Tracing
Cases Remedy of Accounts
London Chatham and Dover Railway v SE Railway Co.
Court of Appeal [1892] 1 Ch. 120; 61 L.J.Ch. 294; 65 L.T. 722; 40 W.R. 194; 8 T.L.R. 82;
36 S.J. 77
LINDLEY L.J.: . . . Before the Judicature Acts a suit for an account could be maintained in equity in the following cases: -(1.) Where the plaintiff had a legal right to have money payable to him ascertained and paid, but which right, owing to defective legal machinery, he could not practically enforce at law. Suits for an account between principal and agent, and between partners, are familiar instances of this class of case. (2.) Where the plaintiff would have had a legal right to have money ascertained and paid to him by the defendant, if the defendant had not wrongfully prevented such right from accruing to the plaintiff. In such a case a Court of law could only give unliquidated damages for the defendant’s wrongful act; and there was often no machinery for satisfactorily ascertaining what would have been due and payable if the defendant had acted properly. In such a case, however, a Court of Equity decreed an account, ascertained what would have been payable if the defendant had acted as he ought to have done and ordered him to pay the amount: M’lntosh v. Great Western Railway Company ( (1865) 4 Giff. 683), is the leading authority in this class of case. (3.) Where the plaintiff had no legal but only equitable rights against the defendant, and where an account was necessary to give effect to those equitable rights. Ordinary suits by cestuis que trust against their trustees and suits for equitable waste fell within this class. (4.) Combination of the above cases.
Note
The damage suffered may be impossible to calculate accurately. In such a case equity is as hamstrung as common law, but equity grants an account. An example of such a case is breach of copyright, it being impossible to ascertain how many copies of the plaintiff’s book would have been sold but for the breach by the defendant. In such a case the court ” . . . as the nearest approximation which it can make to justice, takes from the wrongdoer all the profits he has made by his piracy and gives them to the party he has wronged”: Colburn v. Sims (1843) 2 Hare 543, 560.
Philips v Philips
PHILLIPS v. PHILLIPS
Chancery (1852) 9 Hare 471; 22 L.J.Ch. 141
Srn G. J. TURNER V.-C.: I have no doubt that this bill cannot be maintained. I take the rule to be that a bill of this nature will only lie where it relates to that which is the subject of a mutual account; and I understand a mutual account to mean, not merely where one of two parties has received money and paid it on account of the other, but where each of two parties has received and paid on the other’s account. I take the reason of that distinction to be that, in the case of proceedings at law, where each of two parties has received and paid on account of the other, what would be to be recovered would be the balance of the two accounts; and the party Plaintiff would be required to prove, not merely that the other party had received money on his account, but also to enter into evidence of his own receipts and payments, a position of the case which, to say the least, would be difficult to be dealt with at law. Where one party has merely received and paid monies on account of the other it becomes a simple case. The party Plaintiff has to prove that the monies have been received, and the other party has to prove his payments. The question is only as to the receipts on one side and the payments on the other, and it is a mere question of set-off; but it is otherwise where each party has received and paid. [Counsel for the plaintiff] says, and says truly, that there are cases of the first description which may still come to a Court of Equity. It is true that a case of mere receipts and payments may become so complicated, as Lord Cottenham said in the case of The Taff Vale Railway Company ( (1847) 1 H.L.C. 111), that the account cannot be taken at law, and may become properly the subject of the jurisdiction of a Court of Equity. But where the account is on one side only I think a strong case must be shown before this Court will exercise its jurisdiction. If the door of this Court be opened to entertain every case in which accounts would not be taken in an action at law, but a Court of law would send them to a reference, I do not know where there would remain any protection against suits in equity to parties between whom any account existed.
Jesus College v Bloom
Chancery (1745) 3 Atk. 262
LORD CHANCELLOR: The first question is, whether bills ought to be enter tained merely for satisfaction for timber cut down, after the estate of the tenant that cut it down is determined, by assignment, or otherwise, without praying an injunction.
I am of opinion they ought no .
Waste is a tort, and the remedy lies at law.
In an action of waste, the place wasted is recovered; in an action of trover,
damages.
The ground of coming into this court is, to stay the waste, and not by way of satisfaction for the damages, but by way of prevention of the wrong, which courts of law cannot do in those instances, where a prohibition of waste will not strictly lie.
But in all these cases, this court has gone further, merely upon the maxim of preventing multiplicity of suits, which is the reason that determines this court in many cases.
As in bills for account of assets, &c., that originally was only a bill for discovery, which cannot be had without an account, and therefore the court will make a complete decree and give the party his debt likewise.
So, in bills for injunctions, the court will make a complete decree, and give the party a satisfaction, and not oblige him to bring an action at law, as well as a bill here.
But nothing would tend to greater vexation, than to admit of such bills as the present, after the term is at an end (vide Smith v. Cooke (1746) 3 Atk. 378); and I am glad to find there is no precedent. . . .
The other case was the case of a mine, which is a sort of trade, and an account was therefore necessary (vide Story v. Lord Windsor (1743) 2 Atk. 630); and there are many cases, where this court have made decrees in the cases of mines, which they could not have done in cases of timber.
Therefore the present case is reduced to this, that it is a bill brought by the college, to have an account (after the determination of the tenant’s estate, he having assigned) of a little timber cut down, without praying an injunction; and I think it is such a bill as the court ought not to entertain.
Cases Appointing a Receiver
Evans v Coventry
EVANS v. COVENTRY
Chancery (1854) 3 Drew. 75; 3 W.R. 194;
5 De G.M. & G. 911; 5 W.R. 187; 24 L.T.(o.s.) 186; 19 J.P. 37; 3 Eq.R. 545
KENDERSLEY V.-C.: . . . Unless I can now see grounds for considering that I can make a decree when the cause comes on to be heard, which will have the effect of winding up this concern and distributing all the funds amongst the persons entitled to those funds, unless I say I can see that that can be done in the suit as originally constituted, I ought not to grant a receiver; because a receiver can only be properly granted for the purpose of getting in and securing funds, which this Court, at the hearing or in the course of the cause, will have the means of distributing amongst the persons entitled to those funds.
The bill prays for an account of the monies and funds belonging to the societies, that is, the two societies, and of the application of them; . . . Then comes the fourth section, which prays, ” That the accounts of the said societies may be investigated, and, if necessary, the affairs of the said societies may be wound up.” In connection with that comes the fifth section of the prayer, “That, in the meantime, the conduct and management of the said societies may be taken under the protection of this honourable Court; and that a proper person may be appointed manager and receiver thereof respectively, and to get in the outstandin assets.” Taking those two sections together it comes to this-if necessary (the Plaintiffs have already asked a decree against the Defendants for their liability in respect of their neglect) they say; if necessary to wind up the whole concern, and for that purpose in the meantime until you can wind it up, and that only in the event of its being necessary to wind it up under the pro tection of the Court of Chancery, take the management and conduct of these two societies under the Court’s protection, and appoint a person who shall be the manager and receiver of the societies, and shall get in the outstanding assets. One thing is clear that, that being the only part of the prayer which relates to a receiver, the Court is asked upon the footing of its being necessary to wind up, that is, to make a decree to wind up and dissolve these societies, to settle all their affairs, to get in all that can be got of the assets, and make those pay who may turn out to be liable; and when the funds have been got at, to divide them amongst the various classes of persons and the various individuals interested in those funds. It is only upon the footing of such a decree that a receiver could be asked; therefore, as might be expected from the skill ;ind experience of the draughtsman, it is only upon that footing that a receiver is asked; and the motion now is that a receiver may be appointed to manage the affairs of these societies in the meantime. I do not think that I should grant a receiver of that kind; as I observed on a former occasion, this Court cannot take upon itself the management of a concern of this kind. This Court cannot keep an office for receiving deposits from persons, or lending it out on loans, or receiving premiums on policies; and then paying to the representatives of persons who 1T1ay Erom time to time die whilst this suit is pending. It is quite out of the quest10n that this Court can manage such an institution as this even ad interim. It would not do it for the period that may elapse from the filing of the bill to the final decree in the cause, nor for a single year, or a month, or a week. Having prayed in that manner that a receiver shall be appointed until such winding up shall take place, the sixth paragraph of the prayer is for an injunction to restrain the Defendants from getting in any of the assets of the concern. That is con nected in fact with the appointment of a receiver, and I may observe with respect to that, that of course the appointment of a receiver (if a receiver were appointed) would of itself operate as an injunction; and it would not be neces sary, if a receiver were appointed, to go on and grant an injunction in terms; but where trustees or persons in a fiduciary character have misconducted them selves, then the Court will often grant an injunction as well as a receiver, not because an injunction is necessary to prevent a party from receiving when a receiver is once appointed, but for the purpose of marking its sense of the con duct of the parties who have so misconducted themselves. Until an investiga tion, it is impossible for the Court to know whether they have misconducted themselves or not; now I do not forget the argument upon a former occasion, by which it was urged that, in an institution of this sort, the directors as a matter of course lend the monies out instead of investing them; that it is the ordinary way in which these societies turn their money to account. But even if that were so, though I can hardly say there has not been misconduct or non investment, yet at present, until there has been an investigation, I do not know what the funds were which ought to have been invested and what the conduct of the Defendants in this respect has been. That would be a sufficient reason why, if I granted a receiver, I should accompany it by granting an injunction;
The Vice-Chancellor went on to dismiss the bill on the ground that he could not make a decree for the proper distribution of the funds given the present constitution of the suit; in particular, some parties were not represented-the shareholders of the insurance company-while others represented had conBicting interests-insurers and depositors.
On appeal against the Vice-Chancellor’s refusal to appoint a receiver this decision was reversed.
THE LORD JUSTICE KNIGHT BRUCE: . . . The application before the Court is simply an interlocutory application for an injunction, accompanied by the appointment of a receiver, without which the injunction (if otherwise proper) would be unsafe, and perhaps unreasonable. The application for the appoint ment of a receiver is here in a sense included in the injunction sought, as an order for injunction is always more or less included in an order for a receiver. The application before the Court is founded on the common right of persons who are interested in property which is in danger to apply for its protection. Upon the bill and answer it appears that the Plaintiffs are interested in the funds of that which was an association, under whatsoever circumstances of honesty or dishonesty, constituted or carried on, but the affairs of which have ceased to be, and probably can never again be, in a state of activity. It was intimately connected with another society, or alleged society, of a subsidiary nature.
The Defendants are persons, or include persons, who owned duties to those represented by the Plaintiffs in respect of the funds of the society, for the purpose of care and protection. Those duties appear to have been abandoned 1 a manner deserving, as it would at present appear, the strongest observation. This has led to a grievous loss, which has been sustained by persons of small means and in humble circumstances, who are ill able to bear it. These same Defendants have now under their control, or in their power, a poor remnant of the property which they have so ill-cared for. Whatever may be the specific allegations, or want of specific allegation, in the bill, the true and necessary result of the entire pleadings as they stand is, that this remnant of property is in danger.
In my judgment, the objections which have been urged against this application, at the existing stage of the cause, might be urged with as much reason, as much force, and as much effect, if this were an application to restrain the felling of timber or the destruction of a house. It is a case of waste, partly perpetrated and obviously imminent. But for the judgment which has been given, and for which I feel the most unaffected respect, I should have said, from my experience of the practice of the Court in Lord Eldon’s time, that this was a plain case for that injunction, and that receiver, which I think ought now to be granted.
TURNER L.J.: . . . Prima facie, therefore, there appears a clear case for the interference of the Court; for I certainly cannot accede to [counsel for the defendants’] argument, that a breach of trust is not a sufficient ground for the interference of the Court by the appointment of a receiver. Whether the Plain tiffs will ultimately establish the commission of a breach of trust is not the question now before the Court. It is admitted that funds have been lost, of which it was the duty of the Defendants to take care. That loss is prima facie evidence of a breach of the duty of the Defendants, sufficient to authorize the interference of the Court by the appointment of a receiver.
Re Newdigate Colliery Limited
Court of Appeal (1912] I Ch. 468; 81 L.J.Ch. 235; 106 L.T_ 133; 19 Mans. 155
FLETCHER MOULTON L.J.: . . . I cannot shut out from my mind that by breaking the contracts the receiver and manager would not only do damage to third parties, but would increase the amount of the company’s unsecured liabilities. It seems to me that the receiver and manager ought to do his best to preserve the property as a whole and not to increase the value of one part of it at the cost of another; and this is especially the case where he has been appointed early in the proceedings. For these reasons I think that the learned judge was right in refusing to give the authority requested, and that this appeal must be dismissed.
BUCKLEY L.J.: . . . If the Court were to make the order asked for, the receiver and manager would be directed to refuse to perform the existing contracts for the sale of coal in order that he might sell it at the enhanced price it now commands, with the result that the company would be liable on the contracts for damages for breach thereof. The question is whether the Court ought to give such a direction as that. Something has been said about these contracts being binding upon the receiver and manager personally. That is not so at all. The receiver and manager is a person who under an order of the Court has been put in a position of duty and responsibility as regards the management and carrying on of this business, and has standing behind him-I do not know what word to use that will not create a misapprehension, but I will call them “con stituents “-the persons to whom he is responsible in the matter, namely, the mortgagees and the mortgagor, being the persons entitled respectively to the mortgage and the equity of redemption. . . . The order asked for is an order directing the receiver and manager to disregard the interests of one of his con stituents, the mortgagor, in order to benefit another of his constituents, namely, the mortgagee. It seems to me that such an order is necessarily wrong. No precedent has been cited for such an order, I have never heard of such an application before, and it seems to me in principle to be wrong. It is the duty of the judge who has taken control of the assets to deal with those assets with due regard to the interests of everybody concerned, and not to advance the interests of one of the persons concerned at the expense of the other. For these reasons I think the order was rightly refused by Eve J.
Proprietary Recovery Cases
Westdeutsche Landesbank Girozentrale v. Islington London BC
[1996] 2 WLR 802,
Lord Browne-Wilkinson: … Compound Interest in Equity
In the absence of fraud courts of equity have never awarded compound·interest except againsta trustee or other person owing fiduciary duties who is accountable for profits made from his position. Equity awarded simple interest at a time when courts of law had no right under common law or statute to award any interest. The award of compound interest was restricted to cases where the award was in lieu of an account of profits improperly made by the trustee. We were not referred to any case where compound interest had been awarded in the
absence of fiduciary accountability for a profit. The principle is clearly stated by Lord Hatherley LC in Burdick v. Garrick, LR 5 Ch.App. 233, 241:
‘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 into sucha position as that he is to be presumed to have made, 5 per cent, or compound interest, as the case may be.’
The principle was more fully stated by Buckley LJ in Wai/ersteiner v. Moir (No 2) [1975] QB 373,397:
‘Wherea trustee has retained trust money in his own hands, he will be accountable for the profit which he has made or which he is assumed to have made from the use of the money. In Attorney-General v. Alford, 4 De GM & G 843, 851 Lord Cranworth LC said: “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 pre sumed that he did receive that he is estopped from saying that he did not receive it.” This is an application of the doctrine that the court will not allow a trustee to make any profit from his trust. The defaulting trustee is normally charged with simple interest only, but if it is established that he has used the money in trade he may be charged compound inter est The justification for charging compound interest normally lies in the fact that profits earned in trade would be likely to be used as working capital for earning further profits. Precisely similar equitable principles apply to an agent who has retained moneys of his prin cipal in his hands and used them for his own purposes: Burdick v. Ga”ick.’
In President of India v. La Pintada Compania Navigacion SA [1985] AC 104, 116 Lord Brandon of Oakbrook (with whose speech the rest of their Lordships agreed) considered the law as to the award of interest as at that date in four separate areas. His third area was equity, as to which he said:
Thirdly, the area of equity. The Chancery courts, again differing from the common law courts, had regularly awarded simple interest as ancillary relief in respect of equitable remedies, such as specific performance, rescission and the taking of an account. Chancery courts had further regularly awarded interest, including not only simple interest but also com pound 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 misap plied by a trustee or anyone else in a fiduciary position Courts of Chancery only in two special classes of case, awarded compound, as distinct from simple, interest.’
These authorities establish that in the absence of fraud equity only awards compound (as opposed to simple) interest against a defendant who is a trustee or otherwise in a fiduciary position by way of recouping from such a defendant an improper profit made by him. It is unnecessary to decide whether in such a case compound interest can only be paid where the defendant has used trust moneys in his own trade or (as I tend to think) extends to all cases where a fiduciary has improp erly profited from his trust. Unless the local authority owed fiduciary duties to the bank in rela tion to the upfront payment, compound interest cannot be awarded.
Was There a Trust? The Argument for the Bank in Outline
The bank submitted that, since the contract was void, title did not pass at the date of payment either at law or in equity. The legal title of the bank was extinguished as soon as the money was paid into the mixed account, whereupon the legal title became vested in the local authority. But, it was argued, this did not affect the equitable interest, which remained vested in the bank (‘the retention of title point’). It was submitted that whenever the legal interest in property is vested in one person and the equitable interest in another, the owner of the legal interest holds it on trust for the owner of the equitable title: ‘the sep aration of the legal from the equitable interest necessarily imports a trust.’ For this latter proposition (‘the separation of title point’) the bank, of course, relies on Sinclair v. Brougham [1914) AC 398 and Chase Manhattan Bank NA v. Israel-British Bank (Lown) Ltd [1981) Ch. 105.
The generality of these submissions was narrowed by submitting that the trust which arose in this case was a resulting trust ‘not of an active character:’ see per Viscount Haldane LC in Sinclair v. Brougham [1914] AC 398, 421. This submission was reinforced, after completion of the oral argument, by sending to your Lordships Professor Peter Birks’ paper ‘Restitution and Resulting Trusts:’ see Equity: Contemporary Legal DeveloptM11U,
335. Unfortunately your Lordships have not had the advantage of any submissions from the local authority on this paper, but an article by William Swadling ‘A new role for result ing trusts?’ 16 Legal Studies 133 puts forward counter-arguments which I have found persuasive.
It is to be noted that the bank did not found any argument on the basis that the local authority was liable to repay either as a constructive trustee or under the in personam liab ility of the wrongful recipient of the estate of a deceased person established by In re Diplock; Dipiock v. Wintle (1948] Ch. 465. I therefore do not further consider those points.
The Breadth of the Submission
Although the actual question in issue on the appeal is a narrow one, on the arguments pre sented it is necessary to consider fundamental principles of trust law. Does the recipient of money undera contract subsequently found to be void for mistake or as being ultra vires hold the moneys received on trust even where he had no knowledge at any relevant time that the contract was void? Ifhe dcfes hold on trust, such trust must arise at the date of receipt or, at the latest, at the date the legal title of the payer is extinguished by mixing moneys ina bank account: in the present case it does not matter at which of those dates the legal title was extinguished. If there isa trust two consequences follow: (a) the recipient will be personally liable, regardless of fault, for any subsequent payment away of the moneys to third parties even though, at the date of such payment, the ‘trustee’ was still ignorant of the existence of any trust: see Burrows ‘Swaps and the Friction between Comrnpn Law and Equity’ (1995] RLR 15; (b) as from the date of the establishment of the trust (i.eJ receipt or mixing of the moneys by the ‘trustee’) the original payer will have an equitable proprietary interest in the moneys so long as they are trace able into whomsoever’s hands they come other than a purchaser for value of the legal interest without notice. Therefore, although in the present case the only question directly in issue is the personal liability of the local authority as a trustee, it is not possible to hold the local authority liable without imposinga trust which, in other cases, will create property rights affecting third parties because moneys received under void contract are ‘trust property.’
The Practical Consequences of the Bank’s Argument
Before considering the legal merits of the submission, it is important to appreciate the practical consequences which ensue if the bank’s arguments are correct. Those who sug gest thata resulting trust should arise in these circumstances accept that the creation of an equitable proprietary interest under the trust can have unfortunate, and adverse, effects if the originai recipient of the moneys becomes insolvent: the moneys, if traceable in the hands of the recipient, are trust moneys and not available for the creditors of the recipient. However, the creation of an equitable proprietary interest in moneys received undera void contract is capable of having adverse effects quite apart from insolvency. The proprietary interest under the unknown trust will, quite apart from insolvency, be enforceable against any recipient of the property other than the purchaser for value ofa legal interest without notice.
Take the following example. T (the transferor) has entered intoa commercial contract with RI . Both parties believe the contract to be valid but it is in fact void. Pursuant to that contract: (i) T pays £Im to RI who pays it intoa mixed bank account; (ii)T transfers 100 shares in X company to RI, who is registered asa shareholder. Thereafter RI deals with the money and shares as follows; (iii) RI pays £50,000 out of the mixed account to R2 otherwise than for value; R2 then becomes insolvent, having trade creditors who have paid for goods not delivered at the time of the insolvency; (iv) RI charges the shares inX company to R3 by way of equitable security fora loan from R3.
If the bank’s arguments are correct, RI holds the £Im on trust forT once the money has become mixed in Rl’s bank account. Similarly RI becomes the legal owner of the shares inX company as from the date of his registration as a s):iareholder but holds such shares ona resulting trust for T. T therefore has an equitable proprietary interest in the moneys in the mixed account and in the shares.
T’s equitable interest will enjoy absolute priority as against the creditors in the insol vency of R2 (who was not a purchaser for value) provided that the £50,000 can be traced in the assets of R2 at the date of its insolvency. Moreover, if the separation of title argu ment is correct, since the equitable interest is in T and the legal interest is vested in R2, R2 also holds as trustee for T. In tracing the £50,000 in the bank account of R2, R2 as trustee will be treated as having drawn out ‘his own’ moneys first, thereby benefiting T at the expense of the secured and unsecured creditors of R2. Therefore in practice one may well reach the position where the moneys in the bank ofR2 in reality reflect the price paid by creditors for goods not delivered by R2: yet, under the tracing rules, those moneys arc to be treated as belonging in equity to T.
So far as the shares in the X company are concerned, T can trace his equitable interest into the shares and will take in priority to R3, whose equitable charge to secure his loan even though granted for value will pro tanto be defeated.
All this will have occurred when no one was aware, or could have been aware, of the sup posed trust because no one knew that the contract was void.
I can see no moral or legal justification for giving such priority to the right ofT to obtain restitution over third parties who have themselves not been enriched, in any real sense, at T’s expense and indeed have had no dealings with T. T paid over his money and trans ferred the shares under a supposed valid contract. If the contract had been valid, he would have had purely personal rights against RI. Why should he be better off because the con tract is void?
My Lords, wise judges have often warned against the wholesale importation into com mercial law of equitable principles inconsistent with the certainty and speed which are essential requirements for the orderly conduct of business affairs: see Barnes v. Addy (1874) LR 9 Ch.App. 244, 251 and 255; Scandinavian Trading Tanker Co. A.B. v. Flota Petro/era Ecuatoriana [1983] 2 AC 694, 703-4. If the bank’s arguments are correct, a businessman who has entered into transactions relating to or dependent upon property rights could find that assets which apparently belong to one person in fact belong to another; that there are ‘off balance sheet’ liabilities of which he cannot be aware; that these property rights and liabilities arise from circumstances unknown not only to himself but also to anyone else who has been involved in the transactions. A new area of unmanageable risk will be intro duced into commercial dealings. If the due application of equitable principles forced a con clusion leading to these results, your Lordships would be presented with a formidable task in reconciling legal principle with commercial common sense. But in my judgment no such conflict occurs. The resulting trust for which the bank contends is inconsistent not only with the law as it stands but with any principled development of it.
The Relevant Principles of Trust Law
(i) Equity operates on the conscience of the owner of the legal interest. In the case of a trust, the conscience of the legal owner requires him to carry out the purposes for which the property was vested in him (express or implied trust) or which the law imposes on him by reason of his unconscionable conduct (constructive trust).
(ii) Since the equitable jurisdiction to enforce trusts depends upon the conscience: of the holder of the legal interest being affected, he cannot be a trustee of the property if and ao long as he is ignorant of the facts alleged to affect his conscience, i.e. until he is aware that he is intended to hold the property for the benefit of others in the case of an cxpreu or implied trust, or, in the case of a constructive trust, of the factors which are alleged to affect his conscience.
(iii) In order to establish a trust there must be identifiable trust property. The only apparent exception to this rule is a constructive trust imposed on a person who dishonestly assists in a breach of trust who may come under fiduciary duties even if he does not receive identifiable trust property.
(iv) Once a trust is established, as from the date of its establishment the beneficiary has, in equity, a proprietary interest in the trust property, which proprietary interest will be enforceable in equity against any subsequent holder of the property (whether the original property or substituted property into which it can be traced) other than a purchaser for value of the legal interest without notice.
These propositions are fundamental to the law of trusts and I would have thought uncontroversial. However, proposition (ii) may call for some expansion. There are cases where property has been put into the name of X without X’s knowledge but in circum stances where no gift to X was intended. It has been held that such property is recoverable under a resulting trust: Birch v. Blagrave (1755) I Amb. 264; Childers v. Childers (1857) I
De G & J 482; In re Vinogradoff, Allen v. Jackson [1935] WN 68; In re Muller, Cassin v. Mutual Cash Order Co. Ltd [1953] NZLR 879. These cases are explicable on the ground that, by the time action was brought, X or his successors in title have become aware of the facts which gave rise to a resulting trust; his conscience was affected as from the time of such discovery and thereafter he held on a resulting trust under which the property was recovered from him. There is, so far as I am aware, no authority which decides that X was a trustee, and therefore accountable for his deeds, at any time before he was aware of the circumstances which gave rise to a resulting trust.
Those basic principles are inconsistent with the case being advanced by the bank. The latest time at which there was any possibility of identifying the ‘trust property’ was the date on which the moneys in the mixed bank account of the local authority ceased to be trace able when the local authority’s acco nt went into overdraft in June 1987. At that date, the local authority had no knowledge of,the invalidity of the contract but regarded the moneys as its own to spend as it thought fit. There was therefore-never a time at which both (a) there was defined trust property and (b) the conscience of the local authority in relation to such defined trust property was affected. The basic requirements of a trust were never satisfied. I turn then to consider the bank’s arguments in detail. They were based primarily on principle rather than on authority. I will deal first with the bank’s argument from principle and then tum to the main authorities relied upon by the bank, Sindair v. Brougham [1914] AC 398 and Chase Manhattan Bank NA v. Israel-British Bank (London) Ltd [1981] Ch. 105.
