Proprietary Remedies
Cases
Glencore International AG v Metro Trading International Inc
[2000] EWHC 199 (Comm
Moore Bick J
Issues of English law
I now turn to the issues of English law set out in paragraphs I and J of the Preliminary Issues. Paragraph I mirrors the issues of Fujairah law set out in paragraph F; paragraph J raises questions relating to the identification of proprietary interests in the remaining mixed bulk of goods held by MTI.
Issue I – Whether and to what extent title would pass to MTI in respect of any relevant oil or whether and to what extent the respective Oil Claimant would retain ownership of the oil (if necessary as a co-owner of any commingled or blended bulk) in or notwithstanding each or any of the following assumed circumstances, namely . . . . . . . .
As in the case of Issue F, it is convenient to consider the law relating to commingling and blending generally before dealing with the individual questions posed in this paragraph.
Authorised commingling and blending
It is trite law that delivery of goods to a bailee for storage has no effect on the general property in the goods which remains at all times with the bailor. The bailee’s duty is to redeliver the goods to the bailor in accordance with the terms of the bailment. So long as the goods retain their original identity no difficulties arise, but questions of property do arise once that original identity is lost, and one way in which that may occur is by the storage of goods in a mixed bulk. Until recently this question had received relatively little attention in English law, although it had been considered in a number of cases in the United States where grain is often stored in common silos. Where several people deliver goods of the same kind to a warehouse keeper to be stored in a mixed bulk the storage agreements may all be in the same standard terms and may indicate clearly where property lies. If that is the case, then in addition to the individual contracts between each bailor and the warehouse keeper, it may be possible to find that a separate contract of the kind which in Clarke v Dunraven [1897] A.C. 59 was held to have come into existence between the competitors in the yacht race has come into existence between all the bailors and the warehouse keeper which regulates their property rights in the bulk.
If the goods have been delivered to the warehouse keeper simply for the purposes of storage, the depositor is unlikely to have intended that property should pass to the warehouse keeper. In these circumstances in the absence of any agreement to the contrary the mixed bulk will be owned in common by those whose goods have contributed to it, each depositor becoming an owner in proportion to the amount of his contribution. As goods are added to or drawn from the bulk the interests of the contributors will vary to reflect the quantity of goods still held to their order. These principles, which were developed in the American cases, in particular Sexton & Abbott v Graham (1880) 44 Iowa 181, Nelson v Brown, Doty & Co (1880) 44 Iowa 555 and Savage v Salem Mills Co (1906) 85 Pac. 69, were approved by the House of Lords in Mercer v Craven Grain Storage Ltd [1994] CLC 328. In these circumstances since no property passes to the warehouse keeper it is appropriate to describe him as a bailee, even though his obligation is to redeliver to each depositor not the identical goods deposited with him but the same quantity of goods of the same description drawn from the mixed bulk of which they formed part.
The same principles apply whether the mixed bulk is composed entirely of goods owned by individual bailors or includes goods owned by the warehouse keeper himself, provided there is no intention to pass property or dominion over the goods to him. However, if the warehouse keeper is entitled to treat the goods as his own, the contract will be regarded as one of sale and property will pass on delivery, subject to any agreement to the contrary. Thus in South Australian Insurance Co v Randell (1869) L.R. 3 P.C. 101 farmers delivered wheat to millers who stored it in common as part of their current stock from which they would draw either for sale or for grinding in their mill. The terms on which the farmers delivered wheat gave them the right to demand the return of an equivalent quantity of wheat of the same quality, or the market price, and gave the millers the option of delivering wheat or paying the market price. The transaction therefore amounted to a contract of sale because it gave the millers the right to dispose of the goods entirely as they chose.
The essential distinction between blending and commingling is that where blending has taken place the resultant product is different in nature from both its original constituents. This creates certain conceptual difficulties in the case of unauthorised blending to which I shall return, but should not ordinarily create difficulties where the blending is carried out pursuant to a contract. In such a case the general rule is that the parties are free to decide for themselves at what stage, if any, in the process property in the original goods shall pass to the blender and on what terms. This includes the right to decide who is to own the resultant blend. In Clough Mill Ltd v Martin [1985] 1 W.L.R. 111 the plaintiff supplied yarn to a manufacturer of fabric under a contract which provided that if any of the yarn were incorporated into other goods the property in those goods should remain in the plaintiff until all the yarn supplied had been paid for. Robert Goff L.J. described the effect of a term of that kind as follows at page 119G
“Now it is no doubt true that, where A’s material is lawfully used by B to create new goods, whether or not B incorporates other material of his own, the property in the new goods will generally vest in B, at least where the goods are not reducible to the original materials: see Blackstone’s Commentaries, 17th ed. vol. 2, pp. 404-405. But it is difficult to see why, if the parties agree that the property in the goods shall vest in A, that agreement should not be given effect to. On this analysis, under the last sentence of the condition as under the first, the buyer does not confer on the seller an interest in the property defeasible upon payment of the debt; on the contrary, when the new goods come into existence the property in them ipso facto vests in the plaintiff, and the plaintiff thereafter retains its ownership in them . . . . . . . .”
Oliver L.J. expressed the same view, albeit provisionally. He said at page 123H-124B
“I have had the advantage of reading the judgment of Robert Goff L.J. and for the reasons which are there set out I am not convinced that it necessarily follows that the plaintiff’s proprietary interest in a manufactured article must derive from a grant by the buyer. English law has developed no verysophisticated system for determining title in cases where indistinguishable goods are mixed or become combined in a newly manufactured article and, to adopt the words of Lord Moulton in Sandeman & Sons v Tyzack & Branfoot Steamship Co [1913] A.C. 680, 695, “the whole matter is far from being within the domain of settled law”; and though like Sir John Donaldson M.R., I prefer to reserve my opinion, I am not sure that I see any reason in principle why the original legal title in a newly manufactured article composed of materials belonging to A and B should not lie where A and B have agreed that it shall lie.”
The New Zealand Court of Appeal in Coleman v Harvey [1989] 1 NZLR 723 adopted a similar approach, seeking to identify and give effect to the intention of the parties in a case where the plaintiff had delivered silver coins to the defendant for refining together with scrap belonging to the defendant himself.
In most cases where there is agreement to the use of goods in a manufacturing process the parties will have made specific provision for these matters, but even if they have not, it will usually be possible to determine from the terms of the contract as a whole what their intention was. In the absence of agreement to the contrary, the likelihood is that property will pass on delivery because the supplier intends to give the manufacturer complete dominion over the goods: see South Australian v Randell. In the present case these are questions which will arise for decision at a later stage in the litigation. However, I would respectfully adopt the comments of Robert Goff and Oliver L.J.J. and would hold that in a case where title to newly manufactured goods would otherwise vest solely in the manufacturer, there is no reason in principle why the manufacturer and a supplier should not by agreement cause title to vest originally in the supplier rather than the manufacturer. Other considerations would clearly arise if more than one supplier had entered into an agreement of that kind with the same manufacturer, but that is not a matter which calls for discussion in the present case and I do not propose to say anything about it. However, Mr. Smith’s submission that in all cases title must necessarily vest for an instant in the manufacturer before passing to the supplier is in my view contrary to both principle and authority.
Unauthorised commingling and blending
The effect on proprietary interests of the unauthorised commingling of one person’s goods with those of another was considered by Staughton J. in the case of Indian OilCorporation Ltd v Greenstone Shipping S.A. (Panama) [1988]1 Q.B. 345 following a detailed review of the earlier authorities. The case concerned the mixing on board a vessel of a cargo of crude oil with a quantity of crude oil belonging to the shipowners which represented the residues of cargoes carried on previous voyages. The receivers made a claim for short delivery of cargo on the grounds that they were entitled to receive all the pumpable cargo on board, including previous cargo residues. When the cargo was loaded the residues were distributed among a number of cargo tanks and this raised the question whether the shippers had consented to the mixing taking place. There was some uncertainty about that, but in the end Staughton J. approached the matter on the assumption that there had been no such consent. Having considered the authorities on mixing from Stock v Stock (1594) Poph. 37 to Jones v De Marchant (1916) 28 D.L.R. 561 Staughton J. expressed his conclusion as follows:
“Seeing that none of the authorities is binding on me, although many are certainly persuasive, I consider that I am free to apply the rule which justice requires. This is that, where B wrongfully mixes the goods of A with goods of his own, which are substantially of the same nature and quality, and they cannot in practice be separated, the mixture is held in common and A is entitled to receive out of it a quantity equal to that of his goods which went into the mixture, any doubt as to that quantity being resolved in favour of A. He is also entitled to claim damages from B in respect of any loss he may have suffered, in respect of quality or otherwise, by reason of the admixture.
Whether the same rule would apply when the goods of A and B are not substantially of the same nature and quality must be left to another case. It does not arise here. The claim based on a rule of law that the mixture became the property of the receivers fails.”
This solution to the problem of wrongful mixing of goods of the same kind seems to me, with respect, to be correct both as a matter of justice and principle. None of the parties before me sought to suggest that I should not follow it and I have no hesitation in accepting it as a correct statement of the law.
This brings me to the question which was left open in Indian Oil v Greenstone, namely, the effect on proprietary interests of the wrongful and irreversible mixing of goods of different kinds. Mr. Schaff submitted that the leading cases on mixing do not draw any distinction between mixing goods of the same kind and mixing goods of different kinds. He therefore argued that in this case also the contributors must at worst become owners in common of the mixture in proportion to their contributions and that if for some reason that were not possible, the innocent contributor would acquire sole title to the mixture. Mr. Smith, however, submitted that the effect of the blending is to produce a new commodity different in kind from either of its constituents. The original goods cease to exist altogether and new goods are created in their place, title to which vests in the person who produced them. It is at this point that the rules relating to mixing and the rules relating to the creation of new commodities come into contact.
The authorities considered by Staughton J. in Indian Oil v Greenstone all concern the effect of mixing goods of similar kinds. They all deal with the consequences of the plaintiff’s inability to identify his own property, but none of them considers the effect of a change in the essential nature of the goods for the simple reason that it was unnecessary to do so. The old authorities tended to favour the view that even in the case of mixture of similar goods property in the mixture vests entirely in the innocent party; in those cases, therefore, there was no need for a debate of the kind which one sees in South Australian v Randall about the effect of loss of identity consequent on mixing which might have shed some light on the present question. To that extent it can be said that those cases do not draw any distinction between mixing similar and dissimilar goods, but it is also true to say that they do not directly consider the implications of creating a new commodity.
The fact that blending produces a new commodity lay at the heart of Mr. Smith’s submissions. This aspect of the matter raises difficult questions on which different views have been held as is apparent from the discussion of this subject by McCormack in Reservation of Title, 2nd ed. at pages 59-62. The authority on which Mr. Smith principally relied was Borden (U.K.) Ltd v Scottish Timber Products Ltd [1981] 1 Ch. 25. The plaintiffs in that case supplied resin to the defendants for use in the manufacture of chipboard. The contract provided that property in the resin was to pass to the defendants only when all the goods supplied by the plaintiffs had been paid for, although it also contemplated that the resin would be used in the manufacturing process before payment had in fact been made. In the course of that process the resin was mixed with other materials in such a way as to lose its separate identity. On the appointment of a receiver of the defendants the plaintiffs brought an action for money still owing to them in respect of the price of the resin. They contended that any chipboard manufactured using the resin was charged with the payment of the outstanding amount. The Court of Appeal rejected that argument, holding that once the resin had been used in the manufacture of chipboard it had ceased to exist and with it the plaintiffs’ title. The chipboard was a wholly new product, property in which vested in the defendants as manufacturers.
The leading judgment in Borden was delivered by Bridge L.J. As he made clear at page 32E-F, this was a case in which despite the reservation of title clause the contract permitted the defendants to use the goods before they had paid for them. It was not a case, therefore, in which the defendants were acting as wrongdoers. It may also be worth noticing that the plaintiffs had contended in the court below that they were part-owners of the chipboard. The judge decided that point against them and it was not pursued before the Court of Appeal (see page 33G-H). The appeal was argued, therefore, on the basis that title to the chipboard had vested in the defendants and no one else. The only question before the court was whether the reservation of title clause operated to create a charge over the goods in favour of the plaintiffs.
In a passage at page 35F-G on which Mr. Smith relied in support of his argument Bridge L.J. considered the legal relationship between the parties up to the moment at which the resin was used in the manufacturing process. He said
“But I am quite content to assume that this is wrong and to suppose that up to the moment when the resin was used in manufacture it was held by the defendants in trust for the plaintiffs in the same sense in which a bailee or a factor or an agent holds goods in trust for his bailor or his principal. If that was the position, then there is no doubt that as soon as the resin was used in the manufacturing process it ceased to exist as resin, and accordingly the title to the resin simply disappeared. So much is accepted by Mr. Mowbray for the plaintiffs.”
He then turned to discuss the question whether the plaintiffs were entitled to trace into the chipboard and it is in this context that the rest of his judgment must be read. Having considered in some detail the decision in In re Hallett’s Estate (1880) 13 Ch. D. 696 he said at page 41A
“What are the salient features of the doctrine that Sir George Jessel M.R. there expounds? First, it will be observed that in all cases the party entitled to trace is referred to as the beneficial owner of the property, be it money or goods, which the “trustee,” in the broad sense in which Sir George Jessel M.R. uses that word, including all fiduciary relationships, has disposed of. In the instant case, even if I assume that so long as the resin remained resin the beneficial ownership of the resin remained in the plaintiffs, I do not see how the concept of the beneficial ownership remaining in the plaintiffs after use in manufacture can here possibly be reconciled with the liberty which the plaintiffs gave to the defendants to use that resin in the manufacturing process for the defendants’ benefit, producing their own chipboard and in the process destroying the veryexistence of the resin.
Secondly, the doctrine expounded by Sir George Jessel M.R. contemplates the tracing of goods into money and money into goods. In the latter case it matters not that the moneys represent a mixed fund of which a part only is impressed with the relevant trust. The cestui que trust has a charge on the mixed fund or the property into which it has passed for the amount of the trust moneys. It is at the heart of Mr. Mowbray’s argument to submit that the same applies to a mixture of goods with goods, relying in particular on Sir George Jessel M.R.’s illustration of the mixed bag of sovereigns. Now I can well see the force of that argument if the goods mixed are all of a homogenous character. Supposing I deposit a ton of my corn with a corn factor as bailee, who does not store it separately but mixes it with corn of his own. This, I apprehend, would leave unaffected my rights as bailor, including the right to trace. But a mixture of heterogeneous goods in a manufacturing process wherein the original goods lose their character and what emerges is a wholly new product, is in my judgment something entirely different.
Some extreme examples were canvassed in argument. Suppose cattle cake is sold to a farmer, or fuel to a steel manufacturer, in each case with a reservation of title clause, but on terms which permit the farmer to feed the cattle cake to his herd and the steelmaker to fuel his furnaces, before paying the purchase price. Mr. Mowbray concedes that in these cases the seller cannot trace into the cattle or the steel. He says that the difference is that the goods have been consumed. But once this concession is made, I find it impossible to draw an intelligible line of distinction in principle which would give the plaintiffs a right to trace the resin into the chipboard in the instant case. What has happened in the manufacturing process is much more akin to the process of consumption than to any simple process of admixture of goods. To put the point in another way, if the contribution that the resin has made to the chipboard gives rise to a tracing remedy, I find it difficult to see any good reason why, in the steelmaking example, the essential contribution made by the fuel to the steel manufacturing process should not do likewise.
These are the principal considerations which have led me to the conclusion that the plaintiffs are not entitled to the tracing remedy which they claim.”
Templeman L.J. expressed similar views. He said at page 44:
“When the resin was incorporated in the chipboard, the resin ceased to exist, the plaintiffs’ title to the resin became meaningless and their security vanished. There was no provision in the contract for the defendants to provide substituted or additional security. The chipboard belonged to the defendants.
We were not invited to imply in the contract between the plaintiffs and the defendants an agreement by the defendants to furnish substituted security in the form of an interest in the chipboard; we were invited to allow the plaintiffs to trace their vanished resin to the chipboard and thence to the proceeds of sale of chipboard and property representing those proceeds of sale. I agree that in a commercial contract of this nature no agreement should be implied for the furnishing of additional security. In the absence of any implied or express agreement to provide substitutional security, equity has nothing to trace; the resin and the title and the security disappeared without trace.”
Buckley L.J. said at page 46
“It is common ground that it was the common intention of the parties that the defendants should be at liberty to use the resin in the manufacture of chipboard. After they had so used the resin there could, in my opinion, be no property in the resin distinct from the property in the chipboard produced by the process. The manufacture had amalgamated the resin and the other ingredients into a new product by an irreversible process and the resin, as resin, could not be recovered for any purpose; for all practical purposes it had ceased to exist and the ownership in that resin must also have ceased to exist.
———————–
Common ownership of the chipboard at law is not asserted by the defendants; so the plaintiffs must either have the entire ownership of the chipboard, which is not suggested, or they must have some equitable interest in the chipboard or an equitable charge of some kind upon the chipboard. For my part, I find it quite impossible to spell out of this condition any provision properly to be implied to that effect.
It was impossible for the plaintiffs to reserve any property in the manufactured chipboard, because they never had any property in it; the property in that product originates in the defendants when the chipboard is manufactured.”
I have cited extensively from the judgments in this case because they provide the bedrock for Mr. Smith’s argument. He is clearly right in saying that insofar as they proceed on the footing that title in the resin ceased to exist when the resin itself ceased to exist they do not depend on the fact that the plaintiffs consented to the use of the resin in the manufacturing process. However, I do not think that one can entirely ignore the fact that this was a case of consensual, as opposed to wrongful, consumption (as indeed was Clough Mill vMartin). It might well be said in this sort of case, therefore, that the plaintiffs had by implication agreed not only that the resin should be used, but that title in the resulting product should vest solely in the defendant. Since by the time of the appeal the plaintiffs had given up any attempt to assert title of any kind in the chipboard, the court did not have to enquire closely into the basis on which title had vested in the defendants, much less whether title would have vested in them if their use of the resin had been unauthorised.
The next authority which Mr. Smith drew to my attention was Hendy Lennox (Industrial Engines) Ltd v Grahame Puttick Ltd [1984] 1 W.L.R. 485. This case concerned the sale of diesel engines by the plaintiffs to the defendants for incorporation into generator sets. The contract contained a retention of title clause. One of many questions which arose in that case is of relevance to the present case, namely, whether property in the engines passed to the buyers at the time they were incorporated into the generator sets. The engines were attached to the generators by mechanical means which could easily be undone without causing any damage either to the engine or the generator. Staughton J. held that the proprietary rights of the sellers were not affected by the incorporation of the engines into the generator sets, distinguishing the case from those such as Borden in which the goods had been transformed into a new commodity. This case is really concerned with the doctrine of accession rather than mixing.
The next case was Chaigley Farms Ltd v Crawford, Kaye & Grayshire Ltd [1996] BCC 957 which concerned title to livestock delivered by the plaintiff farmers to an abattoir under a contract containing a retention of title clause and title to the carcasses following slaughter. One question which arose was whether the slaughter of the animals and dressing of the carcasses extinguished the plaintiffs’ title because it created a new commodity. Garland J. considered that there was an essential difference between a live animal and a dead one, particularly one from which all the parts which were not to be sold on as butchers’ meat had been removed. I do not find that surprising, but the case is not of great assistance because it turned essentially on whether the word ‘goods’ in the retention of title clause should (as the judge in fact held) be construed as referring only to livestock.
Mr. Schaff sought to obtain support for his position from the Australian case of Farnsworth v Federal Commissioner of Taxation [1949] 78 C.L.R. 504. That case concerned the delivery of dried fruits by a grower to a packing company to be sold in accordance with the rules of a marketing association. The packing company mixed the plaintiff’s fruit with fruit supplied by other growers in such a way that its identity was lost. A question arose whether the grower had a sufficient interest in the stock held at the packing company to constitute “trading stock on hand” for the purposes of calculating her liability to income tax. Different views were expressed about the interest which the growers held in unsold stock. Latham C.J. and Webb J. considered that pending its sale the growers were owners in common of the fruit in proportion to their contributions, although they did not think that the grower held “trading stock on hand” within the meaning of the relevant legislation. Rich, Dixon and McTiernan JJ. considered that the nature of the operation meant that property in the fruit had passed to the packing company. This appears to have been a case of consensual mixing of similar goods under carefully prescribed conditions and it was unnecessary for the court to consider the problem with which I am concerned. I do not, therefore, derive any real assistance from this case.
More nearly in point is the Scottish case of The International Banking Corporation v Ferguson, Shaw & Sons 1910 SC 182. In that case the defendant bought in good faith a quantity of oil to which the seller did not have title and used it for the manufacture of lard compound by blending it with materials of his own. The pursuers brought an action to recover the oil or damages in lieu, although by that time the lard had already been sold. Lord Low who delivered the leading judgment pointed out at page 192 that in this case a new substance had been created to which the doctrine of specificatio applied by which
“the mixer, whether he be one of the proprietors or a third party, must, as the maker of the new species, become the sole proprietor of the subjects mixed. (Erskine, II. 1, 17)”
Lord Ardwall, concurring, agreed (also at page 192) that the case must be decided in accordance with the well-established doctrine of specification. Similarly, Lord Dundas at page 194 considered that the case was a pure type for the application of the Roman doctrine of specificatio which he considered to be undoubtedly part of the law of Scotland. It is to be noted that the purchaser in this case, although acting wrongfully, was acting in good faith.
In Jones v De Marchant (1916) 28 D.L.R. 561 the plaintiff’s husband took eighteen beaver skins which she owned and, together with four additional skins which he himself provided, had them made up into a coat which he gave to his mistress, the defendant. The plaintiff sought to recover the coat from the defendant on the grounds that it was her property. Richards J.A. considered the case to be governed by the principles of accession and held that the coat as a whole belonged to the plaintiff. In discussing the principle of accession, however, the judge referred to a line of authority which suggests that where goods are wrongfully used to create a new commodity English law is more concerned with the origin of the new commodity than with the fact that a new commodity has come into existence. In the first edition of his work on the law on torts Sir John Salmond stated that the true principle of English law is that property in chattels is not lost simply because they are processed into another form, for example, if corn is ground into flour, or trees cut down and sawn into timber, even though one would ordinarily say that flour is essentially different from corn and sawn timber different from standing trees. Certainly there is old authority for this view, as one can see from the Case of Leather Y.B. 5 Hen.VII fol.15, referred to by Richards J.A. in Jones v De Marchant, in which leather had been wrongfully taken and turned into shoes, and in In re Oatway [1903] 2 Ch. 356 Joyce J. said
“It is a principle settled as far back as the time of the Year Books that, whatever alteration of form any property may undergo, the true owner is entitled to seize it in its new shape if he can prove the identity of the original material: see Blackstone, vol. ii. p. 405, and Lupton v. White. But this rule is carried no farther than necessity requires, and is applied only to cases where the compound is such as to render it impossible to apportion the respective shares of the parties”.
The editors of the current (21st) edition of Salmond & Heuston on the Law of Torts refer to the decisions in Indian Oil v Greenstone and Coleman v Harvey which they suggest are inconsistent with the views expressed by Salmond, but those cases are concerned with the consequences of mixing goods of a similar kind and do not in my view bear directly on this question.
One of the more extreme examples of this principle in operation is to be found in the American case of Silsbury & Calkins v McCoon & Sherman (1850) 3 N.Y. 379 which is also referred to in Jones v De Marchant. In that case corn was taken from its owner and turned into whisky. Despite such a radical alteration in the characteristics of the original goods, the majority held that the whisky belonged to the owner of the corn. The case is interesting for a number of reasons. It appears from the report of the argument that the court was treated to a careful analysis of the Roman law principles of specificatio and accessio as well as having its attention drawn to many of the early English authorities and commentators. It is also interesting in that it suggests that a distinction is to be drawn between an innocent wrongdoer and a wilful wrongdoer, although, as the court accepted, that is not one which has been recognised in any of the English authorities. The case is also notable for the quality of the dissenting judgment which draws attention to the dangers inherent in being too ready to ignore changes in the essential nature of the goods.
I come finally to the case of Foskett v McKeown [2000] 2 WLR 1299 in which money was used in breach of trust to assist in paying premiums under a life insurance policy. The question for decision was whether the beneficiaries were entitled to recover a share of the proceeds of the policy proportionate to the contribution which the trust funds had made to the premiums or were limited to a restitutionary charge over the proceeds of the policy to recover, with interest, the amount which the trust had contributed. Their Lordships held by a majority that the beneficiaries were entitled to a share of the proceeds of the policy because they could trace their assets into the policy and were entitled to enforce their proprietary rights against it.
The leading speech in this case was given by Lord Millett with whom Lord Browne-Wilkinson and Lord Hoffmann agreed. Having referred to the case of In re Hallett’s Estate; Knatchbull v Hallett (1880) 13 Ch. D. 696 Lord Millett said at page 1326H
“In my view the time has come to state unequivocally that English law has no such rule [sc. that in the case of a mixed substitution the beneficiary is confined to a lien]. It conflicts with the rule that a trustee must not benefit from his trust. I agree with Burrows that the beneficiary’s right to elect to have a proportionate share of a mixed substitution necessarily follows once one accepts, as English law does, (i) that a claimant can trace in equity into a mixed fund and (ii) that he can trace unmixed money into its proceeds and assert ownership of the proceeds.
Accordingly, I would state the basic rule as follows. Where a trustee wrongfully uses trust money to provide part of the cost of acquiring an asset, the beneficiary is entitled at his option either to claim a proportionate share of the asset or to enforce a lien upon it to secure his personal claim against the trustee for the amount of the misapplied money.”
And a little later, having pointed out that this branch of the law is concerned with vindicating rights of property and not with reversing unjust enrichment, he said at page 1327D
“The tracing rules are not the result of any presumption or principle peculiar to equity. They correspond to the common law rules for following into physical mixtures (though the consequences may not be identical). Common to both is the principle that the interests of the wrongdoer who was responsible for the mixing and those who derive title under him otherwise than for value are subordinated to those of innocent contributors. As against the wrongdoer and his successors, the beneficiary is entitled to locate his contribution in any part of the mixture and to subordinate their claims to share in the mixture until his own contribution has been satisfied. This has the effect of giving the beneficiary a lien for his contribution if the mixture is deficient.”
Then at page 1328A Lord Millett said this:
“Similar principles apply to following into physical mixtures: see Lupton v White (1808) 15 Ves. 432; and Sandeman & Sons v Tyzack and Branfoot Steamship Co Ltd [1913] A.C. 680, 695 where Lord Moulton said: “If the mixing has arisen from the fault of ‘B’, ‘A’ can claim the goods.” There are relatively few cases which deal with the position of the innocent recipient from the wrongdoer, but Jones v De Marchant (1916) 28 D.L.R. 561 may be cited as an example. A husband wrongfully used 18 beaver skins belonging to his wife and used them, together with four skins of his own, to have a fur coat made up which he then gave to his mistress. Unsurprisingly the wife was held entitled to recover the coat. The mistress knew nothing of the true ownership of the skins, but her innocence was held to be immaterial. She was a gratuitous donee and could stand in no better position than the husband. The coat was a new asset manufactured from the skins and not merely the product of intermingling them. The problem could not be solved by a sale of the coat in order to reduce the disputed property to a divisible fund, since (as we shall see) the realisation of an asset does not affect its ownership. It would hardly have been appropriate to require the two ladies to share the coat between them. Accordingly it was an all or nothing case in which the ownership of the coat must be assigned to one or other of the parties. The determinative factor was that the mixing was the act of the wrongdoer through whom the mistress acquired the coat otherwise than for value.
The rule in equity is to the same effect, as Sir William Page Wood V.-C. observed in Frith v Cartland (1865) 2 H.&M. 417, 420: “if a man mixes trust funds with his own, the whole will be treated as the trust property, except so far as he may be able to distinguish what is his own.” This does not, in my opinion, exclude a pro rata division where this is appropriate, as in the case of money and other fungibles like grain, oil or wine. But it is to be observed that a pro rata division is the best that the wrongdoer and his donees can hope for. If a pro rata division is excluded, the beneficiary takes the whole; there is no question of confining him to a lien. Jones v De Marchant, 28 D.L.R. 561 is a useful illustration of the principles shared by the common law and equity alike that an innocent recipient who receives misappropriated property by way of gift obtains no better title than his donor, and that if a proportionate sharing is inappropriate the wrongdoer and those who derive title under him take nothing.”
In the light of the discussion in Foskett v McKeown I think it right that I should state clearly that I am not concerned at this stage of the litigation with the effect of any fiduciary relationships which may have existed between the parties. Whether any such relationships existed and, if so, what significance they have in the overall context of this case will fall for determination in a later Phase. In this judgment I am confining myself to the position at common law.
‘Mixing’ and ‘mixture’ are ordinary words, not terms of art. They are apt to describe a range of different operations from the addition of a small quantity of one type of material to a large bulk in order to make a slight adjustment to one of its characteristics without changing its essential nature (e.g. the addition of sugar to tea or anti-knock compounds to petrol) to the blending of substantial quantities of different materials in order to produce something which in commercial, terms, and perhaps also in terms of its structure and chemical composition, is different from the original ingredients (e.g. flour, eggs, milk etc. to make a cake, or resin, glues and woodchips to form chipboard). This part of the Phase 1 issues is concerned with the latter type of mixing, that is the deliberate blending of two or more oils of different grades or specifications in order to produce oil of a grade or specification commercially different from any of its ingredients.
Mr. Smith’s submission was essentially a simple one: if goods have ceased to exist because they have been turned into something completely new, the person who made that new thing automatically acquires title to it by virtue of the fact that he made it, is in possession of it and can exercise dominion over it. There is much to be said for that proposition and the doctrine of specificatio is well established in Scots law: see The International Banking Corporation v Ferguson, Shaw & Sons. However, it is less clear that it forms part of English law, at any rate in its full rigour. The principle for which Mr. Smith contended would, I think, offend many people’s sense of justice in a case where the original materials belonged entirely to someone other than the maker of the new commodity, even if he were unaware of the fact; it is even more likely to do so in a case where the maker of the new commodity knew that he had no right to take and use them. It was for this reason that from early times English law allowed the original owner to recover his goods even though in one sense they had been turned into something new, for example, leather into shoes (Case of Leather Y.B. 5 Hen.VII fol.15) or standing trees into sawn timber (Anon. Moore 20, 72 E.R. 411). These cases, which were followed and applied in the American cases of Betts and Church v Lee 5 Johns. 348 (timber wrongfully cut down and turned into shingles), Curtis v Groat 6 Johns. 169 (timber cut down and turned into charcoal) and Silsbury v McCoon itself, are reflected in the passage from the judgment of Joyce J. in Re Oatway to which I referred earlier. The courts did recognise, however, that there would come a point at which the original materials could not be sufficiently identified in the new article to permit recovery by the owner. None of the examples I have given are cases involving mixing, of course, but they do show that it is necessary to approach the proposition that a new commodity automatically belongs to its manufacturer with some care. The old authorities support the conclusion that merely working the original materials to produce a new article is not enough to vest title in the manufacturer if he is a wrongdoer; nor, in the light of Jones v De Marchant and Silsbury v McCoon, is the mere addition of other materials belonging to the manufacturer himself.
The cases to which I have referred proceed on the principle that the owner of goods which are wrongfully taken and used to make a new commodity can recover them from the wrongdoer, even in their altered form, if he can identify them in that new commodity and show that it is wholly or substantially composed of them. In such cases the work carried out on the goods by the wrongdoer, as well as additions of small amounts of the his own materials, are treated as attaching to the goods by accession. This appears most clearly from the judgment in Jones v De Marchant. Under this approach title depends not on the creation of a new commodity, but on the ability of the original owner to identify his goods in the new commodity. Viewed in that way it is difficult to see why the owner of the leather should be able to recover the shoes, or the owner of the trees the boards, but the owner of the stolen ingredients should not be entitled to recover the cake into which they have wrongfully been made, even if their physical presence is less obvious. There are, of course, limits to the extent to which it is possible to identify the original materials in the new commodity, but in my view that is essentially a matter of fact in each case. The examples of the cattle cake and the fuel oil canvassed in Borden can, I think, properly be treated as cases where the goods can no longer be regarded as remaining in existence as a substantial component of the product with the result that property in them must be considered to have passed to the farmer or the steelmaker, as the case may be, by accession. Historically English law has not considered that a wrongdoer who has improved the goods by his labour or by providing additional materials of a relatively minor nature, such as the thread used to turn leather into shoes, should be entitled to property in the new commodity or compensation for his labour or materials. The position would probably be different, however, if the new commodity substantially represented work or materials provided by the wrongdoer.
As I have already said, the court in Borden was not concerned with questions of this kind. The resin had been consumed in the process of manufacture so no title could remain in it and although it could be identified as a constituent of the chipboard, the sellers were not contending that any property in the chipboard had passed to them. Foskett v McKeown is a case of mixed substitution. It is concerned, therefore, with the ability of the claimant to trace his property into a substituted fund and with his proprietary rights against that fund, not with whether his goods could be identified in a new commodity into which they had been turned or with his proprietary rights against it. However, the speech of Lord Millett in particular does provide some helpful insight into those questions. Both Lord Steyn at page 1308H-1309C and Lord Millett at page 1322 D-G were at pains to point out that a clear distinction must be drawn between the rules of following and tracing, which are essentially evidential in nature, and rules which determine substantive rights. The former are concerned with identifying property in other hands or in another form; the latter with the rights that a claimant can assert against the property in its present form. In a case such as Borden, where the buyers were permitted to use the resin in their manufacturing process, there was no difficulty in identifying the resin as a constituent of the chipboard, but it is difficult to see how the sellers could have acquired any rights of ownership over the chipboard in the absence of specific agreement for the reasons given by Robert Goff L.J. in Clough Mill v Martin. And even if the buyers’ use of the resin had been wrongful, the principles of accession would almost certainly have proved an insurmountable obstacle. In Jones v De Marchant, on the other hand, the plaintiff had no difficulty in showing that the skins which belonged to her formed the major part of the coat. She became the owner of the whole coat because it could not be divided and because it had been brought into being by the act of the wrongdoer. As a result the additional skins belonging to her husband, together with any lining, trimming and thread for which he had paid, became her property by accession. This was despite the fact that, as Lord Millett observed, the coat was a new asset manufactured from the skins and not merely the product of intermingling them.
I can now return to the case of wrongful blending of oil products. Two cases call for consideration: the first is where a wrongdoer takes oil belonging to two or more persons which he then blends for his own purposes. In such a case I have no doubt that the two contributors become owners in common of the blended bulk. Each can identify his own oilas a constituent of the bulk and as a wrongdoer the blender cannot acquire title as against the previous owners. This appears clearly from the passage I have already referred to in Lord Millett’s speech in Foskett v McKeown at page 1327D. In the paragraph immediately following Lord Millett pointed out that innocent contributors are entitled to be treated equally as between each other. This does not, I think, mean that in cases of mixed goods the contributors are always entitled to equal interests in the bulk, simply that there must be equality of treatment. In my view that would require the court to take account not only of the quantity of goods which each had contributed but also of the value of those goods.
The second case is where a wrongdoer takes oil belonging to another which he then blends with his own oil. Again, the innocent contributor is able to identify his oil as a substantial constituent of the bulk and as a wrongdoer the blender is unable to override his property. The position is very similar to that of Jones v De Marchant, with this exception, that, unlike the coat in that case, the blended bulk is capable of division. Lord Millett did not consider that the fact that the goods had become mixed by the action of the wrongdoer excluded the possibility of a pro rata division where the nature of the bulk would permit that, as in the case of a fungible like oil. He did, however, make it clear that in a case of this kind pro rata division of the bulk was the best that the wrongdoer could hope for.
The authorities on mixing do not in my view point to any different conclusion. They start from the proposition that where one person wrongfully mixes his goods with those of another so that they cannot be separated, the innocent party is entitled to recover the whole of the mixture. Thus in Spence v Union Marine Insurance Co. Ltd (1868) L.R. 3 C.P. 427 Bovill C.J. said at page 437-8
“It has long been settled in our law, that, where goods are mixed so as to become undistinguishable, by the wrongful act or default of one owner, he cannot recover, and will not be entitled to his proportion, or any part of the property, from the other owner.”
Similarly, in Sandeman & Sons v Tyzack and Branfoot Steamship Co. Ltd [1923] A.C. 680 Lord Moulton said at pages 694-695
“My Lords, if we proceed upon the principles of English law, I do not think it a matter of difficulty to define the legal consequences of the goods of “A.” becoming indistinguishably and inseparably mixed with the goods of “B.” If the mixing has arisen from the fault of “B.,” “A.” can claim the goods. He is guilty of no wrongful act, and therefore the possession by him of his own goods cannot be interfered with, and if by the wrongful act of “B.” that possession necessarily implies the possession of the intruding goods of “B.,” he is entitled to it (2 Kent’s Commentaries, 10th ed., 465).”
It is not clear that Lord Moulton had in mind the case where the mixture had produced an entirely new thing, but the approach is the same, namely, that the interests and the proprietary rights of the wrongdoer are subordinated to those of the innocent party. At the same time he recognised that the law in this area could not be regarded as settled and might need to be developed to meet the requirements of substantial justice in other types of cases. Similarly, in Re Oatway Joyce J. recognised that the “settled principle” that the innocent party is entitled to recover his property in an altered form might have to give way where the nature of the goods permitted a fair distribution between the wrongdoer and the innocent party. In the passage in his judgment which follows that which I cited earlier he said at page 359
“But this rule is carried no farther than necessity requires, and is applied only to cases where the compound is such as to render it impossible to apportion the respective shares of the parties. Thus, if the quality of the articles that are mixed be uniform, and the original quantities known, as in the case of so many pounds of trust money mixed with so many pounds of the trustee’s own money, the person by whose act the confusion took place is still entitled to claim his proper quantity, but subject to the quantity of the other proprietor being first made good out of the whole mass: 2 Stephen’s Commentaries (13th ed.), 20.”
In Indian Oil v Greenstone Staughton J. considered that justice required that in a case of wrongful mixing of similar goods the mixture should be held in common and that each party should be entitled to receive out of the bulk a quantity equal to that of his goods which went into the mixture, any doubt as to that quantity being resolved in favour of the innocent party. He reached that conclusion on the grounds that the proprietary interest of the innocent party could thereby be adequately protected without overriding the proprietary interests of the wrongdoer to a greater extent than was necessary in order to do so. This is also the principle which Lord Millett seems to have had in mind in Foskett v McKeown at page 1328E-G. In my judgment it applies with equal force in the case where the wrongdoer mixes or combines two or more commodities to produce something new, provided that the new thing is a fungible which is capable of being shared between the contributors pro rata without destroying its identity. In some cases, of course, a pro rata division will not be possible: the coat in Jones v De Marchant is one example. In such cases the court may need to resort to other principles in order to do substantial justice, as Lord Moulton recognised in Sandeman v Tyzack.
In the light of the authorities I have therefore reached the conclusion that when one person wrongfully blends his own oil with oil of a different grade or specification belonging to another person with the result that a new product is produced, that new product is owned by them in common. In my view justice also requires in a case of this kind that the proportions in which the contributors own the new blend should reflect both the quantity and the value of the oil which each has contributed. As in other cases of mixing, any doubts about the quantity or value of the oil contributed by the innocent party should be resolved against the wrongdoer. The innocent party is also entitled to recover damages from the wrongdoer in respect of any loss which he has suffered as a result of the wrongful use of his oil.
Meaning of the ‘bulk’
In any discussion of the effects of commingling and blending frequent reference is necessarily made to the ‘bulk’ or ‘mass’ which represents the product of that operation. In many cases the identification of the relevant bulk will present no difficulty; it will simply be the contents of a single storage compartment such as a tank, hold or hopper. In other cases the position may not be so simple. In Sexton & Abbott v Graham, for example, the court recognised that where grain is deposited for storage in a warehouse containing many separate bins, the whole stock of grain of any one type and grade may be regarded as a single bulk notwithstanding the fact that it is held in separate bins and moved around from time to time. In a case of consensual mixing some pointer to the identification of the bulk is likely to be found in the contract between the parties. In a case of wrongful mixing it will be a matter to be determined on the particular facts of the case. I do not think that this question can usefully be taken any further at this stage.
I can now turn to the specific questions raised by Issue I.
Whether and to what extent title would pass to MTI in respect of any relevant oil or whether and to what extent the respective Oil Claimant would retain ownership of the oil (if necessary as a co-owner of any commingled or blended bulk) in or notwithstanding each or any of the following assumed circumstances, namely
1. upon arrival of the carrying vessel in Fujairah territorial waters and/or delivery of the oil into storage, (or in the case of Texaco by virtue of MTI receiving and storing the relevant oil) by virtue of MTI being entitled under the arrangements identified in paragraph (1) above (or in the case of Texaco under the arrangements set out in paragraph (5) above), or any of them, to do any of the following acts, namely
a. to commingle the oil with other oil owned either by itself or by persons other than the respective Oil Claimant;
Neither the arrival of the carrying vessel in the territorial waters of Fujairah, nor the delivery of oil to MTI for storage in commingled bulk would cause title in the oil to pass to MTI.
b. to blend the oil with other oil owned either by itself or by persons other than the respective Oil Claimant; and/or
c. to agree to sell the oil to third parties; and/or
d. to sell and/or deliver the oil to third parties;
The arrival of the carrying vessel in the territorial waters of Fujairah would not itself have any effect on property in the oil, unless the parties had agreed otherwise. However, delivery of goods to another person with permission to use them in a way which will result in their consumption or destruction will normally justify the inference that property in them was intended to pass to that person. The same inference may be drawn if there is permission to dispose of them irrevocably, such as by sale to third parties, though in all these cases the parties may agree otherwise – e.g. where goods are delivered on sale or return. Much will turn, therefore, in each case on the agreement itself and the context in which it was made. I mention this because I am aware that some of the Oil Claimants rely on reservation of title clauses in their contracts with MTI and that Mr. Smith on behalf of MTI did not contend, perhaps for this reason, that property would pass to MTI on delivery. However, I should make it clear that I am not concerned at this stage with the terms of the contracts between the parties which will arise for consideration in a later Phase. The issues which form Phase 1 must therefore be decided by reference to general principles of law. Perhaps the only satisfactory answer to give to the other questions raised in these sub-paragraphs, therefore, is that in the absence of any agreement to the contrary (which may be express or implied), delivery of oil to MTI under a contract which entitled it to make use of the oil in its own blending operations, or to sell and deliver it to third parties would cause title to pass to MTI.
2. by virtue of MTI being entitled under the arrangements identified in paragraph (1) above (or in the case of Texaco paragraph (5) above), or any of them, to do any of the following acts, upon subsequently doing any of the following acts, namely
a. commingling the oil with other oil owned either by itself or by persons other than the respective Oil Claimant;
It follows from what I have already said that the commingling of oil in storage with oil belonging to other persons or to MTI itself would not cause property to pass to MTI, unless the parties had agreed otherwise.
b. blending the oil with other oil owned either by itself or by persons other than the respective Oil Claimant;
In the absence of agreement to the contrary property in the oil would have passed to MTI on delivery. However, the parties to the contract are in principle free to decide for themselves when property in the constituents is to pass and who is to acquire title to the resultant blend.
c. agreeing to sell the oil to third parties; and/or
d. selling and/or delivering the oil to third parties.
The position in these cases is essentially the same. In the absence of any agreement to the contrary, property in the oil would have passed to MTI on delivery, so the subsequent sale and delivery to a third party would have no effect. However, the parties to the contract are in principle free to decide for themselves when and under what circumstances property in the goods is to pass. I should perhaps make it clear that the circumstances under which a buyer in possession of goods is able give a good title to a purchaser under English law even though he is not himself the owner of the goods do not arise for consideration in this Phase of the litigation.
3. upon MTI doing any of the following acts, albeit that MTI were not entitled under the aforesaid arrangements to do any of the same, namely
a. commingling the oil with other oil owned either by itself or by persons other than the respective Oil Claimant;
Wrongfully commingling the oil with other oil in its possession would not cause title to pass to MTI. All those who had contributed to the bulk, including MTI, would become owners in common of the bulk in proportion to their contributions. However, any doubt as to the amount contributed by MTI and other contributors would be resolved in favour of the other contributors, even if that meant in an extreme case that MTI had to be treated as making no contribution at all.
b. blending the oil with other oil owned either by itself or by persons other than the respective Oil Claimant;
The relevant Oil Claimant and MTI (or any other person whose oil had been used to produce the blend) would become owners in common of the new product in proportions which reflected the quantity and value of the oil they had each contributed to the blend.
c. agreeing to sell the oil to third parties; and/or
d. selling and/or delivering the oil to third parties.
It was not suggested that a wrongful disposal by MTI would cause title to pass to it. As I have already indicated, the question whether, and if so under what circumstances, MTI could give a good title to third parties does not arise in Phase 1.
Issue J – Assuming that title did not pass to MTI but was retained by the respective Oil Claimant (if necessary as a co-owner of any commingled or blended bulk), then
1. to the extent that withdrawals were made from any commingled or blended bulk by MTI, whether
a. MTI are deemed or presumed to have withdrawn their own share (if any) first;
b. the shares of the respective Oil Claimant owning in common with MTI are deemed or presumed to have been retained in the commingled or blended bulk last; and
c. there are any circumstances, and if so, what circumstances in which any such rule or presumption will not apply;
Issue J is concerned with the effect which the drawing of oil by MTI for its own purposes from the commingled or blended bulk has on title to the oil which remains. Paragraph 1 did not give rise to any serious dispute because, while not conceding the point, Mr. Smith was inclined to accept that if MTI drew oil from a bulk in which it had a proprietary interest it would normally be right to treat it as having drawn its own oil rather than oil belonging to another owner. At any rate, he did not suggest that there were any circumstances arising in the context of this litigation in which that would not be right to take that view and for my own part I find it difficult to imagine any since MTI could hardly be permitted to rely on its own wrongful act in order to enable it to assert title to what remained. In these circumstances the only proper answer to this group of questions is that MTI is presumed to have withdrawn its own share first and that there are no circumstances in the context of the present litigation in which this presumption does not apply.
2. Whether, in seeking to establish title to the balance or remainder of any commingled or blended bulk on any given date in circumstances where the balance or remainder of the bulk was insufficient on that date to satisfy the proprietary claims of the respective Oil Claimant owning in common therein, it is sufficient for the respective Oil Claimant
a. to prove the difference between the amount owned by them which should have remained in the bulk and the lesser amount which was all that was left in the bulk in fact on any given date; and
b. to rely on any principle or presumption of law as set out in J.1 above,
or
whether it is necessary for the respective Oil Claimant to trace the provenance of the bulk (and each and every part thereof) on any given date right back to a specific cargo or specific cargoes previously owned by them.
This question is directed to the steps which a bailor is required to take in order to establish its interest in a mixed bulk where the quantity of goods remaining in the possession of the bailee falls short of the bailor’s contribution. This question may arise in two fundamentally different situations. The first is where the bailee has simply drawn from the bulk goods to which he was not entitled leaving a shortfall. The second is where, having drawn from the bulk goods to which he was not entitled, the bailee contributes additional goods of his own.
The first of these situations occurred in Mercer v Craven Grain and does not pose great difficulties. If the bailee contributed to the bulk he is presumed to have drawn his own goods first. Any drawing in excess of his entitlement represents a wrongful taking of goods belonging to the other owners. What effect that will have on the position of the bailors as between themselves may depend on the particular facts of the case. It does not arise for decision at this stage and since I have heard no argument on that question I do not propose to express any view on it. However, each of the bailors who had suffered loss as a result would have a corresponding right to recover that loss from the bailee.
The second situation raises more difficult problems and I am not sure that paragraph J.2 actually requires me to consider it. However, it is so closely related to the issues which are raised by paragraph J that I think it desirable to say something about it in the hope that that will assist the parties in preparing for the next stage of the litigation. One of the reasons why this situation gives rise to difficulty is that much will depend on the relationship between the parties under which goods are withdrawn and replaced. Insofar as deposits, withdrawals and replacements are all made pursuant to a contract, there is no difficulty in principle in holding, if this be the intention of the parties, that property in the bulk remains in the original depositors as owners in common, that property passes from the bailors to the bailee when he draws from the bulk for his own use and that property passes from the bailee to the bailors when he restores goods to the bulk. This is really no more than a case of consensual substitution and involves no wrongful act on the part of the bailee.
Where the depositors have not agreed that the bailee may withdraw goods for his own use the position is obviously different because any such withdrawal involves a wrongful act on his part as against the bailors whose stock is thereby depleted. The question then is whether any goods which the bailee subsequently returns to the bulk are to be regarded as taking the place of those which he wrongfully withdrew, or whether they are simply to be regarded as a contribution on his own behalf.
In James Roscoe (Bolton) Ltd v Winder [1915] 1 Ch. 62 the plaintiff sold its business to W who was to get in the book debts and pay the plaintiff an amount equal to the sum of the book debts owing on a certain date. These amounted to just over £623. W got in £455.18.11d. which he paid into his private account. He subsequently drew on that account for his own purposes reducing the balance to £25.18s.0d. Afterwards he paid in money of his own and drew on the account for his own purposes. At his death £358.5s.5d. remained in the account which the plaintiff sought to recover. Sargant J. held that the plaintiff had a charge on the account, but only for the sum of £25.18s.0d. which represented the lowest intermediate balance. The plaintiff had argued that by paying money of his own into the account W had impressed that money with the same charge in favour of the plaintiff as had been impressed on the money which he had originally collected, but that argument was rejected on the grounds that the mere fact of paying money into his private account was not enough to attribute to W an intention to create a charge over that money in favour of the plaintiff. The principle on which this decision rests, namely, that in circumstances of this kind the creation of a trust or charge in favour of a third party requires positive evidence of an intention to do so on the part of the wrongdoer, was applied by the Privy Council in In re Goldcorp Exchange Ltd [1995] 1 AC 74 and by the Court of Appeal in Bishopsgate Investment Management v Homan [1995] 1 All E.R. 347.
In my view the same principle must apply to the substitution of goods in a mixed bulk, and indeed Mr. Schaff did not contend otherwise, although he did submit that in some cases the replacement of goods by the bailee could itself be sufficient evidence of an intention to transfer property to the bailors. I would not rule that out as a possibility, but it would depend very much on the facts of the individual case. The assent of the bailors to a transfer of property in substitution might easily be inferred from the fact that they understood the bailee to be holding a mixed bulk of which they were owners in common and from the fact that they could be presumed to be indifferent to the precise origin of the goods comprising the bulk provided that they remained of the same type and description. An interesting and illuminating discussion of these and related questions in the context of the bulk storage of grain is to be found in an article entitled ‘Grain Elevators’ attributed to Oliver Wendell Holmes published in The American Law Review 1871-1872, vol. VI, p.450.
Apart from identifying the main principles involved in relation to wrongful withdrawal and substitution, I do not think that it is possible at this stage to provide an answer to the question contained in paragraph J.2, save in one respect. The whole of this paragraph proceeds on the assumption that oil belonging to one or more of the Oil Claimants has been mixed with oil belonging to other Oil Claimants, and perhaps to MTI as well, to produce a single bulk. One possibility which it contemplates is that in a case where wrongful drawing by MTI has rendered the bulk too small to satisfy the legitimate claims of all the contributors, a contributor may have to prove by evidence in the ordinary way what part of the remaining bulk represents goods which he contributed. In many cases this would be an impossible task and the work that has already been carried out in this case demonstrates how burdensome it would be even if it were possible. However, in my view that is not what is required and indeed Mr. Smith did not suggest that it was. The amount which each person has contributed to the bulk determines the proportions in which the contributors as a whole become owners in common of that bulk and therefore any claimant must be able to show both that he was a contributor to the bulk and how much he contributed to it. Similarly, a contributor’s share of the bulk will be reduced in proportion to the amount of his drawings from it. However, where there is a shortfall as a result of unauthorised drawing by the bailee or loss of any other kind, the source of the goods which make up the residue of the bulk is irrelevant to determining the proprietary interests of the contributors in what remains.
I think the question raised in paragraph J.2 can therefore best be answered by saying that questions of title to the remaining bulk are to be determined in accordance with the general principles set out in this judgment and that provided an Oil Claimant can show that it contributed to the bulk and has not drawn the whole of its entitlement it is not necessary for it to trace the provenance of the remaining bulk to a cargo which it previously owned in order to establish a proprietary interest in it.
The answers to the questions posed by the preliminary issues are collected in the appendix. They should, of course, be read and understood in the context of the judgment as a whole.
AG for Hong Kong v Reid
[1993] UKPC 2 [1994] 1 All ER 1, [1994] AC 324, [1993] UKPC 2, [1994] 1 AC 324
Lord Templeman
A bribe is a gift accepted by a fiduciary as an inducement to him to betray his trust. A secret benefit, which mayor may not constitute a bribe, is a benefit which the fiduciary derives from trust property or obtains from knowledge which he acquires in the course of acting as a fiduciary. A fiduciary is not always accountable for a secret benefit but he is undoubtedly accountable for a secret benefit which consists of a bribe. In addition a person who provides the bribe and the fiduciary who accepts the bribe may each be guilty of a criminal offence. In the present case Mr. Reid was clearly guilty of a criminal offence.
Bribery is an evil practice which threatens the foundations of any civilised society. In particular, bribery of policemen and prosecutors brings the administration of justice into disrepute. Where bribes are accepted by a trustee, servant, agent or other fiduciary, loss and damage are caused to the beneficiaries, master or principal whose interests have been betrayed. The amount of loss or damage resulting from the acceptance of a bribe mayor may not be quantifiable. In the present case the amount of harm caused to the administration of justice in Hong Kong by Mr. Reid in return for bribes cannot be quantified.
When a bribe is offered and accepted in money or in kind, the money or property constituting the bribe belongs in law to the recipient. Money paid to the false fiduciary belongs to him. The legal estate in freehold property conveyed to the false fiduciary by way of bribe vests in him. Equity however which acts in personam insists that it is unconscionable for a fiduciary to obtain and retain a benefit in breach of duty. The provider of a bribe cannot recover it because he committed a criminal offence when he paid the bribe. The false fiduciary who received the bribe in breach of duty must pay and account for the bribe to the person to whom that duty was owed. In the present case, as soon as Mr. Reid received a bribe in breach of the duties he owed to the Government of Hong Kong, he became a debtor in equity to the Crown for the amount of that bribe. So much is admitted. But if the bribe consists of property which increases in value or if a cash bribe is invested advantageously, the false fiduciary will receive a benefit from his breach of duty unless he is accountable not only for the original amount or value of the bribe but also for the increased value of the property representing the bribe. As soon as the bribe was received it should have been paid or transferred instanter to the person who suffered from the breach of duty. Equity considers as done that which ought to have been done. As soon as the bribe was received, whether in cash or in kind, the false fiduciary held the bribe on a constructive trust for the person injured. Two objections have been raised to this analysis. First it is said that if the fiduciary is in equity a debtor to the person injured, he cannot also be a trustee of the bribe. But there is no reason why equity should not provide two remedies, so long as they do not result in double recovery. If the property representing the bribe exceeds the original bribe in value, the fiduciary cannot retain the benefit of the increase in valuewhich he obtained solely as a result of his breach of duty. Secondly, it is said that if the false fiduciary holds property representing the bribe in trust for the person injured, and if the false fiduciary is or becomes insolvent, the unsecured creditors of the false fiduciary will be deprived of their right to share in the proceeds of that property. But the unsecured creditors cannot be in a better position than their debtor. The authorities show that property acquired by a trustee innocently but in breach of trust and the property from time to time representing the same belong in equity to the cestui que trust and not to the trustee personally whether he is solvent or insolvent. Property acquired by a trustee as a result of a criminal breach of trust and the property from time to time representing the same must also belong in equity to his cestui que trust and not to the trustee whether he is solvent or insolvent.
