Restitution and Unjust Enrichment.
Restitution has been defined as a body of law in which (a) substantive liability is based on unjust enrichment, (b) the measure of recovery is based on the defendant's gain instead of the plaintiff's loss, or (c) the court restores to the plaintiff, in kind, his lost property or its proceeds.
The divergence between the American and English perspectives on restitution is marked. The American Restatement on the law of restitution suggests that a plaintiff will be entitled to restitution in any circumstances where the defendant has been unjustly enriched at the expense of another. In contrast, under the English legal position, there is not necessarily any right to recover money in personam merely because it would be the right and fair thing that it should be refunded to the payer. Entitlement to recovery on the basis of restitution in the English legal system seems to be very much based upon the implied existence of a promise to repay – or, in essence, a contractual obligation of sorts.21
Restitution, more narrowly than tort or contract, focuses on re-establishing equality as between two parties, as a response to a disruption of equilibrium. Its raison d'être is founded in the injustice that lies in one person's retaining something which he or she ought not to retain, requiring that the scales be righted. It also must take into account not only what is fair to the plaintiff, but also what is fair to the defendant.
The overriding impression is that restitution is a remedy for wrongs defined by other theories of liability as opposed to an independent source of liability having characteristic remedies of its own. Yet the Supreme Court of Canada case of Lac Minerals Limited v. International Corona Resources Limited 22 refers to the constructive trust as being one of the remedies in the law of restitution, suggesting that it has both a remedial and a substantive role to play. The distinction is of no immediate practical significance. Where a defendant has committed a wrong from which he benefits, the essential thing is to recognise that the law of restitution offers the plaintiff a choice of remedies, among them a monetary recovery measured either by harm to the plaintiff or benefit to the defendant. If the latter alternative is more advantageous, as in the case of a profitable trespass causing no injury to the plaintiff, there is a sense in which it does not matter whether we describe the result by saying that the law provides an alternative remedy in restitution for a tort liability, or that the basis of liability is the defendant's unjust enrichment at the expense of the plaintiff. The distinction, however, may be important where proof of liability may be provided by reference to the defendant's unjust gain.
The distinction between restitution as a substantive area of law and restitution as a remedial area also has implications in respect of determining what legal system might apply in a multi-jurisdictional dispute – under the relevant principles governing choice of law or the conflict of laws. Depending upon how it is classified, where a conflict of laws arises, the law of restitution that is deemed to govern the resolution of the dispute could be that of where the wrong occurred (if seen as substantive), or that of the forum (where seen as remedial).
Focusing on restitution as a remedy, in contrast to a separate head of liability, a question arises – what basis of liability activates an obligation to provide restitution? The answer is that there are many, and restitution can be considered a catch-all type remedy which leads itself to providing redress for a wide selection of wrongs. These wrongs can be roughly brought together as a class of case where the defendant's independently actionable wrongdoing is what makes an enrichment unjust as opposed to the situation where the defendant's only wrongdoing is the failure to account for a benefit received. In either case, there is violation of a legal duty and unjust enrichment – but the distinction may be said to be between an action and an omission. That duty is the duty to restore or pay for benefit that the recipient cannot conscientiously retain.
The related equitable theories of restitution, unjust enrichment, quasi-contract, contract implied-at-law and quantum meruit – all actions brought under common law doctrines – are essentially the same, and the names are used interchangeably in much case law. (See, Pascals v. Dozier23). In the past, such actions were also known as actions in assumpsit, for money had and received, or an "equitable action to recover money which the defendant in justice ought not to retain... where a defendant has monies of the plaintiff which, ex equo et bono, he ought to refund."24 In essence, the action lies in money received by one party that, in justice and equity, belongs to another. A contract is therefore implied because natural justice requires either the return of the money or some other benefit to be conferred upon the plaintiff.
Unjust enrichment and the law of restitution have been used in the United States as a basis for providing recompense to plaintiffs. In contrast, in England, courts have sought to classify the cause of action as one resting in quasi-contract. In other words, English judges have preferred to find the existence of an implied promise to repay or an implied contractual obligation as a basis for ordering the return or repayment of money, goods or benefit to the rightful owner.25
Tracing – or 'Tracking and Attributing' Ownership to Concealed Wealth.
