Papamichael v National Westminster Bank Plc

Money paid under a causative mistake of fact is recoverable in restitution unless the recipient proves a good-faith change of position. A recipient who knows, or wilfully and recklessly fails to investigate, facts indicating the mistake cannot rely on that defence.

Where property is obtained through a fiduciary’s breach or fraud, the recipient may hold the traceable proceeds on constructive trust if the necessary knowledge is established. Knowing receipt requires knowledge making retention unconscionable; dishonest assistance requires participation in a dishonest and fraudulent design with the requisite dishonest state of mind.

The claimant transferred GRD 2 billion from a joint account to the defendant bank’s correspondent account. The transfer documentation identified the claimant as both applicant and beneficiary and described the payment as investment funds. The bank converted the money into US dollars and used them as security for a foreign-exchange margin account operated by the claimant’s husband.

The claimant alleged that she had paid the money for a fixed-term investment in her own name, whereas the bank maintained that the money was intended as security for her husband’s trading. The court determined the claimant’s beneficial and personal claims, the bank’s knowledge, and its defences based on mistake, change of position, fiduciary liability, knowing receipt, dishonest assistance and authority.

1. Restitution. The claimant paid the GRD 2 billion under a causative mistake of fact. She would not have made the payment had she known that the money would be used as security for her husband’s trading. The primary claim therefore lay in restitution for money paid under a mistake.
2. Change of position. The bank could not establish a relevant change of position. Its accounting and reconciliation system operated on assumptions and could not itself create a legal relationship or authorise use of the money. In any event, the bank acted in bad faith when it appropriated the money after its employee knew that the transfer identified the claimant as beneficiary and deliberately failed to investigate.
3. Constructive trust. The husband was a fiduciary entrusted with arranging an investment for the claimant. By procuring the use of her money to acquire dollars for his own account, he profited from that fiduciary position and held the dollars on constructive trust. The court also accepted that a constructive trust may arise where property obtained by fraud remains identifiable and the recipient has the necessary knowledge.
4. Knowing receipt and dishonest assistance. The bank’s employee had actual knowledge sufficient to make retention of the dollars unconscionable. The bank was liable in knowing receipt for funds it received and in dishonest assistance for participating in the husband’s dishonest and fraudulent design. Dishonesty was assessed by reference both to the facts known and to whether the conduct involved consciousness of transgressing ordinary standards of honest behaviour.
5. Defences. The bank was not a bona fide purchaser for value on the findings. The claimant had not clothed her husband with actual or apparent authority to treat the transferred money as his own. The undue-influence claim was left undecided because the claimant succeeded on her other claims.
6. Order. The claimant was held entitled to GRD 2 billion as money paid under mistake and, in the alternative, US$6,506,604.20 by reason of dishonest assistance or knowing receipt. The precise declarations against the husband and interest were left for further argument.

The proceedings were commenced in the Commercial Court on 5 February 2001. The judgment is a first-instance decision; no earlier judgment or appeal decision is stated.