PROPRIETARY REMEDIES IN CONTEXT
Proprietary Remedies in Context A Study in the Judicial Redistribution of Property Rights
CRAIG ROTHERHAM
OXFORD – PORTLAND OREGON 2002
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Preface This study represents an attempt to advance our understanding of proprietary remedies by focusing on the anxiety engendered and normative issues raised by the non-consensual redistribution of property rights. It endeavours to shine some light on the strategies by which we obscure the reality that property rights are being redistributed and to demonstrate the unfortunate effects of such dissimulation. In addition, it seeks to advance our understanding of the justifications that might be advanced for the redistribution of property. I hope that a better appreciation of these issues might encourage us to recognise the benefits of a more open analysis of this area of law. I am indebted to a number of people for offering their thoughts on my work in recent years. Particular thanks are due to John Armour, Brian Bix, Hanoch Dagan, Neil Duxbury, Andrew Hicks, Eoin O’Dell and Andrew Simester. I also owe a great debt to Kevin Gray, who supervised the PhD thesis that laid the groundwork for parts of this book and whose own fruitful explorations of the moral limits of property have provided an inspiration for my own research. I would like to thank the Master, Fellows, staff and students of Gonville and Caius College who have provided a convivial and stimulating community in which to research and teach during the years in which this book took shape. I am also grateful to the staff of the Squire Law Library, who provided invaluable research support. Finally, my most personal debt of gratitude is owed to Anne who proof read material that was far from her own field of interest and showed much patience and kindness throughout the period in which this work was completed. Craig Rotherham Cambridge February 2002
Contents Frequently Cited Works Table of Cases
xv xvii
Introduction
1 P ART I P ROPERTY
AND
P ROPRIETARY R EMEDIES
1. Exploring the Idea of Remedial Trusts I. From Remedy to Property: the Development of the Trust II. Different Uses of the Constructive Trust III. The Remedial/Institutional Dichotomy 1. Rights and Remedies 2. The Constructive Trust as a Device for Protecting Fiduciary Relationships 3. The Content of the Constructive Trust 4. Is the Remedy Discretionary? 5. Does the Trust Arise Automatically? 6. Remedial Constructive Trusts as Redistributive
5 7 10 12 13
2. Redistribution and Property Rites I. Two Conceptions of Property II. Property in English Legal Thought 1. The Absolutist Conception of Property 2. The Absolutist Conception of Property in English Law III. The Influence of these Understandings on the Law of Proprietary Remedies 1. The Influence of Positivism 2. The Persistence of Absolutist Assumptions IV. Orthodox and Redistributive Proprietary Remedies 1. Orthodox Proprietary Remedies 2. Redistributive Proprietary Remedies V. Reason and Ritual in the Law of Prorietary Remedies 1. Ritual in Legal Discourse 2. Property Rites 3. Rituals and the Normative Framework of the Private Law 4. The Cost of these Rituals
33 33 34 34 36
16 20 24 26 31
38 38 39 40 40 42 42 42 44 46 47
viii Contents 3. The Legacy of Legal Realism: Instrumentalist Approaches to Property I. Property in American Legal Thought 1. The Rise and Fall of Universal Principles of Common Law 2. The Shift to a Positivist Understanding of Property 3. Notions of Property and the Law of Eminent Domain 4. Property and Due Process 5. The Disintegration of Property 6. The Influence of these Understandings on the Common Law II. Instrumentalism in Proprietary Remedies in US Law 1. The Formalism of Early Remedial Constructive Trust Theory 2. Realism about Proprietary Relief 3. Re Omegas and the Unravelling of the Remedial Constructive Trust III. Instrumentalism in other Common Law Jurisdictions 1. The Liberation of the Constructive Trust 2. Determining when Proprietary Relief should be Available IV. Formalism and Instrumentalism Contrasted 4. The Normative Foundations of Proprietary Claims and Remedies I. Considerations of Justice and Efficiency for giving Owners Relief against Third Parties 1. Rights against Remote Recipients of Misappropriated Assets 2. Rights against Third Parties in Respect of Bitiated Transfers II. Rights to Profits III. Should these Remedies be Specific? 1. Justifying Specific Relief 2. To what Extent does the Law Recognise these Concerns? 3. Rights to Specific Recovery and Bankruptcy IV. Should these Remedies have Priority in Bankruptcy? 1. Justifying Remedies in Bankruptcy 2. The Swollen Assets Rationale 3. The Assumption of Risk Rationale: Distinguishing Contract and Restitution Plaintiffs
49 49 49 51 52 53 54 55 57 57 59 60 63 63 64 67 69 69 69 73 75 75 75 76 76 77 77 79 81
P ART II R EDISTRIBUTIVE P ROPRIETARY R EMEDIES 5. The Metaphysics of Tracing: Substituted Title and Property Rhetoric I. Analysing Tracing
89 90
Contents ix
II.
III.
IV.
V.
VI. VII.
1. Is Tracing a Claim or Remedy? 2. Tracing as Part of a Remedial “Process” 3. Do Rights to Proceeds Arise Automatically? 4. Does Tracing Create New Property Rights? The Metaphysics of Tracing: The Denial of the Remedial Nature of Tracing in Legal Discourse 1. Tracing Things 2. Tracing as Ratification 3. The New Orthodoxy: Tracing Value An Explanation of Tracing Rhetoric: The Reconciliation of Tracing with Axiomatic Notions of Property Rights 1. The Function of Tracing Rhetoric 2. The Power of Tracing Rhetoric The Normative Basis for Substituted Title 1. Reasons for Allowing the Assertion of Proprietary Rights over Substitutes 2. Dissonance Between Tracing’s Normative Foundations and the Positive Law The Consequences of Tracing Discourse for the Substantive Law: The Dangers of the Metaphysics of Tracing 1. The Privileging of Transactional Tracing 2. The Suppression of Normative Analysis 3. Illustrations of the Dangers of Formalism Some Realism About Tracing Conclusion
6. The Proprietary Consequences of a Vitiated Intention to Transfer Property: “An Intolerable Reproach to Our System of Jurisprudence”? I. The Possible Legal Responses to a Vitiated Consent to Pass Title 1. Transfers Void at Law 2. Voidable Transfers 3. Transfers Giving Rise to a Beneficial Interest 4. Transfers Pursuant to which Title Passes but a Right to Personal Relief Arises 5. Transfers where Title Passes and the Transferor is Denied Any Remedy II. Vitiated Intent and Equitable Title: Doctrinal Responses 1. The Availability of Proprietary Relief: Millett J’s Framing of the Issue in El Ajou v. Dollar Land Holdings 2. Three Attempts to Determine the Availability of Proprietary Relief in Response to a Vitiated Intention to Transfer Property
90 91 93 96 98 98 100 101 106 106 107 108 108 110 114 115 117 120 125 126
127 127 127 129 130 131 131 132 132
133
x Contents 3. Millett J’s analysis in El Ajou: The Proprietary Consequences of Rescission 4. Millett’s New Analysis III. Proprietary Relief for Vitiated Transfers: Relevant Policy Considerations 1. The Importance of Identifying Involuntary Restitution Claimants 2. Distinguishing between Involuntary Creditors 7. Qualified Consent to Transfer Property: The Mysterious Basis of the Quistclose Trust I. Conceptualising the Quistclose Trust 1. Barclays Bank v. Quistclose Investments 2. Interpretations of the basis of the Quistclose Trust 3. Proprietary Remedy or Orthodox Trust? II. Considerations of Justice and Efficiency 8. Obligation into Ownership: Constructive Trusts and Liens in Arrangements to Assign Property I. The Distribution of Entitlements in Sale of Goods Transactions II. The Passage of Title in Equity: Constructive Trusts and Liens arising in the Context of Contracts of Sale 1. Equitable Interests Arising in Anticipation of a Legal Conveyance of Property where the Contract is Specifically Enforceable or Consideration has been Paid 2. Equitable Proprietary Interests in Incomplete Property III. Conclusion 9. Proprietary Relief for Enrichment by Wrongs: the Shifting Boundary between Ownership and Obligation I. Proprietary Relief for Enrichment by Wrongs: a Normative Analysis 1. Justifications for Priority in Bankruptcy 2. Limitations in the Law’s Ability to do Justice: Difficulties in Identifying Unjust Enrichment 3. Proprietary Relief Sought for Reasons other than Priority II. Lister v. Stubbs and The Ownership/Obligation Distinction 1. Secret Commissions and the Limits of Proprietary Relief 2. Policy Concerns Motivating the Principle 3. Divergence between the Formal Principle and Normative Justifications 4. The Premises and Methodology Underlying the Principle in Lister v. Stubbs
140 146 149 149 150
153 153 153 154 160 161
165 165 167
168 172 175
177 178 178 180 181 182 182 183 183 186
Contents xi III. Deducing Ownership from Obligation: AG for Hong Kong v. Reid 1. The Principle in Reid 2. The Interests of Creditors 3. Divergence between Formal Principle and Policy Concerns 4. The Premises and Methodology Underlying Reid IV. Proprietary Relief for Enrichment by Wrongs in North American Legal Thought V. Conclusion: The Limits and Price of Formalism 10. The Division of Assets on the Breakdown of Intimate Relationships: the Limits of Private Ordering I. Introduction II. From Contract to Status: Justifications for Judicial Intervention 1. “The Cold Legal Question”: the Requirement of an Agreement or Promise 2. A Shift Away from the Intention of the Legal Owner: Restitution and Estoppel 3. Focusing upon Objective Expectations 4. Analogies with Joint Ventures and Commercial Partnerships III. The Inadequacy of Justifications Offered for Intervention in this Area IV. The Limits of the Private Ordering Paradigm: the Case against Applying Conventional Property Norms in the Context of Intimate Relationships 1. Spheres of Justice: Distributive Norms in Intimate Relations 2. The Treatment of Intimate Relationships in Legal Doctrine 3. The Premises of the Absolutist Conception of Private Property 4. The Premises Controverted 5. Intimacy as Market Failure 6. Institutional Considerations V. Is Proprietary Relief Justified? 1. The Significance of a Causal Connection between Contributions and Assets 2. Plaintiffs’ Psychological Connection with Property 3. The Danger of Strategic Behaviour 4. The Interests of Third Parties VI. Conclusion
188 188 188 190 191 195 196
197 197 199 199 202 206 207 208
212 212 213 220 221 225 230 230 231 235 238 240 244
xii Contents 11. Subrogation: Stepping into the Shoes of Secured Creditors I. Explaining Subrogration 1. The Function and Effect of Subrogation Reasoning 2. Traditional Explanations for the Provision of Proprietary Relief 3. Subrogation as Restitution 4. Shifting the Focus to Third Party Creditors II. Identifying Creditors’ Enrichment in Subrogation Cases III. Determining whether Creditors would be Unjustly Enriched I: Cases in which the Plaintiff may be Characterised as an Involuntary Unsecured Creditor 1. Where Plaintiffs’ Property is Used without their Consent to Discharge a Secured Debt 2. Subrogation and Mistakes 3. Practical Compulsion as a Ground for Subrogation IV. Determining whether Creditors would be Unjustly Enriched II: Cases in which the Plaintiff Cannot Readily be Characterised as an Involuntary Unsecured Creditor 1. Sureties’ Acquisition of the Rights of Secured Creditors 2. Bills of Exchange: An Indorser’s Right to a Holder’s Securities 3. Subrogation of Creditors of a Trust Business to the Trustees’ Lien 4. Subrogation and the Doctrine of Marshalling V. Protecting Third Parties: Defences and Registration 1. A Change of Position Defence? 2. Subrogation and Registration VI. Conclusion 12. Constructive Trusts over Sums Obtained from Third Parties to Prevent Over-compensation I. Insurers’ Rights Against an Indemnified Assured 1. The Nature of Insurer’s Rights against an Indemnified Assured 2. Justifying the Insurer’s Proprietary Interest in Money Recovered by the Assured from Third Parties 3. Rights Arising from an Overpayment by the Insurer II. An Assured’s Rights against an Over-indemnified Insurer 1. Lonhro v. Export Credit Guarantee Department 2. Formal Justifications 3. Policy Arguments III. Constructive Trusts over Sums Recovered for the Benefit of Another
245 245 245 248 249 250 253
255 255 257 262
263 263 266 267 269 269 269 272 273
275 275 275 276 283 284 284 285 286 286
Contents xiii IV. Constructive Trusts arising in Favour of Carers of Tort Victims over Damages due from Tortfeasors 13. Proprietary Estoppel I. Rule of Evidence or Substantive Doctrine? II. The Basis for Intervention: is Proprietary Estoppel Limited to the Enforcement of Consensual Arrangements? 1. Enforcing Informal Transfers 2. Estoppel in Unilateral Mistake Cases 3. Estoppel in Common Mistake Cases III. Remedial Discretion 1. The Measure of Relief 2. Personal or Proprietary Relief? IV. The Proprietary Status and Effect of these Remedies 1. Proprietary Estoppel and Third Parties 2. The Nature of Plaintiffs’ Rights Prior to any Judicial Declaration V. Conclusion 14. Liens arising from the Acquisition, Preservation or Improvement of Assets I. Maritime Liens 1. Liens in Maritime Law 2. The Nature of the Maritime Lien II. Equitable Liens: “A Themeless Ragbag”? 1. Introduction 2. A General Right to a Lien over Salvaged Property? 3. Particular Equitable Liens arising from the Acquisition, Preservation or Improvement of Assets P ART III R ESTITUTION
AND
288 291 291 293 293 293 294 297 298 303 304 304 307 310
311 311 311 313 314 314 315 316
P ROPERTY R ITES
15. Proprietary Relief as Restitution I. Birks’ Account of Proprietary Remedies 1. Tracing Value 2. Vitiated Transfers 3. Enrichment by Wrongs 4. Quasi-Matrimonial Property Relief 5. Subrogation 6. Rights Preventing Over-indemnification or Over-compensation 7. Proprietary Estoppel II. The “Proprietary Base” as an Explanation for Proprietary Remedies
325 325 326 329 330 331 331 333 334 335
xiv Contents III. Rationalising Restitution: the Limits of the Project IV. Conclusion
336 338
P ART IV C ONCLUSION 16. Conclusion: Redistributive Proprietary Remedies and the Moral Limits of Property I. Redistributive Proprietary Remedies and the Absolutist Paradigm of Property 1. The Diversity of Property and the Implausibility of the Absolutist Paradigm 2. The Obfuscation of Redistribution and its Consequences II. The Need for a Normative Discourse of Property 1. Property and Justice 2. From the Absolutist Paradigm to a New Discourse 3. The Nature of the New Discourse 4. Toward a Jurisprudence of Redistribution
343 343 344 344 345 346 347
Index
349
343 343
Frequently Cited Works Birks, P., An Introduction to the Law of Restitution (revd edn., Oxford, Clarendon Press, 1989). Burrows, A., The Law of Restitution (London, Butterworths, 1993). Chambers, R., Resulting Trusts (Oxford, Clarendon Press, 1997). Goff, R., and Jones, G., The Law of Restitution (1st edn., London, Sweet and Maxwell, 1966). (2nd edn., London, Sweet and Maxwell, 1978). (3rd edn., London, Sweet and Maxwell, 1986). (4th edn., G. Jones (ed.), London, Sweet and Maxwell, 1994). (5th edn., G. Jones (ed.), London, Sweet and Maxwell, 1998). Mitchell, C., The Law of Subrogation (Oxford, Clarendon Press, 1994). Oakley, A., Constructive Trusts (3rd edn., London, Sweet & Maxwell, 1997). Palmer, G., Law of Restitution (Boston, Mass., Little, Brown & Co, 1978), 4 vols. Seavey, W., and Scott, A. (reptrs.), The Restatement of Restitution (St Paul, Minn., American Law Institute Publishers, 1937). Smith, L., The Law of Tracing (Oxford, Clarendon Press, 1997). Virgo, G., Principles of the Law of Restitution (Oxford, Clarendon Press, 1999).
