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While this point may be peripheral to the discussion, is it clear that the contract between A Ltd. and B Ltd. is not valid under the indoor management rule, notwithstanding the directors’ lack of authority? See, e.g., paragraph 18(1)(d) of the Canada Business Corporations Act.

If the contract is valid (because A Ltd. can’t impeach it) what possible basis is there for a claim against B Ltd. if it was in good faith (see sub-section 18(2)) and gave value?

If the statement that the directors did not have “ostensible authority” suggests the inference that B Ltd. was not in good faith or that the directors were doing what directors generally should not do, the contract may be impeachable by A Ltd., but it is hard to see how, in the light of the indoor management rule, a director does not have ostensible authority simply by being held out by the corporation as a director.

John Swan

-----Original Message-----
From: Lionel Smith
Sent: June 18, 2004 10:15 AM
Subject: [RDG:] From Jonathon Moore

I post this for Jonathan Moore:

 

I agree with much, but not all, of what Robert Stevens wrote:

A (a company) purports to enter into a contract with B under which B acquires benefits from A. The directors who enter into the deal are, however, fraudsters and lack both actual and ostensible authority. Can A recover back the benefit conferred under the purported contract?

It is submitted that the answer is yes.

There is no need to submit that the answer is yes. It is undoubtedly so. There is a right of recovery, subject to defences.

If we adopt an 'unjust factors' approach, what is the unjust factor? Mistake will not do if the directors are the 'controlling mind and will' of the company. The claimant is not making a mistake as the knowledge of the directors will be attributed to A Ltd (see Dollar Land). For the same reason the claimant is not 'ignorant' of the transfer, although this is an 'unjust factor' with no judicial support that I am aware of. Perhaps 'powerlessness' as suggested by Professor Burrows in his textbook would suffice? Again, there is no judicial support for such an unjust factor. I cannot, for myself, see that Lord Nicholls identifies any 'unjust factor'.

By contrast, if we adopt an 'absence of legal ground' analysis the answer is obvious. 'If ... the agreement is set aside, B will be accountable for any benefits he may have received from A under the agreement.'

This is very persuasive. Fitting the case in an unjust factor approach is difficult, though as Robert shows, not impossible. But why bother? Absence of basis is a perfect explanation.

Whatever the view one takes of the above two paragraphs, the claim in the hypothetical I give is not a claim in equity for knowing receipt.

I am not sure I agree with this. When directors of a company improperly transfer the company's assets, the company has traditionally been recognised as having a claim against the recipient for "knowing receipt". The company may well also have a claim for MHR, if any relevant contract is set aside. This is an example, at least at first blush, of alternative analysis. But the far better approach is to sweep away the old language, and say that there is a single claim in unjust enrichment, there being no proper basis for the transfer.

Nor, properly understood, was the claim in Akindele. If A Ltd has paid B money, A Ltd's claim is for money had and received (cf Kleinwort Benson v Lincoln CC and Guinness Mahon.) Is it seriously being argued that the claims in the swaps cases could and should have been pleaded as knowing receipt? If the benefit conferred by A Ltd is a service it is, I would have thought, obvious that the claim is not one for 'knowing receipt' in equity.

The error that counsel and the CA in both Akindele and Criterion made is in thinking that because the directors are in breach of their fiduciary duties in entering into the contract, the claim against the counter-party to the contract is 'knowing' receipt.

If B holds an asset on trust for A and in breach of trust transfers that asset to C, A may have a claim against C based upon knowing receipt. Because Akindele proceeded upon a mistaken assumption as to the nature of the claim, it is submitted that it is weak authority on the issue of the degree of fault (if any) on the part of the recipient which needs to be shown for A's personal claim against C to succeed. Similarly, it is submitted that Lord Nicholls statement is not a reiteration of his extra-judicial views on this important but completely different point.

I am not sure I agree with this either, but it is a matter of interpretation on which reasonable minds may differ. Lord Nicholls said that if the contract is set aside, the claim is in unjust enrichment, and liability is strict. He said this in the same paragraph that begins with the words "I respectfully consider the Court of Appeal in Akindele's case fell into error on this point." And Lord Nicholls summarises Akindele immediately before by saying that, according to the CA, the case turned on unconscionability, both as to want of authority and knowing receipt. Thus, the "point" on which the CA fell into error was in saying that the case, whether viewed from the perspective of want of authority or knowing receipt, turned on unconscionability. Hence, knowing receipt does not turn on unconscionability. Liability will be strict, if the contract is set aside.