Niru Battery Manufacturing Company & Anor v Milestone Trading Ltd & Ors [2003] EWCA Civ 1446

“For a seller which had presented a false bill of lading and had failed to despatch any goods at all, this was indeed a brazen attempt to throw its buyer off balance in order to extricate itself from a difficult situation.”

“… it should now be regarded as settled that if someone possessed of a special skill undertakes, quite irrespective of contract, to apply that skill for the assistance of another person who relies upon such skill, a duty of care will arise. … Furthermore, if in a sphere in which a person is so placed that others could reasonably rely upon his judgment or his skill or upon his ability to make careful inquiry, a person takes it upon himself to give information or advice to, or allows his information or advice to be passed on to, another person who, as he knows or should know, will place reliance upon it, then a duty of care will arise.”

“The touchstone of liability is not the state of mind of the defendant. An objective test means that the primary focus must be on things said and done by the defendant or on his behalf. Obviously the impact of what a defendant says or does must be judged in the light of the relevant contextual scene. Subject to this qualification the primary focus must be on exchanges (in which term I include statements and conduct) which cross the line between the defendant and the plaintiff.”

“The inspection company shall be free in selection of the required inspection procedure(s) and the place of commencement and completion of inspection (in terms of quantity and quality control operations and packaging by taking into account the type of goods.) However, inspection shall be completed by supervision on loading of goods and/or delivery thereof to the forwarder (for air freight and transport by railways). The inspection certificates should clearly state that the inspected goods are exactly the same goods which are loaded on board the carrier for shipment and they fully confirm (sic) to the seller’s proforma invoice, the terms of the relevant L/C and any amendment made to the L/C. The date of issuance of the inspection certificate must be after or concurrent with the date of the bill of lading. Such confirmation must be specified in the terms of the L/C or sight draft (collectible bill of exchange).”

“The original inspection certificate issued not prior to B/L date by (the name of the Company) … certifying that the quality, quantity and packing of the goods loaded are strictly complying with specifications of the goods indicated in the relative proforma invoice and the terms of the L/C and any amendments made thereto as presented to us by the buyer. …”

“As already mentioned, Bank Markazi requires mandatory inspection for all purchased goods imported into Iran whose value is more than USD 20,000. – • quality • quantity • packing • loading”

“Loading Circular no 60/1196 of January 21st 1996 of Bank Markazi states “… inspection shall be completed by supervision of loading of goods and/or delivery thereof to the forwarder (for air freight and transport by railways)”

“In accordance with the Iranian Regulations on submitting Inspection Certificate for Imported Goods the issuance of Inspection Certificate means the goods shipped on board the export carrier are identified by the inspectors as goods for destination of Iran require supervision of loading in addition to any other expressed or implied instructions. Please remember at all times that, when it comes to inspection of goods for Iran, the primary responsibility of the inspection body is towards the Iranian Government.”

“SUPERVISION OF LOADING IS AN OBLIGATION FOR IRAN BECAUSE YOU HAVE TO CERTIFY THE CONFORMITY OF LOADED GOODS. SO, WHENEVER – DUE TO ANY REASON YOU ARE NOT ABLE TO DO THAT, GET A LETTER OF INDEMNITY FROM SELLERS INDICATING THAT THE GOODS INSPECTED ARE REALLY THE ONES THAT ARE SHIPPED.”

“Inspection companies such as SGS are instructed in connection with documentary sales precisely because they are understood to have the necessary facilities and expertise to enable them to determine whether the seller has performed his contract in the relevant respect and are trusted to exercise independent judgment. Although an inspection company may receive its instructions from the seller, it will be aware that its certificate is likely to be required for presentation to the buyer or a bank as part of the documentation against which payment is made. It is aware, therefore, that the buyer, or a bank, which ultimately has recourse to a buyer, will rely on the existence and accuracy of its certificate in paying the price for the goods. The buyer is the person whom the inspection company should have in contemplation as the person most likely to be affected by any error in the certificate. This is a classic example of the situation envisaged by Lord Morris in Hedley Byrne v Heller in which a person known to have particular expertise is instructed to produce a report which he knows will be passed on to another who can be expected to rely on it. In my judgment, it is inherent in the nature of the task undertaken by the inspection company that it assumes responsibility to the buyer for what is stated in the certificate. That, after all, is the whole purpose of its employment.”

