CONSTRUCTIVE NOTICE AND KNOWING RECEIPT: AN ECONOMIC ANALYSIS

Abstract

This article attempts an economic analysis of the policy formulated in Manchester Trust v Furness that constructive notice should not be made the basis of liability arising out of commercial transactions. It concentrates on instances of equitable liability for ”knowing receipt“ where the defendant is required to give restitution of funds which it received in breach of fiduciary duty. The article investigates the social costs of imposing a duty of inquiry on a person receiving misappropriated money in a commercial transaction. It concludes that there are strong economic reasons why a commercial recipient of money should not owe the same rigorous duties of inquiry commonly imposed in conveyancing transactions. However, once the standard of inquiry is adjusted to take into the exigencies of commercial dealings, there are no compelling economic reasons why constructive notice should be rejected as a possible basis of liability in knowing receipt.