Illegal Contracts Remedies
Cases
Craven-Ellis v. Canons Ltd
[1936] 2 KB 403,
GreerLJ:.. The Company having had the full benefit of these services, decline to pay either under the agreement or on the basis of a quantum roeruit. Their defence to the action isa purely technical defence, and if it succeeds the Messrs du Cros as the principal shareholders in the company, and the company, would be in the position of having received and accepted valuable
services and refusing, for purely technical reasons, to pay for them.
As regards the services rendered between December 31, 1930, and April 14, 1931, there is, in my judgment, no defence to the claim. These services were rendered by the plaintiff not as managing director or asa director, but as an estate agent, and there was no contract in exist ence which could present any obstacle to a claim based ona quantum meruit for services rendered and accepted.
As regards the plaintiff’s services after the date of the contract, I think the plaintiff is also entitled to succeed. The contract, having been made by directors who had no authority to make it with one of themselves who had notice of their want of authority, was not binding on either party. It was, in fact, a nullity, and presents no obstacle to the implied promise to pay on a quan tum meruit basis which arises from the performance of the services and the implied acceptance of the same by the company.
It was contended by Mr Croom-Johnson on behalf of the respondents that, inasmuch as the services retied on were purported to be done by the plaintiff under what he and the directors thought was a binding contract, there could be no legal obligation 011 the defendants on a quan tum meruit claim. The only one of the numerous authorities cited by Mr Croom-Johnson that appears to support his contention is the judgment of a Divisional Court in In re Allison, Johnson f5 Foster, Ld.; Ex parte JJirkenshaw.1 The Court consisted of Lord Alverstone, Wills and Kennedy JJ, and the judgment was delivered by Kennedy J. In giving judgment that learned judge, expressing not merely his own opinion, but that of the other two judges, said: ‘There can be no implied contract for payment arising out of acceptance of the work done where the work was done upon an express request which turns out to be no request at all, but which down to the time when the whole of the work had been d ne was supposed by both parties to be valid and operative.’ This passage appears to involve the proposition that in all cases where parties suppose there is an agreement in existence and one of them has performed services, or deliv ered goods in pursuance of the suppositious agreement there cannot be any inference of any promise by the person accepting the services or’ the goods to pay on the basis of a quantum meruit. This would certainly be strictly logical if the inference of a promise to pay on a quan tum meruit basis were an inference of fact based on the ac.i:eptance of the services or of the goods delivered under what was supposed to be,an existing contract; but in my judgment the inference is not one of fact, but is an inference which a rule oflaw imposes on the panies where work has been done or goods have been delivered under what purports to be a binding contract, but is not so in fact.
In my judgment, the obligation to pay reasonable remuneration for the work done when there is no binding contract between the parties is imposed by’a rule oflaw, and not by an inference of fact arising from the acceptance of services or goods. It is one of the cases referred to in books on contracts as obligations arising quasi ex contractu, of which a well known instance is a claim based on money had and received. Although I do not hold that the decision of the Court in Ex parte Birkensha1l)was wrong, I think that the passage I read from the judgment is not a correct statement of the law.
I accordingly think that the defendants must pay on the basis of a quantum meruit not only for the services rendered after December 31, 1930, and before the date of the invalid agreement, but also for the services after that date. I think the appeal should be allowed, and judgment given for such a sum as shall be found to be due on the basis of a quantum meruit in respect of all services rendered by the plaintiff to the company until he was dismissed. The defendants seem to me to be in a dilemma. If the contract was an effective contract by the company, they would be bound to pay the remuneration provided for in the contract. If, on the other hand, the contract was a nullity and not binding either on the plaintiff or the defendants, there would be nothing to prevent the inference which the law draws from the performance by the plaintiff of services to the company, and the company’s acceptance of such services, which, if they had not been performed by the plaintiff, they would have had to get some other agent to carry out.
Rover International Ltd v. Cannon Film Sales Ltd
[1989] 1 WLR 912, Court of Appeal
Kerr LJ: …
Total failure of consideration
The claim for repayment of the five instalments of the advance on this ground was rejected by the judge in the following terms [1987] BCLC 540,546:
‘As for the claim for money had and received, the answer is plain. Theconsideration, if there had beena contract, had not failed at all. Rover has had several films, including ‘Highlander,’ and distributed them in Italy for payment no doubt of substantial sums. To allow it now to get back the moneys which it paid to Cannon would be grossly unjust. There is no claim in law here for moneys had and received to the use ofRover.’
This passage strongly supports my impression that the judge did not have in mind the full financial consequences which would flow from his judgment. But that is ofno direct relevance at thisjuncture. The important point is that in my view the judge could not have expressed himself in this way if his attention had been directe4 to the correct approach in principle. The question whether there has been a total failure of consideration is not answeredby considering whether there was any consideration sufficient to support a contract or purportedcontract. The
test is whether or not the party claiming total failure of consideration has in fact receivedany part of the benefit bargained for under the contract or purported contract.
The relevant principles are set out in Chitty on Contracts, 25th edn. (1983), vol. I, l091-2, para. 1964 and the authorities there cited, to which we understand the judge was notreferred. It is convenient to quote the following passages from the text:
‘Where money has been paid under a transaction that is or becomes ineffective thepayer mayrecover the money provided that the consideration for the payment has totally failed. Although the principle is not confined to contracts most of the cases are concerned with ineffectivecontracts. In that context failure of consideration occurs where the payer has not enjoyed the benefit of any part of what he bargaiped for. Thus, the failure is judged from the payer’s point of view and “when one is considering the law of failure of consid eration and of the quasi-contractual right to recover money on that ground, it is generally speaking, not the promise which is referred to as the consideration, but the performance of thepromise.” The failure has to be total… Thus, any performance of the acrualthing promised, asdetermirud hy the contract, is fatal to recovery under thisheading.
The role of the contractual specification means that it is not true to say that there can bea total failure ofconsideration only where the payer received no benefit at all in return
for the payment. The concept of total failure of consideration can ignore real benefits received by thepayer if they are not the benefit bargained fo.r…’ The quotationwas taken from the speech of Viscount Simon LC in Fibrosa Spo/kaAkcyjna v.
F11irbaim Lawson Combe Barbour Ltd[1943] AC 32, 48. It is not necessary to refer to this or the
other authorities cited in support of this passage, but I should refer to two authorities by way of illustration.
InRowlandv. Diva/l [1923] 2 KB 500 the plaintiff bought a car from thedefendants. He had the use of it for several months but then discovered that the seller had notitle, with the result that he had to surrender the car to the true owner. He sued for the return of the price on the ground that there had beena total failure of consideration. The defendant denied this, point ing out that the plaintiff had had the use of the car for a substantialtime. This contention suc
ceeded at first instance, leaving the plaintiff only with a claim for damages, but this court unanimously upheld theplaintiff’s claim. The consideration for which he had bargained was lawful possession of the car and a good title to it, neither of which he got. Although the car had been delivered to him pursuant to the contract and he had had its use and enjoyment for a con siderable time, there was a total failure of consideration because he had not got any part of what he had bargained for.
The decision of Finnemore Jin Warman v. Southern Counties Car Finance Corporation Ltd [1949) 2 KB 576 was to the same effect. The plaintiff was buying a car on hire purchase when he became aware that a third party was claiming to be the true owner of the car. But he never theless went on paying the remaining instalments and then the necessary nominal sum to exer cise his option to purchase. When the true owner then claimed the car he surrendered it and sued the finance company for the return of everything he had paid. He succeeded on the ground
that there had been a total failure of consideration. He had not bargained for having the use of the ca.r without the option to purchase it.
The position of Rover in the present case is a fortiori to these cases. Admittedly, as the judge said, they had several films from Cannon. But the possession of the films was merely inciden tal to the performance of the contract in the sense that it enabled Rover /Monitor to render ser vices in relation to the films by dubbing them, preparing them for release on the Italian market and releasing them. These were onerous incidents associated with the delivery of the films to them. And delivery and possession were not what Rover had bargained for. The relevant bar gain, at any rate for present purposes, was the opportunity to earn a substantial share of the gross receipts pursuant to clause 6 of the schedule, with the certainty of at least breaking even by recouping their advance. Due to the invalidity of the agreement Rover got nothing of what they had bargained for, and there was clearly a total failure of consideration.
This equally disposes of Mr Pardoe’s ingenious attempt to convert his concession of a quan
tum meruit, in particular the element of reasonable remuneration, into consideration in any rel evant sense. Rover did not bargain for a quantum meruit, but for the benefits which might flow from clause 6 of the schedule. That is the short answer to this point.
It follows that in my view Rover’s claim for the repayment of the five instalments of the advance totalling $312,500 succeeds on the basis of a total failure of consideration.
Mistake of fact
In my view Rover are equally entitled to recover these instalments as having been paid to Cannon under a mistake of fact….
Qµantum meruit
As already mentioned, shortly after the opening of the appeal the plaintiffs’ entitlement to a quantum meruit was agreed, and it was also agreed that its quantification in figures should be dealt with at the same time as the accounts and inquiries relating to the gross receipts. We therefore asked the parties to formulate an agreement statement defining the measures of the quantum meruit so far as possible. It then transpired that a number of points of disagreement remained. We were accordingly supplied with a document which indicated the extent of the agreement and also some minor points raised by one side or the other which were not agreed and on which we were asked to rule. I therefore set out below what I consider to be the appro priate terms defining the quantum meruit to which the plaintiffs are entitled. I have empha sised the words about which the parties were not in agreement to the extent that I consider that they should form part of the definition. This is as follows: ‘Cannon agrees that in the
account to be taken, Rover can recover on a quanrum meruit for work done for Cannon by Rover and! or Monitor Sri in respect of the distribution of the films supplied by Cannon. together with disbursements reasonably incurred by Rover and!or Monitor in connection therewith, such recovery: (a) to include such element of profit as is reasonable (b) not to be in excess of the gross receipts of distribution in Italy of the said films 1upplilcl by Cannon, such gross receipts to be calculated in accordance with clause 12(a) oftbe agreement (c) not to include any work done or disbursements incurred prior to 6 Febnal,J 986 (d) to include the reasonable dubbing and other expenses incurred in connection with
”Link”.’
As can be seen from the emphasised words, the only disagreement of substance was on the question whether the quantum meruit should relate to any services rendered by Rover as well as Monitor. In my view it is right to refer to both; Rover were the parties to the intended con tract and it was always envisaged that the work in Italy would be done by Monitor as their agents. For this reason I also conclude that the element of profit referred to in (a) should not be limited to Monitor, as Cannon had suggested. But that is only how I see the position in prin ciple. It may well turn out that nothing at all can justifiably be claimed on behalf of Rover, because it was a mere ‘front’ and shell; and there could certainly be no question of any dupli cated claim. As regards the expenses incurred in connection with the film ‘Link,’ I can see no good ground for confining these to the dubbing. If and to the extent that additional expenses preparatory to the release of this film had also been reasonably incurred, it seems to me that these should be recoverable.
However, this leaves one further major area of disagreement between the parties to which I
have already referred; the so-called ‘ceiling’ point. The question is whether the quantum meruit should in any event be limited to such amount, if any, as Rover would have been entitled to retain out of the gross receipts by 13 October 1986, when Cannon terminated the (purported) agreement pursuant to clauses 16 and 17, the”default’ and ‘termination’ provisions. As already mentioned, Cannon’s right to invoke these clauses on the ground of the unauthorised release of ‘Highlander’ on 10 October was upheld below, and there has been no appeal against this part of the judgment.
