City Index Ltd & Ors v Gawler & Ors

This appeal raises in summary two issues: (i) whether liability for “knowing receipt” is within the scope of the Civil Liability (Contribution) Act 1978 (“the 1978 Act”); (ii) if so, whether there is a rule of law or practice (at least on the facts of this case) that the knowing recipient should bear 100% of the loss.

The Chancellor answered both questions in the affirmative. On the first, he regarded himself as bound by the decision of this court in Friends Provident Life Office v Hillier, Parker, May & Rowden [1997] QB 85 (“Friends Provident”), notwithstanding apparently conflicting guidance by the House of Lords in Royal Brompton NHS Trust v Hammond (“Royal Brompton”) [2002] 1 WLR 1397. On the second, he held himself bound by another decision of this court, Niru Battery Manufacturing v Milestone Trading (No 2) Ltd [2004] 2 Lloyd’s Rep 319 (“Niru (No 2)”). Both questions are in issue in the appeal.

The relevant facts are as follows. Between February 2000 and August 2004, the claimants in the action (whom I shall refer to compendiously as “Charter”) were defrauded of large sums by a manager in their foreign exchange department (“Mr Chu”). He procured the transfer of sums to the aggregate value of over £9m to the defendant (“City Index”) to finance his personal spread-betting transactions. In December 2004 he was convicted of theft.

In April 2005 Charter began proceedings against City Index. They alleged that the sums transferred from August 2000 were received by City Index with knowledge of breach of trust or fiduciary duty by Mr Chu; that it was “unconscionable” for City Index to use them to finance his spread-betting; and that City Index were accordingly “liable to account to the Claimants as constructive trustee of those funds”. In February 2006 the claim was settled on payment by City Index of £5.5m.

Meanwhile, City Index had begun Part 20 proceedings against some past and present directors of Charter and the group auditors claiming contribution or indemnity under the 1978 Act. (There is no material difference for present purposes between the respective positions of directors and the auditor. For convenience I shall refer simply to “the directors”). After the settlement with Charter, the Part 20 claim was amended to seek contribution or indemnity in relation to the sum of £5.5m. In their claim City Index alleged that the directors’ breaches of duty had caused the unauthorised transfers to continue undetected, and had thereby caused or contributed to Charter’s losses. City Index also alleged that it had retained none of the money transferred, and that the payment of £5.5m to Charter was substantially more than its profit on Mr Chu's account, which was approximately £3 m.

Before the Chancellor the directors sought orders that the Part 20 claim be struck out or summarily dismissed. The Chancellor so ordered, holding that, even accepting that City Index’s liability was within the scope of the Act, there was no reasonable prospect of contribution being ordered.

To set the legal context for the application of the 1978 Act, it is necessary to understand the nature of liability as a constructive trustee based on “knowing receipt”. For this I can quote the Chancellor’s judgment (para 9-11):

“The relevant cause of action is now commonly called ‘knowing receipt’. The essential elements of such a cause of action were elaborated by Hoffmann LJ in El Ajou v Dollar Land Holdings plc [1994] 2 All ER 685, 700 in these terms:

‘For this purpose the plaintiff must show, first, a disposal of his assets in breach of fiduciary duty; secondly, the beneficial receipt by the defendant of assets which are traceable as representing the assets of the plaintiff; and thirdly, knowledge on the part of the defendant that the assets he received are traceable to a breach of fiduciary duty.’

The history and nature of the cause of action was further considered by the Court of Appeal in Bank of Credit and Commerce International (Overseas) Ltd v Akindele [2001] Ch 437. In his judgment, with which Ward and Sedley LJJ agreed, Nourse LJ… reiterated (pp.448-450) that unlike a ‘knowing assistance’ case it was not necessary to show that the defendant had been in any sense a participator in a fraud. He considered the authorities on what knowledge was required to impose liability on a defendant (pp.450-455) and concluded that it must be ‘such as to make it unconscionable for him to retain the benefit of the receipt’…. It was common ground before me that the decision of the Court of Appeal in [Akindele] reflects what the law now is….”

He noted that Nourse LJ had not adopted the suggestion of Lord Nicholls (writing extra-judicially (Footnote: ¹)) that restitutionary liability in respect of knowing receipt should apply “regardless of fault but subject to a defence of change of position”.

In this court also it is accepted that Akindele represents the present law. Accordingly, liability for “knowing receipt” depends on the defendant having sufficient knowledge of the circumstances of the payment to make it “unconscionable” for him to retain the benefit or pay it away for his own purposes.

The 1978 Act followed a 1977 Law Commission report on Contribution (Law Com No 79) (for the history, see per Lord Bingham in Royal Brompton p 1399-1401). It had recommended (inter alia) that statutory rights of contribution “should not be confined, as at present, to cases where damage is suffered as a result of a tort, but should cover cases where it is suffered as a result of tort, breach of contract, breach of trust or other breach of duty . . .”; and that the statutory right to recover contribution should be available “to any person liable in respect of the damage, not just persons liable in tort". (para 81).

The Law Commission’s recommendations were given effect (albeit not in precisely the terms of their proposed draft Bill) in the 1978 Act. The material provisions are as follows:

“1(1) Subject to the following provisions of this section, any person liable in respect of any damage suffered by another person may recover contribution from any other person liable in respect of the same damage (whether jointly with him or otherwise)…

(4)

A person who has made or agreed to make any payment in bona fide settlement or compromise of any claim made against him in respect of any damage (including a payment into court which has been accepted) shall be entitled to recover contribution in accordance with this section without regard to whether or not he himself is or ever was liable in respect of the damage, provided, however, that he would have been liable assuming that the factual basis of the claim against him could be established.

2(1)... in any proceedings for contribution under section 1 above the amount of the contribution recoverable from any person shall be such as may be found by the court to be just and equitable having regard to the extent of that person's responsibility for the damage in question.

…

6(1) A person is liable in respect of any damage for the purposes of this Act if the person who suffered it... is entitled to recover compensation from him in respect of that damage (whatever the legal basis of his liability, whether tort, breach of contract, breach of trust or otherwise).”

The effect of section 1(4) is that, following the settlement, the issue has to be approached on the assumption that the factual basis of Charter’s claim against City Index (summarised in para 4 above) would have been established. Also, in accordance with ordinary summary judgment principles, it has to be assumed that the case against the directors (para 5 above) would be established at trial.

