Exploring Private Law

This page intentionally left blank

E X PLOR I NG PR I VAT E L AW

Inspired by recent debate, the purpose of this collection of essays on private law doctrines, remedies and methods is to celebrate and illustrate the contribution that both ‘top-down’ and ‘bottom-up’ methods of reasoning make to the development of private law. The contributors explore a variety of topical subjects, including judicial approaches to ‘top-down’ and ‘bottom-up’ methods; teaching trusts law; the protection of privacy in private law; the development of the law of unjust enrichment; the private law consequences of theft; equity’s jurisdiction to relieve against forfeiture; the nature of fiduciary relationships and obligations; the duties of trustees; compensation and disgorgement remedies; partial rescission; the role of unconscionability in proprietary estoppel; and the nature of registered title to land. e l i s e ba n t is an Associate Professor in the Melbourne Law School at the University of Melbourne and an Honorary Fellow of the University of Western Australia. m at t h e w h a r d i n g is a Senior Lecturer in the Melbourne Law School at the University of Melbourne.

E X PLOR I NG PR I VAT E L AW Edited by E L ISE BA N T and M AT T H EW H A R DI NG

CAMBRIDGE UNIVERSITY PRESS

Cambridge, New York, Melbourne, Madrid, Cape Town, Singapore, São Paulo, Delhi, Dubai, Tokyo Cambridge University Press The Edinburgh Building, Cambridge CB2 8RU, UK Published in the United States of America by Cambridge University Press, New York www.cambridge.org Information on this title: www.cambridge.org/9780521764353 © Cambridge University Press 2010 This publication is in copyright. Subject to statutory exception and to the provision of relevant collective licensing agreements, no reproduction of any part may take place without the written permission of Cambridge University Press. First published in print format 2010

ISBN-13

978-0-521-76435-3

Hardback

Cambridge University Press has no responsibility for the persistence or accuracy of urls for external or third-party internet websites referred to in this publication, and does not guarantee that any content on such websites is, or will remain, accurate or appropriate.

For Michael Bryan

CONTENTS

List of Contributors x Foreword xii Acknowledgments xvi Table of Cases xvii Table of Legislation xl Introduction

1

elise bant and matthew harding

i Method 1

17

Do top-down and bottom-up reasoning ever meet? keith mason

2

Internationalization or isolation: the Australian cul de sac? The case of contract law 41 paul finn

3

The Australian law of restitution: has the High Court lost its way? 67 andrew burrows

4

Privacy and private law: developing the common law of Australia 86 michael tilbury

5

Towards legal pragmatism: breach of confidence and the right to privacy 109 megan richardson

6

Teaching trust law in the twenty-first century tang hang wu

vii

125

19

viii

Contents

ii Unjust enrichment 7

151

The impact of legal culture on the law of unjustified enrichment: the role of reasons 153 helen scott and daniel visser

8

Natural obligations and unjust enrichment

175

mitchell mcinnes

9

Causality and abstraction in the common law

200

birke häcker

10

Trust and theft

223

robert chambers

iii Equity and trusts 11

247

What is left of equity’s relief against forfeiture?

249

sarah worthington

12

Contracts, fiduciaries and the primacy of the deal anthony duggan

13

Four fiduciary puzzles

298

james edelman

14

Good faith: what does it mean for fiduciaries and what does it tell us about them? 319 richard nolan and matthew conaglen

15

Trustees’ duties to provide information

343

lusina ho

iv Remedies 16

361

The measurement of compensation claims against trustees and fiduciaries 363 lionel smith

17

Substitutability and disgorgement damages in contract 377 katy barnett

275

Contents

18

Unconscionability and proprietary estoppel remedies 402 andrew robertson

19

Partial rescission: disentangling the seedlings but not transplanting them 427 peter watts

20

Of horses and carts: theories of indefeasibility and category errors in the Torrens system 446 kelvin fk low

Index

468

ix

LIST OF CONTR IBUTORS

e l i se ba n t is an Associate Professor in the Melbourne Law School, University of Melbourne, and an Honorary Fellow of the Faculty of Law, The University of Western Australia. k at y b a r n e t t is a PhD student in the Melbourne Law School, University of Melbourne. a n dr e w bu r row s QC (Hon) FBA is the Norton Rose Professor of Commercial Law at the University of Oxford, and a Fellow of St Hugh’s College, Oxford. robe rt ch a m be r s is a professor of Property Law at University College London. m at t h e w c onagl e n is a University Senior Lecturer, University of Cambridge, and a Fellow of Trinity Hall, Cambridge. a n t hon y dug g a n holds the Hon Frank H Iacobucci Chair in the Faculty of Law at the University of Toronto, and is a Professorial Fellow in the Melbourne Law School, University of Melbourne. j a m e s e d e l m a n is Professor of the Law of Obligations at the University of Oxford and a fellow of Keble College, Oxford, as well as a Conjoint Professor, University of New South Wales, and a barrister at One Essex Court, Temple. paul finn is a judge of the Federal Court of Australia, and a Professorial Fellow of the University of Melbourne. birke häcker is a lecturer at Ludwig-Maximilians-Universität München. m at t h ew h a r di ng is a Senior Lecturer in the Melbourne Law School, University of Melbourne. lu s i n a h o is a Professor in the Faculty of Law at the University of Hong Kong. x

List of Contributors

xi

k e lv i n l ow is an Associate Professor at the Singapore Management University, having held the same post at the University of Hong Kong when his chapter was written. The Honourable Keith Mason AC QC is a Professorial Visiting Fellow of the University of New South Wales and was, until 2008, the President of the New South Wales Court of Appeal. m i t c h e l l m c i n n e s is a Professor in the Faculty of Law at the University of Alberta. r ic h a r d n ol a n is a Reader in Corporate and Trust Law at the University of Cambridge, a Fellow of St John’s College, Cambridge, and a Door Tenant at Erskine Chambers, Lincoln’s Inn. m e g a n r ic h a r d s on is Professor of Law and Deputy Director of the Centre for Media and Communications Law at the Melbourne Law School, University of Melbourne. a n dr e w robe rt s o n is a Professor of Law at the University of Melbourne. h e l e n s c o t t is Associate Professor in the Department of Private Law at the University of Cape Town. l ion e l s m i t h is James McGill Professor of Law and the Director of the Quebec Research Centre of Private and Comparative Law in the Faculty of Law at McGill University. ta ng h a ng w u is an Associate Professor in the Faculty of Law at the National University of Singapore. m ich a e l t i l bu ry is Kerry Holdings Professor in Law, Chair of Private Law, the University of Hong Kong; a Professorial Fellow of the University of Melbourne; and an Adjunct Professor of Law at the University of Technology, Sydney. da n i e l v is se r is Professor of Law and Deputy Vice-Chancellor at the University of Cape Town. pet e r wat t s is a Professor in the Faculty of Law at the University of Auckland. s a r a h wort h i ngt on QC FBA is Professor of Law at the London School of Economics and Political Science, a Bencher of Middle Temple and an academic member of 3–4 South Square, Gray’s Inn.

FOR EWOR D

I am delighted to be invited to contribute a foreword to Exploring Private Law, which celebrates the breadth of Michael Bryan’s scholarly interests and the influence of his work on former students, academic colleagues and members of the judiciary. The purpose of a foreword is often to provide an overview of the material which follows. In this case, however, the excellent introduction by Elise Bant and Matthew Harding describes the intellectual terrain covered by the book, considers the topics examined by the 24 contributors and identifies the intersecting issues explored in the various essays. In these circumstances it would add little to describe the scope of the work or discuss the contents of particular essays. Instead, I will briefly mention three broad conceptual questions which underpin the book, and make it such an original and interesting contribution to legal scholarship. Until recently, most legal texts examined subject areas defi ned by reference to recognized common law categories (for example criminal law, contract, property and torts) or (less frequently) by reference to an area of statute law (for example trade practices law). Legal and equitable remedies were often discussed separately from substantive legal principles. By contrast, this book aims to explore the intersections, gaps and inconsistencies between principles which have traditionally been treated as falling within the boundaries of distinct legal and equitable doctrines. Thomas Kuhn’s theory that revolutionary changes in science are prompted by shifts in guiding paradigms1 has been widely accepted in the social and human sciences. By analogy, the identification of different approaches used to resolve questions within different subject boundaries

1

T Kuhn, The Structure of Scientific Revolutions (3rd ed, University of Chicago Press, Chicago 1996).

xii

Foreword

xiii

may help to generate new questions, and result in new ways of ‘seeing’ and resolving particular legal problems. There is increasing scholarly recognition that creative development of the law requires recognition and rationalization of overlaps and inconsistencies between principles which may lead to different outcomes, depending on the category of legal principle which is applied. This book is an important example of that approach, thus contributing to more adventurous legal scholarship, which will assist practising lawyers and judges. A number of the essays adopt a comparative law approach, which may lead to recognition of different ways of analysing and resolving problems which are common to many legal systems. Consistently with Michael Bryan’s reputation as a challenging and thoughtful teacher as well as a rigorous and creative legal scholar, the way the essays in this book cut across conventional legal boundaries will also encourage new approaches to teaching students about the law. The second theme, which is explicitly explored in the fi rst part of the book, concerns the techniques of legal reasoning which are available to resolve novel disputes in private law and the shared (and sometimes contested) understandings of lawyers about the legitimacy of various judicial approaches. It is trite to observe that syllogistic logic does not always provide a legally authoritative or just solution to a novel legal question. Julius Stone identified the limits of logical reasoning processes many years ago. He said: [p]erhaps the simplest illustration of these limits has reference to cases where two or more competing principles are available, each yielding different results; … ‘there are comparatively few cases’ said Lord Wright, ‘in which the relevant rules of law are uncertain. What is more often uncertain is, what is the right rule to apply’.2

Much of the development of common law and equity has come about through the incremental extension of rules laid down in decided cases, to cover new situations. (The recent decision of the Victorian Court of Appeal in Giller v Procopets,3 discussed in Michael Tilbury’s essay, is an example.) 2

3

Lord Wright, Legal Essays and Addresses (Cambridge University Press, Cambridge 1939) 343, cited in Julius Stone, Legal System and Lawyers’ Reasonings (Maitland, Sydney 1964), 56. [2008] VSCA 236.

xiv

foreword

However the process of deducing a specific rule from a broader general principle is also a familiar legal technique. Both approaches have played a part in the development of law and equity and each may assist in providing just solutions to new legal problems. Imagine, for example, how torts law might have evolved without the development of liability for reasonably foreseeable injury. To my mind, debate about the proper limits to the application of both techniques of judicial reasoning is more interesting than debate about the legitimacy of ‘top-down’ compared with ‘bottom-up’ reasoning. As Keith Mason observes in his essay, ‘the two concepts inevitably meet in the day to day exertions of any conscientious judge, whether or not he or she is prepared to admit it’.4 Legal scholars may have more opportunities than practising lawyers and judges to stand back and discern the emergence of broad principles from a series of individual examples. While practising lawyers are sometimes dismissive of legal theory, history shows that it can have an important influence on the development of the law. This book’s combination of theoretical discussion of broad principles and fine-grained analysis of particular cases will be valuable to all those interested in the development and application of private law. The final theme, which is most explicitly addressed in the essays of Justice Paul Finn and Michael Tilbury, concerns the interaction between common law and statute in the future development of private law. One of the questions which is implicitly raised by many of the essays in the book is the extent to which the principled development of private law doctrine can be achieved by judicial decision. Whatever view is taken of the appropriateness of particular forms of legal reasoning, the role of the judge is to resolve particular disputes. This imposes limits on judges’ capacity to survey an area of the law and systematically rationalize competing legal principles. Almost all of the essays in this book raise questions about the limits to judicial creativity. As Justice Finn suggests in his essay on developments in contract law, there is an important place for use of law reform bodies, including ad hoc committees of legal scholars, practising lawyers and judges, to examine and rationalize particular areas of the law. In the future legal educators will need to think about the best ways of equipping tomorrow’s lawyers to participate in law reform. The necessary skills include the ability to think creatively and systematically, to draw insights from judge-made 4

40.

Foreword

xv

and statute law from a variety of legal systems and, sometimes, to look to disciplines outside the law. This fine collection of scholarly essays is a deserved tribute to Michael Bryan, which will stimulate thinking about the ways legal and equitable doctrines and statute law can, and should, change in the future. The Hon Justice Marcia Neave AO Melbourne 30 March 2010

ACK NOW L E D GM E N T S

The editors wish to thank Professor James Hathaway for his support at the early stages of the project, Professor Charles Rickett for his enthusiasm for the project, even though regrettably he could not take part in it, Professor Andrew Robertson for his encouragement and advice throughout, and Professor Carolyn Evans and the Research Committee of the Melbourne Law School for making funding available to us when we needed it. Thanks also to Cambridge University Press for their work in preparing the manuscript for publication. A version of the essay by Paul Finn is to be published in M Hiscock and W van Caenegem (eds), The Internationalisation of Law (Edward Elgar Publishing, Cheltenham UK and Northampton US 2010). Our thanks to the editors and publishers for permission to reproduce the essay here. Finally, we are especially grateful to our assistant Ms Bella Li for her professionalism, efficiency, and meticulous attention to detail.

xvi

TA BL E OF C A SE S

3464920 Canada Inc v Strother (2002) 26 BLR (3d) 235 283 3464920 Canada Inc v Strother (2005) 38 BCLR (4th) 159 283 3464920 Canada Inc v Strother (2005) 8 BLR (4th) 1 283 3464920 Canada Inc v Strother (2005) 256 DLR (4th) 319 283 3464920 Canada Inc v Strother (2007) 281 DLR (4th) 640 11, 277, 282, 283, 284, 289, 290, 297, 299 Abacus Trust (Isle of Man) Ltd v Barr [2003] EWHC 114, [2003] Ch 409, 388 Aberdeen Railway Co v Blaikie Bros (1854) 1 Macq 461, 149 RR 32, 340 Abou-Ramah v Abacha [2006] EWCA Civ 1492, [2007] 1 Lloyd’s Rep 115, 314, 315, 316 ACCC v CG Berbatis Holdings Pty Ltd (2003) 214 CLR 51 76 Actionstrength Ltd v International Glass Engineering In Gl En SpA [2003] 2 AC 541 464 Adams v Amex Bank of Canada [2009] QJ No 5769, 178 Adamson, Ex p (1878) 8 Ch 807 366, 369, 370, 372 Adderley v Dixon (1824) 1 Sim & St 607, 57 ER 239, 254, 378, 381, 383 Adras Building Material Ltd v Harlow & Jones GmbH (1983) 37(4) PD 225 385 Adras Building Material Ltd v Harlow & Jones GmbH (1998) 42(1) PD 221 384, 385 Agip (Africa) Ltd v Jackson [1990] EWCA Civ 2, [1991] Ch 547, 225 Agricultural and Rural Finance Pty Ltd v Gardiner (2008) 251 ALR 322 55, 60 Air Canada v British Columbia (1989) 59 DLR (4th) 161 181 Air Canada v Ontario (Liquor Control Board) (1997) 148 DLR (4th) 193 190 Alati v Kruger (1955) 94 CLR 216 212, 218 Allcard v Skinner (1887) 36 Ch D 145 216, 219 Allen v Gold Reefs of West Africa [1900] 1 Ch 656 328 Allied Irish Banks Plc v Byrne (Chancery Division, 1 February 1994) 432 American Baseball and Athletic Association v Harper, 54 Cent L J 449 (1902) 387, 388 American Broadcasting Company v Wolf, 52 NY (2d) 394, 420 NE (2d) 363, 438 NYS (2d) 482 (1981) 387

xvii

xviii

Table of Cases

AMEV-UDC Finance Ltd v Austin (1986) 162 CLR 170 37 Amoco Australia Pty Ltd v Rocca Bros Motor Engineering Co Pty Ltd [1975] AC 561, 389 Anderson v Galbraith (1858) 15 UCQB 57 188 Angelopoulos v Sabatino (1995) 65 SASR1 35 ANZ Executors and Trustees Ltd v Humes Ltd [1990] VR 615, 386 Aristoc Industries Pty Ltd v R A Wenham (Builders) Pty Ltd [1965] NSWR 581, 383 Arklow Investments Ltd v Maclean [2000] 1 WLR 594 300, 341 Armitage v Nurse [1998] Ch 241 146, 147, 290, 304, 323, 324, 325, 330, 343, 346, 350, 351, 355 Armory v Delamirie (1722) 1 Str 505, 93 ER 664, 229, 375 Atlas Steels (Australia) Pty Ltd v Atlas Steels Ltd (1948) 49 SR (NSW) 157 387, 388 Atlee v Backhouse (1838) 3 M and W 633 158 Attorney-General v Blake [1998] Ch 439 307, 398 Attorney-General v Blake [2001] 1 AC 268 377, 381, 382, 383, 391, 393, 394, 397, 398, 398, 399, 400 Attorney-General v Guardian Newspapers Ltd (No 2) [1990] 1 AC 109 7, 105, 111, 113, 114, 115, 116, 118, 119, 120 Attorney-General (UK) v Heinemann Publishers Australia Pty Ltd (1987) 10 NSWLR 86 116, 310 Attorney-General (England and Wales) v R [2002] 2 NZLR 91 311 Attorney-General (Belize) v Belize Telecom Ltd [2009] UKPC 10, 301 Attorney-General (Hong Kong) v Reid [1992] 2 NZLR 385 236 Attorney-General (Hong Kong) v Reid [1993] UKPC 2, [1994] 1 AC 324, 236 Aussie Invest Corp Pty Ltd v Pulcesia Pty Ltd [2005] VSC 362, 250 Austin v The Commonwealth (2003) 215 CLR 185 22, 28 Australia and New Zealand Banking Group Ltd v Petrik [1996] 2 VR 638 434, 435 Australian Broadcasting Corporation v Lenah Game Meats Pty Ltd (2001) 208 CLR 199 86, 91, 94, 95, 97, 98, 106, 110, 115, 116, 119, 120 Australian Broadcasting Corporation v O’Neill (2006) 227 CLR 57 117 Australian Capital Television Pty Ltd v The Commonwealth (1992) 177 CLR 106 21, 22, 30, 36 Australian Communist Party v The Commonwealth (1951) 83 CLR 1 29 Australian National Airways Pty Ltd v The Commonwealth (1945) 71 CLR 29 29 Australian Securities Commission v AS Nominees Ltd (1995) 133 ALR 1 341 Australian Securities and Investments Commission v Citigroup Global Markets Australia Pty Ltd (No 4) (2007) 160 FCR 35 11, 278, 293, 294, 295, 296, 341 Author of a Blog v Times Newspapers Ltd [2009] EWHC 1358, 124 Avanes v Marshall (2007) 68 NSWLR 595 344, 346

Table of Cases Bacchus Marsh Concentrated Milk Co Ltd v Joseph Nathan & Co Ltd (in liq) (1919) 26 CLR 410 389 Baden Delvaux and Lecuit v Société Générale pour Favoriser le Développement du Commerce et de l’Industrie en France SA [1983] BCLC 325, 312 Badman v Drake [2008] NSWSC 1366, 219 Bahr v Nicolay (No 2) (1988) 164 CLR 604 452, 453, 454, 465 Baker v Baker (1993) 25 HLR 408 408, 410, 416 Baker v Courage & Co [1910] 1 KB 56 76 Baker v JE Clark & Co (Transport) UK Ltd [2006] EWCA Civ 464 148, 306 Baker Ltd v Medway Building and Supplies Ltd [1958] 2 All ER 532 80 Baker Ltd v Medway Building and Supplies Ltd [1958] 3 All ER 540 80 Baltic Shipping Co v Dillon (The Mikhail Lermontov) (1993) 176 CLR 344 264 Bamford v Bamford [1970] Ch 212, 335 Banque Belge pour l’Etranger v Hambrouck [1921] 1 KB 321 215 Banque Financière de la Cité v Parc (Battersea) Ltd [1998] UKHL 7, [1999] 1 AC 221, 69, 70, 85, 232, 265 Banque Financière de la Cité SA v Westgate Insurance Co Ltd [1991] 2 AC 249 329 Barbados Trust Co Ltd v Bank of Zambia [2007] EWCA Civ 148, 229 Barclays Bank Ltd v WJ Simms Son & Cooke (Southern) Ltd [1980] QB 677, 206 Barclays Bank Plc v Guy [2008] EWCA Civ 452, 226 Barclays Bank Plc v Guy [2008] EWHC 893, 226 Barclays Bank Plc v O’Brien [1994] 1 AC 180 432, 460 Barker v Furlong [1891] 2 Ch 172 235 Barlow Clowes International Ltd v Eurotrust International Ltd [2005] UKPC 37 313, 314, 315, 316, 317 Barnes v Addy (1874) LR 9 Ch App 244 23, 33, 34, 71, 77, 78, 81, 82, 447, 449, 450, 451, 466 Barrett v Ministry of Defence [1995] 3 All ER 87 37 Barthe v Succession of Lacroix, 29 La Ann 326 (1877) 197 Bathurst City Council v Saban (1985) 2 NSWLR 704 92 Baylis v Bishop of London [1913] 1 Ch 127 180 BCCI (No 8), Re [1988] AC 214 265 BCCI v Akindele [2001] Ch 437, 71 Bell v Lever Brothers Ltd [1932] AC 161, 302 Bell v Long [2008] EWHC 1273, [2008] 2 BCLC 706, 331 Bell Group Ltd v Westpac Banking Corp (No 9) [2008] WASC 239 335 Belvoir Finance Co Ltd v Stapleton [1971] 1 QB 210 211 Bennett v Alcock (1787) 2 TR 166, 100 ER 90, 95 Berman v Riverside Casino Corp, 323 F (2d) 977 (9th Cir, 1963) 188 Beswick v Beswick [1968] AC 58, 255

xix

xx

Table of Cases

Bethlehem Engineering Export Co v Christie, 105 F (2d) 933 (1939) 387 Bexley London Borough Council v Maison Maurice Ltd [2006] EWHC 3192, 424 BICC Plc v Burndy Corp [1985] Ch 232 250, 252, 254, 259, 266 Bilbie v Lumley (1802) 2 East 469, 102 ER 448, 180, 181, 193 Bird v Fort Frances [1949] 2 DLR 791 228 Bishopsgate Investment Management Ltd v Homan [1994] EWCA Civ 33, [1995] Ch 211, 225 Bize v Dickason (1786) 1 TR 285, 99 ER 1097, 179 Black v Garnock (2007) 230 CLR 438 205 Black v S Freedman & Co (1910) 12 CLR 105 223, 225, 228, 239, 240, 242 Black Clawson v Papierwerke [1975] AC 591, 192 Blacklocks v JB Developments (Godalming) Ltd [1982] Ch 183, 226 Blue Haven Enterprises Ltd v Tully [2006] UKPC 17, 273 Boardman v Phipps [1967] 2 AC 46 281, 338, 396 Boardwalk Regency Corp v Maalouf (1992) 88 DLR (4th) 612 187 Bofinger v Kingsway Group Ltd [2009] HCA 44 6, 85, 299 Bogdanovic v Koteff (1988) 12 NSWLR 472 241 Bo-Lassen v Josiassen [1973] 4 WWR 317 195 Bond Worth Ltd, Re [1980] 1 Ch 228 258, 267 Borden (UK) Ltd v Scottish Timber Products Ltd [1981] Ch 25 258, 267 Bosanquett v Dashwood (1734) Cas T Talbot 38, 25 ER 648, 190 Boudier Cas Req 15.6.1892, S 1893.1.28 166, 172, 173 Bowlen Estate, Re [2002] 207 DLR (4th) 175 237 Bowman De Wet and Du Plessis NNO & Ors v Fidelity Bank Ltd 1997 (2) SA 35 (SCA) 155 Boyd v Mayor of Wellington [1924] NZLR 1174, 455 Bozeman v Louisiana, 879 So 2d 692 (La, 2004) 178 BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266 307 Breakspear v Ackland [2008] EWHC 220, [2009] Ch 32, 344, 346 Breen v Williams (1996) 186 CLR 71 299, 325, 341 Breitmeir v Batke (1966) 56 WWR 678 188 Breskvar v Wall (1971) 126 CLR 376 457 Brickles v Snell [1916] 2 AC 599 250 Bridge v Campbell Discount Co Ltd [1962] AC 600, 270 Bridgeman v Green (1757) Wilm 58, 97 ER 22, 81 Bridger v Savage (1884) 15 QBD 363 188 Bridges v Mees [1957] Ch 475, 448 Bridgewater v Leahy (1998) 194 CLR 457 15, 438, 440, 442, 443, 445 Brinsmead v Harrison (1871) LR 6 CP 584 455 Bristol and West Building Society v Mothew [1998] Ch 1 207, 300, 304, 323, 324, 330, 341 British Industrial Plastics Ltd v Ferguson [1940] 1 All ER 479 316

Table of Cases British Motor Trade Association v Gilbert [1951] 2 All ER 641 400 Brodie v Singleton (2001) 206 CLR 512 35, 37 Browning v Morris (1778) 2 Cowp 790, 98 ER 1364, 189, 190 Bryant, Powis & Bryant Ltd v Quebec Bank [1893] AC 170, 335 Buckenara v Hawthorn Football Club Ltd [1988] VR 39 387, 388 Buckley v Tutty (1971) 125 CLR 353 389 Bulldogs Rugby League Club v Williams [2008] NSWSC 822 387, 388, 390 Bunny Industries Ltd v FSW Enterprises Pty Ltd [1982] Qd R 712 381, 382 Bunyan v Jordan (1937) 57 CLR 1 100 Burland v Earle [1902] AC 83 328, 337 Burr v Bloomburg, 101 NJ Eq 615, 318 A 876 (1927) 383 Burrows v Sharp (1991) 23 HLR 82 404, 407, 410, 411, 421 Butcher v Stapeley (1686) 1 Vern 363, 23 ER 524, 463 Butler v Broadhead [1975] Ch 97, 80 Butler v Rice [1910] 2 Ch 277 435 Butt v Long (1953) 88 CLR 476 389 Buxton v Lister (1746) 3 Atk 383, 26 ER 1020, 383 Cadbury Schweppes Inc v FBI Foods Ltd [1999] 1 SCR 142, 167 DLR (4th) 577, 369 Campbell v Griffin [2001] EWCA Civ 990, 421 Campbell v Hogg [1930] 3 DLR 673 372 Campbell v MGN Ltd [2004] UKHL 22, [2004] 2 AC 457, 106, 115, 119, 120, 121, 122, 123 Campbell v Walker (1800) 5 Ves 678, 31 ER 801, 338 Canadian Aero Service v O’Malley (1973) 40 DLR (3d) 371 396 Canadian Pacific Airlines Ltd v British Columbia (1989) 59 DLR (4th) 218 181 Canson Enterprises Ltd v Boughton & Co [1991] 3 SCR 534, 85 DLR (4th) 129, 13, 284, 363, 364, 366, 367, 369, 370, 372, 373, 374, 375, 376 Canson Enterprises Ltd v Boughton & Co (1995) 11 BCLR (3d) 262 366 Canson Enterprises Ltd v Boughton & Co (1998) 31 BCLR (2d) 46 364 Cape Breton Co Ltd, Re (1885) 29 Ch D 795 337 Car & Universal Finance Co Ltd v Caldwell [1963] EWCA Civ 4, [1965] 1 QB 525, 209, 244 Caratun v Caratun (1992) 96 DLR (4th) 404 229 Carlis v McCusker 1904 TS 917 158 Carrier v Bonham [2002] 1 Qd R 474 100, 101, 102 Carter v Ferguson, 12 NYS 580, 58 Hun 569 (1890) 387 Castillo v Castillo (2005) 260 DLR (4th) 439 193 Castle Phillips Finance Co Ltd v Piddington [1995] 1 FLR 783 435 Central London Property Trust Ltd v High Trees House Ltd [1947] KB 130, 260 Chambers v Miller (1862) 13 CBNS 125 206 Chan v Zacharia (1984) 154 CLR 178 395 Chang v Registrar of Titles (1976) 137 CLR 177 205

xxi

xxii

Table of Cases

Chapin v Powers, 73 NYS (2d) 854 (1947) 387 Chaplin v Leslie Frewin (Publishers) Ltd [1966] Ch 71, 195 Chapman v Westerby [1913] WN 277, 389 Charge Card Services Ltd, Re [1987] Ch 150, 265 Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38, [2009] 3 WLR 267, 59, 431 Chase Manhattan Bank NA v Israel-British Bank (London) Ltd [1981] Ch 105 214, 215, 217, 218, 435 Cheese v Thomas [1994] 1 WLR 29 433 Chesterfield v Janssen (1750) 1 Atk 301, 26 ER 191, 189 Chinn v Hochstrasser [1979] Ch 447, 386 Christinson v McBride (1881) 9 R 34 187 Church of Scientology v Kaufman [1973] RPC 627, 116 Citco Banking Corporation NV v Pusser’s Ltd [2007] UKPC 13, [2007] 2 BCLC 483, 328 Citibank NA v QVT Financial LP [2007] EWCA 11, [2007] 1 All ER (Comm) 475, 137, 146, 303 Clarke v Shee & Johnson (1774) 1 Cowp 197, 98 ER 1041, 188 Clark Paper & Manufacturing Co v Stenacher, 236 NY 312, 140 NE 708 (1923) 388 Clifton Manufacturing, 76 F 2d 577 (4th Cir, 1935) 194 Clough Mill Ltd v Martin [1985] 1 WLR 111 238 Coalport China Co Ltd, Re [1895] 2 Ch 404 324 Cobbe v Yeoman’s Row Management Ltd [2006] EWCA Civ 1139 407, 408, 424 Cobbetts LLP, Lee Crowder (a firm) v Mark Reginald Stuart Hodge [2009] EWHC 786, 307 Coco v AN Clark (Engineers) Ltd [1969] RPC 41 105, 113 Coco v The Queen (1994) 179 CLR 427 88 Cohen v Mirror Newspapers Ltd [1971] 1 NSWLR 623 89 Collings v Lee [2001] 2 All ER 332 208 Commercial Bank of Australia Ltd v Amadio (1983) 151 CLR 447 44 Commissioner for Inland Revenue v First National Industrial Bank 1990 (3) SA 641 (A) 155 Commissioner of State Revenue (Vic) v Royal Insurance Australia Ltd (1994) 182 CLR 51 68, 71, 232 Commonwealth of Australia v Australia and New Zealand Banking Group Ltd (NSWSC, 7 October 1993) 217 Commonwealth of Australia v John Fairfax & Sons Ltd (1980) 147 CLR 39 115, 116 Commonwealth of Australia v Official Trustee in Bankruptcy as Trustee of the Property of Stephen Vasil [2004] NSWSC 1155, 240 Commonwealth of Australia v Verwayen (1990) 170 CLR 394 405

Table of Cases Conlan v Registrar of Titles (2001) 24 WAR 299 241 Consul Developments Pty Ltd v DPC Estates Pty Ltd (1975) 132 CLR 373 81 Conway v Ratiu [2005] EWCA Civ 1302, [2006] WTLR 101, 341 Coomber, Re [1911] 1 Ch 723 298 Co-operative Insurance Society Ltd v Argyll Stores (Holdings) Ltd [1998] AC 1, 255 Cornelius v De Taranto [2001] EMLR 329, 100 Cornelius v De Taranto [2002] EMLR 112, 100 Corrs Pavey Whiting & Byrne v Collector of Customs (Vic) (1987) 14 FCR 434 116 Costello v Derbyshire Constabulary [2001] EWCA Civ 381, [2001] 1 WLR 1437, 228, 229, 233 Coull v Kolbuc (1968) 78 WWR 76 195 Cowan de Groot Properties Ltd v Eagle Trust Plc [1992] 4 All ER 700 312 Cowin, Re (1886) 33 Ch D 179 351 Coxhead v Newmans Tours Ltd (1994) 6 TCLR 1 438 Crabb v Arun District Council [1976] Ch 179 403, 404, 407, 408, 409, 411, 422 Creak v James Moore & Sons Pty Ltd (1912) 15 CLR 426 244 Cream Holdings Ltd v Banerjee [2005] 1 AC 103 117 Cressman v Coys of Kensington (Sales) Ltd [2004] EWCA Civ 47, [2004] 1 WLR 2775, 69 Criterion Properties Plc v Stratford UK Properties LLC [2004] UKHL 28, [2004] 1 WLR 1846, 336 Cuckmere Brick Co Ltd v Mutual Finance Ltd [1971] 1 Ch 949 331 Cud v Rutter (1719) 1 P Wms 569, 24 ER 521, 386 Cundy v Lindsay (1878) 3 App Cas 459 211, 226 Curro v Beyond Productions Pty Ltd (1993) 30 NSWLR 337 387, 388, 389 Curtice Bros v Catts, 72 NJ Eq 831, 66 A 935 (1907) 384 Dagenham (Thames) Dock Co, ex p Hulse, Re (1873) 8 Ch App 1022 250, 251, 254, 266 Daly v Smith (1874) 49 How Pr 150 387 Daly v Sydney Stock Exchange Ltd (1986) 160 CLR 371 218 Damberg v Damberg (2002) 52 NSWLR 492 38, 311 Dan v Barclays Australia Ltd (1983) 46 ALR 437 428 Dartnall, Sawyer v Goddard, Re [1895] 1 Ch 474 351 David Securities Pty Ltd v Commonwealth Bank of Australia (1992) 175 CLR 353 23, 37, 67, 181, 206 Davis v Foreman [1894] 3 Ch 654 388 Davis v Hewitt (1885) 9 OR 435 188 DB Trustees (Hong Kong) Ltd v Consult Asia Pte Ltd [2009] SGHC 62, 137 Denley’s Trust Deed, Re [1969] 1 Ch 373 144 DeJardin v Roy (1910) 12 WLR 704 187

xxiii

xxiv

Table of Cases

De Molestina v Ponton [2002] 1 All ER (Comm) 587 435, 440 DHL International (NZ) Ltd v Richmond Ltd [1993] 3 NZLR 10 341 Dies v British International Mining and Finance Corporation Ltd [1939] 1 KB 724 264 Diggle v Higgs (1877) 2 Ex D 422 188 Digital Pulse Pty Ltd v Harris (2002) 166 FLR 421 31 Director of Public Prosecutions for the Northern Territory v WJI (2004) 219 CLR 43 26, 27 Dollars & Sense Finance Ltd v Nathan [2007] NZCA 177, 226 Domowicz v Orsa Investments Ltd (1993) 15 OR (3d) 661 371 Don Lodge Motel Ltd v Invercargill Licensing Trust [1970] NZLR 1105, 442 Donaldson v Smith [2006] EWHC 1290, 334 Donis v Donis (2007) 19 VR 577 407, 419, 421 Donoghue v Stevenson [1932] AC 562 97, 160, 164 Dougan v Ley (1946) 71 CLR 142 381, 383, 385, 386 Douglas v Hello! Ltd [2001] QB 967 98, 120 Douglas v Hello! Ltd (No 3) [2005] EWCA Civ 595, [2006] QB 125, 103, 115, 120, 123 Dover v Buck (1865) 5 Giff 57, 66 ER 921, 337, 338 Downsview Nominees Ltd v First City Corporation Ltd [1993] AC 295, 328 Duchess of Argyll v Duke of Argyll [1967] Ch 302 105, 118, 123 Duff v Russell, 14 NYS 134, 60 J & S 80 (1891) 387 Dufour v Ackland (1830) 9 LJ 3 188 Dunbar v Plant [1997] EWCA Civ 2167, [1998] Ch 412, 237 Dunbar Bank Plc v Nadeem [1998] 3 All ER 876 433 Duncuft v Albrecht (1841) 12 Sim 189, 59 ER 1104, 386 Dundee General Hospitals Board of Management v Walker [1952] 1 All ER 896 334 Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd [1915] AC 79, 270 Dunn v Flood (1885) 28 Ch D 586 334 Durham Holdings Pty Ltd v New South Wales (2001) 205 CLR 399 460 Durham Tees Valley Airport Ltd v BMI Baby Ltd [2009] EWHC 852, 301 Eastern Air Lines v Gulf Oil Corporation, 415 F Supp 429 (1975) 384 Eastern Rolling Mill v Michlovitz, 157 Md 51, 145 A 378 (1929) 383 Edelstein v Edelstein 1952 (3) SA 1 (A) 158 Ehrman v Bartholomew [1898] 1 Ch 671 388, 389 El Ajou v Dollar Land Holdings Plc [1993] 3 All ER 717 239 El Ajou v Dollar Land Holdings Plc [1994] 2 All ER 685 239 Emcorp Pty Ltd v Australian Broadcasting Corporation [1988] 2 Qd R 169 94 Emerald Construction Co Ltd v Lowthian [1966] 1 WLR 691 316 Emhill Pty Ltd & Anor v Bonsoc Pty Ltd (No 2) [2007] VSCA 108 444

Table of Cases Engels v Merit Insurance Brokers Ltd (2000) 17 CBR (4th) 209 198 Esso Australia Resources Ltd v Federal Commissioner of Taxation (1999) 201 CLR 49 47 Esso Petroleum Co Ltd v Harper’s Garage (Stourport) Ltd [1968] AC 269, 389 Ettingshausen v Australian Consolidated Press Ltd (1991) 23 NSWLR 443 89, 90 Ettingshausen v Australian Consolidated Press Ltd [1993] NSWCA 10 89, 90 Evans v European Bank Ltd (2004) 61 NSWLR 75 239, 240 Evening News Association v Peterson, 477 F Supp 77 (1979) 387 Experience Hendrix LLC v PPX Enterprises Inc [2003] EWCA Civ 323 394, 395, 399 Export Credits Guarantee Department v Universal Oil Products Co [1983] 1 WLR 399 270 Extrasure Travel Insurances Ltd v Scattergood [2002] EWHC 3093, [2003] 1 BCLC 598, 324, 325 Fairweather v St Marylebone Property Co Ltd [1963] 1 AC 510 233 Falcke v Gray (1859) 4 Drew 651, 62 ER 250, 383 Falcke v Scottish Imperial Insurance Company (1886) 34 Ch D 234 34 Fannon v Dobranski (1970) 73 WWR 371 195 Farah Constructions Pty Ltd v Say-Dee Pty Ltd [2004] NSWSC 800, 77 Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 230 CLR 89 5, 6, 20, 21, 22, 23, 25, 26, 33, 34, 36, 37, 48, 77, 78, 79, 84, 317, 449, 450, 451, 454, 455, 466 Farmer v Arundel (1772) 2 Bl W 824, 96 ER 485, 179 Farquharson Brothers & Co v C King & Co [1902] AC 325, 227 Fassihi v Item Software (UK) Ltd [2004] EWCA Civ 1244, [2004] BCC 994, 302 Fletcher v Fletcher (1844) 4 Hare 67 129 Flight v Bolland (1828) 4 Russ 298, 38 ER 817, 195 Flynn v Mackin [1974] IR 101, 203 Foley v Hill (1848) 2 HLC 28, 9 ER 1002, 225 Forbes v NSW Trotting Club Ltd (1979) 143 CLR 242 389 Foreman v Chambers [2007] 284 DLR (4th) 210 236 Foreman v Kingstone [2004] 1 NZLR 841 346, 349, 353, 355, 356, 358 Forge v Australian Securities and Investments Commission (2006) 228 CLR 45 30 Foskett v McKeown [2000] UKHL 29, [2001] 1 AC 102, 70, 225 Fothergill v Rowland (1873) LR 17 Eq 132 383 Francis v Municipal Councillors of Kuala Lumpur [1962] 3 All ER 633 386, 387 Francome v Mirror Group Ltd [1984] 2 All ER 408 113, 114 Franklins Pty Ltd v Metcash Trading Ltd [2009] NSWCA 407, 60 Frazer v Walker [1967] 1 AC 569 453, 461, 462, 467 Friend v Brooker [2009] HCA 21, 299 Fuller v Happy Shopper Markets Ltd [2001] 1 WLR 1681 76

xxv

xxvi

Table of Cases

Fyffes Group v Templeman [2000] 2 Lloyds Rep 643 317 Gagné v Duval (1946) 28 CBR 43 198 Gala v Preston (1991) 172 CLR 243 35 Galambos v Perez [2009] SCC 48, 12 Garcia v National Australia Bank (1998) 194 CLR 395 76, 452, 460 Garland v Consumers’ Gas Co (2001) 208 DLR (4th) 494 183, 190 Garland v Consumers’ Gas Co (No 2) (2004) 237 DLR (4th) 385 182, 183, 190, 191, 193 Gartside v Outram (1856) 26 LJ Ch 378 116 GEC Marconi Systems Pty Ltd v BHP Information Technology Pty Ltd (2000) 128 FCR 1 55 60 General Securities Corporation v Welton, 223 Ala 299, 135 So 329 (1931) 386 Georges v Wieland [2009] NSWSC 733, 386 Geraghty v Minter (1979) 142 CLR 177 389 Gett v Tabet [2009] NSWCA 76, 20 Giller v Procopets [2008] VSCA 236 xiii, 86, 100, 101, 103, 104, 123 Gillett v Holt [2001] 1 Ch 210 404, 415, 422 Gisborne v Gisborne (1877) 2 App Cas 300 324 Giumelli v Giumelli (1999) 196 CLR 101 405, 419 Glandon Pty Ltd v Strata Consolidated Pty Ltd (1993) 11 ACSR 543 341 Global Container Lines Ltd v Bonyad Shipping Co [1998] 1 Lloyd’s Rep 528 341 Golden Strait Corporation v Nippon Yusen Kubishka Kaisha [2007] 2 AC 353 368 Goldsmith v Rodger [1962] 2 Lloyd’s Rep 249 213 Gonthier v Orange Contract Scaffolding Ltd [2003] EWCA Civ 873 420, 421 Goods and Services Tax (Alta), Reference re (1992) 94 DLR (4th) 51 183 Goss v Chilcott [1996] AC 788, 264 Governor, Goulburn Correctional Centre, ex p Eastman, Re (1999) 200 CLR 322 47 Graham v Freer (1980) 35 SASR 424 213 Graham v Pollock (1848) 10 D 646 187 Gray v McCormick, 663 So 2d 480 (La Ct App 2d Cir, 1995) 197 Greater Pacific Instruments Pty Ltd (in liq) v Australian National Industries Ltd (1996) 39 NSWLR 143 219 Greig v Greig [1966] VR 376, 89 Griffiths, Re [2008] EWHC 118, [2008] 2 All ER 654, 80 Grimston v Cuningham (1893) 1 QB 125 387, 388 Grosse v Purvis [2003] QDC 151 87, 99 Grundt v Great Boulder Proprietary Gold Mines Ltd (1937) 59 CLR 641 28 Grupo Torras SA v Al Sabah [2001] CLC 221, 309 Guerin v R [1984] 2 SCR 335, 13 DLR (4th) 321, 13, 366, 367, 373, 374, 375 Guinness Plc v Saunders [1990] 2 AC 663 337, 338

Table of Cases Ha v New South Wales (1997) 189 CLR 465 29 Halliday Estate v Kennedy (1997) 50 CBR (3d) 281 198 Halpern v Halpern (Nos 1 and 2) [2007] EWCA Civ 291, [2008] 1 QB 195, 433 Hambro v Burnand [1904] 2 KB 10 335 Hancock Family Memorial Foundation v Porteous (2000) 22 WAR 198 219 Harris v Digital Pulse Pty Ltd (2003) 56 NSWLR 298 5, 28, 31, 32, 299 Hartigan v International Society for Krishna Consciousness Inc [2002] NSWSC 810 219, 220 Hartigan Nominees Pty Ltd v Rydge (1992) 29 NSWLR 405 346, 355, 356 Harvard Securities, Re [1998] BCC 567, 129 Hawkesley v May [1957] 1 QB 304 347, 348, 349 Hawkins v Clayton (1987–88) CLR 539, 347 Hawthorn Football Club Ltd v Harding [1988] VR 49 387, 388 Hayim v Citibank NA [1987] AC 730, 304 Hedley Byrne & Co Ltd v Heller and Partners [1964] AC 465 302, 312 Heggies Bulkhaul Ltd v Global Minerals Pty Ltd [2003] NSWSC 851, 424 Heine Bros (Aust) Pty Ltd v Forrest [1963] VR 383 388, 389 Heinl v Jyske Bank [1999] Lloyd’s Rep Bank 511, 335 Helmet Integrated Systems v Tunnard [2007] FSR 16, 307 Hely-Hutchinson v Brayhead Ltd [1968] 1 QB 549 335, 336, 337 Heperu Pty Ltd v Belle [2009] NSWCA 252 10, 241, 243 Hermann v Charlesworth [1905] 2 KB 123 197 HIH Casualty and General Insurance Ltd v Chase Manhattan Bank [2003] 1 All ER (Comm) 349 305 Hill v Van Erp (1997) 188 CLR 159 25, 35 Hill v William Hill (Park Lane) Ltd [1949] AC 530 (HL) 188 Hillsdown Plc v Pensions Ombudsman [1997] 1 All ER 862 334 Hilton v Barker Booth and Eastwood (a firm) [2002] EWCA Civ 723 301, 302 Hilton v Barker Booth and Eastwood (a firm) [2005] UKHL 8, [2005] 1 WLR 567, 277, 300, 301, 302 Hogan v Tumut Shire Council (1954) 54 SR (NSW) 284 386, 387 Hogg v Cramphorn Ltd [1967] Ch 254, 335 Holder v Holder [1968] Ch 353, 334 Holliday v Lockwood [1917] 2 Ch 47 440, 442 Holroyd v Marshall (1862) 10 HLC 191, 11 ER 999, 382 Holt v Markham [1905] 1 KB 505 180 Hopkins v TL Dallas Group Ltd [2004] EWHC 1379, [2005] 1 BCLC 543, 334, 336 Horseshoe Club Operating Co (cob The Horseshoe Club) v Bath [1998] 3 WWR 128 (BCSC) 187 Hosegood v Pedler (1896) 66 LJ QB 18 334 Hosking v Runting [2005] 1 NZLR 1 99

xxvii

xxviii

Table of Cases

Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41 227, 282, 295, 296, 301, 341, 396 Howard Perry & Co v British Railways [1980] 1 WLR 1375 384 Howe v Smith (1884) 27 ChD 89 267 Hubbard v City of Hickman, 67 Ky 204 (1868) 194 Hubbard v Vosper [1972] 2 QB 84 117 Huber v Steiner (1835) 2 Bing NC 202, 132 ER 80, 192 Hughes v Western Australian Cricket Association (Inc) (1986) 69 CLR 660 389 Huish v Ellis [1995] BCC 462, 328 Hunter v Canary Wharf Ltd [1997] AC 655, 93 Hunter v Moss [1994] 1 WLR 452 129 Hunter v Senate Support Services Ltd [2004] EWHC 1085, [2005] 1 BCLC 175, 338 Hunter BNZ Finance Ltd v CG Maloney Pty Ltd (1989) 18 NSWLR 420 207 HW Gossard Co v Crosby, 132 Iowa 155, 109 NW 483 (1906) 386, 388 Hyer v Richmond Traction Co, 168 US 471 (1897) 386 Hypec Electronics Pty Ltd v Mead [2003] NSWSC 934, 424 Hypec Electronics Pty Ltd v Mead [2004] NSWCA 221, 424 Hyundai Heavy Industries Ltd v Papadopoulos [1980] 1 WLR 1129 264 Ilich v R (1987) 162 CLR 110 206, 218 Imperial Group Pension Trust Ltd v Imperial Tobacco Ltd [1991] 1 WLR 589 341 Ingram v IRC [1997] 4 All ER 395 337, 338 Ingram v IRC [2000] 1 AC 293 338 IRC v Schroder [1983] STC 480, 346 Irwin v Hunnewell, 21 So 2d 485, 488 (La, 1945) 198 Item Software (UK) Ltd v Fassihi [2004] EWCA Civ 1244, [2005] 2 BCLC 91, 323, 325, 326, 327, 330 Jakeman v Cook (1878) 4 Ex D 26 198 James, Ex p (1803) 8 Ves 337, 32 ER 385, 334 Jane Doe v Australian Broadcasting Corporation [2007] VCC 281 87, 99, 107 JA Pye (Oxford) Ltd v Graham [2002] UKHL 30, [2003] 1 AC 419, 235 Jaques v Stafford (1890) 11 NSWLR 127 43 JC Williamson Ltd v Lukey and Mulholland (1931) 45 CLR 282 386 Jennings v Rice [2002] EWCA Civ 159, [2003] 1 FCR 501, 406, 407, 409, 412, 413, 416, 417, 418, 419, 420, 421, 422, 425 JJ Harrison (Properties) Ltd v Harrison [2001] EWCA Civ 1467, [2002] 1 BCLC 162, 336 J Leslie Engineers Ltd, Re [1976] 1 WLR 292 80 Jobson v Johnson [1969] 1 WLR 1026 270, 272 John Cort v Lassard & Lucifer, 18 Ore 221, 22 P 1054 (1889) 387 Johnson v EBS Pensioner Trustees Ltd [2002] EWCA Civ 164, [2002] Lloyd’s Rep PN 309, 300, 436 Johnson Matthey (Aust) Pty Ltd v Dascorp Pty Ltd [2003] VSC 291, 227

Table of Cases Johnston v Australian Broadcasting Corporation (1993) 113 FLR 307 89 Jones v Shipping Federation of British Columbia (1963) 37 DLR (2d) 273 355 J Willis & Sons v Willis [1986] 1 EGLR 62 420, 421 Kane v Radley-Kane [1999] Ch 274, 337 Kasumu v Baba-Egbe [1956] 1 AC 539 189 Kaye v Robertson [1991] FSR 62 87, 88, 114 Keech v Sandford (1726) Sel Cas King 61, 25 ER 223, 396 Keith v Kellermann, 169 F 196 (1909) 387 Kelly v Cooper [1993] AC 205 277, 301, 302 Kelly v Solari (1841) 11 LJ Ex 10, 152 ER 24, 75, 158 Kelly Asphalt Block Co v Brooklyn Alcatraz Asphalt Co, 133 NE 899 (1922) 194 Kennedy v Panama New Zealand and Australian Royal Mail Co (1867) LR 2 QB 580 212 Kern Corporation Ltd v Walter Reid Trading Pty Ltd (1987) 163 CLR 164 205 Khorasandjian v Bush [1993] QB 727 93, 107 Kilmer v British Columbia Orchard Lands Ltd [1913] AC 319 250, 251, 254, 259, 266 Kilroy v A OK Payday Loans Inc (2007) 278 DLR (4th) 193 191 KLB v British Columbia [2003] 2 SCR 403 288 Kleinwort Benson Ltd v Birmingham City Council [1997] QB 380, 232 Kleinwort Benson Ltd v Lincoln City Council [1999] 2 AC 349 76, 181 Kleinwort Benson Ltd v South Tyneside Metropolitan Borough Council [1994] 4 All ER 972 76 Kolari, Re (1981) 36 OR (2d) 473 239 Koompahtoo Local Aboriginal Land Council v Sanpine Pty Ltd (2007) 233 CLR 115 65 Koorootang Nominees Pty Ltd v Australia and New Zealand Banking Group Ltd [1998] 3 VR 16 78, 449 Kramer v McMahon [1970] 1 NSWR 194 213 Kuwait Oil Tanker SAK v Al Bader [2000] 2 All ER (Comm) 271 309 Kyrris v Oldham [2003] EWCA Civ 1506, [2004] 1 BCLC 305, 341 Laclede Gas Co v Amoco Oil Co, 845 F 2d 76 (4th Cir, 1975) 383 LAC Minerals Ltd v International Corona Resources Ltd [1989] 2 SCR 574, 61 DLR (4th) 14, 236, 396 Lady Hood of Avalon v Mackinnon [1909] 1 Ch 476 183 Lake v Bayliss [1974] 1 WLR 1073 381, 382, 383 Lands Allotment Co, Re [1894] 1 Ch 616 335 Lange v Australian Broadcasting Corporation (1997) 189 CLR 520 30 Larner v London County Council [1949] 2 KB 683 196 Latec Investments Ltd v Hotel Terrigal Pty Ltd (1965) 113 CLR 265 216 Laurin v DeCarolis Construction Co, 363 NE 2d 675 (Mass 1977) 382 Leaf v International Galleries [1950] 2 KB 86 212 Leason Pty Ltd v Princes Farm Pty Ltd [1983] 2 NSWLR 381 212

xxix

xxx

Table of Cases

Legator McKenna Inc & Anor v Shea & Ors [2009] 2 All SA 45 (SCA) 155, 156 Legione v Hateley (1983) 152 CLR 406 44, 250, 251, 254, 256, 259, 260, 266 Lemos v Coutts & Co (Cayman) Ltd [1992–93] CILR 460, 351 Leroux v Brown (1852) 12 CB 801, 138 ER 1119, 192 Lewis, Re [1904] 2 Ch 656 347, 348 LHK Nominees Pty Ltd v Kenworthy (2002) 26 WAR 517 449 Lincoln Hunt Australia Pty Ltd v Willesee (1986) 4 NSWLR 457 94 Lindner v Murdock’s Garage (1950) 83 CLR 628 389 Lipkin Gorman (a firm) v Karpnale Ltd [1991] 2 AC 548 70, 79, 81, 188 Lipohar v The Queen (1999) 200 CLR 485 20, 46, 49 Lister & Co v Stubbs (1890) 45 Ch D 1 236 Lloyd’s v Harper (1880) 16 Ch D 290 129 Logue v Shoalhaven Shire Council [1979] 1 NSWLR 537 465 London Assurance v Mansel (1879) 11 Ch D 363 329 Londonderry’s Settlement, Re [1965] Ch 918 344, 346, 356 Long v Lloyd [1958] 1 WLR 753 212 Longstaff v Birtles [2001] EWCA Civ 1219, [2002] 1 WLR 470, 308 Lord Ashburton v Pape [1913] 2 Ch 469 115 Louth v Diprose (1992) 175 CLR 621 219, 221 Lowe v Waller (1781) 2 Doug 736, 99 ER 470, 189 Lowry v Bourdieu (1780) 2 Doug 468, 99 ER 299, 190 Lumbers v W Cook Builders Pty Ltd (2008) 232 CLR 635 6, 20, 24, 34, 35, 37, 38, 82, 83, 84, 85 Lumley v Wagner (1852) 1 De GM & G 604, 42 ER 687, 387, 388, 389 Lyman v Kuzik (1965) 57 WWR 110 187 Lysaght v Edwards (1876) 2 ChD 499 204, 213, 382 MacDonald Estate v Martin [1990] 3 SCR 1235 288, 289 MacKenzie v Royal Bank of Canada [1934] AC 468, 441 Macquarie Bank Ltd v Sixty-Fourth Throne Pty Ltd [1998] 3 VR 133 226, 449, 450, 460 Maddison v Alderson (1883) 8 App Cas 467 464 Magill v Magill (2006) 226 CLR 551 101 Maguire v Makaronis (1997) 188 CLR 449 338, 436 Malone v Metropolitan Police Commissioner [1979] Ch 344 113, 114 Malone v United Kingdom (1985) 7 EHRR 14 114 Malory Enterprises Ltd v Cheshire Homes (UK) Ltd [2002] EWCA Civ 151, [2002] Ch 216, 208, 226 Manisty’s Settlement, Re [1974] Ch 17 304, 352 Marco Productions Ltd v Pagola [1945] 1 KB 111 387, 388 Marcq v Christie, Manson & Woods Ltd [2003] EWCA Civ 731, [2004] QB 286, 235 Marriott v Hampton (1797) 7 TR 269 158 Martin v Perrie (1986) 24 DLR (4th) 1 193

Table of Cases Martin v Pont [1993] 3 NZLR 25 75 Marvin v Wallace (1856) E & B 726, 119 ER 1035, 466 Mayo v Cantrade [1998] JLR 173, 311 Mayson v Clouet [1924] AC 980, 264 McCulloch v Fern [2001] NSWSC 406, 219 McDonald v Dennys Lascelles Ltd (1933) 48 CLR 457 264, 265 McDonald v Ellis [2007] NSWSC 1068 344, 346, 347, 348, 349, 351 McDonald v North Queensland Newspaper Co Ltd [1997] 1 Qd R 62 90 McGinty v Western Australia (1996) 186 CLR 140 20, 21, 22, 29, 38 McGrath v Campbell (2006) NSW ConvR 56 159 462 McKeand v Thomas [2006] NSWSC 1028 [2006] NSWSC 1356, 424 McKennitt v Ash [2006] EWCA Civ 778, [2008] QB 73, 103, 123, 124 McNeil v Fultz (1906) 38 SCR 198 374 McPhail v Doulton [1971] AC 424, 346 Medforth v Blake [2000] Ch 86 324, 328 Mediana, The [1900] AC 113, 234 Mediterranean Salvage & Towage v Seamar Trading & Commerce ‘The Reborn’ [2009] EWCA Civ 531, 301 Meinhard v Salmon, 164 NE 545 (NY, 1928) 276 Merchants Express Co v Morton (1868) 15 Gr 274 238 Mestaer v Gillespie (1805) 11 Ves 621, 32 ER 1230, 463 Metallgesellschaft Ltd and Hoechst AG v Commissioners of Inland Revenue (Joined Cases C-397/98 and C-410/98) [2000] ECR I-1727 68 Metropolitan Bank v Heiron (1880) 5 Ex D 319 236 Millar v Bassey [1994] EMLR 44, 316 Ministry of Defence v Simpson [1951] AC 251, 80 Minnesota Mining & Manufacturing (Australia) Pty Ltd v Richards [1963] NSWR 1613, 389 M(K) v M(H) [1992] 3 SCR 6 287, 288 M(K) v M(H) (1993) 96 DLR (4th) 289 191 Montague v Flockton (1873) 16 LR Eq 189 387 Moorgate Mercantile Co Ltd v Twitchings [1977] AC 890, 227 Moorgate Tobacco Co Ltd v Philip Morris Ltd (No 2) (1984) 156 CLR 414 105 Moreno v Hanford Sentinel Inc, 172 Cal App 4th 1125 (2009) 124 Morgan v Ashcroft [1938] 1 KB 49 182 Morgan Grenfell & Co Ltd v Welwyn Hatfield District Council [1995] 1 All ER 1 186 Morice v Bishop of Durham (1804) 9 Ves 399, 32 ER 656, 133, 346 Morice v Bishop of Durham (1805) 10 Ves 522, 32 ER 947, 346 Mortimer v Beckett (1920) 1 Ch 571 388 Moses v Macferlan (1760) 2 Burr 1005, 97 ER 676, 73, 179, 186, 189, 191, 193 Mosley v News Group Newspapers Ltd [2008] EWHC 1777 123, 124 Moynes v Coopper [1956] 1 QB 439 207, 215

xxxi

xxxii

Table of Cases

Muller, Re [1953] NZLR 879, 238 Munt v Beasley [2006] EWCA Civ 370, 422 Munt v Stokes (1792) 4 TR 561, 100 ER 1176, 180, 184 Murphy v Burrows [2004] EWHC 1900, 415 Murphy’s Settlement, Re [1999] 1 WLR 282 352 Murray v Big Pictures (UK) Ltd [2008] EWCA Civ 446 106, 123 Murray v Schreuder [2009] WASC 51, 347 Muschinski v Dodds (1985) 160 CLR 583 220 Muse v St Paul Fire & Marine Insurance Co, 328 So 2d 698 (La Ct App 1st Cir, 1976) 198 Mussen v Van Diemen’s Land Co [1938] Ch 253 250, 267, 268 Mutch v Sleeman (1928) 29 SR (NSW) 125 89 Myddleton v Lord Kenyon (1794) 2 Ves 391, 30 ER 689, 442 Natal Bank v Roorda 1903 TH 298 158 National Commercial Bank v Wimborne (1978) 5 BPR 11, 958, 310 Nationwide News Pty Ltd v Naidu (2007) 71 NSWLR 471 100, 101, 102 Nationwide News Pty Ltd v Willis (1992) 177 CLR 1 21 Nepean (Township) Hydro Electric Commission v Ontario Hydro (1982) 132 DLR (3d) 193 181, 189 New Solutions Financial Corp v Transport North American Express Inc (2004) 235 DLR (4th) 385 191 New South Wales v Ibbett (2006) 229 CLR 485 88, 89, 99 New South Wales v Lepore (2003) 212 CLR 511 101 Newmans Tours Ltd v Ranier Investments Ltd [1992] 2 NZLR 68 437, 444 Nguyen v Nguyen (1990) 169 CLR 245 46 Nocton v Lord Ashburton [1914] AC 932, 305 North v Great Northern Railway Company (1860) 2 Giff 64, 66 ER 28, 383 North-West Transportation Co Ltd v Beatty (1887) 12 App Cas 589 328 Northern Territory v Mengel (1995) 185 CLR 307 100 Norwich Union Fire Insurance Society Ltd v William Price Ltd [1934] AC 455, 206 Obermann v ACP Publishing Pty Ltd [2001] NSWSC 1022, 90 OBG Ltd v Allan [2007] UKHL 21, [2008] 1 AC 1, 115, 315, 316, 317 O’Brien v Sheahan [2002] FCA 1292, 424 Oddy, Re (1911) 104 LT 128 324 Oh Hiam v Tham Kong (1980) 2 BPR 9451 456, 461, 467 OJSC Oil Company Yugraneft (in liq) v Abramovich [2008] EWHC 2613 309, 311 Olympia & York Canary Wharf Ltd (No 2), Re [1993] BCC 159 256 On Demand Information Plc (in administrative receivership) v Michael Gerson (Finance) Plc [2002] UKHL 13, [2003] 1 AC 368, 250, 254, 266 Orakpo v Manson Investments Ltd [1978] AC 95, 74

Table of Cases Ormonde v NSW National Parks and Wildlife Service (No 2) [2004] NSWADT 253 86 O’Rourke v Darbishire [1920] AC 581, 346 Orphanos v Queen Mary College [1985] AC 761, 72 Oscar Hammerstein v Marguerite Mann, 122 NYS 276 (1910) 387 Osorio v Cardona (1984) 15 DLR (4th) 619 187 Ottey v Grundy [2003] EWCA Civ 1176 407, 422, 423 Oz-Us Film Productions Pty Ltd v Heath [2000] NSWSC 967, 311 P & V Industries Pty Ltd v Porto (2006) 14 VR 1 323, 325 Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451 59 Page One Records v Britton [1968] 1 WLR 157 388, 389 Paine v Hutchinson (1868) LR 3 Ch 388 386 Palais Parking Station Pty Ltd v Shea (1980) 24 SASR 425 465 Palmer Bruyn & Parker Pty Ltd v Parsons (2001) 208 CLR 388 87, 95 Pan Ocean Shipping Co Ltd v Creditcorp Ltd, The Trident Beauty [1994] 1 WLR 161 84, 85 Pape v Commissioner of Taxation [2009] HCA 23, 20 Paramasivam v Flynn [1998] FCA 1711, 310 Parker v Great Western Railway (1844) 7 Man & G 253 158 Parry v Roberts (1835) 3 Ad & El 118, 111 ER 358, 75 Parton v Milk Board (Vic) (1949) 80 CLR 229 42 Pascoe v Turner [1979] 1 WLR 431 407, 408, 422 Patel v Ali [1984] Ch 283 205, 381 Pavey & Matthews Pty Ltd v Paul (1987) 162 CLR 221 37, 38, 67, 72, 73 Peacock v Powell (1886) 7 NSWLR 139 43 Pearce v Brain [1929] 2 KB 310 195 Perry v Clissold [1907] AC 73, 230 Peskin v Anderson [2001] 1 BCLC 372 341 Philadelphia Ball Club Ltd v Lajoie, 202 Pa 210, 51 A 973 (1902) 387, 388 Phillips v Eyre (1870) LR 6 QB 1 (Exch) 29 192 Phillips v Phillips (1861) 4 De G F & J 208, 45 ER 1164, 216 Pianta v National Finance & Trustees Ltd (1964) 180 CLR 146 381 Plenty v Dillon (1991) 171 CLR 635 88 Plimmer v Wellington Corporation (1884) 9 App Cas 699 404 Port of Brisbane Corp v ANZ Securities (No 2) [2003] 2 Qd R 661 81 Powell v Benney [2007] EWCA Civ 1283, 406 Prince Albert v Strange (1849) 1 H & Tw 1, 47 ER 1302, 111, 113, 122 Prince Jefri Bolkiah v KPMG (a firm) [1999] 2 AC 222 306, 308 Prudential Assurance Co Ltd v London Residuary Body [1992] 2 AC 386 144 Public Trustee v Cooper [2001] WTLR 901, 334 Quek v Beggs (1990) 5 BPR 11 219 R v Khan [1997] AC 558, 87

xxxiii

xxxiv

Table of Cases

R v Neil [2002] 3 SCR 631 288, 289 R v Potisk (1973) 6 SASR 389 206 R v Prince (1868) LR 1 CCR 150 206 Rabaiotti’s Settlements, Re [2000] WTLR 953, 346 Rabihai v Man Shaket Ltd (in liq) (1977) 33(2) PD 281 385 Rahim v Minister of Justice 1964 (4) SA 630 (A) 63 158 Rapley v Ferrari (NSWCA, 10 August 1990) 428 Rasmanis v Jurewitsch (1969) 70 SR (NSW) 407 237 Ratiu v Conway [2005] EWCA Civ 1302, 308 Ratych v Bloomer [1990] 1 SCR 940, 69 DLR (4th) 25, 368 Rawlins v Wickham (1858) 3 DeG & J 304, 44 ER 1285, 432 Reading v Attorney-General [1951] AC 507, 398 Reading v The King [1948] 2 KB 268 398 Reckitt v Barnett, Pembroke & Slater Ltd [1928] 2 KB 244 335 Reckitt v Barnett, Pembroke & Slater Ltd [1929] AC 176, 335 Red River Forest Products Inc v Ferguson [1991] 1 WWR 749 187 Red River Forest Products Inc v Ferguson [1993] 2 WWR 1 187 Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134 396 Regentcrest Plc (in liq) v Cohen [2001] 2 BCLC 80 323, 324 Reid v Reid (NSWSC, 30 November 1998) 219, 220, 221 Reid-Newfoundland Co v Anglo-American Telegraph Co Ltd [1912] AC 555, 398 Rely-A-Bell Burglar and Fire Alarm Company Ltd v Eisler [1926] 1 Ch 609 388, 389 Renate Ilsinger v Martin Dreschers (Case C-180/06) [2009] ECR I-0000 312 Rentokil Pty Ltd v Lee (1995) 66 SASR 301 389 Repatriation Commission v Tsourounakis [2007] FCAFC 29, 406 Riddiford v Warren (1901) 20 NZLR 572 212 Rigby v Connol (1880) 14 Ch D 482 386 Ringrow Pty Ltd v BP Australia Pty Ltd [2005] HCA 71, 270 Ringsted v Lady Lanesborough (1783) 3 Doug 197, 99 ER 610, 25, 26 Rinsdale Pty Ltd v Australian Broadcasting Corporation (1993) Aust Torts Reports ¶81–231 94 Road Traffic Authority of New South Wales v Dederer (2007) 234 CLR 330 35 Robins v Incentive Dynamics Pty Ltd (in liq) (2003) 175 FLR 286 450 Rochefoucauld v Boustead [1897] 1 Ch 196 463 Rollo Ventry Wakefield Gray v BNY Trust Company of Australia Ltd (formerly Guardian Trust Australia Ltd) [2009] NSWSC 789, 347 Rothko, Re, 372 NE 2d 291 (NY, 1977) 281, 282, 297 Roufeil v Lusby [2003] NSWSC 1002, 424 Routestone Ltd v Minories Finance Ltd [1998] BCC 180, 328 Rowe v Vale of White Horse DC [2003] EWHC 388, [2003] 1 Lloyd’s Rep 418, 69 Rowland v Divall [1923] 2 KB 500 264, 271

Table of Cases Roxborough v Rothmans of Pall Mall Australia Ltd (2001) 208 CLR 516 6, 20, 21, 22, 23, 25, 26, 28, 34, 71, 72, 73, 76, 84, 232 Royal Bank of Scotland Plc v Etridge (No 2) [2002] 2 AC 773 460 Royal Brunei Airlines Sdn Bhd v Tan Kok Ming [1995] 1 AC 378 312, 314 Rudder v George Hudson Holdings Ltd [1972] 1 NSWLR 529 386 Ryall v Ryall (1739) 1 Atk 59, 26 ER 39, 238 Ryan v Mutual Tontine Westminster Chambers Association [1893] 1 Ch 116 388 Rylands v Fletcher (1868) LR 3 HL 330 91 S (a child), Re [2005] 1 AC 993 107 Sampson v Murray, 415 US 61 (1974) 386, 387 Sangah v Baxter [2009] NSWCA 78, 102 Saunders v Vautier (1841) 4 Beav 115, 49 ER 282, 204 Saunders v Vautier (1841) Cr & Ph 240, 41 ER 482, 204 Saxby v Fulton [1909] 2 KB 208 187 Say-Dee Pty Ltd v Farah Constructions Pty Ltd [2005] NSWCA 309 5, 33, 77 Scales Trading Ltd v Far Eastern Shipping Co Public Ltd [1999] 3 NZLR 26 430 Scales Trading Ltd v Far Eastern Shipping Co Public Ltd [2001] 1 All ER (Comm) 319, [2001] 1 NZLR 513, 430 Scandinavian Trading Tanker Co AB v Flota Petrolera Ecuatoriana, The Scaptrade [1983] 2 AC 694 250, 251, 252, 253, 256, 258, 267, 268 Schaverien v Jones [2007] NSWSC 1429, 347 Schmidt v Air Products of Canada Ltd [1994] 2 SCR 611 284, 286 Schmidt v Rosewood Trust Ltd [2003] UKPC 26, [2003] AC 709, 130, 131, 132, 344, 345, 346, 349, 351, 352, 353, 354, 355, 356, 358 Schreuder v Murray (No 2) [2009] WASCA 145 347 Schuler AG v Wickman Machine Tool Sales Ltd [1974] AC 235 257, 270 Schwabacher, Re, 98 LT 127 (1907) 386 Scott v National Trust [1998] 2 All ER 705 334 Scottish Co-operative Wholesale Society Ltd v Meyer [1959] AC 324, 326 Scottish & Newcastle Plc v Lancashire Mortgage Corporation Ltd [2007] EWCA 684, 424 Semelhago v Paramadevan [1996] 2 SCR 415, 136 DLR (4th) 1, 204, 368, 371, 381 Sempra Metals Ltd v IRC [2007] UKHL 34, [2007] 3 WLR 354, 69, 70 Service Station Associates Ltd v Berg Bennett & Associates Pty Ltd (1993) 45 FCR 84 321 Shalson v Russo [2003] EWHC 1637, [2005] Ch 281, 228 Sharp v McNeil (1913) 15 DLR 73 239 Sharp v McNeil (1915) 70 DLR 740 239 Shaw v Foster (1872) LR 5 HL 321 262 Sheffield Nickel and Silver Plating Co Ltd v Unwin, The (1877) 2 QBD 214 443, 444

xxxv

xxxvi

Table of Cases

Shepherd Investments Ltd v Walters [2006] EWHC 836, [2007] 2 BCLC 202, 325, 326 Shiloh Spinners v Harding [1973] AC 691 250, 251, 253, 258 Shubert Theatrical Co v Rath, 271 F 827, 20 ALR 846 (1921) 387 Silven Properties Ltd v Royal Bank of Scotland Plc [2003] EWCA Civ 1409, [2004] 1 WLR 997, 331 Simon v Metivier (1766) 1 Bl W 601, 96 ER 347, 466 Sinclair Investment Holdings SA v Versailles Trade Finance Ltd, AV Lomas, Robert W Birchall [2005] EWCA Civ 722, 300 Singh v Ali [1960] AC 167, 211 Sky Petroleum Ltd v VIP Petroleum Ltd [1974] 1 WLR 577 383, 384 Sledmore v Dalby (1996) 72 P & CR 196 416, 417, 421, 425 Smith, Re [1896] 1 Ch 71 324 Smith v Bromley (1760) 2 Doug 696, 99 ER 441, 190 Smith & Fawcett Ltd, Re [1942] Ch 304, 324 Smith Kline & French Laboratories (Aust) Ltd v Secretary, Department of Community Services and Health (1990) 22 FCR 73 107, 116 Smith Kline & French Laboratories (Aust) Ltd v Secretary, Department of Community Services and Health (1991) 28 FCR 291 107 Smith New Court Securities Ltd v Citibank NA [1997] AC 254 368, 375, 436 Smith New Court Securities Ltd v Scrimgeour Vickers (Asset Management) Ltd [1997] 1 AC 254 368, 375, 436 Snepp v United States, 444 US 507 (1980) 397, 398, 399, 400 Soper v Arnold (1889) 14 App Cas 429 267 South Shore Co-Op Association, Re, 103 F 2d 336 (2d Cir, 1939) 194 Spangaro v Corporate Investment Australia Funds Management Ltd [2003] FCA 1025, 81 Spellson v George (1987) 11 NSWLR 300 346 Spence v Crawford [1939] 3 All ER 271 209 Spencer v Hemmerde [1922] 2 AC 507 463 Sport International Bussum BV v Inter-Footwear Ltd [1984] 1 WLR 776 250, 252, 255, 256, 266, 268 Stack v Dowden [2007] 2 AC 432 128 State v Placke, 786 So 2d 889 (La Ct App 2d Cir, 2001) 177 State Bank of New South Wales v Swiss Bank (1995) 39 NSWLR 350 81 Steedman v Drinkle [1916] 1 AC 275 250, 256, 259, 266, 268 Steel v Paz [1993–95] Manx LR 426, 346 Steinberg v Scala (Leeds) Ltd [1923] 2 Ch 452 195 Stephens v Avery [1988] Ch 449 105, 118, 123 Stern v McArthur (1988) 165 CLR 489 205, 250, 251, 254, 256, 259, 260, 262, 266 Stockloser v Johnson [1954] 1 QB 476 249, 250, 265, 266, 267, 268, 271, 272 Stocks v Wilson [1913] 2 KB 235 211 Stocznia Gdanska SA v Latvian Shipping Co [1998] 1 WLR 574 264

Table of Cases

xxxvii

Strand Electric & Engineering Co Ltd v Brisford Entertainments Ltd [1952] 2 QB 246 234 Strover v Strover [2005] EWHC 860 406, 411, 414, 415, 421, 423, 424 Stuart v Kirkland-Veenstra [2009] HCA 15, 46 Succession of Jones, 505 So 2d 841 (La Ct App 2d Cir, 1987) 197 Sullivan v Sullivan [2006] NSWCA 312 407, 412, 418, 419, 421 Sumitomo Bank Ltd v Thahir [1993] 1 SLR 735 311 Sumitomo Bank Ltd v Thahir [1994] 3 SLR 257 311 Summers v Cocks (1927) 40 CLR 321 381 Sumpter v Hedges [1898] 1 QB 673 429, 437 Sunrise Co v Lake Winnipeg, The [1991] 1 SCR 3, 77 DLR (4th) 701, 369 Sweet v Sommer [2004] EWHC 1504, 424 Taitapu Gold Estates Ltd v Prouse [1916] NZLR 825 212, 226 Talbot v Moquin Ménard Giroux Du Temple Inc (1996) 41 CBR (3d) 160 198 Tame v New South Wales (2002) 211 CLR 317 101 Tanwar Enterprises Pty Ltd v Cauchi (2003) 217 CLR 315 205, 213, 250, 251, 256, 260, 262, 266, 268, 382 Tara Shire Council v Garner [2003] 1 Qd R 556 449, 450 Target Holdings Ltd v Redferns [1996] AC 421, 363 Taylor v Johnson (1983) 151 CLR 422 44 Taylors Fashions Ltd v Liverpool Victoria Trustees Co Ltd [1982] QB 133, 259 TCN Channel Nine Pty Ltd v Anning (2002) 54 NSWLR 333 88, 95 TCN Channel Nine Pty Ltd v Ilvariy Pty Ltd (2008) 71 NSWLR 323 259 Television New Zealand Ltd v Rogers [2008] 2 NZLR 277 88, 95 Tempest v Lord Camoys (1882) 41 Ch D 571 89, 94 Temple Legal Protection Ltd v QBE Insurance (Europe) Ltd [2009] EWCA Civ 453, 99 Thomas v Brown (1876) 1 QBD 714 324 Thomas v Bryant, 639 So 2d 378 (La Ct App 2d Cir, 1994) 300 Thomas Borthwick v South Otago Freezing [1978] 1 NZLR 538 158 Thompson’s Settlement, Re [1986] Ch 99, 184 Thorner v Major [2009] UKHL 18, [2009] 1 WLR 776, 337 Tierney v King [1983] Qd R 580, 420 Tillman v Attorney-General (NSW) (2007) 70 NSWLR 448 20 Tillott, Lea v Wilson, Re [1892] 1 Ch 86 355, 356 Tito v Waddell (No 2) [1977] Ch 106 334 Tolley v Fry [1931] AC 333, 90 Tolofson v Jensen (1994) 120 DLR (4th) 289 192, 193 Tooth v Power (1890) 10 NSWLR 143 43 Tornroos v Crocker [1957] SCR 151 281, 282, 297 Tote Investors Ltd v Smoker [1965] 1 QB 509 186 Toteff v Antonas (1952) 87 CLR 647 436 Tracy (representative ad litem of) v Instaloans Financial Solution Centres (BC) Ltd (2008) 293 DLR (4th) 60 191

xxxviii

Table of Cases

Tracy (representative ad litem of) v Instaloans Financial Solution Centres (BC) Ltd (2009) BCCA 110, 191 Trimble v Hill (1879) 5 App Cas 342 43 TSB Bank Plc v Camfield [1995] 1 WLR 430 432, 433, 434, 435, 436, 445 TS Production LLC v Drew Pictures Pty Ltd (2008) 172 FCR 433 42 Tuck’s Settlement Trusts, Re [1978] Ch 48, 145 Turner v Harvey (1821) Jac 169, 37 ER 814, 334 Twinsectra Ltd v Yardley [2002] 2 AC 164 313, 314 Union Eagle Ltd v Golden Achievement Ltd [1997] AC 514 250, 251, 256, 259, 268 United Shoe Machinery Co of Canada v Brunet [1909] AC 330, 444 United States v Dollfus Mieg et Cie SA [1952] AC 582, 455 United States International Marketing Ltd v National Bank of New Zealand Ltd [2004] 1 NZLR 589 313 Unity Joint Stock Banking Corporation v King (1858) 25 Beav 72, 53 ER 563, 404 Universal Distributing Co Ltd, Re (1933) 48 CLR 171 38 University of Canterbury v Attorney-General [1995] 1 NZLR 78 183 Urane v Whipper [2001] NSWSC 796, 442 Uren v First National Home Finance Ltd [2005] EWHC 2529, 69 Urquhart v MacPherson (1878) 3 App Cas 831 443 Vacuum Oil Co Pty Ltd v Wiltshire (1945) 72 CLR 319 334 Vadasz v Pioneer Concrete (SA) Pty Ltd (1995) 184 CLR 102 428, 429, 430, 431, 432, 435, 436, 444, 445 Vallance v The Queen (1961)1 08 CLR 56 27 Valpey v Manley (1845) 1 CB 594 158 Van der Byl v Solomon (1877) 7 Buch 25 158 Vatcher v Paull [1915] AC 372, 354 Velensky v Hache (1981) 121 DLR (3d) 747 187 Victoria Park Racing and Recreations Grounds Co Ltd v Taylor (1937) 58 CLR 479 91, 92, 93, 97, 98 Vinogradoff, Re [1935] WN 68, 238 Viscountess Montacute v Maxwell (1720) 1 P Wms 618, 24 ER 541, 463 Visser v Rousseau en Andere NNO 1990 (1) SA 139 (A) 155 Von Knierem v Bermuda Trust Co Ltd and Grosvenor Trust Co Ltd 1 BOCM 116 (Bermuda High Court, 1994) 346 Wainwright v Home Office [2003] UKHL 53, [2004] 2 AC 406, 90, 101 Wait, Re [1927] 1 Ch 606 204 Wakim, ex p McNally, Re (1999) 198 CLR 511 47 Walker v Stones [2001] 1 QB 902 305 Wall v Bright (1820) 1 Jac & W 494, 37 ER 456, 382 Walsh v Trebilcock (1894) 23 SCR 695 188 Waltons Stores (Interstate) Ltd v Maher (1988) 164 CLR 387 405, 464 Wambo Coal Pty Ltd v Stuart Karim Ariff [2007] NSWSC 589, 218

Table of Cases Warner Brothers Pictures Inc v Ingolia [1966] NSWR 988 387, 388 Warner Brothers Pictures Inc v Nelson [1937] 1 KB 209 387, 388 Warren v Mendy [1989] 1 WLR 853 388, 389 Watt v Westhoven [1933] VLR 458, 212 Wayling v Jones (1995) 69 P & CR 170 404 Westdeutsche Landesbank Girozentrale v Islington London Borough Council [1996] UKHL 12, [1996] AC 669, 143, 185, 215, 217, 218, 238, 239, 240, 242 Wheeldon v Burrows (1879) 12 Ch D 31 458, 459, 462 White v Tomasel [2004] 2 Qd R 438 462 White Brothers v Treasurer-General (1883–84) 2 SC 322 157, 158 Whitehouse v Carlton Hotel Pty Ltd (1987) 162 CLR 285 336 Whitwood Chemical Company v Hardman, reproduced at [1891] 2 Ch 416 388, 389 Wilkinson v Downton [1897] 2 QB 57 100, 107 William Robinson & Co v Heuer [1898] 2 Ch 451 389 Williams v Staite [1979] Ch 291, 421 Willis Faber Enthoven v Receiver of Revenue 1992 (4) SA 202 (A) 155, 158 Winkfield, The [1902] P 42 229, 234 Winterton Constructions Pty Ltd v Hambros Australia Ltd (1991) 101 ALR 363 85 Wolverhampton and Walsall Railway Co v London NW Rwy Co (1873) LR 16 Eq 433 386 Woodward v Hutchins [1977] 1 WLR 760 117 Woolworths Ltd v Richmond Growth Pty Ltd & O’Brien (NSWSC, 1 November 1996) 218, 221 Workers Trust and Merchant Bank Ltd v Dojap Investments Ltd [1993] AC 573 267, 270 World Wide Fund for Nature v World Wrestling Federation Entertainment Inc [2001] EWHC Ch 482 394, 399 Wormall v Wormall [2004] EWCA Civ 1643, 420 Wright v Morgan [1926] 1 AC 788 334, 337 Xenos v Wickham (1867) LR 2 HL 296 302 XL Petroleum (NSW) Pty Ltd v Caltex Oil (Aust) Pty Ltd (1985) 155 CLR 448 99 Yeoman’s Row Management Ltd v Cobbe [2008] UKHL 55, [2008] 1 WLR 1752, 408 Yew Bon Tew v Kenderaan Bas Mara [1983] 1 AC 553 193 Yoshimoto v Canterbury Golf International Ltd [2001] NZLR 523, 59 Young v Blaikie (1822) 1 Nfld LR 277 187 Young v Lalic [2006] NSWSC 18, 406 Youyang Pty Ltd v Minter Ellison Morris Fletcher (2003) 212 CLR 484 363, 364 Zhu v New South Wales Treasurer (2004) 218 CLR 530 205

xxxix

TA BL E OF L EGISL AT ION

Australia CTH Cheques Act 1986, 227 Constitution 29, 31, 38, 39 Corporations Act 2001, 294 International Arbitration Act 1974, 54 Privacy Act 1988, 86 Trade Practices Act 1974 48, 58, 63, 64 Trade Practices Amendment (Australian Consumer Law) Bill 2009, 61

ACT Civil Law (Wrongs) Act 2002, 90 Human Rights Act 2004, 86 Limitation Act 1985, 226 Sale of Goods Act 1954, 213

NSW Civil Liability Act 2002 35, 102 Defamation Act 2005, 90 Real Property Act 1900 203, 454, 455, 456, 457, 459 Sale of Goods Act 1923 203, 204, 213

NT Defamation Act 2006, 90 Land Title Act 241

xl

Table of LEGISLATION

QLD Defamation Act 2005, 90 Land Title Act 1994, 241 Succession Act 1981 440, 441

SA Defamation Act 2005, 90 Real Property Act 1857−1858 454 Sale of Goods Act 1895, 227

TAS Defamation Act 2005, 90 Sale of Goods Act 1896, 227 Supreme Court Civil Procedure Act 1932, 94

VIC Charter of Human Rights and Responsibilities Act 2006, 86 Defamation Act 2005, 90 Goods Act 1958 203, 204, 383 Transfer of Land Act 1958 203, 450, 458, 459

WA Defamation Act 2005, 90 Sale of Goods Act 1895 213, 227

Canada Criminal Code, RSC 1985, c C-46, 187, 190, 191 Civil Code, RSQ, c C-1991 178, 193 Gaming Control Act, SO 1992, c 24, 187 Limitation Act, RSBC 1996, c 266, 192 Limitation Act, SNL 1995, c L-16.1, 192 Vehicles Act, RSS 1978, c V-3, 193

European Union Council Directive (EC) 93/13 of 5 April 1993 on unfair terms in consumer contracts [1993] OJ L95/29 62

xli

xlii

table of legislation

Council Regulation (EC) 44/2001 of 22 December 2000 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters [2001] OJ L12/1 (Brussels Regulation) 312 Council Regulation (EC) 593/2008 of 17 June 2008 on the law applicable to contractual obligations [2008] OJ L177/6 (Rome I) 309 Convention for the Protection of Human Rights and Fundamental Freedoms, Council of Europe (European Convention on Human Rights) (ECHR) 1950 89, 103, 106, 107, 114, 117, 119, 120

France Code civil 166, 167, 168, 169, 170, 171, 172, 174

Germany Civil Code (Bürgerliches Gesetzbuch) (BGB) 56, 154, 162, 164, 178, 193

Israel Contract (Remedies) Law 1970, 385 Sale (International Sale of Goods) Law 1971, 385

New Zealand Contractual Remedies Act 1979 436, 437 Judicature Act 1908, 181 Land Transfer Act 1915, 455 Land Transfer Act 1952, 461

People’s Republic of China Contract Law 53, 54, 57

Singapore Banking Act (Cap 19, 2008 Rev Edn) 132, 134 Land Titles Act 2004 (Cap 157, 2004 Rev Edn) 459 Trustees Act (Cap 337, 2005 Rev Edn) 132, 134 Unfair Contract Terms Act (Cap 396, 1994 Rev Edn) 148

Table of LEGISLATION

South Africa Alienation of Land Act 1981, 158

United Kingdom Australian Courts Act1828 (9 Geo 4 c 83) 43 Bar Council’s Code of Conduct 324 Civil Procedure Rules 1998, 324 Companies Act 2006, 337 Consumer Credit Act 1974, 258 Gambling Act 2005 176, 187 Gambling Act2005 (Commencement No 6 and Transitional Provisions) Order 2006 SI 2006/3272 176 Gaming Act 1845, 187 Human Rights Act 1998 103, 104, 106, 117, 119, 120, 121 Land Registration Act 2002 103, 104, 106, 117, 119, 120, 121 Law of Property Act 1925 203, 258, 338, 339 Limitation Act 1980 192, 226, 233 Lord Cairns’s Act 104 Sale of Goods Act 1893 202, 212 Sale of Goods Act 1979 202, 204 Statute of Frauds 1677 (29 Car 2 c 3) 158, 463, 464, 465, 466 Unfair Contract Terms Act 1977 148, 306 Usury Act1660 (12 Car 2 c 13) 189

United Nations Convention on Contacts for the International Sale of Goods (opened for signature 10 April 1980, entered into force 1 January 1988) 1489 UNTS 3, 5, 41, 42, 50, 51, 53, 54, 56, 59, 60, 61, 63, 64 Convention on the Law Applicable to Trusts and on their Recognition (adopted 1 July 1985, entered into force 1 January 1992) 1664 UNTS 311 (Hague Convention) 310 Convention Relating to a Uniform Law on the International Sale of Goods (opened for signature 1 July 1964, entered into force 18 August 1972) 834 UNTS 107, 385 International Covenant on Civil and Political Rights (adopted 16 December 1966, entered into force 23 March 1976) 999 UNTS 171 (ICCPR) 89 United Nations Committee on International Trade Law (UNCITRAL) Model Law on International Commercial Arbitration 1985, 54

xliii

xliv

table of legislation

Universal Declaration of Human Rights (adopted 10 December 1948 UNGA Res 217A(III)) (UDHR) 89

United States Constitution 386 La Civil Code 178, 193 Restatement (Second) of the Law of Contracts 1981 49, 52, 57, 59, 61, 386 Restatement of the Law of Restitution 1937 194, 198, 215, 218 Restatement (Second) of Torts 1977, 98 Restatement (Second) of Trusts 1963 291, 293 Restatement (Third) of Trusts 276, 293 Statute of Frauds 194 Statute of limitations 194 Uniform Commercial Code 2007 5, 49, 50, 51, 53, 54, 55, 56, 57, 61, 62, 63 Uniform Trust Code 2008 276, 293, 344

Virgin Islands Trust Act 2003, 134

Other Principles of European Contract Law 2002/2003 52, 53, 54, 55, 56, 57, 58, 59, 60, 61, 62, 63 Unidroit Principles of International Commercial Contracts 1994/2004 5, 51, 52, 53, 54, 55, 56, 57, 58, 59, 60, 61, 62, 63, 64

Introduction Elise Bant and Matthew Harding

Th is book of essays is dedicated to Professor Michael Bryan on the occasion of his retirement after 37 years of legal scholarship. Michael, who was educated at the Universities of Oxford and London, taught at Oriel College Oxford and Queen Mary and Westfield College, London, before arriving in 1991 at the then Faculty of Law of the University of Melbourne (now the Melbourne Law School). Over his time in Melbourne, Michael has been a much-loved and respected teacher, mentor and colleague. Indeed, of the 24 scholars who have come together to create this book (22 authors and two editors), no fewer than ten have been students or colleagues of Michael during his Melbourne years. However, as the book attests, Michael’s influence as a scholar has been felt far beyond Melbourne: he has earned the respect and affection of private lawyers all over the world, from both the common law and the civilian traditions. The authors of the essays in this book are judges and scholars from across Australia, as well as Canada, England, Germany, Hong Kong, New Zealand, Singapore and South Africa. All of these authors jumped at the chance to participate in this project, and their essays are a heartfelt tribute both to Michael’s scholarly achievements and to the quiet – and always positive – influence he has had on the research, the careers and the lives of his friends around the world. The book aims to honour Michael by exploring those areas of private law that have long dominated the intellectual landscape of his teaching and research activities. The terrain is expansive, ranging over many difficult and overlapping areas often classified in the classroom as falling within the law of contract, tort, unjust enrichment, equity and trusts, remedies and property. Michael has always been particularly interested in the intersection, or meeting point, of different rules, doctrines and principles: as Birke Häcker notes in her essay, he has ‘never been one for thinking of the law in terms of isolated “compartments”’.1 This fluidity 1

200.

1

2

Bant and Harding

of legal categories is reflected in the book, and many of the essays extend across classroom classifications. Thus, for example, Sarah Worthington’s essay is at the boundary of contract, unjust enrichment and equity, a boundary that Michael himself has explored often in his own work.2 Tony Duggan’s essay brings together contract and equity, while Kelvin Low’s contribution considers the proper relation of equity and statute. Richard Nolan and Matthew Conaglen range across fiduciary and non-fiduciary contexts in illuminating the concept of good faith in private law. Robert Chambers’ contribution deals with the intersection of personal and proprietary liability, and unjust enrichment and wrongs. And Birke Häcker’s essay occupies ground at the intersection of contract, property and unjust enrichment. Notwithstanding the considerable challenges of classification presented by such wide-ranging essays, and the considerable debate in private law scholarship about taxonomical matters generally, we have chosen some divisions for the presentation of the essays in the book. We hasten to add, however, that these divisions have been chosen with readers’ ease, rather than classificatory elegance, in mind. These are Method, Unjust Enrichment, Equity and Trusts, and Remedies. The latter three have been selected because they describe subjects that Michael has taught for many years, often with the scholars who have contributed to this book. The first has been selected because of the overarching theme of the book, to which we now turn. As a scholar as well as a man, Michael is modest: he has never sought to articulate a ‘grand vision’ of private law. Nonetheless, there is a discernable method in Michael’s work, and it is this method that we celebrate in this book. It is the method implied by the book’s title: Exploring Private Law. One trend in recent literature on private law has been to use the metaphor of ‘mapping’ the law to refer to method in private law scholarship.3 Certainly, the ‘mapping’ metaphor is apt: no explorer should shirk from 2

3

See eg, M Bryan, ‘Rescission, Restitution and Contractual Ordering: The Role of Plaintiff Election’ in A Robertson (ed), The Law of Obligations: Connections and Boundaries (Cavendish, London 2004) 59; M Bryan, ‘Unjust Enrichment and Unconscionability in Australia: A False Dichotomy’ in JW Neyers, M McInnes and SGA Pitel (eds), Understanding Unjust Enrichment (Hart Publishing, Oxford 2004) 47; M Bryan, ‘Unconscionable Conduct as an Unjust Factor’ in S Degeling and J Edelman (eds), Unjust Enrichment in Commercial Law (LawBook Co, Sydney 2008) 295; M Bryan, ‘Equitable Relief from Forfeiture: Performance or Restitution?’ in CEF Rickett (ed), Justifying Private Law Remedies (Hart Publishing, Oxford 2008) 363. See eg, A Burrows and Lord Rodger (eds), Mapping the Law: Essays in Memory of Peter Birks (Oxford University Press, Oxford 2006).

Introduction

3

the task of mapping, including an explorer of private law. However, the mapping metaphor captures only part of what it means to explore private law. An explorer, as opposed to a planner, or even a Utopian visionary, must map what he sees from the ground, feeling his way where he must as well as taking the bird’s eye view where he can. In this sense, the explorer brings order to chaos, but not by turning away from the chaos, and not by refusing to bear the responsibility of imposing order. Exploring private law is therefore methodologically pluralistic, and not singular: it entails both mapping in accordance with abstract ordering principles, and the rougher art of observation. This pluralistic method, captured – we hope – in the metaphor of the explorer, is the overarching theme of this book. According to Sir Isaiah Berlin, ‘[t]here is little need to stress the fact that monism … has always proved a deep source of satisfaction both to the intellect and to the emotions’.4 We hope that the essays in this collection, celebrating as they do the pluralistic method entailed in exploring private law, go some way to unsettling the satisfactions of monism, something of which Berlin of course would have approved thoroughly. And we hope that in doing so, the essays reflect both Michael’s own refusal, over the years, to engage in what Robert Chambers in his essay calls ‘arid debates about classification’, 5 as well as his suspicion of what might be called the ‘forest floor’ method of reasoning by analogy from case to case with little effort – at least explicitly – to identify overarching principles of likeness that could guide the analogizing. In the parlance of contemporary legal scholarship, the essays in this book insist on the value of both ‘top-down’ and ‘bottom-up’ styles of reasoning.6 A pluralistic method that takes in both styles of reasoning is, in our view, fitting to thinking about law, given that law entails a sophisticated array of human practices and institutions that on the one hand must reflect and respect, and on the other hand shape and bring order to, the diversity and messiness of human life. In celebrating a pluralistic method in exploring private law, many of the essays in this book are also works of considerable comparative scholarship: a form of legal discourse that can occupy only a marginal place in 4

5 6

I Berlin, ‘Two Concepts of Liberty’ in I Berlin, Four Essays on Liberty (Oxford University Press, Oxford 1969) 118, 170. 245. RA Posner, ‘Legal Reasoning from the Top Down and from the Bottom Up: The Question of Unenumerated Constitutional Rights’ (1992) 59 U Chi L Rev 433 reprinted as RA Posner, Overcoming Law (Harvard University Press, Cambridge MA 1995) ch 5. See also K Mason, ‘What Is Wrong with Top-Down Legal Reasoning?’ (2004) 78 ALJ 574.

4

Bant and Harding

a strictly bottom-up method and that can be pressed into the service of overly ambitious ends by devotees of a rigorous top-down style. Many of the essays look beyond the traditional distinction of law and equity to discern appropriate paths for judicial decision-making in areas of private law in which there exists no authoritative precedent. All engage in close consideration of the innumerable cases that, taken together, are the bedrock of private law in the common law world. The balance of this Introduction provides an overview of these original, distinctive and significant contributions to private law scholarship.

A.

Method

The first part of the book contains a series of essays exploring different methods of legal reasoning, their respective strengths and weaknesses, and their effect on the development of legal doctrine. The essays progress from a wide-ranging analysis of the current method of the High Court of Australia, to a more focused consideration of legal reasoning with reference to confidential information and a developing law of privacy, before concluding with an examination of the particular value of pluralistic method in the context of teaching trusts law in the 21st century. This first part, then, introduces the methods of legal reasoning – top-down and bottom-up – that the essays in the rest of the book explore and exemplify in specific legal settings. Part I commences with Keith Mason’s essay on judicial method. In many ways, this essay exemplifies the aim of the whole book: to show the ways in which a pluralistic method assists the development of private law, and how this must and should be so. Mason considers the High Court of Australia’s use of the distinction, fi rst drawn by Richard Posner, between top-down and bottom-up reasoning.7 He argues that the Court’s repeated castigation of top-down method is a departure from Posner, and is inconsistent and unjustified. Mason shows that the Court has a long tradition of top-down reasoning and argues that such reasoning has been indispensible: indeed, rational judicial decisionmaking demands it. He also argues that the Court has failed to draw the important distinction between an inherently unstable concept and a wrongful application of a stable concept. Drawing on his own experience as a judge, Mason argues that both top-down and bottom-up reasoning have their place in a sound judicial method: ‘the two concepts 7

Posner (n 6).

Introduction

5

inevitably meet in the day-to-day exertions of any conscientious judge, whether or not he or she is prepared to admit it’.8 As a former President of the New South Wales Court of Appeal, Mason provides a unique insight into judicial method and his discussion of Harris v Digital Pulse Pty Ltd9 and Farah Constructions Pty Ltd v Say-Dee Pty Ltd10 – both cases on which he sat – illustrate this distinct perspective. The second essay in the book is by Justice Paul Finn of the Federal Court of Australia. His paper examines the profound effect that legal culture, in particular, the culture of the High Court of Australia, has had on the substantive law of contract in Australia. The paper is in three parts. The first tracks Australia’s journey from legal colonialism, through the development of a species of legal realism in the Mason years that focused on developing an Australian common law and embraced comparative developments from other common law jurisdictions, to the development of the current and fairly restrictive form of legal nationalism. This last stage of development is evident in the current High Court of Australia’s emphasis on the unification of the common law of Australia and the importance of strict doctrinal analysis and the rule of precedent over broader questions of policy. The second part considers international developments in contract law, in particular, the modernization and harmonization of contractual principles that have been achieved through both legislative and ‘soft law’ instruments such as the Uniform Commercial Code in the United States, the Convention on the International Sale of Goods and the Principles of International and Commercial Contracts. The third part considers why Australian courts and practitioners have failed to avail themselves of this rich source of learning, to the increasing cost of Australian contract law. Finn argues that unless Australian courts, the profession and the academy start to integrate comparative law into their analysis and discourse, Australian contract law is in danger of becoming an isolated and irrelevant museum of legal doctrine. Furthermore, it is only through the combined efforts of all those judges, practitioners and academics who are experts in the field that a much-needed systematic reappraisal of Australian contract law can be achieved. Like Keith Mason’s essay, Andrew Burrows’ essay takes up the theme of the High Court of Australia’s criticism of top-down reasoning. However, Burrows focuses in particular on three recent cases of the 8 10

9 40. (2003) 56 NSWLR 298. (2007) 230 CLR 89 (‘Farah ’). The decision of the New South Wales Court of Appeal was Say-Dee Pty Ltd v Farah Constructions Pty Ltd [2005] NSWCA 309.

6

Bant and Harding

Court: Roxborough v Rothmans of Pall Mall Australia Ltd,11 Farah, and Lumbers v W Cook Builders Pty Ltd.12 Burrows regards all three cases as rightly decided, but he is critical of the reasoning of the Court in each of the cases, especially on questions of judicial method in private law. Starting with Roxborough, Burrows argues that Gummow J’s criticism in that case of unjust enrichment scholarship as characterized by top-down reasoning was unfounded, pointing out that unjust enrichment scholarship displays a clear bottom-up pedigree. Burrows also looks at Gummow J’s use of the concept of unconscionability in Roxborough, arguing that it may itself reveal top-down reasoning. With regard to Farah, Burrows’ indictment is more serious: he argues that in a sense the Court refused to engage in reasoning of any kind in that case, by failing to explain inconsistencies between the common law and equity and, indeed, within equity as well. Finally, Burrows argues that the Court demonstrated an unjustified atavism in its decision in Lumbers, preferring the language of the abolished forms of action to the rational and well-established framework for liability that characterizes the modern law of unjust enrichment. Burrows concludes with a plea for the Court to get ‘back on track’.13 The next two essays consider questions of judicial method with reference to a developing law of privacy. As a former New South Wales Law Reform Commissioner who has been considering the protection of the privacy interest in Australian law in recent years, Michael Tilbury is well placed to consider the extent to which the common law of Australia is able to protect that interest. Tilbury undertakes a survey of the law of tort and the law of breach of confidence, arguing that the protection of privacy provided by established causes of action is indirect, piecemeal, and may lead to incoherence in the law. He also argues that no new ‘tort of privacy’ is likely to, or indeed should, develop in Australian law. Th is leads Tilbury to the conclusion that the privacy interest must be protected by statute, not by the common law. Thus, his essay may be read as a demonstration of the limits of the bottom-up method that has traditionally characterized private law decision-making. Megan Richardson takes the opposite view: she argues that the common law, with its incrementalism, is well suited to protecting the privacy interest. Richardson’s paper tracks the protection of the privacy interest 11 13

12 (2001) 208 CLR 516 (‘Roxborough ’). (2008) 232 CLR 635 (‘Lumbers’). 85. At the end of his essay, Burrows notes that the High Court has recently restated its criticisms of unjust enrichment reasoning in Bofinger v Kingsway Group Ltd [2009] HCA 44.

Introduction

7

over time, and she focuses especially on developments in the law of breach of confidence since the celebrated Spycatcher case.14 She argues that the common law, by refusing to theorize the privacy interest, has been able to remain responsive to that interest – whatever it might be – notwithstanding rapid technological, social and even moral change. In this, she contends that the common law has demonstrated its ability to accommodate the ‘messiness of the self’.15 Richardson concludes with some observations about the nature of the privacy interest itself: as a site of conflicting values that are ever changing, the privacy interest itself is forever in flux, and the day may come when ‘even privacy may become an arcane concept’.16 Part I concludes with an essay tackling questions of method in quite a different, and novel, way. Tang Hang Wu considers the important role of method in the teaching of trusts law. His essay demonstrates how comparative analysis – comparing the laws of different jurisdictions, and the rules, doctrines and principles of the common law and equity – can usefully inform a trusts course. Tang acknowledges that there is no one way to teach trusts law. However, he advocates encouraging students to form a ‘transactional mindset’, and he therefore argues that trusts teachers ought to design their courses to reflect trusts practice. For Tang, this aim may be achieved in two ways. First, Tang argues that teachers of trusts law should contextualize the trust. He explains how he does this by introducing the trust as a wealth management vehicle, pointing his students to the uses of offshore trusts, and taking his students through two commercial applications of the trust: securitization, and investment in real estate. For Tang, comparative analysis plays an important pedagogical role in this process, illustrating the benefits and limitations of domestic trusts law in commercial settings. Second, Tang argues for introducing students to the theoretical approach to the express trust that regards it as analogous to – if not a type of – contract, an approach that is well represented in this book.17 He explains how contractarian theory may assist in getting students to think about exclusion clauses and settlor control devices.

B.

Unjust enrichment

The second part of the book is made up of four essays exploring issues in the law of unjust enrichment. Part II opens with three contributions that might just as easily have been placed in Part I, considering broad questions 14 15 17

Attorney-General v Guardian Newspapers Ltd (No 2) [1990] 1 AC 109. 111, 123. 16 124. In the essays by Tony Duggan and James Edelman.

8

Bant and Harding

from a comparative perspective. These essays are good examples of the problem of easy classification that we alluded to at the beginning of this Introduction. And indeed the same is true of the contribution that closes Part II, which tackles a notoriously difficult question at the interface of property, civil wrongs, and unjust enrichment. Helen Scott and Daniel Visser explore in their essay how judicial method has influenced the development of legal doctrine. They take as their starting point a puzzle in the South African law of unjustified enrichment: despite adopting the traditional civilian ‘absence of legal ground’ approach to unjustified enrichment, South African courts have increasingly pointed to ‘unjust factors’ in their decision-making. Scott and Visser argue that the influence of unjust factors in South African law may be attributable to the common law method itself, a method that treats judicial decisions as authoritative, accords a key role to judicial reasoning as a technique for justifying the exercise of law-making power and – in consequence – tends to promote the use of specific and positive reasons for restitution over negative propositions such as that embodied in the absence of legal ground approach. To test the argument, Scott and Visser compare the position in South Africa with another civilian jurisdiction: France. They argue that because French judges are formally prohibited from giving reasons, judicial creativity tends to be concealed: the true reasons for judicial decisions are to be found not in the brief and opaque arrêt of the court itself but rather in the rapports and conclusions of individual magistrates. Coupled with a strong absence of legal ground approach, this hidden reasoning has led to great breadth and unpredictability in the French law of unjustified enrichment. Scott and Visser’s essay demonstrates that judicial method can have a profound effect on substantive law, a lesson worth meditating on when reading the essays by Keith Mason, Paul Finn and Andrew Burrows in Part I of the book. Their essay is also food for thought for those engaged in debates about the retention of ‘unjust factors’ in the law of unjust enrichment in the common law world. Mitchell McInnes explores a relatively neglected area within the law of unjust enrichment, namely, the role and operation of natural obligations. McInnes argues that natural obligations – which are not positively enforceable, but negatively explain why an unjust or unjustified enrichment may be retained – have featured not only in civilian legal systems, but also in the common law. He traces their acceptance in the common law in eighteenth-century cases, through their fall in the nineteenth century, to their rise again in the twentieth century in the wake of the abolition of the mistake of fact/mistake of law distinction. Drawing on

Introduction

9

Duncan Sheehan’s work,18 McInnes argues for a two-fold test for natural obligations that asks: first whether the reason for refusing positive enforcement also impugns the transfer itself; and second whether the reason for refusing positive enforcement aims to protect a party that has performed its side of a bargain. McInnes argues that there is room for natural obligations wherever the law wants to send the message that a transfer is condoned without being assisted, in the grey area ‘between law and morality’.19 He tests his analysis by considering a number of natural obligations arising in the context of gaming, usurious loans, obligations extinguished by the passage of time, and minority contracts. He concludes by considering some possible future avenues for the concept of natural obligations, including payments to ‘dating services’ and payments by bankrupts in satisfaction of discharged debts. Birke Häcker’s essay ranges over a wide variety of impaired consent transfers, adopting a comparative perspective. Drawing the civilian distinction between ‘causal’ and ‘abstract’ transfers, Häcker asks to what extent the common law and equitable approaches to transfers in England and Australia reflect those two models. Although this might seem a curious topic for the ‘Unjust Enrichment’ part of the book, Häcker demonstrates that a satisfactory account of causality and abstraction in the common law tradition cannot be given without an analysis of proprietary restitution and, in particular, the role of equity in reversing impaired consent transfers made without a legal basis. Häcker finds that at common law, abstract transfers are the norm (at least outside sale), so that the validity of a conveyance does not depend on the validity of the underlying legal basis for the transfer. However, she also finds that there is a tension in equity between the causal and the abstract models. Where equity automatically reverses transfers made without sufficient legal basis and pursuant to an ‘unjust factor’, equity operates a causal model. Scholars like Robert Chambers take this view in their accounts of the resulting trust, according to which the right to proprietary restitution vests immediately upon transfer.20 However, Häcker argues that matters are more complicated, and that a ‘power model’ under which equity does not automatically reverse vitiated transfers but rather empowers the defendant to rescind or reverse them, also explains many of the cases. This ‘power model’ is structurally similar to the abstract model of transfer associated with the 18

19

D Sheehan, ‘The Instance and Effect of Natural Obligations in English Law’ (2004) LMCLQ 170. 197. 20 R Chambers, Resulting Trusts (Oxford University Press, Oxford 1997).

10

Bant and Harding

common law. Through her comparative analysis, Häcker thus identifies a profound inconsistency in any common law system which allows equity to alternate between the abstract and the causal approaches. The last essay in Part II, by Robert Chambers, explores the trust as a response to theft. As Chambers points out, not only is the availability of the trust in response to theft an important practical issue, it also raises fascinating questions about the proper relation of law and equity. He considers in detail two types of case. The first is where assets are stolen and retained by the thief. Here Chambers argues that a trust is possible notwithstanding that the victim of the theft retains a (non-possessory) title. However, Chambers goes on to argue that there is no reason why a trust should arise, because the thief is not unjustly enriched at the expense of the victim and the wrong of theft is insufficient to warrant proprietary relief. The second type of case is where assets are stolen and sold by the thief, generating proceeds. Here, Chambers argues that a trust is both possible and justified, because the proceeds represent an unjust enrichment at the expense of the victim of the original theft. In making this argument, Chambers advocates what Häcker would call a thoroughly ‘causal’ model for the operation of a trust, developing his argument with reference to the recent Australian decision of Heperu Pty Ltd v Belle.21 He concludes with some observations about the possibility of a trust of proceeds of stolen assets where the victim of theft retains legal title to the assets in question.

C.

Equity and trusts

The third part of the book contains a set of five essays dealing with issues in equity and trusts. This part commences with a contribution questioning the long-standing equitable jurisdiction to relieve against forfeiture. It then presents a trio of essays on a topic that has attracted a great deal of scholarly interest in recent times: fiduciary relationships and obligations. The final essay in Part III tackles another topic of recent interest: what duties do trustees owe regarding the provision of information to their beneficiaries? The essays, taken together, demonstrate the value of pluralistic method in the development of private law in areas where the cases provide an incomplete explanation of what the law is, or where what courts say and what they do diverge. 21

[2009] NSWCA 252.

Introduction

11

Opening Part III is Sarah Worthington’s provocatively titled essay, ‘What is left of equity’s relief against forfeiture?’ Worthington takes Occam’s razor to the cases on forfeiture, using as her analytical paradigm the hypothetical case of a purchase of a diamond necklace by instalments. Her question is: can the vendor terminate the contract for breach and keep the necklace and the instalments? Her thesis is that, whatever may have been the situation in the past, there is no longer any distinct doctrine of ‘equitable relief against forfeiture’; any relief against forfeiture that might be awarded in the hypothetical case is explained using familiar doctrinal tools from contract law and the law of unjust enrichment. Along the way, Worthington makes observations about the nature of specific performance and the purchaser’s interest under a specifically enforceable contract of sale, and her essay shows that in forfeiture cases, what courts say is not necessarily the same as what they do. Tony Duggan’s essay is the first of three to consider the nature and effect of fiduciary obligations. Drawing on law and economics scholarship, and specifically on contractarian literature, Duggan argues that fiduciary obligations are consensual, not imposed. His thesis is not that contract law and fiduciary law are the same, or that fiduciary law should be subsumed into contract law. Rather, he argues that both contract law and fiduciary law serve the same function, being to facilitiate autonomous alignments of parties’ otherwise competing interests: what he calls ‘the deal’. He examines decisions of the Supreme Court of Canada, notably 3469420 Canada Inc v Strother,22 as well as academic writings, in illustrating the difficulties that courts and scholars have had with the question of the source of fiduciary obligations. He then turns to some of the implications of the functional underpinnings of contract law and fiduciary law, arguing that the primacy of the deal demands legal recognition of exclusion clauses, but subject to ‘the same sort of unconscionability standard that applies in contract law’.23 Finally, taking the recent Australian case of Australian Securities and Investments Commission v Citigroup Global Markets Australia Pty Limited (No 4)24 as an example, Duggan argues that under certain conditions parties should be able to contract out of a fiduciary relationship altogether. In work published elsewhere, James Edelman has done for fiduciaries what Sarah Worthington in this book does for forfeiture: using Occam’s razor, he has argued that fiduciary obligations are nothing more than

22

(2007) 281 DLR (4th) 640.

23

292–3.

24

(2007) 160 FCR 35.

12

Bant and Harding

express or implied terms of voluntary undertakings.25 In his essay in this book, Edelman considers some of the implications of his understanding of fiduciary law for some difficult unresolved questions. Which fiduciary duties can be excluded by agreement? When do fiduciary obligations come to an end? What is the proper law to be applied to fiduciary duties when they arise in a cross-border context? What is the level of fault required before a person can be liable for inducing or assisting in a breach of fiduciary duty? In answering each of these four questions, Edelman demonstrates how an understanding of fiduciary obligations as express or implied terms can yield satisfying answers to these four fiduciary puzzles. Although he focuses on undertakings generally rather than contracts, his thinking is aligned with the analysis of Tony Duggan’s essay in this book, and he might be described to that extent as broadly contractarian. However, what Duggan approaches from a functionalist perspective, Edelman approaches using tools of doctrinal analysis. The lesson of the third essay on fiduciaries in Part III is simple: context is everything. Richard Nolan and Matthew Conaglen begin by drawing a distinction between requirements that apply to fiduciaries and only to fiduciaries – the conflicts rules – and requirements that apply to fiduciaries and non-fiduciaries alike but whose content varies depending on whether or not the person to whom they apply has given a fiduciary undertaking. One of these latter requirements is good faith. For Nolan and Conaglen, in all contexts good faith is concerned with ‘the management of risk inherent in discretion’.26 However, in the fiduciary context this translates into a specific requirement: not to act other than in a way that the fiduciary (subjectively) believes will advance the interests of the principal in the future. The authors note that good faith and the conflicts rules are functionally similar, being concerned with the management of discretion, but they argue that good faith is concerned with intentional behaviour whereas the conflicts rules aim at risk minimization. They go on to identify and explain some important remedial distinctions that flow from the operation of good faith and the confl icts rules in the fiduciary context. Finally, Nolan and Conaglen point out that good faith cannot tell us who is a fiduciary. Only a uniquely fiduciary requirement can do that, and only the conflicts rules are uniquely fiduciary. 25

26

J Edelman, ‘When Do Fiduciary Duties as Arise?’ (2010) 126 LQR 302. In his identification of undertaking as the central fiduciary concept, Edelman appears now to enjoy the company of the Supreme Court of Canada, in a decision handed down after the essays in this book were written: Galambos v Perez [2009] SCC 48. 322.

Introduction

13

Lusina Ho’s essay also explores the importance of context for the development and clarification of the law. Ho considers the duties of trustees to provide information to beneficiaries of the trust. She demonstrates that a satisfactory resolution of the question, ‘How much disclosure?’, requires a fine balance to be achieved between settlor autonomy, trustees’ duties and beneficiaries’ interests; her essay aims to provide some insights as to how this balance might be struck. Noting that the old explanation of duties of disclosure based on property rights has rightly been swept away by the case law, Ho points out that the true basis of trustees’ duties of disclosure has not yet been settled in the authorities. She makes two arguments that can assist in the development of principled criteria in this area. First, disclosure duties depend on the duties of trustees regarding the distribution of trust assets. So, for example, what must be disclosed to beneficiaries of a fi xed trust is likely to be more extensive than what must be disclosed to beneficiaries of a discretionary trust or objects of a fiduciary power. Second, the right of the settlor to exclude beneficiaries’ rights to information also depends on the duties of trustees. For example, in a fi xed trust, a settlor cannot exclude beneficiaries’ rights to information without compromising the core duty of the trustees to account, a duty without which there can be no trust.

D.

Remedies

The fourth part of the book contains essays that look at a wide range of issues in the law of remedies. The first two tackle questions relating to personal remedies of compensation and disgorgement. The latter three deal with the nature, operation and justification of remedies which potentially have proprietary consequences. All five essays illustrate the pluralistic method that characterizes the book, and in this sense they are a fitting way to wrap up the collection. The aim of Lionel Smith’s essay is to ‘clarify the principles governing the measurement of compensation claims against trustees and other fiduciaries’.27 To this end, Smith undertakes a close analysis of the judgments of the Supreme Court of Canada in the case of Canson Enterprises Ltd v Boughton & Co,28 which he uses to cast light on another leading Canadian case, Guerin v R.29 Smith’s thesis can be summarized in three central propositions. First, not every money claim is a claim for loss (and 27

364.

28

(1991) 85 DLR (4th) 129.

29

(1984) 13 DLR (4th) 321.

14

Bant and Harding

therefore compensation). This is especially important when thinking about money claims against trustees and fiduciaries, because some such claims involve the direct enforcement of a trustee’s or a fiduciary’s primary obligation in a manner akin to specific performance. Second, apparently confusing distinctions in the rules governing the award and calculation of money claims against trustees and other fiduciaries make sense once the first proposition is apprehended. Finally, Smith points out that, sometimes, distinctions in the law are explained not with reference to doctrine, but with reference to the rules of evidence. The underlying theme of the essay is that, although there are important differences between common law and equity, differences in the principles by which money claims are measured are not attributable to that jurisdictional divide. Rather, such differences are explained by the different remedial purposes underlying money claims and by rules designed to overcome evidential difficulties. Katy Barnett’s essay offers a wide-ranging analysis of the availability of disgorgement damages in contract law with reference to an organizing concept of substitutability of contractual performance. Her thesis is twofold. First, in cases where a party breaches a contract in order to enter into a more profitable contract with a third party, substitutability plays a key justificatory role for the award of disgorgement damages. Second, in cases where a party has expressly promised not to do something, and does it, and profits thereby, the key justificatory role is played by policy concerns other than substitutability. In making these two arguments, Barnett contributes to debates on the doctrine of efficient breach, the judicial distaste for restraint of trade, the protection of trust in the fiduciary setting, and the underlying values of contract law, such as human autonomy. Andrew Robertson wrote his PhD thesis on the reliance interest and estoppel. One of his supervisors was Michael Bryan. It is therefore especially fitting that Robertson returns to this subject in his essay in the book. Robertson examines the place of the protean concept of unconscionability in the law relating to the award of remedies in cases of proprietary estoppel. He identifies three approaches, each of which works a conception of unconscionability into the justification of the award of such remedies, and each of which finds some support in the case law. The first approach turns on the reprehensibility of the representor’s conduct; the second on the extent of the representor’s responsibility for the relying party’s expectation and detrimental reliance; and the third on all relevant facts taken ‘in the round’. Robertson argues that the proper basis of proprietary estoppel is the protection of the reliance interest in a context where that interest is often difficult to measure except with reference

Introduction

15

to expectation. Accordingly, Robertson rejects all three approaches on the basis that, to the extent that they draw on criteria that are external to the reliance interest, they are bound either to over-compensate or undercompensate the relying party. Robertson concludes that the only work the concept of unconscionability should do in the law of proprietary estoppel is to point to what is necessary, by way of remedy, to protect the reliance interest. No more, and no less, is required. Invoking the imagery of the garden, Peter Watts makes some fundamental arguments in his essay about the seedling doctrine of partial rescission. Watts argues that – notwithstanding statutory reform in New Zealand which permits partial rescission (though not invoked in the 30 years since enactment) – partial rescission is not justified, except perhaps on grounds of convenience in cases where a claimant would otherwise have been able to obtain damages for negligence or deceit. And even in those exceptional cases, according to Watts, there is a danger that partial rescission could become a vehicle for the type of unacceptable interference with party autonomy that he considers occurred in the Australian case of Bridgewater v Leahy.30 Watts proposes that in other cases where partial rescission might be contemplated, a just distribution may be achieved by complete rescission on terms, thus achieving results similar to partial rescission without the associated violence to doctrine. Watts’ conclusion is that there may be limited room in the legal garden for partial rescission where it is ‘victim-sided’, but there is insufficient justification for ‘transplanting’ it and giving it a life of its own in the law. The final essay in the book is by Kelvin Low, on a topic that has attracted Michael Bryan’s interest in recent years.31 The topic is the proper relation of the concept of indefeasibility of title to land that prevails in those jurisdictions that have a ‘Torrens’ system of title by registration, and claims to personal remedies against the holder of such a title. Low offers two visions of the so-called ‘personal equities exception’ to indefeasibility. First, it might be thought that to the extent that claims to personal remedies may be made against the holder of an indefeasible title, the limits of indefeasibility have been exceeded. On this view, claims to personal remedies help 30 31

(1998) 194 CLR 457. M Bryan, ‘Recipient Liability under the Torrens System: Some Category Errors’ in CEF Rickett and R Grantham (eds), Structure and Justification in Private Law: Essays for Peter Birks (Hart Publishing, Oxford 2008) 339, fi rst published in (2007) 26 UQLJ 83; M Harding and M Bryan, ‘Responding to Fraud in Title Registration Systems: A Comparative Study’ in M Dixon (ed), Modern Studies in Property Law (Vol 5) (Hart Publishing, Oxford 2009) 3.

16

Bant and Harding

to define the scope of indefeasibility. Second, it might be thought that, to the extent that claims to personal remedies may be made against the holder of an indefeasible title, a true exception to indefeasibility exists. On this view, claims to personal remedies overlap with and trump indefeasibility. Low criticizes these views, and argues that the continuing acceptance of both of them has led to conceptual uncertainty in thinking about indefeasibility because the two views are inconsistent with each other. In making this argument, Low sets out his views on the utility of the ‘ejectment’ and ‘notice’ provisions of standard Torrens statutes, and develops a theory of the interplay of equity and statute. His underlying thesis is that, in order to resolve difficult questions relating to indefeasibility, more regard should be had to the terms of Torrens statutes than has typically been paid to date. As the preceding synopsis demonstrates, the private law terrain explored in this collection of essays is diverse and often difficult to navigate. Each essay seeks to provide markers for the legal traveller, whether she be judge, scholar, practitioner or student. The essays employ a wide variety of methods to develop these signposts: case-based, comparative, historical, economic, instrumentalist and jurisprudential forms of reasoning all assist in shedding light on the ground that must be travelled. Our hope is that this book will stand testament to the value of methodological pluralism when exploring private law, and will express the great regard that we and all the contributors have for the man who inspired its creation.

PA RT I Method

1 Do top-down and bottom-up reasoning ever meet? Keith Mason

Michael Bryan has always recognized the importance of legal theory in private law. And he understands the influence of broad categories or concepts upon judicial decision-making. In the tradition of Julius Stone, he has repeatedly demonstrated that those who claim to be doing no more than applying the apparent logic of specific precedent, or ‘reasoning from the bottom up’, are inevitably making choices about the premises and precedents used, and basing those choices upon extrapolated doctrines of broad import. Thus, in a recent analysis of the judgments of Callinan J, Michael stated:1 Maynard Keynes’s dictum that ‘[p]ractical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slave of some defunct economist’ is as applicable to practical lawyers as it is to practical business executives. The decisions made by ‘practical judges’ owe as much to legal philosophy as the decisions made by successful managing directors owe to economic theory. The only qualification we should make is that the ‘defunct’ economist or legal theorist is not necessarily discredited, even if he may no longer be fashionable. Legal theory leaves its mark on even the most routine legal decisions, not just in the much discussed ‘hard cases’, but most of the time the theory remains behind the scenes.

Michael’s thesis was that the particular judge showed a strong preference for achieving corrective justice, and a corresponding reluctance to take into account arguments based on considerations of distributive justice. The common law offers the decisions of past judges as its building blocks. But the judges of the present choose which blocks to use or to 1

M Bryan, ‘Justice Callinan’s Judgments in Private Law: Story Telling, Legal Coherence and Corrective Justice’ (2008) 27 UQLJ 29, 30.

19

20

Mason

discard and they have considerable freedom to reshape them if they need adapting. In doing so, they (like their predecessors) bring to bear their own values, including their own understanding of broad categories and trends in the law. Having fairly belatedly determined that precedent is binding without further justification,2 our legal system has devised rules for identifying judicial hierarchies and the essential reasoning of authoritative cases. The High Court’s announcement of a unified Australian common law has proved the springboard for a significant tightening of the screws in recent years. The considered dicta of its justices (so long as they conform with long-established authority)3 and the decisions of any Australian intermediate appellate court on a widening range of topics are now required to be treated as binding, as well as (of course) decisions of the High Court itself.4 The High Court has also been at pains recently to emphasize the importance of following ‘strict’ or formal judicial method whereby propositions of law are derived from the reasoning and language of the canonical cases rather than ‘downwards’ from legal theories, particularly theories that may have only qualified acceptance. A tool in the judicial rhetoric has been a distinction, attributed to Judge Richard Posner, between ‘bottom-up’ (legitimate) judicial reasoning and ‘topdown’ (illegitimate) reasoning.5 As I pointed out in 2004, the expression ‘top-down legal reasoning’ is not a term of art, but it has over the last decade or so become a term of abuse in the High Court of Australia.6 For instance, in Lumbers v W Cook Builders Pty Ltd 7 Gummow, Hayne, Crennan and Kiefel JJ spoke of ‘top-down reasoning’ as having ‘inherent dangers’, sourcing this to the remarks of McHugh J in McGinty v Western Australia 8 and Gummow J in Roxborough v Rothmans of Pall 2

3 4

5

6 7

8

See N Duxbury, The Nature and Authority of Precedent (Cambridge University Press, Cambridge 2008) ch 2. Pape v Commissioner of Taxation [2009] HCA 23, [474] (Heydon J). See Lipohar v Th e Queen (1999) 200 CLR 485, [43]–[59] (Gaudron, Gummow and Hayne JJ); Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 230 CLR 89 (‘Farah ’) [135]; Tillman v Attorney-General (NSW) (2007) 70 NSWLR 448; Gett v Tabet [2009] NSWCA 76. R Posner, ‘Legal Reasoning from the Top Down and from the Bottom Up: The Question of Unenumerated Constitutional Rights’ (1992) U Chi L Rev 433. K Mason, ‘What is Wrong with Top-Down Legal Reasoning?’ (2004) 78 ALJ 574. (2008) 232 CLR 635 (‘Lumbers’) [77]. Their Honours stated that ‘proper analysis of the legal relationships revealed by the evidence’ would illustrate those dangers. (1996) 186 CLR 140 (‘McGinty ’) 232.

Do top-down and bottom-up reasoning ever meet?

21

Mall Australia Ltd.9 All lower courts have been warned not to get too adventurous. In this chapter I seek to explore what the justices mean by the term ‘topdown’ reasoning and why this opprobrium has been aimed in some directions and not others. I demonstrate that the Court’s use of the concept of top-down reasoning is not uniform. Further, the use of this categorical distinction between the good and the bad in judicial method does not do justice to Posner, the legal polymath who is cited as the progenitor of the concept. Indeed, the High Court’s stance bears only a slender relationship to the views of Posner, who clearly endorsed top-down reasoning as playing an important and legitimate role in judicial method. Finally, I argue that the distinction does not do justice to the common law tradition itself. Top-down and bottom-up reasoning have always been part and parcel of sound judicial method and each balances the excesses of the other. The two areas where concerns about the evils of top-down reasoning have been enunciated in the recent judgments are the constitutional free speech implication that was declared in the Australian Capital Television Pty Ltd v The Commonwealth ,10 and in the castigation of ‘any allembracing theory of restitutionary rights and remedies founded upon a notion of “unjust enrichment”’.11 The charge of top-down reasoning that McHugh and Gummow JJ levelled at Deane and Toohey JJ in the Political Advertising Case was that they had drawn upon a doctrine underlying the Constitution as distinct from being an implication from it.12 A secondary level implication of a constitutional freedom of political discussion was said to have been derived from ‘political principles or theories that [were] not anchored in the text of the Constitution or [were] not necessarily implications from its structure’.13 I have pointed out elsewhere14 that the accusation was unjust, given that Deane and Toohey JJ had themselves fi rst referred to doctrines ‘which underlie the Constitution and form part of its structure’.15 But my present 9 10 11 12

13 15

(2001) 208 CLR 516 (‘Roxborough ’) [73]. (1992) 177 CLR 106 (‘Political Advertising Case’). Roxborough (n 9) [72]. See also Farah (n 4) [154]. See McGinty (n 8) 231–2 where McHugh J, whose reasons were endorsed by Gummow J (at 291), branded as top-down, illegitimate reasoning the approach taken by Deane and Toohey JJ in Nationwide News Pty Ltd v Willis (1992) 177 CLR 1 (‘Nationwide News’). In their joint judgment in the Political Advertising Case (n 10), Deane and Toohey JJ had restated their reasoning in the earlier case. McGinty (n 8) 232 (McHugh J). 14 Mason (n 6) 576. Nationwide News (n 12) 70 (emphasis added).

22

Mason

concern is to understand the indictment, not to question the verdict. McHugh and Gummow JJ were branding as illegitimate top-down reasoning, any process of deriving constitutional implications that was not clearly drawn from the text by the usual processes of statutory interpretation or, in the case of ‘structural implications’, implied because it was logically or practically necessary for the preservation of the integrity of that structure.16 The second sighting of the condemnation has been in a general law context, the field of unjust enrichment. Of course, talk of a ‘field’ itself invokes a provocative metaphor because it implies an area with a boundary that usually contains animals or plants with common features or which are at least compatible with each other. In contrast to fields such as ‘Equity’ that raise no eyebrows in the High Court,17 the field of unjust enrichment is a highly contested one, as regards its defining characteristics, its size and (particularly) the extent, if at all, that it includes matters equitable. Gummow J did not source his assertion about the advocacy of ‘an allembracing theory of restitutionary rights and remedies founded upon a notion of “unjust enrichment”’.18 By the date of Roxborough, Peter Birks had abandoned any notion of ‘perfect quadration’, ie the principle that restitution always responded to unjust enrichment.19 His earlier espousal of ‘perfect quadration’, and the continuing espousal of this position by Andrew Burrows, have always distinguished between restitution where unjust enrichment was the event to which restitution responded and restitution in response to an established wrong.20 Goff and Jones in the now seven editions of The Law of Restitution published between 1966 and 2007, Graham Virgo in his two editions of The Principles of the Law of Restitution published in 2000 and 2006, and Mason and Carter, whose 16

17

18

19 20

In McGinty (n 8) 231, McHugh J cited with approval Mason CJ’s distinction between textual and structural implications in the Political Advertising Case (n 10). Mason CJ had said that, for structural implications, ‘the term sought to be implied must be logically or practically necessary for the preservation of the integrity of the structure’ (at 135). See also Austin v The Commonwealth (2003) 215 CLR 185 (‘Austin’) [113]. Despite the difficulties associated with defi ning that field or finding anything in common within it, apart from animals with an assumed but often spurious derivation: see generally K Mason, ‘Fusion: Fallacy, Future or Finished?’ in S Degeling and J Edelman (eds), Equity in Commercial Law (Lawbook Co, Sydney 2005) 42–4. Th is being the assertion made by Gummow J in Roxborough (n 9) [72] that was taken up by the Court in Farah (n 4) [154]. See P Birks, ‘The Law of Restitution at the End of an Epoch’ (1999) 28 UWALR 13, 19. See P Birks, An Introduction to the Law of Restitution (Clarendon Press, Oxford 1985) 26, 44–5; A Burrows, The Law of Restitution (2nd edn Butterworths, London 2002) 5–6.

Do top-down and bottom-up reasoning ever meet?

23

first edition of Restitution Law in Australia was published in 1995, have each included causes of action responsive to other triggers. Each of these, and other, restitution scholars did include matters equitable within the scope of unjust enrichment, but this does not appear to have been the basis for Gummow J’s attack springing from the allegation about an ‘all-embracing theory’ that I have quoted above. His Honour’s failure to demonstrate or even source an assertion that someone, somewhere was advocating the thesis he set out to attack raises its own questions about judicial rhetoric. Unattributed ‘straw man’ reasoning is a poor springboard for the frontal attack that was launched on the unjust enrichment concept in Roxborough. Once again, I want to concentrate on the major, rather than the minor, premise, ie the nature of the illegitimate judicial method condemned. I will, however, give passing consideration to whether there is anything about the unjust enrichment concept justifying condemnation on the basis that it is ‘inherently’ prone to top-down reasoning. Inappropriate top-down reasoning proceeding from the unjust enrichment concept has been identified by the High Court on two occasions. In Farah Constructions Pty Ltd v Say-Dee Pty Ltd,21 the Court was highly critical of a proposition that recipient liability in the area seen to be occupied by the first limb of Barnes v Addy22 might be based on strict liability, 23 even if subjected to various defences including receipt in good faith and for valuable consideration. In reversing the New South Wales Court of Appeal, the High Court restated the proposition that unjust enrichment is not a ‘definitive legal principle according to its own terms’.24 The Court of Appeal’s misuse of the concept was found to be illustrative of Gummow J’s prediction in Roxborough ‘about the consequences of unjust enrichment for the distortion of equitable principles’.25 The High Court stated that the areas in which the concept of unjust enrichment ‘applies are specific and usually long-established. Recipient liability for breach of trust or fiduciary duty has not been one of them.’26 The error was thus identified as one involving the use of an accepted concept in an inappropriate context.

21 23

24

25

22 Farah (n 4). (1874) 9 Ch App 244 (‘Barnes v Addy ’). As it is, for example, in claims to follow certain unauthorized payments from a deceased estate. Farah (n 4) [151], citing David Securities Pty Ltd v Commonwealth Bank of Australia (1992) 175 CLR 353 (‘David Securities’) 378–9. 26 Roxborough (n 9) [74]. Farah (n 4) [151].

24

Mason

In Lumbers, the Full Court of the Supreme Court of South Australia was found to have erred in accepting a claim that had the effect of evading the consequences of corporate insolvency. An obligation to pay, deriving from the cause of action derived from quantum meruit, had been imposed on a company in a group other than the (insolvent) one that had placed the order. Invocation of the restitutionary concepts of ‘free acceptance’ and ‘incontrovertible benefit’ was found to have caused the court below to overlook the governing contractual and corporate framework and their true consequences. According to Gummow, Hayne, Crennan and Kiefel JJ:27 [p]roper analysis of the legal relationships revealed by the evidence [illustrated] the dangers inherent in ‘top-down reasoning’ … The application of a framework for analysis expressed only at the level of abstraction adopted in this case, by reference to ‘benefit’, ‘expense’ and ‘acceptance’ coupled with considerations of unconscionability, creates a serious risk of producing a result that is discordant with accepted principle, thus creating a lack of coherence with other branches of the law.

In summary, the error was of a combined nature, namely the use of (unstable) principles of high generality and the failure to recognize the hegemony of contract in the area in question. As I demonstrate below, when examining the High Court’s reasoning in greater detail, two separate themes can be detected. The primary motif is that arguments ‘top-down’ from general principles rather than ‘bottom-up’ from the constitutional text or the case law are wrong in themselves. The secondary motif is that some concepts (such as unjust enrichment) are ‘inherently’ or particularly unstable and ought therefore to be watched closely because of their capacity to generate top-down reasoning. I propose to examine these propositions in turn. My thesis is that judges engage in reasoning from the top down day in and day out. If they are found to err by an appellate court, that court will itself often resort to such reasoning as one of several judicial tools for keeping lower courts on track and promoting coherence in legal development. Reasoning by reference to broad principles, rules, concepts and categories that are secure in their acceptance is an everyday occurrence for courts at all levels. It is an essential concomitant of common law method. Choices about starting points are inevitable.28 27 28

Lumbers (n 7) [77]–[78]. See generally M Krygier, ‘Julius Stone: Leeways of Choice, Legal Tradition and the Declaratory Theory of Law’ (1986) 9 UNSWLJ 26.

Do top-down and bottom-up reasoning ever meet?

25

Accordingly, the use of the ‘top-down’ opprobrium to stigmatize no more than the misuse of some canonical principle, category or concept may be seen as a rhetorical makeweight, designed to deter others from blundering into protected areas. The limited history of the judicial use of the ‘top-down’ epithet also suggests that judges will reach for it when one established legal proposition is given a new application that threatens to invade or redefine the area occupied by another concept or category that is favoured by the judges who have authority to decide the matter in hand. I shall endeavour to show particular instances where top-down reasoning excited no adverse comment and where such reasoning produced outcomes that are pure orthodoxy. But first I need to identify more closely the meaning of this vituperative term offered by those who have used it in the High Court.

A.

The High Court’s understanding of top-down reasoning

In Roxborough, Gummow J identified the object of his criticism 29 and explained his concerns in the following passage, which was to receive the endorsement of the whole Court in Farah:30 To the lawyer whose mind has been moulded by civilian influences, the theory may come first, and the source of the theory may be the writings of jurists not the decisions of judges. However, that is not the way in which a system based on case law develops; over time, general principle is derived from judicial decisions upon particular instances, not the other way around.

Gummow J adopted in Roxborough31 Posner’s reference to the use of a theory by its adherents:32 to organize, criticize, accept or reject, explain or explain away, distinguish or amplify the existing decisions to make them conform to the theory and generate an outcome in each new case as it arises that will be consistent with the theory and with the canonical cases, that is, the cases accepted as authoritative within the theory.

Gummow J added that:33 As it happens, Lord Mansfi eld favoured the development of legal principle by a journey in the opposite direction. In Ringsted v Lady

29

30 33

Roxborough (n 9) [72]. It is likely that he had the late Peter Birks in his direct sights. See also Hill v Van Erp (1997) 188 CLR 159 (‘Hill ’) 225–7. Farah (n 4) [154]. 31 Roxborough (n 9) [73]. 32 Posner (n 5). Roxborough (n 9) [73].

26

Mason Lanesborough [(1783) 3 Dougl 197, 203; 99 ER 610, 613], his Lordship said: General rules are, however, varied by change of circumstances. Cases arise within the letter, yet not within the reason, of the rule; and exceptions are introduced, which, grafted upon the rule, form a system of law.

These passages suggest that the essential problem lies in the use of ‘theories’ as a basis for understanding the scope and correctness of earlier decisions, including those under review, as distinct from using cases as the basis for developing rules, concepts and theories. In other words, a dichotomy is presented between ‘top-down’ (unacceptable) judicial method and ‘bottom-up’ (acceptable) judicial method. The concluding sentence in the Roxborough passage that was adopted by the whole Court in Farah admits that general principles can emerge ‘over time’, no doubt when authoritative decisions announce or endorse their arrival. In the common law system, by contrast with the civil law system, the recognized gatekeepers are the judges and not the professors.34 This does not, of course, mean that judges never choose to adopt reasoning found in ‘the writings of [non-judicial] jurists’, although sometimes they choose not to acknowledge the source. I shall later seek to demonstrate that this suggested dichotomy between top-down and bottom-up fails to capture the dynamic of common law judicial method. But elsewhere the Court’s focus has been an apparently sharper one, directed at the ‘brutal’ manner in which a particular theory is promoted, brutality being measured by reference to its displacement effect upon theories, principles, rules and categories that are viewed as established. For example, dangers associated with the top-down use of concepts were identified in the following passage in Farah:35 [S]ubstance and dynamism may be restricted by dogma. In turn, the dogma will tend to generate new fictions in order to retain support for its thesis. It also may distort well settled principles in other fields, including those respecting equitable doctrines and remedies, so that they answer the newly mandated order of things. Then various theories will compete, each to deny the others.

And in Director of Public Prosecutions for the Northern Territory v WJI36 Gummow and Heydon JJ spoke of a ‘general principle [being] imposed by 34

35 36

See generally RC van Caenegem, Judges, Legislators and Professors: Chapters In European Legal History (Cambridge University Press, Cambridge 1987). Farah (n 4) [151] quoting Gummow J in Roxborough (n 9) [74]. (2004) 219 CLR 43 (‘WJI ’) [30]. The passage from Roxborough (n 9) [72]–[74] was cited.

Do top-down and bottom-up reasoning ever meet?

27

a particular theory rather than derived from decisions upon particular instances’. Their Honours did not there use the term ‘top-down reasoning’, but the context and language used makes it clear that they had it in mind. It is also clear that Gummow and Heydon JJ saw the problem as one presenting in statutory as well as common law contexts. Th is emerges from their reference in WJI to a passage in the reasoning of Dixon CJ in Vallance v The Queen.37 Dixon CJ was there writing about certain kinds of legislative codes. He referred to a letter from Sir Frederick Pollock to Oliver Wendell Holmes admitting that ‘the consideration of case-law as a pure science tends to make one look on codes as a kind of brutal interference with the natural processes of legal reason’. Dixon CJ thought that the difficulty lay: in the use in the introductory part of the Code of wide abstract statements of principle about criminal responsibility framed rather to satisfy the analytical conscience of an Austinian jurist than to tell a judge at a criminal trial what he ought to do … In the Code … abstractions of doctrine are not the generalized deductions from the particular instances that follow: they come ab extra and speak upon the footing that they will restrain the operation of what follows.

Expressions like ‘dogma’, ‘mandated order of things’ and ‘imposed’ principles appear, at first blush, to clarify the charge. But one person’s dogma can be another’s fidelity to principle. A judgment using a phrase such as ‘it is a principle of contract that …’ or ‘equitable remedies are generally …’ would not be attacked for being ‘top-down’ even if the posited rule or principle was not an absolute one or even if the judge was mistaken about its ambit. Except perhaps for cases of extremely lead-footed reasoning by the court under review, it really comes back to the authoritative content of the doctrine or concept being applied.

