|Judgments - Dubai Aluminium Company Limited v. Salaam (Original Respondent and 2nd Cross-Appellant) and Other
78. This is the final point. The judge's order took account of the fact that Mr Al-Tajir might be insolvent. How should this be reflected in the order to be made in favour of the partnership? The judge's solution was the right one. It is just and equitable that if the partnership is unable to recover from Mr Al-Tajir his share of the contribution, the partnership should be able to recover it from Mr Salaam. Mr Salaam will still be in pocket even if he has to contribute the full $10 million. The inability of a person claiming a contribution from another tortfeasor to recover from a third is relevant as between the claimant and the respondent to the making of a contribution order and its amount. Here the availability of a recovery from Mr Al-Tajir would go to reduce the order to be made against Mr Salaam. But if it is not possible to recover from Mr Al-Tajir, there is no basis for making that reduction in favour of Mr Salaam.
79. For these reasons and those given by your Lordships I agree with the orders proposed.
(1) The issues
80. The issues with which your Lordships are concerned arise in the course of contribution proceedings following the settlement of a major action in the Commercial Court. The action was brought to recover the proceeds of a substantial fraud. The defendants included not only dishonest participants in the scheme who had benefited personally from the fraud but also innocent parties who had not but were alleged to be vicariously liable for the dishonest activities of others. Those who contributed to the settlement included the innocent as well as the guilty. The terms of settlement left some of the guilty parties with undisgorged profits.
81. Three main issues fall to be considered:
(iii) Whether the amount of any undisgorged profits in the hands of the principal wrongdoers may be taken into account in considering the ultimate incidence of liability among those who have contributed to the victim's recoveries.
(2) The scheme
82. The action was concerned with a fraudulent scheme to extract money from the plaintiff, Dubai Aluminium Co Ltd ("Dubal"), which operates an aluminium smelter in Dubai. As a result of the scheme Dubal was induced to pay out some $50 million over a six-year period under a bogus consultancy agreement with Marc Rich & Co AG ("Richco"). Virtually the whole of the proceeds were passed on by Richco and shared out among the principal participants in the fraud under equally bogus subsidiary agreements. The trial judge (Rix J) found that the consultancy agreement was a sham device for abstracting money from Dubal. A remarkable feature of the case is that none of the parties to any of the agreements contended that they were genuine.
83. The principals behind the scheme were Dubal's chief executive, Mr Ian Livingstone, acting in concert with Mr Hany Mohammed Salaam and His Excellency Mahdi Mohammed Al-Tajir. Mr Salaam is an international businessman; Mr Al-Tajir, who had had previous business dealings with Mr Salaam, was at one time a close confidant of the Ruler of Dubai and wielded considerable influence in the region. The three of them together with Mr Salaam's brother Mr Saad Salaam divided the spoils between them or companies which they controlled as follows:
Mr Al-Tajir: $16.5 million (32.9%)
Mr Livingstone: $6.3 million (12.5%)
Mr Saad Salaam: $6 million (12%)
Only a minimal sum was retained by Richco. Of the sums taken by the three main participants, Mr Salaam and his companies received 47%, Mr Al-Tajir 38%, and Mr Livingstone 15%.
(3) The proceedings
84. Dubal brought proceedings against Mr Salaam and two of his companies, and joined as defendants Mr Anthony Amhurst, a London solicitor, and the two successive firms of solicitors of which he was senior partner at the relevant time. Nothing turns on the distinction between the two firms, and I shall refer to them indiscriminately as "Amhursts". Mr Salaam was a client of Amhursts, and Mr Amhurst was the partner who dealt with his affairs. Mr Salaam and Mr Al-Tajir are the respondents to the present appeal. They are also cross-appellants. The appellants are the partners of Amhursts other than Mr Amhurst. With Mr Amhurst they are also respondents to the cross-appeals.
