Liable to change

The face of accessorial liability is changing, but many questions remain unanswered. Bajul Shah reports on Criterion Properties v Stratford UK Properties

The landscape of accessorial liability has changed dramatically in the past 10 years. Few areas of equitable principles have seen as much judicial development as those governing dishonest assistance – where a defendant has assisted in a breach of trust or fiduciary duty – and knowing receipt – where a defendant has received property following a breach of trust or fiduciary duty.

The changes include: the seminal decision of the Privy Council in Royal Brunei Airlines Sdn Bhd v Tan [1995], which redefined the existing principles and held that dishonesty, not knowledge, was the basis of liability for dishonest assistance; the decision of the Court of Appeal in BCCI v Akindele [2001], which held that liability for knowing receipt depended on unconscionability of the defendant; and the decision of the House of Lords in Twinsectra v Yardley [2002], where the test of dishonesty in dishonest assistance was held to have both subjective and objective elements.

The changes have been far-reaching. With the discarding of the once familiar language of “constructive trust” and “liability of constructive trusteeship” (Paragon Finance Plc v Thakerar [1999]), it is now clearly understood that liability for both dishonest assistance and knowing receipt is personal, not proprietary.

One feature that has not changed is the fault-based nature of the liability. It is for the claimant to prove fault on the part of the defendant, whether it was dishonesty (for dishonest assistance) or unconscionability (for knowing receipt). However, even this might now need to be partly reconsidered in the light of certain obiter dicta in the House of Lords’ decision in Criterion Properties plc v Stratford UK Properties LLC [2004].

Criterion had entered into a partnership agreement with Oaktree, a US company formed in January 1998 for the purpose of the joint venture with Stratford. The managing director and other directors of Criterion also signed a poison-pill agreement, purportedly on behalf of Criterion, with Oaktree, whereby Oaktree had the contractual right to be bought out of the partnership on favourable terms if another party gained control of Criterion or if its chairman or managing director ceased to be involved in the management of the company. The managing director of Criterion was dismissed and Oaktree sought to exercise its option to be bought out. However, Criterion sought to set aside the poison-pill agreement in summary judgment proceedings, on the basis that it had not been authorised.

At first instance and in the Court of Appeal, the case was approached on the basis of whether Oaktree’s knowledge disallowed it from relying on the apparent authority of the Criterion directors, and this issue in turn depended on whether it was unconscionable for Oaktree to hold Criterion to the agreement.

The decision of the House of Lords was that the test of unconscionability and knowing receipt were irrelevant, as no property had been received by Oaktree. The only issue was whether the directors had actual or ostensible authority to sign an agreement that was probably in breach of their fiduciary duty, and as this had not been determined in summary judgment, the case was remitted for trial. Lord Justice Nicholls held that if directors cause their company A to enter into an agreement with B for an improper purpose, A’s ability to set aside the agreement depends on familiar principles of agency and company law. If, applying those principles, the agreement is valid and not set aside, questions of knowing receipt would not arise.

However, Lord Nicholls then stated: “If, however, the agreement is set aside, B will be accountable for any benefit he may have received from A under the agreement. A will have a proprietary claim if B still has the assets. Additionally, and irrespective of whether B still has the assets in question, A will have a personal claim against B for unjust enrichment, subject always to a defence of change of position. B’s personal accountability will not be dependent on proof of fault or unconscionable conduct on his part. B’s accountability, in this regard, will be strict.”

With this, Lord Nicholls advocated a strict liability personal claim, subject to a defence of change of position, based on unjust enrichment principles in which unconscionability or fault had no part to play. It would, in effect, become the equitable counterpart to the common law restitutionary action for money had and received, as seen in cases such as Lipkin Gorman v Karpnale [1991]. Lord Nicholls rejected the approach in BCI v Akindele, holding that the case should also have been decided on the question of authority rather than unconscionability.

The remarks are clearly obiter, but they represent a radical departure from the present position. If accepted, a claimant would not have to prove unconscionability on the part of the defendant, but only that the defendant received a benefit as a result of a transaction that can be set aside, such as if it was entered into in breach of fiduciary duty. It would be significantly easier for a claimant to mount this type of claim rather than knowing receipt. Proving unconscionability is not an easy burden to discharge because the test is subjective and, as the majority of cases in this area show, the claimant is unlikely to know the circumstances surrounding the transaction. The majority of accessory liability claims involve companies where directors have committed breaches of fiduciary duties, which have only come to light when the company goes into liquidation or is sold to new owners, often many years later. For the new owners or liquidator to prove what the defendant knew or inquired about is a difficult burden to discharge successfully, as indeed was the case in BCCI v Akindele, where the liquidators of BCCI failed to show that the defendant was unconscionable.

To temper the strict liability approach, a change of position defence is available, such as that the defendant in good faith relied on the receipt and changed their position as a result of it. It would be for the defendant to prove that they acted in good faith in reliance upon the receipt. Recent developments in the change of position defence show that, in the commercial context, the test of unconscionability can provide a useful guide to whether a defendant is acting in good faith – the Court of Appeal’s decision in Niru Battery Manufacturing Co v Milestone Trading Ltd [2003] is an example. Unconscionability would not totally disappear from the picture, but crucially it would be for the defendant to disprove their lack of unconscionability. A sensible and fair compromise for the defendant is, after all, better placed to show what they knew, what inquiries they made, and what they did with the receipt.

The dicta leave many questions unanswered. Is the strict liability regime intended to replace knowing receipt or is it an additional cause of action for the claimant? In stating that the principle is based on unjust enrichment, what is the ‘unjust factor’ that gives grounds for restitution? Is it the mistake as to the validity of the agreement, or a failure of consideration, or an absence of consideration? This is not an idle academic muse – it affects what the claimant pleads in their particulars of claim and what they have to prove. Are the same principles intended to apply gifts as opposed to contractually-acquired benefits?

Whatever the uncertainties, Criterion presents an important new direction that the law could take. To use a geological metaphor, it is currently only a fissure, but has the potential to change the landscape of receipt-based liability radically by breaking away from fault-based liability. Alternatively, it could lie dormant, unnoticed, and will eventually erode away. Time will tell.

Bajul Shah is a barrister at 24 Old Buildings