Contracts & Title
Cases
Rhone v Stephens
[1994] UKHL 3 [1994] 2 All ER 65, [1994] 2 AC 310, [1994] UKHL 3
Lord Templeman
At common law a person cannot be made liable upon a contract unless
he was a party to it. In Cox v. Bishop (1857) 8 De. G. & J. 276 (44 E.R.
604) a lease was assigned to a man of straw and it was held that the covenants
in the lease could not be enforced against an equitable assignee of the lease
who had entered into possession. The covenants were not enforceable because
there was no privity of contract or estate between the lessee and the assignee.
The rigours of the common law which do not allow covenants to be enforced
by and against successors in title were relaxed first by the doctrines laid down
in Spencer’s case (1583) 5 Co. Rep. 16a and then by statutory extensions of
those doctrines introduced by the Grantees of Reversions Act 1540 (32 Hen.
8 c34), the Conveyancing Act 1881 and the Conveyancing Act 1911 now
repealed and reproduced in sections 141 and 142 of the Law of Property Act
1925. In the result, as between landlord and tenant both the burden and the
benefit of a covenant which touches or concerns the land demised and is not
merely collateral run with the reversion and the term at law whether the
covenant be positive or restrictive. As between persons interested in land
other than as landlord and tenant, the benefit of a covenant may run with the
land at law but not the burden; see the Austerberry case.
Thus Clause 3 of the 1960 Conveyance, despite its express terms, did
not confer on the owner for the time being of Walford Cottage the right at
common law to compel the owner for the time being of Walford House to
repair the roof or to obtain damages for breach of the covenant to repair. In
this appeal, Mr. Munby, on behalf of the owners of Walford Cottage contends
that equity will compel the owner of Walford House to comply with the
covenant to repair the roof or to pay damages in lieu.
My Lords, equity supplements but does not contradict the common
law. When freehold land is conveyed without restriction, the conveyance
confers on the purchaser the right to do with the land as he pleases provided
that he does not interfere with the rights of others or infringe statutory
restrictions. The Conveyance may however impose restrictions which, in
favour of the covenantee, deprive the purchaser of some of the rights inherent
in the ownership of unrestricted land. In Tulk v. Moxhay (1848) 2 Ph. 774,
a purchaser of land covenanted that no buildings would be erected on
Leicester Square. A subsequent purchaser of Leicester Square was restrained
from building. The conveyance to the original purchaser deprived him and
every subsequent purchaser taking with notice of the covenant of the right,
otherwise part and parcel of the freehold, to develop the Square by the
construction of buildings. Equity does not contradict the common law by
enforcing a restrictive covenant against a successor in title of the covenantor
but prevents the successor from exercising a right which he never acquired.
Equity did not allow the owner of Leicester Square to build because the owner
never acquired the right to build without the consent of the persons (if any)
from time to time entitled to the benefit of the covenant against building. In
Tulk v. Moxhay the speech of Lord (Cottenham L.C. contained the following
passage at p. 777:
“It is said, that the covenant being one which does not run with the
land, this Court cannot enforce it; but the question is, not whether the
covenant runs with the land, but whether a party shall be permitted to
use the land in a manner inconsistent with the contract entered into by
his vendor, and with notice of which he purchased.”
Equity can thus prevent or punish the breach of a negative covenant
which restricts the user of land or the exercise of other rights in connection
with land. Restrictive covenants deprive an owner of a right which he could
otherwise exercise. Equity cannot compel an owner to comply with a positive
covenant entered into by his predecessors in title without flatly contradicting
the common law rule that a person cannot be made liable upon a contract
unless he was a party to it. Enforcement of a positive covenant lies in
contract; a positive covenant compels an owner to exercise his rights.
Enforcement of a negative covenant lies in property; a negative covenant
deprives the owner of a right over property. As Lord Cottenham said in Tulk
v. Moxhay at p. 778:
“if an equity is attached to the property by the owner, no one
purchasing with notice of that equity can stand in a different situation
from the party from whom he purchased.”
Following Tulk v. Moxhay there was some suggestion that any
covenant affecting land was enforceable in equity provided that the owner of
the land had notice of the covenant prior to his purchase. In Morland v. Cook
(1868) L.R. 6 Eq. 252 lands below sea level were partitioned by a deed
containing a covenant that the expense of maintaining the sea wall should be
borne by the owners of the lands and payable out of the lands by an acre-scot.
Lord Romilly M.R. enforced the covenant against a subsequent purchaser of
part of the lands on the grounds that he had purchased with notice of the
covenant. In Cooke v. Chilcott (1876) 3 Ch. D. 694 a covenant by the
purchaser of land with a well to erect a pump and reservoir and to supply
water from the well to all houses built on the vendor’s land was enforced
against a subsequent purchaser of the land burdened with the covenant on the
grounds that the covenant ran with the land but that in any event the defendant
took with notice of the obligation. Malins V.-C. said, at p. 701:
“I think that when a contract is entered into for the benefit of
contiguous landowners, and one is bound by it and the other entitled
to the benefit of it, the covenant binds him for ever, and also runs with
the land. But it is equally clear that he is bound by taking the land
with notice of the covenant.”
These last two cases did not survive the decision of the Court of
Appeal in Haywood v. The Brunswick Permanent Benefit Building Society
(1881) 8 Q.B.D. 403. In that case land had been conveyed in consideration
of a rent charge and a covenant to build and repair buildings; a mortgagee of
the land was held not to be liable on the covenant either at law or in equity
although the mortgagee had notice of the covenant. Brett L.J. said, at p. 408
that Tulk v. Moxhay:
“decided that an assignee taking land subject to a certain class of
covenants is bound by such covenants if he has notice of them, and
that the class of covenants comprehended within the rule is that
covenants restricting the mode of using the land only will be enforced.
It may be also, but it is not necessary to decide here, that all covenants
also which impose such a burden on the land as can be enforced
against the land would be enforced … It is said that if we decide for
the defendants we shall have to overrule Cooke v. Chilcott, 3 Ch. D.
694. If that case was decided on the equitable doctrine of notice, I
think we ought to overrule it.”
Cotton L.J. said, at p. 409:
“Let us consider the examples in which a court of equity has enforced
covenants affecting land. We find that they have been invariably
enforced if they have been restrictive, and that with the exception of
the covenants in Cooke v. Chilcott 3 Ch. D. 694, only restrictive
covenants have been enforced.”
Cotton LJ. also said, that Tulk v. Moxhay:
“lays down the real principle that an equity attaches to the owner of
the land . . . The covenant to repair can only be enforced by making
the owner put his hand into his pocket, and there is nothing which
would justify us in going that length.”
In London and South Western Railway Co. v. Gomm (1882) 20 Ch.D.
562 an option to purchase land on the happening of an uncertain event was
held to be void for remoteness. It was argued that the covenant was
enforceable in equity. Jessel M.R. said, at pp. 582-583:
“With regard to the argument founded on Tulk v. Moxhay, 2 Ph. 774
that case was very much considered by the Court of Appeal in
Haywood v. The Brunswick Permanent Benefit Building Society, 8
Q.B.D. 403, and the court there decided that they would not extend
the doctrine of Tulk v. Moxhay to affirmative covenants, compelling
a man to lay out money or do any other act of what I may call an
active character, but that it was to be confined to restrictive covenants.
Of course that authority would be binding upon us if we did not agree
to it, but I most cordially accede to it. I think that we ought not to
extend the doctrine of Tulk v. Moxhay in the way suggested here. The
doctrine of that case . . . appears to me to be either an extension in
equity of the doctrine of Spencer’s case to another line of cases, or
else an extension in equity of the doctrine of negative easements . . .
The covenant in Tulk v. Moxhay was affirmative in its terms, but was
held by the court to imply a negative. Where there is a negative
covenant expressed or implied, … the court interferes on one or
other of the above grounds. This is an equitable doctrine, establishing
an exception to the rules of common law which did not treat such a
covenant as running with the land, and it does not matter whether it
proceeds on analogy to a covenant running with the land or on analogy
to an easement. The purchaser took the estate subject to the equitable
burden, with the qualification that if he acquired the legal estate for
value without notice he was freed from the burden.”
Lindley L.J. said, at pp. 587-588, that because in Haywood v.
Brunswick Permanent Benefit Building Society (1881) 8 Q.B.D. 403 it was
sought to extend the doctrine of Tulk v. Moxhay:
“to a degree which was thought dangerous, considerable pains were
taken by the court to point out the limits of that doctrine . . . The
conclusion arrived at … was that Tulk v. Moxhay, when properly
understood, did not apply to any but restrictive covenants.”
In the Austerberry case the owners of a site of a road covenanted that
they and their successors in title would make the road and keep it in repair.
The road was sold to the defendants and it was held that the repair covenant
could not be enforced against them. Cotton L.J. said, 29 Ch.D. 750, 773
“Undoubtedly, where there is a restrictive covenant, the burden and
benefit of which do not run at law, courts of equity restrain anyone
who takes the property with notice of that covenant from using it in a
way inconsistent with the covenant. But here the covenant which is
attempted to be insisted upon on this appeal is a covenant to lay out
money in doing certain work upon this land; and, that being so …
that is not a covenant which a court of equity will enforce: it will not
enforce a covenant not running at law when it is sought to enforce that
covenant in such a way as to require the successors in title of the
covenantor, to spend money, and in that way to undertake a burden
upon themselves. The covenantor must not use the property for a
purpose inconsistent with the use for which it was originally granted;
but in my opinion a court of equity does not and ought not to enforce
a covenant binding only in equity in such a way as to require the
successors of the covenantor himself, they having entered into no
covenant, to expend sums of money in accordance with what the
original covenantor bound himself to do.”
In re Nisbet and Potts’ Contract [1905] 1 Ch. 391 it was held that a
title acquired by adverse possession was not paramount to, and did not destroy
the equitable right of persons entitled to the benefit of prior restrictive
covenants to enforce them against the land. Farwell J. said, at pp. 396-397:
“Covenants restricting the enjoyment of land, except of course as
between the contracting parties and those privy to the contract, are not
enforceable by anything in the nature of action or suit founded on
contract. Such actions and suits alike depend on privity of contract,
and no possession of the land coupled with notice of the covenants can
avail to create such privity: Cox v. Bishop (1857) 8 De G.M. & G.
815. But if the covenant be negative, so as to restrict the mode of use
and enjoyment of the land, then there is called into existence an equity
attached to the property of such a nature that it is annexed to and runs
with it in equity: Tulk v. Moxhay, 2 Ph. 774. This equity, although
created by covenant or contract, cannot be sued on as such, but stands
on the same footing with and is completely analogous to an equitable
charge on real estate created by some predecessor in title of the
present owner of the land charged. . . . effect is given to the negative
covenant by means of the land itself. But the land cannot spend
money on improving itself, and there is no personal liability on the
owner of the land for the time being, because there is no contract on
which he can be sued in contract.”
For over a hundred years it has been clear and accepted law that equity
will enforce negative covenants against freehold land but has no power to
enforce positive covenants against successors in title of the land. To enforce
a positive covenant would be to enforce a personal obligation against a person
who has not covenanted. To enforce negative covenants is only to treat the
land as subject to a restriction.
Mr. Munby who argued the appeal persuasively on behalf of the
owners of Walford Cottage referred to an article by Professor Sir William
Wade and other articles in which the present state of the law is subjected to
severe criticism. In 1965 a Report by a committee appointed by the Lord
Chancellor and under the chairmanship of Lord Wilberforce (Cmnd. 2719)
referred to difficulties caused by the decision in the Austerberry case and
recommended legislation to provide that positive covenants which relate to the
use of land and are intended to benefit specified other land should run with the
land. The Law Commission published on 5 July 1971 Working Paper No. 36
in which the present law on positive rights was described as being illogical,
uncertain, incomplete and inflexible. The Law Commission Report No. 127
laid before Parliament in 1965 made recommendations for the reform of the
law relating to positive and restrictive obligations and submitted a draft Bill
for that purpose. Nothing has been done.
