207 Before the primary judge the foundation for the submission that Mrs Elias and her two daughters were not accountable to Say-Dee was that none of them was guilty of any commercial dishonesty in taking advantage of the opportunity to acquire No. 15 as they had no knowledge that its acquisition was made in circumstances which amounted to a breach of fiduciary duty on the part of Farah. (As Lesmint was controlled by Mr Elias, no similar argument was advanced with respect to its acquisition of No. 13.)
208 However, in my opinion Farah and Mr Elias cannot ignore the breach of their fiduciary duties which I have found they committed and the benefits to be derived therefrom by the device of utilising Mrs Elias and her daughters as "innocent" (in the sense that they may have been unaware of Mr Elias' breach of his fiduciary duties) purchasers of the units in No. 15. Thus both before the primary judge and this Court Say-Dee submitted that each of Mrs Elias and her two daughters fell within the first limb of Lord Selborne LC's much-quoted dictum in Barnes v Addy at 251-252, which was summarised by Lord Nicholls of Birkenhead, when delivering the advice of the Privy Council in Royal Brunei Airlines SDN v Tan Kok Ming [1995] 2 AC 378 at 382, as being
"concerned with the liability of a person as a recipient of trust property or its traceable proceeds." (original emphasis)
209 It is now well established that whereas the second limb of Barnes v Addy, now known as "accessory liability", applies where a third party knowingly assists a trustee (or fiduciary) in a breach of the trustee's or fiduciary's duties and thus requires actual knowledge on the part of the third party of the breach, the first limb, which is known as "recipient liability", on one view does not. Nevertheless, the authorities, to a greater or lesser extent, favour the proposition that liability under the first limb of Barnes v Addy requires some form of knowledge on the part of the recipient of the benefit of the fiduciary's breach of duty. The crucial question that seems to have occupied a deal of judicial time is the nature and extent of that knowledge.
210 The relevant authorities relating to the recipient liability or first limb of Barnes v Addy were subjected to a detailed and penetrating analysis by Hansen J in Koorootang Nominees Pty Ltd v Australian & New Zealand Banking Group Ltd [1998] 3 VR 16 at 78 et seq. His Honour's introductory observation to this undertaking was that the circumstances in which a constructive trust will be imposed upon a person who receives trust property following a breach of trust "is in a state of some uncertainty". However, one thing appears clear. Dishonesty is not a relevant element of recipient liability. Actual or constructive knowledge is sufficient.
211 In the present case there was no evidence that Mrs Elias, let alone her two daughters, had actual knowledge that their respective interests in No. 15 had been acquired on their behalf by Mr Elias in breach of his fiduciary duties to Say-Dee. However, in [176] above I concluded that the Elias family members were complicit in the acquisition of their units in No. 15 in circumstances which attracted the first limb of Barnes v Addy. It is now necessary to explain further that finding.
212 Although Say-Dee's Amended Cross-Claim alleged (in [45]) that each of Mrs Elias and her two daughters stood in a fiduciary position to Say-Dee by virtue of their acting at the request and direction of Mr Elias when acquiring their respective units, this was denied in [33] of their Defence to the Cross-Claim. However, it is to be noted that no defence of bona fide purchase for value without notice was pleaded. This may not be surprising given that their pleaded liability by Say-Dee was that they were fiduciaries.
213 Nevertheless, in their supplementary written submissions on the question of relief, Mrs Elias and the daughters submitted, as I have already noted, that Mrs Elias gave consideration by contracting with Mr Elias to allow the mortgaging of the family home to secure the necessary borrowings for the acquisition of No. 15 only if she and her daughters' interests were protected. Say-Dee responded by asserting in its written supplementary submissions in reply that there was no evidence that the daughters provided any consideration for the purchase of the units in their names and that no such consideration moved from Mrs Elias who did not give evidence at the trial although she was available to do so. It was therefore submitted that a Jones v Dunkel inference could be drawn at least with respect to her state of knowledge.
214 I have already concluded (at [207] above) that in my opinion, Mrs Elias did not enter into an enforceable contract with her husband. Furthermore, neither the daughters (certainly) nor Mrs Elias (probably) were purchasers of their units in No. 15 for value. But even if Mrs Elias did provide value, did she and her daughters acquire their interests with constructive knowledge of Mr Elias' and/or Farah's breaches of their fiduciary duties?
