Third Party Liability (focusing on 'knowing receipt') - Lecture 17 - Property II

What must we demonstrate for a defendent to be liable for ‘knowing receipt’? And how does Foskett v McKweon relate to this? Why is it important to consider whether the recipient has the trust property or not?

In order to make a defendant liable for knowing receipt, the claimant must demonstrate that they have a claim to the trust property which has ended up in the trustee's hands, therefore we must apply the tracing approach and therefore the case of Foskett v McKweon would be relevant. But the recipient may no longer have the trust property, therefore it is not possible to have a proprietary remedy for obtaining the asset again, but you can obtain a personal remedy through knowing receipt.

Are we focusing on either proprietary remedies or personal remedies when it comes to knowing receipt?

Within knowing receipt, we are not focusing on proprietary remedies, but personal remedies - we are focusing on the actions and liabilities of the defendant's actions. The claim against the defendant for knowing receipt is PERSONAL, not proprietary - whether or not the known receipt to account has the property or not. PERSONAL CLAIM.

Can claims in both ‘dishonest assistance’ and ‘knowing receipt’ arise - how does this relate to the Group Seven case? And how should this be addressed?

Claims can arise in dishonest assistance and knowing receipt where the context might make the individual both an assistor, and a recipient (an example of this would be the Group Seven case).

Though, this should be analysed seperately, since they are different. 

What are the 4 elements of liability to establish ‘knowing receipt’ in summary?

1. Proprietary base

2. Breach of duty

3. Beneficial Receipt

4. Fault element

Proprietary base is the 1st element of establishing ‘knowing receipt’, what is meant by this? And what are criticisms of this requirement relating to beneficiaries/claimants?

You need to show that the property the defendant had was one you had an interest in.

This requirement is not unduly favourable towards beneficiaries, as the beneficiary has to demonstrate that the third party has had an interest in their property.

Breach of duty is the 2nd element of establishing ‘knowing receipt’, what is meant by this?

If there is no breach of duty, the claimant/beneficiary cannot complain - a breach of trust or breach of fiduciary duties could be an example of breach of duty.

Arthur v Attorney General of the Turks and Caicos Islands addresses the 2nd requirement for ‘knowing receipt’ (breach of duty), what is the context, outcome and importance?

Context → A minister of the Turks and Caicos Islands transferred freehold property, which belonged to the crown, transferring it to Mr Arthur and a claim was brought against Mr A for knowing receipt that the property belonged to the crown - the crown's assets. The minister, that was transferring the property, was not holding it on trust and didn't have property to the land, and as transferring the property through his capacity as a minister (prima facea - unlawfully), he was acting in breach of his fiduciary duties and the Privy Council concluded that since he was acting in breach of his fiduciary duties, he would be in knowing receipt against Mr A.

Outcome → This means that transfer of a company's property via a director would amount to a breach of fiduciary duty, as the director would not have legal title to the property, but directors would have SOME level of capacity and control, but the recipient they transfer to would be liable for knowing receipt, however this can be expanded to include breach of trust, breach of fiduciary duty and this breach must be ACTUALLY established (for instance if the trustee is authorised to do the following, the party cannot be liable for knowing receipt).

Importance → This case concluded that in order to establish breach of duty, breach of duty and fiduiciary duty is also inculded in this, and this breach must be established otherwise the claim will fail.

Criterion Properties plc v Stratford UK Properties LLC addresses the 2nd requirement for ‘knowing receipt’ (which is breach of duty), what is the outcome and importance?

Outcome and importance → This case outlined that a breach of duty must be established, otherwise the case will fail.

Byers v Saudi National Bank addresses the 2nd requirement for ‘knowing receipt’ (which is breach of duty), what is the context and outcome of the case? What were the comments made in obiter dicta within Byers v Saudi National Bank, and why did Lord Briggs and Lord Burrows disagree about what ‘knowing receipt’ is? And does ‘dishonest assistance’ apply in this case despite it being a case of knowing receipt?