B. Are these types of top-down reasoning contrary to accepted judicial method? The passages quoted suggest a sharp dichotomy between acceptable ‘bottom-up’ reasoning and unacceptable ‘top-down’ reasoning and they treat the latter as a new arrival that needs to be tagged and expelled. This section will demonstrate that the judges who have espoused this

37

(1961) 108 CLR 56, 58.

28

Mason

dichotomy overlook the near universality of reasoning based upon broad principles, theories and categories. Furthermore, any refi nement that focuses upon the ‘brutality’ with which a principle, theory or category is used is also elusive. Some principles, theories and categories need to be adhered to firmly. When they are, and when rivals are sent packing, the ‘top-down’ flea in the ear might as well be applied to the principle that endures as to its unsuccessful rival. This is not to advocate the overthrow of our system of precedent which is supported by reason as well as legal authority. Judicial humility, respect for the past and caution may not be the only virtues but they are virtues nonetheless. Respect for inherited tradition and appropriate use of incremental reasoning in the development of the law mean that bottom-up reasoning is itself entirely appropriate, so long as judges do not fall for the myth that this is all that takes place. Let me first address the proposition that any reasoning top-down is foreign to sound common law method. I intend to consider the proposition in three contexts: constitutional interpretation, statutory interpretation and common law decision-making.38 Sir Owen Dixon is extolled as the exemplar of strict judicial method. This does not mean that he is viewed as a slave to precedent or the constitutional text. His synthesis of the principles underlying estoppels in Grundt v Great Boulder Proprietary Gold Mines Ltd39 continues to be cited and applied. And his discovery of qualifying implications such as the Melbourne Corporation ‘doctrine’ is now entirely orthodox.40 I am not suggesting in any way that these contributions from this great jurist involved or encouraged reasoning of the top-down variety. But the 38

39

40

I include decision-making in matters equitable, although there are mixed signals from authoritative sources as to whether Equity is as hide-bound to precedent as the common law. Cf Heydon JA in Harris v Digital Pulse Pty Ltd (2003) 56 NSWLR 298 (‘Harris’) [454]–[458] (‘What individual judges did [in the era of Sir George Jessel MR] is not a sound guide to what modern Australian courts, at least at levels below the High Court, can do’); Gummow J in Roxborough (n 9) [84] (reference to ‘equitable doctrine[’s] flexibility and adaptability to modern needs, particularly commercial law … [E]quity is the spur to new thought and further remedy, and … provides a means of introducing new policies’) and in ‘Equity: Too Successful?’ (2003) 77 ALJ 30, 39–42; and Kirby J in ‘Overcoming Equity’s Australian Isolationism’ (2009) 3 J Eq 1. (1937) 59 CLR 641, 674–6. Dixon J said (at 674) that the ‘rules governing estoppel … work out the more precise grounds upon which the law holds a party disentitled to depart from an assumption in the assertion of rights against another’. Th is would appear to endorse the legitimacy of testing matters from both the top and the bottom. Of course, the general theory must itself be recognized as a sound hypothesis. See eg, Austin (n 16).

Do top-down and bottom-up reasoning ever meet?

29

same cannot be said for Sir Owen Dixon’s contribution in some other areas of constitutional law. His influential decision that ‘excise’41 extended beyond a tax on production to one on distribution was a proposition that he derived from the idea that an Australian customs union betokened an integrated national economy.42 This view was (with refinements) to find acceptance by the majority of the High Court in Ha v New South Wales,43 but it could not be suggested that it was an inevitable implication from the word ‘excise’ or the structure of the Constitution. In Ha v New South Wales, when the extended Dixonian view of excise was advanced in argument by the Commonwealth Solicitor-General, Mr Griffith QC, there was the following exchange with one of the judges who would form part of the minority:44 daw s on j : That is top-down reasoning and you have no basis on which to support it except the assumption that Sir Owen Dixon made. m r gr i f f i t h : Your honour, our submission is it is not top-down reasoning. It is based on the words of the Constitution itself. daw s on j : That is to make an assumption as to their meaning.

Dixon CJ had warned against confusing ‘the unexpressed assumptions upon which the framers of the [Constitution] supposedly proceeded with the expressed meaning of [a constitutional] power’.45 But he was cautioning against sloppy thinking, not proscribing all assumptions. As I have shown elsewhere, he endorsed at least three of them as tools for constitutional interpretation.46 These are the concepts of the rule of law, parliamentary sovereignty and the supremacy of the Crown as a formal concept. In Australian Communist Party v The Commonwealth,47 Dixon CJ referred to the rule of law as a ‘traditional conception’ that was ‘simply assumed’.48 In his paper, ‘The Law and the Constitution’, he wrote:49 The fundamental conceptions, which a legal system embodies or expresses, are seldom grasped or understood in their entirety at the time when their actual influence is greatest. They are abstract ideas usually arrived at by 41

42 43 44 45

46 49

Section 90 of the Australian Constitution confers on the federal parliament power to impose duties of customs and of excise that is exclusive of the States. See Parton v Milk Board (Vic) (1949) 80 CLR 229, 260. (1997) 189 CLR 465 (‘Ha v New South Wales’). [1997] HCA Trans 103 (18 March 1997). Australian National Airways Pty Ltd v The Commonwealth (1945) 71 CLR 29, 81, cited in McGinty (n 8) 184 (Dawson J). 47 48 Mason (n 6) 578–9. (1951) 83 CLR 1. Ibid 193. O Dixon, ‘The Law and the Constitution’ in O Dixon, Jesting Pilate (Lawbook Co, Melbourne 1995) 38.

30

Mason generalisation and developed by analysis … Sometimes indeed they are but instinctive assumptions of which at the time few or none were aware. But afterwards they may be seen as defi nite principles contained within the ideas which provide the ground of action. Further, when such conceptions have once taken root they seldom disappear. They persist long after the conditions in which they originated have gone. They enter into combinations with other conceptions and contribute to the constructions of new systems of law and government.

Th is surely is authoritative recognition of top-down constitutional reasoning of the very sort attacked by McHugh and Gummow JJ in the aftermath of the Political Advertising Case. In the area of statutory interpretation, numerous ‘traditional conceptions’ have become embedded in the law and drive down upon statutory interpretation. We often describe them as presumptions, for example against denying procedural fairness or abrogating fundamental common law rights. There may be a fictional attribution to parliamentary intent not to override these rights without very clear language. But the reality is that the judges have collectively determined to ‘impose’ these principles upon parliament itself. Decisions of the highest authority require all judges to bring these assumptions to bear upon any task of statutory interpretation. A number of statements have been made in the High Court in recent years suggesting that the Constitution’s references to ‘judicial power’ and ‘courts’ may entrench minimum substantive requirements of independence and impartiality in those exercising the Commonwealth’s judicial power.50 No one could seriously contend that the implication arises automatically or inevitably from the language used. Rather, the judges are (in my respectful opinion, entirely appropriately) bringing to bear their values about how courts ought to behave and how, in the last couple of centuries, they have been generally required to behave by superior courts. Theories about the significance of free speech are well recognized in the common law and they take effect through aspects of the law of defamation. If (in the eyes of some) they were given inappropriate constitutional entrée in the Political Advertising Case, that reasoning was effectively reworked by the different justices who formed the majority in Lange v Australian Broadcasting Corporation.51 They retained the constitutional 50

51

See Forge v Australian Securities and Investments Commission (2006) 228 CLR 45, [41], [64], [181] and other cases cited by M Aronson, B Dyer and M Groves, Judicial Review of Administrative Action (4th edn Lawbook Co, Pyrmont 2009) [2.90]. (1997) 189 CLR 520.

Do top-down and bottom-up reasoning ever meet?

31

implication but now sourced it primarily in the words ‘directly chosen by the people’ that are found in sections 7 and 24 of the Constitution.52 In my view, this slender textual base still left ample room for the play of assumptions which, had they been made by others, could well have elicited the ‘top-down’ opprobrium. Sir Owen Dixon’s discussion in the paper quoted about the means whereby ‘traditional’ and ‘fundamental conceptions’ of public law may enter legal discourse and legitimately affect the resolution of constitutional issues applies equally to judicial method relating to common law problems. Let me give two examples, the second of them being the very area chosen by the High Court for the identification and castigation of top-down reasoning. In Harris v Digital Pulse Pty Ltd,53 four judges wrestled with the question whether exemplary damages could be awarded for breach of an employee’s fiduciary duty of good faith. It was an express term of the defendant’s employment that he would not compete during his employment. In breach, he worked secretly for the benefit of his own business in competition with his employer. The employer dismissed him and sued for remedies that included exemplary damages for breach of fiduciary duty. Palmer J of the New South Wales Supreme Court made such an award, but the New South Wales Court of Appeal (by majority) held that it was not an available remedy in the circumstances, despite the breach being a flagrant one. All four judges satisfied themselves that there was no controlling Australian precedent. At the end of the day, they were also in agreement that exemplary damages were not precluded simply because that remedy had originated in the English common law courts. In other words, for the modern Supreme Court of New South Wales to contemplate the making of such an award did not entail some dreaded ‘ fusion fallacy’. The judges accepted that exemplary damages were not available for breach of contract as such and they proceeded from this point to debate the strength or otherwise of the contract analogy for the separate cause of action for breach of fiduciary duty. It was recognised that the concept of breach of fiduciary duty was equitable in derivation and there was much exploration of the meaning and consequences of that attribution. For the majority in the Court of Appeal, this was to prove the determining factor. Heydon JA, 52 53

Ibid 567. See Digital Pulse Pty Ltd v Harris (2002) 166 FLR 421 (Palmer J); Harris (n 38) (Spigelman CJ, Mason P and Heydon JA). I was the dissenting judge in the Court of Appeal.

32

Mason

in particular, saw Equity as generally hostile to the notion of punitive remedies. Spigelman CJ, who was in general agreement with the reasons of Heydon JA, did not shut the door on exemplary damages being available for breach of fiduciary duty outside the employer/employee setting,54 but he ruled that the contract analogy was too strong for the particular (contractually derived) fiduciary relationship. This briefest of summaries shows the extent of the choices seen to be both open and foreclosed to the respective judges. It also shows the application of broad and contestable theories to the questions at hand. Did the fusion of the administration of law and Equity in New South Wales preclude ‘Equity’ from borrowing and adapting the ‘common law’ idea that ‘damages’ may aim to punish and deter as well as to compensate? In what sense are all fiduciary duties the same? Is an employee’s disloyalty more analogous to a tort or a breach of contract, to the extent that those categories offer guidance? What was the impact of the contractual ordering given that the plaintiff was bringing an alternative cause of action based on breach of fiduciary duty? The resolution of none of these higher level issues offered a conclusive answer to the matter at hand. For one thing, there was more than one of them competing for attention, and they presented in no particular order or hierarchy. For another, the scope and application of the various higher level issues were themselves each highly contestable. As the four judges worked their ways through the maze, they examined many individual precedents. Some were discarded as irrelevant, some were seen as too dated to be of assistance, and in respect of some there was disagreement as to the principles to be extrapolated from the specific case. There was inevitably discussion that focused upon the greater authority of dicta from High Court and senior appellate judges. Differing views were uttered about the conclusions to be drawn from English pre-Judicature Act cases and from jurisdictions other than England. In short, the judges frequently looked down at the cases. But they also looked upwards for guidance as to the questions to be asked, the categories to be identified, and the hierarchies to be respected. As they edged closer to the ultimate question, the judges spilt much ink analysing specific groups of cases to see if they could extrapolate answers as to the higher level issues that would bear upon resolving the specific matter. No one has, to my knowledge, accused any of the four judges in Harris of engaging in ‘top-down’ reasoning. 54

See Harris (n 38) [5].

Do top-down and bottom-up reasoning ever meet?

33

I have already referred to the two instances where the reasoning of the lower court and/or the submissions of counsel in relation to an application of the unjust enrichment concept drew forth condemnation as inherently flawed top-down reasoning. I was one of the errant Court of Appeal judges in Farah. For that and other reasons, I shall avoid any attempt to explain or justify what was written in that closed chapter. The case was one in which a person complaining about a fiduciary’s misuse of information sought to have a constructive trust remedy imposed over land acquired through the agency of the fiduciary in the names of his close relatives. The Court of Appeal held that, even if the relatives did not receive the ‘property’55 with notice of the fiduciary’s breach, there would still be a basis for imposing a constructive trust. The recipients were strictly liable simply because they had received ‘trust property’ and had not shown that they took as purchasers without notice. This was labelled a restitutionary case of unjust enrichment by receipt.56 The High Court rejected this approach after analysing some of the academic and judicial sources relied upon by the Court of Appeal. Reasons, based on authority and principle, were given for continued adherence to a wrongs-based approach to liability in accordance with the fi rst limb of Barnes v Addy.57 There was found to be no room for an alternative, inconsistent basis of strict liability stemming from the unjust enrichment concept. There was, with respect, nothing unusual in the High Court adopting such an approach and its analysis must necessarily be regarded by me as incontrovertibly right. For the purpose of this chapter I am only concerned to explain the Court’s reasoning so far as directed at what it saw as ‘top-down’ errors. In fact, that term was not used, although it was clearly identified in the second part of the following paragraph:58 Fourthly, the restitution basis is unhistorical. There is no sign of it in clear terms in any but the most recent authorities. It is inherent in the Court of Appeal’s conclusion that for many decades the courts have misunderstood the tests for satisfying the fi rst limb of Barnes v Addy : that is improbable. It is inherent in the conclusion advocated by Say-Dee that for many decades the courts have failed to notice the existence of a form of liability co-existing with the fi rst limb: that is equally improbable. The restitution basis reflects a mentality in which considerations of ideal 55

56 57

The High Court held that the Court of Appeal erred in treating the case as one involving the receipt of property. See Say-Dee Pty Ltd v Farah Constructions Pty Ltd [2005] NSWCA 309, [216]–[234]. See Farah (n 4) [148]. 58 Ibid [154].

34

Mason taxonomy prevail over a pragmatic approach to legal development. As Gummow J said:59 To the lawyer whose mind has been moulded by civilian influences, the theory may come fi rst, and the source of the theory may be the writings of jurists not the decisions of judges. However, that is not the way in which a system based on case law develops; over time, general principle is derived from judicial decisions upon particular instances, not the other way around. The restitution basis was imposed as a supposedly inevitable offshoot of an all-embracing theory. To do that was to bring about an abrupt and violent collision with received principles without any assigned justification.

Two broad points were being made: first, that the restitution basis effectively undermined the fi rst limb of Barnes v Addy without justification in principle or on the authorities; and second, that the restitution basis ‘reflected a mentality in which considerations of ideal taxonomy prevail[ed] over a pragmatic approach to legal development’ especially because it was ‘ imposed as a supposedly inevitable offshoot of an allembracing theory’.60 Here, I am concerned only with understanding the particular charge embodied in the second point. That charge drew an adverse inference about the mindset and reasoning of the judges without elaborating its basis beyond pointing to the error itself. For these and other obvious reasons I cannot comment on the accuracy of that inference. The second restitution case to elicit similar criticism from the High Court was Lumbers. Here the lower court’s error was to ignore the primacy of a contractual ordering. Goods and services had been ordered from a company in the group that later went into liquidation. It was held wrong, in those circumstances, to resort to restitutionary 61 or equitable62 notions to get at the company that received the benefit of goods and services ordered by the insolvent company where that created a ‘serious risk of producing a result that [was] discordant with accepted principle, thus creating a lack of coherence with other branches of the law’.63 The High Court also applied a fairly high level principle to the effect that conferral of a benefit was not enough to generate a claim in restitution.64 On my reading of the joint judgment, there was no further information why

59 61 62 64

60 Roxborough (n 9) [72]. Farah (n 4) [154] (emphasis added). Such as ‘benefit’, ‘expense’ and (free) ‘acceptance’. 63 Such as unconscionability. Lumbers (n 7) [78]. Ibid [80] citing Bowen LJ in Falcke v Scottish Imperial Insurance Company (1886) 34 Ch D 234, 248. As the High Court recognized (at [80]) there are exceptions within the principles of necessitous intervention and maritime salvage.

Do top-down and bottom-up reasoning ever meet?

35

this situation illustrated the dangers ‘inherent’ in the restitutionary and equitable principles that were misapplied. Resort to a specific governing precedent or a narrow legal rule is preferable to reasoning that uses generalized concepts that are relatively controversial or relatively unknown.65 But the very matter at issue in Lumbers required the courts to apply reasoning of a higher order because the ultimate choice related to the category of reference. Neither the South Australian Full Court nor the High Court cited any precedent directly on point governing the interplay between contract, restitution and company law.66 One may readily accept that, in any development of the general law, precision is to be preferred if possible.67 Furthermore, since change can beget further change, any bold judge should carefully examine the downstream consequences of replacing one rule with another in the interests of mere coherence. If a satisfactory substitute cannot be formulated, it may be better to leave things as they are, hoping that light will emerge over time or that legislative intervention will address the issue. The tortuous history of the law of highway negligence post-Brodie v Singleton68 illustrates that a well-intentioned leap in a new direction in the interests of coherence can force courts and legislators into reformulating the newly applied rule as the need for further adjustment becomes apparent.69 The High Court’s decision in Lumbers to apply the ultimately determinative principle about the general70 primacy of a contractual ordering over a restitutionary or equitable one was itself a principle applied from the top down. No specific precedent mandated this course, nor was one cited. In this, I am not suggesting that the principle was misapplied or even ‘imposed’ in any vituperative sense. It was simply the governing rule applied by the governing court. 65

66

67

68 69

70

I am not conceding that the restitutionary concepts discussed by the South Australian Full Court were of this nature. The reasoning of Doyle CJ in Angelopoulos v Sabatino (1995) 65 SASR 1 was recognized as assisting, although the facts were distinguished. See Gala v Preston (1991) 172 CLR 243, 261–3 (Brennan J); Hill (n 29) 199 (Gaudron J), 238–9 (Gummow J). (2001) 206 CLR 512 (‘Brodie’). See Road Traffic Authority of New South Wales v Dederer (2007) 234 CLR 330 and Civil Liability Act 2002 (NSW) Pt 5. It is not a universal proposition. Sometimes restitution may appear to trump contract: see K Mason, JW Carter and GJ Tolhurst, Mason and Carter’s Restitution Law in Australia (2nd edn LexisNexis, Sydney 2008) [215]. Equity has been trumping contracts, and even statutes, for centuries.

36

Mason

The study of legal history and of legal taxonomy reveals many situations where orthodox categories and concepts rise and fall, where they get trimmed and adjusted, and where they clash at the borders with other orthodox categories and concepts. While a rule, principle or concept71 is accepted as orthodox and useful it will be afforded such authority as its scope and terms permit, at least so long as it does not come up against some competing category. Within their appointed limits, some categories trump others, as is illustrated by the fact that liability in tort can generally be excluded by an appropriately drawn exclusion clause. But the respective roles of categories such as ‘contract’, ‘tort’, ‘Equity’ and ‘restitution’ are never self-evident, nor are their domains exclusive. In Lumbers, contract and company law simply pulled rank on restitution and Equity. I return to a related aspect of the High Court’s reasoning in Farah. The Court held that the principles respecting fiduciary duty were:72 foreign to unjust enrichment notions because the unjust factors [encountered in unjust enrichment analysis were] commonly concerned with vitiation or qualification of the intention of a claimant … The areas in which the concept of unjust enrichment applies are specific and usually longestablished. Recipient liability for breach of trust or fiduciary duty has not been one of them.

The Political Advertising Case and the restitution cases discussed show, in their different contexts, that accusations of top-down reasoning are likely to be made when a new idea is pressing for recognition in the form of a legal rule or where an accepted idea is seeking a new application. Being new, if not controversial, the idea or application is likely to be expressed broadly, if only because it has not been tested and refined in the fire of academic and/or judicial discourse.73 And if, as with unjust enrichment, it is seen to compete for some of the space already claimed by an older category, such as ‘contract’ or ‘Equity’, then it is hardly surprising that there may be resistance. 71

72

73

Most, if not all, non-statutory legal rules will be formulated in different ways by different authorities and most, if not all, will be subject to qualifications and exceptions. The same is true for less ‘controlling’ legal ideas such as principles and concepts. For a discussion about different types of ‘general concepts’ and the ways that judges give them content, see J Dietrich, ‘Giving Content To General Concepts’ (2005) 29 MULR 6. Farah (n 4) [150] (emphasis added) quoting a statement of James Edelman with apparent agreement. As has turned out to be the case as the constitutional free speech implication was assailed from various quarters since 1992.

Do top-down and bottom-up reasoning ever meet?

37

But the law does not subscribe to the theory that nothing should ever be done for the first time. ‘Rules’ such as that stipulating the non-recovery of money paid under mistake can become encrusted with exceptions and eventually fall. ‘Principles’ such as the notion of efficient breach in contract can for a time be seen as helpful only later to be assailed on all sides. Explanations for rules, such as the implied contract idea in quasi-contract, can be revealed as fictions and then abandoned. Equity can choose to back off and accept a common law rule in preference to continuing on its own separate path.74 Other categories, such as ‘constructive trust’ may, on close examination, prove to be little more than ‘a rag-bag of instances having nothing in common’.75 As Kirby J put it in Brodie, ‘[it] is obvious that the rules of the common law are in a constant process of alteration and re-expression. Far from this being a weakness of the legal system, its capacity to change is one of its greatest strengths.’76 How the judges move from one position to another is a most fascinating study. Different judges do things differently. There is, of course, a spectrum of attitudes. But no one works in a theory-free vacuum. Even the professed incrementalist is confronted with deciding what is ‘an increment too far’.77 The unjust enrichment concept has been authoritatively recognized in Australian law and it has proved a fruitful tool of legal analysis and a spur to its development,78 just as Deane J predicted in 1987.79 The High Court itself has acknowledged unjust enrichment as a ‘unifying legal concept which explains why the law recognises, in a variety of distinct categories of case, an obligation on the part of a defendant to make fair and just restitution of a benefit derived at the expense of a plaintiff ’.80 The concept has been endorsed as capable of ‘assisting in the determination, by the ordinary processes of legal reasoning, of the question whether the law should, in justice, recognise such an obligation in a new or developing 74 75

76 77 78

79

80

See AMEV-UDC Finance Ltd v Austin (1986) 162 CLR 170, 191. RP Austin, ‘Constructive Trusts’ in PD Finn (ed), Essays in Equity (Lawbook Co, Sydney 1985) 196. Brodie (n 68) [203]. The phrase is that of Beldam LJ in Barrett v Ministry of Defence [1995] 3 All ER 87, 95. See generally J Edelman and E Bant, Unjust Enrichment in Australia (Oxford University Press, Melbourne 2006); Mason, Carter and Tolhurst (n 70) [135]–[138]. See Pavey & Matthews Pty Ltd v Paul (1987) 162 CLR 221 (‘Pavey & Matthews’) 257 (Mason and Wilson JJ agreed generally with Deane J’s reasons). See also Lumbers (n 7) [85]. Cf Farah (n 4) [151]. Pavey & Matthews (n 79) 256–7. See also David Securities (n 24) 375, 389, 406; Lumbers (n 7) [83].

38

Mason

category of case’.81 Its generative capacity extends to the recognition or rejection of various defences.82 Several claims, including the recovery of money paid under a mistake of fact or law, the award (and assessment) of reasonable remuneration following full performance of a contract unenforceable by statute, restitution based on failure of consideration, the award of an account of profits for a patent infringement, and the defence of change of position, have been authoritatively attributed to this concept and/or described as falling under its rubric. Dicta in the High Court and other superior Australian courts support the application of the concept even more widely.83 The concepts of ‘(free) acceptance’ and ‘incontrovertible benefit’ that were misapplied by the South Australian Full Court in Lumbers are also well established, 84 which is not to say that they are uncontroversial or to deny that they (like any legal rule) have the potential for misuse. In Lumbers, their erroneous application by the South Australian Full Court, in a particular attempt to side-step the consequences of a corporate insolvency, did not reveal any ‘inherent’ defect in the concept, let alone embody an attempted ‘imposition’ of a dogmatic theory. An erroneous application of a well-accepted concept in a controversial new area did not justify the High Court’s rebuke to the South Australian Full Court, expressed in the ‘top-down’ dialectic currently in vogue. And it provided no evidence of the inherent instability of the unjust enrichment concept.

C.

Posner’s epithet but not his thesis

In McGinty, when fi rst asserting that top-down reasoning is an illegitimate method of interpreting the Constitution, McHugh J cited Judge Posner’s well-known law review article. 85 His Honour quoted the following as Posner’s explanation of top-down and bottom-up reasoning: In top-down reasoning, the judge or other legal analyst invents or adopts a theory about an area of law – perhaps about all law – and uses it to organise, criticise, accept or reject, explain or explain away, distinguish or amplify the existing decisions to make them conform to 81 82 84

85

Pavey & Matthews (n 79) 257 cited in Lumbers (n 7) [85]. See generally Mason, Carter and Tolhurst (n 70) [136]. 83 See ibid [138]. See generally ibid [157]–[158]. Authorities include Re Universal Distributing Co Ltd (1933) 48 CLR 171 (Dixon J); Pavey & Matthews (n 79) esp 227–8, 229, 255–6, 257, 259, 260, 262–3, 264; Damberg v Damberg (2002) 52 NSWLR 492, 529, 530 (Heydon JA). McGinty (n 8) 232 quoting from Posner (n 5) 433.

Do top-down and bottom-up reasoning ever meet?

39

the theory and generate an outcome in each new case as it arises that will be consistent with the theory and with the canonical cases, that is, the cases accepted as authoritative within the theory. The theory need not be, perhaps never can be, drawn ‘from’ the law; it surely need not be articulated in lawyer’s jargon. In bottom-up reasoning, which encompasses such familiar lawyers’ techniques as ‘plain meaning’ and ‘reasoning by analogy’, one starts with the words of a statute or other enactment, or with a case or mass of cases, and moves from there – but doesn’t move far, as we shall see. The top-downer and the bottomupper do not meet.

Posner’s article as a whole does not support the use to which the High Court has put it. For one thing, Posner did not decry top-down reasoning. He pointed out his own association with several top-down theories. And he certainly did not suggest that bottom-up reasoning operates in a vacuum. Indeed, as to bottom-up reasoning, he wrote:86 [T]here isn’t much to bottom-up reasoning. We don’t ever really ‘start’ from a mass of cases or from a statute or from a clause of the Constitution. To read a case, to read a statute, a rule, or a constitutional clause presupposes a vast linguistic, cultural, and conceptual apparatus … [If], as is so common, the case or statute or other enactment is unclear, and maybe even when it seems quite clear, the reader, to extract or more precisely to impute its meaning, must interpret it; and interpretation, we now know, is as much creation as discovery.

Later he stated that:87 even after we acknowledge that bottom-up reasoning is not reasoning but is at best preparatory to reasoning and that legal reasoning worthy of the name inescapably involves the creation of theories to guide decisions, we are left with the question of the appropriate scope of such theories.

Away from the law, ‘top-down’ and ‘bottom-up’ are used to label two types of logical reasoning. Deductive or top-down reasoning works from the more general to the specific. In science or philosophy, the process may, but need not, start at the generality of a theory and then be narrowed to more specific hypotheses. Observations may be collected to test and confi rm (or disprove) the original theory. Inductive or bottom-up reasoning works the other way, moving from specific observations to broader generalizations and theories. Each method has its uses and neither is derided at the expense of the other. In The Ethics of 86

Posner (n 5) 435 (emphasis in original).

87

Ibid 439.

40

Mason

Memory,88 Avishai Margalit referred to this distinction, as it applies to philosophy, as follows:89 There are two styles of philosophers: e.g. philosophers and i.e. philosophers – illustrators and explicators. Illustrators trust, first and foremost, striking examples, in contrast with explicators, who trust, first and foremost, defi nitions and general principles. Explicators may use examples, but their examples are stylized and are more like those that appear after i.e. than the genuine examples that follow e.g. The illustrators, for their part, run the risk of using examples as little anecdotes that serve no philosophical purpose. The dangers of each style in philosophy are clear and almost unavoidable; yet, I believe that style in philosophy matters greatly. When examples are apt, they are illuminations, not just didactic illustrations. When definitions are good, they are explications, not mere stipulations. I see merit in both styles, but in temperament if not by conviction I subscribe to e.g. philosophy.

The law is not observable like nature, and unlike philosophy it refuses to be pushed to logical extremes. It is a system of practical justice. But justice demands levels of certainty and consistency. Like cases should be decided alike and genuine differences given effect. To perceive relevant likenesses or dissimilarities requires organizing principles, theories and concepts, many of them stated in terms of broad generality. It does not follow that those principles, theories and concepts are all-embracing, or unconditional, or timeless. Nor does it follow that judges who apply them are driven by (prohibited) desire for taxonomic purity as distinct from (acceptable) application of traditional common law method and concern for coherence and consistency in the law. Top-down and bottom-up reasoning may in theory be poles apart. But the two concepts inevitably meet in the day-to-day exertions of any conscientious judge, whether or not he or she is prepared to admit it. 88 89

A Margalit, The Ethics of Memory (Harvard University Press, Cambridge MA 2002). Ibid ix.

2 Internationalization or isolation: the Australian cul de sac? The case of contract law Paul Finn

My purpose is to stand back a little and to question the extent of Australia’s participation in what to some are seen today as convergences in the laws and legal systems of the international community.1 I rather suspect my conclusions may be a little surprising. The titles of three recently published articles are presently arresting. The first two are both concerned with significant areas of judge-made law. They are Professor Michael Taggart’s ‘“Australian Exceptionalism” in Judicial Review’2 and the then Justice Michael Kirby’s ‘Overcoming Equity’s Australian Isolationism’.3 The short title of the third, authored by Lisa Spagnolo, is ‘The Last Outpost’.4 It is about Australia’s studied disregard to our cost of the Convention on Contracts for the International Sale of Goods5 and of its jurisprudence. What I have to say betrays a like mix of pessimism and optimism for our law as is conveyed in each of these pieces. I will suggest that there are significant, though I hope not insuperable, barriers to Australian engagement in those areas of international legal thought that have the potential to bear upon the shaping and development of Australia’s common law. I will disregard those parts of the common law that are intrinsically international or transnational in character as, for example, 1

2 3 4

5

Paper originally prepared for the Twentieth Anniversary Symposium, ‘The Internationalisation of Law: Legislating, Decision-Making, Practice and Education’ (Bond University, 2009), and published in M Hiscock and W van Caenegem (eds), The Internationalisation of Law (Edward Elgar, Cheltenham UK and Northampton US 2010). M Taggart, ‘“Australian Exceptionalism” in Judicial Review’ (2008) 36 FL Rev 1. M Kirby, ‘Overcoming Equity’s Australian Isolationism’ (2009) 3 J Eq 1. L Spagnalo, ‘The Last Outpost: CISG Opt Outs, Misapplications and the Costs of Ignoring the Vienna Sales Convention for Australian Lawyers’ (2009) 10(1) Melb J Int’l L 141. (opened for signature on 10 April 1980, entered into force 1 January 1988) 1489 UNTS 3 (‘CISG’).

41

42

Finn

maritime law,6 private international law 7 and, save in relation to the Convention on Contracts for the International Sale of Goods, those areas of statute law that incorporate international conventions. Why select contract law? My reasons for this choice are various. First, obviously, contract is a foundational subject in our law. It is the primary vehicle the law provides for giving legal consequence to our voluntarily assumed relationships and dealings with others. Importantly, it tells us much about what is or is not permissible in how we in this country can conduct ourselves in, or despite, such relationships and dealings. Second, the international dimension of contract is self-evident. It is, for the most part, the glue of international trade and economic relations. Th is international dimension is becoming of increasing importance as international commercial law falls increasingly under the influence of internationally accepted general principles and trade practices and usages, particularly in the context of international commercial arbitration.8 The following is in three parts. The first recounts, briefly, Australia’s journey from legal colonialism to, for the moment, a belated and relatively straitened form of legal nationalism. The second surveys briefly the contemporary international context of contract at least insofar as it evidences internationalizing influences, trends and policy choices and Australian contrasts. The third part suggests present idiosyncrasies in, and distinctive features of, the Australian legal context which may well inhibit our ability or preparedness to locate our contract law in an increasingly instructive international setting.

A.

From legal colonialism to legal nationalism

Aspects of this story have been well told elsewhere.9 I need only highlight the following. 6

7

8

9

See J Allsop, ‘Maritime Law: The Nature and Importance of Its International Character’ (William Tetley Lecture, Tulane University, 15 April 2009). See eg, TS Production LLC v Drew Pictures Pty Ltd (2008) 172 FCR 433 on anti-suit injunctions. See eg, R Goode, ‘International Restatements and National Law’ in WJ Swadling and GH Jones (eds), The Search for Principle: Essays in Honour of Lord Goff of Chieveley (Oxford University Press, Oxford 1999) 46. I would refer in particular to A Mason, ‘The Break with the Privy Council and the Internationalisation of the “Common Law”’ in P Cane (ed), Centenary Essays for the High Court of Australia (LexisNexis, Sydney 2004). See also K Mason, ‘President Mason’s Farewell Speech’ (2008) 82 ALJ 768, 768−9; Kirby (n 3) 29−34. For the colonial period, see P Finn, Law and Government in Colonial Australia (Oxford University Press, Oxford 1987).

Internationalization or isolation

1.

43

The colonial period

Writing in colonial Victoria in 1876, the lawyer TT A’Beckett observed: Our system of jurisprudence corresponds in theory and practice to that of England, and in the administration of justice we have adopted its principles, and given effect to the decisions of its courts.10

England’s common law was the Australian colonists’ inheritance. Though they had some capacity to accommodate that body of law to local conditions and circumstances,11 the local judiciary showed little propensity outside Victoria to do so. While that was unsurprising, it stood in sharp contrast to the extensive innovation and international outlook that was characteristic of much colonial legislation.12 The ‘distant tribunal’,13 the Privy Council was, in any event, the ultimate colonial court of appeal. While its decisions evoked occasional local dissension because of its failure to understand colonial conditions,14 its policy as stated in 1879 in Trimble v Hill15 was that: It is of the utmost importance that in all parts of the Empire where English law prevails the interpretation of that law by the courts should be as nearly as possible the same.16

2.

To 1983

Throughout the first six decades of the twentieth century, the High Court was to insist that Australian courts (including the High Court) ought to follow decisions both of the House of Lords and of the English Court of Appeal.17 The assumption in this was that there was but one common 10 11 12

13 14

15 16

17

TT A’Beckett, ‘A Twenty-Five Years’ Retrospect’ (1876) 1 Melbourne Review 280, 291. See Australian Courts Act 1828 (UK) (9 Geo 4 c 83) s 24. The surviving testament to this is the colonial law library of Victoria’s Attorney-General’s Department now housed in the Law Library of University of Notre Dame in Fremantle. Inglis Clarke’s description at the time of federation. See eg, Jaques v Stafford (1890) 11 NSWLR 127, 133; Tooth v Power (1890) 10 NSWLR 143, 158−9; Peacock v Powell (1886) 7 NSWLR 139, 145. (1879) 5 App Cas 342. Ibid 345. The sad story of the colonists’ attempts to abolish Privy Council appeals on federating has been told by JA La Nauze, The Making of the Australian Constitution (Melbourne University Press, Melbourne 1972). What is truly lamentable is the influence a number of the colonial chief justices were to assert to thwart abolition: see for one account, RB Joyce, Samuel Walker Griffith (University of Queensland Press, Queensland 1984) 211 ff. See generally A Mason (n 9) 69.

44

Finn

law, that of England. Its obvious consequence was that Australia’s judges were not the custodians of the values, choices, empirical propositions and ideology that animated common law doctrine. The Australian judicial function was that of doctrinal technician. Privy Council appeals from all Australian courts were abolished progressively between 1966 and 1986. To use Sir Anthony Mason’s description,18 we had become ‘the masters of our own legal destiny’. What this presaged had already been prefigured in a distinctive trilogy of contract-related equity decisions of the High Court in 1983 – Commercial Bank of Australia Ltd v Amadio,19 Taylor v Johnson,20 and Legione v Hateley21 – which, through the rejuvenated principle of preventing an unconscionable insistence on strict legal rights, gave added impetus in Australian law to the twin themes of controlling the abuse of power and of protecting the vulnerable.22 These decisions are more notable for the reason that not only had they no resonance in decisions of the House of Lords, they struck out in quite new directions.

3.

1983−1995

Much has been written of the evolution in Australia’s common law and legal method from 1983 until the retirement of Mason CJ in 1995.23 Of that latter event, McHugh J was to observe that: When [Mason CJ] left the Court, he had been a party to more judgments making more dramatic changes in the common law than any judge in the history of Australia.24 18 19 22

23

24

A Mason, ‘Future Directions in Australian Law’ (1987) 13 Mon U L Rev 149, 151. 20 (1983) 151 CLR 447. (1983) 151 CLR 422. 21 (1983) 152 CLR 406. I dealt with these matters at some length in P Finn ‘Commerce, The Common Law and Morality’ (1989) 17 MULR 87 and P Finn, ‘Controlling the Exercise of Power’ (1996) 7 Public L Rev 86. I refer, as bookend examples, to C Saunders (ed), Courts of Final Jurisdiction: The Mason Court in Australia (Federation Press, Sydney 1996) and R Gray, The Constitutional Jurisprudence and Judicial Method of the High Court of Australia: The Dixon, Mason and Gleeson Eras (Presdian Legal Publications, Adelaide 2008). I would also note that Sir Anthony Mason was, and remains, a prolific author of extra-curial articles. These provide an important window on his ideas, ideals and purposes. Some number of these are referred to elsewhere in this paper. See also G Lindell (ed), The Mason Papers (Federation Press, Sydney 2007). M McHugh, ‘The Constitutional Jurisprudence of the High Court: 1989−2004’ (Inaugural Sir Anthony Mason Lecture in Constitutional Law, Sydney, 26 November 2004).

Internationalization or isolation

45

This is not the place to examine the dimensions and well-springs of those changes in doctrine and methodology, although it is important to note that they were not unique to Australia.25 For present purposes, though, there are two matters to which I should refer. First, the then members of the High Court quite self-consciously engaged in a process of developing solutions suited to ‘Australian circumstances, needs and values’ rather than, as before, simply embracing ‘ready made solutions from abroad’.26 Inevitably policy considerations were now more openly to be acknowledged as operative factors in judicial decision. Correspondingly, precedent was accorded diminished weight.27 The move was perceptibly one from legal formalism to a species of legal realism.28 The process thus engaged in was Janus-like. While its object was to develop an Australian common law, it was well appreciated both that we were not self-sufficient in legal inspiration and that our legal development was uneven in its range and depth. There was, in consequence, a deliberate resort to comparative developments in other common law jurisdictions notably the US, Canada and New Zealand as well as in England. As Mason CJ was to acknowledge, the contemporaneous expansion in legal publishing and the growing availability of foreign journals etc, facilitated this process.29 English law was no longer privileged: comparative materials were persuasive to the extent that they could persuade. In this sense, the common law was being internationalized and, for a time, it fostered some degree of convergence between jurisdictions. I should add that legal scholarship in Australia began to reflect the same comparative common law trend. Th is again was openly encouraged by Mason CJ.30 The second matter to which I need refer is today of no little importance. It was not assumed in the period of the Mason court that intermediate 25

26 28

29

A like process was occurring in New Zealand and Canada: for New Zealand see P Rishworth (ed), The Struggle for Simplicity in the Law : Essays for Lord Cooke of Thorndon (LexisNexis Butterworths, New Zealand 1997). As Cheryl Saunders has noted: ‘Many of the influences on Australian legal development in the latter part of the 20th century have affected other countries with equal or greater force: the internationalisation of law and strengthening of international norms; the communications revolution; the pressure for a greater measure of popular sovereignty’: C Saunders, ‘The Mason Court in Context’ in Saunders (n 23) 7. A Mason, ‘Australian Contract Law’ (1988) 1 JCL 1, 2. 27 See Gray (n 23) 70. See A Mason, ‘The Evolving Role and Function of the High Court’ in B Opeskin and F Wheeler (eds), The Australian Federal Judicial System (Melbourne University Press, Melbourne 2000) 118−19. This matter is considered in detail in Gray (n 23). See A Mason (n 9) 72. 30 See Mason (n 26) 7.

46

Finn

courts of appeal – or, for that matter, even trial judges in appropriate cases – did not have a law-making role.31 As Kirby J later indicated, 32 intermediate appellate courts then acted on the view that they had a substantive and important role in developing the law. I will return to this matter below.

4.

To the present

It was in a sense predictable that the period immediately following Sir Anthony Mason’s retirement would be one of ‘consolidation’33 and reflection – the more so as the composition of the High Court itself changed markedly. What has since become clear is that there were to be significant discontinuities and that the Court would not be reticent either in declining to build upon, or in departing from, what had so recently preceded it. In one presently important respect there was an obvious, and more exaggerated, continuity. This relates to the Australianization of the common law. A constant refrain in High Court decisions especially since 1995 has been the insistence that there is a ‘common law of Australia’34 and that it is a ‘single and unified one’.35 The most obvious discontinuities have been in methodology, a subject recently analysed by Rachael Gray in The Constitutional Jurisprudence and Judicial Method of the High Court of Australia.36 Though it inevitably suffers from the vice of a generalization when applied to a group of judges collectively, Gray’s conclusion on the last decade – that of the ‘Gleeson Court’ – encapsulates much in what has been said by earlier commentators:37 The Gleeson Court offered a largely untheorised form of legalism that embraced neither the theoretical assumptions of Dixonian legalism nor the realist based jurisprudence of the Mason era.38 31

32 34 35

36 37

38

See Nguyen v Nguyen (1990) 169 CLR 245, 269−70; M McHugh, ‘Law Making in an Intermediate Appellate Court: The NSW Court of Appeal’ (1986−88) 11 Syd L Rev 183, 188. 33 Kirby (n 3) 31−2. G Brennan, ‘Looking at the Future’ in Saunders (n 23). The formula is to be found in over 90 cases since 1995. Cf Stuart v Kirkland-Veenstra [2009] HCA 15 (‘Stuart ’) [102]; Lipohar v The Queen (1999) 200 CLR 485 (‘Lipohar ’) [43] ff. Gray (n 23). See in particular B Selway, ‘Methodologies of Constitutional Interpretation in the High Court of Australia’ (2003) 14 PLR 234, esp 250; L Zines, ‘Legalism, Realism and Judicial Rhetoric in Constitutional Law’ (2002) 5 CLPR 21. See also L Zines, The High Court and the Constitution (5th edn Federation Press, Sydney 2008). Gray (n 23) 78.

Internationalization or isolation

47

What is readily apparent in High Court decisions of the past decade are (i) a marked preoccupation with doctrine and close doctrinal analysis not overtly influenced by policy considerations; (ii) a corresponding retreat from open consideration of ‘values’ – ‘[l]egal reasoning that commands respect does so upon the basis of adherence to legal principle’;39 (iii) a varying but diminished regard for consequentialist considerations in shaping doctrine;40 and (iv) affording greater weight to precedent. It needs to be emphasized, though, that the renewed emphasis upon doctrine has not precluded innovation. But given innovation is rooted in doctrine, it has a particular orientation which is contrived by doctrinal analysis. The perceived potential of individual doctrines themselves provides the impetus to development. Gone are the imperatives of inspiring ideas: ‘popular sovereignty’, ‘good administration’, ‘fairness’, ‘unjust enrichment’ and the like. To the extent that policy informs judicial reasoning, it is left unspoken. It should be added that, while the level of regard given to the decisions and literature of foreign jurisdictions41 remains relatively similar to that of the Mason era, it too is markedly doctrinal in character. I would note in passing of the Taggart and Kirby articles I mentioned at the outset, that it is probably the inexorable consequence of this rigid technique of logical doctrinal analysis that has isolated both Australian administrative law (in its common law form) and Australian equity from the thought of much of both the common law and civil law worlds.42 There is one additional matter of methodological technique to which I should refer. Of recent times the High Court has sought to put on a more principled basis the manner in which statutes may be used analogically in the development of the common law.43 Before statutes will be so used it will be necessary to demonstrate a consistent pattern of legislation in the States (or, where relevant, in the Commonwealth in matters of federal 39

40

41

42 43

See M Gleeson, The Rule of Law and the Constitution (Boyer Lectures, ABC Books 2000) 97−8; cf MA Eisenberg, ‘The Theory of Contracts’ in P Benson (ed), The Theory of Contract Law: New Essays (Cambridge University Press, Cambridge 2001) 209: ‘No significant doctrinal proposition can ultimately be justified either on the ground that it is self-evident or on the basis of another doctrinal proposition. Doctrinal propositions can ultimately be justified only by social propositions.’ See Re Wakim, ex p McNally (1999) 198 CLR 511; but contrast Re Governor, Goulburn Correctional Centre, ex p Eastman (1999) 200 CLR 322, [9]. Again, mostly common law. But see, refreshingly, the reference to German law in Stuart (n 35) [141]. See nn 2 and 3. See Esso Australia Resources Ltd v Federal Commissioner of Taxation (1999) 201 CLR 49, 61−3.

48

Finn

jurisdiction) before the common law can be developed so as to parallel or harmonize with that statutory pattern.44 In relation to the development of contract law, such a pattern does exist in provisions of the Trade Practices Act 1974 (Cth) and State fair trading acts. Given that, in the last 30 years, much of the creative burden of what is in essence contractual litigation has been made to fall upon provisions of the Trade Practices Act (and its State counterparts) and especially upon section 52 and the unconscionable dealings provisions,45 it would seem at least that the qualifying conditions for bringing significant parts of Australian contract law into harmony with the requirements of the Trade Practices Act as it bears upon contractual behaviour would have been satisfied. To take this step, though, will require an open embrace of legislative policy as encapsulated in such statutes and its infusion into the policy informing contract doctrine. It would also bring us closer to some of the ideas that animate the international themes to which I will refer. I earlier mentioned the role of intermediate courts of appeal in lawmaking. It is the case that such courts had over time gone some distance in settling (if not necessarily honouring) the principles they would apply both in departing from earlier decisions of their own particular court, and in following or refusing to follow, decisions of an intermediate court of another Australian jurisdiction.46 What, though, has now been made abundantly plain by the High Court are the rules of precedent and stare decisis henceforth to be followed. These, it is fair to say, have been greeted with a deal of dismay.47 They bear directly upon what I have to say. In Farah Constructions Pty Ltd v Say-Dee Pty Ltd,48 the Court in a joint judgment indicated: Intermediate appellate courts and trial judges in Australia should not depart from decisions in intermediate appellate courts in another jurisdiction on the interpretation of Commonwealth legislation or uniform national legislation unless they are convinced that the interpretation is plainly wrong. Since there is a common law of Australia rather than of each Australian jurisdiction, the same principle applies in relation to non-statutory law.49 44

45 46

47

I refer for convenience to P Finn, ‘Statutes and the Common Law’ in S Corcoran and S Bottomley (eds), Interpreting Statutes (Federation Press, Sydney 2005) 61−2. See ss 51AA, 51AB and 51AC. See eg, N O’Bryan and C Young, ‘A View from Outside the Vortex on Keith Mason’s Retirement Speech and the Australian Doctrine of Judicial Precedent’ (2008) 82 ALJ 771. See K Mason (n 9). 48 (2007) 230 CLR 89. 49 Ibid [135].

Internationalization or isolation

49

The Court had earlier said that an intermediate court of appeal should not depart from ‘long established authority’ or ‘seriously considered dicta of a majority of [the High Court]’.50 The Australian way is not to be one in which the potential for diversity in ideas below the High Court is to be fostered. Th at potential, I have always considered, was a distinct virtue of a system of federalism having its ultimate court of appeal as both a unifying force and an arbiter of difference. 51 Such was Australia’s advantage over England. The rejection of this has quite obvious implications for Australian judicial scholarship.

B.

The international setting

Twentieth-century developments affecting contract law outside Australia provide a necessary backdrop to what I have to say. The emphasis will be upon harmonization, modernization and, to a lesser extent, uniformity of contract laws. Though they are of particular significance to how Australian contract law might evolve, I will here say little specifically about the two monumental works of United States contract law, the Restatement (Second) of the Law of Contracts,52 and the Uniform Commercial Code (‘UCC’).53 Their influence, though, is writ large in the developments to be described. I should, nonetheless, emphasize three of their characteristics. First, the Restatement is a ‘soft law’ instrument. It propounded general principles of contract law, albeit principles which, where appropriate, have incorporated analogically legislative changes in contract law (including the ‘profound impact’ of the UCC).54 The Restatement ’s purpose was to harmonize, not reconcile, the separate contract laws of the then 48 States of the USA. This necessarily involved selection and innovation. As one contemporary commentator observed: On many questions of law there either is no weight of authority, or none established beyond the peradventure of a doubt. In such a case one chooses the law that one thinks ought to be.55

50 52

53

54 55

Ibid [134]. 51 Cf Lipohar (n 35) [45]. American Law Institute, Restatement (Second) of the Law of Contracts (American Law Institute Publishers, St Paul 1981) (‘Restatement ’). The American Law Institute and National Conference of Commissioners on Uniform State Law, Uniform Commercial Code (2007 edn, Thomson/West). See Restatement (n 52) §2. W Patterson, ‘The Restatement of the Law of Contracts’ (1933) 33 Colum L Rev 397, 400.

50

Finn

Second, the UCC was formulated designedly to be legislative in character. Its underlying purposes and policies, as declared in article 1–103, were (inter alia): (1) to simplify, clarify, and modernize the law governing commercial transactions; (2) to permit the continued expansion of commercial practices through custom, usage, and agreement of the parties. Most of its provisions, though, are not mandatory and can be varied or displaced altogether.56 Third, both instruments were prepared by distinguished scholars. Their work involved wide consultation and was subjected to rigorous examination by experts, judges and practitioners.57 That is how the Americans do things. It is how the major continental European countries do things. It is not how we do things. Now let me turn to modern comparative law. From the late nineteenth century, a staple of comparative legal scholarship has been the study of contract law in general and of the similarities and dissonances between the common law and civil law systems in particular. One manifestation of this – driven more by the practical needs of the business community – has been the pursuit of some level of harmonization of the rules of contract which could be expressed in international or transnational instruments. 58 An early participant in that endeavour was the International Institute for the Unification of Private Law (UNIDROIT).59 The unification of the law of international sales was an aspect of its early activities and was reflected in its conventions on the international sale of goods. These were superseded by the United Nations Commission on International Trade Law (UNCITRAL) 1980 Convention on Contracts for the International Sale of Goods (‘CISG’)60 56

57

58

59

60

See JJ White and RS Summers, Hornbook on the Uniform Commercial Code (5th edn West Group, Eagan 2000) 8. In the case of the UCC, see the three Reports of the Permanent Editorial Board for the Uniform Commercial Code reproduced in the 2007 Edition XV−XXV (Thomson, West 2007). On the above see generally, EA Farnsworth, ‘Comparative Contract Law’ in R Zimmerman and M Reimann (eds), Oxford Handbook of Comparative Law (Oxford University Press, Oxford 2006) 900−3. Th is is an international organization created by a statute of the League of Nations in 1926. Australia is one of its now 61 members drawn from all over the world. On UNIDROIT see generally ‘UNIDROIT’ in International Encyclopaedia of Laws, Intergovernmental Organisations (Vol 2) (Kluwer Law International, The Hague 2005) [2]−[39]. See P Schlechtriem and I Schwenzer (eds), Commentary on the UN Convention on International Sale of Goods (2nd edn Oxford University Press, Oxford 2005).

Internationalization or isolation

51

though, as has been acknowledged, they clearly influenced ‘the basic structure and key concepts’ of the CISG.61 There are now 73 parties to the CISG including Australia. The two notable abstentions amongst Australia’s main trading partners are the United Kingdom and India.62 The Convention has been incorporated into Australian Law through State and Territory legislation.63 The object of the CISG was to provide a neutral, uniform and harmonized international sales law. As with the UCC, the CISG allows parties to derogate from its provisions in whole or in part. According to Spagnolo, Australia has a ‘culture’ of opting out of the CISG. There are only thirteen Australian cases which make mention of the Convention.64 Unsurprisingly, the CISG has had barely perceptible impact on Australian contract jurisprudence.65 Nonetheless it has been commented, perhaps optimistically, that: it is to be expected that because the Convention operates in conjunction with Australian contract law it may lead to a reconsideration of some aspects of our (domestic) law.66

There are two features of the CISG to which reference should be made given what I have later to say. First, it does not impose a duty of good faith and fair dealing as such upon parties to contracts to which it applies, the only explicit reference to ‘good faith’ being the article 7(1) requirement that, in the interpretation of the CISG, regard is to be had ‘to the need to promote uniformity in its application and the observance of good faith in international trade’.67 Second, the CISG reflected in some degree the compromises necessarily to be expected of an international instrument prepared in the form of a convention.68 61 62

63 65

66

67 68

Ibid 1−2. On the UK attitude, see Department of Trade and Industry, United Nations Convention on Contracts for the International Sale of Goods (the Vienna Sales Convention): A Consultation Document (October 1997). Note also that Japan ratified the Convention in August 2008. See generally Spagnolo (n 4). 64 They are analysed by Spagnolo, ibid. Notwithstanding notable Australian scholarly contributions: see eg, J Felemegas (ed), An International Approach to the Interpretation of the United Nations Convention of Contracts for the International Sale of Goods (1980) as Uniform Sales Law (Cambridge University Press, Cambridge 2007). J Carter, E Peden and GJ Tolhurst, Contract Law in Australia (5th edn LexisNexis Butterworths, Sydney 2007) [1−20]. See Schlechtriem and Schwenzer (n 60) 1−5; Felemegas (n 65) 45−8. As MJ Bonell observed in An International Restatement of Contract Law: The UNIDROIT Principles of International Commercial Contracts (3rd edn Transnational Publishers, New York 2005) 303: ‘[T]he option in favour of uniform legislation inevitably restricted

52

Finn

In 1971, UNIDROIT returned again, though with quite some diffidence, to international commercial contract law. What it now proposed was the preparation of a restatement of principles of contract law, having a like harmonization purpose as the Restatement, though in this instance, it was harmonization of the domestic laws of nations. Its ultimate product, a ‘soft law’ instrument, was the Principles of International Commercial Contracts (‘UNIDROIT Principles’).69 A parallel initiative to prepare a restatement of European (including English) contract law was commenced in the 1980s by a private group chaired by the distinguished Danish comparatist, Ole Lando. It resulted in the publication between 1995 and 2003 of the Lando Commission’s threevolume Principles of European Contract Law (‘PECL’).70 Again, as with UNIDROIT’s Principles, it was intended to be ‘soft law’ and adopted the style of presentation of the Restatement. Both the UNIDROIT Principles and PECL were prepared by experts (scholars and practitioners) who, importantly, did not represent their home country. In UNIDROIT’s case the experts were drawn from five continents. There is considerable similarity between the two sets of Principles,71 although UNIDROIT deals only with commercial contracts while PECL’s coverage encompasses consumer contracts as well. Their similarity, though, is unsurprising. Both were influenced markedly by the CISG.72 I should further note in passing that PECL has been advanced as a prominent example of harmonization

69

70

71

the drafters’ room for manoeuvre. Due to the differences in legal tradition and at times, even more significantly, in the social and economic structures prevalent in the States participating in the negotiations, some issues had to be excluded at the outset from the scope of the envisaged instrument, while with respect to a number of other items the confl icting views could only be overcome by compromise solutions leaving matters more or less undecided.’ UNIDROIT, Principles of International Commercial Contracts, (Rome, 1994); Principles of International Commercial Contracts 2004 (Rome 2004). The Principles, in both editions, have generated a large and diverse international literature; see eg, Bonell (n 68) which refers to much of the literature: MJ Bonell (ed), The UNIDROIT Principles in Practice : Caselaw and Bibliography on the UNIDROIT Principles of International Commercial Contracts (2nd edn Martinus Nijhoff, The Hague 2006); S Vogenauer and J Kleinheisterkamp, Commentary on the Unidroit Principles of International Commercial Contracts (PICC) (Oxford University Press, Oxford 2009); M Heideman, Methodology of Uniform Contract Law (Springer, Berlin 2007); D Oser, The Unidroit Principles of International Commercial Contracts: A Governing Law? (Martinus Nijhoff, The Hague 2008). There is a significant number of articles on the Principles published in the Uniform Law Review. O Lando and H Beale (eds) Principles of European Contract Law, Parts I and II (Kluwer Law, The Hague, 2000); Part III (Kluwer Law, The Hague, 2003). See Bonell (n 68) ch 8. 72 Ibid ch 7.

Internationalization or isolation

53

in the debate within the European Union on the desirability of a new European civil code.73 For present purposes, that debate and its possible denouement is another story.74 I will later return to the UNIDROIT Principles and PECL but before doing so, I should comment briefly on two further and distinct influences upon how contract law is being shaped internationally which are relevant to the burdens of this chapter. First, and for a variety of reasons which are unnecessary to explore here, very many nations across the world have sought to modernize, or are in the process of modernizing, their contract laws75 and, in the case of members of trading blocs, harmonizing them as well. I need only give one example to make the readily demonstrable point that the UCC, the CISG and the UNIDROIT Principles have been, and are, perceptible influences in these processes of modernization and harmonization.76 In 1999, the People’s Republic of China passed a new Contract Law.77 The Law unified what were previously disparate contract laws and ended the practice (which prevails in Australian sales law where the CISG applies) of treating domestic and foreign contracts differently. In his Introduction to the 1999 translation of the Contract Law, Wei Luo commented on the genesis of, and influences upon, this Law in the following terms: After the twenty years of economic reform, the Chinese economy has been integrated with the world economy. Chinese legislators realized that they 73

74

75

76

77

PECL has been incorporated into what is described as the Draft Common Frame of Reference (or ‘DCFR’) for such a code: see C von Bar, E Clive and H Schulte Nölke (eds), Principles, Definitions and Model Rules of European Private Law: Draft Common Frame of Reference (DCFR) (interim outline edn Sellier, Munich 2008). For a not unexpected UK assessment of the DCFR which provides a history of its genesis and changing purposes, see S Whittaker, The ‘Draft Common Frame of Reference’: An Assessment (November 2008) at http://www.justice.gov.uk/publications/eu-contract-law-common-frame-reference.htm; S Whittaker, ‘A Framework of Principle for European Contract Law’ (2009) 125 LQR 616. See eg, R Zimmerman, ‘Comparative Law and the Europeanization of Private Law’ in Zimmerman and Reimann (n 58). At the moment, in our region, Japan, Indonesia and South Korea are engaged in this process. They may as well be developing their own symbiotic relationship with the latest instrument, the UNIDROIT Principles, acting as a complement or as a supplement to the other two: see Bonell (n 68) 269 esp fn 23 (on the UCC) and 314–4 (on the CISG). UNCITRAL, while commending the use of the Principles ‘for their intended purposes’, has not unqualifiedly taken the view that the Principles can be taken as expressing the lex mercatoria. For instances where the Principles have influenced the modernization or harmonization of contract laws, see Bonell (n 68) 268–70 and the Uniform Law Review articles footnoted there. See also Comment 2 to art 1–302 of the UCC. For a translated version see L Wei (ed), The Contract Law of the People’s Republic of China (Chinese Law Series Vol 2) (William S Hein & Co, New York 1999).

54

Finn had to adopt some general contract principles that are accepted internationally. Therefore, the new contract law is incorporated with many of contract principles and legal terms of civil law, some of the contract principles of common law, and some terms used in the United Nations Convention on the International Sale of Goods and in the American Uniform Commercial Code. The major principles adopted in the new contract law are: equality, fairness, honesty and faithfulness, and limited freedom of contract.78

The Introduction could as well have referred to the influence of the UNIDROIT Principles, the extent of which is palpable in the Law’s ‘General Principles’.79 The second international influence of note is that of international commercial arbitration. All I wish to say here can be put shortly. First, as Roy Goode crisply put it, ‘contract law lies at the heart of international commercial arbitration’;80 second, such arbitration is proving a remarkably powerful motive force in developing ‘principles and rules of transnational commercial law’ with a corresponding diminution in the role of private international law; and third, it is said, we again are witnessing ‘the evolution of a new lex mercatoria, albeit one the boundaries and content of which are uncertain and controversial’.81 Turning now to what can be drawn from the various materials and developments to which I have referred, the first and most obvious comment to make is that we now have available to us a remarkable body of accessible, coherent and instructive source material on contract principles which, in the case of CISG, the UNIDROIT Principles, PECL and, in some degree, the UCC, transcend the common law-civil law divide. Second and more importantly what is clearly discernible in all of these, as well as in the national systems they have influenced, are themes and policy choices which have secured, or else are securing, wide acceptance as expressions of appropriate standards and practices in international 78

79

80 81

Ibid 12. The ‘major principles’ referred to are found in arts 3–6 and 8 of the Law. For an overview of Chinese contract law, see P Blazey and K Chan (eds), The Chinese Commercial Legal System (LawBook Co, Pyrmont 2008) ch 8. See Y Zhang and D Huang, ‘The New Contract Law in the People’s Republic of China and the UNIDROIT Principles of International Commercial Contracts: A Brief Comparison’ (2000) 5 Unif L Rev 429. Goode (n 8) 46, 47. I would note that for the purposes of art 28.1 of the 1985 UNCITRAL Model Law on International Commercial Arbitration, the reference to ‘rules of law’ encompasses a reference to the UNIDROIT Principles. The Model Law has the force of law in Australia: see International Arbitration Act 1974 (Cth) s 16.

Internationalization or isolation

55

and national contract law systems.82 As Lord Steyn observed,83 from such instruments one can discern a ‘common core of solutions for issues of contract law’. Because they usefully illustrate what is idiosyncratic, different and wanting in Australian law, I will refer to three themes and policy choices revealed in these instruments. In providing illustrations I will in the main rely, as a matter of convenience, upon the UNIDROIT Principles. I preface what I have to say with two matters of comment. First, one must acknowledge that significant doctrinal differences exist between the contract laws of common law and of civil law systems and that such differences can constitute impediments to the transposition to a common law system of a concept from the civil law, or from an international instrument utilizing that civil law concept. Simply by way of illustration, the UNIDROIT Principles article 3.2 provides that: A contract is concluded, modified or terminated by the mere agreement of the parties without further requirement.84

There is no requirement of consideration such as generally obtains in common law systems.85 But as is well recognized in common law systems, the impediment posed by the consideration requirement becomes most apparent in practice in relation to modification (or variation) of a contract and especially of long-term or complex contracts – hence the attempts to manufacture consideration or else the resort to such expedients as reliance upon the doctrines of estoppel, election or waiver where contracting parties have apparently departed from the strict terms of their contract.86 It is unsurprising that the consideration requirement for agreements to modify has been criticized;87 has been abolished in the UCC in relation

82

83

84 85

86

87

See MP Furmston (ed), The Law of Contract (3rd edn LexisNexis Butterworths, London 2007) [1.141]–[1.164]. J Steyn, ‘A Kind of Esperanto?’ in P Birks (ed), The Frontiers of Liability (Vol 2) (Oxford University Press, Oxford 1994) 45. PECL art 2:101 is similar in effect. For the varying requirements in the countries of the European Union, see Lando and Beale, Principles of European Contract Law: Parts 1 and II (n 70) 139–43. See eg, GEC Marconi Systems Pty Ltd v BHP Information Technology Pty Ltd (2000) 128 FCR 1 (‘GEC Marconi ’) [226]–[231] (contract of variation), [352]–[390] (election), [424]– [466] (estoppel) and [467]–[477] (waiver). For a recent reaffi rmation by the High Court of the need to which I have referred, see Agricultural and Rural Finance Pty Ltd v Gardiner (2008) 251 ALR 322 (‘Agricultural and Rural Finance ’). See NC Seddon and MP Ellinghaus, Cheshire and Fifoot’s Law of Contract (9th Australian edn LexisNexis Butterworths, Chatswood 2008) [4.35]; Farnsworth (n 58) §4.21–§4.22.

56

Finn

to contracts for the sale of goods;88 and has no place in relations to sales governed by the CISG.89 The second, prefatory comment is this. The provisions of the CISG,90 the UCC,91 the UNIDROIT Principles92 and PECL93 can be excluded, modified or varied, subject to certain stipulated exceptions.94 This facility highlights both that the provisions of these instruments have the character of default rules and that the instruments themselves place a high value on party autonomy, albeit not an unqualified one.95 To enlarge slightly on the utility to Australian practitioners of default rules to be found in international and foreign laws, it should be appreciated that these are a rich source of model clauses available to be incorporated directly into Australian contracts.96 I would instance, for example, the UNIDROIT Principles’ provisions on ‘Hardship’97 and ‘Force Majeure’98 and §314 of the German Civil Code (Bürgerliches Gesetzbuch) (BGB) on ‘Termination of Contracts for Just Cause’.99 Of the themes and policy choices evident in these instruments which I wish to emphasize, the fi rst is that of good faith and fair dealing. The UCC, the UNIDROIT Principles and PECL each impose a mandatory duty of good faith and fair dealing on contracting parties,100 as does

88

89 92 94

95 96 97

98

99

100

UCC art 2–209(i): ‘An agreement modifying a contract within this Article needs no consideration to be binding.’ 91 See CISG art 29(i). 90 See ibid art 3. UCC §1–302. 93 UNIDROIT Principles art 1.5. PECL art 1.102. In the UCC, UNIDROIT Principles and PECL, one such exception, I would emphasize, is the duty of good faith and fair dealing. See UCC §1–302; UNIDROIT Principles art 1.7, and PECL art 1:201. On party autonomy see eg, UNIDROIT Principles art 1.1 and PECL art 1:102. See D Robertson, ‘Force Majeure Clauses’ (2009) 25 JCL 62, 69–73. UNIDROIT Principles art 6.2. For a discussion of this article, see AD Doudko, ‘Hardship in Contract: The Approach of the UNIDROIT Principles and Legal Developments in Russia’ (2004) Unif L Rev 483. UNIDROIT Principles art 7.1.7; and see C Brunner, Force Majeure and Hardship Under General Contract Principles (Kluwer Law International, The Hague 2009). A typical instance of ‘just cause’ is irreparable breakdown in mutual trust and confidence between parties to a long-term contract. UCC §1–304. ‘Good faith’ is defi ned in UCC §1–201(b)(20); UNIDROIT Principles art 1.7; PECL art 1:201. The good faith requirement of art 7 of the CISG is primarily an interpretation provision, but because it also has a gap-fi lling function – see Schlechtriem and Schwenzer (n 60) 6–8 – it has been suggested that it functions in essentially the same way as UNIDROIT Principles art 1.7. See Felemegas (n 65) 45–8; J Lookofsky, Understanding the CISG: A Compact Guide to the 1980 United Nations Convention on Contracts for the International Sale of Goods (3rd worldwide edn Kluwer Law International, The Hague 2008) §2.10.

Internationalization or isolation

57

the Restatement101 and, for example, the Contract Law of the People’s Republic of China102 and the legal systems of almost all member States of the European Union.103 Its foothold in Australian law in contrast is uneasy.104 I should acknowledge immediately that the scope and depth of this duty varies significantly both between instruments and between national systems. To illustrate the point, the UNIDROIT Principles article 1.7(1) provides: Each party must act in accordance with good faith and fair dealing in international trade.

The UCC’s §1–304, by way of contrast, stipulates: Every contract or duty within [the UCC] imposes an obligation of good faith in its performance and enforcement.

‘Good faith’ in turn is defi ned to mean ‘honesty in fact and the observance of reasonable commercial standards of fair dealing’.105 Within its particular province, the UNIDROIT provision is clearly wider and more fundamental in character than that of the UCC. As the comments to article 1.7 indicate, while the principle of good faith informs many of the provisions of the UNIDROIT Principles, the article makes clear that: even in the absence of special provisions in the Principles the parties’ behaviour throughout the life of the contract, including the negotiation process, must conform to good faith and fair dealing.106

As there is now a vast English language literature on good faith in national and international settings, I will limit what I have to say upon it to a few comments which, it seems to me, are apposite given the reticent state of Australian law on this subject. I begin with the proposition that, if contract as an institution is to have integrity, if Australian contract law is to maintain its standing in the global arena, it must, in my view, have effective legal safeguards against undue exploitation and advantage-taking in 101 103

104 105 106

Restatement (n 52) §205. 102 In art 6. See Wei (n 77). See Lando and Beale, Principles of European Contract Law: Parts I and II (n 70) 116–19; R Zimmerman and S Whittaker, Good Faith in European Contract Law (Cambridge University Press, Cambridge 2000). See P Finn, ‘Good Faith and Fair Dealing: Australia’ (2005) NZ Bus Law Q 378. UCC art 1–201. Contrast the Official Comment to §1–304 of the UCC, which makes plain that the provision does not create a separate duty of fairness and reasonableness which can be independently breached.

58

Finn

contract formation. It must secure fair dealing in contract performance and enforcement. The need for such safeguards and standards, as I have indicated, is widely accepted internationally in international instruments and in civil and common law countries. There are four specific applications of the good faith principle in the UNIDROIT Principles to which it is instructive to refer. They are in the main replicated in provisions in PECL. My reasons for labouring good faith in particular are to provide both some sense of its burden and some appreciation of its coherence in transnational commercial law. The first two can be mentioned together. The one – on inconsistent behaviour – should come as no surprise to an Australian audience, save that it involves that form of creativity that some would describe as the ‘ fusion fallacy’; the other – on negotiations in bad faith – involves essentially tortious behaviour and in our law would be caught, if at all, by fraud, equitable estoppel or by the misleading or deceptive conduct provisions of section 52 of the Trade Practices Act 1974 (Cth).107 Article 1.8 (Inconsistent behaviour) A party cannot act inconsistently with an understanding it has caused the other party to have and upon which that other party reasonably has acted in reliance to its detriment. Article 2.1.15 (Negotiations in bad faith) (1) A party is free to negotiate and is not liable for failure to reach an agreement. (2) However, a party who negotiates or breaks off negotiations in bad faith is liable for the losses caused to the other party. (3) It is bad faith, in particular, for a party to enter into or continue negotiations when intending not to reach an agreement with the other party.108

The third noteworthy application of good faith relates to interpretation. What is of interest here are the interpretative criteria. The basic rule of interpretation is primarily subjective: a contract is to be interpreted according to the common intention of the parties and if such intention cannot be established, the contract is to be interpreted according to the meaning that reasonable persons of the same kind as the parties would 107

108

See generally J Dietrich, ‘Classifying Precontractual Liability: A Comparative Analysis’ (2001) 21 LS 153. UNIDROIT Principles art 2.1.15. PECL art 2:301 has a similar provision.

Internationalization or isolation

59

give to it in the circumstances.109 Th is is not our objective theory of contract, but the difference does not matter for present purposes. What is noteworthy is that in applying that basic rule, article 4.3 requires that: regard shall be had to all the circumstances, including (a) preliminary negotiations between the parties; (b) practices which the parties have established between themselves; (c) the conduct of the parties subsequent to the conclusion of the contract; (d) the nature and purpose of the contract; (e) the meaning commonly given to terms and expressions in the trade concerned; (f) usages.110

The CISG article 8(3) and article 5:102 of PECL are to like effect. Despite the welcome advances that have recently been made in Australia’s principles of contract interpretation,111 the departure in article 4.3 from what is permissible in our law is as marked as it is, in my respectful view, commendable. The orthodoxy in this country – and the orthodoxy recently reaffi rmed in English law112 – is that the negotiations of the parties prior to their contracting and their statements of their subjective intentions are, as a general rule, excluded by the parol evidence rule and cannot be used in the interpretation of the contract.113 Given the recent decision of the House of Lords, I would note without disrespect that this rule does not as of course commend itself in all parts of the common law world and, in particular, in parts of the United States.114 I would comment that in a case where there are both a dispute as to whether the contract is or is not partly oral and claims as well of misleading or deceptive conduct in the negotiations for the contract, the evidence 109 111

112 113

114

See UNIDROIT Principles arts 4.1 and 4.2. 110 Ibid art 4.3. Especially in relation to purposive and contextual considerations: see Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451, [22]; see generally D McLauchlan, ‘Plain Meaning and Commercial Construction: Has Australia Adopted the ICS Principles’ (2009) 25 JCL 7; J Steyn, ‘The Intractable Problem of the Interpretation of Legal Texts’ (2003) 25 Syd L Rev 5, esp 10. See Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38, [2009] 3 WLR 267. See generally K Lewison, The Interpretation of Contracts (4th edn Sweet & Maxwell, London 2006) 3.08. See Restatement (n 52) §214(c) and generally Farnsworth (n 58); Yoshimoto v Canterbury Golf International Ltd [2001] NZLR 523, [76]–[78].

60

Finn

of the parties’ negotiations can be admitted on those issues and can result in the court obtaining an informed appreciation not only of the actual object and intent of the contract itself but also of individual clauses of it. Where it is found that the contract is, in fact, wholly written, to require the parol evidence rule to be applied to the construction of the contract in disregard of that informed appreciation does sit rather oddly with the concept of party autonomy. This country’s law has recently been settled on whether postcontractual conduct can be used as an aid to construction of a written contract. It cannot.115 The criticisms of this view have, in the main, been directed at its inflexibility particularly in relational contract settings.116 Speaking extra-curially of the exclusion from consideration of the parties’ post-contractual conduct and of article 4.3 (and its CISG equivalent), Lord Steyn made the now well-known comment:117 Business people and, for that matter, ordinary people, simply do not understand a rule which excludes from consideration how the parties have in the course of performance interpreted their contract. The law must not be allowed to drift too far from the intuitive reactions of justice of men and women of good sense: the rule about subsequent conduct may have to be re-examined.

The fourth, presently noteworthy, good faith application relates to the implication of terms in article 5.1.2 of the UNIDROIT Principles.118 Having indicated (in article 5.1.1) that the contractual obligations of the parties may be ‘expressed or implied’, article 5.1.2 provides: Implied obligations stem from (a) the nature and purpose of the contract; (b) practices established between the parties and usages; (c) good faith and fair dealing; (d) reasonableness.

The approach here to implication (as in PECL’s provision to relatively similar effect)119 is to the ‘sources of implied obligations’. This is far removed 115

116 117 118

119

Agricultural and Rural Finance (n 86) at [35] and [163]; see generally Franklins Pty Ltd v Metcash Trading Ltd [2009] NSWCA 407 at [306]–[328]. See eg, GEC Marconi (n 86) [351]. See also UNIDROIT Principles art 4.3. Steyn (n 111) 10. There is also a provision for supplying omitted terms: UNIDROIT Principles art 4.8. Both provisions deal essentially with the same subject-matter: see Vogenauer and Kleinheisterkamp (n 69) 534–9. PECL art 6:102. See also Lando and Beale, Principles of European Contract Law: Parts I and II (n 70) 305.

Internationalization or isolation

61

from our own approach. I would suggest, though, that to some degree we use these very same sources but we conceal this with remarkably arcane tests of implication. The second general theme manifest in the instruments considered in this paper is the significance accorded to ‘practices and usages’. The CISG,120 the UNIDROIT Principles,121 and PECL,122 for their respective purposes, have kindred general provisions dealing with practices and usages. The UCC’s §1–303, though more detailed, is relatively similar in scope and purpose. The UNIDROIT Principles article 1.9 provides: (1) The parties are bound by any usage to which they have agreed and by any practices which they have established between themselves. (2) The parties are bound by a usage that is widely known to and regularly observed in international trade by parties in the particular trade concerned except where the application of such a usage would be unreasonable. My reason for emphasizing such provisions is that they give substance to the practice and usage criteria used both in interpretation and in the implication of terms.123 Section 1–303(d) of the UCC explicitly acknowledges this. The third theme is that of ‘policing against unfairness’.124 It should be indicated at the outset that, in this respect, the CISG is exceptional in that it was not designed to police sales agreements for unfairness.125 This said, the Restatement, the UCC and the UNIDROIT Principles are replete with provisions (predictable and novel) which are designed in a variety of ways to relieve against unfairness manifest both in bargaining behaviour and in the substance of the agreement or aspects of it. Despite their interest they are too numerous to mention. However, there are several matters of substance to which I should refer. The first is that PECL alone makes general provision for unfair terms, albeit limited to unfair terms not individually negotiated. Because of the proposals in Australia for national legislation on such terms,126 the provisions of PECL’s article 4:110 are worthy of note – the more so because, unlike the Australian proposal, 120 123 124 125 126

CISG art 9. 121 UNIDROIT Principles art 1.9. 122 PECL art 1.105. See above UNIDROIT Principles arts 4.1.3 and 5.1.2. This apt description is drawn from Bonell (n 68) 151. See also Farnsworth (n 58) ch 4. Cf CISG art 4. See Trade Practices Amendment (Australian Consumer Law) Bill 2009 (Cth) Sch 1, Pts 1 and 2.

62

Finn

they more closely harmonize with principles of contract that are widely accepted internationally. Article 4:110: Unfair terms not individually negotiated (1) A party may avoid a term which has not been individually negotiated if, contrary to the requirements of good faith and fair dealing, it causes a significant imbalance in the parties’ rights and obligations arising under the contract to the detriment of that party, taking into account the nature of the performance to be rendered under the contract, all the other terms of the contract and the circumstances at the time the contract was concluded. (2) This Article does not apply to: (a) a term which defi nes the main subject matter of the contract, provided the term is in plain and intelligible language; or to (b) the adequacy in value of one party’s obligations compared to the value of the obligations of the other party.

As the comment to this article indicates, it extends the scope of application of the general clause of the EC Council Directive 93/13 of 5 April 1993 on unfair terms in consumer contracts127 to commercial contracts and contracts between private persons. I would add that mercifully the present Australian bill retreats from what was proposed in the Exposure Draft which extended to business-to-business transactions. I would note additionally PECL in article 4:109 (excessive benefit or unfair advantage), the UNIDROIT Principles in article 3.10 (gross disparity), the UCC in §2–302 (unconscionable contract or term), and the Restatement §208,128 all proscribe contracts and terms which involve gross or unconscionable advantage taking. The next matter of substance to be mentioned, which is reflected in the four provisions I have just referred to, relates to adaptation of a contract. This is best illustrated in the UNIDROIT Principles’ article 3.10. It provides that a party may avoid a contract or a term if, at the time of the conclusion of the contract, the contract or term unjustifiably gave the other party an excessive advantage. It goes on: (2) Upon the request of the party entitled to avoidance, a court may adapt the contract or term in order to make it accord with reasonable commercial standards of fair dealing. (3) A court may also adapt the contract or term upon the request of the party receiving notice of avoidance, provided that that party informs the other party of its request promptly after receiving such notice and before the other party has reasonably acted in reliance on it. 127

[1993] OJ L95/29.

128

See generally Farnsworth (n 58) §4.28.

Internationalization or isolation

63

Both PECL and the UNIDROIT Principles in their respective innovative provisions on contractual hardship129 give a similar power to terminate or to adapt a contract where renegotiation has failed to produce a contract variation. What I would emphasize about these powers to adapt is that they are aspects of a larger policy to be found to varying degrees in the CISG, the UCC and the two sets of Principles, of favouring the preservation of a contract and its performance over facilitating its termination. Distinctly, but consistent with this policy of ‘ favor contractus’,130 express provision is made in all four instruments permitting a party in breach to cure its non-performance.131 However, to revert to powers to adapt contracts, what I wish to emphasize is that they are not novel and they are well accepted in international instruments. The reason for my emphasis is that Australian courts have far more wide-ranging powers to adapt contractual provisions under, for example, sections 87(2)(b) and 87(3) of the Trade Practices Act. These provisions have been remarkably underused.132 While there may be a variety of reasons to account for this, one, I would suggest, is the absence of ‘ favor contractus’ as an informing idea in Australian contract doctrine. To conclude what I have to say about international and comparative contract law, it is in my view fair to say that our common law stands at quite some remove from the converging bodies of law with which I have been concerned. The comparison is, in a sense, unfair because it is being made between judge-made law and instruments (whether or not statutory) prepared by experts over years which have been subject to rigorous review. Necessarily they reflect a coherence and betray a consistency in informing ideas to which the common law can hardly aspire. More importantly for present purposes, if there continues to be a gradual convergence of the contract laws of the civilian and common law systems133 that now is commonly noted, and if instruments such as the CISG, the UNIDROIT Principles and PECL continue to provide guidance in the modernization and harmonization of national and transnational contract laws, those instruments seem likely in quite some degree to embody the future with which Australian contract law will inevitably have to contend. For this reason I return to considering matters Australian. 129 130 131 132

133

PECL art 6:111; UNIDROIT Principles art 6.2.1. See Bonell (n 68) 102–26. CISG art 48; UCC §2–508; UNIDROIT Principles art 7.1.4; PECL art 8:104. See BG Donald and JD Heydon, Trade Practices Law (Vol 2) (Law Book, looseleaf) [18.1934]–[18.1935], [18.1980]. Cf Farnsworth (n 58).

64

Finn

C.

An Australian response?

It is unreasonable and unrealistic to expect the High Court systematically to renovate Australian contract law. That is beyond its function and its capacity. In any event, there is a range of renovations which probably could and should only be secured through legislation. This is particularly so where, as with consumer protection measures, inroads are to be made into party autonomy. It is reasonable, though, to expect the Court when suitable opportunities are presented, to rise above the making of mere doctrinal adjustments and to provide appropriate bearings for our contract law in the modern world. There are, I consider, real risks to contract law itself and real costs to Australia and Australians in failing to do so. Australian contract law, unhelpfully, has six potential sources – the common law, equity, Commonwealth statute, State or Territory statute, incorporated international instruments, for example, the CISG and, finally, the terms of contracts themselves. Having such diverse sources has, in my view, been a recipe for incoherence and for inertia in the legal development of contract law as such. Just as importantly, only the High Court on the one hand, or all of Australia’s legislatures acting together on the other, is capable of reforming contract doctrine as such. Twenty years ago, a United States reviewer of Essays on Contract,134 described Australian contract law as it emerged from that volume as being ‘interesting for its own sake. It appears to be a living museum of an earlier and simpler age of the common law.’135 I simply leave the question: Is this unjust? I think not if one considers only the common law and leaves out of account those statutory provisions such as Part V of the Trade Practices Act which, though not directed at contract doctrine as such, impact heavily on contractual behaviour. To some extent the legal practitioner has at least part of the remedy for this state of affairs in his or her own hands. Our commitment to party autonomy provides parties with the facility to mould contractual terms which are inconsistent with contract law’s default rules or which fill the gaps and silences in contract doctrine. This is now a commonplace practice and has become standardized in many fields of contractual activity (both national and international).136 Valuable as this facility is, though, it 134 135 136

P Finn (ed), Essays on Contract (Law Book Co, Sydney 1987). P Maggs, ‘Book Review’ (1987) 17 Int’l J Legal Info 53, 55–6. A recognized usage of the UNIDROIT Principles is that of providing model clauses for incorporation into a contract as terms of that contract: see Bonell (n 68) 248–56.

Internationalization or isolation

65

does not address directly the modern adequacy and utility either of what can be called the general principles of Australian contract law, or of the default rules that apply in the absence of agreement to the contrary. The drafting solution favours the well advised. It leaves casualties in its wake. And it is predicated on a prescience so often found wanting especially in long-term and relational contracts. More importantly, it privileges expertise because it presupposes an adequate appreciation that there are choices that can be made. This brings one to the important subject of legal education. I would not suggest that contract be taught unrelievedly as comparative law. Necessarily it must have a significant domestic doctrinal dimension, but a questioning one.137 The latter point is rather nicely made by Reinhard Zimmerman in writing on the Europeanization of private law:138 if students continue to be taught the niceties of their national legal systems without being made to appreciate the extent to which the relevant doctrines, or case law, constitute idiosyncracies explicable only as a matter of historical accident, or misunderstanding, rather than rational design, and without being made to consider how else a legal problem may be solved, a national particularization of legal scholarship that takes … the abracadabra of conditions, warranties, and intermediate terms for granted,139 threatens to imprint itself also on the next generation of lawyers.

My apprehension remains that we tend still, with notable exceptions, to do this to ‘the next generation of lawyers’. That we have done it in the past is evident often enough in the argument of counsel in contract cases. How we teach contract law can be a significant aspect of our solution. What needs to be guarded against is that we do not let how we teach remain part of the problem.140 It is not in our national interest to permit this. This brings me to my final point. I have for the most part asserted both that our law of contract stands apart in some degree from what is, or is becoming, internationally orthodox and that, in any event, it warrants systematic reappraisal in its own right. The influence of the international upon it is slight. One lesson is, I consider, obvious from the international developments I have mentioned. It is that the sensitive and successful 137 139

140

See Goode (n 8). 138 Zimmerman (n 74). Cf Koompahtoo Local Aboriginal Land Council v Sanpine Pty Ltd (2007) 233 CLR 115; but cf NC Seddon and MP Ellinghaus, Cheshire and Fifoot’s Law of Contract (8th Australian edn LexisNexis Butterworths, Chatswood 2002) [21.29]. In saying this, I am conscious that the flexibility given to teachers of contract law, particularly when the subject is taught early in a law course and in a semesterized system, is narrow indeed.

66

Finn

reformation of contract is likely best to be achieved if the task is undertaken in the first instance by experts, subject to rigorous review by judges and practitioners knowledgeable in the discipline – and this irrespective of whether the final product is or is not to be legislative in form. I emphasize this matter for this reason. A significant reappraisal of Australian contract law is needed but it needs first and foremost to be systematic; the law needs to be simplified and clarified; and it needs to be better aligned with international commercial law. If the ultimate vehicle must necessarily be national legislation because of the quirks of our federation, the process itself should not be left simply in the hands of governments.141 Australian contract law as a system is too important for that. 141

In the mid 1980s I proposed to the Law Council of Australia that a restatement of Australian contract law be formulated under its aegis. Though the proposal was greeted with real interest, it ultimately lapsed for understandable reasons to which it is unnecessary to refer here. Any future initiative to systematically consider our contract law should, in my view, proceed only with the very significant involvement of the Law Council and of the Australian judiciary.

3 The Australian law of restitution: has the High Court lost its way? Andrew Burrows *

A.

Introduction

When I first taught the BCL restitution course in Oxford in the late 1980s and early 1990s, and when I first came to Australia in 1994,1 we looked across with admiration, and not a little envy, at the wonderful judgments on the law of restitution of the High Court of Australia. We were enthralled by the decisions and reasoning in cases such as: Pavey & Matthews Pty Ltd v Paul,2 rejecting the implied contract theory and awarding a quantum meruit for work done under an unenforceable contract; David Securities Property Ltd v Commonwealth Bank of Australia3 allowing restitution *

Over the years I have been a great admirer of the scholarship of Michael Bryan. The hallmarks of his work are its clarity, practical common sense and careful attention to the details of the case law, combined with penetrating insights. It has also been a huge pleasure to know Michael as a person. His vast knowledge and his calm, modest and kind manner make him one of the very best people to talk to about private law. I am therefore delighted to contribute this chapter, which is a lightly amended version of my Hearn Lecture delivered at the University of Melbourne on 23 April 2009, in honour of Michael. I would like to thank the Melbourne Law School, especially Elise Bant, Michael Bryan and Simon Evans, for making my stay in Melbourne so enjoyable. A version of the Hearn Lecture was also given in Brisbane on 30 April 2009 as a Current Legal Issues seminar organized by the University of Queensland Law School and the Bar Association of Queensland. I would particularly like to thank Kit Barker and Dominic O’Sullivan for extending me that invitation. I would also like to thank David JS Jackson QC for his very interesting reply, prepared for that seminar, entitled ‘The Australian Law of Restitution: Is Andrew Burrows Right that the High Court Has Lost Its Way?’. Finally, I am grateful to James Edelman for his helpful comments on an earlier draft of this chapter.

1

It has been pointed out to me that there is an interesting contrast between this essay and the one I wrote during my Australian visit in 1994: A Burrows, ‘Understanding the Law of Restitution: A Map Through the Th icket’ (1995) 18 UQLJ 149 reprinted, with light updating, in A Burrows, Understanding the Law of Obligations: Essays on Contract, Tort and Restitution (Hart Publishing, Oxford 1998) 45–71. (1987) 162 CLR 221 (‘Pavey & Matthews’). 3 (1992) 175 CLR 353.

2

67

68

Burrows

for mistake of law and recognizing the change of position defence; and Commissioner of State Revenue (Vic) v Royal Insurance Australia Ltd4 rejecting a passing on defence to a claim for restitution of mistakenly overpaid stamp duty. At that time Australia led the way in its development and application of a principled law of restitution and England lagged woefully behind. How times have changed. The English law of restitution over the last fifteen years has seen the most remarkable transformation. The reasoning of the courts at all levels has been characterized by rigorous and enlightened analysis. The growth has been accelerated by two dramatic bursts of litigation, factually so fortunate for the law of restitution: the swaps litigation in the mid-1990s; and more recently, and ongoing, the so-called Hoechst litigation on the consequences of the striking down of UK advanced corporation tax legislation by the European Court of Justice.5 Both spates of litigation have spawned a series of path-breaking decisions on the law of restitution. It has been a thrilling time to be a restitution lawyer in England. Not so in Australia: for while excellent books on the Australian law of restitution have been written,6 the post-Mason High Court has produced little to inspire us. On the contrary, the leading recent cases – of which I will be focusing on three – have been a profound disappointment in attacking unjust enrichment theory as unwanted top-down reasoning. This looks both odd and backward when one compares the approach of the English courts to this area. In exploring these issues, I first want to outline very briefly five features of where we are with the English law of restitution before moving on to examine in detail the three leading High Court of Australia decisions since 2000 which, taken together, present a perplexing picture.

B.

The English law of restitution

The five features of today’s English law of restitution that I would like to draw to your attention are as follows.

4 5

6

(1994) 182 CLR 51. In Joined Cases C-397/98 and C-410/98 Metallgesellschaft Ltd and Hoechst AG v Commissioners of Inland Revenue [2000] ECR I-1727. J Edelman and E Bant, Unjust Enrichment in Australia (Oxford University Press, Melbourne 2006); K Mason, JW Carter and GJ Tolhurst, Mason and Carter’s Restitution Law in Australia (2nd edn LexisNexis, Sydney 2008).

Australian law of restitution

69

First, English law is close to having a settled conceptual framework for approaching restitutionary questions. Lord Nicholls and Lord Mance in Sempra Metals Ltd v IRC 7 have recently accepted the importance of the distinction drawn by many commentators between, on the one hand, restitution of an unjust enrichment where the cause of action is the unjust enrichment;8 and, on the other hand, restitution for wrongs, where a tort or breach of contract or an equitable wrong is the cause of action and restitution, if available at all, is an alternative remedy to compensation. The former – restitution of an unjust enrichment where there is no wrong – is what most of the subject is concerned with. It includes, for example, restitution of payments made by mistake, restitution of payments made for a consideration that has failed, restitution for the compulsory discharge of another’s debt, restitution of taxes demanded ultra vires by the Revenue, and restitution for the value of services rendered, or other non-money benefits supplied, under anticipated or invalid contracts. And in relation to restitution of an unjust enrichment, it is a crucial development, enhancing efficient, rational and transparent decision-making, that courts at all levels in England have found it helpful to rely on the four-step analysis advocated by commentators: benefit; at the expense of the claimant; an unjust factor; and defences.9 Second, this does not mean that, as a matter of pleading, it is sufficient in England simply to plead one’s cause of action for restitution as unjust enrichment. That is as inadequate as pleading compensation for tort without specifying the precise tort in question and its ingredients; or pleading damages for breach of contract without clarifying what constitutes the agreement, the consideration and the alleged breach. Therefore for unjust enrichment, as made clear in Uren v First National Home Finance Ltd,10 one has to plead one of the established categories, such as money paid by mistake or for a failure of consideration, or an incremental development from them. Third, as the scope of some of the unjust factors has been widened, so the courts have had to focus more carefully on the defences to restitution 7 8

9

10

[2007] UKHL 34, [2007] 3 WLR 354, [116], [230]–[231] (‘Sempra Metals’). This expresses the cause of action at a high level of generality. As we shall see in the next paragraph, the elements of the cause of action must be spelt out in the pleadings. See eg, Banque Financière de la Cité v Parc (Battersea) Ltd [1998] UKHL 7, [1999] 1 AC 221 (‘Banque Financière’) (Lord Steyn); Rowe v Vale of White Horse DC [2003] EWHC 388 (Admin), [2003] 1 Lloyd’s Rep 418 (Lightman J); Cressman v Coys of Kensington (Sales) Ltd [2004] EWCA Civ 47, [2004] 1 WLR 2775 (Mance LJ). [2005] EWHC 2529 (Ch).

70

Burrows

in order to protect security of receipt. Most importantly, since its recognition by the House of Lords in 1991 in Lipkin Gorman (a firm) v Karpnale Ltd,11 there have been many cases working out the precise elements of the change of position defence. We now know, for example, that a change of position in anticipation of an enrichment, as well as subsequent to an enrichment, can count; that the defence does not involve comparing the fault of the parties; but that change of position cannot be invoked by someone who has been objectively dishonest or has changed his or her position by conduct that is criminal. I should interject here that the importance of the change of position defence, which is a defence unique to unjust enrichment, cannot be overstated. In its fully developed form, unjust enrichment imposes strict liability in the sense that a person who receives an unjust enrichment is bound to make restitution even though he or she is not at fault. Strict liability, while so difficult to defend in, for example, tort law, is here justified precisely because unjust enrichment does not leave the defendant with any loss to bear. Prima facie one is merely taking away a gain that the defendant should not have had; and it is the change of position defence that precisely ensures that, overall, the defendant is made no worse off than it otherwise would have been by having to make restitution. Fourth, the English courts have regarded restitution of an unjust enrichment as integrating areas of equity as well as common law. For example, in Banque Financière de la Cité v Parc (Battersea) Ltd12 the House of Lords recognized that non-contractual equitable subrogation exemplifies restitution of an unjust enrichment; and in Sempra Metals their Lordships awarded compound interest, traditionally awarded only for breach of fiduciary duty, as the measure of the defendant’s unjust enrichment for invalidly demanded advanced corporation tax. Fift h and finally, while the overall picture is one of dramatic progressive development over the last fi fteen years, this is not to say that the English position is the fi nished article. On the contrary, it remains very much a work in progress. Most importantly, and disappointingly, the law on proprietary rights after equitable tracing was said by the House of Lords in Foskett v McKeown13 to be explicable within traditional opaque property reasoning without resort to unjust enrichment; and the House of Lords has still not had the opportunity since Lipkin Gorman to decide whether what is often referred to as ‘knowing receipt’, or the fi rst limb 11 13

[1991] 2 AC 548 (‘Lipkin Gorman’). [2000] UKHL 29, [2001] 1 AC 102.

12

Banque Financière (n 9).

Australian law of restitution

71

in Barnes v Addy,14 should be best viewed as awarding restitution for an unjust enrichment so that the fault element should be seen as relevant only to defences and not to establishing prima facie liability. For the time being, and despite the extra-judicial writings of Lord Nicholls and Lord Walker to the contrary,15 English law is stuck with requiring the recipient’s knowledge or, in the words of the Court of Appeal in BCCI v Akindele,16 unconscionability, in order to establish liability for receiving an enrichment transferred in breach of fiduciary duty.

C. The three decisions of the High Court of Australia 1.

Roxborough v Rothmans of Pall Mall Australia Ltd17

In Roxborough, a retailer (Roxborough) bought cigarettes from a wholesaler (Rothmans). The purchase price included an itemized amount representing the tax – in the form of a licence fee – that it was thought the wholesaler would have to pay over to the State. That tax was subsequently held to be unconstitutional so that the wholesaler did not have to pay it over. The retailer sought restitution from the wholesaler of the tax element of the payments. A majority of the High Court, Kirby J dissenting, held that the retailer was so entitled. This was because there had been a failure of consideration in the sense that the expected state of affairs – the wholesaler being required to pay over the tax – did not eventuate; and the part of the price representing the tax could be severed from the rest. Moreover, applying Commissioner of State Revenue (Vic) v Royal Insurance Australia Ltd,18 it was irrelevant to the claim for restitution that the retailer had ‘passed on’ that payment to its own customers as part of the price of cigarettes sold. I should emphasize straightaway that, in my view, this was a correct decision and that most of the reasoning of the majority – contained in a joint judgment of Gleeson CJ, Gaudron and Hayne JJ and separate judgments of Gummow J and Callinan J – should be supported. In particular, the majority correctly accepted and applied an extended meaning of failure of consideration beyond failure of a promised return and thereby 14 15

16

(1874) LR 9 Ch App 244 (‘Barnes v Addy ’). Lord Nicholls, ‘Knowing Receipt: The Need for a New Landmark’ in WR Cornish and others (eds), Restitution: Past Present and Future: Essays in Honour of Gareth Jones (Hart Publishing, Oxford 1998) 231; Lord Walker, ‘Dishonesty and Unconscionable Conduct in Commercial Life: Some Reflections on Accessory Liability and Knowing Receipt’ (2005) 27 Syd LR 187. [2001] Ch 437. 17 (2001) 208 CLR 516 (‘Roxborough ’). 18 (1994) 182 CLR 51.

72

Burrows

granted restitution even though the contract was valid. Kirby J dissented on the ground that, as the contract was valid and had not been terminated, one could not award restitution. But while contractual validity does normally exclude restitution, allowing restitution on the facts of this case did not conflict with the contractual allocation of risk which is the policy justification for the normal rule.19 As it was put in the joint majority judgment:20 It accords with the basis of dealing, and contractual arrangements, between the appellants and the respondent to regard that part of the net total amount of each invoice referable to the ‘tobacco licence fees’ as a severable part of the consideration which has failed … [T]he tax component of the net total wholesale cost was treated as a distinct and separate element by the parties. It was externally imposed. It was not agreed by negotiation … To permit recovery of the tax component would not result in confusion between enforcing a contract and claiming a right by reason of events which have occurred in relation to a contract.

One can alternatively look at this, as Robert Stevens has advocated,21 by asking what the position would have been if it had become known prior to payment that the tax was invalid. Would the retailer have been bound to pay that portion of the price? Or, as a matter of contractual construction, was payment of that part of the price conditional on the tax being valid? Agreeing with the decision of the majority, Stevens concludes that, as matter of construction, that part of the payment was conditional on the tax being valid and would not have been payable. So if that is all fine, what is the problem? The problem is that Gummow J, as one of the majority, took the opportunity in his separate judgment to launch a torpedo attack on unjust enrichment. For while he accepted that the implied contract theory of restitution was authoritatively rejected in Australia by Pavey & Matthews, he said that that case had not identified

19

20 21

P Birks, ‘Failure of Consideration and Its Place on the Map’ (2002) 2 OUCLJ 1 argued that, exceptionally, restitution did not on the facts subvert the valid contract because the tax element of the price was fi xed and not negotiated (and, analogously, he suggested (at 5) that Orphanos v Queen Mary College [1985] AC 761 (HL) may have been wrongly decided). Cf J Beatson and G Virgo, ‘Contract, Unjust Enrichment and Unconscionability’ (2002) 118 LQR 352, who argue that the dissenting judgment of Kirby J in Roxborough is to be preferred: the contract between the claimant and the wholesale seller of the tobacco was valid so that restitution of part of the purchase price should not have been awarded. Roxborough (n 17) [21]. R Stevens, ‘Is there a Law of Unjust Enrichment?’ in S Degeling and J Edelman (eds), Unjust Enrichment in Commercial Law (Lawbook Co, Pyrmont 2008) 11.

Australian law of restitution

73

a satisfactory doctrinal basis for the old money counts.22 His attack on unjust enrichment comprised three central objections. First, he argued that unjust enrichment was a ‘unifying legal concept’, to use Deane J’s words in Pavey & Matthews, 23 but was not a definitive legal principle. The danger otherwise was that unjust enrichment would become an all-embracing theory that would distort well-settled doctrines and remedies by the application of ‘top-down reasoning’ and undermine traditional common law development.24 I will refer to this as the ‘topdown reasoning’ objection. Second, Gummow J argued that there were examples of restitution by an action for money had and received where there had been no enrichment of the defendant so that unjust enrichment could not possibly be the explanation. I will call this the ‘no enrichment’ objection. Third, adopting a statement of Paul Finn,25 Gummow J considered ‘unconscionable conduct’ to be a better explanation of the trigger for restitution than unjust enrichment.26 As regards the common law action for money had and received, his specific reasoning was that, ever since Moses v Macferlan,27 this action had been conceived as embodying equitable ideas and central to it, in line with the need for ‘unconscionable conduct’, was that it must be unconscionable for the defendant to retain the money.28 I will refer to this as the ‘unconscionable retention’ objection. It was also reflected in the joint judgment of Gleeson CJ, and Gaudron and Hayne JJ, who talked of whether it was ‘unconscionable of the respondent to withhold repayment’ and of the ‘conscientiousness of the respondent’s retention of the moneys’.29 With respect, each of these three objections is flawed. The first ‘top-down reasoning’ objection is perhaps the most surprising. This is because, as I see it, the whole modern restitution movement has been the very antithesis of top-down reasoning. Commentators like Goff and Jones, and Peter Birks, have been concerned to work from the bottom up with the raw material of the case law providing the acknowledged starting point for the analysis of principle. The books of those scholars are crammed with the details of cases and they are, or were, scholars renowned for their encyclopaedic knowledge of the common law 22 24 25

26 28

Roxborough (n 17) [64]. 23 Pavey & Matthews (n 2) 256–7. Roxborough (n 17) [82]–[84]. P Finn, ‘Equitable Doctrine and Discretion in Remedies’ in Cornish and others (n 15) 251, 252. 27 Roxborough (n 17) [70]. (1760) 2 Burr 1005, 97 ER 676 (KB). Roxborough (n 17) [83]–[89]. 29 Ibid [23]–[24].

74

Burrows

and their mastery of its intricacies. In a modern law school, although legal practitioners may not realize this, there are plenty of academics with topdown theories: eg those who wish to show that the common law promotes economic efficiency or those who argue that the common law discriminates against women. Restitution scholars stand at the other end of the scale and are sometimes derided precisely because they are black-letter lawyers concerned with the painstaking analysis of the rules, principles and doctrine laid down by the judges. In the light of the ‘top-down reasoning’ objection, it is ironic that, in seeking to allay the fears of those who had traditionally rejected the language of unjust enrichment as too discretionary and open-ended, Birks precisely stressed that the law of unjust enrichment that he was advocating was ‘downward-looking to the cases’ and did not seek to ‘draw on an unknowable justice in the sky’.30 For similar reasons it is, with respect, nonsense to suggest that unjust enrichment reasoning somehow contradicts traditional common law reasoning. The common law is developed precisely by the articulation of principle from a mass of decisions. Recognition of the principle against unjust enrichment represents nothing more, and nothing less, than the application of standard common law techniques and shows the common law working at its brilliant best. Indeed, Gummow J’s preference for the language of unconscionable retention shows that he himself, inevitably as an appellate judge, has sought to articulate an underlying principle. Finally to say that unjust enrichment is a legal concept but not a defi nitive legal principle requires further elaboration as to what exactly is meant31 and, on one view, is to draw a distinction without a difference. The second ‘no enrichment’ objection can be quickly dismissed. If there have been successful non-contractual actions for money had and received where the defendant has not been benefited, then Gummow J would clearly be correct that at least those cases could not rest on unjust enrichment. But at best that would be a partial objection because it would obviously leave untouched the many cases where there has been enrichment. More fundamentally, however, Gummow J is, in my view, 30

31

P Birks, An Introduction to the Law of Restitution (revd edn Clarendon Press, Oxford 1989) 19. Th is may be thought reminiscent of the now discredited language of Lord Diplock in Orakpo v Manson Investments Ltd [1978] AC 95. For two diametrically opposed interpretations of what this distinction may mean (on the one hand as a rejection of idiosyncratic notions of fairness and, on the other hand, as a rejection of unjust enrichment as a category of law) see the editors’ ‘Introduction’ in Degeling and Edelman (n 21) 1, 9–10.

Australian law of restitution

75

wrong to think that there have been any relevant ‘no enrichment’ cases. The main example he referred to was the New Zealand case of Martin v Pont32 where the claimant had given his accountant NZ$600,000 to invest and the money had been stolen by one of the accountant’s employees for whom the accountant was responsible. It was held that, irrespective of any tort claim for damages, the claimant could recover the money from the accountant in an action for money had and received. This can be straightforwardly interpreted as an award of restitution for a failure of consideration where the defendant received the money, and hence was initially enriched by it, but could not rely on the change of position defence because the theft was committed by one of its own employees. The personal law of unjust enrichment is prima facie concerned with the defendant receiving an enrichment:33 if the defendant has subsequently been disenriched in good faith that is a matter for the defence of change of position. In so far as Gummow J was suggesting that, if the defence of change of position does not relieve the defendant, one cannot be concerned with the defendant’s enrichment, he was missing the important point that it is the defendant’s initial (unjust) enrichment that prima facie triggers restitution. The third ‘unconscionable retention’ objection fails because it will always be unconscientious to retain an unjust enrichment received, subject to recognized defences such as change of position. So focusing on unconscionable or unconscientious retention adds precisely nothing to the essential unjust enrichment enquiry. It merely semantically repackages the same analysis under a different label albeit one which superficially allowed Gummow J to rid himself of the language of unjust enrichment. To adapt a metaphor used by Birks, unconscionable retention is no more than a fi ft h wheel on the unjust enrichment coach. 34 This was, in effect, recognized as early as 1841 in Kelly v Solari,35 one of the leading cases on restitution of a mistaken payment. An insurance company had paid out on a life insurance policy to a widow even though 32

33 34

35

[1993] 3 NZLR 25. He also referred to the old case of Parry v Roberts (1835) 3 Ad & El 118, 111 ER 358 where the defendant entrusted with money had lost it in a brothel but was held liable in an action for money had and received. Although not analysed in this way one can say that the defendant was initially enriched by the money and could not here rely on a change of position defence. This links with the old language of money ‘had and received’. In discussing ‘knowing receipt’, P Birks in ‘Receipt’ in P Birks and A Pretto (eds), Breach of Trust (Hart Publishing, Oxford 2002) 213, 226 wrote, ‘“unconscionable” seems no more than a fi ft h wheel on the coach’. (1841) 11 LJ Ex 10, 152 ER 24.

76

Burrows

the policy had lapsed because of her deceased husband’s failure to keep up the premiums. In response to the widow’s submission that, beyond showing that she had received a mistaken payment, it must have been unconscientious for her to retain it, Rolfe J said the following: With respect to the argument that money cannot be recovered back except where it is unconscientious to retain it, it seems to me, that wherever it is paid under a mistake of fact, and the party would not have paid it if the fact had been known to him, it cannot be otherwise than unconscientious to retain it.36

In other words, unconscientious retention added nothing beyond the essential unjust enrichment enquiry of whether the payment received had been made by a relevant mistake. One also wonders when, in Gummow J’s world, the cause of action for restitution of a mistaken payment would accrue. The case law clearly establishes that the cause of action accrues at the date the payment is received.37 It does not accrue at a later date when the defendant knows (or ought to know) of the mistake; and a demand for repayment is irrelevant and unnecessary.38 Yet if Gummow J were correct that unconscionable retention triggers the restitution, that established law on accrual would presumably have to be regarded as wrong. It is also puzzling that what Gummow J said on unconscionable retention in Roxborough seems to be inconsistent with what he has said in other judgments as to the vague and conclusory nature of the language of unconscionability. So, for example, in Garcia v National Australia Bank Ltd39 he was party to the joint judgment saying that to use that language is ‘to characterise the result rather than to identify the reasoning that leads to the application of that description’. And in ACCC v CG Berbatis Holdings Pty Ltd40 Gummow and Hayne JJ approved remarks of John McGhee QC that the broad use of terms like unconscionable and unconscientious ‘may have masked rather than illuminated the underlying principles at stake’. One can only conclude that, despite his eminence and influence, Gummow J’s torpedo in Roxborough was both ill designed and badly targeted. 36 37

38

39

Ibid 19. Kleinwort Benson Ltd v South Tyneside Metropolitan Borough Council [1994] 4 All ER 972 (Hobhouse J); Kleinwort Benson Ltd v Lincoln City Council [1999] 2 AC 349 (Lord Hope). Baker v Courage & Co [1910] 1 KB 56; Fuller v Happy Shopper Markets Ltd [2001] 1 WLR 1681. (1998) 194 CLR 395, 409. 40 (2003) 214 CLR 51, 73.

Australian law of restitution

2.

77

Farah Constructions Pty Ltd v Say-Dee Pty Ltd41

Farah, which was controlled by a Mr Elias, and Say-Dee were two companies. They entered into a joint venture to develop a property in Sydney, which they purchased as joint tenants. Mr Elias, acting for Farah, was told by the local council that it would not grant planning permission for the proposed development unless the site could be amalgamated with neighbouring properties. It was in dispute whether that information had been sufficiently disclosed by Mr Elias to Say-Dee. Mr Elias subsequently arranged for two of the neighbouring properties to be bought, one by a company he controlled and the other by himself, his wife and their daughters. At first instance Palmer J of the Supreme Court of New South Wales had held that there had been no breach of fiduciary duty by Farah because Mr Elias had made sufficient disclosure of the information to Say-Dee.42 That was overturned by the New South Wales Court of Appeal (Tobias JA, with whom Mason P and Giles JA agreed) which found that the disclosure had been insufficient so that Farah was in breach of fiduciary duty to SayDee. In addition to Farah’s liability as a defaulting fiduciary, the Court of Appeal held that the land acquired by Mrs Elias and her daughters was held on constructive trust in the relevant shares for Say-Dee. This was because they were recipients of property transferred in breach of fiduciary duty with the guilty knowledge of their agent, Mr Elias, being imputed to them43 or, irrespective of that, because recipient liability under the first limb of Barnes v Addy is best viewed as imposing strict liability for restitution of an unjust enrichment, subject to defences. And here Mrs Elias and her daughters could not rely on the defence of being bona fide purchasers for value because they were volunteers.44 Nor, for reasons that I do not wish to explore in this chapter, was there a defence that Mrs Elias and her daughters had been registered with an indefeasible title.45 41

42 43

44 45

[2004] NSWSC 800, rev’d [2005] NSWCA 309, aff ’d (2007) 230 CLR 89 (HC) (‘Farah ’). While I disagree with their rejection of the normative force of strict liability unjust enrichment, see generally for an assessment of the Farah case, P Ridge and J Dietrich, ‘The Receipt of What? Questions Concerning Th ird Party Recipient Liability in Equity and Unjust Enrichment’ (2007) 31 MULR 47; P Ridge and J Dietrich, ‘Equitable Th ird Party Liability’ (2008) 124 LQR 26. Farah (NSWSC) (n 41). The imputation was said to give them constructive knowledge: see Farah (NSWCA) (n 41) [214]– [215]. Ibid [213], [234]. See M Harding, ‘Barnes v Addy Claims and the Indefeasibility of Torrens Title’ (2007) 31 MULR 343. Cf M Bryan, ‘Recipient Liability under the Torrens System: Some Category

78

Burrows

In so interpreting Barnes v Addy recipient liability as imposing strict liability, based on unjust enrichment, the New South Wales Court of Appeal said that there was ‘no reason why the proverbial bullet should not be bitten’;46 and, in line with obiter dicta in previous Australian cases – most notably Hansen J’s detailed dicta in Koorootang Nominees Pty Ltd v Australia and New Zealand Banking Group Ltd47 – and the writings of academics and judges, most importantly Birks48 and Lord Nicholls,49 the Court of Appeal saw itself as moving the law forward to a preferable principled position. In overturning that decision, the High Court of Australia, in a joint judgment of Gleeson CJ, Gummow, Callinan, Heydon and Crennan JJ, held that there had been sufficient disclosure of information by Farah to Say-Dee so that Farah had not been in breach of fiduciary duty; but that even if there had been a breach of fiduciary duty, Mrs Elias and her daughters did not receive trust property; and that, even if they did, the knowledge of Mr Elias could not be imputed to them as he was not their agent. Moreover, Mrs Elias and her daughters were not volunteers but bona fide purchasers for value without notice. The Court of Appeal’s strict liability interpretation of recipient liability was subjected to a scathing attack. That reasoning was said to have been unjust to the parties, to have led to confusion in the courts, and to have been contrary to both authority and principle.50 In my view, the High Court was correct to reverse the Court of Appeal. For even if there was a breach of fiduciary duty by Farah, and even if Mrs Elias and her daughters provided no value so that they were not

46 48

49 50

Errors’ in C Rickett and R Grantham (eds), Structure and Justification in Private Law (Hart Publishing, Oxford 2008) 339–59. Bryan argues more generally that Barnes v Addy recipient liability should have been irrelevant in Farah. As the Court of Appeal had been concerned with imposing a constructive trust, rather than personal rights to value received, the relevant principles should have been property law principles for the return of equitable trust property. They impose strict liability subject to the holder being a bona fide purchaser for value without notice. But it is submitted that one might regard the constructive trust as the creation of a new proprietary right over particular property resting on the same principles as those applied to the personal ‘receipt’ claim (whether the basis of that be unjust enrichment or an equitable wrong). Farah (NSWCA) (n 41) [232]. 47 [1998] 3 VR 16. P Birks, ‘Misdirected Funds: Restitution from the Recipient’ [1989] LMCLQ 296; Birks (n 34) 213–40. Lord Nicholls (n 15) 230–45. A second limb Barnes v Addy claim, not discussed in the Court of Appeal, was also rejected by the High Court because there had been no dishonest or fraudulent design and, in any event, Mrs Elias and her daughters did not have sufficient knowledge of it.

Australian law of restitution

79

bona fide purchasers, it is hard to see how Mrs Elias and her daughters could be said to have received property transferred in breach of fiduciary duty. It might be that what the Court of Appeal had in mind was that the information acquired by Mr Elias was trust property, that it was traceable into the land, and that Mrs Elias and her daughters were recipients of that land. But there was no clear discussion of this by the Court of Appeal and factually there was no transfer by Farah of information or land to Mrs Elias and her daughters. They never acquired the information and they, not Farah, fi rst acquired the land. It follows that, on an unjust enrichment analysis, it was unclear how it could be said that the benefit to Mrs Elias and her daughters was at the expense of Say-Dee. But while the decision was correct, I part company with the High Court in its analysis of authority and principle on the question of a recipient’s strict liability. In terms of authority, the New South Wales Court of Appeal had pointed to the conflict between the common law model of restitution, as applied in Lipkin Gorman,51 which imposes strict liability on a third party recipient subject to defences, and the equitable law on ‘knowing receipt’ which imposes fault-based liability on a third-party recipient of property transferred in breach of fiduciary duty. Coherence in the law dictates that, unless there is good reason for the difference, one cannot have two different models of restitutionary liability applying to what is essentially the same fact pattern. How can it be that if A takes money from B’s pocket and transfers it to C, C is strictly liable to make restitution to B subject to defences, whereas if A as a trustee takes money from a trust fund held for B and transfers it to C, C is only liable to make restitution to B if it knew that the money was transferred in breach of trust? The High Court of Australia’s answer was not to provide, or even to attempt to provide, a rational explanation for the difference. Instead it thought it sufficient to say that Lipkin Gorman was not argued as a breach of fiduciary duty case;52 that coherence in the law was ‘not a satisfactory reason for an intermediate appellate court to effect a radical change in the law’;53 and that the unsettling of the traditional equitable approach by the Court of Appeal showed how right Gummow J had been in Roxborough to denounce unjust enrichment as a legal principle.54 Permeating the High Court’s reasoning was the belief that common law and equity are fundamentally distinct so that they can happily co-exist without amendment 51 53

Lipkin Gorman (n 11). 52 Farah (HC) (n 41) [141]. Ibid [148]. 54 Ibid [151].

80

Burrows

even though it had been powerfully argued by the New South Wales Court of Appeal in line with the views of many commentators that, in this context, the judges have been applying clashing approaches at common law and equity to the same basic question of liability. Perhaps even more disappointing than the High Court’s failure to address the fundamental question of principle, was its failure to recognize that, even within equity, the insistence on fault has not been uniform. When Peter Birks first exposed the inconsistencies, as between common law and equitable approaches to the receipt of misdirected funds, a major plank of his argument was that even within equity there are pockets of law where strict liability has been imposed on recipients. The major example he gave was the House of Lords’ decision in Ministry of Defence v Simpson55 where, on the in personam claim, the charities were held strictly liable to repay the monies mistakenly transferred to them by the executors in breach of fiduciary duty. Yet the High Court of Australia, despite its fondness for equitable precedent, thought it unnecessary even to mention that leading equitable case relied on by Birks and Lord Nicholls. But there is even more that can be said about precedents in equity. Even if we put to one side equitable proprietary rights after tracing, which do not depend on fault but might be regarded as raising different issues, two examples will suffice to show that it is a myth to pretend that equitable restitutionary liability is always fault-based. In the recent case of Re Griffiths56 the deceased had made three transfers, two in April 2003 and the third in February 2004, in an attempt to avoid paying inheritance tax. The success of the scheme depended on his survival for seven years but he died in April 2005. His executors sought to set aside the gifts for mistake in equity. It was held that, at the time of the third gift but not at the time of the first two, the deceased was relevantly mistaken in that, while he thought he was healthy, he had already contracted cancer. Applying a well-established equitable jurisdiction, the third gift was therefore set aside for mistake. The importance for my theme in this chapter is that the sole question at issue was whether the deceased had been acting under a serious – which was taken to mean a ‘but for’ – mistake. It was completely irrelevant that the recipients of the gifts had no knowledge of his mistake. In other words, it was taken as read that the liability here was strict just 55

56

[1951] AC 251. Other cases suggest that this case can be applied outside the realm of the administration of estates. See Baker Ltd v Medway Building and Supplies Ltd [1958] 2 All ER 532 (Danckwerts J), [1958] 3 All ER 540 (CA); and the obiter dicta in Butler v Broadhead [1975] Ch 97 and Re J Leslie Engineers Ltd [1976] 1 WLR 292. [2008] EWHC 118, [2008] 2 All ER 654.

Australian law of restitution

81

as it would have been had the claim been at common law for a mistaken payment. Even closer to the sort of third party recipient liability in Barnes v Addy is the old case of Bridgeman v Green.57 There the claimant, who was wealthy but vulnerable, had made significant gifts under the undue influence of his servant not only to the servant but also to some of the servant’s relatives and friends. Those third parties were held strictly liable to make restitution to the claimant. As they were not bona fide purchasers for value without notice, there was no justification for their being enriched at the expense of the claimant who did not truly mean them to have the money. In the words of Lord Commissioner Wilmot:58 There is no pretence that Green’s brother or his wife was party to any imposition, or had any due or undue influence over the plaintiff; but does it follow from thence, that they must keep the money? No: whoever receives it, must take it tainted and infected with the undue influence and imposition of the person procuring the gift … Let the hand receiving it be ever so chaste, yet if it comes through a corrupt polluted channel, the obligation of restitution will follow it

The truth, as I see it, is that strict liability subject to defences is a principled way to reconcile the inconsistency on the standard of liability which exists not only as between common law and equity59 but also internally within equity. Admittedly it would have been prudent for the New South Wales Court of Appeal to have heard arguments by counsel on the strict liability approach, instead of proceeding entirely on its own initiative. But no court is bound to stick to the confines of what has been argued before it. The job of a judge and most obviously of an appellate court is to decide the case on the facts as found and according to the law as it determines it to be in line with precedent. And strictly speaking there was no binding Australian precedent against the Court of Appeal’s approach.60 If the 57 59

60

(1757) Wilm 58. 58 Ibid 64–5. M Bryan, ‘The Liability of the Recipient: Restitution at Common Law or Wrongdoing in Equity’ in S Degeling and J Edelman (eds), Equity in Commercial Law (Lawbook Co, Sydney 2005) 327–47 has helpfully pointed out that in some Australian cases (eg State Bank of New South Wales v Swiss Bank (1995) 39 NSWLR 350; Port of Brisbane Corp v ANZ Securities (No 2) [2003] 2 Qd R 661; Spangaro v Corporate Investment Australia Funds Management Ltd [2003] FCA 1025), it has been accepted that a common law money had and received claim (applying Lipkin Gorman, strict liability and change of position) can be brought against the recipient of property transferred in breach of fiduciary duty. What was said on the first limb of Barnes v Addy in Consul Developments Pty Ltd v DPC Estates Pty Ltd (1975) 132 CLR 373 was obiter dicta.

82

Burrows

Court of Appeal for articulated rational reasons regarded the traditional understanding of the first limb of Barnes v Addy to be flawed, it was duty bound to say so and to seek to put the law, by interpretative development, on a sounder footing. In so far as the High Court was suggesting that principled development of the common law is a matter for the High Court only and not for the Court of Appeal in any of the Australian states, this seems to me to be a surprising and ultra-conservative view of the role of Australian appellate courts.

3.

Lumbers v W Cook Builders Pty Ltd61

Finally we come to Lumbers. In essence the question at issue here was whether a sub-contracting builder (Cook Builders), working under a contract with the head-contractor (Sons), was entitled to restitution from the building owner (the Lumbers). The background to the claim, which was for AU$261,715, was that four years after the work in constructing a large house had been completed by the sub-contractor, its liquidator realized that it had not been paid all it should have been for building the house. The sub-contractor decided before trial not to proceed against the headcontractor and instead sued the owner on the ground either that it had been assigned the benefit of the head-contractor’s contract with the owner or that it had a direct claim for restitution against the owner. The assignment argument was dismissed at trial and, from then on, the focus in the case was on the alternative restitutionary claim. That claim was accepted by a majority of the Full Court of the Supreme Court of South Australia but was rejected on appeal to the High Court of Australia. The decision of the High Court again seems correct. Although, in my view far from straightforward, the best explanation for denying restitution is that the benefit received by the owner62 was at the expense of the head-contractor and not at the expense of the sub-contractor. In the words of Gleeson CJ in his excellent judgment, ‘If [the Lumbers] have been enriched, it is at the expense of Sons.’63 This is because the work by 61

62

63

(2008) 232 CLR 635 (‘Lumbers’). See on this case, J Edelman, ‘Unjust Enrichment and Contract’ [2008] LMCLQ 444; JS Getzler, ‘Quantum Meruit, Estoppel and Primacy of Contract’ (2009) 125 LQR 196, 204–9. I am also grateful for having had the opportunity to read the excellent unpublished paper by M Rush, ‘The Intersection between Contract and Unjust Enrichment’. It is submitted that the owner’s request for the building work carried out, albeit made to the head-contractor, was sufficient to establish that the owner was benefited by that building work. Lumbers (n 61) [54].

Australian law of restitution

83

the sub-contractor was contractually procured by the head-contractor so that, although the sub-contractor directly did the work, it was doing it under a valid contract for the head-contractor who in turn was responsible for it to the owner. For the sub-contractor to claim directly against the owner would have required, in Birks’ graphic phrase, ‘leapfrogging’ which, at least in general, has not been allowed in the law of unjust enrichment not least because this would undermine the contractual risk taken by the sub-contractor. Equivalent situations have arisen in a number of English cases and have been subjected to careful analysis by commentators in discussing what is meant by ‘at the expense of the claimant’.64 The principal reasoning of the majority of the High Court of Australia was in the joint judgment of Gummow, Hayne, Crennan and Kiefel JJ. They focused on the contractual relationship between the owner and the head-contractor. The central message was that that contract would be unacceptably undermined if the sub-contractor’s restitutionary claim against the owner were allowed; and contrary to the view of the lower courts, the fact that the head-contractor had acknowledged that it would make no claim for payment against the owner was judged to be an inadequate reason for putting that contractual relationship to one side. It would seem that the Court’s focus on the contractual relationship between the owner and the head-contractor was an alternative good reason for denying restitution. One might say that, vis-à-vis the subcontractor, the owner was in an analogous position to a bona fide purchaser for value and certainly it was legally entitled to the work under its contract with the head-contractor so that it is hard to see how that enrichment was unjust vis-à-vis the sub-contractor. But as between the ‘at the expense of’ explanation, which focuses on the relationship between the head-contractor and the sub-contractor, and the ‘valid contract’ explanation, which focuses on the relationship between the owner and the head-contractor, the former seems the more important. This is because it would apply even if there was no valid contract between the owner and head-contractor, for example, because a purported contract between them was void. Although there would then be no question of a restitutionary claim by the sub-contractor undermining a valid contract between the owner and the head-contractor, one would 64

See eg, P Birks, Unjust Enrichment (2nd edn Oxford University Press, Oxford 2005) 89–93. Any suggestion that commentators have had to amend artificially the meaning of ‘at the expense of’ to accommodate the decision in Lumbers is undermined by the fact that commentators like Birks were writing prior to that decision.

84

Burrows

surely still not wish to allow that claim. And that is precisely because the benefit to the owner was at the expense of the head-contractor and not at the expense of the sub-contractor. But the disappointment here about the joint judgment is its apparent desire to take the Australian law of restitution back into the old world of the forms of action. So it was thought to be of central importance that the sub-contractor could not bring itself within the traditional pleading that the claim was for work and labour done for and at the request of the defendant, ie the owner. That old form of pleading was thought superior to the three-stage analysis into benefit, at the expense of, and unconscionable retention without payment. That analysis was itself now described as dangerous ‘top-down reasoning’ which created a risk of incoherence with other branches of the law, namely, in Lumbers, the contract governing the relationship between the head-contractor and the owner.65 And it was again said that in Australia, unjust enrichment is a legal concept and not a principle for direct application in particular cases.66 If Roxborough took us down the unhelpful road of unconscionable retention, and if Farah irrationally rejected the need for consistency between common law and equity, Lumbers has taken us back into the blind alley of the forms of action. The whole point of the restitution movement was to unpack the wording of the old forms of action and their related pleading so that they can be explained in modern transparent terminology that enables us to understand exactly what the judges are doing. If you so wish, use the mumbo-jumbo language of money had and received to the claimant’s use, or money paid to the defendant’s use, or quantum meruit. But do not pretend that in the modern age that is preferable to the language of unjust enrichment at the claimant’s expense. On the particular issue being dealt with in Lumbers, we know that the reliance on a request in the traditional pleading was often a fiction. And this led us to analyse the role of request and to conclude that it was largely concerned to establish that the particular defendant had been enriched by services but that that enrichment might be established in other ways (eg where the benefit is a necessity and hence incontrovertibly beneficial). Of course, one must be careful not to allow the law of restitution to undermine contract and hence the risks undertaken by the parties. That is the basic theme of much of the discussion by commentators of what is meant by ‘at the expense of’. As Lord Goff himself said in Pan Ocean Shipping

65

Lumbers (n 61) [77]–[78].

66

Ibid [185].

Australian law of restitution

85

Co Ltd v Creditcorp Ltd, The Trident Beauty,67 ‘it is always recognised that serious difficulties arise if the law seeks to expand the law of restitution to redistribute risks for which provision has been made under an applicable contract’.68 But going back into the forms of action in preference to adopting an unjust enrichment analysis will do nothing to help understand or promote that policy and will merely serve to obfuscate the reasoning of the courts. As James Edelman has powerfully expressed it in his case note on Lumbers: ‘No-one today would suggest abolishing our framework of torts and replacing them with forms such as “trespass” and “case”. It would be a pity if the [reasoning] in this case were taken as an attempt to resuscitate them for the law of unjust enrichment.’69

D.

Conclusion

My depressing conclusion is that, while all three of these leading cases were correctly decided, much of the reasoning indicates that, with respect, the High Court has lost its way in relation to the Australian law of restitution. One escape route might be to downplay the importance of that reasoning and to argue that the High Court has merely been warning against the dangers of an over-rigid, or, at the other extreme, an excessively openended, application of unjust enrichment reasoning. But whatever strategy is adopted it is essential to the rationality and coherence demanded by the rule of law that unjust enrichment reasoning is restored to its rightful central place. Indeed as one looks across Australia the schizophrenia is striking because in many lower courts, although admittedly prior to Lumbers, judges (including Gummow J himself in 1991 in the Federal Court)70 have been using the benefit, at the expense of and unjust factor reasoning. That is the way forward and it is incumbent on all of us interested in the Australian law of restitution – whether academic, judge or practitioner – to try to ensure that the High Court is put back on track.71 67 69 70 71

[1994] 1 WLR 161. 68 Ibid 166. J Edelman, ‘Lumbers v W Cook Builders Pty Ltd ’ (case note) [2008] LMCLQ 444, 448–9. Winterton Constructions Pty Ltd v Hambros Australia Ltd (1991) 101 ALR 363. Subsequent to the completion of this chapter, and reinforcing its central theme, the same or similar unsound criticisms of unjust enrichment as those examined in this chapter have been repeated by the High Court of Australia in the context of subrogation in Bofinger v Kingsway Group Ltd [2009] HCA 44. The unjust enrichment reasoning of the House of Lords in Banque Financière (n 9) was specifically rejected.

4 Privacy and private law: developing the common law of Australia Michael Tilbury *

A.

Introduction

At first glance, there appears to be fairly extensive statutory regulation of individual privacy in Australia.1 Closer investigation reveals that such regulation is generally aimed at ‘the fair handling of personal information’2 (‘ information privacy’). This leaves unregulated other aspects of privacy, such as the invasion of the personal space of an individual (‘ intrusion on seclusion’). The legislation’s application may also be restricted to particular bodies (such as public sector agencies), while its enforcement mechanisms are likely to be directed principally to the implementation of the principles, standards, rules and procedures it prescribes, rather than to the provision of remedies aimed at redressing individuals for harm they have suffered as a result of its infringement. This lack of focus on individual redress is not met by any general protection of privacy in private law. Traditionally, as is well known, there is no tort of invasion of privacy at common law. Nor does equitable doctrine extend to protect privacy as such. Calls for the more general protection of privacy in modern law are usually sourced to a famous article of Warren and Brandeis in 1890.3 Over a century later, that call remains largely unheeded, at least in Australia. But times may be changing. Legislatures have begun to recognize a ‘right’ to privacy in human rights charters;4 the pressure for the protection of individual privacy is apparent in case law;5 and recent reviews of privacy in *

The opinions expressed in this essay are those of the author alone.

1

Eg Privacy Act 1988 (Cth). Ormonde v NSW National Parks and Wildlife Service (No 2) [2004] NSWADT 253, [56]. S Warren and L Brandeis, ‘The Right to Privacy’ (1890) 4 Harv L Rev 193. Human Rights Act 2004 (ACT) s 12(a); Charter of Human Rights and Responsibilities Act 2006 (Vic) s 13(a). Consider Australian Broadcasting Corporation v Lenah Game Meats Pty Ltd (2001) 208 CLR 199 (‘Lenah Game Meats ’); Giller v Procopets [2008] VSCA 236 (‘Giller ’);

2 3 4

5

86

Privacy and private law

87

Australia and New Zealand have mooted, or called for, the development of a statutory action for invasion of privacy.6 This chapter considers the ways in which courts in Australia could respond to the pressure to give greater recognition to privacy interests in the context of private law, that is, in actions in which one individual seeks redress from another for an alleged invasion of his or her privacy. Its thesis is that the common law (including equity) provides neither sensible nor optimal avenues for the further development of privacy protection. The failure of the common law to date to provide an action for invasion of privacy may itself be eloquent testimony of this.

B.

Using and adapting tortious causes of action

Traditionally, the common law is thought to have offered only ‘piecemeal’ protection to the privacy interests of individuals,7 and to have done so incidentally or indirectly in tortious actions devoted principally to the protection of other interests. A good example is the decision of the English Court of Appeal in Kaye v Robertson.8 A well-known television actor, whom the defendant tabloid newspaper interviewed and photographed while he was lying in hospital recovering from brain surgery and only in partial command of his faculties, was able to enjoin the publication of an article suggesting that he had consented to the interview and had agreed to have the picture taken. The defendant’s false claim to the plaintiff ’s consent, as well as the economic damage that would result from the plaintiff ’s lost opportunity of selling his story to other newspapers, provided the basis for a claim in malicious falsehood, a tort that, broadly, protects plaintiffs’ economic interests against the false statements of defendants.9 The injunction that the plaintiff was able to obtain

6

7 9

Jane Doe v Australian Broadcasting Corporation [2007] VCC 281 (County Court of Victoria) (‘Jane Doe ’); Grosse v Purvis [2003] QDC 151 (District Court of Queensland) (‘Grosse v Purvis’). Especially NSW Law Reform Commission, ‘Invasion of Privacy’ (Report 120, 2009), to which draft legislation is appended. See also Australian Law Reform Commission, ‘For Your Information: Australian Privacy Law and Practice’ (Report 108, 2008) Vol 3 ch 74; New Zealand Law Commission, ‘Invasion of Privacy: Penalties and Remedies’ (Review of the Law of Privacy Stage 3, Issues Paper 14, 2009). See R v Khan [1997] AC 558, 583 (Lord Nicholls). 8 [1991] FSR 62 (‘Kaye’). See AM Dugdale and MA Jones (gen eds), Clerk & Lindsell on Torts (19th edn Sweet & Maxwell, London 2006) [24–02]. On the requirements of an action for injurious falsehood in Australian law, see Palmer Bruyn & Parker Pty Ltd v Parsons (2001) 208 CLR 388 (‘Palmer Bruyn & Parker ’).

88

Tilbury

addressed, at least partially,10 what Bingham LJ called the ‘monstrous’ invasion of his privacy. This piecemeal protection of privacy leaves open the possibility that gross invasions of privacy can be without remedy where the facts of a case cannot be made to fit within the pigeon-hole of an existing tort. And this possibility leads to the charge that the common law compares unfavourably to other systems of law, like German law, that have a more cohesive approach to privacy.11 However, this charge reflects a limited view of the common law. On the one hand, it underestimates the force of privacy in some common law actions, at least in their application to particular contexts. On the other hand, it tends to play down the creative element in the development of the common law, suggesting a methodology that is at once mechanistic and simplistic. The two torts in which the common law has given the most significant protection to individual privacy are trespass to land and defamation. Trespass to land is the most prominent. Spigelman CJ of the New South Wales Court of Appeal has said that ‘[t]he protection of privacy interests has long been recognised as a social value protected by the tort of trespass’.12 The tort of trespass to land consists of the unauthorized entry by one person upon land in the possession of another.13 The High Court of Australia has described the right of the person in possession of the land, or entitled to its possession, to exclude other persons from the property as a ‘fundamental common law right’.14 As part of the law’s policy of protecting possession, it also protects ‘the privacy and security of its occupier’,15 the more so where the land in question is the occupier’s home.16 The strong connection between respect for privacy and respect for the home, reflected 10

11

12 13

14

15 16

The injunction restrained the publication of any matter that conveyed that the plaintiff had voluntarily consented to be photographed and interviewed, which was, obviously, lesser protection than would be given by an injunction protecting his privacy more broadly: see Kaye (n 8) 66, 69, 70. See BS Markesinis, The German Law of Obligations: Volume II: The Law of Torts: A Comparative Introduction (3rd edn Clarendon Press, Oxford 1997) 416. TCN Channel Nine Pty Ltd v Anning (2002) 54 NSWLR 333 (‘Anning ’) [52]. Where the land in question is the plaintiff ’s home, trespass protects the occupier’s interest in maintaining the right to exclusive possession of his or her ‘place of residence, free from uninvited physical intrusion by strangers’: New South Wales v Ibbett (2006) 229 CLR 485 (‘Ibbett ’) [29]. Coco v Th e Queen (1994) 179 CLR 427, 435 (Mason CJ, Brennan, Gaudron and McHugh JJ). See also W Blackstone, Commentaries on the Laws of England (Vol 3) (Clarendon Press, Oxford 1768) 209. Plenty v Dillon (1991) 171 CLR 635, 647 (Gaudron and McHugh JJ). See especially Anning (n 12) [52]−[55] (Spigelman CJ), and authorities there cited.

Privacy and private law

89

in the old adage that ‘an Englishman’s home is his castle’, is replicated in international conventional law.17 Thus, unauthorized police raids on plaintiffs’ homes will allow plaintiffs to vindicate their ‘rights’, including the recovery of (aggravated) damages for the aff ront to their enjoyment of exclusive and quiet possession;18 television journalists, accompanied by a camera crew, who trespass on the plaintiff ’s premises and confront the plaintiff with allegations of misconduct, subjecting the plaintiff to an aggressive and exploitative interview for which the plaintiff is unprepared, will, in principle, be liable for the hurt to feelings, humiliation and aff ront to dignity that the plaintiff suffers as a result of exposure to the interview;19 and, a trespasser who enters the plaintiff ’s home and installs a microphone to record the plaintiff ’s private conversations will be liable to the plaintiff in an action for trespass for the hurt to the plaintiff ’s feelings caused by this invasion of his or her privacy.20 At one time, the tort of defamation also provided some robust protection to plaintiffs’ privacy interests in those Australian jurisdictions in which defendants could not, by way of defence, justify an action in defamation simply by establishing that what had been published was true. In such jurisdictions, defendants had to establish, in addition to its truth, that the imputation related to a matter of public interest or to the public benefit.21 This defence required ‘the weighing of the right to privacy against the public interest of free discussion of matters of public concern’.22 If the importance of keeping the facts in issue private outweighed the public interest in their publication (as where the facts were spent and no longer relevant to any public discussion of the issue in question), the defendant would fail to establish a defence to a claim in defamation.23 The mere existence of this defence expanded the reach of the law of defamation in its protection of privacy interests. Ettingshausen v Australian Consolidated 17

18 19

20 21

22 23

Convention for the Protection of Human Rights and Fundamental Freedoms, Council of Europe (European Convention on Human Rights) (ECHR) art 8(1); International Covenant on Civil and Political Rights (adopted 16 December 1966, entered into force 23 March 1976) 999 UNTS 171 (ICCPR) art 17(1). See also Universal Declaration of Human Rights (adopted 10 December 1948 UNGA Res 217A(III)) (UDHR) art 12. See Ibbett (n 13) [31]. TCN Channel Nine Pty Ltd v Ilvariy Pty Ltd (2008) 71 NSWLR 323 (‘Ilvariy ’) (where the premises were the plaintiff ’s home and used for business purposes). See also Anning (n 12) (business premises). Greig v Greig [1966] VR 376, 380. See the summary of the various provisions in the several Australian jurisdictions in Johnston v Australian Broadcasting Corporation (1993) 113 FLR 307, 310−11 (Higgins J). Cohen v Mirror Newspapers Ltd [1971] 1 NSWLR 623, 628 (Jacobs and Manning JJA). Eg Mutch v Sleeman (1928) 29 SR (NSW) 125, 136−7.

90

Tilbury

Press Ltd 24 is an example. The publication in the defendant’s magazine of a photograph of the naked plaintiff, a well-known rugby league player, taken for publication in the defendant’s magazine without the plaintiff ’s express or implied consent while he was having a shower, was capable of giving rise to a claim in defamation because it carried the imputation that the plaintiff was a person whose genitals had been exposed to readers of the defendant’s magazine thereby exposing him to more than a trivial degree of ridicule.25 The uniform law of defamation, in force throughout Australia since 2006, removes this protection of privacy interests, making truth alone a defence to a claim in defamation in all jurisdictions.26 It follows that the plaintiff in Ettingshausen would not now bother to place his case on the basis of the imputation set out in the last paragraph simply because it was true that the plaintiff ’s genitals had been exposed to the defendant’s readership.27 If the plaintiff were to succeed in defamation, the publication would have to be capable of carrying some other imputation that, in the circumstances, would overcome the defence of truth – for example, the imputation that the plaintiff had deliberately permitted a photograph to be taken of him with his genitals shown for the purposes of reproduction in a publication with a wide readership.28 It does not follow that the plaintiff will be able to mount a claim for the incidental protection of privacy in any tortious cause of action that is maintainable as a result of the defendant’s wrong. The cause of action through which the protection of privacy interests is sought must be one that is capable of accommodating the protection of privacy interests, even if incidentally. In Lord Hoffman’s words, privacy must be ‘one at least of the underlying values’ 29 protected in the action in question. There is an obvious basis for the common law to 24

25

26

27

28 29

(1991) 23 NSWLR 443 (NSWSC), rev’d [1993] NSWCA 10 (NSWCA) (‘Ettingshausen’). See also McDonald v North Queensland Newspaper Co Ltd [1997] 1 Qd R 62; Obermann v ACP Publishing Pty Ltd [2001] NSWSC 1022. Cf the famous Tolley v Fry [1931] AC 333. Ettingshausen (NSWSC) (n 24) 445 (the fallback imputation (b)); Ettingshausen (NSWCA) (n 24) 2 (where the imputation is stated rather differently). Civil Law (Wrongs) Act 2002 (ACT) s 135; Defamation Act 2005 (NSW) s 25; Defamation Act 2005 (Qld) s 25; Defamation Act 2005 (SA) s 23; Defamation Act 2005 (Tas) s 25; Defamation Act 2005 (Vic) s 25; Defamation Act 2005 (WA) s 25; Defamation Act 2006 (NT) s 22. See P Milmo and WVH Rogers (eds), Gatley on Libel and Slander (11th edn Sweet & Maxwell, London 2008) [2.5]. Ettingshausen (NSWSC) (n 24) 445 (imputation (a)); Ettingshausen (NSWCA) (n 24) 10. Wainwright v Home Office [2003] UKHL 53, [2004] 2 AC 406 (‘Wainwright ’) [18] (Lord Hoff man).

