LAWS 3331

EQUITY AND TRUST II

SECTION 3

WRITTEN ASSIGNMENT
QUESTIONS 1, 2 & 3
CONSTRUCTIVE TRUST

TUTORIAL SESSION MONDAY 4-5 PM

Question No. Name Matric Number

1 Nurul Arifah binti Abdul Hameed 2017288

2 Izzah Wahida binti Aminudin 1929304

3 Amirah Eizlin binti Khairulnizam 2013852

PREPARED FOR DR. ZURAIDAH BINTI HJ ALI

 TABLE OF CONTENTS

Nurul
Question 1 2-4
Arifah

Question 2 4-8 Izzah

Wahida

Question 3 9-12 Amirah

Eizlin

References 13

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QUESTION 1

Louisa is married to Michael and in order to ensure that their properties will be dealt
properly, they agreed to make a will in identical terms, in the event one of them
predeceases the other. When Michael died, Louisa revoked the first will and created a new
will. Whether Louisa is entitled to do so? What if Louisa and Michael have agreed not to
revoke the will? Discuss.

Answer:

To address the first question, the main issue to be answered is whether Louisa is entitled to
revoke the original will and create a new one? In order to further answer this main issue, the
discussion will be subdivided into two other issues. The first sub-issue is whether there is a
mutual agreement to make a will and to not revoke the original will between Louisa and
Michael and the second sub-issue is whether Louisa can revoke the will and create a new one
if Louisa and Michael had agreed not to revoke the will?

Before diving into answering the first sub-issue, it is essential to differentiate between the two
concepts of ‘mirror will’ and ‘mutual will’. These two types of wills have two aspects in
common: the requirement of two or more testators in the making of the will, and that both wills
contain similar terms. Nevertheless. There are also differences to distinguish between the prior
and the latter. According to mirror wills, the person who survives the deceased party is allowed
to make a new will. On the contrary, the latter will requires the testators to agree that they will be
disallowed to create a new will in different terms. The case of Hiroto Watanabe v Law Yen
Yen & Anor1 reiterates and highlights that mirror wills need not carry the obligation to be
irrevocable. If in a mirror will, there later on is an agreement to not revoke the will, it makes a
mirror will a mutual will.

For the first sub-issue of whether there is a mutual agreement to make a will and to not revoke
the original will between Louisa and Michael, it is pertinent for the court to establish that there

1 (2012) 8 MLJ 202

2
exists an agreement between the parties to make wills and to not revoke them. In addition, the
agreement must further indicate that the wills mutually bind both parties and the evidence
proving the agreement may be clear and extrinsic. It is also crucial that the agreement is a clear
contract at law and conduct of the parties may be inferred in determining the above. To illustrate
a mutual will, the case of Charles & Others v Fraser2 may be referred to. In this case, two
sisters agreed to create similar wills in similar terms without an agreement that the will cannot be
revoked. It was then held by the court that they found sufficient evidence that the sisters
expressed their wish that the will should not be changed. Therefore, the will made amounted to a
mutual will and constructive trust was enforced. To further reiterate the concept of mutual wills,
in the case of Re Cleaver3, a husband and a wife created a mutual will. The husband then died
and the wife made changes to the will. The court in this case too could find sufficient evidence to
prove that the husband and wife had agreed to impose mutual legal obligation. It was deduced
from family conversations and wife's conduct after the husband's death that the wife is under a
binding obligation to observe terms of the mutual will made. The case of Re Oldham4 on the
other hand, illustrates a mirror will. In this case, a husband and a wife created a mutual will. The
husband then died and the wife remarried whereby then the wife revoked the old will and
executed a new one contrary to the previous agreement. The court could not find any evidence to
prove that the husband and wife had agreed to not revoke the mutual will which rendered the will
as revocable. As a result, the new will was upheld because the parties did not make the old will
irrevocable. Hence, they did not bind themselves by a trust that should be operative in all
circumstances and all cases which amounted to a mirror will.

In the present case of Louisa and Michael, they are two testators creating the will therefore they
have fulfilled the requirement of having two or more testators. Both of the wills are similar
whereby they reflect each other as per the facts of the case. If there is no evidence that Louisa
and Michael had made the will irrevocable, the new will will be considered as valid because it is
a mirror will and it need not be irrevocable. However, if there is sufficient proof showing the
intention of the parties to consider the will as irrevocable, it would be a mutual will. This also

2 [2010] EWHC Civ 2154 (Ch)

3 [1981] 1 WLR 939
4 [1925] Ch 75

3
answers the second sub-issue of whether Louisa can revoke the will and create a new one if
Louisa and Michael had agreed not to revoke the will.

