Armstrong DLW GmbH v Winnington Networks Ltd

Hearing dates: 17, 18, 19, 20 and 21 October 2011

Approved Judgment

I direct that pursuant to CPR PD 39A para 6. 1 no official shorthand note shall be taken of this Judgment and that copies of this version as handed down may be treated as authentic.

Introduction

In this action, commenced on 17 February 2010, the Claimant, Armstrong DLW GmbH ("Armstrong") claims relief against the Defendant, Winnington Networks Limited ("Winnington") in respect of 21,000 carbon emission allowances known as European Union Allowances ("EUAs"). On 28 January 2010 those EUAs ("the EUAs") were transferred from Armstrong's own carbon emissions account at the German Greenhouse Gas Emissions Trading Scheme Registry ("the German Registry") to Winnington's carbon emissions account at the UK Greenhouse Gas Emissions Trading Scheme Registry ("the UK Registry"). That transfer was effected as a result of an email fraud perpetrated upon Armstrong by an unknown third party, and to which, it is accepted, Winnington was not party. The issue is which of these two parties should bear the loss for the fraud of the third party. The EUAs were immediately sold on and transferred by Winnington to a regular counterparty.

Armstrong now puts its claim on three alternative bases. The first two bases are said to be common law restitutionary claims: a claim to vindicate its proprietary rights in the EUAs, which I refer to as the "proprietary restitutionary claim"; and, secondly, a personal claim at law for restitution on the basis of unjust enrichment to recover the value of the EUAs. Thirdly, Armstrong brings a personal claim in equity based on Winnington's knowing (or unconscionable) receipt of the EUAs or their traceable proceeds.

Structure of this judgment

In this judgment I set out, first, the relevant background and, secondly, the relevant legal principles. I then make observations on the witnesses before turning to the facts in detail, making my relevant findings of fact. Finally I apply the legal principles to the facts. My conclusion is at paragraph 290 below.

Background

The Parties

Armstrong is a company with its registered office in Germany. It is a producer of PVC and linoleum floor coverings and is part of a group of companies owned by Armstrong World Industries Inc, a US listed company. It operates two factories in Germany—at Delmenhorst and at Bietigheim-Bissingen. Until September 2009 both factories contained power plants. Herr Heinrich Leiber is, and was at all material times, the Armstrong employee responsible for emissions trading scheme ("ETS") trading accounts. Herr Markus Bruchmann is, and was, an employee working in the IT department at Delmenhorst. Armstrong has no history of trading in EUAs.

Winnington is a company registered in England with a head office in Crewe. It is engaged in the business of facilitating the supply and distribution of new and high demand technology products. In addition it trades in EUAs (and in other commodities). Winnington is a member of a group of companies. The group has a turnover of approximately £50 million and employs around 30 staff. Mr Adrian John Sumnall is, and was at all material times, managing director of Winnington. Mr Neil Pursell, a certified accountant and former partner in a firm of accountants, is, and was at the time, a director of Winnington, and responsible for finance and due diligence. Mr Paul Byatt was, at the relevant time, the European purchasing manager at Winnington.

The EU Emissions Trading Scheme and EUAs

EUAs are the creature of the EU Emissions Trading Scheme ("ETS") established under EU law pursuant to EC Directive 2003/87/EC of the European Parliament and Council ("the ETS Directive"), as amended and supplemented by further directives and Commission regulations. The ETS was created with effect from 1 January 2005.

Every company (an "operator") within the EU that owns an "installation" that emits carbon dioxide above a certain minimum level must participate in the ETS. Each Member State sets a cap on its CO ₂ emissions for each installation within the Member State's territory that emits CO ₂ above the minimum level during each year.

Each operator governed by the ETS is credited with an allocation of EUAs at the beginning of the compliance year. By Article 3 of the ETS Directive, an "allowance" (an EUA) means an allowance to emit one tonne of CO ₂ during a specified period, which shall be valid only for the purposes of meeting the requirements of the ETS Directive and is transferable in accordance with the provisions of the ETS Directive. This credit of EUAs is made into a registry account, known as the Operator Holding Account, for each installation. This is an electronic account set up in the national registry in the relevant Member State.

Each operator governed by the ETS must monitor its CO ₂ emissions at its installations. At the end of a compliance year, an external audit of the operator's CO ₂ emissions is carried out. This audit determines the level of CO ₂ emitted by the operator during the year and how many EUAs this represents. The operator of each installation must then submit to the national administrator of the ETS the correct number of EUAs to match its emissions in the relevant compliance year.

If an operator does not submit enough EUAs to meet its compliance obligations, it will be fined for every tonne of CO ₂ it has emitted beyond its submission of EUAs.

Any surplus of EUAs held by the operator after it has met its compliance obligations may be carried forward to the following year. Armstrong's practice has been to retain any surplus EUAs it holds. EUAs can also be "retired" by arrangement with the relevant national administrating entity without being used to meet compliance emission reduction targets.

Trading in EUAs

Pursuant to Article 12 ETS Directive, companies may, if they wish, trade the EUAs they have been credited with during the compliance year, provided that, at the end of the year, the company has enough EUAs to cover its emissions for that year. Trading in EUAs is not confined to companies with compliance obligations and, subject to Member State rules, anyone can open a registry account in a Member State registry in order to engage in trading in EUAs, without also being an operator. Such a person is referred to as a "trader". A trade of an EUA is formally completed when an EUA is transferred from one registry account to another. Trades are regularly executed by the transfer of EUAs to and from different registry accounts in different Member States.

Registries and accounts

Regulation 2216/2004 ("the Registries Regulation") provides for the establishment of inter-connected electronic registries in Member States for the trading of EUAs. Each installation and each trader has an account with one of the national registries. Each person with an account in a registry may have one or more authorised representative, who is a natural person who can access the registry and carry out transfers. The national registry issues to each such authorised representative a username and password: see Article 66 of the Registries Regulation. (Article 66(2) itself envisages the possibility of the security of the password having become compromised). The user name and password are required to effect any transfer of the EUAs.

In addition, the UK national registry imposes an additional security requirement. Each authorised representative is required to install a digital certificate on to the particular PC that he uses for access to the secure part of the registry. In this way, if a third party obtained the username and password of a particular authorised representative, he would not be able to use that information to access the account, unless he was able also to use the authorised representative's own PC for access to the registry. At the relevant times, the German Registry did not have such a requirement. In present case, both Mr Sumnall and Mr Pursell were authorised representatives who had access to Winnington's registry account. This is addressed further in paragraph 137 below.

Each account with a national registry has a unique account number. Within that number, there is a designation which indicates the Member State in question: for example, DE designates the German Registry and GB designates the UK Registry. Further there are different numerical designations depending upon whether the account is in the name of an operator or a trader, the former being designated by the number 120 and the latter by the number 121.

All trades in EUAs take place via and are logged through a central EU Community Independent Transaction Log ("CITL") established under Article 5 of the Registries Regulation. Armstrong says the CITL is open to the public and can be searched to find out various accounts and transaction details. In particular, if one has the account number of a company's registry account, the identity of the account holder can be found out simply by searching the CITL website.

The nature of an EUA

EUAs are entirely electronic. They only exist online in national registries. There is no title document or other physical evidence of their existence. However, each EUA has its own individual number and is easily identifiable. If an EUA is sold, it is simply removed from the registry account of one operator or trader and added to that of another operator or trader.

Armstrong's...