The Retention of Title Point
It is said that, since the bank only intended to part with its beneficial ownership of the moneys in performance of a valid contract, neither the legal nor the equitable title passed to the local authority at the date of payment. The legal title vested in the local authority by operation of law when the moneys became mixed in the bank account but, it is said, the bank ‘retained’ its equitable title.
I think this argument is fallacious. A person solely entitled to the full beneficial owner ship of money or property, both at law and in equity, does not enjoy an equitable interest in that property. The legal title carries with it all rights. Unless and until there is a sepa ration of the legal and equitable estates, there is no separate equitable title. Therefore to talk about the bank ‘retaining’ its equitable interest is meaningless. The only question is whether the circumstances under which the money was paid were such as, in equity, to impose a trust on the local authority. If so, an equitable interest arose for the first time under that trust.
This proposition is supported by In re Cook; Beck v. Grant [1948] Ch. 212; Vanderv v. Inland Revenue Commissioners [1967] 2 AC 291, 311G, per Lord Upjohn, and 317F, per Lord Donovan; Commissiuner of Stamp Duties (Queensland) v. Livingston [l 965) AC 694, 712B–E; Underhill and Hayton, Law of Trusts and Trustees, 15th edn. (1995), 866.
The Separation of Title Point
The bank’s submission, at its widest, is that if the legal title is in A but the equitable interest in B, A holds as trustee for B. Again I think this argument is fallacious. There are many cases where B enjoys rights which, in equity, are enforceable against the legal owner A, without A being a trustee, e.g. an equitable right to redeem a mortgage, equitable easements, restrictive covenants, the right to rectification, an insurer’s right by subrogation to receive damages subsequently recovered by the assured: Lord Napier and Ettrick v. Hunter [1993] AC 713. Even in cases where the whole beneficial interest is vested in B and the bare legal interest is in A, A is not necessarily trustee, e.g. where title to land is acquired by estoppel as against the legal owner; a mortgagee who has fully discharged his indebtedness enforces his right to recover the mortgaged property in a redemption action, not an action for breach of trust.
The bank contended that where, under a pre-e:xisting trust, B is entitled to an equitable interest in trust property, if the trust property comes into the hands of a third party, X (not being a purchaser for value of the legal interest without notice), B is entitled to enforce his equitable interest against the property in the hands of X because X is a trustee for B. In my view the third party, X, is not necessarily a trustee for B: B’s equitable right is enforce able against the property in just the same way as any other specifically enforceable equi table right can be enforced against a third party. Even if the third party, X, is not aware that what he has received is trust property B is entitled to assert his title in that property. If X has the necessary degree of knowledge, X may himself become a constructive trustee for B on the basis of knowing receipt. But unless he has the requisite degree of knowledge he is not personally liable to account as trustee: In re Diplock; Diplock v. Wintle [19481 Ch. 465,478; In re Montagu’s Settlement Trusts [1987] Ch. 264. Therefore, innocent receipt of property by X subject to an existing equitable interest does not by itself make X a trustee despite the severance of the legal and equitable titles. Underhill and Hayton, Law of Trusts and Trustees, 369-70, whilst accepting that X is under no personal liability to account unless and until he becomes aware of B’s rights, does describe X as being a constructive trustee. This may only be a question of semantics: on either footing, in the present case the local authority could not have become accountable for profits until it knew that the contract was void.
Resulting Trust
This is not a case where the bank had any equitable interest which pre-dated receipt by the local authority of the upfront payment. Therefore, in order to show that the local authority became a trustee, the bank must demonstrate circumstances which raised a trust for the first time either at the date on which the local authority received the money or at the date on which payment into the mixed account was made. Counsel for the bank specif ically disavowed any claim based on a constructive trust. This was plainly right because the local authority had no relevant knowledge sufficient to raise a constructive trust at any time before the moneys, upon the bank account going into overdraft, became untraceable. Once there ceased to be an identifiable trust fund, the local authority could not become a trustee: In re Goldcorp Exchange Ltd [1995] l AC 74. Therefore, as the argument for the bank recognised, the only possible trust which could be established was a resulting trust ari11ing from the circumstances in which the local authority received the upfront payment.
Under existing law a resulting trust arises in two sets of circumstances: (A) where A makes a voluntary payment to B or pays (wholly or in part) for the purchase of property which is vested either in B alone or in the joint names of A and B, there is a presumption that A did not intend to make a gift to B: the money or property is held on trust for A (if he is the sole provider of the money) or in the case of a joint purchase by A and Bin shares proportionate to their contributions. It is important to stress that this is only a presumption which presumption is easily rebutted either by the counter-presumption of advancement or by direct evidence of A’s intention to make an outright transfer: see Underhill’ and Hayton, Law of Trusts and Trustees, 317 ff.; Vander.;e/1 v. Inland Revenue Commissioners (1967]2 AC 291,312 ff.; In re Vandervell’s Trusts (No 2) (1974] Ch. 269,288 ff. (B) Where A transfers property to B on express trusts, but the trusts declared do not exhaust the whole beneficial interest: ibid. and Quistclose Investments Ltd v. Rolls Razor Ltd ( In Liquidation) (1970] AC 567. Both types of resulting trust are traditionally regarded as examples of trusts giving effect to the common intention of the parties. A resulting trust is not imposed by law against the intentions of the trustee (as is a constructive trust) but gives effect to his presumed intention. Megarry Jin In re Vandervell’s Trusts (No 2) suggests that a resulting trust of type (B) does not depend on intention but operates automatically. I am not con vinced that this is right. If the settlor has expressly, or by necessary implication, abandoned any beneficial interest in the trust property, there is in my view no resulting trust: the undisposed-of equitable interest vests iljl the Crown as bona vacantia: see In re West Sussex Constabulary’s Widows, Children and Be’nevolent (1930) Fund Trusts [1971] Ch. I.
Applying these conventional principles of resulting trust to the present case, the bank’s claim must fail. There was no transfer·of money to the local authority on express trusts: therefore a resulting trust of type (B) above could not arise. As to type (A) above, any pre sumption of resulting trust is rebutted since it is demonstrated that the bank paid, and the local authority received, the upfront P?-yment with the intention that the moneys so paid should become the absolute property<?£ the local authority. It is true that the parties were under a misapprehension that the payment was made in pursuance of a valid contract. But that does not alter the actual intentions of the parties at the date the payment was made or the moneys were mixed in the bank account. As the article by William Swadling, ‘A new role for resulting trusts?’ 16 Legal Studies 133 demonstrates the presumption of resulting trust is rebutted by evidence of any intention inconsistent with such a trust, not only by evidence of an intention to make a gift.
Professor Birks, ‘Restitution and Resulting Trusts:’ see Equity: Contemporary Legal Developments, 335, 360, whilst accepting that the principles I have stated represent ‘a very conservative form’ of definition of a resulting trust, argues from restitutionary principles that the definition should be extended so as to cover a perceived gap in the law of ‘sub tractive unjust enrichment’ (368) so as to give a plaintiff a proprietary remedy when he has transferred value under a mistake or under a contract the consideration for which wholly fails. He suggests that a resulting trust should arise wherever the money is paid under a mistake (because such mistake·vitiates the actual intention) or when money is paid ona condition which is not subsequently satisfied.
As one would expect, the argument is tightly reasoned but I am not persuaded. The search for a perceived need to strengthen the remedies of a plaintiff claiming in restitution involves, to my mind, a distortion of trust principles. First, the argument elides rights in property (which is the only proper subject m,itter of a trust) into rights in ‘the value trans ferred:’ see 361. A trust can only arise where there is defined trust property: it istherefore. not consistent with trust principles to say that a person is a trustee of property which can not be defined. Second, Professor Birks’s approach appears to assume (for example in the case of a transfer of value made under a contract the consideration for which subsequently fails) that the recipient will be deemed to have been a trustee from the date of his original receipt of money, i.e. the trust arises at a time when the ‘trustee’ does not, and cannot, know that there is going to be a total failure of consideration. This result is incompatible with the basic premise on which all trust law is built, viz. that the conscience of the trustee is affected. Unless and until the trustee is aware of the factors which give rise to the sup posed trust, there is nothing which can affect his conscience. Thus neither in the case of a subsequent failure of consideration nor in the case of a payment under a contract subse quently found to be void for mistake or failure of condition will there be circumstances, at the date of receipt, which can impinge on the conscience of the recipient, thereby making him a trustee. Thirdly, Professor Birks has to impose on his wider view an arbitrary and admittedly unprincipled modification so as to ensure that a resulting trust does not arise when there has only been a failure to perform a contract, as opposed to total failure of con sideration: see 356, 359 and 362. Such arbitrary exclusion is designed to preserve the rights of creditors in the insolvency of the recipient. The fact that it is necessary to exclude arti ficially one type of case which would logically fall within the wider concept casts doubt on the validity of the concept.
If adopted, Professor Birks’s wider concepts would give rise to all the practical consequences and injustices to which I have referred. I do not think it right to make an unprin cipled alteration to the law of property (i.e. the law of trusts) so as to produce in the law of unjust enrichment the injustices to third parties which I have mentioned and the conse quential commercial uncertainty which any extension of proprietary interests in personal property is bound to produce.
The Authorities
Three cases were principally relied upon in direct support of the proposition that a resulting trust arises where a payment is made under a void contract.
(A) Sinclair v. Brougham
The claim in rem
The House of Lords held that, the ordinary trade creditors having been paid in full by agreement, the assets remaining were to be divided between the ultra vires depositors and the members of the society pro rata according to their respective payments to the society. The difficulty is to identify any single ratio decidendi for that decision. Viscount Haldane LC (with whom Lord Atkinson agreed) and Lord Parker of Waddington gave fully reasoned judgments (considered below). Lord Dunedin apparently based himself on some ‘super-eminent’ equity (not a technical equity) in accordance with which the court could distribute the remaining assets of the society: see at 434 and 436. The members (by which presumably he means the society) were not in a fiduciary relationship with the depositors: it was the directors not the society which had mixed the moneys: 438. This indicates that he was adopting the approach of Lord Parker: yet he concurred in the judgment of Lord Haldane LC: 438. I can only understand his judgment as being based on some super-emi nent jurisdiction in the court to do justice as between the remaining claimants in the course of a liquidation.
Lord Sumner plainly regarded the case as a matter of doing justice in administering the remaining assets in the liquidation, all other claims having been eliminated: 459. He said, at 458:
‘The question is one of administration. The liquidator, an officer of the court, who has to discharge himself of the assets that have come to his hands, asks for directions, and, after hearing all parties concerned, the court has the right and the duty to direct him how to distribute all the assets Inmy opinion, if precedent fails, the most just distribution of the whole must be directed, so only that no recognised rule of law or equity be disregarded.’
Lord Haldane LC treated the case as a tracing claim: could the depositors follow and recover property with which, in equity, they had ‘never really parted:’ 418. After holding that the parties could not trace at law (418-20) he said that the moneys could be traced in equity ‘based upon trust:’ 420. The only passage in which he identifies the trust is at 421: ‘The property was never converted into a debt, in equity at all events, and there has been throughout a resulting trust, not of an active character, but sufficient, in my opinion, to bring the transaction within the general principle.’
He treats the society itself (as opposed to its directors) as having mixed the depositors’ money with its own money, but says, at 422, 423, that such mixing was nota breach of fidu ciary duty by the society but authorised by the depositors: it was intended that ‘the soci ety should be entitled to deal with [the depositors’ money] freely as its own.’ On that ground he distinguished In re Haiku’s Estate 13 Ch.D. 696 (a trustee is taken to have
drawn his ownmoney first) and held that the mixed moneys therefore belonged to the depositors and members pro rata. Like others before me, I find Lord Haldane LC’s reasoning difficult, if not impossible, to follow. The only equitable right which he identifies arises under ‘a resulting trust, not of anactive character’ which, as I understand it, existed from the moment when the soci ety received themoney. Applying the c nventional approach, the resulting trust could only have arisen because either the depositors were treated as contributors toa fund (a result ing trust oftype (A)above) or because the ‘trust’ on which the moneys were paid to the society had failed (a resulting trust of type (B) ). Yet the finding that the society was not in breach of fiduciaryduty because it was the intention of the parties that the society should be free to deal with the money as its own (423) is inconsistent with either type of resulting trust. Such an intention would rebut the presumption of resulting trust of type (A) and is inconsistent witha payment on express trusts which fail, i.e. with a type (B)resulting trust. Therefore the inactive resulting trust which Lord Haldane LC was referring to was, as Professor Birkspoints out, not a conventional one: indeed there is no trace of any such trust in earlier or later authority. The question is whether the recognition of sucha trust accords with principle and the demands of certainty in commercial dealings.
As to the latter, Lord Haldane LC’s theory, if correct, gives rise to all the difficulties whichI have noted above. Nor does the theory accord with principle. First, ir postulates that thesocietybecame a trustee at a time when it was wholly ignorant of the circumstances giving rise to the trust. Second, since the depositors’ money was intended to be mixed with that of the society, there was never any intention that there should be a separate identifi able trust fund, an essential feature of any trust. Third, and most important, if Lord Haldane LC’s approach were to be applicable in an ordinary liquidation it is quite inca pable of accommodating the rights of ordinary creditors. Lord Haldane LC’s-inactive resulting trust, if generally applicable, would give the depositors (and possibly the mem bers) rights having priority not only to those of ordinary trade creditors but also to those of some secured creditors, e.g. the common form security for bank lending,a floating charge on the company’s assets. The moneys of both depositors and members are, appar ently, trust moneys and therefore form no part of the company’s assets available to pay
creditors, whether secured or unsecured. This seems to be an impossible conclusion. Lord Haldane LC appreciated the difficulty, but did not express any view as to what the posi tion would be if there had been trade creditors in competition: see 421, 42 and 425-6.
Lord Parker analysed the matter differently. He held that the depositors had paid their money not to the society itself but to the directors, who apparently held the moneys on some form of Quistcfose trust (Quistclose Investments Ltd v. Rolls Fazor Ltd (In Liquidation) [1970] AC 567): the money had been paid by the depositors to the directors to be applied by them in making valid deposits with the society and, since such deposit was impossible, the directors held the moneys on a trust for the depositors: see at 441-2 and 444. It is to be noted that Lord Parker does not at any time spell out the nature of the trust. However, he held that the directors owed fiduciary duties both to the depositors and to the members of the society. Therefore it was not a case in which a trustee had mixed trust moneys with his own moneys (to which In re Haflett’s Estate would apply) but of trustees (the directors) mixing the moneys of two innocent parties to both of whom they owed fiduciary duties: the depositors and members therefore ranked pari passu: 442.
I find the approach of Lord Parker much more intelligible than that of Lord Haldane LC: it avoids finding that the society held the money on a resulting trust at the same time as being authorised to mix the depositors’ money with its own. In Jn re Dipfack; Diplock v. Wintle [1948) Ch. 465 the Court of Appeal found the ratio of Sinclair v. Brougliam to lie in Lord Parker’s analysis. But, quite apart from the fact that no other member of the House founded himself on Lord Parker’s analysis, it is in some respects very unsatisfactory. First, the finding that the depositors’ moneys were received by the directors, as opposed to the society itself, is artificial. Although it was ultra vires the society to enter into a contract to repay the moneys, it was not ultra vires the society to receive moneys. Second, Lord Parker’s approach gives depositors and members alike the same priority over trade credi tors as does that of Lord Haldane LC. The fact is that any analysis which confers an equi table proprietary interest as a result of a payment under a void contract necessarily gives priority in an insolvency to the recovery of the ultra vires payment. Lord Parker too was aware of this problem: but he left the problem to be solved in a case where the claims of trade creditors were still outstanding. Indeed he went further than Lord Haldane LC. He appears to have thought that the court had power in some cases to postpone trade credi tors to ultra vires depositors and in other cases to give the trade creditors priority: which course was appropriate he held depended on the facts of each individual case: 444 and 445. There is much to be said for the view that Lord Parker, like Lord Haldane LC and Lord Sumner, was dealing only with the question of the due administration of assets of a com pany in liquidation. Thus he says, at 449:
‘nor, indeed, am I satisfied that the equity to which effect is being given in this case is necessarily confined to a liquidation. It is, however, unnecessary for your Lordships to decide these points.’
This makes it clear that he was not purporting to do more than decide how the assets of that society in that liquidation were to be dealt with.
As has been pointed out frequently over the 80 years since it was decided, Sinclair v. Brougham is a bewildering authority: no single ratio decidendi can be detected; all the rea soning is open to serious objection; it was only intended to deal with cases where there were no trade creditors in competition and the reasoning is incapable of application where there are such creditors. In my view the decision as to rights in rem in Sinclair -.. Brougham should also be overruled. Although the case is one where property rights are involved, such overruling should not in practice disturb long-settled titles. However, your Lordships should not be taken to be casting any doubt on the principles of tracing as established in In re Diplock.
If Sincl ir v. Brougham, in both its aspects, is overruled the law can be established in accordance with principle and commercial common sense: a claimant for restitution of moneys paid under an ultra vires, and therefore void, contract has a personal action at law to recover the moneys paid as on a total failure of consideration; he will not have an equi table proprietary claim which gives him either rights against third parties or priority in an insolvency; nor will he have a personal claim in equity, since the recipient is not a trustee.
(B) Chase Manha11an Bank NA v. Israel-British Bank (London) Ltd [1981] Ch. 105
In that case Chase Manhattan, a New York bank, had by mistake paid the same sum twice to the credit of the defendant, a London bank. Shortly thereafter, the defendant bank went into insolvent liquidation. The question was whether Chase Manhattan hada claim in rem against the assets of the defendant bank to recover the second payment. Goulding J was asked to assume that the moneys paid under a mistake were capable of being traced in the assets of the recipient bank: he was only concerned with the question .
whether there was a proprietary base on which the tracing remedy could be founded: 116s. He held that, where money was paid under a mistake, the receipt of such money without more constituted the recipient a trustee: he said that the payer ‘retains an equitable property in it and the conscience of …. is subjected to a fiduciary duty to respect his proprietary right:’ 119.
It will be apparent from what I have already said that I cannot agree with this reasoning. First, it is based on a concept of retaining an equitable property in money where, prior to the payment to the recipient bank, there was no existing equitable interest. Further,I can not understand how the recipient’s ‘conscience’ can be affected at a time when he is not aware of any mistake. Finally, the judge found that the law of England and that of New York were in substance the same. I find this a surprising conclusion since the New York law of constructive trusts has for a long time been influenced by the concept ofa remedial constructive trust, whereas hitherto English law has for the most part only recognised an institutional constructive trust: see Metal/ und Rohstojf AG”· Donaldson Lufkin (S Jenrette Inc. [1990]1 Q!3 391, 478, 480. In the present context, that distinction is of fundamental importance. Under an institutional constructive trust, the trust arises by operation of law as from the date of the circumstances which give rise to it: the function of the court is merely to declare that such trust has arisen in the past. The consequences that flow from such trust having arisen (including the possibly unfair consequences to third parties who in the interim have received the trust property) are also determined by rules of law, not undera discretion. A remedial constructive trust, as I understand it, is different. It isa judicial remedy giving rise to an enforceable equitable obligation: the extent to which it operates retrospectively to the prejudice of third parties lies in the discretion of the court. Thus for the law of New York to hold that there is a remedial constructive trust wherea payment has been made under a void contract gives rise to different consequences from holding that an institutional constructive trust arises in English law.
However, although I do not accept the reasoning of Goulding J, Chase Manhattan may well have been rightly decided. The defendant bank knew of the mistake made by the pay ing bank within two days of the receipt of the moneys: see at 115A. The judge treated this fact as irrelevant (114F) but in my judgment it may well provide a proper foundation for thedecision. Although the mere receipt of the moneys, in ignorance of the mistake, gives rise to no trust, the retention of the moneys after the recipient bank learned of the mistake may well have given rise to a constructive trust: see Snell’s Equity, 193; Pettit, Equity and the Law of Trusts, 7th edn. (1993) 168; Metal/ und Rohsto.lJ AG v. Donaldson Lufkin (SJenrette Inc. (1990] I QB 391, 473-4.
(C) in re Ames’ Settlement; Dinwiddy v. Ames
In this case [1946] Ch. 217 the father of the intended husband, .in consideration of the son’s intended marriage with Miss H., made a marriage settlement under which the income was payable to the husband for life and after his death to the wife for life or until her remar riage, with remainder to the issue of the intended marriage. There was an ultimate trust, introduced by the words ‘If there should not be any child of the said intended marriage who attainsa vested interest .. .’ for an artificial class of the husband’s next of kin. The marriage took place. Many years later a decree of nullity on the grounds of non-consum mation had the effect of rendering the marriage ,•oid ab initio. The income was paid to the husband until his death which occurred 19 years after the decree of nullity. The question was whether the trust capital was held under the ultimate trust for the husband’s next-of kin or was payable to the settlor’s estate. It was held that the senior’s estate was entitled.
The judgment is very confused. lt is not clear whether the judge was holding (as I think correctly) that in any event the ultimate trust failed because it was only expressed to take effect in the event of the failure of the issue of a non-existent marriage (an impossible con dition precedent) or wether he held that all the trusts of the settlement failed because the beneficial interests were conferred in consideration of the intended marriage and that there had been a total failure of consideration. In either event, the decision has no bearing on the present case. On either view, the fund was vested in trustees on trusts which had failed. Therefore the moneys were held on a resulting trust of type (B) above. The decision casts no light on the question whether, there being no express trust, moneys paid on a consideration which wholly fails are held on a resulting trust.
The stolen bag of coins
The argument for a resulting trust was said to be supported by the case of a thief who steals a bag of coins. At law those coins remain traceable only so long as they are kept sep arate: as soon as they are mixed with other coins or paid into a mixed bank account they cease to be traceable at law. Can it really be the case, it is asked, that in such circumstances the thief cannot be required to disgorge the property which, in equity, represents the stolen coins? Moneys can only be traced in equity if there has been at some stage a breach of fidu ciary duty, i.e. if either before the theft there was an equitable proprietary interest (e.g. the coins were stolen trust moneys) or such interest arises under a resulting trust at the time of the theft or the mixing of the moneys. Therefore, it is said, a resulting trust must arise either at the time of the theft or when the moneys are subsequently mixed. Unless this is the law, there will be no right to recover the assets representing the stolen moneys once the moneys have become mixed.I agree that the stolen moneys are traceable in equity. But the proprietary interest which
equity is enforcing in such circumstances arises under a constructive, not a resulting, trust. Although it is difficult to find clear authority for the proposition, when property is obtained by fraud equity imposes a constructive trust on the fraudulent recipient: the property is recoverable and traceable in equity. Thus, an infant who has obtained property by fraud is bound in equity to restore it: Stocks v. Wilson [1913] 2 KB 235,244; R. Leslie Ltd v. Sheil{ [1914] 3 KB 607. Moneys stolen from a bank account can be traced in equity: Bankers Trust Co. v. Shapira [1980] 1 WLR 1274, 1282c–E. Sec also McCormick v. Crogan (1869) LR 4
HL 82, 97.
Restitution and equitable rights
Those concerned with developing the law of restitution are anxious to ensure that, in certain circumstances, the plaintiff should have the right to recover property which he has unjustly lost. For that purpose they have sought to develop the law of resulting trusts so as to give the plaintiff a proprietary interest. For the reasons that I have given in my view such development is not based on sound principle and in the name of unjust enrichment is capable of producing most unjust results. The law of resulting trusts would confer on the plaintiff a right to recover property from, or at the expense of, those who have not been unjustly enriched at his expense at all, e.g. the lender whose debt is secured by a floating charge and all other third parties who have purchased an equitable interest only, albeit in all innocence and for value.
Although the resulting trust is an unsuitable basis for developing proprietary restitu tionary remedies, the remedial constructive trust, if introduced into English law, may pro vide a more satisfactory road forward. The court by way of remedy might impoae a constructive trust on a defendant who knowingly retains property of which the plaintiffhu been unjustly deprived. Since the remedy can be tailored to the circumstances ofrhe par ticular case, innocent third parties would not be prejudiced and restitutionary defences, such as change of position, are capable of being given effect. However, whether Enrlish law should follow the United States and Canada by adopting the remedial constructive trust wiJI have to be decided in some future case when the point is directly in issue.
I would allow the appeal and vary the judgment of the Court of Appeal so as to order the payment of simple interest only as from 18 June 1987 on the balance from time to time between the sums paid by the bank to the local authority and the sums paid by the local authority to the bank.
LordGoff have already stated that restitution …. can be achieved by means ofa 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 ofa resultingtrust. The immediate reaction must be—why should it? Take the present case. The parties have entered intoa 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 froma 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 othe; 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 Sinclairv. Brougham [1914] AC 398, which appears to provide authority that a resulting trust may indeed arise in a case such as the pres ent. The second is that on the authorities there is an equitable jurisdiction to award the plain tiff 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.
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 bea matter of great difficulty. The legitimate ambition of restitution lawyers has been to establisha 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 per ceived to have the function ofreversing 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 oflawyers, which has manifested itself in relation to the matters under con sideration in the present case.
In the present case, however, it is not the function of our Lordships’ House to rewrite 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 [1914] AC 398 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 espec.ially 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 guid ance 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 arc 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 it under the void contract was received by the council sub ject to a resulting trust. This approach was consistent with that of Dillon LJ in the Court of Appeal: see [1994] 1 WLR 938,947. It is also consistent with the approach of Viscount Haldane LC (with whom Lord Atkinson agreed) in Sinclair v. Brougham [1914] AC 398, 420-421.
I have already expressed the opinion that, at first sight, it is surprising that an equitable pro prietary 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 sup ports 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 judg ments 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 restitu tion. I have however reached the conclusion that it is basically irrelevant to the decision of the present appeal.