When a bribe is accepted by a fiduciary in breach of his duty then he holds that bribe in trust for the person to whom the duty was owed. If the property representing the bribe decreases in value the fiduciary must pay the difference between that value and the initial amount of the bribe because he should not have accepted the bribe or incurred the risk of loss. If the property increases in value, the fiduciary is not entitled to any surplus in excess of the initial value of the bribe because he is not allowed by any means to make a profit out of a breach of duty.
The courts of New Zealand were constrained by a number of precedents of the New Zealand, English and other common law courts which established a settled principle of law inconsistent with the foregoing analysis. That settled principle is open to review by the Board in the light of the foregoing analysis of the consequences in equity of the receipt of a bribe by a fiduciary.
In Keech v. Sandford (1726) Sel. Cas. T. King 61 a landlord refused to renew a lease to a trustee for the benefit of an infant. The trustee then took a new lease for his own benefit. The new lease had not formed part of the original trust property, the infant could not have acquired the new lease from the landlord and the trustee acted innocently, believing that he committed no breach of trust and that the new lease did not belong in equity to his cestui que trust. The Lord Chancellor held nevertheless at page 62 that “the trustee is the only person of all mankind who might not have the lease”; the trustee was obliged to assign the new lease to the infant and account for the profits he had received. The rule must be that property which a trustee obtains by use of knowledge acquired as trustee becomes trust property. The rule must, a fortiori, apply to a bribe accepted by a trustee for a guilty criminal purpose which injures the cestui que trust. The trustee is only one example of a fiduciary and the same rule applies to all other fiduciaries who accept bribes.
In Fawcett v. Whitehouse (l829) 1 Russ. & M. 132 the defendant Whitehouse intending to enter into partnership with the plaintiffs Shand and Fawcett negotiated for the grant of a lease by a landlord to the partnership. The landlord paid Whitehouse £12,000 for persuading the partnership to accept the lease. The Vice-Chancellor, Sir John Leach, said at page 149 that Whitehouse “was bound to obtain the best terms possible for the intended partnership … and that all he did obtain will be considered as if he had done his duty and had actually received the £12,000 for the new partnership, as upon every equitable principle he was bound to do. I am of opinion, therefore, that this is what must be called in a court of equity a fraud on the part of the defendant. It was in fact selling his intended partner for £12,000” . The Vice-Chancellor made a declaration that Whitehouse “had received the £12,000 on behalf of himself and the plaintiffs Shand and Fawcett equally and that he was a trustee as to one-third part of that sum, for Shand, as to another third part … for the plaintiff Fawcett”. An appeal to the Lord Chancellor was dismissed by Lord Lyndhurst. Although in that case, there was no need to trace the sum of £12,000 into other assets, the bribe of £12,000 was plainly held to be trust property.
In Sugden v. Crossland (l856) 3 Sm. & Giff. 192 a trustee was paid £75 for agreeing to retire from the trust and to appoint in his place the person who had paid the £75. The Vice-Chancellor, Sir John Stuart, said at page 194:-
“It has been further asked that the sum of £75 may be treated as a part of the trust fund, and as such may be directed to be paid by Horsfield to the trustee for the benefit of the cestui que trusts under the will. It is a well-settled principle that, if a trustee make a profit of his trusteeship, it shall enure to the benefit of his cestui que trusts. Though there is some peculiarity in the case, there does not seem to be any difference in principle whether the trustee derived the profit by means of the trust property, or from the office itself.”
This case is of importance because it disposes succinctly of the argument which appears in later cases and which was put forward by counsel in the present case that there is a distinction between a profit which a trustee takes out of a trust and a profit such as a bribe which a trustee receives from a third party. If in law a trustee, who in breach of trust invests trust monies in his own name, holds the investment as trust property, it is difficult to see why a trustee who in breach of trust receives and invests a bribe in his own name does not hold those investments also as trust property.
In Tyrrell v. Bank of London and Others (1862) 10 H.L. Cas. 26 a solicitor acting for a bank in negotiating the purchase by the bank of a building known as the Hall of Commerce acquired for himself an interest in a larger property which included the Hall of Commerce and then sold the Hall of Commerce to the bank at a profit. The House of Lords held that the solicitor was a trustee for the bank of his interests in the Hall of Commerce but was not a trustee for the bank of that part of the retained property which the bank never had any intention of acquiring. The solicitor was obliged to bring into account the value of the retained property in calculating the profit which the solicitor had made at the expense of the bank. No difficulty arises from the decision in this case but at pages 59/60 Lord Chelmsford said that if the solicitor had been paid a sum of £5,000 to induce the bank to purchase the Hall of Commerce at an excessive price, the bank could have recovered damages from the solicitor but could not have obtained the £5,000 on the grounds that it belonged to the bank. No reason was given and no authority cited for these observations which were unnecessary for the decision of the appeal before the House and which appear to be inconsistent with the authorities to which the Board have already referred.
In In re Canadian Oil Works Corporation (Hay’s Case) (1875) L.R. 10 Ch. 593 the vendors of property to a company gave money forming part of the purchase price to a director of the company to enable him to subscribe for shares in the company. It was held that the money was the money of the company and that the shares registered in the name of the director were therefore unpaid. The judgment emphasised the rule that “no agent can in the course of his agency derive any benefit whatever without the sanction or knowledge of his principal;” per James L.J. at page 601.
In In re Morvah Consols Tin Mining Company (McKay’s Case) (1875) 2 Ch.D. 1, upon the application of the liquidator of an insolvent company a director was ordered to pay under section 165 of the Companies Act 1862 compensation for his misfeasance in accepting 600 paid-up shares in the company from the vendor of property to the company. Mellish L.J. said at page 5:-
“Either as a matter of bargain or as a present to the agent of the purchaser, it was in consideration of a benefit which the vendor had received from the company’s agents. Now it is quite clear that, according to the principles of a Court of Equity, all the benefit which the agent of the purchaser receives under such circumstances from the vendor must be treated as received for the benefit of the purchaser.”
A similar decision was reached in In re Caerphilly Colliery Company (Pearson’s Case) (1877) 5 Ch. D 336 where a director received paid-up shares from the vendor of property to the company. Jessel M. R. referring to Sir Edwin Pearson the director in question said at pages 340/341: –
“That being the position of Sir Edwin Pearson, can he be allowed to say in a Court of Equity that he, having received a present of part of the purchase money, and being knowingly in the position of agent and trustee for the purchasers, can retain that present as against the actual purchasers? It appears to me that, upon the plainest principles of equity and good conscience, he cannot …. he cannot, in the fiduciary position he occupied, retain for himself any benefit or advantage that he obtained under such circumstances. He must be deemed to have obtained it under circumstances which made him liable, at the option of the cestui que trust, to account either for the value at the time of the present he was receiving, or to account for the thing itself and its proceeds if it had increased in value.”
This is an emphatic pronouncement by the most distinguished equity judge of his generation that the recipient of a bribe holds the bribe and the property representing the bribe in trust for the injured person.
Different reasoning and a different result followed m The Metropolitan Bank v. Heiron (1880) 5 Ex.D. 319. This was a decision of a distinguished Court of Appeal heard and determined on one day, 5th August, perilously close to the long vacation without citation of any of the relevant authorities. An allegation of the receipt of a bribe by director was considered m 1872 by the Board of Directors of the company and they decided to take no action. In 1870 the company sued to recover the bribe of £250 and it was held that the action was barred by the Statute of Limitations. James L. J. said at page 323:-
“The ground of this suit is concealed fraud. If a man receives money by way of a bribe for misconduct against a company or cestui que trust, or any person or body towards whom he stands in a fiduciary position, he is liable to have that money taken from him by his principal or cestui que trust. But it must be borne in mind that that liability is a debt only differing from ordinary debts in the fact that it is merely equitable, and in dealing with equitable debts of such a nature Courts of Equity have always followed by analogy the provisions of the Statute of Limitations, in cases in which there is the same reason for making the length of time a bar as in the case of ordinary legal demands.”
This judgment denies that any proprietary interest exists in the bribe. Brett L.J. at page 324 said that:-
”It seems to me that the only action which could be maintained by the company or by the liquidator of the company against this defendant would be an action in equity founded upon the alleged fraud of the defendant. Neither at law nor in equity could this sum of £250 be treated as the money of the company, until the court, in an action by the company, had decreed it to belong to them on the ground that it had been received fraudulently as against them by the defendant.”
This is a puzzling passage which appears to mean that a proprietary interest in the bribe arises as soon as a court has found that a bribe has been accepted.
Cotton L.J. at page 325 said:-
“Here the money sought to be recovered was in no sense the money of the company, unless it was made so by a decree founded on the act by which the trustee got the money into his hands. It is a suit founded on breach of duty or fraud by a person who was in the position of trustee, his position making the receipt of the money a breach of duty or fraud. It is very different from the case of a cestui que trust seeking to recover money which was his own before any act wrongfully done by the trustee.”
This observation does draw a distinction between monies which are held on trust and are taken out by the trustee and monies which are not held on trust but which the trustee receives in circumstances which oblige him to pay the money into the trust. The distinction appears to be inconsistent with Keech v. Sandford (1726) Sel. Cas. T. King 61 and with those authorities which make the recipient of the bribe liable for any increase in value. The decision in Metropolitan Bank v. Heiron (1880) Ex. D. 319 is understandable given the finding that the fraud was made known to the company more than six years before the action was instituted. But the same result could have been achieved by denying an equitable remedy on the grounds of delay or ratification.
It has always been assumed and asserted that the law on the subject of bribes was definitively settled by the decision of the Court of Appeal in Lister & Co. v. Stubbs (1890) 45 Ch.D. 1.
In that case the plaintiffs, Lister & Co., employed the defendant, Stubbs, as their servant to purchase goods for the firm. Stubbs, on behalf of the firm, bought goods from Varley & Co. and received from Varley & Co. bribes amounting to £5,541. The bribes were invested by Stubbs in freehold properties and investments. His masters, the firm Lister & Co., sought and failed to obtain an interlocutory injunction restraining Stubbs from disposing of these assets pending the trial of the action in which they sought inter alia £5,541 and damages. in the Court of Appeal the first judgment was given by Cotton L.J. who had been party to the decision in Metropolitan Bank v. Heiron (1880) 5 Ex.D. 319. He was powerfully supported by the judgment of Lindley L.J. and by the equally powerful concurrence of Bowen L.J. Cotton L.J. said at page 12 that the bribe could not be said to be the money of the plaintiffs. He seemed to be reluctant to grant an interlocutory judgment which would provide security for a debt before that debt had been established. Lindley L.J. said at page 15 that the relationship between the plaintiffs, Lister & Co., as masters and the defendant, Stubbs, as servant who had betrayed his trust and received a bribe:-
” … is that of debtor and creditor; it is not that of trustee and cestui que trust. We are asked to hold that it is – which would involve consequences which, 1 confess, startle me. One consequence, of course, would be that, if Stubbs were to become bankrupt, this property acquired by him with the money paid to him by Messrs. Varley would be withdrawn from the mass of his creditors and be handed over bodily to Lister & Co. Can that be right? Another consequence would be that, if the appellants are right, Lister & Co. could compel Stubbs to account to them, not only for the money with interest, but for all the profit which he might have made by embarking in trade with it. Can that be right?”
For the reasons which have already been advanced their Lordships would respectfully answer both these questions in the affirmative. If a trustee mistakenly invests moneys which he ought to pay over to his cestui que trust and then becomes bankrupt, the monies together with any profit which has accrued from the investment are withdrawn from the unsecured creditors as soon as the mistake is discovered. A fortiori if a trustee commits a crime by accepting a bribe which he ought to pay over to his cestui que trust, the bribe and any profit made therefrom should be withdrawn from the unsecured creditors as soon as the crime is discovered.
The decision in Lister v. Stubbs is not consistent with the principles that a fiduciary must not be allowed to benefit from his own breach of duty, that the fiduciary should account for the bribe as soon as he receives it and that equity regards as done that which ought to be done. From these principles it would appear to follow that the bribe and the property from time to time representing the bribe are held on a constructive trust for the person injured. A fiduciary remains personally liable for the amount of the bribe if, in the event, the valueof the property then recovered by the injured person proved to be less than that amount.
The decisions of the Court of Appeal m The Metropolitan Bank v. Heiron (1880) 5 Ch.D. 319 and Lister v. Stubbs are inconsistent with earlier authorities which were not cited. Although over 100 years has passed since Lister v. Stubbs, no one can be allowed to say that he has ordered his affairs in reliance on the two decisions of the Court of Appeal now in question. Thus no harm can result if those decisions are not followed.
The decision in Lister v. Stubbs was followed in Powell & Thomas v. Evans Jones & Co. [1905] 1 K.B. 11 and A.G. v. Goddard [1929] 98 L.J.K.B. 743. In Regal (Hastings) Ltd. v. Gulliver [1942] 1 All ER 378 shares intended to be acquired by directors at par to avoid them giving a guarantee of the obligations under a lease were sold at a profit and the directors were held to be liable to the company for the proceeds of sale, applying Keech v. Sandford.
In Reading v. A.G. [1951] AC 507, the Crown confiscated thousands of pounds paid to an army sergeant who had abused his official position to enable drugs to be imported. The Crown was allowed to keep the confiscated monies to avoid circuity of action.
Finally in Islamic Republic of Iran Shipping Lines v. Denby [1987] 1 Lloyd’s Report 367 Leggatt J. followed Lister v. Stubbs as indeed he was bound to do.
The authorities which followed Lister v. Stubbs do not cast any new light on that decision. Their Lordships are more impressed with the decision of Lai Kew Chai J. in Sumitomo Bank Limited v. Kartika Ratna Thahir [1993] 1 S.L.R. 735. In that case General Thahir who was at one time general assistant to the President Director of the Indonesian State Enterprise named Pertamina opened 17 bank accounts in Singapore and deposited DM54 million in those accounts. The money was said to be bribes paid by two German contractors tendering for the construction of steel works in West Java. General Thahir having died, the monies were claimed by his widow, by the estate of the deceased General and by Pertamina. After considering in detail all the relevant authorities the judge determined robustly at page 810 that Lister v. Stubbs was wrong and that its “undesirable and unjust consequences should not be imported and perpetuated as part of” the law of Singapore. Their Lordships are also much indebted for the fruits of research and the careful discussion of the present topic in the address entitled “Bribes and Secret Commissions” delivered by Sir Peter Millett to a meeting of the Society of Public Teachers of Law at Oxford in 1993 and published in the Restitution Law Review [1993] R.L.R. 7. The following passage elegantly sums up the views of Sir Peter Millett :-
“( The fiduciary) must not place himself in a position where his interest may conflict with his duty. If he has done so, equity insists on treating him as having acted in accordance with his duty; he will not be allowed to say that he preferred his own interest to that of his principal. He must not obtain a profit for himself out of his fiduciary position. If he has done so, equity insists on treating him as having obtained it for his principal; he will not be allowed to say that he obtained it for himself. He must not accept a bribe. If he has done so, equity insists on treating it as a legitimate payment intended for the benefit of the principal; he will not be allowed to say that it was a bribe.”
The conclusions reached by Lai Kew Chai J. in Sumitomo Bank Limited v. Kartika Ratna Thahir [1993] 1 S.L.R. 735 and the views expressed by Sir Peter Millett were influenced by the decision of the House of Lords in Boardman v. Phipps [1967] 2 AC 46 which demonstrates the strictness with which equity regards the conduct of a fiduciary and the extent to which equity is willing to impose a constructive trust on property obtained by a fiduciary by virtue of his office. In that case a solicitor acting for trustees rescued the interests of the trust in a private company by negotiating for a takeover bid in which he himself took an interest. He acted in good faith throughout and the information which the solicitor obtained about the company in the takeover bid could never have been used by the trustees. Nevertheless the solicitor was held to be a constructive trustee by a majority in the House of Lords because the solicitor obtained the information which satisfied him that the purchase of the shares in the takeover company would be a good investment and the opportunity of acquiring the shares as a result of acting for certain purposes on behalf of the trustees; see per Lord Cohen at page 103. If a fiduciary acting honestly and in good faith and making a profit which his principal could not make for himself becomes a constructive trustee of that profit then it seems to their Lordships that a fiduciary acting dishonestly and criminally who accepts a bribe and thereby causes loss and damage to his principal must also be a constructive trustee and must not be allowed by any means to make any profit from his wrongdoing.
The New Zealand Court of Appeal in the present case declined to enter into the merits of Lister c. Stubbs, founding itself on a passage in the judgment of this Board delivered by Lord Scarman in Tai Hing Cotton Mill Ltd. v. Liu Chong Hing Bank Ltd. (1986) AC 80, 108 where his Lordship said the duty of the New Zealand Court of Appeal was not to depart from a settled principle of English law. While their Lordships regard the application of stare decisis in the New Zealand Court of Appeal as a matter for that Court, they desire to make the following remarks, in case Lord Scarman’s comments in Tai Hing Cotton Mill Ltd. v. Liu Chong Hing Bank Ltd. have in any way been misunderstood.
In the present case the Court of Appeal did not say and could not have meant that it was bound by a decision of the English Court of Appeal, since for many years the New Zealand courts have not regarded themselves as bound by decisions of the House of Lords, although of course continuing to pay great respect to them. The reasoning of the Court of Appeal, as their Lordships understand it, was rather that in the absence of differentiating local circumstances the Court should follow a decision representing contemporary English law, leaving its correctness for consideration by this Board. Without in any way criticising that approach in the circumstances of this case, where the decision in question was of such long standing, their Lordships wish to add that nevertheless the New Zealand Court of Appeal must be free to review an English Court of Appeal authority on its merits and to depart from it if the authority is considered to be wrong. Hart v. O’Connor [1985] AC 1000 to which Lord Scarman referred in the passage mentioned by the Court of Appeal concerned the very different situation of the Court of Appeal wishing to apply English law but, in the judgment of this Board, misapprehending the state of the contemporary law. In any case where the New Zealand Court of Appeal has to decide whether to follow an English authority, its own views on the issue, untrammelled by authority, will always be of great assistance to the Board.
The Attorney General for Hong Kong has registered caveats against the title of the three New Zealand properties. He seeks to renew the caveats to prevent any dealing with the property pending the hearing of proceedings which, their Lordships are informed, have been initiated for the purpose of claiming the properties on a constructive trust. The respondents oppose the renewal of the caveats on the grounds that the Crown had no equitable interest in the three New Zealand properties. For the reasons indicated their Lordships consider that the three properties so far as they represent bribes accepted by Mr. Reid are held in trust for the Crown.
Before parting with this appeal their Lordships wish to express their appreciation for the eloquent and well structured submissions made by Mr. David Oliver Q.C. on behalf of the Attorney General for Hong Kong and by Mr. Antony White on behalf of the respondents.
Their Lordships will therefore humbly advise Her Majesty that this appeal should be allowed. Since an unfulfilled order has been made against Mr. Reid in the courts of Hong Kong to pay HK$12.4 million, his purpose in opposing the relief sought by the Crown in New Zealand must reflect the hope that the properties, in the absence of a caveat, can be sold and the proceeds whisked away to some Shangri La which hides bribes and other corrupt monies in numbered bank accounts. In these circumstances Mr. and Mrs. Reid must pay the costs of the Attorney General before the Board and in the lower courts; as regards Mr. Molloy the costs orders in his favour in the High Court and in the Court of Appeal should be set aside and Mr. Molloy must repay any sums that have been paid to him. There will be no order against Mr. Molloy for the costs incurred by the Attorney General before the Board.
FHR European Ventures LLP & Ors v Cedar Capital Partners LLC
[2014] UKSC 45 [2014] 3 WLR 535, [2014] UKSC 45, [2015] 1 AC 250, [2015] 1 P &CR DG1, [2014] 4 All ER 79, [2014] WTLR 1135, [2014] 2 All ER (Comm) 425, [2015] AC 250, [2014] 2 BCLC 145, [2014] Lloyd’s Rep FC 617, [2014] 2 Lloyd’s Rep 471, [2014] WLR(D) 317
Prefatory comments
The following three principles are not in doubt, and they are taken from the classic summary of the law in the judgment of Millett LJ in Bristol and West Building Society v Mothew [1998] Ch 1, 18. First, an agent owes a fiduciary duty to his principal because he is “someone who has undertaken to act for or on behalf of [his principal] in a particular matter in circumstances which give rise to a relationship of trust and confidence”. Secondly, as a result, an agent “must not make a profit out of his trust” and “must not place himself in a position in which his duty and his interest may conflict” – and, as Lord Upjohn pointed out in Boardman v Phipps [1967] 2 AC 46, 123, the former proposition is “part of the [latter] wider rule”. Thirdly, “[a] fiduciary who acts for two principals with potentially conflicting interests without the informed consent of both is in breach of the obligation of undivided loyalty; he puts himself in a position where his duty to one principal may conflict with his duty to the other”. Because of the importance which equity attaches to fiduciary duties, such “informed consent” is only effective if it is given after “full disclosure”, to quote Sir George Jessel MR in Dunne v English (1874) LR 18 Eq 524, 533.
Another well established principle, which applies where an agent receives a benefit in breach of his fiduciary duty, is that the agent is obliged to account to the principal for such a benefit, and to pay, in effect, a sum equal to the profit by way of equitable compensation. The law on this topic was clearly stated in Regal (Hastings) Ltd v Gulliver (Note) (1942) [1967] 2 AC 134, 144-145, by Lord Russell, where he said this:
“The rule of equity which insists on those, who by use of a fiduciary position make a profit, being liable to account for that profit, in no way depends on fraud, or absence of bona fides; or upon such questions or considerations as whether the profit would or should otherwise have gone to the plaintiff, or whether the profiteer was under a duty to obtain the source of the profit for the plaintiff, or whether he took a risk or acted as he did for the benefit of the plaintiff, or whether the plaintiff has in fact been damaged or benefited by his action. The liability arises from the mere fact of a profit having, in the stated circumstances, been made.”
The principal’s right to seek an account undoubtedly gives him a right to equitable compensation in respect of the bribe or secret commission, which is the quantum of that bribe or commission (subject to any permissible deduction in favour of the agent – eg for expenses incurred). That is because where an agent acquires a benefit in breach of his fiduciary duty, the relief accorded by equity is, again to quote Millett LJ in Mothew at p 18, “primarily restitutionary or restorative rather than compensatory”. The agent’s duty to account for the bribe or secret commission represents a personal remedy for the principal against the agent. However, the centrally relevant point for present purposes is that, at least in some cases where an agent acquires a benefit which came to his notice as a result of his fiduciary position, or pursuant to an opportunity which results from his fiduciary position, the equitable rule (“the Rule”) is that he is to be treated as having acquired the benefit on behalf of his principal, so that it is beneficially owned by the principal. In such cases, the principal has a proprietary remedy in addition to his personal remedy against the agent, and the principal can elect between the two remedies.
Where the facts of a particular case are within the ambit of the Rule, it is strictly applied. The strict application of the Rule can be traced back to the well-known decision in Keech v Sandford (1726) Sel Cas Ch 61, BAILII: [1726] EWHC Ch J76 , where a trustee held a lease of a market on trust for an infant, and, having failed to negotiate a new lease on behalf of the infant because the landlord was dissatisfied with the proposed security for the rent, the trustee negotiated a new lease for himself. Lord King LC concluded at p 62 that, “though I do not say there is a fraud in this case” and though it “may seem hard”, the infant was entitled to an assignment of the new lease and an account of the profits made in the meantime – a conclusion which could only be justified on the basis that the new lease had been beneficially acquired for the infant beneficiary.
Since then, the Rule has been applied in a great many cases. The question on this appeal is not so much concerned with the application of the Rule, as with its limits or boundaries. Specifically, what is in dispute is the extent to which the Rule applies where the benefit is a bribe or secret commission obtained by an agent in breach of his fiduciary duty to his principal.
On the one hand, Mr Collings QC contends for the appellant, Cedar, that the Rule should not apply to a bribe or secret commission paid to an agent, because it is not a benefit which can properly be said to be the property of the principal. This has the support of Professor Sir Roy Goode, who has suggested that no proprietary interest arises where an agent obtains a benefit in breach of his duty unless the benefit either (i) flows from an asset which was (a) beneficially owned by the principal, or (b) intended for the principal, or (ii) was derived from an activity of the agent which, if he chose to undertake it, he was under an equitable duty to undertake for the principal. Sir Roy suggested that “to treat [a principal] as having a restitutionary proprietary right to money or property not derived from any asset of [the principal] results in an involuntary grant by [the agent] to [the principal] from [the agent’s] pre-existing estate” – Proprietary Restitutionary Claims in Restitution: Past, Present and Future (1998) ed Cornish, p 69 – and see more recently (2011) 127 LQR 493. Professor Sarah Worthington has advanced a slightly different test. She suggests (summarising at the risk of oversimplifying) that proprietary claims arise where benefits are (i) derived from the principal’s property, or (ii) derived from opportunities in the scope of the agent’s endeavours on behalf of the principal, but not (iii) benefits derived from opportunities outside the scope of those endeavours – Fiduciary Duties and Proprietary Remedies: Addressing the Failure of Equitable Formulae (2013) 72 CLJ 720.
On the other hand, it is suggested by Mr Pymont QC on behalf of the respondent claimants in this appeal, that the Rule does apply to bribes or secret commissions received by an agent, because, in any case where an agent receives a benefit, which is, or results from, a breach of the fiduciary duty owed to his principal, the agent holds the benefit on trust for the principal. This view has been supported by Lord Millett writing extra-judicially. In “Bribes and Secret Commissions” [1993] Rest LR 7, he suggested that, on grounds of practicality, policy and principle, a principal should be beneficially entitled to a bribe or secret commission received by his agent – and see more recently, (2012) 71 CLJ 583. He bases his conclusion on the proposition that equity will not permit the agent to rely on his own breach of fiduciary duty to justify retaining the benefit on the ground that it was a bribe or secret commission, and will assume that he acted in accordance with his duty, so that the benefit must be the principal’s. This approach is also supported by Lionel Smith, “Constructive trusts and the no-profit rule” (2013) 72 CLJ 260, whose view, in short, is that the basic rule should be that an agent who obtains a benefit in breach of his fiduciary duty to his principal holds that benefit on trust for his principal.
The decision as to which view is correct must be based on legal principle, decided cases, policy considerations, and practicalities. We start by summarising the effect of many of the cases which touch on the issue; we then turn to the policy and practical arguments, and finally we express our conclusion.
The decided cases
There is a number of 19th century cases not involving bribes or secret commissions, where an agent or other fiduciary makes an unauthorised profit by taking advantage of an opportunity which came to his attention as a result of his agency and judges have reached the conclusion that the Rule applied. Examples include Carter v Palmer (1842) 8 Cl & F 657, where a barrister who purchased his client’s bills at a discount was held by Lord Cottenham to have acquired them for his client. The Privy Council in Bowes v City of Toronto (1858) 11 Moo PC 463 concluded that the mayor of a city who bought discounted debentures issued by the city was in the same position as an agent vis-à-vis the city, and was to be treated as holding the debentures on trust for the city. Bagnall v Carlton (1877) 6 Ch D 371 involved complex facts, but, pared to a minimum, agents for a prospective company who made secret profits out of a contract made by the company were held to be “trustees for the company” of those profits (per James, Baggallay and Cotton LJJ).
In the Privy Council case of Cook v Deeks [1916] 1 AC 554, a company formed by the directors of a construction company was held to have entered into a contract on behalf of the construction company as the directors only knew of the contractual opportunity by virtue of their directorships. In Phipps v Boardman [1964] 1 WLR 993 (affirmed [1965] Ch 992, and [1967] 2 AC 46), where agents of certain trustees purchased shares, in circumstances where they only had that opportunity because they were agents, Wilberforce J held that the shares were held beneficially for the trust. More recently, in Bhullar v Bhullar [2003] 2 BCLC 241, the Court of Appeal reached the same conclusion on similar facts to those in Cook (save that the asset acquired was a property rather than a contract). Jonathan Parker LJ said this at para 28:
“[W]here a fiduciary has exploited a commercial opportunity for his own benefit, the relevant question, in my judgment, is not whether the party to whom the duty is owed (the company, in the instant case) had some kind of beneficial interest in the opportunity: in my judgment that would be too formalistic and restrictive an approach. Rather, the question is simply whether the fiduciary’s exploitation of the opportunity is such as to attract the application of the rule.”
Turning now to cases concerned with bribes and secret commissions, the effect of the reasoning of Lord Lyndhurst LC in Fawcett v Whitehouse (1829) 1 Russ & M 132 was that an agent, who was negotiating on behalf of a prospective lessee and who accepted a “loan” from the lessor, held the loan on trust for his principal, the lessee. In Barker v Harrison (1846) 2 Coll 546, a vendor’s agent had secretly negotiated a sub-sale of part of the property from the purchaser at an advantageous price, and Sir James Knight-Bruce V-C held that that asset was held on trust for the vendor. In In re Western of Canada Oil, Lands and Works Co, Carling, Hespeler, and Walsh’s Cases (1875) 1 Ch D 115, the Court of Appeal (James and Mellish LJJ, Bramwell B and Brett J) held that shares transferred by a person to individuals to induce them to become directors of a company and to agree that the company would buy land from the person, were held by the individuals on trust for the company. In In re Morvah Consols Tin Mining Co, McKay’s Case (1875) 2 Ch D 1, the Court of Appeal (Mellish and James LJJ and Brett J) decided that where a company bought a mine, shares in the vendor which were promised to the company’s secretary were held by him for the company beneficially. The Court of Appeal (Sir George Jessel MR and James and Baggallay LJJ) in In re Caerphilly Colliery Co, Pearson’s Case (1877) 5 Ch D 336 concluded that a company director, who received shares from the promoters and then acted for the company in its purchase of a colliery from the promoters, held the shares on trust for the company. In Eden v Ridsdale Railway Lamp and Lighting Co Ltd (1889) 23 QBD 368, a company was held by the Court of Appeal (Lord Esher MR and Lindley and Lopes LJJ) to be entitled as against a director to shares which he had secretly received from a person with whom the company was negotiating. There are a number of other 19th century decisions to this effect, but it is unnecessary to cite them.
Inducements and other benefits offered to directors and trustees have been treated similarly. In Sugden v Crossland (1856) 2 Sm & G 192, Sir William Page Wood V-C held that a sum of money paid to a trustee to persuade him to retire in favour of the payee was to be “treated as a part of the trust fund”. Similarly, in Nant-y-glo and Blaina Ironworks Co v Grave (1878) 12 Ch D 738, shares in a company given by a promoter to the defendant to induce him to become a director were held by Sir James Bacon V-C to belong to the company. In Williams v Barton [1927] 2 Ch 9, Russell J decided that a trustee, who recommended that his co-trustees use stockbrokers who gave him a commission, held the commission on trust for the trust.
The common law courts were meanwhile taking the same view. In Morison v Thompson (1874) LR 9 QBD 480, Cockburn CJ, with whom Blackburn and Archibald JJ agreed, held that a purchaser’s agent who had secretly agreed to accept a commission from the vendor of a ship, held the commission for the benefit of his principal, the purchaser, in common law just as he would have done in equity – see at p 484, where Cockburn CJ referred to the earlier decision of Lord Ellenborough CJ to the same effect in Diplock v Blackburn (1811) 3 Camp 43. In Whaley Bridge Calico Printing Co v Green (1879) 5 QBD 109, Bowen J (albeit relying on equity at least in part) held that a contract between the vendor and a director of the purchaser, for a secret commission to be paid out of the purchase money, was to be treated as having been entered into for the benefit of the purchaser without proof of fraud.
It is fair to say that in the majority of the cases identified in the previous five paragraphs it does not appear to have been in dispute that, if the recipient of the benefit had received it in breach of his fiduciary duty to the plaintiff, then he held it on trust for the plaintiff. In other words, it appears to have been tacitly accepted that the Rule applied, so that the plaintiff was entitled not merely to an equitable account in respect of the benefit, but to the beneficial ownership of the benefit.
However, many of those cases contain observations which specifically support the contention that the Rule applies to all benefits which are received by an agent in breach of his fiduciary duty. In Sugden at p 194, Sir William Page Wood V-C said that “it is a well-settled principle that if a trustee make a profit of his trusteeship, it shall enure to the benefit of his cestuique trusts”. And in McKay’s Case at p 5, Mellish LJ said that it was “quite clear that, according to the principles of a Court of Equity, all the benefit which the agent of the purchaser receives under such circumstances from the vendor must be treated as received for the benefit of the purchaser”. In Carling’s Case at p 124, James LJ said the arrangement amounted to a “a simple bribe or present to the directors, constituting a breach of trust on their part” and that “the company would be entitled to get back from their unfaithful trustees what the unfaithful trustees had acquired by reason of their breach of trust”. In Pearson’s Case Sir George Jessel MR said at pp 340-341 that the director as agent could not “retain that present as against the actual purchasers” and “must be deemed to have obtained [the benefit] under circumstances which made him liable, at the option of the cestuis que trust, to account either for the value … or … for the thing itself …”. In Eden, Lord Esher said at p 371 that if an agent “put[s] himself in a position which the law does not allow [him] to assume … he commit[s] a wrong against his principal”, and “[i]f that which the agent has received is money he must hand it over to his principal, if it is not money, but something else, the principal may insist on having it”. Lindley and Lopes LJJ each said that they were “of the same opinion” as Lord Esher, and Lindley LJ observed at p 372 that it would be “contrary to all principles of law and equity to allow the plaintiff to retain the gift”.
It is also worth noting that in Morison at pp 485-486, Cockburn CJ quoted with approval from two contemporary textbooks. First, he cited Story on Agency, para 211, where it was said that it could be “laid down as a general principle, that, in all cases when a person is … an agent for other persons, all profits and advantages made by him in the business, beyond his ordinary compensation, are to be for the benefit of his employers.” Secondly, he referred to Paley on Principal and Agent, p 51, which stated that “not only interest, but every other sort of profit or advantage, clandestinely derived by an agent from dealing or speculating with his principal’s effects, is the property of the latter, and must be accounted for”.
The cases summarised in paras 13-17 above and the observations set out in paras 19-20 above are all consistent with the notion that the Rule should apply to bribes or secret commissions paid to an agent, so that the agent holds them on trust for his principal, rather than simply having an equitable duty to account to his principal. It is true that in many of those cases there was apparently no argument as to whether the benefit obtained by the fiduciary was actually held on trust for the principal. However, in some of the cases there was a dispute on the nature of the relief; in any event, the fact that it was assumed time and again by eminent barristers and judges must carry great weight.
However, there is one decision of the House of Lords which appears to go the other way, and several decisions of the Court of Appeal which do go the other way, in that they hold that, while a principal has a claim for equitable compensation in respect of a bribe or secret commission received by his agent, he has no proprietary interest in it.
The House of Lords decision is Tyrrell v Bank of London (1862) 10 HL Cas 26. The facts of the case are somewhat complex and the reasoning of the opinions of Lord Westbury LC, Lord Cranworth and Lord Chelmsford is not always entirely easy to follow. The decision has been carefully and interestingly analysed by Professor Watts, “Tyrrell v Bank of London – an Inside Look at an Inside Job” (2013) 129 LQR 527. In very brief terms, a solicitor retained to act for a company in the course of formation secretly arranged to benefit from his prospective client’s anticipated acquisition of a building called the “Hall of Commerce” by obtaining from the owner a 50% beneficial interest in a parcel of land consisting of the Hall and some adjoining land. After the client had purchased the Hall from the owner, it discovered that the solicitor had secretly profited from the transaction and sued him. Sir John Romilly MR held that the solicitor had held on trust for the client both (i) his interest in (and therefore his subsequent share of the proceeds of sale of) the Hall, and (ii) with “very considerable hesitation”, his interest in the adjoining land – (1859) 27 Beav 273, especially at p 300. On appeal, the House of Lords held that, while the Master of the Rolls was right about (i), he was wrong about (ii): although the client had an equitable claim for the value of the solicitor’s interest in the adjoining land, it had no proprietary interest in that land.
Lord Westbury LC made it clear at pp 39-40 that the fact that the client had not been formed by the time that the solicitor acquired his interest in the land did not prevent the claim succeeding as the client had been “conceived, and was in the process of formation”. He also made it clear at p 44 that, in respect of the profit which the solicitor made from his share of the Hall (which he described as “the subject matter of the transaction”, and, later at p 45, “that particular property included in the [client’s] contract”), the solicitor “must be converted into a trustee for the [client]”. However, he was clear that no such trust could arise in relation to the adjoining land, which was outside “the limit of the agency”, and so “there [was] no privity, nor any obligation”, although the solicitor “must account for the value of that property” – p 46. Lord Cranworth agreed, making it clear that the financial consequences for the solicitor were no different from those that followed from the Master of the Rolls’ order, although he had “thought that possibly we might arrive at the conclusion that the decree was, not only in substance, but also in form, perfectly correct” – p 49. Lord Chelmsford agreed, and discussed bribes at pp 59-60, holding that the principal had no right to a bribe received by his agent.
Although there have been suggestions that, with the exception of Lord Chelmsford’s obiter dicta about bribes, the decision of the House of Lords in Tyrrell was not inconsistent with the respondents’ case on this appeal, it appears clear that it was. If, as the House held, the solicitor was liable to account to the client for the profit which he had made on the adjoining land, that can only have been because it was a benefit which he had received in breach of his fiduciary duty; and, once that is established, then, on the respondents’ case, the Rule would apply, and that profit would be held on trust for the client (or, more accurately, his share of the adjoining land would be held on trust), as in Fawcett, Sugden, Carter, Bowes and Barker, all of which had been decided before Tyrrell, and of which only Fawcett was cited to the House.
We turn to the Court of Appeal authorities which are inconsistent with the notion that the Rule applies to bribes or secret commissions. In Metropolitan Bank v Heiron (1880) 5 Ex D 319, the Court of Appeal held that a claim brought by a company against a director was time-barred: the claim was to recover a bribe paid by a third party to induce the director to influence the company to negotiate a favourable settlement with the third party. It was unsuccessfully argued by the bank that its claim was proprietary. Brett LJ said at p 324 “[n]either at law nor in equity could this sum … be treated as the money of the company”, but he apparently considered that, once the company had obtained judgment for the money there could be a trust. Cotton LJ expressed the same view. James LJ simply thought that there was an equitable debt and applied the Limitation Acts by analogy. This approach was followed in Lister & Co v Stubbs (1890) 45 Ch D 1, where an agent of a company had accepted a bribe from one of its clients, and an interlocutory injunction was refused on the ground that the relationship between the company and its agent was that of creditor and debtor not beneficiary and trustee. Cotton LJ said at p 12 that “the money which [the agent] has received … cannot … be treated as being the money of the [company]”. Lindley LJ agreed and said at p 15 that the notion that there was a trust “startle[d]” him, not least because it would give the company the right to the money in the event of the agent’s bankruptcy. Bowen LJ agreed.
Lister was cited with approval by Lindley LJ in In re North Australian Territory Co, Archer’s case [1892] 1 Ch 322, 338, and it was followed in relation to a bribe paid to an agent by Sir Richard Henn Collins MR (with whom Stirling and Mathew LJJ agreed) in Powell & Thomas v Evan Jones & Co [1905] 1 KB 11, 22, where the principal was held entitled to an account for the bribe, but not to a declaration that the bribe was held on trust. The same view was taken in the Court of Appeal in Attorney General’s Reference (No 1 of 1985) [1986] QB 491, 504-505, where Lord Lane CJ quoted from the judgments of Cotton and Lindley LJJ in what he described as “a powerful Court of Appeal in Lister”, and followed the reasoning. In Regal (Hastings), the decision in Lister was referred to by Lord Wright at p 156, as supporting the notion that “the relationship in such a case is that of debtor and creditor, not trustee and cestui que trust”. However, that was an obiter observation, and it gets no support from the other members of the committee.
More recently, in 1993, in Attorney General for Hong Kong v Reid, the Privy Council concluded that bribes received by a corrupt policeman were held on trust for his principal, and so they could be traced into properties which he had acquired in New Zealand. In his judgment on behalf of the Board, Lord Templeman disapproved the reasoning in Heiron, and the reasoning and outcome in Lister, and he thought his conclusion inconsistent with only one of the opinions, that of Lord Chelmsford, in Tyrrell. In Daraydan Holdings Ltd v Solland International Ltd [2005] Ch 119, paras 75ff, Lawrence Collins J indicated that he would follow Reid rather than Lister, as did Toulson J in Fyffes Group Ltd v Templeman [2000] 2 Lloyds Rep 643, 668-672. But in Sinclair Investments Ltd v Versailles Trade Finance Ltd [2012] Ch 453, in a judgment given by Lord Neuberger MR, the Court of Appeal decided that it should follow Heiron and Lister, and indeed Tyrrell, for a number of reasons set out in paras 77ff, although it accepted that this Court might follow the approach in Reid. In this case, Simon J considered that he was bound by Sinclair, whereas the Court of Appeal concluded that they could and should distinguish it.
Legal principle and academic articles
As mentioned above, the issue raised on this appeal has stimulated a great deal of academic debate. The contents of the many articles on this issue provide an impressive demonstration of penetrating and stimulating legal analysis. One can find among those articles a powerful case for various different outcomes, based on analysing judicial decisions and reasoning, equitable and restitutionary principles, and practical and commercial realities. It is neither possible nor appropriate to do those articles justice individually in this judgment, but the court has referred to them for the purpose of extracting the principle upon which the Rule is said to be based. In addition to those referred to in paras 10, 11 and 23 above, those articles include Hayton, “The Extent of Equitable Remedies: Privy Council versus the Court of Appeal” [2012] Co Law 161, Swadling, “Constructive trusts and breach of fiduciary duty” (2012) 18 Trusts and Trustees 985, Virgo, “Profits Obtained in Breach of Fiduciary Duty: Personal or Proprietary Claim?” (2011) 70 CLJ 502, Edelman “Two Fundamental Questions for the Law of Trusts” (2013) 129 LQR 66 and others listed by Sir Terence Etherton, “The Legitimacy of Proprietary Relief”, (2014) Birkbeck Law Review vol 2(1), 59, at p 60. At p 62 Sir Terence refers to “this relentess and seemingly endless debate”, which, in the Court of Appeal in this case, Pill LJ described as revealing “passions of a force uncommon in the legal world” – [2014] Ch 1, para 61.
The respondents’ formulation of the Rule, namely that it applies to all benefits received by an agent in breach of his fiduciary duty to his principal, is explained on the basis that an agent ought to account in specie to his principal for any benefit he has obtained from his agency in breach of his fiduciary duty, as the benefit should be treated as the property of the principal, as supported by many judicial dicta including those in para 19 above, and can be seen to be reflected in Jonathan Parker LJ’s observations in para 14 above. More subtly, it is justified on the basis that equity does not permit an agent to rely on his own wrong to justify retaining the benefit: in effect, he must accept that, as he received the benefit as a result of his agency, he acquired it for his principal. Support for that approach may be found in Mellish LJ’s judgment in McKay’s Case at p 6, and Bowen J’s judgment in Whaley Bridge at p 113.
The appellant’s formulation of the Rule, namely that it has a more limited reach, and does not apply to bribes and secret commissions, has, as mentioned in para 10 above, various different formulations and justifications. Thus, it is said that, given that it is a proprietary principle, the Rule should not apply to benefits which were not derived from assets which are or should be the property of the principal, a view supported by the reasoning of Lord Westbury in Tyrrell. It has also been suggested that the Rule should not apply to benefits which could not have been intended for the principal and were, rightly or wrongly, the property of the agent, which seems to have been the basis of Cotton LJ’s judgment in Heiron at p 325 and Lister at p 12. In Sinclair, it was suggested that the effect of the authorities was that the Rule should not apply to a benefit which the agent had obtained by taking advantage of an opportunity which arose as a result of the agency, unless the opportunity “was properly that of the [principal]” – para 88. Professor Worthington’s subsequent formulation, referred to in para 10 above, is very similar but subtly different (and probably more satisfactory).
Each of the formulations set out in paras 30 and 31 above have their supporters and detractors. In the end, it is not possible to identify any plainly right or plainly wrong answer to the issue of the extent of the Rule, as a matter of pure legal authority. There can clearly be different views as to what requirements have to be satisfied before a proprietary interest is created. More broadly, it is fair to say that the concept of equitable proprietary rights is in some respects somewhat paradoxical. Equity, unlike the common law, classically acts in personam (see eg Maitland, Equity, p 9); yet equity is far more ready to accord proprietary claims than common law. Further, two general rules which law students learn early on are that common law legal rights prevail over equitable rights, and that where there are competing equitable rights the first in time prevails; yet, given that equity is far more ready to recognise proprietary rights than common law, the effect of having an equitable right is often to give priority over common law claims – sometimes even those which may have preceded the equitable right. Given that equity developed at least in part to mitigate the rigours of the common law, this is perhaps scarcely surprising. However, it underlines the point that it would be unrealistic to expect complete consistency from the cases over the past 300 years. It is therefore appropriate to turn to the arguments based on principle and practicality, and then to address the issue, in the light of those arguments as well as the judicial decisions discussed above.
Arguments based on principle and practicality
The position adopted by the respondents, namely that the Rule applies to all unauthorised benefits which an agent receives, is consistent with the fundamental principles of the law of agency. The agent owes a duty of undivided loyalty to the principal, unless the latter has given his informed consent to some less demanding standard of duty. The principal is thus entitled to the entire benefit of the agent’s acts in the course of his agency. This principle is wholly unaffected by the fact that the agent may have exceeded his authority. The principal is entitled to the benefit of the agent’s unauthorised acts in the course of his agency, in just the same way as, at law, an employer is vicariously liable to bear the burden of an employee’s unauthorised breaches of duty in the course of his employment. The agent’s duty is accordingly to deliver up to his principal the benefit which he has obtained, and not simply to pay compensation for having obtained it in excess of his authority. The only way that legal effect can be given to an obligation to deliver up specific property to the principal is by treating the principal as specifically entitled to it.
On the other hand, there is some force in the notion advanced by the appellant that the Rule should not apply to a bribe or secret commission paid to an agent, as such a benefit is different in quality from a secret profit he makes on a transaction on which he is acting for his principal, or a profit he makes from an otherwise proper transaction which he enters into as a result of some knowledge or opportunity he has as a result of his agency. Both types of secret profit can be said to be benefits which the agent should have obtained for the principal, whereas the same cannot be said about a bribe or secret commission which the agent receives from a third party.
The respondents’ formulation of the Rule has the merit of simplicity: any benefit acquired by an agent as a result of his agency and in breach of his fiduciary duty is held on trust for the principal. On the other hand, the appellant’s position is more likely to result in uncertainty. Thus, there is more than one way in which one can identify the possible exceptions to the normal rule, which results in a bribe or commission being excluded from the Rule – see the differences between Professor Goode and Professor Worthington described in paras 10 and 32 above, and the other variations there described. Clarity and simplicity are highly desirable qualities in the law. Subtle distinctions are sometimes inevitable, but in the present case, as mentioned above, there is no plainly right answer, and, accordingly, in the absence of any other good reason, it would seem right to opt for the simple answer.
A further advantage of the respondents’ position is that it aligns the circumstances in which an agent is obliged to account for any benefit received in breach of his fiduciary duty and those in which his principal can claim the beneficial ownership of the benefit. Sir George Jessel MR in Pearson’s Case at p 341 referred in a passage cited above to the agent in such a case having “to account either for the value … or … for the thing itself …”. The expression equitable accounting can encompass both proprietary and non-proprietary claims. However, if equity considers that in all cases where an agent acquires a benefit in breach of his fiduciary duty to his principal, he must account for that benefit to his principal, it could be said to be somewhat inconsistent for equity also to hold that only in some such cases could the principal claim the benefit as his own property. The observation of Lord Russell in Regal (Hastings) quoted in para 6 above, and those of Jonathan Parker LJ in Bhullar quoted in para 14 above would seem to apply equally to the question of whether a principal should have a proprietary interest in a bribe or secret commission as to the question of whether he should be entitled to an account in respect thereof.
The notion that the Rule should not apply to a bribe or secret commission received by an agent because it could not have been received by, or on behalf of, the principal seems unattractive. The whole reason that the agent should not have accepted the bribe or commission is that it puts him in conflict with his duty to his principal. Further, in terms of elementary economics, there must be a strong possibility that the bribe has disadvantaged the principal. Take the facts of this case: if the vendor was prepared to sell for €211.5m, on the basis that it was paying a secret commission of €10m, it must be quite likely that, in the absence of such commission, the vendor would have been prepared to sell for less than €211.5m, possibly €201.5m. While Simon J was not prepared to make such an assumption without further evidence, it accords with common sense that it should often, even normally, be correct; indeed, in some cases, it has been assumed by judges that the price payable for the transaction in which the agent was acting was influenced pro rata to account for the bribe – see eg Fawcett at p 136.
The artificiality and difficulties to which the appellant’s case can give rise may be well illustrated by reference to the facts in Eden and in Whaley Bridge. In Eden, the promoter gave 200 shares to a director of the company when there were outstanding issues between the promoter and the company. The Court of Appeal held that the director held the shares on trust for the company. As Finn J said in Grimaldi v Chameleon Mining NL (No 2) (2012) 287 ALR 22, para 570, the effect of that decision, if Heiron and Lister were rightly decided, would appear to be that where a bribe is paid to an agent, the principal has a proprietary interest in the bribe if it consists of shares but not if it consists of money, which would be a serious anomaly.
In Whaley Bridge, a director of a company who negotiated a purchase by the company for £20,000 of a property was promised but did not receive £3,000 out of the £20,000 from the vendor. The outcome according to Bowen J was that the vendor was liable to the company for the £3,000, because the company was entitled to treat the contract between the vendor and the director as made by the director on behalf of the company. Bowen J held that it “could not be successfully denied” that if the £3,000 had been paid to the director he would have held it on trust for the company. Mr Collings suggested that the decision was correct because, unlike in this case, the director and vendor had agreed that the £3,000 would come out of the £20,000 paid by the company. Not only is there no trace of such reasoning in Bowen J’s judgment, but it would be artificial, impractical and absurd if the issue whether a principal had a proprietary interest in a bribe to his agent depended on the mechanism agreed between the briber and the agent for payment of the bribe.
The notion that an agent should not hold a bribe or commission on trust because he could not have acquired it on behalf of his principal is somewhat inconsistent with the long-standing decision in Keech, the decision in Phipps approved by the House of Lords, and the Privy Council decision in Bowes. In each of those three cases, a person acquired property as a result of his fiduciary or quasi-fiduciary position, in circumstances in which the principal could not have acquired it: yet the court held that the property concerned was held on trust for the beneficiary. In Keech, the beneficiary could not acquire the new lease because the landlord was not prepared to let to him, and because he was an infant; in Boardman, the trust could not acquire the shares because they were not authorised investments; in Bowes, the city corporation would scarcely have been interested in buying the loan notes which it had just issued to raise money.
The respondents are also able to point to a paradox if the appellant is right and a principal has no proprietary right to his agent’s bribe or secret commission. If the principal has a proprietary right, then he is better off, and the agent is worse off, than if the principal merely has a claim for equitable compensation. It would be curious, as Mr Collings frankly conceded, if a principal whose agent wrongly receives a bribe or secret commission is worse off than a principal whose agent obtains a benefit in far less opprobrious circumstances, eg the benefit obtained by the trustees’ agents in Boardman. Yet that is the effect if the Rule does not apply to bribes or secret commissions.
Wider policy considerations also support the respondents’ case that bribes and secret commissions received by an agent should be treated as the property of his principal, rather than merely giving rise to a claim for equitable compensation. As Lord Templeman said giving the decision of the Privy Council in Attorney General for Hong Kong v Reid [1994] 1 AC 324, 330H, “[b]ribery is an evil practice which threatens the foundations of any civilised society”. Secret commissions are also objectionable as they inevitably tend to undermine trust in the commercial world. That has always been true, but concern about bribery and corruption generally has never been greater than it is now – see for instance, internationally, the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions 1999 and the United Nations Convention against Corruption 2003, and, nationally, the Bribery Acts 2010 and 2012. Accordingly, one would expect the law to be particularly stringent in relation to a claim against an agent who has received a bribe or secret commission.
On the other hand, a point frequently emphasised by those who seek to justify restricting the ambit of the Rule is that the wide application for which the respondents contend will tend to prejudice the agent’s unsecured creditors, as it will serve to reduce the estate of the agent if he becomes insolvent. This was seen as a good reason in Sinclair for not following Reid – see at [2012] Ch 453, para 83. While the point has considerable force in some contexts, it appears to us to have limited force in the context of a bribe or secret commission. In the first place, the proceeds of a bribe or secret commission consists of property which should not be in the agent’s estate at all, as Lawrence Collins J pointed out in Daraydan, para 78 (although it is fair to add that insolvent estates not infrequently include assets which would not be there if the insolvent had honoured his obligations). Secondly, as discussed in para 37 above, at any rate in many cases, the bribe or commission will very often have reduced the benefit from the relevant transaction which the principal will have obtained, and therefore can fairly be said to be his property.
Nonetheless, the appellant’s argument based on potential prejudice to the agent’s unsecured creditors has some force, but it is, as we see it, balanced by the fact that it appears to be just that a principal whose agent has obtained a bribe or secret commission should be able to trace the proceeds of the bribe or commission into other assets and to follow them into the hands of knowing recipients (as in Reid). Yet, as Mr Collings rightly accepts, tracing or following in equity would not be possible, at least as the law is currently understood, unless the person seeking to trace or follow can claim a proprietary interest. Common law tracing is, of course, possible without a proprietary interest, but it is much more limited than equitable tracing. Lindley LJ in Lister at p 15 appears to have found it offensive that a principal should be entitled to trace a bribe, but he did not explain why, and we prefer the reaction of Lord Templeman in Reid, namely that a principal ought to have the right to trace and to follow a bribe or secret commission.
Finally, on this aspect, it appears that other common law jurisdictions have adopted the view that the Rule applies to all benefits which are obtained by a fiduciary in breach of his duties. In the High Court of Australia, Deane J said in Chan v Zacharia (1984) 154 CLR 178, 199 that any benefit obtained “in circumstances where a conflict …. existed … or … by reason of his fiduciary position or of opportunity or knowledge resulting from it … is held by the fiduciary as constructive trustee”. More recently, the Full Federal Court of Australia has decided not to follow Sinclair: see Grimaldi, where the decision in Reid was preferred – see the discussion at paras 569-584. Although the Australian courts recognise the remedial constructive trust, that was only one of the reasons for not following Sinclair. As Finn J who gave the judgment of the court said at para 582 (after describing Heiron and Lister as “imposing an anomalous limitation … on the reach of Keech v Sandford” at para 569), “Australian law” in this connection “matches that of New Zealand …, Singapore, United States jurisdictions … and Canada”. As overseas countries secede from the jurisdiction of the Privy Council, it is inevitable that inconsistencies in the common law will develop between different jurisdictions. However, it seems to us highly desirable for all those jurisdictions to learn from each other, and at least to lean in favour of harmonising the development of the common law round the world.
Conclusions
The considerations of practicality and principle discussed in paras 33-44 above appear to support the respondents’ case, namely that a bribe or secret commission accepted by an agent is held on trust for his principal. The position is perhaps rather less clear when one examines the decided cases, whose effect we have summarised in paras 13-28 above. However, to put it at its lowest, the authorities do not preclude us adopting the respondents’ case in that they do not represent a clear and consistent line of authority to the contrary effect. Indeed, we consider that, taken as a whole, the authorities favour the respondents’ case.
