Al Capone was reputed to have said ‘if you’re going to steal, steal big.’ It hardly needs adding that one would be well advised to place those ill-gotten gains beyond the reach of the law. These principles seem to have guided the fiduciary in the recent Court of Appeal case of Relfo Ltd v Varsani  EWCA Civ 360. However, reminiscent of the contemporaneous case of FHR European Ventures LLP v Cedar Capital Partners LLC  UKSC 45,  3 WLR 535 it seems the appellate courts will take a dim view of such activities and will reshape the law to make it easier for a claimant to achieve restitution of the sums abstracted.
The reshaping in Relfo was both in equitable tracing and common law restitution. In equity, the requirement for chronological transactional links, relaxed somewhat by Agip (Africa) Ltd v Jackson  Ch 265 (Ch) aff’d  Ch 547 (CA), is relaxed a little more. The most part of the note is concerned with establishing the accordance of this with other established principles of tracing, in particular resolving the tension between it and the rule against ‘backwards tracing’.
In common law money had and received (i.e. restitution for unjust enrichment), the question ‘was the enrichment at the claimant’s expense’ is taken to permit only direct transfers, with only very particular /exceptions; transfers via intermediaries are excluded. Following Arden LJ’s minority judgment in Relfo, apparently all that is required is that the defendant is enriched as a matter of substance or economic reality. However, the majority, while wishing to relax the test, did not go as far as Arden LJ.
The fiduciary director and dishonest abstractor of funds in Relfo was one Gorecia. It seems that Gorecia had badly advised his friends the Varsani family and thereby caused them large losses. He felt it necessary to compensate them. In doing so, in breach of fiduciary duty to his principal he transferred some $890,000 of Relfo’s money, but not to Varsani directly. The money was transferred to Mirren Ltd, a British Virgin Islands company (‘the Relfo/Mirren payment’). The next day, a Wisconsin company paid some $878,000 to Varsani (‘the Intertrade payment’).
Although none of the Intertrade payment could be identified as coming from the Relfo/Mirren payment, it was found that Gorecia has caused the payment to Varsani, and that his contacts with some Ukrainian ‘businessmen’ – who controlled the Wisconsin company – had the means to disguise the transfers of money through fraudulent accounting and shadowy corporate vehicles.
In equity, the proprietary claim failed because the money from the Intertrade payment had been dissipated by Varsani. However, personal liability in knowing receipt also exists if the recipient has beneficially received property traceable to a breach of fiduciary duty with sufficient knowledge of that breach that makes it unconscionable to retain it: Bank of Credit and Commerce International (Overseas) Ltd v Akindele  Ch 437 (CA). It does not matter if the property has been dissipated; indeed this is where knowing receipt comes into its own. Knowledge was hardly in issue, so the claim in knowing receipt turned on whether tracing could be made out.
At  Arden LJ quoted Lord Millett in Foskett v McKeown  1 AC 102 (HL) 128 where he considered that in tracing:
There is simply a series of debits and credits which are causally and transactionally linked.
At  she quoted the same Sir Peter Millett, ‘Tracing the proceeds of fraud’  LQR 71, 74:
Equity acts on the conscience of the recipient; and the existence of a direct causal connection between it and the credit should sufficiently identify the one as the source of the other to enable the money credited to [the defendant’s] account to be taken to represent the money debited to [the claimant’s] account.
And at , she concluded that Agip (Africa) Ltd v Jackson  Ch 265 (Ch) (Millett J) aff’d  Ch 547 (CA) was authority for the proposition that:
[M]onies held on trust can be traced into other assets even if those other assets are passed on before the trust monies are paid to the person transferring them, provided that that person acted on the basis that he would receive reimbursement for the monies he transferred out of the trust funds. The decision in Agip demonstrates that in order to trace money into substitutes it is not necessary that the payments should occur in any particular order, let alone chronological order … [A] person may agree to provide a substitute for a sum of money even before he receives that sum of money. What the court has to do is establish whether the likelihood is that monies could have been paid at any relevant point in the chain in exchange for such a promise [by the intermediary].
It was found by inference that the money Varsani received did originate from Relfo (at ). Therefore the claim in knowing receipt succeeded.
At common law, no mention was made of the underlying tort of money had and received and the analysis is framed in the terms of unjust enrichment. Since the elements that: the defendant had been enriched; and the defendant’s enrichment was unjust (as a gratuitous benefit unintended by Relfo qua corporation) were made out and there was no defence of change of position or similar, the claim turned on whether the enrichment was at the claimant’s expense.
