Knowing receipt, characterisation, and proper law: a persistent duty and the cloak of invisibility

Abstract

The categorisation of knowing receipt remains uncertain in both domestic and private international law contexts, despite efforts by judges and scholars to clarify it. This article argues that knowing receipt is viewed as a breach of a continuing restorative and custodial duty owed to the beneficiary. It explains how these duties arise and outlines their content. Under this view, the traditional proprietary and fault-based perspectives on knowing receipt can be reconciled while establishing an equitable nexus for the claim. Additionally, this article suggests that this perspective aligns with the sui generis characterisation in private international law, preventing circumvention of liability.

INTRODUCTION

Liability for knowing receipt was defined by some scholars as a ‘distinctive, primary, custodial liability, which closely resembles the liability of express trustees to account for the trust property which they are charged’.¹ Despite the deceivingly simple definition, the normative justification upon which a knowing recipient ought to be liable as a trustee and the characterisation of knowing receipt in both domestic law and private international law have not always been clear.

The Supreme Court has recently attempted to clarify the doctrine of knowing receipt. In Byers v Saudi National Bank,² the Supreme Court ruled that a ‘continuing equitable proprietary interest’ is necessary to ground a knowing receipt claim. Consequently, the claim in knowing receipt failed in Byers as the beneficiaries’ equitable proprietary interest was extinguished by the foreign law.³

The judgment of Byers left two problems unsolved. Firstly, it is not certain whether an equitable proprietary interest will survive or be revived when the trust property is passed into a common law jurisdiction through a civil law jurisdiction. If the equitable proprietary interest neither survives, nor revives, the judgment of Byers virtually allows knowing recipients to escape from recipient’s liability.⁴

Secondly, despite their Lordships shared conclusion that a ‘continuing equitable proprietary interest’ is the requisite of knowing receipt, their reasoning differ.⁵ Lord Briggs examines knowing receipt as a claim ancillary to a proprietary claim.⁶ Conversely, Lord Burrows sees the nature of knowing receipt as an equitable wrong where a claim in knowing receipt generally features a defendant who knowingly interferes with the claimant’s proprietary rights.⁷ Nonetheless, neither Lord Briggs nor Lord Burrows elaborated on their respective understandings on the juridical nature of knowing receipt.

The analysis of the juridical nature of recipient liability is of practical importance.⁸ From the perspective of domestic law, a proper analysis of the nature of knowing receipt provides a better view of the incurrence, passing, and extinguishment of a knowing recipient’s liability. From the perspective of private international law, a proper analysis of the characterisation of knowing receipt helps in shaping the rules that determine the proper law governing a claim of knowing receipt, which is currently uncertain due to the dissonance in the characterisation of knowing receipt in common law and the obscurity of knowing receipt to most civil law jurisdiction.⁹ It is clear that the nature of knowing receipt affects the decision of jurisdiction and governing law.¹⁰

Our view is that a recipient should be made liable for knowing receipt for his/her breach of restorative or custodial duty to the beneficiary. This view (1) explains the ‘continuing equitable interest’ requirement in Byers—the recipient’s duty will not arise if the beneficiary’s equitable proprietary interest is suspended or no longer exists; (2) best reconciles and highlights the interplay of the ‘proprietary’ and ‘fault’ based approaches in understanding the juridical nature of knowing receipt; (3) echoes with the ‘sui generis’ characterisation of knowing receipt in private international law; and (4) prevents the ruling of Byers from being exploited in the future by preventing knowing recipients, in cross-jurisdictional cases, from circumventing liability merely by relying on the operation of foreign law.

In Section ‘KNOWING RECEIPT—THE TRADITIONAL BASIS’, we illustrate the pitfalls of the traditional bases in understanding knowing receipt. In Section ‘KNOWING RECEIPT—PERSISTENT DUTY MODEL’, we propose that knowing receipt should be understood under a ‘persistent duty model’. In essence, we argue that the receipt of a legal interest subject to a beneficiary’s equitable interest entails equity’s response to impose certain ‘trustee-like’ duties on a knowing recipient. Under those premises, in Section ‘CHOICE OF LAW RULES FOR KNOWING RECEIPT—SUI GENERIS AND BEYOND’, as also argued by Professor Adeline Chong, we argue that knowing receipt should be characterised as sui generis.¹¹ Using sui generis as a starting point, we suggest that the conflict of laws analysis that follows should also be a unique set of rules modelled after the Hong Kong case of First Laser Ltd v Fujian Enterprises (Holdings) Co Ltd¹² In Section ‘WILL A CLAIM FOR KNOWING RECEIPT SURVIVE OR BE REVIVED?’, we illustrate how this proposed understanding of knowing receipt prevents the knowing recipients from being excused of recipient’s liability merely because the trust property had been passed through a civil law jurisdiction.

KNOWING RECEIPT—THE TRADITIONAL BASIS

Traditionally, there are three approaches to understanding the liability of knowing receipt, namely, (1) the unjust enrichment or strict liability approach; (2) the proprietary-based approach; and (3) the unconscionability or fault-based approach.¹³ Before delving into the proposed theoretical foundations of the claim, it is helpful to first consider the prevalent views on the subject and why they fail to precisely account for the nature of the claim.

The strict liability basis

Under this view, the liability of a knowing recipient is strict and is based upon unjust enrichment principles. Professor Peter Birks, one of the foremost proponents of this approach (who later accepted a parallel liability based on the fault-based approach),¹⁴ suggests that a recipient of trust property is liable under knowing receipt as he is unjustly enriched at the expense of the beneficiary. Given its roots in unjust enrichment, the liability for the recipient is hence strict and the recipient’s knowledge at the time of receipt is immaterial. The recipient’s ‘knowledge’ is said to be made relevant again by the operation of certain ‘special defences’, for example where the recipient is a mere ministerial recipient, where the recipient is a bona fide purchaser for value without notice, and where the recipient invokes the defence of a change of position.¹⁵

Although the unjust enrichment basis had gained judicial support in England and Wales, Canada and Australia in the past,¹⁶ it has since lost its thrust where subsequent judgements are said to be ‘inimical to’ the unjust enrichment basis.¹⁷ The gravitation away from the unjust enrichment basis is undoubtedly correct for the following two reasons.

