Charter Plc & Anor v City Index Ltd & Ors

Charter plc, the first claimant in the action, is the holding company of a multinational group of engineering companies. Charter Central Finance Ltd, the second claimant in the action, is one of its subsidiaries. Its main activity is the management of the group’s finance and treasury functions. Mr Chu Wing Kit was employed by another subsidiary, Charter Central Services Ltd, as the treasury manager of Charter Central Finance Ltd with particular responsibility for sterling and dollar cash requirements and foreign exchange. City Index Ltd, the defendant in the action, carries on the business of spread betting primarily in relation to financial markets. Between February 2000 and his summary dismissal on 23rd August 2004 Mr Chu procured that funds of Charter, to an aggregate value of £9,080,939, were transferred to an account of City Index in order to finance his personal spread betting transactions with City Index. On 10th December 2004 Mr Chu was convicted of theft in relation to such transfers.

On 15th April 2005 Charter and Charter Central Finance Ltd served particulars of claim in their action against City Index for the recovery of £9,080,939. They set out the material facts, including three occasions in 2000 and 2001 when officers of the claimants brought their concerns in relation to the activities of Mr Chu to the attention of the National Criminal Intelligence Service or the Metropolitan Police. They averred in paragraph 42 that:

“...the funds transferred by Mr Chu to the City Index Account after 7th August 2000 were received by [City Index] with knowledge that the said transfers resulted from a breach of trust and/or fiduciary duty by Mr Chu. Accordingly it was unconscionable for [City Index], as it did, to take the benefit of the funds so transferred to finance Mr Chu’s spread betting and [City Index] is liable to account to the Claimants as constructive trustee of those funds.”

In its defence served on 13th May 2005 City Index admitted the transfers on which the claimants relied but denied that it was liable to the claimants whether as a constructive trustee or otherwise. On 8th February 2006 the claim was settled on terms that City Index paid the claimants £5.5m on or before 20th February 2006, which it did.

In the meantime, in August 2005, City Index commenced Part 20 proceedings against some, but not all, of the past and present directors of Charter (Defendants 1-12) and the group auditors (Defendant 13) claiming contribution or indemnity under Civil Liability (Contribution) Act 1978 (“the Act”) in respect of any sum which it might be found liable to pay to the claimants. The Part 20 claim was amended on 19th July 2006 (and reamended on 28th September 2006) to reflect the settlement of the claim and to seek contribution or indemnity in relation to the sum of £5.5m. In that context City Index alleged:

“23A. None of the sums transferred by Mr Chu into the City Index account was retained by City Index. Further, the sum of £5,500,000 which City Index paid to the claimants in settlement of their claims against it was substantially more than the profit which City Index made on Mr Chu’s account, which was approximately £3 million in total.

24B. Assuming, however, that the facts alleged by the claimants against City Index could be established, City Index would have been liable to pay the sum of £5,500,000 to the Claimants by way of compensation for the losses suffered by the claimants as a result of the unauthorised transactions.”

In the succeeding paragraphs of the reamended Part 20 particulars of claim City Index sets out the facts on which it relies as justifying the conclusion set out in paragraph 52 that:

“...the Part 20 Defendants’ breaches of duty... caused the Unauthorised Transactions to continue undetected and thereby caused or contributed to the losses allegedly suffered by the Claimants which formed the subject matter of the claim against City Index.”

City Index claims to be entitled by Sections 1, 2(1) and 2(2) of the Civil Liability (Contribution) Act 1978 to recover from the Part 20 Defendants “such contribution (which may be a full indemnity) as the court may find just and equitable having regard to their respective responsibility for the damage in question.”

By application notices issued on 2nd March 2006 the Part 20 defendants seek orders that the Part 20 claim be struck out or summarily dismissed under CPR Rules 3.4(2) and 24.2 on the grounds that the Part 20 particulars of claim disclose no reasonable grounds for bringing the Part 20 claim and/or that City Index has no real prospect of succeeding on the Part 20 claim. Their contentions may be summarised as follows:

As the long title to the Act proclaims, it was enacted to make new provision for contribution between persons who are jointly and severally liable for the same damage and for certain other similar cases where two or more persons have paid or may be required to pay compensation for the same damage. For the purposes of these applications the material provisions are those contained in ss. 1(1), (2) and (4), 2(1) and (2) and 6(1). They are in the following terms:

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).

(2)

A person shall be entitled to recover contribution by virtue of subsection (1) above notwithstanding that he has ceased to be liable in respect of the damage in question since the time when the damage occurred, provided that he was so liable immediately before he made or was ordered or agreed to make the payment in respect of which the contribution is sought.

[(3)...]

(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.

(2)

… the court shall have power in any such proceedings to exempt any person from liability to make contribution, or to direct that the contribution to be recovered from any person shall amount to a complete indemnity.

[3-5]

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).”

