Judicial Statements – Fraud and Trusts

In the English case of Archer v Moss [1971] 1 All E.R. 747, the Court of Appeal had to consider the meaning of “fraud” as used in the English Limitations Act in a factual situation where a builder covered up inadequate work so it was not discovered for some years.

“..It has long been settled that “fraud” in this context does not necessarily involve any moral turpitude {see Beaman v A.R.T.S. Ltd [1949] 1 All E.R. 465}. It is sufficient if what was done was unconscionable {See Kitchen v Royal Air Force Association [1958] 1 W.L.R. 563} Those cases show that “fraud” is not used in the common law sense. It is used in the equitable sense to denote conduct by the Defendant or his agent such that it would be “against conscience” for him to avail himself of the lapse of time ….” (Page 750)

 

The definition of equitable fraud is set out in Kitchen v Royal Air Force Association [1958] 1 W.L.R. 563 and is conduct which having regard to some special relationship between the two parties concerned, is an unconscionable thing for one to do towards the other {Guerin V Canada, [1984] 2 S.C.R. 355; M.(k.) v M.(H.), [1992] 3 S.C.R. 6}.

Such a special relation ship arises in the relationship between a trustee and the beneficiaries of the trust.

The concept of equitable fraud does not involve any degree of moral turpitude, nor does it require any positive act of concealment. The requirements to establish equitable fraud are minimal, and can include mere failure to inform the other party of information which would make them aware of their cause of action {V.A.H v Lynch et al (2000), 255 A.R. 359; Nadon v Voloshin (2001), 289 A.R. 372; Halloran V Sargeant et al (2001) A.O.C. 286}.

Williams in Limitation of Actions in Canada, 2nd ed (Toronto: Butterworths, 1980 stated:

In King v Victor Parsons & Co (a firm) [1973] 1 All E.R. 206 Denning M. R. stated:

In order to show that he “concealed” the right of action “by fraud“, it is not necessary to show that he took active steps to conceal his wrong doing or his breach of contract. It is sufficient that he knowingly committed it and did not tell the owner anything about it. He did the wrong or committed the breach secretly. By saying nothing he keeps it secret. He conceals the right of action. he conceals it by “fraud” as those words have been interpreted in the cases. To this word “knowingly” there must be added “recklessly“; see Beaman v A.R.T.S. Ltd. Like the man who turns a blind eye he is aware that what he is doing may well be wrong, or a breach of contract, but he takes a risk of it being so. He refrains from further inquiry lest it should prove to be correct; and says nothing about it. The court will not allow him to get way with conduct of that kind. It may be that he has no dishonest motive; but that does not matter. He has kept the plaintiff out of the knowledge of his right of action; and that is enough; see Kitchen v Royal Air Force Association.”

A fraudulent Breach of Trust does not have to amount to dishonesty in the Trustee {Kitchen v R.A.F Association [1958] 1 W.L.R. 563; King v Victor Parsons & Co. [1973] 1 W.L.R. 29; Tito v Waddell (No.2) [1977] 1 Ch 106 at 245} but the words “to which the the trustee was a party or privy” do indicate some requirement of advertence or complicity {Thorne v Heard [1894] 1 Ch 599 at 608} and an essential difference in the state of mind of the defendant is inherent in the principal distinction which is made between fraudulent and innocent breaches of trust. See Section 21 of the Limitations of Actions 1958 (Vic).

The fraud of an agent will not be imputed to the trustee, the trustee not being liable for the defaults of the Trustee’s agents unless the Trustee itself is also in default.

Where a Trustee commits a series of Breaches of Trust in respect of a particular fund, for example a series of improper investments, the limitations period runs from the time of the latest breach {Ward v Lewis (1896) 22 V.L.R. 410; Matthews v Trustees Executors and Agency Co Ltd (1898) 24 V.L.R. 643}.

In Armitage v Nurse [1997] EWCA Civ 1279 Lord Justice Millet stated:

Viscount Haldane in Nocton v Ashburton [1914] AC 932 explained;

“in Chancery the term “fraud” thus came to be used to describe what fell short of deceit, but imported breach of a duty to which equity had attached its sanction.” It is worthy of note that he himself used the expression “actual fraud” throughout his speech to distinguish cases of common law fraud or deceit from these other cases.