85. Dubal claimed that Mr Livingstone, in breach of his fiduciary duty and with the dishonest assistance of Mr Salaam, Mr Al-Tajir and Richco, had misappropriated its funds; and that Mr Amhurst had dishonestly played a significant role in the fraud. It alleged that he was responsible for the drafting of the consultancy agreement and subsidiary agreements and for the administration of the scheme; and that he gave instructions to Richco for the payment of moneys due to the principal participants. Dubal accepted that Mr Amhurst did not benefit personally from the fraud, although his firm received relatively modest fees for the work done; but it was Dubal's case that his participation in the scheme was dishonest. This was vigorously denied by Mr Amhurst. For reasons which will become clear, the case has been conducted on the assumption that he was dishonest; but it must be said at the outset that this has never been established. It is common ground that his partners were personally innocent of any wrongdoing, but Dubal sought to make them vicariously liable for his acts under section 10 of the Partnership Act 1890 ("the Partnership Act").
86. Dubal did not join Mr Al-Tajir as a defendant, although at trial it contended, and the judge found, that he was a dishonest participant in the scheme. The judge's finding in this regard was unsuccessfully challenged by Mr Al-Tajir on appeal. Dubal did not join Mr Livingstone or Richco either, having previously settled its claims against them.
87. Dubal claimed that Mr Salaam and Mr Amhurst were liable for knowing receipt as well as dishonest assistance, though it did not pursue its case for knowing receipt against Mr Amhurst at the trial. But its case in knowing receipt, like that in dishonest assistance, was founded on the allegations of dishonesty, and was thus also fault-based. Dishonest receipt gives rise to concurrent liability, since the claim can be based on the defendant's dishonesty, treating the receipt itself as incidental, being merely the particular form taken by the defendant's participation in the breach of fiduciary duty; but it can also be based simply on the receipt, treating it as a restitutionary claim independent of any wrongdoing: see John v Dodwell & Co Ltd  AC 563.
88. Amhursts brought third party proceedings against Mr Salaam, Mr Al-Tajir, Mr Livingstone and Richco, for contribution under the Civil Liability (Contribution) Act 1978 ("the 1978 Act") in respect of any sum for which they might be held liable to Dubal. They did not claim contribution or indemnity from Mr Amhurst himself. Mr Salaam brought similar contribution proceedings against Mr Al-Tajir as well as against Mr Amhurst and Amhursts, while Mr Al-Tajir made a contingent claim to contribution from Mr Amhurst (though not from Amhursts) in case he might be found liable to make a contribution to Amhursts.
89. During the course of the trial Mr Amhurst and Amhursts settled with Dubal by making a payment of $10 million. Mr Amhurst made no contribution to this sum, which was paid by or on behalf of Amhursts alone, but it was expressly paid on terms that the claims and allegations against Mr Amhurst were withdrawn.
90. At the end of the first part of the trial which was concerned with liability and before proceeding to hear the various claims for contribution, the judge with the consent of the parties published what he called his "unreasoned findings". After the conclusion of the second part of the trial and at the request of the parties the judge deferred giving final judgment in order to allow negotiations for settlement to proceed. During the adjournment Mr Salaam settled Dubal's claim against him and his companies and Mr Al-Tajir settled its claim against him in each case at a sum which the judge assessed at approximately $17 million. The judge then proceeded to hear further submissions on the contribution issues in the light of his unreasoned findings before giving final judgment:  1 Lloyd's Rep 415.(4) The decisions below
91. The action having settled, the judge had only to deal with the outstanding claims for contribution. Amhursts did not pursue their claims against Richco, since it was a term of their settlement with Dubal that this should be withdrawn, or against Mr Livingstone. They claimed contribution or indemnity from Mr Salaam and Mr Al-Tajir in respect of the $10 million which they had paid to settle Dubal's claim. Mr Amhurst faced a claim from Mr Salaam and a contingent claim from Mr Al-Tajir. Mr Al-Tajir faced claims for contribution from Amhursts and Mr Salaam and made a contingent claim against Mr Amhurst.
92. Mr Salaam and Mr Al-Tajir contended that they were not liable to contribute any part of the sum which Amhursts had paid to settle the action; but if they were then either Mr Amhurst or Amhursts should be required to make some contribution for the part which Mr Amhurst had played in the scheme.
93. Any liability to contribute to Amhursts' settlement with Dubal is statutory and arises under the 1978 Act. So far as material, section 1 of that Act provides as follows:
94. It was not disputed that the payment of $10 million was made by Amhursts "in bona fide settlement or compromise" of the claims made against them by Dubal, or that the claims made against Mr Amhurst were withdrawn as part of the settlement. The question, therefore, was whether, immediately before making the payment and assuming that the factual basis of Dubal's claim against Amhursts could be established, they would have been "liable in respect of the damage" suffered by Dubal. Such liability could only be vicarious.