Counsel for City Index submits that in any claim under the Act there are three questions to be answered, namely:

This simple analysis is disputed by counsel for the directors and the auditors. They contend that, whilst City Index may well have been liable to restore to Charter all or part of the £9m wrongfully taken by Mr Chu, such a liability is not “in respect of...damage” nor to make “compensation in respect of that damage” for the purposes of ss.1(1) and 6(1). They submit that the remedy of Charter is for restitution and that a liability to make restitution is not within the terms of the Act. For this proposition they rely on the speech of Lord Steyn in Royal Brompton NHS Trust v Hammond [2002] 1 WLR 1397 in which, with the agreement of the other members of the Appellate Committee, he stated that s.6(1) did not comprehend claims in restitution and disapproved of a passage in the judgment of Auld LJ in Friends Provident Life Office v Hillier, Parker, May & Rowden [1997] QB 85. The response of counsel for City Index is twofold: (1) the relevant part of the speech of Lord Steyn is obiter dicta and ineffective to overrule the decision of the Court of Appeal, (2) the liability of City Index to Charter was for compensation in respect of damage, whether or not it was also a claim in restitution, and therefore not comprehended in statements of Lord Steyn. In that context I was referred to a number of judicial and textbook descriptions of the remedy of Charter against City Index as, variously, restitutionary or compensatory or both.

I will deal with these arguments in more detail later but I own to a reluctance to decide this point by reference to whether the relevant passage in a considered speech of a Lord of Appeal in Ordinary, with which all the other members of the Appellate Committee agreed, is obiter dictum or ratio decidendi or by reference to the label attached, in a different context, to Charter’s cause of action against City Index.

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 AER 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 quoted the passage from the judgment of Hoffmann LJ in El Ajou v Dollar Land Holdings plc [1994] 2 AER 685, 700 to which I have referred in paragraph 9 above. He 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”. He ended his discussion of the law with a footnote by reference to an article by Lord Nicholls of Birkenhead in which he had suggested that in respect of knowing receipt equity should follow the law by the imposition of a “restitutionary liability, applicable regardless of fault but subject to a defence of change of position...”. At page 456d Nourse LJ voiced his doubt “whether strict liability coupled with a change of position defence would be preferable to fault based liability in many transactions, for example, where, as here, the receipt is of a company’s funds which have been misapplied by its directors”. It was common ground before me that the decision of the Court of Appeal in Bank of Credit and Commerce International (Overseas) Ltd v Akindele [2001] Ch 437 reflects what the law now is.

Thus the starting point must be a disposal of the assets of the claimant in breach of trust or fiduciary duty. Such a disposal, as by a trustee of part of the trust fund to a person not entitled to it, gives rise to a loss to the trust and a liability on the part of the trustee to make good that which he wrongly took or transferred. The legal basis for that liability is a breach of trust and, thus, within the express terms of s.6(1). The loss to the trust must constitute ‘damage’ in the wide sense of the word as explained by Lord Bingham of Cornhill in Royal Brompton NHS Trust v Hammond [2002] 1 WLR 1397, 1401 as “damage, loss or harm” or in Halsbury's Laws of England 4th Ed. Vol. 12 (1) (1998 Ed) paragraph 802 as “disadvantage which is suffered by a person as a result of the act or default of another”. The right of the beneficiary is to recover, on behalf of the trust, compensation in respect of that loss. Were it otherwise the Act could not enable contribution between two or more defaulting trustees or directors. Such an exclusion would be contrary to the purpose of the Act, as proclaimed in its long title, and would deprive the words in s.6(1) “breach of trust or otherwise” of all meaning.

A claim for ‘knowing receipt’ is parasitic on a claim for breach of trust in the sense that it cannot exist in the absence of the breach of trust from which the receipt originated. If the recipient has the relevant knowledge then he too is accountable to the trust or beneficiary and liable to make good the loss or damage to the extent of what he received. If the basis of his liability is not within the express reference to ‘breach of trust’ in s.6(1) then it appears to be clearly comprehended by the following words ‘or otherwise’. If this is not the case then the Act does not enable the court to order the defaulting trustee to contribute to the liability of or to indemnify the knowing recipient or vice versa.

Accordingly unless I am precluded by authority from such a conclusion I would hold that a disposition in breach of trust gives rise to damage, loss or harm to the trust and the beneficiaries and a liability on the part of both the defaulting trustee and a knowing recipient based on that breach of trust and the requisite knowledge to compensate for that damage, loss or harm by restoring to the trust or beneficiary the equivalent of that which it lost.

Counsel for the directors and for the auditors accept that the judgment of Auld LJ in Friends Provident Life Office v Hillier, Parker, May & Rowden [1997] QB 85 supports my prima facie conclusion. In that case Friends Provident had participated in a development project on terms which required it to pay its share of the development costs as it proceeded. It employed Hillier Parker, a firm of surveyors, to check demands made from time to time for payment of its share of development costs. Friends Provident paid the developer its share of costs, as demanded, on the recommendation of Hillier Parker. There had been included, wrongly, an item described as ‘notional interest’. Friends Provident were unable to recover sums paid as notional interest from the developer and sued Hillier Parker for damages for negligence by reference to those sums paid. Hillier Parker then instituted third party proceedings against the developer. It sought contribution on three bases, namely (1) Friends Provident had paid the notional interest to the developer under a mistake of fact or for no consideration and the latter was liable to repay it, (2) the developer’s receipt of the notional interest was in circumstances such as to constitute it a trustee of those sums and (3) the developer’s application for payment of notional interest was in breach of an express or implied term of the development agreement. The developer successfully applied to strike out the third party proceedings. Hillier Parker appealed.