Firstly, the elements of knowing receipt do not sit well with that of unjust enrichment and the strict liability basis. For instance, an innocent volunteer would not be liable under knowing receipt until he subsequently acquires the requisite degree of knowledge .¹⁸ The liability for knowing receipt is premised upon knowledge and conscionability,¹⁹ and these elements are not necessarily mirrored in the case of unjust enrichment.²⁰

Secondly, the remedy of unjust enrichment is generally that of a personal restitutionary remedy. ‘Restitutionary’ in this context refers to the restoration of ‘the benefit received by the defendant to the claimant’, it does not refer to the restoration of the claimant to the position he occupied before the enrichment.²¹ Moreover, the extent of the defendant’s enrichment, if any, is assessed at the date of receipt.²² The primary focus of a restitutionary remedy is not to make good any consequential losses or gains but to undo the enrichment.²³ Such a remedy is inconsistent with the language that the knowing recipient is ‘liable to account as a constructive trustee’ and as a result be liable to equitable compensation. The measure of equitable compensation, which is premised on the loss caused by the breach of trust, is markedly different to the gain-based remedy of restitution.

The proprietary basis

Under the proprietary basis, the legal owner will hold the property in trust for the beneficiary should the legal and beneficial interest of that property be divided.²⁴ In the same vein, a recipient of trust property will hold that property in trust for the beneficiary and become personally accountable, if the property is transferred in a manner that does not overreach or override the beneficiary’s interest (eg by the doctrine of the bona fide purchaser for value without notice). In a sense, the imposition of such liability is not dependent on proof of knowledge of the breach of trust nor fault on the part of the recipient.

An obvious problem with this basis is that even where there is a separation of legal and beneficial interest, it does not necessarily follow that the holder of the legal interest would automatically hold the said interest in trust for the holder of the beneficial interest. An obvious example to the contrary is the equity of redemption. The equity of redemption, contrasting the equitable right to redeem, is described as ‘an equitable interest in the land consisting of the sum total of the mortgagor’s rights in the property’.²⁵ The equity of redemption grants the mortgagor the right to ‘convey, devise, settle, lease or mortgage’ the interest in the land whilst at the same time creating the situation where he is treated to have parted with the legal interest in the land.²⁶ In this connection, despite the fact that the mortgagee is the owner in law, he is merely an incumbrancer in equity.²⁷ Looking beyond the equity of redemption, equitable rights such as an equitable easement and the right to ratification are also examples where a trust will not automatically be created even where legal and equitable interests separate.

In this connection, perhaps one may consider Lord Briggs’ view taken in Byers. Essentially, his Lordship’s view that liability for knowing receipt is ancillary to the proprietary claim echoes with the proprietary basis whereby an ancillary form of liability arises when a person receives a trust property subject to an equitable interest that is neither overreached nor overridden.²⁸ Nonetheless, in contrast to the proprietary basis, his Lordship’s view diverges with the proprietary basis above suggested in Lewin as he considers the term ‘constructive trusteeship’ in the context of a knowing receipt claim as a formula for remedy,²⁹ rather than to treat the knowing recipient as a real trustee.³⁰

Although Lord Briggs’ proprietary view would eliminate the issue of the notion that a trust must be created upon the separation of legal and equitable interests as identified in the preceding paragraph, his Lordship’s view remains inadequate to accurately describe the liability of knowing receipt. For a recipient of trust property to be caught under knowing receipt, one must also possess a requisite degree of knowledge of the breach of trust.³¹ This description of the requisite degree of knowledge, albeit sometimes described as unhelpful in deciphering the question as to whether actual or constructive notice suffices, suggests that a higher degree of consciousness is required compared to that required under a bona fide purchaser defence. Such is the case in Re Montagu’s Settlement Trust³² which concerned certain trust properties that were transferred to the tenth Duke of Manchester in breach of trust and was subsequently disposed of during his lifetime. The eleventh Duke sought to recover those disposed trust properties by virtue of a knowing receipt claim against the tenth Duke. Sir Robert Megarry VC dismissed the eleventh Duke’s claim as he held that the tenth Duke lacked the requisite degree of knowledge. In arriving to his Lordship’s conclusion, Sir Robert Megarry VC summarised eight relevant principles, the relevant of which are as follows: ³³

‘(1) The equitable doctrine of tracing and the imposition of a constructive trust by reason of the knowing receipt of trust property are governed by different rules and must be kept distinct. Tracing is primarily a means of determining the rights of property, whereas the imposition of a constructive trust creates personal obligations that go beyond mere property rights.

…

(3) Whether a constructive trust arises in such a case primarily depends on the knowledge of the recipient, and not on notice to him; and for clarity it is desirable to use the word ‘knowledge’ and avoid the word ‘notice’ in such cases…’

One may also consider the case of Re Diplock,³⁴ where it was held that although an innocent volunteer would be liable to restore the traceable proceeds of the trust property, he would not be liable to a claim in personam (which encompasses the personal claim of knowing receipt). It is clear from Re Diplock, that even where one fails to invoke the bona fide purchaser defence, it does not necessarily follow that he must also be personally liable for knowing receipt. As such, it would seem that Lord Briggs’ conflation of ‘notice’ and ‘knowledge’ detracts from the authorities cited above. Therefore, the proprietary basis alone is insufficient to accurately account for the basis of the liability of knowing receipt.

The unconscionability or fault basis

The basis, which is supported by the learned authors of Snell’s Equity,³⁵ suggests that fault on the part of the defendant must first be demonstrated before he can be held liable under knowing receipt. ‘Fault’ refers to the possession of requisite knowledge of the breach of trust so as to render subsequent retention of the trust property unconscionable.³⁶

Despite the initial soundness of this basis, the remaining lacuna lies the nebulousness surrounding the duties of the recipient. One might ponder as to what actions a volunteer, who acquires the requisite knowledge after receipt, should take—should the volunteer then return the trust property immediately, or assume the duties of the original trustee?