In these circumstances your Lordships were invited to overrule the
decision of the Court of Appeal in the Austerberry case. To do so would
destroy the distinction between law and equity and to convert the rule of
equity into a rule of notice. It is plain from the articles, reports and papers
to which we were referred that judicial legislation to overrule the Austerberry
case would create a number of difficulties, anomalies and uncertainties and
affect the rights and liabilities of people who have for over 100 years bought
and sold land in the knowledge, imparted at an elementary stage to every
student of the law of real property, that positive covenants affecting freehold
land are not directly enforceable except against the original covenantor.
Parliamentary legislation to deal with the decision in the Austerberry case
would require careful consideration of the consequences. Moreover,
experience with leasehold tenure where positive covenants are enforceable by
virtue of privity of estate has demonstrated that social injustice can be caused
by logic. Parliament was obliged to intervene to prevent tenants losing their
homes and being saddled with the costs of restoring to their original glory
buildings which had languished through wars and economic depression for
exactly 99 years.
Mr. Munby submitted that the decision in the Austerberry case had
been reversed remarkably but unremarked by section 79 of the Law of
Property Act 1925 which so far as material provides as follows:
“(1) A covenant relating to any land of a covenantor or capable of
being bound by him, shall, unless a contrary intention is
expressed, be deemed to be made by the covenantor on behalf
of himself, his successors in title and the persons deriving title
under him or them, and, subject as aforesaid, shall have effect
as if such successors and other persons were expressed.”
This provision has always been regarded as intended to remove
conveyancing difficulties with regard to the form of covenants and to make it
unnecessary to refer to successors in title. A similar provision relating to the
benefit of covenants is to be found in section 78 of the Act of 1925. In Smith
and Snipes Hall Farm Ltd. v. River Douglas Catchment Board [1949] 2 K.B.
500 followed in Williams v. Unit Construction Co. Ltd. (1951) 19 Conv.
(N.S.) 262 it was held by the Court of Appeal that section 78 of the Act of
1925 had the effect of making the benefit of positive covenants run with the
land. Without casting any doubt on those longstanding decisions I do not
consider that it follows that section 79 of the Act of 1925 had the
corresponding effect of making the burden of positive covenants run with the
land. In Jones v. Price [1965] 2 Q.B. 618, 633, Willmer L.J. repeated that:
“a covenant to perform positive acts … is not one the burden of
which runs with the land so as to bind the successors in title of the
covenantor: see Austerberry v. Oldham Corporation.”
In Sefton v. Tophams Ltd. [1967] A.C. 50 Lord Upjohn at p. 73 and
Lord Wilberforce at p. 81 stated that section 79 of the Law of Property Act
1925 does not have the effect of causing covenants to run with the land.
Finally in Federated Homes Ltd. v. Mill Lodge Properties Ltd. [1980] 1
W.L.R. 594, 605-606, Brightman J. referred to the authorities on section 78
of the Act of 1925 and said that:
“Section 79, in my view, involves quite different considerations and
I do not think that it provides a helpful analogy.”
Mr. Munby also sought to persuade your Lordships that the effect of
the decision in the Austerberry case had been blunted by the “pure principle
of benefit and burden” distilled by Sir Robert Megarry V.-C. from the
authorities in Tito v. Waddell (No.2) [1977] 1 Ch. 106, at 301 et seq. I am
not prepared to recognise the “pure principle” that any party deriving any
benefit from a conveyance must accept any burden in the same conveyance.
Sir Robert Megarry relied on the decision of Upjohn J. in Halsall v. Brizell
[1957] Ch. 169. In that case the defendant’s predecessor in title had been
granted the right to use the estate roads and sewers and had covenanted to pay
a due proportion for the maintenance of these facilities. It was held that the
defendant could not exercise the rights without paying his costs of ensuring
that they could be exercised. Conditions can be attached to the exercise of a
power in express terms or by implication. Halsall v. Brizell was just such a
case and I have no difficulty in whole-heartedly agreeing with the decision.
It does not follow that any condition can be rendered enforceable by attaching
it to a right nor does it follow that every burden imposed by a conveyance
may be enforced by depriving the covenantor’s successor in title of every
benefit which he enjoyed thereunder. The condition must be relevant to the
exercise of the right. In Halsall v. Brizell there were reciprocal benefits and
burdens enjoyed by the users of the roads and sewers. In the present case
Clause 2 of the 1960 Conveyance imposes reciprocal benefits and burdens of
support but Clause 3 which imposed an obligation to repair the roof is an
independent provision. In Halsall v. Brizell the defendant could, at least in
theory, choose between enjoying the right and paying his proportion of the
cost or alternatively giving up the right and saving his money. In the present
case the owners of Walford House could not in theory or in practice be
deprived of the benefit of the mutual rights of support if they failed to repair
the roof.
In the result I would dismiss the appeal and make the usual order for
costs against the appellant subject to the usual appropriate legal aid
reservations.
LORD OLIVER OF AYLMERTON
My Lords,
For the reasons given by my noble and learned friend Lord Templeman
I too would dismiss the appeal.
LORD WOOLF
My Lords,
I have benefited from reading in draft the speech of my noble and
learned friend. Lord Templeman. I agree with it and for the reasons he gives
I would dismiss this appeal.
LORD LLOYD
Davies & Ors v Jones & Anor
[2009] EWCA Civ 1164 [2010] 1 P & CR 22, [2010] 5 EG 114, [2009] NPC 126, [2009] EWCA Civ 1164, [2009] 46 EG 142
The Chancellor
Is Lidl bound by the terms of clause 18 of the Jones-Trustees Contract because it took a benefit under that contract?
Having set out the facts and having dealt with the trust issues Judge Jarman QC dealt with this issue in paragraphs 20 to 23 of his judgment. In his consideration of it he referred to the speech of Lord Templeman in Rhone v Stephens [1994] 2 AC 310, and thereby indirectly to Halsall v Brizell [1956] 1 Ch 169 and Tito v Waddell (No.2) [1977] Ch 106. He also referred to the judgment of HH Judge Pelling QC in Baybut and others v Eccle Riggs Country Park Ltd 2nd November 2006 (2006 WL 3206169) but not to the judgment of Peter Gibson LJ in Thamesmead Town Ltd v Allotey (1998) 30 HLR 1052 or Sir Nicolas Browne-Wilkinson V-C in IDC Group v Clark [1992] 1 EGLR 186.
I have quoted the judge’s conclusion in paragraph 7 above. It is criticised by counsel for Lidl on the following grounds:
(1) the “clear understanding” to which the judge referred is an insufficient basis for conferring a benefit or imposing a burden;
(2) the benefit which Lidl did obtain under either the Deed of Assignment or the Transfer of the land was, in each case, unconditional;
(3) its benefit having been obtained on the execution of the Deed of Assignment and Transfer, thereafter Lidl had no choice whether or not to accept it;
(4) In any event the corresponding burden cannot be enforced by action on the contract.
I did not understand counsel for the claimants to place much, if any, emphasis on the “clear understanding” to which the judge referred. Rather, he pointed to the Deed of Assignment as the source of Lidl’s rights. Not only did it contain an assignment by Mr Jones to Lidl of the benefit of the Jones-Thomas and Jones-Trustees Contracts but it provided for the discharge of the Jones-Lidl Contract. Accordingly, this case is not a conventional sub-purchase. I would accept that submission. Thus the rights of Lidl were derived successively from the Deed of Assignment and the transfers executed on completion by the claimants and Mr and Mrs Thomas. The receipt of the benefit of the assignment by the subsequent transfers was conditional on Lidl’s performance of the obligations of Mr Jones under the Jones-Thomas and Jones-Trustees Contracts. Counsel for the claimants then contended that such conditionality was sufficient to impose on Lidl the burden of complying with the provisions of clause 18 of the Jones-Trustees Contract. In addition he submitted that if the conditions for the imposition of the burden on Lidl existed then it must be open to the claimants to enforce that burden by action, if only by way of a claim for unjust enrichment.
I turn then to the decided cases. The origin, in modern times, for the application of the doctrine of benefit and burden is the judgment of Upjohn J in Halsall v Brizell [1956] 1 Ch 169. That case concerned the enforceability of a deed of covenant entered into by the owners of building plots in a development in Liverpool against the successors in title of the original covenantors. The owners of the plots for the time being enjoyed the benefit of the roads and sewers constructed as part of the development and, on behalf of themselves and their successors in title, had covenanted with the trustees to pay part of the cost. Some house-owners, being successors in title to the original covenantors, refused to pay an increased contribution and the trustees and other house-owners applied to the court to determine whether on the true construction of the deed and in the events which had happened the trustees were entitled to require the house-owners to pay the contributions they claimed.
It was conceded in argument in response to a question from the judge that there was a rule that one who accepts the benefit of a deed must also accept the burden of it (see p.180). At page 182 Upjohn J observed that it was plain that the defendants could not be sued on the covenants contained in the deed because the covenant to pay was positive, aspects of it infringed the rule against perpetuities and because the parties before him were not parties to the original contract. He then considered the foundation of the doctrine of benefit and burden, as formulated in Coke on Littleton 230b and applied in Elliston v Reacher [1908] 2 Ch 665, 669, and concluded (p.182/3):
“If the defendants did not desire to take the benefit of this deed, for the reasons I have given, they could not be under any liability to pay the obligations thereunder. But, of course, they do desire to take the benefit of this deed. They have no right to use the sewers which are vested in the plaintiffs, and I cannot see that they have any right, apart from the deed, to use the roads of the park which lead to their particular house, No. 22, Salisbury Road. The defendants cannot rely on any way of necessity or on any right by prescription, for the simple reason that when the house was originally sold in 1931 to their predecessor in title he took the house on the terms of the deed of 1851 which contractually bound him to contribute a proper proportion of the expenses of maintaining the roads and sewers, and so forth, as a condition of being entitled to make use of those roads and sewers. Therefore, it seems to me that the defendants here cannot, if they desire to use this house, as they do, take advantage of the trusts concerning the user of the roads contained in the deed and the other benefits created by it without undertaking the obligations thereunder. Upon that principle it seems to me that they are bound by this deed, if they desire to take its benefits.”
In Tito v Waddell (No.2) [1977] Ch 106 Sir Robert Megarry V-C considered the principle applied by Upjohn J in Halsall v Brizell on pages 299 to 303. He concluded (p.302) that the ‘pure principle’ of benefit and burden was distinct from a conditional benefit or the annexation of a burden to property. In Rhone v Stephens [1994] 2 AC 310 the House of Lords disapproved of the pure principle as enunciated by Sir Robert Megarry but cast no doubt on his comment (p.302) that whether or not an instrument or transaction has created a conditional benefit or a burden annexed to property depends on the proper construction of the instrument or transaction in question.
In Rhone v Stephens [1994] 2 AC 310 a successor in title to the original covenantee sought to enforce a covenant to repair a roof against the successor in title to the original covenantor. Lord Templeman, with whom the other four members of the Appellate Committee agreed, noted that equity cannot, any more than the law, compel an owner to comply with a positive covenant entered into by his predecessor in title. He then referred to the ‘pure principle of benefit and burden’ enunciated by Sir Robert Megarry V-C and continued:
“I am not prepared to recognise the “pure principle” that any party deriving any benefit from a conveyance must accept any burden in the same conveyance. Sir Robert Megarry V.-C. relied on the decision of Upjohn J. in Halsall v. Brizell [1957] Ch. 169. In that case the defendant’s predecessor in title had been granted the right to use the estate roads and sewers and had covenanted to pay a due proportion for the maintenance of these facilities. It was held that the defendant could not exercise the rights without paying his costs of ensuring that they could be exercised. Conditions can be attached to the exercise of a power in express terms or by implication. Halsall v. Brizell was just such a case and I have no difficulty in wholeheartedly agreeing with the decision. It does not follow that any condition can be rendered enforceable by attaching it to a right nor does it follow that every burden imposed by a conveyance may be enforced by depriving the covenantor’s successor in title of every benefit which he enjoyed thereunder. The condition must be relevant to the exercise of the right. In Halsall v. Brizell there were reciprocal benefits and burdens enjoyed by the users of the roads and sewers. In the present case clause 2 of the 1960 conveyance imposes reciprocal benefits and burdens of support but clause 3 which imposed an obligation to repair the roof is an independent provision. In Halsall v. Brizell the defendant could, at least in theory, choose between enjoying the right and paying his proportion of the cost or alternatively giving up the right and saving his money. In the present case the owners of Walford House could not in theory or in practice be deprived of the benefit of the mutual rights of support if they failed to repair the roof.”