Privacy and private law

91

develop incrementally by identifying and expanding causes of action that can encompass the protection of privacy interests. In Australian Broadcasting Corporation v Lenah Game Meats Pty Ltd , 30 Gummow and Hayne JJ (with Gaudron J’s concurrence) explained that ‘the better course’ for protecting privacy in modern Australian law may be ‘to look to the development and adaptation of recognised forms of action to meet new situations and circumstances’. 31 The difficulty is to decide when that adaptation or development should take place. The most important consideration of this issue is the well-known decision of the High Court of Australia in Victoria Park Racing and Recreations Grounds Co Ltd v Taylor,32 which was often wrongly thought to stand in the path of the development of an action at common law for invasion of privacy.33 The simplified facts of the case were that a corporate plaintiff, a racecourse owner and operator, sought to restrain the defendant from broadcasting, from an elevated platform on adjacent land, commentaries on races as they took place on the plaintiff ’s racecourse. The plaintiff alleged that it had suffered damage as a result of people tuning into the radio broadcasts instead of attending the races in person and paying for admission. The plaintiff ’s principal claim was in nuisance, alleging that the defendant’s ‘non-natural user’ of the adjoining land had interfered with the use and enjoyment of the plaintiff ’s land, entitling the plaintiff to the injunction sought.34 By the barest majority, the Court rejected the plaintiff ’s claim. The nub of the tort of nuisance is the impairment of the occupier’s use and enjoyment of the rights of occupation of land.35 For the majority (Latham CJ, Dixon and McTiernan JJ), the ability of neighbours and 30 31

32 33

34

35

Lenah Game Meats (n 5). Ibid [110]. See also [132] (‘looking across the range of already established legal and equitable wrongs’), which has led me to use the modal ‘may’ in the text to this note rather than the indicative in the original since, in context, their Honours make it clear that they are not suggesting that this is the only means of developing the common law. (1937) 58 CLR 479 (‘Victoria Park ’). Lenah Game Meats (n 5) [106]−[111] (Gummow and Hayne JJ, with whom Gaudron J agreed), [313]−[320] (Callinan J); cf [185]−[189] (Kirby J). The claim was an action on the case in the nature of nuisance, which, with its reference to the defendant’s non-natural user of the land, also appealed to the rule in Rylands v Fletcher (1868) LR 3 HL 330: see Victoria Park (n 32) 495, 501−2, 503. There was also an unsuccessful claim for infringement of copyright. Especially Victoria Park (n 32) 502 (Rich J dissenting), 507 (Dixon J). See EW Garrett, The Law of Nuisances (3rd edn Butterworths, London 1908) 3, 173; RA Buckley, The Law of Negligence (4th edn Butterworths, London 2005) [12.25] (pointing out that it ‘has long been clear’ that there is no ‘right to prospect’).

92

Tilbury

others to view and inspect what was occurring on the plaintiff ’s land was not, for the purposes of the tort of nuisance, a relevant impairment of those rights,36 notwithstanding that it may have involved an invasion of the plaintiff ’s privacy.37 But for the minority (Rich and Evatt JJ), there were limits to the ability of people to overlook the land of another. In the absence of authority to the contrary, Rich J held that those limits are reached where, in the circumstances, the ‘right of profitable enjoyment’ of the land outweighs the ‘right of free prospect’,38 following an enquiry that necessarily involves a concentrated focus on the particular facts and that requires an examination of all the surrounding circumstances.39 Rich J supported the limitation on the ‘right of free prospect’ by suggesting that the expected advance of television ‘may force the courts to recognise that protection against complete exposure of the doings of the individual may be a right indispensable to the enjoyment of life’.40 However, for Dixon J considerations such as these did not amount ‘to a new application of settled principle, but to the introduction into the law of new doctrine’.41 The difference of opinion in Victoria Park centred, therefore, on the extent to which the defendant’s ability to overlook the plaintiff ’s land could, for the purposes of an action in nuisance, amount to an interference with the plaintiff ’s rights to the use and enjoyment of the land, particularly its profitable use and enjoyment. Those rights could be seen as deriving from the plaintiff ’s interest in keeping private what was happening on its land, even though, as both Latham CJ and Evatt J pointed out, there is no ‘right’ to privacy in the law.42 By refusing to regard this interest of the plaintiff as equivalent to the traditional interests protected by the use and enjoyment of land, the majority signalled their unwillingness to allow the action in nuisance to act as a, or perhaps the, springboard for the more general development of a law of privacy. 36

37 38

39 40 42

Victoria Park (n 32) 493 (Latham CJ), 507 (Dixon J), 524 (McTiernan J). Just as it is no trespass to land to look at what is happening on the land, to sketch it or to photograph it: see Bathurst City Council v Saban (1985) 2 NSWLR 704, 706−7 (Young J), and authorities there cited. Victoria Park (n 32) 495−6 (Latham CJ), 507−8 (Dixon J). Ibid 504. Evatt J was more specific: the limit is reached where a defendant creates or uses devices with the objective of allowing the public to overlook or spy on the property of another and this causes the plaintiff ‘damage, discomfort or annoyance’ (at 521). The rationale for this limited approach is not obvious. Ibid 501 (Rich J dissenting), 521 (Evatt J dissenting). Ibid 505. 41 Ibid 510. Ibid 495−6 (Latham CJ), 504 (Rich J dissenting), 520−2 (Evatt J dissenting).

Privacy and private law

93

In contrast to Victoria Park, the English Court of Appeal attempted to use the action in nuisance to protect a plaintiff ’s privacy interests in the more recent case of Khorasandjian v Bush.43 The defendant, in addition to other conduct harassing the plaintiff, made persistent telephone calls to her at her parents’ home. While this could be said to interfere broadly with the plaintiff ’s use and enjoyment of the land, it did not interfere with a use or enjoyment that was referable to a proprietary right or interest in the land that was capable of sustaining an action in nuisance – that right was held by her parents.44 Noting that English law had no tort of invasion of privacy,45 but that it was necessary for the court to apply the law in the light of changed social conditions,46 a majority of the Court of Appeal upheld the plaintiff ’s claim in nuisance. Dillon LJ, with whom Rose LJ agreed, said:47 To my mind, it is ridiculous if in this present age the law is that the making of deliberately harassing and pestering telephone calls to a person is only actionable in the civil courts if the recipient of the calls happens to have the freehold or leasehold proprietary interest in the premises in which he or she has received the calls.

No doubt. But the solution is not found in the tort of nuisance. In Hunter v Canary Wharf Ltd,48 the House of Lords overruled this aspect of the case. Lord Goff explained why:49 If a plaintiff, such as the daughter of the householder in Khorasandjian v Bush, is harassed by abusive telephone calls, the gravamen of the complaint lies in the harassment which is just as much an abuse, or indeed an invasion of her privacy, whether she is pestered in this way in her mother’s or her husband’s house, or she is staying with a friend, or is at her place of work, or even in her car with a mobile phone. In truth, what the Court of Appeal appears to have been doing was to exploit the law of private nuisance in order to create by the back door a tort of harassment which was only partly effective in that it was artificially limited to harassment which takes place in her home. I myself do not regard this as a satisfactory manner in which to develop the law.

Recent Australian case law demonstrates that it is equally unsatisfactory to attempt to achieve a greater protection of privacy interests through the 43 44 45 46 48 49

[1993] QB 727 (‘Khorasandjian’). Ibid 734 (Dillon LJ). See also Buckley (n 35) 73−5. Khorasandjian (n 43) 734 (Dillon LJ). Ibid 735 (Dillon LJ). 47 Ibid 734, 735. [1997] AC 655 (‘Hunter’) (Lords Goff, Lloyd, Hoff man and Hope, Lord Cook dissenting). Ibid 691−2.

94

Tilbury

medium of remedies, by extending the scope of the remedy in question to encompass the protection of such interests. The issue has arisen in the law of injunctions and in the law of damages. It is best illustrated by reference to the common scenario, already mentioned, of the television journalist who trespasses on the plaintiff ’s land and who subjects the plaintiff to a harassing interview that is fi lmed by an accompanying camera crew. In such a case, the plaintiff can undoubtedly claim damages – technically aggravated damages – for the aff ront to dignity, the hurt to feelings and the humiliation that flows from the trespass.50 In principle, too, the plaintiff will be able to claim an injunction if a further trespass to the land is threatened. But can the claim in trespass also encompass the invasion of the plaintiff ’s privacy that is threatened by, or occurs as a result of, the screening of the footage of the interview that took place while the defendant was trespassing? The publication of that footage is, of course, a separate, and at least potentially wrongful, act.51 As far as the law of injunctions is concerned, the issue is whether the publication, or threatened publication, of the footage can be stopped. The difficulty is to find a cause of action that will support injunctive relief. The publication is, of course, not itself a trespass, but it may otherwise be actionable, for example, in defamation.52 But what if it is not? A number of early cases, concerned with interlocutory injunctive relief, allowed plaintiffs to restrain the publication of the footage on broader, if unsatisfactory, grounds.53 Their reasoning was based on an indeterminate notion of unconscionability as grounding liability and/or on the wording of the statutory power to issue interlocutory injunctions in cases in which it is ‘just and convenient’ to do so.54 The statutory formula, it was argued, would allow the courts to protect the plaintiff ’s privacy pending trial without necessary reference to the rights that the plaintiff was seeking to enforce at the trial – no doubt in the hope that the action would never be tried (because, for example, the invasion of the plaintiff ’s privacy would no longer be a live issue). Subject of course to any statutory provision to the contrary, it is now clear that Australian law knows nothing 50 51 52 53

54

See Ilvariy (n 19) [15]−[20]. Lenah Game Meats (n 5) [104] (Gummow and Hayne JJ). Consider Ilvariy (n 19) where the action in defamation had failed. See Lincoln Hunt Australia Pty Ltd v Willesee (1986) 4 NSWLR 457; Emcorp Pty Ltd v Australian Broadcasting Corporation [1988] 2 Qd R 169; Rinsdale Pty Ltd v Australian Broadcasting Corporation (1993) Aust Torts Reports ¶81–231 (Supreme Court of Queensland). Eg Supreme Court Civil Procedure Act 1932 (Tas) s 11(12), the provision in issue in Lenah Game Meats (n 5).

Privacy and private law

95

of the stand-alone or autonomous interlocutory injunction.55 The statutory power to issue injunctions requires the plaintiff to identify the rights (which may be legal, equitable or statutory) that are to be determined at trial; and ‘unconscionability’ is not itself a cause of action. The plaintiff ’s cause of action must be found, if at all, elsewhere (for example, in the interference with the plaintiff ’s equitable interest in the copyright of the footage).56 From the perspective of the law of damages, the issue is whether or not the loss or damage that the plaintiff suffers to his or her privacy as a result of the publication is within the scope of protection of the tort of trespass to land.57 We have already noted that the tort of trespass protects the plaintiff ’s interests in exclusive possession of the property.58 But the damage to privacy that is now in question flows from the publication and is not connected to the plaintiff ’s interests in the land. It is, in short, a secondary damage, a damage ‘other than that primarily protected by [the] tort’.59 There are a number of old cases in which trespass to land has, arguably, resulted in the recovery of such secondary damage, as where a plaintiff in an action for trespass to land was able to recover, as a separate head of loss, damages in respect of his daughter’s seduction.60 In modern law, secondary damage is recoverable in an intentional tort like trespass where it is the natural and probable consequence of the tortious act,61 that is, it is within the presumed ‘intent’ of the actor.62 This is essentially a question of fact, determined by reference to all the circumstances of the case.63 Arguably, the mental distress that results from the screening of the interview may, in particular circumstances, be regarded as a natural and probable consequence of the particular trespass. However, it is perhaps more likely to give rise to an independent claim, for example, in defamation. Attempts to secure greater privacy protection through the expansion of remedies are, obviously, based on the assumption that development of the common law can take place through the adaptation of remedies as much as of causes of action. For example, to allow as a recoverable 55 56 57 60

61 63

Lenah Game Meats (n 5). Ibid [101]−[103], pointing to the error of the earlier authorities in n 53. 59 Anning (n 12) [99]. 58 See n 13. Anning (n 12) [99] (Spigelman CJ). Bennett v Alcock (1787) 2 TR 166, 100 ER 90. For full discussion of the ‘secondary damage’ cases, see H McGregor, McGregor on Damages (17th edn Sweet & Maxwell, London 2003) [6–110]−[6–119]. 62 Anning (n 12) [100]. Palmer Bruyn & Parker (n 9) [73], [80] (Gummow J). Anning (n 12) [104].

96

Tilbury

loss in damages, in an action in which it has not previously featured, the injury to feelings, humiliation and aff ront to dignity that flows from an invasion of privacy, is, at least, to recognize that damage as an independent compensation interest.64 It is, of course, likely to be much more. The recognition in damages of a head of damage that protects privacy is an indication that the protection of privacy is within the scope of the tort in question, at least one value underlying it. Its recognition in damages may thus belong to a transitory state of legal development in the sense that it signifies a shift in the way that the law will protect the interest(s) in question – interests that are in the process of being articulated and worked out more fully.65 This merely illustrates the important point that remedies can author ‘distinctive normative principles … inextricably linked to substantive law’.66 Whether or not the greater protection of privacy interests is addressed by seeking to adapt existing causes of action or remedies, the method of incremental development that such adaptation represents is a favoured response of common lawyers to Roscoe Pound’s oft-repeated aphorism that the law must be stable but it cannot stand still.67 The response allows for the careful and considered progression of the common law over time, by meticulous analysis of the similarities and differences between the fact situations of individual cases and the application thereto of legal principles, by extension, where necessary, to cover new situations. The authorities analysed in this essay considered the greater protection of privacy interests by focusing on questions such as whether restricting the ability of others to view what is happening on particular land is compatible with the ‘rights’ protected in nuisance; whether persons without a possessory interest in the land can maintain an action in nuisance; and whether non-pecuniary damage caused by the publication of matter generated 64

65

66

67

See J Berryman, ‘Reconceptualizing Aggravated Damages: Recognizing the Dignitary Interest and Referential Loss’ (2004) 41 U San Diego L Rev 1521 (arguing for the recognition of ‘dignity’ as such an interest). See the discussion of ‘parasitic damage’ in TA Street, The Foundations of Legal Liability: A Presentation of the Theory of the Development of the Common Law (Vol 1) (Edward Thompson Co, New York 1906) 461−5. See Berryman (n 64) 1542 fn 61. Th is undermines the extreme dualist view of remedy that pays insufficient regard to the relationship between liability and remedy, preferring simply to divorce liability from remedy by allowing courts that have determined the defendant’s liability to select from a remedial basket the remedy that is the most appropriate in all the circumstances of the case: see M Tilbury, ‘Remedies and the Classification of Obligations’ in A Robertson (ed), The Law of Obligations: Connections and Boundaries (UCL Press, London 2004) ch 2. Eg R Pound, New Paths of the Law (University of Nebraska Press, Lincoln 1950) 13.

Privacy and private law

97

in the course of a trespass is a natural and probable consequence of the trespass. The technical focus of these enquiries and the reasoning that they generate obscure what, from a present-day perspective, are the ‘real’ or ‘true’ issues in the cases. These centre on whether privacy interests or values, rather than property rights or interests, are capable of protection in the cause of action in question. This raises questions about the proper scope of the causes of action – questions that themselves assume an understanding of the meaning and scope of privacy interests. The latter is arguably the most controversial, yet basal, issue in privacy law, simply because ‘privacy’ can be used to describe almost anything, so that the concept is in danger of being about nothing.68 The answers to the questions cannot but contain implicit judgments on these matters, even if they are not expressly articulated. In short, the methodology may mask, but it cannot eschew, judicial choice, whether that is described as ‘activism’ or not.69 Th is means that care needs to be taken in evaluating Callinan J’s description of the majority judgments in Victoria Park as ‘conservative’ and ‘an anachronism, even by the standards of 1937’.70 What is undoubtedly traditional and, in that sense, ‘conservative’ is their methodology. Thus, Dixon J firmly rejected any approach that would generalize the enquiry into the issue whether ‘in English law the foundation of delictual liability is unjustifiable damage or breach of a specific duty’, with the result that, once damage is shown, the defendant would have to point to some legal justification for causing the damage.71 His Honour said:72 The law of tort has fallen into great confusion, but, in the main, what acts and omissions result in responsibility and what do not are matters defined by long-established rules of law from which judges ought not wittingly depart and no light is shed upon a given case by large generalizations about them.

This may be an allusion to and criticism of the generalization of negligence in Donoghue v Stevenson,73 then barely five years old; regardless, the strong support for the methodology of developing the common law by adapting existing causes of action is obvious. But whether the result in 68

69

70 72

See DJ Solove, Understanding Privacy (Harvard University Press, Cambridge MA 2008) 6−8. And see Lenah Game Meats (n 5) [38]−[43] (Gleeson CJ), [116] (Gummow and Hayne JJ). See MD Kirby, Judicial Activism: Authority, Principle and Policy in the Judicial Method (Sweet & Maxwell, London 2004) especially ch 2. Lenah Game Meats (n 5) [318]. 71 Victoria Park (n 32) 505. 73 Ibid. [1932] AC 562.

98

Tilbury

the case is ‘conservative’ or ‘anachronistic’, especially when compared ‘to the worldly views of Rich J, which strike a chord with a modern reader’,74 must surely depend on an understanding of the proper reach of privacy law. That is the real issue, at least from today’s perspective. Indeed, it remains contentious today whether the law of privacy should extend to the protection of the profitable conduct of the plaintiff ’s business on the plaintiff ’s land, especially at the instance of a corporate plaintiff.75 It must have seemed even more debatable in 1937 in the context of a racing industry that was economically in decline and of a body politic that sought increasing regulation of the gambling that sustained the industry.76

C.

Finding a tort of privacy

The fact that Sir Owen Dixon was not prepared in 1937 to countenance an approach to the protection of privacy interests (or potential privacy interests) based on some generalization of tortious liability, does not mean that such an approach is inapposite today. In Lenah Game Meats, Gummow and Hayne JJ were obviously attracted to the option of the further enhancement of privacy protection through the traditional process of adapting causes of action. However, their Honours pointed out that the incidences of privacy protection in law ‘may be seen as representing species of a genus, being a principle protecting the interests of the individual in leading, to some extent, a secluded and private life … “free from the prying eyes, ears and publications of others”’.77 Indeed, by restricting their conception of privacy to individual privacy (to the exclusion of corporate privacy), and by making it clear that ‘the disclosure of private facts and unreasonable intrusion upon seclusion, perhaps come closest to reflecting a concern for privacy “as a legal principle drawn from the fundamental value of personal autonomy”’,78 their Honours may have delimited a sufficiently workable concept of privacy from which the law could 74 75

76

77

78

Lenah Game Meats (n 5) [318] (Callinan J dissenting). Ibid [43] (Gleeson CJ), [111], [129]−[132] (Gummow and Hayne JJ, with whom Gaudron J agreed). And see Victoria Park (n 32) 508 (Dixon J). See W Peake, Sydney’s Pony Racecourses: An Alternative Racing History (Walla Walla Press, Sydney 2006) ch 8. I am indebted to Joseph Waugh, Senior Legal Officer at the NSW Law Reform Commission, for this reference. Lenah Game Meats (n 5) [132]. The embedded quotation comes from American Law Institute, Restatement (Second) of Torts (American Law Institute Publishers, St Paul 1977) Vol 3 §652A comment b. Lenah Game Meats (n 5) [125]. The embedded quotation comes from the judgment of Sedley LJ in Douglas v Hello! Ltd [2001] QB 967, [126].

Privacy and private law

99

subsequently develop. The New Zealand Court of Appeal did something similar in Hosking v Runting79 when it identified, in the common law of New Zealand, a tort that relates to the publicizing of private information in circumstances where facts exist in respect of which there is a reasonable expectation of privacy, and the publicity given to those private facts is considered highly offensive to an objective reasonable person. The real problem facing any attempt to create a tort of privacy in the manner suggested is that Australian case law may not yield a critical mass of instances of privacy protection from which a liability in tort can be generalized.80 On the one hand, as we have already noticed, there are a few areas of tort law in which privacy protection is, or has been, strong.81 And the incidence of privacy protection can be buttressed in a tortious context by reference to English82 and United States case law.83 On the other hand, it is noticeable that the cases at fi rst instance that have expressly recognized a tort of privacy in Australian law have made no real attempt to generalize the tort from existing legal materials.84 Moreover, the one theoretical attempt to do so is at most tenuous. Peter Birks has mustered an argument that the incidence of aggravated damages can be restated and generalized into a tort of contemptuous harassment,85 a tort that would be capable of protecting at least some privacy interests.86 But the argument is based on the generalization of aggravated damage from a supposed independent interest in equality of respect that is difficult to draw out of aggravated damages in modern Australian law, where they are recoverable for the generally non-pecuniary losses referable to the circumstances and manner of the tort,87 on which they are parasitic.88 Further, this generalization of aggravated damages becomes less useful in its application to invasions of privacy so far as it is restricted to conduct of 79

80

81 82

83

84 85

86 88

[2005] 1 NZLR 1 (NZCA) (‘Hosking ’). But see Television New Zealand Ltd v Rogers [2008] 2 NZLR 277 (NZSC) [23], [25], [99], [144]. Consider NSW Law Reform Commission, ‘Invasion of Privacy’ (Consultation Paper 1, 2007) [2.39]−[2.76]. Text to nn 12−28. See Sir B Neill, ‘Privacy: A Challenge for the Next Century’ in BS Markesinis, Protecting Privacy (Oxford University Press, Oxford 1999) 4−6, 11−12. See NSW Law Reform Commission (n 80) ch 4 (recognising that the privacy tort has developed in a different legal and social environment to that in Australia). Grosse v Purvis (n 5); Jane Doe (n 5) [146]−[164]. P Birks, ‘Harassment and Hubris: The Right to an Equality of Respect’ (1997) 32 Irish Jurist 1. 87 See ibid 4. Ibbett (n 13) [31]. XL Petroleum (NSW) Pty Ltd v Caltex Oil (Aust) Pty Ltd (1985) 155 CLR 448, 468−9 (Brennan J).

100

Tilbury

the defendant that is wanton, spiteful or malevolent, as Birks suggests that it may be.89 In the end, then, it is important to recognize that the assertion of the existence of a privacy tort runs the risk of being no more than that – an assertion. A way around this difficulty may be to argue that privacy interests are capable of being adequately protected in the tort of intentional infliction of harm,90 the tort that derives from the decision of Wright J in 1897 in Wilkinson v Downton.91 The tort makes liable in damages ‘a person who deliberately does an act of a kind calculated to cause physical injury for which there is no lawful justification or excuse and in fact causes injury to the other person’.92 So stated, however, the tort would be of limited utility in its application to invasion of privacy cases: it would extend only to cases of physical injury, while the most common injuries in invasion of privacy cases would be intangible, involving some form of mental distress. Moreover, the tort would apply only to a ‘calculated’ act, which, whatever it means,93 would not encompass negligence. So a defendant who has invaded the plaintiff ’s privacy, for example, by negligently revealing the plaintiff ’s medical history, would not be liable in this cause of action.94 While there is some indication that the courts may be prepared to reconsider the ingredients of the tort,95 either by redefining the damage necessary to support the tort to include mental distress,96 or by watering down the standard of conduct necessary to support the tort to include recklessness,97 it is clear that the courts are not prepared to do 89 90

91 92

93

94

95

96 97

Birks (n 85) 44. Consider P Watson, ‘Searching the Overfull and Cluttered Shelves: Wilkinson v Downton Rediscovered’ (2004) 23 U Tasmania L Rev 264, especially 280−9 (noting, at 290, that the tort has ‘some scope for expansion in the area of tort protection of privacy’); D Réaume, ‘The Role of Intention in the Tort in Wilkinson v Downton’ in J Neyers, E Chamberlain and S Pitel, Emerging Issues in Tort Law (Hart Publishing, Oxford and Portland 2007). [1897] 2 QB 57 (‘Wilkinson v Downton’). Bunyan v Jordan (1937) 57 CLR 1 (‘Bunyan v Jordan’) 10 (Latham CJ). See also Northern Territory v Mengel (1995) 185 CLR 307, 347. On the tort generally, see F Trindade, P Cane and M Lunney, The Law of Torts in Australia (4th edn Oxford University Press, Melbourne 2007) 77−97. See especially Carrier v Bonham [2002] 1 Qd R 474 (‘Carrier v Bonham ’) [25] (McPherson JA). Cf Cornelius v De Taranto [2001] EMLR 329, aff ’d [2002] EMLR 112 (CA), where liability arose in breach of contract. As early as Bunyan v Jordan (n 92), Latham CJ hinted that the traditional ingredients of the tort may be ‘too broadly stated’. See Giller (n 5) [26]−[31] (Maxwell P dissenting). Consider Nationwide News Pty Ltd v Naidu (2007) 71 NSWLR 471 (‘Naidu’) [76]−[80] (Spigelman CJ), [369]-[376] (Basten JA); Giller (n 5) [26]−[38] (Maxwell P dissenting).

Privacy and private law

101

both.98 In truth, the status of the tort, which has been far more the subject of speculation than of application, is in doubt in Australian law, where, arguably, it will ‘disappear beneath the surface of the law of negligence’.99 Although the New South Wales Court of Appeal may have thrown the tort a precarious lifeline in the context of a case involving workplace bullying,100 the Victorian Court of Appeal has rejected its application in a case that indisputably involved privacy interests.101 The tort is thus far from a promising vehicle for the development of a tort of privacy in modern Australian law. Further reflection on the inadequacies of Wilkinson v Downton in this respect leads to the realization that there may be far deeper problems in attempting to generalize a privacy tort within the structure of the current law of torts. A privacy tort will need to cohere with the basal classification between torts that are intentional and those that are not – negligence, the most important tort, falling into the latter category, along with instances of stricter liability.102 There is no agreement as to what torts fall into the category of ‘intentional’.103 It is likely, however, that invasion of privacy will be categorized as such a tort simply because the purpose of the defendants’ conduct in such cases will generally be to invade the plaintiff ’s privacy.104 While the tort would then not reach careless or inadvertent conduct that does not fall within this description but which has invaded the plaintiff ’s privacy and ought to be actionable,105 such conduct would, generally, be actionable in negligence.106 However, the recovery 98

99

100 101

102 103

104

105 106

Especially Wainwright (n 29) [44]−[46] (Lord Hoffman); Giller (n 5) [26]−[38] (Maxwell P dissenting). Wainwright (n 29) [41] (Lord Hoff man). And consider Tame v New South Wales (2002) 211 CLR 317 (Gummow and Kirby JJ); Carrier v Bonham (n 93) [27] (McPherson JA); Magill v Magill (2006) 226 CLR 551, [20] (Gleeson CJ), [117] (Gummow, Kirby and Crennan JJ). See Naidu (n 97) [66]−[83] (Spigelman CJ), [367]−[376] (Basten JA). Giller (n 5) [161]−[166] (Ashley JA), [454]−[470] (Neave JJA, Maxwell P dissenting on this issue). See Dugdale and Jones (n 9) [1–49]−[1–62]. See K Oliphant, ‘The Structure of the Intentional Torts’ in Neyers, Chamberlain and Pitel (n 90) ch 20. See P Cane, ‘Mens Rea in Tort Law’ (2000) 20 OJLS 533, 535. Law reform bodies have tended to argue that only intentional invasions of privacy should be actionable: see Australian Law Reform Commission (n 6) vol 3, [74.161]−[74.164] (which restricts ‘intentional’ conduct to that which is deliberate or wilful). See text to n 94. As in Jane Doe (n 5) [82]−[100]. Although generally actionable in trespass, ‘the intentional infliction of harm cannot be pleaded as negligence’: see New South Wales v Lepore (2003) 212 CLR 511, [270] (Gummow and Hayne JJ). Cf Naidu (n 97) [367] (Basten JA,

102

Tilbury

of damages in negligence would be limited to losses that are foreseeably within the scope of the protection of the tort, rather than to those that are the natural and probable consequence of the tort, as would be the case were the action founded on the (intentional) privacy tort.107 Again, an action in negligence would not give rise to a claim for exemplary damages, whereas an action in an intentional tort probably would.108 These distinctions would be tolerable if the differing results rationally reflected greater or lesser fault on the part of the defendant. But given the incoherence of the ‘intentional torts’, which we have just noted, and their consequent lack of clear distinction from the non-intentional torts, obviously this cannot be guaranteed.109 Moreover, merely careless conduct that invades the plaintiff ’s privacy may not generate a separate claim in negligence where (as will usually be the case) it only caused the plaintiff mental distress, for mental distress standing alone will not generate an action in negligence.110 In short, whatever rationality otherwise attaches to the division between intentional and non-intentional torts, it simply has no obvious or natural relevance to a generalized tort of invasion of privacy, which straddles both. In addition to the difficulties that a privacy tort will face in fitting into this basic classification of torts, it will also pose a methodological challenge to the law of torts. Privacy asserts an individual’s interest or right to protection from the intrusion of others. The recognition of this interest or right involves, as a corollary, the curtailment of the freedom from restraint of others (who may be individuals, artificial persons or public bodies). The claims of these others must necessarily be weighed against the asserted privacy claim in determining whether, and the extent to which, the privacy claim should be recognized. As recent developments in English privacy law indicate, the centrepiece of a privacy tort would thus become the balancing of the privacy interests asserted against those interests that are competing in the circumstances of the particular case, such as the interest in freedom of expression or in national

107 108 109 110

suggesting that the statement should be read down and limited by context); Sangah v Baxter [2009] NSWCA 78 [146] (Basten JA, pointing out that the issue requires further elucidation). Naidu (n 97) [81] (Spigelman CJ). See Trindade, Cane and Lunney (n 92) 122−4. See also Carrier v Bonham (n 93) [26]−[27] (McPherson JA). See P Handford, Mullany & Handford’s Tort Liability for Psychiatric Damage (2nd edn Lawbook Co, Sydney 2006) [4.10], [4.60]. And consider eg, Civil Liability Act 2002 (NSW) s 31.

Privacy and private law

103

security.111 There are areas of tort law where the courts have balanced interests (whether public or private) to determine if the ingredients of, or defences to, a particular tort have been made out – for example, in determining, for the purposes of a claim in private nuisance, whether the defendant’s use of land is ‘reasonable’ having regard to its impact on the plaintiff;112 and in deciding whether or not the defendant has made out the former defence of justification in defamation.113 The balancing exercise required in a tort of privacy would, however, be of a different scale: more prominent, central and controversial than any similar exercise the law of torts has undertaken to date. Of course, this does not mean that it cannot be done. But tort does not seem the most obvious vehicle through which it should be done.

D.

Privacy in equity

Unsurprisingly, then, the English courts have generally shied away from the creation of a privacy tort to give effect, as required by the Human Rights Act 1998 (UK), to the right to respect for private and family life in Article 8 of the European Convention on Human Rights. Instead, they have preferred to ‘shoehorn’ the protection of privacy into the cause of action ‘formerly described as breach of confidence’.114 The decision of the Victorian Court of Appeal in Giller v Procopets115 suggests, at fi rst blush, a like approach for Australia. The defendant, the plaintiff ’s ex-partner in a de facto relationship, published videotaped material of their sexual activities. The plaintiff had consented to the fi lming of some, but not all, of the sexual activity. In the context of litigation concerned with the settlement of property claims on the termination of the parties’ de facto relationship, the plaintiff claimed compensation in an action for breach of confidence for the mental distress she suffered as a result of the publication of the videotaped material. All three judges (Maxwell P, Ashley and Neave JJA) upheld the plaintiff ’s claim. 111

112 113 114

115

For a summary of English law, see McKennitt v Ash [2006] EWCA Civ 778, [2008] QB 73 [8]−[11], and the discussion in J Beatson and others, Human Rights: Judicial Protection in the United Kingdom (Sweet & Maxwell, London 2008) [4–232]−[4–238]. See Trindade, Cane and Lunney (n 92) 167–75; Buckley (n 35) [11.04]−[11.24]. See text to n 21. Douglas v Hello! Ltd (No 3) [2005] EWCA Civ 595, [2006] QB 125, [53] (Lord Phillips MR, Clarke and Neuberger LJJ). Giller (n 5).

104

Tilbury

The major issue identified in respect of the publication of the videotaped material was whether or not the action for breach of confidence could sustain a claim for compensation for mental distress standing alone. A major difficulty with such a claim is to discover its basis in equitable compensation or in damages under Lord Cairns’s Act (as restated in modern legislation). Ashley JA preferred to ground the award of damages in the jurisdiction under Lord Cairns’s Act (rejecting the argument that such damages are unobtainable in response to breaches of purely equitable obligations or only where the defendant has first applied for an injunction).116 However, Neave JA (with whom Maxwell P agreed) was prepared to put the claim on either basis.117 Having found a basis for the damages, both judges addressed the question whether such damages could be obtained for ‘mere distress’ standing alone. Ashley JA pointed out that ‘[n]o Australian authority was cited at trial or on appeal to support the proposition that, in the context under discussion, equitable compensation or equitable damages … can be awarded for mental distress alone’.118 However, like Neave JA, he was prepared to rely on recent English case law to support the proposition.119 The English cases are concerned with the award of compensation in the action for breach of confidence as that action has developed in the context of the Human Rights Act, which, of course, has no relevant counterpart in Australia. English case law cannot, therefore, be convincingly relied on in Australia, unless the common law of Australia is based on similar principles to those that underpin the Human Rights Act. The judgments make no attempt to establish this. In fact, they say very little about the defendant’s liability. Neave JA found it necessary to refer only ‘briefly’ to the principles governing the protection of confidential information.120 Having pointed out that liability may arise either in contract or in equity, her Honour then went on immediately to deal at length with the difficulties, that we have just discussed, of obtaining damages for breach of confidence where the obligation sounds only in equity. This concentration on remedy rather than on the basis of liability is explicable in context. Quite simply, Giller was a classic breach of confidence case, in which there was no need to labour the basis of liability. The facts of the case satisfied the traditional requirements of an action for breach of confidence: namely, that the information in question had the necessary quality of confidence; that it was communicated in circumstances importing an obligation of 116 119

Ibid [133]−[140]. 117 Ibid [420]−[431]. 118 Ibid [133]. Ibid [154] (Ashley JA), [408]−[419] (Neave JA). 120 Ibid [396].

Privacy and private law

105

confidence; and that there was an unauthorized use or disclosure of the information.121 Information touching on the sexual relations of parties in the course of a relationship will easily have the necessary quality of confidence to bring the doctrine of confidentiality into play. Its publication, either by one of the persons in question or by a third party knowing (expressly or constructively) of the circumstances in which it was communicated, will generally amount to a breach of confidence.122 The traditional understanding of the doctrine of confidentiality has broadened and evolved.123 In particular, the application of the doctrine is not limited to cases in which information has been obtained in defined circumstances – for example, in the context of a relationship between the confider and the confidant, or in the knowledge that it has been acquired in breach of a duty of confidence.124 It would seem to be enough that there is ‘an obligation of confidence arising from the circumstances in or through which the information was communicated or obtained’.125 Whether or not there has been a breach of the obligation will thus depend on the circumstances in which the information was obtained.126 As Meagher, Heydon and Leeming put it: ‘equity is moved to intervene by reason of the circumstances in which the defendant obtained the information, rather than by any intrinsic value or importance in the information itself or by any apprehended damage to the plaintiff by the misuse thereof’.127 In this sense, the doctrine of confidentiality is rooted in unconscionability.128

121

122

123 124

125 126 127 128

See Coco v AN Clark (Engineers) Ltd [1969] RPC 41, 47 (Megarry J). These considerations are not necessarily exhaustive, especially as regards a possible necessity for detriment: see RP Meagher, JD Heydon and MJ Leeming, Meagher, Gummow and Lehane’s Equity: Doctrines and Remedies (4th edn Butterworths LexisNexis, Chatswood 2002) [41–050]−[41–055]. Moreover, as the text makes clear, the considerations are subject to elucidation. See RG Toulson and CM Phipps, Confidentiality (2nd edn Sweet & Maxwell, London 2006) [7–004]−[7–011]; F Gurry, Breach of Confi dence (Clarendon Press, Oxford 1984) 97−101 (noting especially the decision in Duchess of Argyll v Duke of Argyll [1967] Ch 302). Consider Meagher, Heydon and Leeming (n 121) [41–035]. See Attorney-General v Guardian Newspapers Ltd (No 2) [1990] 1 AC 109, 281 (Lord Goff ). Moorgate Tobacco Co Ltd v Philip Morris Ltd (No 2) (1984) 156 CLR 414, 438 (Deane J). Toulson and Phipps (n 122) [2–104]–[2–108]. Meagher, Heydon and Leeming (n 121) [41–045]. See Stephens v Avery [1988] QB 449, 456 (Browne-Wilkinson VC) (unconscionable for a person who has received information on the basis that it is confidential subsequently to reveal it).

106

Tilbury

The English cases protecting privacy are not so rooted. Their focus is on the intrinsic nature of the information in issue to determine whether or not it is private for the purposes of Article 8 of the Convention. In the leading case of Campbell v MGN Ltd,129 the famous model, Naomi Campbell, obtained damages in an action for breach of confidence against a newspaper for publishing both covertly taken photographs that identified where she was attending meetings of a self-help group for drug addicts, and the details of her therapy. An action in breach of confidence could no doubt be supported on conventional grounds by reference to the circumstances in which the information was obtained, namely, the covert photography and the disclosure to the newspaper by a member of the self-help group of Ms Campbell’s attendance at the therapy sessions. But the reasoning in this and subsequent cases centres on the private nature of the information: the defendant’s liability is attracted under Article 8 because the claimant has a reasonable expectation of privacy in the circumstances.130 That expectation may arise regardless of the circumstances in which the information has been obtained. Thus, Ms Campbell may have been entitled to maintain the action even if a chance photograph taken by a photographer who was passing in the street nevertheless identified the place at which she was attending therapy sessions.131 In those circumstances, there may have been no breach of confidence but, depending on the circumstances, the information may still have been private as akin to medical information whose publication could jeopardize Ms Campbell’s recovery. Private information is not always confidential, just as confidential information (such as commercial information or governmental secrets) is not always private.132 The modern English cases on privacy under the Human Rights Act do not, therefore, sit easily with the doctrine of confidentiality in Australian law. There is a further reason why this is so. Once satisfied that the information in question is (at least potentially) private, the English courts then decide the extent to which its disclosure would be consistent with the 129 130

131

132

[2004] UKHL 22, [2004] 2 AC 457 (‘Campbell ’). See ibid [20]−[21] (Lord Nicholls), [85] (Lord Hope), [134] (Baroness Hale); Murray v Big Pictures (UK) Ltd [2008] EWCA Civ 446, [20]−[41] (Clarke MR, Laws and Thomas LJJ). See also G Phillipson, ‘The Common Law, Privacy and the Convention’ in H Fenwick, G Phillipson and R Masterman, Judicial Reasoning Under the UK Human Rights Act (Cambridge University Press, Cambridge 2007) ch 9. As opposed to a street scene, which would not ground an action for invasion of privacy: see Campbell (n 129) [122] (Lord Hope). Consider the information in Lenah Game Meats (n 5).

Privacy and private law

107

objective of protecting the right to private life under Article 8, particularly when balanced against the right to freedom of expression in Article 10, of the Convention. The case law makes it clear that the one right does not have preference over the other. Instead there must be an ‘intense focus’ on the comparative importance of the specific rights claimed, and a weighing up of the justifications for interfering with or restricting each right. Moreover, regard must be had to the extent to which the application of each right would, in the circumstances, be proportionate to its legitimate aim.133 This does not mirror what happens in the action for breach of confidence in Australian law when the public interest, including that in freedom of expression, is taken into account as a defence to the action (as opposed to a factor that is taken into account at the outset to determine if the obligation exists).134 In an action for breach of confidence, it would be ‘an invitation to judicial idiosyncrasy’135 to ignore the prima facie enforceability of the obligation of confidence simply by attempting to balance ‘the public interest in maintaining the confidence against the public interest in knowing the truth’.136 It follows that the initial balancing that is inevitable in an action for invasion of privacy no more easily coheres with the equitable action for breach of confidence than it does with the law of torts.137 The above discussion has demonstrated that the English development of privacy law in the context of the action for breach of confidence cannot simply be followed in Australia. Nor should it be. Like the English Court of Appeal’s attempt to encompass privacy protection in the action of nuisance in Khorasandjian, it is only partially effective:138 it can reach only information privacy, leaving cases of intrusion on seclusion untouched. Moreover, it renders the law of confidentiality potentially incoherent. Are there now two versions of the doctrine of confidentiality? The New Zealand Court of Appeal thinks that there are,139 and Toulson and Phipps speak of ‘significantly different types of cause of action’.140 It is by no means obvious why the desire for greater privacy protection should have this effect on the law of confidentiality. 133 134 135

136 137 139 140

See Re S (a child) [2005] 1 AC 993, [17] (Lord Steyn). See Toulson and Phipps (n 122) [6–061]−[6–070]. Smith Kline & French Laboratories (Aust) Ltd v Secretary, Department of Community Services and Health (1990) 22 FCR 73, 111 (Gummow J), aff ’d (1991) 28 FCR 291. Woodward v Hutchins [1977] 1 WLR 760, 764 (Lord Denning MR). See text to nn 111−13. 138 See text to n 49. Hosking (n 79) [42] (Gault and Blanchard JJ). See Toulson and Phipps (n 122) [2–006].

108

Tilbury

E.

Conclusion

With the customary elegance of his prose, Michael Bryan has reminded us that ‘[l]egal rules emerge from, and are shaped by, the process of factfinding, and that process is incompatible with any notion of “timeless” legal categories’.141 The rules and categories associated with the doctrine surrounding the traditional actions at common law and in equity that are thought to provide some protection to the privacy interest, have ceased to be relevant to the effective and generalized protection of the interest in modern conditions. Moreover, the injection of the privacy interest into those actions is almost certain to produce incoherence within them, as well as within broader categories of law. Unfortunately, there is probably no basis for an alternative approach that would generalize a privacy tort from existing instances of privacy protection in tort. It is true that there are other areas of law that protect privacy interests that are not dealt with in this essay. They include the criminal law;142 the statutory regimes regulating information privacy;143 and Australia’s obligations under international law.144 But the principled development of a ‘right to privacy’ from them, and the determination of its contours, surely requires legislative intervention, whether or not occurring as part of the evolution of human rights or constitutional norms. 141 142 143

M Bryan, ‘Book Review: Dimensions of Private Law ’ (2003) 24 Adelaide L Rev 317, 319. NSW Law Reform Commission (n 80) [2.90]−[2.112]. Eg n 1. 144 NSW Law Reform Commission (n 80) [1.26]−[1.31].

5 Towards legal pragmatism: breach of confidence and the right to privacy Megan Richardson *

A.

Introduction

In How Fiction Works,1 literary critic James Wood compares literary fiction with moral philosophy. As Wood explains, while fiction and especially novels are concerned with the reality of human existence, there is a certain persuasive criticism of much modern moral philosophy that it ‘essentially wrote the messiness of the self out of moral discussion’.2 The critique is shared by philosopher Bernard Williams who argues that modern Kantian philosophers tend to view moral dilemmas as easily solved by identifying then elevating the correct ‘universal’ moral principle while in reality life may involve more than one possible moral stance and people who respond differently to moral choices, their decisions influenced by a range of factors – genetics, upbringing, society and so on.3 Similarly, philosopher and law academic Cass Sunstein notes that:4 The hard question, not yet fully elaborated in the philosophical literature, remains: How does one make choices in cases in which incommensurable social goods are at stake, and in which some of these goods must be sacrificed? *

With grateful thanks to Michael Bryan whose deep knowledge of breach of confidence and generosity in sharing his work and ideas with others has inspired me, to the editors for embarking on and carrying through this most worthy project, and to Peiwen Chen for her excellent research assistance. Since breach of confidence/privacy law is a rapidly moving field, it should be noted that this essay reflects developments as at October 2009.

1

J Wood, How Fiction Works (Jonathan Cape, London 2008). Ibid 133. See for instance, B Williams, Ethics and the Limits of Philosophy (Routledge, London 1985) and AW Moore (ed), Bernard Williams: Philosophy as a Humanist Discipline (Princeton University Press, Princeton 2006). C Sunstein, ‘On Analogical Reasoning’ (1993) 106 Harv L Rev 788.

2 3

4

109

110

Richardson

As Sunstein points out, in Anglo-American jurisprudence the judge’s traditional response to such problems is to avoid confronting them head on, adopting instead a process of incremental reasoning in which previous decisions of judges on like questions are taken as the starting point for resolving the case at hand, the focus is on the particulars of disputes, and legal positions are incompletely theorized in advance. In Australia, incrementalism has also been identified as the preferred legal method. Thus in Australian Broadcasting Corporation v Lenah Game Meats Pty Ltd,5 faced with an argument that the High Court should recognize a new privacy cause of action extending to scenes of possums being stunned and killed in a game meat abattoir, Gummow and Hayne JJ respond as follows:6 In the present appeal, Lenah encountered … difficulty in formulating with acceptable specificity the ingredients of any general wrong of unjustified invasion of privacy. Rather than a search to identify the ingredients of a generally expressed wrong, the better course … is to look to the development and adaptation of recognised forms of action to meet new situations and circumstances.

Some scholars and judges have argued that ‘top-down’ styles of reasoning offer better prospects of effective decision-making in the common law.7 But ‘bottom-up’ reasoning has certain utilitarian advantages. In a classic article on ‘The Science of “Muddling Through” ’,8 economist Charles Lindblom observes that, not only is incrementalism the normal approach to administrative decision-making, its reliance on marginal analysis and its focus on results rather than theory reflect a more genuinely pragmatic approach to problem-solving than the alternative ‘rational-comprehensive’ method. In particular,9 The idea that values should be clarified, and in advance of examination of alternative policies, is appealing. But what happens when we attempt it for complex social problems? The first difficulty is that on many critical values or objectives, citizens disagree, congressmen disagree, and public administrators disagree … Even if all administrators had at hand an 5 7

8 9

6 (2001) 208 CLR 199 (‘Lenah ’). Ibid [110]. For instance, R Posner, ‘Legal Reasoning from the Top Down and from the Bottom Up: The Question of Unenumerated Constitutional Rights’ (1992) 59 U Chi L Rev 433 (although seeing a particular role for judicial intuition rather than explicit theorising); R Posner, ‘Pragmatic Adjudication’ (1996) 18 Cardozo L Rev 1; and K Mason, ‘What Is Wrong with Top-Down Legal Reasoning?’ (2004) 78 ALJ 574. C Lindblom, ‘The Science of “Muddling Through”’ (1959) 19 PAR 79. Ibid 81−2.

Breach of confidence and the right to privacy

111

agreed set of values, objectives, and constraints, and an agreed ranking of these values, objectives and constraints, their marginal values in actual choice situations would be impossible to formulate. Unable consequently to formulate the relevant values fi rst and then choose among policies to achieve them, administrators must choose directly among alternative policies that offer different marginal combinations of values. Somewhat paradoxically, the only practicable way to disclose one’s relevant marginal values even to oneself is to describe the policy one chooses to achieve them. Except roughly and vaguely, I know of no way to describe – or even to understand – what my relative evaluations are for, say, freedom and security … in government decisions … than to describe my preferences among specific policy choices that might be made between the alternatives in each of the pairs.

Historically, it may be argued, such styles of reasoning, which seek to provide ‘practical measures for cooperative social life’, have much to do with the common law.10 But does this have to change when the law comes under pressure to consider and evaluate human values in a more direct fashion – as, for instance, with the new discourse of rights including rights to privacy and free speech? In this essay, I argue that the law has responded effectively to new demands for protection of privacy. And if judges have found it difficult to deal with rights-based reasoning it is not because the common law cannot accommodate rights – indeed there is a tradition in the law of talking about privacy as ‘a right’.11 Rather, the difficulty stems from an initial deference to Kantian moral philosophy as the assumed only philosophy of rights. Yet even this may be changing in the latest cases which seem to be coming around to the idea that laws attuned to rights of privacy and free speech still have to accommodate the messiness of the self.

B.

Law’s incrementalism

In Attorney-General v Guardian Newspapers Ltd (No 2),12 Lord Goff provides a classic example of how a recognized form of action, in this case 10

11

12

T Grey, ‘Freestanding Legal Pragmatism’ (1996) 18 Cardozo L Rev 1, 42. See also T Cotter, ‘Legal Pragmatism and the Law and Economics Movement’ (1996) 84 Geo LJ 2074 and G Hadfield ‘The Second Wave of Law and Economics: Learning to Surf ’ in M Richardson and G Hadfield (eds), The Second Wave of Law and Economics (Federation Press, Sydney 1999) 50. For instance, there are references to the ‘right’ to privacy in the ancient case of Prince Albert v Strange (1849) 1 H & Tw 1, 47 ER 1302 (‘Prince Albert v Strange ’). And see M Richardson and L Hitchens, ‘Celebrity Privacy and Benefits of Simple History’ in A Kenyon and M Richardson (eds), New Dimensions in Privacy Law: International and Comparative Perspectives (Cambridge University Press, Cambridge 2006) 250. [1990] 1 AC 109 (‘Spycatcher ’).

112

Richardson

breach of confidence, may be developed to deal with new demands for privacy protection. As the doctrine is elaborated:13 I start with the broad general principle (which I do not intend in any way to be defi nitive) that a duty of confidence arises when confidential information comes to the knowledge of a person (the confidant) in circumstances where he has notice, or is held to have agreed, that the information is confidential, with the effect that it would be just in all the circumstances that he should be precluded from disclosing the information to others … I realise that, in the vast majority of cases, in particular those concerned with trade secrets, the duty of confidence will arise from a transaction or relationship between the parties … But it is well settled that a duty of confidence may arise in equity independently of such cases; and I have expressed the circumstances in which the duty arises in broad terms, not merely to embrace those cases where a third party receives information from a person who is under a duty of confidence in respect of it, knowing that it has been disclosed by that person to him in breach of his duty of confidence, but also to include certain situations, beloved of law teachers – where an obviously confidential document is wafted by an electric fan out of a window into a crowded street, or where an obviously confidential document, such as a private diary, is dropped in a public place, and is then picked up by a passer-by … To this broad general principle, there are three limiting principles to which I wish to refer. The fi rst limiting principle (which is rather an expression of the scope of the duty) … is that the principle of confidentiality only applies to information to the extent that it is confidential. In particular, once it has entered what is usually called the public domain (which means no more than that the information in question is so generally accessible that, in all the circumstances, it cannot be regarded as confidential) then, as a general rule, the principle of confidentiality can have no application to it … The second limiting principle is that the duty of confidence applies neither to useless information, nor to trivia. There is no need for me to develop this point. The third limiting principle is of far greater importance. It is that, although the basis of the law’s protection of confidence is that there is a public interest that confidences should be preserved and protected by the law, nevertheless that public interest may be outweighed by some other countervailing public interest which favours disclosure … It is this limiting principle which may require a court to carry out a balancing operation, weighing the public interest in maintaining confidence against a countervailing public interest favouring disclosure.

13

Ibid 280−2.

Breach of confidence and the right to privacy

113

A remarkable feature of the above passage is the subtle way in which Lord Goff, writing in 1988, moves to re-establish breach of confidence as a privacy doctrine in line with the great nineteenth-century case of Prince Albert v Strange (cited in argument),14 and away from the (by 1988) common understanding of breach of confidence as mainly about commercial and, to some extent, government secrets but only marginally of relevance to privacy. Thus, the particular examples used, of a confidential document wafted out a window or a private diary dropped in a street, actually had little bearing on the case before the House of Lords, being a government secrets case about the publication in several leading newspapers of extracts from the book Spycatcher written by a former British spy.15 It is clear from these examples – and also from Lord Goff ’s more general language of ‘notice’ of confidence as the basis of liability – that breach of confidence is being recast in the passage to take on a broader operation than previously had been supposed, in order to deal with the diversity of modern scenarios involving clashes between privacy and the media. But this is still bottom-up reasoning for, in essence, Lord Goff offers a pragmatic result-oriented reframing of the law which only marginally transcends traditional boundaries and is designed with actual, real-life, cases in mind. What particular cases might Lord Goff have had in mind? One certainly would have been the notorious 1984 case of Francome v Mirror Group Ltd,16 where a well-known jockey and his wife objected to the Daily Mirror’s publication of information about alleged breaches of racing rules obtained through a secret, illegal home telephone tap. The difficulty for the Court of Appeal was that when the case came to be decided it was widely assumed that breach of confidence was founded on a relationship of confidence between a confider and confidant. A relationship was posited as at least ‘normally’ required by Megarry J in an influential decision in Coco v AN Clark (Engineers) Ltd17 in 1969. Further, in 1979, in Malone v Metropolitan Police Commissioner,18 Megarry VC had held that in the absence of a relationship the claimant had no basis for objection to the police secretly tapping his telephone (there pursuant to a warrant), adding that people should be careful what they say in their gardens or on

14 15

16 18

See n 11. P Wright with P Greengrass, Spycatcher: The Candid Autobiography of a Senior Intelligence Officer (William Heinemann Australia, Melbourne 1987). [1984] 2 All ER 408 (‘Francome’). 17 [1969] RPC 41, 47−48 (Megarry J). [1979] Ch 344 (Megarry VC) (‘Malone v Metropolitan Police Commissioner ’).

114

Richardson

public transport if they want to avoid being overheard, for the doctrine would not assist them. However, in Malone v United Kingdom,19 the United Kingdom was found to have failed in its obligation to give legal support to the right to privacy enshrined in Article 8 of the European Convention on Human Rights.20 So in Francome the decision in Malone v Metropolitan Police Commissioner was distinguished as concerned with a lawful telephone tap. Some commentators construed this to mean that only in cases of otherwise unlawful conduct may breach of confidence extend outside relationships of confidence, 21 a position still incidentally giving a great deal of leeway to the media. But in Spycatcher Lord Goff brought surreptitious and other improper obtaining within the ambit of breach of confidence by the simple method of analogizing the liability of the person who obtains information with that of a third-party beneficiary of another’s breach, which had long been based on notice. Now it is conventional wisdom that surreptitious or improper obtaining may give rise to breach of confidence. Th is was not immediately apparent following Spycatcher. For instance, in Kaye v Robertson,22 in 1990, Gordon Kaye (star of the ’Allo ’Allo! television series), suffering a serious brain injury after a car accident, found his hospital room invaded by a reporter and photographer who ‘interviewed’ him and took his photograph for The Sunday Sport. Breach of confidence was not argued and the Court of Appeal seemed unable to address the situation in terms of available legal protection of privacy. There were calls for a statutory privacy action, 23 although they came to nothing. However, just over a decade later in Lenah, Gleeson CJ referred to Lord Goff in Spycatcher as high authority 19

20

21

22 23

(1985) 7 EHRR 14. Although the case predated the incorporation of the European Convention into domestic law by some fifteen years, the United Kingdom as a Convention signatory which also ratified the Convention was still accountable in the European Court of Human Rights for the failure of its institutions to ensure that the rights were complied with (and individual petitions to that Court were permitted from 1966): see, for a useful history, R Kerridge, ‘Incorporation of the European Convention on Human Rights into United Kingdom Domestic Law’ in M Furmston, R Kerridge and BE Sufrin, The Effect on English Domestic Law of Membership of the European Communities (Martinus Nijhoff, London 1983) 247, 247−48. Convention for the Protection of Human Rights and Fundamental Freedoms, Council of Europe (European Convention on Human Rights) (ECHR) 1950. See for instance, G Wei, ‘Surreptitious Takings of Confidential Information’ (1992) 12 LS 302. [1991] FSR 62. See ibid 66 (Glidewell LJ, Bingham and Legatt LJ concurring). Nor was this the fi rst failed attempt to promote statutory reform of the law of confidence: see M Bryan, ‘The Law Commission Report on Breach of Confidence: Not in the Public Interest?’ [1982] PL 188.

Breach of confidence and the right to privacy

115

that breach of confidence is not restricted to relationships of confidence and thus is able to serve privacy interests in a broad fashion.24 Indeed, in Lenah, Gleeson CJ observed that had the information of the Tasmanian abattoir’s operations (secretly recorded by animal rights activists then handed over for public broadcast) been private and confidential, breach of confidence would have been adequate to cover the case.25 Similarly, in its 2004 decision in Campbell v MGN Ltd,26 the House of Lords agreed that the Mirror could be found liable for breach of confidence as a result of its conduct in publishing surreptitiously snapped photographs of Naomi Campbell leaving a Narcotics Anonymous meeting. Lord Goff in Spycatcher was again relied on as clear authority for no relationship being needed. And in Douglas v Hello! Ltd (No 3),27 in 2006, the Court of Appeal accepted that Hello! was liable for breach of confidence for publishing surreptitiously snapped photographs of Michael Douglas and Catherine Zeta Jones’ private wedding, a position not questioned when that case came before the House of Lords.28 In 1988 Lord Goff may have been seen as taking a radical and contentious step in opening up breach of confidence beyond relationships of confidence – although there were several older authorities which could be drawn on in support, as Gleeson CJ noted in Lenah.29 But in the twenty-first century, the position advocated by Lord Goff in Spycatcher is accepted as sound authority, with little acknowledgment that there was doubt even a decade ago.

C.

Thresholds versus balances

Another feature of incremental reasoning nicely illustrated by Lord Goff ’s repositioning of breach of confidence as a privacy doctrine in Spycatcher is the emphasis given in the third limiting principle to ‘balancing’ public interests in maintaining confidentiality and facilitating public 24

25

26 27 28

29

Lenah (n 5) [34]−[36] (Gleeson CJ), referring also to the Australian case of Commonwealth of Australia v John Fairfax & Sons Ltd (1980) 147 CLR 39 (‘John Fairfax’) where, citing the old case of Lord Ashburton v Pape [1913] 2 Ch 469, Mason J used language of information ‘improperly or surreptitiously obtained’ to frame the doctrine’s scope. Lenah (n 5) [39]. As Gleeson CJ also recorded, in that case it was conceded on behalf of the claimant that the information was not confidential: [30] and further at [25]. [2004] UKHL 22, [2004] 2 AC 457 (‘Campbell ’). [2005] EWCA Civ 595, [2006] QB 125 (‘Douglas v Hello! Ltd ’). See OBG Ltd v Allan [2007] UKHL 21, [2008] 1 AC 1 (where OK! ’s appeal from Douglas v Hello! Ltd was considered along with two other ‘economic tort’ appeals). See n 24 and further M Richardson, ‘Breach of Confidence, Surreptitiously or Accidentally Obtained Information and Privacy: Theory Versus Law’ (1994) 19 MULR 673.

116

Richardson

disclosure.30 Even at the time of Spycatcher the position that there must be a public interest defence which allows for a weighing of interests was largely accepted as part of the common law doctrine.31 In ‘The Science of “Muddling Through”’ Lindblom foreshadowed that for policy-makers difficult social choices involving significant and sometimes conflicting values may be best resolved through a process of determining ‘preferences among specific policy choices’.32 The approach is actively encouraged by a limiting principle which invites judges to decide on a case-by-case basis precisely where – among those positions advocated by the parties respectively – the ‘balance’ of public interests should lie between, say, privacy and free speech. Nor is the principle’s importance belied by the other limiting principle posited by Lord Goff, that ‘the duty of confidence applies neither to useless information, nor to trivia’.33 For although at face value this qualification might suggest that courts should first consider whether the privacy value is sufficiently important in a particular case to be worth protecting even before moving to a second step of balancing between privacy and free speech, in practice the cases Lord Goff might have had in mind, writing in 1988, were few and far between. Perhaps the most obvious scenario comes from Church of Scientology v Kaufman,34 decided in 1972, where Goff J relied on triviality as a reason to deny an interlocutory injunction to the Church, which was seeking to stop publication of a book written by a disillusioned former adherent criticizing its teachings and methods. The subject matter was declared not worth protecting as being ‘pernicious nonsense’ and ‘trivial tittle-tattle’.35 It may be wondered whether the ‘pernicious nonsense’ label was more appropriate 30 31

32

33

Spycatcher (n 12) 282 (and see text to n 13). Certain judges in Australia, however, have maintained the traditional view that there is no public interest defence, as such, to breach of confidence although in accordance with the old case of Gartside v Outram (1856) 26 LJ Ch 378, ‘iniquity’ is not protected: see for instance, Corrs Pavey Whiting & Byrne v Collector of Customs (Vic) (1987) 14 FCR 434, 451–6 (Gummow J), and further Smith Kline & French Laboratories (Aust) Ltd v Secretary, Department of Community Services and Health (1990) 22 FCR 73, 110−11 (Gummow J); although contrast John Fairfax (n 24) 57 (Mason J) and Kirby P in the Australian Spycatcher case – Attorney-General (UK) v Heinemann Publishers Australia Pty Ltd (1987) 10 NSWLR 86, 170−1. In Lenah (n 5) [35], Gleeson CJ took for granted that the broader defence applied, noting also the relevance of the Australian implied constitutional freedom of political communication. Lindblom (n 8) 81–2. See also presciently Bryan (n 23) 189, noting that despite the uncertainty of a defence that invokes a broad balancing of interests, ‘[i]t would hardly be sensible, even if it were possible, to elaborate the exact circumstances in which confidential information could be disclosed’. 34 Spycatcher (n 12) 282 (and see text to n 13). [1973] RPC 627. 35 Ibid 627.

Breach of confidence and the right to privacy

117

than triviality to critique the Church’s claims that its relations with its adherents were private and were founded on a trust which now stood to be breached by the former adherent. Was this not rather a case of privacy and trust having questionable value for a claimant whose concern was to stifle public debate – conduct which today might be called an ‘abuse of rights’?36 Be that as it may, there would seem to be a better basis still on which to deny the injunction. As Lord Denning MR noted in Hubbard v Vosper37 in 1971, another case involving the Church of Scientology (as well as its founder) seeking to prevent publication of a book written by a former adherent, the public interest defence to any breach of confidence claim would likely succeed if the case went to trial. Therefore, it may be questioned whether the claimant had met the proper standards for the award of an interlocutory injunction – a remedy that ‘is so useful that it should be kept flexible and discretionary’.38 While there may have been some debate in 1971 as to how far courts should go in assessing substantive defences at the interlocutory stage, the proposition that a court asked to grant a prior restraint should deal with substantive issues (including available defences) as best it can on the available evidence and arguments at the interlocutory stage is now well accepted as the appropriate approach to cases which raise concerns about free speech.39 On the other hand, some might characterize as trivial the information in Woodward v Hutchins,40 a 1977 case where pop stars Tom Jones, Engelbert Humperdinck, Gilbert O’Sullivan and Gordon Mills sought to stop publication of some articles revealing ‘secrets’ about the group’s personal conduct and behaviour in the Daily Mirror. The irony of the 36

37 38

39

40

Now such conduct, being aimed at the destruction of freedom of speech (itself a right identified by Article 10), might be considered an abuse of the Article 8 right to privacy under Article 17 of the ECHR. See also H MacQueen and D Brodie, ‘Private Rights, Private Law and the Private Domain’ in A Boyle and others (eds), Human Rights and Scots Law (Hart Publishing, Oxford 2002) 141, 151 (fn 50 especially). [1972] 2 QB 84. Ibid 95−7. The other judges, Megaw LJ and Stephenson LJ, concurred. For good measure, Megaw LJ added that the injunction should also be denied on the basis of unclean hands, there being strong evidence that ‘the plaintiffs are or have been protecting their secrets by deplorable means’ (at 101). Stephenson LJ ‘entirely agree[d]’ and (rather less plausibly) suggested that damages would be adequate in any event (at 101). See for instance, Cream Holdings Ltd v Banerjee [2005] 1 AC 103. The House of Lords decision there was premised on the language of s 12(3) of the Human Rights Act 1998 (UK), but for a similar approach to interlocutory injunctions and prior restraints developing in Australia, see Australian Broadcasting Corporation v O’Neill (2006) 227 CLR 57. [1977] 1 WLR 760.

118

Richardson

situation was that a former agent, employed to create a desirable public image for the celebrities by selectively channelling their private information through the press, was doing the telling. As Lord Denning MR noted, ‘this pop group sought publicity’ and their agent’s function was to ‘produce’ this ‘favourable image, not only of their public lives but of their private lives also’.41 Again, however, the triviality characterization is problematic, for the information the Daily Mirror sought to publish and for which it had ‘no doubt provided considerable reward’42 was worth a great deal to it, something to readers, and enough to the claimants to take legal steps to prevent publication. In any event, Lord Denning had another reason to deny the injunction, being the ‘public interest’ in correcting a false image by disclosing ‘the truth’.43 There is some attraction in the idea that where an incomplete story is being presented through selective publication of personal information the claimant’s interest in maintaining the myth should be discounted vis-à-vis the public’s interest in knowing the truth on the other side.44 However, the suggestion here again was that the better way to deal with the limited value to be found in offering legal protection to confidentiality in these circumstances was by considering this alongside the value to be found in publication. The impression that triviality per se was only a minor basis, at best, for denying breach of confidence’s protection by the late 1980s is confirmed by other cases where triviality (in the sense of not sufficiently serious or otherwise worthy of protection) might have been invoked. For instance, the fact that the Duke of Argyll proposed to reveal marriage secrets of a domestic nature to The People did not prevent an injunction being granted in the 1967 case of Duchess of Argyll v Duke of Argyll,45 at the instance of his former wife. Nor in Stephens v Avery,46 handed down six months before Spycatcher, was the court prepared to strike out a breach of confidence claim against, inter alia, the Mail on Sunday for its story leaked by a former friend that Mrs Stephens was the secret lover of a woman who was murdered by her husband. It was argued that the claim was ‘frivolous 41 44

45

43 Ibid 763. 42 Ibid. Ibid. Such reasoning lies at the heart of certain media and cultural studies scholarly critiques of celebrity claims of privacy (construing these as serving the interests of celebrities, their agents and promoters and compliant media outlets in ‘strategically regulating’ public understandings of their identities by selectively fi ltering personal information). These commentators may well take the reasoning considerably further than most judges: see, for instance, A Kenyon and E Milne, ‘Images of Celebrity: Publicity, Privacy, Law’ (2005) 10 MALR 311, 314 especially (and references noted there). [1967] Ch 302 (‘Argyll v Argyll ’). 46 [1988] Ch 449 (‘Stephens v Avery’).

Breach of confidence and the right to privacy

119

or vexatious’ but Sir Nicholas Browne-Wilkinson VC responded that ‘I have the greatest doubt whether wholesale revelations of the sexual conduct of an individual can properly be described as ‘trivial tittletattle’.47 So what was left to triviality by the time Lord Goff came to view it in Spycatcher? Bearing in mind the above cases it would seem not much. As Lord Goff said, once the threshold of confidentiality and notice is established (with its own standard of reasonable knowledge),48 the ‘far more greatly important’ limiting principle is balancing public interests. Thus, notwithstanding the reference to triviality posing a limitation for breach of confidence, Lord Goff accepted that in a very large majority of cases a decision as between values of confidentiality (or privacy) and free speech should be reached through the decisionmaking process that Lindblom ascribes to ‘muddling through’ – choosing directly among alternative policies that offer different marginal combinations of values. Indeed, the same seems now to have been accepted by courts coming after, notwithstanding the new discourse of privacy as a ‘right’. In the immediate wake of the Human Rights Act, bringing the ECHR with its rights to privacy and free speech into UK law, there was some suggestion that a rigorous threshold should be met before the right to privacy could be invoked in support of a breach of confidence claim. In Lenah, Gleeson CJ suggested that whether ‘disclosure or observation of information or conduct would be highly offensive to a reasonable person of ordinary sensibilities’ was ‘in many circumstances a useful practical test of what is private’.49 And the Court of Appeal in Campbell adopted and relied on an offensiveness threshold to deny Campbell’s claim for breach of confidence.50 But the House of Lords said a claimant need establish only a ‘reasonable expectation’ of privacy, judged from his or her perspective, and where free speech was also in issue the better course was to consider whether the reasonable expectation of privacy was outweighed by the public interest in free speech51 – identifying this with the (by then) 47 48

49 51

Ibid 454. And see Spycatcher (n 12) 281 (Lord Goff ), leaving open the extent to which notice may go beyond actual knowledge but adding that it must at least include circumstances where ‘the confidant has deliberately closed his eyes to the obvious’. Lenah (n 5) [42] (Gleeson CJ). 50 Campbell (n 26). As allowed for in Articles 8 and 10, which reference each other (in Articles 8(2) and 10(2)): see Campbell (n 26) [14]–[22] (Lord Nicholls), [46]−[56] (Lord Hoffmann, although without using the language of ‘reasonable expectation’ as such), [85]−[86] (Lord Hope), [132]−[136] (Lady Hale), [165]−[167] (Lord Carswell).

120

Richardson

traditional approach of Lord Goff in Spycatcher.52 Thus the Court of Appeal was ‘wrong’ to adopt a high offensiveness test which led it to hold that Campbell’s treatment by Narcotics Anonymous could not be protected without ‘balancing the competing Convention rights’, Lord Hope said.53 And the majority found that on balance Campbell prevailed with her argument that the information was sensitive for a recovering addict (even if she could not complain about disclosure of her drug addiction, given she had publicly lied about it) and that the use of photographs especially was unnecessarily intrusive. Her privacy claim may have been rather weak but it was hard to see a stronger free speech argument on the other side. Similarly, the Court of Appeal added in Douglas v Hello! Ltd,54 it was wrong for the Court at the interlocutory stage to deny the Douglases an injunction against Hello! ’s publication on the basis that their privacy interest was merely ‘residual’ once they sold the wedding rights to OK!.55 They had a genuine privacy interest in deciding what pictures should be published and it was likely they would have succeeded in their breach of confidence action at trial taking into account the limited public interest on Hello! ’s side.56

D.

Incomplete theorizing

Incomplete theorizing is also a feature of incrementalism, according to Lindblom. Th is is evident in Spycatcher where Lord Goff talks of balancing public interests in privacy and free speech, suggesting a vaguely utilitarian calculus but without any extended discussion of the utilitarian reasons why privacy and free speech may be important and how these interests may be reconciled. That, at least, might seem to have changed in the wake of the Human Rights Act. Almost immediately following the Act, judges in the United Kingdom and even Australia began to talk about the right to privacy as a matter of human dignity and autonomy.57 And, if references to Samuel Warren and Louis Brandeis’ classic American article on ‘The Right to Privacy’ are anything to go by, 52

53 55 56 57

In the discussions above, Lord Nicholls, Lord Hoff mann and Lord Hope explicitly referred to Lord Goff in Spycatcher (and Lady Hale and Lord Carswell also agreed in general terms with Lord Hope). 54 Campbell (n 26) [99]. Douglas v Hello! Ltd (n 27). Douglas v Hello! Ltd [2001] QB 967, especially 1006−7 (Sedley LJ). Douglas v Hello! Ltd (n 27) [253]−[258]. See for instance, Douglas v Hello! Ltd [2001] QB 967, 999−1001 (Sedley LJ); Lenah (n 5) [43] (Gleeson CJ), [125]−[126] (Gummow and Hayne JJ).

Breach of confidence and the right to privacy

121

privacy was being reconceived as a matter of ‘inviolate personality’58 – suggesting a Kantian principle of treating human beings as ends in themselves rather than sacrificeable for the greater utilitarian good.59 No wonder judges looked to establishing thresholds to be met before the inviolate right of personality could be invoked. A Kantian approach insists that, as Williams says, ‘moral obligations … cannot confl ict, ultimately, really, or at the end of the line’, moral obligations being ‘inescapable’.60 However, with Campbell, courts seem to have reverted to a more utilitarian idea of privacy as a value whose importance in a particular case may well only be fi nally worked out in the balance with free speech and other public interests. Yet, intriguingly, they continue to use the language of dignity and autonomy. So, according to Lord Hoff mann in Campbell:61 What human rights law has done is to identify private information as something worth protecting as an aspect of human autonomy and dignity … [Breach of confidence in the wake of the Human Rights Act] recognises that the incremental changes … do not merely extend the duties arising traditionally from a relationship of trust and confidence to a wider range of people … Instead of the cause of action being based upon the duty of good faith …, it focuses on the protection of human autonomy and dignity – the right to control the dissemination of information about one’s private life and the right to the esteem and respect of other people … [Freedom of the press and the common law right of the individual to protect personal information] reflect important civilised values, but, as often happens, neither can be given effect in full measure without restricting the other. How are they to be reconciled in a particular case? There is in my view no question of automatic priority. Nor is there a presumption in favour of one rather than the other … But when press freedom comes into conflict with another interest protected by law, the question is whether there is sufficient public interest in that particular publication to justify curtailment of the confl icting right.

Is this top-down reasoning? I suggest it provides yet another example of incomplete theorizing, consistent with Lord Hoff mann’s language of ‘incremental change’. In Campbell, it seems that the right to privacy is tacitly being absorbed into a liberal-utilitarian conception of privacy. Scholars may argue that dignity here has become synonymous with 58 59

60

S Warren and L Brandeis, ‘The Right to Privacy’ (1890) 4 Harv L Rev 193. I Kant, ‘Groundwork of the Metaphysics of Morals’ (1785) reprinted in HJ Paton (trs), The Moral Law (Hutchinson, London 1948). Williams (n 3) 176−7. 61 Campbell (n 26) [50]−[55] (Lord Hoff mann).

122

Richardson

individuality, human flourishing and through that social progress 62 – or rather it is being reabsorbed into a utilitarian treatment of privacy for there are traces of the reasoning also in the ancient case of Prince Albert v Strange.63 It may also be posited that, viewed in such a utilitarian fashion, privacy can never be given automatic priority over other social interests – especially free speech which also has utilitarian value lying in its expressive power, its contribution to democratic debate, and its capacity to generate truth.64 If so, much can be found in common with John Stuart Mill’s understanding of a ‘right’ as simply a shorthand expression for talking about an interest which is regarded so highly that ‘ought and should grow into must and recognised indispensability becomes a moral necessity’, but which may yet be outweighed in a fuller and fi nal assessment of social interests.65 Much of this positing is merely surmise, however, for little is said about the nature of rights, let alone the right to privacy, in the cases. There was no reference made to Mill, for instance, in Campbell . Rather, in the traditional fashion of common law, as Mill might have said, judges continue to operate chiefly ‘by stealth’.66 There is a further implication to the incrementalism being displayed here. Perhaps privacy and free speech are themselves evolving concepts like everything else in the common law, their evolution further catalyzed by their constantly shifting relations inter se. It may be that, at its simplest, privacy entails a right to be ‘let alone’, not to express oneself, as Warren and Brandeis argued in 1890.67 But in actual cases, privacy and expression often go hand in hand, as Eric Barendt points out in an important recent essay.68 And the multiple and various ways in which they may do so are still being discovered. Already we know that privacy encompasses not sharing deeply personal information except with trusted family or 62

63 64

65

66 67 68

In other words, that dignity has become part of, rather than distinct from, the broader liberal-utilitarian rationale for privacy protection discussed in M Richardson, ‘Whither Breach of Confidence: A Right of Privacy for Australia?’ (2002) 26 MULR 381. See Richardson and Hitchens (n 11) 262−3. See John Stuart Mill, ‘On Liberty’ (1859) reprinted in Mary Warnock (ed), On Liberty: Essay on Bentham (Collins, London 1962) ch 2; and E Barendt, Freedom of Speech (2nd edn Oxford University Press, Oxford 2005) ch 1. John Stuart Mill, Utilitarianism (1861/1863) reprinted in Warnock (n 64) 310 and throughout. And see also D Lyons, Rights, Welfare and Mill’s Moral Theory (Oxford University Press, New York 1994) ch 6. And see John Stuart Mill, ‘Bentham’ (1838) reprinted in Warnock (n 64) 108. Warren and Brandeis (n 58) 205. E Barendt, ‘Privacy and Freedom of Speech’ in Kenyon and Richardson (n 11) 11.

Breach of confidence and the right to privacy

123

friends – as in Argyll v Argyll and Stephens v Avery.69 It also embraces not sharing deeply personal information except with a limited circle of people who are not family or close friends, as in Campbell – and more lately Mosley v News Group Newspapers Ltd.70 There, damages were awarded for breach of confidence and privacy after the News of the World published a story on racing boss Max Mosley’s participation in regular orgies involving the same secret group meeting in his neighbourhood, usually finishing with a cup of tea.71 It extends as well to a right to share significant intimate moments with a large group of family and friends as well as an even larger group of fans (but subject to limited terms), as in Douglas v Hello! Ltd. And, with the subsequent decision in Murray v Big Pictures (UK) Ltd,72 it potentially encompasses sharing even anodyne intimate moments with close family (and presumably friends) but not the public at large, since in that case the objection made in the name of Joanne Rowling’s infant son was to photographs covertly taken of him going out to dinner with his family in Edinburgh. The Court of Appeal refused to strike out the claim (or to limit its reasoning to the protection of infants, although clearly that was a consideration), noting that latitude should be given to privacy claimants to make clear what they wish to have treated as private.73 In none of these cases do judges seem to wonder much why those concerned might choose to insist on privacy – they may not know themselves – except that it is obviously a choice they have made. In short, we seem to have reached a position where the common law of privacyconfidentiality accommodates the messiness of the self. 69

70 71

72 73

Similarly McKennitt v Ash [2006] EWCA Civ 778, [2008] QB 73 (‘McKennitt v Ash ’), another case of unwanted disclosures by a former friend, and the recent Australian case Giller v Procopets [2008] VSCA 236 in the Victorian Court of Appeal, where in an action against a former partner it was accepted the sex scenes recorded were confidential to the parties’ relationship and distressing to the claimant when circulated to her family, local community and employer (leave to appeal to the High Court was denied on 23 September 2009). [2008] EWHC 1777 (QB) (‘Mosley ’). Mosley (son of Oswald Mosley) objected to a Nazi slur as false but also made plain he would rather that his family had not had to know about the orgies – pointing out also that the damages award (being premised on publication) was not actually sufficient to address his privacy concerns: ‘Orgy Story Took Mosley Dignity’ BBC News (10 March 2009) . See also G Phillipson, ‘Max Mosley Goes to Strasbourg: Article 8, Claimant Notification and Interim Injunctions’ (2009) 1 J Media Law 73. [2008] EWCA Civ 446. Ibid [36] (emphasising the role of absent consent among other circumstances) and further [50]–[56].

124

Richardson

Perhaps this is where the story should end. But there is still the question of the future. Will breach of confidence fall into obscurity as privacy takes over, as seems to be anticipated in some recent British cases? Breach of confidence is ‘old fashioned’, according to Eady J in Mosley, as distinguished from a (‘new fashioned’) privacy claim under Article 8.74 The reasoning presupposes that the language of privacy is superior to that of confidentiality, being more in touch with modern concerns. But I wonder whether even privacy may become an arcane concept as still more modern concerns arise. These can already be sensed in a number of cases that touch on the networked generation’s desires to share personal information and reflections with large numbers of loosely defined friends, or potential friends, while still retaining some residual control.75 So far courts have resisted suggestions that activities on the internet could be viewed as private, unless effective privacy settings are in place (and it seems that technology is as ineffective in the virtual world as in the real world in supporting privacy, perhaps even more so). Blogging is a ‘public activity’, said Eady J in the recent Night Jack case76 in response to a blogger’s claims of breach of confidence and/or privacy on finding his anonymity pierced by a journalist using mostly internet sources to piece together his identity. Equally, conversations on Facebook (one of the sources) are in the public domain.77 So there was no need to consider whether The Times’s exposé served any public interest that outweighed the claimant’s interest in maintaining control over how much of himself he cared to present to his audience. The language of privacy may seem inadequate to capture what was being sought here. But, is any language perfect? Should we acknowledge what writers of fiction have long understood, the powerlessness of expression together with the obligation to express?78 If the common law is to keep up with fresh demands for legal protection, judges – like the rest of us – may have to live with the inadequacy of ‘privacy’ until something (slightly) better comes along. 74 75

76 77

78

Mosley (n 70) [6] (Eady J) quoting from Buxton LJ in McKennitt v Ash (n 69) [8]. For instance, Author of a Blog v Times Newspapers Ltd [2009] EWHC 1358 (‘Night Jack ’) and Moreno v Hanford Sentinel, Inc, 172 Cal App 4th 1125 (2009). Night Jack (n 75) [33]. See [4.3] of the Claimant’s Skeleton Argument (Hearing 4 June 2009). Thanks to Hugh Tomlinson (who represented the claimant, Richard Horton, in the case) for helpfully providing this information. See Samuel Beckett’s ‘Th ree Dialogues with Georges Duthuit’ (1949) reprinted in S Beckett, Proust: Three Dialogues with Georges Duthuit (J Calder, London 1965) 103.

6 Teaching trust law in the twenty-first century Tang Hang Wu *

A.

Introduction

I met Michael Bryan in 2004 at the Obligations II conference at the Melbourne Law School. It was my first time presenting a paper at an international conference and I was quite nervous. Michael, who was chairing my session, was extremely warm and supportive and put me quickly at ease. After the session, he generously gave me many insightful suggestions on how to improve my paper. Over the years, I have heard that this is just typical of Michael as a person; colleagues from Melbourne have often been eff usive in their praise of Michael. Michael has certainly shown us the way in what is possible in academia – being a respected and inspiring scholar, teacher, colleague and friend. It is my privilege to write an essay dedicated to Michael on the occasion of his retirement. To honour Michael’s substantial contribution as a scholar and teacher in trust law, I have decided to write a chapter on teaching trust law.1 There are a number of pitfalls associated with writing a chapter on teaching. For one thing, there is the danger of sounding overly prescriptive or presumptuous. I am also acutely aware of my limited experience in this area, as compared to other trust teachers, having taught the subject for less than ten years. Thus, this chapter does not have a prescriptive agenda; I do not suggest that there is one way or a ‘correct’ approach to teaching *

I would be happy to hear comments, feedback, suggestions and ideas on teaching Equity and Trusts. Th is chapter benefitted tremendously from my discussions with David Fox, who generously shared with me his invaluable and perceptive insights on teaching trust law, and Hans Tjio who read an earlier version of the chapter and gave me many useful comments. I am also grateful to the various individuals who have taken time from their busy work schedule to talk to my students: Lee Woon Shiu, Tan Woon Tiang, Stacy Choong, Teoh Lian Ee, Benjamin Cher and Martha Koh-Suen.

1

I understand that in most universities the course that is taught is usually entitled ‘Equity and Trusts’ which might also include selected issues in equity. In this essay, I focus on the express trust component in these courses.

125

126

Tang

trust law. Instead, the chapter is meant to begin a dialogue between trust teachers about the ways in which to convince our students that trust law is an interesting subject and highly relevant in the modern context. Trust law, like many subjects in Commonwealth law schools, is taught in the tradition of using case law as the primary source material. This common law tradition has undoubtedly great strengths; the students develop the ability to unpack complex factual situations by reading important court decisions closely. At the same time, the careful study of significant judicial opinions gives students an insight into the process of legal reasoning. There is, however, a downside to a purely case-based approach to teaching law which is especially acute in commercial courses. A casebased teaching method may not present an accurate picture of law practice, especially transactional practice. The reliance on court decisions as the primary ‘raw material’ for teaching pre-supposes that most important issues would be litigated by interested parties. For several reasons this is not true in the commercial context, especially for transactional work. First, not all important commercial issues are litigated; this could be due to a myriad of factors such as the high costs of litigation, the development of an industry-wide consensus around a particular practice, or just simply the fortuitous lack of a dispute in that area of law. Also, it may be that a particular doctrinal rule which has long outlived its usefulness remains in the law books simply because nobody has challenged it. Further, transactional lawyers might be acutely aware of certain contentious legal issues and might strive to avoid litigation by advising their clients to take the appropriate steps. For example, if a settlor wishes to settle a trust in a particular manner which may offend the rules of trust law in his or her home jurisdiction, his or her lawyer may advise the settlor to choose an offshore jurisdiction which permits such structures. Even if the matter is ultimately litigated, there might be a long timelag for the dispute to be resolved and the judgment to be written. In the meantime, before the judgment is written, important legal issues facing the industry remain unexplored by law schools. Finally, the drawback in relying purely on court decisions as teaching material is that the students are not given a balanced depiction of law practice. If, in the trust law course, there are more cases on the reading list on resulting and constructive trusts than there are on express trusts, this might suggest to the students that resulting and constructive trusts are the most active areas of trust practice. Yet this is far from the truth. While it is true that resulting and constructive trusts are important areas of Chancery litigation, the express trust is utilized extensively in commercial practice by

Teaching trust law in the st century

127

transactional lawyers. Thus, a purely case-based teaching method gives the students a ‘litigation mindset’ rather than a ‘transactional mindset’.2 The former mindset trains students to examine situations where matters have gone wrong and the dispute is before the courts; the students will then investigate the appropriate relief to be granted to the litigants, eg a resulting trust or a constructive trust. Th is is obviously an important skill. However, I would argue that students should also be equipped with the intellectual ability to view matters from a transactional perspective. Instead of focusing on cases where parties are already in litigation, the development of a ‘transactional mindset’ emphasizes the relevant legal issues surrounding the structuring of a successful transaction, knowing the contentious issues and advising clients on how to minimize litigation risk. It is suggested that this transactional framework is missing in many trust courses. I am not suggesting that we turn trust courses into legal skills courses where students are taught the ‘nuts’ and ‘bolts’ of drafting trust deeds.3 This is a skill that they should pick up during their professional training. Nevertheless, we owe a duty to our students to teach trust courses in a way which accurately reflects modern contemporary trust practice;4 this can be done without sacrifice to the intellectual content of the course. I believe that many trust law teachers are interested in fi nding ways to make their courses more interesting and relevant. In this chapter, I explore two methods which I have employed to make my trust course more relevant and intellectually challenging. First, I contextualize the modern perspective of trust practice. Why does trust law matter in modern commercial practice? Why do people use the trust to structure their wealth? What are the commercial advantages of using the trust instead of other structures? Second, I introduce an important theme that I believe should be woven into the teaching of the express trust: the contractarian basis of the trust. As I demonstrate below, this has important doctrinal ramifications which present many opportunities for students to reflect on some of the most contentious areas of trust law. 2

3

4

On the difficulties of teaching students to think like transactional lawyers see eg, TL Stark, ‘Thinking Like a Deal Lawyer’ (2004) 54 J Leg Ed 223. It would be helpful to refer students to an actual trust deed. For samples of trust deeds see D Hayton and C Mitchell, Hayton and Marshall Commentaries and Cases on the Law of Trusts and Equitable Remedies (12th edn Sweet & Maxwell, London 2005) 28–47. For a lament on the gulf between law schools in the US and practice see HT Edwards, ‘The Growing Disjunction Between Legal Education and the Legal Profession’ (1992−93) 91 Mich L Rev 34, 39–40.

128

Tang

B.

Contextualizing the trust

In Stack v Dowden, 5 Baroness Hale recently reminded us that in law, ‘context is everything’. Th is is certainly true with regard to the express trust. In teaching trust law effectively, it is very important to contextualize the trust against the background of its modern contemporary uses. At the beginning of the course, trust law students are inevitably taught about the relationship between the settlor, trustee and beneficiary. The teacher will also introduce the concept of the encumbering of title inherent in the trust relationship, ie the trustee holds the legal title to the trust asset subject to the beneficial or equitable interest of the beneficiary. The usual trust course then moves on to examine the other elements of a valid express trust, eg the certainty requirements, the beneficiary principle, constitution, perpetuities and formalities. Very often, it is at this stage that the students get ‘lost’ when confronted by the mass of doctrinal rules relating to the trust. As a matter of strategy, I would suggest that the following issues be signposted early on and continually revisited throughout the course. Is the trust still used in the modern context? How is it used? Why do people use the trust? How do the doctrinal rules affect the uses of a trust? It is crucial to ask these questions because it forces students to reflect on the reasons why and context in which the trust is used today. If these questions are not pursued, the risk is that students will be left with the impression that trust law is no more than a course in legal history and an ‘examination of Victorian structures and values with no relevance today’.6 In the sections below, I discuss the various modern contexts which may be used as illustrations in a trust law course. A related point to the criticism of trust law courses which are too rooted in the past is the fact that common illustrations of trust principles seem to belong to another era. In most Commonwealth law schools, the usual candidate for the subject matter of the trust is the most famous hypothetical real estate in the law, ie Blackacre or its variants, Whiteacre and Greenacre. To illustrate the trust relationship, the lecturer may offer the following hypothetical: ‘S transfers Blackacre to T to hold on trust for B’. While this reference might seem innocuous enough, I would caution on the wisdom of the repeated use of Blackacre as a placeholder. I suspect the reference to Blackacre is alienating to young students as it does not have 5 6

[2007] 2 AC 432, [69]. J Quarrell, ‘Modern Trusts in Legal Education’ [1991] 25 Law Teacher 227, 227.

Teaching trust law in the st century

129

any relevance to their lives. Trust law is difficult enough with terms that are foreign to a beginner such as cestui que trust, cy-près etc. Is it really necessary for even our illustrations to be so old fashioned? The reference to Blackacre merely reinforces the impression in the minds of our students that trust law is an old and stodgy subject, totally irrelevant to the modern world and essentially concerning issues pertaining to a property-owning class. Once such an impression is formed, I fear that students will quickly lose interest in the subject. An alternative and more attractive approach is, at an early stage of the course, to stress that the subject matter of the trust often takes the form of property quite apart from land, eg company shares,7 choses in action,8 money etc.

1.

Trust law as a wealth management vehicle

While students are usually able to grasp the concept of the relationship between the trustee and beneficiary, with the management function resting on the trustee, I would suggest that it is important to contextualize this relationship even further. It is useful to explore the reasons why an individual today would want to utilize the trust to structure his or her wealth. Most students do understand that the trust property is ‘ring fenced’ from the settlor’s creditors in the event of insolvency. However, there are a multitude of other reasons why people settle trusts, including confidentiality, flexibility, control and tax considerations. I suspect that these advantages of the trust are often not emphasized in trust courses. If so, this is a shortcoming that must be addressed; otherwise, students are left with an incomplete understanding of the subject. Besides giving a more accurate picture of modern trust practice, the introduction of the various advantages of the trust as a wealth management device anchors the difficult doctrinal rules (especially those on discretionary trusts and powers) to a practical context. By emphasizing the modern uses of the trust, students are then able to see the relevance of studying these difficult rules. At what stage should the usefulness of the trust as a wealth management vehicle be introduced? I would suggest that this is a theme that should be introduced early on and returned to throughout the course where appropriate. For example, the attractiveness of the trust as a means of structuring a person’s wealth becomes apparent after the topics of 7 8

See eg, Hunter v Moss [1994] 1 WLR 452; Re Harvard Securities [1998] BCC 567. Fletcher v Fletcher (1844) 4 Hare 67; Lloyd’s v Harper (1880) 16 Ch D 290.

130

Tang

discretionary trusts and powers are covered. Schmidt v Rosewood Trust Ltd 9 is an ideal case to illustrate the reasons why people choose to settle substantial portions of their wealth on trust, especially in offshore jurisdictions. It is helpful to examine the facts of this case in some detail. Vitali Schmidt, a wealthy Russian oil and gas man, was the alleged cosettlor of two trusts, the Angora Trust and the Everest Trust. The trustee was Rosewood Trust Ltd (‘Rosewood’) which was based in the Isle of Man. The salient features of the trust were as follows: (i) there was initially some dispute as to the identity of the settlor because the money was channelled by Schmidt through a company (Pacquerette Ltd); (ii) Schmidt was named as the protector of the trust; (iii) there was a wide power of appointment exercisable by the trustees with the prior consent of the protector; (iv) the potential class of beneficiaries was defined as the Royal National Lifeboat Institution and persons listed in a schedule; and (v) in the Everest Trust, there was a wide power for the trustee to add any person or charity (except the current trustee) as a beneficiary. There was evidence that Schmidt wrote two letters to the trustees expressing his wish that his son, Vadim, was to benefit from these two trusts in the event of his death. Schmidt subsequently died under mysterious circumstances.10 Schmidt’s wishes were not fulfi lled and Vadim brought proceedings seeking disclosure of documents. The basic features of the two trusts in Schmidt provide ample material for a meaningful discussion on the principles governing discretionary trusts, hybrid powers,11 protectors and letters of wishes. The case is also a perfect opportunity for students to reflect on the advantages of using trusts, especially off shore trusts, for the purposes of wealth management. First, the trusts in Schmidt were structured in a manner ensuring confidentiality for the settlor and the intended beneficiaries. As can be seen from the facts above, Schmidt tried to mask his own identity as the settlor by channelling the funds through the company Pacquerette Ltd. Also, the ‘true’ beneficiary was a matter of contention in these trusts. The trusts were ostensibly drafted as discretionary trusts which named a class of beneficiaries that included a charity, ie the Royal National Life Boat Association. In the Everest Trust, the trustee 9

10

11

[2003] UKPC 26, [2003] AC 709 (‘Schmidt ’) noted by D Davies, ‘Integrity of Trusteeship’ (2004) 120 LQR 1. Students are often thrilled to learn about the background of this case. See Y Latynina, ‘Losing the Plot in Kukura Kidnapping’ The Moscow Times (Moscow 25 September 2002). On powers see R Nolan, ‘Controlling Fiduciary Powers’ (2009) 68 CLJ 293.

Teaching trust law in the st century

131

was granted a hybrid power to add anyone in the world except the trustee as a beneficiary. The impression one gets from these two trusts is that the Royal National Life Boat Association, although named as a potential beneficiary, never stood a realistic chance of being appointed as the beneficiary of the trust. What then was the purpose of adding the Royal National Life Boat Association? One can only surmize that this was done so to conceal the ‘true’ intended beneficiary of the trust. In other words, this was a ‘black hole’ trust where the true beneficiary was unclear from the start.12 A second advantage of the trust which is apparent from studying Schmidt is that a trust may be designed to ensure maximum flexibility to cater to the settlor’s change of circumstances. Moreover, the trust may be structured in a way to afford the settlor some influence over the trustee’s exercise of discretion on the appointment of the beneficiaries. In Schmidt, flexibility was illustrated by the trustee’s power to add anyone in the world (except the trustee) as a beneficiary. As such, any change in the family situation of the settlor (divorce, new children etc) could be accommodated easily. All the settlor needed to do was to inform the trustee of his wishes from time to time. Against this backdrop, students may be asked to reflect on the weight of the settlor’s wishes on the trustee’s decision making in a discretionary trust.13 This is also an opportune time for students to be introduced to concepts such as a settlor’s letter of wishes14 and the office of a protector.15 This discussion should lead students to understand that through a combination of a letter of wishes and the office of a protector, a settlor may be able to assert a significant influence over the appointment of beneficiaries by the trustees. Th ird, Schmidt highlights the fact that wealthy individuals often settle money on trusts in offshore jurisdictions to gain a tax advantage. It is very useful to refer the students to Lord Walker’s discussion on the background of the discretionary trust on this aspect.16 12

13

14 15

16

On these trusts see P Matthews, ‘Black Hole Trust: Uses, Abuses and Possible Reforms Part 1 and Part 2’ (2002) 1 PCB 42; (2002) 2 PCB 103. In this case, there did not seem to be any allegation that there was a sham trust. See M Conaglen, ‘Sham Trusts’ (2008) 67 CLJ 176. D Hayton, P Matthews and C Mitchell, Underhill and Hayton: Law of Trust and Trustees (17th edn LexisNexis Butterworths, London 2007) 835–9. Ibid. On the protector see generally, D Waters, ‘The Protector: New Wine in Old Bottles?’ in A Oakley (ed), Trends in Contemporary Trust Law (Clarendon Press, Oxford 1996) 63; TH Tey, ‘Trust Protector’ (2008) 20 S Ac LJ 99. Schmidt (n 9) [34]–[36].

132

Tang

Finally, Schmidt is an excellent case for teaching purposes because there is a nice moral to its story. The settlor, for reasons of his own, structured a highly secretive trust. He instituted many layers of secrecy, so much so that it was not clear who the settlor was or who the intended beneficiaries were. When the settlor died, his wishes were probably frustrated precisely because of the lack of transparency in the trust instrument. Before leaving this topic, there are some other points on the advantages of the trust as a wealth management vehicle which can be impressed on students. First, the settlement of a trust in an offshore jurisdiction may enable a settlor who comes from a jurisdiction where there are forced heirship rules to get around these rules.17 For example, there are certain Muslim and civil law countries where there exists such a legal regime.18 In these jurisdictions, an individual does not have full testamentary rights; a certain percentage of his or her estate must go to certain prescribed relatives. Individuals who are subject to such a regime may try to get around its requirements by settling inter vivos trusts in offshore jurisdictions.19 Second, the confidentiality of the trusts can be enhanced by appointing a bank as a trustee; in some jurisdictions, a bank is subject to extremely strict banker-customer confidentiality laws which can sometimes withstand the attacks of the tax authorities of the settlor’s home state.20

2.

Trust law and the rise (and fall?) of offshore trust centres

The Caribbean countries, the Channel Islands (Guernsey and Jersey) and the Isle of Man all have very flexible trust laws; these laws in turn have contributed to the flow of capital to these jurisdictions. Their trust law provides a very useful tool for class discussions. A sceptic may ask, why introduce international trusts in a domestic trust course? Is trust law not difficult enough? Although it is conceded that trust law is a difficult subject, I believe that it is worthwhile to introduce this aspect into the course for a number of reasons. First, this aspect will emphasize the fact that trust law is an important component of international finance. Again, this will (hopefully) sweep away the impression that trust law is an irrelevant subject in the modern context. Second, the introduction of the international trust dimension presents a realistic picture of the global nature 17

18 19 20

For an overview see P Matthews, ‘Capacity to Create a Trust: The Onshore Problems, and the Offshore Solutions’ (2002) 6 Edin LR 176. See eg, A Duckworth, ‘Forced Heirship: Where Are We Now?’ (2005) 4 PCB 208. See eg, Singapore’s Trustees Act (Cap 337, 2005 Rev Edn) s 90. See eg, Singapore’s Banking Act (Cap 19, 2008 Rev Edn) s 47.

Teaching trust law in the st century

133

of trust practice. A client who is not able to achieve his or her objective in a particular jurisdiction will simply move his or her wealth to a jurisdiction whose laws facilitate his or her intention. Third, the introduction of the international trust dimension adds a deeper and more sophisticated understanding of the doctrinal rules. Many of the traditional trust doctrines have come under pressure from the more flexible laws of offshore jurisdictions. If a particular purpose cannot be achieved in onshore jurisdictions, clients will simply situate their structures in offshore jurisdictions.21 An illustration of this are the so-called ‘orphan structures’ which are normally located in offshore jurisdictions. This phenomenon is due to the well-known doctrinal rule of English trust law that a trust for a non-charitable purpose is void, also sometimes known as the ‘beneficiary principle’.22 Some clients might want to set up what are known as ‘orphan structures’, ie companies whose shares are owned by a trust without beneficiaries.23 Under English trust law, it is not possible to set up a trust whose sole purpose is to hold the shares of such orphan companies because this structure offends the beneficiary principle. However, under the laws of jurisdictions such as Belize, Bermuda and the British Virgin Islands, pure purpose trusts are allowed.24 Thus, it is unsurprising that orphan structures are often located in these jurisdictions. Another aspect of the trust law in some of these offshore regimes which may be an eye-opener for students is the length of, and sometimes even lack of, perpetuity periods.25 Furthermore, in some jurisdictions beneficiaries of a purpose trust do not have a right to enforce the trust or ask for trust documents unless explicitly provided for in the trust deed.26 These rules offer an interesting contrast to English law. Obviously, the more flexible trust doctrines in offshore jurisdictions enable a settlor to structure his or her wealth in more creative ways. A settlor with a complicated family situation may wish to keep spendthrift beneficiaries from knowing about the value of the trust or the entitlement of other beneficiaries under the trust. Other rules which may present an interesting comparative angle for discussion include the fact that the prudent man of business standard 21 22 23

24

25 26

See P Matthews, ‘The New Trust: Obligations Without Rights’ in Oakley (n 15) 1, 18–22. See Morice v Bishop of Durham (1804) 9 Ves 399, 32 ER 656. On such ‘orphan structures’ see P Hargreaves, ‘Charitable, Purpose and Hybrid Trusts: A Jersey Perspective’ (2002) PCB 30. For an excellent overview see G Thomas and A Hudson, The Law of Trusts (Oxford University Press, Oxford 2004) ch 39. Ibid. Ibid [39.49]–[39.87], for an overview of enforcement of purpose trusts in the British Virgin Islands.

134

Tang

and modern portfolio theory of investment rules may not apply in these offshore jurisdictions.27 Again, this gives the settlor added flexibility in arranging his or her affairs. A combination of these rules could result in the structuring of trusts which would be avoided under orthodox English trust law. For example, a family patriarch may settle his shares in the family company for his sons on a perpetual trust with the explicit direction that the shares may never be sold. This is possible in some offshore jurisdictions but not under English law. The interesting case of Singapore demonstrates that trust law may even matter to the overall development of a country as a wealth management centre. In the early 2000s, the Singapore government was concerned about Singapore’s future economic competitiveness in light of the remarkable rise of China in many sectors. The government convened an Economic Review Committee composed of distinguished individuals from the private and public sectors to explore new industries that Singapore could develop. One of the recommendations of the Economic Review Committee was that Singapore should focus on the wealth management industry.28 Thus, in order to lure private trust companies and wealthy individuals to ‘park’ their money in Singapore, the government instituted a slew of changes to tax and trust laws. Favourable laws governing trust companies, taxation rules with regard to foreign earned income, abolition of estate duty and amendments to the Trustees Act 29 soon followed. Strict banking secrecy laws were also enacted.30 These changes to the law were followed by an aggressive marketing effort, by the private and public sectors, to push Singapore as a wealth management centre. In order to make Singapore appealing to wealthy individuals, Singapore held events such as F1 motor racing, approved the opening of two casinos and released the sale of seafront marina property.31 The changes to the law, the safety and security of the country, together with the fact that Singapore generally speaking is an easy place to live, soon attracted the attention of 27 28 29

30

31

This rule does not apply under the Virgin Islands’ Trust Act 2003. See E Wong, ‘Singapore: Financial Reforms’ (2003) 18 JIBLR 16. For an overview of the changes to the trust legislation see HW Tang and DP Sandrasegara, ‘Equity and Trusts’ in KS Teo (ed), Developments in Singapore Law Between 2001 and 2005 (Singapore Academy of Law, Singapore 2006) 892–4. See eg, Singapore’s Banking Act s 47. A breach of banking secrecy in Singapore may attract a fine of up to S$125,000 and/or three years imprisonment. See generally, W Arnold, ‘Singapore Makes a Pitch to Draw the Wealth’ New York Times (New York 26 April 2007); N Chatterjee and J O’Donnell, ‘Singapore’s Star Rises as Switzerland Stumbles’ Reuters (15 December 2008) accessed 30 October 2009.

Teaching trust law in the st century

135

the super-wealthy. The results of these efforts have been nothing short of stunning; between the years 2000 and 2006, Singapore’s fund management industry grew from S$280 billion to more than S$600 billion. 32 In fact, the wealth management industry grew by a staggering 24 per cent in 2005–6 alone. Singapore as a case study demonstrates how trust law coupled with banking secrecy laws and a favourable tax regime may contribute to a jurisdiction becoming an important wealth management centre within a short period of time. However, there is a darker side to offshore trust jurisdictions which may be explored with students in a trust course. It has been alleged that the principal reason why wealthy individuals choose to settle trusts offshore is to avoid paying tax in their home country. On the one hand, it has been argued that an individual does not owe an obligation to pay the maximum amount of tax possible; a person is entitled to plan his or her affairs so as to minimize tax liability. On the other hand, tax avoidance is now increasingly seen as a form of anti-social behaviour; there is an argument that a company or a person who deliberately avoids paying taxes is shirking their social responsibilities.33 A more cynical commentator may even argue that many of these offshore structures go beyond tax avoidance and are actually exercises in tax evasion. This argument derives support from some recent events. In Liechtenstein, a bank employee stole a bank’s data and sold it to the German intelligence service.34 The bank’s data provoked a furore in Germany because the information revealed that many Germans including high-profi le individuals kept secret accounts in Liechtenstein to evade paying tax.35 As a result, tax evasion charges were brought against several individuals in Germany. A similar story emerged in Switzerland. Under pressure from the US government, the Swiss bank UBS AG turned over details of 250 of its customers whom the US suspected of committing tax fraud. 36 Not satisfied with this information, the US issued a ‘John Doe’ summons in the US against UBS AG, to compel the bank 32

33

34

35

36

See L Tan, ‘Spore Needs Up to 1,000 More Wealth Managers Now’ The Straits Times (Singapore 30 June 2006). J Calmes and EL Andrews, ‘Obama Asks Curb On Use Of Havens To Reduce Taxes’ New York Times (New York 5 May 2009). See L Browning, ‘Banking Scandal Unfolds Like a Th riller’ New York Times (New York 15 August 2008). Ibid. See also N Kulish and C Dougherty, ‘Deutsche Post Chief Under Tax Inquiry’ New York Times (New York 15 February 2008). C Whitlock, ‘Swiss Talk Tough in Banking Battle: Blacklist Th reat Looms Over Tax Havens’ The Washington Post (Washington DC 29 March 2009).

136

Tang

to reveal details of over 50,000 unnamed US citizens on the ground of suspected tax fraud. 37 There has been some indication that a private settlement may have been reached between the US government and UBS AG. Furthermore, there is also planned legislation, the Stop Tax Haven Bill, proposed in Congress, which received support from Senator Barack Obama before he became the President of the US.38 If this legislation is pushed through, countries which are listed in the Act will suffer punitive trade measures. Apart from the US, offshore wealth management centres have also increasingly been under attack in Europe. The Organization for Economic Co-operation and Development (‘OECD’) maintains ‘white’, ‘black’ and ‘grey’ lists.39 If a country falls within the ‘black’ list, certain sanctions apply. Tax havens were also at the top of the agenda at a recent G20 meeting.40 Countries which found themselves to be on the G20 list would suffer punitive trade sanctions. As such, many countries willingly acceded in principle to the OECD requirements in order to avoid being blacklisted. All of this provides a fascinating insight for trust students into the international and political implications of trust law.

3. Revealing the secret life of the trust: securitization and real estate investment trusts (‘REIT’s) John Langbein points out that in Anglo-American legal culture, the trust is often wrongfully viewed as essentially a form of gratuitous transfer.41 He also astutely points out that this is at odds with commercial practice. Trust teachers arguably do their students a disservice if they do not introduce them to some of the modern, non-gratuitous, uses of the trust. Langbein’s article is therefore recommended reading early in my trust course, to disabuse students of the notion that the trust is essentially gratuitous in nature.42 In order to illustrate further the modern commercial 37

38

39

40

41

42

Ibid. See also ‘IRS Expands Offshore Banking Probe’ The Boston Globe (Boston 28 April 2009). J Charles, ‘Caribbean Wonders about McCain, Obama Policies’ The Miami Herald (Miami 25 July 2008). See RJ Hay, ‘Information Exchange And The Offshore Financial Centres’ (2002) J Financial Regulation and Compliance 141; RT Kudrle, ‘Did Blacklisting Hurt The Tax Havens?’ (2009) 12 J Money Laundering Control 33. M Robbins, ‘Tax Havens under Siege Amid New Consensus over Sanctions’ The Independent (London 4 April 2009). JH Langbein, ‘The Secret Life of the Trust: The Trust as an Instrument of Commerce’ (1997) 107 Yale LJ 165. Parts of this article can be quite difficult for a law student to understand. Therefore, I always preface my recommendation with an assurance that students do not need to know the details of the complex financial instruments described.

Teaching trust law in the st century

137

use of the trust, I usually elaborate on two trust concepts – the asset securitization trust43 and the REIT.44

(a) Securitization Using the asset securitization trust as an illustration has particular resonance at the present time given the US sub-prime mortgage situation. The sub-prime crisis is no doubt a very complex situation but I believe that it is possible to present an outline to the students in a manner which they can understand. I do this by the following diagram and the explanation below: Rates the tiers

Credit rating agencies

Subprime Mortgages

Lender

Investors paid according to the tiering

Trust

Sells the debt

Tiers the debt

Insurance on default Investors

Insurance Co

Figure 1

At risk of over-simplification, I give the accompanying explanation to my students, focusing on a sequence of key questions.45 First, what is sub-prime lending? At the heart of the sub-prime mortgage crisis are mortgage loans that were made to certain people in the US who did not have a good credit

43

44

45

See eg, MA Litwak, ‘A Legal Road Map for Securitisation of Assets and Other Structured Finance Transactions in the British Virgin Islands’ (2005) 20 JIBLR 475. For reported cases on the securitization trust see Citibank NA v QVT Financial LP [2007] EWCA 11, 1 All ER (Comm) 475 (‘Citibank ’) and DB Trustees (Hong Kong) Ltd v Consult Asia Pte Ltd [2009] SGHC 62. On REITs see generally R Booth (ed), Real Estate Investment Trusts: A Global Analysis (Globe Business Publishing, London 2006). A useful documentary on the subprime crisis is CNBC’s documentary House of Cards. A humorous explanation of the subprime crisis using stick drawings may be found here: ‘The Subprime Primer’ accessed 6 July 2009.

138

Tang

history. Hence, the name of the industry – ‘sub-prime lending’. The loans were made at a higher interest rate in light of the poor credit history of the borrowers, and they were secured by way of mortgages on the homes. Why did financiers want to lend money to people who were a poor credit risk? In a climate where house prices kept rising, the idea was that should the mortgagors default on the loans, the lenders could easily realize their loans by selling the homes. Furthermore, the original lenders minimized their risks by not keeping these mortgages on their books. The original lenders (with the help of investment banks) bundled these loans and then transferred them to a trust structure or special purpose vehicle. The trustee or special purpose vehicle would then sell securities to investors; these securities were essentially shares in the underlying mortgages. In most cases, the loans were tiered, ie investors in the top tiers would be paid first. The interest rates in these tiers would reflect the degree of risk of the investment – the riskier the loan, the higher the interest rate payable. Investors could then invest in the relevant tier depending on their risk appetite. How did insurance companies get involved in this story?46 Insurance companies sold insurance policies to investors in sub-prime schemes to guarantee against default with respect to the underlying loans. The insurance companies were particularly keen on selling this kind of insurance because: (a) house prices continued to rise and therefore the risk of default was perceived to be minimal; and (b) the market was unregulated and an insurance company did not have to be fully capitalized in order to meet its liabilities for this kind of insurance. Credit rating agencies also played a part in this unhappy story.47 Recall that the loans were tiered in terms of the priority of payment. The credit rating agencies gave the top tiers of these securities ‘AAA’ ratings; this gave many investors confidence in these instruments. Why were investors keen on such instruments? First, many institutional investors such as banks and pension funds were hungry for investments with a higher rate of returns. These securities appeared quite safe with ‘AAA’ ratings and backing by the appropriate insurance. Furthermore, since there was an underlying security for the loan, ie the house, the investment seemed quite secure. Second, there is also reason to suspect that many investors did not really understand the underlying risk of such securities. 46

47

R O’Harrow Jnr and B Dennis, ‘Downgrades and Downfall: How Could a Single Unit of AIG Cause the Giant Company’s Near-Ruin and Become a Fulcrum of the Global Financial Crisis?’ The Washington Post (Washington DC 31 December 2008). G Morgenson, ‘Debt Watchdogs: Tamed or Caught Napping?’ New York Times (New York 7 December 2008).

Teaching trust law in the st century

139

How then did the sub-prime crisis begin? House prices in the US plunged and houses became virtually unsaleable causing many investors to lose vast amounts of money in sub-prime securities. Insurance companies were then called upon to pay out on the policies sold and some of these insurance companies had difficulties meeting such liabilities. Due to the fact that many distinguished companies lost a lot of money, banks became wary of providing credit – leading to the so-called ‘credit crunch’. In other words, the whole structure collapsed like a house of cards. I use the illustration of the sub-prime crisis to demonstrate to the students the contemporary significance of what they are learning in law school. The purpose of this brief introduction is to reinforce the fact that legal concepts such as the humble mortgage and the trust are used by corporate finance lawyers as the basic building blocks of complex financial instruments.

(b) REITs Another area where the trust concept is used extensively is the REIT. I introduce the REIT to my students because this is an emerging area in Singapore48 and in Asia generally.49 The REIT market in Singapore has been nothing short of phenomenal with a market capitalization of S$27.2 billion in 200750 before the economic crisis. The market is expected to grow even further, especially in Asia. I use the following diagram to explain the REIT:

Unit Holders

Trustee

Acts for unit holders

REIT

Management fees

Manager

Income from property Property Manager

Properties Management fees

Figure 2 48 50

J Koh, ‘Singapore’ in Booth (n 44) ch 10. 49 Ibid. U Shankari, ‘Pressure Building Up in Crowded S-Reit Sector’ The Business Times (Singapore 17 December 2007).

140

Tang

Essentially, the REIT involves large real estate like shopping complexes, factories, hotels or hospitals, which is settled on trust and sold to investors. The owners of these properties sell their properties to a REIT, and interests in the REIT are then sold to investors who consequently hold shares or beneficial units in the REIT as unit holders. Income generated from the properties (eg rental income) is eventually paid to the unit holders after paying off the various fees involved in running the REIT. The REIT is usually managed by a trustee and a manager while the underlying property is managed by a property manager. An astute student will want to know this: why would property owners want to divest their property into the REIT structure? There are several commercial advantages to doing so. First, the owner eliminates the property-holding costs of a large piece of real estate by selling it to the REIT. For example, the REIT removes the following risks for the owner: (i) fluctuating interest rates associated with borrowing costs; (ii) voids in rental; and (iii) potential falls in the value of the property. Second, a related point is that by divesting the property into the REIT, the owner frees up valuable capital which can be used more profitably elsewhere. Th is is especially vital for property owners who have many building projects in emerging markets like India and China. Thus, a successful owner can build a commercial property, divest it into a REIT structure and move on to the next building project. Third, the REIT also overcomes the difficulties in locating suitable institutional investors to purchase the property. Many of the properties managed by REITs are worth hundreds of millions of dollars. It may not be easy to fi nd large institutional investors who have the fi nancial muscle to purchase such properties outright. Furthermore, negotiations for the purchase of such properties may be unduly protracted. In contrast, the REIT is not sold to a single institutional investor but to members of the public via the unit holding structure. Therefore, it might be easier to divest the property via a REIT than actually to sell the property to an institutional investor. Finally, the REIT assures the owner of a steady stream of income even after the property is transferred to the REIT. Usually, the owner or its subsidiary company remains as the management company or property manager. Fees are payable to the owner or its subsidiary company for playing this role. It could be argued that these fees represent an income that is ‘locked in’, free from the risk associated with ownership of the property. Correspondingly, why would a unit holder wish to invest in a REIT? First, the REIT allows individual investors to invest in a diversified property portfolio. Second, there are sometimes tax advantages

Teaching trust law in the st century

141

in investing in a REIT. 51 And fi nally, before the economic crisis, the returns on the REIT were generally quite favourable. 52

C. Method: suggestions on how to contextualize the modern uses of the trust In the preceding section, I argued that it is important to contextualize the modern uses of the trust. This might be a difficult endeavour because many of the issues are not reflected in the case law. In this section, I explore the various strategies that may be employed in contextualizing the trust.

1.

Trust practitioners as a teaching resource

One of the strategies that I have used is to invite a series of eminent trust practitioners who are alumni of our law school to come to talk to my class. These sessions take the form of one-hour talks which intersperse my lectures. Typically, I would invite up to four speakers to speak to students during my trust course. Thus far, I have had a private banker dealing with wealth management, a tax and trust practitioner, an offshore trust lawyer, and representatives from the Singapore Charities Commissioner’s office to speak to my trust law class. The introduction of practitioners into an academic trust course raises some tricky issues which need to be managed carefully. These issues include the following: the logistics of the practitioner talks; managing expectations of the students and speakers; and ensuring that the content of the presentations is suitable for undergraduate students. For these practitioner talks to work, they should be scheduled after the course has covered the elements of an express trust. Otherwise, the students will have no background to understand the relevant legal issues. I have found that these talks reinforce the message that the difficult doctrinal rules form the basic building blocks which may be used to structure complicated commercial transactions. Quite apart from getting the logistics of these sessions right, for the talks to work, the students must not view them as an imposition. I am well aware that some students may resent the talks because they might see them as an additional burden which is outside of the course syllabus. 51 52

See generally Koh (n 48). N Theresianto, ‘Funds Still Drawn to Asian Real Estate’ The Edge (Singapore 23 June 2008).

142

Tang

Such feelings of resentment may affect the group dynamics of the class. In order to counter this, I inform the class from the outset that these onehour talks are meant to be a bridge between theory and practice and to give a deeper insight into trust practice. I also stress that the sessions are not compulsory and that students are free to leave the class before the sessions start. The content of each presentation also needs to be tailored at a level that undergraduate students can grasp. I tell my guest speakers to keep their presentations fairly simple and to provide the students with an overview of the work that they do and the daily legal issues that they face. Past speakers have spoken on issues such as the life of a private banker in wealth management, the uses of the trust in private client business practice, tax advantages of the trust, pressure from international groups on Singapore with regard to the issue of tax co-operation, banking secrecy in Singapore, the governance issues affecting a charity in Singapore, and the flexibility of trust rules in offshore jurisdictions. I also encourage my students to ask the speakers questions before and after class. Overall, I believe that these practitioner sessions have been useful for both the students and my own growth as a trust law teacher. Apart from contextualizing the subject, the sessions demonstrate to the students the myriad possible uses of the trust in the modern context. There is also another subtext to these sessions. The sessions suggest to the students what is possible in future – that they too can carve out successful careers in trust law. In fact, some of my students have approached the speakers after the sessions to ask them for advice in pursuing a career in private banking or tax and trusts. Hopefully, these talks make the subject more relevant to the students and put the difficulty of learning doctrinal rules in the proper perspective. From a personal point of view, I have benefitted tremendously from these presentations. The conversations that I have had with these trust practitioners have often raised interesting unexplored issues which trigger further ideas for teaching and research purposes.

2.

Secondary sources as teaching material

There are several alternatives to court decisions as the source of teaching material. Relevant articles in practitioner journals like Private Client Business and Trust and Trustees are valuable sources of information on international trust practice. In addition to articles in practitioner journals, relevant newspaper and magazine articles can be given to the students to illustrate the fast-changing nature of international trust practice

Teaching trust law in the st century

143

and wealth management. Some of these newspaper and magazine articles are footnoted above.53 Finally, in explaining complex commercial structures such as securitization and REITs, I have often broken the complex structures into simple diagrams.54 I then ask for the students’ assistance in unpacking the structure by asking them leading questions on each element of the diagram. This step-by-step method of teaching enables most students to understand the basic features of complex fi nancial instruments and the way in which the trust fits within these commercial structures.

D.

The contractarian basis of the express trust and the implications for doctrinal rules

Trust law is difficult for a newcomer to grasp because there are multiple themes and policies which run through the subject. One of the traditional themes in trust law is the emphasis on unconscionability. For example, Lord Browne-Wilkinson in Westdeutsche Landesbank Girozentrale v Islington London Borough Council55 said that a fundamental principle is that ‘equity operates on the conscience of the owner of the legal interest’. I believe that this theme is explored adequately in most trust courses especially in the area of the constructive trust and the liability of third parties in the form of knowing receipt and dishonest assistance. However, in the context of the express trust, constant reference to unconscionable conduct may not be particularly helpful. Absent guidelines, the usual objection to basing liability on the unconscionable conduct of the defendant is that this formula may be too open ended. The reference to unconscionable conduct is usually unhelpful in the context of an express trust which is typically a consensual relationship created by the settlor and trustee. Thus, the relationship inherent in an express trust has less to do with unconscionable conduct and more to do with identifying the relevant principles which should govern the creation of such a consensual relationship in relation to trust property. In introducing the express trust, it is important to invite students to reflect on the underlying policies which animate the tripartite relationship between the settlor, trustee and beneficiary. Otherwise, there is a danger 53 54

55

See eg, nn 10, 31–8, 40. An excellent trust textbook with many helpful diagrams is R Pearce and J Stevens, The Law of Trusts and Equitable Obligations (4th edn Oxford Univerisity Press, Oxford 2006). [1996] UKHL 12, [1996] AC 669, 705.

144

Tang

that trust law will seem to be nothing more than a mass of unconnected rules. Simon Gardner in An Introduction to the Law of Trusts admirably identifies some of these policies underlying the express trust.56 He argues that trust law is essentially a facilitative device to further the intention of the settlor. This is consistent with the liberal tradition of property law which attempts to facilitate the autonomy of the property owner. Thus, if the owner intends to give away his or her property in a certain manner, the law will in most cases accommodate this intention. Obviously, there must be some limits to the facilitative function of the law. Some of the wishes of a property owner may not be carried out because they clash with other policy concerns. Gardner identifies these policies, which may trump the general facilitative function of trust law, as follows: paternalistic, communitarian, rights based, and utilitarian. It is beyond the scope of this chapter to examine each of these considerations in detail. Suffice to say, I have often found that it is helpful for the students to reflect on how the doctrinal rules may be explained with reference to these considerations. One theme which has traditionally been under-investigated in trust law courses is the jurisprudential basis of the trust, and in particular whether the express trust is essentially proprietary or contractarian in nature.57 I have found that an exploration of this theme is particularly illuminating in the teaching of the basic doctrinal rules governing the trust. This is because the resolution of many of the contested areas of trust law depends on the underlying jurisprudential basis of the trust. The traditional view is to see the trust as essentially part of property law. A corollary to this view is that for there to be a valid trust, there must always be an equitable interest in the trust assets. Doctrinally, this view of the trust has important ramifications. For example, it leads to a very restrictive view of the validity of the purpose trust. If there must always be an equitable interest residing with a group of beneficiaries, then it is very difficult to expand the purpose trust beyond the Re Denley’s Trust Deed 58 situation. Also, to conceptualize the trust as part of property law may lead to a stricter approach to the certainty requirements for there to be a valid trust. A central theme in property law is the insistence that property rights should be clearly defined and discrete.59 If this insistence is carried over to trust law, 56

57 58 59

See S Gardner, An Introduction to the Law of Trusts (Clarendon Press, Oxford 2003) 25–50. See eg, P Parkinson, ‘Reconceptualising the Express Trust’ (2002) 61 CLJ 657. [1969] 1 Ch 373. See eg, the ‘certainty of term’ requirement in leases in Prudential Assurance Co Ltd v London Residuary Body [1992] 2 AC 386.

Teaching trust law in the st century

145

a conceptually uncertain description in a trust deed, of a class of objects, should never be upheld because it fails to define and delineate property rights, and this should be so even if the trust deed empowers a third party to interpret the meaning of the description.60 In contrast to the proprietary view of the trust, Langbein has highlighted an important theme in trust law, ie the contractarian basis of trust law. He argues that in the three party situation (where there is a settlor, a trustee and a beneficiary), the trust has a very strong contractual flavour. In these situations, Langbein argues, ‘the trust is a deal, a bargain about how the trust assets are to be managed and distributed’.61 Technically, parties have autonomy over the terms of the trust. This contractarian dimension of the trust is an important insight which potentially has very wide implications for the doctrinal rules of trust law. If the contractarian basis is taken to ‘trump’ the proprietary view of the trust, different results may follow in many of the contested areas in trust law. For example, the traditional approach to the purpose trust has already been touched on above – purpose trusts are offensive because a beneficial interest must ultimately vest in someone. Hence, a purpose trust where the beneficial interest is in suspense is objectionable. This line of reasoning is premised on the proprietary view of the trust. However, if one adopts a contractarian basis of the trust, then it could be argued that the real objection to recognizing a purpose trust is the problem of ensuring proper governance of the trust. A purpose trust is objectionable because there is no one to enforce the trust. If this is the real objection to a purpose trust, then it could be easily cured by designating a person as the enforcer of the trust. David Hayton makes precisely this argument. He re-characterizes the beneficiary principle as an ‘enforcer principle’.62 On this analysis, so long as there is an enforcer, a trust is valid even if the trust is a pure purpose trust. The argument is that as long as the trust deed provides for adequate safeguards in matters of governance, why should it not be regarded as valid? Whether this characterization will ultimately prevail in the courts remains a live issue. Quite apart from the validity of the private purpose trust, the contractarian view of the trust may also affect doctrinal rules in other important 60 61

62

See eg, Re Tuck’s Settlement Trusts [1978] Ch 48. JH Langbein, ‘The Contractarian Basis of the Law of Trusts’ (1995) 105 Yale LJ 625, 627. See also A Duggan, ‘Contracts, Fiduciaries and the Primacy of the Deal’, ch 12 in this volume; L Ho, ‘Trustees’ Duties to Provide Information’, ch 15 in this volume. D Hayton, ‘Developing the Obligation Characteristic of the Trust’ (2001) 117 LQR 96. For a call for reform see M Pawloski and J Summers, ‘Private Purpose Trusts: A Reform Proposal’ [2007] Conv 440.

146

Tang

areas. The contractarian basis of the trust may lead us to the following question: is it possible to delegate some of the trustee’s functions to third parties? This problem is illustrated by Citibank NA v QVT Financial LP.63 Citibank dealt with the securitization of debts owing from Eurotunnel to Fixed-Link Finance BV (FLF). FLF, Citibank and MBIA Assurance SA (MBIA) arranged for the debts to be securitized by way of a trust and corresponding security notes were sold to investors. The notes were tiered according to priority of payment (eg Tier 1, Tier 2 and Tier 3) and each tier had a different rate of return. Citibank acted as the trustee and MBIA guaranteed some of the notes issued. QVT Financial Ltd (QVT) invested in Tier 3 of this scheme. Eurotunnel fell into fi nancial difficulties and offered to settle the Tier 3 debt on terms whereby the Tier 3 investors would recover only 61.9 per cent of the par value of their investments. In the trust deed, MBIA was described as the ‘note controlling party’ and given the power to direct the trustee (Citibank) to accept the settlement. MBIA accordingly directed Citibank to accept the settlement. QVT contested MBIA’s power to do so. One of QVT’s arguments was that, by allowing this structure which enabled MBIA to give directions to the trustee, the trust deed effectively sought to reduce the trustee’s obligations below the irreducible core duty as envisaged by Millett LJ in Armitage v Nurse.64 In the Court of Appeal, Arden LJ rejected QVT’s argument and held that the trustee continued to have a duty of good faith. Furthermore, there were other clauses in the trust deed where the trustee had to exercise its discretion. Thus, it cannot be said that the trustee had delegated all its duties to third parties. The delegation of the power to MBIA to direct the settlement did not make the trustee’s duties fall below the irreducible core duties of a trust. Citibank is a very important decision because it appears to be influenced by a contractarian vision of trust law. The case suggests that, even where the terms of a trust clearly provide that a third party may direct the trustee to take a particular course of action, this will be respected by the courts provided it does not derogate from the trustee’s duty of good faith. Another important point which arises from the case is that a trust deed may involve third parties in a trustee’s decision-making if it does not thereby take away all of the trustee’s discretion. Thus, Citibank confirms that settlors are free to create roles for ‘note-controlling parties’ 63

64

Citibank (n 43), noted by A Trukhtanov, ‘The Irreducible Core of Trust Obligations’ (2007) 123 LQR 342. [1998] Ch 241 (‘Armitage v Nurse’).

Teaching trust law in the st century

147

and, by implication, the office of the protector, all of which may be given the power to either supervise or direct the exercise of the discretion of the trustee. The contractarian basis of the trust also raises another interesting issue, namely, the extent to which trustees and trust companies may exclude their duties. The locus classicus in this area is the case of Armitage v Nurse.65 Recall that this was a case about a trust with a widely drafted exemption clause. Under this exemption clause, the trustees were not liable for loss or damage to the trust fund unless the loss or damage was caused by the trustees’ actual fraud. While Millett LJ (as he then was) accepted that there was an irreducible core of trustees’ duties owing to beneficiaries which is fundamental to the concept of the trust, the learned judge did not accept that these irreducible core duties include duties of skill and care, prudence and diligence. According to Millett LJ, the minimum core duties are the duties of the trustee to discharge his or her function honestly and in good faith. That being said, in Armitage v Nurse, Millett LJ hinted that future law commissions should look into developing a different rule for professional trustees. In 2003, the English Law Commission issued a consultation paper which proposed a rule that professional trustees should not be able to rely on exemption clauses that exclude liability arising from negligence.66 Pursuant to this consultation paper, views from the industry were sought. After taking into account the views received, the Commission proposed a different rule three years later.67 In re-examining its views, the Commission considered inter alia the following factors: (a) any reform must not impinge on the settlor’s autonomy; (b) support for reform is strongest when the settlor is unaware of an exemption clause; (c) the impact proposed regulations might have on the trust industry; and (d) the availability of indemnity insurance to professional trustees. Instead of a blanket rule that professional trustees are not entitled to rely on exemption clauses, the Commission proposed a ‘practice based rule’ as follows: Any paid trustee who causes a settlor to include a clause in a trust instrument which has the effect of excluding or limiting liability for negligence 65

66

67

See also JL Langbein, ‘Mandatory Rules in the Law of Trusts’ (2004) 98 Northwestern U L Rev 1105. Law Commission, ‘Trustee Exemption Clauses’ (Law Com CP No 171, 2 December 2002) . Law Commission, ‘Trustee Exemption Clauses’ (Law Com No 301 Cm 6874, 2006) .

148

Tang must before the creation of the trust take such steps as are reasonable to ensure that the settlor is aware of the meaning and effect of the clause.

This ‘practice-based rule’ has since been formally adopted by the Society of Trust and Estate Practitioners.68 The issue of exemption clauses and their relationship with the contractarian vision of trust law raises several interesting aspects for teaching and reflection on trust practice and doctrine. First, the English Law Commission’s volte-face from the original consultation paper to the final report arguably stems from a commitment to the principle of freedom of contract over the terms of the trust. If parties have autonomy over the terms of the trust, it follows that exemption clauses should be respected. Hence, settlors and trustees should be given the autonomy to bargain over exemption clauses. Students can then be invited to reflect on whether settlors really exercise autonomy over the terms of the trust especially vis-à-vis professional trustees who use standard term contracts. Second, the limits to exemption clauses may be explored in trust courses. For example, can professional trustees exclude liability arising from putting themselves in a position of confl ict of interest? Or is a trustee’s duty not to put himself or herself in a position of confl ict an aspect of the irreducible core duties a trustee owes to the beneficiary? Finally, if modern trusts involving three parties are essentially contractarian in nature, then should the Unfair Contract Terms Act 1977 (UK) (UCTA)69 apply to trustee exemption clauses? There is some suggestion in Baker v JE Clark & Co (Transport) UK Ltd 70 that the UCTA only applies to contractual clauses and not to trustee exemption clauses. However, it does not seem that the contractarian basis of the trust was the subject of vigorous argument in that case. Therefore, there is still the possibility that future courts may take the position that the UCTA imposes some limits on the scope of trustee’s exemption clauses.

E.

Conclusion

In this chapter, I have endeavoured to describe how it is possible to teach trust law as it relates to the modern commercial world. My suggestion 68

69 70

Society of Trust and Estate Practitioners, ‘Guidance Notes: Step Practice Rule to Trustee Exemption Clauses’ (2009) . Singapore has a similar act: Unfair Contract Terms Act (Cap 396, 1994 Rev Edn). [2006] EWCA Civ 464.

Teaching trust law in the st century

149

is that two aspects of the course need to be developed, ie contextualizing and situating the trust in its modern context, and highlighting the growing importance of the contractarian analysis of the trust. First, in contextualizing and situating the trust, it is suggested that students can usefully be introduced to contemporary topics such as: (i) the trust as a wealth management vehicle; (ii) the importance of offshore trust jurisdictions; and (iii) complex financial instruments such as the REIT and the instruments deployed in asset securitization. In this regard, the trust law teacher might also wish to explain to students the role of the trust in the sub-prime crisis that led to the global financial meltdown. The second aspect of the trust which provides an interesting theoretical framework and opportunities for discussion is the contractarian analysis of the trust. The adoption of a contractarian analysis of the trust may have an impact on the development of the doctrinal rules affecting: (i) the role of third parties in a trust relationship; and (ii) exemption clauses and the scope of the irreducible core of the trustee’s duties to the beneficiaries.

PA RT I I Unjust enrichment

7 The impact of legal culture on the law of unjustified enrichment: the role of reasons Helen Scott and Daniel Visser

A.

Introduction

Culture is a word with a variety of meanings.1 In this contribution we adopt Hofstede’s definition of culture, namely that it consists of ‘all the learnt patterns of thinking and acting’ in a particular group, or, in slightly different words, ‘the collective programming of the mind which distinguishes the members of one group or category of people from another’.2 That said, we are interested here not in culture per se but specifically in legal culture: for present purposes we define legal culture as the collective habits of thought and action amongst legal opinion-makers – the lawyers, judges and academics in a particular legal system – as well as amongst those who use the legal system or are subjected to it.3 The legal culture of a jurisdiction is created by a great many different societal forces, such as historical accident, political imperatives (including commitment to democracy and human rights), appetite for change coupled with a degree of tolerance of uncertainty, and attitudes towards corruption. That culture, in turn, has a direct bearing on the substantive rules of law that 1

2

3

See D Nelken, ‘Legal Culture’ in J Smits (ed), Elgar Encyclopedia of Comparative Law (Edward Elgar, Cheltenham 2006) 372 ff. G Hofstede, Cultures and Organizations: Software of the Mind (Harper Collins, London 1981) 3–19. See also D Visser, ‘Cultural Forces in the Making of Legal Systems’ (2003) 78 Tulane L Rev 41. Th is description of legal culture is a broad one and has much in common with that of Nelken (n 1) 374: ‘Legal culture, in its most general sense, is one way of describing relatively stable patterns of legally oriented behaviour and attitudes. The identifying elements of legal culture range from facts about institutions such as the number and role of lawyers or the ways judges are appointed and controlled, to various forms of behaviour or prison rates, and, at the other extreme, more nebulous aspects of ideas, values, aspirations and mentalities. Like culture itself, legal culture is about who we are not just what we do.’ See also D Nelken, ‘Using the Concept of Legal Culture’ (2004) Australian J of Legal Philosophy 1.

153

154

Scott and Visser

emerge within the system.4 In this contribution we use one aspect of legal culture, namely the culture of giving reasons in judgments, to investigate how legal culture shapes substantive law, specifically the law of unjust (or unjustified) enrichment. We consider the law of unjustified enrichment in two countries in particular, South Africa and France, with some reference also to the law of England and Germany. This topic is, we believe, a most fitting one in a collection of essays devoted to Michael Bryan, who understands so well the forces that shape legal systems.5

B. South Africa: unjust factors and the common law method 1.

Unjust factors in South African law

In South Africa we have a law of unjustified enrichment. This means, speaking very broadly, that the subject is defined by the concept of the absence of a legal ground. In other words, in general terms, where the defendant is enriched at the expense of the claimant and such enrichment is unjustified, restitution follows. The absence of legal ground approach operates at a more specific level in South African law too. For example, in a case where A pays a debt twice to B, forgetting he had paid it the first time, in order to recover the second payment A must prove that it lacked a legal ground to support it. One reason why he can recover the second payment is that it lacks a legal ground to support it: whereas the first payment is supported by a valid contract – the most central example of a legal ground – the second payment is not. Thus the action which South African law applies in a case like this one is the condictio indebiti: literally, the claim to recover an amount which was not owed. This seems to bring South African law very close to the German law of unjustified enrichment. The German Civil Code (Bürgerliches Gesetzbuch) (BGB) includes a provision – §812(I)(1) – according to which: ‘A person who obtains something by performance [Leistung] by another person or in another way at the expense of this person without legal ground is bound to give it up to him.’ Thus in German law the restitution of transfers arises from the absence of an objectively constituted relationship of indebtedness between the parties.6 4 5

6

Hofstede (n 2) 13–15. See M Bryan, ‘Unjust Enrichment and Unconscionability in Australia: A False Dichotomy’ in JW Neyers, M McInnes and SGA Pitel (eds), Understanding Unjust Enrichment (Hart Publishing, Oxford 2004) 47 ff. See generally (in English) R Zimmermann and J Du Plessis, ‘Basic Features of the German Law of Unjustified Enrichment’ (1994) RLR 14, 24–30; B Markesinis, W Lorenz and G Dannemann (eds), The German Law of Obligations (Vol 1) (Clarendon Press, Oxford 1997) 717–20; T Krebs, Restitution at the Crossroads: A Comparative Study (Cavendish,

Impact of legal culture on unjustified enrichment 155

Given their common roots in the Roman enrichment condictiones, this similarity between the German and South African approaches to enrichment by transfer is unsurprising. However, the South African picture is in truth more complicated than this. In fact, in a case like the example of A and B just described, the claimant must prove not only that the second payment was not owing – that it was an indebitum – but also that it was made under the influence of a mistake.7 If he cannot prove that, he cannot recover the second payment, despite the fact that it was not owed. Indeed, this is true of transfers generally in South African law. Broadly speaking, in order to recover a transfer, the claimant must prove not only that there is no relationship of indebtedness or other legal ground to support it, but also that there is some specific, positive reason why he ought to be able to recover it. We already described the mistake requirement which operates in the context of the condictio indebiti. However, it is also possible to substantiate this condictio using other reasons for restitution, such as compulsion8 and minority or incapacity 9 (where a natural or juristic person lacks the capacity to make the payment in question). Performance rendered in terms of illegal transactions is recoverable only to the extent that the policy underlying the illegality requires this.10 Similarly, performance rendered under contracts which are invalid but not illegal (eg contracts void for lack of compliance with formalities) is recoverable only where the contract has not yet been fully performed by the other party, ie where there has been some failure of consideration.11 Thus it seems that the unjust factors analysis is well advanced in South African law. Of course, in all these cases it is required that the transfer in question be unsupported by any kind of legal ground: the absence of a legal ground is undoubtedly a necessary requirement for recovery. But it is not a sufficient one: the claimant’s

7

8 9 10 11

London 2001) 207–17; and JE Du Plessis, ‘Towards a Rational Structure of Liability for Unjustified Enrichment: Thoughts From Two Mixed Jurisdictions’ (2005) 122(1) South African LJ 142, 172–9. Indeed, according to modern South African law he must prove also that the mistake was an excusable one: see Willis Faber Enthoven v Receiver of Revenue 1992 (4) SA 202 (A) (‘Willis Faber ’) and further H Scott, ‘The Requirement of Excusable Mistake in the Context of the Condictio Indebiti: Scottish and South African Law Compared’ (2007) 124 South African LJ 827. Eg Commissioner for Inland Revenue v First National Industrial Bank 1990 (3) SA 641 (A). Eg Bowman De Wet and Du Plessis NNO & Ors v Fidelity Bank Ltd 1997 (2) SA 35 (SCA). Eg Visser v Rousseau en Andere NNO 1990 (1) SA 139 (A). Although this rule has been present in South African law since the nineteenth century, it was only in 2008 for the first time that it was recognized and applied by the Supreme Court of Appeal: see Legator McKenna Inc & Anor v Shea & Ors [2009] 2 All SA 45 (SCA) (‘Legator’).

156

Scott and Visser

restitutionary claim will fail unless he can demonstrate also a specific, positive reason for restitution. Thus it seems that whereas the South African law of unjustified enrichment is broadly defined in terms of the absence of a legal ground, when it comes to specific restitutionary claims, including claims to recover enrichment by transfer, the law generally requires not only the absence of a legal ground to support the transfer but also a specific reason why it ought to be given back.12 These specific reasons for restitution mean that South African law resembles the English law of unjust enrichment as well as the German law of unjustified enrichment. Moreover, this emphasis on unjust factors in modern South African law seems to be strengthening all the time.13 Thus the question arises, how and why did this mixed analysis of enrichment by transfer evolve? And does the fact that – despite its civilian roots – South African law appears to be moving ever nearer to an unjust factors analysis of enrichment by transfer reveal anything about that analysis more generally?

2.

Some possible explanations

(a) The uncodified ius commune First, it is possible that the explanation for the South African approach lies in the uncodified European common law. Certain unjust factors, in particular mistake, have always been present in the uncodified civilian law. On the one hand, the Roman-Dutch writers all recognized a positive mistake requirement in the context of the condictio indebiti.14 Indeed, this requirement seems to be present even in Justinian’s law;15 some texts suggest that it might go as far back as classical Roman law.16 Similarly, even Roman law recognized a special enrichment action for recovering performance tendered under illegal transactions, the condictio ob turpem vel iniustam causam.17 And indeed the claim to recover part performance rendered under a non-contractual bargain, the condictio causa data causa 12 13

14 15

16

See generally D Visser, Unjustified Enrichment (Juta, Wetton 2008). See eg, the recent decision of the Supreme Court of Appeal in Legator (n 11), in which it was held that the restitution of performance under a contract void for lack of compliance with formalities depends on the failure of counter-performance. Eg Grotius, Inleiding 3.30.6; Voet, Ad Pandectas D.12.6.n.6. Eg Paul, Book 3 Quaestiones D.22.3.25 pr: ‘He who alleges that he has paid an indebitum must prove that he paid it through fraud on the part of the recipient or some just cause of ignorance, and unless he show this, he cannot recover.’ Gaius, Institutes III.91. 17 See generally Digest 12.5.