The conventional view of that question is that the enrichment must be a direct enrichment, i.e. without going via an intermediary. This rule was referred to as the ‘Direct Providers Rule’ or DPR, adopting Burrows’ terminology: at , citing Andrew Burrows, Restatement of the English Law of Unjust Enrichment (OUP 2012) s 8. The exceptions to the DPR are technical, comprising, inter alia, proprietary tracing, the transferor’s inferior title, reviving subrogation, and payment of tax (Burrows quoted at ; see also CCJ Mitchell, P Mitchell and S Watterson, Goff & Jones: The Law of Unjust Enrichment (8th edn, Sweet & Maxwell 2011) [6–01] et seq).
Peter Birks, in Unjust Enrichment (2nd edn, Clarendon 2005) 94–95 and the current editors of Goff & Jones (at [6–25] et seq; see also their articles cited in Relfo) argue that the law should move towards some kind of test of causation in place of the DPR (at ). Arden LJ analysed an antecedent reviving subrogation case, Menelaou v Bank of Cyprus UK Ltd  EWCA Civ 1960,  1 WLR 854 where a text of a ‘a sufficiently close causal connection’ was adopted (Relfo at ). She also looked behind that case to the authorities it cited, Banque Financière de la Cité v Parc Battersea Ltd  1 AC 221 (HL) and Filby v Mortgage Express (No 2) Ltd  EWCA Civ 759,  2 P&CR DG16, also reviving subrogation cases. In Banque Financière, Floyd LJ considered the test to be whether the enrichment came from the claimant as a matter of ‘economic reality’ and this was a factor in Menelaou (Relfo at ).
As a matter of substance, or economic reality, Mr Bhimji Varsani was a direct recipient …
The claim was made out.
While Arden LJ gave the leading judgment, Gloster and Floyd LJJ only agreed with Arden LJ’s analysis in equity. They agreed with her decision at common law, but expressly avoided endorsing its reasoning and the test she laid down for unjust enrichment (at  and ), thinking the case unsuitable for the court to articulate general principles (at ). It therefore cannot be said that Arden LJ’s test for enrichment – extended from subrogation to the general case – has passed into law. However, the tracing rule as articulated does have the Court of Appeal’s authority.
Equity, Tracing and Knowing Receipt
Arden LJ relied on principally on Millett J’s reasoning in Agip v Jackson and also on his additional opinions. Agip was an action against the solicitors who facilitated the misappropriation of Agip’s money. It went to a shell company, Baker Oil, not the solicitors, hence the action in knowing receipt failed. It was the action against them in dishonest assistance that succeeded.
Nonetheless, the tracing arguments were analysed. The difficulty was that Agip’s money, held at the Banque du Sud, was transferred to the Lloyd’s Bank (in New York) a few hours after Lloyd’s Bank (in London) credited Baker Oil’s account. Equity could deal with the complexity of transfers through the inter-bank clearing system where the common law could not (Agip at 289–290). It could also deal with the fact the transactions were not in chronological order. Lloyd’s merely took a delivery risk; this was not fatal to tracing. The Court of Appeal agreed.
However, this the treatment of Millett J’s analysis elides two situations. It is likely that were not expressly distinguished in Agip because the knowing receipt claim was doomed to fail in any event and also because the second situation was not in point. The second situation is known as ‘backwards tracing’. For example, a car is purchased with a loan. The loan is then discharged with the misappropriated money. Conventionally, it is not possible to trace backwards into the car: Bishopsgate Investment Management Ltd v Homan  Ch 211 (CA) 221.
The material differences appear to be: (i) the time taken between the two transactions – the loan-repayment example presupposes a significant gap in time; and (ii) that they are indeed separate transactions in substance. The time gap in Relfo was only one day; hardly a material difference to Agip. The issue is whether they were separate transactions; Craig Rotherham, Proprietary Remedies in Context (Hart 2002) 112 notes that debt is ‘not “just delayed payment”’. However, in her test Arden LJ has regard to the intentions of the intermediary: did he expect to be reimbursed from the misappropriated money? That is absolutely in line with Agip, even though Millett J did not frame the issue that way. It is, however, also in line with the debt situation. More must be required.
