Chapter 10 Tracing & Third party Liability

Chapter 10 – Trust Law

10.1. Introduction

Question on classification

It would be difficult to justify the categorisation on conceptual grounds, since the workbook covers areas which are conceptually quite disparate. Tracing at common law can be a method of identifying property, enabling the plaintiff to take against the defendant whatever common law action is appropriate to protect his common law property rights. This depends on the property remaining identifiable at common law. Note that tracing in this sense is not a cause of action or a remedy in itself, but merely a means of identifying property: see, e.g., the first part of the passage set out from Millett J's judgment in Agip (Africa), referred to with approval by Tuckey J. in Bank Tejarat v. Hong Kong and Shanghai Banking Corporation [1995] 1 Lloyd's Rep 239, 245.

However, the term tracing at common law is also used, especially in some of the more recent cases, to describe a money had and received claim, which is a form of personal liability, and complete on receipt: see, e.g., Agip (Africa) Ltd v Jackson [1991] Ch. 547, where the term is used in this way. It is necessary, however, to establish receipt by the defendant of the plaintiff's property, which is why tracing may be necessary.

Equitable tracing can also a method of identifying property, the equitable title being enforceable against anybody except a bona fide purchaser for value without notice. An equitable tracing claim will be defeated by the destruction of the property, or its loss of identity using the applicable equitable rules. However, if property can be traced in equity into the hands of a knowing receiver, the knowing receiver becomes a constructive trustee of the property, and retains that liability whatever happens subsequently to the property.

However, the term equitable tracing is also used to describe the personal action in Re Diplock, which is complete upon receipt, and is not a proprietary claim at all.

Knowing receipt and knowing assistance are forms of personal liability. A knowing receiver is a constructive trustee, and remains liable even if he or she parts with the property. A knowing assister need not be a constructive trustee, since he or she need never obtain legal title to the trust property, but the liability of a knowing receiver is similar to that of a constructive trustee.

This workbook therefore contains a concoction of personal and proprietary actions, and common law and equitable claims, and has no particular conceptual coherence.

Functional justification for the categorization.

Common law tracing is a means of identifying property, either for a proprietary claim, or to establish that the defendant received the plaintiff's property for a personal claim. Equitable tracing is a remedy; liability for knowing receipt is definitely based, and liability for knowing assistance possibly based, on constructive trusteeship. There could be good reasons for treating them entirely separately, therefore, especially for example, if it was intended to develop a general theory of when constructive trusts might be imposed.

However, there are sound functional reasons for lumping together in this workbook what may well be very disparate concepts, in that the fact situations which can give rise to a tracing claim can also often give rise to a claim for knowing receipt or knowing assistance. An excellent (but by no means the only) example is Agip (Africa) Ltd v Jackson [1991] Ch 547, which is an important authority on common law and equitable tracing, and knowing receipt and knowing assistance. It might also be necessary to trace in equity, in order to establish receipt for a knowing receipt action, as in El Ajou v Dollar Land Holdings plc (No. 2) [1995] 2 All ER 213. For ease of explanation, therefore, I have decided to deal with the concepts in the same workbook, although I would accept that this might annoy conceptual purists.

Passages from Millett J.'s judgment in Agip (Africa), on common law tracing:

Tracing at common law, unlike its counter-part in equity, is neither a cause of action nor a remedy, but serves an evidential purpose. The cause of action is for money had and received. Tracing at common law enables the defendant to be identified as the recipient of the plaintiff's money and the measure of his liability to be determined by the amount of the plaintiff's money he is shown to have received. The common law has always been able to follow a physical asset from one recipient to another. Its ability to follow an asset in the same hands into a changed form was established in Taylor v Plumer. In following the plaintiff's money into an asset purchased exclusively with it, no distinction is drawn between a chose in action such as the debt of a bank to its customer and any other asset: Re Diplock [1948] Ch 466, 519. But it can only follow a physical asset, such as a cheque or its proceeds, from one person to another. It can follow money but not a chose in action. Money can be followed at common law into and out of a bank account and into the hands of a subsequent transferee, provided that it does not cease to be identifiable by being mixed with other money in the bank account derived from some other source: Banque Belge pour l'Etranger v Hambrouck [1921] 1 KB 321. Applying these principles, the plaintiffs claim to follow their money through Baker Oil's account where it was not mixed with any other money and into Jackson & Co's account at Lloyds Bank.

The defendants deny this. They contend that tracing is not possible at common law because the money was mixed, first when it was handled in new York, and secondly in Jackson & Co's own account at Lloyds Bank.

The latter objection is easily disposed of. The cause of action for money had and received is complete when the plaintiff's money is received by the defendant. It does not depend on the continued retention of the money by the defendant. Save in strictly limited circumstances it is no defence that he has parted with it. A fortiori it can be no defence for him to show that he has so mixed it with his own money that he cannot tell whether he still has it or not. Mixing by the defendant himself must, therefore, be distinguished from mixing by a prior recipient. The former is irrelevant, but the latter will destroy the claim, for it will prevent proof that the money received by the defendant was the money paid by the plaintiff.

In my judgment, however, the former objection is insuperable. The money cannot be followed by treating it as the proceeds of a cheque presented by the collecting bank in exchange for payment by the paying bank. The money was transmitted by telegraphic transfer. There was no cheque or any equivalent. The payment order was not a cheque or its equivalent. It remained throughout in the possession of the Banque du Sud. No copy was sent to Lloyds Bank or Baker Oil or presented to the Banque du Sud in exchange for the money. It was normally the plaintiffs' practice to forward a copy of the payment order to the supplier, when paying an invoice but this was for information only. It did not authorise or enable the supplier to obtain payment. There is no evidence that this practice was followed in the case of forged payment orders and it is exceedingly unlikely that it was.

Nothing passed between Tunisia and London but a stream of electrons. It is not possible to treat the money received by Lloyds Bank in London or its correspondent bank in New York as representing the proceeds of the payment order or of any other physical asset previously in its hands and delivered by it in exchange for the money. The Banque du Sud merely telexed a request to Lloyds Bank to make a payment to Baker Oil against its own undertaking to reimburse Lloyds Bank in New York. Lloyds Bank complied with the request by paying Baker Oil with its own money. It thereby took a delivery risk. In due course it was no doubt reimbursed, but it is not possible to identify the source of the money with which it was reimbursed without attempting to follow the money through the New York clearing system. Unless Lloyds Bank's correspondent bank in New York was also Citibank, this involves tracing the money through the accounts of Citibank and Lloyds Bank's correspondent bank with the Federal Reserve bank, where it must have been mixed with other money. The money with which Lloyds Bank was reimbursed cannot therefore, without recourse to equity, be identified as being that of the Banque du Sud. There is no evidence that Lloyds Bank's correspondent bank in New York was Citibank, and accordingly the plaintiffs' attempt to trace the money at common law must fail.

Passage from Fox LJ's judgment in Agip (Africa) on common law tracing:

Now, in the present case, the course of events was as follows. (1) The original payment order was in December signed by an authorised signatory. (2) The name of the payee was then altered to Baker Oil. (3) The altered order was then taken to Banque du Sud who complied with it by debiting the account of Agip with $518,822.92 and then instructing Lloyds Bank to pay Baker Oil. Banque du Sud also instructed Citibank in New York to debit its account with Citibank and credit Lloyds Bank with the amount of the order. (4) Lloyds Bank credited the money to Baker Oil's account on the morning of 7 January. (5) On 8 January, Lloyds Bank in pursuance of instructions from Baker Oil transferred the $518,822.92, which was the only sum standing to the credit of Baker Oil's account, to an account in the name of Jackson & Co. (6) Immediately before the transfer from Baker Oil, Jackson & Co's account was $7,911.80 in credit. In consequence of the transfer it became $526,734.72 in credit.

The inquiry which has to be made is whether the money paid to Jackson & Co's account `was the product of, or substitute for, the original thing.' In answering that question I do not think that it matters that the order was not a cheque. It was a direction by the account holder to the bank.

When Atkin LJ referred in the Banque Belge case to the `original money' he was, I assume, referring to the money credited by Banque Belge (the plaintiff) to Hambrouck's account. Money from that account was the only money in Mlle Spanoghe's deposit account. It was not, therefore, difficult to say that the money in issue (i.e., the residue of Mlle Spanoghe's account) could be identified as the product of the original money. There were no complexities of tracing at all. Everything in Mlle Spanoghe's account came from Hambrouck's account and everything in Hambrouck's account came from the credit in respect of the fraudulent cheque.

The position in the present case is much more difficult. Banque du Sud can be regarded as having paid with Agip's money but Lloyds Bank, acting as directed by Banque du Sud, paid Baker Oil with its own money. It had no other and, accordingly, took a delivery risk. It was, in the end, put in funds, but it is difficult to see how the origin of those funds can be identified without tracing the money through the New York clearing system.

The money in the present case did get mixed on two occasions. The first was in the New York clearing system and the second was in Jackson & Co's own account. The judge held that the latter was of no consequence. I agree. The common law remedy attached to the recipient of the money and its subsequent transposition does not alter his liability. The problem arises at an earlier stage. What did Jackson & Co receive which was the product of Agip's asset?

Baker Oil was controlled for present purposes by Jackson & Co but Baker Oil was paid by Lloyds Bank which had not been put in funds from New York. It was subsequently recouped. But it is not possible to show the source from which it was recouped without tracing the money through the New York clearing system. The judge said [1990] Ch 265, 286:

"Unless Lloyds Bank's correspondent bank in New York was also Citibank, this involves tracing the money through the accounts of the Citibank and Lloyds Bank's correspondent bank with the Federal Reserve Bank, where it must have been mixed with other money. The money with which Lloyds Bank was reimbursed cannot therefore, without recourse to equity, be identified as being that of the Banque du Sud."

I respectfully agree with that view. Accordingly, it seems to me that the common law remedy is not available.