Context → A was a registered owner of shares, holding it on trust for Saad Investments, and then transfered the saves to Samba Financial Group in breach of trust. Under Saudi law which governed the transaction, Saad Investment's equitable proprietary interest was extinguished and Saad Investment became insolvent, the claim is brought by Saad Investment's liquitators who brought a claim against Samba for knowing receipt - Samba Financial Group did know the shares were transferred in breach of trust.

Outcome → The Supreme Court stated the claim failed, since Saad Investments did not have any continuing proprietary interest in the shares when they were received by Samba at the time of transfer. All judges unaninously agreed that the claim can only succeed if the person STILL has an equitable interest at the TIME of transfer, however if the proprietary interest is extinguished or overriden, this ends the possibility of obtaining a claiming in knowing reciept, and also proprietary remedies, since you cannot trace if you have no proprietary interest.

Commentary made in obiter dicta → In dicta, the claimant in knowing receipt can only obtain the claim, if they no longer have the trust property, but if they have the equitable proprietary right still, it will be held on constructive trust as per Foskett v McKweon, therefore knowing receipt would not have to be applicable, however this is left uncertain.

Judges’ disagreement on what knowing receipt is → Lord Briggs suggested that knowing receipt is best understood as a claim ancillary to a proprietary claim, designed to restore trust property, rather than an independent equitable wrong. However, Lord Burrows disagreed with Lord Briggs, describing the liability of a knowing recipient as an equitable proprietary wrong.

Where does ‘dishonest assistance’ apply here, if knowing receipt does not apply? → Maybe ... if there is knowledge of the breach, then the person could be liable for dishonest assistance, however that is distinct from knowing receipt. 

Agrip Africa Ltd v Jackson addresses the 3rd requirement for ‘knowing receipt’ (which is beneficial receipt), what is the context and outcome of the case? What is the 3 academic criticisms arising from the reasoning in Agrip Africa Ltd v Jackson relating to banks and beneficial receipt?

Context → The contextual outcome was that banks do not receive money for their own benefit, but hold it for their clients as agents, therefore banks cannot be held liable for knowing receipt.

Outcome → This case concludes that you must show the defendant/recipient received the property BENEFICIALLY, as in receiving the property for their own benefit. However if they receive the property as an agent or on behalf of someone else (as in not for their benefit, but benefit of the principal - they are not the beneficial owner, nor do they receive it beneficially), they cannot be held liable for knowing receipt.

The criticims →

• Banks do hold money for themselves, utilising the money to invest elsewhere, accepting liability if money is to be taken out of the account and do not hold it ministerially for their clients as an agent, it is a relationship of creditor and debitor with either side being able to sue one another, this is not a dynamic of agent and principal.

• Places banks in a favourable position, denying beneficiaries the ability to recoup losses, since banks would be concerned with iterations to law if they were to be held liable for knowing receipt or concerns that people are litigous, attempting to sue banks for financial gain, therefore, banks can argue due to Agip Africa Ltd v Jackson that they didn't have beneficial receipt and didn't receive the money beneficially, acting as agents and not knowing or being aware of a breach of trust.

• Though … this could prevent beneficiaries defendant-shopping or targetting banks with immense litigation with knowledge that they have filled pockets of wealth to extort, and would otherwise undermine the functionality of banks and impose additional positive obligations and burdens onto banks to detect and prevent fraudulant activities which may hold them liable for knowing receipt by allowing withdrawal or transferring of money. It ensures the stability of the banking and financial industries, but does not blur the lines of penalising banks for merely abiding by clientele’ demands and wishes as per the traditional contractual structure.

Uzinterimpex JSC v Standard Bank plc addresses the ruling in Agrip Africa Ltd v Jackson which focused on 3rd requirement for ‘knowing receipt’ (which is beneficial receipt), what is the outcome of Uzinterimpex JSC v Standard Bank plc?

LJ Bick recognised that there are valid criticisms of Agip Africa Ltd v Jackson as to how banking operates, however this particular appeal is not important as to address whether this aspect of Agip should be departed from and this is obiter.