It is perhaps under these premises that Lord Burrows sought to base his view on (what he coins as) the ‘equitable analogue of the tort of conversion’.³⁷ Under such a view, knowing receipt is understood as the defendant’s knowing interference, by receipt or retention, with the equitable proprietary interest of the claimant.

His Lordship’s view does not provide a full account of the liability of knowing receipt. Firstly, and indeed identified by Lord Burrows himself, the liability of the tort of conversion is strict, which does not sit well with the requirements of ‘knowledge’ in a knowing receipt claim. Secondly, conflating the tort of conversion with knowing receipt presents doctrinal issues as it ignores the tension between legal and equitable proprietary rights.³⁸ The nature of an ‘equitable proprietary right’ is at best controversial in its current state with scholars harbouring different views on the same.³⁹ Given the divergent views on the nature of equitable interests, it cannot be assumed that equitable interests ought to be protected analogously as legal interests.⁴⁰ Thirdly, to ‘convert’ a property means to perform a deliberate act which is inconsistent with another’s right and depriving the other person from use and possession of the property.⁴¹ It is stressed that mere receipt of another’s interest alone is insufficient for establishing conversion, rather, an action on the part of the defendant is required. This is inconsistent with the fact that a knowing recipient will be liable for a passive receipt.

As such, it could be seen that Lord Burrows’ view of knowing receipt as an ‘equitable analogue of the tort of conversion’ sits uneasily with the tort of conversion itself and such analogue ought not be introduced incongruously as the basis of the liability for knowing receipt.

Summary—contradictory or reconcilable?

It now appears that, among these three bases, only the proprietary and fault basis remains the subject of true contention as justifications for knowing receipt. It would seem that the strict liability basis has fallen out of favour with the judiciary and scholars alike.⁴² Nonetheless, neither the proprietary basis nor fault basis alone may be considered capable in comprehensively explaining the theoretical underpinning of the claim in knowing receipt. On the one hand, the proprietary basis oversimplifies the liability of knowing receipt to merely related to the proprietary interest itself and fails to accord proper weight to the ‘knowledge’ requirement. On the other, the fault basis, as it currently stands, fails to clearly define the ‘fault’ or ‘wrong’ giving rise to a claim of knowing receipt.

Despite being branded as two approaches, these two bases could be reconciled to give a full picture of the liability in knowing receipt. Although not to be treated as a conclusive statement on the claim of knowing receipt, the statement of Hoffmann LJ in El Ajou v Dollar Land Holdings plc alludes to the suggestion that the claim of knowing receipt is multi-faceted, encompassing fault and proprietary undertones:⁴³

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 the 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.

Based on His Lordship’s statement, it is appropriate to understand knowing receipt as an ‘equitable proprietary wrong’, that is, ‘a breach of duty arising out of the receipt of trust property subjected to an equitable interest’. Firstly, it is logically sound to understand knowing receipt as an equitable proprietary wrong. The duties of a recipient, and its corresponding wrong, would only arise on the condition that (1) the beneficiary has an equitable proprietary interest that has not been suspended or extinguished by law; (2) the property had been passed into the recipient’s hand. In fact, a person could not logically be liable had he/she not ‘received’ the property or had he/she owned the full title of the property. Secondly, such an understanding of knowing receipt takes into account both the ‘proprietary’ and the ‘fault’ elements, the shortcomings of the traditional bases would accordingly be resolved. To view knowing receipt as an equitable proprietary wrong accurately accounts for the two elements of knowing receipt: (1) the ‘unconscionable knowledge’ and (2) the ‘beneficial receipt’. The remaining question is: what exactly is the ‘duty’ being breached?

Under these premises, we attempt to borrow Hoffmann LJ’s observation and put forward a ‘Persistent Duty Model’ to (1) reconcile the theoretical foundations of knowing receipt and (2) delineate as to how and what duties a knowing recipient is expected to observe.

KNOWING RECEIPT—PERSISTENT DUTY MODEL

The model

Under the Persistent Duty model, where a knowing recipient (‘KR’) obtains a legal interest subjected to equitable proprietary interest that belongs to the beneficiary (‘B’), with the requisite degree of knowledge of the fiduciary’s breach of duty, equity operates to fix the KR with restorative and/or custodial duties in relation to the relevant property.

A breach of those duties by a KR will then result in the imposition of a personal liability on the KR to account for the property as a constructive trustee. Any subsequent disposals do not disturb the fact that the KRs have already been fixed with duties upon receiving the trust property with knowledge of the fiduciary’s breach of duty. These duties will continue to bind the KRs unless they are properly discharged by the KRs. In short, the receipt of a trust property will give rise to restorative and/or custodial duties that will only cease to be binding when the same are discharged by the recipient.

There had been criticisms of the language of ‘constructive trusteeship’ in the context of knowing receipt.⁴⁴ An important caveat to the Persistent Duty Model is that it does not stretch so far to impose a form of ‘trust’ on the knowing recipient.⁴⁵ Rather, it only sees ‘knowing receipt’ as ‘equity’s response’ to impose the recipient with ‘trustee-like duties’ where a breach would render the KR liable to account as a constructive trustee.⁴⁶ As Professors Charles Mitchell and Stephen Watterson explain, the remedial measures to which a knowing recipient is subject are akin to those of an express trustee. This close resemblance in remedies could be best explained and described by the notions of ‘constructive trusteeship’.⁴⁷

Under the Persistent Duty Model, the issue with the Proprietary Basis regarding the imposition of liability of knowing receipt on innocent volunteers⁴⁸ does not arise. Authorities suggest that an innocent volunteer will not owe a duty to the beneficiary unless and until he acquires the requisite degree of knowledge that would render subsequent retention unconscionable.⁴⁹ The Persistent Duty Model aligns with and provides a compelling explanation for these settled principles. Where an innocent volunteer receives trust property subject to B’s equitable interests, the innocent volunteer will not be fixed with the custodian duties unless and until he obtains the requisite degree of awareness. Pending the attainment of knowledge of the fiduciary’s breach, B’s equitable interest remains dormant, thereby imposing no duties on the innocent volunteer. This coheres with authorities where the recipient is held liable as a knowing recipient for he/she acquired knowledge at a time when he/she is still in possession of the property, instead of at the time of receipt.⁵⁰ In this regard, it is ‘knowledge’, rather than ‘notice’, which grounds the restorative and/or custodial duties.

