The “No Profit from Another's Fraud” Rule and the “Knowing Receipt” Muddle
| Date | 01 January 2013 |
| Pages | 37-62 |
| DOI | 10.3366/elr.2013.0138 |
| Published date | 01 January 2013 |
| Author | Niall R Whitty |
In
[2009] CSIH 75, 2010 SC 156, affirming [2007] CSOH 198 (noted by D J Carr, “Equity rising?” (2010) 14 EdinLR 273 and R Evans-Jones [2010] RLR 173).
the doctrine of English Equity known as “knowing receipt” was applied by a Scottish court for the first time as if it were a branch of Scots law. The first defender, Baxter, a director of the pursuer oil company, in breach of his fiduciary obligation qua director owed to the pursuer, brought the chance of making a commercial profit from oil-field exploration to another oil company Eurasia Energy Ltd, the second defender. Eurasia was alleged to have “knowingly received” the opportunity. The First Division held that the rule on liability for knowing receipt required receipt of an asset and that the chance of making a commercial profit was not an asset within the scope of the rule. Eurasia was therefore absolved from liability. The actual decision seems correct. The difficulty arises from the First Division's acceptance of “knowing receipt” as a branch of Scots lawIn this essay Sections C and D below argue that:
the doctrine of “knowing receipt” has never been part of Scots law;
it is doubtful whether there is any juridical space for it, as its task in Scotland is already adequately performed by the principle of “no profit from another's fraud or breach of trust or fiduciary duty”; and
as it so happens, in at least one major respect the “no profit” principle is better than “knowing receipt” as it gives a remedy against good faith gratuitous recipients (i.e. innocent donees) who have been unjustifiably enriched. In England and the Commonwealth
For brevity the term “the Commonwealth” is used to denote the legal systems of the Commonwealth which follow English law and does not include mixed systems within the Commonwealth such as South Africa and Quebec.
it is acknowledged that “knowing receipt” does not extend thus far and its reform is a matter of great controversy.The main focus of the essay is on cases where a rogue B fraudulently induces A to part with money which money or its traceable substitute he then transfers to C. A sues C for recovery. If C no longer retains the money or its traceable substitute, he or she may be
Which in Scotland, while more fully established than “knowing receipt”, is nevertheless not as deeply embedded as sometimes supposed and its reception is also highly controversial. For magisterial and highly critical treatments, see G L Gretton, “Constructive trusts” (1997) 1 EdinLR 281; G L Gretton, “Constructive trusts and insolvency” (2000) 3 ERPL 463; G Gretton, “Proprietary issues”, in D Johnston and R Zimmermann (eds),
In the First Division Lord President Hamilton and Lord Nimmo Smith gave separate opinions (with which Lady Paton concurred) but were in substantial agreement. They first sought to show that the English doctrine of “knowing receipt” had been received in Scots law. Lord Nimmo Smith cited a key passage from the foundational opinion of the Earl of Selborne LC in
(1874) 9 LR Ch App 244 at 251-252 (bracketed numbers added). Lord Nimmo Smith at para [85] referred to Lord Selborne's opinion as a “speech” as if the forum in which it was delivered was the House of Lords; in fact it was the Court of Appeal in Chancery.
strangers are not to be made constructive trustees merely because they act as the agents of trustees in transactions within their legal powers… unless [1] those agents receive and become chargeable with some part of the trust property, or unless [2] they assist with knowledge in a dishonest and fraudulent design on the part of the trustees.
Following
Following
[2007] CSOH 198 at para [193], citing A J P Menzies,
See C.2 below.
At para [85].
At para [16]. He continued: “It is, however, clear that its foundation lies in the law of trusts, under which a stranger to a trust may in certain circumstances become liable to the trustees (or the beneficiaries) in respect of trust property”.
The English law concept of liability as a constructive trustee for knowing receipt is confusing (especially but not only for Scots lawyers)
L Smith, “Constructive trusts and constructive trustees” [1999] CLJ 294.
a thing hitherto unknown in Scots law. Some explanation is needed. Under English law what is imposed under the doctrine of “knowing receipt” is not a constructive trust (or equitable charge or lien)Its content is somewhat obscure. As Sir Robert Megarry has said, “constructive” “seems to mean ‘It isn't, but has to be treated as if it were’ and the less there is of this in the law the better”.
See R Megarry, “Historical development” in
Smith (n 11) at p 301. He continues: “The phrase is only required so long as we wish to preserve the pretence that beneficiaries can only sue their trustees. Once we discard that pretence, we can dispense with the phrase and concern ourselves with identifying those instances where a defendant is liable to a beneficiary even though the defendant is not a trustee.”
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