215 In the present context, constructive knowledge at least includes imputed knowledge; that is, Mrs Elias and her daughters will be taken to have the knowledge of Mr Elias where he was acting as their agent in the acquisition of their units in No. 15: cf Permanent Trustee Australia Co Ltd v FAI General Insurance Co Ltd (2001) 50 NSWLR 679 at 695 [77]; 696-697 [87]-[90] per Handley JA, with whom Meagher and Powell JJA agreed. The question, then, is whether he was so acting. In my opinion he clearly was. It was he who found and negotiated the purchase of No. 15. He agreed that all the necessary dealings with respect to that acquisition were by him. Beyond Mrs Elias agreeing to putting up the family home as collateral security for the purchase, she had no involvement whatsoever in the transaction.
216 It is thus clear that in arranging for three of the units in No. 15 to be purchased in the names of each of Mrs Elias and their two daughters, Mr Elias was acting as their agent. It follows that his knowledge of the breaches of his and/or Farah's fiduciary duties to Say-Dee is thus imputed to the family members for whom he was transacting those purchases. Each therefore had constructive knowledge of their husband's/father's wrongful conduct. Accordingly, the first or recipient liability limb of Barnes v Addy was satisfied.
217 Even if Mrs Elias and her daughters had no constructive knowledge of the nature of that referred to above, the question arises as to whether, not being purchasers of their interests in No. 15 for value, and not having changed their position as a consequence of their respective acquisitions, they nevertheless hold those interests, given the circumstances in which Mr Elias acquired the units in their names, on constructive trust upon the basis that they were so acquired for the profit or benefit of Mr Elias and/or Farah and (perhaps indirectly) his family to the exclusion of Say-Dee and in breach by Farah and/or Mr Elias of its/his fiduciary duties. This question was not specifically exposed in any detail by the parties but nevertheless warrants consideration as it bears upon the true foundation of the first limb of Barnes v Addy upon which Say-Dee did clearly rely.
218 If the question so posed is answered in the affirmative, then knowledge, actual or constructive, of the recipient of the benefit of the fiduciary's breach of duty may become irrelevant. It would mean that the foundation upon which recipient liability rests is different to that of accessory liability. In particular, it would rest on a claim for restitution based on the unjust enrichment of Mrs Elias and the daughters at the expense of Say-Dee. The restoration of trust property still in the possession of the party said to be unjustly enriched by its receipt was hinted at by Vice-Chancellor Megarry in a passage from his judgment in Re Montagu's Settlement Trusts [1987] Ch 264 at 276 cited by Hansen J in Koorootang at 88. His Lordship made it clear that restoration in these circumstances was required unless the recipient was a purchaser (assumingly for value) without notice.
219 Nevertheless, Hansen J considered (at 99) that the principles underpinning liability for "knowing receipt" were still the subject of controversy. At 100 his Honour refers to three competing approaches to this issue: the "property approach", the "conscience approach" and the "restitutionary approach", the latter being based upon the avoidance of unjust enrichment. What is presently important with respect to the differences between these approaches is that, under the first, the recipient must have notice or knowledge of the beneficiary's interest and, under the second, must be guilty of unconscientious conduct which itself implies some level of knowledge. It is only under the third that actual or constructive knowledge that the property has been received in breach of the fiduciary's duties is unnecessary.
220 According to Hansen J (at 100):
"[t]here is considerable persuasion in the third view of recipient-liability. According to that view the liability of a person in receipt of misapplied trust property is most appropriately governed and explained by the law of restitution or unjust enrichment. For this reason, and in order to be consistent with other forms of restitutionary liability (such as restitution of mistaken payments, as to which see David Securities Pty Ltd v Commonwealth Bank of Australia (1992) 175 CLR 353), the liability of the recipient should be strict but subject to defences such as bona fide purchase and change of position. In other words, the knowledge of the recipient of trust property is not relevant in considering whether the elements of recipient-liability are established. Rather, the beneficiary is prima facie entitled to restitution of trust property if he can show that the transaction by which the trust property was transferred to the defendant was vitiated by some recognised 'unjust' factor."
