THE decision in Robb v National Crime Authority [2014] EWHC 4384 (Ch); [2015] Ch. 520 has an ironic aspect. Etherton C. upheld the claims of 71 buyers of off-the-plan properties to be developed in Turkish Northern Cyprus. Robb had defrauded them. They had paid sums to Robb, Robb's company, or Robb's agents. Robb later caused those sums to be transferred into his personal bank account with a London bank, intending to transfer the funds to a bank in Thailand. Since 71 of the investors had rescinded their investment contracts, the Chancellor held those investors entitled to trace their moneys into the London bank account. The irony is that the Chancellor's reasoning would itself unravel the modern doctrine of rescission for fraud.

The Chancellor's ruling on the claimants' entitlements was an episode in litigation between Robb and “enforcement agencies”. The Serious Organised Crime Agency (SOCA) had obtained a property freezing order over Robb's London bank account and then a declaration of a judge of the Queen's Bench Division – each on the ground that the money in the account was “recoverable property” obtained by Robb's unlawful conduct: Proceeds of Crime Act 2002, ss. 245A, 304. “Recoverable property” under that Act is effectively forfeited to the state. As the declaration was expressed not to prejudice any application by third parties, the claimants joined the proceedings to seek a declaration that some or all of the money in Robb's London bank account was not recoverable property. Put simply, they sought to show that the money was theirs. In the words of the legislation (s. 281(3)), each claimant – a “person” – needed to show “that – (a) the person was deprived of the property he claims, or of property which it represents, by unlawful conduct, (b) the property he was deprived of was not recoverable property immediately before he was deprived of it, and (c) the property he claims belongs to him”.

The money in Robb's London bank account was not literally theirs. But the legislation contemplated claims founded on common law and equitable tracing doctrines. To that end, the proceedings were transferred to the Chancery Division, where the National Crime Agency defended the litigation as the SOCA's statutory successor. Etherton C. held each claimant to have “a proprietary claim to part of the fund on ordinary principles of law and equity” and that the requirements of s. 281(3) were fulfilled.

It is appropriate to consider his Lordship's reasoning by the measure of ordinary principles. A tenet of the law of transactions is that, where a person's intention to become bound by a contract was relevantly impaired, that person may elect to rescind the transaction ab initio or instead affirm the contract and claim any other available relief. The impairment may derive from grounds of the common law (fraud or duress) or of equity (e.g. undue influence). Whatever the ground of impairment, the contract is valid but voidable until set aside or affirmed. As the impairment is of the party's consent to being contractually bound, the impairment must be present when the contract is formed. Thus, a contract will be voidable for fraud only if the innocent party has entered into it in reliance on the counterparty's fraud.

NCA v Robb would not have reached the authorised reports had these ordinary principles been applied. Robb defrauded his victims. But, since he first formed that intention after the investors' contracts had been formed, the investors' consent to be bound by contract was unimpaired. Surprisingly, however, Etherton C. held that this was “not, of itself, a bar to rescission”. Whatever may be the position where a party's consent to become bound is impaired on some other ground, “fraud is special”.