In the Court of Appeal Auld LJ, with whom Saville and Rose LJJ agreed, dealt with each of the three bases on which Hillier Parker sought contribution. With regard to mistake of fact or law he concluded (p.99G) that it was arguable that Friends Provident had a claim against Hillier Parker for repayment of the sums paid in respect of notional interest. He then went on to consider whether a restitutionary claim by Friends Provident against the developers would be a claim in respect of the same damage alleged by Friends Provident against Hillier Parker. He concluded (p.102G) that it was. He said:

“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." The purpose and effect of the Act were to provide for contribution beyond that of joint tortfeasors for which section 6 of the Law Reform (Married Women and Tortfeasors) Act 1935 had previously provided. The contribution is as to "compensation" recoverable against a person in respect of "any damage suffered by another" "whatever the legal basis of his liability, whether tort, breach of contract, breach of trust or otherwise." 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, as Ferris J. observed in K. v. P. (J., Third Party) [1993] Ch. 140, 148, holding that illegality was arguably not a defence to a claim under the Act of 1978:

"The Act of 1978 extends the potential for contribution beyond joint tortfeasors to joint contractors, joint trustees and others who are liable in respect of the same damage. . . . it is manifest that the words of section 6(1) of the Act of 1978 are intended to be interpreted widely, hence the use of the words 'whatever the basis of his liability' and the emphasis added by the word 'otherwise' at the end of the enumerated causes of action."

He decided that if the developers were liable to compensate Friends’ Provident for payment of the notional interest it would be because it was paid under a mistake of fact or for no consideration to which s.1(1) of the Act would apply.

He then proceeded to consider the alternative claim based on the allegation that the developers received the notional interest as trustees. He concluded that such a claim was arguable. In that connection he referred to a number of authorities, including Target Holdings v Redferns [1994] 1 WLR 1089. He said (p.108):

“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.

Accordingly, assuming that the developers are trustees for Friends' Provident of all or some of the notional interest the subject of this action and are in breach of that trust by paying the money away for their own use, or in not repaying it on demand by Friends' Provident or in asserting that they, not Friends' Provident, were entitled to it, then, subject to any successful defence of estoppel, I would hold that section 1(1) of the Act of 1978 applies to a claim for restitutionary compensation based on such liability.”

The reference to Nocton v. Lord Ashburton [1914] A.C. 932 is a reference back to the judgment of Peter Gibson LJ in Target Holdings v Redferns [1994] 1 WLR 1089, 1100 where he said:

“The remedy afforded to the beneficiary by equity is compensation in the form of restitution of that which has been lost to the trust estate, not damages. Viscount Haldane L.C. in Nocton v. Lord Ashburton [1914] A.C. 932, 952 referred to the "more elastic" remedies of the Court of Chancery than those of the common law courts, and said:

"Operating in personam as a court of conscience it could order the defendant, not, indeed, in those days, to pay damages as such, but 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."

That is still true today: see, for example, Bartlett v. Barclays Bank Trust Co. Ltd. (Nos. 1 and 2) [1980] Ch. 515, 543, in which Brightman L.J. referred with approval to the remarks to the like effect of Street J. in In re Dawson, decd. [1966] 2 N.S.W.R. 211, 214-216.”

It is not necessary for present purposes to refer to the remainder of the judgment of Auld LJ in which he dealt with the third basis of breach of contract.

The decision of the Court of Appeal in Friends Provident Life Office v Hillier, Parker, May & Rowden [1997] QB 85 was followed by the Court of Appeal in Hurstwood Developments Ltd v Motor and General & Andersley Insurance Services Ltd [2001] EWCA Civ 1785. If unaffected by later authority it supports the prima facie conclusion to which I have referred in paragraph 12 above. The contention of counsel for the directors and for the auditor is that it was overruled by the later decision of the House of Lords in Royal Brompton NHS Trust v Hammond [2002] 1 WLR 1397.

In Royal Brompton NHS Trust v Hammond a building owner sued the architect employed by him in connection with major works of construction for negligence in issuing to the contractor extension certificates and damages for loss allegedly sustained through negligent advice. The Architect issued contribution proceedings against the contractor. The contractor applied to strike them out. He succeeded in all courts on the ground that the contractor and the architect were not both liable for the same damage. In paragraph 6 Lord Bingham of Cornhill dealt with the meaning of ‘damage’ in terms to which I have referred in paragraph 10 above. He, Lords Mackay of Clashfern, Hope of Craighead and Rodger of Earlsferry agreed with the speech of Lord Steyn.