There are indeed presumptions made against wrongdoers in tracing. In bank accounts where monies from different sources are mixed, the wrongdoer is presumed to spend his own money first: Re Hallett’s Estate (1880) 13 Ch D 696 (CA); cf Clayton’s Case (1816) 1 Mer 529, 572; 35 ER 767, 781 – first-in, first-out for the innocent. However, these situations are not comparable to Agip/Relfo.
What is left to analyse is the boundary between debt and disguise. The first thing to observe is Millett J’s view of tracing in 1989, in Agip (at 285):
Tracing at common law, unlike its counterpart in equity, is neither a cause of action nor a remedy but serves an evidential purpose. The cause of action is for money had and received.
Lord Millett had changed his mind by the time of equitable tracing case of Foskett v McKeown, 1999–2000, where he endorsed the views of Lionel Smith, The Law of Tracing (Clarendon 1997). In Foskett (at 128):
What [the claimant] traces, therefore, is not the physical asset itself but the value inherent in it. Tracing is thus neither a claim nor a remedy. It is merely the process by which a claimant demonstrates what has happened to his property, identifies its proceeds and the persons who have handled or received them, and justifies his claim that the proceeds can properly be regarded as representing his property.
On this basis in an Agip/Relfo situation one determines whether the value in the misappropriated property has reached the defendant. Foskett also lays down rules as to how to determine this. While Foskett is best known for rejecting an unjust enrichment basis in the proprietary tracing claim, it also – by a bare majority – rejected the need for causation. A merely transactional link is necessary and sufficient.
At first blush it seems unlikely that there could ever be a transactional link but not a causal one in substituted property. But the peculiar facts of Foskett v McKeown demonstrate this is possible. In Foskett the substitute property was a life insurance policy. The first two instalments had been paid with non-trust money but misappropriated funds had been used to pay the latter instalments. Given the peculiar structure of this complex financial instrument, even if the latter instalments had not been paid at all, upon the policyholder’s death the same sum would have been paid out because the policy was up to date. Hence there was a transactional, but not a causal, link.
Lord Millett gave the leading judgment in Foskett. Indeed, it was important enough for him to take the trouble to persuade Lord Browne-Wilkinson to change his vote during the remarkably long 14-month delay between hearing and judgment. Therefore Lord Millett’s previous references to a causal link must be read in this light. It is not enough for the transferor to cause the final recipient to receive the value; there must be a transactional link, a single integral transaction of sorts. In this respect Foskett can be seen driving additional nails into the coffin of the suggestion there can be ‘causal tracing’ owing to the swollen assets of the recipient – without the need to establish a chain of transactions – suggested in Space Investments Ltd v Canadian Bank of Commerce Trust Co (Bahamas) Ltd  1 WLR 1072 (PC) and deprecated in Re Goldcorp Exchange Ltd  1 AC 74 (PC).
None of this is fatal to Arden LJ’s decision on tracing in Relfo. It does however cast doubt on her precise formulation that the imposition of a proprietary constructive trust depends on the intention of or the promise made by the intermediary to execute the scheme. When would this trust arise? From the time of the intermediary’s transfer out on account of his mala fides? Or from the time of the intermediary’s receipt on account of the completion of the transaction? What would happen if the fiduciary decided not to transfer the money at all – or accepted a loan facility from his ‘business associates’ in order to bring the facts within the backwards tracing matrix.
In FHR the Supreme Court was unimpressed with the outcome that a fiduciary could avoid a proprietary claim (the only effective remedy on the facts) if the defaulting fiduciary who takes a bribe or secret commission ensured that he was not paid directly from her principal’s funds (at ; see also Lord Peter Millett, ‘Bribes and Secret Commissions Again’ (2013) 71 CLJ 583, 602 at n 70). Arden LJ’s formulation does preclude this issue, as it does the artificial loan stratagem. It also avoids the difficult question of what kind of trust is imposed on the final receipt until the transaction is completed. This issue has hitherto arisen in the Re Rose  Ch 499 (CA) line of cases; see Jonathan Garton, ‘The role of the trust mechanism in the rule in Re Rose’  Conv 364. It also arises in respect of election between tracing and following: what kind of constructive trust exists over the substitute property until the claimant elects to trace into it rather than follow the original property? The answer is unclear. However, in both cases, equity manages to cope without needing a precise schematic of its interests.
