Ivey v Crockfords (2017 UKSC 67)

Whilst this is not a trust related case, it is an important one which may have an impact on the trust industry going forward as it sees the Supreme Court fundamentally change the test for dishonesty in English law.

This case concerned a professional gambler (Mr Ivey) who visited the Crockfords casino to play Punto Blanco baccarat. When playing the game at the casino Mr Ivey used a specialist technique called “edge sorting” which enabled him to distinguish between playing cards while they were still face down. By using this technique over the course of one and half days at the casino Mr Ivey won approximately £7.7 million, however the casino refused to pay Mr Ivey on the basis that his technique amounted to cheating. Mr Ivey therefore sued Crockfords for his winnings submitting that he was entitled to use his technique.

Mr Ivey was successful at first instance where the Court held that Mr Ivey had given truthful evidence and concluded that Mr Ivey did not consider his method to amount to cheating. However Crockfords successfully appealed that decision with the Court of Appeal holding (by majority) that the technique did constitute cheating and it breached the implied contract between the parties. Mr Ivey in turn appealed that decision and took the matter to the Supreme Court.

In their decision, the Supreme Court examined what constituted “dishonesty” under English law. The pre-existing criminal law test was based on the 1982 case of R v Ghosh and held there was a two stage test; (i) the conduct must be considered dishonest by the “objective standards of ordinary reasonable and honest people”; and (ii) the defendant must have realised that ordinary, honest people would regard their conduct as dishonest. Mr Ivey argued that the second strand of this test was not satisfied in this case because he did not believe his conduct was dishonest.

A slightly different test is generally applied in civil cases (including in relation to breach of trust claims) as applied in the 2005 case of Barlow Clowes v Eurotrust. The Barlow Clowes test does not include the second, subjective part of the Ghosh test.

Here the Supreme Court unanimously found against Mr Ivey and stated that “The question whether [the appellant’s] conduct was honest or dishonest is to be determined by the fact-finder by applying the (objective) standards of ordinary decent people. There is no requirement that the defendant must appreciate that what he has done is, by those standards”. LJ Hughes went on to state that “The second leg of the test propounded in Ghosh does not correctly represent the law and that directions based upon it ought no longer to be given.” The Court therefore removed the second strand of the criminal test in Ghosh.

This judgment from the Supreme Court has clarified the appropriate test to be applied when considering whether a party has acted dishonestly in both criminal and civil cases with the judgment stating “There can be no logical or principled basis for the meaning of dishonesty (as distinct from the standards of proof by which it must be established) to differ according to whether it arises in a civil action or a criminal prosecution”.

The case has therefore reiterated that the test established in the Barlow Clowes case is the appropriate one to apply in both criminal and civil cases and consequently going forward no regard will be given by the Courts to the subjective views of the individual said to have acted dishonestly when assessing whether their conduct was in fact dishonest in nature.

JSC Mezhdunarodniy Promyshlenniy Bank v Pugachev & Ors [2017] EWHC 2426 (CH)

Mr Pugachev, purported to settle US$95m of assets on five discretionary trusts between 2011 and 2013. Each trust named Mr Pugachev as a discretionary beneficiary and protector. The claimant obtained a substantial judgment against Mr Pugachev and in 2016 sought to enforce it against the trust assets through proceedings in England on three grounds:

  • Mr Pugachev’s role as settlor, discretionary beneficiary and protector meant that only bare trusts existed;
  • The trusts were a sham;
  • The trusts should be set aside under s.423 Insolvency Act 1986.

On the first ground, the English High Court held that the terms of the trusts did not divest Mr Pugachev of his beneficial interest in the assets he had transferred into trust and were bare trusts. The judge relied on the fact that Mr Pugachev was settlor, discretionary beneficiary and protector and had very wide powers as protector which effectively enabled him to prevent distributions to other beneficiaries and remove trustees who refused to transfer assets to him. On the second ground, the Court found the trusts were a sham and Mr Pugachev intended at all times to retain ultimate control of the assets. He held that the solicitor acting as director of the trustee companies had no intentions independent of Mr Pugachev and would comply with Mr Pugachev’s wishes.

On the third ground, the Court found that even if the Court had not found on the first two grounds (so that Mr Pugachev had divested his beneficial interest in the assets), the Court would have found the purpose was to hide control of the assets from the creditors.

This case will be instructive for creditors who wish to attack trust assets in the future with the first ground being of particular interest as it is less of a hurdle than proving a sham claim. Conversely Trustees should be mindful of the successful arguments which were submitted in this case, in particular in the width of powers as Protector which were used to determine a bare trust existed.

Crociani & Ors v Crociani & Ors [2017] JRC146

The plaintiffs, Cristiana Crociani and her minor daughters, brought breach of trust claims against the trustees and former trustees of two related trusts; the Grand Trust and the Fortunate Trust.

The main issue in the Jersey proceedings was the decision of the former trustees in 2010 to appoint out certain assets of the Grand Trust to the Fortunate Trust. The plaintiffs claimed that this appointment was a breach of trust as it removed assets from the Grand Trust, which they alleged Edoarda Crociani (Cristiana’s mother) was not able to benefit to the Fortunate Trust, a trust over which Edoarda was a direct beneficiary and also had significant powers of control. This was in breach of clause 11 of the trust deed which gave the trustees an overriding power to appoint the trust fund “in favour or for the benefit of all or any one or more exclusively of the others or other of the beneficiaries (other than the settlor)”.

The Jersey Court agreed with the plaintiffs and ordered that the 2010 appointment, along with other consequential appointments, were to be declared void and set aside. It was further ordered that Edoarda and BNP (the trustees at the time of the 2010 appointment) must jointly and severally pay to the new trustee over $100m to reconstitute the Grand Trust.

This decision is one of the largest orders against a Trustee in Jersey. It serves as prescient reminder to Trustees that a claim for breach of trust which deals with reconstitution of the trust fund can lead to a judgment for a significant sum, particularly as here where the claim spans a number of years.