Possessory Security
Cases
Gale v. First National Building Soc.
[1985] I.R.11
H.C Costello J.
The first named plaintiff is the registered owner of lands on which is built a house lived in by the first named plaintiff and his wife from early in the year 1973 until towards the end of 1982. The defendant, (a building society), is the owner of a registered charge on the lands which was created by a deed of 13th July, 1973. The plaintiffs left Ireland in the month of October, 1982, and were then (and subsequently) in arrears with the instalments due to the defendant under the deed. On the 1st August, 1984, the defendant, claiming entitlement under the terms of the deed, entered into possession of the plaintiffs’ house and advertised it for sale. The plaintiffs, having learned of what had happened, instituted these proceedings and obtained an interim injunction. A motion for interlocutory relief was then brought, and, by order of the 5th November, 1984, the motion was treated as the trial of the action and adjourned, and issues were ordered to be tried as to (a) whether the defendant was lawfully entitled to take possession (in the absence of a court order) and, if so, (b) had it taken possession peaceably. These issues were heard on the affidavit evidence which had been filed, but Mr. Kilbride, an auctioneer, who had taken possession on the defendant’s behalf, was cross-examined as to the steps he had taken on the 1st August. Having heard that evidence there is no doubt that possession was obtained peaceably by him on the defendant’s behalf, and the only matter, therefore, which is now in controversy is whether the defendant was lawfully entitled to take possession as it did.
.
There is no doubt that the defendant could have applied in a summary way under the provisions of the Registration of Title Act, 1964, for an order for possession, and the plaintiffs’ case is that in the absence of such an order no entitlement to possession existed. In support of this contention they correctly point to the fact that the mortgagee of the legal estate is, in the absence of express provision to the contrary, entitled to enter the mortgaged premises at any time after the execution of a mortgage, but that the owner of a charge has no estate in the lands and indeed, in the absence of statutory authority, could not even obtain an order of ejectment against the legal owner (see Northern Banking Company Ltd. v. Devlin [1924] 1 I.R. 90). They also point out that even if all the powers conferred on mortgagees under the Conveyancing Act, 1881, were conferred by deed on the owner of a charge, no right of re-entry could exist because these powers did not extend to owners of charges (see Devlin’s Case [1924] 1 I.R. 90). These points are not contested by the defendant. It rests its case on a contractual right to possession arising, it is said, from the express agreement of the parties. Clause 7 (a) of the deed provided that, at any time during the continuance of the security, the defendant could, without any further consent or notice to the plaintiffs, enter into possession of the property, a provision subject only to sub-clause (c), which provided that it could not exercise its powers of entry into possession until default had been made by the plaintiffs for three months in the payment of some instalment or other monies payable under the deed. The plaintiffs, it is said, were in default for more than three months in the payment of instalments on the 1st August, 1984, (a fact not controverted by them), and the defendant submits that it entered possession of the premises peaceably as it was entitled to do under the terms of the deed.
Although a number of arguments were advanced on the plaintiffs’ behalf I think I am correct in saying that they principally relied on a decision of the Master of the Rolls in National Bank v. Hegarty (1900) 1 N.I.J.R. 13. This was a case not of registered land but of the owner of a statutory tenancy in land who executed a deed of charge in favour of the plaintiff bank in which he covenanted to pay all monies then or thereafter due to the bank. There was no conveyance of the lands to the bank but the deed contained an express agreement that the bank might at any time without any further consent from the defendant enter into possession of the lands. The bank did not enter into possession pursuant to this covenant but instead instituted proceedings by way of ejectment on the title claiming possession of the lands. This claim failed. The court pointed out (a) that the bank could have got a well charging order to be followed by an order for sale because of the defendant’s default but (b) a claim in ejectment by a person claiming to be entitled to the lands under a covenants which had been broken did not lie. “There is no case in the books”, the judgment reads, “in which, on mere covenant, apart from conveyance of any estate or grant of title, there has been an ejectment decree.” It was pointed out that the bank appeared to have a licence to enter into possession of the lands, but no conveyance of any estate to the bank had been made.
It is important to note exactly what that case decided. The court held that a covenant to allow someone into possession did not convey an estate on the covenantee and so the bank had no estate in the lands on which to ground proceedings in ejectment on the title. But it does not follow that because the bank could not obtain a decree for possession (in those days there was no statutory power to obtain such an order) that it could not takepossession (provided it could do so peaceably). It seems to me that in the present case (as indeed in Hegarty’s Case (1900) 1 N.I.J.R. 13), the defendant had a contractual licence to enter and take possession of the plaintiffs’ lands and hat it exercised this right on the 1st August, 1984, as it was entitled to do pursuant to the parties’ agreement.
The second submission made on the plaintiffs’ behalf was that the right of possession conferred on the defendant by the deed was an interest in the land which should have been registered and that there was a failure to do so which invalidated it. However the deed was itself registered and no separate registration of this ancillary right which it contained was necessary. Furthermore, the non-registration could not affect the contractual right to take possession which the owner of the land had conferred on the defendant.
I must hold, therefore, that the defendant was lawfully entitled to take possession without the necessity of any court order and that it has lawfully exercised this right.
Anderson -v- Finavera Wind Energy Inc & Ors
[2013] IEHC 489 Ryan J
29. Mr Declan McGrath SC for the third defendant submitted that the jurisdiction to strike out a claim arose in two circumstances; by virtue of the court’s inherent jurisdiction and following the rule on O.19, r. 28 of the RSC which provides:-
“The court may order any pleading to be struck out, on the ground that it discloses no reasonable cause of action or answer and in any such case or in case of the action or defence being shown by the pleadings to be frivolous or vexatious, the court may order the action to be stayed or dismissed, or judgment to be entered accordingly, as may be just.”
30. Citing the decision of Costello J. in Barry v. Buckley [1981] IR 306, Mr. McGrath submitted that the court has an inherent jurisdiction to strike out proceedings where there is no prospect of success in the claim. The circumstances in Rogers v. Michelin Tyre Plc [2005] IEHC 294 were similar to this case insofar as the decision of Clarke J. striking out the proceedings was based on the construction and application of contractual documents.
31. He argued that the fact that the plaintiff entered into the loan agreement with Finavera Canada did not equate to the creation of a lien over shares Cloosh new. The charge which the plaintiff claims Finavera Canada agreed to grant over the shares in consideration for the loan has never been executed and, in the absence of execution, an agreement by Finavera Canada is not sufficient to create any security interest over those shares.
32. No charges can be created over the shares in Cloosh new without the consent of SSE and the articles of Cloosh new prohibit the transfer or disposition of any interest in a share. Mr. McGrath referred the court to the decision of Arden L.J. in McKillen v. Misland (Cyprus) Investments Ltd & Others [2013] ECWA Civ. 781 where it was held that because the share transfer in contention was contrary to the pre-exemption rights in the shareholders agreement, the transfer was invalid.
33. Mr Robert Barron SC for the plaintiff argued that Finavera agreed to repay the plaintiffs loan out of the proceeds of sale of the Cloosh Valley transaction and in doing so they created an equitable charge over the shares over Cloosh Valley Wind Farm. The third defendant cannot rely on s. 123 of the Companies Act 1963, which provides:-
“No notice of any trust, express, implied or constructive, shall be entered on the register or be receivable by the registrar.”
because actual notice or knowledge is involved and the third defendant had actual notice of the plaintiffs claims.
34. Counsel submitted that the third name defendant’s reliance on the change to the articles of association is not sufficient for the plaintiffs claim to be struck out in accordance with the principles laid down in Barry v. Buckley [1981] IR 306. That case establishes that for O. 19, r 28 application to be invoked, the vexatiousness or frivolousness must appear from the pleadings only. Costello J. stated at 308:-
“…the court can only make an order under this rule when pleading discloses no reasonable cause of action on its face.”
Costello J. further emphasised that the jurisdiction of the court to strike out proceedings is one to be exercised sparingly and only in clear cases.
35. Mr. McGrath referred to the decisions in Tett v. Phoenix Property and Investments Company Ltd [1986] BCLC 149; in Re Claygreen Ltd [2005] EWHC 2032 (CH) and in Re Champion Publications Ltd (The High Court, Unreported, 4th June 1991). In the last case Blayney J. considered the validity of shares which were transferred contrary to the articles of a company and said:-
“It seems to me that there is only one construction that could be put on the article. While article 11 is far from being clear, when one takes every provision of it into account, in particular clause (g), the construction that must be given to it is that where a member wishes to sell, the other members must be given an opportunity of purchasing. It seems to me that this is the only construction that can be given to clause (g) of article 11.”
36. Mr Barron referred to HKN Invest Oy v. Incotrade PVT Ltd. [1993] 3 IR 152, where Costello J. held at p. 162:-
“A constructive trust will arise when the circumstances render it inequitable for the legal owner of property to deny the title of another to it. It is a trust which comes into existence irrespective of the will of the parties and arises by operation of law. The principle is that where a person who holds property in circumstances which in equity and good conscience should be held or enjoyed by another, he will be compelled to hold the property in trust for another.”
37. This proposition was applied by Barr J. in the subsequent decision in Kelly v. Cahill [2001] 1 IR 56, where the Court said at p. 62:-
“In my opinion a “new model” constructive trust of that nature the purpose of which is to prevent unjust enrichment is an equitable concept which deserves recognition in Irish law.”
38. The plaintiff argued that the decision of Gilligan J. in In Varko Ltd (In Liquidation) (Unreported, High Court, Gilligan J. 3rd February 2012), supports the plaintiffs claim that a constructive trust is an appropriate remedy. In that case Gilligan J. deals with the new model constructive trust, referring to the authority in Eves v. Eves [1975] 1 WLR 1338 where Lord Denning held:-
“It is a constructive trust imposed by law whenever justice and good conscience require it…..
It is an equitable remedy by which the Court can enable an aggrieved party to obtain restitution.”
39. The plaintiff relied on Fitzpatrick v. DAF Sales [1988] 1 I.R. 464 to support the claim that a promise to pay someone out of a particular fund creates an equitable charge. In that case O’Hanlon J. held that in order to give the second named defendant’s claim priority over that of the first named defendant, the plaintiff had to prove a specific agreement with the second named defendant that his liability to the second named defendant would be discharged out of a particular fund. Mr. Barron says that the same consideration extends to this case because the plaintiff had an agreement by virtue of the promissory note that he would be repaid with interest on the completion of the Cloosh Valley transaction.
Conclusions
40. The first question is whether the plaintiff’s case should be dismissed as against the third defendant pursuant to Order 19 rule 28. That company has been joined to the proceedings because its shares are alleged to be the subject of the plaintiff’s lien and any alienation would eviscerate or destroy that security. Although the plaintiff does not allege wrongdoing against the third defendant, he considered it prudent to join the company to the proceedings to protect his security. The claim against the third defendant is made in pursuance of the right to security for the loan.
41. The fact that a case may require some amendment of pleadings is not sufficient for dismissal in limine. If the plaintiff can demonstrate a rational basis that is sound in law, assuming the facts he asserts were to be established, the case cannot be dismissed.
42. The second question is whether the applicant has established that there is no reasonable prospect that the plaintiff could succeed if the case were to proceed to a hearing.
43. My conclusions are as follows.
1) The plaintiff may establish at the hearing that he is entitled to a lien over 110 of the 220 shares issued in Cloosh. In those circumstances, it would greatly diminish the plaintiff’s security to treat the shares of Cloosh new as being free of any claim by him to a lien over them.
2) It would deprive the plaintiff of security that was agreed with the first defendant without examining or evaluating the evidence as to the circumstances in which it is contended that he lost his security.
3) The transactions involving the Cloosh companies and the other defendants and others as outlined in the affidavits are open to challenge by the plaintiff as to their contractual and legal validity in depriving him of the agreed security. That is not to say that they are prima facie unlawful but rather that, at this stage, it is legitimate for the plaintiff to question and examine their legality and their impact on his interest.
4) The plaintiff, while disavowing any case of impropriety against SSE, has raised sufficient ground for exploring whether that company, the owner of the 33 A class shares in the third defendant and claimant to a contractual right to purchase the remainder, was, or ought to have been, on notice of his interest in 50% of the issued shares in Cloosh Valley Wind Farm Ltd.
5) It is at least arguable that the transactions that are alleged to have deprived the plaintiff of his agreed security are of such nature as to give rise in all the circumstances to a constructive trust in his favour over the shares in the third defendant.
44. The motion to dismiss will accordingly be dismissed and the plaintiff is entitled to interlocutory orders in respect of this defendant’s shares. The question arises as to whether the 33 A and 187 B shares in Cloosh Valley Wind Farm Ltd, the third defendant, should be the subject of an injunction prohibiting their sale or whether an order should be confined to the sale proceeds of the shares. In the course of the proceedings, Mr. Barron SC expressed himself satisfied if only the purchase price of the shares were to be the subject of an injunction.
45. Mr. McGrath submitted that there could be commercial implications and serious disadvantage if an injunction were to be imposed. It seems to me that any such risks do not defeat the claim of the plaintiff to the protection he was granted over the shares and, in addition, the balance of justice demands that Mr. Anderson’s protection be given priority over this potential risk.
46. I propose therefore to make an Order restraining the payment or other distribution or disposal of the proceeds of sale of shares in the third defendant until the hearing of the action otherwise than (a) on notice to the plaintiff and (b) with his consent. I will however give Counsel an opportunity of agreeing the form of the restraining order.
Highland Finance (Ireland) v. Sacred Heart College of Agriculture Ltd (in receivership);
[1997] 2 I.L.R.M. 87
Blayney J
The law
Where a party advances money for the express purpose of the purchase of property, it is well-settled that prima facie he is entitled by subrogation to the unpaid vendor’s lien on the property for the amount of the advance. Nottingham Permanent Building Society v. Thurstan [1903] AC 6 : Bank of Ireland Finance Ltd v. Daly [1978] IR 79 : Boodle, Hatfield & Co. v. British Films Ltd [1986] PCC 176 .
This right is an instance of a general right which exists in equity where money is advanced for the purposes of paying off an encumbrance. It was expressed as follows by Lord Jenkins in the decision of the Privy Council in Ghana Commercial Bank v. Chandiram [1960] 2 All ER 865 at p. 871:
It is not open to doubt that, where a third party pays off a mortgage, he is presumed, unless the contrary appears, to intend that the mortgage shall be kept alive for his own benefit.
But while it is clear that prima facie the doctrine of subrogation applies in favour of a lender who advances money for the purchase of property, it is equally clear that there may be circumstances which preclude or prevent the application of the doctrine. In Burston Finance Ltd v. Speirway Ltd [1974] 3 All ER 735 and Paul v. Speirway Ltd [1976] 2 All ER 587 it was held that there were such circumstances and accordingly in neither case was the lender entitled to have the doctrine applied in his favour.
The circumstances which preclude or prevent the application of the doctrine have been expressed in a number of different ways in the authorities. In the House of Lords case, Orakpo v. Manson Investments Lord Diplock said in his speech at p. 7:
The mere fact that money lent has been expended on discharging a secured liability of the borrower does not give rise to any implication of subrogation unless the contract under which the money was borrowed provides that the money is to be applied for this purpose: Wylie v. Carlyon [1922] 1 Ch 51 . Furthermore, even where the contract does so provide, the implication may be displaced by the presence in the contract of express terms which are inconsistent with the acquisition or retention by the lender of a right of subrogation.
In Bank of Ireland Finance Ltd v. Daly McMahon J cited this passage in his judgment and then went on to say at p. 83:
In my opinion the bank’s claim to subrogation after completion of the sale depends on whether the express term of the contract of loan (that the title deeds were to be deposited with the bank on completion of the sale) is inconsistent with the retention of a right of subrogation by the bank after completion. The security by subrogation is not inconsistent with the security by deposit of title deeds. Each is an equitable security of the same rank, but the deposit of title deeds, if implemented, would enable the bank to impede or prevent any dealing with the legal estate in the property without the bank’s consent. I think that the security by deposit of title deeds can be regarded as a security which is additional to the security by subrogation rather than as a substitute for it.
For these reasons I have come to the conclusion that the right of subrogation after completion of the sale was not excluded by the agreement for a deposit of the title deeds.
In Paul v. Speirway Ltd Oliver J expressed the relevant test in somewhat wider terms. He said in his judgment at p. 597:
I think respectfully that the wide general formulation in Coote and in the Ghana case is the right one, and that where the given circumstances exist subrogation applies unless the contrary appears. The real divergence here, as it seems to me, is on the strength of the evidence which is required to demonstrate a contrary intention. It is always dangerous to try to lay down general principles unnecessarily, but it does seem to me to be safe to say that where on all the facts the court is satisfied that the true nature of the transaction between the payer of the money and the person at whose instigation it is paid is simply the creation of an unsecured loan, this in itself will be sufficient to dispose of any question of subrogation.
And at p. 598 he reiterated this in more succinct form:
As it seems to me, where a court, on a review of the facts, comes to the conclusion that what was intended between the parties was really unsecured borrowing, there is no room for the doctrine of subrogation.
In his speech in the Orakpo case, Lord Salmon also adopted a very broad test. He said in his speech at p. 12:
The test whether the courts will apply the doctrine of subrogation is entirely empirical. It is I think impossible to formulate any narrower principle than that the doctrine will be applied only where reason and justice demand that it should be.
Finally, in Boodle, Hatfield & Co. v. British Films Ltd , Nicholls J , having cited the relevant parts of the speeches of the Law Lords in the Orakpo case, drew the following conclusions from them (at p. 182):
From these speeches three guidelines relevant to the present case can be drawn with regard to subrogation arising from a lender paying part of the purchase price at the request of the purchaser. First, one of the ways (because I do not think that Lord Diplock meant that this was the only way) in which the implication of subrogation to the existing security rights of the vendor may be displaced is by the express terms in the contract made between the lender and the borrower being inconsistent with the acquisition by the lender of the security rights. Secondly, the failure of the lender and the borrower to address themselves to the question of whether the lender will acquire the security rights of the vendor will not of itself negative the application of the doctrine of subrogation. A lender who advances money to enable a borrower to complete and who stipulates for a legal charge to be given when his loan is made is unlikely to consider what his security position will be if the legal charge produced is invalid; that is, whether in that event he will acquire a lien by subrogation. But the view of both Lord Diplock and Lord Keith was that such a lender may acquire the pre-existing security rights by subrogation. Thirdly, and of overriding importance, the equitable doctrine of subrogation will not be applied when its application would produce an unjust result. One of the circumstances in which subrogation may lead to an unjust result is if, without the implication of subrogation, the lender obtained all that he bargained for.
I would adopt the statements of principle in the cases I have cited as indicating the manner in which this Court should approach the issue in this appeal, and in the light of such principles I now go on to consider the facts.
It seems to me that the first matter to be taken into account is that the terms of the loan being made by Highland did not make any provision for Highland having any security on the milk quotas themselves. The application forms signed by the college, which contain all the terms of the contract, contain no reference to any such security. The clear inference is, accordingly, that it was not the intention of the parties that Highland should have a charge on the quotas themselves. This does not necessarily exclude the possibility of the doctrine of subrogation being applied, but it is a relevant factor in considering whether ‘a contrary intention appears’ .
The next consideration is that Highland stipulated in the contract that the college should give the co-operative an irrevocable authority to deduct from its milk account and pay over to Highland the monthly instalments due each year during the term of the agreements. While this was not an actual security, it had an equivalent effect, and the fact that it was part of the agreement for the loan is an indication that it was not the intention of the parties that there should be any security on the actual milk quotas themselves. A further indication is that the loan application forms included an ‘indemnity and guarantee by limited company’ addressed to Highland whereby Balla Co-Operative Mart, in consideration of Highland entering into or having entered into the loan agreements, covenanted and undertook with Highland to keep it indemnified against all losses of every kind which it might sustain by reason of the failure of the college to perform and observe the terms and provisions of the loan agreements. Earlier in this judgment I referred to the fact that, by reason of some irregularity in the execution of these guarantees, they turned out to be invalid, and that neither party had made any submission in regard to them. It seems to me, however, that the fact that Highland had stipulated for a security in this form is another indication that it was not its intention to look for any other security.
A further factor is that the amount due by the college to Highland under the loan agreements was different from the amount due by the college to the co-operative. Under the loan agreements, the amount due for interest over the seven year term of the loans was immediately added to the amounts actually advanced, and the aggregate is referred to in the application forms as ‘the total debt’ , and it was this amount which became immediately due by the college, to be paid by the instalments stipulated. So, if Highland were subrogated to the co-operative’s vendor’s lien, it would be in respect of the capital amounts advanced, and not in respect of the ‘total debts’ which became due on the signing of the application forms. Highland could not be subrogated in respect of the total debts since these were never due by the college to the co-operative.
Apart from this, there is the fact which weighed with the learned trial judge, namely, that if Highland were subrogated to the co-operative’s unpaid vendor’s lien, it would become entitled to immediate repayment of its loans which would be wholly inconsistent with its right under the loan agreements which was to be repaid the capital and interest by instalments over seven years. Finally, I consider that the court has to take into account that what was being sold was two milk quotas and not immovable property. It is normal in the case of the latter that a person who advances money for its purchase should have security on the property for the repayment of the advance. In the absence of any evidence, and the case was tried without any evidence, I do not think that the same could be said in regard to the purchase of a chose in action. It seems to me that this is also relevant in considering the party’s intention.
In my opinion, irrespective of which test one applies to the facts, the conclusion is the same. It is not a case in which the doctrine of subrogation should be applied. I would start by endorsing the ground on which the learned trial judge decided the case. He expressed it as follows:
It may be that where a loan is advanced by way of bridging finance or where the loan is made by bankers on terms that it is repayable on demand that one would not necessarily conclude that the bargain between the lender and the borrower is inconsistent with the right of subrogation but in the present case it seems to me that the unique and complex provisions for the repayment of the debt plus interest over a lengthy period by a third party who will or should have in his hands monies of the borrower derived indeed from the very property which was acquired with the loan that this arrangement in any event is inconsistent with a security which could have been realised forthwith. Accordingly, the appropriate inference is that the parties did not intend the preservation of the vendor’s lien.
I am also satisfied that in this case a clear contrary intention appears. It is to be inferred from the special arrangements incorporated in the contract for the payment of the instalments by the co-operative out of the college’s milk account in pursuance of an irrevocable authority. This was how Highland intended that it should be paid and it was inconsistent with it having a lien on the milk quotas limited to the actual amount of its advances.
I am also of the opinion that on the facts the only conclusion open is that this was intended to be an unsecured borrowing, that is to say, a borrowing which was not secured on the quotas themselves. Apart from the fact that there was nothing to suggest that the question of Highland having security on the quotas ever entered the mind of either party, it is clear that Highland were satisfied with the standard requirement in the application form that the instalments would be paid by the co-operative out of the college’s milk account.
Finally, to apply Lord Salmon’s test, I consider that justice and reason do not require that the doctrine of subrogation should be applied in this case. Highland did not seek any security on the quotas in its arrangement with the college, so there is no injustice in it not having any. If it had made a search against the college when it made the loans to it, it would have ascertained that the bank had a floating security on the entire undertaking of the college, and accordingly, that the quotas would become subject to this floating charge unless it got a fixed charge which would take priority to it. Mr McDowell submitted that any such charge would have required the bank’s consent. I do not think it would since a company is free to deal with its assets which are subject to a floating charge until the charge becomes fixed. Highland could, accordingly, have sought to have a security on the quotas. As it did not do so, justice does not require that equity should now give them a charge.
It seems to me that the concluding words in the judgment of Oliver J in Paul v. Speirway Ltd apply equally to this case: he said at p. 599:
And so here, too, as it seems to me, if I am right in the inference which I draw from the facts before me, the plaintiff obtained all that he bargained for and it would not, I think, be equitable that he should now assert some further right for which he did not bargain.
For these reasons I would affirm the decision of the learned trial judge and dismiss this appeal.
Essfood Eksportlagtiernes Sallgsforening v. Crown Shipping (Ireland) Ltd
[1991] ILRM 97
[1991] ILRM 97
The plaintiff and defendant had both carried on business with B. Ltd, a company which was in receivership at the date of the instant proceedings. A dispute arose between the parties concerning the shipment of containers of meat to Japan. The plaintiff had ordered the meat from B. Ltd, who had then asked the defendant, a forwarding agent, to arrange for carriage to Japan. When arrangements had been made, the defendant notified B. Ltd, who in turn notified the plaintiff. The plaintiff then paid B. Ltd for the meat, and the containers left the premises of B. Ltd and were taken in charge by the defendant. The plaintiff claimed that the meat was its property, but the defendant refused to hand over the bills of lading claiming a lien over both goods and bills of lading in respect of a debt allegedly owing to the defendant by B. Ltd. The goods, by this time, had left the defendant’s possession and were in the possession of various shipping lines. The standard trading conditions of the defendant company, which had been accepted by B. Ltd, contained a clause purporting to confer a right of lien in respect of both goods and related documentation. The lien was expressed to be both general and particular, and the clause also purported to allow the defendant to sell the goods after one month’s notice. The clause further provided that customers entering into transactions with the defendant thereby warranted that they were either the owners or the authorised agents of the owners of the goods to which the transactions related, and that they accepted the conditions not only for themselves, but as agents for, and on behalf of, all other persons interested in the goods. The plaintiff was completely unaware of the existence or content of the said standard trading conditions, and obtained an interim injunction preventing the defendant from selling the goods. The plaintiff subsequently brought a motion for interlocutory relief, and by consent, the motion was treated as the trial of the action.
Held by Costello J, in declaring that the defendant had no right, either at common law or in contract, to a lien over the goods and bills of lading, and in directing the defendant to deliver the bills of lading to the plaintiff, and to take such steps as were necessary to enable the plaintiff to obtain possession of the goods, 1, the defendant could only exercise a right of lien at common law over goods which were the property of B. Ltd. In this case, the goods were already the property of the plaintiff when the defendant took possession of them. 2. Even if the defendant could have claimed a common law lien over the goods, it had lost any such right when it had parted with possession of the goods. Hathesing v. Laing (1873) L.R. 17 Eq. 92 applied. Physical possession of the bills of lading gave the defendant no entitlement to possession of the goods to which they relate. 3. The contract entered into by B. Ltd with the defendant was entered into pursuant to a contractual obligation to the plaintiff to ensure that the goods were shipped to Japan, and was not made under any relationship of agency existing between B. Ltd and the plaintiff. The defendant could not therefore rely on any liability arising from the doctrine of ostensible authority. 4. Even if B. Ltd had entered into the contract with the defendant as agent for the plaintiff, the plaintiff was not bound by the terms on which the defendant relies. 5. To give rise to the doctrine of ostensible authority, it was not sufficient that B. Ltd had represented itself to have authority to enter into a contract on the plaintiff’s behalf. Such representation must come from the principal, and the plaintiff had made no such representation, nor could any be inferred from its conduct. Attorney General for Ceylon v. Silva [1953] A.C. 461 applied.
Shogun Finance Ltd v. Hudson
[2003] UKHL 62 [2004] 1 AC 1101, [2004] AC 1101, [2004] 1 Lloyd’s Rep 532, [2003] 3 WLR 1371, [2004] 1 LLR 532, [2004] 1 All ER 215, [2004] 1 All ER (Comm) 332, [2004] RTR 12, [2003] UKHL 62, [2004] 1 AC 919
LORD HOBHOUSE OF WOODBOROUGH
My Lords,
The question at issue on this appeal is: Did Mr Hudson acquire a good title to the car when he bought the car from the rogue (‘R’) who himself had no title? The basic principle is nemo dat quod non habet: see the Sale of Goods Act 1979 s.21(1) and Helby v Matthews [1895] AC 471 where it was held that the same rule applied to a sale by a hire-purchaser. The hire-purchaser has no title to the goods and no power to convey any title to a third party. The title to the goods and the power to transfer that title to any third party remains with the hire purchase company and with it alone. Clause 8 of the hire-purchase ‘agreement’ and the printed words in the form immediately below the space for the customer’s signature also expressly say the same. There are common law and statutory exceptions to this rule (eg, sales in market overt or by a mercantile agent in possession of the goods with the consent of the owner).
In the present case, the statutory exception relied on by Mr Hudson is that in Part III of the Hire-Purchase Act 1964 as re-enacted in the Consumer Credit Act 1974:
” where a motor vehicle has been bailed …. under a hire-purchase agreement …. and, before the property in the vehicle has become vested in the debtor, he disposes of the vehicle to another person …. [who is] a private purchaser [who has purchased] the motor vehicle in good faith without notice of the hire-purchase …. agreement … that disposition shall have effect as if the creditor’s title to the vehicle has been vested in the debtor immediately before that disposition.” (s.27(1) and (2), (emphasis supplied)
Section 29(4) adds:
” the ‘debtor’ in relation to a motor vehicle which has been bailed …. under a hire-purchase agreement …. means the person who at the material time (whether the agreement has before that time been terminated or not) …. is …. the person to whom the vehicle is bailed …. under that agreement.” (emphasis supplied)
The relevant question is therefore one of the application of this statutory provision to the facts of this case (no more, no less). Thus the question becomes:
‘Was R a debtor under the hire-purchase agreement relating to the car?’
Mr Hudson contends that R was; the Finance Company contends that he was not. The judge and the majority of the Court of Appeal found that he was not; Sedley LJ would have held that he was.