Impact of legal culture on unjustified enrichment 157

non secuta, has its roots in classical Roman law too.18 Thus it seems that the explanation for the modern South African approach is, at least in part, historical. At the same time, in the South African context the enrichment condictiones of the uncodified civil law have been profoundly influenced by another remedy of the ius commune, namely the extraordinary, discretionary restitutio in integrum.19 Like the condictiones, that remedy had its roots in Roman law, but it changed its character profoundly in the Roman Dutch law of the seventeenth and eighteenth centuries, emerging in nineteenth-century South African law as a powerful equitable tool.20 In effect, the South African courts used this remedy to develop a parallel body of law running alongside the traditional enrichment condictiones. Since restitutio in integrum relied on specific reasons for equitable intervention, it tended to promote the use of unjust factors by judges in order to justify restitution: To obtain the benefit of this relief [restitutio in integrum], the plaintiffs must show that one or more of the grounds for restitution exist in their case. These grounds are stated by the Roman and Dutch Law writers to be metus [compulsion], dolus [fraud], minor aetas [minority], Capitis diminutio [loss of status], absentia [absence], alienatio judicii mutandi causa [alienation with the object of frustrating a judicial proceeding] and justus error [justifiable mistake] (Voet 4.1.26).21

This remedy has played a crucial role in the development of the mixed approach to enrichment by transfer which exists in modern South African law. Nevertheless, this historical explanation for the mixed analysis cannot be a complete one. It certainly illuminates the tools which the South African courts have used to fashion their current approach, and provides insights into the detailed workings of that approach, but on a more fundamental level it cannot explain why they fashioned it. Nor can the historical explanation explain South Africa’s continuing preference for unjust factors – or at least a mixed approach to enrichment – over the

18 19

20

21

See generally Digest 12.4. H Scott, ‘Unjust Enrichment by Transfer in South African Law: Unjust Factors and Legal Grounds’ (DPhil thesis, University of Oxford 2005). D Visser, ‘Rethinking Unjustified Enrichment: A Perspective of the Competition between Contractual and Enrichment Remedies’ [1992] Acta Juridica 203, 218–25 and Visser (n 12) 108–11. White Brothers v Treasurer-General (1883–84) 2 SC 322 (‘White Brothers’) 349 referring to Voet, Ad Pandectas D.4.1.n.26.

158

Scott and Visser

pure absence of legal ground approach applied in modern German law. It is necessary to look elsewhere for a full explanation.

(b) English influence A second possibility is that the emergence of unjust factors in South African law is simply due to the influence of English law. This is certainly suggested by the decision in White Brothers v Treasurer-General:22 in that case, the emergence of compulsion as a distinct unjust factor in South African law was specifically linked to the influence of the English law of duress of goods.23 However, it does not appear that this development can be wholly attributed to the substantive influence of English law either. On the one hand, the White Brothers case is atypical in this respect: relatively few South African enrichment cases make explicit reference to English law, and although English law has had some impact on the development of individual unjust factors, this influence is not systematic.24 On the other, English influence cannot explain the continuing pull of unjust factors in modern South African law. As Konrad Zweigert and Hein Kötz state in their Introduction to Comparative Law: ‘After the creation of the Union of South Africa in 1910 the progressive anglicization of the law came to a stop.’25 But as explained in the introduction, it is during the course of the twentieth century that we see the unjust factors taking firm hold in South African law, and as recent cases demonstrate, that hold is becoming even 22 23

24

25

White Brothers (n 21). In ibid De Villiers CJ cited eg, Marriott v Hampton (1797) 7 TR 269; Atlee v Backhouse (1838) 3 M and W 633; Parker v Great Western Railway (1844) 7 Man & G 253; and Valpey v Manley (1845) 1 CB 594. In the context of the recovery of minors’ transfers, the English rule that a minor was bound by an unassisted contract which was to his or her advantage (and could not therefore recover any performance rendered under it) was initially received into South African law in the form of the so-called ‘benefit theory’: see eg, Van der Byl v Solomon (1877) 7 Buch 25. However, it was subsequently rejected by the Appellate Division: see Edelstein v Edelstein 1952 (3) SA 1 (A). Similarly, the rule in Thomas v Brown (1876) 1 QBD 714, that there could be no recovery of performance rendered under a contract governed by the Statute of Frauds 1677 (UK) (29 Car 2 c 3) where the other party remained able and willing to perform, was initially received into South African law in Carlis v McCusker 1904 TS 917 but was much criticised in the courts and eventually abrogated by s 28 of the Alienation of Land Act 1981. South African courts have refused to follow English law in rejecting an excusable mistake requirement in cases involving the recovery of mistaken transfers: cf Kelly v Solari (1841) 11 LJ Ex 10, 152 ER 24 (considered in Natal Bank v Roorda 1903 TH 298) with Rahim v Minister of Justice 1964 (4) SA 630 (A) 63 and Willis Faber (n 7). K Zweigert and H Kötz, An Introduction to Comparative Law (3rd edn Oxford University Press, Oxford 1998) 233.

Impact of legal culture on unjustified enrichment 159

stronger now. Finally, the English law of unjust enrichment did not of course exist as a subject until it was identified as such by Goff and Jones.26 The theory of ‘unjust factors’ in particular was the creation of Peter Birks.27 It follows that for much of the period in question there was simply no selfcontained English law of unjust enrichment capable of exerting systematic influence on South African law. For these reasons this explanation for the rise of unjust factors must be rejected also.

(c) Codification A third possible explanation for the emergence of unjust factors in South African law turns on codification: whereas German law is codified, neither English nor South African law is.28 According to the ‘pure’ absence of legal ground approach, where a transaction is void, restitution of performance rendered under it follows automatically. It follows that in order for that approach to function properly, it is necessary to decide in advance which flawed transactions should attract restitution and which should not: if the word ‘void’ implies automatic restitutionary consequences, it must be deployed very carefully indeed. In other words, the absence of legal ground approach can function only in a legal system which already includes a systematic doctrine of nullity. Lacking a code, English law lacks the infrastructure necessary to operate the pure absence of legal ground approach. This argument appears to provide at least a partial explanation for the dominance of the unjust factors analysis in English law. However, it is unclear whether it can be applied in the same way to South Africa. As we have seen, South African law operates both an absence of legal ground analysis and an unjust-factors approach. In fact, it has inherited from the civilian common law much of the infrastructure necessary to operate a pure absence of legal ground approach, such as the concept of natural obligations, and could build on this aspect of its civilian heritage in developing a systematic nullity doctrine. Thus it does not appear that South African law needs unjust factors to function, in the way that English law does.29 It has simply adopted a belt-and-braces strategy, requiring two justifications for recovery where one might do. However, it is possible to take 26 27 28

29

R Goff and G Jones, The Law of Restitution (1st edn Sweet & Maxwell, London 1966). P Birks, An Introduction to the Law of Restitution (Clarendon Press, Oxford 1985). The point is put best by Thomas Krebs: T Krebs, Restitution at the Crossroads (Cavendish, London 2001) ch 16. Eg D Sheehan, ‘Natural Obligations in English Law’ [2004] LMCLQ 172 and M McInnes ‘Natural Obligations and Unjust Enrichment’, ch 8 in this volume, especially 181–4.

160

Scott and Visser

this third explanation further, or at least to take it in a new direction. Not only is the South African law of unjustified enrichment uncodified, like English law; as a former British colony, South Africa operates a system of judge-made law. In fact there appears to be a strong association between specific, positive reasons for restitution such as mistake, compulsion, etc and the common law method itself.

3.

Unjust factors and the common law method

On one level, the debate about unjustified and unjust enrichment is simply an expression of the fundamental difference between civilian culture and common law culture, ie theory, abstraction and generality as opposed to particularity, common sense and – less flatteringly – simple casuistry. This is an old idea. For example, according to Max Weber in his Wirtschaft und Gesellschaft, considering English law and legal method: No system of rational law, nor even a rational systematization of law, can emerge from the forces inherent in cautelary jurisprudence. Such ideas as it produced were linked to fact situations which were formal in the sense of being concrete, recognizable, current and quotidian … They were not general concepts, which are formed by means of abstraction from the particular and by the logical processes of generalization and subsumption, and then applied syllogistically in the form of norms. When legal practice and teaching are purely empirical, legal thinking always moves from the particular to the particular and never tries to rise from the particular case to the general principles from which the decision in the particular case can then be deduced.30

This argument is of course overstated. A famous counter-example is the recognition of the tort of negligence by the House of Lords in Donoghue v Stevenson:31 this decision shows that the common law method is certainly capable of producing generalizations. Whereas it may be broadly true to say that the common law prefers the particular and concrete and the civil law the general and abstract, in this form the argument is too imprecise to provide a satisfactory explanation for the development considered here. However, it is possible to formulate a more specific version of this argument, ie the argument linking unjust factors to the common law method. This can be done by focusing on the other principal attribute of 30

31

M Weber, Wirtschaft und Gesellschaft (4th edn JCB Mohr, Tübingen 1956) 457 ff cited by Zweigert and Kötz (n 25) 193. [1932] AC 562 (‘Donoghue v Stevenson’).

Impact of legal culture on unjustified enrichment 161

the absence of legal ground approach, namely the fact that it turns on a negative proposition. It is axiomatic to the absence of legal ground approach, at least in the context of enrichment by transfer, that a judge presiding in such a case needs a reason not to intervene, ie not to order restitution. If there is no legal ground in play – a relationship of indebtedness etc – the claimant’s transfer is prima facie recoverable. This is not to say that there is a reversed burden of proof in German law: the onus of substantiating his claim rests throughout on the claimant. Nor does it mean that the claimant is in the impossible position of having to prove a negative. In fact, it seems that there are well-developed methods of pleading in German law which are designed to deal with that problem.32 But in a system which applies an absence of legal ground approach, whatever methods of proof are employed, the substantive reasons for restitution must be negative ones. For example, where A pays a debt twice to B, forgetting he had paid it the first time, either (it is said) the claimant ought to be able to recover because he paid the money for a particular purpose, ie the discharge of an obligation, and that purpose failed because no such relationship existed – this is what is referred to as the subjective analysis of the German Leistungskondiktion – or he ought to recover because his payment is unsupported by a legal ground – this is the objective version of that analysis.33 The rule used by a judge to justify his decision according to either version of the analysis thus necessarily incorporates a negative proposition. It is this feature of the absence of legal ground analysis – the fact that it typically provides only negative reasons for intervention – which explains why it has not flourished in systems of judge-made law. Modern common law judges are of course not simply appliers or interpreters of law, but law-makers too. This is the effect of the doctrine of precedent. The operation of this doctrine – the way in which past judicial decisions constrain decisions in future cases – is of course a matter of great controversy.34 But it is axiomatic to the doctrine of precedent that 32

33

34

See the explanation provided by S Meier, ‘No Basis: A Comparative View’ in A Burrows and Lord Roger of Earlsferry (eds), Mapping The Law: Essays in Memory of Peter Birks (Oxford University Press, Oxford 2006) 343, 350–1. Daniel Visser explains how these rules might operate in South African law: Visser (n 12) 329–30. See eg, H Scott, ‘Restitution of Extra-Contractual Transfers: Limits of the Absence of Legal Ground Analysis’ (2006) 14 RLR 93, 95–6. The sources here are too many to be listed individually. Recent accounts include L Alexander and E Sherwin, Demystifying Legal Reasoning (Cambridge University Press, Cambridge 2008) and N Duxbury, The Nature and Authority of Precedent (Cambridge University Press, Cambridge 2008).

162

Scott and Visser

judges’ decisions are in some sense authoritative. It is in the granting of relief that this authority is most clearly exercised. This does not mean that common law judges make law only when they intervene: in the context of an interpretive law-making tradition, the refusal to grant relief may be equally significant. Nevertheless, it is primarily by intervening that common law judges move the law forward, either by creating an entirely new legal rule or, more commonly, by extending the boundaries of an existing one. It is their ability to do this which distinguishes common law judges from their civilian counterparts.35 Furthermore, it appears that reasons play a key role in this judicial law-making function. In fact the practice of giving reasons is historically linked to the emergence of the doctrine of precedent itself: since the middle of the nineteenth century judges have been in the habit of formulating their reasons in written judgments, despite the fact that initially at least they were not obliged to do so.36 Several explanations for the rise of reasoned judgments in the common law have been suggested. On the one hand, the giving of reasons legitimizes the exercise of public power by judges: judicial law-making is justified to the extent that it takes place in accordance with reason, or, in other words, is reasonable.37 More pragmatically, the giving of reasons allows judges to protect themselves on appeal: centralized appeal appears to have emerged in England for the first time after 1875, ie at more or less the same time as the practice of giving reasons itself emerged, and it is likely that these practices were linked in some way.38 Of course, judicial reasons are not always clearly and succinctly formulated. Moreover, even when a judge does formulate such a rule in order to justify her decision in a particular case, it is not like a rule in a statute; it 35

36

37

It is easy for a common lawyer to overstate this point, particularly with respect to German law. Judgments applying laws of general application such as BGB §812 may well have a significant impact: they may shape future understanding of the meaning of that provision, or even establish new lower-level rules to guide the application of that provision. In practice a judgment of the Bundesgerichtshof in Germany is very likely to be followed by lower courts: see (in English) eg, Zweigert and Kötz (n 25) 262 ff and more generally JP Dawson, The Oracles of the Law (Greenwood Press, Westport 1968) ch 6. Nevertheless, the fact remains that such judgments are not ‘law’ in the technical sense that a judgment which is clearly wrong is still required to be followed. Judgments of German courts might be highly persuasive, but they are not authoritative in and of themselves. A German judge dealing with the case of A and B is ultimately applying BGB §812, as interpreted, to the facts. See generally D Dyzenhaus and M Taggart, ‘Reasoned Decisions and Legal Theory’ in D Edlin (ed), Common Law Theory (Cambridge University Press, Cambridge 2007) 134. Dyzenhaus and Taggart (n 36) 152. 38 Ibid 146–50.

Impact of legal culture on unjustified enrichment 163

will not (or should not) be interpreted in that way by future judges. Rather, it has to be read in its context: in formulating the ratio decidendi of her decision, a judge formulates a rule which justifies that particular decision. According to Brian Simpson in a seminal article published in 1961: [I]n many judgments there is no passage which can be enthusiastically underlined and quoted in the headnote as the statement of the ratio decidendi, or put as it stands into a codifying statute; the style of many judgments forbids this. Sometimes however a judge does purpose to state in precise language the rule upon which he acted; many of the great leading cases contain just such formulations. But even in such cases the formulation of the rule by the judge is not, and cannot be, treated as precisely the same as a statutory rule, where every word is sacred. 39

Thus the concept of the ratio decidendi seems itself to embody a species of formal limitation on the power vested in judges: only a rule acted upon by the court can rank as binding, and a judicially formulated rule does not bind except insofar as it justifies the outcome in the particular case in which it appears.40 It follows from this that even where a common law judge does explicitly state the rule upon which she has acted, she will not generally state it more broadly than is necessary to justify her decision. It is not necessarily the case that a judge is required by convention to state a rule as narrowly as possible; but the incomplete nature of case-law rules makes it fruitless at best to state such a rule in a legislative fashion, ie generally and comprehensively, when much less is required to justify the decision in hand: In order to act upon a rule it had been said that a judge need not have any precise formulation of the rule in mind. All he needs is a sufficiently precise idea of the scope of the rule for his immediate purpose. There may be exceptions to the rule too, which he would like to introduce were he codifying a branch of the law, but which he need not have in mind since they do not affect the particular problem which confronts him for decision.41

Thus it appears that the common law method is inherently a conservative one. Only rules acted upon are binding, and rules are not generally formulated more broadly than they need to be in order to justify the particular decision in respect of which they figure. 39

40

AWB Simpson, ‘The Ratio Decidendi of a Case and the Doctrine of Binding Precedent’ in AG Guest (ed), Oxford Essays in Jurisprudence (Oxford University Press, Oxford 1961) 166. Ibid 161. 41 Ibid 164 ff.

164

Scott and Visser

This brief account of judicial reasoning itself offers an explanation for the apparent preference of common law judges for an unjust factors analysis of enrichment by transfer. As we have seen, according to the absence of legal ground analysis, the rule relied upon by a judge to justify her decision must necessarily incorporate a negative proposition: in the case of A and B, the analysis obliges a judge to justify her intervention in terms of the absence of a relationship of indebtedness between the parties. But this negative reason for restitution necessarily justifies a wide range of decisions beyond the case immediately before the court. Where A is permitted to recover his second payment to B on the ground that it lacked a relationship of indebtedness to support it, the rule which justifies this decision is necessarily wildly over-inclusive. It provides a justification also for almost every other judicial decision to order the restitution of enrichment by transfer. Admittedly this point could be reduced to nothing more than the argument that BGB §812 is too general to be palatable to a common law judge: the same thing could be said of the original formulation of the (positive) test for negligence in Donoghue v Stevenson.42 However, in the case of the absence of legal ground test, there is a further dimension. In justifying intervention in terms of the absence of a legal ground, this approach makes restitution the default option. Positive reasons – the existence of a legal ground in the form of a contract, gift etc – are reserved for cases where the judge refuses to intervene. Thus judicial intervention in the form of the granting of relief is justified only with reference to the negative space left over once the legal ground concept has been abstracted. Its analytical focus is exclusively on retention. Yet it is when they grant relief that judges’ decisions most urgently require reasoned justification. After all, it is primarily in granting relief that judges exercise their public power. Thus it appears that the justification for intervention offered by the absence of legal ground approach is not only too broad but also too weak to be palatable to a common law judge. It is analytically strong precisely where such strength is relatively unimportant to a common law judge, ie in providing a reasoned justification for her refusal to intervene. It follows from these points that the absence of legal ground approach is necessarily at war with the judicial conservatism inherent in the common 42

It is unclear to what extent that general test has truly been applied in English law. See eg, D Ibbetson, A Historical Introduction to the Law of Obligations (Oxford University Press, Oxford 1999) 188–95.

Impact of legal culture on unjustified enrichment 165

law method. Conversely, common law judges naturally prefer an analysis which turns on unjust factors such as mistake. On the one hand, positive reasons for restitution necessarily justify a smaller range of cases than negative ones do, thus satisfying the judicial preference for specificity in the formulation of rationes decidendi. More than that, unjust factors offer a positive justification for judicial intervention, ie for the exercise of judicial law-making power, allaying judicial anxiety about reasoned intervention in the context of a legal system which treats judicial decisions as authoritative. Thus unlike the absence of legal ground approach, the unjust-factors analysis reflects and respects the conservatism innate in the common law method.43 If this argument is correct, it seems that the common law method may have been an important factor in the development of an unjust factors analysis in the English law of unjust enrichment.44 In the same way, the introduction of a system of judge-made law into South Africa after colonization by the British in the nineteenth century may offer at least a partial explanation for the drift towards unjust factors discernible in modern South African law of unjustified enrichment, despite its civilian roots. In particular, it may explain why the emphasis on unjust factors in South African law appears to be strengthening all the time, long after the influence of English doctrine has come to an end. Whereas South Africa’s substantive civilian heritage seems to pull it towards the German law, the procedural context in which those substantive rules operate appears to be an important factor pulling it in the opposite direction. The civilian 43

44

Of course, if the absence of legal ground approach were legislatively enacted in England or South Africa, judges would apply it. The point is rather that absent codification of the law of enrichment, no common law system would evolve or even retain a rule of this kind. In this respect it is interesting to note that the doctrine of precedent itself appears to have emerged only during the course of the nineteenth century. Indeed, it seems to have become orthodoxy only very late in that century. According to AWB Simpson, ‘The Common Law and Legal Theory’ in AWB Simpson (ed), Oxford Essays in Jurisprudence (2nd series Clarendon Press, Oxford 1973) 77: ‘any identification between the common law system and the doctrine of precedent, any attempt to explain the nature of the common law in terms of stare decisis, is bound to seem unsatisfactory, for the elaboration of rules and principles governing the use of precedents and their status as authorities is relatively modern, and the idea that there could be binding precedents more recent still. The common law had been in existence for centuries before anybody was very excited about these matters, and yet it functioned as a system of law without such props as the concept of the ratio decidendi, and functioned well enough.’ See further JH Baker, An Introduction to English Legal History (4th edn Butterworths, London 2002) 197–201 and JW Tubbs, The Common Law Mind: Medieval and Early Modern Conceptions (Johns Hopkins University Press, Baltimore 2000) 194.

166

Scott and Visser

remedy of restitutio in integrum may have provided the remedial tool by means of which this shift in emphasis was effected, but the stimulus for this shift is to be found elsewhere.

C. 1.

France: hidden reasons

The contours of unjust enrichment in the Code civil

Like South Africa, France has a law of unjustified enrichment, in the sense that claims of this nature are based in the first instance on the absence of cause. However, unlike South Africa, its history has not led to its employing the notion of unjust factors. This fact, together with the style of reasoning that the political imperatives at work at the time of codification bequeathed to it, makes this area of law far more uncertain than in South Africa and very different to the other jurisdictions that we have discussed so far. The first thing that one needs to understand about French law is that it differentiates between claims for the return of unowed payments (repetition de l’indu) and unjustified enrichment (enrichissement sans cause).45 In this way the Code civil embodies the intention of its silent author, Robert-Joseph Pothier, codifying – of all the Roman condictiones – only the condictio indebiti in article 1376 Cc (and the associated articles 1377–80 Cc). A general action to deal with unjustified enrichment was, however, created by the Cour de cassation in 1892 in the Boudier46 case by invoking the Roman actio de in rem verso.47 The result is that, while recovery of payments that are not owed forms the core of enrichment law in the countries dealt with above, these claims are not in fact seen as part of the law of unjustified enrichment proper in France. We will, therefore, consider each of these claims separately. 45

46 47

See generally MW Scheltema, ‘Restitution and Mistaken Payments’ in E Schrage (ed), Unjust Enrichment and the Law of Contract (Kluwer Law International, The Hague 2001) 87. Cas Req 15.6.1892, S 1893.1.28 (‘Boudier ’). See generally C Wendehorst, ‘Die Leistungskondiktion und ihre Binnenstruktur in Rechtsvergleichender Perspektive’ in R Zimmermann (ed), Grundstrukturen eins Europäischen Bereicherungsrecht (Duncker & Humblot, Berlin 2005) 35 ff; HW Scheltema, Onverschuldigde Betaling (Kluwer, The Hague 1997) 16 ff; B Nicholas, ‘Modern Developments in the French Law of Unjustified Enrichment’ in PW Russell (ed), Unjustified Enrichment: A Comparative Study of the Law of Restitution (VU University Press, Amsterdam 1996) 78.

Impact of legal culture on unjustified enrichment 167

(a) Repetition de l’indu Article 1376 Cc states that he who in error or knowingly has received a payment that is not owed to him is obliged to return this payment to the person from whom he had received it. By payment is meant only ‘the voluntary transfer of the ownership of a specific thing or a sum of money’.48 Normally a payment is indu if it is without legal ground, but in defining what counts as a payment sans cause French law distinguishes between an indu objectif and an indu subjectif. The former notion is employed in the case of payments that are not owed at all, while the latter is used in the case of payments of an existing obligation by someone other than the debtor.49 In the case of an indu objectif, the mere fact of the absence of legal ground is enough to trigger the remedy of article 1376 Cc: although the article makes reference to the recipient having received an unowed sum either mistakenly or knowingly, it does not require error on the part of the plaintiff. If one considers the history of this situation, it would seem that the requirement of error had, as it were, drifted out of French law. The French Humanists, for example Jacques Cujas50 and Francisco Duarenus,51 and later Pothier,52 all treated error as a requirement for the successful institution of the condictio indebiti, basing this requirement on the notion that a knowing payment brings about a presumption of donation. However, not much emphasis was ever placed on this requirement – or, for that matter, on the law of unjustified enrichment as a whole – by the authors of the pre-codification period. Thus John Dawson says of Pothier that the chief characteristic of his treatment was ‘its total lack of originality’ and that he ‘went straight back to Roman law, but gave a most incomplete picture’.53 No wonder then that the codification of the Roman condictio indebiti without its Justinianic rider54 of mistake as a requirement was easily accepted in French law. 48 50

51 52 53

54

Nicholas (n 47) 78. 49 See Scheltema (n 47) 18. See J Cujacius, Opera Omnia (Lutetiae Parisiorum, 1558) Vol 7, col 236 ad C 5.5.9. See also L Winkel, ‘Mistake of Law: English and Roman Comparisons’ in W Swadling (ed), The Limits of Restitutionary Claims: A Comparative Analysis (British Institute of International and Comparative Law, London 1997) 252. F Duarenus, Opera Omnia (Francofurti, 1607) ad C 4.5 and D 12.6. R Pothier, Condictio Indebiti (in Ouvres) (Brussels/Amsterdam 1806) art 3 [160]. JP Dawson, Unjust Enrichment: A Comparative Analysis (Little Brown & Co, Boston 1951) 92–4. See n 15.

168

Scott and Visser

However, in French law the pure ‘without legal ground’ approach does yield in one instance to an unjust-factor approach. This happens in the case of the mistaken payment of another’s debt, that is to say, where a debt is owed, but not by the person making the payment – a situation referred to in French law as an indu subjectif. If the pure approach were applied in this situation, the person paying the debt of another would always be able to claim the payment back on the basis that he or she did not owe that debt. This is, however, prevented by article 1377 Cc, which requires that the payment must have been made under the influence of a liability mistake to be recoverable.55

(b) Enrichissement sans cause When it comes to unjustified enrichment liability generally, the French system relies solely on the enrichment being without legal ground for it to be recoverable. This principle is untrammelled by the typical policy considerations that come into play where an unjust-factor approach is applied either partially or fully. It is true that since the judicial creation of a general enrichment action in France – about which more below – several limiting devices have been developed by the French courts. These devices could be seen as the incremental introduction of an unjust-factor approach. For example, to be able to institute a successful enrichment claim, the plaintiff must not have acted ‘at his own risk or in his own interest (à ses risqué et perils et dans son intérêt), while some cases also suggest – controversially – that the plaintiff must not have been at fault.56 The notion of subsidiarity has also produced some limitation on the scope of the action. Yet these considerations have remained peripheral, and have not dislodged the question whether there is a legal ground for the enrichment or not as the primary decider of the availability of an enrichment action. These features have made the French law of unjustified enrichment impossibly wide and unpredictable – a situation exacerbated by the approach of the French courts to the giving of reasons. In order to substantiate this point, we outline, first, the general approach to reasoning in French courts. Next, we illustrate this point by considering the Boudier decision. 2.

Hidden reasons

The judgment of a French court is typically extremely short and essentially amounts to a single sentence in which syllogistic reasoning 55

See Scheltema (n 47) 18.

56

See Nicholas (n 47) 84–6 and the cases cited there.

Impact of legal culture on unjustified enrichment 169

is employed to apply a principle, derived from the provisions of the Code, to the facts. 57 The formulation of a French judgment suggests not only an assumption that purely deductive reasoning from the provisions of the Code is possible, but also that it is the only acceptable form of reasoning. However, as Neil McCormick has shown, although legal reasoning can be purely deductive58 it rarely is, since, as he puts it, ‘we can run out of rules without running out of the need for legal decisions – because rules are unclear, or because the proper classification of relevant facts is disputable, or even because there is dispute whether there is or is not any legal ground at all for some claim or decision at law’. 59 The impossibility of using only deductive reasoning is accepted by French lawyers – and that means that they also accept that judges must reach beyond the Code and resort to policy in deciding at least some cases.60 In other words, the reasoning visible in the judgment of a French court is not the only reasoning that it employs. Before we consider the interaction between the reasons given in a judgment and the reasons that actually inform that judgment, it is necessary fi rst to note why French legal culture insists on painting this ‘official portrait’, while the ‘unofficial portrait’ presents a much more realistic picture of what actually happens.61 In fact, the reason why French court decisions present a façade of strict deductive reasoning is to be found in the objectives of the revolution of 1789, one of which was to limit the excessive powers which judges had arrogated to themselves in the pre-revolutionary period. This led to an explicit prohibition against judges making law in article 5 of the Code.62 Therefore, although French courts do make law – how could they not? – the fact that they are formally forbidden to do so requires the reasoning behind the changes in the law to be obscured by the formality of their terse, syllogistic judgments. The result is that, ‘[t]he formulation of the principle or motif which constitutes the major premise of the syllogism

57

58 59 60

61 62

J Beatson and E Schrage (eds), Cases, Materials and Texts on Unjustified Enrichment (Hart Publishing, Oxford 2003) 17–18. N McCormick, Legal Reasoning and Legal Theory (Clarendon Press, Oxford 1978) 19. Ibid 100. M Lasser, ‘Judicial (Self-)Portraits: Judicial Discourse in the French Legal System’ (1995) 104 Yale LJ 1325, 1351, 1399. Ibid. See ibid 1326 ff explaining the ‘unofficial portrait’ of French judges, which is not as well known as the ‘official’ one, as described by, for instance, Dawson (n 35) 263 ff. See also Beatson and Schrage (n 57) 17.

170

Scott and Visser

may be repeated unaltered through dozens or hundreds of cases, while the critical reader wonders at the increasingly forced interpretation of either the principle or the facts which is necessary to accommodate the syllogism, until a slight difference in formulation may alert the reader to a possible modification’.63 Although, then, an arrêt offers, in the words of Barry Nicholas,64 ‘none of the opportunity for the expression of individual views which is provided by its discursive Common law counterpart’, there is another layer of reasoning below the formal reasoning that is to be found in the judgments themselves. This ‘unofficial discourse’ takes place in the magistracy in the form of conclusions and rapports.65 At the start of the case a rapporteur prepares an analysis of the case for the court and the reasoning in it is not unlike that in a typical common law judgment.66 At the end of the case another magistrate (the ‘reporting judge’) writes a conclusion which reflects on the reasons that might and should underlie the judgment and which is similar in style and content to the rapport. (In the Cour de cassation a conclusion by the Avocat-General is mandatory.)67 These rapports and conclusions have much in common with the familiar style of reasoning in common law judgments, that is to say they are discursive, contain reference to case law (‘ jurisprudence’), and employ socioeconomic and other policy arguments, often gleaned from discussion of the issues by academic writers (‘doctrine’).68 The rapports and conclusions are not anonymous and are written in a dialectical style, since their purpose is to convince the court that it should adopt the solution proposed in the document. If a court in fact adopts a solution so proposed – and if that solution cannot be produced by a straightforward deduction from the Code – the result is new jurisprudence, new judge-made law, which has a peculiar position in the French legal system as a whole. It will be reported in the formal style of the arrêt, and as such there will be no formal acknowledgment that it is not ‘law’ as contemplated by the Code, yet the insiders to the system know – and operate on the basis that – ‘ jurisprudence is not a real source of law’.69 Thus French legal culture adopts a bifurcated approach to the reasons for a judgment: it distinguishes between the formal reason given in the arrêt, namely that the facts necessitate the 63

64 65 66 68

Beatson and Schrage (n 57) 18. The sections in this book on French law were written by Barry Nicholas. See also D Harris and D Tallon, Contract Law Today: Anglo-French Comparisons (Oxford University Press, Oxford 1989) 391. Beatson and Schrage (n 57) 16. Lasser (n 60) 1355 ff and see also Beatson and Schrage (n 57) 16. Beatson and Schrage (n 57) 16. 67 Ibid. Ibid; Lasser (n 60) 1399. 69 Lasser (n 60) 1354.

Impact of legal culture on unjustified enrichment 171

application of a particular provision of the Code (which Lasser terms the grammatical approach to reasoning),70 and informal reasons, namely the various policy considerations that compel a particular outcome even though it is not indicated by simple deductive reasoning from the provisions of the relevant article of the Code (which Lasser terms the hermeneutic approach to reasoning). This bifurcated approach allows the French legal system to move forward without having to directly challenge the principle (as contained in article 5 of the Code) that only the legislature can make law.71 It is important to note three important limitations to the ‘alternative reasoning’ found in the rapports and conclusions. First, the theory of academic doctrine as well as the practice of the courts acknowledge the legitimacy of alternative reasoning only when there is uncertainty or a gap in the law, so that the margins within which judicial creativity is possible are not large. Second, there is no compulsion on the judge to exercise the power to make law in this way. Third, the rapports and conclusions are only accessible when their authors permit them to be published to others than those for whom they were written – and in practice it is difficult to get hold of those that are not published.72 To summarize: the rapports and conclusions give some clue as to the ultimate reasons for the court’s decision (especially where the court has adopted the solution suggested in the document), but formally they represent no more than the views of the magistrates that prepared them. This means that the search for reasons in the French legal system is an extraordinarily complicated one. The constitutional injunction against courts making law compels that reasons be formulated in a way which produces an intricate dance between official, deductive reasoning in the formal arrêts and the interpretative reasoning in the rapports and conclusions, but without the latter being freely available.73 This opaque approach leads to a paradoxical result. Far from producing the result envisaged by article 5 of the Code, the fact that judicial creativity is hidden in this way means that French judges are able to be far more creative than judges in either Germany or England, exactly because they do not need to justify their decisions other than by formulating a brief deductive argument relating to a provision in the Code.74 Thus they

70 72

73

71 Ibid. Ibid. Ibid 1352, 1353, 1357 (where Lasser comments that a mere four to six conclusions and two or three rapports are published in any one year). 74 Ibid 1407. Ibid 1332.

172

Scott and Visser

are able to be creative in an unaccountable way. Th is also means that the outcomes of cases are more difficult to predict than is the case in common law systems.

3.

The reasoning in the Boudier case

The famous arrêt Boudier75 illustrates dramatically the latitude that the French approach to the giving of reasons produces. The general enrichment action that was created in this case did not have any restrictions placed on it at all. It was a case of indirect enrichment which arose in the following circumstances. A tenant of land had not fulfilled his obligations in terms of the lease; the landlord (Putureau-Miran) therefore terminated the lease. The tenant owed Fr15,000, but in part settlement he gave up the standing crop to Putureau-Miran, which reduced his debt to Fr5,376. Subsequently, a supplier of manure sued Putureau-Miran for the value of the manure, since he had not been paid by the tenant. The court of first instance allowed the action, and this was confirmed by the Cour de cassation, which held that allowing the action did not violate article 1165 Cc (privity of contract) and further reasoned – since it perceived a gap in the law – as follows: Considering that the actio de in rem verso derives from the principle of equity which forbids one to enrich oneself at the expense of another and has been regulated by no text in our laws, its exercise is subject to no fi xed condition; that it is sufficient that the plaintiff alleges and offers to establish the existence of an advantage which, by a sacrifice or an act, he has conferred on the other party; and since the plaintiff had proved by witnesses that the manure supplied on the date indicated in the arrêt had indeed been used on the land of the defendant for the crops from which the defendant had profited, the arrêt has done no more than make an exact application of the principles in this matter.76

In a note on the case, Labbé said bluntly that ‘if one relies only on the text of the arrêt, nothing could be more vague or less precise’.77 He explains that in order to follow the court’s reasoning one has to consult the rapport of the magistrate Loubers, from which it appears that when the accounts were drawn up and the value of the crop calculated in the context of the dispute between landlord and tenant, it was assumed ‘that the landlord would only have the value of the crop if he paid for the value of 75 76

Boudier (n 46). See Beatson and Schrage (n 57) 40. Translated by Barry Nicholas.

77

Ibid.

Impact of legal culture on unjustified enrichment 173

the manure’.78 In other words, the decision did not even make it explicit that enrichment had to be without legal ground. Labbé concluded thus: We think that the true principle from which one must not depart is that no-one should enrich himself at the expense of another without just cause. We regret that the words that we have emphasised were not reproduced in the Court’s formula.79

This principle was, however, articulated in subsequent cases.80 The fact that the sole determinant of recoverability is whether the enrichment is without legal ground, however, leaves the French law of unjustified enrichment with a margin of uncertainty and breadth of application that most other legal systems would find difficult to live with. One need only consider the fact that the Boudier decision created an untrammelled right to claim on the basis of unjustified enrichment in instances of indirect enrichment (an area where most legal systems subject recovery to a range of strict policy considerations – if recovery is allowed at all) in order to realize how wide the general action in France really is. Indeed, it comes very close to the spectre of a general remedy based solely on the notion of equity. The following statement from the first half of the century by HC Gutteridge and RJA David remains essentially true: ‘it is … impossible to state the doctrine in a form which is absolutely systematic, dominated as it is by the subjective and paramount notions of morality and fair play’.81

D.

Conclusion

Attitudes to judicial reasoning and judicial law-making have profoundly shaped the evolution of the law of enrichment in both the common law and civil law contexts. On the one hand, we have argued that there is a close link between the emergence of an unjust factors analysis in English and South African law and the common law method itself. This appears to be due to the fact that judicial reasons in the form of unjust factors both satisfy the preference of common law judges for specificity in the formulation of rationes decidendi and play an important role in justifying the exercise of judicial law-making power. Thus our argument explains why South African law, despite its civilian origins, has evolved away from the pure absence of legal ground approach associated with modern civilian 78 81

Ibid 41. 79 Ibid 42. 80 See ibid and the cases reproduced at 339 ff. HC Gutteridge and RJA David, ‘The Doctrine of Unjustified Enrichment’ (1935) 5 CLJ 222–3 also quoted by Zweigert and Kötz (n 25) 562.

174

Scott and Visser

systems. On the other hand, in French law the dominant legal culture appears to have given rise to the almost total suppression of the reporting of judicial reasons. This is due in turn to the antipathy towards judicial law-making felt by the original drafters of the Code civil. Ironically, it leaves modern French judges relatively unconstrained in their development of the law of unjustified enrichment. Thus we have sought to demonstrate the importance of legal culture to the development of substantive law, specifically the law of unjustified enrichment. From their common root in the uncodified ius commune, French and South African law have evolved radically divergent approaches. Whereas French law embraces an extreme version of the ‘pure’ absence of legal ground approach, South African law tends strongly towards unjust factors. Much contemporary debate in this area has focused on the relative merits of these two approaches: it is tempting to think that individual jurisdictions might act as test cases. Yet in the case of South Africa and France, this divergence appears to have been driven at least in part by the attitudes of these jurisdictions towards the role of judicial reasoning itself.

8 Natural obligations and unjust enrichment Mitchell McInnes

Though the term has largely fallen out of use and the underlying concept may strike some as anachronistic, it is natural to think of Michael Bryan as a gentleman. Cardinal Newman famously spoke of one ‘mainly occupied in … removing the obstacles which hinder the free and unembarrassed action of those about him’.1 He has his eyes on all his company … he can recollect to whom he is speaking; he guards against unseasonable allusions, or topics which may irritate; he is seldom prominent in conversation, and never wearisome … He makes light of favours while he does them, and seems to be receiving when he is conferring. He never speaks of himself except when compelled … he has no ears for slander or gossip, is scrupulous in imputing motives to those who interfere with him, and interprets every thing for the best. [H]e observes the maxim of the ancient sage, that we should ever conduct ourselves towards our enemy as if he were one day to be our friend.

Those words very much fi nd their mark. I first gained an impression of Michael, as a true gentleman, shortly after my wife and I arrived in Australia in the mid 1990s. Although Michael was at a different university – indeed, in a different city – he very graciously welcomed us to our new home, while helping me adjust to the peculiarities of Antipodean private law. His kindness was as genuine and understated as it was unexpected. The subject of this essay accordingly seems doubly appropriate to the occasion. Natural obligations occur at the intersection of two concepts that help to define Michael Bryan: unjust enrichment and honour. An additional impetus for this paper lies in the fact that, despite their increasing importance, natural obligations are not widely recognized or well understood, even amongst lawyers interested in restitutionary liability. 1

JH Cardinal Newman, The Idea of a University (Longmans, London 1925) 208–9.

175

176

McInnes

They ‘exist at the edge of the law’s frontiers … no more than a virtual requirement, a dotted line where the very concept of obligation wears thin’.2 The topic is ignored by most of the leading texts3 and, though the situation has begun to improve,4 it has been the subject of few articles. Natural obligations nevertheless are important in both theory and practice. Given the relative obscurity of the subject, it seems best to begin with a definition, an illustration and a caveat. First, the defi nition: a natural obligation typically is said to be a duty that, despite being juridically unenforceable in a positive sense, is binding upon the obligor’s conscience and therefore is capable of explaining a transaction and defeating restitutionary liability. Second, the illustration: for reasons of public policy, even if the parties have not committed any sort of wrong, a Commonwealth court generally will not positively enforce a gambling agreement by compelling payment.5 As a result, it commonly is said that a wager does not generate legal rights and obligations. Nevertheless, it may generate natural rights and obligations, which are said to be binding in conscience. Consequently, to the extent that payment actually does occur, it fulfi lls a legitimate purpose and it can be retained with honour. Restitution is unavailable even if a transfer is undertaken in the belief that it could be compelled in law. Finally, a caveat: although the doctrine generally is discussed in terms of a natural obligation that affects the party’s conscience, such language 2

3

4

5

J Cartwright and S Whittaker (trs), P Catala, Proposals for Reform of the Law of Obligations and the Law of Prescription (Institute of European and Comparative Law, Oxford 2005) 50. Cf P Birks, Unjust Enrichment (2nd edn Oxford University Press, Oxford 2005) 257−8; G Virgo, The Principles of the Law of Restitution (2nd edn Oxford University Press, Oxford 2006) 674. G Dannemann, ‘Unjust Enrichment by Transfer: Some Comparative Remarks’ (2001) 79 Texas L Rev 1837; R Sutton, ‘Moral or Natural Obligation as Consideration for Contract’ (2002) 98 ALR 5th 353; D Sheehan, ‘The Instance and Effect of Natural Obligations in English Law, [2004] LMCLQ 170; HW Tang, ‘Natural Obligations and the Common Law of Unjust Enrichment’ (2006) 6 OUCLJ 133. The situation in England recently has undergone a dramatic revision. Section 335 of the Gambling Act 2005 (UK) now says that ‘[t]he fact that a contract relates to gambling shall not prevent its enforcement’. The example of an unenforceable wagering contract nevertheless is employed throughout this paper because: (1) it most clearly illustrates the propositions under discussion; (2) it continues to apply elsewhere in the Commonwealth; and (3) it continues to apply in England to agreements made before the legislative provisions belatedly came into force in 2007: Gambling Act 2005 (Commencement No 6 and Transitional Provisions) Order 2006 SI 2006/3272 (UK).

Natural obligations and unjust enrichment

177

is dangerous insofar as it echoes the long-discredited view that unjust enrichment turns upon abstract notions of ‘justice’ and a broad discretion to achieve ‘equitable’ results. In truth, however, there is nothing ‘natural’ about the phenomenon in question. Nor do the applicable rules involve any sort of mystical investigation into the claimant’s conscience.6 The doctrine merely reflects the fact that, in some circumstances, the courts will allow a transfer to stand even though they would not have compelled its performance. Consequently, the distinction tentatively drawn in the preceding paragraph, between legal rights and natural rights, is somewhat misleading. A wager undoubtedly affects the parties’ legal positions. The important point, however, is that whereas most transactional agreements are positively and negatively enforceable (so as both to compel the debtor’s performance and justify the creditor’s enrichment), a wager is restricted to the latter function only.

A.

History

While it may be an overstatement to say that natural obligations are inherent in any notion of unjust enrichment, it is true to say that the concept has long been an established feature of restitutionary regimes within the western tradition.

1.

Roman law

For present purposes, the story begins in ancient Rome.7 Natural obligations originated as a response to the tension that existed within Roman private law between tradition and certainty on the one hand, and fairness and flexibility on the other. The Praetors ameliorated the rigidity of the existing rules by drawing upon the ius naturale and by giving limited effect to certain types of transactions that affected the parties’ conscience. Although the doctrine developed haphazardly, three situations ultimately were said to entail natural obligations: (1) promises and obligations rendered unenforceable for technical reasons, rather than for moral defects, (2) obligations assumed by parties, such as slaves, who possessed factual, 6

7

That point sometimes is overlooked. The idea of conscience was taken literally in State v Placke, 786 So 2d 889 (La Ct App 2d Cir, 2001), where the court held that the doctrine of natural obligations could not apply to a State government which, as a legal abstraction, was incapable of consciously forming the requisite sense of moral obligation. R Zimmermann, The Law of Obligations: Roman Foundations of the Civilian Tradition (Juta-Kluwer, Cape Town 1992) 7−10; A Borkowski and P du Plessis, Textbook on Roman Law (3rd edn Oxford University Press, Oxford 2005) 252−3.

178

McInnes

but not legal, capacity, and (3) obligations extinguished by the passage of time. While the precise rules varied from one situation to the next, satisfaction of a natural obligation invariably barred recourse to the condictio indebiti (ie the action that generally allowed recovery of enrichments that occurred without legal basis). While the affected party could not be compelled to perform, restitution was unavailable to the extent that performance nevertheless occurred. Civilian jurisdictions, of course, continue to bear the imprint of ancient Rome. Thomas Krebs reports that while ‘the concept has been abolished in name, German law still recognises’8 the concept of natural obligations. Section 762 of the German Civil Code – the Bürgerliches Gesetzbuch (‘BGB’) – for example, deals with the issue of wagers in terms of both positive and negative enforcement. No obligation is established by gaming and betting. What has been paid due to such gaming or betting may not be demanded back on the basis that no obligation existed.

The Roman legacy likewise explains why, within North America, natural obligations most often are discussed in Louisiana9 and Quebec.10 In Louisiana, Article 1761 of the Civil Code again addresses the twin issues of non-enforcement and non-recovery.11 A natural obligation is not enforceable by judicial action. Nevertheless, whatever has been freely performed in compliance with a natural obligation may not be reclaimed.

In Quebec, the relevant provision is Article 1554 of the Civil Code.12 Every payment presupposes an obligation; what has been paid where there is no obligation may be recovered. Recovery is not admitted, however, in the case of natural obligations that have been voluntarily paid. 8

9

10

11

12

T Krebs, Restitution at the Crossroads: A Comparative Study (Hart Publishing, Oxford 2001) 267. F Martin, ‘Natural Obligations’ (1941) 15 Tulane L Rev 497; D Snyder, ‘The Case of Natural Obligations’ (1995) 56 La L Rev 423; Bozeman v Louisiana, 879 So 2d 692 (La, 2004). JL Baudouin and PG Jobin, Les obligations (6th edn Éditions Yvon Blais, Cowansville, 2005) 555; Adams v Amex Bank of Canada [2009] QJ No 5769 (Que SC). Acts 1984, No 331, § 1. The surrounding Articles explain that ‘[a] natural obligation arises from circumstances in which the law implies a particular moral duty to render a performance’, and illustrate the concept by reference to: (1) obligations ‘extinguished by prescription or discharged in bankruptcy’; (2) obligations ‘incurred by a person who, although endowed with discernment, lacks legal capacity’; and (3) obligations ‘to execute the donations and other dispositions made by a deceased person that are null for want of form’. RSQ, c C-1991.

Natural obligations and unjust enrichment

2.

179

Traditional common law

More surprisingly, the ancient Roman conception of natural obligations also has informed the common law principle of unjust enrichment. As so often is true, the primary gateway was provided by Lord Mansfield, who, in addition to being a master of the common law, had been trained in civil law.13 Moses v Macferlan14 amply illustrates that proposition. In explaining the nature of restitution, Lord Mansfield drew upon Roman law not only to analogize between the action for money had and received and the ancient category of quasi ex contractu, but also to delineate the scope of recovery. Before discussing the circumstances that support liability, he identified situations that do not. And with respect to the latter, he invoked the concept (though not the name) of natural obligations in explaining that restitution is available ‘only for money which, ex æquo et bono, the defendant ought to refund’. [I]t does not lie for money paid by the plaintiff, which is claimed of him as payable in point of honor and honesty, although it could not have been recovered from him by any course of law; as in payment of a debt barred by the Statute of Limitations, or contracted during his infancy, or to the extent of principal and legal interest upon an usurious contract, or, for money fairly lost at play: because in all these cases, the defendant may retain it with a safe conscience, though by positive law he was barred from recovering.

That doctrine was applied not infrequently in the years that followed.15 In Bize v Dickason,16 Lord Mansfield himself said that ‘if a man has actually paid what the law would not have compelled him to pay, but what in equity and conscience he ought, he cannot recover it back again’. In Farmer v Arundel,17 a pauper resided in the plaintiff ’s parish but nevertheless received care from the defendant parish. The plaintiff complied with the defendant’s demand for reimbursement, but later sought restitution on the ground that the defendant had not satisfied the formalities that would have subjected the plaintiff to an enforceable 13 14

15

16 17

CHS Fifoot, Lord Mansfield (Clarendon Press, Oxford 1936) 26−30. (1760) 2 Burr 1005, 1012–13, 97 ER 676 (KB) 680−1 (‘Moses v Macferlan’). See also P Birks, ‘English and Roman Learning in Moses v Macferlan’ (1984) 37 CLP 1, 16−17. Sir William Evans, ‘An Essay on the Action for Money Had and Received’ (1802) reprinted in [1998] RLR 1, 5, 8−9. (1786) 1 TR 285, 286–7, 99 ER 1097, 1098. (1772) 2 Bl W 824, 825–6, 96 ER 485, 486.

180

McInnes

debt. De Grey CJ rejected the claim by explaining that ‘[m]oney due in point of honour or conscience, though a man is not compellable to pay it … shall not be recovered back’. The same principle appears to underlie Munt v Stokes.18 A man borrowed money from the defendants. The plaintiffs, as the man’s executors, subsequently repaid the sum, but then sought restitution on the basis that statute rendered the loan void. Anticipating an objection from the bench, plaintiff s’ counsel argued that, as a result of the legislation, the loan had not been repayable as a matter of either law or conscience. Lord Kenyon CJ found for the defendants. Although the original agreement was void by statute, he believed that the claimants ‘were bound in both honour and conscience to refund the money which the defendants had advanced’. In reaching that conclusion, he observed that the loan agreement ‘was not malum in se, but malum prohibitum’ – not evil in itself, but merely wrong because it was prohibited. Notwithstanding the development initiated by such cases, the concept of natural obligations effectively disappeared from the common law at the beginning of the nineteenth century. The most important explanation for that development was Bilbie v Lumley.19 The direct effect of Lord Ellenborough CJ’s decision was to create a rule that generally denied restitution for payments made by mistakes of law (as opposed to mistakes of fact). An indirect effect of Bilbie was the marginalization, if not abolition, of natural obligations. The concept of natural obligations almost invariably arises in conjunction with a mistake of law. Money might be paid, for instance, in the mistaken belief that a wagering debt is enforceable in law. Although an action in unjust enrichment to recover such a payment ultimately would have failed by reason of natural obligation, Bilbie saw it defeated, at an earlier stage of analysis, by the rule that prohibited a restitutionary claim being founded on a mistake of law. By the beginning of the twentieth century, judicial attitudes exacerbated the impact of the mistake of law doctrine. The concept of natural obligations was anathema to judges who regarded the principle of unjust enrichment, with its perceived reliance upon palm tree justice, as ‘well-meaning sloppiness of thought’.20 18 20

(1792) 4 TR 561, 100 ER 1176 (‘Munt ’). 19 (1802) 2 East 469, 102 ER 448 (‘Bilbie’). Holt v Markham [1905] 1 KB 505 (CA) 513. See also Baylis v Bishop of London [1913] 1 Ch 127 (CA) 140.

Natural obligations and unjust enrichment

3.

181

Natural obligations today

After lying dormant for nearly two centuries, natural obligations once again have become relevant within the common law world. That is true for two reasons.

(a) Unjust factors The rule in Bilbie has been abolished. Courts no longer draw a distinction between mistakes of fact and mistakes of law. Although the precise rules remain somewhat under-developed, restitution generally is available anytime that a transfer of wealth occurs by reason of the claimant’s error.21 The full effect of that change has not yet permeated into practice. The courts have yet to be presented with claims that previously would have been barred by the mistake of law doctrine, but now ought to be defeated, as in Lord Mansfield’s day, on the basis of natural obligations. As Peter Birks anticipated, however, the fall of Bilbie entails the need to ‘differentiate between civil [ie positively enforceable] and natural obligations’.22 The time accordingly will come when the courts must ‘cope with the question whether, if you honour a moral obligation because you believe that you are legally obliged to do so, and you are mistaken in that belief, you can recover’.23 A person who has paid on a wager, for instance, may frame a restitutionary action in terms of a simple causative mistake. And yet, despite proof of an enrichment, a corresponding expense, and an unjust factor, the court must, unless precedent and principle are to be overhauled, deny relief. That conclusion may be framed in various ways. A judge may say that there can be no ‘restitution of an enrichment which is not unjust’,24 or that liability would ‘stultify’25 the policies that rendered the wager unenforceable in a positive sense. At 21

22 23 25

Nepean (Township) Hydro Electric Commission v Ontario Hydro (1982) 132 DLR (3d) 193 (SCC) (‘Nepean (Township) Hydro Electric Commission’); Air Canada v British Columbia (1989) 59 DLR (4th) 161 (SCC); Canadian Pacific Airlines Ltd v British Columbia (1989) 59 DLR (4th) 218 (SCC); Kleinwort Benson Ltd v Lincoln City Council [1999] 2 AC 349 (HL); David Securities Pty Ltd v Commonwealth Bank of Australia (1992) 175 CLR 353 (HCA); Judicature Act 1908 (NZ) s 94A(1). P Birks, ‘Mistakes of Law’ [2000] CLP 205, 215. Ibid. 24 Birks (n 3) 258. P Birks and C Mitchell, ‘Unjust Enrichment’ in P Birks (ed), English Private Law (Oxford University Press, Oxford 2000) 626−30.

182

McInnes

root, however, the explanation for the denial of relief must be the same one that Lord Mansfield provided: the claimant acted in satisfaction of a natural obligation.

(b) Juristic reasons Elsewhere in the Commonwealth, natural obligations have been re-introduced into the law of unjust enrichment through the abolition of the mistake of law doctrine. Within Canadian law, in contrast, natural obligations once again have become relevant as a result of the Supreme Court of Canada’s decision, in Garland v Consumers’ Gas Co (No 2), 26 to re-orient restitutionary liability from unjust factors to juristic reasons. From that essentially civilian perspective, relief is available with respect to any transfer that occurs without legal basis. To that end, Iacobucci J identified four ‘established categories’ of juristic reason: contract, donative intent, disposition of law, and ‘other valid common law, equitable or statutory obligation’.27 Significantly, however, none of those categories easily covers a payment made in satisfaction of a natural obligation, as in the case of a wager. • Contract: while payment is made pursuant to an agreement, gambling contracts are void and a void contract cannot constitute a juristic reason. • Donative intent: although satisfaction of a wager sometimes is said to constitute a ‘voluntary payment’ (ie a gift), 28 that is an artificial statement of law that typically runs contrary to the underlying facts. Granted, there may be situations in which sophisticated gamblers honour their wagers despite knowing that payment cannot be legally compelled. Such transfers may properly be characterized as voluntary and hence irreversible as a matter of donative intent. The relevant case, however, is one in which a gambler honours a wager in the mistaken belief that the debt is positively enforceable. Assuming that a ‘voluntary payment’ is defined as one that occurs gratuitously and not in satisfaction of an obligation, the label is inapt. But for the erroneously perceived obligation, the defendant would not have been enriched. Moreover, it is 26

27

(2004) 237 DLR (4th) 385 (SCC) (‘Garland ’). See also M McInnes, ‘Making Sense of Juristic Reasons: Unjust Enrichment After Garland v Consumers’ Gas Co’ (2004) 42 Alberta L Rev 399; M McInnes, ‘Juristic Reasons and Unjust Factors in the Supreme Court of Canada’ (2004) 120 LQR 554. Garland (n 26) 403 28 Morgan v Ashcroft [1938] 1 KB 49 (CA).

Natural obligations and unjust enrichment

183

well-established that an apparent gift may be recovered on the basis of a causative mistake.29 • Disposition of law: although the scope of this category of juristic reason has yet to be defined, it most likely is confined to transfers occurring in satisfaction of official demands (eg court judgments and government taxes)30 and therefore can not accommodate the concept of natural obligations. • Other valid common law, equitable or statutory obligation: Iacobucci J’s fi nal category might have been conceived, more broadly, as a general miscellany of juristic reasons sufficient to defeat liability. If so, it clearly would encompass natural obligations. As actually drafted, however, Garland ’s fourth head of juristic reason cannot accommodate that concept. Unless the phrase is to be distorted, to speak of a ‘valid common law obligation’ is to speak of a positively enforceable duty. It would be confusing at best to use such language in reference to a situation in which the transferee enjoys rights only if and when payment occurs. Payment of a wager accordingly triggers a prima facie right to restitution on the current Canadian understanding of unjust enrichment. The Garland analysis, however, contains a second stage in which the defendant is entitled to resist liability by demonstrating some residual form of juristic reason. That exercise is guided by a consideration of the circumstances as a whole, but with special reference to public policy and the parties’ reasonable expectations. It is at that stage that Canadian courts must re-develop the concept of natural obligations. There is no need to re-invent the wheel, of course. The fundamental decisions already have been made and Garland merely requires that they be expressed appropriately. As the traditional precedents reveal, for instance, public policy dictates that while a wagering debt is not positively enforceable, it does sufficiently explain a transfer that occurs between gamblers. Although the proposition obviously is circular, it also can be said that negative enforcement accords with reasonable expectations. It need merely be added that, in the interests of clarity and cohesion, the courts should explicitly re-introduce the language 29

30

Lady Hood of Avalon v Mackinnon [1909] 1 Ch 476; University of Canterbury v AttorneyGeneral [1995] 1 NZLR 78 (CA). Reference re: Goods and Services Tax (Alta) (1992) 94 DLR (4th) 51 (SCC) 71; Garland v Consumers’ Gas Co (2001) 208 DLR (4th) 494 (Ont CA) 538 (‘Garland v Consumers’ Gas Co’).

184

McInnes

of ‘natural obligations’ as shorthand for the factors underlying such decisions.

B.

The test for natural obligations

Natural obligations sometimes may be identified simply on the basis of precedent. The common law has long accepted, for instance, that wagers, though not positively enforceable, generally can be retained once received. In other situations, however, courts will be required to reassess existing authorities or perhaps start from scratch. The parties may dispute the scope of a particular rule or, because the categories are never closed, a claimant may propose formulation of a new species of natural obligation. In either event, clear criteria will be needed. To this point, natural obligations have been described as a sort of hybrid. For reasons that are specific to each category, the legal system is unwilling to accord the parties’ juridical relationship full recognition. Although the operative policies preclude positive enforcement, they are not offended by performance itself. Transfers accordingly are irreversible to the extent that they actually occur. But when will that be true? As Birks noted, ‘a moment’s reflection will reveal that it is intensely difficult to say in which cases a moral obligation remains untouched despite not being legally enforceable’.31 Several tests for identifying such cases have been proposed, some of which arguably obscure more than they clarify.32 Duncan Sheehan, however, has helpfully suggested that a natural obligation may exist when the reason for refusing positive enforcement neither: (1) impugns the transfer itself; nor (2) exists to protect a party that has performed.33 Sheehan’s fi rst criterion recalls Lord Kenyon’s focus on transactions that are ‘not malum in se, but malum prohibitum’. 34 Some transactions are so fundamentally flawed, so ‘evil in themselves’, as to require complete repudiation. In such circumstances, the courts are willing neither to enforce outstanding obligations, nor to countenance completed transfers. Restitution consequently may be available with respect 31 32

33

Birks (n 22) 215. Louisiana courts recently have employed a five-part test that requires proof that the transferor: (1) owed a moral duty to a particular person; (2) felt so strongly about the moral duty as to feel obliged to act; (3) recognized the duty by performing it; (4) fulfilled the duty by rendering performance of a pecuniary nature; and (5) fulfi lled the duty in a way that did not impair the public order : Thomas v Bryant, 639 So 2d 378 (La Ct App 2d Cir, 1994). Sheehan (n 4) 185. 34 Munt (n 18).

Natural obligations and unjust enrichment

185

to benefits conferred. 35 Other transactions, however, are prohibited not because they are inherently flawed, but rather because, for some extraneous reason, the legal system refuses to lend assistance. Those transactions may entail natural obligations. While the parties’ relationship does not warrant judicial intervention, it does provide a legitimate basis for acts that do occur. Executed transfers consequently are irreversible. Sheehan’s second criterion focuses on the precise nature of the reason as to why a transaction enjoys less than full effect. That reason occasionally is one sided. The legal system may be prepared to strike down a transaction in order to protect one of the parties. And, of course, such protection will be largely illusory unless the vulnerable party is entitled to both resist positive enforcement and resile from tainted transactions. Sometimes, however, the vulnerable party may not require full protection. The operative mischief may lie not in performance per se, but rather in its compulsion. If so, then it is enough for the courts to refuse positive enforcement. To the extent that the parties perform of their own accord, their actions are a legitimate function of the underlying relationship. Restitution is unavailable with respect to benefits received in satisfaction of an obligation that, but for the overriding mischief, would have been enforced in law. Before considering categories of natural obligation, which is the purpose of the next section of the essay, something must be said about the relationship between natural obligations and bars to recovery. Liability in unjust enrichment sometimes is denied, notwithstanding proof of a prima facie claim, because some overriding policy militates against relief. That arguably may be true, for instance, in the event of illegality or officiousness. At least at first glance, the concept of natural obligations may appear to operate in a similar manner. There nevertheless is a crucial difference. A natural obligation positively justifies a transfer. It demonstrates that an enrichment was conferred pursuant to a purpose that the legal system regards as legitimate (albeit only upon execution). A bar, in contrast, operates negatively. Restitution is denied because the legal system is offended by something in the nature of the transaction or the claimant’s behaviour. 35

A prominent example is provided by the swaps saga. The agreements were rendered void by the local councils’ lack of capacity: Westdeutsche Landesbank Girozentrale v Islington London Borough Council [1996] UKHL 12, [1996] AC 669 (HL). The evil in question, however, may itself constitute a bar to recovery.

186

McInnes

C.

Categories of natural obligation

Th is section focuses on the most important heads of natural obligation, as identified by Lord Mansfield in Moses v Macferlan. 36 (Page restrictions require that the discussion focus on one jurisdiction – Canada – but the governing rules are much the same throughout the Commonwealth.) These heads, or categories, of natural obligation are: obligations arising from gambling ; obligations arising under usurious loans; obligations extinguished by passage of time; and obligations arising under contracts created during infancy. The categories of natural obligations are never closed, however, and the doctrine should apply any time that the criteria are met. Th is section accordingly concludes by identifying other instances in which natural obligations have been, or might be, recognized.

1.

Obligations arising from gambling

The law of wagering is complex and most of the details lie beyond the scope of this discussion. For present purposes, it is sufficient to sketch the history in outline.37 While wagers previously were valid and enforceable at common law,38 the situation had changed by the eighteenth century. Some judges undoubtedly were influenced by moral considerations, but the shift primarily was due to more mundane matters. Gambling disputes were very common and it was thought that scarce judicial resources should not be wasted on trifling matters:39 ‘However laudable the sport may be’, judges 36 37

38

39

Moses v Macferlan (n 14) 1012–13; 680−1. For a discussion of the historical and legal aspects of gambling, see SP Monkcom and others (eds), Smith & Monkcom: The Law of Betting, Gaming and Lotteries (2nd edn Butterworths, London 2001); D Miers, Regulating Commercial Gambling (Oxford University Press, Oxford 2004). For a discussion of the contractual aspects of gambling, see GHL Fridman, The Law of Contract (4th edn Carswell, Toronto 1999) 377−8; GH Treitel, The Law of Contract (11th edn Sweet & Maxwell, London 2003) ch 12. As a matter of law, the concept of ‘gaming’ or ‘wagering’ applies only if each party stands to win or lose: Tote Investors Ltd v Smoker [1965] 1 QB 509 (CA). Moreover, even if each party stands to win or lose, a transaction will not fall within the definition of gaming or wagering if the parties’ main purpose lies elsewhere: Morgan Grenfell & Co Ltd v Welwyn Hatfield District Council [1995] 1 All ER 1 (QB) (swaps agreement). S Smith, Atiyah’s Introduction to the Law of Contract (6th edn Clarendon Press, Oxford 2005) 213−14.

Natural obligations and unjust enrichment

187

had ‘far more serious matters to attend to’40 and courts did ‘not exist for settling disputes as to who drew the winning number in the lottery’.41 The objections, in other words, pertained to executory, rather than executed, contracts. And since wagering was not malum in se,42 and since there was no concern to protect a class of vulnerable parties,43 the legal system, though unwilling to provide an enforcement mechanism, had no objection to completed transactions. Against that backdrop, the courts developed several informal tactics for reducing the incidence of litigation. They might, for instance, hear claims arising from wagering agreements only if and when all other categories of claim had been concluded. A more effective strategy, however, required legislative intervention. Parliament previously had intervened on several occasions, but its most important response came in 1845. Section 18 of the Gaming Act 1845 (UK) declared wagering or gaming contracts to be ‘null and void’, and said that no action could lie for anything won on a wager.44 Gambling is now heavily regulated within Canada, as elsewhere. The Criminal Code prohibits various gambling-related activities (while creating an exception for betting between private individuals)45 and every province and territory has legislation to regulate various forms of gambling (eg lotteries, video lottery terminals). For private law purposes, however, the Gaming Act 1845 remains most significant. It is directly applicable in the four western provinces46 and its essential provisions are legislatively reproduced in others.47 40 42

43

44

45 46

47

Graham v Pollock (1848) 10 D 646, 648. 41 Christinson v McBride (1881) 9 R 34. The fact that modern Canadian courts do not regard gambling contracts as inherently immoral is evidenced by their enforcement of gambling debts incurred in jurisdictions that enforce wagering contracts: Boardwalk Regency Corp v Maalouf (1992) 88 DLR (4th) 612 (Ont CA); Horseshoe Club Operating Co (cob The Horseshoe Club) v Bath [1998] 3 WWR 128 (BCSC); cf Saxby v Fulton [1909] 2 KB 208 (CA). Times and attitudes have changed. In England, for instance, the Gambling Act 2005 (UK) now contains provisions aimed at protecting children and vulnerable adults. Section 334 of the Gambling Act 2005 (UK) repealed the Gaming Act 1845 (UK), along with a number of related statutes. Section 335 of the new Act further states that ‘[t]he fact that a contract relates to gambling shall not prevent its enforcement’. Criminal Code, RSC 1985, c C-46, s 204(b). DeJardin v Roy (1910) 12 WLR 704 (Sask DC); Lyman v Kuzik (1965) 57 WWR 110 (Alta SC AD); Osorio v Cardona (1984) 15 DLR (4th) 619 (BCSC); Red River Forest Products Inc v Ferguson [1991] 1 WWR 749 (Man QB), aff ’d [1993] 2 WWR 1 (Man CA). Gaming Control Act, SO 1992, c 24, s 47.1. Cf Young v Blaikie (1822) 1 Nfld LR 277 (Nfld SC); Velensky v Hache (1981) 121 DLR (3d) 747 (NBQB) (relevant English statutes not received law in New Brunswick).

188

McInnes

The governing rules follow the scheme suggested earlier in this chapter. The winning party has no legal right to enforce the satisfaction of a debt,48 but if payment does occur, then it generally is irrecoverable.49 Although the gaming contract itself is invalid, the parties’ relationship creates a moral obligation that constitutes a legal basis for the transfer and thereby bars restitution.50 The essence of that analysis sometimes is obscured. In Lipkin Gorman (a firm) v Karpnale Ltd,51 for instance, Lord Templeman explained that ‘a gaming loss, whenever paid, is a completed voluntary gift from the loser to the winner’.52 The payment is ‘voluntary’, however, not in the sense that it is entirely gratuitous, but rather only in the sense that it was not compellable in law. Semantics aside, the crucial point is that since the losing party, in honouring a wager, makes payment in order to fulfi ll a purpose, the winner’s enrichment is not without basis. The same regime extends to a stakeholder (ie a trusted third party who holds the prize pending the outcome of the bet). The stakes are irrecoverable from either the winning party or the stakeholder as long as they are paid over before the losing party objects.53 In contrast, if either party demands restitution from the stakeholder before the winnings are paid out, the third party is liable for reimbursement.54

2. Obligations arising under usurious contracts Usury is an ideal candidate for the recognition of a natural obligation. Whereas early courts regarded interest upon money as sinful, ‘medieval conceptions began gradually to give way before the impulse of commercial and industrial activity [and] the sin of avarice turned into the offence 48

49

50 51 52

53

54

Breitmeir v Batke (1966) 56 WWR 678 (Alta Dist Ct). Nor, perhaps, is the winning party entitled to enforce a new contract, supported by fresh consideration, in which the losing party reiterates the promise to pay the gambling debt: Hill v William Hill (Park Lane) Ltd [1949] AC 530 (HL). Restitution may be available, however, if the winning party cheated: Dufour v Ackland (1830) 9 LJ 3; Berman v Riverside Casino Corp, 323 F 2d 977 (9th Cir, 1963). Bridger v Savage (1884) 15 QBD 363 (CA) 367. [1991] 2 AC 548 (HL) (‘Lipkin Gorman’). Ibid 562. Restitution was available in Lipkin Gorman not because money was paid pursuant to a gambling debt, but rather because a gambling debt was paid with money stolen from the claimant. See also Clarke v Shee & Johnson (1774) 1 Cowp 197, 98 ER 1041 (KB). Diggle v Higgs (1877) 2 Ex D 422 (CA); Davis v Hewitt (1885) 9 OR 435 (Ont HC); Walsh v Trebilcock (1894) 23 SCR 695 (SCC). Anderson v Galbraith (1858) 15 UCQB 57 (CA).

Natural obligations and unjust enrichment

189

of usury’.55 The offence in question came to consist not in ‘the lending of money at profit but the lending of money at a rate of profit greater than that permitted by the statute’.56 The underlying policy of preventing the exploitation of vulnerable borrowers obviously precludes positive enforcement of a usurious agreement. As always in the current context, however, the more interesting question arises if a borrower does repay the loan according to its terms. There is much to be said in favour of relief. While the contract is void, the parties are not in pari delicto and the claim is brought by a member of the protected class. But how much is available for recovery: the entire payment or something less?

(a) The historical position In Moses v Macferlan, Lord Mansfield said that restitution ‘does not lie for money paid by the plaintiff … to the extent of principal and legal interest upon an usurious contract’.57 Such a payment, he explained, ‘is claimed of him as payable in point of honor and honesty, although it could not have been recovered from him by any course of law’.58 Lord Mansfield’s recognition of a natural obligation in such circumstances is not surprising.59 Though reluctantly respectful of usury statutes,60 he favoured free trade and was eager to salvage as much of the invalidated transactions as possible. The clearest statement of Lord Mansfield’s position appears in Browning v Morris.61 After explaining that the action for money had and received was unavailable if an illegal contract was performed by parties in pari delicto, he cited the Usury Act 1660 (UK)62 in reference to a different category of case in which ‘transactions are prohibited by positive statutes, for the sake of protecting one set of men from another set of men’. The operative policies in that category, he explained, dictate that while ‘the party injured 55 57 59

60

61

62

56 Kasumu v Baba-Egbe [1956] 1 AC 539 (PC West Africa CA) 551. Ibid. Moses v Macferlan (n 14) 1012–13; 680−1 (emphasis added). 58 Ibid. Lord Mansfield, appearing prior to his elevation to the bench as William Murray, Solicitor-General, forcefully argued the position in Chesterfield v Janssen (1750) 1 Atk 301, 26 ER 191. See also J Oldham, The Mansfield Manuscripts (Vol 1) (University of North Carolina Press, Chapel Hill 1992) ch 9. Lowe v Waller (1781) 2 Doug 736, 99 ER 470 (in holding that a bill of exchange given upon a usurious security was void, Lord Mansfield said, ‘I own, with a great leaning and wish on my part, that the law should turn out to be [otherwise]. But the words of the Act are too strong’). (1778) 2 Cowp 790, 98 ER 1364 (‘Browning v Morris’). Lord Mansfield’s discussion was cited with approval in Nepean (Township) Hydro Electric Commission (n 21). 12 Car 2, c 13.

190

McInnes

may bring an action for the excess of interest … there is no penalty upon the party’ responsible for the usury.63 The contract is statutorily void, but the execution of the invalid loan (ie the credit extended by the defendant to the claimant) gives rise to a natural obligation that governs the parties’ relationship. The policy of protection entitles the borrower to restitution of the usurious component of interest, but by the same token, receipt of the initial benefit obligates the borrower, as a matter of conscience, to repay the loan.64

(b) Garland revisited Though not previously recognized, either judicially or academically, it appears that essentially the same analysis may explain the result in Garland.65 The defendant sold natural gas under terms that were approved by a regulatory board. The resulting contract imposed a ‘late payment penalty’ (‘LPP’), calculated as 5 per cent of an outstanding bill, upon a tardy customer. Over the course of 20 years, that provision generated something in the vicinity of CA$150,000,000. Halfway through that period, the claimant began class action proceedings based on an allegation that the LPP violated section 347 of the Criminal Code, which prohibited interest in excess of 60 per cent per annum. The Supreme Court of Canada accepted that argument66 and sent the case back to trial for a determination of the defendant’s restitutionary liability. When the case returned to the court, Iacobucci J held that since the regulatory board’s order was inconsistent with the Criminal Code provision, there was no juristic reason for the defendant’s enrichment. He nevertheless restricted recovery to: (1) payments received after the plaintiff first raised the allegation of illegality; and (2) the value received in excess of the permissible rate of interest. Iacobucci J’s first restriction is difficult to justify. As he himself had insisted a few years earlier,67 liability for unjust enrichment generally is strict. And since the defendant’s fault or knowledge ought to be irrelevant, there is no principled basis for saying that, despite criminally extracting 63 64

65 67

Browning v Morris (n 61) 792–3; 1365 (emphasis added). Again, in Smith v Bromley (1760) 2 Doug 696, 697; 99 ER 441, 443, Lord Mansfield said that while restitution ‘would not lie, for so far as principal and legal interest went, the debtor was obliged, in natural justice, to pay, therefore he could not recover it back. But for all above legal interest equity will assist the debtor … to recover back the surplus’. See also Lowry v Bourdieu (1780) 2 Doug 468, 99 ER 299; Bosanquett v Dashwood (1734) Cas T Talbot 38, 40; 25 ER 648, 649. Garland (n 26). 66 Garland v Consumers’ Gas Co (n 30). Air Canada v Ontario (Liquor Control Board ) (1997) 148 DLR (4th) 193 (SCC).

Natural obligations and unjust enrichment

191

its enrichment, the defendant should be entitled to retain benefits that it reasonably expected to keep. Iacobucci J’s second restriction, in contrast, arguably is consistent with the concept of natural obligations. Following Lord Mansfield, it might be said that while the claimants, as the objects of the Criminal Code’s protective provisions regarding usury, were entitled to restitution of the illegal component of the LPP, they had no claim insofar as their payments represented a legal rate of interest. The restitutionary goal is not to punish the defendant, but rather to reverse a transaction insofar as it ought not to have occurred.68 Having enjoyed an extended credit period, the claimants were conscience-bound to pay for that benefit.69

3.

Obligations extinguished by passage of time

A third category of natural obligation arises when a debt becomes unenforceable through the passage of time. As Lord Mansfield explained in Moses v Macferlan,70 the creditor is entitled, in good conscience, to retain money received after that time, even though payment could not have been extracted through legal action. The policy concerns associated with the passage of time (ie the unfairness of indefinitely subjecting a debtor to the threat of litigation, the risks inherent in old evidence, the desire to encourage prompt action71) pertain not to the validity of the debt, but rather to its enforcement. Consequently, since late payment continues to fulfill the legitimate purpose of discharging a debt, a creditor’s enrichment is not 68

69

70 71

See also Kilroy v A OK Payday Loans Inc (2007) 278 DLR (4th) 193 (BCCA); Tracy (representative ad litem of) v Instaloans Financial Solution Centres (BC) Ltd (2008) 293 DLR (4th) 60 (BCSC), aff ’d [2009] BCCA 110. Although Garland generally fits within the concept of natural obligations, it does encounter one obstacle. A natural obligation justifies a transfer, but is not otherwise enforceable. In the context of usurious agreements, however, the Supreme Court of Canada has held that positive enforcement of a legal rate of interest sometimes is available: New Solutions Financial Corp v Transport North American Express Inc (2004) 235 DLR (4th) 385 (SCC). The court was split on the appropriate response to an unexecuted contractual provision requiring an illegal rate of interest. The dissenting judges favoured the ‘blue-pencil’ doctrine that entirely excises an offending provision. Combined with Garland, that approach would fully respect the concept of natural obligations. Although there would be no question of enforcing the interest provision, the creditor would be entitled to retain a legal rate of interest if payment did occur. The majority of the court, however, devised a fourpart test for applying the doctrine of ‘notional severance’, which allows a criminal rate of interest to be re-written, reduced to the permitted maximum, and enforced. Moses v Macferlan (n 14) 1012–13; 680−1. M(K) v M(H) (1993) 96 DLR (4th) 289 (SCC).

192

McInnes

without juristic reason and restitution is not warranted. Indeed, the same policy considerations that preclude enforcement of a debt similarly militate (albeit to a lesser extent) against restitution. An action to reclaim a late payment would require the court to rely upon dated evidence and long memories in order to investigate the account between the parties. The current category of natural obligation, however, is anomalous in one potentially significant respect. Debts arising from a wagering contract or a usurious agreement are void from the outset. The transferor is never bound to a payment unless and until it actually occurs. And since there is no legally recognized debt to explain a transfer, restitution must be denied on the basis of a natural obligation. The expiration of a limitation period, in contrast, bars recovery on a debt that previously was positively enforceable. Moreover, according to the traditional common law approach, the effect of a lapsed limitation period is procedural.72 Though no longer open to action, the underlying debt continues to exist. As a result, if late payment does occur, a debate arises regarding the basis upon which restitution is denied. While the concept of natural obligations may be invoked, it is simpler to say that payment is received in discharge of the original debt. That analysis generally appears to hold true in England, for instance, where the Limitation Act 1980 (UK), with certain exceptions,73 merely bars action on a subsisting debt. That explanation cannot be maintained, however, if the passage of time extinguishes the underlying obligation, instead of merely barring action. That approach historically was employed in civil law,74 and it has been adopted by legislation in several Canadian provinces, including British Columbia75 and Newfoundland.76 In those jurisdictions, a late payment is irrecoverable not because it discharges an existing legal debt, but rather because it satisfies a natural obligation. 72

73

74

75

76

Huber v Steiner (1835) 2 Bing NC 202, 132 ER 80; Leroux v Brown (1852) 12 CB 801, 138 ER 1119; Phillips v Eyre (1870) LR 6 QB 1 (Exch) 29; Black Clawson v Papierwerke [1975] AC 591 (HL) 630; Tolofson v Jensen (1994) 120 DLR (4th) 289 (SCC) (‘Tolofson v Jensen’) 317−22. Limitation Act 1980 (UK) ss 3(2), 17, and 25(3), which respectively deal with actions regarding converted chattels, title to land and the enforcement of advowsons, state that the underlying rights are extinguished upon the expiration of time. JL Beaudoin and P Deslauriers, La Responsabilité Civile (6th edn Éditions Yves Blais, Cowansville 2003) 1330. Limitation Act, RSBC 1996, c 266, s 9 (‘the right and title of the person formerly having the cause of action … is … extinguished’). Limitation Act, SNL 1995, c L-16.1, s 17(1) (‘A cause of action and the right or title on which it is based are extinguished upon the expiration of the limitation period for that cause of action’).

Natural obligations and unjust enrichment

193

The situation elsewhere in Canada is more complicated. Until recently, limitation statutes generally followed the traditional common law approach. The passage of time left the underlying debt intact, but prevented the creditor from taking action upon it. In 1994, however, the Supreme Court of Canada revisited the interpretation of such provisions in Tolofson v Jensen.77 La Forest J questioned the feasibility of distinguishing between ‘substance’ and ‘procedure’, and denigrated the ‘rather mystical view that a common law cause of action [gives] the plaintiff a right that endure[s] forever’.78 He much preferred a rule that, upon the passage of time, provided the debtor with an indefeasible right to be free of liability.79 He accordingly held that, even though the provision before him was phrased in terms of non-actionability,80 the debt was extinguished once the period lapsed.81 The preceding discussion is largely theoretical. Following Lord Mansfield’s statement of the proposition in Moses v Macferlan, few cases have explored the recipient’s right to retain payment received after the expiration of a limitation period. That lack of precedent is not surprising. A person who fails to pay within a prescribed period is even less likely to do so afterwards. If late payment does occur, it is apt to be the result of an erroneous belief that payment must be made, but since that mistake is one of law, restitution traditionally was denied on the basis of Bilbie.82 Alternatively, late payment may be made, as an informed choice, for the purpose of settling a dispute. If so, the payment will fulfill its purpose and restitution again will be denied. Leaving those possibilities aside, the authorities do indicate that restitution is unavailable with respect to payments made after the lapse of time. That certainly was true under the traditional civilian model that now informs Garland,83 and it generally remains true in modern civilian jurisdictions as well.84 Although it operates on the basis of unjust factors, rather than juristic reasons, American law similarly denies recovery of

77 79

80 81 82 83

84

Tolofson v Jensen (n 72). 78 Ibid 319. Cf Yew Bon Tew v Kenderaan Bas Mara [1983] 1 AC 553 (PC Malay); Martin v Perrie (1986) 24 DLR (4th) 1 (SCC). Vehicles Act, RSS 1978, c V-3, s 180(1) (‘no action shall be brought’). See also Castillo v Castillo (2005) 260 DLR (4th) 439 (SCC). Discussed above at n 19. WW Buckland and P Stein, A Textbook of Roman Law (Cambridge University Press, Cambridge 1963) 554. The German Civil Code is explicit on that point: BGB § 222. See also Civil Code, RSQ, c C-1991, art 1554; La Civil Code art 1760; Zimmermann (n 7) 8.

194

McInnes

money mistakenly paid following the expiration of time. Section 61 of the Restatement of the Law of Restitution attributes that outcome to the ‘Existence of a Moral Duty by Transferor’.85 A person who, in the mistaken belief that he is subject to a duty to another, has conferred a benefit upon such other intending to confer … the benefit as the performance of such duty, is not entitled to restitution … if the existence of an enforceable duty was prevented only by the Statute of Limitations.

George Palmer states the same view86 and on those few occasions when the issue has been litigated, American courts have denied relief. Clifton Manufacturing Co v United States87 is illustrative. Sharing the government’s belief that a levy remained enforceable, the taxpayer paid money in discharge of the tax. When it subsequently discovered that the claim previously had become time-barred, the taxpayer sought restitution. The court rejected the claim on the basis that the plaintiff ‘in truth was indebted to the United States’.88

4. Obligations arising under contracts created during infancy The law of infants’ contracts is notoriously complex, but for present purposes, broad strokes will suffice. To begin, the general topic can be sub-divided into three categories, depending upon the nature of the benefit for which the infant contracts.89 • Enforceable: a minor is capable of incurring immediate liability for the necessities of life, as well as beneficial employment and training contracts. 85

86 87

88 89

American Law Institute, Restatement of the Law of Restitution (American Law Institute Publishers, St Paul 1937) (‘Restatement ’) § 61. That section also precludes recovery of payments made in discharge of debts that are rendered unenforceable by the Statute of Frauds, a discharge from bankruptcy, infancy or coverture. Relief nevertheless is available if payment is induced by fraud, misrepresentation or duress. GE Palmer, The Law of Restitution (Little Brown & Co, Boston 1978) § 14.28. 76 F 2d 577 (4th Cir, 1935) (‘Clifton Manufacturing ’). See also Re South Shore Co-Op Association, 103 F 2d 336 (2d Cir, 1939); Hubbard v City of Hickman, 67 Ky 204 (1868); Kelly Asphalt Block Co v Brooklyn Alcatraz Asphalt Co, 133 NE 899 (1922). Clifton Manufacturing (n 87) 581. Fridman (n 37) 152−70; Treitel (n 37) 539−57. A fourth category, consisting of contracts that are invariably prejudicial and hence inescapably void, sometimes is identified. It is unclear, however, which (if any) contracts fall within that description.

Natural obligations and unjust enrichment

195

• Enforceable unless avoided: contracts concerning the acquisition of ‘permanent’ assets (eg land, shares in companies, partnerships and marriage settlements) generally are valid and enforceable unless the minor elects to avoid them during infancy or within a reasonable time of reaching the age of majority. • Unenforceable unless ratified: all remaining contracts presumptively bind the counterparty, but not the minor. The minor becomes bound only by ratifying the agreement upon reaching the age of majority. Although the details of that scheme are complicated, the underlying principles are clear enough. While encouraging people to provide the essentials of life to infants (first category), the law is prepared, in differing degrees depending upon the circumstances, to protect minors from the follies of youth (second and third categories). That protection, of course, must in principle entail not only immunity from enforcement, but also the recovery by infants of benefits conferred upon the counterparty. The first category presents no difficulty in the current context. Since a contract for the necessities of life is enforceable, there is no question of restitution on the grounds of infancy and, if need be, the counterparty’s right of retention can be justified by the agreement itself. The second category requires only slightly more work. If restitution is unavailable because the infant has failed to avoid the contract, then the contract once again explains the counterparty’s right of retention. There is no need to invoke the concept of natural obligations. The interesting cases arise within the third category. Although the minor immediately is entitled to enforcement,90 the counterparty enjoys a reciprocal right only if and when the infant ratifies the agreement upon becoming an adult. But what if a minor voluntarily performs in the interim? If the minor ultimately refuses to ratify, then recovery certainly is available, although there is some debate as to whether, in addition to infancy and non-ratification, a total failure of consideration must be shown.91 For present purposes, however, the relevant situation occurs if a minor voluntarily performs during infancy and then ratifies the agreement upon reaching the age of majority. Having chosen to 90

91

The doctrine of mutuality, however, bars specific enforcement. Since a minor is not subject to such relief, neither is he or she entitled to its benefits: Flight v Bolland (1828) 4 Russ 298, 38 ER 817 (Ch). Steinberg v Scala (Leeds) Ltd [1923] 2 Ch 452 (CA); Pearce v Brain [1929] 2 KB 310; Coull v Kolbuc (1968) 78 WWR 76 (Alta DC); Fannon v Dobranski (1970) 73 WWR 371 (Alta DC); cf Chaplin v Leslie Frewin (Publishers) Ltd [1966] Ch 71 (CA); Bo-Lassen v Josiassen [1973] 4 WWR 317 (Alta DC).

196

McInnes

stand by the agreement, the erstwhile infant obviously cannot recover benefits previously conferred. But what is the explanation for the fact that the counterparty enjoyed that benefit during the period of infancy? The answer appears to lie in the concept of natural obligations. Although the counterparty could not have enforced the contract during the operative time, the minor was bound in conscience to pay for the counter-benefits received.92

5.

Other obligations

The list of natural obligations remains open. The courts may recognize new situations in which some mischief pertains to enforcement rather than performance, and in which a transfer may be irreversible even though it could not have been compelled.

(a) A common law illustration Though not traditionally recognized as such, certain cases within the law of unjust enrichment may be explained in terms of natural obligations. That may be true of Larner v London County Council.93 When its employees went off to war, the defendant gratuitously promised to make up any difference between their civil pay and their military pay. The former employees were required to disclose any changes in military remuneration, but the claimant failed to do so and consequently was overpaid. When the claimant returned to his civil position, the defendant believed that it was entitled to reverse the overpayment by taking deductions from his weekly pay. A dispute then arose between the parties. Denning LJ sided with the defendant on the ground that the excess payment was caused by mistake. Significantly, however, it is clear that the defendant could not have recovered to the extent that it simply honoured its initial undertaking. The explanation did not lie in contract because, ‘as the men were legally bound to go to war, there was in strictness no consideration for the promise’.94 The explanation might involve donative intent since the defendant intended to give a gift of sorts. Interestingly, however, Denning LJ stressed that ‘there was no question here of enforcing the promise by action’95 and found that the defendant ‘made a promise to the men which they were bound in honour to fulfil’.96 92 95

Sheehan (n 4). Ibid. 96 Ibid.

93

[1949] 2 KB 683 (CA).

94

Ibid 688.

Natural obligations and unjust enrichment

197

(b) Civil law illustrations Additional guidance might be obtained from civilian jurisdictions that have considerable experience with natural obligations. Caution is required, however. Natural obligations occupy an anomalous position somewhere between law and morality, and as such, invariably mediate a compromise between competing values and interests. There is an obvious danger in blindly transplanting policy decisions from one jurisdiction to another. Having said that, it remains instructive to see how natural obligations have been employed in the civilian world. German law, for example, has recognized a natural obligation in connection with marriage-broker services.97 A marriage broker, though not entitled positively to enforce a demand for payment, is entitled to retain any payments that are received. Within the common law, such agreements initially were given full force, but eighteenth-century Chancellors adopted a dimmer view of the matter, and money paid to a marriage broker has been recoverable ever since.98 With the recent growth of ‘dating services’, however, it may be time to re-consider the issue. A natural obligation would constitute a compromise – condonation without assistance. While unable to compel payment, a marriage broker could retain any payments received. Louisiana constitutes an especially fertile source of suggestions. State courts have relied upon natural obligations in developing a wide-ranging, and sometimes quite surprising, body of law. That concept was invoked, for instance, against an employer who long paid his workers unusually low wages. When the employer overpaid one employee and sought restitution of the excess, the court denied liability on the ground that the payment was binding in conscience.99 Less controversially, a natural obligation arose in connection with the enjoyment of low rent and household services. Restitution consequently was denied with respect to a payment made by the recipient of those benefits.100 Gray v McCormick101 follows the same pattern. Until an inter-generational squabble resulted in eviction, a young couple resided in a house owned by the wife’s parents. The young couple then unsuccessfully sued in unjust enrichment with respect to mortgage payments they had made while in possession. Though they could not have been forced by law to make those payments, the claimants 97 99 100 101

Zimmermann (n 7) 8. 98 Hermann v Charlesworth [1905] 2 KB 123 (CA). Barthe v Succession of Lacroix, 29 La Ann 326 (1877). Succession of Jones, 505 So 2d 841 (La Ct App 2d Cir, 1987). 663 So 2d 480 (La Ct App 2d Cir, 1995).

198

McInnes

were morally indebted for the housing they enjoyed. Muse v St Paul Fire & Marine Insurance Co102 involved a slight variation on the same theme. A State-owned charity hospital provided care to a tort victim who was indigent and consequently not liable for his own medical bills. The man’s lawyer received a settlement from the tortfeasor and, in the mistaken belief that he was required by law to do so, paid an appropriate sum to the hospital. Once again, the circumstances triggered a right to retain in good conscience. In another important line of authority, Louisiana’s courts also have denied restitution of payments made in satisfaction of debts already discharged through bankruptcy.103 Interestingly, America’s common law jurisdictions have arrived at the same conclusion. The Restatement does not refer directly to natural obligations, but it does deny restitution of a benefit conferred pursuant to a ‘moral duty’.104 A debt discharged through bankruptcy is said to entail such a duty. Surprisingly, the same issue apparently has not been settled in Canada’s common law jurisdictions.105 It is clear that a post-discharge promise to pay an old debt is not positively enforceable unless it is supported by fresh consideration.106 It appears, however, that a bankrupt has not yet sought restitution of money (mistakenly) paid in discharge of an extinguished debt.107

D.

Conclusion

To say that Michael Bryan is a gentleman is, of course, to tell only part of the story. He also is, amongst many other things, a scholar. And just as his quiet dignity evokes values that sadly tend to be associated with earlier eras, so too his scholarship may be said to be ‘old-school’ or ‘traditional’ in the best possible sense. His style of analysis is fi rmly rooted in the classical model of the common law. His knowledge is encyclopedic, his research is exhaustive, his arguments are fi rmly rooted in precedent. That approach is too seldom emulated, but only because it is awfully hard to achieve. This paper is presented in honour of the man and his work. 102 103 105

106

107

328 So 2d 698 (La Ct App 1st Cir, 1976). Irwin v Hunnewell, 21 So 2d 485, 488 (La, 1945). 104 Restatement (n 85) § 61. LW Houlden, GB Morawetz and J Sarra, Bankruptcy and Insolvency Law of Canada (3rd edn Carswell, Toronto 2005) § 24(5). Jakeman v Cook (1878) 4 Ex D 26 (Div Ct); Halliday Estate v Kennedy (1997) 50 CBR (3d) 281 (Ont Div Ct); Engels v Merit Insurance Brokers Ltd (2000) 17 CBR (4th) 209 (Ont SCJ); cf Gagné v Duval (1946) 28 CBR 43 (Que SC) (promise to pay supported by ‘moral consideration’, and hence enforceable, under Quebec’s civil law). Cf Talbot v Moquin Ménard Giroux Du Temple Inc (1996) 41 CBR (3d) 160 (Que SC).

Natural obligations and unjust enrichment

199

Although the common law historically had little regard for natural obligations, recent developments within the action for unjust enrichment require a re-consideration of the concept. And the key to that exercise, it has been suggested, lies in a careful analysis of the various potential categories of natural obligation. Though not positively enforceable, a debt may constitute a juristic reason for a transfer, and thereby bar restitution, if the reason for refusing enforcement neither impugns the transfer itself, nor aims to protect the party that has performed. As Lord Mansfield indicated 250 years ago, those criteria may be met in the context of obligations arising from wagers, usurious loans and infants’ contracts, as well as obligations extinguished by the passage of time. Other categories, yet to be identified, await further development of the concept of natural obligations.

9 Causality and abstraction in the common law Birke Häcker *

A.

Introduction

A contribution on ‘causality and abstraction’, being concerned with the relationship between contract and conveyance, may at first sight seem misplaced in a book section headed ‘Unjust Enrichment’. What, after all, do the prerequisites of a valid conveyance have to do with restitutionary claims governing the reversal of unjust enrichments? ‘Property law’ would appear to be the appropriate header. Yet it would be wrong to assume that it is possible to confine the issue to that specific box. Michael Bryan, whose retirement this collection marks, has never been one for thinking of the law in terms of isolated ‘compartments’. As his list of publications impressively illustrates, his academic interest spans all core areas of private law and is particularly caught by the ‘intersection’ between different sets of rules. An especially fascinating interface, and one which has occupied Michael on many occasions, is that between contract, property and unjust enrichment. This chapter seeks to explore some of the pertinent questions from a distinctly Civilian perspective. It enquires into the extent to which the Common Law (in the wide sense of the word) makes the effectiveness of property transfers depend on the existence of a valid legal basis for the transfer. In doing so, it hopes to show that, whether a given Common Law system has to be classified as a ‘causal’ or an ‘abstract’ transfer system will be determined not so much – or at any rate not only – by its rules about the passing of property at common law (in the narrow sense), but also by equitable rules and principles and ultimately by its stance *

The Australian research for this chapter was done during my time as a visitor to the John Fleming Centre for Advancement of Legal Research at the Australian National University in Canberra (February/March 2009). I would like to thank the Director of the Centre, Peter Cane, as well as Jane Stapleton and the entire College of Law for the kind invitation and wonderful hospitality extended to me.

200

Causality and abstraction in the common law

201

towards so-called ‘proprietary restitution’. Although the relevance of the latter tends to be obscured by the conceptual discrepancies between the Civilian ‘absence of basis’ model of restitutionary liability and the traditional Common Law ‘unjust factor’ approach, proprietary restitution provides a crucial cornerstone for any comprehensive account of causality and abstraction in the Common Law.

B.

Causal and abstract transfer systems

In a causal transfer system, the validity of a (purported) conveyance is dependent on the existence and validity of an appropriate legal basis for the transfer. The legal basis provides the reason and justification for the transfer and is at the same time an indispensable constituent element. It typically consists of an obligation on the part of the transferor to effect the conveyance to the transferee, often a contractual obligation (eg under a contract of sale). If the legal basis is lacking from the outset, ownership cannot be transferred. If it is subsequently avoided ab initio by rescission, ownership automatically (and retroactively) revests in the transferor. A number of Civilian legal systems operate a causal transfer system. France, Austria and the Netherlands are among them. Under a causal transfer system, contract and conveyance can either be contained in a single legal transaction or they can be notionally distinct. In the former case, the conclusion of a valid obligatory contract is in and of itself sufficient to bring about the intended conveyance.1 Where, by contrast, contract and conveyance are separate, this is usually because the legal system concerned requires the transfer of ownership to be manifested by an element of publicity, such as the delivery of a movable object by the transferor to the transferee (traditio) or the registration of a conveyance of land.2 In an abstract transfer system, of which German law may serve as the prime example, contract and conveyance are necessarily distinct transactions. This is known as the ‘principle of separation’. As a consequence, the conclusion of an obligatory contract (such as a contract of sale) has no proprietary effects whatsoever. The ‘principle of abstraction’ pre-supposes separation, but goes even further. It maintains that the validity of the conveyance does not in any way depend upon the existence and validity of the underlying legal basis, contractual or otherwise. 1 2

This is the position in France. Th is is the position in Austria and the Netherlands, though their approaches appear to differ with regard to the need for a so-called ‘real agreement’.

202

Häcker

Provided that the requirements for a valid transfer of ownership are met (for movables: agreement on the conveyance coupled with a delivery to the transferee), it does not matter that a legal basis may be lacking. And if an obligatory contract in pursuance of which the conveyance was made is subsequently rescinded, this does not cause ownership to revest. In both cases, the transferor is confined to seeking a re-transfer of ownership from the transferee by means of a personal claim in unjustified enrichment. There are, however, two qualifications worth mentioning. The first is that the parties are free to make their agreement about the transfer of ownership (the so-called ‘real agreement’) conditional on the validity of the envisaged underlying legal basis. If the condition fails, then the conveyance fails as well. This closely resembles causality. The second qualification is that certain grounds of rescission will affect both the obligatory contract and the real agreement and thus entitle the rescinding party to avoid both. Fraud and duress are the core examples.3 It is important to realize that neither of these ‘exceptions’ call into question the abstract nature of the German transfer system. A conditional nexus between contract and conveyance has to be expressly stipulated by the parties; it will not be implied. The situation in which the identical defect allows both transactions to be set aside bears only an apparent resemblance with causality. It is not the rescission of the obligation which makes ownership revest, but the exercise of the transferor’s (notionally separate) right to rescind the real agreement.

C.

The proprietary effects of contracting

Since there can be no abstraction without a separation between contract and conveyance, we may begin our survey of the Common Law world by considering the proprietary effects of contracting (if any) at common law and in equity. The rule that immediately comes to mind is that a contract for the sale of specific goods in a deliverable state is capable of passing, and – unless the parties otherwise intend – does pass, title to the goods in question as soon as it is concluded.4 The conveyance is effected solo 3

4

German law does not allow rescission for non-fraudulent misrepresentation per se or for undue influence. Although such situations may be caught by other doctrines, this feature of the law of rescission accounts for the peculiarly German incidents of abstraction: cf B Häcker, Consequences of Impaired Consent Transfers: A Structural Comparison of English and German Law (Mohr Siebeck, Tübingen 2009) 23–4, 60–4, 94–8, 165–7, 198–202. The old common law rule was fi rst codified in the Sale of Goods Act 1893 (UK). It is now contained in the Sale of Goods Act 1979 (UK) ss 17 and 18 rule 1, and in the corresponding

Causality and abstraction in the common law

203

consensu by virtue of the parties’ contractual agreement. Transactions similar to sale, such as barter, may follow the same pattern.5 However, it is clear that the rule does not extend much further. The money paid as purchase price for the goods has to be delivered6 to the seller for title to pass to him.7 And if the sale was one of an estate in land, it is well established that contract and conveyance are separate transactions. Property cannot pass at common law until a deed (or other prescribed instrument) has been properly executed and the transfer registered in the appropriate register.8 At common law, the principle of separation therefore prevails whenever the solo consensu rule does not apply.9 Yet the picture would be incomplete without also taking account of equity, that progeny of the Court of Chancery which is so distinctive of Common Law systems and which has brought forth the remarkable institution known as the trust. Equity makes it possible to regard a beneficiary’s entitlement in respect of trust property as a special kind of proprietary interest, prima facie binding on third-party purchasers and protected in the trustee’s insolvency. Moreover, the operation of the maxim that ‘equity regards as done that which ought to be done’ ensures that any specifically enforceable personal claim to the conveyance of a particular asset will automatically result in the creation of a trust. As a consequence, equity to some extent counteracts the effects of separation at common law. Where does it do so? It is clear that the maxim has no role to play where title to goods passes to the transferee solo consensu upon the conclusion of a sale contract.10 In that case, the relevant common law

5

6 7

8

9

10

provisions of sale of goods legislation elsewhere in the Common Law world: eg ss 22 and 23 rule 1 of the Sale of Goods Act 1923 (NSW) and of the Goods Act 1958 (Vic). In most Common Law jurisdictions, the question has not yet been authoritatively decided, but the Irish Supreme Court has held that title to a bartered chattel cannot pass solo consensu: Flynn v Mackin [1974] IR 101. We will not specifically consider the possibility of a conveyance by deed. The issue is not merely one of specification, but cf D Fox, Property Rights in Money (Oxford University Press, Oxford 2008) [3.52]. The position is different only where money is ‘sold’, as might be the case with a collector’s coin. For England, see Law of Property Act 1925 (UK) s 52(1), and Land Registration Act 2002 (UK) s 27. Since 1990, all of England has been an area of compulsory registration. In Australia, the old deeds registration system has, since the middle of the nineteenth century, been gradually superseded by land registration under the so-called ‘Torrens system’: cf eg Real Property Act 1900 (NSW); Transfer of Land Act 1958 (Vic). It is arguable that there is separation of sorts even in sale of goods cases where the parties have agreed that title shall pass upon delivery or when the purchase price is paid. There may be some scope for it if title to unique goods is intended to pass at a later stage (cf n 9), but much is to be said for the view that the sale of goods legislation impliedly

204

Häcker

property right is already vested in the buyer,11 and only the bare delivery remains outstanding.12 Neither will the maxim apply to claims for the payment of money (eg the seller’s claim to the purchase price), since currency is never unique. Depending on one’s view of barter,13 there may be room for it here, but the most prominent field of application certainly relates to realty. In Lysaght v Edwards,14 Sir George Jessel MR famously observed that ‘[t]he effect of a contract of sale [of an estate in land] has been settled for more than two centuries … It is that the moment you have a valid contract for sale the vendor becomes in equity a trustee for the purchaser of the estate sold, and the beneficial ownership passes to the purchaser.’15 Equity here pre-empts the common law by ascribing proprietary effects to an agreement which the common law does not recognize as self-executing. On another level, however, equity also reflects the common law. Just as the buyer of goods, having acquired title solo consensu, can nevertheless not normally demand delivery from the seller while the latter’s unpaid vendor’s lien still persists,16 so the buyer of an estate in land cannot normally exercise his rights under Saunders v Vautier17 or otherwise compel a common law conveyance until he has paid the agreed purchase price.18 There are two factors capable of disturbing the apparently neat symmetry between common law and equity. The first emanates from amongst the rules of specific performance themselves. The reason why courts are willing to specifically enforce contracts relating to land is that damages are usually inadequate where unique assets are concerned. But here lies a problem. Specific performance was and remains a discretionary remedy.19 Countervailing considerations may dictate that it should – exceptionally – be denied, especially where its grant would cause severe hardship to the

11

12 14 17 18

19

excludes vendor-purchaser constructive trusts altogether: cf Atkin LJ’s observations in Re Wait [1927] 1 Ch 606, 635–6. Subject to the unpaid vendor’s lien: cf eg Sale of Goods Act 1979 (UK) ss 39–41; Sale of Goods Act 1923 (NSW) ss 42–3; Goods Act 1958 (Vic) s 47. But cf text to nn 50–52. 13 Cf text to n 5. (1876) 2 ChD 499 (‘Lysaght v Edwards’). 15 Ibid 506. 16 See n 11. (1841) 4 Beav 115, 49 ER 282, aff ’d (1841) Cr & Ph 240, 41 ER 482. In Lysaght v Edwards (n 14) 506, Sir George Jessel MR therefore described the position of the unpaid vendor (the constructive trustee) as in some respects analogous to that of an unpaid mortgagee. Contrast L Smith, ‘Transfers’ in P Birks and A Pretto (eds), Breach of Trust (Hart Publishing, Oxford 2002) 111, 125–6, who regards the purchaser as having a mere security interest prior to full payment. This aspect is emphasized by the Supreme Court of Canada in Semelhago v Paramadevan [1996] 2 SCR 415, 136 DLR (4th). Cf the critical discussion by R Chambers, ‘The Importance of Specific Performance’ in S Degeling and J Edelman (eds), Equity in Commercial Law (Lawbook Co, Pyrmont 2005) 431, 434–48.

Causality and abstraction in the common law

205

defendant. In Patel v Ali,20 for example, a seller’s health so deteriorated after the conclusion of the contract that an order of specific performance became unavailable. Yet how can the vendor-purchaser constructive trust be reconciled with the demands of legal certainty if its creation depends conceptually on a future exercise of discretion which may well be influenced by interim events? The second source of concern is connected. It derives from recent Australian jurisprudence. In Tanwar Enterprises Pty Ltd v Cauchi, 21 the High Court suggested that the relationship of parties to an executory contract for the sale of realty was purely contractual and not one of trustee and beneficiary.22 While this leaves open the possibility of a constructive trust arising when the purchase price is paid in full,23 it calls the suitability of the trust vehicle as such into question and at the same time carries the idea of separation from the common law sphere into the realm of equity. Tanwar has, however, not completely closed the door on equitable property rights being created by virtue of an obligatory agreement alone. Subsequent cases indicate that the purchaser does, at least, acquire some sort of ‘special equitable interest’ in the land he has agreed to buy. 24 To this extent, Australian law still ascribes proprietary consequences to contracts concerning realty.

D. Causality and abstraction at common law In order to determine whether and when the common law adheres to a principle of abstraction, it is necessary to look separately at cases in which contract and conveyance are distinct transactions and at cases where the solo consensu principle allows them to be rolled up into one single transaction. The position in equity will, as far as possible, be left aside for the time being. It is considered in the next section.

1.

Conveyance separate from the underlying contract

It will be recalled that the principle of separation does not pre-determine whether a given legal system conceives of transfers as causal or abstract. 20 22

23 24

[1984] Ch 283. 21 (2003) 217 CLR 315 (‘Tanwar ’). Ibid [45]–[53]. Reference was made to the judgments of Jacobs J in Chang v Registrar of Titles (1976) 137 CLR 177, 190, and of Deane J in Kern Corporation Ltd v Walter Reid Trading Pty Ltd (1987) 163 CLR 164, 192. Cf the critical discussion of Tanwar by Chambers (n 19) 448–61, esp 454–7. See Stern v McArthur (1988) 165 CLR 489 (‘Stern v McArthur ’) 523; Smith (n 18) 126. Zhu v NSW Treasurer (2004) 218 CLR 530, [141]. Cf also Black v Garnock (2007) 230 CLR 438, [3], [31]–[34], [83], [119], and see already Stern v McArthur (n 23) 523.

206

Häcker

In a causal transfer system, a valid obligation is an essential precondition (amongst other requirements) for a valid conveyance made in pursuance of it. In an abstract transfer system, a conveyance can be validly effected even without the existence of an underlying obligation. With respect to movables, money cases provide the clearest examples of conveyances which cannot be brought about by contract alone. A delivery needs to take place for title to notes or coins to pass to the payee.25 This involves a transfer of possession (handing over) coupled with the appropriate intention on the part of the transferor to give up his proprietary interest in the cash.26 Does there also have to be a valid legal basis in the form of a contractual or other obligation to make the payment? Such would seem to be the implication of occasional suggestions that a transferor’s liability mistake may prevent title passing to the transferee.27 A liability mistake is, after all, nothing but a misapprehension about the existence of a legal basis. If it really did prevent title passing, then the common law could justifiably be described as operating an essentially causal system of transfers by delivery. Yet there is ample evidence that the common law is not causal in this sense.28 In Barclays Bank Ltd v WJ Simms Son & Cooke (Southern) Ltd,29 Robert Goff J stated that ‘where an action is brought to recover money paid under a mistake of fact, property will almost invariably have passed to the defendant’, and he added that ‘the kind of mistake that will ground recovery is … far wider than the kind of mistake which will vitiate [ie render void] an intention to transfer property’.30 His observations are borne out by those criminal law cases in which defendants were acquitted of charges of larceny or theft brought on the basis that they had accepted payments knowing that these were not due. A prominent example31 is the decision of the High Court of Australia in Ilich v R.32 It makes clear that only ‘fundamental mistakes’ (such as mistakes as to the identity of the other party) are capable of calling the 25 26

27

28 30

31

32

Cf text to nn 6–7. As well as perhaps the transferee’s intention to acquire title upon receipt, but cf Fox (n 7) [3.75]. Eg Norwich Union Fire Insurance Society Ltd v William Price Ltd [1934] AC 455, 461–2. Cf also the ‘proprietary theory’ advocated by S Stoljar, The Law of Quasi-Contract (2nd edn Lawbook Co, Sydney 1989). For a detailed discussion see Fox (n 7) [3.48] ff, [4.03] ff. 29 [1980] QB 677. Ibid 689. Cf also David Securities Pty Ltd v Commonwealth Bank of Australia (1992) 175 CLR 353, esp 377–8. Other examples include Chambers v Miller (1862) 13 CBNS 125; R v Prince (1868) LR 1 CCR 150; R v Potisk (1973) 6 SASR 389. (1987) 162 CLR 110 (‘Ilich v R’). The case concerned a mistaken overpayment.

Causality and abstraction in the common law

207

validity of a conveyance by delivery into question, not the misguided belief in a non-existent liability.33 It follows as a matter of logical inevitability that the avoidance of an obligation in pursuance of which a payment was made (in particular the rescission of an underlying contract) can never as such have any proprietary effect at common law. If a defrauded investor manages to revest in himself a common law right to possession in respect of the money paid over (or – more likely – its traceable proceeds), this must be because both contract and conveyance have been validly set aside. That dispository transactions should be voidable for fraud just as much as obligatory ones need not come as a surprise. German law certainly envisages this.34 The possibility would seem to be equally, albeit perhaps less explicitly, recognized in the Common Law world. In Moynes v Coopper, 35 Lord Goddard CJ stated in general terms: ‘Where a transfer of property is obtained by fraud, there is no doubt but that the property does pass, subject, however, to the right of the defrauded party on discovering the fraud to disaffi rm the transaction and resume his property.’36 Two observations are therefore warranted. First, the widespread assumption that title to money (notes and coins) revests automatically when the legal basis for its transfer falls away37 through rescission is misleading, but usually harmless. Though notionally based on separate acts, the avoidance of contract and conveyance will in practice often go hand in hand.38 Second, it would be wrong to infer from the abstract nature of payment transactions that the payee’s title, once obtained, is subsequently always unimpeachable by the payer.39 33

34 35 36

37

38 39

Cf esp ibid 123–9, 134–43. As regards the conveyance, the payer’s misapprehension about his liability constitutes a mere ‘motivational mistake’. See end of section B above (identity of defect). [1956] 1 QB 439 (‘Moynes v Coopper ’). Ibid 445. There is a question over whether revesting occurs retrospectively so as to turn anyone handling the money in the interim into a (potential) converter. The Australian case of Hunter BNZ Finance Ltd v CG Maloney Pty Ltd (1989) 18 NSWLR 420 (‘Hunter BNZ Finance’) suggests as much, but contrast the statement by Millett J in Bristol and West Building Society v Mothew [1998] Ch 1, 23 (concerning equitable wrongdoing). No attempt is normally made to justify the assumption. A rare exception is the contribution by L Smith, ‘Unjust Enrichment: Big or Small?’ in Degeling and Edelman (n 19) 35, 44. He argues that the common law operates a causal transfer system similar to the French. Cf also Fox (n 7) [6.18]. Yet this is the gist of the argument made by W Swadling, ‘Rescission, Property, and the Common Law’ (2005) 121 LQR 123, esp 139 ff. See my reply in B Häcker, ‘Rescission of Contract and Revesting of Title: A Reply to Mr Swadling’ [2006] RLR 106, 110–11; Fox (n 7) [3.61] ff. Cf also Häcker (n 3) 138–42.

208

Häcker

What distinguishes a transfer system which allows the identical defect to operate in respect of both contract and conveyance from rigorous wholesale ‘abstractionism’40 is that the former can sometimes look deceptively causal. The difference shows up only when we consider the issue from the reverse angle: a defrauded vendor’s rescission (of a contract of sale) will not entail the restoration to the fraudster of title to any money he may already have paid for the goods. His own conveyance was untainted by any defect of consent and cannot be avoided.41 Moving to land law, the other big field in which contract and conveyance are clearly distinguished, the same pattern recurs with a slight modification. There is no doubt that a properly executed and registered conveyance is effective to transfer the estate concerned at common law, irrespective of whether the transferor was under a valid obligation to bring it about. Accordingly, a subsequent rescission of the underlying contract does nothing to divest the transferee of his interest. Moreover, because of the formalities involved in the transfer, there is little scope for any ‘apparent’ exceptions to abstraction and thus for false appearances of causality. Unlike in the payment scenario just outlined, a defrauded seller of land is unable simply to avoid both contract and conveyance alike at common law. His fee simple will not revest in him unless and until any relevant instrument is formally set aside and the register appropriately amended. To the extent that registration is constitutive and conclusive of title,42 the most that he can achieve pending re-registration is a declaration to the effect that an equitable interest has arisen in his favour.43 The discrepancy between the land context and cases concerned with the delivery of movables should not be taken to indicate any fundamental conceptual rift . 40

41 42

43

Th is is the term I used to describe Swadling’s approach (cf n 39) in B Häcker, ‘Proprietary Restitution after Impaired Consent Transfers: A Generalised Power Model’ [2009] CLJ 324, 326–37. On the requirement of restitutio in integrum see text to n 47. As under the Australian Torrens system (cf n 8). Fraud constitutes a recognized exception to the indefeasibility of Torrens title, so that the fraudster’s registration can be undone. For England, see the conclusiveness provision in s 58 of the Land Registration Act 2002 (UK) and the rules on ‘alteration’ and ‘rectification’ of the register. Cf Collings v Lee [2001] 2 All ER 332; Malory Enterprises Ltd v Cheshire Homes (UK) Ltd [2002] EWCA Civ 151, [2002] Ch 216 (both concerning slightly different sets of facts). It is submitted that the trust solution may be taking conclusiveness too far. As between the original parties, title should arguably revest in the transferor as soon as the deed of conveyance is set aside. Correction of the land register would then be decisive only vis-à-vis third-party purchasers. What are essentially questions of third-party protection could be identified and addressed as such. (Note the language of ‘deeming’ in s 58 of the Land Registration Act 2002 (UK)!)

Causality and abstraction in the common law

209

Quite the contrary. It is a natural consequence of the differences between formal and informal mechanisms of conveyancing.

2.

Conveyance by means of self-executing contract

How does the picture change when we look at cases in which title passes solo consensu by way of a self-executing contract for the sale of goods? It will be recalled that there can be no abstraction without separation. If obligatory contract and conveyance are two aspects of a single legal transaction, then they necessarily stand and fall together. As a result, the rescission of such an agreement at common law, eg for the buyer’s fraud as in Car & Universal Finance Co Ltd v Caldwell,44 will automatically lead to a revesting of title in the seller. Here, then, is an example of causality in the Common Law tradition. It is the lack of a principle of separation – and the concomitant dependence of the conveyance upon the validity of the contract of sale – which accounts for the (perceived) need to protect innocent third-party purchasers from the transferee by means of the so-called ‘third party rights bar to rescission’.45 The sale of goods is, of course, a two-sided transaction. And while the seller’s title to the goods passes to the buyer solo consensu without the need for a delivery (unless the parties otherwise intend), performance of the buyer’s obligation to pay the purchase price requires – as we have seen – the relevant notes and coins to be handed over to the seller. Viewed in the light of the above observations about the effects of setting aside the underlying contract at common law, the position would seem to be as follows. A defrauded vendor’s rescission of the sale contract effects unilateral proprietary restitution in specie. The vendor’s title revests, the buyer’s does not.46 The apparent asymmetry between the parties is no cause for concern. Its repercussions are absorbed by the rule that the rescinding party has to be able to make restitutio in integrum to the other. The seller cannot thus exercise his rights in respect of the goods sold without at the same time repaying to the fraudster any part of the purchase price already received.47 44 45

46 47

[1965] 1 QB 525. I have argued elsewhere that third-party purchasers can be adequately protected even without the need to bar rescission wholesale in the relationship between the innocent seller and the fraudulent buyer: B Häcker, ‘Rescission and Th ird Party Rights’ [2006] RLR 21; Häcker (n 3) 259 ff. Cf text to n 41. See Spence v Crawford [1939] 3 All ER 271, 288–9 (Lord Wright stating that the fraudster ‘must not be robbed’). Restitutio in integrum does not require the exact notes and coins to be re-conveyed, but only payment of an equivalent amount.

210

Häcker

A question, however, arises with regard to the converse scenario. Assume that it is the buyer who wishes to rescind a contract of sale for the seller’s fraud and to recover the purchase price. Being a victim of fraud, he should – in accordance with what was said above – be able to avoid both the obligatory contract and, with respect to the money, the transfer of title by delivery. Yet here proprietary restitution appears to be bilateral. There is no straightforward way of preventing title from revesting in the fraudulent seller. Perhaps this is a piece of historical baggage which Common Law jurisdictions just have to accept. The differences between confining the fraudster to a personal restitutionary claim and affording him a right to immediate possession are likely to be marginal in the light of the requirement of mutual restitutio in integrum. But they are not wholly without relevance. If the rescinding buyer subsequently became bankrupt, the fraudulent seller would be able to recover the goods from the buyer’s trustee in bankruptcy (or sue the latter in conversion), while a personal claim would have confined him to the quota. It is not impossible to get round the problem. If a Common Law system so wished, it could hold that where the seller has already delivered the goods sold to the buyer, the act of delivery acts as a second (abstract) means of conveyance and thus prevents title revesting in the seller simply because the underlying contract is rescinded at common law.48 Title would only revest if the conveyance by delivery were impeachable in its own right, ie if the seller was the victim of fraud, but not if he himself was the fraudster. There are difficulties with such an approach. Most obviously, it is hard to explain how title to goods can pass twice over, first by contract and then again by delivery. At one time I thought these difficulties insurmountable.49 But they need not be after all. At the beginning of the twentieth century, the German jurist Theodor Kipp developed what became known as the ‘doctrine of double effect’ (Doppelwirkungslehre).50 He argued that two sets of events, occurring at the same time or one after the other, could both have identical legal consequences. Kipp’s prime concern was to justify why it was possible to rescind a contract already void for other reasons (such as one party’s incapacity). He did not envisage his theory as operating in the case of two consecutive instances of derivative 48

49 50

This idea was first voiced by Swadling (n 39), who invoked it to support his ‘abstractionist’ view of sale. Häcker, ‘Rescission of Contract and Revesting of Title: A Reply to Mr Swadling’ (n 39) 109. T Kipp, ‘Über Doppelwirkungen im Recht, insbesondere über die Konkurrenz von Nichtigkeit und Anfechtbarkeit’ in Festschrift der Berliner Juristischen Fakultät für Ferdinand von Martitz (Liebmann, Berlin 1911) 211.

Causality and abstraction in the common law

211

acquisition of ownership, 51 yet it is here that a comparative glance at Kipp’s work may prove most fruitful for the Common Law. Application of the theory of double effect would allow for the construction of an act of conveyance separate from the underlying contract, at least for the ordinary case in which a lay seller (not trained to appreciate the legal intricacies of the solo consensu rule) evinces an intention to transfer title which is generic enough to survive beyond the time of contracting. Provided that the intent still persists at the moment of delivery, the causal conveyance solo consensu could well be overlaid by a second, abstract conveyance. The latter would no longer be susceptible to the specific vulnerabilities of the underlying contract of sale.52 That transfers of title by delivery should have some role to play in the sale of goods context is nothing exceptional, albeit that they usually become relevant only where the contract of sale is invalid for one reason or another, such that title cannot pass solo consensu. Cases in which the parties’ obligatory agreement is void for infancy or illegality illustrate this.53 As soon as the ‘seller’ has delivered the goods ‘sold’ to their ‘buyer’, he can no longer reclaim them, and he commits a tort by simply taking them back.54 The failure to understand these decisions as straightforward examples of conveyance by delivery, coupled with the often unspoken assumption of a wall-to-wall principle of causality operating at common law, has led to some puzzlement55 and produced a number of rather elaborate explanation attempts. On the view advanced here, there is no need to regard illegal contracts as merely unenforceable so as to justify the property transfer upon delivery.56 Nor is it necessary to maintain that title stays behind despite the delivery (because of the contract being void), but then to hold the seller debarred from asserting it by the maxim in pari delicto potior est conditio defendentis.57 Instead, all is down to the delivery 51 52

53

54 55

56

57

Ibid 221. Identity of defect would – of course – remain possible. In this, the present model differs from Swadling’s view (cf n 48). Cf Stocks v Wilson [1913] 2 KB 235; Belvoir Finance Co Ltd v Stapleton [1971] 1 QB 210; Singh v Ali [1960] AC 167 (‘Singh v Ali ’). In identity fraud cases, such as Cundy v Lindsay (1878) 3 App Cas 459, the transferor’s fundamental mistake prevents not only the conclusion of a valid contract, but also a valid conveyance by delivery. Singh v Ali (n 53): claim in detinue. Cf T Weir, ‘Taking for Granted: The Ramifications of Nemo Dat ’ (1996) 49 CLP 325, 343. This is the explanation advocated by L van Vliet, Transfer of Movables in German, French, English and Dutch Law (Ars Aequi Libri, Nijmegen 2000) 111–14. This is the explanation advocated by MJ Higgins, ‘The Transfer of Property under Illegal Transactions’ (1962) 25 MLR 149.

212

Häcker

as an abstract transfer mechanism. The remaining question for Common Law jurisdictions to answer is whether delivery acts not merely as a substitute means of passing title in sale of goods cases, but – applying the doctrine of double effect – also as an additional conveyance.

E.

Causality and abstraction in equity

On the level of equity, it is convenient to distinguish between situations in which the contract has been concluded, though not yet (fully) executed, from those in which full performance has already been rendered.

1.

Rescission in period during which proprietary effects are based purely on contract

What happens if a contract for the sale of goods is rescinded in equity before the seller has delivered the goods sold to the buyer? Let us assume that the latter has made a non-fraudulent misrepresentation inducing the sale. Title will have passed to him solo consensu. Strictly speaking, title cannot simply revest upon the seller’s equitable rescission (as it would with rescission at common law). Even though the contract was the vehicle of conveyance, its avoidance in equity is insufficient fully to reverse the transfer.58 In practice, this presents no difficulty. An equitable interest will be raised in the seller’s favour, and – the goods still being in his possession – execution of the trust is possible without the buyer’s participation. Prior to delivery, at least, the principle of causality could thus be said to wholly pervade the sale of goods. There is a caveat, however. It derives from a line of Australian and New Zealand authorities holding that a saving provision in the sale of goods legislation, by which ‘the rules of the common law’ relating to fraud and misrepresentation were preserved under the statute,59 implied that the rules of equity were excluded.60 If correct, this would make it virtually impossible to rescind a contract of sale for non-fraudulent misrepresentation.61 Yet the provision need not be construed so restrictively. The term ‘rules of the common law’ can be 58

59 60 61

Cf the related observations in Alati v Kruger (1955) 94 CLR 216 (‘Alati v Kruger ’) 224, cited in the text to n 103. Cf the Sale of Goods Act 1893 (UK) s 61(2) and the provisions modelled thereon. See esp Riddiford v Warren (1901) 20 NZLR 572; Watt v Westhoven [1933] VLR 458. Unless there were a ‘complete difference in substance’ between the performance received and that promised: cf Kennedy v Panama New Zealand and Australian Royal Mail Co (1867) LR 2 QB 580.

Causality and abstraction in the common law

213

read in a wide sense, encompassing the rules emanating from both the common law courts and the Lord Chancellor’s jurisdiction. In England, the equivalent saving provision has never been understood to bar equitable rescission.62 Australian courts, too, have since distanced themselves from the narrow interpretation,63 and in New South Wales and the Australian Capital Territory the relevant legislation has now been amended to clarify that sales law conforms to the general law of contract.64 It was noted above that although estates in land could not be transferred solo consensu and required a separate act of conveyance, the conclusion of a specifically enforceable contract to make the transfer (especially an agreement to sell) is generally thought to give rise to a vendor-purchaser constructive trust.65 What is the effect of rescission in such a case? In the pre-Tanwar66 Australian decision of Kramer v McMahon,67 Helsham J suggested obiter that the equitable interest might then ‘revest by force of the rescission itself’.68 Yet in Lysaght v Edwards, Sir George Jessel MR had indicated that no equitable interest would have been created in the first place. He said: ‘“Valid contract” means … a contract sufficient in form and in substance, so that there is no ground whatever for setting it aside as between the vendor and purchaser – a contract binding on both parties.’69 This provides a further illustration of the uncertainties connected with the maxim that ‘equity regards as done that which ought to be done’. He who comes to equity must – it appears – come not only with clean hands, but also with sufficient evidence to convince the court that no misrepresentation or undue influence occurred, however innocently.

2. Fully executed transfers: different models of proprietary restitution and their implications Turning to cases where the principle of separation applies and a conveyance (by the delivery of a movable object or by an appropriately registered transfer of real estate) has already taken place, equity’s take on causality and abstraction is essentially determined by its rules on so-called 62

63

64

65 68

Cf Leaf v International Galleries [1950] 2 KB 86; Long v Lloyd [1958] 1 WLR 753; Goldsmith v Rodger [1962] 2 Lloyd’s Rep 249. Graham v Freer (1980) 35 SASR 424; Leason Pty Ltd v Princes Farm Pty Ltd [1983] 2 NSWLR 381. Sale of Goods Act 1923 (NSW) s 4(2A); Sale of Goods Act 1954 (ACT) s 62(1A). Cf also Law Reform Commission of Western Australia, ‘The Sale of Goods Act 1895, Project No 89’ (Final Report, 1998) ch 6 – recommendations never implemented. 67 Cf text to nn 14 ff. 66 Cf text to nn 21 ff. [1970] 1 NSWR 194. Ibid 206. 69 Lysaght v Edwards (n 14) 507.

214

Häcker

‘proprietary restitution’. The core question is whether or not equity automatically reverses transfers made without a sufficient legal basis (and under the influence of an unjust factor). If it did, then it would in effect be counteracting the allocation of property rights at common law. Abstraction at the common law level would be supplanted by a causal principle in equity. Money mistakenly paid would always be held on trust for the payer, and the rescission of a contract would – whenever title does not revest at common law – result in each party becoming a trustee for the other with respect to all rights acquired in accordance with the agreement.70 On one view, this is precisely how proprietary restitution works. The trust is sometimes described as ‘constructive’ and sometimes as ‘resulting’. In fact, it is both. It arises by operation of law and carries the equitable interest back to the transferor. What is crucial for present purposes is not the exact name of the trust, but that it springs up ipso iure without more under what may be labelled the ‘immediate interest model’ of proprietary restitution.71 Though the unjust enrichment creditor does not technically ‘retain’ an equitable interest in the asset transferred,72 the fact that he necessarily ‘obtains’ one whenever the basis for his transfer fails ab initio73 makes the immediate interest model of proprietary restitution into a champion of causality in equity. Various explanations are offered for why unjust enrichments lacking a valid basis are automatically reversed in equity. Most prominent and straightforward among them is the suggestion that the defendant enrichee’s personal restitutionary liability consists first and foremost of a duty to effect restitution in specie by re-transferring the exact rights received. In accordance with the maxim that ‘equity regards as done that which ought to be done’, this yields a trust interest for the claimant transferor. It seems that US law explicitly adopts this approach. The 70

71

72

73

Although the unjust factor approach towards unjust enrichment (unlike the absence of basis approach) does not dictate that proprietary restitution following rescission of contract be bilateral, it is widely assumed to be: cf S Worthington, ‘The Proprietary Consequences of Rescission’ [2002] RLR 28, 36–8 (‘classical model’). The immediate interest model of proprietary restitution is most prominently defended by R Chambers, Resulting Trusts (Oxford University Press, Oxford 1997). On the effects of rescission cf R Chambers, ‘Two Kinds of Enrichment’ in R Chambers, C Mitchell and J Penner (eds), Philosophical Foundations of the Law of Unjust Enrichment (Oxford University Press, Oxford 2009) 242, 252–3. Th is was the view of Goulding J in Chase Manhattan Bank NA v Israel-British Bank (London) Ltd [1981] Ch 105 (‘Chase Manhattan’) discussed in the text to nn 76–77. It is widely agreed that a subsequent failure of basis/consideration would not generate a trust.

Causality and abstraction in the common law

215

American Law Institute’s Restatement of the Law of Restitution of 193774 provides: ‘Where the owner of property transfers it as a result of a mistake of such a character that he is entitled to restitution, the transferee holds the property upon a constructive trust for him.’75 It is thus perhaps unsurprising that one of the leading cases lending support to the immediate interest model elsewhere in the Common Law world has an intimate connection with the United States. In Chase Manhattan Bank NA v Israel-British Bank (London) Ltd,76 Goulding J was considering the effects of a mistaken overpayment of US$2 million by reference to New York law when he stated obiter that English law, too, would regard the payer as having a ‘continuing’ or ‘persistent equitable proprietary interest’ in the money.77 In England itself, however, Chase Manhattan has not been left unscathed by later developments. The immediate interest model espoused by Goulding J met with the disapproval of the House of Lords in Westdeutsche Landesbank Girozentrale v Islington London Borough Council.78 And although Westdeutsche could be read as denying the existence of proprietary restitution altogether and putting English law on an ‘abstractionist’ track,79 I have argued elsewhere that the decision is in fact compatible with what may be called the ‘power model’ of proprietary restitution.80 On this view, the claimant transferor is not afforded a vested trust interest in respect of the asset conveyed under an impairment of consent, but a mere power in rem. If the power is legal, as in the case of fraud, it allows the claimant to revest title (assuming, of course, that such revesting is possible without formalities, eg an amendment of the land register). Banque Belge pour l’Etranger v Hambrouck81 provides an example.82 If the power is merely equitable, as in the case of a 74

75

76 78 79

80 82

American Law Institute, Restatement of the Law of Restitution (American Law Institute Publishers, St Paul 1937) (‘Restatement ’). Ibid § 163. Cf also § 160: ‘Where a person holding title to property is subject to an equitable duty to convey it to another on the ground that he would be unjustly enriched if he were permitted to retain it, a constructive trust arises.’ Chase Manhattan (n 72). 77 Ibid 118–20. [1996] AC 669 (‘Westdeutsche’). Cf text to nn 39–40. M Bryan, ‘The Criteria for the Award of Proprietary Remedies: Rethinking the Proprietary Base’ in M Bryan (ed), Private Law in Theory and Practice (Routledge, London 2007) 271, 283–5, argues that Westdeutsche was a case of subsequent failure of consideration (cf n 73) and that proprietary relief was rightly denied on that ground. Häcker (n 40). 81 [1921] 1 KB 321. The mechanism operating here is essentially of the kind envisaged by Lord Goddard CJ in Moynes v Coopper (n 35): see text to nn 35–36.

216

Häcker

non-fraudulent misrepresentation or undue influence, its exercise brings a trust into existence. Before the power is exercised, there is no trust. The majority’s approach in Allcard v Skinner83 illustrates this proposition. By contrast with the dissent of Cotton LJ, who seemed to regard the Mother Superior as holding the gifted railway stock ‘in trust’ for Miss Allcard from the outset, 84 the judgments of Lindley and Bowen LJJ are best understood as based on Miss Allcard’s unexercised equitable power in rem to ‘avoid’ the gift having been lost by lapse of time.85 The power model of proprietary restitution presupposes – or rather implies – that (most) conveyances are fully abstract. If a conveyance by delivery is voidable and set aside, this is not because either the common law or equity operates a causal transfer system, but because a defect in the transferor’s intention has allowed him to revoke his consent to the transfer of title (besides allowing him to rescind an underlying contract where appropriate). Take the example of a negligently induced liability mistake. D misrepresents to P that the latter still owes him money, forgetting that P’s wife has already settled the debt. P pays up. On the power model of proprietary restitution, a trust arises if and when P decides to exercise his equitable power in rem (rather than simply claiming repayment of the relevant amount by a common law claim for money had and received). If D’s negligent misrepresentation had caused P to enter into a contract with him and then to make the payment in accordance with its terms, the identical defect would have allowed P to avoid both the contract and – by a notionally separate act – the conveyance. What looks causal in effect is nevertheless abstract in theory. It will be recalled that ‘apparent exceptions’ to abstraction do nothing to impeach the purity of the principle. Despite the superficial similarities between a causal transfer system and one which is abstract, but not ‘abstractionist’, the importance of distinguishing clearly between the immediate interest model and the power model of proprietary restitution is not entirely theoretical.86 Nor does it exhaust itself in the question of which set of bona fide purchase rules to apply immediately after receipt87 or the problem of the unsuspecting 83 86

87

(1887) 36 ChD 145 (‘Allcard v Skinner’). 84 Ibid 175. 85 Cf esp ibid 187–9. Note (further to what was discussed in the text to nn 41 and 46): on the immediate interest model of proprietary restitution, the defrauded vendor of goods would arguably hold the purchase money received on trust for the fraudster following retroactive rescission of the contract! Unlike vested equitable interests, equitable powers in rem – being ‘mere equities’ – are defeasible by any bona fide purchaser for value from the transferee, even of a purely equitable interest: Phillips v Phillips (1861) 4 De G F & J 208, 45 ER 1164; Latec Investments Ltd v Hotel Terrigal Pty Ltd (1965) 113 CLR 265.

Causality and abstraction in the common law

217

recipient’s liability for breach of trust.88 It also has potential implications for the eventual scope of proprietary restitution. Only a fully abstract transfer system has the ability to exclude from the ambit of proprietary restitution certain defects which it regards as insufficiently serious to warrant a proprietary response, while at the same time recognizing that they are perfectly good ‘unjust factors’ at the level of personal claims. If the House of Lords in Westdeutsche were understood as seeking to restrict the availability of proprietary restitution (policy considerations to this effect are evident in the speeches of Lords Goff and Browne-Wilkinson),89 then the easiest way of achieving a balance between all the competing interests at stake is to deny that a power in rem exists where the transferor’s mistake was purely spontaneous.90 On this approach, the payer’s liability mistake in Chase Manhattan would not have generated any proprietary interest, irrespective of the recipient’s state of mind. The fact that the payer had a personal claim to recover the payment of an amount not due is neither here nor there. Unlike the immediate interest model,91 the power model treats the question of proprietary restitution as essentially independent of the parties’ obligatory relationship. Since it is highly improbable that English courts will go so far as to exclude altogether the possibility of avoiding transfers even if these were induced by the transferee’s misrepresentation, powers in rem would appear to provide the best reflection of English law as it stands.

3.

The Australian position

Other Common Law systems are still hovering somewhere between the different approaches. Australia, in particular, displays features of both the American model taken aboard and exported by Chase Manhattan and the power model gradually emerging in England.92 Chase Manhattan is widely regarded as being of great persuasive authority. It has been approved and applied on a number of occasions. In Commonwealth of Australia v ANZ Banking Group Ltd,93 for example, O’Keefe CJ declared that money which appeared to constitute the traceable proceeds of fraud practised on the claimant was held on trust for 88 90 92

93

Cf Westdeutsche (n 78) 703–6. 89 Ibid 684, 703. Häcker (n 40) 354–7. 91 See text to nn 71–77. An excellent and detailed analysis of the Australian case law which puts to shame the present overview is now contained in E Bant, ‘Trusts, Powers and Liens: An Exercise in Ground-Clearing’ (2010) 4 J Eq 286. NSWSC 7 October 1993.

218

Häcker

the latter. Citing Chase Manhattan he observed that ‘[m]onies paid as a result of fraud or mistake are impressed with a trust in favour of the payer, who is entitled to an order for the return of those moneys’.94 A similarly sweeping statement is contained in Woolworths Ltd v Richmond Growth Pty Ltd & O’Brien.95 The defendants’ solicitors had miscalculated the amount due under a transaction resulting in an overpayment of AU$450,000 by the plaintiffs.96 Holding that the overpaid amount was held on ‘constructive trust’ for them, Bainton J not only referred to Chase Manhattan, but drew directly on the American Restatement.97 He said: ‘I can see no reason why the law in Australia should take a different view of the legal effect of a mistaken payment or transfer.’ In Ilich v R, already discussed,98 Chase Manhattan was mentioned only in passing, and the terminology was markedly more cautious. Two of the majority judges suggested that although title to the overpaid cash had passed to the defendant (so that a conviction for stealing could not be upheld), the mistaken payer would have had a civil action to recover the amount and ‘equitable rights may arise’.99 This is at least compatible with a power model of proprietary restitution. As Australian courts are beginning to assess the impact of Westdeutsche,100 the power interpretation may yet gain ground.101 Also ambiguous are those decisions in which property rights were said to ‘revest’ upon rescission of the contract in performance of which they were originally transferred. In Alati v Kruger,102 for example, the High Court famously stated that ‘a rescission which the common law courts would not accept as valid cannot of its own force revest the legal title to property which had passed, but if a court of equity would treat it as effectual the equitable title to such property revests upon the rescission’,103 and in Daly v Sydney Stock Exchange Ltd,104 another High Court case, Brennan J took for granted that this principle applied not only to sale, but across the board. As a corollary, he concluded that a lender of money could not assert any equitable interest or treat the borrower as a trustee unless and 94

95 97 99 101

102

In fraud cases, there is (additionally?!) a common law power in rem: cf eg Hunter BNZ Finance (n 36) where an equitable remedy was not sought and the issue of tracing through mixed funds did not arise. NSWSC 1 November 1996 (‘Woolworths’). 96 There was no suggestion of fraud. Restatement (n 74). 98 Ilich v R (n 32): see text to nn 32–33. Ibid 129 (Wilson and Dawson JJ). 100 Cf n 78 and corresponding text. In Wambo Coal Pty Ltd v Stuart Karim Ariff [2007] NSWSC 589, [32]–[44], White J expressly adopted Lord Browne-Wilkinson’s knowledge- or ‘conscience’-based approach. Alati v Kruger (n 58). 103 Ibid 224. 104 (1986) 160 CLR 371.

Causality and abstraction in the common law

219

until the contract of loan had been validly set aside.105 Though indicative of a causal approach, these decisions do not unequivocally support the immediate interest model of proprietary restitution. They are also explicable on the basis that a party entitled to rescind an obligatory contract is at the same time able to exercise a (notionally independent) power in rem in order to avoid the conveyance. The Australian case law on gifts induced by undue influence would appear to lean more towards the power model. The relevant decisions tend to adopt the approach espoused by the majority in Allcard v Skinner,106 treating the gratuitous transfer as ‘voidable’ in equity.107 Like Allcard v Skinner, many concern religious giving. In Quek v Beggs,108 McLelland J spoke of the impugned gift transactions being ‘rescinded’ and ‘set aside’. He ordered a re-transfer of the real estate concerned at common law.109 A similar conclusion was reached in McCulloch v Fern,110 where the defendant sect leader’s ‘spiritual domination’ over the donors led them to give him money subsequently used to pay off the mortgage on a house. Palmer J held that the presumption of resulting trust (which trust would have been created from the outset) had been successfully rebutted by the fact that the payment was intended as a gift ,111 but that – following rescission for undue influence – a ‘constructive trust’ had arisen in proportion to the parties’ respective contributions.112 Finally, in Hartigan v 105

106 107

108 109

110 112

Ibid 387–90, followed in Greater Pacific Instruments Pty Ltd (in liquidation) v Australian National Industries Ltd (1996) 39 NSWLR 143; Hancock Family Memorial Foundation v Porteous (2000) 22 WAR 198. But cf the critical observations by M Bryan, ‘Rescission, Restitution and Contractual Ordering: The Role of Plaintiff Election’ in A Robertson (ed), The Law of Obligations: Connections and Boundaries (UCL Press, London 2004) 59, esp 62–70. Bryan’s argument divorces the issue of proprietary restitution from the fate of the obligatory contract, albeit in a slightly different way from the one envisaged by the power model. Allcard v Skinner (n 83): see text to nn 83–85. A difficult case is Badman v Drake [2008] NSWSC 1366, where a gift of money was ‘set aside’. Rather than declaring that the traceable proceeds were held on trust for the donor, Young CJ saw them as no more than a security for the personal claim to repayment (described as ‘equitable compensation’). (1990) 5 BPR 11, 761. Cf also Louth v Diprose (1992) 175 CLR 621 (‘Louth v Diprose’), a case argued and decided on the basis of ‘unconscionability’. [2001] NSWSC 406. 111 Ibid [50]. Ibid [114] ff. Contrast Reid v Reid (NSWSC 30 November 1998) (‘Reid ’), where an (apparently) immediately vested resulting trust was found to exist. A son heavily reliant on his parents had fi nanced the purchase of a house of which he and his mother were registered as joint tenants. Bryson J held that undue influence had been made out even without any improper conduct on the parents’ part.

