Money had and received - Defence - Claimants being victims of fraud by third party
Armstrong DLW GmbH v Winnington Networks Ltd: ChD (Mr Stephen Morris QC (sitting as a deputy High Court judge)): 11 January 2012
The proceedings revolved around the transference of 21,000 carbon emission allowances known as European Union allowances (EUAs). In January 2010, S, an individual claiming to represent a company in Dubai (Z Ltd), contacted the defendant company to inquire whether it was interested in trading EUAs.
Further conversations and emails ensued between the defendant, Z Ltd and S. On 25 January 2010, P, the employee of the defendant responsible for its ‘know your customer’ procedure, sent an email to Z Ltd, inviting it to supply various documents that would allow a ‘trading relationship’ to be established on proper grounds. On 26 January, an email was received by the defendant from Z Ltd. That email included no formal company details and was sent from a free web-based internet address. P responded by email on the same day, seeking further information. That information was not provided by Z Ltd.
On 28 January 2010, 21,000 EUAs owned by the claimant company were transferred from its account into an account belonging to the defendant. On the same day, the defendant agreed to purchase 21,000 EUAs from Z Ltd for a price of €267,645. Pursuant to that agreement, the defendant received into its account the 21,000 EUAs transferred from the claimant’s account. At that point in time, the defendant did not know that the holder of the account from which the EUAs had been transferred was the claimant (as opposed to Z Ltd or anyone else).
The defendant immediately sold on the 21,000 EUAs and on the same day effected payment of the purchase price to Z Ltd. It subsequently transpired that the transfer had been carried out without the authority of the claimant and was the result of a ‘phishing’ email fraud perpetrated upon it by an unknown third party. The claimant put its claim on three alternative bases. The first two bases were common law restitutionary claims: a claim to vindicate its proprietary rights in the EUAs; a personal claim at law for restitution on the basis of unjust enrichment to recover the value of the EUAs; and it brought a personal claim in equity based on the defendant’s knowing (or unconscionable) receipt of the EUAs or their traceable proceeds.
The claimant’s claim essentially rested on the submission that the defendant’s due diligence procedure was insufficient and had not been followed through, that at the point of entering and concluding the transaction the defendant had known very little about Z Ltd, and that, in the circumstances, the defendant had known or consciously closed its eyes to the risk that the transaction was fraudulent or improper or that, alternatively, it had known of circumstances that would have led a reasonable person in its position to have made further inquiries.
The defendant contended that, on the facts, it had not known that the transaction had been fraudulent, and that there had been nothing inherently suspicious about the transaction or the circumstances leading to its conclusion. The further issue arose as to whether the EUAs could be properly considered ‘property’ so as to allow a proprietary restitutionary claim to be made. Consideration was given to Re Celtic Extraction  Ch 475. The claim would be allowed.
(1) On the authorities, there was a basis of claim that could conveniently be labelled a ‘proprietary restitutionary claim’, which was distinct from a claim for restitution on grounds of unjust enrichment. As a matter of authority and principle, if and where legal title remained with the claimant, a proprietary restitutionary claim at common law would be available in respect of receipt by the defendant of a chose in action or other intangible property (see ,  of the judgment).
On the evidence, the instant case would fall on the side of being a proprietary restitutionary claim. Applying the test identified in Celtic, an EUA would certainly be ‘property’ and intangible property under the statutory definition there in place. The statutory framework would confer an entitlement on the holder of an EUA to exemption from a fine. Second, the EUA was an exemption which was transferable, and expressly so, under the statutory framework. Third, the EUA was an exemption which had value. An EUA would not be a chose in action in the narrow sense, since it could not be claimed or enforced by action. However, to the extent that the concept encompassed wider matters of property, it could so be described. Ultimately, however, it would not matter greatly whether the EUA was a chose in action of merely another form of ‘intangible property’ (see , ,  of the judgment).
As there was a proprietary restitutionary claim, there would be no claim for restitution based on unjust enrichment (see  of the judgment).
(2) To demonstrate knowing or unconscionable receipt, it would be necessary to show that the recipient’s state of knowledge was such as to make it unconscionable for him to retain the benefit of the receipt. On that basis, the claimant’s claim lay in receipt of trust property and the issue would be whether the defendant’s receipt of the EUAs had been ‘unconscionable’ (see  of the judgment).
In the instant case, the defendant’s employees, while being uninvolved in the phishing scam, had consciously and deliberately closed their eyes to the possibility or risk of a phishing scam being involved in the transaction. They had done that, first, when P had authorised the transaction, despite knowing very little about Z Ltd.
Second, when the EUAs had been transferred, at which point no confirmation had been received that the account to which they were being transferred belonged to Z Ltd. Third, when payment to Z Ltd had been authorised, despite P not having received an appropriate response to its emails seeking confirmation of ownership. On the evidence, the instant case was one where the inquiries that ought to have been made had been made, but the defendant had failed to wait for a response to those inquiries, thus deliberately and consciously choosing to take the risk that the EUAs had not belonged to the claimant. Consequently, the defendant had failed, wilfully and recklessly, to pursue the inquiries that an honest and reasonable man would have made, and which it had in fact made (see ,  of the judgment).
The defendant’s receipt of the EUAs had been unconscionable (see  of the judgment).
Luke Harris (instructed by Stephenson Harwood) for the claimant; Victor Joffe QC (instructed by Myers & Sons Solicitors) for the defendant.