What was the ‘hire-purchase’ ‘agreement’ relied on? It was a written agreement on a standard hire-purchase printed form purporting to be signed as the “customer” by one Durlabh Patel, the person who lived at 45 Mayflower Rd, Leicester, to whom driving licence No.’PATEL506018DJ9FM’ had been issued and with a date of birth 01/06/58. This was an accurate identification of the real Mr Durlabh Patel, but in no respect of R who was not the person who lived at that address, not the person to whom the driving licence had been issued and (one suspects) not a twin in age of the real Mr Patel. R forged Mr Patel’s signature so as to make the signature on the hire-purchase ‘agreement’ appear to be the same as that on the driving licence. The parties to the written ‘agreement’ are Mr Patel (the “customer”), and Shogun Finance Ltd (the creditor). There is also an offer and acceptance clause:
You [“the customer named overleaf”] are offering to make a legal agreement by signing this document. We [the creditor] can reject your offer, or accept it by signing it ourselves.”
If we sign this document it will become legally binding at once (even before we send you a signed copy) …..”
The effect of this is that –
(i) it re-emphasises that the customer/hirer is, and is only, the person named on the front of the document;
(ii) it makes it clear that the agreement is the written agreement contained in the written document;
(iii) the offer being accepted by the creditor is the offer contained in the document and that alone, that is to say, the offer of Mr Durlabh Patel of the address in Leicester and to whom the driving licence was issued;
(iv) for a valid offer to be made, the form must have been signed by Mr Durlabh Patel; and,
(v) most importantly of all, the question in issue becomes a question of the construction of this written document, not a question of factual investigation and evaluation.
I will take these points in turn but the second and fifth are fundamental to them all and to the giving of the correct answer to this case.
The first point is a matter of the construction of the written document. It admits of only one conclusion. There is no mention in the document of anyone other than Mr Durlabh Patel. The language used is clear and specific, both in the substance of the identification – name and address and driving licence number and age – and in the express words of the offer and acceptance clause – “the customer named overleaf”. The ‘agreement’ is a consumer credit agreement. It is unlike a mere retail sale where, although title may, indeed, will normally have already passed to the buyer, the seller is not obliged to part with the goods until he has been paid or is satisfied that he will be paid. Credit is only relevant to the release of the seller’s lien and to his obligation to deliver, not to the basic transaction; the basic transaction is unaffected and will stand. Under a contract for the sale of goods, the contract has been made and, normally, the title to the goods has vested in the buyer before the time for payment has arrived. (Retention of title clauses are a modern development.) By contrast, in a consumer credit transaction, the identity of the customer is fundamental to the whole transaction because it is essential to the checking of the credit rating of the applicant borrower. All this precedes the making of any contract at all. No title to the goods is obtained by the hirer at any stage. If the finance company does not accept the proposer’s offer, the proposer has acquired nothing. Unlike in the sale of goods, there is nothing – no status quo – which has to be undone. The observations of Devlin LJ in Ingram v Little [1961] 1 QB at p.69 are not pertinent; the approach and dicta of Denning MR in Lewis v Averay [1972] 1 QB 198 are misplaced and wrong.
It has been suggested that the finance company was willing to do business with anyone, whatever their name. But this is not correct: it was only willing to do business with a person who had identified himself in the way required by the written document so as to enable it to check before it enters into any contractual or other relationship that he meets its credit requirements. Mr Durlabh Patel was such an identified person and met its credit requirements so it was willing to do business with him. If the applicant had been, say, Mr B Patel of Ealing or Mr G Patel of Edgbaston, it would not have been willing to deal with them if they could not be identified or did not meet with its credit requirements. Correctly identifying the customer making the offer is an essential precondition of the willingness of the finance company to deal with that person. The Rogue knew, or at least confidently expected, that the finance company would be prepared to deal with Mr Durlabh Patel but probably not with him, the Rogue; and he was, in any event, not willing himself to enter into any contract with the finance company. This is not a case such as that categorised by Sedley LJ ([2002] QB at 846) as the use of a “simple alias” to disguise the purchaser rather than to deceive the vendor – the situation which resembles that in King’s Norton Metal v Edridge Merrett & Co (14 TLR 98). But, even then, in a credit agreement it would be useless to use a pseudonym as no actual verifiable person against whom a credit check could be run would have been disclosed and the offer would never be accepted. Mr Durlabh Patel is the sole hirer under this written agreement. No one else acquires any rights under it; no one else can become the bailee of the motor car or the ‘debtor’ “under the agreement”. It is not in dispute that R was not Mr Durlabh Patel nor that R had no authority from Mr Patel to enter into the agreement or take possession of the motor car.
Mr Hudson seeks to escape from this conclusion by saying: ‘but the Rogue was the person who came into the dealer’s office and negotiated a price with the dealer and signed the form in the presence of the dealer who then witnessed it.’ The third and fourth points address this argument. The gist of the argument is that oral evidence may be adduced to contradict the agreement contained in a written document which is the only contract to which the finance company was a party. The agreement is a written agreement with Mr Durlabh Patel. The argument seeks to contradict this and make it an agreement with the Rogue. It is argued that other evidence is always admissible to show who the parties to an agreement are. Thus, if the contents of the document are, without more, insufficient unequivocally to identify the actual individual referred to or if the identification of the party is non-specific, evidence can be given to fill any gap. Where the person signing is also acting as the agent of another, evidence can be adduced of that fact. None of this involves the contradiction of the document: Young v Schuler 11 QBD 651, which was a case of an equivocal agency signature and it was held that evidence was admissible that the signature was also a personal signature – “evidence that he intended to sign in both capacities …. does not contradict the document and is admissible”. (per Cotton LJ at p.655) But it is different where the party is, as here, specifically identified in the document: oral or other extrinsic evidence is not admissible. Further, the Rogue was no one’s agent (nor did he ever purport to be). The rule that other evidence may not be adduced to contradict the provisions of a contract contained in a written document is fundamental to the mercantile law of this country; the bargain is the document; the certainty of the contract depends on it. The relevant principle is well summarised in Phipson on Evidence, paragraphs 42-11 and 42-12: “When the parties have deliberately put their agreement into writing, it is conclusively presumed between themselves and their privies that they intend the writing to form a full and final statement of their intentions, and one which should be placed beyond the reach of future controversy, bad faith or treacherous memory.” (See also Bank of Australasia v Palmer [1897] AC 540, per Lord Morris at p.545.) This rule is one of the great strengths of English commercial law and is one of the main reasons for the international success of English law in preference to laxer systems which do not provide the same certainty. The case of Hector v Lyons 58 P&CR 156 is simply an application of this basic and long established principle. The father was claiming to be able to enforce a contract of sale of land. The father had conducted the negotiations. Woolf LJ said, at pp. 160-161:
“In this case there is no dispute as to who, according to the written contract, are the parties. The son was described in the contract as one of the parties. He does exist and, in so far as there was a contract at all, it was between him and the other party identified in the contract, Mrs Pamela Doris Lyons.”
Browne-Wilkinson V-C delivered to a judgment to the same effect. On p.159 he referred to the cases “entirely concerned with transactions between two individuals face to face entering into oral agreement”, saying:
“In my judgment the principle there enunciated has no application to a case such as the present where there is a contract and wholly in writing. There the identity of the vendor and of the purchaser is established by the names of the parties included in the written contract.”
Mr Hudson submitted, as he had to, that this decision was wrong and should be overruled. In my opinion the Court of Appeal’s decision was clearly correct and correctly reasoned in accordance with well established principles.
The argument also fails on another ground. There was no consensus ad idem between the finance company and the Rogue. Leaving on one side the fact that the Rogue never had any intention himself to contract with the finance company, the hire-purchase ‘agreement’ to which Mr Hudson pins his argument was one purportedly made by the acceptance by the finance company, by signing the creditor’s box in the form, of a written offer by Mr Durlabh Patel to enter into the hire-purchase agreement. This faces Mr Hudson with a dilemma: either the contract created by that acceptance was a contract with Mr Durlabh Patel or there was no consensus ad idem, the Rogue having no honest belief or contractual intent whatsoever and the finance company believing that it was accepting an offer by Mr Durlabh Patel. On neither alternative was there a hire-purchase agreement with the Rogue.
It is as well to digress at this stage to consider the chain of contracts or alleged contracts relied upon by Mr Hudson. First, Mr Hudson relies upon a contract of sale he made with the Rogue when he agreed to buy the motor car from the Rogue. He says he got a good title to it from the Rogue under this contract notwithstanding that R had no title. In support of this statute-based contention he argues that there was another contract which he has to say was a contract of hire-purchase between the Rogue and the finance company, the supposed contract contained in the written hire-purchase agreement. There is no dispute that the finance company had bought the motor car from the dealer and was or had become the owner of the car at the time when the finance company signed the document and thereby accepted the offer (if any) in the written hire-purchase document. (That contract of purchase was never put in evidence.) The title to the car was in the finance company. The hirer/debtor under the ‘agreement’ was Mr Durlabh Patel not the Rogue. The Rogue only comes into the picture because he was the unidentified individual who came into the dealer’s office and caused the dealer to sell the motor car to the finance company and the dealer, thereafter, to deliver it to him although he was not in fact Mr Durlabh Patel. (He, of course, came into the story again later as the person who purported to sell the car to Mr Hudson.) The dealer (as his witness signature testifies) apparently believed the Rogue when the Rogue said his name was Mr Patel and negotiated with him, face to face, the price at which the dealer would be willing to sell the car. That negotiation enabled the dealer to fill in the appropriate finance details which the ‘customer’ should ask for. But the Rogue never had any face to face dealings with the finance company; he dealt with it solely by submitting a written document containing an offer and acceptance clause. There is no room for the application of the ‘face to face’ principle between the Rogue and the finance company. Nor was the dealer the agent of the finance company to enter into any contract on behalf of the finance company. The dealer is a mere facilitator serving primarily his own interests. If there could have been any doubt or room for argument about this point, it is put beyond argument or doubt by the terms of the offer and acceptance clause in the governing document. R and the dealer are not two individuals conducting negotiations in which all the terms necessary to constitute a binding contract are agreed.
As regards the delivery of the motor car by the dealer to the Rogue, it is not in dispute that, in making that delivery, the dealer was acting as the agent of the finance company. But he was acting without authority. The dealer’s authority was to deliver the car to Mr Durlabh Patel, not to anyone else. That delivery did not create any bailment of the car by the finance company to the Rogue. The Rogue was a thief. Albeit by an elaborate but effective course of action, he stole the car from the possession of the dealer just as surely as if he was a thief stealing it from the forecourt. The dealer may have acted under an innocent mistake induced by the fraud the Rogue had practised on him; but it will, nevertheless, have been a tortious disposal of the motor car by the dealer. But the matter does not stop there. It would not be a delivery “under a hire-purchase agreement”. This follows from the fact that there was no hire-purchase agreement (or any agreement or contract) between the finance company and the Rogue. It further follows from the fact that the only ‘debtor’ under the supposed agreement was Mr Durlabh Patel. It was never the Rogue and neither the finance company nor the Rogue ever intended that it should be.
The final point was the fact that the purported customer’s signature was not in truth that of Mr Durlabh Patel. The supposed hire-purchase agreement therefore from the outset lacked an essential ingredient and within the terms of the document was never an offer eligible for acceptance. A forged signature is neither the signature of the purported signatory nor of the forger. There may be an exception where the ‘forger’ had the authority of the actual party to sign on his behalf and in his name, in which case it probably would not be a forgery unless there was some dishonest intent to deceive. The same applies to using a ‘mere pseudonym’ or a trading name. But that is not this case.
It follows that the appeal must be dismissed and the majority judgment of the Court of Appeal affirmed.
But, before I leave this case, I should shortly summarise why the argument of the appellant’s counsel was so mistaken. The first reason was that they approached the question as if it was simply a matter of sorting out the common law authorities relating to the sale of goods. They did not treat it as a matter of applying a statutory exception to the basic common law rule, nemo dat quod non habet. Further, they did not analyse the structure of the overall transaction and the consumer credit agreement within it. Accordingly, they misrepresented the role of the dealer, wrongly treating him as the contracting agent of the finance company which he was not. They never analysed the terms of the written document and had no regard at all to the offer and acceptance clause it contained which, if there was any contract between a ‘debtor’ and the finance company, governed their relationship and which expressly set out the only way in which such a contract could come into existence. They made submissions which contradicted the express written contract and were therefore contrary to principle and long established English mercantile law. They submitted that Cundy v Lindsay (1878) 3 App Cas 459 was wrongly decided and should be overruled, substituting for it a general rule which, in disregard of the document or documents which constitute the agreement (if any), makes everything depend upon a factual enquiry into extraneous facts not known to both of the parties thus depriving documentary contracts of their certainty. They sought to convert a direct documentary contract with the finance company into a face to face oral contract made through the dealer as the contracting agent of the finance company, notwithstanding that the dealer was never such an agent of the finance company. Finally they sought, having by-passed the written contract, to rely upon authorities on oral contracts for the sale of goods, made face to face and where the title to the goods had passed to the ‘buyer’, notwithstanding that this was a documentary consumer credit transaction not a sale and, on any view, no title had ever passed to R. In the result they have invited a review of those authorities by reference to the particular facts of each of them. They have sought to draw your Lordships into a discussion of the evidential tools, eg rebuttable presumptions of fact and the so-called face-to-face ‘principle’, used by judges in those cases to assist them in making factual decisions (see also the dictum of Gresson P in Fawcett v Star Car Sales [1960] NZLR at 413), notwithstanding that the present case concerns the construction of a written contract. They forget that the, presently relevant, fundamental principles of law to be applied – consensus ad idem, the correspondence of the contractual offer and the contractual acceptance, the legal significance of the use of a written contract – are clear and are not in dispute. Inevitably over the course of time there have been decisions on the facts of individual ‘mistaken identity’ cases which seem now to be inconsistent; the further learned, but ultimately unproductive, discussion of them will warm academic hearts. But what matters is the principles of law. They are clear and sound and need no revision. To cast doubt upon them can only be a disservice to English law. Similarly, to attempt to use this appeal to advocate, on the basis of continental legal systems which are open to cogent criticism, the abandonment of the soundly based nemo dat quod non habet rule (statutorily adopted) would be not only improper but even more damaging.
Eide UK Ltd & Anor v Lowndes Lambert Group Ltd & Anor
[1997] EWCA Civ 3005 [1998] 1 All ER 946, [1997] EWCA Civ 3005
Phillips LJ
The Issue
Section 53 of the Marine Insurance Act 1906 provides:
(1) Unless otherwise agreed, where a marine policy is effected on behalf of the assured by a broker, the broker is directly responsible to the insurer for the premium, and the insurer is directly responsible to the assured for the amount which may be payable in respect of losses, or in respect of returnable premium.
(2) Unless otherwise agreed, the broker has, as against the assured, a lien upon the policy for the amount of the premium and his charges in respect of effecting the policy; and, where he has dealt with the person who employs him as a principal, he has also a lien on the policy in respect of any balance on any insurance account which may be due to him from such person, unless when the debt was incurred he had reason to believe that such person was only an agent.
The Brokers contend that these provisions have the following effect:
1) The Brokers enjoyed a general lien over the Policies in respect of the balance owed to them by Colne Standby on the insurance account.
2) That lien carried with it the right to apply the entirety of the claims proceeds received by the Brokers in reduction of that account.
The Bank joins issue with both contentions.
The issue is thus whether Section 53(2) gave the Brokers a right to retain the claims proceeds in part satisfaction of Colne Standby’s liabilities under their insurance account.
The Judgment
The Judge held that the lien granted by Section 53(2) was a lien on the policy itself and no more. Any right enjoyed by a Broker to use claims proceeds collected under the policy to discharge the liability of an assured, or an agent acting for an assured, arose by virtue of general principles of set-off and not under the Statute. Finally the Judge held that Section 53(2) did not, in any event, permit a Broker to assert a lien against one co-assured in respect of the liability of another co-assured.
The parties had agreed that the result of the action should turn on the determination of the issue in the O.14A proceedings. Accordingly the Judge gave judgment in favour of the Bank for £269,702.58 plus interest. It is against that Order that the Brokers appeal.
The approach to the interpretation of Section 53(2)
The Judge held that the appropriate approach was to give effect to what he considered to be the clear meaning of the sub-section without consideration of case law on the subject before 1906, referring to the well known statement of Lord Herschell in Bank of England v.Vagliano Brothers [1891] AC 107, as cited by Roskill L.J. in the context of the 1906 Act in “The Eurysthenes” [1977] QB 49 at p.75. While I agree that the starting point must be to consider the natural meaning of the language used in the sub-section I believe that one must consider the existing case law when considering its effect, for the following reasons. As Mr Gilman, Q.C., for the Bank pointed out, the 1906 Act does not purport to be a comprehensive code, but expressly preserves, by Section 91(2) the rules of common law, including the law merchant, insofar as consistent with the Act. Furthermore, Section 87(1) recognises that usage may vary what would otherwise be an implication of law and, as Arnould 16th Ed. points out at paragraph 162, the rules contained in Section 53 are derived from mercantile usage.
The “lien on the policy”
As I shall demonstrate shortly, a number of authorities indicate that a Broker who has a lien over the policy has a commensurate right to retain claims proceeds collected under the policy insofar as necessary to satisfy the debt secured by the lien. In these circumstances it may be that it is a pointless exercise in semantics to argue about whether any right in relation to the proceeds is implicitly conferred by Section 53(2), or whether it arises as a result of some independent rule of law based on mercantile usage when a lien exists under Section 53(2). Having said that, I do not find it acceptable to suppose that the draftsman of the 1906 Act intended, by the simple phrase “lien on the policy” to do more than describe an equally simple and well established type of security, namely the right to retain possession of physical property until a debt has been discharged. True it is that the word “lien”, which is used to describe this right which exists in law, is also used to describe other types of security interest which do not necessarily depend upon possession and which can be exercised over a chose in action. It does not seem to me, however, that the phrase “lien on the policy” can properly be treated as shorthand to embrace both a physical possessory lien on a policy and a right to annexe or set-off the proceeds collected under the policy in discharge of a debt owed to the holder of the policy.
Mr Gilman suggested that such a conclusion would be fatal to the Brokers, in that they had, when agreeing to the issues under O.14A, limited those issues to the effect of Section 53(2) of the 1906 Act and further agreed that the result of the action should turn on the O.14A proceedings. I do not agree. If, on whatever legal basis, the enjoyment of a possessory lien on a policy places the broker in a position to look to the proceeds recovered under the policy in order to discharge a debt owed to him, the Brokers in the present case ought, if they had the general lien which they assert, to be entitled to have recognised their right to set-off the proceeds recovered against Colne Standby’s debt. I propose, then, to consider first the efficacy of the possessory lien over the policy itself, then the nature of the right that the Broker enjoys in relation to the claims proceeds under the policy and, finally, the question of whether, or to what extent, these rights apply in a case, such as the present, of composite insurance.
The efficacy of the possessory lien over the policy
A possessory lien over the policy plainly has little value if the assured is able to recover directly from the Underwriter without production of the policy. Before 1906 I do not believe that this would have been considered possible – hence a number of cases where the assured brought suit in trover against the Broker to recover the policy. The position was covered in the 1906 Act by Section 22, which provides:
“Subject to the provisions of any statute, a contract of marine insurance is inadmissible in evidence unless it is embodied in a marine policy in accordance with this Act.”
The significance of this provision lay in other provisions of the Act which required the policy to be stamped – provisions repealed by the Finance Act 1959. These replaced earlier statutory provisions to like effect, see Ionides v. Pacific Fire and Marine Ins. Co. (1871) LR 6 QB 674 at 684-5. The Court would normally be expected to insist upon the production of a policy where a claim was made under it. Quite apart from this it was generally considered that the Underwriter could not be required to pay under a policy unless the policy was produced. Thus, in 1906, the possessory lien appeared a highly effective security, for it prevented the assured from recovering under a policy until a lien secured by the policy was discharged. However, in Swan v. Maritime Insurance Co. [1907] 1 KB 116, Channel J. dismissed a defence plea that Underwriters were not liable because the plaintiff, an assignee, was unable to produce the policy. This decision, coupled with the subsequent abolition of the stamping requirement, has had the effect of reducing the value of the possessory lien on the policy, although production of the policy is sometimes a contractual condition precedent to Underwriters’ liability.
In Hunter v. Leathley (1830) Lloyd and Welsby 125; 10 B.& Cr.
858 Lord Tenterden upheld a subpoena requiring a broker to produce a policy but made it plain that the Court would not permit the plaintiffs to recover payment under the policy without discharging the broker’s lien. Arnould, paragraph 200, suggests that where an assured attempts to defeat a broker’s lien by suing without production of the policy, the appropriate course is for the broker to intervene under O.15 r.6 RSC or commence his own proceedings, but the nature of the interest that the broker would assert in such circumstances has never been clarified by the courts. At all events I suspect that the observation of Diplock J. in Amalgamated General Finance Co. v. Golding [1964] 2 Lloyd’s Rep. 162 at p.170 that a broker can put difficulties in the way of a claimant who tries to circumvent a broker’s lien by recovering without production of the policy remains true.
The broker’s right in relation to the claims proceeds
Arnould at paragraph 200 states:
“Although it has been doubted whether a lien on a policy gives a lien on the proceeds collected under it, where the broker is authorised to collect losses or returns of premiums his right to retain the sum for which he has a lien out of monies received by him under the policy has been expressly recognised and seems clearly established.”
The doubt in question was expressed by Scrutton L.J. in Fairfield Shipping Co. v. Gardner, Mountain & Co. (1911) 104 L.T. 288. Despite that doubt, I consider that the conclusion expressed by the Editors of Arnould was well justified. As early as 1802, in Man v. Shiffner & Ellis (1802) 2 East 523, Lord Ellenborough CJ, when speaking of the position of a mercantile agent, said at p.530:
“as the plaintiff could only have recovered the policy out of the hands of the [agents] by satisfying their lien, so the same lien attached on the proceeds of the policy recovered from the underwriters”.
Twelve years later in Mann v Forrester (1814) 4 Camp. 60 Lord Ellenborough said:
The defendants having had no notice that this policy was not for White and Lubbern [the party who employed them], they had a lien upon it for their general balance. They must be supposed to have made advances on the credit of the policy, which was allowed to remain in their hands. Therefore, they had a right to satisfy their general balance from the money received under the policy, whether before or after the notice communicated to them of the plaintiff’s interest.
The following year, Gibbs CJ in Westwood v. Bell (1815) 4 Camp. 349 at 352-3 said:
I hold that if a policy of insurance is effected by a broker, in ignorance that it does not belong to the persons by whom he is employed, he has a lien upon it for the amount of the balance which they owe him. In this case Clarkson has misconducted himself, and is liable for not disclosing that he was a mere agent in the transaction; but the defendants, who had every reason to believe that he was the principal, are entitled to hold the policy. If goods are sold by a factor in his own name, the purchaser has a right to set-off a debt due to him, in an action by the principal for the price of the goods. The factor may be liable to his employer for holding himself out as the principal; but that is not to prejudice the purchaser who bona fide dealt with him as the owner of the goods, and gave him credit in that capacity. The lien of the policy-broker rests on the same foundation. The only question is, whether he knew or had reason to believe that the person by whom he was employed was only an agent; and the party who seeks to deprive him of his lien must make out the affirmative.
It is, I suspect, no coincidence that the wording of Section 53(2) echoes that of this passage as Westwood v. Bell was cited by the First Edition of Chalmers, edited by the draftsman of the Act, as an example of the rule set out in the sub-section.
Cahill v. Dawson (1857) 3 CBNS 106 was a case in which it was treated as axiomatic that a Broker had a lien over the proceeds of a policy of insurance in respect of the monies due on account from the agent who had placed the insurance, unless at the time that the indebtedness was incurred, the Broker was aware that the person placing the insurance was acting “merely as agent” for the assured.
Montagu v. Forward [1893] 2 QBD 350 was a case which involved no lien on the policy. By a chain of agents the assured instructed Lloyd’s Brokers to collect on a policy. These Brokers were unaware that the agents from whom they received their instructions were acting other than as principals. It was held that, in these circumstances, the brokers were entitled to set off the proceeds that they had collected to discharge the agents’ indebtedness to them. Bowen L.J. stated the governing principal thus at p.355:
The case is, in my judgment, governed by the principle of the decision in George v. Clagett , by the rules of common sense and justice, and I think also by the law of estoppel. The principle is not confined to the sale of goods. If A. employs B. as his agent to make any contract for him, or to receive money for him, and B. makes a contract with C., or employs C. as his agent, if B. is a person who would be reasonably supposed to be acting as a principal, and is not known or suspected by C. to be acting as an agent for any one, A. cannot make a demand against C. without the latter being entitled to stand in the same position as if B. had in fact been a principal. If A. has allowed his agent B. to appear in the character of a principal he must take the consequences.
This case is to be contrasted with Maspons Y Hermano v. Mildred (1882) 9 QBD 530; (1883) 8 AC 874. In that case merchants had placed insurance on instructions from an intermediary of the assured. After a casualty, the merchants collected on the policies, but sought to set off the proceeds against the indebtedness of the intermediary on account. It was common ground that the merchants were aware of the fact that the intermediary had acted as an agent when they collected under the policies, but they contended that they were ignorant of this and had thus acquired a lien over the policies when the insurance was placed, which they were entitled to transfer to the proceeds, notwithstanding their supervening knowledge of the agency. This plea failed, not because it was unsound in law, but because the Brokers were held to have been aware of the agency at the time that the policies were issued.
The importance of the lien on the policy is, thus, that it enables the Broker to maintain a set-off in respect of a receipt of claims proceeds notwithstanding that he has acquired knowledge of the existence of a previously undisclosed assured prior to the receipt, provided that he had no such knowledge when the lien on the policy arose. This demonstrates the fallacy in Mr Gilman’s argument that the right of set-off in relation to proceeds is simply a feature of the law of agency and has no connection with the broker’s lien on the policy. If the broker retains possession of the policy, discovery of the existence of a previously undisclosed principal will not defeat the accrued security
of the lien on the policy, or the commensurate right to set-off where a collection is made under the policy. If, however, the broker parts with possession of the policy and then discovers the existence of the undisclosed principal, he will have no continuing security, even if he recovers possession of the policy – see Near East Relief v. King, Chasseur & Co. [1930] 2 KB 30 at p.44.
Arnould’s view that a lien on the policy carries with it a right to retain the claims proceeds collected under the policy is supported by other 19th century text books of distinction. Thus: Park “A System on the Law of Marine Insurances” 1802 states at p.403 footnote (b):
As the brokers transact the chief part of the business, and generally pay the premiums, the law has given them a lien upon the policies in their hands, so as to enable them to deduct out of any monies they may receive for the assured, not only the premium and commission due on the particular policies, but the general balance due to them on the account between them and their principals.
Phillips on Marine Insurance 2nd ed. 1840 at page 575 states:
In respect to the assured, the broker also has a lien on the policies in his hands for a general balance. A broker effected two policies and paid the premium on both. A loss took place on one of them. It was held that he had a lien for both premiums [Leeds v. Mercantile Ins. Co. 6 Wheat 565.]
Where the policy remains in the hands of the [broker] he has in general a lien and a right to receive and retain payments of losses to the amount of his general balance against the assured.
Duer on Marine Insurance 1846 expresses it thus at page 288:
The lien of the agent is not to be regarded merely as a right to retain the possession of the policy until his claims, constituting his lien, are satisfied. The obligation of the lien attaches equally on all moneys received by him under the policy; or, to speak more correctly, he has an immediate right to apply such moneys, so far as may be necessary, to the satisfaction of his debt.
While this passage relates to the position of a mercantile agent, other passages make it clear that the same principle applies to an insurance broker – see pages 281, 285.
Story, Commentaries on the Law of Agency 1869, states as follows at paragraph 379:
In relation to insurance brokers. This class of agents, also, have now, by general usage, a lien upon the policies of insurance in their hands, procured by them for their principals, as also upon the moneys received by them upon such policies, not only for the amount of their commissions and the premiums for the particular policies, but also for the balance of their general insurance account with their employers. But the lien does not extend to cover any balance due upon business foreign to that of effecting policies of insurance, as the usage does not extend to such a claim; although, in many cases, it may be made available by way of set-off, and, in cases of bankruptcy, by way of mutual debt and mutual credit.
For these reasons I consider that the Judge erred in failing to recognise that a broker who has a lien over a policy of marine insurance is normally entitled, when he collects under the policy, to apply the proceeds collected in discharge of the debt that was protected by the lien. The precise basis of this right does not appear clearly from the authorities, but one can well understand that it should have become established as a matter of mercantile usage, for it is a natural adjunct of the lien on the policy. It was a normal part of the duty of a broker who remained in possession of the policy to collect the insurance proceeds and that duty would have been anomalous indeed if the act of collecting under the policy had destroyed the security afforded by the lien.
It is, of course, always possible for a broker to agree that he will not assert any claim over proceeds collected for an assured, and we were told by Mr Gaisman, Q.C., for the Brokers that such an undertaking is often sought by and given to a mortgagee. It is accepted by the Bank that it is not open to it to argue that the authority that it gave to the Brokers to collect the claim proceeds in the present case was subject to any such agreement. In these circumstances, I would hold that, if and insofar as the Brokers enjoyed a lien over the Policy as security for Colne Standby’s indebtedness, they enjoyed a commensurate right to retain the proceeds that they collected in diminution of the indebtedness protected by that lien. This leads me to what I consider to be the most difficult issue raised by this appeal.
