Pleading dishonesty against Trustees: Sofer v Swissindependent Trustees SA [2020] EWCA Civ 699

Publication Date

18 Jun 2020


Mr Sofer brought a claim for breach of trust against the trustees of a very substantial discretionary trust, on the basis that they had made gifts out of the trust to his father, when the trust instrument only permitted them to make loans. Upon his father’s death it emerged that $61m had been paid out to the father, $19m of which his estate was unable to repay. The claim faced two major hurdles: first, the trust instrument contained an exoneration clause excluding liability for anything other than acts "in personal conscious and fraudulent bad faith by the trustee”; second, the claimant himself had signed indemnities in respect of the ‘loans’, releasing the trustees from any liability.
HHJ Paul Matthews struck out the claim for failing properly to plead dishonesty by the trustee, and in the alternative granted summary judgment to the trustees based upon the indemnities.
The Court of Appeal unanimously allowed the appeal, both from the strike out and from summary judgment. As to the pleading of dishonesty, the Court of Appeal confirmed that the test of dishonesty was that set out in Fattal v Walbrook Trustees (Jersey) Ltd [2010] EWHC 2767 (Ch); as well as a deliberate breach, it was necessary to show either knowledge that the breach is contrary to the interests of the beneficiaries, recklessness as to the same, or a belief so unreasonable that no reasonable trustee could have believed the act was in the interests of the beneficiaries. It was not, said Arnold LJ, necessary to identify the particular individuals in the corporate trustee who met that test; it was enough to plead that the corporate entity had the relevant state of knowledge, and further particulars should be given ‘as soon as is feasible’.
Moreover, the claimant could rely upon inference from the other matters pleaded as supporting an allegation of Fattal knowledge, and although some of the particulars relied upon could, in isolation, be seen as consistent with honest incompetence, the effect of the pleading as a whole was not. Similarly, some of the pleaded particulars were inconsistent, because the claimant was advancing alternative cases on the different Fattal limbs; that was permissible. The Judge had failed “to step back and consider all of the particulars … as a whole to see if there was sufficient to tip the balance”. The pleading would not be struck out.
On summary judgment, the Court of Appeal held that the deeds of indemnity could be construed as only authorising payments that were in truth loans, and not gifts, and also as impliedly not authorising payments which were made dishonestly. Such an interpretation was not ‘uncommercial’. The Judge below had wrongly accepted the defendants’ contested evidence on a summary judgment application, and wrongly found that the alleged representation by the trustees that the gifts were loans equated to a  ‘shared assumption’, sufficient to give rise to an estoppel by convention. It was (at least arguably) necessary for the claimant to know the legal effect of what he was doing before a waiver would arise, i.e. that they were in truth gifts, and prohibited by the trust instrument.
Comment: Pleading dishonesty against professional trustees is a nerve-wracking task, coming with professional and reputational risk for the practitioner as well as huge costs risks for the client. Although all judgments on strike-out should be taken with a pinch of salt (they only set the threshold for surviving strike-out, rather than best practice), this is a helpful indication from the Court of Appeal as to what does, or does not, constitute a sufficient pleading of dishonesty against a trustee protected by an exoneration clause. Further, it is acceptable to plead knowledge and dishonesty in a general sense against a corporate trustee and to wait until after disclosure for full particulars, so long as the facts are capable of supporting an inference to that effect. 


Aidan Briggs

Practice Areas

Trusts, Wills & Estates