This raises an issue of principle of some general importance. Cannon submit that the plain tiffs would be unjustly enriched if they reco ered more by way of a quantum meruit than what would have been their entitlement under tlJe purported contract, bearing in mind that it was their breach which led to its termination. They rely on the famous dictum of Lord Mansfield in Moses v. Macferlan (1760) 2 Burr. 1005, 1010, that the defendant
‘may defend himself by every thing which shows that the plaintiff, ex aequo et bono, is not entitled to the whole of his demand, or to any part of it.’
The problem only arises in cases where a contrac has been rescinded by an ‘innocent’ party without a prior breach by the other party. Where there has been a prior breach, as in somewhat similar situations in which pre-payments may be recoverable such as Dies v. British and International Mining and Finance Corporation Ltd [1939) l KB 724 … the ‘innocent’ party can of course sue for damages. But where the contract was void ab initio or has come to an end with out breach, e.g., by frustration, all remedies must necessarily lie in the area of restitution.
The contention on behalf of Cannon is at first sight attractive, that Rover’s recovery of a quantum meruit should be subject to a ‘ceiling’ which would take account of their breach and the consequent right of Cannon, which was in fact invoked, to terminate under the ‘default’ clause, but for the fact that the contract has been void ab initio. However, on further consider ation I have reached the clear conclusion that this would not be a correct analysis, for a num ber of reasons.
First, there are purely pragmatic reasons which militate against the justice of a superficially
attractive solution on these lines. Thus, it is not simply a case of a contract which was void ab initio without the knowledge of either party and which was then broken by Rover. It was a case where the invalidity of the contract was discovered by Cannon, no doubt with considerable sat isfaction, and relied upon by them. If they had wished to do so they could have affirmed the contract, since the cause of its invalidity had no practical significance for the parties’ bargain. But they chose to rely on the invalidity, and when they first invoked it there had been no breach on the side of Rover; merely unfounded allegations of breaches and other unattractive conduct from the side of Cannon. In these circumstances it docs not appear unjust that Cannon cannot have the best of both worlds: reliance on the invalidity of the contract ab initio as well as upon a subsequent breach on the part of Rover. Moreover, the suggested ‘ceiling’ would be unjust, since its operation would be one-sided. The quantum meruit in favour of Rover would be lim ited, and indeed disappear entirely on the facts of this case, whereas the benefits of the restitu tionary position in favour of Cannon would be without limit, since no ‘ceiling’ would be
applicable to their entitlement to the gross receipts.
Secondly,I do not think that the contention in favour of a ‘ceiling’ is in accordance with principle. It would involve the application of provisions of a void contract to the assessment ofa quantum meruit which only arises due to the non-existence of the supposed contract. Albeit onvery different facts,a similar mixture between a contract and an extra-contractual quantum meruit was rightly rejected by Saville J in Greenmast Shipping Co. SA v. Jean Lion et Cie SA
[1986) 2 Lloyd’s Rep. 277.
Moreover, as pointed out in Goff and Jones, The Law of Restitution, 3rdedn. (1986), 691, there has been reluctance to accept the full breadth of Lord Mansfield’s dictum in Moses v. Macferlan,2 Burr. 1005, 1010. As shown by this chapter, the concept of restitution in the face of what would otherwise be unjust enrichment has been limited by defences protecting the party from whom restitution is claimed; not by considering the merits or demerits of the party which has madea payment under a mistake or for a consideration which has wholly failed.
Finally, if the imposition of a ‘ceiling’ in the present case were accepted, then the conse quences could be far-reaching and undesirable in other situations which it would be impossi ble to distinguish inprinciple. It would then follow that an evaluation of the position of the parties toa voidcontract, or to one which becomes ineffective subsequently, could always be called for. We know that this is not the position in the case of frustrated contracts, which are governed by the Law Reform (Frustrated Contracts) Act 1943. It would cause many difficul ties if the position were different in relation to contracts which are void ab initio. By analogy to Cannon’s submission in the present case, in deciding on the equities of restitution the court could then always be called upon to analyse or attempt to forecast the relative position of the parties undera contract which is ex hypothesi non-existent. This is not an attractive proposi tion, andI can see no justification for it in principle or upon anyauthority.
I therefore conclude that Cannon must accept the primary basis on which they have suc
ceeded, the invalidity of the contract ab initio, and that they cannot also rely on Rover’s breach of this non-existent contract. It follows that for the purposes of assessing an appropriate quan tum meruitI would order an account to be taken on the basis of the terms set out abov.e.
Westdeutsche Landesbank Girozentrale v. Islington London Borough Council
[1994] 4 All ER 890, Queen’s Bench Division, (1994] I WLR 938, Court of Appeal, (1996] 2 WLR 802, House of Lords
HobhouseJ:
(2) Money had and received
(a) Total failure of consideration
The phrase’failure of consideration’ is one which in its terminology presupposes that there has been at some stage a valid contract which has been partially performed by one party. It is essentiallya concept for use in the law of contract and provides a common law remedy governed byrigid rules granted as of right where the contract becomes ineffective through breach or otherwise. The rules that govern the application of the principle include thetechnical concept of an ‘entire’ consideration, what amounts in law to a total failure of consideration, and the absence of defences to the action for the recovery of money paid for a consideration which has wholly failed. ln the case of ultra vires transactions such as those with whichI am concerned where there is not and never has been any contract, I prefer to use the phrase ‘absence of con sideration’.I note that this was the phrase used by the House of Lords in theWoolwich case, [1993] AC 70 and has been used by other judges in the past, although it is right to say that the
phrase ‘failure of consideration’ has very frequently been used in connection with void contracts
(see eg the argument in Fibrosa Spolka Akcyjna v. Fairbairn Lawson Combe Barbour Ltd [1943] AC32 at 36).
Adopting for the moment the contractual approach, what amounts to a total failure of con sideration was authoriti vely considered by the House of Lords in the Fibrosacase. That case concerneda frustrated contract under which the buyer had made an advance payment of the price but had not received any goods or actual benefit in return and under which, prior to its frustration, the seller had incurred expense in starting to manufacture the goods which would, after the completion of their manufacture, have become the subject of the sale. It was argued that the consideration for the advance payment was the promises of the seller and that they had been valid promises; it was said that the principle was confined to cases where the contract was avoided (so that the promises were avoided as well). Viscount Simon, having referred to the opinion expressed in Chandler v. Webster [1904) I KB 493 that the doctrine of failure of consideration only applied to contracts which had been avoided as opposed to frustrated, and hav ing distinguished contracts under seal, continued ([1943] AC 32 at 48):
‘ when one is considering the law of failure of consideration and of the quasi-contractual right to recover money on that ground, it is, generally speaking, not the promise which is referred to as the consideration, but the performance of the promise. The money was paid to secure performance and, if performance fails, the inducement which brought about the payment is not fulfilled.’
Accordingly the relevant failure of consideration for the application of this principle is the fail ure of performance on the part of the opposite party. If the opposite party has at least partially performed his obligations under the contract so as to confer some benefit upon the claimant, then the claimant cannot rely upon the principle. Further, it is clear from the speeches in the House of Lords and the overruling of Chandler v. Webs/er that, whilst the principle was prop erly applied in cases where contracts had been avoided ab initio, it was not confined to such cases.
Applying the principle stated in the Fibrosa case, the banks cannot say that the contractual principle enables them to recover on any of the contracts save for the third and fourth Sandwell swaps. On the third and fourth Sandwell swaps there were only payments one way and there was never any performance by Sandwell. Accordingly, in respect of those two transactions, K.leinwort Benson is entitled to say, on the basis of the contractual principle, that there has been a total failure of consideration and that they should be entitled to recover all sums paid under those two swaps at common law as money had and received. As regards the Islington swap and the second Sandwell swap, there has been partial performance by both sides and both sides have received benefits under the ‘contract’. As regards the first Sandwell swap the contemplated con tract was in fact fully performed and neither party can, on the contractual approach, say that there was any failure of consideration, let alone any total failure. Therefore the contractual prin ciple of total failure of consideration does not suffice to give any right to recover the sums paid under those contracts.
(b) Void contracts and absence of consideration
To get round the difficulty that they could not satisfy the test stated in the Fibrosa case, the plaintiffs advanced various arguments which all in the end amounted to the proposition that, where there has never been any contract in law, as is the case where the purported contracted is ultra vircs one party, any sums paid under that contract can in principle be recovered. They recognised that if ordering the repayment of sums paid amounted to indirectly enforcing the ultra vires contract, as was the case in Sinclair v. Brougham, the prima facie right to repayment could not be recognised, but they relied in particular upon what was said by Lord Parker, which expressly recognised that where no questioo of indirectly enforcing an ultra ,·ires contract was involved there might well be a right ofrecovery (see [1914] AC 398 at 440).
They were also able to rely upon the decision of the Divisional Court in Broi,gham v. Dwytr
(1913) 108 LT 504. This case also involved the ultra vires banking business of the Birkbeck Building Society. The plaintiff was the liquidator of the society and the defendant was a cus tomer of the supposed bank. It appears that the defendant had had an active current account with the society for some time and that at the date of the liquidation the account was £32 2s 2d overdrawn. The county court judge had declined to distinguish between ultra vires and illegal ity and had given judgment for the defendant. The Divisional Court allowed the appeal and held that the plaintiff was entitled to recover the amount of the overdraft as money had and
received by the defendant to the use of the society. The distinction between ultra vires and ille gality was underlined, and the basis of recovery was spelt out by Lush J (at 505):
‘It turned out that in point oflaw the building society were incompetent to make such a contract, and it followed that the contract which the directors thought they were mak ing was not a contract at al but was simply a transaction which in point of law did not exist. The consequence was that the defendant had received moneys belonging to the building society under a transaction which had no validity of any sort or kind. H the mat ter stood there, I should have thought it plain that there being no contract an action for money had and received would lie. The case appears to me to be on all fours with one in which money has been advanced on something which was thought to be a contract, but as to which it turns out there has been a total failure of consideration … theaction was main tainable, and the defendant had no answer to it. It was an action brought for money lent under a transaction which was thought to be valid but which was in fact not valid. On prin ciple I can sec no possible reason why such an action should not be maintainable, and the Court of Appeal in Re Coltman ((1881) 19 Ch D 64) clearly decided that in a case such as the present assuming the contract not to be illegal, there would be no answer to the action.’
What Lush J says must of course be read subject to what was said by the House of Lords in Sinclair v. Brougham, but it confirms the basic proposition that in the absence of some special factor money paid under an ultra vires contract can be recovered as money had and received in the same manner as can money paid for a consideration that has totally failed. This is so even though no question of mistake of fact arises and there were mutual dealings under the supposed contract which would preclude the application of what I have chosen to characterise as the ordinary contractual principle. ;
The same conclusions are also powerfully supported by the annuity cases and, in particular,
Hicks v. Hicks.
The two cases referred to in the speeches in Sinclair v. Brougham, that is to say Re Phoenix Life Assurance Co, Hoart’s Case (1862) 2John·& H 441, 70 ER 1041 and Flood v. frish Provident Assurance Co. Ltd [1912] 2 Ch. 597n, were concerned with purported insurance contracts which were entered into ultra vires the powers of the relevant insurance company. In the Phoenix Life Assurance case the claimants were allowed to prove in the liquidation for the premiums that they had paid on the basis that they would have been recoverable at law as money had and received. Flood’s case was similar save that the insurance company ..vas not in liquidation. The premiums paid on the void policies were held to be recoverable as being money paid without considera tion. The Phoenix Life Assurance case was cited and treated as having been decided upon the same basis. These cases are accordingly consistent with both sides’ submissions. The language used assists the banks; the facts show that the application of the Fibrosa test would have led to the same conclusion.