Table of Cases Addis v. Campbell (1841) 4 Beav. 401 ...................................................................144 Addison v. Gandassequi (1812) 4 Taunt. 574..........................................................95 Adkins v. Children’s Hospital 261 US 525 (1923) ...................................................53 AG for Hong Kong v. Reid [1994] AC 324 ................................12, 17, 18, 29, 31, 40, 45, 46, 174, 177, 180, 188, 189, 190, 191, 192, 193, 194, 195, 196, 256, 276, 280, 282, 330, 336 AG of Hong Kong v. Humphrey’s Estate (Queen’s Gardens) Ltd. [1987] AC 114....................................................................................................295 AG v. Birmingham Corporation (1859) K & J 528. .................................................37 Air Jamaica Ltd. v. Charlton [1999] 1 WLR 1399.................................................135 AG v. Blake [2001] AC 268 ........................................................................................9 Alati v. Kruger (1955) 94 CLR 216 ........................................................................145 Albazero, The [1977] AC 777.........................................................................287, 288 Aline, The (1839) 1 Wm. Rob. 111........................................................................312 Aluminium Industrie Vaassen BV v. Romalpa Aluminium Ltd [1976] 1 WLR 676..............................................................................120, 126, 161 Amalgamated Investment & Property Co. Ltd. v. Texas Commerce International Bank Ltd. [1982] QB 84...............................................................295 American Sugar-Refining Co. v. Fancher 40 NE 206 (NY, 1895) ...........................61 Armatage Motors Ltd v. Royal Trust Corp. of Canada (1997) 149 DLR (4th) 398.....................................................................................................270, 271 Armour v. Thyssen Edelstahlwerke AG [1991] 2 AC 339 ......................................121 Ashburn Anstalt v. Arnold [1989] Ch. 1 ..........................................11, 160, 218, 304 Associated Japanese Bank (International) Ltd. v. Credit du Nord SA [1989] 1 WLR 255..............................................................................................129 Atlas Cabinets and Furniture Ltd. v. National Trust Co. Ltd. (1990) 68 DLR (4th) 161 .....................................................................................26 Australian Elizabethan Theatre Trust, Re (1981) 102 ALR 681 (Fed Ct).............156 Babcock v. Lawson (1880) 5 QBD 284...................................................................129 Bainbridge v. Browne (1881) 18 Ch. D 188.............................................................25 Baker v. Baker (1993) 25 HLR 408 ........................................................................300 Balfour v. Balfour [1919] 2 KB 571........................................................216, 217, 218 Bank of America v. Arnell [1999] Lloyd’s Bank Rep. 399.....................................133 Banner Homes Group Plc v. Luff Developments Ltd. [2000] Ch. 372 .............11, 293 Banque Belge pour L’Etranger v. Hambrouck [1921] 1 KB 321 ............................109 Banque Financière de La Cité v. Parc (Battersea) Ltd. [1999] 1 AC 221.. ........................................93, 247, 248, 250, 251, 252, 253, 254, 258, 259, 261, 268, 270, 271, 273, 279, 346
xviii Table of Cases Barclays Bank Ltd v. Simms [1980] QB 677 ..........................................................128 Barclays Bank plc v. O’Brien [1994] AC 140 .................................................217, 241 Barclays Bank plc v. Quistclose Investments Ltd. [1970] AC 567 .........................................................19, 41, 67, 153, 154, 155, 156, 157, 158, 159, 160, 161, 162, 163, 282 Barker v. St Quintin (1844) 12 M & W 441 ..........................................317, 318, 319 Basham, Re [1986] 1 WLR 1498............................................................................293 Bathurst City Council v. PWC Properties Pty Ltd. (1998) 157 ALR 414 .....................................................................................63, 309 Baumgartner v. Baumgartner (1987) 164 CLR 137 ..............................202, 207, 208 BCCI (No 8), Re [1998] AC 214 ............................................................................162 BCCI v. Akindele [2000] 3 WLR 1423.....................................................................22 Beaumont, decd, Re [1980] Ch. 444.......................................................................220 Beddoe, Re [1893] 1 Ch. 547..................................................................................316 Beesly v. Hallwood Estates [1960] 1 WLR 549.......................................................295 Beeston, Re [1899] 1 QB 626..................................................................................129 Bell v. Lever Brothers Ltd. [1932] AC 161..............................................................131 Benares, The (1850) 14 Jur. 581.............................................................................312 Benett v. Wyndham (1862) 4 De GF & J 259 ........................................................316 Beresford v. Hobson (1816) 1 Mod. 373 ................................................................214 Berkey v. Third Avenue Railway Co. 244 NY 84 (Ct. App. 1926).........................326 Biggerstaff v. Rowattís Wharf Ltd. [1896] 2 Ch. 93 .................................................77 Binions v. Evans [1972] Ch. 359 ................................................................8, 218, 304 Birmingham Midshires Mortgage Services Ltd. v. Sabherwal (2000) 80 P & CR 256........................................................................................305 Bishopsgate Investment Management Ltd. v. Homan [1995] Ch. 211 ...........................................................................................122, 123 Blackburn Building Society v. Cunliffe, Brooks & Co (1882) 22 Ch. D 61 ............................................................................................254 Bloxam v. Saunders (1825) 4 B & C 941 ...............................................................166 Blyth Shipbuilding Co, Re. [1926] Ch. 494............................................................174 Boardman v. Phipps [1967] 2 AC 46 .....................................................................180 Bold Buccleugh, The (1851) 7 Moo. PC 267..........................................................312 Bond Worth, Re [1980] Ch. 228...............................................................................97 Born, Re [1900] 2 Ch. 433......................................................................................320 Boscawen v. Bajwa [1996] 1 WLR 328..................90, 92, 94, 96, 101, 103, 110, 246, 251, 254, 255, 256, 257, 271, 272, 333 Box v. Barclays Bank plc [1998] Lloyd’s Banking Rep. 185..................................155 Bozon v. Bolland (1839) 4 My. Ch. 354.................................................................317 Bristol & West Building Society v. Mothew [1996] 4 All ER 698.............15, 130, 148 British Railways Board v. Herrington [1972] AC 877 .............................................56 Brooks v. Chicago Downs Association Inc. 791 F 2d 512 (7th Cir., 1986)...............56 Brunsdon v. Allard (1859) E & E 19 ......................................................................319 Bryson v. Bryant (1992) 29 NSWLR 188...............................................................232
Table of Cases xix Burbery Finance v. Hindsbank Ltd. [1989] 1 NZLR 356.......................................295 Burdick v. Garrick (1870) LR 5 Ch. App. 233 .......................................................136 Burgess v. Wheate (1757-9) 1 Eden 177 ....................................................................8 Burns v. Burns [1984] 1 All ER 244 .......................................................197, 218, 231 Burns v. Burns [1998] NZFLR 654 ........................................................................240 Burrell v. The Earl of Egremont (1844) 7 Beav. 205 ......................................262, 263 Burrows & Burrows v. Sharpe (1989) 23 HLR 82..................................................300 Burston Finance Ltd v. Speirway Ltd [1974] 1 WLR 1648 ....................................273 Butler v. Rice [1910] 2 Ch. 277 ......................................................................257, 333 Campbell v Griffin [2001] EWCA Civ. 990 ...................................................299, 300 Canadian Imperial Bank of Commerce v. Bello (1992) 64 P & CR 48..........................................................................................305 Canadian Superior Oil Ltd. v. Paddon-Hughes Development Co. Ltd. (1970) 12 DLR (3d) 247 ....................................................................................295 Carl Zeiss Siftung v. Herbert Smith (No 2) [1969] 2 Ch. 276. ................................15 Carlisle Banking Co. v. Thompson (1884) 28 Ch. D 398.......................................253 Carr Saunders v. Dick McNeil & Associates [1986] 1 WLR 922 ...........................343 Carreras Rothmans Ltd v. Freeman Matthews Treasure Ltd [1985] Ch. 207 ...................................................................................................157 Cartwright v. Cartwright (1853) 3 De GM & G 982 .....................................215, 216 Cass v. Jones (In re Jones) 50 Bankr. 911 (Bankr. ND Tex., 1985).......................160 Castellain v. Preston (1883) 11 QBD 380 ..............................................................246 Caunce v. Caunce [1969] 1 WLR 286....................................................................240 Cave v. Cave (1880) 15 Ch. D 639...........................................................................94 Central Trust Co. v. Shepard (In re Shepard) 29 Bankr. 928 (Bankr. MD Fla., 1983)........................................................................................83 Chaplin v. Chaplin (1733) 3 P Wms 229 ..............................................................214 Chase Manhattan Bank v. Israel British Bank [1980] Ch. 105...........................................................13, 15, 18, 19, 20, 41, 61, 75, 128, 133, 138, 139, 146, 147, 149, 260, 284 Chattock v. Muller (1878) 8 Ch. D 177 ...................................................................11 Chelsea Cloisters Ltd, Re (1981) 41 P & CR 98........................................................85 Chetwynd v. Allen [1899] 1 Ch. 353 ..............................................................248, 257 Chinn v. Collins [1981] AC 533.............................................................................169 CIN Properties v. Rawlins [1995] 2 EGLR 130........................................................56 City of London Building Society v. Flegg [1988] AC 54 .........................................241 Clark v. Bulmer (1843) 11 M & W 243 .................................................................173 Clarkson Booker Ltd. v. Andjel [1964] 2 QB 775.....................................................95 Clayton’s Case (1816) 1 Mer. 529 ..........................................................................104 Cleadon Trust, Re [1939] Ch. 286 .........................................................................258 Cleaver, Re [1981] 2 All ER 1018.............................................................................11 Clough v. The London and North Western Ry Co (1871) 7 LR 26 ........................145 Commercial Banking Co. of Sydney Ltd. v. Mann [1961] AC 1..............................98 Commercial Union Assurance Co v. Lister (1874) LR 9 Ch. App. 483 ................278
xx Table of Cases Commissioner for Stamp Duties (Queensland) v. Livingston [1965] AC 694......................................................................................................97 Commonwealth v. Alger 7 Cush. 53 (Mass., 1851) .................................................53 Commonwealth v. Verwayen (1990) 95 ALR 321..........203, 292, 295, 300, 301, 307 Coombe v. Coombe (1951) 2 KB 215 .....................................................................291 Cooper v. Phibbs (1867) LR HL 149 ......................................................................322 Corpis v. Middleton (1823) 1 T & R 224 ...............................................................263 Countess of Shrewsbury v. Earl of Shrewsbury (1790) 1 Ves. Jun. 227................................................................................262, 316 Countess of Strathmore v. Bowes (1789) 2 Cox 28 ................................................213 Crabb v. Arun DC [1976] Ch. 179.........................................................................298 Craythorne v. Swinburne (1807) 14 Ves. 160 ........................................248, 263, 264 Crick v. Ludwig (1994) 117 DLR (4th)..................................................................206 Cuddon v. Tite (1858) 1 Giff. 395..................................................................170, 275 Cundy v. Lindsay (1873) 3 App. Cas. 459 .......................................................74, 128 Cunningham v. Brown 265 US 1 (1923)..................................................................61 Cunningham v. Harrison [1973] QB 942 ..........................................12, 29, 288, 333 Currie v. M'Knight [1897] AC 97 ..........................................................................312 Cyril Lord Carpet Sales Ltd. v. Browne (1966) 111 Sol. Jo. 51................................95 Dallow v. Garrold (1884) 14 QBD 543..................................................................320 Davidson v. Worthing (1987) 26 ETR 26...............................................................232 Davison’s Estate, Re (1893) 31 LR Ir. 249, affíd [1894] 1 IR 5 .............................264 Day v. Mead [1987] 2 NZLR 443 ..........................................................................219 De Nemours Powder Co. v. Masland 244 US 100 (1917)........................................51 Denley, Re [1969] 1 Ch. 373 ..........................................................................156, 157 Dent v. Scott (1648) Aleyn 6 ..................................................................................214 Denton v. Davies (1812) 18 Ves. 499 .....................................................................122 Dickie v. Torbay Pharmacy [1995] 3 NZLR 429 .....................................................66 Dillwyn v. Llewelyn (1862) De GF & J 517.....................................................21, 293 Dines Construction Ltd. v. Perry Dines Corp. (1989) 4 NZCLC 65,298 ....................................................................................160 Diplock, Re [1948] Ch. 465 ................................16, 17, 100, 104, 107, 132, 137, 139 DKLR Holdings Co. (No. 2 ) Pty Ltd. v. Commissioner for Stamp Duties (NSW ) (1982) 149 CLR 431 ....................................................................97 Dodsworth v. Dodsworth (1973) 228 EG 1115 ..............................................300, 303 Dow Corning Corp, Re. 192 BR 428 (Bankr ED Mich, 1996)...........................27, 61 Drake v. Whipp [1996] 1 FLR 826.........................................................................200 Dufour v. Pereira (1769) Dick 419 ..........................................................................11 Duke of Beaufort v. Patrick (1853) 17 Beav 60 ......................................................306 Duncan, Fox, & Co. v. North and South Wales Bank (1880) 6 App. Cas. 1 ..........................................................................249, 254, 288 Durham County Permanent Investment Land and Building Society, Re (1871) LR 12 Eq. 516 .......................................................................254 Dyer v. Dyer (1788) 2 Cox Eq. Cas. 92..................................................................199
Table of Cases xxi E & L Berg Homes Ltd. v. Grey (1980) 253 EG 473...............................................299 Earl of Buckinghamshire v. Hobart (1818) 3 Swans. 186 ......................................262 Edwards v. Glyn (1859) 2 E & E 29........................................................................157 Edwards, Re (1873) 8 Ch. App. 289.......................................................................166 Eisdell v. Coningham (1859) 28 LJ (Ex.) 213 ........................................................320 El Ajou v. Dollar Land Holdings plc [1993] 3 All ER 717...............74, 109, 132, 133, 140, 141, 142, 143, 146, 147, 148, 149, 151 Elders Pastoral Ltd. v. BNZ [1989] 2 NZLR 180 ...............................................18, 64 Electrical Enterprise Retail Pty Ltd. v. Rodgers (1989) 15 NSWLR 473.......................................................................................174 ER Ives Investment v. High [1967] 2 QB 379.................................293, 305, 306, 334 Erlanger v. New Sombrero Phosphate Co. (1878) 3 App. Cas. 1218 ....................................................................................145 Errington v. Errington and Woods [1952] 1 KB 290......................................218, 304 Everson v. Rich (1988) 53 DLR (4th) 470..............................................204, 205, 232 Eves v. Eves [1975] 3 All ER 768 ............................................................................218 EVTR, Re [1987] BCLC 646 ..........................................................................155, 160 Ex parte Cleland (1867) LR 2 Ch. App. 808 ..................................................320, 322 Fairfold Properties Ltd. v. Exmouth Docks [1993] Ch. 196 ...................................317 Faithfull v. Ewen (1878) 7 Ch. D 495 ....................................................................321 Falcke v. Scottish Imperial Insurance Co. (1886) 34 Ch. D 234 ....................245, 315 Farhall v. Farhall (1871) 7 Ch. App. 123 ..............................................................267 ffrench’s Estate, Re (1887) 21 LR Ir 283...................................................................94 Finch v. Earl of Winchilsea (1715) 1 P Wms 277 ......................................................8 Flaherty v. Moran (1890) 45 NW 381 .....................................................................56 Fletcher v. Fletcher (1788) 2 Cox 99.......................................................................216 Fortex Group Ltd. (in Receivership & Liquidation) v. MacIntosh [1998] 3 NZLR 171 ..................................................................................26, 63, 66 Foskett v. McKeown [2001] 1 AC 102 .......................................12, 72, 73, 90, 97, 98, 105, 109, 110, 122, 346 Fribance v. Fribance [1957] 1 WLR 384 ................................................................218 Gee v. Pritchard (1818) 2 Swans. 402 ........................................................................9 General Communications Ltd. v. Developmental Finance Corporation of New Zealand [1990] 3 NZLR 406..............................................................................155 Ghana Commercial Bank v. Chandiram [1960] AC 732 ..............248, 254, 332, 333 Gibert v. Gonard (1885) 54 LJ Ch. 439..........................................................159, 162 Gillett v. Holt [2001] Ch. 210 ................................................................293, 299, 300 Gillies v. Keogh [1989] 2 NZLR 327.......................197, 204, 206, 219, 230, 245, 295 Gillott’s Settlement, Re [1934] Ch. 97....................................................................168 Gissing v. Gissing [1971] AC 886 .......................37, 56, 197, 199, 200, 230, 231, 303 Giumelli v. Giumelli (1999) 161 ALR 473 .................................11, 21, 300, 303, 309 Goldcorp Exchange Ltd, Re [1995] 1 AC 74 ..........................65, 66, 77, 79, 101, 111, 113, 140, 144, 159, 330 Goring, The [1988] AC 831....................................................................................316
xxii Table of Cases Government of Mauritius v. Union Flacq Sugar Estates Co. Ltd. [1992] 1 WLR 903................................................................................................52 Grant v. Edwards [1986] Ch. 638 ..........................................................................305 Gresley v. Mousley (1859) 4 De G & J 78...............................................................130 Griffith v. Williams (1977) 248 EG 947.................................................................298 Guardian Ocean Cargoes Ltd. v. Banco do Brasil SA [1991] 2 Lloydís Rep. 68............................................................................155, 160 GUS Property Management Ltd. v. Littlewoods Mail Order Stores Ltd., (1982) SC (HL) 157 ........................................................................286 Habermann v. Koehler (1996) 73 P & CR 515 ......................................................305 Halcyon Isle, The [1981] AC 221 ...................................................................282, 313 Halifax Building Society v. Thomas [1996] Ch. 217................................18, 142, 191 Hallett, Re (1880) Ch. D 696..............................94, 98, 104, 105, 109, 116, 137, 314 Harman v. Glencross [1986] Fam. 81 ....................................................................320 Harris Calculating Machine Co, Re. [1914] 1 Ch. 920..........................................254 Harvey, Re [1896] 1 Ch. 137..................................................................................262 Haygarth v. Wearing LR 12 Eq. 320 ......................................................................144 Hayward v. Giordani [1983] NZLR 141................................................................230 Hazell v. Hammersmith and Fulham LBC [1992] 2 AC 1 ...................................136 Heid v. Reliance Finance (1983) 154 CLR 326 ..........................................................9 Helby v. Matthews [1895] AC 471.........................................................................167 Herman v. Smith (1984) 34 Alta. LR (2d) 90........................................................232 Hewett v. Court (1983) 57 CLR 211 ........................................................85, 173, 174 Hobbs v. Marlowe [1978] AC 16............................................................................279 Hoffman v. Red Owl Stores 133 NW 2d 267 (Wis., 1965) ....................................301 Holiday Inns Inc. v. Broadhead (1974) 232 EG 951 ..............................................300 Holroyd v. Marshall (1862) 10 HLC 191.........................................................11, 168 Hospital Products International v. United States Surgical Corporation (1984) 58 ALJR 587.......................................................................159 Hounslow LBC v. Twickenham Garden Developments Ltd. [1971] Ch. 233 ...................................................................................................160 Hua Chiao Commercial Bank Ltd. v. Chiapua Industries Ltd. [1987] AC 99......................................................................................................108 Hunt v. Luck [1902] 1 Ch. 428 ..............................................................................240 Hunt v. Severs [1994] 2 AC 350...............................................................12, 288, 333 Hunter Engineering Co. v. Syncrude Canada Ltd. (1989) 57 DLR (4th) 321...............................................................................................................17 Hurst v. Picture Theatres Ltd. [1915] 1 KB 1.........................................................160 Hussey v. Palmer [1972] 3 All ER 744 ...........................................................218, 289 Hyundai Heavy Industries Co. Ltd. v. Papadopoulos [1980] 1 WLR 1129....................................................................................173, 174 Illich v. R (1987) 162 CLR 110.......................................................................128, 129 Illinois Central Railroad v. Illinois 146 US 389 (1892) ...........................................53 Industries & General Mortgage Co. Ltd. v. Lewis [1949] 2 All ER 573 .................192
Table of Cases xxiii Ingram v. Little [1960] 3 All ER 332......................................................................128 Inna, The [1938] P 148 ..................................................................................312, 313 International Refugee Organisation v. Maryland Drydock Co, 179 F 2d 284 (4th Cir., 1949) ..............................................................................59 Inwards v. Baker [1965] 2 QB 29...........................................................................304 Ivor v. Wilkes (1820) 3 B & Ald 304 ........................................................................36 Jackson v. Crosby (No 2) (1979) 21 SASR 280 ......................................................299 Jaggard v. Sawyer [1995] 1 WLR 269 ....................................................................343 James Bibby Ltd v. Woods and Howard [1949] 2 KB 449 .....................................318 Johnson v. Crédit Lyonnais Co. (1877) 3 CPD 32 .................................................167 Johnson v. Smiley (1853) 17 Beav. 223 ..........................................................129, 146 Johnson, Re (1880) 15 Ch. D 548...................................................................268, 316 Jones & Sons (Trustee) v. Jones [1997] Ch. 159 ......................................94, 103, 104, 105, 109, 123, 346 Jones v. Hansen 867 P 2d 303 (Kan., 1994).............................................................56 Jones v. Jones 532 So 2d 574 (Miss., 1988) ............................................................208 Jordan v. Mitchell 705 So 2d 453 (Ala. Civ. App., 1997) ......................................203 Jordan v. Money (1854) 5 HLC 185.......................................................................291 Joseph v. Knox (1813) 3 Camp. 320...............................................................287, 333 JT Development Ltd. v. Quinn (1991) P & CR 33 .................................................203 Kayford Ltd (In Liquidation), Re [1975] 1 WLR 279..............................................85 Keech v. Sandford (1728) Sel. Cas. t King 61.....................................17, 74, 184, 185 Keighley v. Maxted & Co. v. Durant [1901] AC 240.............................................101 Kemp v. Elmer Co. 56 F 2d 657 (SD Cal, 1932) ......................................................59 Kennedy v. Panama, New Zealand, and Australian Royal Mail Co. Ltd. (1867) LR 2 QB 580 ...........................................................................................129 King v. David & Allen Sons, Billposting [1916] 2 AC 54.......................................305 Kings Norton Metal Co. Ltd. v. Eldridge, Merret & Co. Ltd. (1897) 14 TLR 98 ...............................................................................................128 Kingsnorth Finance Co. Ltd. v. Tizard [1986] 1 WLR 783....................................240 Kleinwort Benson Ltd. v. Lincoln CC [1999] 2 AC 349 .........................................260 Knox v. Gye (1872) LR. 5 HL 656..........................................................................326 Kountze Bros, Re 79 F 2d 98 (2d Cir., 1935) ...........................................................83 Kwei Tek Chao v. British Traders & Shippers Ltd. [1954] 2 QB 459 ....................167 Lamb v. Cranfield (1873) 43 LJ 408.......................................................................143 Lankow v. Rose [1995] 1 NZLR 277 ......................................204, 206, 232, 233, 240 Lann v. Church (1820) 4 Madd. 491 .....................................................................317 Lanoy v. Duke and Duchess of Atholl (1742) 2 Atk. 444 .......................................269 Latec Investments v. Hotel Terrigal Pty. (1965) 113 CLR 265...........................9, 131 Lawrence v. Fox 20 NY 268 (1859) ..........................................................................51 Lee v. Butler [1893] 2 QB 318 ................................................................................167 Lee-Parker v. Izzet [1972] 1 WLR 775 ...................................................................299 Leslie, Re (1883) 23 Ch. 552...................................................................................315 Levy v. Stogdon [1898] 1 Ch. 478 ..........................................................................170
xxiv Table of Cases Lewis v. Averay [1971] 3 All ER 907..............................................................128, 129 Liggett (Liverpool) Ltd v. Barclays Bank Ltd [1928] 1 KB 48 ................................260 Lipkin Gorman v. Karpnale Ltd. [1991] AC 548 ..................72, 94, 95, 98, 101, 102, 103, 110, 181, 192, 249, 269, 328 Lister & Co v. Stubbs [1990] Ch. 1................................142, 182, 184, 185, 186, 187, 188, 192, 194, 196, 276, 283, 330 Lloyds Bank plc v. Carrick [1996] 4 All ER 630.....................................................170 Lloyds Bank plc v. Rosset [1990] AC 105 ..............................200, 201, 203, 208, 218, 231, 242, 303, 305, 306 Loescher v. Dean [1950] Ch. 491 ...........................................................................320 London and Cheshire Insurance Co. Ltd. v. Laplagrene Property Co. Ltd. [1971] Ch. 499 ...................................................................................................272 Lonhro v. Export Credit Guarantee Department [1996] 2 Lloyd’s Rep. 649 ..........................................................................284, 333 Lonrho plc v. Fayed (No 2) [1992] 1 WLR 1 ...................................................21, 141 Lonsdale & Thompson Ltd. v. Black Arrow Group PLC [1993] 2 WLR 815..............................................................................................171 Lord Napier and Ettrick v. Hunter [1993] 1 AC 713 ..............12, 22, 29, 40, 46, 194, 275, 276, 277, 278, 279, 280, 281, 282, 284, 285, 309, 333 Lord St John v. Lady St John (1805) 11 Ves. Jun. 526 ...........................................216 Lord Strathcona Steamship Co. v. Dominion Coal Co. [1926] AC 108........................................................................................................8 Loretto v. Teleprompter Manhatten CATV Corp. 458 US 419 (1982) ....................57 Lovett v. Fairclough (1990) 61 P & CR 385 ...........................................................299 Lysaght v. Edwards (1876) 2 Ch. D 499.........................................................168, 169 Lyus v. Prowsa [1982] 1 WLR 1044.........................................................................11 Mackenzie v. Mackintosh (1891) 64 LT 706 ..........................................................317 Manby v. Scott (1659) 86 ER 781 ..........................................................................213 Marvin v. Marvin 557 P 2d 106 (Cal., 1976) ..................................................56, 205 Mayor of Bradford v. Pickles [1895] AC 587 .....................................................36, 56 McAlpine Construction v. Panatown [2000] 3 WLR 946 ......................................287 McCullough v. Marsden (1919) 45 DLR 645.................................................255, 333 McNally v. US 483 US 350.....................................................................................195 Medley v. Martin (1673) Rep. t Finch 63 ..................................................................8 Meguerditchian v. Lightbound [1917] 1 KB 298 ...................................................317 Mercantile Mutual Insurance (Australia) Ltd. v. Farrington (1996) 44 NSWLR 634.......................................................................................156 Mercer v. Graves (1872) LR & QB 499 ..........................................317, 318, 319, 322 Midland Bank plc v. Cooke [1995] 4 All ER 562 ...................200, 201, 209, 231, 242 Miller v. Race (1758) 1 Burr 452......................................................................73, 127 Miller v. Schoene 276 US 272 (1928) .......................................................................53 Miller, Gibb & Co Ltd, Re [1957] 2 All ER 266 .....................................................278 Mogul Steamship Co. v. McGregor Gow & Co. [1892] AC 25...........................36, 56 Moorgate Mercantile Ltd v. Twitchings [1977] AC 890...........................................38