Thus Lord Templeman stressed that conditions may be attached to the exercise of a right or power by express terms or by implication, thereby recognising that, as Sir Robert Megarry had considered, the question is one of construction of the relevant instrument or transaction. Even so, as Lord Templeman pointed out, the condition must be relevant or reciprocal to the exercise of the right.
The principle was considered again by the Court of Appeal in Thamesmead Town Ltd v Allotey (1998) 30 HLR 1052. In that case the successor in title to the original covenantor refused to pay his share of the costs of repairing and maintaining sewers he had the right to use as appurtenant to his house. The covenantee in which the relevant housing estate was vested sued for their recovery. The defence was that as the defendant had not been a party to the original covenant he could not be liable for the sums claimed. That defence succeeded at first instance and on appeal. Peter Gibson LJ, with whom Hobhouse and Butler-Sloss LJJ agreed, noted that there was an exception to the rule that the burden of a positive covenant does not run with the land in cases where the covenantor may not take the benefit of a transaction without undertaking the burden imposed by it. He referred to Halsall v Brizell and Rhone v Stevens. He noted that Lord Templeman had suggested that there were two requirements for that exception to apply, namely (1) relevance of the burden or its discharge to the exercise of the rights which enable the benefit to be obtained and (2) the opportunity to choose whether or not to exercise the right or having taken the right whether to renounce its benefit, as opposed to a choice whether or not to acquire the rights at all. In relation to those requirements he concluded (p.1060):
“Similarly, it is not possible to enforce every burden in a conveyance by depriving the covenantor’s successors in title of every benefit which he enjoyed under the conveyance. There must be a correlation between the burden and the benefit which the successor has chosen to take. Lord Templeman plainly rejected the notion that taking a benefit under a conveyance was sufficient to make every burden of the conveyance enforceable. Further, there is no authority to suggest that any benefit obtained by a successor in title, once the property has been transferred to him, to enable the enforcement of a burden under the conveyance is sufficient, even if that benefit was not conferred as of right by the conveyance. In my judgment, it cannot be sufficient that the taking of an incidental benefit should enable the enforcement of a burden against a person who has not himself covenanted to undertake the particular burden. Lord Templeman’s reference to rights and power suggests that the successor in title must be able as of right to obtain the relevant benefit. I have already pointed out that not only is there no right conferred on the defendant by the 1988 transfer to use the communal areas but also the plaintiff has no obligation to maintain those areas.
[Counsel]’s second argument was that the judge erred in holding that the burden of a positive covenant is enforceable only if and to the extent that a successor in title chooses to exercise the corresponding right. That overstates what in fact the judge did say. He did not use the words “to the extent that”. [Counsel] submits that once a successor in title enters into the transaction by which he takes title he is liable regardless of whether he has actually chosen to enjoy a benefit. He submits that the judge has confused the acquisition of the right with the exercise of the right. He suggests that any other construction would lead to an impractical result requiring the plaintiff to monitor the exercise of rights by persons living in Thamesmead. For my part, I see considerable force in the common sense of that argument, but in the light of the authorities the argument seems to me impossible. As I have already pointed out, in Halsall v. Brizell, at 182, Upjohn J. was expressing the relevant principle in terms that the successors in title could choose whether or not to take the benefit of the deed. Similarly, in Rhone v. Stephens, Lord Templeman in distinguishing Halsall v.Brizell, expressed himself in terms which indicated that the successors in title had to have a choice whether to exercise the right or, having taken the right, whether to renounce the benefit. Lord Templeman was not expressing himself in terms that the successors in title had to have a choice whether to acquire the rights at all. Accordingly, I must reject this second argument also.”
Thus Peter Gibson LJ also stressed the need for a correlation between the burden and the benefit the successor in title has chosen to take and his ability to choose whether or not to take the benefit.
The principle was applied in 2006 in two cases on which counsel for the claimants relied. The first was Jenkins v Young Bros Transport Ltd [2006] 1 WLR 3189 and the second Baybut v Eccle Riggs Country Park Ltd 2006 WL 3206169. In the former a solicitor had, in the name of his then firm, entered into a conditional fee agreement with a client. While the litigation proceeded he moved firms twice. On each occasion the benefit of the CFA was assigned by the former firm to the subsequent firm. The client was successful and his costs, to be paid by the defendant, were then assessed. The defendant in the action contended that he should not be made to pay the costs due under the CFA after its first assignment because the claimant was not liable to pay them. That contention failed before the costs judge and Rafferty J sitting with assessors. The latter concluded that the benefit and burden of the CFA might be assigned because:
“The benefit of being paid was inextricably linked to the meeting by Girlings of its burden of ensuring to the best of its ability that the claimant succeeded.”
Plainly an inextricable link between benefit and burden would satisfy the tests formulated in all the earlier cases. That is sufficient for present purposes, though I have some doubt whether the relevant benefit and burden were correctly described.
In Baybut v Eccle Riggs Country Park Ltd the purchaser of a caravan park purported to terminate the 10 year licences under which the owners of the various caravans occupied their respective pitches. HH Judge Pelling QC concluded (paragraph 59) that the new owner of the caravan park was subject to the burden of the licences not only because they had been novated but also because
“[he, the purchaser] deliberately chose to take the benefit of the caravan site…and the income stream that it represented….it could not have done so without accepting the burden of the licences entered into by the claimants with [the former owner].”
But this was said in the context that the sale agreement of the caravan site had contained a covenant by the purchaser with the vendor to perform and observe the future obligations imposed by the licences. Thus, under the sale agreement the purchaser took the benefit of the licences conditionally on accepting the burdens thereunder. In addition the principle that one who takes the benefit of a licence to occupy the land granted to another in the form of an income stream, presumably by receiving periodical payments, will be bound by the burden to permit the licence-holder to occupy his pitch is also well known. Both grounds are in accordance with the principles formulated by Lord Templeman and Peter Gibson LJ.
Rhone v Stephens and Thamesmead Town Ltd v Allotey are binding on us. They establish a number of propositions the application of which are exemplified in the other cases to which I have referred, namely Halsall v Brizell, that part of Tito v Waddell which was not disapproved in Rhone v Stephens, Jenkins v Young Bros Transport Ltd and Baybut v Eccle Riggs Country Park Ltd. In my view those propositions are:
(1) The benefit and burden must be conferred in or by the same transaction. In the case of benefits and burdens in relation to land it is almost inevitable that the transaction in question will be effected by one or more deeds or other documents.
(2) The receipt or enjoyment of the benefit must be relevant to the imposition of the burden in the sense that the former must be conditional on or reciprocal to the latter. Whether that requirement is satisfied is a question of construction of the deeds or other documents where the question arises in the case of land or the terms of the transaction, if not reduced to writing, in other cases. In each case it will depend on the express terms of the transaction and any implications to be derived from them.
(3) The person on whom the burden is alleged to have been imposed must have or have had the opportunity of rejecting or disclaiming the benefit, not merely the right to receive the benefit.
Applying those propositions to the facts of this case I conclude that the judge reached the wrong conclusion. First, a “clear understanding”, such as he referred to in the passage from his judgment I have quoted in paragraph 6 above, is an insufficient base from which to start. An understanding such as he described can neither confer benefits nor impose burdens. What is required is a transaction having legal effect. In this case the benefit and burden is alleged to arise from land. Accordingly the relevant transaction must be effected by a deed or other document.
In his respondent’s notice and in argument before us counsel for the claimants placed principal reliance on the Deed of Assignment. That Deed effected a transaction having legal consequences, namely the assignment of the benefit of the Jones-Thomas and Jones-Trustees Contracts by the claimants to Lidl. But the benefit derived by Lidl from that assignment was not thereby made conditional, as it might have been, on Lidl performing and observing the obligations of Mr Jones under those contracts. In the absence of a covenant to that effect contained in the Deed of Assignment the transaction did not purport to impose any burden on Lidl. Both contracts imposed on Mr Jones substantial obligations to carry out various site works. There is nothing in the Deed of Assignment from which it would be possible to find by implication an undertaking or requirement imposed on Lidl to carry out Mr Jones’s obligations. Accordingly the questions whether acceptance of the benefit was conditional on performance of the burden and whether Lidl had sufficient opportunity to disclaim or reject the benefit do not arise.
The benefit to Lidl might have been realised by assigning the benefit of the contracts to some third party purchaser. In that event there could have been no question of Lidl undertaking any burden. But in all probability the benefit of the Deed of Assignment would be realised, as it was, by completing the contracts the benefit of which Lidl had thereby acquired. Completion took place on the 4th August and some reliance was put on that transaction by counsel for the claimants. But in my view that transaction cannot avail the claimants either. Completion of those contracts was not dependent on Lidl undertaking any of the burdens imposed on Mr Jones by clause 18 of the Jones-Trustees Contract, indeed they did not arise until after completion. The relevant transfers did not contain any stipulation requiring Lidl to perform and observe the obligations of Mr Jones under the contracts thereby completed. Accordingly, as with the Deed of Assignment so with the transfers there is nothing which could be regarded as either expressly or by implication imposing any relevant obligation on Lidl. Again the questions whether receipt of the benefit is sufficiently relevant to or conditional on the imposition of the burden and whether Lidl had sufficient opportunity to disclaim or reject the benefit do not arise.
The fact is that clause 18 of the Jones-Trustees Contract was contractually binding on Mr Jones. The obligations thereby imposed arose after completion of the contracts. There was no subsequent transaction by which benefits were conferred and burdens imposed capable of attracting the principle relied on. In the absence of a covenant in the Transfer binding Lidl to perform and observe Mr Jones’ obligations under clause 18 of the Jones-Trustees Contract they could not be imposed on Lidl but remained the obligations of Mr Jones alone. Mr Jones was originally a party to these proceedings. Why the claim against him was made only on the basis that he was the agent of Lidl is not for us to speculate. For these reasons I would allow the appeal and, subject to our conclusion on the other issue, set aside the judge’s answer to that part of the preliminary issue and make a declaration in the opposite sense.
In those circumstances it is unnecessary to consider whether if the burden had been imposed on Lidl it was capable of being enforced by action at the suit of the claimants. But in the light of counsel’s submissions I wish to add a few words in relation to it. Counsel for Lidl submitted that the burden could only be enforced by withholding the relative benefit not by action. He relied on the statement of Upjohn J in Halsall v Brizell to the effect that it was plain that the trustees could not sue on the covenant. Counsel also relied on the dictum of Sir Nicolas Browne-Wilkinson in IDC Group Ltd v Clark [1992] 1 EGLR 187, 190 that:
“the only means of enforcement in a Halsall v Brizell type of case is to prevent the person from enjoying the rights which they seek to enjoy under the document, save upon the terms that they give effect to the positive obligations imposed on them.”