Does the general lien conferred by Section 53(2) apply in the case of composite insurance
Where one of a number of persons who are individually interested in the subject matter of a marine adventure takes out insurance for the benefit of all, so that each has a right to sue in respect of his own interest, the insurance is known as composite insurance. The extent of the independence of the right of each assured to claim in respect of his own interest was recognised in Samuel v, Dumas [1924] A.C.431. Policies of composite insurance existed before the 1906 Act and were recognised by the Act. Thus S.8 provides that a partial interest of any kind is insurable, and S.14 provides:
(1) Where the subject-matter insured is mortgaged, the mortgagor has an insurable interest in the full value thereof, and the mortgagee has an insurable interest in respect of any sum due or to become due under the mortgage.
(2) A mortgagee, consignee, or other person having an interest in the subject-matter insured may insure on behalf and for the benefit of other persons interested as well as for his own benefit.
(3) The owner of insurable property has an insurable interest in respect of the full value thereof, notwithstanding that some third person may have agreed, or be liable, to indemnify him in case of loss.
A common form of composite insurance must have been a single policy taken out by a managing owner on a vessel owned in shares by a number of individuals. Under S.5 of the Merchant Shipping Act 1894 a ship is divided into 64 shares and part owners can have separate interests in a ship. Where the managing owner insures on behalf of all, all may be jointly liable for the premiums – see Robinson v. Gleadow (1835) 2 Bing N.C. 156 – but the insurance is nonetheless a composite insurance.
With one possible exception, none of the authorities deal directly with the nature of the lien enjoyed by a broker where one of a number of persons interested in a marine adventure insures both on his own behalf and on behalf of the other persons interested. That is the position in the present case.
Mr Gaisman submitted that the language of Section 53(2) makes the position clear and the fact that the situation with which we are concerned may have been without case precedent when the Act was passed is nothing to the point. In the present case, Colne Standby was the person with whom the Brokers “dealt” and who employed the Brokers when the insurance was placed. The Brokers dealt with Colne Standby “as a principal” – indeed Colne Standby was the principal party assured under the policy. At no time did the Brokers have “reason to believe that [Colne Stanby] was only an agent”.
Mr Gilman submitted that the draftsman was addressing only the position where there is a single assured and a single employer. The Act simply fails to deal with the position of composite insurance. It is a general principle of law that where a composite insurance is taken out, the acts or omissions of one co-assured do not prejudice the position of the other co-assureds, who are treated as if they have independent policies. Precisely the same position should be adopted in the present case, so that the Bank cannot be prejudiced by the fact that Colne Standby has defaulted on its debts.
I do not find it satisfactory to have to resolve this issue without evidence of market practice. Story on Agency, 6th Edition, commented at p.433:
“…it is clear that all general liens have their origin in the positive or implied agreement of the parties. Some of them, however, have now, by the general usage of trade, become so fixed and invariable that no proof whatsoever is required to establish their existence.”
The absence of any decided case dealing with the point suggests that both before and after 1906 it has been taken for granted either that a general lien does arise in a case of composite insurance where the “employer” who places the insurance does so both on his own behalf and on behalf of co-assureds, or that it does not. We must, however, decide the point without evidence of usage. On that basis, my conclusions are as follows.
1. Section 53(2) does not apply to composite insurance. “where he has dealt with the person who employs him as a principal” is not appropriate language to describe dealings between a broker and an employer who places insurance both on his own behalf and on behalf of other interests. The latter part of the sub-section suggests to me that the draftsman was indeed, as Mr Gilman submitted, addressing only the simple position of one employer and one assured.
2. It is a general principle of the law of agency that no-one can create a lien beyond his own interest – see Bowstead & Reynolds 16th Edition at paragraph 7-087.
3. This principle was recognised in the context of marine insurance in the case of Maspons v. Mildred to which I have already referred. That case involved (1) foreign merchants, who were the plaintiffs, (2) shipping agents, bankers and importers called Demestre, who gave instructions to effect insurance of a cargo owned by the plaintiffs and (3) London merchants, to whom those instructions were given and to whom the cargo was consigned, who were the defendants. One of the questions asked of the jury was “on whose behalf and for whose benefit were the insurances effected?” The jury answered “for all parties whom it might concern”. In the Court of Appeal Lindley L.J. remarked:
“The jury were, in our opinion, quite right in finding that the defendants effected the insurances for the benefit of all concerned – i.e., as it turns out, for the benefit of the plaintiffs and of Demestre & Co. and of the defendants, according to their respective interests in the cargo. The plaintiffs being the owners of the cargo, the insurance was, consequently, for the[ir] benefit, subject to the liens, if any, of Demestre & Co. and of the defendants, according to their respective interests in the cargo.”
On those facts, the defendants’ attempt to demonstrate that they enjoyed a general lien on the policy in respect of Demestre’s liability on their account with the defendants was unsuccessful.
In the House of Lords Lord Blackburn held that the position was governed by the provisions of the Factors Act 1825 which provided that a consignee could have no lien over goods shipped in the name of a consignor if the consignee had notice that the consignor was not the actual and bona fide owner of such goods. As to this, Lord Blackburn said at pp. 885-6:
It is not necessary that there should be notice of the name of the person who has an interest, but only that there is a person having such an interest, or, as in the Spanish letter he is called, an interesado; that is enough to give the consignee notice that the consignor “is not the actual and bona fide owner of such goods”, or rather of the whole interest in such goods. But so far as the consignor has an interest by way of lien or otherwise paramount to that of the interesado he is the actual owner, and the consignee has his lien.
It seems to me that this was, on analysis, a case of composite insurance. No general lien could be asserted by the Defendants in respect of Demestre’s liability to them, save to the extent that Demestre had an interest in the policy by way of lien that was derived from and superior to the plaintiffs’ title.
4. A case such as Maspons v. Mildred differs from one such as the present where a policy covers, not merely different interests in the same property, but a fleet of vessels where different interests may exist in each vessel. Nor is it appropriate to apply the Factors’ Act in the present case, even by analogy. I am, however, in no doubt that the suggestion that an assured who places cover expressly both on his own behalf and on behalf of other interests, thereby subjects his co-assureds to the burden of a general lien in respect of his indebtedness to the brokers under a running insurance account is contrary to principle and unsupported by any authority.
For these reasons I have concluded that Section 53(2) of the 1906 Act did not confer a general lien over the Policies in favour of the Brokers in the present case, and thus that they derived no right to retain the proceeds collected on behalf of the Bank under those policies in diminution of the debts owed to them in respect of other insurance business placed by Colne Standby.
I would conclude with this general observation. Where, as is usual, a broker collects under the policy which he procured for the assured, the broker will normally have a right to set-off the monies received for a particular assured against any indebtedness of that assured. To this extent, if either market practice or contractual agreement places the broker in a position to insist on collecting under a policy, the broker will enjoy a degree of security. This case demonstrates, however, that in a case of composite insurance such security falls short of that which would be provided by a general lien over policy and proceeds.
For these reasons, I would dismiss this appeal.
LORD JUSTICE WALLER:
I agree.
LORD JUSTICE CHADWICK:
I also agree.
Metall Market OOO v Vitorio Shipping Company Ltd & Anor
[2013] EWCA Civ 650 [2014] 1 QB 760, [2013] EWCA Civ 650, [2014] 2 WLR 979, [2013] 2 Lloyd’s Rep 541, [2014] QB 760, [2013] WLR(D) 221, [2013] 1 CLC 979, [2013] 2 All ER (Comm) 585
Rix LJ
The shipping jurisprudence
The earliest case cited is Black v. Rose (1864) 2 Moore NS 277 (PC), an appeal in the Privy Council from the Supreme Court of Ceylon. A charter provided for discharge of the cargo “free of risk and expense to the ship”. There were also provisions for demurrage. A dispute as to the payment of freight led to the master exercising a lien during discharge. The claimant charterer disputed the lien, the shipowner cross-claimed for demurrage. The shipowner succeeded on both counts. The Supreme Court said: “As we hold that the Merchant’s refusal to pay freight on delivery was wrongful, we must hold that his omission to unload and receive the cargo on the proper terms was wrongful also, and that the part of the judgment which fixes him with demurrage is correct” (at 286). The Privy Council affirmed without calling on the respondent (at 288). It seemed as natural to the courts as it could be that a party who was responsible for discharging promptly subject to a lien for freight could not complain about having to pay for the time lost through exercise of the lien: for the fault, the breach of contract, was on the side of the charterer. Mr Karia says that this turns entirely on the fact that the breach of contract sounded in demurrage, rather than damages under some other name: but there is no sign whatsoever that this is the rationale of the decision. The case came to the Privy Council only a few years after the decisions in Somes, which does not appear to have been considered at all.
Ford v. Cotesworth (1868) LR 4 QB 127 is in our bundles, because it is the famous case which affirms that there is no magic in a laytime code or in the term “demurrage”. If the contract is silent as to the time to be occupied in discharge, the term to be implied, as normal, is that discharge has to be done “within a reasonable time under the circumstances” (at 133). For breach of such a term, damages are payable.
The Merchant Shipping Act 1862 remedied one of the defects of a lien for freight, which was that if possession was lost on discharge into a warehouse, then the lien was lost. The MSA 1862 permitted discharge into statutory warehouses under a retained lien for freight. What however was to happen abroad? Mors-le-Blanch v. Wilson (1873) LR 8 CP 227 decided that, at any rate if the master maintained the shipowner’s exclusive control, the lien could be retained. Broader questions were left for another day. One can see the problem in the course of being worked out. There was a claim in that case by the shipowner for damages for detention “there being no stipulation for demurrage” (at 230). The consignee had both refused the cargo and failed to pay freight. The damages claim was upheld in principle (subject to the verdict of the jury). One of the questions for the jury to consider was “whether under the circumstances of the case he had acted unreasonably in keeping the goods on board for the time he did” (at 240). So that was a case where a lien was exercised and yet the shipowner was entitled in principle to damages for detention.
In Gaudet v. Brown (Cargo ex “Argos”) (1873) LR 5 PC 134 the authorities at Le Havre prevented the discharge of a cargo of petroleum. The shipowner found no nearer port where he could discharge the cargo and so took it back again to London. He was held entitled to his freight, backfreight and expenses, because the consignee was under a duty to discharge the cargo and the shipowner was under a duty to take care of the cargo in the circumstances which had arisen and he had acted reasonably. He could not throw the cargo into the sea, but he was not required to retain and preserve the cargo at his own expense. That was not a case where a lien was exercised, but the case illustrates the doctrine that a shipowner is entitled to be indemnified in contract and/or bailment for the reasonable expenses of dealing with a cargo where the consignee is unwilling or, as here, unable to perform his duty of discharging the cargo (at 161, 165).[7]
The Great Northern Railway Company v. Swaffield (1874) LR 9 Ex 132 is not a shipping case but it arises out of a contract of carriage by rail. The defendant sent his horse by rail, but there was no one to meet it at its destination. The railway sent the horse to a livery stable. The next day the stable keeper refused to deliver the horse save on his reasonable charges. The owner refused to pay, and the dispute went from bad to worse, while the horse stayed at the stable. Some months later the railway paid the stable’s charges and sued the owner for them. The court of exchequer found the owner liable for all the charges, applying Cargo ex Argos (at 138). That was a case where the expenses involved in looking after the bailed chattel were recoverable even though the chattel was liened for those charges. Pollock B said:
“Therefore they did what it was their duty to do. Then comes the question, Can they recover any expenses thus incurred against the owner of the horse? As far as I am aware, there is no decided case in English law in which an ordinary carrier of goods by land has been held entitled to recover this sort of charge against the consignee or consignor of goods. But in my opinion he is so entitled. It had long been debated whether a shipowner has such a right, and gradually, partly by custom and partly by opinions of authority in this country, the right has come to be established…That seems to me to be a sound rule of law. That the duty is imposed upon the carrier, I do not think any one has doubted; but if there was that duty without the correlative right, it would be a manifest injustice”
citing Notara v. Henderson (1872) LR 7 QB 225 at 230-235 and Cargo ex Argos. The jurisprudence can be seen developing, and the rationale is justice. The delay was caused by the owner’s unwillingness to take delivery on payment of the expense to which the carriage had given rise. But he was not permitted to take delivery save on such payment. No one seems to have asked if the livery stable’s expense had been contracted for. There were of course no laytime or demurrage provisions. But it was obvious that if something untoward occurred which created an expense, and that expense had been caused by the chattel owner’s failure to take delivery, if necessary by discharging a lien, then under the contract or in bailment the responsibility rested on the chattel owner, not on the carrier.[8]
Strang, Steel & Co v. A Scott & Co (1889) 14 App Cas 601 (PC) is a leading case on the nature of the liability to contribute in general average and the lien which comes with it. It was held that a shipowner has not only a right but also an obligation to collect contributions and to enforce his lien for them from contributors not only for himself but also on behalf of all who share in the adventure (in case any of them may be net payees). It was also explained that the origin of these rights and obligations lay in the ancient civil law of the sea, going back to the Lex Rhodia, or else could be explained as founded in implied contract. In any event, they had become part of the law of England, and had their “foundation in the plainest equity” (at 607-8). In these circumstances, it seems to me improbable that the unsatisfactory limitations of the English common law remedy of the artificer’s lien can throw much light on these matters. And so, as I follow through this shipping jurisprudence, it turns out to be.
Little v. Stevenson & Co [1896] AC 108 is a House of Lords authority which recognises a charterer’s or consignee’s obligation, even where laytime can only begin once a ship is in berth, to do all that he can to enable her to get into berth. Lord Herschell said (at 118 and 119):
“…and the lay days were to count from the time when she was berthed, and notice was given to the charterer. Undoubtedly that would impose by implication upon the charterer the duty of doing any act that was necessary on his part, according to the custom of the port, to enable him to get a berth.”
“I do not for a moment deny that he is bound to do whatever is reasonable on his part, with the view of getting the ship berthed at the earliest period that is reasonably possible…”
Thus, even outside the special case of general average contribution, the case of a charterer or consignee in a typical contract for carriage by sea is quite unlike the case of the artificer’s customer in Somes. There was no recognition in Somes of any obligation on the part of the chattel owner to remove his chattel on the completion of repairs. Whereas the consignee is under an obligation to discharge his goods and by implication under the further obligation, once notice of the ship’s arrival at the port has been given, to facilitate its discharge by doing whatever is reasonably necessary to enable the ship to get to the berth where discharge is to take place, and, it may be in the case of a berth charter, where alone laytime starts running.
In Lyle Shipping Company Limited v. Corporation of Cardiff (1899) 5 Com Cas 87 the ship had earned demurrage while loading at Fremantle, and then sailed to Cardiff. At Cardiff the shipowner claimed the Fremantle demurrage due from the consignee and interrupted discharge in exercise of a lien for demurrage which the contract gave him. Four days were lost before the consignee came to terms. The remaining dispute was as to whether the shipowner had acted reasonably in exercise of his lien and whether he should have discharged the cargo earlier into a statutory warehouse. Bigham J decided those factual questions in favour of the shipowner. He said:
“There was every likelihood of the dispute being settled in a few days, and it would have been unreasonable, under the circumstances, to have landed the cargo and incurred warehouse rent. The plaintiffs are, therefore, entitled to damages for four days’ detention.”
The judge spoke of damages for detention, not demurrage. This was because no separate demurrage was earned by the vessel at Cardiff during the discharging operation, indeed the contract terms at discharging, unlike loading, did not provide for laytime or demurrage, but simply said “Ship to be discharged with all dispatch, as customary, weather permitting” (at 91-94).[9] There was no further reasoning. It was axiomatic that if the shipowner chose (reasonably) to exercise his lien by way of self help, the consignee remained liable to pay damages for his fault in not paying the (loading port) demurrage and thereby detaining the vessel. Somes was not cited, (and the question raised by this appeal is whether it ought to have been). There was an appeal ((1900) 5 Com Cas 397) but not on this point. I might observe that counsel involved in the case were Messrs Walton QC, Rufus Isaacs QC, Bailhache, Carver QC and Scrutton. Homer might perhaps have nodded, but to be accompanied by Aeschylus, Sophocles and Euripides would be unprecedented.
Smailes v. Hans Dessen & Co (1906) 12 Com Cas 117 was a factually more complicated case raising identical issues, where the ship refused to discharge because of an outstanding claim for freight, and the argument was again run by the consignee that the ship should have discharged into a statutory warehouse (now under the Merchant Shipping Act 1894) “to mitigate the damages which were increasing every day the ship was kept waiting to discharge” (at 135). The demurrage provisions did not impose an absolute obligation but merely one to use reasonable care “at the rate customary at each port during customary working hours” (at 119 and 127). Lyle Shipping was cited to, but not by, the court. The conclusion was the same. The consignee, by failing to pay the freight and thus to facilitate the discharge, was a wrongdoer and the sole issue was whether the shipowner had failed to mitigate the damages in the form of demurrage which were being caused by the consignee (see at 137, where Collins MR said: “They are bound to act reasonably. Reasonableness begins at home; a shipowner has a right to look at his own interests before he considers how far he can mitigate damages imposed upon another person. A plaintiff is not bound to jeopardise any of his own rights in the hope of mitigating damages that may be payable by his opponent”). On this occasion counsel were Messrs Horridge KC, Bailhache, Scrutton QC and Roche. Thus the same conclusion was reached whether or not damages for detention or demurrage were in issue.
It was not until Anglo-Polish Steamship Line, Ltd v. Vickers Ltd (1924) 19 Ll L Rep 89, 121 (Bailhache J) that the Somes principle was referred to in this context (albeit it is not named as such in the judgment). But it did not fare well. The case also involved general average and/or salvage, for the ship went aground during her voyage, which was with a cargo of bombs from England to Sweden. The Swedish authorities would not permit the transhipment of the cargo which had been planned. The ship returned to England and discharged her cargo there (but not into a statutory warehouse). The consignees had refused to give a general average bond, and the shipowner exercised its lien. There was a claim for demurrage, backfreight and for the costs of storage. The claim for demurrage was rejected, on the ground that the delay was due as much to the shipowner’s failure to provide a salvage bond (requested by the salvors) as to the consignee’s fault (at 123). The claim for backfreight was allowed (“there was nothing in the wide world for the master to do with these goods on board but to bring them to some place where he could put them ashore”, at 124). That left the claim for the expenses of maintaining the lien (at 125).
Bailhache J said:
“It was argued first of all that none of those expenses at Nobel’s could be charged because they were expenses of maintaining the lien; and no doubt these goods were landed at Nobel’s for the double purpose: (1) because they must be got out of the ship; and (2) they were held there subject to plaintiffs’ lien. And it was said that the general law is that when a man is claiming a lien and holding goods because he has a lien upon them, he cannot charge the cost of holding these goods in order to maintain his lien. No doubt there is authority to that effect. My own view is that the general rule of law is rather more the other way round, and that what is stated as a general rule is rather the exception. As I understand it, if the goods were held in a place for the hire of which under the contract between the parties payment would have to be made, as for instance in a ship or warehouse, then the person who is exercising the lien is entitled to claim payment for the detention of his ship if he holds the goods in the ship or, if less expensive, he clears them out of the ship and puts them into a warehouse and in my opinion the expenses of keeping them in the warehouse. That was done in this case. The goods were reasonably put on this ground of Messrs Nobel’s; and in my opinion the consignees are liable for these expenses notwithstanding that the object of putting them on Nobel’s land was the two-fold one of getting them out of the ship and maintaining the lien.”
It seems to me that that case is a direct authority in support of the arbitrators’ award, although not of course binding on this court. It is not mentioned in the judge’s judgment, because it seems it was not cited to him. Mr Karia submits that either it is distinguishable or that it is per incuriam. It seems to me to be neither. Mr Karia distinguishes it, first, on the basis that the consignees were not seeking delivery back in England, they wanted delivery in Sweden. That is nothing to the point: they wanted their cargo delivered to them (even if in Sweden, but I am not sure what the position was back in England); and in any event the Somes principle is concerned with the lienee’s rights, not the lienor’s. It cannot be said that a lien was not exercised in Anglo-Polish. Mr Karia next seeks to distinguish Anglo-Polish on the ground that the case turned on provisions for demurrage. However, the judge held that no demurrage was payable, therefore the expenses of storage were not analysed as mitigation for demurrage. It is not a demurrage case. What Bailhache J said, I think correctly when what Lord Campbell said in Somes about contrasting the artificer’s lien with the wharfinger’s lien is considered, is that (at any rate in contract of carriage or warehousing cases) the essence of the contract is that the bailor is paying for the carrier’s or the warehouse owner’s carriage and/or storage time: and see also in this respect Vacha v. Gilbert. Furthermore, the cases I have cited above indicate that no difference of principle appears to arise in demurrage cases or damages for detention cases respectively. As for Bailhache J having decided the case per incuriam, that is plainly wrong. Bailhache J clearly had Somes in mind. Mr Karia has to say that Anglo-Polish is wrong. That proposition is in issue in this appeal.
I cite The Prins Knud [1942] AC 667 (PC) only for the famous observation by Lord Wright about general average (at 689-690):
“Their Lordships, in coming to this conclusion, may well quote the language of that great judge, Story J., in United States v. Wilder (1838) 3 Sumn. 308). That was a case of general average. He quoted observations of Lord Stowell in The Waterloo (1820) 2 Dods. 433 on the question of salvage, which Lord Stowell described as “a right otherwise universally allowed, and highly favoured in the law, for the protection of those who are subjected to it; for it is for their benefit that it exists under that favour of the law. It is what the law calls jus liquidissimum, the clearest general right that they who have saved lives and property at sea should be rewarded for such salutary exertions (2 Dods. 435-6).” Story then said of the right to general average (3 Sumn. 318): “If there ever was a case which ought to be settled by a court of justice, upon principles of right and liberality, this is precisely that case. No court of justice ought to decline to enforce it, unless there be clear, definite and uncontrovertible prohibition against the exercise of it.””
The question, or one of the questions, in this case is whether Somes provides that clear, definite and uncontrovertible prohibition against what Ms Blanchard submits, and the arbitrators have found, is the justice to be stated between these parties.
I come then to The Winson [1982] AC 939, on which the judge, Mr Karia and in T Comedy Mr Hirst QC relied. The claim in it was by salvors against cargo for the storage charges for salved wheat from a ship which had gone aground on a reef out at sea on a voyage to Bombay. The wheat was salved by 20 April 1975 and taken 420 miles to Manila and stored there, the shipowner abandoned the voyage on 24 April, cargo accepted the storage charges from 24 April, but refused to pay them for the period up to 24 April. Thus it was not a dispute between a shipowner and cargo, and it was not a dispute about a lien (artificer’s or otherwise), for a lien was never exercised (at 946G). The House of Lords held that cargo was liable for the disputed storage charges, approving and applying Cargo ex Argos and Great Northern Railway Co v. Swaffield. A relationship of bailment was created between cargo and salvors as soon as the cargo was salved on to vessels provided by the salvors, and just as the salvors had a duty to take care of the cargo, so cargo had an obligation to pay for the reasonable costs of the salvors doing so.
That had also been the decision of Lloyd J in the Commercial Court. However, the court of appeal ([1981] QB 403) had decided that before the mutual duties of bailment arose between salvors and cargo, a condition precedent of inability to communicate with the cargo owners had to be fulfilled; but this was held by the House of Lords to be erroneous. In this court Megaw LJ mentioned a further point raised on behalf of cargo which it was unnecessary for him to decide, and this involved reliance on Somes and the more recent case decided by Brandon J, The Katingaki. No such point had been raised before Lloyd J, indeed the exercise of any lien had not been pleaded. It is impossible to tell from Megaw LJ’s judgment what the point was: he simply said: “I do not find it necessary or desirable to express any views upon that issue” (at 425). In the House of Lords the respondent cargo owner raised the point again (see Mr Pollock QC arguendo at 954), but, with respect, the submission is obscure. It involved the propositions, however, that –
“2. As a matter of fact, the exercise of a lien will inevitably involve the lienor [sc the lienee] in the obligation to take proper care of the property liened. 3 Expenditure on the preservation and retention of the property will inevitably have a dual effect: (i) it enables the [lienee] to preserve his possession, to preserve his lien and to fulfil his duties as bailee; it benefits the owner of the goods in the sense that the goods are preserved and looked after rather than being exposed to deterioration or loss”.
It is immediately apparent from these submissions how difficult it is to fit the complexities of a contract of carriage by sea into the Somes simplicity of a straightforward common law artificer’s lien of pure self help uncomplicated by contractual terms or implications. Mr Anthony Clarke QC for the salvors was not required to reply.
As to this, it would seem that Lord Diplock had his own difficulties with the lien point (see at 962B-D, and his “if I have succeeded in following it aright”). Lord Diplock continued:
“My Lords, the extent to which any possessory lien that a salvor would be entitled to exercise at common law is capable of surviving, or is modified by, the provisions of clauses 4 and 5 of the Lloyd’s open form raises difficult and hitherto undecided questions of law into which, in my view, it is not necessary for this House to enter in the instant case – and it would be unwise for your Lordships to attempt to do so. The only reason why the cargo owner upon the failure of its main propositions sought by this subsidiary proposition, to reach some tabula in naufragio juridiciabile was in order to avail itself of the principle which it contended was laid down by this House in Somes v. Directors of British Empire Shipping Co. (1860) 8 H.L.Cas. 338, to the effect that, where a person entitled to a possessory lien over goods incurs expenses in maintaining possession of them in the exercise of his right of lien and preserving in the meantime their value as security for the owner’s indebtedness to him, he cannot recover such expenses from the owner. That case is, in my view, authority for the proposition that, where a lienee remains in possession of goods in the exercise of his right of lien only (i.e., one who has refused a demand by the lienor for redelivery of the goods with which, in the absence of the lien, the lienee would be under a legal obligation to comply), he cannot recover from the lienor loss or expenses incurred by him exclusively for his own benefit in maintaining his security as lienee and from which the lienor derives no benefit as owner of the goods. I would not seek to suggest that this authority has become outdated for the proposition that was then laid down; but I would deny that it is authority for anything more and, in particular, for the further proposition that expenditure necessary for the preservation from deterioration from which the owner does derive benefit is irrecoverable, where such expenditure is made by a bailee at a time before possession of the goods has been demanded of him by the owner and his only right to retain lawful possession of them rests upon his own election to continue in possession, after such demand, in the exercise of the rights of lienee.
However that may be, the short answer to the lien point in the instant case is that on the facts it never arose…”
I would observe that this whole passage, while entitled to the fullest respect as coming from Lord Diplock, is entirely obiter. Moreover, Lord Diplock was expressing a certain scepticism as to the value of the Somes principle and was clearly of the mind that it was a much more limited principle than was being suggested. In particular he was suggesting that it was not to be extended and made it clear that it did not arise unless (a) a right of lien was being exercised against a demand for delivery, (b) the sole reason why the goods remained in the lienee’s possession was the exercise of the right of lien, (c) the expenses incurred by the lienee were exclusively for his own benefit in maintaining the lien, and (d) the lienor derived no benefit as owner of the goods from such expenses. Lord Diplock no doubt highlighted these matters because they were relevant to the facts and arguments before their Lordships. What he was not concerned with, however, were other considerations which might arise, such as those which I have highlighted in discussing Somes and the shipping cases above. It is to be remembered that on the facts of The Winson everything arose out of the misfortune of the ship out at sea, far from the discharge port. The cargo owner had no responsibility for that misfortune and was not suggested to be in breach of any obligation concerned with taking delivery at the discharge port or with delaying the ship or its voyage in any way. The lis was in any event not with the shipowner but with salvors. And as to the contract made between cargo and the salvors, Lord Diplock was cautious to say nothing about how that might affect the Somes principle, but he was very conscious that it might well do so. I do not think it is safe to say other than that Somes stands for some proposition affecting a purely common law lien in the limited circumstances sketched by Lord Diplock, and that that proposition was not in play on the facts of that case, and that the facts of that case are equally distant from the facts of our case.
The Boral Gas [1988] 1 Lloyd’s Rep 342 (Evans J) was another case where Somes was cited but not applied. In that case there was a claim on the last voyage of a consecutive voyage charter in respect of demurrage earned on the earlier voyages, a contractual lien for demurrage was purportedly exercised and discharging was halted for a number of days. However, the shipowner’s claim for demurrage incurred during the exercise of the lien failed, since Evans J held that the charter did not give a lien on one voyage in respect of demurrage on any other voyage, and indeed did not, on its true interpretation, give a contractual lien for demurrage at all. In the circumstances the alternative argument raised on behalf of the charterer in reliance on Somes did not have to be determined. However, on the hypothesis that a contractual lien for demurrage had been granted, the judge rejected the submission, and he did so irrespective of the question, debated before him, of whether, as a matter of laytime jurisprudence itself, the ceasing of discharge for the shipowner’s own purposes stopped the running of laytime. As to that submission, he said (at 349) that –
“These are difficult questions and it would not be right for me to consider them further in this judgment unless they arise for decision in this case. I have reached the clear conclusion that they do not.”