Table of Cases xxv Morgan v. Seymour (1637/1638) 1 Chan. Rep. 120..............................................263 Morley v. Morley (1855) 5 De GM & G 610..........................................248, 262, 333 Morone v. Morone 413 NE 2d 1154 (NY, 1980) ...................................................201 Moynes v. Cooper [1956] 1 QB 439 .......................................................................128 Murray v. Roty (1982) l34 DLR (3d) 50................................................219, 232, 240 Muschinski v. Dodds (1986) 160 CLR 583........................10, 13, 26, 28, 63, 66, 135, 207, 208, 223, 230, 243, 308 Mutual Trust Co. and Creditview Estate Homes Ltd, Re. (1997) 149 DLR (4th) 385 .................................................................................253 Nanwa Gold Mines, Re [1955] WLR 1080 ............................................................163 National Guardian Mortgage Corporation v. Roberts [1993] NPC 149 .................................................................................................257 National Provincial Bank v. Ainsworth [1965] AC 1175.................30, 160, 218, 305 Nebbia v. New York 291 US 502 (1934) ..................................................................53 Neste Oy v. Lloyds Bank Plc [1983] 2 Lloyd’s Rep. 658 ......................19, 20, 82, 146 Neville Estates v. Madden [1962] Ch. 832 .............................................................156 New Jersey Coalition Against War in the Middle East v. JMB Realty Corp. 650 A 2d 757 (NJ, 1994) ............................................................................56 Newton v. Porter (1877) NY 133..............................................................................18 Newtons of Wembley Ltd. v. Williams [1965] 1 QB 560 .......................................167 Nicholson v. Chapman (1793) 2 H Bl 254.............................................................315 Nollan v. California Coastal Commission 483 US 825 (1987) ................................53 Northern Developments (Holdings) Ltd, Re. (Unreported, 6 Oct 1978) ..............157 Norwich Union Fire Insurance Society v. Price [1934] AC 455 .............................128 Nuthall v. Heslop [1995] NZFLR 755....................................................................233 Oatway, Re [1903] 2 Ch. 356.................................................................................104 Ogilvie v. Littleboy (1897) 13 TLR 399 ..................................................................131 Oliver v. Bradley [1987] 1 NZLR 586 ....................................................................223 Omegas Group Inc., Re 16 F 3d 1443 (1994) .................................60, 61, 62, 63, 243 Orakpo v. Manson Investments Ltd [1978] AC 95 ................................249, 253, 259 Ormerod v. Tate (1801) 1 East 464........................................................................321 Otto Kopje Diamond Mines Ltd, Re. [1893] 1 Ch. 618 .........................................291 Oughtred v. IRC [1960] AC 206 ......................................................................11, 168 Owen v. Delamere (1872) LR 15 Eq. 134...............................................................267 Pallant v. Morgan [1953] Ch. 43 .....................................................................11, 293 Papazian v. American Steel and Wire Co. of New Jersey 155 F Supp. 111 (1957)........................................................................................59 Paragon Finance Plc v. DB Thakerar & Co. [1999] 1 All ER 400 ...........................11 Parry v. Wright (1823) 1 Sim. & St. 369...............................................................262 Parsons & Cole v. Briddock (1708) 2 Vern. 608 ....................................................263 Pascoe .v Turner [1979] 1 WLR 431 ..............................................................303, 305 Pasi v. Kamana [1986] 1 NZLR 603..............................................206, 211, 232, 265 Penn Central Transportation Co. v. New York City 438 US 104 (1978) ......................................................................................................52
xxvi Table of Cases Peter v. Beblow (1993) 101 DLR (4th) 621.................................25, 64, 65, 203, 205, 209, 210, 232, 233 Pettitt v. Pettitt [1970] AC 777.......................................200, 218, 220, 224, 230, 303 Pettkus v. Becker (1980) 117 DLR (3d) 257....................................63, 202, 203, 204, 205, 210, 211, 219, 223, 230 Phillips v. Brooks Ltd. [1919] 2 KB 243 .................................................................128 Phillips v. Phillips (1862) 4 De G F & J 208.......................................................9, 131 Phillips v. Phillips [1993] 3 NZLR 159 ..................................................................202 Pickens v. Pickens 490 So 2d 872 (Miss, 1986) ........................................56, 208, 223 Pickering v. Busk (1812) 15 East 38 .......................................................................167 Plimmer v. Mayor of Wellington (1884) 9 App. Cas. 699 .....................................297 Pointon v. Baines (unreported CP 213/87, NZHC, 1991)....................................203 Polly Peck International plc (in administration) (No 2), Re [1998] 3 All ER 812...................................................................7, 17, 26, 31, 38 Popescu, Re (1995) 55 FCR 583 .......................................................................66, 243 PruneYard Shopping Centre v. Robins 447 US 74 (1980) .......................................56 Pumpelly v. Green Bay Co. 89 US (13 Wall) 166 (1871) ........................................52 Pybus v. Smith (1791) 3 Bro CC 340 .....................................................................215 R v. Ashwell (1885) 16 QBD 190 ...........................................................................129 R v. Davies [1982] 1 All ER 513.............................................................................129 R v. Shadrokh-Cigari [1988] Crim LR 465............................................................128 Rainbow v. Moorgate Properties Ltd. [1975] 2 All ER 821....................................320 Ramsden v. Dyson (1866) LR 1 HL 129.........................................293, 294, 296, 298 Randal v. Cockran (1748) 1 Ves. Sen. 98...............................................277, 278, 279 Rawluk v. Rawluk (1990) 65 DLR (4th) 161.........................28, 60, 63, 64, 205, 237 Rayner v. Preston (1881) 18 Ch. D 1 .....................................................................171 Re 512760 Ontario inc (1992) 9 DLR (4th) 719................................................27, 65 Redgrave v. Hurd (1881) 20 Ch. D 1 .....................................................................129 Reversion Fund & Insurance Ltd. v. Maison Cosway Ltd. [1913] 1 KB 364 .........................................................................................258, 259 Riches v. Hogben [1985] 2 Qd. R 292 ......................................................................21 Ripon City, The [1897] P 226.................................................................................311 Robert Addie and Sons (Collieries) Ltd. v. Dumbreck [1929] AC 358 ....................56 Roberts Petroleum Ltd. v. Bernard Kenny Ltd. [1983] 2 AC 192 ..........................320 Rogers, Re (1891) 8 Morrell 243 ............................................................................158 Rose v. IRC, Re Rose [1952] 1 Ch. 499 ....................................................................10 Rose, Re: Midland Bank Executor and Trustee Co. Ltd. v. Rose [1949] 1 Ch. 78 ....................................................................................................10 Rosenich v. Rosenich (1989) 75. Alta. LR (2d) 327................................232, 233, 240 Ross v. Buxton (1889) 42 Ch. D 190 ..............................................................317, 321 Rowland v. Christian 443 P 2d 561 (Cal., 1968) .....................................................56 Roxburghe v. Cox (1881) 17 Ch. D 520 .................................................................243 Royal Bank of Scotland plc v. Etridge (No 2) [2001] 3 WLR 1021........................241 Russell v. Smith [1958] 1 QB 27 ............................................................................128
Table of Cases xxvii Ruta, The [2000] 1 WLR 2068...............................................................................312 Salisbury v. Tibbetts 259 F 2d 59 (1958)..................................................................20 Scarf v. Jardine (1882) 7 App. Cas. 345...................................................................95 Scholey v. Peck [1893] 1 Ch. 709............................................................315, 317, 321 Sen v. Headley [1991] Ch. 425.........................................................................10, 307 Seton Laing Co. v. Lafone (1887) 19 QBD 68........................................................291 Sexton v. Kesser 225 US 90 (1912)...........................................................................60 Sharpe, Re [1980] 1 WLR 219..........................................................30, 307, 308, 319 Shaw v. Neale (1885) 6 HL Cas. 581 .............................................................317, 318 Shelfer v. City of London Electric Lighting Co (1895) 1 Ch. 287 ....................................................................................37, 55, 187 Shipman v. Shipman [1924] 2 Ch. 140..................................................................218 Simm v. Anglo-American Telegraph Co. (1879) 5 QBD 188 ........................167, 292 Sinclair v. Brougham [1914] AC 398 .................................................19, 20, 100, 101 Sir Thomas Gardnerís Case (1615) Roll Abr v. 1 p 351 ........................................214 Skelly Oil Co. v. Ashmore 365 SW 2d 582 (Mo, 1963)..........................................172 Sledmore v. Dalby (1996) P & CR 196...................................................299, 300, 308 Smith v. Hughes (1871) LR 6 QB 597....................................................................131 Smith v. Township of Au Gres 150 F 257 (6th Cir., 1906) ......................................59 Smith, Re [1906] 1 Ch. 71......................................................................................192 Société des Industries Mètallurgiques SA v. Bronx Engineering Co. Ltd. [1975] 1 Lloyd’s Rep. 465................................................173 Solle v. Butcher [1949] 2 All ER 1107 ....................................................................130 Sorochan v. Sorochan (1986) 20 DLR (4th) 1..................................64, 231, 233, 234 Soulos v. Korkontzilas (1997) 146 DLR (4th) 21.......................................12, 65, 185 Space Investments Ltd v. Canadian Imperial Bank of Commerce Trust Co [1986] 1 WLR 1072.................................................................84, 85, 111 Spence v. Crawford [1939] 3 All ER 271........................................................144, 145 Springette v. Defoe [1992] 2 FLR 388 ....................................................................231 State v. Schmid 423 A 2d 615 (1980).......................................................................56 Stearns v. Village Main Reef Gold Mining Co (1905) 10 Com. Cas. 89 .........................................................................................283, 284 Stephens v. Weston (1824) 3 B & C 535.................................................................317 Stepney v. Biddulph (1865) 13 WR 676.................................................................144 Stiles v. Cowper (1748) 3 Atk. 692 .........................................................................297 Stoke-on-Trent City Council v. W & J Wass Ltd. [1988] 1 WLR 1406 .....................9 Stott v. Milne (1884) 25 Ch. D 710........................................................................316 Stump v. Gaby (1852) 2 De G M & G 623 ............................................................130 Surrey County Council v. Bredero Homes Ltd. [1993] 1 WLR 1361 .........................9 Sympson v. Prothero (1857) 26 LJ (Ch.) 671.........................................................320 Tailby v. Official Receiver (1888) 13 App. Case 523 .....................................168, 169 Tarn v. Turner (1888) 34 Ch. D 456 .....................................................................262 Tassel v. Hare (1675) 73 SS no 339 ...........................................................................8 Taylor v. Plumer (1815) 3 M & S 562........................................89, 99, 100, 101, 126
xxviii Table of Cases Taylors Fashions Ltd v. Liverpool Victoria Trustees Co Ltd [1982] QB 133....................................................................................295, 296, 322 Taypotat v. Surgeson [1985] 3 WWR 18 .........................................................85, 174 Thompson v. Androscoggin River Improvement Co. 54 NH 544 (1874) ...................................................................................................................51 Thomson v. Davenport (1829) 9 B & C 78 ..............................................................95 Thurstan v. Nottingham Permanent BS [1902] 1 Ch. 1 ........................................259 Tilley’s Will Trusts, Re [1967] Ch. 1179 ........................................................105, 109 Tooke v. Hollingworth (1793) 5 TR 215 ..................................................78, 109, 128 Toovey v. Milne (1819) 2 B & A 683......................................................................157 Transport & General Credit Co. Ltd. v. Morgan [1939] 1 Ch. 531 .......................174 Tropical Capital Inverstment Ltd. v. Stanlake Holdings Ltd. (unreported, May 24, 1991) ..............................................................................155 Tuttle v. Buck 119 NW 946 (Minn., 1909)..............................................................56 Twinsectra Ltd v. Yardley [1999] Lloyd’s Banking Rep. 438 ..............................................................................................130, 157, 159 Unicom Computer Corp, Re 14 F 3d 391 (9th Cir., 1994) ......................................61 Union Bank of Australia Ltd. v. McClintock & Co. [1922] 1 AC 240 .....................98 Union Eagle Ltd. v. Golden Achievement Ltd. [1997] AC 514 ..............................169 United Australia Ltd. v. Barclays Bank Ltd. [1941] AC 1 .....................................101 United Bank of Kuwait plc v. Sahib [1997] Ch. 107..............................................305 United States v. Fontana 528 F Supp. 137 (SD NY, 1981) .....................................59 US v. Ochs 842 F 2d 515 (1st Cir. 1988) ...............................................................195 Uston v. Resorts International Hotel Inc. 445 A 2d 370 (1982)...............................56 Vandervell No 2, Re [1974] 1 Ch. 269 ...................................................................134 Veritas, The [1901] P 304.......................................................................................313 Village of Euclid v. Amber Realty Co. 272 US 365 (1926).......................................53 Voyce v. Voyce (1991) 62 P & CR 290 ...................................................................307 VR Dye & Co. (a firm) v. Peninsula Hotels Pty Ltd. (in liq) (1998) 28 ACSR 167 ..........................................................................................156 Wait, Re [1927] 1 Ch. 606 .....................................................................................174 Wallis v. Woodyear (1855) 2 Jur. NS 179..............................................................269 Walsh v. Lonsdale (1882) LR 21 Ch. D 9.................................................................45 Walton Stores v. Maher (1988) 164 CLR 387................................................300, 301 Waltons Stores v. Maher (1987) 76 ALR 513.................................................203, 295 Waselenko v. Touche Ross Ltd. [1983] 2 WWR 352........................................85, 175 Watson v. Maskell (1834) 1 Bing. NC 366 ............................................................317 Watts & Ready v. Storey [1984] 134 NLJ 631........................................................299 Watts v. Watts 405 NW 2d 303 (Wis., 1987) ........................................................227 Webb v. Smith (1880) 30 Ch. D 192......................................................................269 Weldon v. Weldon (1883) 9 PD 52 ........................................................................218 Weldtech Ltd, Re. [1991] BCC 16 ..........................................................................121 West Coast Hotel Co v. Parish 300 US 379 (1937) ............................................54, 59 West v. Knowles 311 P 2d 689 (Wash., 1957) .......................................................227
Table of Cases xxix Westdeutsche Landesbank Girozentrale v. Islington LBC [1996] AC 669 .......................................................9, 10, 11, 19, 20, 22, 23, 24, 26, 40, 75, 82, 97, 109, 128, 133, 134, 135, 136, 137, 138, 144, 146, 147, 149, 152, 160, 244, 260, 284, 286, 328, 329 Wheaton v. Maple Co. [1893] 3 Ch. 48 .................................................................187 Whitbread & Co. Ltd. v. Watt [1902] 1 Ch. 835 ...................................................170 White v. Dobinson (1844) 14 Sim. 273..................................................................278 Wilkinson v. Clements (1872) 8 Ch. App. 96 ........................................................173 Williams & Glyn Bank v. Boland [1981] 1 AC 487...............................................241 Williams v. Mason 556 So 2d 1045 (Miss., 1990) .................................................208 Williams v. Staite [1979] Ch.. 291 .........................................................................304 Willmott v. Barber [1982] QB 133.........................................................................294 Winter Garden Theatre (London) Ltd. v. Millenium Productions Ltd. [1946] 1 All ER 678............................................................................................160 Woverhampton Corp. v. Emmons [1901] 1 KB 515 ..............................................173 Wrexham Mold and Connahís Quay Ry Co, Re [1899] 1 Ch. 440 ...................................................................246, 248, 255, 258 Wroth v. Tyler [1974] Ch. 30.................................................................................169 Yaxley v. Gotts [1999] 2 FLR 941...........................................................................293 Yerkey v. Jones (1939) 63 CLR 649 ........................................................................217 Yonge v. Reynell (1852) 9 Hare 809 ...............................................................264, 268 Yorkshire Insurance Co. Ltd. v. Nisbet Shipping Co. Ltd. [1962] 2 QB 330.................................................................................................279
Introduction H Y I S I T that we seem incapable of describing, explaining or justifying the law of proprietary remedies without resort to the most arcane language? Imagine what those in other disciplines must think of us when we slip into the use of legal fictions, equitable maxims, evidential presumptions and estoppels, talk of tracing and subrogation—not to mention our tendency to dwell on the elusive distinction between “institutional” and “remedial” constructive trusts. Rather than being taken seriously in its own right by philosophers or economists, our treatment of proprietary remedies would seem more likely to attract the interest of those, such as anthropologists and sociologists, who specialise in deciphering the significance of odd cultural practices. Equally, however, jurists cannot hope to understand this area of law without first decoding the strange language that characterises it. This book provides a study of doctrines that allow for the acquisition of fully-fledged rights of ownership or security without an owner’s consent and the issues raised by such a redistribution of property rights. The theme is that the key to explaining the odd discourse that pervades the law of proprietary remedies lies in an appreciation of the tension between our recognition of remedies that redistribute property rights and our understanding that property is inviolable. A satisfactory explanation of the law of proprietary remedies requires some reflection upon the factors that have influenced and continue to influence the evolution of the law in this context. Such reflection is essential, both as an aid to the interpretation of the existing case law and as a basis for predicting future developments. The choice of the factors that are treated—explicitly or implicitly—as influencing the development of the law of proprietary remedies will reveal much about the author’s vision of the nature of the common law and do much to shape the account of this particular area. The task of this introduction then is to clarify exactly what sort of account this book provides. One might approach this area by seeking to demonstrate that the different remedies in question share fundamental conceptual features that go beyond the basic distinction that they are proprietary, as opposed to personal. This approach might go as far as arguing that the doctrines in question are derived from certain “first principles” that allow them to be presented as part of a systematic whole. This book does not offer that type of account. Indeed, it represents, in part, a critique of such endeavours. Attempts to present the positive law in terms of a crystalline set of first principles are inevitably highly misleading as descriptive accounts. The common law has developed in a piecemeal fashion through the use of fictions and the haphazard extension of existing legal concepts under the
W
2 Introduction influence of judges and jurists of divergent legal and political visions. The depiction of the product of this disorderly process as the culmination of an evolution of legal concepts from their primitive origins to their mature forms is rather naïve. What is more, even assuming that on occasion it is possible to demonstrate the influence of certain axioms in shaping legal development, there are particular difficulties in presenting the area of law in question as based on “first principles”. For, the idea of “proprietary remedies” implies that the courts, rather than simply enforcing existing rights, may award property rights as a remedy. This suggestion is in tension with the understanding that the role of the judiciary is to protect proprietary rights and that the power to redistribute property lies with the legislature alone. This gives the area an inherently unprincipled look. Judges and jurists have spilt a great deal of ink in their quest to reduce the metaphorical language and special pleading that flourishes in this area to a neat set of principles. However, the result tends to be the introduction of new metaphors and fictions.1 Moreover, such accounts leave too much unexplained. For, even if it were possible to depict the law of proprietary remedies as a coherent system of principles, the question would remain: “is it a good system?”. The presentation of judicially developed doctrines in this way reflects a formalistic impulse to divorce the law from fundamental issues of policy. These are issues that we can never escape. A different form of analysis might treat changes in doctrine as motivated by particular policy choices: for instance, the promotion of efficiency or a specific conception of moral desert. A systematic analysis of these issues is no doubt valuable in its own right. Such a study would certainly give us insight into some of the intuitions that underlie the arcane language that flourishes in this area. In addition, an analysis of this kind would also assist us both to diagnose the law’s failings and to offer prescriptions for its reform. Nonetheless, in itself, such an analysis is unlikely to provide a sufficient basis for understanding the law of proprietary remedies. For one thing, in interpreting, applying and changing the common law, judges do not always, or perhaps even often, openly pursue policy objectives. Indeed, this is particularly true of the law in this area. The judicial justification of proprietary remedies could hardly be more obscure. While scholars examining some areas of law have argued that a consistent policy can be detected behind apparently casuistic judicial discourse,2 such a claim seems untenable with respect to the law of proprietary remedies. If the desire to produce a “principled” analysis of the law of proprietary remedies is unrealistic and yet the prevalence of this aspiration makes it impossible to understand the law in terms of policy alone, how are we to analyse these doctrines? The key lies in appreciating the tension between the two modes of analysis and in 1
See especially infra ch. 15. Some in the law and economics movement have claimed that the common law tends to evolve efficient norms: see, for example, P Rubin, “Why is the Common Law Efficient?” (1977) 6 JLS 51. On the other hand, this process is thought to be achieved in spite of, rather than because of “the characteristic rhetoric of opinions” in which “the true grounds of legal decision are concealed rather than illuminated”, see R Posner, Economic Analysis of Law (3rd edn., Boston, Mass., Little, Brown, 1986) 21. 2
Introduction 3 understanding how this tension is resolved. Much of the law of proprietary remedies is underpinned by a friction between the judiciary’s wish to confer property rights for various well-intentioned ends and the understanding that it has no business doing so. Thus, in substance, the law in this area appears to involve a clash of principle and policy. The rhetoric that has developed in this field serves to defuse this conflict, presenting what is in substance “unprincipled” in a form that is consistent with conventional doctrine. To understand this area of law, one must appreciate, first, the tension between axiomatic notions of property and the policy objectives being pursued, and, secondly, the rhetoric that defuses much of this tension by obscuring it. What is required is neither a study merely of supposed “principles” nor one simply of “policy” but of both and of the devices used to mediate the relationship of the two. A study of the rhetoric in this area reveals the influence a particular conception of property has in structuring the discourse that prevails in the law of proprietary remedies. Decisions regarding the content and objects of property rights are made against the background of a notion of property that proscribes the non-consensual redistribution of these entitlements. Where this understanding does not result in a redistributive remedy being withheld altogether, it demands that it be conceptualised in a disingenuous fashion. While there are numerous instances in which the judiciary intervenes to readjust property rights, these are disguised through formal devices that maintain the appearance of fidelity with the vision of property as a fundamental limit on, rather than a product of, judicial activity. The result is what Oliver Wendell Holmes characterised as a “paradox of form and substance”3— whereby the law remains logically consistent with certain principles regarded as immutable and yet changes in substance to deal with “the felt necessities of the time”.4 This analysis is not equally true of all jurisdictions. This book examines how, in the United States, changes in legal thought associated with “legal realism” encouraged an abandonment of the aspirations of formalism. In addition, it explores how other jurisdictions have moved from a formalistic understanding of property as free from judicial readjustment toward a more instrumentalist approach that accepts the reality of redistribution. The historical and comparative perspectives provided in this book emphasise the contingency of the discourse of proprietary remedies that prevails in England today. They indicate that property is not something immutable but a dynamic body of norms embedded in and conditioned by deeper assumptions about law and social justice. In examining the principles, policies and rhetoric in this field, this book does not seek merely to explain the law of proprietary remedies. It also provides a critique of this area and offers suggestions for reform. The profound disquiet over the judicial role in the redistribution of proprietary rights has led to dysfunctional law. 3 O Wendell Holmes, “Common Carriers and the Common Law” 13 Am L Rev. 909 at 929 (1879). See G E White, Justice Oliver Wendell Holmes: Law and the Inner Self (New York, Oxford University Press, 1993) 139. 4 O Wendell Holmes, The Common Law (Boston, Mass., Little, Brown, & Co, 1881) 1.