The arguments of the parties have been generously developed in some 100 pages of “skeleton” argument. However, the essential areas of dispute can be shortly stated.

To paraphrase Lord Bingham (Royal Brompton para 6) there are in essence three questions under section 1(1): (1) What “damage” did Charter suffer? (2) Was City Index liable to Charter in respect of that damage? (3) Were the directors liable to Charter in respect of that damage or some of it? “Damage” is synonymous with “loss” or “harm”, but does not mean “damages” (ibid para 6). Liability “in respect of damage” means liability to pay “compensation” in respect of that damage whether on the basis of “tort,… breach of trust or otherwise” (s 6(1)).

There is little difficulty about questions (1) and (3). Charter’s “damage” or “loss” was the £9m transferred to City Index, in so far as it was not recovered from other sources. On the assumed facts, the directors would have been liable in tort (negligence) to compensate Charter for that loss. According to Mr Boswood QC (for City Index) the answer to question (2) is equally clear. City Index’s liability to Charter as “constructive trustee” was liability to “compensate” based on “breach of trust or otherwise”. On the other side, Mr Brindle QC for the directors (supported by Mr Salzedo for the auditor) argues that liability in knowing receipt is restitutionary, not compensatory; or, in other words, receipt-based, not loss-based. Accordingly, on the ordinary use of language, and as authoritatively established by Royal Brompton, it is not within the section.

To evaluate the respective arguments, it is necessary to look with some care at the judgments in these two cases. In the former, Friends Provident were participants in a development project. They had employed surveyors, Hillier Parker, to check payment demands made from time to time to the developer. Due to Hillier Parker’s negligence, some payments to the developer had included, wrongly, an item described as “notional interest”. Friends Provident sued Hillier Parker for damages for negligence, and Hillier Parker instituted proceedings against the developer for contribution under the 1978 Act. The claim for contribution succeeded in this court, reversing the decision of the court below.

It is important at the outset to bear in mind that the judgment was given in 1995, long before Akindele had clarified the modern basis of liability for “knowing receipt”. The language of some of the arguments must be read in the context of the state of the law at that time.

Auld LJ, giving the leading judgment, accepted two alternative bases: first, “quasi-contract” (p 96G), categorised as either (i) “mistake of fact or law” (p 96H), or (ii) “payment for no consideration” (p 98G); secondly, “breach of trust” (p 104B). On the first basis, he concluded that it was arguable that Friends Provident would have had a claim against the developers for repayment of the interest as money paid under a mistake of fact or for no consideration (p 99G). He rejected the argument that such liability was “restitutionary” not “compensatory” and therefore outside section 6 (p 100F). He also declined to treat the Commission’s reference to “wrongdoers other than tortfeasors” (clause 5 of the draft Bill), or the reference to “responsibility” in section 2, as indicating that the Act was confined to liability “arising from breach of duty or default” (p 102D, 103E). Of section 6 he said:

“It is difficult to imagine a broader formulation of an entitlement to contribution. It clearly spans a variety of causes of action, forms of damage in the sense of loss of some sort, and remedies, the last of which are gathered together under the umbrella of ‘compensation’. The Act was clearly intended to be given a wide interpretation…” (p 102G-103B)

Of the alternative basis, breach of trust, he considered that it was arguable that receipt under a mistake, even without knowledge, was enough to make the developers constructive trustees; but that in any event it was arguable on the facts that the developers did know at the time of receipt that they were not entitled to the interest (p 106B). He held that their potential liability was enough to bring them arguably within the Act. He also rejected an argument that the claim would be “for an account and restitution, not a claim for damages for breach of trust” (p 107B). On this point, he accepted that the word “compensation” was often used in authorities to describe the nature of the remedy against a trustee, including, for example, Viscount Haldane LC’s reference to the power of the Court of Chancery:

“… to order the defendant… to make restitution, or to compensate the plaintiff by putting him in as good a position pecuniarily as that in which he was before the injury”. (Nocton v. Lord Ashburton [1914] A.C. 932, 952)

Auld LJ concluded:

“Here, Hillier Parker's case is that the developers were in breach of trust in dissipating the money, in failing to pay it back when asked to do so, and in denying Friends' Provident's entitlement to repayment. In my view, and in the light of my construction of sections 1(1) and 6(1) of the Act of 1978 under the heading of quasi-contract, whatever the precise form of remedy Friends' Provident might have in respect of that money, whether restitutionary or in damages, it is for compensation for damage it has suffered by its loss in the sense referred to by Viscount Haldane L.C. in Nocton v Lord Ashburton [1914] A.C. 932 and in the words of the Act.” (p 108C-D)

I would observe at this stage that the decision on the second basis of claim is direct authority that the liability of a “knowing recipient” to repay money received is liability to pay “compensation” for “breach of trust or otherwise” within the meaning of the 1978 Act. Unless it has been overtaken by Royal Brompton, it is binding on us.

The Royal Brompton case was not directly concerned with liability as a constructive trustee, but with liability in tort and breach of contract. The architect on a construction project was held liable to the building owner for negligently issuing extension certificates to the contractor. He sought contribution from the contractor on the basis of his liability to the owner in breach of contract for delay in completing the building. It was held that this was not liability for “the same damage”. As Lord Bingham said:

“It would seem to me clear that any liability the Employer might prove against the Contractor and the Architect would be independent and not common. The Employer's claim against the Contractor would be based on the Contractor's delay in performing the contract and the disruption caused by the delay, and the Employer's damage would be the increased cost it incurred, the sums it overpaid and the liquidated damages to which it was entitled. Its claim against the Architect, based on negligent advice and certification, would not lead to the same damage because it could not be suggested that the Architect's negligence had led to any delay in performing the contract.” (para 7)

That part of the decision has no direct bearing on the present case. However, Lord Steyn, with whom the other members of the House also agreed, took the opportunity to comment on Friends Provident. He cited Auld LJ’s reference to the breadth of the formulation of entitlement to contribution under section 6, and his comment that the Act was “clearly intended to be given a wide interpretation”. He referred also to a subsequent case in this court, Hurstwood Developments Ltd v Motor & General & Andersley & Co Insurance Services Ltd [2001] EWCA Civ 1785, in which was held that a claim by an employer against a contractor for negligent site investigation services and a claim by the employer against insurance brokers for failure to insure against the contingency were held to be claims for “the same damage”. Keene LJ, relying on Friends Provident, had commented on the need “not to be over-influenced” by the possibility of formulating the respective measures of damages in different words.