The story is nonetheless different if the subsequent transferee is the original express trustee as he would continue to be bound by the original terms of trust.⁵¹ In Byers, Lord Briggs suggests that the trustee’s ‘re-acquisition of the property is treated as his making good of the breach of trust’.⁵² However, the statement, when read in tandem with his Lordship’s proprietary view of knowing receipt, is contradictory. The first difficulty emanates from Lord Briggs’ heavy reliance on the analogy of the ‘bona fide purchaser defence’ and the use of language, such as, ‘the equitable interest has been extinguished or overridden’. Where the beneficiary’s equitable interest has been extinguished in a way analogous to the application of the bona fide purchaser defence, a proprietary claim would immediately be defeated as tracing is no longer possible. It would hence follow that the ‘ancillary’ claim in knowing receipt would also fail accordingly. It is unclear how and why the trustee would continue to be liable under these premises.

As against merely focusing on a proprietary view of knowing receipt, the authors argue that the concept of ‘duty’ offers a better basis for understanding the same. Indeed, his Lordship also relied solely on ‘duty’ to explain why the trustee, as the final recipient, is required to keep the property and rectify their initial breach. The Persistent Duty Model offers a more coherent reading, as against the saying that the trustee’s duties are ‘revived’,⁵³ the better view would be that the duties owed by the trustee were not extinguished, passed on to the knowing recipient, nor discharged. It was instead the legal interest in the property that was passed on to the knowing recipient, the trustee’s duties themselves persists and continues to bind him/herself until it is properly discharged. In contrast, the restorative and/or custodial duty for the next recipient, if any, emerges should he acquire requisite knowledge of the trustee’s breach. This is the precise reason why (1) the trustee will continue to be subject to the beneficiary’s personal interests; (2) the other non-trustee recipients will concurrently be liable for knowing receipt; and (3) these duties persist regardless of the ‘extinguishment’ of the equitable interest.⁵⁴

The contents of the duty

After understanding how a beneficiary’s equitable interest leads to the imposition of corresponding restorative and custodial duties, the next logical questions are: (1) why ‘restorative and/or custodial’ duties?; and (2) what are the boundaries of these restorative and/or custodial duties?

In answering the first question, one must first understand the bounds of the duties of a knowing recipient. A knowing recipient does not possess the powers of an express trustee, as he may not invest and manage the trust just as an express trustee.⁵⁵ It is also said that the knowing recipient’s core duty of practical significance is to restore the misapplied trust property immediately.⁵⁶ Therefore, the duties of a knowing recipient are not simple carbon copies of that of the trustees’, nor can a knowing recipient be bound to act in accordance with the original trust. This also accords with the principle that in order for a trust to arise, a trustee must know of the facts giving rise to the trust.⁵⁷ In most cases, a knowing recipient would not be aware of the exact terms of the original trust, and it follows that he lacks the requisite knowledge to be bound under the same. From this perspective, the duties of the KR must be attenuated as against that of the T.

The core of a trustee’s duties serves as a helpful reference to draw the boundaries of the duties of a knowing recipient. At its foundation, the irreducible core duty of a trustee is to perform the trust honestly and in good faith for the benefit of the beneficiaries.⁵⁸ It is said that this irreducible core is the minimum that is necessary to give substance to the concept of trust.⁵⁹ Although the decision of Armitage v Nurse was in the context of the enforceability of an exemption clause for the trustee’s own actual fraud, it sheds light upon the roots of the trustee’s duty, that is to act in good faith and honestly for the benefit of the beneficiaries.

Given that a knowing recipient owes ‘trustee-like’ duties but typically lacks knowledge of the terms of the original trust, the most reasonable way for him to act in the beneficiary’s best interest—thereby discharging his duties—would be to restore the trust. This, in turn, ensures that the beneficiary could continue to enjoy their rights to the original trustee’s due administration. Therefore, to clearly define the duty of a knowing recipient, one has to take reference from that of a trustee or a fiduciary.

Consider the scenario of a trust: (1) the primary duty of the trustee is to carry out the directions given by the settlor, which is manifested in the form of the terms of the express trust;⁶⁰ (2) subject to this duty, the trustee has an overriding duty to keep safe custody of the trust property;⁶¹ and (3) if the original trust is a discretionary trust, the beneficiary is entitled to the due administration of the trust.⁶²

Drawing analogy from the duties of a trustee, the only way for a knowing recipient to act in the best interest of the beneficiary is to reconstitute the trust fund as soon and as practicable as possible, so that the trustee may continue the operation of the trust in the manner so intended under the original trust. In this manner, the beneficiary will continue to enjoy its right of due administration of the trust and be properly considered for entitlement subject to the terms of the trust. Acting without regard to the terms of the trust jeopardises the entire trust structure and cannot be said to be in the interests of the beneficiary. The knowing recipient is neither authorised under the trust, nor in the position to make many dispositions or investments. As the beneficiary’s equitable interests originate from and are defined by the original trust,⁶³ without the trust, the beneficiary ceases to have any interest whatsoever. It follows that the only logical duty is for the knowing recipient to restore the trust immediately and to preserve the integrity of the trust. This could be done by either restoring in specie or the proceeds representing the trust property. Until then, the knowing recipient would be subjected to a persistent duty and must act subordinate to the beneficiary’s equitable interest.