221 Hansen J then considered the academic support for the third view, the leading proponent of which was the late Professor Peter Birks. It is a view which, according to his Honour, derives support from the speech of Lord Goff of Chieveley, with whom Lords Bridge, Griffiths and Ackner agreed, in Lipkin Gorman (a firm) v Karpnale Ltd [1991] 2 AC 548 at 578-579 although this was not a breach of fiduciary duty case. What their Lordships made clear, however, was that a claim in restitution for the recovery of property by which the recipient has been unjustly enriched at the expense of the claimant can only be denied where the recipient is a bona fide purchaser for value or where an innocent recipient has so changed his or her position that he or she will suffer an injustice if called upon to restore the property in whole or in part. Subject only to those "defences", the liability of the recipient is strict.
222 The approach in Lipkin received the support of Lord Nicholls, writing extra-judicially in 1998. In his article "Knowing Receipt: The Need for a New Landmark" in W R Cornish et al (eds) Restitution Past, Present and Future, Ch 15, his Lordship opines at 238-9 (omitting citations):
"The decision in Lipkin Gorman v Karpnale has been rightly described as a catalyst for the evolution of a more rational remedial structure. Encouraged by this major development in the law, the restitutionary approach has been widely hailed as showing the way forward for recipient liability …
There is force in this view. In this respect equity should now follow the law. Restitutionary liability, applicable regardless of fault but subject to a defence of change of position, would be a better-tailored response to the underlying mischief of misplaced property than personal liability which is exclusively fault-based. Personal liability would flow from having received the property of another, from having been unjustly enriched at the expense of another. It would be triggered by the mere fact of receipt, thus recognising the endurance of property rights. But fairness would be ensured by the need to identify a gain, and by making change of position available as a defence in suitable cases when, for instance, the recipient had changed his position in reliance on the receipt."
223 According to Hansen J in Koorootang (at 102), the adoption of the restitutionary approach would have the consequence that the plaintiff need only prove:
(a) enrichment of the defendant;
(b) at the expense of the plaintiff, which is
(c) unjust on the ground of some recognised factor.
224 In the circumstances of the present case there can be no doubt as to the factors (a) and (b) and, in my opinion, factor (c) is satisfied by the fact that Mr Elias caused Mrs Elias and their two daughters to acquire their respective interests in No. 15 in breach of Farah's fiduciary duty to Say-Dee. Furthermore, Say-Dee's claim for restitution is a personal claim against parties still in possession of the very property acquired in their name in breach of that duty. Being a claim in personam recognised by equity, it matters not that those parties are registered as the proprietors of the property in question (as to which see below).
225 Although Hansen J in Koorootang concluded (at 105) that he favoured the view that liability of a recipient of trust property is restitution based so that liability is strict subject only to defences of bona fide purchaser (for value) and/or change of position, as the plaintiff in that case did not conduct its case on the basis that recipient liability was strict, it was unnecessary for his Honour to come to a concluded view on the issue. Nevertheless, his Honour decided that there was a rational and principled distinction between the two limbs of Barnes v Addy. His view as to the foundation of recipient liability under the first limb, although obiter, was clear and, in my respectful view, compelling.
226 There is only one decision of the High Court that bears (but indirectly) upon this issue. In Consul Development Pty Ltd v DPC Estates Pty Ltd (1975) 132 CLR 373, Stephen J, with whom Barwick CJ agreed, cited the following passage from the dissenting judgment of Jacobs P in the Court of Appeal in that case [1974] 1 NSWLR 443 at 459:
"The point of the difference between the person receiving trust property and the person who is made liable, even though he is not actually a recipient of trust property, is that in the first place knowledge, actual or constructive, of the trust is sufficient, but in the second place something more is required, and that something more appears to me to be the actual knowledge of the fraudulent or dishonest design, so that the person concerned can truly be described as a participant in that fraudulent dishonest activity."