It is not hard to envisage situations in which the failure of the person benefitted to perform the associated obligations could satisfy the conditions for a claim in unjust enrichment. Further I am unclear how that statement can be reconciled with cases dealing with compensation for letting down the surface of land in performance of a right to do so subject to paying the surface owner compensation. In such a case it seems that the landowner may sue the mineworker for compensation see, for example, the decision of the Exchequer Division in Aspden v Seddon (1875-6) 1 Ex D 496 and of the Court of Appeal in Westhoughton UDC v Wigan Coal and Iron Co. [1919] 1 Ch 159. Further, alternative means of enforcement have been allowed in both Jenkins v Young Bros Transport Ltd and Baybut v Eccle Riggs Country Park Ltd although this point does not appear to have been raised in either of them. It is not, if, as I understand to be the case, the other members of the court agree with my conclusion so far, necessary to resolve this issue in this case. Money Markets International Stockbrokers Ltd v London
Stock Exchange Ltd & Anor
[2001] EWHC 1052 (Ch)
Neuberger J
THE PRINCIPLES AS DERIVED FROM THE AUTHORITIES
Introduction
MMI relies on the principle that “there cannot be a valid contract that a man’s property shall remain his until his bankruptcy, and on the happening of that eventual go over to someone else, and be taken away from his creditors”, which as already mentioned I call “the principle”. As a number of the cases to which I have referred show, there is no doubt that the principle exists, and has been applied to defeat provisions which have that purported effect. However, it is equally clear from the authorities that there are occasions where a provision which, at least on its face, appears to offend the principle has been upheld. I do not find it easy to discern any consistent approach in the authorities as to the application of the principle. In this, I do not appear to be alone. The difference of outcome in ex p Jay 14 Ch. D. 19 and ex p Newitt 16 Ch. D. 522 has been described as “rather surprising…” by Dr Fidelis Oditah in an article entitled “Assets and the Treatment of Claims in Insolvency” (1992) 108 LQR 459 at 476. “The result in British Eagle …. has not been the subject of universal approbation” according to Gerard McCormack in “Proprietary Claims and Insolvency” (1997) at 18. The “distinction between a determinable interest and an interest forfeitable on a condition subsequent has rightly been characterised… as “little short of disgraceful to our jurisprudence” when applied to “a rule professedly founded on considerations of public policy” a view endorsed in re Sharp’s Settlement Trusts [1973] 1 Ch. 331 at 340D” – per Professor Roy Goode opp.cit. at 148.
It is not, however, my function to criticise the law. I have to decide whether the principle applies to invalidate the purported exercise by the directors of LSE of their rights under Article 8 of the LSE Articles in relation to the disputed share, bearing in mind the facts of this case, the guidance given by the authorities as to the circumstances in which the principle applies, and, to the extent that it is relevant, the Convention. Having considered the authorities, it seems to me convenient to proceed to deal with the various ways to which the application of the principle has been analysed in the present case. This course has its dangers, because it may be that one has to look at the position “in the round”, given that the principle is essentially one of public policy, and it therefore could be said to be inappropriate to compartmentalise features. However, to justify the applicability or non-applicability of a particular principle by reference to “public policy”, without considering the specific ground or grounds upon which it is said that public policy requires a particular result is even more dangerous. Public policy has been famously described as “an unruly horse”, and, therefore, at least to my mind, when considering an argument based on public policy, the court should analyse each of the arguments advanced to explain it. In the present, because it is accepted on behalf of LSE that the principle exists, and that it is based on public policy, it seems to me that this reasoning indicates that I should consider each of the arguments as to the proper approach to the principle, in turn.
Established categories
Although I have already mentioned them, it is right to start with two established categories where the principle does not apply. It does appear well established that an interest granted on the basis that is inherently limited on insolvency is recognised by the Court. In other words, a determinable interest, that is an interest with a limitation until insolvency, is valid – see the discussions in Snell, Underwood and Hayton, and Professor Goode’s book and the passage quoted above from Fry LJ in Barter 26 Ch. D. 510 at 519. It must, I think, follow that an interest granted on the basis that it is inherently limited on some other event is effective, even if that event occurs on or after an insolvency.
Secondly, a lease can be validly forfeited – i.e. determined by the lessor in the event of the lessee or tenant becoming insolvent. As I have mentioned, that has never been challenged and appears to have been impliedly sanctioned by the legislature in Section 146(9) of the Law of Property Act 1925. For some reason, a lease liable to forfeiture on grounds other than insolvency will be determinable on any of those grounds notwithstanding that the lessee is insolvent.
An inherent proviso
Mr Mann argues on behalf of LSE that, where, as the original part of the arrangement pursuant to which a right or property (an “asset”) is granted, there is a provision under which the grantor can in some way confiscate the asset (“a deprivation provision”), on an insolvency or otherwise, it is enforceable even if the grantee is insolvent. Another way of putting the same point, possibly in a more limited way, is that, where it is an inherent feature of an asset from the inception of its grant that it can be taken away from the grantee (whether in the event of his insolvency or otherwise), the law will recognise and give effect to such a provision. A property or right subject to removal in the event of insolvency has been described by Oditah (op.cit. at 108 LQR 474) as a “flawed” asset.
This has the merit of being a simple and readily comprehensible proposition, and one which is easy to apply. However, it does not seem to me to be correct. First, it would represent such an easy way of avoiding the application of the principle, that it would be left with little value. In other words, it seems to me that, if I accepted Mr Mann’s simple proposition, the effect would be to emasculate the principle which, at least to Professor Goode, is one which should be more widely, rather than more narrowly, applied. In his book (op. cit. at 150) he not only described “[t]he distinction between recapture of interest transferred outright and examination of a limited interest” as “redolent of [a] highly artificial distinction”. He went on to describe as “sound” Section 541(c)(i) of the US Bankruptcy Code which he said, “roundly declares ipso facto termination clauses ineffective, however they are formulated”. Professor Goode also suggested that this “is a sound rule and one which English courts could sensibly follow”. I appreciate that there is a real argument to support the contrary view, namely that the principle should be abrogated on the basis that it is not for the courts but for the legislation to override contractual terms. This argument could be said to have particular force in light of the sophisticated and detailed legislative apparatus enshrined in the Insolvency Act, and Insolvency Rules, 1986. However, that is not an approach open to me in view of the authorities to which I have referred.
Secondly, it would be inconsistent with the apparently well established principle referred to by Snell, Underwood & Hayton, and Professor Goode. That principle, to quote from Professor Goode, is that “the transfer of an asset… upon the condition that the asset is to revest [on] liquidation [of the transferee] is void”. It is true that this rule can in some cases (especially relating to real property) be explained by reference to the provision being repugnant or offending the rule against perpetuities. However, such arguments do not apply to personal property – see, for instance, per Farwell J in Borland at [1901] 1 Ch. 288-290.
Thirdly, it appears to me that an analysis of the authorities undermines the notion that the initial inclusion, and subsequent operation, of a deprivation provision in the event of insolvency is ipso facto effective in an insolvent situation. In Whitmore 2 J&H 204, there was a single contract pursuant to which Mr Mason had paid his share of capital into a partnership, had acquired his interest in the partnership assets, including the mining lease, and had agreed that, in the event of his bankruptcy, his interest in that lease would effectively be forfeited for no consideration to his partners. The deprivation provision was thus an inherent part of the bargain pursuant to which he obtained his interest in the lease; the beneficial interest which was accorded to him by the partner who acquired the lease contained what amounted to a provision for forfeiture in favour of the surviving partners in the event of the bankrupt’s insolvency. In my judgment, if LSE’s first argument is correct, Page Wood V-C ought to have concluded that the effective confiscation of the bankrupt’s equitable interest was effective, and yet he did not.
I consider that the decision in Borland [1901] 1 Ch. 279 is also difficult to reconcile with LSE’s first argument. It was an inherent term of the contract between the members of the company inter se and with the company (by virtue of Articles of Association) that, from the moment the shares in question were issued to Mr Borland, they were subject to the directors of the company being entitled to require him to transfer them away. As Farwell J made clear in passages in his judgment at [1901] 1 Ch. 291-3, in so far as the Articles entitled the directors to require the shares to be transferred away on the shareholder’s insolvency, they would have offended against the principle, were it not for the fact that they provided for compensation. Apart from being, at least in some respects, pretty similar to the present case, there is force in the contention that Farwell J should have decided otherwise if LSE’s first argument is correct.
However, Mr Borland originally had shares in the company which were not, it would appear from the report, subject to such a potential direction from the directors. Accordingly, Mr Mann contends that Borland was a case where the bankrupt had had shares which were not “flawed”, but subsequently voluntarily agreed to their becoming flawed. Properly understood, he therefore contends that the decision in Borland was really based on the well established proposition that, having acquired assets which were not subject to being confiscated in the event of bankruptcy, a provision which rendered the assets subject to such deprivation agreed to after they had been acquired would not be enforceable. I accept that principle is correct – see the passages I have quoted from Snell and from Underwood and Hayton (op.cit.) and the decision in ex p McKay 8 Ch. App. 643 may well be explicable on this basis. Although the argument has some force, it does not seem to me that it can be fairly said to have been the basis from which Farwell J reached his conclusion. It is true that, in at least two places in his judgment, he did make reference to the fact that the potentially offending provision was to be found only in the new Articles, but it does not seem to me that that fact formed part, let alone an essential part, of his reasoning.
In what amounts to something of a refinement or narrowing of the proposition, Mr Mann suggests that the principle applies not only in those cases where a bankrupt agrees the deprivation provision subsequent to his acquisition of the property or right, but also where he acquires the property or right subject to a deprivation provision for consideration which was not subject to a deprivation provision. Thus, in Borland [1901] 1 Ch. 279, the bankrupt acquired the shares which were subject to the deprivation provision in exchange for shares which were not subject to such a provision; in Whitmore 2 J&H 204, the acquisition of the interest in the lease subject to the deprivation provision was for a sum of money which, ex hypothesi, was itself not subject to any deprivation provision. That argument could be said to tie in the decisions in Whitmore and Borland with cases such as ex p Mackay 8 Ch. App. 643. However, as I have mentioned, it does not seem to be the basis upon which Farwell J decided Borland; nor do I think that it was the basis upon which Page Wood V-C decided Whitmore.
Furthermore, if this alternative way of putting LSE’s first point was correct, it would mean that a deprivation provision was unenforceable even in a case where it was an inherent part of the asset or a term pursuant to which the asset was originally acquired, unless the asset was obtained gratuitously or in return for another asset which was itself subject to a deprivation provision. That is not a test propounded in any textbook, article or case on the topic, save, possibly, Whitmore 2 J&H 204. In any event, if that was indeed the proper formulation of the principle, it would mean that a proviso for re-entry in the event of insolvency, was unenforceable in the case of a lease granted for a premium. While I know of no authority where that point has been specifically considered, it would appear to be inconsistent with what has always been understood to be the law: see for instance Official Custodian for Charities -v- Parway Estates Development Limited (in liquidation) [1985] 1 Ch. 151 (where the consideration for the grant of a lease was not a capital sum, but substantial building works). Quite apart from this, in Shroff 48 TLR 443, it is clear that Mr Madhavji paid for his membership of the Bombay Broker’s Hall, and for his membership card; yet, as I have mentioned, the Privy Council held cancellation of his membership and the forfeiture of his card subsequent on his bankruptcy was effective.
It also appears to me that, whether expressed in the broader or narrower way, LSE’s contention is difficult to reconcile with the majority view of the House of Lords in British Eagle [1975] 1 WLR 758. At the time that the plaintiff agreed to render the relevant services to the defendant, both of them were bound by the IATA Clearing House arrangements, and accordingly at the very moment they entered into their agreement, it was an inherent part of their contractually enforceable arrangement that, in due course, when the Clearing House accounts came to be drawn up, there would be no debts as between the plaintiff and the defendant, merely debits or credits as between each of them and IATA. Mr Mann argues that the difference between the majority view expressed by Lord Cross and the minority view expressed by Lord Morris was attributable to the difference between their respective juridical analyses of the interrelationship between the agreement between the plaintiff and the defendant for the provision of specific services, and the over-arching arrangement between variousairlines, including the plaintiff and the defendant, and IATA. I am not persuaded that that is correct. The point is perhaps most graphically illustrated in the passage I have quoted from the judgment of Lord Morris at [1995] 1 WLR 768 where he expressly reached his conclusion “[o]n either view”.
Accordingly, convenient and simple though it may be, I do not consider that the suggestion that a deprivation provision on insolvency or otherwise is validprovided it is included as part of the initial bargain (or as an inherent part of the asset) is correct; nor do I consider that the more refined version of this analysis, involving a super added requirement that the asset in question must have been acquired for no consideration or for consideration which was itself subject to a deprivation provision, can be supported. However, as is common ground, it seems that the converse proposition is correct: if a person has a specific asset which is not subject to a deprivation provision, then a deprivation provision to which he subsequently agrees to make it subject is unenforceable in the event of insolvency: see the passages quoted above from Snell, and from Underwood and Hayton (opp.cit.).