Evans J then continued, giving his reasons why the Somes submission failed irrespective of the difficult issue raised on laytime jurisprudence:
“The charterers’ submission predicates that there has been a refusal by the shipowners to discharge in accordance with the charter-party. The right to exercise a lien is given expressly by the charter-party itself. It can only operate as a qualification of the undertaking to give discharge. By exercising the right, the shipowners in my judgment do not refuse to give discharge in accordance with their undertaking. Rather, they rely, as they are entitled to do when freight or demurrage is due and unpaid, upon the qualification in their favour of what would otherwise be their obligation, which in the circumstances frees them from it. Therefore, in my judgment, the case is not one where the shipowners have refused to perform their undertaking to give discharge, because the obligation itself is qualified, nor where they have done anything equivalent to removing the vessel from the discharging berth.
For these reasons, by reference to Scrutton and the authorities there cited, I hold that demurrage does not cease to accrue merely be reason of the shipowners’ reasonable and lawful exercise of their lien.”
Thus, for yet other reasons, but with the same result, the Somes principle was held to be inapplicable. The “authorities” there referred to by Evans J were Lyle Shipping and Smailes v. Hans Dessen, and the passage from Scrutton citing those cases is set out at 347 of the report of Evans J’s judgment. Although Evans J referred to the (purported) lien as being a contractual lien, his reasoning does not seem to me to depend on whether it is or is not. Whether the lien is given by contract or the common law, any obligation to discharge is qualified by the right to lien. Moreover, although Evans J also referred in that last paragraph to “demurrage”, nothing would seem to depend on any principle of “once on demurrage always on demurrage”, since nothing depended on laytime jurisprudence: and in any event the stoppage appears to have commenced during the laytime and before any demurrage accrued – see at 347 where Evans J says “The underlying question is whether laytime counted and demurrage accrued during the period of the dispute…”.
By the time of The Olib [1991] 2 Lloyd’s Rep 108 Webster J held that it was virtually unarguable that the shipowner was not entitled to recover his expenses where cargo had been discharged ashore in the absence of any valid consignee instructions (at 116).
The World Navigator [1991] 2 Lloyd’s Rep 23 (CA) is concerned with damages for detention. Although the precise formulation of the implied term by which a charterer or consignee is obliged to facilitate the ship to become an arrived ship was not and did not need to be decided, this court affirmed the long standing rule that such an implied obligation existed and that breach of it could lead to damages (although in that case it did not): see headnote (1) and per Parker LJ at 30.
Finally, in ENE Kos 1 Ltd v. Petroleo Brasileiro SA (No 2) [2012] UKSC 17, [2012] 2 WLR 976 the Supreme Court has affirmed and applied the jurisprudence based on Cargo ex Argos and Swaffield which had itself been applied in The Winson, while emphasising that the matter did not depend on a doctrine of agency of necessity but on the principles of bailment. There a time charter was terminated by the shipowner in mid-voyage but in port under the charter’s express termination clause. The charterer subsequently discharged his cargo. The shipowner claimed payment for the time taken in discharging and for bunkers consumed. The commercial judge awarded the claim pursuant to the rights of a non-contractual bailee of goods, and that result was restored by the Supreme Court. However, the Supreme Court also found in favour, albeit only by a majority, of the shipowner’s contractual claim under the time charter’s employment and indemnity clause 13, indeed that was the majority’s primary holding (see at para [18]).
There was no exercise of any lien in that case, but there was of course in Swaffield. In the circumstances, the Somes principle was not directly in issue. However, Lord Sumption paid a glancing reference to a much broader principle at the outset of his discussion of bailment when he said this:
“[18] Strictly speaking, this [the decision on clause 13] makes it unnecessary to address any of the other legal bases put forward by the owners in support of their claim. But I propose to deal with the question whether the owners were also entitled to succeed at common law as non-contractual bailees of the cargo after the withdrawal of the vessel…On the whole, one would expect a coherent system of law to produce a consistent answer under both heads, and in my judgment it does.
[19] Unlike many civil law systems, English law does not allow a general right of recovery for benefits conferred on others or expenses incurred in the course of conferring them. In the pejorative phrase which has become habitual, there is no recovery for benefits “officiously” conferred. In Falcke v Scottish Imperial Insurance Co (1886) 34 Ch D 234, 248 Bowen LJ said:
“The general principle is, beyond all question, that work and labour done or money expended by one man to preserve or benefit the property of another do not according to English law create any lien upon the property saved or benefited, nor, even if standing alone, create any obligation to repay the expenditure. Liabilities are not to be forced upon people behind their backs any more than you can confer a benefit upon a man against his will.”
[20] While this remains the general principle, the exceptions have over the years become more important than the rule. The particular feature of the present case which makes it difficult to apply the general rule is that the original bailment of the cargo occurred under a previous contractual relationship. The bailment was therefore consensual, albeit that after the withdrawal of the MT Kos from the time charter, it was no longer contractual. It is common ground, and clear on the authorities that in these circumstances, the owners had a continuing duty to take reasonable care of the cargo, which they could not escape except by retaining it until arrangements were made to discharge it. But the owners had in no sense officiously put themselves in this position, nor had they (as the charterers put it in argument) “voluntarily assumed” possession of the goods.”
Those remarks of course could apply equally to the present case. and that is so whether or not the contractual adventure in our case is regarded as continuing so as to include the landing of the cargo in Hamina. Moreover, the law of general average makes abundantly clear that the obligation of cargo to contribute to general average expenditure and the shipowner’s right and obligation to exercise his lien to preserve the collection of that contribution are the very antithesis of officious interference or voluntary assumption of possession.
The other observation I would make is that throughout his judgment Lord Sumption emphasises that the shipowner had no reasonable alternative, no practical choice but to remain in possession and take care of the cargo.
Question 2: discussion and decision
After this full consideration of the authorities, I can draw my conclusions together relatively quickly.
In my judgment, the Somes principle is a narrow one, applicable to an artificer’s lien but of doubtful status outside that context. It appears to be founded in the technical doctrine that a right of lien does not carry with it any cause of action to recover an indemnity for the expenses of exercising it in the absence of some other basis for recovery, such as in contract or bailment or tort. It also appears to be founded in a pragmatic concern that an artificer may act purely for his own benefit in retaining the chattel, in circumstances where there is no breach involved on the part of the lienor other than the failure to pay the price of the artificer’s labour, which is the failure which gives rise to the lien, and where there is no benefit to the lienor. It is not clear, for there was no discussion in Somes, why that breach (of non-payment) does not by itself give rise to a claim in damages, where the natural and reasonable consequence is that the chattel is retained to secure performance of the obligation to pay. It may be, but I speculate, it is on the ground that no damages are ordinarily payable for breach of an obligation to pay money. Of particular importance for these purposes, however, is that in the ordinary case of an artificer’s lien contemplated in Somes there is no breach of contract involved in the lienor’s failure to remove his chattel from the artificer at the time due for payment (see Lord Wensleydale’s example of the tailor) and no contemplation let alone contract that the lienee will be inconvenienced or incur expense as a result of the exercise of his lien or that the lienor will be expected to pay accordingly.
Such a doctrine may work more or less satisfactorily in the typical case of an artificer’s lien, but in a highly commercial setting such as ship-building or ship-repairing the Somes case itself illustrates the harshness and uncommerciality of the limitations of the doctrine. Where the lienor cannot pay, the lien is worthless, because it does not bring with it a right of either expenses or sale; and where the lienor will not pay, he can blackmail the lienor with the expense of retention: even though he could choose, if he wished, to obtain the release of his chattel by giving adequate security for the lienee’s claim (and nowadays by a payment into court).
Fortunately, there is no sign that the Somes principle was of wide application. It was subject to any express or implied contract for the payment of the expenses of retention, as the Somes case itself recognised. Such a contract might well have been inferred in Somes itself, and no principled extension of its principle can be found in the circumstance that the inference of a contractual obligation to pay for continued use of the dock did not commend itself to the courts hearing that case. Nevertheless, in a different context, such as that of the wharfinger, Lord Campbell recognised the already existing jurisprudence whereby storage fees would continue during the period of retention: Rex v. Humphery; and see also Vacha v. Gillett and Swaffield. The rationale that the retention is merely the lienee’s option of self-help for his own benefit and is not to be visited on the defaulting lienor could in theory have been applied even in the case of a wharfinger’s lien (by analogy to the unsuccessful submission adopted by the charterer in The Boral Gas), but the common law did not press its doctrine that far: it was sufficient that there was a contractual right which could supplement the jejuneness of the common law remedy. If there was, it was not said that the exercise of the lien was merely for the benefit of the lienee, without fault on the part of the lienor (other than his failure to pay) so that the expense involved in the retention of the chattel by the lienee was to be regarded as being for his own account.
In particular, it seems to me significant that the examples of application of the Somes principle available to our court are few and, with the exception of The Katingaki which more or less reproduced the facts of Somes, not of a commercial nature. It is also to the highest degree significant that despite the enormous care taken by counsel to research the issue, no case applying the Somes principle can be produced in the shipping context of carriage of goods by sea. The closest example is T Comedy, a case of carriage of goods by road, but I have expressed my puzzlement over that decision above. In the shipping context, whether the rationale is the presence of an obligation to receive and discharge the cargo; or the presence of demurrage provisions; or the breach of the obligation not to delay the vessel, even outside laytime and demurrage provisions, where such delay gives rise to damages for detention; or the recognition that a demand for the discharge of cargo is invalid where a prior obligation to pay freight or some other payment for which there is a lien has not been met, so that the consignee cannot be said to be complying with his obligation to receive and discharge the cargo (see The Boral Gas and Voyage Charters at para 10.19); or, where the contract of carriage has come to an end, and the shipowner has had to incur expense to take care of the cargo but still wishes to retain the cargo subject to a lien for the payment of such expenses; for one reason or another, the Somes principle has been kept at a distance.
Thus Swaffield, a case of contract of carriage by rail, has been approved and applied by the House of Lords in The Winson and by the Supreme Court in ENE Kos. It is a case where the owner could not have his horse back without paying the storage expenses incurred by reason of his failure to collect the horse at the right time and/or by reason of his invalid demand to recover the horse without paying the storage expenses being incurred. Lyle Shipping is a case where a lien was claimed and the resulting delay had to be paid for by the consignee as damages for detention. Smailes v. Hans Dessen is an almost identical case, although there the expenses of the delay caused by the exercise of the lien were to be found in an obligation to pay demurrage. Neither case has ever been doubted. Anglo-Polish Steamship is an authority on almost identical facts to our own. The decision in my judgment was neither per incuriam nor wrong. On the contrary it is consonant with the whole of the shipping jurisprudence.
Shipping is performed on the basis that time is money and that a ship is a floating and travelling warehouse for which cargo must pay either in the form of agreed freight or hire, or by way of damages for any breach of contract. If the ship is delayed by the cargo owner’s failure to arrange timely discharge: whether that failure is his breach in facilitating the vessel’s arrival in berth where she may become an arrived ship (and thus start the laytime clock running which may in due course lead to demurrage), or whether he has incurred demurrage under the laytime code; or whether there is no laytime or demurrage code, but merely a general obligation to discharge according to the custom of the port or with customary despatch; or whether he has delayed discharge by refusing to discharge a lien for freight or any other payment for which the ship has a lien and has thereby given invalid instructions to discharge; then the contractual arrangement contemplates that either by the means of the liquidated damages known as demurrage, or by means of general damages for detention, the cargo owner must pay (subject of course to any express exceptions to his liability). That is the commercially just result, and the authorities reflect the search for the just and reasonable result. Thus the exercise of a lien must be reasonable and there must be no failure to mitigate damages, but subject to such commercially sensitive principles, the exercise of a lien is no excuse from contractual liability. Even if the Somes principle were prima facie capable of applying, the contractual context, as contemplated in Somes itself, would take the case out of it. And if the contract comes to an end, as in ENE Kos, then the ship will in any event be entitled to claim the cost of taking care of cargo and to continue to enforce any lien it has.
I would not therefore accept the judge’s distinction between demurrage and damages for detention. The authorities such as Lyle Shipping and Smailes v. Hans Dessen show that the same conclusion is reached in either case. The Boral Gas shows that nothing turns on any particular laytime/demurrage language or jurisprudence. It is rather that the charterer or consignee cannot complain that the shipowner is causing the delay himself when everything starts with the cargo interest providing invalid instructions for discharge. It is more therefore than a mere failure to pay: the failure to pay means that there is no valid instruction to discharge or true willingness to receive the cargo. It is as though the customer who does not pay his tailor is contractually in breach for leaving his finished clothes at his tailor’s. Even if, therefore, it were permitted to go beyond the consignee’s concession to the arbitrators concerning the incurring of demurrage at St Petersburg, which in my view it is not, the arbitrators were right to say that the unreasonable intransigence of the consignee gave rise to a liability in damages for detention which the owner was entitled to mitigate.
Nor would I accept the judge’s reasoning that the Somes principle entails that, as a matter of law, the exercise of the lien has to be deemed to be for the sole benefit of the shipowner. In The Winson, even Mr Pollock QC, who relied on Somes, recognised that the benefits are mixed: the shipowner preserves his lien in his own interest, but the cargo interest is also benefited by the continuing care of his cargo. That was the arbitrators’ finding and it should be respected. It reflects the commercial realities and the justice of the situation. A shipowner should not be required to abandon his lien because the only other choices facing him were the disastrous ones of turning his ship into a floating warehouse for an indefinite period, or throwing the cargo into the sea, or storing them on land at his own expense.
Above all in the context of general average, there is in my judgment no room for the strictness of the Somes principle. General average becomes part of English law through the general, internationally recognised, law of the sea deriving from the Lex Rhodia. The shipowner has an obligation, as well as a right, to collect general average contribution, or security for it, from all contributors and on behalf of all parties to the adventure. Mr Karia submits that there could have been no question in this case of the only other cargo interest involved, the steel pontoons carried on deck, being a net payee of general average contributions. In my judgment that does not undermine the shipowner’s duty to collect general average contributions on behalf of all contributing interests (although it could of course mean that, if the duty were not complied with, then the shipowner would not be liable in damages as a result). However, quite apart from that obligation, there is no reason why the lien for general average should be subject to a strict but narrow principle deriving from the English common law’s artificer’s lien, as the citation from The Prins Knud makes abundantly clear.
It is not surprising to me that the Somes principle has developed no progeny within shipping law, when I consider the background to that principle in the distant doctrine of the distraint of animals.
In these circumstances, Mr Karia’s submission that Somes is the overriding principle is to my mind profoundly mistaken.
The arbitrators did not say anything in their award to clarify whether they considered that the contract of carriage had come to an end, for instance on departure from St Petersburg or after landing the cargo into storage at Hamina. But they put their solution in both contract and in bailment. It seems to me, as it did in a slightly different context to Lord Sumption in ENE Kos, that the practicalities, justice and applicable principles of the matter should not lead to a different conclusion in either event. If the expenses of exercising a lien may be claimed in a post-contractual situation of bailment, there should be all the more reason for reaching the same result in a contractual bailment. That was what the arbitrators found and held, and I think they were entitled to those conclusions.
Conclusion
In sum, I would dismiss the consignee’s appeal on question 1 concerning the alleged discharge of the lien on the 98 coils, and allow the owner’s appeal on question 2 concerning the applicability of the Somes principle. In the result, the appeal from the arbitrators’ award fails and the award is upheld.
I would not wish to end my judgment without commending all counsel involved for the excellence of their submissions, both written and oral.
Lady Justice Arden:
I agree.
Lord Justice Patten:
I also agree.
Note 1 In Somes in the Exchequer Chamber, (1859) El Bl & El 367, cited at para [46] of Popplewell J’s judgment [Back]
Note 2 Counsel for the shipowner, Mr Blackburn, had mentioned the item of dock dues in the estimate in arguendo, but he submitted: “It is a special charge for the use of an expensive tool, not a rent for a place of deposit”. He also submitted: “A bailee has, by law, a lien for his skill and labour expended on a chattel bailed to him for that purpose. He has not, by law, a lien for any other charge” (at 361) [Back]
Note 3 No doubt it was typical to keep a tailor waiting for the payment of his bill. [Back]
Note 4 Not unlike the case put by Lord Cranworth in Somes [Back]
Note 5 See nowChitty on Contracts, 31st ed, 2012, at para 33-090 [Back]
Edwards & Anor v Flightline Ltd.
[2003] EWCA Civ 63 [2003] 1 WLR 1200
Parker LJ
CONCLUSIONS
In Palmer v. Carey a lender agreed to finance the activities of a trader in goods, on terms that the proceeds of sale of the goods be paid into an account in the name of the lender, and that the lender recoup himself on a monthly basis in respect of sums advanced, with the balance being released to the trader subject to a right for the lender to retain a sum representing an agreed share of the trader’s profit. The trader subsequently became bankrupt. At the date of the bankruptcy, a substantial sum was owing to the lender in respect of sums advanced. The lender claimed security over goods and proceeds of sale in the hands of the trader. The Privy Council, reversing the decision of the High Court of Australia (Knox CJ dissenting), held that the lender had no such security. In the course of its judgment (delivered by Lord Wrenbury), the Privy Council said this:
“The law as to equitable assignment, as stated by Lord Truro in Rodick v. Gandell, is this: ‘The extent of the principle to be deduced is that an agreement between a debtor and a creditor that the debt owing shall be paid out of a specific fund coming to the debtor, or an order given by a debtor to his creditor upon a person owing money or holding funds belonging to the giver of the order, directing such person to pay such funds to the creditor, will create a valid equitable charge upon such fund, in other words, will operate as an equitable assignment of the debts or fund to which the order refers.’
An agreement for valuable consideration that a fund shall be applied in a particular way may found an injunction to restrain its application in another way. But if there be nothing more, such a stipulation will not amount to an equitable assignment. It is necessary to find, further, that an obligation has been imposed in favour of the creditor to pay the debt out of the fund. This is but an instance of the familiar doctrine of equity that a contract for valuable consideration to transfer or charge a subject matter passes a beneficial interest by way of property in that subject matter if the contract is one of which a Court of equity will decree specific performance.” (Emphasis supplied.)
The above statement of principle was adopted verbatim by the House of Lords in Swiss Bank Corporation v. Lloyds Bank Ltd and others [1982] AC 584 at 613A-E per Lord Wilberforce.
The judgment in Palmer v. Carey then turns to the provisions of the agreement between the lender and the trader in that case, and in particular the provision in article 3 of the agreement that the proceeds of sale of the goods be paid into an account in the name of the lender. The judgment continues:
“Under art. 3, however, the proceeds are to be paid to the lender’s credit at his bank. This gives the lender a most efficient hold to prevent the misapplication of the proceeds, but there is nothing in that article to give him a property by way of security or otherwise in the moneys of the borrower before or after he, the lender, has them in his charge.”
The judgment goes on to express the agreement of the Privy Council with the following passage from the dissenting judgment of the Chief Justice in the court below:
“The words of the agreement on which the appellant relies are apt to express a contract by the bankrupt to apply the money in the purchase of goods, to sell those goods, and to pay the proceeds of sale into the appellant’s bank account, but I can see nothing in them to indicate that the intention was to assign any interest in the goods purchased by the bankrupt or to create either a charge over or a trust of such goods in favour of the appellant.”
Although Palmer v. Carey concerned contractual arrangements made between the parties out of court, in our judgment Lord Wrenbury’s statement of principle applies directly to consent orders, such as the February Order and the March Order, which embody terms agreed between the parties; and also indirectly, by analogy, to other court orders. Thus, the reason why a freezing order does not create a security right over the assets from time to time subject to it is, in my judgment, that a freezing order – without more – does not impose an obligation on the part of the respondent to satisfy any judgment debt out of those assets. Rather, a freezing order provides what Lord Wrenbury described (in the passage quoted above) as “a most efficient hold to prevent the misapplication [of those assets]”. As Lord Wrenbury makes clear, that is not enough to create a security right. On the other hand, cases in Professor Goode’s category of ‘procedural securities’ are cases in which the clear purpose of the order is to afford a claimant an element of security in the satisfaction of his claim. Hence, by analogy with the principle stated by Lord Wrenbury, a security right is created.
The question in the instant case, then, is whether one can spell out of the terms of the March Order a provision (albeit not expressed in terms) to the effect that the Company must satisfy any judgment obtained by Flightline (up to the specified maximum of £3.325M) out of the monies in the joint account; or, to put it the other way round, a provision to the effect that if Flightline is successful in obtaining a judgment in the action it is entitled to payment out of such monies (or of so much thereof as is required to satisfy the judgment) as a matter of right.
We find ourselves wholly unable to spell out of the March Order any such provision. Firstly, we can see nothing on the face of the March Order (without at this stage bringing into account any background facts) to indicate that anything other than continuing interim protection of a ‘freezing’ nature was intended to be provided. In particular, the terms of the Company’s undertaking, as contained in the Second Schedule to the March Order, seem to me to be entirely consistent with the continuance of interim protection of a ‘freezing’ nature until trial or further order. As Mr Moss accepted, the mere fact that the monies in the account were under the control of the court does not serve to take the case out of the freezing order category. Secondly, when one takes account by way of background of the terms of the February Order, the conclusion that the March Order confers no security rights is in my judgment reinforced. We agree with Mr Pascoe that the February Order plainly did not achieve anything more than the continuation of interim protection of a ‘freezing’ nature until the date of the adjourned hearing.
Nor are we persuaded that Mr Moss’s reliance on the inclusion of the word ‘escrow’ in the title of the joint account has the significance which he seeks to give it. In our judgment there is no satisfactory basis for inferring (because there is no direct evidence about it) that the use of that word indicates that the parties for their part understood the March Order to create a security right. In any event, as Mr Moss himself asserts, the question whether the March Order created a security right is ultimately a question of law.
Equally, it seems to us to be nothing to the point that the freezing order as granted on 16 January 2002 does not contain the subparagraph in the standard form relating to the provision of security.
As to the figure of £3.325M which appears in the Company’s undertaking in the March Order, as compared with the figure of £4.2M which appears in the February Order, given that the March Order represented a compromise of the interlocutory dispute (including the Company’s application to discharge the freezing order ab initio) we find it impossible to draw any relevant inference from the fact that the £4.2M was reduced to £3.325M. Nor does the background of the Company’s serious financial difficulties seem to us to afford any reliable indication as to whether the March Order created a security right.
In respectful disagreement with the judge, therefore, we conclude that the March Order did not confer any security right on Flightline and that the appeal should accordingly be allowed on the primary issue.
Order: appeal allowed; order made in terms of agreed draft lodged by counsel; permission to appeal to the House of Lords refused.
Agnew and Bearsley v. The Commissioner of Inland Revenue
[2001] Lloyd’s Rep Bank 251, [2001] Lloyds Rep Bank 251, [2001] 3 WLR 454, [2001] 2 BCLC 188, [2001] 2 AC 710, [2001] UKPC 28, [2001] BCC 259
The Judicial Committee of the Privy Council Decisions
[Delivered by Lord Millett]
——————
The question in this appeal is whether a charge over the uncollected book debts of a company which leaves the company free to collect them and use the proceeds in the ordinary course of its business is a fixed charge or a floating charge.
The company which granted the charge in question, Brumark Investments Limited, is in receivership. The only assets available for distribution to creditors are the proceeds of the book debts which were outstanding when the receivers were appointed and which they have since collected. If the charge is a fixed charge, as the receivers contend, the proceeds are payable to the company’s bank Westpac Banking Corporation as the holder of the charge. If, however, it was a floating charge at the time it was created then, by the combined effect of the Seventh Schedule to the Companies Act 1993 and section 30 of the Receiverships Act 1993, they are payable to the employees and the Commissioner of Inland Revenue as preferential creditors. In a carefully reasoned judgment the judge (Fisher J) held that it was a fixed charge, but his decision was reversed by the Court of Appeal. A curiosity of the case is that the distinction between fixed and floating charges, which is of great commercial importance in the United Kingdom, seems likely to disappear from the law of New Zealand when the Personal Property Act 1999 comes into force.
The debenture is dated 9th August 1995. It is closely modelled on the instrument which was the subject of the controversial decision of the English Court of Appeal in In re New Bullas Trading Ltd [1994] 1 BCLC 449 and may have been deliberately drafted in order to take advantage of that decision. The relevant provisions of the debenture are set out in full in the judgments below and their Lordships can state them shortly. It is expressed to create a fixed charge on the book debts of the company which arise in the ordinary course of trading and their proceeds, but not those proceeds which are received by the company before the charge holder requires them to be paid into an account with itself (which it could do at any time but never did) or the charge created by the deed crystallises or is enforced whichever should first occur. Subject thereto, the charge is expressed to be a floating charge as regards other assets of the company. The debenture prohibits the company from disposing of its uncollected book debts, but permits it to deal freely in the ordinary course of its business with assets which are merely subject to the floating charge; these include the money in its bank accounts and the proceeds of the book debts when collected.
Thus the deed purports to create a fixed charge on the book debts which were outstanding when the receivers were appointed and the proceeds of the debts which they collected. Prior to their appointment, however, the company was free to collect the book debts and deal with the proceeds in the ordinary course of its business, though it was unable to assign or factor them. The question is whether the company’s right to collect the debts and deal with their proceeds free from the security means that the charge on the uncollected debts, though described in the debenture as fixed, was nevertheless a floating charge until it crystallised by the appointment of the receivers. This is a question of characterisation. To answer it their Lordships must examine the nature of a floating charge and ascertain the features which distinguish it from a fixed charge. They propose to start by tracing the history of the floating charge from its inception to the present day, paying particular attention to charges over book debts.
The floating charge originated in England in a series of cases in the Chancery Division in the 1870’s: In re Panama, New Zealand, and Australian Royal Mail Co (1870) 5 Ch App 318 (generally regarded as the first case in which the floating charge was recognised); In re Florence Land and Public Works Co, Ex p. Moor (1878) 10 Ch D 530; In re Hamilton’s Windsor Ironworks Co., Ex p. Pitman & Edwards (1879) 12 Ch D 707; and In re Colonial Trusts Corporation, Ex p. Bradshaw (1879) 15 Ch D 465. Two things led to this development. First, the possibility of assigning future property in equity was confirmed in Holroyd v Marshall (1862) 10 HL Cas 191. The principle was of general application and made it possible for future book debts to be assigned by way of security: Tailby v Official Receiver (1888) 13 App Cas 523. Secondly, the Companies Clauses Consolidation Act 1845 sanctioned a form of mortgage for use by statutory companies by which the company assigned “its undertaking”. It was natural that this formula should afterwards be adopted by companies incorporated under the Companies Act 1862.
The debenture in In re Panama, New Zealand, and Australian Royal Mail Co. was in this form. It charged “the undertaking” of the company “and all sums of money arising therefrom”. This was taken to mean all the assets of the company both present and future including its circulating assets, that is to say, assets which are regularly turned over in the course of trade. From the word “undertaking” Giffard LJ derived the inference that unless and until the charge holder intervened the parties contemplated that the company was to be at liberty to carry on business as freely as if the charge did not exist, which it would not be able to do if the circulating assets were subject to a fixed charge.
The thinking behind the development of the floating charge was that compliance with the terms of a fixed charge on the company’s circulating capital would paralyse its business. This theme was repeated in many of the cases: see for example In re Florence Land and Public Works Co. at p. 541 per Sir George Jessel MR; Biggerstaff v Rowatt’s Wharf Ltd. [1896] 2 Ch 93, at p.101 per Lindley LJ and p. 103 per Lopes LJ. A fixed charge gives the holder of the charge an immediate proprietary interest in the assets subject to the charge which binds all those into whose hands the assets may come with notice of the charge. Unless it obtained the consent of the holder of the charge, therefore, the company would be unable to deal with its assets without committing a breach of the terms of the charge. It could not give its customers a good title to the goods it sold to them, or make any use of the money they paid for the goods. It could not use such money or the money in its bank account to buy more goods or meet its other commitments. It could not use borrowed money either, not even, as Sir George Jessel MR observed, the money advanced to it by the charge holder. In short, a fixed charge would deprive the company of access to its cash flow, which is the life blood of a business. Where, therefore, the parties contemplated that the company would continue to carry on business despite the existence of the charge, they must be taken to have agreed on a form of charge which did not possess the ordinary incidents of a fixed charge.
The floating charge is capable of affording the creditor, by a single instrument, an effective and comprehensive security upon the entire undertaking of the debtor company and its assets from time to time, while at the same time leaving the company free to deal with its assets and pay its trade creditors in the ordinary course of business without reference to the holder of the charge. Such a form of security is particularly attractive to banks, and it rapidly acquired an importance in English commercial life which the Insolvency Law Review Committee (1982 Cmnd. 8558 at para. 1525) later considered should not be underestimated. It was, however, not available to individual traders because of the doctrine of reputed ownership in bankruptcy. That doctrine did not apply to companies. It was abolished in England by the Insolvency Acts 1985-6 following a recommendation of the Insolvency Law Review Committee. It had already been abolished in New Zealand by Section 42 of the Insolvency Act 1967.
Valuable as the new form of security was, it was not without its critics. One of its consequences was that it enabled the holder of the charge to withdraw all or most of the assets of an insolvent company from the scope of a liquidation and leave the liquidator with little more than an empty shell and unable to pay preferential creditors. Provision for the preferential payment of certain classes of debts had been introduced in bankruptcy in 1825 and was extended to the winding up of companies by section 1(1)(g) of the Preferential Payments in Bankruptcy Act 1888. Section 107 of the Preferential Payments in Bankruptcy Amendment Act 1897 now made the preferential debts payable out of the proceeds of a floating charge in priority to the debt secured by the charge.
