On 5 June 2020, the Court of Appeal (the CoA) handed down its judgment in Sofer v SwissIndependent Trustees SA  EWCA Civ 699. The judgment may be of interest to beneficiaries looking to bring breach of trust claims in circumstances where the trust instrument contains a wide exoneration clause (i.e. where dishonesty/fraud must be shown) to trustees when seeking an indemnity/waiver, and also to practitioners when preparing or reviewing pleadings which touch on allegations of dishonesty.
Mr Sofer (the claimant/appellant) issued a claim for breach of trust against the Swiss trustees of a discretionary trust settled by his father (Hyman Sofer), on the grounds that they had made large gifts to his father from the trust, when the trust deed only permitted them to make loans. Following the settlor's death it transpired that US$61m had been paid out to the claimant's father, $19m of which his estate could not repay.
The breach of trust claim was met with two key obstacles: 1) the trust deed contained an exoneration clause excluding liability for anything other than acts by the trustees which were effectively fraudulent/dishonest; and 2) the claimant had previously signed deeds of indemnity in respect of the payments (which had been defined in those deeds as having been "loans"), releasing the trustees from any liability. The trustees countered with an application to have the claim struck out on the basis that the claimant failed to properly plead dishonesty by the trustee. In the alternative, they sought summary judgment based upon the indemnities previously given.
At first instance HHJ Paul Matthews held that dishonesty had not been adequately pleaded in the draft particulars relied upon, and struck out the claim; Mr Sofer appealed.
The Court of Appeal Judgment
The CoA unanimously allowed the appeal with respect to both strike out and summary judgment. Regarding the pleading of dishonesty, the judgment does (quite gently) critique the drafting of the claimant's pleadings (of which there were a number of different versions filed), the key points include:
- The Court confirmed that the test of dishonesty is that set out in Fattal v Walbrook Trustees (Jersey) Ltd  EWHC 2767 (Ch): a deliberate breach of trust is not enough - it is necessary to show either: i) knowledge, or recklessness to the fact, that the breach is contrary to the interests of the beneficiaries; or ii) a belief that the act was in the interests of the beneficiaries but said belief being so unreasonable that no reasonable professional trustee would have held such a belief.
- With respect to corporate trustees, Arnold LJ confirmed that it was not necessary for the claimant's pleadings to identify the particular individuals within the corporate entity who were alleged to have been dishonest, it being enough to plead that the entity had the relevant state of knowledge at the time. At paragraph 32 of the judgment, he said: "I do not accept [that]… a mere failure to identify at the outset the directors, officers or employees who had that knowledge means that such an allegation is liable to be struck out without further ado", however, "such particulars should be given as soon as is feasible";
- The claimant could rely upon the broader picture conveyed by other matters pleaded in order to support an inference of dishonesty and the requisite knowledge. Accordingly, whilst the Court acknowledged that some sections in the particulars relied upon could be seen as being consistent with 'honest incompetence' (which would undermine an inference of dishonesty), the broader effect of the pleading was not. The Court accepted that the Judge at first instance had "failed to step back and consider all of the particulars pleaded … as a whole to see if there was sufficient to tip the balance” when considering if the claim should be struck out.
- With respect to summary judgment, the Court held that the deeds of indemnity which the claimant had previously signed could only be construed as having authorised payments which were actually loans, not gifts (the latter being how the relevant payments should have been characterised, on the claimant's case). In addition, the deeds of indemnity could not authorise payments where the nature of the payments had been (allegedly) misrepresented to the claimant. The Court accepted that there was force in the claimant's submissions that it was necessary for him to know the legal effect of what he was being asked to waive, before a waiver would in fact arise.
This Appeal judgment provides a helpful indication as to what would constitute a satisfactory pleading of dishonesty against a trustee (where said trustee is protected by a wide exoneration clause), at least to the extent that it can resist a strike out or summary judgment application. Where pleadings include allegations of dishonesty but are lacking in detail and reliant upon inference (being common for claimants with limited information, particularly prior to disclosure), the guidance set out in the judgment should be adhered to. Provided it is, criticism of the pleadings by defendants can be addressed, and hopefully dismissed, early on.
Further, it is helpful to have confirmation from the CoA that it is acceptable for a claimant to plead knowledge and dishonesty against a corporate trustee, without first particularising the state of knowledge of specific individuals within that entity, albeit with the proviso that fuller particulars should be provided "as soon as is feasible".
Finally (and noting that the substantive claim is yet to be decided), this judgment may be a useful warning to trustees seeking indemnities/waivers prior to a distribution, who may want to more thoroughly consider the wording used to classify the payment being made, especially if there is ambiguity as to whether the distribution is a loan or is more akin to a gift.