95. Section 10 of the Partnership Act provides for the vicarious liability of partners. It is in the following terms:
96. Mr Salaam and Mr Al-Tajir contended that Amhursts were not liable for Mr Amhurst's participation in the fraud. According to them Amhursts had no need to settle the action and were not entitled to contribution in respect of the $10 million they paid. Their primary argument was that this was a matter of law. Section 10 of the Partnership Act, they said, is limited to torts or other wrongs actionable at common law, and does not cover wrongdoing formerly cognisable only by the courts of equity in the exercise of their exclusive jurisdiction. This argument was rejected by the judge and the majority of the Court of Appeal (Evans and Aldous LJJ, Turner J dissenting on this point). It has been revived before your Lordships.
97. In the alternative Mr Salaam and Mr Al-Tajir submitted that Amhursts' claim failed on the facts. They were not vicariously liable for Mr Amhursts' wrongdoing because, they said, he was not acting in the ordinary course of Amhursts' business as section 10 of the Partnership Act requires. The judge rejected this submission, but it was unanimously accepted by the Court of Appeal.
98. As the claims against Mr Amhurst and Amhursts had been settled, Amhursts relied upon the assumption provided for by Section 1(4) of the 1978 Act that the factual basis of the claims against them could be established. The factual basis of Dubal's claim was (i) that Mr Amhurst dishonestly assisted Mr Livingstone to act in breach of his fiduciary duties to Dubal; (ii) that he did so dishonestly; and (iii) that he did so "in his capacity as a partner in [Amhursts]". By common consent these words have been taken to mean (as they were obviously intended to mean) "in the ordinary course of Amhursts' business." As against Amhursts, Dubal pleaded that, in his capacity as a partner, he drafted the relevant agreements or gave instructions for them to be drafted and carried out or gave instructions for the carrying out of certain administrative acts in relation to the distribution of the proceeds of the fraud. These activities lay at the heart of the fraud; they were fundamental to the operation of the scheme. The judge held that Mr Amhurst, who "must be treated as having dishonestly assisted the scheme", had done so "in his role as a solicitor" (ie. in the ordinary course of Amhursts' business). In that role, he said, "he had played (ie. must be assumed to have played) an important and substantial and not merely peripheral or incidental role in the scheme." Accordingly he held that, on the assumed facts, Amhursts were vicariously liable for Mr Amhursts' wrongdoing and were in principle entitled to contribution from Mr Salaam and Mr Al-Tajir. He then proceeded to consider the principles on which the contributions of the various parties should be assessed.
99. As the Court of Appeal observed, however, what Dubal alleged Mr Amhurst did in his capacity as a partner in Amhursts represented only part of the contribution which he made to the fraud:  QB 113. As against him personally, Dubal alleged that he acted not only as a solicitor but also as a director of Mr Salaam's companies. Although receiving his instructions from Mr Salaam, he gave direct advice and assistance to other wrongdoers, specifically Mr Livingstone and Richco, who were not clients of his or his firm. Indeed, he was so closely involved with Mr Livingstone in the negotiations that, in the judge's words, he "appeared to be part of the Dubal team". He told Richco that it was required to concur in the scheme if it was to do business in Dubai or with Dubal, and gave Richco to understand that it was not expected to provide any services pursuant to the consultancy agreement. He dealt only with other parties to the dishonest scheme and all his work was done in the context of the scheme.
100. This persuaded the Court of Appeal to reverse the Judge's decision. Evans LJ said,  QB 113, 133:
He claimed to derive this proposition from the decision of this House in Credit Lyonnais Bank Nederland NV v Export Credits Guarantee Department  1 AC 486. Since much of Mr Amhurst's conduct on which Dubal relied took place outside the ordinary course of their business, he held that Amhursts were not vicariously liable for his wrongdoing.