10. A second mischief arose from the very nature of the floating charge which allowed a company to continue to trade and incur credit despite the existence of the charge. This put the ordinary trade creditors of the company at risk, even though they would not normally know of the existence of the charge; for the holder of the charge could step in without warning at any time and obtain priority over them. Such trade creditors would include the suppliers of goods which the charge holder could appropriate to the security and realise for its own benefit leaving the suppliers unpaid. This was seen by many judges as an injustice and by Lord Macnaghten as a great scandal: see In re General South American Co. (1876) 2 Ch D 337 at 341 per Malins V-C; Salomon v Salomon [1897] AC 22 at p. 53 per Lord Macnaghten; In re London Pressed Hinge Co. Ltd. [1905] 1 Ch 576, at pp. 581, 583 per Buckley J. Lord Macnaghten proposed giving the ordinary trade creditors a preferential claim on the assets of an insolvent company in respect of debts incurred within a limited time before the winding-up. More than 80 years later a recommendation along not dissimilar lines was made by the Insolvency Law Reform Committee. Neither was implemented. The remedy adopted by Parliament was to require floating charges to be registered so that those proposing to extend credit to a company could discover their existence. The requirement was introduced (in England) by section 14 of the Companies Act 1900 and (in New Zealand) by section 130 of the Companies Act 1903. It was extended (in England) by section 10(1)(e) of the Companies Act 1907 and (in New Zealand) by section 89(2)(f) of the Companies Act 1933 to include all charges on book debts whether floating or fixed. The thinking behind this was presumably that debts subject to a fixed charge are still shown as assets in the company’s balance sheet as “debtors” and thus appear to be available to support the company’s credit. So far as the ordinary trade creditors were concerned, however, the remedy provided by registration was more theoretical than real.
11. Before the introduction of this legislation the expression “floating charge”, though in common use, had no distinct meaning. It was not a legal term or term of art. Now, however, it became necessary to distinguish between fixed charges and charges which were floating charges within the meaning of the Acts. Lord Macnaghten essayed the first judicial definition in Governments Stock and Other Securities Investment Co Ltd v Manila Railway Co. [1897] AC 81, at p. 86:
Bank Of Credit And Commerce International SA (No. 8), Re
[1997] UKHL 44 [1997] 3 WLR 909, [1998] BPIR 211, [1998] AC 2142, [1997] BCC 965, [1998] 1 BCLC 68, [1998] Lloyd’s Rep 48, [1998] AC 214, [1998] 1 AC 2142, [1997] 4 All ER 568, [1998] 1 AC 214, [1997] UKHL 44
Lord Hoffmann
4. Rights of a secured creditor
The general rule is that a secured creditor is not obliged to resort to his security. He can claim repayment by the debtor personally and leave the security alone. In China and South Sea Bank Ltd. v. Tan Soon Gin (alias George Tan) [1990] 1 AC 536, 545, where the creditor’s security consisted of a mortgage over shares and a personal guarantee from a surety, Lord Templeman said:
“The creditor had three sources of repayment. The creditor could sue the debtor, sell the mortgage securities or sue the surety. All these remedies could be exercised at any time or times simultaneously or contemporaneously or successively or not at all.”
If the creditor recovers judgment against the debtor and the debt is paid, the security is released. But B.C.C.I. accepts that this will be the consequence of payment. The security created by the letter of lien/charge will be discharged and the deposit left unencumbered. Of course the depositor will only be entitled to a dividend in the winding up. But this would have been his position even if he had never granted the charge in the first place.
In the present case, however, Mr. McDonnell (for Rayners) and Mr. Carr (for the Solai Group) have advanced a number of arguments as to why B.C.C.I. should not be entitled to sue them for money lent without first giving credit for the full amount of the sums deposited as security. I shall consider each in turn.
5. Bankruptcy set-off
Rule 4.90 of the Insolvency Rules 1986 (reproducing earlier legislation) is headed “Mutual credit and set-off” and provides:
“(1) This rule applies where, before the company goes into liquidation there have been mutual credits, mutual debts or other mutual dealings between the company and any creditor of the company proving or claiming to prove for a debt in the liquidation. (2) An account shall be taken of what is due from each party to the other in respect of the mutual dealings, and the sums due from one party shall be set off against the sums due from the other. . . . (4) Only the balance (if any) of the account is provable in the liquidation. Alternatively (as the case may be) the amount shall be paid to the liquidator as part of the assets.”
When the conditions of the rule are satisfied, a set-off is treated as having taken place automatically on the bankruptcy date. The original claims are extinguished and only the net balance remains owing one way or the other: Stein v. Blake [1996] 1 AC 243. The effect is to allow the debt which the insolvent company owes to the creditor to be used as security for its debt to him. The creditor is exposed to insolvency risk only for the net balance.
Not all jurisdictions recognise this kind of security in bankruptcy. The recent judgment of Sir Richard Scott V.-C. in In re Bank of Credit and Commerce International S.A. (No. 10) [1997] 2 W.L.R. 172 illustrates the problems caused by the fact that English law, as the law of the ancillary liquidation, recognises such a set-off but the law of the principal liquidation (Luxembourg) does not. In English law, it is strictly limited to mutual claims existing at the bankruptcy date. There can be no set-off of claims by third parties, even with their consent. To do so would be to allow parties by agreement to subvert the fundamental principle of pari passu distribution of the insolvent company’s assets: see British Eagle International Airlines Ltd. v. Compagnie Nationale Air France [1975] 1 W.L.R. 758.
The sense of injustice which is undoubtedly felt by the depositors in this case arises, I think, not so much from the operation of rule 4.90 but from the principle that a company is a person separate from its controlling shareholders. If the depositors had been third parties in economic reality as well as in law, I imagine that it would not have been thought particularly unfair that the liquidators had chosen to exercise their undoubted choice of remedies and to proceed against the primary borrowers rather than resort to the third party security which they held. But the separate personality of depositor and borrower was an essential element in the structure which the parties chose to adopt for their borrowings and it cannot be ignored now that B.C.C.I. has become insolvent.
The appellants nevertheless say that on the facts of this case there was mutuality between the depositor and B.C.C.I. and that automatic set-off under rule 4.90 therefore took place; the sum owed by B.C.C.I. to the depositor (i.e. the amount of the deposit and interest) being set off against the amount owed by the depositor to B.C.C.I. The result was to extinguish the dept pro tanto for the benefit of both Mr. Jessa and Rayners, both being liable for the same obligation.
6. Construction of the security documents
The difficulty about this argument is that the depositor did not owe anything to B.C.C.I. The only contract between him and B.C.C.I., contained in the letter of lien/charge, created no personal liability on his part. In Tam Wing Chuen v. Bank of Credit & Commerce Hong Kong Ltd. [1996] B.C.C. 388, the Privy Council had to construe a very similar document and held that no personal liability could be implied. Lord Mustill said:
“One thing is clear, that nowhere in these clauses does the instrument actually say that the depositor is to have a liability equal to the amount of the deposit, or, for that matter, equal to the indebtedness of the company. Thus, if the depositor is to succeed he must show that the transaction as formulated cannot be given any meaning unless he is personally liable.”
Mr. McDonnell said that in the present case, the only way in which the transaction as formulated could be given a meaning would be if it were construed as creating a personal liability on the part of the depositor to pay the borrower’s indebtedness. Although it did not expressly do so, but instead purported to create a charge over the deposit, it was, he submitted legally ineffective for this purpose. A charge in favour of B.C.C.I. over a debt owed by B.C.C.I. to the depositor was, as the Court of Appeal held, conceptually impossible and created no proprietary interest in B.C.C.I. (In this respect, the present case was distinguishable from Tam Wing Chuen because in Hong Kong such charges had been legitimated by statute: see section 15A of the Law Amendment and Reform (Consolidation) Ordinance, Cap. 23). The only way in which the letter in this case could operate as an effective security was contractually. Mr. McDonnell submitted that to give effect to this intention, it should therefore be construed as imposing a personal obligation upon the depositor which B.C.C.I. would be entitled to set off against his claim for the return of the deposit. On the winding up of B.C.C.I., the effect of rule 4.90 was to make such a set-off mandatory.
(a) M.S. Fashions Ltd.
Mr. McDonnell relied upon M.S. Fashions Ltd. v. Bank of Credit and Commerce International S.A. [1993] Ch. 425 as a case in which this kind of reasoning had been approved. I do not think that this is right. The case involved a very unusual security document in which, although no personal obligation was expressly created, references were made to the liability of the depositor being that of principal debtor. It was only to give effect to these words that the document was construed as creating a personal liability limited to the amount of the deposit. This was held to result in a set-off between depositor and B.C.C.I. which, since depositor and principal debtor were jointly and severally and unconditionally liable for the same debt, discharged the principal debtor.
There is no doubt that the decision in M.S. Fashions produces a rather anomalous result to which the Court of Appeal [1996] Ch. 245, 269, 273, drew attention. If the documents in that case had, as in this case, merely created a charge over the deposit or a contractual limitation on the right to withdraw the deposit (such as that in the third paragraph of the lien/charge letter which I have quoted), there would have been no cross-claim for the purposes of set-off. If the depositor had given a personal guarantee in the usual form and no demand had been made upon him before the bankruptcy date, his liability would have been merely contingent and would likewise have been incapable of set-off. But because the depositor was also personally liable jointly and severally with the borrower, an automatic set-off took place which discharged the borrower. The distinction is artificial because in no case would the bank wish to rely upon the depositor’s personal liability, whether as principal or guarantor. It will simply keep his money in accordance with the letter of charge. It could be said that, for a bank which is thinking of becoming insolvent, the M.S. Fashions case is a trap for the unwary.
The difficulty, as the Court of Appeal recognised, is to find a way of coming to a different answer which recognises the automatic and self-executing nature of set-off under rule 4.90 and the principle that joint and several debtors are liable for the same debt so that payment or deemed payment by the one discharges the other. In the case of a charged deposit, one possible answer is that the existence of the charge destroys mutuality: the bank’s claim against the depositor is in its own right but the depositor’s claim is subject to the equitable interest of the bank. This argument was somewhat cursorily rejected in M.S. Fashions at first instance and (advanced in a different form) at rather greater length in the Court of Appeal. In this case, the Court of Appeal suggested that reliance might be placed upon the retrospective effect of the collection and distribution of assets by the liquidator, so that the recovery of the debt from the principal debtor could be deemed to take place immediately before the operation of rule 4.90 and, by discharging the debt, prevent set-off from taking place. I record the debate without comment; it is something which may have to be decided in the unlikely event of documentation such as that in M.S. Fashions appearing in another liquidation. (The B.C.C.I. liquidators say that they have settled all their cases in which such documents were used.) But the point does not arise in this case because the letter of lien/charge simply cannot be construed as creating a personal joint and several obligation.
(b) Re Charge Card Services Ltd.
The Court of Appeal rejected the argument that the letter was ineffective unless construed as imposing personal liability. They accepted Mr. McDonnell’s submission that, by reason of conceptual impossibility, it could not operate as a charge over the deposit. But they said that it could provide perfectly good security by virtue of the contractual provisions in the third paragraph which limited the right to repayment of the deposit and made it what is sometimes called a “flawed asset.” I agree and could stop there without commenting on the question of whether a charge is conceptually impossible or not. But the point has been very fully argued and should, I think, be dealt with.
The doctrine of conceptual impossibility doctrine was first propounded by Millett J. in In re Charge Card Services Ltd. [1987] Ch. 150 and affirmed, after more extensive discussion, by the Court of Appeal in this case. It has excited a good deal of heat and controversy in banking circles; the Legal Risk Review Committee, set up in 1991 by the Bank of England to identify areas of obscurity and uncertainty in the law affecting financial markets and propose solutions, said that a very large number of submissions from interested parties expressed disquiet about this ruling. It seems clear that documents purporting to create such charges have been used by banks for many years. The point does not previously appear to have been expressly addressed by any court in this country. Supporters of the doctrine rely on the judgments of Buckley L.J. (in the Court of Appeal) and Viscount Dilhorne and Lord Cross (in the House of Lords) in Halesowen Presswork & Assemblies Ltd. v. National Westminster Ltd. [1971] 1 Q.B. 1; [1972] A.C. 785. The passages in question certainly say that it is a misuse of language to speak of a bank having a lien over its own indebtedness to a customer. But I think that these observations were directed to the use of the word “lien”, which is a right to retain possession, rather than to the question of whether the bank could have any kind of proprietary interest. Opponents of the doctrine rely upon some nineteenth-century cases, of which it can at least be said that the possibility of a charge over a debt owed by the chargee caused no judicial surprise.
The reason given by the Court of Appeal [1996] Ch. 245, 258 was that “a man cannot have a proprietary interest in a debt or other obligation which he owes another.” In order to test this proposition, I think one needs to identify the normal characteristics of an equitable charge and then ask to what extent they would be inconsistent with a situation in which the property charged consisted of a debt owed by the beneficiary of the charge. There are several well-known descriptions of an equitable charge (see, for example, that of Atkin L.J. in National Provincial and Union Bank of England v. Charnley [1924] 1 K.B. 431, 449-450) but none of them purports to be exhaustive. Nor do I intend to provide one. An equitable charge is a species of charge, which is a proprietary interest granted by way of security. Proprietary interests confer rights in rem which, subject to questions of registration and the equitable doctrine of purchaser for value without notice, will be binding upon third parties and unaffected by the insolvency of the owner of the property charged. A proprietary interest provided by way of security entitles the holder to resort to the property only for the purpose of satisfying some liability due to him (whether from the person providing the security or a third party) and, whatever the form of the transaction, the owner of the property retains an equity of redemption to have the property restored to him when the liability has been discharged. The method by which the holder of the security will resort to the property will ordinarily involve its sale or, more rarely, the extinction of the equity of redemption by foreclosure. A charge is a security interest created without any transfer of title or possession to the beneficiary. An equitable charge can be created by an informal transaction for value (legal charges may require a deed or registration or both) and over any kind of property (equitable as well as legal) but is subject to the doctrine of purchaser for value without notice applicable to all equitable interests.
The depositor’s right to claim payment of his deposit is a chose in action which the law has always recognised as property. There is no dispute that a charge over such a chose in action can validly be granted to a third party. In which respects would the fact that the beneficiary of the charge was the debtor himself be inconsistent with the transaction having some or all of the various features which I have enumerated? The method by which the property would be realised would differ slightly: instead of the beneficiary of the charge having to claim payment from the debtor, the realisation would take the form of a book entry. In no other respect, as it seems to me, would the transaction have any consequences different from those which would attach to a charge given to a third party. It would be a proprietary interest in the sense that, subject to questions of registration and purchaser for value without notice, it would be binding upon assignees and a liquidator or trustee in bankruptcy. The depositor would retain an equity of redemption and all the rights which that implies. There would be no merger of interests because the depositor would retain title to the deposit subject only to the bank’s charge. The creation of the charge would be consensual and not require any formal assignment or vesting of title in the bank. If all these features can exist despite the fact that the beneficiary of the charge is the debtor, I cannot see why it cannot properly be said that the debtor has a proprietary interest by way of charge over the debt.
The Court of Appeal said that the bank could obtain effective security in other ways. If the deposit was made by the principal debtor, it could rely upon contractual rights of set-off or combining accounts or rules of bankruptcy set-off under provisions such as rule 4.90. If the deposit was made by a third party, it could enter into contractual arrangements such as the limitation on the right to withdraw the deposit in this case, thereby making the deposit a “flawed asset.” All this is true. It may well be that the security provided in these ways will in most cases be just as good as that provided by a proprietary interest. But that seems to me no reason for preventing banks and their customers from creating charges over deposits if, for reasons of their own, they want to do so. The submissions to the Legal Risk Review Committee made it clear that they do.
If such charges are granted by companies over their “book debts” they will be registrable under section 395 and 396(1)(e) of the Companies Act 1985. There is a suggestion in the judgment of the Court of Appeal that the banking community has been insufficiently grateful for being spared the necessity of registering such charges. In my view, this is a matter on which banks are entitled to make up their own minds and take their own advice on whether the deposit charged is a “book debt” or not. I express no view on the point, but the judgment of my noble and learned friend Lord Hutton in Northern Bank Ltd. v. Ross [1990] BCC 883 suggests that, in the case of deposits with banks, an obligation to register is unlikely to arise.
Since the decision in In re Charge Card Services Ltd. [1987] Ch. 150 statutes have been passed in several offshore banking jurisdictions to reverse its effect. A typical example is section 15A of the Hong Kong Law Amendment and Reform (Consolidation) Ordinance Cap. 23, which I have already mentioned. It reads:
“For the avoidance of doubt, it is hereby declared that a person (“the first person”) is able to create, and always has been able to create, in favour of another person (“the second person”) a legal or equitable charge or mortgage over all or any of the first person’s interest in a chose in action enforceable by the first person against the second person, and any charge or mortgage so created shall operate neither to merge the interest thereby created with, nor to extinguish or release, that chose in action.”
There is similar legislation in Singapore (section 9A of the Civil Law Act, Cap. 43); Bermuda (the Charge and Security (Special Provisions) Act 1990 and the Cayman Islands (the Property (Miscellaneous Provisions) Law 1994. The striking feature about all these provisions is that none of them amend or repeal any rule of common law which would be inconsistent with the existence of a charge over a debt owed by the chargee. They simply say that such a charge can be granted. If the trick can be done as easily as this, it is hard to see where the conceptual impossibility is to be found.
In a case in which there is no threat to the consistency of the law or objection of public policy, I think that the courts should be very slow to declare a practice of the commercial community to be conceptually impossible. Rules of law must obviously be consistent and not self-contradictory; thus in Rye v. Rye [1962] A.C. 496, 505, Viscount Simonds demonstrated that the notion of a person granting a lease to himself was inconsistent with every feature of a lease, both as a contract and as an estate in land. But the law is fashioned to suit the practicalities of life and legal concepts like “proprietary interest” and “charge” are no more than labels given to clusters of related and self-consistent rules of law. Such concepts do not have a life of their own from which the rules are inexorably derived. It follows that in my view the letter was effective to do what it purported to do, namely to create a charge over the deposit in favour of B.C.C.I. This means that the foundation for Mr. McDonnell’s argument for implying a personal obligation disappears.
7. “Due . . . in respect of . . . mutual dealings”
In the alternative, Mr. McDonnell submitted that even if the depositor was under no personal obligation to pay, being liable to have the deposit applied in discharge of the principal’s debt was for the purpose of rule 4.90 just as good. Indeed, from B.C.C.I.’s point of view, it was even better, since the bank was relieved from having to enforce the obligation and could repay itself by entries in its own books. Therefore the amount of the deposit should be treated as “due” to B.C.C.I. for the purposes of rule 4.90 (2). It is clear that for the purposes of the rule, the claim by the creditor against the insolvent company must be a provable debt. It speaks of a “creditor of the company proving or claiming to prove for a debt in the liquidation.” It has long been held that this does not mean that the creditor must actually have lodged a proof (Mersey Steel and Iron Co. v. Naylor, Benzon & Co. (1882) 9 Q.B.D. 648) but the debt must be one which would have been provable if he had. The Court of Appeal held that the same was true of the claim by the company against the creditor: the debt must be one which would have been provable against Mr. Jessa if he had been bankrupt. I am not sure that this is right and, as Mr. McDonnell pointed out, the contrary was decided by the High Court of Australia in Gye v. McIntyre (1991) 171 C.L.R. 609, a case which does not appear to have been cited to the Court of Appeal. In England, the extension of the definition of a provable debt by the Insolvency Rules 1986 probably means that the point is unlikely to arise in practice. It is not however necessary to decide it because in my view rule 4.90 requires at least the existence of a right to make a pecuniary demand: see The Eberle’s Hotels and Restaurant Co. Ltd. v. E. Jonas & Brothers (1887) 18 Q.B.D. 459 and Dixon J. in Hiley v. Peoples Prudential Assurance Co. Ltd. (1938) 60 C.L.R. 468, 497. A right to appropriate property under one’s control or to be discharged from a liability is not the same thing as a right to make a pecuniary demand upon the other party to mutual dealings. If there is any anomaly, it is that which I have discussed in connection with M.S. Fashions and consists in the fact that there is a set-off when the depositor has undertaken personal liability. There is no anomaly in there being no set-off when he has not.
8. Payment by the surety
Next the appellants say that the depositor, as surety, is entitled to pay off the debt himself and then claim indemnity from the principal debtor. This proposition is not disputed. But then the appellants say that the mode of payment they propose to employ is to appropriate their deposits for the purpose. In my view this cannot be done. For the reasons which I have already stated, there was no set-off between depositor and B.C.C.I. at the bankruptcy date. Accordingly, all that the depositor can do is to prove in the liquidation. It cannot manufacture a set-off by directing that the deposit be applied to discharge someone else’s debt, even though it may, as between itself and the debtor, have a right to do so. This is the very type of arrangement which the House declared ineffective in British Eagle International Airlines Ltd. v. Compagnie Nationale Air France [1975] 1 W.L.R. 758.
9. Right of indemnity
Mr. McDonnell next advanced an elaborate argument which he said produced a debt owing from B.C.C.I. to Rayners which could be set off against its liability under rule 4.90. It proceeded as follows. First, Rayners’ request to Mr. Jessa to charge his deposits to secure its liability to B.C.C.I. gave rise to an implied promise to indemnify him against any loss which he might suffer thereby: see Ex parte Ford; In re Chappell (1885) 16 Q.B.D. 305 and In re A Debtor (No. 627 of 1936) [1937] Ch. 156. Secondly, the bankruptcy of B.C.C.I. resulted in Mr. Jessa suffering loss as a result of making the deposit for which he had a claim against Rayners. Thirdly, Rayners has a claim against B.C.C.I. to be idemnified against Mr. Jessa’s claim because its obligation to pay Mr. Jessa was a result of the breach by B.C.C.I. of its obligation as a mortgagee to take proper care of the security and restore it unimpaired. B.C.C.I.’s bankruptcy converted the security from a claim to the deposit to a mere right to prove in the liquidation, with a fraction of the value of the original deposit. Fourthly, because Mr. Jessa’s claim arises out of the implied promise given when the deposit was made, Rayners’ claim against B.C.C.I. derives from a right which existed before the bankruptcy date and can be set off under rule 4.90.
The first stage in the argument is indisputable. I make no comment on the second; Mr Crystal, for the liquidators, said that a principal debtor who requested a surety to charge a deposit as security for his debt did not warrant the solvency of the institution with which the deposit was made. I will, however, assume in favour of the appellants that Mr. Jessa would have been entitled, as against Rayners, to be indemnified for his loss. It is at the third stage that the argument breaks down. B.C.C.I.’s charge was not over the money which Mr Jessa deposited. That became the property of B.C.C.I.: see Foley v. Hill (1848) 2 H.L.Cas. 28. The charge was over Mr. Jessa’s chose in action, the debt owed to him by B.C.C.I.. The insolvency involved no breach of duty by B.C.C.I. in its capacity as chargee and did not change the nature of the debt which it owed. The reason why Mr. Jessa lost his money was because the debt became subject to the statutory scheme of payment by pari passu distribution of the assets of B.C.C.I. But this had no connection with the fact that he had given a charge. Rayners therefore had no claim against B.C.C.I. which it could set off against its indebtedness.
The appellants said that to regard the giving of security as merely the creation of a charge over an existing debt was too narrow a view. The depositing of the money was an integral part of the creation of the security. Mr. Carr, for the Solai Group, pointed out that S.G.G.S. had made the deposit purely for the purpose of providing security; as I mentioned in part 2, above, the letter of lien/charge was actually executed before the money was deposited. The deposit was not an asset already in existence; it was new money provided as security. Mr. McDonnell said that he was in a similar position because although Mr. Jessa had made the deposits earlier, he had been advised by B.C.C.I. to use them as security when he would otherwise have withdrawn them. But however one describes what was done to create the security, the fact is that the charge was over the debt and not over the money. The choses in action belonged to Mr. Jessa and S.G.G.S.; the money belonged to the bank. The appellants may have been badly advised to create an asset for the purpose of giving a charge by depositing money with B.C.C.I., but they are not making a claim on the grounds of bad advice. There would be no point in doing so because it would not put them in a better position in the liquidation.
10. Duty to restore the security
The appellants’ next argument suffers from much the same defect as the last one. They say that B.C.C.I. is not entitled to judgment against the debtor companies unless it is able to restore the security which has been provided. The principle is undisputed, having been affirmed by this House in Ellis & Co’s Trustee v. Dixon-Johnson [1925] A.C. 489, although Mr. Crystal for B.C.C.I. said that it was limited to restoration of security given by the debtor and did not apply to third parties. There seems to be no authority on this point but I am content to assume in favour of the appellants that it applies equally to security provided by a third party. Nevertheless, B.C.C.I. is in a position to restore the security simply by releasing the charge over the deposit. The fact that it cannot restore the money in full is not relevant; the charge was not over the money and the winding up affects only B.C.C.I.’s role as a debtor, not its role as a chargee. In fact, in the case of an equitable charge, there is no formal act of release required. The charge simply ceases to exist when the debt it secured has been repaid.
11. Marshalling
Finally the appellants rely upon the equitable doctrine of marshalling. This is a principle for doing equity between two or more creditors, each of whom are owed debts by the same debtor, but one of whom can enforce his claim against more than one security or fund and the other can resort to only one. It gives the latter an equity to require that the first creditor satisfy himself (or be treated as having satisfied himself) so far as possible out of the security or fund to which the latter has no claim. I am at a loss to understand how this principle can have any application in the present case. There is only one debt and that is owed to B.C.C.I. by the principal borrower. B.C.C.I. has security to which it can resort as it chooses: see the citation from China and South Sea Bank Ltd. v. Tan Soon Gin [1990] 1 AC 536 in part 4, above. There is no basis upon which the depositors can assert an equity to require B.C.C.I. to proceed against their deposits before claiming against the principal debtors.
For these reasons I would dismiss both appeals.
LORD HOPE OF CRAIGHEAD
My Lords,
I have had the benefit of reading in draft the speech which has been prepared by my noble and learned friend, Lord Hoffmann. I agree with it, and for the reasons which he has given I also would dismiss these appeals.
LORD HUTTON
My Lords,
I have had the advantage of reading in draft the speech of my noble and learned friend, Lord Hoffmann. For the reasons he gives I, too, would dismiss these appeals.
“A floating security is an equitable charge on the assets for the time being of a going concern. It attaches to the subject charged in the varyingcondition in which it happens to be from time to time. It is of the essence of such a charge that it remains dormant until the undertaking charged ceases to be a going concern, or until the person in whose favour the charge is created intervenes.”
The concept of a proprietary interest in a fluctuating fund of assets was, of course, very familiar to Chancery judges. The similarity between the position of the holder of a floating charge and that of the beneficiaries of a trust fund has been noted by Professor Goode: see Legal Problems of Credit and Security (1988) pp. 48-51.
12. The most celebrated, and certainly the most often cited, description of a floating charge is that given by Romer LJ in In re Yorkshire Woolcombers Association Ltd. [1903] 2 Ch D 284 at p. 295:
“I certainly do not intend to attempt to give an exact definition of the term “floating charge,” nor am I prepared to say that there will not be a floating charge within the meaning of the Act, which does not contain all the three characteristics that I am about to mention, but I certainly think that if a charge has the three characteristics that I am about to mention it is a floating charge. (1.) If it is a charge on a class of assets of a company present and future; (2.) if that class is one which, in the ordinary course of the business of the company, would be changing from time to time; and (3.) if you find that by the charge it is contemplated that, until some future step is taken by or on behalf of those interested in the charge, the company may carry on its business in the ordinary way as far as concerns the particular class of assets I am dealing with.”
13. This was offered as a description and not a definition. The first two characteristics are typical of a floating charge but they are not distinctive of it, since they are not necessarily inconsistent with a fixed charge. It is the third characteristic which is the hallmark of a floating charge and serves to distinguish it from a fixed charge. Since the existence of a fixed charge would make it impossible for the company to carry on business in the ordinary way without the consent of the charge holder, it follows that its ability to so without such consent is inconsistent with the fixed nature of the charge. In the same case Vaughan Williams LJ explained at p. 294:
“… but what you do require to make a specific security is that the security whenever it has once come into existence, and been identified or appropriated as a security, shall never thereafter at the will of the mortgagor cease to be a security. If at the will of the mortgagor he can dispose of it and prevent its being any longer a security, although something else may be substituted more or less for it, that is not a “specific security” (emphasis added).
14. This was the first case to deal specifically with book debts. The question was whether a charge on uncollected book debts was a fixed charge or a floating charge so as to require registration. At every level of decision it was held to be a floating charge, the critical factor being the company’s freedom to receive the book debts for its own account and deal with the proceeds without reference to the charge holder. At first instance Farwell J said at p. 288:
“If the assignment is to be treated as a specific mortgage or charge or disposition, then the company had no business to receive one single book debt after the date of it; but if, on the other hand, although not so called, the company was intended to go on receiving the book debts and to use them for the purpose of carrying on its business, then it contains the true elements of a floating security” (emphasis added).
And at p. 289:
“A charge on all book debts which may now be, or at any time hereafter become charged or assigned, leaving the mortgagor or assignor free to deal with them as he pleases until the mortgagee or assignee intervenes, is not a specific charge, and cannot be. The very essence of a specific charge is that the assignee takes possession, and is the person entitled to receive the book debts at once. So long as he licenses the mortgagor to go on receiving the book debts and carry on the business, it is within the exact definition of a floating security” (emphasis added).
