Unjustified Enrichment: Key Issues in Comparative Part 8 pps

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(b) Is this genuine leapfrogging?

Supposing that there is a sufficient proprietary connection, is the leapfrog￾ging apparent or real? Even those who believe strongly in a requirement

of privity or directness are content to accept the long reach of the propri￾etary argument.74 Underlying this consensus is the fact that, like agency,

this is not a genuine example of leapfrogging. A remote recipient of an￾other’s money is as direct a recipient from that other as the first recipient.

Thus, if I find your wallet it makes no difference whether I am the first

recipient or the second or the twenty-second. Suppose a pickpocket took

it and, in alarm, threw it down, and then I found it. My position in that

case would be the same as in the case in which your wallet fell from

your pocket into the road without your noticing its loss. The mechanism

does not matter: a receipt of your money is a receipt directly from you.

Similarly, if I use your bicycle for a month, it does not matter whether

you were or were not in possession immediately before me. My user is

taken from you, because the bicycle is yours. The model from which

their Lordships worked in Lipkin Gorman v. Karpnale cannot be used to

support the proposition that true leapfrogging is permissible. The prop￾erty argument looks as though it supports leapfrogging the first direct

recipient but it actually only establishes what might be called sequential

directness.

These conclusions can be confirmed from German law, where benefits

acquired by the use or consumption of property belonging to another

provide the central case for the Eingriffskondiktion, the claim in respect

of enrichment obtained by encroachment on the rights of another. This

claim is likewise indifferent to the number of hands between claimant

and defendant. In one case cattle were stolen from their owner. They were

later sold to the defendant. No exception to nemo dat operated. The cattle

remained the property of the claimant until the buyer slaughtered and

processed them, at which point, by specificatio, he became the owner of

the resulting manufactured products. The owner was allowed to leapfrog

the thief and recover their value from the innocent buyer. For the reasons

just given, this was a factual leapfrog but in the eye of the law the buyer

was immediately enriched from the owner, by his Eingriff upon the latter’s

74 Burrows, Law of Restitution, 48–9; Tettenborn, ‘Lawful Receipt’, 5; Virgo, Principles, 108,

where, true to the structure produced by his analysis, he says this is vindication of

property, not unjust enrichment, and therefore not a true exception to the privity

rule which applies in the law of unjust enrichment.

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property rights.75 Again, on facts essentially identical to those of Lipkin

Gorman v. Karpnale, the Federal Court held that a casino which had bona

fide received money that had been misappropriated from the claimants

was bound to make restitution to the claimants. In that case the facts

were such that the casino did acquire title to the claimants’ money but,

because it could not be regarded as having given value for the money and

therefore had to be regarded as having received gratuitously, it was bound

to make restitution.76

3. The causation argument

The causation argument, if it works, does support genuine leapfrogging.

There is genuine leapfrogging when the plaintiff can make out his case in

unjust enrichment against a first recipient but wants to leap over that first

recipient to attack a second or subsequent recipient. The causal argument

cuts in at that point: but for the unjust enrichment of the first recipient,

the second would not have received the thing. Andrew Tettenborn puts

this case:

C inadvertently overpays his creditor A by £1000; A, pleasantly surprised on

reading his next bank statement but entirely unsuspicious, ... proceeds to give

£1000 from his other account to his son B ... A can almost certainly plead change

of position as a defence. Hence the potential significance of a direct claim by

C against B; can C say (in effect): ‘I have paid money by mistake; but for this B

would not have been enriched; therefore B has been unjustifiably enriched at

my expense and ought to refund.’77

Ought he to refund? His answer is no. In German law it is certainly yes,

at least in this very case, which is provided for in the second sentence of

§ 816(1) BGB. It would be somewhat shocking if the answer were not yes

in English law too and, with great respect to Professor Tettenborn, I think

it is yes.

75 BGHZ 55, 176; English translation in Markesinis et al., Law of Contracts, 786. It is

noteworthy that in holding the buyer liable in unjust enrichment for their value, the

Federal Court declined to take into account his outlay in acquiring the cattle, which

the Court said was recoverable by the buyer only from the thief. Cf. Dawson, ‘Indirect

Enrichment’, 815: ‘This is not usually thought to infringe the requirement of

directness.’ 76 BGH 37, 363, 366. Here the contract between the dishonest gambler and the casino

was illegal and void because the law debarred local residents from gambling in the

casino. Contrast the otherwise identical BGHZ 47, 393, where the gambling contract

was valid and the claim against the casino was defeated. For a full discussion of these

cases, see Carsten Zulch, ‘Bona fide Purchase, Property and Restitution: ¨ Lipkin Gorman

v. Karpnale in German Law’, in: Swadling, Limits of Restitutionary Claims, 106–40. 77 Tettenborn, ‘Lawful Receipt’, 1–2.