Byers v Saudi National Bank addresses the ruling in Agrip Africa Ltd v Jackson which focused on 3rd requirement for ‘knowing receipt’ (which is beneficial receipt), what is the outcome of Byers v Saudi National Bank?

In Byers v Saudi National Bank, Lord Briggs emphasised that banks receive money ministerially (in relation to clearing of money), but this reaffirms the orthodox approach that banks intend to receive money for their clients and not themselves, therefore they cannot receive property/assets beneficially (as in benefit of themselves) and therefore, cannot be held liable for knowing receipt. (however, if you can still be liable for dishonest assistance nonetheless, if you do receive the property beneficially).

Bank of Credit and Commerce International (Overseas) Ltd v Akindele addresses the 4th requirement for ‘knowing receipt’ (which is the fault element), what is the context and outcome of the case? And why is this case important in regards to Royal Brunei Airlines v Tan (which established the fault element test for ‘dishonest assistance’) and what is the fault element test established for ‘knowing receipt’ by Bank of Credit and Commerce International (Overseas) Ltd v Akindele? What are the criticisms of the case?

Context → The employees of a registered Caiman Island's company acted in breach of fiduciary duties by trying to inflate the value of the company and as a part of the scheme, the employees entered into an artifical investment agreement with Akindele where A invested $10 million and received a payment of $17 million from the company and received more later on. The deal led to A receiving $17 million from the company and the company went insolvent. The claimants are the liquidators of the company, claiming A had to account for $17 million since he received it in breach of fiduciary duty (and liquidators also brought a seperate claim for dishonest assistance towards A, but the trial judge rejected this, finding that A did not act dishonestly, therefore the claim failed).

Outcome → The court considered whether there was a claim for knowing receipt and the court concluded it was possible for claimants to succeed as you DON'T need to show the defendant acted dishonestly, the test is 'whether the defendants knowledge of where the money came from makes it unconscionable for him to retain the benefit?' - this drew a distinction between knowledge and dishonesty (distinction in the fault requirement between third party liability VERSUS knowing receipt) and on the facts of the case, there was insufficient evidence that it was unconscionable for A to retain the money he received, therefore A was not liable and A was not aware of any facts that put the proprietary of the whole scheme that made A question the authenticity of this agreement, such as the high interest rates and any suspicions would have to relate to the particular transactions, A did not have any suspicions which means it wasn't unconscionable for him to keep the money he received.

Importance and unconscionability test established→ Nourse LJ outlined that "What then, in the context of knowing receipt, is the purpose to be served by a categorisation of knowledge? All that is necessary is that the recipient’s state of knowledge should be such as to make it unconscionable for him to retain the benefit of the receipt."

• Therefore, it is better to following Lord Nicholls approach in Tam v Royal Brunei Airlines, departing from the initial requirement of knowledge, but he didn't adopt dishonesty as the fault element (in relation to third party liability) and INSTEAD in terms of (knowing) receipt liability, unconscionability is the fault element HERE.

Criticisms of the case → Uncertainty of the law, since Akindele focuses on Tam, but disregards the discussion on dishonesty and adopts the unconscionability approach.

Byers v Saudi National Bank addresses the 4th requirement for ‘knowing receipt’ (which is the fault element), what is the commentary made in obiter dicta? And the commentary regarding the test of unconscionability established in Bank of Credit and Commerce International (Overseas) Ltd v Akindele?

Lord Briggs and Burrows in obiter dicta were concerned with the lack of certainty that arises from unconsconiability, especially certainty in commerical contexts and the test should not vary from case to case, due to it being 'unruly and unpredictable' which could otherwise be manipulated by judges.

Crédit Agricole Corporation and Investment Bank v Papadimitriou addresses the 4th requirement for ‘knowing receipt’ (which is the fault element) and the test in Akinele, what is the importance of this case?