After setting out the facts and describing the claims Lord Steyn referred to the terms of the Act. In part VIII of his speech he considered the meaning of the phrase “the same damage” in s.1(1). He referred to the Court of Appeal decisions in Friends Provident Life Office v Hillier, Parker, May & Rowden [1997] QB 85 and Hurstwood Developments Ltd v Motor and General & Andersley Insurance Services Ltd [2001] EWCA Civ 1785. He quoted the part of the judgment of Auld LJ in the former which I have set out in paragraph 15 above. He considered that the proposition that the Act should be given a broad interpretation was in large measure correct. In paragraph 27 he continued:

“The focus is, however, on the composite expression "the same damage". As my noble and learned friend Lord Bingham of Cornhill has convincingly shown by an historical examination the notion of a common liability, and of sharing that common liability, lies at the root of the principle of contribution: see also Current Law Statutes Annotated (1978), vol. 2, "Background to the Act", at ch 47. 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. Such solutions could have been adopted but considerations of unfairness to parties who did not in truth cause or contribute to the same damage would have militated against them. Moreover, the adoption of such solutions would have led to uncertainty in the application of the law. That is the context of section 1(1) and the phrase "the same damage". It must be interpreted and applied on a correct evaluation and comparison of claims alleged to qualify for contribution under section 1(1). No glosses, extensive or restrictive, are warranted. The natural and ordinary meaning of "the same damage" is controlling.”

In paragraph 30 Lord Steyn concluded, for the reasons he had set out in paragraphs 22 and 23 of his speech, that the claims against the architect and the contractor were not for “the same damage”. In essence the claim against the former was for late delivery of the building, which was not a claim which could be or had been made against the architect, whilst the claim against the latter was for negligently evaluating the contractor’s entitlement to an extension of time. Thus the conclusion of Lord Steyn was to the effect that it is not legitimate by any process of construction to extend the meaning of the phrase “the same damage” beyond its natural and ordinary meaning.

In section XI of his speech Lord Steyn returned to, amongst others, the decisions in Friends Provident Life Office v Hillier, Parker, May & Rowden [1997] QB 85 and Hurstwood Developments Ltd v Motor and General & Andersley Insurance Services Ltd [2001] EWCA Civ 1785. He quoted the first two sentences in the passage from the judgment of Auld LJ I have set out in paragraph 15 above. He continued:

“Goff & Jones, The Law of Restitution, 5th ed, 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.”

In relation to Hurstwood Developments Ltd v Motor and General & Andersley Insurance Services Ltd [2001] EWCA Civ 1785 he concluded that it had been wrongly decided. He did not reach any comparable conclusion with respect to Friends Provident Life Office v Hillier, Parker, May & Rowden [1997] QB 85.

Thus, in summary, Lord Steyn reached two conclusions, namely (1) the phrase “the same damage” must be construed and applied in accordance with its natural and ordinary meaning and (2) a claim for restitution is not a claim for “compensation” within s.1(1). The first was plainly part of the decision of the House of Lords rejecting the contention that the damage sustained by the building owner for which the contractor was liable was the same as the damage for which the architect was liable. The status of the second conclusion is much less clear. That question arose before the Court of Appeal in Niru Battery v Milestone Trading Ltd [2004] 2 Ll.L.R. 319.

Niru Battery v Milestone Trading Ltd 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 subsequent 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. By his order Moore-Bick J declared Mr Mahdavi, CAI and SGS to be jointly and severally liable for the overall loss of Niru and Bank Sepah. The appeal of CAI was dismissed, see Niru Battery v Milestone Trading Ltd [2004] QB 985.

There were also contribution proceedings between CAI and SGS. At the trial, in reliance on Friends Provident Life Office v Hillier, Parker, May & Rowden [1997] QB 85 it had been common ground that the Act applied as between them. Shortly before the judge handed down his judgment counsel drew his attention to the speeches in Royal Brompton NHS Trust v Hammond [2002] 1 WLR 1397. The judge withdrew his draft judgment on the contribution issues and adjourned the hearing. Before the adjourned hearing SGS paid the sum due to Niru under the judgment in the main action and sought an indemnity from CAI. Following further argument Moore-Bick J held that SGS was entitled to be repaid the whole amount it had paid on the basis that it was subrogated to the rights of Niru against CAI. He rejected submissions that the same result could be justified by principles of recoupment or by an application of the Act. CAI appealed and SGS cross-appealed.

The Court of Appeal dismissed the appeal of CAI in respect of the subrogation claim and allowed the appeal of SGS on the recoupment claim. The case is relevant for present purposes because of the appeal of SGS in respect of the Act. This was dealt with by Clarke LJ in paragraphs 73 to 78. He referred to the terms of the Act and the material passages in the judgment of Auld LJ in Friends Provident Life Office v Hillier, Parker, May & Rowden [1997] QB 85 and the speech of Lord Steyn in Royal Brompton NHS Trust v Hammond [2002] 1 WLR 1397. He recorded that it was common ground between counsel that the passage in the speech of Lord Steyn I have quoted in paragraph 21 above was obiter dictum and added:

“77....If that is correct, (as it may well be) the strict position appears to be that we remain bound by the decision in Friends’ Provident.

78.

In these circumstances, although both parties made detailed submissions on the question whether a claim for restitution is a claim for “compensation”, I do not think it would be appropriate for me to express my own view on the point, at any rate unless it were necessary to do so in order to resolve the issues on this appeal. In the light of the conclusions which I expressed earlier it is not necessary to express such an opinion. 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 1000%, 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. In these circumstances, it is not necessary or appropriate for me to lengthen this judgment by my own analysis of the meaning of compensation in s.6(1) of the 1978 Act.”