“There is nothing to suggest that Niru objected to the request to substitute ‘inspected’ for ‘loaded’, however, and I think that there can be little doubt that if Bank Sepah had been willing to make that amendment, Niru would have been content for the clause (and thus the certificate) to be modified in that way. In the event that departure from the established form was rejected by the Central Bank of Iran whose approval to the amendment had been sought by Bank Sepah.”

“In the event, therefore, the letter of credit, a copy of which was provided to SGS, simply called for the presentation of an inspection certificate issued by SGS not prior to bill of lading date certifying that the quality, quantity and packing of the goods conformed to the contract. Since the goods were being exported to Iran all concerned were aware that the inspection certificate would have to comply with the requirements of the Central Bank circular by referring to “the quality, quantity and packing of the goods loaded”

“SGS understood well enough that the Iranian authorities insisted on their particular form of certification because they wanted confirmation that the goods delivered were the goods the surveyor had inspected, but in the present case no one at SGS seems to have stopped to think how that requirement could be met. If the letter of credit had called for an ocean bill of lading, I do not think that anyone at SGS would have doubted that it was necessary for an inspector to be present at the port to watch the goods being put on board. Indeed, that was what was originally contemplated in this case. The mere fact that a bill of lading had been issued by the ship would not have been regarded as sufficient. I find it difficult to understand, therefore, why in this case the fact that Maritime had issued a bill of lading should have been considered a sufficient basis for SGS to issue a certificate referring to goods “loaded”

“The tort of deceit involves a false representation made by the defendant, who knows it to be untrue, or who has no belief in its truth, or who is reckless as to its truth. If the defendant intended that the plaintiff should act in reliance on such representation and the plaintiff in fact does so, the defendant will be liable in deceit for the damage caused.”

“The claimants say that in presenting the documents to Bank Sepah under the letter of credit CAI represented that the bill of lading was genuine, although it knew that it was in fact false, and did so with the intention that Bank Sepah should accept it as genuine and make payment accordingly.”

“Thus, for example, in cases in which the court was asked to reverse a judge’s findings of fact which depended upon his view of the credibility of the witnesses, it would only do so if satisfied that the judge was plainly wrong. This can be seen from many cases, as for example The Ikarian Reefer [1995] Lloyd's Rep 455, where the court reversed the decision of the trial judge that the plaintiff insured shipowners had not deliberately scuttled their vessel or cast her away. Giving the judgment of the court, Stuart-Smith LJ addressed the correct approach as follows (at pp 458-9): “(1) The burden of showing that the trial Judge was wrong lies on the appellant. … (2) When questions of the credibility of witnesses who have given oral evidence arise the appellant must establish that the trial Judge was plainly wrong. Once again there is a long line of authority emphasizing the restricted nature of the Court of Appeal’s power to interfere with a Judge’s decision in these circumstances though in describing that power different expressions have been used. In SSHontestroom v SSSagaporak … [1927] AC 37 at p 47 Lord Sumner said: “None the less not to have seen the witnesses puts appellate Judges in a permanent position of disadvantage as against the trial Judge and unless it can be shown that he has failed to use or has palpably misused his advantage, the higher Court ought not to take the responsibility of reversing conclusions so arrived at merely on the results of their own comparisons and criticisms of the witnesses and of their own view of the probabilities of the case.” …. Finally in Mersey Docks and Harbour Board v Proctor [1923] AC 253 at p 258, Viscount Cave LC said: “In such a case … it is the duty of the Court of Appeal to make up its own mind not disregarding the judgment appealed from and giving special weight to that judgment in cases where the credibility of witnesses comes into question, but with full liability to draw its own inferences from the facts proved or admitted and to decide accordingly.” (3) When a party has been acquitted of fraud the decision in his favour should not be displaced except on the clearest grounds. This proposition is not in contest and is supported by the House of Lords in Akerhielm v De Mare [1959] AC 789 at p 806, where the earlier authority of Glasier v Rolb (1889) 42 Ch D 436 is cited.” “(1) The burden of showing that the trial Judge was wrong lies on the appellant. … (2) When questions of the credibility of witnesses who have given oral evidence arise the appellant must establish that the trial Judge was plainly wrong. Once again there is a long line of authority emphasizing the restricted nature of the Court of Appeal’s power to interfere with a Judge’s decision in these circumstances though in describing that power different expressions have been used. In SSHontestroom v SSSagaporak … [1927] AC 37 at p 47 Lord Sumner said: “None the less not to have seen the witnesses puts appellate Judges in a permanent position of disadvantage as against the trial Judge and unless it can be shown that he has failed to use or has palpably misused his advantage, the higher Court ought not to take the responsibility of reversing conclusions so arrived at merely on the results of their own comparisons and criticisms of the witnesses and of their own view of the probabilities of the case.” …. Finally in Mersey Docks and Harbour Board v Proctor [1923] AC 253 at p 258, Viscount Cave LC said: “In such a case … it is the duty of the Court of Appeal to make up its own mind not disregarding the judgment appealed from and giving special weight to that judgment in cases where the credibility of witnesses comes into question, but with full liability to draw its own inferences from the facts proved or admitted and to decide accordingly.” (3) When a party has been acquitted of fraud the decision in his favour should not be displaced except on the clearest grounds. This proposition is not in contest and is supported by the House of Lords in Akerhielm v De Mare [1959] AC 789 at p 806, where the earlier authority of Glasier v Rolb (1889) 42 Ch D 436 is cited.”