220

Häcker

International Society for Krishna Consciousness Inc,113 a gift of a farm to the Hare Krishna Movement could have been set aside had it not been for the intervening sale of the farm to an innocent third-party purchaser. As it was, the donee was held liable to disgorge the proceeds of the sale. Bryson J described the personal remedy as ‘equitable relief’. There was not the slightest suggestion that the donee had, by the sale on, breached a fully constituted trust.114 One factor making the analysis of Australian decisions difficult is the courts’ tendency to approach proprietary responses to unjust enrichment from a distinctly defendant-sided perspective. Rather than focusing on the transferor’s impaired consent or the absence of a legal basis for the transfer, judges ask whether it would be ‘unconscionable’ for the transferee to exercise the unfettered rights of someone who has acquired common law title. If so, equitable constraints are imposed by means of a ‘constructive trust’.115 The language of ‘unconscionability’ pervades a number of the cases discussed above. Its dangers lie less in the shift of perspective as such than in the potential for inviting ‘discretionary remedialism’, ie the re-allocation of property rights by the exercise of judicial discretion. Such temptation should and can be resisted.116 What the shift of perspective might then lead to in the long run is the exclusion of proprietary restitution in spontaneous mistake cases, a development which is – as shown above – compatible with the power model. The argument for allowing the transferor to revoke his consent to a conveyance made to discharge a non-existent liability is, after all, stronger where the mistake was induced by the defendant’s misrepresentation than where it was spontaneous. For the time being, ‘unconscionability’ appears not to be so confi ned, at least not expressly.117 However, it is interesting – and (in view of the ‘constructive trust’ rhetoric) also 113 114

115 116

117

[2002] NSWSC 810. Since Bryson J did not advert to his own earlier decision in Reid (n 112), we may infer that he did not actually regard the Reid case as concerning a ‘fully effectual and intended gift’ procured by undue influence. The leading case is Muschinski v Dodds (1985) 160 CLR 583. Bryan (n 79) 276, observes that – despite the rhetoric – there is ‘in fact no tendency on the part of Australian judges to interfere with claimants’ established property rights. “Conscience” is for the most part synonymous with the enforcement of a claimant’s proprietary base.’ In the New Zealand case of Taitapu Gold Estates Ltd v Prouse [1916] NZLR 825, 833, Hosking J actually stated that ‘[e]quity regards it as unconscientious to retain what has been given and received in mistake’.

Causality and abstraction in the common law

221

slightly perplexing – that the concept features more prominently in the gift cases applying the power model118 than in those apparently approving the immediate interest model.119

F.

Summary and conclusion

In a recent contribution concerning the circumstances under which a claimant can obtain a proprietary remedy, Michael Bryan writes: ‘The cases … are mostly “a wilderness of individual instances”, being for the most part decisions on their own facts from which few general propositions can be derived.’120 Nowhere is this statement borne out more impressively than by the case law dealing with proprietary responses to unjust enrichment. This paper has sought to put some of the conflicting decisions into focus by looking at them through the eyes of a comparative lawyer. Its point of departure was the Civilian question about the extent to which Common Law jurisdictions can be characterized as operating an ‘abstract’ or ‘causal’ transfer system. At first glance, this has nothing to do with proprietary restitution, but only with the rules governing the passing of property. These are relatively straightforward. Except in the sale of goods context (where the solo consensu principle applies), transfers of title at common law are abstract. Their validity does not depend on the existence of a valid legal basis. And even in sale cases, it is arguable that a ‘doctrine of double effect’ should be recognized so as to ensure that title to goods sold does not automatically revest in the fraudulent seller when the defrauded buyer rescinds the contract of sale. Provided that delivery has already occurred, its conveyancing effect would make the (second) transfer abstract and thus invulnerable to defects in the parties’ obligatory relationship. Yet an account of causality and abstraction within the Common Law tradition would be incomplete if it did not also consider the issue 118

119

120

A particularly well-known example is Louth v Diprose (n 109), where a substantial gift made by a lovesick man to a woman deliberately exploiting his affections was ‘set aside’ for ‘unconscionable conduct’. While it may go without saying that a fraudster’s conduct is ‘unconscionable’, one would have expected more than a passing reference to ‘unconscionability’ in Woolworths (n 95). In Reid (n 112), Bryson J emphasized that there was ‘nothing like victimisation in this case’ and thus no unconscionability! Bryan (n 79) 271.

222

Häcker

of proprietary restitution and in particular the role of equity in reversing impaired consent transfers made without a legal basis. Cases adopting the immediate interest model are implicitly supplanting common law abstraction by a causal principle in equity. The equitable interest in the asset transferred is automatically carried back to the transferor. The power model of proprietary restitution, by contrast, regards transfers as abstract both at common law and in equity. Though the model allows for ‘apparent’ exceptions where the identical defect besets both contract and conveyance, and though it can also cater for spontaneous mistake cases, there is not a hint of causality about it. Different Common Law jurisdictions may well go down different routes in following one or the other model, but their precedents should at least strive for internal consistency. Hopefully, it will one day be possible to distil from them firm general propositions about the pre-conditions of proprietary restitution in a given legal system. Until then, it remains to be seen whether (and where) equity actually follows the common law on the issue of abstraction.

10 Trust and theft Robert Chambers

This chapter concerns the trust as a response to theft. For anyone hoping to recover misappropriated assets or their traceable proceeds, this is an important practical issue. For a trust lawyer, it also involves fascinating questions about the division between law and equity, the nature of equitable interests, and the reasons why trusts arise. It is an issue wherever there is a law of trusts, but of particular interest in Australia thanks to the High Court’s judgment in Black v S Freedman & Co Ltd.1 An employee stole money from his employer and paid it to his wife, and the court held that the traceable proceeds of the stolen money were held in trust for the employer. While this might have been regarded as a trust arising in response to a breach of fiduciary duty, O’Connor J did not rely on this, but said, ‘[w]here money has been stolen, it is trust money in the hands of the thief, and he cannot divest it of that character’.2 This trust has been the subject of a recent debate in the Journal of Equity between Susan Barkehall Thomas and John Tarrant. Barkehall Thomas argued that a trust is not possible so long as the victim retains legal title to the stolen assets, but if that title is lost, then the traceable proceeds can be held in trust.3 She was responding to Tarrant’s argument that the thief’s right to possession of the stolen assets is held in trust for the victim,4 and provoked his reply.5 Presented here is the view that the thief ’s right to possession of stolen assets can be the subject of a trust, but there is no good reason why it should be. The victim’s superior legal right to possession is adequately protected at common law. If the victim’s legal title is lost producing 1 3

4

5

2 (1910) 12 CLR 105 (‘Black v Freedman’). Ibid 110. S Barkehall Thomas, ‘Th ieves as Trustees: The Enduring Legacy of Black v S Freedman & Co Ltd ’ (2009) 3 J Eq 52. J Tarrant, ‘Property Rights to Stolen Money’ (2005) 32 UWALR 234; J Tarrant, ‘The Theft Principle in Private Law’ (2006) 80 ALJ 531. J Tarrant, ‘Thieves as Trustees: In Defence of the Theft Principle’ (2009) 3 J Eq 170.

223

224

Chambers

traceable proceeds, then a trust of those proceeds does and should arise. A trust of the traceable proceeds of stolen assets can be understood as a purchase money resulting trust, in which the purchase price for the proceeds was provided by the victim unwillingly and with no intention to benefit the thief. In modern terms, this can be described as restitution of unjust enrichment at the victim’s expense, which is sometimes called subtractive unjust enrichment to distinguish it from wrongful enrichment or profit from wrongdoing. While the crime of theft is clearly a wrong, that wrong is not the real reason why the trust arises. A trust of the original stolen assets cannot be explained the same way. The thief’s right to possession was not acquired at the victim’s expense. If a trust arises at that stage, it can only be a constructive trust arising in response to the wrong of theft. Previously such trusts were limited to cases of breach of trust or fiduciary duty, murder, or manslaughter. Its extension to ordinary theft is difficult to justify. This chapter deals first with the possibility of a trust of the original stolen assets and then a trust of the traceable proceeds of those assets.

A.

Trust of stolen assets

If assets were already held in trust before being misappropriated, then normally they will continue to be held in trust so long as they remain identifiable, unless they are transferred to someone who takes free of the trust because of a defence such as bona fide purchase, overreaching, or indefeasibility of registered title. This is not controversial (although there is some controversy over the nature of the trust of the traceable proceeds of those assets).6 The concern here is the possibility of a trust of stolen assets that were not held in trust at the time of the theft. To analyse this issue properly, we must first distinguish between the original assets and their proceeds, and then between cases in which the victim retains legal title to the original assets and those in which that title is lost. Only then can we consider whether a trust of the original assets can and should arise. 6

The most recent contribution to the long running debate is J Penner, ‘Value, Property, and Unjust Enrichment: Trusts of Traceable Proceeds’ in R Chambers, C Mitchell, and J Penner (eds), The Philosophical Foundations of the Law of Unjust Enrichment (Oxford University Press, Oxford 2009) ch 11.

Trust and theft

1.

225

Assets and their proceeds

Where the original assets are goods, there is normally no difficulty distinguishing them from their proceeds, except perhaps in cases where they have been mixed with other indistinguishable goods or used to manufacture new goods. When stolen goods are sold, the proceeds of sale are clearly distinct from the original asset. The same is true when stolen money is used to purchase goods. There is some potential for confusion when money is deposited in or withdrawn from a bank account. This is because we commonly think of cash, cheques and bank accounts all as money. If a thief deposits stolen money in a bank (as happened in Black v Freedman), the bank will acquire good title to the notes and coins, in exchange for an adjustment to the balance of the thief’s bank account. If the account is in credit, the increased balance is an increased debt due to the thief,7 and this asset is the traceable proceeds of the stolen cash. If the account is overdrawn, the deposit decreases the thief’s debt to the bank, and while this benefits the thief, it is not normally regarded as leaving behind any traceable proceeds.8 Where cash is withdrawn from a bank account dishonestly, those notes may be either original assets or proceeds depending on whether the victim is the bank or its customer. If the rogue had authority to draw on the account (as the customer’s agent, employee, partner etc), the customer bears the loss as a reduction in the balance of its account, and the notes received by the rogue are the traceable proceeds of that lost asset. If the withdrawal was unauthorized, then normally the bank bears the loss and the notes received by the rogue are the bank’s original assets transferred to the rogue by mistake.9

2.

The victim’s title

The next question is whether the victim has retained legal title to the misappropriated assets. There are numerous ways in which that title might be lost. First, it may be lost at the outset, depending on the way in which the assets are misappropriated. A rogue can obtain the victim’s legal title by 7

8

9

Foley v Hill (1848) 2 HLC 28, 9 ER 1002; Foskett v McKeown [2000] UKHL 29, [2001] 1 AC 102, 110, 127–8. Bishopsgate Investment Management Ltd v Homan [1994] EWCA Civ 33, [1995] Ch 211; see LD Smith, ‘Tracing into the Payment of a Debt’ (1995) 54 CLJ 290. See Agip (Africa) Ltd v Jackson [1990] EWCA Civ 2, [1991] Ch 547 for an exception to this.

226

Chambers

fraud or forgery, whereas ordinary theft deprives the victim of possession, but not title (that is, the right to possession). A fraudulently induced deed or contract of sale will cause title to pass from victim to rogue unless the deception is so fundamental that it renders the deed or contract void (for non est factum).10 While forgery has no effect on the victim’s title at common law, the registration of a forged transfer of land will cause title to pass.11 In these cases, the rogue acquires a voidable legal title, and the victim acquires a power to recover it by rescinding the deed or contract or by rectification of the land titles register. The victim’s power to recover legal title is a right or power in rem that can be exercised against subsequent owners, subject to the rules protecting honest buyers. A right to recover land through rectification has been called a trust.12 Ordinary theft does not destroy the victim’s title to the money, documents, or goods stolen. By taking possession, the thief thereby obtains a right to possession (as discussed below), but the victim retains a better right to possession until something else occurs to bring about the loss of that right. If the victim’s legal title survives the theft, it may yet be destroyed by subsequent events. There are numerous ways in which that might happen. Goods, documents and money may be physically destroyed. Goods may cease to exist in law under the rules governing specification, accession, or fi xtures if they are used in a manufacturing process or are attached to other goods or land. The end of a limitation period can extinguish a right to possession, although some statutes provide exceptions for stolen goods.13 The sale of stolen assets to an honest buyer can also destroy the victim’s title. This happens if stolen money (that is, cash) is used as currency. A bona fide purchaser of notes and coins for value will acquire good title to them free of the victim’s right.14 There are also rules protecting people 10

11

12

13 14

Cundy v Lindsay (1878) 3 App Cas 459; see W Swadling, ‘Rescission, Property, and the Common Law’ (2005) 121 LQR 123. See eg, Macquarie Bank Ltd v Sixty-Fourth Throne Pty Ltd [1998] 3 VR 133 (CA); Dollars & Sense Finance Ltd v Nathan [2007] NZCA 177; Barclays Bank plc v Guy [2008] EWHC 893 (Ch), aff ’d [2008] EWCA Civ 452. Taitapu Gold Estates Ltd v Prouse [1916] NZLR 825; Blacklocks v JB Developments (Godalming) Ltd [1982] Ch 183. In Malory Enterprises Ltd v Cheshire Homes (UK) Ltd [2002] EWCA Civ 151, [2002] Ch 216, [65] the plaintiff was described as the ‘beneficial owner’ of land that could be recovered by rectification. See eg, Limitation Act 1980 (UK) s 4; Limitation Act 1985 (ACT) s 5. D Fox, ‘Bona Fide Purchase and the Currency of Money’ (1996) 55 CLJ 547; D Fox, Property Rights in Money (Oxford University Press, Oxford 2008) ch 8.

Trust and theft

227

who acquire cheques and other negotiable instruments as holders in due course (ie for value, in good faith, and without notice of the defect in title).15 Title to stolen goods is not so easily lost. An honest buyer will acquire the thief’s right to possession, but this will not normally destroy the victim’s superior right to possession and the buyer will be liable for the tort of conversion. This is the standard application of the rule that nemo dat quod non habet (no one can give what he does not have). Subject to a few wellknown exceptions, the thief cannot sell more than he or she has, which is a right to possession subject to the victim’s better right. Most of the exceptions to nemo dat are unlikely to apply to stolen goods, since they are designed to protect honest buyers who have relied on the seller’s apparent authority to sell them as the owner’s agent. When goods are stolen, the victim is not responsible for the buyer’s belief that the thief has authority to sell the goods,16 and the victim’s carelessness in protecting goods from theft does not operate as an exception to nemo dat.17 An exception that may apply in some jurisdictions is sale in market overt. This was abolished in England but is still preserved in South Australia, Tasmania and Western Australia.18 However, if the thief is later convicted of theft, then title to goods sold in market overt will revert to the victim.19 All of the exceptions to nemo dat depend on the sale to an honest buyer. In that event, the victim will turn her or his attention to the traceable proceeds of sale, if any, as discussed below. However, so long as the stolen assets are retained by the thief, then normally the victim will continue to hold legal title to those assets, and the question at the centre of the debate between Barkehall Thomas and Tarrant is whether the victim can have both legal title to the assets and an equitable interest in them under a trust. 15 16 17

18

19

See eg, Cheques Act 1986 (Cth) s 50. See Farquharson Brothers & Co v C King & Co [1902] AC 325 (HL). Moorgate Mercantile Co Ltd v Twitchings [1977] AC 890, 925; Johnson Matthey (Aust) Pty Ltd v Dascorp Pty Ltd [2003] VSC 291. Sale of Goods Act 1895 (SA) s 22; Sale of Goods Act 1895 (WA) s 22; Sale of Goods Act 1896 (Tas) s 27: ‘Where goods are sold in market overt, according to the usage of the market, the buyer acquires a good title to the goods, provided he buys them in good faith, and without notice of any defect or want of title on the part of the seller’. Th is exception to nemo dat does not apply to sales of cattle in Tasmania: Sale of Goods Act 1896 (Tas) s 27. Sale of Goods Act 1895 (SA) s 24; Sale of Goods Act 1895 (WA) s 24; Sale of Goods Act 1896 (Tas) s 29.

228

Chambers

3.

Can a trust arise?

As discussed above, the sale of stolen assets may or may not destroy the victim’s legal title. Therefore, it is possible for the victim to retain legal title to stolen assets in the hands of the buyer and claim the traceable proceeds of sale in the hands of the thief. That is discussed at the end of this chapter. This section deals with the possibility of a trust of the original stolen assets while the victim still retains legal title to them. Please note we are discussing only the possibility of such a trust arising, and could not do otherwise since there are no cases in which such a trust has been found to exist. All of them, including Black v Freedman, concerned a trust of the traceable proceeds. Barkehall Thomas’ main argument against a trust of the original stolen assets was that such a trust is not possible because it lacks subject matter. Th is was put in two alternative ways: either the thief has no title or the thief ’s possessory title cannot be the subject of a trust. For the first argument, she relied on a passage in Rimer J’s judgment in Shalson v Russo:20 [A] thief ordinarily acquires no property in what he steals and cannot give a title to it even to a good faith purchaser: both the thief and the purchaser are vulnerable to claims by the true owner to recover his property. If the thief has no title in the property, I cannot see how he can become a trustee of it for the true owner: the owner retains the legal and beneficial title.

As Tarrant explained, this is contrary to the fundamental common law principle of relativity of title. The thief does have a title. Simply by taking possession, the thief thereby acquires a right to possession which is enforceable against everyone in society except someone with a better right, such as the victim or the police in the exercise of their statutory powers to seize stolen property. Against anyone else, the essence of the thief’s claim is ‘I had it first’ and the issue of how the thief obtained possession is simply not relevant. As Lightman J said in Costello v Derbyshire Constabulary:21 [T]he fact of possession of a chattel of itself gives to the possessor a possessory title and the possessor is entitled to rely on such title without reference to the circumstances in which such possession was obtained: his entitlement to do so is not prejudiced by the fact that he obtained such 20 21

[2003] EWHC 1637, [2005] Ch 281, [110]. [2001] EWCA Civ 381, [2001] 1 WLR 1437 (‘Costello’) [14]. Also see Bird v Fort Frances [1949] 2 DLR 791 (Ont).

Trust and theft

229

possession unlawfully or under an illegal transaction. His claim can only be defeated by proof of a title superior to his possessory title.

A possessory title (that is, a right to possession obtained solely by taking possession) is protected as fully as a title acquired by sale, gift or in other ways. When damages are awarded for conversion, they are normally measured by the full market value of the goods without deduction for the fact that the plaintiff is a thief, finder, or bailee, with only a possessory title.22 The alternative argument, that a possessory title cannot be held in trust, was made and rebutted somewhat more tentatively. Barkehall Thomas said:23 Tarrant assumes that the possessory right held by the thief is a form of title which the thief can hold on trust for the victim. However this is not necessarily correct. As a mere possessory title, which gives only limited rights, it is not necessarily a right which can be held by one person on trust for another.

Tarrant responded briefly by saying, ‘there is nothing in the case law to suggest that a property right that is vulnerable to defeat by another property right is incapable of being held on trust’.24 There is an absence of case law on this point perhaps because it has never been doubted that possessory titles can be held in trust, and there is no reason to start now. The trust is such a powerful and flexible institution in part because any assignable right can be held in trust (and so too can some non-assignable rights).25 A right that cannot be assigned because it is purely personal to the right-holder (such as a licence to practise a profession) cannot be held in trust,26 but other limits on title do not have the same effect. A possessory title has market value, it can be sold or given away, and there is nothing to prevent it being held in trust. If it were otherwise, the consequences would be alarming. Defects in title and the possibility that we might not have the best possible title are risks we all face, including trustees. The suggestion that such defects might prevent those assets from being held in trust would certainly surprise settlors, trustees and beneficiaries around the world. Countless arrangements for the distribution of wealth and 22

23 25 26

See Armory v Delamirie [1722] 1 Strange 506, 93 ER 664; The Winkfield [1902] P 42 (‘The Winkfield ’); Costello (n 21); R Stevens, Torts and Rights (Oxford University Press, Oxford 2007) 63–6. Barkehall Thomas (n 3) 58. 24 Tarrant (n 5) 178. Barbados Trust Co Ltd v Bank of Zambia [2007] EWCA Civ 148. Caratun v Caratun (1992) 96 DLR (4th) 404 (Ont CA).

230

Chambers

management of tax liabilities depend on the validity of trusts that may include such assets. There is a useful parallel in Perry v Clissold,27 a case involving the compulsory acquisition of land from an adverse possessor for use as a school site. The relevant statute provided that compensation would be paid to the ‘owners of land’ acquired, and the Minister of Public Instruction denied a claim brought by Clissold’s executors and trustees on the basis that he had been ‘a mere trespasser, without any estate or interest in the land’.28 The Privy Council advised that full compensation should be paid, warning that to do otherwise would ‘have the effect of shaking titles which but for the Act would have been secure, and would in process of time have become absolute and indisputable’.29 Similarly, a rule that possessory titles could not be held in trust would shake many equitable titles that have long been thought secure, and presumably also prevent such titles from passing to a trustee in bankruptcy for distribution among the bankrupt’s creditors. It can scarcely be imagined that such a rule exists or has been overlooked for so long.

4.

Should a trust arise?

This leads us to the heart of Tarrant’s argument. While there should be no doubt that a thief can hold a possessory title in trust, is there any reason why a trust should arise for the victim? In short, why would equity intervene in this way? Tarrant said that the trust was justified on ‘pragmatic’ grounds,30 quoting an argument made by David Fox:31 The reason for recognizing the trust is entirely pragmatic: it is anomalous that a person who has a distinct equitable title to the money before it is misapplied, such as the principal in a fiduciary relationship, should have standing to follow or trace the money in equity, whereas a person with an undivided legal and beneficial title should be left to rely on the vagaries of the common law rules of identification to recover it.

Access to the equitable tracing rules (assuming they are superior to the common law rules) may be a good reason for imposing a trust over the traceable proceeds of stolen assets, but that does not require a trust to arise before the stolen assets are exchanged for their proceeds.

27 30

[1907] AC 73 (PC). Tarrant (n 5) 179.

28 31

29 Ibid 77, 79. Ibid 80 (Lord Macnaghten). Fox, Property Rights in Money (n 14) 140.

Trust and theft

231

The other pragmatic justification, offered by Barkehall Thomas,32 is that the trust provides better protection from the consequences of the thief’s bankruptcy. However, so long as the victim retains legal title to the assets, that superior right to possession will be enforceable against everyone else in society, including the thief’s trustee in bankruptcy. Honesty is not normally a defence to a claim for conversion. In this situation, the victim is not claiming as an unsecured creditor of the thief, but as someone enforcing a property right to possession of an asset in the trustee’s hands.33 If the stolen assets were sold by the thief and never reached the trustee in bankruptcy, the victim will be an unsecured creditor with respect to the claim against the thief for damages for conversion. A trust then becomes important with respect to any traceable proceeds from the sale, but again, this does not depend on a trust arising before the stolen assets were sold. In the absence of any pragmatic reason for imposing a trust over the original stolen assets, is there a justification based on trust principles? Can we find an accepted reason for imposing a constructive or resulting trust in some other context that might apply by analogy and with sufficient force in this one? We can begin by putting to one side the wide variety of constructive trusts that have been described as ‘perfectionary’.34 These trusts arise in cases involving specific performance, incomplete gifts, secret trusts, mutual wills, proprietary estoppel, or family homes, and can be explained as trusts arising to perfect promises, intentions to benefit others, or detrimentally relied upon expectations. There is nothing to be found among them that might apply by analogy to cases of theft (at least in the absence of a fiduciary relationship).35 The trust we seek to impose on thieves is restitutionary, compelling them to surrender assets that cannot be retained in good conscience. There are two main groups of reasons why people are required to make restitution. The first is wrongdoing. When a benefit has been obtained 32 33 34

35

Barkehall Thomas (n 3) 54. M Bridge, Personal Property Law (3rd edn Oxford University Press, Oxford 2002) 13. G Elias, Explaining Constructive Trusts (Clarendon Press, Oxford 1990); R Chambers, ‘Constructive Trusts in Canada’ (1999) 37 Alberta L Rev 173. There is an argument that the constructive trust imposed in response to a breach of fiduciary duty ‘is not wrong-based’ but compels performance of ‘the undertaking given by the defendant fiduciary when he took office that he would act exclusively in the best interests of his principal’: C Mitchell, ‘Causation, Remoteness, and Fiduciary Gains’ (2006) 17 King’s College LJ 325, 329.

232

Chambers

in breach of duty to the victim, we sometimes compel the wrongdoer to surrender it to the victim. The second is unjust enrichment even in the absence of wrongdoing. A person who receives a benefit at the expense of another, however honestly, can sometimes be compelled to give it back to the person who incurred that expense. As discussed below, a trust of the traceable proceeds of stolen assets might be justified on either ground (with unjust enrichment put forward as the best explanation). However, this is not true of a trust of the original stolen assets. Although the thief does have a possessory title that can be held in trust, that title was not acquired at the victim’s expense. The essential elements of a claim for restitution of unjust enrichment in the absence of wrongdoing are: (a) enrichment of the defendant; (b) at the plaintiff ’s expense; and (c) some reason why retention of that enrichment is unjust.36 The second element (which is not required in cases of restitution for wrongs) is absent in cases where the victim of theft has retained legal title to the stolen assets. It may seem odd to regard the thief’s right to possession as not having been acquired at the victim’s expense. The thief has the use and enjoyment of an asset that was being used and enjoyed by the victim before the theft. It appears to be a clear case of benefit and corresponding deprivation,37 but appearances can be deceiving. No doubt the thief’s possessory title is (or at least can be) enriching, having both use and exchange value. However, the victim still retains a superior legal title with both use and exchange value. While both titles relate to the same asset, they are otherwise unrelated. The thief’s title was not taken from the victim, but acquired independently. In England and Australia, there is no requirement in the law of unjust enrichment that the defendant’s gain equals the plaintiff ’s loss. As Morritt LJ said in Kleinwort Benson Ltd v Birmingham City Council,38 ‘the words “at the expense of the plaintiff ” … do no more than point to the requirement that the immediate source of the unjust enrichment must be the plaintiff ’.39 So, the mere fact that the thief’s gain does not equal the 36

37

38 39

Banque Financière de la Cité v Parc (Battersea) Ltd [1998] UKHL 7, [1999] AC 221, 226–7. See A Burrows, The Law of Restitution (2nd edn Butterworths, London 2002) 15. J Edelman and E Bant, Unjust Enrichment in Australia (Oxford University Press, Oxford 2006) 123, 129. [1997] QB 380 (CA). Ibid 400. Also see Commissioner of State Revenue (Vic) v Royal Insurance Australia Ltd (1994) 182 CLR 51, 75; Roxborough v Rothmans of Pall Mall Australia Ltd (2001) 208 CLR 516, 529; P Birks, Unjust Enrichment (2nd edn Oxford University Press, Oxford 2005)

Trust and theft

233

victim’s loss is neither here nor there. The point is that the victim is not the source of the thief’s possessory title. In other words, the thief’s right to possession does not come from the victim. It was acquired simply by taking possession, and as Lightman J said in Costello, ‘the circumstances in which such possession was obtained’ are entirely irrelevant.40 The victim’s older and superior right to possession continues undiminished by the thief’s new title. The same is true when possession of land is wrongly taken. The adverse possessor acquires a fee simple estate immediately upon taking possession, while the owner’s estate remains unaffected until it is extinguished by the expiry of a limitation period.41 In the meantime, there are two separate estates with respect to the same land that were acquired independently.42 As Lord Radcliffe said in Fairweather v St Marylebone Property Co Ltd:43 It is necessary to start, I think, by recalling the principle that defi nes a squatter’s rights. He is not at any stage of his possession a successor to the title of the man he has dispossessed. He comes in and remains in always by right of possession, which in due course becomes incapable of disturbance as time exhausts the one or more periods allowed by statute for successful intervention. His title, therefore, is never derived through but arises always in spite of the dispossessed owner.44

It does not matter whether the person dispossessed has only a limited right to possession. The squatter acquires a fee simple estate even if the person dispossessed is only a tenant from year to year.45 It is the same with theft of goods. The thief acquires an unlimited right to possession even if the victim is just a bailee. The quality or duration of the victim’s title is irrelevant because the thief does not acquire that title. Any weakness in the thief’s title is unrelated to the manner in which it was acquired, but is due to the continued existence of the victim’s superior title, which arose prior to the theft and continues unchanged by it. So long as the victim retains legal title, there is no transfer of rights from victim to thief and neither is there any transfer of value. The thief’s

40 41

42 43

78–82; cf M McInnes, ‘Interceptive Subtraction, Unjust Enrichment and Wrongs: A Reply to Professor Birks’ (2003) 62 CLJ 697. Costello (n 21) [14]. In England, the Limitation Act 1980 (UK) s 15 does not apply to registered land, so the owner’s estate will not be extinguished until the adverse possessor is registered as proprietor of that estate: Land Registration Act 2002 (UK) ss 96–8. E Cooke, Land Law (Oxford University Press, Oxford 2006) 207–8. [1963] 1 AC 510. 44 Ibid 535. 45 Ibid 541.

234

Chambers

enrichment arises and exists independently of the victim’s loss. This is demonstrated by the measure of damages available for conversion or trespass. The normal measure is the value of the right infringed, regardless of whether the plaintiff suffers any loss or the defendant makes any gain. For example, in The Winkfield,46 the bailee of goods destroyed in a collision at sea was entitled to their full value even though he was not liable to the bailors and suffered no loss whatsoever. The damages awarded to a plaintiff wrongly deprived of the use of goods is the market value of that use, even if the plaintiff suffered no loss or harm from that deprivation.47 In these cases, the gain to the defendant is equally irrelevant. The defendant who caused the collision in The Winkfield clearly made no gain from the disaster. It is often assumed that if damages are not loss based, then they must be gain based (or punitive or nominal),48 but that is not true. The normal measure of damages is the value of the right infringed regardless of loss or gain. As Robert Stevens said: ‘In the assessment of damages it is necessary to distinguish between damages awarded as a substitute for the right infringed and consequential damages as compensation for loss to the claimant, or gain to the defendant, consequent upon this infringement.’49 A thief is liable to the victim for the market value of the goods stolen and it does not matter whether the thief derived any benefit from the theft or the victim suffered any loss. Those three values exist independently of each other. The source of the thief’s benefit is her or his possessory title and the existence and value of that title is irrelevant to the victim’s claim. Since the victim’s rights to possession and damages are not affected by the thief’s gain, it is difficult to see how that gain comes from the victim in any meaningful legal sense. It has been suggested that the fact of possession is the enrichment acquired by the thief at the victim’s expense, even though there is no change to the victim’s right to possession.50 However, the fact of possession cannot be disentangled from possession itself, which is a legal right. We sometimes use the term ‘factual possession’ to mean the element of physical control which is required (along with an intention to possess)

46 47

48 49 50

The Winkfield (n 22). The Mediana [1900] AC 113 (HL); Strand Electric & Engineering Co Ltd v Brisford Entertainments Ltd [1952] 2 QB 246 (CA). See J Edelman, Gain-Based Damages (Hart Publishing, Oxford 2002) 67–8. Stevens (n 22) 60; also see 63–70, 79–84. Edelman and Bant (n 37).

Trust and theft

235

to obtain ‘legal possession’,51 but that physical control does not normally have legal significance on its own independently of possession. A servant with custody of goods possessed by the master has no claim for wrongful interference with that custody. The claim belongs to the master who has possession.52 Similarly, people who interfere with the physical control of goods do no wrong unless they interfere with the right to possession of those goods. Warehouses and carriers are not guilty of conversion if they store or ship stolen goods on behalf of the thief, so long as they act honestly. As Romer J said in Barker v Furlong,53 ‘the carrier and packing agent are generally held not to have converted, because by their acts they merely purport to change the position of the goods and not the property in them’.54 So long as the victim retains legal title, her or his claim against the thief is not restitutionary, but simply the enforcement of a right acquired before the theft, most probably by sale or gift. The story is substantially different in cases where the victim’s legal title is transferred to a rogue and the victim is entitled to rescind the transaction and recover that title. The rogue has acquired a title at the victim’s expense in circumstances that make it unjust for the rogue to retain for her or his own benefit. The victim’s right to rescind the transaction and recover title can be explained as restitution of unjust enrichment (although it might also be explained in other ways). Perhaps the easiest way to assess whether there is any adequate justification for a trust of the original stolen assets in the absence of wrongdoing is to consider the situation with the element of wrongdoing removed. Would we impose a trust on an honest finder, who obtained a possessory title without any intention of interfering with the true owner’s right to possession? There are certainly no cases suggesting that is possible (just as there are no cases of a thief holding the original stolen assets in trust), and it is difficult to imagine any possible reason for imposing a trust. This is also true where an honest defendant is guilty of the tort of conversion but not the crime of theft. The only justification for imposing a trust over the thief’s possessory title seems to be the desire to strip the thief of the profits of crime, and this does not seem to be sufficient. Trusts have been imposed in cases where assets were obtained in breach of trust or fiduciary duty or by murder or manslaughter, even though 51 52 54

JA Pye (Oxford) Ltd v Graham [2002] UKHL 30, [2003] 1 AC 419, [40]. See Bridge (n 33) 20–1. 53 [1891] 2 Ch 172. Ibid 182. Also see Marcq v Christie, Manson & Woods Ltd [2003] EWCA Civ 731, [2004] QB 286; Bridge (n 33) 58–61.

236

Chambers

those assets were not acquired at the victim’s expense. In Canada, trusts can arise in cases of breach of confidence.55 However, for other wrongs, restitutionary trusts do not arise, or at least not in the absence of unjust enrichment at the victim’s expense. It would be odd to make an exception for ordinary theft. It was not that long ago that a major debate took place over whether a constructive trust should be imposed in cases of bribery.56 In AttorneyGeneral (Hong Kong) v Reid,57 the Acting Director of Public Prosecutions for Hong Kong had accepted millions of dollars in bribes to breach his fiduciary duty to the Crown, and the New Zealand Court of Appeal, following authority established by the English Court of Appeal a century earlier in Metropolitan Bank v Heiron58 and Lister & Co v Stubbs, 59 held that a constructive trust did not arise. Th is was reversed by the Privy Council, which set the law in a new direction. Lord Templeman said:60 Although over 100 years has passed since Lister v Stubbs, no one can be allowed to say that he has ordered his affairs in reliance on the two decisions of the Court of Appeal now in question. Thus no harm can result if those decisions are not followed.

A trust was imposed in Reid to help ensure that a fiduciary would not receive any profit from a breach of fiduciary duty and to facilitate tracing so that the proceeds of the crime could not be ‘whisked away to some Shangri La which hides bribes and other corrupt monies in numbered bank accounts’.61 While the same pragmatic concerns arise in cases of ordinary theft, it can hardly be supposed that a trust has long been quietly available as a response to theft, but only recently in cases of bribery. Theft is also a crime that can impose great harm on its victims, but it lacks the two attributes that figured prominently in the advice given by Lord Templeman in Reid: bribery involves a betrayal of fiduciary duty, and ‘is an evil practice which threatens the foundations of any civilised society’.62 Perhaps this overstates the harm of bribery and understates the harm of theft, but it cannot be doubted that the constructive trust imposed in Reid 55

56

57 58 60

Lac Minerals Ltd v International Corona Resources Ltd [1989] 2 SCR 574, 61 DLR (4th) 14; Foreman v Chambers [2007] 284 DLR (4th) 210 (BCCA). See R Goode, ‘Property and Unjust Enrichment’ in A Burrows (ed), Essays on the Law of Restitution (Oxford University Press, Oxford 1991) 215; P Millett, ‘Bribes and Secret Commissions’ [1993] RLR 7 reprinted in P Birks (ed), The Frontiers of Liability (Vol 1) (Oxford University Press, Oxford 1994) 51. [1993] UKPC 2, [1994] 1 AC 324 (‘Reid ’); reversing [1992] 2 NZLR 385 (CA). (1880) 5 Ex D 319 (CA). 59 (1890) 45 Ch D 1 (CA) (‘Lister v Stubbs’). Reid (n 57) 336. 61 Ibid 339 (Lord Templeman). 62 Ibid 330.

Trust and theft

237

was an exceptional remedy to a particular form of wrongdoing and not a routine response generally available for all wrongs. Trusts also arise in cases of murder and manslaughter, when one joint tenant kills another. The surviving joint tenant holds the title free of the deceased joint tenant’s interest at law, but as a tenant in common with the victim’s estate in equity.63 The severity of the crime is the factor which justifies the imposition of a constructive trust in the absence of unjust enrichment or any breach of fiduciary duty. These are not cases of unjust enrichment at the victim’s expense, although (like the thief’s possessory title) it might seem otherwise. The survivor’s joint ownership, and the right of survivorship which is an inherent feature of that ownership, were not acquired unjustly, but obtained at an earlier stage, most likely by sale or gift. A surviving joint tenant is not prevented from enjoying that right if someone else murders the other joint tenant, regardless of how ‘unjust’ we regard the death and loss.64 It is the survivor’s own crime which calls for the intervention of equity. In terms of moral turpitude, ordinary theft does not provide the same justification, at least not in the absence of unjust enrichment at the victim’s expense.

B.

Trust of proceeds

As suggested above, the wrong of theft is insufficient to justify the imposition of a trust in the absence of unjust enrichment at the victim’s expense. Argued here is that where unjust enrichment is present, the element of wrongdoing is unnecessary. A trust of the proceeds of stolen assets can be justified entirely by unjust enrichment. It is not a constructive trust imposed to strip a wrongdoer of profits, but an application (or extension) of the principles which give rise to a purchase money resulting trust.

1.

Purchase money resulting trust

The classification of a trust as constructive or resulting is not important for its own sake, but is useful if it reveals something about the reason why the trust arises. Those who see the trust of the proceeds of theft as constructive, see it as a response to the wrongful misappropriation. For 63

64

See eg, Dunbar v Plant [1997] EWCA Civ 2167, [1998] Ch 412 (CA); Re Bowlen Estate [2002] 207 DLR (4th) 175 (Alta QB). See Rasmanis v Jurewitsch (1969) 70 SR (NSW) 407.

238

Chambers

example, in Westdeutsche Landesbank Girozentrale v Islington London Borough Council,65 Lord Browne-Wilkinson said:66 I agree that the stolen monies 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 fi nd 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.

For those who take this view, the wrong seems to provide the essential justification for extending the constructive trust from breach of fiduciary duty to ordinary theft. For those who see the trust as resulting, the wrong is not important, since resulting trusts have never depended on wrongdoing, and can be imposed even upon unknowing infants.67 The essential elements connecting the purchase of assets with stolen money to (other) purchase money resulting trusts are: (a) the acquisition of an asset by the defendant; (b) the payment of the purchase price by the claimant; and (c) no intention to make a gift. The controversial element is the last one. Some, like William Swadling, believe that a purchase money resulting trust depends on a presumed declaration of trust.68 Others, like Lord Browne-Wilkinson, believe it depends on a common intention to create a trust.69 If either view is correct, the trust of the proceeds of stolen assets cannot be resulting. However, there is a long (albeit slender) line of cases in England, Canada and Australia in which the trust in this situation was identified as a resulting trust. It begins with Ryall v Ryall,70 in which an executor purchased land with money misappropriated from the deceased person’s estate. Lord Hardwicke LC said that ‘the means of coming at this by way of resulting trust is excepted out of the statute of frauds; if the estate is purchased in the name of one, and the money paid by another, it is a trust notwithstanding there is no declaration in writing by the nominal purchaser’.71 Th is was followed in the Ontario case of Merchants Express Co v Morton,72 where the proceeds of a train robbery were used to purchase a hotel. The victim’s right to an injunction restraining the sale of the hotel 65 67 68 69 71

[1996] UKHL 12, [1996] AC 669 (‘Westdeutsche’). 66 Ibid 716. Re Vinogradoff [1935] WN 68; Re Muller [1953] NZLR 879. W Swadling, ‘Explaining Resulting Trusts’ (2008) 124 LQR 72. Westdeutsche (n 65) 708. 70 (1739) 1 Atk 59, 26 ER 39. 72 Ibid 59–60; 39–40. (1868) 15 Gr 274.

Trust and theft

239

was based on ‘the principle of resulting trust arising from the purchase of property by one with the moneys of another, and upon the principle of the Court following moneys or other property; and fastening upon them in favour of the true owner’.73 In Sharp v McNeil,74 a partner used assets misappropriated from the partnership to purchase a house for his sister in Nova Scotia, and Townshend CJ said:75 The law is not so helpless as to leave the party wronged without a remedy, and it holds the person to whom such a conveyance has been made as a trustee for the rightful owner. In other words a resulting trust follows.

In Re Kolari,76 a bank employee in Ontario purchased assets with money stolen from the bank and Stortini DCJ said that a ‘resulting trust arises where property is obtained by fraud or theft’.77 In El Ajou v Dollar Land Holdings plc,78 Millett J (as he then was) based the right to trace the proceeds of a massive fraud on ‘an old-fashioned institutional resulting trust’.79 This was followed in New South Wales in Evans v European Bank Ltd,80 in a case where the proceeds of a massive credit card fraud could be traced to a company in Vanuatu. Spigelman CJ said that the Vanuatu company held the proceeds in trust for the cardholders, relying on Black v Freedman and other cases, including Westdeutsche. He then went on to say:81 The trust so created is, in my opinion, better described as a presumed or resulting trust, rather than as a constructive trust. There is no authoritative statement as to when trusts should be classified as presumed, resulting or constructive … A case of simple theft involves a transfer of property about which the transferor was entirely unaware. The transferee holds any property into which the stolen property has been converted on trust in a manner which should be seen as automatic.

If the trust of the proceeds of stolen assets is resulting, it does not depend on any presumption of intention. Proof of the misappropriation provides the necessary evidence that the victim did not intend to make a gift. The value of describing the trust as resulting has nothing to do with the procedural advantage provided by the presumption of resulting trust. Its value is perhaps twofold. 73 75 78 79 80

Ibid 278 (Spragge VC). 74 (1913) 15 DLR 73 (NSCA), aff ’d (1915) 70 DLR 740 (SCC). Ibid (NSCA) 75. 76 (1981) 36 OR (2d) 473. 77 Ibid 478. [1993] 3 All ER 717, rev’d on other grounds [1994] 2 All ER 685 (CA). Ibid (first instance) 734. (2004) 61 NSWLR 75 (‘Evans’) [112], [113]. 81 Ibid.

240

Chambers

First, a resulting trust is not a discretionary remedial response. Lord Browne-Wilkinson opened a door to that possibility in Westdeutsche, when he expressed an appreciation for the way in which a North American ‘court by way of remedy might impose a constructive trust on a defendant who knowingly retains property of which the plaintiff has been unjustly deprived’.82 As Spigelman CJ noted above, the resulting trust is an automatic response to the purchase of proceeds with the victim’s money. The classification of the trust as constructive leaves this in doubt, prompting Spigelman CJ to take the precaution of saying, ‘[i]f appropriately characterised as “constructive”, the trust that arises upon receipt of stolen funds by an active participant in the theft is of an institutional rather than remedial character’.83 The second, more important benefit of the resulting trust is that it does not depend on wrongdoing. Of course, this does not matter where the proceeds are acquired by the thief, for once the trust arises, it will persist even if the proceeds are transferred to an innocent recipient. O’Connor J made this clear in Black v Freedman, when he said that ‘it is trust money in the hands of the thief, and he cannot divest it of that character’.84 However, if the original stolen assets are not held in trust, and the trust arises only when they are exchanged for proceeds, how do we justify the trust in cases where the original assets are transferred to an innocent recipient and then exchanged for proceeds? This poses no problem if wrongdoing is not an essential element.

2.

Innocent recipients

In Black v Freedman, the thief paid the stolen money into his own bank account. At that point, the victim’s legal title to the money was lost and the proceeds of that money (the increased balance of the thief’s account) was held in trust for the victim. The thief then drew money out of the account and paid it into his wife’s account. Since she was a donee and therefore not entitled to the defence of bona fide purchase, it did not matter whether she

82 83

84

Westdeutsche (n 65) 716. Evans (n 80) [115]. Also see Commonwealth of Australia v Offi cial Trustee in Bankruptcy as Trustee of the Property of Stephen Vasil [2004] NSWSC 1155, [18] (Young CJ): ‘Where money has been stolen, including stolen by deception or by fraud, equity imposes a constructive trust on the thief immediately upon receipt of those stolen moneys.’ Black v Freedman (n 1) 110.

Trust and theft

241

had notice of the theft or not. Her involvement in the theft was irrelevant because the assets she received were already trust assets. Events occurred in a different order in Heperu Pty Ltd v Belle.85 An investment broker (Cincotta) misappropriated his client’s cheques and paid them into his wife’s (Belle’s) account with an investment company (Perpetual). He then used forged authorizations to transfer money from the Perpetual account to his wife’s Westpac bank account and to draw on the Westpac account to pay down her credit card and mortgage debts and their joint mortgage debts. The claim that he was acting as her agent failed. So too did the claim against her for knowing receipt because she had no knowledge or notice of his misappropriations, and also because she did not receive the money for her own benefit when it was paid through her accounts without her knowledge or authority. The only claim against her with any potential to succeed was that she was ‘liable as a volunteer’. The phrase ‘liable as a volunteer’ was taken from the pleadings in the case and is odd because it does not indicate a source of liability. Liability does not arise just because assets are received by a volunteer (that is, as a donee). It arises because those assets are ‘owned at law or in equity by the plaintiff ’,86 in which case the recipient’s status as a volunteer is relevant because it negates the protection afforded to honest buyers, such as the defences of bona fide purchase, overreaching, or indefeasibility of title, or the exceptions to nemo dat. This must be further qualified in several Australian jurisdictions where the defence of indefeasible title to land is available to volunteers.87 So if, in Heperu v Belle, Cincotta had used misappropriated funds to purchase land in his own name and then transferred it to Belle as a gift, her status as volunteer would have been irrelevant since her title would be indefeasible in New South Wales. The essential question is whether assets received by a volunteer do belong in law or equity to the plaintiff. In Heperu v Belle, the misappropriated cheques belonged to the client at law (and Perpetual was liable to him for conversion). The trust for him first arose when the proceeds of those cheques were paid into Belle’s Perpetual account without her knowledge or consent, but why did it arise? Allsop P said:88 Given the character of the depredation on the appellants by Mr Cincotta, there would be no doubt that the funds in the Perpetual account able to be 85 87

88

[2009] NSWCA 252 (‘Heperu v Belle’). 86 Ibid [162] (Allsop P). Bogdanovic v Koteff (1988) 12 NSWLR 472 (CA); Land Title Act 1994 (Qld) s 180; Land Title Act (NT) s 183; Conlan v Registrar of Titles (2001) 24 WAR 299. Heperu v Belle (n 85) [93].

242

Chambers identified as the proceeds of the misappropriated cheques would belong in equity to the appellant. Ms Belle’s submissions conceded as much.

We face a difficult problem if this is a constructive trust imposed to strip a wrongdoer of ill-gotten gains, for Belle was innocent. The problem is obviated if this is a resulting trust that arises regardless of fault to compel her to give up an asset purchased with the client’s money and without any intention on his part of making a gift. Allsop P recognized this difficulty when he said:89 It is also important to recognise that the trust rests on the existence of property rights and in that sense is not purely remedial. The court declares that a trust exists and existed (though the innocent volunteer did not know it) … The (now discovered) existence of the fund or asset by the (hitherto) entirely innocent volunteer explains, in part perhaps, the taxonomical preference of Spigelman CJ in Robb Evans.

It is sometimes suggested that a trust can arise when an innocent recipient later becomes aware of the misappropriation, because that knowledge affects the recipient’s conscience and perhaps makes the recipient a party to the wrong. In Black v Freedman, Griffith CJ said ‘that a man may at a certain stage be innocent, but that, if he knows that he has got the advantage of a fraud to which he was no party and says he will keep it, then he becomes himself a party to the fraud and is liable to the jurisdiction of the Court of Equity’.90 In Westdeutsche, Lord BrowneWilkinson said:91 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 so long as he is ignorant of the facts alleged to affect his conscience, ie until he is aware that he is intended to hold the property for the benefit of others in the case of an express or implied trust, or, in the case of a constructive trust, of the factors which are alleged to affect his conscience.

Either approach creates more problems than it solves.92 In Heperu v Belle, it would mean that no trust existed when the proceeds of the misappropriated cheques went through Belle’s accounts. Therefore, when money was transferred from her Perpetual account to her Westpac account, the 89 91

92

Ibid [155]–[156]. 90 Black v Freedman (n 1) 109. Westdeutsche (n 65) 705. Also see B McFarlane, The Structure of Property Law (Hart Publishing, Oxford 2008) 305–6. See B Häcker, ‘Proprietary Restitution After Impaired Consent Transfers: A Generalised Power Model’ (2009) 68 CLJ 324.

Trust and theft

243

increased balance of the latter was purchased from her own resources and not at the client’s expense. Presumably, the equitable tracing rules would not be available before the recipient later became aware of the misappropriation, perhaps after the proceeds had already been mixed with other assets. And what would happen if the recipient became bankrupt, died, or declared other equitable interests in the proceeds while still unaware of the misappropriation? Would intervening trusts for creditors or others take priority over the trust for the victim because they arose first in time? Or could those creditors and trust beneficiaries be stripped of their rights simply by informing them of the misappropriation and thereby affecting their consciences or making them parties to the fraud? These are just some of the problems that might arise if the existence of the trust for the victim depended on knowledge or notice.93 Allsop P explained the real effect of the innocent recipient’s subsequent knowledge or notice in Heperu v Belle. That awareness does not create the trust for the victim, which arises when the proceeds are fi rst obtained, but makes it possible for the recipient to become personally liable to the victim for the value of the trust assets. Until then, the recipient is not ‘under a personal obligation to account in money terms for property received as well as a claim to restore the property itself ’.94 Liability is limited to the value of the assets surviving when knowledge or notice is acquired.95 Surviving enrichment is the essential element of the claim to recover the traceable proceeds or their value from the innocent recipient. It also provides a link between the common law personal claim to restitution of the value of stolen money (ie the action for money had and received) and the equitable property claim to the traceable proceeds of that money. As Allsop P said:96 To identify the common law right in this way is to focus upon the measure of the value surviving in the hands of an innocent voluntary recipient when notice of the claim is received, rather than the measure of value received. Th is can be recognised as conformable with the underlying conception that it is the inequitable retention of money or benefit that lies at the root of unjust enrichment. In the context of both the common law right and the equitable obligation to restore resting on the identification and recognition of the equitable interest in the property by tracing in equity, there is every reason for coherence and conformity between the operation of common law and equity in this respect. 93 94

Also see R Chambers, Resulting Trusts (Clarendon Press, Oxford 1997) 201–12. Heperu v Belle (n 85) [131]. 95 Ibid [162]. 96 Ibid [145] (citations omitted).

244

Chambers

3. Where the victim retains legal title There is one final matter that will be discussed briefly, even though it is controversial. This is the possibility of a trust of the proceeds of stolen assets while the victim still retains legal title to the original assets. Th is arose in Creak v James Moore & Sons Pty Ltd,97 where goods were stolen and then sold to an honest buyer for £31. The police arrested the thieves, seized the traceable proceeds of the sale, and paid them (along with other monies) to the victims. The victims then sued the buyer claiming £32 16s as damages for conversion of the stolen goods. The majority of the High Court of Australia (with Isaacs J dissenting) held that the claim for conversion should be dismissed. Griffith CJ said:98 If a man, having received a sum of money which is identified as being in fact the proceeds of property of his that has been sold without his authority, afterwards becomes aware of the fact, he is prima facie bound to elect whether he will affirm or disaffirm the sale. That is to say, he cannot keep the money and recover the full value of the goods.

Barton J agreed with this, but the two judges held different views on who was entitled to the proceeds of sale of the stolen goods. Griffith CJ thought that the victims were entitled to the money and had received it ‘in ignorance of their independent equitable title to it’.99 Barton J thought that the proceeds of sale were received by the victims for the use of the buyer. To whom should the proceeds belong in this case? Griffith CJ’s analysis is not consistent with the arguments set out above, because the proceeds of the sale were not the traceable proceeds of the victims’ title, which was unaffected by the sale to the buyer. The nemo dat principle meant that the buyer obtained only the thief’s possessory title, which was all he had to sell. The proceeds of sale were the proceeds of that title. Since the proceeds were not obtained at the victims’ expense, there is no sufficient reason for a trust to arise in their favour. If a victim affirms the sale, then perhaps a trust is possible, but this analysis is not without difficulties. The buyer is also a victim and presumably entitled to rescind the fraudulently induced contract of sale and recover the purchase price from the thief.100 Those proceeds are obtained by the thief at the buyer’s expense (not the victim’s) and the buyer’s power to rescind the sale and recover the proceeds arises before the victim elects 97 100

(1912) 15 CLR 426. 98 Ibid 433. 99 Ibid 432–33. A fraudulently induced purchase ought to be treated like a fraudulently induced sale; see Car & Universal Finance Co Ltd v Caldwell [1963] EWCA Civ 4, [1965] 1 QB 525.

Trust and theft

245

to affirm it. It is not clear why a victim’s right to elect to affirm the sale should take priority over a buyer’s right to elect to rescind it.

C.

Conclusion

I thank the editors for their kind invitation to contribute to this book in honour of Michael Bryan, and do hope he is pleased with this chapter. He has a wonderful gift for seeing the essential features in any case or debate, and the connections between cases and areas of law that the rest of us miss. But for the promise to maintain the element of surprise, I would have asked for his opinion and advice. He has no love for arid debates about classification, but this chapter is not about that. Whether we label the trust of the traceable proceeds of stolen money as constructive or resulting is itself of no importance. What matters is why the trust arises, and those categories are useful to the extent that they help illuminate that reason. For very practical reasons, it matters whether this trust arises to strip thieves of the profits of crime or to reverse unjust enrichment regardless of wrongdoing. The Australian jurisprudence in this area is far ahead of that in other jurisdictions, and I can only hope that this chapter makes some contribution to a debate that has been admirably carried forward by Susan Barkehall Thomas and John Tarrant.

PA RT I I I Equity and Trusts

11 What is left of equity’s relief against forfeiture? Sar ah Worthington

All law students learn about equity’s jurisdiction to relieve against forfeiture. Suppose a purchaser has paid 90 per cent of the instalments on a diamond necklace, but defaults on the fi nal instalment.1 Should the vendor be able to terminate the contract for breach and keep both the necklace and the instalments? Many would think that result patently unfair, and that the law should protect the purchaser from ‘forfeiture’ of the necklace, or at least from ‘forfeiture’ of the instalments already paid. But is the outcome unfair? Or, more pointedly, is it always unfair? Does it make any difference that the contract is for a necklace rather than for some other benefit? Or that 90 per cent rather than 5 per cent of the instalments have been paid? Or that the purchaser is never going to be able to find the additional money? Or that the contract itself expressly provides for termination and forfeiture, and has been freely negotiated between competent parties? And if the outcome is unfair, which of the ‘forfeitures’ should be remedied? Is the proper solution to give the purchaser extra time to find the final instalment and complete the contract (also paying for any consequential damage to the vendor because of the delay), so that she gets her necklace, or is it to allow the vendor to terminate the sale agreement but compel him to return the instalments? These are the puzzles in ‘equity’s relief against forfeiture’. The argument advanced here is that, as in other areas, equity recognized early on that certain categories of cases warranted relief from what was seen as the unduly harsh operation of common law rules. Over time, however, different strands of this early equitable jurisdiction developed into independent and rigorously analysed legal principles, so much so that there is now nothing left in the box marked ‘equitable relief against forfeiture’. This does not mean that courts no longer grant relief, just that 1

Th is illustration was used by both Denning and Somervell LJJ in Stockloser v Johnson [1954] 1 QB 476 (QB) (‘Stockloser ’).

249

250

Worthington

we now have more refined and robust ways of describing when and how perceived problems will be remedied. It would clarify analysis if these distinct strands of legal analysis which now fully comprehend equity’s jurisdiction to relieve against forfeiture were explicity recognized, and ‘equitable relief against forfeiture’ were no longer seen as an autonomous, separate and additional option for relief. This suggestion is controversial, and goes against substantial judicial authority which assumes an independent equitable jurisdiction to grant relief against forfeiture.2 Lord Wilberforce in Shiloh Spinners v Harding3 (a case concerning a right of re-entry onto real property) said:4 There cannot be any doubt that from the earliest times courts of equity have asserted the right to relieve against the forfeiture of property. The jurisdiction has not been confi ned to any particular type of case. The commonest instances concerned mortgages, giving rise to the equity of redemption, and leases, which commonly contained re-entry clauses; but other instances are found in relation to copy holds, or where the forfeiture was in the nature of a penalty. Although the principle is well established, there has undoubtedly been some fluctuation of authority as to the selflimitation to be imposed or accepted on this power.

Indeed, the fluctuations in approach have been dramatic. At the liberal end of the spectrum, Lord Simon of Glaisdale went so far as to assert an unlimited and unfettered jurisdiction for equity to relieve against forfeitures.5 2

3

In the UK, Re Dagenham (Thames) Dock Co, ex p Hulse (1873) 8 Ch App 1022 (CA in Chancery) (‘Dagenham’); Kilmer v British Columbia Orchard Lands Ltd [1913] AC 319 (PC) (‘Kilmer ’); Brickles v Snell [1916] 2 AC 599 (PC); Steedman v Drinkle [1916] 1 AC 275 (PC) (‘Steedman’); Mussen v Van Diemen’s Land Co [1938] Ch 253 (‘Mussen’); Stockloser (n 1); Shiloh Spinners v Harding [1973] AC 691 (HL) (‘Shiloh ’); Scandinavian Trading Tanker Co AB v Flota Petrolera Ecuatoriana, The Scaptrade [1983] 2 AC 694 (HL) (‘The Scaptrade’); Sport International Bussum BV v Inter-Footwear Ltd [1984] 1 WLR 776 (CA, HL) (‘Bussum’); BICC Plc v Burndy Corp [1985] Ch 232 (CA) (‘Burndy’ ); Union Eagle Ltd v Golden Achievement Ltd [1997] AC 514 (PC) (‘Union Eagle’); On Demand Information Plc (in administrative receivership) v Michael Gerson (Finance) Plc [2002] UKHL 13, [2003] 1 AC 368 (HL) (‘On Demand ’); and in Australia, Legione v Hateley (1983) 152 CLR 406 (HCA) (‘Legione ’); Stern v McArthur (1988) 165 CLR 489 (HCA) (‘Stern’); Tanwar Enterprises Pty Ltd v Cauchi (2003) 217 CLR 315 (HCA) (‘Tanwar ’); Aussie Invest Corp Pty Ltd v Pulcesia Pty Ltd [2005] VSC 362. Useful commentary can be found in many places, but see especially C Harpum, ‘Relief against Forfeiture and the Purchaser of Land’ [1984] 43 CLJ 134; M Pawlowski, ‘The Scope of Equity’s Jurisdiction to Relieve Against Forfeiture of Interests in Property Other than Land’ [1994] JBL 372; L Smith, ‘Relief Against Forfeiture: A Restatement’ [2001] 60 CLJ 178; M Bryan, ‘Equitable Relief from Forfeiture: Performance or Restitution?’ in CEF Rickett (ed), Justifying Private Law Remedies (Hart Publishing, Oxford 2008) 363. 5 Shiloh (n 2). 4 Ibid 722. Ibid 726.

What is left of equity’s relief against forfeiture?

251

A decade later, this minority view was roundly disapproved as a ‘beguiling heresy’.6 Nowadays, in both the UK and Australia, and perhaps more widely, the pendulum has swung still further, and prevailing judicial attitudes are far more restrictive7 than at certain times in the past.8 The movement in this direction is, it is suggested, motivated by a desire to clarify the principles underlying equity’s relief against forfeiture. The end result, although not explicitly recognized in any judgment or commentary, has been to repackage this equitable jurisdiction so that all the relief that is now afforded by the courts falls squarely within the recognized and rigorously applied principles relating to enforcement of contractual agreements or the provision of restitution for unjust enrichment. Demonstrating this requires exact analysis of the principles underpinning awards of specific performance, the contractual interpretation of security and penalty clauses, and the pre-conditions for restitution for unjust enrichment. First, however, it is useful to describe the orthodox perceptions of equity’s jurisdiction to relieve against forfeiture.

A.

Descriptions of equity’s jurisdiction to relieve against forfeiture

In Shiloh, Lord Wilberforce continued his analysis from the paragraph quoted earlier, saying:9 it remains true today that equity expects men to carry out their bargains and will not let them buy their way out by uncovenanted payment. But it is consistent with these principles that we should reaffirm the right of courts of equity in appropriate and limited cases to relieve against forfeiture for breach of covenant or condition where the primary object of the bargain is to secure a stated result which can effectively be attained when the matter comes before the court, and where the forfeiture provision is added by way of security for the production of that result.

Deciding which cases not only conform to the general description, but also fall into the smaller subset of ‘appropriate and limited cases’ has proved difficult. Citing Lord Wilberforce again:10 There has not been much difficulty as regards two heads of jurisdiction. First, where it is possible to state that the object of the transaction and of 6 7 8

9

The Scaptrade (n 2) 699 (Lord Diplock). See especially Union Eagle (n 2); The Scaptrade (n 2); Tanwar (n 2). See eg, Dagenham (n 2); Kilmer (n 2); Legione (n 2); Stern (n 2). This liberal view is favoured by Harpum (n 2). Shiloh (n 2) 723. 10 Ibid 722.

252

Worthington the insertion of the right to forfeit is essentially to secure the payment of money, equity has been willing to relieve on terms that the payment is made with interest, if appropriate, and also costs … Secondly, there were the heads of fraud, accident, mistake or surprise, always a ground for equity’s intervention, the inclusion of which entailed the exclusion of mere inadvertence and a fortiori of wilful defaults.

A short pause for thought indicates that this is rarely adequate guidance when difficult cases come before the court. The first head too easily accommodates paternalistic intervention: courts focus on the substance of contractual terms, not the adequacy of the parties’ freely negotiated common commitment to them. And the second head is breathtakingly broad if it is seen to add to the law’s more specific and well-developed, but limited, jurisdiction to intervene in cases of fraud, mistake, misrepresentation and accident. There is another jurisdictional limitation. Although these extracts do not spell it out, the ‘forfeiture clause’ must necessarily demand forfeiture of a proprietary or possessory right; it is not enough if other rights, no matter how valuable, are made the subject of forfeiture.11 Pleas to expand the jurisdiction to include a broader category of forfeitures have been roundly resisted.12 Any application of this equitable jurisdiction, and certainly any argument for its expansion, faces serious policy considerations against it. The whole tenor of this mode of equitable intervention is to override the legitimate agreement of competent contracting parties because a court regards the agreed forfeiture provision as unacceptable. This raises questions about the ability of parties at arm’s length to look after their own interests, the importance of certainty in commercial transactions, and the costs and delay surrounding investigations into whether the court will or will not grant relief.13 These policy difficulties are accompanied by serious analytical difficulties. The equitable jurisdiction to relieve against forfeiture initially developed by analogy from equity’s intervention in common law mortgages (where consistent relief eventually led to the recognition of the purchaser’s equity of redemption).14 The parallels are clear. In both cases a contractual 11

12 13 14

See The Scaptrade (n 2) (refused re time charter of a ship); Burndy (n 2) (allowed re interest in a patent); Bussum (n 2) (refused re licence to use a trademark; see especially 794 (Lord Templeman)). The Scaptrade (n 2); Bussum (n 2). The Scaptrade (n 2) 703–4; Bussum (n 2) 788–9 (Oliver LJ, CA), 794 (Lord Templeman, HL). S Worthington, Equity (2nd edn Oxford University Press, Oxford 2006) 219–24.

What is left of equity’s relief against forfeiture?

253

term provides for forfeiture of a proprietary interest if one party does not perform on time. Equity intervenes to give more time, thus protecting the defaulting party against losing the asset, provided this can be done without harming the defendant. This means the remedy is conditional on the claimant being able to perform, and on performance (with a money component for lateness) being sufficient to ensure that the defendant does not suffer any detriment.15 But the analogy is unsound. The original rationale is ignored; it is no longer necessary to show that the forfeited property was only ever intended to provide security. The original remedy may also have relied on equity’s power to specifically enforce the reconveyance term in the mortgage because the underlying property was land: this too is no longer an explicit issue in modern cases. On the other hand, modern cases confine their relief to forfeitures of possessory or ownership rights. This aspect of the equity of redemption cases was surely only coincidental: if the security had been over other types of interests, the reasoning would not have altered. All this makes it difficult to identify a coherent rationale. The expanded jurisdiction seems to have retained its factual links with history but discarded its explanatory links.

B.

What is the paradigm case where relief against forfeiture might be requested?

A contract for the instalment purchase of a necklace illustrates the potential need for relief against forfeiture. Typically, such contracts expressly provide for forfeiture of the contract property, and perhaps also the instalments, on breach by the purchaser of the periodic payment obligations. Courts then have to address issues of forfeiture of the contract property (the necklace) or forfeiture of the payment instalments (the purchase price). This simple model is illustrative of the general pattern in these cases, but notice the forms that forfeiture clauses might take. Forfeiture of the contract property (the necklace) can be achieved by an explicit clause to that effect, or by a clause that allows the vendor to terminate the contract on the purchaser’s breach of a particular covenant (typically a payment covenant). In these cases, an express forfeiture clause and a general contract termination clause achieve the same ends: both effectively provide for termination of the contract and forfeiture of the contract property. 15

Shiloh (n 2).

254

Worthington

On the other hand, a contract termination clause, without more, does not provide for forfeiture of instalments; that requires an express clause directed to those ends. The contract property may be a necklace, but is more typically land (either ownership or leasehold interests), or an interest in intangible or intellectual property. The infringement is most frequently failure to pay an instalment of the purchase price, but might equally be breach of some other payment obligation,16 or breach of a non-payment contractual covenant. For simplicity in the analysis here, the infringing party is referred to generically as the purchaser, the innocent party as the vendor, and the contract is assumed to be one relating to contract property being acquired by payment of the purchase price by instalments.

C. When do courts award relief against forfeiture of the contract property? When courts award relief against forfeiture of the contract property, they inevitably do so by way of an order for specific performance of the contract, subject to terms which ensure that the innocent party (the vendor) is compensated in money for any loss (damages, interest and costs) arising from the initial breach that brought the matter to court.17 When will the courts award specific performance? The general rules (in the absence of forfeiture and termination clauses) are well known. An order for specific performance can be requested by either party, including the party in breach, provided that party is ready, willing and able to complete the contract and compensate the defendant for any consequential loss, and provided also that there are no reasons disentitling the claimant to such relief (delay, clean hands etc).18 A court will order specific performance only when common law damages would be inadequate. This conclusion depends on the nature of the asset being transferred and the adequacy of damages in respect of that transfer (ie whether the asset is unique or rare or unable to be valued),19 not on the personal circumstances of either the vendor or the purchaser at the time of the breach (eg the insolvency of one of them) even though that may profoundly affect the practical adequacy of damages. 16 17 18 19

Ibid; Burndy (n 2); On Demand (n 2). Dagenham (n 2); Kilmer (n 2); Burndy (n 2); Legione (n 2); Stern (n 2). Worthington (n 14) 24–31, 69–71. Eg, Adderley v Dixon (1824) 1 Sim & St 607, 57 ER 239 (ordering specific performance of an agreement to assign the debts of a bankrupt).

What is left of equity’s relief against forfeiture?

255

Notably, the class of contracts that might attract orders for specific performance does not map perfectly onto the class of cases where equity will consider relief against forfeiture (ie cases that involve the potential forfeiture of proprietary or possessory interests). The forfeiture class is too wide: equity would not order specific performance of all these contracts (eg it would not order specific performance of contracts for the sale or use of ordinary assets, whether tangible or intangible). It is also too narrow: equity might order specific performance of contracts which do not fall into this category.20 Interestingly, however, in all the major cases where relief against forfeiture of the contract property has been granted, the contract is of a type where equity would routinely order specific performance – eg contracts for the transfer of interests in land, patents or shares in private companies.21 In addition, in every major case where equity has declined to exceed the rather odd proprietary/possessory limit on its forfeiture jurisdiction, the case is one where equity would have declined to order specific performance. Indeed, in each of these cases the specific performance issue was explicitly considered and declined, even though in the end it was a general forfeiture-specific jurisdictional limiting rule that was expressly applied.22 The nature of the underlying property is not the only consideration in ordering specific performance, of course. Equity’s privileged enforcement of contracts has other limitations. Equity will not order specific performance by the vendor if the purchaser is unwilling or unable to perform,23 if performance is simply impossible, if the vendor was somehow duped into signing the deal or can advance some other equitable defence, or if the order would cause the vendor unwarranted hardship which is out of all proportion to the purchaser’s real losses.24 In short, when a claimant comes before the court, even a claimant who has breached the contract, equity will entertain a request for specific 20

21

22

23

24

The point is that the class of cases where specific performance is possible is not defi ned by proprietary characteristics: see Beswick v Beswick [1968] AC 58 (HL) (a controversial case), and the discussion in Co-operative Insurance Society Ltd v Argyll Stores (Holdings) Ltd [1998] AC 1 (HL) (where specific performance was not ordered). The addition of an explicit forfeiture or termination clause is of course crucial to the fi nal decision to order specific performance. See 256 below. The Scaptrade (n 2) 700–1 (Lord Diplock) (specific performance of a contract for personal services – here, a time charter – would not be ordered); Bussum (n 2) 789 (Oliver LJ, CA; the HL did not consider the issue). This requirement of ‘mutuality’ ensures the court can secure the performance due to both parties. See Worthington (n 14) 28–9, which also explains the common law parallels.

256

Worthington

performance, albeit alongside an order for the payment of damages to the innocent defendant to compensate for the loss arising from the admitted breach of contract. The end result – if there is no express forfeiture clause – is that mere failure to pay on time (or a breach of some other term of the contract) will not necessarily entail the purchaser suffering forfeiture of the contract property. If the contract is of the type that warrants an order for specific performance, and if the purchaser is not disentitled by her behaviour, and if the defendant is not unreasonably disadvantaged by the order, then an order for specific performance will be granted. Obviously these are all big ifs. But this analysis does not fit the relief against forfeiture cases. These cases include explicit forfeiture clauses. What difference does this make to orders for specific performance? Consider a ‘time of the essence’ clause. These clauses are regarded as conditions by both the common law and equity, and – subject to some limited but important exceptions that are considered later – their terms are upheld even if one party then suffers a disproportionate loss as a result. Sometimes this is easily rationalized. In shipping contracts or securities trading, for example, the interests of certainty and predictability are valued over individual hardship.25 But the same rules apply even without this justification. Where time is of the essence, the clause is stringently enforced. Performance that is only ten minutes late is still too late,26 and it is irrelevant that the counter-party will suffer no loss from the delay. Termination prevents the purchaser acquiring the contract property, and so effects a forfeiture.27 Lord Hoffmann in Union Eagle Ltd v Golden Achievement Ltd 28 (where the purchaser was ten minutes late in settling a contract for the sale of land in Hong Kong) defended the fairness of such a tough stance:29 The present case seems to their Lordships to be one to which the full force of the general rule applies. The fact is that the purchaser was late. Any

25

26

27

28

See The Scaptrade (n 2) (accidental non-payment of time-charter fees; were ready, willing and able to pay, but no relief granted); Bussum (n 2). Union Eagle (n 2) especially 521 (Lord Hoff mann); Steedman (n 2); Tanwar (n 2). Contrast Legione (n 2) especially 429 (Gibbs CJ and Murphy J). The analysis will be similar if the innocent party purports to make time of the essence by giving appropriate notice stipulating a date for completion and making it clear that time is then to be of the essence: Stern (n 2) 429. (Although note concern about one party unilaterally elevating a warranty to a condition: Re Olympia & York Canary Wharf Ltd (No 2) [1993] BCC 159.) Union Eagle (n 2). 29 Ibid 523.

What is left of equity’s relief against forfeiture?

257

suggestion that relief can be obtained on the ground that he was only slightly late is bound to lead to arguments over how late is too late, which can be resolved only by litigation … In his dissenting judgment, Godfrey JA [in the Hong Kong Court of Appeal] said that the case ‘cries out for the intervention of equity’. Their Lordships think that, on the contrary, it shows the need for a firm restatement of the principle that in cases of rescission of an ordinary contract of sale of land for failure to comply with an essential condition as to time, equity will not intervene.

The same is equally true for contract conditions other than ‘time of the essence’ clauses.30 In all these cases, courts will not generally order specific performance in favour of defaulting purchasers (the limited exceptions are considered below). It is irrelevant that termination according to the terms of the contract will prevent the purchaser acquiring the anticipated benefits under the contract. Forfeiture, and the denial of contractual benefits, is itself a condition of the contract. If this is the strict rule relating to forfeiture clauses inserted as conditions, then how is the purchaser ever going to succeed in obtaining relief against forfeiture?

1.

Arguments favouring relief against forfeiture of the contract property

There are a number of chinks in this rigidly unhelpful conclusion, although their practical impact is slight. The argument is uphill, clearly. In these forfeiture cases it is invariably true that the purchaser has breached a term of the contract and, as a result, the vendor has terminated the contract relying on an express clause permitting that response (either an express forfeiture clause or a time of the essence clause allowing termination). The purchaser must therefore argue that her failure should not count as a breach of contract, or should count as a breach but not attract the remedy of termination or forfeiture. How might this be done? There are four potential avenues, although only two provide helpful possibilities.

(a) The forfeiture clause is by way of security First, if the forfeiture clause is inserted simply by way of security for the obligation to pay the purchase price (or comply with some other covenant), and provided that by the time the matter reaches court the purchaser 30

Although, unless the condition is imposed by statute, the courts must be satisfied that the parties properly intended the term to be a condition: Schuler AG v Wickman Machine Tool Sales Ltd [1974] AC 235 (HL) (‘Schuler ’).

258

Worthington

can make the required payment and compensate the vendor for any consequential loss caused by the original non-compliance, then the court will order specific performance of the contract with damages. The proviso is important. A purchaser who is not ready, willing and able to perform will not obtain relief, and the security will be enforced according to its terms. In these circumstances, the court order may be seen as avoiding a multiplicity of actions – ordering specific performance achieves, in one step, what might be less precisely and more wastefully achieved by enforcement of the terms of the security. What persuades a court that the forfeiture term is inserted only by way of security?31 Sometimes this is obvious on the face of the contract, as with old-style mortgages. The same might be said of contracts for the lease of real property where the lessor has a right of re-entry if the lessee breaches nominated covenants, although these cases are not all interpreted this way.32 Although not traditionally regarded as ‘relief against forfeiture’ cases, similar findings are also common in retention of title cases, where attempts to forfeit to the seller either ownership of the manufactured products or an interest in the sale proceeds are routinely regarded as creating a security interest by way of charge, despite express words to the contrary.33 In all of these cases the law looks to the substance of the rights agreed between the contracting parties, not to the label applied by the parties. Beyond those cases, however, there is little scope to run this argument.34 The context of many contractual forfeiture clauses suggests they have been inserted for commercial reasons that go well beyond the provision of security for a payment obligation.35 Indeed, the argument has been roundly rejected in precisely the line of cases where it might have been expected to have most success: contracts for the purchase of land 31

32

33

34

35

Sometimes a statute prescribes that result: see Law of Property Act 1925 (UK) s 146; Consumer Credit Act 1974 (UK) ss 87–91. See Shiloh (n 2) (where the clause was seen as having a purpose beyond simply ensuring that the original lessee paid the prescribed rentals) and the cases cited there. And the charge is invariably unregistered and therefore ineffective: Re Bond Worth Ltd [1980] 1 Ch 228 (‘Bond Worth ’); Borden (UK) Ltd v Scottish Timber Products Ltd [1981] Ch 25 (‘Borden’); Clough Mill Ltd v Martin [1985] 1 WLR 111, discussed in S Worthington, Proprietary Interests in Commercial Transactions (Oxford University Press, Oxford 1996) 27–33. But see Smith (n 2) who favours this approach more generally in personal property sales agreements. Eg, Shiloh (n 2) (commercial reasons relating to protection of the lessor’s rights in precisely the circumstances which materialized); The Scaptrade (n 2).

What is left of equity’s relief against forfeiture? 259

where the purchaser is allowed into possession, the purchase price is paid by instalments, and there is a provision for forfeiture of the land if the instalments are not paid in a timely fashion. Here the analogy with oldfashioned mortgages has been pressed, but explicitly rejected by both UK and Australian courts.36

(b)

Waiver or estoppel prevents reliance on the forfeiture clause If the purchaser can show that the vendor waived the forfeiture or time of the essence clause (and so waived the right to terminate), or, alternatively, was somehow responsible for creating the impression that a breach – or, more usually, a delay in payment – by the purchaser would not result in forfeiture of the purchaser’s rights under the contract, then the court may regard the termination by the vendor as premature, and may order specific performance of the contract in favour of the purchaser, provided the purchaser is in a position to perform and pay damages for the consequential losses to the vendor. This is because, put very generally, in the circumstances it would be unconscionable for the vendor to rely on his strict legal rights.37 But in waiver and estoppel cases the courts do not operate on the basis of a loose and subjective view of what is ‘ fair’, harking back to the length of the Chancellor’s foot. The purchaser must meet tough standards to support an assertion that a contractual condition has been waived, even temporarily, or that the vendor is estopped from relying on the strict terms of the contract.38 Even so, this approach is widely recognized.39

36

37

38

39

Union Eagle (n 2) 519 (Lord Hoff mann); Stern (n 2) [8] (Mason CJ), but contrast [13] (Deane and Dawson JJ). Also contrast the approach in the US, where the mortgage analogy is accepted: see Stern (n 2) [16] (Mason CJ) and the cases cited there. Burndy (n 2) perhaps illustrates another context in which courts may regard the vendor’s insistence on forfeiture as unconscionable: ie where equitable set-off of the obligations between the parties effectively means the purchaser is not in practical default in paying instalments. In Union Eagle (n 2) 521, Lord Hoff mann noted that the distinction drawn by Mason and Deane JJ in Legione (n 2) 449 between conduct which amounts to an estoppel and conduct which contributes to the breach so as to make it unconscionable to enforce a forfeiture is a very narrow one, particularly in view of the broad modern concept of estoppel which has been developed in cases such as Taylors Fashions Ltd v Liverpool Victoria Trustees Co Ltd [1982] QB 133. Eg Kilmer (n 2) (as explained, rather controversially, in Steedman (n 2) 280 (Viscount Haldane)); Steedman (n 2) 279 (Viscount Haldane, obiter); Legione (n 2) 449 (Mason and Deane JJ).

260

Worthington

Note, however, that this argument is not a panacea. If the facts indicate that the vendor has waived strict operation of the forfeiture or termination clause, or is estopped from asserting the contrary, then – unless the facts are very odd indeed, or unless the purchaser has provided consideration for the variation of the terms of the contract – the relief will only be temporary. The vendor will be able to revert to the original terms of the contract, usually on giving reasonable notice to the vendor of his intention to do so.40 The end result is that the purchaser will only be protected from forfeiture if, in the interim, she is ready, willing and able to perform according to the interim or amended terms of the contract. A purchaser who simply lacks the funds to perform will not be saved (again, unless the facts are very unusual indeed), and even if the purchaser performs, any subsequent breach will lead to forfeiture unless it too is waived or an estoppel operates.

(c) The forfeiture clause is penal In Legione v Hateley,41 both Gibbs CJ and Murphy J were of the view that equitable relief might be granted because the forfeiture would deliver ‘a harsh and excessive penalty for a comparatively trivial breach’.42 An express clause that provides for forfeiture of the contract property is clearly not a penalty in the technical sense.43 Is it enough that the contract terms deliver an ‘unfair’ outcome, even if the behaviour of the vendor has been perfectly fair, or certainly not unconscionable? If unfairness of outcome, even of the most radical kind, sufficed as grounds for equitable intervention, then nothing would be left of freedom of contract. Equity would be able to intervene in every case where the terms were excessively tough or where the personal circumstances of the vendor or purchaser had turned the contract into a more onerous agreement. As Mason CJ said in Stern v McArthur:44 Furthermore, to accept the respondents’ submission and extend relief against forfeiture to instances in which no exceptional circumstances are established would be to eviscerate unconscionability of its meaning. The doctrine is a limited one that operates only where the vendor has, by his conduct, caused or contributed to a situation in which it would 40 41 43

44

Central London Property Trust Ltd v High Trees House Ltd [1947] KB 130. Legione (n 2). 42 Ibid 429. See the cases referred to at 266–72 below, where penalties are discussed in the context of forfeiture of instalments. Stern (n 2) [23]. Mason CJ was in the minority on the outcome, but his approach was favoured by the majority in Tanwar (n 2) [36].

What is left of equity’s relief against forfeiture?

261

be unconscionable on the vendor’s part to insist on the forfeiture of the purchaser’s interest. Priestley JA thought that ‘it would be unreasonable and unconscionable … to permit (the vendors) to shut (the purchasers) out from ownership’ … and consequently allowed relief against forfeiture. But, contrary to his Honour’s view, the jurisdiction to grant relief against forfeiture does not authorize a court to reshape contractual relations into a form the court thinks more reasonable or fair where subsequent events have rendered one side’s situation more favourable.

The cases universally support this approach: there is no case where relief against forfeiture of the contract property has been granted on this ground alone. Equity is not moved by arguments suggesting that the contractual term imposing forfeiture of the contract property is, in the circumstances, penal.45

(d)

The forfeiture clause is inequitable because it divests a property interest Finally, there is the possibility of a distinctive and autonomous jurisdictional argument that the courts should afford relief against forfeiture of the purchaser’s proprietary or possessory interest because such forfeiture is inherently ‘inequitable’. The thesis advanced in this chapter is that there is no such autonomous jurisdiction. Proof of a negative is inherently difficult, but a trawl through the authorities reveals no case where this argument alone provides the ratio for the court’s decision to afford relief against forfeiture. On the contrary, there are plenty of cases which – if only by silence – suggest the contrary. The equitable doctrine of relief against forfeiture allegedly protects both possessory and proprietary rights. Yet the jurisdiction is never raised by way of defence where there is an impending loss of possessory rights following a breach of contract in ordinary cases of retention of title, hire or hire purchase. Nor has it been successfully raised where an ordinary contract of sale is terminated for breach of condition. It is only raised where the contract is specifically enforceable. And there, if the forfeiture follows termination for breach of condition, the practice is that relief is only granted if the forfeiture term is interpreted as providing security, or if the vendor has played some part in the purchaser’s breach so that it would now be unfair for the vendor to insist on his strict legal rights. Indeed, both jurisdictionally and technically, it is difficult to argue that the courts look to protect the purchaser’s possessory or proprietary 45

Forfeiture of instalments requires separate consideration: see 266–72 below.

262

Worthington

interests. Possessory interests have only ever been material in forfeiture cases concerning leases of land, but a lease of land gives the lessee a lot more than mere possession. In other cases, such as sales of land where the purchaser goes into possession with the consent of the vendor, the fact of possession is, rightly, ignored. And if the jurisdiction is really concerned with forfeiture of the purchaser’s equitable ownership interests in the contract property, then, technically, the argument is flawed. It is impossible to regard the purchaser as having such an interest, unless, at the very least, the contract is specifically enforceable. If the purchaser has breached a condition, then the vendor is allowed to terminate. This is the express agreement of the parties. Unless the facts suggest the vendor should not be allowed to rely on these strict legal rights, this means the contract is no longer specifically enforceable at the request of the purchaser, and the purchaser therefore cannot have an equitable proprietary interest in the contract property. Indeed, the availability of specific performance is not the only precondition to the purchaser’s claim to an equitable proprietary interest in the contract property. The issue may once have been controversial, but modern cases are increasingly consistent in their analysis.46 Historically, it was often said that the purchaser is the equitable owner of the property from the time of the contract.47 However, digging deeper, this is clearly not quite true. The purchaser only has an equitable ownership interest if the contract of sale is specifically enforceable and unconditional. This, it turns out, means that the purchaser does not acquire equitable ownership until the price is paid, even when the contract is specifically enforceable.48 In short, the typical purchaser in a forfeiture case is not the equitable owner of the contract property, for a variety of doctrinal reasons. Given 46

47

48

See especially the explicit discussions in Stern (n 2) [2]–[4] (Deane and Dawson JJ); Tanwar (n 2) [43]–[53]. Shaw v Foster (1872) LR 5 HL 321, 333, 356; also see Worthington (n 33) 196 and the cases cited there. Worthington (n 33) 206–7; Worthington (n 14) 264–9. The confusion often arises because the various issues are not segregated. Suppose a purchaser has a specifically enforceable contract of sale with an insolvent vendor. Courts will order specific performance of this contract in favour of the purchaser, notwithstanding the insolvency of the vendor, if the purchaser is ready, willing and able to complete. The insolvent vendor’s estate will then lose the sale property, but gain the purchase price. But if the purchaser cannot pay, the court will not order specific performance and the purchaser will not be heard to assert that in any event she already has some insolvency-protected equitable proprietary ownership interest in the sale property. At most she may be able to argue that she has a purchaser’s lien over the property to secure repayment of any instalments of the purchase price that she has already paid, but these protective liens are not inevitably available.

What is left of equity’s relief against forfeiture? 263

this, it is difficult to see why a court should order specific performance of a sale contract so as to relieve the purchaser from forfeiture of her equitable ownership of the sale property. It may, of course, order specific performance for other reasons. And indeed, this is the argument the purchaser has to make. Alternatively, she has to argue at the very least that the vendor’s termination for breach was ineffective. This is not quite the end of the story on proprietary interests in the contract property. Before the purchase price is paid, the purchaser may have an equitable lien on the contract property to secure the return of any prepayments of the price; this is a purchaser’s lien.49 Indeed, even where the contract is not specifically enforceable, this purchaser’s lien may exist.50 This is clearly a proprietary interest in the contract property, but – where this interest exists51 – its protection only requires the vendor to return the pre-payments of purchase price; it does not require the vendor to specifically perform the contract, and so it does not protect the purchaser against forfeiture of the contract property. In short, the forfeiture cases fail to illustrate an autonomous equitable jurisdiction to relieve against forfeiture of the purchaser’s interest in the contract property. This is not as surprising as it might at first seem, since strict doctrinal analysis suggests the purchaser does not have such an interest that equity might protect.

2.

Summary of the avenues for relief against forfeiture of the contract property

The analysis above suggests that a purchaser stands very little chance of obtaining relief against forfeiture of the contract property – ie in getting her diamond necklace – if she has breached a term of the contract which brings into operation a forfeiture clause unless that clause is construed as one providing security or the vendor has waived or is estopped from relying on the forfeiture clause, and, in both cases, the purchaser is ready, willing and able to perform the contract and pay damages to the vendor for any loss suffered as a consequence of the breach. It follows that the restrictions commonly asserted to apply to relief against forfeiture are both too wide and too narrow. They are too wide in that not all purchasers are protected from losing proprietary or possessory interests; protection is only afforded if the underlying contract is specifically enforceable, and not all contracts for the transfer or provision of 49

Worthington (n 33) 226–9.

50

Ibid.

51

Ibid.

264

Worthington

proprietary or possessory rights are specifically enforceable. And they are too narrow in the sense that the court will order specific performance of contracts which are not concerned with proprietary or possessory interests; the court will enforce security agreements as such, not as forfeitures, regardless of whether the asset that stands as security is a ‘proprietary or possessory’ interest, or is a contractual right or licence. Finally, the doctrines of waiver and estoppel operate to protect a purchaser from unfair or unconscionable reliance by the vendor on any rights, not simply rights that allow for forfeiture of proprietary or possessory interests.

D.

Relief against forfeiture of the purchase price instalments52

A purchaser who has paid 90 per cent of the purchase price of a diamond necklace will not want to forfeit both the contract property and the instalments simply because she cannot pay the final instalment. If there is no express instalments forfeiture clause, then she may be fortunate, although not every purchaser is automatically so lucky. But if there is an express forfeiture clause, then the analysis is far more complicated. In the absence of a forfeiture clause, the law of unjust enrichment may assist. If the contract of sale is terminated, the purchaser can recover instalments of the purchase price that were paid as a condition of gaining title to the sale property, since if title is not transferred there is a total failure of consideration.53 On current authorities, this remains true even if the purchaser has benefitted from use of the property in the interim.54 On the other hand, where instalments are made at least in part for some other purpose, and that other purpose is achieved, then there is no total failure of consideration, and so no recovery at law.55 Modern unjust enrichment scholars suggest this limitation is unprincipled and should be removed, but as yet the courts have not been persuaded.56 52

53

54 55

56

Th is analysis does not directly address the issue of the purchaser’s potential forfeiture of improvements to the contract property (eg by way of newly constructed buildings or planning permits), but see the comment at n 101 below. Mayson v Clouet [1924] AC 980 (PC); McDonald v Dennys Lascelles Ltd (1933) 48 CLR 457 (HCA) (‘McDonald ’); Dies v British International Mining and Finance Corporation Ltd [1939] 1 KB 724; Baltic Shipping Co v Dillon (The Mikhail Lermontov) (1993) 176 CLR 344 (HCA); Goss v Chilcott [1996] AC 788 (PC). Rowland v Divall [1923] 2 KB 500 (CA) (‘Rowland ’). Hyundai Heavy Industries Ltd v Papadopoulos [1980] 1 WLR 1129 (HL); Stocznia Gdanska SA v Latvian Shipping Co [1998] 1 WLR 574 (HL). The academic arguments are not all one way: in favour of the total failure of consideration requirement, see Worthington (n 14) 279–88; against, see P Birks, An Introduction

What is left of equity’s relief against forfeiture? 265

But this is not the real impediment in forfeiture cases. The real impediment is that claims in unjust enrichment can only be advanced successfully where it would be unjust for the vendor to keep the instalments. 57 That seems unlikely where the contract expressly provides for precisely that result. The payment of the purchase price is then not conditional on the transfer of the sale property; it is an unconditional payment of the price, and indeed paid on terms that the vendor can retain it in precisely the circumstances that now cause the purchaser to ask for relief against forfeiture. In those circumstances the sum is not recoverable at law.58

1.

Arguments favouring relief against forfeiture of the purchase price instalments

Once again, there are some potential chinks in the armour of this harsh result for purchasers. The analysis follows the same series of four exceptions assessed in relation to relief against forfeiture of the contract property. This time only one avenue seems likely to generate doctrinal and practical chances of success. Yet again, there does not seem to be any independent autonomous equitable jurisdiction.

(a) The forfeiture clause is by way of security If the purchaser could argue that the instalments forfeiture clause was inserted merely by way of security, then the clause would be enforced accordingly. However, the argument seems fanciful59 and there are no cases where this possibility has been raised, so it is dismissed here.

57

58 59

to the Law of Restitution (rev’d edn Oxford University Press, Oxford 1989) 242–8; A Burrows, The Law of Restitution (2nd edn Butterworths LexisNexis, London 2002) 333–6; Bryan (n 2) 376. Also note that the requirement is only ‘difficult’ where contracts are terminated for breach. It would not prevent restitution and counter-restitution where there is no contract at all, or where a purported contract is void or voidable and has been avoided: Worthington (above). Banque Financière de la Cité v Parc (Battersea) Ltd [1998] UKHL 7, [1999] AC 221 (HL) 227 (Lord Steyn). Stockloser (n 1) 493 (Denning LJ); McDonald (n 53) 478 (Dixon J). Consider what obligation is being secured (is it the purchaser’s obligation to pay the remaining instalments, or to pay damages on breach?), and what asset is standing as security (presumably the purchaser’s personal right to restitution of the purchase price instalments – crucially, and obviously, only where that right exists – see text to n 57 above). Put like that, the chance of this approach being within the contemplation of the parties is remote, although if it were it would operate much like the controversial charge-back clauses in Re Charge Card Services Ltd [1987] Ch 150 and Re BCCI (No 8) [1988] AC 214 (HL).

266

Worthington

(b)

Waiver or estoppel denies the operation of the forfeiture clause Again, if the vendor has waived the contractual forfeiture clause or is estopped from relying on it, then the purchaser may be in a better position in attempting to recover her instalments.60 In practical terms, however, it is hard to see how these circumstances might come about. It would involve a vendor justifiably insisting on terminating the contract for breach and forfeiting the contract property, but somehow having agreed to concede the forfeiture clause that relates to the instalments. Perhaps unsurprisingly, there are no cases illustrating this option, and it too is dismissed. (c) The forfeiture clause is penal This is the most fruitful chink in the armour for the purchaser, but its analysis in all the forfeiture cases is quite unsatisfactory. Indeed, there is only one case – Steedman v Drinkle61 – where the vendor was required to repay the instalments despite an express instalments forfeiture clause.62 Unfortunately the analysis in this case provides no clear guidance.63 It is universally accepted (perhaps wrongly)64 that an instalments forfeiture clause is not, technically, a penalty, but is somehow, in some circumstances, ‘in the nature of a penalty’. This is put in different ways in different cases. First, there is the rather intuitive assertion that on termination it is ‘unfair’ for the vendor to keep both the sale property and the purchase price instalments. Th is intuition guides the common reaction to the necklace sale used at the outset of this chapter. But the sentiment is not always warranted. Where the purchaser has gone into occupation,65 or has had the use of tangible or intellectual property,66 or is paying for 60

61 62

63

64 65 66

Although precisely what that position is will depend on the context. The waiver or estoppel may be limited, and in any event, even if the forfeiture clause is waived, the total failure of consideration requirement for an unjust enrichment claim may disentitle the purchaser to restitution: see 264 above. Steedman (n 2). The court was not prepared to provide relief against forfeiture of the contract property, but did provide relief against forfeiture of the instalments. Indeed, the Privy Council provided no independent reasons, and simply agreed with the conclusions of the trial judge. See 271 below. Dagenham (n 2); Kilmer (n 2); Steedman (n 2); Legione (n 2); Stern (n 2); Tanwar (n 2). Burndy (n 2); Stockloser (n 1); On Demand (n 2); and also Bussum (n 2) (on its facts, although the court denied jurisdiction).

What is left of equity’s relief against forfeiture? 267

services provided under the terms of the contract,67 then the instalments support delivery of a real benefit and the argument for relief against forfeiture seems weak. The cases support this.68 In any event, however ‘unfair’ it may be to make contractual provision for forfeiture of both the contract property and the instalments, it is arguably also ‘unfair’ for the court to revise a freely agreed and presumably appropriately priced contract between competent parties. Romer LJ in Stockloser v Johnson69 put it thus:70 Generally speaking, courts of equity have never interfered with contracts merely by reason of their being improvident … To this rule exceptions were made, notably in favour of expectant heirs and borrowers, to whom equity manifested some tenderness … [but … i]f a man agrees to buy property by instalments which he will forfeit to the vendor if he cannot continue them to completion, he knows perfectly well the risk which he is taking and I do not know what right he has to appeal to equity if that risk does in fact ripen into actuality.

If the court is to interfere, then there must be some even weightier legal principle in play than party autonomy and freedom of contract. What that might be is considered below. A second view calls into aid the cases on deposits, and suggests that excessive deposits and excessive forfeitures of instalments are analagous. They are not. A deposit is not simply a pre-payment of part of the purchase price; it is also a guarantee that the contract will be performed.71 Courts intervene in deposit cases when they think the label applied by the parties is not appropriate: the sum is not really by way of guarantee that the contract will be performed;72 properly labelled, it is simply partpayment of the purchase price. This re-labelling by courts is not novel. True, the analysis in deposit cases has some oddities,73 but they are not material to the argument here. If the court decides a deposit is really a 67 68 70 71 72

73

The Scaptrade (n 2) (where, again, the court denied jurisdiction). Eg, Stockloser (n 1); Mussen (n 2). 69 Stockloser (n 1). Ibid 495–6 (Romer LJ, in the minority). Also see Mussen (n 2) 262–3 (Farwell J). Howe v Smith (1884) 27 ChD 89 (CA) 95, 101; Soper v Arnold (1889) 14 App Cas 429, 435. Workers Trust and Merchant Bank Ltd v Dojap Investments Ltd [1993] AC 573 (PC) (‘Dojap’). In particular, the courts seem to categorize the payment according to its quantum, not – as they more usually do – by assessing the rights in relation to it that have been agreed by the parties. But even this has parallels: many products and proceeds retention of title clauses are seen as effecting a security rather than assigning ownership simply because the courts will not believe that the parties intended the associated windfall gains to go to the seller rather than the manufacturer: see eg, Bond Worth (n 33); Borden (n 33).

268

Worthington

part-payment of the purchase price, then the forfeiture rules that apply to deposits no longer operate. The payment is simply an instalment of the purchase price. Since these contracts typically lack instalment forfeiture clauses, the purchaser is left free to claim recovery of the purchase price in unjust enrichment on a total failure of consideration.74 Clearly nothing in this approach assists where the sums paid are accurately labelled as partpayments of the purchase price and there is an express forfeiture clause in the contract. A third view is that equitable relief will only be granted if the forfeiture clause is penal in nature and, at the time the vendor seeks to enforce it, it would be unconscionable for the vendor to do so.75 This coupling of conditions makes it clear that the vendor can sometimes rely on an express forfeiture clause that is ‘penal in nature’, but not always.76 When is the vendor’s reliance unconscionable? In Mussen v Van Diemen’s Land Co77 (where relief against forfeiture of the instalments was denied), Farwell J said that the whole basis of the decision in Steedman was that the purchasers were ready and willing to perform the contract, but the vendor insisted on exercising his legal right to terminate for breach of condition. In those circumstances, and only those circumstances (which did not pertain in Mussen), Farwell J thought it was unconscionable for the vendor to insist on termination and retain the instalments. But this divide cannot be the right one. Courts support vendors who wish to terminate contracts for breach of condition even when the purchaser is, later, ready, willing and able to complete.78 In these cases it cannot automatically and inevitably be unconscionable – even at a practical level – for the vendor to forfeit the instalments: consider the cases where the purchaser has been in occupation, or had use of the contract property.79 Farwell J’s test casts its net too wide, and when it captures cases where relief does seem appropriate this is by accident rather than by good design. Given this, it is surprising that Denning LJ in Stockloser thought Farwell J’s explanation was far too narrow. He saw Steedman as a case where:80 74 75 76 77 79

80

This argument will not always succeed: see 264 above. Stockloser (n 1) 490 (Denning LJ). Contrast ibid 495–6 (Romer LJ, in the minority); Mussen (n 2) 263–4 (Farwell J). Mussen (n 2). 78 Union Eagle (n 2); Tanwar (n 2). Almost every case listed in n 2 is in this category, including those cases where the court declined jurisdiction because the purchaser’s interest was not proprietary: The Scaptrade (n 2); Bussum (n 2). Stockloser (n 1) 491 (Denning LJ).

What is left of equity’s relief against forfeiture? 269 the vendor had somewhat sharply exercised his right to rescind the contract and retake the land, and it was unconscionable for him also to forfeit the sums already paid. Equity could not specifically enforce the contract, but it could and would relieve against the forfeiture.

This is effectively an assertion that a valid exercise of a legal right to terminate is unconscionable if the forfeiture clause then delivers a windfall to the vendor. Indeed, Denning LJ’s supporting illustrations make this explicit (he used the necklace example when 90 per cent of the instalments have been paid – but not when only 5 per cent had been paid; he also used the example of a sale where a 50 per cent ‘deposit’ had been demanded).81 Elaborating, Denning LJ continued:82 These illustrations convince me that in a proper case there is an equity of restitution which a party in default does not lose simply because he is not able and willing to perform the contract. Nay, that is the very reason why he needs the equity. The equity operates, not because of the plaintiff ’s default, but because it is in the particular case unconscionable for the seller to retain the money. In short, he ought not unjustly to enrich himself at the plaintiff ’s expense. Th is equity of restitution is to be tested, I think, not at the time of the contract, but by the conditions existing when it is invoked.

This seems to suggest that equity’s jurisdiction to relieve against forfeiture builds out from the common law rules on penalties and restitution for unjust enrichment. But how? And why? Clearly there is a deep intuition that sometimes – but by no means always – it is unfair or inequitable for the vendor to forfeit both the contract property and the instalments already paid. Is is also clear that this intuition sees its justification lying somewhere in the same domain as the penalties jurisdiction. So far, however, no case or commentary has nailed a satisfactory explanation of the dividing line between acceptable and unacceptable instalments forfeiture provisons. A rational and rigorous explanation of the divide seems possible. Perhaps surprisingly, however, the explanation sits squarely within the rigorous and technical penalty jurisdiction, not within some equitable or ‘soft’ modification or extension of it.

81

82

Ibid 491–2 (Denning LJ). Interestingly, these examples are additionally qualifi ed by a requirement that, on termination, the vendor resells the contract property at a profit. Ibid 492 (Denning LJ).

270

Worthington

Penalties are unlawful.83 A penalty is any clause which provides that, on breach,84 the offending party must pay a sum of money (or transfer or forfeit property other than money)85 that is extravagant and unconscionable in comparison with the greatest provable loss that could conceivably flow from the breach.86 A clause is not a penalty simply because its stipulation sometimes leads to recovery of more than the claimant has lost, even if the amount is penal. It is a penalty, however, if it cannot be justified as a genuine pre-estimate of the loss which the innocent party is likely to incur by reason of the breach, as assessed at the time the contract was entered into.87 The penalty jurisdiction is a technical one, and courts do not intervene if the same ends are achieved by the parties using a mechanism that falls outside the formal technical definition of a penalty. Here, perhaps unusually, the courts look to form rather than substance.88 A clause is a penalty only if the obligation arises on breach of the contract, if its quantum is penal (as noted above), and if it requires a payment or transfer or forfeiture from the defaulting party. If the clause takes some other form, it cannot be struck down as a penalty. Pursuing this line, an instalments forfeiture clause operates only on the purchaser’s breach. Moreover, if the instalments are exclusively partpayments of the purchase price and do not secure any collateral benefits, then the forfeiture clause is inevitably penal. This is because the clause implicitly suggests that, as time goes on, the vendor’s estimated losses will escalate in line with an increasing percentage of the total purchase price. This is highly unlikely. By contrast, where the instalments are not exclusively contributions to the purchase price, it is less easy to be dogmatic. Such clauses are not necessarily penal. If the purchaser goes into occupation or makes use of the contract property, for example, then the 83

84

85 86

87 88

And unenforceable to the extent that they exceed the actual loss suffered by the injured party: Jobson v Johnson [1969] 1 WLR 1026 (CA) (‘Jobson’), 1038 (Nicholls LJ). This is crucial: Export Credits Guarantee Department v Universal Oil Products Co [1983] 1 WLR 399. Jobson (n 83). Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd [1915] AC 79 (HL) 87 (Lord Dunedin); Dojap (n 72) 578 (Lord Browne-Wilkinson); Ringrow Pty Ltd v BP Australia Pty Ltd [2005] HCA 71 (HCA). Deposits are an exception to this general rule: see 267 above. Bridge v Campbell Discount Co Ltd [1962] AC 600, 622 (Lord Radcliffe); Schuler (n 30). But this is not unknown. Look at many tax-driven distinctions; and every classification of a contract as a lease rather than a licence, or as effecting a hire purchase rather than an instalments purchase.

What is left of equity’s relief against forfeiture?

271

instalments may be seen as some sort of proxy for a rental or licence fee which the vendor will have foregone. It follows that these cases need individual assessment. On the arguments advanced below, however, these clauses will in any event not be categorized as penalties even if their economic impact is penal. So, in some cases at least, an instalments forfeiture clause operates only on breach and is penal. But this is not quite enough to make the clause a penalty. A penalty requires the purchaser to cede to the vendor some asset which, but for the forfeiture clause, would be the purchaser’s. This is not typically the case with forfeitures of instalments, since the purchaser has no proprietary interest in them.89 But sometimes the description is apt. If the instalments are exclusively part payments of the purchase price, then it is universally agreed that the purchaser has a right to restitution of the instalments in the absence of the forfeiture clause.90 In these circumstances, the instalments forfeiture clause effectively forfeits to the vendor the purchaser’s unjust enrichment claim.91 In these limited circumstances, the forfeiture clause is technically a penalty. It follows that the clause will not be enforced; the vendor will be left to his claim in damages for breach of contract and the purchaser will be free, without the forfeiture clause, to make a claim in unjust enrichment for recovery of the instalments. On this technical analysis of whether an instalments forfeiture clause is a penalty, very few cases will make the grade. All these clauses clearly only operate on the purchaser’s breach. But it will often be difficult to argue that the clause is penal, and even more difficult to argue that it effects a forfeiture of the purchaser’s valuable claim in unjust enrichment. There the requirement for total failure of consideration currently imposes a significant barrier.92 All three pre-conditions must be met if the forfeiture clause is to be classified as a penalty. Different contexts call for different responses. Consider a common forfeiture case where the purchaser goes into possession and derives a benefit, although not the benefit prescribed by a contract which is exclusively for transfer of title. If the contract is terminated, the purchaser can currently successfully assert a total failure of consideration, despite the benefits enjoyed.93 But the forfeiture clause is then less likely to be judged penal, especially if it provides a proxy for rental or use value. 89 91

92

Stockloser (n 1) 489 (Denning LJ). 90 See 264 above. Indeed, this is an unjust enrichment claim that would have had a proprietary base (a purchaser’s lien), although this is not material to the penalty argument. 93 See 264 above. Eg, Rowland (n 54).

272

Worthington

Applying this analysis to the earlier illustration of the purchase of a necklace, the instalments forfeiture clause in this context is a penalty, and is unenforceable to the extent it exceeds actual loss.94 This is true whether the purchaser has paid 5 per cent or 90 per cent of the purchase price.95 A clause is either a penalty or it is not; there is no subsidiary test which looks to the time of the breach to see whether some added factor makes it unconscionable for the vendor to rely on the clause. With penalties, it is not to the point to argue that competent parties have expressly agreed to these (penal) terms, so the courts should not interfere. The values being protected by the penalty jurisdiction may be open to debate, but these values are currently seen as overriding freedom of contract.96 Note that the same constraint is not operative where the clause is not a penalty, so for example competent consent can override unjust enrichment claims if, but only if, such concessions are not technically penalties.97

(d) The forfeiture clause is inequitable because it divests a property interest Finally, the argument for an independent autonomous equitable jurisdiction to deliver forfeiture of instalment payments is not specifically advocated in any of the forfeiture cases, and it is easy to see why. Clearly the purchaser has no legal or equitable interest in the instalments. The monies have been paid over to the vendor for his own use under the terms of a valid contract. Nor, without more, does she have an equitable lien over the contract property to secure their return. If the vendor is not compelled to return the instalments (because the contract specifically provides otherwise), then there is no purchaser’s lien, and no proprietary interest to be forfeited.98 The only way to escape this loop is to show that the contractual term permitting the vendor to retain the instalments is invalid. Th is might be done in the very unlikely event that the clause has been waived (see above)99 or if it constitutes a penalty (again, see above),100 but it has never been suggested that such a clause is ipso facto invalid because of some equitable rule providing relief against forfeiture.

94 96 98

99

Jobson (n 83). 95 Contrast Stockloser (n 1) 492 (Denning LJ). Worthington (n 14) 224–46. 97 See 271 above. Worthington (n 33) 170–1, 236–7 (the proprietary interest would, in any event, be a lien over the contract property, but to secure return of the instalments). 100 See 266 above. See 266–72 above.

What is left of equity’s relief against forfeiture?

2.

273

Summary of the avenues for relief against forfeiture of the instalments101

The analysis above suggests that a purchaser stands very little chance of obtaining relief against forfeiture of her instalments unless the forfeiture clause is technically a penalty. This is rarely the case. To be classed as a penalty, the clause must be both penal (as judged at the time of the contract) and effect a waiver of a valid potential unjust enrichment claim that belongs to the purchaser. The forfeiture of instalments in the necklace sale turns out to be one of the few cases that meets this test. Otherwise the options for the purchaser are negligible. The practical likelihood of the forfeiture clause being a security, or being waived by the vendor, is negligible. And the argument that equity has an autonomous jurisdiction to relieve against forfeiture of a property interest in the instalments will not withstand scrutiny.

E.

Conclusion

This analysis suggests that, whatever the history, there is now no independent autonomous equitable jurisdiction providing relief against forfeiture of either the contract property or the purchase price instalments. Indeed, courts consistently resist interfering with the substance of the parties’ contract, and are loath to rewrite terms because they strike the court as somehow unfair in the circumstances that have emerged. Courts will, of course, interpret contract terms to ascertain the intention of the parties and the real nature of the rights that have been granted; this can have consequences if terms are interpreted as creating a security interest rather than providing for an outright assignment. Courts will confine deposits to reasonable sums to guarantee performance of the contract. Courts will invalidate penalty clauses to the extent that they exceed the 101

Th is analysis does not directly address the issue of the purchaser’s potential forfeiture of improvements to the contract property (eg by way of newly constructed buildings or planning permits). Technically, however, the analysis follows precisely that advanced here. The purchaser is not the equitable owner of the improvements (if only for the reasons given at 261 above). She is therefore unlikely to obtain any relief unless the forfeiture is a penalty. That, in turn, depends on the purchaser being able to show that the forfeiture clause is penal, and that its operation forfeits an unjust enrichment claim that the purchaser would otherwise have had. Neither is invariably the case. Finally, an alternative argument based on proprietary estoppel (which has been irrelevant to the analysis advanced here) is unlikely to succeed: Blue Haven Enterprises Ltd v Tully [2006] UKPC 17 (PC). But see Bryan (n 2) for a more optimistic assessment.

274

Worthington

real loss that results from the breach. Other than that, the courts simply exercise their well-known and predictable discretion in ordering specific performance. Alternatively, if the contract is terminated, they determine whether the purchaser is entitled to restitution for unjust enrichment, which claim might be set off against the vendor’s claim for damages. That is all. There is no special but imprecise equitable jurisdiction to relieve against forfeiture.

12 Contracts, fiduciaries and the primacy of the deal Anthon y Duggan *

A.

Introduction

Are fiduciary obligations consensual or imposed? The question matters because to say that fiduciary obligations are consensual suggests that they must take second place to the parties’ own wishes, as expressed in their contract or, in the absence of an explicit contract, in the terms of their underlying arrangement. On the other hand, to say that fiduciary obligations are imposed suggests that the parties’ own wishes are not all that count and that, in an appropriate case, fiduciary law may override express or implied contractual terms in furtherance of other interests. The view that fiduciary obligations are consensual is grounded in considerations of both economic efficiency and party autonomy because it treats the parties’ own preferences as paramount and it respects their right to decide for themselves on the shape and content of their relationship. On the other hand, the view that fiduciary obligations are imposed is grounded in the idea either that there is a moral dimension to fiduciary relationships which contract law does not capture or that fiduciary law has a public interest component which may trump the interests of the parties themselves. Paul Finn is one of the leading exponents of the *

Michael Bryan and I have been friends and colleagues for more than twenty years. I am delighted to have been asked to contribute to this volume in his honour. Michael is one of the best law teachers I know. As generations of student evaluations will attest, he has an extraordinary gift for making the most impenetrable subject-matter seem straightforward and, perhaps better still, interesting. He also has a unique capacity for putting students at their ease, with a quiet blend of humour, kindness and encouragement. I cannot think of a better way, than this collection of essays, to celebrate the career of this outstanding teacher, accomplished scholar and notoriously self-effacing man. Among various other collaborations, for the past five years or so Michael and I have taught a commercial equity course together in the Melbourne LLM programme. The subject of this essay is one of the topics we covered in our course and I owe many of the ideas expressed here to my conversations with Michael, inside and outside the classroom. I hasten to add, though, that none of the essay’s shortcomings should be laid at his door.

275

276

Duggan

higher morality thesis.1 He argues that whereas contract law allows both parties to promote their own respective interests, fiduciary law requires the principal to subordinate her own interests to the interests of the beneficiary. This distinction could not be more fundamental because it suggests that the underlying objective of contract law is essentially an economic one, namely to promote self-interest, while fiduciary law’s goal is a non-economic one, namely to promote other-regarding behaviour or, if you like, altruism. The public interest thesis typically takes the form of statements such as that fiduciary law is important for the preservation of institutions – for example, the trust or the professional adviser-client relationship or the administration of justice – and that the parties’ own interests must necessarily play second fiddle to these larger concerns.2 In the United States, the view that fiduciary obligations are consensual is known as the ‘contractarian approach’, while the opposing view has been labelled ‘anti-contractarianism’.3 The contractarian approach, though not without its critics,4 dominates current thinking, primarily as a result of two key contributions to the academic literature: the first by Frank Easterbrook and Dan Fischel on the contractual nature of fiduciary obligations at large; and the second by John Langbein on the contract-like features of trusts law in particular.5 The influence of Langbein’s work has permeated the Restatement (Third) of Trusts and the Uniform Trust Code 2008 and, by these and other means, is finding its way into the courts.6 In 1

2 3

4

5

6

PD Finn, ‘The Fiduciary Principle’ in TG Youdan (ed), Equity, Fiduciaries and Trusts (Carswell, Toronto 1989) 1; PD Finn, ‘Contract and the Fiduciary Principle’ (1989) 12 UNSWLJ 76. The higher morality thesis is traceable to Cardozo J’s famous statement in Meinhard v Salmon, 164 NE 545, 546 (NY, 1928) that ‘a trustee is held to something stricter than the morals of the market place. Not honesty alone, but the punctilio of an honor the most sensitive, is then the standard of behavior’. See further, text at nn 53–5 below. See eg, HN Butler and LE Ribstein, ‘Opting Out of Fiduciary Duties: A Response to the Anti-Contractarians’ (1990) 65 Wash L Rev 1; JH Langbein, ‘The Contractarian Basis of the Law of Trusts’ (1995) 105 Yale LJ 625. Eg DA DeMott, ‘Beyond Metaphor: An Analysis of Fiduciary Obligation’ [1988] Duke LJ 879; MB Leslie, ‘Trusting Trustees: Fiduciaries and the Limits of Default Rules’ (2004) 94 Geo LJ 67. FH Easterbrook and DR Fischel, ‘Contract and Fiduciary Duty’ (1993) 36 JL and Econ 425; Langbein (n 3); JH Langbein, ‘Mandatory Rules in the Law of Trusts’ (2004) 98 Northwestern UL Rev 1105. See also R Cooter and BJ Freedman, ‘The Fiduciary Relationship: Its Economic Character and Legal Consequences’ (1991) 66 NYULR 1045. Leslie (n 4). The Restatement (Third) Trusts Project has been ongoing since 1992. Th ree volumes have been published to date. The fourth and final volume is in preparation. Part of the fourth volume, including the provisions governing exculpatory clauses in trust instruments (see Part D below) was presented in tentative draft form at the American Law Institute Annual Meeting, Washington DC, 18–20 May 2009.

Contracts, fiduciaries and the primacy of the deal 277

Australia, the leading judicial pronouncement is Mason J’s statement in Hospital Products Ltd v United States Surgical Corporation:7 the fiduciary relationship, if it is to exist at all, must accommodate itself to the terms of the contract, so that it is consistent with, and conforms, to them. The fiduciary relationship cannot be superimposed upon the contract in such a way as to alter the operation which the contract was intended to have according to its true construction.8

This passage seems to put the courts firmly in the contractarian camp. On the other hand, the statement presupposes the existence of an explicit contract between the parties and it is not necessarily an endorsement of the broader contractarian position that fiduciary obligations are essentially contractual ones, even if there is no contract in the traditionally understood sense. For example, it is probably fair to say that Langbein’s reconceptualization of trusts law in contractarian terms would be controversial in Australia. In Canada, by contrast, there is still controversy even over the case where the parties have concluded a formal contract. The latest word is 3464920 Canada Inc v Strother,9 a decision involving a solicitor’s duty to avoid conflicts of interest. Here the Supreme Court split 5–4 on the relationship between the terms of a solicitor’s retainer and the solicitor’s fiduciary obligations to the client, with the majority subscribing to the anti-contractarian position and the minority favouring the contractarian approach. In a recent analysis of the case, Remus Valsan and Lionel Smith side strongly with the majority.10 Their defence of anti-contractarianism is both succinct and instructive and it irresistably invites debate. In this essay, I propose – perhaps recklessly – to take up the challenge of attempting a response to them. In Part B below I explain the contractarian perspective in a little more detail, with reference to the leading scholarly contributions. In Part C, I provide an overview of the Strother case followed by discussion of Valsan and Smith’s arguments. One implication of the contractarian approach is that parties should be free to exclude or modify fiduciary obligations by contract subject to more or less the same 7 8

9 10

(1984) 156 CLR 41 (‘Hospital Products’). Ibid 97. Mason J’s statement was endorsed by the Privy Council in Kelly v Cooper [1993] AC 205, 215 (Lord Browne-Wilkinson) and by the House of Lords in Hilton v Barker Booth and Eastwood (a firm) [2005] UKHL 8, [2005] 1 WLR 567, [30] (Lord Walker). (2007) 281 DLR (4th) 640 (‘Strother ’). R Valsan and L Smith, ‘The Loyalty of Lawyers: A Comment on 3464920 Canada Inc v Strother ’ (2008) 87 Can Bar Rev 247. For a statement in support of the minority’s contractarian position, see A Duggan ‘Solicitors’ Confl ict of Interest and the Wider Fiduciary Question’ (2007) 45 Can Bus LJ 414.

278

Duggan

rules that govern exemption clauses in general (misrepresentation, unconscionable conduct and the like). In Part D, I discuss this issue specifically, with reference to the Federal Court of Australia case, Australian Securities and Investments Commission v Citigroup Global Markets Australia Pty Limited (No 4).11 The Citigroup case is a good example of contractarianism in action and it brings the main policy implications of the debate sharply into focus. Part E concludes. This essay is a predominantly policy-oriented one with an emphasis on economic analysis. In his contribution to this collection, James Edelman, building on an earlier study,12 tackles the relationship between contract and fiduciary law, but from a doctrinal perspective. Given our different methodologies, it is instructive to note that we reach more or less the same conclusions.

B.

The contractarian approach

Easterbrook and Fischel’s argument runs as follows. It is true that fiduciary law requires B to act in A’s interests, but so do contracts. Contract is the standard mechanism for limiting one party’s self-interested behaviour in favour of another. For example, when B contracts to supply goods or services to A, she limits her freedom to engage in activities that would prejudice her obligations to A. B accepts the restraint because she expects to be more than compensated for it by the returns payable under the contract. However, the viability of the contract mechanism depends on the parties being able to spell out B’s obligations at the time of transacting. In the usual case, they can do this in terms of either outcomes (an agreed result) or inputs (agreed steps B must take or processes she must follow). The paradigm fiduciary relationship involves the transfer to B of assets or some sort of enterprise to control and manage on A’s behalf.13 The separation of asset or enterprise ownership from management and control gives B an incentive to cheat by misappropriating assets or otherwise using her position for personal gain. The standard contractual techniques are not well suited to managing this kind of risk. How is the contract to spell 11 12 13

(2007) 160 FCR 35 (‘Citigroup’) (Jacobson J). J Edelman, ‘When Do Fiduciary Duties Arise’ (2010) 126 LQR 302. Eg trustees control and manage the trust assets, directors control and manage a company’s business, lawyers control and manage litigation (among other things), brokers control and manage investments and fi nancial advisers at least partially do the same in the sense that, through their advice, they participate with their client in the control and management of the client’s investments.

Contracts, fiduciaries and the primacy of the deal 279

out B’s obligations? A simple promise not to cheat will not work because B’s controlling position creates an information asymmetry so that A may have no way of knowing whether B is keeping her promise or not: asset losses, for example, might signify either cheating or just bad luck, while asset gains are not sure-fire proof of B’s honesty. A promise to achieve specific outcomes might solve the problem, but this kind of commitment is risky, particularly for complex undertakings, and B may be unwilling to make it. A promise to make specific inputs is the main alternative but this will usually be impractical because fiduciary relationships are typically long-term ones and attempting to dictate B’s actions in advance may inhibit her ability to adapt if circumstances change over time. Besides, the transaction costs of writing a fully specified contract like this would normally be prohibitive, as would the costs to A of monitoring B’s compliance over the long term. This is where fiduciary law comes in. Fiduciary law imposes an obligation of loyalty to prevent B from making personal gains while acting on A’s account and to prevent conflicts of interest. The aim is to deter B from exploiting the relationship to her own advantage. Fiduciary obligations perform a gap-filling function, like contractual implied terms. They avoid the need for the parties to agree in detail on everything B can and cannot do in the course of the relationship. This means, for example, that when a company appoints a director, the parties can write a relatively short contract. Likewise, when a client engages a lawyer or parties enter into a partnership agreement. The courts supply the missing details by spelling out, ex post, what B’s duty of loyalty means in particular circumstances. Parties who do not want the standard fiduciary package are free to bargain around it either generally (by incorporating an exculpatory provision in the terms of B’s appointment) or on a case-by-case basis (by B obtaining A’s informed consent to a transaction that fiduciary law would otherwise prohibit). Remedies for breach of fiduciary obligation include the constructive trust and the account of profits. These are gains-based remedies, in the sense that they allow A to recover the amount of B’s profit regardless of whether A has suffered loss. By contrast, damages is the standard remedy for breach of contract and damages is a loss-based remedy. The contractarian explanation for this difference lies in deterrence considerations. Fiduciary law’s gains-based remedies regime increases the penalty for disloyalty and so it makes B more trustworthy. An ex ante assurance of B’s trustworthiness is in both A’s and B’s interests. It is in A’s interests given A’s likely difficulty in monitoring B’s conduct over the course of

280

Duggan

the relationship. It is also in B’s interests because it helps to break down the misgivings A might otherwise have about entering into a relationship with B. For this reason, a contract which fully specified the terms of B’s engagement would probably provide for a gains-based remedies system. Fiduciary law avoids the need for express contractual terms by making gains-based remedies the default rule: B must disgorge the profits from fiduciary wrongdoing except if the parties specify otherwise. As Langbein points out, the trust is something of a special case because the trustee’s (B’s) deal is with the creator of the trust – the settlor or the testator (C) – not the beneficiary (A). However, this difference does not set the trust apart from other fiduciary relationships. The trust is in substance a third-party contract: C contracts with B for the benefit of A. The two fundamental characteristics of contract are consensual formation and party autonomy over terms. The trust has both of these characteristics: ‘no-one can be made to accept a trusteeship’ and ‘nearly all trusts law is default law – rules that the parties can reject’.14 Subject to some relatively limited exceptions, B and C can contract around trusts law by including an appropriately worded provision in the instrument that creates the trust. Additionally and, again subject to certain restrictions, A can excuse B from breach of her trustee’s obligation by giving his informed consent to a particular transaction or course of dealing. These observations apply equally to trusts inter vivos and testamentary trusts: Acceptance of a testamentary trusteeship is a consensual act. The appointment comes from the probate court, standing in, as it were, for the decedent. The testamentary trustee decides whether to accept the trust on the terms contained in the instrument and in the background default law of trusts. The person designated either declines the appointment or agrees to the trust deal.15

The trust is commonly a vehicle for gift-giving and so it may not be immediately obvious how it can be contractual. However, while C’s intention vis-à-vis A may be a donative one, his relationship with B is contractual in the sense described above, and it is the relationship between B and C that matters in terms of defi ning the trust.16 In summary, trusts – like fiduciary relationships at large – are contracts, not in a formal sense, but in the functional sense Langbein identifies. Trusts and other fiduciary relationships are characterized by consensual formation and party autonomy, just like contracts. The contractarian message is neither a historical 14

Langbein (n 3) 650.

15

Ibid 627.

16

Ibid 652.

Contracts, fiduciaries and the primacy of the deal 281

nor a taxonomical one. The claim is not that fiduciary law and the law of contracts share common origins. That would be absurd, given the separate development of common law and equity in the English courts. Nor is the claim that trusts and fiduciary law should now be merged with the law of contracts: ‘like other legal institutions that have been deeply influenced by modern contractarian analysis, such as the corporation or the marriage, the trust has an institutional integrity and convenience that fully justifies its independence’.17 Rather, the objective of the contractarian approach is to identify the policy underpinnings of trusts and fiduciary law and, in doing so, to illuminate and improve on the law.18 By way of illustration, Langbein cites the New York Court of Appeals decision Re Rothko.19 Mark Rothko appointed three executors to administer his estate. The executors sold Rothko’s paintings to the Marlborough Gallery. One of the executors was a director of the gallery. Another executor was an artist the gallery represented. Rothko’s popularity later increased and prices for his works went up dramatically. The court held that the two executors were in a conflict of interest over the sale to the gallery and it ordered them to account for what it supposed to have been a shortfall in the price. What the decision appears to have overlooked is that Marlborough was the gallery Rothko used to sell paintings during his lifetime and he knew the two executors had personal ties to the gallery. The facts suggest that Rothko wanted his executors to deal with the gallery.20 If this was in fact the case then, from a contractarian perspective, the decision is wrong because it violates party autonomy: ‘family and personal trustees often have interests adverse to the trust’. Evidence establishing that the testator was aware of the trustee’s conflict when he selected her ‘bears materially on the standard of fiduciary duty that the trust deal embodies’.21 The Supreme Court of Canada decision in Tornroos v Crocker 22 is an example going in the other direction. Tornroos, Dietrich and Crocker each owned a one-third share in a limited company. The company’s articles of association gave its shareholders a right of pre-emption. Tornroos 17 20

21

22

Ibid 630. 18 Ibid. 19 372 NE 2d 291 (NY, 1977) (‘Rothko’). Langbein (n 3) 666 citing RV Wellman, ‘Punitive Surcharges Against Disloyal Fiduciaries: Is Rothko Right?’ (1978) 77 Mich L Rev 95. Ibid. Boardman v Phipps [1967] 2 AC 46 (HL) is subject to the same sort of analysis. From a contractarian perspective the fault with the decision lies in the court’s failure to ask whether the testator would have authorized the defendants’ purchase of the Lester & Harris shares if he had anticipated the potential benefits to the trust at the time he wrote his will: Langbein (n 3) 666–7. [1957] SCR 151 (‘Tornroos’).

282

Duggan

died, having appointed his widow, Dietrich and Crocker as his executors. Three months later, Dietrich died, leaving his shares in the company to his widow. She wanted to sell them and, to comply with the pre-emption rule, she offered half of them to Tornroos’ estate and half to Crocker. Tornroos’ surviving executors (his widow and Crocker) turned the offer down on the ground that the shares were not authorized investments under the terms of Tornroos’ will. Crocker then bought the shares for himself and so he ended up holding a two-thirds controlling interest in the company. A new trustee was appointed to Tornroos’ estate. He sued Crocker alleging breach of fiduciary duty and claiming that Crocker held his shares on constructive trust for the estate. The court found in Crocker’s favour holding, in effect, that he did not breach his fiduciary obligations by buying the shares. Tornroos was well aware of what the company’s articles said and he must have realized the possibility that Dietrich’s or Crocker’s shares might be offered to his estate: in settling the terms of his will and giving directions to his trustees, it is plain he did not desire his estate should exercise the right to purchase but was content that his own shares should continue as a minority holding in a company controlled by one or other of his business associates, in whom he had such confidence that he desired they should be his trustees.23

This is essentially a contractarian perspective and it is the same sort of analysis Langbein argues the court should have undertaken in Rothko. The lesson Tornroos teaches and that Rothko overlooks is, to adapt Mason J’s words in Hospital Products, that the trustee’s fiduciary obligations must accommodate themselves to the terms of the trust deal, so that they are consistent with, and conform to them. Fiduciary obligations should not be superimposed upon the trust deal in such a way as to alter the operation it was intended to have according to its true construction.24

C.

The Strother case 1.

Overview

Strother was a case involving a lawyer’s fiduciary obligations to his client. The client had engaged Strother to provide advice about fi lm production tax shelter investments. There was a change in the tax laws aimed at defeating this kind of tax shelter and Strother advised the client there was no way round the new rules. Some time later, Strother discovered a loop-hole 23

Ibid 158 (Kellock J).

24

See text at n 8.

Contracts, fiduciaries and the primacy of the deal 283

but, instead of telling the client, he exploited it himself. The client sued Strother and his firm alleging breach of fiduciary duties and claiming an account of profits. The trial judge dismissed the claim,25 but this decision was reversed by the British Columbia Court of Appeal.26 A further appeal to the Supreme Court resulted in a 5–4 split in the plaintiff ’s favour. The main point of disagreement was the scope of the defendant’s retainer. Binnie J, for the majority, held that the retainer obliged the defendant to keep the plaintiff informed of new developments, while McLachlin CJC, for the minority, held the opposite. Given that, as McLachlin CJC was at pains to stress, this is a question of fact, there is not much to be gained from debating the merits of the competing views. However, in the course of getting to their respective conclusions, the two judgments made some observations about the interaction between contract and fiduciary law and these are noteworthy. According to the majority, while the scope of a lawyer’s retainer is governed by contract, ‘the solicitor-client relationship thus created is … overlaid with certain fiduciary responsibilities, which are imposed as a matter of law’.27 Furthermore: fiduciary duties provide a framework within which the lawyer performs the work and may include obligations that go beyond what the parties expressly bargained for. The foundation of this branch of the law is the need to protect the integrity of the administration of justice.28

These statements could be read as suggesting that fiduciary obligations may be imposed on parties regardless of what their contract says and, therefore, against their wishes. In any event, this is how the minority read them.29 The minority judgment strongly endorses the opposite position, namely that the terms of the contract shape the fiduciary relationship and not vice versa: the fiduciary duty between lawyer and client is rooted in the contract between them. It enhances the contract by imposing a duty of loyalty with respect to the obligations undertaken, but it does not change the contract’s terms. Rather, it must be molded [sic] to those terms.30

These words of course echo Mason J’s statement in Hospital Products, which McLachlin CJC goes on to quote.31 25 26

27 29

3469420 Canada Inc v Strother (2002) 26 BLR (3d) 235. 3469420 Canada Inc v Strother (2005) 38 BCLR (4th) 159, supp reasons 8 BLR (4th) 1, additional reasons 256 DLR (4th) 319. Strother (n 9) [34] (emphasis added). 28 Ibid (emphasis added). Ibid [147] (McLachlin CJC). 30 Ibid [141] (emphasis added). 31 Ibid.

284

Duggan

2.

Earlier cases

The minority judgment in Strother reflects the contractarian approach to fiduciary obligations, whereas the majority judgment is anti-contractarian. Valsan and Smith suggest that McLachlin CJC may not have realized the implications of what she was saying because she is ‘on record as one who forcefully emphasizes the normative differences between fiduciary obligations and [contract law]’.32 The case they have in mind is Canson Enterprises Ltd v Boughton & Co, 33 where McLachlin J, as she then was, stressed that, in contrast to contract and tort, ‘the fiduciary relationship has trust, not self-interest, at its core, and when breach occurs, the balance favours the person wronged’.34 At first glance, this sounds like Finn’s higher morality thesis, but the source McLachlin J cites in support of her position is not Finn, but Cooter and Freedman.35 As it happens, Cooter and Freedman’s analysis is an economic one and it is substantially the same as Easterbrook and Fischel’s leading contractarian account of fiduciary law. Drawing on Cooter and Freedman, McLachlin J locates the distinctiveness of fiduciary law not in any moral dimension but, rather, in: ‘(i) separation of ownership from control or management …; (ii) openended obligations, in that specific conduct or results are not stipulated; (iii) asymmetry of information concerning acts and results’.36 As explained in Part B above, these are the features contractarians rely on to explain the functional equivalence of fiduciary law and contractual implied terms. In short, McLachlin J’s judgment in Canson has a distinct contractarian flavour to it. Furthermore, there is at least one other case where McLachlin J has taken a clearly contractarian position on an aspect of trusts law. In Schmidt v Air Products of Canada Ltd,37 a contributory-defined benefit pension fund was in surplus at the time of its winding up, and the company and its employees both claimed the surplus. The pension plan in question was an amalgamation of two earlier plans, one of which had been set up as a trust with the company and employees as joint settlors and the employees as beneficiaries, and the court split over this part of the disputed funds. Cory J, for the majority, held that under the terms of the original trust deed, the trustees held any surplus for the employees alone but that, in the absence of this express provision, the doctrine of resulting 32 34

35

33 Valsan and Smith (n 10) 266. [1991] 3 SCR 534 (‘Canson’). Ibid 543. For a similar statement, see Norberg v Wynrib [1992] 2 SCR 226, [65], discussed in A. Duggan, ‘Fiduciary Obligations in the Supreme Court of Canada: A Retrospective’ (2011) 50 Can Bus LJ (forthcoming) Part III. 36 Cooter and Freedman (n 5). Canson (n 33) 544. 37 [1994] 2 SCR 611 (‘Schmidt ’).

Contracts, fiduciaries and the primacy of the deal 285

trusts would have applied. According to the doctrine of resulting trusts, the default rule is that surplus trust funds are returnable to the settlors in proportion to their contributions. In his view: where the circumstances of a particular case do not indicate any particular intention to part outright with money contributed to a pension plan, equity and fairness would seem to require that all parties who contributed to the fund should be entitled to recoup a proportionate share of any surplus subject to a resulting trust.38

Moreover, this should be the outcome regardless of the pension plan’s terms: the terms of the pension plan are relevant to distribution issues only to the extent that those terms are incorporated by reference in the instrument which creates the trust. The contract or pension plan may influence the payment of trust funds, but its terms cannot compel a result which is at odds with the existence of a trust.39

This all sounds remarkably like what Binnie J was later to say in Strother in a parallel context: in the application of fiduciary law or the law of trusts, the terms of the parties’ underlying deal are not determinative; fiduciary law, in common with the law of trusts at large, creates obligations that ‘are imposed as a matter of law’ and which ‘may go beyond what the parties expressly bargained for’.40 McLachlin J, dissenting, held that the company was entitled to the surplus by virtue of: (1) the express terms of the trust as amended; or, alternatively (2) the doctrine of resulting trusts. In the resulting trusts context, she held that when applying the doctrine the courts must keep in mind the terms of the plan.41 In a defined benefit plan, if there is a shortfall between the size of the fund at a particular time and the amount required to meet the plan’s obligations, the company must make up the difference. In a defined contribution plan, by contrast, the employees bear the risk of any shortfall because their pensions are tied to the funds available for distribution at any given time. The corollary is that in the case of a defined contribution plan, the employees get the benefit if the plan’s investments perform better than expected. In other words, both the upside and downside risks are on the employees. In the absence of a clear indication in the plan to the contrary, one would expect the reverse to be true in a defined benefit plan, namely, that since the company bears the downside

38 41

Ibid 649. 39 Ibid 639–40 (emphasis added). 40 See text at nn 27 and 28. Sopinka J also dissented in part and agreed with McLachlin J.

286

Duggan

risk it also gets the upside benefit. Therefore, in the absence of an express provision in the plan one way or the other, the court should find a resulting trust to the effect that any surplus on the winding-up of a defined benefit plan goes to the employer alone. To give employees a share of the surplus, as the resulting trusts doctrine does, might encourage employers to fund defined benefit plans less generously or to prefer defined contribution plans instead, so depriving employees of guaranteed benefits. On the other side of the coin, awarding the surplus to the employees would ‘give them more than they bargained for’.42 It would be hard to find a more emphatic endorsement of the contractarian approach.

3.

Other issues

According to Valsan and Smith: the mere fact that fiduciary duties can be weakened by consensual arrangements does not in any sense prove that they are contractual in origin. Legally imposed duties to take care not to cause injury can also be weakened by consensual arrangements.43

This is perfectly true but, as explained in Part B above, the contractarian approach rests on not just one, but two grounds: fi rst, consensual formation and second, party autonomy over terms. A legally imposed duty of care, by definition, does not possess the first of these characteristics. Furthermore, the contractarian claim is not that fiduciary obligations are contractual in origin but, rather, that they serve a contractual function.44 Valsan and Smith claim that contractarian theory cannot account for the case where a lawyer acts pro bono because, ‘in the absence of consideration, there is no contract as the common law understands that concept’.45 Again, though, the contractarian approach claims only that fiduciary law is functionally equivalent to contract, not that it is 42

43

Schmidt (n 37) 700 (emphasis added). As McLachlin J goes on to point out, her ‘practical view of things is supported by the policy of the Minister of National Revenue. Information Circular No 17–13R7, December 31, 1981, is based on the assumption that surplus is normally returnable to the employer. In order to comply with registration requirements, surplus in excess of the employer’s current service funding obligations in the following 24-month period must be either refunded to the employer or applied against the employer’s obligations for contributions on account of current or past service in the current and subsequent years. Furthermore, all pension plans are to contain a provision permitting an actuarial surplus to be refunded to contributing employers of the plan’: ibid. (The pension plans in issue pre-dated these requirements.) Valsan and Smith (n 10) fn 87. 44 See text at n 17. 45 Valsan and Smith (n 10) 266.

Contracts, fiduciaries and the primacy of the deal 287

formally the same or that fiduciary law should be merged with the law of contract. Valsan and Smith also suggest that the contractarian approach ‘ill-suits the recognition of fiduciary obligations between parents, or those in loco parentis, and their dependent children’.46 On the other hand, Easterbrook and Fischel argue that the guardian/ward relationship ‘is much the same as the trustee/beneficiary relation, except that variation by contract is disallowed in light of the ward’s youth or incapacity. Variation may be allowed by the court on application and approval in advance.’47 The prohibition on contracting out is not inconsistent with characterizing the obligation as an in substance contractual one; contract law, too, may prohibit contracting out of certain obligations, but the fact that particular obligations are mandatory does not detract from the contractual basis of the parties’ relationship. In the case of the trust, the deal is between the settlor or testator (C) and the trustee (B). Who is the deal between in the parent/child or guardian/ward cases? The typical case is where the parent or guardian uses her influence over the child to obtain a gift or some contractual advantage. In such cases, the relationship creates a presumption of undue influence which, if not rebutted, will allow the court to set the transaction aside.48 Th is translates to an obligation on the parent or guardian to avoid using her position for personal gain. Stating the matter this way makes the parallel with the trust readily apparent and it leads, in turn, to thinking about the parent-child relationship as an over-arching fiduciary one. However, this is perhaps a trap and it may be more productive to focus on the particular transaction in dispute rather than the relationship at a global level, as Easterbrook and Fischel appear to do. From this more limited perspective, the deal is the contract or the gift and, obviously, the parties to it are the parent and the child. Here fiduciary law, in the guise of the undue influence doctrine, is analogous to the doctrine of capacity in contract law. The doctrine of capacity, as it relates to minors, provides for the avoidance of contracts on the ground that the child’s youth prevents her from making proper judgments. Likewise, the undue influence doctrine provides for the avoidance of gift s and contracts on the ground that the parent’s influence calls into question the voluntariness of the child’s actions. In both cases, the underlying concern is to police transactions where the quality 46 48

Ibid. 47 Easterbrook and Fischel (n 5) 432. M(K) v M(H) [1992] 3 SCR 6, (‘M(K) v M(H)’) 66 (La Forest J).

288

Duggan

of the weaker party’s consent may have been affected. In other words, the contract and fiduciary law agendas are identical. In Canada, the courts have extended the concept of a parent’s fiduciary obligations beyond the protection of the child’s economic interests to cases where the parent causes physical harm.49 These cases do not readily fit with the preceding analysis because their focus is necessarily on the relationship at a global level and not particular transactions. The parent’s fiduciary obligation is to avoid infl icting personal injury, but it is hard to explain this in contractarian terms: where is the underlying deal, and who are the parties to it? In M(K) v M(H), 50 La Forest J said that ‘being a parent comprises a unilateral undertaking that is fiduciary in nature’.51 Th is statement suggests that the obligation is a consensual one on the parent’s part but that the child is not party to it, presumably because until adulthood she lacks the capacity to accept the undertaking. These considerations raise questions not so much about the correctness of the contractarian approach as about the correctness of applying fiduciary law to cases of parental abuse. In this connection, it is noteworthy that the Canadian cases in point are controversial outside Canada. 52 The fact pattern engages the tort of battery and it is hard to see what might be gained by super-imposing equitable obligations. 53 In M(K) v M(H), the plaintiff ’s main motivation for framing the action in breach of fiduciary duty was a concern that the tort action might have been barred by the limitations statute. However, this is ‘instrumental manipulation of fiduciary principles’54 and, in any event, the court in M(K) v M(H) dispelled the concern by liberally applying the limitation rule for claims in tort. Valsan and Smith point out that ‘the Supreme Court of Canada has frequently underlined the importance of fiduciary law to the public interest, especially in the lawyer-client relationship’ and this is ‘inconsistent with viewing the fiduciary obligation as a purely contractual one’. 55 They refer to MacDonald Estate v Martin56 and R v Neil,57 concerning the lawyer’s duty to avoid conflicts of interest between one client and another. In both cases, the court refers to public interest considerations such as maintaining the integrity of the justice system, facilitating mobility within the 49 50 52

53 56

Ibid. See also KLB v British Columbia [2003] 2 SCR 403. M(K) v M(H) (n 48). 51 Ibid 63. AH Oosterhoff, Oosterhoff on Trusts: Text, Commentary and Materials (7th edn Thomson Carswell, Toronto 2009) 831–3. Ibid 832. 54 Ibid 831. 55 Valsan and Smith (n 10) 266. [1990] 3 SCR 1235 (‘MacDonald ’). 57 [2002] 3 SCR 631 (‘Neil ’).