The banks also relied upon the decision of Cairns J in North Cenlral Wagon Financt Co. Ltd
v. Brailsford [1962] 1 WLR 1288. The facts were somewhat complicated. In summary they were that in 1955 the defendant, Brailsford, entered into what purported to be a hire-purchase con tract with the plaintiffs in respect of an Albion lorry which was in fact already owned by the defendant. Under that agreement the plaintiffs advanced £1,000, which was used by the defen dant to purchase a second lorry. Matters then proceeded for some two and a half years on the basis of the supposed hire-purchase agreement and variations or it. Substantial payments were made by or on behalf of the defendant to the plaintiffs. However, by the beginning of 1958 there was still money apparently owing by the defendant to the plaintiffs. The plaintiffs sued for the money outstanding under the supposed hire-purchase agreement. The defendant objected that it was in truth an unregistered bill of sale and therefore void. The court upheld that contention and it followed that the claim on the supposed contract could not succeed. However, an alter native claim for the repayment of the £1,000 as money had and received by the defendant to
the use of the plaintiffs was allowed. Cairns J dealt with the point very shortly. He said ([1962]
I WLR 1288 at 1293-1294):
‘I now turn to the plaintiffs’ alternative claim for money had and received. In Davies v. Rees ((1886) 17 QBD 408), it was held that a bill of sale which is void for want of form is void for all purposes, but nevertheless it was held at first instance, and not contested on appeal, that the money could be recovered by the lender with reasonable interest. In Bradford Advance Co., Ltd v. Ayers ([1924] WN 152), 8AJLHACHE, J, held that the money could be recovered, not on the basis of any oral agreement leading up to the bill of sale, but as money had and received. ln my view, the same considerations apply where money is advanced on a bill of sale which is void for non-registration.’
CairnsJ held that the plaintiffs were entitled to recover from the defendant the sum advanced, ‘less repayments and other proper credits, with interest’ (see [1962] l WLR 1288 at1295). This case will not stand up to any analysis on the basis of satisfying the Fibrosa test. Benefits had been given and received and the approach of the court was not to deny the remedy but to take them into account in evaluating the computation of the amount of the remedy. Similarly, it is not a case which was based in any way upon any mistake of fact.
The argument of the banks was formulated in a number of ways. The simplest was that contained in the skeleton argument of Mr Southwell QC for Kleinwort Benson: ‘Payments made undera void contract do not amount to consideration for the purposes of the law of restitution.’ In support of that proposition he cites two Gaming Act cases, which in my judgment do not assist since payments for honour are in law gifts (see the Lipkin Gorman case), and Brailsford’s case and Hicks v. Hicks, which are clear authorities in favour of the proposition. The argument developed by Mr Sumption QC was that it is necessary to ask whether the payer got the bene fit for which he bargained. ‘What the bank bargained for was payments which would discharge a legal obligation and which the bank was entitled lawfully to receive. What it obtained were payments made under a void agreement which Islington was prima facie entitled to recoverback.’
In support of that submission Mr Sumption relied primarily upon two cases. The first,
Rowland v. Divall [1923] 2 KB 500, in which the purchaser of a motor car was suing the seller for the return of the price on the basis that, although the motor car had been delivered to the buyer and in fact on-sold by him, the seller had never passed a good title in the car tohim. The price was held to be recoverable as money paid for a consideration that had wholly failed and the benefit which he had had through having the possession of the motor car fora period of time was disregarded. I do not find that case of assistance. It has to be contrasted with the decision of the Privy Council in Linz v. Electric Wire Co. of Palestine Ltd [1948] AC 371, where a similar claim failed on the ground that there was not a total failure of consideration. In Linz’s case what the plaintiff had paid for was a number of preference shares which had been invalidly issued. Such decisions depend upon an analysis of whether the defendant’s breach was funda mental to the particular contractual transaction and, by necessary implication, whether the plaintiff was in the circumstances precluded from treating the contract as rescinded. In Linz ‘s case it was held that ‘she got exactly that which she bargained to get’;(see [I948) AC 371 at
377). In Rowland v. Diva/I it was considered that the buyer did not get what he bargained for. This is very different from the present case where there was in truth no bargain at all and prob lems of deciding what was the essential part of the bargain do not arise and there can be no ques tion whether the plaintiff’s conduct has affected his right to treat the contract as rescinded.
The second case relied upon by Mr Sumption was more helpful and, indeed, was illustrative ofa principle recognised in a number of other cases. The case was Rover lnternation11l Ltdv. Cannon Film Sales Ltd (No 3) [he considered the case and continued:]
This case illustrates that for the purposes of the law of failure of consideration it is contractual performance that must be looked at and that collateral benefits received do not deprive the payer of his remedy. Similarly, compensation by way of quantum meruit or under some form of quasi contract is not a relevant benefit at all. It does not arise under the relevantcontract. It is awarded by the court independently, on the basis that there is no effective contract. However, again, the analysis of Kerr LJ is essentially contractual. In my judgment, the correct analysis is that any payments made under a contract which void ab initio, in the way that an ultra vires contract is void, are not contractual payment at all.
They are payments in which the legal property in the money passes to the recipient, but in equity the property in the money remains with the payer. The recipient holds the money as a fiduciary for the payer and is bound to recognise his equity and repay the money to him. This relationship and the consequent obligation have been recognised both by courts applying the common law and by Chancery courts. The principle is the same in both cases: it is uncon scionable that the recipient should retain the money. Neither mistake nor the contractual prin ciple of total failure of consideration are the basis for the right of recovery.
Where payments both ways have been made the correct view is to treat the later payment as, pro tanto, a repayment of the earlier sum paid by the other party. The character of the remedy, both in law and equity, is restitution, that is to say putting the parties back into the position in which they were before. Accordingly, the remedy is only available to a party on the basis that he gives credit for any benefit which he has received. He must give credit for any payments which have been made by the opposite party to him and, where the court thinks appropriate, paya quantum meruit or quantum valebat. The same conclusion follows from the application of the principle of unjust enrichment: in so far as the recipient has made cross-payments to the payer, the recipient has ceased to be enriched.
This formulation is explicitly the basis of the decisions in the annuity cases and the decision of the Divisional Court in Brougham v. Dwyer (1913) 108 LT 504. It is implicit in the decision in Brailsfiml’s case [1962) I WLR 1288. It is also fully consistent with the many judicial statements of the general principle which underlies the law of restitution and unjust enrichment which are typified by the statement, already quoted, of Lord Wright in the Fihrosa case [1943) AC 32 at 61. .
The application of the principle is subject to the requirement that the courts should not grant a remedy which amounts to the direct or indirect enforcement of a contract which the law requires to be treated as ineffective. Since the obligation which law and equity require the con science of the receiver to recognise is in effect an obligation to repay money, it is hard to think of any situation where this qualification will be relevant save where the void contract was one which purported to create a debtor and creditor relationship, as was the case in Sinclairv. Brough11m. Since Sinclair v. Brougham was decided on the basis of applying this qualification, it is a decision which tends to confirm the formulation. The existence of the qualification and its relevance in Sinclair v. Brougham was repeated by Lord Sumner in R. Leslie Ltd v. Sheill [1914) 3 KB 607 at 613.
The right to recover payments is also subject to any available defences. Generally speaking, those are any defences which affect the equity. This is again either explicit or implicit in the annuity cases and, since the Lipkin Gorman case, includes, as an application of that approach, the defence of change of position.
Since the right of recovery, although based on equitable principles, has been recognised by the common law courts and has been held to be capable of founding an action for money had and received, it can form a proper basis for a legally recognised right of recovery in personam in the present cases. If, contrary to my view, there were some distinction to be drawn between the right to restitution as recognised in law and in equity, any such distinction should not now affect the outcome of a case where no question of insolvency arises; the principles of both law and equity should be applied in a unified fashion so as to provide the appropriate remedy.
This decision is sufficient to establish the prima facie right of the plaintiffs to recover in both of the actions which are before me. It also follows from the fact that I consider that the correct analysis is absence of consideration and not failure of consideration that it is not open to Kleinwort Benson to assert an absolute right of recovery on the third and fourth Sandwell swaps on the basis of a right to recover money paid for a contractual consideration that has wholly failed to which there are no defences; it will be open to Sandwell to seek to raisea defence of change of position. Likewise, it follows that it is irrelevant to the existence of a cause of action in connection with the payments made under the first Sandwell swap that the supposed contract was in fact full)· performed and there was no failure of consideration at all in the contractual sense.
Goss v. Chilcott
[1996] AC 788, Privy Council
Lord Goff
As their Lordships have already recorded, Neazor J held that the company could not succeed on its claim in restitution, because he considered that there had been no total failure of consid eration for the loan, the defendants having furnished consideration for it in the form of the mortgage instrument. With this conclusion, their Lordships are unable to agree.
The advance was in fact paid by the company to Haddon Marshall & Co., as solicitors, but, having regard to the terms on which they received it from the company, was retained by them in their trust account until after the defendants had executed the mortgage instrument. It was then available to the defendants but was in fact received by Mr Haddon, as agreed between him and the defendants. In these circumstances the loan appears in fact to have been advanced to the defendants pursuant to the terms of the mortgage instrument, the consideration for the advance being expressed to be the personal covenants by the defendants to repay the advance upon those terms. Even if (which their Lordships doubt) the loan had been paid pursuant toa preceding oral agreement between the company and the defendants, it must have been paid in consideration for the defendants’ promise to repay it, though the ensuing loan contract would (as their Lordships have already indicated) have become merged in and superseded by the) contract contained in the mortgage instrument.
But the consideration there referred to, necessarily implicit if not explicit in every loan con-
tract, was the consideration necessary for the formation of the contract; and, as Viscount Simon LC observed ina much-quoted passage in his speech in Fibrosa SpolkaAkcyjna v. Fairbairn
Lawson Combe Barbour Ltd [1943] AC 32, 48:
‘when one is considering the law of failure of consideration and of the quasi-contractual right to recover money on that ground, it is, generally speaking, not the promise which is referred to as the consideration, but the performance of the promis.e If this were not so,there could never be any recovery of money, for failure of consideration, by thepayer of the money in return for a promise of future performance, yet there arc endless e,cam ples which show that money can be recovered, as for a complete failure of consideration, in cases where the promise was given but could not be fulfilled.’
Of course, in the case of a loan of money any failure by the borrower to repay theloan, in whole or in part, by the due date, will in ordinary circumstances give rise toa claim in contract for repayment of the part of the loan which is then due. There will generally be no need to have recourse toa remedy in restitution. But in the present case that course is,exceptionally, not open to the company, because the defendants have been discharged from their obligations under the mortgage instrument; and so the company has to seek recovery in restitution. Let it however be supposed that in the present case the defendants had been so discharged from liab ility ata time when they had paid nothing, by way of principal or interest, to the company. In such circumstances their Lordships can see no reason in principle why the company should not beable to recover the amount of the advance made by them to the defendants on the ground that the money had been paid for a consideration which had failed, viz. the failure of the defen dants to perform their contractual obligation to repay the loan, there being no suggestion of any illegality or other ground of policy which precluded recovery in restirution in such circum-
stances.
