'The receipt of what?': Questions concerning third party recipient liability in equity and unjust enrichment.

• Jurisdiction: Australia
• Author: Dietrich, Joachim
• Date: 01 April 2007

[This article argues that equitable recipient liability should not be displaced by a strict liability claim in unjust enrichment. Furthermore, recent judicial and academic suggestions to the contrary fail to engage in a proper analysis of the requisite elements of either claim. In particular, the questions of whether there has been a 'receipt' of trust property and whether proprietary relief is available have been glossed over. To demonstrate the complexity and confusion surrounding both the equitable and unjust enrichment claims the article considers (against the backdrop of proprietary claims reliant on the priority/tracing rules) the application of equitable recipient liability and unjust enrichment theory to a simple fact scenario and then more complex variations. It is argued on doctrinal and policy grounds that equitable fault-based liability best reconciles the competing claims of the beneficiary of a trust or fiduciary relationship, and the third party recipient of trust property. The High Court of Australia, in its recent decision of Farah Constructions Pty Ltd v Say-Dee Pty Ltd, reached similar conclusions on a number of key points.]

CONTENTS I Introduction II An Overview of Possible Claims in Equity III General Principles Applicable to Establishing Recipient Liability in Equity and Unjust Enrichment A Current Liability Rules in Equity 1 Receipt 2 Trust Property 3 Misappropriated Trust Property 4 The Trigger for Knowing Receipt Liability: A Defendant's Wrongdoing B Unjust Enrichment Theory IV Form of Relief: Proprietary or Personal A In Equity B Unjust Enrichment Theory V More Complex Factual Scenarios A Scenario A B Scenario B 1 Liability in Equity 2 Liability in Unjust Enrichment 3 An Alternative Analysis of Say-Dee VI Is 'Strict' Unjust Enrichment-Based Liability Desirable Even if There Is Receipt? VII Conclusion I INTRODUCTION

The law concerning the personal liability of parties involved, broadly speaking, as 'accessories' in a breach of trust or fiduciary relationship is in a state of considerable uncertainty and confusion, leaving it 'in danger of becoming a quagmire of conflicting propositions and rationales'. (1) Traditionally, such liability is divided into two broad and potentially overlapping classes of case: (1) liability as a result of assisting in the breach of trust or fiduciary duty ('knowing assistance'); (2) and (2) liability as a result of the receipt of trust property or other property which is the subject of a fiduciary relationship ('recipient liability' or 'knowing receipt'). Further, the possibility of a proprietary claim for the recovery of specific property received by a defendant, or its traceable proceeds, forms a significant backdrop to any personal liability. Indeed, one can question whether the two classes of personal liability ought to be dealt with as distinct and separate heads of liability at all. (3)

Putting that to one side for now, however, at least in relation to knowing receipt cases, the sources of confusion are manifold. These include the use of misleading descriptions and labels such as 'constructive trustee' (4) and inconsistencies in the law as to the precise content of the recipient liability rule, in particular, the level of knowledge necessary to activate personal liability. (5) Adding to the complexities (or perhaps providing a solution to them), more recent academic commentary argues that an alternative analysis is apposite in factual circumstances similar to those in which equity's recipient liability rule applies. Such an analysis is used by some to argue that 'strict liability' should arise on the receipt of an unjust enrichment where trust property is received by third parties. In England, at least, there has been strong judicial and extra-judicial endorsement (from senior Law Lords) of such 'strict' unjust enrichment-based liability (6) and the need for a new landmark case to resolve the difficulties. (7)

Following on from earlier obiter dicta of Australian judges, (8) in Say-Dee Pty Ltd v Farah Constructions Pry Ltd ('Say-Dee'), (9) the New South Wales Court of Appeal accepted as 'clear' (10) and 'compelling' (11) the view that the 'liability of a recipient of trust property is restitution based so that liability is strict subject only to defences of bona fide purchaser (for value) and/or change of position'. (12) Consequently, courts ought to 'abandon the fault-based idea of knowing receipt'. (13) The Court opined that it was time to bite 'the proverbial bullet' in favour of such an approach. (14)