4 Introduction The refusal to acknowledge the normative dimension of common law reasoning has precluded rational policy-making and has meant that legal justification is often structured by unspoken premises and characterised by obfuscatory rhetoric. The studies of different proprietary remedies and remedial processes all offer a normative analysis of the area examined, thus allowing for an evaluation of the positive law in the light of considerations of moral desert and efficiency. They suggest that what is required is a more honest discourse that will provide, not so much a rejection of the absolutist paradigm of property, as an understanding of its proper limits.
Part I
Property and Proprietary Remedies
1
Exploring the Idea of Remedial Trusts H E R E I S considerable hostility expressed toward the notion of the “remedial constructive trust” in English legal discourse. However, the “formidable and continuing problems of terminology which afflict the consideration of many questions on constructive trusts”1 often make it difficult to assess exactly what is meant by a remedial constructive trust and to appreciate quite why it attracts so much antipathy. The purpose of this chapter is to analyse the remedial/institutional distinction and to identify what is thought to be at stake in the rejection of the notion of remedial trusts. It focuses on several different distinctions that are often treated as significant. Ultimately, only one of these can really explain both what is distinct about the English judiciary’s approach to constructive trusts and why English courts are so antagonistic toward the notion of trusts characterised as “remedial”. A theme that is central to this book is that the key to comprehending this and other controversies in the law of proprietary remedies lies in the deeply felt conviction that the judiciary should not create or redistribute property rights.
T
I . FROM REMEDY TO PROPERTY : THE DEVELOPMENT OF THE TRUST
The deep distrust expressed in English legal culture toward to the idea of “the remedial constructive trust” is somewhat surprising when one considers the origins of the trust. Initially, the use and its successor the trust were understood as creating personal rights. It was only gradually, as remedies to protect the beneficiary were developed, that these devices took on a more proprietary appearance. Until the mid-fifteenth century, a use could bind only those who took property through a person in whom trust had been reposed. Thus, rogues who disseised a feofee were not bound by a use even if they were aware of its existence.2 It was probably not until the late fifteenth century that it became common to enforce uses against the heir of the feofee or against a third party purchaser of the legal estate who had actual notice of the use.3 The understanding that rights arising from these arrangements were proprietary in nature seems to have begun to take root in this period.4 Nonetheless, the received wisdom in Coke’s time was that a
1 2 3 4
Re Polly Peck International plc (in administration) (No 2) [1998] 3 All ER 812 at 830 per Nourse LJ. See AWB Simpson, A History of the Land Law (Oxford, Clarendon Press, 1986) 181. Ibid. at 180. JH Baker An Introduction to English Legal History (3rd edn., London, Butterworths, 1990) 286.
8 Property and Proprietary Remedies trust of land gave rise merely to an unassignable personal right of action, rather than an interest in land.5 The Courts of Chancery were willing to enforce trusts, as they had previously enforced uses, against third party purchasers with express notice of a trust.6 Subsequently, this protection was extended, and by the end of the sixteenth century the trust had taken on much of its modern form as an arrangement that was enforceable against all except a bona fide purchaser of the legal estate without notice.7 Nonetheless, it seems that it was only in the course of the following century that the courts recognised that the beneficiary’s interest prevailed against other claims against the trustee’s estate, such as those of the trustee’s creditors or that of a trustee’s widow claiming dower.8 Eventually, it became established that beneficiaries had a right of action against creditors of a trustee who had enforced judgment against assets subject to the trust.9 In addition, legislation was enacted establishing that interests arising under trusts were the property of the beneficiary for the purpose of administering beneficiaries’ estates.10 By the time of Lord Nottingham’s tenure as Lord Chancellor, the trust was treated by the Courts of Chancery as a proprietary interest; and from the middle of the eighteenth century it was recognised as such by the courts of common law. Thus, Lord Mansfield insisted that “the forum where they are adjudged is the only difference between trusts and legal estates”.11 The depiction of equitable rights as proprietary served a powerful ideological function in justifying equitable intervention. In many respects, the trust functions as “a contract for the benefit of a third party”.12 As such, it was highly suspect in the light of the common law doctrine of privity of contract. The characterisation of the beneficiary’s rights as proprietary, and, thus, by definition, as binding third parties, legitimated equity’s role in this area. It is a tactic that has remained available to those seeking to side-step the constraints of the doctrine of privity. As Winfield observed, “When the courts wish to enable the [third party] beneficiary to sue they make the promisor a trustee and when they wish to prevent him from doing so they fall back on the shibboleth of privity of contract”.13 5
JH Baker, An Introduction to English Legal History (3rd edn., London, Butterworths, 1990) at
350. 6 Wildgoose v. Wayland (1596) reproduced in JH Baker and SF Milsom, Sources of English Legal History. Private Law to 1750 (London, Butterworths, 1986) 125. Baker, supra n. 4 at 351. 7 Simpson supra n. 2 at 206. 8 Medley v. Martin (1673) Rep t Finch 63 (creditor); Tassel v. Hare (1675) 73 SS no 339 (doweress). See Baker, supra n. 4 at 351. 9 Finch v. Earl of Winchilsea (1715) 1 P Wms 277. See Baker, supra n. 4. 10 Statute of Frauds 1677, 29 Car II c 3 s 10. See Baker, supra n. 4. The enactment was drafted by Lord Nottingham and probably amounted to a codification of what he understood the position to be in equity. 11 Burgess v. Wheate (1757–9) 1 Eden 177. 12 FH Lawson, A Common Lawyer Looks at the Civil Law (London, Butterworths, 1953) 200; J Langbein, “The Contractarian Basis of the Law of Trusts” (1995) 105 Yale LJ 625 at 628. 13 W Winfield, The Province of Tort (Cambridge, Cambridge University Press, 1931) 107. See, e.g., Lord Strathcona Steamship Co. v. Dominion Coal Co. [1926] AC 108; Binions v. Evans [1972] Ch. 359.
Exploring the Idea of Remedial Trusts 9 In a time in which the prevailing political theory stated that the protection of property was the very reason for government,14 Chancery judges were eager to characterise equitable norms as property rights. At the turn of the nineteenth century, Lord Eldon insisted that equity protected property rights alone, and so was available only when the plaintiff had a right in rem.15 While this was an unfortunately restrictive view of the role of equity, the justificatory power of which does not withstand close analysis,16 it provides a good illustration of the ideological power of the rhetoric of property. On the other hand, these equitable rights differed substantially from the property rights of the common law. Procedurally, equity was said to act in personam on those whose consciences were affected. The substantive consequence of this was that, of those who acquired a legal interest in property, only those who were volunteers or who had purchased the interest with notice of the beneficiary’s rights were bound. The limited protection afforded to these rights led some to doubt whether they really deserved the name “property”.17 In large part this doubt can be attributed to a misconception that property rights must necessarily be absolute. The better view is that a judicial willingness to enforce these arrangements against a class of third parties is indicative of the status of beneficial interests as property rights.18 In any event, by the time Maitland and Stone queried the validity and pitfalls of characterising a beneficiary’s rights as proprietary,19 this characterisation had probably been employed for too long to be denied. Nonetheless, even today, judges and commentators wishing to transcend the constraints of conventional
14 J Locke, Two Treatises of Government (ed. Peter Laslett, Cambridge, Cambridge University Press, 1988) bk II § 123 at 350. See also Entick v. Carrington (1765) 19 St Tr 1029 at 1060 per Camden CJ: “The great end for which men entered into society was to secure their property. That right is preserved sacred and incommunicable . . . ”. 15 Gee v. Pritchard (1818) 2 Swans. 402 at 413. The notion resurfaces from time to time. Thus, it has recently been argued that a plaintiff may recover the profits of a tort only where the wrong involves a breach of property rights: see Stoke-on-Trent City Council v. W & J Wass Ltd. [1988] 1 WLR 1406 at 1415 per Nourse LJ; Surrey County Council v. Bredero Homes Ltd. [1993] 1 WLR 1361 at 1364 per Dillon LJ. However, this tendency was criticised in AG v. Blake [2001] AC 268 at 283 per Lord Nicholls. 16 See, A Gambaro, “Property” in A Candian, A Gambaro and B Pozzo, Property, Propriété, Eigentum (Padua, Cedam, 1992) 1 at 167. 17 On the other hand, the proprietary status of the rights of beneficiares might be thought to be emphasised by the conventional view that equitable rights are good against all who subsequently acquire equitable interests in the asset in question, even bona fide purchasers. See, e.g., Phillips v. Phillips (1862) 4 De G F & J 208 at 217; Lac Investments v. Hotel Terrigal Pty. (1965) 113 CLR 265. This state of affairs has been regarded as justifying judicial caution in recognising equitable interests: Westdeutsche Landesbank Girozentrale v. Islington LBC [1996] AC 669 at 704 per Lord BrowneWilkinson. However, the matter may not be so clear-cut. Australian courts, e.g., have shown a willingness to judge the relative merits of competing equitable claims rather than inevitably giving priority to the earlier interest: Heid v. Reliance Finance (1983) 154 CLR 326 at 341 per Mason and Deane JJ. See M Cope, Proprietary Claims and Remedies (Leichhardt, NSW, Federation Press, 1997) 104–6. 18 See, e.g., A Honoré, “Rights of Exclusion and Immunities Against Divesting” (1960) 34 Tulane Law Rev 453 at 466. 19 Maitland, supra n. 9 at 47; H Stone, “The Nature of the Rights of the Cestui Que Trust” (1917) 17 Col. L Rev. 467.
10 Property and Proprietary Remedies understandings of property are apt to emphasise the origin of equitable rights as personal obligations.20
II . DIFFERENT USES OF THE CONSTRUCTIVE TRUST
In addition to trusts that gave effect to consensual arrangements, the courts of Chancery recognised certain trust relationships that were said to arise by operation of law. In contrast to the express trust, the resulting trust arises as a result of the presumed intention of the transferor of property—it is not necessary that the transferee (the trustee) share this intention.21 More strikingly, the constructive trust often comes into being even where there is no evidence that the beneficiary intended it and it is positively contrary to the will of the constructive trustee. The constructive trust emerged as a device for constraining errant trustees and recipients of trust property but proved so useful that it came to be employed more broadly. As a result, constructive trusts are imposed in widely differing situations, and much of the lack of clarity that pervades analyses of this area flows from a failure to distinguish clearly between these. Constructive trusts are sometimes used merely to protect what we have come to see as an existing equitable proprietary right.22 This is true of constructive trusts imposed upon a person who has received trust property and cannot claim to be a bona fide purchaser of the legal title for value without notice. While it is often asserted that the constructive trust is imposed irrespective of the intention of the parties, intention is an essential ingredient in many instances in which the device is employed. A constructive trust is imposed where it would be unfair not to give effect to an owner’s intention to transfer property despite the lack of formalities normally required for such a transfer. Illustrations of the use of the constructive trust in this way are interests that arise where owners have done everything in their power to effect a transfer,23 and where an intention to transfer property is made in contemplation of death.24 Constructive trusts also arise where, because of the transferee’s detrimental reliance, it would be unfair to deny the effect of the transferor’s intention to confer an interest despite the absence of the formalities usually required. Constructive trusts are imposed in this way in the 20 See, e.g., Muschinski v. Dodds (1986) 160 CLR 583 at 615 per Deane J; C Rickett, “The Classification of Trusts” (1999) 18 NZULR 305 at 309. 21 See Westdeutsche Landesbank Girozentrale v. Islington LBC [1996] AC 669 at 708 per Lord Browne-Wilkinson. Cf the view that there was also a class of trusts that arose automatically, without reference to intention because of a settlor’s failure to dispose completely of his or her beneficial interest in the property. 22 S Gardner, An Introduction to the Law of Trusts (Oxford, Clarendon Press, 1990) 232; R Grantham and C Rickett, Enrichment and Restitution in New Zealand (Oxford, Hart Publishing, 2000) 406. 23 Re Rose, Midland Bank Executor and Trustee Co. Ltd. v. Rose [1949] 1 Ch. 78; Re Rose, Rose v. IRC [1952] 1 Ch. 499. See Oakley, Constructive Trusts at 318; N Hopkins, The Informal Acquisition of Rights in Land (London, Sweet & Maxwell, 2000) 15. 24 See, e.g., Sen v. Headley [1991] Ch. 425. Hopkins, supra n. 23, at 22
Exploring the Idea of Remedial Trusts 11 context of mutual wills,25 where there is a common intention to share beneficial ownership,26 in the context of estoppel by representation.27 Similarly, constructive trusts are imposed upon the acquisition of property, in circumstances in which it would be unconscionable for the recipient to assert beneficial ownership of the property because of a prior agreement and detrimental reliance. This is true where the property was transferred on condition that it be held on trust,28 where there was a contract to transfer the property when acquired and the transferee has furnished consideration,29 where a purchaser of land has promised to honour a contractual licence.30 and where there was a joint venture whereby the property was to be acquired for the parties’ mutual benefit.31 The constructive trust is also employed to regulate the transitional stages of consensual transactions, providing a fair distribution of entitlement and curbing opportunities for exploitation. Thus, vendors subject to a specifically enforceable contract of sale hold the property on trust prior to the transfer of legal title.32 Similarly, a trust arises in favour of mortgagors over the mortgaged property after redemption,33 or in respect of their share of the proceeds of any mortgagee sale.34 The more controversial applications of the constructive trust arise in situations that cannot be readily characterised as enforcing either existing property rights or informal transfers or as involving the regulation of consensual transactions. For example, a constructive trust arguably arises where it is unconscionable for a recipient to retain property in circumstances where the transferor’s intention to pass title was vitiated.35 Still greater a source of anxiety are instances of the 25 Dufour v. Pereira (1769) Dick 419 at 421; Re Cleaver [1981] 2 All ER 1018 at 1024. See Oakley, Constructive Trusts at 263. 26 See, e.g., D Hayton, “Remedial Constructive Trusts of Homes: An Overseas View” [1988] Conv. 259 at 264; S Gardner, supra n. 22 at 228–31; S Moriarty, “Licences and Land Law: Legal Principles and Public Policies” (1984) 100 LQR 376. 27 Lloyds Bank plc v. Rosset [1990] AC 105; Giumelli v. Giumelli (1999) 161 ALR 473. 28 The constructive trust is sometimes claimed to be the basis of relief for secret trusts. See, for instance, RP Austin, “Constructive Trusts” in P Finn (ed.), Essays in Equity (Sydney, Law Book Co., 1985) 196 at 197; Birks, An Introduction to the Law of Restitution at 65; Paragon Finance Plc v. DB Thakerar & Co. [1999] 1 All ER 400 at 408–9 per Millett LJ. On the other hand, many commentators argue that the constructive trust has nothing to do with the courts’ treatment of this area: see e.g., Oakley, Constructive Trusts at 260–3. 29 Holroyd v. Marshall (1862) 10 HLC 191. 30 Ashburn Anstalt v. Arnold [1989] Ch. 1 at 23–6 per Fox LJ; Lyus v. Prowsa [1982] 1 WLR 1044. See Hopkins, supra n. 23 at 47–60. 31 Banner Homes Group Plc v. Luff Developments Ltd. [2000] Ch. 372; Pallant v. Morgan [1953] Ch. 43; Chattock v. Muller (1878) 8 Ch. D 177. 32 Lysaght v. Edwards (1876) 2 Ch. D 499 (land); Oughtred v. IRC [1960] AC 206 (shares in a private company). See Oakley, Constructive Trusts at 275. 33 The constructive trust no longer has any real relevance in this field in English law since the Law of Property Act 1925 indicated that mortgages were to be made by way of charge rather than conveyance. See Oakley, ibid. at 307. 34 Banner v. Berridge (1881) 18 Ch. D 254. Again, this use of the constructive trust has been rendered irrelevant by the implementation of a statutory trust in the Conveyancing Act 1881, s 21(3)—a provision reenacted in the Law of Property Act 1925. See Oakley ibid. at 308. 35 Chase Manhattan Bank NA v. Israel-British Bank (London) Ltd. [1981] 1 Ch. 105; cf Westdeutsche Landesbank Girozentrale v. Islington LBC [1996] AC 669. See infra ch. 6.
12 Property and Proprietary Remedies constructive trust that appear to redistribute property without regard to the parties’ intentions. This is true of constructive trusts employed in conjunction with tracing to claim proceeds of property.36 Another example is provided by trusts that arise to prevent trustees or other fiduciaries from acquiring beneficial ownership of property obtained in breach of duty.37 A third illustration is provided by trusts arising in favour of one who has indemnified another pursuant to a contract of insurance38 or has cared for the victim in order to prevent a victim’s overcompensation by a party liable for the loss caused.39
III . THE REMEDIAL / INSTITUTIONAL DICHOTOMY
Analysis of the nature of the constructive trust is commonly framed in terms of whether it is an “institution” or a “remedy”. While it has been in vogue in this context for over 40 years,40 the term “institutional” is particularly unhelpful. Roscoe Pound first used the expression in this area, commenting that the constructive trust was a remedial rather than substantive institution.41 It is evident that Pound assumed that, regardless of the function of the constructive trust, it was indeed an institution.42 It appears that he used the term “institutional” to mean nothing more than an established practice. Pound was writing of developments in the years 1918–19. While today we tend to distinguish between English and American approaches to the constructive trust, Pound was in no way suggesting that American law had developed the constructive trust in novel ways. This is not surprising, given that he was writing almost two decades before his colleagues at Harvard, Warren Seavey and Austin Scott, produced the Restatement of Restitution. In Pound’s view, “[l]ittle that is new” was involved in the cases upon which he was reflecting. Instead, his analysis merely concerned “a few interesting applications of settled principles”.43 Thus, he focused on the historic role of the constructive trust and cited a mixture of English and American cases. 36
For a striking recent example see Foskett v. McKeown [2001] 1 AC 102. See, e.g., AG for Hong Kong v. Reid [1994] AC 324; Lac Minerals v. Corona (1989) 61 DLR (4th) 14; Soulos v. Korkontzilas (1997) 146 DLR (4th) 214. 38 Lord Napier and Ettrick v. Hunter [1993] 1 AC 713. 39 Cunningham v. Harrison [1973] QB 942; Hunt v. Severs [1994] 2 AC 350. 40 In an article published in 1959, Maudsley observed that “English law has always thought of the constructive trust as an institution, a type of trust”: RH Maudsley “Proprietary Remedies for the Recovery of Money” (1959) 75 LQR 234 at 237. The institutional/remedial dichotomy was further entrenched in D Waters’ work, The Constructive Trust (London, Sweet & Maxwell, 1964). 41 R Pound, “The Progress of Law” (1920) 33 Harv. L Rev. 420 at 420–1. 42 Drawing on Pound, Scott made the same distinction in an article published in the Law Quarterly Review in 1955. Scott commented that, “as Professor Pound has pointed out, a constructive trust, unlike an express trust, is a remedial and not a substantive institution”: AW Scott, “Constructive Trusts” (1955) 71 LQR 39 at 41. While the terms remain rather poorly explained, Scott quite rightly understood the distinction drawn by Pound as “remedial”/“substantive”, not “remedial”/“institutional”. The latter distinction seems to have come into vogue with Maudsley’s article four years later (see supra n. 40). 43 Ibid. at 421. 37
Exploring the Idea of Remedial Trusts 13 Subsequently, many judges and jurists have used the expression “institutional” without explaining its import, while those who have paused to clarify the matter have tended to use the term in quite different ways.44 Thus, Charles Rickett recently suggested that: the term “institutional constructive trust” is an attempt to corral all those cases we call “constructive trusts”, and which have some historical pedigree, which we cannot avoid, and with which we essentially feel happy.45
The remaining sections examine some of the characteristics that have been thought to distinguish the remedial constructive trust from its institutional counterpart and consider what it is about some applications of the constructive trust that makes us uncomfortable.