Lord Steyn dealt with these two cases at two points in his judgment. First, in a passage headed “The meaning of ‘the same damage’”, having quoted from the two cases, he said:

“It will be necessary to return to these two decisions. At this stage I concentrate on the proposition that the 1978 Act ought to be given a broad interpretation. In large measure this statement is correct. This view can in particular be accepted to the extent that the 1978 Act extended the reach of the contribution principle to a wider range of cases ‘whatever the legal basis of . . . liability, whether tort, breach of contract, breach of trust or otherwise’ (section 6(1)) and in the light of the comprehensive powers of the court under section 2(1) and (2).

But this purposive and enlarged view of the reach of the statute does not assist on the central issue of construction before the House. The critical words are “liable in respect of the same damage.” … It was common ground that the closest synonym of damage is harm. The focus is, however, on the composite expression ‘the same damage’…. The legislative technique of limiting the contribution principle under the 1978 Act to the same damage was a considered policy decision. The context does not therefore justify an expansive interpretation of the words ‘the same damage’ so as to mean substantially or materially similar damage….” (para 26-7)

Later, in a passage headed “Earlier decisions”, he returned to the two cases. Since this passage is central to Mr Brindle’s submission, I will set the relevant part out in full:

“It is necessary to refer to dicta in four earlier decisions. In [Friends Provident] Auld LJ observed at p 102G-H:

‘In my judgment, despite the distinction between a claim for restitution and one for damages, each may be a claim for compensation for damage under sections 1(1) and 6(1) of the Act of 1978. The difference between asking for a particular sum of money back or for an equivalent sum of money for the damage suffered because of the withholding of it is immaterial in this statutory context, which is concerned with 'compensation' for 'damage'.’

Goff & Jones, The Law of Restitution, 5th ed (1998), p 396, commented on this dictum:

‘To conclude that a restitutionary claim is one for 'damage suffered' cannot be justified in principle; nor is it, in our view, consistent with the natural meaning of the statutory language. A claim for restitution cannot be said to be a claim to recover compensation within the meaning of section 1(1).’

I am in respectful agreement with this criticism of the Friends' Provident case. To this extent it cannot be accepted as a correct statement of the law.”

He then referred again to Hurstwood Developments, in which claims against the contractor for negligent site investigation, and against insurance brokers for failure to insure, were held to be claims for “the same damage”. He disagreed:

“The fact is, however, that the insurance brokers had no responsibility for the remedial work. In my view the extensive interpretation of section 1(1) adopted by the Court of Appeal led to a conclusion not warranted by the language of the statute. If my conclusions in respect of the claims under consideration in the present case are correct it follows that the Hurstwood case was wrongly decided.”

Before drawing some conclusions from this passage, I should comment on the passage from Goff & Jones 5^th Ed, pp 395-6, on which Lord Steyn relied. This edition was dated 1998, again well before the law of knowing receipt was re-stated in Akindele. The authors noted that the statutory right to contribution was “not all-embracing”, and that the Law Commission had “regrettably” rejected a proposal that it should extend to joint liability for debt. They referred to the “very wide” interpretation given to “the phrase ‘any damage’” by the Court of Appeal in Friends Provident, and to their rejection of the argument that the Act required some measure of breach of duty or default.

There followed the short passage cited by Lord Steyn (quoted above), including the statement that a claim for restitution “cannot be said” to be a claim to recover “compensation”. As a general statement, this seems, with respect, to go too far, at least where the restitutionary claim is for no more than the amount of the loss suffered by the claimant. There is no doubt that the language of “compensation” can be, and is often, used to describe such claims. As the Chancellor pointed out (para 29-31), it is not difficult (nor particularly helpful) to prepare rival lists of quotations (from statements of high authority) showing alternative uses of the terms “restitutionary” and “compensatory” (Footnote: ²) in this context. I have some sympathy with the observation of Brightman J (Bartlett v Barclays Trust Co (No.2) [1980] Ch.515, 545B) quoted by the Chancellor, that:

“… the so-called restitution which the [trustee] must now make to the plaintiffs....is in reality compensation for loss suffered by the plaintiffs...not readily distinguishable from damages except with the aid of a powerful legal microscope.”

It seems unlikely that the draftsman of the 1978 Act intended its application to depend on such subtle distinctions of nomenclature.

In the following paragraph of the 5^th Edition (not cited by Lord Steyn) the authors observed that the trial judge in Friends Provident had been “surely right” to conclude that the wording of the Act strongly suggested that –

“… for a contribution to be recoverable from a person that person must bear some responsibility for the damage in question… The loss to the payer of money paid under a mistake of fact or for no consideration can scarcely be said to have been suffered as the result of the act or default of the recipient. Failure to meet the plaintiff’s claim cannot itself… be treated as an act or default for this purpose… the cause of action is complete when the money is received.” (citing [1995] 4 All ER 260, 271)

This suggests that a principal concern of the authors of Goff & Jones at that stage was, not so much the width of the interpretation given by Auld LJ to the Act in general, but his inclusion within its scope of liability unconnected with fault; fault on both sides being, in their view, a necessary starting-point for the exercise of attributing “responsibility”, as required by section 2.

This distinction between innocent and fault-based liability is itself not without difficulty. It would be seem paradoxical if the innocent recipient of money paid under a mistake of fact were alone unable to take advantage of the 1978 Act, leaving him (unlike a guilty recipient) to bear the liability in full. In practice, however, this situation is unlikely to arise. If the innocent recipient still has the money, he will return it as soon as he knows of the mistake. If he has paid it away in good faith, he is likely to have a “change of position” defence. It is only if he has paid it away in bad faith, or “unconscionably”, that he will need the assistance of the 1978 Act to share his load. In that event, there is no conceptual or practical difficulty in his relative responsibility being weighed with that of others under section 2.

For completeness I note that this issue was touched on by this court in Niru (No2) (discussed below). However, the court did not find it necessary to rule on that aspect of the case, and it was in any event common ground that the court remained bound by Friends Provident (see para 77, per Clarke LJ; para 87, per Sedley LJ).