First, if one concentrates on the issue of bribes or secret commissions paid to an agent or other fiduciary, the cases, with the exception of Tyrrell, were consistently in favour of such payments being held on trust for the principal or other beneficiary until the decision in Heiron which was then followed in Lister. Those two decisions are problematical for a number of reasons. First, relevant authority was not cited. None of the earlier cases referred to in paras 13, 14 or 16 above were put before the court in Heiron (where the argument seems to have been on a very different basis) or in Lister. Secondly, all the judges in those two cases had given earlier judgments which were inconsistent with their reasoning in the later ones. Brett LJ (who sat in Heiron) had been party to the decision in McKay’s and Carling’s Cases; Cotton LJ (who sat in Heiron and Lister) had been party to Bagnall (which was arguably indistinguishable), James LJ (who sat in Heiron) was party to Pearson’s and McKay’s Cases, as well as Bagnall; Lindley LJ (who sat in Lister) had been party to Eden; and Bowen LJ (who sat in Lister) had decided Whaley Bridge. Thirdly, the notion, adopted by Cotton and Brett LJJ that a trust might arise once the court had given judgment for the equitable claim seems to be based on some sort of remedial constructive trust which is a concept not referred to in earlier cases, and which has authoritatively been said not to be part of English law – see per Lord Browne-Wilkinson in Westdeutsche Landesbank Girozentrale v Islington LBC [1996] AC 669, 714-716. Fourthly, the decisions in Heiron and Lister are difficult to reconcile with many cases not concerned with bribes or secret commissions paid to agents, such as those set out in paras 12, 13 and 15 above. If the reasoning in Heiron and Lister is correct, then either those other cases were wrongly decided or the law is close to incoherent in this area.
As for the domestic cases subsequent to Lister, they are all explicable on the basis that it was either conceded or decided that the reasoning in the Court of Appeal in Lister was binding. Further, even after Lister, cases were being decided in which it seems to have been accepted or decided by Chancery Judges that where an agent or other fiduciary had a duty to account for a benefit obtained in breach of his fiduciary duty, the principal was entitled to a proprietary interest in the benefit – examples include Wilberforce J in Phipps, Lord Templeman in Reid, and Lawrence Collins J in Daraydan Holdings Ltd.
Were it not for the decision in Tyrrell, we consider that it would be plainly appropriate for this Court to conclude that the courts took a wrong turn in Heiron and Lister, and to restate the law as being as the respondents contend. Although the fact that the House of Lords decided Tyrrell in the way they did gives us pause for thought, we consider that it would be right to uphold the respondents’ argument and disapprove the decision in Tyrrell. In the first place, Tyrrell is inconsistent with a wealth of cases decided before and after it was decided. Secondly, although Fawcett was cited in argument at p 38, it was not considered in any of the three opinions in Tyrrell; indeed, no previous decision was referred to in the opinions, and, although the opinions were expressed with a confidence familiar to those who read 19th century judgments, they contained no reasoning, merely assertion. Thirdly, the decision in Tyrrell may be explicable by reference to the fact that the solicitor was not actually acting for the client at the time when he acquired his interest in the adjoining land – hence the reference in Lord Westbury’s opinion to “the limit of the agency” and the absence of “privity [or] obligation” as mentioned in para 24 above. In other words, it may be that their Lordships thought that the principal should not have a proprietary interest in circumstances where the benefit received by the agent was obtained before the agency began and did not relate to the property the subject of the agency.
Quite apart from these three points, we consider that, the many decisions and the practical and policy considerations which favour the wider application of the Rule and are discussed above justify our disapproving Tyrrell. In our judgment, therefore, the decision in Tyrrell should not stand in the way of the conclusion that the law took a wrong turn in Heiron and Lister, and that those decisions, and any subsequent decisions (Powell & Thomas, Attorney-General’s Reference (No 1 of 1985) and Sinclair), at least in so far as they relied on or followed Heiron and Lister, should be treated as overruled.
In this case, the Court of Appeal rightly regarded themselves as bound by Sinclair, but they managed to distinguish it. Accordingly, the appeal is dismissed.
Union Eagle Limited v. Golden Achievement Limited (Hong Kong)
[1997] UKPC 5 [1997] AC 514, [1997] 2 WLR 341, [1997] 2 All ER 215
Lord Hoffman
This clears the way for the main point in the appeal. The boundaries of the equitable jurisdiction to relieve against contractual penalties and forfeitures are in some places imprecise. But their Lordships do not think that it is necessary in this case to draw them more exactly because they agree with Litton V.-P. that the facts lie well beyond the reach of the doctrine. The notion that the court’s jurisdiction to grant relief is “unlimited and unfettered” (per Lord Simon of Glaisdale in Shiloh Spinners Ltd v. Harding [1973] A.C. 691, 726) was rejected as a “beguiling heresy” by the House of Lords in The Scaptrade (Scandinavian Trading Tanker Co. A.B. v. Flota Petrolera Ecuatoriana [1983] 2 A.C. 694, 700). It is worth pausing to notice why it continues to beguile and why it is a heresy. It has the obvious merit of allowing the court to impose what it considers to be a fair solution in the individual case. The principle that equity will restrain the enforcement of legal rights when it would be unconscionable to insist upon them has an attractive breadth. But the reasons why the courts have rejected such generalisations are founded not merely upon authority (see Lord Radcliffe in Campbell Discount Co. Ltd v. Bridge [1962] A.C. 600, 626) but also upon practical considerations of business. These are, in summary, that in many forms of transaction it is of great importance that if something happens for which the contract has made express provision, the parties should know with certainty that the terms of the contract will be enforced. The existence of an undefined discretion to refuse to enforce the contract on the ground that this would be “unconscionable” is sufficient to create uncertainty. Even if it is most unlikely that a discretion to grant relief will be exercised, its mere existence enables litigation to be employed as a negotiating tactic. The realities of commercial life are that this may cause injustice which cannot be fully compensated by the ultimate decision in the case.
The considerations of this nature, which led the House of Lords in The Scaptrade to reject the existence of an equitable jurisdiction to relieve against the withdrawal of a ship for late payment of hire under a charterparty, are described in a passage from the judgment of Robert Goff L.J. in the Court of Appeal [1983] Q.B. 529, 540-541 which was cited with approval by the House: see [1983] 2 A.C. 694, 703-4. Of course the same need for certainty is not present in all transactions and the difficult cases have involved attempts to define the jurisdiction in a way which will enable justice to be done in appropriate cases without destabilising normal commercial relationships.
9. Their Lordships do not think that it is possible, as Mr. Lyndon-Stanford Q.C. suggested, to draw a broad distinction between “commercial” cases such as The Scaptrade and transactions concerning land, which are the traditional subject-matter of equitable rules. Land can also be an article of commerce and a flat in Hong Kong is probably as good an example as one could find. It is necessary to look more closely at the nature of the transaction rather than its subject-matter. The jurisdiction to grant relief is well established in cases of late payment of money due under a mortgage or rent due under a lease. The principle upon which the court acts was stated by Lord Wilberforce in Shiloh Spinners Ltd v. Harding [1973] A.C. 691, 722 as follows:- “Where it is possible to state that the object of the transaction and of the insertion of the right to forfeit is essentially to secure the payment of money, equity has been willing to relieve on terms that the payment is made with interest, if appropriate, and also costs.”
10. In such cases the court will, despite the express words of forfeiture in the mortgage or lease, “mould them into mere securities”: see Viscount Haldane L.C. in G. and C. Kreglinger v. New Patagonia Meat and Cold Storage Company Ltd [1914] AC 25, 35.
11. In the case of contracts for the sale of land, however, the position is rather more complicated. It appears that in the eighteenth century, there may have been a view that the vendor’s right to rescind was also regarded as “essentially to secure the payment of money” and that relief should be given as in the case of a mortgage. Vernon v. Stephens (1722) P.Wms. 66 may have been such a case, although a different explanation is given by Chancellor Kent in Benedict v. Lynch (1815) 7 Am.Dec. 484, 488. But such an attitude did not survive Eldon L.C.’s famous outburst in Hill v. Barclay (1811) 18 Ves. Jun. 56, 60:-
“… the Court has certainly affected to justify that right, which it has assumed, to set aside the legal contracts of men, dispensing with the actual specific performance, upon the notion, that it places them, as nearly as can be, in the same situation as if the contract had been with the utmost precision specifically performed: yet the result of experience is, that, where a man, having contracted to sell his estate, is placed in this situation, that he cannot know, whether he is to receive the price, when it ought to be paid, the very circumstance, that the condition is not performed at the time stipulated, may prove his ruin, notwithstanding all the Court can offer as compensation.”
12. When a vendor exercises his right to rescind, he terminates the contract. The purchaser’s loss of the right to specific performance may be said to amount to a forfeiture of the equitable interest which the contract gave him in the land. But this forfeiture is different in its nature from, for example, the vendor’s right to retain a deposit or part payments of the purchase price. So far as these retentions exceed a genuine pre-estimate of damage or a reasonable deposit they will constitute a penalty which can be said to be essentially to provide security for payment of the full price. No objectionable uncertainty is created by the existence of a restitutionary form of relief against forfeiture, which gives the court a discretion to order repayment of all or part of the retained money. But the right to rescind the contract, though it involves termination of the purchaser’s equitable interest, stands upon a rather different footing. Its purpose is, upon breach of an essential term, to restore to the vendor his freedom to deal with his land as he pleases. In a rising market, such a right may be valuable but volatile. Their Lordships think that in such circumstances a vendor should be able to know with reasonable certainty whether he may re-sell the land or not.
13. It is for this reason that, for the past eighty years, the courts in England, although ready to grant restitutionary relief against penalties, have been unwilling to grant relief by way of specific performance against breach of an essential condition as to time. In Steedman v. Drinkle [1916] 1 AC 275 Viscount Haldane said at page 279:-
“Courts of Equity, which look at the substance as distinguished from the letter of agreements, no doubt exercise an extensive jurisdiction which enables them to decree specific performance in cases where justice requires it, even though literal terms of stipulations as to time have not been observed. But they never exercise this jurisdiction where the parties have expressly intimated in their agreement that it is not to apply by providing that time is to be of the essence of their bargain.”
14. This principle has never since been questioned in any case in England or the Privy Council, although it has been criticised in academic writings and certain Australian cases as both historically inaccurate and unduly rigid. It is certainly true that in In re Dagenham (Thames) Dock Co. Ex parte Hulse (1873) L.R. 8 Ch.App. 1022 the court declared a term providing for forfeiture of half the purchase price to be a penalty and granted relief by a decree of specific performance, despite an express provision that time was to be of the essence. The same may have happened in Kilmer v. British Columbia Orchard Lands Ltd. [1913] AC 319, although the latter case was distinguished in Steedman v. Drinkle on the ground that the parties had agreed to a new completion date of which time was not to be of the essence. It is difficult to find any trace of this ground in the judgment in Kilmer and the explanation has been said to be a rewriting of history, although, if this was so, Lord Atkinson, who had been a member of the Board in Kilmer, adhered to the revised version when delivering the judgment of the Judicial Committee in Brickles v. Snell [1916] 2 AC 599. But their Lordships do not think it necessary to pursue these historical inquiries because it can freely be acknowledged that there have been cases, such as In re Dagenham (Thames) Dock Co. Ex parte Hulse, in which the courts appear to have considered that, first, a restitutionary form of relief would for some reason be inadequate, and secondly, that the need for commercial certainty was not so strong as to make it necessary to exclude relief by way of specific performance. A feature of the Dagenham case was that the purchaser had been in possession of the land pending completion for five years, during which time it had constructed a dock at its own expense. In the then state of the English law of unjust enrichment, it would not have been easy to find a restitutionary remedy which provided adequate relief against forfeiture: compare Stockloser v. Johnson [1954] 1 Q.B. 476.
15. Similar considerations informed the judgment of the High Court of Australia in Legione v. Hateley (1983) 152 C.L.R. 406, in which the purchasers entered into possession pending completion of a contract of which time was of the essence and built a house upon the land. They failed to complete on the due date after asking for an extension and receiving a non-committal answer from a clerk with the vendors’ solicitors. Gibbs C.J. and Murphy J., at pages 413-430, considered that the conversation estopped the vendors from relying upon the contractual date until a definite refusal had been returned and a reasonable time had then elapsed. Alternatively, the fact that the purchasers had built a house of considerable value upon the land, so that they would suffer a “harsh and excessive penalty for a comparatively trivial breach” (page 429) made the case an exceptional one in which the principle in Steedman v. Drinkle should not be applied and relief granted by way of a decree of specific performance. Mason and Deane JJ., at pages 430-451, did not accept that the conversation amounted to an estoppel, but agreed to the grant of relief by way of specific performance on the ground that the conversation had contributed to the purchaser’s breach and that this, together with the other features of the case, made it unconscionable for the vendor to rescind the contract and recover the property.
16. The line between conduct which amounts to an estoppel and conduct which contributes to the breach so as to make it unconscionable to enforce a forfeiture is in their Lordships’ view a narrow one, particularly in view of the broad modern concept of estoppel which has been developed in cases such as Taylors Fashions Ltd. v. Liverpool Victoria Trustees Co. Ltd. (Note) [1982] QB 133. Leaving aside the question of estoppel, both In re Dagenham (Thames) Dock Co. Ex parte Hulse and Legione v. Hateley could be regarded as cases in which it might have been expected that the purchaser should be entitled to relief by way of restitution rather than by way of being allowed to keep the benefit of the bargain in spite of his breach of an essential term. In neither case, however, was restitutionary relief considered; partly, no doubt, because of the state of the authorities on this branch of the law and partly because there was no suggestion that the value of the land so exceeded the purchase price as to make a practical difference between restitution and specific performance. In the later Australian case of Stern v. McArthur (1988) 165 C.L.R. 489, however, the distinction emerged very clearly and sharply divided the court. The purchasers in that case bought a plot of land in 1969 for A$5,250 payable by way of a deposit of $250 and thereafter by monthly instalments of not less than $50. Under the contract, on default in paying instalments for more than 4 weeks the balance of the purchase price became due, and the vendor could then serve a notice to complete within 21 days making time of the essence. The purchasers built a house upon the land but in 1979 they defaulted and failed to comply with a notice to complete. By that time the value of the land had greatly increased. The purchasers tendered the balance of the price and claimed relief by way of specific performance. The vendor offered restitution by way of compensation for their improvements to the land. Deane and Dawson JJ. said, at page 528, that the instalment payments were “essentially an arrangement whereby the appellants undertook to finance the respondents’ purchase upon the security of the land”. There was accordingly a compelling analogy with a mortgage, in which relief against forfeiture of the estate would ordinarily be granted as of course despite an express term that time was to be of the essence. Gaudron J. put her judgment, at pages 530-542, entirely upon the mortgage analogy. Mason C.J., at pages 493-505, and Brennan J., at pages 505-521, dissented, treating the contract as one of sale. They refused to accept that a purchaser, in breach of a term which expressly entitled the vendor to rescind, could claim to retain the benefit of the bargain and held that the offer of restitution disposed of any claim to relief.
17. Equity has always regarded the question of whether a transaction is a mortgage as depending upon substance rather than form, so that the difference of opinion in Stern v. McArthur can be regarded as concerning the proper analysis of the nature of the transaction rather than the scope of the jurisdiction to relieve against forfeiture. But their Lordships do not think it necessary to consider these Australian developments further because they provide no help for the purchaser in this case. There is no question of any penalty, or of the vendor being unjustly enriched by improvements made at the purchaser’s expense, or of the vendor’s conduct having contributed to the breach, or of the transaction being in substance a mortgage. It remains for consideration on some future occasion as to whether the way to deal with the problems which have arisen in such cases is by relaxing the principle in Steedman v. Drinkle supra, as the Australian courts have done, or by development of the law of restitution and estoppel. The present case seems to their Lordships to be one to which the full force of the general rule applies. The fact is that the purchaser was late. Any suggestion that relief can be obtained on the ground that he was only slightly late is bound to lead to arguments over how late is too late, which can be resolved only
by litigation. For five years the vendor has not known whether he is entitled to resell the flat or not. It has been sterilised by a caution pending a final decision in this case. In his dissenting judgment, Godfrey J.A. said that the case “cries out for the intervention of equity”. Their Lordships think that, on the contrary, it shows the need for a firm restatement of the principle that in cases of rescission of an ordinary contract of sale of land for failure to comply with an essential condition as to time, equity will not intervene.
18. Their Lordships will accordingly humbly advise Her Majesty that the appeal should be dismissed. The appellant must pay the respondent’s costs before their Lordships’ Board.
Foskett v. McKeown and Others
[2000] UKHL 29; [2000] 3 All ER 97 (1999-2000) 2 ITELR 711, [2000] WTLR 667, [2000] 2 WLR 1299, [2001] AC 102, [2000] UKHL 29, [2000] 3 All ER 97, [2000] Lloyd’s Rep IR 627, [2001] 1 AC 102
Lord Hope
Mr. Kaye then said in support of the cross-appeal that, if his argument on election were to be rejected, the purchasers were nevertheless unable to trace into any part of the policy moneys. He submitted that the majority of the Court of Appeal were wrong to hold that the purchasers were entitled to repayment of such amounts of their money as could be shown to have been expended by the life assured on the payment of the premiums. This was because the purchasers could not show that there was any proprietary or causal link between their money and the asset which they claimed, which was the death benefit paid under the policy. A contingent right to the payment of that sum was acquired at the outset when the first premium was paid by the life assured out of his own money. The purchasers’ money did not add anything of value to what had already been acquired on payment of that premium. The sum payable on the death remained the same, and the rights under the policy were not made more valuable in any other respect by the payment of the additional premiums.
I do not think that there is any substance in this argument. One possible answer to it is that given by Sir Richard Scott V.-C. [1998] Ch. 265, 277C-D, who said that the statements of principle by Fry L.J. in In re Leslie: Leslie v. French (1883) 23 Ch.D. 552, 560 supported the right of the purchasers to trace their money into the proceeds of the policy. On his analysis the life assured, as a trustee of the policy, was prima facie entitled to an indemnity out of the trust property in respect of the payments made by him to keep the policy on foot, and the purchasers can by subrogation pursue that remedy.
I am, with great respect, not wholly convinced by this line of reasoning. It seems to me that the circumstances of this case are too far removed from those which Fry L.J. had in mind when he said a lien might be created upon the moneys secured by a policy belonging to someone else by the payment of the premiums. He referred, in his description of the circumstances, to the right of trustees to an indemnity out of the trust property for money which they had expended in its preservation, and to the subrogation to this right of a person who at their request had advanced money for its preservation to the trustees. In this case the life assured was a trustee of the policy, but he was also the person who had effected the policy and had set up the trust. When he paid the premiums, he did so not as a trustee – not because the person who was primarily responsible for their payment had failed to pay and it was necessary to take steps to preserve the trust – but because he was the person primarily responsible for their payment. The trust was one which he himself had created. He was making a further contribution towards the property which, according to his own declaration, was to be held in trust for the beneficiaries. In that situation it is hard to see on what ground the trustees of the policy could be said to be under any obligation to refund to him the amount of his expenditure. The general rule is that a man who makes a payment to maintain or improve another person’s property, intentionally and not in response to any request that he should do so, is not entitled to any lien or charge on that property for such payment: Falcke v. Scottish Imperial Insurance Co. (1886) 34 Ch.D. 234, per Cotton L.J. at p. 241. A further difficulty about the subrogation argument is that it cannot be said that it was at the purchasers’ request that the life assured used their money to pay the premiums.
On the other hand I consider that there is no difficulty, on the facts of this case, as to the purchasers’ right on other grounds to reimbursement of the money which was taken from them by the life assured. Mr. Kaye’s argument was that the purchasers could not trace their money into the proceeds of the policy because no causative link could be established between the proceeds which had been paid out by way of death benefit and the relevant premiums. In my opinion the answer to this point is to be found in the terms of the policy. It states that “in consideration of the payment of the first premium already made and of the further premiums payable and subject to the conditions of this policy” the insurer was, on the death of the life assured, to pay to the policy holder the benefits specified. The purchasers’ claim that they have a right to a proportionate share of the proceeds raises more complex issues, for the resolution of which it will be necessary to look more closely at the terms of the policy. But their right to the reimbursement of their own money seems to me to depend simply upon it being possible to follow that money from the accounts where it was deposited into the policy when the premiums were paid, and from the policy into the hands of the trustees when the insurers paid to them the sum of £1m. by way of death benefit.
On the agreed facts it is plain that the purchasers can trace their money through the premiums which were paid with it into the policy. When the insurers paid out the agreed sum by way of death benefit, the sum which they paid to the trustees of the policy was paid in consideration of the receipt by them of all the premiums. As Professor Lionel Smith, The Law of Tracing (1997), p. 235, has explained, the policy proceeds are the product of a mixed substitution where the value being traced into a policy of life assurance has provided a part of the premiums. In my opinion that is enough to entitle the purchasers, if they cannot obtain more, at least to obtain reimbursement of their own money with interest from the proceeds of the policy. There can be no doubt as to where the equities lie on the question of their right to recover from the proceeds the equivalent in value of that which they lost when their money was misappropriated. I would dismiss the cross-appeal.
There remains however the principal issue in this appeal, which is whether the purchasers can go further and establish that they are entitled to a much larger sum representing a proportionate share of the proceeds calculated by reference to the amount of their money which was used to pay the premiums. The purchasers’ argument was presented by Mr. Mawrey on two grounds. The first was that they were entitled as a result of the tracing exercise to a proprietary right of part ownership in the proceeds which, on the application of common justice, enabled them to claim a share of them proportionate to the contribution which their money had made to the total sum paid to the insurers by way of premium. The second, which was developed briefly in the alternative and, I thought, very much by way of a subsidiary argument, was that the law of unjust enrichment would provide them with a remedy.
It seems to me that two quite separate questions arise in regard to the first of these two arguments. The first question is simply one of evidence. This is whether, if the purchasers can show that their money was used to pay any of the premiums, they can trace their money into the proceeds obtained by the trustees from the insurers in virtue of their rights under the policy. The second question is more difficult, and I think that it is the crucial question in this case. As I understand the question, it is whether it is equitable, in all the circumstances, that the purchasers should recover from the trustees a share of the proceeds calculated by reference to the contribution which their money made to the total amount paid to the insurers by way of premium.
I believe that I have already said almost all that needs to be said on the first question. It is agreed that the purchasers’ money was used to pay the last two premiums. Whether their money was also used to pay a part of the 1988 premium, and if so, how much of it was so used will require to be resolved by evidence. But at least to the extent of the last two premiums the purchasers can trace their money into the policy. The terms of the policy provide a sufficient basis for tracing their money one step further. They show that this money can be followed into the proceeds received by the trustees of the policy by way of death benefit. It is clearly stated in the policy document that the benefits specified are to be made in consideration of the payment to the insurer of all the premiums. This is enough to show that the tracing exercise does not end with the receipt of the premiums by the insurers. They can say that they gave value for the premiums when they paid over to the trustees the sum to which they were entitled by way of death benefit. Nothing is left with the insurers, because they have given value for all that they received. That value now resides in the proceeds received by the trustees.
But the result of the tracing exercise cannot solve the remaining question, which relates to the extent of the purchasers’ entitlement. It is the fact that this is a case of mixed substitution which creates the difficulty. If the purchasers’ money had been used to pay all the premiums there would have been no mixture of value with that contributed by others. Their claim would have been to the whole of the proceeds of the policy. As it is, there are competing claims on the same fund. In the absence of any other basis for division in principle or on authority – and no other basis has been suggested – it must be divided between the competitors in such proportions as can be shown to be equitable. In my opinion the answer to the question as to what is equitable does not depend solely on the terms of the policy. The equities affecting each party must be examined. They must be balanced against each other. The conduct of the parties so far as this may be relevant, and the consequences to them of allowing and rejecting the purchasers’ claim, must be analysed and weighed up. It may be helpful to refer to what would be done in other situations by way of analogy. But it seems to me that in the end a judgment requires to be made as to what is fair, just and reasonable.
My noble and learned friend Lord Hoffmann states that this is a straightforward case of mixed substitution, which the Roman lawyers (if they had an economy which required tracing through bank accounts) would have called confusio. I confess that I have great difficulty in following this observation, as the relevant texts seem to me to indicate that they would have found the case far from straightforward and that it is quite uncertain what they would have made of it.
The discussion by the Roman jurists of the problems of ownership that arise where things which originally belonged to different people have been inextricably mixed with or attached to each other took place in an entirely different context. They were concerned exclusively with the ownership of corporeal property: with liquids like wine or solid things like heaps of corn, to which without any clear distinction in their use of terminology they applied what have come to be recognised as the doctrines of confusio and commixtio (Institutes of Justinian II.1.27 and 28), and with the application of the principle accessorium principale sequitur to corporeal property according to the type of property involved – accession by moveables to land, by moveables to moveables, by land to land and accession by the produce of land or the offspring of animals. I would have understood the application of the Roman law to our case if we had been dealing with the ownership of a collection of coins of gold or silver which had been melted down into liquids and transformed into another corporeal object such as a bracelet or a statue. That would indeed have been a problem familiar to Gaius and Justinian, which they would have recognised as being capable of being solved by the application of the doctrine of confusio. But here we are dealing with a problem about the rights of ownership in incorporeal property.
The taking of possession, usually by delivery, was the means by which a person acquired ownership of corporeal property. The doctrines of commixtio and confusio were resorted to in order to resolve problems created by the mixing together, or attaching to each other, of corporeal things owned two or more people. Sandeman & Sons v. Tyzack and Branfoot Steamship Co. Ltd. [1913] A.C. 680, in which Lord Moulton described the doctrines of English law which are applicable to cases where goods belonging to different owners have become mixed so as to be incapable of either being distinguished or separated, was also a case about what the Roman jurists would have classified as corporeal moveables – bales of jute in the hold of a cargo vessel which were unmarked and could not be identified as belonging to any particular consignment. But incorporeal property, such as the rights acquired under an insurance policy upon payment of the premiums, is incapable either of possession or of delivery in the sense of these expressions as understood in Roman law. Problems relating to rights arising out of payments made by the insurers under the policy would have belonged in Roman law to the law of obligations, and it is likely that the remedy would have been found in the application of an appropriate condictio. This is an entirely different chapter from that relating to the possession and ownership of things which are corporeal.
I think that, even if they had felt able to apply the doctrine of confusio to our case, it is far from clear that the Roman jurists would have reached a unanimous view as to the result. It is worth noting that even in the well-known case of the picture painted by Apelles on someone else’s board or panel differing views were expressed: see Stair’s Institutions, II.1.39. Paulus thought that the picture followed the ownership of the board as an accessory thereto (Digest, 6.1.23.3), while Gaius regarded the board as accessory to the picture (Digest, 41.1.9.2). Justinian’s view, following Gaius, was that the board was accessory to the picture, as the picture was more precious (Institutes Justinian II.1.34). Stair expresses some surprise at this conclusion, because Justinian had previously declared that ownership of precious stones attached to cloth, although of greater value than cloth, was carried with the cloth. These differences of view are typical of the disputes between the Roman jurists which are to be found in the Digest.
In these circumstances I see no escape from the approach which I propose to follow, which is to examine the evidence about the rights which, in the events which happened, were acquired under the policy.
I turn first to the terms of the policy. In return for the payment of each premium the insured acquired a chose in action against the insurers which comprised the bundle of rights in terms of the policy which resulted from the payment of that premium. What those rights comprised from time to time must depend on the facts. If the life assured had not committed suicide at the age of 45, the policy might have remained on foot for many years. It was a contract of life assurance in which the sum assured on death was £1m. There was a unit-linked investment content in each premium. The value of the units allocated by the insurers on receipt of each premium might in time have exceeded that sum. That would have increased the total amount payable on the death. But in the event the policy was not kept up for long enough for this to occur. The unit-linked investment content did not in fact make any contribution to the amount which was paid to the trustees of the policy. The effect of the payment of the first premium was to confer a right on the trustees of the policy as against the insurers to the payment of £1m. on the death of the life assured. The effect of the payment of the four remaining premiums up to the date of the life assured’s suicide was to reduce the amount which the insured had to provide to meet this liability out by reinsurance or of its own funds. But they had no effect on the right of the trustees to the payment of the sum assured under the terms of the policy, as they did not increase the amount payable on the death.
I do not think that the purchasers can demonstrate on these facts that they have a proprietary right to a proportionate share of the proceeds. They cannot show that their money contributed to any extent to, or increased the value of, the amount paid to the trustees of the policy. A substantially greater sum was paid out by the insurers as death benefit than the total of the sums which they received by way of premium. A profit was made on the investment. But the terms of the policy show that the amount which produced this profit had been fixed from the outset when the first premium was paid. It was attributable to the rights obtained by the life assured when he paid the first premium from his own money. No part of that sum was attributable to value of the money taken from the purchasers to pay the additional premiums.
The next question is whether the equities affecting each party can assist the purchasers. The dispute is between two groups of persons, both of whom are innocent of the breach of trust which led to the purchasers’ money being misappropriated. On the one hand there are the purchasers, who made a relatively modest but wholly involuntary contribution to the upkeep of the policy. On the other there are the children, who are the beneficiaries of the trusts of the policy but who made no contribution at all to its upkeep.
Mr. Mawrey submitted that a solution to precisely the same problem had been found in Edinburgh Corporation v. Lord Advocate (1879) 4 App. Cas. 823 where competing claims to a mixed fund had been resolved by the application of equitable principles. Central to his argument was the proposition that the asset of which the purchasers had been the part-purchasers was the policy itself, not the amount of the death benefit. They were to be seen as the involuntary purchasers of a share in the entire bundle of contractual rights under the policy. The proceeds of the policy were the product of those contractual rights. The terms of the policy made it clear that all benefits which were payable under it were to be made in consideration of the payment to the insurers of all the premiums. It followed that, as it was the product of the premiums towards the payment of which they had contributed, the amount of the death benefit was a mixed fund in which they were entitled to participate. He relied also, by way of analogy, on the observations of Ungoed-Thomas J. in In re Tilley’s Will Trusts [1967] Ch. 1179, 1189 as to the rights of the beneficiary to participate in any profit which resulted where a trustee mixed trust money with his own money and then used it to purchase other property: see also Scott v. Scott (1963) 109 C.L.R. 649.
I am unable to agree with this approach to the facts of this case. In Edinburgh Corporation v. Lord Advocate (1879) 4 App. Cas. 823 the property in question was clearly a mixed fund, all the assets of which had contributed to the increase in the value of the funds held by the trustees. The facts of the case and the prolonged litigation which resulted from it are somewhat complicated: for a full account, see Magistrates of Edinburgh v. McLaren (1881) 8 R. (H.L.) 140. The essential point was that funds contributed by a benefactor of a hospital for particular trust purposes had for more than 170 years been held, administered and applied as part of the general funds of the hospital. The Court of Session had been directed by an earlier decision of the House of Lords in the same case to ascertain how much of the funds which had been managed in this way belonged to the hospital. In terms of its interlocutor of 20 July 1875 the Court of Session held that the benefactor’s funds had been immixed with the funds of the hospital from an early period down to that date, and that they must therefore be held to have participated proportionately with the hospital’s funds and property in the increase of value of the aggregate funds and property of the hospital during that period. Steps were then taken to ascertain and fix the amount of the whole of the aggregate funds and what the amount of the benefactor’s funds was in proportion to the present value of the aggregate. When this had been done the case was appealed again to the House of Lords on the question, among others, whether it was right to treat the two funds as having been inextricably mixed up.
The decision of the Court of Session was upheld on this point, for reasons which I do not need to examine in detail as they have no direct bearing on the issues raised in this appeal. As Lord Blackburn put it at p. 835, the Court of Session solved the difficulty
“in a way perfectly consistent with justice and good sense, and not inconsistent with any technical rule of law, and no other solution has been suggested which would be so satisfactory.”
But the main relevance of the case for the purposes of the purchasers’ argument lies in the following observation which he made at p. 833:
“No other way was suggested at the bar in which the fund, if the two were inextricably mixed up, could be apportioned except that of taking the proportion which the two funds bore to each other, and dividing the mixed fund in that proportion; and I cannot myself see any other way.”
I would have had no difficulty in reaching the same conclusion had I been persuaded that, on the facts, this was truly a case of two funds which had been inextricably been mixed up, each of which had contributed to the profit in the hands of the trustees. But it seems to me that it is on this point that the analogy with that case, and with the example of a lottery ticket purchased with money from two different sources which was also mentioned in argument, breaks down. It is no doubt true to say that the policy consisted of a bundle of rights against the insurers in consideration of the payment of all the premiums. But these rights have now been realised. We can see what has been paid out and why it was paid. We know that we are dealing with an amount paid to the trustees of the policy as death benefit in consequence of the life assured’s suicide. In terms of the policy the right to payment of that amount of death benefit was purchased when the life assured paid the first premium. The insurers’ right to decline payment in the event of the death of the life assured by suicide was lost after 12 months, when he kept the policy on foot by the payment of the second premium. Nothing that happened after that date affected in any way the right of the trustees of the policy to be paid the sum of £1m. when the life assured took his own life. The policy was kept on foot by the payment of the payment of the further premiums over the next three years. These premiums reduced the cost to the insurers of covering their liability under the policy in the event of the insured’s death. But they made no difference to the rights which were exercisable against the insurers by the trustees of the policy or to the rights of the children as beneficiaries against the trustees.
The situation here is quite different from that where the disputed sum is the product of an investment which was made with funds which have already been immixed. In the case of the lottery ticket which is purchased by A partly from his own funds and partly from funds of which B was the involuntary contributor, the funds are mixed together at the time when the ticket is purchased. It is easy to see that any prize won by that lottery ticket must be treated as the product of that mixed fund. In the case of the funds administered as an aggregate fund by the hospital, the funds from each of the two sources had been mixed together from an early date before the various transactions were entered into which increased the amount of the aggregate. It was consistent with justice and common sense to regard the whole of the increase as attributable in proportionate shares to the money taken from the two sources. But in this case the right to obtain payment of the whole amount of the death benefit of £1m. had already been purchased from the insurers before they received payment of the premiums which were funded by the money misappropriated from the purchasers.
Of the other analogies which were suggested in the course of the argument to illustrate the extent of the equitable remedy, the closest to the circumstances of this case seemed to me to be those relating to the expenditure by a trustee of money held on trust on the improvement of his own property such as his dwelling house. This was the analogy discussed by Sir Richard Scott V.-C and by Hobhouse L.J. at [1998] Ch. 265, 282E-G and 289E-290H. There is no doubt that an equitable right will be available to the beneficiaries to have back the money which was misappropriated for his own benefit by the trustee. But that right does not extend to giving them an equitable right to a pro rata share in the value of the house. If the value of the property is increased by the improvements which were paid for in whole or in part out of the money which the trustee misappropriated, he must account to the trust for the value of the improvements. This is by the application of the principle that a trustee must not be allowed to profit from his own breach of trust. But unless it can be demonstrated that he has obtained a profit as a result of the expenditure, his liability is to pay back the money which he has misapplied.
In the present case the purchasers are, in my opinion, unable to demonstrate that the value of the entitlement of the trustees of the policy to death benefit was increased to any extent at all as a result of the use of their money to keep the policy on foot, as the entitlement had already been fixed before their money was misappropriated. In these circumstances the equities lie with the children and not with the purchasers. I do not need to attach any weight to the fact that the purchasers have already been compensated by the successful pursuit of other remedies. Even without that fact I would hold that it is fair, just and reasonable that the children should be allowed to receive the whole of the sum now in the hands of the trustees after the purchasers have been reimbursed, with interest, for the amount of their money which was used to pay the premiums.
There remains the question which Mr. Mawrey raised in his alternative argument, which is whether the purchasers have a remedy in unjust enrichment. Normally, where this question is raised, there are only two parties – the plaintiff is the person at whose expense the defendant is said to have been enriched and the defendant is the person who is said to have been enriched at the expense of the plaintiff. This case is an example of third party enrichment. The enrichment of the children is said to have resulted from a transaction with the insurers by the life assured, who had enriched himself by subtracting money from the purchasers. It is clear that the life assured was unjustly enriched when, in breach of trust and without their knowledge, he took the money from the purchasers. He transferred his enrichment to the insurers when he used that money to pay premiums. But the insurers can say in answer to a claim of unjust enrichment against them that they changed their position when, in ignorance of the breach of trust, they paid the sum assured to the trustees of the policy. Can the purchasers take their remedy against the children, who are entitled as beneficiaries under the trust of the policy to payment of the sum now in the hands of the trustees? And, if they can, does their remedy in unjust enrichment extend to a proportionate share of the proceeds of the policy, which far exceeds the amount of their involuntary expenditure when the life assured took from them the money which he used to make payment of the premiums?
These questions were not fully explored in the course of the argument, but I think that it is not necessary to do more than to make a few basic points in order to show why I consider that the purchasers cannot obtain what they want by invoking this remedy. If it could be shown that the children had consciously participated in the life assured’s wrongdoing and that, having done so, they had profited from his subtraction from the purchasers of the money used to pay the premiums, the answer would be that the law will not allow them to retain that benefit. A remedy would lie against them in unjust enrichment for the amount unjustly subtracted from the purchasers and for any profit attributable to that amount. But in this case it is common ground that the children are innocent of any wrongdoing. They are innocent third parties to the unjust transactions between the life assured and the purchasers. In my opinion the law of unjust enrichment should not make them worse off as a result of those transactions than they would have been if those transactions had not happened.
The aim of the law is to correct an enrichment which is unjust, but the remedy can only be taken against a defendant who has been enriched. The undisputed facts of this case show that the children were no better off following payment of the premiums which were paid with the money subtracted from the purchasers than they would have been if those premiums had not been paid. This is because, for the reasons explained by Hobhouse L.J. [1998] Ch. 265, 286D-F, the insurers would have been entitled to have recourse to the premiums already paid to keep up the policy and because the premiums paid from the purchasers’ money did not, in the events which happened, affect the amount of the sum payable in the event of the insured’s death. The argument for a claim against them in unjust enrichment fails on causation. The children were not enriched by the payment of these premiums. On the contrary, they would be worse off if they were to be required to share the proceeds of the policy with the purchasers. It is as well that the purchasers’ remedy in respect of the premiums and interest does not depend upon unjust enrichment, otherwise they would have had to have been denied a remedy in respect of that part of their claim also.
In these circumstances I cannot see any grounds for holding that the purchasers are entitled to participate in the amount of the death benefit except to the extent necessary for them to recover the premiums, with interest, which were paid from their money which had been misappropriated. So I would dismiss both the appeal and the cross-appeal.
LORD MILLETT
My Lords,
This is a textbook example of tracing through mixed substitutions. At the beginning of the story the plaintiffs were beneficially entitled under an express trust to a sum standing in the name of Mr. Murphy in a bank account. From there the money moved into and out of various bank accounts where in breach of trust it was inextricably mixed by Mr. Murphy with his own money. After each transaction was completed the plaintiffs’ money formed an indistinguishable part of the balance standing to Mr. Murphy’s credit in his bank account. The amount of that balance represented a debt due from the bank to Mr. Murphy, that is to say a chose in action. At the penultimate stage the plaintiffs’ money was represented by an indistinguishable part of a different chose in action, viz. the debt prospectively and contingently due from an insurance company to its policyholders, being the trustees of a settlement made by Mr. Murphy for the benefit of his children. At the present and final stage it forms an indistinguishable part of the balance standing to the credit of the respondent trustees in their bank account.
Tracing and following
The process of ascertaining what happened to the plaintiffs’ money involves both tracing and following. These are both exercises in locating assets which are or may be taken to represent an asset belonging to the plaintiffs and to which they assert ownership. The processes of following and tracing are, however, distinct. Following is the process of following the same asset as it moves from hand to hand. Tracing is the process of identifying a new asset as the substitute for the old. Where one asset is exchanged for another, a claimant can elect whether to follow the original asset into the hands of the new owner or to trace its value into the new asset in the hands of the same owner. In practice his choice is often dictated by the circumstances. In the present case the plaintiffs do not seek to follow the money any further once it reached the bank or insurance company, since its identity was lost in the hands of the recipient (which in any case obtained an unassailable title as a bona fide purchaser for value without notice of the plaintiffs’ beneficial interest). Instead the plaintiffs have chosen at each stage to trace the money into its proceeds, viz. the debt presently due from the bank to the account holder or the debt prospectively and contingently due from the insurance company to the policy holders.
Having completed this exercise, the plaintiffs claim a continuing beneficial interest in the insurance money. Since this represents the product of Mr. Murphy’s own money as well as theirs, which Mr. Murphy mingled indistinguishably in a single chose in action, they claim a beneficial interest in a proportionate part of the money only. The transmission of a claimant’s property rights from one asset to its traceable proceeds is part of our law of property, not of the law of unjust enrichment. There is no “unjust factor” to justify restitution (unless “want of title” be one, which makes the point). The claimant succeeds if at all by virtue of his own title, not to reverse unjust enrichment. Property rights are determined by fixed rules and settled principles. They are not discretionary. They do not depend upon ideas of what is “fair, just and reasonable.” Such concepts, which in reality mask decisions of legal policy, have no place in the law of property.
A beneficiary of a trust is entitled to a continuing beneficial interest not merely in the trust property but in its traceable proceeds also, and his interest binds every one who takes the property or its traceable proceeds except a bona fide purchaser for value without notice. In the present case the plaintiffs’ beneficial interest plainly bound Mr. Murphy, a trustee who wrongfully mixed the trust money with his own and whose every dealing with the money (including the payment of the premiums) was in breach of trust. It similarly binds his successors, the trustees of the children’s settlement, who claim no beneficial interest of their own, and Mr. Murphy’s children, who are volunteers. They gave no value for what they received and derive their interest from Mr. Murphy by way of gift.
Tracing
We speak of money at the bank, and of money passing into and out of a bank account. But of course the account holder has no money at the bank. Money paid into a bank account belongs legally and beneficially to the bank and not to the account holder. The bank gives value for it, and it is accordingly not usually possible to make the money itself the subject of an adverse claim. Instead a claimant normally sues the account holder rather than the bank and lays claim to the proceeds of the money in his hands. These consist of the debt or part of the debt due to him from the bank. We speak of tracing money into and out of the account, but there is no money in the account. There is merely a single debt of an amount equal to the final balance standing to the credit of the account holder. No money passes from paying bank to receiving bank or through the clearing system (where the money flows may be in the opposite direction). There is simply a series of debits and credits which are causally and transactionally linked. We also speak of tracing one asset into another, but this too is inaccurate. The original asset still exists in the hands of the new owner, or it may have become untraceable. The claimant claims the new asset because it was acquired in whole or in part with the original asset. What he traces, therefore, is not the physical asset itself but the value inherent in it.
Tracing is thus neither a claim nor a remedy. It is merely the process by which a claimant demonstrates what has happened to his property, identifies its proceeds and the persons who have handled or received them, and justifies his claim that the proceeds can properly be regarded as representing his property. Tracing is also distinct from claiming. It identifies the traceable proceeds of the claimant’s property. It enables the claimant to substitute the traceable proceeds for the original asset as the subject matter of his claim. But it does not affect or establish his claim. That will depend on a number of factors including the nature of his interest in the original asset. He will normally be able to maintain the same claim to the substituted asset as he could have maintained to the original asset. If he held only a security interest in the original asset, he cannot claim more than a security interest in its proceeds. But his claim may also be exposed to potential defences as a result of intervening transactions. Even if the plaintiffs could demonstrate what the bank had done with their money, for example, and could thus identify its traceable proceeds in the hands of the bank, any claim by them to assert ownership of those proceeds would be defeated by the bona fide purchaser defence. The successful completion of a tracing exercise may be preliminary to a personal claim (as in El Ajou v. Dollar Land Holdings [1993] 3 All E.R. 717) or a proprietary one, to the enforcement of a legal right (as in Trustees of the Property of F.C. Jones & Sons v. Jones [1997] Ch. 159) or an equitable one.
Given its nature, there is nothing inherently legal or equitable about the tracing exercise. There is thus no sense in maintaining different rules for tracing at law and in equity. One set of tracing rules is enough. The existence of two has never formed part of the law in the United States: see Scott The Law of Trusts 4th. ed. (1989), pp.605-609. There is certainly no logical justification for allowing any distinction between them to produce capricious results in cases of mixed substitutions by insisting on the existence of a fiduciary relationship as a precondition for applying equity’s tracing rules. The existence of such a relationship may be relevant to the nature of the claim which the plaintiff can maintain, whether personal or proprietary, but that is a different matter. I agree with the passages which my noble and learned friend Lord Steyn has cited from Professor Birks’ essay The Necessity of a Unitary Law of Tracing, and with Dr. Lionel Smith’s exposition in his comprehensive monograph The Law of Tracing (1997) see particularly pp. 120-130, 277-9 and 342-347.
This is not, however, the occasion to explore these matters further, for the present is a straightforward case of a trustee who wrongfully misappropriated trust money, mixed it with his own, and used it to pay for an asset for the benefit of his children. Even on the traditional approach, the equitable tracing rules are available to the plaintiffs. There are only two complicating factors. The first is that the wrongdoer used their money to pay premiums on an equity linked policy of life assurance on his own life. The nature of the policy should make no difference in principle, though it may complicate the accounting. The second is that he had previously settled the policy for the benefit of his children. This should also make no difference. The claimant’s rights cannot depend on whether the wrongdoer gave the policy to his children during his lifetime or left the proceeds to them by his will; or if during his lifetime whether he did so before or after he had recourse to the claimant’s money to pay the premiums. The order of events does not affect the fact that the children are not contributors but volunteers who have received the gift of an asset paid for in part with misappropriated trust moneys.
The cause of action
As I have already pointed out, the plaintiffs seek to vindicate their property rights, not to reverse unjust enrichment. The correct classification of the plaintiffs’ cause of action may appear to be academic, but it has important consequences. The two causes of action have different requirements and may attract different defences.
A plaintiff who brings an action in unjust enrichment must show that the defendant has been enriched at the plaintiff’s expense, for he cannot have been unjustly enriched if he has not been enriched at all. But the plaintiff is not concerned to show that the defendant is in receipt of property belonging beneficially to the plaintiff or its traceable proceeds. The fact that the beneficial ownership of the property has passed to the defendant provides no defence; indeed, it is usually the very fact which founds the claim. Conversely, a plaintiff who brings an action like the present must show that the defendant is in receipt of property which belongs beneficially to him or its traceable proceeds, but he need not show that the defendant has been enriched by its receipt. He may, for example, have paid full value for the property, but he is still required to disgorge it if he received it with notice of the plaintiff’s interest.
Furthermore, a claim in unjust enrichment is subject to a change of position defence, which usually operates by reducing or extinguishing the element of enrichment. An action like the present is subject to the bona fide purchaser for value defence, which operates to clear the defendant’s title.
The tracing rules
The insurance policy in the present case is a very sophisticated financial instrument. Tracing into the rights conferred by such an instrument raises a number of important issues. It is therefore desirable to set out the basic principles before turning to deal with the particular problems to which policies of life assurance give rise.
The simplest case is where a trustee wrongfully misappropriates trust property and uses it exclusively to acquire other property for his own benefit. In such a case the beneficiary is entitled at his option either to assert his beneficial ownership of the proceeds or to bring a personal claim against the trustee for breach of trust and enforce an equitable lien or charge on the proceeds to secure restoration of the trust fund. He will normally exercise the option in the way most advantageous to himself. If the traceable proceeds have increased in valueand are worth more than the original asset, he will assert his beneficial ownership and obtain the profit for himself. There is nothing unfair in this. The trustee cannot be permitted to keep any profit resulting from his misappropriation for himself, and his donees cannot obtain a better title than their donor. If the traceable proceeds are worth less than the original asset, it does not usually matter how the beneficiary exercises his option. He will take the whole of the proceeds on either basis. This is why it is not possible to identify the basis on which the claim succeeded in some of the cases.
Both remedies are proprietary and depend on successfully tracing the trust property into its proceeds. A beneficiary’s claim against a trustee for breach of trust is a personal claim. It does not entitle him to priority over the trustee’s general creditors unless he can trace the trust property into its product and establish a proprietary interest in the proceeds. If the beneficiary is unable to trace the trust property into its proceeds, he still has a personal claim against the trustee, but his claim will be unsecured. The beneficiary’s proprietary claims to the trust property or its traceable proceeds can be maintained against the wrongdoer and anyone who derives title from him except a bona fide purchaser for value without notice of the breach of trust. The same rules apply even where there have been numerous successive transactions, so long as the tracing exercise is successful and no bona fide purchaser for value without notice has intervened.
A more complicated case is where there is a mixed substitution. This occurs where the trust money represents only part of the cost of acquiring the new asset. As Ames pointed out in “Following Misappropriated Property into its Product” (1906) Harvard Law Review 511, consistency requires that, if a trustee buys property partly with his own money and partly with trust money, the beneficiary should have the option of taking a proportionate part of the new property or a lien upon it, as may be most for his advantage. In principle it should not matter (and it has never previously been suggested that it does) whether the trustee mixes the trust money with his own and buys the new asset with the mixed fund or makes separate payments of the purchase price (whether simultaneously or sequentially) out of the different funds. In every case the value formerly inherent in the trust property has become located within the value inherent in the new asset.
The rule, and its rationale, were stated by Williston in “The Right to Follow Trust Property when Confused with Other Property” (1880) 2 Harvard Law Journal at p. 29:
“If the trust fund is traceable as having furnished in part the money with which a certain investment was made, and the proportion it formed of the whole money so invested is known or ascertainable, the cestui que trust should be allowed to regard the acts of the trustee as done for his benefit, in the same way that he would if all the money so invested had been his; that is, he should be entitled in equity to an undivided share of the property which the trust money contributed to purchase–such a proportion of the whole as the trust money bore to the whole money invested.
“The reason in the one case as in the other is that the trustee cannot be allowed to make a profit from the use of the trust money, and if the property which he wrongfully purchased were held subject only to a lien for the amount invested, any appreciation in value would go to the trustee.”
If this correctly states the underlying basis of the rule (as I believe it does), then it is impossible to distinguish between the case where mixing precedes the investment and the case where it arises on and in consequence of the investment. It is also impossible to distinguish between the case where the investment is retained by the trustee and the case where it is given away to a gratuitous donee. The donee cannot obtain a better title than his donor, and a donor who is a trustee cannot be allowed to profit from his trust.
In In re Hallett’s Estate; Knatchbull v. Hallett (1880) 13 Ch. D. 696, 709 Sir George Jessel M.R. acknowledged that where an asset was acquired exclusively with trust money, the beneficiary could either assert equitable ownership of the asset or enforce a lien or charge over it to recover the trust money. But he appeared to suggest that in the case of a mixed substitution the beneficiary is confined to a lien. Any authority that this dictum might otherwise have is weakened by the fact that Jessel M.R. gave no reason for the existence of any such rule, and none is readily apparent. The dictum was plainly obiter, for the fund was deficient and the plaintiff was only claiming a lien. It has usually been cited only to be explained away (see for example In re Tilley’s Will Trusts [1967] Ch. 1179, 1186 per Ungoed-Thomas J.; Burrows The Law of Restitution (1993) p. 368). It was rejected by the High Court of Australia in Scott v. Scott (1963) 109 C.L.R. 649 (see the passage at pp. 661-2 cited by Morritt L.J. below at [1998] Ch. 265, 300-301). It has not been adopted in the United States: see the American Law Institute, Restatement of the Law, Trusts, 2d (1959) at section 202(h). In Primeau v. Granfield (1911) 184 F. 480 (S.D.N.Y.) at p. 184 Learned Hand J. expressed himself in forthright terms: “On principle there can be no excuse for such a rule.”
In my view the time has come to state unequivocally that English law has no such rule. It conflicts with the rule that a trustee must not benefit from his trust. I agree with Burrows that the beneficiary’s right to elect to have a proportionate share of a mixed substitution necessarily follows once one accepts, as English law does, (i) that a claimant can trace in equity into a mixed fund and (ii) that he can trace unmixed money into its proceeds and assert ownership of the proceeds.
Accordingly, I would state the basic rule as follows. Where a trustee wrongfully uses trust money to provide part of the cost of acquiring an asset, the beneficiary is entitled at his option either to claim a proportionate share of the asset or to enforce a lien upon it to secure his personal claim against the trustee for the amount of the misapplied money. It does not matter whether the trustee mixed the trust money with his own in a single fund before using it to acquire the asset, or made separate payments (whether simultaneously or sequentially) out of the differently owned funds to acquire a single asset.
Two observations are necessary at this point. First, there is a mixed substitution (with the results already described) whenever the claimant’s property has contributed in part only towards the acquisition of the new asset. It is not necessary for the claimant to show in addition that his property has contributed to any increase in the value of the new asset. This is because, as I have already pointed out, this branch of the law is concerned with vindicating rights of property and not with reversing unjust enrichment. Secondly, the beneficiary’s right to claim a lien is available only against a wrongdoer and those deriving title under him otherwise than for value. It is not available against competing contributors who are innocent of any wrongdoing. The tracing rules are not the result of any presumption or principle peculiar to equity. They correspond to the common law rules for following into physical mixtures (though the consequences may not be identical). Common to both is the principle that the interests of the wrongdoer who was responsible for the mixing and those who derive title under him otherwise than for value are subordinated to those of innocent contributors. As against the wrongdoer and his successors, the beneficiary is entitled to locate his contribution in any part of the mixture and to subordinate their claims to share in the mixture until his own contribution has been satisfied. This has the effect of giving the beneficiary a lien for his contribution if the mixture is deficient.
Innocent contributors, however, must be treated equally inter se. Where the beneficiary’s claim is in competition with the claims of other innocent contributors, there is no basis upon which any of the claims can be subordinated to any of the others. Where the fund is deficient, the beneficiary is not entitled to enforce a lien for his contributions; all must share rateably in the fund.
The primary rule in regard to a mixed fund, therefore, is that gains and losses are borne by the contributors rateably. The beneficiary’s right to elect instead to enforce a lien to obtain repayment is an exception to the primary rule, exercisable where the fund is deficient and the claim is made against the wrongdoer and those claiming through him. It is not necessary to consider whether there are any circumstances in which the beneficiary is confined to a lien in cases where the fund is more than sufficient to repay the contributions of all parties. It is sufficient to say that he is not so confined in a case like the present. It is not enough that those defending the claim are innocent of any wrongdoing if they are not themselves contributors but, like the trustees and Mr. Murphy’s children in the present case, are volunteers who derive title under the wrongdoer otherwise than for value. On ordinary principles such persons are in no better position than the wrongdoer, and are liable to suffer the same subordination of their interests to those of the claimant as the wrongdoer would have been. They certainly cannot do better than the claimant by confining him to a lien and keeping any profit for themselves.
Similar principles apply to following into physical mixtures: see Lupton v. White (1808) 15 Ves. 442; and Sandemann & Sons v. Tyzack and Branfoot Steamship Co. Ltd. [1913] A.C. 680, 695 where Lord Moulton said: “If the mixing has arisen from the fault of B, A can claim the goods.” There are relatively few cases which deal with the position of the innocent recipient from the wrongdoer, but Jones v. De Marchant (1916) 28 D.L.R. 561 may be cited as an example. A husband wrongfully used 18 beaver skins belonging to his wife and used them, together with four skins of his own, to have a fur coat made up which he then gave to his mistress. Unsurprisingly the wife was held entitled to recover the coat. The mistress knew nothing of the true ownership of the skins, but her innocence was held to be immaterial. She was a gratuitous donee and could stand in no better position than the husband. The coat was a new asset manufactured from the skins and not merely the product of intermingling them. The problem could not be solved by a sale of the coat in order to reduce the disputed property to a divisible fund, since (as we shall see) the realisation of an asset does not affect its ownership. It would hardly have been appropriate to require the two ladies to share the coat between them. Accordingly it was an all or nothing case in which the ownership of the coat must be assigned to one or other of the parties. The determinative factor was that the mixing was the act of the wrongdoer through whom the mistress acquired the coat otherwise than for value.
The rule in equity is to the same effect, as Sir William Page Wood V.-C. observed in Frith v. Cartland (1865) 2 H. & M. 417 at p. 418:
“. . . If a man mixes trust funds with his own, the whole will be treated as the trust property, except so far as he may be able to distinguish what is his own.”