Lord Dunedin did the same when he said at p. 963:

“…if based on fraud, then, in accordance with the decision in Derry v Peek (1889), 14 App. Cas. 337, the fraud proved must be actual fraud, a mens rea, an intention to deceive.”

Derry v Peek established that nothing short of a fraudulent intention in the strict sense will suffice for a case of deceit or fraud properly so called. It requires proof of dishonesty. Nothing less will do. Gross and culpable negligence is not enough.

However if a Trustee pursued a course of action knowing it was contrary to the interests of the beneficiaries, or being recklessly indifferent whether or not it was so contrary, then there would be dishonesty, and thus, actual fraud. There is no need for the Trustee to personally to benefit. The narrow definition of “wilful default” in Re Vickery, Vickery v Stephens [1931] All ER Rep 562 was directly in point.

Limitations of Actions

Statutes of limitation limit the time in which a person can bring an action against a trustee for various breaches of Trust. In South Australia and Victoria there is a six year limitations period for “innocent” Breaches of Trust. However there is no limitations period for fraud, fraudulent breach or the retention or conversion of trust funds or property. In NSW and the territories there is a 12 year limitations period – with time running from the date when the plaintiff first discovers, or may with reasonable diligence discover the facts giving rise to the cause of action.

“Fraud” in this context is not confined to common law “fraud” . It is sufficient that there be come knowledge of impropriety {Banque Commerciale SA (en lign) V Akhil Holdings Ltd (1990) CLR 279 at 286}.

The Court of Appeal in Applegate v Moss [1971] 1 QB 406 had to consider the meaning of the word “fraud” appearing in the Limitation Act, 1939 (UK). In that case it was held that fraud in the context of that limitations provision did not necessarily import moral turpitude. It was enough for the conduct of the defendant, or of the defendant’s agent, to be so unconscionable that it would be inequitable to allow the defendants to rely upon the limitation.

Lord Denning MR said:

“Those cases show that ‘fraud’ is not used in the common law sense. It is used in the equitable sense to denote conduct by the defendant or his agent such that it would be ‘against conscience’ for him to avail himself of the lapse of time. The section applies whenever the conduct of the defendant or his agent has been such as to hide from the plaintiff the existence of his right of action, in such circumstances that it would be inequitable to allow the defendant to rely on the lapse of time as a bar to the claim. Applied to a building contract, it means that if a builder does his work badly, so that it is likely to give rise to trouble thereafter, and then covers up his bad work so that it is not discovered for some years, then he cannot rely on the statute as a bar to the claim. The right of action is concealed by ‘fraud’ in the sense in which ‘fraud’ is used in this section.”

Rasmussen v Rasmussen [1995] VicRp 38; [1995] VR 613 at 635a case concerning a constructive trust supports the position of Lord Denning. In all Australian jurisdictions except South Australia the same limitations periods apply to constructive trustees as to express trustees.

Millet J stated in Armitage v Nurse [1998] Ch 241; EWCA Civ 1279:

“The result is that in the absence of deliberate concealment liability for an honest breach of trust is statute-barred after six years, but liability for a dishonest breach of trust endures without limitation of time”.

Pagone J in Reader v Fried [2001] VSC 495.
[10] “The transaction placed the directors in a position of clear conflict of interest in which, in my view, they preferred their own interest to that of the whole of the members of the fund”. [25]” A dealing with the trust property in a way that prefers the commercial interests of the trustees (or of the directors of the trustees) to the broader interests of all the beneficiaries of the trust is, in my view, conduct amounting to moral turpitude”.

Extensions of the set limitations period is allowed where the defendant has concealed the cause of action by fraud {In Victoria Section 27 of the Limitation of Actions Act 1958}.

In the absence of concealed fraud, the cause of action for breach of trust arises when the breach was committed, not on the subsequent assessment of the loss caused by the breach.

Extensions of the set limitations period is also allowed where the claimant’s interest in the Trust is a future interest {In Victoria Section 21(2) of the Limitation of Actions Act 1958} A right of action is not deemed to have accrued to any beneficiary entitled to a future interest in trust property until the interest has vested in possession.

The rationale was stated by Millett J in Armitage v Nurse [1998] Ch 241; EWCA Civ 1279:

“It is not that a beneficiary with a future interest has not the means of discovery, but that he should not be compelled to litigate (at considerable personal expense) in respect of an injury to an interest which he may never live to enjoy”.


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