[HOUSE OF LORDS]
Lord Bridge of Harwich, Lord Templeman, Lord Griffiths, Lord Ackner and Lord Goff of Chieveley
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My Lords, the appellants, Lipkin Gorman ("the solicitors"), are a firm of solicitors. Norman Barry Cass was a partner in the firm from 1978 to 1980. He had the authority of his partners to draw upon the solicitors' client account, an his signature alone. The account was held at the branch of Lloyds Bank ("the Bank") at 62, Brook Street, London W .1.
Cass proved to be a compulsive gambler. He gambled regularly at the casino at the Playboy Club ("the Club") which was owned by the respondents, though he also gambled elsewhere. Such was his addiction to gambling that he found his own resources insufficient; and so he helped himself to money in the client account. Without his partners' knowledge, between March and November 1980 he misappropriated large sums of money from the client account.
Cass used various methods to lay his hands on the money in the client account. His principal method was to have a cheque made out by the solicitors' cashier (a man named Chapman who, as the judge found, had been suborned by Cass), drawn on the client account and made payable to cash; Cass would then sign the cheque and Chapman would cash it at the Bank and hand the cash to Cass. In addition, Cass caused building society accounts opened by him in the name of the solicitors to be credited with cash drawn from the client account by means of cheques made payable to various building societies; a total of £40,000 was credited to building societies in this way, during the relevant period. Cass then drew cash from the building society accounts. When Cass finally absconded, there was only £600 left in the building society accounts (excluding interest). Lastly, on one occasion Cass procured the issue of a banker's draft for £3,735 ("the banker's draft") drawn on the Bank in favour of the solicitors; this he did by issuing a cheque in favour of the bank drawn on the client account. Chapman took delivery of the draft and passed it to Cass. By these means Cass dishonestly acquired a total of £323,222∙14 from the client account. From time to
time, however, he paid back into the client account various sums, totalling £100,313∙16, to cover up shortfalls caused by his withdrawals, leaving a net shortfall of £222,908∙95. It is accepted that a substantial part of the money so misappropriated by Cass, or of sums derived from it, was exchanged by Cass for gaming chips at the Club, as was the banker's draft. In other words, these sums were gambled away by Cass. Indeed the total sum staked by Cass at the gaming tables of the Club was no less than £561,014∙06. This sum included some money of his own; but it was no doubt so large because of his restaking sums which he won from time to time, his total winnings amounting to £378,294∙06. It has been agreed by the Club that the net sum won by the Club and lost by Cass over a .period of about 10 months was £174,745. Over that period, the maximum resources of Cass were £20,050. On the Basis that credit is given for the whole of that sum, it has been agreed that at least £154,695 won by the Club and lost by Cass was derived from money obtained by Cass from the solicitors' client account.
At the Club, Cass would present cash either at the cash deck or at the gaming tables. At the cash deck, he would be given a so-called "cheque credit slip" in exchange for cash: he would then exchange the slip for plastic chips of various denominations. If he presented cash at a gaming table, he would be given chips in exchange for the cash. These chips at all times remained the property of the Club. Bets were normally made by putting down chips at the gaming table, but cash could be put down at the gaming table and if so would be accepted, for bets, without any chips being used. Chips could also be accepted in lieu of cash for refreshments at the Club; but their actual use for this purpose at the Club appears to have been very rare, and there was no evidence that Cass ever used them for that purpose. Any unused chips, together with chips representing sums won in gaming, could be exchanged either for cash or a "winnings cheque" drawn an the club's Bank. Cass however returned to the Club all the winnings cheques he received, receiving in their place fresh cheque credit slips which he then exchanged for chips for the purposes of gaming.
Cass absconded to Israel. In due course he was extradited from Israel; and on 8 June 1984 he was convicted at the Central Criminal Court on 21 counts of theft of money from the solicitors' client account and sentenced to three years' imprisonment.
