The appellant firm of solicitors (B) appealed a decision that it had breached its fiduciary duty as a trustee.

The respondents (C) had invested in a property investment scheme operated by a single purpose company (X). The offering documents consisted largely of two emails from X. C paid the investment monies into B's client account. B acted for X. B used most of the money to reduce X's short-term bank borrowing. The scheme was unsuccessful and X was placed in administration. C sought recovery of their money from B. C claimed breach of an escrow agreement, alternatively, that B had received the monies on trust for C and had advanced them in breach of that trust. C also claimed in restitution.

At first instance, the judge rejected C’s claim in respect of the escrow agreement, but held that there had been an implied resulting trust analogous to a Quistclose trust, and a resulting trust arising from the fact that B had received the monies without authority from X. The judge indicated that he would also probably have upheld C's restitutionary claim.

The judge emphasised the importance of identifying the basic principles applicable to the creation of Quistclose-type trusts, rather than treating the unusual facts as justification for engaging in some kind of equitable free-for-all.  In this instance the judge used the phrase “Quistclose trusts also to accommodate other trusts which share the same essential characteristics”.The term Quistclose-type trust originated from the decision of the House of Lords in Barclays Bank v Quistclose Investments Limited [1970] AC 567.  The case helped to identify the primary purpose of the trust but left uncertain the ownership of the beneficial interest in the money during the period between its transfer and the failure of the primary purpose.

Before the Court of Appeal the issues were whether (1) C had advanced the money on trust pending the satisfaction of ill-defined conditions, or had made immediate loans to X by paying the money to B as X's agents; (2) B had X's authority to receive and disburse C's money and, if not, whether the money was therefore held by B on a resulting trust for C; (3) C had a restitutionary claim against B in respect of unjust enrichment.

Court of Appeal held that:

  1. The issue regarding C's objective intention had to be addressed by reference to the offering documents. As those documents constituted the whole of the invitation material to which C had responded, they lay at the heart of the analysis of what, if any, restrictions C had sought to place on the use that could be made of their money. The offering documents invited interested investors to make immediate payments to B's client account by way of loan to X, in return for promised loan notes in which X acknowledged its immediate obligations as borrower. The clear implication was that B was being identified as X's agent for the receipt of loan monies, and X as B's client for that purpose. The identification of B's client account was an arrangement to pay a commercial counter-party, through a solicitor agent B. The risk taken by investors responding to X's invitation was that the scheme might be seriously undersubscribed and then dissolved without them obtaining control through an equity share. On the judge's findings of fact, C made their payments to B as immediate loans to X. Subject to the agency issue, B received those payments into its client account as trustee for X, and had not breached any obligation owed to C when it disbursed them for X's benefit.
  2. As to whether there was a resulting trust due to lack of authority, C had to be taken as having intended that the money should belong to X from the moment it reached B's client account, as it would if C had paid X direct. B were X's solicitors at the time the payments were made and C's payments had been disbursed for X's benefit before any repayment request was made by C. At first instance, the resulting trust argument adopted by the judge, based on the payments having been made to B's client account, was wrong.
  3. There were two insuperable obstacles to the restitutionary claim. First, from receipt B held C's monies on client account trust for X. B was therefore not enriched by the receipts. Second, B would have had a change of position defence if a restitutionary claim had otherwise been available.

Appeal was allowed. There was force in the judge's criticism of B, namely that C's monies had been disbursed without checking the precise terms on which they had been solicited. However, as more diligent enquiry would only have confirmed the understanding that the monies constituted loans, any lack of diligence could not be treated as commercially unacceptable conduct.