This formulation of the knowing recipient’s duties differs from that of Lord Burrows in Byers where the knowing recipient owes a duty to ‘not receive’.⁶⁴ There are situations where the transfer of trust property do not require any acceptance from the recipient,⁶⁵ which under Lord Burrows’ formulation, would result in liability under knowing receipt by essentially doing nothing. Firstly, His Lordship’s formulation does not fit with the general understanding that it is the ‘subsequent retention of the equitable interest’, rather than the ‘receipt’, which attracts liability.⁶⁶ Secondly, the duty suggested by Lord Burrows would be overly broad, hence onerous. This particular hardship by way of an example is where the knowing recipient knows that the trustee would make a bank transfer to him in breach of trust.⁶⁷ If one adopts the duty suggested by Lord Burrows, the knowing recipient must then instruct the bank to reject the transfer to avoid any breach of the same.⁶⁸ A less onerous view would be that the duty is not breached by mere receipt. Rather, it is breached by the recipient acting contrary to the beneficiary’s interest, which is the failure to restore the trust.⁶⁹

In cases where immediate restoration is impossible,⁷⁰ the knowing recipient, in acting in the best interest of the beneficiary and hence to preserve the integrity of the trust, ought not to make restorations where the identity and whereabouts of beneficiaries remain unclear to avoid disposition of the trust property to another stranger to the trust. In other words, in the meantime before the beneficiary comes forth to claim its interest, the knowing recipient owes a duty to hold the property in safe custody so that the same can be restored immediately as soon as possible.

A remaining question is whether restoration to the wrongdoing trustee constitutes a discharge of the restorative duty. Although it is part and parcel of the wrongdoing trustee’s duty to recover trust property that he has mistakenly transferred,⁷¹ the restorative duty may not be discharged should the knowing recipient know about the trustee’s impropriety.⁷² Mitchell and Watterson referred to the Hong Kong case of Bank of China v Kwong Wa Po,⁷³ where it was held that a recipient will be liable under knowing receipt if he merely repaid it to the ‘wrongdoer who is guilty of the misappropriation or breach of trust’.⁷⁴ Viewing this scenario through the Persistent Duty Model, a transfer of the trust property to a wrongdoing trustee is not an action that preserves the integrity of the trust as that trustee would more likely than not continue his breaches of trust. Where the recipient is armed with the knowledge of that trustee’s impropriety, a subsequent transfer to that trustee cannot logically be acting in the best interest of the beneficiary. Such a transfer is arguably akin to a third party returning a stolen property to a thief. It follows that in these circumstances, the knowing recipient owes a duty to safe custody of the trust property until a new trustee (that is not the wrongdoing trustee) or the beneficiary comes forward and claims his/her interest. Until then, the custodial duty would be replaced by a duty to immediate restoration of the trust. It is solely within those circumstances that the recipient may continue the due administration of the trust.

Conclusions on the persistent duty model

It is apparent that the true nature of a knowing receipt claim remains in a state of uncertainty and turmoil. Attempts from previous authorities to steady the ship, for example Lord Millett’s characterisation of knowing receipt as ‘receipt-based’ and their Lordships’s attempts in Byers, fail to do what it has set out to do. The main reason stems from the fact that neither the proprietary basis nor the fault basis alone could give a full account of knowing receipt. Rather paradoxically, neither of the bases seems to suggest an exclusion of other potential perspectives to analyse knowing receipt. The net result of which creates an deficient analysis where both bases are insufficient on their own, yet neither explicitly denies the need for additional analytical frameworks.

On the contrary, the Persistent Duty Model provides a more surgical analysis to the uncertainties surrounding knowing receipt. Knowing receipt should be understood as a duty-based liability that arises when the restorative and/or custodial duties of the recipient are breached. Seemingly, this formulation would categorise knowing receipt as a fault-based liability. It is important to note, however, that these duties are imposed on the recipient only where he is aware of B’s equitable interest. This element breathes into the liability of knowing receipt a proprietary element, as the duty would not arise unless the beneficiary has a ‘continuing equitable proprietary interest’.

The adoption of the Persistent Duty Model implies the following: (1) it could be right to say that knowing receipt is related to a proprietary claim,⁷⁵ as the duty of the recipient only arises when he/she receives a misappropriated trust asset with the knowledge of the trustee’s mischief; and (2) whilst it is also correct to say that knowing receipt is a ‘wrong’,⁷⁶ and such wrong pertains to the recipient’s breach of restorative and/or custodial duty instead of ‘proprietary wrong’.

The multi-faceted nature of the claim of knowing receipt means that its treatment, be it in the domestic law or private international law context, is best seen as separate and distinct from other heads of liability. It is against this premise where we will embark on the following analysis on the choice of law rules.

CHOICE OF LAW RULES FOR KNOWING RECEIPT—SUI GENERIS AND BEYOND

There is no consensus as to the conflict-of-law rules to be applied to equitable wrongs.⁷⁷ There are various approaches, including (1) the common law forum to simply apply the law of the forum, and consider the foreign elements of an equitable wrong when assessing the conscience of the wrongdoer; (2) analogising the equitable wrong with other established conflict rules, such as tort, unjust enrichment;⁷⁸ or (3) when equitable remedies are sought, the common law forum to consider whether, under the proper law, the obligation in dispute is similar to a fiduciary duty, hence sufficient to justify the common law forum’s imposition of appropriate local equitable remedies against such equitable wrongs.⁷⁹ Nonetheless, the learned authors of Dicey, Morris & Collins suggest that ‘application of independent choice of law techniques to claims based on equitable obligations’ are ‘admittedly more difficult to fit within this (ie the prominent) framework’.⁸⁰

It is understandable that claims for dishonest assistance, a form of equitable wrong, are now prominently categorised as a tort for choice of law purpose. This is primarily because (1) dishonest assistance, in substance, is indistinguishable from tort and (2) civil jurisdictions have generally unified torts and equitable torts as ‘civil torts’.⁸¹ However, the same cannot be said for knowing receipt. As shown in the above sections, the nature of knowing receipt (in the common law context) entails a combination of tortious, restitutionary, fiduciary concepts and is also related to proprietary interest.