I should add this. Atkin LJ's approach in the Banque Belge case amounts virtually to saying that there is now no difference between the common law and equitable remedies. Indeed, the common law remedy might be wider because of the absence of any requirement of a fiduciary relationship. There may be a good deal to be said for that view but it goes well beyond any other case and well beyond the views of Bankes and Scrutton LJJ. And in the 70 years since the Banque Belge decision it has not been applied. Whether, short of the House of Lords, it is now open to the courts to adopt it I need not consider. I would in any event feel difficulty in doing so in the present case where, as I indicate later, it seems to me that the established equitable rules provide an adequate remedy.

Notes on Agip (Africa) - common law tracing

Millett J. makes clear that the claim for money had and received does not depend on the continued retention of the money by the defendant.

Millett J. also distinguished between a payment order and a cheque, commenting (at p. 399) that the payment order never moved from Tunisia, and that nothing passed between Tunisia and London but a stream of electrons, so that it was not possible to treat the money received by Lloyds as representing the proceeds of the payment order or of any other physical asset (e.g., a cheque) previously in its hands and delivered by it in exchange for the money.

This distinction seems in principle difficult to justify, since a cheque no more represents the money itself than do the stream of electrons; its possession merely confers contractual rights against the issuing bank, but there is no doubt that Lloyds had a contractual claim against the Banque du Sud at the latest when they had received and acted upon the telexed payment order. However, it is in line with Millett’s view in (1991) 107 L.Q.R. 71, 73, that the common law will only follow tangible property from one person to another.

Millett J.'s reasoning was applied by Tuckey J. in Bank Tejarat v. Hong Kong and Shanghai Banking Corporation (Ci) Ltd. and Hong Kong and Shanghai Bank Trustee (Jersey) Ltd. [1995] 1 Lloyd's Rep. 239 (above). As in Agip (Africa), the money was paid by telegraphic transfer, through clearing banks, and for the same reason, a common law tracing claim failed. Bank Tejarat also failed to argue that, since (as is common in documentary credit transactions) they had paid against presentation of a draft (i.e., a bill of exchange), that operated similarly to a cheque. The draft was not, being used, as a cheque would be, as the method of making the payment. Its presentation to the plaintiff bank was merely the trigger for payment, so the analogy with the cheque failed. Tuckey J observed that:

"The simple answer to this submission is that the drafts were not the means by which Tejarat paid their money to CAK. The payment out of Tejarat's account ... was probably made by telex instructions ... (a stream of electrons). It was certainly not made by the drafts, so there is nothing from which Tejarat can trace."

Electrons are particles and themselves (presumably) physical objects, but there is no way in which any particular electron, or group of electrons, can be associated with any particular property of the plaintiff.

Fox L.J. did not (at p. 465h) adopt that distinction, relying instead upon the fact that Lloyds had credited the money to Baker Oil before it was reimbursed with the plaintiff's money. Note that under this form of payment it is more usual for the second bank to wait until payment has been received before crediting its customer's account. This, however, would seem to be merely an additional reason why the money could not be traced through the New York banks. It does not explain why Agip could not follow the causes of action, and it is necessary to adopt Millett J's distinction to do that.

Fox L.J.'s views of Atkin L.J.'s views in Banque Belge, that the common law, like equity, can follow money through mixed accounts, are at best neutral, and at worst disapproving.

Passage from Millett J's judgment (whose decision was upheld by the Court of Appeal) in Agip (Africa) on the equitable tracing claim.

There is no difficulty in tracing the plaintiffs' property in equity, which can follow the money as it passed through the accounts of the correspondent banks in New York or, more realistically, follow the chose in action through its transmutation as a direct result of forged instructions from a debt owed by the Banque du Sud to the plaintiffs in Tunis into a debt owed by Lloyds Bank to Baker Oil in London.

The only restriction on the ability of equity to follow assets is the requirement that there must be some fiduciary relationship which permits the assistance of equity to be invoked. The requirement has been widely condemned and depends on authority rather than principle, but the law was settled by Re Diplock [1948] Ch 466. It may need to be reconsidered but not, I venture to think, at first instance. The requirement may be circumvented since it is not necessary that the fund to be traced should have been the subject of fiduciary obligations before it got into the wrong hands; it is sufficient that the payment to the defendant itself gives rise to a fiduciary relationship: Chase Manhattan Bank N.A. v Israel-British Bank (London) Ltd [1981] Ch 105.

The requirement is, however, readily satisfied in most cases of commercial fraud, since the embezzlement of a company's funds almost inevitably involves a breach of fiduciary duty on the part of one of the company's employees or agents. That was so in present case. There was clearly a fiduciary relationship between Mr Zdiri and the plaintiffs. Mr Zdiri [the chief accountant] was not a director nor a signatory on the plaintiffs' bank account, but he was a senior and responsible officer. As such he was entrusted with possession of the signed payment orders to have them taken to the bank and implemented. He took advantage of his possession of them to divert the money and cause the separation between its legal ownership which passed to the payees and its beneficial ownership which remained in the plaintiffs. There is clear authority that there is a receipt of trust property when a company's funds are misapplied by a director and, in my judgment, this is equally the case when a company's funds are misapplied by any person whose fiduciary position gave him control of them or enabled him to misapply them. ...

The tracing claim in equity gives rise to a proprietary remedy which depends on the continued existence of the trust property in the hands of the defendant. Unless he is a bona fide purchaser for value without notice, he must restore the trust property to its rightful owner if he still has it. But even a volunteer who has received trust property cannot be made subject to a personal liability to account for it as a constructive trustee if he has parted with it without having previously acquired some knowledge of the existence of the trust: Re Montagu's Settlement Trusts [1987] Ch 264.

The plaintiffs are entitled to the money in court which rightfully belongs to them. To recover the money which the defendants have paid away the plaintiffs must subject them to a personal liability to account as constructive trustees and prove the requisite degree of knowledge to establish the liability.

Passage from Fox LJ's judgment in Agip (Africa) on the equitable tracing claim:

Both common law and equity accepted the right of the true owner to trace his property into the hands of others while it was in an identifiable form. The common law treated property as identified if it had not been mixed with other property. Equity, on the other hand, will follow money into a mixed fund and charge the fund. There is, in the present case, no difficulty about the mechanics of tracing in equity. The money can be traced through the various bank accounts to Baker Oil and onwards. It is, however, a prerequisite to the operation of the remedy in equity that there must be a fiduciary relationship which calls the equitable jurisdiction into being. There is no difficulty about that in the present case since Mr Zdiri must have been in a fiduciary relationship with Agip. He was the chief accountant of Agip and was entrusted with the signed drafts or orders upon Banque du Sud.

Notes on the (successful) equitable tracing claim in Agip (Africa):

In addition to their claim at common law (which failed), the plaintiffs also claimed (successfully) that they were entitled to trace in equity. Since the only reason they failed at common law was because they could not establish that what Baker Oil had received was their money, this clearly suggests that it is easier to establish that the defendant has received the plaintiff's property in equity than it is at common law.

Because (unlike the action for money had and received) tracing in equity is a proprietary claim, it depends on retention of the money by the defendant (see the distinction between personal and proprietary claims). Baker Oil had retained only about US $ 45,000, and only this amount could be traced in equity, but the plaintiffs also succeeded in respect of the amount dissipated by Baker Oil, on the basis of knowing assistance (see notes on knowing assistance).

Passage from Millett J's judgment (whose decision was upheld by the Court of Appeal) in Agip (Africa) on the equitable tracing claim:

There is no difficulty in tracing the plaintiffs' property in equity, which can follow the money as it passed through the accounts of the correspondent banks in New York or, more realistically, follow the chose in action through its transmutation as a direct result of forged instructions from a debt owed by the Banque du Sud to the plaintiffs in Tunis into a debt owed by Lloyds Bank to Baker Oil in London.

The only restriction on the ability of equity to follow assets is the requirement that there must be some fiduciary relationship which permits the assistance of equity to be invoked. The requirement has been widely condemned and depends on authority rather than principle, but the law was settled by Re Diplock [1948] Ch 466. It may need to be reconsidered but not, I venture to think, at first instance. The requirement may be circumvented since it is not necessary that the fund to be traced should have been the subject of fiduciary obligations before it got into the wrong hands; it is sufficient that the payment to the defendant itself gives rise to a fiduciary relationship: Chase Manhattan Bank N.A. v Israel-British Bank (London) Ltd [1981] Ch 105.

The requirement is, however, readily satisfied in most cases of commercial fraud, since the embezzlement of a company's funds almost inevitably involves a breach of fiduciary duty on the part of one of the company's employees or agents. That was so in present case. There was clearly a fiduciary relationship between Mr Zdiri and the plaintiffs. Mr Zdiri [the chief accountant] was not a director nor a signatory on the plaintiffs' bank account, but he was a senior and responsible officer. As such he was entrusted with possession of the signed payment orders to have them taken to the bank and implemented. He took advantage of his possession of them to divert the money and cause the separation between its legal ownership which passed to the payees and its beneficial ownership which remained in the plaintiffs. There is clear authority that there is a receipt of trust property when a company's funds are misapplied by a director and, in my judgment, this is equally the case when a company's funds are misapplied by any person whose fiduciary position gave him control of them or enabled him to misapply them. ...

The tracing claim in equity gives rise to a proprietary remedy which depends on the continued existence of the trust property in the hands of the defendant. Unless he is a bona fide purchaser for value without notice, he must restore the trust property to its rightful owner if he still has it. But even a volunteer who has received trust property cannot be made subject to a personal liability to account for it as a constructive trustee if he has parted with it without having previously acquired some knowledge of the existence of the trust: Re Montagu's Settlement Trusts [1987] Ch 264.

The plaintiffs are entitled to the money in court which rightfully belongs to them. To recover the money which the defendants have paid away the plaintiffs must subject them to a personal liability to account as constructive trustees and prove the requisite degree of knowledge to establish the liability.