Importance → You do require a fault element for knowing receipt, and Lord Sumpton in Papadimitrious was in agreement with the objective test of assessing knowledge, such as having constructive notice of proprietary interests, especially a reasonable person in the position of the defendant to serious cause to question the transaction and that this was the same test for knowing receipt as it is a bona fide purchaser - if we adopt Lord Sumpton's approach such as making some sort of enquiry and the defendant doesn't investigate any further, we will not allow the defendant not be liable - it is an objective test of fault.

• Therefore, the unconscionability test established in Akindele was interpreted to be as an objective test.

Arthur v Attorney General of the Turks & Caicos Islands addresses the 4th requirement for ‘knowing receipt’ (which is the fault element), what is the importance of this case? And how does it interpret the Akinele unconscionability rule, and how does it vary from the Padadimitriou case?

This case prefers a subjective test of fault and Lord Briggs' prefers the subjective fault element of knowledge, and that the recipients conscience must be actually affected for knowing receipt to be affected, such as deliberately turning a blind eye despite knowledge of the breach of duty as to how the property came to you.

• Contradicts the Papadimitriou case intrepretation of the Akindele rule which states it is an objective test, whilst Arthur v AG of Turk and Caicos Islands outlines the Akinele unconscionability test is subjective (uncertain?)

What are the concerns of contradicting messages within Arthur v Attorney General of the Turks & Caicos Islands, Crédit Agricole Corporation and Investment Bank v Papadimitriou and their interpretation of Bank of Credit and Commerce International (Overseas) Ltd v Akindele regarding the fault element test of unconscionability to establish ‘knowing receipt’? And which test application would benefit claimants or the defendants?

The criticisms focus on the uncertainty of the law and inconsistency in what the fault element of knowing receipt requires.

The fault element test was established as ‘unconscionability’ in Bank of Credit and Commerce International (Overseas) Ltd v Akindele.

This interpretation has been reaffirmed by Crédit Agricole Corporation and Investment Bank v Papadimitriou in implementing an objective standard to the fault element in terms of 'whether the defendants knowledge of where the money came from makes it unconscionable for him to retain the benefit?’.

HOWEVER, the interpretation in Papadimitriou is contradicted with Arthur v Attorney General of the Turks & Caicos Islands, since they preferred a subjective test of fault and Lord Briggs' prefers the subjective fault element of knowledge, and that the recipients conscience must be actually affected for knowing receipt to be affected, such as deliberately turning a blind eye despite knowledge of the breach of duty as to how the property came to you.

Due to the uncertain nature of whether the ‘unconscionability’ test is objective as per Papadimitriou, or subjective as per Arthur, this can benefit and disadvantage the either side, objective standards as echoed in Papadimitriou benefits the beneficiary since it’s easier to establish, and the subjective standards as echoed by Arthur benefits the third party since its harder to prove the intentions of the party and imposes an evidentiary burden. This uncertainty as to whether we have a subjective or objective approach to unconscionability would cause great uncertainty towards beneficiaries wishing to make a claim, since they would be uncertain as to which approach is applied to the inconsistency of case law.

A subjective test would be harder to fulfill because we have to otherwise have to have actual irrefutable evidence to get inside the third parties’ head and intentions to assess whether they are liable for knowing receipt, and it would be much harder to assess that they themselves had knowledge and that it was unconscionable based on that knowledge as opposed to being objectively unconscionable for actions that would to a reasonable, ordinary person be an unconscionable act to retain the profit from the knowledge they know. This uncertainty would either skew in benefit of the beneficiary, or vastly disadvantage them.

What are the criticisms of Byers v Saudi National Bank relating to the 2nd requirement of ‘knowing receipt’ which is breach of duty?

In relation to knowing receipt, ‘breach of duty’ would be a criticism that rules are unduly favourable towards beneficiaries.

As demonstrated by Byers v Saudi National Bank, it was concluded that the claim failed since Saad did not have any continuing proprietary interest in the shares when they were received by Samba at the time of transfer. All judges unaninously agreed that the claim can only succeed if the person STILL has an equitable interest at the TIME of transfer, however if the proprietary interest is extinguished or overriden, this ends the possibility of obtaining a claiming in knowing receipt.

