ABSTRACT Restitution From Banks Jonathon P. Moore Christ Church, Oxford Submitted to the Board of the Faculty of Law, University of Oxford, for the Degree of Doctor of Philosophy Hilary Term 2000. This study analyses certain controversial issues commonly arising when a claim for restitution is brought against a bank. Chapter 1 considers the equitable claim traditionally labelled ‘knowing receipt’. Three issues are discussed: (i) the basis in principle of the claim for ‘knowing receipt’; (ii) whether the claim requires proof of fault on the part of the recipient; and (iii) whether the claim can be brought in relation to the receipt by a bank of a mortgage or guarantee offered to the bank in breach of trust or fiduciary duty. The conclusions are (i) that ‘knowing receipt’ is often a claim in unjust enrichment, though the dishonest recipient will also be liable for an equitable wrong; (ii) that when the unjust enrichment version of ‘knowing receipt’ is in issue, the claim should be one of strict liability; and (iii) a claim in unjust enrichment can be brought against a bank to defeat its interest in a mortgage or guarantee offered in breach of trust. Chapters 2 to 4 concern a concept within the law of unjust enrichment that has come to be called ministerial receipt. A ministerial receipt is a receipt of money or property by an agent on behalf of his or her principal. Banks often receive money as agents on behalf of account holders. Chapters 2 and 3 analyse that concept as it is dealt with at common law and in equity respectively. At common law, ministerial receipt is a defence which exists only if the agent pays over the money in question before receiving notice of the right of the plaintiff to restitution. By contrast, ministerial receipt in equity operates to restrict a right to restitution which would otherwise arise. A claim for ‘knowing receipt’ cannot be brought against an agent in equity. Chapter 4 argues that the equitable treatment of agents is correct as a matter of principle, and that no common law claim in unjust enrichment should be maintainable against a person who receives as agent. Special attention is given to banks. Chapter 5 analyses three other defences which a bank can plead in answer to restitutionary claims: ‘good consideration’, bona fide purchase and set off. It is concluded that there is no general defence of ‘good consideration’; that the bank can plead bona fide purchase in relation to money deposited into an account in credit; and that in the context of combining two or more bank accounts set off is merely a species of bona fide purchase. RESTITUTION FROM BANKS Jonathon P. Moore Christ Church, Oxford Submitted to the Board of the Faculty of Law, University of Oxford, for the Degree of Doctor of Philosophy Hilary Term 2000. Approx. 100,000 words ACKNOWLEDGEMENTS A number of people have read and commented on parts of this thesis. I am very grateful to Joseph Santamaria QC, James Edelman, Ben McFarlane, Oliver Sanders and Lesley Taylor. I have also benefited from several discussions with Dr Lionel Smith. I have Dr Smith to thank not only for that assistance, but also for kindly giving me permission to quote from a working version of his paper ‘Property, Unjust Enrichment and the Structure of Trusts’ soon to be published in the Law Quarterly Review. I gratefully acknowledge the Commonwealth Scholarship which funded my studies at Oxford, both for the BCL and for the D Phil. The Commonwealth Scholarship Scheme is funded by the Department for International Development and is administered on behalf of the Commonwealth Scholarship Commission in the United Kingdom by the Association of Commonwealth Universities and the British Council. Finally, my greatest debt is to my supervisor, Professor Peter Birks. His kind, generous and unrivalled expertise has influenced this work enormously. Restitution From Banks CHAPTER HEADINGS Introduction PART I - CLAIMS Chapter 1 The Bank’s Receipt of Misdirected Property PART II – BANKS AS AGENTS IN THE LAW OF RESTITUTION Chapter 2 Ministerial Receipt at Law Chapter 3 Beneficial Receipt in Equity Chapter 4 A Genuine Defence of Ministerial Receipt PART III - DEFENCES Chapter 5 ‘Good consideration’, Bona fide purchase and ‘Set-Off’ Conclusion i TABLE OF CONTENTS TABLE OF CASES.................................................................................................... VI ABBREVIATIONS..................................................................................................XIV INTRODUCTION........................................................................................................1 A. ‘KNOWING RECEIPT’ .............................................................................................2 B. MINISTERIAL RECEIPT...........................................................................................5 C. DEFENCES ...............................................................................................................8 CHAPTER 1 - THE BANK’S RECEIPT OF MISDIRECTED PROPERTY .......9 A. INTRODUCTION.......................................................................................................9 B. RECIPIENT LIABILITY IN EQUITY ........................................................................11 1. Claims to Vindicate Pre-Existing Proprietary Rights ................................11 A new meaning of ‘vindication’?...........................................................................12 Change of position and the pre-existing vindicatio................................................14 Implications for banks............................................................................................17 An anticipatory change of position ........................................................................20 2. Claims to the Traceable Proceeds of Trust Assets ......................................22 Resulting trusts.......................................................................................................26 The impact of the unjust enrichment analysis........................................................30 Implication for banks .............................................................................................32 3. ‘Knowing Receipt’..........................................................................................34 Recent arguments in favour of fault liability .........................................................42 Re Diplock, trust interests and legal title..........................................................43 An attack on the institution of the trust.............................................................47 A windfall to the innocent recipient..................................................................49 The lack of authority in favour of strict liability...............................................53 Commercial chaos, especially for banks...........................................................56 The logic of unjust enrichment demands fault..................................................59 No competing interest requires fault......................................................................60 A likely change in the law – strict liability in unjust enrichment ..........................62 C. GUARANTEES AND MORTGAGES OFFERED IN BREACH OF TRUST.....................63 1. The Beneficiary's Consent.............................................................................67 Bona fide purchase in Gold v Rosenberg...............................................................72 2. Mortgages and Guarantees as Enrichment .................................................75 3. Defences in Koorootang.................................................................................78 CHAPTER 2 - MINISTERIAL RECEIPT AT LAW.............................................85 A. CLAIMS AGAINST AGENTS IN GENERAL..............................................................85 1. Before ANZ v Westpac ..................................................................................85 2. ANZ v Westpac.............................................................................................115 Detriment .............................................................................................................117 Pure model of payment over and the rule in Clayton’s Case...............................124 Difficulties created by the pure model of payment over......................................125 Difficulties created by the reversibility model.....................................................127 ii A series of important concessions........................................................................128 Constructive payment over .............................................................................129 Who gets the benefit of the part-repayment by the account holder?....................130 A special rule for banks / burden of proof?..........................................................131 3. Comparison with Change of Position.........................................................134 The English cases revisited..................................................................................135 Other differences..................................................................................................136 B. WHEN DOES A BANK RECEIVE MONEY AS AGENT? .........................................141 1. Money Deposited by Account Holder.........................................................142 2. Money Deposited by Third Party ...............................................................142