This does not, in my opinion, exclude a pro rata division where this is appropriate, as in the case of money and other fungibles like grain, oil or wine. But it is to be observed that a pro rata division is the best that the wrongdoer and his donees can hope for. If a pro rata division is excluded, the beneficiary takes the whole; there is no question of confining him to a lien. Jones v. De Marchant 28 D.L.R. 561 is a useful illustration of the principles shared by the common law and equity alike that an innocent recipient who receives misappropriated property by way of gift obtains no better title than his donor, and that if a proportionate sharing is inappropriate the wrongdoer and those who derive title under him take nothing.
Insurance policies
In the case of an ordinary whole life policy the insurance company undertakes to pay a stated sum on the death of the assured in return for fixed annual premiums payable throughout his life. Such a policy is an entire contract, not a contract for a year with a right of renewal. It is not a series of single premium policies for one year term assurance. It is not like an indemnity policy where each premium buys cover for a year after which the policyholder must renew or the cover expires. The fact that the policy will lapse if the premiums are not paid makes no difference. The amounts of the annual premiums and of the sum assured are fixed in advance at the outset and assume the payment of annual premiums throughout the term of the policy. The relationship between them is based on the life expectancy of the assured and the rates of interest available on long term government securities at the inception of the policy.
In the present case the benefits specified in the policy are expressed to be payable “in consideration of the payment of the first premium already made and of the further premiums payable.” The premiums are stated to be “£10,220 payable at annual intervals from 6 November 1985 throughout the lifetime of the life assured.” It is beyond argument that the death benefit of £1m. paid on Mr. Murphy’s death was paid in consideration for all the premiums which had been paid before that date, including those paid with the plaintiffs’ money, and not just some of them. Part of that sum, therefore, represented the traceable proceeds of the plaintiffs’ money.
It is, however, of critical importance in the present case to appreciate that the plaintiffs do not trace the premiums directly into the insurance money. They trace them first into the policy and thence into the proceeds of the policy. It is essential not to elide the two steps. In this context, of course, the word “policy” does not mean the contract of insurance. You do not trace the payment of a premium into the insurance contract any more than you trace a payment into a bank account into the banking contract. The word “policy” is here used to describe the bundle of rights to which the policyholder is entitled in return for the premiums. These rights, which may be very complex, together constitute a chose in action, viz.the right to payment of a debt payable on a future event and contingent upon the continued payment of further premiums until the happening of the event. That chose in action represents the traceable proceeds of the premiums; its current value fluctuates from time to time. When the policy matures, the insurance money represents the traceable proceeds of the policy and hence indirectly of the premiums.
It follows that, if a claimant can show that premiums were paid with his money, he can claim a proportionate share of the policy. His interest arises by reason of and immediately upon the payment of the premiums, and the extent of his share is ascertainable at once. He does not have to wait until the policy matures in order to claim his property. His share in the policy and its proceeds may increase or decrease as further premiums are paid; but it is not affected by the realisation of the policy. His share remains the same whether the policy is sold or surrendered or held until maturity; these are merely different methods of realising the policy. They may affect the amount of the proceeds received on realisation but they cannot affect the extent of his share in the proceeds. In principle the plaintiffs are entitled to the insurance money which was paid on Mr. Murphy’s death in the same shares and proportions as they were entitled in the policy immediately before his death.
Since the manner in which an asset is realised does not affect its ownership, and since it cannot matter whether the claimant discovers what has happened before or after it is realised, the question of ownership can be answered by ascertaining the shares in which it is owned immediately before it is realised. Where A misappropriates B’s money and uses it to buy a winning ticket in the lottery, B is entitled to the winnings. Since A is a wrongdoer, it is irrelevant that he could have used his own money if in fact he used B’s. This may seem to give B an undeserved windfall, but the result is not unjust. Had B discovered the fraud before the draw, he could have decided whether to keep the ticket or demand his money back. He alone has the right to decide whether to gamble with his own money. If A keeps him in ignorance until after the draw, he suffers the consequence. He cannot deprive B of his right to choose what to do with his own money; but he can give him an informed choice.
The application of these principles ought not to depend on the nature of the chose in action. They should apply to a policy of life assurance as they apply to a bank account or a lottery ticket. It has not been suggested in argument that they do not apply to a policy of life assurance. This question has not been discussed in the English authorities, but it has been considered in the United States. In a Note in 35 Yale Law Journal (1925) at pp. 220-227 Professor Palmer doubted the claimant’s right to share in the proceeds of a life policy, and suggested that he should be confined to a lien for his contributions. Professor Palmer accepted, as the majority of the Court of Appeal in the present case did not, that the claimant can trace from the premiums into the policy and that the proceeds of the policy are the product of all the premiums. His doubts were not based on any technical considerations but on questions of social policy. They have not been shared by the American courts. These have generally allowed the claimant a share in the proceeds proportionate to his contributions even though the share in the proceeds is greater than the amount of his money used in paying the premiums: see for example Shaler v. Trowbridge (1877) 28 N.J. Eq. 595; Holmes v.Gilman (1893) 138 N.Y. 369); Vorlander v. Keyes (1924) 1 F. 2d. 67 (1924); Truelsch v. Northwestern Mutual Life Insurance Co. (1925) 202 N.W. 352 (1925); Baxter House v. Rosen (1967) 278 N.Y. 2d. 442; Lohman v. General American Life Insurance Co. (1973) 478 F. 2d. 719. This accords with Ames’ and Williston’s opinions in the articles to which I have referred.
The question is discussed at length in Scott: The Law of Trust in section 508.4 at pp. 574-584. Professor Scott concludes that there is no substance in the doubts expressed by Palmer. He points out that the strongest argument in favour of limiting the beneficiary’s claim to a lien is that otherwise he obtains a windfall. But in cases where the wrongdoer has misappropriated the claimant’s money and used it to acquire other forms of property which have greatly increased in value the courts have consistently refused to limit the claimant to an equitable lien. In any case, the windfall argument is suspect. As Professor Scott points out, a life policy is an aleatory contract. Whether or not the sum assured exceeds the premiums is a matter of chance. Viewed from the perspective of the insurer, the contract is a commercial one; so the chances are weighted against the assured. But the outcome in any individual case is unpredictable at the time the premiums are paid. The unspoken assumption in the argument that a life policy should be treated differently from other choses in action seems to be that, by dying earlier than expected, the assured provides a contribution of indeterminate but presumably substantial value. But the assumption is false. A life policy is not an indemnity policy, in which the rights against the insurer are acquired by virtue of the payment of the premiums and the diminution of the value of an asset. In the case of a life policy the sum assured is paid in return for the premiums and nothing else. The death of the assured is merely the occasion on which the insurance money is payable. The ownership of the policy does not depend on whether this occurs sooner or later, or on whether the bargain proves to be a good one. It cannot be made to await the event.
The windfall argument has little to commend it in the present case. The plaintiffs were kept in ignorance of the fact that premiums had been paid with their money until after Mr. Murphy’s death. Had they discovered what had happened before Mr. Murphy died, they would have intervened. They might or might not have elected to take an interest in the policy rather than enforce a lien for the return of the premiums paid with their money, but they would certainly have wanted immediate payment. This would have entailed the surrender of the policy. At the date of his death Mr. Murphy was only 45 and a non-smoker. He had a life expectancy of many years, and neither he nor the trustees had the means to keep up the premiums. The plaintiffs would hardly have been prepared to wait for years to recover their money, paying the premiums in the meantime. It is true that, under the terms of the policy, life cover could if necessary be maintained for a few years more at the expense of the investment element of the policy (which also provided its surrender value). But it is in the highest degree unlikely that the plaintiffs would have been willing to gamble on the remote possibility of Mr. Murphy’s dying before the policy’s surrender value was exhausted. If he did not they would recover nothing. They would obviously have chosen to enforce their lien to recover the premiums or have sought a declaration that the trustees held the policy for Mr. Murphy’s children and themselves as tenants in common in the appropriate shares. In either case the trustees would have had no alternative but to surrender the policy. In practice the trustees were able to obtain the death benefit by maintaining the policy until Mr. Murphy’s death only because the plaintiffs were kept in ignorance of the fact that premiums had been paid with their money and so were unable to intervene.
The reasoning of the Court of Appeal
The majority of the Court of Appeal (Sir Richard Scott V.-C. and Hobhouse L.J.) held that the plaintiffs could trace their money into the premiums but not into the policy, and were accordingly not entitled to a proportionate share in the proceeds. They did so, however, for different and, in my view, inconsistent reasons which cannot both be correct and which only coincidentally led to the same result in the present case.
The Vice-Chancellor considered that Mr. Murphy’s children acquired vested interests in the policy at its inception. They had a vested interest (subject to defeasance) in the death benefit at the outset and before any of the plaintiffs’ money was used to pay the premiums. The use of the plaintiffs’ money gave the plaintiffs a lien on the proceeds of the policy for the return of the premiums paid with their money, but could not have the effect of divesting the children of their existing interest. The children owned the policy; the plaintiffs’ money was merely used to maintain it. The position was analogous to that where trust money was used to maintain or improve property of a third party.
The Vice-Chancellor treated the policy as an ordinary policy of life assurance. It is not clear whether he thought that the children obtained a vested interest in the policy because Mr. Murphy took the policy out or because he paid the first premium, but I cannot accept either proposition. Mr. Murphy was the original contracting party, but he obtained nothing of value until he paid the first premium. The chose in action represented by the policy is the product of the premiums, not of the contract. The trustee took out the policy in all the recorded cases. In some of them he paid all the premiums with trust money. In such cases the beneficiary was held to be entitled to the whole of the proceeds of the policy. In other cases the trustee paid some of the premiums with his own money and some with trust money. In those cases the parties were held entitled to the proceeds of the policy rateably in proportion to their contributions. It has never been suggested that the beneficiary is confined to his lien for repayment of the premiums because the policy was taken out by the trustee. The ownership of the policy does not depend on the identity of the party who took out the policy. It depends on the identity of the party or parties whose money was used to pay the premiums.
So the Vice-Chancellor’s analysis can only be maintained if it is based the fact that Mr. Murphy paid the first few premiums out of his own money before he began to make use of the trust money. Professor Scott records only one case in which it has been held that in such a case the claimant is confined to a lien on the ground that the later premiums were not made in acquiring the interest under the policy but merely in preserving or improving it: see Thum v. Wolstenholme (1900) 21 Utah 446, 537. The case is expressly disapproved by Scott (loc. cit.) at section 516.1, where it is said that the decision cannot be supported, and that the claimant should be entitled to a proportionate share of the proceeds, regardless of the question whether some of the premiums were paid wholly with the claimant’s money and others wholly with the wrongdoer’s money and regardless of the order of the payments, or whether the premiums were paid out of a mingled fund containing the money of both.
In my opinion there is no reason to differentiate between the first premium or premiums and later premiums. Such a distinction is not based on any principle. Why should the policy belong to the party who paid the first premium, without which there would have been no policy, rather than to the party who paid the last premium, without which it would normally have lapsed? Moreover, any such distinction would lead to the most capricious results. If only four annual premiums are paid, why should it matter whether A paid the first two premiums and B the second two, or B paid the first two and A the second two, or they each paid half of each of the four premiums? Why should the children obtain the whole of the sum assured if Mr. Murphy used his own money before he began to use the plaintiffs’ money, and only a return of the premiums if Mr. Murphy happened to use the plaintiffs’ money first? Why should the proceeds of the policy be attributed to the first premium when the policy itself is expressed to be in consideration of all the premiums? There is no analogy with the case where trust money is used to maintain or improve property of a third party. The nearest analogy is with an instalment purchase.
Hobhouse L.J. adopted a different approach. He concentrated on the detailed terms of the policy, and in particular on the fact that in the event the payment of the fourth and fifth premiums with the plaintiffs’ money made no difference to the amount of the death benefit. Once the third premium had been paid, there was sufficient surrender value in the policy, built up by the use of Mr. Murphy’s own money, to keep the policy on foot for the next few years, and as it happened Mr. Murphy’s death occurred during those few years. But this was adventitious and unpredictable at the time the premiums were paid. The argument is based on causation and as I have explained is a category mistake derived from the law of unjust enrichment. It is an example of the same fallacy that gives rise to the idea that the proceeds of an ordinary life policy belong to the party who paid the last premium without which the policy would have lapsed. But the question is one of attribution not causation. The question is not whether the same death benefit would have been payable if the last premium or last few premiums had not been paid. It is whether the death benefit is attributable to all the premiums or only to some of them. The answer is that death benefit is attributable to all of them because it represents the proceeds of realising the policy, and the policy in turn represents the product of all the premiums.
In any case, Hobhouse L.J.’s analysis of the terms of the policy does not go far enough. It is not correct that the last two premiums contributed nothing to the sum payable on Mr. Murphy’s death but merely reduced the cost to the insurers of providing it. Life cover was provided in return for a series of internal premiums paid for by the cancellation of units previously allocated to the policy. Units were allocated to the policy in return for the annual premiums. Prior to their cancellation the cancelled units formed part of a mixed fund of units which was the product of all the premiums paid by Mr. Murphy, including those paid with the plaintiffs’ money. On ordinary principles, the plaintiffs can trace the last two premiums into and out of the mixed fund and into the internal premiums used to provide the death benefit.
It is true that the last two premiums were not needed to provide the death benefit in the sense that in the events which happened the same amount would have been payable even if those premiums had not been paid. In other words, with the benefit of hindsight it can be seen that Mr. Murphy made a bad investment when he paid the last two premiums. It is, therefore, superficially attractive to say that the plaintiffs’ money contributed nothing of value. But the argument proves too much, for if the plaintiffs cannot trace their money into the proceeds of the policy, they should have no proprietary remedy at all, not even a lien for the return of their money. But the fact is that Mr. Murphy, who could not foresee the future, did choose to pay the last two premiums, and to pay them with the plaintiffs’ money; and they were applied by the insurer towards the payment of the internal premiums needed to fund the death benefit. It should not avail his donees that he need not have paid the premiums, and that if he had not then (in the events which happened) the insurers would have provided the same death benefit and funded it differently.
In the case of an ordinary life policy which lapses if the premiums are not paid, the Vice-Chancellor’s approach gives the death benefit to the party whose money was used to pay the first premium, and Hobhouse L.J.’s approach gives it to the party whose money was used to pay the last premium. In the case of a policy like the present, Hobhouse L.J.’s approach also produces unacceptable and capricious results. The claimant must wait to see whether the life assured lives long enough to exhaust the amount of the policy’s surrender value as at the date immediately before the claimant’s money was first used. If the life assured dies the day before it would have been exhausted, the claimant is confined to his lien to recover the premiums; if he dies the day after, then the claimant’s premiums were needed to maintain the life cover. In the latter case he takes at least a proportionate share of the proceeds or, if the argument is pressed to its logical conclusion, the whole of the proceeds subject to a lien in favour of the trustees of the children’s settlement. This simply cannot be right.
Hobhouse L.J.’s approach is also open to objection on purely practical grounds. It must, I think, be unworkable if there is an eccentric pattern of payment; or if there is a fall in the value of the units at a critical moment. Like the Vice-Chancellor’s approach, it prompts the question: why should the order of payments matter? It is true that the premiums paid with the plaintiff’s money did not in the event increase the amount payable on Mr. Murphy’s death, but they increased the surrender value of the policy and postponed the date at which it would lapse if no further premiums were paid. Why should it be necessary to identify the premium the payment of which (in the events which happened) prevented the policy from lapsing? Above all, this approach makes it impossible for the ownership of the policy to be determined until the policy matures or is realised. This too cannot be right.
The trustees argued that such considerations are beside the point. It is not necessary, they submitted, to consider what the plaintiffs’ rights would have been if the policy had been surrendered, or if Mr. Murphy had lived longer. It is sufficient to take account of what actually happened. I do not agree. A principled approach must yield a coherent solution in all eventualities. The ownership of the policy must be ascertainable at every moment from inception to maturity; it cannot be made to await events. In my view the only way to achieve this is to hold firm to the principle that the manner in which an asset is converted into money does not affect its ownership. The parties’ respective rights to the proceeds of the policy depend on their rights to the policy immediately before it was realised on Mr. Murphy’s death, and this depends on the shares in which they contributed to the premiums and nothing else. They do not depend on the date at which or the manner in which the chose in action was realised. Of course, Mr. Murphy’s early death greatly increased the value of the policy and made the bargain a good one. But the idea that the parties’ entitlements to the policy and its proceeds are altered by the death of the life assured is contrary to principle and to the decision of your Lordships’ House in D’Avigdor Goldsmid v. Inland Revenue Commissioners [1953] A.C. 347. That case establishes that no fresh beneficial interest in a policy of life assurance accrues or arises on the death of the life assured. The sum assured belongs to the person or persons who were beneficial owners of the policy immediately before the death.
In the course of argument it was submitted that if the children, who were innocent of any wrongdoing themselves, had been aware that their father was using stolen funds to pay the premiums, they could have insisted that the premiums should not be paid, and in the events which happened would still have received the same death benefit. But the fact is that Mr. Murphy concealed his wrongdoing from both parties. The proper response is to treat them both alike, that is to say rateably. It is morally offensive as well as contrary to principle to subordinate the claims of the victims of a fraud to those of the objects of the fraudster’s bounty on the ground that he concealed his wrongdoing from both of them.
The submission is not (as has been suggested) supported by Professor David Hayton’s article “Equity’s Identification Rules” in Professor Peter Birk’s Laundering and Tracing (1995) at pp. 11-12. Professor Hayton is dealing with the very different case of the party who decides to purchase an asset and has the means to pay for it, but who happens to use trust money which he has received innocently, not knowing it to belong to a third party and believing himself to be entitled to it. In such a case his decision to use the trust money rather than his own is independent of the breach of trust; it is a matter of pure chance. This is a problem about tracing, not claiming, and has nothing to do with mixtures, as Professor Hayton’s article itself makes clear. It is a difficult problem on the solution to which academic writers are not agreed. But it does not arise in the present case. It was Mr. Murphy’s decision to use the plaintiffs’ money to pay the later premiums. The children are merely passive recipients of an asset acquired in part by the use of misappropriated trust money. They are innocent of any personal wrongdoing, but they are not contributors. They are volunteers who derive their interest from the wrongdoer otherwise than for value and are in no better position than he would have been if he had retained the policy for the benefit of his estate. It is not, with respect to those who think otherwise, a case where there are competing claimants to a fund who are both innocent victims of a fraud and where the equities are equal. But if it were such a case, the parties would share rateably, which is all that the plaintiffs claim.
I should now deal with the finding of all the members of the Court of Appeal that the plaintiffs were entitled to enforce a lien on the proceeds of the policy to secure repayment of the premiums paid with their money. This is inconsistent with the decision of the majority that the plaintiffs were not entitled to trace the premiums into the policy. An equitable lien is a proprietary interest by way of security. It is enforceable against the trust property and its traceable proceeds. The finding of the majority that the plaintiffs had no proprietary interest in the policy or its proceeds should have been fatal to their claim to a lien.
The Court of Appeal held that the plaintiffs were entitled by way of subrogation to Mr. Murphy’s lien to be repaid the premiums. He was, they thought, entitled to the trustee’s ordinary lien to indemnify him for expenditure laid out in the preservation of the trust property: see In re Leslie (1883) 23 Ch. D. 560. Had Mr. Murphy used his own money, they said, it would have been treated as a gift to his children; but the fact that he used stolen funds rebutted any presumption of advancement.
With all due respect, I do not agree that Mr. Murphy had any lien to which the plaintiffs can be subrogated. He was one of the trustees of his children’s settlement, but he did not pay any of the premiums in that capacity. He settled a life policy on his children but without the funds to enable the trustees to pay the premiums. He obviously intended to add further property to the settlement by paying the premiums. When he paid the premiums with his own money he did so as settlor, not as trustee. He must be taken to have paid the later premiums in the same capacity as he paid the earlier ones. I do not for my own part see how his intention to make further advancements into the settlement can be rebutted by showing that he was not using his own money; as between himself and his children the source of the funds is immaterial. He could not demand repayment from the trustees by saying: “I used stolen money; now that I have been found out you must pay me back so that I can repay the money”. Moreover, even if the presumption of advancement were rebutted, there would be no resulting trust. Mr. Murphy was either (as I would hold) a father using stolen money to make further gifts to his children or a stranger paying a premium on another’s policy without request: see Falcke v. Scottish Imperial Insurance Co. (1886) 34 Ch. D. 234.
But perhaps the strongest ground for rejecting the argument is that it makes the plaintiffs’ rights depend on the circumstance that Mr. Murphy happened to be one of the trustees of his children’s settlement. That is adventitious. If he had not been a trustee then, on the reasoning of the majority of the Court of Appeal, the plaintiffs would have had no proprietary remedy at all, and would be left with a worthless personal claim against Mr. Murphy’s estate. The plaintiffs’ rights cannot turn on such chances as this.
The relevant proportions
Accordingly, I agree with Morritt L.J. in the Court of Appeal that, on well established principles, the parties are entitled to the proceeds of the policy in the proportions in which those proceeds represent their respective contributions. It should not, however, be too readily assumed that this means in the proportions in which the insurance premiums were paid with their money. These represent the cost of the contributions, not necessarily their value.
A mixed fund, like a physical mixture, is divisible between the parties who contributed to it rateably in proportion to the value of their respective contributions, and this must be ascertained at the time they are added to the mixture. Where the mixed fund consists of sterling or a sterling account or where both parties make their contributions to the mixture at the same time, there is no difference between the cost of the contributions and their sterling value. But where there is a physical mixture or the mixture consists of an account maintained in other units of account and the parties make their contributions at different times, it is essential to value the contributions of both parties at the same time. If this is not done, the resulting proportions will not reflect a comparison of like with like. The appropriate time for valuing the parties’ respective contributions is when successive contributions are added to the mixture.
This is certainly what happens with physical mixtures. If 20 gallons of A’s oil are mixed with 40 gallons of B’s oil to produce a uniform mixture of 60 gallons, A and B are entitled to share in the mixture in the proportions of 1 to 2. It makes no difference if A’s oil, being purchased later, cost £2 a gallon and B’s oil cost only £1 a gallon, so that they each paid out £40. This is because the mixture is divisible between the parties rateably in proportion to the value of their respective contributions and not in proportion to their respective cost. B’s contribution to the mixture was made when A’s oil was added to his, and both parties’ contributions should be valued at that date. Should a further 20 gallons of A’s oil be added to the mixture to produce a uniform mixture of 80 gallons at a time when the oil was worth £3 a gallon, the oil would be divisible equally between them. (A’s further 20 gallons are worth £3 a gallon–but so are the 60 gallons belonging to both of them to which they have been added). It is not of course necessary to go through the laborious task of valuing every successive contribution separately in sterling. It is simpler to take the account by measuring the contributions in gallons rather than sterling. This is merely a short cut which produces the same result.
In my opinion the same principle operates whenever the mixture consists of fungibles, whether these be physical assets like oil, grain or wine or intangibles like money in an account. Take the case where a trustee misappropriates trust money in a sterling bank account and pays it into his personal dollar account which also contains funds of his own. The dollars are, of course, merely units of account; the account holder has no proprietary interest in them. But no one, I think, would doubt that the beneficiary could claim the dollar value of the contributions made with trust money. Most people would explain this by saying that it is because the account is kept in dollars. But the correct explanation is that it is because the contributions are made in dollars. In order to allocate the fund between the parties rateably in proportion to the value of their respective contributions, it is necessary to identify the point at which the trust money becomes mixed with the trustee’s own money. This does not occur when the trustee pays in a sterling cheque drawn on the trust account. At that stage the trust money is still identifiable. It occurs when the bank credits the dollar equivalent of the sterling cheque to the trustee’s personal account. Those dollars represent the contribution made by the trust. The sterling value of the trust’s contribution must be valued at that time; and it follows that the trustee’s contributions, which were also made in dollars, must be valued at the same time. Otherwise one or other party will suffer the injustice of having his contributions undervalued.
Calculating the plaintiffs’ share
I finally come to the difficult question: how should the parties’ contributions, and therefore their respective shares in the proceeds, be calculated in the case of a unit-linked policy of the present kind? This makes it necessary to examine the terms of the policy in some detail.
All the reported cases have been concerned with ordinary policies of life assurance. In all the cases the insurance moneys have been shared between the parties in the proportions in which their money has been used to pay the premiums irrespective of the dates on which the premiums were paid. This favours the party who paid the later premiums at the expense of the party who paid the earlier ones. There is therefore a case for adding interest to the premiums in order to produce a fair result. This cannot be justified by the need to compensate the parties for the loss of the use of their money over different periods. It is not merely that this branch of the law is concerned with vindicating property rights and not with compensation for wrongdoing. It is that ex hypothesi the money has not been lost but used to produce the insurance money. But I think that taking account of interest can be justified nonetheless. The policy and its proceeds are not the product of the uninvested premiums alone. If they were, the sum assured would be very much smaller than it is. They are the product of the premiums invested at compound interest. It does not matter, of course, what the insurance company actually does with the money. What matters is how the sum assured is calculated, because this shows what it represents. In practice it represents the sum which would be produced by the premiums over the term of the expected life of the assured together with compound interest at the rate available at the inception of the policy on long term government securities. But the question has not been the subject of argument before us, and having regard to the mechanics of the present policy the calculations may not be worth doing. I agree therefore with my noble and learned friend Lord Hoffmann that there is no need to explore this aspect further.
Unit-linked policies, however, are very different. These policies have become popular in recent years, and are commonly employed for personal pension plans taken out by the self-employed. Under such a policy the premiums are applied by the insurance company in the acquisition of accumulation units in a designated fund usually managed by the insurance company. The bid and offer prices of the units are published daily in the financial press. The value of the units can go down as well as up, but since they carry the reinvested income their value can be expected to increase substantially over the medium and long term. The policy is essentially a savings medium, and (subject to tax legislation) can be surrendered at any time. On surrender the policyholder is entitled to the value of the units allocated to the policy. Early policies provided that on death the policyholder was entitled merely to the return of his premiums with interest, but more modern policies provide for payment of the value of the units in this event also.
Where money belonging to different parties is used to pay the premiums under a policy of this kind, it cannot be right to divide the proceeds of the policy crudely according to the number of premiums paid by each of them. The only sensible way of apportioning the proceeds of such a policy is by reference to the number of units allocated to the policy in return for each premium. This is readily ascertainable, since policyholders are normally issued with an annual statement showing the number of units held before receipt of the latest premium, the number allocated in respect of the premium, and the total number currently held. But in any case these numbers can easily be calculated from published material.
This would obviously be the right method to adopt if the policyholder acquired a proprietary interest in the units. These would fall to be dealt with in the same way as grain, oil or wine. There would of course still be a mixed substitution, since after the mixture neither party’s contributions can be identified. Neither can recover his own property, but only a proportion of the whole. Unlike Roman law, the common law applied the same principles whenever there is no means of identifying the specific assets owned by either party. In the United States they have been applied to logs, pork, turkeys, sheep and straw hats: see Dr. Lionel Smith, The Law of Tracing, at p. 70. In fact unit-linked policies normally provide that the policyholder has no proprietary interest in the units allocated to the policy. They are merely units of account. The absence of a proprietary interest in the units would be highly material in the event of the insolvency of the insurance company. But it should have no effect on the method of calculating the shares in which competing claimants are entitled to the proceeds of the policy. This depends upon the proportions in which they contributed to the acquisition of the policy, and the question is: in what units of account should the parties’ respective contributions be measured? Should they be measured in sterling, this being the currency in which the premiums were paid? Or should they be measured by accumulation units, if this was the unit of account into which the premiums were converted before the admixture took place? Principle, and the cases on physical mixtures, indicate that the second is the correct approach. A unit linked policy of the kind I have described is simply a savings account. The account is kept in units. The mixing occurs when the insurance company, having received a premium in sterling, allocates units to the account of the insured where they are at once indistinguishably mixed with the units previously allocated. The contribution made by each of the parties consists of the units, not merely of their sterling equivalent. The proceeds of a unit-linked policy should in my opinion be apportioned rateably between the parties in proportion to the value of their respective contributions measured in units, not in sterling.
The policy in the present case is only a variant of the unit-linked policy of the kind I have described. It is also primarily a savings medium but it offers an additional element of life assurance. This protects the assured against the risk of death before the value of the units allocated to the policy reaches a predetermined amount. On receipt of each premium, the insurance company allocates accumulation units in the designated fund to the policy (“the investment element”), and immediately thereafter cancels sufficient of the units to provide “the insurance element.” This is in effect an internal premium retained by the insurance company to provide the life cover. The amount of the internal premium is calculated each year by a complicated formula. The important feature of the formula for present purposes is that the internal premium is not calculated by reference to the sum assured of £1m. but by reference to the difference between the current value of the units allocated to the policy and the sum assured. As the value of the units increases, therefore, the amount of the internal premium should reduce. When their value is equal to or greater than the sum assured, no further internal premiums are payable. Thenceforth the policy is exactly like the kind of unit-linked policy described above. The policyholder is entitled to the investment element, ie. the value of the accumulated units, on death as well as on surrender.
If the policyholder dies at a time when the investment element is less than the sum assured, then he receives the sum assured. This is paid as a single sum, but it has two components with different sources. One is the investment element, which represents the value of the accumulated units at the date of death. The other is the insurance element, which is merely a balancing sum. It will be very large in the early years of the policy and will eventually reduce to nothing. It is the product of the internal premiums and is derived from the cancelled units. The internal premiums, however, though derived from the cancelled units, were credited to the account in sterling. The proceeds of the internal premiums, therefore, should be apportioned between the parties pro rata in the proportions in which those premiums were provided in sterling.
In my opinion the correct method of apportioning the sum assured between the parties is to deal separately with its two components. The investment element (which amounted to £39,347 at the date of death in the present case) should be divided between the parties by reference to the value at maturity of the units allocated in respect of each premium and not cancelled. The balance of the sum assured should be divided between the parties rateably in the proportions in which they contributed to the internal premiums. This is not to treat the allocated units as a real investment separate from the life cover when it was not. Nor is it to treat the method by which the benefits payable under the policy is calculated as determinative or even relevant. It is to recognise the true nature of the policy, and to give effect to the fact that the sum assured had two components, to one of which the parties made their contributions in units and to the other of which they made their contributions in the sterling proceeds of realised units.
These calculations require the policyholder’s account to be redrawn as two accounts, one for each party. The number of units allocated to the policy on the receipt of each premium should be credited to the account of the party whose money was used to pay the premium. The number of units so allocated should be readily ascertainable from the records of the insurance company, but if not it can easily be worked out. The number of units which were cancelled to provide the internal premium should then be ascertained in similar fashion and debited to the appropriate account. In the case of the earlier premiums paid with Mr. Murphy’s own money this will be the trustees’ account. In the case of the later premiums paid with the plaintiffs’ money, the cancelled units should not be debited wholly to the plaintiffs’ account, but rateably to the two accounts. The amount of the internal premiums should then be credited to the two accounts in the same proportions as those in which the cancelled units were debited to provide them.
This approach is substantially more favourable to the children than a crude allocation by reference to the premiums. By taking account of the value of the units, it automatically weights the earlier premiums which should have bought more units than the later ones. And it gives effect to the fact that, under the terms of the policy, both parties contributed to the later internal premiums which produced the greater part of the death benefit.
It is, of course, always open to the parties in any case to dispense with complex calculations and agree upon a simpler method of apportionment. But in my opinion the court ought not to do so without the parties’ consent. If it does, anomalies and inconsistencies will inevitably follow. Take the present case. The method of apportionment, with greatly differing results, ought not to depend upon whether the value of the units at the date of death is slightly more or slightly less than the sum assured. Yet once their value exceeds the amount of the sum assured, the policy becomes an ordinary unit-linked pension policy without an insurance element. If the sum assured is divided crudely in proportion requires that the same method be adopted for pension policies, which is surely wrong. If it is adopted for pension policies, then it is difficult to see how foreign currency assets can be treated differently, which is certainly wrong. There is an enormous variety of financial instruments. For present purposes they form a seamless web. Cutting corners in the interest of simplicity is tempting, but in my opinion the temptation ought to be resisted.
Conclusion
Accordingly I would allow the appeal. In my opinion the insurance money ought to be divided between the parties in the proportions I have indicated. But I am alone in adopting this approach, and as the question was not argued before us I am content that your Lordships should declare that the money should be divided between the parties in proportions in which they contributed to the premiums. For the reasons given by my noble and learned friend Lord Hope of Craighead, with which I agree, I would dismiss the children’s cross-appeal.
Boscawen & Ors. v Bajwa & Anor
[1995] EWCA Civ [1996] 1 WLR 328, [1995] 4 All ER 769, [1996] WLR 328
Millett LJ
TRACING
It is still a prerequisite of the right to trace in equity that there must be a fiduciary relationship which calls the equitable jurisdiction into being: see Agip (Africa) Ltd. v Jackson [1991] Ch 547 CA at p.566 per Fox LJ. That requirement is satisfied in the present case by the fact that from the first moment of its receipt by Dave in its general client account the £140,000 was trust money held in trust for the Abbey National. The Appellants do not dispute that the Abbey National can successfully trace £137,405 of its money into Hill Lawson’s client account. But they do dispute the judge’s finding that it can trace the sum further into the payment to the Halifax.
The £137,405 was paid into Hill Lawson’s general client account at the bank because it was only intended to be kept for a short time. Funds which were held for clients for any length of time were held in separate designated accounts. Hill Lawson’s ledger cards showed Mr. Bajwa as the relevant client. According to Mr. Duckney, Hill Lawson also held other funds for Mr. Bajwa which were the result of an inheritance which he had received. These were the source from which Hill Lawson made good the shortfall of £2,595 which arose when Dave’s cheque was dishonoured. The amount of these other funds is unknown, though it was certainly nothing like £140,000. The evidence does not show whether they were held in Hill Lawson’s general client account or whether they were held in a separate designated account. If they were held in the general client account, the £137,405 received from Dave was (quite properly) mixed not only with moneys belonging to other clients but also with money belonging to Mr. Bajwa. Hill Lawson can be presumed not to have committed a breach of trust by resorting to moneys belonging to other clients, but they were perfectly entitled to use Mr. Bajwa’s own money to discharge the Halifax’s charge on his property. Whether they did so or not cannot be determined in the absence of any evidence of the amount involved. Accordingly, it is submitted, the Abbey National has failed to establish how much of its money was applied in the discharge of the Halifax’s charge and how much of the money which was applied for this purpose was Mr. Bajwa’s own money.
The Abbey National answers this submission in two ways. First, it submits that Hill Lawson’s ledger cards show that Hill Lawson appropriated the £137,405 which it had received from Dave towards the payment of the sum of £140,000 to the Halifax, and resorted to Mr. Bajwa’s other funds only when Dave’s cheque for the balance was dishonoured. The ledger cards were, of course, made up after the event, though long before any litigation ensued, so they are not primary evidence of actual appropriation; but they are reliable evidence of the appropriation which Hill Lawson believed that they had made.
I accept this submission. It is not necessary to apply artificial tracing rules where there has been an actual appropriation. A trustee will not be allowed to defeat the claim of his beneficiary by saying that he has resorted to trust money when he could have made use of own; but if the beneficiary asserts that the trustee has made use of the trust money there is no reason why he should not be allowed to prove it.
The second way in which the Abbey National answers the Appellants’ submission is by reliance on equity’s ability to follow money through a bank account where it has been mixed with other moneys by treating the money in the account as charged with the repayment of his money. As against a wrongdoer the claimant is not obliged to appropriate debits to credits in order to ascertain where his money has gone. Equity’s power to charge a mixed fund with the repayment of trust moneys enables the claimant to follow the money, not because it is his, but because it is derived from a fund which is treated as if it were subject to a charge in his favour: see Re Hallett’s Estate, Knatchbull v Hallett (1880), 13 Ch.D. 696; Re Oatway, Hertslett v Oatway [1903] 2 Ch. 365; El Ajou v Dollar Land Holdings [1993] 3 All ER 717.
The Appellants accept this, but submit that for this purpose Mr. Bajwa was not a wrongdoer. He was, as I have said, not guilty of any impropriety or want of probity. He relied on his solicitors, and they acted unwisely, perhaps negligently, and certainly precipitately, but not dishonestly. Mr. Bajwa, it is submitted, was an innocent volunteer who mixed trust money with his own. As such, he was not bound to give priority to the Abbey National, but could claim parity with it. Accordingly, Mr. Bajwa and the Abbey National must be treated as having contributed pari passu to the discharge of the Halifax’s charge; and in the absence of the necessary evidence the amounts which were provided by Mr. Bajwa and the Abbey National respectively cannot be ascertained. (In fact, on this footing the Abbey National would be entitled to succeed to the extent of one half of its claim, but that is by the way).
For this proposition the Appellants rely on a passage in Re Diplock [1948] 465 CA at p.524 which is as follows:
“Where an innocent volunteer (as distinct from a purchaser for value without notice) mixes ‘money’ of his own with ‘money’ which in equity belongs to another person, or is found in possession of such a mixture, although that other person cannot claim a charge on the mass superior to the claim of the volunteer he is entitled, nevertheless, to a charge ranking pari passu with the claim of the volunteer. ……………….
But this burden on the conscience of the volunteer is not such as to compel him to treat the claim of the equitable owner as paramount. That would be to treat the volunteer as strictly as if he himself stood in a fiduciary relationship to the equitable owner which ex hypothesi he does not. The volunteer is under no greater duty of conscience to recognize the interest of the equitable owner than that which lies upon a person having an equitable interest in one of two trust funds of ‘money’ which have become mixed towards the equitable owner of the other. Such a person is not in conscience bound to give precedence to the equitable owner of the other of the two funds.”
This would be highly relevant if the distinction which the court was there making was between the honest and the dishonest recipient. But it was not. The distinction was between the innocent recipient who had no reason to suspect that the money was not his own to dispose of as he pleased, and the recipient who knew or ought to have known that the money belonged to another. In Re Diplock the defendants were the recipients of grants made to them by the personal representatives of a deceased testator in accordance with the terms of the residuary gift in his will. The gift was afterwards held by the House of Lords to be ineffective, with the result that the testator’s residue passed on intestacy. The next of kin then brought proceedings to recover the moneys paid away. The defendants found themselves in an unenviable position. Not only had they received the money honestly and in good faith, but they had had no reason to think that it was not theirs. There was no question of their having consciously mixed money which belonged to another with their own.
But the present case is very different. Neither Mr. Bajwa nor his solicitors acted dishonestly, but nor were they innocent volunteers. Hill Lawson knew that the money was trust money held to Dave’s order pending completion and that it would become available for use on behalf of their client only on completion. They were manifestly fiduciaries. Mr. Bajwa, who was plainly intending to redeem the Halifax’s mortgage out of the proceeds of sale of the property, must be taken to have known that any money which his solicitors might receive from the purchasers or their mortgagees would represent the balance of the proceeds of sale due on completion and that, since he had made no arrangement with the purchasers to be advanced any part of that amount before completion, it would be available to him only on completion. He cannot possibly have thought that he could keep both the property and the proceeds of sale. Had he thought about the matter at all, he would have realised that the money was not his to mix with his own and dispose of as he saw fit. The only reason that he and his solicitors can be acquitted of dishonesty is that he relied on his solicitors and they acted in the mistaken belief that, save for the tidying up of some loose ends, they were on the point of completing.
It follows that Mr. Bajwa cannot avail himself of the more favourable tracing rules which are available to the innocent volunteer who unconsciously mixes trust money with his own.
SUBROGATION
The Appellants submit that the mere fact that the claimant’s money is used to discharge someone else’s debt does not entitle him to be subrogated to the creditor whose debt is paid. There must be “something more “: Paul v Speirway [1976] Ch. 220 at p. 230 per Oliver J; and see Orakpo v Manson Investments Ltd. where Lord Diplock said at p. 105::
“The mere fact that money lent has been expended upon 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.”
From this the Appellants derive the proposition that in order to be subrogated to the creditor’s security the claimant must prove (i) that the claimant intended that his money should be used to discharge the security in question (that being the “something more” required by Oliver J.) and (ii) that he intended to obtain the benefit of the security by subrogation. I cannot accept that formulation as a rule of general application regardless of the circumstances in which the remedy of subrogation is sought. The cases relied on were all cases where the claimant intended to make an unsecured loan to a borrower who used the money to discharge a secured debt. In such a case the claimant is not entitled to be subrogated to the creditor’s security since this would put him in a better position than he had bargained for. Oliver J. was not prepared to say more than that:
“It is always dangerous to try to lay down general principles unnecessarily, but it does seem to me to be safe to say this: 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. That really, as it seems to me, is to say no more than that the question of subrogation or no subrogation cannot be divorced from a review of the rights proved or presumed to be intended to be created between the payer of the money and the person requiring its payment.”
In that passage Oliver J was plainly limiting his observations to a claim to be subrogated to the creditor’s security. The mere fact that the payer of the money intended to make an unsecured loan will not preclude his claim to be subrogated to the personal rights of the creditor whose debt is discharged if the contractual liability of the original borrower proves to be unenforceable: see, for example, Re Wrexham, Mold and Connah’s Quay Railway Co. [1899] 1 Ch. 440 (where the borrowing was ultra vires ); Liggett (Liverpool) Ltd. v Barclays Bank Ltd. [1928] 1 KB 48 (where the borrowing was unauthorised).
In Orakpo v Manson Investments Ltd. Lord Diplock pointed out (at p. 104) that the remedy of subrogation was available in a whole variety of widely different circumstances, and that this made
“particularly perilous any attempt to rely upon analogy to justify applying to one set of circumstances which would otherwise result in unjust enrichment a remedy of subrogation which has been held to be available for that purpose in another and different set of circumstances.”
The converse is equally true. It is perilous to extrapolate from one set of circumstances where the court has required a particular precondition to be satisfied before the remedy of subrogation can be granted a general rule which makes that requirement a precondition which must be satisfied in other and different circumstances. In the present case there was no relevant transaction between Abbey National (“the payer of the money”) and Mr. Bajwa (“the person at whose instigation it was paid”). This does not mean that the test laid down by Oliver J in Paul v Speirway has not been satisfied; it means that the test is not applicable. In Butler v Rice [1910] 2 Ch. 277 the fact that the debtor had not requested the claimant to make the payment and did not know of the transaction was held to be immaterial. This is not to say that intention is necessarily irrelevant in a case of the present kind; it is to say only that where the payment was made by a third party and the claimant had no intention to make any payment to or for the benefit of the recipient the relevant intention must be that of the third party.
In cases such as Butler v Rice and Ghana Commercial Bank v Chandiram [1960] AC 732, where the claimant paid the creditor direct and intended to discharge his security, the court took the claimant’s intention to have been to keep the original security alive for his own benefit save in so far as it was replaced by an effective security in favour of himself. In the present case the Abbey National did not intend to discharge the Halifax’s charge in the events which happened, that is to say in the event that completion did not proceed. But it did not intend its money to be used at all in that event. If Butler v Rice and similar cases are relied upon to support the proposition that there can be no subrogation unless the claimant intended to keep the original security alive for its own benefit save insofar as it was replaced by a new and effective security, with the result that the remedy is not available where the claimant had no direct dealings with the creditor and did not intend his money to be used at all, then I respectfully dissent from that proposition. I prefer the view of Slade LJ in Re T.H. Knitwear (Wholesale) Ltd. that in some situations the doctrine of subrogation is capable of applying even though it is impossible to infer a mutual intention to this effect on the part of the creditor and the person claiming to be subrogated to the creditor’s security. In the present case the payment was made by Hill Lawson, and it is their intention which matters. As fiduciaries, they could not be heard to say that they had paid out their principal’s money otherwise than for the benefit of their principal. Accordingly, their intention must be taken to have been to keep the Halifax’s charge alive for the benefit of the Abbey National pending completion. In my judgment this is sufficient to bring the doctrine of subrogation into play.
The application of the doctrine in the present case does not create the problem which confronted Oliver J. in Paul v Speirway. The Abbey National did not intend to be an unsecured creditor of anyone. It intended to retain the beneficial interest in its money unless and until that interest was replaced by a first legal mortgage on the property. The factual context in which the claim to subrogation arises is a novel one which does not appear to have arisen before, but the justice of its claim cannot be denied. The Abbey National’s beneficial interest in the money can no longer be restored to it. If it is subrogated to the Halifax’s charge its position will not be improved nor will Mr. Bajwa’s position be adversely affected. Both parties will be restored as nearly as may be to the positions which they were respectively intended to occupy.
The Appellants place much reliance on a passage in Re Diplock at pp. 549-550 where the court was dealing with the claim against the Leaf Homoeopathic Hospital. The Hospital received a grant for the specific purpose of enabling it to pay off a secured bank loan. The passage in question is as follows:
“Here, too, we think that the effect of the payment to the bank was to extinguish the debt and the charge held by the bank ceased to exist. The case cannot, we think, be regarded as one of subrogation, and if the appellants were entitled to a charge it would have to be a new charge created by the court. The position in this respect does not appear to us to be affected by the fact that the payment off of this debt was one of the objects for which the grant was made. The effect of the payment off was that the charity, which had previously held only an equity of redemption, became the owners of unincumbered property. That unincumbered property derived from a combination of two things, the equity of redemption contributed by the charity and the effect of the Diplock money in getting rid of the incumbrance. If equity is now to create a charge (and we say ‘create’ because there is no survival of the original charge) in favour of the judicial trustee, it will be placing him in a position to insist upon a sale of what was contributed by the charity. The case, as it appears to us, is in effect analogous to the cases where Diplock money is expended on improvements on charity land. The money was in this case used to remove a blot on the title; to give the judicial trustee a charge in respect of the money so used would, we think, be equally unjust to the charity who, as the result of such a charge, would have to submit to a sale of the interest in the property which it brought in. We may point out that if the relief claimed were to be accepted as a correct application of the equitable principle, insoluble problems might arise in a case where in the meanwhile fresh charge on the property had been created or money had been expended upon it.”
The passage is not without its difficulties, and is in need of reappraisal in the light of the significant developments in the law of restitution which have taken place in the last 50 years. The second sentence is puzzling. The discharge of the creditor’s security at law is certainly not a bar to subrogation in equity; it is rather a precondition. But the court was probably doing no more than equate the remedy to the creation of a new charge for the purpose of considering whether this was justified.
It is also unclear what conclusion was thought to follow from the observation that the unincumbered property derived from two sources, the equity of redemption contributed by the charity and the money belonging to the next of kin which was used to redeem the mortgage. If the money had been used to buy the property without any contribution from the charity, the next of kin would have sought a declaration that they were solely and beneficially entitled to the property under a constructive trust. Their claim to be subrogated to the security which had been discharged with their money reflected the respective contributions which they and the charity had made and did not encroach upon the charity’s equity of redemption at all.
Nor is it clear to me why insoluble problems would arise in a case where there had been fresh charges created on the property in the meantime. The next of kin would obtain a charge by subrogation with the same priority as the charge which had been redeemed except that it would not enjoy the paramountcy of the legal estate. A subsequent incumbrancer who obtained a legal estate for value without notice of the interest of the next of kin would take free from it. It is not necessary to decide whether a subsequent incumbrancer who took an equitable charge only would take free from the interest of the next of kin; the question has not yet arisen for decision, but it is not insoluble.
Taken as a whole, however, the passage cited is an explanation of the reasons why,in the particular circumstances of that case, it was considered unjust to grant the remedy of subrogation. The Hospital had changed its position to its detriment. It had in all innocence used the money to redeem a mortgage held by its bank which, no doubt, was willing to allow its advance to remain outstanding indefinitely so long as it was well secured and the interest was paid punctually. The next of kin were seeking to be subrogated to the bank’s security in order to enforce it and enable a proper distribution of the estate to be made. This would have been unjust to the Hospital. It may be doubted whether, in its anxiety to avoid injustice to the Hospital, the court may not have done an even greater injustice to the next of kin, who were denied even the interest on their money. Justice did not require the withholding of any remedy, but only that the charge by subrogation should not be enforceable until the Hospital had had a reasonable opportunity to obtain a fresh advance on suitable terms from a willing lender, perhaps from the bank which had held the original security.
Today considerations of this kind would be regarded as relevant to a change of position defence rather than as going to liability. They do not call for further consideration in the present case.
ADOPTION.
The Appellant’s submissions on adoption and ratification are misconceived. The short answer to them is that the right to follow an asset, whether at common law or in equity, does not depend on adoption or ratification. In the leading case of Taylor v Plumer (1815), 3 M. & S. 562 Lord Ellenborough CJ pointed out that, had the successful party’s case depended on ratification, it must fail; in United Australia Ltd. v Barclay’s Bank Ltd. [1941] AC 1 at pp. 27-29 Lord Atkin exposed the doctrine as a fiction; and in Karpnale Ltd v Lipkin Gorman, after pointing out that tracing or following property into its product involves a decision by the original owner to assert his title to the product in place of his original property, Lord Goff at p. 573 said that this was sometimes referred to as ratification, but that he himself would not so describe it. In Agip (Africa) Ltd. v Jackson [1990] Ch. 265 the money was paid away by the bank in reliance on a forged payment order. It was argued that a forgery is a nullity and that the plaintiffs could not ratify it. It was pointed out that the plaintiffs did not rely on the forgery but on the bank’s want of authority. They did not seek to ratify the payment or treat it as made with their authority; on the contrary, they pleaded that it was made without their authority and sought to recover it on that very ground.
In my view Counsel for the Abbey National was correct in analysing the doctrine in play as one of election between remedies. The beneficiary who complains that his trustee has committed a breach of trust by using trust money to acquire an asset for himself may either reject the asset and insist that the trustee replace the money, or assert his title to the asset. In the latter case the breach of trust of which he complains is the trustee’s retention of the asset for his own benefit. The fact that he does not also complain of the acquisition of the asset but seeks to take advantage of it does not mean that he adopts or ratifies it – he will almost certainly plead that it was a breach of trust – it means only that he does not seek a remedy in respect of it. There is no justification for the proposition that the Abbey National’s right to be subrogated to the Halifax’s charge did not arise until the Abbey National elected to seek that remedy.
Nor in my judgment is there any justification for the proposition that the Abbey National’s right to be subrogated to the Halifax’s charge did not arise until the court made the necessary order. The order merely satisfied a pre-existing equity. The Abbey National’s equity arose from the conduct of the parties. It arose at the very moment that the Halifax’s charge was discharged in whole or in part with the Abbey National’s money. It arose because, having regard to the circumstances in which the Halifax’s charge was discharged, it would have been unconscionable for Mr. Bajwa to assert that it had been discharged for his benefit. At law, Mr. Bajwa became the owner of an unincumbered freehold interest in the property; but he never did, even for an instant, in equity.
Lipkin Gorman v Karpnale
[1988] UKHL 12 [1991] 3 WLR 10, [1991] 2 AC 548, [1988] UKHL 12
Lord Goff
The solicitors’ appeal
I turn then to the solicitors’ appeal in respect of the
money, which they claim from the respondents as money had and
received by the respondents to their use. To consider this aspect
of the case it is, in my opinion, necessary to analyse with some
care the nature of the claim so made.
The solicitors’ claim is, in substance, as follows. They say,
first, that the cash handed over by the bank to Chapman in
exchange for the cheques drawn on the solicitors’ client account
by Cass was in law the property of the solicitors. That is
disputed by the respondents who say that, since the cheques were
drawn on the bank by Cass without the authority of his partners,
the legal property in the money immediately vested in Cass; that
argument was however rejected by the Court of Appeal. If that
argument is rejected, the respondents concede for present purposes
that the cash so obtained by Cass from the client account was
paid by him to the club, but they nevertheless resist the solicitors’
claim on two grounds: first, that they gave valuable consideration
for the money in good faith, as held by a majority of the Court
of Appeal; and second that, in any event, having received the
money in good faith and having given Cass the opportunity of
winning bets and, in some cases, recovering substantial sums by
way of winnings, it would be inequitable to allow the solicitors’
claim.
At the heart of the solicitors’ claim lies Clarke v. Shee and
Johnson (1774) 1 Cowp. 197, Lofft. 756. In that case the
plaintiff’s clerk received money and negotiable notes from the
plaintiff’s customers, in the ordinary course of the plaintiff’s trade
as a brewer, for the use of the plaintiff. From the sums so
received by him, the clerk paid several sums, amounting to nearly
£460, to the defendant “upon the chances of the coming up of
tickets in the State Lottery of 1772,” contrary to the Lottery Act
1772. The Court of Queen’s Bench held that the plaintiff was
entitled to recover the sum of £460 from the defendant as money
had and received by him for the use of the plaintiff. The
judgment of the court was delivered by Lord Mansfield. He said,
1 Cowp. 197, 199-201:
“This is a liberal action in the nature of a bill in equity;
and if, under the circumstances of the case, it appears that
the defendant cannot in conscience retain what is the
subject matter of it, the plaintiff may well support this
action . . . the plaintiff does not sue as standing in the
place of Wood his clerk: for the money and notes which
Wood paid to the defendants, are the identical notes and
money of the plaintiff. Where money or notes are paid
bona fide, and upon a valuable consideration, they never
shall be brought back by the true owner; but where they
come mala fide into a person’s hands, they are in the
nature of specific property; and if their identity can be
traced and ascertained, the party has a right to recover. It
is of public benefit and example that it should; but
otherwise, if they cannot be followed and identified, because
there it might be inconvenient and open a door to fraud.
Miller v. Race, 1 Burr. 452: and in Golightly v. Reynolds
(1772) Lofft. 88 the identity was traced through different
hands and shops. Here the plaintiff sues for his identified
property, which has come to the hands of the defendant
iniquitously and illegally, in breach of the Act of
Parliament, therefore they have no right to retain it: and
consequently the plaintiff is well entitled to recover.”
It is the solicitors’ case that the present case is indistinguishable
from Clarke v. Shee and Johnson. In each case, the plaintiff’s
money was stolen – in that case by his servant, and in the present
case by a partner – and then gambled away by the thief; and the
plaintiff was or should be entitled to recover his money from the
recipient in an action for money had and received. It is the
respondents’ case that the present case is distinguishable on one or
more of the three grounds I have mentioned. I shall consider
those three grounds in turn.
Title to the money
The first ground is concerned with the solicitors’ title to
the money received by Cass (through Chapman) from the bank. It
is to be observed that the present action, like the action in Clarke
v. Shee and Johnson, is concerned with a common law claim to
money, where the money in question has not been paid by the
appellant directly to the respondents – as is usually the case where
money is, for example, recoverable as having been paid under a
mistake of fact, or for a consideration which has failed. On the
contrary, here the money had been paid to the respondents by a
third party, Cass; and in such a case the appellant has to establish
a basis on which he is entitled to the money. This (at least, as a
general rule) he does by showing that the money is his legal
property, as appears from Lord Mansfield’s judgment in Clarke v.
Shee and Johnson. If he can do so, he may be entitled to succeed
in a claim against the third party for money had and received to
his use, though not if the third party has received the money in
good faith and for a valuable consideration. The cases in which
such a claim has succeeded are, I believe, very rare (see the
cases, including Clarke v. Shee and Johnson, collected in Goff and
Jones, The Law of Restitution, 3rd ed. (1986), p. 64, note 29).
This is probably because, at common law, property in money, like
other fungibles, is lost as such when it is mixed with other money.
Furthermore, it appears that in these cases the action for money
had and received is not usually founded upon any wrong by the
third party, such as conversion; nor is it said to be a case of
waiver of tort. It is founded simply on the fact that, as Lord
Mansfield said, the third party cannot in conscience retain the
money – or, as we say nowadays, for the third party to retain the
money would result in his unjust enrichment at the expense of the
owner of the money.
