Unjust enrichment: strict liability for trust property

X steals C's money and gives it to D. D is innocent of any wrongdoing by X and thinks it is a gift. X disappears, or is not worth suing, and D has used the money to pay his outgoings. How then may C recover his money?

We know from Lipkin Gorman v Karpnale Ltd [1991] 2 AC 548 (HL) that C may bring a claim for restitution arising from unjust enrichment against D.

D has been directly enriched at C's expense and in circumstances where there has been no consent from C. Therefore C has a personal claim, not dependent on tracing into any specific property, for the repayment of his money by D, the recipient of his property.

The liability to repay is strict, subject to defences. Suppose X holds money on trust for C and in breach of trust pays the money to D. D is innocent of any wrongdoing by X and believes himself entitled to the money.

X disappears or is not worth suing, and D has used the money to pay his outgoings. Can C recover the money using the Lipkin Gorman claim?

The answer to this question is no: Re Montagu's Settlement Trusts [1987] Ch 264; Bank of Credit and Commerce International (Overseas) Ltd v Akindele [2000] 4 All ER 221 (CA). C has no cause of action against D unless he can establish the equitable wrong of knowing receipt.

This distinction in respect of the rights of recovery of those who own property at law and those who own property in equity has come in for considerable judicial and academic criticism, but has remained the law: Criterion Properties Plc v Stratford U.K. Properties LLC [2004] UKHL 28[2004] 1 WLR 1846 at [4] (Lord Nicholls and Lord Walker agreeing); Twinsectra Ltd v Yardley [2002] UKHL 12 [2002] 2 AC 164 (Lord Millett) Lord Hoffmann The Redundancy of Knowing Assistance in Birks (ed), The Frontiers of Liability (1994), 27 at p 29 Birks, Unjust Enrichment (2005), pp 156-58).

Administration of estates

However the limitation to a fault based remedy against the unauthorised recipients of trust property has never applied in the analogous situation where those entitled in the estate of a deceased person seek to recover assets that have been misapplied, from those in receipt.

In Ministry of Health v Simpson [1951] AC 251 (HL) it was confirmed that the next of kin of the deceased were entitled to recover by a personal remedy against each of the beneficiaries who had received distributions under the will from the personal representative in breach of his fiduciary duty (because the will had subsequently been held to be invalid).

There was no requirement to show that the beneficiaries had been at fault or that their conduct was unconscionable in any way.

Equally, an unsatisfied creditor of a deceased may compel a beneficiary who has been paid in priority to him to refund the money, even though the money was paid and received in good faith and without notice of the creditor's claim and the estate has been fully administered (March v Russell (1837) 3 M & Cr 31).

The most likely basis for these claims is that in each case the property is paid away without the consent of the next of kin/creditor who is entitled to it in priority. Even if the recipient is not at fault, and even if he no longer retains the very property received, the recipient remains enriched by its value.

The enrichment is at the expense of the next of kin/creditor because the beneficiary has intercepted a benefit which should otherwise have accrued to the claimant. This enrichment of the beneficiary remains extant unless and until the recipient can show a change of position or he refunds the property.

Developments in Australia

Such reasoning has recently been unequivocally accepted in Australia outside the realms of the administration of estates. In SayDee Pty Ltd v Farah Constructions Pty Ltd [2005] NSWCA 309 (unreported), the claimant and defendant entered into a joint venture to purchase and develop some land. The application for planning permission was made by the director and controller of the defendant, X, and was refused on the grounds that the development was too small.

X was, however, told that permission would be granted if surrounding land were included within the development. X informed the claimant that the permission had been refused but did not inform it of the potential for a development including the surrounding land. Subsequently X arranged for the surrounding land to be purchased by another company he controlled as well as by his wife and daughters. This was held to have been a breach of fiduciary duty by X.

Wife and daughters

In relation to the liability of the wife and daughters, the New South Wales Court of Appeal held that, whether or not they had the necessary knowledge to establish the equitable wrong of participation in a breach of fiduciary duty, the wife and daughters each held half of their interests in the properties on constructive trust for the claimant on the basis of a strict liability in unjust enrichment for the receipt of trust property:

'But in the absence of any High Court authority to the contrary, I see no reason why the proverbial bullet should not be bitten by this Court in favour of the Birks/Hansen approach. In my opinion there is support for the adoption of the restitutionary approach in Lipkin in the House of Lords and in the exposition on the subject by Hansen J in Koorootang...On the foregoing basis, Mrs Elias and the two children are liable to account for any profit or benefit they derived from the acquisition of their respective interests in No 15 as a result of Mr Elias' and Farah's breach of their fiduciary duties. They hold those interests on constructive trust for the joint venture.' (Tobias JA at [234] - [235]).

Money improperly paid

A recent case decided by Justice Lawrence Collins, Primlake Ltd v Matthews Associates [2006] EWHC 1227 (Ch), indicates that developments in this country may not be far behind and that momentum is building towards strict recipient liability in equity.

The facts of the case may be simplified for present purposes: the claimant company, which was in liquidation, brought proceedings against M, for whom the entire share capital of the claimant was held as nominee, but who was not appointed an officer of the company.

The director of the company, R, acting on instructions from M, paid sums to M or M's pension fund over a number of years, apparently for no consideration.

J Lawrence Collins reviewed all the potential bases for the payments advanced by M and concluded that there was no legal justification for them. He held (at para [334]) that M was liable for breach of his fiduciary duty as a de facto director of the company. Importantly, however, if he was wrong on this he held that M was liable as a constructive trustee on the basis of knowing assistance and dishonest receipt.

He then held (at [335]): 'The prevailing view is that there is no separate cause of action for unjust enrichment as such, and that it is necessary for the case to be brought within one of the recognised restitutionary heads, such as money had and received, constructive trust, and resulting trust. In my judgment the authorities would justify the conclusion that Mr Matthews is liable for money had and received (and also, probably, as a trustee on resulting trust) on the basis of an absence of consideration in the sense of no legal basis for the payments: Woolwich Equitable Building Society v Commissioners of Inland Revenue [1993] AC 70, 197; Westdeutsche Landesbank Girozentrale v Islington LBC [1996] AC 669, 683 and 710; Guinness Mahon & Co Ltd v Kensington and Chelsea RLBC [1999] QB 215; Goff & Jones, Restitution, 6 th ed. para 1055.

This is significant for two reasons. Firstly, the analysis for the recovery of the money on a strict liability basis in restitution (unjust enrichment) follows immediately on from the analysis that M was liable in respect of the very same property in equity for knowing receipt.

This reinforces the view that the equitable wrong of knowing receipt has in fact be covering much of the ground that can be dealt with by an alternative cause of action for strict liability (subject to defences) for the receipt of trust property.

Secondly, if the reasoning is correct, it cannot be separated from the analogous situation in which the strict liability remedy has always been denied, that is unauthorised payments from an inter vivos trust.

The reasoning is this: the recipient has been enriched by property which belonged in equity to the claimant and is therefore enriched at the claimant's expense. Unless the recipient can establish a legal basis for the payment then, absence the change of position defence, it must be returned.

Hence it may not be long before a case arises for decision which cannot be resolved on the established bases for liability for the receipt of trust property and which raises the question of strict liability on the Lipkin Gorman lines in stark contrast. It seems likely that in such a situation the courts in England may well also 'bite the proverbial bullet'.