Court of Appeal
Published January 8, 2008
Charter plc and Another v City Index Ltd (David Gawler and Others, Part 20 defendants)
Before Lord Justice Mummery, Lady Justice Arden and Lord Justice Carnwath
Judgment December 21, 2007

A party which received money transferred in breach of trust, who was liable as a knowing recipient if he retained it money or paid it away in unconscionable circumstances could recover contribution from any other person responsible for damage to the party defrauded.

Whether the knowing recipient should bear all the defrauded party’s loss depended on the facts which could only be assessed at trial.

The Court of Appeal so held in a reserved judgment allowing the appeal of City Index Ltd, the defendant and claimant for contribution under Part 20 of the Civil Procedure Rules, from Sir Andrew Morritt, Chancellor ( The Times October 27, 2006; [2007] 1 WLR 26) who allowed the application of David Gawler and 12 others to dismiss summarily its claim for a contribution to a settlement it had agreed in proceedings brought against it by the claimants, Charter plc and Charter Central Finance Ltd.

Mr Anthony Boswood, QC and Mr Alan Maclean for City Index; Mr Michael Brindle, QC and Mr Daniel Stilitz for the first to twelfth Part 20 defendants; Mr Simon Salzedo for the thirteenth Part 20 defendant; the claimants did not appear and were not represented.

LORD JUSTICE CARNWATH said that between 2000 and 2004 Charter was defrauded of large sums by a manager in its foreign exchange department, the sum being the transfer of £9 million to the defendant to finance his personal spread betting transactions. He was convicted of theft in December 2004.

Charter brought proceedings against the defendant on the basis it received the sums transferred with knowledge of breach of trust or fiduciary duty of the manager. The claim was settled for £5 5 million in February 2006.

The defendant began Part 20 proceedings against some of the claimants’ directors and the group auditors claiming indemnity or contribution under the Civil Liability (Contribution) Act 1978 that their breaches of duty caused the unauthorised transfers to continue undetected, and so causing the claimants’ losses.

His Lordship said that it was accepted that Bank of Credit and Commerce International (Overseas) Ltd v Akindele ( The Times June 22, 2000; ([2001] Ch 437) represented the law on liability for knowing receipt: that liability depended 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 issue of contribution under the 1978 Act had to be approached on the assumption the factual basis of the claim would have been established, and that the case against the directors would be established at trial.

Having considered dicta of Lord Steyn in the House of Lords in Royal Brompton Hospital NHS Trust v Hammond ( The Times April 26, 2002; [2002] 1 WLR 1397) and of the Court of Appeal in Friends Provident Life Office v Hillier Parker May & Rowden ([1997] QB 85), his Lordship said that Royal Brompton was not direct authority for the meaning of the word “compensation” nor of its applicability to liability for knowing receipt and the case was not directly relevant.

Lord Steyn had not held that Friends Providentwas wrongly decided, nor had he directly criticised its conclusion on knowing receipt. Thus the defendant’s liability to the claimants did not depend solely on the receipt of money paid in breach of trust, but on retaining it or paying it away in circumstances where it was unconscionable to do so.

Adopting a wide view of the 1978 Act, in ordinary language the defendant’s liability to make good the claimants’ loss could properly be referred to as liability to compensate it.

In any event, the court was bound so to hold on the basis of Friends Provident, and the dicta in Royal Bromptondid not require otherwise, so that his Lordship agreed with the Chancellor’s conclusion on that aspect.

However, the Chancellor had gone on to say that the overriding cause of the claimants’ loss was that the defendant, having received the money, instead of paying it back, paid it to someone else; so that it was not just or equitable to require the alleged negligent directors and auditors to contribute to the liability of the knowing recipient, the defendant.

The Chancellor’s reasoning was understandable on the basis that he found Niru Battery Manufacturing Co v Milestone Trading Ltd (No 2) ([2004] All ER (Comm) 289) was binding authority for the proposition that a defendant who paid money away in bad faith, because he had the relevant knowledge, was to be treated in the same way as one who had received it with that knowledge and retained it.

However, his Lordship analysed that case on the basis that the Court of Appeal’s conclusion was reached as one of fact, not law, so that that aspect of its reasoning did not bind the present court.

Nor was such a general principle supportable. It would impose a restriction on the wide scope of section 2 of the 1978 Act, granting the court the discretion to order such compensation as was just and equitable, unjustified by its wording..

The defendant’s liability depended on the facts of the case, which could only be assessed at trial. The appeal should be allowed to that extent, and the order for summary judgment set aside.

Lady Justice Arden gave a judgment concurring in the result and Lord Justice Mummery agreed with Lord Justice Carnwath.

Solicitors: Macfarlanes; Ashurst; Barlow Lyde & Gilbert.

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