1. Rights and Remedies (a) A Dichotomy Between Substantive Rights and Remedies Pound’s remarks have sometimes been interpreted as drawing a distinction between substantive rights and remedies46; and, independently, other commentators have relied upon such a contrast in analysing this area. Thus, it has been said, rather cryptically, that the constructive trust and tracing “are not so much remedies as part of the process of establishing the substantive rights of the parties”.47 This seems a rather unpromising distinction. It is unlikely that Pound, who profoundly influenced the realists and was writing at the time of Hohfeld, was relying on such a misconceived dichotomy. It has long been observed that, while they are analytically distinct, rights and remedies are correlative. Where one can find a remedy, one will be able to point to a right that determines that it is available; and one has a right only where the law provides a remedy for its breach.48 The notion that rights and remedies are not inextricably linked was given short shrift by Goulding J in Chase Manhattan Bank v. Israel British Bank.49
44 While, commentators generally place a good deal of significance on the distinction, as Malcolm Cope observes, “[t]here is, however, no agreement as to what situations are institutional and what are remedial”: M Cope, The Constructive Trust (Sydney, Law Book Co., 1992) 15. 45 Rickett, supra n. 20 at 325. 46 See, e.g., D Waters, “The Constructive Trust in Evolution: Remedial and Substantive” [1991] Estates and Trusts Jnl. 334 at 334. 47 Sir Robert Megarry and PV Baker (eds.), Snell’s Principles of Equity (27th edn., London, Sweet and Maxwell, 1978) 572. 48 A Corbin, “Legal Analysis and Terminology” (1919) 29 Yale LJ 163 at 167; R Stevens, “Restitution, Property and the Cause of Action in Unjust Enrichment” (1989) 39 U of Tor. LJ 258 at 285. See also Muschinski v. Dodds (1985) CLR 583 at 616 per Deane J. 49 [1981] Ch. 105. It was argued that in New York the constructive trust was a remedy and therefore formed part of its procedural rather than substantive law—a distinction that would have had jurisdictional consequences.
14 Property and Proprietary Remedies He observed that: Within the municipal confines of a single legal system, right and remedy are indissolubly connected and correlated, each contributing in historical dialogue to the development of the other, and save in very special circumstances it is as idle to ask whether the court vindicates the suitor’s substantive right or gives the suitor a procedural remedy, as to ask whether thought is a mental or a cerebral process. In fact the court does both things by one and the same act.50
Thus, in itself, the distinction between rights and remedies cannot illuminate the controversy over the remedial constructive trust. (b) Facilitative Institutions and Remedies We tend to associate remedies with the redress given for breaches of what H.L.A. Hart termed “primary rules”: those rules that require people to act or prohibit them from acting in particular ways. However, in addition, there are what Hart referred to as “secondary rules”: those rules that provide “individuals with facilities for realizing their wishes, by conferring legal powers upon them to create, by certain specified procedures and subject to certain conditions, structures of rights and duties within the coercive framework of the law”.51 The norms that allow parties to enter into contracts or express trusts are good examples of secondary rules. These provide frameworks that allow individuals to choose to structure their legal rights and liabilities to suit their needs. This seems to be the distinction that Pound was drawing so long ago. He used the phrase “substantive trust” as a synonym for “express trust”,52 and he noted that “one of the most effective remedial expedients” available to the Chancellor “was to treat a defendant as if he were a trustee”.53 Thus, to Pound, real trustees were those who voluntarily assumed the primary obligations of the facilitative institution of the express trust. In contrast, the constructive trust, as the name suggests, was not a true trust (i.e. a facilitative institution) but a remedy imposed by the courts.54 Perhaps the notion that the express trust is a “substantive” as opposed to “remedial” institution, as Pound put it, derives from the fact that it plays a part in people’s lives outside the context of the judicial process in a way that the constructive trust does not. Thus, it is said that, while the express trust is a product of intention, the constructive trust arises by operation of law.55 The express trust is a pervasive 50
Muschinski v. Dodds (1985) CLR 583 at 124. HLA Hart, The Concept of Law (Oxford, Clarendon Press, 1960) 27. 52 See infra n. 67. 53 Pound, supra n. 41 at 421. 54 See A Kull, “Restitution in Bankruptcy: Reclamation and Constructive Trust” (1998) 72 Am. Bankcy. L J 265 at 288. 55 See, e.g., FW Maitland, Equity: A Course of Lectures (2nd edn., Cambridge, Cambridge University Press, 1936) at 53. This distinction is not entirely helpful. Intention does often play a role in constructive trust doctrines. However, the constructive trust is perhaps never awarded solely in response to the parties’ intention. Thus, the constructive trust is used as a facilitative device to enforce certain consensual arrangements, such as transfers of land (see infra ch. 8). Here it provides for an allocation of the risks arising in the transitional stages of sales transactions. Elsewhere, through the doctrine of the 51
Exploring the Idea of Remedial Trusts 15 instrument that people employ in managing their affairs, while the constructive trust surfaces merely as a tool used by the judiciary when things break down. In contrast with the express trust, when used in the context of fiduciary relationships, the constructive trust functions to remedy breaches of consensually assumed primary rights. For example, the constructive trust is used to protect express trust relationships where trust property comes into the hands of a third party. In addition, outside the context of express trusts, the constructive trust is used to punish other breaches of fiduciary duties.56 Thus, by providing a remedy for breaches of express trusts and other fiduciary relationships, the constructive trust gives those institutions much of their content. The express trust appears to have a life of its own in the way the constructive trust does not. While, in positivistic terms, we might view the express trust as no more than a reflection of the remedies presently available to enforce it,57 it can be seen as something more than this. In the context of the development of the trust, the relationship between prohibitions, rights and remedies has been and continues to be dynamic and reflexive. If it is ultimately true that in some sense the remedies constitute the institution, they nevertheless seem to assume its existence. As Goulding J observed, right and remedy have “each contribut[ed] in historical dialogue to the development of the other”.58 Prohibitions, rights and remedies give the express trust its structure but also are shaped with reference to an idea of the “trust” as a legal relationship that serves a particular function. In contrast, we have no equivalent notion of what the essential nature of the constructive trust might be. The metaphors commentators use to describe the constructive trust suggest the distaste that those who seek principle and order have for this device. To them the law of constructive trusts consists of nothing more than “a rag-bag of instances having little in common”59 or a “a vague dust-heap for the reception of relationships which are difficult to classify or which are unwanted in other branches of the law”.60 Edmund Davies LJ addressed this issue in more sympathetic terms in Carl Zeiss Stiftung v. Herbert Smith (No 2),61 arguing that: English law provides no clear and all-embracing definition of a constructive trust. Its boundaries have been left perhaps deliberately vague, so as not to restrict the court by technicalities in deciding what the justice of a particular case may demand.62 “common intention” constructive trust, the device is used to confer rights that arise, not merely as the result of the parties’ agreement, but because of detrimental reliance upon that agreement (see infra ch. 10.II.1). 56 Although whether constructive trusts rather than the remedy of account should be awarded in this context is another question. See infra ch. 9.I. 57 Cf. Millett LJ’s remark that someone “is not subject to fiduciary obligations because he is a fiduciary; it is because he is subject to them that he is a fiduciary”: Bristol & West Building Society v. Mothew [1996] 4 All ER 698 at 712. 58 Chase Manhattan Bank v. Israel British Bank [1981] Ch. 105. See supra, text accompanying n. 50. 59 Austin, supra n. 29 at 196. 60 EI Sykes, “The Doctrine of Constructive Trusts” (1941) 15 Aust. LJ 171 at 175. 61 [1969] 2 Ch. 276. 62 Ibid. at 300.
16 Property and Proprietary Remedies Strangely, as a defence for the English approach to the area, this sounds rather like an apology for “palm tree justice”—that spectre which English lawyers so often argue haunts the use of the constructive trust in jurisdictions other than their own. In any event, it is difficult to square this vagueness with the “technicalities” that do litter this area of law, such as the insistence on a fiduciary relationship as a prerequisite for tracing.63
2. The Constructive Trust as a Device for Protecting Fiduciary Relationships (a) Constructive Trusts and Fiduciary Relationships There is a tendency in English legal thought to regard the constructive trust as inextricably linked with consensual equitable relationships.64 Certainly the use of the constructive trust to remedy breaches of the primary rights associated with the fiduciary relationship gives that facilitative institution much of its structure. However, it does not follow that the constructive trust does not have applications beyond this role. As Waters put it, “[t]he fiduciary relationship permeates the whole of English constructive trust thinking”.65 For many commentators this is why the constructive trust is viewed as substantive in English legal thought and the extension of the device beyond this role is thought to give it a more remedial quality. Thus, according to Goode, it is because of the increasing availability of the constructive trust that “it more closely resembles the American remedial trust than the traditional institutional mode created by English law”.66 It was the tendency to limit the device to situations where there was a pre-existing fiduciary relationship that was the target of Roscoe Pound’s criticism in that much cited but little analysed article of 80 years ago. Pound lamented a judicial tendency to treat the constructive trust “as something substantive” by assuming that the remedy was available only for someone “who is the beneficiary of a substantive trust”.67 In particular, he complained that this habit prevented or complicated the use of the constructive trust to prevent those who killed fellow joint tenants from benefiting through the operation of survivorship. On this analysis, the point is not that the constructive trust is not a remedy, but more that it is an integral part of the key institutions of the law of equity: the express trust and the fiduciary relationship. This gives rise to the impression that to use the constructive trust as a more general remedy outside these institutions
63
See Re Diplock [1949] Ch. 465. For analyses of this tendency, see P Maddaugh and J McCamus, The Law of Restitution (Aurora, Ont., Canada Law Book, 1990) 82, 87–93; Waters, supra n. 40 at 2. 65 Ibid. at 19–22. 66 R Goode, “Twentieth Century Developments in Commercial Law” [1983] LS 283 at 292. 67 Pound, supra n. 41 at 423. 64
Exploring the Idea of Remedial Trusts 17 would be somehow unprincipled.68 According to this view, the constructive trust serves to bring interlopers under the umbrella of existing fiduciary relationships and to force errant fiduciaries to disgorge profits made in breach of their duties.69 This attitude led Austin Scott to bemoan the tendency of English scholars to define the constructive trust in terms of breaches of fiduciary duty.70 In particular, he complained that Keech v. Sandford 71 was treated “as though it were the constructive trust”.72 Thus, until recently, in arguing for the availability of a constructive trust, commentators thought it important to point to the existence of a fiduciary relationship.73 Thus, in the New Zealand Court of Appeal in Liggett v. Kensington, Gault J emphasised the perceived importance of fiduciary relationships in this context.74 Similarly, in Re Polly Peck (No 2),75 Mummery LJ argued that one of the features that distinguishes the Canadian remedial constructive trust from the English institutional variety is that the Canadian courts do not require a pre-existing fiduciary relationship.76 The notion that the constructive trust’s role is limited to enforcing trusts and fiduciary duties in part explains the requirement that a fiduciary relationship must exist before one can trace in equity and claim a constructive trust.77 It also accounts for the tendency to argue that the way to develop the law in the area is through being “more ready to categorise wrongdoers as fiduciaries”.78 The continuing significance attached to the connection between the constructive trust and fiduciary relationships was also apparent in AG for Hong Kong v. Reid,79 where the Privy Council concluded that an employer became the beneficial owner of a bribe accepted by an employee. What seemed to be a remedial 68 For observations to this effect see Hunter Engineering Co. v. Syncrude Canada Ltd. (1989) 57 DLR (4th) 321 at 349 per Dickson CJ; M Neave, “The Constructive Trust as a Remedial Device” (1978) 11 MULR 343 at 343; D Waters, Law of Trusts in Canada (2nd edn., Toronto, Carswell, 1984) 381; G Klippert, Unjust Enrichment (Toronto, Butterworths, 1983) 185; J Dewar, “The Development of the Remedial Constructive Trust” (1982) 60 Can. Bar Rev. 265 at 275; Cope, supra n. 44 at 16. 69 Cope, supra n. 44 at 13. 70 Scott referred to the following definition: “[a] constructive trust is raised by a court of equity wherever a person, clothed with a fiduciary character, gains some personal advantage by availing himself of his situation as a trustee”: Lewin, Trusts (15th edn., London, Sweet & Maxwell, 1950) 155. See Scott supra n. 42 at 47. 71 (1728) Sel. Cas. t King 61. 72 Ibid., at 47 (emphasis in the original). 73 This is apparent, for instance, in the 1986 edn. of R Goff and G Jones’ text, The Law of Restitution (3rd edn.). On the one hand, the authors argued that in undue influence cases, “[e]ven if a fiduciary relationship is deemed necessary, the courts will undoubtedly hold that the equitable title remains in such a transferor” (ibid. at 256). On the other hand, they thought it necessary, in arguing that the courts should be prepared to grant proprietary remedies for duress, that they “should not be inhibited from doing so by the absence of any fiduciary relationship” (ibid. at 247). 74 [1993] 1 NZLR 257 at 281. 75 [1998] 3 All ER 812. 76 Ibid. at 825. 77 This has been the received wisdom in England since Re Diplock [1949] Ch. 465 which interpreted Sinclair v. Brougham [1914] 2 Ch. 356 as establishing this position. 78 Sir Peter Millett, “Equity—The Road Ahead” (1995) 9 Trust Law International 35 at 40. 79 [1994] AC 324.
18 Property and Proprietary Remedies constructive trust, in that it neither reflected the parties’ intentions nor protected existing property rights, was justified because it enforced a fiduciary relationship.80 Subsequently, in Halifax Building Society v. Thomas,81 which involved an attempt by a bank to recover the profits of a mortgage fraud, the Court of Appeal distinguished AG for Hong Kong v. Reid on the basis that the rogue in Halifax was not a fiduciary.82 (b) The Role of the Constructive Trust Beyond Fiduciary Relationships (i) The Use of the Device Beyond Fiduciary Relationships in North American law It is in this light that we can appreciate the observation that the birth of the remedial constructive trust in American law is marked by the divorce of the device from consensual fiduciary relationships in the decision of the New York Supreme Court in Newton v. Porter.83 There, the plaintiff was allowed to claim a constructive trust against a thief and trace the proceeds of his property despite the absence of a preexisting fiduciary relationship. The significance of this development was noted by Dickson J in the Supreme Court of Canada in his influential dissenting judgment in Rathwell v. Rathwell.84 In a passage that admirably identifies a difference in attitudes regarding the scope and function of the constructive trust in English and American law, he observed that: English law has long treated [the constructive trust] as an analogous institution to the express trust arising in certain definite situations such as the assumption of trustee duties by a stranger to a trust, the participation in the fraud of a trustee by a stranger, and reception and dealing with trust property by stranger in ways inconsistent with the trust. . . . The examples mentioned above are situations where a man against his will is brought within the express trust institution, but in the United States the constructive trust has never been so limited. Its amplitude oversteps the substantive trust machinery. It is a remedial mechanism.85
(ii) Constructive Trusts Employed Outside Fiduciary Relationships in English Law Nonetheless, it is true that, even in English law, the constructive trust has always had a role beyond the enforcement of existing fiduciary relationships. This is so 80
See infra ch. 9.III.1. [1996] Ch. 217. See infra ch. 9.III.3(b). 82 Ibid. at 229 per Peter Gibson LJ. 83 (1877) 69 NY 133. The significance of the case is described in similar terms by Goulding J in Chase Manhattan [1981] Ch. 105 at 125 relying on the testimony of Prof. George Palmer. A similar severance of the constructive trust from pre-existing fiduciary relationships took place in New Zealand in Elders Pastoral Ltd. v. BNZ [1989] 2 NZLR 180. 84 (1978) 83 DLR (3d) 289. 85 Ibid. at 305. 81
Exploring the Idea of Remedial Trusts 19 where the device is used in the context of consensual relationships that are not conventionally characterised as fiduciary in nature. Consider the use of the constructive trust to constrain a vendor of real estate prior to completion or to control the mortgagee in the use of the proceeds of sale of mortgaged property. The transactions into which the parties enter cannot be said to be inherently ones in which one party reposes trust and confidence in the other. Rather, a limited relationship is imposed through a constructive trust to regulate risks that arise in these transactions. Similarly, constructive trusts are imposed by operation of law in some circumstances to prevent one party unconscionably departing from a promise or agreement that has been relied upon by the other party. This is true of the constructive trusts that enforce a common intention to share the beneficial ownership of property, those awarded in the context of proprietary estoppel to enforce assurances given by a legal owner, and those imposed to enforce mutual wills. In all these cases, the constructive trust that arises is generally characterised as coming into being by operation of law rather than as a direct response to the intention of the parties.86 What is it then that makes the imposition of a constructive trust outside a pre-existing fiduciary relationship acceptable in these cases? In all the situations mentioned above, constructive trusts are employed to regulate consensual relationships. In contrast, the recognition of a constructive trust outside the context of consensual relationships is perceived as a more radical imposition, and, hence, tends to be pejoratively labelled “remedial”.87 The unease generated by the use of the constructive trust beyond its role in the regulation of consensual relationships is apparent from instances in which the device has been used in the context of vitiated transfers. The constructive trust has been used in some cases to confer equitable title where transferors have transferred legal title but their intention to do so was vitiated in some way or where it would have been unconscionable for the transferee to assert beneficial title to the property in question. Examples include the rather cryptic House of Lords’ decision in Sinclair v. Brougham,88 the High Court decisions in Chase Manhattan Bank v. Israel (British) Bank 89 and Neste Oy v. Lloyds Bank Plc,90 and Lord BrowneWilkinson’s analysis of the area in Westdeutsche Landesbank Girozentrale v. Islington LBC.91 At first sight, it is tempting to conclude that these decisions indicate that the remedial/institutional distinction has nothing to do with any concern about the use of the constructive trust outside the context of fiduciary 86 See Westdeutsche Landesbank Girozentrale v. Islington LBC [1996] AC 669 at 708 per Lord Browne-Wilkinson. 87 It is in these terms that Charles Rickett analyses the tension in Quistclose trust jurisprudence between a “pure trusts law philosophy” that emphasises intention and a “remedial trusts law philosophy” that imposes proprietary relief for other rationales. See C Rickett, “Different Views on the Scope of the Quistclose Analysis: English and Antipodean Insights” (1991) 107 LQR 608. 88 [1914] AC 398. 89 [1981] Ch. 105. 90 [1983] 2 Lloyd’s Rep. 658 at 666. 91 [1996] AC 669. See infra ch. 6.II.2(c).
20 Property and Proprietary Remedies relationships.92 However, this is not so clear. The House of Lords in Westdeutsche Landesbank overruled the holding in Sinclair v. Brougham that those who had made payments to the defendant under contracts that were void ab initio because they were ultra vires were entitled to proprietary relief.93 Moreover, Chase Manhattan and Neste Oy have always been very controversial, and have often been viewed as representing remedial applications of the constructive trust.94 Finally, Lord Browne-Wilkinson’s explanation of the role of the constructive trust has been criticised by influential opponents who would deny the device any real role in this context. This is apparent in the extra-judicial analysis of Sir Peter Millett who, when a Lord Justice of the Court of Appeal, argued that the only role the constructive trust has outside fiduciary relationships is in the enforcement of rights to recover unique property in the context of specific performance or rescission.95 Yet, even if the constructive trust is generally limited to enforcing fiduciary duties and regulating consensual relationships, it is hardly obvious that it should be so restricted in its availability. There are certainly good arguments for employing the constructive trust more broadly.
3. The Content of the Constructive Trust (a) The “Trustee’s” Duties The express trust is an institution consisting of a set of rights and privileges enjoyed by the beneficiary, along with correlative obligations and prohibitions that bind the trustee and certain third parties who deal with trust property. The device provides for the creation of relationships of varying degrees of complexity from a bare trust to an active trust with detailed duties of management. What then is the nature of the constructive trust? Does it give rise to a complex legal relationship or does is it simply amount to a proprietary remedy that gives plaintiffs the right to have specific assets transferred to them? To a large degree, the answer to that question seems to depend on the jurisdiction in which one asks it. In the United States, the constructive trust is not regarded as creating an active trust analogous to an express trust at all; indeed, no fiduciary relationship arises.96 In the view of American scholars, the constructive trust is essentially a fiction.97 It merely denotes that the defendant is under a 92 See, e.g., S Gardner, “The Element of Discretion” in P Birks (ed.), The Frontiers of Liability Vol II (Oxford, Oxford University Press, 1994) 186 at 187. 93 Supra n. 91, at 686–9 per Lord Goff, 713 per Lord Browne-Wilkinson. 94 See, e.g., A Tettenborn, “Remedies for Recovery of Money Paid by Mistake” [1980] CLJ 272 at 273. 95 Sir Peter Millett, “Restitution and Constructive Trusts” (1998) 114 LQR 399. See infra ch. 6.II.4. 96 Salisbury v. Tibbetts 259 F 2d 59 at 64 (1958); Scott, supra n. 42 at 40–1. 97 See, e.g., J Langbein, “The Later History of Restitution” in WR Cornish et al., Restitution: Past, Present and Future: Essays in Honour of Gareth Jones (Oxford, Hart Publishing, 1998) 37 at 37; Kull, supra n. 54 at 287.