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.Sm 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 of 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 Bon 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, ‘Restitution and Resulting Trusts,’ published in Equity: Contemporary Legal Developments (1992) (ed. Goldstein), 335, 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 experimen tal, written to test the temperature of the water. I feel bound to respond that the temperature
of the water mu.st be regarded as decidedly cold: sec, e.g., Professor Burrows, ‘Swaps and the Friction between Common Law and Equity’ [1995] RLR 15, and Mr W. J. Swadling, ‘A new role for resulting trusts?’ (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 imme diately lost by mixing with other asset of the payee, and at that time the payee has no know ledge 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. T is 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 consider ation for the payment therefore fails at the time of payment. It is true that the doctrine of mis take 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 appro priate 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 co 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 aJI 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’ [1995] RLR 15, 27: the duty to account for profits accru ing from the trust property; the inability of the payee to rely upon the defence of change of posi tion; 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 chat, in reaching that conclusion,I do not find it necessary to review the decision of Goulding J in Chase Manhallan Bank NA v. Israel-British Bank (London) Ltd [1981] Ch. 105.
Interest
I wish 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 [1994] 4 All ER 890,955:
‘Anyone who lends or borrows money on a commercial basis receives or pays interest peri odically and if that interest is not paid it is compounded …. I see no reason whyI 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 chat, if it had not had the use of the bank’s money, it would (if free to do so) have borrowed 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 sim ilar terms in its business. Full restitution requires that, on the facts of the present case, com pound 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. 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 with out that power the common Jaw remedy is incomplete. Fortunately, however, judges of equity have always been ready to address new problems, and to create new doctrines, where justice so requires….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 exer cised in cases of fraud. Indeed it is plain chat, on the same faces, 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. ls 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 20th 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. FurthermoreI am satisfied that, in particular, the equitable jurisdiction may, where appropriate, be exercised in the case of a personal claim in restitution ….
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 demand, of justice. An action of restitution appears co 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 CJ 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 just ice. 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 just ice 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 per mitted 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 oflegal history.
It remains for me to say that I am sat,sfied, for the reason given by Hobhousc J, that this is a case in which it was appropriate that tompound 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 bor rowed 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 LJ [1994] I WLR 938,947,949, I agree with the Court of Appeal that the interest should run from the date of receipt of the money.
Daraydan Holdings Ltd & Ors v Solland International Ltd & Ors
[2004] EWHC 622 (Ch) (26 March 2004)
Mr Justice Lawrence Collins:
XII Legal principles
An agent or other fiduciary who makes a secret profit is accountable to his or her principal or cestui que trust. There have been many cases in the development of the rules for civil liability for bribery of which perhaps the most important are Panama & South Pacific Telegraph Co v India Rubber, etc Works Co (1875) LR 10 Ch App 515; Hovenden & Sons v Millhoff (1900) 83 LT 41; Reading v R [1949] 2 KB 232, affd [1951] AC 507; Mahesan v Malaysia Government Officers’ Co-operative Housing Society [1979] AC 374; Logicrose Ltd v Southend United Football Club Ltd [1988] 1 WLR 1256; and AG for Hong Kong v Reid [1994] 1 AC 324. The following principles can be distilled from the cases.
An agent should not put himself in a position where his duty and interest may conflict, and if bribes are taken by an agent, the principal is deprived of the disinterested advice of the agent, to which the principal is entitled. Any surreptitious dealing between one principal to a transaction and the agent of the other is a fraud on the other principal. For this purpose sub-agents owe the same duty not to take bribes as agents, despite the absence of privity of contract between them and the principal: see Bowstead and Reynolds on Agency (17th ed Reynolds, 2001), para 6-085 and Powell & Thomas v Evans Jones & Co [1905] 1 KB 11, at 18 (CA).
In proceedings against the payer of the bribe there is no need for the principal to prove (a) that the payer of the bribe acted with a corrupt motive; (b) that the agent’s mind was actually affected by the bribe; (c) that the payer knew or suspected that the agent would conceal the payment from the principal; (d) that the principal suffered any loss or that the transaction was in some way unfair: the law is intended to operate as a deterrent against the giving of bribes, and it will be assumed that the true price of any goods bought by the principal was increased by at least the amount of the bribe, but any loss beyond the amount of the bribe itself must be proved; (e) that the bribe was given specifically in connection with a particular contract, since a bribe may also be given to an agent to influence his mind in favour of the payer generally (e.g. in connection with the granting of future contracts).
The agent and the third party are jointly and severally liable to account for the bribe, and each may also be liable in damages to the principal for fraud or deceit or conspiracy to injury by unlawful means. Consequently, the agent and the maker of the payment are jointly and severally liable to the principal (1) to account for the amount of the bribe as money had and received and (2) for damages for any actual loss. But the principal must now elect between the two remedies prior to final judgment being entered: Mahesan v Malaysia Government Officers’ Co-operative Housing Society [1979] AC 374, at 383. The third party may also be liable on the basis of accessory liability in respect of breach of fiduciary duty: Bowstead and Reynolds, para 8-221. The principal is also able to rescind the contract with the payer of the bribe.
In the normal case it is not difficult to determine whether the relationship is such as to give rise to a duty to account. In the present case the Sollands and Mr Khalid have denied that he was an agent or fiduciary. It is not always easy to delimit the scope of fiduciary relationships from arm’s length relationships not involving a fiduciary duty: see, e.g. Oakley, Constructive Trusts, 3rd ed. 1997, pp 85-99; Meagher, Gummow and Lehane, Equity Doctrines and Remedies, 4th ed 2002, pp 156-167. Very often the definitions are circular: e.g. Ex p Dale & Co (1879) 11 Ch D 772, at 778: a fiduciary relationship “is one in respect of which if a wrong arise, the same remedy exists against the wrongdoer on behalf of the principal as would exist against a trustee on behalf of the cestui que trust.” In Bristol and West Building Society v Mothew [1998] Ch 1, at 18, Millett LJ said:
“A fiduciary is someone who has undertaken to act for or on behalf of another in a particular matter in circumstances which give rise to a relationship of trust and confidence. The distinguishing obligation of a fiduciary is the obligation of loyalty. The principal is entitled to the single-minded loyalty of his fiduciary. This core liability has several facets. A fiduciary must act in good faith; he must not make a profit out of his trust; he must not place himself in a position where his duty and interest may conflict; he may not act for his own benefit or the benefit of a third person without the informed consent of his principal. This is not intended to be an exhaustive list, but it is sufficient to indicate the nature of fiduciary obligations. They are the defining characteristics of the fiduciary.”
In Reading v R [1949] 2 KB 232, at 236, Asquith LJ said that there is a fiduciary relationship whenever the plaintiff entrusts a job to be performed, for instance the negotiation of a contract, and relies on the defendant to procure for the plaintiff the best terms available (approved by Lord Porter [1951] AC 507, at 516).
XIII Conclusions on liability
The principal issues with regard to Mr Khalid’s liability are these:
(a) whether he acted as an agent/representative of any of the claimants or owed them any fiduciary duties, and in particular whether he was employed by Sheikh Mohammed;
(b) whether (if he was an employee or agent of Sheikh Mohammed) he can rely on Qatari law, and if he can, whether its effect is that an employee or agent may receive a commission from a third party contracting with his employer or principal, unless expressly forbidden by the terms of his contract of employment;
(c) whether Mr Dajani compromised the claim against him, or informed him that no action would be taken against him.
At the trial the case for the Sollands was that Mr Khalid was employed by QIS, and not by Sheikh Mohammed, and that he was not the claimants’ fiduciary because, in particular, his role and responsibilities in relation to the Contracts was very limited. Their defence was that the claimants had exaggerated his role in order to support their case. His pay was low. He acted generally as a mere messenger, and he worked at a very low level. It was accepted that he would sometimes relay specifications but issues of any importance were dealt with by others, especially Mr Dajani. Mr Khalid did not have a discretion or the position to negotiate, and he did not negotiate prices. He checked that previously authorised works had been carried out, but he was only checking execution and not approving the work. Mr Khalid was totally unqualified to be project manager and does not appear to have carried out any such role, since he appears to have been in Doha for the majority of the project. He did not have authority to bind any of the claimants.
Sheikh Sultan’s evidence was that Mr Khalid was relied on by him to identify contractors, obtain prices from contractors and then recommend/approve the appropriate contractor. Mr Khalid was expected to consider the price and then pass on his recommendation to Sheikh Sultan or Sheikh Mohammed for the final decision. Sheikh Sultan relied on him and would send him to ask for a discount or to instruct changes. Sheikh Sultan expected Mr Khalid to negotiate with the Sollands and to try to get the best prices – while the ultimate decision would be taken by Sheikh Mohammed as to whether or not to proceed with a particular transaction, Mr Khalid should have negotiated the contract to make it as good as possible. Sheikh Sultan expected him to negotiate with the Sollands in relation to Grosvenor Hill Court, 28 Charles Street and 28A Charles Street; he was the person who had been left by the claimants to try to lower the prices. Sheikh Sultan trusted Mr Khalid to conduct the negotiations on behalf of the claimants and assumed that he in fact did so.
I am wholly satisfied that, on any application of the concept of fiduciary, Mr Khalid was a fiduciary who extracted very substantial payments from the Sollands and their companies in return for his influence in obtaining and carrying out the Contracts. This is demonstrated by his own admissions; by statements made by the Sollands in these proceedings and in the adjudication proceedings; and by numerous documents. It is also confirmed by the evidence of Sheikh Sultan and Mr Dajani in these proceedings, and also by the evidence of Mr Meisterhans. Although it would make no difference to his liability whether it was he who solicited the payments, or Mrs Solland who offered them, there is no reason to doubt Mrs Solland’s account that it was Mr Khalid who requested the payments, and no reason whatever to think that (as he contended) that it was Mrs Solland who volunteered to make the payments.
Mr Khalid himself, in a witness statement made on July 4, 2002, accepted that: “I have for a number of years acted as an assistant and adviser to both…Sheikh Mohammed and…Sheikh Sultan with both whom I travel and work closely. I deal with many of their affairs on a day to day basis and have advised and assisted them in most aspects of their dealings with Grazyna Solland and companies associated with her.”
Mrs Solland, in the adjudication proceedings, described Mr Khalid as Sheikh Mohammed’s representative, and as project manager for his projects in Qatar and for Stage 1 of the Lombard House project, and asserted that he gave her instructions and design briefs; and that he gave design instructions in relation to 28A Charles Street. In correspondence shortly before these proceedings were commenced, the Sollands’ then solicitors described Mr Khalid as having negotiated the Lombard House contract, and as the agent of Sheikh Mohammed and Sheikh Sultan, and a representative of Daraydan.
The documents show that the Sollands and their advisers and associates thought that they would not have obtained the Contracts without making the payments to Mr Khalid. Mr Gerber was told on December 14, 2000 that they “otherwise would not get the contract.” The notes taken by the Inland Revenue of a meeting record Mr Gerber as saying that “it was essential to obtaining the contract to pay the clients agent a 10% kickback.” (February 7, 2001). The BDO Stoy Hayward draft report to the Inland Revenue said that “International were informed, albeit totally off the record that unless they agreed to make such payments they would not be successful in the tender for the contract” (July 31, 2001). In evidence Mr and Mrs Solland accepted that it was probable or very possible that if the payments had not been made, they would not have got the Contracts. Mr Paisner described Mr Khalid (in a handwritten note plainly made following a discussion with his clients) as “the introducer of all business undertaken by Solland International.” The records of Interiors were altered by Mrs Harris, on the instructions of Mr Solland, to change the record of the commissions in the purchase ledger from “payments on account” to an expense connected to services provided by Mrs Al-Attiya to “procure cont[ract].”
Mr Meisterhans gave evidence that Mr Khalid was responsible for International getting the Lombard House contract, and that Mr Khalid was the person to ring up when difficulties arose, because the person who received the commission was clearly the person who controlled the entire contract. The International Board Minutes show that commission was paid by International because of competition from other sources: e.g. minutes of November 12, 1997 (“Commission must be paid to intermediaries”); and it was paid to Mr Khalid who was presented as an individual of influence, e.g. minutes dated March 24, 1999: “Mr Steifel suggests writing a letter to Mr Khaled [sic] to help to solve the problems with Mr Dajani. International would explain why we believe Mr Dajani behaves unreasonable [sic] and we will ask Mr Khaled to help to stop this”.
Mr Khalid introduced the prospect of the Lombard House project to the Sollands. Sheikh Sultan accepted that Mr Khalid was not involved in the negotiation of the Phase 1 Lombard House Contract, but was clear that he was involved in bringing proposals and sketches to Sheikh Mohammed and presenting Mrs Solland to Sheikh Mohammed in Doha. Mr Khalid was the liaison for Lombard House; anything that related to the planning of phase 1 of the project needed to go through him.
Jackson Rowe Associates, construction consultants acting for International in the Lombard House adjudication proceedings, described Mr Khalid as a commercial manager who managed various properties reporting to Sheikh Sultan and as project manager for stage 1 and the client’s (i.e. Darydan’s) representative for stage 2, and in their report claimed that changes were agreed with (among others) Mr Khalid.
It is clear from the documents that Mr Khalid: (a) negotiated and entered into agreements with the Sollands and initialled and approved contracts to be entered into with the Sollands – in particular the Grosvenor Hill Court Contract and the 28 Charles Street Contract; (b) approved invoices for payment which had been raised by the Sollands; (c) authorised the Sollands to carry out additional work; (d) approved payment schedules produced by the Sollands; (e) received invoices sent by the Sollands on behalf of the claimants or was copied in on them; and (f) received designs from the Sollands which he was to approve or in relation to which he was to obtain approval.
Mr Khalid’s written contract of employment was with Sheikh Mohammed and it was a term of that contract that he reported to Sheikh Sultan. On January 21, 1997 Mr Khalid entered into the written contract of employment, under which “Confidentiality, Trust and Honesty are the basis of the Job….Attention to details and maximum cost efficiency in all involvements”. Although Sheikh Sultan signed as the “employer”, I am satisfied that, as a matter of construction and having regard to the factual matrix (namely that Mr Khalid had been working for Sheikh Mohammed and had been receiving payments from him), Sheikh Mohammed was Mr Khalid’s employer.
Sheikh Sultan and Sheikh Mohammed were Directors of each of the Manx companies. Sheikh Sultan was a specially appointed representative of Daraydan in respect of Lombard House (as a result of a request communicated to the board of directors of Daraydan by Sheikh Mohammed). I accept the claimants’ submission that as a result of being employed by Sheikh Mohammed (or by reason of the duties that he owed to Sheikh Mohammed as an employee of QIS or as a result of the functions that he in fact performed), Mr Khalid also owed duties to the Isle of Man companies (Cairn, Northwest, Landmark and Theebah) of which Sheikh Mohammed is the beneficial owner, and to Daraydan, either directly or as a sub-agent.
Mr Khalid accepts that he did not inform Sheikh Mohammed or Sheikh Sultan, or any of the corporate claimants about the payments (and Mr and Mrs Solland abandoned any suggestion that either Sheikh Mohammed or Sheikh Sultan was aware of the payments, although Mr Meisterhans persisted in the allegation).
I reject Mr Khalid’s defence of release, or forbearance to sue, or estoppel. Mr Dajani’s evidence was that he never made the oral agreement with Mr Khalid not to sue him, as alleged by Mr Khalid, and Mr Khalid has not availed himself of his opportunity to cross-examine Mr Dajani (nor did the first to fourth defendants). I have no reason to doubt Mr Dajani’s written evidence.
Nor is Mr Khalid’s defence based on Qatari law an impediment to judgment. First, I accept the claimant’s submission that for the most part Mr Khalid’s duties were governed by English law: the oral and written contracts entered into with Sheikh Mohammed were when he was an English resident for a contract of employment or of agency in England and were consequently governed by English law, and his relationship with Daraydan as a project manager was on a contract expressly governed by English law. If Qatari law governed any aspect of the relationship, Mr Khalid did not adduce any expert evidence, and even the expert retained by the Sollands, Mr Siddiqui, accepted that Mr Khalid would be subject to duties of confidentiality, trust and honesty under Qatari law, and that an employee who defrauded his employer by taking secret commissions would be committing a criminal offence (although Mr Siddiqui’s opinion was that the contract of employment was not valid, because it was not in Arabic). It is not therefore necessary to decide whether in any event English public policy would come into play to disapply any foreign custom which validated what would in English law be regarded as corrupt practices.
XIV Conspiracy
Mr Khalid was fraudulently misappropriating 10% of the monies paid by his employers by getting them to pay him £1.8m through the defendants which they would never have agreed to do. He has expressly admitted in his witness statement (and implicitly in his Defence) that he did not tell the claimants about these payments. Sheikhs Mohammed and Sultan and the Directors of Daraydan were ignorant of these payments and that they would never have agreed to them.
The Sollands (a) knew that Mr Khalid was defrauding the claimants by keeping these payments secret from them, and (b) by their actions they helped him to carry out this fraud. The minutes of International confirm that the commission payments were built into the price. Mr and Mrs Solland did not persist in their allegation that Sheikh Mohammed knew of the payments (although Mr Meisterhans did make that suggestion), but at trial, Mr and Mrs Solland and Mr Meisterhans confirmed that they knew that Daraydan was ignorant of the commissions and that they specifically did not disclose them to Daraydan.
XV Remedies: constructive trust and Lister & Co v Stubbs
In Lister & Co v Stubbs (1890) 45 Ch D 1 it was alleged by the plaintiffs that their foreman had received secret commissions which he had invested in land and other investments. They sought interlocutory relief to prevent him dealing with the land and requiring him to bring the other investments into court. The injunction was refused. It was held that the injunction should be refused because the money was not that of the plaintiffs so as to make the defendant a trustee, but was money to which the plaintiffs would be entitled to claim in the action, i.e. “a debt due from the Defendant to the Plaintiffs in consequence of the corrupt bargain which he entered into” but (a) the money which he had received under that bargain could not be treated as being money of the Plaintiffs “before any judgment or decree in the action had been made” (at 12-13, per Cotton LJ) (b) the relation between them was that of debtor and creditor, and not that of trustee and cestui que trust (at 15, per Lindley LJ). Lindley LJ said (at page 14) that he was influenced by two considerations: (a) firstly, the “startling consequence” that if the claimants were entitled to a proprietary remedy, the property acquired by the defendant with the bribe money would be withdrawn from the mass of the defendant’s creditors on the defendant’s bankruptcy; and (b) secondly, the fact that the claimants would be entitled not only to an account of the money plus interest, but also to all profits made by the defendant using the money, for example if he had set himself up in business: he did not think that this could be right.
The decision was followed in Powell & Thomas v Evan Jones & Co [1905] 1 KB 11. Lister & Co v Stubbs is no longer good law on the availability of interlocutory relief in debt claims since the development of the Mareva jurisdiction: Mercedes Benz AG v Leiduck [1996] AC 284, at 300 (P.C.).
It has been held by the Privy Council that Lister & Co v Stubbs was wrongly decided: AG for Hong Kong v Reid [1994] 1 AC 324, in which the Board consisted of Lord Templeman, Lord Goff of Chieveley, Lord Lowry, Lord Lloyd of Berwick and Sir Thomas Eichelbaum. Lord Templeman said (at 336):
“The decision in Lister & Co 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 constructive trust for the person injured.”
Those who have supported Lister & Co v Stubbs rely on the policy that proprietary restitution is only justified where there has been a subtraction from the claimant’s ownership or where the claimant has a proprietary basis for the claim. The general creditors have given value, and there is no reason why the agent’s principal should have a preferred position. The policy against bribery is sufficiently vindicated through a personal remedy. Thus, according to Professor Goode, proprietary remedies should only be available where the defendant receives gains which derive from the claimant’s property, or where they stem from activity which the defendant was under an equitable obligation to undertake (if at all) for the plaintiff: the decision in Lister & Co v Stubbs was correct, because the bribe resulted from conduct in which the defendant should not have engaged at all: Goode, Property and Unjust Enrichment, in Essays on the Law of Restitution, ed. Burrows 1991, 215 at 230-231; Proprietary Restitutionary Claims, in Restitution: Past, Present and Future, ed Cornish et al, 1998, 63, at 69. So also Professor Birks considers that proprietary restitution is only justified where the claimant has a proprietary base to his claim, i.e. where the defendant’s breach of duty consists of misapplication of property belonging to the claimant; but in the case of bribery, the money paid to the agent comes from the third party, and not from the principal: Birks, Introduction to the Law of Restitution, 1989, at 386. See also Virgo, Principles of the Law of Restitution, 1999, p 543; Burrows, Law of Restitution, 2nd ed 2002, p 500; Tettenborn, Law of Restitution in England and Ireland, 2nd ed. 1996, pp 231-233.
But the Privy Council preferred the views of Sir Peter Millett (as he then was), Bribes and Secret Commissions [1993] Restitution LR 7, at 20, that
“[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 decision of the Privy Council is regarded as black-letter law by Bowstead and Reynolds, para 6-082. It is also treated as representing the law by Lewin, Trusts (17th ed. Mowbray et al, 2000), para 20-34, and by Snell, Equity (30th ed. McGhee, 2000), para 9-53. Goff and Jones, Law of Restitution (6th ed. 2002), para 33-025, prefer AG for Hong Kong v Reid but consider that Lister & Co v Stubbs is a decision which is still technically binding.
AG for Hong Kong v Reid has been preferred at first instance to Lister & Co v Stubbs by Laddie J in Ocular Sciences Ltd v Aspect Vision Care Ltd [1997] RPC 289, 412-413 (a breach of confidence case) and by Toulson J (obiter) in Fyffes Group Ltd v Templeman [2000] 2 Lloyd’s Rep 643. But Sir Richard Scott VC in Att Gen v Blake [1997] Ch 84, 96 and the Court of Appeal in Halifax Building Society v Thomas [1996] Ch 217, 229 treated Lister & Co v Stubbs as still binding, although neither of those cases was a case involving bribery of an agent.
The House of Lords forcefully re-affirmed the rules of stare decisis in Davis v Johnson [1979] AC 264, but nothing was said about the decisions both in the Court of Appeal (e.g. Doughty v Turner Manufacturing Co Ltd [1964] 1 QB 518; Worcester Works Finance Ltd v Cooden Engineeering Co Ltd [1972] 1 QB 210) and at first instance which suggest that both a judge of first instance and the Court of Appeal are free to follow decisions of the Privy Council on common law principles which depart, after full argument, from earlier decisions of the Court of Appeal.
In Smith v Leech Brain & Co Ltd [1962] 2 QB 405, 415 Lord Parker CJ, sitting as a judge of first instance, said that he would if necessary follow The Wagon Mound [1961] AC 388 rather than Re Polemis [1921] 3 KB 560:
“… I should say, in case the matter goes further, that I would follow, sitting as a trial judge, the decision in the Wagon Mound case; or rather, more accurately, I would treat myself, in the light of the arguments in that case, able to follow other decisions of the Court of Appeal, prior to the Polemis case, rather than the Polemis case itself. As I have said, that case has been criticised by individual members of the House of Lords, although followed by the Court of Appeal in Thurogood v Van Den Berghs & Jurgens, Ltd. I should treat myself as at liberty to do that, and for my part I would do so the more readily because I think it is important that the common law, and the development of the common law, should be homogeneous in the various sections of the Commonwealth. I think it would be lamentable if a court sitting here had to say that while the common law in the Commonwealth and Scotland has been developed in a particular way, yet we in this country, and sitting in these courts, are going to proceed in a different way.”
In I Congreso del Partido [1978] QB 500, at 519, Robert Goff J said that he agreed with every word in that passage, and would have followed The Philippine Admiral [1977] AC 373 (PC) (denying sovereign immunity to state trading ships) in preference to The Porto Alexandre [1920] P 30 had he not already been relieved from the binding authority of The Porto Alexandre by the then recent decision of the Court of Appeal in Trendtex Trading Corp v Central Bank of Nigeria [1977] QB 529, on the commercial exception to sovereign immunity.
The system of precedent would be shown in a most unfavourable light if a litigant in such a case were forced by the doctrine of binding precedent to go to the House of Lords (perhaps through a leap-frog appeal under the Administration of Justice Act 1969, section 12) in order to have the decision of the Privy Council affirmed. That would be particularly so where the decision of the Privy Council is recent, where it was a decision on the English common law, where the Board consisted mainly of serving Law Lords, and where the decision had been made after full argument on the correctness of the earlier decision.
Accordingly, if this case were not distinguishable from Lister & Co v Stubbs, I would have applied AG for Hong Kong v Reid. There are powerful policy reasons for ensuring that a fiduciary does not retain gains acquired in violation of fiduciary duty, and I do not consider that it should make any difference whether the fiduciary is insolvent. There is no injustice to the creditors in their not sharing in an asset for which the fiduciary has not given value, and which the fiduciary should not have had.
But even if I were bound by Lister & Co v Stubbs, in my judgment there are two very significant differences between this case and that decision which in any event justify the restitutionary remedy. First, the facts of this case make it a case where there is a proprietary basis for the claim and where the bribe derives directly from the claimants’ property. This is not a case where the price is presumed (for the purposes of the personal remedy) to have been increased by the amount of the bribe. Rather it is a case where the evidence is that the price was actually increased by the amount of the bribe, and where the bribe was paid out of the money paid by the claimants for what they thought was the price. These factors make the claim one for the restitution of money extracted from the claimants.
Secondly (and independently), the portion representing the bribe was paid as a result of a fraudulent misrepresentation of the Sollands, to which Mr Khalid was a party, that the true price was the invoice price, when it fact the price had been inflated to pay the bribes. I do not consider that Halifax Building Society v Thomas [1996] Ch 217 rules out a proprietary claim to the proceeds of fraud. In that case the defendant fraudulently obtained a loan from the building society, and it sought a declaration that it could keep the proceeds of sale as against the Crown’s competing claim to confiscate the surplus in execution of a criminal confiscation order. The Court of Appeal refused to make the declaration on the grounds that the fraudster was not a fiduciary, that there was no universal principle that wherever there was a personal fraud the fraudster would become a trustee for the defrauded party, and that the building society had, with knowledge of the fraud, affirmed the mortgage, and was therefore only a secured creditor. The decision is controversial: see e.g. Goff & Jones, para 36-017; Burrows, p 476; Virgo, pp 494-6. But in the present case Mr Khalid was a fiduciary, and the claimants had not affirmed any of the Contracts, and had rescinded the only contracts still to be performed.