I draw the following points from this review:

To conclude, City Index’s liability to Charter does not depend solely on receipt of money paid in breach of trust, but on their retaining it or paying it away in circumstances where it was unconscionable to do so. Although the directors’ legal responsibility arose at an earlier stage, it was only when City Index failed to return the money that Charter suffered any loss. In ordinary language (adopting a wide view of the 1978 Act) City Index’s liability to make good that loss can properly be referred to as liability to “compensate” them. In any event, we are bound so to hold by the judgment of this court in Friends Provident, and the dicta in Royal Brompton do not require otherwise. On this issue I respectfully agree with the Chancellor’s conclusion.

Before leaving the first issue, I should acknowledge Mr Salzedo’s interesting argument on the circumstances in which “guidance” by the House of Lords, on issues not directly before it, can be taken as in effect overruling inconsistent decisions of the Court of Appeal. However, on the view I have formed of the limited scope of the guidance in Royal Brompton,this issue does not arise.

Although the Chancellor accepted that City Index’s liability was in principle within the scope of the 1978 Act, he also accepted the directors’ argument that it was valueless in practice. It was “inconceivable” that it would get any contribution for the £3m profit it had made from the spread-betting activities, so that the real issue concerned the balance of £2.5 m paid to settle the claim. He analysed the three leading modern cases: Dubai Aluminium v Salaam [2003] 2 AC 366 (see judgment para 37 for the facts); Cressman v Coys of Kensington [2004] 1 WLR 2775 (also referred to, variously, as McDonald or Coys) (see judgment para 40); and Niru Battery v Milestone Trading Ltd (No 2) [2004] 2 Ll.L.R. 319 (judgment para 23, 42). He also referred to two 19th C cases, Bahin v Hughes (1886) 31 Ch.D 390, and Wynne v Tempest [1897] 1 Ch. 110, which established that –

“… one of two defaulting trustees who has received and made use of money paid out in breach of trust must indemnify the trustee who received no such benefit.” (para 46)

He concluded:

“The general rule in equity, as exemplified in [the two 19^th C cases] cannot be dismissed on the grounds that the Act provides for a new regime. They are clear instances of what, in common circumstances, is to be regarded as just and equitable. In each case the overriding consideration is the fact that one of the two trustees received the trust money and made use of it. It is not necessary that he should have retained it. The overriding cause of the loss in all such cases is that the recipient, having received the money, instead of paying it back paid it to someone else. It would be unwise to suggest that the recipient, with the requisite knowledge, of money wrongly applied by a fiduciary can never obtain contribution from the fiduciary. But no facts were relied on by counsel for City Index as taking this case out of the normal rule. Nor, in my judgment, is there any reason of justice or equity why, in the general run of cases, negligent directors and auditors should contribute to the liability of the knowing recipient who has either retained the money so received or paid it away for his own purposes, use and benefit.” (para 52, emphasis added)

Before us, the difference between the parties is narrow. Mr Brindle and Mr Salzedo essentially adopt the Chancellor’s reasoning. On the other side, Mr Boswood accepts that if City Index retained any of the money received from Mr Chu, it would have had to repay it before any apportionment takes place. That is the effect of Dubai Aluminium and Cressman. He accepts that the same applies to the £3m profit made by City Index. That is because it is “obviously just and equitable” for the loss to be met out of any retained profits, before the remainder is apportioned between those legally responsible (see per Lord Millett in Dubai para 164).

However, he does not accept that the same reasoning applies to the balance of £2.5m. He challenges the Chancellor’s view that it makes no difference that the money has been paid away. There is no principle of “deemed retention”. The circumstances in which it was paid away are relevant, but only as factors to be taken into account in attributing responsibility under section 2. In so far as Niru (No 2) appears to decide otherwise, it is not binding on us, and should not be followed.

I agree with Mr Boswood that neither Dubai nor Cressman is conclusive on this narrow issue. In the first, the House of Lords proceeded on the basis that the property transferred was still available in the hands of the “knowing recipient”. Lord Nicholls thought it “obvious” that -

“Regard should be had to the amounts payable by each party under the compromises and to the amounts of Dubai Aluminium's money each still has in hand.” (para 53-4, emphasis added)

Later he commented that:

“… an unusual, and notable, feature of this case is the extent to which some parties to the fraud, but not others, remain in possession of substantial amounts of misappropriated money even after the plaintiff's claims have been met.” (para 59)

Similarly, in Cressman Mance LJ emphasised that the registration mark, which had been transferred by mistake to the knowing recipient (Mr McDonald), was “not just realisable but easily returnable” (para 31). It is true that one defence advanced by Mr McDonald at trial was that he had changed his position by transferring the car and the number plate to his partner. Mance LJ seems to have thought that such a transfer would make no difference, as, for example, appears from the following statement of principle:

“… justice requires that a person, who (as a result of some mistake which it becomes evident has been made in the execution of an agreed bargain) has a benefit or the right to a benefit for which he knows that he has not bargained or paid, should reimburse the value of that benefit to the other party if it is readily returnable without substantial difficulty or detriment and he chooses to retain it (or give it away to a third party) rather than to re-transfer it on request. Even if realisable benefit alone is not generally sufficient, the law should recognise, as a distinct category of enrichment, cases where a benefit is readily returnable.” (para 37, emphasis added)

However, this defence was rejected on the facts. Accordingly, statements as to the legal effect of such a transfer were not necessary to the decision, and are not binding on us. The significance of the case on this point lies chiefly in the extent to which the reasoning was adopted in Niru(No2), to which I now turn.

The second Niru case requires particularly careful examination, both because of the relative complexity of the facts, and because of the unusual way in which the case developed through the courts. The main facts are sufficiently indicated by the Chancellor’s summary (para 23):

“(The case) concerned a contract by Niru to buy lead from Milestone. The purchase price was to be paid by means of a letter of credit opened by Bank Sepah in favour of Milestone to be paid against production of a number of documents including a certificate of SGS as to the quality and packing of the goods loaded. If SGS was to certify the quality of the lead it was necessary to obtain LME warrants. For that purpose Mr Mahdavi, the individual behind Milestone, procured CAI to finance the acquisition of warrants to be retained by them as security for repayment of their loan by, ultimately, the purchase price payable by Niru. False documents were issued by a forwarding agent, at the behest of Mr Mahdavi, such as to induce Bank Sepah to pay the price for the lead to CAI but CAI had already sold the warrants and, pursuant to instructions from Mr Mahdavi, had credited another of his companies with the proceeds. Thus Niru was liable to Bank Sepah for the purchase price under its counter-indemnity, Bank Sepah had paid the purchase price but neither of them had received any lead.”