The solicitors commenced proceedings against both the respondents and the bank. Their claim against the respondents was for the recovery, on various grounds, of the money taken by Cass from the current account and gambled away at the Club. They also claimed damages for conversion of the banker's draft. Their claim against the bank was for damages for conversion or for breach of contract, or alternatively as constructive trustees. Before Alliott J. (1987) 1 W.L.R. 987, the solicitors' claim against the respondents failed, except for the claim for damages for conversion of the banker's draft. Their claim against the bank succeeded in pair. ln the Court of Appeal the solicitors' appeal from the judge's decision dismissing their claim against the respondents in respect of the money was dismissed by a majority (May and Parker L.JJ., Nicholls L.J. dissenting) [1989] 1 W.L.R. 1340. I shall refer in
due course to the grounds for this decision; though I wish to record at this stage that Nicholls L.J. would have held the respondents liable in damages for conversion of the money. The respondents' cross-appeal in respect of the banker's draft was also dismissed, but the cross-appeal of the bank succeeded. Your Lordships' House has been concerned only with the appeal of the solicitors from the dismissal of their claim against the respondents, and the respondents' cross-appeal in respect of the banker's draft. The solicitors' claim against the bank has no longer been pursued.
Before the Court of Appeal, and again before your Lordships' House, the solicitors' claim against the respondents was for the full sum of £222,908∙98 as money had and received. It was not a claim for conversion of the money; and, despite the view expressed by Nicholls L.J. in his dissenting judgment, I do not consider that such an alternative claim was open to the solicitors. Before the Court of Appeal, though not before the judge, the solicitors relied strongly on Clarke v. Shee and Johnson 1 Cowp. 197, in support of their claim. The majority of the Court of Appeal however distinguished that case and rejected the solicitors' claim on the ground that the respondents received the money in good faith and for valuable consideration such consideration arising first (per May and Parker L.JJ.) from the fact that the club supplied chips in exchange for the money, the contract under which the chips were supplied not being avoided as a contract by way of gaining or wagering under section 18 of the Gaming Act 1845; and second (per Parker L.J.) from the fact that, although the actual gaming contracts under which Cass gambled away the money were void under the Act, nevertheless he obtained in exchange for the money the chance of winning and of then being paid and so received valuable consideration from the club. So far as the solicitors' claim for conversion of the banker's draft was concerned, the Court of Appeal rejected a contention by the club that they could escape liability on the ground that they were holders in due course of the draft. I shall consider first the solicitors' appeal in respect of the money, and then the respondents' cross-appeal in respect of the draft; though, as will appear, the appeal and cross-appeal share certain common features.
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I turn then to the last point on which the respondents relied to defeat the solicitors' claim for the money. This was that the claim advanced by the solicitors was in the form of an action for money had and received, and that such a claim should only succeed where the defendant was unjustly enriched at the expense of the plaintiff. If it would be unjust or unfair to order restitution, the claim should fail. It
was for the court to consider the question of injustice or unfairness, on broad grounds. If the court thought that it would be unjust or unfair to hold the respondents liable to the solicitors, it should deny the solicitors recovery. Mr. Lightman, for the club, listed a number of reasons why, in his submission, it would be unfair to hold the respondents liable. These were (1) the club acted throughout in good faith, ignorant of the fact that the money had been stolen by Cass; (2) although the gaming contracts entered into by the club with Cass were all void, nevertheless the Club honoured all those contracts; (3) Cass was allowed to keep his winnings (to the extent that he did not gamble them away); (4) the gaming contracts were merely void not illegal; and (5) the solicitors' claim was no different in principle from a claim to recover against an innocent third party to whom the money was given and who no longer retained it.
I accept that the solicitors' claim in the present case is founded upon the unjust enrichment of the club, and can only succeed if, in accordance with the principles of the law of restitution, the club was indeed unjustly enriched at the expense of the solicitors. The claim for money had and received is not, as I have previously mentioned, founded upon any wrong committed by the club against the solicitors. But it does not, in my opinion, follow that the court has carte blanche to reject the solicitors' claim simply because it thinks it unfair or unjust in the circumstances to grant recovery. The recovery of money in restitution is not, as a general rule, a matter of discretion for the court. A claim to recover money at common law is made as matter of right; and even though the underlying principle of recovery is the principle of unjust enrichment, nevertheless, where recovery is denied, it is denied on the basis of legal principle.
