#6837 - Charter Plc V. City Index - Restitution of Unjust Enrichment BCL

Charter plc v. City Index

Facts

Between February 2000 and August 2004 the claimants in the action (whom I shall refer to compendiously as "Charter") were defrauded of large sums by a manager in their foreign exchange department ("Mr Chu"). He procured the transfer of sums to the aggregate value of over 9m to the defendant ("City Index") to finance his personal spread-betting transactions.

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

Meanwhile City Index had begun Part 20 proceedings against some past and present directors of Charter and the group auditors claiming contribution or indemnity under the 1978 Act.

Holding

Cranworth LJ

Is liability for ‘knowing receipt’ covered by the 1978 Act?

There followed the short passage cited by Lord Steyn (quoted above), including the statement that a claim for restitution "cannot be said" to be a claim to recover "compensation". As a general statement this seems, with respect, to go too far, at least where the restitutionary claim is for no more than the amount of the loss suffered by the claimant. There is no doubt that the language of "compensation" can be, and is often, used to describe such claims. As Sir Andrew Morritt C pointed out [2007] 1 WLR 26, paras 29-31 it is not difficult (nor particularly helpful) to prepare rival lists of quotations (from statements of high authority) showing alternative uses of the terms "restitutionary" and "compensatory" (cf the use of "recompense" in Lord Nicholls's article mentioned in para 7 above) in this context…. It seems unlikely that the draftsman of the 1978 Act intended its application to depend on such subtle distinctions of nomenclature.

For completeness I note that this issue was touched on by this court in Niru Battery Manufacturing Co v Milestone Trading Ltd (No 2)[2004] 2 All ER (Comm) 289 (discussed below). However, the court did not find it necessary to rule on that aspect of the case, and it was in any event common ground that the court remained bound by the Friends' Provident case (see para 77, per Clarke LJ; para 87, per Sedley LJ).

31 I draw the following points from this review: (i) the Royal Brompton case [2002] 1 WLR 1397 is not directly relevant to the present case. The sole issue was the meaning of "the same damage", in a context where the competing liabilities were in tort and breach of contract. The case is not direct authority for the meaning of the word "compensation", nor of its application to liability for "knowing receipt"; (ii) Lord Steyn's criticisms of the wide interpretation adopted by Auld LJ were specifically directed to the issue before him, that is the meaning of "the same damage". He implicitly accepted that in other respects a "purposive and enlarged view of the reach of the statute" was appropriate; (iii) Lord Steyn did not hold that the Friends' Provident case [1997] QB 85 itself was wrongly decide.

32To conclude, City Index's liability to Charter does not depend solely on receipt of money paid in breach of trust, but on their retaining it or paying it away in circumstances where it was unconscionable to do so.

Although the directors' legal responsibility arose at an earlier stage, it was only when City Index failed to return the money that Charter suffered any loss. In ordinary language (adopting a wide view of the 1978 Act) City Index's liability to make good that loss can properly be referred to as liability to "compensate" them. In any event we are bound so to hold by the judgment of this court in theFriends' Providentcase, and the dicta in theRoyal Bromptoncase do not require otherwise.

Deemed Retention Rule in Niru Battery

Mr Boswood accepted that if City Index retained any of the money received from Mr Chu, it would have had to repay it before any apportionment takes place. That is the effect of the Dubai Aluminium case [2003] 2 AC 366 and the Cressman case [2004] 1 WLR 2775. He accepted that the same applies to the 3m profit made by City Index. That is because it is "obviously just and equitable" for the loss to be met out of any retained profits, before the remainder is apportioned between those legally responsible.

However, he did not accept that the same reasoning applies to the balance of 2.5m. He challenges Sir Andrew Morritt C's view that it makes no difference that the money has been paid away. There is no principle of “deemed retention”. The circumstances in which it was paid away are relevant, but only as factors to be taken into account in attributing responsibility under section 2. In so far as Niru Battery Manufacturing Co v Milestone Trading Ltd (No 2) [2004] 2 All ER (Comm) 289 appears to decide otherwise, it is not binding on us and should not be followed.

I confess with respect that I have not found the reasoning in the leading judgment easy to follow. In particular, the crucial jump from example two to example three is not fully explained. There seem to be three strands in the argument: first, that CAI had paid the money away in "bad faith"; secondly, that the "real damage" was caused by CAI, because, if it had not paid the money away, Niru's cause of action against SGS would not have been complete (para 37); thirdly, that the case was similar to the Cressman case [2004] 1 WLR 2775. None of these points seems free from difficulty. As I have already noted, the finding of "bad faith" seems to have been used in a special sense, as no more than the corollary of the conclusion that there was no "change of position" defence. There was no finding of actual dishonesty.

That reasoning is...