To an English lawyer, tracing refers to the process whereby assets which in equity belong to another, or may be said to be impressed by a constructive trust in another's favour, may be 'traced' by their beneficial owner from their point of departure through to their current location. It provides an answer to the question of who the true owner of wealth may be – if it has been misappropriated or lost due to some form of wrongdoing. It is an equitable remedy (although it is also available at law in more narrow factual settings). Accordingly, it requires adherence to the maxims of equity. These maxims ensure that those who seek the assistance of the courts of equity are themselves deserving of such assistance and include rules such as the following:
- He who comes to equity must come with clean hands.
- He who seeks equity must do equity.
- Equity follows the law.
- Equity will not suffer a wrong to be without a
remedy.
Equitable relief is only available where legal remedies are either not available or have been exhausted. It is what one might call a 'pollyfilla' in conceptual terms, providing cover for those areas not reached by the common law in the strict sense.
Where one's property is in the hands of another in an identifiable form, both common law and equity recognize the right to follow or trace that property and to reclaim it.
Tracing or 'following at common law' treats property as identifiable so long as it has not become mixed-up with other property. Such property could be tangible. It could also be an intangible – such as a chose in action (for example, a bank account in credit balance). Property purchased with the claimant's money could also be identified provided that there was no admixture of other money. In such a case, the common law "proceeded on the basis that the unauthorized act of purchasing was one capable of ratification by the owner of the money." 26
There are, however, serious limitations to the common law remedy of tracing. In the first place, as the common law did not recognize equitable rights, a beneficiary under a trust could not at law follow his property into the hands of the trustee. However, by joining the trustee to a suit, he could follow it into the hands of a stranger. More importantly, however, the conditions made it impossible to trace property into a mixed fund. Equity, on the other hand, could declare the mixed fund, or any property bought with it, to be subject to a charge which could, if necessary, be enforced by a sale of the property. As a result, equity developed its own remedy of tracing. "If, in 1815, the common law halted outside the banker's door, by 1879, equity had had the courage to lift the latch, walk in and examine the books." 27
For property to be traced in equity there are three conditions, namely:
- The property must be traceable;
- There must be an 'equity' to trace;
and
- Tracing must not produce an inequitable result.
If these conditions are satisfied, the claimant will be entitled either to the assets into which his property has been traced or else, if there are also other persons who have a claim upon them, to a charge.
Property can be traced only if it is traceable. In most cases this presents little difficulty. However, there are other cases which are less straightforward – particularly when money is mixed with other monies in a bank account or other blended fund. It is for a trustee to prove what is trust property and what is his own. If he cannot distinguish between them, then the whole will be treated as trust property.28
A debtor has the right to 'appropriate' (meaning – to take or exercise control over property) money to make any payment he wishes – or to pay whatever debt he chooses, provided he does this at the time of making the payment, and provided he is solvent. The appropriation need not be express, and may be inferred from circumstances known to both parties. However, a mere inward intention not communicated to the creditor is not enough.
If a debtor makes no appropriation, the creditor, such as a bank, may do so at any time even in the course of an action. He may appropriate the payment (such as by means of a set-off from a deposit in a bank account), to a statute-barred debt, but he cannot appropriate the payment to an illegal item if a legal item remains unpaid.
(a) The Rule in Clayton's Case. 29
Under English law, when there has been no express appropriation of property, the rule of convenience, known as the rule in Clayton's case, of 1816, is sometimes applied. This is confined to cases where there is an unbroken account between the parties, or one "blended fund" as in the case of a current account at a bank or between traders. The effect of the rule is that in the absence of any express appropriation, each payment is impliedly appropriated to the earliest debt that is not statute-barred. The appropriation is made by the very act of setting the two items off against each other. Another way of saying this is 'first in, first out' – whereby the first payment out is set-off against the first payment in, and vice versa.
Sometimes, under English law, a bank will break an account and open a new and distinct one. In such a case, entries before the break will not be affected by entries after the break. Where there are two or more concurrent and inter-dependent accounts of the same nature at a bank, however, the bank may treat the rule as applying to the accounts as if they were combined. Otherwise, the rule will be applied to each account separately.
The rule under English law is excluded if the parties otherwise agree, or a contrary intention appears from the circumstances. It is not enough however merely to show that the bank refused to allow cheques to be drawn on an over-drawn account unless credits of an equivalent amount were paid in; such credits thus go in reduction of the oldest debts and not in offsetting the newly-drawn cheques.