Given the nuances of knowing receipt, an independent characterisation (1) is necessary to give the court flexibility to apply the proper law governing the claim of knowing receipt;⁸² and therefore, (2) can ensure that both the personal claim against the knowing recipient and the proprietary claim over the trust property are governed by the same law, that is the law which has the most real and closest connection with the claim.⁸³ While common law recognises knowing receipt and equitable obligations, the same equity-based characterisation of knowing receipt, is not as readily available in civil law jurisdictions. The more plausible scenario is where a civil law jurisdiction governs a claim of knowing receipt, the concept will inevitably necessitate translation or adaptation to align with the legal categories and concepts of that system.⁸⁴ It is inappropriate for the common law forum to unilaterally assume that the civil law jurisdiction would approach a claim for knowing receipt in like fashion as a common law court, and to force-fit fiduciary and equitable concepts when applying the proper law.⁸⁵ As a result, the characterisation of knowing receipt in private international law must remain flexible, a proper legal framework should provide the common law court with room to manoeuvre and to adapt its unique characterisation of knowing receipt to broader categories of obligations and liabilities, such as restitution or tort, that are readily recognised in civil jurisdictions. Therefore, we concur with Chong’s suggestions that knowing receipt should be characterised as sui generis (ie its own category and should be governed by the law that has the closest and most substantial connection to the case). This is primarily owing to the multifaceted nature of knowing receipt, which prevents it from neatly fitting into any single established categories, such as tort, restitution, equity or property.⁸⁶

However, the sui generis characterisation is merely a starting point as it only assists the court in identifying the proper law to govern the relationship between the recipient and the beneficiary. In some cases, such as Byers, the claim for knowing receipt would be barred if the law of the most real and substantial connection does not recognise the concept. In deciding whether it would be equitable to hold the recipient liable, the appropriate inquiry should rather focus on the potential obligation and remedies that the recipient would be subjected to under the proper law,⁸⁷ and the proper question to be asked is: how would the foreign civil law court deal with the claim?⁸⁸ The Hong Kong case of First Laser Ltd v Fujian Enterprises (Holdings) Co Ltd⁸⁹ and the English case of Arab Monetary Fund v Hashim (No 8)⁹⁰ are to a similar effect.

In First Laser, the parties agreed that the plaintiff was to acquire the defendant’s shareholding in a Mainland China project. Despite being paid the consideration, the defendant sold the relevant shareholding to another company for a profit. One of the plaintiff’s claims was that the defendant held the agreed shareholding and the profit on trust for the plaintiff by reason of the agreement. The Hong Kong Court of Final Appeal held that the claim would not be stifled merely because the proper law does not recognise the equitable concept.⁹¹ The proper analysis is to first examine the nature of the obligation under the proper law and then to consider whether the obligation was capable of supporting the remedies sought by the claimant in the common law action.⁹²

In the latest edition of his book, Professor Adrian Briggs states that the approach of First Laser is to ‘look to the lex causae to determine whether the obligation which arose under it was sufficiently similar to fiduciary duty to justify it as an equitable wrong for which local equitable remedies were appropriate’.⁹³ If Briggs’ view was right, the approach of First Laser would be one of a double actionability test, requiring a plaintiff to prove that the claim is of akin fiduciary nature under both the common law and the proper law. Briggs’ observation could be traced back to Lord Collins NPJ’s reference to Hashim (No 8) in delivering the Court of Final Appeal’s unanimous decision in First Laser. However, there is a slight distinction between the tests laid down in Hashim (No 8), as Chadwick J suggested a four-step inquiry that closely resembles the ‘double-actionability rule’:

1. Firstly, the court identifies the proper law governing the relationship between the defendant and the beneficiary;

2. Secondly, under the proper law, what are the duties of the defendant;

3. Thirdly, whether those duties can be regarded as ‘fiduciary duties’ in the common law forum;

4. Lastly, if so, whether it is unconscionable for the defendant to retain the assets.

The distinction between First Laser and Hashim (No 8) is that the former does not examine whether the duties owed under the proper law resemble fiduciary duties in a common law forum.⁹⁴ Instead, the approach in First Laser focuses only on whether there is an available remedy in the common law forum (regardless of whether such remedies are in common law or equity) that is similar to duties that could be imposed by the proper law.⁹⁵ As pointed out by Professor Anselmo Reyes, when considering the two approaches together, the correct reformulated analysis should be:⁹⁶

1. Firstly, identify the governing law;

2. Secondly, identify the duties which the defendant is subjected to under the proper law;

3. Thirdly, identify the remedies which the defendant is subjected for the breach of the duties under the proper law;

4. Lastly, identify the available remedies under the law of the common law forum which is analogous to the remedies imposed in step 3.

The final step of the reformulated analysis serves nothing more than a reality check to ensure that the remedies are enforceable in the common law forum and would not constitute a double actionability test.

While the choice of law rules for tort are applied to other equitable accessory liability (eg dishonest assistance), we suggest that the reformulated approach based on the First Laser approach should be the proper choice of law rules for knowing receipt, except that the first step (ie identification of the governing law) will be conducted by determining the jurisdiction which the case shares the most real and substantial connection with. The suggestion will lead to two important advantages.

Firstly, practically speaking, as the reformulated approach is not a double actionability test, the plaintiff no longer has to satisfy a high burden of proving a viable claim in both the common law forum and the civil law jurisdiction.⁹⁷ This includes the prevention of difficulties such as (1) proving that a certain cause of action in civil law jurisdictions is analogous to the complicated nature of knowing receipt in common law; and (2) identifying a viable cause of action in civil law jurisdiction, which is not fiduciary in nature. The plaintiff proving the claim under the proper law will not bear the onus of proving the claim in both jurisdictions. The proposed set of rules only focuses on the enforceability of obligations and duties, if any, under the proper law, and the feasibility of the remedies under the law of the forum.