101. Aldous LJ based himself on the same proposition. He acknowledged that advising on and drafting legal agreements fell squarely within the ordinary course of business of a firm of solicitors, and that Amhursts would have been liable if this had been the full extent of Mr Amhurst's assumed participation in the scheme. But it was not. In the first place, much of Mr Amhurst's part in the scheme took place outside the course of Amhursts' business. In the second place, the judge had found that Mr Amhurst had "dishonestly assisted Mr Livingstone to act in breach of his fiduciary duties by conceiving, planning and assisting in giving effect to the scheme", and Dubal had alleged that all the relevant agreements "were sham agreements and were known to Mr Amhurst to be so". Aldous LJ,  QB 113, 142, concluded with the proposition that
102. The Court of Appeal accordingly held that Amhursts were not liable to Dubal in respect of Mr Amhurst's participation in the scheme, and were accordingly not entitled to contribution. They dismissed the contribution proceedings without having to consider the basis upon which the judge dealt with them.
(5) The scope of section 10 of the Partnership Act 1890
103. Like the judge and the Court of Appeal, I too reject the argument that section 10 of the Partnership Act is confined to torts or other common law wrongs. There is nothing to be said for such a limitation. The section is in the widest terms. It applies whenever injury is caused to a non-partner, or any penalty is incurred, "by any wrongful act or omission of any partner." The section is concerned only with fault-based liability, but there is nothing in its wording to indicate that the liability must arise at common law. On the contrary, the reference to penalties shows that the liability may be statutory. As my noble and learned friend, Lord Nicholls of Birkenhead, has observed, the liability of co-partners to penalties for breach of the revenue laws was well established by 1890 when the Partnership Act was passed.
104. Moreover, the vicarious liability of partners for equitable wrongdoing was certainly known to the Court of Chancery at least as early as 1842: see Brydges v Branfill (1842) 12 Sim 369. The facts of that case bear a striking similarity to those of the present. The tenant for life of settled land embarked on an elaborate fraud to lay his hands on capital moneys. The scheme required a private Act of Parliament to be obtained to enable the estate to be sold under the direction of the court and the proceeds paid into court and invested in other land; a fictitious sale of the tenant for life's own lands to an associate of his; the application of the money in court in the purchase of the land from the associate at an excessive price; and the deliberate deception of the court to obtain an order under which part of the money in court was paid out to the tenant for life. He employed a firm of solicitors to act for him in obtaining the Act and the orders of the court and in every other proceeding under the Act. The partner who acted in the transactions (one Brooks) was privy to all the circumstances of the transactions, but neither of his partners was aware that there was any fraud or irregularity in them. Despite holding that their moral characters were unaffected by the transactions, Sir Lancelot Shadwell V.-C. held them jointly and severally liable with Brooks to make good the loss to the trust estate.
105. In that case Brooks dealt with the money by taking it out of court and paying it over to the tenant for life, much as Mr Amhurst is alleged to have acted in the present case, but this was not the ground on which the innocent partners were held liable. In dealing with the money Brooks was acting in a purely ministerial capacity under a power of attorney from the tenant for life, and he duly accounted to his principal. The money was not received in any sense by the firm or by Brooks on its behalf; the power of attorney was given to Brooks alone and not jointly with his partners, as in St. Aubyn v Smart (1868) LR 3 Ch App 646. He was guilty of dishonest assistance, not of knowing or even dishonest receipt, and the only basis on which his partners could have been liable was that they were vicariously liable for his wrongdoing.
106. Vicarious liability of partners for tort seems to have entered English law at much the same time. It was certainly established by the middle of the 19th century: see Ashworth v Stanwix (1860) 3 E & E 701, where the Court of Queen's Bench treated it as settled law that innocent partners were vicariously liable for the torts of their co-partner. At all events it was considered to be sufficiently well established to be incorporated in the Partnership Act when this was enacted to codify the law of partnership. Section 10 assimilated the vicarious liability of partners to that of employers and adopted the same criterion: that the wrongful act or omission must have been performed in the ordinary course of the business of the party sought to be made vicariously liable. In Meekins v Henson  1 QB 472, 477 Winn J observed that section 10 of the Partnership Act produced "a necessary equation of a partnership firm with employers for this purpose". The necessity of such an equation is self-evident: it would be absurd if a professional firm were vicariously liable for the acts of an employee but would not be liable if the same acts had been committed by a partner.