This means that in the process of third party liability and actions that leads to loss suffered by the beneficiary, if both their equitable interest at the time of transfer, or their proprietary interest is extinguished in the process of the fraudulant act, the beneficiary have limited methods of redress, barring them from a claim in knowing receipt, and also proprietary remedies as the beneficiaries can no longer trace if they have a proprietary interest. Therefore, there are concerns of injustice towards beneficiaries being unable to recoup their loss.

What are some benefits of the approach taken in Bank of Credit and Commerce International (Overseas) Ltd v Akindele relating to the 4th requirement for ‘knowing receipt’ which is the fault element?

In relation to knowing receipt, I would argue that one of the elements of liability, specifically ‘fault element’ would agree with the statement that rules are unduly favourable towards beneficiaries.

As per Bank of Credit and Commerce International (Overseas) Ltd v Akindele (and Tam v Royal Brunei Airlines), unlike dishonest assistance where you must prove ‘dishonesty’ (through an objective standard), instead knowing receipt focuses on unconscionability as it’s fault element departing away from Tam v Royal Brunei Airlines and the court outlined that it was possible for claimants to succeed as you DON'T need to show the defendant acted dishonestly, the test is 'whether the defendants knowledge of where the money came from makes it unconscionable for him to retain the benefit?’

It reduces the evidentary burden of the claims to prove whether the third party was subjectively dishonest.

Byers v Saudi National Bank explores the remedies available for ‘knowing receipt’, what is concluded in Byers v Saudi National Bank? What did Lord Briggs, and Lord Burrows argue, and why was Lord Burrows regarded as wrong for two reasons?

Lord Briggs views equitable proprietary remedies as ancillary, whilst Lord Burrows sees it as an equitable proprietary wrong and Lord Briggs' view might be more approved in relation to equitable proprietary remedies, whilst Burrows' view is less approved. What is meant by ancillary by Lord Briggs is if the recipient doesnt have the property due to it being transferred and disspitated, it is ancilary as the climant in knowing receipt might come to the rescue in those circumstances, however this remains unclear, but we must conclude the same tracing process, or either follow through proprietary remedies as per Foskett v McKweon, or personal remedies of knowing receipt.

There are several reasons why Lord Burrows is wrong in his approach, is because

1. Receipt is passive where the person simply receives the property, if this receipt is seen as an active wrongdoing and if this ground of dishonest assistance is addressed, then why would knowing receipt exist?

2. In equity, the property received can be intangible, whilst in common law, the tangible property cannot then immediately become intangible

Mitchell and Watterson explore the remedies available for ‘knowing receipt’, what do they conclude?

They argued that knowing recipients take up obligations once the property is transferred over to them akin to a trustee, however this is widely debated and contested.

Arthur v Attorney General of the Turks & Caicos Islands address Mitchell and Watterson’s article discussing ‘knowing receipt’ remedies, what did the case conclude?

Arthur v Attorney General of the Turk & Caicos Islands picked up on the Mitchell and Watterson case, such as them having a personal liability to restore the value of the property that has been misapplied, however this view has not been implemented widely, due to the need to distinguish Foskett v McKweon, and the personal liability and remedy nature of knowing receipt.

William v Central Bank of Nigeria also address ‘knowing receipt’ remedies, what did the two points did this case conclude? The benefit of this ruling?

This case concluded that a knowing receipent is not liable as a trustee for two reasons, this can be read as

1. limitation regime which relates to trustees and a knowing recipient is not a trustee for these purposes, and

2. knowing recipient commits a wrong and due to the wrongdoing can be made to account for their gains and losses, but in order to obtain those remedies for knowing recipient, you don't have to word knowing recipients as 'constructive ownership'

The benefit of this case is directed towards the third party, since this case recognises that the third party is not liable as a trustee nor can they have the claims against them (which expires due to the limitation act which is 6 years).

