Unconscionable receipt PDF

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Summary

lecture delivered by neal geach....

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Unconscionable receipt 

Personal action against a third party. NOT a proprietary claim.

The Nature of Recipient Liability 

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Where a stranger receives trust property, in breach of trust, and retains that property, then the claim against that person will be proprietary in nature and will be asserting ownership of that property. The property will be deemed to be held on a constructive trust, but that stranger will be obliged to restore the property to the trust immediately. Concerned with when the third party no longer has the property or the substitute. Tracing shows that at one time, they did have the property, or the substitute and this claim is brought against them. a proprietary claim to assert ownership would be defeated on the grounds that the property has been dissipated or is no longer identifiable, but this claim allows the claimant to get restitution for the value of the original property with the value judged at the date of receipt by the stranger. Alternative to a proprietary claim but not as good. It is a primary wrong that enables the vindication of one’s proprietary rights. it is a personal action against the recipient of property which “is concerned with whether or not a person is to have imposed upon him the personal burdens and obligations of trusteeship” – Sir Robert Megarry VC in Re Montagu’s Settlement Trusts [1992] the court will hold the recipient personally liable in equity to account for the gain received when they received the property it is fault based but “While a knowing recipient will often be found to have acted dishonestly, it has never been a prerequisite of the liability that he should.” - Nourse LJ in BCCI (Overseas) Ltd v Akindele [2001] the basis of the action is not dishonesty. Usually the defendant will have acted dishonesty but this not a necessary factor. The action does not apply to receipt of property under a contract that is set aside – Criterion Properties Plc v Stratford UK Properties LLC [2004]

The requirements for a claim 

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Hoffman LJ in El Ajou v Dollar Land Holdings plc [1994]: 1. Disposal of property in breach of trust or in breach of a fiduciary duty 2. Beneficial receipt of the assets by the defendant 3. Fault by way of knowledge on the part of the defendant that the property was disposed in breach of trust of fiduciary duty The third requirement justifies the liability and why the recipient must restore the value of the property to the claimant. It prevents an innocent volunteer who receives the property from having to account under the action. “Expressed in its simplest terms, the question is whether the recipient must have actual knowledge (or the equivalent) that the assets received are traceable to a breach of trust or whether constructive knowledge is enough.” - Nourse LJ in BCCI v Akindele [2001]

The Baden categories of knowledge 1. Actual knowledge 2. Wilfully shutting one’s eye to the obvious

3. Wilfully and recklessly failing to make such inquiries as an honest and reasonable man would make 4. Knowledge of circumstances which would indicate the facts to an honest and reasonable man 5. Knowledge of circumstances which would put an honest and reasonable man on inquiry  2 and 3 are taken to be the equivalent to actual knowledge  4 and 5 are more objectively assessed and constitute constructive knowledge  The CA tended to view constructive knowledge as sufficient but never looked at it in depth.  In first instance decisions, it was felt that the first 3 were needed for there to be in requisite level of knowledge, particularly in the context of commercial transactions.  This statement of knowledge had originated in the context of dishonest assistance before it was rechristened, and it had started to attract judicial reservation over its use such Mr Justice Millett. The test for knowledge 

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The purpose of any categorisation of knowledge is to enable the court to determine whether it would be unconscionable to permit the defendant to retain the received property and so decide whether to bind him with the obligation of constructive trusteeship but not make him a trustee. The test = was the defendant’s knowledge such that it would be unconscionable to retain the property? This was affirmed by the CA in Charter plc v City Index Ltd [2008] The rationale for the reform is that the test, based on unconscionability, avoids the difficulties of definitions, and allows the courts to reach common sense decisions in commercial cases. There is still a vagueness to the term and will still be difficulties applying it. The aim was to move away from the old classifications of knowledge from Baden and the debate over whether actual or constructive knowledge is needed. The issue of knowledge remains a question of fact with the issue of unconscionability inferred and is distinct from questions of the recipient’s morality. However, knowledge and the Baden categories have had a bit of a revival recently with their use in academic texts endorsed with it being said that “the Baden classification of knowledge is still useful in distinguishing different types of knowledge for the purpose of determining what kind of knowledge makes it unconscionable for the defendant to retain the trust property.” - HHJ Stephen Morris QC in Armstrong DLW GmbH v Winnington Networks Ltd [2012] In commercial cases “Baden types (1) to (3) knowledge on the part of a defendant render receipt of trust property “unconscionable”. It is not necessary to show that the defendant realised that the transaction was “obviously” or “probably” in breach of trust or fraudulent; the possibility of impropriety or the claimant's interest is sufficient. (2) Further Baden types (4) and (5) knowledge also render receipt “unconscionable” but only if, on the facts actually known to this defendant, a reasonable person would either have appreciated that the transfer was probably in breach of trust or would have made inquiries or sought advice which would have revealed the probability of the breach of trust.”

Remedies    

Naturally, the claimant will want their property back but then it is not an unconscionable receipt claim against the recipient personally which is being made. Where it is available, claimants will undertake the tracing/following process and then make a proprietary restitution claim over the property received by the defendant. A personal action can be brought for a monetary restitution award for the value of the gain that the recipient has received. Where the gain received amounts to less than the loss suffered by the claimant then the latter can elect to obtain equitable compensation – City Index Ltd v Gawler [2007]...