Sedley LJ agreed that the Court of Appeal remained bound by its own decision in Friends Provident Life Office v Hillier, Parker, May & Rowden [1997] QB 85 “notwithstanding the doubt cast upon it by as respected an authority as Lord Steyn who, as both counsel accept, was speaking obiter”. It is evident from what followed that Sedley LJ did not agree with the passage from Goff & Jones which criticised the decision of the Court of Appeal in Friends Provident Life Office v Hillier, Parker, May & Rowden [1997] QB 85.

Counsel for the directors and for the auditors point out that the views of the Court of Appeal in Niru Battery v Milestone Trading Ltd [2004] 2 Ll.L.R. 319 are based on concessions of counsel. It is suggested that the concessions were wrong and, by contrast, I should regard myself as bound by the statement of Lord Steyn which I have quoted in paragraph 21 above.

I can express my view quite shortly. As I have pointed out in paragraph 22 above the passages in the speech of Lord Steyn dealing with the meaning and application of the phrase “the same damage” in s.1(1) are a necessary part of the decision of the House of Lords in Royal Brompton NHS Trust v Hammond [2002] 1 WLR 1397. But in that case no question of restitution arose as all relevant liabilities arose in contract or tort. By contrast, in Friends Provident Life Office v Hillier, Parker, May & Rowden [1997] QB 85 questions of restitution and knowing receipt did arise. The passage in the judgment of Auld LJ (pages 102/103) to which the criticism of Goff & Jones and Lord Steyn was directed related to the claim in restitution not that dealing with knowing receipt. It is true that in dealing with the latter claim, at p.108, Auld LJ referred back to his earlier construction of ss 1(1) and 6(1) but his conclusion that the claim in knowing receipt came within the Act was not criticised. Accordingly I share the views of counsel in Niru, supported by the prima facie opinions of the members of the Court of Appeal in that case, that the statement of Lord Steyn on p.1413 is obiter dictum. It follows that the decision of the Court of Appeal in Friends Provident Life Office v Hillier, Parker, May & Rowden [1997] QB 85, 106-108 is binding on me for the proposition that a claim in knowing receipt is one “to recover compensation...in respect of. damage”.

However, given the weight to be attached to the obiter dicta in Royal Brompton NHS Trust v Hammond [2002] 1 WLR 1397, I should consider the position if I am wrong in concluding that I am bound by the decision on knowing receipt in Friends Provident Life Office v Hillier, Parker, May & Rowden [1997] QB 85, 106-108. Counsel for the directors and for the auditors rely on a number of judicial statements as to the nature of the liability for knowing receipt in contexts other than the Act. Thus, in Royal Brunei Airlines v Tan [1995] 2 AC 378, 386F Lord Nicholls of Birkenhead stated in relation to the two heads of liability established in Barnes v Addy LR 9 Ch.App. 244 that “Recipient liability is restitution-based; accessory liability is not”. In Twinsectra Ltd v Yardley [2002] 2 AC 164, 194 para. 105 Lord Millett described the cause of action for knowing receipt as “restitutionary”. In Gruppo Torras v Al Sabah (24th June 1999 unreported) p.243 Mance J considered that liability based on knowing receipt did not “depend on the commission of any wrong or give rise to any obligation to make good any loss other than by way of restitution”. In Bank of Credit and Commerce International (Overseas) Ltd v Akindele [2001] Ch 437, 455F Nourse LJ recognised liability for knowing receipt as part of our law of restitution. Similarly in Niru Battery v Milestone Trading Ltd [2004] QB 985 paras 149-162 Clarke LJ treated the claim for knowing receipt as a species of restitution.

Counsel for City Index countered with a rival set of quotations. Thus in Bartlett v Barclays Trust Co (No.2) [1980] Ch.515, 545B Brightman J considered 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.”

In Target Holdings Ltd v Redferns [1996] AC 421, 434 Lord Browne-Wilkinson stated that if specific restitution is not possible

“then the liability of the trustee is to pay sufficient compensation to the trust estate to put it back to what it would have been had the breach not been committed”.

The consequential remedy by way of the imposition of a constructive trust is described by Lewin on Trusts 17th Ed. paras 7-11 and 7-13 as a “compensatory remedial trust”. Oakley, Constructive Trusts 3rd Ed.p.8 describes the reliance by a beneficiary on the personal liability of a constructive trustee to account as a claim for equitable compensation of breach of trust. Snell’s Equity 31st Ed. Para 28-09 points out that the liability of a defaulting trustee is to pay into the trust “a sum equivalent to the amount of the loss”.

I do not find any of these statements particularly helpful. They were made in different contexts. Further even if a cause of action can be described as restitutionary it does not necessarily follow that it is not also for the recovery of compensation and so within s.6(1) of the Act. The question is whether a claim based on knowing receipt is a claim to recover compensation for damage sustained by virtue of the initial breach of trust. For the reasons given in paragraphs 9 to 13 above I consider that it is even if it also may be described as restitutionary. Accordingly even if I am bound by the dictum of Lord Steyn I must consider whether the remedy of knowing receipt is only restitutionary or whether it is also compensatory. In my view it is compensatory within the provisions of s.6(1) even if it may also be described as restitutionary.