227 However, this case was concerned with the second limb of Barnes v Addy and not the first. It is authority for the proposition that there is a distinction between the two and that dishonesty or lack of probity is not a necessary element for recipient liability. This fact is now well entrenched in Australian law: Spangaro v Corporate Investment Australia Funds Management Ltd (2003) 47 ACSR 285; Tara Shire Council v Garner [2003] 1 Qd R 556 at 577; Hancock Family Memorial Foundation Ltd v Porteous (1999) 151 FLR 191 at 209 per Anderson J, affirmed in (2000) 22 WAR 198 per Ipp, Owen and McKechnie JJ; Macquarie Bank Ltd v Sixty-Fourth Throne Pty Ltd [1998] 3 VR 133 at 164; Koorootang at 105 per Hansen J; Ninety Five Pty Ltd (in liq) v Banque Nationale de Paris [1988] WAR 132 at 173-4, 176 per Smith J. Stephen J in Consul Development was not called upon to consider restitutionary principles as the foundation underpinning the first limb of Barnes v Addy.
228 Since Koorootang was decided in 1997 there have been a number of cases, of which those referred to in the preceding paragraphs are examples, which have considered the first limb of Barnes v Addy but on the conventional basis of the necessity to prove actual or constructive knowledge by the recipient of the breach of trust. None have sought to grapple with the proper rationale upon which recipient liability should be founded. This may well be because in all of them the issue of whether recipient liability can apply in the absence of proof of actual or constructive knowledge did not arise for consideration either because the plaintiff was able to establish the necessary knowledge of the relevant breach or because the case was decided upon other grounds, such that comments upon recipient liability were obiter. Nonetheless, there are dicta which seem to favour the restitutionary approach advocated by Professor Birks and favoured by Hansen J: see NIML Ltd v Man Financial Australian Ltd [2004] VSC 449 [53]-[63] per Harper J; Tara Shire Council at 576 [61]; National Australia Bank Ltd v Rusu [2001] NSWSC 32 at [43]-[44] per Bryson J.
229 In NIML, Harper J ultimately decided the case on the basis that the defendant did not fall within the first limb in Barnes v Addy because it did not actually receive the relevant trust property. Nevertheless, his Honour considered whether constructive knowledge was a necessary element in cases where recipient liability was pleaded. In his Honour's view (at [53]):
"it is an essential ingredient in the cause of action pleaded by [the plaintiff] against [the defendant] that the latter either had constructive knowledge of the general nature of [the defaulting fiduciary's]dishonesty or was unjustly enriched by its receipt " (emphasis added)
230 Later in his judgment, Harper J (at [62]-[63]) refers in some detail to Koorootang, noting Hansen J's preference for the restitutionary view of recipient liability based upon unjust enrichment and in relation to which the knowledge of the recipient is irrelevant. Although it was not necessary for Harper J to decide NIML on that basis, his comments above represent some support for the view that, where the recipient is unjustly enriched, the first limb in Barnes v Addy may be satisfied even in the absence of any kind of knowledge on the part of that recipient.
231 Similarly, in Rusu, Bryson J (as he then was) ultimately determined that the defendants were not recipients of the relevant trust funds and as such did not fall within the first limb of Barnes v Addy. However, his Honour did offer the following comments on recipient liability:
"In [ Royal Brunei ] their Lordships at 386E-386F distinguished recipient liability from accessory liability, apparently on the basis that dishonesty is not an element of recipient liability. Their Lordships were not called on to deal fully with recipient liability but they appear to have expressed the basis of the distinction with the observation: 'Recipient liability is restitution-based; accessory liability is not'.
The principles which deeply underlie equity suggest that a restitution-based remedy must have some basis in the position in conscience of the person against whom it is awarded so that it must be shown that a recipient did not receive the payment for value or had notice of another person's equitable interest in the money; or at the very least, it should be open to him to show that he did give value and had no notice." (emphasis added)
232 Again, his Honour's comments seem to provide support for the proposition that where the recipient is not a purchaser for value the first limb in Barnes v Addy may be satisfied without the necessity to establish actual or constructive knowledge.
233 Writing extra-judicially in January 2003, Mason P referred in favourable terms to Lord Nicholls' call, recorded in [225] above, to abandon the fault-based idea of knowing receipt in favour of the strict liability restitutionary approach subject to a change of position defence: (2003) 77 ALJ 358 at 368. The President nevertheless accepted that the issue had yet to be determined conclusively by the High Court.
234 But in the absence of any High Court authority to the contrary, I see no reason why the proverbial bullet should not be bitten by this Court in favour of the Birks/Hansen approach. In my opinion there is support for the adoption of the restitutionary approach in Lipkin in the House of Lords and in the exposition on the subject by Hansen J in Koorootang at 99-105.