“It is implicit in the statement of Lord Macmillan in Powell v Streatham Nursing Home at p 256 that the probabilities and possibilities of the case may be such as to impel an appellate court to depart from the opinion of the trial Judge formed upon his assessment of witnesses whom he has seen and heard in the witness box. Speaking from my own experience, I have found it essential in cases of fraud, when considering the credibility of witnesses always to test their veracity by reference to the documents in the case, and also to pay particular regard to their motives and the overall probabilities. It is frequently very difficult to tell whether a witness is telling the truth or not and where there is a conflict of evidence such as there was in the present case, reference to the objective facts and documents, to the witness’ motives, and to the overall probabilities, can be of very great assistance to a judge in ascertaining the truth.”

“The need for appellate caution in reversing the judge’s evaluation of the facts is based upon much more solid grounds than professional courtesy. It is because specific findings of fact, even by the most meticulous judge, are inherently an incomplete statement of the impression which was made upon him by the primary evidence. His expressed findings are always surrounded by a penumbra of imprecision as to emphasis, relative weight, minor qualification and nuance (as Renan said, la vérité est dans une nuance), of which time and language do not permit exact expression, but which may play an important part in the judge's overall evaluation.”

“Mr Francis said that he was told some time later that an amendment had been made to the letter of credit, but that he did not go into details and paid little or no attention to its precise nature. He said he gave no thought to what the letter of credit required in terms of documents to be presented under it.”

“We had quite a lengthy relationship with him over the years and he had always complied with his obligations, so I didn’t feel the need to double check on him.”

“In fact the use of such letters of credit (often calling for no more than some form of notification that the goods are in the warehouse or that the seller intends to ship but requiring no negotiable transport document) are commonplace in the metals industry. Indeed, it is now more common in the metals industry to have this type of prepayment arrangement than to negotiate shipping documents because the delays in producing transport documents in the right place at the right time can often make a transaction unworkable. Instead, buyers frequently accept FCRs, beneficiary’s certificates, guarantees (whether or not backed by a bank), commitments to ship and other forms of comfort letters and inspection certificates which assure the buyer that goods have been identified even if they are some way off being shipped.”

“No, because originally the LC did call for a transport document. I knew that and I said that the LC – the transaction couldn’t proceed on that basis. The customer arranged for amendments to be made to that LC. Now in retrospect you can say: “Yes, why did you not ask what amendments they were and list them and get comfort with that?”

“Well the customer told me – and this was a customer I’d had for 7-8 years, we’d lent hundreds of millions of dollars, probably made millions of dollars in revenue, it was a big customer of the bank, so – always made good its debts, so I’d no reason not to believe them, certainly.”

“1.0 We refer to above documentary credit … and enclose following documents as called for under the credit: 1.0 Full Set 3/3 Original FIATA Multimodal Transport Bills of Lading and 4 Non Negotiable Copies … 2.0 We request you to check enclosed documents against the credit and advise us of any discrepancies.”

