Just following orders?

A, B and C v D and E Limited [2019] NZHC 992

Could a lawyer be liable to disappointed children for a client’s decision to transfer assets to a trust?

One of the fundamental duties of a solicitor is to implement the instructions given to him or her by a client.  But what if those instructions are morally dubious?  Where a third party suffers a loss, can the lawyer say that he or she was only following instructions?  The answer is a clear ‘no’ if the client’s instruction relates to a breach of the client’s fiduciary duties.  A recent case suggests that such breaches might be more common than previously thought.   

The concept of dishonest assistance (sometimes called ‘knowing assistance’) has been used by the Courts to impose liability on solicitors and other professionals where they have assisted a client to breach his or her fiduciary duties to third parties.  An uncontroversial example is Fletcher v Refuge Trust [2012] 2 NZLR 227 (CA) where a solicitor was held personally liable in circumstances where he had assisted a trustee to misappropriate trust funds.  The recent case of A, B and C v D and E Limited [2019] NZHC 992 points to the potential expansion of this exposure.  

The case concerns the assets of a father who died in 2016.  The father had three children from his first marriage (the Children).  The marriage broke up in the 1980s and the father went on to form a new relationship.  In 2014, two years before his death, the father instructed his lawyers to transfer his assets to a trust.  The beneficiaries of the trust did not include the Children.  He explained to his lawyers that he was estranged from the Children and wished to prefer his partner and others.

After his death, the Children brought a claim against the trustees of the father’s trust (the Trustees) in the High Court.  The Children alleged that the father had abused them both physically and sexually when they were young.  They said the abuse was of such an extreme nature that it had detrimentally affected them all their lives.  The Children alleged that their father owed them fiduciary duties.  They said that the father had breached his fiduciary duties, both by abusing them and by transferring his property to the trust.  As against the father’s lawyers, the Children said that the lawyers had knowingly assisted the father’s breach of fiduciary duties such that the lawyers were also liable to them.

Both the Trustees and the lawyers made applications to strike out the Children’s claims.  In a recently released decision, Johnston AJ reviewed overseas decisions which have considered whether parents owe fiduciary duties to their children.  Canadian and Australian cases have found that parents do owe duties to the children during their childhood but there is a lack of authority on whether the duties could extend into adulthood.  In this case, the Children argued that the father’s abusive conduct during childhood meant that his duty extended beyond childhood.

To succeed with a strike out application, a defendant must prove that the plaintiff’s claim has no prospect of success.  This is a high test.  Johnston AJ was not prepared to accept that the Children’s claim against the Trustees had no prospect of success.

“Although it would certainly be breaking new ground, it appears to me not entirely beyond the bounds of possibility that the courts may accept that a parent who behaves abusively towards his or her children – especially in the extreme way alleged here – and where it can be demonstrated that that abuse has had a deleterious effect on the children in later life, might have imposed on him or her a fiduciary obligation to provide for their economic interests beyond their coming of age.”

The lawyers fared better in their strike out application.  The Children were unable to point to any evidence that the lawyers knew of the father’s abuse.  On that basis, Johnston AJ struck out the claim against them.  However, the judge commented that he would have allowed the claim against the lawyers to proceed to trial if the Children had been able to point to evidence suggesting that the lawyers had been aware of the allegations of abuse, or even should have been aware of them.

The Children’s claim against the Trustees will continue.  If that case proceeds to trial, it will likely create new law on the extent of parents’ legal duties to their children.

Comment - Matthew Atkinson

This case related to an extreme situation where adult children sought to overturn the manner in which their father dealt with his property while he was alive because of alleged historic physical and sexual abuse.  No doubt the allegations of abuse will impact on the findings of the Court when it considers the Trustee’s claim.

The case is interesting as the Court seemed comfortable with the idea that parents owe fiduciary duties to their children during their childhood.  While the limits of such a duty will need to be mapped out by future decisions, this case suggests that, even where there is no abuse, parents could breach their fiduciary duties if they transfer assets to a family trust where the children’s interest in the trust is less than they could otherwise expect under the Family Protection Act 1955.  If so, lawyers and accountants who advise on such transfers could be exposed to claims having knowingly assisted the breach by the parent.  

Whether the Courts are prepared to go this far remains to be seen.  The recognition of a fiduciary duty to a person’s children would significantly interfere with the person’s freedom to deal with their personal property as they choose.  This suggests that there may need to be some other form of lapse by the parent, such as serious physical or sexual abuse, before the Courts would consider finding a breach of fiduciary duty.

Matthew Atkinson is a Partner at Fee Langstone