Exploring the Idea of Remedial Trusts 21 specifically enforceable duty to convey property to the plaintiff.98 Thus, it is a simple property right rather than a true trust. As Waters puts it, “[t]he constructive trust is the terminological vehicle for conferring specific property upon the claimants”.99 Similarly, the Australian High Court recently stated that “[s]uch a trust does not necessarily impose . . . the various administrative duties and fiduciary obligations which attend the settlement of property to be held by a trustee upon an express trust for successive interests”.100 Instead, the court concluded that the declaration of a constructive trust was “akin to orders for conveyance” made in proprietary estoppel cases.101 Indeed, it would make little sense to impose all the duties, such as those of investment, assumed by a trustee under a complex express trust arrangement upon a third party who receives trust property.102 The device seems to be designed to require the defendant to make specific restitution; it is not intended to give rise to an enduring relationship.103 Occasionally where a continuing relationship is desirable, the court might prescribe a more extensive set of obligations.104 However, generally, it is more likely that all that is created is, at most, a “passive” trust and that the declaration of the interest merely entails that the defendant should transfer the property to the plaintiff. In contrast, there has been a tendency in England and at times in the Commonwealth to assume that the constructive trust does indeed impose a fullyfledged fiduciary relationship.105 This is due in part to the rather tortured development of the constructive trust. In imposing liability on “strangers to the trust” the courts and jurists have treated these third parties as voluntarily assuming the position of trustees.106 While this may be true in some circumstances, more often it is an absurd fiction that highlights the trust’s uncertain position hovering between obligation and ownership. Before the express trust had come to be seen as proprietary in effect, the courts felt obliged to rely on the fiction that constructive trustees had consented to their responsibilities.107 Now that we accept that these rights have a proprietary dimension, we may dispense with this charade. Instead, we can analyse the matter on the basis that an express trust consists of a complex of personal obligations (fiduciary duties) and proprietary rights. While
98
Waters, supra n. 40 at 23; Cope, supra n. 44 at 25. D Waters, “The Nature of the Remedial Constructive Trust” in P Birks (ed.), Frontiers of Liability Vol II (Oxford, Oxford University Press, 1994) 165 at 183. 100 Giumelli v. Giumelli (1999) 161 ALR 473 at 475. 101 Ibid. (citing Dillwyn v. Llewelyn (1862) DE GF & J 517; Riches v. Hogben [1985] 2 Qd. R 292). 102 See Lonrho plc v. Fayed (No 2) [1992] 1 WLR 1 at 12 per Millett J; Rickett, supra n. 20 at 328; J Martin (ed.), Hanbury & Martin: Modern Equity (15th edn., London, Sweet & Maxwell Ltd, 1997) 287–8; Cope, supra n. 44 at 16. 103 Gardner, supra n. 22, at 187 and 190. 104 Waters, supra n. 68 at 404. 105 Cope, supra n. 44 at 12. 106 See, for instance, Austin, supra n. 29 at 207. 107 See supra, text accompanying n. 2. 99
22 Property and Proprietary Remedies the latter bind the world, the former probably ought to bind only those who accept them or, at the very least, have express notice of them. The difficulties that arise from the assumption that constructive trusts inevitably involve fiduciary duties can be seen in Lord Napier and Ettrick v. Hunter.108 There, the House of Lords concluded that an insurer, who had indemnified an assured in respect of particular losses, was entitled to a proprietary remedy in respect of moneys subsequently recovered by the assured from a third party liable for those losses. However, fearing that the imposition of a constructive trust would place unduly burdensome obligations upon the assured, their Lordships concluded that the appropriate remedy was an equitable lien.109 This conclusion would not have been necessary if they had accepted that the constructive trust might not involve all the incidents of an express trust. The differing perceptions regarding the extent of a constructive trustee’s duties is one way in which we may make sense of the notion that the constructive trusts of English and American law are different creatures. And yet, in both jurisdictions, the constructive trust is a remedy; it is merely a question of how complex and onerous a remedy it is. Moreover, if this is what sets the American constructive trust apart, it is not obvious why this difference should be seen as a cause for concern. (b) The Liability of Innocent “Trustees” The assumption that the device gives rise to active duties also explains much of Lord Browne-Wilkinson’s analysis of the constructive trust in Westdeutsche Landesbank Girozentrale v. Islington LBC.110 Citing the maxim that “equity operates on the conscience of the owner of the legal interest”, he concluded that a constructive trust arises only where recipients of property have sufficient knowledge of facts that would make it unconscionable to treat the property as their own.111 This may seem a promising argument, given the present state of the law of knowing receipt. As the authorities stand, those who have received but do not retain trust property are liable to account for it only if they had sufficient knowledge to make their receipt or subsequent dealing with the property unconscionable.112 What then is the nature of the relationship of an innocent recipient of trust property and the beneficial owner? Lord Browne-Wilkinson argued that “innocent receipt of property by X subject to an existing equitable interest does not by itself make X a trustee despite the severance of the legal and equitable titles”.113 This appears to assume that the legal and equitable interests could 108
[1993] 1 AC 713. Ibid. at 738 per Lord Templeman, 745 per Lord Goff, 752 per Lord Browne-Wilkinson. See infra ch. 12.I.2. 110 [1996] AC 669. 111 Ibid. at 705. 112 See BCCI v. Akindele [2001] Ch. 437. 113 [1996] AC 669 at 707. 109
Exploring the Idea of Remedial Trusts 23 remain severed despite the fact that the recipient is not subject to a trust. Yet, it is difficult to see how this could be so. The concept of trusteeship is the only basis that equity has for recognising ownership.114 When fiduciary obligations and property rights are treated as analytically distinct, it becomes possible to analyse the legal relationship of a beneficiary and an innocent third party recipient in terms of a subsisting constructive trust. According to this analysis, the legal and equitable titles remain separated by virtue of the recipient’s becoming a constructive trustee upon receipt of the property. The trust property and its proceeds belong to beneficiaries in so far as they are entitled to exercise their rights over them at any point that they are in the hands of any one other than a bona fide purchaser of the legal title without notice. However, constructive trustees will not incur any personal liability for dealing with trust property if they had no notice of the beneficiaries’ interests in that property. If it is accepted that the constructive trust is in the nature of a simple property right and does not ordinarily give rise to a trust of an active character, it may be accepted that it may arise without the knowledge of the recipient. The question whether the recipient in whose hands property is no longer identifiable is liable to account for that property may be treated as a distinct issue. Only recipients who became aware or, at least, should have become aware, of the title of the plaintiff will be personally liable. (c) The “Beneficiary’s” Rights In a rare display of support for the notion of the “remedial constructive trust” from an English judge, Lord Browne-Wilkinson in Westdeutsche Landesbank suggested that there might be a place for the device if it did not affect innocent third parties.115 This is apparently how he understood that the device functions in the United States. This is odd, as it is difficult to find any jurisdiction that interprets the constructive trust in these terms. There is some support in the United States for limiting the effect of the constructive trust in bankruptcy.116 However, the restrictions on the remedy go no further than this; it will still bind third parties other than bona fide purchasers of a legal interest. In particular, if imposed prior to the constructive trustee’s bankruptcy, such a remedy will give the plaintiff priority over general creditors. If Lord Browne-Wilkinson’s account appears misconceived as a description of the law in other jurisdictions, it has little more appeal as a prescription for future development. There seems to be little value in extending the scope of the constructive trust on these terms—indeed it seems rather pointless to describe the contemplated legal relationship as a constructive trust at all. If a remedy lacks what would seem to be the essential attribute of a trust, i.e. proprietary effect, what is the 114 115 116
See Millett, supra n. 95 at 404. [1996] AC 669 at 716. See infra ch. 3.II.3.
24 Property and Proprietary Remedies point of calling it a trust? Moreover, stripped of any proprietary consequences, it is difficult to see what useful role “these emasculated trusts” might serve.117 If the law of proprietary remedies is to be rationalised, a more fruitful inquiry would involve an effort to identify when the award of fully-fledged proprietary rights is merited.118
4. Is the Remedy Discretionary? A central issue in the remedial constructive trust debate is whether the trust “arises . . . in defined circumstances and in accordance with settled principles of equity, or [whether it] . . . is imposed by the court in its discretion whenever it is considered just to do so”.119 Thus, several commentators have argued that what distinguishes the remedial constructive trust from other constructive trusts is the discretion that the courts exercise in deciding whether it should be granted. 120 It has been suggested that “the question whether a restitutionary proprietary claim should be granted should depend on whether it is just, in the particular circumstances of the case”.121 However the more orthodox view is that, given the effects of proprietary claims on defendants and on third parties, the availability of these rights should not be determined pursuant to ad hoc judicial evaluations.122 Thus, Sir Peter Millett, as he was then, argued extra-judicially that “proprietary remedies should be granted only in defined circumstances and then ordinarily as a matter of course, so that rights of property may be fixed and ascertainable in advance”.123 While Millett apparently favours the constructive trust being available as a matter of course, by qualifying the prescription with the word “ordinarily”, he robs it of much of its certainty. And, indeed, we may ask whether discretionary constructive trusts are really something foreign to English law. The flexible approach taken in the context of proprietary estoppel suggests that they are not.124 Furthermore, we may ask whether the manner in which constructive trusts are employed in other jurisdictions is really discretionary in a worrisome way. In what sense then is the constructive trust a discretionary remedy in American law? If we consider first whether the device is available only in defined circumstances, it would seem that the determination of when plaintiffs will be entitled to 117
P Birks, “Trusts Raised to Reverse Unjust Enrichment: The Westdeutsche Case” [1996] RLR 3 at
14. 118
See, e.g., E Sherwin, “Constructive Trusts in Bankruptcy” (1989) University of Illinois Law Rev.
297. 119
Millett, supra n. 95 at 399. See, especially, Gardner, supra n. 92 at 190–2; P Birks, “The End of the Remedial Constructive Trust?” (1998) 12 Trust Law International 202 at 203. 121 Goff and Jones, The Law of Restitution (3rd edn.) at 78. 122 Millett, supra n. 95 at 399; Birks, An Introduction to the Law of Restitution at 378. 123 Millett, supra n. 95. 124 See infra ch. 13.IV. 120
Exploring the Idea of Remedial Trusts 25 a constructive trust is all too well defined. Defendants who are unjustly enriched may be required to hold specific property obtained at the expense of a plaintiff on constructive trust.125 As regards the second question whether the constructive trust is available as a matter of course, it is safe to say that it is not. The courts exercise a discretion in this context because equitable remedies are available only where common law remedies would be inadequate. However, if the remedy is needed because unique property is involved or because the defendant is insolvent, the courts will award it. This is a relatively constrained discretion; indeed, it is fair to say that, like the remedy of specific performance, its exercise is well enough regulated to be “only technically discretionary”.126 On this analysis, the difference between the English and American approaches is not so much a conceptual one but one of degree. Ultimately, the real objection is not that the approach taken in the United States is too discretionary but that the remedy is too widely available. One reason that we may be suspicious of the hostility expressed toward the notion of discretion in proprietary remedies is that there is an important class of proprietary rights that are best understood as arising upon the exercise of a power of election by the plaintiff. Thus, where they have a right to rescind a contract and revest rights to property in the process or to claim property acquired by a fiduciary in conflict of interest, plaintiffs exercise a discretion. The plaintiff’s election has retrospective effect and third parties other than bona fide purchasers of the legal title are bound by the equity in question.127 Third parties who have notice of the facts that give rise to the equity are treated as taking their chances if they deal with the property at issue. Is there any reason why a similar philosophy should not apply to a reasonably constrained judicial discretion to grant a proprietary remedy? Much of the discussion regarding the discretionary nature of the remedial constructive trust has focused on recent developments in Canada.128 While there are some dicta that suggest that Canadian courts foresee themselves preserving a high degree of discretion in this area, the matter is not clear-cut. There are equally dicta suggesting the need to develop principles to constrain the use of the device, given its effect on third parties.129 It may be that it is only because we see the Canadian law in a state of transition that its constructive law has a discretionary quality. The freeing of the remedy from traditional categories offers an opportunity for the development of a more principled and systematic law of constructive trusts and it may well be that, as this process takes place and guidelines develop, the courts will cease to exercise a strong discretion in this area.130 Thus, Donovan Waters 125
The Restatment of Restitution at § 160. Cf. P Birks, “Proprietary Rights as Remedies” in P Birks (ed.), Frontiers of Liability Vol II (Oxford, Oxford University Press, 1994) 214 at 217. 127 Bainbridge v. Browne (1881) 18 Ch. D 188. 128 See, e.g., Gardner, supra n. 92 at 193. 129 See, e.g., McLachlin J in Peter v. Beblow (1993) 101 DLR (4th) 621 at 643–4. 130 Dewar, supra n. 68 at 275; J Dodds, “The New Constructive Trust: An Analysis of its Nature and Scope” (1988) 16 MULR 482 at 520. 126
26 Property and Proprietary Remedies suggests that the discretion identified in Canadian law may be characteristic of “the formative age” of the remedial constructive trust, rather than an enduring feature of the device.131 Again, this suggests that the key to rationalising the constructive trust in Canadian law, and indeed in any jurisdiction, is the identification of principles that may determine the circumstances in which proprietary relief will be appropriate. 5. Does the Trust Arise Automatically? (a) Automatic Vesting as the Basis for the Institutional/Remedial Constructive Trust Distinction In the debate on whether the constructive trust is institutional or remedial a surprising amount of energy has been focused on the question of when the proprietary rights in question arise. The term “institutional” has been used to denote “a relationship which arises and exists under the law independently of any order of a court”.132 Many have seen this as the critical issue in determining whether a constructive trust is remedial.133 Thus, in Westdeutsche Landesbank, Lord BrowneWilkinson remarked that “an institutional constructive trust . . . arises by operation of law as from the date of the circumstances which give rise to it: the function of the court is merely to declare that such trust has arisen in the past”.134 In contrast, the remedial constructive trust has pejoratively been described as being “created by the court after the event”.135 (b) The Suggestion that Constructive Trusts Must Arise Automatically There is a tendency to assume that constructive trusts must arise automatically. Thus, Andrew Kull argues that “the claimant’s property right necessarily antedates its judicial acknowledgement in the same way that entitlement to damages always precedes their calculation”.136 The analogy is not helpful. A right to damages does not give a plaintiff an interest in anything specific. Neither the practical consequences of the constructive trust—in particular the timing of its effects on third parties—nor the manner in which it is conceptualised is inevitable. For example, a right may be either a right in rem or a right ad rem,137 the latter being a personal 131
Waters, supra n. 99 at 184. Muschinski v. Dodds (1985) 160 CLR 583 at 614 per Deane J. See also Martin, supra n. 102 at 290. 133 See, e.g., G Elias, Explaining Constructive Trusts (Oxford, Clarendon Press, 1990) 161; Waters, supra n. 46 at 340. See also Atlas Cabinets and Furniture Ltd. v. National Trust Co. Ltd. (1990) 68 DLR (4th) 161 at 169–70 per Lambert JA. 134 [1996] AC 669 at 714. This is also viewed as the defining quality of the institutional constructive trust by the majority of the New Zealand Court of Appeal in Fortex Group Ltd. (in Receivership & Liquidation) v. MacIntosh [1998] 3 NZLR 171 at 172 per Tipping J (Gault and Keith JJ concurring). 135 Polly Peck (No 2) [1998] 3 All ER 812 at 824 per Mummery LJ. 136 Kull, supra n. 54 at 287. 137 For a discussion, see R Goode, “The Right to Trace and its Impact in Commercial Transaction— I” (1976) 92 LQR 360 at 363. 132
Exploring the Idea of Remedial Trusts 27 right to have the thing transferred that is not necessarily enforceable against third parties. Moreover, even if the remedy is to be in rem, it need not arise prior to its declaration. A proprietary remedy may take effect prospectively upon being declared. Alternatively, the interest in question may be conceptualised as arising when declared by the court but taking effect retrospectively.138 Thus, prior to judicial declaration, a plaintiff’s right may be characterised as an equity—a right to a proprietary interest—rather than a fully-fledged property right. Constructive trusts are not natural phenomena; it is in our power to determine whether they arise automatically. We could take the view that rights to specific property give rise to a property right that pre-exists any judicial recognition, but we need not. The decision should be made with a view to its practical implications. (c) Difficulties in Regarding the Timing of the Interest as the Key Indicia of the Remedial Constructive Trust Despite the importance that has been attached to the question of the timing of the plaintiff’s proprietary right, it is unlikely that this consideration can provide a satisfactory basis for distinguishing between remedial and institutional constructive trusts. For one thing, there are conceptual difficulties with regarding many applications of the constructive trust in English law as generating a property right at the time of the events giving rise to the claim. In particular, where the decision to award a proprietary remedy lies in the discretion of the court, it makes little sense to treat it as arising automatically.139 A defendant who is the subject of a claim that the court may in its discretion decide merits a proprietary remedy has a property right in assets in question, albeit one that may be defeated, depending on how the court exercises its discretion. It follows that, prior to judgment, plaintiffs in such a situation cannot be said to have an existing proprietary right, but merely a right to have a court consider whether they should be granted such a right. Once again, we may observe that the use of the constructive trust in the context of proprietary estoppel is hardly consistent with the assertion that the remedial constructive trust is unknown in English law.140 There are also difficulties regarding any constructive trust that arises upon tracing as automatic. For, plaintiffs who have successfully traced may choose to assert either a constructive trust or an equitable lien. Whenever this election takes place, it is clear that it must happen at some point after the events that give rise to the plaintiff’s claim. We may argue that the discretion acknowledged in proprietary estoppel case law is an aberration and downplay the significance of the remedial discretion conferred on plaintiffs in the context of tracing. But, even so, the timing of the interests arising in this context does not seem capable of explaining why the 138 See, e.g., Re Dow Corning Corp. 192 BR 428 at 436 (Bankr ED Mich, 1996) per Spector J; Re 512760 Ontario Inc. (1992) 9 DLR (4th) 719 at 730 per Adams J. 139 Waters, supra n. 46 at 356. 140 See infra ch. 13.IV.
28 Property and Proprietary Remedies constructive trust is thought to be remedial in North America but institutional in England. For, the orthodox view in North America is that constructive trusts arise automatically.141 If this is the criterion that sets it apart from constructive trusts of the institutional variety, once again, it is difficult to identify concrete examples of the remedial constructive trust. (d) Interests that Arise Only when Declared as “Repugnant to Legal Certainty . . . and the Rule of Law” What is it about the notion that constructive trusts may not arise automatically that causes us anxiety? Perhaps the harshest critic of the possibility of proprietary interests arising only when declared by the court is Peter Birks.142 In his view, “[w]ere this . . . not wrapped in the impenetrable language of the ‘remedial constructive trust’, it would instantly reveal itself as ugly, repugnant to legal certainty, the sanctity of property and the rule of law”.143 Birks’ judgement that a proprietary interest that does not pre-exist its declaration by a court is necessarily “ugly” does not readily lend itself to analysis. However, his other criticisms are illuminating. The argument that such a proprietary remedy would be repugnant to the demand for legal certainty is, in itself, simply unsustainable. This appears to assume something more: that proprietary remedies that do not arise automatically are discretionary in a strong sense. The issues are linked but not inseparable. If it is true that it is very difficult to accept that discretionary proprietary remedies can give rise to property rights that pre-exist their declaration, it does not follow that nondiscretionary rights must arise automatically. It would be perfectly possible to establish a rule that provided the requisite certainly by holding that a plaintiff was entitled to relief on the proof of particular defined facts but which still provided that the remedy given had only prospective effect.144 Thus, the real objection is not to proprietary remedies that do not arise automatically. Rather, the objection to the remedial constructive trust is that, first, the remedy is discretionary and, secondly, that the proprietary interest granted operates retrospectively to the prejudice of third parties—both features that may be thought to be contrary to the rule of law. (e) Interests that Arise Only when Declared as “Contrary to the Sanctity” of Property It may be true that a proprietary remedy that comes into being only when declared by the court would be repugnant to axiomatic notions of “the sanctity of prop141 AW Scott, The Law of Trusts (3rd edn., Boston, Mass., Little, Brown & Co, 1967) v, 5 § 462 at 3416. This view was also favoured by the majority of the Canadian Supreme Court in Rawluk v. Rawluk (1990) 65 DLR (4th) 161. 142 P Birks, “Property and Unjust Enrichment: Categorical Truths” [1997] NZLR 623 at 641. 143 Ibid. 144 Something that was contemplated by Deane J in Muschinski v. Dodds (1985) 160 CLR 583 at 614. See S Evans, “Property, Proprietary Remedies and Insolvency: Conceptualism or Candour” (2000) 5 Deakin LR 31 at 36.