Romer LJ at p. 296 and Cozens-Hardy LJ at p. 297 spoke in similar vein in the Court of Appeal, both expressly treating the company’s right to go on receiving the book debts as inconsistent with the nature of a fixed charge.
15. When the case reached the House of Lords sub. nom. Illingworth v Houldsworth [1904] AC 355 Lord Halsbury LC also took this to be the critical factor at p. 357:
“It contemplates not only that it should carry with it the book debts which were then existing, but it contemplates also the possibility of those book debts being extinguished by payment to the company, and that other book debts should come in and take the place of those that had disappeared. That, my Lords, seems to me to be an essential characteristic of what is properly called a floating security. The recitals … shew an intention on the part of both parties that the business of the company shall continue to be carried on in the ordinary way – that the book debts shall be at the command of, and for the purpose of being used by, the company. Of course, if there was an absolute assignment of them which fixed the property in them, the company would have no right to touch them at all. The minute after the execution of such an assignment they would have no more interest in them, and would not be allowed to touch them, whereas as a matter of fact it seems to me that the whole purport of this instrument is to enable the company to carry on its business in the ordinary way, to receive the book debts that were due to them, to incur new debts, and to carry on their business exactly as if this deed had not been executed at all. That is what we mean by a floating security.” (emphasis added).
16. The jurisprudential nature of the floating charge was analysed by Buckley LJ in Evans v Rival Granite Quarries Ltd. [1910] 2 KB 979. By now it was evident that the classification of a security as a floating charge was a matter of substance and not merely a matter of drafting. As Fletcher Moulton LJ observed in that case at p. 993:
“But at an early period it became clear to judges that this conclusion did not depend upon the special language used in the particular document, but upon the essence and nature of a security of this kind.”
17. The law was settled to this effect for the next 70 years. By the 1970’s, however, the banks had become disillusioned with the floating charge. The growth in the extent and amount of the preferential debts, due in part to increases in taxation and in part to higher wages and greater financial obligations to employees, led banks to explore ways of extending the scope of their fixed charges. It had always been possible to take a fixed charge over specified debts. There were two ways of doing this. A lender could take an assignment of each debt and perfect the security by giving notice to the debtor, thereby constituting the assignment a legal assignment and entitling the assignee to collect the debt itself. The debtor, having received notice of the assignment, would not obtain a good discharge by paying the assignor. But this method of dealing with a large number of book debts was commercially impractical. A bank or other financial institution is unlikely to be in a position to maintain credit control over the debts from time to time owing to its customer or to want to collect the debts itself; while giving notice to the debtors would seriously harm its customer’s credit. The method commonly adopted, therefore, was for the lender to take an assignment of the debts but refrain from giving notice to the debtors until the assignor was in default. This meant that the assignment was an equitable assignment only, and debtors who paid the assignor without notice of the assignment would obtain a good discharge. In order to entitle the assignor to collect the debts, the assignee gave it authority to collect the debts on the assignee’s behalf. The instrument of charge would constitute the assignor a trustee of the proceeds for the assignee and require it to account to the assignee for them.
18. There was never any doubt that the second of these two methods, like the first, was effective to create a fixed charge on the book debts. The fact that the assignor was free to collect the book debts was not inconsistent with the fixed nature of the charge, because the assignor was not collecting them for its own benefit but for the account of the assignee. The proceeds were not available to the assignor free from the security but remained under the control of the assignee.
19. It was, however, generally considered that it was not possible to take a fixed charge over a fluctuating class of present and future book debts. There were two reasons for this. One was commercial: book debts are part of the circulating capital of a business and constitute an important source of its cash flow, which makes it difficult to subject them to a fixed charge without paralysing the business. The other was conceptual. It is a characteristic of a floating charge that it is a charge on fluctuating assets, and it was assumed that a charge on fluctuating assets must therefore be a floating charge. The fallacy in this reasoning was exposed by Slade J in Siebe Gorman & Co. Ltd. v Barclays Bank Ltd. [1979] 2 Lloyd’s Rep 142.
20. The case was concerned with the proceeds of book debts in the form of bills of exchange which were held for collection when the receivers were appointed. The company had purported to grant its bank a fixed charge on its book debts and a floating charge on other assets. The company was prohibited from disposing of the uncollected debts, and although it was free to collect them it was required to pay the proceeds into an account in its name with the bank. Slade J held that the critical feature which distinguished a floating charge from a fixed charge was not the fluctuating character of the charged assets but the company’s power to deal with them in the ordinary course of business. He found that, on the proper construction of the debenture, the company was not free to draw on the account without the consent of the bank even when it was in credit. Accordingly, he held that the charge on the uncollected book debts and their proceeds was a fixed charge.
21. The debenture placed no express restrictions on the company’s right to draw on the account, which was the company’s ordinary business account, and the judge’s finding in this respect has been doubted. But it was critical to his decision that the charge on the book debts was a fixed charge. He said at p. 158:
“… if I had accepted the premise that [the company] would have had the unrestricted right to deal with the proceeds of any relevant book debts paid into its account, so long as that account remained in credit, I would have been inclined to accept the conclusion that the charge on such book debts could be no more than a floating charge.”
22. The decision was followed by the Supreme Court of Ireland in Re Keenan Bros. Ltd. [1986] BCLC 242 where the company purported to grant its bank fixed charges over its present and future book debts. The debenture prohibited the company from disposing of the book debts or creating other charges over them without the consent of the bank. It allowed the company to collect the book debts, but required it to pay the proceeds into a designated account with the bank from which the company was not to make any withdrawals without the written consent of the bank. In holding the charge to be a fixed charge, McCarthy J presciently observed at p. 247 that:
“It is not suggested that mere terminology itself, such as using the expression ‘fixed charge’, achieves the purpose; one must look, not within the narrow confines of such term, not to the declared intentions of the parties alone, but to the effect of the instruments whereby they purported to carry out that intention …”
The critical feature which led the Court to characterise the charge on the book debts as a fixed charge was that their proceeds were to be segregated in a blocked account where they would be frozen and rendered unusable by the company without the bank’s written consent. As Henchy J explained at p. 246:
“It seems to me that such a degree of sequestration of the book debts when collected made those moneys incapable of being used in the ordinary course of business and meant that they were put, specifically and expressly, at the disposal of the bank. I am satisfied that assets thus withdrawn from ordinary trade use, put in the keeping of the debenture holder, and sterilised and made undisposable save at the absolute discretion of the debenture holder, have the distinguishing feature of a fixed charge. The charge was not intended to float in the future on the book debts; it was affixed forthwith and without further ado to those debts as they were collected … (emphasis added).
23. These cases were followed by a number of cases on the other side of the line. An Australian case was Hart v Barnes (1982) 7 ACLR 310, where the debenture purported to create a fixed charge on the company’s future book debts, but the parties entered into a collateral agreement of the same date which allowed the company to collect the book debts and use the proceeds in its business as it saw fit. Anderson J held that the charge was a floating charge. The debenture holder could not sensibly be said to have obtained a proprietary interest by way of a fixed charge when its interest was
“defeasible and capable of being destroyed by the company which is able to use the proceeds of such book debt in its business without in any way being accountable to the debenture holder for such proceeds.
This is the other side of the coin. If the chargor is free to deal with the charged assets and so withdraw them from the ambit of the charge without the consent of the chargee, then the charge is a floating charge. But the test can equally well be expressed from the chargee’s point of view. If the charged assets are not under its control so that it can prevent their dissipation without its consent, then the charge cannot be a fixed charge.
24. An English decision was In re Brightlife Ltd. [1987] Ch 200. The company purported to grant its bank a fixed charge over its book debts both present and future and a floating charge over other assets. The company was not permitted to sell, factor or discount debts without the bank’s written consent, but it was free to collect the debts and pay them into its ordinary bank account, though it was not required to do so. The case was thus distinguishable from but very similar to Siebe Gorman save that it was concerned with the proceeds of book debts which were still uncollected when the receivers were appointed. Hoffmann J held that, although the charge was expressed to be a fixed charge, it should be characterised in law as a floating charge. As he explained at p. 209:
“In this debenture, the significant feature is that [the company] was free to collect its debts and pay the proceeds into its bank account. Once in the account, they would be outside the charge over debts and at the free disposal of the company. In my judgment a right to deal in this way with the charged assets for its own account is a badge of a floating charge and is inconsistent with a fixed charge.”
25. In New Zealand there was Supercool Refrigeration and Air Conditioning v Hoverd Industries Ltd. [1994] 3 NZLR 300, where the facts were indistinguishable from those in Siebe Gorman. Tompkins J held that the charge was a floating charge. He held (following Hoffmann J in Brightlife) that a restriction on charging or assigning the debts was not sufficient by itself to create a fixed charge, and (not following Slade J in Siebe Gorman) that a requirement to pay the proceeds into the company’s account with the holder of the charge without any restriction on the company’s power to use the money in the account was insufficient to do so either.
26. Brightlife was followed in In re Cosslett (Contractors) Ltd. [1998] Ch 495, in a different context. It was concerned with the nature of a charge over plant and machinery on a building site which the chargor was free to remove from the site but only if they were not required for the completion of the works. At p. 510 Millett LJ said:
“The chargor’s unfettered freedom to deal with the assets in the ordinary course of his business free from the charge is obviously inconsistent with the nature of a fixed charge; but it does not follow that his unfettered freedom to deal with the charged assets is essential to the existence of a floating charge. It plainly is not, for any well drawn floating charge prohibits the chargor from creating further charges having priority to the floating charge; and a prohibition against factoring debts is not sufficient to convert what would otherwise be a floating charge on book debts into a fixed charge: see in In re Brightlife Ltd. [1987] Ch 200, 209, per Hoffmann J.
The essence of a floating charge is that it is a charge, not on any particular asset, but on a fluctuating body of assets which remain under the management and control of the chargor, and which the chargor has the right to withdraw from the security despite the existence of the charge. The essence of a fixed charge is that the charge is on a particular asset or class of assets which the chargor cannot deal with free from the charge without the consent of the chargee. The question is not whether the chargor has complete freedom to carry on his business as he chooses, but whether the chargee is in control of the charged assets.”
27. The need for a requirement that the company should pay the proceeds of its book debts into the bank account which the company maintained with the holder of the charge did not cause any problem for the banks or their customers. That is what the company would normally do even in the absence of such a requirement. But the banks did not want to monitor the bank account and be required to give their consent whenever the company wished to make a withdrawal. They wanted the best of both worlds. They wanted to have a fixed charge on the book debts while allowing the company the same freedom to use the proceeds that it would have if the charge were a floating charge. With this object in view the draftsman of the charge which came before the court in New Bullas adopted a new approach.
28. In every previous case the debenture had treated book debts and their proceeds indivisibly. Now for the first time in any reported case the draftsman set out deliberately to distinguish between them. As in the present case the debenture purported to create two distinct charges, a fixed charge on the book debts while they remained uncollected and a floating charge on their proceeds. It differed from the debenture in the present case only in that the proceeds of the debts were not released from the fixed charge until they were actually paid into the company’s bank account, whereas in the present case they were released from the fixed charge as soon as they were received by the company. Their Lordships attach no significance to this distinction. The intended effect of the debenture was the same in each case. Until the charge holder intervened the company could continue to collect the debts, though not to assign or factor them, and the debts once collected would cease to exist. The proceeds which took their place would be a different asset which had never been subject to the fixed charge and would from the outset be subject to the floating charge.
29. The question in New Bullas, as in the present case, was whether the book debts which were uncollected when the receivers were appointed were subject to a fixed charge or a floating charge. At first instance Knox J, following Brightlife, held that they were subject to a floating charge. His decision was reversed by the Court of Appeal. Nourse LJ gave the only judgment.
30. He began by observing that, there being usually no need to deal with a book debt before collection, an uncollected book debt is a natural subject of a fixed charge; but once collected, the proceeds being needed for the conduct of the business, it becomes a natural subject of a floating charge. Their Lordships regard this as unsound: one might equally well say that unsold trading stock is a suitable subject of a fixed charge. Trading stock, that is to say goods held for sale and delivery to customers, and book debts, that is to say debts owed by customers to whom goods have been supplied or services rendered, are equally part of a trader’s circulating capital. The trader does not hold them for enjoyment in specie. They provide him with his cash flow and as such are the natural subjects of a floating charge. His ability to carry on business depends upon his freedom to realise such assets by turning them into money and back again.
31. The principal theme of the judgment, however, was that the parties were free to make whatever agreement they liked. The question was therefore simply one of construction; unless unlawful the intention of the parties, to be gathered from the terms of the debenture, must prevail. It was clear from the descriptions which the parties attached to the charges that they had intended to create a fixed charge over the book debts while they were uncollected and a floating charge over the proceeds. It was open to the parties to do so, and freedom of contract prevailed.
32. Their Lordships consider this approach to be fundamentally mistaken. The question is not merely one of construction. In deciding whether a charge is a fixed charge or a floating charge, the Court is engaged in a two-stage process. At the first stage it must construe the instrument of charge and seek to gather the intentions of the parties from the language they have used. But the object at this stage of the process is not to discover whether the parties intended to create a fixed or a floating charge. It is to ascertain the nature of the rights and obligations which the parties intended to grant each other in respect of the charged assets. Once these have been ascertained, the Court can then embark on the second stage of the process, which is one of categorisation. This is a matter of law. It does not depend on the intention of the parties. If their intention, properly gathered from the language of the instrument, is to grant the company rights in respect of the charged assets which are inconsistent with the nature of a fixed charge, then the charge cannot be a fixed charge however they may have chosen to describe it. A similar process is involved in construing a document to see whether it creates a licence or tenancy. The Court must construe the grant to ascertain the intention of the parties: but the only intention which is relevant is the intention to grant exclusive possession: see Street v Mountford [1985] AC 809 at p. 826 per Lord Templeman. So here: in construing a debenture to see whether it creates a fixed or a floating charge, the only intention which is relevant is the intention that the company should be free to deal with the charged assets and withdraw them from the security without the consent of the holder of the charge; or, to put the question another way, whether the charged assets were intended to be under the control of the company or of the charge holder.
33. In New Bullas the preferential creditors argued that the charge was a floating charge because the company was indeed free to withdraw the book debts from the security, which it could do simply by collecting them and using the proceeds in the ordinary course of its business. Nourse LJ rejected this, holding that it was not correct to say that the book debts could cease to be subject to the fixed charge at the will of the company; they ceased to be subject to the fixed charge because that is what the parties had agreed in advance when they entered into the debenture.
34. Their Lordships agree with Fisher J in the present case that this reasoning cannot be supported. It is entirely destructive of the floating charge. Every charge, whether fixed or floating, derives from contract. The company’s freedom to deal with the charged assets without the consent of the holder of the charge, which is what makes it a floating charge, is of necessity a contractual freedom derived from the agreement of the parties when they entered into the debenture. To find the consent in question in the original agreement would turn every floating charge into a fixed charge.
35. The decision has attracted much academic comment, much (though not all) of it hostile. Most interest, perhaps not surprisingly, has been generated by the novel attempt to separate the book debts from their proceeds: see for example Professor Goode: “Charges over Book Debts: A Missed Opportunity” (1994) 110 LQR 592; Sarah Worthington: “Fixed Charges over Book Debts and other Receivables” (1997) 113 LQR 562; Berg per contra: “Charges over Book Debts: A Reply” [1995] JBL 443. Their Lordships will return to this aspect after they have examined the other reasons given by Fisher J for following New Bullas in the present case.
36. The judge considered that the critical distinction between a floating charge and a fixed charge lay in the presence or absence of a power on the part of the company to dispose of the charged assets to third parties. It was sufficient to create a fixed charge on book debts that the company should be prohibited from alienating them, whether by assigning, factoring or charging them. It was not necessary to go further and also prohibit the company from collecting them and disposing of the proceeds. Their Lordships cannot accept this. It is contrary to both principle and authority and their Lordships think to commercial sense. It is inconsistent with the actual decisions in Brightlife and Supercool and contrary to the statements of principle in virtually every case from Re Yorkshire Woolcombers Association Ltd. to Cosslett. It makes no commercial sense because alienation and collection are merely different methods of realising a debt by turning it into money, collection being the natural and ordinary method of doing so. A restriction on disposition which nevertheless allows collection and free use of the proceeds is inconsistent with the fixed nature of the charge; it allows the debt and its proceeds to be withdrawn from the security by the act of the company in collecting it.
37. The judge drew a distinction between a power of disposition and a power of consumption. There is nothing, he suggested, inconsistent with a fixed charge in prohibiting the company from disposing of the charged asset to others but allowing it to exploit the characteristics inherent in the nature of the asset itself. Their Lordships agree with this, so long as the destruction of the security is due to a characteristic of the subject matter of the charge and not merely to the way in which the charge is drafted. A fixed charge may be granted over a wasting asset. A short lease, for example, is not particularly good security, but there is no conceptual difficulty in making it subject to a fixed charge. It will cease to exist by effluxion of time, but while it subsists it cannot be destroyed or withdrawn from the security by any act of the chargor. The chargee can protect itself by arranging appropriate terms of repayment so that the amount of the debt which is outstanding at any one time is commensurate with the value of the remaining security.
38. The judge gave two examples of fixed charges over assets which are defeasible at the will of the chargor. One was a charge over uncalled share capital; the other was a shipowner’s lien on subfreights. With respect neither supports his argument. A charge on uncalled share capital leaves the company with the right to make calls, and this may properly be regarded as analogous to a right to collect book debts. But, as the Court of Appeal observed, such a charge is normally accompanied by restrictions on the use to which the company may put the receipts, so that the situation is analogous to that which was thought to obtain in Siebe Gorman and did obtain in In re Keenan. The company can collect the money, but it is not free to use it as it sees fit.
39. The common form provision in a charterparty that the ship owner has a lien on subfreights is a different matter. In England it has been held to be a registrable charge either as a charge on book debts whether fixed or floating (In re Welsh Irish Ferries Ltd. [1986] Ch 471; Itex Itagrani Export SA v Care Shipping Corp. [1990] 2 Lloyd’s Rep 316) or as a floating charge (Annangel Glory Compania Naviera SA v M Golodetz Ltd. [1988] 1 Lloyd’s Rep 45). In none of these cases was it held to be a fixed charge, but the better view is that it is not a charge at all: see Oditah “The Juridical Nature of a Lien on Subfreights” (1989) LMCLQ. 191.
40. The extent of the rights conferred by the lien was described by Lord Alverstone in Tagart, Beaton & Co. v James Fisher & Sons [1903] 1 KB 391 at p. 395:
“A lien such as this on a sub-freight means a right to receive it as freight and to stop that freight at any time before it has been paid to the time charterer or his agent; but such a lien does not confer the right to follow the money paid for freight into the pockets of the person receiving it simply because that money has been received in respect of a debt which was due for freight.”
41. The lien is the creation of neither the common law nor equity. It originates in the maritime law, having been developed from the ship owner’s lien on the cargo. It is a contractual non-possessory right of a kind which is sui generis. Since the subfreights are book debts and so incapable of physical possession, the lien has been described as an equitable charge: see The Nanfri [1979] AC 757 at p. 784 per Lord Russell of Killowen. But this was a passing remark which was not necessary to the decision, and if the lien is a charge it is a charge of a kind unknown to equity. An equitable charge confers a proprietary interest by way of security. It is of the essence of a proprietary right that it is capable of binding third parties into whose hands the property may come. But the lien on subfreights does not bind third parties. It is merely a personal right to intercept freight before it is paid analogous to a right of stoppage in transitu. It is defeasible on payment irrespective of the identity of the recipient. In this respect it is similar to a floating charge while it floats, but it differs in that it is incapable of crystallisation. The ship owner is unable to enforce the lien against the recipient of the subfreights but, as Oditah observes, this is not because payment is the event which defeats it as Nourse J stated in In re Welsh Irish Ferries Ltd.; it is because the right to enforce the lien against third parties depends on an underlying property right, and this the lien does not give. Apart from the obiter dictum of Lord Russell in The Nanfri, the cases in which the lien has been characterised as an equitable charge are all decisions at first instance and none of them contains any analysis of the requirements of a proprietary interest. Quite apart from the conceptual difficulties in characterising the lien as a charge, the adverse commercial consequences of doing so are sufficiently serious to cast grave doubt on its correctness. In passing from this topic their Lordships note that the decision in In re Welsh Irish Ferries Ltd. will be reversed by Parliament by section 396(2)(g) of the Companies Act 1985 inserted by section 93 of the Companies Act 1989 when that section is brought into force.
42. Their Lordships turn finally to the questions which have exercised academic commentators: whether a debt or other receivable can be separated from its proceeds; whether they represent a single security interest or two; and whether a charge on book debts necessarily takes effect as a single indivisible charge on the debts and their proceeds irrespective of the way in which it may be drafted.
43. Property and its proceeds are clearly different assets. On a sale of goods the seller exchanges one asset for another. Both assets continue to exist, the goods in the hands of the buyer and proceeds of sale in the hands of the seller. If a book debt is assigned, the debt is transferred to the assignee in exchange for money paid to the assignor. The seller’s former property right in the subject matter of the sale give him an equivalent property right in its exchange product. The only difference between realising a debt by assignment and collection is that, on collection, the debt is wholly extinguished. As in the case of alienation, it is replaced in the hands of the creditor by a different asset, viz. its proceeds.
44. The Court of Appeal saw no reason to examine the conceptual problems further. They held that, even if a debt and its proceeds are two different assets, the company was free to realise the uncollected debts, and accordingly the charge on those assets (being the assets whose destination was in dispute) could not be a fixed charge. There was simply no need to look at the proceeds at all. The same point is neatly expressed in Lightman and Moss: The Law of Receivers of Companies (2nd Ed. 1994) at p. 36:
“If there is a valid legal distinction to be drawn between a debt and its proceeds, then one might have thought that the two should be treated as separate assets of the company, ie. that the debt exists while uncollected and is extinguished by payment, at which point the company acquires a new asset, namely the moneys paid by the debtor. If this is right, then it is difficult to see why an agreement relating to dealings with one asset, namely the moneys received, should be at all relevant to the validity of the charge which existed over a different asset, namely the debt while it was uncollected.”
45. Their Lordships agree with this to this extent: if the company is free to collect the debts, the nature of the charge on the uncollected debts cannot differ according to whether the proceeds are subject to a floating charge or are not subject to any charge. In each case the commercial effect is the same: the charge holder cannot prevent the company from collecting the debts and having the free use of the proceeds. But it does not follow that the nature of the charge on the uncollected book debts may not differ according to whether the proceeds are subject to a fixed charge or a floating charge; for in the one case the charge holder can prevent the company from having the use of the proceeds and in the other it cannot. The question is not whether the company is free to collect the uncollected debts, but whether it is free to do so for its own benefit. For this purpose it is necessary to consider what it may do with the proceeds.
46. While a debt and its proceeds are two separate assets, however, the latter are merely the traceable proceeds of the former and represent its entire value. A debt is a receivable; it is merely a right to receive payment from the debtor. Such a right cannot be enjoyed in specie; its value can be exploited only by exercising the right or by assigning it for value to a third party. An assignment or charge of a receivable which does not carry with it the right to the receipt has no value. It is worthless as a security. Any attempt in the present context to separate the ownership of the debts from the ownership of their proceeds (even if conceptually possible) makes no commercial sense.
47. The draftsman of the debenture in the present case recognised this. He purported to separate the book debts and their proceeds, but he did not attempt to separate their ownership. They were charged by the same chargor to the same chargee. It is a matter of personal choice whether one describes this as resulting in two different charges or a single charge (which is said to be convertible). The critical factor which is determinative of the nature of the charge in respect of the uncollected book debts is that the event which is said to convert the charge from a fixed to a floating charge (if there is only one) or to replace the one charge by the other (if there are two) is the act of the company.
48. To constitute a charge on book debts a fixed charge, it is sufficient to prohibit the company from realising the debts itself, whether by assignment or collection. If the company seeks permission to do so in respect of a particular debt, the charge holder can refuse permission or grant permission on terms, and can thus direct the application of the proceeds. But it is not necessary to go this far. As their Lordships have already noted, it is not inconsistent with the fixed nature of a charge on book debts for the holder of the charge to appoint the company its agent to collect the debts for its account and on its behalf. Siebe Gorman and Re Keenan merely introduced an alternative mechanism for appropriating the proceeds to the security. The proceeds of the debts collected by the company were no longer to be trust moneys but they were required to be paid into a blocked account with the charge holder. The commercial effect was the same: the proceeds were not at the company’s disposal. Such an arrangement is inconsistent with the charge being a floating charge, since the debts are not available to the company as a source of its cash flow. But their Lordships would wish to make it clear that it is not enough to provide in the debenture that the account is a blocked account if it is not operated as one in fact.
49. Before their Lordships the receivers insisted that the company had no power to withdraw either the book debts or their proceeds from the security of the fixed charge. The debenture was so drafted that the company had no need to do so. The debts were automatically extinguished by collection and their proceeds never became subject to a fixed charge. But this is simply playing with words. Whether conceptually there was one charge or two, the debenture was so drafted that the company was at liberty to turn the uncollected book debts to account by its own act. Taking the relevant assets to be the uncollected book debts, the company was left in control of the process by which the charged assets were extinguished and replaced by different assets which were not the subject of a fixed charge and were at the free disposal of the company. That is inconsistent with the nature of a fixed charge.
50. Their Lordships consider that New Bullas was wrongly decided. They will humbly advise Her Majesty that the present appeal should be dismissed. The appellants must pay the respondents’ costs before the Board.
Inglis v Roberston & Baxter
[1898] UKHL 2 (1898) 25 R (HL) 70 d
Lord Watson
I do not find it necessary to consider, for the purposes of this appeal, whether, or in what circumstances, according to the law of England, a valid pledge of documents of title to goods stored in a bonded warehouse will enable the pledgee to defeat the right of a creditor of the person who in the warehouse hooks is entered as the owner of the goods. The present question does not arise between two Englishmen, nor does it arise in relation to mercantile transactions which can reasonably be characterised as English. The situs of the goods was in Scotland. The Scottish creditors who claim their proceeds did not make any English contract; and in order to attach them they made use of the execution which the law of Scotland permits for converting their personal claim against the owner into a real charge upon the goods themselves. It would, in my opinion, be contrary to the elementary principles of international law, and, so far as I know, without authority, to hold that the right of a Scottish creditor when so perfected can he defeated by a transaction between his debtor and the citizen of a foreign country which would be according to the law of that country, but is not according to the law of Scotland, sufficient to create a real right in the goods.
I can see no reason to doubt that, by Scottish law as well as English, the indorsement and handing over of delivery-orders in security of a loan, along with a letter professing to hypothecate the goods themselves, is sufficient in law, and according to mercantile practice, to constitute a pledge of the documents of title, whatever may be the value and effect of the right so constituted. In my opinion, the right so created, whether in England or in Scotland, will give the pledgee a right to retain the ipsa corpora of the documents of title until his advance is repaid. The crucial question in this case is, whether the right goes farther and vests in the pledgee of the documents, not a jus ad rem merely, but a real interest in the goods to which these documents relate. That is a question which I have no hesitation in holding must, in the circumstances of this case, be solved by reference to the law of Scotland. The whisky was in Scotland, and was there held in actual possession by a custodier for Goldsmith as the true owner. That state of the title could not, so far as Scotland was concerned, be altered or overcome by a foreign transaction of pledge which had not, according to the rules of Scottish law, the effect of vesting the property of the whisky, or, in other words, a jus in re, in the pledgee.
I have been surprised by the suggestion, which appears to have found favour with one of the learned Judges in the Court below, that the recent decision of this House in North-Western Bank v. Poynter, Son, & Macdonalds,1 Is an authority for holding that this appeal ought to he decided according to English law. The circumstances of that case appear to me to stand in marked contrast to the facts of this appeal. There a Liverpool firm owned and held the bills of lading of a cargo destined to the port of Glasgow. The firm obtained an advance from a Liverpool bank, to whom they, as a security, duly indorsed the bill of lading, which carried the property of the goods according to Scottish as well as English law. The bank sent the bill of lading, without indorsing it, to the pledgors in Liverpool, in order that they might act as the agents of the bank in selling the cargo, and receiving and accounting for the price. Upon that footing the pledgors sold the cargo, and a Scottish creditor, to whom they owed a personal debt, arrested the price in the hands of the purchaser in Scotland, and claimed a preferable right to it, upon the ground that by the law of Scotland the pledgees had lost their right of property in the cargo, which had reverted to the pledgors in consequence of their having returned the bill of lading to them for a temporary and special purpose, I thought at the time, and I remain of opinion with my noble and learned friend Lord Herschell, that, in these circumstances, the relative rights of the pledgor and the pledgee depended upon the law of England, the country in which the pledge of the bill of lading was made, and in which the facts which were said to have destroyed the right of the pledgees occurred. I am not prepared to hold that, whenever the cargo of a ship is destined to a port in one country, the dealings of the owner of the cargo with the bill of lading which represents and carries the property of the goods must in every other country be governed by the law of the locus where the ship is to unload.
It was not disputed by the appellant’s counsel, and it is hardly necessary to repeat, that by the common law of Scotland the indorsation and hypothecation of delivery-orders, although it may give the pledgee a right to retain the documents, does not give him any real right in the goods which they represent. He can only attain to that right by presenting the delivery-orders to the custodier by whom they were granted, and obtaining delivery of the goods from him, or by making such intimation of his right to the custodier as will make it the legal duty of the latter to hold the goods for him. His right, which in so far as it relates to the goods is in the nature of a, jus ad rem, will be defeated if, before he has either obtained delivery or given such intimation, the goods are validly attached in the hands of the custodier by a creditor of the person for whom the custodier holds them.