(b) The Rule in Re. Hallett's Estate. 30
The rule in Clayton's case is sometimes excluded by the rule in Re. Hallett's Estate. Where a trustee draws value on a bank account which contains both his own money and a trust fund's, he is deemed to draw on his own money, first, even if it was the most recently paid in, and to draw on the trust fund's only after all his own money has been depleted; as the presumption in such circumstances is always against a breach of trust.
Often tracing is impossible because the property has been dissipated. Equitable remedies presuppose the continued existence of the money either as a separate fund or as part of a mixed fund. If such continued existence is not established, equity is as helpless as the common law itself.
Even if property is traceable, there is no equitable right to trace and claim it unless some initial fiduciary relationship existed. The right to trace is founded upon the existence of a beneficial owner with an equitable proprietary interest in property in the hands of a trustee or other fiduciary agent. This initial fiduciary relationship is essential. It is not enough to show that one has acquired a benefit by abusing the property of another, or merely to prove unjust enrichment, in other words. However, it may arise from the transaction itself, such as where, for example, money is paid under a mistake of fact where the payer retains in the money a continuing equitable proprietary interest; furthermore, it may arise purely from the fact of fraud itself. The victim's money will be regarded as trust money if it is held under a special or fiduciary duty when parted with (Re Diplock). The fiduciary duty can exist either because of the relationship between the fraudster and the victim prior to the fraud, or because of the circumstances in which the fraudster obtained the money (fraud etc.). The circumstances in Bankers Trust created a 'fiduciary relationship' – implied, in a sense.
Tracing requires speed, knowledge and agility. Once the intensive period of pursuing the stolen funds is over, the defrauded party's lawyers can look at other methods of recovering any shortfall by means of pursuing litigation against deep pocketed defendants. This is where accessory liability may occur. Possible targets of the litigation could include the banks through which the funds passed, lawyers whose clients' accounts may have been used in the transferring of stolen funds, and accountants who may have set up nominee companies and become nominee directors.
Constructive Trust.
(a) Remedy or Cause of Action.
The constructive trust is but one remedy in the law of restitution, and will only be imposed in appropriate circumstances. The court determines whether a claim for unjust enrichment is established, and then examines whether, in the circumstances, a constructive trust is the appropriate remedy to redress that unjust enrichment. There is no unanimous agreement on the circumstances in which a constructive trust will be imposed. Some guidelines, however, can be suggested. First, no special relationship between the parties is necessary. Insistence on a special relationship would undoubtedly lead to relationships being created in order to justify the remedy. Secondly, the constructive trust is not reserved for situations where a right of property is recognized. That would limit the constructive trust to its institutional function, and deny to it the status of a remedy, its more important role. A pre-existing right of property need not necessarily exist when a constructive trust is ordered. The imposition of a constructive trust can both recognize and create a right of property. A proprietary remedy, however, should not be imposed whenever it is "just" to do so, unless further guidance can be given as to what those situations may be. One of the areas in which the constructive trust has proved most useful is in imposing liability on accessories, where, in the absence of the imposition of a constructive trust, an independent action against a facilitator may not necessarily lie. In recent years, English courts have been more willing to fashion remedies in circumstances where all good conscience facilitators should be held to account. The standard of accessory liability, in summary terms, is what an 'honest man' would have done under the circumstances.
(b) Liability.
Equitable tracing claims are sometimes referred to as 'constructive trust' claims. The constructive trust arises by operation of law pursuant to equitable principles. Provided certain criteria are present, an English court has the right of discretion to hold that a constructive trust is impressed over certain property – regardless of the intention of those concerned. Broadly speaking, there are two types of constructive trust claim. They may be framed loosely as those arising as a result of "recipient liability" and those arising as a result of "accessory liability".