So, in the present case, the solicitors seek to show that the
money in question was their property at common law. But their
claim in the present case for money had and received is
nevertheless a personal claim; it is not a proprietary claim,
advanced on the basis that money remaining in the hands of the
respondents is their property. Of course there is no doubt that,
even if legal title to the money did vest in Cass immediately on
receipt, nevertheless he would have held it on trust for his
partners, who would accordingly have been entitled to trace it in
equity into the hands of the respondents. However, your Lordships
are not concerned with an equitable tracing claim in the present
case, since no such case is advanced by the solicitors, who have
been content to proceed at common law by a personal action, viz.
an action for money had and received. I should add that, in the
present case, we are not concerned with the fact that money
drawn by Cass from the solicitors’ client account at the bank may
have become mixed by Cass with his own money before he
gambled it away at the club. For the respondents have conceded
that, if the solicitors can establish legal title to the money in the
hands of Cass, that title was not defeated by mixing of the money
with other money of Cass while in his hands. On this aspect of
the case, therefore, the only question is whether the solicitors can
establish legal title to the money when received by Cass from the
bank by drawing cheques on the client account without authority.
Before your Lordships, and no doubt before the courts
below, elaborate argument was advanced by counsel upon this
issue. The respondents relied in particular upon two decisions of
the Privy Council as showing that where a partner obtains money
by drawing on a partnership bank account without authority, he
alone and not the partnership obtains legal title to the money so
obtained. These cases. Union Bank of Australia Ltd, v. McClintock
[[1922] 1 A.C, 240 and Commercial Banking Co. of Sydney Ltd, v.
Mann [1961] AC 1, were in fact concerned with bankers’ cheques:
but for the respondents it was submitted that the same principle
was applicable in the case of cash. The solicitors argued that
these cases were wrongly decided, or alternatively sought to
distinguish them on a number of grounds. I shall have to examine
these cases in some detail when I come to consider the
respondents’ cross-appeal in respect of the banker’s draft; and, as
will then appear, I am not prepared to depart from decisions of
such high authority as these. They show that, where a banker’s
cheque payable to a third party or bearer is obtained by a partner
from a bank which has received the authority of the partnership to
pay the partner in question who has, however, unknown to the
bank, acted beyond the authority of his partners in so operating
the account, the legal property in the banker’s cheque thereupon
vests in the partner. The same must a fortiori be true when it is
not such a banker’s cheque but cash which is so drawn from the
bank by the partner in question. Even so, I am satisfied that the
solicitors are able to surmount this difficulty, as follows.
It is well established that a legal owner is entitled to trace
his property into its product, provided that the latter is indeed
identifiable as the product of his property. Thus, in Taylor v.
Plumer (1815) 3 M. & S. 562, where Sir Thomas Plumer gave a
draft to a stockbroker for the purpose of buying exchequer bills,
and the stockbroker instead used the draft for buying American
securities and doubloons for his own purposes, Sir Thomas was able
to trace his property into the securities and doubloons in the hands
of the stockbroker, and so defeat a claim made to them by the
stockbroker’s assignees in bankruptcy. Of course, “tracing” or
“following” property into its product involves a decision by the
owner of the original property to assert his title to the product in
place of his original property. This is sometimes referred to as
ratification. I myself would not so describe it; but it has, in my
opinion, at least one feature in common with ratification, that it
cannot be relied upon so as to render an innocent recipient a
wrongdoer (cf. Bolton Partners v. Lambert (1889) 41 Ch.D. 295,
307, per Cotton L.J. – “an act lawful at the time of its
performance [cannot] be rendered unlawful, by the application of
the doctrine of ratification.”)
I return to the present case. Before Cass drew upon the
solicitors’ client account at the bank, there was of course no
question of the solicitors having any legal property in any cash
lying at the bank. The relationship of the bank with the solicitors
was essentially that of debtor and creditor; and since the client
account was at ail material times in credit, the bank was the
debtor and the solicitors were its creditors. Such a debt
constitutes a chose in action, which is a species of property; and
since the debt was enforceable at common law, the chose in
action was legal property belonging to the solicitors at common
law.
There is in my opinion no reason why the solicitors should
not be able to trace their property at common law in that chose
in action, or in any part of it, into its product, i.e. cash drawn by
Cass from their client account at the bank. Such a claim is
consistent with their assertion that the money so obtained by Cass
was their property at common law. Further, in claiming the
money as money had and received, the solicitors have not sought
to make the respondents liable on the basis of any wrong, a point
which will be of relevance at a later stage, when I come to
consider the defence of change of position.
Authority for the solicitors’ right to trace their property in
this way is to be found in the decision of your Lordships’ House in
Marsh v. Keating (1834) 1 Bing. (N.C.) 198. Mrs. Keating was the
proprietor of £12,000 interest or share in joint stock reduced 3 per
cent. annuities, standing to her credit in the books of the Bank of
England, where the accounts were entered in the form of debtor
and creditor accounts in the ledgers of the bank. Under what
purported to be a power of attorney given by Mrs. Keating to the
firm of Marsh, Sibbard & Co., on which Mrs. Keating’s signature
was in fact forged by Henry Fauntleroy, a partner in Marsh,
Sibbard & Co., an entry was made in the books of the Bank of
England purporting to transfer £9,000 of Mrs. Keating’s interest or
share in the stock to William Tarbutt, to whom, on the
instructions of Henry Fauntleroy, the stock had been sold for the
sum of £6,018 15s. In due course, the broker who conducted the
sale accounted for £6,013 2s.6d. (being the sale price less
commission) by a cheque payable to Marsh & Co. Upon the
discovery of the forgery, Mrs. Keating made a claim upon the
Bank of England; and the bank requested Mrs. Keating to prove in
the bankruptcy of the partners in Marsh & Co. in respect of the
sum so received by them. Mrs. Keating then commenced an
action, pursuant to an order of the Lord Chancellor, for the
purpose of trying the question whether the partners in Marsh &
Co. were indebted to her, in which she claimed the sum so
received by Marsh & Co. as money had and received to her use.
The opinion of the judges was taken, and their opinion was to the
effect that Mrs. Keating was entitled to succeed in her claim.
Your Lordships’ House ruled accordingly. It must follow a fortiori
that the solicitors, as owners of the chose in action constituted by
the indebtedness of the bank to them in respect of the sums paid
into the client account, could trace their property in that chose in
action into its direct product, the money drawn from the account
by Cass. It further follows, from the concession made by the
respondents, that the solicitors can follow their property into the
hands of the respondents when it was paid to them at the club.
Whether the respondents gave consideration for the money
There is no doubt that the respondents received the money
in good faith; but, as I have already recorded, there was an acute
difference of opinion among the members of the Court of Appeal
whether the respondents gave consideration for it. Parker L.J.
was of opinion that they did so, for two reasons:
(1) The club supplied chips in exchange for the money.
The contract under which the chips were supplied was a separate
contract, independent of the contracts under which bets were
placed at the club; and the contract for the chips was not avoided
as a contract by way of gaming and wagering under section 18 of
the Gaming Act 1845.
(2) Although the actual gaming contracts were void under
the Act, nevertheless Cass in fact obtained in exchange for the
money the chance of winning and of then being paid and so
received valuable consideration from the club.
May L.J. agreed with the first of these two reasons.
Nicholls L.J. disagreed with both.
I have to say at once that I am unable to accept the
alternative basis upon which Parker L.J. held that consideration
was given for the money, viz. that each time Cass placed a bet at
the casino, he obtained in exchange the chance of winning and
thus of being paid. In my opinion, when Cass placed a bet, he
received nothing in return which constituted valuable consideration.
The contract of gaming was void; in other words, it was binding in
honour only. Cass knew, of course, that, if he won his bet, the
club would pay him his winnings. But he had no legal right to
claim them. He simply had a confident expectation that, in fact,
the club would pay; indeed, if the club did not fulfil its obligations
binding in honour upon it, it would very soon go out of business.
But it does not follow that, when Cass placed the bet, he received
anything that the law recognises as valuable consideration. In my
opinion he did not do so. Indeed, to hold that consideration had
been given for the money on this basis would, in my opinion, be
inconsistent with Clarke v. Shee and Johnson (1774) 1 Cowp. 197,
Lofft 756. Even when a winning bet has been paid, the gambler
does not receive valuable consideration for his money. All that he
receives is, in law, a gift from the club.
However, the first basis upon which Parker and May L.JJ.
decided the point is more difficult. To that I now turn.
In common sense terms, those who gambled at the club
were not gambling for chips: they were gambling for money. As
Davies L.J. said in C.H.T. Ltd, v. Ward [1965] 2 Q.B. 63, 79:
“People do not game in order to win chips; they game
in order to win money. The chips are not money or
money’s worth; they are mere counters or symbols used for
the convenience of all concerned in the gaming.”
The convenience is manifest, especially from the point of view of
the club. The club has the gambler’s money up front, and large
sums of cash are not floating around at the gaming tables. The
chips are simply a convenient mechanism for facilitating gambling
with money. The property in the chips as such remains in the
club, so that there is no question of a gambler buying the chips
from the club when he obtains them for cash.
But this broad approach does not solve the problem, which
is essentially one of analysis. I think it best to approach the
problem by taking a situation unaffected by the impact of the
Gaming Acts.
Suppose that a large department store decides, for reasons
of security, that all transactions in the store are to be effected
by the customers using chips instead of money. On entering the
store, or later, the customer goes to the cash desk and obtains
chips to the amount he needs in exchange for cash or a cheque.
When he buys goods, he presents chips for his purchase. Before he
leaves the store, he presents his remaining chips, and receives cash
in return. The example may be unrealistic, but in legal terms it
is reasonably straightforward. A contract is made when the
customer obtains his chips under which the store agrees that, if
goods are purchased by the customer, the store will accept chips
to the equivalent value of the price, and further that it will
redeem for cash any chips returned to it before the customer
leaves the store. If a customer offers to buy a certain item of
goods at the store, and the girl behind the counter accepts his
offer but then refuses to accept the customer’s chips, the store
will be in breach of the contract for chips. Likewise if, before he
leaves the store, the customer hands in some or all of his chips
at the cash desk, and the girl at the cash desk refuses to redeem
them, the store will be in breach of the contract for chips.
Each time that a customer buys goods, he enters into a
contract of sale, under which the customer purchases goods at the
store. This is a contract for the sale of goods; it is not a
contract of exchange, under which goods are exchanged for chips,
but a contract of sale, under which goods are bought for a price,
i.e. for a money consideration. This is because, when the
customer surrenders chips of the appropriate denomination, the
store appropriates part of the money deposited with it towards the
purchase. This does not however alter the fact that an
independent contract is made for the chips when the customer
originally obtains them at the cash desk. Indeed that contract is
not dependent upon any contract of sale being entered into; the
customer could walk around the store and buy nothing, and then be
entitled to redeem his chips in full under the terms of his
contract with the store.
But the question remains: when the customer hands over his
cash at the cash desk, and receives his chips, does the store give
valuable consideration for the money so received by it? In
common sense terms, the answer is no. For, in substance and in
reality, there is simply a gratuitous deposit of the money with the
store, with liberty to the customer to draw upon that deposit to
pay for any goods he buys at the store. The chips are no more
than the mechanism by which that result is achieved without any
cash being handed over at the sales counter, and by which the
customer can claim repayment of any balance remaining of his
deposit. If a technical approach is adopted, it might be said that,
since the property in the money passes to the store as depositee,
it then gives consideration for the money in the form of a chose
in action created by its promise to repay a like sum, subject to
draw-down in respect of goods purchased at the store. I however
prefer the common sense approach. Nobody would say that the
store has purchased the money by promising to repay it: the
promise to repay is simply the means of giving effect to the
gratuitous deposit of the money with the store. It follows that,
by receiving the money in these circumstances, the store does not
for present purposes give valuable consideration for it. Otherwise
a bank with which money was deposited by an innocent donee from
a thief could claim to be a bona fide purchaser of the money
simply by virtue of the fact of the deposit.
Let me next take the case of gambling at a casino. Of
course, if gaming contracts were not void under English law by
virtue of section 18 of the Gaming Act 1845, the result would be
exactly the same. There would be a contract in respect of the
chips, under which the money was deposited with the casino; and
then separate contracts would be made when each bet was placed,
at which point of time part or all of the money so deposited
would be appropriated to the bets.
However, contracts by way of gaming or wagering are void
in English law. What is the effect of this? It is obvious that
each time a bet is placed by the gambler, the agreement under
which the bet is placed is an agreement by way of gaming or
wagering, and so is rendered null and void. It follows, as I have
said, that the casino, by accepting the bet, does not thereby give
valuable consideration for the money which has been wagered by
the gambler, because the casino is under no legal obligation to
honour the bet. Of course, the gambler cannot recover the money
from the casino on the ground of failure of consideration; for he
has relied upon the casino to honour the wager – he has in law
given the money to the casino, trusting that the casino will fulfil
the obligation binding in honour upon it and pay him if he wins his
bet – though if the casino does so its payment to the gambler will
likewise be in law a gift. But suppose it is not the gambler but
the true owner of the money (from whom the gambler has perhaps,
as in the present case, stolen the money) who is claiming it from
the casino. What then? In those circumstances the casino cannot,
in my opinion, say that it has given valuable consideration for the
money, whether or not the gambler’s bet is successful. It has
given no consideration if the bet is unsuccessful, because its
promise to pay on a successful bet is void; nor has it done so if
– 20 –
the gambler’s bet is successful and the casino has paid him his
winnings, because that payment is in law a gift to the gambler by
the casino.
For these reasons I conclude, in agreement with Nicholls
L.J., that the respondents did not give valuable consideration for
the money. But the matter does not stop there; because there
remains the question whether the respondents can rely upon the
defence of change of position.
Change of position
I turn then to the last point on which the respondents relied
to defeat the solicitors’ claim for the money. This was that the
claim advanced by the solicitors was in the form of an action for
money had and received, and that such a claim should only
succeed where the defendant was unjustly enriched at the expense
of the plaintiff. If it would be unjust or unfair to order
restitution, the claim should fail. It was for the court to consider
the question of injustice or unfairness, on broad grounds. If the
court thought that it would be unjust or unfair to hold the
respondents liable to the solicitors, it should deny the solicitors
recovery. Mr. Lightman, for the club, listed a number of reasons
why, in his submission, it would be unfair to hold the respondents
liable. These were (1) the club acted throughout in good faith,
ignorant of the fact that the money had been stolen by Cass; (2)
although the gaming contracts entered into by the club with Cass
were ail void, nevertheless the club honoured all those contracts;
(3) Cass was allowed to keep his winnings (to the extent that he
did not gamble them away); (4) the gaming contracts were merely
void not illegal; and (5) the solicitors’ claim was no different in
principle from a claim to recover against an innocent third party
to whom the money was given and who no longer retained it.
I accept that the solicitors’ claim in the present case is
founded upon the unjust enrichment of the club, and can only
succeed if, in accordance with the principles of the law of
restitution, the club was indeed unjustly enriched at the expense of
the solicitors. The claim for money had and received is not, as I
have previously mentioned, founded upon any wrong committed by
the club against the solicitors. But it does not, in my opinion,
follow that the court has carte blanche to reject the solicitors’
claim simply because it thinks it unfair or unjust in the
circumstances to grant recovery. The recovery of money in
restitution is not, as a general rule, a matter of discretion for the
court. A claim to recover money at common law is made as a
matter of right; and even though the underlying principle of
recovery is the principle of unjust enrichment, nevertheless, where
recovery is denied, it is denied on the basis of legal principle.
It is therefore necessary to consider whether Mr. Lightman’s
submission can be upheld on the basis of legal principle. In my
opinion it is plain, from the nature of his submission, that he is in
fact seeking to invoke a principle of change of position, asserting
that recovery should be denied because of the change in position
of the respondents, who acted in good faith throughout.
Whether change of position is, or should be, recognised as a
defence to claims in restitution is a subject which has been much
debated in the books. It is however a matter on which there is a
remarkable unanimity of view, the consensus being to the effect
that such a defence should be recognised in English law. I myself
am under no doubt that this is right.
Historically, despite broad statements of Lord Mansfield to
the effect that an action for money had and received will only lie
where it is inequitable for the defendant to retain the money (see
in particular Moses v. Macferlan (1760) 2 Burr. 1005), the defence
has received at most only partial recognition in English law. I
refer to two groups of cases which can arguably be said to rest
upon change of position: (1) where an agent can defeat a claim to
restitution on the ground that, before learning of the plaintiff’s
claim, he has paid the money over to his principal or otherwise
altered his position in relation to his principal on the faith of the
payment; and (2) certain cases concerned with bills of exchange, in
which money paid under forged bills has been held irrecoverable on
grounds which may, on one possible view, be rationalised in terms
of change of position: see, e.g. Price v. Neal (1762) 3 Burr. 1354,
and London and River Plate Bank Ltd, v. Bank of Liverpool [1896]
1 Q.B. 7. There has however been no general recognition of any
defence of change of position as such; indeed any such defence is
inconsistent with the decisions of the Exchequer Division in
Currant v. Ecclesiastical Commissioners for England and Wales
(1880) 6 Q.B.D. 234, and of the Court of Appeal in Baylis v.
Bishop of London [1913] 1 Ch. 127. Instead, where change of
position has been relied upon by the defendant, it has been usual
to approach the problem as one of estoppel: see, e.g. R. E. Jones
Ltd, v. Waring and Gillow Ltd. [1926] A.C. 670, and Avon County
Council v. Hewlett [1983] 1 W.L.R. 605. But it is difficult to see
the justification for such a rationalisation. First, estoppel
normally depends upon the existence of a representation by one
party, in reliance upon which the representee has so changed his
position that it is inequitable for the representor to go back upon
his representation. But, in cases of restitution, the requirement of
a representation appears to be unnecessary. It is true that, in
cases where the plaintiff has paid money directly to the defendant,
it has been argued (though with difficulty) that the plaintiff has
represented to the defendant that he is entitled to the money; but
in a case such as the present, in which the money is paid to an
innocent donee by a thief, the true owner has made no
representation whatever to the defendant. Again, it was held by
the Court of Appeal in Avon County Council v. Hewlett that
estoppel cannot operate pro tanto, with the effect that if, for
example, the defendant has innocently changed his position by
disposing of part of the money, a defence of estoppel would
provide him with a defence to the whole of the claim.
Considerations such as these provide a strong indication that, in
many cases, estoppel is not an appropriate concept to deal with
the problem.
In these circumstances, it is right that we should ask
ourselves: why do we feel that it would be unjust to allow
restitution in cases such as these? The answer must be that,
where an innocent defendant’s position is so changed that he will
suffer an injustice if called upon to repay or to repay in full, the
injustice of requiring him so to repay outweighs the injustice of
denying the plaintiff restitution. If the plaintiff pays money to
the defendant under a mistake of fact, and the defendant then,
acting in good faith, pays the money or part of it to charity, it is
unjust to require the defendant to make restitution to the extent
that he has so changed his position. Likewise, on facts such as
those in the present case, if a thief steals my money and pays it
to a third party who gives it away to charity, that third party
should have a good defence to an action for money had and
received. In other words, bona fide change of position should of
itself be a good defence in such cases as these. The principle is
widely recognised throughout the common law world. It is
recognised in the United States of America (see Restatement of
Restitution, para. 142, and Palmer on Restitution, vol. III, para.
16.8); it has been judicially recognised by the Supreme Court of
Canada (see Rural Municipality of Storthoaks v. Mobil Oil Canada
Ltd. (1975) 55 D.L.R. (3d) 1); it has been introduced by statute in
New Zealand (Judicature Act 1908, section 94B (as amended)), and
in Western Australia (see Western Australia Law Reform (Property,
Perpetuities and Succession) Act 1962, section 24, and Western
Australia Trustee Act 1962, section 65(8)), and it has been
judicially recognised by the Supreme Court of Victoria (see Bank
of New South Wales v. Murphett [1983] 1 V.R. 489). In the
important case of Australia and New Zealand Banking Group Ltd,
v. Westpac Banking Corporation (1988) 78 A.L.R. 187, there are
strong indications that the High Court of Australia may be moving
towards the same destination (see especially at pp. 162 and 168,
per curiam). The time for its recognition in this country is, in my
opinion, long overdue.
I am most anxious that, in recognising this defence to
actions of restitution, nothing should be said at this stage to
inhibit the development of the defence on a case by case basis, in
the usual way. It is, of course, plain that the defence is not open
to one who has changed his position in bad faith, as where the
defendant has paid away the money with knowledge of the facts
entitling the plaintiff to restitution; and it is commonly accepted
that the defence should not be open to a wrongdoer. These are
matters which can, in due course, be considered in depth in cases
where they arise for consideration. They do not arise in the
present case. Here there is no doubt that the respondents have
acted in good faith throughout, and the action is not founded upon
any wrongdoing of the respondents. It is not however appropriate
in the present case to attempt to identify all those actions in
restitution to which change of position may be a defence. A
prominent example will, no doubt, be found in those cases where
the plaintiff is seeking repayment of money paid under a mistake
of fact; but I can see no reason why the defence should not also
be available in principle in a case such as the present, where the
plaintiff’s money has been paid by a thief to an innocent donee,
and the plaintiff then seeks repayment from the donee in an
action for money had and received. At present I do not wish to
state the principle any less broadly than this: that the defence is
available to a person whose position has so changed that it would
be inequitable in ail the circumstances to require him to make
restitution, or alternatively to make restitution in full. I wish to
stress however that the mere fact that the defendant has spent
the money, in whole or in part, does not of itself render it
inequitable that he should be called upon to repay, because the
expenditure might in any event have been incurred by him in the
ordinary course of things. I fear that the mistaken assumption
that mere expenditure of money may be regarded as amounting to
a change of position for present purposes has led in the past to
opposition by some to recognition of a defence which in fact is
likely to be available only on comparatively rare occasions. In
this connection I have particularly in mind the speech of Lord
Simonds in Ministry of Health v. Simpson [1951] A.C. 251, 276.
I wish to add two further footnotes. The defence of change
of position is akin to the defence of bona fide purchase; but we
cannot simply say that bona fide purchase is a species of change
of position. This is because change of position will only avail a
defendant to the extent that his position has been changed;
whereas, where bona fide purchase is invoked, no inquiry is made
(in most cases) into the adequacy of the consideration. Even so,
the recognition of change of position as a defence should be
doubly beneficial. It will enable a more generous approach to be
taken to the recognition of the right to restitution, in the
knowledge that the defence is, in appropriate cases, available; and
while recognising the different functions of property at law and in
equity, there may also in due course develop a more consistent
approach to tracing claims, in which common defences are
recognised as available to such claims, whether advanced at law or
in equity.
I turn to the application of this principle to the present
case. In doing so, I think it right to stress at the outset that the
respondents, by running a casino at the club, were conducting a
perfectly lawful business. There is nothing unlawful about
accepting bets at a casino; the only relevant consequence of the
transactions being gambling transactions is that they are void. In
other words, the transactions as such give rise to no legal
obligations. Neither the gambler, nor the casino, can go to court
to enforce a gaming transaction. That is the legal position. But
the practical or business position is that, if a casino does not pay
winnings when they are due, it will simply go out of business. So
the obligation in honour to pay winnings is an obligation which, in
business terms, the casino has to comply with. It is also relevant
to bear in mind that, in the present case, there is no question of
Cass having gambled on credit. In each case, the money was put
up front, not paid to discharge the balance of an account kept for
gambling debts. It was because the money was paid over, that the
casino accepted the bets at all.
In the course of argument before your Lordships, attention
was focused upon the overall position of the respondents. From
this it emerged, that, on the basis I have indicated (but excluding
the banker’s draft) at least £150,960 derived from money stolen by
Cass from the solicitors was won by the club and lost by Cass.
On this approach, the possibility arose that the effect of change
of position should be to limit the amount recoverable by the
solicitors to that sum. But there are difficulties in the way of
this approach. Let us suppose that a gambler places two bets
with a casino, using money stolen from a third party. The
gambler wins the first bet and loses the second. So far as the
winning bet is concerned, it is readily understandable that the
casino should be able to say that it is not liable to the true owner
for money had and received, on the ground that it has changed its
position in good faith. But at first sight it is not easy to see how
it can aggregate the two bets together and say that, by paying
winnings on the first bet in excess of both, it should be able to
deny liability in respect of the money received in respect of the
second.
There are other ways in which the problem might be
approached, the first narrower and the second broader than that
which I have just described. The narrower approach is to limit
the impact of the winnings to the winning bet itself, so that the
amount of all other bets placed with the plantiff’s money would be
reoverable by him regardless of the substantial winnings paid by
the casino to the gambler on the winning bet. On the broader
approach, it could be said that, each time a bet is accepted by
the casino, with the money up front, the casino, by accepting the
bet, so changes its position in good faith that it would inequitable
to require it to pay the money back to the true owner. This
would be because, by accepting the bet, the casino has committed
itself, in business terms, to pay the gambler his winnings if
successful. In such circumstances, the bookmaker could say that,
acting in good faith, he had changed his position, by incurring the
risk of having to pay a sum of money substantially larger than the
amount of the stake. On this basis, it would be irrelevant
whether the gambler won the bet or not, or, if he did win the
bet, how much he won.
I must confess that I have not found the point an easy one.
But in the end I have come to the conclusion that on the facts of
the present case the first of these three solutions is appropriate.
Let us suppose that only one bet was placed by a gambler at a
casino with the plaintiff’s money, and that he lost it. In that
simple case, although it is true that the casino will have changed
its position to the extent that it has incurred the risk, it will in
the result have paid out nothing to the gambler, and so prima
facie it would not be inequitable to require it to repay the amount
of the bet to the plaintiff. The same would, of course, be equally
true if the gambler placed a hundred bets with the plaintiff’s
money and lost them all; the plaintiff should be entitled to
recover the amount of all the bets. This conclusion has the merit
of consistency with the decision of the Court of King’s Bench in
Clarke v. Shee and Johnson (1774) 1 Cowp. 197, Lofft. 756. But
then, let us suppose that the gambler has won one or more out of
one hundred bets placed by him with the plaintiff’s money at the
casino over a certain period of time, and that the casino has paid
him a substantial sum in winnings, equal, let us assume, to one
half of the amount of all the bets. Given that it is not
inequitable to require the casino to repay to the plaintiff the
amount of the bets in full where no winnings have been paid, it
would, in the circumstances I have just described, be inequitable,
in my opinion, to require the casino to repay to the plaintiff more
than one half of his money. The inequity, as I perceive it, arises
from the nature of gambling itself. In gambling only an occasional
bet is won, but when the gambler wins he will receive much more
than the stake placed for his winning bet. True, there may be no
immediate connection between the bets. They may be placed on
different occasions, and each one is a separate gaming contract.
But the point is that there has been a series of transactions under
which all the bets have been placed by paying the plaintiff’s
money to the casino, and on each occasion the casino has incurred
the risk that the gambler will win. It is the totality of the bets
which yields, by the laws of chance, the occasional winning bet;
and the occasional winning bet is therefore, in practical terms, the
result of the casino changing its position by incurring the risk of
losing on each occasion when a bet is placed with it by the
gambler. So, when in such circumstances the plaintiff seeks to
recover from the casino the amount of several bets placed with it
by a gambler with his money, it would be inequitable to require
the casino to repay in full without bringing into account winnings
paid by it to the gambler on any one or more of the bets so
placed with it. The result may not be entirely logical; but it is
surely just.
For these reasons, I would allow the solicitors’ appeal in
respect of the money, limited however to the sum of £150,960.
The respondents’ cross-appeal in respect of the banker’s draft
The Court of Appeal unanimously affirmed the decision of
the judge that the respondents were liable in damages for the
conversion of the banker’s draft. Two main issues arose on this
aspect of the case. The first issue was whether the legal title to
the draft was vested in the solicitors so as to enable them to
claim that the draft was converted by the respondents, or that
they were alternatively liable, on the basis of waiver of the tort
of conversion, to pay to the solicitors the amount of the draft
received by them from the bank as money had and received for
the use of the solicitors. The second issue was whether, if such
legal title was vested in the solicitors, the respondents could then
defeat their claim on the ground that they were holders in due
course and so protected by section 38(2) of the Bills of Exchange
Act 1882. The judge held that the banker’s draft, having been
originally obtained for a lawful purpose and then improperly
indorsed by Cass, was at all material times the property of the
solicitors. He further held that, on the facts of the case, the
respondents did not become holders in due course. He therefore
held the respondents liable in damages for conversion [1987] 1
W.L.R. 987, 994-995. In the Court of Appeal, May L.J. upheld the
judge’s decision, expressly affirming his conclusion that on the
facts the respondents were not holders in due course [1989] 1
W.L.R. 1340, 1360; and Parker L.J. likewise upheld the judge’s
decision, expressly affirming his conclusion that the solicitors
obtained a good title to the draft. Nicholls L.J. agreed with
Parker L.J., at p. 1387 that, for the reasons given by him, the
solicitors obtained a good title to the draft; and he further held
that, since (as with the cash exchanged for chips) the respondents
did not give value for the draft, they could not become holders in
due course under the Act.
I wish to say at once, in agreement with Nicholls L.J. and
for the reasons I have already given, that the respondents never
gave value for the draft, any more than they gave valuable
consideration for the solicitors’ money paid to them by Cass. It
follows that the respondents were never holders in due course of
the draft. The only question remaining is whether the solicitors
obtained title to the draft.
On this aspect of the case, the respondents relied strongly
on the decision of the Judicial Committee of the Privy Council in
Commercial Banking Co. of Sydney v. Mann [1961] AC 1, in
which the Board consisted of Viscount Simonds, Lord Reid, Lord
Radcliffe, Lord Tucker and Lord Morris of Borth-y-Gest, the
advice of the Board being given by Viscount Simonds. In that
case, the respondent Mann carried on his profession as a solicitor
in Sydney in partnership with a man called Richardson. Mann and
Richardson maintained a “trust account” in the name of the
partnership with a branch of the Australian and New Zealand Bank
in Sydney (“the A.N.Z. bank”). Under the partnership agreement,
all the assets of the partnership were the property of Mann, but
cheques might be drawn on the partnership bank account by either
partner, Mann having given the necessary authority to the A.N.Z.
bank to enable Richardson to draw on the partnership account with
it. Richardson, in purported exercise of that authority, drew a
number of cheques on that account, in each case there being
inserted, after the word “Pay” in the printed form of cheque, the
words “Bank cheque favour H. Ward” or “Bank cheque H. Ward;” he
also filed application forms for bank cheques in favour of H. Ward
to a like amount, purporting to sign them on behalf of the firm.
He took the documents to the A.N.Z. bank, which in each case
debited the firm’s account and issued a bank draft of an equal
amount in the form “Pay H. Ward or bearer.” Each cheque was
then taken by Ward to a branch of the appellant bank, and cashed
over the counter. In due course, each of the cheques was paid by
the A.N.Z. bank to the appellant bank. From first to last the
part played by Richardson was fraudulent; Ward was not a client
of the partnership, nor had any client authorised the payment to
him of any money held in the trust account. Mann then sued the
appellant bank for conversion of the bank cheques, or alternatively
to recover the sums received by it from the A.N.Z. bank as money
had and received to his use. He succeeded in his claim before the
trial judge, whose decision was affirmed by the Court of Appeal of
New South Wales. The Privy Council however allowed the appeal,
holding (1) that Mann never obtained any title to the cheques, and
(2) that he could not obtain title by ratifying the conduct of
Richardson in obtaining the cheques from the A.N.Z. bank, without
at the same time ratifying the dealings in the cheques by Ward
and the appellant bank (a conclusion which could, in my opinion,
have been reached on the alternative basis that Mann could not,
by ratifying the conduct of Richardson in obtaining the cheques,
thereby render the innocent appellant bank a wrongdoer). It
followed that Mann’s claim for damages for conversion failed, and
that his alternative claim for money had and received also failed.
In so holding, the Board applied the previous decision of the Privy
Council in Union Bank of Australia Ltd, v. McClintock [1922] 1
A.C. 240, which they held to be indistinguishable on both points
from the case before them.
It was the submission of the respondents in the present
appeal that both cases are indistinguishable from the present case,
and accordingly that in the present case the solicitors never had
sufficient title to the banker’s draft to found an action for
damages for conversion against the respondents (or a claim for
money had and received), and further that they could not make
good their title by ratification of Cass’s action in obtaining the
money from the solicitors’ client account at the bank without also
ratifying his action in using the money for gambling at the club.
It is of some interest to record the process of reasoning by
which the Board in Mann’s case reached their conclusion on the
issue of title. Viscount Simonds said [1961] AC 1, 8:
“It is important to distinguish between what was
Richardson’s authority in relation on the one hand to the
A.N.Z. bank and on the other to Mann. No question arises
in these proceedings between Mann and the A.N.Z. bank. It
is clear that Mann could not as between himself and the
bank question Richardson’s authority to draw cheques on the
trust account. The position as between Mann and
Richardson was different. Richardson had no authority,
express or implied, from Mann either to draw cheques on
the trust account or to obtain bank cheques in exchange for
them except for the proper purposes of the partnership. If
he exceeded those purposes, his act was unauthorised and
open to challenge by Mann. It is in these circumstances
that the question must be asked whether, as the judge held,
the bank cheques were throughout the property of Mann. It
is irrelevant to this question what was the relation between
Richardson and Ward and whether the latter gave any
consideration for the bank cheques that he received and at
what stage Mann learned of the fraud that had been
practised upon him. The proposition upon which the
respondent founds his claim is simple enough: Richardson
was his partner and in that capacity was able to draw upon
the trust account and so to obtain from the bank its
promissory notes: therefore the notes were the property of
the partnership and belonged to Mann, and Richardson could
not give a better title to a third party than he himself
had.”
He then referred to the previous decision of the Privy Council in
McClintock’s case [1922] 1 AC 240 and continued, [1961] AC 1,
10-11:
“This is a direct decision that, if the acts of McClintock
were unauthorised in the relevant sense of that word, the
bank cheques did not when issued become the property of
the plaintiffs. It appears to their Lordships that the
majority of the full court in McClintock’s case erred in
regarding as decisive the fact that as between the plaintiffs
and the bank McClintock was authorised to obtain bank
cheques, whereas the relevant question was whether
McClintock was as between the plaintiffs and himself
authorised to obtain the particular cheques that were
converted. Upon the verdict of the jury that he was not so
authorised, they should have come to the opposite
conclusion. In the same way in the present case the judge,
having found that Richardson obtained the bank cheques in
question in fraud of Mann and without his authority, should
have gone on to hold that they did not become the property
of Mann. Whether they became his by his subsequent
ratification of the acts of Richardson is another question,
which their Lordships will examine just as it was examined
in McClintock’s case. Upon what has been called the main
question they observe that they could not hold that the
respondent acquired a property in the bank cheques without
directly contradicting a decision which has in 40 years been
the subject of no adverse comment. And they would add
that it appears to be in accordance with principle. They
agree with the analysis of the transaction which was
submitted by counsel for the appellant. In effect
Richardson, by means of unauthorised cheques,
misappropriated moneys in the trust account and used them
to acquire bank cheques from the A.N.Z. bank which bound
that bank to pay Ward or bearer out of its own money the
amounts specified in the cheques. Their Lordships were not
referred to any case in which in such circumstances
property so acquired has been held to belong automatically
to the party defrauded. In the present case, as in
McClintock’s case, counsel sought to rely on such cases as
Cundy v. Lindsay [(1878) 3 App. Cas. 459, H.L.], but it
appears to their Lordships as it must have done to the
Board in McClintock’s case, that the principle that the
purchaser of a chattel takes it, as a general rule, subject to
what may turn out to be informalities of title has no
application to a case of misappropriation of funds by an
agent and their subsequent application for his own purposes.
That there is a remedy, perhaps more than one, available to
the person defrauded is obvious, but that is not to say that
the property so acquired at once belongs to him so that he
can sue in conversion a third party into whose hands it has
come.”
In the Court of Appeal, Parker L.J. stated that he had great
difficulty in following the reasoning in the two cases [1989] 1
W.L.R. 1340, 1371 F-G. I feel bound to say that I find the
reasoning in the passage I have quoted completely clear. Before
your Lordships, Mr. O’Brien for the solicitors was bold enough to
suggest that your Lordships should hold that these cases were
wrongly decided. It would take a great deal to persuade me to do
so, having regard to the distinction of the judges involved; and I
have heard no argument that persuades me to do so. In my
opinion, the crucial question is whether, on the facts of the
present case, the solicitors have succeeded in distinguishing Mann’s
case [1961] AC 1 on acceptable grounds.
The judge distinguished the case as follows. He held that
the draft was originally obtained by Cass for a lawful purpose; he
therefore received the draft with the authority of his partners, and
the draft then became the property of the solicitors. This finding
was strongly challenged by the respondents, both before the Court
of Appeal and before your Lordships, on the ground that the point
was never pleaded, and that there was in any event no evidence to
support the judge’s conclusion. Parker L.J. simply rejected the
respondents’ argument on this point without reasons; but having
heard full argument upon it, I am satisfied that the respondents
are justified in their complaint. It is plain that the point was
never pleaded; indeed the solicitors’ pleaded case was that the
draft was obtained by Cass as part of his fraudulent design to loot
money from the solicitors’ client account for his own purposes. If
the point had been pleaded, it would have been a matter for
investigation at the trial whether the draft had indeed been
obtained for a proper purpose, for example for the purpose of
completion of a conveyancing transaction. As it was, there was
no investigation of this point, and there was no evidence to
support the judge’s finding.
Parker L.J. sought to distinguish Mann’s case [1961] AC 1
on another ground, viz. that the draft had been obtained from the
bank by Chapman and then handed by him to Cass; and that when
Chapman received the draft, it was his duty to hand it to the
solicitors and the property therefore passed to the solicitors when
he obtained possession of it. The difficulty with this approach is
that it appears to proceed on the assumption that Chapman was
acting innocently in obtaining the banker’s draft from the bank and
handing it to Cass; whereas the judge held that he had been
suborned by Cass: see [1987] 1 W.L.R. 987, 1018. In my opinion,
the receipt by Chapman of the banker’s draft was no different
than the receipt by Cass himself, and the introduction of Chapman
into the picture makes no difference.
However, before your Lordships Mr. O’Brien for the
solicitors submitted that Mann’s case could be distinguished from
the present case because the banker’s cheques in that case were
made payable to a third party (Ward) or bearer, whereas in the
present case the banker’s draft was made payable to the solicitors.
Now it is true that, in Mann’s case, it cannot have been the
intention of the A.N.Z. bank that the property in the banker’s
cheques should, on delivery to Richardson, immediately pass to
Ward. Even so, the point seems to me to be of crucial
importance. For the effect of the banker’s draft in the present
case having been made payable to the solicitors is, in my opinion,
that the solicitors had the immediate right to possession of the
draft against any other person, including, of course, Cass. On this
basis, as it seems to me, the solicitors had vested in them, as
from the moment when the banker’s draft was delivered to Cass
(through Chapman) by the bank, sufficient title to enable them to
bring an action for damages for conversion of the draft.
Authority for this proposition is to be found in Bute (Marquess) v.
Barclays Bank Ltd. [1955] 1 Q.B. 202. In that case one McGaw,
the manager of three farms belonging to the plaintiff, applied to
the Department of Agriculture for Scotland for certain subsidies in
respect of the farms. After McGaw had left the plaintiff’s
employment, the department sent to him, in satisfaction of the
application, three warrants in respect of the subsidies. The
warrants were made payable to McGaw, but elsewhere on them
appeared the words “for the Marquess of Bute.” McGaw paid the
warrants into his own personal account at a branch of defendant
bank, which forwarded them for collection and paid the proceeds
into his account, upon which he then drew. It was held by McNair
J. that the plaintiff was entitled to succeed in an action against
the defendant bank for damages for conversion. McNair J. held
that the words “for the Marquess of Bute” had the effect that, in
the circumstances, the warrants were payable to the Marquess of
Bute through McGaw. He further held that, in order to succeed in
an action for conversion, it was enough that the plaintiff could
prove that, at the time of the alleged conversion, he was entitled
to immediate possession; and that, as McGaw’s employment had
terminated before he received the warrants, the plaintiff would
have been entitled to require McGaw to deliver the warrants to
him when they were received. So also in the present case, as
soon as the bank handed over the banker’s draft, the solicitors
were entitled to require its delivery to them, the draft being made
payable to them and neither Chapman nor Cass having any right to
retain it against them. It is of some interest to observe that,
consistent with this approach, the banker’s draft could not be
transferred without indorsement by or on behalf of the solicitors;
and that when Cass used the draft at the casino, he purported to
indorse it on behalf of the solicitors, although of course he did so
without authority.
For this reason, which constitutes another ground upon which
Parker L.J. relied in the Court of Appeal, I am of the opinion
that the solicitors had sufficient title to enable them to proceed
in an action of conversion against Cass, or, in due course, against
the respondents. It follows that since, for the reasons I have
already given, the respondents cannot claim to have been holders
in due course of the banker’s draft, their cross-appeal must fail.
I understand that (failing agreement between them) counsel
for the parties will make submissions to your Lordships on interest
and costs after judgment has been delivered.
The Trustee of the Property of FC Jones & Sons v Jones
[1996] EWCA Civ 1324 1997] 1 Cr App R 335, [1997] WLR 51, [1996] BPIR 644, [1996] 3 WLR 703, [1997] 1 Ch 159, [1996] 4 All ER 721, [1996] EWCA Civ 1324, [1997] 1 WLR 51, [1997] Ch 159
LORD JUSTICE MILLETT:
The firm of F.C. Jones & Sons carried on business as potato growers. There were three partners, Messrs. F.C. Jones, F.W.J. Jones and A.C. Jones. In 1984 the firm got into financial difficulties. A supplier obtained judgment against it. The judgment was not satisfied and a bankruptcy notice was issued. The partners failed to comply with the notice and thereby committed an act of bankruptcy. The judgment creditor presented a bankruptcy petition, a receiving order was made and in due course the partners were adjudicated bankrupt.
In the meantime, that is to say after the act of bankruptcy and before the adjudication, Mrs. Jones, the wife of Mr. F.W.J. Jones, opened an account with a firm of commodity brokers in order to deal on the London Potato Futures Market. Into this account she paid the proceeds of three cheques totalling £11,700. The cheques were all drawn by Mrs. Jones’ husband, Mr. F.W.J. Jones, on the joint account of himself and Mr. A.C. Jones at the local branch of Midland Bank.
Mrs. Jones’ dealings in potato futures proved to be highly profitable. She received two cheques totalling £50,760 from the commodity brokers and paid them into a call deposit account which she opened at R. Raphael & Sons Plc (“Raphaels”). She allowed Mr. F.W.J. Jones to withdraw £900 from the account, leaving a balance of £49,860. Shortly afterwards the Official Receiver informed Raphaels of his claim to the money in the account. Mrs. Jones immediately demanded the release of the money and Raphaels interpleaded.
Pursuant to an order made on the interpleader summons the money held by Raphaels was paid into court and issues between the rival claimants were directed to be tried with the trustee in bankruptcy as plaintiff and Mrs. Jones as defendant. In 1986 the proceedings were transferred to the Chancery Division where, after an unexplained lapse of nine years, they came on for hearing before Mr. Cherryman QC, sitting as a deputy judge of that Division. He found in favour of the trustee and ordered that the money in court be paid out to him. Mrs. Jones now appeals from his decision.
The trustee’s case, as presently formulated, is simplicity itself. The money in court represents the proceeds of Mrs. Jones’ successful speculation with the £11,700 which she received from her husband. The £11,700, in turn, was paid to her out of the joint account of two of the partners, who were afterwards adjudicated bankrupt. The money was drawn from the joint account after the date of the act of bankruptcy on which the receiving order was made. All this is undisputed. But, says the trustee, the money in the joint account had already vested in him, for under section 37 of the Bankruptcy Act 1914 his title to the assets of the bankrupts related back to the date of the act of bankruptcy. Accordingly, Mrs. Jones never acquired any title to the money. The money which she received from her husband belonged to the trustee, and the money in court represents the proceeds of her successful speculation with his money.
The trustee submits that his title to the money in court is clear and unimpeachable unless Mrs. Jones can take advantage of section 45 of the Bankruptcy Act 1914 by proving (a) that she was paid the £11,700 as a creditor of the firm and (b) that at the time she received the money she had no notice of any available act of bankruptcy. Counsel for Mrs. Joneshas disclaimed any contention that she was a creditor of the firm, and he concedes that the trustee’s claim is bound to succeed in relation to the original sum of £11,700 with interest thereon. But, he submits, the trustee cannot recover the profits which Mrs. Jones made by the use of the money because he cannot maintain a proprietary claim in equity, and he cannot maintain a proprietary claim in equity because he cannot establish the existence of a fiduciary relationship between Mrs. Jones and the trustee.
Counsel for Mrs. Jones submits that all claims by a trustee or liquidator to recover payments to third parties, whether as fraudulent preferences (which are voidable) or as dispositions by a company made after the commencement of the winding up (which are void), must be made by way of an action for money had and received; that this, being an action at law, is a personal claim; that it does not matter whether the transaction which is impugned was void or merely voidable; and that, in the absence of a constructive trust or fiduciary relationship which would justify the intervention of equity, the trustee cannot recover the proceeds of the profitable investment by the recipient of the money which he received.
The judge thought that Mrs. Jones was a constructive trustee. He said:
“… the trustee really has no problem in establishing a fiduciary relationship. In my view where, as here (due to the effect of the doctrine of relation back), A pays B’s money to C, B retains the beneficial title to the money and C becomes a bare trustee (see Chase Manhattan Bank v. Israel-British Bank [1981] 1 Ch. 105, 119.”
Founding himself on that reasoning, the deputy judge applied the equitable rules of tracing.
It is, however, in my view plain that Mrs. Jones did not receive the money in a fiduciary capacity and that she did not become a constructive trustee. The deputy judge’s conclusion presupposes that A (who in this case is the bankrupts) had a legal title to transfer. In the present case, however, the bankrupts had been divested of all title by statute. Mr. F.W.J. Jones had no title at all in law or equity to the money in the joint account at Midland Bank, and could confer no title on Mrs. Jones.
While, however, I accept the submissions of counsel for Mrs. Jones that she did not become a constructive trustee, I do not accept the proposition that the trustee in bankruptcy is unable to recover the profits which Mrs. Jones made by the use of his money unless she can be shown to have received it in one or other of the two capacities mentioned; nor do I consider it necessary for him to invoke the assistance of equity in order to maintain his claim. In short, I do not accept the main submission of counsel that the only action at law which was available to the trustee was an action against Mrs. Jones for money had and received.
It is, in my view, unhelpful to categorise the payment of the £11,700 to Mrs. Jones as either “void” or “voidable”. Neither term is strictly accurate. In order to see why this is so it is necessary to consider the effect of the doctrine of relation back under the old bankruptcy law. I recently had occasion to examine this in detail in In re Dennis [1995] 3 WLR 367. At p.387 I said:
“It is clear from the authorities that the relation back of the trustee’s title did not merely make the title of the debtor himself or any person claiming through the debtor defeasible in the event of adjudication. If the debtor was adjudicated bankrupt, then as from the date of the act of bankruptcy neither the debtor nor any such person claiming under him who could not bring himself within the protective provisions of the Bankruptcy Acts had any title at all; as from that date title was vested in the trustee. The position of the debtor and persons who claimed under him during the intermediate period was extremely curious. They did not possess a defeasible title, but either an indefeasible title if the act of bankruptcy was not followed by adjudication or no title at all if it was. Outside the law of bankruptcy no similar ambulatory title was known to the law.”
In saying this I was summarising the law expounded by this Court in In re Gunsbourg [1920] 2 KB 426. In that case the debtor transferred his assets to a company which he had formed. He afterwards committed an act of bankruptcy on which he was adjudicated bankrupt. The company had sold some of the assets which it had acquired from the debtor to a bona fide purchaser without notice of the act of bankruptcy. The trustee impugned the transfer to the company, which was held to be fraudulent and void and to constitute an act of bankruptcy. The trustee then sought to recover from the purchaser the assets which he had acquired from the company after the act of bankruptcy. The court held that the title of the trustee related back to the earlier act of bankruptcy, which consisted of the transfer to the company, and that neither the company nor any subsequent purchaser could establish any title against the trustee. It was a hard case, because the defendant was a bona fide purchaser without notice of the act of bankruptcy; but he was unable to bring himself within the protective provisions of section 45 of the Act of 1914, which were limited to persons who had dealt directly with the bankrupt.
At p.438 Lord Sterndale MR explained the way in which the doctrine of relation back operated as follows:
“If this be correct the position is exactly the same as if the bankrupt had been in possession of goods belonging to another person, to which he had no title, and had sold them to the original transferee who had then resold them. In such a case neither the original nor any of the subsequent transferees would take any title at all, and the true owner could recover the goods from anyone in whose possession he found them. I know of no doctrine of law or equity which would relieve any of the transferees in these circumstances.
It was however argued that this statement of Lord Esher cannot be taken to its full extent and that it must be confined to avoiding dealings with his property by the bankrupt himself after the date of relation back. This was founded on the argument that the original transfer was not void but only voidable, and that therefore any bona fide purchase from the original transferee was protected. I am not sure that void and voidable are quite apt expressions, but clearly the transfer was not voidat the moment it was made, for it might be that no circumstances would ever arise in which a trustee’s title would accrue or the bankruptcy law apply. I will assume that voidable is a correct expression to describe the nature of the transaction, and then it becomes necessary to ascertain the effect of the avoidance caused by the making of the receiving order. This seems to me to be quite different from the effect of avoidance in the ordinary case of a voidable transfer where no principles of bankruptcy law apply. In this latter case the title of the person avoiding the transaction arises only from the time when he elects to avoid, and therefore intervening bona fide transactions are protected because the transferor up to the date of avoidance had and could confer a good title. In the case under consideration so soon as the receiving order is made the trustee at once gets a title which relates back to the earliest act of bankruptcy within three months of the receiving order, whether it be the one upon which the receiving order is made or not, and therefore his position and rights are entirely different from those of an ordinary person who elects to avoid a voidabletransaction.”
Warrington LJ cited the decision in In re Hart, Ex parte Green [1912] 3 KB 6 and distinguished it on the ground that there the original disposal by the debtor was prior to the act of bankruptcy, though the later transfer by the disponee to the defendant was after it. In such a case the trustee could not succeed against a transferee for value without notice. He continued [1920] 2 KB 426 at p.446:
“This seems to me to have no application to such a case as the present in which the effect of the subsequent bankruptcy is, without more, to vest the property in the trustee as from a date anterior to the dealing impeached.
… The statutory transfer passes the legal property in the goods to the trustee as from the commencement of the bankruptcy, and subsequent sales thereof by any person other than the trustee can confer no property on the purchaser …”
As I pointed out in In re Dennis at p.387:
“This could not be clearer. The transfer to the company constituted an act of bankruptcy. Had no adjudication followed, the transfer would have passed title to the company. It might still have been possible for the creditors to impugn it as a fraudulent conveyance, but then it could not have been avoided as against a bona fide purchaser for value without notice. The relation back of the trustee’s title, however, did not strictly render the transaction either void or voidable; it operated automatically to divest the debtor at the date of the act of bankruptcy of any title to pass to the transferee, and this enabled the trustee to prevail against anyone who could not bring himself within the protective provisions of section 45.”
Accordingly, as from the date of the act of bankruptcy the money in the bankrupts’ joint account at Midland Bank belonged to the trustee. The account holders had no title to it at law or in equity. The cheques which they drew in favour of Mrs. Jones were not “void” or “voidable” but, in the events which happened, they were incapable of passing any legal or equitable title. They were not, however, without legal effect, for the bank honoured them. The result was to affect the identity of the debtor but not the creditor and to put Mrs. Jones in possession of funds to which she had no title. A debt formally owed by Midland Bank apparently to Messrs F.W.J Jones and A.C. Jones but in reality to their trustee ultimately became a debt owed by Raphaels apparently to Mrs. Jones but in reality to the trustee.
What is the result? If the cheques had passed the legal title to Mrs. Jones but not the beneficial ownership, she would have received the money as constructive trustee and be liable to a proprietary restitutionary claim in equity (sometimes, though inaccurately, described as a tracing claim). Mrs. Jones would have been obliged, not merely to account for the £11,700 which she had received, but to hand over the £11,700 in specie to the trustee. Her position would have been no different from that of an express trustee who held the money in trust for the trustee; or from that of Mr. Reid in Attorney-General for Hong Kong v. Reid [1994] 1 AC 324, whose liability to account for the profits which he made from investing a bribe was based on his obligation to pay it over to his principal as soon as he received it. The existence of any such obligation has been disputed by commentators, but no one disputes that, if the obligation exists, it carries with it the duty to pay over or account for any profits made by the use of the money.
But Mrs. Jones was not a constructive trustee. She had no legal title to the money. She had no title to it at all. She was merely in possession; that is to say, in a position to deal with it even though it did not belong to her. Counsel for Mrs. Jones says that it follows that she cannot be made liable to any kind of proprietary claim. He relies strongly for this purpose on Ex parte Hooson, In re Chapman & Shaw (1872) 8 Ch. 231, followed in In re Bishop, Ex parte Claxton (1891) Morr. 221, which are both cases concerned with fraudulent preference. In each case the debtor had paid a debt on the eve of his bankruptcy, the payment was found to be a fraudulent preference and the creditor was ordered to repay the amount in question to the trustee in bankruptcy. The creditor failed to do so and was committed to prison under the Debtors Act 1869. That Act had abolished imprisonment for debt, but there were exceptions. One exception was “default by a trustee or person acting in a fiduciary capacity”. The court held that there was no fiduciary relationship between the debtor and his creditors, still less between the creditor whose debt was paid and the rest of the creditors. Given the fact that the payment was good when made and that it continued to bind the debtor himself, being voidable only at the instance of the trustee in bankruptcy, the conclusion was perhaps inevitable.
But those were cases in which the payment was valid when made and passed a good though defeasible title to the recipient. He obtained legal title to the money and, since he was not a trustee, equitable title as well. He was free to deal with the money on his own account as he pleased. If he made a profit from the use of his own money, he was entitled to keep it. If he become bankrupt, the money would form part of his estate and the debtor’s trustee would have to prove in his bankruptcy for the amount claimed. The present case is entirely different. Mrs. Jones had no title at all, at law or in equity. If she became bankrupt, the money would not vest in her trustee. But this would not be because it was trust property; it would be because it was not her property at all. If she made a profit, how could she have any claim to the profit made by the use of someone else’s money?
In my judgment she could not. If she were to retain the profit made by the use of the trustee’s money, then, in the language of the modern law of restitution, she would be unjustly enriched at the expense of the trustee. If she were a constructive trustee of the money, a court of equity, as a court of conscience, would say that it was unconscionable for her to lay claim to the profit made by the use of her beneficiary’s money. It would, however, be a mistake to suppose that the common law courts disregarded considerations of conscience. Lord Mansfield CJ, who did much to develop the early law of restitution at common law, founded it firmly on the basis of good conscience and unjust enrichment.
It would, in my judgment, be absurd if a person with no title at all were in a stronger position to resist a proprietary claim by the true owner than one with a bare legal title. In the present case equity has no role to play. The trustee must bring his claim at common law. It follows that, if he has to trace his money, he must rely on common law tracing rules, and that he has no proprietary remedy. But it does not follow that he has no proprietary claim. His claim is exclusively proprietary. He claims the money because it belongs to him at law or represents profits made by the use of money which belonged to him at law.
The trustee submits that he has no need to trace, since the facts are clear and undisputed. Mrs. Jones did not mix the money with her own. The trustee’s money remained identifiable as such throughout. But, of course, he does have to trace it in order to establish that the money which he claims represents his money. Counsel for Mrs. Jonesacknowledges that the trustee can successfully trace his money into her account at Raphaels, for his concession in respect of the £11,700 acknowledges this. I do not understand how his concession that the trustee is entitled to £11,700 of the money in court is reconcilable with his submission that the only cause of action available to the trustee is an action for money he had and received. I say this for two reasons. In the first place, the trustee has never brought such an action, and any such action would now be long out of time. In the second place, in an action for money had and received it would be irrelevant what Mrs. Jones had done with the money after she received it. Her liability would be based on her receipt of the money, and she would be personally liable to a money judgment for £11,700. But while the trustee would be entitled to a money judgment for that sum, he would not be entitled to any particular sum of £11,700 in specie.