“111. I begin by setting out the circumstances in which the disposal of the funds occurred. CAI disposed of the warrants in consultation with Mr Mahdavi early in December 1998. Once that had been done any prospect of completing the transaction (as CAI understood it) disappeared because Milestone was no longer in a position to give delivery of the goods. The documents had been presented to Bank Sepah in trust for CAI and in theory could have been recalled. Indeed, both Mr Francis and Mr Michallet recognised that CAI should have taken steps to recall them. Had it done so, I have no doubt that the arrangements being made to enable Bank Sepah to make payment under the letter of credit would immediately have come to a halt, whether the documents had actually been returned or not. Apart from anything else, it would have become clear to Bank Sepah and Niru that no goods had been delivered to a carrier and that Milestone was no longer able to perform the contract. However, Mr Francis did not take steps to recall the documents, nor did he tell the back office to stop pressing for payment. That was not because he intended to obtain payment from Bank Sepah for goods which he knew could not be delivered, but simply because at that stage he did not give any thought to what Bank Sepah was doing and failed to make sufficient allowance for the fact that payment might still be made. 112. On 21st December CAI learned from Bank Sepah that the funds would be remitted the next day. CAI must have informed Mr Mahdavi immediately because on the same day he and Mr Ramanuj gave instructions by fax on behalf of Milestone for the funds to be credited to the account of Nikam. Mr Francis said that he was surprised when he learned that funds would be received from Bank Sepah. His immediate reaction was that the money ought to be returned because the transaction had come to an end. He thought that payment had simply resulted from the inefficiency of the Iranian banking system. 113. At that point Mr Francis decided to speak to Mr Mahdavi. He told Mr Mahdavi that in his view the money should be returned to Bank Sepah, but Mr Mahdavi became emotional and threatened legal action against CAI if it did not comply with his instructions. He told Mr Francis that he was in discussions with Niru for the shipment of a new consignment of lead and that the only matter still to be agreed was the precise quantity to be delivered. He did not want the money to be returned to Bank Sepah because that would imperil the whole business. Mr Francis thought that what Mr Mahdavi had told him was plausible but there were conflicting considerations at play: should he comply with the customer’s instructions, or should he return the funds to Bank Sepah? He was in something of a quandary, so he went to see the head of CAI’s Legal department, Miss Garner, for advice. 114. Unfortunately neither Mr Francis nor Miss Garner made any note of their conversation, but both said it was brief and I infer from their evidence that it was quite informal. According to Mr Francis, he told Miss Garner that funds had been received in respect of a transaction which he understood to have been abandoned and asked whether, in the light of what Mr Mahdavi had told him, he should follow his instructions. She told him that provided he was comfortable with the explanation given by Mr Mahdavi and if the instructions were for the funds to be transferred to a metal broker, he should do so. 115. Miss Garner’s evidence was to essentially the same effect. She recalled the conversation as having been brief and very informal. Mr Francis had told her that he had suggested to Mr Mahdavi that the funds should be returned to Bank Sepah since the transaction would not go through, but that Mr Mahdavi had insisted that negotiations were going on with a view to completing the transaction on a revised basis. Mr Francis had wanted to know whether he should follow Mr Mahdavi’s instructions and she had told him he should if he was satisfied with what he had been told. 116. Mr Mahdavi himself said he had no recollection of a conversation of the kind described by Mr Francis, but he did not dispute the account he had given, except for the suggestion that he had threatened to sue the bank. 117. I accept as reliable Mr Francis’s account of his conversation with Mr Mahdavi. 