The overwhelming evidence in this case is that the prices charged to the claimants by Interiors and International had been increased to cover the 10% commission payments, and that Mr Khalid was paid his commission from the money received by Interiors and International from the claimants.
From the outset the commission payments were directly built into the prices. This appears clearly from admissions made by the Sollands and their advisers, and from the board minutes of International. Thus according to the Sollands’ Further Information, Mrs Solland was asked by Mr Khalid to “add 10% to the budgets” she was preparing for 27 Grosvenor Hill Court, and Mrs Solland said in a witness statement that she was told by Mr Khalid to “allow for a 10% commission payment on the contracts to be paid back.” A draft chronology of commission payments prepared by Berwin Leighton Paisner following a meeting with Mr Solland (and which must have reflected his instructions) states that Mr Khalid told Mrs Solland that she was “to build in a 10%” and that later, after International became the contracting party, “enough was built into estimates for International to pay 10% commissions.”
International’s board minutes record that the percentage difference between the prices charged by International to the claimants and the price at which Interiors could operate reflected (inter alia) the commission payments. Thus, on January 15, 1998, it was recorded that Interiors could work at approximately a 20% discount to the prices quoted to the client in respect of the Lombard House contract. But this left very little room for International, as Mr Khalid wanted 10%, there might be others who required an additional 5%, and the client also wanted a discount. On May 7, 1998, it was recorded in respect of the Farmhouse contract that: “Interiors must operate at 30% discount to this budget. Client will bargain. Commissions must be covered.” The board minutes for November 10, 1998 record the concern when it was learned that Daraydan had found out the tender price of one of its main contractor candidates: “International has a problem. It does not want to disclose its profit to client. Commission is included.”
There was an attempt by Mr and Mrs Solland in the witness box to resile from those admissions, but the documents and their previous admissions (all obviously made on advice) speak with one voice, and I am satisfied that they reflect the true position.
There are clear admissions from the Sollands that the commission payments were a direct kickback to Mr Khalid of 10% of all payments under the contracts. According to the draft chronology prepared by Berwin Leighton Paisner on behalf of the Sollands: “The Grosvenor Hill project was completed during this time and each time payments were made under the contract, 10% was paid out. ” Notes taken by the Inland Revenue of a meeting with Mr Gerber record that Mr Gerber told them that “it was essential to obtaining the contract to pay the clients agent a 10% kickback.” The draft BDO Stoy Hayward report states that “the terms of such commissions were 10% of all net receipts from Daraydan. These were to be paid to a specified account…immediately on receipt of monies by International from Daraydan.”
Finally, Mr Khalid was party (with the Solland and their companies) to a conspiracy to defraud the claimants by falsely representing that the true price was the figure including the commission, when in fact the true price was the price before the commission. The claimants thought that they were paying the price to the Sollands when in fact they were paying Mr Khalid out of their own money.
For these reasons I consider that the claimants are entitled to judgment against Mr Khalid and to the proprietary remedy which they seek.
Foskett v. McKeown and Others
[2000] UKHL 29; [2000] 3 All ER 97 (18 May 2000)
LORD BROWNE-WILKINSON
My Lords,
There are many cases in which the court has to decide which of two innocent parties is to suffer from the activities of a fraudster. This case, unusually, raises the converse question: which of two innocent parties is to benefit from the activities of the fraudster. In my judgment, in the context of this case the two types of case fall to be decided on exactly the same principles, viz. by determining who enjoys the ownership of the property in which the loss or the unexpected benefit is reflected.
On 6 November 1986, Mr. Murphy effected a whole-life policy (“the policy”) with Barclays Life Assurance Co. Ltd. (“the insurers”) in the sum of £1m. at an annual premium of £10,220. The policy (which was issued on 27 January 1987) provided that on the death of Mr. Murphy a specified death benefit became payable, such benefit being the greater of (1) the sum assured (£1m.) and (2) the aggregate value of units notionally allocated under the terms of the policy to the policy at their bid price on the day of the receipt by the Insurers of a written notice of death. The policy stated that “in consideration of the first premium already paid and of the further premiums payable and subject to the conditions of this policy the company will on the death of the life assured pay to the policy holder or his successors in title (“the policy holder”) the benefits specified.”
Although primarily a whole-life policy assuring the sum assured of £1m., the policy had an additional feature, viz. a notional investment content which served three purposes. First, it determined the surrender value of the policy. Second, it determined the alternative calculation of the death benefit if the value of the notionally allocated units exceeded the sum assured of £1m. Third, the investment element was used to pay for the cost of life cover after the payment of the second premium in November 1987. By condition 4 of the policy, units were notionally allocated to the policy upon receipt of the second and all subsequent premiums. By condition 6 of the policy, upon receipt of each premium resulting in the notional allocation of units under condition 4, the Insurers cancelled sufficient units to meet the cost of life cover for the next year. Condition 10 provided for conversion of the policy into a paid-up policy: units would thereafter continue to be cancelled under condition 6 so long as there were units available for that purpose. As soon as there were no units available, no death benefit or surrender value was to be available under the policy. Sir Richard Scott V.-C., [1998] Ch. 265, 275, summarised the position as follows:
“. . . if a premium is not paid, then (provided at least two years’ premiums have been paid) the policy is converted into a paid-up policy and units that have been allocated to the policy are applied annually in meeting the cost of life insurance until all the allocated units have been used up. Only at that point will the policy lapse.”
Five premiums were paid, in November 1986, 1987, 1988, 1989 and 1990. The 1986 and 1987 premiums were paid by Mr. Murphy out of his own resources. The 1989 and 1990 premiums were paid out of moneys misappropriated by Mr. Murphy from the plaintiffs. The source of the 1988 premium is disputed: unconditional leave to defend on issues relating to this premium has been granted.
The policy was directed to be held on trusts. On 15 March 1989 the policy was irrevocably appointed to be held in trust for Mr. Murphy absolutely. On 16 March 1989 he settled the policy on trust for his wife and his mother but subject to a power for him to appoint to members of a class which included his wife, his mother and his children but which excluded Mr. Murphy himself. By a deed of appointment dated 1 December 1989 Mr. Murphy appointed the policy and all moneys payable thereunder upon trust (in the events which happened) as to one-tenth for Mrs. Brigette Murphy and as to nine-tenths for his three children equally.
I turn then to consider the source of the moneys which constituted the fourth and fifth premiums. In 1988 Mr. Murphy, together with an associate of his, Mr. Deasy, acquired control of an English company which itself owned and controlled a Portuguese company. Those two companies between them marketed plots of land forming part of a site in the Algarve in Portugal to be developed and sold by them to purchasers. Each prospective purchaser entered into a contract with one of the companies for the purchase of his plot. The contract required each purchaser to pay the purchase price to Mr. Deasy, to be held by him upon the trusts of a trust deed (“the Purchasers trust deed”) under which the purchasers’ money was to be held in a separate bank account until either the plot of land was transferred to him or a period of two years had expired, whichever first happened. If after two years the plot had not been transferred to the purchaser the money was to be repaid with interest. Some 220 prospective purchasers entered into transactions to acquire plots on the building estate and paid some £2,645,000 to Mr. Deasy to be held by him on the terms of the purchasers trust deed. However, the land in Portugal was never developed. When the time came for the money to be refunded to the purchasers it was found that it had been dissipated and that £20,440 of those funds had been used to pay the fourth and fifth premiums due under the policy.
Mr. Murphy committed suicide on 9 March 1991. On 6 June 1991 the insurers paid £1,000,580-04 to the two surviving trustees of the policy. Mrs. Murphy has been paid her one-tenth share. The dispute, for the rest, lies between Mr. Murphy’s three children (as beneficiaries under the policy trust) and the purchasers of the plots in Portugal, from whose money £20,440 has been applied in breach of the trusts of the purchasers trust deed in paying the fourth and fifth premiums. The purchasers allege that, at a minimum, 40 per cent. of the premiums on the policy have been paid out of their moneys and that having traced their moneys through the policy into the policy moneys, they are entitled to 40 per cent. of the policy moneys. On the other side, the children contend that the purchasers are not entitled to any interest at all or at most only to the return of the sum misappropriated to pay the premiums, viz. £20,440 plus interest. The Court of Appeal, by a majority (Sir Richard Scott V.-C. and Hobhouse L.J., Morritt L.J. dissenting) [1998] Ch. 265, held that the purchasers were entitled to be repaid the amount of the fourth and fifth premiums together with interest but were not entitled to a pro-rata share of the policy proceeds.
The purchasers appeal to your Lordships claiming that the policy moneys are held in trust for the children and themselves pro rata according to their respective contributions to the premiums paid out of the purchasers’ moneys on the one hand and Mr. Murphy personally on the other, i.e. they claim that a minimum of 40 per cent. (being two out of the five premiums) is held in trust for the purchasers. The children, on the other hand, seek to uphold the decision of the majority of the Court of Appeal and, by cross-appeal, go further so as to claim that the purchasers are entitled to no rights in the policy moneys.
As to the cross-appeal, I have read in draft the speech of my noble and learned friend Lord Hope of Craighead. For the reasons which he gives I would dismiss the cross-appeal.
As to the appeal, at the conclusion of the hearing I considered that the majority of the Court of Appeal were correct and would have dismissed the appeal. However, having read the draft speech of Lord Millett I have changed my mind and for the reasons which he gives I would allow the appeal. But, as we are differing from the majority of the Court of Appeal I will say a word or two about the substance of the case and then deal with one minor matter on which I do not agree with my noble and learned friend Lord Millett.
The crucial factor in this case is to appreciate that the purchasers are claiming a proprietary interest in the policy moneys and that such proprietary interest is not dependent on any discretion vested in the court. Nor is the purchasers claim based on unjust enrichment. It is based on the assertion by the purchasers of their equitable proprietary interest in identified property.
The first step is to identify the interest of the purchasers: it is their absolute equitable interest in the moneys originally held by Mr. Deasly on the express trusts of the purchasers trust deed. This case does not involve any question of resulting or constructive trusts. The only trusts at issue are the express trusts of the purchasers trust deed. Under those express trusts the purchasers were entitled to equitable interests in the original moneys paid to Mr. Deasy by the purchasers. Like any other equitable proprietary interest, those equitable proprietary interests under the purchasers trust deed which originally existed in the moneys paid to Mr. Deasy now exist in any other property which, in law, now represents the original trust assets. Those equitable interests under the purchasers trust deed are also enforceable against whoever for the time being holds those assets other than someone who is a bona fide purchaser for value of the legal interest without notice or a person who claims through such a purchaser. No question of a bona fide purchaser arises in the present case: the children are mere volunteers under the policy Trust. Therefore the critical question is whether the assets now subject to the express trusts of the purchasers trust deed comprise any part of the policy moneys, a question which depends on the rules of tracing. If, as a result of tracing, it can be said that certain of the policy moneys are what now represent part of the assets subject to the trusts of the purchasers trust deed, then as a matter of English property law the purchasers have an absolute interest in such moneys. There is no discretion vested in the court. There is no room for any consideration whether, in the circumstances of this particular case, it is in a moral sense “equitable” for the purchasers to be so entitled. The rules establishing equitable proprietary interests and their enforceability against certain parties have been developed over the centuries and are an integral part of the property law of England. It is a fundamental error to think that, because certain property rights are equitable rather than legal, such rights are in some way discretionary. This case does not depend on whether it is fair, just and reasonable to give the purchasers an interest as a result of which the court in its discretion provides a remedy. It is a case of hard-nosed property rights.
Can then the sums improperly used from the purchaser’s moneys be traced into the policy moneys? Tracing is a process whereby assets are identified. I do not now want to enter into the dispute whether the legal and equitable rules of tracing are the same or differ. The question does not arise in this case. The question of tracing which does arise is whether the rules of tracing are those regulating tracing through a mixed fund or those regulating the position when moneys of one person have been innocently expended on the property of another. In the former case (mixing of funds) it is established law that the mixed fund belongs proportionately to those whose moneys were mixed. In the latter case it is equally clear that money expended on maintaining or improving the property of another normally gives rise, at the most, to a proprietary lien to recover the moneys so expended. In certain cases the rules of tracing in such a case may give rise to no proprietary interest at all if to give such interest would be unfair: see In Re Diplock [1948] Ch. 465, 548.
Both the Vice-Chancellor and Hobhouse L.J. considered that the payment of a premium on someone else’s policy was more akin to an improvement to land than to the mixing of separate trust moneys in one account. Hobhouse L.J. was additionally influenced by the fact that the payment of the fourth and fifth premiums out of the purchasers’ moneys conferred no benefit on the children: the policy was theirs and, since the first two premiums had already been paid, the policy would not have lapsed even if the fourth and fifth premiums had not been paid.
Cases where the money of one person has been expended on improving or maintaining the physical property of another raise special problems. The property left at the end of the day is incapable of being physically divided into its separate constituent assets, i.e. the land and the money spent on it. Nor can the rules for tracing moneys through a mixed fund apply: the essence of tracing through a mixed fund is the ability to re-divide the mixed fund into its constituent parts pro rata according to the value of the contributions made to it. The question which arises in this case is whether, for tracing purposes, the payments of the fourth and fifth premiums on a policy which, up to that date, had been the sole property of the children for tracing purposes fall to be treated as analogous to the expenditure of cash on the physical property of another or as analogous to the mixture of moneys in a bank account. If the former analogy is to be preferred, the maximum amount recoverable by the purchasers will be the amount of the fourth and fifth premiums plus interest: if the latter analogy is preferred the children and the other purchasers will share the policy moneys pro rata.
The speech of my noble and learned friend Lord Millett demonstrates why the analogy with moneys mixed in an account is the correct one. Where a trustee in breach of trust mixes money in his own bank account with trust moneys, the moneys in the account belong to the trustee personally and to the beneficiaries under the trust rateably according to the amounts respectively provided. On a proper analysis, there are “no moneys in the account” in the sense of physical cash. Immediately before the improper mixture, the trustee had a chose in action being his right against the bank to demand a payment of the credit balance on his account. Immediately after the mixture, the trustee had the same chose in action (i.e. the right of action against the bank) but its value reflected in part the amount of the beneficiaries’ moneys wrongly paid in. There is no doubt that in such a case of moneys mixed in a bank account the credit balance on the account belongs to the trustee and the beneficiaries rateably according to their respective contributions.
So in the present case. Immediately before the payment of the fourth premium, the trust property held in trust for the children was a chose in action i.e. the bundle of rights enforceable under the policy against the insurers. The trustee, by paying the fourth premium out of the moneys subject to the purchasers trust deed, wrongly mixed the value of the premium with the value of the policy. Thereafter, the trustee for the children held the same chose in action (i.e. the policy) but it reflected the value of both contributions. The case, therefore, is wholly analogous to that where moneys are mixed in a bank account. It follows that, in my judgment, both the policy and the policy moneys belong to the children and the trust fund subject to the purchasers trust deed rateably according to their respective contributions to the premiums paid.
The contrary view appears to be based primarily on the ground that to give the purchasers a rateable share of the policy moneys is not to reverse an unjust enrichment but to give the purchasers a wholly unwarranted windfall. I do not myself quibble at the description of it being “a windfall” on the facts of this case. But this windfall is enjoyed because of the rights which the purchasers enjoy under the law of property. A man under whose land oil is discovered enjoys a very valuable windfall but no one suggests that he, as owner of the property, is not entitled to the windfall which goes with his property right. We are not dealing with a claim in unjust enrichment.
Moreover the argument based on windfall can be, and is, much over-stated. It is said that the fourth and fifth premiums paid out of the purchasers’ moneys did not increase the value of the policy in any way: the first and second premiums were, by themselves, sufficient under the unusual terms of the policy to pay all the premiums falling due without any assistance from the fourth and fifth premiums: even if the fourth and fifth premiums had not been paid the policy would have been in force at the time of Mr. Murphy’s death. Therefore, it is asked, what value has been derived from the fourth and fifth premiums which can justify giving the purchasers a pro rata share. In my judgment this argument does not reflect the true position. It is true that, in the events which have happened, the fourth and fifth premiums were not required to keep the policy on foot until the death of Mr. Murphy. But at the times the fourth and fifth premiums were paid (which must be the dates at which the beneficial interests in the policy were established) it was wholly uncertain what the future would bring. What if Mr. Murphy had not died when he did? Say he had survived for another five years? The premiums paid in the fourth and fifth years would in those events have been directly responsible for keeping the policy in force until his death since the first and second premiums would long since have been exhausted in keeping the policy on foot. In those circumstances, would it be said that the purchasers were entitled to 100 per cent. of the policy moneys? In my judgment, the beneficial ownership of the policy, and therefore the policy moneys, cannot depend upon how events turn out. The rights of the parties in the policy, one way or another, were fixed when the relevant premiums were paid when the future was unknown.
For these reasons and the much fuller reasons given by Lord Millett, I would allow the appeal and declare that the policy moneys were held in trust for the children and the purchasers in proportion to the contributions which they respectively made to the five premiums paid.
There is one small point on which my noble and learned friends Lord Millett and Lord Hoffmann disagree, namely, whether the pro rata division should take account of the notional allocation of units to the policy and to the fact that contributions were made at different times, i.e. when the various premiums were paid. I agree that, for the reasons given by Lord Hoffmann, it is not necessary to complicate the calculation of the pro rata shares by taking account of these factors and would therefore simply divide the policy moneys pro rata according to the contributions made to the payment of the premiums.
LORD STEYN
My Lords,
This is a dispute between two groups of innocent parties about the rights to a death benefit of about £1m. paid by insurers pursuant to a whole life policy. The first group are individuals who contracted between June 1989 and January 1991 to purchase plots of land in Portugal which were intended to be developed as an estate with villas and a golf and country club. Mr. Timothy Murphy was the dominant figure behind the development project. He obtained over £2.6m. from the purchasers. With effect from November 1987 he took out a whole life policy at an annual premium of £10,200. The policy had an investment content, which served various purposes. It determined the surrender value of the policy. It determined the alternative calculation of the death benefit if the value of notionally allocated units exceeded the sum assured (i.e. £1m.) The investment element was to be used to pay for the cost of life cover after the payment of the second premium. Mr. Murphy used his own money to pay the premiums for 1986 and 1987. The value of the units allocated to the policy after the payment of the 1987 premium was more than enough to pay for the life element in the next three years. Mr. Murphy in fact paid the premium for 1988. It is still unclear where he got the money from. But he undoubtedly paid the premiums for 1989 and 1990 with money stolen from the purchasers. On 9 March 1991 Mr. Murphy committed suicide. On 6 June 1991 the insurers paid a sum of about £1 million as a death benefit under the policy. The children are express beneficiaries of the trusts of the policy. The purchasers claimed a proportionate part of the policy moneys. The issue concerns the respective rights of the purchasers and the children to the policy moneys. By a majority the Court of Appeal reversed the trial judge’s decision in favour of the purchasers and decided that the purchasers are only entitled to recover the money stolen from them and used to pay the 1989 and 1990 premiums together with interest: Foskett v. McKeown [1998] Ch. 265. On appeal to the House of Lords the primary case of the purchasers was that they are entitled to share in the policy moneys in the same proportion as the amount of the premiums paid out of the purchasers’ moneys bear to the total amount of the premiums paid i.e. a two-fifths share. I will explain my reasons for concluding that the purchasers have no rights to the policy moneys. There is, however, an anterior point. On the appeal to the House of Lords counsel for the children argued that by resorting to other remedies the purchasers made a binding election which preclude them from advancing their present claim. In my view there was in truth no inconsistency between the remedies to which the purchasers resorted.
The purchasers put forward a proprietary claim. They allege that they are equitable co-owners in the policy moneys: specifically their claim is that they are entitled to 40 per cent. and the children to 60 per cent. of the policy moneys. The purchasers point out that they can trace the stolen money (£20,440) through various bank accounts into payments in respect of the 1989 and 1990 premiums. Given that a total of five premiums were paid the purchasers assert that they are entitled to equitable proprietary rights to 40 per cent. of the sum assured. The purchasers argued that the proceeds of the policy were purchased out of a common fund to which the purchasers and the children contributed and that on equitable principles the purchasers are entitled to a proportionate part of the proceeds. Counsel for the purchasers observed in his printed case that it is not an area of the law where the House is constrained by previous authority. Accordingly, he argued, wider considerations of policy must be taken into account.
There are four considerations which materially affect my approach to the claim of the purchasers. First the relative moral claims of the purchasers and the children must be considered. The purchasers emphasise that their claim is the result of the deliberate wrongdoing of Mr. Murphy. This is a point in favour of the purchasers. Moreover the case for the children is not assisted by the fact that Mr. Murphy sought to make provision for his family. The legal question would be the same if the beneficiary under the express trust was a business associate of Mr. Murphy. On the other hand, it is an important fact that the children were wholly unaware of any wrongdoing by their father. Secondly, it is clear that in the event the premiums paid in 1989 and 1990 added nothing of value to the policy. The policy was established and the children acquired vested interests (subject to defeasance) before Mr. Murphy pursuant to the rights acquired by the children before 1989. The entitlement of the children was not in any way improved by payment of the 1989 and 1990 premiums. Thirdly, the purchasers have no claim in unjust enrichment in a substantive sense against the children because the payment of the 1989 and 1990 premiums conferred no additional benefit on the children. They were not enriched by the payment of those premiums: they merely received their shares of the sum assured in accordance with their pre-existing entitlement. The fourth point is that the children, as wholly innocent parties, can cogently say that, if they had become aware that Mr. Murphy planned to use trust money to pay the fourth and fifth premiums, they would have insisted that he did not so pay those premiums, with the result that they would still have received the same death benefit. (The relvance of such a factor is helpfully explained by Professor Hayton, “Equity’s Identification Rules,” Chapter 1 in P. Birks (ed) Laundering and Tracing (Oxford, 1995), p. 11-12 and Charles Mitchell, Tracing Trust Funds Into Insurance Proceeds, [1997] L.M.C.L.Q. 465, 472.)
In arguing the merits of the proprietary claim counsel for the purchasers from time to time invoked “the rules of tracing.” By that expression he was placing reliance on a corpus of supposed rules of law, divided into common law and equitable rules. In truth tracing is a process of identifying assets: it belongs to the realm of evidence. It tells us nothing about legal or equitable rights to the assets traced. In a crystalline analysis Professor Birks (The Necessity of a Unitary Law of Tracing, essay in Making Commercial Law, Essays in Honour of Roy Goode, (1997), pp. 239-258) explained that there is a unified regime for tracing and that “it allows tracing to be cleanly separated from the business of asserting rights in or in relation to assets successfully traced”: at p. 257. Applying this reasoning Professor Birks concludes at p. 258:
“. . . that the modern law is equipped with various means of coping with the evidential difficulties which a tracing exercise is bound to encounter. The process of identification thus ceases to be either legal or equitable and becomes, as is fitting, genuinely neutral as to the rights exigible in respect of the assets into which the value in question is traced. The tracing exercise once successfully completed, it can then be asked what rights, if any, the plaintiff can, on his particular facts, assert. It is at that point that it become relevant to recall that on some facts those rights will be personal, on others proprietary, on some legal, and on others equitable.”
I regard this explanation as correct. It is consistent with orthodox principle. It clarifies the correct approach to so-called tracing claims. It explains what tracing is about without providing answers to controversies about legal or equitable rights to assets so traced.
There is no difficulty in tracing the stolen moneys. Moreover, it is self-evident that there must be a right to recover the moneys stolen and used for the payment of the 1989 and 1990 premiums. Equity’s method of achieving the necessary result is to impose a lien or charge over the stolen money. The formal assertion to the contrary on behalf of the children, which is the subject of a cross appeal, is without substance. The question is whether the purchasers have equitable proprietary rights to the sum assured which was paid in terms of the policy. This brings me back to the distinctive feature of the case, namely that the fourth and fifth premiums did not contribute or add to the sum received by the children. Sir Richard Scott, V.-C., observed, [1998] Ch. 265, 282:
“. . . If a trustee used trust money to improve or maintain his house, the beneficiaries would, in my view, be entitled to a charge on the house to recover their money. But unless it appeared that the improvements had increased the value of the house there would be no basis for a claim to a pro rata share in the house and no reason for the imposition of a constructive trust. There would, in such a case, be no benefit acquired by the use of the trust money for which the trustee would be accountable. Similar reasoning applies, in my opinion, in the present case. . . . They did not, in my opinion, become entitled to a pro rata share in the policy either via a constructive trust route or via a resulting trust route.”
On this point Hobhouse L.J. (now Lord Hobhouse of Woodborough) apparently took a similar view: at p. 291E-F. I am in respectful agreement with this reasoning of the majority on this aspect. The Vice-Chancellor and Hobhouse L.J. further concluded that the misapplied trust funds were not used to acquire the policy, or the death benefit of £1m. nor any share in either. On appeal to the House counsel for the purchasers while not formally conceding anything observed that the improvement argument is “a wholly unrealistic argument.” He argued that the proceeds of the policy were purchased out of a common fund to which both the purchasers and the children had contributed. This was the primary issue on the appeal to the House.
The argument of the purchasers is supported by the carefully reasoned dissenting judgment of Morritt L.J. He relied on the analogies of the cases where (1) an asset is bought with a mixed fund composed of trust money and the trustees own money, and is then passed to an innocent volunteer, and (2) a trustee mixes money from one trust with that of another, and uses the mixed fund to purchase an asset. Morritt L.J. pointed to longstanding authorities to the effect that in such situations beneficiaries may be entitled to a pro rata share of the purchased asset: at p. 301G-302B. But it is clear that this reasoning of Morritt L.J. is critically dependent on the relative closeness of the two analogies. On balance I have been persuaded that the analogies cited by Morritt L.J., and strongly relied on by counsel for the purchasers, are not helpful in the circumstances of the present case.
