It is an increasingly common feature of litigation that a party seeks to recover misappropriated or lost money or assets.
Of course, mistakes can occur innocently where, in the age of electronic banking, money is simply paid to the wrong account. However, all too often money is diverted as a result of fraudulent activity. In many instances the fraudster cannot be found or no longer has any assets and, in such circumstances, a claimant will have to look elsewhere for a remedy, usually to the ultimate recipient. Banks and financial institutions can often find themselves caught in the middle as claimants seek to identify the recipient and freeze the relevant accounts.
Money and other assets may also be misappropriated as a result of corruption. In that case, or where there is a complex fraud, money may be transferred multiple times and across international boundaries in order to obfuscate its source. This adds another layer of complication to the remedies available.
Although intuitively, it would seem that the innocent party should automatically be entitled to the return of his money from the recipient, the legal mechanisms for such recovery are not always straightforward and can often throw up significant obstacles in practice.
There are two common legal avenues for recovery against the recipient of misappropriated funds: (i) knowing receipt or a similar ground based on a constructive trust analysis; or (ii) unjust enrichment, generally falling within the ambit of a claim for money had and received.
From a claimant’s perspective, the benefit of a constructive trust claim is that it gives rise to proprietary rights, provided that the claimant is able to trace the asset or its proceeds. However, neither cause of action provides certainty of recovery. An unjust enrichment claim is susceptible to defences such as change of position. Similarly, a defendant to a knowing receipt claim who can show he is a bona fide purchaser for value without notice will not be liable.
Relfo v Varsani
The recent Court of Appeal decision in Relfo v Varsani  EWCA Civ 360 concerned both tracing and unjust enrichment. Each is considered in more detail below but, more generally, the Court of Appeal’s approach arguably demonstrates a willingness on the part of the Court to assist an innocent party in recovering misappropriated funds.
The Relfo case concerned a claim by a liquidator seeking to recover approximately £500,000 which he claimed had been transferred from the insolvent company to the defendant, albeit indirectly. The allegation was that this had been instigated by a dishonest associate of the defendant who had owned the insolvent company and also separately managed the business affairs of the defendant’s family.
The money was transferred from the insolvent company and this was followed by a series of international transfers to various entities at various times of varying amounts in different currencies culminating in a transfer to the defendant. The liquidator argued that the money in the hands of the defendant could be claimed by it through tracing or unjust unrichment.
Tracing is neither a cause of action nor a remedy. It is merely a process by which a claimant will follow his assets, pursuant to an underlying cause of action, such as knowing receipt.
Tracing has been described as being ‘not a matter of court discretion but of property rights’ (Re Montagu’s Settlement Trust  Ch 287). More recently, Lord Millet in Foskett v McKeown  1 AC 102, stated:
‘We … speak of tracing one asset into another but that … is inaccurate. The original asset still exists in the hands of the new owner, or it may have become untraceable. The claimant claims the new asset because it was acquired in whole or in part with the original asset. What he traces, therefore, is not the physical asset itself but the value inherent in it … Tracing is thus neither a claim nor a remedy. It is merely the process by which a claimant demonstrates what has happened to his property, identifies its proceeds and the persons who have handled or received them, and justifies his claim that the proceeds can properly be regarded as representing his property.’
Complications arose in Relfo v Varsani because of the following potential obstacles to tracing the money:
- there was no clear line of payments from the company to the defendant, so that it was not possible to identify a coherent chain of payments
- the payments were not all in chronological order
- the sum transferred from the claimant company and the sum ultimately paid to the defendant did not match – Floyd LJ accounted for the difference in the end figure as being a ‘1.3 per cent money laundering charge and a $10 bank charge’.
However, the Court of Appeal held that evidential gaps and possible chronological anomalies did not prevent the liquidator from being able to trace the money in equity, or prevent the court from concluding that the money paid to the defendant was substituted proceeds.
There are a number of important points which can be drawn from the Court of Appeal’s decision:
- Notwithstanding that there might be evidential gaps, the court was entitled to draw an inference not only that the claimant’s monies had passed to the intermediaries’ accounts but that they were the source of the monies paid on to the defendant. It should be cautioned, however, that whether a court is able to draw such an inference in a particular case will always depend on the circumstances.
- It does not matter how many accounts the money passes through or that the transactions are not in chronological order. However, these factors may make it harder to substitute one asset for another. The fact that payments need not be in chronological order recognises that instances where the intermediary pays out money in the expectation that it will be reimbursed should not preclude a claimant’s ability to trace and therefore must be seen as a welcome development in actions against money launderers.
- Intention of itself is not enough to make the payment to the defendant substitute property for the claimant’s property. However, intention can be a relevant factor in the ‘basket of factors’ the court will take into account;
Ultimately, it seems that the court will look at the transaction as a whole to determine whether the monies paid to the defendant amount to substitute proceeds. However, the fact that the Court of Appeal has permitted courts to draw inferences in cases of money laundering and financial crime where there are evidential gaps suggests an approach keen to provide relief in appropriate cases.
To succeed in an unjust enrichment claim, a court will need to be satisfied as to:
- the enrichment of the defendant
- that such enrichment was at the expense of the claimant
- that the enrichment was unjust (i.e. that it falls within one of the recognised causes of action such as money had and received)
- that no defence is available to the defendant.
The Relfo decision concerned the second of these questions and specifically whether a claim can be brought against an indirect recipient. The general position is that a claim can only be brought against the direct recipient of a benefit, albeit various exceptions to this had previously been recognised. The Court of Appeal considered that the exceptions should be regarded as being a matter of general principle, rather than a set of separate and discrete exceptions.
However, no further clarification of the nature or extent of this general principle was provided.
It seems that, in essence, there must be a sufficient link between the transaction whereby the claimant conferred a benefit on the direct recipient and the transaction under which the defendant received the benefit so as to make the defendant’s enrichment unjust. Certainly in Relfo, the Court of Appeal was ultimately unanimous in the overall conclusion that the liquidator was entitled to a restitutionary remedy.
However, given that no general principle was articulated, it is fair to say that, in many instances, it may be difficult to determine whether an indirect beneficiary will be afforded a restitutionary remedy. The best that can be said is that it is likely that the court will look at the economic reality of the matter as a whole to determine whether the defendant has been unjustly enriched at the expense of the claimant.
The Court of Appeal’s decision in Relfo is of general interest as providing a practical illustration of tracing and unjust enrichment claims.
As regards tracing, the case is significant in highlighting that, even though there may be evidential gaps, a court may draw an inference that a claimant’s monies are the source of monies paid to the defendant. However, the greater the gaps or anomalies and the more accounts the money passes through, the harder it will be to trace.
As regards unjust enrichment, the decision provides an important example of a claimant succeeding against an indirect recipient notwithstanding that the Court of Appeal has left open the question of the full extent of any general principle underpinning indirect unjust enrichment claims. It remains to be seen whether and how any such principle is developed in future cases.
From a wider perspective, Relfo is one example of the increasing body of jurisprudence dealing with proprietary remedies in the recovery of assets linked to fraud and corruption. In United States v Abacha, Field J granted a freezing injunction in respect of assets that were linked to corruption. He stated that ‘corruption, like other types of fraud, is a global problem and it and its consequences are only going to be dealt with effectively if there is co-operation and assistance not only between the governments of states but also between the courts of different national jurisdictions.’ In FHR European Ventures LLP v Cedar Capital Partners LLC  UKSC 45, the Supreme Court held that a proprietary claim was available in respect of bribes or secret commissions. All of these cases, but Relfo in particular, demonstrate a vigorous approach from the courts in dealing with assets connected with fraud and corruption.