To conclude on all of the issues discussed, Louisa would be entitled to revoke the will and create
a new one if there is no evidence that Louisa and Michael had made the will irrevocable because
the will would be a mirror will. However, if Louisa and Michael had agreed not to revoke the
will, Lousia cannot revoke the will and create a new one because it would then be a mutual will.

QUESTION 2

George is the sole trustee of deceased Teo’s estate which consists of two houses, one towing
lorry, one car and cash funds in a bank. The trust instrument provides that the trustee
would take steps to sell the towing lorry and that all other property would be used for the
benefit of Teo’s two daughters. George sold the car to Tommy for RM60,000 (the market
value for the car now is not less than RM150,000) The two beneficiaries file a suit against
George for breach of trust and Tommy for knowingly inter-meddling with trust property.

Explain Tommy’s position.

Answer:

The discussion for the following question will be focusing on one main issue, whether Tommy
can be liable to Theo’s daughter as a stranger? The following issue will be further dissected
into three sub issues. The first sub-issue being whether Tommy can be liable as a stranger to
constructive trust? The discussion will then be followed with whether Tommy has accessory
liability and whether Tommy can be liable through knowing receipt ?

In determining whether a person would fall within the perimeter of a stranger in a constructive
trust, there are several elements to be considered. According to the case of Mara v Browne5
Liability is imposed on a stranger under certain circumstances. In the above mentioned case, the

5 (1874) LR 9 Ch App 244

4
plaintiff’s solicitor, previous trustee, had undertaken unauthorised investment using money
secured from the trust fund and consequently had suffered losses. The current trustee had
acknowledged the following transaction. The issue at hand is, "Whether the solicitor can be
held accountable for the losses personally as a constructive trustee." It was decided by the
Court that the defendant is not liable as a constructive trustee as he had only acted in the capacity
of a representative for one of the trustees to which the investments were made by another
trustee. It was highlighted that the concept of “stranger” under the following circumstances
which would give rise to a liability is when an individual who is not the trustee to the trust
interferes with the administration of the trust and assumes control of the trust as though he were
to be a constructive trustee.

Such strangers would then be categorised as trustee son de tort, an individual who is in the
position deemed to have fiduciary duties as a result of an act amounting to fraud or tort. Such an
individual as expounded in the case discussed earlier, acts as a trustee, having the possession and
managing the trust assets on behalf of the beneficiaries, even though was not expressly or
impliedly appointed as a trustee to the said trust. In the case of Selangor Rubber Estate v
Craddock6, a person may be considered a tort trustee in default when firstly, he unlawfully
intermeddles in the administration of the estate of the deceased or acts as an executor. Secondly,
although lawful executor duties apply, they are not eligible for the protection and privileges
given to executors to a trust. Thirdly, all costs as well as losses incurred suffered by the
beneficiary in the administration of the estate, shall be held accountable on the expense of the
son de tort.

In the reflection of Tommy’s circumstances, he had indeed inter-meddled with the trust property
as he had taken possession of the car instead of the beneficiaries. In the following scenario, only
George is the trustee of deceased Teo’s estate. In contrast to the case of Mary v Browne,
Tommy has not agreed nor impliedly intended to administer the trust property, the said car which
clearly makes him a mere stranger in the following transaction. The fact that he has purchased
the car from George gives an impression that he has no intention of returning the car back to the
beneficiaries or to use the car in favour of the instructions of the deceased or beneficiaries.
Moreover, according to the principles laid in the case of Selangor Rubber Estate v Craddock,
6 [1983] BCLC 325

5
Tommy shall fall within the second category of a constructive trustee de son tort. He has been
put in the position of a constructive trustee as he had purchased a trust property through fraud
committed by George. Additionally, the beneficiaries had made a complaint intending to sue
George for the transfer of ownership of the car to Tommy.

Moving on to the last two sub-issues in determining whether Tommy’s shall bear personal
liability through knowing receipt or whether he has accessory liability.

We will first discuss the scope of recipient liability which is also known as knowing receipt.
As a general rule, the case of Barnes v Addy7 has recognised the concept of a constructive trust
that a stranger in a trust shall not be liable unless he receives property with the knowledge that
such a transaction was made through breach of trust to which he shall return the property. It was
expounded in the case of Soar v Ashwell8 that “A person not nominated as trustee may be
bound to liability as if he were a nominated trustee, namely where he has knowingly assisted a
nominated trustee in fraudulent/dishonest disposition of trust.”