No intention to prejudice
Mr Mann contends that an important validating feature of any deprivation provision is that it was not entered into with the intention of disadvantaging creditors on a bankruptcy. It may be that, at one time, the fact that there was no intention to interfere with, or to override that pari passu rules on bankruptcy would have been a reason for holding a deprivation provision valid. However, in light of the observations of Lord Cross in British Eagle at [1975] 1 WLR 780H, I consider that that contention is no longer maintainable: he said that it was “irrelevant” the parties to the arrangements in that case “had good business reasons for entering into them and did not direct their minds to the question of how the arrangements might be effected [on] insolvency”. To my mind, he was indicating that one must look at the effect of the deprivation provision, and whether, if it applies in the context of an insolvency, it is contrary to public policy in light of the bankruptcy laws.
Further, I would refer to the observations I have quoted of Farwell J in Borland at [1901] 1 Ch. 290-291 and of Lord Blanesburgh in Shroff at 48 TLR 446. In my judgment, they are difficult to marry up with the view that the absence of any intention to evade the insolvency rules is a factor – or at any rate a major factor – which assists the court in concluding that a deprivation provision should be effective on an insolvency. Certainly, the reasoning in those two cases is very hard to reconcile with the view that the absence of intention to evade would render a provision effective if it would otherwise have been held to have been unenforceable.
Once again, however, it seems to me that the converse of the proposition upon which LSE relies is correct. If a deprivation provision, which might otherwise be held to be valid, can be shown to have been entered into by the parties with the intention of depriving creditors their rights on an insolvency, then that may be sufficient to justify holding invalid the provision when it would not otherwise have been held invalid. Support for that may be found in Borland at [1901] 1 Ch. 290 where Fry J referred to there being no question of the article in question “preferring any one person to another”, and in Shroff where at 48 TLR 446, Lord Blanesburgh referred to the fact that the rules of the Association were “entirely innocent of any design to evade the law of insolvency”. Further, it seems to me that the judgment of Farwell J in Borland indicates that, if it is clear that there was no intention to evade the bankruptcy law, then the court will tend to lean in favour of upholding a deprivation provision (which otherwise be invalid) on the ground that it entitles the person so deprived to a reasonable sum in respect of the asset concerned.
The provision applies on an event other than insolvency
It is also argued on behalf of LSE that the fact that a deprivation provision falls to be operated on the happening of an event or events not being the insolvency of the transferee, is at least a factor which is to be taken into account as a factor upholding the provision. That may be the ground for justifying the fact that the deprivation provision was effective in ex p Newitt 16 Ch. D. 522, in contrast with the striking down of the provision in ex p Jay 14 Ch. D. 19. As I see it, in Newitt, the essential points were that the landowner’s right to take possession of the builder’s materials was not dependent on the builder being bankrupt, but being in default, and the materials were specifically to become the property of the landowner on the basis that they represented liquidated damages in respect of the builder’s breach of contract.
In light of the reasoning of the majority of the House of Lords in British Eagle [1975] 1 WLR 758, there must be real doubt as to whether that reasoning can now be sustained. First, it appears clear from the speech of Lord Cross that it is the effect of a deprivation provision in the event of insolvency with which one is ultimately concerned, and not, so much whether or not the deprivation provision is expressed to apply on insolvency or not – see at [1975] 1 WLR 780G-H. Further, it is clear from the facts of British Eagle itself: the deprivation provision, or its equivalent, was in no way concerned with insolvency, and was intended to apply automatically to what would otherwise be sums due under contracts between IATA members. Secondly, the effect of the arrangement in Newitt was to render the landowner a secured creditor (at least to the value of the builder’s materials on the premises) so far as his claim for damages was concerned. In part of his reasoning, Lord Cross considered that this represented an objectionable feature of the arrangement from the point of view of bankruptcy principles – see at [1975] 1 WLR 780C-F.
Nonetheless, it appears to me that, particularly when one bears in mind that a forfeiture clause in a lease is binding on a trustee in bankruptcy or liquidator, even if the forfeiture is triggered by the bankruptcy or liquidation itself, there is something to be said for the logic of the view expressed in Newitt, namely that the forfeiture proviso in respect of the builders materials was enforceable against the builder, and therefore his trustee in bankruptcy could not avoid it. However, I find it hard to see how the reasoning in Newitt can stand in light of the reasoning of the majority of the House of Lords in British Eagle. It is not as if the forfeiture arrangement in Newitt was akin to a forfeiture provision in a lease, because, other than the right to forfeit, the landowner had no interest whatever in the materials: as between him and the builder, they were the builder’s property and the builder encumbered them with a deprivation provision. On the other hand, at least with a forfeiture clause in a lease, it can be said that the landlord always retains the reversionary interest to the land the subject of the lease.
However, there are problems with applying the principle if Newitt is wrong. Would a purported forfeiture of the materials by the landowner after the builder had actually gone bankrupt have been ineffective, if the principle had applied? Whether a purported forfeiture of the materials before the bankruptcy, and if so for how long before the bankruptcy, would have been valid, it is hard to say. After all, in British Eagle, the clearing house arrangement would only have taken effect after the plaintiff had gone into liquidation, and there was no criticism of the effect of clearing house arrangements prior to the liquidation. It may be that, if the deprivation provision can be activated in an event other than bankruptcy or liquidation (irrespective of whether those events could also activate the provision) then, provided the right to implement the provision has arisen before the bankruptcy or liquidation, and provided that the deprivation has been completed by the date of the bankruptcy or liquidation, then it will not fall foul of the principle. Some support for this view is to be found in cases such as Re Detmold (1889) 40 Ch. D. 585, and Re Balfour’s Settlement [1938] Ch 928. However, in Newitt itself, James LJ said at 16 Ch. D. 531: “To my mind, it is immaterial at what particular moment the seizure was made”. Similarly, Lord Blanesburgh in Shroff at 48 TLR 446 reached his conclusion “whether or not the expulsion [takes] place before the commencement of… insolvency”.
There is attraction in the argument that a deprivation provision which engages on an event other than insolvency will be enforceable notwithstanding the insolvency of the owner of the asset concerned. There is also authority to support that view, namely ex p Newitt 16 Ch. D. 522, as I have mentioned. However, I think the argument is difficult to reconcile not only with the view of Lord Cross in British Eagle [1975] 1 WLR 758, but also with the way Lord Blanesburgh expressed himself in Shroff at 48 TLR 446. The deprivation provision in that case was exerciseable on default not on bankruptcy; if that alone had been enough to validate the provision even on a Member’s bankruptcy, it is hard to see why there was any necessity to justify the decision by reference to “the nature and character of the Association”. It also may be that this argument on behalf of LSE is difficult to reconcile with Borland [1901] 1 Ch. 279.
The alternative approach is to analyse cases such as Shroff as involving a deprivation provision which is exerciseable on an event which is so similar to insolvency, namely default, that it falls within the basic principle as described in the earlier cases. Such an approach could be said to be consistent with the last of the passages I quoted from the judgment in Whitmore at 215. If this alternative approach is correct then it would validate some deprivation provisions in the event of an insolvency (i.e. those triggered by events not akin to insolvency) but it would not assist LSE in the instant case.
Valueless assets etc.
Clearly, there must be cases where, for one reason or another, not so far considered, a deprivation provision will be upheld. There may in exceptional cases be a public policy reason for upholding a deprivation provision. Cases which would more frequently occur are those where the right or property subject to the deprivation provision has no value, or (in many cases) if it is incapable of assignment, or depends on the character or status of the owner. In such cases, a deprivation provision would, as I see it, normally be enforceable in the event of the insolvency of the owner. If the asset has no value, or if it is incapable of transfer, then it could scarcely be said to be to the detriment of the creditors of the owner if he was deprived of the asset. Similarly, if the ownership of the asset depends on the personal characteristics of the owner, it is difficult to see how objection could be taken to a power to take away the asset, not least because it would be inherently unsuitable to be retained for the benefit of his creditors. An example which springs to mind would be membership of a club. Coming closer to the facts of the present case, the loss of membership of a financial institution, such as a stock exchange, where one has failed to meet one’s debts or has gone bankrupt cannot, in my view, be said to fall foul of the principle. Membership of such an exchange turns on the personal attributes and acceptability of a particular individual, and expulsion of the grounds of not honouring financial obligations (or, indeed, insolvency) would seem to be almost an inevitable incident of membership.
It is presumably for this sort of reason that no argument was advanced in Shroff 48 TLR 443, or indeed in this case, to support the contention that loss of membership of a Stock Exchange on the grounds of failure to honour obligations, or bankruptcy, could be challenged. In the instant case, and, I think, in Shroff, it was accepted that a person’s membership of such an exchange depends on his personal characteristics, and is in any event not transferable.
Ancillary assets
On behalf of LSE, it is contended that the decision in Shroff goes rather further than this. Having accepted that a member of the Association had two separate interests, namely an interest in his card and a contingent interest in the property of the Association, the Privy Council concluded that “the nature and character of the Association” was such that, if a defaulting member was expelled from the Association “no interest in his card remains in himself and none can pass to his assignee”. In other words, although a member’s interest in his card was a proprietary right, separate from his right as a member of the Association, it was effectively ancillary to his membership of the Association, and if he was validly expelled from the Association (which, for the reasons which I have been discussing, he had been), the principle could not be applied so as to invalidate the deprivation of his card.
In agreement with this contention, it seems to me that the reasoning of the Privy Council was effectively that the membership of the Association and the ownership of the card, although separate rights, were so inextricably linked, that a valid deprivation of the former right justified a deprivation of the latter property, notwithstanding the principle. It is not entirely clear from the reasoning of Lord Blanesburgh whether one looks to see which is the main asset, membership of the Association or ownership of the card, or whether one looks at the composite arrangement. I suspect that in most cases, these would come to the same thing.
It is contended on behalf of MMI that this is not the right analysis of Shroff, and, if it is, I should not follow it. So far as the first component of that argument is concerned, I do not agree with it. As I have already said, it appears to me that the analysis I have been considering is to be found in the passage in Lord Blanesburgh’s judgment at 48 TLR 446 which opens with the words “But their Lordships find the real answer to this contention…”: as a matter of ordinary language, one would expect what follows to encapsulate the essential reasoning for rejecting the contention he has been considering, which is, in effect, the application of the principle to the facts of that case.
As to the argument that I should not follow this reasoning, I accept that a decision of the Privy Council is not technically binding on me; I also accept that Lord Blanesburgh’s apparent reliance on Plumbly 13 Ch. D. 667 is a little mystifying, and Mr Mann did not seek strenuously to justify or even explain it. It is further the fact that the decision in Shroff does not appear to have been considered, or even cited, in any subsequent cases on the topic. On the other hand, it would obviously be wrong to adopt a cavalier approach to a decision of the Privy Council; perhaps the most directly relevant case, namely Borland [1901] 1 Ch. 279, was cited to, and distinguished by, the Board, and there is nothing in any previous or subsequent authority which can fairly be said to call into question the reason given by the Board for rejecting the contention that the principle applied on the facts of that case. Over and above that, it seems to me that both the result and the reasoning, at least as I understand it, in Shroff were correct. The essential right or interest enjoyed by a member of the Association was the right to be a broker and conduct business as such, which involved coming into the Bombay Broker’s Hall, because that is where the business was carried on. The rights and obligations, such as the ownership of the card and the contingent right to share in the assets of the Association if and when it was dissolved, as well as the obligation to make payments pursuant to, and to abide by, the Rules of the Association, were all incidental to that basic right and were unassignable. If a member was justifiably deprived of that right in circumstances where he was bankrupt, then public policy would not require application of the principle to invalidate the deprivation or removal of the other ancillary rights, even if the principle would have invalidated the deprivation of one or more of those ancillary rights if they had been rights which, as it were, stood alone.