Secondly, adequate homage is rendered to the international principle of comity as this set of choice of law rules seeks not to indiscriminately apply the law of the common law forum. The set of choice of law rules does not automatically presuppose that it is inherently just and equitable for the rules of domestic law of equity to be indiscriminately applied regardless of the proper law.⁹⁸ Instead, this set of rules focuses on the application of the proper law and to firsts determine if there is any privity between the defendants and the claimants, and eventually the question of whether the defendants bear any form of duties and remedies, be it fiduciary, tortious, restitutionary or proprietary. Furthermore, the duties and remedies identified under the proper law need not match with the exact nature of knowing receipt (ie a mixture of fiduciary, tortious, proprietary and restitutionary concepts). It simply leaves the characterisation of knowing receipt in civil law jurisdictions, which in any event is not a matter for the determination of the common law forum and also not decisive to the claim, untouched. The only questions to be asked under the reformulated approach are: (1) how will the civil law jurisdiction see the relationship between the parties, (2) what duties do the defendant owe, and (3) what could be done to remedy the wrongs. The set of choice of law rules currently proposed shows sufficient respect for both the proper law and the complex nature and concept of knowing receipt.

WILL A CLAIM FOR KNOWING RECEIPT SURVIVE OR BE REVIVED?

Extinguished?

Despite the Supreme Court did not pertain to a situation where the property is passed back to a common law jurisdiction, the language used by their Lordships in Byers could lead to the unsatisfactory result where the knowing recipient will be excused of recipient’s liability merely because the trust property had been passed through a civil law jurisdiction.⁹⁹ The use of ‘extinguish’ and ‘overridden’ implied that once the property is in the hands of a KR in a civil law jurisdiction, the equitable interest will no longer exist and the equitable and legal interest will once again be unified, as if there had been no division.¹⁰⁰ In reaching the judgment, the Supreme Court drew analogy from the bona fide purchase defence,¹⁰¹ as the bona fide purchaser would own the property legally and beneficially and shall be able to pass a good title to whoever he/she is inclined. The analogy and the decision in Byers creates the following result: (1) the KR in a civil law jurisdiction (KR1) would possess the good title of the property and could therefore pass it to another KR in a common law jurisdiction (KR2); and (2) both KR1 and KR2 would be excused of recipient’s liability as the equitable interest was extinguished by the civil law in the process of transferring.

However, the comparison between a bona fide purchaser and the application of foreign law seems to be misconceived. The distinction between a bona fide purchaser and a knowing recipient lies in the knowledge of the fiduciary or trustee’s breach of duties.¹⁰² The language of the bona fide purchaser, per se, connotes that the recipient is innocent and lacks knowledge of the breach of fiduciary duty. Allowing a bona fide purchaser to attain and retain the beneficial interest is neither inequitable nor unconscionable. The same cannot be said in a case where the property is passed through a civil law jurisdiction and back into a common law jurisdiction, as the recipients in both the civil law and common law jurisdictions have knowledge of the breach of the fiduciary. Allowing these recipients to keep possession of the property, freeing them from the beneficiary’s interest, would effectively be placing these recipients, who possess knowledge of the initial breach, in the same position as a bona fide purchaser and would allow these recipients to benefit from the misfortune of the beneficiary. Such an equivalence does grave injustice to bona fide purchasers and will leave a loophole to be exploited by knowing recipients.

Cloak of invisibility—duty suspended and resurfaced

With the characterisation proposed in Section ‘KNOWING RECEIPT—PERSISTENT DUTY MODEL’ in mind, the better approach is as follows. First, the duty of knowing recipient is merely suspended when the trust asset is in the possession of a knowing recipient in a civil law jurisdiction—the recipient’s duties do not arise as the proper law does not recognise fiduciary or equitable interest and concepts. This is because the proper law does not recognise the beneficiary as the equitable owner of the property. As a result, the recipient is effectively shielded from the beneficiary’s equitable interest and the common law forum cannot exercise its equity jurisdiction to impose any equitable duties. Nonetheless, applying the reformulated First Laser approach, the recipient might still be liable for remedies and duties that could be imposed by the proper law. Second, the duty of the knowing recipient will resurface if the property is passed into the hands of a recipient located in a common law jurisdiction, as the interest of the beneficiary could be properly recognised under English law.

In other words, the proper law is, at most, like a ‘Cloak of Invisibility’ which cloaks the recipient’s duty from the beneficiary’s equitable interest and the common law forum’s equity jurisdiction. The Cloak will be removed when the property is passed back into a common law jurisdiction, and it will no longer assist the recipient in their mischief. As the equitable interest is, once again, recognised in common law jurisdiction, so will the corresponding duties resurface and be seen. This approach is preferable as it (1) better aligns with the conflict authorities; and (2) ensures that the knowing recipient would be caught, without interfering with other established concepts, such as the bona fide purchaser defence.

Contrary to the highlight of ‘equitable interests’, a long line of conflict-of-law authorities suggests that the assertion of trust and equitable interest depends on whether the relationship between the claimant and the defendant is one that binds the latter’s ‘conscience’.¹⁰³ Firstly, in equity, equitable obligation arises often because the conscience of the holder of the legal interest was affected.¹⁰⁴ Secondly, in private international law, equitable rights are classified as personal rights. The equitable obligations in respect of property, which are imposed by law (eg constructive trust), will not be affected simply because the proper law does not recognise the equitable proprietary interest.¹⁰⁵ When imposing constructive trusts or other equitable obligations over subjects not within the forum’s jurisdiction, the equity court only operates in personam and exercises its jurisdiction to compel the holder of the legal interests of the property, whose conscience has been affected by knowledge of certain facts, to act in a particular way.¹⁰⁶ Nonetheless, a person is only compellable to act if there is privity between the beneficiary and the person.¹⁰⁷ While the line of authorities concerns the assertion of constructive trust over foreign properties, the principle could still be taken reference as a claim for knowing receipt is essentially asserting equitable accessory liabilities that are comparable to that of a constructive trustee.¹⁰⁸ To summarise, the two questions prerequisite to the establishment of a claim for knowing recipient in a case, where the property is passed through a civil law jurisdiction and back into a common law jurisdiction, are: (1) what is the relationship between the beneficiary and the knowing recipient;¹⁰⁹ and (2) whether the conscience of the knowing recipient requires him to act subordinate to the beneficiary’s interest.