In the present case however, although no part of the principal sum had been repaid by the
defendants, two instalments of interest had been paid; and the question arises whether these two payments of interest precluded recovery on the basis that in such circumstances the failure of consideration for the advance was not total. Their Lordships do not think so. The function of the interest payments was to pay for the use of the capital sum over theperiod for which the loan was outstanding, which was separate and distinct from th_e obligation to repay the capital sumitself. In these circumstances it is, in their Lordships’ opinion, both legitimate and appro priate for present purposes to consider the two separately. In the present case, since it is unknown when the mortgage instrument was altered, it cannot be known whether, in particu lar, the second interest instalment was due before the defendants were discharged from their obligations under the instrument. Let it be supposed however that both interest payments had fallen due before that event occurred. In such circumstances, there would have been no failure of consideration in respect of the interest payments rendering them recoverable by the defen dants; but that would not affect the conclusion that there had been a total failure of considera tion in respect of the capital sum, so that the latter would be recoverable by the company in full on that ground. Then let it be supposed instead that the second interest payment did not fall due until after the avoidance of the instrument. In such circumstances the consideration for that interest payment would have failed (at least if it was payable in advance), and it would prima facie be recoverable by the defendants on the ground of failure of consideration; but 1hat would not affect the conclusion thatthe capital sum would be recoverable by the company also on that ground. In sucha case,therefore, the capital sum would be recoverable by the lender, and the interest payment would be recoverable by the borrower; and doubtless judgment would, in the event, be given for the balance with interest at the appropriate rate: see Wesrdeutsclu Landesbank Girozentrak v. Islington London Borough Council [1994) I WLR 938. In either event, therefore,
the amount of the loan would be recoverable on the ground of failure of consideration. In the
present case, since no part of the capital sum had been repaid, the failure of consideration for the capital sum would plainly have been total. But even if part of the capital sum had been repaid, the law would not hesitate to hold that the balance of the loan outstanding would be recoverable on the ground of failure of consideration; for at least in those cases in which appor tionment can be carried out without difficulty, the law will allow partial recovery onthis 3g8ro3u.n.d.:.see David Securities Ply. Ltd v. Commonwealth Bank of Australia (1992) 175 CLR 353,
Taylor v. Bowers
(1876) 1 QBD 291
Cockburn CJ Inthe present case nothing has been done to carry out the fraudulent or illegal object beyond the delivery of the goods to Alcock and their removal to Stafford. We put aside the bill of sale to the defendant, as the plaintiff was not a party to it, nor did it form part of the original arrangement. The next fact is, that before anything was done, and before the sale by auction, the plaintiff repudiated the whole transaction, and demanded back his goods from Alcock and the defendant. Under these circumstances, we think that the plaintiff is entitled to recover back his property from the defendant. The action is not founded upon the illegal agree ment, nor brought to enforce it, but, on the contrary, the plaintiff has repudiated the agree ment, and his action is founded on that repudiation.
Now it seems to us well established that where money has been paid, or goods delivered, under an unlawful agreement, but there has been no further performance of it, the party pay ing the money or delivering the goods may repudiate the transaction, and recover back his money or goods.
In Haste/ow v. Jackson1 Littledale, J says: ‘If two parties enter into an illegal contract, and money is paid upon it by one to the other, that may be recovered back before the execution of the contract, but not afterwards.’ And in Bone v. Eck/ess,2 Bramwell, B, referring to Haste/ow v.Jackson,3 says: ‘Clearly an authority to pay over money for an illegal purpose may be revoked before the money is paid over. In Haste/ow v. Jackson that proposition of law was laid down, although there the plaintiff had to prove, as part of his case, that he had entered into an illegal contract; he did not, however, seek to recover upon it Thleaw is in favour of undoing or
defeating an illegal purpose, and is therefore in favour of the recovery of the money before the illegal purpose is fulfilled, not afterwards.’ The defendant appealed to the Court of Appeal.
James, LJ: Now the rule is, that a man certainly cannot recover goods in respect of which he is obliged to state a fraud of his own as part of his title. But that is not, according to my view, the position of this plaintiff. All the plaintiff has got to say is: ‘These were my goods. I was pos sessed of these goods in 1868. I have never parted with them to anybody. They are my goods still. I never sold them, and I have never given them to anybody in such a way as to deprive myself of the right to possession of them.’ It is the defendant who has got really to shew the fraud. He says, I claim these goods under a bill of sale by Alcock to me, and Alcock claims them under an assignment from the plaintiff to him by means of an inventory given to him with pos session. Thus it is the defendant who has got to make out his title to the goods from the trans action which is a fraud, and which it seems he was a party to, in fact the defendant has got to make out his title from the fraudulent possession that was given to Alcock; and there would be no title in the defendant independently of that. So that if it was merely a question for tho lint time to be determined upon principle, without authority, I should have no doubt in sayinlJ that the plaintiff was not obliged to rely upon the fraud for the purpose of recovering back the IJC)Od1, the legal possession of which in effect had never been parted with by him. But, to mentionno other cases, the case of Bowes v. Foster4 seems to me entirely upon all fours with this cases. In
deceived the plaintiff by executing a bill of sale of the goods to the defendant, one of the plaintiff’s creditors. When the plaintiff discovered what had happened, he this case Bowers took from Alcock with the knowledge of Alcock’s title, so he was in fact a party to the whole transaction from beginning to end. Therefore Bowers, if that question were open upon this rule, can be in no better position than Alcock.
It appears to me, therefore, that the judgment of the Queen’s Bench Division was right, and should be affirmed.
Mellish, LJ: … Buttheillegal transaction was not carried out; it wholly came to an end. To hold that the plaintiff is enabled to recover does not carry out the illegal transaction, but the effect is to put everybody in the same situation as they were before the illegal transac tion was determined upon, and before the parties took any steps to carry it out. That, I apprehend, is the true distinction in point oflaw. If money is paid or goods delivered for an illegal purpose, the person who had so paid the money or delivered the goods may recover them back before the illegal purpose is carried out; but if he waits till the illegal purpose is carried out, or if he seeks to enforce the illegal transaction, in neither case can he maintain an action; the law will not allow that to be done. In the present action the facts come within the first alternative; and I am of opinion that the Queen’s Bench Division has properly held, that the plaintiff does not require the aid of the illegal transaction, but is really bringing the action to set it aside.
I
Grove,J: … the plaintiff is not setting up hiJ own fraud in order to make a title, but he is repu diating the fraud and setting up his own prior rightful claim as owner of the goods. No doubt he is admitting that the goods got into Alc k’s hands through his, the plaintiff’s, own sham transfer for the fraudulent purpose of deceiving the creditors, but he is not setting up that fraudulent purpose in order to get the goods, but, on the contrary, he is setting it aside. I am, therefore, of opinion that the judgment ought to be affirmed. ·
Kearley v. Thomson
(1890) 24 QBD 742,
Fry LJ As a general rule, where the plaintiff cannot get at the money which he seeks to recover without shewing the illegal contract, he cannot succeed. In such a case the usual rule is potior est conditio possidentis. There is another general rule which may be thus stated, that where there is a voluntary payment of money it cannot be recovered back. It follows in the pres ent case that the plaintiff who paid the 40/. cannot recover it back without shewing the contract upon which it was paid, and when he shews that he shews an illegal contract Tothat gen-
eral rule there are undoubtedly several exceptions, or apparent exceptions..There is suggested to us a third exception, which is relied on in the present cue, and th1 authority for which is to be found in the judgment of the Court of Appeal in the can of Taylor v. Bowers.1 In that case Mellish, LJ, in delivering judgment, says at 300: ‘If money ii paid, or goods delivered for an illegal purpose, the person who has so paid the money or delivered the goods may recover them back before the illegal purpose is carried out.’ It ii remarkable that this proposition is, as I believe, to be found in no earlier case than Taylor v. Bowers, which occurred in 1867, and, notwithstanding the very high authority of the learned judge who expressed the law in the terms which I have read, I cannot help saying for myself that I think the extent of the application of that principle, and even the principle itself, may,
at some time hereafter, require consideration, if not in this Court, yet in a higher tribunal: and I am glad to find that in expressing that view I have the entire concurrence of the Lord Chief Justice. But even assuming the exception to exist, does it apply to the present case? What is the condition of things if the illegal purpose has been carried into effect in a mater ial part, but remains unperformed in another material part? As I have already pointed out in the present case, the contract was that the defendants should not appear at the public exam ination of the bankrupt or at the application for an order of discharge. It was performed as regards the first; but the other application has not yet been made. Can it be contended that, if the illegal contract has been partly carried into effect and partly remains unperformed, the money can still be recovered? In my judgment it cannot be so contended with success. Let me put an illustration of the doctrine contended for, which was that partial performance did not prevent the recovery of the money. Suppose a payment of 100/. by A to B on a contract that the latter shall murder C and D. He has murdered C, but not D. Can the money be recovered back? In my opinion it cannot be. I think that case illustrates and determines the present one.
I hold, therefore, that where there has been a partial carrying into effect of an illegal purpose in a substantial manner, it is impossible, though there remains something not performed, that the money paid under that illegal contract can be recovered back.
Bigos v. Bousted
[1951] 1 All ER 92,
Pritchard J : Kearley v. Thomson appears to me to be easily distinguishable from Taylor v. Bowers in that, whereas the reason for the decision in Taylor v. Bowers was that nothing had been done in pur suance of the illegal agreement, in Kearley v. Thomson the report makes it quite clear that the plaintiff failed because something had been done in pursuance of the illegal agreement, and, therefore, I do not regard Kearley v. Thomson as in any way conflicting with the decision in Taylor v. Bowers, although, of course, the observations made by Fry, LJ, in Kearley v. Thomson on the rule as laid down by Mellish, LJ, in Taylor v. Bowers deserve attention, and, as I pointed out, occur again in subsequent cases.
In 1905 the Court of Appeal considered this question again in Hermann v. Charlesworth, in connection with an illegal marriage brokerage contract. The plaintiff in that case had promised to pay £250 to the defendant if and when he introduced her to a gentleman who should marry her. She also paid to the defendant £52 which w s called ‘a client’s fee.’ The defendant there upon introduced her to several men, but no marriage took place; and eventually the plaintiff brought an action to recover the £52. The action was remitted to the county court where the county court judge gave judgment for the plaintiff on the ground that, although the contract was a marriage brokerage contract and, therefore, illegal, the parties were not in pari delicto, as the defendant, who was out for money, was more blameworthy than the plaintiff, who was out for a husband. The defendant appealed to the Dtvisional Court who took the view that the con tract did not come within the mischief which the law attributes to marriage brokerage contracts and allowed the appeal. The plaintiff appealed to the Court of Appeal who took the view that the Divisional Court was wrong, and that the contract was an illegal contract. Therefore, it became necessary for them to discuss the question with which I am concerned in the present case, and they allowed the plaintiff’s appeal, with the result that she recovered her £52. The reason which the Court of Appeal gave for their decision was that, the object of the contract being to bring about a marriage, it could not be performed in part, and, therefore, as nothing had been done in the performance of the contract, the plaintiff was entitled to recover the money back, although she had paid it under an illegal contract. The facts in that case were pecu liar, but, on the whole, it appears to me that the reason for the decision seems to support Taylor v. Bowers and to disregard the criticism of that case which was made by Fry, LJ, in Kearley v. Thomson.
