Misdirected Funds: Problems of Uncertainty and Inconsistency
| DOI | http://doi.org/10.1111/j.1468-2230.1994.tb01920.x |
| Author | Steven Fennell |
| Date | 01 January 1994 |
| Published date | 01 January 1994 |
me
Modem
Law Review
[Vol.
57
Misdirected Funds: Problems
of
Uncertainty and
Inconsistency
Steven
Fennel1
*
Introduction
The recent cases of
Lipkin
Gomuzn
v
Karpnale
Ltd’
and
Agip
(Africa)
Ltd
v
Jackson*
and the ensuing academic comment have done much to clarify the
principles behind the law of restitution and the various forms of equitable liability
for involvement in a breach of trust. It must not, however, be forgotten that in
practice a claim based on unjust enrichment or wrongful involvement in a breach
of trust is likely to be brought in conjunction with a claim for conversion or for a
breach of a contractual or tortious duty to take reasonable care to safeguard the
plaintiff from fraud. An examination of the principles behind tortious and
contractual liability shows that they are not necessarily consistent with these recent
developments, and that as a result the outcome of a case may depend more on the
mechanism used by the fraudster to misdirect the plaintiffs money than on either
the injustice of the defendant’s enrichment or the wrongful nature of his
beha~iour.~ This leads to inconsistency and the blurring of the key issues. As
one commentator has already pointed out in this ~ontext,~ the court should never
lose sight of the fact that the fundamental question is who, as between two innocent
parties, should in good conscience bear the loss caused by a third party. The
difficulty is aggravated by the different intellectual approaches of the ‘property
lawyer,’ the ‘restitution lawyer’ and the ‘common lawyer.
’5
This article examines the ways in which restitution, contract, tort and equity
address the problems of misdirected funds. It highlights the inconsistencies
between the approaches adopted by each branch of the law, and suggests that the
outcome of any dispute will depend more on the technical nature of the fraud than
on the key issue of principle, namely which of two innocent parties should bear the
loss. Finally, it is argued that the law could be clarified and simplified if the
~~~~ ~~ ~
*Nottingham Law School, Nottingham Trent University.
Much of this work for this article was done when
I
was at Sheffield University.
I
am grateful
to
John Birds,
Rob Bradgate, Peter Luxton, David Townend and Fidelma White for their helpful comments on an earlier
version of this paper presented at a seminar at the Commercial Law Unit, Sheffield, in March
1993.
I
am
particularly indebted
to
Rob Bradgate, to Michele Todd of Kershaw Tudor, and to Alan Berg of Watson,
Farley and Williams for reading and providing detailed comments on previous drafts. All views expressed
and any remaining errors are, of course, my own.
1
[1991] 2
AC
548.
2 [1991]
Ch
547.
3
Liability may also
be
imposed by statute, particularly the Financial Services Act
1986,
which gives the
Court a discretion
to
order anyone ‘knowingly concerned’ in the operation of an unauthorised
investment business
to
compensate investors for the
losses
caused by the dishonesty, incompetence or
bad luck of the business in question
(s
6(2)).
The court may also order a person knowingly concerned
in sharp practice such as unsolicited calling to remedy the contravention, which may in certain cases
include the power
to
make the person knowingly concerned pay compensation. An order made under
s
6(2)
is called a ‘restitution order’ by the statute, but it may
be
used
to
order Compensation more akin
to
tortious compensation than to the undoing of unjust enrichment:
Securities
and
Investments
Bwrd
v
Puntell
SA
(No
2)
[1992] 3
WLR
8%.
Halliwell, ‘Restitutionary Claims: A Change of Position Defence?’
(1992)
ne Conveyancer
124.
Halliwell,
op cit
n
4,
at pp
127- 128;
Gray, ‘Property in Thin Air‘
(1991)
50
CU
252.
4
5
38
0
The
Modern
Law
Review
Limited
1994
January
19941
Misdirected Funds: Problems
of
Uncertainty and Inconsistency
principles of unjust enrichment were to be applied to all cases of misdirected
funds.
A
Unjust Enrichment and Misdirected Funds
(a) Restitutionary Claims
The decision of the House of Lords in
Lipkin Gormun
v
Kurpnale
clarified the
basis of a restitutionary claim against the recipient of misdirected funds.6 When
the plaintiff can show that the defendant has been enriched by the payment of
misdirected funds, he can recover the enrichment subject to the defences of
bona
fzde
purchase,’ change of position and estoppel.* Thus, the casino which had
received the money from the plaintiff solicitors’ client account was liable to repay
it, subject to the defence of change of position which reduced its liability by the
amount paid out in winnings to the dishonest partner, Cas9
(b)
The
Tort
of
Conversion
An aspect of the
Lipkin Gorman
case which has attracted less attention is the claim
for conversion brought by the solicitors. It shows that the plaintiff will have a
wider claim when the defendant receives a chattel rather than money. In addition to
the withdrawals from the client account, Cass stole a banker’s draft for
f3,OOO
payable to the firm and, having indorsed it, gave it to the club in return for chips. It
was held by Steyn
J
at first instance that the club was not a ‘holder in due course’
because it had reason to believe that Cass was not entitled to the bill of exchange
(the club suspected that the document had been improperly indorsed, but it
nevertheless presented it for payment).’O This finding was upheld on appeal, and
the House of Lords also held that the nature of the gaming transaction meant that
the club could not be treated as having given value.” Consequently, the club
could not take the benefit of section 29(l)(b)
of
the Bills of Exchange Act 1882,
which allows a holder in due course to take a bill of exchange free from defects in
the title of the previous holders, and was therefore liable for conversion provided
that the solicitors could establish a sufficient right to immediate possession of the
draft.
6
7
8
For
a
full
account of the case, see McKendrick, ‘Restitution, Misdirected Funds and Change of
Position’
(1992)
55
MLR
377.
The defendant casino could not rely on the defence of
&om
jide
purchase because the Gaming Act
1845
required it to
be
treated as the recipient of a gift.
Estoppel differs from change of position by requiring reliance on a representation, and by operating as
a complete defence, allowing the defendant to retain the entire enrichment:
Avon
County Council
v
Howlerr
[1983]
1
WLR
605,
discussed by McKendrick,
op
cir
n
6,
at p
385.
9
McKendrick,
op
cit
n
6,
at pp
384-385,
points
out
the difficulties
of
the application of the defence
of
change of position to the facts of the case.
10
Under the Bills of Exchange Act
1882,
s
29,
a person qualifies as a holder
in
due course if he gives
value for the bill, if he has no notice of the defect in title, if the bill is presented for payment on time,
and if there is no irregularity on the face of the bill.
S
38(2)
allows a holder in due course to enforce the
bill regardless of the defects in the title of any previous holder, and free of personal defences which
would have been available between previous parties. However, under
s
2
a person cannot be a holder
in due course against the rightful owner if one of the indorsements is forged, although he does have
good
title against indorsers subsequent to the forgery. See Bradgate and Savage,
Commercial
Law
(London: Buttenvorths,
1991)
pp
410-412
for details.
per
Lord Goff, at p
583.
1
I
0
The
Modem
Law
Review
Limited
1994
39
To continue reading
Request your trial