Millett J's views on knowing receipt (upheld in the CA)

In Baden, Delvaux and Lecuit v. Societe General pour Favoriser le Developpement du Commerce et de l'industrie en France S.A. [1983] BCLC 325, 403, Peter Gibson J. said:

[Millett J set out the knowledge requirements in that case, and continued]

I respectfully agree. In my judgment, much confusion has been caused by treating this as a single category and by failing to differentiate between a number of different situations. Without attempting an exhaustive classification, it is necessary to distinguish between two main classes of case under this heading.

The first is concerned with the person who receives for his own benefit trust property transferred to him in breach of trust. He is liable as a constructive trustee if he received it with notice, actual or constructive, that it was trust property and that the transfer to him was breach of trust; or if he received it without such notice but subsequently discovered the facts. In either case he is liable to account for the property, in the first case as from the time he received the property, and in the second as from the time he acquired notice.

The second and, in my judgment, distinct class of case is that of the person, usually an agent of the trustees, who receives the trust property lawfully and not for his own benefit but who then either misappropriates it or otherwise deals with it in a manner which is inconsistent with the trust. He is liable to account as a constructive trustee if he received the property knowing it to be such, though he will not necessarily be required in all circumstances to have known the exact terms of the trust. This class of case need not be considered further since the transfer to Baker Oil was not lawful.

In either class of case it is immaterial whether the breach of trust was fraudulent or not. The essential feature of the first class is that the recipient must have received the property for his own use and benefit. This is why neither the paying nor the collecting bank can normally be brought within it. In paying or collecting money for a customer the bank acts only as his agent. It is otherwise, however, if the collecting bank uses the money to reduce or discharge the customer's overdraft. In doing so it receives the money for its own benefit.

This is not a technical or fanciful requirement. It is essential if receipt-based liability is to be properly confined to those cases where the receipt is relevant to the loss. This can be demonstrated by considering the position of Mr. Bowers in the present case. He was a partner in Jackson & Co. but he played no active part in the movement of the funds. He did not deal with the money or give instructions in regard to it. He did not take it for his own benefit. He neither misapplied nor misappropriated it. It would not be just to hold him directly liable merely because Mr. Jackson and Mr. Griffin, who controlled the movement of the money from the moment it reached Baker Oil, chose on this occasion to pass it through his firm's bank account instead of through Euro-Arabian's account as previously.

Mr. Griffin did not receive the money at all, and Mr. Jackson and Mr. Bowers did not receive or apply it for their own use and benefit. In my judgment, none of them can be made liable to account as a constructive trustee on the basis of knowing receipt.

Extract from judgment of Millett J (whose judgment was upheld in the Court of Appeal) in Agip (Africa) - on knowing assistance:

A stranger to the trust will also be liable to account as a constructive trustee if he knowingly assists in the furtherance of a fraudulent and dishonest breach of trust. It is not necessary that the party sought to be made liable as a constructive trustee should have received any part of the trust property, but the breach of trust must have been fraudulent. The basis of the strangers liability is not receipt of trust property but participation in a fraud: Barnes v Addy (1874) 9 Ch App 244, and see the explanation of the distinction between the two categories of the case given by Jacobs P in DPC Estates Pty Ltd v Grey [1974] 1 NSWLR 443.

The authorities at first instance are in some disarray on the question whether constructive notice is sufficient to sustain liability under this head. In the Baden case [1983] BCLC 325, Peter Gibson J accepted a concession by counsel that constructive notice is sufficient and that on this point there is no distinction between cases of ‘knowing receipt' and ‘knowing assistance.' This question was not argued before me but I am unable to agree. In my view the concession was wrong and should not have been made. The basis of liability in the two types of cases is quite different; there is no reason why the degree of knowledge required should be the same, and good reason why it should not. Tracing claims and cases of ‘knowing receipt' are both concerned with rights of priority in relation to property taken by a legal owner for his own benefit; cases of ‘knowing assistance' are concerned with the furtherance of fraud. In Belmont Finance Corporation Ltd v Williams Furniture Lt [1979] Ch 250, the Court of Appeal insisted that to hold a stranger liable for ‘knowing assistance' the breach of trust in question must be a fraudulent and dishonest one. In my judgment it necessarily follows that constructive notice of the fraud is not enough to make him liable. There is no sense in requiring dishonesty on the part of the principal while accepting negligence as sufficient for his assistant. Dishonest furtherance of the dishonest scheme of another is an understandable basis for liability; negligent but honest failure to appreciate that someone else's scheme is dishonest is not.

In Re Montagu's Settlement Trusts [1987] Ch 264, 285, Sir Robert Megarry V-C doubted whether constructive notice is sufficient even in cases of ‘knowing receipt.' Whether the doubt is well founded or not (as to which I express no opinion), ‘knowing assistance' is an a fortiori case.

Knowledge may be provided affirmatively or inferred from circumstances. The various mental states which may be involved were analysed by Peter Gibson J in Baden's case [1983] BCLC 325 as comprising: (i) actual knowledge; (ii) wilfully shutting one's eyes to the obvious; (iii) wilfully and recklessly failing to make such inquiries as an honest and reasonable man would make; (iv) knowledge of circumstances which would indicate the facts to an honest and reasonable man; and (v) knowledge of circumstances which would put an honest and reasonable man on inquiry.

According to Peter Gibson J, a person in category (ii) or (iii) will be taken to have actual knowledge, while a person in categories (iv) or (v) has constructive notice only. I gratefully adopt the classification but would warn against over refinement or a too ready assumption that categories (iv) or (v) are necessarily cases of constructive notice only.

The true distinction is between honesty and dishonesty. It is essentially a jury question. If a man does not draw the obvious inferences or make the obvious inquiries, the question is: why not? If it is because, however foolishly, he did not suspect wrongdoing or, having suspected it, had his suspicions allayed, however unreasonably, that is one thing. But if he did suspect wrongdoing yet failed to make inquiries because `he did not want to know' (category (ii)), or because he regarded it as `none of his business' (category (iii)), that is quite another. Such conduct is dishonest, and those who are guilty of it cannot complain if, for the purpose of civil liability, they are treated as if they had actual knowledge.

In the present case, Mr Bowers did not participate in the furtherance of the fraud and he cannot be held directly liable on this ground. Mr Jackson and Mr Griffin, however, clearly did. Mr Jackson set up the arrangements and employed Mr Griffin to carry them out. The money was under their control from the time it was paid into Baker Oil's account until the time it left Jackson & Co.'s clients' account in the Isle of Man Bank. One or other of them gave the actual instructions to the banks which disposed of the money. They plainly assisted in the fraud. The sole remaining question is: did they do so with the requisite degree of knowledge?

Notes on the knowing assistance claim in Agip (Africa):

(i) In addition to the tracing claims, knowing assistance claims were successfully made against various defendants: Jackson and Bowers were partners in the firm of chartered accountants (Jackson & Co.), and Griffin was an employee. Jackson and Griffin were also the only shareholders of Baker Oil. Jackson and Griffin were also directors of Euro-Arabian Jewellery Ltd., which owned Kinz, a French company which eventually received most of the money, and of which Fox L.J. observed that "There is no evidence that Euro-Arabian carried on any genuine business activity." Euro-Arabian had also been used as a "cut-off" company in the previous frauds against Agip.

Successful claims were made against Jackson and Griffin but not Bowers, who though a partner in Jackson & Co., had no relevant knowledge of the transactions. However, Bowers was liable for his employee and co-partner.

(ii) But note the nature of the dishonesty in Agip. It does not seem to be necessary for the defendant to know the exact nature of the fraud. In Agip Africa the action succeeded against the money launderers' accountants, who may have believed only that they were participating in an illegal currency transaction, contrary to the exchange control laws of Tunisia. However, in Bank Tejarat, it was not enough simply for the defendants to be aware that CAK (who committed the fraud) was an offshore company, of the type often used for fraudulent purposes, since anonymity is also a reason for operating through an off-shore company. Note that in Bank Tejarat, both sides had accepted that knowledge within the first three Baden heads was required to establish liability for knowing receipt, and all the discussion in the case revolved around head (iii). However, Tuckey J. also observed that:

"At the end of the day it is a jury question: Was there dishonesty or want of probity?"

10.2. Some important distinction

10.2.1. Introduction

Before we embark upon a study of this area of law, there are two important distinctions that need to be grasped, that between personal and proprietary claims, and that between common law and equity.

The next page returns you to the important distinctions menu page, enabling you to choose which distinction to study.


10.2.2. Personal & Proprietary Claim

Before we embark upon a study of this area of law, there are two important distinctions that need to be grasped, that between personal and proprietary claims, and that between common law and equity.

It is fairly fundamental to distinguish between proprietary claims, which identify the plaintiff's property in the defendant's hands, and personal claims, which depend on the defendant's receipt, or other dealings with the plaintiff's property. This question asks you to identify some of the characteristics of each claim.


However, the only judgment that is consistent with both Agip (Africa) and FC Jones is that of Bankes LJ, who clearly took the view that Banque Belge retained property throughout in the unspent money (which is all they claimed), because it had not passed as currency.

The claim in FC Jones was (at least in Millett and Beldam LJJ's views) a proprietary common law claim, because property in the money never passed to Anne Jones, and the plaintiffs were able to claim its increase in value when it was invested.

Nourse LJ arrived at the same conclusion by the money had and received route, but it is difficult to justify his reasoning, since Anne Jones had received far less than was being claimed.

It may be objected that the claim was really personal because all Anne Jones ever had was a personal (debt) action to money, legal title to which was held by commodity brokers, and then a bank. But the plaintiff's claim was nonetheless a proprietary claim to Anne Jones' debt action, albeit that the debt action itself was personal. It would not have been affected if Anne Jones had been declared bankrupt (although it would have been rendered worthless by the bankruptcy of the commodity brokers or bank).

A knowing receipt claim is complete either on receipt by the defendant of the trust property, or on his or her later acquiring the necessary knowledge (see further the discussion in Agip (Africa)). The liability remains whatever happens to the property subsequently, so in this sense it is a personal liability.