It was argued, however, that the common law of Scotland has been materially altered by the provisions of the Factors Act, 1889, their effect being that a pledge of the documents of title is by itself sufficient to carry a real right to the goods ; and that the pledgee of the documents, from the moment when his right is completed by indorsation and delivery, is in the same position as if he had been pledgee of the goods and had obtained possession of them. The statute of 1889 is an English Act, which consolidates and repeals the previous Factors Acts from 4 Geo. IV. c. 83, to 40 and 41 Vict. c. 39. But, by the Factors (Scotland) Act, 1890, the whole provisions of 1 22 R. (H. L.) 1 ; [1895] A. C. 56. the English statute of 1889 are extended to Scotland, and must therefore be construed as if they had originally been made applicable to that country.
Two clauses of the Act of 1889 were founded on by the appellant. The first of these is sec. 3, which enacts that ” a pledge of the documents of title to goods shall be deemed to be a pledge of the goods.” So far as it applies, the language of that clause is unambiguous. It provides that to that extent a pledge of the documents of title shall, although in point of fact it is not so, be nevertheless regarded in law as equivalent to a pledge of the goods. If the enactment had been embodied in a statute which contemplated an alteration of the general law with regard to contracts of pledge in Scotland, I should have had little difficulty in holding that its effect would have been to make a pledge of the documents of title in all cases equivalent to a completed pledge of the goods themselves. But I am unable to come to the conclusion that the clause was meant to be, or is, of general application. It is one of a group of clauses which are collected under the statutory heading, “Dispositions by Mercantile Agents”; and an examination of the context of these clauses shews conclusively, in my opinion, that the enactments of sec. 3 were merely intended to define the full effect of a pledge of the documents of title made by a mercantile agent under and by virtue of one or other of the subsections of the preceding clause (sec. 2). Accordingly, sec. 3 has, in my apprehension, no application to the case of a pledge of documents of title by one who was in the position of Goldsmith, or by any other person who is not a mercantile agent within the meaning of the Act of 1889.
The other clause founded upon by the appellant was sec. 9, one of a group of clauses which occur under the statutory heading “Dispositions by Sellers or Buyers of Goods.” The main if not the sole object of these clauses appears to be this—to protect the purchaser or pledgee of documents of title deriving right from one who is lawfully in possession of them against a claim of retention for unpaid price, or a right of stoppage in transitu, by the original seller, in cases where the purchaser or pledgee has had no notice of such claim or right. Goldsmith from whom the appellant derived his right as pledgee to the documents of title representing the whisky in question, was not a pledgor within the meaning of sec. 9, who must be a person who has obtained the documents of title either from his seller, or with consent of his seller. Goldsmith did not obtain the documents of title which he pledged to the appellant from the respondents, who were his sellers, or with their consent. He got the documents in his own right and in his own name, as owner of the whisky, directly from the warehousemen after the goods had been transferred to his name in the warehouse books.
I am therefore of opinion that the interlocutor appealed from ought to be affirmed, with costs.
Lord Herschell.—[His Lordship stated the facts, and continued :—] It was admitted on behalf of the appellant that, apart from the provisions of the Factors Act, 1889, which were extended to Scotland by an Act of the year 1890, the claim of the respondents as arresting creditors must prevail. The question turns, then, on the construction of certain provisions of the Act of 1889. The section mainly relied on is the third, which is in these terms :—” A pledge of the document of title to goods shall be deemed to be a pledge of the goods.”
I think that in the present case there was a pledge of documents of title to goods. They were indorsed and handed to the appellant as security for an advance, and he was clearly entitled to hold them until the advance had been repaid. This appears to me to have constituted a pledge of the documents, and I fail to see how it was any the less a pledge because the agreement of 18th December was at the same time executed by Goldsmith. But it is not necessary in the view I take to express an opinion upon the point so much discussed in the judgments in the Court of Session, whether the effect of the enactment is to put the pledgee of the documents of title in the same position as if he had received possession of the goods to which the documents relate. I think the enactment has no application to the present case, inasmuch as the pledge was not a disposition by a mercantile agent, and, in my opinion, it is to such dispositions only that the section applies. It is true that it is general in its terms, but it is one of a group of sections headed ” Dispositions by Mercantile Agents.” The Act is divided into parts. The first, headed ” Preliminary,” consists of a definition clause. The last part, headed ” Supplemental,” contains provisions as to the mode of transfer ” for the purposes of this Act,” and certain savings. The other two parts are headed respectively ” Dispositions by Mercantile Agents,” and “Dispositions by Buyers and Sellers of Goods.” These headings are not, in my opinion, mere marginal notes, but the sections in the group to which they belong must be read in connection with them and interpreted by the light of them. It appears to me that the Legislature has clearly indicated the intention that the provisions of sec. 3 should not be treated as an enactment relating to all pledges of documents of title, but only to those effected by mercantile agents.
The only other section relied on by the appellant is the 9th. I think this section also is inapplicable to the case before your Lordships. I am not satisfied, as at present advised, that the section applies in any case where no right to the goods or the documents of title remains in the seller who has parted with possession of them. But I do not decide this point. The possession of the documents of title which were pledged was obtained from the warehouse-keeper by Goldsmith by virtue of his ownership of the goods. They had already been transferred into his name by the warehouse-keeper, and were held for him before the warrants were delivered. I think, in these circumstances, it cannot properly be said he obtained possession of them ” with the consent of the seller.”
For these reasons I think the judgment appealed from should be affirmed, and the appeal dismissed with costs.
Lord Macnaghten and Lord Morris concurred.
Goldcorp Exchange Ltd & Ors v Liggett & Ors
[1994] UKPC 3 [1995] AC 74, [1995] 1 AC 74, [1994] UKPC 3, [1994] 2 All ER 806
III. Title to bullion: the sale contracts
Their Lordships begin with the question whether the customer obtained any form of proprietary interest, legal or equitable, simply by virtue of the contract of sale, independently of the collateral promises. In the opinion of their Lordships the answer is so clearly that he did not that it would be possible simply to quote section 18 of the Sale of Goods Act 1908 (New Zealand) (corresponding to section 16 of the Sale of Goods Act 1893 {UK}) and one reported case and turn to more difficult issues. It is however convenient to pause for a moment to consider why the answer must inevitably be negative, because the reasons for this answer are the same as those which stand in the way of the customer-s at every point of the case. It is common ground that the contracts in question were for the sale of unascertained goods. For present purposes, two species of unascertained goods may be distinguished. First, there are generic goods. These are sold on terms which preserve the seller’s freedom to decide for himself how and from what source he will obtain goods answering the contractual description. Secondly, there are “goods sold ex-bulk”. By this expression their Lordships denote goods which are by express stipulation to be supplied from a fixed and a pre-determined source, from within which the seller may make his own choice (unless the contract requires it to be made in some other way) but outside which he may not go. For example, “1 sell you 60 of the 100 sheep now on my farm”.
Approaching these situations a priori common sense dictates that the buyer cannot acquire title until it is known to what goods the title relates. Whether the property then passes will depend upon the intention of the parties and in particular on whether there has been a consensual appropriation of particular goods to the contract. On the latter question the law is not straightforward, and if i~ had been decisive of the present appeal it would have been necessary to examine cases such as Carlos Federspiel & Co. S.A. v. Charles Twigg & Co. Ltd. [1957] 1 Lloyd’s Rep. 240 and other cases cited in argument. In fact, however, the case turns not on appropriation but on ascertainment, and on the latter the law has never been in doubt. It makes no difference what the parties intended if what they intend is impossible: as is the case with an immediate transfer of title to goods whose identity is not yet known. As Lord Blackburn wrote m his treatise on The Effect of the Contract of Sale, 1st ed. (1845), pages 122-123, a principal inspiration of the Sale of Goods Act 1893:-
“The first of the rules that the parties must be agreed as to the specific goods on which the contract is to attach before there can be a bargain and sale, is one that is founded on the very nature of things. Till the parties are agreed on the specific individual goods the contract can be no more than a contract to supply goods answering a particular description, and since the vendor would fulfil his part of the contract by furnishing any parcel of goods answering that description, and the purchaser could not object to them if they did answer the description, it is clear there can be no intention to transfer the property in any particular lot of goods more than another, till it is ascertained which are the very goods sold. This rule has existed at all times; it is to be found in the earliest English law books … “
It makes no difference, although the goods are so far ascertained that the parties have agreed that they shall be taken from some specified larger stock. In such a case the reason .still applies: the parties did not intend to transfer the property in one portion of the stock more than in another, and the law which only gives effect to their intention, does not transfer the property in any individual portion”
Their Lordships have laboured this point, about which there has been no dispute, simply to show that any attempt by the non-allocated claimants to assert that a legal title passed by virtue of the sale would have been defeated, not by some arid legal technicality but by what Lord Blackburn called “the very nature of things”. The same conclusion applies, and for the same reason. to any argument that a title in equity was created by the sale, taken in isolation from the collateral promises. It is unnecessary to examine in detail the decision of the Court of Appeal in in re Wait [1927] 1 Ch, 606 for the facts were crucially different. There, the contract was for a sale ex-bulk. The 500 tons in question formed part of a larger quantity shipped on board a named vessel; the seller could supply from no other source; and once the entire quantity had been landed and warehoused the buyer could point to the bulk and say that his goods were definitely there although he could not tell which part they were. It was this feature which prompted the dissenting opinion of Sargant L.J. that the sub purchasers had a sufficient partial equitable interest in the whole to found a claim for measuring-out and delivery of 500 tons. No such feature exists here. Nevertheless, the reasoning contained in the judgment of Atkin L.J., at pages 625-641, which their Lordships’ venture to find irresistible. points unequivocally to the conclusion that under a simple contract for the sale of unascertained goods no equitable title can pass merely by virtue of the sale.
This is not, of course, the end of the matter. As Atkin L.J. himself acknowledged at page 636:-
“[The rules m the statute] have, of course. no relevance when one is considering rights 1 legal or equitable, which may come into existence dehors the contract for sale. A seller or a purchaser may, of course. create any equity he pleases by way of charge, equitable assignment or any other dealing with or disposition of goods, the subject matter of sale: and he may, of course, create such an equity as one of the terms expressed in the contract of sale. ,.
Their Lordships therefore turn to consider whether there is anything in the collateral promises which enables the customers to overcome the practical objections to an immediate transfer of title. The most direct route would be to treat the collateral promises as containing a declaration of trust by the company in favour of the customer. The question then immediately arises – What was the subject matter of the trust? The only possible answer, so far as concerns an immediate transfer of title on sale. Is that the trust related to the company’s current stock of bullion answering the contractual description; for there was no other bul1ion to which the trust could relate. Their Lordships do not doubt that the vendor of goods sold ex-bulk can effectively declare himself trustee of the bulk in favour of the buyer, so as to confer pro tanto an equitable title. But the present transaction was not of this type. The company cannot have intended to create an interest in its general stock of gold which would have inhibIted any dealings with it otherwise than for the purpose of delivery under the non-allocated sale contracts. Conversely the customer, who is presumed to have intended that somewhere in the bullion held by or on behalf of the company there would be stored a quantity representing “his” bullion, cannot have contemplated that his rights would be fixed by reference to a combination of the quantity of bullion of the relevant description which the company happened to have in stock at the relevant time and the number of purchasers who happened to have open contracts at that time for goods of that description. To understand the transaction in this way would be to make it a sale of bullion ex-bulk, which on the documents and findings of fact it plainly was not.
Nor is the argument improved by re-shaping the trust, so as to contemplate that the property in the res vendita did pass to the customer, albeit m the absence of delivery, and then merged in a general equitable title to the pooled stock of bullion. Once again the argument contradicts the transaction. The customer purchased for the physical delivery on demand of the precise quantity of bu1lion fixed by h1s contract, not a shifting proportion of a shifting bulk, prior to delivery. It is of course true that a vendor may agree to retain physical possession of the goods on behalf of his purchaser after the sale has been completed, and that there may be a constructive delivery and redelivery of possession, so as to transform the vendor into a bailee or pledgee without the goods actua1ly changing hands: See per Lord Atkinson in Dublin City Distillery Ltd. v. Doherty [1914] A.C. 823, at page 844. Lord Atkinson was there contemplating a situation, such as existed in the Dublin City case itself, where the goods held in the warehouse were already identified (by numbers on the casks: see page 825), so that the contract was one for the sale of specific goods under which the property would pass at once to the vendee. The case is, however, quite different where the sale is of generic goods. Even if the present contract had been a sale ex-bulk, in the sense that the contractual source was the bulk of bullion in the store, section 18 of the 1908 Act would have prevented the property from passing on sale: see Laurie v. Dudin & Sons [19261 1 K.B. 223 and Whitehouse v. Frost (1810) 12 East. 614. The present case is even more clear, since the customers contracted to purchase generic goods without any stipulation as to their source.
The next group of arguments for the non-allocated claimants all turn on an estoppel, said to derive from the collateral promises. Their Lordships derive no assistance from cases such as Waltons Stores (Interstate) Ltd. v. Maher [1988] 64 CLR 387 and Commonwealth of Australia.v. Verwayen (1990) 95 ALR: 321 which show that on occasion a party may estop himself from relying on the protection of the statute. No such estoppel could assist the customers here, for the problem facing them at every turn is not section 18, but the practical reality underlying it which Lord Blackburn called “the very nature of things”: namely that it is impossible to have a title to goods, when nobody knows to which goods the title relate, The same objection rules out reliance on cases such as In re Sharpe [1980 J 1 WLR. 219 concerning what is called a proprietary estoppel.
A more plausible version of the argument posits that the company, having represented to its customers that they had title to bullion held in the vaults, cannot now be heard to say that they did not. At first sight this argument gains support from a small group of cases, of which Knights v. Wiffen (870) LR 5 Q.B. 660 is the most prominent. Wiffen had a large quantity of barley lying in sacks in his granary, close to a railway station. He agreed to sell 80 quarters of this barley to Maris, without appropriating any particular sacks. Maris sold 60 quarters to Knights, who paid for them and received in exchange a document signed by Maris addressed to the station master, directing him to deliver 60 quarters of barley. This was shown by the station master to Wiffen who told him that when he got the forwarding note the barley would be put on the line. Knights gave a forwarding note to the station master for 60 quarters of barley. Maris became bankrupt, and Wiffen, as unpaid vendor, refused to part with the barley. Knights sued Wiffen in trover, to which Wiffen pleaded that the barley was not the property of the plaintiff. A very strong court of Queen’s Bench found in favour of the plaintiff. Blackburn J. explained the matter thus, at pages 655-666:-
“No doubt the law is that until an appropriation from a bulk is made, so that the vendor has said what portion belongs to him and what portion belongs to the buyer, the goods remain “in solido, and no property passes. But can Wiffen here be permitted to say, ‘I never set aside any quarters?’ …. The defendant knew that, when he assented to the delivery order, the plaintiff, as a reasonable man would rest satisfied – .. The plaintiff may well say, ‘I abstained from active measures in consequence of your statement, and I am entitled to hold you precluded from denying that what you stated was true’.”
There may perhaps be a shadow over this decision, notwithstanding the high authority of the court: see the observations of Brett L.J. in Simm v. Anglo-American Telegraph Co. (1879) 5 QED 188 at page 212. Assuming that the decision was nevertheless correct t The question is whether it applies to the present case. Their Lordships consider that, notwithstanding the apparent similarities, it does not. The agreement for sale in Knight v. Wiffen (supra) was a sale ex-bulk, or at least it must have been seen as such, for ctherwise Blackburn J’s judgment would have contradicted his treatise in the passage above quoted.
On this view, the bulk was the whole of the stock in Wiffen’ s warehouse. This stock was therefore committed to the purchase to the extent that Wiffen could not properly have sold the whole of it without making delivery of part to his buyer. Another and more important aspect of the same point is that the bulk actually existed. The effect of Wiffen’s representation was to preclude him from denying to the sub-purchaser, Knights, that he had made a sufficient appropriation from the fixed and identified bulk to give the intermediate purchaser, and hence Knights himself, the proprietary interest sufficient to found a claim in trover. The present case is quite different, for there was no existing bulk and therefore nothing from which a title could be carved out by a deemed appropriation. The reasoning of Knights v. WifJen (supra) does not enable a bulk to be conjured into existence for this purpose simply through the chance that the vendor happens to have some goods answering the description of the res vendita in its trading stock at the time of the sale – quite apart, of course, from the fact that if all the purchasers obtained a deemed title by estoppeq there would not be enough bullion to go around.
All this aside, there is another reason why the argument founded on estoppel cannot prevail. The answer is given by Mellor J. in Knights v. Wiffen itself, at pages 666-667, where quoting from Blackburn’s Contract of Sale page 162 he says:-
“This is a rule [i.e. the estoppel], which, within the limits applied by law, is of great equity; for when parties have agreed to act upon an assumed state of facts, their rights between themselves are justly made to depend on the conventional state of facts and not on the truth. The reason of the rule ceases at once when a stranger to the arrangement seeks to avail himself of the statements which were not made as a basis for him to act upon. They are for a stranger evidence against the party making the statement, but no more than evidence which may be rebutted; between the parties they form an estoppel in law”
Later, Brett L.J. was to observe in Simm v. Anglo-American TeLegraph Co. (supra) at pages 206-207:-
“It seems to me that an estoppel gives no title to that which is the subject matter of estoppel. The estoppel assumes that the reality is contrary to that which the person is estopped from denying, and the estoppel has no effect at all upon the reality of the Circumstances … A person may be estopped from denying that certain goods be10ng to another; he may be compelled by a suit in the nature of an action of trover to deliver them up, if he has them in his possession under his control; but if the goods, in respect of which he has estopped himself, really belonged to someone else, it seems impossible to suppose that … he can be compelled to deliver over another’s goods to the person in whose favour the estoppel exists against him … That person cannot recover the goods, because no property has really passed to him. he can recover only damages. in my view estoppel only creates a cause of action between the person in whose favour the estoppel exists and the person who is estopped.”
Similar statements can be found in several texts, such as for example N. E. Palmer. “Bailment” 2nd Edn. (1991), page 1374.
To this the customers respond that they are not obliged to assert the same proprietary interest against the bank as they would do if their opponents were strangers to the entire relationship. By taking a floating rather than an immediate fixed charge the bank accepted the risk of adverse dealings by the company with its assets. and when the charge crystallised the bank “stood in the shoes” of the company, taking those assets with all the detrimental features which the company had attached to them. If the estoppel binds the company, then it must bind the bank as well.
Attractive as this argument has been made to seem, their Lordships cannot accept it. The chargee does not become on the crystallisation of the charge the universal successor of the chargor. in the same way as the trustee, in bankruptcy or personal representative, who is as much subject to the personal claims of third parties against the insolvent as he is entitled to the benefit of personal claims of which the insolvent is the obligee. Rather, the chargee becomes entitled to a proprietary interest which he asserts adversely to the company, personified by the liquidator and all those general creditors who share in the assets of the company. The freedom of the chargor to deal with its assets pending the crystallisation of the charge does not entail that the chargee’s right to the assets is circumscribed by an indebtedness of a purely personal nature. The most that the Knights v. Wiffen line of authority can give to the purchaser is the pretence of a title where no title exists. Valuable as it may be where one party to the estoppel asserts as against the other a proprietary cause of action such as trover, this cannot avail the purchaser in a contest with a third-party creditor possessing a real proprietary interest in a real subject matter, whereas the purchaser has no more than a pretence of a title to a subject matter which does not actually exist.
Similar obstacles stand in the way of a more elaborate version of the same argument. This seeks to combine two principles: the first that a person who represents (by attornment or otherwise} that he has goods In his possession which he holds for a third party is in certain circumstances prec1uded from denying to that third party that he does so possess and hold the goods even if in tact he does not; the second that a bailee of goods is precluded, as against the bailor, from denying that the bailor has a good title. The result is said to be that by acknowledging itself to be a bailee the company gave its customers a good title to that which they had agreed to purchase. Whilst acknowledging the ingenuity of this argument their Lordships are unable to accept it. If correct, it would entail that a customer, who chose to bring a proprietary action [such as trover, under the former law) rather than simply claiming damages for non-delivery would be entitled to an order for delivery-up of the goods which he had purchased. But which goods? Not a portion of the goods in store, for there was no representation and the customers cannot have believed that it was from these goods alone that by a process of separation their own orders would be fulfilled. And if not these goods, there were no others to which the title could attach since the source of supply was completely at large.
Their Lordships must also reject a further variant of the argument, whereby a trust in respect of bullion came into existence as an aspect bf a bailment, so that even if title stricto sensu did not pass nevertheless the fruits of the breach of trust may be traced into the existing stock of bullion. In other circumstances it might be necessary to look more closely at those elements of the argument which seek to attach the characteristics of a trust to a relationship of bailment, which does not ordinarily have this character, and also at the feasibility of tracing. There is no need for this, however, since there was never any bailment, and no identifiable property to which any trust could attach.
IV. Title to after-acquired bullion
Having for these reasons rejected the submission that the non-allocated claimants acquired an immediate title by reason of the contract of sale and the collateral promises their Lordships turn to the question whether the claimants later achieved a proprietary interest when the company purchased bullion and put it into its own stock. Broadly speaking, there are two forms which such an argument might take.
According to the first, the contracts of sale were agreements for the sale of goods afterwards to be acquired. It might be contended that quite independently of any representation made by the company to the non-allocated claimants, as soon as the company acquired bullion answering the contractual description the purchaser achieved an equitable title, even though the passing of legal title was postponed until the goods were ascertained and appropriated at the time of physical delivery to the purchaser. In the event this argument was not separately pursued, and their Lordships mention it only by way of introduction. They will do so briefly. since it was bound to fail. The line of old cases, founded on Holroyd v. Marshall (1862) 10 H.L.C. 191 and discussed in Benjamin on Sale of Goods, 3rd Edn. (1987), pages 80, 218-219, at paras. 106 and 357 which might be said to support it, was concerned with situations where the goods upon acquisition could be unequivocally identified with the individual contract relied upon. As Lord Hanworth M.R. demonstrated in in re Wait, supra, the reasoning of these cases cannot be transferred to a situation like the present where there was no means of knowing to which, if any, of the non-allocated sales a particular purchase by the company was related. Since this objection on its own is fatal, there is no need to discuss the other obstacles which stand in its way.
The second category of argument asserts, in a variety of forms, that the collateral promises operated to impress on the bullion, as and when it was acquired by the company, a trust in favour of each purchaser. Before looking at the arguments in detail it is necessary to mention a problem which is very little discussed in the Judgments and arguments. It will be seen that the ana1vsis to date has involved two markedly different assumptions. The first relates to the expectation of the customer in the light of the collateral promises. The customer is assumed to have believed that it would make no difference whether he took immediate delivery of the bullion and put it in a bank, or left it with the company – except that in the latter case he would avoid the trouble, risk and expense of storage. 1n law this expectation could be fulfilled only by a system under which the company obtained bullion either by an outside purchase or by transfer from its own stock, and immediately stored it separately in the name of the customer, leaving it untouched until the moment of delivery or re-purchase. The second assumption relates to the obligations which the company actually undertook. It has not been suggested that this matched the customer’s expectation, for there is nothing in the collateral promises, either written or oral, entitling the customer to separate and individual appropriation of goods. Instead, as shown by the passage already quoted from the judgment of McKay ]., the arguments proceed on the basis that the company promised to maintain bullion, separate from its own trading stock, which would in some way stand as security, or reassurance, that the bullion would be available when the customer called for delivery. But what kind of security or reassurance? 1f the scheme had contemplated that, properly performed, it would have brought about a transfer of title to the individual customer before that customer’s appropriated bullion was mixed in the undifferentiated bulk, analogies could have been drawn with decisions such as Spence v. Union Maine Insurance Co. Ltd. (1868) LR 3 CP 427, South Australia Insurance Co .v. Rendell (1869) 3 App.Cas. 101, Indian 0il Corporation Ltd. v. Greenstone Shipping S.A. (Panama) [1988] Q.B. 345, and the United States silo cases of which Savage v. Salem Mills Co. (1906) 85 Pacific Rep. 69 is an example. Since, however, even if the company had performed its obligations to the full there would have been no transfer of title to the purchaser before admixture, these cases are not in point. The only remaining alternative, consistently with the scheme being designed to give the customer any title at all before delivery, is that the company through the medium of the collateral promises had declared itself a trustee of the constantly changing undifferentiated bulk of bullion which should have been set aside to back the customers’ contracts. Such a trust might well be feasible in theory, but their Lordships find it hard to reconcile with the practicalities of the scheme, for it would seem to involve that the separated bulk would become the source from which alone the sale contracts were to be supplied: whereas, as already observed, it is impossible to read the collateral promises as creating a sale ex-bulk.
This being so, whilst it is easy to see how the company’s failure to perform the collateral obligations has fuelled the indignation created by its failure to deliver the bullion under the sales to non-allocated purchasers, their Lordships are far from convinced that this particular breach has in fact made any difference.
Let it be assumed, however, as did McKay J. in his dissenting judgment, that the creation of a separate and sufficient stock would have given the non-allocated purchasers some kind of proprietary interest, the fact remains that the separate and sufficient stock did not exist.
The customers’ first response to this objection is that even if the concept of an immediate trust derived from a bailment arising at the time of the original transactions cannot be sustained, the collateral promises created a potential or incomplete or (as it was called in argument) “floating” bailment, which hovered above the continuing relationship between each purchaser and the company, until the company bought and took delivery of bullion corresponding to the claimant’s contract, whereupon the company became bailee of the bullion on terms which involved a trust in favour of the purchaser. Their Lordships find it impossible to see how this ingenious notion, even if feasible in principle. could be put into practice here, given that the body of potential beneficiaries was constantly changing as some purchasers called for and took delivery whilst others came newly on the scene, at the same time as the pool of available bullion waxed and waned (sometimes to zero as regards some types of bullion) with fresh deliveries and acquisitions. Even if this is left aside, the concept simply does not fit the facts. True, there is no difficultly with a transaction whereby B promises A that if in the future goods belonging to A come within the physical control of B he will hold them as bailee for A on terms fixed in advance by the agreement.. But this has nothing to do with a trust relationship, and it has nothing to do with the present case. sn1ce in the example given A has both title to the goods and actual or constructive possession of them before then receipt by B, whereas in the present case the non-allocated claimants had neither. The only escape would be to suggest that every time the company took delivery of bullion of a particular description all the purchasers from the company of the relevant kind of bullion acquired both a higher possessory right than the company (for such would be essential if the company was to be a bailee) and a title to the goods, via some species of estoppel derived from this notional transfer and re-transfer of possession, Their Lordships find it impossible to construct such a contorted legal relationship from the contracts of sale and the collateral promises,
Next, the claimants put forward an argument in two stages, First, it is said that because the company held itself out as willing to vest bullion in the customer and to hold it in safe custody on behalf of him in circumstances where he was totally dependent on the company, and trusted the company to do what it had promised without in practice there being any means of verification. the company was a fiduciary, From this it is deduced that the company as fiduciary created an equity by inviting the customer to look on and treat stocks vested in it as his own, which could appropriately be recognised only by treating the customer as entitled to a proprietary interest in the stock.
To describe someone as a fiduciary, without more. 15 meaningless. As Justice Frankfurter said in S.8.C. v. Chenery Corporation 318 U. S. 80, 85-86 (1943) cited in Goff and Jones on Restitution, 4th Edn. at page 644:-
“To say that a man is a fiduciary only begins analysis it gives direction to further inquiry. To whom is he a fiduciary? What obligations does he owe as a fiduciary? In what respect has he failed to discharge these obligations? And what are the consequences of his deviation from duty?”
Here, the argument assumes that the person towards whom the company was fiduciary was the non-al1ocated claimant. But what kind of fiduciary duties did the company owe to the customer? None have been suggested beyond those which the company assumed under the contracts of sale read with the collateral promises; namely to deliver the goods and meanwhile to keep a separate stock of bullion (or, more accurately, separate stocks of each variety of bullion) to which the customers could look as a safeguard for performance when delivery was called for. No doubt the fact that one person is placed in a particular position vis-à-vis another through the medium of a contract does not necessarily mean that he does not also owe fiduciary duties to that other by virtue of being in that position. But the essence of a fiduciary;.relationship is that it creates obligations of a different character from those deriving from the contract itself. Their Lordships have not heard in argument any submission which went beyond suggesting that by virtue of being a fiduciary the company was obliged honestly and conscientiously to do what it had contract promised to do. Many commercial relationships involve just such a reliance by one party on the other. and to introduce the whole new dimension into such relationships which would flow from giving them a fiduciary character would (as it seems to their Lordships) have adverse consequences far exceeding those foreseen by Atkin L.J. in In re Wait. It is possible without misuse-of language to say that the customers put faith in the company, and t ha t their trust has not been repaid. But the vocabulary is misleading; high expectations do not necessarily lead to equitable remedies.