But in my judgment the concession that the trustee can trace the money at common law is rightly made. There are no factual difficulties of the kind which proved fatal in this Court to the common law claim in Agip (Africa) Ltd. v. Jackson [1991] Ch 547. It is not necessary to trace the passage of the money through the clearing system or the London Potato Futures Market. The money which Mrs. Jones paid into her account with the commodity brokers represented the proceeds of cheques which she received from her husband. Those cheques represented money in the bankrupts’ joint account at Midland Bank which belonged to the trustee.
In Lipkin Gorman (a Firm) v. Karpnale Ltd. [1991] 2 AC 548 at p.573 Lord Goff held that the plaintiffs could trace or follow their “property into its product” for this “involves a decision by the owner of the original property to assert title to the product in place of his original property”. In that case the original property was the plaintiffs’ chose in action, a debt owed by the bank to the plaintiffs. Lord Goff held that the plaintiffs could:
“… trace their property at common law in that chose in action, or in any part of it, into its product, i.e. cash drawn by Cass from their client account at the bank.”
Accordingly, the trustee can follow the money in the joint account at Midland Bank, which had been vested by statute in him, into the proceeds of the three cheques which Mrs. Jones received from her husband. The trustee does not need to follow the money from one recipient to another or follow it through the clearing system; he can follow the cheques as they pass from hand to hand. It is sufficient for him to be able to trace the money into the cheques and the cheques into their proceeds.
In Agip (Africa) Ltd. v. Jackson [1990] Ch. 265 at p.285 I said that the ability of the common law to trace an asset into a changed form in the same hands was established in Taylor v. Plumer (1815) 3 M. & S. 562. Lord Ellenborough CJ in that case had said:
“The product of or substitute for the original thing still follows the nature of the thing itself as long as it can be ascertained to be such and the right only ceases when the means of ascertainment fails, which is the case when the subject is turned into money and confined within the general mass of the same description.”
In this it appears that I fell into a common error, for it has since been convincingly demonstrated that, although Taylor v. Plumer was decided by a common law court, the court was in fact applying the rules of equity; see Lionel Smith, “Tracing in Taylor v. Plumer: Equity in the King’s Bench” (1995) LMCLQ 240.
But this is no reason for concluding that the common law does not recognise claims to substitute assets or their products. Such claims were upheld by this Court in Banque Belge pour l’Etranger v. Hambrouck [1921] 1 KB 321 and by the House of Lords in Lipkin Gorman (a Firm) v. Karpnale Ltd. [1991] 2 AC 548. It has been suggested by commentators that these cases are undermined by their misunderstanding of Taylor v. Plumer, but that is not how the English doctrine of stare decisis operates. It would be more consistent with that doctrine to say that, in recognising claims to substituted assets, equity must be taken to have followed the law, even though the law was not declared until later. Lord Ellenborough CJ gave no indication that, in following assets into their exchange products, equity had adopted a rule which was peculiar to itself or which went further than the common law.
There is no merit in having distinct and differing tracing rules at law and in equity, given that tracing is neither a right nor a remedy but merely the process by which the plaintiff establishes what has happened to his property and makes good his claim that the assets which he claims can properly be regarded as representing his property. The fact that there are different tracing rules at law and in equity is unfortunate though probably inevitable, but unnecessary differences should not be created where they are not required by the different nature of legal and equitable doctrines and remedies. There is, in my view, even less merit in the present rule which precludes the invocation of the equitable tracing rules to support a common law claim; until that rule is swept away unnecessary obstacles to the development of a rational and coherent law of restitution will remain.
Given that the trustee can trace his money at Midland Bank into the money in Mrs. Jones’ account with the commodity brokers, can he successfully assert a claim to that part of the money which represents the profit made by the use of his money? I have no doubt that, in the particular circumstances of this case, he can. There is no need to trace through the dealings on the London Potato Futures Market. If Mrs. Jones, as the nominal account holder, had any entitlement to demand payment from the brokers, this was because of the terms of the contract which she made with them. Under the terms of that contract it is reasonable to infer that the brokers were authorised to deal in potato futures on her account, to debit her account with losses and to credit it with profits, and to pay her only the balance standing to her account. It is, in my opinion, impossible to separate the chose in action constituted by the deposit of the trustee’s money on those terms from the terms upon which it was deposited. The chose in action, which was vested in Mrs. Jones’ name but which in reality belonged to the trustee, was not a right to payment from the brokers of the original amount deposited but a right to claim the balance, whether greater or less than the amounted deposited; and it is to that chose in action that the trustee now lays claim.
Given, then, that the trustee has established his legal claim to the £11,700 and the profits earned by the use of his money, and has located the money, first, in Mrs. Jones’ account with the commodity brokers and, later, in Mrs. Jones’ account at Raphaels, I am satisfied that the common law has adequate remedies to enable him to recover his property. He did not need to sue Mrs. Jones; and he did not do so. He was entitled to bring an action for debt against Raphaels and obtain an order for payment. When he threatened to do so, Raphaels interpleaded, and the issue between the trustee and Mrs. Jones was which of them could give a good receipt to Raphaels. That depended upon which of them had the legal title to the chose in action. The money now being in court, the court can grant an appropriate declaration and make an order for payment.
In my judgment the trustee was entitled at law to the money in the joint account of the bankrupts at Midland Bank, which had vested in him by statute. He was similarly entitled to the balance of the money in Mrs. Jones’ account with the commodity brokers, and the fact that it included profits made by the use of that money is immaterial. He was similarly entitled to the money in Mrs. Jones’ account at Raphaels and able to give them a good receipt for the money. Mrs. Jones never had any interest, legal or equitable, in any of those monies. The trustee is plainly entitled to the money in court and the judge was right to order that it be paid out to him.
I would dismiss the appeal.
LORD JUSTICE BELDAM: I too would dismiss the appeal.
Paragon Finance Plc v D B Thakerar & Co (A Firm)
[1998] EWCA Civ 1249
Millett LJ
Fraudulent breach of trust
Section 21 of the 1980 Act so far as material provides as follows:
21 Time limit for actions in respect of trust property.
(1) No period of limitation prescribed by this Act shall apply to an action by a beneficiary under a trust, being an action-
(a) in respect of any fraud or fraudulent breach of trust to which the trustee was a party or privy; or
(b) to recover from the trustee trust property or the proceeds of trust property in the possession of the trustee, or previously received by the trustee and converted to his use.
…….
(3) Subject to the preceding provisions of this section, an action by a beneficiary to recover trust property or in respect of any breach of trust, not being an action for which a period of limitation is prescribed by any other provision of this Act, shall not be brought after the expiration of six years from the date on which the right of action accrued.”
Section 38 provides that the expressions “trust” and “trustee” have the same meanings respectively as in the Trustee Act 1925 (“the 1925 Act”). This extends the meaning of those expressions to “implied and constructive trusts”: see Section 68(17) of the 1925 Act.
By Paragraphs 106 to 108 of the Statement of Claim the Plaintiffs allege that the Defendants were guilty of a fraudulent breach of trust. The Plaintiffs’ case is that the Defendants obtained the mortgage advance dishonestly by statements (in the Report on Title) which they knew to be untrue and consequently held the money on a constructive trust to return it to the Plaintiffs immediately on receipt. Payment of the money to or by the direction of the borrower on completion of the sub-purchase instead of to the Plaintiffs was a breach of this constructive trust. As Counsel for the Plaintiffs acknowledged, it was not a breach of the trust which would have arisen in the ordinary way from the receipt of the advance money for payment of the amount due on completion. That trust was discharged according to its terms, but its existence assumes that the Defendants acted honestly; on the Plaintiffs’ case it never came into being but was displaced ab initio by the constructive trust in their favour.
The Plaintiffs submit that Section 21(1)(a) of the 1980 Act taken with the extended definition of the words “trust” and “trustee” has the effect of excluding the application of any period of limitation to their claim for breach of this constructive trust. They say that it is irrelevant that the trust in question had no independent existence apart from the fraud but is rather equity’s response to the fraud. They submit that, if such a fact was ever relevant, it ceased to be so after the passing of the 1939 Act. This makes it necessary to consider the antecedent law and the effect of the 1939 Act.
Before 1890, when the Trustee Act 1888 (“the 1888 Act”) came into operation, a claim against an express trustee was never barred by lapse of time. The Court of Chancery had developed the rule that, in the absence of laches or acquiescence, such a trustee was accountable without limit of time. The rule was confirmed by Section 25(3) of the Judicature Act 1873, which provided that no claim by a cestui que trust against his trustee for any property held on an express trust, or in respect of any breach of such trust, should be held to be barred by any statute of limitation.
The explanation for the rule was that the possession of an express trustee is never in virtue of any right of his own but is taken from the first for and on behalf of the beneficiaries. His possession was consequently treated as the possession of the beneficiaries, with the result that time did not run in his favour against them: see the classic judgment of Lord Redesdale in Hovenden v. Lord Annesley (1806) 2 Sch. & Lef. 607 at pp. 633-4.
The rule did not depend upon the nature of the trustee’s appointment, and it was applied to trustees de son tort and to directors and other fiduciaries who, though not strictly trustees, were in an analogous position and who abused the trust and confidence reposed in them to obtain their principal’s property for themselves. Such persons are properly described as constructive trustees.
Regrettably, however, the expressions “constructive trust” and “constructive trustee” have been used by equity lawyers to describe two entirely different situations. The first covers those cases already mentioned, where the defendant, though not expressly appointed as trustee, has assumed the duties of a trustee by a lawful transaction which was independent of and preceded the breach of trust and is not impeached by the plaintiff. The second covers those cases where the trust obligation arises as a direct consequence of the unlawful transaction which is impeached by the plaintiff.
A constructive trust arises by operation of law whenever the circumstances are such that it would be unconscionable for the owner of property (usually but not necessarily the legal estate) to assert his own beneficial interest in the property and deny the beneficial interest of another. In the first class of case, however, the constructive trustee really is a trustee. He does not receive the trust property in his own right but by a transaction by which both parties intend to create a trust from the outset and which is not impugned by the plaintiff. His possession of the property is coloured from the first by the trust and confidence by means of which he obtained it, and his subsequent appropriation of the property to his own use is a breach of that trust. Well known examples of such a constructive trust are McCormick v Grogan (1869) 4 App.Cas. 82 (a case of a secret trust) and Rochefoucald v Boustead [1897] 1 Ch. 196 (where the defendant agreed to buy property for the plaintiff but the trust was imperfectly recorded). Pallant v Morgan [1953] Ch. 43 (where the defendant sought to keep for himself property which the plaintiff trusted him to buy for both parties) is another. In these cases the plaintiff does not impugn the transaction by which the defendant obtained control of the property. He alleges that the circumstances in which the defendant obtained control make it unconscionable for him thereafter to assert a beneficial interest in the property.
The second class of case is different. It arises when the defendant is implicated in a fraud. Equity has always given relief against fraud by making any person sufficiently implicated in the fraud accountable in equity. In such a case he is traditionally though I think unfortunately described as a constructive trustee and said to be “liable to account as constructive trustee.” Such a person is not in fact a trustee at all, even though he may be liable to account as if he were. He never assumes the position of a trustee, and if he receives the trust property at all it is adversely to the plaintiff by an unlawful transaction which is impugned by the plaintiff. In such a case the expressions “constructive trust” and “constructive trustee” are misleading, for there is no trust and usually no possibility of a proprietary remedy; they are “nothing more than a formula for equitable relief”: Selangor United Rubber Estates Ltd. v Cradock [1968] 1 WLR 1555 at p. 1582 per Ungoed-Thomas J.
The constructive trust on which the Plaintiffs seek to rely is of the second kind. The Defendants were fiduciaries, and held the Plaintiffs’ money on a resulting trust for them pending completion of the sub-purchase. But the Plaintiffs cannot establish and do not rely upon a breach of this trust. They allege that the money which was obtained from them and which would otherwise have been subject to it was obtained by fraud and they seek to raise a constructive trust in their own favour in its place.
The importance of the distinction between the two categories of constructive trust lies in the application of the Statutes of Limitation. Before 1890 constructive trusts of the first kind were treated in the same way as express trusts and were often confusingly described as such; claims against the trustee were not barred by the passage of time. Constructive trusts of the second kind however were treated differently. They were not in reality trusts at all, but merely a remedial mechanism by which equity gave relief for fraud. The Court of Chancery, which applied the Statutes of Limitation by analogy, was not misled by its own terminology; it gave effect to the reality of the situation by applying the Statute to the fraud which gave rise to the defendant’s liability: see Soar v Ashwell [1893] 2 QB 390 at p. 393 per Lord Esher:
“If the breach of the legal relation relied on….in the view of the Court of Equity treats the defendant as trustee for the Plaintiff, the Court of Equity treats the defendant as a trustee by construction, and the breach is called a constructive trust; and against the breach by which by construction creates the trust the Court of Equity allows Statutes of Limitation to be vouched.”
Lord Esher’s reference to the breach of the legal relation shows that while the first kind of constructive trust was a creature of equity’s exclusive jurisdiction the second arose in the exercise of its concurrent jurisdiction. That is why the Statute was applied by analogy. For a fuller discussion of the distinction between the two categories of constructive trust, see Hovenden v Lord Annesley ( supra) at pp 632-3; Soar v Ashwell ( supra); Taylor v Davies [1920] AC 636; Clarkson v Davies [1923] AC 100; Selangor United Estates Ltd. v Cradock ( supra); Competitive Insurance Co. Ltd. v Davies Investments Ltd. [1975] 1 WLR 1240.
It was evidently considered unduly harsh that trustees should remain liable indefinitely for innocent breaches of trust when even common law actions for fraud were barred after six years, and Section 8 of the 1888 Act introduced a period of limitation (effectively six years) for such claims. Its purpose was to provide protection for trustees who would otherwise be liable without limitation of time (laches and acquiescence apart) where the breach of trust was committed innocently: see Re Richardson [1920] 1 Ch. 423 at p. 440. It excepted two cases from its provisions: (i) where the claim was founded upon any fraud or fraudulent breach of trust to which the trustee was party or privy and (ii) where the proceeds were still retained by the trustee or had previously been received by the trustee and converted to his use. The same scheme was adopted by Section 19 of the 1939 Act and Section 21 of the 1980 Act.
Section 1(3) of the 1888 Act defined “trustee” as follows:
“(3) For the purposes of this Act the expression “trustee” shall be deemed to include an executor or administrator and a trustee whose trust arises by construction or implication of law as well as an express trustee….”
Read literally and without regard to its evident purpose the 1888 Act might be thought to have replaced the former scheme in its entirety and to have abolished the distinction between the two categories of constructive trust. This, however, was not the case. In Taylor v Davies ( supra) the Privy Council sitting on a Canadian appeal had to consider Section 47 of the (Ontario) Limitations Act 1914. The Canadian Act was closely modelled on the 1888 Act and contained a definition of “trustee” in similar terms. The Privy Council held that constructive trustees of the second kind were not within the terms of the Act and could still rely on the Statutes of Limitation by analogy, as otherwise a section which was passed for the relief of trustees would seriously alter for the worse the position of constructive trustees. Viscount Cave said at p. 653:
“It does not appear that the section has this effect. The expressions “trust property” and “retained by the trustee” properly apply, not to a case where a person having taken possession of the property on his own behalf is liable to be declared a trustee by the Court; but rather to a case where he originally took possession upon trust or on behalf of others. In other words they refer to cases where a trust arose before the occurrence of the transaction. The exception no doubt applies, not only to an express trustee named in the instrument of trust, but also to those persons who under the rule explained in Soar v Ashwell and other cases are treated as being in like position; but in their Lordships’ opinion it does not apply to a mere constructive trust of the character described in the judgment of Sir William Grant” (in Beckford v Wade (1805) 17 Ves. Jun. 87, 97 ie. a constructive trust of the second kind).
The Privy Council revisited the question in Clarkson v Davies [1923] AC 100. Unlike Taylor v Davies this was a case of fraud. It was held that this was not a valid distinction. Referring to Taylor v Davies the Privy Council stated:
“…it was there laid down that there is a distinction between a trust which arises before the occurrence of the transaction impeached and cases which arises only by reason of that transaction.”
The same conclusion was reached in Piwinski v Corporate Trustees of the Diocese of Armidale [1971] 1 NSWLR 266 and Queensland Mines v Hudson [1976] ACLC 28,658. In each of those cases the New South Wales Supreme Court had to consider the limitation provisions of the Trustee Act 1925 of New South Wales which were also modelled on those of the 1888 Act.
Had the present case occurred before 1940, therefore, the Defendants could have pleaded a limitation defence to the claim based on constructive trust. The question is whether the distinction between the two kinds of constructive trust survived the passing of the 1939 Act, Section 19 of which was in the virtually the same terms as Section 21 of the 1980 Act, and both of which adopted the definition of “trust” and “trustee” in 1925 Act.
The 1939 Act was enacted in response to the Fifth Interim Report of the Law Revision Committee in 1936. This included a recommendation in the following terms:
“It is perhaps too late now to suggest that [the 1888 Act] was intended to do away with the distinction between express and constructive trusts for the purpose of the limitation of actions, though the definition of “trustee” in Section 1(3) seems to point to that conclusion. At any rate we consider that the distinction should now be abolished, and we recommend that the exception in Section 8 of [the 1888 Act] should expressly be made to extend to trustees whether holding on express or constructive trusts, including personal representatives.”
In his book on Canadian law “The Constructive Trust” Professor Donovan Waters has written at p. 1020:
“However, in England, without the benefit of later trust developments, the Limitation Act was intended to bury this issue, and by almost unanimous consent bury the issue it did.”
In a recent and so far unreported decision Barlow Clowes International Ltd. v Eurotrust International Ltd. in which judgment was delivered this year the Court of Appeal of the Isle of Man considered the provisions of Section 21 of the (Manx) Limitation Act 1984, which is in identical terms to Section 21 of the 1980 Act. The plaintiffs alleged that the defendants had knowingly assisted in the commission of a fraudulent breach of trust and were accordingly “liable to account as constructive trustees”. The Court held that on the facts pleaded the trust arose before the occurrence of the transactions impeached (ie. that the constructive trust was of the first kind), with the result that present question did not arise. But affirming the decision of the First Deemster reported at (1998/9) 2 O.F.L.R. 42 it also held that (i) that the rule in Taylor v Davies had no application to a person who knowingly assists in a fraudulent breach of a pre-existing trust and (ii) that the former distinction between the two categories of constructive trust had been abrogated by the 1939 Act and therefore by the Manx Act.
The first of these propositions is not relevant to anything which we have to decide, since despite the flexibility of the concept of the constructive trustee it cannot be stretched so far that it encompasses the borrowers in the cases before us. The Plaintiffs do not charge the Defendants with “knowing assistance”. They do not allege that the Defendants are strangers who were implicated in a breach of trust committed by trustees or others in a fiduciary position. They allege the converse; that despite their fiduciary position the Defendants allowed themselves to be implicated in a fraud committed by others.
The second proposition is, however, of direct relevance to the present case. The Court of Appeal held that, by incorporating for the first time the definition of “trust” and “trustee” contained in Section 68(17) of the 1925 Act, Section 19 of the 1939 Act had the effect of abrogating the former distinction between the two kinds of constructive trust. In reaching this conclusion the Court relied on the recommendation of the Law Revision Committee and what the Court described as the preponderance of academic writing.
In my judgment there are formidable arguments in favour of the contrary view, some based on textual analysis and others on policy considerations. They include the following:
(1) If the 1939 Act was intended to abrogate the former distinction between the two kinds of constructive trust, it is difficult to see how it achieved its object. It can hardly have done so by merely by adopting the definitions of “trust” and “trustee” in the Trustee Act 1925, since these are not materially different from those in the 1888 Act. If anything the use of the definitions in the 1925 Act points in the opposite direction, for that Act is concerned exclusively with the powers and duties of trustees properly so called. It is not concerned with persons whose trusteeship is merely a formula for giving restitutionary relief. Such persons have no trust powers or duties; they cannot invest, sell or deal with the trust property; they cannot retire or appoint new trustees; they have no trust property in their possession or under their control, since they became accountable as constructive trustees only by parting with the trust property. They are in reality neither trustees nor fiduciaries, but merely wrongdoers.
(2) The Law Reform Committee was concerned with a different problem. By a process of reasoning which, like the Committee, I find difficult to understand, the Courts had applied the extended definition of “trustee” to Section 8 of the 1888 Act but not to the exceptions, with the result that an executor could plead the statute even though he retained the property. This anomaly was corrected by the new definitions, which were materially different in relation to personal representatives.
(3) The actual recommendation of the Law Reform Committee went wider than the mischief to which it drew attention, and it is an open question whether Parliament intended to adopt the wider recommendation or merely to put an end to the mischief. If it had intended the former, however, it is difficult to believe that it would have chosen to do so by the means which it adopted. It would surely have used language like that to be found in Section 11 of the (New South Wales) Limitation Act 1969.
(4) As a matter of statutory construction the question turns on the meaning of the opening words of Section 21(1) of the 1980 Act (re-enacting in similar terms the opening words of Section 19(1) of the 1939 Act). As Harpum noted in his influential article in 102 LQR 266 at p. 288, these are not apt to cover constructive trusts of the second kind. This is because they refer to
“…an action by a beneficiary under a trust…to which the trustee…”
As Harpum observed, these words would appear to be prima facie applicable only to those whose trusteeship precedes the occurrence which is the subject of the claim against them and not those whose trusteeship arises only by reason of that occurrence.
(5) One of the distinctions between express trusts and other trusts under the former law was that express trusts were evidenced in writing and other trusts were not. This distinction has clearly been abolished (probably by the 1888 Act) and there is no occasion to regret its passing. In expressing the opinion that the rule in Taylor v Davies was abolished by the 1939 Act, however, most commentators have concentrated on the inappropriateness of distinguishing for limitation purposes between trusts by reference to the modes of their creation. This is not, however, the distinction between the two kinds of constructive trusts which was drawn in that case. That was the distinction between an institutional trust and a remedial formula – between a trust and a catch phrase. In my opinion, those academic writers whose opinions were relied on by the Manx Court of Appeal were not primarily concerned with the issue now under consideration.
(6) If the views of trust and restitution lawyers are also taken into account, the opinions of academic writers are more tentative than the Manx Court of Appeal allowed. The Consultation Paper on Limitation of Actions (No. 151) issued by the Law Commission deals with the problem at pp.74-6 in terms which do not support the view that the distinction between the two kinds of constructive trust is plainly obsolete.
(7) The Manx Court of Appeal appears to have misunderstood the relevance of Shephard v Cartwright [1955] AC 728. In that case the defendants pleaded the 1939 Act. At p. 450 Viscount Simonds adopted the answer given by Denning LJ at [1953] Ch. 756. This was that if the father had taken the money on behalf of his children, as he ought to have done, and had since converted it to his own use, then no period of limitation would run; but if he had taken the money fraudulently and adversely to the children, the period of limitation would not start to run until the children discovered the fraud. This was consistent only with the survival of the old law. Denning LJ must have considered that the distinction between the two kinds of constructive trustee was still relevant after the passing of the 1939 Act, or he would not have drawn the distinction he did.
(8) Although at first sight the distinction drawn in Taylor v Davies appears to be merely chronological, it marks a real difference between trustees (whether or not expressly appointed as such) who commit a breach of trust (however created) and persons who are not trustees at all but who are described as trustees for the purpose of enabling equitable relief to be granted against them. Actions founded on tort are barred after six years, and there is no exception for actions founded on fraud, though the start of the limitation period may be deferred in such cases. There is no logical basis for distinguishing between an action for damages for fraud at common law and the corresponding claim in equity for “an account as constructive trustee” founded on the same fraud. Section 21 of the 1980 Act can sensibly be limited to wrongs cognisable by equity in the exercise of its exclusive jurisdiction. It makes no sense to extend it to the exercise of its concurrent jurisdiction.
(9) Although the 1939 and 1980 Acts are perhaps not wholly consistent in this respect, any principled system of limitation should be based on the cause of action and not the remedy. There is a case for treating fraudulent breach of trust differently from other frauds, but only if what is involved really is a breach of trust. There is no case for distinguishing between an action for damages for fraud at common law and its counterpart in equity based on the same facts merely because equity employs the formula of constructive trust to justify the exercise of the equitable jurisdiction.
(10) A principled system of limitation would also treat a claim against an accessory as barred when the claim against the principal was barred and not before. There is, therefore, a case for treating a claim against a person who has assisted a trustee in committing a breach of trust as subject to the same limitation regime as the claim against the trustee: see J.W. Brunyate, Limitation of Actions in Equity (1932) Ch. 1. But the borrowers, who obtained the money by deceit and were the principal wrongdoers, were neither trustees nor fiduciaries. If guilty of fraud, they can plead the statute. It would be extraordinary if the Defendants were liable in equity as accessories or co-conspirators without limit of time when the claim against the principal wrongdoers was barred.
We do not have to decide this question, because it is sufficient that the Plaintiffs cannot show that the Defendants have no reasonably arguable limitation defence. In my judgment we should treat the Defendants as having an arguable limitation defence of which they should not be deprived by amendment.
But I would offer a more vigorous response. I question whether so many different remedies should continue to be available for the same misapplication of property. They make proceedings of the present kind unnecessarily complex. But whatever the answer to this question, the present problem is a semantic one. The Defendants cannot sensibly be described as constructive trustees at all. The expression is used in its remedial sense, though not in the sense in which it is used in the United States and Canada, where it is the basis of a discretionary proprietary remedy; in cases of the present case a plaintiff is necessarily confined to a personal remedy. Before the Judicature Act the expression was a catch phrase which was employed by the Court of Chancery to justify the exercise of equity’s concurrent jurisdiction in cases of fraud. 125 years later it is surely time to discard it. If we cannot bring ourselves to discard it, at least we can resolve not to take it literally.
Breach of fiduciary duty
In my judgment the application for leave to amend to plead breach of fiduciary duty fails for a similar reason. It is clear from the authorities already cited that the Court of Chancery drew the same distinction between those whose fiduciary obligations preceded the acts complained of and those whose liability in equity was occasioned by the acts of which complaint was made. In pleading breach of fiduciary duty the Plaintiffs concentrate on the information which the Defendants possessed but concealed from them rather than on the money, but the position is essentially the same. On the Plaintiffs’ case the Defendants did not obtain the information from the Plaintiffs or by reason of their fiduciary relationship; they obtained it from the borrowers and because of their complicity in the fraud. The fraud was committed when the borrowers submitted their fictitious application forms to the Plaintiffs, and this must have been before the Plaintiffs retained the Defendants as their solicitors. On the Plaintiffs’ case the Defendants did not take advantage of their fiduciary relationship to misappropriate moneys entrusted to them; the borrowers obtained the money by fraud and procured it to be channelled to them through the Defendants’ client account. It would be absurd if the borrowers were deprived of the protection of the Limitation Act because of the route by which the money reached them; and equally absurd if they were entitled to it and the Defendants were not. The Defendants’ fiduciary relationship only came into being in the course of the fraud and was incidental to the means by which the fraud was perpetrated. The Plaintiffs’ case cannot sensibly be described as based on breach of fiduciary duty. Their case is that they were swindled.
Nelson v Rye
The Plaintiffs, however, submit that a claim for an account in respect of a breach of fiduciary duty is outside the scope of the 1980 Act and is accordingly not subject to any period of limitation. For these propositions they rely on Nelson v Rye [1996] 1 WLR 1378. In my judgment that case is not in point, but since the Plaintiffs place great reliance on it I must explain why I regard it as irrelevant as well as wrongly decided.
In Nelson v Rye the plaintiff was a solo musician who appointed the defendant his manager on terms that he would collect the fees and royalties which were due to him and pay his expenses and account to him annually for his net income after deducting his own commission. When the relationship came to an end the plaintiff claimed an account, and the question was whether the account should be limited to the six years before the issue of the writ or whether it should extend over the whole period of the relationship. Actions for an account are dealt with by Section 23 of the 1980 Act. The time limit for such an action is dependent on the nature of the claim which is the basis of the duty to account.
The Judge recognised that the defendant’s obligation to account was contractual and held that a claim to enforce the contractual right to an account would have been barred after six years by Sections 5 and 23 of the 1980 Act. But he held that this was irrelevant because the plaintiff had chosen to sue for breach of fiduciary duty and not for breach of contract. He observed that not all fiduciary relationships give rise to constructive trusts, but held that this one did. After stating that it was a fallacy to suppose that breach of fiduciary duty and breach of constructive trust were different causes of action, he held that the defendant’s failure to account was either a breach of fiduciary duty which fell outside the 1980 Act altogether or a breach of a constructive trust which fell within Section 21(1)(b) of the Act.
The law on this subject has been settled for more than a hundred years. An action for an account brought by a principal against his agent is barred by the Statutes of Limitation unless the agent is more than a mere agent but is a trustee of the money which he received: see Burdick v Garrett (1870) 5 Ch.App. 233; Knox v Gye (1872) 5 App.Cas. 656; Re Sharpe [1892]1 Ch.D. 154. A claim for an account in equity, absent any trust, has no equitable element; it is based on legal, not equitable rights: see How v Earl Winterton [1896] 2 Ch. 617 at p. 639 per Lindley LJ. Where the agent’s liability to account was contractual equity acted in obedience to the statute: see Hovenden v Lord Annesley (1806) 2 Sch. & Lef. 607 at p. 631 per Lord Redesdale. Where, as in Knox v Gye, there was no contractual relationship between the parties, so that the liability was exclusively equitable, the Court acted by analogy with the statute. Its power to do so is implicitly preserved by Section 36 of the 1980 Act (re-enacting in simpler terms the tortuous provisions of Section 2(2) and (7) which were subjected to critical analysis by Sir Robert Megarry V.-C. in Tito v Waddell (No. 2) [1977] Ch. 106 at pp. 250-252).
Accordingly, the defendant’s liability to account for more than six years before the issue of the writ in Nelson v Rye depended on whether he was, not merely a fiduciary (for every agent owes fiduciary duties to his principal), but a trustee, that is to say, on whether he owed fiduciary duties in relation to the money.
Whether he was in fact a trustee of the money may be open to doubt. Unless I have misunderstood the facts or they were very unusual it would appear that the defendant was entitled to pay receipts into his own account, mix them with his own money, use them for his own cash-flow, deduct his own commission, and account for the balance to the plaintiff only at the end of the year. It is fundamental to the existence of a trust that the trustee is bound to keep the trust property separate from his own and apply it exclusively for the benefit of his beneficiary. Any right on the part of the defendant to mix the money which he received with his own and use it for his own cash flow would be inconsistent with the existence of a trust. So would a liability to account annually, for a trustee is obliged to account to his beneficiary and pay over the trust property on demand. The fact that the defendant was a fiduciary was irrelevant if he had no fiduciary or trust obligations in regard to the money. If this was the position, then the defendant was a fiduciary and subject to an equitable duty to account, but he was not a constructive trustee. His liability arose from his failure to account, not from his retention and use of the money for his own benefit, for this was something which he was entitled to do.
Unless the defendant was a trustee of the money which he received, however, the claim for an account was barred after six years. The fact that the defendant was a fiduciary did not make his failure to account a breach of fiduciary duty or make him liable to pay equitable compensation. His liability to account arose from his receipt of money in circumstances which made him an accounting party. It did not arise from any breach of duty, fiduciary or otherwise. The defendant was merely an accounting party who had failed to render an account.
Accordingly, insofar as it decided that the defendant was liable to account without limit of time even if the money was not trust money, Nelson v Rye was in my opinion wrongly decided. But it is not in point in the present case. The Defendants were, of course, accounting parties in respect of the moneys advanced by the Plaintiffs; but unless and until the underlying transactions are set aside the Defendants have duly accounted for the money. They laid it out in accordance with their instructions on completion of each of the transactions in question: see Bristol & West Building Society v Mothew ( supra). The Plaintiffs do not claim an account on the ground that the receipt of the money by the Defendants made them accounting parties. They claim equitable compensation for breach of fiduciary duty, and they seek all necessary accounts to enable the compensation to be quantified. For the reasons I have already given, such a claim could be met by a limitation defence before 1939 and is at least arguably subject to such a defence today.
Twinsectra Limited v Yardley and Others
[2002] UKHL 12 [2002] 38 EGCS 204, [2002] 2 All ER 377, [2002] UKHL 12, [2002] WTLR 423, [2002] PNLR 30, [2002] 2 WLR 802, [2002] 2 AC 164, [2002] NPC 47
LORD HUTTON
My Lords,
I have had the advantage of reading in draft the speeches of my noble and learned friends Lord Hoffmann and Lord Millett. For the reasons which they give I agree that the undertaking given by Mr Sims to Twinsectra Ltd (“Twinsectra”) created a trust, and I turn to consider whether the Court of Appeal was right to hold that Mr Leach is liable for assisting in Mr Sims’ breach of trust. Carnwath J held that the undertaking did not create a trust, but he also held that Mr Leach had not been dishonest. The Court of Appeal reversed his findings and held that the undertaking gave rise to a trust and that Mr Leach had acted dishonestly and was liable as an accessory to Mr Sims’ breach of trust.
My Lords, in my opinion, the issue whether the Court of Appeal was right to hold that Mr Leach had acted dishonestly depends on the meaning to be given to that term in the judgment of Lord Nicholls of Birkenhead in Royal Brunei Airlines Snd Bhd v Tan [1995] 2 AC 378. In approaching this question it will be helpful to consider the place of dishonesty in the pattern of that judgment. Lord Nicholls considered, at pp 384 and 385, the position of the honest trustee and the dishonest third party and stated that dishonesty on the part of the third party was a sufficient basis for his liability notwithstanding that the trustee, although mistaken and in breach of trust, was honest. He then turned to consider the basis on which the third party, who does not receive trust property but who assists the trustee to commit a breach, should be held liable. He rejected the possibility that such a third party should never be liable and he also rejected the possibility that the liability of a third party should be strict so that he would be liable even if he did not know or had no reason to suspect that he was dealing with a trustee. Therefore Lord Nicholls concluded that the liability of the accessory must be fault-based and in identifying the touchstone of liability he stated, at p 387 H: “By common accord dishonesty fulfils this role.” Then, at pp 388 and 389, he cited a number of authorities and the views of commentators and observed that the tide of authority in England had flowed strongly in favour of the test of dishonesty and that most, but not all, commentators also preferred that test.
Whilst in discussing the term “dishonesty” the courts often draw a distinction between subjective dishonesty and objective dishonesty, there are three possible standards which can be applied to determine whether a person has acted dishonestly. There is a purely subjective standard, whereby a person is only regarded as dishonest if he transgresses his own standard of honesty, even if that standard is contrary to that of reasonable and honest people. This has been termed the “Robin Hood test” and has been rejected by the courts. As Sir Christopher Slade stated in Walker v Stones [2000] Lloyds Rep PN 864, 877 para 164:
“A person may in some cases act dishonestly, according to the ordinary use of language, even though he genuinely believes that his action is morally justified. The penniless thief, for example, who picks the pocket of the multi-millionaire is dishonest even though he genuinely considers that theft is morally justified as a fair redistribution of wealth and that he is not therefore being dishonest.”
Secondly, there is a purely objective standard whereby a person acts dishonestly if his conduct is dishonest by the ordinary standards of reasonable and honest people, even if he does not realise this. Thirdly, there is a standard which combines an objective test and a subjective test, and which requires that before there can be a finding of dishonesty it must be established that the defendant’s conduct was dishonest by the ordinary standards of reasonable and honest people and that he himself realised that by those standards his conduct was dishonest. I will term this “the combined test”.
There is a passage in the earlier part of the judgment in Royal Brunei which suggests that Lord Nicholls considered that dishonesty has a subjective element.
Thus in discussing the honest trustee and the dishonest third party at [1995] 2 AC 378, 385 A-C he stated:
“These examples suggest that what matters is the state of mind of the third party …. But [the trustee’s] state of mind is essentially irrelevant to the question whether the third party should be made liable to the beneficiaries for breach of trust.”
However, after stating, at p 387 H, that the touchstone of liability is dishonesty, Lord Nicholls went on at page 389 B-C to discuss the meaning of dishonesty:
“Before considering this issue further it will be helpful to define the terms being used by looking more closely at what dishonesty means in this context. Whatever may be the position in some criminal or other contexts (see, for instance, R v Ghosh [1982] QB 1053), in the context of the accessory liability principle acting dishonestly, or with a lack of probity, which is synonymous, means simply not acting as an honest person would in the circumstances. This is an objective standard.”
My noble and learned friend Lord Millett has subjected this passage and subsequent passages in the judgment to detailed analysis and is of the opinion that Lord Nicholls used the term “dishonesty” in a purely objective sense so that in this area of the law a person can be held to be dishonest even though he does not realise that what he is doing is dishonest by the ordinary standards of honest people. This leads Lord Millett on to the conclusion that in determining the liability of an accessory dishonesty is not necessary and that liability depends on knowledge.
In R v Ghosh [1982] QB 1053 Lord Lane CJ held that in the law of theft dishonesty required that the defendant himself must have realised that what he was doing was dishonest by the ordinary standards of reasonable and honest people. The three sentences in Lord Nicholl’s judgment, at p 389 B-C, which appear to draw a distinction between the position in criminal law and the position in equity, do give support to Lord Millett’s view. But considering those sentences in the context of the remainder of the paragraph and taking account of other passages in the judgment, I think that in referring to an objective standard Lord Nicholls was contrasting it with the purely subjective standard whereby a man sets his own standard of honesty and does not regard as dishonest what upright and responsible people would regard as dishonest. Thus after stating that dishonesty is assessed on an objective standard he continued, at p 389 C:
“At first sight this may seem surprising. Honesty has a connotation of subjectivity, as distinct from the objectivity of negligence. Honesty, indeed, does have a strong subjective element in that it is a description of a type of conduct assessed in the light of what a person actually knew at the time, as distinct from what a reasonable person would have known or appreciated. Further, honesty and its counterpart dishonesty are mostly concerned with advertent conduct, not inadvertent conduct. Carelessness is not dishonesty. Thus for the most part dishonesty is to be equated with conscious impropriety. However, these subjective characteristics of honesty do not mean that individuals are free to set their own standards of honesty in particular circumstances. The standard of what constitutes honest conduct is not subjective. Honesty is not an optional scale, with higher or lower values according to the moral standards of each individual. If a person knowingly appropriates another’s property, he will not escape a finding of dishonesty simply because he sees nothing wrong in such behaviour.”
Further, at p 391 A-C, Lord Nicholls said:
“Ultimately, in most cases, an honest person should have little difficulty in knowing whether a proposed transaction, or his participation in it, would offend the normally accepted standards of honest conduct.
Likewise, when called upon to decide whether a person was acting honestly, a court will look at all the circumstances known to the third party at the time. The court will also have regard to personal attributes of the third party, such as his experience and intelligence, and the reason why he acted as he did.”
The use of the word “knowing” in the first sentence would be superfluous if the defendant did not have to be aware that what he was doing would offend the normally accepted standards of honest conduct, and the need to look at the experience and intelligence of the defendant would also appear superfluous if all that was required was a purely objective standard of dishonesty. Therefore I do not think that Lord Nicholls was stating that in this sphere of equity a man can be dishonest even if he does not know that what he is doing would be regarded as dishonest by honest people.
Then, at p 392 F-G, Lord Nicholls stated the general principle that dishonesty is a necessary ingredient of accessory liability and that knowledge is not an appropriate test:
“The accessory liability principle
Drawing the threads together, their Lordships’ overall conclusion is that dishonesty is a necessary ingredient of accessory liability. It is also a sufficient ingredient. A liability in equity to make good resulting loss attaches to a person who dishonestly procures or assists in a breach of trust or fiduciary obligation. It is not necessary that, in addition, the trustee or fiduciary was acting dishonestly, although this will usually be so where the third party who is assisting him is acting dishonestly. ‘Knowingly’ is better avoided as a defining ingredient of the principle, and in the context of this principle the Baden [1993] 1 WLR 509 scale of knowledge is best forgotten.”
I consider that this was a statement of general principle and was not confined to the doubtful case when the propriety of the transaction in question was uncertain.
At p 387 B-C, Lord Nicholls stated that there is a close analogy between “knowingly” interfering with the due performance of a contract and interfering with the relationship between a trustee and a beneficiary. But this observation was made in considering and rejecting the possibility that a third party who did not receive trust property should never be liable for assisting in a breach of trust. I do not think that in referring to “knowingly” procuring a breach of contract Lord Nicholls was suggesting that knowingly assisting in a breach of trust was sufficient to give rise to liability. Such a view would be contrary to the later passage, at p 392 F-G, dealing directly with this point.
There is, in my opinion, a further consideration which supports the view that for liability as an accessory to arise the defendant must himself appreciate that what he was doing was dishonest by the standards of honest and reasonable men. A finding by a judge that a defendant has been dishonest is a grave finding, and it is particularly grave against a professional man, such as a solicitor. Notwithstanding that the issue arises in equity law and not in a criminal context, I think that it would be less than just for the law to permit a finding that a defendant had been “dishonest” in assisting in a breach of trust where he knew of the facts which created the trust and its breach but had not been aware that what he was doing would be regarded by honest men as being dishonest.
It would be open to your Lordships to depart from the principle stated by Lord Nicholls that dishonesty is a necessary ingredient of accessory liability and to hold that knowledge is a sufficient ingredient. But the statement of that principle by Lord Nicholls has been widely regarded as clarifying this area of the law and, as he observed, the tide of authority in England has flowed strongly in favour of the test of dishonesty. Therefore I consider that the courts should continue to apply that test and that your Lordships should state that dishonesty requires knowledge by the defendant that what he was doing would be regarded as dishonest by honest people, although he should not escape a finding of dishonesty because he sets his own standards of honesty and does not regard as dishonest what he knows would offend the normally accepted standards of honest conduct.
In cases subsequent to Royal Brunei there has been some further consideration of the test to be applied to determine dishonesty (the cases being helpfully discussed in an article by Mr Andrew Stafford QC on “Solicitors’ liability for knowing receipt and dishonest assistance in breach of trust” in (2001) 17 Professional Negligence 3. For the reasons which I have given I consider that in Abbey National PLC v Solicitors Indemnity Fund Ltd [1997] PNLR 306 Steel J applied the correct test. In that case, at p 310, she referred to the test set out in R v Ghosh [1982] QB 1053 and to Lord Nicholl’s judgment in Royal Brunei [1995] 2 AC 378 and observed that it was to the effect that honesty is to be judged objectively, and she continued:
“What in this case, did, Mr Fallon do, and was he acting as a reasonable and honest solicitor would do? In that case it was laid down that individuals are not free to set their own standards. Mr Fenwick on behalf of the defendant says that if I find that by those standards Mr Fallon was dishonest that would be enough. I need to consider what he did and ask the question: Was he acting as an honest person should? Was what he did dishonest by the standards of a reasonable and honest man or a reasonable and honest solicitor? Having read that case, however, it seems to me that the judgment does not set down a wholly objective test for civil cases. Lord Nicholls particularly refers to a conscious impropriety. The test there, it seems, does embrace a subjective approach, and I have to look at the circumstances to see whether they were such that Mr Fallon must have known that what he did was by the standards of ordinary decent people dishonest. I accept totally that individuals should not be free to set their own standards, but there is in my view a subjective element both in civil and in criminal cases.”
Therefore I turn to consider the judgment of Carnwath J and the Court of Appeal on the basis that a finding of accessory liability can only be made against Mr Leach if, applying the combined test, it were established on the evidence that he was dishonest.
At the trial Mr Leach was cross-examined very closely and at length about his state of mind when he paid to Mr Yardley the monies transferred to him by Mr Sims. The tenor of his replies was that he paid the monies to his client because his client instructed him to do so. Thus in the course of that cross-examination counsel for Twinsectra put the following questions to him (page 55 of the transcript):
“Q. That is not what you said in your pleading which is what I am putting to you. In your pleading you said that with the exception of the Glibbery payment every other payment was made by you in the belief that the money was going to be used for the acquisition of property by companies of Mr Yardley.
A. I had no reason to disbelieve that it was not. As I said, I believed my client. He borrowed the money. I followed his instructions.
Q. £200,000 was being transferred to Y C Sales, you did not believe for a moment that that company was going to use it to acquire property, did you?
A. My Lord, I merely followed my client’s instructions.
CARNWATH J: I think there is a difference. I mean I understand you are saying that, but there is a difference between saying: “I simply paid it in accordance with my client’s instructions”, and saying, as is said in the pleading: “I paid it in the belief it was going to be used on the acquisition of property”. Now, if your evidence that the former was true and the latter was not then fair enough, but I think Mr Tager is entitled to ask you whether it is right positively to state that you paid the monies in the belief that they were being applied in the acquisition of property.
A. I merely believed in the sense that the monies my client had borrowed were being used for the purpose for which he borrowed them. I actually didn’t consider the point.
Q. No, so it is probably that pleading goes rather farther than your own recollection?
A. Yes, I think it is probably ….
MR TAGER: You were putting forward a case in your pleading that Mr Sims had confirmed with you on 23 December that it was going to be used for property. You asked your client if that was so and you got him to confirm the details. The money comes in, you pay it out and you believe each time that that is how the money was used.
A. I had no reason to disbelieve my client.
CARNWATH J: I think I am clear what the witness is saying, Mr Tager.”
Carnwath J stated, at pp 50, 51 and 52 of his judgment:
“I do not find Mr Leach to have been dishonest, but he was certainly misguided. He found himself in a difficult position. His retainer for Mr Yardley on the Apperley Bridge transaction was very important to his practice (at a time when large conveyancing jobs were few), and offered the prospect of similar work in the future. When asked to review the documentation on the Nigerian venture, he was understandably reluctant to prejudice his relationship with his client.
I do not accept his evidence that he paid no regard to the details. He was specifically asked to review the terms. He must have realised that it was a very unusual venture, and that the returns of the kind offered were very unlikely to be associated with a wholly legitimate business transaction. ….
His attitude to the Twinsectra loan was not dissimilar. When asked to give the undertaking himself, he regarded it as a very unusual request, and one outside the normal course of a solicitor’s practice. This did not lead him to advise Mr Yardley against it, but rather to distance himself from any responsibility for its terms. He told Mr Sims that they were a matter for him. This unease ought to have put him on notice of the need for caution when dealing with the money received under the undertakings. He was clearly aware of their terms. Indeed, his pleaded defence asserts (paragraph 25(4)) that he believed their ‘substance … to be that the advance would be applied in the acquisition of property’ and that he had received them on the footing that they would be so applied. Yet, in evidence, he frankly admitted that he had regarded the money as held simply to the order of Mr Yardley, without restriction. Again, I have to conclude that he simply shut his eyes to the problems. As far as he was concerned, it was a matter solely for Mr Sims to satisfy himself whether he could release the money to Mr Yardley’s account.”
Later in the judgment after holding that the undertaking given by Mr Sims did not create a trust the judge stated, at p 73:
“Were any of the defendants knowing recipients or accessories?
The above conclusion makes it unnecessary to resolve the more difficult question whether any of the defendants (that is, the Yardley companies, or Mr Leach) had the necessary state of mind to make them liable under these headings. For these purposes the companies must realistically be taken to have had the same knowledge and state of mind as Mr Yardley. I have already given my views as to the extent to which I regard him as having acted dishonestly. In Mr Leach’s case, I have found that he was not dishonest, but that he did deliberately shut his eyes to the implications of the undertaking. Whether in either case this would be sufficient to establish accessory liability depends on the application of the Royal Brunei principles to those facts. Although that case was concerned with “knowing assistance” rather than “knowing receipt”, I would find it very difficult, in the light of the current state of the authorities to which I have referred, to define the difference in the mental states required; and I doubt if there is one.”
It would have been open to the judge to hold that Mr Leach was dishonest, in that he knew that he was transferring to Mr Yardley or to one of his companies monies which were subject to an undertaking that they would be applied solely for the acquisition of property and that the monies would not be so applied. But the experienced judge who was observing Mr Leach being cross-examined at length found that Mr Leach, although misguided, was not dishonest in carrying out his client’s instructions.
The judge did not give reasons for this finding or state what test he applied to determine dishonesty, but I think it probable that he applied the combined test and I infer that he considered that Mr Leach did not realise that in acting on his client’s instructions in relation to the monies he was acting in a way which a responsible and honest solicitor would regard as dishonest. The judge may also have been influenced by the consideration that as he did not find that Mr Sims’ undertaking created a trust Mr Leach would not have realised that he was dealing with trust property.
It is only in exceptional circumstances that an appellate court should reverse a finding by a trial judge on a question of fact (and particularly on the state of mind of a party) when the judge has had the advantage of seeing the party giving evidence in the witness box. Therefore I do not think that it would have been right for the Court of Appeal in this case to have come to a different conclusion from the judge and to have held that Mr Leach was dishonest in that when he transferred the monies to Mr Yardley he knew that his conduct was dishonest by the standards of responsible and honest solicitors.
This was the view taken by the Court of Appeal in Mortgage Express Ltd v Newman & Co [2000] Lloyds Rep PN 745 where the issue before the court was not dissimilar to the issue in the present case. In that case it was alleged that the defendant, a solicitor, had dishonestly taken part in a mortgage fraud. In the High Court [2000] PNLR 298 the judge found that the defendant had not consciously suspected a mortgage fraud. Nevertheless he found that she had deliberately refrained from making enquiries and giving advice which an ordinary honest and competent solicitor would have made and given in all the circumstances, and that she had no excuse for doing so other than the fact that she had taken a highly restricted and blinkered view of the duties that she owed to her clients. The judge considered that the explanation for this behaviour was to be found in what she had been told by an insurance and mortgage broker, Mr Baruch, at the outset of the whole transaction, which was that a particular client was not the kind of client who required to be advised of the matters of which a purchaser would normally be advised. The judge found that the solicitor had not been dishonest. He said, at pp 321 and 322:
“Her fault thus lay in her grossly defective appreciation of the nature of the duties she owed to Mortgage Express and a determination at the outset not to concern herself with any matters which were not strictly within the tunnel of her vision. If she honestly believed that it was proper for her to take such a restricted view of her duties, and did not in fact come to suspect that a mortgage fraud was being committed, then in my judgment, however gross the negligence she was not guilty of a dishonest or fraudulent omission within the meaning of rule 14(f). I have concluded that, unreasonable as it was for her to hold it, the view that she held of the very restricted ambit of her duties to Mortgage Express was honestly held ….
My conclusion is that her whole approach to this problem was from the outset both naïve and well below the standards which should be expected of her profession, but was not dishonest.”
The Court of Appeal held that the judge’s finding that the defendant’s conduct was explained by instructions given to her by Mr Baruch was not one which he could have come to on the pleadings and the evidence and that therefore his judgment must be set aside. The plaintiff had submitted that in the absence of a conclusion as to the Baruch instructions, it was clear that the judge would have held that the defendant had been dishonest. Therefore the plaintiff submitted that the Court of Appeal should so hold. The Court of Appeal acknowledged the logic of this submission but observed that it did not take into account the important fact that the judge had concluded that the defendant had not been dishonest after having seen her cross-examined over one and a half days, and Aldous LJ (with whose judgment Tuckey and Mance LLJ agreed) stated, at p 752, para 38:
“It would not be right for this court to conclude that Ms Newman was dishonest when the judge had concluded to the contrary, albeit upon a basis which I have held to be flawed. A conclusion as to whether Ms Newman acted honestly can only be reached after seeing Ms Newman give her evidence.”
However, in the present case, the Court of Appeal considered that it was entitled to differ from the judge and to find that Mr Leach had been dishonest on the ground that the judge had deliberately refrained from considering a particular aspect of the case, namely “Nelsonian” dishonesty. In his judgment, at p 68, Carnwath J cited the following passage from the judgment of Lord Nicholls in Royal Brunei [1995] 2 AC 378, 389:
“an honest person does not participate in a transaction if he knows it involves a misapplication of trust assets to the detriment of the beneficiaries. Nor does an honest person in such a case deliberately close his eyes and ears, or deliberately not ask questions, lest he learn something he would rather not know, and then proceed regardless.”
Later in his judgment at page 73 after holding that the undertaking did not create a trust the judge continued with the passage which I have already set out under the heading:
“Were any of the defendants knowing recipients or accessories?”
Delivering the judgment of the Court of Appeal and after referring to the passage in the judgment of Carnwath J, at p 68 citing Lord Nicholls, Potter LJ stated [1999] Lloyd’s Rep Bank 438, 462 para 102:
“Bearing in mind the inclusion within Lord Nicholl’s definition of dishonesty of the position where a party deliberately closes his eyes and ears, it can only be assumed that at that point, when the judge referred to Mr Leach as ‘not dishonest’, he was referring to the state of conscious, as opposed to ‘Nelsonian’, dishonesty, and it is plain that he deliberately refrained from resolving the latter question on the basis that it was unnecessary to do so.
103. Had the judge undertaken that task, Mr Tager submits that he could only have been driven to one conclusion, namely that Nelsonian dishonesty was established.”
At the conclusion of a detailed and careful consideration of the submissions advanced by the respective counsel Potter LJ concluded the portion of the judgment relating to Mr Leach by stating, at p 465, para 109,:
“It seems to me that, save perhaps in the most exceptional circumstances, it is not the action of an honest solicitor knowingly to assist or encourage another solicitor in a deliberate breach of his undertaking. At the very least it seems to me that Mr Leach’s conduct amounted, in the words of Lord Nicholls to ‘acting in reckless disregard of others’ rights or possible rights [which] can be a tell-tale sign of dishonesty’.
110. I do not consider that the points taken by Mr Jackson are sufficient to negative that tell-tale sign in this case. I have already dealt with his submissions (1) and (3). So far as his submission (2) is concerned, for reasons already given it does not seem to me that the fact that Mr Leach was acting for Mr Yardley can of itself excuse the former’s refusal to consider the rights or possible rights of Twinsectra which came to his notice. Nor do I consider that the question whether Mr Leach acted dishonestly in the Nelsonian sense depends on whether he appreciated that what was anticipated was a ‘mere’ breach of undertaking or that it constituted a breach of trust. In such a case the vice seems to me to rest in deliberately closing his eyes to the rights of Twinsectra, whether legal or equitable, as the beneficiary of the undertaking, and his deliberate failure to follow matters up or take advice for fear of embarrassment or disadvantage.”
I agree with Lord Hoffmann that it is unfortunate that Carnwath J referred to Mr Leach deliberately shutting his eyes to the problems and to the implications of the undertaking, but like Lord Hoffmann I do not think it probable that having cited the passage from the judgment of Lord Nicholls at [1995] 2 AC 378, 389 F the judge then overlooked the issue of Nelsonian dishonesty in finding that Mr Leach was not dishonest. I also consider, as Lord Millett has observed, that this was not a case where Mr Leach deliberately closed his eyes and ears, or deliberately did not ask questions, lest he learned something he would rather not know – he already knew all the facts, but the judge concluded that nevertheless he had not been dishonest. I also think that Potter LJ applied too strict a test when he stated at page 465:
“It seems to me that, save perhaps in the most exceptional circumstances, it is not the action of an honest solicitor knowingly to assist or encourage another solicitor in a deliberate breach of his undertaking.”
This test does not address the vital point whether Mr Leach realised that his action was dishonest by the standards of responsible and honest solicitors. In the light of the judge’s finding, based as it clearly was, on an assessment of Mr Leach’s evidence in cross-examination in the witness box before him, I consider the Court of Appeal should not have substituted its own finding of dishonesty.
