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):

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:

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:

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:

Auld LJ concluded:

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:

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:

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:

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:

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:

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 –

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:

Royal Brompton is not directly relevant to the present case. The sole issue was the meaning of “the same damage”, in a context where the competing liabilities were in tort and breach of contract. The case is not direct authority for the meaning of the word “compensation”, nor of its application to liability for “knowing receipt”.

Lord Steyn’s criticisms of the wide interpretation adopted by Auld LJ were specifically directed to the issue before him, that is the meaning of “the same damage”. He implicitly accepted that in other respects a “purposive and enlarged view of the reach of the statute” was appropriate.

Lord Steyn did not hold that Friends Provident itself was wrongly decided, although he did so hold in respect of Hurstwood. The need to differ from the “dicta” of Auld LJ appears to have arisen principally from the reliance placed on them by Keene LJ in Hurstwood. In particular, the House of Lords made no direct criticism of Auld LJ’s conclusion on “knowing receipt”. Although this part of his reasoning also relied on the wide interpretation adopted in the earlier part of the judgment, that was not related to the words “the same damage”, which was the context in which the criticisms had been made.

The passage in Goff & Jones on which Lord Steyn relied was directed principally to the inclusion within the scope of 1978 Act of liability not based on fault. The criticisms made by the authors were not in terms directed to the treatment of liability for “knowing receipt”. They were in any event written before Akindele had established that fault, in the sense of “unconscionable” retention of money received, is an essential element of the cause of action. In that context, their concerns about the difficulty of apportioning responsibility would have carried less weight.

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 –

He concluded:

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 -

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:

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):

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 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:

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):

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

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:

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

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

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

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:

He concluded:

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 –

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:

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.