Lastly, Alexander v. Rayson and Berg v. Sadler and Moore, two comparatively recent cases,’ were cited to me, and it was argued on behalf of the plaintiff that they seriously affect the authority of Taylor v. Bowers. In Alexander v. Rayson the defendant, in 1929, rented a flat from the plaintiff at a rent of £1,200 a year, which was to include certain services. The plain tiff required the agreement for that letting to be in two documents. One document was the lease which contained a provision for certain services which were to be rendered by the lessor (the plaintiff], and the rent together with the benefit of the services was stated to be
£450 a year. The other document, which provided for virtually the same services as those provided in the first document, stated that the consideration for those services should be
£750 per year. The rent was paid quarterly, the defendant paying £300 in each quarter, i.e., at the rate of £1,200 a year, until Mid-summer, 1934. The defendant refused to pay £300 in respect of the quarterly instalment falling due on Sept. 29, 1934, because, as she alleged, the plaintiff had failed to provide the services which he had contracted to provide. She ten dered, however, one quarter’s rent under the lease, i.e., £112 10s., but the plaintiff claimed £300 under the two agreements. The plaintiff’s purpose in having those two document, prepared was purely to deceive and to defraud the assessment committee who had to aae11 the rates of the premises. It was proved that that attempt failed because the assessment com mittee were not deceived, and, therefore, prevented themselves from being defrauded. In those circumstances, the Court of Appeal decided that the plaintiff could not maintain his action. The judgment of the Court of Appeal was prepared by Romer, LJ, and read by Scott, LJ, and it contains a passage ([1936] 1 KB 190) which, it is said, seriously affects the author ity of Taylor v. Bowers:
‘Plaintiff’s counsel further contended that inasmuch as the plaintiff had failed in his attempted fraud, and could therefore no longer use the documents for an illegal purpose, he was now entitled to sue upon them. The law, it was said, would allow to the plaintiff a locus poenitentiae. So, perhaps, it would have done, had the plaintiff repented before attempting to carry his fraud into effect: see Taylor v. Bowers. But, as it is, the plaintiff’s repentance came too late-namely, after he had been found out. Where the illegal purpose has been wholly or partially effected the law allows no locus poenitentiae: see Salmond and Winfield’s Law of Contract, 152. It will not be any the readier to do so when the repentance, as in the present case, is merely due to the frustration by others of the plaintiff’s fraudulent purpose.’
The ‘others’ referred to were the assessment committee, who were not parties to the illegal agreement, but who found out the purpose of that agreement in time to save themselves from being defrauded.
In Berg v. Sadler and Moore the plaintiff was a tobacconist who had been a member of the Tobacco Association but had been put on the ‘stop list’ of that association for a breach of its rules, and, as a result, he could not obtain supplies of cigarettes from members of the associ ation. The plaintiff arranged with a member of the association called Reece, that Reece should order in his own name, but really on behalf of the plaintiff, cigarettes from the defendants, Sadler & Moore, who were members of the association. Reece did so, and the plaintiff sent his representative, accompanied by a representative of Reece, to receive the cigarettes from the defendants. The plaintiff’s representative paid for the cigarettes with the plaintiff’s money, but the defendants, being suspicious about the transaction, refused to deliver the cigarettes or to return the money which the plaintiff’s representative had paid to them. Thereupon, the plain tiff sued the defendants for the return of the money. The case was tried, in the first instance, by Macnaghten, J, who held that the plaintiff was guilty of an attempt to obtain the cigarettes by false pretences and that the court would not assist him to recover his money. The plaintiff appealed, but the decision of Macnaghten, J, was upheld by the Court of Appeal. The judgments in the Court of Appeal contain some strong expressions of opinion as to what the courts ought to do in these and similar circumstances. Lord Wright, MR, based his judg ment on Kearley v. Thomson, which he discussed at some length. He then s;iid ((1937] 1 All ER 642): ‘Fry, LJ [in Kearley v. Thomson] goes on … to distinguish Taylor v. Bowers, where recovery was allowed, as I understand the decision, on the ground that the illegal purpose had been abandoned, and that the plaintiff had so repented that he was not debarred from recovering what he had paid.’
That passage shows the importance which Lord Wright, MR, attributed to the decision in Taylor v. Bowers, and to the allegation of repentance on behalf of the plaintiff in that cue, although it was not actually mentioned in the case itself. Lord Wright, MR, then said ‘Some such argument was put forward in this case, but I should like to add expression of opinion of Fry, LJ, on that point the observations which are containedln I judgment of this court in Alexander v. Rayson Lord Wright, MR, then cited the passage which I have already read from Alexander v. Rayson. Romer, J, gave a very short judgment in Berg v. Sadler Moore, but it does contain a prin ciple. He said (ibid., 644):
‘I entirely agree, and, once the facts of this case are understood, it is abundantly plain that no court in this country would lift a finger to help the plaintiff to recover from the defendants the money which the plaintiff paid to them. The money was paid by the plain tiff to the defendants in the course, and for the purposes, of an attempt, on the part of the plaintiff, to defraud the defendants; the fact that, owing to the vigilance of the defendants, the attempt was frustrated is, in my opinion, wholly immaterial.’
Finally, Scott, LJ, dealt with the matter, first, by setting out the passage from the original judg ment of Macnaghten, J, which was stated in very clear terms, and could leave no doubt as to what the learned judge meant. Macnaghten, J, said ([1936] 2 All ER 461):
‘I have no hesitation in saying that in this case Mr Berg attempted, although the attempt failed, by deceit to induce a course of action on the part of the defendants, Messrs. Sadler & Moore, which would have been an action to their grave injury. If in fact they had sup plied goods to Mr Berg, he being on the “Stop List”, the consequences to them might have been consequences of a very serious charaper in their business. It seems to me that it is a plain case of … an attempt to obtain goods by false pretences, and it is nothing to the pur pose to say that the fraudulent person w):io was attempting to commit that crime was in fact willing to pay to the persons he was attempting to defraud the full price of the goods. Now those being the facts as I find theni to be, the question arises, can Mr Berg under those circumstances, having paid this money with the intention of obtaining goods by this false pretence, now maintain an action in this court to recover the money? No case has been cited to me where the court has ever entertained any such action. If dishonest people pay money for a dishonest purpose, and then by good fortune the offence which they designed to commit is not committed, are they entitled in this court to come and ask for recovery of the money? In my opinion, they are not. It would be a bad example if this court were to entertain an action by a man for money dishonestly paid for the purpose of com mitting an offence against the criminal law, and he were allowed to claim from the court an order that the money should be repaid.’ ·
After quoting this passage, Scott, LJ, continued ([1937] 1 All ER 644):
‘I entirely agree with that judgment, which I have adopted as my own. At the same time, I agree with what Lord Wright, MR, has said, that the facts of this case involve a slightly new application of the rule, but ubi eadem ratio ibi jus. The principle which forbids the assistance of the court to a plaintiff who asks it in order to effect a dishonest purpose extends, in my opinion, to the case of a request for the court’s assistance in order to extri cate himself from a pecuniary difficulty in which he has placed himself by an incomplete performance of a dishonest course of action.’
I now have to consider how the authorities to which I have referred should be applied to the facts of the present case. I confess that there was a time when I thought it would be right to apply to the facts of this case the reasoning of the decision in Taylor v. Bowers, but, having con sidered all the authorities, I do not take that view. I think that what is to be extracted from the authorities may be stated as follows. I think that they show, first, that there is a distinction between what may, for convenience, be called the repentance cases, on the one hand, and the frustration cases, on the other hand. If a particular case may be held to fall within the category of repentance cases, I think the law is that the court will help a person who repents, provided his repentance comes before the illegal purpose has been substantially performed. Ifl were able in this case, to take the view that the defendant had brought himself within that sphere of the authorities, it might well be that I would have been able to help him by saying that his repentance had come before the illegal purpose had been substantially performed, but I do not tak, that view. I think, however, that this case falls within the category of cases which I call the frua tration cases, and that it is proper to regard it as in the same category as Alexander v. R.y1ofl, and Berg v. Sadler Moore, rather than as in the category of cases such as Taylor v. Bo.,,,, and Kearley v. Thomson, and, to some extent, Hermann v. Charlesworth.
In Alexander v. Rayson the illegal contract was made between the plaintiff and the defen dant. It was frustrated by third parties and, as there was no repentance by the plaintiff before the frustration by others of his fraudulent purpose, he was held disentitled to succeed. In Berg v. Sadler Moore the illegal contract was entered into between the plaintiff and a third party, and was frustrated by the defendants, and the plaintiff was held disentitled to succeed. In the present case the illegal contract was entered into between the plaintiff and the defendant. The defendant is in the position in which the plaintiff was in all the other cases which I have men tioned, and the performance of that illegal contract was frustrated by the other party to it, namely, the plaintiff. For that reason this is, I think, a frustration case and not a case of repen tance.
On the return of the defendant’s wife and daughter from Italy the whole project fell to the ground. There was no repentance which caused the contract not to be carried out. The defen dant desired that it should be carried out until the plaintiff failed to do so, and, when she failed, the wife and daughter had to return to England because, as the result of the plaintiff’s failure, they could no longer afford to stay in Italy. By the plaintiff’s failure the whole venture was frus trated, and, in those circumstances, I do not think that the reason for this illegal contract not having come to fruition was the repentance of the defendant. The reason was that the whole object of the contract was frustrated by the failure on the part of the plaintiff to provide the lire which she had contracted to provide in Italy. In those circumstances, I have come to the con clusion that the words of Macnaghten, J, ([1936] 2 All ER 462) in Berg v. Sadler Moore, which were cited with approval by Scott, LJ, in the Court of Appeal, should be applied to this case:
‘If dishonest people pay money for a dishonest purpose, and then by good fortune the offence which they designed to commit is not committed, are they entitled in this court to come and ask for recovery of the money? In my opinion they are not. It would be a bad example if this court were to entertain an action by a man for money dishonestly paid for the purpose of committing an offence against the criminal law, and he were allowed to claim from the court an order that the money should be repaid.’
That is the view which I take in this case and, for those reasons, I have come to the conclusion that this is not a case where the defendant showed himself to be within the exception of which Taylor v. Bowers is an example. In all the circumstances, I think that the defendant’s counter claim must fail, and, accordingly, there must be judgment for the defendant on the claim and his counterclaim must be dismissed.
Green v. Portsmouth Stadium Ltd
[1953] 2 QB 190, Court of Appeal
Denning LJ: … In considering whether this statement of claim discloses a cause of action, it must be observed that there is no allegation that the plaintiff was under any mistake of fact, nor is there any allegation that he was under a mistake oflaw; nor that he was oppressed or imposed upon in any way. We must assume on this pleading that the bookmaker knew perfectly well that the only lawful charge was l ls. 3d.; nevertheless he voluntarily chose to pay £2 to the stadium, and he now seeks to recover it back. He does not claim, and cannot claim, for money paid on a consideration that has wholly failed, for he has had the consideration. He has gone on to the track and conducted his bookmaking operation there. The only ground on which he claims the money is that there was a breach of the statute in charging him too much.
But the point which impressed Parker J was that this was not an action for a declaration or for an injunction or for damages. It was an action for money had and received, to which differ ent considerations might apply. Reference was made to the judgment of Lord Mansfield in Browning v. Morris,1 where he said: ‘But, where contracts or transactions are prohibited by pos itive statutes, for the sake of protecting one set of men from another set of men; the one, from their situation and condition, being liable to be oppressed or imposed upon by the other; there, the parties are not in pari delicto; and in furtherance of these statutes, the person injured, after the transaction is finished and completed, may bring his action and defeat the contract.’ In my judgment, those observations of Lord Mansfield only apply to cases where the statute, on its true construction, contemplates the possibility of a civil action. He said that it was ‘in further ance of the statutes’ that the action for money had and received could be brought. Just as in an action for damages, so, also, in an action for money had and received, it is a question of the true interpretation of the ‘statute whether an action lies so as to recover the overcharge. I see noth ing in this statute to authorize such an action.
I can conceive of cases where bookmakers might themselves aid and abeta breach of the statute. Some rich bookmakers might willingly pay more than the statutory amount in order to geta privileged position for themselves as against their poorer brethren. Clearly, such people could not recover the overpayments. Nor can the plaintiff here. The breach of the statute,
standing by itself, does not give rise to a claim for repayment.