However, a knowing receiver becomes constructive trustee of the property knowingly received. One effect of this is that if the property increases in value in the receiver’s hands, the beneficiary can claim the increase in value. If the property is sold by the receiver, the beneficiary can trace the proceeds, should he or she so elect. All the options that the plaintiff had in A-G for Hong Kong v. Reid will also be open to the beneficiary in a KR case.

It is also because of the imposition of the constructive trust that knowing receipt differs from tracing, in that the receiver remains liable even after having parted with the property (indeed, parting with it will constitute a breach of trust).

This must be a personal action, because there is no need for the defendant ever to receive any property. Knowing assistance is accessory-based, rather than receipt-based liability.

A knowing assister cannot therefore be a constructive trustee, legal title to trust property not having passed to him or her, but the knowing assister treated as if he or she is. Thus the answer "both" might just be appropriate.

10.2.3. Common Law & Equity

Common law and equity operate on principles that are very different, and the purpose of these questions is to examine those differences. On the next page we start with some very general questions about the way in which the two jurisdictions operate.

This then is about the differences in principle between common law and equitable claims - here you are being asked to categorise a number of attributes. But there is nothing really special about this area - the distinction between common law and equity here is much the same as elsewhere in the law.

Note that some of these attributes may apply both to common law and equitable claims.

When answering these questions think generally - we are not for the time being looking at any particular claim.

Generally speaking, common law title is good against the world, whereas equitable title is defeated by the bona fide purchaser for value of the legal title without notice. That is one of the most fundamental differences between the two systems of title.

Liability at common law is in principle strict; for example, it is possible to be liable in conversion without knowing the identity of the owner at common law. Liability for money had and received is also strict in principle (there is no evidence that the Playboy Club was aware in Lipkin Gorman of the source of Cass's money), although it is said to depend on the defendant being unjustly enriched, and is therefore defeated by his or her giving valuable consideration for the money.

Even if it was not clear before, however, it is now clear that equitable jurisdiction depends on conscience; this was central to the decision in Westdeutsche v Islington BC.

The common law seems to require a clear identification of the property owned; this is one reason why it is not generally possible to trace at common law into mixed accounts. Equity however is more metaphysical, and makes use of the imposition of a charge. This makes it unnecessary to identify the precise property claimed; a charge can be imposed on all the money in the account, and this allows equity to trace into mixed accounts.

Because common law liability is strict, and is possibly based on unjust enrichment principles, it would arguably be unjust if no defence were available. The House of Lords in Lipkin Gorman held, as part of the ratio, that a change of position defence applied to a money had and received claim, the result being that the club were not liable for the winnings they paid out to Cass. The reasoning in Lipkin Gorman would appear, in principle, to apply to any unjust enrichment claim, where liability is strict.

The position in equity is less clear. Where liability is effectively strict, as for example with the donees in the Diplock personal claim, it seems reasonable for the same defence to be available as at common law. It is more difficult to justify the change of position defence where liability is fault-based, however, and since the imposition of a trust depends on the conscience of the trustee being affected, the rationale for allowing a change of position defence there must surely be weaker.

10.3 Tracing

Tracing at common law involves the identification of the plaintiff's property. If the plaintiff can identify his or her property in the hands of the defendant, the plaintiff may have various remedies in consequence, such as conversion. We begin with two simple questions on the identification of property.

However, in an essentially similar situation in Banque Belge (where Mlle Spanogue had spent most of the money given to her by Hambrouck), Bankes LJ (whose judgment is surely the only one of the three which is consistent with both Agip (Africa) and the FC Jones case?) held that property in the remaining money had never passed to her, because it had not been passed as currency, and that the plaintiffs therefore had a proprietary claim to the money that she retained.

10.3.1. Tracing at Common Law

10.3.1.1. Proprietary Tracing at Common Law

One of the main differences between legal and equitable title is that legal title is, in principle, enforceable against anybody in the world, and it might therefore be thought that if the plaintiff can establish that the defendant has his property, he should be able to recover it. However, whereas the common law developed an action for the recovery of a specific piece of land, it never extended this 'real' remedy to allow a plaintiff to recover a specific chattel. Although the common law acknowledged the plaintiff's ownership of the chattel, his action was a personal action in detinue, the remedy for which was damages. The defendant could therefore choose whether to return the plaintiff's chattel or pay him its full value as damages.

The Common Law Procedure Act 1854, s. 78, gave the court a discretion to order specific delivery of the chattel, and this power is retained by s.3 of the Torts (Interference with Goods) Act 1977. But there is no absolute right to the return of the chattel. The importance of the proprietary claim lies rather in the fact that it entitles the plaintiff to the full value of the chattel, in preference to the claims of the defendant's other creditors.

The common law also concluded that the plaintiff's right should continue even if the defendant has exchanged the plaintiff's property for some other property, or sold it and purchased other property with the proceeds. So long as it was possible to 'trace' his original property - that is, to show that what the defendant now holds can be regarded as simply a substitute - his claim is unaffected. In Re Diplock's Estate [1948] Ch 465, Lord Greene MR explained the doctrine in terms of the plaintiff ratifying the wrongful sale of purchase, to enable the legal owner to claim the substitute.

In Taylor v Plumer (1815) 3 M & S 562, Sir Thomas Plumer had handed over money to a stockbroker with instructions to purchase exchequer bonds, but the stockbroker instead purchased American investments and bullion, and attempted to abscond with these. He was caught before he could leave England, and the investments and bullion were seized by Plumer. The assignees of the stockbroker then brought an action to recover them from Sir Thomas, but failed. The investments and bullion were held to be Sir Thomas' own property. In effect, Plumer's money was traced into the investments and bullion for, according to Lord Ellenborough at p. 575,

"the product of or substitute for the original thing still follows the nature of the thing itself, as long as it can be ascertained as such".

As Millett LJ observed in Trustees of the Property of F.C. Jones & Sons v Anne Jones [1996] 3 WLR 703, Taylor v Plumer was actually decided on equitable principles (see also Lionel Smith [1995] LMCLQ 240), but claims to substitute assets were upheld in Banque Belge v Hambrouck [1921] 1 KB 321 and Lipkin Gorman v Karpnale Ltd [l991] 2 AC 548 (below), and indeed, in Trustees of the Property of F.C. Jones & Sons v Anne Jones itself. So it is clear that a substitution doctrine is recognised by the common law.

Two other points need to be made about the substitution doctrine. First, if it depends on ratification, the plaintiff is equally entitled not to ratify the transaction, and instead to claim property the original property. Secondly, where (e.g.) money is paid into a bank account, at any rate where it is unmixed with other money, it is exchanged for a chose in action against the bank. In Diplock, Lord Greene MR thought that there was no reason why the common law would not allow the substitution of the money into the chose in action:

"If it is possible to identify a principal's money with an asset purchased exclusively by means of it, we see no reason for drawing a distinction between a chose in action such as a banker's debt to his customer and any other asset. If the principal can ratify the acquisition of the one, we see no reason for supposing that he cannot ratify the acquisition of the other."

This passage was approved by Millett J in Agip (Africa) Ltd v Jackson [1990] 1 Ch 265.

The principle also works the other way round. If I have a chose in action against a bank, and write a cheque, drawing out cash, the common law also allows substitution of the chose in action into the money.

Although Millett J approved the Diplock passage, he thought that the principal was limited to following an asset into a changed form in the same hands, rather than following the same asset from one recipient to another. Millett J did not think that it necessarily followed that the common law allowed free tracing of choses in action from one person to another - it can do so, but only where the transfer is made by a tangible object. For example, the common law will trace choses in action from one person to another where they are transferred by a cheque, but not where the transfer is made electronically, as in Agip Africa itself, or in Bank Tejarat.

10.3.1.2. Money had and Received


A proprietary tracing claim depends upon the plaintiff being able to trace his actual property, or in Taylor v Plumer its product of or substitute, into the defendant's hands. In the case of currency, title will pass to the recipient, but the law imposes upon the recipient of (e.g.) money stolen from the plaintiff an obligation to reimburse the plaintiff with an equivalent sum.

From the House of Lords decision in Lipkin Gorman v Karpnale Ltd [1991] 2 AC 548, and in particular the speech of Lord Goff, the basis of the action appears to be that the defendant has been unjustly enriched at the expense of the plaintiff. The claim is established merely by showing that the defendant has received the plaintiff's property. The defendant's knowledge (or lack of it) are irrelevant. Nor is the action defeated by the recipient later disposing of the money, or mixing it with his own money, since the claim is a personal and not a proprietary claim. In other words, there is no need for the plaintiff to identify his money in the defendant's hands - merely to establish that the defendant received the money. In Lipkin Gorman itself, all of the money received had been mixed after receipt, and some paid out, but that did not prevent the plaintiffs from suing for money had and received.

It is defeated, however, if the recipient has not been unjustly enriched. Innocently to receive stolen money in return for full consideration is not to be unjustly enriched at all, so that for example, a shop which has innocently taken stolen money to pay for its goods is not liable to the victim of the theft.

Consideration recognised by the common law must be provided, however. In Lipkin Gorman v Karpnale Ltd [1991] 2 AC 548, the owners of the club were unable to claim that they had provided consideration for the money, since contracts by way of gaming and wagering were rendered null and void by the Gaming Act 1845, s. 18. Gambling contracts were therefore not contracts for consideration.

The case also establishes a change of position defence to the restitutionary common law claim, where the defendant has altered his position in good faith, so that it would be inequitable to require him to make restitution or restitution in full. This defence was used in Lipkin Gorman to limit the plaintiff's right to recover to the net winnings taken by the casino, rather than all the money gambled by the thief. Paying out money as winnings constituted a change of position by the club.

The change of position defence was also applied by Tuckey J in Bank Tejarat v Hong Kong and Shanghai Banking Corporation (Ci) Ltd and Hong Kong and Shanghai Bank Trustee (Jersey) Ltd [1995] 1 Lloyd's Rep 239.

It is not yet clear whether the change of position defence applies only to money had and received, or to any of the other restitutionary claims considered in this workbook.