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The validity of the proposition that a second or subsequent recipient

can be reached on the basis of the causal argument rests partly on the

real state of things in Lipkin Gorman v. Karpnale, which differed from the

model on which their Lordships relied. The House of Lords tried to bring

the facts within the model of a proprietary connection between the firm

and the casino. A proprietary connection satisfies and does not infringe

the requirement of directness. However, the real situation in that case was

quite different.

(a) The true situation in Lipkin Gorman v. Karpnale

The money which the gambling solicitor gave to the casino was his own,

not the firm’s. He was an authorised signatory to draw on the client ac￾count and it was expressly decided that the money which he drew out

became his. The property had passed to him. The firm was indeed con￾templated as having a power to revest it, and such a power may, as seen,

suffice to create a proprietary connection. However, unless the title in

the gambler was from the beginning voidable, which was not said but

may have been assumed, it is difficult to explain how they acquired that

power.

Traceability does not in itself confer rights.78 Suppose I give you a gold

coin which you sell for £500, with which you buy a painting. Through

these substitutions I can trace the value of the gold coin into the paint￾ing. But if, at the moment you received the gold coin, I had no propri￾etary interest in it whatever, the successful tracing exercise will give me

no rights in the painting. Let it be that I gave you the coin for your birth￾day. I can trace to satisfy my curiosity, but successful tracing will give

me no rights. It would be utterly absurd to assert that the mere fact of

substitution could create property rights in the substitute greater than

and unrelated to property rights in the original. So here, to explain the

firm’s power to revest the money which traceably went into the coffers of

the casino, it is necessary to know that it had a proprietary interest in the

money at the moment at which the gambler received it. And that is not

said.

It may therefore be that this case will ultimately be seen as explicable

only on the basis that it is possible to reach a secondary recipient on a

purely causal basis: the casino would not have received the money but for

the enrichment by subtraction from the firm of the primary recipient, the

gambling solicitor.

78 L. D. Smith, The Law of Tracing (1997), 10–14, 299–300.

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(b) Supporting case law

A reinterpretation of one major case would not suffice if the causal argu￾ment were not rooted in other decisions too. It has a good root, though

somewhat overgrown with weeds. There is a group of cases, lucidly ex￾plained by Charles Mitchell,79 in which mistaken payments have been

recovered from subsequent recipients on proof that the enrichment did

come through to them. Where these cases are difficult, it is usually not

because the doctrine is itself suspect, but because of doubts as to whether

the second recipient has indeed been enriched. The particular problem is

generally the question whether money employed by the first recipient to

discharge the obligations of the second recipient has indeed effected a le￾gal discharge, for without that discharge it cannot be said that the money

has been, in the Latin phrase, in rem versum, turned to his advantage. A

more general difficulty has been the want of understanding of the law

of unjust enrichment. As Mitchell shows, some cases have taken wrong

turnings, for want of any map.

In Bannatyne v. D. & C. MacIver the London agents of the defendant firm

borrowed money for them without authority. The plaintiff lenders mis￾takenly believed that they did have authority. The Court of Appeal upheld

the claim against the firm to the extent that the money had been turned

to their advantage. Romer LJ said:

Where money is borrowed on behalf of a principal by an agent, the lender

believing that the agent has authority, though it turns out that his act has not

been authorised, or ratified, or adopted by the principal, then, although the

principal cannot be sued at law, yet in equity, to the extent to which the money

borrowed has in fact been applied in paying legal debts and obligations of the

principal, the lender is entitled to stand in the same position as if the money

had originally been borrowed by the principal.80

This is the same doctrine as underlies B. Liggett (Liverpool) Ltd v. Barclays

Bank Ltd,

81 a decision of Wright J which was interpreted by the Court of

Appeal in Re Cleadon Trust Ltd.82 In that case a bank had laid out money

believing that it had the authority of a company which was its customer,

when in fact it had only the authority of one director of the company. It

79 Charles Mitchell, The Law of Subrogation (1994), chap. 9, especially 124–9, 133–5. Cf.

Whitty, ‘Indirect Enrichment’, 215, 251–2. 80 [1906] 1 KB 103 (CA) at 109. In Reid v. Rigby & Co. [1894] 2 QB 40 recovery was allowed

at law, the facts being materially identical. 81 [1928] 1 KB 48. 82 [1939] Ch 286 (CA), discussed by Mitchell, Law of Subrogation, 127–8, 162–5.

