Lipkin Gorman v Karpnale [1991] 2 AC 548

Facts

• Lipkin Gorman, a firm of solicitors, employed a partner, Cass, who fraudulently diverted £229,908 from the firm’s bank account due to compulsive gambling.
• Cass used the stolen funds to purchase gambling chips at Karpnale Ltd, the defendant gaming club, and lost £154,695 at the club.
• The chips, used to place bets, had no independent value and remained the club’s property; they could only be exchanged for winnings.
• Cass was subsequently convicted of theft.
• Lipkin Gorman sought to recover the misappropriated funds from Karpnale Ltd, arguing the club was not a bona fide purchaser and that the firm had an equitable claim to the funds.

Issues

1. Whether Karpnale Ltd, as a recipient of stolen funds used for gaming, could retain the money by claiming to have given valuable consideration via the exchange of gambling chips, in light of the Gaming Act 1945 rendering such contracts void.
2. Whether Lipkin Gorman could utilize equitable tracing to recover the funds from Karpnale Ltd, an innocent recipient.
3. Whether the doctrine of knowing receipt and the recipient's knowledge played a role in determining liability and the right to recovery.

Decision

• The House of Lords ruled in favor of Lipkin Gorman, holding that Karpnale Ltd had not provided valuable consideration for the stolen money since the gaming contracts were void by statute.
• The club’s provision of gambling chips did not constitute valuable consideration; the chips merely enabled betting on void contracts and were not goods or services purchased.
• As the club did not give valuable consideration, it was not protected as an innocent recipient and was required to repay the net amount lost, £154,695, to Lipkin Gorman.
• The liability was limited to the net amount, acknowledging the club had altered its position in reliance on receipt of the funds.

Legal Principles

• A recipient of funds misappropriated via void or illegal contracts cannot claim valuable consideration if the relevant transaction is void by statute.
• Equitable tracing enables recovery of misappropriated funds from innocent recipients unless they gave valid consideration.
• Good faith or innocence does not alone shield recipients from liability where no valuable consideration exists for the transfer.
• The doctrine of knowing receipt considers the degree of knowledge (actual or constructive) the recipient had of the source of funds, affecting potential liability.
• Debate persists regarding whether constructive knowledge suffices for liability, as distinguished in cases like Re Montagu’s Settlement Trusts (actual knowledge required) and Nelson v Larholt (constructive notice sufficient).
• The Baden scale categorizes levels of knowledge relevant to assessing recipient liability for knowing receipt.

Conclusion

Lipkin Gorman v Karpnale Ltd establishes that funds lost on void gaming contracts can be recovered from recipients who provided no valid consideration, even if innocent, and clarifies the requirements for tracing and knowing receipt in the context of fund misappropriation.