Conclusion
I am here concerned with a claim to rely on “the principle” i.e. that a provision that a person’s property shall pass to another or be confiscated is regarded by the court as void where the person concerned is insolvent. Having considered a number of authorities concerned with the application of the principle, and the analysis of those authorities, it seems to me that the position may be summarised as follows.
First, there is no doubt that the principle exists: it has been applied or approved in a number of cases, and fairly recently in the House of Lords. Secondly, the principle is essentially based on a common law rule of public policy, which is itself based on the long-established approach of the English law to the treatment of assets and creditors on insolvency. Thirdly, there are circumstances in which the principle does not apply. Fourthly, it is not possible to discern a coherent rule, or even an entirely coherent set of rules, to enable one to assess in any particular case whether such a provision (a “deprivation provision”) falls foul of the principle. Fifthly, and perhaps not surprisingly, it is not entirely easy to reconcile the conclusions, and indeed the reasoning, in some of the cases. Sixthly, there are some rules, of a somewhat “piecemeal” nature which can be derived from the cases.
It seems to me that one can extract the following rather limited propositions from the cases:
1. A person cannot validly arrange his affairs so that what is already his own property becomes subject to being taken away in the event of his insolvency;
2. Subject to the first proposition, the transfer of an asset for an interest coming to an end on the transferee’s insolvency (or on some other event) is apparently effective even if the transferee is insolvent;
3. Subject to the following propositions, the transfer of an asset on the condition that the asset will revest in the transferor in the event of the transferee’s insolvency is generally invalid;
4. A proviso in a lease for determination, i.e. for forfeiture or re-entry, even in the event of the lessee becoming insolvent, is enforceable where the lessee is insolvent;
5. In deciding whether a deprivation provision exerciseable other than on insolvency offends against the principle, one is primarily concerned with the effect of the provision and not with the intention of the parties, but it may be that, if the deprivation provision is exerciseable for reasons which are not concerned with the owner’s insolvency, default or breach, then its operation will not be within the principle;
6. However, if the intention of the parties when agreeing the deprivation provision was to evade the insolvency rules, then that may invalidate a provision which would otherwise have been valid, and if the intention of the parties was not to evade the insolvency laws, the court will be more ready to uphold the deprivation provision if it provides for compensation for the deprivation;
7. The court will scrutinise with particular care a deprivation provision which would have the effect of preferring the person to whom the asset reverts or passes, as against other unsecured creditors of the insolvent person whose estate is deprived of the asset pursuant to the provision;
8. Where the deprivation provision relates to an asset which has no value, or which is incapable of transfer, or which depends on the character or status of the owner, then it will normally be enforceable on insolvency;
9. A deprivation provision which might otherwise be invalid in light of the principle may be held to be valid if the asset concerned is closely connected with or, more probably, subsidiary to, a right or other benefit in respect of which a deprivation provision is valid;
10. If the deprivation provision does not offend against the principle then (subject to there being no other objection to it), it will be enforceable against a trustee in bankruptcy or on a liquidation just as much as it would have been enforceable in the absence of an insolvency.
Ice-cream Ltd. v. Masterfoods Ltd.
[1990] 2 I.R. 467
Lynch J.
A number of points should be noted about these agreements which are, of course, at the very core of the two cases brought by HB and Mars and at the core of the applications which I now have to decide:
(1) The retailer is not restricted from selling the products of other suppliers in competition with HB. The only restriction is that the HB freezers must not be used for that purpose.
(2) That form of restriction is widespread throughout this State and the European Community and does not seem to have been heretofore challenged either under European law or domestic law, although I recognise that this is not a conclusive point because there can always be a first time.
(3) In many small shops the retailer will wish to accommodate only one freezer and will therefore have to be satisfied to carry only HB ice-cream products if he takes a HB freezer. However, if the retailer has a HB freezer he can negotiate with another supplier to supply a freezer and complete the change-over in two months.
(4) The retailer can provide his own freezer and carry only the brands he wishes to carry. He can also provide a second freezer, if he has room for it, and carry only the brands he likes in that freezer or carry any products in it. There is no requirement that HB ice-cream products can only be sold from HB’s freezers, just simply that other brands will not be sold from HB’s freezers.
As from the month of June, 1989, Mars began an attempt to enter into the Irish ice-cream market with its ice-cream Mars product. HB discovered that some of its retailers were storing this product in HB’s freezers contrary to their agreements with HB. I have no doubt that a substantial proportion of retailers were assured by servants of Mars that “HB would not mind”, or words to that effect, and that those assurances were made at least recklessly, not caring whether they were true or false. HB did mind and made its objections clear in correspondence and called upon Mars to desist. Mars denied that it had authorised any servant or agent to give any such assurance as referred to but nevertheless claimed that HB
had no right to object to the Mars product being stored in HB’s freezers if the retailers so wished, having regard to the provisions of Articles 85 and 86 of the Treaty of Rome and article 9 of the Restrictive Practices (Groceries) Order, 1987, as confirmed by the Restrictive Practices (Confirmation of Order) Act, 1987.
Mars claims that it should be entitled to have retailers, if the retailers so wish, use space in HB’s freezers to store and sell Mars’ products. Mars does not suggest or concede that it should get the agreement of HB to this use of HB’s freezers having regard to the legal provisions referred to above. It contends that it is entitled to this facility absolutely free of charge, that it need not pay one penny to HB for the use of its £7 million worth of freezers or towards the £1 million annual cost of servicing and replacing them.
HB objects that this is an unlawful interference with its property right in its freezers and with its contractual rights vis-Ã -vis its retailers. There is no issue but that what Mars wishes to do is an interference with HB’s property and contractual rights, but the issue is whether or not such interference is wrongful or unlawful.
HB says that its bailment by the loan or hire of its freezers to retailers does not entitle retailers nor a fortiori anyone else (in this case Mars) to store products therein which have not been supplied by HB. Mars says that the retailer has possession of the freezer and therefore there can be no trespass against HB. HB replies that such possession as the retailer has does not entitle him to store other products in HB’s freezers and that storage of other products in HB’s freezers is a trespass or is certainly a wrong committed against its property rights in the freezers.
I am satisfied that HB has a serious case to be tried on the issue of wrongful interference with its property rights in its freezers. So far as interference with HB’s contractual rights is concerned, again no real issue arises but that interference with its contractual rights has taken place. The question is whether or not that interference is lawful or, at any rate, not unlawful by virtue of Articles 85 and 86 of the Treaty of Rome or article 9 of the Order of 1987. Prima facie the interference is unlawful and therefore the onus of establishing that it is not unlawful rests on Mars.
It follows, and I am satisfied, that HB has a serious case to be tried on the issue of wrongful interference with its contractual rights vis-Ã -vis its retailers to whom it has supplied freezer cabinets.
Turning to Mars’ case, I shall deal first with Articles 85 and 86 of the Treaty of Rome. Article 85(1) provides:
“The following shall be prohibited as incompatible with the common market: all agreements between undertakings, decision by associations of undertakings and concerted practices which may affect trade between Member States and which have as their object or effect the prevention, restriction or distortion of competition within the common market, and in particular those which:
(a) directly or indirectly fix purchase or selling prices or any other trading conditions;
(b) limit or control production, markets, technical development, or investment;
(c) share markets or sources of supply;
(d) apply dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a competitive disadvantage;
(e) make the conclusion of contracts subject to acceptance by the other parties of supplementary obligations which, by their nature or according to commercial usage, have no connection with the subject of such contracts.”
As regards the particular examples set out in this article of breaches of it in paragraphs (a) to (e), Mars mainly relies on paragraph (e) without necessarily abandoning the possibility of a contravention of some other paragraph.
I think that a breach of paragraph (e) does not arise at all in this case. The contracts in question are bailments of freezers whether they be on loan or hire. The terms objected to relate to the very basis of the contract of bailment, namely, the purpose for which the goods (the freezers) are bailed to the bailee (the retailer). The freezers are bailed to the bailees for the purpose of storing, selling and advertising HB ice-cream products only. Those terms are not supplementary obligations nor by their nature or according to commercial usage do they not have an essential connection with the contracts of bailment. They do. It would seem that none of the particular breaches set out in paragraphs (a) to (e) of Article 85(1) apply; certainly, none clearly apply to the facts of this case. That is not, of course, conclusive because there could still be a breach of Article 85 if it was reasonably clear that there was a contravention of the general intention of the article. Is it reasonably likely that these contracts of bailment of freezers may affect trade between member states of the European Community and may prevent, restrict or distort competition within the common market? I am not satisfied that Mars has made out a sufficient prima facie or serious case to that effect.
The foregoing ruling largely but not wholly governs the case under Article 86 as well. Article 86 provides:
“Any abuse by one or more undertakings of a dominant position within the common market or in a substantial part of it shall be prohibited as incompatible with the common market in so far as it may affect trade between Member States. Such abuse may, in particular consist in:
(a) directly or indirectly imposing unfair purchase or selling prices or other unfair trading conditions;
(b) limiting production, markets or technical development to the prejudice of consumers;
(c) applying dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a competitive disadvantage;
(d) making the conclusion of contracts subject to acceptance by the other parties of supplementary obligations which, by their nature or according to commercial usage, have no connection with the subject of such contracts.”
The particular breaches set out in paragraphs (a) to (d) of Article 86 are the same as those set out in Article 85, with the omission of paragraph (c) of Article 85 which relates to sharing of markets or sources of supply. My conclusions about these particular breaches in relation to Article 85 govern the particulars contained in Article 86. However, as in the case of Article 85, this is not conclusive.
I think that Mars has established a serious case to be tried that HB enjoys a dominant position within the Irish ice-cream market. However, I am not satisfied that Mars has estalished a serious case to be tried that HB has by these contracts of bailment abused its dominant position either so as to affect trade between members states or at all.
I turn now to article 9 of the Restrictive Practices (Groceries) Order, 1987, which reads:
“No supplier, wholesaler or retailer shall be a party to any agreement, arrangement or understanding (whether induced by threat, promise or otherwise) which has or is likely to have the effect of limiting or restricting entry to trade in any grocery goods.”
Ice-cream products are clearly “grocery goods” within the meaning of this article and therefore article 9 applies to them.
It was submitted by Mars that the exclusivity clause in HB’s bailment contracts with its retailers to whom it supplies freezers is illegal and unenforceable by virtue of article 9. I have already drawn attention to a number of points about these agreements. They do not restrict any retailer from selling other brands besides HB’s, provided he is equipped to do so, and there is nothing to prevent another supplier who wishes to enter into the ice-cream market in Ireland from canvassing such retailers to take Mars’ products and for such retailers, if necessary, to equip themselves to store them or offering the necessary storage to the retailer. Mars may not only canvass retailers of HB’s products to do this but it can also canvass other retailers to whom other suppliers of ice-cream bail or lend or hire freezers.
Mars says that the bailment contracts restrict its entry to the trade in Ireland. However, in this action Mars is seeking terms of entry to the Irish ice-cream trade which are more favourable to it than those available to other suppliers. In the case of HB, Mars is seeking to have available to it the £7 million capital investment and £1 million annual maintenance and replacement cost of freezers free gratisand for nothing. Mars could also, of course, seek to use storage space for its products from other suppliers of freezers, and it appears it has done that in the case of Valley Ice Cream Limited, although it has not disclosed the terms of that arrangement.
I am not satisfied that Mars has established a sufficiently serious case to be tried that the HB bailment contracts limit or restricts its entry to the Irish ice-cream trade within the meaning of article 9 of the Order of 1987.
On the question of balance of convenience as to whether to grant or refuse HB an interlocutory injunction, I think the balance lies in HB’s favour. Mars achieved its sales target in 1989 so it has not suffered any real loss to date. On the other hand, HB’s property and contractual rights have been set at nought. If I refuse an injunction there must be a danger that other suppliers might seek to poach HB’s freezer space on the basis that an injunction was unlikely to be given against them if not given against Mars. The damage suffered by HB is incapable of calculation as also is the element of bad will created thereby between HB and the retailers. Moreover, HB objected to Mars’ conduct and there has been no undue delay in bringing the proceedings. In the circumstances I think the proper status quo to be preserved is that which existed prior to the month of June, 1989, that is to say, the state of affairs existing before the alleged wrongful conduct of Mars. On being satisfied, as I am, with the undertaking as to damages given on behalf of HB, I make the order sought in HB’s notice of motion, that is to say, the interlocutory injunction asked for in the terms of paragraphs 1, 2 and 3 of its notice of motion, and I refuse to grant the orders sought by Mars in its notice of motion.