It is therefore necessary to consider whether Mr. Lightman's submission can be upheld on the basis of legal principle. In my opinion it is plain, from the nature of his submission, that he is in fact seeking to invoke a principle of change of position, asserting that recovery should be denied because of the change in position of the respondents, who acted in good faith throughout.
Whether change of position is, or should be, recognised as a defence to claims in restitution is a subject which has been much debated in the books. It is however a matter on which there is a remarkable unanimity of view, the consensus being to the effect that such a defence should be recognised in English law. I myself am under no doubt that this is right.
Historically, despite broad statements of Lord Mansfield to the effect that an action for money had and received will only lie where it is inequitable for the defendant to retain the money (see in particular Moses v. Macferlan (1760) 2 Burr. 1005), the defence has received at most only partial recognition in English law. I refer to two groups of cases which can arguably be said to rest upon change of position: (1) where an agent can defeat a claim to restitution on the ground that, before learning of the plaintiff's claim, he has paid the money over to his principal or otherwise altered his position in relation to his principal on the faith of the payment; and (2) certain cases concerned with bills of exchange, in which money paid under forged bills has been held
irrecoverable on grounds which may, on one possible view, be rationalised in terms of change of position: see, e.g. Price v. Neal (1762) 3 Burr. 1355, and London and River Plate Bank Ltd. v. Bank of Liverpool [1896] 1 Q.B. 7. There has however been no general recognition of any defence of change of position as such; indeed any such defence is inconsistent with the decisions of the Exchequer Division in Durrant v. Ecclesiastical Commissioners for England and Wales (1880) 6 Q.B.D. 234, and of the Court of Appeal in Baylis v. Bishop of London (1913] 1 Ch. 127. Instead, where change of position has been relied upon by the defendant, it has been usual to approach the problem as one of estoppel: see, e.g. R. E. Jones Ltd. v. Waring and Gillow Ltd. [1926] A.C. 670 and Avon County Council v. Howlett [1983] 1 W.L.R. 605. But it is difficult to see the justification for such a rationalisation. First, estoppel normally depends upon the existence of a representation by one party, in reliance upon which the representee has so changed his position that it is inequitable for the representor to go back upon his representation. But, in cases of restitution, the requirement of a representation appears to be unnecessary. It is true that, in cases where the plaintiff has paid money directly to the defendant, it has been argued (though with difficulty) that the plaintiff has represented to the defendant that he is entitled to the money; but in a case such as the present, in which the money is paid to an innocent donee by a thief, the true owner has made no representation whatever to the defendant. Again, it was held by the Court of Appeal in Avon County Council v. Howlett that estoppel cannot operate pro tanto, with the effect that if, for example, the defendant has innocently changed his position by disposing of part of the money a defence of estoppel would provide him with a defence to the whole of the claim. Considerations such as these provide a strong indication that, in many cases, estoppel is not an appropriate concept to deal with the problem.
In these circumstances, it is right that we should ask ourselves: why do we feel that it would be unjust to allow restitution in cases such as these? The answer must be that, where an innocent defendant's position is so changed that he will suffer an injustice if called upon to repay or to repay in full, the injustice of requiring him so to repay outweighs the injustice of denying the plaintiff restitution. If the plaintiff pays money to the defendant under a mistake of fact, and the defendant then, acting in good faith, pays the money or part of it to charity, it is unjust to require the defendant to make restitution to the, extent that he has so changed his position. Likewise, on facts such as those in the present case, if a thief steals my money and pays it to a third party who gives it away to charity, that third party should have a good defence to an action for money had and received. In other words, bona fide change of position should of itself be a good defence in such cases as these. The principle is widely recognised throughout the common law world. It is recognised in the United States of America (see American Law Institute, Restatement of the Law, Restitution (1937), section 142, pp. 567-578 and Palmer, The Law of Restitution (1978), vol. III, para. 16.8); it has been judicially recognised by the Supreme Court of Canada (see Rural Municipality of Storthoaks v. Mobil Oil Canada Ltd. (1975) 55 D.L.R.