In the main proceedings Moore-Bick J held Mr Mahdavi liable in deceit and as an accessory to a breach of trust, CAI liable in restitution, and SGS liable in negligence for inaccuracies in the inspection certificate. In Niru (No1) CAI’s appeal was dismissed by this court ([2004] QB 985).

CAI and SGS had each issued Part 20 proceedings against the other claiming contribution. CAI was liable, because it should have realised (having itself already sold the lead) that the money received for its purchase from Bank Sepah had been paid by mistake. SGS was liable because if it had not issued the inspection certificate, the Bank would not have released the money. Before Moore-Bick J it seems to have been common ground (on the basis of Friends Provident) that in principle they were both liable for the “same damage”, and could claim contribution from each other under the 1978 Act. In his draft judgment, Moore-Bick J would have apportioned responsibility equally between them. However, before judgment was handed down, his attention was drawn to the House of Lords decision in Royal Brompton. Accordingly, he gave judgment in the main action only, and adjourned the Part 20 proceedings for further argument.

Thus Niru (No 2) was concerned only with liability as between SGS and CAI; but not, in the event, solely under the 1978 Act. Following the judgment in the main action, SGS had paid the judgment sum in full, and had amended its claim in the Part 20 proceedings (with leave) to add claims for relief against CAI by way of subrogation and recoupment, in addition to the previous claim for contribution. Moore-Bick J held that SGS was entitled to be repaid the whole amount, on the basis that it was subrogated to the rights of Niru against CAI. He rejected the alternative claims for recoupment, or for contribution under the 1978 Act. Both sides appealed.

The appeal was heard by the same constitution as Niru (1). The leading judgment again was given by Clarke LJ. The court held that SGS was entitled to be repaid the whole of the judgment sum, on the basis not only of subrogation but also of recoupment. On those points the case has no direct relevance to the present question, although the judgment has been subject to powerful criticism, notably in the current edition of Goff & Jones (7^th Ed p 389-90). (Footnote: ³) The significance of the case is in the court’s apparent assimilation of those principles to that of contribution under the 1978 Act, and its indications that the same result would have been achieved under all three bases. The question for us is how far those indications should be treated as binding, or if not, whether they should in any event be followed. To answer that question it is necessary to look in some detail at the sequence of reasoning in the judgment of Clarke LJ, having regard also to the doubts expressed by Sedley LJ.

It is important to note the factual context against which CAI’s liability was judged. For this Clarke LJ (at para 20) referred back to his judgment in Niru (No1), in which (at paras 169-170) he had commented on the state of mind of CAI’s employee, Mr Francis:

“… the judge concluded that good faith required a person in Mr Francis' position who realised that the money had been paid by mistake to make enquiries of Bank Sepah to ascertain the position and not to pay the money away in the meantime. I have reached the clear conclusion that he was correct so to hold. This is, at the very least, an example of the case of the kind of bad faith expressly mentioned by Lord Goff in Lipkin Gorman …, namely where a person ‘has changed his position in bad faith, as where the defendant has paid away the money with knowledge of the facts entitling the plaintiff to restitution’. Here, on the judge's findings of fact, when the money was paid away, Mr Francis (and thus CAI) knew the facts which entitled Bank Sepah to restitution, namely that it had paid under a mistake of fact.

In all these circumstances the judge was in my opinion correct to hold that CAI did not act in good faith in paying the money away and that it would be inequitable or unconscionable to deny Bank Sepah a right to restitution by repayment of the monies paid under the letter of credit….”

It is a notable feature of this passage, echoed in the remainder of his judgment in Niru (2), that Clarke LJ treated CAI’s conduct in paying the money away with knowledge of the mistake as tantamount to “bad faith”, even though (as Goff & Jones observes: para 14-003C) they, unlike SGS, had not been found negligent, let alone dishonest.

The bulk of Clarke LJ’s judgment is set out under the heading “Subrogation” paras (22-65). There follow shorter passages under the headings “Recoupment” (paras 66-72) and “Contribution” (paras 73-8). At first sight, only the latter is directly relevant to the present case. However, parts of the discussion of subrogation are stated more broadly. It is necessary therefore to consider the judgment with some care.

Early in the section on subrogation (at para 26), Clarke LJ suggested four different factual situations for consideration:

(1)

Niru sues both SGS and CAI and obtains judgment against them both jointly and severally and CAI satisfies the judgment;

(2)

Niru sues both SGS and CAI and obtains judgment against them both jointly and severally and SGS pays the judgment debt in circumstances in which CAI still holds the money received from Bank Sepah;

(3)

Niru sues both SGS and CAI and obtains judgment against them both jointly and severally and SGS pays in circumstances in which CAI had paid money away and has no change of position defence (this case); and

(4)

Niru sues SGS but not CAI and obtains judgment against SGS which SGS satisfies.”

In the first example, it was common ground that CAI would not be entitled to sue SGS in order to recover the amount it had paid to Niru by exercising a right of subrogation; “There would in those circumstances be no question of SGS being unjustly enriched by CAI's payment.” (para 29). Similarly, in the second example, there could be no doubt that SGS would be entitled to recover the whole amount from CAI, regardless of the reasons for which the money was mistakenly paid to CAI (para 30-32):

“Any other solution would leave CAI holding monies which, if acting in good faith, it would have repaid to Bank Sepah and thus to Niru.” (para 30)

The third example was the instant case. Of that Clarke LJ said:

“For my part, I do not see that there is any difference in principle between the second and third examples. Thus I see no distinction in principle between the position of the recipient who retains the money and the recipient who has paid it away otherwise than in good faith. In both examples the recipient seems to me to be unjustly enriched.

He rejected the submission that this would involve an unnecessary extension of the categories of case “in which subrogation has traditionally been recognised by the courts”. That approach assumed that SGS and CAI were equally to blame, a view which Clarke LJ rejected:

“In the instant case CAI acted in bad faith in paying the monies away. In these circumstances (as already indicated) it is to my mind be treated, both as between itself and Niru and as between itself and SGS, in the same way as if it retained the monies. It does not seem to me to be appropriate to treat CAI and SGS as equally responsible. It is true that SGS was careless (and thus negligent because of the duty of care owed to Niru) but it would not have been liable if CAI had not paid the money away in bad faith because Niru's cause of action would not have been complete. For the reasons already given, just as Niru's carelessness would have afforded CAI no defence to its claim, so SGS' carelessness or negligence should not in my opinion afford CAI any defence to SGS' claim (as it were in Niru 's name), now that SGS has discharged its liability to Niru. (para 37)

He regarded this approach as “consistent” with the approach of the court in Cressman, which he discussed at some length. He noted in particular that the court had not treated the retention of the property as critical:

“Mance LJ said in paragraph 36 that, although Mr McDonald had not realised the value of the mark, it was a readily realisable benefit and that, if he had transferred it to his partner, that could go at most to a possible change of position defence. In my opinion, the same is true here. Thus I would not accept Mr Bloch's submission that having paid the money away on Mr Mahdavi's instructions CAI did not benefit from the payment.