Contracts, fiduciaries and the primacy of the deal 289

legal profession and preserving clients’ access to their counsel of choice. As it happens, though, both cases are also readily understandable in contractarian terms. In the typical case, it will not be in the client’s interests for his lawyer also to act for the opposing party and if the lawyer were free to do so, this would be likely to affect both the demand and pricing for legal services. In this sense, fiduciary law reflects both parties’ likely ex ante preferences and it mimics the provision they would have agreed on if they had written a fully specified contract. Moreover, in both MacDonald and Neil, the court stressed that the solicitor can avoid liability by obtaining both clients’ informed consent. In other words, like other aspects of fiduciary law, the solicitors’ conflict rule is a default one. In Strother, both the majority and minority judgments spoke of the public interest in maintaining the integrity of the justice system. According to Binnie J, this consideration may justify imposing obligations beyond what the parties bargained for,58 while, according to McLachlin CJC, an excessively robust confl icts rule would compromise the integrity of the justice system by threatening the security of retainers and limiting clients’ access to legal services, particularly in specialized practice areas and small communities.59 However, from a contractarian perspective there is a more basic consideration which both judgments appear to overlook. Unless the contract is paramount, the courts would be using fiduciary law to rewrite the parties’ bargain and it is hard to see how this could be justified. Take the facts of Strother itself and assume for the sake of argument that the minority’s reading of the retainer is the correct one. This means that, as a matter of contract, Strother was under no obligation to provide new information about fi lm production tax shelters unless the client specifically asked for it. Now suppose the court were to say that nevertheless, as a matter of fiduciary law, Strother was under a continuing obligation to volunteer such information. The upshot would be to foist on the client services it neither wanted nor bargained for. The client itself would get a windfall because presumably the fees it paid Strother did not reflect this additional obligation. In future similar cases, though, the lawyer would presumably demand a premium for his services and the client’s only choice would be to pay the extra or do without the lawyer’s services altogether. The client would not have the option of stipulating in the retainer for a lower of level of service because, ex hypothesi, the terms of the retainer are not determinative. The majority judgment in Strother appears to suggest that overriding the contract may be needed ‘to protect 58

Strother (n 9) [34].

59

Ibid [136]–[138].

290

Duggan

the integrity of the administration of justice’, but the administration of justice is hardly served by forcing unwanted legal services on members of the public. None of this is to deny the importance of the public interest considerations the cases identify. The point is simply that public interest considerations and the parties’ own interests will frequently coincide – as in Strother – and the court’s reliance on public interest rhetoric should not distract attention from the essentially contractual nature of the conflicts rule. In this connection, it might be worth noting that the law of contracts can be rationalized in public interest terms – among other things, it facilitates commercial activity and increases wealth – but it would be implausible to suggest that, therefore, contractual obligations are not consensual. According to Valsan and Smith, ‘the contract governing the relationship between the parties is very important’, but it is not decisive.60 The contract indicates what the fiduciary must do, while fiduciary law indicates how she must do it. ‘The strictness of the obligations imposed by fiduciary law can be much more exacting than the contract would seem to imply.’61 The first part of this statement is a substantial concession to the contractarian position. The second part appears to be question-begging because it suggests that the fiduciary package is independent of the parties’ own preferences and this is the very point at issue. Contrary to what Valsan and Smith seemingly suggest, the contractarian approach explains both the content of fiduciary obligations and the strictness with which fiduciary law is applied. Running through this and their other arguments is the implication that fiduciary obligations have a moral dimension that is lacking in the law of contract. In other words, while they do not expressly say so, they apparently subscribe to Finn’s position that fiduciary obligations require the subordination of the principal’s self-interest to the interests of the beneficiary, whereas contract law promotes self-interested pursuits. However, as pointed out in Part B above, this argument overlooks the point that contract is the law’s primary mechanism for aligning competing interests and so, as it turns out, there is nothing distinctive about fiduciary law in this respect.

D.

Exclusion clauses

In Armitage v Nurse,62 the English Court of Appeal held that trustee exemption clauses can validly exempt trustees from all breaches of trust 60

Valsan and Smith (n 10) 267.

61

Ibid 268.

62

[1998] Ch 241 (CA).

Contracts, fiduciaries and the primacy of the deal 291

except fraud. The line is drawn at actual fraud because allowing a trustee to act dishonestly would undermine ‘the irreducible core of obligation’ of honesty and good faith.63 The rule is the same in the United States. For example, the Restatement (Second) of Trusts provides that: by the terms of the trust the trustee may be permitted to sell trust property to himself individually, or as trustee to purchase property from himself individually, or to lend to himself money held by him in trust, or otherwise to deal with the trust property on his own account.64

Hence, as Langbein says, ‘even the duty of loyalty, the “most fundamental” rule of trust law, yields to contrary terms of the settlor’.65 However, ‘although the various fiduciary rules are default rules, the settlor may not abrogate them in their entirety, because eliminating all fiduciary duties would make the trust illusory’.66 This all makes obvious sense from a contractarian perspective. As explained in Part B above, the default rule character of trusts and fiduciary law is one of contractarian theory’s linch-pins. Drawing the line at fraud is also consistent with the contractarian approach. Langbein gives the following example: if I am the owner of Blackacre, I am allowed to give Blackacre to T, or to make T the beneficiary of a trust for Blackacre. What the rule forbids me from doing is effecting that transfer by means of an illusory trust, a trust nominally for the benefit of B, rather than T. A purported trust to T as trustee for B, pursuant to trust terms providing that T shall owe B no fiduciary duties, would be illusory because B could not enforce a trust that is shorn of fiduciary duties.67

63 64

65 67

Ibid 253 (Millett LJ). American Law Institute, Restatement (Second) of Trusts (American Law Institute Publishers, St Paul 1963) (‘Restatement ’) s 170(1). Langbein (n 5) 1122. 66 Ibid. Ibid 1122–3. See also: DWM Waters, M Gillen and L Smith, Waters’ Law of Trusts in Canada (3rd edn Carswell, Toronto 2005) 927, citing public policy as the reason for disallowing blanket exclusion clauses, but going on to adopt the same sort of reasoning as Langbein’s; and D Hayton, ‘The Irreducible Core Content of Trusteeship’ in AJ Oakley (ed), Trends in Contemporary Trust Law (Clarendon Press, Oxford 1996) 47, acknowledging that while English law allows ‘a settlor to generate his local law for his autonomous trust so long as it is not inconsistent with, or repugnant to, the very trust relationship that he is purporting to create’, the duty to act in good faith cannot be excluded because ‘to do so would make a nonsense of the trust relationship as an obligation of confidence. It would make the trustees a law unto themselves free from the jurisdiction of the court and the court will not recognize this if the trustees were intended to be trustees and not absolute owners’ (at 48 and 57–8).

292

Duggan

There is an obvious parallel here with contract law and, in particular, the doctrine of fundamental breach. A party cannot simultaneously make a promise and insist on a term which absolves her from all responsibility for breach. An exclusion clause drawn as widely as this would make the promise illusory: there is either a promise or there is not, but the prospective promisor cannot have it both ways. Pursuing the contract analogy further, the doctrine of unconscionability may sometimes apply to avoid contractual exclusion clauses. An example might be where the party relying on the clause (B) knows that the other party (A) is unaware of the term or does not understand it and deliberately takes advantage of A’s ignorance to complete the deal. Another possible example is where B uses undue influence or otherwise pressures A into signing the contract.68 An obvious way for B to head off challenges of this kind would be to draw the provision to A’s attention, either by making sure it is prominently written in the contract or by pointing it out to A and perhaps also explaining it to him. In this indirect sense, it could be said that the unconscionability laws may in certain circumstances give rise to a duty of disclosure. Sauce for the goose is sauce for the gander and contractarian theory suggests that clauses excluding liability for breach of trust or fiduciary obligation should be subject to the same restrictions. As it happens, there are signs the law is heading in this direction. For example, the English Law Commission has recommended that trustee exemption clauses should be permitted, subject to a requirement for disclosure.69 The Commission’s proposed rule is that: any paid trustee who causes a settlor to include a clause in a trust instrument which has the effect of excluding or limiting liability for negligence must before the creation of the trust take such steps as are reasonable to ensure that the settlor is aware of the meaning and effect of the clause.70

The Commission explains the underlying concerns as follows: many settlors appear to be unaware of the existence or the effect of trustee exemption clauses [and this] undermines the argument that settlors may autonomously decide to grant the trustees the protection of the exemption. It also challenges the view that exemption clauses operate in a properly functioning market; the asymmetry of information between the trustee and the settlor has the effect of conferring on the former the benefit of a protection not appreciated by the latter.71 68

69 70

MJ Trebilcock, The Limits of Freedom of Contract (Harvard University Press, Cambridge MA 1993) 118–20. Law Commission, ‘Trustee Exemption Clauses’ (Law Com No 301 Cm 6874, 2006). Ibid [6.65]. 71 Ibid [1.19].

Contracts, fiduciaries and the primacy of the deal 293

These are exactly the same as the concerns behind the unconscionability doctrine in contract law and the Commission’s proposed response at least approximates the contract law solution. In the United States, the Restatement (Second) of Trusts sets out six factors for the court to consider before ruling on the validity of a trustee exclusion clause: (1) whether the trustee prior to the creation of the trust had been in a fiduciary relationship to the settlor, as where the trustee had been guardian of the settlor; (2) whether the trust instrument was drawn by the trustee or by a person acting wholly or partially on his behalf; (3) whether the settlor has taken independent advice as to the provisions of the trust instrument; (4) whether the settlor is a person of experience and judgment or is a person who is unfamiliar with business affairs or is not a person of mature judgment or understanding; (5) whether the insertion of the provision was due to undue influence or other improper conduct on the part of the trustee; (6) the extent and reasonableness of the provision.72

In a similar vein, the Uniform Trust Code directs the court to consider: (1) whether the existence and contents of the exclusion clause were adequately communicated to the settlor; and (2) whether the clause is fair under the circumstances.73 As David Horton has pointed out, these provisions amount to a codification of the unconscionability standard in the trusts context.74 Moreover, the Uniform Trust Code version bears an obvious correspondence with the English Law Commission’s proposal. In summary: (1) provisions limiting or excluding liability for breach of trust or fiduciary obligation are permissible, except, as in contract, for ‘core obligations’; and (2) trustee and fiduciary exclusion clauses are, or should be, subject to the same sort of unconscionability standard that applies in contract law. If the law allows parties to exclude particular obligations, does it allow them to contract out of the fiduciary relationship altogether? Citigroup75 is an interesting case in point. It involved an action brought by the Australian securities regulator, ASIC, against Citigroup alleging that 72

73 74 75

Restatement (n 64) s 222, comment d. The corresponding provision in the Restatement (Third) of Trusts is s 96, which is still in tentative draft form: see n 6. Uniform Trust Code (2008) s 1008(b). D Horton, ‘Unconscionability in the Law of Trusts’ (2009) 84 Notre Dame L Rev 1675. Citigroup (n 11). The following account deals only with selected aspects of the case. For a more comprehensive discussion, see PF Hanrahan, ‘ASIC v Citigroup: Investment Banks, Confl icts of Interest and Chinese Walls’ in J O’Brien (ed), Private Equity, Corporate Governance and the Dynamics of Capital Market Regulation (Imperial College Press, London 2007) ch 5.

294

Duggan

the company had contravened certain statutory provisions by being in breach of fiduciary duty to its client, Toll Holdings Ltd.76 Citigroup carried on various businesses in Australia, including corporate and investment banking. It carried on this business through a number of operating divisions, including the Investment Banking Division and the Equities Division. The Investment Banking Division provided advisory and investment banking services to clients, while the Equities Division engaged in the proprietary trading of securities. The two divisions were separated by a Chinese Wall. Toll retained the Investment Banking Division to provide financial advice and investment banking services in connection with Toll’s proposed takeover of a company called Patrick Corporation Ltd. During the course of the takeover bid, a trader in the Equities Division acquired a substantial number of Patrick shares. The trader apparently did not have inside information about Toll’s takeover bid for Patrick, but was simply responding to movements in the market price for Patrick shares. When the trader’s superior found out what was happening, he instructed the trader to stop buying Patrick shares, which the trader did. ASIC brought proceedings against Citigroup alleging, among other things, that it had breached the fiduciary duty it owed Toll to avoid conflicts of interest. The mandate letter, which set out the terms of Citigroup’s retainer, contained the following provision: [Toll] acknowledges that Citigroup has been retained hereunder solely as an adviser to [Toll], and not as an adviser to or agent of any other person, and that [Toll’s] engagement of Citigroup is as an independent contractor and not in any other capacity including as a fiduciary … [Toll] should be aware that Citigroup and/or its related bodies corporate may be providing or may in the future provide financial or other services to other parties with conflicting interests.77

Citigroup argued that this provision meant there was no fiduciary relationship between the parties and so there was no actionable conflict of interest. ASIC’s response was that the contractual stipulation would be effective to exclude the fiduciary relationship only if Citigroup obtained Toll’s informed consent to the provision. Jacobson J of the Federal Court of Australia held that, but for the exclusion clause in the mandate letter, as a fi nancial adviser Citigroup would 76

77

Corporations Act 2001 (Cth) s 912A(1)(aa) provides that a fi nancial services provider must have in place adequate arrangements for the management of confl icts of interest. ASIC has standing under the legislation to bring civil proceedings for non-compliance. Citigroup (n 11) [145] (emphasis added).

Contracts, fiduciaries and the primacy of the deal 295

have owed fiduciary obligations to its client, Toll. However, the exclusion clause displaced this outcome. Relying in part on Mason J’s statement in Hospital Products, he concluded that ‘it is open to the parties to a contract to exclude or modify the operation of fiduciary duties’.78 Moreover: where a fiduciary relationship is said to be founded upon a contract, the ordinary rules of construction of contracts apply. Thus, whether a party is subject to fiduciary obligations, and the scope of any fiduciary duties, is to be determined by construing the contract as a whole in the light of the surrounding circumstances known to the parties and the purpose and object of the transaction.79

In the present case, the words of the mandate letter were clear and so, Jacobson J concluded, they should be enforced accordingly.80 The decision is subject to a number of qualifications. In the first place, ASIC’s argument was that the provision required Toll’s informed consent as a matter of fiduciary law. However, this assumes a pre-existing fiduciary relationship, whereas ASIC in effect conceded that the alleged fiduciary relationship dated only from the mandate letter. ASIC rested its case solely on the application of fiduciary law and it appears to have overlooked the possibilities offered by contract law for the avoidance of exclusion clauses: for example, there was no allegation of mistake or misrepresentation and no suggestion that Citigroup’s failure to draw the provision to Toll’s attention might have qualified as unconscionable conduct. As a result, the court did not have to address these issues. Furthermore, Jacobson J was careful to distinguish between cases where the parties are already in a fiduciary relationship when they sign the contract containing the exclusion clause and cases, like the present one, where the contract creates the relationship: ‘a person who is already subject to fiduciary obligations must obtain the client’s fully informed consent to the exclusion or modification of those obligations’.81 Citigroup is fully consistent with the contractarian approach. The conclusion that, subject to the restrictions indicated above, parties may contract out of a fiduciary relationship respects the twin precepts of consensual formation and party autonomy. Why might the parties not have wanted fiduciary law to apply? An excessively robust conflict of interests rule would make it hard for financial conglomerates like Citigroup to combine advisory businesses with equities trading businesses and it may force them to disintegrate.82 ‘Horizontal disintegration means lost economies 78 82

79 Ibid [276]–[278]. Ibid [281]. Hanrahan (n 75) 118.

80

Ibid [335].

81

Ibid [307].

296

Duggan

of scope and higher prices for customers’ with no offsetting improvement in the quality of the services provided.83 These considerations suggest that the exclusion clause may have been in both Citigroup’s and Toll’s ex ante interests. Given how ASIC argued the case, Jacobson J did not have to consider the possible application of the unconscionability laws. However, the United States rules, discussed above, provide some guidance as to how he might have dealt with the issue if it had arisen. The takeover deal was a sizeable one and the parties, including Toll, were ‘highly sophisticated’.84 Toll did not rely exclusively on Citigroup for advice, but had engaged the services of another investment bank as well. There was no pre-existing fiduciary relationship between Toll and Citigroup. The mandate letter was the subject of negotiation between the parties. And, finally, for the reasons suggested above, the exclusion clause was not unreasonable. All these factors militate strongly against a finding of unconscionability. The corollary is that, under the circumstances, Citigroup was under no obligation as a matter of contract law to draw the clause to Toll’s attention. Assume the parties had been in a pre-existing fiduciary relationship. Then, according to Jacobson J, Citigroup might have been under an obligation, as a matter of fiduciary law, not only to draw the clause to Toll’s attention, but to obtain Toll’s fully informed consent to it. However, as Jacobson J noted, ‘the sufficiency of disclosure may depend on the sophistication and intelligence of the person to whom the disclosure is required to be made’85 and in the circumstances of this case, Citigroup’s duty might not have been a particularly onerous one. Why should it make a difference whether the parties were already in a fiduciary relationship at the time of the contract? The reason is that this changes the dynamics of their situation. If B is already A’s fiduciary, A is likely to be off guard and it may not occur to him that there are provisions in the contract that could be contrary to his interests. On the other hand, in the absence of a pre-existing relationship, A will usually have no basis for assuming that B is looking out for him.

E.

Conclusion

A fiduciary relationship may be created by contract. According to Mason J’s much-cited statement in Hospital Products, in such cases the fiduciary relationship must accommodate itself to the terms of the 83 85

Easterbrook and Fischel (n 5) 427–8. Citigroup (n 11) [296].

84

Hanrahan (n 75) 119.

Contracts, fiduciaries and the primacy of the deal 297

contract. In other words, the deal takes precedence. The clear implication is that fiduciary obligations are consensual, not imposed, and this is the main lesson of the contractarian approach. The justifications are grounded in considerations of both efficiency (the imposition of fiduciary obligations without regard to the parties’ own wishes is likely to result in a misallocation of resources) and party autonomy (imposing obligations on a party without her consent violates her rights as an individual and compromises her opportunities for self-determination). The same logic applies to cases where the fiduciary relationship arises independently of any formal contract between the parties. While it is true that in such cases there may be no contract in the conventional sense, there is always an underlying deal and, in determining the scope and content of the fiduciary relationship, the courts should have an eye to the deal. Rothko, read in conjunction with Tornroos, is instructive in this connection, as is the disagreement between the majority and the minority in Strother. One version of the anti-contractarian argument is that fiduciary law has a public interest component not found in the law of contract. The other version is that fiduciary law reflects a higher morality. However, the public interest argument downplays the inter-connectedness of public and private interests and it overlooks the fact that most areas of private law, including the law of contract, can be rationalized in public interest terms; fiduciary law is not distinctive in this respect. The higher morality argument, for its part, over-estimates the law’s capacity to make people behave unselfishly. It is true that fiduciary law requires the fiduciary to put the principal’s interests before her own, but it achieves this by means of a penalties system, not by appealing to the fiduciary’s better nature. In any event, contract law is also a mechanism for aligning different parties’ interests and it, too, works on a system of penalties for non-compliance. In other words, fiduciary law is not distinctive in this respect either.

13 Four fiduciary puzzles James Edelman *

A hundred years ago Fletcher Moulton LJ said of fiduciary duties that ‘[t]here is no class of case in which one ought more carefully to bear in mind the facts of the case’.1 In the last century nothing has changed to alter the force of this dictum. However, the development of fiduciary duties in England has shown why they are so dependent upon the facts of the case. This is because of their nature as terms which are expressed or implied into voluntary undertakings. The constraints of space in this chapter preclude an explanation of this thesis. I have given that explanation, from a doctrinal perspective, in a longer article elsewhere.2 The same conclusion, from a contextual ‘contractarian’ approach, is also reached in Tony Duggan’s chapter in this volume.3 This chapter takes that premiss – that fiduciary duties are voluntary undertakings – as its starting point and shows how such an analysis helps to understand and provide answers to four contemporary puzzles in the law concerning fiduciary obligations. The four puzzles are as follows: (1) Which fiduciary duties can be excluded by agreement? (2) When do fiduciary obligations come to an end? (3) What is the proper law to be applied to fiduciary duties where they arise in a cross-border context? (4) What is the level of fault required before a person can be liable for inducing or assisting in a breach of fiduciary duty? The point I will make in this chapter is that each of the four conundra can be easily understood once we see fiduciary duties as duties which are expressed or implied into voluntary undertakings. The chapter begins with a brief introduction to the nature of fiduciary duties as terms *

Thanks to Robert Mancini for sagacious observations.

1

Re Coomber [1911] 1 Ch 723, 728−9. J Edelman, ‘When Do Fiduciary Duties Arise?’ (2010) 126 LQR 302. A Duggan, ‘Contracts, Fiduciaries and the Primacy of the Deal’, ch 12 in this volume.

2 3

298

Four fiduciary puzzles

299

expressed or implied into voluntary undertakings before showing how this conception explains the pattern of development of the law in each of the four areas. The explanation of principle in this chapter, through the prism of English law, is deliberate. Although this book is dedicated to an Australian academic, Australian fiduciary law is too unsettled for the underlying thesis of this chapter to be stated with confidence with respect to Australia. For instance, obiter dicta in the High Court of Australia suggest that fiduciary duties are proscriptive, not prescriptive (which would preclude positive duties to act in the best interests of the beneficiary or to act in good faith).4 But recent extra-judicial scholarship by Justice Heydon casts doubt both on that proposition and whether the Justices could really have intended it in such absolute terms.5 Further, as will be seen below, in the context of private international law some Australian authority has treated fiduciary obligations as sui generis, denying an analysis which would treat these duties in the same way as any other express or implied terms.6 But in other contexts courts are less reluctant to draw comparisons7 and Justice Gummow, in an extra-judicial foreword, has recently endorsed a powerful monograph which rails against this Australian traditionalism in private international law.8 It is not merely Australian fiduciary law which is unsettled. The same is true of Canadian law, as a recent decision of the Supreme Court of Canada, split 5–4 on several fundamental fiduciary issues, neatly demonstrates.9 The attendant problems and inconsistencies of the majority’s approach in that decision are powerfully expressed in Tony Duggan’s chapter in this volume.10 Despite the focus in this chapter upon English law, it is hoped that the principles expressed here will be just as instructive in the development of Canadian, Australian or New Zealand fiduciary law. 4

5

6

7 8

9 10

Breen v Williams (1996) 186 CLR 71, 92−3 (Dawson and Toohey JJ), 113 (Gaudron and McHugh JJ), 137−8 (Gummow J); Friend v Brooker [2009] HCA 21, [84]−[85]. JD Heydon ‘Are the Duties of Company Directors to Exercise Care and Skill Fiduciary?’ in S Degeling and J Edelman (eds), Equity in Commercial Law (Lawbook Co, Sydney 2005) ch 9. See also Bofinger v Kingsway Group Limited [2009] HCA 44 at [35]. Of course, the concept of an express or implied term is not, and was never, a purely common law notion. It always applied to all instruments whether interpreted in a common law or equitable jurisdiction. Harris v Digital Pulse Pty Ltd (2003) 56 NSWLR 298. WMC Gummow, ‘Foreword’ in TM Yeo, Choice of Law for Equitable Doctrines (Oxford University Press, Oxford 2004) vi. 3469420 Canada Inc v Strother (2007) 281 DLR (4th) 640. Duggan (n 3). See also J Edelman, ‘Unanticipated Fiduciary Liability’ (2008) 124 LQR 21.

300

Edelman

A.

The nature of fiduciary duties

The starting point for any consideration of the law concerning fiduciary duties in England is the ‘masterful survey’11 of Millett LJ in Bristol and West Building Society v Mothew:12 A fiduciary is someone who has undertaken to act for and 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 singleminded loyalty of his fiduciary. Th is 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 his 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.

The underlying thesis of this chapter is that this dictum of Millett LJ is an insistence upon two elements which illustrate fiduciary duties as terms expressed or implied in the circumstances into voluntary undertakings: (1) an undertaking; and (2) circumstances requiring the recognition of particular obligations of loyalty.13 A recent example which illustrates how fiduciary duties are express or implied terms in voluntary undertakings is the decision of the House of Lords in Hilton v Barker Booth and Eastwood (a firm).14 The claimant property developer, Hilton, was involved in negotiations for a development with Bromage. Hilton was unaware that Bromage had just been released from jail for fraud offences. The pair reached agreement that Hilton would buy a site, develop it and sell it on to Bromage. With consent of Hilton and Bromage, the defendant solicitors acted for them both in the transaction. They acted for Hilton in getting a bank loan and for Bromage 11

12 13

14

Johnson v EBS Pensioner Trustees Ltd [2002] EWCA Civ 164, [2002] Lloyd’s Rep PN 309, [37]. Relied upon in Arklow Investments Ltd v Maclean [2000] 1 WLR 594, 599−600; Sinclair Investment Holdings SA v Versailles Trade Finance Ltd, AV Lomas, Robert W Birchall [2005] EWCA Civ 722, [13]; Temple Legal Protection Ltd v QBE Insurance (Europe) Ltd [2009] EWCA Civ 453, [12]. [1998] Ch 1 (‘Mothew ’) 18. These circumstances were perhaps infelicitously given the general description of ‘trust and confidence’ since this begs the question ‘a relationship of trust and confidence with whom?’ A beneficiary under an express trust, who is unaware of the trust or the trustee, is owed the same fiduciary duties as one who is so aware. [2005] UKHL 8, [2005] 1 WLR 567 (‘Hilton’).

Four fiduciary puzzles

301

in advancing the cash he would require to pay the deposit. The defendant solicitors had previously acted for Bromage in relation to his fraud offences. They did not disclose this fact to Hilton. When the development was finished Bromage failed to complete. Hilton terminated the contract. At this point the defendant solicitors told Hilton that there was a conflict of interest and that he should find different solicitors. The bank enforced its security, the properties were sold, and Hilton’s business collapsed. The claim by Hilton against the solicitors was pleaded and argued as a case of breach of an implied term of the contract. Hilton alleged that the solicitors were under an implied contractual duty to inform him of Bromage’s criminal convictions. In the Court of Appeal this claim failed. Delivering the leading decision, the Vice Chancellor said that different considerations applied to breach of contractual duty than applied to breach of fiduciary duty.15 Since this was just a breach of contract case, and since Hilton knew that the solicitors were acting for Bromage, there was an implied exclusion of liability for the solicitors in relation to any confidential information they possessed about Bromage.16 The House of Lords rejected this approach. The Lords unanimously held that the contract had been breached and there was no such implied exclusion.17 The Lords did not distinguish between the way ‘fiduciary’ terms are implied into the contractual undertaking and the way any other contract terms are implied. In the leading speech Lord Walker said that the contract ‘moulded and informed’ fiduciary duties.18 In relation to implied terms generally, the English test has now been restated in Attorney-General (Belize) v Belize Telecom Ltd.19 In that case Lord Hoff mann explained that the five overlapping factors mentioned by Lord Simon in BP Refinery (Westernport) Pty Ltd v Shire of Hastings20 were simply guidelines which formed part of a broader test directed to the meaning which would be conveyed to a reasonable person having all the background knowledge reasonably available to the person to whom the undertaking was addressed. The reasonable person would therefore 15 16 18

19

20

Hilton v Barker Booth and Eastwood (a firm) [2002] EWCA Civ 723 (‘Hilton (CA)’) [15]. Ibid [32]−[33]. 17 Hilton (n 14). Ibid [30], quoting Mason J’s famous dissenting judgment in Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41, 97, which was approved by the Privy Council in Kelly v Cooper [1993] AC 205 (‘Kelly v Cooper ’) 215. See also Hodgkinson v Simms [1994] 3 SCR 377 (fiduciary duty to disclose). [2009] UKPC 10, [2009] BCC 43. See also Davis J in Durham Tees Valley Airport Ltd v BMI Baby Ltd [2009] EWHC 852 (Ch) [89] and Mediterranean Salvage & Towage v Seamar Trading & Commerce ‘The Reborn’ [2009] EWCA Civ 531. (1977) 180 CLR 266, 282−3.

302

Edelman

consider: (1) whether the proposed implication is reasonable and equitable; (2) whether it is necessary to give business efficacy to the contract; (3) whether it is so obvious that ‘it goes without saying’; (4) whether it is capable of clear expression; (5) whether it contradicts any express term of the contract. The Hilton decision, as pleaded, was a decision concerned with implied contractual duties. Other recent examples can also be given21 which demonstrate that fiduciary duties are being treated as no more than terms which are expressed or implied into obligations arising from undertakings, either contractual or unilateral.22

B. 1.

The four fiduciary puzzles considered

Which fiduciary duties can be excluded by agreement?

Since the decision in Kelly v Cooper,23 English courts have accepted that it is possible for fiduciary duties to be excluded by implication as well as by positive expression. However, a very difficult question arises as to the limits to this principle. Are there any fiduciary duties which cannot be excluded? The issue of exclusion of the conflict duty was considered in Hilton. When the case was decided in the Court of Appeal, Sir Andrew Morritt VC held that the solicitors had excluded this core fiduciary obligation by implication. His Lordship considered that a term should be implied into the contract between Hilton and his solicitors that the solicitors could act for both parties and were not required to disclose any confidential information.24 But when the case reached the House of Lords this analysis was rejected. As Lord Scott said:25 If, when instructing the respondent fi rm to act for him, the proposed implied term had been put to the appellant, it is inconceivable that he 21

22

23

For instance, in Fassihi v Item Software (UK) Ltd [2004] EWCA Civ 1244, [2004] BCC 994 the Court of Appeal considered that the question of whether to recognize a fiduciary duty of a director to disclose his own wrongdoing was governed by the scope of the decision of the House of Lords in Bell v Lever Brothers Ltd [1932] AC 161 (which concerned implied terms). Unilateral undertakings include deeds (which can take effect even if the promisee is unaware of the promise: Xenos v Wickham (1867) LR 2 HL 296, 312), promises which are relied upon under the doctrine in Hedley Byrne & Co Ltd v Heller and Partners [1964] AC 465 (‘Hedley Byrne’), and those unilateral promises which induce detrimental reliance under the doctrine of estoppel. [1993] AC 205. 24 Hilton (CA) (n 15) [32]−[33]. 25 Hilton (n 14) [6].

Four fiduciary puzzles

303

would have responded ‘Yes, of course’, or with words to that effect. He would have asked what sort of information his solicitors were talking about and to whom the duty of confidentiality was owed.

It is noteworthy that although Lord Scott considered that there was no implied term which had excluded the no-confl ict duty, his Lordship clearly contemplated that any fiduciary obligation to avoid conflict could have been expressly excluded and confidential information could have been withheld. The circumstances required a term that the solicitors would not place themselves in a situation of conflict; they did not warrant an implication that confidential information could be withheld if there was a conflict. The issue of express exclusion was directly raised in Citibank NA v QVT Financial LP.26 In very brief summary, the case involved a fourparty arrangement in relation to Eurotunnel debt. Citibank agreed to act as trustee of notes issued for the beneficial holders under a trust. There were four different degrees of subordination of these notes for the different beneficial owners. The trust deed provided for the guarantor of those notes (a third party, MBIA) to issue directions to Citibank concerning how Citibank could exercise its rights as trustee. It also provided that Citibank, in following these directions, ‘need not have regard to the interests of [the beneficiary] noteholders’. MBIA instructed Citibank to exercise an option to convert part of the debt in the notes to cash. Some of the subordinated noteholders complained that the option would be exercised at an undervalue. They argued that a power to dispose other than in their best interest was not possible as a matter of construction. Alternatively, if it was, they argued that Citibank would be in breach of its obligations as trustee if it followed the direction of MBIA. The Court of Appeal rejected both arguments. It held that this power was present and that Citibank had partially excluded duties to act in the best interests of the noteholders. In the lead judgment Arden LJ held that the court should lean against a construction of the contractual documents such that ‘the powers of the trustee were so reduced that it ceases to be a trustee at all’, however, she considered that ‘that point has not been reached in the present case’27 because the trustee continued to have an obligation of good faith as well as other discretions under the trust deed. The decision has been criticized for allowing parties to exclude or reduce the ‘irreducible core’ of trust duties.28 But it does no such thing. 26 28

[2007] EWCA 11, 1 All ER (Comm) 475. 27 Ibid [82]. A Trukhtanov, ‘The Irreducible Core of Trust Obligations’ (2007) 123 LQR 342.

304

Edelman

The expression ‘irreducible core’ comes from the decision of Millett LJ in Armitage v Nurse.29 In that case, the question was whether a trustee had excluded liability for negligence by a clause which provided that ‘[n]o trustee shall be liable for any loss or damage which may happen to [the trust] fund or any part thereof or the income thereof at any time or from any cause whatsoever unless such loss or damage shall be caused by his own actual fraud’. The claimant alleged that this clause could not exempt the trustee from gross negligence. The Court of Appeal disagreed. Giving the leading judgment, Millett LJ said this:30 there is an irreducible core of obligations owed by the trustees to the beneficiaries and enforceable by them which is fundamental to the concept of a trust. If the beneficiaries have no rights enforceable against the trustees there are no trusts. But I do not accept the further submission that these core obligations include the duties of skill and care, prudence and diligence. The duty of the trustees to perform the trusts honestly and in good faith for the benefit of the beneficiaries is the minimum necessary to give substance to the trusts.

Millett LJ was not suggesting that the irreducible core consisted of three separate obligations, namely honesty, good faith and a duty to act in the best interests of the beneficiaries. His statement must have been intended as a compendious description of the duty of ‘good faith’ which he had very recently enunciated as part of his disambiguation of the duty of loyalty in Mothew. It will be recalled that Millett LJ in Mothew had described the duty of loyalty as comprising, inter alia, a duty of good faith. He did not suggest that there was any separate loyalty duty of ‘honesty’ or ‘acting in the beneficiary’s best interests’; indeed to have suggested so would have been contrary both to authority and principle.31 His Lordship in Armitage must have been focusing only upon the trustee’s intentions in performing trust obligations for the benefit of the beneficiary (ie that the intentions must be ‘in good faith’ or ‘honest’ in relation to rights held for another). There is an important reason why Millett LJ focused only upon the intentionality of the trustee’s performance rather than the other three obligations of loyalty that he had enunciated in Mothew. Unlike the other duties which are voluntarily assumed and can therefore be voluntarily 29 31

[1998] Ch 241 (‘Armitage’). 30 Ibid 253−4. As to the lack of any precise duty encompassed in the vague formulation ‘best interests’, see Edelman (n 2). As to authority see Hayim v Citibank NA [1987] AC 730. It is also well established that a trust power to add to a class of fi xed beneficiaries is valid, even though the exercise of that power would often be plainly contrary to the best interests of existing beneficiaries: Re Manisty’s Settlement [1974] Ch 17.

Four fiduciary puzzles

305

excluded, the duty to act honestly is imposed by law. Its content will depend upon the particular circumstances but it is a ‘duty of universal obligation. It exists independently of contract or of special obligation [whenever] a man intervenes in the affairs of another.’32 As an imposed obligation, good faith or honesty can never be excluded voluntarily.33 It is, of course, open to the parties to enlarge this core imposed obligation of good faith. A fiduciary relationship might involve express or implied undertakings to act reasonably or candidly which might also loosely be described as obligations of good faith. The expression or implication of such obligations will, of course, depend upon the express or implied undertaking by the fiduciary.34 One possible qualification to this view arose in Walker v Stones.35 In that case the question was whether trustees were exonerated by an exclusion clause when, at the direction of the settlor, they procured a subsidiary company to subscribe to a worthless bond issue which reduced the value of the shares of the parent company which were held on trust. Delivering the leading judgment, Sir Christopher Slade referred to Millett LJ’s view that ‘if [trustees act] in good faith and in the honest belief that they are acting in the interests of the beneficiaries their conduct is not fraudulent’. Sir Christopher Slade disagreed and posed a broader test which effectively included within dishonesty instances of gross negligence:36 With respect, however, I fi nd myself unable to agree with the third proposition, if stated without qualification. At least in the case of a solicitortrustee, a qualification must in my opinion be necessary to take account of the case where the trustee’s so-called ‘honest belief ’, though actually held, is so unreasonable that, by any objective standard, no reasonable solicitor-trustee could have thought that what he did or agreed to do was for the benefit of the beneficiaries.

This is no longer English law. I will discuss, below, the equitable wrong of dishonest assistance where this approach to dishonesty has been rejected by the House of Lords and the Privy Council. It suffices to say at this point that a genuinely held view, no matter how unreasonable, is not a dishonest one. 32 33

34

35

Nocton v Lord Ashburton [1914] AC 932, 954 (Viscount Haldane). HIH Casualty and General Insurance Ltd v Chase Manhattan Bank [2003] 1 All ER (Comm) 349, [16], [76], [98], [121]−[122]. The larger question of the content of ‘good faith’ duties in the fiduciary context is explored in Edelman (n 2). [2001] 1 QB 902. 36 Ibid 939.

306

Edelman

Although at common law the exclusion of express or implied duties in a trustee’s undertaking is no different from the exclusion of duties in any other undertaking, there is one respect in which legislation has been construed to permit trustees to exclude obligations that other parties making undertakings cannot. The current approach of the courts to the Unfair Contract Terms Act 1977 (UK) is that the Act does not apply to trustee exemption clauses because the trust deed is not a contract and an exclusion clause in a trust deed is not a ‘notice’ excluding liability.37 This reasoning was based on the idea that ‘notice’ is everything apart from a ‘formal legal document’ but that ‘contract’ includes only bilateral formal legal documents. The effect is that whilst the Act restricts exclusions in a consumer contract or a voluntary undertaking made to a consumer, undertakings by a trustee are not so restricted. This construction of the legislation is surprising but it was effectively endorsed by the Law Commission in 2006 and no change seems imminent.38 In summary then, in English law all express or implied fiduciary duties can be excluded.39 Th is makes complete sense if one appreciates that fiduciary duties are simply terms implied into voluntary undertakings. General duties, such as the duty of honesty, which are imposed by law cannot be excluded. But these duties are universal. Although their content will depend upon the circumstances of the case, they are not unique to fiduciaries and their content may vary from fiduciary to fiduciary just as it does in other contexts.

2.

When do fiduciary duties terminate?

Th is second puzzle was considered in Prince Jefri Bolkiah v KPMG (a firm).40 KPMG were auditors of an investment agency which worked for the government of Brunei. Prince Jefri was the chairman of the agency. He retained KPMG to advise him in relation to major litigation in which he was involved. The retainer involved KPMG having access to confidential information such as the location of his assets. The litigation ultimately settled. Subsequently KPMG were appointed to investigate 37

38

39

40

The concession in Baker v JE Clark & Co (Transport) UK Ltd [2006] EWCA Civ 464 that the Act did not apply was accepted by the Court of Appeal. Law Commission, ‘Trustee Exemption Clauses’ (Law Com No 301, 2006) 84, recommending the continued recognition of exemption clauses subject to a rule of practice requiring them to be reasonably brought to the attention of the other party. Tony Duggan shows that United States and Australian law reaches the same conclusion which he also justifies on economic grounds: Duggan (n 3). [1999] 2 AC 222 (‘Prince Jefri ’).

Four fiduciary puzzles

307

the loss of agency assets alleged to have been removed by Prince Jefri. KPMG appointed a different team of people to work on the investigation and erected ‘Chinese walls’. Prince Jefri was not satisfied. He sought an injunction to remove KPMG from the investigation. The House of Lords held that KPMG were required to show that the ‘Chinese walls’ had removed any real risk of disclosure. This onus had not been discharged so the injunction was granted. But KPMG were held not to have breached any fiduciary duty. Delivering the lead decision in the House of Lords, Lord Millett explained why:41 Where the court’s intervention is sought by a former client, however, the position is entirely different. The court’s jurisdiction cannot be based on any confl ict of interest, real or perceived, for there is none. The fiduciary relationship which subsists between solicitor and client comes to an end with the termination of the retainer. Thereafter the solicitor has no obligation to defend and advance the interests of his former client. The only duty to the former client which survives the termination of the client relationship is a continuing duty to preserve the confidentiality of information imparted during its subsistence.

Although it has been described by the Court of Appeal as ‘trite law’,42 this passage is doubted in Snell’s Equity.43 Taken literally, the sub-editor argues, it would mean that a fiduciary would be entitled to take advantage of any valuable corporate opportunity within the scope of his employer’s business, provided he simply resigns his employment. There are two answers to this. The first is that a fiduciary who discovers a corporate opportunity during the course of his employment will be required to disclose that to his employer. A failure to do that will be a breach of fiduciary duty during the course of his employment. Although it has been said that ‘it is of course not improper for an employee to make arrangements for his future employment or business activity whilst still employed’,44 this is not always true. It is a question of degree. As Moses LJ pointed out in Helmet Integrated Systems v Tunnard:45 it is insufficient merely to cloak activities with legitimacy by describing them as preparatory. The fi rst task … is to identify the employee’s 41 42 43

44

45

Ibid 235. See also Attorney-General v Blake [1998] Ch 439 (‘Blake’) 453−5. Blake (n 41) 454. J McGhee (ed), Snell’s Equity (31st edn Sweet & Maxwell, London 2005) 153 [7–22]−[7–24]. Cobbetts LLP, Lee Crowder (a firm) v Mark Reginald Stuart Hodge [2009] EWHC 786 (Ch) [94]. [2007] FSR 16, [30]−[32].

308

Edelman obligations. Once these have been identified, the court is in a proper position to discern whether the activities of an employee undertaken in pursuance of a plan to be fulfi lled on his departure is in breach of his duty to his employer or not.

The second reason why an employee’s conduct post-termination might still amount to a breach of fiduciary duty within the Prince Jefri rule is that even if a contractual relationship is terminated a new non-contractual relationship might still arise. A voluntary undertaking into which fiduciary duties are implied need not be a contractual one. So as long as there is a new voluntary relationship then duties might be implied even if the old relationship has terminated. In Longstaff v Birtles46 the claimants, Mr and Mrs Longstaff, negotiated for the purchase of a public house. They were advised by the defendant solicitors. The negotiations broke down. Subsequently, the solicitors suggested the purchase of a second public house to the Longstaffs. The solicitors had an interest in the second public house but they did not advise the Longstaffs to seek independent legal advice. The Longstaffs bought into a partnership with the solicitors. They lost a lot of money and were left in financial ruin. They claimed against the solicitors, including for breach of fiduciary duty. The solicitors argued that the retainer had concluded after the first transaction and therefore the fiduciary duty ended with it. Mummery LJ rejected this argument holding that:47 a relationship of trust and confidence [existed] between the Longstaffs and the solicitors [which] … did not cease on the termination of the retainer … in the context of the relationship the proposal gave rise to a situation in which the duty of the solicitors might conflict with their interest; and that they acted in breach of fiduciary duty in continuing to deal with the Longstaffs, in a situation of a conflict of duty and interest, without insisting that they obtain independent advice.

In summary then, a fiduciary duty will terminate when a voluntary undertaking terminates. However, if a new voluntary relationship arises, or if a fiduciary duty has been breached prior to the termination of the relationship then liability will arise.

46

47

[2001] EWCA Civ 1219, [2002] 1 WLR 470 (‘Longstaff ’ ). See also Ratiu v Conway [2005] EWCA Civ 1302, [74]–[75]. Longstaff (n 46) [35].

Four fiduciary puzzles

3.

309

Choice of law for fiduciary duties

Imagine a case where an English company enters into a partnership agreement in Italy with an Italian company to bid for and exploit an Italian oil field. The partnership agreement is expressed to be governed by Italian law. In breach of the agreement, and also of its fiduciary duty to the Italian company, the English company submits an independent bid for the oil field. The English company wins the bid and makes vast profits. In the belief that Italian law will not permit the disgorgement of profits in these circumstances, the Italian company sues the English company in England for breach of contract and breach of fiduciary duty. In relation to the breach of contract claim, the governing law is plainly Italian law.48 What is the governing law for the fiduciary obligation? Strangely, until recently, the limited authority on this question suggested that it was English law. In Dicey, Morris and Collins on The Conflict of Laws49 it is said that ‘[t]he courts have had little occasion to consider the choice of law rules applicable to causes of action which would, as a matter of English domestic law, be seen as being based on or concerned with an equitable obligation or equitable wrong’. There are two potential answers to this question.50 The first is that, in the words of Adrian Briggs, 51 ‘the domestic law distinction between common law and equity is wholly irrelevant to the conflict of laws’. This is the approach that Briggs favours. It is also favoured by Yeo Tiong Min in his 2006 monograph, Choice of Law for Equitable Doctrines.52 On this approach, as Dicey, Morris and Collins asserts, ‘where 48

49

50

51 52

Now governed by the Council Regulation (EC) 593/2008 of 17 June 2008 on the law applicable to contractual obligations [2008] OJ L177/6 (‘Rome I’). L Collins and others (eds), Dicey, Morris and Collins on The Conflict of Laws (14th edn Sweet & Maxwell, London 2006) [34–033]. A Briggs, Conflict of Laws (2nd edn Oxford University Press, Oxford 2008) 216. A third approach mentioned, but not favoured, by Briggs is that ‘so long as the foreign law (usually in practice the place where the defendant acted) imposes a form of liability resembling the nature of the English action, the claim will proceed on the basis of English law’. Briggs suggests that this approach was taken in the cases concerning dishonestly assisting a breach of trust: see Kuwait Oil Tanker SAK v Al Bader [2000] 2 All ER (Comm) 271 (CA); Grupo Torras SA v Al Sabah [2001] CLC 221 (CA). However, in relation to a claim for knowing assistance, Clarke J rejected this approach and ‘strongly inclined’ to the view that dishonest assistance was to be characterized as a ‘tort’: see OJSC Oil Company Yugraneft (in liq) v Abramovich [2008] EWHC 2613 (‘OJSC Oil Company’) [185], [221]−[223]. Briggs (n 50) 216. The central thesis of Yeo’s entire 360-page book is that there is no separate choice of law rule for equitable doctrines or remedies. The thesis is succinctly stated, and endorsed, in

310

Edelman

a fiduciary relationship is alleged to arise by reason of a contractual relationship between the parties, a court may find that the proper law is that which governs the contract’.53 The second approach is that the operation of equity depends upon the conscience of the defendant so that there is no choice of law rule that applies when English equity is applied by an English court. In other words, there is something unique about equitable doctrines and remedies which makes it inappropriate for a contract to govern the relationship. Although authority is sparse, there is a line of authority which favours the latter position.54 The first two decisions in this line of cases, both Australian, express the view that the lex fori governs equitable claims in the context of considering the proper law of a trust. Trusts can be put to one side as their proper law is now usually governed in both Australia and the United Kingdom by the Convention on the Law Applicable to Trusts and on their Recognition.55 However, in the context of fiduciaries generally these trusts cases were followed in Australia by Paramasivam v Flynn.56 That case was a decision of the Full Court of the Federal Court of Australia (special leave to appeal to the High Court of Australia was refused). The appellant applied for an extension of time in which to sue the respondent for alleged breaches of fiduciary duty (sexual assault by a guardian of his ward) sixteen years earlier. The appellant and respondent had both been resident in New South Wales at the time and most of the assaults had occurred in New South Wales (with some occurring also in Fiji). The action was commenced in the Australian Capital Territory and a question arose as to which substantive law should be applied to the claim for breach of fiduciary duty: the law of the forum (the Australian Capital Territory) or the law of New South Wales. The Full Federal Court held that the law of the forum applied. The only concession to the apparent oddity of this result was that the court acknowledged that where the

53 54 55

56

the foreword by Gummow J of the High Court of Australia: see Gummow (n 8) vi. See also J Fawcett, J Carruthers and P North, Cheshire, North and Fawcett: Private International Law (14th edn Oxford University Press, Oxford 2008) 769 and Collins and others (n 49) [2–035], [34–033]. Collins and others (n 49) 1884. See also S Lee, ‘Restitution, Public Policy and the Confl ict of Laws’ (1998) 20 UQLJ 1. Adopted 1 July 1985, entered into force 1 January 1992, 1664 UNTS 311 (‘Hague Convention’). The Hague Convention was enacted into law in the UK and Australia in 1992. The earlier decisions were National Commercial Bank v Wimborne (1978) 5 BPR 11,958; Attorney-General (UK) v Heinemann Publishers Australia Pty Ltd (1987) 10 NSWLR 86, 151 (Kirby P), 192 (McHugh JA). [1998] FCA 1711.

Four fiduciary puzzles

311

source of the fiduciary obligation is a contract then it may be that the law of the forum will not apply. Th is Australian approach has gathered strength. In Oz-Us Film Productions Pty Ltd v Heath57 it was applied and Young J argued that ‘the proper law of the contract is irrelevant’.58 The same approach was taken in Damberg v Damberg, 59 (although the issue appears not to have been raised), a case which involved, as Nygh and Davies put it, a ‘transfer in Germany of German immovable property from one German domiciliary to two others’.60 Nygh and Davies, like Young J,61 rely upon the maxim that equity acts in personam on the conscience of the individual, a maxim now castigated as wholly misleading in Snell’s Equity.62 There is some very limited support for the Australian approach in Singapore63 and Jersey64 but little authority for it elsewhere. In contrast, Dicey Morris and Collins takes a strong stance against the Australian suggestion that the law of the forum could ever apply to a claim because it is an ‘equitable’ claim, boldly asserting that ‘the Australian approach finds little support in England’.65 The voices of Lord Collins, Briggs and Yeo 66 are now supported by the decision of Christopher Clarke J in OJSC Oil Company Yugraneft (in liq) v Abramovich.67 Although the case involved a claim for dishonest assistance in a breach of fiduciary duty rather than a breach of fiduciary duty itself, Christopher Clarke J expressly rejected the Australian lex fori approach. If, as is likely, English law rejects the Australian approach then what should the proper law be for fiduciary duties? Dicey Morris and Collins suggests that ‘where a fiduciary relationship is alleged to arise by reason of a contractual relationship between the parties, a court may fi nd that the proper law is that which governs the contract’.68 So if a fiduciary duty 57 58 60

61 62

63

64 66 68

[2000] NSWSC 967 (‘Oz-Us Film Productions’). Ibid [22]. 59 (2001) 52 NSWLR 492. P Nygh and M Davies, The Conflict of Laws in Australia (7th edn Butterworths, Sydney 2002) 632. Oz-Us Film Productions (n 57) [13]. McGhee (ed), Snell’s Equity (32nd edn Sweet & Maxwell, London 2010) (forthcoming). I am the author of the relevant section. The High Court applied the law of the forum in that case in a result upheld by the Court of Appeal in Sumitomo Bank Ltd v Thahir [1993] 1 SLR 735, aff ’d [1994] 3 SLR 257. However, the reasoning of the Court of Appeal did not apply a blanket ‘ lex fori ’ approach because this was an equitable claim. Instead the Court of Appeal considered the case of receipt of bribes as one of unjust enrichment and relied upon a ‘place of enrichment’ rule. Mayo v Cantrade [1998] JLR 173, 193. 65 Collins and others (n 49) [2–035], fn 62. Ibid. Cf Lee (n 54). 67 OJSC Oil Company (n 50) [194]. Collins and others (n 49) [34–043]. See also Attorney-General (England and Wales) v R [2002] 2 NZLR 91.

312

Edelman

arises in a contractual context (ie is expressed or implied into a contract) then the rule should be the same as that for the contract. As for voluntary undertakings that are non-contractual, in Renate Ilsinger v Martin Dreschers,69 for the purposes of Article 15 of the Brussels Regulation,70 the European Court of Justice held that a unilateral promise or undertaking to another person was to be treated as a contract, just as Lord Devlin had insisted 45 years earlier.71

4.

Assistance in a breach of trust or fiduciary duty

The final recent development in this area which I consider is the liability of third parties for wrongdoing when they participate in a breach of fiduciary duty. The most difficult issue in such cases is the degree of knowledge or fault required for the third party to become liable. I will first outline the position prior to 2005 before turning to consider two recent cases. Until 2002, the leading decision on the degree of fault required for liability for inducing or assisting in a breach of fiduciary duty was the decision of the Privy Council in Royal Brunei Airlines Sdn Bhd v Tan Kok Ming.72 In that case, the defendant was the managing director of a company which operated as a travel agency. He misapplied money which the company held on trust for the airline by deliberately paying it into the company current account instead of the trust account. Delivering the advice of the Privy Council, Lord Nicholls held that the managing director was liable for dishonestly assisting in a breach of trust. Lord Nicholls explained that the focus should be on dishonesty rather than a particular ‘degree of knowledge’.73 Dishonesty, his Lordship suggested, is an objective standard and in a commercial setting it simply means that which is ‘commercially unacceptable conduct’.74 The reference by Lord Nicholls to degrees of knowledge was a reference to the decision in Baden Delvaux and Lecuit v Société Générale pour Favoriser le Développement du Commerce et de l’Industrie en France SA.75 In that case Peter Gibson J suggested that there were five different degrees of knowledge: (1) actual knowledge; (2) wilfully 69 70

71 74

75

Case C-180/06 Renate Ilsinger v Martin Dreschers [2009] ECR I-0000. Council Regulation (EC) 44/2001 of 22 December 2000 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters [2001] OJ L12/1 (‘Brussels Regulation’). Hedley Byrne (n 22) 529. 72 [1995] 1 AC 378 (‘Tan’). 73 Ibid 392. Ibid 392 quoting Cowan de Groot Properties Ltd v Eagle Trust Plc [1992] 4 All ER 700, 761 (Knox J). [1983] BCLC 325, 387.

Four fiduciary puzzles

313

shutting one’s eyes to the obvious; (3) wilfully and recklessly failing to make enquiries as an honest and reasonable man would make; (4) knowledge of the circumstances which would indicate the facts to an honest and reasonable man; (5) knowledge of the circumstances that would put an honest and reasonable man on enquiry. However, in Twinsectra Ltd v Yardley,76 a majority of the House of Lords appeared to retreat from this objective test for honesty in place of a combined objective/subjective test. Lord Hutton said that dishonesty is:77 a standard which combines an objective test and a subjective test, and which requires that before there can be a fi nding of dishonesty it must be established that the defendant’s conduct was dishonest by ordinary standards of reasonable and honest people and that he himself realised that by those standards his conduct was dishonest.

Lord Hoffmann agreed and added that dishonesty ‘requires a dishonest state of mind, that is to say, consciousness that one is transgressing ordinary standards of honest behaviour’.78 This combined objective/subjective test was heavily criticized both academically79 and judicially.80 It arose for reconsideration in 2005 in Barlow Clowes International Ltd v Eurotrust International Ltd,81 an appeal to the Privy Council from the Court of Appeal of the Isle of Man. Peter Clowes and Guy Cramer conducted a fraudulent off-shore investment scheme which was run through a company, Barlow Clowes International Ltd. The fraud promised high returns and deceived many small investors of a combined total of £140 million. The fraud was assisted by the International Trust Corporation (Isle of Man) Ltd (‘ITC’) which provided off-shore financial services for Barlow Clowes and Cramer. The liquidator of Barlow Clowes claimed that ITC and its directors were liable for having dishonestly assisted Clowes and Cramer to misappropriate the investors’ funds. The question for the appeal was whether one of the directors, Henwood, had been dishonest. Henwood had suspected that the funds passing through ITC were part of a fraud but he decided not to make enquiries. He had an ‘exaggerated notion of dutiful service to clients’ and 76 79

80 81

[2002] 2 AC 164 (‘Twinsectra’). 77 Ibid [27]. 78 Ibid [20]. A Pedain, ‘Dishonest Assistance: Guilty Conduct or a Guilty Mind?’ (2002) CLJ 524, 525−6; C Rickett, ‘Quistclose Trusts and Dishonest Assistance’ (2002) RLR 112; Lord Walker, ‘Dishonesty and Unconscionable Conduct in Commercial Life: Some Reflections on Accessory Liability and Knowing Receipt’ (2005) 27 Syd LR 187, 197. US International Marketing Ltd v National Bank of New Zealand Ltd [2004] 1 NZLR 589. [2006] 1 WLR 1476 (‘Barlow Clowes’).

314

Edelman

believed that the client was always right. Henwood gave evidence that he truly thought this to be an honest attitude.82 The composition of the Privy Council included Lord Nicholls, who had delivered the advice of the Privy Council in Tan, Lord Hoffmann, whose speech in Twinsectra had been criticized for its inconsistency with Tan, and Lord Walker, one of those critics, who had advocated a return to an objective ‘jury question’ for dishonesty in his 2004 John Lehane Memorial Lecture in Sydney.83 Delivering the unanimous advice of the Privy Council, Lord Hoffmann said that ‘the money in Barlow Clowes was either held on trust for the investors or belonged to the company subject to fiduciary duties on the part of the directors’.84 In either case fiduciary duties had been breached by ITC in relation to the misappropriated money. The question then was whether Henwood had acted dishonestly in inducing the breach of those fiduciary duties by ITC. Lord Hoffmann asserted that his speech, and that of Lord Hutton, in Twinsectra had been misunderstood. Acknowledging that there was an element of ambiguity in their speeches, Lord Hoffmann said that neither he nor Lord Hutton meant to suggest that there was a subjective element to the test which required the defendant to have reflected on what were ordinary standards of honest behaviour.85 Hence, Lord Hoff mann said, his decision in Twinsectra had not departed in any way from the Privy Council’s decision in Tan.86 On the facts of Barlow Clowes, the Privy Council held that Henwood’s ‘warped moral approach’ was dishonest since ‘he should have entertained a clear suspicion’ that the money was being misappropriated by the directors.87 Although Lord Nicholls in Tan insisted on an objective notion of ‘commercially unacceptable conduct’ rather than a focus on degrees of knowledge, Lord Hoff mann in Barlow Clowes seemed to focus upon degrees of knowledge by focusing on the suspicion that Henwood held. How should the test for dishonesty now be understood? The issue arose in a more recent decision of the Court of Appeal in Abou-Ramah v Abacha.88 The Court of Appeal held that a Nigerian bank was not liable for dishonest assistance in a breach of fiduciary duty when it assisted fraudsters to launder money that they had derived from a breach of fiduciary duty. Although the bank did not have any particular suspicions 82 85 88

Ibid [12]. 83 Lord Walker (n 79) 197. 84 Barlow Clowes (n 81) [28]. Ibid [15]−[16]. 86 Ibid [18]. 87 Ibid [28]. [2006] EWCA Civ 1492, [2007] 1 Lloyd’s Rep 115 (‘Abou-Ramah ’).

Four fiduciary puzzles

315

of the transactions in question, it did suspect ‘in a general way’ that the fraudsters were involved in corrupt practices. It was the lack of those particular suspicions, and a conclusion that the bank’s general suspicions were not dishonest, that led the Court of Appeal to find that the conduct was not dishonest. All members of the Court of Appeal held that the test involved subjective elements, including the subjective state of mind of the defendant. The issue of dishonesty is still far from clear. But two things seem to have emerged from Barlow Clowes and Abou-Ramah. First, despite Lord Nicholls’ rejection of the degrees of knowledge, a claimant must show actual knowledge or suspicion. Second, general suspicion is not sufficient: the knowledge or suspicion must be targeted at the particular claimant or the particular transaction to which the claimant is a party. As with the other three issues considered above, greater clarification of this test for dishonesty can be found by understanding fiduciary duties as terms that are expressed or implied into voluntary undertakings. Thought of in these terms, there is an immediate parallel between assisting a breach of fiduciary duty and the tort of assisting a breach of contract. The latter tort came under scrutiny by the House of Lords in the conjoined appeals in OBG Ltd v Allan.89 In OBG Ltd v Allan the defendant receivers were purportedly appointed under a floating charge. The creditors that appointed the receivers were negligently advised by solicitors that they could tack their unsecured debt on to a floating charge which had no underlying debt. It was common ground that the receivers had committed torts of trespass to land and conversion of chattels. The question was whether they were also liable for collecting the proceeds of the company’s book debts. The claim against them by the claimant was formulated as the tort of unlawful interference with the claimant’s contractual relations. The claim failed because there was no breach of contract and hence no liability for inducing or assisting a breach of contract.90 As with the other issues raised in the conjoined appeals, it was the speech of Lord Hoffmann which was the leading majority speech on this issue. Lord Hoff mann set out three requirements for liability for inducing or assisting a breach of contract: (1) a breach of contract; (2) knowledge by the defendant that his actions would cause the breach of contract; (3) intention to cause the breach of contract.91 In relation to what amounts to 89 91

[2007] UKHL 21, [2008] 1 AC 1 (‘OBG Ltd v Allan’). 90 Ibid [86]. A causal connection with any loss is also required: ibid [88]−[89].

316

Edelman

‘knowledge’ for the purposes of the tort of inducing breach of contract, Lord Hoffmann approved a statement by Lord Denning MR that:92 Even if they did not know the actual terms of the contract, but had the means of knowledge – which they deliberately disregarded – that would be enough. Like the man who turns a blind eye. So here, if the officers deliberately sought to get this contract terminated, heedless of its terms, regardless whether it was terminated by breach or not, they would do wrong. For it is unlawful for a third person to procure a breach of contract knowingly, or recklessly, indifferent whether it is a breach or not.

The test is therefore partly subjective. It requires actual knowledge or recklessness. Another case approved by Lord Hoff mann was British Industrial Plastics Ltd v Ferguson.93 In that case the defendant received the claimant’s secret information from the inventor (the claimant’s employee) and although knowing of the employee’s contractual obligations he honestly believed that the employee was not in breach of contract. As MacKinnon LJ said, ‘his honesty was vindicated at the expense of his intelligence’.94 But mere knowledge by the defendant that his actions would lead to a breach of contract is not enough. The breach of contract must also be an intended end in itself or a means to some intended end. Lord Hoff mann explained that this was what judges and writers mean when they say that the claimant must have been ‘targeted’.95 He cited the example of Millar v Bassey 96 where Shirley Bassey broke her contract to perform with her recording company. Although the Court of Appeal refused to strike out the claim against her, Lord Hoff mann condemned this conclusion because whilst it was a foreseeable consequence, the breach of contract was not Ms Bassey’s desired end, nor a means of her achieving her desired end.97 The requirements for ‘dishonesty’ for the equitable wrong of dishonestly inducing a breach of fiduciary duty as expressed by Lord Hoff mann in his advice in Barlow Clowes and the Court of Appeal in Abou-Ramah are, on close examination, indistinguishable from the requirements which his Lordship set out for the tort of knowingly inducing a breach of contract in OBG Ltd v Allan. However, one advantage of the test for inducing or assisting a breach of contract, over the wrong of assisting a breach of fiduciary duty, is the absence of the epithet ‘dishonesty’. In the future, 92 93 96

See Emerald Construction Co Ltd v Lowthian [1966] 1 WLR 691, 700−1. [1940] 1 All ER 479. 94 Ibid 513. 95 OBG Ltd v Allan (n 89) [43]. [1994] EMLR 44. 97 OBG Ltd v Allan (n 89) [43].

Four fiduciary puzzles

317

English law may follow the Australian approach in this respect and abandon that vague adverb ‘dishonestly’.98 But one piece of the puzzle is still unplaced. If the test for assisting a breach of fiduciary duty is the same as the test for assisting a breach of contract, what about the situation where the defendant assists in the breach of a non-contractual voluntary obligation? If fiduciary duties are to be understood as terms expressed or implied into voluntary obligations then it should not matter whether the obligation is contractual or a unilateral voluntarily assumed obligation. Lord Hoffmann’s approach from Barlow Clowes and OBG Ltd v Allan ought to apply equally to assistance in the breach of any voluntarily assumed rights. A succinct answer to this question was given in a book chapter in 1994:99 [T]he action for knowing assistance in a breach of trust [or fiduciary duty] should be abolished … If [a defendant] has intentionally interfered with the plaintiff ’s rights in law or equity he should be liable on the principles of Lumley v Gye.

Perhaps unsurprisingly, the author of this article was L Hoffmann.

C.

Conclusion

A decade ago I attended a conference in Melbourne and listened to an erudite paper which involved a scholarly and theoretical discussion critiquing part of the structure of the law of obligations and suggesting a new way of looking at this part of private law. There was silence at the end of the paper. No one had any questions. Then one hand was tentatively raised. In a soft voice the questioner thanked the presenter for his learned paper and then asked a short question: ‘Why?’ The questioner was Michael Bryan, whom I met shortly afterwards and whose generosity and friendship I have enjoyed over the last decade. All those who have debated and discussed law with Michael know that his polite, dulcet tones take debate to another level. Like Lucretius, Michael shows that the spear can always be thrown further. 98 99

Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 230 CLR 89. L Hoff mann, ‘The Redundancy of Knowing Assistance’ in P Birks (ed), The Frontiers of Liability (Oxford University Press, Oxford 1994) 29. The parallel doctrines have also been noticed by C Harpum, ‘Accessory Liability for Procuring or Assisting a Breach of Trust’ (1995) 111 LQR 545, 546; Lord Nicholls, ‘Knowing Receipt: The Need for a New Landmark’ in W Cornish and others, Restitution: Past Present and Future: Essays In Honour of Gareth Jones (Hart Publishing, Oxford 1998) 244; Fyffes Group v Templeman [2000] 2 Lloyd’s Rep 643.

318

Edelman

In this chapter I have considered four important fiduciary questions. To the question of which fiduciary duties can be excluded by agreement, the answer was ‘all of them except for those duties, such as the duty not to deceive others, which are generally imposed on people by law’. To the question of when fiduciary duties will terminate, the answer was ‘when the contract or voluntary undertaking terminates’. To the question of the proper law which should govern fiduciary duties the answer was ‘the proper law of the underlying contract or voluntary undertaking’. And to the question of the degree of fault in the wrong of dishonest assistance in a breach of fiduciary duty the answer was ‘the same as that in cases of inducing breach of contract: actual knowledge or recklessness’. These pieces assist in providing the answer to the larger fiduciary puzzle of why fiduciary duties arise: fiduciary duties arise because they are terms which are expressed or implied into voluntary undertakings.

14 Good faith: what does it mean for fiduciaries, and what does it tell us about them? Richard Nolan and Matthew Conaglen

A.

Introduction

Good faith is said to be central to fiduciary duties: it is said to be one of the core duties of a fiduciary in the execution of his office. Yet it is equally true that duties of good faith apply to others, who are undoubtedly not fiduciaries. How can this apparent inconsistency be explained? How can a central duty affecting fiduciaries be a duty which, if far from ubiquitous, is apparently much more common than its application to fiduciaries? Answering these questions is vital to understanding the scope and function of fiduciary doctrine. The way forward is to recognize the fundamental point that legal duties, like all other things, can be categorized in different ways for different purposes: it is conceptually meaningless to categorize other than in a teleological fashion. Th is chapter addresses the application of that observation to duties of good faith in order to show that it is possible for such duties to apply to persons who are not fiduciaries, while at the same time meaning something unique when they are applied in the fiduciary context.

1.

Some introductory observations on legal categorization

In seeking to understand a complex set of duties, such as the duties that apply to fiduciaries, one can legitimately ask different questions about those duties, to different ends. There is more than one way to skin a cat. One approach is to identify the duties that are peculiar to fiduciaries, in the sense that those duties are not owed by other kinds of actors. From that base, one can seek to describe the nature and function of fiduciary duties by reference to the duties that mark fiduciaries out from other 319

320

Nolan and Conaglen

kinds of actors, or, in other words, the duties that identify fiduciaries.1 Alternatively, and equally legitimately, one can consider the suite of duties that apply to all fiduciaries, irrespective of whether those duties are of a kind that apply to other kinds of actors.2 The first type of analysis allows one to isolate the distinctive function served by fiduciary duties, whereas the second type of analysis allows one to form a full picture of the variety of ways in which the law regulates the actions of fiduciaries. The purpose for which a categorization is being made often affects the level of abstraction at which the relevant concept is to be discussed. Thus, for example, if one is concerned with the breadth of application of a particular kind of duty or regulatory technique, one can identify its application at a generic level to different kinds of actors without focusing on the particular way in which it affects those different actors. But if one is concerned with similarities and differences in the ways that the conduct of different kinds of actors is regulated, one will have a greater interest in differences between the precise types of conduct, or outcomes, that the duty or technique requires. As a simple example, duties to refrain from causing harm are owed by numerous legal actors and can be analysed under the umbrella concept of ‘duties of care’ in order to be differentiated from, and analysed alongside, other duties (such as duties of skill in performing an agreed task) without attention being focused on the different standards of care that must be met by different actors. But if one seeks to understand and analyse the different ways in which the conduct of different legal actors is regulated by law, the difference in standards of care will be of far greater relevance.

2. Application of the observations to good faith So it is with the requirement that fiduciaries act in good faith, as this chapter seeks to demonstrate. In so demonstrating, the chapter makes the following points. A requirement to act in good faith can be identified in a number of situations, both fiduciary and non-fiduciary, in the sense that one can identify a common qualifier of action across a range of such situations. Numerous legal actors are subject to control by reference to the concept of good faith. A requirement of good faith controls – or qualifies – the process by which these people make decisions. However, at a lower 1

2

See eg, M Conaglen, ‘The Nature and Function of Fiduciary Loyalty’ (2005) 121 LQR 452; M Conaglen, Fiduciary Loyalty (Hart Publishing, Oxford 2010). See eg, RC Nolan, ‘Controlling Fiduciary Power’ [2009] CLJ 293.

Good faith: what does it mean for fiduciaries?

321

level of abstraction (ie a greater level of detail), one can address the context in which that requirement operates, and identify important distinctions between the types of process to which the requirement is applied. In turn, the various contexts in which the requirement of good faith is applied mean that the requirement to act in good faith can require actors in different situations to conduct themselves in quite different ways, taking into account different considerations. In other words, the precise outcome of a requirement to act in good faith can vary between different actors, even if the requirement is described in the same generic terms as a requirement that applies to someone in a different situation. Hence, one can plausibly say, at a high level of abstraction, that the process of qualifying exercises of discretion by the imposition of a requirement to act in good faith is not unique to fiduciaries, because that process can be identified in a number of situations that are not fiduciary in nature. At a lower level of abstraction, a requirement of good faith operates in a unique context when it applies to fiduciaries. The consequence is that the requirement demands a specific and unique form of behaviour from fiduciaries as opposed to others who must perform some act, if at all, in good faith. At this lower level of abstraction, it is sensible to speak of a ‘fiduciary duty of good faith’. Thus, the apparent inconsistency between saying that duties of good faith are core fiduciary duties and require unique outcomes in fiduciary contexts while also saying that duties of good faith are not unique or peculiar to fiduciaries is more apparent than it is real. The statements are not mutually contradictory, as each is made for a different purpose. So, as Gummow J has observed, ‘the concept of “good faith” appears in various areas of the law, in each case with a distinct body of authority as to its meaning and application’. 3 Good faith is a concept that can require various outcomes, one of which alone is applicable to fiduciaries and not to anyone else. It is, therefore, entirely possible to accept this instance of good faith as a core duty of a fiduciary. Why that should be so can be seen readily once the nature of this doctrine of good faith is understood.

3.

Consequences

Having set out an analysis which locates a species (or particular application) of good faith amongst fiduciary duties, this chapter then argues 3

Service Station Associates Ltd v Berg Bennett & Associates Pty Ltd (1993) 45 FCR 84, 91.

322

Nolan and Conaglen

that the analysis also illuminates the function of good faith in controlling the behaviour of fiduciaries. In doing so, the chapter makes the following points. Good faith, as it applies to fiduciaries, is principally a means of prohibiting behaviour which will likely harm the principal. Like the conflicts rules, it does not require particular action, but prohibits certain behaviour, and it does this for the same reasons, namely to limit the harm that a fiduciary can do by exercising his power to affect his principal’s interests without abolishing the fiduciary’s discretion to advance those very interests. And like the conflicts rules, good faith is functionalist in its operation on the activities of a fiduciary: good faith is concerned with the management of the risk inherent in discretion, rather than the direct promotion of virtue or diligence. Both virtue and diligence may incidentally be made more likely by stigmatizing certain forms of behaviour, or certain situations, that are known to promote the opposite. That is something of a truism. Indeed, the desire to promote virtue and diligence may well be the reason for the requirements of both good faith (as it affects fiduciaries) and the conflicts rules. But that is not how the requirements operate, given the difficulties a court would face in seeking directly to promote the virtuous and diligent performance of each and every fiduciary undertaking. The distinction between goal and technique is vital. However, while what might be called ‘fiduciary good faith’ is a unique and central aspect of fiduciary doctrine, and is vital in controlling fiduciaries, it does not and cannot serve to identify who is a fiduciary. As indicated earlier, good faith is a concept whose meaning is governed or, more accurately, inflected by context. Merely to say that someone ‘must act in good faith’ does not and cannot identify the sense in which good faith is used. What does identify the sense is the context. In more concrete terms, it is only possible to identify that someone is subject to the doctrine of fiduciary good faith if it is already known that the person is a fiduciary, that is, subject to a set of unique legal rules which apply when one person, the fiduciary, must act in the interests of another, his principal, and must subordinate his own interests to the interests of the principal save where specifically allowed to do otherwise. Instead, some other criterion must be used to mark out who is a fiduciary and for what purposes; then, and only then, will it be apparent that the fiduciary must act in good faith as a fiduciary should. The rules which perform that function of unambiguously signalling who is a fiduciary, and for what purposes, are the conflicts rules, even though the warrant for their application to given facts is not always clear. Indeed, the fact that the conflicts

Good faith: what does it mean for fiduciaries?

323

rules serve to identify who is a fiduciary, and for what purposes, is one of the reasons why the confl icts rules have such particular importance amongst fiduciary duties.

4.

The way ahead

In order to make these points, this chapter proceeds as follows. First, it establishes how good faith controls action by fiduciaries. Th is must be contrasted with another, highly contentious and debatable usage of the term ‘good faith’ as a justification for imposing specific obligations to act on specific types of fiduciary. Next, with this clearer view in mind of the function that good faith performs in the context of fiduciaries, the chapter goes on to contrast what good faith means in that context with what it means in other contexts. In turn, that illuminates the unique and key role of good faith in the law of fiduciaries, and how it fits into that body of law as one of the techniques used to regulate action by fiduciaries.

B.

The use of ‘good faith’ to control action by fiduciaries

The requirement that fiduciaries should act in good faith has been said to be a key requirement of fiduciary doctrine.4 To speak of a ‘duty to act in good faith’, however, can easily conceal an important distinction. If that distinction is not made, confusion can easily follow. Sometimes, the fiduciary’s ‘duty to act in good faith’ means that the fiduciary has power to act, but no duty; yet if he does exercise that power, he must do so in good faith.5 In other contexts, and much more controversially, the same words may mean that the fiduciary has a duty to do something particular in a certain way.6 For example, a director may have to disclose his own wrongdoing.7 4 5

6

7

Bristol and West Building Society v Mothew [1998] Ch 1 (‘Mothew ’) 18 (Millett LJ). As regards trustees see eg, Armitage v Nurse [1998] Ch 241 (‘Armitage’). As regards company directors see eg, Regentcrest plc (in liq) v Cohen [2001] 2 BCLC 80 (‘Regentcrest ’). See further L Ho, ‘Good Faith and Fiduciary Duty’ (Obligations IV Conference, National University of Singapore, July 2008); R Teele Langford, ‘ENT Pty Ltd v Sunraysia Television Ltd: A Positive Fiduciary Duty of Disclosure’ (2008) 26 C&SLJ 470. Item Software (UK) Ltd v Fassihi [2004] EWCA Civ 1244, [2005] 2 BCLC 91 (‘Fassihi ’) rejected in Australia by P & V Industries Pty Ltd v Porto (2006) 14 VR 1 (‘Porto’). See also M Harding, ‘Two Fiduciary Fallacies’ (2007) 2 J Eq 1.

324

Nolan and Conaglen

1.

Exercising power in good faith

The former notion of fiduciary good faith is doctrinally uncontroversial. It has very long been accepted that a fiduciary must exercise his powers in good faith. What that means, precisely, is less well understood. In this context, the requirement of action in good faith is, in reality, not so much a positive duty as a requirement not to act in bad faith.8 Regularity is to be presumed: it is up to someone who alleges irregularity to establish that fact.9 In addition, English rules of civil procedure specifically address the question of pleading and proving conscious bad faith (and cognate concepts such as fraud).10 So the control on power is in truth negative in form, a prohibition of bad faith. When understood in this way, good faith makes perfect sense. Courts are ill suited to second-guess the exercise of discretion for various reasons. These reasons apply with differing force in different circumstances, but they operate to create a general suspicion of judicial dirigisme, something that is generally well-founded in experience, if not logically necessary. Amongst the most important of those reasons are an unwillingness to usurp the exercise of discretion from those in whom it has been explicitly vested,11 and the acknowledgment that judges are very often ill suited to pronounce on the merits of taking one particular course of action over another, and that this would be the case even if courts had the resources to undertake such a potentially immense task. Conversely, where it is clear that the person in whom the exercise of discretion was vested has consciously acted in a way that he knows to be unmeritorious, the courts are able to interfere without needing to second-guess the exercise of discretion themselves. What amounts to bad faith can, of course, vary from case to case, but good faith and bad faith are both ascertained by reference to actual, subjective, states of mind. Th is has often been emphasized in judicial decisions, whether they concern trustees12 or directors.13 Bad-faith action has 8 9

10

11 12

13

Consider eg, Gisborne v Gisborne (1877) 2 App Cas 300, 305 (Lord Cairns). See eg, Re Oddy (1911) 104 LT 128, 131 (Joyce J) (trustees) and Re Coalport China Co Ltd [1895] 2 Ch 404, 409 (Lindley LJ) (directors). See Civil Procedure Rules 1998 (UK) PD 16 8(2), as supplemented by strict professional guidance to barristers in the Bar Council’s Code of Conduct §704(c). See also Medforth v Blake [2000] Ch 86 (‘Medforth ’) 103 (Scott VC). Tempest v Lord Camoys (1882) 41 Ch D 571, 578 (Jessel MR), 579 (Brett LJ), 580 (Cotton LJ). See eg, Re Smith [1896] 1 Ch 71, 76 (Kekewich J) (in relation to powers of investment); Mothew (n 4) 18; and Armitage (n 5) 253–4 (Millett LJ) (general principle). Re Smith & Fawcett Ltd [1942] Ch 304, 306 (Lord Greene MR); Medforth (n 10) 103 (Scott VC); Regentcrest (n 5) [120] (Jonathan Parker J). See also Extrasure Travel

Good faith: what does it mean for fiduciaries?

325

been taken to include acts taken for reasons of caprice or spite.14 Indeed, good-faith action can even include unauthorized action in some cases.15 But in all cases, good faith as applied to fiduciaries has key commonalities. These emerge more clearly when fiduciary good faith is compared with other usages of good faith.

2.

Good faith as a source of obligation to act

More controversial is the apparent use of good faith as an obligation in the strict sense – a duty to take action. The key case that seems to take this line is a decision of the English Court of Appeal, Item Software (UK) Ltd v Fassihi.16 In Fassihi, Arden LJ held (with the agreement of Mummery LJ and Holman J) that a director acted in breach of fiduciary duty when he duplicitously sought to acquire for himself a contract that his company was seeking, while at the same time encouraging the company to take a hard line in the contractual negotiations. Moreover, the Court held that the director ought to have informed his company of his breach of duty. Arden LJ made clear her view that this duty to disclose was not an independent duty to disclose misconduct, but rather an application of ‘the fundamental duty to which a director is subject, that is the duty to act in what he in good faith considers to be the best interests of his company’.17 The Supreme Court of Victoria deliberately declined to follow Fassihi in P & V Industries Pty Ltd v Porto18 on the basis that fiduciary duties are proscriptive in nature, and so cannot generate ‘positive obligations to act to protect the interest of the principal’.19 However, just as a trustee’s duties are not all fiduciary in nature, 20 notwithstanding that trustees undoubtedly are fiduciaries, so a director’s duties need not all be fiduciary in nature. Even if the duty of disclosure in Fassihi is not a fiduciary duty in the sense of a proscriptive duty, that conclusion does not mean that the duty cannot exist as a non-fiduciary duty. Assuming that such a duty can arise, and that its content is not so uncertain as to be

14 16 19

20

Insurances Ltd v Scattergood [2002] EWHC 3093 (Ch), [2003] 1 BCLC 598, [87]–[90] (Jonathan Crow QC). See the cases cited at n 12. 15 Armitage (n 5) 251, 253–4 (Millett LJ). Fassihi (n 7). 17 Ibid [41]. 18 Porto (n 7). Ibid [42] (Hollingworth J). The court also doubted that Fassihi (n 7) represents the law in England (at [34]), but this doubt now seems misplaced in the light of more recent English cases applying the Fassihi doctrine: see eg, Shepherd Investments Ltd v Walters [2006] EWHC 836 (Ch), [2007] 2 BCLC 202 (‘Shepherd Investments’) [85]. Breen v Williams (1996) 186 CLR 71 (‘Breen v Williams’) 137 (Gummow J).

326

Nolan and Conaglen

meaningless,21 what matters to the analysis in this chapter is whether it is the concept of good faith alone that generates the positive duty to act. It is suggested that it does not. The duty to make disclosure that was recognized in Fassihi arose because ‘a director is under a fundamental duty to act in what he in good faith considers to be the best interests of the company’.22 The director has a basic duty to act – not simply to stand passively by – within a set of possible actions defined by his subjective appreciation of what would advance the interests of the company. In this context, the element of ‘good faith’ does not generate the requirement to act; it serves as part of the defi nition of what falls within the scope of lawful action. This is not contentious. What Fassihi did, rather more controversially, was to hold that in the precise circumstances of the case (and possibly more generally) the set of possible actions that the director could, in good faith, consider to be in the best interests of the company contained only one possibility – an obligation to disclose his own wrongdoing to the company. In other words, even if the decision in Fassihi is followed, it is not the doctrine of good faith alone which itself generates the director’s duty to disclose his own misconduct, but the duty he owes to act within a set of possible actions defined by his subjective appreciation of what is in the company’s best interests. Quite aside from any doctrinal criticisms of the view that the requirement of good faith can, by itself, generate an obligation to disclose, the notion of an obligation to act posited on good faith alone is open to more fundamental objections. Good faith is simply too vague a concept to direct and judge action with any acceptable degree of predictability. It is impossible to say with any clarity what behaviour is mandated by good faith alone. Furthermore, if a court were to delineate what a fiduciary should do solely by reference to good faith, good faith would override, as a source of obligation, any undertaking consensually assumed by the fiduciary in cases of inconsistency. That hardly amounts to the respect for party autonomy which underpins English civil law. What a requirement of good-faith action by a fiduciary in the best interests of his principal can possibly do is to provide a justification, an organizing principle, which can guide the courts when they have to make 21

22

For criticism of the uncertainty that the Fassihi doctrine creates, see S Ritchie and A Stafford, Fiduciary Duties: Directors and Employees (Jordan Publishing, London 2008) [2.152]–[2.161]. Shepherd Investments (n 19) [85] (Etherton J). See also Scottish Co-operative Wholesale Society Ltd v Meyer [1959] AC 324, 367 (Lord Denning); Fassihi (n 7) [41] (Arden LJ).

Good faith: what does it mean for fiduciaries?

327

interstitial implications into a fiduciary’s undertaking. In other words, good faith can be a guide to the courts when they have to imply terms of a fiduciary’s undertaking because no express terms govern the situation. That might just provide an adequate explanation for the Fassihi case. However, the implication made into the director’s undertaking in that case still stands open to criticism on grounds of impracticality and, indeed, inconsistency with the principle that a director and company, when they contract for the director’s services, do not mean the director to be at a unique disadvantage vis-à-vis the company in the event that he breaches that contract.

3.

Summary

In the context of action by fiduciaries, good faith is not a duty requiring action. It is a quality that must be shown in the performance of a fiduciary’s undertaking, which is established most commonly by the fiduciary’s agreement, or less often as a response to his behaviour. That quality really amounts to a lack of bad faith; and what that means should become clearer in the next section. More controversially, good faith may also amount to an organizing principle which justifies the implication of duties into the undertaking of someone identified as a fiduciary. But even if it does, good faith does not in itself amount to a duty to undertake particular actions.

C.

What is fiduciary good faith?

What amounts to the sort of good faith – the meaning and content of good faith – that applies to fiduciaries is best illustrated by a comparison with other circumstances where a person is said to be obliged to act, if at all, in good faith. Three such circumstances will have to suffice for present purposes; but they serve well to make the point that fiduciary good faith is different in important respects from good faith in other contexts. The three circumstances arise with respect to: receivers when realizing security; shareholders changing the articles of association of a company; and the insured when dealing with his insurer. Good faith in all of these examples stands in contrast to good faith as applied to fiduciaries.

1.

Non-fiduciary good faith

When a receiver, or a mortgagee, realizes security, he is certainly not a fiduciary for the owner of the asset subject to the security by virtue of

328

Nolan and Conaglen

that task.23 Indeed, it would make no sense at all if he were: it is the very point of security that the secured creditor can act in his own interests and contrary to the interests of the owner of the asset subject to the security (usually, but not always, the debtor). However, that certainly does not give the receiver or mortgagee carte blanche to act as he pleases: it is well established that the receiver or mortgagee must, when realizing the security, act in good faith.24 But what does that mean? It certainly does not mean that the receiver or mortgagee must further the interests of anyone but himself. That would flatly contradict his undoubted privilege to further his own interests. Rather, it means that the receiver or mortgagee must not deliberately seek to harm the interests of the owner of the secured assets save in so far as that is the unavoidable consequence of the creditor asserting his rights to realize the security for the purposes of repayment. In this context, good faith amounts to the avoidance of unnecessary harm: it is a requirement that the receiver’s or mortgagee’s powers not be exercised in order to cause harm to the owner of the assets which constitute the security other than the harm that is inherent in the receiver or mortgagee having resort to the secured assets in order to discharge obligations owed to the creditor. The same is true of shareholders. Shareholders are not as such fiduciaries for each other in English law. Shareholders are the distinct owners of shares in a company, and each shareholder is perfectly entitled to act in his own interests as regards the management and affairs of the company unless there is some feature of the particular relationship between specific shareholders that dictates otherwise.25 Yet case law clearly states that all shareholders are obliged to act in good faith in a vote on a proposed resolution to alter their company’s articles of association.26 These two propositions – the shareholder’s privilege of self-interested action and the requirement to act in good faith – are perfectly easily reconciled. The 23

24

25

26

W Clark (ed), Fisher and Lightwood’s Law of Mortgage (12th edn Butterworths, London 2006) [30.22]; C Harpum, S Bridge and M Dixon, Megarry and Wade: The Law of Real Property (7th edn Sweet & Maxwell, London 2008) [25–018]. Downsview Nominees Ltd v First City Corporation Ltd [1993] AC 295; Huish v Ellis [1995] BCC 462; Routestone Ltd v Minories Finance Ltd [1998] BCC 180; Medforth (n 10). Other, more specific duties can attach to the mortgagee or receiver, depending on the circumstances (see Medforth); but it is the requirement of good faith that is of interest for present purposes. North-West Transportation Co Ltd v Beatty (1887) 12 App Cas 589; Burland v Earle [1902] AC 83 (‘Burland ’) 94. Allen v Gold Reefs of West Africa [1900] 1 Ch 656; Citco Banking Corporation NV v Pusser’s Ltd [2007] UKPC 13, [2007] 2 BCLC 483.

Good faith: what does it mean for fiduciaries?

329

requirement of good faith in this context simply prohibits a shareholder’s vote being used to alter a company’s articles in a way that deliberately inflicts harm on the interests of the other shareholders in the company, save in so far as that harm is a necessary consequence of the shareholder lawfully pursuing his own interests in the company. Again, what is at issue is a nuanced prohibition on the infliction of harm. Finally, case law indicates that an insured must show the utmost good faith in his dealings with his insurer.27 But that does not mean the insured must act in the insurer’s interests, rather than his own. In essence, what good faith means in this context of highly unequal access to material information is that the insured must share material information with the insurer, both when contracting to form an insurance policy and when making a claim under it, or risk the insurer avoiding the contract. On one level, this is different from the previous two examples: in this case, the law is not concerned about the effect of the exercise of one person’s legal power on another, but rather with the transfer of information from one party to another so that the recipient of that information can take care of his own interests. Nevertheless there is a deeper similarity. In all the situations examined in this section, good faith is concerned with the protection of interests from harm rather than the pursuit of another’s interests. The requirement to act in good faith, when it is applied outside the context of a fiduciary relationship, is one limitation on the freedom of economic actors to take decisions as they see fit, notwithstanding that they will affect the economic interests of others. The requirement of good faith operates to limit the breadth of legitimate decisions that can be taken, by requiring that the decision-maker does not intentionally or consciously harm the economic interests of the other party in the relevant relationship. What remains to be done is to compare that application of the concept of good faith with the way in which good faith operates where the relevant relationship is a fiduciary one.

2.

Fiduciary good faith

Attempts to define fiduciary obligations have, in recent times, focused on the principles regulating actual or possible conflicts between a fiduciary’s 27

London Assurance v Mansel (1879) 11 Ch D 363, 367 (Jessel MR); Banque Financière de la Cité SA v Westgate Insurance Co Ltd [1991] 2 AC 249, 268 (Lord Bridge of Harwich), 281–2 (Lord Jauncey of Tullichettle).

330

Nolan and Conaglen

duty to his principal and either his self-interest or duties he owes to someone else. These so-called ‘conflicts rules’ form an undisputed aspect of fiduciary doctrine.28 They are necessary, in the strict logical sense, to any concept of fiduciary obligation, and so they form a firm basis from which to start an investigation of what fiduciary obligations might be. Indeed, the conflicts rules have been said to constitute the only true fiduciary obligations: the conflicts rules are uniquely fiduciary.29 On the basis of that criterion for categorization, a requirement that action be undertaken in good faith does not form part of fiduciary law. The requirement that powers be exercised in good faith is indeed not unique to fiduciaries: as has already been seen, it also applies to other holders of a power. Yet a fiduciary is always subject to this requirement.30 To say that a person may not act in circumstances where some interest or other obligation conflicts, or may conflict, with his duties, and yet to allow him to act in bad faith, simply makes no sense. More importantly for present purposes, the content of this requirement – what actually amounts in a given case to good faith or bad faith action – will be informed by the fiduciary’s undertaking to act in the interests of another, that is, by the very same fact which explains and justifies the application of the confl icts rules to the case. Fiduciary duties are owed by one party to another, and so the relationship can be described as a fiduciary one,31 ‘when and insofar as that other is entitled to expect that he will act in that other’s … interest to the exclusion of his own several interest’.32 That expectation is only legitimate, and so is only protected by fiduciary doctrine, when the person who is said to be a fiduciary has: bound himself in some way to protect and/or to advance the interests of another. This is perhaps the most obvious of the characteristics of the fiduciary office for Equity will only oblige a person to act in what he believes to be another’s interests if he himself has assumed a position which requires him to act for or on behalf of that other in some particular matter.33 28

29 31

32

PD Finn, ‘The Fiduciary Principle’ in T Youdan (ed), Equity, Fiduciaries and Trusts (Carswell, Toronto 1989); PD Finn, ‘Fiduciary Law and the Modern Commercial World’ in E McKendrick (ed), Commercial Aspects of Trusts and Fiduciary Obligations (Clarendon Press, Oxford 1992); Conaglen, ‘The Nature and Function of Fiduciary Loyalty’ (n 1) 454–60; and Conaglen, Fiduciary Loyalty (n 1) ch 3. See sources at ibid. 30 Armitage (n 5); Mothew (n 4); Fassihi (n 7). ‘It is not because a person is a “fiduciary” or a “confidant” that a rule applies to him. It is because a particular rule applies to him that he is a fiduciary or confidant for its purposes’: PD Finn, Fiduciary Obligations (Lawbook Co, Sydney 1977) [3]. Finn, ‘The Fiduciary Principle’ (n 28) 54. 33 Finn (n 31) [15].

Good faith: what does it mean for fiduciaries?

331

The content of what is meant by good faith in a fiduciary context is informed by the fiduciary nature of that undertaking: in other words, good faith action in this context must be action directed to the furtherance of another’s interests – or, more accurately, action not designed to thwart those interests. This focus on furthering the interests of another sets fiduciary good faith apart from good faith in other contexts. As has been discussed above, in the non-fiduciary contexts where one finds a requirement of good faith, the decision-maker who is subject to the requirement of good faith must ensure that they have not deliberately sought to sacrifice or harm those interests save insofar as that is necessary to achieve the purposes for which the decision-making powers have been granted. Thus, for example, a mortgagee will act in bad faith if he knowingly sells the mortgaged property at a price so low that it could not possibly be justified as consistent with his ‘duty to take reasonable care to obtain whatever is the true market value of the mortgaged property at the moment he chooses to sell it’.34 To sell at such a price is deliberately to harm the existing interests of the mortgagor in the equity of redemption. However, the mortgagee is under no duty to seek to further or advance the interests of the mortgagor, and so he does not act in bad faith if he has taken reasonable care to sell the mortgaged property for its true market value at the time of sale, even if he is aware that a delay in the sale could result in an increased sale price with a greater residue payable to the mortgagor (or smaller outstanding debt still owed by the mortgagor to the mortgagee).35 In contrast, fiduciary good faith is not just about prohibiting the use of power to harm another’s existing interests (save as a necessary, but collateral, consequence of pursuing one’s own legitimate interests), though fiduciary good faith certainly encompasses that prohibition. The fiduciary undertaking – which provides the context within which the fiduciary requirement to act in good faith operates – means that fiduciary good faith is about more. It is also about prohibiting any intentional use of those powers that is not directed to the furtherance – the future development – of the principal’s interests. That is the key to distinguishing fiduciary good faith from other usages of the term. Because the fiduciary has undertaken to act in furtherance of the interests of the principal in the 34 35

Cuckmere Brick Co Ltd v Mutual Finance Ltd [1971] 1 Ch 949, 966 (Salmon LJ). Silven Properties Ltd v Royal Bank of Scotland plc [2003] EWCA Civ 1409, [2004] 1 WLR 997, [14]–[15]. See similarly, Bell v Long [2008] EWHC 1273 (Ch), [2008] 2 BCLC 706, [17] (Patten J).

332

Nolan and Conaglen

fiduciary relationship, the insistence that he do so in good faith means that he is required, not merely to ensure that he avoids sacrificing the principal’s existing interests, but also to act in a way that he subjectively believes will positively advance those interests.

3.

What this shows

The requirement to act in good faith is a qualifier which limits the range of legitimate decisions that a person can make when he is bound by it. At one level of abstraction, the requirement to act in good faith is not unique to fiduciaries because the generic thought process which it requires is the same in fiduciary and in non-fiduciary situations: the person subject to the requirement of good faith is obliged not to act in bad faith, which means that he must not deliberately harm the interests (usually the economic interests) of the other party. However, if one analyses the concept of good faith at a deeper level of detail, asking precisely what outcomes it requires of different kinds of actors, it can be seen to operate in a unique way in the fiduciary context, because it qualifies the fiduciary’s unique undertaking to advance the interests of the other party in the relationship. As such, a fiduciary fails to comply with the requirement that he act in good faith – he acts in bad faith – if he acts in a way that he is conscious will harm the principal’s existing interests but also if he realizes that his actions will fail to advance the interests of the principal in the future. The latter qualification on the range of permissible conduct open to the fiduciary marks the fiduciary concept of good faith out from the outcomes that the requirement of good faith achieves in non-fiduciary settings.

D.

Remedial implications

Fiduciary good faith is part of a suite of techniques used to control power vested in fiduciaries.36 It is a negative technique in that it rules out action, rather than mandating action or any particular quality of action. In this, it matches other key techniques, namely the conflicts rules, for the control of fiduciary power.37 That should not come as a surprise. The same reasons for this negativity or prescription apply to good faith as to the conflicts rules: the need to control power without abolishing the discretion 36

37

For an overview of the entire suite of doctrines that apply to the holders of such powers, see Nolan (n 2). See generally ibid.

Good faith: what does it mean for fiduciaries?

333

inherent in the very grant of that power, and the utility of creating controls that can be generalized across the very different undertakings and tasks of different fiduciaries. But there are still key differences between fiduciary good faith and the conflicts rules. These differences reveal themselves in the way each can operate to invalidate an exercise of power. The reason for these remedial differences lies in the respective purposes of the rules themselves.

1.

The different purposes of good faith and the conflicts rules

The key point is that the requirement of good faith seeks to guard against a different degree of threat to the due performance of an undertaking than the degree of threat addressed by the confl icts rules. The requirement of good faith is concerned to prohibit intentional behaviour, consciously acting in a way that is anticipated to harm the principal’s existing interests or not to further the principal’s interests in the future. The conflicts rules, by contrast, seek to render it less likely that the principal’s interests will be harmed by the fiduciary not just where the fiduciary anticipates such harm, but where the fiduciary is likely to be tempted away from proper performance of his duties towards the principal. The conflicts rules have this aim whether or not the fiduciary actually anticipates harm to any of the principal’s interests; and they apply where the likelihood of temptation arises because of a conflict of duty and interest, or a conflict of duty and duty. 38 In short, the requirement of good faith is actuated by consciously anticipated harm, whereas the conflicts rules are actuated by an objectively increased risk of harm, human nature in general being as it is. One is concerned that a bad decision has been taken; the other is concerned with a situation that risks a bad decision being made. It is thus more likely (though certainly not guaranteed) that harm will result from a breach of the requirement of good faith than from breach of the conflicts rules: consciously anticipated harm has a habit of being realized more often than the harm which may result from a situation in which there is merely a temptation to misbehave. This factual difference is reflected in the consequences for a purported exercise of power in breach of the requirement of good faith or the conflicts rules. The requirement 38

See generally Conaglen, ‘The Nature and Function of Fiduciary Loyalty’ (n 1); M Conaglen, ‘Fiduciary Regulation of Confl icts between Duties’ (2009) 125 LQR 111; Conaglen, Fiduciary Loyalty (n 1).

334

Nolan and Conaglen

of good faith limits what a fiduciary may or may not do lawfully in the exercise of his powers. Good faith goes to the scope of a power.39 Put the other way, bad-faith action is outside the scope of a power.40 By contrast, action which is merely in breach of the conflicts rules is not void ab initio but voidable ex debito justiciæ, without proof of unfairness, save in exceptional circumstances.41 This important distinction deserves further explanation.

2.

The consequences of bad faith for the exercise of power

If a power is purportedly exercised in bad faith, the purported exercise is in principle a nullity, though in practice the operation of equitable defences may preclude a particular claimant from successfully making such an allegation and so give some effect to the purported exercise of the power. Furthermore, other rules of law may well apply to the acts which constitute the purported exercise of the power, and those rules may mean that the acts have some legal effect or consequences. So, where a trustee makes a contract that is beyond his powers, that contract may well bind him at law, because the trustee is a juridical person, and so may make contracts unless subject to some particular disability. If the trustee makes the contract in breach of trust, the breach will not affect the prima facie validity of the contract itself; but it will mean that the trustee may not indemnify himself out of the trust fund when he comes to perform his obligations under the contract.42 Equally, where trustees make a contract in breach of trust, a court will not grant specific performance of the contract.43 39

40

41

42

43

Dundee General Hospitals Board of Management v Walker [1952] 1 All ER 896, 905 (Lord Reid), a Scottish case cited with approval as regards English law in Scott v National Trust [1998] 2 All ER 705, 717–18 (Robert Walker J). Hopkins v TL Dallas Group Ltd [2004] EWHC 1379 (Ch), [2005] 1 BCLC 543 (‘Hopkins’) [87]–[91] (Lightman J). As regards the basic rule see eg, Ex p James (1803) 8 Ves 337, 345; 32 ER 385, 388 (Lord Eldon C); Wright v Morgan [1926] 1 AC 788 (‘Wright ’); and Tito v Waddell (No 2) [1977] Ch 106, 241 (Megarry VC). As regards exceptional circumstances, see Holder v Holder [1968] Ch 353; Hillsdown plc v Pensions Ombudsman [1997] 1 All ER 862, 895–6 (Knox J); and Public Trustee v Cooper [2001] WTLR 901, 993 (Hart J). See eg, Hosegood v Pedler (1896) 66 LJ QB 18, 20–1; Vacuum Oil Co Pty Ltd v Wiltshire (1945) 72 CLR 319, 324–5 (Latham CJ), 335 (Dixon J). See also Donaldson v Smith [2006] EWHC 1290 (Ch) [54] (David Donaldson QC sitting as a Deputy High Court Judge). See eg, Turner v Harvey (1821) Jac 169, 178; 37 ER 814, 818 (Lord Eldon C) and Dunn v Flood (1885) 28 Ch D 586, 594–5 (Fry LJ).

Good faith: what does it mean for fiduciaries?

335

So too, if a trustee disposes of an asset outside the scope of his equitable powers, that disposition will not overreach the beneficiaries’ interests: it is ineffectual in equity. However, the beneficiaries may be affected by the consequences of the disposition – for example, they may lose their rights to reclaim the asset because it is now owned at law by a bona fide purchaser for value without notice of the wrongfulness of the disposition.44 The same principles apply in the context of directors’ dealings; but their application is affected and shaped by the different context. Directors act as agents for their company in bringing about corporate transactions:45 they are not trustees in the sense that they do not own property on behalf of the company.46 Once again, acts of a director in bad faith are prima facie void, not voidable, though various rules of law may nevertheless render those acts binding on the company. In certain cases, however, and for very specific reasons, the transaction is voidable rather than void.47 Where the director abuses his powers in purporting to make a contract, for example by acting in bad faith, the abuse is relevant to the existence of his actual authority; but whether a counterparty is affected by his lack of actual authority is another matter. If the counterparty to the purported contract knows about, or is put on enquiry as to, the director’s bad faith, the purported contract does not bind the company:48 it is then void, not voidable.49 Otherwise, a contract made within the express terms of the 44

45

46 47

48

49

See generally, RC Nolan, ‘Understanding the Limits of Equitable Property’ (2006) 1 J Eq 18, drawing on C Harpum, ‘Overreaching, Trustees’ Powers and the Reform of the 1925 Legislation’ (1990) CLJ 277. See eg, Hely-Hutchinson v Brayhead Ltd [1968] 1 QB 549 (‘Hely-Hutchinson’) 583 (Lord Denning MR). See eg, Re Lands Allotment Co [1894] 1 Ch 616, 631, 638 (Lindley and Kay LJJ). These circumstances concern the exercise of a legal power to create new property rights (such as the power to issue new shares, considered in Hogg v Cramphorn Ltd [1967] Ch 254 and Bamford v Bamford [1970] Ch 212). The case law which indicates that abuse of such a legal power will make the result voidable, rather than void, concerns the proper purposes doctrine, rather than bad faith. See Nolan (n 2), particularly at 319–21. But bad faith and improper purposes both go to the scope of a power, so the remedial response to an exercise of such a legal power in bad faith should be the same as the response to exercise of the power for improper purposes (Nolan). Bryant, Powis & Bryant Ltd v Quebec Bank [1893] AC 170, 180 (Lord Macnaghten); Hambro v Burnand [1904] 2 KB 10, 25 (Romer LJ); Reckitt v Barnett, Pembroke & Slater Ltd [1928] 2 KB 244, 257–60 (Scrutton LJ) (who refers to ‘clear notice of fraud’ at 260), 262–5 (Sankey LJ), rev’d [1929] AC 176 (HL), holding that the scope of the agent’s authority did not include the actions in question. Heinl v Jyske Bank [1999] Lloyd’s Rep Bank 511. In Australia, note Bell Group Ltd v Westpac Banking Corp (No 9) [2008] WASC 239, [4462] (Owen J), who does not make the necessary distinction between cases involving contracts and cases involving the issue of

336

Nolan and Conaglen

director’s authority will bind the company, even though the director acted in bad faith. In other words, the counterparty is allowed to proceed on a footing (contrary to the facts) that the director still had actual authority at the relevant time, unless the counterparty knows of the director’s bad faith, or is put on enquiry about it.50 And the counterparty may also put forward an alternative case based on the director’s ostensible authority – that is, based on the fact that the company held out the director as having authority, and the counterparty relied on that.51 But none of these possibilities involves the director having actual authority to bind the company, because his action is not lawful as between him and the company: ‘Actual authority, express or implied, is binding as between the company and the agent, and also as between the company and others, whether they are within the company or outside it.’52 Finally, where a director of a company disposes of legal title to the company’s assets in bad faith, and therefore without authority, a simple trust is raised over those assets in favour of the company.53 The company can then seek remedies founded on this trust, subject always to defences, such as an order that legal title to the assets be transferred back to the company.

3.

The consequences of self-dealing for the exercise of power

Different aspects of the conflicts rules serve to control transactions. Some aspects of the rules concern transactions where the fiduciary acts to the exclusion of his principal: for example, where the fiduciary takes an opportunity for his own benefit rather than for the principal’s. In those cases, the fiduciary is not exercising his powers as such: he has succumbed to the temptation to act in his personal capacity when he should be acting (if at all) in his representative capacity. Other aspects of the rules involve the fiduciary acting in his representative capacity but where the likelihood of his doing so correctly is lessened by the existence of a personal interest (or another duty) which conflicts (or may conflict) with the proper performance of his representative undertaking. It is this latter situation which

50 51

52

53

shares (as to which, see n 47), citing only authority concerning share issues (Whitehouse v Carlton Hotel Pty Ltd (1987) 162 CLR 285, [10] (Mason, Deane and Dawson JJ)) for a general proposition the authority does not support. See n 48. Hopkins (n 40); Criterion Properties plc v Stratford UK Properties LLC [2004] UKHL 28, [2004] 1 WLR 1846. Hely-Hutchinson (n 45) 583 (Lord Denning MR). See also Hopkins (n 40) [88]–[89] (Lightman J). See eg, JJ Harrison (Properties) Ltd v Harrison [2001] EWCA Civ 1467, [2002] 1 BCLC 162.

Good faith: what does it mean for fiduciaries?

337

concerns the use – or abuse – of the fiduciary’s representative powers, like the requirement of good faith, and so is of interest in this chapter. Th is aspect of the confl icts rules is commonly known as the selfdealing rule. The self-dealing rule applies when a trustee deals with, or acts in relation to, assets in the trust fund, both qua trustee and in some other capacity. 54 It is immaterial for the purposes of the rule whether that trustee acts by himself in this other capacity or jointly with someone else.55 Prior to the codification of directors’ duties in Part 10 of Chapter 2 of the Companies Act 2006 (UK), the self-dealing rule also applied when a director dealt with his company.56 The name ‘self-dealing rule’ is therefore a slight misnomer, for application of the rule does not necessarily depend on there being one person who is party to a transaction in two different capacities: a company and its directors are distinct people, after all.57 What matters is that a particular person, the fiduciary, is concerned with both sides of the transaction in question. The self-dealing rule addresses transactions that have occurred, or at least are taken to have occurred. By contrast, the requirement of good faith is concerned with the logically prior question of whether a transaction ever occurred which binds the principal at all:58 the requirement goes to the question whether the fiduciary concerned had authority to enter into the transaction.59 If trustees contract with one of their number and within their powers, the self-dealing rule makes the contract voidable.60 More specifically, if trustees have a sufficiently wide power of sale and sell a trust asset to one of their number, but without due authorization, then the sale is voidable at the instance of the beneficiaries, not void, subject always to the operation 54

55 56

57 58

59 60

See eg, Wright (n 41) (fiduciary’s own interest adverse to that of his principal); Re Thompson’s Settlement [1986] Ch 99 (‘Thompson’s Settlement ’) 114–15 (Vinelott J) (fiduciary’s interest as representative of others adverse to that of his principal); Kane v RadleyKane [1999] Ch 274 (exercise of a power of appropriation by personal representatives). See eg, Thompson’s Settlement (n 54). See eg, Burland (n 25); Re Cape Breton Co Ltd (1885) 29 Ch D 795; Hely-Hutchinson (n 45). The somewhat problematic successor to the self-dealing rule in company law is Companies Act 2006 (UK) s 177. Companies Act 2006 (UK) s 16, re-enacting earlier legislation. In this regard, see A Oakley, Constructive Trusts (3rd edn Sweet & Maxwell, London 1997) 146 and following, noting the texts cited there. See Ingram v IRC [1997] 4 All ER 395 (‘Ingram’) 425 (Millett LJ). See eg, Dover v Buck (1865) 5 Giff 57, 63; 66 ER 921, 924 (Stuart VC) (‘Dover v Buck ’); and Guinness plc v Saunders [1990] 2 AC 663 (‘Guinness’) 697–8 (Lord Goff ). Suggestions to the contrary in D O’Sullivan, S Elliot and R Zakrzewski, The Law of Rescission (Oxford University Press, New York 2008) [1.65]–[1.69] are wrong. For a fuller refutation, see Conaglen, Fiduciary Loyalty (n 1) ch 4, section III-A.

338

Nolan and Conaglen

of available defences. The sale is a real sale at law; and the trustees have power in equity to make that sale, but they make it in circumstances where the conflict between their duty and self-interest creates such temptations that the sale must be regarded as flawed, unless duly authorized, and consequently voidable rather than void.61 The same principle holds good for a company director who deals with his company: unless duly authorized, the resulting transaction is voidable, not void.62 The practical importance of this distinction between void and voidable should not be overstated, however. Protection for third parties concerned by the action impugned is often said to be the reason for preferring ‘voidable’ over ‘void’.63 Certainly, third parties can be well protected by the bars to rescission of voidable action. Still, even if action is void in equity there are at least three ways of protecting third parties.64 First, the court does not have to grant a declaration that action is void, with consequential relief: remedies may be withheld on established equitable principles such as laches and clean hands. Second, in the exercise of its Chancery jurisdiction, the court can grant relief on terms, where appropriate.65 Third, even if an act is void in equity, the legal consequences of the act remain unless and until reversed, and a third party may be able to prevent any reversal of those consequences, for example because he is a bona fide purchaser of a legal interest in the assets concerned for value without notice of the equities.

4.

The interaction of remedial responses

The existence of two different remedial responses to infringement of two different rules which limit the scope, or the use, of fiduciary power raises some interesting questions about how those responses interact. If 61

62 63

64

65

See eg, Campbell v Walker (1800) 5 Ves 678, 682; 31 ER 801, 803 (Arden MR); Dover v Buck (n 60) 63; 924 (Stuart VC). Occasionally, no transaction occurs at law because there is only one party involved and he cannot transact with himself. However, this situation is rare, given the effect of the Law of Property Act 1925 (UK) s 72. Also, a power of sale cannot be exercised by a sole trustee in favour of himself because there is no genuine arm’s length sale, within the terms of the power. In either such case, the self-dealing rule cannot apply: there is no transaction to which it can respond. See the dissenting judgment of Millett LJ in Ingram (n 59) 424–5, subsequently vindicated in Ingram v IRC [2000] 1 AC 293 (HL). Guinness (n 60) 697–8 (Lord Goff ). See eg, Hunter v Senate Support Services Ltd [2004] EWHC 1085 (Ch), [2005] 1 BCLC 175, [179] (John Randall QC sitting as a Deputy High Court Judge). Cf Abacus Trust (Isle of Man) Ltd v Barr [2003] EWHC 114 (Ch), [2003] Ch 409, [30] (Lightman J). See eg, Boardman v Phipps [1967] 2 AC 46 and Maguire v Makaronis (1997) 188 CLR 449.

Good faith: what does it mean for fiduciaries?

339

a transaction has occurred at law, and the transaction can be characterized in equity as both void and voidable, what then is the consequence? An example is where trustees sell shares forming part of the trust fund to one of their number, and they do so in bad faith, such that they have neither power to make the sale nor their beneficiaries’ consent to it. In such a case, the trustees effectively transfer property at law;66 but for reasons examined earlier, the transfer will both fail to overreach the beneficiaries’ interests and be subject to the self-dealing rule. The better view is that a claimant should be able to make either argument and, if necessary, elect between the two. At issue here are two sets of arguments about the application of equitable doctrine, not two sets of facts. Any inconsistency between arguments is to be resolved by election at judgment, not by any misplaced suggestion that the arguments constitute facts. Likewise, the two responses to the two arguments – void and voidable – may be inconsistent, but that inconsistency need only be resolved at judgment: responses, unlike facts, are open to election.

5.

Summary

The response to a purported exercise of power in breach of the requirement of good faith is different from the response to an exercise of power in breach of the self-dealing rule. The former is void in equity whereas the latter is voidable. This difference reflects and is justified by the different type and degree of risk that the requirements respectively address. If the requirement of good faith has been breached, it necessarily means that a bad decision has been taken. If the self-dealing rule is breached, it necessarily means only that there is a situation which risks a bad decision being made; the breach might involve more serious circumstances, but it does not necessarily do so. One requirement deals with the actual risk of harm – a risk identified by the decision-maker himself. The other rule deals with situational risk. Both of them might be in play in a given case; and there are perfectly good mechanisms for reconciling them and their respective consequences.

E.

Identification of fiduciaries

The requirement of good faith demands a specific and unique form of behaviour from fiduciaries when compared to what it requires of other 66

Law of Property Act 1925 (UK) s 72(4).

340

Nolan and Conaglen

non-fiduciary actors who must perform some act, if at all, in good faith. This raises the question, which can be addressed briefly, whether that conclusion might assist in resolving the ‘notoriously intractable problem’67 of identifying who owes fiduciary duties. The short answer is that it will not. Obviously, the requirement to act in good faith cannot be used as an identifier of the fiduciary status of the person to whom it is applied if the concept is being discussed at a high level of abstraction, because that generic technique for controlling discretion can be identified in a number of situations that are not fiduciary in nature. But nor can the requirement of good faith be used to discriminate between fiduciary and non-fiduciary situations when it is analysed at the lower level of abstraction that has been discussed in detail in this chapter. Although, at that level of analysis, the requirement of good faith is central to understanding how fiduciaries must operate, and can be seen to operate in a unique fashion in the fiduciary context, that does not mean that it is a good identifier of fiduciary actors. As this chapter has demonstrated, the words ‘good faith’ alone cannot determine precisely what outcomes will be achieved by application of the requirement of good faith, because those outcomes are dependent on the context in which the requirement operates. The good-faith requirement operates in a unique fashion in the fiduciary context, because of the way it interacts with the fiduciary’s undertaking to act in the best interests of the principal. As has been seen, the fiduciary concept of good faith demands not only that the fiduciary refrain from acting in a way that he is conscious will harm the principal’s existing interests, but also that he refrain from acting if he realizes that his actions will fail to advance the interests of the principal in future. However, good faith only has a special meaning in the fiduciary context because it takes account of the fiduciary nature of the undertaking that it qualifies. In other words, one can only conclude that the uniquely fiduciary application of good faith is the appropriate one in a given case after one has concluded that the undertaking is fiduciary. It would, therefore, be to put the cart before the horse to suggest that the requirement of good faith can identify which actors are fiduciary and which are not. In contrast, the conflicts rules are of universal application to fiduciaries,68 and they are peculiar to fiduciaries in the sense that neither they, nor functionally equivalent alternative doctrines, are applied to 67 68

EJ Weinrib, ‘The Fiduciary Obligation’ (1975) 25 UTLJ 1, 5. Aberdeen Railway Co v Blaikie Bros (1854) 1 Macq 461, 471, 149 RR 32, 39 (Lord Cranworth); R Cooter and B Freedman, ‘The Fiduciary Relationship: Its Economic

Good faith: what does it mean for fiduciaries?

341

actors who are not considered to occupy a fiduciary position. As such, the conflicts rules can perform the function of signalling who is a fiduciary, and for what purposes. However, it is not always clear when application of the conflicts rules to given facts is warranted. Resolution of that question is beyond the scope of this paper, although the trend in the cases favours the view that fiduciary duties apply when ‘someone … 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’69 because in that situation it is legitimate for the other party to expect that the person who has given the undertaking ‘will act in the interests of [the principal] to the exclusion of its own or any third party’s interests, in its dealings for or on behalf of that [principal]’.70 It is the combination of that undertaking to act in a representative capacity and the legitimacy of the expectation that the person so doing will act to the exclusion of his own several interest that identifies the person as a fiduciary and justifies the application of the conflicts rules.71 In turn, that identification of the person as a fiduciary means that the fiduciary concept of good faith will be applied. But the important point for present purposes is that although the concept of good faith has a special meaning when applied in the fiduciary context, it cannot perform the function of identifying fiduciaries.

F.

Conclusions

This chapter has been concerned with investigating the application of the good faith concept to fiduciaries, in order to determine what good

69

70

71

Character and Legal Consequences’ (1991) 66 NYULR 1045, 1054; C Harpum, ‘Fiduciary Obligations and Fiduciary Powers: Where Are We Going?’ in P Birks (ed), Privacy and Loyalty (Clarendon Press, Oxford 1997) 146–7. Mothew (n 4) 18 (Millett LJ). See also eg, Hospital Products Ltd v United States Surgical Corp (1984) 156 CLR 41, 96–7 (Mason J); Breen v Williams (n 20) 113 (Dawson and Toohey JJ), 137 (Gummow J); Global Container Lines Ltd v Bonyad Shipping Co [1998] 1 Lloyd’s Rep 528, 546 (Rix J); Arklow Investments Ltd v Maclean [2000] 1 WLR 594 (‘Arklow ’) 599 (Henry J); Peskin v Anderson [2001] 1 BCLC 372, [34] (Mummery LJ); Kyrris v Oldham [2003] EWCA Civ 1506, [2004] 1 BCLC 305, [142] (Jonathan Parker LJ); Conway v Ratiu [2005] EWCA Civ 1302, [2006] WTLR 101, [57] (Auld LJ); Australian Securities and Investments Commission v Citigroup Global Markets Australia Pty Ltd (No 4) (2007) 160 FCR 35, [272] (Jacobson J). Australian Securities Commission v AS Nominees Ltd (1995) 133 ALR 1, 17 (Finn J). See also Imperial Group Pension Trust Ltd v Imperial Tobacco Ltd [1991] 1 WLR 589, 596 (Browne-Wilkinson VC); Glandon Pty Ltd v Strata Consolidated Pty Ltd (1993) 11 ACSR 543, 557; DHL International (NZ) Ltd v Richmond Ltd [1993] 3 NZLR 10, 23; Arklow (n 69) 598 (Henry J). For more detailed analysis, see Conaglen, Fiduciary Loyalty (n 1) ch 9.

342

Nolan and Conaglen

faith means in a fiduciary context, and what that tells us about fiduciaries. Good faith is frequently identified as a core element of the controls that apply to fiduciaries, and yet at the same time is said not to be unique to fiduciaries because the requirement applies to other legal actors as well. The key to unravelling this conundrum is to recognize that categorization is a purposive exercise, so that the requirement of good faith can be fiduciary for some purposes while at the same time being non-fiduciary for others. The requirement of good faith is not fiduciary if one is seeking to identify the duties which are peculiarly owed by those in fiduciary relationships. But it does apply to fiduciaries and it has a unique meaning when applied to fiduciaries because of the context in which it operates. This, however, means that the good faith concept cannot operate as an identifier of fiduciary relationships, because one can only determine that the uniquely fiduciary application of good faith is appropriate after one has concluded that the relationship is one where a fiduciary undertaking exists. The conflicts rules serve more effectively to identify fiduciary relationships. But they are not the only rules specifically designed to safeguard (negatively) the integrity of undertakings for the benefit of another: good faith is another such rule.

15 Trustees’ duties to provide information Lusina Ho *

A.

Introduction

Writing in 2003 in response to Armitage v Nurse,1 Michael Bryan provided an illuminating analysis on the modification of trustees’ duties by exculpation clauses.2 In that context, he argued that ‘the “irreducible core” of trust obligation may be larger than envisaged by Millett LJ in Armitage v Nurse’.3 Millett LJ (as he then was) considered the trustee’s irreducible obligations to include performing ‘the trusts honestly and in good faith for the benefit of the beneficiaries’, and rendering accounts to the beneficiaries. For the duty to account to have any substance, the beneficiaries must have correlative rights to inspect trust accounts. As Millett LJ put it, ‘[i]f the beneficiaries have no rights enforceable against the trustees there are no trusts’;4 ‘[e]very beneficiary is entitled to see the trust accounts, whether his interest is in possession or not’.5 These latter observations in Armitage v Nurse have now been extensively relied upon to justify beneficiaries’ rights to obtain information about the trust,6 an area of law that has long been fraught with difficulty. The *

The author is grateful to Peter Chau, Kelvin Low and the editors of the present book for their helpful comments, and Joey Ma for her unfailing research assistance. Research for this chapter is funded by the Research Grant Council of Hong Kong (General Research Fund #744107H).

1

[1998] Ch 241 (Ch D) (‘Armitage v Nurse’). M Bryan, ‘Contractual Modification of the Duties of a Trustee’ in S Worthington (ed), Commercial Law and Commercial Practice (Hart Publishing, Oxford 2003) 513–28. Bryan argues that additionally, the trustee’s duty to restore trust properties he has wrongly – albeit honestly – acquired and the beneficiaries’ correlative right to claim proprietary recovery are part of the inherent core of the trust relationship, and cannot be excluded. 5 Ibid 514. 4 Armitage v Nurse (n 1) 253. Ibid 261. C Mitchell, ‘Disclosure of Trust Information to Discretionary Beneficiaries’ (1999) 115 LQR 206; D Hayton, P Matthews and C Mitchell, Underhill and Hayton: Law of Trusts and Trustees (17th edn LexisNexis Butterworths, London 2006) 820; J Mowbray and others, Lewin on Trusts (18th edn Thomson Sweet & Maxwell, London 2008) 794.

2

3 6

343

344

Ho

proprietary justification for beneficiaries’ rights to information and the circular test of ‘trust document’ laid down in Re Londonderry’s Settlement7 are antiquated and do not provide a transparent analytical tool for adjudicating disputes. They were recently abandoned in a landmark decision of the Privy Council in Schmidt v Rosewood Trust Ltd,8 which held that: first, disclosure of trust information is based on the court’s inherent jurisdiction to supervise the administration of trusts; second, a beneficiary’s proprietary entitlement under a trust is neither necessary nor sufficient to determine the disclosure of trust information; and third, all discretionary objects (including beneficiaries of discretionary trusts and objects of fiduciary powers) – and, a fortiori, fi xed trust beneficiaries – are entitled to invoke the court’s jurisdiction to order disclosure of all types of trust information, but it is a matter of judicial discretion whether relief is to be granted to the particular object at all, what documents will be disclosed, and what safeguards will be imposed on disclosure.9 Although Schmidt is welcomed for putting to rest the much-criticized proprietary basis for beneficiaries’ rights to disclosure, it has met with a mixed reception in judicial decisions in Australia10 and even in England.11 In light of these observations, the present chapter considers, fi rst, how prima facie principles on disclosure subject to discretionary considerations can be rendered from the trustee’s core obligations, and second, the extent to which settlors are allowed to modify beneficiaries’ rights to information.12 In seeking to accomplish these tasks, the chapter draws inspiration from Bryan’s approach of supplementing Millett LJ’s broad observation about trustees’ core obligations as good faith performance and rendering accounts. The present chapter does not seek to enlarge these obligations, which are applicable to all types of fiduciary dispositions; rather, it supplements Millett LJ’s observation by considering also core obligations that are additionally and specifically applicable to each type of beneficial disposition. It argues that such an exercise helps render prima facie principles that are sufficiently 7 8 10

11

12

[1965] Ch 918 (Ch D) (‘Londonderry ’). [2003] UKPC 26, [2003] AC 709 (‘Schmidt ’). 9 Ibid [51], [54]. Avanes v Marshall (2007) 68 NSWLR 595 (‘Avanes v Marshall ’). But see McDonald v Ellis [2007] NSWSC 1068 (‘McDonald v Ellis’). Breakspear v Ackland [2008] EWHC 220, [2009] Ch 32 (Ch D) [9]–[10] (‘Breakspear v Ackland ’). In the United States, this issue has been most debated in the draft ing of the Uniform Trust Code 2008, which codifies the trustees’ duty to provide information: KD Millard, ‘The Trustee’s Duty to Inform and Report under the Uniform Trust Code’ (2005–6) 40 Real Prop Prob & Tr J 373, 374.

Trustees’ duties to provide information

345

nuanced for the range of circumstances involved in disclosure of trust information.

B.

Beneficiaries’ rights to information – rendering principles of disclosure from accountability

Disputes on disclosure of trust information raise policy tensions between making trustees accountable and beneficiaries’ rights meaningful on the one hand, and protecting confidentiality, trustees’ rightful administration, and the interests of the beneficiaries as a whole on the other. All these suggest that there can be no simple solution for beneficiaries’ rights to information other than to strike a delicate balance between conflicting policies in individual cases. This calls for some scope of judicial discretion, but does not entail blanket discretion. It is submitted that the discretionary approach of Schmidt can be combined with principles emerging from previous case law as follows.13 First, as a threshold question, the court considers whether a beneficiaryclaimant is entitled to relief at all – this question depends solely on the strength of the beneficiary’s interest.14 Second, for beneficiaries who, as a class, pass the threshold requirement, and where a minimum level of disclosure to the whole class raises no realistic prospects of harm to any relevant party, they are entitled to such disclosure as of right. Th ird, for other beneficiaries who pass the threshold requirement, disclosure depends ultimately on judicial discretion, but in relation to each type of trust information, there can still be prima facie duties of disclosure subject to overriding circumstances. These duties can be rendered from the trustee’s core obligation to account, taking into consideration confl icting concerns (such as confidentiality or preserving trustees’ rightful administration) that typically affect certain classes of information, and, in appropriate cases, the nature of the claimant’s beneficial entitlement. The starting point in answering all these three enquiries lies in affi rming the beneficiaries’ rights to information as based on trustee accountability (as opposed to beneficiaries’ proprietary rights) and examining the core obligations of trustees in relation to each type of beneficial disposition. 13

14

As Lewin on Trusts points out, Schmidt is ‘evolutionary, not revolutionary’; ‘[p]revious case-law remains relevant in working out how the court’s discretion should be exercised’: Mowbray and others (n 6) 798. Schmidt (n 8) [54].

346

Ho

Beneficiaries’ rights to information were justified in earlier authority as an incident of beneficiaries’ proprietary rights.15 The better view, now supported with ‘virtual unanimity’,16 is to justify rights to information on trustees’ core duty to account for the administration of the trust fund; after all, if the beneficiaries do not even know about the existence and general nature of their beneficial entitlement, they will not be able to enforce their rights and hold trustees accountable. And it is a fundamental feature of the private express trust that the trustees are ultimately held accountable by beneficiaries alone.17 The same feature justifies the beneficiary principle, which requires that a private trust be established in favour of (natural or legal) persons, so that there is a party with sufficient interest to enforce the trust.18 It also explains why the objects of a disposition need to be certain,19 so that the trustee knows to whom distributions should be made, and the courts can determine whether wrongful distributions to non-beneficiaries have been made. This view is overwhelmingly favoured in judicial decisions20 as well as academic21 and extra-judicial commentaries, 22 a significant number of which rely upon Millett LJ’s oft-cited statements in Armitage v Nurse mentioned above.23 Only Bryson JA in McDonald v Ellis24 remains 15

16 17

18

19 20

21 22

23

See O’Rourke v Darbishire [1920] AC 581 (HL) 626–7; Londonderry (n 7). For a detailed account of the earlier authorities considered to support the proprietary basis, see JC Campbell, ‘Access by Trust Beneficiaries to Trustees’ Document Information and Reasons’ (2009) 3 J Eq 97, 114–30. Breakspear v Ackland (n 11) [52]. Spellson v George (1987) 11 NSWLR 300, 315–16, cited in Foreman v Kingstone [2004] 1 NZLR 841 (‘Foreman v Kingstone’) [72]. Powers granted to protectors to monitor trustees are normally treated as fiduciary powers to be exercised for the benefit of the beneficiaries: IRC v Schroder [1983] STC 480; Steel v Paz [1993–95] Manx LR 426; Von Knierem v Bermuda Trust Co Ltd and Grosvenor Trust Co Ltd 1 BOCM 116 (Bermuda High Court, 1994). Their fiduciary duties are owed to beneficiaries. Accordingly, the presence of protectors does not change the fact that beneficiaries are the only and ultimate holders of rights in the trust relationship. Morice v Bishop of Durham (1804) 9 Ves 399, 32 ER 656, aff ’d (1805) 10 Ves 522, 32 ER 947. McPhail v Doulton [1971] AC 424 (HL). Hartigan Nominees Pty Ltd v Rydge (1992) 29 NSWLR 405 (‘Hartigan Nominees’) 421–2 (Kirby P), 443 (Sheller JA); Re Rabaiotti’s Settlements [2000] WTLR 953; Schmidt (n 8); Foreman v Kingstone (n 17) [82]; Avanes v Marshall (n 10); Breakspear v Ackland (n 11) 52. See n 6. Sir G Lightman, ‘The Trustees’ Duty to Provide Information to Beneficiaries’ [2004] PCB 24; Campbell (n 15) 142–3. See text to nn 4–5. 24 McDonald v Ellis (n 10).

Trustees’ duties to provide information

347

wedded to the proprietary basis,25 but implicit in his Honour’s reasoning is the assumption that, albeit not ideal, the proprietary basis is necessary to preserve clarity and certainty by laying down prima facie entitlements to information.26 It is submitted that the proprietary basis is not necessary to establish such entitlements. Thus in Murray v Schreuder,27 Newnes J of the Supreme Court of Western Australia affirmed the prima facie entitlements of non-discretionary beneficiaries without addressing the debate between the two conflicting approaches.28 In fact, as the present chapter seeks to argue, seeing disclosure of information as based on trustees’ duty to account provides a more coherent basis for rendering absolute and prima facie entitlements to information.

C.

Entitlement as of right to notification of beneficial interest

As suggested above, certain classes of beneficiaries should be entitled as of right to a basic level of information. The present section will argue that the rights of adult beneficiaries of fi xed-interest trusts to be informed, without demand, of the existence and general nature of their beneficial entitlements fall within this category. In Hawkesley v May,29 it was held that when a life tenant of a fi xed inter vivos trust attained majority and hence became entitled in possession, he had the right to be informed, without demand, about his beneficial entitlement.30 Hawkesley v May involved an income beneficiary whose 25

26 28

29 30

See also Schaverien v Jones [2007] NSWSC 1429 (Bryson JA). For recent academic support of the proprietary basis, see G Dawson, ‘A Fork in the Road for Access to Trust Documents’ (2009) 3 J Eq 39. McDonald v Ellis (n 10) [51]. 27 [2009] WASC 51. Ibid [57], aff ’d by the Court of Appeal in Schreuder v Murray (No 2) [2009] WASCA 145 [93] on other grounds. See also Rollo Ventry Wakefield Gray v BNY Trust Company of Australia Ltd (formerly Guardian Trust Australia Limited ) [2009] NSWSC 789 [33]. [1957] 1 QB 304 (‘Hawkesley v May’). Where testamentary trusts are concerned, Re Lewis [1904] 2 Ch 656 (‘Re Lewis’) held that an executor owed no duty to inform a beneficiary of the terms and condition of his conditional gift, but this view was severely criticized in Hawkins v Clayton (1987–88) CLR 539. Hawkesley v May explained the rule on the basis that a will is a public document of which no disclosure is necessary, although Lightman (n 22) 35–6 considered it unrealistic to expect individuals to check the registry regularly and thought it best not to follow Re Lewis. There is not yet any judicial authority as to the right of minor beneficiaries to be notified. It has been suggested that the trustees should inform their parents or guardians, except when they have reason to believe that these individuals may not act in the

348

Ho

interest was vested in possession but, although there is no authority on point, it is submitted that all adult beneficiaries of a fi xed-interest trust should be so informed as soon as the settlement is made. A capital beneficiary cannot rely on the life-interest holder to look after the capital;31 indeed, he has a legitimate interest in the present state of the trust property, which will ultimately become the capital.32 Informing contingent beneficiaries of their interests as soon as the settlement is established enables them to monitor and hence preserve their part of the trust fund. 33 In a similar vein, one cannot expect a concurrent beneficiary to look beyond his personal interest in claiming his beneficial share, let alone exercise his entitlement to hold the trustee accountable, so even where there is no contingent beneficiary, all beneficiaries should have a right to be informed of their interests. There was no suggestion in Hawkesley v May or subsequent cases that such a right to information is subject to trustee or judicial discretion. It is submitted that the duty should at most be qualified by a requirement to take reasonable steps,34 but not subject to discretion. Typical concerns of compromising the trustee’s discretion or confidentiality to third parties are irrelevant; after all, there is no dispositive discretion in a fi xed trust, and it is hard to see how informing a beneficiary of the existence and general nature of his entitlement can raise legitimate issues of confidentiality with respect to third parties. More fundamentally, apart from the core obligations to protect the trust fund and keep accounts, which are applicable to all trustees, the core duties specifically applicable to a trustee of a fi xed-interest trust are to compile a complete list of the beneficiaries and take reasonable steps to seek each of them out and make a distribution to them. If trustees need to perform all these acts in any event, requiring them to disclose general information to beneficiaries would neither place a significant additional burden on them nor generate a flood of claims as might happen if the same duty were imposed on the trustees of discretionary trusts or the donees of fiduciary powers. Lewin on Trusts argues that the beneficiaries’ rights in this context should still be excluded if the trustee considers that the beneficiary’s interest is too remote to have a

31 32 33 34

best interests of the minor beneficiaries (Mowbray and others (n 6) 790). In such cases, a direction from the court might be sought. Hayton, Matthews and Mitchell (n 6) 823 approved by Lightman (n 22) 34. McDonald v Ellis (n 10) [30]. For a contrary view, see Mowbray and others (n 6) 788–89. Hayton, Matthews and Mitchell (n 6) 823. See also Romer LJ in Re Lewis (n 30) 318, albeit in the context of executors.

Trustees’ duties to provide information

349

reasonable chance of successfully seeking trust information or that there are exceptional circumstances.35 However, there is no indication as to what such exceptional circumstances might be. Moreover, although notification of beneficiary entitlement should ‘carry with it the right to inspect documents of the trust from which [beneficiary] rights may be deduced and the rendering of trust accounts’,36 it does not follow that if the beneficiary has no reasonable chance to inspect those documents on demand, his right to be informed of his entitlement without demand should also be extinguished. It is appreciated that the recognition of an entitlement as of right to be notified of beneficial interests, even if limited to fi xed-trust beneficiaries, might appear to conflict with the principle laid down in Schmidt, that ‘no beneficiary (and least of all a discretionary object) has any entitlement as of right to disclosure of anything which can plausibly be described as a trust document’.37 However, in that passage Lord Walker was referring to the disclosure of trust documents, as opposed to the notification of beneficial entitlements. Besides, Hawkesley v May was not considered in Schmidt, whether in argument or in judgment. There is also judicial support for not applying the discretionary approach adopted in Schmidt to fi xed trusts.38 Accordingly, a trustee should owe the duty, not to be ameliorated by discretion, to take reasonable steps to inform all adult beneficiaries of a fi xed trust of their beneficial entitlements.39 For reasons that will emerge in Part E below, it is also submitted that such a duty should not be excludable by the settlor.

D. Prima facie principles subject to overriding circumstances In Schmidt, Lord Walker held that a court needs to exercise discretion on: first, whether a claimant has no more than a theoretical possibility of obtaining a benefit (in which case there would be no relief at all); second, what classes of documents are to be disclosed; and third, what safeguards are to be imposed.40 It is submitted that prima facie principles in relation to the first two issues can be rendered from the core and universal obligation of the trustee to provide account, and, importantly, from core 35 37 39 40

Mowbray and others (n 6) 789. 36 Foreman v Kingstone (n 17) [85]. Schmidt (n 8) [67]. 38 McDonald v Ellis (n 10). Hayton, Matthews and Mitchell (n 6) 824. Schmidt (n 18) [54], [67].

350

Ho

obligations that are specifically applicable to the type of disposition at issue. It is beyond the scope of the present chapter to explore all these principles; it will only consider three examples of them.

1.

Beneficiaries of fixed-interest trusts

In relation to the first issue identified by Lord Walker, beneficiaries of a normal fi xed trust41 should have no difficulty showing more than a theoretical possibility of obtaining a benefit. In fact, their claim for disclosure is arguably at the strong, if not the strongest, end of the continuum: first, the specific core duty of a fi xed trustee is to draw up the complete list of beneficiaries, seek them out, and make distributions to them. Correlative to these duties, fi xed-trust beneficiaries do not just have a prospect of obtaining their beneficial share, they have a legal certainty of obtaining it, as recognized by their having interests in specie in the trust fund. They therefore have strong incentive to monitor the trustee and preserve the value of the trust fund. Second, given that the size of the beneficiary class is typically relatively manageable, and that trustees owe a duty to seek each beneficiary out anyway, it will not be unduly onerous to require trustees to provide information on demand. In relation to the second issue, that is classes of documents that can be disclosed to beneficiaries of normal fi xed trusts, prima facie principles can be laid down in relation to each class of document. The present chapter will focus on trust accounts (and information about the state of the trust fund) and trust deeds, since they are the main documents that might be sought for disclosure. Here, the importance of the class of information in holding trustees to their core obligations needs to be weighed against conflicting concerns of protecting trustees’ rightful administration, personal and commercial confidentiality, and the interest of the beneficiaries as a whole. Brief observations on each of these classes of documents are in order. Trust accounts and information about the state of the trust fund are crucial to holding trustees to their core duty to preserve the integrity of the trust fund. There is confl icting authority as to whether fi xed-trust beneficiaries are entitled to inspect trust accounts as of right or can only do so upon the exercise of judicial discretion. On the one hand, there is Millett LJ’s absolute statement in Armitage v Nurse that all beneficiaries 41

Mowbray and others (n 6) 829–30 exclude from this category long-stop beneficiaries of fi xed trusts whose rights are remote or wholly defeasible.

Trustees’ duties to provide information

351

are entitled to see trust accounts,42 and the refusal in recent Australian authorities to apply Schmidt to fi xed-interest trusts.43 On the other hand, Lord Walker in Schmidt held that no beneficiary had any right to compel disclosure of trust documents, and that disclosure was but a matter of judicial discretion.44 His Lordship did not refer to Armitage v Nurse, but relied on North J’s observation in Re Cowin45 that the beneficiaries only have a prima facie right to inspect documents about the trust property, and that disclosure can be withheld if justified by the circumstances. Despite its importance to accountability, the disclosure of trust accounts to fi xed-trust beneficiaries can pose realistic concerns about compromising the interests of the beneficiaries as a whole, and over-burdening the trustees. The former concern can be illustrated by the facts of Lemos v Coutts & Co (Cayman) Ltd,46 where a trust account was sought to initiate hostile litigation against the trust in an overseas jurisdiction. Serious risks of family disharmony can also be taken into account by imposing safeguards on disclosure. The latter concern justifies allowing beneficiaries entitled to part of the trust fund to inspect only that part of the trust account necessary to protect their own beneficial interests. In light of these concerns, a prima facie principle in favour of disclosure subject to the two limits discussed above is therefore more appropriate. Trust deeds and supporting documents raise similar considerations as trust accounts and should be prima facie disclosable in the same manner.

2.

Discretionary objects

(a) Notification of beneficial entitlement A preliminary issue in relation to discretionary objects (that is, beneficiaries of discretionary trusts and objects of fiduciary powers) is whether the trustee owes a duty to take reasonable steps to notify all objects of 42

43 44

45 46

Armitage v Nurse (n 1) 261 (Millett LJ): ‘Every beneficiary is entitled to see the trust accounts, whether his interest is in possession or not.’ See also Re Tillott, Lea v Wilson [1892] 1 Ch 86 and Re Dartnall, Sawyer v Goddard [1895] 1 Ch 474, both of which involved fi xed-interest trusts. McDonald v Ellis (n 10). Schmidt (n 8). Although Lord Walker’s statement refers to trust documents and does not single out trust accounts, it would be artificial to interpret his Lordship as excluding the latter, and accepting that there is an absolute entitlement to see trust accounts: Mowbray and others (n 6) 801. (1886) 33 Ch D 179. [1992–93] CILR 460 discussed in Mowbray and others (n 6) 820.

352

Ho

their beneficial entitlements,47 or whether the duty is limited to notifying only those with a realistic prospect of benefit.48 The authorities before Schmidt seem to support the latter, more modest duty. In Re Manisty’s Settlement,49 Templeman J opined that a trustee holding a fiduciary power of appointment owed no duty to notify remote sub-classes of objects.50 In Re Murphy’s Settlement,51 Neuberger J held that a discretionary beneficiary could invoke the court’s jurisdiction to order his settlor-father to disclose the identity and address of the trustee, since the son was clearly within a relatively small class of objects and was a reasonably worthy claimant due to his limited means.52 If a settlor is subject to such a duty, it should be doubly so for the trustee. However, without addressing the issue expressly, Schmidt held that beneficiaries’ access to trust information is based on the court’s jurisdiction to hold trustees accountable, and all discretionary objects have locus standi to invoke the court’s jurisdiction to seek trust information. Following Schmidt, two main arguments have been made in favour of the broader duty to take reasonable practicable steps to notify discretionary objects. First, it has been said that if all discretionary objects have locus standi to seek information, it would be ‘remarkable’ if they then had no right to be informed of their entitlements.53 It is submitted that this is not remarkable, but rather justifiable because direct notification to all discretionary objects is extremely onerous, if not infeasible. Once the duty is qualified by reasonable practicable steps, such as advertising or website announcement, the notification may not be effective without compromising, say, the legitimate wish to keep the identity of the settlor confidential.54 Second, it has been said that the objects’ rights to hold the trustee accountable and to make out their cases to the trustee will be illusory if they do not know about their entitlements.55 However, for objects who

47

48 50 52 53 54

55

Hayton, Matthews and Mitchell (n 6) 822–23 (footnotes omitted); Lightman (n 22) 36–7. 49 Mowbray and others (n 6) 789. [1974] Ch 15 (‘Manisty’s Settlement ’). Ibid 25. 51 [1999] 1 WLR 282 (Ch) (‘Murphy ’). Deriving support from Manisty’s Settlement (n 49) 25. Lightman (n 22) 37. Take the example of an intermediate power in favour of the whole world except a specified group of individuals, where typically the identity of the settlor is not readily discernible from the trust instrument. An advertisement about the existence of such a power is unlikely to be truly informative. Hayton, Matthews and Mitchell (n 6) 822–3 (footnotes omitted).

