Charter Plc v City Index Ltd (Gawler and Others, Part 20 defendants)
| Jurisdiction | England & Wales |
| Judge | LORD JUSTICE CARNWATH,Lady Justice Arden,Lord Justice Mummery |
| Judgment Date | 21 December 2007 |
| Neutral Citation | [2007] EWCA Civ 1382 |
| Docket Number | Case No: A3/2006/2331HC05C00933 |
| Court | Court of Appeal (Civil Division) |
| Date | 21 December 2007 |
[2007] EWCA Civ 1382
Lord Justice Mummery
Lady Justice Arden and
Lord Justice Carnwath
Case No: A3/2006/2331HC05C00933
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE CHANCERY DIVISION
SIR ANDREW MORRITT
Royal Courts of Justice
Strand, London, WC2A 2LL
Anthony Boswood QC & Alan Maclean (instructed by Messrs. Macfarlanes) for the Appellants
Michael Brindle QC & Daniel Stilitz (instructed by Messrs Ashurst) for the 1 st to 12 thRespondents
Simon Salzedo (Instructed by Messrs Barlow Lyle & Gilbert) for the 13 thRespondent.
Hearing dates : 13th & 14th November, 2007
This appeal raises in summary two issues: (i) whether liability for “knowing receipt” is within the scope of the Civil Liability (Contribution) Act 1978 (“the 1978 Act”); (ii) if so, whether there is a rule of law or practice (at least on the facts of this case) that the knowing recipient should bear 100% of the loss.
The Chancellor answered both questions in the affirmative. On the first, he regarded himself as bound by the decision of this court in Friends Provident Life Office v Hillier, Parker, May & Rowden [1997] QB 85 (“ Friends Provident”), notwithstanding apparently conflicting guidance by the House of Lords in Royal Brompton NHS Trust v Hammond (“ Royal Brompton”) [2002] 1 WLR 1397. On the second, he held himself bound by another decision of this court, Niru Battery Manufacturing v Milestone Trading (No 2) Ltd [2004] 2 Lloyd's Rep 319 (“Niru (No 2)”). Both questions are in issue in the appeal.
The relevant facts are as follows. 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 December 2004 he was convicted of theft.
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. (There is no material difference for present purposes between the respective positions of directors and the auditor. For convenience I shall refer simply to “the directors”). After the settlement with Charter, the Part 20 claim was amended to seek contribution or indemnity in relation to the sum of £5.5m. In their claim City Index alleged that the directors' breaches of duty had caused the unauthorised transfers to continue undetected, and had thereby caused or contributed to Charter's losses. City Index also alleged that it had retained none of the money transferred, and that the payment of £5.5m to Charter was substantially more than its profit on Mr Chu's account, which was approximately £3 m.
Before the Chancellor the directors sought orders that the Part 20 claim be struck out or summarily dismissed. The Chancellor so ordered, holding that, even accepting that City Index's liability was within the scope of the Act, there was no reasonable prospect of contribution being ordered.
Knowing receipt
To set the legal context for the application of the 1978 Act, it is necessary to understand the nature of liability as a constructive trustee based on “knowing receipt”. For this I can quote the Chancellor's judgment (para 9–11):
“The relevant cause of action is now commonly called 'knowing receipt'. The essential elements of such a cause of action were elaborated by Hoffmann LJ in El Ajou v Dollar Land Holdings plc [1994] 2 All ER 685, 700 in these terms:
'For this purpose the plaintiff must show, first, a disposal of his assets in breach of fiduciary duty; secondly, the beneficial receipt by the defendant of assets which are traceable as representing the assets of the plaintiff; and thirdly, knowledge on the part of the defendant that the assets he received are traceable to a breach of fiduciary duty.'