The formulation does not, however, deal with the possibility of withdrawal from the scheme. That would be better dealt with by reference to the fiduciary’s intention – it is he who shapes the transaction and the nature of it. It is he who could repent and put an end to the fiduciary wrongdoing, not the intermediary. This is close to the reasoning of Sales J in the court below (at ):
On the facts as I find them, Mr Gorecia caused the Relfo/Mirren payment to be made intending to produce the result that the funds so paid should, by means to be devised by his Ukrainian contacts, be paid on to Bhimji Varsani, and it is likely that they acted so as to bring about the result which Mr Gorecia asked them to produce. The Relfo/Mirren payment and the Intertrade payment were closely related in time and amount[.]
As for the artificial loan stratagem, it is submitted that since equity looks to form and not substance, this situation can be dealt with summarily by examining the facts.
Moreover, it is further submitted that the Agip approach to tracing is not implicitly overruled by Foskett. Instead, what Foskett does is confine Millett J’s earlier remarks about causation in tracing to what binds together different elements of the same transaction. The Agip approach does not go so far as asking if as a matter of economic reality the receipt was caused by the fiduciary; it does not ask if her assets were swollen by the receipt; it asks if it was in reality part of the same transaction.
Thus, the question of whose intention and the lack of closer analysis aside, Arden LJ’s application of tracing stands up to scrutiny. It is, however, vital to keep sight of the principles adumbrated here. Tracing governs the right of property as well as personal rights. According to Lord Millett (Foskett at 127):
Property rights are determined by fixed rules and settled principles. They are not discretionary. They do not depend upon ideas of what is ‘fair, just and reasonable’. Such concepts, which in reality mask decisions of legal policy, have no place in the law of property.
Finally, Relfo can be criticised for its loose approach to knowing receipt. The authority of Hoffmann LJ in El Ajou v Dollar Land Holdings plc  2 All ER 685 (CA) 700 holds that what is required for knowing receipt is: (i) disposal of assets in breach of fiduciary duty; (ii) beneficial receipt of them or their traceable proceeds; and (iii) knowledge of that breach on the part of the defendant. Knowledge is a much more subjective standard than notice; it is possible to have notice but not knowledge of a fact: Re Montagu’s Settlement Trusts  Ch 264 (Ch).
So when Arden LJ suggests that (at ) ‘the innocence of the recipient will go to the question of whether he was a bona fide purchaser for value and without notice’, she elides the proprietary tracing claim (requiring notice), and the personal claim in knowing receipt (requiring knowledge). If Varsani had not dissipated Relfo’s money, he would have been liable in the proprietary claim merely if he had had notice. Because he had, the claimant had to make out knowledge. However, since knowledge is the greater level of cognisance, it follows that if a defendant has no knowledge he has no notice either (but not vice versa).
This element of knowing receipt was dealt with by reference to payment: ‘Mr Bhimji Varsani could not establish that he gave value for the Intertrade payment’ (at ). Provided knowledge is made out – and it was (at ) – giving value is neither here nor there. So once again, despite the rather loose reasoning, the decision is correct. Sales J dealt with the matter correctly in the court below (at  et seq).
Common Law Restitution
It’s hard not to agree with Arden LJ regarding the drift towards a more causal approach. It was thought a requirement that the money used to pay the right-holder (i.e. the chargee) had to be traceable to enrichment of the defendant: Parkash v Irani Finance Ltd  Ch 101 (CA); see, e.g., Charles Mitchell, The Law of Subrogation (Clarendon 1995). No doubt this reflects subrogation’s equitable heritage. The issue in Relfo’s antecedent case Menelaou was that the bank had released its charge a month after the defendant had acquired the new house. Impermissible backwards tracing would have been required. However, like in Relfo, a more causal enquiry was adopted, and a proprietary right – a lien – was awarded to the bank.
There is evidently a tension between a property right awarded on the basis of a merely causal link (and indeed with a possible element of discretion) with the trenchant dicta in Foskett: see, e.g., Rotherham at 253. Nonetheless, by the time of Menelaou the unjust enrichment analysis of subrogation had apparently become entrenched. It therefore follows a fortiori that if unjust enrichment for the subrogation of a proprietary right can take on a causal, not transactional, test, then simple personal unjust enrichment can do the same. There are, however, serious doubts about the efficacy of the ‘economic reality’ test of causation. Moses LJ observed that it is a ‘fuzzy concept’ which might mask the decision-maker’s true reasoning (Menelaou at ). As noted, only Arden LJ endorsed this test in Relfo.