118. In the light of all the evidence I am satisfied that Mr Francis did not give Miss Garner a full account of the circumstances which had led up to the receipt of the money or of the reasons why he thought it ought to be returned to Bank Sepah. Although he did give her to understand that he was concerned that Milestone might not have access to sufficient lead to satisfy its contract with Niru, he failed to make it clear that he understood the payment to have been made under a letter of credit in respect of specific parcels of lead that had since been disposed of by the bank, thereby making it impossible for that transaction to be completed. That had played a large part in causing him to think that the money should be returned, but he does not appear to have articulated the reasons for his concern very clearly. If he had, it would have been an easy matter for Miss Garner to check the file and I think she would probably have done so. 119. Mr Mahdavi had been a customer of CAI for a long time and had shown himself to be a successful trader who was adept at putting deals together. Mr Francis accepted his account of negotiations with Niru and decided that he should follow his instructions with regard to the disposal of the funds. He therefore gave instructions for the funds to be put at the disposal of Nikam from whose account they were shortly afterwards paid away on Mr Mahdavi’s instructions. 120. Two aspects of these events strike me as particularly significant. First, I think it is clear, both from Mr Francis’s recognition that the documents should have been withdrawn when the warrants were sold and from his concern on 22nd December that payment had been made in respect of a transaction that could no longer be completed, that he realised that Bank Sepah had paid on a false basis. He did not, of course, analyse the situation in legal terms, but he was aware that CAI should not have received the funds because by that time the contract had irretrievably broken down. Secondly, the grounds put forward by Mr Mahdavi for retaining the money were not that the original contract was still capable of being performed, but that he was in negotiations with Niru and had almost reached the point of agreeing terms for a new contract. The fact that Mr Mahdavi said that he did not want the money to be returned to Bank Sepah in case that put an end to the whole business simply emphasised the fact that the negotiations were still at a delicate stage. In fact, unbeknown to Mr Francis, no such negotiations were going on at that time. It was not until January 1999 that Milestone opened the bidding with its faxes to Niru of 4th January putting forward its claim for damages and offering to ship part of the goods pending the satisfactory settlement of its claims. 121. An important feature of the present case is the fact that the payment which CAI relies on as constituting a change of position was made after it had been recognised that Bank Sepah had probably been labouring under a mistake and had a strong claim to recover the payment it had earlier made. CAI did not, in Lord Goff’s words in Lipkin Gorman v Karpnale, have “knowledge of the facts entitling the plaintiff to restitution” since Mr. Francis did not know that the documents against which the payment had been made included a false bill of lading, but it did have knowledge of other facts, namely the sale of the lead, which, on its own understanding of the position, made it impossible for the transaction to be completed and which, if known to Bank Sepah would have led it to withhold payment. A moment’s reflection would have led Mr. Francis to realise that the reason given by Mr. Mahdavi for wishing to retain the payment did not justify the course he was asking the bank to take. He did not suggest that the transaction pursuant to which the payment had been made had not broken down or that Bank Sepah or Niru were aware that the lead had been sold. He did not say that he had managed to reach agreement with Niru, or even that Niru had agreed that Milestone should retain the payment pending agreement. He simply said that he was in the throes of negotiating a substitute transaction with Niru and that the repayment of the funds on the grounds that the lead had been sold would prejudice those negotiations. Thus, on the facts as Mr. Francis understood them, nothing said by Mr. Mahdavi actually undermined Bank Sepah’s right to repayment of the money.”