(3d) l); it has been introduced by statute in New Zealand (Judicature Act 1908, section 94B (as amended)), and in Western Australia (See Western Australia Law Reform (Property, Perpetuities and Succession) Act 1962, section 24 and Western Australia Trustee Act 1962, section 65(8)), and it has been judicially recognised by the Supreme Court of Victoria: See Bank of New South Wales v. Murphett [1983] 1 V.R. 489. In the important case of Australia and New Zealand Banking Group Ltd. v. Westpac Banking Corporation (1988) 78 A.L.R. 157, there are strong indications that the High Court of Australia may be moving towards the same destination (See especially at pp. 162 and 168, per curiam). The time for its recognition in this country is, in my opinion, long overdue.
I am most anxious that, in recognising this defence to actions of restitution, nothing should be said at this stage to inhibit the development of the defence on a case by case basis, in the usual way. It is, of course, plain that the defence is not open to one who has changed his position in bad faith, as where the defendant has paid away the money with knowledge of the facts entitling the plaintiff to restitution; and it is commonly accepted that the defence should not be open to a wrongdoer. These are matters which can, in due course, be considered in depth in cases where they arise for consideration. They do not arise in the present case. Here there is no doubt that the respondents have acted in good faith throughout, and the action is not founded upon any wrongdoing of the respondents. It is not however appropriate in the present case to attempt to identify all those actions in restitution to which change of position may be a defence. A prominent example will, no doubt, be found in those cases where the plaintiff is seeking repayment of money paid under a mistake of fact; but I can see no reason why the defence should not also be available in principle in a case such as the present, where the plaintiff's money has been paid by a thief to an innocent donee, and the plaintiff then seeks repayment from the donee in an action for money had and received. At present I do not wish to state the principle any less broadly than this: that the defence is available to a person whose position has so changed that it would be inequitable in all the circumstances to require him to make restitution, or alternatively to make restitution in full. I wish to stress however that the mere fact that the defendant has spent the money, in whole or in part, does not of itself render it inequitable that he should be called upon to repay, because the expenditure might in any event have been incurred by him in the ordinary course of things. I fear that the mistaken assumption that mere expenditure of money may be regarded as amounting to a change of position for present purposes has led in the past to opposition by some to recognition of a defence which in fact is likely to be available only on comparatively rare occasions. In this connection I have particularly in mind the Speech of Lord Simonds in Ministry of Health v. Simpson [1951] A.C. 251, 276.
I wish to add two further footnotes. The defence of change of position is akin to the defence of bona fide purchase; but we cannot simply say that bona fide purchase is a species of change of position. This is because change of position will only avail a defendant to the
extent that his position has been changed; whereas, where bona fide purchase is invoked, no inquiry is made (in most cases) into the adequacy of the consideration. Even so, the recognition of change of position as a defence should be doubly beneficial. It will enable a more generous approach to be taken to the recognition of the right to restitution, in the knowledge that the defence is, in appropriate cases, available; and while recognising the different functions of property at law and in equity, there may also in due course develop a more consistent approach to tracing claims, in which common defences are recognised as available to such claims, whether advanced at law or in equity.
I turn to the application of this principle to the present case. In doing so, I think it right to stress at the outset that the respondents, by running a casino at the Club, were conducting a perfectly lawful business. There is nothing unlawful about accepting bets at a casino; the only relevant consequence of the transactions being gambling transactions is that they are void. In other words, the transactions as such give rise to no legal obligations. Neither the gambler, nor the casino, can go to court to enforce a gaming transaction. That is the legal position. But the practical or business position is that, if a casino does not pay winnings when they are due, it will simply go out of business. So the obligation in honour to pay winnings is an obligation which, in business terms, the casino has to comply with. It is also relevant to bear in mind that, in the present case, there is no question of Cass having gambled on credit. In each case, the money was put up front, not paid to discharge the balance of an account kept for gambling debts. It was because the money was paid over, that the casino accepted the bets at all.