Curiously, David Hayton, ‘A 2014 review of recent trust law developments’  TLI 51 takes the view that the changes to unjust enrichment doctrine apply to knowing receipt, and therefore to equitable liability. The Court of Appeal did not say the unjust enrichment claim was in equity or knowing receipt. On the other hand it did not say that it wasn’t, but it seems reasonable to assume the action has not been changed when the court did not say so.
There is however much to be said for his points, echoing the courts, that strict liability coupled with a change of position defence (where the onus of proof is on the defendant) is not ideal in the commercial sphere, and also that:
Received principles are that while legal proprietary rights are rights in rem binding the whole world, equitable proprietary rights, hidden behind such legal rights, are more difficult to spot so that they do not bind bona fide purchasers for value without notice and, indeed, will not make a gratuitous recipient personally liable until he or she becomes aware of the equitable rights and unconscionably or dishonestly fails to return the relevant property to its rightful owners. Thus such [a] recipient cannot be liable if before attaining such awareness he dissipates the property by spending the received money or the proceeds of sale of the received property.
The catch is that the abstracted money was not purely equitable property. The unique position of companies means that they have actions both at common law and in equity – the former owing to their legal ownership of their property and the latter owing to the analogy between fiduciaries in custody of property absent a trust (directors are not trustees) and full-blown trustees.
That leaves first whether the basic restitutionary action is appropriate for commercial situations. It seems well settled that it is: Lipkin Gorman v Karpnale  2 AC 548 (HL). The bona fide purchaser rule will likely protect commercial parties; on the more generous application of notice in commercial situations, see, e.g., Sinclair Investments (UK) Ltd v Versailles Trade Finance Ltd  EWCA Civ 347,  Ch 453 (CA) at  et seq.
Second is whether a strict liability action should be extended beyond direct recipients; it is to this point Hayton’s comments are most apposite. It is one thing scrutinising the immediate source of a gift, but quite another enquiring into the history of it. The intensity of the burden on the defendant in this strict liability action is greatly increased, perhaps beyond breaking point. Other issues noted by Goff & Jones (at [6–17] et seq) include the disturbing of previously allocated risks of default in insolvency and recovery ahead of unsecured creditors; a greater number of multi-party disputes; and the risk of double recovery or double liability. They argue that steps will be needed to bolster the doctrine of reviving subrogation should the DPR be abrogated, including confirming the bona fide purchaser rule; disallowing the claim where it would undermine contractually allocated risks; affirming a rule against double recovery; and even introducing a rule of remoteness.
One final point connects the common law and equitable actions. Goff & Jones argue (at [6–49]) that Agip can only be explained via causal-based reasoning and a common law claim. This is an extraordinary ex post facto rationalisation – the claim was expressly said to fail at common law because money had and received required a common-law traceable link which was not available on the facts. But applying Arden LJ’s reasoning in Relfo, the claim would be allowed. This would mean the Agip approach to tracing in equity would not be necessary and could be restricted or overruled, with the result that the tension between it and impermissible backwards tracing would be relieved.
What all of this means is that Relfo Ltd v Varsani does not turn out to be terribly ground-breaking. The action in knowing receipt was decided broadly correctly although with flawed reasoning and did not extend that action or tracing. The action in common law restitution was extended but the principles not fully defined owing to lack of agreement within the court. Nonetheless, it is a first, exploratory step in developing unjust enrichment albeit without full considerations of the issue Hayton and Goff & Jones raise.
There is one easy way all of this controversy could have been avoided. The claim was not pleaded in dishonest assistance. Knowing receipt does not displace dishonest assistance. The actions overlap and one may be a dishonest recipient: see, e.g., Lord Nicholls, ‘Knowing Receipt: The Need for a New Landmark’ in WR Cornish et al, Restitution: Past, Present and Future (Hart 1998) 243. Dishonest assistance does not require the accessory to receive anything. It only requires that the accessory be dishonest by the standard of ordinary and honest people and to assist the breach of fiduciary duty: Royal Brunei Airlines v Tan  2 AC 378 (PC). Moreover, receipt of suspicious property is something from which dishonesty can be inferred: Air Canada v M & L Travel Ltd  3 SCR 787 (Supreme Court of Canada) 812 (Iacobucci J). It was found that ‘Varsani knew that the money came from Relfo and was told that it was compensation for the Varsani family’ (at ). Therefore an action would almost certainly have lain in dishonest assistance. This has the advantage of taking in the ‘economic reality’ of the transfer of value without the problems posed by strict liability coupled with a defence of change of position or the difficulties in tracing set out.