As I have stated, Carnwath J did not give reasons for his finding that Mr Leach was not dishonest and did not state the test which he applied to determine dishonesty. Therefore the question arises whether a new trial should be ordered. An argument of some force can be advanced that there should be a retrial, and in Mortgage Express Ltd v Newman & Co [2000] Lloyd’s Rep PN 745 the Court of Appeal ordered a new trial, although with considerable reluctance. However the present case can be distinguished from Mortgage Express on the ground that in that case the judge appears to have based his decision on a factual matter (Mr Baruch’s instructions) which was not before him in evidence. In the present case the evidence was fully deployed before the judge and he saw Mr Leach rigorously cross-examined at length as to his state of mind. Whilst the judge did not define the test of dishonesty which he applied, I think it probable, as I have stated, that he applied the right test, ie the combined test, and did not apply a purely subjective test. In these circumstances I consider that it would not be right to order a retrial. Whilst the decision whether a new trial should be ordered will largely depend on the facts of the particular case, I find support for this view in the judgment of the House in Automatic Wood-Turning Co Ltd v Stringer [1957] AC 544, 555. In that case the Court of Appeal had ordered a new trial on the issue of negligence, but the order was set aside and Lord Morton of Henryton stated:
“My Lords, I cannot think that this order would have been made if the Court of Appeal had fully appreciated that Oliver J, after hearing all the evidence, had expressed his view that the appellants had not been guilty of negligence at common law. There is no indication in the record that the learned judge had not fully considered the evidence when he expressed this view.”
For the reasons which I have given I would allow Mr Leach’s appeal and set aside the judgment of the Court of Appeal.
Lord Millett (dissenting)
Dishonesty as a state of mind or as a course of conduct?
In R v Ghosh [1982] QB 1053 Lord Lane CJ drew a distinction between dishonesty as a state of mind and dishonesty as a course of conduct, and held that dishonesty in section 1 of the Theft Act 1968 referred to dishonesty as a state of mind. The question was not whether the accused had in fact acted dishonestly but whether he was aware that he was acting dishonestly. The jury must first of all decide whether the conduct of the accused was dishonest according to the ordinary standards of reasonable and honest people. That was an objective test. If he was not dishonest by those standards, that was an end of the matter and the prosecution failed. If it was dishonest by those standards, the jury had secondly to consider whether the accused was aware that what he was doing was dishonest by those standards. That was a subjective test. Given his actual (subjective) knowledge the accused must have fallen below ordinary (objective) standards of honesty and (subjectively) have been aware that he was doing so.
The same test of dishonesty is applicable in civil cases where, for example, liability depends upon intent to defraud, for this connotes a dishonest state of mind. Aktieselskabet Dansk Skibsfinansiering v Brothers [2001] 2 BCLC 324 was a case of this kind (trading with intent to defraud creditors). But it is not generally an appropriate condition of civil liability, which does not ordinarily require a guilty mind. Civil liability is usually predicated on the defendant’s conduct rather than his state of mind; it results from his negligent or unreasonable behaviour or, where this is not sufficient, from intentional wrongdoing.
A dishonest state of mind might logically have been required when it was thought that the accessory was liable only if the principal was guilty of a fraudulent breach of trust, for then the claim could have been regarded as the equitable counterpart of the common law conspiracy to defraud. But this requirement was discarded in Royal Brunei Airlines Sdn Bhd v Tan [1995] .2 AC 378
It is, therefore, not surprising that Lord Nicholls rejected a dishonest state of mind as an appropriate condition of liability. This is evident from the opening sentence of the passage cited above, from his repeated references both in that passage and later in his judgment to the defendant’s conduct in “acting dishonestly” and “advertent conduct”, and from his statement that “for the most part” (ie not always) it involves “conscious impropriety”. “Honesty”, he said, “is a description of a type of conduct assessed in the light of what a person actually knew at the time.” Usually (“for the most part”), no doubt, the defendant will have been guilty of “conscious impropriety”; but this is not a condition of liability. The defendant, Lord Nicholls said, at p 390E, was “required to act honestly”; and he indicated that Knox J had captured the flavour of dishonesty in Cowan de Groot Properties Ltd v Eagle Trust Plc [1992] 4 All ER 700, 761 when he referred to a person who is “guilty of commercially unacceptable conduct in the particular context involved.” There is no trace in Lord Nicholls’ opinion that the defendant should have been aware that he was acting contrary to objective standards of dishonesty. In my opinion, in rejecting the test of dishonesty adopted in R v Ghosh [1982] QB 1053, Lord Nicholls was using the word to characterise the defendant’s conduct, not his state of mind.
Lord Nicholls had earlier drawn an analogy with the tort of procuring a breach of contract. He observed, at p 387 B-C, that a person who knowingly procures a breach of contract, or who knowingly interferes with the due performance of a contract, is liable in damages to the innocent party. The rationale underlying the accessory’s liability for a breach of trust, he said, was the same. It is scarcely necessary to observe that dishonesty is not a condition of liability for the common law cause of action. This is a point to which I must revert later; for the moment, it is sufficient to say that procuring a breach of contract is an intentional tort, but it does not depend on dishonesty. Lord Nicholls was not of course confusing knowledge with dishonesty. But his approach to dishonesty is premised on the belief that it is dishonest for a man consciously to participate in the misapplication of money.
This is evident by the way in which Lord Nicholls dealt with the difficult case where the propriety of the transaction is doubtful. An honest man, he considered, would make appropriate enquiries before going ahead. This assumes that an honest man is one who would not knowingly participate in a transaction which caused the misapplication of funds. But it is most clearly evident in the way in which Lord Nicholls described the conduct of the defendant in the case under appeal. The question was whether he was personally liable for procuring or assisting in a breach of trust committed by his company. The trust was created by the terms of a contract entered into between the company, which carried on the business of a travel agency, and an airline. The contract required money obtained from the sale of the airline’s tickets to be placed in a special trust account. The company failed to pay the money into a special account but used it to fund its own cash flow. Lord Nicholls described the defendant’s conduct, at p 393:
“In other words, he caused or permitted his company to apply the money in a way he knew was not authorised by the trust of which the company was trustee. Set out in these bald terms, the defendant’s conduct was dishonest.”
There was no evidence and Lord Nicholls did not suggest that the defendant realised that honest people would regard his conduct as dishonest. Nor did the plaintiff put its case so high. It contended that the company was liable because it made unauthorised use of trust money, and that the defendant was liable because he caused or permitted his company to do so despite his knowledge that its use of the money was unauthorised. This was enough to make the defendant liable, and for Lord Nicholls to describe his conduct as dishonest.
In my opinion Lord Nicholls was adopting an objective standard of dishonesty by which the defendant is expected to attain the standard which would be observed by an honest person placed in similar circumstances. Account must be taken of subjective considerations such as the defendant’s experience and intelligence and his actual state of knowledge at the relevant time. But it is not necessary that he should actually have appreciated that he was acting dishonestly; it is sufficient that he was.
This is the way in which Lord Nicholls’ use of the term “dishonesty” was understood by Mance LJ in Grupo Torras SA v Al-Sabah [1999] CLC 1469. It is also the way in which it has been widely understood by practitioners: see William Blair QC “Secondary Liability of Financial Institutions for the Fraud of Third Parties” (2000) 30 Hong Kong Law Journal 74; Jeremy Chan “Dishonesty and Knowledge” (2001) 31 Hong Kong Law Journal 283; Andrew Stafford QC “Solicitors’ liability for knowing receipt and dishonest assistance in breach of trust” (2001) 17 Professional Negligence 3. Mr Blair QC, at p 83, welcomed the “more pragmatic and workable test of objective dishonesty”. Mr Stafford QC, at p 14, invited your Lordships to
“Reiterate that honesty is an objective standard and that individuals are not free to set their own standards of proper conduct;
“Direct that trial judges should reach specific conclusions as to whether an honest person, having the same knowledge, experience and attributes as the defendant, would have appreciated that what he was doing would be regarded as wrong or improper; “Direct that if the hypothetical honest person would have appreciated that what he was doing was wrong or improper, then it is appropriate to conclude that the defendant acted dishonestly; “Deprecate attempts to over-refine degrees of knowledge and tests of dishonesty.”
This is almost entirely objective. The only subjective elements are those relating to the defendant’s knowledge, experience and attributes. The objective elements include not only the standard of honesty (which is not controversial) but also the recognition of wrongdoing. The question is whether an honest person would appreciate that what he was doing was wrong or improper, not whether the defendant himself actually appreciated this. The third limb of the test established for criminal cases in R v Ghosh [1982] QB 1053 is conspicuously absent. But there is no trace of it in Lord Nicholls’ opinion in Royal Brunei Airlines Sdn Bhd v Tan [1995] 2 AC 378 either.
Judges have frequently used the word dishonesty in civil cases in an objective sense to describe deliberate wrongdoing, particularly when handling equitable concepts such as concealed fraud. In Beaman v ARTS Ltd [1949] 1 KB 550 the defendants were sued for conversion. They had stored packages for the plaintiff. The plaintiff found herself stranded in enemy occupied Europe during the war and was unable to communicate with the defendants. The defendant’s manager, who was about to be called up and was anxious to close the business down for the duration, opened the packages. Finding their contents to be of little or no value, he considered himself justified in giving them away to the Salvation Army, though he kept one package for himself. The trial judge (Denning J) expressly acquitted the manager of dishonesty or moral turpitude. Reversing the judge, Lord Greene MR described the defendant’s conduct as reprehensible. They would, he said, at p 561:
“no doubt be shocked to hear their conduct described as fraudulent. That is, however, quite immaterial. Mr Ingram, who misappropriated one of the plaintiff’s cases for his own use, was no doubt shocked when counsel described his action as stealing. No amount of self-deception can make a dishonest action other than dishonest; nor does an action which is essentially dishonest become blameless because it is committed with a good motive” (emphasis added).
This is as clear a statement of principle as can be imagined. Neither an honest motive nor an innocent state of mind will save a defendant whose conduct is objectively dishonest. Mr Ingram was not criminally dishonest, since it never entered his head that other people would regard his conduct as dishonest. But equity looks to a man’s conduct, not to his state of mind.
The Law Commission must plead guilty of the same usage. In their Report on Limitation of Actions (Law Com No 270) they propose replacing the expression “deliberate concealment” in Section 32(1)(b) of the Limitation Act 1980 by “dishonest concealment”. They explain this concept, at paragraph 3.137 of their Report as follows:
“We are of the view that our proposals in relation to ‘concealment’ should only apply where the defendant has been guilty of ‘unconscionable conduct’ – or in other words, if the concealment can be said to be ‘dishonest’ … the claimant must show that the defendant was being dishonest in [concealing information]. We do not consider that the concealment could be described as ‘dishonest’ unless the person concealing it is aware of what is being concealed and does not wish the claimant to discover it … by covering up shallow foundations the builder . . . . cannot be said to have been guilty of ‘dishonest concealment’ unless he was aware that his work was defective or negligent, and does not want the claimant to discover this” (emphasis added).
In the context it is clear that the Law Commission are indicating requirements which are not only necessary but sufficient. It would be self-defeating to require the plaintiff to establish subjective dishonesty: many people would see nothing wrong, and certainly nothing dishonest, in seeking to avoid legal liability by refraining from disclosing their breach of duty to a potential plaintiff.
The modern tendency is to deprecate the use of words like “fraud” and “dishonesty” as synonyms for moral turpitude or conduct which is morally reprehensible. There is much to be said for semantic reform, that is to say for changing the language while retaining the incidents of equitable liability; but there is nothing to be said for retaining the language and giving it the meaning it has in criminal cases so as to alter the incidents of equitable liability.
Should subjective dishonesty be required?
The question for your Lordships is not whether Lord Nicholls was using the word dishonesty in a subjective or objective sense in Royal Brunei Airlines Sdn Bhd v Tan [1995] 2 AC 378. The question is whether a plaintiff should be required to establish that an accessory to a breach of trust had a dishonest state of mind (so that he was subjectively dishonest in the R v Ghosh sense); or whether it should be sufficient to establish that he acted with the requisite knowledge (so that his conduct was objectively dishonest). This question is at large for us, and we are free to resolve it either way.
I would resolve it by adopting the objective approach. I would do so because:
(1) consciousness of wrongdoing is an aspect of mens rea and an appropriate condition of criminal liability: it is not an appropriate condition of civil liability. This generally results from negligent or intentional conduct. For the purpose of civil liability, it should not be necessary that the defendant realised that his conduct was dishonest; it should be sufficient that it constituted intentional wrongdoing.
(2).The objective test is in accordance with Lord Selborne’s statement in Barnes v Addy LR 9 Ch App 244 and traditional doctrine. This taught that a person who knowingly participates in the misdirection of money is liable to compensate the injured party. While negligence is not a sufficient condition of liability, intentional wrongdoing is. Such conduct is culpable and falls below the objective standards of honesty adopted by ordinary people.
(3) The claim for “knowing assistance” is the equitable counterpart of the economic torts. These are intentional torts; negligence is not sufficient and dishonesty is not necessary. Liability depends on knowledge. A requirement of subjective dishonesty introduces an unnecessary and unjustified distinction between the elements of the equitable claim and those of the tort of wrongful interference with the performance of a contract.
If Mr Sims’ undertaking was contractual, as Mr Leach thought it was, then Mr Leach’s conduct would have been actionable as a wrongful interference with the performance of the contract. Where a third party with knowledge of a contract has dealings with the contract breaker which the third party knows will amount to a breach of contract and damage results, he commits an actionable interference with the contract: see D C Thomson & Co Ltd v Deakin [1952] Ch 646 CA, 694; Sefton v Tophams Ltd [1965] Ch 1140, where the action failed only because the plaintiff was unable to prove damage.
In British Motor Trade Association v Salvadori [1949] Ch 556 the defendant bought and took delivery of a car in the knowledge that it was offered to him by the vendor in breach of its contract with its supplier. There is a close analogy with the present case. Mr Leach accepted payment from Mr Sims in the knowledge that the payment was made in breach of his undertaking to Twinsectra to retain the money in his own client account until required for the acquisition of property.
In Sefton v Tophams Ltd the defendant bought land in the knowledge that the use to which it intended to put the land would put the vendor in breach of his contractual obligations to the plaintiff. Again the analogy with the present case is compelling. Mr Leach knew that by accepting the money and placing it at Mr Yardley’s free disposal he would put Mr Sims in breach of his contractual undertaking that it would be used only for the purpose of acquiring property.
In both cases the defendant was liable for any resulting loss. Such liability is based on the actual interference with contractual relations, not on any inducement to break them, so that it is no defence that the contract-breaker was a willing party to the breach and needed no inducement to do so. Dishonesty is not an ingredient of the tort.
It would be most undesirable if we were to introduce a distinction between the equitable claim and the tort, thereby inducing the claimant to attempt to spell a contractual obligation out of a fiduciary relationship in order to avoid the need to establish that the defendant had a dishonest state of mind. It would, moreover, be strange if equity made liability depend on subjective dishonesty when in a comparable situation the common law did not. This would be a reversal of the general rule that equity demands higher standards of behaviour than the common law.
If we were to reject subjective dishonesty as a requirement of civil liability in this branch of the law, the remaining question is merely a semantic one. Should we return to the traditional description of the claim as “knowing assistance”, reminding ourselves that nothing less than actual knowledge is sufficient; or should we adopt Lord Nicholls’ description of the claim as “dishonest assistance”, reminding ourselves that the test is an objective one?
For my own part, I have no difficulty in equating the knowing mishandling of money with dishonest conduct. But the introduction of dishonesty is an unnecessary distraction, and conducive to error. Many judges would be reluctant to brand a professional man as dishonest where he was unaware that honest people would consider his conduct to be so. If the condition of liability is intentional wrongdoing and not conscious dishonesty as understood in the criminal courts, I think that we should return to the traditional description of this head of equitable liability as arising from “knowing assistance”.
Knowledge
The question here is whether it is sufficient that the accessory should have actual knowledge of the facts which created the trust, or must he also have appreciated that they did so? It is obviously not necessary that he should know the details of the trust or the identity of the beneficiary. It is sufficient that he knows that the money is not at the free disposal of the principal. In some circumstances it may not even be necessary that his knowledge should extend this far. It may be sufficient that he knows that he is assisting in a dishonest scheme.
That is not this case, for in the absence of knowledge that his client is not entitled to receive it there is nothing intrinsically dishonest in a solicitor paying money to him. But I am satisfied that knowledge of the arrangements which constitute the trust is sufficient; it is not necessary that the defendant should appreciate that they do so. Of course, if they do not create a trust, then he will not be liable for having assisted in a breach of trust. But he takes the risk that they do.
The gravamen of the charge against the principal is not that he has broken his word, but that having been entrusted with the control of a fund with limited powers of disposal he has betrayed the confidence placed in him by disposing of the money in an unauthorised manner. The gravamen of the charge against the accessory is not that he is handling stolen property, but that he is assisting a person who has been entrusted with the control of a fund to dispose of the fund in an unauthorised manner. He should be liable if he knows of the arrangements by which that person obtained control of the money and that his authority to deal with the money was limited, and participates in a dealing with the money in a manner which he knows is unauthorised. I do not believe that the man in the street would have any doubt that such conduct was culpable.
The findings below
Mr Leach’s pleaded case was that he parted with the money in the belief, no doubt engendered by Mr Yardley’s assurances, that it would be applied in the acquisition of property. But he made no attempt to support this in his evidence. It was probably impossible to do so, since he was acting for Mr Yardley in the acquisition of the three properties which had been identified to him on 23 December, and must have known that some of the payments he was making were not required for their acquisition. In his evidence he made it clear that he regarded the money as held by him to Mr Yardley’s order, and that there was no obligation on his part to see that the terms of the arrangements between Twinsectra and Mr Sims were observed. That was Mr Sims’ responsibility, not his.
The judge found that Mr Leach was not dishonest. But he also found as follows:
“He was clearly aware of [the terms of the undertaking]. Indeed, his pleaded defence asserts … that he believed their ‘substance … to be that the advance would be applied in the acquisition of property’ and that he had received them on the footing that they would be so applied. Yet, in evidence, he frankly admitted that he had regarded the money as held simply to the order of Mr Yardley, without restriction. Again, I have to conclude that he simply shut his eyes to the problems. As far as he was concerned, it was a matter solely for Mr Sims to satisfy himself whether he could release the money to Mr Yardley’s account.”
The Court of Appeal thought that the judge’s two conclusions (i) that Mr Leach was not dishonest and (ii) that he “simply shut his eyes to the problems” (or, as he put it later in his judgment “deliberately shut his eyes to the implications”) were inconsistent. They attempted to reconcile the two findings by saying that the judge had overlooked the possibility of wilful blindness. Potter LJ put it in these terms [1999] Lloyd’s Rep 438, 465, para 108:
“Mr Leach clearly appreciated (indeed he recorded) that an undertaking in the form proposed created difficulties for Mr Sims (as Mr Sims himself recognised) yet, as from that point … [he] deliberately closed his eyes to those difficulties in the sense that he treated them as a problem simply for Mr Sims and not for himself or his client.”
Conclusion
I do not think that this was a case of wilful blindness, or that the judge overlooked the possibility of imputed knowledge. There was no need to impute knowledge to Mr Leach, for there was no relevant fact of which he was unaware. He did not shut his eyes to any fact in case he might learn the truth. He knew of the terms of the undertaking, that the money was not to be at Mr Yardley’s free disposal. He knew (i) that Mr Sims was not entitled to pay the money over to him (Mr Leach), and was only prepared to do so against confirmation that it was proposed to apply the money for the acquisition of property; and (ii) that it could not be paid to Mr Yardley except for the acquisition of property. There were no enquiries which Mr Leach needed to make to satisfy himself that the money could properly be put at Mr Yardley’s free disposal. He knew it could not. The only thing that he did not know was that the terms of the undertaking created a trust, still less a trust in favour of Twinsectra. He believed that Mr Sims’ obligations to Twinsectra sounded in contract only. That was not an unreasonable belief; certainly not a dishonest one; though if true it would not have absolved him from liability.
Yet from the very first moment that he received the money he treated it as held to Mr Yardley’s order and at Mr Yardley’s free disposition. He did not shut his eyes to the facts, but to “the implications”, that is to say the impropriety of putting the money at Mr Yardley’s disposal. His explanation was that this was Mr Sims’ problem, not his.
Mr Leach knew that Twinsectra had entrusted the money to Mr Sims with only limited authority to dispose of it; that Twinsectra trusted Mr Sims to ensure that the money was not used except for the acquisition of property; that Mr Sims had betrayed the confidence placed in him by paying the money to him (Mr Leach) without seeing to its further application; and that by putting it at Mr Yardley’s free disposal he took the risk that the money would be applied for an unauthorised purpose and place Mr Sims in breach of his undertaking. But all that was Mr Sims’ responsibility.
In my opinion this is enough to make Mr Leach civilly liable as an accessory (i) for the tort of wrongful interference with the performance of Mr Sims’ contractual obligations if this had been pleaded and the undertaking was contractual as well as fiduciary; and (ii) for assisting in a breach of trust. It is unnecessary to consider whether Mr Leach realised that honest people would regard his conduct as dishonest. His knowledge that he was assisting Mr Sims to default in his undertaking to Twinsectra is sufficient.
Knowing receipt
Each of the sums which Mr Leach received for his own benefit was paid in respect of an acquisition of property, and as such was a proper disbursement. He thus received trust property, but not in breach of trust. This was very properly conceded by counsel for Twinsectra before your Lordships.
Conclusion
I would reduce the sum for which judgment was entered by the Court of Appeal by £22,000, and subject thereto dismiss the appeal.
Bank of Credit & Commerce International & Anor v Akindele
[2000] EWCA Civ 502 [2000] 3 WLR 1423, [2000] WTLR 1049, [2000] BCC 968, [2001] Ch 437, [2000] Lloyd’s Rep Bank 292, (1999-2000) 2 ITELR 788, [2000] EWCA Civ 502, [2000] 4 All ER 221, 2 ITELR 788
Nourse LJ
Knowing receipt
The essential requirements of knowing receipt were stated by Hoffmann LJ in El Ajou v. Dollar Land Holdings Plc [1994] 1 All ER 685, 700:
“For this purpose the plaintiff must show, first, a disposal of his assets in breach of fiduciary duty; secondly, the beneficial receipt by the defendant of assets which are traceable as representing the assets of the plaintiff; and thirdly, knowledge on the part of the defendant that the assets received are traceable to a breach of fiduciary duty.”
In the present case the first two requirements were satisfied in relation to the defendant’s receipt of the US$16.679m paid to him pursuant to the divestiture agreement. But the satisfaction of the third requirement, knowledge on the part of the defendant that the sum received by him was traceable to a breach or breaches of fiduciary duty by Messrs Naqvi, Hafeez and Kazmi, is problematical.
So far as the law is concerned, the comprehensive arguments of Mr Sheldon and Mr Moss have demonstrated that there are two questions which, though closely related, are distinct: first, what, in this context, is meant by knowledge; second, is it necessary for the recipient to act dishonestly? Because the answer to it is the simpler, the convenient course is to deal with the second of those questions first.
Knowing receipt – dishonesty
As appears from the penultimate sentence of his judgment, Mr Justice Carnwath proceeded on an assumption that dishonesty in one form or another was the essential foundation of the claimants’ case, whether in knowing assistance or knowing receipt. That was no doubt caused by the acceptance before him (though not at any higher level) by Mr Sheldon, recorded at p. 677F, that the thrust of the recent authorities at first instance was that the recipient’s state of knowledge must fall into one of the first three categories listed by Peter Gibson J in the Baden case [1993] 1 WLR 509, 575-576, on which basis, said Mr Justice Carnwath, it was doubtful whether the test differed materially in practice from that for knowing assistance. However, the assumption on which the judge proceeded, derived as I believe from an omission to distinguish between the questions of knowledge and dishonesty, was incorrect in law. While a knowing recipient will often be found to have acted dishonestly, it has never been a prerequisite of the liability that he should.
An authoritative decision on this question, the complexity of whose subject transactions has sometimes caused it to be overlooked in this particular context, is Belmont Finance Corporation v. Williams Furniture Ltd (No. 2) [1980] 1 All ER 393, where the plaintiff (“Belmont”) was the wholly-owned subsidiary of the second defendant (“City”), which in turn was the wholly-owned subsidiary of the first defendant (“Williams”). The chairman of all three companies and the sole effective force in the management of their affairs was Mr John James. Reduced to its essentials, what had happened there was that the shareholders of a fourth company (“Maximum”) had agreed to sell its shares to Belmont for £500,000 and to buy the share capital of Belmont from City for £489,000, a transaction which, as carried out, constituted a contravention of section 54 of the Companies Act 1948 (prohibition of provision of financial assistance by a company for the purchase of its own shares) and was thus a misapplication of Belmont’s funds.
Belmont having subsequently become insolvent, its receiver obtained an independent valuation of the shares in Maximum as at the date of the transaction which suggested that, instead of being worth £500,000, they were only worth some £60,000. The receiver brought an action in Belmont’s name principally against Williams, City and the shareholders of Maximum, claiming that they were liable to Belmont, first, for damages for conspiracy and, secondly, as constructive trustees on the grounds of both knowing assistance and knowing receipt. At the trial, Foster J found that Mr James genuinely believed that to buy the capital of Maximum for £500,000 was a good commercial proposition for Belmont. He held that there had been no contravention of section 54 and dismissed the action.
On Belmont’s successful appeal to this court Buckley LJ is recorded, at p. 403A-B, as having pointed out that Mr James had genuinely believed that the transaction was a good commercial proposition for Belmont without having any good grounds for that belief. He continued:
“After careful consideration I do not feel that we should be justified in disturbing the judge’s finding that Mr James genuinely believed that the agreement was a good commercial proposition for Belmont. It was a belief which, on his view of the commercial aspects of the case, Mr James could have sincerely held.”
Having observed, at p. 404E, that Mr James, as a director of both Williams and City knew perfectly well what the objects of the transaction were, that other officers of City had the same knowledge and that their knowledge must be “imputed” to the respective companies, and having referred, at p. 405C, to the judgment of Lord Selborne LC in Barnes v. Addy (1874) 9 Ch App 244, 251, Buckley LJ dealt with the claim in constructive trust at p. 405F:
“In the present case, the payment of the £500,000 by Belmont to [the shareholders of Maximum], being an unlawful contravention of section 54, was a mis-application of Belmont’s money and was in breach of the duties of the directors of Belmont. £489,000 of the £500,000 so misapplied found their way into the hands of City with City’s knowledge of the whole circumstances of the transaction. It must follow, in my opinion, that City is accountable to Belmont as a constructive trustee of the £489,000 under the first of Lord Selborne LC’s two heads.
There remains the question whether City is chargeable as a constructive trustee under Lord Selborne’s second head on the ground that Belmont’s directors were guilty of dishonesty in buying the shares of Maximum and that City with knowledge of the facts assisted them in that dishonest design. As I understand Lord Selborne LC’s second head, a stranger to a trust not- withstanding that he may not have received any of the trust fund which has been misapplied will be treated as accountable as a constructive trustee if he has knowingly participated in a dishonest design on the part of the trustee to misapply the fund; he must himself have been in some way a party to the dishonesty of the trustees. It follows from what I have already held that the directors of Belmont were guilty of misfeasance but not that they acted dishonestly.”
Goff LJ also held that City was liable in knowing receipt; see pp. 410- 412. Waller LJ did not add anything of his own on the question of constructive trust. Accordingly, though the claim in knowing assistance failed because the directors of Belmont did not act dishonestly, the claim in knowing receipt succeeded. I will return to that decision when dealing with the question of knowledge.
The decision in Belmont (No. 2) is clear authority for the proposition that dishonesty is not a necessary ingredient of liability in knowing receipt. There have been other, more recent, judicial pronouncements to the same effect. Thus in Polly Peck International Plc v. Nadir (No. 2) [1992] 4 All ER 769, 777D, Scott LJ said that liability in a knowing receipt case did not require that the misapplication of the trust funds should be fraudulent. While in theory it is possible for a misapplication not to be fraudulent and the recipient to be dishonest, in practice such a combination must be rare. Similarly, in Agip (Africa) Ltd v. Jackson [1990] Ch. 265, 292A, Millett J said that in knowing receipt it was immaterial whether the breach of trust was fraudulent or not. The point was made most clearly by Vinelott J in Eagle Trust Plc v. SBC Securities Ltd [1993] 1 WLR 484, 497E:
“What the decision in Belmont (No. 2) shows is that in a ‘knowing receipt’ case it is only necessary to show that the defendant knew that the moneys paid to him were trust moneys and of circumstances which made the payment a misapplication of them. Unlike a ‘knowing assistance’ case it is not necessary, and never has been necessary, to show that the defendant was in any sense a participator in a fraud.”
Knowing receipt – the authorities on knowledge
With the proliferation in the last 20 years or so of cases in which the misapplied assets of companies have come into the hands of third parties, there has been a sustained judicial and extra-judicial debate as to the knowledge on the part of the recipient which is required in order to found liability in knowing receipt. Expressed in its simplest terms, the question is whether the recipient must have actual knowledge (or the equivalent) that the assets received are traceable to a breach of trust or whether constructive knowledge is enough. The instinctive approach of most equity judges, especially in this court, has been to assume that constructive knowledge is enough. But there is now a series of decisions of eminent first instance judges who, after considering the question in greater depth, have come to the contrary conclusion, at all events when commercial transactions are in point. In the Commonwealth, on the other hand, the preponderance of authority has been in favour of the view that constructive knowledge is enough.
In Karak Rubber Co Ltd v. Burden [1972] 1 WLR 602, 632H, Brightman J referred to a person:
“who is a constructive trustee because (though not nominated as a trustee) he has received trust property with actual or constructive notice that it is trust property transferred in breach of trust.”
In (Belmont No. 2), at p. 405C-D, Buckley LJ referred to the principle, established by the decision of this court in Re Lands Allotment Co [1894] 1 Ch. 616, that the directors of a company are treated as if they were actual trustees of the assets of the company which are in their hands or under their control. He continued:
“So, if the directors of a company in breach of their fiduciary duties misapply the funds of their company so that they come into the hands of some stranger to the trust who receives them with knowledge (actual or constructive) of the breach, he cannot conscientiously retain those funds against the company unless he has some better equity. He becomes a constructive trustee for the company of the misapplied funds.”
At p. 410H-I, Goff LJ said that what Belmont had to show, amongst other things, was that City received all or part of the £500,000 “knowing or in circumstances in which it ought to know, that it was a breach of trust”. He answered that question at p. 412E, saying:
“In my judgment the answer to that question must plainly be Yes for they are fixed with all the knowledge that Mr James had. Now, he had actual knowledge of all the facts which made the agreement illegal and his belief that the agreement was a good commercial proposition for Belmont can be no more a defence to City’s liability as constructive trustees than in conspiracy.
Apart from this, clearly, in my judgment, Mr James knew or ought to have known all the facts that I have rehearsed, showing that there was in any event a misfeasance apart from illegality.”
Similarly, in Rolled Steel Products (Holdings) Ltd v. British Steel Corporation [1986] Ch. 246, 306H, Browne-Wilkinson LJ said:
“A third party who has notice – actual or constructive – that a transaction, although intra vires the company, was entered into in excess or abuse of the powers of the company cannot enforce such transaction against the company and will be accountable as constructive trustee for any money or property of the company received by [him].”
In Agip (Africa) Ltd v. Jackson, at p. 291, Millett J, in reference to a person who receives for his own benefit trust property transferred to him in breach of trust, said:
“He is liable as a constructive trustee if he received it with notice, actual or constructive, that it was trust property and that the transfer to him was a breach of trust . . .”
In Houghton v. Fayers [2000] 1 BCLC 511, 516, I myself said that it was enough for the claimant company to establish that the second defendant “knew or ought to have known that the money had been paid to him in breach of [the first defendant’s] fiduciary duty to [the claimant]”.
Collectively, those observations might be thought to provide strong support for the view that constructive knowledge is enough. But it must at once be said that in each of the three cases in this court (including, despite some apparent uncertainty in the judgment of Goff LJ at p. 412F, Belmont (No. 2)), actual knowledge was found and, further, that the decisions in Karak and Agip were based on knowing assistance, not knowing receipt. Thus in none of the five cases was it necessary for the question to be examined in any depth and there appears to be no case in which such an examination has been conducted in this court. The groundwork has been done in other cases at first instance. I will refer to those of them in which the question has been considered in depth.
The seminal judgment, characteristically penetrative in its treatment of authority and, in the best sense, argumentative, is that of Megarry VC in Re Montagu’s Settlement Trusts [1987] Ch. 264. It was he who first plumbed the distinction between notice and knowledge. It was he who, building on a passage in the judgment of this court in Re Diplock [1948] Ch. 465, 478-479, first emphasised the fundamental difference between the questions which arise in respect of the doctrine of purchaser without notice on the one hand and the doctrine of constructive trusts on the other. Reading from his earlier judgment in the same case, he said at p. 278B-C:
“The former is concerned with the question whether a person takes property subject to or free from some equity. The latter is concerned with whether or not a person is to have imposed upon him the personal burdens and obligations of trusteeship. I do not see why one of the touchstones for determining the burdens on property should be the same as that for deciding whether to impose a personal obligation on a [person]. The cold calculus of constructive and imputed notice does not seem to me to be an appropriate instrument for deciding whether a [person’s] conscience is sufficiently affected for it to be right to bind him by the obligations of a constructive trustee.”
He added that there is more to being made a trustee than merely taking property subject to an equity.
The practical importance of that distinction had been explained by the Vice-Chancellor in his earlier judgment. The question in that case was whether the widow and executrix of the will of the 10th Duke of Manchester was liable to account to the 11th Duke in respect of certain settled chattels or the proceeds of sale thereof. Having found that the 10th Duke had had no knowledge that the chattels received by him were still subject to any trust and that he believed that they had been lawfully and properly released to him by the trustees, Megarry VC continued (see p. 272A):
“If liability as a constructive trustee depended on his knowledge, then he was not liable as a constructive trustee, and his estate is not liable for any chattels that have been disposed of, as distinct from any traceable proceeds of them. Even if he was not a constructive trustee and was a mere volunteer, his estate is liable to yield up any chattels that remain, or the traceable proceeds of any that have gone … But unless he was a constructive trustee, there appears to be no liability if the chattels have gone and there are no traceable proceeds.”
At p. 285B Megarry VC summarised his conclusions in eight subparagraphs. I read the first three:
“(1)The equitable doctrine of tracing and the imposition of a constructive trust by reason of the knowing receipt of trust property are governed by different rules and must be kept distinct. Tracing is primarily a means of determining the rights of property, whereas the imposition of a constructive trust creates personal obligations that go beyond mere property rights.
(2)In considering whether a constructive trust has arisen in a case of the knowing receipt of trust property, the basic question is whether the conscience of the recipient is sufficiently affected to justify the imposition of such a trust.
(3)Whether a constructive trust arises in such a case primarily depends on the knowledge of the recipient, and not on notice to him; and for clarity it is desirable to use the word ‘knowledge’ and avoid the word ‘notice’ in such cases.”
The effect of the Vice-Chancellor’s decision, broadly stated, was that, in order to establish liability in knowing receipt, the recipient must have actual knowledge (or the equivalent) that the assets received are traceable to a breach of trust and that constructive knowledge is not enough.
In Eagle Trust Plc v. SBC Securities Ltd (supra), at p. 503E, Vinelott J did not think it would be right to found a decision that the statement of claim in that case disclosed no cause of action solely on the authority of Re Montagu’s Settlement Trusts. However, on the ground that he (unlike Megarry VC) was dealing with a commercial transaction, he arrived at the same conclusion and held that in such a transaction constructive knowledge is not enough. At p.504D, he cited a well known passage in the judgment of Lindley LJ in Manchester Trust v. Furness [1895] 2 QB 539, 545, the latter part of which reads thus:
“In dealing with estates in land title is everything, and it can be leisurely investigated; in commercial transactions possession is everything, and there is no time to investigate title; and if we were to extend the doctrine of constructive notice to commercial transactions we should be doing infinite mischief and paralyzing the trade of the country.”
The decision of Vinelott J was followed by Knox J in Cowan de Groot Properties Ltd v. Eagle Trust Plc [1992] 4 All ER 700 (another case of a commercial transaction) and the decisions of both of them by Arden J at the trial of the action in Eagle Trust Plc v. SBC Securities Ltd; see [1996] 1 BCLC 121.
We were also referred to three decisions in New Zealand and one in Canada. In each of Westpac Banking Corp. v Savin [1985] 2 NZLR 41, Equiticorp Industries Group Ltd v. Hawkins [1991] 3 NZLR 700 and Lankshear v. ANZ Banking Group (New Zealand) Ltd [1993] 1 NZLR 481 the preferred view was that constructive knowledge was enough, although in the last-named case the point went by concession. All of them were cases of commercial transactions. In Westpac Banking Corp. v Savin, a decision of the Court of Appeal, Richardson J, having expressed a provisional preference for the view that constructive knowledge was enough, said at p. 53:
“Clearly Courts would not readily import a duty to enquire in the case of commercial transactions where they must be conscious of the seriously inhibiting effects of a wide application of the doctrine. Nevertheless there must be cases where there is no justification on the known facts for allowing a commercial man who has received funds paid to him in breach of trust to plead the shelter of the exigencies of commercial life.”
In Citadel General Assurance Co v. Lloyds Bank Canada (1997) 152 DLR (4th) 411, another case of a commercial transaction, the Supreme Court of Canada held, as a matter of decision, that constructive knowledge was enough.
The Baden case
It will have been observed that up to this stage I have made no more than a passing reference to the fivefold categorisation of knowledge accepted by Peter Gibson J in the Baden case [1993] 1 WLR 509, 575-576: (i) actual knowledge; (ii) wilfully shutting one’s eyes to the obvious; (iii) wilfully and recklessly failing to make such enquiries as an honest and reasonable man would make; (iv) knowledge of circumstances which would indicate the facts to an honest and reasonable man; (v) knowledge of circumstances which will put an honest and reasonable man on inquiry. Reference to the categorisation has been made in most of the knowing receipt cases to which I have referred from Re Montagu’s Settlement Trusts onwards. In many of them it has been influential in the decision. In general, the first three categories have been taken to constitute actual knowledge (or its equivalent) and the last two constructive knowledge.
Two important points must be made about the Baden categorisation. First, it appears to have been propounded by counsel for the plaintiffs, accepted by counsel for the defendant and then put to the judge on an agreed basis. Secondly, though both counsel accepted that all five categories of knowledge were relevant and neither sought to submit that there was any distinction for that purpose between knowing receipt and knowing assistance (a view with which the judge expressed his agreement -see p. 582E-F), the claim in constructive trust was based squarely on knowing assistance and not on knowing receipt; see p. 572D. In the circumstances, whatever may have been agreed between counsel, it is natural to assume that the categorisation was not formulated with knowing receipt primarily in mind. This, I think, may be confirmed by the references to “an honest and reasonable man” in categories (iv) and (v). Moreover, in Agip Millett J warned against over refinement or a too ready assumption that categories (iv) and (v) are necessarily cases of constructive knowledge only – see [1990] Ch. at 293, reservations which were shared by Knox J in Cowan de Groot [1992] 4 All ER, at 761G.
Knowing receipt – the recipient’s state of knowledge
In Royal Brunei Airlines Sdn Bhd v. Tan (supra), which is now the leading authority on knowing assistance, Lord Nicholls of Birkenhead, in delivering the judgment of the Privy Council, said that “knowingly” was better avoided as a defining ingredient of the liability, and that in that context the Baden categorisation was best forgotten; see [1995] 2 AC at p. 392H. Although my own view is that the categorisation is often helpful in identifying different states of knowledge which may or may not result in a finding of dishonesty for the purposes of knowing assistance, I have grave doubts about its utility in cases of knowing receipt. Quite apart from its origins in a context of knowing assistance and the reservations of Millett and Knox JJ, any categorisation is of little value unless the purpose it is to serve is adequately defined, whether it be fivefold, as in Baden, or twofold, as in the classical division between actual and constructive knowledge, a division which has itself become blurred in recent authorities.
What then, in the context of knowing receipt, is the purpose to be served by a categorisation of knowledge? It can only be to enable the court to determine whether, in the words of Buckley LJ in Belmont No. 2, the recipient can “conscientiously retain [the] funds against the company” or, in the words of Megarry VC in Re Montagu’s Settlement Trusts, “[the recipient’s] conscience is sufficiently affected for it to be right to bind him by the obligations of a constructive trustee”. But if that is the purpose, there is no need for categorisation. All that is necessary is that the recipient’s state of knowledge should be such as to make it unconscionable for him to retain the benefit of the receipt.
For these reasons I have come to the view that, just as there is now a single test of dishonesty for knowing assistance, so ought there to be a single test of knowledge for knowing receipt. The recipient’s state of knowledge must be such as to make it unconscionable for him to retain the benefit of the receipt. A test in that form, though it cannot, any more than any other, avoid difficulties of application, ought to avoid those of definition and allocation to which the previous categorisations have led. Moreover, it should better enable the courts to give common-sense decisions in the commercial context in which claims in knowing receipt are now frequently made, paying equal regard to the wisdom of Lindley LJ on the one hand and of Richardson J on the other.
Knowing receipt – a footnote
We were referred in argument to “Knowing Receipt: The Need for a New Landmark”, an essay by Lord Nicholls in Cornish, Nolan, O’Sullivan and Virgo (eds.) “Restitution Past, Present and Future” (1998); a work of insight and scholarship taking forward the writings of academic authors, in particular those of Professors Birks, Burrows and Gareth Jones. It is impossible to do justice to such a work within the compass of a judgment such as this. Most pertinent for present purposes is the suggestion made by Lord Nicholls, at p. 238, in reference to the decision of the House of Lords in Lipkin Gorman v. Karpnale Ltd [1991] 2 AC 548:
“In this respect equity should now follow the law. Restitutionary liability, applicable regardless of fault but subject to a defence of change of position, would be a better-tailored response to the underlying mischief of misapplied property than personal liability which is exclusively fault-based. Personal liability would flow from having received the property of another, from having been unjustly enriched at the expense of another. It would be triggered by the mere fact of receipt, thus recognising the endurance of property rights. But fairness would be ensured by the need to identify a gain, and by making change of position available as a default in suitable cases when, for instance, the recipient had changed his position in reliance on the receipt.”
Lord Nicholls goes on to examine the Diplock principle, suggesting that it could be reshaped by being extended to all trusts but in a form modified to take proper account of the decision in Lipkin Gorman v. Karpnale Ltd; see p. 241.
No argument before us was based on the suggestions made in Lord Nicholls’ essay. Indeed, at this level of decision, it would have been a fruitless exercise. We must continue to do our best with the accepted formulation of the liability in knowing receipt, seeking to simplify and improve it where we may. While in general it may be possible to sympathise with a tendency to subsume a further part of our law of restitution under the principles of unjust enrichment, I beg leave to doubt whether strict liability coupled with a change of position defence would be preferable to fault-based liability in many commercial transactions, for example where, as here, the receipt is of a company’s funds which have been misapplied by its directors. Without having heard argument it is unwise to be dogmatic, but in such a case it would appear to be commercially unworkable and contrary to the spirit of the rule in Royal British Bank v. Turquand (1856) 6 E&B 327 that, simply on proof of an internal misapplication of the company’s funds, the burden should shift to the recipient to defend the receipt either by a change of position or perhaps in some other way. Moreover, if the circumstances of the receipt are such as to make it unconscionable for the recipient to retain the benefit of it, there is an obvious difficulty in saying that it is equitable for a change of position to afford him a defence.
Knowing receipt – the facts of the present case
I return to the facts of the present case, in order to determine whether the defendant is liable in knowing receipt to repay (together with interest) US$6.679m of the sum received by him pursuant to the divestiture agreement, being the excess over the US$10m he paid to ICIC Overseas pursuant to the 1985 agreement. (By a decision whose forensic good sense dispensed with an analysis of its juristic foundation the claimants abandoned a claim for the full US$16.679m.) The answer to that question depends on whether the judge’s findings, though made in the course of an inquiry as to the defendant’s honesty, are equally supportive of a conclusion that his state of knowledge was not such as to make it unconscionable for him to retain the benefit of the receipt.
I start with the defendant’s state of knowledge at the date of the 1985 agreement. As to that, the judge found that there was no evidence that anyone outside BCCI had reason to doubt the integrity of its management at that time. More specifically, it is clear that the judge was of the view that the defendant had no knowledge of the underlying frauds within the BCCI group either in general or in relation to the 1985 agreement. He found that the defendant saw it simply as an arm’s-length business transaction. Moreover, he was not prepared to draw the conclusion that the high rate of interest and the artificial nature of the agreement were sufficient to put an honest person in the defendant’s position on notice that some fraud or breach of trust was being perpetrated. He said that the defendant would have had no reason to question the form of the transaction.
Those findings, expressed in language equally appropriate to an inquiry as to constructive notice, appear to me to be consistent only with the view that the defendant’s state of knowledge at the date of the 1985 agreement was not such as to make it unconscionable for him to enter into it. However, that point, though of great importance, is not in itself decisive. We have also to consider the defendant’s state of knowledge at the date of the divestiture agreement, by which time, as the judge said, he did have suspicions as to the conduct of BCCI’s affairs.
In order to understand the judge’s reference, it is necessary to go back to what he said at p. 675B-C:
“Towards the end of 1988 the defendant decided to end his relationship with BCCI, and in particular to terminate the share agreement. A number of factors led to this decision. In late 1987 there had been rumours in the Nigerian press of irregularities involving BCCI. He had received warnings from senior business figures in Nigeria. One was Dr Onaolapo Soleye, a former Nigerian Minister of Finance, who has provided a witness statement. He says that he informed the defendant of ‘unorthodox and irregular banking practices around the world’, and warned him of the effect a scandal relating to BCCI could have on his business image and that of BCCI Nigeria. The defendant also became aware later in 1988 that various BCCI officials had been arrested by US Customs in Tampa in connection with money laundering offences. He considered selling his shares in BCCI Nigeria, but was dissuaded from doing so by Dr Soleye and others, because of the tribal imbalance it would create within the bank.
At this time the defendant was seeking to realise £20m of his own money, and to raise a further £40m, to finance a property investment venture in the UK. The major banks involved including N M Rothschild in London and BNP, objected to him raising part of the finance from BCCI.”
So in late 1987, more than two years after the 1985 agreement was entered into, there were press rumours of irregularities involving BCCI and warnings to the defendant from senior business figures in Nigeria of unorthodox and irregular banking practices around the world. Later in 1988 the defendant became aware that various BCCI officials had been arrested in connection with money laundering offences. He also knew that the major banks involved in financing his property investment venture in the United Kingdom objected to his raising part of the finance from BCCI.
There having been no evidence that the defendant was aware of the internal arrangements within BCCI which led to the payment to him of the US$16.679m pursuant to the divestiture agreement, did the additional knowledge which he acquired between July 1985 and December 1988 make it unconscionable for him to retain the benefit of the receipt? In my judgment it did not. The additional knowledge went to the general reputation of the BCCI group from late 1987 onwards. It was not a sufficient reason for questioning the propriety of a particular transaction entered into more than two years earlier, at a time when no one outside BCCI had reason to doubt the integrity of its management and in a form which the defendant had no reason to question. The judge said that the defendant was entitled to take steps to protect his own interest, and that there was nothing dishonest in his seeking to enforce the 1985 agreement. Nor was there anything unconscionable in his seeking to do so. Equally, had I thought that that was still the appropriate test, I would have held that the defendant did not have actual or constructive knowledge that his receipt of the US$6.79m was traceable to a breach or breaches of fiduciary duty by Messrs Naqvi, Hafeez and Kazmi.
Conclusion
For these reasons, though by a different route in relation to knowing receipt, I have come to the conclusion that Mr Justice Carnwath’s decision to dismiss the action was correct. I would affirm it and dismiss the claimants’ appeal.
Lord Justice Ward:
I agree.
Lord Justice Sedley:
I also agree.
Order: appeal dismissed with costs; leave to appeal to the House of Lords refused.
.
Westdeutsche Landesbank Girozentrale v Islington LBC
[1996] UKHL 12 (22 May 1996) [1996] UKHL 12, [1996] 5 Bank LR 341, [1996] AC 669, [1996] 2 WLR 802, [1996] 2 All ER 961, [1996] 2 AC 669
Lord Goff
The three problems
There are three reasons why the present case has become so
complicated. The first is that, in our law of restitution, there has developed
an understanding that money can only be recovered on the ground of failure
of consideration if that failure is total. The second is that because, in
particular, of the well known but controversial decision of this House in
Sinclair v. Brougham [1914] A.C. 398. it has come to be understood that a
trust may be imposed in cases such as the present where the incapacity of one
of the parties has the effect that the transaction is void. The third is that our
law of interest has developed in a fragmentary and unsatisfactory manner, and
in consequence insufficient attention has been given to the jurisdiction to
award compound interest.
I propose at the outset to devote a little attention to each of these
matters.
(1) Total failure of consideration.
There has long been a desire among restitution lawyers to escape from
the unfortunate effects of the so-called rule that money is only recoverable at
common law on the ground of failure of consideration where the failure is
total, by reformulating the rule upon a more principled basis: and signs that
this will in due course be done are appearing in judgments throughout the
common law world, as appropriate cases arise for decision. It is fortunate
however that, in the present case, thanks (I have no doubt) to the admirable
researches of counsel, a line of authority was discovered which had escaped
the attention of the scholars who work in this field. This line of authority was
concerned with contracts for annuities which were void if certain statutory
formalities were not complied with. They were not therefore concerned with
contracts void by reason of the incapacity of one of the parties. Even so, they
were concerned with cases in which payments had been made, so to speak,
both ways; and the courts had to decide whether they could, in such
circumstances, do justice by restoring the parties to their previous positions.
They did not hesitate to do so, by ascertaining the balance of the account
between the parties, and ordering the repayment of the balance. Moreover the
form of action by which this was achieved was the old action for money had
and received what we nowadays call a personal claim in restitution at
common law. With this precedent before him, Hobhouse J. felt free to make
a similar order in the present case; and in this he was self-evidently right.
The most serious problem which has remained in this connection is the
theoretical question whether recovery can here be said to rest upon the ground
of failure of consideration. Hobhouse J. thought not. He considered that the
true ground in these cases, where the contract is void, is to be found in the
absence, rather than the failure, of consideration; and in this he was followed
by the Court of Appeal. This had the effect that the courts below were not
troubled by the question whether there had been a total failure of
consideration.
The approach so adopted may have found its origin in the idea, to be
derived from a well known passage in the speech of Viscount Simon L.C. in
the Fibrosa case [1943] AC 32, 48, that a failure of consideration only
occurs where there has been a failure of performance by the other party of his
obligation under a contract which was initially binding. But the concept of
failure of consideration need not be so narrowly confined. In particular it
appears from the annuity cases themselves that the courts regarded them as
cases of failure of consideration; and concern has been expressed by a number
of restitution lawyers that the approach of Hobhouse J. is contrary to principle
and could, if accepted, lead to undesirable consequences: (see Professor Birks
in (1993) 23 W.A.L.R. 195; Mr. W. J. Swadling in [1994] R.L.R. 73; and
Professor Burrows in [1995] R.L.R. 15). However since there is before your
Lordships no appeal from the decision that the Bank was entitled to recover
the balance of the payments so made in a personal claim in restitution, the
precise identification of the ground of recovery was not explored in argument
before the Appellate Committee. It would therefore be inappropriate to
express any concluded view upon it. Even so, I think it right to record that
there appears to me to be considerable force in the criticisms which have been
expressed; and I shall, when considering the issues on this appeal, bear in
mind the possibility that it may be right to regard the ground of recovery as
failure of consideration.
(2) A proprietary claim in restitution
I have already stated that restitution in these cases can be achieved by
means of a personal claim in restitution. The question has however arisen
whether the Bank should also have the benefit of an equitable proprietary
claim in the form of a resulting trust. The immediate reaction must be – why
should it? Take the present case. The parties have entered into commercial
transaction. The transaction has, for technical reasons, been held to be void
from the beginning. Each party is entitled to recover its money, with the
result that the balance must be repaid. But why should the plaintiff Bank be
given the additional benefits which flow from a proprietary claim, for example
the benefit of achieving priority in the event of the defendant’s insolvency?
After all, it has entered into a commercial transaction, and so taken the risk
of the defendant’s insolvency, just like the defendant’s other creditors who
have contracted with it, not to mention other creditors to whom the defendant
may be liable to pay damages in tort.
I feel bound to say that I would not at first sight have thought that an
equitable proprietary claim in the form of a trust should be made available to
the Bank in the present case, but for two things. The first is the decision of
this House in Sinclair v. Brougham [1914] A.C. 398, which appears to
provide authority that a resulting trust may indeed arise in a case such as the
present. The second is that on the authorities there is an equitable jurisdiction
to award the plaintiff compound interest in cases where the defendant is a
trustee. It is the combination of those two factors which has provided the
foundation for the principal arguments advanced on behalf of the Bank in
support of its submission that it was entitled to an award of compound
interest. I shall have to consider the question of availability of an equitable
proprietary claim, and the effect of Sinclair v. Brougham, in some depth in
a moment. But first I wish to say a few words on the subject of interest.
(3) Interest.
One would expect to find, in any developed system of law, a
comprehensive and reasonably simple set of principles by virtue of which the
courts have power to award interest. Since there are circumstances in which
the interest awarded should take the form of compound interest, those
principles should specify the circumstances in which compound interest, as
well as simple interest, may be awarded; and the power to award compound
interest should be available both at law and in equity. Nowadays, especially
since it has been established (see National Bank of Greece S.A. v. Pinios
Shipping Co. No. 1. The Maira [1990] 1 A.C. 637) that banks may, by the
custom of bankers, charge compound interest upon advances made by them
to their customers, one would expect to find that the principal cases in which
compound interest may be awarded would be commercial cases.
Sadly, however, that is not the position in English law. Unfortunately,
the power to award compound interest is not available at common law. The
power is available in equity; but at present that power is, for historical
reasons, exercised only in relation to certain specific classes of claim, in
particular proceedings against trustees for an account. An important I
believe the most important – question in the present case is whether that
jurisdiction should be developed to apply in a commercial context, as in the
present case.
Equitable proprietary claims
I now turn to consider the question whether an equitable proprietary
claim was available to the Bank in the present case.
Ever since the law of restitution began, about the middle of this
century, to be studied in depth, the role of equitable proprietary claims in the
law of restitution has been found to be a matter of great difficulty. The
legitimate ambition of restitution lawyers has been to establish a coherent law
of restitution, founded upon the principle of unjust enrichment; and since
certain equitable institutions, notably the constructive trust and the resulting
trust, have been perceived to have the function of reversing unjust enrichment,
they have sought to embrace those institutions within the law of restitution, if
necessary moulding them to make them fit for that purpose. Equity lawyers,
on the other hand, have displayed anxiety that in this process the equitable
principles underlying these institutions may become illegitimately distorted;
and though equity lawyers in this country are nowadays much more
sympathetic than they have been in the past towards the need to develop a
coherent law of restitution, and of identifying the proper role of the trust
within that rubric of the law, they remain concerned that the trust concept
should not be distorted, and also that the practical consequences of its
imposition should be fully appreciated. There is therefore some tension
between the aims and perceptions of these two groups of lawyers, which has
manifested itself in relation to the matters under consideration in the present
case.
In the present case, however, it is not the function of your Lordships’
House to write the agenda for the law of restitution, nor even to identify the
role of equitable proprietary claims in that part of the law. The judicial
process is neither designed for, nor properly directed towards, such
objectives. The function of your Lordships’ House is simply to decide the
questions at issue before it in the present case; and the particular question now
under consideration is whether, where money has been paid by a party to a
contract which is ultra vires the other party and so void ab initio, he has the
benefit of an equitable proprietary claim in respect of the money so paid.
Moreover the manner in which this question has arisen before this House
renders it by no means easy to address. First of all, the point was not debated
in any depth in the courts below, because they understood that they were
bound by Sinclair v. Brougham to hold that such a claim was here available.
But second, the point has arisen only indirectly in this case, since it is relevant
only to the question whether the court here has power to make an award of
compound interest. It is a truism that, in deciding a question of law in any
particular case, the courts are much influenced by considerations of practical
justice, and especially by the results which would flow from the recognition
of a particular claim on the facts of the case before the court. Here, however,
an award of compound interest provides no such guidance, because it is no
more than a consequence which is said to flow, for no more than historical
reasons, from the availability of an equitable proprietary claim. It therefore
provides no guidance on the question whether such a claim should here be
available.