In that case the court rejected the change of position defence on much the same basis as it did here… it was held that even if the car had been transferred to Mr McDonald's partner, he was in possession of sufficient knowledge to exclude inequity or good faith… ” (para 43-4)

He then noted Mance LJ’s treatment of the issue of contribution, in which he had attributed 100% of the responsibility to McDonald because -

“The real damage lies in the [Cressmans'] continuing deprivation of the mark or its value, which was still the result of Coys' breach, but was, much more directly, the result of Mr McDonald's determination to retain and refusal to re-transfer the mark.”

Clarke LJ commented:

“Thus in the result Mr McDonald was left liable for the whole of the value of the benefit on the footing that the 1978 Act applied and that a contribution of 100 per cent was just and equitable having regard to the extent of Mr McDonald's responsibility for the damage in question. I have reached the same conclusion on the facts of this case. The relative positions of SGS and CAI seem to me to be very different. Although both SGS and CAI were liable for the same loss suffered by Niru, as in the Coys case the real damage was caused by CAI's failure to repay the monies which had been paid by mistake.” (para 46)

He concluded this section with a comment, on which Mr Brindle strongly relies, which is in terms directed to all three bases of claim:

“It seems to me that, whether by the route of subrogation, recoupment or the operation of the 1978 Act (assuming it applies) the just result is that CAI should bear the whole of the loss. This too can be tested by considering the position if CAI still retained the monies. In that case, I do not think that there can be any doubt that the just result would be that the whole of the sum paid should be repaid either to Niru or, in circumstances in which SGS had discharged its liability under the judgment, to SGS. To my mind the position is no different in circumstances where CAI has paid the monies away otherwise than in good faith, any more than it was in the Coys case on the assumption that Mr McDonald had transferred the car and its number plate to his partner.” (para 50, emphasis added)

Later, having held that SGS was entitled to succeed also on the basis of recoupment, he turned to the issue of contribution. He said:

“I have already expressed my view as to the appropriate result on the assumption that the 1978 Act applies, namely that CAI should pay the whole amount of the judgment save as to costs. This conclusion makes it unnecessary to consider whether the 1978 Act applies.”

For this reason, as I have already noted, he found it unnecessary to decide the effect of the Royal Brompton case on the claim under the Act. As he explained (para 78):

“I have already expressed my conclusion that if the 1978 Act applies the just result would be to order CAI to pay a contribution of 100 per cent, as was done in the Coys case, and for similar reasons. No question of any possible conflict between the effects of subrogation, recoupment and contribution therefore arises. On the other hand, if the Act does not apply, the result is the same, namely that SGS is entitled to recover in full from CAI by way of subrogation or recoupment.”

Sedley LJ agreed with the result, but expressed concerns at what he described as “discontinuities” in the developing law of restitution and contribution. He accepted that the applicability of the 1978 Act did not matter once it was decided that SGS could recover in full under any of the three bases, but he added:

“… the merits of a not very different case could well be such as to require the court to decide whether it is bound by law to award all or nothing rather than allocate the loss as justice requires.” (para 81)

He thought that an equal division of responsibility (as initially proposed by Moore-Bick J) would have been “unsurprising”, on the basis that “but for either defendant's breach of its duty to Niru the loss would not have occurred”. He commented:

“It is only because of the doctrinal difference between restitution and tort that this logic is apparently unavailable to us. I cannot help wondering whether this is the way the law should be going. It is even less satisfactory that the same logic may not be available in subrogation or recoupment, even though these doctrines are directed to the same end of ensuring so far as possible that losses are distributed justly.

There is good authority about the position of a restitution claimant who has neglected his own interests, but none about a restitution claimant who himself has acted unlawfully, where in both cases the claimant has by his act contributed to the occurrence of the eventual loss…” (para 82-3)

He concluded:

“Our task has not been made any easier by the parties' unwillingness to debate an apportioned contribution except under pressure from the court. Counsel's arguments have essentially been for all or for nothing, and in the circumstances I do not dissent from the conclusion of the other two members of the court that the justice of this particular case requires CAI to reimburse SGS in full, whether by way of subrogation or recoupment or contribution. But for my part I would have preferred to be able to put the statutory remedy of contribution first rather than last among the reasons for so concluding.” (para 89)

The third member of the court (Lady Bulter-Sloss P) agreed with Clarke LJ without further comment.

I confess with respect that I have not found the reasoning in the leading judgment easy to follow. In particular, the crucial jump from example two to example three is not fully explained. There seem to be three strands in the argument: first, that CAI had paid the money away in “bad faith”; secondly, that the “real damage” was caused by CAI, because, if it had not paid the money away, Niru's cause of action against SGS would not have been complete (para 37); thirdly, that the case was similar to Cressman. None of these points seems free from difficulty. As I have already noted, the finding of “bad faith” seems to have been used in a special sense, as no more than the corollary of the conclusion that there was no “change of position” defence. There was no finding of actual dishonesty. The second point, as Sedley LJ observed, could be made to work both ways. If SGS had not been negligent, the money would have been paid to CAI, and it would not have been liable for its restitution. As to Cressman, the point was not essential to the decision, and the reasoning was not fully developed.

I do not think, however, that this aspect of Niru (No 2) can be disregarded as obiter, merely because the contribution issue as such was not decided. It seems to have been a material part of Clarke LJ’s reasoning on subrogation (made explicit in paragraph 50) that the same result would be achieved under each of the other two bases. On the other hand, as I read the judgment, this conclusion was reached as one of fact, not law (see, e.g. para 46, referring to his conclusion “on the facts of this case”). This is also implicit in the agreement of Sedley LJ, who acknowledged that “the merits of a not very different case” might require a different allocation, and regretted that the counsel’s argument had been essentially “for all or for nothing”. On that reading, the judgments, though of course persuasive, are not binding upon us.