Exploring the Idea of Remedial Trusts 29 erty”. However, it does not follow that interests that pre-exist judicial declaration may not be similarly stigmatised. Indeed, there are many instances where particular proprietary remedies will be inconsistent with notions of the inviolability of property whether they take effect automatically or not. In considering the threat that the constructive trust poses to “the sanctity of property” commentators have placed too much weight on the issue of the timing of the interest. This has encouraged among English lawyers a feeling, noted by Donovan Waters, that the constructive trust “seems to be adjectival, rather than inherently remedial. It is the description of a result, not a remedy”.145 Burrows, for example, argues that the constructive trust arises automatically in that the court “merely recognises and declares the parties’ pre-court rights” and consequently it cannot be a remedy because remedies “must be either constitutive or coercive”.146 Yet, in many contexts, new interests are brought into being by a constructive trust, in which case the device is, to use Burrows’ terminology, “constitutive” of a new legal relationship.147 That it may be said to arise automatically does not change the fact that the constructive trust is, nevertheless, a remedy. In determining whether it may be regarded as contrary to the “sanctity of property” of property, the real issue is whether it is a redistributive remedy. Ultimately, the significance of the issue of whether the constructive trust arises automatically is not so much practical as ideological. Where a constructive trust is redistributive, the conceptualisation of the interest as arising automatically does little more than obscure the fact that our understanding that property rights are inviolable is being compromised. The characterisation of redistributive constructive trusts as automatic allows them to take on some of the appearance of conventional remedies that enforce pre-existing, consensually created interests. This obfuscation of the judicial role in readjusting property rights reflects an inclination to avoid directly confronting the policy issues that would inevitably arise were it acknowledged that some constructive trusts create new property rights.148 (f) The Merits of Automatic Vesting Given that one consequence of automatic vesting is that the constructive trust will bind third parties prior to any judicial declaration, a decision that the interest arises in this way should follow from a conclusion that its effects would be merited. Unfortunately, there is a danger that the courts may be seduced by the comforting effects of conceptualising the constructive trust as arising automatically 145 D Waters, “The English Constructive Trust: A Look Into the Future” (1966) 19 Vanderbilt L Rev. 1215 at 1253. 146 Burrows, The Law of Restitution at 36. 147 Consider, e.g., AG for Hong Kong v. Reid [1994] AC 324; Lord Napier and Ettrick v. Hunter [1993] AC 713; Cunningham v. Harrison [1973] QB 942. 148 P O’Connor, “Happy Partners or Strange Bedfellows: The Blending of Remedial and Institutional Features in the Evolving Constructive Trust” (1996) 20 MULR 735 at 758.
30 Property and Proprietary Remedies and fail to give adequate consideration to the consequences this would have for third parties.149 (i) Who do these Rights Affect? The question whether automatic vesting is appropriate ought to be determined in light of which parties will be affected by the interest in question. Where there is a purchase of a legal title in property subject to an equitable interest, the conflict between the interests of the beneficiary and those of third party purchasers is regulated by the rule that purchasers must have at least constructive knowledge of the interest before they will be bound. This rule largely absolves those who are free from fault and in most cases probably provides a reasonable accommodation of competing interests. However, this approach is open to criticism. As a matter of moral desert, we may ask whether purchasers who have not taken care, who have merely constructive knowledge of any beneficial interests, should bear the risks of improper dealing by a fiduciary. Moreover, as a matter of efficiency, we may be concerned that this approach is liable to add to the search costs of prospective purchasers. Typically, these constructive trusts arise out of breaches of fiduciary duty. Where the beneficiaries are sui juris they may often be in a better position to prevent such breaches. On the other hand, an objective standard of constructive knowledge may well be more efficient to administer than one that invites the parties to dispute whether a purchaser had actual knowledge of any beneficial interest. Thus, the law probably strikes a reasonable balance in holding that, prior to any curial intervention, the constructive trust binds those who are not bona fide purchasers without notice. (ii) Are these Interests Readily Identifiable by Third Parties? As mentioned, it is difficult to regard remedies that are to some degree discretionary as arising automatically. On the other hand, that a plaintiff’s right does not crystallise automatically into a proprietary interest need not in itself determine whether it binds third parties prior to its crystallisation. However, caution needs to be exercised. Generally, it should not be enough that purchasers know of the facts that give rise to the plaintiff’s action; those facts should be such that it can be relatively easily predicted that, should the matter go to court, a property right will be recognised. This was, at least in part, what Lord Wilberforce had in mind in National Provincial Bank v. Ainsworth150 when he insisted that a proprietary interest in land must be “definable [and] identifiable by third parties”.151 Where the determination of the remedy appropriate to vindicate the plaintiff’s rights is subject to a substantial degree of discretion, the plaintiff’s interest is not precisely “definable” and therefore not readily “identifiable by third parties”. This was a difficulty with the “deserted wife’s equity” that was in question in Ainsworth. It 149 This is well illustrated by Browne-Wilkinson J’s analysis in Re Sharpe [1980] 1 WLR 219. See infra ch. 13.IV.2. 150 [1965] AC 1175 151 Ibid. at 1248.
Exploring the Idea of Remedial Trusts 31 may also be true of rights arising out of the courts’ identification of the “minimum equity to do justice” under the doctrine of proprietary estoppel.152
6. Remedial Constructive Trusts as Redistributive In Re Polly Peck (No 2)153 Nourse LJ defined the remedial constructive trust in terms that provide an indication of why the concept causes so much anxiety in English legal culture. In his view, the remedial constructive trust involves “an order of the court, granting, by way of remedy, a proprietary right to someone, who, beforehand, had no proprietary right”.154 He argued that: You cannot grant a proprietary right to A who has not had it beforehand, without taking some proprietary right away from B. No English Court has ever had the power to do that, except with the authority of Parliament.155
Similarly, Mummery LJ noted with concern that in Canada the constructive trust had developed in such a way that the remedy could be awarded “even though there is no pre-existing right of property”.156 Thus, the more difficult it is to characterise relief given in a particular context as merely enforcing existing rights or a consensual transfer, the more likely that relief will be characterised as “remedial”. For example, although one would never guess it from reading Lord Templeman’s judgment, counsel for the appellant in AG for Hong Kong v. Reid, who were seeking specific recovery of the proceeds of bribes accepted by the respondent, framed their argument in terms of a “remedial constructive trust”.157 This does indeed point to an important difference between North American and English constructive trust jurisprudence. On the other side of the Atlantic, judges and jurists have openly accepted that constructive trusts may give a plaintiff a new proprietary right.158 In contrast, in England, in some contexts the courts have declined to award a constructive trust for the reason that it would be redistributive.159 Moreover, in other contexts, English courts have conceptualised what appear to be redistributive constructive trusts in a manner that suggests that they involve the enforcement of existing proprietary rights.160 Concerns about judicial redistribution of property are at the heart of many of the tensions in the law of proprietary remedies. As we have already seen, this explains much of the importance attached to the issue of the timing of the 152 153 154 155 156 157 158 159 160
See infra ch. 13.IV.1(b). 3 All ER 812. Ibid. at 830. Ibid. at 831. Ibid. at 825. Birks, supra n. 126 at 216. See, e.g., Forest J in Lac Minerals v. Corona Ltd. (1989) 61 DLR 14 at 50. See, e.g. Gissing v. Gissing [1971] AC 886. See, infra, ch. 2.V.2.
32 Property and Proprietary Remedies proprietary interest established in constructive trust cases. For, the characterisation of a redistributive remedy as automatic can serve to obscure the fact that the remedy is creating new property rights, rather than enforcing existing ones. In addition, while there are independent considerations that militate against judicial discretion in the award of proprietary relief, discretion also causes unease because it emphasises the judicial role in determining property rights. An understanding of the acute anxiety raised by redistributive proprietary remedies requires a consideration of the role of property in legal thought. This is the focus of the following two chapters.
2
Redistribution and Property Rites N C O M M O N L A W jurisdictions the judiciary has played a vital role in shaping the institution of property. Judge-made doctrine is in large part responsible for deciding which resources may be owned, which social facts give rise to proprietary rights and obligations, and the very content of those rights and obligations. In large part, this book provides an examination and critique of the manner in which courts deal with such questions of entitlement to resources in the context of the law of proprietary remedies.
I
I . TWO CONCEPTIONS OF PROPERTY
Much that is perplexing in this area of law can be understood only when we appreciate the constraints imposed by understandings of property that we treat as axiomatic.1 The law in this area cannot be explained without first comprehending the meaning ascribed to and the function performed by property in our legal discourse. One particular distinction in the use of the term “property” is crucial in this context. From one perspective, “property” can be understood simply as those rules making up the “law of property”: rules established as the consequence of relatively specific deliberations concerning entitlement to resources in particular circumstances. According to this rigidly positivistic view, “property” refers simply to those norms that deal with the regulation of entitlement to resources—this usage does not imply the existence of some unitary conception of property that dictates the proper objects and content of proprietary protection. Thus, if there is a dispute about entitlement to a particular resource, use of such terms as “property” and “ownership” is unlikely to be very enlightening. Instead, the identification of relevant norms is essentially an empirical matter focused upon previous judicial determinations. This perspective suggests that our analysis of property should be from the “bottom up”.2 We cannot assume any systematic consistency in our approach to property, from which “principles” may be distilled. And any search for such 1 See, e.g., P Stein, “The General Notions of Contract and Property in Eighteenth Century Scottish Thought” [1963] Juridical LR 1. 2 On the distinction between “top down” (deductive) and “bottom up” (inductive) reasoning, see R Posner, “Legal Reasoning from the Top Down and From the Bottom Up” (1992) 59 U Chi. LR 433. For a discussion of the level of abstraction in the context of property see M Radin, Reinterpreting Property (Chicago, Ill., University of Chicago Press, 1993).
34 Property and Proprietary Remedies consistency should be conducted through a process of induction, by examining the concrete rules of our legal system. Moreover, the role of such principles would be in organising our analysis of the law after the event; they would not have a part to play in legal adjudication. In contrast, “property” can be perceived as a concept that plays a fundamental normative role in a legal system. So understood, it is from a conception of property that we can deduce the more particular rules of a given system’s law of property. Moreover, it is to notions of property and ownership to which we turn when we need guidance in hard cases. Which of these understandings better characterises “property” in common law thought? Is it true, as Jeremy Waldron suggests, that a legal culture’s “particular conception of ownership [is] constituted by the property rules of the legal system”?3 Or may it be the case that it is at least as true that the conception of property prevailing in a particular legal system plays a role in constituting that system’s rules governing entitlement to resources?
II . PROPERTY IN ENGLISH LEGAL THOUGHT
1. The Absolutist Conception of Property Property has enjoyed a special place in political thought. Indeed it was often described as the very reason for which governments were created and laws made.4 Notions of fundamental property rights have performed a number of important functions in accounts of the law. Rather than simply denoting a set of conventionally recognised rules that dictate when the state will enforce individuals’ claims to resources, a conception of property is understood to determine these rules.5 First, some have looked to property to indicate the extent to which the state could intervene to legislate to regulate the lives of its subjects—the subject matter of public law. This perspective was particularly evident in constitutional law in the United States at the turn of last century, where, in the context of expanded concepts of “takings” and “due process”, an absolutist conception of property was understood to provide the principal limitation on state power.6
3
J Waldron, The Right to Private Property (Oxford, Clarendon Press, 1988) 52. See, e.g., J Locke, Two Treatises of Government (ed. Peter Laslett, Cambridge, Cambridge University Press, 1988) bk II § 123 at 350. 5 HT Dickson, Liberty and Property (London, Weidenfeld and Nicolson, 1977) 310; P Stein and J Shand, Legal Values in Western Society (Edinburgh, Edinburgh University Press, 1973) 207–11; J Nedelsky, Private Property and the Limits of Constitutionalism: The Madisonian Framework and its Legacy (Chicago, Ill., University of Chicago Press, 1990) 259; C Rotherham, “Conceptions of Property in Common Law Discourse” [1998] LS 41 at 51–3. 6 J Nedelsky, Private Property and the Limits of American Constitutionalism (Chicago, Ill., Chicago University Press, 1990); J Ely, The Guardian of Every Other Right (2nd edn., New York, Oxford University Press, 1992) 3. 4
Redistribution and Property Rites 35 Secondly, a particular notion of property also provides the basis of a theory of how the courts should regulate interaction among its citizens—the subject matter of the private law. In particular, it lends itself to an account of the private law as a system of corrective justice that is independent of concerns of distributive justice. According to this account, property delineates a zone of personal freedom for individuals from their fellow citizens. Thirdly, such a conception of property has served to differentiate the role of the judiciary from that of the legislature, thereby suggesting that the courts’ powers to shape the common law are subject to important constraints. According to this understanding, the role of the courts is to enforce property rights and contracts; the judiciary has no role in redistributing property—this being a matter of distributive justice and, therefore, within the sole province of the legislature.7 Thus, this conception of property forms part of a formalistic vision of law in which policy has no part to play in judicial decision-making.8 The particular conception of property that has performed these different functions is an absolutist one that Thomas Grey refers to as the notion of “thingownership”,9 Tony Honoré as the “basic model” of the “full liberal conception of ownership”10 and J.W. Harris as “full-blooded ownership”.11 This evokes an image of property as the exclusive and inviolable ownership of discrete things, whereby the owner is invested with absolute powers within rigid boundaries.12 An owner is seen as necessarily enjoying all the entitlements in the bundle of rights that is property: the rights to use, to exchange, to derive income, to exclude and to be immune from expropriation. This suggests a conception of the private law whereby the courts should interfere only to protect individuals’ personal security and integrity and property rights. If no one else’s rights of property or personal security are infringed, the courts will not restrain owners in the exercise of their property rights. What is more, those rights are regarded as inviolable, save by legislative intervention, and only then with due compensation.13 The classical liberal paradigm of property represents one of our legal culture’s “dominant sentiments” or “collective dreams”,14 readily gaining acceptance because of its capacity to legitimate the common law. Such an understanding of property is seldom consciously espoused, let alone justified by judges and jurists. 7 8
See Rotherham, supra n. 5 at 51–3. K Llewellyn, The Common Law Tradition—Deciding Appeals (Boston, Mass., Little, Brown, 1960)
38. 9 T Grey, “The Disintegration of Property” in JR Penncock and JW Chapman (eds.), Nomos XXII: Property (1980) 69 at 81. 10 A Honoré, “Ownership” in A Guest (ed.), Oxford Essays in Jurisprudence (Oxford, Oxford University Press, 1961) 107 at 147. 11 JW Harris, Property and Justice (Oxford, Clarendon Press, 1996) 29–30. 12 For an account, see J Singer, “No Right to Exclude: Public Accommodations and Private Property” (1996) 90 North Western University Law Review 1283 at 1453. 13 See, e.g., WH Blackstone, Commentaries on the Laws of England (Chicago, Ill., Chicago University Press, 1979) i, at 135 and ii, at 9. 14 M Loughlin, Sword & Scales: An Examination of the Relationship between Law and Politics (Oxford, Hart Publishing, 2000) 32.
36 Property and Proprietary Remedies Indeed, few participants in our legal culture would have given much thought to, let alone systematically studied, notions of property in the abstract. Rather, through study and practice, lawyers are inculcated with a habitus, a set of dispositions that provides them with a “feel for the game”15—an intuitive grasp of the leeways of legal argument. Part of this ingrained understanding involves an acceptance that judicial redistribution of property rights is improper.
2. The Absolutist Conception of Property in English Law (a) The Rise and Entrenchment of an Absolutist Conception of Property Absolutist notions of private property and freedom of contract gained prominence in the late eighteenth century and achieved their apotheosis in the following century.16 This development reflected both the political ideology of the day and concerns about the legitimacy of the common law in the face of the growing influence of liberal democratic ideals. The period marked, in the words of one commentator, “the consecration of the spirit of unrestricted egoism”.17 In the first part of the nineteenth century the courts declined to hold landowners liable for causing injury to trespassers by setting spring guns on their property.18 In the last decade of the century the House of Lords refused to hold liable a landowner who had drawn off water running under his own land in order to drain a municipality’s water supply.19 Similarly, their Lordships declined to restrict anti-competitive behaviour in the market place.20 As the twentieth century dawned, the judiciary’s response to the age of “collectivism” that Dicey announced was engulfing the nation21 was to take refuge in positivism, a jurisprudential creed that precluded a commitment to any particular form of morality. Yet, in reality, even as laissez-faire notions lost much of their appeal and the modern regulatory state became institutionalised, the judiciary tended to fall back on the classical liberal vision of the private law when faced with hard questions.22 Thus, while the absolutist conception of property suffered a rather different fate in the United States,23 it has retained considerable vitality in English legal thought.
15
See P Bourdieu, Language & Symbolic Power (Cambridge, Polity Press, 1991) 9 and 27. The classic study of this is of course P Atiyah, The Rise and Fall of Freedom of Contract (Oxford, Clarendon Press, 1979). 17 HC Gutteridge, “Abuse of Rights” (1935) 5 CLJ 22. 18 Ivor v. Wilkes (1820) 3 B & Ald 304. See J Finnis, “Intention in Tort Law” in D Owen, Philosophical Foundations of Tort Law (Oxford, Clarendon Press, 1995) 229 at 231–2. 19 Mayor of Bradford v. Pickles [1895] AC 587. 20 Mogul Steamship Co. v. McGregor Gow & Co. [1892] AC 25. 21 AV Dicey, Law and Opinion in England (2nd edn., London, Macmillan, 1914) 211–310. 22 M Horwtiz, The Transformation of American Law 1780–1860 (New York, Oxford University Press, 1977) 256–7; Atiyah, supra n. 16 at 235–6. 23 See infra ch. 3.I. 16
Redistribution and Property Rites 37 (b) Illustrations of the Influence of this Conception The conventional understanding of property in terms of the absolute ownership of particular objects can best be witnessed at work in cases where the judiciary is asked to limit or readjust proprietary entitlements in a manner that conflicts with this orthodoxy. In such cases, the courts will often invoke axiomatic notions of property to provide normative guidance in the resolution of a dispute over rights to possess and use resources.24 Developments in the law of nuisance in the nineteenth century illustrate this. In AG v. Birmingham Corporation,25 the House of Lords indicated that considerations of the public good were irrelevant in determining whether the defendant had committed a nuisance. The fact that enjoining the city’s sewage system might result in its populace being up to their knees in effluent would not sway their Lordships in their decision that this system was causing a nuisance. At issue were the rights of individual citizens—considerations of utility were beside the point. Subsequently, in Shelfer v. City of London Electric Lighting Co.26 the English Court of Appeal found that the defendant’s electricity generating operation’s interference with the plaintiff’s use and enjoyment of his land amounted to an actionable nuisance. The defendant asked that the court, pursuant to the discretion conferred by Lord Cairns’s Act,27 limit the plaintiff to an award of damages in lieu of granting an injunction. The widespread use of the injunction in nuisance cases was still less than a century old and the scope of the remedy had yet to be decisively determined.28 Nonetheless, the Court rejected the defendant’s plea, concluding that limiting the plaintiff to damages would amount to a taking of property rights—an impermissible result. Lindley LJ reasoned that “[e]xpropriation, even for a money consideration, is only justified where Parliament has sanctioned it”.29 It is apparent that the Court of Appeal reached its conclusion that what was asked involved an interference with the plaintiff’s property rights by starting from the premise that those rights were absolute. While the influence of these assumptions has diminished somewhat in recent years, they still prove capable of exerting an influence. This was apparent, for example in Gissing v. Gissing,30 where the House of Lords rejected a wife’s claim for a proprietary interest to reward her contributions to the matrimonial home. Lord Morris asserted that “[a]ny power in the court to alter ownership must be found in statutory enactment”.31 Again, the nature of property and its role in
24
See also G Samuel, “Property Notions in the Law of Obligations” [1994] CLJ 524 at 539. (1859) K & J 528. 26 (1895) 1 Ch. 287. 27 The Chancery Amendment Act 1858. 28 See J McLaren, “Nuisance Law and the Industrial Revolution—Some Lessons from Social History” (1983) 3 OJLS 155. 29 Supra n. 26 at 316. 30 [1971] AC 886. 31 Ibid. at 898. 25
38 Property and Proprietary Remedies delineating the province of the judiciary from that of the legislature was assumed without discussion. More recently, a similar disinclination to expropriate property rights was apparent in the House of Lords’ decision in Moorgate Mercantile Ltd v. Twitchings.32 The plaintiff, the owner of a motor vehicle in the possession of another under a hirepurchase agreement, had failed to register its interest under a scheme run by the industry. Subsequently, the hirer had sold the car on to the defendant, which had consulted the register in question. When the plaintiff sued the defendant for conversion it was asked whether the defendant took the car subject to the plaintiff’s rights. In finding for the plaintiff, Lord Fraser argued that “an owner of property is entitled to be careless with it if he likes”.33 Thus, in his view, it was axiomatic that property could pass only with consent and that fault was not a basis for denying proprietary protection.
III . THE INFLUENCE OF THESE UNDERSTANDINGS ON THE LAW OF PROPRIETARY REMEDIES
Absolutist notions of property have done much to shape the substance and form of the English law of proprietary remedies. Their influence is apparent in Mummery LJ’s view in Re Polly Peck (No 2)34 that a constructive trust characterised as remedial should be denied on the basis that the English judiciary has never had the power to take away another’s proprietary rights.35
1. The Influence of Positivism Amongst jurists, the philosophy underlining the approach to proprietary remedies favoured in English law has received its clearest articulation in the work of Peter Birks. At first glance, Birks’ analysis of the area is marked by a refusal to offer a normative account of property. Instead, he has claimed that property is a concept that “ought never to be deconstructed”.36 In his view, “[t]he conceptual approach” that involves simply asking whether something is someone’s property “creates a barrier between the law and an impossibly difficult political question”.37 Thus, he has argued that: The question whether a claim deserves priority in insolvency is an impossible question. By contrast, the questions whether the plaintiff has a proprietary interest, and, if so, from 32 33 34 35 36
[1977] AC 890. Ibid. at 925. [1998] 3 All ER 812 See supra ch. 1.III.6. P Birks, “The End of the Remedial Constructive Trust?” (1998) 12 Trust Law International 202 at
214. 37
Ibid.