In these circumstances I regard it as particularly desirable that your
Lordships should, so far as possible, restrict the inquiry to the actual questions
at issue in this appeal, and not be tempted into formulating general principles
of a broader nature. If restitution lawyers are hoping to find in your
Lordships’ speeches broad statements of principle which may definitively
establish the future shape of this part of the law, I fear that they may be
disappointed. I also regard it as important that your Lordships should, in the
traditional manner, pay particular regard to the practical consequences which
may flow from the decision of the House.
With these observations by way of preamble, I turn to the question of
the availability of an equitable proprietary claim in a case such as the present.
The argument advanced on behalf of the Bank was that the money paid by
them under the void contract was received by the Council subject to a
resulting trust. This approach was consistent with that of Dillon L.J. in the
Court of Appeal: see [1994] 1 W.L.R. 938, 947. It is also consistent with the
approach of Viscount Haldane L.C. (with whom Lord Atkinson agreed) in
Sinclair v. Brougham [1914] A.C. 398, 420-421.
I have already expressed the opinion that, at first sight, it is surprising
that an equitable proprietary claim should be available in a case such as the
present. However before I examine the question as a matter of principle. I
propose first to consider whether Sinclair v. Brougham supports the argument
now advanced on behalf of the Bank.
Sinclair v. Brougham
The decision of this House in Sinclair v. Brougham has loomed very
large in both the judgments in the courts below and in the admirable
arguments addressed to the Appellate Committee of this House. It has long
been regarded as a controversial decision, and has been the subject of much
consideration by scholars, especially those working in the field of restitution.
I have however reached the conclusion that it is basically irrelevant to the
decision of the present appeal.
It is first necessary to establish what the case was about. The Birkbeck
Permanent Benefit Building Society decided to set up a banking business,
known as the Birkbeck Bank. The banking business was however held to be
ultra vires the objects of the building society; and there followed a spate of
litigation concerned with solving the problems consequent upon that decision.
Sinclair v. Brougham was one of those cases.
The case has been analysed in lucid detail in the speech of my noble
and learned friend. Lord Browne-Wilkinson, which I have read (in draft) with
great respect. In its bare outline, it was concerned with the distribution of the
assets of the Society, which was insolvent. There were four classes of
claimants. First, there were two classes of shareholders – the A shareholders
(entitled to repayment of their investment on maturity) and the B shareholders
(whose shares were permanent). Next, there was a numerous class of people
who had deposited money at the bank, under contracts which were ultra vires
and so void. Finally, there were the ordinary trade creditors of the Society.
By agreement, the A shareholders and the trade creditors were paid off first,
leaving only the claims of the depositors and the B shareholders. There were
sufficient assets to pay off the A shareholders, but not the depositors and
certainly not both. The question of how to reconcile their competing claims
arose for consideration on a summons by the liquidator for directions.
The problem arose from the fact that the contracts under which the
depositors deposited their money at the bank were ultra vires and so void.
That prevented them from establishing a simple contractual right to be repaid,
in which event they would have ranked with the ordinary trade creditors of the
Society in the liquidation. As it was, they claimed to be entitled to repayment
in an action for money had and received in the same way as the Bank
claimed repayment in the case now before your Lordships. But the House of
Lords held that they were not entitled to claim on this ground. This was in
substance because to allow such a claim would permit an indirect enforcement
of the contract which the policy of the law had decreed should be void. In
those days, of course, judges still spoke about the common law right to
restitution in the language of implied contract, and so we find Lord Sumner
saying in a much quoted passage, at p. 452:
To hold otherwise would be indirectly to sanction an ultra
vires borrowing. All these causes of action are common species of the
genus assumpsit. All now rest, and long have rested, upon a notional
or imputed promise to repay. The law cannot de jure impute promises
to repay, whether for money had and received or otherwise, which, if
made de facto, it would inexorably avoid.”
This conclusion however created a serious problem because, if the
depositors had no claim, then, in the words of Lord Dunedin, at p. 436:
“The appalling result in this very case would be that the society’s
shareholders, having got proceeds of the depositors’ money in the form
of investments, so that each individual depositor is utterly unable to
trace his money, are enriched to the extent of some 500 per cent.”
As a matter of practical justice, such a result was obviously unacceptable: and
it was to achieve justice that the House had recourse to equity to provide the
answer. It is, I think, apparent from the reasoning of the members of the
Appellate Committee that they regarded themselves, not as laying down some
broad general principle, but as solving a particular practical problem. In this
connection it is, in my opinion, significant that there was a considerable
variation in the way in which they approached the problem. Viscount
Haldane, with whom Lord Atkinson agreed, did so, at p. 421, on the basis
that there arose in the circumstances “a resulting trust, not of an active
character.” Lord Dunedin based his decision upon a broad equity of
restitution, drawn from Roman and French law. He asked himself the
question, at p. 435: “Is English equity to retire defeated from the task which
other systems of equity have conquered?” – a question which he answered in
the negative. Lord Parker of Waddington, at pp. 441-442, attempted to
reconcile his decision with the established principles of equity by holding that
the depositors’ money had been received by the directors of the Society as
fiduciaries, with the effect that the depositors could thereafter follow their
money in equity into the assets of the Society. Lord Sumner, at p. 458,
considered that the case should be decided on equitable principles on which
there was no direct authority. He regarded the question as one of
administration, in which “the most just distribution of the whole must be
directed, so only that no recognised rule of law or equity be disregarded.”
Setting on one side the opinion of Lord Parker, whose approach I find very
difficult to reconcile with the facts of the case. I do not discern in the
speeches of the members of the Appellate Committee any intention to impose
a trust carrying with it the personal duties of a trustee.
For present purposes. I approach this case in the following way. First,
it is clear that the problem which arose in Sinclair v. Brougham, viz. that a
personal remedy in restitution was excluded on grounds of public policy, does
not arise in the present case, which is not of course concerned with a
borrowing contract. Second, I regard the decision in Sinclair v. Brougham as
being a response to that problem in the case of ultra vires borrowing
contracts, and as not intended to create a principle of general application.
From this it follows, in my opinion, that Sinclair v. Brougham is not relevant
to the decision in the present case. In particular it cannot be relied upon as
a precedent that a trust arises on the facts of the present case, justifying on
that basis an award of compound interest against the Council.
But I wish to add this. I do not in any event think that it would be
right for your Lordships’ House to exercise its power under the Practice
Statement (Practice Statement (Judicial Precedent) [1966] 1 W.L.R. 1234) to
depart from Sinclair v. Brougham. I say this first because, in my opinion,
any decision to do so would not be material to the disposal of the present
appeal, and would therefore be obiter. But there is a second reason of
substance why, in my opinion, that course should not be taken. I recognise
that nowadays cases of incapacity are relatively rare, though the swaps
litigation shows that they can still occur. Even so, the question could still
arise whether, in the case of a borrowing contract rendered void because it
was ultra vires the borrower, it would be contrary to public policy to allow
a personal claim in restitution. Such a question has arisen in the past not only
in relation to associations such as the Birkbeck Permanent Benefit Building
Society, but also in relation to infants’ contracts. Moreover there is a
respectable body of opinion that, if such a case arose today, it should still be
held that public policy would preclude a personal claim in restitution, though
not of course by reference to an implied contract. That was the opinion
expressed by Leggatt L.J. in the Court of Appeal in the present case (see
[1994] 1 W.L.R. 938, 952E-F), as it had been by Hobhouse J.; and the same
view has been expressed by Professor Birks (see An Introduction to the Law
of Restitution (1985), at p. 374). I myself incline to the opinion that a
personal claim in restitution would not indirectly enforce the ultra vires
contract, for such an action would be unaffected by any of the contractual
terms governing the borrowing, and moreover would be subject (where
appropriate) to any available restitutionary defences. If my present opinion
were to prove to be correct then Sinclair v. Brougham will fade into history.
If not, then recourse can at least be had to Sinclair v. Brougham as authority
for the proposition that, in such circumstances, the lender should not be
without a remedy. Indeed, I cannot think that English law, or equity, is so
impoverished as to be incapable of providing relief in such circumstances.
Lord Wright, who wrote in strong terms (see [1938] C.L.J. 305) endorsing
the just result in Sinclair v. Brougham, would turn in his grave at any such
suggestion. Of course, it may be necessary to reinterpret the decision in that
case to provide a more satisfactory basis for it: indeed one possible suggestion
has been proposed by Professor Birks (see his An Introduction to the Law of
Restitution, pp. 396 et seq.). But for the present the case should in my
opinion stand, though confined in the manner I have indicated, as an assertion
that those who are caught in the trap of advancing money under ultra vires
borrowing contracts will not be denied appropriate relief.
The availability of an equitable proprietary claim in the present case
Having put Sinclair v. Brougham on one side as providing no authority
that a resulting trust should be imposed in the facts of the present case. I turn
to the question whether, as a matter of principle, such a trust should be
imposed, the Bank’s submission being that such a trust arose at the time when
the sum of £2.5m. was received by the Council from the Bank.
As my noble and learned friend Lord Browne-Wilkinson observes, it
is plain that the present case falls within neither or the situations which are
traditionally regarded as giving rise to a resulting trust, viz. (1) voluntary
payments by A to B. or for the purchase of property in the name of B or in
his and A’s joint names, where there is no presumption of advancement or
evidence of intention to make an out and out gift; or (2) property transferred
to B on an express trust which does not exhaust the whole beneficial interest.
The question therefore arises whether resulting trusts should be extended
beyond such cases to apply in the present case, which I shall treat as a case
where money has been paid for a consideration which fails.
In a most interesting and challenging paper published in Equity:
Contemporary Legal Developments (1992 ed. Goldstein). Professor Birks has
argued for a wider role for the resulting trust in the field of restitution, and
specifically for its availability in cases of mistake and failure of consideration.
His thesis is avowedly experimental, written to test the temperature or the
water. I feel bound to respond that the temperature of the water must be
regarded as decidedly cold: see. e.g., Professor Burrows in [1995] R.L.R. 15.
and Mr. W.J. Swadling in (1996) 16 Legal Studies 133.
In the first place, as Lord Browne-Wilkinson points out, to impose a
resulting trust in such cases is inconsistent with the traditional principles of
trust law. For on receipt of the money by the payee it is to be presumed that
(as in the present case) the identity of the money is immediately lost by
mixing with other assets of the payee, and at that lime the payee has no
knowledge of the facts giving rise to the failure of consideration. By the time
that those facts come to light, and the conscience of the payee may thereby be
affected, there will therefore be no identifiable fund to which a trust can
attach. But there are other difficulties. First, there is no general rule that the
property in money paid under a void contract does not pass to the payee: and
it is difficult to escape the conclusion that, as a general rule, the beneficial
interest to the money likewise passes to the payee. This must certainly be the
case where the consideration for the payment fails after the payment is made,
as in cases of frustration or breach of contract: and there appears to be no
good reason why the same should not apply in cases where, as in the present
case, the contract under which the payment is made is void ab initio and the
consideration for the payment therefore fails at the time of payment. It is true
that the doctrine of mistake might be invoked where the mistake is
fundamental in the orthodox sense of that word. But that is not the position
in the present case: moreover the mistake in the present case must be
classified as a mistake of law which, as at the law at present stands, creates
its own special problems. No doubt that much-criticised doctrine will fall to
be reconsidered when an appropriate case occurs: but I cannot think that the
present is such a case, since not only has the point not been argued but (as
will appear) it is my opinion that there is any event jurisdiction to award
compound interest in the present case. For all of these reasons I conclude, in
agreement with my noble and learned friend, that there is no basis for holding
that a resulting trust arises in cases where money has been paid under a
contract which is ultra vires and therefore void ab initio. This conclusion has
the effect that all the practical problems which would flow from the imposition
of a resulting trust in a case such as the present, in particular the imposition
upon the recipient of the normal duties of trustee, do not arise. The dramatic
consequences which would occur are detailed by Professor Burrows in his
article on Swaps and the Friction between Common Law and Equity in [1995]
R.L.R. 15, 27: the duty to account for profits accruing from the trust
property; the inability of the payee to rely upon the defence of change of
position: the absence of any limitation period: and so on. Professor Burrows
even goes so far as to conclude that the action for money had and received
would be rendered otiose in such cases, and indeed in all cases where the
payer seeks restitution of mistaken payments. However, if no resulting trust
arises, it also follows that the payer in a case such as the present cannot
achieve priority over the payee’s general creditors in the event of his
insolvency – a conclusion which appears to me to be just.
For all these reasons I conclude that there is no basis for imposing a
resulting trust in the present case, and I therefore reject the Bank’s submission
that it was here entitled to proceed by way of an equitable proprietary claim.
I need only add that, in reaching that conclusion, I do not find it necessary to
review the decision of Goulding J. in Chase Manhattan Bank N.A. v. Israel-
British Bank (London) Ltd. [1981] Ch. 105.
Interest
It is against that background that I turn to consider the question of
compound interest. Here there are three points which fall to be considered.
These are (1) whether the court had jurisdiction to award compound interest;
(2) if so, whether it should have exercised its jurisdiction to make such an
award in the present case; and (3) from what date should such an award of
compound interest run, if made.
It is common ground that in a case such as the present there is no
jurisdiction to award compound interest at common law or by statute. The
central question in the present case is therefore whether there is jurisdiction
in equity to do so. It was held below, on the basis that the Bank was entitled
to succeed not only in a personal claim at common law but also in a
proprietary claim in equity, that there was jurisdiction in equity to make an
order that the Council should pay compound interest on the sum adjudged due.
It was that jurisdiction which was exercised by Hobhouse J., whose decision
on the point was not challenged before the Court of Appeal, on the basis that
Sinclair v. Brougham [1914] A.C. 398 provided binding authority that a
proprietary claim was available to the Bank in this case. However since, in
my opinion. Sinclair v. Brougham provides no such authority, and no
proprietary claim is available to the Bank, the question now arises whether the
equitable jurisdiction to award compound interest may nevertheless be
exercised on the facts of the present case.
I wish however to record that Hobhouse J. was in no doubt that, if he
had jurisdiction to do so, he should award compound interest in this case. He
said (see [1994] 4 All E.R. at p. 955):
“Anyone who lends or borrows money on a commercial basis
receives or pays interest periodically and if that interest is not paid it
is compounded. … I see no reason why I should deny the plaintiff a
complete remedy or allow the defendant arbitrarily to retain part of the
enrichment which it has unjustly enjoyed.”
With that reasoning I find myself to be in entire agreement. The Council has
had the use of the Bank’s money over a period of years. It is plain on the
evidence that, if it had not had the use of the Bank’s money, it would (if free
to do so) have borrowed the money elsewhere at compound interest. It has
to that extent profited from the use of the Bank’s money. Moreover, if the
Bank had not advanced the money to the Council, it would itself have
employed the money on similar terms in its business. Full restitution requires
that, on the facts of the present case, compound interest should be awarded.
having regard to the commercial realities of the case. As the judge said, there
is no reason why the Bank should be denied a complete remedy.
It follows therefore that everything depends on the scope of the
equitable jurisdiction. It also follows, in my opinion, that if that jurisdiction
does not extend to apply in a case such as the present. English law will be
revealed as incapable of doing full justice.
It is right that I should record that the scope of the equitable
jurisdiction was not explored in depth in the course of argument before the
Appellate Committee, in which attention was concentrated on the question
whether a proprietary claim was available to the Bank in the circumstances of
the present case. In other circumstances, it might well have been appropriate
to invite further argument on the point. However, since it was indicated to
the Committee that the Council was not prepared to spend further money on
the appeal, whereupon it took no further part in the proceedings, and since the
relevant authorities had been cited to the Committee, I am satisfied that it is
appropriate that the point should now be decided by your Lordships’ House.
I wish also to record that I have had the opportunity of reading in draft
the speech of my noble and learned friend Lord Woolf, and that I find myself
to be in agreement with his reasoning and conclusion on the point. Even so,
I propose to set out in my own words my reasons for reaching the same
conclusion.
I shall begin by expressing two preliminary thoughts. The first is that,
where the jurisdiction of the court derives from common law or equity, and
is designed to do justice in cases which come before the courts, it is startling
to be faced by an argument that the jurisdiction is so restricted as to prevent
the courts from doing justice. Jurisdiction of that kind should as a matter of
principle be as broad as possible, to enable justice to be done wherever
necessary: and the relevant limits should be found not in the scope of the
jurisdiction but in the manner of its exercise as the principles are worked out
from case to case. Second, I find it equally startling to find that the
jurisdiction is said to be limited to certain specific categories of case. Where
jurisdiction is founded on a principle of justice. I would expect that the
categories of case where it is exercised should be regarded not as occupying
the whole field but rather as emanations of the principle, so that the possibility
of the jurisdiction being extended to other categories of case is not foreclosed.
It is with these thoughts in mind that I turn to the equitable jurisdiction
to award interest. In President of India v. La Pintada Compania Navigacion
S.A [1985] A.C. 104 Lord Brandon of Oakbrook, delivering a speech with
which the other members of the Appellate Committee agreed, described the
equitable jurisdiction in the following words, at p. 116:
“Chancery courts had further regularly awarded interest,
including not only simple interest but also compound interest, when
they thought that justice so demanded, that is to say in cases where
money had been obtained and retained by fraud, or where it had been
withheld or misapplied by a trustee or anyone else in a fiduciary
position.”
Later however he said, also at p. 116, that Courts of Chancery only awarded
compound, as distinct from simple, interest in two special classes of case.
With great respect I myself consider that, if the jurisdiction to award
compound interest is available where justice so demands, it cannot be so
confined as to exclude any class of case simply because that class of case has
not previously been recognised as falling within it. I prefer therefore to read
the passage quoted from Lord Brandon’s speech as Mason C.J. and Wilson
J. read it in Hungerfords v. Walker (1988) 171 C.L.R. 125, 148, as providing
examples (i.e., not exclusive examples) of the application of the underlying
principle of justice.
Now it is true that the reported cases on the exercise of the equitable
jurisdiction, which are by no means numerous, are concerned with cases of
breach of duty by trustees and other fiduciaries. In Attorney-General v. Alford
(1855) 4 De G.M. & G. 843, for example, which came before Lord
Cranworth L.C., the question arose whether an executor and trustee, who had
for several years retained in his hands trust funds which he ought to have
invested, should be chargeable with interest in excess of the ordinary rate of
simple interest. It was held that he should not be chargeable at a higher rate.
Lord Cranworth recognised that the court might in such a case impose interest
at a higher rate, or even compound interest. But he observed that if so the
court does not impose a penalty on the trustee. He said, at p. 851:
“What the court ought to do, I think, is to charge him only with
the interest which he has received, or which it is justly entitled to say
he ought to have received, or which it is so fairly to be presumed that
he did receive that he is estopped from saying that he did not receive
it.”
In cases of misconduct which benefits the executor, however, the court may
fairly infer that he used the money in speculation, and may, on the principle
‘In odium spoliatoris omnia praesumuntur’ assume that he made a higher rate,
if that was a reasonable conclusion.
Likewise in Burdick v. Garrick (1876) L.R. 5 Ch. App. 233, where
a fiduciary agent held money of his principal and simply paid it into his bank
account, it was held that he should be charged with simple interest only. Lord
Hatherley L.C., at pp. 241-242, applied the principle laid down in Attorney-
General v. Alford, namely that:
“… the Court does not proceed against an accounting party by way
of punishing him for making use of the Plaintiff’s money by directing
rests, or payment of compound interest, but proceeds upon this
principle, either that he has made, or has put himself in such a position
that he is to be presumed to have made, 5 per cent., or compound
interest, as the case may be …. If the Court finds . . . that the
money received has been invested in an ordinary trade, the whole
course of decision has tended to this, that the Court presumes that the
party against whom relief is sought has made that amount of profit
which persons ordinarily do make in trade, and in those cases the
Court directs rests to be made.”
For a more recent case in which the equitable jurisdiction was invoked, see
Wallersteiner v. Moir (No.2) [1975] Q.B. p. 373.
From these cases it can be seen that compound interest may be
awarded in cases where the defendant has wrongfully profited, or may be
presumed to have so profited, from having the use of another person’s money.
The power to award compound interest is therefore available to achieve justice
in a limited area of what is now seen as the law of restitution, viz. where the
defendant has acquired a benefit through his wrongful act (see Goff and Jones,
Law of Restitution, 4th ed., pp. 632 et seq.; Birks, Introduction to the Law of
Restitution, pp. 313 et seq.; Burrows, Law of Restitution, pp. 403 et seq.) The
general question arises whether the jurisdiction must be kept constrained in
this way, or whether it may be permitted to expand so that it can be exercised
to ensure that full justice can be done elsewhere in that rubric of the law. The
particular question is whether the jurisdiction can be exercised in a case such
as the present in which the Council has been ordered to repay the balance of
the Bank’s money on the ground of unjust enrichment, in a personal claim at
common law.
At this stage of the argument I wish to stress two things. The first is
that it is plain that the jurisdiction may, in an appropriate case, be exercised
in the case of a personal claim in equity. In both Alford’s case and Burdick
v. Garrick, the cases were concerned with the taking of an account, and an
order for payment of the sum found due. In each case the accounting party
was a fiduciary, who held the relevant funds on trust. But the jurisdiction is
not limited to cases in which a proprietary claim is being made and an award
of interest is sought as representing the fruits of the property so claimed. On
the contrary, the jurisdiction is in personam, and moreover an award of
interest may be made not only where the trustee or fiduciary has made a
profit, but also where it is held that he ought to have made a profit and has
not done so. Furthermore in my opinion the decision of the Court of Appeal
in In re Diplock [1948] Ch. 465 provides no authority for the proposition that
there is no jurisdiction to award compound interest where the claim is a
personal claim. It is true that in that case the Court of Appeal decided not to
award interest against a number of charities which had been held liable, in a
personal claim in equity, to repay legacies which had been paid to them in
error. But in so doing the Court simply followed an old decision of Lord
Eldon in Gittins v. Steele (1818) 1 Swanst. 199, 200, in which his judgment
was as follows:
“Where the fund out of which the legacy ought to have been
paid is in the hands of the Court making interest, unquestionably
interest is due. If a legacy has been erroneously paid to a legatee who
has no farther property in the estate, in recalling that payment I
apprehend that the rule of the court is not to charge interest; but if the
legatee is entitled to another fund making interest in the hands of the
court, justice must be done out of his share.”
The Court of Appeal in In re Diplock can have had no desire to make an
award of interest against the charities in the personal claim against them in
that case, and they must have been very content to follow uncritically this old
“rule of court.” But it does not follow that me rule or court went to the
jurisdiction of the court. It is more likely that it represented an established
practice which, as Lord Eldon’s brief judgment indicates, was subject to
exceptions. In any event the Court of Appeal was there concerned only with
simple interest: and in cases of the kind there under consideration, it seems
unlikely that any question of an award of compound interest would ever have
arisen.
I must confess that I find the reasoning which would restrict the
equitable jurisdiction to award compound interest to cases where the claim is
proprietary in nature to be both technical and unrealistic. This is shown by
the reasoning and conclusion of Hobhouse J. in Kleinwort Benson Ltd. v.
South Tyneside Metropolitan Borough Council [1994] 4 All E.R. 972, another
swap transaction case, in which the plaintiff bank had no proprietary claim.
The judge upheld the submission of the defendant council that, although they
were under a personal liability to make restitution both at law and in equity,
nevertheless the court had no jurisdiction to award compound interest on the
sum adjudged due. He said, at p. 994:
“If … the plaintiff is only entitled to a personal remedy which
will be the case where, although there was initially a fiduciary
relationship and the payer was entitled in equity to treat the sum
received by the payee as his, the payer’s, money and to trace it, but
because of subsequent developments he is no longer able to trace the
sum in the hands of the payee, then there is no subject matter to which
the rationale on which compound interest is awarded can be applied.
The payee cannot be shown to have a fund belonging to the payer or
to have used it to make profits for himself.”
This reasoning is logical, assuming the restricted nature of the equitable
jurisdiction to award compound interest. But if, as Lord Brandon of
Oakbrook stated, the jurisdiction is founded upon the demands of justice, it
is difficult to see the sense of the distinction which Hobhouse J. felt compelled
to draw. It seems strange indeed that, just because the power to trace
property has ceased, the court’s jurisdiction to award compound interest
should also come to an end. For where the claim is based upon the unjust
enrichment of the defendant, it may be necessary to have power to award
compound interest to achieve full restitution, i.e. to do full justice, as much
where the plaintiff’s claim is personal as where his claim is proprietary in
nature. Furthermore I know of no authority which compelled Hobhouse J. to
hold that he had no jurisdiction to award compound interest in respect of the
personal claim in equity in the case before him.
For these reasons I am satisfied that there is jurisdiction in equity to
award compound interest in the case of personal claims as well as proprietary
claims.
I turn next to the question whether the equitable jurisdiction can be
exercised in aid of common law remedies such as, for example, a personal
remedy in restitution, to repair the deficiencies of the common law. Here I
turn at once to Snell’s Equity, 29th ed. (1990), at p.28, where the first maxim
of equity is stated to be that “Equity will not suffer a wrong to be without a
remedy”. The commentary on this maxim in the text reads as follows:
“The idea expressed in this maxim is that no wrong should be
allowed to go unredressed if it is capable of being remedied by courts
of justice, and this really underlies the whole jurisdiction of equity.
As already explained, the common law courts failed to remedy many
undoubted wrongs, and this failure led to the establishment of the
Court of Chancery. But is must not be supposed that every moral
wrong was redressed by the Court of Chancery. The maxim must be
taken as referring to rights which are suitable for judicial enforcement,
but were not enforced at common law owing to some technical defect.”
To this maxim is attributed the auxiliary jurisdiction of equity. The
commentary reads as follows:
“Again, to this maxim may be traced the origin of the auxiliary
jurisdiction of the Court of Chancery, by virtue of which suitors at law
were aided in the enforcement of their legal rights. Without such aid
these rights would often have been ‘wrongs without remedies.’ For
instance, it was often necessary for a plaintiff in a common law action
to obtain discovery of facts resting in the knowledge of the defendant,
or of deeds, writings or other things in his possession or power. The
common law courts, however, had no power to order such discovery,
and recourse was therefore had to the Court of Chancery, which
assumed jurisdiction to order the defendant to make discovery on his
oath.”
The question which arises in the present case is whether, in the exercise of
equity’s auxiliary jurisdiction, the equitable jurisdiction to award compound
interest may be exercised to enable a plaintiff to obtain full justice in a
personal action of restitution at common law.
I start with the position that the common law remedy is, in a case such
as the present, plainly inadequate, in that there is no power to award
compound interest at common law and that without that power the common
law remedy is incomplete. The situation is therefore no different from that
in which, in the absence of jurisdiction at common law to order discovery,
equity stepped in to enable justice to be done in common law actions by
ordering the defendant to make discovery on oath. The only difference
between the two cases is that, whereas the equitable jurisdiction to order
discovery in aid of common law actions was recognised many years ago, the
possibility of the equitable jurisdiction to award compound interest being
exercised in aid of common law actions was not addressed until the present
case. Fortunately, however, judges of equity have always been ready to
address new problems, and to create new doctrines, where justice so requires.
As Sir George Jessel M.R. said, in a famous passage in his judgment in In re
Hallett’s Estate (1880) 13 Ch. D. 696. 710:
“I intentionally say modern rules, because it must not be
forgotten that the rules of Courts of Equity are not, like the rules of
the Common Law, supposed to have been established from time
immemorial. It is perfectly well known that they have been
established from time to time – altered, improved, and refined from
time to time. In many cases we know the names of the Chancellors
who invented them. No doubt they were invented for the purpose of
securing the better administration of justice, but still they were
invented.”
I therefore ask myself whether there is any reason why the equitable
jurisdiction to award compound interest should not be exercised in a case such
as the present. I can see none. Take, for example, the case of fraud. It is
well established that the equitable jurisdiction may be exercised in cases or
fraud. Indeed it is plain that, on the same facts, there may be a remedy both
at law and in equity to recover money obtained by fraud: see Johnson v. The
King (1904) AC 817. 822. per Lord Macnaghten. Is it to be said that, if the
plaintiff decides to proceed in equity, compound interest may be awarded: but
that if he chooses to proceed in an action at law, no such auxiliary relief will
be available to him? I find it difficult to believe that, at the end of the
twentieth century, our law should be so hidebound by forms of action as to
be compelled to reach such a conclusion.
For these reasons I conclude that the equitable jurisdiction to award
compound interest may be exercised in the case of personal claims at common
law, as it is in equity. Furthermore I am satisfied that, in particular, the
equitable jurisdiction may, where appropriate, be exercised in the case of a
personal claim in restitution. In reaching that conclusion, I am of the opinion
that the decision of Hobhouse J. in the Kleinwort Benson case that the court
had no such jurisdiction should not be allowed to stand.
I recognise that, in so holding, the courts would be breaking new
ground, and would be extending the equitable jurisdiction to a field where it
has not hitherto been exercised. But that cannot of itself be enough to prevent
what I see to be a thoroughly desirable extension of the jurisdiction, consistent
with its underlying basis that it exists to meet the demands of justice. An
action of restitution appears to me to provide an almost classic case in which
the jurisdiction should be available to enable the courts to do full justice.
Claims in restitution are founded upon a principle of justice, being designed
to prevent the unjust enrichment of the defendant: see Lipkin Gorman v.
Karpnale Ltd. [1991] 2 AC 548. Long ago, in Moses v. Macferlan (1760)
2 Burr. 1005, 1012, Lord Mansfield said that the gist of the action for money
had and received is that “the defendant, upon the circumstances of the case.
is obliged by the ties of natural justice and equity to refund the money.” It
would be strange indeed if the courts lacked jurisdiction in such a case to
ensure that justice could be fully achieved by means of an award of compound
interest, where it is appropriate to make such an award, despite the fact that
the jurisdiction to award such interest is itself said to rest upon the demands
of justice. I am glad not to be forced to hold that English law is so
inadequate as to be incapable of achieving such a result. In my opinion the
jurisdiction should now be made available, as justice requires, in cases of
restitution, to ensure that full justice can be done. The seed is there, but the
growth has hitherto been confined within a small area. That growth should
now be permitted to spread naturally elsewhere within this newly recognised
branch of the law. No genetic engineering is required, only that the warm sun
of judicial creativity should exercise its benign influence rather than remain
hidden behind the dark clouds of legal history.
I wish to add that I for my part do not consider that the statutory
power to award interest, either under section 3 of the Law Reform
(Miscellaneous Provisions) Act 1934 or under section 35A of the Supreme
Court Act 1981 (which, pursuant to section 15 of the Administration of Justice
Act 1982, superseded section 3 of the Act of 1934), inhibits the course of
action which I now propose. It is true that section 3(1) of the Act of 1934,
when empowering courts of record to award interest in proceedings for the
recovery of any debt or damages, did not authorise the giving of interest upon
interest. But I cannot see that it would be inconsistent with the intention then
expressed by Parliament later to extend the existing equitable jurisdiction to
award compound interest to enable courts to ensure that full restitution is
achieved in personal actions of restitution at common law. It is of course
common knowledge that, until the latter part of this century, the existence of
a systematic law of restitution, founded upon the principle of unjust
enrichment, had not been recognised in English law. The question whether
there should be a power to award compound interest in such cases, in order
to achieve full restitution, simply did not arise in 1934 and cannot therefore
have been considered by Parliament in that year. To hold that, because
Parliament did not then authorise an award of compound interest in
proceedings the nature of which was not then recognised, the Courts should
now be precluded from exercising the ordinary judicial power to develop the
law by extending an existing jurisdiction to meet a newly recognised need
appears to me to constitute an unnecessary and undesirable fetter upon the
judicial development of the law. It is not to be forgotten that there is
jurisdiction in equity, as well as at common law, to order restitution on the
ground of unjust enrichment; and I cannot see that section 3(1) of the 1934
Act would have precluded any extension of the existing equitable jurisdiction
to award compound interest to enable full restitution to be achieved in such
a case. Accordingly neither would section 3(1), which applied to all courts
of record, have precluded a similar extension of the jurisdiction to enable full
restitution to be achieved in actions at common law. Section 35A of the Act
of 1981 no doubt perpetuated the position as established by section 3(1) of the
Act of 1934, in that it too did not confer a power on the courts to award
compound interest: but I cannot see that this affects the position. In so far as
it is relevant to refer to the Report of the Law Commission (Cmnd. “229 of
7 April 1978) which preceded that enactment, it appears from the Report that
it was generally opposed to the introduction of any general power to award
compound interest: but there was no intention of interfering with the equitable
jurisdiction, and the problem which has arisen in the present case was not
addressed. I wish to add that such an extension of the equitable jurisdiction
as I propose would, in my opinion, be a case of equity acting in aid of the
common law. There is in my opinion no need, and indeed no basis, for
outlawing such a development as a case of equity acting in aid of the
legislature simply because the legislature, in conferring upon courts the power
to award simple interest, did not authorise the giving of compound interest.
It remains for me to say that I am satisfied, for the reasons given by
Hobhouse J., that this is a case in which it was appropriate that compound
interest should be awarded. In particular, since the Council had the free use
of the Bank’s money in circumstances in which, if it had borrowed the money
from some other financial institution, it would have had to pay compound
interest for it, the Council can properly be said to have profited from the
Bank’s money so as to make an award of compound interest appropriate.
However, for the reasons given by Dillon L.J., at pp. 947-949. I agree with
the Court of Appeal that the interest should run from the date of receipt of the
money.
Conclusion
For these reasons I would dismiss the appeal.
Shalson & Ors v Russo & Ors
[2003] EWHC 1637 [2005] Ch 281, [2005] 2 WLR 1213, [2003] EWHC 1637 (Ch)
Rimer J
That method appears to me to have little to do with tracing, and to be illogical and potentially unfair. Mr Smith illustrated this by the example of a fraudster with £50 in his account, who then steals £25 from each of A and B and pays it into his account, so increasing the balance to £100. He uses £50 of it to buy a car, so reducing the balance to £50. He then steals £25 from C and pays that into the account, so increasing it to £75, and then dissipates the lot. On Mr Trace’s argument, each of A, B and C can trace his money into the car On Mr Smith’s argument, only A and B can I agree with Mr Smith. I can see no basis why C can or should be entitled to trace his money into the car, because by no rational process can his money be regarded as having paid for it. It may be that Mr Trace’s suggested method of tracing represents an appropriate way in which, in certain circumstances, to divide up a fund (compare Barlow Clowes International Ltd (in liquidation) and others v Vaughan and others [1992] 4 All ER 22) but I do not regard it as providing an appropriate tracing method in this case. It is said to be supported by the guidance given by Lord Millett in Foskett — a very different case on its facts – but I was not convinced that it is.
Mr Smith submitted that, if the Shalson parties are entitled to a tracing claim, it is, first, confined to the various payments totalling £19.45m that Mr Shalson made to Mr Russo. Although Mr Shalson lent money to Edenton which went into WIB which went into the Mosaique, Mr Shalson assigned his Edenton indebtedness to Redshore and so he cannot claim a continued beneficial entitlement to any such indebtedness for any tracing purposes. This point is weakened by the fact that Redshore was, I find, a nominee for Mr Shalson, although since Mr Shalson apparently thought it necessary to constitute such a nominee for himself, it is not clear to me why he can simply claim to stand in Redshore’s shoes for the purpose of these proceedings. Secondly, he submitted that a like method of tracing is applicable as the Mimran parties have themselves adopted. The exercise simply requires a further column of Shalson trust funds, and to the extent that payments from the WIB account are in respect of the Mosaique, those payments would be treated as made in proportion to the relative sizes of the two trust funds at the time the payment is made. The Mimran parties have carried out such an exercise, and its net overall result is, they say, that US$4,077,628.75 of the Mimran payments is traceable into the Mosaique and US$1,429,154 of the Shalson payments is also so traceable.
(f) Is Mr Mimran entitled to trace into (i) the Mosaique, (ii) the Hamilton/Russo loans to Edenton, or (iii) the Hamilton share in Edenton?
For reasons given, I have held that the bulk of Mr Mimran’s tracing claim fails because the WIB/PKB account was overdrawn. I have, however, recognised that he can show that US$899,702 of his payments became represented as an asset in that account and that he may be able to trace this either into the Mosaique or elsewhere, although to identify to what extent he can (by the Mimran methodology), an inquiry may be necessary. I now consider whether in principle Mr Mimran is able to trace any of this money into any of these three assets.
(i) The Mosaique
Edenton agreed to build, acquire and own the Mosaique before Mr Mimran made any of his payments Edenton was owned by Mr Russo and Mr Shalsonthrough their companies, each owning one share. Mr Russo’s share was held through Hamilton. The arrangement between Mr Russo and Mr Shalsonwas that Edenton would pay for the construction and acquisition costs with finance by way of loans provided by each of them. That was Edenton’s only source of funds. Mr Shalson made his loans by way of payments to Edenton’s account with WIB; and Edenton’s bank statement shows that the Brookscastle Settlement and Hamilton (which also had an account at WIB) also purportedly made payments to Edenton, although the extent to which these entries represent truth or fiction is uncertain. The payments are not reflected in WIB’s PKB account, a factor which casts doubt on them, but they could have been genuine transactions reflected simply by internal entries in WIB’s books.
The Mosaique payments paid out of the WIB account can be regarded as made by Mr Russo. It was he who had control of the account and he whom I consider should be regarded as the wrongdoing trustee who has dealt with a mixed fund in part comprising trust money belonging to Mr Mimran. In order to identify what, if any, proprietary interest those payments might give Mr Mimran it is, I consider, necessary to identify what, if any, interest they could or would have given Mr Russo but for any wrongdoing on his part: in principle, I consider that Mr Mimran’s only right can be to assert for himself the interest which, absent any wrongdoing, the payments would have given Mr Russo.
I cannot see any basis on which Mr Russo could have claimed that the payments gave him a personal proprietary interest in, or charge over, the Mosaique. He was not making the payments either as a purchaser or chargee of the Mosaique. The only purchaser of the Mosaique was Edenton, and whilst Mr Russo’s motives and intentions at any time are not easy to fathom, he cannot be regarded as having made the payments in competition with Edenton. On the contrary, he had, through Hamilton, a half share in Edenton, which was building the boat and owned it, and the only way in which Edenton could pay the bills was if it was provided with funds by its shareholders. The agreement between Mr Russo and Mr Shalson was that they would each lend Edenton the money.
In these circumstances, looking at the matter both from Mr Russo’s and from Edenton’s viewpoint, I do not see that the money Mr Russo paid out can be regarded as representing anything other than the application of money lent to Edenton by its shareholders, in exchange for which loans Edenton assumed obligations in debt. Moreover, there is no basis for attributing to Edenton the knowledge that any of the money paid out on its behalf was trust money belonging to Mr Mimran. First, the evidence about Edenton did not satisfy me that it should be fixed with knowledge of Mr Russo’s activities in relation to the operation of the WIB account it was in no sense a wrongdoer in relation to the operation of that account. Secondly, at the time the payments were made, there is no basis on which Edenton could be fixed with knowledge that any of the payments made on its behalf were made from loans deriving from anyone other than its shareholders or from nominees on their behalf. In my view, had a claim been levelled by Mr Mimran against Edenton for a share in the Mosaique, Edenton’s answer would have been that it was a good faith purchaser of the money lent to it by its shareholders, and had no notice of Mr Mimran’s claims. As it is not a party to the action, and no claim has ever been made against it, it has not had the opportunity of advancing any such answer.
If, however, the money so paid out towards the Mosaique is not to be characterised as the application of money lent to Edenton, then the only alternative is that it was the gratuitous application by Mr Russo of the money of others towards the building of Edenton’s boat. But that could not have given those whose money was so applied any proprietary interest in or charge over the Mosaique. As Bowen LJ said in Falcke v Scottish Imperial Insurance Co (1886) 34 Ch D 234, at 248:
“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.”
The unwitting contributor would have a claim against Mr Russo for misapplying his money, and I would not exclude the possibility that he might have a personal restitutionary claim against Edenton. But he would not have a proprietary interest in the Mosaique. I reject Mr Mimran’s claim to trace into the Mosaique.
(ii) The Hamilton/Russo loans to Edenton
Mr Smith was critical of the suggestion that Hamilton actually made any loans to Edenton, albeit that there is some evidence justifying the inference that it did. However, for the purposes of this alternative way of putting Mr Mimran’s tracing claim, he accepted that such loans were made.
As follows from what I have said, I consider the correct inference is that, to the extent that Mr Russo was applying money from the WIB account towards the acquisition of the Mosaique, that money must be regarded as representing his contribution of the necessary loans to Edenton. In fact, I understand that he has never claimed to have made any loans to Edenton himself: and by early 2001 he appears to have regarded Hamilton as the only relevant lender on his side of the joint venture, although Mr Shalson’s evidence was that he knew nothing about any loans from Hamilton, and that he assumed the loans had been made by Mr Russo. Despite Mr Shalson’s understanding, I find that the relevant Mosaique payments are to be regarded as representing part of the Hamilton loans to Edenton. I am prepared to assume that Hamilton can properly be fixed with knowledge of whatever Mr Russo was doing on its behalf. I also find that to the extent that the Hamilton loans are to be regarded as in part made up of money belonging beneficially to Mr Mimran, Hamilton could not assert a title to that part against him.
In my view, therefore, the Mimran money is in principle traceable into the Hamilton loans to Edenton. Whether any such claim can be made good against Mr Shalson, who now claims the benefit of those loans, is a matter to which I come in (g) below.
(iii) The Hamilton share in Edenton
I reject the further alternative argument that the money is traceable into the Hamilton share in Edenton. There is no evidence suggesting that the share was acquired with the Mimran money.
(g) Is a defence of a “good faith purchaser for value without notice” open to Mr Shalson?
By March 2001, Mr Russo claimed to be the beneficial owner of the Edenton loans owed to Hamilton, having purportedly acquired them by an assignment from Hamilton shortly before. If Mr Mimran had an equitable interest in, or charge over, those loans immediately before the Hamilton/Russo assignment, he would have had a like interest immediately afterwards: Mr Russo was not a good faith purchaser without notice. On about 1 March 2001, Mr Russo,Edenton and Mr Shalson executed the charge in favour of Mr Shalson over the Edenton indebtedness to Mr Russo, being indebtedness which Edenton expressly acknowledged.
Mr Smith submitted that the Hamilton/Russo assignment was a sham, largely because he said it was obvious that Mr Russo did not pay the stated consideration for it. In my view that would not make it a sham, although it might result in Hamilton having a lien on the loans for the unpaid price. But I do not see how this argument could help the Mimran parties since they have abandoned their claims against Hamilton. I am anyway not disposed to make any finding that the Hamilton/Russo assignment was a sham. I proceed on the basis that it was valid.
I turn to Mr Russo’s charge of the loans to Mr Shalson. I see no reason why, for what it was worth, it did not take effect according to its terms. I find that, at the time, Mr Shalson had no actual or constructive notice of Mr Mimran’s claim to be entitled to -any interest in those loans. I accept that he knew that Mr Mimran was owed money by Mr Russo or WIB which could not be paid, but knowledge of that would not have given him the further knowledge of Mr Mimran’s claim to an interest in the loans. Nor do I find that Mr Shalson had any relevant Nelsonian knowledge by failing to make relevant inquiries of matters of which he was put on notice. Of course, he knew that Mr Russo was heavily stretched, and was probably insolvent. But I do not see why he was not entitled to obtain what security he could to protect his own position. He was simply a substantial creditor of Mr Russo and WIB, who was taking normal commercial steps to protect his own position as best he could, although no doubt there was a risk that they would or might be avoided as preferences in the event of Mr Russo’s bankruptcy. I find that he was not on notice of any impropriety by Mr Russo in effecting the charge of the loans, or at any rate not on notice of any impropriety which impacted on Mr Mimran. I record that I find that he personally knew nothing of the Hamilton loans to Edenton, but I also record that I find that Mr Wolinsky did know of them.
I find, therefore, that Mr Shalson had no notice of Mr Mimran’s claim s at the time of the March charge over the loans. As a chargee of the loans who took his interest by grant, he may technically have been a “purchaser”. But even so, he would only take free of Mr Mimran’s claims if he gave value for the charge and took it in good faith.
I hold that there is no basis for finding any want of good faith on Mr Shalson’s part. Less easy is the question whether he gave value for the charge. The charge identifies no consideration moving from Mr Shalson to Mr Russo, and the antecedent debt from Mr Russo would not constitute such consideration. The charge had, however, been in negotiation at least since January 2001, and I have explained the negotiation between Mr Russo and Mr Wolinsky as to the length of notice which Mr Shalson could give for calling in the loans. I infer that they would ordinarily be payable on demand, but Mr Shalson agreed to a three-month notice period (Mr Russo had wanted six months), and I would be disposed to regard that as constituting a sufficient variation of rights to constitute the giving by Mr Shalson of value for the charge. But in these circumstances the courts are anyway ready to find that consideration has been impliedly given for the security. In Wigan v English and Scottish Law Life Assurance Association [1909] 1 Ch 291, Parker J said at 297, 298:
“If such a security is given, it may of course be given upon some express agreement to give time for the payment of the debt, or to give consideration for the security in some other way, or, if there be no express agreement, the law may very readily imply an agreement to give time. It may not be a definite time, but to forbear for some indefinite time in consideration of the security being given. And further than that, if there is no express agreement, and no agreement can be implied at the time and under the circumstances at and under which the indenture giving the further security is executed, yet if that security be communicated to a person who could otherwise sue on the debt, and on the strength of that security he does in fact forbear to sue on the debt, he does give that time with the object of securing which the security is presumably given, and then I think it appears on the cases that there is sufficient consideration, though in a sense it is an ex post facto consideration, for the security which is given.”
In my judgment, this is a case in which it is possible to find that- (in addition to the consideration I have identified) there was an implied consideration in the nature of a forbearance to sue, if only for a short time, and in the event Mr Shalson actually sued within a fortnight. The evidence shows that the consideration Mr Russo sought on the giving of his other securities to Mr Shalson was the holding by Mr Shalson of his hand for the briefest of times, illustrated by his letter of 2 March 2001 in which he offered Mr Shalson security over his Rotch Italia interest “in consideration of your not today demanding payment of this deposit”. I find that it was implicit that the consideration for the charge over the loans was the giving of time, if only a short time, in addition to the agreement to defer the calling in of the Edenton loans for three months. I find, therefore, that in March 2001 Mr Shalson became a good faith purchaser for value of the Edenton loans, without notice of Mr Mimran’s claim to trace into the loans, and that he therefore took his charge free of Mr Mimran’s claim. The result is that Mr Mimran’s tracing claim fails.
I add that if Hamilton did have a vendor’s lien on the loans for the unpaid price, it might have been arguable that Mr Mimran could trace his claim into that lien, that Mr Shalson should be fixed with Mr Wolinksy’s knowledge of the Hamilton/Russo assignment and, in turn, with notice that Hamilton retained such a lien. But no such case was argued or suggested, and as any such claim would be one against Hamilton, against which Mr Mimran has abandoned his claims, I do not consider it further.
(h) The Mimran tracing claims generally
Had I concluded that Mr Mimran could trace into the Edenton loans, it is not obvious that such a right could prove to be of any value to him. I should be surprised, but do not know, if Edenton has any assets. I infer that its only asset was the Mosaique, although this has been sold to Cardinal, with Braemar being entitled to the benefit of what might be regarded as its full commercial value. A feature of the August 2001 transactions – which are not of the simplest — is that whereas at one moment Edenton owned a boat said to be worth £13.2m, and resolved to sell it to Cardinal for that sum, immediately after the sale it appeared to have nothing to show for it: Cardinal owns the boat, Braemar has a 25-year lease of it, Cardinal uses the rent to repay the borrowed purchase price to Redshore and Edenton gets nothing.
I should, however, at least make certain findings of fact. First, I find that the sale to Cardinal was -not motivated by any intention on anyone’s part to defeat anyone else’s proprietary claims to the Mosaique or their claims as a creditor. I find that the sole motive for the sale was that it offered a route to a saving of VAT. Much was made by Mr Smith of Allen & Overy’s letter of 16 August 2001 wrongly stating that Edenton was the owner of the Mosaique. That was a mistake, and how it arose I do not know. But it anyway had zero effect on the Mimran parties. They have never displayed any interest in joining Edenton as a party, and although they have known about Cardinal’s role for a year or more, they have never displayed any interest in joining Cardinal either (or, for that matter, Braemar). I also find that the letter was in no way motivated by a desire or intention to mislead. Secondly, and consistently with the motive behind the sale, it was structured in an artificial way so as to achieve the desired VAT saving, whilst maintaining almost the entire commercial interest in the Mosaique in a Shalson company, namely Braemar. Thirdly, I do not find that the transaction was a sham, as Mr Smith suggested it was: the documents were intended by everyone to have the effect they purported to have. The result is that I find that Cardinal did become and is the owner of the Mosaique, although it derives no commercial interest from the acquisition other than its £15,000 a year, its reward for making the scheme available and being a party to it. It is perhaps best regarded as in a position analogous to that of a freeholder of a property held on a long lease at a low rent and subject to put and call options in favour of others.
(i) The claim for alleged dishonest assistance by Mr Jerne in signing the Westland agreements
The Shalson parties assert that both Westland agreements were part of the fraud that Mr Russo practised on Mr Shalson and that, in so far as Mr Mimran assisted in that part of the operation, he is liable for dishonest assistance in Mr Russo’s breach of trust and fiduciary duty. The case is that the Westland agreements were used to persuade Mr Shalson that he would be participating in a hugely profitable venture, whereas the truth was that they were used by Mr Russo to buy time in which to misappropriate, or conceal the misappropriation of, Mr Shalson’s money out of WIB. I am prepared to assume that that is a possible explanation of what lay behind the Westland agreements. On that assumption, the issue is whether Mr Mimran was a party to that dishonesty. He and Mr Jerne deny that they knew anything about the Westland agreements, but the Shalson parties rely on the fact that each agreement is purportedly signed for Westland by Mr Jerne. This claim is not advanced by the Shalson parties as a freestanding one in its own right: it is advanced merely as a claimed set-off to the Mimran parties’ tracing claim. I do not find that an easy concept to follow, but will first consider the general merits of the allegation.
I have explained the slowness with which Mr Jerne asserted his denial that he signed the Westland agreements. One might have expected him to rush to do so once he had learnt the position, but he did not, and I must take that into account in deciding whether he is telling the truth about this part of the case. What might also have been of value was some expert evidence as to whether the signatures were Mr Jerne’s. Mr Smith told me that the Mimran parties would have wished to call such evidence, but were met with the difficulty that no original of either Westland agreement was available: and they were advised by a leading handwriting expert that in those circumstances she could not give an opinion on the authenticity of the signatures, a difficulty explained to Lloyd J at a pretrial review on 10 February 2003.
I am, therefore, faced with two agreements apparently signed by Mr Jerne, but which he has belatedly denied he signed and says are forgeries. Mr Mimran also denies all knowledge of the agreements. The absence of expert evidence has been explained, and so I am left with the issue of whether or not I should accept the evidence to the effect that Mr Mimran and Mr Jerne both knew nothing of the Westland agreements, and had no part in their execution.
I do accept that evidence. Whilst Mr Russo has demonstrated his capacity for dishonesty, there is no basis at all for painting Mr Mimran or Mr Jerne in like colours. Mr Mimran was, I find, as much an innocent victim of Mr Russo’s fraud as was Mr Shalson. In May 2000, Westland was simply not in a position to enter into the agreement it did, and the correspondence between Mr Russo and Mr Mimran shortly before the signing of the first Westland agreement is quite inconsistent with any then proposal on the part of Westland to commit itself to the transaction into which it entered on 19 May. If Mr Mimran were a knowing party to the then impending first Westland agreement, I would have expected mention to have been made of it in those letters. I regarded both Mr Mimran and Mr Jerne as honest witnesses, and I find that they had no part in the Westland agreements and that the signatures on them purporting to be Mr Jerne’s were not made either by his hand or with his or Mr Mimran’s authority. I reject this part of the Shalson parties’ case.
(j) The Mimran parties’ claim under section 423 of the Insolvency Act 1986
The Mimran parties say that the charges Mr Russo granted Mr Shalson over the Edenton share and loans were transactions entered into at an undervalue so as to be capable of being avoided by a creditor such as Mr Mimran. Mr Mimran relies on section 423 of the Insolvency Act 1986.
In my view there is nothing in this All Mr Russo did by these charges was to give one of his creditors securities for his indebtedness which that creditor would not otherwise have had. As Millett J explained in Re M C Bacon Ltd [1990] BCLC 324, at 340, the giving of those securities did not deplete Mr Russo’s assets or diminish their value. All he lost as a result was the ability to apply the charged assets otherwise than in satisfaction of the secured debts. I see no reason why Mr Russo was not entitled to create the charges or why Mr Shalson was not entitled to take them. They involved no disposition of assets at an undervalue and section 423 is not engaged at all. In the event of Mr Russo’s subsequent bankruptcy, they might perhaps have amounted to preferences under section 340, but that is a different matter. I reject this claim.
2. The Mimran parties’ other claims
These are claims against Mr Russo and WIB. They have not been defended but the relevant facts have been proved by the evidence.
(a) The GSS deal
I have summarised the essential history of this. I add that I find that by October 1998, it was agreed that Mr Russo would subscribe and pay for Oceanwave’s holding of 1,050 shares in Westbond, but that if this was not done by 30 November 1998 Mr Russo was to pay Mr Mimran US$8.5m plus interest from 1 January 1997 at the interbank rate. It was not done by that date, although it was purportedly done in December 1998, when a fictitious payment was credited to Oceanwave’s account with WIB, and Oceanwave used it (or believed it was using it) to pay for the Westbond shares issued to it. Although Oceanwave later received share certificates for its shares, Westbond denies that any shares were validly issued to it, as is shown by a letter of 18 April 2001 from Henry Sherman of Westbond to Mr Jerne. Alternatively, if the shares were validly issued, Westbond would be likely to have a lien on them for the US$12,682,320 unpaid purchase price. Either way, Mr Russo did not fulfil the conditions of the agreement of October 1998, and it follows that Mr Mimran is entitled to judgment against him for US$8.5m plus interest from 1 January 1997.
Mr Shipley, who argued this part of the Mimran parties’ case, submitted that Oceanwave is also entitled to judgment against WIB for the US$12.683m credited to its account. Even though this was a fictitious entry, which did not represent the real movement of a single cent, he said that WIB’s bank statement showing this credit amounted to an admission by WIB against interest, and so Oceanwave is entitled to judgment against WIB for this amount. He acknowledged that I could not give unconditional judgments both in favour of Mr Mimran for US$8.5m and Oceanwave for US$12.683m, since that would amount (at least, in theory) to double recovery, but said that I could and should give judgments for both sums on the basis that Mr Mimran and Oceanwave would have to make an election as to which judgment to enforce. Mr Shipley’s point was that it is too early at this stage to know how they might wish to exercise any such right of election.
I see the merit of that proposal, but I am anyway not prepared to give judgment for Oceanwave against WIB. The credit entry of US$12.683m was a fraudulent fiction which did not represent the movement of any money into WIB. Now that the truth is out it is unreal to regard Oceanwave as having a claim against WIB in respect of such a sum. It does not represent money paid into the account either by Oceanwave or by anyone else. It is simply a lie, which appears to recognise a debt due from WIB to Oceanwave, but one for which Oceanwave gave no consideration to WIB. The credit entry can, in my view, be regarded as a mistake which WIB’s liquidator ought to be entitled to correct. I reject Oceanwave’s claim for this sum. But Mr Mimran is entitled to judgment against Mr Russo for US$8 5m plus interest. I will hear further from counsel as to whether credit needs to be given against this for any recoveries in the US proceedings to which Mr Shipley referred.