“It was that element of conscious wrongdoing that I found lacking in the present case. Although I was critical of the way Mr Francis dealt with the matter, I did not find that he was dishonest precisely because, having seen him in the witness box, I was not satisfied that he had consciously transgressed the standards to be expected of an ordinary honest banker. I see no ground for departing from that conclusion now.”

“103. The letter from Milestone to CAI enclosing the documents set out a list of the documents enclosed, the first of which was a full set of original FIATA multimodal transport bills of lading. Mr Francis accepted that he ought to have seen a letter of this kind addressed to him and that if he had done so he would have had to read part of it in order to decide what action was required. He could not remember seeing this letter at the time, however, and was adamant that if he had done so, he had not appreciated the significance of the reference to the bill of lading. For him this was a documentary matter to be passed to the back office without further ado. 104. It is appropriate at this stage to say something about Mr Francis and the way he gave his evidence. It is fair to say that although he was facing serious criticism for the way in which he handled this transaction, he gave his evidence in an unusually straightforward and open manner. He did not seek to evade the difficult question or bluster when under pressure, nor did he attempt to deflect an unwelcome line of questioning even when it was likely to place him in a difficult position. For example, he unhesitatingly accepted that the letter of credit provided Milestone's only source of funds, that it was almost invariably the case that a letter of credit required the presentation of a transportation document of some kind and that the bank's insistence on retaining possession of the warrants made it impossible for a genuine transport document to come into existence before the bank had been paid. 105. The letters from Milestone and Woralco enclosing the documents were essentially of a routine kind and many such routine communications passed across Mr Francis's desk in the course of each day. Although it can no doubt be said that all letters coming into the bank should be read carefully and their contents fully digested before any action is taken, in practice this does not always happen even in the best regulated offices. I think it more likely than not that Mr Francis did see one or both of these letters, but I accept his evidence that he did not appreciate the significance of the reference to the bill of lading. That may have been due to carelessness on his part, but having seen and heard him give evidence I am not persuaded that he allowed the documents to be sent to the back office for checking and presentation to Bank Sepah knowing full well that the bills of lading were not genuine. Nor, I should make it clear, am I persuaded that he was reckless in that regard, in the sense that he realised something might be wrong but did not bother to investigate. I accept that the significance of the letter simply failed to register with him. 106. The fact that the bank had agreed to finance this transaction against the security of the warrants was not something that would ordinarily be communicated to the back office whose role was limited to one of administration. It is not surprising, therefore, that none of those responsible for the checking and presentation of the documents was aware of the inconsistency between the existence of a bill of lading and the continued retention by the bank of the warrants covering the goods. On 26th November Mr Francis sent a fax to Bank Sepah complaining about its failure to pay for the documents and seeking urgent action on its part, but there was no need for him to review the documents for the purposes of sending that fax and nothing further had occurred in the meantime to alert him to the fact that the documents that had been presented included a bill of lading. 107. Mr Malek submitted that Mr Francis knew that the documents called for under the letter of credit included a transport document and that both he and Mr Michallet were willing for that to be the case despite the fact that such a document was bound to be false. For the reasons I have given I am unable to accept that. The claim against CAI in deceit must therefore fail.”

“In these circumstances, it is right that we should ask ourselves: why do we feel that it would be unjust to allow restitution in cases such as these? The answer must be that, where an innocent defendant’s position is so changed that he will suffer injustice if called upon to repay or to repay in full, the injustice of requiring him so to repay outweighs the injustice of denying the plaintiff restitution. If the plaintiff pays money to the defendant under a mistake of fact, and the defendant then, acting in good faith, pays the money or part of it to charity, it is unjust to require the defendant to make restitution to the extent that he has so changed his position. Likewise, on facts such as those in the present case, if a thief steals my money and pays it to a third party who gives it away to charity, that third party should have a good defence to an action for money had and received. In other words, bona fide change of position should of itself be a good defence in such cases as these. The principle is widely recognised throughout the common law world. … [A number of examples are given] … The time for its recognition in this country is, in my opinion, long overdue. I am most anxious that, in recognising this defence to actions of restitution, nothing should be said at this stage to inhibit the development of the defence on a case by case basis, in the usual way. It is, of course, plain that the defence is not open to one who has changed his position in bad faith, as where the defendant has paid away the money with knowledge of the facts entitling the plaintiff to restitution; and it is commonly accepted that the defence should not be open to a wrongdoer. These are matters which can, in due course, be considered in depth in cases where they arise for consideration. … At present I do not wish to state the principle any less broadly than this: that the defence is available to a person whose position has so changed that it would be inequitable in all the circumstances to require him to make restitution, or alternatively, to make restitution in full.”

“I do not think that the concept of good faith should be diluted by treating it as capable of being breached by conduct that is not dishonest or otherwise tainted by bad faith. It is sometimes said that recklessness is equivalent to intent. Shutting one’s eyes deliberately to the consequences of what one is doing may make it impossible to deny an intention to bring about those consequences. Thereapart, however, the concepts of negligence on the one hand and fraud on the other ought, in my view, to be kept strictly apart. … In my judgment, breach of a duty of good faith should, in this area as in all others, require some dishonesty or improper motive, some element of bad faith, to be established.”

“For this purpose the plaintiff must show, first, a disposal of his assets in breach of fiduciary duty; secondly, the beneficial receipt by the defendant of assets which are traceable as representing assets of the plaintiff; and thirdly, knowledge on the part of the defendant that the assets he received are traceable to a breach of fiduciary duty.”

“What the decision in Belmont (No 2) … shows most clearly is that in a ‘knowing receipt’ case it is only necessary to show that the defendant knew that the monies paid to him were trust monies and of circumstances which made the payment a misapplication of them. Unlike a ‘knowing assistance’ case it is not necessary, and never had been necessary, to show that the defendant was in any sense a participator in the fraud.”