Yet this view, albeit dicta, was expressed in a case in which, as the High Court of Australia in Farah Constructions Pty Ltd v Say-Dee Pty Ltd ('Farah') (15) has now held, neither equity's recipient liability rule nor unjust enrichment was applicable to the facts. Further, it is at least arguable that the proprietary remedy awarded in the case did not necessarily follow on the basis of either of those doctrines. (16)

Framing these difficulties in a more general way, it is suggested that factual scenarios that raise considerable challenges for equity's recipient liability rule cannot be decided without close analysis--such challenges cannot be avoided by resort to unjust enrichment or mere statements of conclusions. One needs to be clear about: (1) whether the facts are amenable to analysis on the basis of liability for receipt, either in equity or unjust enrichment, that is, whether there is a receipt of trust or other property at all; (17) (2) whether an alternative analysis in unjust enrichment is indeed the preferable approach in some or all of these cases; and (3) what form (proprietary or personal) any remedy should take.

Unfortunately, although much attention is often paid in the cases to the second question, very little attention is paid to the first--the second question can only be meaningfully addressed after an answer to the first is obtained. It is argued that the decision of the NSW Court of Appeal in Say-Dee avoids important policy and doctrinal questions that need to be resolved before Australian courts embrace unjust enrichment. (18) The solutions offered by unjust enrichment theory (which is itself complex) are not necessarily more desirable or easier to apply than liability in equity, yet some judges appear to view unjust enrichment as a panacea without, perhaps, fully appreciating those complexities. The High Court in Farah has now overturned the decision of the Court of Appeal. Although the High Court overturned the Court of Appeal's findings of fact in at least two significant ways, by holding that no breach of fiduciary duty had occurred and that the fiduciary was not an agent of the third party purchasers of the property, it went on to consider and strongly reject the conclusions reached by the Court of Appeal, on the assumption that there had been a breach of fiduciary duty. In doing so, the unanimous joint judgment in Farah reached many conclusions broadly consistent with this article.

This article proposes to 'plunge into [the] murky waters' (19) of equity's knowing receipt rule and unjust enrichment theory, starting with a simple fact scenario that allows for the straightforward application of each doctrine. The article will also discuss other equitable claims that might arise from this scenario, for its central argument is that knowing receipt can only be properly understood within this context. From this, the article illustrates how more complex variations on the initial fact scenario raise significant conceptual difficulties and policy questions that need to be resolved irrespective of which doctrinal vehicle is applied. It is argued that only after those preliminary questions are resolved will it be possible to tackle the question of which of the two analyses, or a different approach altogether, is more appropriate.

The article adopts a seven-part structure. Part II provides an overview of the types of claim that may arise in equity from the simple fact scenario with which the discussion commences. Part III considers the general principles applicable to establishing a claim either (a) in equity, under the knowing receipt rules; or (b) on the basis of unjust enrichment theory. Part IV discusses the availability of proprietary remedies on the basis of (a) equitable principles; or (b) unjust enrichment theory. Part V considers more complex factual scenarios and how the basic principles discussed in Parts III and IV apply to these more complex scenarios. This Part will include a discussion of the decision and reasoning of the NSW Court of Appeal in Say-Dee and, briefly, the High Court in Farah. Part VI will consider some of the advantages and disadvantages of the respective approaches to recipient liability in equity and unjust enrichment.

In Part VII, the article concludes that a genuinely receipt-based liability (whether in unjust enrichment or equity) ought to be seen as the personal liability companion to the proprietary claim dependant upon the priority and tracing rules, and hence should not be available in circumstances in which trust property or its traceable value was not received by the third party. This means that such a claim cannot extend merely to the 'receipt' of information or opportunities that can be asserted to 'belong' to the principal, but which the fiduciary 'transfers' to the third party.

In any case, it will be concluded that, outside the proprietary claim, any recipient-based personal liability ought to be wrongs-based and, if so, then there is no real need to distinguish between the two limbs of Barnes v Addy: (20) both are essentially similar liability rules focused on participation in wrongs. Hence, it is considered that a separate analysis of whether there is any 'receipt' of property or 'enrichment' does not need to be engaged in for the purposes of personal liability.

II AN OVERVIEW OF POSSIBLE CLAIMS IN EQUITY

To take a simple fact scenario: a trustee holds 'property' (21) on...