[CHANCERY DIVISION]

AGIP (AFRICA) LTD. v. JACKSON AND OTHERS

[1987 A. No. 7785]

Trusts - Constructive trust - Fraud - Plaintiffs' employee forging payment order in favour of company incorporated by defendant accountants - Accountants having no knowledge of fraud on plaintiffs - Accountants transferring money to other accounts on behalf of clients - Whether money recoverable from accountants as money had and received - Whether money traceable as trust funds - Whether accountants knowingly assisted in furtherance of fraudulent design

The plaintiffs, a company concerned with drilling for oil in Tunisia, maintained a U.S. dollar account at a bank in Tunis. On 18 December 1984, a senior officer of the plaintiffs signed a payment order for $518,822.92 in favour of a shipping company which their chief accountant, Z., fraudulently altered by substituting for the shipping company the name of B. Ltd., giving their address and account number with a branch of Lloyds Bank Plc. in London. B. Ltd. had recently been incorporated and its two directors and shareholders were the first defendant (a chartered accountant in partnership with the second defendant), and the third defendant, one of their employees. On Friday 4 January 1985, Z. took the altered payment order to the Tunisian bank, which executed it by debiting the plaintiffs' account and, by telex, instructed Lloyds Bank in London to credit B. Ltd.'s account with $518,822.92 with a value date of Monday 7 January, and also by telex gave instructions to its correspondent bank in New York to reimburse Lloyds Bank with a similar amount. Lloyds Bank acted on those instructions and on 7 January credited B. Ltd.'s account with the sum and, in doing so, took a delivery risk since it made the payment five hours before the opening of business in New York and before confirmation of the receipt of cover. Meanwhile the plaintiffs had discovered the fraud and by 7 January had discovered that it was the latest in a series of frauds by Z. Shortly after Lloyds Bank had credited B. Ltd.'s account, they received a telex from the Tunisian bank which attempted to stop the payment or get B. Ltd. to reverse it on the ground that the payment had been made in error. B. Ltd. refused to make a refund and, on the third defendant's instruction, Lloyds Bank transferred the whole sum to the dollar account of the defendants' firm with the bank. B. Ltd.'s account was immediately closed after the transfer and the company was subsequently put into liquidation. Thereafter moneys were transferred from the account of the defendants' firm with Lloyds Bank to its client account with a bank in the Isle of Man. From that account sums were transferred overseas to various recipients with whom the plaintiffs had never had any dealings. At all times the defendants had acted in accordance with instructions from their clients.

The plaintiffs brought an action against the defendants to recover the money as money had and received or on the ground

that the defendants as constructive trustees of the money had acted in breach of trust. It was not alleged that the defendants were parties to the fraud or that they had actual knowledge of it. By their defence, the defendants pleaded that they had at all times acted on the instructions of their clients and that at the time of making the payments on those instructions they had had no notice of the plaintiffs' claim to the money. They paid the remainder of the money still under their control into court.

On the hearing of the action in which the defendants claimed that it was the Tunisian bank and not the plaintiffs who had title to bring the action:-

Held, giving judgment for the plaintiffs, (1) that, although the Tunisian bank had no lawful authority to debit the plaintiffs' account on the forged instrument, the bank had in fact done so and in doing so had used the plaintiffs' money; that the bank itself had title to bring proceedings against the defendants to recover sums equivalent to the money which it had a potential liability to repay to the plaintiffs but the defendants' claim that the bank was the only proper plaintiff failed, for the plaintiffs were entitled to bring an action either against the defendants or the bank to recover moneys paid by the bank as their agents but without their authority (post, pp. 283A-E, F-284C).

Dicta in In re Diplock [1948] Ch. 465, 519, C.A. and of Robert Goff J. in Barclays Bank Ltd. v. W. J. Simms Son & Cooke (Southern) Ltd. [1980] Q.B. 677, 699 considered.

(2) That since the money had not been mixed with any other moneys in the account of B. Ltd. and had then been transferred to the account of the defendants' firm, the plaintiffs would have had a good cause of action at common law if they had been tracing a physical asset; but that the receipt of the money by Lloyds Bank in accordance with the false instrument had been by telegraphic communication between bankers and, therefore, the plaintiffs' common law claim for money had and received against the defendants failed because no physical asset of the plaintiffs could be traced at common law to the defendants' firm; that even if the money could be traced at common law from the immediate recipient and then to the firm's account, the plaintiffs had no cause of action at common law because the defendants had accounted for the money to their principals before they had notice of the plaintiffs' claim (post, pp. 286C-F, 287G - 288G, 289D).

Banque Belge pour l'Etranger v. Hambrouck [1921] 1 K.B. 321, C.A. applied.

But (3) that, since the plaintiffs' chief accountant had acted in breach of the fiduciary duty he owed to them, the plaintiffs' money could be traced in equity as trust property and the property was to be returned to them by anyone having possession of it other than a bona fide purchaser without notice of the trust; that the defendants were liable to account for any property still in their possession and, accordingly, the plaintiffs were entitled to the money the defendants had paid into court (post, pp. 290G - 291A).

Chase Manhattan Bank N.A. v. Israel-British Bank (London) Ltd. [1981] Ch. 105 considered.

(4) That the defendants had no personal liability for the remainder of the plaintiffs' money unless they had the requisite degree of knowledge to establish liability to account for it as constructive trustees; that none of the defendants could be held

liable on the basis of knowingly receiving the trust funds because the second defendant had never received the trust funds and the other two defendants had not received the trust funds for their own benefit, but they would be liable if they had knowingly assisted in the furtherance of a fraudulent and dishonest breach of trust; that they must have known that they were assisting in concealing the destination of the money from, inter alios, the plaintiffs and they must have at least realised that their clients might be involved in a fraud on the plaintiffs; that they were at best indifferent to the possibility of fraud and that was not honest behaviour; that, although they could have made inquiries for their own protection, it was not failure to do so that caused them to be liable to the plaintiffs but it was because they had failed in their duty to act honestly and had participated in the misapplication of the plaintiffs' property and, therefore, the first and third defendants had knowingly assisted in the fraud and were liable to refund the plaintiffs for their loss and the second defendant was vicariously liable for his partner and his employee (post, pp. 292D-F, 294A-G,295B-D, F - 296F).

Belmont Finance Corporation Ltd. v. Williams Furniture Ltd. [1979] Ch. 250, C.A.; Baden, Delvaux and Lecuit v. Société General pour Favoriser le Développement du Commerce et de l'Industrie en France S.A. [1983] B.C.L.C. 325 and In re Montagu's Settlement Trusts [1987] Ch. 264 considered.

The following cases are referred to in the judgment:

Alms Corn Charity, In re [1901] 2 Ch. 750

Baden, Delvaux and Lecuit v. Société General pour Favoriser le Développement du Commerce et de l'Industrie en France S.A. [1983] B.C.L.C. 325

Banque Belge pour l'Etranger v. Hambrouck [1921] 1 K.B. 321, C.A.

Barclays Bank Ltd. v. W. J. Simms Son & Cooke (Southern) Ltd. [1980] Q.B. 677; [1980] 2 W.L.R. 218; [1979] 3 All E.R. 522

Barnes v. Addy (1874) 9 Ch. App. 244

Belmont Finance Corporation Ltd. v. Williams Furniture Ltd. [1979] Ch. 250; [1978] 3 W.L.R. 712; [1979] 1 All E.R. 118, C.A.

Chase Manhattan Bank N.A. v. Israel-British Bank (London) Ltd. [1981] Ch. 105; [1980] 2 W.L.R. 202; [1979] 3 All E.R. 1025

Colonial Bank v. Exchange Bank of Yarmouth, Nova Scotia (1885) 11 App.Cas. 84

D.P.C. Estates Pty. Ltd. v. Grey [1974] 1 N.S.W.L.R. 443

Diplock, In re [1948] Ch. 465; [1948] 2 All E.R. 318, C.A.

Jones v. Williams (1857) 24 Beav. 47

Montagu's Settlement Trusts, In re [1987] Ch. 264; [1987] 2 W.L.R. 1192

Taylor v. Plumer (1815) 3 M. & S. 562

Underwood (A.L.) Ltd. v. Bank of Liverpool [1924] 1 K.B. 775

United Australia Ltd. v. Barclays Bank Ltd. [1941] A.C. 1; [1940] 4 All E.R. 20, H.L.(E.)

The following additional cases were cited in argument:

Avon County Council v. Howlett [1983] 1 W.L.R. 605; [1983] 1 All E.R. 1073, C.A.

Bankers Trust Co. v. Shapira [1980] 1 W.L.R. 1274; [1980] 3 All E.R. 353, C.A.

Bell's Indenture, In re [1980] 1 W.L.R. 1217; [1980] 3 All E.R. 425

Brook v. Hook (1871) L.R. 6 Exch. 89

Foley v. Hill (1848) 2 H.L. Cas. 28, H.L.(E.)

Joachimson (N.) v. Swiss Bank Corporation [1921] 3 K.B. 110, C.A.

King v. Stewart (1892) 66 L.T. 339

London Joint Stock Bank Ltd. v. Macmillan [1918] A.C. 777, H.L.(E.)

Ministry of Health v. Simpson [1951] A.C. 251; [1950] 2 All E.R. 1137 H.L.(E.)

ACTION

On 1 March 1985, the plaintiffs, Agip (Africa) Ltd., issued a writ against the first and second defendants, Barry Kingsley Jackson and Edward Norman Bowers, who practised as Jackson & Co., a firm of chartered accountants in Douglas, Isle of Man, and against the third defendant, Ian Duncan Griffin, who was an employee of that firm. By their re-re-amended statement of claim, the plaintiffs alleged, inter alia, that their bankers, Banque du Sud of Tunis, purporting to act on the plaintiffs' authority caused the sum of U.S. $518,822.92 to be paid into the account of Baker Oil Services Ltd. ("Baker Oil") at the High Holborn branch of Lloyds Bank Plc. The Banque du Sud had made the payment pursuant to a payment order which without the plaintiffs' knowledge or consent had been altered after it had been signed to be made payable to Baker Oil, a company of which the plaintiffs had no knowledge of or dealings with and its only directors and shareholders were the first and third defendants. The money had then been transferred to the dollar account of the defendants' firm and Baker Oil's account closed.

The plaintiffs alleged that the defendants had given no consideration to Baker Oil in respect of the transferred sum; that the first and third defendants had wrongfully, deliberately and recklessly for their own purposes or that of their firm caused or procured the payment of the money from Baker Oil's account to that of their firm at a time when they either knew or ought to have known that neither Baker Oil nor their firm nor any of the defendants had any right to receive the money; and that the defendants had wrongfully and without authority intermeddled with the plaintiffs' moneys and acted as principals in directing, causing or procuring the moneys to be paid into their dollar account. Alternatively, the defendants in disposing of the money knew that the funds were being paid by the plaintiffs through their bankers, knew that the bankers, Banque du Sud, were claiming that the payment had been made by mistake and that the bankers were demanding its recall.

They further alleged that the defendants had wilfully and recklessly failed to make such inquiries as a reasonable and honest person in the defendants' position would make; that they did not inform the plaintiffs or the Banque du Sud that they and Baker Oil claimed to be acting in a fiduciary capacity and did not give the names of the persons whom they claimed to be their principals or beneficiaries and in the premises had acted with a want of probity; that the defendants had become constructive trustees of the money and had acted in breach of trust in disposing of the money; that the defendants believed that the money was paid as a

result of illegal acts (contravention of Tunisian exchange control laws) to which the plaintiffs' employees or agents were parties and they would have known that the money was paid by the plaintiffs as a result of mistake or fraud without the plaintiffs' knowledge or consent if the defendants had not wilfully and recklessly failed to make inquiries; that there was no other explanation for the payment of the money from the plaintiffs which was consistent with activity other than mistake or an unlawful activity of which the plaintiffs were the intended victims and in which at least one of the plaintiffs' own officers, employers or agents was knowingly involved in breach of his own duty to the plaintiffs; and that, although the defendants had expressly considered the possibility in July and August 1984 that the payment had been made without the plaintiffs' knowledge or consent, the defendants had nevertheless assisted in the disposal of the money from the plaintiffs by forming and acting as directors of Baker Oil and in giving instructions to Lloyds Bank and the Isle of Man bank to receive and dispose of the money or in themselves receiving the money into accounts in their firm's name.

The plaintiffs pleaded that they had suffered loss by the defendants' actions or if it was the case that the money was paid to Baker Oil by Banque du Sud and not the plaintiffs, then the defendants were at all material times obliged to restore the money to the Banque du Sud which bank had debited the plaintiffs' account with the sum and the plaintiffs had failed to obtain repayment. The plaintiffs claimed against the first and second defendants U.S.$518,822.92 and interest on that sum under section 35A of the Supreme Court Act 1981; alternatively, damages against the first and second defendants with interest thereon or damages against all the defendants with interest thereon.

By their defence, the defendants denied that they were liable to the plaintiffs and pleaded that at all material times they were acting as agents for a French lawyer, Monsieur Yves Coulon, and his client, Madame Sophie Ben Hassine; and that at the times of making the payments on M. Coulon's instructions, none of the defendants had notice of the plaintiffs' claim to the money.

The facts are stated in the judgment.

Michael Tugendhat Q.C. and Michael Gettleson, for the plaintiffs. A claim for money had and received at common law may be made both against the first person to whom the money was paid and also against any person who received the money from the first person without giving any consideration therefor, provided that the money is identifiable; see Banque Belge pour l'Etranger v. Hambrouck [1921] 1 K.B. 321, 326-328, 332-336. Money remains identifiable at common law notwithstanding that it has been paid into a bank account, at least if it is not mixed with other moneys: see ibid., and compare Bankers Trust Co. v. Shapira [1980] 1 W.L.R. 1274. Although tracing at common law follows the money from hand to hand the claim that is made is not a proprietary claim, i.e. for the return of the money or its product in specie or even for a declaration, but is a claim simply for a money judgment: see the Banque Belge case at pp. 332-333, 336. It follows that it is irrelevant that the recipient has received the money merely as a trustee, taking no

personal benefit: see King v. Stewart (1892) 66 L.T. 339. It is generally equally irrelevant that the recipient may have parted with the money. Exceptions exist where there is an estoppel: see Avon County Council v. Howlett [1983] 1 W.L.R. 605, or where the recipient has received the money as agent for a disclosed principal to whom he has accounted.

In so far as equity also gives a personal remedy against the recipients of money paid to them by trustees under a mistake of fact, it seems that the principles are not less favourable to the claimant: see Snell's Principles of Equity, 28th ed. (1982), p. 303, and Ministry of Health v. Simpson [1951] A.C. 251. Equitable principles are more commonly invoked in order to found a proprietary remedy, usually by means of a declaration of trust, or in order to gain priority in an insolvency. In the present case there is little scope for such a remedy. The moneys concerned either remain under the control of the defendants, but in a place unknown, perhaps France, or they have gone altogether, and are irretrievable. The suggested instructions to the defendants have not been proved, still less has his authority to give any instructions. Where there is a proprietary remedy and it is declared that the recipient was a constructive trustee of the claimant's fund, there is also a personal remedy, arising from that fact, if the money has subsequently been disposed of, since there is no difference in this respect between an express trustee and a constructive trustee: see In re Bell's Indenture [1980] 1 W.L.R. 1217, 1236C.

The present is a case of "knowing receipt." The money was received into the defendants' own account at Lloyds Bank Plc.'s Holborn branch. Alternatively the corporate veil of Baker Oil Services Ltd. is to be lifted. Evidence is lacking as to why the defendants received the money into their own account. "Baker Oil" was a company formed and controlled by the defendants for the sole purpose of receiving the money. The reason for such an arrangement must have been concealment. The defendants most probably believed that the payments were made unlawfully and that the plaintiffs might wish to trace and recall them. That is also the most probable explanation for the defendants failing to make any contact with the plaintiffs to find out about the payment received. There is no evidence, whether oral or documentary, as to what was the consideration for, or the purpose of, the payment. Nor do any proper records appear to have been kept as to how the enormous sums of money received by Euro-Arabian Jewellery Ltd. were disposed of. This would suggest to a reasonable and honest person that the object of the exercise was concealment and that the money had not been lawfully obtained and/or that it was not going to be used for the benefit of the the plaintiff. Since the defendants have chosen not to give any evidence as to the existence of any principals or beneficiaries, they must be regarded as being themselves principals.

Alternatively, if the defendants are to be taken as not having "received" the money, it would then be a case of "knowing assistance" in the furtherance of a fraudulent or dishonest breach of trust. The whole scheme up to 7 January 1985 depended upon their involvement. Again, if the defendants are not to be regarded as "principals" then they were "trustees" for the plaintiff, unless or until they were informed that

the invoice for U.S.$518,822.92 had been paid, and, on the evidence, they were never told that it had been paid. The money came from Lloyds Bank Plc. with notice that it was the plaintiffs' money and that payment of the invoice was its purpose. It could not be honestly retained by the defendants except for discharge of that purpose. On this basis the defendants have paid the money to persons other than the beneficiary for no reason, or at least for no reason of which there is any evidence, and they are, accordingly, personally liable to restore the trust property.

The Banque du Sud was authorised to pay the invoice, of $518,802.92, drawn in favour of Maersk Supply (Tunisia) Ltd., identified on the altered payment order. On analysis, the Banque du Sud repaid its debt to the plaintiffs by debiting the plaintiffs' bank account, and thereafter the Banque du Sud became not a creditor of the plaintiff, but their agent. As agent the Banque du Sud paid the right sum, in respect of the right invoice, but to the wrong payee. The money so used was the plaintiffs' money, at least in equity; it did not belong to the Banque du Sud. It follows that the plaintiffs are the right plaintiffs in the action. Alternatively, the plaintiffs, by bringing these proceedings have ratified the Banque du Sud's action in making the payment. Alternatively, if the Banque de Sud was not entitled to debit the plaintiffs' account, it has nevertheless done so, and it has not restored the position. If the plaintiffs are not the right plaintiffs to bring proceedings, then the position of the Banque du Sud can be compared with that arising in the Banque Belge and Bankers' Trust cases. The result is that the plaintiffs have been compelled to discharge the liability of the defendants to the Banque du Sud, and are therefore the proper plaintiffs: see Goff & Jones on Restitution, 3rd ed. (1986), p. 325. [Reference was also made to Colonial Bank v. Exchange Bank of Yarmouth, Nova Scotia (1885) 11 App.Cas. 84; and London Joint Stock Bank Ltd. v. Macmillan [1918] A.C. 777.]

Peter Leaver Q.C. and Martin White, for the defendants. The plaintiffs never paid away their own money, and therefore have suffered no loss as a result of the forgery by Mr. Zdiri. The plaintiffs therefore have no title to sue.

The relationship between a bank and its customer is that of debtor and creditor, and not that of trustee and beneficiary: see Foley v. Hill (1848) 2 H.L.Cas. 28 and N. Joachimson v. Swiss Bank Corporation [1921] 3 K.B. 110. The bank's duty to honour instructions given to it is to be determined in accordance with its mandate. A bank has no mandate to pay upon a forged instruction. If a bank does pay on a forged instruction, it acts outside the scope of its mandate, at its own risk, and with its own money. Vis-à-vis its customer the payment is not, of itself, any payment at all. If a bank pays on a forged instruction it cannot debit its customer's account, unless the customer can and does ratify the payment, or is estopped by negligence from doing so: see Barclays Bank Ltd. v. W. J. Simms Son & Cooke (Southern) Ltd. [1980] Q.B. 677, and Halsbury's Laws of England, 4th ed., vol. 3 (1973), para. 181F. If the name of the beneficiary on the payment order was altered after signature, such a change was a material alteration and constituted

the payment order a forgery. Forgery cannot be ratified: see Brook v. Hook (1871) L.R. 6 Exch. 89, 99-100. The plaintiffs in the present case therefore have no title to sue.

There is no evidence of the plaintiffs having been compelled by law to make payment to the Banque du Sud. If the plaintiffs' account has not been re-credited the only explanations for this can be either that the Banque du Sud wrongly debited the account or that the plaintiffs are liable in negligence to the Banque du Sud. The liability which the plaintiffs claim to have discharged is not a liability of the defendants owed to the Banque du Sud; it can only be the plaintiffs' own liability arising out of their own negligence: see London Joint Stock Bank Ltd. v. Macmillan [1918] A.C. 777.

If these contentions are wrong, nevertheless a personal action for money had and received can only be brought by the payer, A, against the original payee, B. Unless A can trace his money into the hands of a later recipient, C, in whose hands it remains, A cannot bring an action at law against C. There is no authority which supports any right for A to bring a personal action against C; such is the inevitable inference that should be drawn from Banque Belge pour l'Etranger v. Hambrouck [1921] 1 K.B. 321. In the present case the money was paid to Baker Oil Services Ltd. as the original payee, and therefore a claim against the defendants must fail unless the moneys can be traced into their hands, and are shown still to remain there. But no funds still remain in the hands of the defendants, and, it has never been possible to trace the money into their hands at all, because (a) the money became irretrievably mixed with the funds of the Banque du Sud, and in the hands of Lloyds Bank Plc.'s correspondent bank in New York, and the money became further mixed with other moneys in the defendants (Jackson & Co.'s) client account at the Holborn branch of Lloyds Bank in London. As to the ability to identify moneys at common law: see the Banque Belge case at p. 327 per Bankes L.J., at pp. 329-330 per Scrutton L.J., and at pp. 334-335 per Atkin L.J.

The plaintiffs' claim to trace the money in equity must fail because, save for the money paid into court, it has all been paid away.

As to constructive trust, the plaintiffs never paid away their own money, and cannot therefore claim to have suffered loss as a result of the forgery. The plaintiffs therefore cannot claim in respect of a breach of a trust of which it was not a beneficiary, or claim that the money belonged to it in equity. A critical distinction must be drawn between (i) a payment made by a bank outside the scope of its mandate, as in the case of forgery, in which case the customer's account cannot be debited, and the value of the customer's chose in action, i.e. his credit balance, is not reduced, and (ii) a payment by a bank made within its mandate, i.e. on an authorised signature, but where (unknown to the bank) the purpose of the payment is other than for the customer's proper purposes. In the later case the customer's account can be debited and the value of the customer's chose in action accordingly reduced. All of the constructive trusteeship cases fall within (ii) above. In such a case the company suffers loss because the value of its chose in action is reduced and the director or other signatory is in breach of trust because he has abused

his right to give instructions to the bank on behalf of its customer, the company. But case (i), above, is the present case, because the plaintiffs can point to no breach of trust by a director or by any other person with power to sign documents on the plaintiff's behalf, or to control its assets. In addition the plaintiffs have in fact suffered no loss as a result of the forgery. Equity cannot avoid the consequences of the common law rule set out above. The defendants cannot be regarded as constructive trustees.

If the contentions as to constructive trust are wrong, it does not matter whether the plaintiffs' claim is treated as "knowing receipt" or as "knowing assistance," since, (a), if there was a breach of trust it was a fraudulent breach of trust on any view of the matter, and the only issue remaining is the issue as to the defendants' state of mind. (b) The degree of knowledge required under each of the two heads of constructive trusteeship is the same: see In re Montagu's Settlement Trusts [1987] Ch. 264. The plaintiffs must show a want of probity of one of categories (i) to (iii), set out by Peter Gibson J. in Baden, Delvaux and Lecuit v. Société General pour Favoriser le Développement du Commerce et de l'Industrie en France S.A. [1983] B.C.L.C. 325, i.e. (i) "actual knowledge," (ii) wilfully shutting ones eyes to the obvious, or (iii) wilfully and recklessly failing to make such inquiries as an honest and reasonable man would make: see the Montagu case at pp. 276-277, 277D, 281B, and 285.

The plaintiffs allege wilful and reckless failure to make proper inquiries, but the court should not be astute to impute knowledge where no actual knowledge exists: see the Montagu case at p. 279. Fraud must be proved to a high standard. In the present case the defendants had taken over an existing scheme from a reputable firm and, over a period of two years received large sums in U.S.$ (dollars) from the plaintiffs; the payments had been administered by them on the instructions of M. Coulon, a French lawyer, through the medium of companies controlled by the defendants, which had never traded, had no assets, and had never performed services for the plaintiff. All the companies had in the past been liquidated after a very few transactions, and no previous payment had been questioned, or repayment called for.

The defendants received no benefit from these transactions save payment of their fees. The payment to "Baker Oil Services Ltd." was no different in character from the previous payments received from the plaintiff. On 7 January 1985, when the defendants were informed by Lloyds Bank Plc. of a possible claim by the Banque du Sud for recall of the payment, the defendants asked for the reason, stating that they, themselves, knew of no reason, and they were told by Lloyds Bank Plc., that the bank knew of no reason either. They offered to leave the money in the "Baker Oil" account for a short period for inquiries to be made. The defendants never asserted that "the money had already been disposed of to third parties." On 8 January 1985 the defendants were told by Lloyds Bank Plc. that, so far as the bank was concerned, the money could be dealt with, as no reason had been given for its recall. Transfer of the money through the defendants' account in London to their bank account in the Isle of Man was then effected. No further

information having been received part of the money was paid away on 16 January 1985. On 19 April 1985, the balance, i.e. £45,414.72, was paid into court, in accordance with a consent order. The conduct of the defendants was exactly what an honest and reasonable person would have done. There was no failure to make proper inquiries, and the plaintiffs' claim in constructive trust fails. [Reference was made to Colonial Bank v. Exchange Bank of Yarmouth, Nova Scotia, 11 App.Cas. 84, and London Joint Stock Bank Ltd. v. Macmillan [1918] A.C. 777.]

19 May. MILLETT J. read the following judgment. By this action the plaintiffs, Agip (Africa) Ltd., claim to recover a sum of U.S.$518,822.92 of which they were deprived by the fraud of an employee. They seek to follow funds which were telegraphically transferred by their bank in Tunisia as a result of forged instructions and to recover them, not from the recipient company, but from the persons who controlled the recipient company and caused it to part with them (the first and third defendants), or from the persons through whose hands they subsequently passed (the first and second defendants). The greater part of the money was paid away and probably found its way to confederates of the fraudulent employee. The balance, amounting to U.S.$45,160.78, has been paid into court. The defendants make no claim to this sum.

It is not alleged that the defendants were parties to the fraud or that they had actual knowledge of it. The plaintiffs bring an action at common law for money had and received. Alternatively they claim that the defendants are liable to account in equity as constructive trustees. As against the first and second defendants the plaintiffs rely on the mere receipt of the money. In addition, however, they also allege that all the defendants, and in particular the first and third defendants, were guilty of wilful and reckless failure to make the inquiries which honest men would have made in order to satisfy themselves that they were not acting in furtherance of a fraud.

1. THE FACTS

The frauds

The plaintiffs are a company incorporated in Jersey and a wholly owned subsidiary of Agip S.P.A. of Milan, the Italian oil company, itself a subsidiary of E.N.I., the Italian state holding company.

The plaintiffs' main business is concerned with oil exploration in Africa. In the late 1970s and early 1980s they were engaged in drilling for oil in Tunisia both on their own account and in the course of joint ventures with other oil companies under permits and concessions granted by the Tunisian Government. Their Tunis branch held a U.S. dollar account at the Banque du Sud in Tunis from which payments were made to overseas suppliers. Over a period of many years, both before and after March 1983 when the defendants first appeared on the scene, the plaintiffs were systematically defrauded of millions of U.S. dollars by

their chief accountant, a Mr. Zdiri. He was not a director of the plaintiffs or a signatory of their bank account but it was his duty to place completed payment orders together with the invoices to which they related before the authorised signatory and obtain his signature to them. It was also his responsibility to take the signed payment orders to the bank or to entrust them to a subordinate for this purpose. From time to time, however, he fraudulently altered the name of the payee on a payment order after it had been signed by the authorised signatory and thereby diverted the payment to a recipient of his own choosing.

Between March 1983 and January 1985 alone, sums totalling over U.S.$10.5m. were obtained by this means. During this period some 27 payment orders were fraudulently altered. The payees were all companies registered in England and managed by the defendants from the Isle of Man. Seven different payee companies were used in succession. Each held a U.S. dollar account at the High Holborn branch of Lloyds Bank Ltd. into which the money was paid.

The present action is concerned with a payment of a sum of U.S.$518,822.92 which was made on 7 January 1985 to Baker Oil Services Ltd. ("Baker Oil"). This was the last of the diverted payments. The frauds were discovered very shortly after it was made.

The defendants

The first defendant, Mr. Jackson, and the second defendant, Mr. Bowers, practise in partnership together as chartered accountants in Douglas, Isle of Man, under the name Jackson & Co. The third defendant, Mr. Griffin, is an employee of that firm. At all material times they were acting on the instructions of their client, a Monsieur Yves Coulon, a French lawyer. He was almost certainly acting for other principals whose identity is not known.

Jackson & Co. were introduced to the High Holborn branch of Lloyds Bank Plc. in March 1983 by a Mr. Humphrey, a partner in the well known firm of Thornton Baker. They probably took over an established arrangement. Thenceforth they provided the payee companies. These companies each had a purely nominal share capital which was usually registered in the names of service companies provided by Jackson & Co. In each case Mr. Jackson and Mr. Griffin were the directors and the authorised signatories on the company's account at Lloyds Bank. In the case of the first few companies Mr. Humphrey was also a director and authorised signatory. Any one signatory could sign. None of the companies had any assets or carried on any business activity. None of them was known to or had any dealings or contact with the plaintiffs. In the case of each company except Baker Oil, after two or three payments had been received and paid out, the account was closed, and a new account was opened for the successor company. Its predecessor was then promptly put into liquidation and either Mr. Jackson or Mr. Bowers was appointed liquidator. The payee companies' bank statements all showed the receipts to be derived from payments made by the plaintiffs.

When a payment was received by the payee company it was immediately transferred, usually on the same day, to another company, Euro-Arabian Jewellery Ltd. ("Euro-Arabian"), which also maintained a

U.S. dollar account at the same branch of Lloyds Bank. Euro-Arabian was registered in England. Mr. Jackson was one of three directors. He, Mr. Griffin and Mr. Humphrey were the authorised signatories of its account at Lloyds Bank. Any one of them could sign. There is no evidence that Euro-Arabian carried on any genuine business activity. It has not been suggested that it was known to or had any dealings or contact with the plaintiffs. As soon as it received a payment from a payee company it paid it out to parties overseas.

Most of the money went to Kinz Joailler S.A.R.L. ("Kinz"), a company incorporated in France and described as carrying on a jewellery business in Paris and elsewhere in France. It appears to have been a wholly owned subsidiary of Euro-Arabian. Mr. Jackson was its sole director but was probably a nominee. M. Coulon was its legal adviser. It has not been suggested that it was known to the plaintiffs. Other payments were made to M. Coulon and a Mr. Chouck ben Abdelaziz, who has not been further identified.

M. Coulon was introduced by the defendants to Mr. Breeze, the assistant manager of the High Holborn branch of Lloyds Bank. M. Coulon had no authority to operate the accounts of any of the payee companies or of Euro-Arabian but Mr. Breeze was authorised to disclose information concerning the accounts to him. Mr. Breeze was told to expect payments from Tunis at the rate of approximately $500,000 a month. When a payment was expected he would be notified by Jackson & Co. and would then contact the Overseas Division of Lloyds Bank and ask to be informed when the payment was received. As soon as he learned that the money had arrived he would telephone Jackson & Co. to inform them. They would not, however, give him immediate instructions for the disbursement of the money. There would be a short interval, presumably while they sought instructions from M. Coulon. Disbursement would usually be effected later on the same day on the authority of written instructions delivered by Jackson & Co. by hand to the Douglas branch of Lloyds Bank and read over the telephone to the High Holborn branch. The written instructions, usually signed by Mr. Jackson, would follow later by way of confirmation.

M. Coulon would visit London from time to time and discuss the state of the accounts with Mr. Breeze. They would lunch together. Mr. Breeze clearly understood M. Coulon to be behind the arrangements and to be the person whose instructions were being relayed to the branch by Jackson & Co. It had not been suggested that he was mistaken.

The defendants' state of mind

The defendants elected to call no evidence. Their state of mind is therefore largely a matter of inference. The plaintiffs relied, however, on three documents as providing some direct evidence of it. The first is the minutes of the first meeting of the directors of Keelward Ltd., one of the payee companies, held at the offices of Jackson & Co. in Douglas on 22 March 1984. The meeting was attended by Mr. Jackson and Mr. Griffin who were appointed directors of the company with immediate

effect, and the minutes are signed by Mr. Jackson. They include the following passage:

"Mr. Jackson reported that the company had been invited to act as agent for Euro-Arabian . . . in the receipt of moneys from Tunisia. This formed part of a long standing arrangement between the beneficial owners of Euro-Arabian . . . the Banque du Sud in Tunis and an offshore subsidiary of Agip S.P.A., called Agip (Africa) Ltd. In essence, the arrangement resulted in the extraction of moneys from Tunisia in circumvention of the Tunisian exchange control regulations. Keelward Ltd. would act merely in a fiduciary capacity and, in the absence of specific instructions to the contrary, all moneys received were to be passed immediately to the account of Euro-Arabian . . . with Lloyds Bank Plc. at 58 High Holborn, London . . . Euro-Arabian . . . would ensure that Keelward Ltd. was paid an appropriate amount to cover fees, expenses, etc."

The second consists of an attendance note made by Mr. Smyth, a partner in the firm of Knapp-Fishers, solicitors, of a meeting with Mr. Jackson and M. Coulon on 24 July 1984 when his advice was sought in connection with the payments. Objection was taken on behalf of the defendants to its admissibility. Mr. Smyth was not called as a witness and there is no evidence that his attendance note was ever seen by any of the defendants. There is thus no admissible evidence of the truth of its contents and I shall disregard it.

The third document consists of a letter dated 14 August 1984 and addressed by Mr. Smyth to Mr. Jackson at Jackson & Co. It is headed "Euro Arabian Jewellery" and the original was obtained from the liquidator of Euro-Arabian. It contains the considered advice which Mr. Smyth gave following his meeting with Mr. Jackson and M. Coulon on 24 July. In the absence of evidence to the contrary, I infer that it was seen by Mr. Jackson and is therefore admissible as evidence of the advice he received at the time. It deals first with the question of the recovery by the Tunisian Government or the plaintiffs from Lloyds Bank of money in the bank's possession. In this connection it contains the following passages:

"Turning now to Agip, Agip may be able to establish a cause of action by claiming that the payments were obtained by fraud. Agip could also rely on English law as the fraud would presumably have taken place within England, at the time when the moneys were transferred out of Agip's account into the account of the U.K. company. However, although Agip may be able to establish a cause of action, it would still be necessary for Agip to establish fraud (as defined under English law) for any action for the recovery of the moneys to be successful."

The letter then deals with the disclosure by Lloyds Bank of the banking transactions. In this connection Mr. Smyth advised:

"Because of the general principle of banking confidentiality, it would be extremely difficult for the Tunisian Government or Agip to obtain an order requiring Lloyds Bank to disclose banking

transactions, unless disclosure is ordered by the English courts . . . However, if Agip could establish a cause of action by reason of possible frauds, it might obtain an order for the disclosure of banking transactions . . . As in our case, there would appear to be no clear case of fraud under English law, this could frustrate early disclosure by Lloyds Bank, although Agip could seek an injunction whereby the moneys in Lloyds Bank account would be 'frozen' until the matter came to full trial."

Finally, the letter deals with tracing the money after liquidation of the payee companies. Mr. Smyth advised:

"If Agip can establish fraud, recovery of the moneys after the recipient companies have been liquidated will depend, to some extent upon whether or not Lloyds Bank held the moneys on trust for Agip."

The payment to Baker Oil

Baker Oil was incorporated on 12 October 1984 with an authorised share capital of £2,000. Mr. Jackson and Mr. Griffin each subscribed for one £1 share. No other shares were issued. Mr. Jackson and Mr. Griffin were the sole directors. Jackson & Co.'s office in Douglas was the registered office. The company's name was misleading. Neither oil nor oil services made their appearance in its memorandum of association.

Baker Oil was the successor to Parkfoot Ltd. ("Parkfoot"), which had been put into liquidation on 6 December 1984 shortly after receiving and paying out to Euro-Arabian on the same day a sum of $502,458.33. Baker Oil then opened a U.S. dollar account, No. 11955608 at the High Holborn branch of Lloyds Bank. The mandate was completed on 17 December 1984 and forwarded to Mr. Breeze on the same day. Mr. Jackson and Mr. Griffin were the authorised signatories, the signature of either being sufficient.

On 18 December 1984, Mr. Del Sorbo, a senior officer of the plaintiffs' Tunis branch and an authorised signatory of its account at the Banque du Sud, signed a payment order for $518,802.92 in favour of Maersk Supply (Tunisia) Ltd. ("Maersk") at Morgan Guaranty Trust Co. of New York. This was in payment of the hire of a vessel, Maersk Endurer, for the month of October. The invoice for that sum was dated 7 November and was due for payment within 60 days. After Mr. Del Sorbo had signed the payment order, it was fraudulently and without his knowledge altered by the substitution for the name of the original payee of the name "Beker-Oil Service Cie." (sic) with the address of the High Holborn branch of Lloyds Bank and the correct number of Baker Oil's dollar account.

The altered payment order was taken to the Banque du Sud on or shortly before Friday 4 January 1985. On that day Banque du Sud executed it by debiting the plaintiffs' account with a sum of $518,822.92, value date 7 January, and by telexing instructions to Lloyds Bank as follows:

"Attention Freeman

"Order Agip

"Payer fil sans frais pour nous dol. U.S. 518,882.92. Beker Oil Services Cie cpte no. 11.95.56.08 aupres vous memes.

"Val 7/1.

"Reglement V/Fact 40 Meu - 07/84 du 7/11/84 . . .

"Vous couvrons aupres Citibank New York meme valeur Bank Sud."

Miss Freeman was the principal in charge of foreign services at the High Holborn branch. The branch had no telex and the message was received by Lloyds Overseas Division where it was the responsibility of a Mr. Bendon, an international manager, to assess the delivery risk. When Banque du Sud telexed its instructions to Lloyds Bank, it also telexed appropriate instructions to Citibank, its correspondent bank in New York, to debit its account at Citibank and to credit Lloyds Bank or its correspondent bank in New York with a similar amount. This necessarily involved the exposure of Lloyds Bank to a delivery risk in New York. New York is five hours behind London, and Lloyds Bank was being asked to make a payment in London on 7 January 1985 before the opening of business in New York and well before confirmation of the receipt of the cover.

The High Holborn branch had already been notified by Jackson & Co. on Friday 4 January that another payment was expected and had asked to be informed by Lloyds Overseas Division as soon as it was received. Miss Freeman heard from Lloyds Overseas Division on the Monday morning, 7 January, that the money had been received for the account of Baker Oil and she so informed Mr. Breeze. He rang Mr. Griffin at about 1 p.m. and conveyed the information to him. Half an hour or so later M. Coulon telephoned from the airport and spoke to Mr. Breeze. He said that he was on the way to the bank. Mr. Breeze told him that the money had arrived.

The attempted recall

The fraud was discovered in Tunis late in the afternoon of Friday 4 January but its extent did not become apparent until the morning of Monday 7 January when Mr. Del Sorbo visited the Banque du Sud and was shown a large number of forged payment orders. These included the order for $502,458.33 in favour of Parkfoot and the order for $518,822.92 in favour of Baker Oil. He confirmed that neither company was known to the plaintiffs and that the name of the payee on the original payment order had been altered after he had signed it. He asked the bank to try to stop the two payments.

The Banque du Sud sent two messages by telex to Lloyds Bank during the afternoon of 7 January, one in respect of the payment to Parkfoot and one in respect of the payment to Baker Oil. In each case the Banque du Sud stated that according to the party giving the order the transfer had been "effectué par erreur." No other explanation was given. Lloyds Bank was asked to try to stop the payment or, if this was not possible, to obtain its customer's agreement to reverse the transaction. Parkfoot had already paid the money away and closed its account at

Lloyds Bank. It was far too late for Lloyds Bank to do anything about it and there is no evidence that it made any attempt to do so.

The telex in respect of the payment to Baker Oil was received by Lloyds Overseas Division at 2.25 p.m. London time. Mr. Bendon was advised of it and spoke to the Banque du Sud. He also spoke to Miss Freeman at the High Holborn branch. He learned from her that the money had been credited to Baker Oil's account, that the customer had already been advised of the fact and that Miss Freeman held instructions to pay the money out that same day. At Mr. Bendon's request Miss Freeman spoke to Jackson & Co. She can no longer remember to whom she spoke but she reported that Lloyds Bank had received a request from the Banque du Sud for a recall. She was asked for the reason and said that no reason had been given. She was promised that the money would be left with Lloyds Bank for 24 hours or possibly just overnight "so that checks could be made." She reported this to Mr. Bendon.

Mr. Bendon spoke again to the Banque du Sud and dictated a reply to the bank's two telexes that same afternoon. It was sent by cable on 9 January and confirmed by telex on 10 January. So far as material it reads:

". . . I have to confirm that we had already paid the amount of U.S. dollars 518,822.92 on the morning of 7 January 1985 to our customers Baker Oil . . . account number 11955608 with our High Holborn branch in accordance with the instructions which you had given us on 4 January with value 7 January. Our branch have contacted their customer who refuse to refund stating that they know of no reason why they should not have received moneys which they believe to be due to them and which they have stated to us they have already disposed of to other parties. I regret therefore that we are unable to stop payment as you have requested."

There are significant differences between Mr. Bendon's message, which was calculated to deter the Banque du Sud from pursuing its attempt to recall the money, and Miss Freeman's evidence of what she had been told by Jackson & Co. and reported to Mr. Bendon. It is possible that there was some misunderstanding between them but I doubt it and, in the absence of any evidence from the defendants, I am not prepared to infer one. Miss Freeman was a clear and reliable witness but after this lapse of time she cannot be expected to remember everything she had heard and reported to Mr. Bendon.

In the witness box Mr. Bendon was confused about the relationship between the two payments whose recall had been sought but there is no reason to think that he was confused about it at the time, and the message he dictated speaks for itself. His failure to mention Jackson & Co.'s offer to keep the money with Lloyds Bank for a short period appears extraordinary but it is, I think, to be explained by the fact that from first to last he was concerned not for the Banque du Sud, still less for its customer, but for the position of Lloyds Bank. In the absence of evidence from the defendants to the contrary I conclude:

(i) That Jackson & Co. did not offer to refund the money if a good reason was given for the recall but rather that they refused to return the

money unless a good reason was given, so that Mr. Bendon's statement that they refused to refund was accurate so far as it went.

(ii) That Mr. Bendon, rightly or wrongly, took that to mean a good reason for Lloyds Bank's insistence on the return of the money.

(iii) That accordingly he took the offer to keep the money at Lloyds Bank for a short while to be a matter between Lloyds Bank and its customer and not something to be communicated to the Banque du Sud.

(iv) That Mr. Bendon's statement that "they knew of no reason why they should not have received moneys which they believe to be due to them" was based on something to that effect said by Jackson & Co. to Miss Freeman in order to justify their refusal to refund the money unless there was a good reason to do so; but

(v) Mr. Bendon's statement that "they have stated to us that they have already disposed of it to other parties" was probably based not on anything said by Jackson & Co. to Miss Freeman but upon his own appreciation as a banker of the consequences of Miss Freeman having in her possession instructions from the customer for the disposal of the money.

The disposal of the money

On the following day, 8 January, Miss Freeman spoke to Mr. Bendon again. Following their discussion she telephoned Jackson & Co. and confirmed that so far as Lloyds Bank was concerned the value was good and the money was at the customer's disposal, no reason for the recall having been given. Miss Freeman then dealt with the money in accordance with the instructions which she had received by telephone on the previous day and which were confirmed by letter dated 7 January and signed by Mr. Griffin. In accordance with those instructions, she transferred the $518,822.92, which was the only sum standing to the credit of Baker Oil's account, to an account in the same branch in the name of Jackson & Co. and closed the account. She then confirmed these transactions by letter addressed to the secretary of Baker Oil, a service company provided by Jackson & Co. of which the defendants were directors and shareholders, in which she referred to the receipt of the $518,822.92 "by order of Agip."

Jackson & Co.'s account was an ordinary partnership account. It had been opened in March 1984. All three defendants were authorised signatories. Any one of them could sign. Immediately before the transfer from Baker Oil, the account was $7,911.80 in credit. As a result of the transfer it became $526,734.72 in credit. On 9 January, in accordance with instructions contained in or confirmed by a letter dated 8 January and signed by Mr. Griffin, $518,000 was transferred from the account to Jackson & Co.'s clients' account at the Isle of Man Bank Ltd. in the Isle of Man, which was newly opened for the purpose. After two other small debits, this left the account of Jackson & Co. at Lloyds Bank $8,560.80 in credit. Although the account was an ordinary partnership account it was being used as a clients' account, for Jackson & Co. did not receive the money for their own benefit but as nominees for their clients.

On 15 January the greater part of the $518,000 was paid out by the Isle of Man Bank in accordance with a letter of instructions of the

previous day by Jackson & Co. The money was paid as follows: $400,000 to Kinz: $70,000 to Mr. Chouck ben Abdelaziz; U.S. dollar equivalent of Ffr. 34,330.70 to M. Coulon. In a subsequent letter dated 22 February 1985 to the plaintiffs' solicitors, the defendants' solicitors stated, inter alia:

"If your clients can persuade ours that the funds in question have been stolen or otherwise improperly misappropriated our clients will co-operate immediately and disclose all material facts within their knowledge and do all in their power to preserve any such assets - my underlining.

The plaintiffs relied on the words underlined as evidence that the funds were not really paid away on 15 January but remained available to the defendants. When last seen, it was pointed out, the bulk of the money was in the hands of a wholly owned subsidiary of Euro-Arabian, both companies being under Jackson & Co.'s control.

I do not think that that is a fair reading of the evidence. The meaning of the words underlined in the passage I have read is far too uncertain to bear the weight placed upon them. In their context and immediately following a reference to "material facts within their knowledge," the words "such assets" probably mean assets within their control. They still had over $45,000 within their control which they subsequently paid into court. Moreover, there is evidence that Jackson & Co. were unwilling to pay out the money as soon as they did but yielded to the importunity of their clients. There is no ground upon which I can legitimately infer that the defendants retained control of the money and there is good reason to suppose that whatever was paid to their clients has gone for ever.

Subsequent events

Baker Oil, Euro-Arabian and Kinz have all been put into liquidation. The plaintiffs have an unsatisfied judgment against Baker Oil for the return of the money. They have brought proceedings in Tunisia against the Banque du Sud for the recovery of the sums debited to their account on forged instructions but these have been unsuccessful. Now they seek to recover the $518,822.92 from the defendants.

2. THE CLAIM AT COMMON LAW

The plaintiffs claim to recover money paid under a mistake. The money was paid to Baker Oil but it was not mixed with other money in Baker Oil's account and accordingly the plaintiffs claim to be able to follow it at common law into the account of Jackson & Co. and to recover it from Mr. Jackson and Mr. Bowers, the partners of the firm. Unlike a tracing claim in equity, the common law claim for money had and received is a personal and not a proprietary claim and the cause of action is complete when the money is received. With only limited exceptions, it is no defence that the defendant has parted with the money. The claim does not depend on any impropriety or want of probity on the part of the defendants. Several objections to it have been raised on behalf of the defendants and to these I now turn.

The plaintiffs' title to sue

The first point taken on behalf of the defendants is that the plaintiffs have no title to sue and that the only proper plaintiff is the Banque du Sud. The relationship between a bank and its customer is that of debtor and creditor, and the bank's authority to debit the customer's account is derived from its mandate. At one stage I understood it to be contended that even where the bank has acted in accordance with its mandate in debiting the customer's account, the title to sue is vested in the bank. It is said to follow from the interposition of the relationship of debtor and creditor that the property in the money has passed to the bank which must accordingly be taken to have paid the payee with its own money and not that of the customer. There are dicta in In re Diplock [1948] Ch. 465, 519, which appear to lend support to this contention. But, with respect, it overlooks the fact that by honouring the customer's cheque in favour of a third party and debiting his account, the bank acts as principal in repaying part of the debt to its customer and as the agent of the customer in paying his money to the third party.

The defendants, however, correctly insist that a bank has no right to debit its customer's account on a forged instruction since in such a case it has no mandate from the customer to do so. The law is conveniently summarised by Robert Goff J. in Barclays Bank Ltd. v. W. J. Simms Son & Cooke (Southern) Ltd. [1980] Q.B. 677, 699:

"In such cases the bank, if it pays the cheque, pays without a mandate from its customer; and unless the customer is able to and does ratify the payment, the bank cannot debit the customer's account . . ."

Seizing on the words "cannot debit the customer's account," the defendants submit that in the present case the Banque du Sud must be taken to have paid out its own money to Baker Oil and not that of the plaintiffs.

In my judgment this is a complete non sequitur. Goff J. was obviously using the word "cannot" in the sense of "has no legal right," not in the sense of "has no physical power." There is a great difference between what a party may lawfully do and what it may in fact do. The fact that a transaction is unauthorised does not mean that it has not taken place. Whether the Banque du Sud was entitled to debit the plaintiffs' account is a question of (Tunisian) law. Whether it did so is a question of fact. If Tunisian law is the same as English law - as I must assume it is - then the Banque du Sud may not have been entitled to debit the plaintiffs' account but the fact is that it did so. The plaintiffs may have been entitled to require the bank to re-credit the money to their account and to treat the sums as paid with the bank's own money, but they have tried to do so and failed. Whether it was entitled to do so or not, the fact remains that the Banque du Sud paid out the plaintiffs' money and not its own.

There is no doubt that in such a case the bank is a proper plaintiff, at least if it has re-credited the customer's account or there is still a risk that it may be required to do so: see Colonial Bank v. Exchange Bank of Yarmouth, Nova Scotia (1885) 11 App.Cas. 84, 91. In that case the

Privy Council considered that the bank had a sufficient interest to recover the money if only to obtain relief from the consequences of its potential liability to its customer. That reasoning is inconsistent with any suggestion that far from being the wrong plaintiff, the bank was the only proper plaintiff.

In my judgment, any such suggestion would be contrary to principle. Where an agent has paid away his principal's money in circumstances which give rise to a right of recovery, either principal or agent can sue, while, if the money has been paid without authority, the principal has alternative remedies: to sue the agent or the person to whom he paid the money. By suing one he does not in any sense waive the claim against the other. He must of course elect between the alternative remedies but there is no final election until a judgment is obtained and satisfied: United Australia Ltd. v. Barclays Bank Ltd. [1941] A.C. 1.

The defendants submit that the payment order in question was a forgery, and that a forgery is a nullity and cannot be ratified. That is true but irrelevant. The plaintiffs do not rely on the forgery but on the bank's want of authority. They do not seek to ratify the payment or to treat it as if it were made with their authority. On the contrary, they plead that it was made without their authority and claim to recover it on that very ground. The short answer to the defendants' argument is that the right to follow an asset at common law does not depend on ratification. In his celebrated judgment in Taylor v. Plumer (1815) 3 M. & S. 562, Lord Ellenborough C.J. pointed out that, had the successful party's case depended on ratification, it must fail; while the transparent nature of the fiction of ratification which had been adopted in the earlier cases was exposed and continued reliance on it was denounced in memorable language by Atkin L.J. in United Australia Ltd. v. Barclays Bank Ltd. [1941] A.C. 1, 27-29. Observations in In re Diplock [1948] Ch. 466, 518, might be taken to be an attempt to revive the fiction. They have been widely criticised but appear to be limited to the case where it is sought to follow an asset into a changed form in the same hands rather than follow the same asset from one recipient to another. (In such a case there is no question of ratification in equity. The plaintiff merely pleads the transaction as a result of which one trust asset was substituted for another and the trustee cannot be heard to say that it was a breach of trust.)

The character of the relevant mistake

The defendants' next point is closely allied to the first and, in my judgment, is equally misconceived. The plaintiffs claim to recover money paid to Baker Oil by mistake. Such a mistake must be that of the plaintiffs themselves or their agent. The defendants submit that there was no such mistake. The only relevant mistake was that of Banque du Sud which made the payment in the mistaken belief that it had the plaintiffs' authority to make it. It had no such authority. Hence it is submitted that it was not in fact the plaintiffs' agent when it made the payment and the mistake was not that of the plaintiffs or their lawfully authorised agent.

Once again the non sequitur is obvious. The Banque du Sud was the lawfully authorised agent of the plaintiffs with a general authority to debit their account and transfer the money in accordance with their instructions. Its authority was derived from the mandate. The fact that it was mistaken in believing that it had instructions to make a particular payment does not prevent its mistake from being that of the plaintiffs' duly authorised agent.

Tracing at common law

The next question is whether the plaintiffs can follow the payment into the hands of Jackson & Co; for the fact that it was the plaintiffs' money which left the Banque du Sud does not mean that it was the plaintiffs' money which reached Baker Oil or Jackson & Co. Tracing at common law, unlike its counterpart in equity, is neither a cause of action nor a remedy but serves an evidential purpose. The cause of action is for money had and received. Tracing at common law enables the defendant to be identified as the recipient of the plaintiff's money and the measure of his liability to be determined by the amount of the plaintiff's money he is shown to have received.

The common law has always been able to follow a physical asset from one recipient to another. Its ability to follow an asset in the same hands into a changed form was established in Taylor v. Plumer, 3 M. & S. 562. In following the plaintiff's money into an asset purchased exclusively with it, no distinction is drawn between a chose in action such as the debt of a bank to its customer and any other asset: In re Diplock [1948] Ch. 466, 519. But it can only follow a physical asset, such as a cheque or its proceeds, from one person to another. It can follow money but not a chose in action. Money can be followed at common law into and out of a bank account and into the hands of a subsequent transferee, provided that it does not cease to be identifiable by being mixed with other money in the bank account derived from some other source: Banque Belge pour l'Etranger v. Hambrouck [1921] 1 K.B. 321. Applying these principles, the plaintiffs claim to follow their money through Baker Oil's account where it was not mixed with any other money and into Jackson & Co.'s account at Lloyds Bank.

The defendants deny this. They contend that tracing is not possible at common law because the money was mixed, first when it was handled in New York, and secondly in Jackson & Co.'s own account at Lloyds Bank.

The latter objection is easily disposed of. The cause of action for money had and received is complete when the plaintiff's money is received by the defendant. It does not depend on the continued retention of the money by the defendant. Save in strictly limited circumstances it is no defence that he has parted with it. A fortiori it can be no defence for him to show that he has so mixed it with his own money that he cannot tell whether he still has it or not. Mixing by the defendant himself must, therefore, be distinguished from mixing by a prior recipient. The former is irrelevant, but the latter will destroy the claim, for it will prevent proof that the money received by the defendant was the money paid by the plaintiff.

In my judgment, however, the former objection is insuperable. The money cannot be followed by treating it as the proceeds of a cheque presented by the collecting bank in exchange for payment by the paying bank. The money was transmitted by telegraphic transfer. There was no cheque or any equivalent. The payment order was not a cheque or its equivalent. It remained throughout in the possession of the Banque du Sud. No copy was sent to Lloyds Bank or Baker Oil or presented to the Banque du Sud in exchange for the money. It was normally the plaintiffs' practice to forward a copy of the payment order to the supplier when paying an invoice but this was for information only. It did not authorise or enable the supplier to obtain payment. There is no evidence that this practice was followed in the case of forged payment orders and it is exceedingly unlikely that it was.

Nothing passed between Tunisia and London but a stream of electrons. It is not possible to treat the money received by Lloyds Bank in London or its correspondent bank in New York as representing the proceeds of the payment order or of any other physical asset previously in its hands and delivered by it in exchange for the money. The Banque du Sud merely telexed a request to Lloyds Bank to make a payment to Baker Oil against its own undertaking to reimburse Lloyds Bank in New York. Lloyds Bank complied with the request by paying Baker Oil with its own money. It thereby took a delivery risk. In due course it was no doubt reimbursed, but it is not possible to identify the source of the money with which it was reimbursed without attempting to follow the money through the New York clearing system. Unless Lloyds Bank's correspondent bank in New York was also Citibank, this involves tracing the money through the accounts of Citibank and Lloyds Bank's correspondent bank with the Federal Reserve Bank, where it must have been mixed with other money. The money with which Lloyds Bank was reimbursed cannot therefore, without recourse to equity, be identified as being that of the Banque du Sud. There is no evidence that Lloyds Bank's correspondent bank in New York was Citibank, and accordingly the plaintiffs' attempt to trace the money at common law must fail.

This is, however, not the only objection to the plaintiffs' claim to recover the money from Jackson & Co. at common law and without proof of dishonesty or want of probity on their part, and I must deal with the other objections taken by the defendants.

The claim against Jackson & Co.

The plaintiffs' money was paid to Baker Oil but they claim to recover it as money had and received by Jackson & Co. They submit that in order to succeed in such a claim all that the claimant needs to prove is (i) that the money was paid either to the defendant or to some prior recipient; (ii) in circumstances which make it recoverable; (iii) that if it was paid to a prior recipient it can be followed into the hands of the defendant; and (iv) that neither the defendant nor any prior recipient gave value. If correct, then a recipient otherwise than for value from a person who is liable to an action for money had and received is equally liable to such an action. The contention has some academic support but, with one possible exception, it is not supported by any judicial authority.

The possible exception is Bank Belge pour l'Etranger v. Hambrouck [1921] 1 K.B. 321. That case apart, there is none so far as I am aware in which a claim for money had and received has been successfully brought against anyone other than the immediate recipient of the money or his principal.

In that case H. obtained by fraud from his employer a number of cheques purporting to be drawn by the employer on the plaintiff bank. He paid the cheques into a bank account in his own name. His bank collected the proceeds from the plaintiff bank and credited them to H.'s account. H. then drew cheques on his account in favour of S., his mistress, who paid them into her own account at her own bank. She spent most of the money but a balance of £315 remained. This sum was paid into court by her bank and was claimed by the plaintiff bank. The plaintiff bank was held entitled to it.

It is not easy to know what that case decided. The plaintiff bank sought a declaration that the £315 was its property. The relief it claimed was not a money judgment but an order for payment of the £315. In other words, it was making a proprietary claim. The trial judge, however, treated it as a common law action for money had and received and entered an ordinary money judgment against S. for the sum claimed. Her appeal was dismissed.

The plaintiff had limited its claim to the £315 in court. That was also consistent with a proprietary claim, though the decision to limit the claim may have been due to other considerations. But there is no hint in any of the judgments in Court of Appeal that the claim need not have been so limited; although if S. was in truth personally accountable for money had and received, the fact that she had dissipated the money was irrelevant. On the contrary, Banks L.J. was concerned to show that the money had not been mixed in her account, which indicates that he considered the claim to be a proprietary one in which it was necessary to establish not what S. had received but what she still retained.

Scrutton L.J. held that the money could be traced in equity. It is not clear whether he relied on this to support the common law claim or to found relief in equity, but since the plaintiff had limited its claim to the £315, this made no difference to the result. Atkin L.J. alone drew attention to the difference between the two types of claim. He, too, held that the money could be followed in equity, and that this entitled the plaintiff to a specific order for the return of the money in question. He then dealt expressly with the common law action for money had and received and held that the plaintiff's ability to follow the money at common law entitled it to bring such an action.

I think that at first instance I am bound to regard that case as authority for the proposition that an action for money had and received is not limited to the immediate recipient or his principal but may be brought against a subsequent transferee into whose hands the money can be followed and who still retains it. But it is no authority for the proposition that it lies against a subsequent transferee who has parted with the money, and I doubt that it does. At this remove the action begins to take on the aspect of a proprietary claim rather than the enforcement of a personal liability to account. Should it be sought to

impose personal liability on a person who has parted with the money, recourse can be made to equity which has developed appropriate principles by which such liability can be determined. The alternative is to expose an innocent transferee who has dissipated the money to a claim at law where none would exist in equity and to make that liability depend on the fortuitous circumstance that the money had not been mixed with other money prior to its receipt by him. Such a difference in outcome cannot be justified as reflecting the fact that in one case the defendant is being required to account to the former legal owner while in the other he is accounting merely to an owner in equity, for the equitable remedies are available to the former legal owner who has been deprived of his property as the result of a breach of fiduciary obligation.

But it is not necessary for me to decide this question because, in my judgment, there is a clear answer to the plaintiffs' claim for money had and received. Jackson & Co. must be treated as being in the same position as an agent who has accounted to his principal. Money paid by mistake to such an agent cannot afterwards be recovered from the agent but only from the principal. In every previously decided case the agent has received the money directly from the plaintiff, and it is well established that to obtain the benefit of the defence the recipient must have been known to the plaintiff to have been acting for a disclosed principal. In such a case the agent is treated as a mere conduit pipe and the money is taken as having been paid to the principal rather than the agent.

This defence would not have been available to Baker Oil. So far as the Banque du Sud was concerned, Baker Oil received the money as principal. If, however, the action for money had and received is extended to a subsequent transferee, the defence must be adapted to meet the extension, for it is unlikely that there will have been any dealings between the plaintiff or his agent and the subsequent transferee. In such a case the transferee's liability must depend on the character in which he received the money from the person from whom he received it. Baker Oil and Jackson & Co. were both acting as agents and trustees for the same clients and the payment by Baker Oil to Jackson & Co. was a transfer from one agent to another for onward transmission to their common principals. Save as regards the sum in court, the money has been accounted for to those principals and, in my judgment, any claim to recover it must now be made against them and not against Jackson & Co.

This defence does not avail an agent who has accounted to his principal after notice of the plaintiff's claim; but that was not the position in the present case. The evidence cannot be described as satisfactory, but the burden of proof rests on the plaintiffs, and they have failed to show that the defendants had such notice before 15 January 1985. They do not seem to have been apprised of the plaintiffs' claim or of the discovery of the fraud. They were told only that the Banque du Sud was seeking to recall the payment. They were given no reason for the recall and, for all they knew, it might have had nothing to do with any claim by the plaintiffs to recover the money.

In addition, the defence does not avail an agent who is implicated in his principal's fraud. The relevant principles have not, however, been worked out by the common law. They have been developed in a series of modern cases which have been concerned with the application of equitable principles. It is accordingly convenient to deal with this aspect of the plaintiffs' claim under that head.

Lifting the corporate veil

There is some artificiality in treating Baker Oil as a distinct legal entity. It was a mere nominee used purely as a vehicle for the transfer of money. It was the creature of Mr. Jackson and Mr. Griffin. In reality it was nothing more than a name on a bank account. Its existence as a body corporate with a separate legal personality of its own was neither necessary nor relevant to any function which it performed. But, in my judgment, such considerations are out of place where dishonesty or want of probity is absent, while they are unnecessary where it is present.

Conclusion

In my judgment, the claim to recover the money from Jackson & Co. as money had and received and without proof of dishonesty or want of probity must fail. It fails as regards the sum in court because of the impossibility of tracing the money at common law. It fails as regards the balance for this and for the additional reason that Jackson & Co. accounted to their principals before they had notice of the plaintiffs' claim.

It would be a reproach to the law if the defendants' liability depended on whether or not the Banque du Sud and Lloyds Bank shared the same correspondent bank in New York. But then it would be equally deplorable if the defendants' liability depended on whether or not they had mixed the plaintiffs' money with some of their own during its temporary sojourn in Baker Oil's account. And it would scarcely be more seemly if their liability arose only because they made the foolish mistake of passing the money through their own bank account instead of routing it through Euro-Arabian as on previous occasions. Fortunately, none of these is the case. There is no difficulty in tracing the plaintiffs' money in equity, which has well developed principles by which the proceeds of fraud can be followed and recovered from those through whose hands they pass. Whether equity can make its tracing rules available in aid of common law remedies, or whether, as I think, it would be preferable to develop a unified restitutionary remedy for the recovery of property transferred without consideration to a recipient with no legitimate justification for receiving it, are questions which must be left for others to decide. There is certainly no need for recourse to the common law action for money had and received, which is not well equipped for the task. In my judgment, the plaintiffs' attempted reliance on the common law was unnecessary and misplaced.

3. THE CLAIM IN EQUITY

There is no difficulty in tracing the plaintiffs' property in equity, which can follow the money as it passed through the accounts of the

correspondent banks in New York or, more realistically, follow the chose in action through its transmutation as a direct result of forged instructions from a debt owed by the Banque du Sud to the plaintiffs in Tunis into a debt owed by Lloyds Bank to Baker Oil in London.

The only restriction on the ability of equity to follow assets is the requirement that there must be some fiduciary relationship which permits the assistance of equity to be invoked. The requirement has been widely condemned and depends on authority rather than principle, but the law was settled by In re Diplock [1948] Ch. 466. It may need to be reconsidered but not, I venture to think, at first instance. The requirement may be circumvented since it is not necessary that the fund to be traced should have been the subject of fiduciary obligations before it got into the wrong hands; it is sufficient that the payment to the defendant itself gives rise to a fiduciary relationship: Chase Manhattan Bank N.A. v. Israel-British Bank (London) Ltd. [1981] Ch. 105. In that case, however, equity's assistance was not needed in order to trace the plaintiff's money into the hands of the defendant; it was needed in order to ascertain whether it had any of the plaintiff's money left. The case cannot, therefore, be used to circumvent the requirement that there should be an initial fiduciary relationship in order to start the tracing process in equity.

The requirement is, however, readily satisfied in most cases of commercial fraud, since the embezzlement of a company's funds almost inevitably involves a breach of fiduciary duty on the part of one of the company's employees or agents. That was so in present case. There was clearly a fiduciary relationship between Mr. Zdiri and the plaintiffs. Mr. Zdiri was not a director nor a signatory on the plaintiffs' bank account, but he was a senior and responsible officer. As such he was entrusted with possession of the signed payment orders to have them taken to the bank and implemented. He took advantage of his possession of them to divert the money and cause the separation between its legal ownership which passed to the payees and its beneficial ownership which remained in the plaintiffs. There is clear authority that there is a receipt of trust property when a company's funds are misapplied by a director and, in my judgment, this is equally the case when a company's funds are misapplied by any person whose fiduciary position gave him control of them or enabled him to misapply them.

The tracing remedy

The tracing claim in equity gives rise to a proprietary remedy which depends on the continued existence of the trust property in the hands of the defendant. Unless he is a bona fide purchaser for value without notice, he must restore the trust property to its rightful owner if he still has it. But even a volunteer who has received trust property cannot be made subject to a personal liability to account for it as a constructive trustee if he has parted with it without having previously acquired some knowledge of the existence of the trust: In re Montagu's Settlement Trusts [1987] Ch. 264.

The plaintiffs are entitled to the money in court which rightfully belongs to them. To recover the money which the defendants have paid

away the plaintiffs must subject them to a personal liability to account as constructive trustees and prove the requisite degree of knowledge to establish the liability.

Knowing receipt

In Baden, Delvaux and Lecuit v. Société General pour Favoriser le Développement du Commerce et de l'Industrie en France S.A. [1983] B.C.L.C. 325, 403, Peter Gibson J. said:

"It is clear that a stranger to a trust may make himself accountable to the beneficiaries under the trust in certain circumstances. The two main categories of circumstances have been given the convenient labels in Snell's Principles of Equity (28th ed.) pp. 194, 195, 'knowing receipt or dealing' and 'knowing assistance'. The first category of 'knowing receipt or dealing' is described in Snell, op cit. at p. 194 as follows: 'A person receiving property which is subject to a trust . . . becomes a constructive trustee if he falls within either of two heads, namely: (i) that he received trust property with actual or constructive notice that it was trust property and that the transfer to him was a breach of trust; or (ii) that although he received it without notice of the trust, he was not a bona fide purchaser for value without notice of the trust, and yet, after he had subsequently acquired notice of the trust, he dealt with the property in a manner inconsistent with the trust.' I admit to doubt as to whether the bounds of this category might not be drawn too narrowly in Snell. For example, why should a person who, having received trust property knowing it to be such but without notice of a breach of trust because there was none, subsequently deals with the property in a manner inconsistent with the trust not be a constructive trustee within the 'knowing receipt or dealing' category?"

I respectfully agree. In my judgment, much confusion has been caused by treating this as a single category and by failing to differentiate between a number of different situations. Without attempting an exhaustive classification, it is necessary to distinguish between two main classes of case under this heading.

The first is concerned with the person who receives for his own benefit trust property transferred to him in breach of trust. He is liable as a constructive trustee if he received it with notice, actual or constructive, that it was trust property and that the transfer to him was a breach of trust; or if he received it without such notice but subsequently discovered the facts. In either case he is liable to account for the property, in the first case as from the time he received the property, and in the second as from the time he acquired notice.

The second and, in my judgment, distinct class of case is that of the person, usually an agent of the trustees, who receives the trust property lawfully and not for his own benefit but who then either misappropriates it or otherwise deals with it in a manner which is inconsistent with the trust. He is liable to account as a constructive trustee if he received the property knowing it to be such, though he will not necessarily be required in all circumstances to have known the exact terms of the trust.

This class of case need not be considered further since the transfer to Baker Oil was not lawful.

In either class of case it is immaterial whether the breach of trust was fraudulent or not. The essential feature of the first class is that the recipient must have received the property for his own use and benefit. This is why neither the paying nor the collecting bank can normally be brought within it. In paying or collecting money for a customer the bank acts only as his agent. It is otherwise, however, if the collecting bank uses the money to reduce or discharge the customer's overdraft. In doing so it receives the money for its own benefit.

This is not a technical or fanciful requirement. It is essential if receipt-based liability is to be properly confined to those cases where the receipt is relevant to the loss. This can be demonstrated by considering the position of Mr. Bowers in the present case. He was a partner in Jackson & Co. but he played no active part in the movement of the funds. He did not deal with the money or give instructions in regard to it. He did not take it for his own benefit. He neither misapplied nor misappropriated it. It would not be just to hold him directly liable merely because Mr. Jackson and Mr. Griffin, who controlled the movement of the money from the moment it reached Baker Oil, chose on this occasion to pass it through his firm's bank account instead of through Euro-Arabian's account as previously.

Mr. Griffin did not receive the money at all, and Mr. Jackson and Mr. Bowers did not receive or apply it for their own use and benefit. In my judgment, none of them can be made liable to account as a constructive trustee on the basis of knowing receipt.

Knowing assistance

A stranger to the trust will also be liable to account as a constructive trustee if he knowingly assists in the furtherance of a fraudulent and dishonest breach of trust. It is not necessary that the party sought to be made liable as a constructive trustee should have received any part of the trust property, but the breach of trust must have been fraudulent. The basis of the stranger's liability is not receipt of trust property but participation in a fraud: Barnes v. Addy (1874) 9 Ch. App. 244, and see the explanation of the distinction between the two categories of the case given by Jacobs P. in D.P.C. Estates Pty. Ltd. v. Grey [1974] 1 N.S.W.L.R. 443.

The authorities at first instance are in some disarray on the question whether constructive notice is sufficient to sustain liability under this head. In the Baden case [1983] B.C.L.C. 325, Peter Gibson J. accepted a concession by counsel that constructive notice is sufficient and that on this point there is no distinction between cases of "knowing receipt" and "knowing assistance." This question was not argued before me but I am unable to agree. In my view the concession was wrong and should not have been made. The basis of liability in the two types of cases is quite different; there is no reason why the degree of knowledge required should be the same, and good reason why it should not. Tracing claims and cases of "knowing receipt" are both concerned with rights of priority in relation to property taken by a legal owner for his own

benefit; cases of "knowing assistance" are concerned with the furtherance of fraud. In Belmont Finance Corporation Ltd. v. Williams Furniture Ltd. [1979] Ch. 250, the Court of Appeal insisted that to hold a stranger liable for "knowing assistance" the breach of trust in question must be a fraudulent and dishonest one. In my judgment it necessarily follows that constructive notice of the fraud is not enough to make him liable. There is no sense in requiring dishonesty on the part of the principal while accepting negligence as sufficient for his assistant. Dishonest furtherance of the dishonest scheme of another is an understandable basis for liability; negligent but honest failure to appreciate that someone else's scheme is dishonest is not.

In In re Montagu's Settlement Trusts [1987] Ch. 264, 285, Sir Robert Megarry V.-C. doubted whether constructive notice is sufficient even in cases of "knowing receipt." Whether the doubt is well founded or not (as to which I express no opinion), "knowing assistance" is an a fortiori case.

Knowledge may be provided affirmatively or inferred from circumstances. The various mental states which may be involved were analysed by Peter Gibson J. in Baden's case [1983] B.C.L.C. 325 as comprising: (i) actual knowledge; (ii) wilfully shutting one's eyes to the obvious; (iii) wilfully and recklessly failing to make such inquiries as an honest and reasonable man would make; (iv) knowledge of circumstances which would indicate the facts to an honest and reasonable man; and (v) knowledge of circumstances which would put an honest and reasonable man on inquiry.

According to Peter Gibson J., a person in category (ii) or (iii) will be taken to have actual knowledge, while a person in categories (iv) or (v) has constructive notice only. I gratefully adopt the classification but would warn against over refinement or a too ready assumption that categories (iv) or (v) are necessarily cases of constructive notice only. The true distinction is between honesty and dishonesty. It is essentially a jury question. If a man does not draw the obvious inferences or make the obvious inquiries, the question is: why not? If it is because, however foolishly, he did not suspect wrongdoing or, having suspected it, had his suspicions allayed, however unreasonably, that is one thing. But if he did suspect wrongdoing yet failed to make inquiries because "he did not want to know" (category (ii)) or because he regarded it as "none of his business" (category (iii)), that is quite another. Such conduct is dishonest, and those who are guilty of it cannot complain if, for the purpose of civil liability, they are treated as if they had actual knowledge.

In the present case, Mr. Bowers did not participate in the furtherance of the fraud and he cannot be held directly liable on this ground. Mr. Jackson and Mr. Griffin, however, clearly did. Mr. Jackson set up the arrangements and employed Mr. Griffin to carry them out. The money was under their control from the time it was paid into Baker Oil's account until the time it left Jackson & Co.'s clients' account in the Isle of Man Bank. One or other of them gave the actual instructions to the banks which disposed of the money. They plainly assisted in the fraud. The sole remaining question is: did they do so with the requisite degree of knowledge?

The defendants' state of mind

Mr. Jackson and Mr. Griffin knew that the money was coming from the plaintiffs, an oil company with a branch in Tunis; that most of it was being paid to Kinz, which ran a jewellery business in France; that more than $10m. had been dealt with in this way in less than two years; and that their instructions came from the recipients and not from the plaintiffs. They knew of no connection or dealings between the plaintiffs and Kinz or of any commercial reason for the plaintiffs to make substantial payments to Kinz. They must have realised that the only function which the payee companies or Euro-Arabian performed was to act as "cut-outs" in order to conceal the true destination of the money from the plaintiffs. They must also have realised that the only purpose in having two "cut-outs" instead of one was to make it impossible for investigators to make any connection between the plaintiffs and Kinz without having recourse to Lloyds Bank's records; and their object in frequently replacing the payee company by another must have been to reduce the risk of discovery by the plaintiffs.

This is damning evidence; but it does not stop there. The letter dated 14 August 1984 from Knapp-Fishers shows that Mr. Jackson was concerned - whether for himself or his clients is immaterial - at the possibility that the plaintiffs might obtain disclosure of Lloyds Bank's records, discover what had happened to the money, and try to recover it.

Mr. Jackson and Mr. Griffin are professional men. They obviously knew that they were laundering money. They were consciously helping their clients to make arrangements designed for the purpose of concealment from, inter alios, the plaintiffs. It must have been obvious to them that their clients could not afford their activities to see the light of day. Secrecy is the badge of fraud. They must have realised at least that their clients might be involved in a fraud on the plaintiffs.

Can Mr. Jackson and Mr. Griffin possibly have believed that their arrangements had an honest purpose? They pleaded no such belief. They have given no evidence. On their behalf it was submitted that they were entitled to be reassured by the fact that they were taking over arrangements which had been established for some years; that they were introduced to them by a partner in a well known and reputable firm of chartered accountants; and that, if there was any wrongdoing, it would surely have come to light long before. Had Mr. Jackson and Mr. Griffin given evidence to this effect, I might or might not have believed it. But I will not assume it when they do not tell me so.

Reliance was also placed on Miss Freeman's assurance on 8 January that, so far as Lloyds Bank was concerned, the defendants were at liberty to dispose of the money. But this was not an assurance that they could do so as far as the plaintiffs were concerned. Just as Miss Freeman's first message about the recall was not an alert, so her second was not an all clear.

What did Mr. Jackson and Mr. Griffin think was going on? There is some evidence of this in the minutes of the first meeting of the directors of Keelward Ltd. on 22 March 1984, and it would be wrong of me to ignore it. It suggests that they thought that their clients were engaged in

evading Tunisian exchange control, possibly with the connivance of the plaintiffs and on their behalf - though the minutes do not say so. In my judgment, however, it is no answer for a man charged with having knowingly assisted in a fraudulent and dishonest scheme to say that he thought that it was "only" a breach of exchange control or "only" a case of tax evasion. It is not necessary that he should have been aware of the precise nature of the fraud or even of the identity of its victim. A man who consciously assists others by making arrangements which he knows are calculated to conceal what is happening from a third party, takes the risk that they are part of a fraud practised on that party.

But it is not necessary to rest my decision on this ground. After Mr. Smyth's letter of 14 August 1984, the defendants cannot claim that the possibility of a fraud on the plaintiffs never crossed their minds; it was specifically drawn to their attention. Yet they never made any inquiries of the plaintiffs or took any steps to satisfy themselves that the arrangements had the plaintiffs' knowledge and approval. They comforted themselves with the fact that there was "no clear case of fraud under English law."

I am led to the conclusion that Mr. Jackson and Mr. Griffin were at best indifferent to the possibility of fraud. They made no inquiries of the plaintiffs because they thought that it was none of their business. That is not honest behaviour. The sooner that those who provide the services of nominee companies for the purpose of enabling their clients to keep their activities secret realise it, the better. In my judgment, it is quite enough to make them liable to account as constructive trustees.

Causation

Although no argument was addressed to me on this question, the judgment of Peter Gibson J. in Baden's case [1983] B.C.L.C. 325 contains a lengthy discussion of the position of a party who is put on inquiry but fails to inquire. He concluded that there is no presumption that, had inquiries been made, truthful answers would have been given; but that the plaintiff must prove that inquiry would have disclosed the truth, for the burden lies upon him to prove a causal connection between the failure to make inquiry and the loss.

Peter Gibson J. was considering the question in the context of constructive notice, but a similar question appears to arise in the context of imputed knowledge of type (iii). For my part, I doubt that this is the correct approach even in cases of constructive notice, but I entirely reject it in cases of dishonesty. There is a great weight of judicial authority as well as principle against it. In my judgment, it derives from a misunderstanding of the basis of the constructive trustee's liability. He is not liable for failing to make inquiry, but for the misapplication of the plaintiff's property. He is under no duty to make inquiry. His only duty is to act honestly. If he makes inquiry, he does so for his own protection. If he does not make inquiry, the loss is not caused by his failure to do so but by his participation in the misapplication of the plaintiff's funds. He is liable only if he acted with knowledge; and this must be judged in the light of all the circumstances known to him and any explanation actually given to him. But it is not, in my view, to be judged by

considering the hypothetical explanations which might have been given to him if he had sought them. If it were otherwise, his liability would depend on whether the fraudster would have been sufficiently inventive to be able to supply a plausible explanation if asked for one. In the present case, it would depend on whether the defendants should be assumed to have directed their inquiries, which ex hypothesi they did not make, to Mr. Zdiri or to his superiors. Such considerations are or ought to be irrelevant. They have been repeatedly denounced in the strongest terms: "A more dangerous doctrine could not be laid down, nor one involving a more unsatisfactory inquiry:" Jones v. Williams (1857) 24 Beav. 47, 62, per Sir John Romilly M.R., cited with approval by Stirling L.J. in In re Alms Corn Charity [1901] 2 Ch. 750, 762, and by Bankes L.J. in A.L. Underwood Ltd. v. Bank of Liverpool [1924] 1 K.B. 775, 789.

In my judgment, the fact that a false but credible explanation would or might have been given is no defence to a party put on inquiry who makes none. Mr. Jackson and Mr. Griffin are not to be held liable for the misapplication of the plaintiffs' funds because they failed to make inquiries which would have discovered the fraud, but because they dishonestly assisted in the misapplication. Their failure to make the inquiries which honest men would have made to satisfy themselves that they were not engaged in furthering a fraud is merely the evidence from which their dishonesty is inferred.

Mr. Bowers

Although Mr. Bowers cannot be held directly liable, he is vicariously liable for the acts of his partner, Mr. Jackson, and his employee, Mr. Griffin.

4. CONCLUSION

The plaintiffs are entitled to judgment against Mr. Jackson and Mr. Bowers for payment out of the sum in court with interest from the date of its payment in, and to judgment against all three defendants for the balance of the sum claimed with interest from the date of its receipt by Baker Oil.

Solicitors: Shindler & Co.; Wedlake Bell.

T. C. C. B.