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was allowed to debit the company’s account. The explanation of the case,

in the reinterpreted version later offered by the majority of the Court

of Appeal, was that the money must be regarded as a mistaken advance

to that one director applied by him to the discharge of the company’s

debts, which were indeed discharged because, though the director had no

authority to draw on the company’s account, yet he did have authority to

discharge the company’s debts.83

Butler v. Rice,

84 though in some respects confusing, is factually more

straightforward. Butler, who had been misled by Mr Rice, mistakenly

thought that Mr Rice owned a house subject to a charge and made a

loan to him thinking he was lending to discharge that charge. Mr Rice

had no such interest and in fact used the money to discharge a mortgage

on property belonging to his wife. Mrs Rice, who had not known of her

husband’s doings, regarded herself as entitled to a windfall, leaving Butler

to his remedy against her husband. But Warrington J held that Butler was

entitled to be subrogated to the claim and security which had been paid

off. In other words Mrs Rice, as second recipient, had to surrender the

enrichment which she would not have received but for the unjust enrich￾ment of the first recipient.

In Agip (Africa) Ltd v. Jackson85 the plaintiff company’s account with

a bank in Tunisia was debited with large sums on the basis of forged

payment warrants. The defendants were accountants who were ultimately

made liable for the wrong of assisting the fraud. Another claim against

the remote recipients as recipients rather than wrongdoers ultimately fell

foul of a defence, but it was held in principle to lie. It is difficult to see why

Agip was allowed to maintain this restitutionary claim.86 The bank would

appear to have lost its own money. However, if the bank is treated as hav￾ing enriched itself without Agip’s consent by insisting on debiting Agip’s

account, the rest follows: because of that enrichment of the first recipient,

Agip was able to go after those who, but for that receipt, would not

themselves have been enriched. Just possibly Ministry of Health v. Simpson

(Re Diplock in the courts below)87 might also be explained in this way.

83 [1939] Ch 286 at 318 (Scott LJ) and 326 (Clauson LJ). 84 [1910] 2 Ch 277. 85 [1990] Ch 265, affirmed [1991] Ch 547 (CA). 86 E. McKendrick, ‘Tracing Misdirected Funds’, [1991] Lloyd’s Maritime and Commercial Law

Quarterly 378–90 observes that no adequate explanation was given, the courts having

accepted, somewhat mysteriously, that, the bank being Agip’s agent, Agip could avail

itself of its mistake. 87 [1948] Ch 465 (CA); [1951] AC 251 (HL).

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(c) Restrictions

Bearing in mind the operation of defences, one should not jump to the

conclusion that the causal argument needs to be heavily restricted. How￾ever, the largely illusory requirement of ‘privity’ inevitably encourages a

suspicious or at best restrictive attitude to it. Tettenborn’s example from

which this discussion began turned on a situation in which the claimant’s

rights against the first recipient had been extinguished as a matter of law,

for to the extent that the immediate enrichee had in turn enriched the

remoter payee he himself had an indubitable defence of change of po￾sition. Identical in this respect is the case covered in the German Civil

Code.88 A requirement of extinction of the immediate enrichee’s liability

would be extreme. A milder requirement would be that remedies against

the first recipient must have been exhausted. In Agip (Africa) Ltd v. Jackson

it appears that Agip had tried and failed to get its bank to reinstate its

account.89

It is impossible at the moment to say whether some such restrictive pre￾condition will be insisted upon. A different and very severe precondition

would be traceability. This can be ruled out, except in an evidential role.

Successful tracing can certainly sometimes support the difficult factual

finding that the remoter recipient would not have received but for the

earlier receipt by the first recipient. The fact that the gambler traceably

gave the casino the money which he obtained from the firm can be seen as

helping to show that there was no other way that he could have indulged

his habit.90 However, traceability cannot be a necessary precondition of

leapfrogging on the basis of the causation argument. Tettenborn’s exam￾ple is carefully constructed to exclude it. The father’s gift to his son came

from a separate account; the money that went to the son was definitely

not traceably the money which the father mistakenly received.

(d) Where leapfrogging is not allowed, and why

It is necessary at the end to revisit the cases that were looked at earlier

where C validly contracts with X to confer a benefit on D.91 For example,

C, a bank, contracts with its customer to lend the customer money and to

send that money to D; or C, a garage, agrees with an insurance company

to repair D’s car at the insurance company’s expense. In those cases C

cannot leapfrog its contractual counterparty in order to bring a claim in

88 Above, 518. 89 Above, n. 85. 90 The invocation of tracing in Baroness Wenlock v. River Dee Co. (1887) 19 QBD 155 should

be explained in the same way. 91 Above, 502.

