IN Relfo Ltd. (in liquidation) v Varsani [2014] EWCA Civ 360, the defendant (Bhimji Varsani) had received US$878,469.35 which allegedly represented £500,000 of Relfo's funds that its director (Gorecia) had improperly caused to be paid away, without authority and in breach of his duties as director. Relfo's liquidator subsequently sued the defendant to recover what it had lost. Though Relfo's proprietary claim failed, the Court of Appeal held, affirming Sales J.'s judgment, that Relfo had a personal claim for the sums received by the defendant on two bases: (1) a cause of action for knowing receipt; and (2) a cause of action in unjust enrichment. In so holding, the Court faced several questions of substantial wider significance.
The major controversy regarding Relfo's knowing receipt claim concerned whether the $878,469.35 credited to the defendant's Singapore bank account represented the traceable proceeds of the £500,000 misappropriated from Relfo. The key obstacle was evidential. Relfo's liquidator could show that, on 5 May 2004, Gorecia had improperly caused a transfer of £500,000 from Relfo's London account to the Latvian account of a second company, Mirren (the “Relfo-Mirren payment”), and that, on the same day, a corresponding US$ amount (less 1.3%) was transferred from the Lithuanian account of a third company, Intertrade, to the defendant's Singapore account (the “Intertrade payment”). However, Relfo's liquidator had no evidence of specific intermediate transactions, to demonstrate how the Relfo–Mirren payment was translated into the Intertrade payment.
Could that large evidential gap be bridged by inference? Significantly, the Court of Appeal held that it could, in principle and on the facts. Courts could infer transactional connections, even where direct evidence is absent (see El Ajou v Dollar Land Holdings plc [1993] 3 All E.R. 717 (Millett J.)). Relfo was an extreme case – it was necessary to infer a whole series of intermediate transactions of which there was no evidence. Nevertheless, the Court considered that the surrounding circumstances offered ample material from which Sales J. could properly infer that Gorecia had procured the payment to the defendant, ultimately from Relfo's funds, by roundabout means. Inter alia: (1) the payments were similar in amount and timing; (2) Gorecia's explanations for the transactions had been inconsistent and unreliable; (3) Gorecia's true, unconfessed motive was probably to use Relfo's available funds, which would otherwise be lost in satisfying Relfo's substantial tax liabilities to HMRC, to make a substantial payment to the defendant's wider family (with whom Gorecia had valuable, long-standing business relationships) to make amends for investment losses for which Gorecia bore responsibility; (4) Gorecia also had the means, via shady Ukrainian business contacts, expert in money laundering, to arrange for the payment to occur via a circuitous, disguised route.
This conclusion, that the Intertrade payment represented the traceable proceeds of Relfo's funds, also raised a problem of chronology. The Intertrade payment was made before the sums credited to Mirren's account, from Relfo, were paid from that account. The Court of Appeal did not think this precluded a tracing connection. Without taking any general position on the possibility of “backwards tracing”, the Court effectively assumed that, if B pays C, before B is paid by A, a qualifying tracing connection can exist between the two payments (B–C, A–B), at least if (1) B paid C pursuant to a prior arrangement with A, under which A would reimburse B from the misappropriated funds, and (2) A subsequently used those funds to reimburse B in this way (cf. Agip (Africa) Ltd. v Jackson [1990] Ch. 265 (Millett J.), [1991] Ch. 547 (CA)). On the facts, it was a legitimate inference that the Intertrade payment, and the unidentified intermediate transactions, had been made on the basis of arrangements that Mirren would ultimately provide reimbursement from Relfo's moneys.
Relfo's unjust enrichment claim raised questions of even greater doctrinal significance. On appeal, attention focused on one necessary component: whether the defendant had been enriched “at the claimant's [Relfo's] expense”. This element has received almost no explicit judicial discussion until remarkably recently, and its correct interpretation remains controversial. Some scholars advocate a restrictive starting point, which confines restitutionary claims to cases where C has “directly” enriched D, subject to limited exceptions (e.g. Burrows, A Restatement of the English Law of Unjust Enrichment, Part 2; Virgo, The Principles of the Law of Restitution, 2nd ed.). Others prefer the alternative, broader starting point that a counterfactual “but for” connection between D's enrichment and C's loss prima facie suffices, subject to cutting back by defences/bars/other qualifications (e.g. Goff and Jones – The Law of Unjust Enrichment, 8th ed., ch. 6; Watterson [2011] C.L.P. 435).