The history and nature of the cause of action was further considered by the Court of Appeal in Bank of Credit and Commerce International (Overseas) Ltd v Akindele [2001] Ch 437. In his judgment, with which Ward and Sedley LJJ agreed, Nourse LJ… reiterated (pp.448–450) that unlike a 'knowing assistance' case it was not necessary to show that the defendant had been in any sense a participator in a fraud. He considered the authorities on what knowledge was required to impose liability on a defendant (pp.450–455) and concluded that it must be 'such as to make it unconscionable for him to retain the benefit of the receipt'…. It was common ground before me that the decision of the Court of Appeal in [ Akindele] reflects what the law now is….”
He noted that Nourse LJ had not adopted the suggestion of Lord Nicholls (writing extra-judicially 1) that restitutionary liability in respect of knowing receipt should apply “regardless of fault but subject to a defence of change of position”.
In this court also it is accepted that Akindele represents the present law. Accordingly, liability for “knowing receipt” depends on the defendant having sufficient knowledge of the circumstances of the payment to make it “unconscionable” for him to retain the benefit or pay it away for his own purposes.
The 1978 Act followed a 1977 Law Commission report on Contribution (Law Com No 79) (for the history, see per Lord Bingham in Royal Brompton p 1399–1401). It had recommended (inter alia) that statutory rights of contribution “should not be confined, as at present, to cases where damage is suffered as a result of a tort, but should cover cases where it is suffered as a result of tort, breach of contract, breach of trust or other breach of duty…”; and that the statutory right to recover contribution should be available “to any person liable in respect of the damage, not just persons liable in tort”. (para 81).
The Law Commission's recommendations were given effect (albeit not in precisely the terms of their proposed draft Bill) in the 1978 Act. The material provisions are as follows:
“1(1) Subject to the following provisions of this section, any person liable in respect of any damage suffered by another person may recover contribution from any other person liable in respect of the same damage (whether jointly with him or otherwise)…
(4) A person who has made or agreed to make any payment in bona fide settlement or compromise of any claim made against him in respect of any damage (including a payment into court which has been accepted) shall be entitled to recover contribution in accordance with this section without regard to whether or not he himself is or ever was liable in respect of the damage, provided, however, that he would have been liable assuming that the factual basis of the claim against him could be established.
2(1)… in any proceedings for contribution under section 1 above the amount of the contribution recoverable from any person shall be such as may be found by the court to be just and equitable having regard to the extent of that person's responsibility for the damage in question.
…
6(1) A person is liable in respect of any damage for the purposes of this Act if the person who suffered it… is entitled to recover compensation from him in respect of that damage (whatever the legal basis of his liability, whether tort, breach of contract, breach of trust or otherwise).”
The effect of section 1(4) is that, following the settlement, the issue has to be approached on the assumption that the factual basis of Charter's claim against City Index (summarised in para 4 above) would have been established. Also, in accordance with ordinary summary judgment principles, it has to be assumed that the case against the directors (para 5 above) would be established at trial.
Issue (1) –“knowing receipt” under the 1978 Act
The arguments of the parties have been generously developed in some 100 pages of “skeleton” argument. However, the essential areas of dispute can be shortly stated.
To paraphrase Lord Bingham ( Royal Brompton para 6) there are in essence three questions under section 1(1): (1) What “damage” did Charter suffer? (2) Was City Index liable to Charter in respect of that damage? (3) Were the directors liable to Charter in respect of that damage or some of it? “Damage” is synonymous with “loss” or “harm”, but does not mean “damages” (ibid para 6). Liability “in respect of damage” means liability to pay “compensation” in respect of that damage whether on the basis of “tort,… breach of trust or otherwise” (s 6(1)).
There is little difficulty about questions (1) and (3). Charter's “damage” or “loss” was the £9m transferred to City Index, in so far as it was not recovered from other sources. On the assumed facts, the directors would have been liable in tort (negligence) to compensate Charter for that loss. According to Mr Boswood QC (for City Index) the answer to question (2) is equally clear. City Index's liability to Charter as “constructive trustee”...
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