Madoff Securities International Ltd v Raven & Ors
[2013] EWHC 3147 (Comm) (18 October 2013)
The Hon. Mr Justice Popplewell:
….
(13) MSIL Kohn payments: the directors’ ex turpi causa defence
The doctrine ex turpi causa non oritur actio is a rule of public policy which was explained by Lord Mansfield CJ in Holman v Johnson (1775) 1 Cowp 341 , 343 in the following terms:
“No court will lend its aid to a man who founds his cause of action upon an immoral or an illegal act. If, from the plaintiff’s own stating or otherwise, the cause of action appears to arise ex turpi causa, … there the court says he has no right to be assisted. It is upon that ground the court goes; not for the sake of the defendant, but because they will not lend their aid to such a plaintiff.”
The Defendants’ argument is that it is of the essence of MSIL’s claim that in making the MSIL Kohn Payments, MSIL was being used by Bernard Madoff as a vehicle to perpetrate and conceal the fraud perpetrated by the Ponzi scheme and to launder the proceeds of such fraud. The Claimant’s case was in this respect set out in paragraph 68 of the Reamended Particulars of Claim in the following terms:
“In fact, while MSIL may have carried on certain legitimate trading activities, its primary function, as pleaded more particularly below, was to facilitate the concealment of Bernard Madoff’s Ponzi scheme and the distribution of the fruits thereof to Bernard Madoff, his family and third parties, including in particular Sonja Kohn. MSIL was abused by Bernard Madoff: (i) as a cover for his fraud (Bernard Madoff would falsely represent that substantial volumes of investment activity were undertaken in London by MSIL on behalf of BLMIS, but none was); (ii) to launder money stolen from BLMIS’s customers and return it to BLMIS’s market-making and proprietary trading businesses, which were run by Mark and Andrew Madoff; and (iii) as a vehicle for making payments including the MSIL Kohn Payments, Interest Payments and Madoff Family Lifestyle Payments. The fact that MSIL was an apparently legitimate, FSA-regulated entity assisted Bernard Madoff’s purposes, particularly the laundering of money.”
The Defendants must establish two elements. The first is that there is a sufficient connection between the illegality and the Claimant’s claim. The second is that the unlawful conduct and state of mind of Bernard Madoff is to be attributed to MSIL so as to make the fraudulent and unlawful purposes of Bernard Madoff, which are relied upon as founding the illegality, those of MSIL itself.
Connection
The modern authorities do not all speak with one voice on the nature and degree of connection required between the illegality and the claim in order for the ex turpi causa doctrine to be engaged. In Tinsley v Milligan [1994] 1 AC 340, the House of Lords was unanimous in disapproving a “public conscience” test which had previously held favour in a number of Court of Appeal decisions, but was divided over the correct test. The majority held that the relevant test was whether the claimant had to plead or rely upon his own illegality (“the reliance test”). The minority favoured a broader test of whether the claim was tainted by illegality. Some subsequent authority suggests that a more flexible approach applies at least outside the context of property rights, and that the appropriate test is of a sufficient degree of linkage (e.g. “inextricably linked”) or of causation: see for example Cross v Kirby [2000] All ER (D) 212 per Judge LJ at [103], Gray v Thames Trains [2009] 1 AC 1139 per Lord Hoffmann at [30]-[31] and [54]. But in Stone & Rolls Ltd v Moore Stephens [2009] 1 AC 1391, the reliance test was reaffirmed expressly by Lord Walker at [131], and implicitly by Lord Scott at [96] and [103], and perhaps also by Lord Brown at [205] and Lord Mance at [208]). Only Lord Phillips at [21]-[25] treated the reliance test as neither sufficient nor determinative. In the recent decision of the Court of Appeal in Jetivia SA and Urs Brunscweiler v Bilta (UK) Limited (in liquidation) [2013] EWCA Civ 968, Patten LJ, giving the judgment of the Court, quoted from the speech of Lord Browne-Wilkinson in Tinsley v Milligan laying down the reliance test and said at [18]:
“It is clear from this passage that a distinction is being made between reliance on the illegal act as the basis of the cause of action and (as in Tinsley v Milligan) the enforcement of a property or other legal right which although historically the product of an illegal act or transaction, has an independent existence from it. Although there have been subsequent dicta in this court suggesting that some causal connection less than the reliance test is sufficient to engage the ex turpi causa rule (see e.g. Cross v Kirby [2000] CA Transcript No. 321 per Beldam LJ), the House of Lords has re-affirmed reliance as the correct test in Stone & Rolls Ltd v Moore Stephens [2009] 1 AC 1391 (see Lord Walker of Gestingthorpe at [131], Lord Scott at [96] and Lord Mance at [208]) and neither party to this appeal has suggested that it does not represent a correct statement of the law.”
I propose to follow this clear statement of principle in a decision by which I am bound and adopt the reliance test.
Applying the reliance test, MSIL’s claim is not founded on any illegality. The claim against the directors does not require MSIL to plead or prove any wrongdoing on the part of Bernard Madoff. The Ponzi scheme merely constitutes the occasion for the claim, not the basis for it, nor an ingredient of it.
The submission on behalf of the Madoff brothers, adopted by the other director Defendants, was that it was critical to bear in mind that MSIL’s case was that the money which was paid out constituted the proceeds of the fraud. But although this was indeed one of MSIL’s arguments advanced for the purposes of establishing insolvency when seeking to meet the Defendants’ reliance on the Duomatic principle, it is not an allegation upon which MSIL has relied or needs to rely for the purposes of advancing its claim against the Defendant directors. Moreover and in any event I have rejected it on the facts, having found that the funding of the payments can not be traced to the customer deposits acquired in the fraud.
Attribution
There is a general principle, often called the Hampshire Land principle, that in a claim brought by a company for losses caused by a director’s fraud or other unlawful conduct, the law will not attribute to the company the fraud or other unlawful conduct of the director when the company is itself the victim of that conduct: In re Hampshire Land Co [1896] 2 Ch 743; Belmont Finance v Williams Furniture [1979] Ch 250, Stone & Rolls Ltd v Moore Stephens [2009] 1 AC 1391 at [137]-[156]. Stone & Rolls is authority for the proposition that there is an exception to the Hampshire Land principle, of uncertain ambit, in the case of a “one man company” where the fraudster or fraudsters whose conduct or knowledge is sought to be attributed to the company is or are the “sole actor” in the sense that there is no separate constituency of directors or shareholders who are innocent of his/their fraud. But even in the case of such a “sole actor”, the Hampshire Land principle remains applicable where the claim is against the delinquent directors or those associated with their wrongdoing: see Jetivia v Bilta at [75] and [78]-[82] explaining Stone & Rolls.
The director Defendants cannot bring themselves within the Stone & Rolls exception. Although it is notoriously difficult to extract a ratio from the judgments in that case, the decision does not itself support an exception to the Hampshire Land principle outside the context of a “one man company” or a “sole actor”, which formed a critical part of the reasoning of Lord Walker and Lord Brown. MSIL was not such a one man company and Bernard Madoff was not such a sole actor. MSIL had independent and innocent shareholders at all times, being some or all of Peter, Andrew, Mark and Ruth Madoff and Mr Konigsberg and Mr Cohn. It had active independent directors. None of them were party to the fraud here relied on.
The Defendants contended that they did not need to bring themselves within the sole actor exception to the Hampshire Land principle. They contended that the principle was not engaged in the first place, because MSIL was not the victim of Bernard Madoff’s fraud but merely the vehicle or instrument through which the fraud was in part perpetrated or concealed. It was only a secondary victim in the sense that it suffered loss as a result of a fraud targeted at others, namely the victims of the Ponzi scheme. This reflects the language of the pleading which is in substance that that Bernard Madoff abused MSIL by using it as an instrument for his fraud.
In Stone & Rolls, the Court of Appeal and two of the majority of the Supreme Court expressed the view that the status of the company as a secondary victim in that case, as opposed to the intended target of the fraud, did not prevent attribution, either because it did not trigger the Hampshire Land principle (Rimer LJ at [72]-[73], Lord Phillips at [55], Lord Walker at [172]), or because it did not prevent the sole actor exception applying (Lord Walker at [174]). Lord Brown at [198] left the position open. By contrast, Lord Mance at [230] to [234] treated the use of the company as a mere tool for the fraudulent scheme as sufficient to make it a victim so as to trigger the Hampshire Land principle.
In Jetivia v Bilta the Court of Appeal treated the company as the intended victim of the fraud but held that if it were merely a secondary victim that would still be sufficient to trigger the Hampshire Land principle: see Patten LJ at [35], [75] and [77]. However the language of these passages, and of [42] and [52], emphasises that the company’s status as secondary victim was sufficient to trigger the principle in that case because the defendants were seeking to attribute to the company the very wrong in which they were complicit, so as to prevent the company’s claim to recover against them for such wrong. The Hampshire Land principle is identified and summarised in [42] in terms which treat the company as the victim because its claim is based on the unlawful conduct of the particular director which is the subject matter of the attribution question, the policy being to preclude that director, and those complicit with him in the fraud, from relying upon their own wrong. In this respect the fact that the auditors in Stone & Rolls were innocent of the fraud which was the conduct sought to be attributed to the company in that case, was treated as a crucial point of distinction, both in this context (see [52]) and in the context of the sole actor exception (see [81]).
The balance of this authority suggests that the Hampshire Land principle is not triggered where the company is used as an instrument of a fraud targeted against a third party victim, resulting in loss to the company only as a secondary victim, in circumstances where the attribution is invoked by those not party to the relevant fraud. That would allow the attribution of Bernard Madoff’s fraudulent knowledge and conduct to MSIL for the purposes of the ex turpi causa defence in the present case. The defence in the present case seeks to apply Bernard Madoff’s knowledge and perpetration of the Ponzi scheme fraud to MSIL for the purposes of a claim which is made by MSIL not against him, but against the other directors, who were innocent of knowledge of the Ponzi scheme or participation in it. Their liability potentially arises irrespective of the Ponzi scheme.
The ex turpi defence therefore fails solely on the ground that the reliance test is not met. Had it been, the defence would have succeeded on the issue of attribution.
(14) MSIL Kohn payments: the directors’ limitation defence
In relation to breaches of contract and the duty to exercise reasonable skill and care, the limitation period is six years (Limitation Act 1980 ss. 2, 5, 36). In relation to directors’ breaches of fiduciary duty the limitation period is governed by s. 21 of the Limitation Act 1980 so as to be the same as that for trustees (Paragon Finance Plc. v D B Thakerar & Co [1999] 1 All ER 400, 415-6; Gwembe Valley Development Company Ltd v Koshy [2004] 1 BCLC 131 at [90]). It is six years unless the action is in respect of any fraud or fraudulent breach of trust. Section 21 provides in material part.
“(1) No period of limitation prescribed by this Act shall apply to an action by a beneficiary under a trust, being an action—”
(a) in respect of any fraud or fraudulent breach of trust to which the trustee was a party or privy; […]
(3) Subject to the preceding provisions of this section, an action by a beneficiary to recover trust property or in respect of any breach of trust, not being an action for which a period of limitation is prescribed by any other provision of this Act, shall not be brought after the expiration of six years from the date on which the right of action accrued. […]
In each case the six year period is subject to extension where there is deliberate concealment of facts relevant to the Claimant’s cause of action within the meaning of section 32 which provides in material part:
“(1) ….…where in the case of any action for which a period of limitation is prescribed by this Act, either—
(b) any fact relevant to the plaintiff’s right of action has been deliberately concealed from him by the defendant; […]
the period of limitation shall not begin to run until the plaintiff has discovered the fraud, concealment or mistake (as the case may be) or could with reasonable diligence have discovered it.’