There is in principle no difficulty about allowing a proprietary claim in respect of the proceeds of an insurance policy. If in the circumstances of the present case the stolen moneys had been wholly or partly causative of the production of the death benefit received by the children there would have been no obstacle to admitting such a proprietary claim. But those are not the material facts of the case. I am not influenced by hindsight. The fact is that the rights of the children had crystallised by 1989 before any money was stolen and used to pay the 1989 and 1990 premiums. Indeed Morritt L.J. expressly accepts that “in the event, the policy moneys would have been the same if the later premiums had not been paid:” at p. 302F. Counsel for the purchasers accepted that as a matter of primary fact this was a correct statement. But he argued that there was nevertheless a causal link between the premiums paid with stolen moneys and the death benefit. I cannot accept this argument. It would be artificial to say that all five premiums produced the policy moneys. The purchasers’ money did not “buy” any part of the death benefit. On the contrary, the stolen moneys were not causally relevant to any benefit received by the children. The 1989 and 1990 premiums did not contribute to a mixed fund in which the purchasers have an equitable interest entitling them to a rateable division. It would be an innovation to create a proprietary remedy in respect of an asset (the death benefit) which had already been acquired at the date of the use of the stolen moneys. Far from assisting the case of the purchasers the impact of wider considerations of policy in truth tend to undermine the case of the purchasers. One needs to consider the implication of a holding in favour of the purchasers in other cases. Suppose Mr. Murphy had surrendered the policy before going bankrupt. Assume Mr. Murphy had partly used his own money and partly used money stolen from the purchasers to pay premiums. The hypothesis is that the stolen money did not in any way increase the surrender value of the policy. Justice does not support the creation to the prejudice of trade creditors of a new proprietary right in the surrender value of the policy: compare Roy Goode, Proprietary Restitutionary Claims, essay in Restitution: Past Present and Future, ed. Cornish, Nolan, O’Sullivan, and Virgo, p. 63 et seq. For these reasons I differ from the analysis of Morritt L.J. and reject the argument of the purchasers.
There is one final matter of significance. In a critical final passage in his judgment Morritt L.J. observed, at p. 303A:
“. . . In my view . . . common justice requires that the purchasers should have the right to participate in that which has followed from the use of their money together with the other moneys, taking their share out of that joint and common stock.”
The purchasers do not assert that they suffered any loss. They cannot assert that the children would be unjustly enriched if the purchasers’ claim fails. In these circumstances my perception of the justice of the case is different from that of Morritt L.J. If justice demanded the recognition of such a proprietary right to the policy moneys, I would have been prepared to embark on such a development. Given that the moneys stolen from the purchasers did not contribute or add to what the children received, in accordance with their rights established before the theft by Mr. Murphy, the proprietary claim of the purchasers is not in my view underpinned by any considerations of fairness or justice. And, if this view is correct, there is no justification for creating by analogy with cases on equitable interests in mixed funds a new proprietary right to the policy moneys in the special circumstances of the present case.
My Lords, for these reasons, as well as the reasons given by Lord Hope of Craighead, I would dismiss both the appeal by the purchasers (the appellants) and the cross appeal by the children (the cross appellants.)
LORD HOFFMANN
My Lords,
I have had the advantage of reading in draft the speech of my noble and learned friend Lord Millett. I agree with him that this is a straightforward case of mixed substitution (what the Roman lawyers, if they had had an economy which required tracing through bank accounts, would have called confusio). I agree with his conclusion that Mr. Murphy’s children, claiming through him, and the trust beneficiaries whose money he used, are entitled to share in the proceeds of the insurance policy in proportion to the value which they respectively contributed to the policy. This is not based upon unjust enrichment except in the most trivial sense of that expression. It is, as my noble and learned friend says, a vindication of proprietary right.
The only point on which I differ from my noble and learned friend is the calculation of the proportions. The policy was a complicated chose in action which contained formulae for the calculation of different amounts which would become payable on different contingencies. One such formula (which, in the event, was irrelevant to the calculation of the amount payable) was by reference to notional units in a notional fund of notional investments. My noble and learned friend considers that these units should be treated as if they were real and that they formed separate property which some part of each premium had been used to buy. In my opinion, that overcomplicates the matter. The units were merely part of the formula for calculating what would be payable. They cannot be regarded as separate property or even some kind of internal currency. It would not in my view have mattered whether the formula for calculating the amount payable had been by reference to the movements of the heavenly bodies. The policy was a single chose in action under which some amount would fall due for payment in consideration of the premiums which had been paid. Immediately before Mr. Murphy’s suicide, it was owned by the children and the beneficiaries in proportion to the value of their contributions to that consideration. The fact that the contingency which made the money payable was the death of Mr. Murphy cannot affect the proprietary interests in the chose in action and therefore in its proceeds: see D’Avigdor-Goldsmid v. Inland Revenue Commissioners [1953] A.C. 347. In the case of contributions which are made at different times to the consideration for a single item of property such as the chose in action in this case, I can see an argument for saying that the value of earlier payments is greater than that of later payments. A pound today is worth more than the promise of a pound in a year’s time. So there may be a case for applying some discount according to the date of payment. But no such argument was advanced in this case and I do not think that your Lordships should impose it upon the parties. I therefore agree with Morritt L.J. that the fund should be held simply in proportion to the contributions which the parties made to the five premiums.
LORD HOPE OF CRAIGHEAD
My Lords,
This is a competition between two groups of persons who claim to be entitled to participate in the same fund. The fund consists of the death benefit paid by the insurers under a policy of life assurance to the trustees of the policy following the death of the life assured, Timothy Murphy, by suicide. The amount of the death benefit was £1m., to which a small sum was added as interest from the date of the death until payment. At the date of death the policy was held in trust for the children of the life assured and for his mother, who is also now deceased. The mother’s share of the sum paid under the policy was distributed to her before her death. The trustees have made certain payments from the balance of that sum for the maintenance of the children. The remainder has been retained and invested by them, and it is that sum which forms the amount now in dispute. The third, fourth and fifth respondents, who are the children of the life assured, claim to be entitled to payment of the whole of that amount as the remaining beneficiaries under the trusts of the policy.
There would have been no answer to the claim by the children had it not been for the fact that the last two of five annual premiums (and possibly a portion of the previous year’s premium – the facts have yet to be established by evidence) were paid by the life assured out of money which, dishonestly and in breach of trust, he had misappropriated. The facts have been set out fully by my noble and learned friend Lord Browne-Wilkinson and I do not need to repeat them here. It is sufficient to say that it is not disputed that these premiums were paid from money which had been deposited with the life assured and his business associate Mr. Deasey by the purchasers of plots of land in Portugal. This money was to be held in trust on their behalf upon the trusts of a trust deed pending the carrying out by a company controlled by the life assured of a scheme for the development of the land. In the event the company did not carry out the development and the purchasers’ money was misappropriated from the bank accounts into which it had been deposited. The purchasers’ claim is to a share of the proceeds of the life insurance policy, on the ground that the rights under the policy had been paid for in part with money which was taken from them without their agreement and in breach of trust to pay the premiums.
In the Court of Appeal it was held by a majority (Sir Richard Scott V.-C. and Hobhouse L.J., Morritt L.J. dissenting) that the purchasers were not entitled to participate in the proceeds of the policy except to the extent of such of their money, with interest thereon, as could be traced into the premiums: [1998] Ch. 265. Morritt L.J. would have granted a declaration to the effect that the proceeds were to be shared between the children and the purchasers. He held that they should be distributed between them in the same proportions as the life assured’s own money and that which he took from the purchasers bore to the total amount paid to the insurers by way of premium during the lifetime of the policy. The purchasers have appealed against that judgment on the broad ground that common justice requires that the children should share the proceeds with them commensurately with the premiums which were paid by the life assured from his own money and the purchasers’ money respectively. The children have cross-appealed on two grounds. The first is that the purchasers, having elected to take the benefit of other remedies, are precluded from pursuing any claim against the proceeds of the policy. The second is that the purchasers cannot trace their money into any part of the proceeds, because the right to payment of the sum of £1m. paid by the insurers as death benefit had already been acquired before the purchasers’ money was used to pay the premiums.
I shall deal first with the childrens’ cross-appeal. Mr. Kaye for the children based his argument on election upon the purchasers’ receipt of compensation for the breach of trust in other proceedings brought on their behalf. The appellant obtained a declaration in 1994 that the shares in the company and the land in Portugal which was to be developed by it were held in trust for the purchasers. He also obtained for them £600,000 under a compromise in 1997 with Lloyds Bank, with whom the purchasers’ money had been deposited and from whose bank accounts it had been misappropriated to pay the 1990 premium. Mr. Kaye submitted that, as the purchasers had elected to recover their plots of land in specie and had received monetary compensation in satisfaction of their claims for the misappropriation of the deposit moneys, they were barred by that election from pursuing any claim against the proceeds of the policy. He maintained that the purchasers, by pursuing these remedies, had obtained all that they had bargained for when they paid their money to the developers. They no longer had any proprietary base from which they could trace, and they had already been fully compensated as they were now in a position to complete the development. As the entire original purpose of the deposits had been fulfilled, they had lost nothing. They were in no need of any further relief by way of any proprietary or equitable remedy.
In my opinion the claims which were made against the developers and the bank and the claim now made against the proceeds of the policy are two wholly unrelated remedies. The purchasers were not put to any election when they were seeking to recover from the developers and the bank what they lost when, in breach of trust, their money was misappropriated. Had the claim which they are now making been one by way of damages, the relief which they have already obtained in the other proceedings would have been taken into account in this action in the assessment of their loss. That would not have been because they were to be held to any election, but by applying the rule that a party who is entitled to damages cannot recover twice over for the same loss. But in this action they are claiming a share of the proceeds of the policy on the ground that the money which was taken from them can be traced into the proceeds. The amount, if any, to which they are entitled as a result of the tracing exercise does not require any adjustment on account of the compensation obtained by pursuing other remedies. This is because the remedy which they are now seeking to pursue is a proprietary one, not an award of damages. The purpose of the remedy is to enable them to vindicate their claim to their own money. The compensation which they have obtained from elsewhere may have a bearing on their claim to a proportionate share of the proceeds. But it cannot deprive them of their proprietary interest in their own money. For these reasons I would reject this argument.
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 ChD 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] AC 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 value and 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.
Relfo Ltd v Varsani
[2014] EWCA Civ 360
Lady Justice Arden :
Issue for this court
This appeal concerns a tracing claim and an unjust enrichment claim. Tracing is the process used to determine what has happened to a person’s property (see Worthington, Fiduciary Duties and Proprietary Remedies [2013] CLJ 720, 741). If a fiduciary steals trust money, the beneficiary can claim back the money, or any money or asset for which it has been substituted, from the person who has knowingly received it. A similar claim may be made in unjust enrichment.
In these proceedings, Sales J by his order dated 27 July 2012 held that the liquidator of Relfo Ltd (“Relfo”) was entitled to repayment of the principal sum of $878,479.35 from Mr Bhimji Varsani on the basis of both knowing receipt and unjust enrichment. Mr Bhimji Varsani now appeals that order. On the judge’s findings, that sum was substitute property for monies belonging to Relfo which were misappropriated and paid to a company called Mirren Ltd (“Mirren”). Alternatively, Mr Bhimji Varsani acquired that sum at Relfo’s expense and so the claim succeeded also in unjust enrichment.
The issues for this court are:
First issue: Could the court on the facts as found by it conclude that the credit to Mr Bhimji Varsani’s account was in law substitute property for Relfo’s money?
Second issue: Was the credit to Mr Bhimji Varsani’s account received by him at the expense of Relfo for the purposes of unjust enrichment?
There is no challenge to the judge’s findings of primary fact.
The principal findings about the misappropriation of Relfo’s money and payment to Mr Bhimji Varsani
Mr Devji Gorecia (“Mr Gorecia”) and his wife were at the material time the shareholders and directors of Relfo.
Mr Gorecia has close links with the Varsani family, that is, Mr Bhimji Varsani and his brother and his father, Mr Varsani Senior. Mr Gorecia advises Mr Varsani Senior about business opportunities and to a considerable extent Mr Varsani Senior authorises Mr Gorecia to make and manage investments on the family’s behalf. For his part Mr Gorecia looks to the Varsani family, and Mr Varsani senior in particular, as a source of funding for business projects in which he also invests and also for loans when Mr Gorecia gets into business difficulties.
Mr Varsani Senior retains the predominant role within the family of managing the bank accounts and investments where the family’s accumulated wealth is located. He has joint signing rights over many of the bank accounts held in his sons’ names and the bank statements for those accounts are sent to Mr Varsani Senior at his home address so that he can retain oversight of transactions passing through those accounts.
On 5 May 2004, when Relfo owed some £1.4m to Her Majesty’s Revenue and Customs (“HMRC”), Mr Gorecia wrongfully caused the sum of £500,000 (“the Relfo/Mirren payment”) to be paid out of its bank account in London into the bank account of Mirren at Rietumu Banka (“Rietumu”) in Latvia (“the Mirren account”). This left Relfo insolvent and on 23 July 2004 it went into creditors’ voluntary liquidation.
On the same day, Intertrade Group LLC (“Intertrade”) made a transfer (“the Intertrade payment”) of $878,479.35, being the dollar equivalent of £500,000 less an amount representing 1.3%, from its account (“the Intertrade account”) with Ukio Bankas in Lithuania to the account of Mr Bhimji Varsani at Citibank Singapore. Citibank bank deducted $10, apparently in respect of bank charges. As a result, $878,469.35 was credited to Mr Bhimji Varsani’s account on 10 May 2004.
The bank statements for Intertrade’s account showed that the Intertrade payment was funded by two payments of $780,000 and $150,000 made to Intertrade’s account on 5 May 2004. The second of those payments was timed at 11.15 am on 5 May 2004.
On 13 May 2004, the sum of $100,000 was paid out of Mr Bhimji Varsani’s Citibank account to Mr and Mrs Gorecia. This was said to be for the purposes of a business venture which ultimately did not go ahead. Mr and Mrs Gorecia claimed that they had returned this sum, but the judge made no finding to this effect.
The judge rejected the argument that the Intertrade payment was in consideration of a transaction with a Ukrainian entity.
At trial Relfo accepted that it could not point to specific transactions passing between the Mirren and Intertrade accounts to show how the Relfo/Mirren payment was translated into the Intertrade payment which went to Mr Bhimji Varsani’s account with Citibank Singapore. Mirren and Intertrade could have had other accounts.
The judge held that in the period from September 2004 to May 2005 there were ten transfers between Mirren’s account and Intertrade’s account but there was no transfer out of Mirren’s account in advance of the Intertrade payment which could have funded it. After the Relfo/Mirren payment, Mirren’s account was dissipated but none of the withdrawals was made to Intertrade.
A source in Ukraine, known as Mr Kudaev, produced documents showing that the Relfo/Mirren payment was originally intended to be a loan from Relfo to Mirren but that this arrangement was replaced by one which provided for the payment to go to Mr Bhimji Varsani in settlement of some obligation from “Corn Ltd”.
The judge found that Mr Gorecia caused the Relfo/Mirren payment to be paid intending to produce the result that the funds so paid should, by means to be devised by his Ukrainian contacts, be paid on to Mr Bhimji Varsani and it is likely that they acted so as to bring about the result which Mr Gorecia asked them to produce.
Relfo tried to sue Mr Bhimji Varsani in the Supreme Court of Singapore but its claim was dismissed by Prakash J on the ground that it was seeking to enforce the claim of HMRC ([2008] SGHC 105). Prakash J was, however, satisfied that there was sufficient evidence to show that the Intertrade payment represented the traceable proceeds of the Relfo/Mirren payment. Those proceedings having failed, Relfo brought the present proceedings in England and Wales.
The judge found that Mr Gorecia had not given a coherent account of the reasons for the Relfo/Mirren payment (judgment, [55]). The judge further found that Mr Gorecia was dishonest and that he was concerned to make good trading losses that he had caused the Varsani family:
“it is probable that something along the following lines occurred. Mr Gorecia felt under considerable pressure in his relationship with the Varsani family because the Corn and Odessa investments were doing badly by early 2004, at great potential cost to the Varsanis. He therefore decided to divert funds under his control (in the form of the money still held by Relfo, which otherwise would only be lost to the taxman) to the Varsanis in an effort to make some amends. He was aware that the Ukrainian businessmen with whom he dealt had access to networks of entities which could be used as different vehicles to effect payments in ways which obscured the true source of monies and were used to preparing corrupt and fraudulent accounting books and records. He used one or other of his contacts in the Ukraine to arrange to transfer the money from Relfo to the Varsanis in a way that disguised its source and the purpose of the payment. The Intertrade payment represented the onward transmission of the Relfo/Mirren payment, effected and disguised using the complex networks which his contacts had at their disposal.” (judgment, paragraph [59])
The judge did not accept the explanations given by Mr Varsani Senior:
“… [Mr Gorecia] would have had every incentive to explain to Mr Varsani senior that, in order to make amends to the family and at some risk to himself if he were found out, he was making arrangements to transfer about £500,000 from Relfo to the Varsanis. I did not believe Mr Varsani senior’s protestations that he knew nothing about such an arrangement and his attempts to explain the Intertrade payment and the payment of US$100,000 to Mr and Mrs Gorecia from Bhimji Varsani’s account with Citibank Singapore. It is likely that the payment to Mr and Mrs Gorecia, coming so soon after receipt of the Intertrade payment, was sent as a reward for Mr Gorecia for arranging the Relfo/Mirren payment and the Intertrade payment.” (judgment, [60])
As regards Mr Bhimji Varsani’s knowledge of the source of the payment, the judge held:
“In my view, it is highly probable that either Mr Gorecia or Mr Varsani senior informed Bhimji Varsani at about the time of the Intertrade payment into his account that it represented funds which Mr Gorecia had extracted from Relfo to make good some of the losses that the Varsani family had suffered in relation to the investments in the Ukraine, for which Mr Gorecia had had responsibility.” (judgment, [63])
The judge rejected Relfo’s claim that the balance standing to the credit of Mr Bhimji Varsani’s account with Citibank was its property. The Supreme Court of Singapore had made a “freezing order” so that for a substantial period no activity had taken place on that account, but that order had been discharged in January 2009. Mr Bhimji Varsani had used the account after that date and there was no evidence about how the monies in the account had been used.
The judge accepted Relfo’s argument, based on El Ajou v Dollar Land Holdings plc [1993] 3 All ER 717 (Millett J) and [1994] 2 All ER 685 (Court of Appeal), that he could draw an inference that the Intertrade payment was Relfo’s money:
“[77]…I accept Mr Shaw’s submission based on El Ajou. In that case the question arose whether the victims of a fraudulent share-selling scheme could follow money they had paid as a result of the fraud through bank accounts where it was or may have been mixed with other money. At first instance Millett J held that they could: equity treated the accounts as charged with the repayment of their money and if the money in an account subject to such a charge was then transferred into different accounts the victims could claim a charge over each of the recipient accounts ([1993] 3 All ER 717, at 735h-736a). The Defendant, which was not itself involved in the fraud, submitted that the Plaintiff had not established that the money received into a particular account (the Keristal No 2 account) had been money derived from the fraud, because the money only came into that account in May 1986 whereas the relevant payments by the Plaintiff pursuant to the fraud had been made on 30 March and 1 April 1986 ([1993] 3 All ER 717, 734f). However, Millett J found that, by a slim margin, the Plaintiff had shown that the inference should be drawn on the facts of the case that the receipts were to be identified with the earlier payments so as to support a tracing claim: [1993] 3 All ER 717, 734h-736d. Millett J’s finding on this was upheld in the Court of Appeal: [1994] 2 All ER at 692f-693f. Mr Shaw submitted that in similar fashion, in the circumstances of the present case, the inference should be drawn that the Intertrade payment is to be identified with the Relfo/Mirren payment so as to enable the court to conclude on the balance of probabilities that the Intertrade payment into Bhimji Varsani’s account represented the traceable proceeds of the Relfo/Mirren payment….I agree with this.” (judgment, [76], [77])
The judge continued:
“On the facts as I find them, Mr Gorecia caused the Relfo/Mirren payment to be made intending to produce the result that the funds so paid should, by means to be devised by his Ukrainian contacts, be paid on to Bhimji Varsani, and it is likely that they acted so as to bring about the result which Mr Gorecia asked them to produce. The Relfo/Mirren payment and the Intertrade payment were closely related in time and amount (and the documents sent to the Liquidator by Mr Kudaev, deriving from someone who obviously had good knowledge of the transactions, provide a plausible explanation for the precise 1.3% difference between the two payments). There was no other reason for Intertrade to make the Intertrade payment to Bhimji Varsani. Although the court has insufficient information available to be able to map each step in the process by which that result was achieved, it is a fair inference that the Intertrade payment was the product of a series of transactions between a number of entities and across a number of bank accounts designed to produce the result that funds paid in the Relfo/Mirren payment were (subject to the 1.3% deduction) paid on to Bhimji Varsani. Each bank account in the journey of the funds, or each chose in action or obligation assumed by one entity to another to pay on the funds or to account for them and/or reimburse the other for paying them on, was charged in equity with the obligation to repay the funds to Relfo, and the funds received by Bhimji Varsani pursuant to the Intertrade payment were similarly so charged.” (judgment, [77]) (emphasis added)
The judge then considered whether Mr Bhimji Varsani had the requisite knowledge and found that he had. There is no appeal from that part of the judge’s judgment.
Accordingly the judge held that Relfo was entitled to trace the Relfo/Mirren payment into the Intertrade payment in Mr Bhimji Varsani’s hands.
The judge held that, if he was wrong in drawing the inferences that he had drawn so that the tracing claim failed, Mr Bhimji Varsani had been unjustly enriched at the expense of Relfo and that accordingly Relfo’s alternative claim in unjust enrichment succeeded. As to the connection between the Relfo/Mirren payment, the enrichment satisfied the “but for” test i.e. Mr Bhimji Varsani would not have been enriched if the Relfo/Mirren payment had not been made. The judge held that he did not need to consider whether there had to be a closer connection than this since the counsel then appearing for Mr Bhimji Varsani (not counsel on this appeal) conceded that if Relfo showed that Mr Gorecia’s object in arranging for the Relfo/Mirren payment to be made was to cause a transfer of value to Mr Bhimji Varsani, the enrichment of the latter was direct and that the nature of this connection did not require further consideration (judgment, [87]). Mr Salter seeks to withdraw that concession on this appeal.
In the judge’s judgment, liability was strict and Mr Bhimji Varsani could not establish any of the defences to unjust enrichment. Again there is no appeal on this point.
FIRST ISSUE
There is little dispute over the basic principles of tracing. Mr Richard Salter QC, for Mr Bhimji Varsani, submits that tracing is a process whereby a claimant traces what has happened to his property (see per Lord Millett in Foskett v McKeown [2001] 1 AC 102, and per Lewison J (as he then was) in Ultraframe(UK) Ltd v Fielding [2005] EWHC 1638 (Ch) at [1472]). Tracing is not a matter of discretion but of property rights: Re Montagu’s Settlement Trust [1987] Ch 264 at 285B-C, per Megarry J. There must something in the nature of a series of direct substitutions.
The issues on which the submissions have divided are (1) the link, or “nexus”, required to trace the claimant’s property into what is said to be its substituted product; (2) the role of the original payer’s intention; (3) whether the court could fill the evidential gaps in this case and (4) whether substitutions must occur in order (the “timing” issue).
(1) Link: Both Mr Salter and Mr Peter Shaw, for Relfo, submit that there must be sufficient nexus between the acquired assets and the misapplied funds. It is common ground that this requirement was in general not satisfied where some of the assets were already owned by the defendant or were paid into an overdrawn account so that no property could be identified as representing the substituted product of the claimant’s property. Thus tracing could not lead to a charge over the general assets of the recipient in these circumstances: Director of the Serious Fraud Office v Lexi Holdings plc [2009] QB 376, [49] to [50].
Mr Salter submits that it follows that mere transactional links are not sufficient in themselves. He submits that there must be a direct substitution, and the substituted property must result from an exchange with the misappropriated property. On his submission, a “nexus” is a shorthand way of describing a direct substitution. The property must be identified as the claimant’s property at each stage of the chain: see Bishopsgate Investments Ltd v Homan [1995] Ch. 211, 221F per Leggatt LJ.
Mr Salter goes on to submit that there was no direct transactional link between the money paid out of Relfo’s account and the money paid in to Mr Bhimji Varsani’s account. The bank statements for Mirren’s account do not show that Relfo’s money left that account for onward transmission to Mr Bhimji Varsani. So Relfo could not show either an unbroken chain of direct substitutions to enable it to trace the money taken from Relfo’s account into Mr Bhimji Varsani’s account. That meant that Mr Bhimji Varsani could not in equity be regarded as having received Relfo’s property for the purposes of the tracing claim. It also meant that there was no sufficiently direct connection between Relfo’s loss and the enrichment of Mr Bhimji Varsani to found a claim in unjust enrichment.
Mr Shaw submits that, in terms of causation, what was required was a transactional link: see per Lord Millett in Foskett v McKeown [2001] 1 AC 102 at 128:
“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. ”
On Mr Shaw’s submission, there was a deliberate scheme to remove Relfo’s assets and to vest them in Mr Bhimji Varsani. The purpose of the intermediaries was to hide Relfo’s money en route. This was not a case of seeking to trace into pre-existing assets. This leads to the next point.
(2) The role of intention: Mr Salter submits that the judge was wrong to find that the payment to Mr Varsani was a substitute mainly because the payment was “designed to produce the result that funds paid in the Relfo/Mirren payment were (subject to the 1.3% deduction) paid on to Bhimji Varsani” (judgment, [77]). On his submission, it is not enough that a payment was made with the intention of replacing the proceeds with other proceeds. Intention cannot make an exchange of property a case for tracing. It must still be shown by evidence or inference that there is a direct chain of substitutions whereby the claimant’s property was exchanged for another asset. That submission leads to the next point.