It is also not clear what happens when money is paid to a second recipient, but Millett argues (convincingly, I would suggest) in (1991) 107 LQR 71, at p. 79, that since the action is personal and not proprietary, what happens to the money after it has been received by the first recipient is irrelevant. It becomes the property of the first recipient, and any subsequent recipient will be receiving the first recipient's money, rather than that of the plaintiff. It ought also to follow that the first recipient will only be liable to reimburse the value of what was received, and if he makes a favourable investment with it, he should be able to keep the benefit of that. Authority to the contrary can be found in Nourse LJ’s judgment in Trustee of the Property of F.C. Jones and Sons (a firm) v Anne Jones [1996] 3 WLR 703, [1996] 4 All ER 721, but this looks incorrect in principle, and it is in any case weak authority as Millett and Beldam LJJ reasoned on the basis of a proprietary tracing claim.


10.3.1.3. Changed of Position Defence

Common law liability (unlike equity in general) is in principle strict. It is however a defence to a money had and received claim to provide consideration, because then the recipient is not unjustly enriched. However, it must be consideration recognised by the common law - it was not in Lipkin Gorman.

Lipkin Gorman also established a partial defence of change of position, partial because it only applies to the money affected by the change in position. In the case itself, the club had changed its position by paying some money back to Cass as winnings, and this provided it with a defence regarding this money.

A change of position defence was also successfully argued in Bank Tejarat, where the defendant bank (even on the assumption, which was not established, that it had received the plaintiffs' money at common law), had paid it out to a third party in reliance upon an apparently lawful instruction.

10.3.2. Tracing at Equity

10.3.2.1. Comparison with Common Law

This part is about proprietary equitable tracing. The personal claim in Re Diplock is dealt with separately, under the heading of personal equitable claims.

The next page asks you questions about Agip (Africa) v Jackson, where an equitable tracing claim succeeded but a common law claim failed, and it is therefore possible to compare the requirements for both.

We then consider other fundamental advantages of equitable tracing over its common law counterpart, for example where the money is mixed (beginning on page 6).

Tracing in equity is possible into mixed bank accounts. It was possible to trace in equity in Agip (Africa) v. Jackson, although it was not possible at common law. Note that the common law claim in Agip, had it succeeded, would have been a personal claim, complete on receipt, whereas the equitable tracing claim was proprietary in nature.

The common law claim failed, because it was impossible at common law to trace the money in the recipient's hands (Baker Oil) as the plaintiff's money.

There were two possible routes that the money might be said to have taken (see especially the diagrammatic representation of Agip Africa), but the common law could follow neither route.

One route would have been to trace the money through the New York clearing banks, but this was not possible because it had become mixed with other money, and there was the additional problem, alluded to by Fox LJ, that Lloyds had paid the money out to Baker Oil before being reimbursed via the New York clearing banks.

The other route would have been to trace via the telex from Banque du Sud to Lloyds Bank in London - surely this would have transferred a cause of action to Lloyds to be reimbursed, at any rate once they had relied on the telex? But the common law will only trace physical objects from one person to another - all that passed between the banks was a stream of electrons, which could not be traced.


Trustee of the Property of FC Jones and Sons (a Firm) v Jones [1996] CA

Facts
A supplier of F.C. Jones & Sons obtained judgment against the firm. The judgment was not satisfied and a bankruptcy notice was issued. The partners, Messrs. F.C. Jones, F.W.J. Jones and A.C. Jones, failed to comply with the notice, and thereby committed an act of bankruptcy. Between the act of bankruptcy and the adjudication, Mrs. Anne Jones, the wife of Mr. F.W.J. Jones, opened an account with a firm of commodity brokers in order to deal on the London Potato Futures Market, and paid into it three cheques totalling £11,700, drawn on the firm's partners' account.

Mrs Jones' dealings in potato futures proved to be highly profitable. She received two cheques totalling £50,760 from the commodity brokers and paid them into a call deposit account (at Raphaels), in which there was remaining a balance of £49,860. This money was claimed by the trustee in bankruptcy, on the grounds that the legal title was vested in him, and had been since the time of the act of bankruptcy.

Decision
The trustee in bankruptcy was entitled to the entirety of the £49,860 remaining the call deposit account, and hence the profit element. In Millett LJ's view, this was a proprietary claim, none of the money having been mixed with other money, and no property having passed to Mrs Jones. He thought that in contrast, a money had and received action ought, in principle, to be limited to the amount of the money received, but that the trustee had made a proprietary rather than a personal claim.

Nourse L.J. agreed with Millett L.J., but also (apparently) took the view that the same result could be reached on the basis of a money had and received claim (surely this cannot possibly be correct).

It was necessary to trace the money at common law, because Mrs. Jones did not receive the money in a fiduciary capacity, and did not become a constructive trustee (see further below for the fiduciary requirement for equitable tracing claims).


Re Hallett's Estate, Knatchbull v Hallett (1880) Court of Appeal

Facts
Hallett, a solicitor, was a trustee of his own marriage settlement. He had paid some of the money from that trust into his own bank account, into which he also paid money which had been entrusted to him for investment by a client. He made various payments into and out of the account, which at his death contained sufficient funds to meet the claims of the trust and his client, but not those of his personal creditors as well.

Held
The Court of Appeal held that both the trust and the client were entitled to a charge in priority to the general creditors, and that the various payments out of the account must be treated as payments of Hallett's own money.


Note
The principle is that where an act can be done rightly, the trustee is not allowed to say that he did it wrongfully. Hallett was not entitled to use the trust money for his personal benefit, so it was assumed that he had spent his own money, rather than the trust funds.

The principle does not restrict the beneficiaries to a claim on money in the bank account, however: they have first claim on any identifiable property that can be traced back to the trust: see Oatway, but also the limitations placed on that case in Tilley.

One problem with this line of cases is in deciding for exactly what proposition they stand. The narrow principle, that where an act can be done rightly, the trustee is not allowed to say that he did it wrongfully, would allow a trustee to mix trust money with his own, draw money out of the mixed fund, and place the money drawn out into an investment which increased in value. As long as the trustee always left in the account sufficient to reimburse the trust, arguably he has done nothing wrong, in which case the beneficiaries ought not to be able to claim the investment. If the amount in the mixed fund had, even by the smallest amount, dropped below the amount of the trust money, however, the trustee has behaved wrongfully, and the beneficiaries could claim the entire investment.

Another possibility that the trustee was not allowed to mix the money in the first place, and that as long as the fund remains mixed, the beneficiaries can always choose which part of the fund to claim. They will therefore always be able to claim the investment, in that situation.

Sinclair v Brougham [1914] AC 398 (HL)

Facts and decision: A building society set up a banking business which was held (in the case itself) to be ultra vires the building society. The society became insolvent, and the question arose how to divide up assets. By the time of the action, the only live issue was between some of the shareholders and the depositors in the bank, the position of other shareholders and the trade creditors having been settled by agreement.

As far as is possible to tell from the figures in the report, about £11 million had been invested by the bank depositors, and about £1 million by the building society shareholders. Something like £5 million was left, legal title to which was of course with the shareholders of the society.

Because the banking business was ultra vires the society, the depositors had no action in contract for the money deposited, but in the lower courts they sued for money had and received. If they had won this personal action, they would have taken in priority to the building society shareholders, who would have got nothing. The money had and received action failed, however, this aspect of the lower courts’ decisions being upheld in the House of Lords, on the grounds that it was based on implied contract, and that it would not be proper to allow an implied contract action where the express contract was void. The House therefore refused to grant a restitutionary claim based on an implied contract.

Had the matter rested there, the result would have been extremely undesirable, since if the depositors had no action, the shareholders would have been entitled to the entirety of the £5 million. Thus, not only would they have recovered all their money (which amounted to about £1 million), but they would also have received a substantial windfall. Clearly in the absence of any action by the depositors, therefore, the shareholders would have been unjustly enriched, at the depositors’ expense.

In the House of Lords the possibility of tracing in equity was contemplated for the first time, and indeed the depositors succeeded in tracing their money in equity. The House of Lords held that because the depositors could trace in equity into the remaining fund, the depositors and members of the society ranked pro rata according to their respective payments to the society (i.e., that the money should be distributed between shareholders and depositors pari passu), a solution which was probably the fairest that could be achieved.

Reasoning in Sinclair v Brougham

To achieve the fair result required (see facts and decision) creative reasoning on the part of their Lordships, the case producing three different and novel lines of reasoning, and no clear ratio. The depositors had to establish that they were entitled to the money in equity, but if they could do that, the problem was the rule in Re Hallett’s Estate, the effect of which would have entitled the depositors to take to the exclusion of the shareholders (the reasoning being that the shareholders having mixed depositors’ money with their own, must have been regarded as spending their own money first). The depositors successfully argued a resulting trust, on the grounds that although they had parted with the legal title to the money deposited, they should be presumed to retain equitable title, given that the banking business was void ab initio.

The House of Lords clearly wanted to, and did, arrive at a pari passu solution, but the methods of avoiding the consequences of Re Hallett’s Estate have never been easy to support, and this really does appear to be a case where the House strove to find the just solution.

Viscount Haldane L.C. (with whom Lord Atkinson agreed) avoided the consequences of Hallett by holding that although the shareholders held the depositors’ money on resulting trust, it was not of an active character. It was not entirely clear what this meant, but presumably he regarded the shareholders as not being fiduciaries, so as to attract the rule in Hallett’s Estate. He distinguished Hallett because (in his view) there was no breach of fiduciary duty by society, since they had consent of depositors: ‘the society should be entitled to deal with [the depositors'] money freely as its own’.

Lord Parker took an entirely different line, that the depositors' money and shareholders' money had been received not by the society itself, but by the directors of the society, as fiduciaries. Because there was therefore a fiduciary relationship, an equitable tracing claim was possible, but there were no Hallett problems because the directors, rather than the shareholders, were the fiduciaries. Thus there was no mixing of any trust money with fiduciary money. The trust was (on this analysis) similar to the Quistclose trust, the directors taking the money specifically to make valid deposits of it (which unbeknown to everybody were of course impossible, leading to the failure of the primary trust). Lord Parker’s view was also adopted in Re Diplock, where the Court of Appeal took the view that Sinclair v Brougham was authority for the proposition that an initial fiduciary relationship was required for tracing in equity (a proposition which still appears to be accepted as valid).