In the course of argument before your Lordships, attention was focused upon the overall position of the respondents. From this it emerged, that, on the basis I have indicated (but excluding the banker's draft), at least £150,960 derived from money stolen by Cass from the solicitors was won by the Club and lost by Cass. On this approach, the possibility arose that the effect of change of position should be to limit the amount recoverable by the solicitors to that sum. But there are difficulties in the way of this approach. Let us suppose that a gambler places two bets with a casino, using money stolen from a third party. The gambler wins the first bet and loses the second. So far as the winning bet is concerned, it is readily understandable that the casino should be able to say that it is not liable to the true owner for money had and received, on the ground that it has changed its position in good faith. But at first sight it is not easy to see how it can aggregate the two bets together and say that, by paying winnings on the first bet in excess of both, it should be able to deny liability in respect of the money received in respect of the second.
There are other ways in which the problem might be approached, the first narrower and the second broader than that which I have just described. The narrower approach is to limit the impact of the winnings to the winning bet itself, so that the amount of all other bets placed with the plantiff's money would be recoverable by him regardless of the substantial winnings paid by the casino to the gambler on the winning
bet. On the broader approach, it could be said that, each time a bet is accepted by the casino, with the money up front, the casino, by accepting the bet, so changes its position in good faith that it would inequitable to require it to pay the money back to the true owner. This would be because, by accepting the bet, the casino has committed itself, in business terms, to pay the gambler his winnings if successful. In such circumstances, the bookmaker could say that, acting in good faith, he had changed his position, by incurring the risk of having to pay a sum of money substantially larger than the amount of the stake. On this basis, it would be irrelevant whether the gambler won the bet or not, or, if he did win the bet, how much he won.
I must confess that I have not found the point an easy one. But in the end I have come to the conclusion that on the facts of the present case the first of these three solutions is appropriate. Let us suppose that only one bet was placed by a gambler at a casino with the plaintiff's money, and that he lost it. In that simple case, although it is true that the casino will have changed its position to the extent that it has incurred the risk, it will in the result have paid out nothing to the gambler, and so prima facie it would not be inequitable to require it to repay the amount of the bet to the plaintiff: The same would, of course, be equally true if the gambler placed a hundred bets with the plaintiff's money and lost them all; the plaintiff should be entitled to recover the amount of all the bets. This conclusion has the merit of consistency with the decision of the Court of King's Bench in Clarke v. Shee and Johnson, 1 Cowp. 197. But then, let us suppose that the gambler has won one or more out of one hundred bets placed by him with the plaintiff's money at a casino over a certain period of time, and that the casino has paid him a substantial sum in winnings, equal, let us assume, to one half of the amount of all the bets. Given that it is not inequitable to require the casino to repay to the plaintiff the amount of the bets in full where no winnings have been paid, it would, in the circumstances I have just described, be inequitable in my opinion, to require the casino to repay to the plaintiff more than one half of his money. The inequity, as I perceive it, arises from the nature of gambling itself. In gambling only an occasional bet is won, but when the gambler wins he will receive much more than the stake placed for his winning bet. True, there may be no immediate connection between the bets. They may be placed on different occasions, and each one is a separate gaming contract. But the point is that there has been a series of transactions under which all the bets have been placed by paying the plaintiff's money to the casino, and on each occasion the casino has incurred the risk that the gambler will win. It is the totality of the bets which yields, by the laws of chance, the occasional winning bet; and the occasional winning bet is therefore, in practical terms, the result of the casino changing its position by incurring the risk of losing on each occasion when a bet is placed with it by the gambler. So, when in such circumstances the plaintiff seeks to recover from the casino the amount of several bets placed with it by a gambler with his money, it would be inequitable to require the casino to repay in full without bringing into
account winnings paid by it to the gambler on any one or more of the bets so placed with it. The result may not be entirely logical; but it is surely just.
For these reasons, I would allow the solicitors' appeal in respect of the money, limited however to the sum of £150,960.
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