In summary therefore I conclude that the Part 20 claim of City Index does satisfy the provisions of ss.1 and 6 of the Act because (a) the decision of the Court of Appeal in respect of knowing receipt in Friends Provident Life Office v Hillier, Parker, May & Rowden [1997] QB 85, 106-108 was not overruled expressly or by implication by the House of Lords in Royal Brompton NHS Trust v Hammond [2002] 1 WLR 1397; and (b) a claim for knowing receipt is a claim for compensation for damage sustained in consequence of a breach of trust notwithstanding that it may also be described as restitutionary. I derive comfort for those views from the fact that if I am wrong it would seem that all the counsel and all the judges concerned with Dubai Aluminium v Salaam [2003] 2 AC 366 (see paragraphs 37 to 39 below) failed to appreciate that the Act did not apply to any of the contribution claims made and considered by Rix J, the Court of Appeal and the House of Lords notwithstanding that Royal Brompton NHS Trust v Hammond [2002] 1 WLR 1397 was referred to in argument in the House of Lords. Accordingly, in my judgment, the Part 20 claim is not liable to be struck out or summarily dismissed on this ground.

Given the terms of s.2(1), whether City Index should receive any and if so how much contribution from any one of the 12 directors or from the auditors depends on what the court finds to be just and equitable having regard to the extent of that director’s or the auditors’ responsibility for the damage in question. There can be no question of striking out such a claim under CPR r.3.4(2). Whether I should grant summary judgment dismissing the claim, as sought by the directors and auditors, depends on whether it has a real prospect of success within CPR r.24.2, no one suggesting that there should be a trial for some other reason.

Counsel for City Index emphasises the width of the discretion conferred on the court by s.2(1) not only in the requirement that the contribution should be just and equitable but also by the need to consider both blame and causation in assessing responsibility. He points out that the issue is one of apportionment which, unlike the prior question of liability, is not a question of all or nothing but of where on the scale between the two the extent of the contribution should lie. He stresses the need for the court to consider all relevant facts and then to make a value judgment. He submits that such a claim is inherently unsuited to summary judgment.

On the facts of the Part 20 claim, as indicated by the pleadings, City Index, though liable to Charter because of its knowing receipt, was not dishonest or fraudulent. Counsel for City Index suggests that the conduct and responsibility of City Index is on a par with that of the directors and the auditors, as claimed. Had any of them performed their duties it is unlikely that Mr Chu would ever have been able to transfer any or any further money of Charter to City Index. In addition, he points out, though City Index may have received £9m it paid much of it away in hedging transactions and, in the event, only profited from Mr Chu’s fraudulent activities to the extent of £3m. Thus if it has to bear the whole of the £5.5m it paid to Charter it will be £2.5m out of pocket. He points, by way of example, to Eastgate Group Ltd v Lindsey Morden Group Inc. [2002] 1 WLR 642 in which Longmore LJ stressed that the question of the amount of contribution was a matter for the trial judge and Downs v Chappell [1997] 1 WLR 426 in which a negligent defendant was required to contribute to the liability of a fraudulent one. So, he emphasises, the balancing exercise is one for the trial judge and is not amenable to summary determination.

Much of this is common ground. It is not disputed that the allegations of breach of duty made in the Part 20 Particulars of Claim do have a real prospect of success. The essence of the case for the directors and for the auditors is that City Index received the money for which it was accountable and either retained it or disbursed it for its own purposes. In such circumstances, they contend, it is inconceivable that they should be ordered to contribute to the liability of City Index. Though not suggesting that such a conclusion is one of law, they rely on various cases in which such views have been expressed. In chronological order they are Dubai Aluminium v Salaam [2003] 2 AC 366, McDonald v Coys of Kensington [2004] 1 WLR 2775 and Niru Battery v Milestone Trading Ltd [2004] 2 Ll.L.R. 319. I will consider each in turn.

In Dubai Aluminium v Salaam [2003] 2 AC 366 Dubai Aluminium sued several defendants who were alleged to have participated in a fraudulent scheme. The proceeds of the fraud were received by three of the defendants: Messrs Salaam, Al Tajir and Livingstone. Another defendant, Mr Amhurst, a solicitor, was alleged to have dishonestly assisted in the fraud, though not to have benefited from it, save by way of fees paid to his firm, Amhursts. The claims brought by Dubai Aluminium against all the defendants were for knowing receipt insofar as each defendant received proceeds and for dishonest assistance to the extent that he did not. The defendants settled with the claimant. Mr Salaam and Mr Al Tajir each paid around $17 million and Amhursts paid $10 million for both itself and Mr Amhurst. Amhursts sought contribution from Mr Salaam and Mr Al Tajir. Mr Salaam and Mr Al Tajir sought contribution from Mr Amhurst. Rix J dismissed the claims of Mr Salaam and Mr Al Tajir for contribution from Mr Amhurst. In addition he held that Amhursts should receive an indemnity from Mr Salaam and Mr Al Tajir. The appeals of Mr Salaam and Mr Al Tajir were allowed by the Court of Appeal on the ground that Amhursts were not vicariously liable for the actions of Mr Amhurst. Consequently the firm was not entitled to contribution in respect of the sums it paid in settlement of the claim. The firm, Mr Salaam and Mr Al Tajir appealed.

