Recipient Liability in Trusts: Tracing, Fault and Unjust Enrichment
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Added: 28.01.2026 at 14:05
Summary:
Explore recipient liability in trusts, tracing principles, fault, and unjust enrichment to understand legal responsibilities and remedies in English trust law.
Tracing Notes: Recipient Liability in Trusts and the Boundaries of Unjust Enrichment
Trust law, once a staple of familial and domestic property arrangements, has come to occupy a central role in the contemporary commercial world of England and Wales. Structures such as pension funds, investment portfolios, and company bodies often hinge on the trust’s ability to ringfence assets and define responsibilities. As business dealings increase in sophistication, incidents of breach—intentional or otherwise—become more frequent, spotlighting the question of who bears responsibility when trust property is wrongly diverted. Central to this is the principle of recipient liability: can, and should, a third party who receives misapplied trust property—knowingly or innocently—be held personally liable?
This essay aims to analyse the law’s complex approach to recipient liability, distinguishing carefully between personal and proprietary remedies. It interrogates the rationale behind judicial willingness to impose obligation, scrutinises the role of fault, and explores how principles of unjust enrichment meet the self-imposed limits of equity. By referencing leading English cases, and drawing on the evolving academic and judicial thought, the discussion seeks to illuminate current uncertainties and recommend a practical, principled path forwards.
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The Foundations of Recipient Liability in Trust Law
Recipient liability, in its essence, concerns whether a person who comes into receipt of trust property—outside the chain of fiduciary duty—should answer for its misapplication. A critical point of distinction must be made between mere receipt and active assistance, the latter often being more egregious and correspondingly more culpable. The courts have developed both the doctrine of ‘knowing assistance’, typically focusing on those who knowingly join in dishonest dealings (as explored in *Royal Brunei Airlines v Tan*), and ‘knowing receipt’, which targets those who simply receive misapplied assets.Traditionally, equity is loath to impose harsh personal liability on mere recipients unless they possess some degree of fault—whether knowledge, recklessness, or something more. As a rule, if a recipient holds property that is still identifiable, the beneficiary can enforce a proprietary right to retrieve what is theirs via tracing. The real conundrum, and the focus of recipient liability, arises when property has been dissipated or mingled beyond recall. In such cases, personal liability may be the only remedy left to the wronged beneficiary.
A separate but related distinction is between proprietary and personal claims. Proprietary claims track the property itself; if Mrs Smith’s trust money is used to buy a painting, equity will allow her to claim against the painting, wherever it goes. But where the property is lost or spent, personal remedies—potentially requiring the recipient to compensate the loss—are the sole recourse.
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Constructive Trusteeship and the Requirement of Fault
Constructive trusteeship can impose a personal obligation on a recipient to make good the loss, even if they were not originally a trustee. The law here is split: it sometimes requires culpability, sometimes does not. Where fault is required, its definition is slippery. Should liability arise for dishonesty alone, as preferred by Lord Millett in *Twinsectra v Yardley*, or is knowing negligence—or even mere carelessness—sufficient?This ambiguity is illustrated by the notable case of *Bank of Credit and Commerce International (Overseas) Ltd v Akindele*, where the Court of Appeal confirmed that “unconscionability” is the touchstone for knowing receipt, but declined to pin down precisely what counts as knowledge or recklessness. This lack of clarity places recipients, particularly in commercial settings, in a difficult position: is the onus on them to inquire rigorously into every source of funds, or is passive receipt protected unless knowledge of impropriety is proven?
Of course, a system that imposes strict liability with no room for innocence risks excessive harshness and would undermine the ease of commercial dealings—a concern that has often steered judges towards more restricted interpretations of constructive trusteeship. The law thus treads a delicate line between deterring wrongdoing and ensuring the smooth transferability of property in commercial society.
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The Innocent Recipient and the Resilience of Property Rights
English trust law is marked by a deep respect for property rights. Even where a recipient does nothing wrongful, the beneficial owner (e.g., a trust beneficiary) can press a claim, so long as the property or its substitute remains identifiable—that is, equity cares less about personal blame and more about the tracking of property. This approach is exemplified in *Foskett v McKeown*, where Lord Millett affirmed the proprietary nature of tracing in equity, enabling beneficiaries to follow their value into substitute forms.Yet, if the trust property has vanished—spent on a night out, perhaps, or used to pay untraceable bills—proprietary remedies become impossible. Should the law then impose a personal liability on the innocent recipient? Doing so raises significant fairness concerns, especially if the recipient was unaware and gave value, or has since changed position in reliance on the gift. This tension lies at the heart of the debate between strict trustee-like liability and the more moderate doctrine of unjust enrichment.