With recipient liability, the defendant receives trust property without notice that it is trust property, or if not aware of the fact that it is trust property at the time of receipt, he subsequently becomes so aware and deals with the property nonetheless, in a manner inconsistent with the trust. In cases of both recipient and accessory liability, a common denominator is that there has generally been what is called a breach of fiduciary duty. A fiduciary is someone in a position of trust. Common examples of fiduciaries are trustees, professional advisors and company directors. Whenever money is obtained by fraud, the fraudulent recipient is the fiduciary, so that the victim can trace that money into the hands of any subsequent recipient. 31
Once a breach of fiduciary duty is established, the claimant should then be able to show that the recipient had the claimant's assets, or a derivative thereof in his possession. Finally, the claimant must establish knowledge of breach on the part of the recipient. The degree of knowledge required is unclear – however, the majority of English precedents appears to support the requirement for proof of actual dishonesty. 32 Some authorities have imputed actual knowledge constructively – due to the presence of objective indicators showing that an honest man would not have acted in the manner that has been impugned. 33
With accessory liability, we are concerned with persons who have assisted in the breach of duty. In the case of Barnes v. Addy, 34 Selbourne LC had the following to say:
"Strangers are not to be made constructive trustees...unless [they] receive and become chargeable with some part of a trust property, or unless they assist with knowledge in a dishonest and fraudulent design on the part of the trustees".
Recipient and accessory liability are discussed in detail in the section "Accessory Civil Liability." Readers are referred to section 8.0 for a more thorough discussion of the ins and outs of the subject. For present purposes, however, it is sufficient to point out that a constructive trust may arise by virtue of receipt of trust property or assistance in a breach of trust.
(c) Appreciation in Value of Constructive Trust Assets.
With reference to the issue of whether the beneficiary of a constructive trust is entitled to recover not only the capital sum lost but also any appreciation in value of the asset, the following case is instructive. In the case of Foskett v McKeown, The Times, 24 May 2000, the House of Lords had to decide which of two innocent parties should benefit from the activities of a fraudster. In this case, a fraudster misappropriated money from a trust fund and used £20,000 to pay some premiums on a pre-existing life insurance policy. On his death, his insurers paid more than £1 million to his children who were the
surviving beneficiaries. The House of Lords held that, as the £20,000 had been applied to make payment of 40 per cent of the premiums, the victims of the deceased fraudster's wrong were entitled to 40 per cent of the proceeds of the policy – representing more than £400,000. The court accepted the argument that the victims were entitled to trace their money through the policy into the amount paid out by the insurers after the fraudster's death and to claim a proportionate share of it from his children.
Class Actions.
Class Actions provide an invaluable vehicle for recovery where the victims of a fraud are many. A fraudster will be more inclined to sit up and take notice of a class action involving potentially thousands of claimants, as opposed to a number of actions taken separately by different victims with different levels of resources. One of the advantages of the typical class action is the potential for the pooling of resources. Another is the incentive of significant attorneys' fees based upon a percentage of recovery, which has the effect of attracting better capitalized law firms.
On the other hand, the class action is not well suited to many types of fraud claims, per se. The element of personal reliance on the part of each victim (which is an essential element in a common law fraud type claim), makes them unsuitable for formulation as a class action – if grounded on the tort of deceit – by virtue of the diversity of members of a class and the subjective nature of the reliance requirement. On the other hand, in a 'monies had and received,' or unjust enrichment-type claim, a class action can proceed by reference purely to the actus of the fraudster – involving concentration of analysis on the unjustified having and receiving. The class members' right to recovery is dependent upon evidence of the fact of transmission of value to the wrongdoer or his enterprise following an adjudication of, say, criminal liability.
Footnotes
21. The Canadian approach to restitution is far more generous to the victim that the English one.
22. [1989] 1 SCR 574.
23. 219 Ten. 4553, 407 SW 2.
24. Nash v. Tane 72 U.S. 689 (1866).
25. See, West Deutsche Landesbank Girozentrelle v. Islington London Borrough Council [1996] A.C. 669.
26. Re Diplock [1948] Ch. 465 at 518.
27. Banque Belge v. Hambrouck [1921] 1 K.B. 321, at page 335, per Atkin LJ.
28. Re. Tilley W.T. [1967] Ch. 1179.
29. See, Devaynes v. Noble: Clayton's Case (1816) 1 Mer. 572.
30. Re. Hallett's Estate (1880) 13 Ch. D. 696.
31. See, Twin Sectra v. Yardley [1999] Lloyds Reports 438.
32. See, Dubai Aluminum v. Salaam [1999] 1 Lloyds Reports 415; Torras v. Al Sabah [1999] CLC 1469.
33. See, Agip (Africa) Ltd. v. Jackson [1990] Ch. 265 at 285.
34. (1874) LR 9 Ch. App 244.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