Such liability had been scrutinised further in the case of Baden Delvaux and Lecuit Societe
General9 that in deciding the categories of knowledge and the state of mind breach by the
nominal trustee is divided into five. Firstly, the state of mind having the actual knowledge.
Secondly, willfully shutting your eyes to the obvious or wilfully and recklessly failing to make
inquiries that an honest and reasonable man would make which is to also be treated as actual
knowledge. Fourthly, the knowledge of circumstances which would point out the facts to an
honest and reasonable man and knowledge of circumstances which would put an honest and
reasonable man on inquiry which would be considered as constructive knowledge. Therefore,
there are four elements that have to be fulfilled, there is a trust to which there is a dishonest and
fraudulent design on part of the trustee of that trust, assistance by the stranger in that design and
the knowledge of the stranger. Liability through knowing receipt requires knowledge. It is to be

7 [1995] 2 AC 378

8 [1896] 1 CH. 199

9 [1968] All ER 1073

6
noted that the decision made in the case of Royal Brunei Airlines Sdn Bhd v Tan10 had lowered
the bar for liability. Dishonesty on the third party is a sufficient and necessary ingredient. It is
unnecessary to prove that the breach of trust by the trustee need not itself be dishonest and
fraudulent.

In the application of Barnes v Addy assuming that Tommy does not have knowledge that
George is only holding the car as a trustee for the daughters. Tommy does not have any actual
knowledge and did not intentionally turn a blind eye to any facts about the car that would seem
obvious. He did not have any knowledge of circumstances which would point out the facts about
the car as a trust property to an honest and reasonable man. There is no proof of dishonesty on
Tommy's part. Tommy in no way has acted dishonestly according to the standards of an honest
and reasonable person. In his eyes, he is simply buying a car following all the rules. His lack of
knowledge of George as the trustee which releases him from liability.

However, in relying on the requirements set under the case of Baden Delvaux and Lecuit
Societe General, it could be argued that under the third category of the knowledge, Tommy
should have made his own inquiries on the best and cheapest deal for the car. He may have
wilfully failed to make more inquiries on the car such as its current ownership status to George.
He may have had knowledge of circumstances which would put an honest and reasonable man
on inquiry. It should have been a red flag to Tommy that George would be selling a car that he
would say he owns, under market value and pocket a RM90,000 loss. Due to such failure of
making inquiries shall bring him liability as a constructive trustee.

Lastly, whether Tommy has accessory liability on this matter. It was highlighted in the case of
Selangor United Rubber Estate v Craddock that the existence of constructive knowledge of
the stranger suffices to establish liability. It was further emphasised by the court that "The
knowledge required to hold a stranger liable as a constructive trustee in a dishonest and
fraudulent design, is knowledge of circumstances which would indicate to an honest and
reasonable man that such a design was being committed or would put him on enquiry, which the
stranger failed to make, whether it was being committed.” This is also supported by where

10 (1874) LR 9 Ch App 244

7
knowledge is required for both knowing assistance and knowing receipt. The court had
emphasised further in the case of Bank of Credit and Commerce International (Overseas) v
Akindele11 that “Fault on the part of the defendant means that the defendant must know enough
of the facts surrounding the misapplication of the trust property to make it unconscionable for
him to retain the benefit of his receipt.”

In application of Selangor United Rubber Estate v Craddock, Tommy has knowledge of the
circumstances that would put any reasonable man in inquiry. Tommy is presumed to know the
current market price for the car. Yet, when George offers to sell it to him well under the market
value and would cause a loss of RM90,000, it should seem suspicious to Tommy that George is
willing to do so. He should have asked about that as well as inquired about the status of the car. =
constructive knowledge. Tommy's knowledge falls within type 3 which is wilfully and recklessly
failing to make inquiries that an honest and reasonable man would make. It was reckless of
Tommy to simply buy the car without asking about any information about it such as its
ownership status and whether George actually owns it or not. It could be concluded that liability
arises at the material time which is during the sale and purchase of the car. It cannot be disputed
that Tommy’s knowledge at the material times, that it was impossible to keep the advantages of
the purchased car. Moreover, as emphasised in the case of Royal Brunei Airlines Sdn Bhd v
Tan, the act of dishonesty of Tommy shall render him liable.