This was no ordinary application of principle. In Manifest Shipping Co. Ltd. v Uni-Polaris Co. Ltd. [2001] UKHL 1; [2003] 1 A.C. 469, the House of Lords held that a contract party's fraud following formation of a contract is relevant to breach, but is no ground for rescission, at [50]–[51], [61] (“[o]n ordinary contractual principles”), [109]–[110]. Regrettably, the case was not cited to Etherton C., who said that “[t]here is no binding authority” in point. The only source prayed in aid by Etherton C. was Lord Bingham of Cornhill's opinion that “fraud unravels all” is no mere slogan, since fraud vitiates judgments, contracts and all transactions whatever: HIH Casualty & General Insurance Ltd. v Chase Manhattan Bank [2003] UKHL 6; [2003] 1 All E.R. (Comm.) 39, at [15], quoting Denning L.J. in Lazarus Estates Ltd. v Beasley [1956] 1 Q.B. 702, 712–713 (CA). However, fraud does not always and absolutely unravel all. Judgments, contracts and all transactions infected with fraud are not void: they are voidable until set aside or affirmed: see for example Jonesco v Beard [1930] A.C. 298 (HL) (judgments); Sharland v Sharland [2015] UKSC 60; [2015] 3 W.L.R. 1070, at [29]–[42] (consent order obtained by fraud); see also SZFDE v Minister for Immigration and Citizenship [2007] HCA 35; (2007) 232 C.L.R. 189, at [15]–[22]. All that HIH Casualty decided was that a contractual stipulation was ineffective to exclude liability for fraud, whereas liability for, say, innocent misrepresentation may be so excluded subject to statute: see Misrepresentation Act 1967, s. 3; Unfair Contract Terms Act 1977, s. 11(1). The maxim that fraud unravels all gave no support to the Chancellor's reasoning in NCA v Robb. A substantial body of other authority is contrary to that reasoning: see for example Spence v Crawford [1939] 3 All E.R. 271, 286–288 (fraud); and see Adam v Newbigging (1888) 13 App. Cas. 308, 315, 319, 329, 331 (innocent misrepresentation).

In law, the claimants therefore had no entitlement to rescind. Subject to that sizeable caveat, what of Etherton C.'s analysis of the principles of rescission?

Though his Lordship's analysis followed the analyses of others (e.g. Bristol & West Building Society v Mothew [1998] Ch. 1, 22), it mischaracterises rescission to say that the claimants' entitlement to rescind in turn entitled them to trace in equity. The true position is the reverse. Rescission depends on being able to make restitutio in integrum. (Since fraud entitles a party to rescind at common law by self-help, rescission on equitable grounds may be left aside.) The common law has few means of achieving restitution. As a result, the right to rescind at law is easily lost. Any alteration in assets transferred under an impugned contract will bar rescission: see O'Sullivan, Elliott and Zakrzewski, The Law of Rescission, 2nd ed. (Oxford 2014), [18.83] (goods). On existing authority, the alteration of the claimants' moneys in NCA v Robb might have barred rescission at law. However, equity can more readily see the way to achieving restitution because equitable remedies are flexible and diverse. Where a defrauded person's attempt to rescind by self-help is ineffective at law, equity will recognise the purported rescission as valid if the parties can be returned substantially to their prior positions through the grant of equitable relief: Alati v Kruger (1955) 94 C.L.R. 216, 223–224.

Here lies the reason why it is misleading to speak of rescission as entitling a defrauded person to trace. Tracing presupposes that some identified asset “represents” some other asset on which the claimant initially had some claim. To “return” such an asset to an innocent party whose moneys were used to acquire it is to recognise that the asset in substance represents the innocent party's moneys: Re Mouat [1899] 1 Ch. 831, 834–835; Brady v Stapleton (1952) 88 C.L.R. 322, 332–333, 335. Had the claimants' intentions been vitiated by Robb's fraud in NCA v Robb, the point should not have been that rescission enabled them to trace their original money into money of the different form of funds mixed in Robb's London bank account. The point should have been that equity's willingness to see the moneys in Robb's London bank account as in substance representing the claimants' original moneys would have allowed the claimants to rescind. The theory that a “proprietary base” is necessary and sufficient to found an entitlement to trace (Birks, An Introduction to the Law of Restitution (Oxford 1985), 378, 381; Virgo, The Principles of the Law of Restitution, 2nd ed. (Oxford 2015), 567, 569–570) inverts the relationship between rescission and the doctrines of tracing in equity.

A court in Australia or Canada might conceivably have reached the result reached in NCA v Robb by granting a constructive trust as a remedy for fraud: O'Sullivan et al. [16.63]–[16.64]; and see Armstrong DLW GmbH v Winnington Networks Ltd. [2012] EWHC 10 (Ch); [2013] Ch. 156, at [273]–[276]. Even in those jurisdictions, it is unsettled to what extent such a discretion may be exercised notwithstanding the settled doctrines of rescission. For now, at least, such relief is said to be outside the powers of English courts. As a decision on rescission in English law as that law presently stands, it is submitted that National Crime Authority v Robb was decided per incuriam and ought not to be followed.