I return therefore to the grounds on which the Chancellor summarily dismissed the claim for contribution (para 35 above). I take his reference to the two 19^th C cases as illustrative, rather than directly relevant to the construction of the 1978 Act. As he saw it, the “overriding cause” of the loss was that City Index, having received the money, instead of paying it back paid it to someone else. It was not just or equitable to require negligent directors and auditors to contribute to the liability of the knowing recipient who has either retained the money so received “or paid it away for his own purposes, use and benefit”.

That reasoning is entirely understandable on the basis (as the Chancellor held) that Niru (No 2) was binding authority for the proposition that –

“a defendant who paid the money away in bad faith, because he had the relevant knowledge, was to be treated in the same way as one who had received it with that knowledge and retained it.” (para 37)

However, as I have said, I do not think that this aspect of the reasoning in Niru (No2) is binding on us. Nor do I think, with respect, that such a general principle is supportable. It would impose a restriction on the wide scope of section 2 of the 1978 Act, unjustified by its wording. I accept, as is common ground, that, if the money has been retained by the knowing recipient, he must return it. That is not because of some wider principle of law, but simply as a matter of “obvious” equity. If on the other hand he has parted with the money, then the two potential defendants are in similar positions. They will both be out of pocket if the liability is enforced against them. There is no automatic presumption that one form of liability attracts a larger share than another (even in a case where one party has been fraudulent: Downs v Chappell [1997] 1 WLR 426).It all depends on the facts, which can only be assessed at trial.

For these reasons, I would respectfully differ from the Chancellor’s conclusion on the second point. I would accordingly allow the appeal to that extent, and set aside the summary judgment.

Like Carnwath LJ, I consider that the appeal on the first issue should be dismissed but for different reasons, which I set out below. On the second issue, I agree with Carnwath LJ that the appeal should be allowed for the reasons given by him, and for the additional reasons set out below. I need not set out ss 1 or 6 of the Civil Liability (Contribution) Act 1978 (“the 1978 Act”) as the relevant provisions are set out in [10] above. I refer to the issues as Carnwath LJ has defined them in his judgment.

The law about claims to recover money or other property transferred to a person who is not entitled to it is complex. The claims which may be made in these circumstances include claims for unjust enrichment based on the wrongful conduct of the defendant (known as knowing receipt) and claims for unjust enrichment based on innocent receipt (often called claims for money had and received). The ingredients of these two causes of action are different, and there are also confusing differences in the names given to the remedies available for them, if established. Mummery LJ commented on the confusing terminology in this area with regret in the course of the hearing of this appeal. In a report (issued during my chairmanship of the Law Commission) entitled Aggravated, Exemplary and Restitutionary Damages (Law Com 247) (1997) ([3.82] to [3.84]), the Law Commission made a plea for the simplification of terminology but its call has gone unheeded. This is not a case in which this court can lay down guidelines about terminology but my approach below to this issue suggests that there is a need for further analysis of these claims and the types of remedy available for them.

With that introduction I turn to the present case. The exact basis of the remedy sought against City Index is important. In its statement of case, Charter alleged that City Index was liable to account to it as constructive trustee of certain sums which it received from Mr Chu on the grounds that (1) City Index knew that Mr Chu, in transferring those sums, was acting in breach of his fiduciary duty to Charter and (2) the circumstances made it unconscionable for City Index to retain those funds. Ironically, in its defence, City Index contended that any liability to Charter was for money had and received and that as a result it was entitled to the benefit of the defence of change of position. (It contended that it had used the funds paid to hedge its position.) However that may be, City Index is entitled to proceed on its claim for contribution on the basis that the claim made against it succeeded: s 1(4) of the 1978 Act. Mr Chu did in fact make some small profits on his spread betting and City Index made a return of £3m from its dealings with Mr Chu but those profits were not material to the basis of Charter’s claim against City Index. Charter sought repayment of the sums paid out.

The expressions "constructive trust" and "liable to account" are portmanteau expressions that can be used to define the remedies for different sorts of causes of action, including breach of trust, and different types of relief. Despite this, it is important in the context of the question at issue on this appeal to distinguish between a claim that a person should pay damages to make good the claimant’s loss and a claim that a person should account for profits which he has made by the use of the claimant’s property. The Chancellor in his illuminating judgment describes the liability for knowing receipt but he does not deal with the different kinds of remedy which I have just described. Charter’s claim falls within the first category, that is to say, it is a claim to make good Charter’s loss, and not the second. Charter’s overall claim was for some £8.6 million representing the greater part of the sums it paid out, and the settlement was for some £5.5 million. If the transactions with Mr Chu had been successful so that City Index made net gains, and if Charter, instead of making the claim it in fact made, had made a claim for an account of those profits, its claim would still have been against City Index for an account as a constructive trustee. But it would have been a claim for an account of profits.

The distinction between making good the claimant's loss and accounting for profits is important in this case because, in my judgment, in the passage cited by Lord Steyn in Royal Brompton from the fifth edition of Goff and Jones on The Law of Restitution, the editors are expressing a view about claims within the second category (accounting for profit). Before I come to that point, I observe that Lord Steyn earlier makes the point, with respect to the expression “liable in respect of the same damage”, that the rights of contribution conferred by the Act were not unlimited (see [23] above). This point is supported by paras. 58 and 80(a) of the report of the Law Commission on Contribution (Law Com No 79) (1977). These passages make it clear that the Law Commission at least did not envisage that the statutory right would be available to defendants to claims based on innocent receipt. (We are moreover told by counsel that no relevant and admissible statements were made in Parliament during the passage of the Bill which became the 1978 Act, which in turn substantially implemented the Law Commission’s report on Contribution.)