As these are interlocutory applications, this judgment in no way finally determines the issues with which I have dealt. Therefore the costs of both motions will be reserved.
Finally, I am grateful to counsel on both sides for their detailed and helpful submissions in these cases. The fact that I have not chosen to refer specifically in the course of my judgment to any of the many authorities cited does not mean that they have been overlooked.
In re M’Wey; Ryan v. Cashin and Costello
[1928] I.R. 492
Meredith J. 492
The defendant, Margaret Cashin, claims that she is entitled to £300 India 51/2 per cent. Stock and £400 3 per cent. Local Loans Stock, on the ground that what, in the indorsement of claim in the originating summons, are described as receipts for the said stock were delivered to her by the deceased shortly before his death as a donatio mortis causa of the said stock.
It is not unimportant to observe that the receipts are not, strictly speaking, receipts for the stock, but only receipts for the consideration paid for the stock. Thus the so-called receipt for the £400 3 per cent. Local Loans Stock is a receipt for the sum of £252 10s., which was the consideration for the purchase at 631/8 of £400 interest or share in the said stock. It appears from the receipt that the stock had been transferred on the date therein mentioned to the deceased. Consequently, quoad the property in respect of which the donatio mortis causa is claimed, the document is simply a memorandum or statement of particulars of the “interest or share” in the stock that was transferred to the deceased on the date mentioned.
The defendant, Margaret Cashin, was cross-examined on her affidavit, and I had some doubt in my own mind if, on her evidence in the box, the intention to make a donatio was quite clear. However, that point was not contested, and the only point raised on the facts was that the gift was intended to take effect immediately and unconditionally. But the point seems to me to be disposed of by the directions of the deceased not to sell until after his death. I therefore hold that the deceased gave Margaret Cashin the receipts intending to make a donatio mortis causa.
The question accordingly is whether, or not, that intention alone was sufficient notwithstanding the nature of the property in each case a share or interest in certain stock made transferable in a specified Bankand notwithstanding the nature of the actual thing delivered, which was in each case a mere memorandum. To hold that it is sufficient would, in my opinion, be to hold that the case of Ward v. Turner (1) is no longer good law. But the authority of that case was recognised by the House of Lords in Duffield v. Elwes (2), and was followed in Moore v. Moore (3), and, as was held in the last-mentioned case, so I hold in this, that the receipts in question here do not differ substantially from the receipts for the South Sea Annuities, which were the subject matter in Ward v. Turner (1). In re Andrews (4) belongs to the same line of authorities.
If the executors of the donor are to be held trustees for the donee for the purpose of giving effect to the gift simply because a document is handed to the donee giving particulars of a share or interest in stock that had been purchased, the intention being clear, much of the learning and of the subtle distinctions in the cases on donationes mortis causa must be regarded as obsolete. Where the executors have been held to be trustees, it is not because the donor himself had made himself a trustee, but because he had made an incomplete gift and because the doctrine, that equity will not assist a volunteer by completing an incomplete gift, does not apply to a donatio mortis causa. But there must in the first instance be something which merely requires to be completed in order to perfect the legal title.
I have only to add that in Duckworth v. Lee (5) all the members of the Court of Appeal in Ireland were agreed that the doctrine of donatio mortis causa was not to be extended. There has always been a distinction between the English law on this subject and the Roman law as it existed in the time of Justinian, and if Ward v. Turner (1) were not to be held to govern this case then it seems to me that the law would be extended so as to efface the distinction.
Lynch v. Burke
[1995] IESC 2 [1995] 2 IR 159; [1996] 1 ILRM 114
O’Flahery J SC
9. The case as pleaded and apparently presented in the High Court on the plaintiff’s behalf was to say that the monies on deposit were held on an implied or resulting trust by Moira Burke for the benefit of the estate of the deceased. As already pointed out, the learned trial judge felt that he was constrained by the decision in Owens v. Greene and Freeley v. Greene [1932] I.R. 225, to uphold this submission.
20. Since historically the concept of an implied or resulting trust was an invention of equity to defeat the misappropriation of property as a consequence of potentially fraudulent or improvident transactions, it would surely be paradoxical if the doctrine is allowed to be invoked to defeat the clear intention of the donor as found by the trial judge, an intention so clear, as the Chief Justice observed in the course of the debate before us, that he could not possibly have made any other finding as regards the donor’s intention than the one that he did make. In this regard it is apposite to recall what Lindley L.J. said in Standing v. Bowring (1886)31 Ch.D. 282 at 289:-
“Trusts are neither created nor implied by law to defeat the intentions of donors or settlors; they are created or implied or are held to result in favour of donors or settlors in order to carry out and give effect to their true intentions, expressed or implied. It appears to me there are no equitable as distinguished from legal grounds on which the plaintiff can obtain relief.”
As to Owens v. Greene and Freeley v. Greene [1932] I.R. 225, the requirement that that case seems to lay down for a donee to benefit, is that the deposit receipt is a joint one and that it is payable to the parties or the survivor thus putting it out of the depositor’s power to deal with the fund without the concurrence of his co-owner during his lifetime. This certainly appears from the judgment of Fitzgibbon J. at pp. 245 and 246 of the report. This concept appears to be implicit, also, in the judgment of Kennedy C.J. (the relevant passage is quoted at length by the learned trial judge); or, at the least, that the donee should be entitled equally with the donor to resort to the funds during the joint lives. The judgments were also concerned to emphasise the importance in the legal scheme of things that testamentary dispositions should be required to comply with the relevant statutory requirements. Of course, if one were dealing with a testamentary disposition there would have to be compliance with the relevant requirements of the legislation in question. But that is to beg the question; if the arrangement made was not testamentary (which in my judgment it was not) then the legislative provisions (see Part VIII of the Succession Act, 1965) have no application.
21. Towards the end of his submissions, Mr. McCann, no doubt in the light of the trial judge’s finding about the donor’s intentions, came to submit that his client’s claim rested in law and to say that the case was not concerned with a trust, express or implied. He says the situation is simply that the monies on deposit belonged to the estate of the deceased. However, I believe that at law the niece had a legal interest in the monies on deposit either by reason of the contractual relationship of the parties or, in the alternative, as a gift which admittedly was not a completed gift in the conventional sense but is nonetheless one that should be upheld as being a gift subject to a contingency viz, that of the death of the donor which contingency does not disqualify it as being a proper gift.
22. It seems to me that Owens v. Greene and Freeley v. Greene [1932] I.R. 255, gives cause for unease on a number of grounds. In the first place, the judgments contain a number of severe criticisms of witnesses in the case which sound strange to us since we are accustomed to holding that matters of primary fact are exclusively for the trial judge and even in regard to inferences of fact respect must always be afforded to the trial judge’s finding. ( Hay v . O’Grady [1992] 1 I.R. 210). But since no report of the judgment of the trial judge (Meredith J.) is existant, we do not know what findings of fact he made. Further, criticisms are made in the course of the judgments concerning counsel’s submissions which are difficult to square with the manner in which the case was pleaded and, indeed, the account of the argument put forward for the donees as it appears in the report. The case pleaded was that the deceased declared that the monies on deposit were to belong beneficially to the plaintiff in the event of the death of the deceased and would not in that event form any part of his estate. The argument apparently presented to the Court was that the sole question was whether the trial judge was justified in finding as a fact, as he did find, that the donor intended and expressed the intention that each (donee) should be entitled beneficially to the property of which he became the legal owner on the death of the donor, thus rebutting the presumption of a resulting trust.
23. As his last stand, Mr. McCann has urged that if it is thought that the concept of trust must be considered (and in my view because of the course that the case took in the High Court it is clear that we must deal with the relevance of the trust concept) that we should not overrule Owens v. Greene and Freeley v. Greene [1932] I.R. 225 since it has stood for so long and, therefore, has been relied upon over the years by practitioners in advising clients. In the circumstances, since I believe – a view shared by all members of the Court – that the decision was wrongly decided it should be overruled. ( The Attorney General v. Ryan’s Car Hire Ltd. [1965] I.R. 642; Mogul of Ireland v. Tipperary (N.R.) County Council [1976] I.R. 260 and Finucane v. McMahon [1990] 1 I.R. 165).
24. This will introduce a measure of consistency in our jurisprudence: it restores equity to the high ground which it should properly occupy to ameliorate the harshness of common law rules on occasion rather than itself to be an instrument of injustice. Further, it brings us into line with other common law jurisdictions.
25. I would allow the appeal.
Egan J.
I agree.
Blayney J.
I agree
Denham J .
I agree.