(2) ‘For the purposes of subsection (1) above, deliberate commission of a breach of duty in circumstances in which it is unlikely to be discovered for some time amounts to deliberate concealment of the facts involved in that breach of duty.’
Dishonesty
On behalf of Mr Flax it was argued that s. 21(1)(a) could have no application because it is necessary to show that fraud is an essential ingredient in the cause of action; and that the breaches of duty alleged against Mr Flax are pursued on the basis that it is unnecessary to prove fraud in order to establish breach of fiduciary duty. Mr Clarke relied on Beaman v ARTS [1949] 1 KB 550, 557-8. That case is not directly in point; it was concerned with s. 26 (a) of the Limitation Act 1939 governing cases “based on fraud”, now re-enacted in s. 32(1)(a) Limitation Act 1980, a provision upon which the Claimant does not seek to rely. Nevertheless he is right to submit that to come within the disapplication of any limitation period provided for in s. 21(1)(a) the cause of action alleged must be for fraudulent breach of trust. Fraudulent or dishonest breach of fiduciary duty is a distinct cause of action from simple breach of fiduciary duty, and it requires dishonesty (in the sense described below) as a necessary element: Paragon Finance plc v D B Thakerar & Co [1999] 1 All ER 400, 406c-f. But the fallacy in the argument is that the Claimant alleges both causes of action. The claim is advanced as one for fraudulent breach of fiduciary duty, and is none the less so by reason of the fact that the Claimant’s claim is also pursued in the alternative for simple breach of fiduciary duty without proof of dishonesty. The claim for breach of fiduciary duty without dishonesty does not mean that fraud is not a necessary ingredient of its separate cause of action for dishonest breach.
The exception in s. 21(1)(a) only applies where the director’s conduct is dishonest: Armitage v Nurse [1998] Ch 241, 260F-G. In this context, as Millett LJ explained at 251E-F, dishonesty:
“connotes at the minimum an intention on the part of the trustee to pursue a particular course of action, either knowing that it is contrary to the interests of the beneficiaries or being recklessly indifferent whether it is contrary to their interests or not.
It is the duty of a trustee to manage the trust property and deal with it in the interests of the beneficiaries. If he acts in a way which he does not honestly believe is in their interests then he is acting dishonestly. It does not matter whether he stands or thinks he stands to gain personally from his actions. A trustee who acts with the intention of benefitting persons who are not the objects of the trust is not the less dishonest because he does not intend to benefit himself.”
In Fattal v Walbrook Trustees (Jersey) Ltd [2010] EWHC 2767 (Ch) Lewison J said at [79] that he took this to mean “that in order to establish dishonesty it is necessary to show that a trustee deliberately committed a breach of trust which he did not honestly believe was in the interests of the beneficiaries”. Drawing on the analysis of Rattee J and the Court of Appeal in Walker v Stones [2001] QB 902, he summarised the position as follows at [81]
“……what is required to show dishonesty in the case of a professional trustee is:
i) A deliberate breach of trust;
ii) Committed by a professional trustee:
a) Who knows that the deliberate breach is contrary to the interests of the beneficiaries; or
b) Who is recklessly indifferent whether the deliberate breach is contrary to their interests or not; or
c) Whose belief that the deliberate breach is not contrary to the interests of the beneficiaries is so unreasonable that, by any objective standard, no reasonable professional trustee could have thought that what he did or agreed to do was for the benefit of the beneficiaries.
In these passages the reference to a “deliberate” breach of trust is a reference to the act or omission which constitutes the breach being a deliberate one. It is not a requirement of deliberate breach in the sense of a conscious intention that the act or omission should amount to a breach of trust. The director must take a conscious decision to perform the act or omission in question. In the case of an omission this requires a deliberate and conscious decision to abstain from doing something rather than a mere negligent failure to do so as a result of not applying one’s mind to the question.
I have found that Mr Raven and Mr Flax each reasonably considered that the payments were in the interests of MSIL. They were not guilty of any dishonesty in making the payments.
Mr Toop and the Madoff brothers were not themselves responsible for making the payments. They assumed there was nothing wrong with them but failed to apply their minds to the question how they might be in MSIL’s interests. That was not a deliberate omission. There was no deliberate breach of trust. Moreover they did not act with reckless indifference as to whether the payments were in the interests of the company. They simply failed to exercise the independent judgment required of them in relation to an aspect of the business being handled by their fellow directors. This was a breach of the duty to exercise reasonable diligence and care, not dishonesty.
The conduct of the director Defendants in relation to the accounting treatment of the payments and their funding, and contact with the auditors, was not dishonest, as I have explained earlier in this judgment.
Against the Madoff brothers, MSIL made a further and separate allegation of dishonesty. This was that in relation to BLMIS’ fraudulent T Bill trading, between 2005 and 2008, they knew that the US$310 million received by BLMIS from MSIL was fraudulently recorded in BLMIS’ books as “commission income” due from MSIL. The evidence to which I was referred by the Claimant in support of this allegation was exiguous. The treatment of the sum as commission income was attested to in a paragraph from the witness statement of Ms Collura which in turn relied upon a number of documents which did not on their face self evidently support the proposition. There was no evidence to link the Madoff brothers to knowledge of these documents. The evidence relied upon did not meet the necessary degree of cogency to make out an allegation of dishonesty, which I therefore reject. Even had this allegation been made good, I would not have treated it as supporting a conclusion that the brothers were guilty of any dishonesty in relation to the MSIL Kohn Payments. In any event it would not have assisted MSIL’s case on limitation because the alleged dishonesty fell within the period six years prior to the issue of the Claim Form.
Concealment
The Claimant’s argument relied upon three propositions. First, that the directors’ breaches of duty were deliberate. Second, that their breaches of duty were committed in circumstances where it was unlikely that they would be discovered for some time where (a) Bernard Madoff was the controlling shareholder of MSIL, (b) he personally brokered the arrangement with Mrs Kohn whereby the MSIL-Kohn Payments would be made, and (c) the directors were party to the making of false statements to MSIL’s auditors in relation to the filing and approval of MSIL’s accounts; specifically, the failure to inform the auditors that the sums being paid to Mrs Kohn were not in fact payments for research services properly supplied to MSIL (but were in reality payments made by MSIL for Mr Madoff’s benefit) was an act of concealment. Third that the Claimant did not discover that “concealment” until after the appointment of the Joint Provisional Liquidators on 19 December 2008, and could not with reasonable diligence have discovered the concealment before then: the concealment could not reasonably have been discovered earlier in circumstances where (a) the only members of MSIL’s Board were the wrongdoers (i.e., the directors), (b) those directors had misled MSIL’s auditors, and (c) those directors had wrongfully failed to disclose their own misconduct.
These propositions were not made good. As to the first, the conduct complained of against Mr Toop and the Madoff brothers was negligent, not deliberate. As to the second, there was no concealment. The payments and their funding were patent from MSIL’s books and records, and were known to the auditors, who were not misled by any of the Defendants. They were openly discussed amongst the directors and with the compliance department. There was nothing secret about them, or about the written research which was being delivered to London. If, contrary to my findings, the making of the payments constituted a breach of duty, there was nothing in the circumstances in which the payments were made which made it unlikely that such breach would be discovered for some time. As to the third, anyone within the company could with reasonable diligence have discovered the payments throughout the time that they were being made. Mr Bond, Mr Purcell, Mr Marshall, Mr Allen, Ms Wood, and Mr Hui all knew of them, against none of whom does the Claimant allege wrongdoing.
Accordingly the claims against all the director Defendants in respect of MSIL Kohn payments made before 8 December 2004 are time barred.
(15) MSIL Kohn payments: the directors’ claims for relief from sanction
Section 727 of the Companies Act 1985, replaced in identical terms by section 1157 of the Companies Act 2000, provides that:
“If in proceedings for negligence, default, breach of duty or breach of trust against-
an officer of the company…
it appears to the court hearing the case that the officer or person is or may be liable but that he acted honestly and reasonably, and that having regard to all the circumstances of the case…he ought fairly to be excused, the court may relieve him, either wholly or in part, from his liability on such terms as it thinks fit.”
I have found that Mr Raven and Mr Flax acted honestly and reasonably in making the payments. Although the Madoff brothers and Mr Toop were in breach of duty in failing to apply their minds to whether the payments were in the interests of the company, they nevertheless acted reasonably within the meaning of that word in the section. It is apparent from the fact that the section is applicable to liability for negligence that “reasonably” is a broad concept, such that the relief is potentially available even where the director has been in breach of his duty to exercise reasonable care. In Re D’Jan of London [1993] BCC 646 Hoffmann LJ said at page 649:
“It may seem odd that a person found to have been guilty of negligence, which involves failing to take reasonable care, can ever satisfy a court that he acted reasonably. Nevertheless, the section clearly contemplates that he may do so and it follows that conduct may be reasonable for the purposes of section 727 despite amounting to lack of reasonable care at common law.”
Had I found that any of the director Defendants was liable or potentially liable in respect of any of the MSIL Kohn Payments, I would have held that he ought fairly to be excused from any liability in the circumstances, in particular where:
(1) he acted reasonably and honestly throughout;
(2) the payments caused MSIL no loss;
(3) the directors did not seek or obtain any benefit from the payments;
(4) the payments were approved with full knowledge by all the voting shareholders of the company;
(5) the degree of fault, if any, was venial; and
(6) the consequences of imposing any personal liability would be unduly harsh, and disproportionate to any degree of fault.
(16) MSIL Kohn payments: the claim against Mrs Kohn, Erko and Tecno Gibraltar
The claim was advanced primarily against Mrs Kohn personally, including the receipt based claims which were advanced on the basis that the payments were received by Erko, Tecno Italy and Tecno Gibraltar (“the Recipient Companies”) as agents or nominees on her behalf. The receipt based claims were maintained against Erko and Tecno Gibraltar on the alternative basis that they were the beneficial recipients of the relevant payments, rather than she. Erko’s position as a defendant is anomalous. The claim was maintained against Erko on this alternative basis, notwithstanding that the company was dissolved in 1998 and that MSIL’s case was that it had not received any of the payments in any capacity because the Erko payments were made by cheques which were endorsed in favour of Mrs Kohn’s daughter, Ms Herzog, and paid into the latter’s account at Bank Gutmann in Austria. Asserson Law Offices remained solicitors on the record for Erko, but no evidence or representations were put forward on its behalf at the trial.
The Claimant asserts liability against Mrs Kohn by reference to four causes of action:
(1) dishonest assistance constructive trust;
(2) knowing receipt constructive trust;
(3) a restitutionary claim;
(4) a proprietary claim.
Dishonest assistance constructive trust
In order to establish this cause of action the Claimant must establish:
(1) a breach of fiduciary duty,
(2) assisted by the defendant,
(3) dishonestly.
The opening and closing written submissions on behalf of Mrs Kohn contain a heading which treats the first ingredient as being a “breach of fiduciary duty causing loss” (my emphasis), suggesting that loss is a necessary ingredient in addition to breach. The point was not supported by authority, nor was it addressed or developed further in argument on either side. The liability of a dishonest assistant is an accessory liability which confers a personal remedy against the assistant to account in equity as if he were the trustee in breach of trust (see Lewin on Trusts 18th Edn 40-09). Accordingly I accept that the liability of the assistant depends upon proof of loss to the same extent as the liability of the party in breach of trust or fiduciary duty whom he assists, but no further. The liability of the assistant is for such loss as the party in breach of fiduciary duty would be liable for. It is not necessary to show that the assistance itself is causative of any loss.
