardley's companies as recipients of the misapplied funds. Unless the money belonged to Twinsectra immediately before its misapplication, there is no basis on which a proprietary remedy against third party recipients can be justified.
The case is, of course, even closer to the present than the traditional cases in which a Quistclose trust has been held to have been created. I do not think that subtle distinctions should be made between "true" Quistclose trusts and trusts which are merely analogous to them. It depends on how widely or narrowly you choose to define the Quistclose trust. There is clearly a wide range of situations in which the parties enter into a commercial arrangement which permits one party to have a limited use of the other's money for a stated purpose, is not free to apply it for any other purpose, and must return it if for any reason the purpose cannot be carried out. The arrangement between the purchaser's solicitor and the purchaser's mortgagee is an example of just such an arrangement. All such arrangements should if possible be susceptible to the same analysis.
When the trust in favour of the lender arises
(4) Knowing (or dishonest) assistance
The ingredients of accessory liability
In the next passage of his judgment, at p 252, he amplified this by referring to those who
The meaning of dishonesty in this context
Dishonesty as a state of mind or as a course of conduct?
There was no evidence and Lord Nicholls did not suggest that the defendant realised that honest people would regard his conduct as dishonest. Nor did the plaintiff put its case so high. It contended that the company was liable because it made unauthorised use of trust money, and that the defendant was liable because he caused or permitted his company to do so despite his knowledge that its use of the money was unauthorised. This was enough to make the defendant liable, and for Lord Nicholls to describe his conduct as dishonest.
This is almost entirely objective. The only subjective elements are those relating to the defendant's knowledge, experience and attributes. The objective elements include not only the standard of honesty (which is not controversial) but also the recognition of wrongdoing. The question is whether an honest person would appreciate that what he was doing was wrong or improper, not whether the defendant himself actually appreciated this. The third limb of the test established for criminal cases in R v Ghosh  QB 1053 is conspicuously absent. But there is no trace of it in Lord Nicholls' opinion in Royal Brunei Airlines Sdn Bhd v Tan  2 AC 378 either.
This is as clear a statement of principle as can be imagined. Neither an honest motive nor an innocent state of mind will save a defendant whose conduct is objectively dishonest. Mr Ingram was not criminally dishonest, since it never entered his head that other people would regard his conduct as dishonest. But equity looks to a man's conduct, not to his state of mind.
In the context it is clear that the Law Commission are indicating requirements which are not only necessary but sufficient. It would be self-defeating to require the plaintiff to establish subjective dishonesty: many people would see nothing wrong, and certainly nothing dishonest, in seeking to avoid legal liability by refraining from disclosing their breach of duty to a potential plaintiff.
Should subjective dishonesty be required?
(1) consciousness of wrongdoing is an aspect of mens rea and an appropriate condition of criminal liability: it is not an appropriate condition of civil liability. This generally results from negligent or intentional conduct. For the purpose of civil liability, it should not be necessary that the defendant realised that his conduct was dishonest; it should be sufficient that it constituted intentional wrongdoing.
(2).The objective test is in accordance with Lord Selborne's statement in Barnes v Addy LR 9 Ch App 244 and traditional doctrine. This taught that a person who knowingly participates in the misdirection of money is liable to compensate the injured party. While negligence is not a sufficient condition of liability, intentional wrongdoing is. Such conduct is culpable and falls below the objective standards of honesty adopted by ordinary people.
(3) The claim for "knowing assistance" is the equitable counterpart of the economic torts. These are intentional torts; negligence is not sufficient and dishonesty is not necessary. Liability depends on knowledge. A requirement of subjective dishonesty introduces an unnecessary and unjustified distinction between the elements of the equitable claim and those of the tort of wrongful interference with the performance of a contract.
The findings below