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unjust enrichment against D. The valid contract between C and X makes

the crucial difference.

It will be observed that in these cases C has a cause of action against

the contractual counterparty X not only in contract but also in unjust

enrichment. The reason why C wants to leapfrog X is precisely that he

has suffered a repudiatory breach and a failure of consideration. It might

at first be supposed that C must therefore be within the doctrine which

allows him to show that the remote D would not have received but for the

unjust enrichment of the immediate enrichee. The doctrine says that one

who has a cause of action in unjust enrichment against the first recipient

is, subject to unsettled restrictions as to exhaustion of remedies against

that first recipient, entitled to proceed in unjust enrichment against such

subsequent recipients as (a) would not have received but for the enrich￾ment and (b) are not protected by the defences of bona fide purchase or

change of position.

However, there is no question of allowing C to leapfrog his contractual

counterparty. C, having dealt validly with X, has to take the risk of X’s

bad behaviour or insolvency. The point made earlier was that C cannot

say that D is a direct or first recipient because in these cases it is not at

C’s immediate expense that D receives. C is the means chosen by X, and

D receives immediately at the expense of X. At this point the concern is

with the different question whether D can none the less be attacked as a

subsequent recipient. He cannot. D is, remotely, enriched at C’s expense,

but he cannot on these facts be reached by C.

The policy reason still stands in the background: C must accept the

risks of dealing with his chosen contractual counterparty. The insolvency

regime would be subverted if C could find ways of leapfrogging an insol￾vent X. However, it might also be argued that C is anyhow not strictly

within the causal doctrine which reaches remote recipients. That argu￾ment requires that the second or subsequent recipient would not have

been enriched but for the unjust enrichment of the first recipient. In

these cases that causal requirement might be said not to be satisfied. For

here D, as second or remoter recipient, would have received anyway. The

contract between C and X envisaged a benefit conferred on D. It is only

by reason of a later breakdown in the relationship between C and X that

D appears ex post in the guise of a subsequent recipient of an unjust en￾richment. If this is right, there is no second avenue of attack. D is not a

first recipient, and he is not a second recipient either. That is, he is not a

person who would not have been enriched but for the unjust enrichment

of the first recipient.

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Peter Watts says that the best explanation of the denial of the leapfrog￾ging claim against D in these cases is that, vis-a-vis ` D, C can point to no

unjust factor. In performing the contract with X he voluntarily – neither

mistakenly nor conditionally – confers the benefit on D.92 Although that

is true, it misses the point of the causation argument. The causation ar￾gument does not require the claimant to establish an unjust factor in

relation to the remote recipient. It merely asserts that, subject to bona

fide purchase and change of position, an unjust enrichment in the imme￾diate recipient is an unjust enrichment in one who received through the

immediate recipient and because of his receipt. That being the ground

rule allowing recovery from the remote recipient, one needs a different

kind of reason to explain why a claimant sometimes cannot rely on it. He

cannot rely on it to leapfrog an initially valid contract. Why?

Putting aside the technical causal deficiency just noticed, Burrows

comes nearer to the mark when he says that the law of unjust enrich￾ment must not be allowed to undermine contracts.93 That has to be filled

out by repetition of the points on which German writers always insist,

namely that nobody should be allowed to evade either defences arising in

relation to a contract or the consequences of the insolvency of the cho￾sen contractual counterparty.94 It is for these reasons that there can be

no leapfrogging over contractual counterparties. The remote recipient in

such cases is enriched, and he is enriched at the expense of the claimant,

but he is beyond reach.

V. Conclusion

This has been an exploration of the range of the law of unjust enrichment,

as controlled by the phrase ‘at the expense of the plaintiff’. In English law

this means pushing out on almost unknown seas. A summary of the posi￾tion is essentially this. In the law of unjust enrichment it cannot be used

in the sense of ‘by doing a wrong to’. It has to be used in the subtractive

sense – the ‘from’ sense. ‘From’ might be understood narrowly or broadly.

It looks as though English law is moving to a broad interpretation. That

92 P. Watts, ‘Does a Subcontractor have Restitutionary Rights against the Employer?’,

[1995] Lloyd’s Maritime and Commercial Law Quarterly 398, 401. 93 A. S. Burrows, ‘Restitution from Assignees’, [1994] Restitution LR 52, 55–6. 94 Meier, ‘Mistaken Payments’, 571. The last paragraph of her article appears to suggest

that leapfrogging in this situation might after all be possible, as though Re Diplock

[1948] Ch 465 provided a springboard. Whatever else it might support, that case

cannot dent the absolute bar against leapfrogging contractual counterparties.