“What then, in the context of knowing receipt, is the purpose to be served by a categorisation of knowledge? It can only be to determine whether, in the words of Buckley LJ in Belmont Finance … [1980] 1 All ER 393,405, the recipient can “conscientiously retain [the] funds against the company” or, in the words of Sir Robert Megarry V-C in In re Montagu’s Settlement Trusts [1987] Ch 264, 273 “[the recipient’s] conscience is sufficiently affected for it to be right to bind him by the obligations of a constructive trustee”

“Moreover, if the circumstances of the receipt are such as to make it unconscionable for the recipient to retain the benefit, there is an obvious difficulty in saying that it is equitable for a change of position to afford him a defence.”

“It is a defence to a claim for restitution of money paid or property transferred under a mistake of law that the defendant honestly believed, when he learnt of the payment or transfer, that he was entitled to receive and retain the money or property.”

“Their Lordships are, however, most reluctant to recognise the propriety of introducing the concept of relative fault into this branch of the common law, and indeed decline to do so. They regard good faith on the part of the recipient as a sufficient requirement in this context.”

“The defence should be regarded as founded on a principle of justice designed to protect the defendant from a claim to restitution in respect of a benefit received by him in circumstances in which it would be inequitable to pursue that claim, or to pursue it in full.”

“I do not think that it is desirable to attempt to define the limits of good faith; it is a broad concept, the definition of which, insofar as it is capable of definition at all, will have to be worked out through the cases. In my view it is capable of embracing a failure to act in a commercially acceptable way and sharp practice of a kind that falls short of outright dishonesty as well as dishonesty itself. The factors which will determine whether it is inequitable to allow the claimant to obtain restitution in a case of mistaken payment will vary from case to case, but where the payee has voluntarily parted with the money much is likely to depend on the circumstances in which he did so and the extent of his knowledge about how the payment came to be made. Where he knows that the payment he has received was made by mistake, the position is quite straightforward: he must return it. This applies as much to a banker who receives a payment for the account of his customer as to any other person: see, for example, the comment of Lord Mersey in Kerrison v Glyn, Mills,Currie & Co (1912) 81 LJKB 465 (HL) at page 472. Greater difficulty may arise, however, in cases where the payee has grounds for believing that the payment may have been made by mistake, but cannot be sure. In such cases good faith may well dictate that an enquiry be made of the payer. The nature and extent of the enquiry called for will, of course, depend on the circumstances of the case, but I do not think that a person who has, or thinks he has, good reason to believe that the payment was made by mistake will often be found to have acted in good faith if he pays the money away without first making enquiries of the person from whom he received it.”

“The need to make enquiries of Bank Sepah is not a matter to be viewed in terms of a duty owed by one banker to another; it is a matter to be viewed in terms of a duty of good faith which a person who has received a payment that he has good reason to think was made under a mistake owes to the person who made it. If under those circumstances the payee fails to make enquiry of the payer before disposing of the money he can properly be described as failing to act in good faith because he acts in the knowledge that he may be infringing the rights of another despite having the means of avoiding that consequence.”

“Thus, on the facts as Mr Francis understood them, nothing said by Mr Mahdavi actually undermined Bank Sepah’s right to repayment of the money.”

“consciousness that one is transgressing ordinary standards of honest behaviour”

“In my judgment, in principle and on the authorities, the following propositions can be stated. (1) A receiver managing mortgaged property owes duties to the mortgagor and anyone else with an interest in the equity of redemption. (2) The duties include, but are not necessarily confined to, a duty of good faith. (3) The extent and scope of any duty additional to that of good faith will depend on the facts and circumstances of the particular case. (4) In exercising his powers of management the primary duty of the receiver is to try and bring about a situation in which interest on the secured debt can be paid and the debt itself repaid. (5) Subject to that primary duty, the receiver owes a duty to manage the property with due diligence. (6) Due diligence does not oblige the receiver to continue to carry on a business on the mortgaged premises previously carried on by the mortgagor. (7) If the receiver does carry on a business on the mortgaged premises, due diligence requires reasonable steps to be taken in order to try to do so profitably. I do not think that the concept of good faith should be diluted by treating it as capable of being breached by conduct that is not dishonest or otherwise tainted by bad faith. It is sometimes said that recklessness is equivalent to intent. Shutting one’s eyes deliberately to the consequences of what one is doing may make it impossible to deny an intention to bring about those consequences. Thereapart, however, the concepts of negligence on the one hand and fraud or bad faith on the other ought, in my view, to be kept strictly apart. Equity has not always done so. The equitable doctrine of “fraud on a power” has little, if anything, to do with fraud. Lord Herschell in Kennedy v De Trafford [1897] A.C. 180 gave an explanation of a lack of good faith that would have allowed conduct that was grossly negligent to have qualified notwithstanding that the consequences of the conduct were not intended. In my judgment, the breach of duty of good faith should, in this area as in all others, require some dishonesty or improper motive, some element of bad faith, to be established.”