Later in his speech in Royal Brompton, Lord Steyn cites the passage from Goff & Jones to which I have just referred. The relevant extract from the speech of Lord Steyn and within it the passage from Goff & Jones may be found at [24] above. Carnwath LJ is critical of the passage cited by Lord Steyn (see [27] above). He expresses the view that the word "compensation" can often be used to describe claims in restitution. He cites in support the observation of Brightman J in Bartlett v Barclays Trust Co (No 2) which deals with a claim against a trustee for compensation for loss. With respect, it is necessary to examine the passage from Goff and Jones cited by Lord Steyn in its fuller context. It is preceded by two important sentences:

“It is evident that the Court [in Friends Provident] was anxious to give the [1978] Act a "wide interpretation". It did so by equating a claim in restitution for benefit gained with a claim for damages for loss suffered. ” (italics added)

So the antithesis which the learned editors of Goff & Jones are drawing at this point is between restitution for benefit gained on the one hand and a claim for loss suffered on the other, that is, between a claim for an account of profits and a claim for damages for loss. When the extract from the speech of Lord Steyn is read with this in mind, it is clear that the point or at least one of the points being made is that a claim for an account of profits is not a claim for “compensation in respect of....damage” within the meaning of s 6(1) of the 1978 Act. Of course, the word “compensation” is used in a very wide sense in equity, but in s 6(1) the word “compensation” must be a remedy in respect of damage and that may be a different concept. The holding of Auld LJ in Friends Provident, which Lord Steyn cited, also focused on "compensation". The last sentence of the passage cited from Goff & Jones by Lord Steyn makes it clear that the crux of the editors’ criticism was what they regarded as a misunderstanding of the term "compensation" as used in the 1978 Act. It follows, with respect to Carnwath LJ (cf [31(ii)] above), that Lord Steyn’s concern was not solely with the concept of damage. He was also concerned about the true meaning of the word “compensation” in the 1978 Act.

What follows from this analysis? In my judgment the exact analysis is important. That is not to say that I disagree with Carnwath LJ ([28]) that in the passage cited by Lord Steyn from Goff & Jones the editors were making a second point, namely that a claim for unjust enrichment based on innocent receipt could not in the editors’ opinion be characterised as a claim for compensation in respect of damage. That that was a second, and separate, point is evident from the final sentence of the passage from Goff & Jones cited by Lord Steyn. I do not, however, think that it is correct to say that this concern was necessarily “a principal concern” of the editors (cf [28]) above), still less their only concern. Nor am I myself persuaded that the development of the law by this court in Akindele assists the analysis on this issue, since the distinction between innocent and knowing receipt was pre-existing: see for example Minister of Health v Simpson [1951] AC 256 and the decision of this court in Polly Peck International plc v Nadir and others (No 2)[1992] 4 All ER 769 (cf [26] above).

I do, however, share his conclusion that the observations of Lord Steyn were not part of the ratio in Royal Brompton. On the other hand, they provide invaluable guidance, especially given that the other members of the House agreed with them. However, in this instance we are not dealing with a claim either for unjust enrichment based on innocent receipt or with a claim for an account of profits. Accordingly, the observations of Lord Steyn do not in any event apply in the circumstances of this case. There is therefore no need to consider further whether this court could have applied them in preference to the holdings of this court in Friends Provident.

The claim of the employer against the developer in Friends Provident, if brought, for overpaid notional interest would after all have been a claim for unjust enrichment based on innocent receipt, and it may be that in so far as Auld LJ’s holding applied to a claim for unjust enrichment based on wrongful receipt his observations too were obiter. However, it has been said that liability for knowing receipt is merely concurrent with that for innocent receipt (see for example, per Lord Millett in Dubai Aluminium Co Ltd v Salaam [2003] 2 AC 366 at [87]). Accordingly I express no concluded view on this point.

I further consider that it is unnecessary for me to express any view on what would have been the position under the 1978 Act if Charter’s claim had been for an account of profits. However, even if a statutory right of contribution does not exist, a right may exist in equity, though it may not be as flexible as the statutory right. It would seem logical that a right of contribution should lie between all the defendants to claims arising from a breach of trust even if the claim made against the party seeking contribution is for an account of profits, rather than for recoupment of the claimant’s loss. In the circumstances of this case, I can limit myself to saying that, if and in so far as this court is not (for the reason suggested) bound by the holding of Auld LJ in Friends Provident, I would reach the same conclusion as he did in relation to a claim for contribution in respect of a claim for knowing receipt which seeks the making good of the claimant’s loss. Such a claim is outside Lord Steyn’s criticism of Auld LJ’s holding.

For these reasons I have come to the same conclusion as Carnwath LJ on this issue, but for different reasons.

I agree with what Carnwath LJ has said on this issue. I am indebted to Carnwath LJ for his careful and instructive analysis of the difficult authorities. I agree with his reasons for allowing the appeal on this issue and add some supporting reasoning of my own.

Where a trustee is liable to account to the trust for the misapplication of trust funds, the basis of liability is, to use Maitland’s description, “severe”. This basis is imposed to deter trustees. The same basis is applied to other fiduciaries and third parties who have participated in a breach of trust, in the present case by receiving trust monies. Different rules apply on matters such as causation, remoteness and onus of proof from those which apply to claims in, for example, tort: see generally Murad v Al-Saraj [2005] All ER (D) 503. Similarly, the liability of a recipient of trust funds wrongly transferred to him is not, at least as between the beneficiaries and himself, reduced by amounts he has spent: the effect of the principle is to deny a defence of change of position in these circumstances (see generally Minister of Health v Simpson, at page 276). The colourful term "disgorgement” of profits is often used to describe an account of profits made on this severe basis, and indeed it may be better if this term was reserved for that situation.

It is, however, no part of the deterrent purpose of remedies for breach of trust or fiduciary duty to prevent a person, who is liable to disgorge profits, from claiming indemnification or contribution from a third party. He would clearly be entitled to claim damages from his legal advisers if he had acted on their advice. There is no difference between this type of claim and a claim for contribution from other persons who are also responsible for the loss which the trust has suffered.

Once the court is satisfied that the claim is within the 1978 Act, it has the discretion conferred by s 2 of that Act, namely the discretion to order such compensation as is “just and equitable having regard to [the] responsibility for the damage in question [of the person against whom contribution is sought]”. In my judgment, it is not fanciful to suppose that that discretion could be exercised in some circumstances and to some extent in City Index’s favour. Accordingly this case cannot be struck out summarily, but must go to trial.

For these reasons, I respectfully disagree with the judgment of the Chancellor on this issue, and agree with that of Carnwath LJ.

I would add that no detailed argument has been addressed to the question whether the damage suffered by Charter as a result of any negligence by any director or the auditors corresponds to the damage it suffered as a result of the payments to City Index so as to meet the requirement that (if they are liable) the directors and its auditors are liable “in respect of the same damage” as City Index for the purposes of s 1(1) of the 1978 Act. I thus express no view on that issue.

I agree with the judgment of Carnwath LJ.