(3) Whether the evidential gaps could be filled: Mr Salter emphasises that Relfo cannot identify a direct payment out of Mirren’s account. Relfo has not shown that the same asset came out through the chain of substitution. The claim form simply states that the same full amount turned up in the end. The judge was not entitled to draw the inference that the Intertrade payment was the substituted product of the Relfo/Mirren payment because no transactional link was identified. It was unjustified to conclude that any inference was more probable than any other. Relfo simply made out cause and effect. The court should not reverse the burden of proof. There was no authority for the proposition that the court could infer a whole series of transactions of alleged substitution of which there was no evidence.
Mr Shaw submits that even gaps in the evidence about tracing of this kind may be filled by inference.
Mr Shaw submits that the bank statements of Mirren’s account clearly show Relfo’s money eventually leaving that account as part of the process of dissipation to which I have already referred.
Mr Shaw submits that the further steps in the chain from the recipients of monies paid out of Mirren’s account can be inferred. He relies on El Ajou, to which the judge referred (see the passage from the judge’s judgment quoted in paragraph 22 of this judgment).
In El Ajou, three Canadians persuaded the plaintiff’s agent to invest the plaintiff’s monies in illegal share selling schemes. The plaintiff sought to recover its monies from an entity known as DLH, which had meanwhile acquired the Canadians’ business. The action failed as DLH did not have the knowledge necessary to make them constructive trustees. Some of the proceeds of the scheme had been invested in a property project, and the issue arose whether the plaintiff could trace into bank accounts from which the investment had been made. (It is worth noting that, in El Ajou, foreign law was not pleaded. Millett J held that it was therefore irrelevant that the plaintiff’s money went through civil law jurisdictions that did not recognise the fiduciary relationship between the plaintiff and its agent. Likewise in this case Relfo’s property may have gone through civil law jurisdictions but Mr Bhimji Varsani has not pleaded any foreign law).
In El Ajou, the three Canadians, for whom a Mr D’Albis acted, had used an account, known as the Keristal no 2 account, for receiving monies to be invested in the property project. The question was whether two credits totalling $2,684,432 to that account represented the plaintiff’s money.
Mr Shaw relies on the fact that, in El Ajou, Millett J would if necessary have been prepared to draw inferences of the kind drawn by the judge in this case. Millett J held that, if the question had arisen as between the three Canadians and the plaintiff, he would have drawn the appropriate inference as to the source of the credits to the Keristal no 2 account as the Canadians would have been in a position to explain it (and had not done so). DLH was not, however, in a position to explain the source of these credits. Nonetheless Millett J would have drawn the inference that the credits represented monies belonging to the victims of the fraud even as against it because there was no evidence that the Canadians had any other substantial assets.
This is apparent from the following passage in which Millett J held:
“It is, of course, beyond dispute that the money which was received in the Keristal No 2 account was the Canadians’ money. It is, however, true that the plaintiff is unable by direct evidence to identify that money with the money which Mr D’Albis had sent to Panama only a few weeks before. If the question arose in proceedings between the plaintiff and the Canadians, then, in the absence of evidence to the contrary, the court would draw the necessary inference against the latter, for they would be in a position to dispel it. But DLH is not; it is as much in the dark as the plaintiff.
Nevertheless, in my judgment there is sufficient, though only just, to enable the inference to be drawn. One of the two sums received in the Keristal No 2 account was $1,541,432 received on 12 May 1986 from Bank of America. That corresponds closely with the sum of $1,600,000 transferred to Bank of America, Panama on 1 April 1986. In relation to the later transaction, Bank of America may, of course, merely have been acting as a correspondent bank in New York and not as the paying bank; and the closeness of the figures could be a coincidence. It is not much, but it is something; and there is nothing in the opposite scale. The source of the other money received in the Keristal No 2 account is not known, but from the way in which the Canadians appear to have dealt with their affairs, if one sum came from Panama, then the other probably did so, too….
… the fact remains that there is no evidence that the Canadians had any substantial funds available to them which did not represent proceeds of the fraud. This is acknowledged by counsel for DLH. For the source of the money he points to the $1·4345m received by Zawi and the payments totalling $4,927,000 made by Herron and Wilmington which cannot be accounted for. …The money in the accounts of Herron and Wilmington represented proceeds of the fraud. It can be traced in equity from those accounts to the Keristal No 2 account as well as through Zawi or any other intermediate recipient as through the first and second tier Panamanian companies. The victims of a fraud can follow their money in equity through bank accounts where it has been mixed with other moneys because equity treats the money in such accounts as charged with the repayment of their money. If the money in an account subject to such a charge is afterwards paid out of the account and into a number of different accounts, the victims can claim a similar charge over each of the recipient accounts. They are not bound to choose between them. Whatever may be the position as between the victims inter se, as against the wrongdoer his victims are not required to appropriate debits to credits in order to identify the particular account into which their money has been paid. Equity’s power to charge a mixed fund with the repayment of trust moneys (a power not shared by the common law) enables the claimants to follow the money, not because it is theirs, but because it is derived from a fund which is treated as if it were subject to a charge in their favour…. In my judgment, there is some evidence to support an inference that the money which reached the Keristal No 2 account represented part of the moneys which had been transmitted to Panama by the second tier Panamanian companies some six weeks previously, and the suggestion that it was derived from any other source is pure speculation.”
Mr Shaw submits that in the present case the traceable property (Relfo’s money) was represented by choses in action after payment into its bank account (judgment, [77]). Consistently with authority, property can be replaced by different choses in action owed by other entities. The judge inferred that there was a series of transactions between a number of entities and across a number of different accounts. He referred to a “journey” of the funds, and to a succession of choses in action, or obligations, assumed by one entity to another to pay on the funds (judgment, [77]). That is at the heart of the process. There was an obligation on Mirren to reimburse those responsible for arranging the Intertrade payment.
Mr Shaw places particular emphasis on the fact that there was an exchange of value. He submits that in tracing it is sufficient if the value of the claimant’s property that is substituted for another asset can be identified and that there is a transfer or exchange of the value of the claimant’s money. In Foskett at page 128 (see paragraph 33 of this judgment), Lord Millett held that in a tracing claim, the claimant traces not the physical asset but the value inherent in it.
(4) Timing issue: Mr Shaw submits that the better view of tracing is that payments do not need to be in strict chronological sequence as long as it remains possible to trace substitutions of value: see Agip (Africa) Ltd v Jackson [1990] 1 Ch 265, and Foskett v McKeown.
Mr Shaw submits that a bank can make a transfer of money before it receives the money that will reimburse it. Thus the chronological sequence of payments is not decisive. As Sir Peter Millett (as he then was) explained in Tracing the proceeds of fraud [1991] LQR 71:
“Equity acts on the conscience of the recipient; and the existence of a direct causal connection between it and the credit should sufficiently identify the one as the source of the other to enable the money credited to [the defendant’s] account to be taken to represent the money debited to [the claimant’s] account. ”
In this case, submits Mr Shaw, obligations were exchanged on the basis that the money-launderer paid out first to the third party (Intertrade), before he was reimbursed. However, on his submission, the order in which the transactions occur is not relevant. In Agip, the claimant was the victim of a fraud. Its employee had forged instructions to its bank, Banque du Sud (“BS”), directing the bank to pay money to a third party, Baker Oil, on Agip’s behalf. BS accepted these instructions and instructed Lloyds Bank, Baker Oil’s bank, to credit Baker Oil’s account in accordance with the payment order instruction. BS then instructed its correspondent New York bank to reimburse Lloyds Bank’s correspondent New York bank. Lloyds Bank paid out to Baker Oil before BS had put it in funds. This was the critical fact. Millett J at first instance ([1990] Ch. 265, 286) held:
“Nothing passed between Tunisia and London but a stream of electrons. It is not possible to treat the money received by Lloyds Bank in London or its correspondent bank in New York as representing the proceeds of the payment order or of any other physical asset previously in its hands and delivered by it in exchange for the money. The Banque du Sud merely telexed a request to Lloyds Bank to make a payment to Baker Oil against its own undertaking to reimburse Lloyds Bank in New York. Lloyds Bank complied with the request by paying Baker Oil with its own money. It thereby took a delivery risk. In due course it was no doubt reimbursed…” (emphasis added)
Millett J held that this did not prevent tracing in equity:
“There is no difficulty in tracing the plaintiffs’ property in equity, which can follow the money as it passed through the accounts of the correspondent banks in New York or, more realistically, follow the chose in action through its transmutation as a direct result of forged instructions from a debt owed by the Banque du Sud to the plaintiffs in Tunis into a debt owed by Lloyds Bank to Baker Oil in London.” (pages 289-290)
On appeal, this court accepted that there was no difficulty about the mechanics of tracing in equity on those facts.
As Professor Lionel Smith explains in The Law of Tracing (Oxford) (1997) at page 251:
“Banque du Sud ‘bought’ on credit, from Lloyds Bank, a payment to Baker Oil; or it borrowed money from Lloyds Bank and directed that the lent money should be paid to Baker Oil. It later paid the loan with a certain value; hence that value could be traced into the payment to Baker Oil and onwards.”
Mr Shaw referred to this as the “delivery risk” approach to tracing, i.e. that a party in the tracing chain makes a payment in reliance on a promise by an earlier intermediary to reimburse him.
Mr Shaw submits that intermediaries in the chain in the present case, including Mirren, must have taken the “delivery risk”. On that basis, the absence of evidence of a payment from Mirren to Intertrade does not defeat tracing. There is a string of choses in action through which Relfo can trace.
Mr Salter accepts that timing is not necessarily fatal to the right to trace. Precise timings may not matter but they can, as in this case, show that asset B is not a direct substitution for asset A. In this case, the Intertrade payment could not be a substitute for Relfo’s money because the timing of the payments was such that the Relfo/Mirren payment on 5 May 2004 could not have funded that payment. The judge should therefore have dismissed the tracing claim against Mr Bhimji Varsani.
Mr Salter further accepts that there may be an exception in the context of international banking, as where the correspondent bank pays out before receiving funding: see Agip. That is because the court can “lift the latch of the bank’s door” because the bank will be an agent for the receiving party. What is procured is payment through agents. That means there is a direct payment through the bank system. In this case there is no evidence that there were agents here.
My conclusions on the first issue
I accept Mr Shaw’s submission that the judge was entitled to draw the inference not merely that Relfo’s monies had passed into Intertrade’s account but that those monies were actually the source of the monies paid to Mr Bhimji Varsani. The payments that the judge inferred were greater in number and scale than those that Millett J inferred in El Ajou, but the principle is the same. The judge had plenty of material from which to draw the inference. In [77] of his judgment, he refers to the similarity in amount and timing of the Mirren payment and the Intertrade payment, the fact that the amount paid to Mr Bhimji Varsani was the same as the amount of the Relfo/Mirren payment less 1.3%, which might well have been a commission, the fact that Mr Bhimji Varsani gave no consideration for this payment and the fact that on his findings Mr Gorecia authorised the payment from Relfo’s account intending that it should lead to a payment to Mr Bhimji Varsani.
I accept Mr Salter’s submission that the intention of Mr Gorecia would not be enough in itself to make the Intertrade payment substituted property for the purposes of the tracing rules. However intention can be relevant as a factor in the basket of factors from which the judge may draw an inference that it is in fact a substitution.
I do not, however, accept Mr Salter’s submission that that intention was a major part of the evidence on which the judge based his inference. I have referred to other matters to which the judge referred in [77] of his judgment. In addition, there was further material in the factual background found by the judge, such as the extensive evidence supporting the inference, namely the prior dealings between Mr Gorecia and the Varsani family, the prior dealings between Mr Gorecia and Ukrainian businessmen and between Mirren and Intertrade and the transactions between their accounts. The judge found that the Ukrainian businessmen in question had access to vehicles through which monies could be laundered, and were used to preparing false records (see paragraph 18 of this judgment). The judge also found that both Mr Gorecia and Mr Varsani Senior were unsatisfactory witnesses. Moreover, he found that Mr Gorecia was motivated by a wish to make amends for the losses that Mr Varsani Senior had incurred through following his advice.
Once the judge made the inference that Relfo’s money was substituted by payments used ultimately to make the Intertrade payment, it is in my judgment an inevitable conclusion that the Mirren payment and the Intertrade payments were causally and transactionally linked.
I also accept Mr Shaw’s submission that, when funds are transmitted through the banking system, what matters is that there has been an exchange of the value of the claimant’s property into the next product for which it is substituted and so on down the chain of substitutions. This seems to me to follow from the speech of Lord Millett in Foskett v McKeown cited above, and particularly the following passage:
“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….”
The inference that the judge made means that he found that what had happened was on the following lines. At the start of the chain of transactions, Relfo had money on deposit with its bank, i.e. it had the benefit of a debt owed to it by its bank. It exchanged this right for a debt owed to it by Mirren. The value of this debt lay in the credit balance on this account. Mirren agrees to transfer this balance to another person or person at some future date in exchange for Intertrade making the Intertrade payment.
I therefore accept Mr Shaw’s submission that the fact that Mirren did not reimburse anyone for the Intertrade payment until after the Intertrade payment had been made does not matter. On the judge’s findings, the Intertrade payment and the other payments made throughout the chain of substitutions was made on the faith of the arrangement that Mirren would provide reimbursement. By making that arrangement, Mirren exploited and used the value inherent in Relfo’s money that had been paid into Mirren’s account.
In my judgment, Mr Shaw is correct in his submission that Agip is authority for the proposition that monies held on trust can be traced into other assets even if those other assets are passed on before the trust monies are paid to the person transferring them, provided that that person acted on the basis that he would receive reimbursement for the monies he transferred out of the trust funds. The decision in Agip demonstrates that in order to trace money into substitutes it is not necessary that the payments should occur in any particular order, let alone chronological order. As Mr Shaw submits, a person may agree to provide a substitute for a sum of money even before he receives that sum of money. In those circumstances the receipt would postdate the provision of the substitute. What the court has to do is establish whether the likelihood is that monies could have been paid at any relevant point in the chain in exchange for such a promise. I see no reason in logic or principle why this particular way of proving a substitution should be limited to payments to or by correspondent banks.
I further agree with Mr Shaw that there is no logical reason why the substituted product of a claimant’s money cannot be traced through any number of accounts. There is no limit on the number of substitutions that can in theory take place. However, the number of substitutions and the fact that they do not occur in chronological sequence may make it harder to substitute one asset for another.
Tracing enables a beneficiary to recover trust property that has been misappropriated. As Lord Millett held in Foskett v McKeown at page 127:
“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 without notice.”
Thus the innocence of the recipient will go to the question of whether he was a bona fide purchaser for value and without notice. In this case, Mr Bhimji Varsani could not establish that he gave value for the Intertrade payment.
There was a suggestion that Relfo should have sued those responsible for the fraud, not Mr Bhimji Varsani who is an innocent recipient of funds of which it has been defrauded. Mr Bhimji Varsani knew that the money came from Relfo and was told that it was compensation for the Varsani family. The position, as is well known, is that a claimant may choose which cause of action to pursue in respect of any wrong to it.
For these reasons, I would uphold the decision of the judge on this point.
SECOND ISSUE
The background to the argument here is that, in general, for a claim for unjust enrichment to succeed, the defendant must be enriched directly by the claimant. Mr Bhimji Varsani only raises the second issue if he wins on the first issue. If my Lady and my Lord agree with my conclusion on the first issue, Mr Bhimji Varsani has not succeeded on the first issue. Nonetheless, as we have heard full argument, I propose to decide this appeal also on this alternative ground. The point of law is whether, on the facts as found by the judge, Relfo would succeed on a claim for unjust enrichment against Mr Bhimji Varsani even though he did not receive the benefit of the Intertrade payment directly from Relfo and on the hypothesis that Relfo cannot establish any tracing claim to that payment.
As explained in paragraph 26 above, the judge held that Mr Bhimji Varsani would not have obtained the Intertrade payment but for the Relfo/Mirren payment (judgment, paragraph [87]). “But for” is a filter, or preliminary filter, which the law uses to filter out loss for which a claim for compensation will not succeed. Thus, if loss would have occurred in any event, a court will conclude that the defendant’s wrong did not cause the claimant’s loss.
As also explained in paragraph 26 above, the judge’s conclusion was based on a concession by counsel then appearing for Mr Bhimji Varsani. The concession was one of law. Mr Shaw does not seriously object to its being withdrawn. I would accordingly permit it to be withdrawn.
It is effectively common ground that liability in unjust enrichment requires more than a “but for” test to be satisfied where the claimant, as in this case, contends that the defendant was enriched at the claimant’s expense through the intervention of third parties.
The argument on this issue proceeds on the basis that, contrary to my conclusion on the first issue, Relfo’s tracing claim fails.
On this appeal, Mr Salter submits that, if Relfo has no tracing claim, it likewise has no claim in unjust enrichment. Mr Salter submits that the cases show that normally the defendant has to be a person to whom the claimant directly transferred the benefit. Mr Salter accepts that there are a number of exceptions, for example, where a tracing claim is available. The present position, submits Mr Salter, is that there is no general principle. He relies on section 8 of A Restatement of the English Law of Unjust Enrichment by Professor Andrew Burrows, (Oxford, 2012) (“the Restatement”). This valuable work presents the position in the following way:
“8 At the claimant’s expense: general
(1) The defendant’s enrichment is at the claimant’s expense if the benefit obtained by the defendant is-
(a) from the claimant and
(b) directly from the claimant rather than by way of another person.
(2) In any of the following cases, it does not matter that the benefit obtained by the defendant (D) is from the claimant (C) by way of another person (X) –
(a) where X transfers as an asset to D but C has a better right to that asset than X;
(b) where X transfers an asset to D but X was holding the asset on trust for C;
(c) where X is acting as C’s agent in respect of the benefit;
(d) where X charges and receives from C an amount representing tax on X’s supply of goods and services to C and pays or accounts for that amount to D (Her Majesty’s Revenue and Customs) as tax due;
(e) where C is subrogated to X’s (or another’s) present or former rights against D in a situation where the benefit was supplied to D by X;
(f) where X was under a legal obligation to supply the benefit to C but instead supplied the benefit to D and –
(i) the supply to D discharged X’s obligation to C, or
(ii) the supply to D was in breach of X’s fiduciary duty to C but C’s claim against X has been exhausted.
(3) In a contract for the benefit of a third party, the third party’s benefit is to be treated as obtained directly from the contracting party who required the benefit to be supplied rather than from the contracting party who supplied it.
(4) Even if the benefit obtained by the defendant is directly from the claimant, the enrichment is generally not at the claimant’s expense if the benefit is merely incidental to the furtherance by the claimant of an objective unconnected with the defendant’s enrichment.”
Professor Burrows calls the principle now set out in section 8 “the direct providers only” rule, though he accepts there are exceptions to it. I will therefore refer to it as “the DPR”. Section 8 is a very useful point of reference but I must not be taken as accepting that, if there is a DPR, section 8 contains an exhaustive list of the exceptions.
Mr Salter also accepts that some writers have favoured a wider principle than the DPR, such as the editors of Goff & Jones on The Law of Unjust Enrichment (8th ed, 2011) at paras 6-18 and 6-25, Stephen Watterson, Direct Transfers in the Law of Unjust Enrichment, Current Legal Problems 64 (2011), pp 435-470, Charles Mitchell, “Liability Chains” in Unjust Enrichment in Commercial Law, ed. Degeling and Edelman (2008) and Professor Peter Birks, Unjust Enrichment (2nd ed) pp 94-5.
Mr Salter accepts that Mr Bhimji Varsani cannot rely on any defence: in particular he does not now claim that he was a bona fide purchaser of the Intertrade payment.
The DPR raises some immediate questions. Why should the law impose a rule that there can be no claim in unjust enrichment unless the defendant happens to receive the benefit directly from the claimant rather than from the claimant via a third party, and then allow a long list of what might be called ad hoc exceptions? The answer to this question is that DPR is a rule about limiting the substitution of new property or rights for the property which leaves the claimant’s hands. It may be very unjust to allow the claimant to recover the new property or rights if he has no tracing claim, for example, where the immediate recipient made a gift to the defendant of an amount equal to what he had received from the claim and this transaction of gift was independent of his transaction with the claimant. The claimant may, moreover, end up being able to recover his property from a number of defendants at different stages in the chain.
On this basis, the “exceptions” represent the boundaries (thus far ascertained) of recoverability for indirect unjust enrichment. It is not enough for the claimant to show the defendant is better off by the amount by which the claimant is worse off. That does not even satisfy a “but for” test of causation. Some greater link is required to be shown.
Likewise the list of exceptions raises questions. The exceptions are a motley collection. Some of them are principles from other areas of law, such as trust law, and some of them are remedies, such as subrogation, which do not constitute a basis of liability. They are not, therefore, principles for imposing liability for unjust enrichment carved out of the DPR.
Mr Salter’s submissions involve the analysis of a large number of authorities, including Filby v Mortgage Express (No 2) Ltd [2004] EWCA Civ 759, Banque Financière de la Cité v Parc Battersea Ltd [1991] 1 AC 221 and Kleinwort Benson Ltd v Birmingham City Council [1997] QB 380. We were also taken for completeness to Gibbs v Maidstone and Tunbridge Wells NHS Trust [2010] EWCA Civ 678, and Uren v First National Home Finance Ltd [2005] EWHC 2529 (Ch) but they do not significantly assist on the question of whether a principle exists which defines when a claimant can succeed on his claim in unjust enrichment against an indirect recipient.
Mr Salter accepts that the decision of Henderson J in Investment Trust Companies v HMRC [2012] EWHC 458 (Ch); [2012] STC 1150 (“ITC”) is the first case in which the question of the nature of the connection has been squarely addressed. In that case, clients of Investment Management Companies sought to recover overpaid VAT from the HMRC, to whom it was paid by their investment managers, on the basis that the HMRC had been unjustly enriched, indirectly at their expense. The managers had not reclaimed this VAT. Henderson J held:
“[68] The real question, therefore, is whether claims of the present type should be treated as exceptions to the general rule. So far as I am aware, no exhaustive list of criteria for the recognition of exceptions has yet been put forward by proponents of the general rule, and I think it is safe to assume that the usual preference of English law for development in a pragmatic and step-by-step fashion will prevail. Nevertheless, in the search for principle a number of relevant considerations have been identified, including (in no particular order):
(a) the need for a close causal connection between the payment by the claimant and the enrichment of the indirect recipient;
(b) the need to avoid any risk of double recovery, often coupled with a suggested requirement that the claimant should first be required to exhaust his remedies against the direct recipient;
(c) the need to avoid any conflict with contracts between the parties, and in particular to prevent ‘leapfrogging’ over an immediate contractual counterparty in a way which would undermine the contract; and
(d) the need to confine the remedy to disgorgement of undue enrichment, and not to allow it to encroach into the territory of compensation or damages.”
Henderson J came to his conclusion that the weight of authority was in favour of the DPR with a limited number of exceptions after very careful consideration of all but two of the authorities cited by Mr Salter. Little purpose would be served by my performing the same exercise as I agree with his analysis of those cases.
Faced with that authority, Henderson J concluded that there was no authority which required him to hold that there was any general principle which allowed unjust enrichment claims against indirect recipients. He held that such guidance as was available to him suggested that there was no general principle, so far as claims against indirect recipients were concerned. There was only a list of exceptions. He did not regard that as a closed list but went on to identify the criteria in paragraph 68, which I have set out above. He effectively created the exception now found in section 8(2)(d) of the Restatement.
Mr Shaw submits that there is no universal requirement for direct enrichment. Enrichment at the claimant’s expense may be indirect if it falls within a number of recognized exceptions. He relies on the decision of this court in Menelaou v Bank of Cyprus UK Ltd [2013] EWCA Civ 1960, which was delivered after ITC was decided. I shall analyse the decision in Menelaou in more detail when I come to my conclusions.
Mr Shaw submits that in Menelaou there was a sufficiently close link to the gain if there was a transfer of value between the parties. The intermediate transfers can be disregarded if the reality is that there is a transfer between the claimant and the defendant. In his leading judgment, and by reference in particular to Banque Financière, Floyd LJ concluded that the appropriate test was one of economic reality.
Mr Shaw further submits that the criteria laid down by Henderson J in paragraph 68 of his judgment in ITC are satisfied in this case. He further accepts that, if Relfo made a recovery from any other party it would have to give credit but in fact he submits there has never been any suggestion that Mr Bhimji Varsani might be sued by anyone else, and that, contrary to what Mr Salter informed us, that Relfo would obtain a recovery from any other person. The reality was that Mr Bhimji Varsani was enriched at Relfo’s expense and that was sufficient justification for the judge’s conclusion.
For reasons which I develop below, I consider that the judge’s ultimate conclusion was correct notwithstanding the withdrawal of the concession in this court. Furthermore, in my judgment, Menelaou supports the argument that, where the defendant is not the direct recipient of the benefit provided by the claimant, and the claimant has no proprietary right to any asset in the defendant’s hands, unjust enrichment may be available on the basis of a general principle rather than on the basis of bringing the case within (say) one of the specific situations in section 8 of the Restatement.
The decision in Menelaou is instructive. The claim in Menelaou was by a bank which withdrew its charge over its customers’ property to enable them to sell that property and use the proceeds to help their adult daughter purchase another property. The issue was whether the bank could be subrogated to a charge on the daughter’s property. The bank did not have any proprietary interest in the proceeds of sale. They belonged to the parents and in error the parents’ solicitors had made them available to the daughter free of any charge on her property, so there was an issue as to the connection between the actions of the bank and the acquisition of the property by the daughter. At trial, the judge held that the daughter’s enrichment was not at the bank’s expense. This court disagreed. It held that, in determining whether there was a sufficient connection to enable the court to say that the daughter had been unjustly enriched, the court was entitled to have regard to the economic reality of the situation, which was the bank would never have released its charge unless it had been promised a further charge over the property of the daughter which was not forthcoming.