“A bank which receives a mistaken payment and disburses it can only bring itself within the change of position defence if it shows that at the time of disbursement it knew or thought it knew more than the fact of receipt standing alone. This must be information which, if true, would entitle the payee to deal with the receipt as it did and that information must have come from the payer.” “Looked at on its own terms State Bank of New South Wales’ submission has an element of the fantastic about it. It says that it received this very large payment with a message from Swiss Bank saying: “Credit this to the account you keep for customers.”

“Issue (1B): Honest receipt This issue arises from a principle proposed by Brennan C.J. (then Brennan J.) in David Securities Pty. Ltd. v Commonwealth Bank of Australia (1992) 175 C.L.R. 353, 399. It reads: “It is a defence to claim for restitution of money paid or property transferred under a mistake of law that the defendant honestly believed, when he learnt of the payment or transfer, that he was entitled to receive and retain the money or property.”

“Unless some limiting principle is introduced, the finality of any payment would be as uncertain as the governing law.”

“So far as the law is concerned, the comprehensive arguments of Mr Sheldon and Mr Moss have demonstrated that there are two questions which, though closely related, are distinct: first, what, in this context, is meant by knowledge; second, is it necessary for the recipient to act dishonestly? Because the answer to it is the simpler, the convenient course is too deal with the second of those questions first. Knowing receipt – dishonesty As appears from the penultimate sentence of his judgment, Carnwath J proceeded on an assumption that dishonesty in one form or another was the essential foundation of the claimant’s case, whether in knowing assistance or knowing receipt. That was no doubt caused by the acceptance before him (though not at any higher level) by Mr Sheldon, recorded at p. 677F, that the thrust of the recent authorities at first instance was that the recipient’s state of knowledge must fall into one of the first three categories listed by Peter Gibson J in Baden v Société Générale pour Favoriser le Développement du Commerce et de l’Industrie en France SA (Note) [1993] I WLR 509, 575-576, on which basis, said Carnwath J, it was doubtful whether the test differed materially in practice from that for knowing assistance. However, the assumption on which the judge proceeded, derived as I believe from an omission to distinguish between the questions of knowledge and dishonesty, was incorrect in law. While a knowing recipient will often be found to have acted dishonestly, it has never been a prerequisite of the liability it should. “Belmont Finance Corpn Ltd v Williams Furniture Ltd (No 2) [1980] 1 All ER 393 is clear authority for the proposition that dishonesty is not a necessary ingredient of liability of knowing receipt. There have been other, more recent, judicial pronouncements to the same effect. Thus in Polly Peck International plc v Nadir (no 2) [1992] 4 All ER 769, 777D Scott LJ said that liability in a knowing receipt case did not require that the misapplication of the trust funds should be fraudulent. While in theory it is possible for a misapplication not to be fraudulent and the recipient to be dishonest, in practice such a combination must be rare. Similarly, in Agip (Africa) Ltd v Jackson [1990] Ch 265,292A Millett J said that in knowing receipt it was immaterial whether the breach of trust was fraudulent or not. The point was made most clearly by Vinelott J in Eagle Trust pc v SBC Securities Ltd [1993] I WLR 484, 497: “What the decision in Belmont (No 2) [1980] I All ER 393 shows is that in a ‘knowing receipt’ case it is only necessary to show that the defendant knew that the moneys paid to him were trust moneys and of circumstances which made the payment a misapplication of them. Unlike a ‘knowing assistance’ case it is not necessary, and never has been necessary, to show that the defendant was in any sense a participator in a fraud.”

“The defence should be regarded as founded on a principle of justice designed to protect the defendant from a claim to restitution in respect of a benefit received by him in circumstances in which it would be inequitable to pursue that claim, or to pursue it in full.”