City Index Ltd & Ors v Gawler & Ors

A personal claim in knowing receipt which seeks to make good the claimant’s loss may fall within the Civil Liability (Contribution) Act 1978. It is a claim for compensation in respect of damage, despite its equitable or restitutionary character.

When fixing contribution, the court has a broad discretion to make a just and equitable allocation by reference to responsibility for the damage. A knowing recipient who has retained the property must return it, and retained profits should meet the loss before apportionment. If the recipient has paid the property away, however, there is no rule or presumption that the recipient must bear the whole loss. Responsibility depends on all the circumstances and ordinarily requires determination at trial.

A company group was defrauded when an employee transferred more than £9 million to a spread-betting business. The group alleged that the business received the money with knowledge of the employee’s breach of fiduciary duty and that its retention or use was unconscionable. The claim was settled for £5.5 million.

The business sought contribution under the Civil Liability (Contribution) Act 1978 from directors and an auditor whose alleged negligence had allowed the transfers to continue undetected. The Chancellor struck out that claim. He held that knowing receipt was within the Act, but that the recipient could not realistically obtain contribution because it should bear the entire loss.

The appeal concerned whether a loss-based claim in knowing receipt was within the Act and whether a knowing recipient which had paid the money away was necessarily responsible for 100% of the loss.

1. The appeal was allowed in part. The court upheld the conclusion that the pleaded claim in knowing receipt fell within the Civil Liability (Contribution) Act 1978. It set aside the summary judgment because the recipient was not necessarily responsible for the whole loss.

2. Per Carnwath LJ, with whom Mummery LJ agreed, knowing receipt requires receipt of assets transferred in breach of fiduciary duty and knowledge making retention or disposal for the recipient’s purposes unconscionable. On the assumed facts, the recipient’s liability was to make good the claimant’s loss. In ordinary language that was liability to compensate in respect of damage. Friends Provident Life Office v Hillier, Parker, May & Rowden [1997] QB 85 remained binding on that point. The observations in Royal Brompton NHS Trust v Hammond [2002] 1 WLR 1397 did not displace it because they addressed the statutory expression “the same damage”, rather than knowing receipt directly.

3. Arden LJ reached the same conclusion by distinguishing a claim to make good loss from a claim to account for profits. The former was a claim for compensation in respect of damage and was within the Act. The case did not require a decision about innocent receipt or an account of profits.

4. Where the knowing recipient retains the misapplied money or an identifiable benefit, it must return it. Retained profits should likewise be used to meet the loss before contribution is apportioned. This follows as a matter of obvious equity.

5. Where the recipient has paid the money away, there is no general rule of “deemed retention” and no automatic presumption that its form of liability attracts a greater share. Niru Battery Manufacturing Co v Milestone Trading Ltd (No 2) [2004] 2 Lloyd’s Rep 319 did not establish a binding rule that a recipient acting without good faith must always bear 100% of the loss. Its conclusion was fact-specific.

6. Section 2 gives the court a broad discretion to order the contribution that is just and equitable having regard to responsibility for the damage. The respective conduct of the recipient, directors and auditor required assessment at trial. It was not fanciful that the discretion might be exercised in the recipient’s favour. The summary judgment was therefore set aside.

1. Court of Appeal (Civil Division): Upheld the ruling that the loss-based knowing-receipt claim was within the Civil Liability (Contribution) Act 1978. Allowed the appeal on apportionment and set aside the summary judgment.

2. Chancery Division: Sir Andrew Morritt, the Chancellor, held that knowing receipt was within the Act but struck out the contribution claim because there was no reasonable prospect of any contribution being ordered.