The House of Lords disagreed with the Court of Appeal and held that the firm was vicariously liable for the acts of Mr Amhurst and therefore entitled to claim contribution. Lord Nicholls of Birkenhead referred in paragraphs 50 and 51 to the contention of Mr Salaam and Mr Al Tajir that the judge had been wrong to take account of the extent to which they still had in their possession the proceeds of their fraud. He rejected that submission. In paragraphs 52 to 54 he said:

“52.

I cannot accept this submission. It is based on a misconception of the essential nature of contribution proceedings. The object of contribution proceedings under the Contribution Act is to ensure that each party responsible for the damage makes an appropriate contribution to the cost of compensating the plaintiff, regardless of where that cost has fallen in the first instance. The burden of liability is being redistributed. But, of necessity, the extent to which it is just and equitable to redistribute this financial burden cannot be decided without seeing where the burden already lies. The court needs to have regard to the known or likely financial consequences of orders already made and to the likely financial consequences of any contribution order the court may make. For example, if one of three defendants equally responsible is insolvent, the court will have regard to this fact when directing contribution between the two solvent defendants. The court will do so, even though insolvency has nothing to do with responsibility. An instance of this everyday situation can be found in Fisher v C H T Ltd (No 2) [1966] 2 QB 475, 481, per Lord Denning MR.

53.

In the present case a just and equitable distribution of the financial burden requires the court to take into account the net contributions each party made to the cost of compensating Dubai Aluminium. 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. As Mr Sumption submitted, a contribution order will not properly reflect the parties' relative responsibilities if, for instance, two parties are equally responsible and are ordered to contribute equally, but the proceeds have all ended up in the hands of one of them so that he is left with a large undisgorged balance whereas the other is out of pocket.

54.

Rix J considered this was obvious. So did Ferris J, in K v P [1993] Ch 140, 149. I agree with them.”

The auditors, in particular, rely on this case as showing that it is inconceivable that they should have to contribute any part of the £5.5m paid by City Index in settlement of the claim of Charter for £9m. No part of the latter sum was received by them; all of it went to City Index. If and insofar as City Index parted with it, it did so for its own purposes and in order to hedge the bets placed with it by Mr Chu.

In McDonald v Coys of Kensington [2004] 1 WLR 2775 the personal representatives of a deceased car owner committed it for sale to a firm of auctioneers but reserving the personalised number with which it was registered. The auctioneers failed to do what was necessary to reserve the number and the purchaser of the car procured its continued registration in connection with the vehicle he had bought. The personal representatives sued the auctioneers for negligence and breach of contract. The claim was settled on the basis of a payment by the auctioneers of £13,600 odd to the personal representatives and the assignment of the latter to the former of all their rights against the purchaser. The auctioneers made a Part 20 claim against the purchaser and sought contribution from him under the Act.

The judge concluded that the purchaser had been unjustly enriched at the expense of the estate to the extent of the value of the personalised number, which he assessed as £15,000, and ordered him to indemnify the auctioneers. The purchaser appealed. He sought to amend his appellants notice to contend that the Act did not apply because the liability of the purchaser was in restitution. Permission was refused and the Court of Appeal dealt with the appeal on the footing that the Act did apply. In paragraphs 47 and 48 Mance LJ said:

“47....Assuming, as we must, that the claims against Mr McDonald by way of unjust enrichment and against Coys by way of damages for breach of contract seek compensation in respect of the same damage, that damage must consist in the estate's continuing deprivation of the mark, not simply the initial transfer of the right to the mark with the car on 12 December 2000. That is, in any event, also the realistic view of Coys' breach of contract. By itself, it would have caused no more than minor irritation and extra costs, had Mr McDonald disgorged the mark, by possession of which he was unjustly enriched, after he became aware that he had by a mistake obtained it along with the car. The real damage lies in the estate's 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 retransfer the mark.

48.

On the hypothesis on which we must approach this part of the appeal, it was therefore open to the judge to treat both parties as causally responsible for the same damage. Bearing in mind that it is Mr McDonald who received the benefit of the mark, and that the whole proceedings would have been unnecessary had he retransferred the mark to the estate's order as he should have done, the judge's conclusion that Coys should recover 100% contribution from him appears to me unassailable in this court.”

The directors and the auditors rely on that case as showing, once again, that in cases of knowing receipt or the restitutionary equivalent the loss lies on he who receives the property.

The directors and the auditors, particularly the former, also rely on Niru Battery v Milestone Trading Ltd [2004] 2 Ll.L.R. 319. I have already set out the relevant facts of that case in paragraphs 23 to 26 above. SGS sought contribution or indemnity from CAI in respect of the money it had paid to satisfy the joint and several judgment against it and CAI. The latter had received the purchase price for the lead from Niru but had paid it away on the instructions of Mr Mahdavi. The claim was put on three bases, subrogation, recoupment and contribution under the Act.

In paragraph 34 Clarke LJ indicated that in his view a knowing recipient who pays away what he received is in no better position than the knowing recipient who has retained it. In paragraph 37 he said:

“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 [to] 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.”

Clarke LJ then referred to the passages in the judgment of Mance LJ in McDonald v Coys of Kensington [2004] 1 WLR 2775, which I have quoted in paragraph 41 above, and added:

“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.”

