The Court of Appeal, in Sofer v SwissIndependent Trustees SA  EWCA Civ 699, has overturned a decision of the High Court and has allowed an appeal against an order striking out a claim brought by the claimant beneficiary for breach of trust under CPR 3.4(2)(a), on the ground that it failed to sufficiently plead a case of dishonesty to overcome a trustee exoneration clause. In so doing, the Court of Appeal has given useful guidance on pleading dishonesty in statements of case.
The claimant, Roger Sofer, (“C”) was a beneficiary of a discretionary trust, the Puyol Trust, created in 2006 by a wealthy South African bookmaker and investor, Hyman Sofer. The professional trustee, a trustee company based in Switzerland, was given the power to lend trust assets to beneficiaries, however was prohibited from paying or transferring trust property to the beneficiaries prior to the death of Mr Sofer, who was added as a beneficiary of the Puyol Trust shortly after it was created. Between 2006 and 2016, the trustee paid significant sums out of the Puyol Trust to Mr Sofer, recording the payments as loans, but without making any provisions for security, interest, or repayment. Mr Sofer died on 8 July 2016, at which time the total sums paid to him out of the Puyol Trust was nearly $19.2 million, a sum which his estate was unable to repay to that trust. Shortly following his death, the trustee released Mr Sofer’s estate from its purported obligation to repay the outstanding loans.
C issued a claim on 25 September 2018 alleging that the payments made by the trustee to Mr Sofer between 2006 and 2016 were gifts rather than loans, and were made in breach of the prohibition in clause in the trust deed. C sought (among other remedies) a declaration to that effect, together with orders that the trustee should reinstate the Puyol Trust and be removed as trustee. The trustee responded to the claim by applying to strike it out, alternatively requesting summary judgment dismissing the claim. The strike out application was made on the basis that the Puyol Trust deed contained a trustee exoneration clause which excluded any liability on the part of the trustee except where the loss was caused “by acts done or omissions made in personal conscious and fraudulent bad faith” and, as the particulars of claim did not contain adequate particulars of dishonesty, the trustee was entitled to rely on the exoneration clause.
C cross applied for permission to rely upon amended particulars of claim, which did expressly plead dishonesty.
High Court’s decision
At first instance, the trustee’s strike out application succeeded. HHJ Paul Matthews determined that C’s pleading was flawed in two key respects:
- C failed to give proper particulars of the trustee’s alleged knowledge of, or reckless indifference to, the interests of the beneficiaries, and
- C failed to identify the individuals whose knowledge was to be attributed to the defendant trustee, being a trustee company.
HHJ Matthews also held that the draft amended particulars of claim were not well drafted and, as to their substance, they did not plead all the matters which C relies upon as showing the dishonesty of the trustee.
Court of Appeal’s decision
The Court of Appeal unanimously agreed that the claim should not have been struck out and considered that the claimant beneficiary should have been permitted to amend his particulars of claim to plead particulars of the trustee’s alleged dishonesty.
Arnold LJ helpfully set out the relevant principles in relation to pleading dishonesty:
- Fraud or dishonesty must be specifically alleged and sufficiently particularised, and will not be sufficiently particularised if the facts alleged are consistent with innocence: Three Rivers District Council v Governor and Company of the Bank of England (No.3)  2 AC 1.
- Dishonesty can be inferred from primary facts, provided that those primary facts are themselves pleaded. There must be some fact which tilts the balance and justifies an inference of dishonesty, and this fact must be pleaded: Three Rivers at  (Lord Millett).
- The claimant does not have to plead primary facts which are only consistent with dishonesty. The correct test is whether or not, on the basis of the primary facts pleaded, an inference of dishonesty is more likely than one of innocence or negligence: JSC Bank of Moscow v Kekhman  EWHC 3073 (Comm) at - (Flaux J, as he then was).
- Particulars of dishonesty must be read as a whole and in context: Walker v Stones  QB 902 at 944B (Sir Christopher Slade).
He also gave useful guidance to practitioners in drafting statements of the case generally:
- The purpose of giving particulars is to allow the defendant to know the case he has to meet: Three Rivers at -; McPhilemy v Times Newspapers Ltd  3 All ER 775at 793B (Lord Woolf MR).
- When giving particulars, no more than a concise statement of the facts relied upon is required: McPhilemy at 793B.
- Unless there is some obvious purpose to be served by fighting over the precise terms of a pleading, contests over their terms are to be discouraged: McPhilemy at 793D.
It is rare for the Court of Appeal to give guidance on drafting statements of case.
The decision in Sofer should provide comfort to practitioners pleading dishonesty: it is likely that criticisms that a pleading lacks detail can be overcome provided the aforementioned guidance is followed. The Court of Appeal’s judgment points to a practical and pragmatic approach being taken which may dissuade parties from seeking to strike out borderline cases in claims of fraudulent breach of trust, although obviously it remains the case that such a claim should be identified and pleaded as fully as possible at the earliest opportunity.