Mills v Shields (No.2)
Thistle Bloodstock Ltd v Irish Horseracing Regulatory Board & Ors
[2020] IEHC 96 (28 February 2020)
EX TEMPORE JUDGMENT of Mr. Justice Allen delivered on the 28th day of February20201. The plaintiff in this action, and the moving party on this application, carries on thebusiness of a stud farm at a property at Grangecuffe, County Kilkenny. The plaintiff hadin its stable until July 2019 a stallion called The Tartan Spartan. In December 2017 inDubai the Tartan Spartan suffered a tendon injury or, in the argot of the business, “brokedown”. The horse was repatriated and rested for a year but in February 2019 broke downagain in the same leg. The plaintiff’s assessment was that he was unlikely to recover, andit was decided that he should be euthanized.2. In July 2019 the Tartan Spartan left the plaintiff’s yard with two or three other horses.There is some uncertainty as to the precise circumstances in which that came about. Inthe affidavit of Andrew Hughes, sworn on the 7th February, 2020, to ground thisapplication, it was said that he, Mr. Hughes instructed Mr. Jim Derwin to undertake toeuthanize the horse. In a second supplemental affidavit, sworn on the 26th February,2020, Mr. Hughes says that it was a man called Declan Glynn who set up thearrangement with Mr. Derwin. Mr. Derwin in an affidavit sworn on the 18th February,2020, deposes that he had never spoken to Mr. Hughes: and that now appears to becommon case.3. Mr. Derwin is a horse dealer. He describes himself as an international horse dealer andequine agent who buys and sells horses all over Ireland on a daily basis at fairs, sales andfrom private yards. He deposes that in June 2019 he had a telephone call from DeclanGlynn who said that the plaintiff had three or four horses for sale and asked whether Mr.Derwin would be interested. By his account, Mr. Derwin agreed over the telephone tobuy the horses and agree the price.4. Mr. Derwin says that he had previously dealt with Mr. Glynn and paid for all his purchasesby cheque and he exhibits a bundle of cheques all but one of which can have had nothingto do with the transaction in July 2019, but he says that he cannot remember the price heagreed to pay for those horses.5. In any event, on the 5th or perhaps the 8th July, 2019 Mr. Derwin sent a lorry to theplaintiff’s yard. The driver of the lorry was Mark Doolin. On Mr. Derwin’s account, Mr.Doolin, having loaded the horses, telephoned Mr. Derwin and suggested that one of thehorses, The Tartan Spartan, might be of interest to Mr. Philip Fenton who is a trainer andwho carries on business from Glenbower Stables, Carrick-on-Suir, County Tipperary.Page 2 ⇓6. Mr. Derwin deposed that he immediately telephoned Mr. Fenton and, sight unseen byeither, an agreement was made for the sale and purchase of the horse to Mr. Fenton for€2,000. Mr. Derwin says that he then phoned Mr. Doolin and diverted the lorry toTipperary where the horse was delivered to Mr. Fenton, who gave Mr. Doolin a cheque for€2,000 made out to Mr. Derwin.7. Mr. Derwin’s account of events is not precisely matched by that of Mr. Fenton. In anaffidavit sworn on the 20th February, 2020, Mr. Fenton recalls that it was Mr. Doolinrather than Mr. Derwin who telephoned him on behalf of Mr. Derwin.8. According to Mr. Fenton he did not agree to buy the horse sight unseen but rather agreedto meet Mr. Doolin in Kilkenny where, having in the meantime checked out The TartanSpartan’s form, he took a look at the horse. Mr. Fenton recalls that having decided thathe might take a chance on the horse rang Mr. Derwin and he says that the bargain wasthen struck over the phone. When the horse arrived at Glenbower Stables, Mr. Fentonhad it examined by an equine veterinarian, who reported it to be a fit candidate forathletic function.9. The outcome of all of this from The Tartan Spartan’s point of view was rather mixed. Onthe one hand, rather than being fed to hounds, he went back into training in Mr. Fenton’sstable. On the other hand, he was gelded.10. Over the following months the horse was trained up and in January, 2020 was entered forthe 3.22 p.m. handicap hurdle at Naas Racecourse for Saturday 8th February, 2020 underthe colours of Mr. Fenton’s wife, Ms. Patricia Hogan.11. On the morning of Friday, 7th February, 2020 it came to the attention of Mr. Hughes thatThe Tartan Spartan was due to run on the following day and that afternoon an ex parteapplication was made to Mr. Justice Heslin for an interim injunction restraining Mr. Derwinand Mr. Fenton from running him. Late that morning letters had been sent calling forundertakings by noon, but those letters were sent by e-mail at about 11.40 a.m. or 11.50a.m. and it is accepted that there was no opportunity for a reply, even if the e-mails hadbeen opened immediately: which Mr. Derwin and Mr. Fenton say they were not.12. The affidavit of Andrew Hughes, sworn on 7th February, 2020 was drafted in haste. As Ihave said, Mr. Hughes deposed that it was he who instructed Mr. Derwin to euthanize thehorse. It was also said that the plaintiff had never signed a change of ownership formand had never transferred the horse’s passport to any other party. Mr. Hughes exhibiteda copy of the passport which he said showed the ownership of the horse to the plaintiff.13. Mr. Cahill, counsel for Mr. Fenton, protests that this was misleading. In the first place, itis said, the reference to a change of ownership form conveys that there was a system orpractice of such forms – which there was not. Mr. Hughes does not in his later affidavitcontest this but neither does he offer any explanation for the reference in his groundingaffidavit to such a form.Page 3 ⇓14. Secondly, it is said, the averment that the passport was not transferred was false. It isnow accepted that this averment was false. It was corrected in a supplemental affidavitof Andrew Hughes, sworn on 10th February, 2020, but that of course was after Mr.Justice Heslin had given the interim injunction.15. In my view, there is substance to the complaint of lack of candour. There appears to bean issue now as to whether the horse’s passport is evidence of ownership but the premiseof the application to Mr. Justice Heslin was that it was, and that the plaintiff had it. It isnow accepted that the horse needed to be accompanied by its passport wherever it mightgo, specifically to the abattoir where its value would depend upon whether or not it hadbeen stamped out of the human food chain.16. In Bambrick v. Cobley [2005] IEHC 43, Clarke J. (as he then was) approved a statementby Browne-Wilkinson V-C in Tate Access Floors Inc. v. Boswell [1993] All E.R. 303, as thegolden rule of full and frank disclosure. Browne-Wilkinson V-C. said:-“No rule is better established, and few more important, than the rule (the goldenrule) that a plaintiff applying for ex parte relief must disclose to the court allmatters relevant to the exercise of the court’s discretion whether or not to grantthe relief before giving the defendant an opportunity to be heard. If that duty isnot observed by the plaintiff, the court will discharge the ex parte order and may,to mark its displeasure, refuse the plaintiff further inter partes relief even thoughthe circumstances would otherwise justify the grant of such relief.”17. The misstatement in the first affidavit of Mr. Hughes was corrected in the supplementalaffidavit but to my mind has not been explained. What is said by Mr. Hughes in hisaffidavit of the 10th of February, 2020 is:-“I wish to clarify that I did not transfer the passport of the horse to any other partyother than the third named defendant for the purposes of slaughtering the horse.I say that I am aware of my legal obligation that a passport must at all timesaccompany a horse and my obligation to transfer the passport with the horse to theslaughtering facility and the slaughtering facility in turn to hand the passport to theTurf Club or other regulatory authority once the horse was put down.”18. It seems to me that if Mr. Hughes was aware of the requirement that the passport shouldgo to the slaughtering facility with the horse and would be transferred by the facility tothe Turf Club the averment otherwise in his first affidavit was grossly careless.19. The affidavits which have been exchanged on this application canvass a number of issuesas to Turf Club and equine veterinary practice and animal welfare, but I am notpersuaded of the relevance of much of this to the issue which I now have to decide.20. The plaintiff’s case is that the horse belongs to it; that it is entitled to its return; and thatThe Tartan Spartan is not to be run against its wishes. Incidentally, the suggestion isPage 4 ⇓that the horse will, if returned to the plaintiff, be put out to grass rather than destroyedbut if the horse belongs to the plaintiff, the plaintiff is free to decide its fate.21. Mr. Fenton’s case on the other hand is that the horse belongs to him; that he bought andpaid for it in good faith; that he spent money and time training it up; and that he isentitled to and wishes to run it.22. The plaintiff challenges Mr. Fenton’s averment that he bought the horse in good faith. Itis suggested that he bought a racehorse in unusual circumstances and at a grossundervalue and it is suggested that he has behaved secretively.23. I am not on this application to finally decide any contested issue of fact, but I am boundto say that the argument that Mr. Fenton bought a racehorse at gross undervalue iswholly consistent with the plaintiff’s case that The Tartan Spartan was broken down andfit only for dog food. The proposition that Mr. Fenton behaved in a clandestine manner isto my mind utterly inconsistent with the fact that Mr. Fenton entered the horse in the3.22 p.m. handicap hurdles in Naas.24. This is an application for an interlocutory injunction. The court cannot on such anapplication finally decide any contested issue of fact or resolve any seriously argued issueof law.25. The principles to be applied on an application for an interlocutory injunction restrainingtrespass are set out in a decision of Keane J. (as he then was) in Keating & CompanyLimited v. Jervis Shopping Centre Limited [1997] 1 I.R. 512. That was a case in whichthe claim related to real property, but it seems to me the principles apply equally topersonal property. Mr. Justice Keane said this:-“It is clear that a landowner, whose title is not in issue, is prima facie entitled to aninjunction to restrain a trespass and that this is also the case where the claim is foran interlocutory injunction only. However, that principle is subject to the followingqualification explained by Balcombe L.J. in the English Court of Appeal in Patel v.W.H. Smith (Eziot) Limited and Another [1987] 1 W.L.R. 853 at p. 859: -‘However, the defendant may put in evidence to seek to establish that he hasa right to do what would otherwise be a trespass. Then the court mustconsider the application of the principles set out in American Cyanamid Co v.Ethicon Ltd. [1975] 1 A.C. 396 in relation to the grant or refusal of aninterlocutory injunction.’”26. On the evidence now before the court I am not satisfied that there is a bona fide issue tobe tried as to whether Mr. Fenton acted in good faith. He agreed to buy and paid bycheque for a horse which the plaintiff no longer wanted and which was accompanied by itspassport. He later dealt openly with the Turf Club and Naas Racecourse. He dealt with ahorse dealer who had possession of the horse and the passport with the permission of thebreeder.Page 5 ⇓27. Section 21 of the Sale of Goods Act 1893 provides:“21.(1) Subject to the provisions of this Act, where goods are sold by a person who is notthe owner thereof, and who does not sell them under the authority or with theconsent of the owner, the buyer acquires no better title to the goods than the sellerhad, unless the seller of the goods is by his conduct precluded from denying theseller’s authority to sell.(2) Provided also that nothing in this Act shall affect –(a) the provisions of the Factors Acts or any enactment enabling the apparentowner of goods to dispose of them as if he were the true owner thereof.; …”28. Section 2 of the Factors Act 1889 provides that:-“2.- (1) Where a mercantile agent is, with the consent of the owner, in possession of goodsor the documents of title to goods, any sale, pledge, or other disposition of thegoods made by him when acting in the ordinary course of business of a mercantileagent, shall, subject to the provisions of this Act, be as valid as if he were expresslyauthorised by the owner of the goods to make the same; provided that the persontaking under the disposition acts in good faith, and has not at the time of thedisposition noticed that the person making the disposition has not authority tomake the same.”(2) Where a mercantile agent has, with the consent of the owner, been in possession ofgoods or the documents of title to goods, any sale, pledge, or other dispositionwhich would have been valid if the consent had continued, shall be validnotwithstanding the determination of the consent: provided that the person takingunder the disposition had not at the time thereof notice that the consent had beendetermined.”29. It is now accepted that Mr. Hughes did not deal directly with Mr. Derwin but that thearrangements were made by Mr. Glynn. Mr. Glynn was employed by the plaintiff between2013 and September 2017 and since then, in the words of Mr. Hughes, “helps out fromtime to time”.30. On the plaintiff’s case, Mr. Glynn was entrusted with The Tartan Spartan and his passportto bring him to slaughter. Mr. Glynn’s reward was to have been whatever he couldpersuade the slaughterman to pay for the horse.31. In my view, there is a bona fide issue to be tried as to whether Mr. Glynn, on collectingthe horse and passport, became the owner of the horse. Mr. Glynn in an affidavit swornon 27th February, 2020, denies that he ever had title or ownership of the horse: but thatis a question of law.32. Alternatively, there is a bona fide issue to be tried as to whether Mr. Glynn or Mr. Derwinwas or were mercantile agents of the plaintiff. On the plaintiff’s case, Mr. Glynn and Mr.Page 6 ⇓Derwin were authorised to sell the horse to a slaughterman. In my view, there is a bonafide issue to be tried as to whether he had the plaintiff’s ostensible or apparent authorityto sell it otherwise than for slaughter.33. These are issues of law, or combined issues of fact of law, which the court is not in aposition to finally decide on this interlocutory application.34. The case now made on behalf of the plaintiff is that if the order now sought is refused andhe ultimately wins the case, his property rights in The Tartan Spartan will have beeninfringed in the meantime. I accept that argument.35. On the other hand, if the order now sought is made and Mr. Fenton ultimately wins, hisproperty rights will have been infringed. If as Mr. Lanigan O’Keeffe argues on behalf ofthe plaintiff, damages would not be an adequate remedy for the plaintiff, it seems to meto follow that damages would not be an adequate remedy for Mr. Fenton either.36. The notice of motion seeks an interlocutory mandatory order for the interim return of thehorse but Mr. Lanigan O’Keeffe did not press that. What is proposed is that The TartanSpartan will remain in the possession of Mr. Fenton and will remain in training but shouldnot be allowed to run. If the horse is not allowed to run, the plaintiff will not suffer anypecuniary loss. Mr. Fenton however, will be deprived of the opportunity to run the horsewhich seems to me is a matter of sport as well as the possibility that he may win prizemoney.37. The plaintiff accepts that Mr. Fenton is a reputable and experienced trainer and that hehas and will continue to care for the animal properly.38. Mr. Hughes expresses an apprehension that the horse if run may break downcatastrophically, but that apprehension is not supported by veterinary evidence and thecase is not made that Mr. Fenton’s plan to race the horse is reckless. I must balance therisk of potential injustice to both parties.39. The Tartan Spartan left the plaintiff’s yard on the way to slaughter but is now fit to run.Objectively, Mr. Fenton’s assessment of the condition of the horse in July, 2019 appearsto have been more accurate than that of Mr. Hughes. I am not persuaded that there is arisk that the horse will catastrophically breakdown or that Mr. Fenton intends to deal withhim otherwise than entirely correctly and in accordance with the best veterinary advice.Insofar as the plaintiff relies upon considerations of animal welfare, I am not satisfied thatthe running of The Tartan Spartan would be inconsistent with animal welfare.40. I find that the balance of convenience is against the making of the interlocutory ordersought and I will decline to make the order. I will, however, give directions to ensure anearly trial of the action.