The views of both Lords Dunedin and Sumner appear to have been based on a broad jurisdiction to do justice. Lord Dunedin used a broad equity of restitution, or super-eminent equity. Lord Sumner took a broad brush approach to achieve justice in administering the assets of the insolvent society.

There are thus three entirely different strands of reasoning in Sinclair v Brougham, and in Westdeutsche Lord Browne-Wilkinson commented that it was very difficult to ascertain the ratio.

The bank in Westdeutsche argued that the case was authority for the automatic resulting trust reasoning that they were arguing; although legal title to the money in Sinclair had passed to the shareholders, the depositors never intended (given that the banking business was ultra vires) equitable title to pass, and therefore retained it. Thus, even though (as in Westdeutsche) neither the transferors nor the recipients were aware that the transactions were ultra vires, the recipients held the money on resulting trust for the transferors.

Lord Browne-Wilkinson's view of Sinclair v Brougham

Lord Browne-Wilkinson commented on the particular views advanced in the earlier case. Of Lord Haldane’s view, a reasonable summary is that he did not believe that the resulting trust of a non-active character could exist. Indeed, the whole tenor of the majority view in Westdeutsche is that resulting trusts have full proprietary and fiduciary consequences. Lord Browne-Wilkinson also took the view that the categories of resulting trust are exhaustive, and that Lord Haldane’s suggested resulting trust fell into neither category. He also observed that the unconventional ‘inactive’ resulting trust would raise all the problems of the reductio ad absurdum (but note that the reductio ad absurdum works only if Hallett’s Estate applies, whereas of course Lord Haldane was concerned to ensure that it did not). Lord Haldane’s view would also, in the opinion of Lord Browne-Wilkinson, be inconvenient for all trade creditors, since all money deposited in this way would be on trust, and hence not company money - hence the depositors would always take priority over trade creditors. In Sinclair v Brougham Lord Haldane had addressed this issue, but did not resolve it, since the position of trade creditors had been settled before the case reached the House of Lords.

Of Lord Parker’s view, Lord Browne-Wilkinson noted that no other member of the House used the same reasoning. He also thought that receipt by directors was an artificial analysis, since the society itself had power to receive (if not to repay) the depositors' money. There was also the same problem with trade creditors as before. Lord Parker was aware of this, but like Lord Haldane preferred to leave it to be dealt with in a future case where the matter was raised. Of the other views expressed in Sinclair, Lord Browne-Wilkinson took the view that they were not of general application. In conclusion, he took the view that the earlier case was wrong on the tracing issue, and that the depositors ought to have had no equitable title to the money deposited.

Lord Browne-Wilkinson was of the view, however, that the personal action in Sinclair v Brougham should have succeeded. He rejected the view that a money had and received claim is based on an implied contract, in which case the argument against using an implied contract to avoid the consequences of the express contract being ultra vires and void cannot stand up. He thought that the personal claim in Sinclair should have succeeded, with the depositors ranking pari passu with unsecured creditors, but taking priority over the shareholders, a result, be it noted, which would probably be regarded by most people as less fair than the result actually reached in Sinclair.

The personal action was not really an issue in Westdeutsche, at any rate in the House of Lords, since the local authority did not resist the bank’s personal claim, but Lord Browne-Wilkinson cited Fibrosa Spolka Akcyjna v Fairbairn Lawson Combe Barbour Ltd [1943] AC 32, where a money had and received claim succeeded for a total failure of consideration, where advance payment had been made under a contract later frustrated (and hence rendered void) by the outbreak of World War II. He also cited Lipkin Gorman v Karpnale [1991] 2 AC 548, [1991] 3 WLR 10 (although in that case the action was not brought by one of the contracting parties).

The personal action is not directly relevant to this workbook, but in Guinness v Saunders [1990] 2 AC 663 the House of Lords (or at least Lord Templeman) held that quantum meruit was based on implied contract, and rejected Saunders’ claim on arguments very similar to those that had succeeded in Sinclair v Brougham. Different reasoning was accepted by Lord Goff, however, and also elsewhere by Lord Templeman. Burrows (in his introductory book on restitution) disapproves of Lord Templeman’s reasoning because it is based on an outdated implied contract view, preferring instead an essentially public policy based conflict of interest argument - see p. 308.

Since he took the view that Sinclair v Brougham was wrong both in allowing the tracing claim, and in its refusal to allow the personal claim, and that it was difficult to ascertain precisely what the ratio of the case was, Lord Browne-Wilkinson concluded that the case should be overruled. It is interesting that in Sinclair v Brougham the House of Lords appears to have construed the law creatively in order to reach a solution which most people would probably think fair, whereas Lord Browne-Wilkinson's preferred outcome in Sinclair would have given the shareholders nothing. It is also interesting to observe that the majority of the House of Lords in Westdeutsche most certainly did not strive to reach a ‘fair’ result in the case itself. Obviously, having overruled the case, Lord Browne-Wilkinson did not regard Sinclair v Brougham as a useful authority for the bank.

We see, then, two important advantages of equitable tracing over its common law counterpart; first, identification of the money is easier, and secondly, it is possible to trace into mixed accounts in equity, but not at common law.

The ability to trace into mixed accounts brings with it its own problems, however. Also, there is one significant disadvantage of equitable over common law tracing (the need to establish a fiduciary relationship before tracing in equity can begin). The next page returns you to the equitable tracing menu, which allows you to examine these matters, and also to consider defences to an equitable tracing action.


10.3.2.2. Competing Claims into Mixed Accounts

This part of the workbook is about how equitable tracing actually works into mixed funds, particularly where (for example) there is not enough money left in the fund to satisfy all claims. It is assumed that all the equities are equal (to distinguish the situation, for example, where a trustee or other fiduciary mixes trust money with his or her own).

The next few pages enable comparisons to be drawn between the main methods of distribution, Clayton's case, pari passu and the North American Rolling Charge.

Clayton's case (distribution)

Clayton's case, which was developed in the context of running bank accounts, apportions each payment out to the earliest payment into the account.

This first-in first-out rule operates rather like a bus queue, attributing successive payments out of an account to the earliest payment in. The effect of this is that if money is dissipated from the account, Clayton’s case benefits later payments in, whereas if money from the account is committed to an investment which increases in value, the rule benefits earlier payments in. In both cases, a great deal can turn capriciously on the chance order of payments.


Pari passu

Distribution pari passu apportions in proportion to the contribution each contributor has made.

North American Rolling Charge

The North American Rolling Charge was described by Woolf L.J. in Barlow Clowes as follows:

"This solution involves treating credits to a bank account made at different times and from different sources as a blend or cocktail with the result that when a withdrawal is made from the account it is treated as a withdrawal in the same proportions as the different interests in the account (here of the investors) bear to each other at the moment before the withdrawal is made."

Effectively, each withdrawal is shared pari passu by all contributors to the account, the remaining balances then being re calculated.

A major advantage of the North American Rolling Charge over pari passu distribution is that later investors are not affected by past withdrawals from the account. In other respects, however, the timings of payments in is irrelevant, so the more capricious features of Clayton's case are also avoided.

There is no doubt that pari passu is sometimes easiest. It is necessary to know the total input into the mixed fund (at least since it was last overdrawn), and how much is now remaining, but no other details of the account need to be known. In cases such as Barlow Clowes, and Sinclair v Brougham, where this is known, but where the number of transactions is vast, pari passu is easier than Clayton's case, and certainly easier than the North American Rolling Charge.

However, where the account is dissipated, such as in the example, it is only necessary to consider the latest payments in under Clayton's case. In the example, Paul's position need not be considered again, however many other payments into and out of the account are made. There is no need to know the total payments. For long-term running accounts, therefore, Clayton's case is easier to calculate than pari passu.

Under Clayton's case, Paul and Michael are treated differently, although there is no obvious basis for distinguishing between them.

Contrast the North American Rolling Charge, where they are treated in the same way.

It is difficult to justify Clayton's case on the basis of fairness, although it can sometimes be justified on the grounds of convenience.

It should be obvious from the above discussion that:

1. Where all payments in are simultaneous, pari passu is the only sensible distribution method.

2. Clayton's case will usually be easiest to operate in any other case, since at least where the fund is dissipated, it will cut out the earliest payments in entirely from consideration.

3. Pari passu may however be easiest to operate in a case like Barlow Clowes, where the total investment is known, as is the amount remaining in the account, but the very large number of transactions would make application of Clayton's case difficult.

4. Where the fund is dissipated, Clayton's case favours later investments, pari passu earlier; where an investment is purchased the opposite is normally true. In each case, the North American Rolling Charge usually arrives at an intermediate position.

5. Although pari passu is often thought to be fairer than Clayton's case, it allows later investors to benefit from investments, or to be punished for withdrawals, made before they made any payments in. There is no obvious justice in this, unless the investment was intended to be into a common fund, in which case pari passu is fairest and will normally be adopted (see further Barlow Clowes and Re Hobourn Aero [1946] Ch 46, affirmed on other grounds [1946] Ch 194).

6. The North American Rolling Charge avoids the unfairness of pari passu where a common fund is not intended, while also avoiding the capriciousness of Clayton's case, depending as Clayton's case does on the precise timing of deposits. It is, however, almost always the most difficult, and hence most expensive, method of distribution. It appears not to have found favour in U.K. law.

7. Occasionally, as in El Ajou and El Ajou (No. 2), an entirely different method of apportionment is adopted. It might be possible to justify this on the basis that there were no competing claims here, since the money was being traced into the defendants' hands only for the benefit of establishing a knowing receipt claim against them, but that does not seem entirely satisfactory. In our article in [1998] Denning Law Journal 43, Sarah Lowrie and I argued two other possible justifications for El Ajou apportionment:

(a) Millett J.'s matching of large cheques in with large cheques out may possibly justify the inference that the plaintiff's money was never truly mixed with that of the other fraud victims;

(b) (better) Where fraudsters deliberately conceal the order of transactions in order to hide the trail, but it appears that all their money is the proceeds of that fraud, the law should presume (in the absence of evidence to the contrary) simultaneity of transactions, leading to a pari passu apportionment - this is not inconsistent with the actual result in El Ajou.


