As a result of its intense focus on the state of the defendant’s conscience, does equity fail to strike a fair balance between the interests of beneficiaries and third-party recipients of trust assets?

The doctrine of unconscionability distinguishes equity law from the common law. As such, an intense focus on the state of conscience is a defining feature of equity’s operations. However, its operation in knowing receipt has led to uncertainty as to when a recipient is liable, failing to strike a fair balance for both beneficiaries and third parties who are left without clarity as to their rights. It is argued there is no balance to be struck between a third-party gaining asset she should never have gained, against the equitable proprietary interest of the beneficiary. The third party should account for gain regardless of conscience or knowledge. Therefore, conscience does not cause equity to fail in striking a fair balance, but rather attempts to strike a balance where one should not be found. 

Intense focus on conscience?

Conscience underlies the roots of equity law, historically enabling the Court of Chancery to intervene where the rigidities of the common law would cause inequitable hardship. Although the two courts fused into one jurisdiction, Samet argues that conscionability has allowed equity to narrow the gap between law and morality, thus mitigating the strictness of the common law and legitimising the law. Consequently, equity intensely focuses on conscience in many areas of law, one being the law on third party recipients, or knowing receipt (KR). This can be seen in the case law; in Selangor v Cradock, the court stated that equity is concerned with D’s knowledge as is it concerned with fastening upon the conscience of the person with that knowledge. The key case demonstrating this intense focus is BCCI v Akindele where the Court of Appeal held that the test for KR is whether the recipient’s state of knowledge is such that it is unconscionable for him to retain the benefit of the receipt. If it is, the D can be liable for a personal claim by the beneficiary. This test recast earlier categorisations of conscionability in Re Montagu and Baden, where actual and constructive knowledge could be sufficient for KR.  

Strikes a fair balance?

The unconscionability test does not provide guidance as to what level of knowledge is actually needed. Birks argues that ‘unconscionability indicates unanalysed disapprobation thus embraces every position in the controversy’. Thus, the term cannot in itself be defined, and cases have demonstrated that defendants with entirely different levels of fault can fall into the category of unconscionability. The level of knowledge required in each case is highly fact-specific, it is unclear whether the test is a subjective or objective test of unconscionability. This has been further confused by inconsistent case law since BCCI, for instance, Twinsectra applies an objective test suggesting that constructive notice is sufficient, but in Arthur v AG of Turks and Caicos Islands, the Privy Council found that unconscionable knowledge is subjective (actual knowledge). In the same year, it was found in Armstrong DLW that knowledge can be all five Baden categories (actual and constructive knowledge). The uncertainty of the case law and the requirement of unconscionability means a fair balance cannot be struck between the interests of beneficiaries and third parties who cannot even ascertain when may have rights. However, Agnew defends unconscionability in KR, arguing that uncertainty can be avoided if we disentangle the question of whether a duty arises from the question of breach. Unconscionability should not be relevant for where a duty arises, but for D’s moral fault in breaching the duty. Thus, it can be clarified as to whether the term is used generally, or narrowly for specific breaches - where D understands that morally, she is doing wrong. 

This theory of unconscionability may provide certainty and clarity. However, the case law authorities do not replicate this certainty. Stevens argues Norse’s analysis in Akindele was flawed as his examination of the existing authorities was biased towards his justification for his conclusion. For instance, he did not draw attention to Megarry V-C’s dicta in Re Montagu, nor the Court of Appeal judgement in Twinsectra, where the dishonesty test from Tan was applied in KR. Instead, Norse LJ considered how the cases addressed the question of the degree of knowledge needed, rather than how most had sought to abandon the doctrine of notice in favour of general fault. Moreover, he adopted the unconscionability test without reference to doubts about its suitability in Tan, where Lord Nicolls argued that the concept was either synonymous with dishonesty, or something different and unclear. Thus, Norse LJ’s solution is flawed and does not strike a fair balance between beneficiaries and third parties who are both uncertain of what their rights are. 

Unnecessary need for a balance

Birks argues that there should be two types of liability for KR, one wrong-based, and the other based on unjust enrichment. However, Nourse LJ in Akindele rejects the unjust enrichment analysis, arguing that fault-based liability is preferable over the strict liability coupled with change of position defence. Birks argues that this position does not necessarily suggest an outright rejection of unjust enrichment as Nourse LJ referred to Lord Nicholls’s article which Birks argues had been misunderstood. Lord Nicholls himself favoured liability in unjust enrichment cases where the claimant is only entitled in equity, but was not arguing for a subsumption of KR under unjust enrichment. In fact, he was arguing for the recognition of liability in unjust enrichment alongside fault-based liability for KR. On this, Birks argues that if we consider Akindele, Chief Akindele held onto the money due to a factual inquiry resembling an inquiry into constructive notice; he neither knew or ought to have known the improprieties occurring inside BCCI. Thus, Akindele suggests that KR requires unreasonableness in the failure to appreciate the trust origin of the assets in question. However, Birks suggests that this test might not be preferred. He argues that if disqualification from the defence of change of position is confined to those who have actual knowledge in KR, it would seem anomalous to have liability for fault-based KR based on carelessness, as the fault in KR would cancel out the defence. Thus, unjust enrichment should be used alongside the dishonesty requirement, where a dishonest recipient should make good any losses and account for all benefits received. 

This is the better test. Unjust gains will always be restored as UE requires strict liability. This is because UE is not loss based, thus does not deal with deciding which of two innocent parties should bear a loss. Instead, it requires parties to pay back surplus assets they should not keep. Despite this not aligning with all the case law, there is a strong argument that the equitable owner should not be deprived of a claim in unjust enrichment. Depriving her would be defying the fundamental principle of that cause of action, whilst another’s wealth is unjustly swollen. The liability to make restitution should thus be independent of fault, there should be no balance between the beneficiary’s and the recipient’s ‘interests’. 

In conclusion, equity’s intense focus on the state of D’s conscience has unnecessarily led to unclear and uncertain authorities on the knowledge required for KR. This cannot strike a fair balance between rights as parties are unable to assert their interests if they cannot ascertain when they will arise. Instead, the focus should be on unjust enrichment, thus creating a strict liability duty of restitution where D gains property which belongs to another. This clarifies the position of the parties in all situations, striking a balance is thus unnecessary.  

The writer, Simrhan Khetani, is a law graduate from the University of Cambridge and future trainee solicitor at Akin Gump LLP. She has a keen interest in Equity and Trust law and will be pursuing this interest in her work as a solicitor.

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