Lord Nicholls discusses strict liability in relation to claims in unjust enrichment, what does he argue in summary?

Lord Nicholls argues that there needs to be a fusion of unjust enrichment, since it already is cemented in allowing for a personal restitution claim based on strict liability, but also have knowing receipt.

You can have fault based liability in equity without knowing receipt doing all the work, with defences such as change of position.

Can change of position be relied upon if you act in bad faith within the current English law?

In the current law, change of position cannot be RELIED on if you act in bad faith, therefore it is not dependant on knowing receipt due to knowing receipt is reliant on the FAULT requirement. However if this was removed, change of position could be possible.

Ministry of Health v Simpson discusses strict liability in relation to claims in unjust enrichment, what is the context and outcome?

Context → This case focuses on the administration of a dead person's estatement, and by mistake, they paid money to the defendant believing it was properly paid to D.

Outcome → The beneficiary of the testators estate were able to establish a claim without showing the defendants were at fault, this could provide a basis for expanding strict liability more generally 

Twinsectra Ltd v Yardley discusses strict liability in relation to claims in unjust enrichment, what is the conclusion in the case?

This commentary was made in obiter dicta, relying on Lord Nicholl's article, but this idea has not been adopted and this is not what the law is, but whether the law should adopt a strict liability approach? 

Relfo Ltd (in liq) v Varsani discusses strict liability in relation to claims in unjust enrichment, what is the context, outcome and importance of the case?

Context → R are the claimants who could show that the R director transfered half a million pounds to M and this was in breach of fiduciary duty, on the same day another similar transfer happened from intertrade to Mr Varsani for a similar sum minus commission, the difficulty R had was showing the money going from M to intertrade.

Outcome → The court of appeal said it was possible to trace the value of the property, a claim in knowing receipt was possible - this is consistent with backwards tracing and what was mentioned in Brazil v Durant.

Importance → It is also possible that a claimant to bring a claim against V in unjust enrichment, since he was enriched at R's expense, and it should succeed (whether or not equitable claims should exist with strict liability claims in unjust enrichment, addressing problems Lord Nicholls explored in his articles.) - In unjust enrichment, you must show the enrichment of V comes at the direct expense of R and was treated as SEPERATE from TRACING in the case

Lipkin Gorman v Karpnale discusses strict liability in relation to claims in unjust enrichment, what is the conclusion of the case?

The circumstances must be so extraordinary that they should be able to exploited any defence of change in position

Re Diplock discusses strict liability in relation to claims in unjust enrichment, what is the conclusion of the case?

Outcome → If charities don't change their position after receiving donations and feel confident in their finacial future, they would not be liable for knowing receipt - however if strict liability was implemented, the charities would not be able to prove fault/not having knowledge of breach of trust and therefore would be held liable for knowing receipt.

The liability is strict, meaning the claimant does not need to prove fault, wrongdoing, or knowledge on the part of the recipient. The recipient was enriched at the expense of the beneficiaries, and no valid legal ground existed for the retention. The claim is subject to equitable defences, such as a change of position, where a recipient has in good faith spent the money on something they would not otherwise have bought (e.g., in Re Diplock, improving the charity's property)

How do you approach strict liability raised in relation to unjust enrichment?

A strict liability approach to knowing receipt treats the claim as a form of "unjust enrichment".

• Liability is based simply on the fact that the recipient received property that belonged to someone else (vitiated transfer), regardless of whether they knew it was in breach of trust.

• Knowledge Element: The recipient’s knowledge is irrelevant to the initial liability.

• Defences: Instead of requiring knowledge, the defendant might rely on defences like "change of position" or being a "bona fide purchaser for value without notice

In PQ, if you recognise a strict liability knowing receipt based claim, you must also FOCUS on -

1. you need to show that the enrichment of the defendants comes at the expense of the claimant because it's a direct transfer between the two AND

2. change of position is only a defence if strict liability is recognised, and it is not relevant to knowing receipt