That was said in relation to the claim by way of subrogation. In connection with the claim for recoupment he reached the same conclusion. In paragraph 69 he said:

“It seems to me that, for all the reasons already given under the heading of subrogation, the ultimate or primary liability as between CAI and SGS was indeed that of CAI. This case is a far cry from joint (or indeed several) tortfeasors responsible for the same damage. The crucial distinction is that already referred to, namely the fact that CAI was at no time entitled to retain or make use of the monies which it had received by mistake. If it had acted in good faith it would have repaid the monies and SGS would not have been liable at all. In these circumstances both law and equity should in my opinion regard CAI as primarily or ultimately liable as between itself and SGS, as that expression is used in the cases.”

The conclusion of Clarke LJ in relation to the claim for contribution under the Act, assuming that it applied, is to be found in paragraph 50, which is in these terms:

“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. Thus, notwithstanding the views expressed by the judge the first time round, I would not accept the central thrust of Mr Bloch's submission that SGS and CAI were equally liable for Niru's loss, albeit under different causes of action.”

Clarke LJ found support for that view in the decision of the House of Lords in Dubai Aluminium v Salaam [2003] 2 AC 366. He added in paragraph 51:

“The facts here are of course very different but to my mind the key feature of the case is that CAI received monies under the letter of credit and did not return them.”

Sedley LJ and the President of the Family Division agreed.

I should also mention that counsel for the auditors relied, by way of analogy, on statements as to the liability in equity of one trustee to indemnify another trustee. Both Cotton LJ in Bahin v Hughes (1886) 31 Ch.D 390, 395 and Chitty J in Wynne v Tempest [1897] 1 Ch. 110, 113 emphasised 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.

Counsel for the directors and for the auditors submit that it is inconceivable, however negligent any of them may have been, that they, who received nothing, should be found liable to indemnify City Index which received the £9m claimed and, insofar as it may not have retained it, used it for its own purposes. In those circumstances, they contend, the claim for contribution in respect of the sum of £5.5m paid by City Index in settlement of the claim as advanced in these Part 20 proceedings has no real prospect of success.

Counsel for City Index did not seriously dispute these propositions in relation to any part of the £9m which City Index had retained. He accepted that the question for my determination was, in effect, whether City Index had any real prospect of success in establishing that it is just and equitable that the directors and the auditors should contribute to its liability in relation to that part of the £9m it had not retained but used for its own purposes. He submitted that the application by the recipient of the money wrongly received by him could not, per se, disentitle the recipient from any contribution. He instanced the case of a knowing recipient giving the money away to charity. It would, he suggested, depend on all the facts. He described Dubai Aluminium v Salaam [2003] 2 AC 366 as an extreme case. He criticised the conclusions of Clarke LJ in Niru Battery v Milestone Trading Ltd [2004] 2 Ll.L.R. 319 in respect of contribution under the Act as both unnecessary and illogical. He contended that as the activities of SGS had been a cause of the loss there should have been an order for some contribution to recognise that fact. He suggested that the two trust cases I have referred to in paragraph 46 above are irrelevant to the exercise of the discretion conferred by s.2(1) of the Act.

The question what, if any, contribution should be ordered to be paid by the directors or the auditors is one for the discretion of the court to be exercised in the light of all the relevant facts and circumstances. At this stage I must assume that City Index will be successful in establishing the negligence of the directors and auditors on which it relies. It will follow that their acts and omissions were a cause of the loss suffered by Charter. But it does not follow that if their conduct is a cause then they should be ordered to pay some contribution. The submission of counsel for City Index to that effect is contrary to the conclusions of the Court of Appeal and House of Lords in each of Dubai Aluminium v Salaam [2003] 2 AC 366, McDonald v Coys of Kensington [2004] 1 WLR 2775 and Niru Battery v Milestone Trading Ltd [2004] 2 Ll.L.R. 319.

Each of those cases shows the importance to be attached to the receipt and retention of the relevant property by one of those found liable to the claimant. In this case City Index admits to having made a profit of £3m from the spread betting activities of Mr Chu financed by the £9m he stole from Charter. In my judgment it is inconceivable that City Index would get contribution from the directors or auditors such as to restore to them any part of that profit. This much I understood counsel for City Index to accept.

Accordingly the issue is, as I have summarised it in paragraph 48 above, whether there is a real prospect of City Index obtaining contribution in respect of the balance of £2.5m it paid to Charter to settle the claim. In my view there is not. In Niru Battery v Milestone Trading Ltd [2004] 2 Ll.L.R. 319 the relevant defendant, CAI, had paid away the sums it had received with the requisite knowledge. The Court of Appeal held 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. I doubt whether it would make any difference if the money had been paid away by the wrongful recipient to charity, but that is not this case.

The general rule in equity, as exemplified in the two cases to which I have referred in paragraph 46 above, 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.

For all these reasons I conclude that there is no real prospect of City Index obtaining an order against any of the directors or the auditors for contribution towards the sum of £5.5m City Index paid to settle the claim for £9m. In those circumstances I will summarily dismiss the Part 20 proceedings brought against them by City Index.

For the reasons I have sought to explain: