A. Proprietary and Personal Claims under the Equitable Regime

At this stage, it will be useful to clarify the differences between the equitable regime and the unjust enrichment approach. Under orthodox trust principles, claims against third-party recipients can arise where they have received trust property as a result of a breach of duty by a trustee or fiduciaryFootnote ⁶ (for the purposes of this article, where a fiduciary holds or receives identifiable property on behalf of another they are regarded as a “trustee”).Footnote ⁷ Two types of claim are available in these circumstances.Footnote ⁸ The first type of claim is a proprietary one and the second type of claim is a personal one.

The proprietary claim is generally regarded as the more desirable of the two as it offers practical benefits to litigants that are not provided by personal claims.Footnote ⁹ These benefits include the ability to recover property even where the recipient is insolvent, as well as being able to bring claims against subsequent recipients.Footnote ¹⁰ This proprietary claim does, however, have limits. A proprietary claim in equity will be defeated if the property has been received by a good faith purchaser of the legal title,Footnote ¹¹ and the claim can only attach to identifiable property either in the form of the original trust assets or where it is traced into substitutions.Footnote ¹² The ability to trace into substitutions has proven contentious, with some academics arguing that rights to new property can only be explained on the basis of unjust enrichment.Footnote ¹³ A major practical consequence of the unjust enrichment analysis of tracing is that it could potentially allow the recognition of an additional defence of change of position, which would allow the courts to take into account detriments suffered by an innocent recipient of trust property.Footnote ¹⁴ In Foskett v McKeown, the unjust enrichment analysis of tracing was rejected by the majority in the House of Lords and it was explained that the claim for traceable proceeds is based on the vindication of the beneficiary's property rights.Footnote ¹⁵ The consequence is that no change of position defence applies to proprietary claims,Footnote ¹⁶ a view that is shared in this article and which is developed further on.Footnote ¹⁷

Alongside the proprietary claim, there is a potential personal claim in equity for knowing receipt (or “unconscionable receipt”).Footnote ¹⁸ This personal claim for knowing receipt will be useful where the recipient no longer retains the traceable proceeds of the trust property, or where the property has depreciated in value. As the name indicates, a successful claimant must demonstrate that the defendant has received trust property and, in addition, has the required standard of knowledge that the property was received in breach of trust.Footnote ¹⁹ The element of receipt can be established through the successful following or tracing of the trust property.Footnote ²⁰ However, this claim is only available where the recipient has received full “beneficial receipt” of the property, and will not be available where a third party receives trust property on behalf of the trustee.Footnote ²¹ A more difficult issue is the degree of knowledge required to establish this form of liability.Footnote ²² Some cases had indicated that constructive knowledge would suffice,Footnote ²³ whereas other cases required a state of mind which is closer to dishonesty.Footnote ²⁴ The only recurrent theme was that some degree of knowledge was required.Footnote ²⁵ At present, the solution preferred by the courts to this issue has been to adopt a test of “unconscionable” receipt,Footnote ²⁶ which provides a flexible approach that can be tailored depending on the context of the case before the court. This is also explored further on in this article.Footnote ²⁷

B. Strict Liability Personal Claims in Common Law and Equity

A claim for unjust enrichment is currently available against a recipient who is enriched at the expense of the claimant upon a recognised unjust factor with no available defence.Footnote ²⁸ A classic example of an unjust enrichment is where the claimant makes a mistaken payment. The receipt of such a payment traditionally only gives rise to a personal claim (although this issue itself is not without controversy,)Footnote ²⁹ which can be satisfied by restitution of an equivalent value as opposed to the return of specific property.Footnote ³⁰ If a claim for unjust enrichment was available against a recipient of trust property, it would be necessary to identify an “unjust factor”, with commentators focusing on the claimant's lack of consent or the trustee's lack of authority for making the transfer.Footnote ³¹ This is distinct from the approach in knowing receipt which focuses on the conduct of the recipient. For this reason, unjust enrichment is commonly referred to as a form of strict liability, albeit one that has also been described as “fragile” due to the application of the change of position defence.Footnote ³² This defence of change of position will be available where the recipient has, in good faith, changed their circumstances as a consequence of the enrichment and where the recipient would be worse off if they were required to make restitution.Footnote ³³

Additionally, equity recognises a strict liability personal claim, but only for the recovery of mistaken payments by those who are administering the estate of a deceased person.Footnote ³⁴ At present, unlike claims for unjust enrichment, recipients of such payments do not have the benefit of the change of position defence and can only escape personal liability if they stand as a good faith purchaser.Footnote ³⁵ These claims are discussed in the final section of this article, where it is explained that they can be readily accommodated within an unjust enrichment analysis.

C. Changing Attitudes towards the Availability of Unjust Enrichment for the Recovery of Trust Property

Of central importance to this article is the argument that the equitable regime should be supplemented by a concurrent strict liability personal claim in unjust enrichment.Footnote ³⁶ An example is the Court of Appeal decision in Relfo v Varsani,Footnote ³⁷ although it should be noted that a similar position has been set out in a number of lower court decisions.Footnote ³⁸ In Relfo, the claimant was seeking to recover money which had been transferred in breach of fiduciary duty to the defendant. The court concluded that the money could be traced into the hands of the defendant who had also knowingly received the property.Footnote ³⁹ However, it was also concluded that the claimant would have been able to succeed on the basis of unjust enrichment. It is notable that this discussion of unjust enrichment was unnecessary given that the grounds for knowing receipt had been established. According to Arden L.J., “[i]f a fiduciary steals trust money, the beneficiary can claim back the money, or any money or asset for which it has been substituted, from the person who has knowingly received it. A similar claim may be made in unjust enrichment”.Footnote ⁴⁰ This statement is in direct conflict with an earlier Court of Appeal authority, BCCI v Akindele, where Nourse L.J. rejected the unjust enrichment analysis in the context of claims for the receipt of trust property.Footnote ⁴¹ In Relfo, no acknowledgment was made of the controversy of introducing unjust enrichment alongside the equitable regime. The position adopted in Relfo indicates that the courts have yet to be fully convinced that unjust enrichment should not be concurrently available alongside the equitable regime. It is contended in the following section that the beneficiary's inability to bring an unjust enrichment claim cannot be solely explained by the recipient's security of receipt nor by the beneficiary's pre-existing equitable title. Instead, it will be explained that the equitable regime responds to the trustee's breach of their duty of preservation and this also provides a more convincing explanation as to why beneficiaries cannot bring a claim for unjust enrichment against third-party recipients.

A. Security of Receipt

One of the most commonly cited reasons for rejecting the availability of unjust enrichment in claims against recipients of trust property is the protection of the recipient's security of receipt.Footnote ⁴² It is axiomatic that security of receipt is an important issue, and indeed it will be argued further on that unjust enrichment does not fully protect innocent recipients so it should only be available in the absence of any alternative means of recovery.Footnote ⁴³ However, the security of receipt issue does not, on its own, provide a compelling explanation for rejecting strict liability personal claims against recipients of trust property. The reason for this position is that it is difficult to see why security of receipt should not also preclude the application of strict liability personal claims in claims for unjust enrichment and the personal claim in Re Diplock.Footnote ⁴⁴ Moreover, if the primary justification for rejecting unjust enrichment was to protect security of receipt then, arguably, the aforementioned change of position defence should be recognised as an additional defence for recipients of trust property. But, as it will be argued below,Footnote ⁴⁵ the aim of recovering trust property transferred in breach of the trustee's duty would be undermined by the presence of the change of position defence. Although the security of receipt issue is undoubtedly a concern which prevents the overextension of the equitable regime, it does not provide the sole justification for the equitable regime as it currently stands.

B. Title-Based Claims and Defective Transfers

Another approach is provided by Smith, who contends that the basis of the proprietary and personal claims in equity is the claimant's continuing title to property which has reached the hands of the recipient.Footnote ⁴⁶ This distinguishes these cases from traditional unjust enrichment claims such as mistaken payments, where title is lost at the moment of transfer and the basis of the claim is a defective transfer. Under Smith's approach, strict liability personal claims only arise for defective transfers whereas the title of the beneficiary justifies treating those cases differently from defective transfer cases. Although it may appear that Smith's view is similar to the approach developed in this article, it is important to note that Smith's position seems to rely on the fact that a beneficiary has a pre-existing proprietary right which entitles them to make a proprietary claim. However, that does not seem to provide a sufficient distinction between claims under the equitable regime and claims for unjust enrichment. Jaffey, for example, contends that the core case of unjust enrichment, the mistaken payment, cannot be understood without reference to the claimant's initial title.Footnote ⁴⁷

The difficulty of distinguishing title-based claims and defective transfer claims on the basis of title can be further illustrated by considering the strict liability personal claim that is available for the recovery of mistaken transfers by executors.Footnote ⁴⁸ Smith has argued that this strict liability personal claim derives from the rights of the estate to recover overpayments, so that it is not a title-based claim but a defective transfer claim.Footnote ⁴⁹ This is debatable for two reasons. First, as Lord Davey explained in Harrison v Kirk, the equitable action was introduced to maintain the creditor or legatee's right of recovery against the estate after the courts began to protect executors when they had distributed assets under the decree of the court.Footnote ⁵⁰ If the executor has any right to bring a claim it is an extension of the creditor or legatee's pre-existing rights, not the other way around.Footnote ⁵¹ Second, the claimant's pre-existing right to recover is nonetheless a type of property right, even though it might not be a full beneficial title.Footnote ⁵² For these reasons, a preferable analysis would be one that explains the normative basis of the equitable right to make a title-based claim against a third party. As will be argued in this article, the title-based claim is dependent upon a breach of the trustee's duty to preserve identifiable property which, as will be demonstrated below,Footnote ⁵³ is absent where an executor makes a mistaken payment.

A. Recovering Property

In the preceding section, it was explained that the claimant's right to recover property from third parties cannot be differentiated from unjust enrichment merely on the basis of the claimant's original property rights. Nonetheless, this analysis does not deny that beneficiaries do have proprietary rights in trust property. Whilst the property remains under the control of the trustee, the beneficiary has a superior right to the property and will enjoy priority over the trustee's creditors.Footnote ⁵⁴ But it does not necessarily follow that the right to recover property from a third party is the same right that exists where the property is still in the hands of the trustee or fiduciary.Footnote ⁵⁵ This approach requires a modification of Virgo's analysis that such claims arise through the vindication of property rights,Footnote ⁵⁶ which was also adopted in Foskett v McKeown.Footnote ⁵⁷ Whilst the claim is still one which vindicates the claimant's property rights, the precise cause of action is the trustee's wrongdoing.

The wrongdoing which unlocks the door to the beneficiary's right to bring a direct claim to recover property under the equitable regime is the failure of the trustee to retain control over trust property,Footnote ⁵⁸ in breach of their duty to preserve the beneficiary's interests in identifiable property. A duty of preservation is normally created when an express trustee or fiduciary accepts to hold identifiable property subject to the beneficiary or principal's interests.Footnote ⁵⁹ This duty can also be imposed, as in resulting or constructive trusts where the trustee is placed under “an obligation to deal with property in a particular way on behalf of another person”.Footnote ⁶⁰ The recurrent theme is that a duty of preservation will only arise where the trustee has knowledge that they hold identifiable property on behalf of a beneficiary.Footnote ⁶¹ This duty will be breached where the trustee makes an unrestricted transfer and can no longer preserve the beneficiary's interests in the transferred property.Footnote ⁶² Accordingly, the beneficiary's right to recover trust property from a third-party recipient is best seen as a secondary right which, arguably, creates a new property right where the property is no longer subject to the control of the trustee.Footnote ⁶³ The beneficiary's secondary right replicates the performance of the beneficiary's primary rights as closely as possible. Thus, the proprietary claim achieves what the trustee can no longer do; it preserves the beneficiary's interests in identifiable property by enabling the beneficiary to recover specific property. This also explains why claimants can recover substitutions made by innocent recipients. Lord Millett has argued that the trustee has a duty to preserve the beneficiary's interests in identifiable property, and this primary duty can be enforced whenever the trustee substitutes the original property for new assets.Footnote ⁶⁴ Since the secondary right replicates performance of the primary right, the ability to recover traceable proceeds of trust property in the hands of a third party operates in the same way. As Bramwell L.J. explained in Re Smith, Fleming, & Co., the beneficiary should not be prevented from tracing into substitutions merely as a result of the trustee's breach of their duty.Footnote ⁶⁵

Ho has contended that the accounting process can be used to explain rights to recover property from third parties as directly enforcing the trustee's primary duty.Footnote ⁶⁶ But the duty is not simply for the beneficiary's interests to be preserved in identifiable property. It is a personal duty which must be performed by the trustee, and if a trustee makes an unrestricted transfer they can no more control what happens with the trust property than any other transferor who advances property to another person.Footnote ⁶⁷ Moreover, as Swadling has noted, merely because a claim to recover property from a third party appears to duplicate a claim to recover property from a trustee does not mean that they are analytically the same.Footnote ⁶⁸ Indeed, there are important reasons for recognising the distinction between proprietary claims to recover property where it is retained by the trustee and claims to recover property from a third party. The proposition that a beneficiary does not have a primary right to recover property from third parties is in line with the general pattern in equity where the beneficiary's primary rights are against the trustee, and it is the trustee who has the power to bring claims against third parties.Footnote ⁶⁹ For example, in Field v Field, the beneficiary sought to prevent a trustee from leaving deeds in the hands of solicitors.Footnote ⁷⁰ This request was refused as appropriate steps had been taken by the trustees to ensure that the solicitors had safeguarded the property. It is only where the trustee retains control over the property in the hands of a third party that it will still be possible for the beneficiary to enforce their primary rights.Footnote ⁷¹

Whether the beneficiary is asserting their primary or secondary rights will be important for two reasons. First, no limitation period applies where property is retained by a third party who holds property on behalf of the trustee,Footnote ⁷² whereas claims to recover property from a third party who receives unrestricted control of property are subject to a limitation period.Footnote ⁷³ Second, third parties who hold trust property on behalf of trustees will only be liable for dishonest assistance. This will be the case even where the third party has knowledge that they have received trust property in breach of other trust obligations.Footnote ⁷⁴ A knowing receipt claim can only arise where the trustee has lost control over trust property and has breached their duty of preservation. This is because a party who knowingly receives unrestricted control over trust property has an unfettered choice to assist in the recovery of trust property whereas a solicitor or bank, who is acting under the instructions of the trustee, may be liable for breaching a separate duty to the trustee if they refuse to act in accordance with these instructions.Footnote ⁷⁵

B. The Personal Claim for Knowing Receipt

Like the proprietary claim, the purpose of knowing receipt is to facilitate the recovery of misapplied trust property. Knowing receipt does this by imposing a duty on knowing recipients to assist in the recovery of trust property.Footnote ⁷⁶ This duty is, however, distinguishable from the trustee's duty of preservation. As explained by Swadling, a third-party recipient may become subject to a “duty to convey” property to the beneficiary whereas a trustee is subject to a “duty to hold” property.Footnote ⁷⁷ We can only expect a recipient to be under a duty to convey the property where they have sufficient knowledge that the property was received in breach of the trustee's duty of preservation.Footnote ⁷⁸

In contrast to the view adopted here, Mitchell and Watterson have argued that the duty of the knowing recipient mirrors the express trustee's duty to account.Footnote ⁷⁹ These authors take the view that the recipient is under a “primary restorative duty”, but that there is no need to show that the recipient breached any duty.Footnote ⁸⁰ They cite Green v Weatherill as an example, where it was concluded that an account could be requested against a knowing recipient without an allegation of breach.Footnote ⁸¹ There are two reasons for departing from Mitchell and Watterson's analysis. The first reason is that even if a knowing recipient is subject to the same duty as a trustee, it is questionable whether a trustee can be held personally liable in the absence of a breach of duty. An account is merely a process,Footnote ⁸² and this process does not provide an explanation as to why the trustee should be liable where the trust property has been lost.Footnote ⁸³ Mitchell has argued that the trustee owes a primary duty to provide substitutive performance in the form of a debt for any shortfall.Footnote ⁸⁴ But the beneficiary does not have a primary right to a non-specific asset in the form of a debt, as it is a fundamental principle of trust law that there must be identifiable property.Footnote ⁸⁵

Instead it is arguably the loss of the trust property, in breach of the duty of preservation, which provides the basis for the trustee's personal liability. For example, in Re Swan a trustee was held liable to account for the destruction of jewellery.Footnote ⁸⁶ According to Sargant J., the point in time when the trustee is liable to account is when they commit a breach of trust as “the right of the cestui que trust which was first violated was a right to the property itself”.Footnote ⁸⁷ This can be seen to operate in a similar way to the principle of res ipsa loqitor,Footnote ⁸⁸ as the very fact that the trust property has been lost will infer that, on the balance of probabilities, the trustee has breached their obligation.Footnote ⁸⁹ In turn, when Maugham J. stated in Green v Weatherill that there can be an account without proof of a breach of duty, this may simply mean that it will be inferred that the knowing recipient has breached their duty where they no longer retain the trust property.Footnote ⁹⁰ The second reason is that, even if one accepts that a trustee can be held personally liable in the absence of any breach of duty,Footnote ⁹¹ extending this reasoning to a third-party recipient is more difficult. As Chambers has noted, knowledge alone is not a very convincing reason for imposing personal liability upon a third-party recipient.Footnote ⁹² For this reason, it is appropriate to recognise that it is the recipient's breach of their duty to convey the property which gives rise to personal liability.

The concept of unconscionability provides two important functions in, first, identifying the degree of knowledge required for the imposition of this duty and, second, identifying when the duty has been breached. In relation to the first point, unconscionability enables the courts to recognise that different levels of enquiry may be appropriate depending on the context of the defendant's receipt.Footnote ⁹³ It may be appropriate to find constructive knowledge in transactions involving land, which can be “leisurely investigated”, but not in commercial transactions where no such opportunity arises.Footnote ⁹⁴ Second, unconscionability also enables the courts to take into account the defendant's conduct in determining whether the recipient has indeed breached their duty.Footnote ⁹⁵ Take, for example, a defendant who discovers that they have innocently received trust property, but the property is stolen by someone else before the property can be restored. A trustee would not be held personally liable in such circumstances,Footnote ⁹⁶ and it would be inappropriate to impose a more onerous duty on a third party than the duty of a trustee who has accepted their position.Footnote ⁹⁷

C. The Conflicting Aims of Unjust Enrichment

In light of the analysis in the preceding section, the most obvious reason for rejecting the application of unjust enrichment is that a claim for unjust enrichment fails to replicate the primary right of the beneficiary which relates to identifiable property. Unlike the equitable regime, unjust enrichment focuses on reversing the abstract enrichment of the recipient, but this does not require restitution of the original property or its traceable proceeds.Footnote ⁹⁸ The introduction of the unjust enrichment analysis would actually undermine the premise of the equitable regime by sending the message to recipients that restoration of identifiable trust property does not determine the question of their personal liability. It may be argued that the introduction of unjust enrichment would at least deter recipients from deliberately dissipating the trust property, as this would normally exclude the protection afforded by the change of position defence.Footnote ⁹⁹ But any recipient who seeks to deprive the claimant of trust property would in any case be liable under the claim for knowing receipt, and they would not be made “more liable” by the availability of a concurrent claim for unjust enrichment.

There are good reasons for the different approaches of the equitable regime and unjust enrichment. Whereas the equitable regime is designed to recover what has been lost by the trustee's breach of duty, the law of unjust enrichment is designed for dealing with “not-wrongs”.Footnote ¹⁰⁰ This means that the law of unjust enrichment does not provide strong enough justifications to allow recovery of specific property. For example, the traditional basis of a claim for unjust enrichment is that the claimant has intended to make an outright transfer but their intention was deficient, such as where the enrichment arises as a result of mistakes or failed conditions.Footnote ¹⁰¹ The conscious decision to transfer property in these cases means that the recipient will receive unrestricted dominion over the enrichment.Footnote ¹⁰² Therefore, claimants lose their right to recover specific property and unjustly enriched recipients are only obliged to make restitution of an equivalent sum.

It must be noted that there are some situations where proprietary claims are increasingly available in cases that have been categorised as instances of unjust enrichment. For example, Lord Browne-Wilkinson in Westdeutsche Landesbank Girozentrale v Islington L.B.C. concluded that interests in stolen money would be protected under a constructive trust.Footnote ¹⁰³ Moreover, cases of fraud are commonly dealt with using equitable principles, either in the form of a trust or “mere equities” in the form of rescission.Footnote ¹⁰⁴ However, as this author has previously argued there is a very different principle which underpins the application of the equitable regime in cases of unauthorised transfers or where money is obtained through deception.Footnote ¹⁰⁵ Claims that are based purely on unjust enrichment will normally only give rise to a strict liability personal claim, but a trust can be imposed (along with a duty to preserve property) where a recipient has stolen property or fraudulently induced a transfer.Footnote ¹⁰⁶ Notably, just as under the equitable regime, whenever the claimant enjoys rights under such a trust they will also be precluded from bringing an unjust enrichment claim against subsequent recipients.Footnote ¹⁰⁷ Claims to recover trust property and claims for unjust enrichment should, therefore, be seen as mutually exclusive.Footnote ¹⁰⁸

A. The Search for an Unjust Factor

First, it is difficult to identify a reason why the enrichment of a third party is “unjust” which does not conflict with the wider operation of the law of trusts. If the unjust factor was “ignorance” that would undermine the whole premise of recognising that it is the trustee who has control and power over trust property.Footnote ¹⁰⁹ There are many acts of which the beneficiary is “ignorant” of, or even may object to, but the trustee still has power to do.Footnote ¹¹⁰ An alternative is to focus on “absence of basis” but, to borrow an argument from Worthington, the trustee undoubtedly does have the legal power to transfer legal title which provides a clear basis even for deliberate misapplications by the trustee.Footnote ¹¹¹

A final possibility is that there is a lack of authority.Footnote ¹¹² However, if the claimant is merely basing the claim on the premise of a lack of authority, this alone cannot be sufficient to enable a claim for unjust enrichment. To return to the example given earlier,Footnote ¹¹³ a trustee might lack authority to give property to a third party but they nonetheless retain control over the trust property. In such circumstances, the beneficiary will be precluded from bringing any personal claim against a third party unless that third party has dishonestly assisted in a breach of duty.Footnote ¹¹⁴ If a claim for unjust enrichment could arise on the basis of a lack of authority, it would mean that any third party who receives property on behalf of a trustee could be liable even in the absence of dishonesty, as the change of position defence would be precluded where the recipient has knowledge.Footnote ¹¹⁵ To avoid the conclusion that all third-party recipients of trust property would find themselves potentially liable under unjust enrichment, it has been argued that a third party is only “enriched” where they obtain “beneficial receipt” of trust property.Footnote ¹¹⁶ However, Hood has pointed out that third parties may be enriched regardless of whether they receive property “beneficially”.Footnote ¹¹⁷ For example, banks use customer deposits to fund their profit making activities. Indeed, both Burrows and Mitchell have conceded that receiving banks would often find themselves open to liability under unjust enrichment, subject to the change of position defence.Footnote ¹¹⁸ But this would represent a radical expansion of the potential liability of banks. This is not simply an issue which concerns security of receipt. The courts of equity traditionally provided higher levels of protection to third parties who held property on behalf of trustees. This is because, according to Selborne L.C. in Barnes v Addy, if such recipients were open to strict liability personal claims it would discourage third parties from providing their services to trustees.Footnote ¹¹⁹ As Shadwell V.C. explained in Lockwood v Abdy, “in cases where gentlemen act as trustees, they must, of necessity, employ solicitors, receivers, bankers, and agents of various kinds”.Footnote ¹²⁰ If unjust enrichment was available on the basis that the trustee lacked authority to transfer property to the recipient, it would impede the ability of all trustees to carry out their duties effectively.

B. The Difficulties with the Fault Requirement

Second, as noted earlier,Footnote ¹²¹ the most contentious issue relating to knowing receipt has been the degree of knowledge required to establish the claim.Footnote ¹²² Accordingly, Lord Nicholls argued extra-judicially that the solution would be to provide beneficiaries with a personal claim under a form of strict liability subject to the change of position defence.Footnote ¹²³ The purported attraction of this proposal would be that it would remove the fault requirement from the question of liability.Footnote ¹²⁴ Nevertheless, the question of the defendant's fault would still be a central issue in most claims for unjust enrichment. Indeed, Virgo notes that the result in most cases will be the same whether personal liability rests on knowing receipt or unjust enrichment.Footnote ¹²⁵ This is because the defence of change of position will only be available in circumstances where the defendant has acted in good faith.Footnote ¹²⁶ Courts will still need to consider the extent of the recipient's knowledge under the requirement of good faith in every case where the third party seeks to defend against a claim for unjust enrichment. Moreover, the term “unconscionability” is increasingly being used to define good faith in the context of the change of position defence.Footnote ¹²⁷ In fact, it has been explicitly stated that it would not be “desirable to attempt to define the limits of good faith” as the courts have looked to maintain a similar degree of flexibility that has been developed in the context of knowing receipt claims.Footnote ¹²⁸ The proposition that unjust enrichment would remove the difficulties in defining the fault requirement for establishing the personal liability of third-party recipients cannot be sustained.

C. Continuing Enrichment

Third, it has been contended that the absence of a claim for unjust enrichment would lead to great injustice where an innocent recipient is still financially better off despite no longer retaining misapplied property (“continuing enrichment”).Footnote ¹²⁹ This is because, as noted above,Footnote ¹³⁰ unjust enrichment focuses on the abstract wealth of the recipient rather than the retention of the original property or its traceable proceeds.Footnote ¹³¹ An example will demonstrate the point. In Bank of America v Arnell, one of the defendants had innocently received £25,750.Footnote ¹³² The payment had been received from a fraudster who convinced the recipient that this was a legitimate transaction.Footnote ¹³³ As part of the arrangement with the fraudster, the recipient retained £750 of the received funds.Footnote ¹³⁴ The defendant subsequently spent this money “on various items as part of her general living expenses”.Footnote ¹³⁵ It was concluded that she was an innocent recipient, which precluded any possible claim for knowing receipt. But if unjust enrichment had been available in Arnell, the defendant would have still been unjustly enriched at the claimant's expense by the receipt of the £750 whether or not she retained any traceable proceeds as she had spent the money “in the ordinary course of things”.Footnote ¹³⁶

The problem with any perceived “injustice” created by the result in Arnell is that it overlooks the fact that it is the trustee who bears sole responsibility for the loss of the property by making an unrestricted transfer to the innocent recipient in the first place.Footnote ¹³⁷ Therefore, the loss of trust property by an unknowing third party should be resolved through the personal liability of the trustee. As stated by Romilly M.R. in Browne v Butter, “if a trustee so deals with a trust fund as to allow a third party to obtain the control over it, whereby it is afterwards lost, he becomes liable for a breach of trust by acting beyond the scope of his authority”.Footnote ¹³⁸ Admittedly, in some cases, it may not be possible to successfully sue the trustee.Footnote ¹³⁹ For example, the trustee may lack the funds to provide compensation. But the inability of a wrongdoer to pay compensation is an unconvincing reason for imposing liability on an innocent party.Footnote ¹⁴⁰ Another possibility is that the trustee may be protected by an exclusion clause. Nonetheless, if that is the case, this is a risk that the settlor will have accepted and there cannot be any complaint if this risk eventuates. There is simply no need to impose liability for continuing enrichment, as any losses which result from the dissipation of the trust property by an innocent recipient should be exclusively governed by the trustee's liability.

A. Innocent Recipients and Continuing Enrichment

If an unjust enrichment claim is available against a recipient of trust property, much will rest on the operation of the change of position defence. It is argued here that the change of position defence does not ensure sufficient protection for innocent recipients. There are two reasons why unjust enrichment will place an unwelcome burden on innocent recipients; the first relates to the bargaining power of litigants, and the second relates to the difficulties of establishing precisely how the enrichment has been lost. In regard to the first reason, the classification of knowledge as part of the cause of action or the defence is important in showing who has the burden of proving the recipient's state of mind.Footnote ¹⁴² Whereas in knowing receipt the burden of proving the knowledge of the recipient is imposed on the claimant, in unjust enrichment the defendant has the burden of proving good faith.Footnote ¹⁴³ This may seem like a subtle distinction, but it should not be assumed that it is an insignificant one. As Smith has noted, “[a]lthough there may be no difference in the classroom between fault-based liability and strict liability with defences, there is a great difference in the courtroom”.Footnote ¹⁴⁴ By placing the burden on the defendant it is more likely that a defendant would seek to minimise the risks of litigation by agreeing to make restitution, even when they have a strong argument that they have changed their position.Footnote ¹⁴⁵

The second reason is that the recipient is required to demonstrate their innocent state of mind and also that the loss of the enrichment was due to an extraordinary expenditure.Footnote ¹⁴⁶ In regard to the recipient's state of mind, it has been argued by Kiri that the burden of proof should be placed on the recipient as they are the party that will be better placed to supply this evidence.Footnote ¹⁴⁷ But the difficulties in proving the recipient's state of mind are not insurmountable,Footnote ¹⁴⁸ and, given the potentially onerous nature of personal liability for the receipt of trust property, it is appropriate that the claimant has the burden of proving the recipient's state of mind. Also, proving that an expenditure was “extraordinary” is often far from an easy task. Phillip Collins Ltd. v Davis provides a good example.Footnote ¹⁴⁹ In Phillip, the defendants had received overpayments but were trying to argue that they had changed their position. To establish the change of position defence, these defendants were required to demonstrate that they had altered their circumstances in relation to periodical overpayments over six years. Parker J. concluded that he was “unable to find that any particular item of expenditure was directly referable to the overpayments of royalties”.Footnote ¹⁵⁰ A pragmatic conclusion was reached whereby the defendants were entitled to a defence of 50% for the sums received due to their change in lifestyle,Footnote ¹⁵¹ but even this solution does not guarantee that an innocent party will not be unfairly burdened.

The predicament of the defendants in Phillip provides a stark illustration of the difficulties that may be faced by defendants in establishing the defence of change of position. Although Burrows has contended that courts should not require defendants “to account precisely for how they” spend enrichments,Footnote ¹⁵² there is no guarantee that defendants will find that all judges will show similar pragmatism. For example, in the more recent case of MGN Ltd. v Horton, Tugendhat J. indicated that a defendant would need to provide a full account of any expenditure by demonstrating that each expenditure was attributable to the enrichments.Footnote ¹⁵³ A further concern is that the courts may take an unduly narrow approach to the types of detriment that will be relevant under this defence. In Scottish Equitable v Derby, the Court of Appeal rejected the change of position defence despite the fact that, because of an overpayment, the recipient had “begun to accustom himself to a standard of living and a level of security beyond his true means”.Footnote ¹⁵⁴ As Dietrich and Ridge have noted, strict liability subject to the change of position defence is “potentially oppressive in all cases”.Footnote ¹⁵⁵ This is unavoidable in traditional unjust enrichment scenarios as the claimant lacks any other means of recovering the enrichment. But, given that the beneficiary's rights are sufficiently protected by their ability to recover trust property and their right to sue the trustee, the addition of unjust enrichment simply adds an unnecessary risk for innocent third parties of trust property.

B. The Potential Impact on the Proprietary Claim

Even if one takes the view that the change of position defence does provide sufficient protection for innocent recipients, it would still be necessary to reconsider the scope of the existing proprietary claim for the recovery of trust property. This is because any recipient who had changed their position would still be left worse off if they retained any traceable proceeds of the trust property. It is notable that Lord Millett advocated the unjust enrichment analysis for the personal liability of third-party recipients, but rejected the application of the change of position defence in claims which were contingent upon tracing.Footnote ¹⁵⁶ By contrast, some of the strongest supporters of the unjust enrichment analysis have recognised that a personal claim for unjust enrichment alongside the existing proprietary claim in equity would offer too much protection for beneficiaries to the detriment of innocent recipients.Footnote ¹⁵⁷ For this reason, Birks argued that the change of position defence should also be available for those who retain the traceable proceeds of trust property.Footnote ¹⁵⁸ Burrows has also argued that the failure to harmonise the personal and proprietary claims would allow claimants to “outflank the change of position defence”.Footnote ¹⁵⁹ According to Bryan, this would create “tactical opportunities” and he describes this as an “undesirable outcome”.Footnote ¹⁶⁰

A first point to mention is that it is commonly accepted by authors such as Birks and Burrows that proprietary claims to recover the original property are not examples of unjust enrichment.Footnote ¹⁶¹ These authors have, instead, argued that unjust enrichment underpins proprietary claims where the property is traced into substitute assets. This means that the introduction of the change of position defence for those who retain the traceable proceeds of trust property would only provide a partial solution to the overburdening of recipients. For those innocent recipients who retain the original property, the claimant would still have the choice of pursuing a proprietary claim which is not subject to the change of position defence as well as a strict liability personal claim in unjust enrichment.Footnote ¹⁶² If the central justification for recognising the change of position defence in proprietary claims against third parties is that the claimant could circumvent its operation in personal claims, this outcome is inevitable where the recipient retains the original property.

The second point is that, even if we ignore the plight of innocent recipients who retain the original trust property, the availability of the change of position defence in claims for the recovery of the traceable proceeds of trust property would only serve to reduce the chances of recovering misapplied property. The point is made effectively by Fox, who explains that “it would erode the security of property if vindicatory actions could be defeated by questions about the justice of the defendant's being required to make full restitution”.Footnote ¹⁶³ This provides a decisive reason for rejecting the change of position defence in proprietary claims against third parties. In short, unless the courts are going to make substantial changes to the proprietary claim by weakening the beneficiary's rights to recover misapplied property, the introduction of a personal claim for unjust enrichment would impose a burden on innocent recipients which cannot be justified.

A. The Nature of the Legatee's Rights

There are a number of reasons for questioning the basis of the proprietary claim in Re Diplock. In Re Diplock, the main authorities relied on to establish the proprietary claim for the mistaken payments were the decisions in Re Hallett's Estate and Sinclair v Brougham, and neither case concerns the availability of proprietary responses in the administration of estates.Footnote ¹⁷² Only five other authorities were referenced in the Court of Appeal's discussion of the proprietary claim, but only one of those authorities, Re Blake, related to claims for testamentary property.Footnote ¹⁷³ It was even noted by Greene M.R. that Re Blake ruled out the possibility of a proprietary claim against third parties.Footnote ¹⁷⁴ Moreover, Akkouh and Worthington have pointed out that the court's reliance upon Sinclair is questionable in light of modern judicial treatment of the reasoning applied in Sinclair.Footnote ¹⁷⁵

There were two limbs to the court's reasoning that a proprietary claim was available in Re Diplock and both reveal that the reasoning was flawed. First, it was stated that claimants can trace in equity where there is a fiduciary duty or an existing proprietary interest.Footnote ¹⁷⁶ Second, as the legatees enjoyed a type of equitable proprietary interest, a proprietary claim was available.Footnote ¹⁷⁷ With regard to the first proposition, the question of whether one can trace, which is the question that the court asked in Re Diplock, is not the same as asking whether the claimant has a proprietary claim.Footnote ¹⁷⁸ Tracing is merely a process and it does not establish a right to recover property.Footnote ¹⁷⁹ Furthermore, it is indeed correct that the presence of a fiduciary duty can be an important factor in identifying the availability of a proprietary claim against a third party. However, it is not simply the presence of a fiduciary duty which is important in establishing proprietary claims against third parties, but that the position of the fiduciary must entail a duty of preservation in relation to identifiable property. For example, an agent is a fiduciary but the principal would have no proprietary claim if the agent is permitted to mix the proceeds of a sale of property with their own.Footnote ¹⁸⁰ For the second proposition, it has been demonstrated earlier in this article that even beneficiaries do not have a general right to bring a direct claim to recover trust property from a third party.Footnote ¹⁸¹ There must in fact be a transfer made in breach of the duty of preservation in relation to identifiable property.

The problem in Re Diplock is that, whilst an executor owes a duty to preserve the general wealth of the estate for creditors or legatees,Footnote ¹⁸² this does not constitute a duty to preserve interests in identifiable property for any particular beneficiary.Footnote ¹⁸³ This is because, during administration, the executor will not necessarily know who is entitled to the assets.Footnote ¹⁸⁴ As explained by Viscount Radcliffe in Commissioner of Stamp Duties v Livingston, “until administration was complete no one was in a position to say what items of property would need to be realised for the purposes of that administration or of what the residue, when ascertained, would consist or what its value would be”.Footnote ¹⁸⁵ Even in cases where a specific legacy is left to a legatee, until the executor assents, the legatee does not have title in relation to any specific property.Footnote ¹⁸⁶

B. The Strict Liability Personal Claim in Re Diplock

The executor's position is also important in understanding the personal claim in Re Diplock. The personal claim works on the basis that the creditors or legatees have a right to satisfaction from the assets of the estate, which may be lost where assets have been received by a third party under a mistaken payment by an executor. This is demonstrated by the rule that no claim for repayment could be made against an overpaid recipient when a shortfall arises after the overpayment.Footnote ¹⁸⁷ Therefore, the claimant only has standing to bring a claim on the basis that a reduction in the wealth of the estate is attributable to the transfer to the recipient. In this way, the strict liability personal claim is an appropriate means for recovery as it reflects the primary rights of the creditors and legatees during administration, which is protected by the executor's duty to preserve the value of the estate as opposed to a duty to preserve identifiable property. This personal claim could be assimilated under an unjust enrichment analysis, with the unjust factor being the “deprivation of assets for the distribution of the estate”.Footnote ¹⁸⁸

This raises the question of whether the change of position defence should be similarly available for these claims. There is early authority which indicates that hardships suffered by recipients are not taken into account by the court, such as David v Frowd.Footnote ¹⁸⁹ But this must be placed in context. When the courts of equity began to permit the release of legacies without requiring security,Footnote ¹⁹⁰ this was on the basis that “everybody taking a residue must know that he takes it subject to the testator's liabilities, and takes the risk of its afterwards turning out that there are undiscovered liabilities”.Footnote ¹⁹¹ According to modern authorities, taking the risk that there could be an obligation to return an enrichment would preclude the availability of the change of position defence.Footnote ¹⁹² It can be argued that it is no longer the case that all recipients of mistaken payments by executors will be aware they may be required to repay, and it would be fictional for the courts to ignore evidence presented by recipients that they were unaware of this risk. Furthermore, in principle, it seems that the courts always had the power to take into account hardships suffered by recipients. For example, in Johnson v Johnson, Lord Alvanley explained that a common law claim for money had and received (the precursor to the modern law of unjust enrichment) was not permitted against the recipient of a mistaken payment by an executor, as it was only in equity where the court could take into account “the mode in which the funds might have been applied”, otherwise “great injustice may arise”.Footnote ¹⁹³ There is, therefore, a compelling case for the application of the change of position defence, which was yet to be developed at the time of Johnson and Re Diplock, to ensure that claims to reverse transfers of abstract wealth which result from mistakes by executors are treated with the same degree of justice as similar claims in unjust enrichment.

C. The Absence of Proprietary Claims in Cases of Mistake

The incompatibility of this strict liability personal claim alongside claims to recovery specific property is reflected in the dearth of support for the availability of a proprietary claim in the cases that preceded Re Diplock. In cases of mistaken payments by executors, the courts would provide the legatee or creditor with the personal claim, with no mention of any proprietary claim.Footnote ¹⁹⁴ Admittedly, there are some instances where the language used by the courts seemed to indicate a proprietary response. For example, in many of the cases it was stated that the legatee or creditor could “follow” the property into the hands of the recipient.Footnote ¹⁹⁵ Nevertheless, as noted in the latest edition of Williams, Martyn and Sunnocks, this simply meant that a personal claim could be made against the recipient.Footnote ¹⁹⁶ The phrase “follow the assets” normally referred to the type of situation that Birks described as “leapfrogging”, whereby a claimant seeks to establish a personal claim against indirect recipients.Footnote ¹⁹⁷ An ability to bring a claim against an indirect recipient does not necessarily demonstrate the presence of a proprietary right and the language of “following the assets” tells us little about the nature of the claim. More telling is the fact that the claim was generally regarded as a personal one, as revealed by Lord Cottenham L.C.’s statement in March v Russell where it was explained that a claimant's interest in overpaid assets is protected by “the personal liability of the legatee”.Footnote ¹⁹⁸

There are at least some authorities to support the availability of a proprietary claim in this context, with the strongest example being Brooksbank v Smith.Footnote ¹⁹⁹ But on closer analysis, this case is quite distinct from Re Diplock. In Brooksbank, the defendant had received shares on the basis that the executors had been informed his wife had survived the testatrix when in fact she had not. It was held that there was a specific lien on behalf of the legatees. A significant factor in this case appeared to be that the executors had been misinformed of the survival of the defendant's wife. The case was treated as one that was comparable to fraud for limitation purposes and it is entirely possible that the basis of the case is closer to the earlier mentioned situations where a trust is imposed on a party who obtains property by deception.Footnote ²⁰⁰ Another authority is West v Roberts where the mistaken recipient of shares was ordered to return them in specie.Footnote ²⁰¹ The claim succeeded on the basis that the claimant was a specific legatee and that there had been an assent by the executors.Footnote ²⁰² An assent gives the legatee full legal title to the property and Swinfen Eady J. recognised that, in the absence of an assent, the legatee would not have any general right to demand the return of the shares.Footnote ²⁰³ Therefore, the case is actually an authority for the proposition that the proprietary claim should not have been available in Re Diplock as the executors had not assented and neither were the claimants specific legatees.

A further example is Noble v Brett where a creditor sought to recover money from the legatees.Footnote ²⁰⁴ In Noble, the residuary legatee was insolvent but the executors retained property as trustees for the other legatees. Romilly M.R. seemed to accept that “the right of the creditor and that of the executor to attach the fund itself is limited to the case where the executor or the Court has not parted with the control over it”.Footnote ²⁰⁵ Similarly, in Dibbs v Goren, a lien was imposed but only in relation to funds which were still under the control of the executors.Footnote ²⁰⁶ Once more, this undermines the conclusion in Re Diplock, where the property was no longer retained by the executors or the court and was instead under the control of the recipients. It is also worth noting that, in Noble, no enquiry was made whether any of the money was retained by the residuary legatee. If a proprietary claim had been available, this would have enabled the creditor to also recover from the recipient.Footnote ²⁰⁷ Likewise, in Todd v Studholme, the essential issue was that a number of creditors had been overpaid, but part of the money could not be recovered due to the insolvency of some of the recipients.Footnote ²⁰⁸ Once more, no attempt was made to identify any remaining property in the hands of the insolvent recipients. Sir Page Wood V.C. even noted that no lien attached to property purchased under an equitable mortgage as the personal right to recover from the other recipients meant that the claimant's “remedy is already ample”.Footnote ²⁰⁹

Finally, claimants who sought to recover overpayments were denied the practical benefits that would have attached to proprietary claims. In Jervis v Wolferstan, claims for overpayments were restricted to the original value received, and it was not possible to “recover any of the income”.Footnote ²¹⁰ Similarly, in Gittins v Steele it was concluded that interest could only be recovered where the court held property but not where assets had been received by legatees.Footnote ²¹¹ Although the position today is that the courts have wider powers to recover interest for personal claims,Footnote ²¹² this was not the case at the time of these decisions.Footnote ²¹³ Since this was the core issue in Gittins v Steele, it seems odd that the claimants pursued interest under a strict liability personal claim when interest would have readily been available for a proprietary claim. The only logical conclusion is that it was generally recognised that no proprietary claim was possible alongside the strict liability personal claim.

D. Proprietary Claims for Wrongdoings by Executors and Recipients

There were, however, certain situations where a proprietary claim would become available. It was noted earlier that the knowledge and actions of a legal owner can justify the imposition of a trust, along with a duty of preservation, in relation to identifiable property.Footnote ²¹⁴ Similarly, a duty of preservation would be imposed where the executor misapplied property knowing that it would deprive the assets of the estate from those who were entitled as creditors or legatees.Footnote ²¹⁵ As a result, proprietary claims could be made to recover these transfers. Such cases are clearly distinct from the circumstances of Re Diplock, where the transfer was made under a genuine, albeit mistaken, belief that the recipients were entitled to the property. In Nugent v Gifford, it was stated that property could not generally be followed “as specifick assets” where it had been transferred by an executor, but that “[t]his court will indeed follow assets upon voluntary alienations by collusion of the executor”.Footnote ²¹⁶ Similarly, in Harford v Lloyd the executor misapplied property by making a transfer to a third party who invested the money into securities and the beneficiary was permitted a charge over the securities.Footnote ²¹⁷ A further example is Midgley v Midgley, where the executor had made a payment to the recipient's solicitor for a debt against the estate despite being aware that the debt was not recoverable.Footnote ²¹⁸ The claimants recovered the money under a proprietary claim.Footnote ²¹⁹

There are also those cases where the recipient had obtained property through deception and this justified the imposition of a trust which in turn enabled a claim to recover the transferred property.Footnote ²²⁰ As noted above,Footnote ²²¹ Brooksbank v Smith would fall within this scenario and another example is Consett v Bell, where the recipient had deceived the executor into making a payment that was not due under the will.Footnote ²²² The court in Consett recognised that the claimant would have the right to recover specific property in this type of situation.Footnote ²²³ In both Brooksbank and Consett, the claimant's proprietary rights can be justified by the imposition of a trust, along with a duty of preservation, against those who fraudulently induce transfers. This fits with a number of clear judicial statements which recognised that executors had the right to make dispositions of property, and to give the recipient good title, unless the recipient had acted in bad faith.Footnote ²²⁴ This may appear to simply reflect the operation of the good faith purchaser defence, however it is implicit that the word “disposition” includes distributions to volunteers.Footnote ²²⁵ Moreover, whereas the burden of demonstrating good faith under the good faith purchaser defence is placed on the defendant,Footnote ²²⁶ the burden of proving bad faith in claims to recover specific property received from an executor was clearly placed on the claimant.Footnote ²²⁷

Probably the most revealing aspect of the case law concerning deliberate misapplications of property, as opposed to non-induced mistakes, is that these cases provide the early foundations of the knowing receipt action. As Harpum stated, “[m]any of the principles of liability for knowing receipt were developed in relation to improper dispositions by executors”.Footnote ²²⁸ This would have been an unnecessary development if the strict liability personal claim was available against these recipients.Footnote ²²⁹ For example, it was stated in Keane v Robarts that “[e]very person who acquires personal assets by a breach of trust, or devastavit in the executor, is responsible to those who are entitled under the will, if he is a party to the breach of trust”.Footnote ²³⁰ Another example is Rolfe v Gregory where the executor used testamentary property to pay a debt in circumstances where the recipient was aware of the misapplication of the property.Footnote ²³¹ There was no consideration in these cases whether the recipient should have been strictly liable. The only logical conclusion is that, as with the general pattern of the equitable regime, the proprietary claim precludes the application of any strict liability personal claim.