On any analysis, Relfo's funds were not directly transferred to the defendant: his enrichment was conferred indirectly, via third parties and a series of intervening transactions. This should have been unproblematic given the findings, underlying the successful knowing receipt claim, that the Intertrade payment represented the traceable proceeds of Relfo's misdirected funds: even proponents of the restrictive approach typically accept that a sufficient connection exists if D receives an asset (or the traceable proceeds thereof) to which C can assert title. The Court of Appeal nevertheless proceeded to consider whether a sufficient connection could exist for an unjust enrichment claim against a remoter party, even if (contrary to the Court's actual findings) tracing was not possible.
The Court of Appeal's discussion was ultimately inconclusive on the general point of principle. They acknowledged recent academic discussion surrounding the “at the claimant's expense” requirement, and found difficulty with either extreme, that “direct enrichment” is always required or, conversely, that a counterfactual “but for” connection is always sufficient. Arden L.J. tantalisingly suggested that recent cases, which emphasise “substance” over “form”, and the “economic reality”, when allowing unjust enrichment claims against indirect recipients, may be moving towards recognising a wider general principle (e.g. Menelaou v Bank of Cyprus plc [2013] EWCA Civ 1960, [2014] 1 W.L.R. 854). However, all judges ultimately reserved their opinions on how the lines should generally be drawn, perhaps conscious that this issue will soon be addressed by the Supreme Court in the Menelaou appeal. In any event, they all viewed Relfo as an easy case. Gorecia had intended to bring about the payment to the defendant, albeit via a disguised and circuitous route, arranged by third parties. As a matter of “substance” or “economic reality”, this was equivalent to a “direct payment” to the defendant.
There is one other, fundamental question, hidden in the unjust enrichment pleadings in Relfo that requires attention. On appeal, no doubt was cast on Sales J.'s assumption that a company, whose assets are misdirected by directors without authority and in breach of fiduciary duty, might have a common law personal claim in unjust enrichment against a third party recipient, which involves (1) a strict restitutionary liability and (2) is different from, but might co-exist with, equity's fault-based liability for “knowing receipt” ([2012] EWHC 2168 (Ch), at para. [89]). Sales J.'s analysis is highly significant at a doctrinal level because of what it suggests about the basis of the unjust enrichment claim.
Why might a third party recipient of misdirected moneys or other assets be strictly liable at common law to make restitution of their value? Scholarship divides sharply into two main bodies of opinion. Some hold (A) that this is an unjust enrichment claim, based on a ground for restitution that is sometimes labelled “ignorance” (cf. Birks, An Introduction to the Law of Restitution; Burrows, The Law of Restitution, 3rd ed.), but would be better articulated in terms of either the claimant's “lack of consent” or the defendant's “want of authority” (Goff and Jones, ch. 8; cf. Burrows, A Restatement, s. 17). Others, in contrast, insist (B) that it is not an unjust enrichment claim, but rather a claim that “vindicates” the claimant's continuing property rights in the misdirected assets (or traceable proceeds) (see especially Virgo, Principles).
Sales J. unequivocally adopted position (A). In argument, Relfo's counsel quoted passages from Goff and Jones, ch. 8, where the “want of authority” unjust factor is elaborated (at para. [86]). Sales J. expressly agreed with those submissions and, echoing the discussion in Goff and Jones, explained that “Relfo had its funds diverted by Mr Gorecia in breach of his fiduciary duty as a director of Relfo and acting outside the scope of his authority … [T]hat establishes a proper ground for an in personam claim by Relfo under the law of unjust enrichment against [Varsani] for repayment of a sum equivalent to the extent of his enrichment” (at para. [88]).
Neither this decision, nor its implicit endorsement on appeal, can be plausibly recast as favoured by position (B)'s advocates. Relfo's unjust enrichment claim against the defendant could not plausibly be represented as a claim “vindicating” Relfo's continuing proprietary rights in its misdirected funds or their traceable proceeds: Sales J. was specifically exploring the unjust enrichment claim on the basis that Relfo might not be able to satisfy the law's tracing rules. The corollary is that tracing has only contingent relevance for the availability of this common law unjust enrichment claim. The ground for restitution is found in the unauthorised disposal of the company's assets. Tracing is only one way – important, but not invariably necessary – of establishing that a remoter beneficiary of the misdirected funds was enriched “at the claimant's expense”.