10.3.2.3. Fiduciary Mixing Money for His/Her Own

In the last section, it was assumed that all competing claimants were essentially innocent victims; in this section, we look at the position where a trustee has mixed trust money with his or her own - the trustee is not entirely innocent in this situation.

It would seem that the position discussed here (beginning with the question on the next page) can be generalised to where any fiduciary mixes money with which he/she is entrusted with his/her own.

Authorities you may care to consider in this section include:

Re Hallett's Estate
Re Oatway
Re Tilley's WT

10.3.2.4. Need for Initial Fiduciary Relationship

Unlike tracing at common law, tracing in equity requires that at some stage, there must have existed a fiduciary relationship of some sort which was sufficient to give rise to an equitable proprietary right in the plaintiff. The clearest case is that of the relationship of trustee and beneficiary, so that in breach of trust cases there is no problem, but agents and bailees (and others) may also occupy a fiduciary position.

The requirement of a fiduciary relationship for tracing in equity is not easy to justify in principle, because (it is argued) it means that a mere equitable owner may have a better action than someone who is both legal and equitable owner of property (since there will always be a fiduciary relationship in the former case, with the trustee). Thus a beneficiary can always trace in equity - someone who is both legal and equitable owner (assuming that this is possible) can only do so if he can find an additional fiduciary relationship.

The requirement appears to have arisen by historical accident. The original authority for tracing into mixed funds was Re Hallett's Estate (1880) 13 ChD 696, which involved mixing by a trustee. The principle was extended in Sinclair v Brougham [1914] AC 398, from which (because the speeches of their Lordships differ substantially) it has always been difficult to extract a clear ratio, and indeed the case has recently been overruled in Westdeutsche Landesbank Girozentrale v Islington London Borough Council [1996] AC 669. However, as the case was interpreted in Re Diplock's Estate, the mixing was done by a fiduciary, and the case was interpreted as authority for the requirement of an initial fiduciary relationship.

In Re Diplock's Estate, the plaintiffs also succeeded on a personal claim, so it might be thought arguable that remarks on the proprietary tracing claim were obiter, except that the proprietary remedy was necessary for the interest claim. Re Diplock was accepted by Millett J in Agip (Africa) as Court of Appeal authority for the requirement, and it has in any case been reiterated by the Privy Council in Re Goldcorp Exchange [1995] 1 AC 74, by the Court of Appeal in Trustee of the Property of F.C. Jones and Sons (a Firm) v Jones [1996] 3 WLR 703, [1996] 4 All ER 721, and by the House of Lords in Westdeutsche v Islington BC [1996] AC 669, so the requirement appears to be entrenched. In Westdeutsche, Lord Browne-Wilkinson doubted the very concept of someone being both legal and equitable owner, on the ground that the equitable ownership would have no existence in the absence of separation of legal and equitable titles (for example, on the creation of a trust). Since he also appears to take the view that if there is a trust, there will inevitably be a fiduciary relationship, this may also justify the Diplock conclusion in principle, since it will be difficult to conceive of an equitable title existing in the absence of a fiduciary relationship.

(Note that the example he gives, where legal title is transferred to someone who is not a bona fide purchaser for value without notice, and where there is therefore separation of legal and equitable title but not necessarily a trust, does not negate this proposition, since it depends on the initial creation of a trust, albeit that it is not between the parties to the action. Moreover, the example depends on equitable tracing being possible, but this is not a problem either, because there is no need for the fiduciary relationship to exist between the parties to the action, as long as it originally existed; this follows from Re Diplock [1948] Ch 465, above, where an action was successful against a volunteer.)

In Chase Manhatten Bank NA v Israel-British Bank (London) Ltd [1981] Ch 105, the plaintiff mistakenly paid a sum of money twice to the defendant, and on the defendant's liquidation, was able to trace the money mistakenly paid into the hands of the liquidators. There was no fiduciary relationship initially between plaintiff and defendant, but Goulding J held it sufficient that a fiduciary relationship arose as a result of the mistaken payment. Goulding J’s reasoning was heavily criticised in Westdeutsche, but the proposition that the fiduciary relationship need not have arisen initially appears to be good law. In Agip (Africa), Millett J observed that:

"In [Chase Manhattan] however, equity's assistance was not needed in order to trace the plaintiff's money into the hands of the defendant; it was needed in order to ascertain whether it had any of the plaintiff's money left. The case cannot, therefore, be used to circumvent the requirement that there should be an initial fiduciary relationship in order to start the tracing process in equity."

The general proposition, then, is that it is necessary for the fiduciary relationship to exist before the tracing process starts. In Agip itself, therefore, it was necessary to show a fiduciary relationship before the money got into the New York clearing system. Unfortunately, before Goulding J’s reasoning in Chase Manhattan was criticised into oblivion in Westdeutsche, it led Tuckey J into error in Bank Tejarat v Hong Kong and Shanghai Banking Corporation (Ci) Ltd and Hong Kong and Shanghai Bank Trustee (Jersey) Ltd [1995] 1 Lloyd's Rep 239. He observed that Millett J's analysis of Chase Manhattan was wrong, since the money became mixed (in another bank account) before it reached the defendant. Tuckey J therefore concluded that where a payment is made under a mistake of fact (in Bank Tejarat itself the bank had been deceived into thinking that the shipping documents tendered to it represented goods that had been shipped, whereas in fact they were simply forgeries), a fiduciary relationship arises as soon as the money has been paid out; it is not delayed until it has been actually received by the recipient. In the light of Westdeutsche, this must now clearly be regarded as wrong; in any case, in Westdeutsche, Lord Browne-Wilkinson observed that Goulding J had been asked to assume that the money was traceable into the hands of the defendant, the only issue being whether the plaintiffs had a proprietary claim.

Millett has argued in (1991) 107 LQR 71, at pp. 75-76, that the fiduciary requirement is not particularly problematic in fraud cases, 'since the embezzlement of a company's funds almost inevitably involves a breach of fiduciary on the part of one of the company's employees or agents', as indeed in Agip (Africa) itself. Fraud by a stranger, such as that which occurred in Bank Tejarat, and such as would be typical in maritime frauds, presents greater difficulties in this regard, but if it can be established that the fraudster has induced the victim to convey property to him, then the fraudster may become a constructive trustee on the principles in Bannister v Bannister (see the informal trusts workbook). That would establish the fiduciary relationship for subsequent tracing purposes, but it would not help if, for example, it was necessary to trace through a mixed bank account to establish that the fraudster had received the victim's money in the first place. Victims of theft by a stranger will not normally be able to trace in equity, since the thief will not acquire legal title and therefore cannot become a trustee, whether constructive or otherwise. That is the main limitation of proprietary tracing in equity.

Establishing a fiduciary relationship may also required for knowing receipt, where it is necessary to establish that the recipient received the plaintiff's equitable property: e.g., El Ajou v Dollar Land Holdings plc [1994] 2 All ER 685, and El Ajou v Dollar Land Holdings plc (No.2) [1995] 2 All ER 213. A fiduciary relationship is also necessary for knowing assistance; this is why it was necessary to establish one in Bank Tejarat itself.


10.3.2.5. Defences

It is clear that tracing in equity is only possible where an equitable title can still be established. To be a bona fide purchase for value of the legal estate without notice therefore provides a complete defence, not just to the immediate, but to all subsequent recipients.

Equitable tracing is also a proprietary claim, and is not therefore available against a defendant who no longer has the property, or where the property has been destroyed. If the defendant has the requisite knowledge, he or she may still in those circumstances be liable as a knowing recipient, however.

In Lipkin Gorman a partial defence of change of position was available. It is not entirely clear to what extent, if at all, this applies outside the common law claim for money had and received, but in principle, it is difficult to justify it not applying equally to all these claims, which are essentially restitutionary in nature.


10.4 Personal Equitable Claims

10.4.1. Introduction

Tracing in equity is proprietary in nature (see further the distinction between personal and proprietary claims). In this section we consider the personal equitable claims, that do not depend on the continued retention by the defendant of the plaintiff's property: knowing receipt, knowing assistance, and the personal claim in Re Diplock.

Knowing receipt and knowing assistance compared

It is possible for a stranger to become liable as constructive trustee if he either assists a trustee (or other fiduciary) in breach of trust (or other fiduciary duty), regarding property under his control, or receives trust property with knowledge of breach of trust (or other fiduciary duty). The first type of case is categorised as 'knowing assistance', the second as 'knowing receipt'. A knowing receiver becomes constructive trustee of the property received. Since a knowing assister need never receive trust property, it is probably not correct to describe him as a constructive trustee, but he is liable as if he were.

The next page discusses the knowledge requirements for knowing receipt and knowing assistance.

The question at issue is usually the degree of knowledge required for imposition of a liability for knowing receipt or knowing assistance.

The usual starting point is Baden, Delvaux and Lecuit v Société General pour Favoriser le Développement du Commerce et de l'Industrie en France SA [1983] BCLC 325, where Peter Gibson J suggested five possible categories of knowledge sufficient to establish constructive trusteeship:

"(i) actual knowledge;

"(ii) wilfully shutting one's eye to the obvious;

"(iii) wilfully and recklessly failing to make such inquiries as an honest and reasonable man would make;

"(iv) knowledge of circumstances which would indicate the facts to an honest and reasonable man; and

"(v) knowledge of circumstances which would put an honest and reasonable man on inquiry."

