#6873 - Niru Battery Manufacturing Co V. Milestone Trading - Restitution of Unjust Enrichment BCL

Niru Battery Manufacturing Co. v. Milestone Trading

Facts

These proceedings arise out of a contract for the sale by Milestone Trading Ltd. ("Milestone") to Niru of 10,000 metric tonnes of lead ingots made in February, 1998 which provided for payment by letter of credit against presentation of (among other documents) FIATA multimodal transport bills of lading and an inspection certificate issued by SGS. In due course a letter of credit was opened by Bank Sepah in favour of Milestone. Milestone was one of a group of companies known as the "Woralco" group controlled by Mr. Mahdavi.

In order to obtain the lead needed to perform its contract with Niru, Milestone, acting through Mr. Mahdavi, obtained financing from CAI against the deposit of the warehouse warrants relating to the goods. The warrants, possession of which gave CAI complete control over the goods, were to be released to Milestone only on repayment of the advance. However, the letter of credit represented Milestone's only source of funds and it therefore became necessary for Mr. Mahdavi to find a way in which documents could be presented for payment before the warrants had been released by the bank. That was achieved by enlisting the help of the second defendant, Maritime Freight Services Ltd. ("Maritime"), which was prepared to issue a FIATA bill of lading stating that it had taken the goods in charge for carriage to Iran at a time when CAI still held the warrants and the goods themselves were still in the warehouse.

Inaccurate certification by SGS: On being informed that Maritime had issued a bill of lading recording that it had taken the goods in charge for carriage to Iran, SGS issued an inspection certificate in which it certified, among other things, that the goods were marked with the name of Niru and that the quality, quantity and packing of the goods loaded complied with the contract. The certificate was inaccurate in two respects: the goods were not marked with Niru's name and had not been put under the control of Maritime, let alone loaded on to any form of transport. The Judge held that SGS was negligent in issuing the certificate and therefore liable to Niru in tort.

CAI Sold the Goods, and appropriated the mistaken payment: The documents, including the bill of lading and the inspection certificate, were presented to Bank Sepah under the letter of credit by CAI, which presented them as a principal. After some minor discrepancies had been corrected, the documents were accepted by Bank Sepah, but it was unable to make payment because the authorities in Iran failed to make the necessary foreign currency available. The price of lead began to fall causing CAI to become concerned about the adequacy of its security and eventually, after consulting Mr. Mahdavi but without telling Bank Sepah or Niru, it sold the goods to reimburse itself. Then, somewhat to everyone's surprise, funds were made available to enable Bank Sepah to honour the letter of credit and a sum of about U.S.$5.8 m. was remitted to CAI for payment to Milestone. The officer responsible for Milestone's account, Mr. Francis, knew that the bank had sold the lead that was to have been delivered under the contract and had assumed that the transaction was dead. He was unsure, therefore, how to respond to the receipt of the funds, but having spoken to Mr. Mahdavi he was persuaded to release them to another company in the Woralco group, Nikam Metal Finance Ltd. Needless to say (as the Judge put it) they were subsequently lost.

In the result no goods were delivered to Niru by Milestone, or by any other company under the Mahdavi umbrella. Niru was, however, out of pocket because, pursuant to its counter-indemnity, Bank Sepah had debited its account with the full amount of the payment. In short, Niru had been induced to part with the sum of U.S.$5.8 m. and received nothing in return other than the sum of U.S.$116,760 which was paid under a performance guarantee provided by Milestone under the contract.

The Judge held that CAI had been unjustly enriched by the receipt of the funds from Bank Sepah and that it could not rely on change of position as a defence to a claim in restitution because it had failed to act in good faith when dealing with the funds.

Mr. Francis of CAI knew that the payment was mistaken: Mr. Francis did not know that a false bill of lading had been presented to Bank Sepah in order to obtain payment under the letter of credit but he knew that CAI had sold the warrants (and thus the lead) which formed the basis of the transaction and that the transaction could not therefore be completed. He therefore realised that Bank Sepah must have paid by reason of a mistake… In these circumstances, having realised that Bank Sepah had paid by mistake, to my mind, good faith required Mr. Francis to enquire of Bank Sepah before paying the money away in accordance with Mr. Mahdavi's instructions and the Judge was correct so to hold.

The question for the court here was the scope of change of position defence; in particular, what is the meaning of “good faith” required for triggering this defence.

Holding

There is to my mind no indication in the speech of Lord Goff or of Lord Templeman to suggest that the defence of change of position is only lost where the defendant is guilty of dishonesty or other wrongdoing, although it would of course be lost in those circumstances.

“Unconscionable and Inequitable” test

The emphasis in Lord Goff's speech is upon whether it would be unjust or inequitable to allow restitution. It is not upon whether the defendant has been dishonest. Thus, for example, Lord Goff gave as an example of bad faith the case where the defendant had paid away the money with knowledge of the facts entitling the claimant to restitution. It seems to me that such a person may not be dishonest in the Twinsectra Ltd v Yardley [2002] 2 AC 164 sense. A similar approach can be seen in the speech of Lord Templeman. For example, he said [1991] 2 AC 548, 560, that the reason why the donee of money from a thief must return the money was that he could not "in good conscience" rely on the bounty of the thief to deny restitution to...