Ultimately, it was acknowledged by the Court that constructive trust shall be imposed on
strangers who knowingly accept fraudulent property. The court stressed that strangers could be
held liable even if they knowingly profited from the fraud, even if they did not participate in the
fraud itself. Conclusively, Tommy has knowledge to put a reasonable person on notice or
enquiry which is sufficient to impose liability on him.

11 [1893] 2 QB 390

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QUESTION 3

Personal liability to account on the basis of knowing assistance of trust property applies to
strangers who assisted a nominated trustee in committing a breach of trust. With reference
to decided cases, especially the decision of the Privy Council in the case of Royal Brunei
Airlines, comment on the importance of the above statement.

Answer:

In answering the third question, it must be based on the decision decided by the Privy
Council in the case of Royal Brunei Airlines. This question is concerning the personal liability to
account on the basis of knowing assistance of trust property applies to strangers who assisted a
nominated trustee in committing a breach of trust. Before that, as stated by Lord Selbourne in
Barnes v Andy12, "… strangers are not to be made constructive trustees merely because they act
as the agents of trustees in transactions within their legal powers, transactions, perhaps of which
a Court of Equity may disapprove, unless those agents receive and become chargeable with some
part of the trust property, or unless they assist with knowledge in a dishonest and fraudulent
design on the part of the trustees". From this statement it can be deduced, there are 2 situations
where a third party or stranger may become liable. The first is commonly known as 'knowing
receipt' and the second where liability arises from 'knowing assistance'. However, this question
will be focusing on knowing assistance.

It is relevant to differentiate the old and present case that has been decided on knowing
assistance. The old case was Baden Delvaux and Lecuit Societe Generale13. In this case, $4
million was held in trust by the accused bank. The defendant was given instructions by the
trustee to move the money to a Panamanian bank in an account that was not marked as the
trustee's account. The money was then lost. The defendant had resorted to a Bahama court order
to get the money released. It was claimed that the defendant had knowingly assisted in a
fraudulent disbursement of trust funds and that this court order had been improperly obtained. It
12 [1983] BCLC 325
13[1995] UKPC 4

9
was held by the judge Peter Gibson there are four elements that must be established if the case
was under knowing assistance, and the decision was Societe Generale as a defendant was not
liable because it had no knowledge of the fraud in which it assisted. Further, it stated that the
relevant knowledge had to be a knowledge of facts which falls under the types established by the
judge in this case.
Next, referring to Royal Brunei Airlines Sdn Bhd and Philip Tan Kok Ming 14, this
present case it overruled the decision in Baden’s case regarding the elements that need to be
fulfilled in order for a third party or stranger to be liable in knowing assistance. Facts of this
case, a Borneo Leisure Travel Sdn Bhd as a travel agency sold a flight ticket on behalf of the
claimant. The travel agency had agreed to hold the proceeds of the ticket sales on trust for the
Royal Brunei Airline. Later, the travel agency was in financial difficulty, the owner of the
agency , Tan, decided to take the money from a trust account and used it to deal with the cash
flow problems in the travel agency. Due to this, the claimants brought an action against the
owner of the agency to claim the money used from the trust account because the travel agency
went into liquidation. Lord Nocholls in this case declared that, "'Knowingly is better avoided as
a defining ingredient of the principle, and the principle of the Baden’s scale of knowledge is best
forgotten”. It was concluded that dishonesty is a necessary ingredient of accessory liability.
Dishonesty is also a sufficient ingredient. The dishonesty test can be deduced whereby the
trustee’s own state of mind is unimportant but rather look at what an honest person would have
done if they had been placed in the same circumstances as the defendant. Therefore it was held
that the defendant had no right to employ or use the money in the trust account in his business
and he had acted dishonestly by assisting in taking money out the trust account, hence making
him liable for the loss suffered by the airline.

After citing the facts and decision based on old and latest cases there are differences on
the elements that need to be established. This part will be discussing the difference in elements in
each case. From the old decision in Baden’s case, it can be deduced that there are 4 elements that
need to be fulfilled in order for the stranger to be liable for knowing assistance. Based on this
case, the first element is there must be an existence of trust between the parties.as in this case
there is a fiduciary relationship between the parties. Next, there must also be an existence of a

14[2001] Ch. 437

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dishonest and fraudulent design on part of the trustee of that trust which is a question of facts in
each case. Thirdly, there must have been assistance by the stranger or a third party in that design
also is a question of facts. Lastly, the stranger must have knowledge and the knowledge must fall
within the types of knowledge that has been established in Baden’s case. On the contrary, the
decision in Baden’s case has been overruled by the Royal Brunei Airlines case, whereby it has
lowered the bar for liability on knowing assistance. This is because it was difficult to determine
the types of knowledge. Therefore, in the latest case it can be concluded that it is sufficient to
prove the act of dishonesty by the defendant and there is no requirement to prove a dishonesty
part of the trustee in making the third party liable notwithstanding the statement in Baden’s case.