Let it be assumed. however, that the company could properly be described as a fiduciary and let it also be assumed that notwithstanding the doubts expressed above the non-allocated claimants would have achieved some kll1d of proprietary interest if the company had done what It said. This still leaves the problem. to which their Lordships can see no answer, that the company did not do what it said. There never was a separate and sufficient stock of bullion in which a proprietary interest could be created. What the non-allocated claimants are really trying to achieve is to attach the proprietary interest, which they maintain should have been created on the non-existent stock, to wholly different assets. It is understandable that the claimants, having been badly let down in a transaction concerning bullion should believe that they must have rights over whatever bullion the company still happens to possess. Whilst sympathising with this notion their Lordships must reject it, for the remaining stock, having never been separated, is Just another asset of the company, like its vehicles and office furniture. 1f the argument applies to the bullion it must apply to the latter as well, an obviously unsustainable idea.
Finally it is argued that the court should declare in favour of the claimants a remedial constructive trust, or to use another name a restitutionary proprietary interest, over the bullion in the company’s vaults. Such a trust or interest would differ fundamentally from those so far discussed, in that it would not arise directly from the transaction between the individual claimants, the company and the bullion, but would be created by the court as a measure of justice after the event. Their Lordships must return to this topic later when considering the Walker & Hall claimants who, the trial judge has held. did acquire a proprietary interest in some bullion, but they are unable to understand how the doctrine in any of its suggested formulations could apply to the facts of the present case. By leaving its stock of bullion in a non-differentiated state the company did not unjustly enrich itself by mixing its own bullion with that of the purchasers: for all the gold belonged to the company. It did not act wrongfully in. acquiring. maintaining and using its own stock of bullion, since there was no term of the sale contracts or of the collateral promises, and none could possibility be implied, requiring that all bullion purchased by the company should be set aside to fulfil the unallocated sales. The conduct of the company was wrongful in the sense of being a breach of contract. but it did not involve any injurious dealing with the subject-matter of the alleged trust. Nor, if some wider equitable principle is involved, does the case become any stronger. As previously remarked the claimants’ argument really comes to this, that because the company broke its contract in a way which had to do with bullion the court should call into existence a proprietary interest in whatever bullion happened to be in the possession and ownership of the company at the time when the competition between the non-allocated claimants and the other secured and unsecured creditors first arose. The company’s stock of bullion had no connection with the claimants’ purchases, and to enable the claimants to reach out and not only abstract it from the assets available to the body of creditors as a whole, but also to afford a priority over a secured creditor. would give them an adventitious benefit devoid of the foundation in logic and justice which underlies this important new branch of the law.
V. Conclusion on property in bullion
For these reasons their Lordships reject, in company with all the judges in New Zealand, the grounds upon which it is said that the customers acquired a proprietary interest in bullion. in the light of the importance understandably attached to this dispute m the courts of New Zealand, and the careful and well-researched arguments addressed on this appeal, the Board has thought it right to approach the question afresh in some little detail. The question is not. however, novel since it has been discussed in two English authorities very closeto the point.
The first is the Judgment of Oliver J. (as he then was) in In re London Wine Co, (Shippers) Ltd.[1986] PCC 121. The facts of that case were not precisely the same as the present, and the arguments on the present appeal have been more far-reaching than were there deployed. Nevertheless their Lordships are greatly fortified in their opinion by the close analysis of the authorities and the principles by 01iver J., and in other circumstances their Lordships would have been content to do little more than summarise it and express their entire agreement. So also with the judgment delivered by Scott L.J. in Mac-Jordan Construction Ltd. v. Brookmount Erostin Ltd. [1992J BCLC 350 which is mentioned by Gault J. [1993] ] N.Z.L.R. 257. 284, but not discussed since it was not then reported in full. This was a stronger case than the present, because the separate fund which the contract required the insolvent company to maintain would have been impressed with a trust in favour of the other party, if in fact it had been maintained and also because the floating: charge which, as the Court of Appeal held, took priority over the contractual claim, expressly referred to the contract under which the claim arose. Once again their Lordships are fortified in their conclusion by the fact that the reasoning of Scott L.J. conforms entirely with the opinion at which they”have independently arrived.
VI Proprietary interests derived from the purchase price
Their Lordships now turn to the proposition. which first emerged during argument in the Court of Appeal. and which was not raised in the London Wine case. that a proprietary interest either sprang into existence on the sales to customers, or should now be imposed retrospectively through restitutionary remedies. in relation not to bullion but to the monies originally paid by the customers under the contracts of sale. Here at least it is possible to pin down the subject-matter to which the proprietary rights are said to relate. Nevertheless. their Lordships are constrained to reject all the various ways in which the submission has been presented. once again for a single comparatively simple reason.
The first argument posits that the purchase monies were from the outset impressed with a trust in favour of the payers. That a sum of money paid by the purchaser under a contract for the sale of goods is capable in principle of being the subject of a trust in the hands of the vendor is clear. For this purpose it is necessary to show either a mutual intention that the monies should not fall within the general fund of the company’s assets but should be applied for a special designated purpose, or that having originally been paid over without restriction the recipient has later constituted himself a trustee of the money; see Quistclose Investments Ltd. v. Rolls Razor Ltd. (In liquidation) [1970] AC 567, 581-2. This requirement was satisfied in In re Kayford [1975] I W.L.R. 279 where a company in financial difficulties paid into a separate deposit account money received from customers for goods not yet delivered, with the intention of making withdrawals from the account only as and when delivery was effected, and of refunding the payment to customers if an insolvency made delivery impossible. The facts of the present case are, however, inconsistent with any such trust. This is not a situation where the customer engaged the company as agent to purchase bullion on his or her behalf, with immediate payment to put the agent in funds, delivery being postponed to suit the customer’s convenience. The agreement was for a sale by the company to, and not the purchase by the company for, the customer. The latter paid the purchase price for one purpose alone, namely to perform his side of the bargain under which he would in due course be entitled to obtain delivery. True, another part of the consideration for the payment was the collateral promise to maintain separate cover ~ but this does not mean that the money was paid for the purpose of purchasing gold, either to create the separate stock or for any other reason. There was nothing in the express agreement to require, and nothing in their Lordships’ view can be implied, which constrained in any way the company’s freedom to spend the purchase money as it chose, or to establish the stock from any source and with any funds as it though fit. This being so their Lordships cannot concur in the decision of the learned President that the purchase price was impressed with a continuing beneficial interest in favour of the customer, which could form the starting point for a tracing of the purchase monies into other assets.
The same insuperable obstacle stands In the way of the alternative submission that the company was a fiduciary. If one asks the inevitable first question – What was the content of the fiduciary’s duty? – the claimants are forced to assert that the duty was to expend the monies in the purchase and maintenance of the reserved stock. Yet this is precisely the obligation which, as just stated, cannot be extracted from anything express or implied in the contract of sale and the collateral promises. in truth, the argument that the company was a fiduciary (as regards the money rather than the bullion) is no more than another label for the argument in favour of an express trust and must fail for the same reason.
Thus far, all the arguments discussed have assumed that each contract of sale and collateral promises together created a valid and effective transaction coupling the ordinary mutual obligations of an agreement for the sale of goods with special obligations stemming from a trust or fiduciary relationship. These arguments posit that the obligations remain in force, albeit unperformed, the claimants’ object being to enforce them. The next group of arguments starts with the contrary proposition that the transactions were rendered ineffectual by the presence of one or more of three vitiating factors: namely 1 misrepresentation, mistake and total failure of consideration. To these their Lordships now turn.
It is important at the outset to distinguish between three different ways In which the existence of a misrepresentation, a mistake or a total failure of consideration might lead to the existence of a proprietary interest in the purchase money or its fruits superior to that of the bank.
1. The existence of one or more of these vitiating factors distinguished the relationship from that of an ordinary vendor and purchaser, so as to leave behind with the customer a beneficial interest in the purchase moneys which would otherwise have passed to the company when the money was paid. This interest remained with the customer throughout everything that followed, and can now be enforced against the general assets of the company, including the bullion. in priority to the interest of the bank.
2. Even if the full legal and beneficial interest in the purchase moneys passed when they were paid-over, the vitiating factors affected the contract In such a wav as to re-vest the moneys in the purchaser. and, what is more, to do so in a way which attached to the moneys an interest superior to that of the bank.
3. In contrast to the routes just mentioned. where the judgment of the court would do no more than recognise the existence of proprietary rights already in existence, the court should by its judgment create a new proprietary interest, superior to that of the bank, to reflect the justice of the case.
With these different mechanisms in view, their Lordships turn to the vitiating factors relied upon. As to the misrepresentations these were presumably that (in fact) the company intended to carry out the collateral promise to establish a separate stock and also that (in law) if this promise was performed the customer would obtain a title to bullion. Whether the proprietary interests said to derive from this misrepresentation were retained by the customers from the moment when they paid over the purchase monies, or whether they arose at a later date, was not made clear in argument. If the former, their Lordships can only say that they are unable to grasp the reasoning for if correct the argument would entail that even in respect of those contracts which the company ultimately fulfilled by delivery the monies were pro tempore subject to a trust which would have prevented the company from lawfully treating them as its own. This cannot be right. As an alternative it may be contended that a trust arose upon the collapse of the company and the consequent non-fulfilment of the contracts. This contention must also be rejected, for two reasons. First, any such proprietary right must have as its starting point a personal claim by the purchaser to the return of the price. No such claim could exist for so long as the sale contract remained in existence and was being enforced by the customer. That is the position here. The customers have never rescinded the contracts of sale, but have throughout the proceedings asserted various forms of proprietary interest in the bullion, all of them derived in one way or another from the contracts of sale. This stance is wholly inconsistent with the notion that the contracts were and are so ineffectual that the customers are entitled to get their money back. As a last resort the non-allocated claimants invited the Board to treat the contracts as rescinded if their claims for a proprietary interest in bullion were rejected. There is however no mechanism which would permit the claimants to pause, as it were, half-way through the delivery of the present judgment and eject at last to rescind; and even if such a course were open, the remedies arising on rescission would come too late to affect the secured rights of the bank under its previously crystallised floating charge.
Furthermore, even if this fatal objection could be overcome, the argument would, in their Lordships’ opinion, be bound to fail. Whilst it is convenient to speak of the customers “getting their money back” this expression is misleading. Upon payment by the customers the purchase moneys became, and rescission or no rescission remained, the unencumbered property of the company. What the customers would recover on rescission would not be “their” money t but an equivalent sum. Leaving aside for the moment the creation by the court of a new remedial proprietary right, to which totally different considerations would apply, the claimants would have to contend that in every case where a purchaser is misled into buying goods he is automatically entitled upon rescinding the contract to a proprietary right superior to those of all the vendor’s other creditors, exercisable against the whole of the vendor’s assets. It is not surprising that no authority could be cited for such an extreme proposition. The only possible exception is In re Eastgate, Ex parte Ward [1905] 1 K. B. 465. Their Lordships doubt whether, correctly understood, the case so decides, but if it does they decline to follow it.
Similar objections apply to the second variant, which was only lightly touched upon in argument: namely, that the purchase monies were paid under a mistake. Assuming the mistake to be that the collateral promises would be performed and would yield a proprietary right, what effect would they have on the contracts? Obviously not to make them void ab initio, for otherwise it would mean that the customers had no right to insist on delivery. Perhaps the mistake would have entitled the customers to have the agreements set aside at common law or under statute, and upon this happening they would no doubt have been entitled to a personal restitutionary remedy in respect of the price. This does not, however, advance their case. The monies were paid by the customers to the company because they believed that they were bound to pay them; and in this belief they were entirely right. The situation is entirely different from Chase Manhattan Bank N.A, v. Israel-British Bank (London) Ltd. [1931] Ch. 105, to which much attention was given in the Court of Appeal and in argument before the Board. It may be – their Lordships express no opinion upon it – that the Chase Manhattan case correctly decided that where one party mistakenly makes the same payment twice it retains a proprietary interest in the second payment which (if tracing is practicable) can be enforced against the payees’ assets In a liquidation ahead of unsecured creditors. But in the present case, the customers intended to make payment, and they did so because they rightly conceived that that was what the contracts required. As in the case of the argument based on misrepresentation, this version conceals the true nature of the customers’ complaint: not that they paid the money, but that the goods which they ordered and paid for have not been delivered. As in the case of the misrepresentation, the alleged mistake might well have been a ground for setting aside the contract if the claimants had ever sought to do so; and in such a case they would have had a personal right to recover the sum equivalent to the amount paid. But even if they had chosen to exercise this right, it would not by operation of law have carried with it a proprietary interest.
Their Lordships are of the same opinion as regards the third variant, which is that a proprietary interest arose because the consideration for the purchase price has totally failed. It is, of course, obvious that in the end the consideration did fail, when delivery was demanded and not made. But until that time the claimants had the benefit of what they had bargained for, a contract for the sale of unascertained goods. Quite plainly a customer could not on the day after a sale have claimed to recover the price for a total failure of consideration, and this at once puts paid to any question of a residuary proprietary interest and distinguishes the case from those such as Sinclair v. Brougham [1914] A.C. 398, where the transactions under which the monies were paid were from the start ineffectual; and Neste Oy v. Lloyds Bank PLC [1983] 2 Lloyd’s Rep. 658, where to the knowledge of the payee no performance at all could take place under the contract for which the payment formed the consideration.
There remains the question whether the court should create after the event a remedial restitutionary right superior to the security created by the charge. The nature and foundation of this remedy were not clearly explained in argument. This is understandable, given that the doctrine is still in an early stage and no single juristic account of it has yet been generally agreed. In the context of the present case there appear to be only two possibilities. The first is to strike directly at the heart of the problem and to conclude that there was such an imbalance between the positions of the parties that if orthodox methods fail a new equity should intervene to put the matter right, without recourse to further rationalisation. Their Lordships must firmly reject any such approach. The bank relied on the floating charge to protect its assets; the customers relied on the company to deliver the bullion and to put in place the separate stock. The fact that the claimants are private citizens whereas their opponent is a commercial bank could not justify the court in simply disapplying the bank’s valid security .. No case cited has gone anywhere near to this, and the Board would do no service to the nascent doctrine by stretching it past breaking point.
Accordingly, if the argument is to prevail some means must be found, not forcibly to subtract the moneys or their fruits from the assets to which the charge really attached, but retrospectively to create a situation in which the moneys never were part of those assets. In other words the claimants must be deemed to have a retained equitable title (see Goff and Jones, op. cit., page 94). Whatever the mechanism for such deeming may be in other circumstances their Lordships can see no scope for it here. So far as concerns an equitable interest deemed to have come into existence from the moment when the transaction was entered into, it is hard to see how this could co-exist with a contract which, so far as anyone knew. might be performed by actual delivery of the goods. And if there was no initial interest at what time before the attachment of the security, and by virtue of what event, could the court deem a proprietary right to have arisen? None that their Lordships are able to see. Although remedial restitutionary rights may prove in the future to be a valuable instrument of justice they cannot in their Lordships’ opinion be brought to bear on the present case.
For these reasons the Board must reject all the ways in which the non-allocated claimants assert a proprietary interest over the purchase price and its fruits. This makes it unnecessary to consider whether) if such an interest had existed, it would have been possible to trace from the subject-matter of the interest into the company’s present assets. Indeed it would be unprofitable to do so without a clear understanding of when and how the equitable interest arose, and of its nature. Their Lordships should, however, say that they find it difficult to understand how the judgment of the Board in Space Investments Ltd. v. Canadian Imperial Bank of Commerce Trust Co. (Bahamas) Ltd. [1986] 1 W L R 1072, on which the claimants leaned heavily in argument, would enable them to overcome the difficulty that the monies said to be impressed with the trust were paid into an overdrawn account and thereupon ceased to exist: see, for example, In re Diplock [1948] Ch. 465. The observations of the Board in Space Investments were concerned with a mixed, not a non-existent, fund.
VII. The position of the bank
The claimants have sought to contend that if they fail on everything else they are still entitled to an equitable right founded on wrongful dealing on the part of the bank. Thorp J. was prepared to go this far with the argument that the bank knew at least by June 1988, and probably before, that the company’s obligations to supply bullion far exceeded its ability to do so. But the learned judge could not see, any more than the Board can see, how this could prevent the bank from claiming the normal benefits of its security. Much more than this would be required, and nothing has so far been forthcoming. Quite apart from the practical impossibility of founding any conclusion on the fragmentary written material now available, it would be quite impossible for the Board to conclude any enquiry on its own account without the benefit of an investigation by the courts in New Zealand, in the light of the full discovery and extensive oral evidence which would be essential to doing justice in the matter. Understandably, Thorp J. did not consider an application by the receivers for directions to be a suitable vehicle for such an enquiry. All that the Board can say is that if there is material in support of the more serious al1egations, nothing in this opinion will prevent its deployment In a proper manner.
VIII. Non-allocated claimants: Conclusions.
Their Lordships ful1y acknowledge the indignation of the c1aimants, caught up in the insolvency of the group of which the company formed part, on finding that the assurances of ‘a secure protection on the strength of which they abstained from calling for delivery were unfulfilled; and they understand why the court should strive to alleviate the ensuing hardship. Nevertheless there must be some basis of principle for depriving the bank of its security and in company with McKay]. they must find that none has been shown.
IX. The claim by Mr Liggett
The claim by Mr. Liggett differs in only three respects from those of the non-allocated claimants as a whole. First, it is very much larger. He agreed to purchase 1,000 gold maple coins at a price of $732,000. While this entirely explains his special indignation at the conduct of the company, and his consequent decision to pursue a separate claim, it plainly makes no difference to the outcome.
The second ground of distinction concerns the circumstances of the purchase. In brief, what happened was th1S. On 1Ith February 1988 My. Liggett made a purchase for 52 maple coins! He handed over a cheque and was told that seven days would be needed to clear it before he could collect the coins. In the meantime, he decided to make a larger purchase and with this in mind he hired a safe deposit box from another company to store the 52 maples and the further maples which he proposed to purchase. He then called again at the offices of the company and was given a description of the method of making unallocated purchases on the same general lines as those given to the other claimants. This caused him to change his mind about taking physical delivery of the coins already bought and those which he intended to add. Instead, he made an agreement for the purchase of a further 1000 maples and did not call for delivery, relying on the collateral promises. He did not personally receive a certificate of deposit ref erring to the goods as unallocated, since he was abroad at the relevant time.
These facts are more favourable to Mr. Liggett’s claim than those of the non-allocated claimants as a whole. My. Liggett was at least shown 52 coins in respect of which the court was later to find that there was an ascertainment and appropriation sufficient to pass the properly, and the fact that the two transactions were closely linked could certainly have given Mr. Liggett the impression that their legal effect would be the same. Acknowledging this, their Lordships cannot find that the distinction makes any difference. Whatever Mr. Liggett may have thought, and whatever the special features of the transaction. the fact remains that it was an agreement for the purchase of generic goods. For the reasons already given such contract even when accompanied by the collateral promises could not create a proprietary interest of any kind.
The third ground of distinction from the case of the non-allocated claimants is as follows. Mr. Liggett’s purchase was so large by comparison with the company’s ordinary retail bullion transactions that the company felt it prudent to reduce its “short” position in maples by buying in a substantial quantity of extra coins. It was argued on behalf of Mr. Liggett that the coins so purchased were earmarked for Mr. Liggett’s purchases and hence through ascertainment and appropriation became his immediate property, only afterwards being wrongfully admixed with the bulk of the bullion in the vault. If this argument were correct, it would follow that not only was the company not entitled to deal with the coins in any other way than to deliver them to Mr. Liggett when called, but also that it could not supply him with coins from any other source. No doubt if the facts were strong enough the court would be able to conclude that this was what the company had done with the implied consent of Mr. Liggett. In the event, however, the evidence of the bullion manager and clerk, upon which Mr. Liggett relied before Thorp]. to prove the appropriation, was (as the learned judge put it) “demonstrably against the proposition that the maples purchased by Exchange were purchased expressly for Mr. Liggett and therefore appropriated to his contract”. The learned judge went on to give reasons for this opinion, and nothing in the analysis of the facts presented to the Board gives their Lordships any reason to doubt that the learned judge! s conclusion was correct.
In these circumstances their Lordships are constrained to al10w the appeal of the bank in respect of Mr. Liggett for the same reasons as those already given in relation to the non-al1ocated claimants.
X. The Walker & Hall claims
These claims are on a different footing. It appears that until about 1983 the bullion purchased by customers of the predecessor of Walker & Hall was stored and recorded separately. Thereafter. the bullion representing purchases by customers was stored en masse, but it was still kept separate from the vendor’s own stock. Furthermore, the quantity of each kind of bullion kept in this pooled mass was precisely equal to the amount of Walker & Hall’ s exposure to the relevant categories of bullion and of its open contracts with customers. The documentation was also different from that received by the customers who later became the non-allocated claimants. The documents handed to the customer need not be quoted at length. but their general effect was that the vendor did not claim title in the bullion described in the document and that the title to that bullion, and the risk in respect of it, was with the customer. The document also stated that the vendor held the bullion as custodian for the customer in safe storage. These arrangements ceased when the shares of Walker & Hall were purchased by the company, and the contractual rights of the customers were transferred.
The features just mentioned persuaded Thorp J. at first instance to hold, in contrast to his conclusion in relation to the non-allocated claimants and Mr. Liggett, that there had been a sufficient ascertainment and appropriation of goods to the individual contracts to transfer title to each customer; and that thereafter the customers as a whole had a shared interest in the pooled bullion, which the vendors held on their behalf. The Dublin City Distllery case, supra) was cited in support of this conclusion. It followed that when the company absorbed the hitherto separated bullion into its own trading stock upon the acquisition of Walker & Hall’s business, and thereafter drew upon the mixed stock, it wrongfully dealt with goods which were not its own.
Thus far, the decision of Thorp J. was favourable to the Walker & Hall claimants. There remained, however, the question of relief. Here, the learned judge applied conventional principles of tracing and concluded that the proprietary recoveries of the Walker & Hall claimants and those in a similar position could not exceed the lowest balance of metal held by the company between the accrual of their rights and the commencement of the receivership: see James Roscoe (Bolton)Ltd. v. Winder [1915] 1 Ch. 62 and the passages from Ford and Lee’s Principles of the Law of Trusts (1990) 2nd Edition, pages 738-768, paras. 1716-1730 and Goff and Jones, The Law of Restitution, 3rd ed. (l986) , at page 74, cited by the learned judge.
Although the Walker & Hall claimants had succeeded on liability the bank was not unduly concerned, since the limitation of the claim to the lowest intermediate balance meant that it was of comparatively small financial significance. The bank therefore did not appeal against this part of Thorp J.’ s judgment when the unsuccessful claimants appealed to the Court of Appeal against other aspects of that Judgment. A rather confusing situation then arose. Because the bank had not appealed in relation to the Walker & Hall claimants the Court of Appeal had no occasion to consider whether these claimants really were, as the judge had held, in a different position from the non-allocated claimants and Mr. Liggett, although some brief observations by Gault J. in his Judgment [1993J 1 NZLR 257 at page 277 appeared to indicate some doubt on this score. When, however, the court had turned to the question of quantum, and ordered that the non-allocated claimants and Mr. Liggett were entitled to charges on the remaining bullion assets of the company in priority to the charge of the bank, it concluded its declaration with the words ” … and the successful claimants in the High Court are in the same position as the present appellants to the extent they cannot recover under the judgment of His Honour My. Justice Thorp”. This enhancement of the remedy available to the Walker & Hall claimants made Thorp J.’s adverse judgment much more serious for the bank, and accordingly t he bank desired to appeal to this Board not only on the ground that the Court of Appeal had wrongly enlarged the remedy but also (in case it should be held that in principle the decision of the court on the availability of a remedy should be upheld) on the ground that ThorpJ. had been m error when holding that the Walker & Hall claimants had any proprietary rights at all. To this the Walker & Hall claimants objected, on the ground that since the bank had never appealed to the Court of Appeal on the issue of liability it could not appeal to the Board. The bank responded that it was not they but the claimants who had set the appellate procedure In motion and if the judgment of Thorp J. was to be reopened at all, it ought to be reconsidered in full.
In the event, a lengthy investigation by the Board of what had happened in the Court of Appeal was avoided by a sensible arrangement between the parties, whereby the bank accepted its willingness to abide by the decision of Thorp J. on liability (although without making any concession upon it) in the event that the Board restored the learned judge’s decision on the measure of recovery. To this issue, therefore, their Lordships will immediately turn.
On the facts found by the learned judge the company as bailee held bullion belonging to the individual Walker & Hall claimants, intermingled the bullion of all such claimants, mixed that bullion with bullion belonging to the company, withdrew bullion from the mixed fund and then purchased more bullion which was added to the mixed fund without the intention of replacing the bullion of the Walker & Hall claimants. In these circumstances the bullion belonging to the Walker & Hall claimants which became held by the company’s receivers consisted of bullion equal to the lowest balance of metal held by the company at any time; see James Roscoe (Bolton) Ltd. v. Winder [1915] 1 Ch. 62.
The Walker & Hall claimants now seek to go further and ask the court to impose an equitable lien on all the property of the company at the date of the receivership to recover the value of their bullion unlawfully misappropriated by the company. Such a lien was considered by the Board in Space Investments Limited v. Canadian Imperial Bank of Commerce Trust Co. (Bahamas) Ltd. [1986] 1 WLR 1072. In that case the Board held that beneficiaries could not claim trust moneys lawfully deposited by a bank trustee with itself as banker in priority to other depositors and unsecured creditors. But Lord Templeman considered the position which would arise if a bank trustee unlawfully borrowed trust monies. He said at page 1074:-
“A bank in fact uses all deposit moneys for the general purposes of the bank. Whether a bank trustee lawfully receives deposits or wrongly treats trust money as on deposit from trusts, all the moneys are in fact dealt with and expended by the bank for the general purposes of the bank. In these circumstances it is impossible for the beneficiaries interested in trust money misappropriated from their trust to trace their money to any particular asset belonging to the trustee bank. But equity allows the beneficiaries. or a new trustee appointed in place of an insolvent bank trustee to protect the interests of the beneficiaries, to trace the trust money to all the assets of the bank and to recover the trust money by the exercise of an equitable charge over all the assets of the bank,”
These observations were criticised by Professor Goode in his Mary Oliver Memorial Address published in 103 L.Q. R. (1987) 433, at pages 445-7 as being inconsistent with the observations of the Court of Appeal in In re Diplock ‘s Estate [1948] Ch. 465 at page 521 where it was said:-
“The equitable remedies pre-suppose the continued existence of the money either as a separate fund or as part of a mixed fund or as latent in property acquired by means of such a fund. If, on the facts of any individual case, such continued existence is not established, equity is as helpless as the common law itself. If the fund, mixed or unmixed, is spent upon a dinner, equity, which dealt only in specific relief and not in damages, could do nothing. If the case was one which at common law involved breach of contract the common law could, of course, award damages but specific relief would be out of the question. It is, therefore, a necessary matter for consideration in each case where it is sought to trace money in equity, whether it has such a continued existence, actual or notional, as will enable equity to grant specific relief.”
In the case of a bank which employs all borrowed moneys as a mixed fund for the purpose of lending out money or making investments, any trust money unlawfully borrowed by a bank trustee may be said to be latent in the property acquired by the bank and the court may impose an equitable lien on that property for the recovery of the trust money.
The imposition of such an equitable lien for the purpose of recovering trust money was more favourably regarded by Professor Peter Birks in An Introduction to the Law of Restitution at pages 377 et seq. and by Goff and Jones on the Law of Restitution 4th Edition especial1y at pages 73 to 75.
The law relating to the creation and tracing of equitable proprietary interests is still in a state of development. In A.G. for Hong Kong v. Reid [1994] AC 324 the Board decided that money received by an agent as a bribe was held in trust for the principal who is entitled to trace and recover property representing the bribe. in Lord Napier and Ettrick v. Hunter [1993] A.C. 713 at 738-739 the House of Lords held that payment of damages in respect of an Insured loss created an equitable charge in favour of the subrogated insurers so long only as the damages were traceable as an identifiable fund. When the scope and ambit of these decisions and the observations of the Board in Space Investments fall to be considered, it will be necessary for the history and foundations in principle of the creation and tracing of equitable proprietary interests to be the subject of close examination and full argument and for attention to be paid to the works of Paciocco in (1989) 68 Can. Bar. Rev. 315, Maddaugh and McCamus “The Law of Restitution” (1990), Emily L. Sherwin’s article “Constructive Trusts in Bankruptcy” (1989) U. Ill. L. Rev. 297, 335 and other commentators dealing with equitable interests in tracing and referring to concepts such as the position of “involuntary creditors” and tracing to “swollen assets”
In the present case it is not necessary or appropriate to consider the scope and ambit of the observations in Space Investments or their application to trustees other than bank trustees because all members of this Board are agreed that it would be inequitable to impose a lien in favour of the Walker & Hall claimants. Those claimants received the same certificates and trusted the company in a manner no different from other bullion customers. There is no evidence that the debenture holders and the unsecured creditors at the date of the receivership benefited directly or indirectly from the breaches of trust committed by the company or that Walker & Hall bullion continued to exist as a fund latent in property vested in the receivers.
In these circumstances the Walker & Hall claimants must be restored to the remedies granted to them by the trial judge.
Their Lordships will accordingly humbly advise Her Majesty that the appeal ought to be allowed, the judgment of the Court of Appeal of New Zealand of 30th April 1992 set aside and the Judgment of Thorp J. of 17th October 1990 restored. Their Lordships were informed that the parties had been able to agree the matter of costs in any event and therefore make no order in that regard.