The case of Lipkin Gorman v Karpnale Ltd [1991] 2 AC 548 is widely regarded as a landmark judgement in English law, establishing unjust enrichment as a core principle of the law of obligations. The House of Lords held that a recipient of stolen money may be liable in restitution unless they had given valid consideration or changed their position in good faith.
The case also clarified how void gaming contracts under the Gaming Act 1845 affect claims for restitution. Importantly, the House of Lords recognised, for the first time, the defence of change of position, offering a significant development in the law of restitution.
Facts of Lipkin Gorman v Karpnale Ltd
The plaintiffs, Lipkin Gorman, were a firm of solicitors. One of their partners, Mr Norman Barry Cass, was a compulsive gambler. He dishonestly withdrew approximately £229,908 from the firm’s client account at Lloyds Bank, where he was an authorised signatory. Mr Cass used this money to gamble at the Playboy Club, a casino operated by Karpnale Ltd.
In the course of his gambling at the club, Mr Cass exchanged the stolen money for gambling chips. These chips were used to place bets and could be exchanged for winnings. However, they were essentially valueless in themselves and remained the property of the club. Out of the total amount gambled, £154,695 was lost by Cass to the club. The remaining amount was either returned to him as winnings or otherwise dissipated.
When Cass was eventually convicted of theft and sentenced to imprisonment, Lipkin Gorman brought a claim to recover the stolen money from Karpnale Ltd, arguing that the club had been unjustly enriched at the firm’s expense. At that time, gambling contracts were void under section 18 of the Gaming Act 1845, as they were contrary to public policy.
Procedural History
High Court
At first instance, the matter was heard by Alliott J, who dealt with a complex set of factual and legal claims. The plaintiffs brought claims both against the club and their bank. The claims included allegations of negligence and breach of trust against the bank, and claims for money had and received against the club.
The judge awarded only a minor sum against the club for conversion of a banker’s draft. The main claim for money had and received failed. Against the bank, Alliott J made critical findings, noting that the bank manager had allegedly suppressed information regarding Cass’s activities. However, the bank’s counsel had made a “no case to answer” submission and did not present evidence. This resulted in complications in the factual findings against the bank.
Court of Appeal
The Court of Appeal, comprising May LJ, Parker LJ, and Nicholls LJ (dissenting), rejected the majority of Lipkin Gorman’s claims. The court held that although gambling contracts were void under the Gaming Act 1845, the exchange of money for chips at the casino constituted good consideration, as the chips could be used within the club to gamble or purchase services such as drinks. Therefore, the club had not been unjustly enriched.
On the issue of the bank’s liability, the Court rejected both claims in negligence and constructive trust. The judges held that the bank had not acted negligently, and that a bank could not be held liable as a constructive trustee in the absence of actual knowledge of wrongdoing.
May LJ emphasised that the obligations of a banker are largely mechanical and that the bank could not be expected to question the wisdom of each transaction, especially given the volume of cheques processed daily. Only in exceptional cases would liability arise.
Lipkin Gorman v Karpnale Ltd Judgement
The appeal against the bank was not pursued further. The matter that came before the House of Lords was solely the claim against Karpnale Ltd for restitution.
The House of Lords allowed the appeal and found in favour of Lipkin Gorman, holding that Karpnale Ltd had been unjustly enriched by the receipt of stolen funds. Their Lordships ruled that the club had not provided valid consideration, as the gaming contract was void and the chips were simply a mechanism to facilitate the gambling activity.
Lord Templeman remarked that:
“The club received stolen money by way of gift from the thief; the club, being a volunteer, has been unjustly enriched at the expense of the solicitors from whom the money had been stolen and the club must reimburse the solicitors.”
The House of Lords also considered whether any defence was available to the club. In doing so, they acknowledged and formally recognised for the first time in English law the defence of change of position. This defence applies when the recipient of the money, acting in good faith, has changed their position in reliance on the receipt such that it would be inequitable to require full repayment.
Lord Goff, supporting this view, stated:
“There was a consensus… that such a defence should be recognised in English law. I myself am under no doubt that this is right.”
Applying this principle, the court held that Karpnale Ltd was only liable to repay the net amount it had retained — £154,695 — since the rest of the money had been paid out as winnings and the club had changed its position in good faith. The court also awarded £3,735 in damages for conversion relating to a banker’s draft that had been used in gambling.
Legal Principles Established
The ruling in Lipkin Gorman v Karpnale Ltd is significant for several reasons:
Recognition of Unjust Enrichment
The case firmly established unjust enrichment as a distinct and independent legal doctrine in English law. The judgement clarified that claims for money had and received are rooted in the principle of restitution for unjust enrichment.
Defence of Change of Position
For the first time, the change of position defence was formally recognised. A recipient who has acted in good faith and altered their financial position based on the received funds may be partially or wholly excused from repayment.
Consideration and Void Contracts
The case highlighted the legal implications of void contracts under the Gaming Act 1845. The court held that even if money was exchanged for chips, this did not constitute valid consideration if the underlying transaction — gambling — was void.
Equitable Tracing
The judgement clarified that money could be traced through void transactions and recovered from a third party unless valid consideration was given or a defence like change of position applied.
Banking Law (Court of Appeal)
Although not appealed further, the Court of Appeal’s judgement on bank liability remains a leading authority. It confirmed that banks have no general duty to question client transactions unless there are clear signs of impropriety.
Conclusion
Lipkin Gorman v Karpnale Ltd [1991] 2 AC 548 stands as a foundational authority in the law of restitution and unjust enrichment. It confirmed that stolen funds could be recovered from innocent recipients unless consideration was provided or the recipient had changed their position. The recognition of the change of position defence ensured fairness in such claims, preventing unjust results for innocent parties.