Trustees’ duties to provide information

353

have but a theoretical possibility to receive a benefit from the trust, and whose application for a benefit will almost certainly be rejected, their rights to apply and hold trustees to account are illusory because of the inherent weakness in their claim, not because of the lack of notification. Besides, the core duty to account does not entail that all objects must be notified where reasonably practical. A closer examination of the specific core duties of the discretionary trustee will explain why this is so. A discretionary trustee owes the duty to survey the class and consider applications so as to decide to whom distribution should be made, if at all.56 It is neither necessary nor feasible for him to draw up a complete list of beneficiaries, let alone inform every single one of his beneficial entitlement. As long as all those who have more than a remote expectation of distribution and hence sufficient self-interest to monitor the trustee are informed, the trustee can be held accountable. Accordingly, since the integrity of the trust is not at risk, there is no reason to impose an excessive burden on the trustee to notify remote objects.

(b) Access to trust information Similar considerations apply to justify the threshold requirement laid down in Schmidt, namely that discretionary objects with a theoretical possibility of a benefit have no access to trust information. As long as all those objects with a realistic possibility of a benefit and hence sufficient incentive to monitor trustees are granted access, trustees are held accountable. Here, judicial discretion focuses on analysing the nature of the claimant’s beneficial entitlement. In comparison, the second and third stages of enquiry, as to the disclosable classes of documents and safeguards on disclosure, involve weighing a wider range of factors such as confidentiality and the impact of disclosure on a trustee’s exercise of discretion.57 Some of these factors may 56

57

The trustee of a fiduciary power need not appoint any particular individual to receive the gift . The High Court of New Zealand in Foreman v Kingstone (n 17) [48] has laid down a useful list of overriding circumstances on the basis of Schmidt. These include: confl icting personal or commercial confidentiality; adverse impact on the trustees (such as compromising trustee discretion); the position of other beneficiaries and third parties; embitterment of family feelings and the relationship between the trustees and beneficiaries to the detriment of the beneficiaries as a whole; the feasibility of limited disclosure in edited form; and safeguards that might be imposed on disclosure (through undertakings to limit the use of the information). In addition, Lewin on Trusts also suggests that the nature of the object’s expectation should also be relevant in evaluating the extent of relief, such as when details of trust accounts are not disclosed to an object

354

Ho

be particularly relevant to certain classes of documents. For example, disclosure of trust accounts to discretionary objects would include information about the identity of recipients of discretionary distributions and the relevant discretionary trust or power, in order that the applicant could assess whether a lawful distribution has been made. This would raise issues of confidentiality of the identity of other beneficiaries, and the need for safeguards on disclosure. Where personal confidentiality is at issue, Lord Walker in Schmidt suggested that a balance between the competing interests of different beneficiaries would need to be struck.58 In comparison, not only the confidentiality of competing beneficiaries, but also the protection of the trustee’s exercise of discretion will be most relevant to demands to disclose letters of wishes and correspondence between the trustee and other beneficiaries. At these two stages of enquiry, although prima facie principles can be laid down balancing accountability with the overriding factors that affect the class of document at issue, the scope of discretion will still be significant in order to cater for the panoply of circumstances involved.

3.

Objects of personal powers

The position of objects of personal powers was not considered in Schmidt. There is consensus in academic commentaries that in general, until an appointment has been made in their favour, objects of personal powers have no right to be notified of their position or to obtain any trust information.59 This reflects the fact that whether individually or relatively, they do not have any right to be considered by the donee of the power, let alone receive any distribution from the trust fund. This is because the donee of a personal power owes no duty to exercise it, nor to exercise it subject to fiduciary duties. The only constraint is that ultra vires appointments can be struck down as a ‘fraud’ upon the power, yet even this is actionable not by the objects, but by those beneficiaries entitled in default of the exercise of the power.60 Accordingly, the trustee owes no duty to account to them; his duty to account is owed to the beneficiaries entitled in default, to whom the trustee owes duties to provide information. The integrity of the trust concept has not been compromised.

58 59 60

with a slight, albeit more than theoretical prospect of benefit (Mowbray and others (n 6) 827–8). Schmidt (n 8) [67]. Mowbray and others (n 6) 828; Hayton, Matthews and Mitchell (n 6) 823. Vatcher v Paull [1915] AC 372; Hayton, Matthews and Mitchell (n 6) 29.

Trustees’ duties to provide information

E.

355

Settlors’ restriction of beneficiaries’ rights to information

An issue that has yet to receive extensive judicial consideration is the extent to which settlors can rely on provisions in the trust deed to restrict beneficiaries otherwise entitled to seek disclosure from having access to trust information. It is submitted that again the answer lies in the fundamental question as to what obligations form the irreducible core obligations of a trustee, whether generally with respect to all trusts or specifically with respect to the particular type of disposition at issue. Despite the dearth of authority, there is overwhelming consensus in academic commentaries that a general prohibition on disclosing any information to any beneficiary is void for repugnancy to the trust concept, it being the trustee’s irreducible obligation to account to all beneficiaries (including objects of fiduciary powers).61 Beyond this extreme situation, one can only analyse the permissibility of information secrecy clauses on the basis of a pre-Schmidt decision of the Full Court of the Supreme Court of Queensland directly on point, Tierney v King,62 as well as contrary observations in recent judicial decisions that are not directly on point. In particular, some support for the permissibility of less extensive restrictions has been expressed in relation to two situations. First, relying on Tierney v King, it has been suggested that a clause excluding the disclosure of a specified kind of information may be permissible.63 In Tierney v King itself, Matthews J (with whom the other members of the Court agreed) accepted a clause requiring the trustees of a superannuation fund to ‘observe strict secrecy with regard to the affairs, accounts and transactions’ as valid in excluding disclosure of an actuarial report that would otherwise be disclosable as a trust document under the Londonderry principle. Tierney v King was relied on by Sheller JA in Hartigan Nominees Pty Ltd v Rydge64 as affirming the validity of settlors’

61

62 63

64

Armitage v Nurse (n 1) 253; Jones v Shipping Federation of British Columbia (1963) 37 DLR (2d) 273, 274–5 (where a clause in a pension deed prohibiting any accounting or action against the trustee except by the employer-settlor was held unenforceable); Foreman v Kingstone (n 17) [93]; Hayton, Matthews and Mitchell (n 6) 825; Mowbray and others (n 6) 833; Lightman (n 22) 38; but see Campbell (n 15) 145. [1983] Qd R 580 (‘Tierney v King ’). Mowbray and others (n 6) 833. A clause in the form of the original clause in Tierney v King, which contained a blanket exclusion in relation to trust administration, including trust accounts, may not survive the present judicial climate. Hartigan Nominees (n 20).

356

Ho

imposition of confidentiality in trust administration.65 Although Kirby P also explained the result of Tierney v King on the basis of the secrecy clause, his Honour was more concerned to disapprove Matthews J’s uncritical application of Londonderry than to express support for the clause.66 It is submitted that Tierney v King should not be followed nowadays. It was decided at a time when, due to the misconceived proprietary basis and consequently the crude test of ‘trust document’, the class of prima facie disclosable documents was wider than necessary to hold trustees accountable. At the same time, in cutting down the scope of disclosure, the Court accepted the secrecy clause wholesale without discriminating between those wishes of the settlor that are legitimate and those that are not. Now that rights to information are firmly grounded in the core obligations of the trustee, a close link can be maintained between those obligations and the principles of disclosure they generate. In particular, since discretion is built into judicial deliberations on disclosure, a settlor’s legitimate wishes for secrecy will have been taken into account before imposing disclosure in a particular case; duties of disclosure will therefore reflect the mandatory core duties of the trustee. There is no need to rectify over-inclusion through giving effect to a secrecy clause as of right. As Schmidt makes clear, just as no beneficiary is entitled to information as of right, a settlor’s wish for confidentiality is but one factor, albeit weighty, for consideration in exercise of judicial discretion.67 This is reinforced in Foreman v Kingstone,68 where immediately after stating that the trustee is accountable to all beneficiaries, Potter J emphasized that the duty ‘cannot be compromised by a settlor’s desire for confidentiality in relation to his and the trust’s personal and financial affairs unless there exist exceptional circumstances’.69 In light of these judicial sentiments, where the prima facie duty of disclosure is subject to discretion, the better approach seems to be to scrutinize a secrecy clause and take into account only legitimate concerns raised therein in the overall balancing exercise, but not give effect to its full extent as of right. Where the beneficiaries are entitled to information as of right, such as the notification of fi xed-trust beneficiaries of their beneficial entitlements, it is submitted that settlors’ 65

66 68

Ibid 446. In Tierney v King, Matthews J also justified the decision on the ground that the actuarial report disclosed the reasons for the trustees’ exercise of discretion, but this was expressly criticized by Sheller JA in Hartigan Nominees, who treated the secrecy clause as the only justification for non-disclosure. Hartigan Nominees (n 20) 420. 67 Schmidt (n 8) [67]. Foreman v Kingstone (n 17). 69 Ibid, [93].

Trustees’ duties to provide information

357

secrecy clauses should not be taken into account. Th is is because the typical arguments for secrecy are not conclusive: the concern that disclosure of a future fortune may dampen self-motivation may only affect some beneficiaries. Even if a particular beneficiary is affected, the effect may not be significant given the limited extent of disclosure. Besides, it needs to be balanced against the need to hold trustees accountable. In a similar vein, any right of the settlor to exclude beneficiaries’ information rights on the basis of his freedom of disposition should be balanced against the integrity of the trust concept and the inherent nature and content of the rights of beneficiaries. To the extent that the settlor designates certain individuals as beneficiaries, who enjoy a core minimum of rights, he limits his freedom of disposition. Even if one takes the view that fiduciary obligations are consensual, settlors are not allowed to set up a trust but then abrogate the core duties of the trustee. To do so would be to set up a self-contradictory settlement.70 Moreover, if the settlor had any legitimate reason for preserving confidentiality, such as maintaining family harmony or promoting independence amongst his descendants (by deferring their detailed knowledge of family bounty), this can be taken into account as part of the overriding circumstances. Another situation where a settlor’s exclusion of information rights has received widespread support is when the settlor himself excludes his own rights to information as a beneficiary of the trust.71 It is said that this can be applied in blind trusts, where individuals occupying public office can exclude themselves from any information about the trust in order to avoid conflicts of interest. From the examples provided in Lewin on Trusts, such an arrangement seems to be justified on the basis that the right-holder has contracted or consented to the waiver of information rights.72 However, while this waiver argument can justify allowing some of the beneficiaries to exclude their rights to information,73 it cannot justify allowing all of the beneficiaries to do so; for this would infringe the fundamental core of the trust, which entails that at least one beneficiary be able to enforce the trust. In any event, if the exclusion is justified on the basis of the choice of 70

71

72

73

See A Duggan, ‘Contracts, Fiduciaries and the Primacy of the Deal’, ch 12 in this collection. Mowbray and others (n 6) 834; Hayton, Matthews and Mitchell (n 6) 825. The two treatises differ in their view on whether, if the settlors’ family members are also beneficiaries in the trust, their information rights can be excluded. Mowbray and others (n 6) 834 give the examples of settlors, beneficiaries who are parties to the trust instrument, and beneficiaries who have effected a release. Note the qualification in ibid, to ‘some beneficiaries’ only.

358

Ho

the beneficiary himself as a beneficiary, it has nothing to do with a settlor’s restriction of beneficiary rights as a settlor. To recap briefly, the present chapter argues that any perceived scope of settlor restriction on beneficiaries’ rights to information can be explained away as resting on the settlor’s own waiver of rights or out-dated principles that have already been overtaken by recent case law. Accordingly, it is submitted that clauses that seek to restrict beneficiaries’ rights to information should not take effect as of right. This does not entail that a settlor’s legitimate wish for confidentiality will be ignored; instead, in light of the approaches laid down in Schmidt and Foreman v Kingstone, the likely – and better – way forward is for the court to treat the clause as one of the discretionary factors to be taken into account when deciding whether or not to order disclosure, rather than to give effect to the clause as of right.

F.

Conclusion

Schmidt has dismantled the faulty, proprietary foundation for beneficiaries’ rights to information and based the law on the firm ground of trustees’ accountability for their core obligations. However, as with most landmark decisions, the task of dismantling old case law took up a good part of the judgment, leaving it to subsequent cases to re-build the principles brick by brick. The present chapter has sought to make two modest contributions to this process. First, it argues that by closely considering not just the core trustee obligations that are applicable to all types of fiduciary dispositions, but also those additionally and specifically applicable to the particular type of disposition concerned, as well as the extent of information sought, a coherent set of prima facie principles, subject to overriding circumstances, can be laid down to guide the exercise of judicial discretion. The emphasis on the specific core obligations in the present chapter is not meant to increase the burden of trustees, nor to augment the irreducible core of trustees’ obligations mentioned in Armitage v Nurse. In that case, Millett LJ was referring to the basic duties common to all trusts, such as those to account and to act honestly and in good faith for the benefit of the beneficiaries. The present approach merely supplements the existing basis by fleshing out in more concrete terms the specific duties applicable to each type of fiduciary disposition. Second, the affirmation of the new basis of information rights as essential for accountability enables a rational and sufficient link to be built

Trustees’ duties to provide information

359

between the basis of the duties on disclosure and the extent of relief ultimately determined by the court after its weighing exercise. In this way, even though the extent of the duty of disclosure imposed in each particular case is arrived upon through a discretionary process, it already reflects the minimum necessary to hold trustees accountable, and hence should be treated as mandatory. Accordingly, there is no justification, apart from a beneficiary’s waiver of his rights, to continue to give effect to settlors’ secrecy clauses as of right.

PA RT I V Remedies

16 The measurement of compensation claims against trustees and fiduciaries Lionel Smith

A.

Introduction

One of the wonderful things about working at the university, in the world of ideas, is that ideas defy physical distance. Unlike some other contributors to this volume, I have never had the pleasure of working alongside Michael Bryan, although I have frequently had the good fortune to meet him at conferences. But even so, I can keep his ideas always close at hand. His meticulous analysis of any problem always repays careful study, and this is especially true of the particularly difficult problems that he often chooses to engage with. I have learned a lot from him, and from his ideas. Everyone would agree that Michael Bryan is an authority on equity, and for my contribution to this volume in his honour, I have chosen a topic in that field. Although it was decided almost twenty years ago, Canson Enterprises Ltd v Boughton & Co1 remains the leading authority from the Supreme Court of Canada on the question of the measurement of claims for compensation against fiduciaries. The case involved a claim against a solicitor for a breach of his fiduciary obligations, but the judgment addresses the measurement of claims against trustees as well. Canson repays study not only for Canadian lawyers; it has been influential in some of the highest appellate courts of the Commonwealth. In Target Holdings Ltd v Redferns,2 Lord Browne-Wilkinson (with whom all the other Law Lords agreed) said that Canson ‘contains an illuminating exposition of the rules applicable to equitable compensation for breach of trust’. He found that exposition, however, in the minority judgment of McLachlin J, as she then was. Similarly, in Youyang Pty Ltd v Minter 1 2

[1991] 3 SCR 534, 85 DLR (4th) 129 (SCC) (‘Canson’), hereafter cited to SCR. [1996] AC 421 (HL) 438–9.

363

364

Smith

Ellison Morris Fletcher,3 the High Court of Australia quoted with approval two passages from the same minority judgment. In this paper, I will attempt to elucidate exactly what were the issues confronting the Court in Canson, and what were the principles rightly applicable to those issues. I will argue that the Court’s analysis was somewhat more complicated than it needed to be, and that a number of principles were discussed in the judgments even though they were not relevant to the dispute before the Court. The goal is to clarify the principles governing the measurement of compensation claims against trustees and other fiduciaries. I will show that not every money claim against a fiduciary is a claim for a loss suffered; some claims are claims to enforce the primary obligations of the fiduciary. These claims to enforce primary obligations rightly attract the application of principles that have no application to claims for loss suffered. Conversely, claims for loss suffered due to a breach of an obligation attract principles that are not relevant in claims to enforce primary obligations. Furthermore, claims for loss suffered may attract certain evidentiary presumptions that favour the plaintiff, but even these presumptions have a limited scope; they operate to resolve evidentiary difficulties, and they have no relevance where no such difficulty is present.

B.

Understanding Canson

1.

The factual background

Canson concerned a lawyer who was in a confl ict of duty and duty.4 The plaintiffs Canson Enterprises Ltd and Fealty Enterprises Ltd entered into a joint venture with Peregrine Ventures Inc, which would involve the acquisition of land for development.5 The acquisition involved an intermediary, George Treit, who was to take a commission from the joint venturers when they acquired the land from the Hendersons who were selling it. However, Treit had made a separate arrangement with another corporation, Sun-Mark Development Corp, because Sun-Mark had already agreed to purchase the land from the Hendersons for CA$410,000. 3 4

5

(2003) 212 CLR 484, [35], [40]. The judgments make frequent reference to ‘conflict of interest’, which is short for ‘conflict of self-interest and fiduciary duty’, but the complaint was actually founded on a confl ict between the fiduciary duty owed to one client and the fiduciary duty owed to another client. The facts are set out in more detail in the trial judgment (Canson Enterprises Ltd v Boughton & Co (1998) 31 BCLR (2d) 46) than in the Supreme Court of Canada judgments.

Measurement of compensation claims

365

Treit represented to Canson and Fealty that the price of the land was CA$525,000 and that he was not fi nancially interested in it, apart from his agreed commission. The joint venturers paid that amount for the land, giving Sun-Mark a profit of CA$115,000; pursuant to Treit’s arrangement with Sun-Mark, half of this amount was paid to a company controlled by Treit. Peregrine was aware of this secret profit, and crucially, so was Ralph Wollen, who was the solicitor for Sun-Mark and for the joint venturers. On the one hand, he drafted the joint venture agreement; on the other hand, in acting as a conveyancer, he conveyed the land directly from the Hendersons to the joint venturers, concealing the involvement of SunMark while paying to Sun-Mark its ‘flip’ profit of CA$115,000. Obviously Wollen breached the duty that lies on a fiduciary to avoid being in a situation where his duty to one beneficiary conflicts with his duty to another. The joint venture went ahead, however, with the goal of developing the land. This turned out to be a disaster. The joint venturers hired an engineering firm to conduct soil tests; this firm failed to notice that there was a deep layer of peat in the soil. Construction went ahead with a warehouse. The land subsided and the warehouse suffered extensive damage. The joint venturers sued the soil engineers and the corporation that had driven the piles for the building. They succeeded against both, but due to the insolvency of these entities they ended up with significant losses. In this next round of litigation, Canson and Fealty sued Wollen and his firm, as well as Treit, the company he controlled, Sun-Mark, Peregrine, and some other parties. The action proceeded as a special case on agreed facts. The agreed facts included that in the case of Canson, the loss suffered was CA$801,290.41, while in the case of Fealty it was CA$280,278.00. There was also an agreed fact that the plaintiffs would not have entered into the transaction had they known of the secret profit. The trial judge found that none of the defendants was liable for the whole loss that the plaintiffs had suffered. On the facts in the stated case, Wollen might be liable, but only for the secret profit received by Sun-Mark, along with development expenses they had incurred prior to the intervening negligence of the soil engineers and the pile-drivers. The judge understood the secret profit to represent the amount by which the plaintiffs had overpaid for the land as compared with its true value, so that it served as a compensatory measure. The other defendants might be liable in the same amount, as having breached their own fiduciary duties or participated in the concealment of such. On the facts in the stated case, Treit would additionally be liable for the same amount in deceit. The Court of Appeal dismissed an appeal.

366

Smith

When the case reached the Supreme Court of Canada, the only issue was the quantum of the liability to be imposed on Wollen (and therefore on his firm) based on the facts in the stated case. He breached his fiduciary obligation, and this was agreed to be a but-for cause of the losses suffered; however, in a more direct sense, the losses were caused by the negligence of the soil engineers and the pile-drivers. The crucial issue was a simple one: was the chain of causation between Wollen’s breach and the plaintiff ’s losses broken by the intervening negligence of others, so as to relieve Wollen of liability?

2.

The judgments in the Supreme Court of Canada

There were three judgments in the Supreme Court of Canada, all of which agreed in the result: the appeal was dismissed.6 La Forest J wrote the majority judgment, in which Sopinka, Gonthier and Cory JJ concurred. Stevenson J also agreed with this judgment, but wrote a short judgment of his own to make a few points.7 McLachlin J, as she then was, wrote a concurring minority judgment, in which Lamer CJ and L’Heureux-Dubé J concurred. Both the majority and the minority judgment struggled with the fact that in some sense, money claims against fiduciaries seem to be handled differently than ‘ordinary’ claims in negligence. These differences are illustrated by cases like Ex p Adamson8 and Guerin v R,9 both of which 6

7

8 9

The stated case resolved the question of law as to the extent of the liability of Wollen and the others in respect of the loss that was also caused by the negligence of the soil engineers and pile-drivers. The case was then returned for trial, where some facts were found that were inconsistent with the assumed facts in the earlier stated case. The litigation again reached the Court of Appeal, partly on issues related to whether a person (or a partnership) could be liable to disgorge a secret profit that it did not receive. It was ultimately held that Wollen and the fi rm could be liable to account for a gain they did not receive only according to the principles for knowing assistance in a breach of trust, which were not activated here. They could, however, be liable in a compensatory measure for the difference between the amount paid for the land by the plaintiffs, and its actual value: Canson Enterprises Ltd v Boughton & Co (1995) 11 BCLR (3d) 262 (CA). One of these was an important terminological point: ‘Th is case is not one of profit making and restitutionary concepts do not fit’: Canson (n 1) 590. Often judges refer to ‘restitution’ when they are discussing compensation claims against fiduciaries. This can be very misleading because it is not a question of restitution for unjust enrichment. We will return to this. Stevenson J also said: ‘I do not think that the so-called fusion of law and equity has anything to do with deciding this case’: Canson (n 1) 590. In this respect I also agree with him, as the discussion below will show. (1878) 8 Ch D 807 (CA) (‘Ex p Adamson’). [1984] 2 SCR 335, 13 DLR (4th) 321 (‘Guerin’).

Measurement of compensation claims

367

were cited in both judgments (and to both of which we shall return). Both judgments tried to analyse in what way claims in equity are different, in order to make sense of the case law. The majority judgment settled on this formula: There is a sharp divide between a situation where a person has control of property which in the view of the court belongs to another, and one where a person is under a fiduciary duty to perform an obligation where equity’s concern is simply that the duty be performed honestly and in accordance with the undertaking the fiduciary has taken on; … In the case of a trust relationship, the trustee’s obligation is to hold the res or object of the trust for his cestui que trust, and on breach the concern of equity is that it be restored to the cestui que trust or if that cannot be done to afford compensation for what the object would be worth. In the case of a mere breach of duty, the concern of equity is to ascertain the loss resulting from the breach of the particular duty.10

In other words, the crucial distinction was said to be between cases where there is property held for another, and those where there is not. The property-holding category includes cases where property is held in trust, but also cases like Guerin.11 The minority judgment resisted this distinction and insisted that the crucial difference is between cases ‘in equity’ and those ‘at common law’. For this reason, the case turned into a dispute about whether, and to what extent, the common law and equity are now fused in Canada. According to the minority, different principles apply in equity: In summary, compensation is an equitable monetary remedy which is available when the equitable remedies of restitution and account are not appropriate. By analogy with restitution, it attempts to restore to the plaintiff what has been lost as a result of the breach; ie the plaintiff ’s lost opportunity. The plaintiff ’s actual loss as a consequence of the breach is to be assessed with the full benefit of hindsight. Foreseeability is not a concern in assessing compensation, but it is essential that the losses made good are only those which, on a common sense view of causation, were caused by the breach. The plaintiff will not be required to mitigate, as the term is used in law, but losses resulting from clearly unreasonable behaviour on the part of the plaintiff will be adjudged to flow from that behaviour, and not from the breach.12 10 11

12

Canson (n 1) 578 (underlining in original). In Guerin, it was held that there was not a trust in the technical sense, although the Crown owed fiduciary obligations to the plaintiff First Nation in relation to reserve land. Canson (n 1) 556.

368

Smith

The minority judgment attempts to show that the common law measures a loss at the time of the breach, while equity, more sensitively, does so at the time of trial, ‘with the full benefit of hindsight’.13 This is a false dichotomy. The common law is perfectly capable of measuring losses at the time of trial; indeed, this is the ordinary rule.14 Only in particular circumstances, which depend upon particular justifications, does the law ignore events happening between the wrong and the trial and which affect the assessment of the loss.15 The minority judgment is difficult to follow in other ways as well. It suggests that ‘the plaintiff will not be required to mitigate’, but at the same time, that ‘losses resulting from clearly unreasonable behaviour on the part of the plaintiff will be adjudged to flow from that behaviour, and not from the breach’. Surely this is all that mitigation ever means. It suggests that ‘[f]oreseeability is not a concern in assessing compensation’, but immediately qualifies this by saying that ‘it is essential that the losses made good are only those which, on a common sense view of causation, were caused by the breach’. The minority agreed that in the case at hand, the losses in question were not recoverable, even though it was part of the stated case that they were causally linked to the defendant’s breach of fiduciary obligation. In other words, the conclusion must be that although they were linked to the breach in a but-for sense, they were not linked on a ‘common sense view of causation’. But the common law’s rules regarding remoteness are simply an attempt to provide a framework of legal analysis, which allows consistency of application across cases, for the idea of a ‘common sense view of causation’. The reason that we do not allow recovery (in tort or contract or breach of fiduciary obligation) for all losses that are linked in a but-for sense to the breach is that we think that this would cast the net of moral and legal responsibility 13 14

15

See also ibid 554–5. Semelhago v Paramadevan [1996] 2 SCR 415, 136 DLR (4th) 1 (‘Semelhago’) [16]; Smith New Court Securities Ltd v Scrimgeour Vickers (Asset Management) Ltd [1997] 1 AC 254 (‘Smith New Court Securities’); Golden Strait Corporation v Nippon Yusen Kubishka Kaisha [2007] 2 AC 353. For example, indemnity insurance held by the plaintiff, which reduces or eliminates the loss, is always ignored. This can only be explained on policy grounds, which must also be found to explain the exclusion of other ‘collateral benefits’: see generally Ratych v Bloomer [1990] 1 SCR 940, 69 DLR (4th) 25. In contracts for the sale of goods, the presumption is that the assessment should be made at the time of breach; this is said to be justified on the basis that the plaintiff who is a seller can always sell the goods to another buyer, while the plaintiff who is a buyer is free to buy equivalent goods; any loss occurring later is therefore caused by the plaintiff himself: Semelhago (n 14) [13].

Measurement of compensation claims

369

too widely.16 In difficult cases, common sense may run out, or different people’s common sense may point in different directions.17 But there is nothing here that is peculiar to equity; both the common law and equity must struggle with this problem. The minority judgment has attracted some support.18 In what follows, however, I will suggest that both the minority and the majority judgments failed to identify exactly what were the ‘special’ rules that sometimes apply in cases of breach of fiduciary obligation. Moreover, once we identify what those ‘special’ rules are, we will fi nd that they do not belong particularly to either the common law or equity.

3. Not every claim for money is a claim for loss (a) Introduction The most fundamental error that runs through Canson is a failure to recognize that not every claim for money is a claim for a loss. The judges knew that some money claims in equity were subject to a different manner of quantification that did not look to remoteness or foreseeability or even causation; they assumed that this meant that claims for compensation are handled differently in equity. The truth is that those claims that are assessed without regard to remoteness, foreseeability or causation are not claims for loss. Let us begin to unpack this by citing a nineteenth-century judgment that was quoted by both the majority and the minority in Canson. In Ex p Adamson, James LJ, with whom Baggallay LJ concurred, said: The Court of Chancery never entertained a suit for damages occasioned by fraudulent conduct or for breach of trust. The suit was always for an equitable debt or liability in the nature of debt. It was a suit for the restitution of the actual money or thing, or value of the thing, of which the cheated party had been cheated.19 16

17

18

19

This is the premise of the great book, HLA Hart and T Honoré, Causation in the Law (2nd edn Oxford University Press, Oxford 1985). See also Lord Hoff mann, ‘Causation’ (2005) 121 LQR 592. Difficult cases include overdetermination, where there are multiple causes each sufficient to bring about the same effect. See T Honoré, ‘Necessary and Sufficient Conditions in Tort Law’ in T Honoré (ed), Responsibility and Fault (Hart Publishing, Oxford 1999) 94 and Sunrise Co v Lake Winnipeg (The) [1991] 1 SCR 3, 77 DLR (4th) 701. In addition to the references above at nn 2 and 3, see also Cadbury Schweppes Inc v FBI Foods Ltd [1999] 1 SCR 142, 167 DLR (4th) 577 [93]. Ex p Adamson (n 8) 819. The statement that the Court of Chancery never entertained a suit for damages is actually false. Claims for damages for loss caused were sometimes

370

Smith

What does it mean to say that ‘the suit was always for an equitable debt’ rather than for damages? The difference is between a claim to enforce a primary obligation, and a claim for the loss caused by the failure to perform a primary obligation. This distinction is crucial, but it is not particularly equitable. Imagine that Alan and Belinda make a contract by which they agree that Alan will build Belinda a garage for $10,000. Let us assume that Alan does the work and Belinda pays. She then concludes that the work was not done properly. Belinda’s claim against Alan will be a claim for damages for breach of contract. It will take this form: that Alan had a contractual obligation to do work of a certain standard; this was a primary obligation, that is to say, an obligation that comes into existence without any wrongdoing; however, Alan breached this primary obligation; as a result, Alan has now come under a new obligation – a secondary obligation – to compensate Belinda for the loss caused by Alan’s breach of the primary obligation. Now change the assumptions. Imagine that Alan builds the garage to the required standard, but Belinda does not pay him. Alan’s claim against Belinda will also be a contractual claim. However, Alan does not need to sue for damages; he can sue in debt. In this context, what that means is that he can claim $10,000 by making a claim of the following form: Belinda promised to pay Alan $10,000 for building the garage; Alan built the garage; Belinda owes Alan $10,000. The crucial point is to notice that when Alan makes this claim, he does not need to say anything about loss. He is not making a claim based on a secondary obligation to compensate him for the loss caused by Belinda’s breach of contract.20 We can think about the debate in Canson in terms of this claim by Alan. There is no room for any consideration of remoteness or foreseeability or even causation in Alan’s claim. That is not because it is a claim in equity; in fact, Alan’s claim owes nothing to equity. It is because Alan’s claim is not a claim for a loss suffered. A claim for a contractual debt is, in

20

allowed, quite apart from the statutory jurisdiction, dating from 1858, to allow ‘damages in lieu’ of an injunction or specific performance. See PM McDermott, Equitable Damages (Butterworths, Sydney 1994) ch 1. McDermott notes (at 25) that in the nineteenth century, the words ‘compensation’ and ‘damages’ were used interchangeably in Chancery. However, despite this historical error by James LJ in Ex p Adamson (n 8) the contrast he drew between debt and damages remains valid and indeed fundamental. Whether he could make a claim of that kind is a different question. For example, what if Alan missed a profitable business opportunity due to Belinda’s non-payment? He might have suffered a loss much greater than $10,000. I do not explore that issue here.

Measurement of compensation claims

371

a sense, a claim for specific performance. Because it is a money claim, it is not described as specific performance. The common law courts always had jurisdiction to grant the relief sought; it was not necessary to go to Chancery and seek a decree of specific performance. But it is just like specific performance in the sense that the plaintiff seeks the enforcement of the defendant’s primary contractual obligation, rather than seeking damages to compensate for loss caused by the breach of those primary obligations. This allows us to turn to specific performance as such. Assume a contract for the purchase and sale of an interest in land. If the vendor will not convey, the purchaser may seek specific performance. No one would argue for consideration of remoteness or foreseeability or causation in such a case, because it is not a claim for loss. Even mitigation drops out of the picture. It has sometimes been observed that such a claim may allow a plaintiff to avoid having to mitigate his or her loss.21 This is true, but it misses the point: the claim is not a claim for a loss. This is starkly illustrated when an order for specific performance is turned into a money order. Since 1858, courts of equity have had the jurisdiction to grant ‘damages in lieu of’ specific performance. The Supreme Court of Canada has made it clear that when this occurs, the exercise is not one of compensating for loss.22 It is rather an exercise of giving the plaintiff an amount of money that will put the plaintiff in the same position he or she would have been in if he or she had been granted a decree of specific performance, and the decree had been fulfilled. This may well be overcompensatory; this is all right, because the aim is not compensation.23

(b) Application to trusts When we turn to trusts and fiduciary obligations, we see the same thing. Not every claim is a claim for compensation for a loss caused by a breach of duty. But, if we focus on trust law, we see that some claims involve the direct enforcement of the trustee’s primary obligations under the trust.24 A claim of this kind is like a claim for the specific performance of a contract. And, just as in that context, this kind of claim may turn into a kind of substitute specific performance: if the trustee no longer has the trust 21 22 23

24

See Domowicz v Orsa Investments Ltd (1993) 15 OR (3d) 661 (Gen Div). Semelhago (n 14). For discussion, see L Smith, ‘Understanding Specific Performance’ in E McKendrick and N Cohen (eds), Comparative Remedies for Breach of Contract (Hart Publishing, Oxford 2005) 221. SB Elliott and C Mitchell, ‘Remedies for Dishonest Assistance’ (2004) 67 MLR 16, 23–31.

372

Smith

property, he will have to replenish the trust fund out of his own assets. But it is like specific performance in the sense that the claim is not framed as a claim to replenish a loss; and, in the sense that no breach of trust needs to be pleaded to secure relief of this kind. The claim is merely a demand that the trustee perform the trust. Assume that a trustee has taken $500 of trust money and purchased shares with it. If the shares were not an authorized investment, this is a breach of trust. The beneficiaries are free to adopt the unauthorized investment if it suits them. If it does not suit them, then the claim against the trustee proceeds through the accounting mechanism to which all trustees are subject. The trustee presents an account that shows the $500 disbursement; the beneficiaries are entitled to disallow that entry because it is unauthorized.25 The result is that there is no entry in the account that justifies any disbursement of $500 of trust money; but the money was disbursed; hence, the trustee is personally liable to restore $500 to the trust, out of his own resources, in order to make the account balance.26 The trust has been compensated in a sense. But the claim to the $500 is not framed as a claim for a loss caused by a breach. It is framed as a claim to enforce the trustee’s primary obligation: ‘You are supposed to hold $500 on trust; do so.’ It is like a claim to specific performance. That is why issues of remoteness, foreseeability and even causation – which are issues about loss – do not arise. In this light, we can understand the statement in Ex p Adamson, to the effect that ‘[t]he suit was always for an equitable debt or liability in the nature of debt. It was a suit for the restitution of the actual money or thing, or value of the thing, of which the cheated party had been cheated’.27 The debt is the primary obligation to hold the relevant property on trust; it is not a claim for loss caused. It is a claim for ‘restitution’ in the sense that the trustee must put back what he took out of the trust fund. But it is not restitution in the usual sense, that is, the legal response imposed when one party has been unjustly enriched at the expense of another party.28

(c) The role of causation, remoteness and mitigation Canson was a claim for loss suffered by the breach of a fiduciary obligation. It was not framed as a claim that the defendant perform his primary 25

26 27

See Campbell v Hogg [1930] 3 DLR 673 (PC). For the back story to this extraordinary case, see C Backhouse and NL Backhouse, The Heiress vs the Establishment: Mrs Campbell’s Campaign for Legal Justice (UBC Press, Vancouver 2005). Conversely, once he has done so, he can keep the unauthorized investment. Ex p Adamson (n 8) 819. 28 See text at n 7.

Measurement of compensation claims

373

obligation. It could not have been, because his relevant primary obligation was to disclose to the plaintiff the conflicting fiduciary duties that he owed to other parties; or, if he could not do that with the consent of those other parties, to withdraw. It would have been nonsense to frame the claim in that way. The only way to frame it was as a claim for loss caused. But as soon as a claim is framed in that way, issues of causation must be brought in, because the only relevant loss is the loss that the defendant caused. And as soon as that is raised, issues of remoteness arise, because there are limits to the responsibility that we can rightly impose on someone for the causal outcomes of a breach of duty.29 All of the judges agreed, in the end, that the loss was too remote to be recoverable. To suggest, as did the minority, that this was because different rules govern in equity was to make a mistake. The majority was closer to the mark, in saying that the relevant question is whether the claim relates to entrusted property.30 But the real distinction, which has nothing to do with the difference between common law and equity, is whether the claim was for loss caused by a breach, or was a claim to enforce a primary duty.

4.

Resolving evidentiary difficulties against one who wrongly created them

How do we understand the principle that was elucidated in Guerin, and which was referred to in both the majority and minority judgments in Canson? In Guerin, the federal Crown was responsible for making arrangements for the grant of a lease over the reserve land of a First Nation band; the governing legislation does not allow bands to make direct dispositions of interests in such land. The band surrendered the land to the Crown so that it could grant a lease to a golf club on certain terms agreed between the band and the Crown; the Crown granted the lease on 29

30

For similar reasons, issues of mitigation may also arise, although they did not in Canson itself. Th is does not, however, mean that the scope of mitigation or remoteness in a case of breach of fiduciary duty will necessarily be the same as in a case of negligence. The law may rightly give different answers to these questions in relation to different kinds of wrongful act. Th is is the gist of the argument in Hoff mann (n 16). But any such differences are attributable to the nature and characteristics of the wrongful acts in question, and not simply to whether they are common law or equitable wrongs. We will return to this point in the next section, where it is illustrated by commonalities in treatment between the common law tort of deceit and the equitable wrong of breach of fiduciary obligation. In cases where property has been entrusted, it is more likely to be possible to frame the claim as one to enforce a primary duty, by substitution with a money award if necessary.

374

Smith

terms less advantageous to the band. The Court held that this was not a trust, but that there was a fiduciary obligation and it had been breached. The value of the loss caused by the breach had to be calculated. The Court did not put the band in the position it would have been in had the Crown obtained the terms that had been agreed with the band. The reason is that the trial judge found as a fact that those terms could not have been obtained. Instead, the Court put the band in the position it would have been in had the Crown obtained the most advantageous use of the land that it could have done. How do we understand this result? The majority in Canson put Guerin aside as a case that was concerned with the entrustment of property, which therefore involved stricter rules for the assessment of loss.31 However, on the approach to Canson that is discussed in the previous section, this is not the correct distinction. If Guerin had been a case in which the band insisted on performance by the Crown of its primary obligation, as if the Crown was a trustee of the land that had made an unauthorized disposition of it, then the Crown would have been liable for the current value of the land, with an offsetting credit for the profit that the band had derived from the lease that was actually granted. But Guerin was about compensation for loss caused by a breach; therefore, the principles for the direct enforcement of primary obligations were not relevant. So why was the Guerin principle, which is clearly plaintiff friendly, not relevant in Canson? In fact, the principle that was applied in Guerin was one that could have applied in Canson, had there been occasion. In Guerin, Wilson J said: Since the lease that was authorized by the Band was impossible to obtain, the Crown’s breach of duty in this case was not in failing to lease the land, but in leasing it when it could not lease it on the terms approved by the Band. The Band was thereby deprived of its land and any use to which it might have wanted to put it. Just as it is to be presumed that a beneficiary would have wished to sell his securities at the highest price available during the period they were wrongfully withheld from him by the trustee (see McNeil v Fultz (1906) 38 SCR 198), so also it should be presumed that the Band would have wished to develop its land in the most advantageous way possible during the period covered by the unauthorized lease. In this respect also the principles applicable to determine damages for breach of trust are to be contrasted with the principles applicable to determine damages for breach of contract. In contract it would have been necessary 31

Canson (n 1) 578.

Measurement of compensation claims

375

for the Band to prove that it would have developed the land; in equity a presumption is made to that effect32

Wilson J puts the principle in terms of a presumption, drawing a contrast between equity and contract. There is such a presumption, but it is not confined to equity. There is a general principle that when a party creates an evidentiary difficulty, via his own legally wrongful act, then that difficulty will be resolved against that party. This is frequently applied in the common law, as in cases of conversion33 and deceit.34 The principle in question cannot be said to be one that arises ‘in equity’.35 It follows that if this presumption is not applied in negligence cases, it is not because of the division between common law and equity.36 Since the wrong in Canson was a breach of fiduciary obligation, this principle could have applied. Had there been an evidentiary difficulty about the quantum of the loss, that difficulty should have been resolved against the breaching fiduciary. However, there was no such difficulty and so the principle in Guerin was of no relevance. The amount of the loss in Canson was agreed in the stated case. The only question was whether it was too remote. 32

33 34

35

36

Guerin (n 9) 362–3. The majority simply adopted the method of calculation used by the trial judge; it was this method for which Wilson J was trying to provide a principled explanation. Armory v Delamirie (1722) 1 Str 505, 93 ER 664 (KB). Smith New Court Securities (n 14). For a list of cases, see also L Smith, The Law of Tracing (Clarendon Press, Oxford 1997) 77–8. McLachlin J implied this by marking her disagreement with La Forest J with the claim: ‘I base this result, however, in equity. I cannot concur in the suggestion in my colleague’s reasons that apart from cases where the trustee controls the property of the cestui que trust, damages for breach of fiduciary duty should be measured by analogy to tort and contract’: Canson (n 1) 542–3. But she also said, with reference to Guerin: ‘The considerations applicable in this respect to breach of fiduciary duty are more analogous to deceit than negligence or breach of contract’: Canson (n 1) 552. Deceit is a common law tort, so if the distinction is between deceit and breach of fiduciary obligation on the one hand, and breach of contract and negligence on the other, it is not a distinction between common law and equity. Similarly, McLachlin J referred to Guerin as showing that in equity, foreseeability of loss was irrelevant; but she herself noted that the same was true in the common law tort of deceit, undermining the claim that the relevant principle was one that arises only in equity. The reason that the principle is not generally applicable in negligence relates to the nature of the right that is breached. In negligence, the plaintiff typically has a right to be free of carelessly caused loss. The amount of the loss determines the extent of the defendant’s wrongful act; this is what is meant when it is said that ‘damage is the gist of negligence’. This is not true in breaches of fiduciary obligation, but nor is it true in deceit or in conversion or even in breach of contract. In all those situations, the question whether a wrongful act has been committed is analytically distinct from the question of the extent of the

376

Smith

C.

Conclusion

There are, of course, important differences between the common law and equity.37 It is not clear, however, that reaching a decision in Canson required any complicated diversion through the question whether law and equity are now fused. The principles by which money claims are measured are different in different cases. The differences, however, do not seem to arise out of an opposition between common law and equity. There is a crucial distinction between cases in which the plaintiff claims a loss caused by the defendant’s breach, and cases in which the plaintiff seeks to force the defendant to perform his primary duty, whether specifically or by a money substitute. There are also some cases in which the ordinary burden of proof is reversed, and evidentiary difficulties are resolved against the one who wrongfully created them. Michael Bryan is a master of equitable doctrine. He is also a leader in showing us the myriad ways in which the common law and equity can interact, without irreparable injury and indeed with fruitful consequences for the betterment of the legal system as a whole.38 My hope is that the modest analysis in this paper inscribes itself in that tradition. Good legal doctrine, just like a good idea, defies not only physical distance but also jurisdictional boundaries.

37

38

loss caused. We can decide that a wrong has been committed, and then we may, in assessing loss, impose a presumption or reverse the burden of proof. But in negligence, there is generally a wrong only insofar as loss has been suffered. The plaintiff must therefore prove the extent of the loss without the aid of any presumption, because until the loss is proved, no wrong has been established. For one attempt to say what they are, see L Smith, ‘Fusion and Tradition’ in S Degeling and J Edelman (eds), Equity in Commercial Law (Lawbook Co, Sydney 2005) 19. To mention three prominent examples: M Bryan, ‘Recovering Misdirected Money from Banks: Ministerial Receipt at Law and in Equity’ in F Rose (ed), Restitution and Banking Law (Mansfield Press, Oxford 1998); M Bryan, ‘Unjust Enrichment and Unconscionability in Australia: A False Dichotomy?’ in J Neyers, M McInnes and S Pitel (eds), Understanding Unjust Enrichment (Hart Publishing, Oxford 2004); M Bryan, ‘The Liability of the Recipient: Restitution at Common Law or Wrongdoing in Equity?’ in S Degeling and J Edelman (eds), Equity in Commercial Law (Lawbook Co, Sydney 2005).

17 Substitutability and disgorgement damages in contract K aty Barnett *

The principles governing the award of disgorgement damages for breach of contract remain opaque. In the leading judgment in Attorney-General v Blake,1 Lord Nicholls proposed a ‘legitimate interest’ test for determining when a breach of contract would give rise to an account of profits. However, continuing uncertainty about what constitutes a legitimate interest has made the test notoriously difficult to apply. In that context, Lord Steyn’s remark, that ‘[e]xceptions to the general principle that there is no remedy for disgorgement of profits against a contract breaker are best hammered out on the anvil of concrete cases’,2 simply highlights the need for concrete criteria to guide the enquiry. The fact remains that, nine years after Blake was decided, and notwithstanding numerous cases addressing the question, there is no settled judicial approach as to when disgorgement of profits will be awarded for breach of contract. This chapter suggests that the concept of ‘substitutability’ is an important key to the enquiry which must be made by courts. Substitutability is already a criterion for the award of specific relief. But the way in which substitutability is applied to determine a plaintiff ’s right to disgorgement in different contexts needs to be nuanced. This chapter explains that, for what are here called the ‘second sale’ cases, the central question is whether the subject matter of the contract was substitutable. However, the chapter goes on to explain that for the so-called ‘agency problem’ cases, substitutability is not the only factor, although it remains relevant. The plaintiff *

Th is paper is dedicated to my friend, teacher, mentor and thesis supervisor, Michael Bryan, without whose support I would not have undertaken postgraduate studies. Special thanks to Robert Chambers, Michael Bryan, Andrew Robertson, James Edelman and the editors for their comments on earlier draft s of this paper. Any errors, of course, remain my own.

1

[2001] 1 AC 268 (‘Blake’).

2

Ibid 291.

377

378

Barnett

must also have reposed trust in the defendant, or there must be another public policy reason for the contract to be effected by an award of disgorgement damages. These criteria suggest an important overlap between the award of disgorgement damages for breach of negative contractual covenants and account of profits for breach of fiduciary duty.

A. Substitutability: a key to determining liability for disgorgement damages Substitutability is central to the justification of specific performance of contracts. Specific relief will be ordered in circumstances where the plaintiff would be unable (or would find it very difficult) to procure a substitute performance.3 Because the plaintiff will suffer a non-compensable loss as a result of the defendant’s non-performance, the plaintiff is justified in compelling the defendant to perform the contract. Various commentators have noted that if specific relief was or ought to have been available to a plaintiff in a contract claim, but is no longer available, it is likely that the plaintiff may be able to seek disgorgement damages.4 Disgorgement is awarded in lieu of performance if the promisee would have been or was awarded specific relief before the promisor put the remedy out of the promisee’s reach. 5 A similar analysis by Robert Stevens argues that damages are awarded as a substitute for a right of which a person has been deprived.6 Where the promisor has deprived the promisee of performance and made a profit thereby, it is argued that the ‘next best’ solution is to cause the defendant to disgorge his gains. 3 4

5 6

Adderley v Dixon (1824) 1 Sim & St 607, 610; 57 ER 239, 240 (‘Adderley ’). SM Waddams, ‘Restitution as Part of Contract Law’ in A Burrows (ed), Essays on the Law of Restitution (Clarendon Press, Oxford 1991) 197; J Edelman, Gain-Based Damages: Contract, Tort, Equity and Intellectual Property (Hart Publishing, Oxford 2002) 152−5; P Benson, ‘Disgorgement for Breach of Contract and Corrective Justice: An Analysis in Outline’ in JW Neyers, M McInnes and SGA Pitel (eds), Understanding Unjust Enrichment (Hart Publishing, Oxford 2004) 327−30; P Jaffey, ‘Disgorgement and “Licence Fee Damages” in Contract’ (2004) 20 JCL 1, 10; MA Eisenberg, ‘The Disgorgement Interest in Contract Law’ (2006) 105 Mich L Rev 559, 582; R Cunnington, ‘The Measure and Availability of Gain-Based Damages for Breach of Contract’ in R Cunnington and D Saidov (eds), Contract Damages: Domestic and International Perspectives (Hart Publishing, Oxford 2008) 205−42; R Cunnington, ‘The Inadequacy of Damages as a Remedy for Breach of Contract’ in CEF Rickett (ed), Justifying Private Law Remedies (Hart Publishing, Oxford 2008) 115−45. Eisenberg (n 4) 584. R Stevens, Torts and Rights (Oxford University Press, Oxford 2007) 60.

Substitutability and disgorgement damages

379

These analyses all accept that disgorgement damages should only be ordered when: (1) damages are inadequate to compensate for breach; (2) specific relief is no longer available; and (3) the defendant has made a profit from breaching the contract. Disgorgement damages are a tertiary remedy, only available when the secondary remedy of specific relief is unavailable. It is also widely accepted that disgorgement damages should be available where the contractual relationship involves a concurrent fiduciary relationship.7 The principle of substitutability plays a key role in determining when damages are inadequate such that specific relief could, in principle, be available, and hence disgorgement damages in cases where specific relief is not, in fact, available. However, although substitutability helps establish whether disgorgement damages should be available for breach of contract, the thesis of this chapter is that it needs to be nuanced and its role further clarified. To this end, the case law can be broken down into two categories of cases where disgorgement damages may be available. (1) ‘Second sale’ cases. Alice contracts with Boris, but Boris breaches his contract with Alice and sells to Conrad for a profit. Typically, the contract between Alice and Boris is no longer specifically enforceable but there is a profit for Boris to disgorge. (2) ‘Agency problem’ cases.8 Boris promises Alice he will not do a specific thing which relates to Alice’s best interests, but Boris then breaches the contract and goes ahead and does the very thing which he has contracted not to do, making a profit as a consequence. The chapter argues that, in both scenarios, some kind of advertent conduct is necessary in the context of breach of contract. This is because of the punitive and deterrent rationales behind disgorgement damages. There must be a conscious or advertent indifference to the rights of the plaintiff for the punishment to be deserved.9 Further, the deterrence aspect seems more appropriate and proportionate if the wrongful actions are conscious and advertent. Substitutability is important in this context in establishing the blameworthiness of a defendant’s conduct, as it helps to ascertain when it is 7 8

9

Edelman (n 4) 152–5. ‘Agency’ in this article is used in an economic sense rather than the legal sense. Th is will be discussed in further detail in Part C. B Chapman and M Trebilcock, ‘Punitive Damages: Divergence in Search of a Rationale’ (1989) 40 Ala L Rev 741, 780–3. Cf JH Dawson, ‘Restitution Without Enrichment’ (1981) 61 B U L Rev 563, 614.

380

Barnett

appropriate from a punitive and deterrent perspective to impose disgorgement damages. Justice Chapman and Michael Trebilcock have argued that, ordinarily, remedies which exact punishment and deterrence are not appropriate for breach of contract, even if the breach is intentional.10 The breaching party is not denying the relevance of the plaintiff ’s rights; rather he is prepared to pay damages flowing from that breach if proven.11 However, the counter to this is that if a substitute performance cannot be procured, damages will be inadequate, and the defendant’s conduct becomes a denial of the plaintiff ’s rights. If the subject matter of a contract is unique, the promisor’s conduct is blameworthy because the promisee will be unable to procure a substitute performance from elsewhere. In such contracts, it is also appropriate that promisors should be deterred from breaching the contract and depriving the promisee of performance. On the other hand, if a performance is substitutable, then disgorgement damages should not be awarded, even if the breach is entirely advertent.12 In this sense, as will be discussed in the conclusion to the next section, substitutability leaves open the possibility of ‘efficient breach’.

B.

Substitutability and second sale cases

The second sale cases occur when a vendor sells property, goods or services to a purchaser, but then breaches his contract with the purchaser to sell the item more profitably to a third party.13 Whether or not disgorgement damages will be available depends on where the subject matter of the contract sits on the spectrum: from fungible property, goods or services at one end (which a plaintiff can easily procure from elsewhere) to unique property, goods or services at the other end (which cannot be procured from elsewhere).14 Looking at the categories of land, chattels and goods, shares and stock, and services in turn, the chapter will first consider the way in which courts have established whether or not the particular subject matter of a contract is substitutable for the purposes of awarding specific relief, and then whether or not courts have been prepared to order disgorgement damages. 10 13

14

11 Chapman and Trebilcock (n 9). Ibid 783. 12 Jaffey (n 4) 7−9. The second sale cases encompass all kinds of benefits transferrable under contract, including land, goods, chattels and services. H Dagan, ‘Restitutionary Damages for Breach of Contract’ (2000) 1 Theoretical Inquiries in Law 115, 134–36; S Thel and P Siegelman, ‘The Role of Disgorgement in Contract Law’ (Fordham Legal Studies Research Paper No 1353402 2009) 21 .

Substitutability and disgorgement damages

1.

381

Contracts for sale of land

Land has been ‘accorded a unique status as a symbol of the self and as a resource closely linked to personal freedom, rank and power’.15 It has a ‘peculiar and special value’, and therefore is intrinsically nonsubstitutable. Specific performance of contracts for sale of land will usually be ordered.16 However, some doubt has been cast over the special status of land by a majority of the Canadian Supreme Court in Semelhago v Paramadevan.17 Sopinka J, in delivering the majority judgment, said in obiter that developments in modern real estate meant every piece of real estate was no longer unique.18 His Honour concluded: Specific performance should, therefore, not be granted as a matter of course absent evidence that the property is unique to the extent that its substitute would not be readily available19

As Robert Chambers has argued, this misunderstands the reasoning behind specific performance, because the purchaser may be able to fi nd property with very similar features, but will not be able to obtain exactly the same land from another vendor. 20 Damages cannot be an adequate response where a plaintiff is unable to get a full substitute for the benefit for which she bargained. Semelhago v Paramadevan is contradicted in Australia by Barwick CJ’s dicta in Pianta v National Finance & Trustees Ltd.21 Lake v Bayliss22 and Bunny Industries Ltd v FSW Enterprises Pty Ltd 23 suggest that courts have long been willing effectively to award 15 16

17

18 20

21 22 23

Dagan (n 14) 138. Adderley (n 3); Dougan v Ley (1946) 71 CLR 142 (‘Dougan v Ley ’). Specific performance of a contract for sale of land is nevertheless subject to discretionary considerations: see eg, Patel v Ali [1984] 1 Ch 283 (hardship on the defendant); Summers v Cocks (1927) 40 CLR 321 (lack of clean hands of the plaintiff ). [1996] 2 SCR 415, 136 DLR (4th) 1 (‘Semelhago v Paramadevan’). Note that La Forest J dissented on that issue, saying (at 2): ‘However, given the assumption under which the case was argued, I prefer not to deal with the circumstances giving rise to entitlement to specific performance or generally the interpretation that should be given to the legislation authorizing the award of damages in lieu of specific performance. In considering modification to existing law, both these interdependent factors may well require examination, and the arguments in this case were not made in those terms.’ Ibid 10. 19 Ibid. R Chambers, ‘The Importance of Specific Performance’ in S Degeling and J Edelman (eds), Equity in Commercial Law (Lawbook Co, Sydney 2005) 431. Cf W Swadling, ‘The Vendor-Purchaser Constructive Trust’ in Degeling and Edelman (above) 463. (1964) 180 CLR 146, 151 (Barwick CJ). [1974] 1 WLR 1073 (‘Lake v Bayliss’) cited by Lord Nicholls in Blake (n 1) 284. [1982] Qd R 712 (‘Bunny Industries’).

382

Barnett

disgorgement damages for a breach of a contract to sell land, well before Blake. Th is is unsurprising, given the intrinsically non-substitutable nature of land. In each case, the vendor breached the contract with the initial purchaser and sold the land for a profit to a third party. In Lake v Bayliss, the matter was further complicated because the vendor contracted to convey the land to the purchaser in return for the purchaser withdrawing two legal claims against her. In both cases, the vendor was said to be a trustee of the proceeds of sale and had to account for them (subject to the purchaser providing the requisite consideration).24 The effect was to force the vendor to disgorge his or her profits to the purchaser. The result in these cases has been justified by reference to the constructive trust which is said to arise upon execution of the contract of sale and before settlement occurs. But the trust analogy has always been unsatisfactory, as noted in Lysaght v Edwards.25 Sir Thomas Plumer MR in Wall v Bright 26 described the vendor as ‘in progress towards’ bare trusteeship. A vendor will only become a bare trustee when the whole of the purchase moneys are paid and the vendor is bound by contract to convey. In any case, the Australian High Court has thrown the constructive trust analysis into doubt in Tanwar Enterprises Pty Ltd v Cauchi.27 US courts have also rejected the constructive trust analysis.28 The constructive trust analysis suffers particular problems in the second sale cases, because it is said to arise from the specifically enforceable nature of the contract for sale of land. In Lake v Bayliss and Bunny Industries, the contracts of sale were no longer actually specifically enforceable, because the land had been conveyed to a third party. Nonetheless, in both cases, the courts found that the vendor was subject to fiduciary duties arising from the constructive trust. In an attempt to bypass the difficulties of the constructive trust analysis, American scholars have categorized the remedies in the second sale cases as expectation damages. 29 There is said to be an implied term in contracts of sale that the vendor will not seek out or accept more profitable offers, and the buyer is said to pay an implicit premium for that promise. It is argued that when a vendor is forced to disgorge his profits in 24 25

26 28 29

Lake v Bayliss (n 22) 1076; Bunny Industries (n 23) 717−19. (1876) 2 Ch D 499, 510. See also Holroyd v Marshall (1862) 10 HLC 191, 11 ER 999; Swadling (n 20). (1820) 1 Jac & W 494, 503; 37 ER 456, 459. 27 (2001) 217 CLR 315 (‘Tanwar ’). Laurin v DeCarolis Construction Co, 363 NE 2d 675 (Mass 1977). EA Farnsworth, ‘Your Loss or My Gain? The Dilemma of the Disgorgement Principle in Breach of Contract’ (1985) 94 Yale LJ 1339, 1364−5; Eisenberg (n 4) 582.

Substitutability and disgorgement damages

383

a second sale scenario, this is a form of expectation damages, because the purchaser has paid for the right to any profit gained by the vendor pursuant to the implied term.30 The difficulty with this analysis is that, like the constructive trust analysis, it involves a fiction: namely, that if the vendor sold to someone else, the parties agreed the purchaser would be entitled to the profit made by the vendor. This chapter suggests that it is better to avoid such fictions altogether. In Blake, Lord Nicholls suggested that Lake v Bayliss should be seen as a case of disgorgement of profits for breach of contract.31 The second sale cases make much more sense if one sees them in this light, and the constructive trust analysis is abandoned once the land has been conveyed to a third party. Further, this avoids unduly stretching the defi nition of expectation damages by importing fictions about implied clauses.

2.

Contracts for sale of goods or chattels

Where contracts for sale of goods or chattels involve a good or chattel that can easily be obtained elsewhere, the general principle is that damages will be adequate compensation for non-performance. 32 However, a good or chattel may be non-substitutable if it is rare,33 or it would be very difficult for a plaintiff to procure an equivalent substitute performance because the defendant is particularly well situated to meet the plaintiff ’s needs.34 Sometimes, there may be an instalment contract to supply goods and services over a long period of time.35 This is not substitutable because a complex contract cannot be replaced with an identical deal. In some circumstances, although a good or chattel is generally fungible, it 30 32

33

34

35

Eisenberg (n 4) 582. 31 Blake (n 1) 284. Adderley (n 3) 610; 240. However, Thel and Siegelman (n 14) 9−15 argue that even where compensatory damages are concerned, the market damage measure means disgorgement is effectively available if the market value is greater than the original contract value – see eg, Goods Act 1958 (Vic) s 56(3) for an Australian example. Falcke v Gray (1859) 4 Drew 651, 62 ER 250; Burr v Bloomburg, 101 NJ Eq 615, 318 A 876 (1927); Dougan v Ley (n 16); Aristoc Industries Pty Ltd v R A Wenham (Builders) Pty Ltd [1965] NSWR 581. See eg, North v Great Northern Railway Company (1860) 2 Giff 64, 66 ER 28; Sky Petroleum Ltd v VIP Petroleum Ltd [1974] 1 WLR 577 (‘Sky Petroleum’). Buxton v Lister (1746) 3 Atk 383, 26 ER 1020; Adderley (n 3); Eastern Rolling Mill v Michlovitz, 157 Md 51, 145 A 378 (1929); Sky Petroleum (n 34); Thomas Borthwick v South Otago Freezing [1978] 1 NZLR 538. Cf Fothergill v Rowland (1873) LR 17 Eq 132, 140; Laclede Gas Co v Amoco Oil Co, 845 F 2d 76, 80 (4th Cir, 1975).

384

Barnett

may be unavailable because of particular circumstances at that time.36 For example, in Howard Perry & Co v British Railways,37 members of the National Union of Railwaymen had refused to transport steel in a gesture of solidarity with striking steelworkers. The plaintiffs were steel stockholders, and had consignments of steel waiting to be delivered in two of the defendant’s depots. The steel could not be kept for a long period of time because it would harden and become unmalleable, and would thus be unworkable. The defendants would not allow the plaintiffs to collect the steel from the depots themselves. Accordingly, the plaintiffs sought delivery up of the goods pursuant to the contract. Megarry VC explained why steel was non-substitutable in the particular circumstances: If a plaintiff can easily replace the goods detained by purchasing their equivalent on the market, then the payment of damages out of which the price of the equivalent may be paid is adequate compensation to the wronged plaintiff, and there is little or no point in making an order for the delivery of the goods. Far better to let the plaintiff fend for himself with the defendant’s money. In normal times, the steel here in dispute might indeed be in this category; but these times are not normal, and at present steel is obtainable on the market only with great difficulty, if at all. If the equivalent of what is detained is unobtainable, how can it be said that damages are an adequate remedy? They plainly are not. Mr Irvine observed that at present ‘steel is gold’, and one can see what he meant. Yet even that may not do justice to his cause, since as far as I know gold is still available on the open market to those who pay the price.38

Disgorgement damages have been awarded in Adras Building Material Ltd v Harlow & Jones GmbH,39 an Israeli case which is highly reminiscent of Howard Perry. The defendant Harlow, a German company, entered into a contract of sale with the plaintiff Adras, an Israeli company. The contract provided that the defendant would supply the plaintiff with 7,000 tons of iron at a price of 570 Deutschmarks per ton. There was a delay in delivery because of the Yom Kippur War in October 1973, but 5,025 tons were shipped to the plaintiff in early 1974. On 8 April 1974, the defendant told the plaintiff that it had to sell the remaining iron because 36

37 39

Curtice Bros v Catts, 72 NJ Eq 831, 833; 66 A 935, 936 (1907) (scarcity of tomatoes for a cannery); Sky Petroleum (n 34) (scarcity of petroleum); Eastern Air Lines v Gulf Oil Corporation, 415 F Supp 429, 442–3 (1975); Howard Perry & Co v British Railways [1980] 1 WLR 1375 (‘Howard Perry ’). Howard Perry (n 36). 38 Ibid 1383 (emphasis added). (1998) 42(1) PD 221 (‘Adras’) translated in (1995) 3 RLR 235, 271.

Substitutability and disgorgement damages

385

of high storage costs. In fact the price of iron had spiked, and the defendant profited by selling the iron to a third party in Hamburg for a price of DM804.70 per ton. The plaintiff did not obtain an alternative supply of iron and sued to recover damages for breach of contract pursuant to the Sale (International Sale of Goods) Law 1971 (Israel),40 and to recover the profit made by the defendant in respect of the sale of the remaining iron.41 A majority of the Supreme Court of Israel42 found that the plaintiff was entitled to recover the defendant’s profit. Barak J noted that the plaintiff had a right under Israeli law to specific performance, and suggested that disgorgement was appropriate because the defendant had deprived the plaintiff of its right to performance.43 It has been suggested that Adras represents a dangerously broad approach to disgorgement damages.44 The Court did not consider whether Adras could have procured a substitute performance. However, if the Court had found that the Yom Kippur War had prevented Adras from procuring a substitute performance, then the result would have been justifiable. Substitutability would have provided a coherent limitation on the Adras principle. If it is difficult to procure a substitute performance, and specific relief is no longer available, then disgorgement damages should also be available. For example in Dougan v Ley, the contract involved the transfer of a taxi licence which was scarce and difficult to acquire, but not impossible45 The plaintiff sought specific performance and succeeded in gaining it, so clearly the court regarded the benefit under the contract as non-substitutable. If for some reason specific performance was no longer available, but there was a profit from the on-sale of the taxi licence to a third party, then, in the absence of relevant defences, disgorgement damages should have been available. 40

41

42

43

44 45

Authorized English translation: Israeli Ministry of Justice, Laws of the State of Israel (Vol 25) 32. Th is statute implements the Convention Relating to a Uniform Law on the International Sale of Goods (opened for signature 1 July 1964, entered into force 18 August 1972) 834 UNTS 107 into Israeli law. In a previous hearing, the Supreme Court had held that the plaintiff had never terminated the contract, and therefore the plaintiff had failed to prove any loss: see Adras Building Material Ltd v Harlow & Jones GmbH (1983) 37(4) PD 225. Comprised of S Levin, Barak and Bach JJ. Ben Porath VP and D Levin J dissented on the basis that the property in question was non-specific. Adras (RLR) (n 39) 271 citing Rabihai v Man Shaket Ltd (in liq) (1977) 33(2) PD 281, 295. See also Contract (Remedies) Law 1970 (Israel) s 3. H Dagan, ‘The Distributive Foundation of Corrective Justice’ (1999) 98 Mich L Rev 138. Dougan v Ley (n 16) 151−2 (Dixon J), 153−4 (Williams J).

386

Barnett

3.

Contracts for shares and stock

Generally, shares are substitutable, and will be readily available on the open market at a certain price. Public shares on the open market are likely to be substitutable, and if they are, a court will not order specific performance for a contract for the sale of shares or stock.46 However, sometimes there will not be an adequate market for a particular share or stock.47 In other circumstances, the market price for shares might be uncertain or there may be a risk that requiring the plaintiff to purchase the shares with damages will prejudice the plaintiff or a third party. In these circumstances, a court will also order specific performance.48 If a second sale case arose which involved unique shares or a situation where the market price was uncertain, it is suggested that by analogy with the cases above, disgorgement damages should be available.

4.

Contracts for services

The question of the substitutability of personal services is fraught with difficulty. Courts are generally reluctant to order specific performance for contracts for services,49 on the basis that it is inappropriate to compel an unwilling defendant to maintain a continuous personal relationship with the plaintiff.50 46

47

48

49

50

Hyer v Richmond Traction Co, 168 US 471, 483 (1897); Re Schwabacher, 98 LT 127, 128 (1907) (‘Schwabacher ’); Chinn v Hochstrasser [1979] Ch 447, 470. Cud v Rutter (1719) 1 P Wms 569, 24 ER 521; Duncuft v Albrecht (1841) 12 Sim 189, 59 ER 1104; Paine v Hutchinson (1868) LR 3 Ch 388; Dougan v Ley (n 16) 151; General Securities Corporation v Welton, 223 Ala 299, 135 So 329 (1931) (‘General Securities’); Rudder v George Hudson Holdings Ltd [1972] 1 NSWLR 529; Georges v Wieland [2009] NSWSC 733 (‘Georges v Wieland ’) [17]–[25]. Schwabacher (n 46) 128; General Securities (n 47); ANZ Executors and Trustees Ltd v Humes Ltd [1990] VR 615, 630–1 (Brooking J); Georges v Wieland (n 47). Rigby v Connol (1880) 14 Ch D 482, 487 (Jessel MR) (‘Rigby ’); H W Gossard Co v Crosby, 132 Iowa 155, 170, 109 NW 483, 488−9 (1906) (‘H W Gossard Co’); J C Williamson Ltd v Lukey and Mulholland (1931) 45 CLR 282 (‘J C Williamson’) 293 (Starke J); Hogan v Tumut Shire Council (1954) 54 SR (NSW) 284 (‘Hogan’); Francis v Municipal Councillors of Kuala Lumpur [1962] 3 All ER 633 (‘Francis’); Sampson v Murray, 415 US 61, 83 (1974) (‘Sampson v Murray ’); American Law Institute, Restatement (Second) of the Law of Contracts (American Law Institute Publishers, St Paul 1981) § 367. The US position is further complicated by the Thirteenth Amendment to the Constitution, which says ‘neither slavery nor involuntary servitude’ shall exist in the US. Wolverhampton and Walsall Railway Co v London NW Rwy Co (1873) LR 16 Eq 433; Rigby (n 49) 487 (Jessel MR); H W Gossard Co (n 49) 170; 488−9; J C Williamson (n 49) 293

Substitutability and disgorgement damages

387

However, in some circumstances, a court may order an injunction to restrain a breach of a negative covenant where a defendant has agreed not to provide their services to any person other than the plaintiff, particularly where the services involved are unique. The cases involve employees such as opera singers,51 acrobats,52 sportsmen,53 actors and actresses54 and television presenters,55 all of whom provide unique services. In US cases, there is explicit consideration of the uniqueness of the services provided56 because of the way in which Lumley v Wagner57 was interpreted by US textbook writers.58 Courts effectively consider substitutability as a determinant of injunctive relief. If an employee can easily be replaced, damages will suffice, but if an employee possesses special qualities and has agreed not to move to a competitor, they will be restrained by injunction (so long as such restraint is reasonable). Sometimes it is difficult to predict when the services of an employee will be unique. In two American cases decided within days of one another,

51

52

53

54

55

56

57 58

(Starke J); Atlas Steels (Australia) Pty Ltd v Atlas Steels Ltd (1948) 49 SR (NSW) 157 (‘Atlas Steels’) 161 (Sugarman J); Hogan (n 49); Francis (n 49); Sampson v Murray (n 49) 83. Lumley v Wagner (1852) 1 De GM & G 604, 42 ER 687 (‘Lumley v Wagner ’); Duff v Russell, 14 NYS 134, 60 J & S 80 (1891); Oscar Hammerstein v Marguerite Mann, 122 NYS 276 (1910); Chapin v Powers, 73 NYS (2d) 854 (1947). John Cort v Lassard & Lucifer, 18 Ore 221, 22 P 1054 (1889) (non-unique acrobats); Keith v Kellermann, 169 F 196 (1909) (unique diver); Shubert Theatrical Co v Rath, 271 F 827, 20 ALR 846 (1921) (unique acrobats). Philadelphia Ball Club Ltd v Lajoie, 202 Pa 210, 51 A 973 (1902) (‘Philadelphia Ball Club ’); American Baseball and Athletic Association v Harper, 54 Cent L J 449 (1902) (‘American Baseball ’) (baseballers); Hawthorn Football Club Ltd v Harding [1988] VR 49 (‘Harding ’); Buckenara v Hawthorn Football Club Ltd [1988] VR 39 (‘Buckenara’) (AFL footballers); Bulldogs Rugby League Club v Williams [2008] NSWSC 822 (‘Williams’) (ARL footballers). Montague v Flockton (1873) 16 LR Eq 189; Daly v Smith (1874) 49 How Pr 150; Carter v Ferguson, 12 NYS 580, 58 Hun 569 (1890); Grimston v Cuningham (1893) 1 QB 125 (‘Grimston’); Warner Brothers Pictures Inc v Nelson [1937] 1 KB 209 (‘Nelson’); Marco Productions Ltd v Pagola [1945] 1 KB 111 (‘Marco Productions’); Warner Brothers Pictures Inc v Ingolia [1966] NSWR 988 (‘Ingolia’). Evening News Association v Peterson, 477 F Supp 77 (1979); American Broadcasting Company v Wolf, 52 NY (2d) 394, 420 NE (2d) 363, 438 NYS (2d) 482 (1981); Curro v Beyond Productions Pty Ltd (1993) 30 NSWLR 337 (‘Curro’). See eg, Bethlehem Engineering Export Co v Christie, 105 F (2d) 933, 935 (1939) (Learned Hand J). Lumley v Wagner (n 51). JN Pomeroy, A Treatise on Equity Jurisprudence (Vol 4) (4th edn Bancroft-Whitney Company, San Francisco 1919) §1343, 3218−16. First edition cited with approval in Philadelphia Ball Club (n 53) 216; 973. See also JN Pomeroy, Treatise on the Specific Performance of Contracts (3rd edn Banks & Company, Albany 1926) §24, 75–7. Earlier edition also cited with approval in Philadelphia Ball Club (n 53) 216; 973.

388

Barnett

both of which involved professional baseball players, 59 the result reached by the respective courts were diametrically opposed, so that it has been said: The one has a solemn judicial fi nding that he is a person of such attainments in his profession that his position cannot possibly be fi lled. The other is decreed to be simply an ordinary person, whose place can easily be fi lled, and whose absence from his post can result in no particular or irreparable injury. Lajoie’s professional reputation is established and enhanced at the cost of his freedom, while Harper gets his freedom at the expense of his professional reputation.60

It seems that in the US, courts are more likely to restrain employees with a unique public persona than they are to restrain salespersons and managers.61 By contrast, Australian and English courts do not explicitly consider the unique nature of the service provided,62 although some Australian cases say that the principle in Lumley v Wagner applies to contracts for ‘special services’, inferring that the court is cognizant of the quality of the services involved.63 Nevertheless, analysis of the case law suggests that substitutability still underlies the reasoning of courts. Actors, footballers, newsreaders and the like will be restrained from breaching a promise not to work for a competitor, so long as the restraint is reasonable and not too long in duration.64 Managers,65 travelling salespersons,66 porters,67 or other ordinary employees68 are far less likely to be restrained from working for a competitor. There are instances where courts will restrain an ordinary employee from working for a competitor for a 59

60 61

62

63 64

65

66 67 68

Philadelphia Ball Club (n 53) (injunction granted); American Baseball (n 53) (injunction refused). Note to Philadelphia Ball Club Ltd v Lajoie, 90 American State Rep 627, 649 (1902). HW Gossard Co (n 49); Clark Paper & Manufacturing Co v Stenacher, 236 NY 312, 140 NE 708 (1923). The exception to this is Kekewich J’s decision at fi rst instance in Whitwood Chemical Company v Hardman (‘Whitwood ’) reproduced at [1891] 2 Ch 416, 419–23. Atlas Steels (n 50) 164, 165; Curro (n 55) 347; Williams (n 53) [53]−[54]. Grimston (n 54); Nelson (n 54); Marco Productions (n 54); Ingolia (n 54); Harding (n 53); Buckenara (n 53); Curro (n 55); Williams (n 53). Whitwood (n 62); Davis v Foreman [1894] 3 Ch 654; Mortimer v Beckett (1920) 1 Ch 571; Page One Records v Britton [1968] 1 WLR 157 (‘Page One Records’); Warren v Mendy [1989] 1 WLR 853 (‘Warren v Mendy ’). Ehrman v Bartholomew [1898] 1 Ch 671 (‘Ehrman’). Ryan v Mutual Tontine Westminster Chambers Association [1893] 1 Ch 116. Rely-A-Bell Burglar and Fire Alarm Company Ltd v Eisler [1926] 1 Ch 609 (‘Rely-A-Bell ’); Heine Bros (Aust) Pty Ltd v Forrest [1963] VR 383 (‘Heine Bros’).

Substitutability and disgorgement damages

389

limited time, so long as the restriction does not restrain the employee from any employment.69 Clearly substitutability is not the only issue at play in these cases. First, courts do not wish to force people to work in jobs where they are unhappy or if they could get a better opportunity elsewhere. Second, using the facts of Curro v Beyond Productions Pty Ltd 70 as an illustration, if a newsreader is prevented from working for another company, there is still a vast range of ordinary professions in which she can work. However, if Ms Curro had been a woman with limited skills, she would have found it far more difficult if the court had restrained her from working as a waitress, making her effectively unemployable. It follows that if a restriction contained in a covenant is excessively severe, courts will refuse to enforce it or limit its operation.71 Similarly, if relations between the parties have broken down and it is simply not feasible to require co-operation,72 courts will also refuse to award an injunction forcing the parties to work together. The common law doctrine of restraint of trade also informs the attitude of the courts. Under this doctrine, contractual obligations restricting someone’s ability to trade are void by reason of illegality unless they are reasonable and in the interests of both contracting parties and of the public at large.73 Courts are particularly concerned to safeguard the right of individuals to work in their chosen trade or profession without unjust restriction, and thus they will scrutinize restraints on employment more closely.74 Generally, disgorgement damages have not been thought to be available for breach of a contract for services.75 However, Christopher Wonnell has argued that by removing remedies for employers, employees may be 69

70 71

72 73

74

75

William Robinson & Co v Heuer [1898] 2 Ch 451 (‘William Robinson’); Chapman v Westerby [1913] WN 277 (‘Chapman’). Curro (n 55). Ehrman (n 66); Heine Bros (n 68); William Robinson (n 69); Whitwood (n 62) and Chapman (n 69). Cf Rely-A-Bell (n 68). Page One Records (n 65); Warren v Mendy (n 65). Bacchus Marsh Concentrated Milk Co Ltd v Joseph Nathan & Co Ltd (in liq) (1919) 26 CLR 410; Esso Petroleum Co Ltd v Harper’s Garage (Stourport) Ltd [1968] AC 269; Amoco Australia Pty Ltd v Rocca Bros Motor Engineering Co Pty Ltd [1975] AC 561. See eg, Lindner v Murdock’s Garage (1950) 83 CLR 628, 633; Butt v Long (1953) 88 CLR 476; Minnesota Mining & Manufacturing (Australia) Pty Ltd v Richards [1963] NSWR 1613; Buckley v Tutty (1971) 125 CLR 353; Forbes v NSW Trotting Club Ltd (1979) 143 CLR 242; Geraghty v Minter (1979) 142 CLR 177; Hughes v Western Australian Cricket Association (Inc) (1986) 69 CLR 660; Rentokil Pty Ltd v Lee (1995) 66 SASR 301. Cf Curro (n 55) 346. James Edelman has suggested that disgorgement damages ought to have been available in Lumley v Wagner (n 51) had Ms Wagner profited as a result of her breach: Edelman (n 4) 158.

390

Barnett

disempowered, and that the ‘enforced servitude’ objection specifically to performing contracts for services should be thoroughly questioned.76 He argues that disgorgement damages could be a way of solving the dilemma: To isolate and safeguard only an employee’s interest in controlling her human relationships, the law should refuse an injunction against any employee who is willing to disgorge any economic profit from her breach of contract. Courts could properly enjoin an employee who could not demonstrate improper conduct by her employer, and who would not disgorge the economic profit from her breach, from working for a competitor.77

Accordingly, it is arguable that disgorgement damages should be paid by breaching employees to enable them to leave the service of employers for whom they no longer wish to work. Disgorgement damages better balance the competing interests of the parties than an injunction: on the one hand, they recognize the plaintiff ’s interest in the defendant’s unique performance, but on the other hand, they allow the defendant to get another job.78 In addition, the restraint of trade concerns which may arise when an injunction is awarded do not arise for disgorgement damages.

5.

Second sale cases and efficient breach

It can be seen that substitutability helps to establish when disgorgement damages should be available for second sale cases, where a promisor breaches a contract to sell at a profit to a third party. Substitutability also helps to clarify when a promisor should be allowed to ‘efficiently breach’ in a second sale scenario. Efficient breach theory argues that a promisor should be able to breach his contract and enter into a more profitable contract with a third party.79 This is said to maximize efficiency in the marketplace. Clearly courts are concerned with such issues – the common law restraint of trade doctrine, for example, seeks to 76 77 78

79

CT Wonnell, ‘The Contractual Disempowerment of Employees’ (1993) 46 Stan L Rev 87. Ibid 136 (emphasis added). Note Williams (n 53), where an Australian Rugby League player, Sonny Bill Williams, sought to play for a French Rugby Union club, Toulon, in breach of his five-year contract to play with the Bulldogs Rugby League Club Ltd. The Bulldogs were successful in obtaining an injunction to restrain Williams from playing for Toulon, but released Williams after Toulon paid a ‘transfer fee’ of £300,000—effectively a partial disgorgement of profits by agreement. See . See eg, R Posner, Economic Analysis of Law (5th edn Aspen Law & Business, New York 1998) 131–9.

Substitutability and disgorgement damages

391

maximize efficiency and competition in the marketplace. Equally clearly, if one accepts efficient breach without qualification, it is prima facie problematic for the second sale cases, which involve precisely this scenario. Disgorgement damages for breach of contract have been criticized by supporters of efficient breach because they are said to remove the incentive for the promisor to breach his contract and enter into a more efficient contract,80 so that the only way the promisor can extricate himself from the contract is to negotiate a release from the contract. This is said to create a ‘bilateral monopoly’ where the cost of negotiation between promisor and promisee is prohibitively high.81 First, it is important to note that the assumptions which underlie efficient breach have been questioned in certain important respects which will not be canvassed in detail here.82 However, even if one accepts the fundamental premise, there will only be a bilateral monopoly where the subject matter of the contract is not available on the market.83 Let us say, for example, Alice has made a contract with Boris which says that Boris will supply her with 2,000 widgets. If widgets are incredibly rare, and Boris is the only supplier in the world market, Alice will not be able to procure a substitute performance. This means that there will be a bilateral monopoly if Boris wants to negotiate with Alice to get out of the contract, but in any case, it is likely that a court would not let Boris get out of the contract. Substitutability determines that this is a case for specific performance.

80

81

82

83

See D Campbell, ‘The Treatment of Teacher v Calder in AG v Blake ’ (2002) 65 MLR 256; D Campbell and D Harris ‘In Defence of Breach: A Critique of Restitution and the Performance Interest’ (2002) 22 JLS 208; D Campbell, ‘The Extinguishing of Contract (2004) 67 MLR 818. See also S de Long, ‘The Efficiency of a Disgorgement as a Remedy for Breach of Contract’ (1989) 22 Ind L Rev 737, who accepts efficient breach theory, but recognizes that disgorgement may be economically efficient in some circumstances. Posner himself is prepared to allow breach where it is ‘opportunistic’: Posner (n 79) 119. See R O’Dair, ‘Restitutionary Damages for Breach of Contract and the Theory of Efficient Breach: Some Reflections’ (1993) 46 CLP 113, 131; LD Smith, ‘Disgorgement of the Profits of Breach of Contract: Property, Contract and “Efficient Breach”’ (1995) 24 CBLJ 121, 134–5; Thel and Siegelman (n 14) 20. See IR Macneil, ‘Efficient Breach of Contract: Circles in the Sky’ (1982) 68 Va L Rev 947; D Friedmann, ‘The Efficient Breach Fallacy’ (1989) 18 JLS 1; Smith (n 81); P Jaffey, ‘Efficiency, Disgorgement and Reliance in Contract: A Comment On Campbell and Harris’ (2002) 22 LS 570; M Eisenberg, ‘Actual and Virtual Specific Performance, the Theory of Efficient Breach, and the Indifference Principle in Contract Law’ (2005) 93 California LR 975, 989–96; R Cunnington, ‘Should Punitive Damages Be Part of the Judicial Arsenal in Contract Cases?’ (2006) 26 LS 369, 384–9; Eisenberg (n 4) 571–2. Thel and Siegelman (n 14) 20.

392

Barnett

By contrast, if Boris wants to breach his contract with Alice, and she can easily procure the widgets from elsewhere, there will not be a bilateral monopoly, and Boris will be free to breach or to negotiate a release. Therefore, substitutability helps to provide a more nuanced version of efficient breach theory, having regard to the scarcity or otherwise of the subject matter of the contract. This chapter now turns to the criteria for award of disgorgement damages for breach of negative covenant and breach of fiduciary duty in the so-called ‘agency problem’ cases. As will be seen, there is some overlap with the second sale cases, but the approach does need to be nuanced because of the particular policy considerations involved.

C. Substitutability and the agency problem cases 1.

The overlap of breach of fiduciary duty and injunctions to restrain breach of negative covenant

The contractual rights granted by negative covenants84 and those entailed in cases which involve fiduciary duties could be said to be intrinsically non-substitutable because they are intangible benefits which cannot be bought or sold in any market.85 Thus, these cases are broadly akin to the second sale cases where the defendant has put specific performance out of the reach of the plaintiff. Substitutability also helps explain breach of negative covenant cases where disgorgement is awarded as a surrogate for expectation damages.86 Nonetheless, substitutability does not provide a complete explanation of the outcome of the negative covenant cases. If substitutability were the sole criterion, then every breach of negative covenant would give rise to disgorgement damages. However, this paper will suggest that something more is needed in the negative covenant cases. We need to compare breach of negative covenant cases with those cases involving concurrent breaches of fiduciary duty and contract in order to provide a more complete analysis. There is a kinship between cases involving breaches of negative covenant and cases involving concurrent breaches of fiduciary duty and contract. 84

85 86

It should be noted that the personal services cases are also negative covenant cases, but they will not be considered in this section as they fit better with the second sale cases. The negative covenant cases overlap with other areas, and thus have always been difficult to categorize. D Laycock, ‘The Death of the Irreparable Injury Rule’ (1990) 103 Harv L Rev 687, 707–8. Eisenberg (n 4) 587–8.

Substitutability and disgorgement damages

393

This was adverted to by Lord Nicholls in Blake when he described George Blake’s contractual obligations as ‘closely akin to a fiduciary obligation’.87 Whether Boris is subject to a fiduciary duty or a negative covenant, he contracts with Alice not to do a specific thing which relates to Alice’s best interests, but Boris then breaches the contract and goes ahead and does the very thing which he has contracted not to do, and profits thereby. In the case of fiduciary duties Boris is obliged not to allow his personal interests to conflict with his duty to serve Alice’s interests and not to make an unauthorized or secret profit. In the case of a negative covenant, Boris’ obligation is not to do the particular thing specified in the negative covenant. In addition, however, it will be argued that where trust is conferred on Boris, he also has an obligation not to profit, and if he does profit, that profit should be stripped from him. The common factor between the breach of fiduciary duty cases and the negative covenant cases is the trust conferred on the promisor. Both kinds of contract involve what Steve Thel and Peter Siegelman call ‘the agency problem’.88 ‘Agency’ in this context refers not to the legal concept of agency, but the economic concept of principal-agent. Th is form of analysis attempts to ascertain how a principal can design a contract which motivates another individual, his agent, to act in the principal’s interests.89 An agency problem arises when there is information asymmetry concerning what action the agent either has undertaken or should undertake. Agency problems can create a situation of ‘moral hazard’ because the party that is insulated from risk generally has more information about its actions and intentions than the party paying for the negative consequences of the risk. Part of the difficulty in both fiduciary duty cases and negative covenant cases is the difficulty the promisee has in monitoring the promisor’s performance. The promisor can breach before the promisee has a chance to issue an injunction, and the breach cannot be undone. The promisor is not the one who suffers from the breach; indeed in these cases, he profits as a result. Therefore, addressing the agency problem means providing incentives for the agent to behave in accordance with the principal’s wishes. The law of contract does not presently provide adequate incentives for a promisor in a negative covenant situation to perform the promise. If compensatory damages are inadequate and specific performance is no 87 89

Blake (n 1) 287. 88 Thel and Siegelman (n 14) 25. JE Stiglitz, ‘Principal and Agent (ii)’ in SN Durlauf and LE Blume (eds), The New Palgrave Dictionary of Economics (2nd edn Palgrave Macmillan, London 2008).

394

Barnett

longer available, the promisor has discretion to breach which he should not have. In a situation like Blake, compensatory damages were inadequate. Blake, the ‘notorious traitor’, published an unauthorized autobiography in breach of his contract, and without the consent of the British government. His actions had not caused a pecuniary loss to the Crown which could be compensated. Nor could the government restrain George Blake from publishing his book; it had already occurred. In addition, the purpose of the contract was not to make a profit, but to protect the government, and the case involved a relationship of trust and confidence. It is appropriate to have incentives to promote performance on the part of promisors in these kinds of contracts. This conclusion is not without precedent. As Robert Cooter and Bradley J Freedman have argued, the agency problem in breach of fiduciary duty has been dealt with by the availability of profit stripping remedies.90 The chapter first explains the role of substitutability in breach of negative covenant cases, and then turns to explore the agency problem in more detail.

2.

Substitutability in breach of negative covenant cases

Although the primary focus of the negative covenant cases is the agency problem, substitutability is still a relevant factor, particularly where disgorgement is awarded as a surrogate for expectation damages.91 Plaintiffs will wish to claim gain-based damages in circumstances where the defendant has benefited in a measurable way and has caused a loss which is speculative or hard to quantify.92 The kinds of case in which it is typically difficult to measure the losses of the plaintiff are intellectual property infringement cases, in which it is very difficult to ascertain the plaintiff ’s losses resulting from the infringement, but the sales of the defendant are clear and quantifiable. Two of the post-Blake cases could be said to fit within this scenario: World Wide Fund for Nature v World Wrestling Federation Entertainment Inc93 and Experience Hendrix LLC v 90

91 92 93

R Cooter and BJ Freedman, ‘The Fiduciary Relationship: Its Economic Character and Legal Consequences’ (1991) 66 NYULR 1045, 1047. Eisenberg (n 4) 587–8. D Laycock, ‘The Scope and Significance of Restitution’ (1989) 67 Tex L Rev 1277, 1287. [2001] EWHC Ch 482 (‘WWF’ ). Although note the dismissive comments of Jacobs J at [62]: ‘The fact that [the contract] relates to the use of initials and so is a bit “trademarkish” or “IPish” does not mean the common law should provide [disgorgement damages].’

Substitutability and disgorgement damages

395

PPX Enterprises Inc.94 Each case involved a settlement contract in which the defendant had breached an agreement not to use certain intellectual property belonging to the plaintiff (the initials ‘WWF’ in the first case and the recordings of Jimi Hendrix in the second case). In both cases, it was very hard for the court to ascertain the losses caused by the breach, but the profits were clear. The nature of the breach of negative covenant cases is such that we will never know what would have happened had the defendant not breached the covenant, and therefore, the defendant has not only put specific relief out of the plaintiff ’s reach, he has also made it very difficult for her to calculate her losses. The defendant has deprived the plaintiff of performance, the plaintiff cannot obtain a substitute performance, and nor can she be adequately compensated for her loss. However, although the principle of substitutability thus plays a role in determining disgorgement damages for breach of a negative covenant, it will be seen that agency problems and policy considerations also play a part in the breach of negative covenant cases. In order to see how the agency problem operates, it is first necessary to look at breach of fiduciary duty.

3.

The agency problem in breach of fiduciary duty cases

It is clear that profit-stripping remedies are available where a fiduciary has profited from a breach of fiduciary duty.95 The reason for this stems from the nature of the fiduciary obligation itself. Fiduciaries are required to act in the interests of the beneficiary, and not in a self-interested fashion. Fiduciary obligations have two principal aspects: (1) The fiduciary must not place him or herself in a position of confl ict between his or her own interests and his or her duty to the beneficiary, nor may the fiduciary place himself or herself in a conflict between his or her duties to two or more beneficiaries. (2) The fiduciary must not make an unauthorized profit from his or her fiduciary position.96

94 95 96

[2003] EWCA Civ 323 (‘Experience Hendrix’). M Conaglen, ‘The Nature and Function of Fiduciary Loyalty’ (2005) 121 LQR 452, 463. Chan v Zacharia (1984) 154 CLR 178, 199 (Deane J).

396

Barnett

The deterrent philosophy of fiduciary law is said to demand that a fiduciary be prevented from profiting at the expense of a beneficiary.97 Even bona fi de fiduciaries must disgorge any unauthorized gains obtained in the discharge of their fiduciary role.98 Fiduciary duties may be imposed outside the ‘presumptive circle’, even in the context of a contractual relationship which is ordinarily selfinterested. As Mason J noted in Hospital Products Ltd v United States Surgical Corporation,99 a person may come under a fiduciary relationship in a range of circumstances. The critical feature of these relationships is that the fiduciary undertakes or agrees to act for or on behalf of or in the interests of another person in the exercise of a power or discretion which will affect the interests of that other person in a legal or practical sense. The relationship between the parties is therefore one which gives the fiduciary a special opportunity to exercise the power or discretion to the detriment of that other person who is accordingly vulnerable to abuse by the fiduciary of his position … It is partly because the fiduciary’s exercise of the power or discretion can adversely affect the interests of the person to whom the duty is owed and because the latter is at the mercy of the former that the fiduciary comes under a duty to exercise his power or discretion in the interests of the person to whom it is owed.100

Alternatively, it is said that the fiduciary has the exercise of a power or discretion to which the beneficiary is vulnerable.101 97

98

99 101

See Edelman (n 4) 83–5, 212; M McInnes, ‘Account of Profits for Common Law Wrongs’ in Degeling and Edelman (n 20) 405, 428; Conaglen (n 95) 463; J Edelman, ‘GainBased Damages and Compensation’ in A Burrows and Lord Rodger of Earlsferry (eds), Mapping the Law: Essays in Memory of Peter Birks (Oxford University Press, Oxford 2006) 141, 147–50; A Duggan, ‘Solicitors’ Confl ict of Interest and the Wider Fiduciary Question’ (2007) 45 CBLJ 414, 421–2; PD Finn, ‘The Fiduciary Principle’ in TG Youdan (ed), Equity, Fiduciaries and Trusts (Carswell, Toronto 1989) 26. Cf L Smith, ‘The Motive, Not the Deed’ in J Getzler (ed), Rationalizing Property, Equity and Trusts: Essays in Honour of Edward Burn (LexisNexis Butterworths, London 2003) 53. See Keech v Sandford (1726) Sel Cas King 61, 25 ER 223; Boardman v Phipps [1967] 2 AC 46; Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134; Canadian Aero Service v O’Malley (1973) 40 DLR (3d) 371. (1984) 156 CLR 41 (‘Hospital Products’). 100 Ibid 96–7 (Mason J). There are also parallels with Dawson J’s ‘vulnerability’ test from Hospital Products at ibid 142: ‘There is, however, the notion underlying all the cases of fiduciary obligation that inherent in the nature of the relationship itself is a position of disadvantage or vulnerability on the part of one of the parties which causes him to place reliance upon the other and requires the protection of equity acting upon the conscience of that other.’ Dawson J’s test was preferred by the Supreme Court of Canada in LAC Minerals Ltd v International Corona Resources Ltd [1989] 2 SCR 574, 61 DLR (4th) 14.

Substitutability and disgorgement damages

397

Commentators have searched for a unifying principle of fiduciary relationships, but the cases are notoriously difficult to rationalize. Justice Easterbrook and Daniel Fischel have suggested that the reason why it is difficult to discover a unifying principle of fiduciary relationships is because scholars are mistakenly looking for something unique or special about fiduciary relationships.102 They argue that fiduciary relationships are just one extreme of a spectrum of contractual and consensual relations.103 Fiduciary relationships tend to arise when a transaction is complex, and one party wishes to confer discretion on another, but it is too difficult specifically to enumerate each and every undertaking.104 Fiduciary relationships are a species of voluntary undertaking where certain terms are implied into the agreement between the parties.105 Another hallmark of the fiduciary relationship is that it is very difficult to monitor whether or not the fiduciary is undertaking his or her duties.106 Cooter and Freedman argue that because of the agency problem, fiduciaries are difficult to supervise, and therefore gain-stripping remedies are the law’s way of controlling and penalizing fiduciaries for any breach of duty.107 Disgorgement strips the fiduciary of his or her gain from misappropriation, so that from the fiduciary’s perspective, it is as if the wrong had not been committed.108 Any incentive to profit is removed. Disgorgement damages deter fiduciaries from misappropriation. The case which had particular resonance for the majority of the House of Lords in the Blake case was Snepp v United States,109 a fiduciary duty case which otherwise bore an uncanny resemblance to Blake. Snepp, a former employee of the Central Intelligence Agency (CIA) was liable to disgorge profits made by releasing an unauthorized book about the United States’, in particular the CIA’s, activities in Vietnam. The US Supreme Court was prepared to find that Snepp owed concurrent contractual and fiduciary obligations to the CIA and awarded a constructive trust in favour of the CIA over the profits from Snepp’s book. 102

103 105

106 107 108

FH Easterbrook and DR Fischel, ‘Contract and Fiduciary Duty’ (1993) 26 J Law and Economics 425, 438. 104 Ibid 425–38. Ibid 426–7; Thel and Siegelman (n 14) 24. See especially, J Edelman, ‘When Do Fiduciary Duties Arise?’ (2010) 126 LQR 302; J Edelman, ‘Four Fiduciary Puzzles’, ch 13 in this collection; A Duggan, ‘Contracts, Fiduciaries and the Primacy of the Deal’, ch 12 in this collection. Cooter and Freedman (n 90) 1048–9; Easterbrook and Fischel (n 102) 427. Cooter and Freedman (n 90) 1046–7. Ibid 1051. 109 444 US 507 (1980) (‘Snepp’).

398

Barnett

The similarities between Blake and Snepp highlight the overlap between the fiduciary duty cases and the breach of negative covenant cases generally, because the rationale behind the two is so similar. It is trite to say that the label fiduciary has often been misused in order to achieve a just result.110 In particular, some cases seem to have been called ‘fiduciary’ merely to obtain the disgorgement remedies which fiduciary law offers. Some of the cases which have been placed into the ‘fiduciary basket’ could be better analysed as cases where disgorgement damages were awarded for breach of a negative covenant.111 Clearly profit-stripping remedies are seen as an appropriate method of deterring breaches of fiduciary duty; it is suggested that the same should be the case with some negative covenant cases, particularly those where the promisor has a duty which involves the public interest or trust on the part of the promisee.

4.

The agency problem in breach of negative covenant cases

As discussed, there is an overlap between cases involving injunctions to restrain a breach of negative covenant and cases involving concurrent breach of contract and fiduciary duty.112 One of the suggestions of the Court of Appeal in Blake was that disgorgement damages should be awarded where the defendant had done ‘the very thing which he agreed not to do’.113 Th is was rejected by Lord Nicholls.114 A better approach would be to qualify Lord Woolf’s analysis by specifying that in negative covenant cases, the defendant agreed to do something for the benefit of the plaintiff and, if the defendant had kept his obligations, he would have foregone the profit he in fact obtained. Having done the very thing he had agreed not to do, and having made a profit thereby, the defendant should be obliged to disgorge that profit. Easterbrook and Fischel argue that negative covenants are often included in contracts where one party seeks to govern the future conduct of the other, but cannot specify exactly which obligations will arise in advance without costly and inconvenient negotiation.115 They regard 110

111

112 114

P Birks, ‘Restitutionary Damages for Breach of Contract: Snepp and the Fusion of Law and Equity’ [1987] LCMLQ 421. Some of the concurrent breach of fiduciary duty cases cited with approval in Blake could perhaps be better categorized as breach of negative covenant cases: see eg, ReidNewfoundland Co v Anglo-American Telegraph Co Ltd [1912] AC 555; Reading v AttorneyGeneral [1951] AC 507 (cf speech of Lord Denning in Reading v The King [1948] 2 KB 268, 276–7). 113 Smith (n 81) 127. Attorney-General v Blake [1998] Ch 439, 458. Blake (n 1) 286. 115 Easterbrook and Fischel (n 102) 444–5.

Substitutability and disgorgement damages

399

the negative covenant in the Snepp case as setting in train a process for making decisions in the future as to what Snepp could and could not write. Snepp should have tried to negotiate a second contract to ascertain exactly which parts of his manuscript could be published: The fi rst contract established the employment relation and the submission requirement. The second contract would establish the terms of publication. Just as restitution plus an additional penalty induces the would-be thief to enter into market transactions instead, the profits remedy induces the parties to contract explicitly. It is a contract-inducing, not a contractfrustrating, approach.116

On this analysis, the disgorgement remedy removes the incentive for the promisor to breach, and instead gives the promisor incentive to negotiate with the promisee. A further reason why disgorgement damages tend to be awarded for breaches of fiduciary duties or breach of negative covenant is because these contracts often involve a conferral of trust on the promisor by the promisee (to a greater or lesser degree), and therefore courts are willing to say for public policy reasons that these contracts should not be breached.117 In circumstances where a contract is one which imports a special degree of trust or reliance, disgorgement damages will often be the best or only way to effectuate the contract and to give the promisor efficient incentives to perform.118 It is also worth noting that punitive damages tend to be awarded for particular kinds of breach of contract where there is a special sense of trust, in which one party is open to being ‘used’ by the other.119 These contracts include contracts of insurance and the like. Unfortunately, after Blake, courts have seemed unsure of how to treat cases involving breach of negative covenant. In each of WWF120 and Experience Hendrix,121 it is suggested that the contracts concerned typified the agency problem, and the plaintiffs had reposed trust in the defendants. Accordingly, full disgorgement damages should have been payable. The settlement contracts in each case were essentially non-substitutable, and the loss suffered by the plaintiffs was uncertain and speculative. Further, in each case, the plaintiff had trusted the defendant to refrain from committing the very breach which occurred, and neither contract was designed to serve a profit-making purpose.122 Indeed, in both cases 116 119 121 122

Ibid 444. 117 Eisenberg (n 4) 588–92. 118 Ibid 592. 120 Chapman and Trebilcock (n 9) 765–7. WWF (n 93). Experience Hendrix (n 94) (Mance LJ, Hooper J and Peter Gibson LJ). See following discussion on profit-making purpose.

400

Barnett

the contract involved was a settlement, and thus the plaintiffs would have been forgiven for thinking that their troubles were over once the settlement was entered into. It was difficult for the plaintiffs in each case to supervise the performance of the obligation. It is in precisely these sorts of circumstances that disgorgement remedies should be available, if a profit has been made.123 There are other public policy reasons for imposing disgorgement damages. Melvin Eisenberg suggests disgorgement damages are awarded in cases where bargains were designed to serve interests other than profitmaking.124 He argues that: [C]ourts should protect the disgorgement interest in the case of bargain contracts that are not designed for profit-making purposes, so as to give the promisor in such contracts efficient incentive to perform, and effectuate contracts of this type.125

Blake and Snepp involved national security interests, but this is not the only kind of case which raises public policy issues in the context of contracts not entered into for profit. In British Motor Trade Association v Gilbert,126 the defendant sought to sell his car in breach of a contractual term preventing the unauthorized sale of second-hand cars. An injunction restraining the breach had been obtained, but the defendant sold the car anyway. The policy of the post-World War II legislation which gave rise to the restraint in the contract was to regulate and limit the sale of cars to prevent an inflationary black market. The defendant was ordered to pay an account of profits made by him as a result of the breach of the injunction.127 Eisenberg argues that the contract in Gilbert created an ‘externality’, which meant that the contract should benefit the public rather than the contracting parties. In these kinds of cases, disgorgement damages will be the best or only way to effectuate the contract and to give the promisor incentives to perform because the public may not have standing to sue.128 The policy concerns in Snepp, Blake and Gilbert can be united under a single head of bargains designed to serve the public and interests other than profit-making. On this analysis, it is far more likely that a court will order disgorgement damages for breach of negative covenant or fiduciary 123

124 127

See K Barnett, ‘Deterrence and Disgorging Profits for Breach of Contract’ [2009] RLR 79, 89–90. Eisenberg (n 4) 588. 125 Ibid 591. 126 [1951] 2 All ER 641 (‘Gilbert ’). Ibid 645. 128 Eisenberg (n 4) 592.

Substitutability and disgorgement damages

401

duty if the purpose of the bargain was to serve the public, or to serve interests other than profit-making.

D.

Conclusion

This chapter asserts that disgorgement damages cases may be divided according to whether they are ‘second sale’ cases or ‘agency problem’ cases. As has been noted by other scholars, substitutability is an important key to establishing liability for disgorgement damages for breach of contract, but it must be nuanced according to the context. In the second sale cases, if the plaintiff can obtain a substitute performance, damages will be adequate. And if a court can still order specific relief, it should do so in preference to ordering disgorgement damages. Disgorgement damages will only be ordered if the performance was nonsubstitutable, specific relief is no longer available and the defendant has made a profit. This still leaves room for the concept of ‘efficient breach’ in a second sale case in certain circumstances, but only if the subject matter of the contract is substitutable. In the agency problem cases, the critical point is that there is a relationship of trust between the plaintiff and the defendant. Typically, the defendant has made a promise that he will not do something which would prejudice the plaintiff, which promise cannot be monitored by the plaintiff, but the defendant goes ahead and breaches anyway. In those circumstances, whether one classes the promise as fiduciary or not, there are public policy reasons for deterring such conduct. Disgorgement damages should be available in order to give efficacy to these promises. This is particularly the case where contracts are not-for-profit contracts, where compensatory damages may not adequately protect the plaintiff ’s interest in performance. Disgorgement damages provide an incentive for the defendant to perform or to negotiate a release rather than to leave a plaintiff ‘high and dry’.

18 Unconscionability and proprietary estoppel remedies Andrew Robertson *

A.

Introduction

In recent years both courts and scholars have embraced the idea that the notion of unconscionability has a role to play in determining the appropriate remedy in proprietary estoppel cases. This means that, in exercising the remedial discretion it exercises in giving effect to proprietary estoppel, a court should consider what remedy is required in the circumstances to assuage the conscience of the representor.1 If the fundamental concern of proprietary estoppel is to prevent or redress unconscionable conduct, then it stands to reason that the remedial discretion should be informed by a consideration of what the representor’s conscience, properly informed, would require. There are three different ways in which unconscionability might be taken into account in the framing of relief. First, the remedy could reflect the reprehensibility of the representor’s conduct (the ‘reprehensibility’ approach). On this view, the more reprehensible the conduct, the more extensive the remedy that is needed to correct the representor’s conscience. Second, the remedy could reflect the extent of the representor’s responsibility for the relying party’s predicament (the ‘extent of responsibility ’ approach). Under this approach, the more significant the role played by the representor in inducing the relevant assumption and failing to correct it, the more extensive the remedy that will be required *

Some of the ideas discussed in this chapter have their origins in a PhD thesis I wrote in the mid-1990s under the co-supervision of Michael Bryan on ‘The Reliance Basis of Estoppels by Conduct’. Michael was a great teacher, extremely kind and encouraging supervisor and has been a generous and supportive colleague over the past ten years at Melbourne Law School. I am delighted to have the opportunity to join with the other contributors to this collection in paying tribute to him.

1

Throughout this chapter, the party against whom an estoppel is claimed will be referred to as the ‘representor’ and the party claiming the benefit of an estoppel will be referred to as the ‘relying party’.

402

proprietary estoppel remedies

403

to prevent unconscionable conduct. Third, the exercise of the remedial discretion could involve a broad assessment of what relief, considering all circumstances ‘in the round’, is necessary to assuage the representor’s conscience (the ‘in the round ’ approach). This third approach allows the court to take account of the factors considered under the first two approaches, along with others, such as the financial needs of the parties. This chapter will examine the way in which each of these approaches operates, and will show that each of the three finds some support in the case law. It will argue, however, that none of the three can be justified in principle. The essence of the argument to be offered is that unconscionability can add nothing to the remedial equation in a proprietary estoppel case beyond identifying the need to protect against reliance loss. The underlying concern to prevent unconscionable conduct justifies the court’s concern that the relying party should suffer no harm as a result of the representor’s inconsistent conduct, but can require no more than this. Because harm resulting from the relying party’s reliance on the representor’s conduct is an indispensible ingredient of the variety of unconscionable conduct that underlies proprietary estoppel, the representor’s conscience is fully assuaged by a remedy that ensures the relying party suffers no harm as a result of action taken in reliance on the representor’s conduct. This view reflects what could be seen as a fourth approach to unconscionability in proprietary estoppel remedies, which is that the only role played by unconscionability in the determination of relief in a proprietary estoppel case is to point to the need to ensure complete protection for the relying party against harm resulting from his or her reliance on the relevant assumption.

B.

Reliance, expectations and the dictates of conscience

In a very well-known statement in Crabb v Arun District Council, 2 Scarman LJ said that a court considering a proprietary estoppel case has to consider three questions: ‘First, is there an equity established? Secondly, what is the extent of the equity, if one is established? And, thirdly, what is the relief appropriate to satisfy the equity?’3 Although scholars sometimes treat the extent of the equity or quantum as an issue that is separate from the form that relief should take,4 the courts tend not to do this. Although 2 4

[1976] Ch 179 (CA) (‘Crabb ’). 3 Ibid 192–3. See eg, B McFarlane, The Structure of Property Law (Hart Publishing, Oxford 2008) ch E4; S Gardner, ‘The Remedial Discretion in Proprietary Estoppel: Again’ (2006) 122 LQR 492.

404

Robertson

Scarman LJ’s dictum is commonly quoted, judges tend to merge the second and third questions. Scarman LJ himself did this in Crabb. Having determined that an equity was established in the circumstances, he then said: ‘I turn now to the other two questions – the extent of the equity and the relief needed to satisfy it.’5 The reason for this tendency may be that it is difficult to describe the extent of an equity without using either a firm figure (eg ‘the extent of the equity is $100,000’) or a particular form (eg ‘the extent of the equity is that the claimant should have the fee simple’). It is commonly very difficult, and unnecessary, to express the extent of the equity in the form of an amount of money.6 To express the equity in the form of particular relief of course answers Scarman LJ’s third question as well as his second. This chapter follows the common practice of the courts and treats the extent of the equity and the relief necessary to satisfy it as a single question of remedial discretion: how should an equity arising by way of proprietary estoppel be satisfied? The central issue in the exercise of the remedial discretion in a proprietary estoppel case concerns the relationship between the protection of the relying party’s expectations and his or her actual or potential reliance loss. It is now well established in English and Australian law that the starting point in determining relief when a proprietary estoppel is established is the fulfi lment of the relying party’s expectations in specie. The relying party’s assumptions or expectations are to be made good unless to do so would be: (a) impractical; or (b) unjust to the party against whom the estoppel is claimed.7 As to the first qualification, there are several reasons why it might be impractical to fulfi l the relying party’s expectations: (i) because of uncertainty as to the nature or extent of the interest the relying party expected to receive, 8 (ii) because the subject property has been disposed of,9 (iii) because a clean break between the parties is required,10 or (iv) because it would cause injustice to a third party to 5 6

7

8

9 10

Crabb (n 2) 199. Th is is because the extent of the equity depends on the extent of the detriment, and the detriment tends not to be easily quantifiable: see A Robertson, ‘The Reliance Basis of Proprietary Estoppel Remedies’ (2008) 78 Conv 295. Ibid 297. The discussion in this section of the chapter draws on my analysis of the case law in that article and two others: ‘Reliance and Expectation in Estoppel Remedies’ (1998) 18 LS 360; ‘Satisfying the Minimum Equity: Equitable Estoppel Remedies after Verwayen’ (1996) 20 MULR 805. Eg Unity Joint Stock Banking Corporation v King (1858) 25 Beav 72, 53 ER 563; Plimmer v Wellington Corporation (1884) 9 App Cas 699 (PC). Eg Wayling v Jones (1995) 69 P & CR 170. Eg Burrows v Sharp (1991) 23 HLR 82 (CA); Gillett v Holt [2001] 1 Ch 210 (CA).

proprietary estoppel remedies

405

require the representor to transfer the promised interest to the relying party.11 Second, and more significantly for the purposes of this chapter, the relying party’s prima facie entitlement to receive the promised or expected interest will give way to some lesser remedy where the value of the expected interest is disproportionate to the harm that would be suffered by the relying party as a result of his or her reliance if the relevant assumption was not made good. This is sometimes described as the ‘minimum equity’ principle: it requires the court to grant the minimum remedy necessary to satisfy the relying party’s equity, which means the minimum necessary to protect against reliance-based harm. This principle can be said to be grounded in the notion of unconscionability or, more particularly, the need to ‘avoid relief which [goes] beyond what [is] required for conscientious conduct’.12 In a well-known statement in Commonwealth v Verwayen,13 Deane J said that: the prima facie entitlement to relief based upon the assumed state of aff airs will be qualified in a case where such relief would exceed what could be justified by the requirements of good conscience and would be unjust to the estopped party. In such a case, relief framed on the basis of the assumed state of affairs represents the outer limits within which the relief appropriate to do justice between the parties should be framed.14

This statement of principle leaves open the question of when relief based on the assumed state of affairs will exceed the requirements of good conscience and on what basis it will be considered to do so. Since detriment resulting from reliance is an indispensible ingredient of unconscionable conduct in a proprietary estoppel case, it might be said that a remedy that goes beyond what is necessary to prevent detriment resulting from reliance will exceed the requirements of good conscience. In Waltons Stores (Interstate) Ltd v Maher,15 Brennan J said that equitable estoppel was best understood by: identifying the unconscionable conduct which gives rise to the equity as the leaving of another to suffer detriment occasioned by the conduct of the party against whom the equity is raised. Then the object of the principle can be seen to be the avoidance of that detriment and the satisfaction of the equity calls for the enforcement of a promise only as a means of avoiding the detriment and only to the extent necessary to achieve that object.16 11 13

12 Eg Giumelli v Giumelli (1999) 196 CLR 101 (HCA). Ibid 125. (1990) 170 CLR 394. 14 Ibid 445–6. 15 (1987) 164 CLR 387.

16

Ibid 427.

406

Robertson

On this view, the notion of unconscionability informs the remedial discretion in proprietary estoppel through the minimum equity or proportionality principle. Since the proportionality principle is now regarded as the ‘most essential requirement’ in the determination of relief in proprietary estoppel cases,17 it is important to take note of the way it operates and the effect it has. The need to ensure proportionality between the remedy and the detriment is now given explicit consideration in almost all cases in which English and Australian courts are required to frame relief to give effect to proprietary estoppel.18 In most cases it is found that the only way to satisfy the equity raised by the estoppel is by requiring the representor to make good the expectation, usually in specie but sometimes in monetary form. In some cases this is because the relying party’s reliance interest happens to coincide in form or in value with his or her expectation interest. But the principal reason that the application of the proportionality principle does not usually result in the granting of a lesser remedy is because the relying party’s reliance loss is typically not readily quantifiable, and so the court cannot be satisfied that it can adequately be prevented by anything less than fulfi lment of the relying party’s expectations. Where the relying party’s reliance loss cannot accurately be quantified then usually the only way to ensure that the relying party does not suffer loss as a result of his or her reliance is to fulfi l his or her expectations. In the majority of cases, therefore, the proportionality principle does not displace the relying party’s prima facie entitlement to fulfilment of his or her expectations because the representor is unable to show that complete protection against reliance loss can be achieved in any other way. The proportionality principle does, however, play an important role in shaping proprietary estoppel relief in England and Australia. In a significant minority of cases the court does reach the conclusion that awarding the relying party the expected interest would be disproportionate to his or her reliance loss, and that more limited relief can provide adequate protection against reliance loss. In some cases this is done by way of equitable compensation quantified by reference to the relying party’s reliance loss.19 In other cases the relying party’s reliance loss is disproportionate to the value of the expected interest but cannot accurately be quantified. In 17 18 19

Jennings v Rice [2002] EWCA Civ 159, [2003] 1 FCR 501 [36]. Robertson (n 6) 298. Eg Strover v Strover [2005] EWHC 860; Young v Lalic [2006] NSWSC 18; Powell v Benney [2007] EWCA Civ 1283; Repatriation Commission v Tsourounakis [2007] FCAFC 29, (2007) 158 FCR 214, (2007) 239 ALR 491.

proprietary estoppel remedies

407

these cases relief is determined on the basis of a ‘broad-brush’ approach, which yields a monetary or proprietary remedy reflecting neither the full extent of the relying party’s expectations nor the precise value of his or her reliance loss.20 In still other cases the court is able to grant specific relief – such as the right to occupy property for a limited period – which has the effect of allowing the relying party to resume the position he or she occupied before taking action in reliance.21 Up to this point the remedial equation in a proprietary estoppel case can be seen as turning on three central questions: first, whether it is possible in practical terms to grant the relying party the interest he or she expected to receive; second, whether to do so would be unjust to the representor because it would go beyond what is necessary to ensure that the relying party suffers no reliance loss; and, third, if so, what is the minimum remedy necessary to achieve that end. We now need to consider the effect on that remedial equation of the unconscionability criterion in its ‘reprehensibility’, ‘extent of responsibility’ and ‘in the round’ formulations.

C.

The ‘reprehensibility’ approach

In the Court of Appeal in Cobbe v Yeoman’s Row Management Ltd , 22 Dyson LJ listed ‘the degree to which the representor’s conduct can properly be said to be unconscionable’ as one of the factors to be taken into account in determining ‘what relief justice requires to satisfy the equity’. 23 Th is seems to indicate that the remedy should reflect the degree of reprehensibility of the representor’s conduct, which presumably means the more reprehensible the conduct, the more extensive the relief. In Jennings v Rice24 Robert Walker LJ observed that ‘the factors relevant to the exercise of the court’s discretion’ include ‘particularly oppressive conduct on the part of the defendant, as in Crabb’s case or Pascoe v Turner ’.25 The idea that misbehaviour or high-handed conduct on the part of the defendant can affect the quantum of relief is also supported by obiter remarks made by Dillon LJ in Burrows v Sharp26

20

21 23 25

26

Eg Jennings v Rice (n 17); Ottey v Grundy [2003] EWCA Civ 1176 (‘Ottey ’); Donis v Donis (2007) 19 VR 577 (VSCA). 22 Eg Sullivan v Sullivan [2006] NSWCA 312. [2006] EWCA Civ 1139 (‘Cobbe’). Ibid [126]. 24 Jennings v Rice (n 17). Ibid [52] referring to Crabb and Pascoe v Turner [1979] 1 WLR 431 (CA), both of which will be discussed below. Burrows v Sharp (n 10) 92.

408

Robertson

and Roche LJ in Baker v Baker, 27 but these remarks were based on what will be shown below to be a questionable reading of comments made by Scarman LJ in Crabb. As Simon Gardner has observed, it is difficult to fi nd authority that directly supports the proposition.28 In addition to the obiter dicta , direct support can be found in the form of decisions in which a generous approach to relief coincides with highly reprehensible conduct on the part of the representor. The decision of the Court of Appeal in Cobbe provides one example, although the House of Lords held on appeal that no proprietary estoppel arose on the facts.29 The relying party in that case spent considerable time and money seeking planning permission for a property on the assumption that, if the permission was granted, the property would be sold to him on certain agreed terms. As Dyson LJ noted in his discussion of the remedy, the trial judge found that the representor had deliberately refrained from telling the relying party of her change of heart in order to ensure that the relying party ‘continued unabated in his efforts to obtain planning permission’ which significantly improved the value of the representor’s property.30 In circumstances in which it was not possible to fulfi l or quantify the relying party’s expectations or quantify the harm he suffered as a result of his reliance, the Court of Appeal upheld the trial judge’s award of an amount equivalent to half of the increase in the value of the property resulting from the grant of planning permission. A generous approach to relief was also adopted in circumstances involving reprehensible conduct in Pascoe v Turner.31 In that case the Court of Appeal held that, even though the defendant’s expenditure on improvements was modest, the minimum equity raised by the estoppel required the plaintiff to make good his repeated declaration to the defendant that the house was hers and to transfer the fee simple to the defendant. The plaintiff ’s conduct might be considered to have been at the highly reprehensible end of the spectrum because he ‘not only stood by and watched but encouraged and advised, without a word to suggest 27

28

29

30

(1993) 25 HLR 408, 419: ‘In determining the relief appropriate the court must look at the conduct of the parties as well as the extent of the equity.’ S Gardner, ‘The Remedial Discretion in Proprietary Estoppel’ (1999) 115 LQR 438, 454–5. Yeoman’s Row Management Ltd v Cobbe [2008] UKHL 55, [2008] 1 WLR 1752. Lord Scott of Foscote nevertheless agreed with the Court of Appeal that Mrs Lisle-Mainwaring took unconscionable advantage of Mr Cobbe and Lord Walker of Gestingthorpe described her conduct as ‘unattractive’ (at [28] and [92] respectively). 31 Cobbe (n 22) [130]. Pascoe v Turner (n 25)

proprietary estoppel remedies

409

that she was putting her money and personal labour into his house’.32 He subsequently sought to evict her from the house ‘by any legal means at his disposal with a ruthless disregard of the obligations binding upon conscience’.33 Reprehensible conduct by the defendant also coincided with a generous approach to relief in the important case of Crabb. Mr Crabb owned two portions of land, one of which had a right of way giving access to a road and one of which did not. Mr Crabb approached the Council requesting access at a second point so that the two portions could be sold separately. The Council led Mr Crabb to believe that he would be granted a right of way giving access to the back portion and confirmed this assumption by putting up gates at the point of access. In reliance on the assumption Mr Crabb sold the front portion of his land without reserving a right of way, leaving himself with a landlocked portion. Without knowing that the front portion had been sold, but knowing that Mr Crabb proposed to do this, the Council subsequently took the ‘discourteous and high handed’ action of pulling down the gates without warning, boarding up the access point and demanding a large sum of money for an easement. The Court of Appeal held that an equity arose against the Council which required the Council to grant a right of way to Mr Crabb. The court held that, although Mr Crabb should reasonably have expected to pay for the access, the equity was to be satisfied by requiring the Council to grant the access free of charge. This apparently generous remedy has been seen as a response to reprehensible conduct by the Council. In Jennings v Rice, for example, Aldous LJ accepted as partially correct counsel’s argument that the court in Crabb ‘had refused to confine the claimant to his expectations due to the misconduct of the defendant’. 34 Th is is the impression given by the judgment in Crabb of Lawton LJ, who had earlier expressed his surprise that a local authority should behave in the way they did, going back on a firm undertaking ‘without a word of warning, explanation or apology’.35 Lawton LJ appeared to justify the conclusion that the Council should not be paid anything for the right of way on the basis that the Council, ‘knowing that the plaintiff intended to sell part of this land, stood by when he did so and without a word of warning allowed him to surround himself with a useless piece of land from which there was no exit’.36 The circumstances that led him to agree with Lord Denning MR

32 35

Ibid 436. 33 Ibid 438. 34 Jennings v Rice (n 17) [23]. Crabb (n 2) 191. 36 Ibid 192.

410

Robertson

that the Council should not be paid anything for the right of way included the fact that: as the result of the defendants resiling from their undertaking, this piece of land which is designated for light industry has stood useless. It might well have been profitable not only to the plaintiff but to other people living nearby. In an area where employment for the young is not always easy to find, we have the spectacle of this piece of land next door to a housing estate being rendered useless at a time when it could have been of value to the community. For that the defendants are solely to blame. 37

Lord Denning MR and Scarman LJ, however, clearly justified the remedy solely on the basis that it compensated Crabb for reliance loss he had already suffered as a result of the Council’s inconsistent conduct. Lord Denning MR said: [Mr Crabb’s landlocked portion of land] has been sterile and rendered useless for five or six years; and Mr Crabb has been unable to deal with it during that time. Th is loss to him can be taken into account. And at the present time, it seems to me that, in order to satisfy his equity, Mr Crabb should have the right of access at point B free of charge without having to pay anything for it.38

In his discussion of what was necessary to satisfy Mr Crabb’s equity, Scarman LJ noted that ‘had matters taken a different turn’ he would without hesitation have said that the plaintiffs should be required to pay a sum of money for the right of way, ‘[b]ut as already mentioned by Lord Denning MR and Lawton LJ, there has been a history of delay, and indeed high handedness, which it is impossible to disregard’.39 It is this remark that has principally been relied upon in subsequent cases to support the view that the conduct of the parties should be taken into account in the determination of relief.40 But it seems clear from what Scarman LJ went on to say in the same paragraph that he reached the conclusion that Mr Crabb should not be required to pay for the right of way because of the economic harm that the Council’s conduct caused Mr Crabb, rather than the moral blameworthiness of that conduct: I am not disposed to consider whether or not the defendants are to be blamed in moral terms for what they did. I just do not know. But the effect of their action has been to sterilise the plaintiff ’s land; and for the reasons which I endeavoured to give, such action was an infringement of

37 40

Ibid. 38 Ibid 189–90. 39 Ibid 199. Especially Burrows v Sharp (n 10) 92 (Dillon LJ) and Baker v Baker (n 27) 419 (Roch LJ).

proprietary estoppel remedies

411

an equitable right possessed by the plaintiff. It has involved him in loss, which has not been measured; but, since it amounted to sterilisation of an industrial estate for a very considerable period of time, it must surpass any sort of sum of money which the plaintiff ought reasonably, before it was done, to have paid the defendants in order to obtain an enforceable legal right.41

The reprehensibility thesis derives some support from recent cases in which relief limited to the bare prevention of detriment has been granted in circumstances where the representor’s conduct was at the less reprehensible end of the unconscionability spectrum. The decision in Strover v Strover,42 which will be discussed in the next section of this chapter, provides one example of this. A second example is Burrows v Sharp, where the representor (Mrs Sharp) promised to bequeath a house to her granddaughter and the granddaughter’s husband (Mr and Mrs Burrows). In return, the Burrows agreed to provide funding for the acquisition of the house from the local authority and to care for Mrs Sharp’s handicapped daughter after Mrs Sharp’s death. The plan required the parties to live together in cramped conditions in the house, and this very quickly led to a falling out between them. Dillon LJ described the arrangement as ‘a classic example of a good idea which has gone sour without anyone’s fault with the result that there has been a major family row and much unhappiness on both sides’.43 The trial judge ordered that Mrs Sharp hold the property on trust for herself for life, with remainder to the Burrows. The Burrows were required to continue to make mortgage repayments and the parties were thus required to continue to cohabit. The Court of Appeal held that this was unworkable. Instead, the court held that the equity should be satisfied by Mrs Sharp paying to the Burrows the amount of the mortgage instalments they had paid and their other expenditure on the house, together with interest. It was acknowledged that this remedy would give the Burrows ‘nothing for the loss of their expectation that they would succeed to the property 62 Green Way in due course, and nothing for the fact that they have given up security of tenure in their previous flat’.44 Dillon LJ, giving the principal judgment, did not directly link the remedy with Mrs Sharp’s blamelessness, but did note that the remedy needed to be determined ‘in light of the circumstances at the date of the hearing, taking into account if appropriate conduct of the parties up to that date, including any high-handed conduct of any party’.45 He in fact observed that the 41 43

Crabb (n 2) 199. 42 Strover v Strover (n 19). Burrows v Sharp (n 10) 84. 44 Ibid 93. 45 Ibid 92.

412

Robertson

conduct of Mr and Mrs Burrows, in seeking to enforce a trust deed that made Mrs Sharp a bare trustee of the property for the Burrows, knowing that the deed did not reflect the true agreement between the parties, was ‘a factor which comes into consideration under that heading, though in the event I do not think it is a very important factor in this case’.46 Another good example of limited relief being granted against a relatively blameless defendant is Sullivan v Sullivan,47 the facts of which were as follows. The appellant was living in a Housing Commission house with her three children. The appellant’s brother and sister-in-law told the appellant in a Christmas card that they would purchase a home for her to occupy in return for a small rent. Although the appellant was expected to ‘abide by certain basic conditions’, it was to be her ‘home for life’. The respondents subsequently purchased a house chosen by the appellant and allowed her and her family to live in it for approximately nine years. In reliance on the promise, the appellant gave up Housing Commission accommodation for which she had waited seven years. During her occupancy of the house owned by the respondents the relying party spent some time and effort and the sum of AU$6,300 on improvements. The Court of Appeal held by a majority of 2–1 that to hold the respondents to the promise would exceed the requirements of conscientious conduct. The majority held that the equity could be satisfied by allowing the appellant to remain in the house for a further period of seven years subject to the payment of a modest rent. The conduct of the respondents in that case might be considered to be at the less reprehensible end of the spectrum since the original promise was a generous and gratuitous one ‘given in the context of an affectionate family relationship, which has since unfortunately broken down’.48 Moreover, the respondents had generously given the appellant the benefit of occupation of the house at a low rental for a period of nine years prior to the breakdown of that relationship.49 The reprehensibility approach to unconscionability appears, however, to be contradicted by the decision in Jennings v Rice. The relying party in that case (Mr Jennings) was a self-employed bricklayer who was initially employed by the representor (Mrs Royle) to work as a gardener in his spare time. Mr Jennings later ran errands, took Mrs Royle shopping and undertook minor maintenance work for her in his evenings and on 46 48

49

Ibid. 47 Sullivan v Sullivan (n 21). Ibid [95]. Counsel for the respondents noted (at [77]) that ‘this was a case of pure generosity, not a case where something was done to fulfi l a moral responsibility or by way of some trade-off ’. Ibid [41].

proprietary estoppel remedies

413

weekends. For the last ten years or so of Mrs Royle’s life, this work went unremunerated. As Mrs Royle became infirm in the last few years of her life, Mr Jennings provided personal care for her and slept on a sofa in her house to provide her with security. Mr Jennings did this work on the faith of assurances that Mrs Royle would ‘see him right’ and that, ‘all this [apparently referring to her house and furniture] will be yours one day’. These assurances were made to Mr Jennings for the very purpose of inducing acts of reliance for Mrs Royle’s own benefit. Mrs Royle then deliberately disappointed Mr Jennings’ expectations knowing that he had relied on them in a very substantial way over a period of many years. It seemed that Mr Jennings expected to receive at least Mrs Royle’s house and furniture (which were worth some £435,000), if not her entire estate (worth £1.285 million) when she died. Despite the highly reprehensible nature of Mrs Royle’s conduct in deliberately inducing substantial acts of reliance for her own benefit and then deliberately breaching her promises, Mr Jennings’ equity was assessed by the trial judge at £200,000, which was the estimated cost of full-time nursing care for the last eight years of Mrs Royle’s life, at £25,000 per year. The Court of Appeal upheld that remedy, which was equal to less than half the value of the house and furniture. Since Mrs Royle’s conduct was somewhere near the high end of the reprehensibility scale, the outcome in Jennings v Rice suggests that, if unconscionability plays a role in determining the extent of the remedy granted to give effect to proprietary estoppel, it does not require a generous remedy as a response to highly reprehensible conduct.

D.

The ‘extent of responsibility’ approach

Simon Gardner has argued that unconscionability guides the courts in a more specific way, with the quantum of the remedy reflecting the extent of the representor’s responsibility for the relying party’s assumption and detrimental reliance.50 Gardner argues that, while a broader range of factors may legitimately affect the mode of the remedy, the quantum should reflect the aim of the jurisdiction, which is to prevent unconscionable conduct. He suggests that the judge should ‘seek the outcome that (in his or 50

Gardner (n 4) 500. PD Finn, ‘Equitable Estoppel’ in PD Finn (ed), Essays in Equity (Lawbook Co, Sydney 1985) 92–3 has also argued that the exercise of the remedial discretion in equitable estoppel involves a consideration of ‘what, in the circumstances it would be unconscionable for the [representor] to insist upon given the responsibility he bears in or for the [relying party’s] actions’.

414

Robertson

her view, though others may differ) best redresses the unconscionability’.51 Since the expectation created by the representor and detrimental reliance are the essential ingredients of the unconscionability, ‘the outcome must reflect both the claimant’s expectation and reliance, and the degree to which these can be ascribed to the defendant, given his encouragement or acquiescence’.52 In Gardner’s view the remedy should be pitched at some point between the expectation measure and the reliance measure, and that point should be determined by the extent of the representor’s responsibility for the expectation and the reliance. On this view, the additional factor raised by the reference to unconscionability is the extent to which responsibility for the expectation and reliance can be ascribed to the defendant. This view also finds some support in the recent case law. In Strover v Strover Hart J adopted an unusually restrictive approach to relief in circumstances where the representors’ responsibility for the relevant assumption was slight. The partners in an accounting firm effected ‘mirror policies’ of life insurance to protect one another in the event that one of them should die during the life of the partnership. The policies were intended to cover the expense that the surviving partners would incur in having to purchase the partnership interest of the deceased from his estate. Each policy was held on trust, with the two other partners nominated as beneficiaries. One of the partners, the relying party, died after he had retired from the partnership. At the time he retired the relying party wrongly assumed that, following his retirement, the policy would enure for the benefit of his wife and children. In fact the other partners remained the beneficiaries under the trust. In reliance on his false assumption, the deceased lost the opportunity to renegotiate the ‘mirror policies’ arrangement before he died. The surviving partners would have been likely to agree to correct the arrangement if the matter had been raised with them because they were similarly exposed with their own policies. Hart J concluded that a proprietary estoppel arose in the circumstances, but held that the remedy should reflect the fact that there was a 20 per cent chance that the deceased would not have taken corrective steps had he not been mistaken. The equity arising by way of proprietary estoppel was therefore held to be equal to 80 per cent of the proceeds of the policy. The responsibility borne by the representors in Strover v Strover for the relying party’s predicament was clearly at the low end of the spectrum. Not only did the estoppel arise from acquiescence, but the representors shared the 51

Gardner (n 4) 500.

52

Ibid.

proprietary estoppel remedies

415

relying party’s mistake. They acquiesced in an arrangement founded on a common mistake, which was that following the relying party’s retirement the partnership would maintain the policy at the relying party’s expense.53 The extremely low level of responsibility borne by the representors might, if one was to adopt the ‘extent of responsibility’ approach to unconscionability, be said to have justified the unusually strict, reliancebased approach to relief adopted by Hart J. There is no hint of this in the judgment, however, and the outcome can be explained at least as well on the basis of a strict application of the minimum equity principle. In Murphy v Burrows54 the nature of the inducing conduct was expressly acknowledged as an important factor in the determination of relief. The relying party in that case worked part time as a farm hand in the expectation of receiving certain property on the death of the representor. Although it was held that no estoppel arose, the judge said by way of obiter dictum that, if an estoppel had arisen, the remedy should be close to the detriment because of the vague nature of the assurances: ‘It seems to me that in all the circumstances of this case, any award should be closer to the detriment suffered by Jimmy Murphy rather than his expectations. I take into account the equivocal nature of the assurances that were made.’55 He said: [I]n considering unconscionability in the context of the case as a whole, I do take into account the nature and quality of the assurances that were made. Mr Bragiel in this context relied on the facts in Gillett [v Holt] as indicating that even vague assurances can found an estoppel. I agree, but I also bear in mind that the quality of the assurances do impact on the issue of unconscionability when looking at the matter ‘in the round’.56

E.

The ‘in the round’ approach

A broader interpretation of the unconscionability criterion is that it allows the court, in fashioning the remedy, to take account of all of the circumstances of the case ‘in the round’. Nicholas Hopkins has argued that the English courts are developing an approach to remedial discretion in estoppel which requires the judge to evaluate a broad range of factors ‘in the round’ in order to determine what is necessary to redress the unconscionable conduct.57 There is strong support for this view in the 53 55 57

Strover v Strover (n 19) [26]–[27], [42]. 54 [2004] EWHC 1900 (Ch). Ibid [124]. 56 Ibid [109]. N Hopkins, ‘Unconscionability, Constructive Trusts and Proprietary Estoppel’ in M Bryan (ed), Private Law in Theory and Practice (Routledge-Cavendish, London 2007)

416

Robertson

judgments,58 although again it is difficult to identify cases in which it has clearly affected the outcome. In Sledmore v Dalby,59 the Court of Appeal held that the Recorder erred by failing to take into account the needs of the parties in determining the appropriate remedy. Sledmore v Dalby provides a very useful example of the issues raised by the ‘in the round’ approach and will be discussed again later in this chapter. Mr Dalby had made improvements to a house in reliance on an assumption induced by his parents-in-law (Mr and Mrs Sledmore) that the house would one day be given to Mr and Mrs Dalby, and that in the meantime Mr Dalby and his family would be allowed to remain in the house rent free. Mr Sledmore and Mrs Dalby subsequently died, leading to a contest between Mr Dalby and his mother-in-law for the house. At first instance the Recorder held that an equity had arisen in favour of Mr Dalby, which was to be satisfied by Mr Dalby holding a non-assignable personal licence to remain in the property for as long as he wished. The Court of Appeal held that it was no longer inequitable for Mr Dalby’s expectation to be defeated and ‘the minimum equity to do justice to the respondent … was an equity which has now expired’.60 The outcome in Sledmore v Dalby might have been justified solely on the basis that the respondent had enjoyed eighteen years of rent-free accommodation, and this benefit outweighed the money and labour expended by Mr Dalby in improving the property in reliance on the assumption. Indeed, Hobhouse LJ did justify the outcome on this basis,61 and later in Jennings v Rice Aldous LJ observed that, in Sledmore v Dalby: ‘The need for proportionality was at the heart of the judgments.’62 But Roch LJ, with whom Hobhouse and Butler-Sloss LJJ agreed, held that ‘[t]he Recorder should have considered the position of the appellant and her needs and balanced those against the present use of the premises made by the

58

59 61

62

199, 215. See also N Hopkins, ‘Understanding Unconscionability in Proprietary Estoppel’ (2004) 20 JCL 210 and N Hopkins, ‘Conscience, Discretion and the Creation of Property Rights’ (2006) 26 LS 475. In addition to the cases below, it is worth noting that in Baker v Baker (n 27) 419, Roch LJ said: ‘The fact that the plaintiff now has suitable accommodation where he has good neighbours and is very happy should not deprive him of relief, but is a factor which should be taken into account by the court in seeking the minimum equity to do justice in this case.’ See also J Mee, ‘The Limits of Proprietary Estoppel: Thorner v Major ’ (2009) 21 CFLQ 367, 376. (1996) 72 P & CR 196 (CA) 204. 60 Ibid 205. Ibid 209. Hobhouse LJ also held that the assumption on which Mr Dalby incurred the expenditure was that Mrs Sledmore would leave the property to her daughter, and this assumption was never falsified. Jennings v Rice (n 17) [29].

proprietary estoppel remedies

417

respondent and his present need for them’.63 Roch LJ treated as significant the fact that Mr Dalby was making minimal use of the house at the time of the trial and had accommodation elsewhere. His elder daughter had married and his younger daughter, at the age of 27, was ‘able to maintain herself’.64 Mrs Sledmore, on the other hand, was in a precarious fi nancial position, was ‘liable to lose her present accommodation and … has a pressing need’ to use the house ‘for occupation as her own residence’.65 Although the outcome might have been justified on the basis of an approach that looked only at what was the minimum necessary to ensure that Mr Dalby suffered no detriment, the weight placed on the relative needs of the parties for the subject property makes Sledmore v Dalby a leading example of the ‘in the round’ approach. Another prominent example of the ‘in the round’ approach is Jennings v Rice, which was discussed earlier. In that case the trial judge treated as relevant his views that the representor had no special obligations to her family, that to reward an employee on the scale of £420,000 was excessive, that the house was an unsuitable one for the relying party to live in, and that Mr Jennings would need £150,000 to buy a suitable house.66 The Court of Appeal accepted these as relevant considerations. Aldous LJ, with whom Mantell and Robert Walker LJJ agreed, held that the value of the equity ‘will depend on all of the circumstances’ and that the trial judge ‘took into account the relevant factors as placed before him, namely the expectation, the detriment, the position of Mr Jennings and the amount available’.67 An additional factor that might be relevant to the ‘in the round’ approach was mentioned by way of obiter by Robert Walker LJ in Jennings v Rice. Robert Walker LJ observed that, where a proprietary estoppel arises out of a consensual arrangement between the parties falling short of a binding contract, ‘then the court’s natural response is to fulfi l the claimant’s expectations’.68 Robert Walker LJ was referring to a situation in which the action taken by the relying party was seen by the parties as a quid pro quo for the relevant promise, and this took the form of a mutual understanding which identified both ‘the expected detriment and the expected benefit’ in reasonably clear terms. In those circumstances, Robert Walker LJ suggested, the court is inclined ‘to vindicate the claimant’s expectations as far as possible’ because the parties ‘probably regarded the expected benefit and the accepted detriment as 63 66

Sledmore v Dalby (n 59) 204. Jennings v Rice (n 17) [15].

64 67

Ibid 204, 205. Ibid [36], [38].

65 68

Ibid. Ibid [50].