107. Vicarious liability is a loss distribution device based on grounds of social and economic policy. Its rationale limits the employer's liability to conduct occurring in the course of the employee's employment. "The master ought to be liable for all those torts which can fairly be regarded as reasonably incidental risks to the type of business he carries on": see Atiyah, Vicarious Liability in the Law of Torts (1967), p 171; Lister v Hesley Hall Ltd  1 AC 215. The Restatement of the Law of Agency vol 1 p 508 is to the same effect:
Since this is the underlying rationale of the doctrine there is no rational ground for restricting the liability to torts, or for excluding liability in equity, particularly when equitable liability often has its counterpart at common law. Why should a firm be vicariously liable if a partner procures or induces a breach of contract but not if he procures or participates in a breach of trust or fiduciary duty? If the risk of wrongdoing is one which can fairly be said to be reasonably incidental to the employer's business, why should it matter that the liability arises in equity and not at common law or by statute?
108. The vicarious liability of an employer for his employees' torts, however, was still in course of development in 1890, and the circumstances in which he could be liable for his employee's intentional and dishonest wrongdoing was still problematic. It was not settled until the decision of your Lordship's House in Lloyd v Grace, Smith & Co  AC 716: see in particular p 732, where Lord Macnaghten traced the development of the doctrine in relation to fraudulent and criminal wrongdoing. Wisely, and no doubt deliberately, section 10 was drafted in the widest terms to embrace every kind of wrong capable of causing damage to non-partners, so that there was no danger that the vicarious liability of partners (unlike that of employers) might be ossified by the terms of the statute and fail to keep step with future developments.
109. Mr Salaam and Mr Al-Tajir supported their submissions by an elaborate analysis of the structure of the Partnership Act, which they said showed that section 10 is confined to common law wrongs. Section 9, they said, is concerned with the liability of the firm for breach of contract, section 10 with its liability in tort, and sections 11 and 13 with liability in equity. Liability arising out of a breach of trust, they argued, is dealt with by sections 11 and 13 and not section 10; liability as a constructive trustee is dealt with by section 13, and the basic rule is non-liability. They went so far as to submit that, if section 10 applies to liability in equity, then sections 11 and 13 are redundant.
110. In my opinion this analysis is faulty. Section 9 is not concerned with the liability of the firm at all but with the liability of the individual partners. It provides that every partner in a firm is liable jointly with the other partners for all debts and obligations of the firm incurred while he was a partner. Where section 10 makes the firm vicariously liable for loss caused by a partner's wrongdoing, therefore, section 9 makes the liability the joint liability of the individual partners. Sections 11 and 13 are not concerned with wrongdoing or with vicarious liability but with the original liability of the firm to account for receipts. I explained the difference between the two sections in Bass Brewers Ltd v Appleby  2 BCLC 700, 711. Section 11 deals with money which is properly received by the firm in the ordinary course of its business and is afterwards misappropriated by one of the partners. The firm is not vicariously liable for the misappropriation; it is liable to account for the money it received, and cannot plead the partner's wrongdoing as an excuse for its failure to do so. Section 13 deals with money which is misappropriated by a trustee who happens to be a partner and who in breach of trust or fiduciary duty afterwards pays it to his firm or otherwise improperly employs it in the partnership business. The innocent partners are not vicariously liable for the misappropriation, which will have occurred outside the ordinary course of the firm's business. But they are liable to restore the money if the requirements of the general law of knowing receipt are satisfied.
111. Thus the structure of the Partnership Act provides no support for argument advanced by Mr Salaam and Mr Al-Tajir. The critical distinction between section 10 on the one hand and sections 11 and 13 on the other is not between liability at common law and liability in equity, but between vicarious liability for wrongdoing and original liability for receipts. The firm (section 10) and its innocent partners (section 9) are vicariously liable for a partner's conduct provided that three conditions are satisfied: (i) his conduct must be wrongful, that is to say it must give rise to fault-based liability and not, for example, merely receipt-based liability in unjust enrichment; (ii) it must cause damage to the claimant; and (iii) it must be carried out in the ordinary course of the firm's business. The first two conditions are plainly satisfied in the present case, and I can turn to the third.