Under these premises and the Persistent Duty Model, the answers to the two questions above would be: (1) the knowing recipient owes the beneficiary a persistent duty to restore and/or a persistent duty to hold custody of the trust property, which arises because of the knowing recipient’s knowledge of the beneficiaries’ equitable interest;¹¹⁰ and (2) the knowledge would make subsequent retention unconscionable.¹¹¹

Putting it into the context of the case, where the property is passed through a civil law jurisdiction and back into a common law jurisdiction, B’s claim for knowing receipt would be defeated where (1) KR1 has no knowledge or the KR1 conscience is not affected because (2) the civil law jurisdiction sees KR1 as the owner of the property.¹¹² However, B’s claim for knowing receipt should not be defeated when (1) the trust property is passed back to KR2 in a common law jurisdiction, (2) common law recognises B, instead of KR2, as the equitable owner of the property, (3) the knowledge of KR2 affects its conscience, and (4) therefore, equity imposes equitable obligations, including restorative and custodial duties on KR2.¹¹³

This would not disturb the application of the bona fide purchaser defence and the requirement of ‘continuing equitable interest’. In the case of the bona fide purchaser defence, the transfer of property to a bona fide purchaser defence will free the property from the beneficiary’s interest and overriding the equitable interest. Applying the Persistent Duty Model, it could be said that as the consciousness of the bona fide purchaser defence was not affected, no duty shall arise when he/she receives the property and he/she obtains a better and clean title. The beneficiaries’ equitable interest in the trust property will, in the case of a successful bona fide purchaser defence, truly be terminated and extinguished. On the contrary, in the case of Byers, the consciousness of the recipient in Saudi Arabia was affected when viewed in the common law forum’s equity lens, hence the restorative and custodial duty should have arisen. However, as the proper law acts as a Cloak of Invisibility, the beneficiary's equitable interest is suspended under Saudi Arabian law, the common law court is barred from imposing the duties and accessory liabilities over the recipient. The case will not be the same once the property passes back into a common law jurisdiction as the Cloak will be pierced and equity can resume its scrutiny towards the recipient’s conscience as against the beneficiary’s equitable interest, leading to the resurfacing of the recipient’s duty.

CONCLUSION

Knowing receipt is unique and ‘sits at the intersection of equity, restitution, wrongs and property’.¹¹⁴ To fully understand knowing receipt in both domestic law and private international law contexts, it is important not to shoehorn it into a specific category. We argue that the Persistent Duty Model is the appropriate approach to analyse knowing receipt. This is because the Model attempts to comprehend knowing receipt from a multi-faceted perspective and pays due regard to the elements of knowing receipt. On the one hand, it recognises that a claim for knowing receipt, at its roots, is a complaint against a wrong. On the other hand, it acknowledges that a claim for knowing receipt would not have arisen had there been no equitable proprietary interest and knowledge of fiduciary/trustee’s breach of duties. The Model gives fair recognition to the force of both the proprietary basis and the fault basis, thus, interweaving into a more comprehensive view. This view suggests that when the beneficiary holds an equitable interest, and the recipient receives the legal interest of the trust property with knowledge that the trustee breached its duty, a restorative and/or custodial duty will arise to bind the recipient with a view to protect the beneficiary’s rights.

Given its complexity, ‘knowing receipt’ should be given its own set of choice of law rules. The sui generis characterisation connotes that a claim for knowing receipt should be governed by the law of the places where the claim has most real and substantial connection with. Nonetheless, the subsequent determination of liability and remedies should also not focus specifically on the ‘fiduciary’ nature of the recipient’s liability in common law. The reformulated approach based on First Laser, which focuses on the nature of remedy is preferable for two reasons. First, it acknowledges the discrepancies between common law and civil law jurisdictions and will not shoehorning one into another. Under the reformulated approach based on First Laser, a claimant need not bear the onus of proving its claim twice and proving ‘knowing receipt’ as a viable claim in a civil law jurisdiction. This reduces the unnecessary difficulty and cost in pursuing a claim for knowing receipt with cross-border elements. This is in line with equity’s objective of protecting beneficiaries and prohibiting unconscionable acquisition of equitable interests. Second, it endows the court with flexibility to foster ‘equitable responses’. The new rule does not require a perfect point to bridge the obligation of knowing recipients in common law and civil law jurisdictions.

Nonetheless, as equitable doctrines are foreigners to some jurisdictions, the beneficiary’s equitable interest might not necessarily be recognised. After all, the relationship between the recipient and the beneficiary is a combined outcome of the recipient’s knowledge, the beneficiary’s equitable interest, and the retention and/or disposal of the trust property in spite of the knowledge of the fiduciary/trustee’s breach of duties. Therefore, the duties persist only if these elements exist or only when these duties are not discharged. The application of foreign law could still affect a claim for knowing receipt: if the proper law does not recognise equitable interest, it inhibits the beneficiary’s role as the beneficial owner, thus the recipient will be cloaked and cannot be seen through with the common law equitable principles. For these reasons, a claim for knowing receipt survives on the condition that the beneficiary’s equitable interest still exists or if the proper law does not block the common law forum from exercising its equity jurisdiction on the recipient.

Author Biographies

Tsui Zealot Kenneth is currently a PCLL candidate and Research Assistant at the Faculty of Law, The University of Hong Kong. He also obtained his Bachelor of Social Sciences (Government and Laws) and Bachelor of Laws from the University of Hong Kong.

Lam Wang Tat Max is currently a trainee solicitor in Hong Kong. He obtained his Bachelor of Laws from the University of Hong Kong.

Footnotes

ACKNOWLEDGEMENTS

The authors would like to thank Professor Anselmo Reyes SC, Professor Lusina Ho, Mr Wilson Lui, and Mr Shaun Elijah Tan for their insightful comments and encouragement. We would also like to thank Mr Alric Wong for his kind assistance. The usual caveats apply.