This article examines the complex issue of "knowing receipt", where assets have been transferred in breach of trust and how recipient liability is treated by the Jersey courts. The issue has been highlighted by a recent court case.

Editor's note: A recent Jersey law case has put the spotlight on the issue of “knowing receipt”, where assets have been transferred in breach of trust. In this feature, advocate Richard Wakeham, associate at Sinels Advocates, Jersey, examines how recipient liability stands under Jersey law.

Introduction
In the recent case of Bagus Investments v. Kastening , the Royal Court of Jersey signalled that the English claim of “knowing receipt” might be known in Jersey law.  This move could potentially represent a significant shift in Jersey’s legal landscape as, at first blush at least, it appears to run contrary to that stated in the well known judgment of Birt, DB (as he then was), in Re Esteem where it was held that innocent recipients of assets transferred in breach of trust would be strictly personally liable and that the English doctrine of liability for knowing receipt did not apply in Jersey law.

The position under English law

To make a successful claim in knowing receipt under English law, a claimant “…must show, first a disposal of 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.” 

The basis of the claim is the fault of the defendant and, if proven, a defendant will be personally liable to account as if he were a trustee.  Despite the vernacular employed, no trust exists because the knowing recipient will not likely continue to hold trust property.   If the defendant continued to hold trust property or the property traceable to trust property, a proprietary claim would ordinarily be made. 

Re Esteem

In one  of the three Re Esteem landmark judgments Birt, DB (as he then was), found that the English claim of knowing receipt left “a lacuna in English law”   because an unrecoverable loss might result where trust assets are transferred to an innocent recipient who does not mix them with his own assets.    This causes a problem if the recipient disposes of the assets received rather than his own because (a) the claimant has no right to make a proprietary claim and to trace or follow into the recipient’s assets and (b) the recipient has insufficient knowledge to make him personally liable as a knowing recipient. 

The solution set down in Re Esteem required a reconsideration of the fundamental principles of unjust enrichment.  Principles of unjust enrichment impose a personal liability on an innocent recipient to make restitution where he mistakenly receives assets unless he has changed his position in which case he has a defence.  This analysis enabled Birt, DB, to authoritatively state:

“…the state of mind required for a ‘knowing receipt’ claim under English law is not required in Jersey.  It is a strict restitutionary liability.  However, the claim is based upon unjust enrichment and, accordingly, the beneficiary can only succeed to the extent that the recipient remains unjustly enriched.  A defence of change of position is therefore available.”   

Bagus Investments v Kastening

The judgment in Bagus  appeared to accept that there exists both restitutionary and “knowing receipt” claims in Jersey law.  Birt, B, made the following observations in this regard:

“… there was a restitutionary claim in accordance with the decision in Re Esteem … and secondly there was a claim in knowing receipt…” 

 “A claim in knowing receipt (with its requirement for knowledge that renders it unconscionable to retain the money in question) clearly does not arise from the same or substantially the same facts as a simple claim in restitution…”  

Further, Birt, B, also indicated that there was a requirement of knowledge in a claim of “knowing receipt” and that there was no defence available.  Birt, B, observed as follows in this regard:

“A claim in knowing receipt is a personal claim and there is no defence of change of position.”  

 “In my judgment, the knowledge which a defendant must have in order to be liable for knowing receipt is knowledge of the breach of trust or fiduciary duty which underlies and gives rise to a claim.”

Conclusion

Whilst the two judgments appear at odds, it is possible to cautiously take Bagus as confirmation that there are at least two types of recipient liability under Jersey law; a strict liability for innocent recipients to make restitution (to the extent they have not become disenriched) and an unconscionability, or fault-based liability, for guilty recipients to account as if they were trustee. 

However, this analysis is fraught with difficulty and uncertainty given that in Re Esteem Birt, B, clearly distinguished a claim of “knowing receipt” in Jersey from its English equivalent.  Furthermore, it must also be noted that the question in Bagus was not whether a cause of action in “knowing receipt” existed in Jersey law but instead whether it was reasonably arguable that such a claim might be prescribed in Jersey law.  Although it seems that the former question is implicitly answered in the affirmative by the court moving to answer the latter, this is not necessarily so.  In the circumstances, the better view is that the detailed and full judgment delivered in Re Esteem is to be preferred because it was delivered post trial whilst the judgment in Bagus followed an interlocutory application. 

Until the Royal Court clarifies the position, it is at least arguable that there exists liability for both “knowing receipt” and “(strict or unknowing) receipt” under Jersey law and, depending on how the claim is framed, this distinction may enable innocent recipients to deny prima facie personal liability for strict receipt contrary to Re Esteem.