Furthermore, it will be relevant to cite a case that applied the recent approach. This approach has
been applied in Industrial Concrete Products Bhd v Concrete Engineering Products Bhd 15,
where in this case, Choo Chin Thye was made a director of Concrete Engineering Product Bhd
(CEPCO) as well as a mandatory signatory to the company's banking instruments Choo had
acted beyond his power as a director of CEPCO in dealing with the company's assets and thus
had committed a breach of trust to CEPCO by appointment of ICP to take over the management
of CEPCO core business, since ICP was in the same line of business as CEPCO. In addition,
without reference or approval to the board of CEPCO, Choo executed the management
agreement for and on behalf of CEPCO. Also, CEPCO claimed accounts of profits made by Lim
Yong Kiat in having assisted, facilitated, participated in Choo's breach of fiduciary duty to
CEPCO. This case adopted a principle in the Royal Brunei Airlines case by applying the
dishonesty act. Therefore, the court found that ICP and Lim’s actions, deeds and thoughts to be
dishonest in their dealings in this transaction. Neither Lim nor ICP approached Choo to manage
or purchase the core business of CEPCO.

Next, this section will explain the importance which personal liability to account on the basis of
knowing assistance of trust property applies to strangers who assisted a nominated trustee in
committing a breach of trust. Basically, this part will be discussing the importance of the law by
imposing the liability to account of trust property to the stranger or third party based on knowing
assistance in committing the breach of trust. Firstly, the importance is made to address or make

15 [2001] 2 MLJ 332

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up for instances of unjust enrichment.16 For example, unjust enrichment occurs when someone
has ownership of anything such as cash, real estate, or other assets that they should not have
since they got it unfairly through fraud or a breach of fiduciary obligation. To address the unfair
situation that has occurred, a constructive trust has been established. Beside that, the importance
is that it can transfer ownership of property from the individual who has it illegally and back to
the legitimate owner.17 It can be said the purpose is to protect the right of the beneficiaries of the
property that has been taken illegally by the constructive trustee. For instance, if the person has
fraudulently nominated in a breach of trust based on knowing assistance, when the law imposed
the property of the beneficiary can be remedied, in which the constructive trustee need to return
back the trust property, benefits and all proceed derive from the trust property if any to the legal
owner which is the beneficiary of the trust property. Hence, it can be deduced that the statement
and decision of the court in the case where the law is applicable is very important to impose a
constructive trust in order to protect the trust property from the fraudulent people.

16 Sember, B. (2023, May 11). What is a constructive trust? LegalZoom.

17 Hicks, P. (n.d.). A Guide to Constructive Trusts. Trust & Will.

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 REFERENCES

ARTICLES

Hicks, P. (n.d.). A Guide to Constructive Trusts. Trust & Will. Retrieved June 22, 2023,
from https://trustandwill.com/learn/constructive-trust

Sember, B. (2023, May 11). What is a constructive trust? Legal Zoom. Retrieved June
22, 2023, from https://www.legalzoom.com/articles/what-is-a-constructive-trust

CASES
Baden Delvaux and Lecuit Societe Generale [1983] BCLC 325
Bank of Credit and Commerce International (Overseas) v Akindele [2001] Ch. 437
Barnes v Andy (1874) LR 9 Ch App 244
Charles & Others v Fraser [2010] EWHC Civ 2154 (Ch)
Hiroto Watanabe v Law Yen Yen & Anor (2012) 8 MLJ 202
Industrial Concrete Products Bhd v Concrete Engineering Products Bhd [2001] 2 MLJ 332
Mara v Browne [1896] 1 Ch 199
Re Cleaver [1981] 1 WLR 939
Re Oldham [1925] Ch 75
Royal Brunei Airlines Sdn Bhd and Philip Tan Kok Ming [1995] 2 AC 378
Soar v Ashwell [1893] 2 QB 390
Selangor Rubber Estate v Craddock [1968] All ER 1073

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