This court found particular support for this approach in two of the cases cited to us. The first was Banque Financière. In that case, as Floyd LJ explains, in order to circumvent disclosure obligations a bank lent money first to the general manager (Mr Herzig) of the bank who in turn lent the money to another company who used it to discharge a loan from RTB, another bank. The Appellate Committee of the House of Lords was unimpressed by the fact that Mr Herzig was interposed as borrower and lender. Lord Hoffmann, with whom a majority of the House agreed, held that to allow the interposition of Mr Herzig to alter the substance of the transaction would be pure formalism. He further held:
“I think it should be recognised that one is here concerned with a restitutionary remedy and that the appropriate questions are therefore, first, whether the defendant would be enriched at the plaintiff’s expense; secondly, whether such enrichment would be unjust and thirdly, whether there are nevertheless reasons of policy for denying a remedy. An example of a case which failed on the third ground is Orakpo v Manson Investments Ltd. [1975] AC 95, in which it was considered that restitution would be contrary to the terms and policy of the Moneylenders Acts.”
The second case was Filby v Mortgage Express. In that case, again as Floyd LJ explains, Mr and Mrs Filby’s matrimonial home was subject to a mortgage in favour of the Halifax. They also had an unsecured development loan account with the Midland Bank. Mr Filby sought to remortgage the matrimonial home with Mortgage Express. The mortgage advance was paid to solicitors who used part of it to redeem the Halifax mortgage and another part in the reduction of the debit balance on the development loan account with the Midland. However, Mrs Filby had not signed the mortgage, and so, as against her, it was void. Mortgage Express claimed to be subrogated, amongst other things, to the rights of the Midland Bank against Mrs Filby to the extent that the joint debt to them had been discharged with their money. This court considered the unjust enrichment claim obiter. At [62] May LJ stated:
“Accordingly so far as is relevant to this appeal, the remedy of equitable subrogation is a restitutionary remedy available to reverse what would otherwise be unjust enrichment of a defendant at the expense of the claimant. The defendant is enriched if his financial position is materially improved, usually as here where the defendant is relieved of a financial burden – see Peter Birks, An Introduction to The Law of Restitution page 93. The enrichment will be at the expense of the claimant if in reality it was the claimant’s money which effected the improvement. Subject to special defences, questions of policy or exceptional circumstances affecting the balance of justice, the enrichment will be unjust if the claimant did not get the security he bargained for when he advanced the money which in reality effected the improvement, and if the defendant’s financial improvement is properly seen as a windfall. The remedy does not extend to giving the claimant more than he bargained for. The remedy is not limited to cases where either or both the claimant and defendant intended that the money advanced should be used to effect the improvement. It is sufficient that it was in fact in reality so used. The remedy is flexible and adaptable to produce a just result. Within this framework, the remedy is discretionary in the sense that at each stage it is a matter of judgment whether on the facts the necessary elements are fulfilled.”
I agree with Henderson J that the “reality” which May LJ was invoking was not confined to strictly legal reality, but could in appropriate circumstances include a broader underlying commercial or economic reality (judgment, [65]).
This court accepted in Menelaou that the bank had released the charge over the parents’ house with a view to its obtaining security over the daughter’s house. The majority relied on economic reality. Moses LJ, however, did not think it was necessary to rely on economic reality as such on the grounds that this test was uncertain and that a decision-maker might use this concept because he was unable to articulate his real reasoning.
This court also relied on the fact that there had been a transfer of value, but given that there had been no transfer of value in law, this does not detract from the reasoning based on economic reality. In all the circumstances, Floyd LJ concluded at [42] of his judgment:
“Whilst the precise range of relevant factors which are relevant may require consideration in other cases, for my part I would hold that there was a sufficiently close causal connection in the present case between the Bank’s agreement to part with its estate in Rush Green Hall and the enrichment of Melissa to hold that Melissa was enriched at the Bank’s expense.”
Menelaou is, of course, a case about subrogation and thus one only of the exceptions listed in section 8(2) of the Restatement. Nonetheless, particularly read with the passage from the speech of Lord Hoffmann in Banque Financière and the dictum of May LJ set out above, the decision strongly supports the view that the law is moving towards identification of a general principle. Overall the court must find that there is a sufficient link between the formation of the transaction whereby the claimant conferred a benefit on the direct recipient (or was entitled to receive a benefit) and the transaction under which the defendant obtained a benefit to make the enrichment unjust. I do not read the judgments of Gloster and Floyd LJJ as taking any different view on that point. Moreover, in deciding whether there is a sufficient link, the court will look at the substance and not the form.
Any principle for unjust enrichment against indirect recipients will have to be refined in later cases. For now, the criteria identified by Henderson J will no doubt be of assistance. They identify important policy considerations for the application of the law in this area. As I see it, they are consistent with there being some ultimate general principle.
In this case, on the basis of the judge’s unappealed findings, the Intertrade payment was a gratuitous benefit to Mr Bhimji Varsani. The judge found that Mr Gorecia’s objective was to confer a benefit on Mr Bhimji Varsani by a circuitous route. Those factors are in my judgment the principal factors that make his enrichment unjust. In my judgment, they are sufficient for this purpose. As a matter of substance, or economic reality, Mr Bhimji Varsani was a direct recipient. It follows that the concession made at trial was correctly made.
There is no requirement for Relfo to pursue other possible defendants: it has always been a principle of English law that the claimant can (subject to well-established doctrines, such as election) choose which defendant to sue. It is likewise a well-established rule that in general a claimant may not recover more than his loss, so Relfo must obviously give credit for anything it might recover from some other party.
I would therefore dismiss the appeal on the second issue as well as the first issue.
Conclusion
I would dismiss this appeal. In the circumstances it is not necessary to deal with a cross-appeal raised by Relfo, on which I would make no order.
Lady Justice Gloster:
I agree that this appeal should be dismissed for the reasons set out in paragraphs 56 to 68 of the judgment of Arden LJ. Like her, I agree that, on the basis of the judge’s findings of fact, and the inferences which he drew to the effect that the Mirren payment and the Intertrade payments were causally and transactionally linked, Relfo was entitled to maintain a tracing claim notwithstanding that Mirren did not reimburse anyone for the Intertrade payment until after that payment had been made.
However, although we heard argument on the second issue, I was initially reluctant to express any conclusion as to whether, in the alternative, Relfo was entitled to maintain a separate claim in unjust enrichment on the assumed hypothesis that it had failed in its tracing claim. My reasons for my reluctance were as follows:
i) First, as Arden LJ points out at paragraph 3 of her judgment, the second issue only arises if the appellant succeeds on the first issue, viz. he establishes that Relfo had no tracing claim. In circumstances where we have decided that there was indeed a tracing claim premised on the factual basis that “there was an unbroken series of substitutions of Relfo’s money by means of transfers between accounts leading to the Intertrade payment” (see paragraph 70 above), it might be somewhat confusing, to say that, even if Relfo had failed on issue one, it would have succeeded on issue two. In those circumstances it might be said that the precise factual hypothesis upon the basis of which the court reached its conclusion in relation to unjust enrichment was unclear.
ii) Second, as Arden LJ points out in paragraph 26 of her judgment, the judge did not have to consider on the facts before him whether there had to be any closer connection upon which to base an unjust enrichment claim other than the mere fact that the “but for” test was satisfied; i.e. that Mr Bhimji Varsani would not have been enriched if the Relfo/Mirren payment had not been made. That was because counsel then appearing for Mr Bhimji Varsani (not counsel on this appeal) conceded that, if Relfo showed that Mr Gorecia’s object in arranging for the Relfo/Mirren payment to be made was to cause a transfer of value to Mr Bhimji Varsani, the enrichment of the latter was direct and that the nature of this connection did not require further consideration (judgment, [87]). Whilst Mr Shaw did not seriously object to Mr Salter seeking to withdraw that concession on appeal, I do not consider it satisfactory for this court to have to engage, for the first time, in an analysis of the facts relating to the extent of the connection, when that analysis was not one which was conducted by the judge, but decided on the basis of a concession.
However, for the reasons given by Floyd LJ in paragraphs 115 to 122 of his judgment, and despite my initial reluctance, I am nonetheless satisfied that we are able to conclude that the arrangement by which Mr Gorecia benefited and enriched Bhimji Varsani using Relfo’s money was in the circumstances in reality equivalent to a direct payment and demonstrated a sufficient causal connection to support a remedy in unjust enrichment.
Like Floyd LJ I do not consider that this is a suitable case for the court to attempt to articulate general principles as to the circumstances in which a claim for unjust enrichment might lie, notwithstanding that that the defendant has not received his benefit directly from the claimant. It is clear from the cases to which Arden LJ has referred that the court has not limited the remedy to cases falling within what Professor Burrows in The Restatement refers to as “the direct providers only” rule and that there are exceptions to the rule. Again this is not a suitable case in which to explore the extent of those exceptions. What one can say is that on the basis of the evidence as found by the judge this was clearly a case which demonstrated the necessary causal link between the payment and the gain to justify an unjust enrichment claim.
For the above reasons I would also dismiss the appeal on the alternative ground that the Liquidator had a good claim in unjust enrichment.
Lord Justice Floyd:
I also agree that this appeal should be dismissed for the reasons set out in paragraphs 56 to 68 of the judgment of Arden LJ, in other words that the liquidator of Relfo (“the Liquidator”) was entitled to recover the proceeds of its property by the process of tracing.
The Liquidator relied, as an alternative ground, on a claim in unjust enrichment. He contended that, in the event that its tracing claim failed, for example because of the need to show a series of substitutions of its property and its proceeds, and in any event, he could still maintain a claim in unjust enrichment. The Judge did not have to decide that issue, but because he had heard full argument, he did decide it. We have heard extended argument on it as well.
The Judge dealt with the second issue in the following way. He recorded and accepted the submissions of Mr Shaw for the Liquidator that the undoubted enrichment of Mr Bhimji Varsani was unjust, arising at it did from the diversion of Relfo’s funds by Mr Gorecia in breach of the fiduciary duty he owed to Relfo and without Relfo’s authority. That left the question of whether the enrichment of Mr Bhimji Varsani was, in law, at the expense of Relfo. Mr Shaw submitted before the judge that the test of whether enrichment of one person was at the expense of another was, in law, that propounded by the learned editors of Goff & Jones The Law of Unjust Enrichment (8th Edition ed. Mitchell, Mitchell and Watterson), namely that the claimant has suffered a loss which is sufficiently closely connected with the defendant’s gain for the court to hold that there is a transfer of value between them: see Goff & Jones, paragraph 1-15. That of course raised the question of what was sufficiently close for this purpose.
Before the judge there was a debate which was ultimately rendered academic as to whether a simple “but for” test of causation was all that was required for a sufficiently close connection. This is the test for which the editors of Goff & Jones contend, whilst recognising that it does not presently represent an established view. Their view is that other elements of unjust enrichment, coupled with the available defences, make it unnecessary to insist on a strict test of causation. Be that as it may, given that the question of whether there is a sufficiently close connection between the claimant’s loss and the defendant’s gain is one of degree, the “but for” test must represent the lowest and most generous (from the claimant’s viewpoint) end of the spectrum.
That particular debate was rendered academic because counsel for Mr Bhimji Varsani, although contending for a more demanding test of causation, accepted that, if the Liquidator made out his case on the facts in relation to the objective Mr Gorecia had in arranging for the Relfo/Mirren payment to be made (i.e. to achieve a transfer of value to Bhimji Varsani by triggering an equivalent payment to him), the necessary element of directness or proximity for which he argued would be present. As the Judge had made those factual findings, the concession operated so as to allow the judge to reach the conclusion that the enrichment of Mr Varsani was at Relfo’s expense.
The judge did however hold that counsel’s concession was rightly made. As Arden LJ has recorded, Mr Salter who appeared on the appeal (but not below) sought permission to withdraw the concession and to challenge its correctness, and, as Mr Shaw did not resist permission being granted, we gave it.
Mr Salter’s challenge to the conclusion reached by the judge was that a remedy in unjust enrichment is only available (absent a proprietary claim) where there is a direct transfer from claimant as payor to defendant as payee. The judge, submits Mr Salter, should have asked not only whether there was a sufficiently close causal connection, but also whether the transfer from claimant to defendant was direct.
The “direct transfers only” rule, for which there is also eminent academic support, represents the other extreme of the spectrum of possible tests to which I referred in paragraph 107 above. In fact, adherence to the direct transfers only rule makes it unnecessary to ask whether there is a sufficiently close causal connection, or, alternatively, if one does ask the question it will answer itself. A direct transfer from A to B must be sufficiently close – it could not be closer. However, as Arden LJ has amply demonstrated, the courts have not rigidly observed a direct transfers only rule, and exceptions have been recognised: see per Henderson J in Investment Trust Companies (In liquidation) v Revenue & Customs Commissioners [2012] EWHC 458 (Ch); [2012] STC 1150. This suggests, at the very least, that something less than the direct transfers only rule, by way of a general test of the necessary connection, may suffice.
To illustrate the type of case where the causal link may be inadequate, Professor Burrows in The Law of Restitution (3rd Edn.) page 70 cites the example of a payment made by mistake by C to X. X then, no doubt feeling generous as a result of the mistaken payment to him, makes a gift of the money to D. The enrichment of D satisfies a “but for” causation test, but the enrichment of D is not strongly causally related to C’s mistaken payment. The payment might be said to provide an occasion or opportunity for X to pay C. X’s decision to pay D is an independent act by X, not controlled or arranged by C. In those circumstances the law regards the enrichment of D as being at the expense of X, not of C, or at least refuses to recognise a sufficiently close causal connection between C’s loss and D’s gain.
The present case is not one in which I would wish to attempt to lay down any general rule applicable to determine causation in unjust enrichment cases. In particular I would not wish to attempt, because it is not necessary, an analysis of precisely how much liberalisation of a direct transfers only rule, or how much tightening of a “but for” test, will ultimately prove to be appropriate. However, in my judgment, the factual findings made by the judge in the present case made his conclusion that there was a sufficiently close causal connection an inevitable one. Indeed, provided one focuses on substance and not on form, or as it is put in some of the cases, on economic reality, the facts in the present case showed that the arrangement by which Mr Gorecia benefited and enriched Bhimji Varsani using Relfo’s money were equivalent to a direct payment. I would draw attention to some of those findings.
Mr Gorecia had close links with the Varsani family. The Varsani family treated Mr Gorecia as a business partner. The Varsani family were advised by Mr Gorecia on business matters and the family provided him with funding and loans. The family had various bank accounts: the account in question in the present case being in the name of Bhimji Varsani. At the material time, Mr Gorecia felt a debt or obligation towards the Varsani family arising out of some unsuccessful investments (“the Corn and Odessa investments”) into which he had guided them.
The Relfo/Mirren payment and the Intertrade payment were on successive days, May 4 and 5 2004. The Relfo/Mirren payment and the Intertrade payment were linked in that the Intertrade payment represented the dollar equivalent of the Relfo/Mirren payment less a 1.3% money laundering charge and a $10 bank charge.
Mr Gorecia made an elaborate attempt to “demonstrate that there was no linkage between the Relfo/Mirren payment and the Intertrade payment”, by suggesting that the payments were related to complex commercial dealings in the Ukraine, Russia and elsewhere. The judge rejected Mr Gorecia’s account as untruthful. He found Mr Gorecia to be “a thoroughly dishonest witness prepared to lie whenever necessary to protect himself or bolster the position of the Varsani family in the legal proceedings in which they became involved as a result of his actions”.
Despite adopting “the usual cautious approach to assessment of a case based on fraud” the judge concluded that the true position was as follows:
“Mr Gorecia felt under considerable pressure in his relationship with the Varsani family because the Corn and Odessa investments were doing badly by early 2004, at great potential cost to the Varsanis. He therefore decided to divert funds under his control (in the form of the money still held by Relfo, which otherwise would only be lost to the taxman) to the Varsanis in an effort to make some amends. He was aware that the Ukrainian businessmen with whom he dealt had access to networks of entities which could be used as different vehicles to effect payments in ways which obscured the true source of monies and were used to preparing corrupt and fraudulent accounting books and records. He used one or other of his contacts in the Ukraine to arrange to transfer the money from Relfo to the Varsanis in a way that disguised its source and the purpose of the payment. The Intertrade payment represented the onward transmission of the Relfo/Mirren payment, effected and disguised using the complex networks which his contacts had at their disposal.”
Mr Gorecia explained to the Varsanis that he was arranging for the transfer from Relfo to the Varsanis. In due course Mr Gorecia was rewarded for making the arrangements for Relfo/Mirren payment and the Intertrade payment by a reverse payment to him of $100,000. The judge concluded:
“However, it was clear from Mr Gorecia’s own evidence and the schedules of payments and receipts in respect of the Corn and Odessa investments that the shadowy Ukrainian business associates of Mr Gorecia were used to channel payments through business entities which did not on the face of it have anything to do with the transactions to which the payments related and were involved in falsifying books and records in relation to those investments. In my view, therefore, Mr Gorecia had access to Ukrainian business-people who had the capacity and willingness, depending on the circumstances, to use networks of companies to effect payments in ways which could not readily be traced or followed.
I find, on the evidence taken overall, that Mr Gorecia made use of his access to these contacts and networks to arrange for transfer of the Relfo/Mirren payment to Bhimji Varsani’s account with Citibank Singapore.”
The intermediate arrangements were therefore an elaborate façade to conceal what was in truth intended and arranged to be a payment for the benefit of Bhimji Varsani. There was however more than mere intention involved. The structure put in place by Mr Gorecia made it inevitable that the payment would be effected to Bhimji Varsani. There was no other purpose in the interim arrangements other than to conceal the true nature of the transaction. Mr Gorecia and the Varsanis were closely connected. There was no question of any intervening act of free will. There was no question of any of the intervening entities doing anything other than the bidding of Mr Gorecia.
It was these findings of fact which the judge had in mind when accepting the concession of counsel for Bhimji Varsani that the necessary causative connection was present in this case. Short of applying the rigid exclusionary rule based on direct transfers only, the judge was bound to conclude on these particular facts that there was a sufficient causal connection between Relfo’s loss and Bhimji Varsani’s gain to provide for a remedy in unjust enrichment. I cannot accept the suggestion that the intervening and meaningless arrangements orchestrated by Mr Gorecia, which had no other purpose than to disguise the source of the funds diverted from Relfo, changed what would otherwise have been a direct payment into one which the law will not recognise as sufficiently proximate.
For these reasons I would also dismiss the appeal on the alternative ground that the Liquidator had a good claim in unjust enrichment.
Carroll Group Distributors Ltd. v. G. and J.F. Bourke Ltd.
[1989] IEHC 1; [1990] 1 IR 481; [1990] ILRM 285 (4th October, 1989)
Murphy J.
1. This is yet one more case of the many which have arisen in recent years concerning the interpretation and application of what have come to be known as ‘retention of title clauses’.
2. The plaintiffs (Carrolls) are the well known tobacco company and the two defendant companies (Bourkes) carried on a retail business in Limerick. The affairs of the two defendant companies were so intertwined that they in fact constituted one operation and accordingly have been treated for all purposes as if they constituted only one company. Between 4 February 1986 and 2 April 1986 Carrolls supplied to Bourkes goods to the value of £54,517.26 . Bourkes were allowed approximately four weeks credit and it is common case that the conditions on which the goods were supplied included a reservation of title clause in the terms set out in the appendix to this judgment.
3. On 25 April 1986 Mr. Dermot Fitzgerald was appointed liquidator of the company in a creditors’ liquidation thereof.
4. The representatives of Carrolls and the liquidator identified goods supplied by Carrolls in the possession of Bourkes at the commencement of the liquidation to the value of £7,376.70. It was agreed between the parties that Carrolls were entitled to those goods in accordance with the retention of title clause and they were accordingly returned reducing the indebtedness of the company to £47,140.56.
5. At the time the liquidator was appointed the company maintained two accounts with its bankers. The number one account which was in credit in a sum (expressed in round terms) at £28,000 and the number two account which was overdrawn in a sum (again expressed in round terms) in the sum of £21,000. The number two account aforesaid was the account on which the bank from time to time advanced the moneys required by Bourkes to pay wages and salaries and the number one account was the only other account of Bourkes. No special account was opened for the purpose of segregating the proceeds of sale of goods supplied by Carrolls. On 7 May 1986 the bank debited the number one account with the amount due to the bank on foot of the number two account leaving a net balance due to Bourkes of a sum of approximately £7,000. The decision to set off one account against the other was made exclusively by the bank and was not the result of any disposition made by the liquidator.
6. The right of a vendor and purchaser to agree that the property in goods agreed to be sold should remain in the vendor notwithstanding the agreement for a sale and the delivery of the goods to the purchaser cannot be questioned. The right was recognized in Irish case law in the second part of the last century (see Bateman v Green and King (1868) IR 2 CL 166 and McEntire v Crossley Brothers Ltd [1895] AC 457) and affirmed by the provisions of the Sale of Goods Act 1893, s. 19(1). Accordingly the liquidator was correct in returning the goods supplied by Carrolls and in the possession of Bourkes at the date when the liquidator was appointed.
7. The issue in the present case relates to the right of Carrolls in respect of the proceeds of sale of the goods supplied by them. In this context too the basic legal principles are well established. Where a trustee or other person in a fiduciary position disposes of property the proceeds of sale are impressed with a trust which entitle the benificiary or other person standing in the fiduciary relationship to trace such proceeds into any other property acquired therewith by the trustee. The right of tracing carries with it the presumption that where the substituted property is subsequently diminished it is presumed, notwithstanding the order of disposal and the well known rule in Clayton’s case that the trustee disposed of his own property in the first instance and encroached subsequently, if at all, upon the property of the benificiary. Whether fiduciary obligations are imposed on one party or another depends in part upon the character in which they contract and partly on the nature of the dealings in which they engage. Obviously one would be slow to infer that a vendor and purchaser engaged in an arms length commercial transaction undertook obligations of a fiduciary nature one to the other. On the other hand if one postulates that in any context one person is selling the goods of another the assumption of fiduciary obligations in relation to the sale and in particular the proceeds thereof might well be appropriate. It seems to me that the question must be asked how does a party come to sell property of which he is not the owner. Is he selling as a trustee in pursuance of a power of sale? Is he selling as the agent of the true owner? Does the sale constitute a wrongful conversion? If any of those questions were answered in the affirmative it seems to me that the law would impose a trust on the proceeds of sale which would confer on the true owner the right to recover those proceeds from the actual seller or if the proceeds were no longer in the seller’s hands to trace them into any other property acquired with them. If the new asset was acquired partly with such proceeds and partly with other moneys provided by the seller then the right of the true owner would be to a charge on the new asset or mixed fund to the extent of the proceeds of the sale of his property. This is the rule enunciated in In re Hallett’s Estate: Knatchbull v Hallett (1880) 13 Ch D 696.
8. In the present case clearly there was nothing wrongful about the sale by Bourkes of the goods supplied by Carrolls. Not merely was this envisaged by the circumstances of the parties but it was positively anticipated in the conditions under which the goods were sold by Carrolls. As appears from the retention of title clause it was expressly provided that in the event of the sale of goods by Bourkes that they should ‘act on their own account and not as agent for Carrolls’.
9. It would seem to me to follow, therefore, that no fiduciary duty was imposed by law on Bourkes or the liquidator thereof in relation to the proceeds of the sale of any of the goods in question and that if such a fiduciary obligation is to be established it must be found in the actual bargain or the trust created in respect of the proceeds by the agreement contained in the conditions of sale.
10. The retention of title clause expressly provided as follows:-
11. Notwithstanding the property remaining in the company all risks shall pass to the customer on delivery of the goods to the customer’s premises and so long as the title in the goods shall remain in the company, the customer shall hold the goods as bailee for the company and store the goods safely and suitably so as to clearly show them to be the property of the company and identifiable as such. The customer hereby authorises the company to enter upon the premises of the customer or to any other premises designated to the customer for delivery of the goods to recover possession of the goods at all reasonable times and without notice to the customer.
12. Clearly on a sale by Bourkes the goods would no longer be stored by them or identified in accordance with the provisions aforesaid. Obviously the parties intended that the property would pass to the sub-purchaser who would become the full owner thereof. Again it was clear that Bourkes were selling ‘on their own account’ and presumably at an increased price to provide a profit margin for the retailer. Again it was open to Bourkes to sell below cost or on credit terms so that the goods would not be immediately or necessarily replaced by assets of equal value.
13. The operative clause expressly provided that the property in the goods should remain in Carrolls ‘until the customer (Bourkes) shall have discharged all sums due by the customer (Bourkes) to the company (Carrolls) at the date of final handing over of possession of the goods whether such sums shall be due on foot of this transaction or shall be due on foot of some other transaction or transactions between the customer (Bourkes) and the company (Carrolls)’.
14. It is in this context that one must consider the crucial provisions of the retention of title clause insofar as it deals with the proceeds of sale, namely:-
…the customer (Bourkes) shall hold all moneys received for such sale or other disposition in trust for the company (Carrolls) and undertake to maintain an independent account of all sums so received and on request shall provide all details of such sums and accounts.
15. No separate account was opened in respect of the proceeds of any goods supplied by Carrolls and it is probable that Carrolls were aware that no such steps were taken. Instead the proceeds of sale of the goods supplied by Carrolls together with other goods dealt with by Bourkes in the ordinary course of their business were paid into the number one account aforesaid. In fact the analysis made by the liquidator would suggest that some 5% of the moneys paid into the number one account represented the proceeds of sale of goods supplied by Carrolls. If one ignores the particular facts of the case and simply analyses the bargain made between the parties it is clear that such an arrangement properly implemented would result in a bank account with sums of money credited thereto which would probably be in excess of the amounts due by Bourkes to Carrolls. This would arise partly from the fact that the goods would be resold at a marked up price and partly from the fact that the proceeds of sale would include some goods the cost price of which had been discharged and some had not. In other words the bank account would be a fund to which Carrolls could have recourse to ensure the discharge of the moneys due to them even though they would not be entitled to the entire of that fund. Accordingly the fund agreed to be credited would possess all the characteristics of a mortgage or charge as identified by Romer LJ in ln re George Inglefield Ltd [1933] Ch 1 at 27-28.