It is clear that categories (ii) to (v) all represent varieties of constructive notice. Categories (i) to (iii) would normally suggest dishonesty, requiring either intention or something akin to criminal law recklessness. The test in categories (iv) and (v) is objective (i.e., akin to negligence), as opposed to the subjective test in (i) to (iii). Nevertheless, it is possible for someone to be dishonest even within (iv) and (v). Yet although many of the cases take as their starting point these five categories, the courts have recently recoiled from using them as the only basis either for establishing liability, or for distinguishing between the two types of liability. It now seems that liability for both knowing receipt and knowing assistance can be founded on the basis of any of the five categories. In the case of knowing assistance, however, there is an additional requirement for dishonesty (or lack of probity). In the case of knowing receipt there is no dishonesty requirement, but constructive knowledge is required, which may be narrower than notice satisfying categories (iv) and (v).

That there is a difference between the knowledge requirements for knowing receipt and knowing assistance can be seen most clearly from the Belmont litigation, where on facts which were effectively identical, a knowing receipt claim succeeded and a knowing assistance claim failed.


10.4.2. Knowing Receipt

There are two main issues in knowing receipt claims. One is the knowledge requirement, and the other is what is meant by receipt. The next page asks you some questions, of a general nature, on the knowledge requirement, and these are followed up with some more detailed questions on the cases. Then we consider what is meant by receipt, particularly in the light of Millett J's view in Agip (Africa) v Jackson.

We need, then, to establish the knowledge requirement for knowing receipt.

Belmont (No. 2) clearly suggests that dishonesty is not required for a knowing receipt claim.

It has often been assumed that something akin to constructive notice in land law is sufficient, but doubt was cast on this by dicta in Re Montagu's ST [1987] Ch 264, where chattels were transferred to the defendant in breach of a trust created by a family settlement, and the defendant sold the chattels. The defendant certainly had constructive notice in the strict land law sense, since his solicitor was aware of the terms of the trust, and therefore the defendant had imputed notice. However, Megarry V-C thought that while constructive notice might be appropriate for a tracing claim, where the actual money or property can still be identified, something more should be required before constructive trusteeship is imposed. He seemed inclined to the view that even for a knowing receipt claim, and against a volunteer at that, only the first three heads of Baden knowledge would suffice.

Megarry V-C's view was unnecessary to the actual decision in the case, since he did not think that the Duke had the requisite knowledge under any of the five Baden heads. At p. 286B he said that 'even if, contrary to my opinion, all of the five Baden types of knowledge are in point, instead of only the first three, I do not think that he had any such knowledge'.

The distinction between constructive notice and the requisite knowledge for knowing receipt has also been criticised as being wrong in principle, for example by Harpum (1987) 50 MLR 217. It might also be argued that if, as Fox LJ thought in Agip (Africa), all five Baden heads suffice for knowing assistance, it would be odd to require a higher standard of knowledge for knowing receipt. However, there is an additional dishonesty requirement for knowing assistance, which may deal with this criticism.

In (1991) 107 LQR 71, Millett at pp. 80 ff, argued that Montagu is wrong in principle, because once property is traced in equity into the defendant's hands, he becomes trustee of it for the plaintiff (a necessary consequence of legal title being vested in the defendant, when equitable title remains in the plaintiff). Disposing of the property is therefore a breach of trust, and while it might deprive the plaintiff of his proprietary remedy, there ought to be a continuing liability for breach of trust. That argues that the knowledge requirement for each should be the same, but the argument breaks down for volunteers, since tracing liability for volunteers is strict, whereas even for volunteers, some knowledge is required for knowing receipt. In any case, the assumption that separation of legal and equitable title necessarily implies the existence of a trust is no longer tenable in the light of Westdeutsche.

Millett also argues for liability to be receipt-based, as at common law, rather than fault-based, subject to a change of position defence, but although the courts have shown some wariness of Montagu, they show no signs of following this route. Indeed, Millett J himself recognised that he was bound by authority in El Ajou v Dollar Land Holdings plc [1993] 3 All ER 717, and that the defendant did not have the requisite knowledge for knowing receipt (he was reversed on the facts in the Court of Appeal [1994] 2 All ER 685).

Furthermore, the courts appear to be adopting a higher knowledge requirement than the land law notice doctrine, but for different reasons. The notice doctrine developed in land transactions on the assumption that there would be a full and careful investigation of title, and the courts appear unwilling to impose constructive trusteeship in commercial transactions without something more akin to constructive knowledge, as opposed to notice. In Eagle Trust plc v SBC Securities Ltd [1992] 4 All ER 488 and Cowan de Groot Properties Ltd v Eagle Trust plc [1992] 4 All ER 700 this was treated to being similar to the first three Baden heads, but it may be an over simplification to assume that that will always be so. Liability for knowing receipt probably requires more than mere possession of the trust property.

In Agip (Africa) Ltd v Jackson [1990] 1 Ch 265, Millett J said of liability for knowing receipt that 'the recipient must have received the property for his own use and benefit'. It followed that a bank was not liable as a knowing receiver merely because money had been deposited in a customer's account. Millett J's decision in Agip (Africa) was upheld by the Court of Appeal [1991] Ch 547, but there was no appeal on the issue of knowing receipt, and there is discussion only of knowing assistance. However, the same view was adopted in Bank Tejarat, where the fraudsters' bankers were held not liable as knowing receivers, although Tejarat's money could be traced to them in equity, and they had sufficient knowledge for knowing receipt, although not for knowing assistance.


10.4.3. Knowing Assistance

We now move on to look at knowing assistance. This is a major difference between knowing assistance and any of the other actions we have considered so far. Of course, if the knowing assister does not receive trust property (as in the case of some of the defendants in Agip Africa), it is difficult to describe him or her as a constructive trustee. Possibly it is more correct to say that a knowing assister is treated as if he or she was a constructive trustee.

It has been clear since at least Belmont (No. 1) that dishonesty, or lack of probity, is required for a knowing assistance claim. In Lipkin Gorman v Karpnale Ltd [1989] 1 WLR 1340 in the Court of Appeal, the bank was unsuccessfully sued for knowing assistance, May LJ taking the view, after approving statements from Belmont (No. 1), that (at p. 1355D):

"In my opinion, therefore, there is at least strong persuasive authority for the proposition that nothing less than knowledge, as defined in one of the first three categories stated by Peter Gibson J in Baden, Delvaux and Lecuit v Société General pour Favoriser le Développement du Commerce et de l'Industrie en France SA [1983] BCLC 325, of an underlying dishonest design is sufficient to make a stranger a constructive trustee of the consequences of that design."

(Note that when the case went to the House of Lords, there was no appeal against the decision regarding the bank, and as against the club the issues were confined to the common law money had and received action.)

A different position was taken by Fox LJ in Agip (Africa) Ltd v Jackson, however. He appeared to accept that dishonesty was a requirement for knowing assistance, but that subject to this requirement, any of the five Baden heads of knowledge would suffice. A similar view had been taken by Millett J at first instance, who suggested caution regarding the five Baden categories:

"I gratefully adopt the [Baden] classification but would warn against over refinement or a too ready assumption that categories (iv) or (v) are necessarily cases of constructive notice only. The true distinction is between honesty and dishonesty. It is essentially a jury question."

It seems fairly clear, therefore, that whereas any of the five Baden heads will probably suffice for liability, dishonesty or 'lack of probity' (a term used by May LJ in Lipkin Gorman v Karpnale Ltd, which requires more than mere negligence) is also required to found a constructive trusteeship claim based on knowing assistance. This has been reiterated by Vinelott J in Eagle Trust plc v SBC Securities Ltd [1992] 4 All ER 488 and by the Court of Appeal in Polly Peck International plc v. Nadir (No. 2) [1992] 4 All ER 769. In Eagle Trust Vinelott J thought that knowledge of the fraudulent design had to be able to be imputed to the defendant, and that constructive notice of the fraudulent design would not be enough, although knowledge may be inferred in the absence of evidence if such knowledge would have been imputed to an honest and reasonable man.

Assuming that want of probity can be established, however, it does not appear to be necessary for the defendant to be aware of the precise details of the fraud. In Agip Africa, it was not enough simply for the defendants to be aware that CAK (who committed the fraud) was an offshore company, of the type often used for fraudulent purposes, since anonymity is also a reason for operating through an off-shore company.

In Royal Brunei Airlines Sdn Bhd v Tan [1995] 2 AC 378, the Privy Council held that the liability of the third party depended on the dishonesty of that party, and that the breach of trust (which was, of course, a prerequisite for accessory liability) need not itself be a dishonest and fraudulent breach of trust by the trustee. On the facts, however, both the trustee and the third party had acted dishonestly, that latter by causing or permitting the trustee to apply money in a way he knew was not authorised by the trust.

10.4.4. Lord Diplock Claims

In Re Diplock's Estate [1948] Ch 465, which was affirmed by the House of Lords on this issue in Ministry of Health v Simpson [1951] AC 251, the next of kin also succeeded in a personal action against the charities, which like the other personal actions considered in this section, was complete on receipt. Unlike knowing receipt, however, liability was strict, the defendants were innocent volunteers who took in good faith, with no notice of the next-of-kin's title. The action appears to apply only to volunteers, but clearly cannot apply to all volunteers if Re Montagu's ST [1987] Ch 264 is correct, so we need to consider its limits.

In Diplock, the executors had made the payments to the charities under a mistake of law. The charities unsuccessfully argued that the personal action was limited to payments made under a mistake of fact (on analogy with the common law money had and received action), and where the administration of the estate had been made by the direction of the court. It is arguable that the action applies only to the administration of estates, but it seems more probable that it applies generally against volunteers. There is a requirement, however, that remedies against the wrongdoers (in this case the executors) should be exhausted first, which is presumably why no Diplock-based personal action was brought in Montagu. It is also possible (but not certain) that the change of position defence in Lipkin Gorman v Karpnale Ltd [1991] 2 AC 548 applies to this equitable action also.

10.5. Conclusion

We have now studied all the relevant parts of the subject individually. In many of the cases, however, the plaintiff tries all possible actions, so the cases tend not to deal with each part of the subject discretely.

Those who are interested to read Chapter 1 to Chapter 9, please click here.