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Restitution and the Blending of Common Law and Equity
Traditionally, the common law has been strict in its approach; the tort of conversion imposed liability regardless of fault on recipients of wrongfully transferred property. This too has seemed harsh, prompting judicial innovation. The House of Lords’ decision in *Lipkin Gorman v Karpnale Ltd* is pivotal here: the ‘change of position’ defence was recognised, allowing liability to be limited if the recipient, having acted in good faith, altered their circumstances relying on the validity of the receipt.In the wake of *Lipkin Gorman*, legal thinking has moved towards harmonisation with unjust enrichment principles, championed particularly by Lord Nicholls. The key elements are enrichment at the claimant’s expense, absence of justification, and availability of fair defences for bona fide recipients. This approach softens both common law’s rigidity and equity’s sometimes ambiguous reliance on fault, aiming for greater overall justice and certainty.
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The Diplock Principle and Strict Liability
A unique scenario arises in the administration of deceased estates, discussed in the often-cited case of *Baroness of Diplock*. Here, recipients who took estate funds in error were held strictly liable to repay, even if they acted innocently and the money was already spent. The rationale was that the law must ensure restitution to the rightful heirs, thus prioritising the correction of unjust deprivation over the protection of innocent recipients.However, such stringency, while logically coherent in the context of estates, has been critiqued for its inflexibility, particularly where recipients are charities or individuals who have no basis for suspecting error. Although the courts have stopped short of extending this rigid liability more widely, the principle sits as a reminder that the law’s response to mistaken transfers can be swift and uncompromising.
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The Murky Middle: Careless Recipients
Between deliberate wrongdoers and the wholly innocent lies a grey area: the careless recipient. Should an individual or institution who failed, say, to notice warning signs, or make minimal enquiries, be liable as if they were a knowing wrongdoer? Judicial opinion leans against it. In *Re Montagu’s Settlement Trusts*, Sir Robert Megarry V-C held that mere carelessness does not make a recipient a constructive trustee; true knowledge (actual or arguably wilfully blind) is required. This is not without logic: imposing full liability for negligence could unwittingly stifle commerce, as every recipient would be duty-bound to scrutinise every transaction.Nevertheless, critics worry that this sets the bar for culpability too high, potentially allowing recklessly ignorant recipients to evade responsibility. There is thus a pressing need to balance the legitimate interests of beneficiaries (who may have lost irreplaceable sums) against the commercial reality that not all recipients can or ought to investigate every payment exhaustively.
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Practical Implications and Prospects for Reform
For students of law and practitioners alike, the uncertainty in the present doctrine of recipient liability is more than academic. In the commercial reality of London’s financial district, or even in more modest local trust arrangements, recipients need reasonably clear guidance. Litigation is expensive, and the unpredictability of equitable principles—however well-intentioned—can chill commercial dealings or provoke injustice.A possible answer lies in a more structured, tripartite model: (1) strict liability in limited estate or mistake scenarios (as per *Diplock*); (2) fault-based liability for cases of knowing assistance or receipt; and (3) unjust enrichment liability with tailored defences (like ‘change of position’) for innocent or careless recipients. Such clarity could be achieved via statute—Parliament, after all, has a record of reforming tricky corners of equity, as with the Trustee Act 2000—or via authoritative pronouncement from the Supreme Court.
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Conclusion
Recipient liability, at first glance a niche corner of the law, raises fundamental questions about property, justice, and commercial certainty. The answer to “who should pay” when trust property is misapplied is neither simple nor static; it reflects a balancing act between the need to protect beneficiaries, the trust’s defining purpose, and the commercial world's demand for predictability.The best way forward is a principled, pragmatic approach—one which respects centuries of equitable tradition but adapts to contemporary demands. Whether by statute or judicial clarification, the law should encourage the responsible transfer of property without unfairly penalising the unwitting recipient, while ensuring the wronged beneficiary is not left empty-handed. Through such evolution, the law of trusts can remain fit for purpose in an era of ever-growing commercial complexity.
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Appendix – Key Terms and Cases
- Constructive trustee: A person ordered by a court to deal with property as a trustee, having received it improperly. - Tracing: The process by which claimants identify their property in the hands of another. - Unjust enrichment: The legal principle that one should not benefit unfairly at another’s expense. - Proprietary remedy: A right to claim an asset itself, not just compensation. - Liability to account: The duty of a person (trustee or otherwise) to justify dealings with trust property.
Illustrative Cases: - *Foskett v McKeown* [2001] 1 AC 102 (proprietary tracing) - *Bank of Credit and Commerce International (Overseas) Ltd v Akindele* [2001] Ch 437 (knowing receipt) - *Re Diplock* [1948] Ch 465 (strict liability in estates) - *Lipkin Gorman v Karpnale Ltd* [1991] 2 AC 548 (change of position defence) - *Re Montagu’s Settlement Trusts* [1987] Ch 264 (careless recipients)
For those embarking on the study of trusts, these principles frame not only the mechanics of recipient liability but the broader ongoing dialogue between equity and commercial need in English law.
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