In Frigoscandia (Contracting) Ltd v Continental Irish Meat Ltd and Laurence Crowley [1982] ILRM 396 McWilliam J (at 398 dealing with the property in the goods sold rather than the proceeds of sale thereof) commented upon retention of title clauses as follows:-
16. A difficulty which arises with regard to clauses of this nature is that they are included in the contracts to secure the payment to the vendor of the price of the goods and therefore it may be said as has been argued that the goods once delivered, are intended to be held by the purchaser as security for such payment and that the transaction is in the category of a mortgage in that the vendor, although retaining ownership or an interest in the goods, cannot take possession of them provided that the specified instalments are paid, and that this leads to the conclusion that such a clause must be treated as creating a mortgage or a charge over the goods. In my opinion such a conclusion can have no general application to these clauses and each case must depend on its own facts.
17. I fully agree with that observation. The fact that a vendor may seek to protect his commercial interests and in particular his right to recover the purchase price of goods sold by him by retaining the title to property which he has agreed to sell and of which he has delivered possession to the purchaser, does not convert the contract for sale into a mortgage which may require registration in accordance with the provisions of the Companies Act 1963, s. 99. It would be wrong to infer that a particular transaction constituted a mortgage merely because the vendor structured it in such a way as to protect his commercial interests. On the other hand parties cannot escape the inference that a transaction constitutes a mortgage registrable under s. 99 aforesaid by applying particular labels to the transaction. The rights of the parties and the nature of the transaction in which they are engaged must be determined from a consideration of the document as a whole and the obligations and rights which it imposes on both parties. This is a principle of general application. Not infrequently efforts have been made to treat a document which is in truth a lease as a licence by so describing it. The description may be a material consideration but clearly it cannot be decisive. Specifically in relation to mortgages registrable under the Companies Acts it has been held that it is the substance of the transaction as ascertained from the words used by the parties and the context in which the document is executed that determines registrability under the Companies Acts (see In re Kent and Sussex Sawmills Ltd [1947] Ch 177). It seems to me that the bargain between the parties insofar as it relates to the transaction subsequent to a sale by Bourkes is in substance – though not in terms – the same as that which existed in In re Interview Ltd [1975] IR 383 in that effectively Bourkes were creating or conferring a charge on the proceeds of sale in substitution for the right of property which Carrolls had previously enjoyed. The charge so created required registration under s. 99 of the Companies Act 1963 and in the absence of such registration was invalid.
18. Whilst the issue does not arise having regard to the foregoing decision it may be as well to record my view that even if Carrolls had obtained a charge over Bourkes’ number one bank account in accordance with a right to trace the proceeds of sale of their goods into that account, that such a right was necessarily defeated when and to the extent that the monies in that account were dissipated and not replaced by any other asset. It follows that in my view the total amount in respect of which a claim might have been asserted was the balance of £7,000 remaining in the number one account after the bank had exercised its right of setoff. This practical conclusion is fully supported by the decision in Roscoe v Winder [1915] 1 Ch62.
19. Accordingly it seems to me that the plaintiffs’ claim must be dismissed.
APPENDIX
Reservation of Title
20. Notwithstanding delivery and passing of risk the property and title in the goods shall remain in the company and shall not pass to the customer until the customer shall have discharged all sums due by the customer to the company at the date of final handing over of possession of the goods (hereinafter referred to as ‘the relevant sums’) whether such sums shall be due on foot of this transaction or shall be due on foot of some other transaction or transactions between the customer and the company.
21. In such circumstances the following provisions shall apply:-
22. The company hereby confers on the customer the right to sell or otherwise dispose of the goods, subject to as hereinafter provided, in the normal course of business. If the customer (who shall in such case act on his own account and not as agent for the company) shall so sell or otherwise dispose of the goods, the customer shall hold all monies received for such sale or other disposition in trust for the company and undertakes to maintain an independent account of all sums so received and on request shall provide all details of such sums and accounts.
23. Notwithstanding the property remaining in the company, all risks shall pass to the customer on delivery of the goods to the customer’s premises and so long as the title in the goods shall remain in the company, the customer shall hold the goods as bailee for the company and store the goods safely and suitably so as to clearly show them to be the property of the company and identifiable as such. The customer hereby authorises the company to enter upon the premises of the customer or to any other premises designated by the customer for delivery of the goods, to recover possession of the goods at all reasonable times and without notice to the customer.
24. Nothing in this clause shall confer on the customer any right to return the goods. The company may maintain an action for the price notwithstanding that property and title in the goods shall not have been vested in the customer.
25. Prior to the payment in full of all sums due by the customer to the company under this contract the customer shall be entitled to use the goods as provided above but may not offer the goods or their proceeds where sold or otherwise disposed of as security for the performance of any obligation of the customer to any third parties. At any time prior to the customer paying all relevant sums the company may, by notice in writing delivered to the customer’s last known address or place of business, determine the customer’s right to use the said goods in the manner detailed above or at all, whereupon the customer shall forthwith return the goods to the company or the company may enter the customer’s premises at all reasonable times for the purpose of recovering the said goods or any part of them.
26. Further, in the happening of any of the events set out below such events shall forthwith, without any necessity for notice, determine the customer’s right to use, sell or otherwise dispose of the goods:-
(a) Any notice to the customer that a receiver or manager is to be or has been appointed;
(b) Any notice to the customer that a petition to wind up is to be or has been presented or any notice of any resolution to wind up the customer (save for the purpose of reconstruction or amalgamation) has been passed;
(c) A decision by the customer that the customer intends to make arrangement with its creditors;
(d)The insolvency of the customer within the meaning of s. 62(3) of the Sale of Goods Act 1893.
27. Furthermore and independently of the above, where any of the foregoing provisions do not apply, the company hereby reserves the right of disposal as provided by s. 19(1) of the Sale of Goods Act 1893.
Money Markets International Stockbrokers Ltd. (in liquidation) (No. 2), Re
[2000] IEHC 75; [2001] 2 IR 17 (20th October, 2000)
THE HIGH COURT
No. 1999 32 COS
IN THE MATTER OF MONEY MARKETS INTERNATIONAL STOCKBROKERS LIMITED (IN LIQUIDATION)
AND
IN THE MATTER OF THE COMPANIES ACTS
Judgment delivered by Ms Justice Carroll on the 20th October 2000
1. This is the third of five issues ordered to be tried by order of the 19th of July 1999 by Laffoy J. The first issue was the subject matter of a Judgment by Laffoy J on the 23rd of May 2000. The third issue is “should K and H Options Limited (K and H) be entitled to claim the sum of £237,030 against client funds of MMI for option premia in respect of settled stock exchange transactions”. It is now calculated by the official liquidator, Tom Kavanagh, that the sum of money should be £321,620. The shortfall in the general clients account (the section 52 account) which excluded the premia monies as per the ledger, at the date of liquidation was £1.1 million. The account should have contained £2.3 million.
2. Apart from ordinary stock exchange transactions with a settlement date five days later, MMI as agent for their clients negotiated with K and H for the purchase of named shares on a settlement date three months ahead at a fixed price the (“strike price”). This was a “call option”. Back to back with that was a “put option” under which K and H could call on MMI’s client to buy the shares at the strike price on the settlement day. If the share price had gone up above the strike price on the settlement date, the client made a profit. If the share price had gone down below the strike price, the client suffered a loss. For these options, premia were payable regardless of whether a profit or loss was made. In the case of settled stock exchange transactions where share premia were payable by a client, the individual client account with MMI was debited with the amount of the share premia. I am told MMI made a corresponding credit entry in a book showing amounts due to K and H for the share premia. The status of this accounting practice is not clear. K and H do not claim to be creditors of MMI. What is clear that having made the debit entries in the individual client’s accounts the money due to K and H was not always withdrawn from the general client account. Normally the share premia amounts would have been paid to MMI once a month by cash withdrawal from the clients account. However in the period before going into liquidation on the 15th of March 1999 (probably September to December 1998) money unpaid to K and H which should have been withdrawn from the general client account but was not, amounted to approximately to £321,620.
3. MMI had a statutory obligation under the Stock Exchange Act 1995 (as amended by the Investor Compensation Act 1998) to hold client’s money in what is designated a section 52 account in an institution specified by the Central Bank (section 52 (3)(b) ).
4. In the requirements imposed by the Central Bank under section 52 (1) reequirement 7.1 provides that money ceases to be client money if it is paid
(a) to the client
(b) to a third party on the instructions of the client
(c) into any account with a credit institution in the name of the client not being an account which is also in the name of the member firm, or
(d) to the member firm itself where it is due and payable to the member firm
5. Requirement 7.2 provides that where a member firm draws a cheque or other payable order under 7.1 the money does not cease to be client money until the cheque or order is presented and paid by the credit institution.
6. Requirement 8.1 provides that money may only be paid out of a client account by a member firm in the course of carrying out its activities in accordance with requirement 2.2 (i.e. it must inform a third party that the money is client money) or in circumstances where the money ceases to be client money in accordance with requirement 7.1 (mentioned above) or in accordance with requirement 19.4 (not relevant in this context as it relates to reconciliation difficulties).
7. In her Judgment on the first issue Laffoy J held that the official liquidator was not entitled to recoup out of client funds sums due to MMI. Section 52 (7)(a) as amended by section 64 of the Investor Compensation Act 1998) provides
“No liquidator, receiver, administrator, examiner official assignee or creditor of investment business firm shall have or obtain any recourse or right against client money or client investment instruments or client documents of title relating to such investment instruments received, held, controlled or paid on behalf of a client by an investment business firm until all proper claims of the clients or of their heirs successors or assigns against client money and client investment instruments or documents of title relating to such investment instruments have been satisfied in full”
8. Laffoy J held that the clear and unambiguous meaning of paragraph (a) (is that the beneficial claims of client creditors have to be satisfied in full before anybody else, even a contributor to the ultimate balance, has a call on the funds.
9. Mr McCarthy for the official liquidator submitted that the Judgment of Laffoy J disposed of the matter
10. Mr Collins for K and H claims that a trust was created in its favour in the client account in respect of money debited in individual clients accounts for premia for completed stock exchange transactions. It therefore has a proprietary claim, a right in rem, against those monies. He submits that K and H are not any of the named persons in section 52 and was not party to the issue. Therefore he was not precluded from making a claim under section 52 because MMI had authority to deduct premia in clients’ accounts and in due course pay K and H. He claims that once allocated, the money belongs in equity to K and H. He did concede that in a mixed fund he could not claim to be paid 100%, i.e. in priority to the client creditors who owed K and H nothing, but he said there could be some basis on which an equitable distribution could be made. He did elaborate later on how this might be achieved. In support of his proposition he cited Barclays Bank Limited -v-Quistclose Investments Limited (1970 AC507). In this case where there was a loan to a company by a third person for the purpose of paying a declared dividend, paid into a separate account opened specially for the purpose, it was held this gave rise to a trust in favour of the creditors and if the trust failed, in favour of the third person.
In Carreras Rothman Limited-v-Freeman Matheus Treasure Limited and another (1985 CH 207), owing to the Defendant’s precarious financial position, a special account was opened into which Carreras Rothman Limited (CR) paid the amount due by the Defendant to third parties who were providing advertising facilities for CR. The Defendant went into liquidation and it was held that the money held in the special account was never held beneficially by the Defendant. A trust was created and the Plaintiff could enforce the payment of the monies in the special account to the third parties.
In General Communications Limited-v-Development Finance Corporation of New Zealand Limited (1999 3 NZLR406), this case concerned the supply of goods by GC Limited to a firm VW. DFC agreed to advance a sum of money payable by instalments to VW specifically to purchase equipment. Later an alteration agreed was that the total advance would be paid to VW’s solicitors who undertook to pay directly to VW suppliers. After GC supplied goods but before payment, a receiver was appointed to VW. DFC asked VW’s solicitor to return the balance of funds which they did, getting an indemnity. In a claim by GC it was held that the money once received by the solicitors was held by them on behalf of VW on terms to apply it only to payment of suppliers of equipment and if equipment was not purchased to repay it to DFC. It was held that DFC had put the funds beyond its power of recall and conferred a beneficial interest on each supplier as each contract of supply was fulfilled.
11. Based on the principles enunciated in these cases it was claimed on behalf of K and H that the entry in the individual clients account by MMI crystallised K and H’s interest in the money. The only other step was the transfer of funds.
12. Alternatively there is a claim to a constructive trust in favour of K and H on the basis that it would be inequitable to deny it. The clients are in debt to K and H and would be unjustly enriched and K and H put to the expense and difficulty of suing individual clients.
13. It was further submitted that MMI was acting within the scope of its fiduciary duty in allocating money for the payment of its liabilities. If a client instructed MMI to return monies allocated for payment of option premia owed, MMI would have been entitled to refuse to comply and would not have been in breach of its fiduciary duty. After the transaction is carried out a client cannot terminate the authority of the agent to make the payment.
14. It is quite clear that K and H’s claim is based on the existence of a trust. In Mr McQuillian’s affidavit sworn on the 13th of December 1999 on behalf of the credit clients of MMI it was claimed in paragraph 10 that MMI were only entitled to hold monies to the further instructions of clients. In Mr Holt’s replying affidavit sworn on the 14th of February 1999 on behalf of K and H (paragraph 5) it is stated that the standard terms and conditions of trade contained authorisations to MMI to make deductions from clients accounts without requirement for each deduction to be specifically authorised and he exhibited two such client’s authorisations. I was however unable to find the authorisation he mentioned in the exhibits. However it was not suggested by anybody that MMI did not have authority to pay the share premia on completed transactions to K and H.
15. Mr Hardiman on behalf of the investors represented by Mr McQuillian submitted (inter alia) that:
(1) K and H could not have a proprietary right in a fund where there were client investors who owed no money to K and H;
(2) K and H could not acquire a proprietary interest in the fund as no specific fund is identified and there is no properly constituted trust;
(3) The use of the individual client’s account by MMI is consistent with contractual obligations not the creation of a trust
4 Section 52 (5) of the Stock Exchange Act 1995 exhausts all equities in the client account
16. Mr Barnaville for the Central Bank supported Mr Hardiman’s argument.
17. I do not think the Judgment of Laffoy J went so far as to say that no person whatever could make a claim against the section 52 account until the client creditors were paid. She said the beneficial claim of client creditors had to be satisfied in full before anyone else had a call on the funds. It seems to me that there could be cases where the beneficial entitlement of client creditors are challenged by persons other than the named persons in the section. But what I purpose to do first is to examine the claim of K and H to the creation of a trust in portion of the section 52 account monies. If there is no trust there is no basis for a claim against the monies.
18. In my opinion the debit entry in an individual client account cannot be construed as a declaration of trust. MMI had no authority to create a trust. It is not disputed they had authority to pay K and H a debt owed by a client for option premia. Under the Central Bank requirement 7.1 they could pay money to a third party on the instructions of the client. The fact that it must actually be paid is underlined by requirement 7.2 where it is provided that if it were drawn by a cheque or other order it did not cease to be client money until the cheques/order was presented and paid.
19. Therefore as far as share premia were concerned MMI could pay K and H out of the client account. When it was paid over it ceased to be client money. Since the money in this case was not paid out in accordance with requirement 8.1 and 7.1 it never ceased to be client funds. None of the clients themselves created any trust in favour of K and H. There was no separate fund designated for the payment of share premia. In each of the three cases cited by Mr Collins a special fund was created. No such fund was created here. It would not in any event have been possible to create a separate designated fund to pay K and H the money it was owed. The money coming from the client account had to be paid to K and H or it remained client money. No halfway house arrangement was possible under the requirements.
20. In my opinion it is not possible to impose a constructive trust on the grounds of unjust enrichment or any other equitable ground. The client creditors of MMI had the share premium payments deducted from their account before their net credit balance was calculated. They have already suffered a loss in respect of this as their contractual liability to pay K and H still remains. K and H still claim to be entitled to sue each of the MMI clients who owe them money for share premia.
21. I am not saying there are circumstances under which a person not named specifically in section 52 can make a claim against an individual client account in a section 52 account. I purpose to leave that question for a case where there is a basis for making a claim against the beneficial interest of a client creditor. What I am saying that is if it is possible this is not one of those cases. The issue must be answered in the negative.
Kelly v. Cahill
[2001] IEHC 2; [2001] 2 ILRM 205 (18th January, 2001)
JUDGMENT delivered by Mr. Justice Barr on the 18th day of January, 2001.
The facts relating to this matter are not in dispute and are as follows:-
1. The plaintiff is the sole surviving executor named in the last will and testament of Michael Cahill Senior (the deceased) made on the 23rd October, 1969 who died on 20th March, 1996 without having revoked or altered the will. The other executor appointed by the deceased predeceased him and was not replaced. The plaintiff applied for and obtained probate of the deceased’s will on 22nd January, 1998 and pursuant thereto entered into the administration of the estate.
2. The first defendant (the widow) is the widow of the deceased. The second defendant is a nephew of the testator. The deceased was a farmer and the owner of substantial holdings of registered land. He died without issue. By his last will the deceased devised all of his property to his widow and his brother, Martin Cahill, as joint tenants for life with remainder to trustees in trust for his nephew, the second defendant. Martin Cahill, the deceased’s brother, died on 16th March, 1998.
3. In course of administration of the deceased’s estate certain facts have come to light relating to the ownership of part of the lands comprised in the estate which have caused the plaintiff as administrator to seek directions from the Court, thus giving rise to this action. The matters raised by him include –
The answers to the following questions arising in relation to the administration of the estate of the said Michael Cahill Senior, deceased:
Whether the lands contained in Folio GY043846F of the Register County of Galway pass under the terms of the will of Michael Cahill deceased dated 23rd October, 1969 to the first named defendant for life and thereafter in remainder to the second named defendant, subject to the widow’s right to one half of the lands pursuant to the provisions of part (IX) of the Succession Act, 1965.
Whether in the events which have happened, the second named defendant is a constructive trustee of the remainder interest in the lands comprised in Folio GY043846F for the benefit of the first named defendant.
Such directions as may appear to this Honourable Court to be proper on foot of the answers to the questions at paragraph 1 (a) and (b) above.
In the event that the Court holds that the second named defendant is a trustee of the lands comprised in Folio GY043846F as a constructive trustee for the first named defendant, an Order directing the second named defendant to execute such assurance as may be necessary to vest the said lands in the first named defendant.”
4. The facts which have posed the foregoing questions are deposed to by Mr. Joseph O’Hara who was the deceased’s solicitor at all material times and are summarised as follows:-
5. In or about the month of January, 1994 Mr. Michael Cahill, the testator since deceased, and his wife, the first defendant, called upon Mr. O’Hara and he obtained instructions from Mr. Cahill that he wished to alter the will which he had made on 23rd October, 1969. He informed his solicitor that he no longer wished to benefit his nephew Michael Cahill Junior, the second defendant, and that he wished to leave all of his property to his wife, the first defendant. There is no doubt that the testator had at that time changed his mind regarding the disposition of his property and had decided that his entire estate should be inherited by his wife absolutely on his death without any remainder provision and that this should be achieved by way of a new or revised will. However, Mr. O’Hara foresaw a likely disadvantage for the testator’s wife if his revised testamentary intention was achieved in the way intended by him. The difficulty was that a 2% probate tax had been created by the Finance Act, 1993 which the solicitor believed would be payable by the widow on the value of the estate inherited by her. At that time there were no exemptions in respect of such tax. In the light of this Mr. O’Hara advised his client, the testator, that he could achieve the same result without liability for probate tax by transferring his lands into the joint names of himself and his wife, the effect of which would be that the property would then pass to his wife, as sole owner if she survived him. The testator agreed to that course of action. Mr. O’Hara had also ascertained that all of the other assets of his client and his wife were in their joint names. A Deed of Transfer dated 14th January, 1994 was duly drawn up by Mr. O’Hara to give effect to the revised instructions which he had received. The deed provided that lands comprised in Folio 46909 of the Register County of Galway were transferred from the sole ownership of Michael Cahill into the joint names of the latter and his wife, Nellie Cahill. The deed was duly executed and at that time the joint owners and their solicitor believed that it included all of the lands then owned by Michael Cahill. In fact in drawing the deed the solicitor had made an error. He was not then aware that as noted thereon Folio 46909 had been prior to the date of execution of the deed closed to Folio GY043846F of the Register County of Galway (the second folio) of which Mr. O’Hara had no knowledge at that time. The second folio comprised 17 entries of which Nos. 6 to 9 were the lands transferred from Folio 46909. The end result was that through the inadvertence of the solicitor and unknown to the testator and his wife the lands comprised in entries 1 to 5 and 10 to 17 in the second folio were not included in the Deed of Transfer contrary to the express intentions of the testator. No new will was made and the end result was that having regard to the terms of the original will and of the Deed of Transfer per se the lands which had not been transferred into the joint names of the deceased and his wife would on his death pass to her for life with remainder to the second defendant, Michael Cahill Junior, but subject to the widow’s legal right share under the Succession Act, 1965 to one half of the lands concerned, should she elect to make such a claim. Mr. O’Hara has deposed that he does not believe that that would accord with the stated intention of the deceased, which was that his nephew, Michael Cahill Junior, would not benefit from the estate and that his wife would be the sole beneficiary.
The Law
6. The nett issue which I must address is whether in the light of Mr. O’Hara’s inadvertence regarding the folios in question which resulted in a failure to carry out his client’s instructions to include all his lands in the Deed of Transfer made in January, 1994, a constructive trust arises comprising the lands which were not transferred into joint ownership as intended by the testator. This raises the question as to whether in the circumstances under review it is established that a ‘New Model’ constructive trust as Mr. Justice Keane described it in “Equity and the Law of Trusts in Ireland” has been established and, if so, whether such a trust has a place in Irish law.
7. The concept of ‘New Model’ constructive trusts is explained by Keane J (as he then was) in the following passages from his learned work at pp. 196/7
“In recent years, there has been much discussion in other jurisdictions as to whether a constructive trust can be said to arise in any circumstances where permitting the defendant to retain the property would result in his being ‘unjustly enriched’. This, it has been said, effectively means treating the constructive trust as a form of remedy intended to restore property to a person to whom in justice it should belong rather than as an institution analogous to the express or resulting trust. The constructive trust, in its additional form, arises because of equity’s refusal to countenance any form of fraud: in this wider modern guise it is imposed by law ‘whenever justice and good conscience require it’.”
The latter is a quotation from the landmark judgment in this area of Lord Denning MR in Hussey -v- Palmer [1972] 3AER 744 at 747. In that case, the plaintiff had been living with her daughter and son-in-law. She had paid £607.00 to a contractor to build on another room in the expectation that she could live there for the rest of her life. When disputes later arose and she left, she sought the return of the £607.00. Having regard to the informal nature of the arrangement, she was in obvious difficulty in establishing that it was a loan rather than a gift. However, Lord Denning did not consider that problem insuperable. Having observed that it did not matter whether one proceeded by way of a resulting trust or a constructive trust, he went on
“By whatever means it is described, it is a trust imposed by law wherever justice and good conscience require it. It is a liberal process, founded upon large principles of equity to be applied in cases where a defendant cannot conscientiously keep the property for himself alone, but ought to allow another to have the property or a share of it ……. It is an equitable remedy by which the Court can enable an aggrieved party to obtain restitution”. The end result was that the plaintiff was entitled to a share in the house proportionate to her contribution.
Keane J commented that
“Broadly speaking, it may be said that the application of the principle of unjust enrichment requires the restoration by the defendant to the plaintiff of a benefit which it would be unjust for him to retain. Sometimes this can be done by a simple award of money, e.g., the refund of money paid under a mistake of fact. But sometimes the restoration of the benefit can only be achieved by giving the plaintiff an interest in property. Thus, the constructive trust is imposed by the Court as an equitable remedy intended to restore to the plaintiff the benefit of which he has been deprived. In the words of Cardozo J ‘a constructive trust is the formula through which the conscience of equity finds expression’. Beatley -v- Guggenageim Exploration Co. 225 NY 380 at 386.”
8. I adopt with respect the foregoing assessment of ‘New Model’ constructive trusts by Keane J.
9. It seems to me that the kernel of the question I have to determine is whether the evidence establishes a clear, positive intention on the part of the testator that his wife should inherit all of his property on his death; that he took appropriate steps to bring that about and that he could not reasonably have known that through his solicitor’s error the Deed of Transfer, which he and his wife duly executed, did not include all of his lands and that his stated intention to benefit his wife exclusively on his death was defeated in part. In the light of Mr. O’Hara’s and the first defendant’s affidavits, the accuracy of which is not in dispute it is established that the testator expressed such an intention to his solicitor in clear terms and that he had good reason for believing that the Deed of Transfer did in fact achieve his intention that his wife would acquire absolutely as surviving joint owner all of his lands on his death as Mr. O’Hara had advised. In my view it is irrelevant that the second defendant was neither aware of or had any responsibility for the error which was made. The essential element is that the testator changed his mind regarding the disposition of his estate after death and that he took appropriate steps to give effect to his revised intention. That having been established, it follows that in the words of Lord Denning, ‘justice and good conscience’ requires that the second defendant should not be allowed to inherit the testator’s property or any part of it on the death of his widow and that his interest in remainder under the will should be deemed to be a constructive trust in favour of the widow. In my opinion a ‘New Model’ constructive trust of that nature the purpose of which is to prevent unjust enrichment is an equitable concept which deserves recognition in Irish law. In that regard I note also that it accords with the following observations of Costello J (as he then was) in HKN Invest OY and Anor. -v- Incotrade PVT Limited (In liquidation) and Ors . [1993] 3 IR 152 at 162.
“ ……. A constructive trust will arise when the circumstances render it inequitable for the legal owner of property to deny the title of another to it. It is a trust which comes into existence irrespective of the will of the parties and arises by operation of law. The principle is that where a person who holds property in circumstances which in equity and good conscience should be held or enjoyed by another he will be compelled to hold the property in trust for another……”
10. And in that context that the learned judge referred with apparent approval to the judgment of Lord Denning MR in Hussey -v- Palmer supra .
11. In the light of my findings the answers to the questions posed in paragraph 1 of the plaintiff’s claims are:-
No.
Yes.
12. I direct that the second named defendant shall execute such assurance as may be necessary to vest in the first defendant all of the lands comprised in Folio GY043846 of the Register County of Galway.