418

Robertson

being (in a general, imprecise way) equivalent, or at any rate not obviously disproportionate’.69 In Jennings v Rice, neither the expected detriment nor the expected benefit were defined in clear terms by the parties, so the suggested principle did not apply in that case. The idea has been strongly criticized70 and, in subsequent extra-judicial writing, Robert Walker has accepted that he ‘would have done better to refer to a spectrum rather than a dividing line’ since there is rarely ‘anything like a clear bargain at the outset of the relationship’.71 The status of the principle is therefore in some doubt. The reasoning of the New South Wales Court of Appeal in Sullivan v Sullivan also provides strong support for a broad ‘in the round’ approach. The facts of the case were discussed above. The New South Wales Court of Appeal held (2–1) that the loss of the public housing was a significant detriment, but had not adequately been quantified by the relying party. The relying party had led no evidence as to how long it would take her to regain public housing. The majority noted that, although ‘prima facie the operation of estoppel is to preclude departure from the assumed state of affairs’, that entitlement is qualified if such relief would ‘exceed the requirements of conscionable conduct and would be unjust to the estopped party’.72 The majority held that it would be unjust to enforce the promise in this case because: (1) the promise was gratuitous, given in the absence of any substantial moral obligation or any kind of trade off; (2) the promise was given in the context of an affectionate family relationship, which has unfortunately since broken down; (3) the appellant is now about 40, so has a life expectancy that could be of the order of 40 years; (4) … an order that bound the respondents for up to a further 40 years could work significant hardship if their financial circumstances change; (5) all this must be considered in light of the paucity of evidence referred to earlier, which should not operate in favour of the appellant.73 69 70

71

72

Ibid [45]. Gardner (n 4) 494–7; J Mee, ‘The Role of Expectation in the Determination of Proprietary Estoppel Remedies’ in M Dixon (ed), Modern Studies in Property Law (Vol 5) (Hart Publishing, Oxford 2009) 389, 411–15. R Walker, ‘Which Side “Ought to Win”: Discretion and Certainty in Property Law’ (2008) 6 TQR 5, 10; also published in [2008] Sing JLS 229, 239. Sullivan v Sullivan (n 21) [94]. 73 Ibid [95].

proprietary estoppel remedies

419

In all of those circumstances, the relying party’s equity was held to be satisfied by an order that allowed the relying party to remain in the house for a further seven years. Allowing the relying party to remain in the house for seven years was said to provide the relying party with a reasonable time to seek suitable Housing Commission accommodation, although the court could not conclude that it was ‘likely to be sufficient for her to obtain such accommodation’.74 The majority therefore granted a remedy that was designed to give the relying party an opportunity to resume her pre-reliance position. This was a reliance-based remedy, although it was not entirely certain to protect the relying party against reliance loss. This limited relief was justified by a range of factors considered in the round, which included the gratuitous nature of the promise, the non-reprehensible nature of the representors’ conduct and the potential hardship to the representors if they were made to fulfi l the promise. The dissenting judge in Sullivan v Sullivan, Handley JA, applied the principles from Giumelli v Giumelli75 and Jennings v Rice and concluded that it was not inequitably harsh to enforce the relying party’s expectations of accommodation for life. Handley JA held that the representors had not discharged the evidentiary onus of bringing forward material to cut down the relying party’s prima facie entitlement.76 Whether it is relevant to the exercise of the remedial discretion that a promise is gratuitous and made in the absence of any prior moral obligation or trade off is now a contentious question in Australian law. In his dissenting judgment in Sullivan v Sullivan, Handley JA observed that estoppels by encouragement have frequently been upheld in the absence of a prior moral obligation.77 The Victorian Court of Appeal in Donis v Donis78 preferred the view of Handley JA in Sullivan v Sullivan to that of the majority, holding that it was irrelevant that the promises in Donis v Donis were gratuitous and given in the absence of a moral obligation. The equity arising by way of estoppel does not, Nettle JA said, require a trade off or consideration, but ‘inheres in the detriment which 74 76

77

Ibid [96]. 75 Giumelli v Giumelli (n 11) On the onus question, the approach of Handley JA is undoubtedly correct. To establish the estoppel, the onus on the claimant is to show that she will suffer substantial detriment if the assumption is not adhered to. Once substantial detriment is established, the onus shifts to the representor to show that the detriment can be prevented in some way other than by holding the representor to the assumption. Given the difficulty of quantifying detriment in most cases, the doctrine of proprietary estoppel would operate very differently from the way it does if the onus were on the relying party to quantify his or her detriment. Sullivan v Sullivan (n 21) [54]. 78 Donis v Donis (n 20).

420

Robertson

the promisee suffers by acting in reliance upon the promise’.79 Nettle JA said that a lack of moral obligation is only relevant in limited circumstances: ‘where the meaning of a promise or assurance is uncertain, a lack of existing moral obligation may reveal that the plaintiff ’s expectation or assumption is extravagant and thus that equity is better satisfied in another and more limited way’.80 In other words, the lack of a trade off or moral obligation goes to the extravagance or unreasonableness of the assumption adopted by the relying party. Proprietary estoppel will only protect the relying party to the extent that his or her assumptions and acts of reliance are reasonable, and whether an assumption is reasonable depends on the circumstances in which it was induced.81 The maximum remedy, therefore, is fulfi lment of the relying party’s reasonable expectations82 and an extravagant expectation cannot in any circumstances be protected. In Jennings v Rice, Robert Walker LJ suggested that ‘it would be unwise to attempt any comprehensive enumeration of the factors relevant to the exercise of the court’s discretion’ in giving effect to an equitable estoppel. It may well be contrary to the spirit of the ‘in the round’ approach even to attempt to list the major factors. Nevertheless, it seems that the principal factors that might be taken into account include the following, in addition to the uncontroversial criteria set out in the second section of this chapter. If the ‘in the round’ approach is accepted as good law then the court not only can have regard to these factors but perhaps ought, for consistency, to do so in an appropriate case. First, the court can have regard to any misconduct or high-handed conduct on the part of the representor. Second, the court can take account of any misconduct on the part of the relying party.83 Th ird, the court can have 79 80 81

82

83

Ibid [40] (Nettle JA, with whom Maxwell ACJ and Ashley JA agreed). Ibid [41] (emphasis added). The leading authority on this point is now Thorner v Major [2009] UKHL 18, [2009] 1 WLR 776 (noted by B McFarlane and A Robertson, ‘Apocalypse Averted: Proprietary Estoppel in the House of Lords’ (2009) 125 LQR 535 and Mee (n 58)). See Wormall v Wormall [2004] EWCA Civ 1643 and A Robertson, ‘Reasonable Reliance in Estoppel by Conduct’ (2000) 23(2) UNSWLJ 87, 97–8. In Jennings v Rice (n 17) [52], Robert Walker LJ suggested that the factors relevant to the exercise of the court’s discretion include misconduct on the part of the claimant. The case cited in support of this proposition was J Willis & Sons v Willis [1986] 1 EGLR 62 (CA) (‘J Willis’), a straightforward unclean hands case in which claimants who had submitted a fraudulent document in support of their claim were denied relief. Cf Gonthier v Orange Contract Scaffolding Ltd [2003] EWCA Civ 873 (‘Gonthier ’) criticized by M Halliwell, ‘Equitable Property Rights, Discretionary Remedies and Unclean Hands’ [2004] Conv 439, 449–51.

proprietary estoppel remedies

421

regard to the present and future financial needs of the parties including, where appropriate, the extent of other claims on the representor’s estate. Fourth, the court can have regard to the fairness and appropriateness of any exchange between the parties. Th is includes an objective element such as that taken into account by the trial judge in Jennings v Rice; ie whether the promise was an appropriate one in the context of the relationship between the parties. The assessment of the fairness of the exchange may also include a subjective element, so that where the assurances have ‘a consensual character falling not far short of an enforceable contract’ then it is relevant that the parties themselves ‘regarded the expected benefit and the accepted detriment as being (in a general, imprecise way) equivalent’.84 While the court might be inclined to grant full expectation relief in the ‘near contract’ situation, the fact that the promise was entirely gratuitous and given in the absence of an existing moral obligation, in a case such as Sullivan v Sullivan, might incline the court towards more limited relief.

F.

The limits of unconscionability

The discussion above has shown that the ‘reprehensibility’, ‘extent of responsibility’ and ‘in the round’ approaches to unconscionability all find some support in the case law. The ‘in the round’ approach has the strongest support, although the outcomes of the cases that are commonly cited in support of that approach can mostly be explained on other bases. The cases in which relief has been refused to a relying party who has engaged in misconduct can mostly be justified on the basis of the ‘clean hands’ defence.85 Cases in which relief has been limited to something less than complete fulfilment of expectations, and in which this outcome might be attributed to a consideration of unconscionability ‘in the round’ factors, can mostly be rationalized on the basis of the proportionality principle.86 Cases in which a generous remedy has been granted against a representor who has engaged in high-handed conduct can mostly be rationalized on the basis that this was the only way to ensure that the relying party suffered 84 85

86

Jennings v Rice (n 17) [45]. Notably J Willis (n 83) and Gonthier (n 83). See also Williams v Staite [1979] Ch 291 (CA) 299 where Goff LJ (with whom Cumming Bruce LJ agreed) accepted in obiter that an equity arising by way of proprietary estoppel can be lost through misconduct, but explained this as an application of the clean hands doctrine. Notably Burrows v Sharp (n 10); Sledmore v Dalby (n 59) 204; Campbell v Griffin [2001] EWCA Civ 990; Strover v Strover (n 19); Sullivan v Sullivan (n 21); Donis v Donis (n 20).

422

Robertson

no detriment.87 It would be difficult to argue that authority compels the ‘reprehensibility’, ‘extent of responsibility’ or ‘in the round’ approach to be followed. It remains to consider the difficulties, in principle and in application, with those different approaches to unconscionability. In a proprietary estoppel case, departure from the relevant assumption is only unconscionable if, inter alia, the departure would cause harm to the relying party as a result of action he or she has taken in reliance on the assumption.88 If that is so, then once the detriment has been avoided, there can be nothing unconscionable in the representor acting inconsistently with the assumption. That is why the choice of remedy in proprietary estoppel cases focuses on what is necessary to prevent detriment resulting from reliance.89 Introducing the representor’s level of responsibility, the reprehensibility of his or her conduct or other conscience-based factors into the remedial equation must necessarily have the effect of either overcompensating or undercompensating the relying party. There can be no justification for either. In order to do justice to the relying party, the courts must ensure that the remedy is adequate to prevent detriment and, in order to do justice to the representor, the courts must ensure that the remedy goes no further than is necessary to prevent detriment. Thus, in Jennings v Rice, Robert Walker LJ said that: ‘The essence of the doctrine of proprietary estoppel is to do what is necessary to avoid an unconscionable result, and a disproportionate remedy cannot be the right way of going about that.’90 Two examples from the recent case law show that courts cannot respond to the degree of responsibility at the same time as ensuring both that the relying party suffers no detriment and that the remedy is proportionate to the detriment. The first example is Munt v Beasley,91 where a tenant improved a loft space on the assumption that the loft space was included in the lease. The landlord acquiesced in that work while being 87

88

89 91

Notably Crabb (n 2). A possible exception is Pascoe v Turner (n 25), although the outcome of that case might perhaps be explained on the basis that the relying party had, as a result of reliance on the relevant assumption, developed a significant emotional attachment to the house in question and would have suffered a substantial emotional detriment if she had been forced to make a new home elsewhere: see Robertson (n 6) 309–12. Th is point is made repeatedly in the case law. See eg, Ottey (n 20) [54] where Arden LJ observed that: ‘In the course of his judgment, Robert Walker LJ [in Gillett v Holt] by implication accepted the argument that what makes an assurance binding is the detrimental reliance on the promise by the person to whom the assurance is given (see [2001] Ch 210 at 227).’ See Robertson (n 6) 302–3. 90 Jennings v Rice (n 17) [56]. [2006] EWCA Civ 370.

proprietary estoppel remedies

423

mistaken as to his own legal rights. The court concluded that fulfi lment of the relying party’s expectation would not be disproportionate to the reliance loss arising from the renovation work. It could be concluded that in this case the representor’s responsibility for the assumption was slight, as it was in Strover v Stover, because he was mistaken as to his own legal rights and confirmed the relying party’s assumption only through acquiescence. It was not possible, however, to weigh that level of responsibility against both the need to protect against reliance loss and the need to go no further than is necessary to do so. The degree of responsibility could only be factored in by undercompensating the relying party. In Ottey v Grundy,92 on the other hand, the relevant assumption was induced by an express promise which was confirmed in writing. The unequivocal nature of the assurance might, in accordance with the extent of responsibility approach, have justified a generous remedial outcome, but there was no room for it to play a role in the determination of relief. The need to ensure proportionality between the remedy and the detriment required a remedy that was less than half the value of the expectation. If the high degree of responsibility borne by the representor was to be factored into the remedial equation, this could only be done by departing from the minimum equity principle and granting a disproportionate remedy. This could be justified only if the remedial goal was to punish the representor. These two examples show that the extent of the representor’s responsibility cannot be factored into an equation that requires the court to ensure both that the relying party is protected against harm and that the remedy goes no further than is necessary to prevent harm. The extent of responsibility can play a role in the determination of relief only if the court rejects both the proportionality principle and the principle that the remedy must provide complete protection against harm. The ‘reprehensibility’ and ‘in the round’ approaches to unconscionability face the same difficulty: the considerations they introduce can be accommodated only by undercompensating or overcompensating the relying party. The ‘in the round’ approach to unconscionability suffers from two additional problems. The first is that the ‘in the round’ approach introduces at the remedial stage factors that do not relate to the reason for intervention, or basis of the equity. The basis of the equity is the representor’s responsibility for ensuring that no harm is suffered by the relying party, as a result of his or her reliance, as a consequence of the 92

Ottey (n 20).

424

Robertson

representor’s inconsistent behaviour.93 As a matter of principle, the remedy should reflect that reason for intervention, and factors that have no relation to the basis of liability should not affect the quantum of relief.94 The second problem is that the factors are not applied consistently. Not only is there obvious scope for disagreement as to the relevance of a particular factor, but it seems that some ‘in the round’ considerations, such as the financial needs of the parties and whether an excessive reward was promised for services performed by the relying party, play a role only in cases involving family members and domestic carers.95 In proprietary estoppel cases arising between parties at arm’s length, the courts consistently assess how best to satisfy the equity by reference to a more tightly constrained set of criteria. In such cases the courts look only to the relying party’s expectations, the nature of the relying party’s detriment, the need for proportionality and how best to achieve it.96 Many proprietary estoppel cases concern dealings between parties at arm’s length. In these cases the courts do not take account of broader considerations such as the needs of the parties or the appropriateness of the relevant promise.97 There can be no justification for treating the remedial question in cases 93

94

95

96

97

Th is point is made by S Bright and B McFarlane, ‘Proprietary Estoppel and Property Rights’ [2005] CLJ 449, 463–5 and McFarlane (n 4) 460. Gardner (n 28) 459–60; Gardner (n 4) 501 (‘As a matter of principle, the quantum of relief ought to be affected only by factors germane to the recipe by which a claim arises at all’). A similar point about the application of settled principles, rather than resort to fairness and unconscionability, in the determination of the commercial cases was made by B McFarlane and D Nolan, ‘Remedying Reliance: The Future Development of Promissory and Proprietary Estoppel in English Law’ (Obligations III Conference, University of Queensland, July 2006). A rare exception to this is Cobbe (n 22), where the Court of Appeal may have taken the reprehensibility of the representor’s conduct into account. Some recent examples are: Scottish & Newcastle plc v Lancashire Mortgage Corporation Limited [2007] EWCA 684, [56]–[57] (dealings between creditors concerning the priority of charges); Bexley London Borough Council v Maison Maurice Ltd [2006] EWHC 3192, [72]–[74] (dealings between landowners concerning access to property); McKeand v Th omas [2006] NSWSC 1028, [2006] NSWSC 1356 (dealings between neighbours concerning licence to run service cables through one property to the neighbouring property); Strover v Strover (n 19) [41]–[45] (dealings between partners in an accounting fi rm concerning interests in a life insurance policy); Sweet v Sommer [2004] EWHC 1504 (Ch) [42]–[43] (dealings between owners of adjoining property concerning a right of way); Hypec Electronics Pty Ltd v Mead [2003] NSWSC 934, aff ’d [2004] NSWCA 221 (dealings between liquidator and company director); Heggies Bulkhaul Ltd v Global Minerals Pty Ltd [2003] NSWSC 851 (dealings between tenant and purchaser of land); O’Brien v Sheahan [2002] FCA 1292 (dealings between trustee in bankruptcy and bankrupts); Roufeil v Lusby [2003] NSWSC 1002 (dealings between liquidator and company directors).

proprietary estoppel remedies

425

between family members and those involving domestic carers as turning on different considerations from those that are applied in cases arising between parties acting at arms’ length, such as neighbours in dispute over a right of way or secured creditors involved in a priority dispute. If it was appropriate in Jennings v Rice to take account of the fact that £420,000 was an excessive reward for an employee, then consistency would require the court also to consider the appropriateness of promises and the fairness of exchanges in proprietary estoppel cases between parties at arm’s length. If the financial needs of the parties are relevant to the determination of the extent of an equity arising by way of estoppel in a domestic case, it is difficult to see why that consideration is not equally relevant to the determination of the extent of an equity arising in a commercial case. If the equity arising by way of proprietary estoppel in the commercial cases is the same as that arising in the family property cases, then the same set of criteria should be applied to determine the appropriate relief. The case of Sledmore v Dalby exemplifies the problems identified above. If, as Hobhouse LJ found, the expense and effort incurred by Mr Dalby in improving the property were outweighed by the benefit of eighteen years of rent-free accommodation, then there was no room for the needs of the parties to play a role in the determination of the remedy. If Mr Dalby’s financial or housing needs were greater than those of his mother-in-law, it is difficult to see how this could justify the granting of a remedy to him if he suffered no net detriment as a result of his reliance on the assumption. A remedy for Mr Dalby could be justified only on the basis that it would be unconscionable for Mrs Sledmore to turn Mr Dalby out of the house because he was in financial need. That financial need would have no connection to the equity arising by way of estoppel (assuming it did not result from Mr Dalby’s reliance on the promise) and could therefore be justified only on the basis of a broader principle that it is unconscionable to assert a property interest against a person in greater need.98 If, on the other hand, the benefits received by Mr Dalby did not adequately compensate him for the effort and expenditure he incurred, then it is difficult to see how his equity could be extinguished by Mrs Sledmore’s need for accommodation. Mrs Sledmore’s obligation not to cause harm by behaving inconsistently would somehow then be 98

As McFarlane (n 4) 460 observes, the court would be taking advantage of the parties’ presence before it to adjust their rights according to ‘some abstract notion that rights relating to land should be distributed according to people’s need’, which not only does not relate to the basis of the claim before the court, but does not form part of the broader system of land law.

426

Robertson

qualified by a counter-obligation on the part of Mr Dalby not to assert an equity against a person in greater need. The refusal of relief in specie to Mr Dalby could perhaps be justified on the basis of hardship as a discretionary bar to the granting of specific relief, but if that were so, the decisive influence on the remedy would be better understood as an application of more broadly applicable equitable principles relating to hardship rather than a principle specific to proprietary estoppel.

G.

Conclusion

Where a proprietary estoppel is established, the representor’s conscience requires that the relying party’s reliance interest is adequately protected, through fulfi lment of the relevant assumption, through adequate compensation or some other remedy. Because reliance loss commonly takes the form of unquantifiable harm, in many cases the only way to ensure that the relying party is fully protected against reliance loss is to require the representor to adhere to the relevant assumption. But once the relying party is adequately protected against reliance loss, the representor’s conscience is assuaged. A remedy that exceeds the minimum necessary to ensure complete protection against reliance loss goes beyond the requirements of good conscience and is unjust to the representor. These considerations properly balance the interests of the relying party and the representor, and properly focus the court’s attention on the reasons for intervention. They leave no scope for factoring in the reprehensibility of the representor’s conduct, the nature of the inducing conduct or broader ‘in the round’ considerations which are unconnected with the basis of the equity arising by way of proprietary estoppel.

19 Partial rescission: disentangling the seedlings, but not transplanting them Peter Watts

A.

Introduction

Fomented by one or two prominent decisions, there has been considerable academic debate in the Commonwealth about the potential within the common law (embracing equity therein) for recognition of a concept of partial rescission.1 More than one writer has pointed out that what is being argued about is not the complex issues that surround the extent to which, and the methods by which, the law places parties back in their pre-transaction positions where a ground for rescinding a contract (or other transaction) arises – called the process of restitutio in integrum.2 What is involved there is full rescission, or cutting away, of the contract from the plaintiff ’s point of view, which often involves consideration of the extent to which justice requires that the defendant be also placed back in his or her pre-contract position. Partial rescission, in contrast, envisages cutting away only some terms of the contract, leaving others on foot. In some cases, too, partial rescission might contemplate fresh terms being added in substitution for those parts that have been cut away. Notwithstanding the differences between the two concepts, we will see that in rare cases partial rescission may yet be an appropriate aspect of the process of restitutio. What has been less conspicuous is that two potential species of partial rescission need to be considered. One arises where it is the victim, for the want of a better word, who seeks to keep part of the contract on foot, or at least to retain some assets obtained under it, but who rejects other parts. 1

2

Much of the literature is collected in D O’Sullivan, S Elliott and R Zakrzewski, The Law of Rescission (Oxford University Press, Oxford 2008) 466. See eg, ibid ch 19.

427

428

Watts

The other arises where it is the perpetrator, again for the want of a better word, who is doing so. These are the seedlings to be disentangled. It might not be thought surprising that one might fi nd victim-sided partial rescission to have a stronger claim for space in the legal garden than perpetrator-sided. However, it is not clear that either type has a pressing case to be transplanted out. In fact, it is perpetrator-sided partial rescission that has drawn most attention, and it is to it that this analysis first turns. Before doing so, it should be noted that what is being considered in this chapter is a remedy arising by operation of law, rather than by agreement. It is possible for parties to a contract to agree to cancel the operation of part of the contract. It would be unusual to make that cancellation retrospective, but, in principle, even retrospective cancellation, inter partes, of those parts should be possible.3 That would be consensual partial rescission, which is not further addressed herein.

B.

Perpetrator-sided partial rescission 1.

The authorities in favour

The chief candidate promoted as suitable for perpetrator-sided partial rescission is the case where the promisee has misrepresented the scope of the relevant contract to the promisor in circumstances where the court is confident that the promisor would have entered into the contract had the promisee’s representation been accurate. The issue arises whether the promisee, notwithstanding his misleading conduct, can hold the promisor to a contract as represented. The most prominent such case is the decision of the High Court of Australia in Vadasz v Pioneer Concrete (SA) Pty Ltd.4 In Vadasz, the appellant promisor agreed to become a surety for the company of which he was a director, in order to secure continuity of construction supplies to the company made by the respondent promisee. The promisee represented that the guarantee would cover only any increased indebtedness of the company when in fact it was drafted as an all-moneys guarantee. Demand subsequently needed to be made on the guarantee, and the promisee claimed for the total indebtedness of the company. The director resisted honouring the guarantee at all, on the basis that its scope had 3

4

See Dan v Barclays Australia Ltd (1983) 46 ALR 437; Rapley v Ferrari (NSWCA, 10 August 1990). (1995) 184 CLR 102 (‘Vadasz’).

Partial rescission

429

been misrepresented to him. At all levels of decision, it was held that the director remained liable for the extended credit incurred by the company, but he was not liable beyond that. It is reasonably clear from the joint judgment of the High Court that the Full Court of the Supreme Court of South Australia had seen itself as rescinding the guarantee in part only, leaving it in place in relation to the extended credit but discharging it in respect of existing credit. The resulting orders were upheld by the High Court. Th is is high authority in favour of a concept of partial rescission. However, it has been argued elsewhere, including by this writer, that it was unnecessary, and indeed less than optimal, for the Court to rest its decision on the basis of partial rescission.5 The preferable order to have given was an order for total rescission of the contract, but conditioned with the requirement that the claimant recompense the promisee for the money it had advanced the company at the promisor’s request. On this argument, this would have been orthodox rescission, which incorporates requirements of restitutio for both parties.6 It should be admitted that these requirements are somewhat unsettled, a point returned to below.7 While on the facts of Vadasz the outcome would have been the same on either analysis, there is an important difference between the two analyses. The matter can be tested in this way. Assume that the surety discovers the creditor’s misrepresentation before the creditor has advanced fresh moneys to the debtor. In the absence of a clause in the guarantee permitting the surety to withdraw the guarantee on notice, partial rescission 5

6

7

M Chen-Wishart, ‘Unjust Factors and the Restitutionary Response’ (2000) 20 OJLS 557; P Watts, ‘Rescission of Guarantees for Misrepresentation and Actionable Non-disclosure’ [2002] CLJ 301. It is not necessary for present purposes to consider the subtleties as to whether in some circumstances rescission is the act of the promisor rather than a remedy given by the court, since on either basis the promisor can be compelled to do justice to the promisee. For the relevant background to this issue, see O’Sullivan, Elliott and Zakrzewski (n 1) ch 10. It might also be noted that the common law has not so far required a party who cancels a contract for breach in performance, as opposed to misrepresentation in formation, to pay anything for services received before cancellation if nothing was due and payable for the services at the date of cancellation: Sumpter v Hedges [1898] 1 QB 673 (‘Sumpter ’). The more accommodating approach within the law of rescission is to be preferred. New Zealand’s Contractual Remedies Act 1979 s 9 has, in effect, abrogated Sumpter. For recent academic discussion of Sumpter, see B McFarlane and R Stevens, ‘In Defence of Sumpter v Hedges’ (2002) 118 LQR 568; J Tarrant, ‘Partial Failure of Consideration’ (2008) 34 UWALR 59; and T Baloch, Unjust Enrichment and Contract (Hart Publishing, Oxford 2009) 170–3.

430

Watts

would leave the surety on the hook for any further advances. Total rescission, in contrast, would enable the surety to say that he or she has not agreed to this document, and it must not be acted upon. Vadasz and its endorsement of partial rescission was followed by the New Zealand Court of Appeal in Scales Trading Ltd v Far Eastern Shipping Co Public Ltd.8 However, the actual order made in that case, also involving a guarantee, appears to have been total rescission on terms, and again the Court provided no justification for partial rescission as against the more orthodox remedy. The Privy Council subsequently reversed the Court of Appeal’s order that the surety recompense the creditor for credit advanced in reliance on the guarantee on the basis that the evidence was that the surety would not have entered into a guarantee of any sort had it been told, as should have been done, of the true arrangements between the creditor and the principal debtor.9 The Privy Council adverted to the concept of partial rescission but declined to address its merits. Daniel Meikle has argued in favour of partial rescission in this context on the basis that it is a concept not only distinct from total rescission but in fact quite unconnected to it.10 He argues that partial rescission is a species of rectification, whereby the court permits a promisee, so long as he or she is uncorrupt, to rectify the relevant contract so that it conforms to the promisor’s understanding of it. He views the situation as analogous to that applying in cases where the promisee makes no misrepresentation but knows that the promisor misunderstands what the relevant document, objectively read, provides for. In such cases of what is called ‘unilateral mistake’, it is now widely thought that the promisor not only can back out of the contract but can, in the alternative, elect to enforce it on the basis of the relevant document being reformed so that it conforms to his or her understanding of it.11 There are two hurdles, perhaps more, to be considered before this argument can be accepted. First, the case of unilateral mistake is an example of victim-sided rectification, whereas we are concerned with what would, if it existed, be perpetrator-sided rectification; even if not negligent, the promisee will usually be responsible for the fact that the written contract does not comport with the promisor’s understanding. It 8 10

11

[1999] 3 NZLR 26. 9 [2001] 1 All ER (Comm) 319; [2001] 1 NZLR 513. D Meikle, ‘Partial Rescission: Removing the Restitution from a Contractual Doctrine’ (2003) 19 JCL 40. The central examples are noted and discussed in D McLauchlan, ‘The “Drastic” Remedy of Rectification for Unilateral Mistake’ (2008) 124 LQR 608, 621–8.

Partial rescission

431

is not altogether clear, however, that fault, short of dishonesty, is a bar to rectification.12 There is something to be said for at least an innocent representor being permitted to seek rectification if its other requirements can be established. Th is leads directly to the second hurdle. Meikle uses the example of rectification for unilateral mistake as illustrating the point that in some contexts the law contemplates a contract being imposed upon a party. However, it has been powerfully argued, in particular by David McLauchlan,13 that in fact rectification, whether for common or unilateral mistake, turns on the claimant showing either that the parties subjectively reached agreement on the basis of the pleaded terms or that the claimant reasonably understood that the parties had so reached agreement. The only distinction between unilateral and common mistake is that with unilateral mistake the promisee knows before it is completed that the document which is intended to reduce the agreement to writing does not conform to the agreement, or to the claimant’s reasonable understanding of the agreement. It follows from this argument that where a party makes a purely unilateral mistake as to what is being agreed that has in no way been encouraged or promoted by the other party, then rescission may be available to the mistaken party if the other knows of the error, but not rectification. In the context of a case such as Vadasz it seems unlikely that the requirements of rectification, on the McLauchlan understanding, would often be made out. Even if the surety may have conducted him- or herself in a way which could reasonably have led the lender to assume that the surety was agreeing to guarantee the lesser obligation, in most cases the lender will not itself have intended to contract on this basis. The lender will have intended to contract solely on the terms of its standard written form, whatever misrepresentations its staff might have made. It has no interest in the narrower undertaking except as a locus poenitentiae in a case like Vadasz. There is no compelling reason to give the lender this refuge. Th is is to say nothing of the fact that rectification in itself is something to be carefully watched because of its effect on the security of formal contracts, reflected in the courts’ circumspection on this topic.14 12

13 14

See N Seddon and M Ellinghaus, Cheshire and Fifoot’s Law of Contract (9th Australian edn LexisNexis, Sydney 2008) [12.38]. McLauchlan (n 11). See now Chartbrook Ltd v Persimmon Homes Ltd [2009] 3 WLR 267. For evidence, see McLauchlan (n 11) 618.

432

Watts

2.

The authorities against perpetrator-sided partial rescission

The notion that rescission operates in toto is very old, and was almost continuously accepted until recently, both for victim-sided and perpetratorsided rescission. This in itself is an important reason for great scepticism as to the virtues of, or at least the necessity for, partial rescission. Because most of the older cases are directed at victim-sided partial rescission, more will be said about those cases when that topic is considered. The most prominent modern decision to reject perpetrator-sided partial rescission is TSB Bank plc v Camfield.15 The claimant surety in this case obtained a plausible action for rescission as a result of the consumerprotection regime introduced by Barclays Bank plc v O’Brien.16 She had been induced to sign the guarantee by her husband’s representation that her liability under it was limited to £15,000, whereas the document contained no such limit. Hence the misrepresentation was not that of the creditor, but the creditor was hoist with it because it had failed to take the steps that O’Brien required as a guard against the possibility of spousal undue influence or misrepresentation. The Court of Appeal held that the wife was entitled to rescind the guarantee in toto, and was not liable to pay anything for the money that the creditor had advanced to the husband’s business venture, not even £15,000 worth of credit. Ironically, Camfield gave an impetus to the concept of partial rescission. Nourse LJ clearly considered that the bank’s claim had some merit, but felt obliged to reject it because he concluded, citing Ferris J in Allied Irish Banks plc v Byrne,17 that the bank, in seeking that the plaintiff remain liable for £15,000 of the more than £40,000 owed by the husband, was seeking partial rescission of the guarantee. In fact, consistently with the above reconstruction of Vadasz, the bank should have been seen as simply seeking equitable restitutio complementary to total rescission. It is hardly surprising, however, that the High Court of Australia, in feeling keenly the same merits, decided in Vadasz not to follow Camfield. That Court then fell into the same trap as the English court, and thought what was entailed was partial rescission. As indicated already, the scope of the restitutio defence to an action for rescission has long been uncertain within the Commonwealth. The 15

16

[1995] 1 WLR 430 (‘Camfield ’). For early authority, see Rawlins v Wickham (1858) 3 DeG & J 304, 321–2; 44 ER 1285, 1292. [1994] 1 AC 180 (‘O’Brien’). 17 Chancery Division, 1 February 1994.

Partial rescission

433

writer has considered this topic elsewhere.18 The argument made is that there are two limbs to the defence: a reliance limb designed to protect the defendant’s reliance on the validity of the relevant contract, and a counter-restitutionary limb designed to require the claimant to account to the defendant for benefits received under the contract before rescission. A defendant’s recourse to the reliance limb, a type of change-of-position defence, is readily lost where he or she was a wrongdoer.19 The counterrestitutionary limb is less readily lost, but it does require proof that the plaintiff was benefited by the defendant. Where there has not been a direct receipt of money, it is probably necessary to show that any service performed for the plaintiff by the defendant (which might include the provision of money to a third party) was freely accepted by the plaintiff.20 This will not be easy where the relevant contract was induced by undue influence or duress, but is feasible where the inducement was merely misrepresentation as to certain facts. In Camfield, Nourse LJ expressly took the view that Mrs Camfield had not been benefited by her husband’s receipt of the loan funds,21 a view endorsed by Millett LJ in Dunbar Bank plc v Nadeem.22 Nonetheless, something must have triggered Nourse LJ’s intuition that the merits were not all in Mrs Camfield’s favour. It is respectfully suggested that it was restitutionary factors that lay behind the intuition. The misrepresentation did not affect the underlying request on the part of Mrs Camfield for some moneys to be advanced to her husband. To the extent that the intuition reflects a combination of a sense of unjust enrichment on Mrs Camfield’s part and a sense of unjust impoverishment on the bank’s, and in relation to services a sense of consent in their conferral, then this is true of most aspects of the law of restitution. The enrichment element has been badly overplayed in modern theorizing about the basis of restitution.23 That said, the authors of The Law of Rescission are also not convinced that in a case like Camfield the surety is benefited by the amount that he 18 19

20

21 23

See Watts (n 5). This probably explains why some judgments refer only to a counter-restitutionary limb: see eg, Dunbar Bank plc v Nadeem [1998] 3 All ER 876, 884 (‘Dunbar’ ). But cf Cheese v Thomas [1994] 1 WLR 29. Cf Halpern v Halpern (Nos 1 and 2) [2007] EWCA Civ 291, [2008] 1 QB 195, [74]. See also Chen-Wishart (n 5). Camfield (n 15) 434. 22 Dunbar (n 19) 884. See P Watts, ‘A Property Principle and a Services Principle’ [1995] RLR 49; and P Watts, ‘Property and “Unjust Enrichment”: Cognate Conservators’ [1998] NZ L Rev 151.

434

Watts

or she was willing to guarantee.24 In order to calculate the value of the benefit received by the surety they argue that the face value of the advance to the principal debtor needs to be discounted by the risk of the debtor’s default at that time. It is true that the discounted sum is the value of the liability that the surety assumes under the guarantee; it is the sum that the surety would need to pay to have someone take the guarantee off her hands. However, for the purposes of the law of restitution it is suggested that it is the service that should be valued, and the service in this instance is the actual cash advanced, if any. In most cases we will not know why the surety values that service; there are likely to be many intangible gains from the action. Hence a spouse may perceive his or her standard of living, or contentedness, as depending on the continuing support of the bank to the debtor’s business. It should be observed, however, that even if it is right to view the benefit to the surety as the face value of the money advanced at the surety’s request (but not, of course, moneys not lent in reliance on that request), that is unlikely to be the end of the story. If the surety discovers the (causative) misrepresentation after some money has been advanced but before the borrower’s insolvency, it is suggested that the surety should be entitled to require the creditor to recall the credit where it is possible to do so under the terms of the loan with the borrower. Alternatively, the surety should be entitled to pay out the creditor and be subrogated to the creditor’s position. If the loan moneys are on-demand, the surety should then be able to exercise those rights to subrogation immediately. Where the credit has been advanced for a fi xed term, then the surety might again choose to pay out the creditor to the extent of any moneys advanced in reliance on the surety’s request and be subrogated to its rights. Otherwise, the surety might prefer to accept a partial rescission. The surety should not, it is suggested, be required to do so if it would prefer to buy out the creditor. This is the partial rescission which was adverted to at the beginning of this paper; it operates only as part of the attempt to effect total rescission. Where the rescission occurs only after the insolvency of the borrower, the surety remains liable for such credit as was advanced at its request. Australia and New Zealand Banking Group Ltd v Petrik,25 a decision of the Court of Appeal of Victoria on similar facts to Vadasz, appears to 24

25

O’Sullivan, Elliot and Zakrzewski (n 1) [19.42]. See too the implicit defence of Camfield (n 15) in N Enonchong, Duress, Undue Influence and Unconscionable Dealing (Sweet & Maxwell, London 2006) 503. [1996] 2 VR 638 (‘Petrik ’).

Partial rescission

435

be an example of partial rescission being given as a result of the victim’s election. The judgment of Phillips JA, with whom Brooking and Tadgell JJA agreed, reveals that the Court felt some discomfort with the concept of partial rescission, and one infers that variants on total rescission were canvassed with counsel. Counsel for the bank sought as a condition of any complete rescission that the defendant surety pay AU$20,000 (agreeing to forgo interest at the contractual rate), the amount for which she had consented to stand surety, or alternatively that the guarantee stand enforceable as to that sum. Counsel for the defendant indicated his client’s preference for the latter remedy, and so partial rescission was in substance ordered. The order in Petrik meant that the bank retained a mortgage against the surety, as part of the surety’s election for partial rescission. It is an interesting issue whether counter-restitution should, in general, encompass the giving of proprietary rights to the promisee in circumstances where the promisee had proprietary rights before rescission. By analogy with cases such as Butler v Rice, 26 and without the need to endorse the constructive trust conferred in Chase Manhattan Bank NA v Israel-British Bank (London) Ltd,27 it may be that the surety’s liability for the agreed sum should be secured against the pre-rescission secured assets. The Court in Petrik did not need to give this issue particular attention, there being no suggestion that the surety was in financial difficulty.

3.

Summing up on perpetrator-sided partial rescission

It turns out that Vadasz is not a very convincing authority for partial rescission, and Camfield is not a very convincing authority against partial rescission, since in neither case was it necessary for the concept to be invoked by the parties. Not much weight can be put on it, but one might regard Camfield as carrying more conviction, because the Court turned down the option of partial rescission in the face of evident sympathy for the promisee, whereas in Vadasz the court never addressed the alternative of what rescission in toto might require on the facts. Camfield has since been followed in England. It has been assumed that the case is of general application, and hence as being against both victim-sided partial rescission,28 and perpetrator-sided partial rescission.29 26 28 29

[1910] 2 Ch 277. 27 [1981] Ch 105. De Molestina v Ponton [2002] 1 All ER (Comm) 587 (‘De Molestina’). See eg, Castle Phillips Finance Co Ltd v Piddington [1995] 1 FLR 783.

436

Watts

However, in Johnson v EBS Pensioner Trustees Ltd,30 the Court of Appeal declined to give rescission at all in a case reminiscent of Camfield, except that the ground of rescission was failure properly to avoid a conflict of interest, rather than misrepresentation. Equitable rescission was seen by the Court as a discretionary remedy which the Court then proceeded to withhold.31 Nothing was said, however, to favour partial rescission as an option. In terms of the merits, there seems much to be said for the argument that where a misrepresentation is sufficiently significant that, had the promisor known what the document provided for he or she would not have signed it, that fact should, prima facie, entitle the promisor to withdraw from the contract altogether. Convincing arguments the other way have yet to be made, so far as this writer can see. In Vadasz the High Court appears to have seen the merits of partial rescission as resting on the same considerations as total rescission on terms, but the case for the more promisee-centred remedy is not made out. To deny the misrepresentor what in effect is the defence of partial rescission is consistent with the common law’s approach to measuring damages for misrepresentation. Once representees show that a negligent or fraudulent misrepresentation caused them to enter into their respective contracts they are entitled by way of damages to be placed back in their pre-contract positions. It is irrelevant that they would have lost money even had the representations been true.32

C.

Victim-sided partial rescission 1.

The authorities in favour

That there might be more to be said in favour of victim-sided partial rescission gains circumstantial support from the fact that New Zealand already has it, as a result of section 9 of its Contractual Remedies Act 1979. Th is datum will be discussed before such scarce evidence as exists at common law is adduced.

30 31

32

[2002] EWCA Civ 164, [2002] Lloyd’s Rep PN 309. Again, see the different approach in Australia in Maguire v Makaronis (1997) 188 CLR 449, where rescission was permitted but on condition of restitutio in integrum. Smith New Court Securities Ltd v Citibank NA [1997] AC 254, 267, 283. See too Toteff v Antonas (1952) 87 CLR 647, 650–51.

Partial rescission

437

(a) Contractual Remedies Act 1979 (NZ) The New Zealand provision operates as follows. Upon cancellation of a contract, but without prejudice to the victim’s common law rights to damages, a court may, in its discretion, order a party to the contract to do any one or more of the following: vest property that has been the subject of the contract in the other party; pay a sum of money to that other party; or direct any party to the proceedings to do or refrain from doing in relation to any other party any act or thing as the court thinks just. The thinking behind section 9 is not altogether accessible, 33 but it is likely that it was intended to overcome some of the perceived defects in the law of money had and received. In particular, the rule requiring a total failure of consideration before a refund could be obtained for breach of contract was widely thought too constraining. It was also thought that the inability of the party in breach of contract to get anything for work and materials except as a factor in the measure of a victim’s claim for damages was unjust – the common law bar on any claim being available to the contract-breaker is associated with Sumpter v Hedges.34 However, what is clear is that the Act as a whole was designed to assimilate the remedies for pre-contract misrepresentation with those for contractual breach leading to cancellation. This had the consequence that if it were going to be possible to give partial refunds for breach of contract (but only upon cancellation; partial refunds where the contract were left on foot were not provided for), it had also to be possible to give partial refunds for misrepresentation. To the writer’s knowledge there is not yet a reported example of partial rescission for misrepresentation being granted under New Zealand’s Contractual Remedies Act, although the most celebrated case under the Act, Newmans Tours Ltd v Ranier Investments Ltd,35 involved a partial refund for breach of contract. Here the plaintiff contracted to buy as part of one transaction three travel agency businesses, one in Honolulu and the other two in Seattle. It then cancelled the contract for breaches by the vendor. However, it wished to retain the Honolulu business, while rejecting the Seattle ones. It sought, under section 9, a refund for the Seattle businesses. The contract provided for a unitary price. Fisher J, affirmed 33

34

The Report of the Contracts and Commercial Law Reform Committee, Misrepresentation and Breach of Contract (reprinted January 1978) is not very elucidating on s 9. Sumpter (n 7). 35 [1992] 2 NZLR 68 (‘Newmans Tours’).

438

Watts

on this aspect of the case by the Court of Appeal,36 gave a refund based on the relative size of the turnover of the Seattle businesses to the combined turnovers of the businesses. It is to be assumed that a similar solution would have been available had the plaintiff ’s complaint been that misrepresentations had been made affecting the Seattle businesses.

(b) Bridgewater v Leahy Far and away the most prominent common law example of victim-sided partial rescission is another decision of the High Court of Australia, Bridgewater v Leahy.37 One cannot refrain from saying that Bridgewater is a most surprising decision. It is remarkable enough for its majority finding of unconscionability, but it is astonishing in its approach to remedy. It demonstrates a principal danger of recognizing partial rescission, namely that the remedy can result in a quite different transaction to that agreed to by the parties. It should be said that Michael Bryan gave it a dispassionate treatment, albeit in a context where he was not focusing on remedy.38 On the other hand, Jack Beatson and Graham Virgo have described it as ‘the high water mark of what can be seen as a process of discretionary “practical justice” in which the competing interests are balanced’,39 and the authors of The Law of Rescission note that the case is ‘difficult to reconcile with any recognized or comprehensible principle’.40 The dissenting judgment of Gleeson CJ and Callinan J, which opens the report, remains undented, it is suggested, by the judgment of Gaudron, Gummow and Kirby JJ which follows it. Nonetheless, it is the majority judgment which creates the precedent. Although we are principally concerned with the remedy, a narrative of the facts is needed. The plaintiffs were suing in right of a testator, Bill York, to have set aside certain inter vivos dispositions that he had made in favour of his nephew, Neil York. Bill was a farmer who by his old age had acquired a number of farming properties, some jointly owned with his brother, Neil’s father. Bill had four daughters and no sons. Bill, his brother, and Neil, who had worked on the farms most of his adult life, formed a 36 37 38

39

40

Coxhead v Newmans Tours Ltd (1994) 6 TCLR 1. (1998) 194 CLR 457 (‘Bridgewater ’). M Bryan, ‘Unjust Enrichment and Unconscionability in Australia: A False Dichotomy?’ in J Neyers, M McInnes and S Pitel (eds), Understanding Unjust Enrichment (Hart Publishing, Oxford 2004) 58–9. J Beatson and G Virgo, ‘Contract, Unjust Enrichment and Unconscionability’ (2002) 118 LQR 352, 354. O’Sullivan, Elliot and Zakrzewski (n 1) fn to [19.27].

Partial rescission

439

partnership to run the properties. As Bill aged, the bond between Neil and him became closer. When Bill was aged 81, in 1985, he made a will that gave Neil an option to purchase for AU$200,000 all Bill’s pastoral holdings together with his interest in the other assets of the farming partnership, valued at the time at nearly AU$700,000. His four daughters were named as the residuary beneficiaries. At the time, Bill had full testamentary capacity and the trial judge found that Bill had initiated the option proposal and was not acting under any pressure or influence from Neil. Neil was not present when Bill gave instructions to his solicitor to prepare the will. The plaintiffs also challenged this will, but failed at first instance and did not pursue the challenge on appeal. Some two and a half years later, Neil approached Bill suggesting that Bill sell him a substantial part of his pastoral holdings for AU$150,000. The impetus for this was that Neil had just acquired that sum as a result of selling land that he himself owned. Bill had been wanting Neil to sell that land, because it was some distance away and a distraction from Neil’s work for the partnership. There was no evidence that Neil made the proposal in order to forestall the possibility of a challenge to the will after Bill’s death. By this time Bill’s faculties were weakening somewhat, but he was found to have had testamentary capacity and understanding (he was examined by a doctor for this purpose). The same solicitor as prepared the will prepared the documents to give effect to this new plan. Evidence of a later consultation with the solicitor showed that Bill thought that he had made adequate inter vivos gifts in favour of his daughters and in the will to justify his having made such a favourable transaction with Neil. One way or another, there is much to be said for the conclusion of the dissenting judges that Bill showed a consistent and independent cast of mind. He was very generous to Neil but that was how he wanted things. At the same time, the majority judgment sets out a patch of crossexamination from the trial which rather suggests that Bill had come to defer to Neil, whom he treated as a son and whom he saw as providing the continuity he desired for the farming business. A short extract from the judgment is as follows: That’s the way he reacted to you all the time, wasn’t it? – Most of the time, yes. Whatever you wanted you could have? – Not all the time. Well, can you give me one instance of when you wanted something and he wouldn’t give it to you? – Well, early in the piece I know when I wanted to buy a new tractor he wouldn’t let me do that. How many years ago was that? – Probably 1980 and that.

440

Watts

Further facts are now needed to understand the remedy that was given. The transaction itself, as is common, was not structured as an outright sale and purchase for AU$150,000, but comprised two documents under one of which Neil agreed to buy the properties for full value set at AU$696,811, with AU$150,000 payable on settlement, and the balance to be forgiven in stages pursuant to a deed of forgiveness of debt. The existing will was not itself altered as a result of the transaction, notwithstanding that the transaction effectively accelerated much of what would occur upon Bill’s death. Hence, the option found in the will was left intact. This, on the face of things, was beneficial to the residuary beneficiaries, since the option in the will could now apply only to such pastoral land as remained in Bill’s hands yet the price remained AU$200,000 should Neil exercise the option. It is not clear, however, that this side effect was a factor weighing with either Bill or Neil. Nine months later, Bill died, aged 85. As indicated, the residuary beneficiaries subsequently challenged the will, the inter vivos dispositions, and also instituted proceedings under the family protection provisions of the Succession Act 1981 (Qld). The plaintiffs did not move with expedition, however, and the proceedings under the Succession Act were dismissed on the basis of want of prosecution, a result that was not challenged in the litigation that made its way to the High Court. The plaintiffs failed at first instance and in the Queensland Court of Appeal, by majority, but succeeded in the High Court. The remedy given by the High Court was as follows. It permitted the plaintiffs, the estate, to elect to set aside the deed of forgiveness without having also to set aside the sale of the land. This prima facie left Neil on the hook for approximately AU$550,000 (land value less the AU$150,000 he had paid in cash), plus interest at commercial rates. This was partial rescission since, as the Court appreciated, the two contracts were interdependent, and the Court can be taken to have accepted that prima facie the two were to be treated as a single transaction.41 The Court then concluded that this result was too generous to the plaintiffs: ‘in seeking equity, the estate must be prepared to do equity’.42 The deed of forgiveness needed to be made unenforceable in some sum, which the Court held would be best determined by returning the case to the trial judge for this purpose. The 41

42

Ordinarily, contracts agreed to be interdependent should be treated as one, and rescindable either as one or not at all: De Molestina (n 28) [6.9]. See too Holliday v Lockwood [1917] 2 Ch 47 (‘Holliday ’). Bridgewater (n 37) [125].

Partial rescission

441

Court indicated that the reason for the unjustness of the prima facie order for rescission was that there would otherwise be very little benefaction for Neil under the will (he retained the option in the will but now there was little land to which it would apply, the evidence being that the value of the option was, as a result of the order, only AU$48,000). The testator’s real desire to benefit Neil should be given some recognition, along with consideration of the moral claims of the widow and daughters reflected in the Succession Act, even if strictly that Act no longer had application to the proceedings. Th is, it is suggested, is insupportable. In the fi rst place, the result of partial rescission was to leave Neil liable in contract for something which he never contemplated, let alone agreed to. It is not at all clear that he had the fi nancial resources to buy the land, even on credit, which the Court set at commercial rates of interest; indeed, it is a fair inference that he did not. It is not unheard of for rescission to result in the promisee being left in a worse position than if he or she had not committed the ‘wrong’,43 but it is unheard of for a court to make the promisee personally liable to the promisor in contract for a completely different bargain than agreed to.44 Yet the Court saw the only injustice as being that as a result of the partial rescission Neil would also receive relatively little benefaction under the will. Th is leads to the second point. The Court seems to have had little compunction in using its orders to effectuate a rewriting of the will, notwithstanding that the plaintiffs had failed in their attack on the will and had failed to keep alive their claim under the Succession Act. The only proper remedy in these circumstances, it is submitted, would have been total rescission of both the sale and the deed of forgiveness. Some readjustments might have been necessary to achieve restitutio. Whatever Neil’s shortcomings in his dealings with Bill, it is submitted that they provided no basis for imposing a positive duty on him to free Bill of his influence in order that Bill might have had the opportunity to reconsider the wisdom of his will. Given that nothing else caused Bill to rewrite his will, and that the appellants had failed in their challenge to the will, there was no basis on which the Court could prevent the will taking

43

44

See eg, MacKenzie v Royal Bank of Canada [1934] AC 468, discussed in Watts (n 5) 302–7. Presumably, the Court would have made Neil pay the full price of the land even if the transaction had not been structured in two parts, but to the extent that the structure was a factor, it was another fortuity for which Neil was not at least personally responsible.

442

Watts

effect in Neil’s favour. The appellants had to be left responsible for their own litigation decisions in relation to the family protection claim. Apart from Bridgewater, the writer knows of no case where victimsided partial rescission has occurred.45

2.

Authorities against victim-sided partial rescission

As indicated already, there is a long line of authority insisting that a victim can rescind a contract only in toto. Some of these are listed in The Law of Rescission.46 This general rule does not apply where parts of a contract, or items in a chain of contracts, are severable by express or implied agreement of the parties.47 In many ways it is not necessary to go much past Myddleton v Lord Kenyon48 in 1794. The long but very colourful judgment in this case of Lord Loughborough LC could not be more emphatic that partial rescission is not an option in equity’s armoury. Here the plaintiff, Myddleton, had had very substantial interests in land, some of which were entailed in favour of his son. He got himself into debt to the tune of £100,000 and a deed of composition was made with trustees for his creditors, to which his son was also a party, which involved the trustees obtaining control of all their land. The plaintiff some five years later brought this action alleging misrepresentation and other defects in the procuring of the deed, and, amongst other things, that the deed resulted in his son being unduly favoured. If the deed could not be rescinded as against the creditors, it should be rescinded as between himself and his son, he argued. He failed. The following are extracts from the judgment of the Lord Chancellor:49 The relief prayed is not to set aside the deed as null and void; but to declare, that all the trusts are void after that for payment of the debts; leaving all those parts to stand, and obtain their full effect so far as the payment of the debts goes. The species of relief it is totally incompetent to the Court to give. The deed may be set aside in toto. Any bargain, the parties enter into with each other, may be declared null, and set aside, upon grounds of undue practice or influence exerted, mistake. I do not say, want of consideration; for a bargain without consideration is a contradiction in terms, 45

46 47

48

The breadth of remedy endorsed by the majority judgment has, however, been remarked upon in subsequent cases: see Urane v Whipper [2001] NSWSC 796, [29]. O’Sullivan, Elliot and Zakrzewski (n 1) 457–8. See eg, Holliday (n 41); Don Lodge Motel Ltd v Invercargill Licensing Trust [1970] NZLR 1105. (1794) 2 Ves 391, 30 ER 689. 49 Ibid 408; 697–8.

Partial rescission

443

and cannot exist. These grounds would entitle the Court to set it aside in toto: but I cannot make a new bargain for the parties; or force them into a new agreement upon those things, which are matter of absolute will, and depending totally upon the consent and temper of the parties. I cannot make a new family settlement. No judge is competent to such an act … Each of the parties is rei suae arbiter et moderator. The only possible effect of the judgment of the Court, that it is improper, is to rescind it. This Court, if it was to go farther, and to substitute other terms, would make itself the moderator of the private affairs of all the families of England. I cannot say to the father or the son, ‘you ought to make these concessions’. I cannot say, the father ought to tie up the son to a life estate. The answer to all that is the temper of the parties and their disposition at the time.

Two reasons for the rule against partial rescission can be inferred from this passage. First, it is perceived that to leave parts of a contract in force while removing others is in fact to make a new bargain for the parties, something that should not be done even against a wrongdoer. Second, if the court were to admit of its power so to reform bargains upon a defect in the making of a contract being proven, it would promote litigation, not so much induced by the defect itself but by the prospect that a new and more favourable bargain might be finessed from it. The legion of later cases do not add much to this reasoning, except to add the point that usually the victim will be adequately protected by damages if he or she is unable to rescind in toto. Damages will not be an option where a misrepresentation is innocent and non-negligent, but then in such cases the claimant’s case is weaker. This point about the adequacy of damages is made in cases such as Urquhart v MacPherson,50 and The Sheffield Nickel and Silver Plating Co Ltd v Unwin.51 These reasons all have force. The dangers of partial rescission imposing a new bargain on the defendant are well borne out by Bridgewater. Having said that, part of what makes Bridgewater such a poor advertisement for partial rescission is that which has assisted many other cases that have declined partial rescission to appear so compelling. This is that the party seeking partial rescission often wants to cut away part of the contract but give no restitutio for doing so; in other words petitioners for partial rescission want a one-sided deal. Urquhart is a good example, where the claimant wished to keep all of the assets he had acquired from the defendant under a contract by which they had dissolved their farming partnership, but at the same time rescind the clauses by which he had given up any 50 51

(1878) 3 App Cas 831 (PC) (‘Urquhart ’) 838. (1877) 2 QBD 214 (‘Sheffield Nickel ’) 223.

444

Watts

claims the partnership may have had against the defendant. The same can be said of the unsuccessful claim for partial rescission in the Sheffield Nickel case.52 Contrast that selfish approach with that in the Newmans Tours case where the plaintiff was wanting to return the Seattle businesses to the defendant but was not seeking to combine that remedy with any more than an equivalent part of the total consideration that had been paid for all three businesses. In such circumstances, partial rescission has a degree of merit. It may be considerably simpler for a plaintiff to return assets it does not want and get a refund than to have to keep them and try to assess as damages what its ongoing losses might be. It is true that in many cases such an outcome will not have been adverted to by the contracting parties, but then that is true of most remedies that arise upon cancellation of a contract. In a recent case bearing some likeness to Newmans Tours, Emhill Pty Ltd & Anor v Bonsoc Pty Ltd (No 2),53 the Victorian Court of Appeal ruled that partial rescission was not available to a victim of misrepresentation, notwithstanding that Vadasz had opened the door to perpetrator-sided partial rescission. The nature of the plaintiff ’s claim is not altogether clear, but it appears that, as one of a series of discrete leases, it entered into a lease of two units in a building complex, one unit being retail premises and the other a car park associated with it. There was one composite rental for the two units. The defendant in fact did not own the car park and therefore was not in a position to lease it. The plaintiff occupied the premises for the term of the lease but was apparently seeking a refund in relation to the misrepresentation about the carpark. Warren CJ, with whom Buchanan and Ashley JJA agreed, declined to permit rescission, either total or partial, since there was no separate rental specified for the car park.

3.

Summing up on victim-sided partial rescission

In theory, there might be a place for victim-sided partial rescission. If operated fairly, it could provide a plaintiff with an alternative remedy to damages; unwanted property could be returned and a partial refund obtained. It would involve the court in trying to assess what would be

52 53

See too United Shoe Machinery Co of Canada v Brunet [1909] AC 330 (PC) 340. [2007] VSCA 108.

Partial rescission

445

the appropriate degree of refund, but that may be a simpler task for both plaintiff and the court than establishing the extent of the plaintiff ’s loss. On the other hand, its absence from the remedial menu is hardly a source of serious injustice, or shame for the common law. It must, therefore, be doubtful that it is appropriate for judges now to relent in their opposition to the concept after more than 200 years of consistent antipathy. If it were done, it would be difficult not to also revisit the common law’s insistence that only a total failure of consideration can generate a refund for breach of contract. It may also be that the release of the remedy will lead to new problems in the law, such as occurred in Bridgewater where one-sided partial rescission worked an injustice to the defendant.

D.

Conclusion

The validity and merits of the concept of partial rescission, cutting away part only of a contract leaving the rest on foot, need to be assessed separately depending on whether it is the victim, or the perpetrator, who is seeking the remedy. It is difficult to see any case for partial rescission in support of a wrongdoer. However, a strong argument can be made that the counterrestitution that is a condition of rescission in toto will sometimes provide an outcome that can look like partial rescission. For this reason, the Vadasz case, favouring partial rescission, is argued to be rightly decided for the wrong reasons. Camfield was correct to reject a concept of partial rescission, but wrongly overlooked the possibility of total rescission on terms. There are more merits to victim-sided partial rescission. However, it is not clear that its long absence from the menu of common law remedies is a serious gap in the remedial system. If improperly used, to allow a one-sided cutting away, it is capable of injustices of its own, witnessed by Bridgewater.

20 Of horses and carts: theories of indefeasibility and category errors in the Torrens system Kelvin FK Low *

A.

Introduction

The essays collected in this volume are drawn from multiple jurisdictions and cover a broad range of legal issues – demonstrating both Michael Bryan’s breadth of scholarly interests and the reach of his work. Of the many subjects that have engaged his interest, Bryan’s knowledge and expertise in equity is unquestionable, having written dozens of articles on the subject of equity and trusts and being invited to contribute to the seminal Australian text on the law of trusts.1 One fascinating area in this wide landscape of equity is how equitable principles apply and operate in the context of Torrens land registration. For some years now, Bryan has been teaching this difficult subject in a course entitled ‘Equity in Real Property Law’ for the Melbourne Law Masters programme. However, those of us who have not had the benefit of attending Bryan’s course may glimpse his insight into the subject only through his published work. His fi rst on this subject was originally published in the University of Queensland Law Journal2 before it was reprinted with an expanded introduction in one of the many Festschriften3 honouring the late *

Materials on the Torrens system have not been easy to come by and I would like to thank Kelry Loi, Tang Hang Wu, my brother Low Fatt Sheng and the staff of the Lui Che Woo Law Library at the University of Hong Kong for their assistance in retrieving relevant material from Singapore, Australia and elsewhere. I am also grateful to the editors for providing me with proofs of Michael Bryan’s article with Matthew Harding, ‘Responding to Fraud in Title Registration Systems: A Comparative Study’, thereby averting the obsolescence of this essay even prior to publication.

1

H Ford and others, Principles of the Law of Trusts (3rd edn Lawbook Co, Sydney 1994). (2007) 26 UQLJ 83. Including one edited by Bryan himself: M Bryan (ed), Private Law in Theory and Practice (Routledge-Cavendish, Oxford 2007).

2 3

446

Category errors in the Torrens system

447

Peter Birks – Structure and Justification in Private Law.4 In that article, ‘Recipient Liability under the Torrens System: Some Category Errors’, Bryan lamented that, as it analyses what some might consider ‘a narrowly domestic issue of Australian law … it might have disappointed Birks, who was ever the opponent of legal nationalism’.5 Although he then stressed that the issue of recovery of land within a framework of statutory title registration was universal, Bryan perhaps understated the significance of the article. Characteristically modest, the essay was clearly of interest beyond Australia. The Torrens system of registration has spread far beyond the shores of Australia to New Zealand, Singapore, Malaysia, parts of Africa, including Kenya and Sudan, numerous provinces in Canada, various States of the United States of America and the British Overseas Territories in the Caribbean. The Torrens system has ever been the subject of interest to English scholars,6 and keen interest in the rich literature and case law concerned with the Torrens system remains today, even after the recent overhaul of the English system of land registration via the Land Registration Act 2002 (UK).7 Th is comparative interest of scholars in other land registration systems is itself reflected in Bryan’s other article on the subject, ‘Responding to Fraud in Title Registration Systems: A Comparative Study’,8 co-authored with Matthew Harding. One of the most controversial topics in the overlap between equity and Torrens registration is the scope and nature of what have alternately been christened ‘personal equities’ or ‘claims in personam’. Within this difficult area, the topic of claims under the first limb of Barnes v Addy,9 or recipient liability, is arguably the most contentious. It should not come as a surprise, therefore, that this subject occupied Bryan for all of his first article and a significant part of his second. While Bryan’s works will form the starting point for my essay, I do not propose to cover the same ground. 4

5 6

7

8

9

M Bryan, ‘Recipient Liability under the Torrens System: Some Category Errors’ in C Rickett and R Grantham (eds), Structure and Justification in Private Law (Hart Publishing, Oxford 2008) 339−59. Ibid 339. See eg, TBF Ruoff, An Englishman Looks at the Torrens System (The Law Book Co, Sydney 1957). See eg, E Cooke and P O’Connor, ‘Purchaser Liability to Th ird Parties in the English Land Registration System: A Comparative Perspective’ (2004) 120 LQR 640. M Harding and M Bryan, ‘Responding to Fraud in Title Registration Systems: A Comparative Study’ in M Dixon (ed), Modern Studies in Property Law (Vol 5) (Hart Publishing, Oxford 2009) 3. (1874) LR 9 Ch App 244 (‘Barnes v Addy ’).

448

Low

Whereas Bryan focused on the mistakes committed in the process of translating specific claims into the context of Torrens registration in his first article and undertook a more open-ended comparative study in his second, this essay proposes to consider the nature and limits of indefeasibility or, speaking conversely, the scope and basis (or bases) of personal equities or claims in personam. On the other hand, this essay is more constrained than Bryan’s second article as it does not purport to consider amendments that could and ought to be effected to Torrens registration systems through a comparative study of other land registration systems.

B.

Setting the stage

A trustee (T) disposes of trust property to a stranger (S) in breach of trust. T then either absconds or is discovered to be a man of straw with no traceable proceeds in his possession. What are the remedies available to the beneficiary of the trust (B)? Outside of the statutory registration scheme and where S retains the trust property, the answer to the question is not difficult. B having an equitable proprietary interest in the trust property from the outset, this interest will bind S unless he is a bona fide purchaser of the legal interest for value without notice of B’s competing interest. There is some dispute as to whether the trust so affecting S is express, merely persisting through the transfer from T to S,10 or constructive, being imposed upon S.11 The best description may well be that S is a ‘constructive trustee of an express trust interest’.12 However, in spite of the controversy, the result is nonetheless clear. Provided the trust property (or its traceable proceeds) remains identifiable in S’s hands, B may claim an interest in it. This he may do in various ways. B may be, though this is unlikely, content to seek a declaration that S holds the property on trust for him.13 Alternatively, provided B satisfies the requirements in Saunders v Vautier,14 B may require S to convey legal title to the property to him. Finally, B may ask the courts to require S to transfer the property to new or other non-defaulting trustees to hold on trust for B.15 There is 10 12

13

14 15

See eg, Bryan (n 4) 342−4. 11 See eg, ibid 344−5. JE Penner, The Law of Trusts (5th edn Oxford University Press, Oxford 2006) 113. See also L Smith, ‘Transfers’ in P Birks and A Pretto (eds), Breach of Trust (Hart Publishing, Oxford 2002) 111, 138. Cf Bridges v Mees [1957] Ch 475. See generally, R Meagher, D Heydon and M Leeming, Meagher, Gummow and Lehane’s Equity: Doctrines and Remedies (4th edn Butterworths LexisNexis, Chatswood 2002) ch 19. (1841) 4 Beav 115, 49 ER 282. J Mowbray and others, Lewin on Trusts (18th edn Sweet & Maxwell, London 2008) 1673.

Category errors in the Torrens system

449

no question of resort to Barnes v Addy. In these circumstances, B’s claim is sometimes referred to as equity’s vindicatio.16 Where, however, S has disposed of the trust property and no traceable proceeds remain in his hands, the above proprietary claim cannot succeed as against S for the obvious reason that the res is no longer in S’s possession. Provided it can be found in another party’s possession, the same claim may be brought against that party. However, as against S, it is only possible to seek a personal remedy. This is the point at which the first limb of Barnes v Addy becomes relevant. According to Lord Selborne, S will only be personally liable to B if he had some notice or knowledge of B’s competing interest.17 Leaving aside more recent agitations for a form of strict liability on the basis of unjust enrichment,18 rejected by the High Court of Australia in Farah Constructions Pty Ltd v Say-Dee Pty Ltd,19 the degree of notice or knowledge required to render S personally liable on the first limb of Barnes v Addy is a matter of some controversy.20 Nevertheless, this controversy need not detain us. Even if mere constructive notice sufficed for the purposes of personal liability under the first limb of Barnes v Addy, this still sets a higher threshold than equity’s vindicatio. Thus, where B simply wishes to ‘recover’ trust property outside the Torrens system, there is no reason to resort to a claim under the first limb of Barnes v Addy. All of this is tolerably clear. The difficulty arises where a beneficiary wishes to recover Torrens registered land transferred in breach of trust. A series of cases21 culminating with the High Court’s decision in Farah 16 17 18

19 20

21

P Birks, Unjust Enrichment (2nd edn Oxford University Press, Oxford 2005) 64−5. (1874) LR 9 Ch App 244, 251−2. See eg, P Birks, ‘Misdirected Funds: Restitution from the Recipient’ [1989] LMCLQ 296; Sir PJ Millett, ‘Tracing the Proceeds of Fraud’ (1991) 107 LQR 71; Lord Nicholls of Birkenhead, ‘Knowing Receipt: The Need for a New Landmark’ in WR Cornish and others (eds), Restitution: Past, Present and Future: Essays in Honour of Gareth Jones (Hart Publishing, Oxford 1998) 231; P Birks, ‘Receipt’ in Birks and Pretto (n 12) 213; Lord Walker of Gestingthorpe, ‘Dishonesty and Unconscionable Conduct in Commercial Life: Some Reflections on Accessory Liability and Knowing Receipt’ (2005) Syd LR 187. Contra L Smith, ‘Unjust Enrichment, Property and the Structure of Trusts’ (2000) 116 LQR 412; S Worthington, Equity (2nd edn Oxford University Press, Oxford 2006) 179−89. See also KFK Low, ‘Recipient Liability in Equity: Resisting the Siren’s Lure’ [2008] RLR 96. (2007) 230 CLR 89 (‘Farah ’). See C Harpum, ‘The Stranger as Constructive Trustee’ (1986) 102 LQR 114, 120−7; S Gardner, ‘Knowing Assistance and Knowing Receipt: Taking Stock’ (1996) 112 LQR 56, 57−64. Koorootang Nominees Pty Ltd v Australian and New Zealand Banking Group Ltd [1998] 3 VR 16; Macquarie Bank Ltd v Sixty-Fourth Throne Pty Ltd [1998] 3 VR 133 (‘Macquarie Bank ’); LHK Nominees Pty Ltd v Kenworthy (2002) 26 WAR 517; Tara

450

Low

appear to confuse the two forms of liability in the course of translating the claim from ‘general law’ to Torrens registration. According to Bryan, this ‘Selbornising’ of the recovery of trust property ‘has not been justified, or even very much noticed, by the judges who have [done] it.’22 By employing one basis of liability (knowing receipt) to obtain a remedy available under a very different basis of liability (vindicatio), the courts have ‘overlook[ed] some verities of the law of equitable title’.23 In other words, they have committed a serious ‘category error’. In both his papers, Bryan closely studies the decision in Farah, the facts of which are a complex variation of the theme illustrated above. However, its particular complications do not concern us. We are only concerned with the High Court’s conclusion that a claim under the first limb of Barnes v Addy is barred by indefeasibility. The court appears to have reasoned thus for two reasons. First, there is no relevant receipt as a registered proprietor does not receive title to the land from the defaulting trustee but by virtue of registration under the Torrens statute. Second: to recognise a claim in personam against the holder of a mortgage registered under the Transfer of Land Act, dubbing the holder a constructive trustee by application of a doctrine akin to ‘knowing receipt’ when registration of the mortgage was honestly achieved, would introduce by the back door a means of undermining the doctrine of indefeasibility which the Torrens system establishes.24

The first objection will not be considered here as it is peculiar to the knowing receipt claim.25 The second merely asserts incompatibility without an accompanying explanation and is accordingly unconvincing. It is thus not surprising that this aspect of the court’s decision has not been regarded as having the authority that a decision of the High Court would usually command.26 In his first article, Bryan acknowledges that the High Court was correct in rejecting the claim to recover the land

22 24 25

26

Shire Council v Garner [2003] 1 Qd R 556; Robins v Incentive Dynamics Pty Ltd (in liq) (2003) 175 FLR 286. Bryan (n 4) 348. 23 Ibid 359. Macquarie Bank (n 21) 157 quoted in Farah (n 19) 169. But see KFK Low, ‘The Nature of Torrens Indefeasibility: Understanding the Limits of Personal Equities’ (2009) 33 MULR 205, 229−30. In addition to doubts expressed by Bryan (n 4), see R Chambers, ‘Knowing Receipt: Frozen in Australia’ (2007) 2 J Eq 40; M Harding, ‘Barnes v Addy Claims and the Indefeasibility of Torrens Title’ (2007) 31 MULR 343. See also H Atkin, ‘“Knowing Receipt” Following Farah Constructions Pty Ltd v Say-Dee Pty Ltd ’ (2007) 29 Syd LR 713; L Griggs, ‘In Personam: Barnes v Addy and the High Court’s Deliberations in Farah Constructions Pty Ltd v Say-Dee Pty Ltd ’ (2008) 15 APLJ 9.

Category errors in the Torrens system

451

specifically. However, he considers that this is because specific recovery ought to have been regarded as premised upon equity’s vindicatio, which is plainly barred by the obstacle of indefeasibility, 27 rather than on the basis of recipient liability. On the other hand, in spite of the repeated express references to recipient liability in their judgment, he considers that the High Court failed properly to consider the viability of a personal award on the basis of recipient liability.28 In reaching this conclusion, Bryan did not consider that the claim would succeed as a personal equity or in personam claim.29 This conclusion is interesting. Bryan contemplates personal liability on the basis of unjust enrichment as a distinctly plausible claim. Yet he does not appear to consider that this claim would succeed as a personal equity or an in personam claim. This suggests that Bryan contemplates two exceptions to indefeasibility: first, a true exception to indefeasibility premised upon the conduct of the registered proprietor; and second, an ‘exception’ that simply marks the limits of indefeasibility. More recently, in his article with Harding, Bryan has adopted a different view, now considering that Farah was correctly decided, even as to liability under the first limb of Barnes v Addy. Harding and Bryan suggest that:30 The possibility remains, perhaps only in theory at present at least in Australian law, that an in personam claim might be brought in a case like Farah Constructions based on the unjust enrichment of the defendant … suffice it to say that if the principle of indefeasibility of title rules out an in personam claim based on knowing receipt, it is difficult to see how that principle could be consistent with proprietary restitution of unjust enrichment.

Th is conclusion is now aligned with my own. However, in my view, although there are several possible reasons for Bryan’s change of mind, those reasons remain unclear. Perhaps Bryan now agrees with the High Court in Farah that there was no relevant receipt. Or perhaps he now believes that there is only one exception (or ‘exception’) to indefeasibility and that neither a knowing receipt nor a different unjust enrichment claim will satisfy the requirements of this exception. And there is still the possibility that Bryan continues to think that there are two exceptions to indefeasibility, neither of which is satisfied by such claims.

27 30

Bryan (n 4) 356. 28 Ibid 358. Harding and Bryan (n 8) 29.

29

Ibid.

452

Low

C. Explaining indefeasibility and in personam liability There is today no stable understanding of the meaning of indefeasibility or the basis and scope of the personal equities exception. Th is is remarkable considering the age of the Torrens registration system – it has been more than 150 years since it was introduced in South Australia in 1858.31 Whereas there are hundreds of articles studying the Torrens system and the compatibility of a multitude of claims therein,32 there are significantly fewer papers endeavouring to pin down an understanding of indefeasibility and/or the personal equities exception.33 The latter debates have yet to yield a clearly favoured theory. Yet without a stable theory, it seems rather pointless debating the feasibility of individual claims within the Torrens system. Such discussions put the cart before the horse. It is thus difficult to agree with the statement that ‘[a]lthough the basic nature of the [personal equities] exception is clear, there remains uncertainty about its precise parameters’.34 Rather, its exact parameters are uncertain precisely because its nature remains impenetrable. On the occasions when scholars do focus on the nature of indefeasibility and personal equities, we often gloss over inconsistencies in the case law and sometimes even descend into mere description. A reasonably good effort is that found in a leading text, which informs us that the basis of 31

32

33

34

For an excellent introduction to its conception, evolution and enactment, see PM Fox, ‘The Story Behind the Torrens System’ (1950) 23 ALJ 489. Cf S Robinson, Transfer of Land in Victoria (The Law Book Co, Sydney 1979) 1−25. See also D Pike, ‘Introduction of the Real Property Act in South Australia’ (1961) 1 Adel L Rev 169. In addition to Bryan (n 4) see eg, JP Moore, ‘Equity, Restitution and In Personam Claims Under the Torrens System’ (1998) 72 ALJ 258, (1999) 73 ALJ 712; L Griggs, ‘In Personam, Garcia v NAB and the Torrens System: Are They Reconcilable?’ (2001) 1 QUTLJ 76; L Griggs, ‘Indefeasibility and Mistake: The Utilitarianism of Torrens’ (2003) APLJ 108; S Christensen and B Duncan, ‘Is Indefeasibility of Title a Bar to Restitution After Reversal of a Judgment on Appeal?’ (2005) 11 APLJ 17; Harding (n 26). See eg, S Robinson, ‘Claims In Personam in the Torrens System: Some General Principles’ (1993) 67 ALJ 355; JG Tooher, ‘Muddying the Torrens Waters with the Chancellor’s Foot? Bahr v Nicolay ’ (1993) 1 APLJ 1; D Skapinker, ‘Equitable Interests, Mere Equities, “Personal” Equities and “Personal Equities”: Distinctions with a Difference’ (1994) 68 ALJ 593; MA Hughson, M Neave and P O’Connor, ‘Reflections on the Mirror of Title: Resolving the Confl ict between Purchasers and Prior Interest Holders’ (1997) 21 MULR 460; L Stevens and K O’Donnell, ‘Indefeasibility in Decline: The In Personam Remedies’ in D Grinlinton (ed), Torrens in the Twenty-First Century (LexisNexis, Wellington 2003) 141; HW Tang, ‘Beyond the Torrens Mirror: A Framework of the In Personam Exception to Indefeasibility’ (2008) 32 MULR 672. AJ Bradbrook, SV MacCullum and AP Moore, Australian Real Property Law (4th edn Lawbook Co, Sydney 2007) 165. Contra Tooher (n 33) 1.

Category errors in the Torrens system

453

enforcing personal equities ‘is the enforcement of personal claims against the registered proprietor arising out of the proprietor’s conduct’.35 We are told also that ‘the conduct may pre-date or post-date registration’, 36 but that ‘there is no … personal equity unless the circumstances give rise to a known legal or equitable cause of action enforceable against the registered proprietor of the legal interest in question’.37 Furthermore, ‘it must be shown that the proprietor’s conscience is affected by the circumstances that give rise to the legal or equitable cause of action’.38 Despite these efforts at explanation, we are not told why the theory that personal equities enforce personal claims leads to such requirements as a known cause of action and unconscionability. Purely descriptive exercises bring to mind the Indian fable of the six blind men describing an elephant, immortalized in poetry by John Godfrey Saxe.39 It is true that few exercises (if any) are purely descriptive but it is also doubtful that we have fully explored the nature and basis of indefeasibility and the personal equities exception. Until we do so, we face the same quandary as the six blind men.

1.

Personal equities as limits to indefeasibility

The idea that there are limits to the principle of indefeasibility is uncontroversial. After all, indefeasibility is not an all-protective concept. As Lord Wilberforce observed in Frazer v Walker,40 indefeasibility ‘does not involve that the registered proprietor is protected against any claim whatsoever’.41 More recently, Sir Anthony Mason remarked that ‘[i]ndefeasibility does not mean, and has never meant, absolute indefeasibility’.42 It is, however, more difficult to pin down the precise limits to the principle in spite of indefeasibility serving as the ‘foundation of the Torrens system’.43 A substantial body of scholars believe that the personal equities exception defines the limit of indefeasibility. In other words, personal equities begin where indefeasibility ends. Thus, it has been suggested that ‘to call it an “exception to indefeasibility of title” at all may be misleading’.44 35 36 39

40 42 43 44

P Butt, Land Law (5th edn Lawbook Co, Sydney 2006) 788 (emphasis in original). Ibid. 37 Ibid 789. 38 Ibid 790. JG Saxe, ‘The Blind Men and the Elephant: A Hindoo Fable’ in JG Saxe, The Poems of John Godfrey Saxe: Complete in One Volume (Ticknor and Fields, Boston 1868) 259−60. [1967] 1 AC 569 (‘Frazer v Walker ’). 41 Ibid 580. Sir A Mason, ‘Indefeasibility: Logic or Legend?’ in Grinlinton (n 33) 3, 4. Bahr v Nicolay (No 2) (1988) 164 CLR 604 (‘Bahr v Nicolay’), 613 (Mason CJ and Dawson J). Butt (n 35) 788. Contra Skapinker (n 33) 594−5. See also Mason (n 42) 5.

454

Low

Yet even amongst these scholars there is a range of views as to where the principle ends and the ‘exception’ begins.45 Bryan’s analysis in his first article is interesting because he embraces one aspect of these theories – that there is a limit to indefeasibility – but does not consider that the personal equities exception circumscribes indefeasibility. So far as the limit to indefeasibility is concerned, Bryan considers that it terminates where a proprietary claim is not sought and ‘personal relief comes into its own’.46 This is certainly not a uniquely held view, though many scholars who share it tend to consider that personal relief is synonymous with personal equities rather than a separate, second, exception.47 I consider it, however, to be indubitably wrong and it is heartening to see that Bryan now considers that ‘the grounds of personal liability should be consistent with the principles of proprietary recovery and not independent of them’.48 The term ‘indefeasible’, although part of Sir Robert Torrens’s vocabulary, is notably absent in many Torrens statutes.49 In the original South Australian Real Property Act 1857−8, the word appeared only in the shoulder note to the then section 39.50 It remains absent from the paramountcy provision of the New South Wales Real Property Act 1900 that was the subject of consideration in Farah. In 1982, Douglas Whalan described it as ‘a misnomer’ and ‘an unfortunate choice of word’.51 I have previously suggested that one of the main reasons why the principle of indefeasibility and its counterpart, the personal equities exception, is so poorly understood is ‘the remarkable failure on the part of courts and commentators to refer to the precise language of the various Torrens statutes’.52 In Australia, this problem is exacerbated by the lack of uniformity of the Torrens statutes amongst the various States.53 It does not help that the principle of indefeasibility has not been regarded as being expressed clearly in the various statutes. Instead of expressing the concept and its 45

46 47

48 50

51 53

Cf Butt (n 35) 787−93; R Chambers, ‘Indefeasible Title as a Bar to a Claim for Restitution’ [1998] RLR 126; Low (n 25). Bryan (n 4) 358. See eg, BC Crown, ‘A Hard Look at Bahr v Nicolay ’ in D Neo, HW Tang and M Hor (eds), Lives in the Law (NUS Faculty of Law and Academy Publishing, Singapore 2007) 191. Harding and Bryan (n 8) 32. 49 Mason (n 42) 3. DJ Whalan, The Torrens System in Australia (The Law Book Co, Sydney 1982) 296 citing RR Torrens, The South Australian System of Conveyancing by Registration of Title (Register and Observer General Printing Offices, Adelaide 1859) 11. 52 Ibid 296−7. Low (n 25) 209. See the criticisms in P Butt, ‘Waste of Every Kind of Energy’ (1992) 127 ALN 28; M Neave, ‘Towards a Uniform Torrens System: Principles and Pragmatism’ (1993) 1 APLJ 114; SV MacCallum, ‘Uniformity of Torrens Legislation’ (1993) 1 APLJ 135; E Kerr, ‘Property Law: Uniformity of Laws: Towards a National Property Practice’ (1993) 1 APLJ 145.

Category errors in the Torrens system

455

exceptions within one section, ‘there is a mosaic of sections – sometimes incomplete and occasionally overlapping – from which the meaning and extent of indefeasibility must be extracted’.54 This has prompted the criticism, in the context of the New Zealand Land Transfer Act 1915, that ‘[t]he Act is so badly drafted in this respect that it is difficult so to harmonize these sections – making, as they apparently do, reduplicated provisions as to the same matters in different words – as to extract from them the principle intended by the Legislature’.55 The starting point then is with the provisions themselves and we must begin with the paramountcy provisions. Since Farah was an appeal from New South Wales, it is convenient to study indefeasibility on the basis of that state’s Real Property Act 1900. In New South Wales, section 42(1) provides: Notwithstanding the existence in any other person of any estate or interest which but for this Act might be held to be paramount or to have priority, the registered proprietor for the time being of any estate or interest in land recorded in a folio of the Register shall, except in case of fraud, hold the same, subject to such other estates and interests and such entries, if any, as are recorded in that folio, but absolutely free from all other estates and interests that are not so recorded except … [five exceptions follow which are irrelevant for our purposes].

Whilst it may not be the most elegantly drafted of provisions, it is difficult to see how section 42(1) of the New South Wales Real Property Act 1900 may be construed as supporting the commonly held view that indefeasibility is concerned only to prohibit specific recovery of land. Rather, the registered estate or interest is expressed as ‘absolutely free from all other estates and interests that are not so recorded’. It is trite law that, in an action for conversion of a chattel, the original owner of the chattel may not specifically recover the chattel itself but must settle for an award of damages, the payment of which effects, by operation of law, a transfer of his title to the tortfeasor.56 Yet no one would conceive of describing the tortfeasor’s title to the chattel as indefeasible. It is a remarkably weak ‘indefeasible’ interest that falls prey to a competing interest, albeit mediated by the tort of conversion and taking the form of ‘mere’ damages. It would be equally absurd to describe a registered proprietor’s title as indefeasible if indefeasibility merely prevented specific recovery and 54 55 56

Whalan (n 50) 293. Boyd v Mayor of Wellington [1924] NZLR 1174, 1211 (Salmond J). Brinsmead v Harrison (1871) LR 6 CP 584; United States v Dollfus Mieg et Cie SA [1952] AC 582.

456

Low

nothing more. It is, after all, ‘a hollow victory for the registered proprietor to retain the land if they have to pay a sum equivalent to the value of the land in terms of equitable compensation’.57 A more sensible and, it is submitted, literal reading of section 42(1) would suggest that all unrecorded prior estates and interests are overreached by registration. They would fall by the wayside of the indefeasible registered interest and holders of such prior interests would have no claims against the registered proprietor that are premised upon such interests, whether or not they seek specific recovery of the land. The confusion that indefeasibility prohibits only specific recovery may stem from the presence of one of many complementary provisions in most Torrens statutes to the principal paramountcy provision.58 One species of complementary provision is the ejectment provision.59 In the New South Wales Real Property Act 1900, this is found in section 118, which provides, by subsection (1), that ‘[p]roceedings for the possession or recovery of land do not lie against the registered proprietor of land’, except in six specified circumstances. Strictly speaking, it is not obvious why section 118 needed to be enacted. If a prior superior interest was ousted by section 42(1), then specific recovery on the basis of such superior interest would already be barred by section 42(1) itself. On closer examination, it would appear that none of the six listed exceptions60 are prohibited by section 42(1) in the first place. Section 118(1) is for the most part otiose. If it serves any purpose at all, it must be to prevent proceedings for possession or recovery of land that, whilst not falling foul of indefeasibility as conferred by the paramountcy provision in section 42(1), are nevertheless not specifically listed in section 118(1) itself as an exception. Yet it has not been so regarded and claims for specific performance for possession of land are perhaps among the most established personal equities recognized by the courts.61 Perhaps more pertinently, section 118(1) is at best concerned to prohibit proceedings for the possession or recovery of land. It is not, nor 57 58

59 60

61

Tang (n 33) 691. For the labelling of the different sections of the various Torrens statutes see eg, WN Harrison, ‘Indefeasibility of Torrens Title’ (1952) 2 UQLJ 206; Whalan (n 50) 293−6. Harrison (n 58) 228; Whalan (n 50) 293, 294. Subsections (a) to (c) have nothing to do with competing unregistered interests and are not prohibited by the principle of indefeasibility as provided by the paramountcy provision Real Property Act 1900 (NSW) s 42(1) anyway. Subsection (d) is likewise not prohibited by the paramountcy provision as it falls within the fraud exception. Section 118(1)(e) mirrors s 42(1)(c) whereas s 118(1)(f) reflects s 42(1)(a). Th is was specifically acknowledged by the Privy Council in Oh Hiam v Tham Kong (1980) 2 BPR 9451 (‘Oh Hiam’) 9454.

Category errors in the Torrens system

457

could it conceivably be construed to be, concerned with permitting claims for personal remedies such as damages or equitable compensation based on prior title (which would otherwise be excluded by section 42(1) of the Act) so long as they are not proceedings for the possession or recovery of land. Closely allied to this view of indefeasibility is the thesis that indefeasibility is concerned to prohibit only proprietary claims to the land. The ‘claim in personam’ label subtly suggests this view, though some proponents continue to employ the label of ‘personal equities’. According to them, claims in personam are simply not prohibited, even if they ‘may lead to an order binding the registered proprietor to give up the whole or part of a registered interest’.62 There are two difficulties with this view if we read ‘claim in personam’ literally to refer to the nature of the claim: whether it is in rem or in personam. First, in referring the preclusionary effect of the principle of indefeasibility to the nature of the claim, it runs directly into the same problem as the view that indefeasibility does not prohibit a money award from being ordered against a registered proprietor. On this view, then, a person who has been deprived of his interest in land by the registration of another may simply sue the latter in trespass and seek a monetary award. Since the claim is personal in nature, it ought not to be precluded by the principle of indefeasibility as presently explained. Yet this would be a very insipid form of indefeasibility. Indeed, the objection would be even stronger here since even specific recovery of land would be permitted. Second, it often raises confusion as to whether a claim in personam may ever be proprietary.63 A proprietary claim in personam appears to be an oxymoron. A claim is either in rem or it is in personam. It cannot be both in rem and in personam. The key to understanding the apparent dual nature of personal equity claims lies in appreciating that indefeasibility protects the registered proprietor and the registered proprietor alone and that the in personam label ought not to be regarded as referring to the nature of the claim but rather to the party against whom it arose.64 The in personam or in rem nature of any claim that arises as against the registered proprietor is irrelevant vis-à-vis the registered proprietor. The registered proprietor is bound by the claim on the basis that it arises as against him, not because it is proprietary, which would be the case if it arose against another party 62

63

Butt (n 35) 788. See also Breskvar v Wall (1971) 126 CLR 376, 384−5; cf Hughson, Neave and O’Connor (n 33) 490−1. Tang (n 33) 679−80. 64 Low (n 25) 214−15.

458

Low

and then bound him because of its proprietary effect. It is in that respect in personam. Coupled with the recognition that indefeasibility does not protect persons who are not registered proprietors, even from proprietary rights, this is the key to understanding the potential in rem consequences of a claim in personam. Likewise, very closely allied to the notion that indefeasibility is concerned to prohibit property claims is the idea that it is concerned to prohibit claims dependant on notice. In part, this stems from the erroneous assumption that all unregistered property interests (apart from statutorily specified overriding interests such as unregistrable short-term leases) are equitable and thus the registered proprietor, who holds a legal interest, must be affected by such property rights, if at all, by notice. In part, it stems from an erroneous reading of what has come to be known as the notice provisions65 in the various Torrens statutes. The former is the easier misconception to dispel. The commonly held view that all non-exempted unregistered property interests in Torrens lands must be equitable is, on closer analysis, probably wrong. It is often thought that registration is compulsory unless otherwise specifically exempted and therefore non-registration will invalidate any transfer or creation of property rights.66 Thus, according to section 40(1) of the Victorian Transfer of Land Act 1958: Subject to this Act no instrument until registered as in this Act provided shall be effectual to create vary extinguish or pass any estate or interest or encumbrance in on or over any land under the operation of this Act, but upon registration the estate or interest or encumbrance shall be created varied extinguished or pass in the manner and subject to the covenants and conditions specified or declared to be implied in instruments of a like nature.

A plain reading of this section demonstrates that it only invalidates instruments which would otherwise be valid. This suggests that where common law property rights may arise apart from any instruments, such as easements arising by implication under the rule in Wheeldon v Burrows, 67 they will not attract the operation of the section and so may exist as legal unregistered property interests, at least in Victoria. Th is is not to say that the same legal unregistered property interests may subsist in all Torrens systems. Such interests may be less common in 65 66 67

Harrison (n 58) 208−9; Whalan (n 50) 295. See eg, Mason (n 42) 3. (1879) 12 Ch D 31 (‘Wheeldon v Burrows’).

Category errors in the Torrens system

459

New South Wales than Victoria. Whereas section 40(1) of the Victorian Transfer of Land Act 1958 invalidates unregistered instruments, the equivalent provision in the New South Wales Real Property Act 1900 – section 41(1) – invalidates dealings, which is arguably wider in operation than instruments.68 Whereas there is clearly no instrument in the implication of an easement under the rule in Wheeldon v Burrows, it is arguable that such an easement nevertheless arises from a dealing, which if unregistered is ineffectual at common law. Nor is the distinction between legal and equitable unregistered property interests always significant. Where the particular Torrens jurisdiction has enacted specific rules as to priority between unregistered rights, as is the case in the Singapore Land Titles Act69 through section 49, these would prevail over the usual rules of priority that would otherwise apply as between unregistered property interests so that their legal or equitable status may be moot. The other cause of the confusion of indefeasibility with claims involving notice lies in a misunderstanding of the function of the notice provisions in Torrens statutes. It has thus been suggested that the abolition of the doctrine of notice ‘is the most important sense in which it may be said that a registered proprietor’s title is indefeasible’.70 Consider a typical notice provision: that found in section 43(1) of the New South Wales Real Property Act 1900. For convenience, it may be broken down into two parts. The first part provides: Except in the case of fraud no person contracting or dealing with or taking or proposing to take a transfer from the registered proprietor of any registered estate or interest shall be required or in any manner concerned to inquire or ascertain the circumstances in or the consideration for which such registered owner or any previous registered owner of the estate or interest in question is or was registered, or to see to the application of the purchase money or any part thereof, or shall be affected by notice direct or constructive of any trust or unregistered interest, any rule of law or equity to the contrary notwithstanding …

The second part then provides: and the knowledge that any such trust or unregistered interest is in existence shall not of itself be imputed as fraud.

It is debateable whether the notice provisions of the Torrens statutes have the effect of abolishing the doctrine of notice. It is certainly conceivable, 68

Cf Butt (n 35) 733−4.

69

Cap 157, 2004 Rev Edn.

70

Harding (n 26) 356.

460

Low

but I prefer the view that the paramountcy provisions have that effect in and of themselves, insofar as the doctrine of notice refers to notice of prior competing property interests. Indeed, those provisions go beyond abolishing the doctrine of notice by protecting the registered proprietor from all adverse property interests, whether they would otherwise bind him by that doctrine or otherwise. It is difficult to contemplate how a registered proprietor may be affected by notice of an unregistered interest that he is supposed to take free of. It is likely that the notice provisions were inserted ex abundanti cautela. They reinforce the paramountcy provisions but do not define them. If they define anything at all, they circumscribe the limits of the fraud exception, as provided in the second part of section 43(1). If the first part of section 43(1) has any effect beyond reinforcing the paramountcy provision by emphasizing that the slate has indeed been wiped clean, it must be to affect the question of priority as between unregistered interests.71 It says nothing of the nature of indefeasibility as conferred upon registered proprietors. Th is preoccupation with notice is unhealthy, not simply because it is unwarranted but because the courts72 and scholars73 alike have time and again confused the doctrine of notice as it applies between competing property interests (which is what proponents of the notice theory of indefeasibility are concerned to prevent) and claims which rely on notice in a completely different sense,74 such as the English doctrine arising out of Barclays Bank plc v O’Brien,75 or the Australian doctrine stemming from Garcia v National Bank of Australia.76

2.

Personal equities as a true exception to indefeasibility

This brings us to the other theory of personal equities – that they operate to permit that which the principle of indefeasibility would otherwise prohibit: in short, that personal equities are a true exception to indefeasibility. The principal stumbling block here would be the theory of Parliamentary sovereignty.77 How do we explain the courts refusing to give effect to the 71 73 75

76 77

Robinson (n 31) 56−8. 72 Macquarie Bank (n 21) 149−54 (Tadgell JA). Tang (n 33) 693−5. 74 Low (n 25) 223−5. [1994] 1 AC 180. See also Royal Bank of Scotland plc v Etridge (No 2) [2002] 2 AC 773, 802 (Lord Nicholls); Chambers (n 45) 130; J Mee, ‘Undue Influence, Misrepresentation and the Doctrine of Notice’ (1995) 54 CLJ 536, 541−2. (1998) 194 CLR 395. Durham Holdings Pty Ltd v New South Wales (2001) 205 CLR 399.

Category errors in the Torrens system

461

principle of indefeasibility as directed by the legislature? Th is is easier than it might seem.78 Indeed, some characteristics exhibited by personal equities favour this theory. If claims falling within the personal equities exception are merely claims not prohibited by indefeasibility, it is difficult to comprehend why the courts require that ‘it must be shown that the proprietor’s conscience is affected by the circumstances that give rise to the legal or equitable cause of action’.79 There is no reference in any of the Torrens statutes to conscience. However, the requirement of unconscionability is explicable once the personal equities exception is regarded as an exception to indefeasibility. It also explains why the exception is sometimes regarded as the personal equities exception, despite embracing claims at common law. Whether personal equities are an exception to indefeasibility is a matter of some controversy. They were not so regarded by the Privy Council in the leading case of Frazer v Walker.80 One of the most cited passages from that celebrated judgment is the following: their Lordships have accepted the general principle that registration under the [New Zealand] Land Transfer Act, 1952, confers upon a registered proprietor a title to the interest in respect of which he is registered (under sections 62 and 63) immune from adverse claims, other than those specifically excepted. In doing so they wish to make clear that this principle in no way denies the right of a plaintiff to bring against a registered proprietor a claim in personam, founded in law or in equity, for such relief as a court acting in personam may grant.81

Unfortunately, the following passage, which clearly indicates that their Lordships did not consider them exceptions at all, is often omitted: Their Lordships [do not intend] to limit or define the various situations in which actions of a personal character against registered proprietors may be admitted. The principle must always remain paramount that those actions which fall within the prohibition of sections 62 and 63 may not be maintained.82

Other cases are less clear. Typical of the confusion is the Privy Council decision in Oh Hiam v Tham Kong.83 On the one hand, their Lordships consider that claims would be permitted ‘where there is not merely a question of competitive claims to title, but a relationship between the 78

79 81

There is a hint of this in WMC Gummow, ‘Equity and the Torrens System Register’ in Grinlinton (n 33) 51. Butt (n 35) 790. 80 Frazer v Walker (n 40). Ibid 585. 82 Ibid 585. 83 Oh Hiam (n 61).

462

Low

parties justifying intervention by equity acting in personam’.84 In another passage, their Lordships consider that: the principle of indefeasibility of title under the Torrens system of conveyancing, while operating effectively and indeed necessarily for its effectiveness as between individual rival claimants to a property, in no way interfere[s] with the ability of the court, exercising its jurisdiction in personam to insist upon proper conduct in accordance with the conscience which all men should obey.85

While the reasoning resembles that in Frazer v Walker in some respects, it departs from the case in others. The two passages show some confusion as to the role that indefeasibility serves. On the one hand, it is suggested that indefeasibility prohibits ‘competitive claims to title’; on the other, it is suggested that indefeasibility protects the registered proprietor against ‘rival claimants to a property’. There is also a departure from the simple notion that personal equity claims are claims that fall outside the principle of indefeasibility and thus may either be legal or equitable, and an espousal of the notion that such claims are instances of ‘equity acting in personam’ so as to ‘insist upon proper conduct in accordance with the conscience which all men should obey’. The sporadic preoccupation with unconscionability has led the New South Wales Court of Appeal to deny the implication of an easement under the Wheeldon v Burrows principle over Torrens land in the absence of unconscionable behaviour on the part of the registered proprietor.86 If such claims are simply claims that are not prohibited by indefeasibility, it is difficult to understand why there is a need to establish unconscionability over and above the requisite elements of the relevant cause of action. In fact, this latter understanding of personal equities bears a remarkable resemblance to time-honoured instances of equity rebelling against the law, including statute law.87 These instances are familiar to most lawyers, particularly property lawyers. Th is remarkable ability of equity lawyers to thumb their collective noses at Parliament and disregard what otherwise appear to be clear directions from the legislature is poorly documented outside of the Chancery.88 The most famous statute 84 86

87 88

Ibid 9454. 85 Ibid. McGrath v Campbell (2006) NSW ConvR 56−159. Contra: White v Tomasel [2004] 2 Qd R 438. See Gummow (n 78) 51−4. One fi nds no mention of it in the leading texts on statutory interpretation: see eg, FAR Bennion, Statutory Interpretation (5th edn LexisNexis, London 2008).

Category errors in the Torrens system

463

to suffer from this ignominy is the Statute of Frauds 1677.89 The Statute was enacted to prevent the fraud and perjury that was endemic at the time.90 However, whilst it operated to prevent perjury, ‘it opened new and different possibilities of deception’.91 In setting out ‘formality’ (the word is here used loosely) requirements for various transactions, it paved the way for persons involved in such transactions to repudiate them on the basis of failure to comply with the Statute. One such transaction was the contract for the sale of land. The Chancery responded in this particular instance with the development of the doctrine of part performance as early as 1686.92 Nor is the doctrine of part performance the only means by which equity trumped the Statute. In response to the ‘formalities’ set out for the creation of trusts of land, the Chancery developed the doctrine in Rochefoucauld v Boustead.93 The doctrine of secret trusts was likewise developed to circumvent the formality provisions for wills, originally found in the Statute.94 Speaking somewhat boldly, Lord Parker LC declared in a case that ‘[i]n cases of fraud, equity should relieve, even against the words of the statute’.95 Other statutes suffering a similar fate included the various statutes of limitations. It is often said that ‘equity will not allow a statute to be used as an instrument of fraud’.96 Thus, an acknowledgment of a debt within the limitation period would start time running afresh and prevent the claim from being barred in what has been described as ‘the task of decorously disregarding an Act of Parliament’.97 In this context, equity also developed the doctrine of concealed fraud.98 Closer to our present context, equity gave priority to an earlier unregistered instrument over a subsequent registered deed in the face of statutory direction 89 90

91

92

93 94

95 96

97 98

29 Car 2 c 3. TG Youdan, ‘Formalities for Trusts of Land, and the Doctrine in Rochefoucauld v Boustead ’ [1984] CLJ 306, 307. R Megarry and HWR Wade, The Law of Real Property (5th edn Stevens & Sons, London 1984) 587. Butcher v Stapeley (1686) 1 Vern 363, 23 ER 524. See also AWB Simpson, A History of the Common Law of Contract (Clarendon Press, Oxford 1987) 613−16. [1897] 1 Ch 196 (CA). See generally PH Pettit, Equity and the Law of Trusts (10th edn Oxford University Press, Oxford 2006) 127−38. Viscountess Montacute v Maxwell (1720) 1 P Wms 618, 620; 24 ER 541, 542. Supposedly coined by Lord Eldon in Mestaer v Gillespie (1805) 11 Ves 621, 628; 32 ER 1230, 1232: see LA Sheridan, Fraud in Equity (Sir Isaac Pitman & Sons, London 1957) 146. Spencer v Hemmerde [1922] 2 AC 507, 519 (Lord Sumner). JW Brunyate, Limitation of Actions in Equity (Stevens & Sons, London 1932) 23−37. See also Sheridan (n 96) 159−66.

464

Low

otherwise.99 Equity’s behaviour has sometimes been explained on the basis that ‘the action to enforce an equity created by estoppel is not brought “upon any contract”, for the equity arises out of the circumstances. That is not to say that there is an equity which precludes the application of the statute. It is to say that the statute has no application to the equity.’100 It has even been suggested that equity construes the relevant statute as if it included an exception in cases of fraud,101 an implied term of sorts. However, there are limits to equity’s indifference towards Parliamentary intent. Equity will not employ such a device to render a statutory provision nugatory. Thus, an estoppel was rejected in Actionstrength Ltd v International Glass Engineering In Gl En SpA102 because to ‘admit an estoppel on [the grounds alleged] would be to repeal the Statute of Frauds’.103 In many ways, the personal equities exception appears to reflect this Nelsonian attitude of equity. It explains why there is a need to rely upon a known legal or equitable cause of action.104 The statutes to which lip service has been paid by equity are all concerned to prohibit some cause of action or other and, in each case, equity has been concerned to see how, on occasion, that cause of action may nevertheless be enforced in the face of the statute.105 It also explains why the exception is sometimes christened the personal equities exception, as it is often thought that the defendant is charged upon the equities rather than the prohibited claim even though 99 100

101

102 105

Sheridan (n 96) 156−9. Waltons Stores (Interstate) Ltd v Maher (1988) 164 CLR 387, 433 (Brennan J). See also Maddison v Alderson (1883) 8 App Cas 467, 476 (Lord Selborne LC). Sheridan (n 96) 146. It seems unlikely given the identity of the draft smen involved (Lord Nottingham and Lord Chief Justice North) that such a crucial provision would have been intentionally omitted as implicit in the case of the Statute of Frauds. See CD Hening, ‘The Original Draft s of the Statute of Frauds (29 Car II c 3) and Their Authors’ (1913) 61 U Pa L Rev 283. [2003] 2 AC 541. 103 Ibid [26] (Lord Hoff mann). 104 Butt (n 35) 789. There is a growing body of opinion supporting the view that an entirely separate equitable estoppel concerned to protect reliance is a more appropriate response but such a view cannot possibly explain personal equities as they currently exist: see eg, M Spence, Protecting Reliance (Hart Publishing, Oxford 1999); NJ McBride, ‘A Fift h Common Law Obligation’ (1994) 14 LS 35; A Robertson, ‘Situating Equitable Estoppel within the Law of Obligations’ (1997) 19 Syd LR 32; A Robertson, ‘Reliance, Conscience and the New Equitable Estoppel’ (2000) 24 MULR 218; P Benson, ‘The Unity of Contract Law’ in P Benson (ed), The Theory of Contract Law: New Essays (Cambridge University Press, New York 2001) 118−205; A Robertson, ‘The Statute of Frauds, Equitable Estoppel and the Need for “Something More”’ (2003) 19 JCL 173; JW Neyers and JM Moncrieff, ‘(Mis) Understanding Estoppel’ (2003) LMCLQ 429. See also E Cooke, The Modern Law of Estoppel (Oxford University Press, Oxford 2000).

Category errors in the Torrens system

465

in raising the equity, it is necessary to establish the elements of the prohibited cause of action, which may either be legal or equitable. It would also explain why, in addition to satisfying the elements of a known legal or equitable cause of action, it is necessary to establish further that the registered proprietor’s conscience is affected.106 If proof of the prohibited cause of action sufficed to permit enforcement, equity would effectively be repealing the statute. This, as we have seen, would be to ask too much of equity. However, upon proof of the relevant cause of action and some sort of ‘fraud’, equity regards itself as having paid sufficient lip service to the statute as to permit enforcing the ‘equity’ against the defendant. There appears, therefore, to be a reasonably good fit between this explanation of the exception and the characteristics of the personal equities exception. However, a number of difficulties remain. First, when the courts search for ‘unconscionability’, they are not necessarily looking for something beyond the elements of the prohibited cause of action. Thus, one of the classical personal equities is the right of a purchaser to enforce the contract of sale against the registered proprietor without more. It appears that the registered proprietor’s conscience is affected ipso facto by his having promised to convey the land to the purchaser. In contrast, where equity wishes to snub the legislature by enforcing an oral contract for the sale of land apparently contrary to the express language of the Statute of Frauds, it at least has the courtesy to require something beyond the mere oral contract – viz part performance. It is certainly arguable that there is a difference between permitting enforcement of a prohibited claim on the basis that the claim itself raises issues of unconscionability, and permitting enforcement of a prohibited claim when not doing so would be unconscionable. Second, whereas equity may occasionally decorously disregard Parliament, there are limits to how far it will go to do so. Equity will not directly challenge Parliamentary sovereignty. The complication to this ‘fraud’ theory of personal equities is that all Torrens statutes have expressly provided for a fraud exception to indefeasibility that is very carefully circumscribed.107 By allowing ‘rights to be enforced against a registered proprietor whose conscience is found to be affected as a result of his or her conduct falling short of “fraud” as that term is understood’108 106 108

Butt (n 35) 790. 107 Cf Harding and Bryan (n 8). Butt (n 35) 792 citing Logue v Shoalhaven Shire Council [1979] 1 NSWLR 537, 563−5; Palais Parking Station Pty Ltd v Shea (1980) 24 SASR 425, (1981) 55 ALJ 145; Bahr v Nicolay (n 43); Robinson (n 33).

466

Low

in the relevant Torrens statute, the courts are skirting dangerously close to challenging Parliamentary sovereignty. It may not entail a judicial repeal of the statute, but in graft ing an exception to indefeasibility evidently wider than that contemplated by Parliament, it certainly goes further than earlier courts’ efforts in circumventing the Statute of Frauds. It is also much harder to justify doing so on the basis that ‘equity will not allow a statute to be used as an instrument of fraud’, since the statute itself already contains a carefully crafted fraud exception. Finally, it bears remembering that the Statute of Frauds was not always well regarded. It was enacted as a response to the ills of its time but these very quickly gave way to vastly different concerns. No less a judge than Lord Mansfield remarked that ‘[h]ad the Statute of Frauds been always carried into execution according to the letter, it would have done ten times more mischief than it has done good, by protecting, rather than by preventing, frauds’.109 Similarly, Lord Campbell remarked that the Act ‘promotes fraud, rather than prevents it’.110 It is doubtful whether any of the Torrens statutes would draw such widespread condemnation. Furthermore, unlike the Statute of Frauds, which very quickly became outdated, the concerns that the Torrens registration system was keen to address in 1858 remain very much live today.

D.

Conclusion

Th is brings us to Bryan’s conclusions as to the viability of a claim to Torrens registered land in recipient liability under the fi rst limb of Barnes v Addy. If the correct limit to indefeasibility is that it prohibits proprietary claims and only such claims, then not only should a Barnes v Addy claim for personal relief succeed, as Bryan suggests in his fi rst article, but the plaintiff ought in principle to be able to seek specific recovery of the land as well.111 On the other hand, if indefeasibility protects a registered proprietor from competing property rights and any claims thereunder, as Bryan, in his second article, suggests might be the case, then it may well be that the High Court in Farah was correct to reject such a claim as a personal equity, albeit not necessarily for the right reasons.112 109 110 111 112

Simon v Metivier (1766) 1 Bl W 601, 96 ER 347. Marvin v Wallace (1856) 6 El & Bl 726, 119 ER 1035. See eg, Harding (n 26). See eg, Low (n 25). Cf Chambers (n 26) 51−2, discussing fraud. In respect of the fraud exception, see generally, DJ Whalan, ‘The Meaning of Fraud Under the Torrens System’

Category errors in the Torrens system

467

It appears, therefore, that the more pressing problem with our current understanding of the various Torrens systems is not the perpetration of ‘category errors’, though there is no doubt that these exist. It is that there is no stable theory of indefeasibility and the unwritten exception of personal equities. There are at least half-a-dozen theories, occasionally combined in various permutations, as to what indefeasibility serves to protect, what the personal equities exception permits, and how it may be accommodated with the terms of the relevant Torrens statute. The confusion may even be gleaned from its name. It is variously referred to as the ‘personal equities’ exception or the ‘claim in personam’ exception. Sometimes the two labels are applied interchangeably but they are occasionally used to hint subtly at a particular theory. The former suggests that it is a true exception, the latter that it simply demarcates the limits of indefeasibility. The cases are themselves in a state of disarray, committing to differing contradictory theories (sometimes within the same case)113 and thus proposing diverse conditions for the operation of personal equities. The precise terms of the various statutes have been all but forgotten, contrary to the advice of the Privy Council in Frazer v Walker. In Australia, it is particularly troubling that decisions attempt to harmonize the law without referring to the provisions of the particular Torrens statute.114 In the past, we would be cautioned against approaching indefeasibility with preconceptions as to what it meant and advised to refer to the precise provisions themselves.115 While harmonization is a laudable goal, it is questionable whether it should be an objective of the courts rather than the legislature. The true nature of indefeasibility and its relationship with the personal equities or in personam exception (if either label is even appropriate) is a controversial issue that desperately needs resolution. In doing so, we need to take cognizance of the inconsistencies within the case law and academic literature and resolve these differences, with close attention to the language of the various Torrens statutes. If we fail to do so, we risk stumbling around the principle of indefeasibility blindly for the next century and a half, describing the proverbial elephant that we know as personal equities.

113

(1975) 2 NZULR 207; P Butt, ‘Notice and Fraud in the Torrens System: A Comparative Analysis’ (1977) 13 UWAL Rev 354. See eg, Oh Hiam (n 61). 114 See eg, Griggs (n 26). 115 See eg, Harrison (n 58).

INDEX

abstract transfers, causal transfers and common law, 205–12 equity, 212–21 meaning, 9–10, 201–2 account of profits breach of fiduciary law, 283, 289–90 contract. See disgorgement nature of remedy, 279–80 patent infringement, 38 accountability, trustees, 345–7 accounts, disclosure to beneficiaries, 343, 350–1 advanced corporation tax, 68 adverse possession, 230, 233 agency breach of fiduciary duty, 395–8 concept, 393 contract and agency problems, 379, 392–401 articles of association, changing, good faith, 328–9 assisting breach of trust, 312–17 Australia. See High Court of Australia bailment, collision at sea, 234 bank accounts, theft from, 225 banking secrecy, 134, 142 bankruptcy. See insolvency barter, 204 beneficiaries 129 beneficiary principle, 346 information rights, 13, 343–4 accountability, 345–7 accounts, 343, 350–1 confidentiality and, 345, 347–9, 353–4

discretionary trusts, 351–4 fi xed-interest trusts, 350–1 inspection of documents, 349 objects of personal powers, 354 overriding circumstances, 349–54 proprietary rights and, 346 right of notification of beneficial interests, 347–9 settlors’ restrictions, 355–8 bilateral monopoly, 391–2 bribery, constructive trusts, 236–7 Brussels Regulation, unilateral promises, 312 capacity, minors, 287 causal transfers abstract transfers and common law, 205–12 equity, 212–21 meaning, 9–10, 201–2 theft, 10 causation, compensation from fiduciaries, 368–9, 373 Charities Commissioner, 141 Chattels. See sale of goods Chinese Walls, 294, 307 CISG Convention (1980), 41, 50–1, 52–3, 54–63 civilian tradition common law and, 160–1 contract law, 55 natural obligations, 178, 197–8 Roman law and, 178 theory and, 25, 34 unjust enrichment, 201

468

Index classification fluidity, 2 good faith, 320–1 legal duties, 319–42 codes, 27 colonialism, 43 common law See also method Australian colonial period, 43 Australian unification, 5, 20, 46–7 civilian law and, 160–1 equity and, 6 compensation from fiduciaries, 367–8, 375–6 unjust enrichment, 80 judges as law-makers, 161–2 methodology, 25, 34 precedents, 161–2 privacy and, 6–7, 87 reasons for decision-making, 162–5 South African restitution law and, 160–6 comparative approaches contract, 50–63 good faith, 56–63 legal education, 65 methodology, 3, 45 unjust enrichment, 153–4 compensation from fiduciaries Canson, 363–4 causation, 368–9, 373 facts, 364–6 foreseeability, 368 judgments, 366–9 minority judgment, 367–9 secret profits, 365 equity/common law dichotomy and, 367–8, 375–6 evidentiary difficulties, 373–5 mitigation, 373 non-compensatory claims, 369–73 overview, 13–14 special rules, 369 specific performance and, 371–2 condictio causa data causa non secuta , 156 condictio indebiti, 154, 155, 156, 166, 167

469

condictio ob turpem vel iniustam causam, 156 confidence, breach of See also privacy Canada, 236 English privacy rights, 103–7, 112–15 incomplete theorizing, 120–4 New Zealand, 107 overview, 6–7 trivial information, 116–19 confidentiality fiduciary duties, 132 continuing duty, 307 exclusion, 301, 302–3 information rights and, 345, 348, 355–8 unconscionability and, 105 conflict of laws, 42, 309–12 conflicts of interests, fiduciaries good faith, 330, 333–4 identification of fiduciaries, 340–1 Mothew principle, 300 self-dealing, 336–9 solicitors, 277, 288–90, 308, 364–6 conscience, natural obligations, 176, 177 consent, impaired consent, 9–10 constructive trusts. See trusts consumer protection, 432 contemptuous harassment, 99 context good faith, 322–3 trust law, 127–43 contract agency problems, 379, 392–401 boundaries, 2 breach of negative covenants, 387–8 China, 53–4, 57 CISG Convention and, 41, 51 civilian tradition, 55 consideration, 55–6 contractarian view of fiduciary duties anti-contractarian view, 275–6, 297 Citigroup, 293–6 fiduciaries and contract terms, 282 trusts as three party contracts, 280–1 weakened duties, 286–7 damages. See damages

470

Index

contract (cont.) development in Australia, 5, 42–8 disgorgement damages, 387–8 services, 388, 389 distinctiveness of Australian law, 64–6 doctrinal view, 11–12, 300–2 Canson v Broughton, 284 exclusion clauses, 290–6 international debate, 276–8 legal education, 143–8 parental relations, 287–8 party autonomy, 275, 281 pro bono work, 286 public interest and, 276, 288–90 Rothko Re, 281 Schmidt, 284–6 Strother, 282–4, 289–90 Tornroos v Crocker, 281–2 efficient breach, 390–2 express trusts and, 143–8 forfeiture. See forfeiture relief freedom of contract, 267 gambling contracts, 182 good faith, 56, 57–63 implied terms, 60–1, 279, 301–2 inducing breach, 315–16 information asymmetry, 393 internationalization, 42, 49–63 CISG Convention (1980), 41, 50–1, 52–3, 54–63 good faith, 56–63 implied terms, 60–1 Lando Principles (PECL), 52–63 model clauses, 56 post-contract conduct and interpretation, 60 practices and usages, 61 unfair terms, 61–3 UNIDROIT principles, 50, 52–63 methodology, 42–9 minors, 287 party autonomy, 64 penal clauses, 260–1, 266–72 practices and usages, 61 pre-contractual negotiations and interpretation, 59–60

property transfers and common law, 205–12 effects of contract, 202–5 self-executing contracts, 209–12 separate contracts, 205–9 rescission. See rescission 2nd Restatement, 49 sale of goods. See sale of goods sale of land. See land sources of law, 64 specific performance, 254–7 land, 381 substitutability. See substitutability time of the essence clauses, 256–7, 259 unfair terms, 61, 62 EC Directive, 62 internationalization, 61–3 trustee exemption clauses, 148, 306 Uniform Commercial Code, 50, 54 unilateral mistake, 430–1 unjust enrichment and, 34–7, 67, 83–4 failure of consideration, 71–2 implied contract theory, 67, 72 unlawful interference, 315–16 conversion damages, 229, 234, 455 evidence, 375 corrective justice, 19 covenants, breach of negative covenants agency problem, 398–401 fiduciary duty and, 392–4 substitutability, 387, 394–5 credit crunch, 139 credit rating agencies, 138 Crown supremacy in Australia, 29 culture. See legal culture cy-près, 129 damages breach of privacy, 94, 95 contract disgorgement. See disgorgement damages efficient breach, 390–2 intentional breaches, 380 nature of remedy, 279 scenario, 370

Index conversion, 229, 234 exemplary damages, Australia, 31–2 fiduciaries. See compensation from fiduciaries penal damages, 270 specific performance with, 258 trespass, 94, 95, 234 debts scenario, 370 specific performance and, 371–2 deceit, evidence, 375 defamation free speech and, 30 privacy and, 89–90, 95, 103 deposits, forfeiture, 267–8, 269 directors good faith, 325–6, 335–6 self-dealing, 337, 338 discretionary trusts, beneficiaries’ information rights, 351–4 disgorgement damages in contract agency problems, 379, 392–401 breach of fiduciary duty, 395–8 breach of negative covenants, 398–401 breach of negative covenants, 387 agency problems, 398–401 fiduciary duty and, 392–4 substitutability, 387, 394–5 expectation damages, 382–3 overview, 14 principles, 377, 379 public policy and, 400–1 second sales, 379, 380–92 efficient breach, 390–2 goods and chattels, 383–5 land, 381–3 services, 386–90 shares, 386 substitutability, 14, 378–401 distributive justice, 19 duress, 158, 202, 433 easements, 458, 462 education. See legal education efficiency, efficient breach of contract, 390–2

471

equity See also unconscionability boundaries, 2 breach of trust. See compensation from fiduciaries clean hands, 213 common law and, 6 compensation from fiduciaries, 367–8, 375–6 unjust enrichment, 80 conflict of laws and, 309–11 conscience and, 143 forfeiture relief. See forfeiture relief maxims, 203 overview, 10–13 parliamentary sovereignty and, 465–6 paternalism, 252 privacy and, 103–7 property transfers causality and abstraction, 212–21 effects of contracting, 203–5 punitive remedies and, 32 redemption, 252–3 unjust enrichment. See unjust enrichment estoppel. See proprietary estoppel European Convention on Human Rights, private and family life, 103, 114 European Union, unfair contract terms, 62 excise, meaning, 29 exemplary damages breach of good faith, 31–2 equity and, 32 expectation damages, 382–3 fiduciary duties breach agency problems, 395–8 assisting, 312–17 compensation. See compensation from fiduciaries constructive trusts, 33–4, 77, 279–80, 282, 448, 450 exemplary damages, 31–2 negative covenants and, 392–4

472

Index

fiduciary duties (cont.) remedies, 279–80, 332–9 Torrens system and, 448–51 choice of law, 309–12 confidentiality, 132 continuing duty, 307 exclusion, 301, 302–3 information rights and, 345, 348, 355–8 conflicts of interests. See conflicts of interests contractarian view anti-contractarian view, 284, 275–6, 286–90, 297 arguments supporting, 282, 286–90 Canson v Broughton, 284 Citigroup, 293–6 doctrinal view, 11–12, 300–2 economic analysis and, 275, 298 fiduciaries and contract terms, 282–4 international debate, 276–8 legal education, 143–8 overview, 11, 275–82 parental relations, 287–8 party autonomy, 275, 281 pro bono work, 286 public interest and, 276, 288–90 Rothko Re, 281 Schmidt, 284–6 significance, 275–6 Strother, 282–4, 289–90 Tornroos v Crocker, 281–2 trusts as three party contracts, 280–1 US terminology, 276 weakened duties, 286–7 development in England, 298 exclusion clauses, 291, 293 confidentiality, 301, 302–3 contractarian view and, 290–6 excludable duties, 302–6 implied exclusions, 302–3 negligence, 304–5 unconscionability, 292–3 unfair contract terms and, 148, 306

gap-fi lling function, 279 good faith. See good faith guardians, 287 honesty, 305 identification of fiduciaries, 339–41 information asymmetry, 279 lawyers, 282–4 loyalty. See loyalty, duty of moral dimension, 275–6, 284 paradigm relationship, 278–9 parents, 287–8 public interest and, 276, 288–90 termination, 306–8 terminology, 276 unjust enrichment and, 23, 33–4, 36, 70, 78–9 misuse of information, 33–4, 77, 78–9 voluntary undertakings, 11–12, 298–9, 300–2 force majeure, 56 forced heirship, 132 forfeiture relief arguments for instalment relief assessment, 273 clauses by way of security, 265 improvements, 273 inequitable divestment of property interests, 272 overview, 265–72 penal clauses, 266–72 unconscionability, 268–9 waiver or estoppel, 266, 273 arguments for property relief assessment, 263–4 clauses by way of security, 257–9 inequitable divestment of property interests, 261 overview, 257–64 penal clauses, 260–1 waiver or estoppel, 259–60 clarification of principles, 251 deposits, 267–8, 269 equitable doctrine description, 251–3 disappearance thesis, 11, 249–51, 273–4 failure to pay on time, 256

Index fairness and, 256–7, 259, 260–1, 266–7, 269, 272 fluctuating approaches, 250–1 forfeiture clauses, 256–7 by way of security, 257–9, 265 commercial reasons, 258 penal clauses, 260–1, 266–72 waiver, 259–60 forfeiture of instalment payments arguments against, 265–72 overview, 11, 264–73 unjust enrichment, 264–5 heads of jurisdiction, 251–2 hypothetical scenario, 249 overriding contract, 252–3 paradigm case, 253–4 property forfeiture arguments against, 257–64 circumstances of relief, 254–7 specific performance, 254–7 time of the essence clauses, 256–7, 259 forgery, 226 France 1789 Revolution, 169 causal property transfers, 201 judgments conclusions and rapports, 170–1 hidden reasoning, 168–72 legal culture, 168–72 privity of contract, 172 unjust enrichment, 8 contours, 166–8 enrichissement sans cause, 166, 168 répétition de l’indu, 166, 167 uncertainty, 166, 173 fraud fiduciaries, 291 assistance to, 312–15 disposal of trust land, 448–51 limitation periods and, 463 passing of title and, 202, 207–11 Torrens registration system and, 455 disposal of trust land, 448–51 personal equities exception, 460–6 Statute of Frauds (1677), 463, 464, 465, 466 victims’ title, 226

473

free expression, 21–2, 30–1, 102 fusion fallacy, 31, 58 gambling natural obligations, 182, 186–8 public policy and gambling debts, 176 regulation, 178, 187 Germany codification of law, 159 contract, termination for just cause, 56 natural obligations and unjust enrichment limitation of actions, 193 marriage brokering, 197 wagers, 178 privacy law, 88 property transfers, 201–2 tax avoidance in Liechtenstein, 135 torts, 164 unjust enrichment, 154–5, 161 good faith CISG Convention (1980) and, 51 context, 322–3 contract, comparative law, 56–63 controlling fiduciaries’ actions, 323–7 bad faith, 334 exercise of power, 324–5, 334–6 good faith as source of obligation, 325–7 exemplary damages, Australia, 31–2 fiduciary duty, 300 conflicts rules, 330, 333–4, 340–1 core duty, 304, 319 meaning, 327–8 other’s interests, 330–2 remedies, 332–9 functionalism, 322 identification of fiduciaries, 339–41 legal classification, 320–1 consequences, 321–3 meaning, 12 non-fiduciaries, 319, 327–9 insurance, 329 limitation on economic freedom, 329

474

Index

good faith (cont.) mortgagees, 327 receivers, 327 shareholders, 328–9 prohibiting harm to principals, 322 remedies, 332–9 conflicts of interest, 333–4 interaction, 338–9 self-dealing, 336–9 trustees, 146–7 goods. See sale of goods guardians, fiduciary obligations, 287 Hague Trust Convention (1985), 310 harassment, 99 hardship clauses, 56 High Court of Australia, method acceptability of top-down method, 27–38 common law decisions, 30–8 constitutional interpretation, 28–30 evolution of method, 42–9 free speech, 21–2, 30–1 overview, 4–5, 19–40 Posner and, 4, 20–1, 25, 38–40 statutory interpretation, 30 understanding of top-down method, 25–7 unjust enrichment, 6, 22–4, 33–8, 67 hire purchase, 261 honesty, fiduciary duty, 305 Human Rights Act, 103, 119, 120 improvements, forfeiture relief and, 273 in pari delicto potior est conditio defendentis, 211 incrementalism, 110–15, 121–3 inducement to breach of contract, 315–16 infants contracts, 194 resulting trusts, 238 information asymmetry contracts, 393 fiduciary relations, 279 information rights. See beneficiaries injunctions, privacy and, 94–5

insolvency thieves, 231 trustees, 203 unjust enrichment and, 38, 56, 82–5, 198 insurance, utmost good faith, 329 intellectual property rights accounts for profits, 38 disgorgement damages, 394–5 internationalism, contract law, 42, 49–63 judgments, reasons for decisions, 162–5 jus commune, 157, 159 knowing receipt, 70, 77–8, 449–50 knowledge degrees, 312–13 disposal in breach of trust, 449 Torrens registration system and, 459–60 land contracts for sale constructive trusts, 205, 382 disgorgement damages, 381–3 expectation damages, 382–3 specific performance, 381 substitutability, 381–3 disposal in breach of trust, 448–51 estoppel. See proprietary estoppel registration. See Torrens system status, 381 Lando Principles (PECL), 52–63 Law Commission, 147–8, 292, 306 leases forfeiture clauses, 258 forfeiture relief, 262 legal classification. See classification legal culture meaning, 153–4 unjust enrichment and, 173–4 legal development Australia, 42–9 colonial period, 43 isolationism, 47 judges as law-makers, 46

Index precedents, 45, 47, 48–9 Privy Council appeals, 43, 44 to 1983, 43–4 1983–95, 44–6 to the present, 46–9 unified common law, 5, 20, 46–7 Canada, 45 New Zealand, 45 legal duties, classification, 319–42 legal education comparative approaches, 65 through case law, 126–7 trusts. See trusts Lewin on Trusts, 348, 353, 357 liens, 204, 205, 263, 272 limitation periods, 191–4, 226, 233, 258, 463 loyalty, duty of contractarian view, 283 exclusion clauses, 291 gains-based remedies, 279 meaning, 279 malicious falsehood, 87 maritime law, 42 marriage brokering, 197 method See also top-down reasoning; unjust enrichment bottom-up reasoning breach of confidence, 113 incrementalism, 110–15 civilian tradition, 166 incomplete theorizing, 120–4 incrementalism, 110–15, 121–3 judicial method and substantive law, 8, 173–4 mapping, 2–4 muddling through, 110–11, 116 overview, 4–7 pluralism, 2–5, 10 reasons for decision-making, 162–5 teaching, 7 top-down reasoning acceptability, 27–38 bottom-up method and, 3–4 privacy debate, 110–11 common law decisions, 30–8

475

concept, 25–7 constitutional interpretation, 30–8 debate, 25–7 Dixon and, 28–9 Farah, 1, 25–6, 33–4, 36, 77 High Court disapproval, 4–6, 19–40 judicial habits, 24–5 Lumbers, 24, 34–8 Roxborough, 71–6 statutory interpretation, 30 term of abuse, 20–1 unjust enrichment, 6, 22–4, 33–8, 73–4 top-down v bottom-up, 3–6, 19–40 Posner and, 4, 20–1, 25, 38–40 privacy debate, 110–11 unjust enrichment, 8 minors, capacity, 287 mistakes, restitution, 215 mitigation, compensation from fiduciaries, 373 monism, 3 monopolies, bilateral monopolies, 391–2 moral hazard, 393 morality, fiduciary obligations and, 275–6, 284 mortgages, 252–3, 258, 259, 327 muddling through, 110–11, 116 national security, 102, 400 natural obligations categories Canada, 186–98 civilian examples, 178, 197–8 discharged bankrupts, 198 gambling, 182, 186–8 infancy contracts, 194 limitation periods, 191–4 other categories, 196 promises, 196 usurious contracts, 188–91 definition, 176 enforceability Canada, 182–4 categories of obligations, 186–98

476

Index

natural obligations (cont.) juristic reasons, 182–4 overview, 181–4 test, 184–5 unjust factors, 181–2 gambling, 186–8 German law, 178, 197 legal history, 177–84 legal v natural rights, 176–7 Louisiana, 178, 184, 197–8 moral duty, 198 public policy and, 176 Quebec, 178 Roman law, 177–8 terminology, 176–7 traditional common law, 179–80 unjust enrichment and, 8–9, 182–4 usurious contracts, 188–91 negligence damages, 101–2 fiduciary duties and, exclusion clauses, 304–5 presumption, 375 principles, 97, 160, 164 nemo dat quod non habet, 227, 244 nuisance, privacy and, 91–3, 96–7, 103 OECD, 136 offshore trusts, 131, 132–6 orphan structures, 133 parents, fiduciary obligations, 287–8 parliamentary sovereignty, 29, 460, 465–6 party autonomy civil law, 326 contract, 64 contractarian view of fiduciary duties, 275, 281 patents, infringement, 38 paternalism, 252 pension funds, surpluses, 284–6 perpetuities, 133–4 possessory title, 228–30 Praetors, 177 precedents bottom-up methodology, 28 doctrine, 161–2

legal development, 45, 47, 48–9 ratio decidendi, 163 reshaping, 19–20 presumptions, 30, 375 Principles of European Contract Law (Lando Principles), 52–63 privacy, 6–7 See also confidence, breach of adapting tortious causes of action, 87–98 balance of interests, 102–3, 115–20 breach of confidence and, 103–7, 112–15 common law means, 6–7, 87 creation of tort, 98–103 damages, 94, 95 defamation actions, 89–90 equity, 103–7 gaps, 86–7 German law, 88 Human Rights Act and, 103, 119, 120 incomplete theorizing, 120–4 incrementalism, 110–15, 121–3 information privacy, 86 injunctions, 94–5 intrusion, 86 malicious falsehood, 87–8 nuisance actions, 91–3 remedies, 94–7 right, 111, 119–20 trespass, 88–9 trivial information, 116–19 private international law, 42, 309–12 private law, method. See method Privy Council Australian abolition of appeals to, 44 colonial court, 43 property rights express trusts and, 144–5 trust beneficiaries, 346 property transfers. See title, passing of proprietary estoppel circumstances, 464 equity, 403–4 forfeiture clauses, 259–60, 266, 273 proportionality principle, 406–7, 422 Statute of Frauds (1677) and, 464

Index unconscionability approaches, 14–15, 402–3 extent of responsibility approach, 402, 413–15, 422–3 ‘in the round’ approach, 403, 415–22, 423–6 limits, 421–6 reliance and expectations, 403–7 reprehensibility approach, 402, 407–13 public interest, fiduciary obligations and, 276, 288–90 public policy disgorgement damages and, 400–1 natural obligations and, 176 purpose trusts, 133, 145 quasi ex contractu, 179 ratio decidendi, 163 real estate investment trusts (REITs), 139–41 reasons for judicial decisions, 162–5 receivers, good faith, 327 redemption, 252–3 registration of land. See Torrens system REITs, 139–41, 143 remedies See also specific remedies breach of fiduciary law, 279–80, 332–9 compensation. See compensation from fiduciaries good faith, 332–9 Torrens system. See Torrens system rescission, 212 partial rescission academic debate, 427 meaning, 427–8 operation of law, 428 overview, 15 perpetrator-sided, 428–36 opposing authorities, 432–5 summary, 435–6 supporting authorities, 428–31 species of rectification, 430–1 unilateral mistake, 430–1 victim-sided, 436–45

477

legislation, 437–8 opposing authorities, 442–4 summary, 444–5 supporting authorities, 436–42 restitutio in integrum, 157, 166, 209, 210, 427, 429, 432 restitution. See compensation from fiduciaries; unjust enrichment restraint of trade, 389 resulting trusts. See trusts retention of title clauses, 258, 261 rule of law, 29–30, 85 sale of goods CISG Convention (1980), 41, 50–1 disgorgement damages in contract, 383–5 passing of title, 202–3, 206–8, 209–12 proprietary effects of contracting, 202–3 sales in market overt, 227 securities regulation, 293–6 securitization, 137–9, 143, 146–7 self-dealing, 336–9 services breach of negative covenants, 387 restraint of trade, 389 specific performance, 386–90 settlors, restrictions on beneficiaries’ information rights, 355–8 shareholders, good faith, 328–9 shares, specific performance of contracts, 386 slaves, 177 Society of Trust and Estate Practitioners, 148 solicitors acting pro bono, 286 fiduciary duties, 282–4, 300–2 compensation claims, 363–6 conflicts of interest, 277, 288–90, 308, 364–6 termination, 308 South Africa English legal influence on, 158–9 Union of South Africa (1910), 158 unjust enrichment, 8

478

Index

South Africa (cont.) burden of proof, 155–6 codification and, 159–60 common law method and substantive law, 160–6 English influence, 158–9 historical roots, 156–60 illegal transactions, 155 invalid contracts, 155 jus commune and, 157, 159 mistake, 155 unjust factors, 154–6 specific performance debts and, 371–2 discretionary remedy, 204–5 forfeiture relief and, 254–7 land contracts, 381 restraint of trade and, 389 sale of goods, 383–5 sale of shares, 386 services, 386–90 substitutability and, 378 statutory interpretation, 30 sub-prime mortgages, 137–9 substitutability disgorgement damages in contract and agency problems, 379, 392–401 breach of negative covenants, 387, 394–5, 398–401 efficient breach, 390–2 goods and chattels, 383–5 land contracts, 381–3 overview, 14, 378–401 principle, 378–80 second sales, 379, 380–92 services, 386–90 shares, 386 specific performance and, 378 swaps, 68, 185, 186 taxation offshore trusts and, 131, 135–6 Stop Tax Haven Bill (US), 136 tax evasion, 135–6 unjust enrichment, 68, 71–6 taxonomy. See classification

theft See also trusts bankruptcy of thieves, 231 constructive trusts, 224 limitation periods, 226 passing of title, 225–7 possessory title, 228–30 resulting trusts, 224 trusts and, 10 trusts of proceeds innocent recipients, 240–3 overview, 237–45 purchase money resulting trusts, 237–40 victims retaining legal title, 244–5 trusts of stolen assets assets and proceeds, 225 debate, 230 overview, 224–37 possibility of trust, 228–30 victims’ title, 225–7 time of the essence clauses, 256–7, 259 title, passing of causal v abstract transfers common law, 205–12 equity, 212–21 meaning, 9–10, 201–2 self-executing contracts, 209–12 separate contracts, 205–9 common law, 205–12 conditional transfers, 202 effects of contracting, 202–5 equity, 212–21 impaired consent, 9–10 land registration, 203, 208 possessory title, 228–30 proprietary effects of contracting common law, 202–3 equity, 203–5 overview, 202–5 proprietary restitution, 213–14 power model, 215–17 rescission, 212 retention of title clauses, 258, 261 sale of goods, 202–3, 206–8, 209–12 theft. See theft top-down reasoning See also method

Index acceptability, 27–38 Australia acceptability, 27–38 common law decisions, 30–8 concept, 25–7 constitutional interpretation, 28–30 debate, 25–7, 34 Farah, 25–6, 33–4, 36, 77–82 High Court disapproval, 4–6, 19–40 judicial habits, 24–5 Lumbers, 24, 34–8 Roxborough, 25–6, 71–6 statutory interpretation, 30 term of abuse, 20–1 unjust enrichment and, 6, 22–4, 33–8, 73–4 Posner and, 4, 20–1, 25, 38–40 Torrens system easements, 458, 462 exceptions to indefeasability of title, 15–16 Australian fraud exception, 208 claims in rem and in personam, 457–8 Farah, 449–51, 454 fraudulent disposal of trust property, 448–51 personal equities exception, 460–6, 467 personal liabilities and, 452–66 personal liabilities as limits to, 453–60 unconscionability, 461 unregistered interests, 458–9 indefeasibility ejectment, 456–7 notice, 458, 459–60 paramountcy provisions, 455–6, 460 introduction, 452 statutory interpretation, 462–3 widespread system, 447 torts See also specific torts Germany, 164

479

privacy and adapting torts, 87–98 creating privacy tort, 98–103 tracing stolen assets, 223–7 unjust enrichment, 70, 80 trespass damages, 94, 95, 234 injunctions, 94–5 privacy and, 88–9 trivial information and breach of confidence, 116–19 trust, breach of account of profits, 283, 289–90 agency problems, 395–8 assisting, 312–17 compensation. See compensation from fiduciaries constructive trusts, 33–4, 77, 279–80, 282, 448, 450 exemplary damages, 31–2 land disposal, 448–51 notice, 449 remedies, 279–80, 332–9 trustees See also fiduciary duties accountability, 345–7 compensation from. See compensation from fiduciaries fiduciary duties core duties, 147 exemption clauses, 147–8, 290–6, 302–6 good faith, 146–7 professional trustees, 147–8 fraud, 291 indemnity insurance, 147 insolvency, 203 unjust enrichment, 23 trusts See also fiduciary duties beneficiaries’ information rights accountability principles, 345–7 accounts, 343, 350–1 confidentiality and, 345, 347–9, 353–4 discretionary trusts, 351–4 fi xed-interest trusts, 350–1

480

Index

trusts (cont.) inspection of documents, 343, 349 objects of personal powers, 354 overriding circumstances, 349–54 overview, 13, 343–4 property rights, 346 right of notification of beneficial interests, 347–9 settlors’ restrictions, 355–8 beneficiary principle, 133, 145 confidentiality, 132 constructive trusts breach of fiduciary duties information misuse, 33–4, 77 knowing receipt, 450 nature of remedy, 279–80 Torrens system, 448 bribery, 236–7 coherence and, 34 contract for sale of land and, 205, 382 murder and manslaughter, 237 resulting trusts and, 237–8 rhetoric, 220 theft. See theft contractarian view. See fiduciary duties donative instruments, 280 exclusion clauses, 147–8 flexibility, 131, 229 forced heirship and, 132 Hague Convention (1985), 310 importance of trust law, 134–5 legal education, 7, 125–49 case law method, 126–7 contextualizing, 127–43 contractarian basis of express trusts, 143–8 historical structures, 128–9 secondary sources, 142–3 Singapore example, 134–5 trust practitioners as teaching resources, 141–2 offshore trusts, 131, 132–6 origins, 203 orphan structures, 133 overview, 10–13 perpetuities, 133–4

proprietary view of, 144–5 purpose trusts, 133, 145 REITs, 139–41, 143 resulting trusts constructive trusts and, 237–8 pension fund surpluses, 285–6 theft. See theft securitization, 137–9, 143, 146–7 theft and. See theft wealth management vehicles, 129–32 UNCITRAL, 50 unconscionability confidentiality and, 105 express trusts and, 143–2 exclusion clauses, 292–3 forfeiture of instalment payments, 268–9 proprietary estoppel approaches, 14–15, 402–3 extent of responsibility approach, 402, 413–15, 422–3 in the round approach, 403, 415–22, 423–6 limits, 421–6 reliance, expectations and, 403–7 reprehensibility approach, 402, 407–13 Torrens registration system and, 461, 462 unjust enrichment, 6, 73, 75–6, 220 undue influence, 81, 213, 216, 219, 287, 292, 293, 433 UNIDROIT, 50, 52–63 Uniform Commercial Code, 50, 54 unilateral promises, conflict of laws, 312 unjust enrichment Australian reasoning See also High Court of Australia, method corporate insolvency, 24, 38, 82–5 disappointment, 68 equity, 80–1 Farah, 25–6, 33–4, 36, 77–82 forms of action and, 84 knowing receipt, 77

Index Lumbers, 24, 34–8, 82–5 no enrichment objection, 73, 74–5 rejection of top-down method, 22–4, 33–8, 73–4 requirements, 232–3 Roxborough, 25–6, 71–6 strict liability, 23, 77–82 survey, 67 unconscionability, 6, 73, 75–6 wrong reasoning, 6 boundaries, 2 change of position defence, 70 civilian v common law, 3–4, 8, 9, 160, 166, 201 conceptual framework, 69 constructive trusts. See trusts contract and, 34–7, 83–4 failure of consideration, 71–2 implied contract theory, 67, 72 development, 68, 70 equitable tracing, 70, 80 equity and, 22–3, 70, 212–21 power model, 9–10, 215–16, 218–20 fiduciary duties and, 23, 33–4, 36 forfeiture of instalment payments, 264–5 France. See France Germany, 154–5, 161 insolvency and, 24, 38, 82–5, 198 knowing receipt, 70

leapfrogging, 83 legal culture and, 173–4 natural obligations. See natural obligations overview, 7–10, 68–71 perfect quadration, 22 proprietary restitution immediate vested model, 214 power model, 9–10, 215–16 stolen assets and proceeds. See theft requirements, 69, 232–3 Roman law, 155, 157 South Africa. See South Africa strict liability, 23, 70, 77–82 Torrens system and, 451 unjust factors, 69–70 unlawful interference with contractual relations, 315–16 usurious contracts, 188–91 usury regulation, 189 Vienna Sales Convention. See CISG Convention (1980) vindicatio, 449, 450, 451 wagers. See gambling waiver, forfeiture clauses, 259–60, 266

481