Breach of fiduciary duties by directors
I have held that none of the director Defendants was in breach of fiduciary duty. But this is not an end to MSIL’s case in dishonest assistance against Mrs Kohn, because MSIL seeks to rely upon Mr Dale being in breach of fiduciary duty in making the payments. This limits the claim to the payments after 4 February 2003 when Mr Dale first became a director.
Mr Crow QC described this argument, aptly in my view, as a shabby point pulled out of the hat in closing. I confess that when this argument was articulated in MSIL’s written closing submissions it took me by surprise. It was not adverted to in the written or oral opening of MSIL, which relied solely on allegations of breaches by the directors who remained active defendants at the trial. It is fair to say that it is within the pleaded case, and the list of issues settled in February 2012, because both were drafted and served before MSIL settled with Mr Dale. But I had understood that the breaches of fiduciary duty being relied on were solely those of the remaining Defendants and that the dishonest assistance claim against Mrs Kohn was parasitic on such breach being established. I therefore have considerable reservations about whether it is fair to allow MSIL to advance such a case. I will nevertheless address it.
MSIL relied essentially on what was said to be Mr Dale’s acceptance of fault contained in his witness statement in the following passages:
(1) “The whole process of receipt of “fees receivable” and the making of the MSIL-Kohn Payments was, I now recognise, improper and inappropriate. I accept that I should have recognised this at the time. It was not in MSIL’s best interests to make the MSIL-Kohn Payments because MSIL could not afford them without the fee income and did not need them to carry out its trading business.”
(2) “Although I believed that the research was not worth the money being paid for it, I did not tell KPMG this.”
(3) “In my view the research provided by the Kohn entities was irrelevant and of no value to MSIL. No-one at MSIL used the research. Sometimes it remained unopened or was simply left on the second floor of the office. None of the traders came looking for it. It was obviously not relevant to MSIL’s business and was merely regurgitated from pre-existing material containing extracts from other publications. I understood it to be the mechanism to enable the MSIL-Kohn Payments to be continued to be made through MSIL, in that the research was sent to justify the amount and frequency of the MSIL-Kohn Payments.”
(4) “I now recognise that it was not in MSIL’s best interests to continue making these payments and that they were inappropriate, unnecessary and unsustainable having regard to MSIL’s core business. I should have recognised this at the time. I chose not to act on the multiple indications given in the conversations I had with Mr Madoff and Mrs Kohn, and which were confirmed in my discussions with Stephen Raven.”
(5) “I knew there was no economic benefit to MSIL making such payments, and was not aware of any goods or service which Mrs Kohn, Erko or Tecno provided to MSIL at all – let alone any service worth $700,000 a quarter. In hindsight, although I spoke to Stephen Raven, I should have done more than this given my concerns and I should have challenged the payments.”
The circumstances in which Mr Dale came to give this evidence on behalf of MSIL are noteworthy. In his Defence, verified by a statement of truth, he had maintained that he believed he had been acting in MSIL’s interests, and denied any breach of duty. He was not a rich man and had substantially exhausted his limited resources on legal fees before the trial, at which he could not afford to be represented. He was facing a claim which would have made him bankrupt, and which he explained was causing and would cause considerable domestic strain. He was offered the ability to settle for £20,000 plus the possibility of having to pay a further £130,000 out of future income if he earned enough prior to April 2015 to be able to afford it (in accordance with a defined formula). At the time he gave evidence he had not earned enough for any part of the £130,000 to be payable. In return he had to agree to sign a witness statement in agreed terms, drafted initially by MSIL’s solicitors, and to give evidence for MSIL. For pragmatic reasons, which I do not criticise, he accepted a settlement on these terms. The settlement agreement warranted the accuracy of the witness statement, so that Mr Dale was potentially at risk of losing the benefit of the settlement if he departed from it in any material respect. The witness statement purported to accept his own wrongdoing. It purported to explain the departure from the evidence in his Defence by being “assisted by the additional evidence disclosed by the Claimant” although it emerged that he had not himself considered such disclosure.
This put Mr Dale in an uncomfortable position in giving his evidence. I accept that within this difficult straightjacket he was doing his best to answer questions honestly and helpfully, but this background requires me to treat with considerable caution his apparent conversion to an acceptance of fault. However that may be, it is tolerably clear that at the time of the events in question he did think that the MSIL Kohn Payments were in MSIL’s interests. He believed that Bernard Madoff had a bona fide commercial reason for the payments being made and that was sufficient to make him happy with them. Mr Dale was told of Bernard Madoff’s responses to Mr Flax and Mr Raven when they raised the matter with him. Accordingly he knew that Bernard Madoff’s attitude was that Mrs Kohn was a good analyst who spoke to him in New York and was only being paid what a good analyst would be paid; that he got value from the research; that the research had the potential to pay for itself; that a single good idea could justify the payments; that he found Mrs Kohn’s advice to be of great value; and that apart from research or information from Mrs Kohn, Bernard Madoff valued Mrs Kohn for her contacts. Mr Dale was himself told by Bernard Madoff in a conversation of 20 April 2007 that the payments were not just for research but for the services which Mrs Kohn provided to Bernard Madoff including introductions and her perspective on European institutions and markets, all of which the latter regarded as of great benefit. Mr Dale did not think that the written research received in London was of value to the traders, although he did not know whether or to what extent it was being used, but he believed that it was sent to Bernard Madoff in New York, which was what Bernard Madoff told him: in the conversation of 20 April 2007 Bernard Madoff told him that Mrs Kohn was providing the same information to him as to MSIL in London and that he was using it to make his decisions globally, i.e. including those for MSIL. Mr Dale was himself keen to persuade Mr Raven of the desirability of continuing to make the payments when the latter was seeking to use MiFID as a ground to put an end to the payments and their funding. Mr Dale believed that the payments, and their funding, were properly accounted for in the statutory accounts. Mr Dale did not mislead the auditors, his fellow directors, or those within MSIL who were concerned with compliance, and he did not believe that anyone else had.
Accordingly I reject the allegation that Mr Dale was in breach of fiduciary duty.
No loss
I have concluded that had any of the directors been in breach of fiduciary duty, such breach gave rise to no loss and so none would have been liable for any loss. That is fatal to a claim against Mrs Kohn for assisting such alleged breaches of fiduciary duty.
Wise Finance Company Limited v. Hughes
[1999] IESC 6 (12th November, 1999)
Judgment delivered the 12th day of November 1999, by Keane, J.
1. This is an appeal from an order and judgment of the High Court (Laffoy J) refusing to grant the plaintiff an order for possession of certain premises, the property of the defendant, in County Longford. It is not in dispute that the plaintiff had advanced the defendant the sum of £25,000 for a term of three months and that the loan was secured by a charge on the defendant’s property in Longford. The rate of interest was to be 2% per month and, if the loan was not repaid in full within the three month period, interest thereafter would be payable in advance of 3% per month on the unpaid balance. The interest for the three month period was to be deducted at the date of draw down and, in addition there was what was described as a “procurement fee” and a “broker’s fee”. These deductions totalled £5,000, leaving a net balance payable to the defendant of £20,000.
2. That sum was duly advanced to the defendant, but not repaid at the end of the three month period. The defendant, however, did pay the interest at the rate of 3% per month for approximately a year after the termination of the three month period. The plaintiff then instituted these proceedings, at which stage it claimed that the defendant owed it £33,500. In addition to the deductions from the loan, the defendant had at that point paid £11,750 in respect of interest to the plaintiff.
3. The proceedings were in the form of a special summons claiming an order for possession pursuant to s.62(7) of the Registration of Title Act 1964 of the charged premises. In the first affidavit sworn by the defendant, a number of matters were raised by way of defence to the plaintiff’s claim. However, in a second affidavit a further ground was advanced, i.e. that the plaintiff had no license to carry on a business of money lending in this jurisdiction, contrary, as it was argued, to the provisions of the Moneylenders Acts 1900 and 1933, which were in force at the time the money was advanced.
4. That contention was upheld by the learned High Court judge. In the course of her reserved judgment, Laffoy J, having noted that it was not in dispute that the plaintiff was engaged in the business of money lending, went on to consider certain categories of person to whom the requirements of the Acts as to the obtaining of a licence did not apply. Being satisfied that the plaintiff came within none of these categories and that it was settled law that any contract entered into in contravention of the restrictions contained in the relevant Acts was unenforceable ( Cornelius v. Phillips [1918] AC 199), she dismissed the plaintiff’s claim.
5. Unfortunately, it was not drawn to the attention of the learned High Court judge that certain other exemptions from the requirements of the Act as to the obtaining of licences came into being as a result of s.136 of the Central Bank Act 1989 and the Money-lenders Act 1900 (s.6 (e)) Order 1993 (S.I. No. 167 of 1993). Section 136 of the 1989 Act provided that a licence was not required in the case of :-
“any class or classes of body corporate in respect of which the Minister for Industry and Commerce, by order made from time to time declares that, from such date as he may specify in such order, this Act does not apply.”
6. Article 2(1)(a)(iii) of the 1993 Order provided that :-
“It is hereby declared that the Money-lenders Act 1990 ( sic) does not apply to the following classes of bodies corporate :
(a) bodies corporate whose business consists wholly or mainly of the business of…
(iii) lending money for use for the purposes of purchasing, developing or otherwise dealing with land whether or not the loan is secured on land or for some other purpose where the loan is secured on land whether with or without other security…”
7. The plaintiff, in their appeal to this court, contended that they came within the provisions of Article 2(1)(a)(iii) on the ground that their business consisted wholly or mainly of the business of lending money where the loan was secured on land, whether with or without other security. However, in the written submissions lodged on behalf of the defendant, it was urged that there was no evidence of this in the affidavits filed in the High Court.
8. On the hearing of the appeal, Mr. Ronan Murphy for the plaintiff submitted that the terms of the commitment letter on foot of which the loan in question was entered into and the nature of the printed standard form completed by the defendant made it clear that the plaintiff was engaged as a matter of routine in transactions consisting of the lending of money where the loan was secured on land. I am satisfied, however that that falls well short of what is required by the terms of Article (2)(a)(iii). It went no further than demonstrating that in the case of some transactions the loan was so secured, but there remained no evidence as to the extent to which the business of the plaintiff consisted wholly or mainly of such transactions.
9. It is certainly unsatisfactory that, through no fault of the learned High Court judge or counsel for the defendant, this case was dealt with in the court below on an erroneous legal basis, i.e. that the category of exemptions from the requirements of the Acts was confined to those set out in the written judgment. If the fact was that the business of the plaintiff consisted wholly or mainly of the business of making loans which were secured on land, then it would seem unjust that the defendant should entirely escape the financial obligations he had entered into with the plaintiff, save for the £11,750 he has already paid in respect of interest. On the other side of the coin, it was conceded on behalf of the plaintiff that, if the matter was remitted to the High Court for a rehearing, justice required that it should be on the basis that the plaintiff paid all the costs of the proceedings to date and confined the claim to interest from the date of the judgment and order of Laffoy J to interest at the court rate.
10. I would, in these circumstances, allow the appeal and remit the matter to the High Court so that it can be determined in accordance with what is now accepted to be the applicable law. It would be for the High Court judge to determine in the light of whatever evidence was furnished whether the plaintiff in fact came within the provisions of Article 2(1)(a)(iii). It would also be open to the defendant to rely on the other grounds raised by him in the High Court which have not so far been the subject of any adjudication in that court. I would so order only on the undertaking of the plaintiff to confine its claim for interest from the date of the order appealed from to the date of the determination of the matter in the High Court to interest at the court rate. The plaintiff must also pay all the defendant’s costs of the proceedings to date.