Redistribution and Property Rites 39 what moment that interest takes its priority, are technical conceptual questions, which a lawyer can hope to answer. . . . Lawyers have no special competence in distributive justice. They cannot be expected to say who deserves what. But, given a decent law library and some time to do the work, a lawyer can be expected to say . . . whether on given facts a proprietary interest has arisen, and, if so, precisely of what kind.38
On the face of it, this statement represents a plea for positivism, and it is vulnerable to all the criticisms usually directed against that form of legal philosophy. In particular, positivism offers no account of how the law may deal with novel cases, decide between conflicting authorities or reconsider existing rules.39 In the context of the law of proprietary remedies, this represents a very significant failing, as this has proved to be a particularly dynamic and contested field. Birks’ position is hardly unusual. The mentality, characterised by Robert Stevens as “substantive formalism”, that prevailed in English legal culture for much of this century, did much to limit the evolution of the constructive trust.40 The positivism of this period discouraged the formulation of a systematic justificatory theory for the remedy that might have provided a basis for its rational development. In addition, the slavish adherence to precedent that flourished at this time ensured that any incremental growth of the doctrine was sluggish at best.41
2. The Persistence of Absolutist Assumptions Despite his strictures against normative reasoning, in practice Birks has never been so constrained. He has consistently shown an inclination to fall back upon the axiom that the judiciary cannot create property rights.42 On the one hand, this has encouraged him to reject new forms of redistributive proprietary remedies.43 In addition, it has led him to conceptualise existing examples of such remedies as something other than redistributive through the notion of the “proprietary base”.44 An acceptance of the possibility that the courts might redistribute property rights would bring with it a responsibility for justifying such intervention—something for which English courts have shown little taste. As a result of the failure of 38
Ibid. at 214–15. See Rotherham, supra n. 5 at 45–7. 40 R Stevens, Law and Politics: The House of Lords as a Judicial Body, 1900–1976 (London, Weidenfeld and Nicolson, 1979). See also A Paterson, The Law Lords (London, Macmillan, 1982); Atiyah, supra n. 16 at 660–71. 41 See RH Maudsley, “Restitution in England” (1966) 19 Vanderbilt L Rev 1123 at 1123–4. 42 See, e.g., P Birks, “Proprietary Rights as Remedies” in P Birks (ed.), The Frontiers of Liability (Oxford, Oxford University Press, 1994) 214 at 218; ii, “Proprietary Restitution: An Intelligible Approach” (1995) 9 Trusts Law International 43 at 44. 43 See, e.g., his opposition to the award of constructive trusts in the context of restitution for wrongs: P Birks, An Introduction to the Law of Restitution at 387–9. 44 See infra ch. 15. 39
40 Property and Proprietary Remedies the judiciary to justify its treatment of this area according to consequences, the analysis of proprietary rights has tended to remain resolutely bipartite—focused on the rights of the plaintiff and the defendant alone. The result is that little thought is given to the interests of third party creditors. Of course, it would not be true to say that policy considerations are never taken into account. The courts have, at times, proposed restricting the use of proprietary remedies in the context of vitiated transfers on the basis of fairness to creditors.45 However, this concern has not been consistently pursued and often the courts have extended the application of proprietary remedies with little thought for third parties.46
IV . ORTHODOX AND REDISTRIBUTIVE PROPRIETARY REMEDIES
Proprietary remedies may be divided into those that function to protect existing property rights or to enforce consensual transfers and those that create new property rights without reference to the intention of the owner. It is the latter form of remedy that causes so much unease in English legal culture. Thus, trusts that vindicate pre-existing property rights and voluntary transfers tend to be thought of as something other than “remedial”, in contradistinction to those constructive trusts that give rise to new property rights.47
1. Orthodox Proprietary Remedies The place of the constructive trust in remedying breaches of duties arising under express trusts is obvious enough. According to contemporary understandings of equitable proprietary rights, where there is an existing division of legal and beneficial ownership, the imposition of a constructive trust upon a third party in possession of trust property represents nothing more than the enforcement of an extant proprietary relationship. Here, the constructive trust may be seen as “simply part of the express trust package deal”,48 and the device is no more than a reflection of the duty that all the world, bar bona fide purchasers of a legal interest without notice, has to respect equitable proprietary rights. Constructive trusts give rise to new property rights wherever they are employed beyond the context of enforcing rights over specific assets arising under express 45 See, e.g., Westdeutsche Landesbank Girozentrale v. Islington LBC [1996] AC 669 at 704 per Lord Browne-Wilkinson and 683–4 per Lord Goff. 46 See, e.g., Lord Napier & Ettrick v. Hunter [1993] AC 713; AG for Hong Kong v. Reid [1994] 1 AC 324. 47 See, e.g., R Goff and G Jones, The Law of Restitution (4th edn.) at 68 (distinguishing between proprietary remedies and pure proprietary claims); A Oakley, Constructive Trusts at 21; M Cope, Constructive Trusts (Sydney, Law Book Co., 1992) at 17; J Glover, “Equity, Restitution and the Proprietary Recovery of Value” (1991) 14 UNSW LJ 247 at 266. See supra ch. 1.II.2(b)(ii). 48 S Gardner, An Introduction to the Law of Trusts (Oxford, Clarendon Press, 1990) 232; CEF Rickett, “The Classification of Trusts” (1999) 18 NZULR 305 at 320.
Redistribution and Property Rites 41 trusts. Yet, not all such applications of the device are commonly characterised as remedial or thought of as particularly threatening. Constructive trusts that regulate consensual agreements give us little cause for pause.49 This is true of the constructive trust that arises in the context of the sale of land.50 The effect of the device in that context is to determine the point in time at which title is transferred—an issue that is inevitably somewhat arbitrary and one on which classical liberal thought is agnostic. Something similar may be said of constructive and resulting trusts said to arise where a transferor’s intent is vitiated in some way. In this context, it is argued that, in some circumstances while legal title passes, the transferee may hold the property on trust for the transferor.51 The conclusion that mistakes that vitiate the intent of the transferor should prevent property passing could be reconciled with the emphasis placed on the autonomy of the individual in the ideology that underlies classical liberal notions of property and contract, although it is not demanded by that ideology. Similarly, the Quistclose trust doctrine can be and generally is reconciled with orthodoxy through the argument that it involves the enforcement of the transferor’s will that the transferee receive only a limited right of property.52 Judicial discomfort with the power to use the constructive trust to alter property rights is apparent in the treatment of disputes over the distribution of property following the breakdown of intimate relationships. The common intention constructive trust effectively enforces a promise by legal owners to hold all or part of their property for the benefit of another.53 As such, it is entirely consistent with axiomatic notions of property. Beyond this, the judiciary traditionally disavowed all power to redistribute property other than according to the will of the original owner. This view still holds sway in England. While other common law jurisdictions have moved away from this orthodoxy, they have, in the face of absolutist notions of property, struggled to articulate satisfactory normative foundations upon which to construct their new doctrines. Proprietary relief as a response to vitiated transfers, the Quistclose trust and the traditional approach to family property disputes can be regarded as consistent with axiomatic notions about property. These may be viewed as being “remedies” only in a weak sense: they involve the enforcement of consensual transfers or the recognition of a lack of “real” consent, rather than a forced redistribution of property rights. This does not mean that they are not or should not be controversial. The provision of proprietary relief in these circumstances is often difficult to justify, particularly given its consequences on third parties. Nonetheless, these remedies do no give rise to the acute anxiety that redistributive remedies are apt to generate.
49 50 51 52 53
See supra ch. 1.II.2(b)(ii). See infra ch. 8.II.1. See, e.g., Chase Manhattan Bank v. Israel British Bank [1981] Ch. 105. See infra ch. 6. See infra ch. 7.I.3. See, infra ch. 10.II.1.
42 Property and Proprietary Remedies 2. Redistributive Proprietary Remedies The other proprietary remedies examined in this book have a more obviously redistributive hue. By virtue of the doctrine of tracing, owners who initially enjoyed rights over certain assets are permitted to assert those rights over assets that did not previously belong to them. Similarly, constructive trusts for enrichment by wrongs, the acquisition of proprietary rights by subrogation, and proprietary remedies arising to prevent over-indemnification all enable plaintiffs to assert rights for which they never bargained. In addition, while proprietary estoppel is often concerned with enforcing informal agreements and promises, it is also used to prevent owners unconscionably taking advantage of another’s mistake.54 Finally, the numerous examples of liens arising by operation of law cannot be accounted for in terms of conventional notions of property. Each of these doctrines, in substance, provides for the non-consensual readjustment of proprietary rights and so runs counter to the conventional paradigm of property. How do we account for the presence of such doctrines when the understanding of property that runs deep in our legal culture should preclude their existence? The answer lies in an appreciation of the manner in which these doctrines are conceptualised.
V . REASON AND RITUAL IN THE LAW OF PRORIETARY REMEDIES
1. Ritual in Legal Discourse How are we to understand the rhetoric that pervades the law of proprietary remedies? The formal reasoning employed in these doctrines explains the relief provided in terms that are often so obviously fictional or metaphorical that it is difficult to view them as intelligible.55 However, it would be surprising if such elaborate doctrines were not meaningful on some level. To understand this discourse and to appreciate its power we must grasp its symbolic dimension and its performative function. One way in which we can do this is by understanding these doctrines as rituals. Ritual is by no means an uncommon feature of legal argument. Anthropologists identify it as a characteristic of the legal discourse of cultures generally regarded as more primitive than our own.56 Closer to home, it has often been observed that the judgments of the French Cour de Cassation are disingenuous in their presentation of decisions as a process of logical deduction from principles that permits 54
See, infra ch. 13.II. On the meaningless quality of much property talk, see K Gray, “Equitable Property” (1994) 47(2) CLP 157 at 159. 56 See, e.g., M Gluckman, The Judicial Process Among the Barotse of Northern Rhodesia (Manchester, Manchester University Press, 1955) 310. 55
Redistribution and Property Rites 43 no scope for judicial discretion and thus removes the dispute from moral and political controversy.57 Another example of ritual was provided by the use of fictions in English law to enable novel claims to be brought within the context of the existing forms of action.58 While we abandoned those forms of action and prohibited the use of fictions in pleading last century, the struggle to free ourselves from their influence has been a long one.59 Rituals colour our view of the world. They form part of, and take their meaning from, the conceptual systems we use to give meaning to our experiences.60 In particular they play a role in the constitution and maintenance of certain key social symbols in a struggle against indeterminacy.61 At times, rituals emphasise, and so reinforce, particular concepts and categories that are central to a symbolic order. We can see this in ceremonies such as traditionally found at weddings, in royal coronations, and in much of the display found in courts of law.62 More important for the purposes of this study, however, are rituals that play a role in defusing the conflict that can arise when we find it difficult to reconcile particular experiences or aspirations with our world vision.63 At such junctures, rituals can allow us to transgress, in substance, the categories we use to organise and understand our social order, while suppressing the nature of that transgression. What is, in substance, a departure from established norms is through ritual presented in a form that complies with the conventions in question.64 Through this process, the order that is apparently under threat may actually be reaffirmed.65 These rituals accommodate the urge for continuity and the desire for change: change is permitted, provided it is not acknowledged.66 It was in this vein that Lon Fuller observed that fictions and related devices serve to reconcile legal rules and decisions with premises to which a legal culture is committed.67 Where the result judges or jurists would like to endorse diverges from a 57 JP Dawson, Oracles of Law (Ann Arbor, University of Michigan Law School, 1968) 375; K Zweigert and H Kotz, An Introduction to Comparative Law (2nd edn., Oxford, Clarendon Press, 1992) 127. 58 JH Baker, An Introduction to English Legal History (London, Butterworths, 1990) 230–2. 59 FW Maitland, The Forms of Action at Common Law (ed. AH Chaytor and WJ Whittaker, Cambridge, Cambridge Unitversity Press, 1936). 60 G Homans, “Anxiety and Ritual: The Theories of Malinowski and Radcliffe-Brown” (1941) 43 American Anthropologist 164 at 172. 61 S Falk Moore, Law as Process (London, Routledge and Kegan Paul, 1978) 40; E Hobsbawn and T Ranger, “Inventing Traditions” in E Hobsbawn and T Ranger (eds.), The Invention of Tradition (Cambridge, Cambridge University Press, 1983) 1 at 9. 62 On law as ritual, see S Falk Moore and B Myerhoff, Secular Ritual (Amsterdam, Van Gorcum, 1977) 2. 63 See e.g., V Turner, Schism and Continuity in African Society (Manchester, Manchester University Press, 1957); M Gluckman, Order and Rebellion in Tribal Africa (New York, Free Press, 1963). 64 R Rappaport, Ritual and Religion in the Making of Humanity (Cambridge, Cambridge University Press, 1999) 130. 65 C Bell, Ritual: Perpectives and Dimensions (Oxford, Oxford University Press, 1997) 65; E Leach, Culture and Communication: The Logic by which Symbols are Connected (Cambridge, Cambridge University Press, 1976). 66 P Bourdieu, The Logic of Practice (Cambridge, Polity Press, 1990) 238. 67 LL Fuller, Legal Fictions (Stanford, Cal., Stanford University Press, 1967) at 51–3.
44 Property and Proprietary Remedies fundamental premise, rather than questioning the validity of that premise, they will manipulate the formal expression of the decision so as to disguise its transgressive quality. These devices ensure that, at the level of formal expression, the law adheres to premises we regard as sacred and, thus, allow us to avoid fundamentally rethinking our normative commitments.68 In this way, in the terms of Thomas Kuhn’s analysis of the processes of accommodation that take place between experience and theoretical structures in science, the appearance is maintained that what is being done is “normal” law and not a “paradigm shift” requiring a change in our “world view”.69
2. Property Rites Generally, an inclination toward the metaphysical is associated with law in its more primitive forms. We might think that, by now, English law must have shaken off recourse to such rituals. And, it is fair to say that, in general, argument and deliberation in contemporary common law discourse proceed in a reasonably open fashion. However, this is relative; and it is certainly less true of the analysis of proprietary remedies in English law. In this field, there tends to be little reference to policy, and legal argument has a highly formal quality and a tendency toward the metaphysical that is commonly associated with ritual.70 While we reject many of the excesses of our ancestors, some arcane forms of rationalisation still have us in their thrall. Through fiction and metaphor, specific instances of redistribution are secreted in the interstices of existing doctrines that provide for the enforcement of existing property rights and of consensual decisions to transfer property. This process has excused us from developing principles that would, first, allow us to redistribute property rights openly and, secondly, establish the proper limits of redistribution. It is in light of the symbolic significance of property that we can appreciate the rhetoric found in the jurisprudence of proprietary remedies. This explains why the discomfort engendered by the idea that the judiciary might create or readjust property rights is nowhere more apparent than in the discourse surrounding doctrines that actually permit such intervention. Thus, we find that doctrines that in substance appear to transgress the prohibition against redistribution are wrapped in metaphors, fictions, estoppels and evidential presumptions. These devices suppress the reality that property rights are being readjusted by effecting the appearance that what is involved is simply the enforcement either of an owner’s pre-existing property rights or of a consensual transfer.
68 O Barfield, “Poetic Diction and Legal Fiction” in M Black (ed.), The Importance of Language (Englewood Cliffs, NJ, Prentice Hall, 1962) 51 at 60–4. 69 Cf. T Kuhn, The Structure of Revolutions in Science (2nd edn., Chicago, Ill., University of Chicago Press, 1970). 70 Bell, supra n. 65 at 65.
Redistribution and Property Rites 45 One way this is achieved is through notions of transmutation and substitution.71 Thus, in tracing, an asset over which a plaintiff seeks to assert rights is treated as if it were an asset that the plaintiff already owned. In a similar vein, in subrogation, plaintiffs are treated as if they were someone else and then permitted to exercise that other person’s proprietary rights. Similar effects are achieved through the use of fictions. Thus, in an alternative description of subrogation, the doctrine is expressed in terms of assignment, as if plaintiffs had themselves bargained for security. We can see this phenomenon elsewhere. For example, the doctrine of prescription came to incorporate the fiction of a “lost ancient grant”, suggesting that it was essentially concerned with the consensual transfer of property.72 Another example is the manner in which the American courts developed the doctrine of the “attractive nuisance” at the turn of the century. This provided, through the artifice of a fictional invitation, liability in negligence for landowners for injury suffered by children who were, in reality, trespassers.73 Evidential devices are also used to maintain conformity with axiomatic notions of property on a formal level, while providing for something quite different in substance. For example, in enrichment by wrongs, we see the use of evidential presumptions manufacturing the appearance of consent. The law presumes fiduciaries who accept bribes to have intended to hold them on trust for their principals.74 Similarly, estoppels may be used to prevent owners from relying on their rights without requiring that those rights be formally qualified.75 Finally, English courts often convert obligations to transfer specific assets into ownership through the use of the doctrine of conversion that gives effect to the maxim that “equity regards as done that which ought to be done”. Through this method, the common law transforms contractual rights that the civilian law treats as purely personal into proprietary interests76—a result that is often contrary to the parties’ immediate intention.77 Even more problematically, this maxim is 71 We may compare these doctrines with rituals of transubstantiation found in religious ceremonies. A familiar example is the Catholic Eucharist, where bread and wine represent the body of Christ. In addition, in part reflecting complex symbolic understandings and in part economic necessity, in the sacrificial ceremonies of many cultures one thing stands in the place of another. Thus, in some cultures a sheep or goat is used as a substitute for a bull. More striking is the triumph of economy and imagination of the Nuer of Sudan, for whom a cucumber stands in for an ox. See, R Frith, Symbols: Public and Private (London, George Allen and Unwin, 1973) 179 and 415. 72 WH Blackstone, supra n. 13, ii at 263–6. See AWB Simpson, A History of the Land Law (2nd edn., Oxford, Clarendon Press, 1986) at 109. 73 This fiction was subsequently abandoned in the First Restatement of Tort. 74 AG for Hong Kong v. Reid [1994] 1 AC 324. 75 J Nicholson, “Owning and Owing: In what circumstances will the Responsibilities of Ownership Preclude or Postpone the Assertion of the Rights of an Owner?” (1988) 16 MULR 784. 76 A Scots lawyer reflecting on constructive trusts, remarks, “for the English lawyer this transformation is so obvious, so close to his eye, that he often hardly realises that it is a transformation, while for the Scots lawyer—or at least for many Scots lawyers—the transformation seems so strange as to be incomprehensible and unaccountable”. See G Gretton, “Constructive Trusts: I” (1997) 1 ELR 281 at 283. See also K Barker, “Rescuing Remedialism in Unjust Enrichment Law: Why Remedies are Right” [1998] CLJ 301 at 305. 77 See, e.g., Walsh v. Lonsdale (1882) LR 21 Ch. D 9.
46 Property and Proprietary Remedies sometimes combined with other legal rites to create entitlements never contemplated by the parties. Thus, in AG for Hong Kong v. Reid,78 when the maxim was added to the counterfactual evidential presumption that the fiduciary intended to hold the benefit in question on trust for his principal, the bribe became the principal’s property. Similarly, in Lord Napier & Ettrick v. Hunter,79 the equitable lien granted to prevent an assured’s over-indemnification was said to arise from an implied term in the contract of insurance that was then, by virtue of the maxim, converted into a proprietary interest. Notions of tracing and subrogation, fictions of consent, evidential devices and the doctrine of conversion are employed to redistribute property rights. Yet in each, a departure from the conventional paradigm of property, suggesting a shift from the province of the judiciary into that of the legislature, is obscured. Rhetoric is employed to provide the illusion that these doctrines involve the observance of existing entitlements, rather than a redistribution of the parties’ rights and obligations. In substance, these doctrines depart from, and thus threaten to undermine, the orthodox understanding of property. Yet, at the same time, the rhetorical strategies employed disguise this departure and draw upon the symbolic power of the classical liberal understanding of property to insulate these doctrines from controversy. In these rites of denial, in the very process of transgression, property is affirmed as a powerful cultural symbol—marking an inviolable boundary between law and politics. Thus, the rituals with which we are concerned are comprehensible not in terms of explanatory logic but as performative acts.80 Take, for instance, the doctrine of tracing and the explanation that plaintiffs are entitled to a proprietary remedy because they are able to “follow” an asset into another asset. We may infer that this is a mere conclusion, a statement of a legal outcome, rather than a true explanation for that outcome: for, to the extent that it is treated literally as an explanation, it is metaphysical nonsense. The power of this explanation lies in its role as a speech act. It not so much an explanation of something that has taken place outside the court, as an act that confers legitimacy upon a judicial redistribution of property by denying its transgressive nature.
3. Rituals and the Normative Framework of the Private Law In our legal culture, property is not seen merely as the aggregate of isolated decisions about entitlement to resources. Instead we embrace a more abstract conception of property that forms part of a conceptual system that organises and gives meaning to our private law. It is part of a normative order in which notions of 78
[1994] 1 AC 324. [1993] AC 713. 80 JL Austin, How to do Things with Words (2nd edn., Cambridge, Mass: Harvard University Press, 1975); J Searle, Speech Acts (Cambridge, Cambridge University Press, 1969). For a discussion of the application of these principles to the study of ritual, see Bell, supra n. 65 at 68–72. 79
Redistribution and Property Rites 47 autonomy, consent, and fault are invested with a specific normative significance and take on a particular meaning. These concepts both reflect and influence our understanding of the proper extent of the freedom of the individual from the demands of others. In the process, they often allow us to interpret the law not as just an exercise of ad hoc discretion or the application of isolated rules, but as a moral order. It is this normative order to which the rituals of tracing, subrogation, fictional consent, evidential presumptions and estoppels seek to connect us. Their power as speech acts depends on the extent to which they succeed in this endeavour. It is difficult to reconstruct the process by which our law of proprietary remedies developed into the highly formalistic state we find it in today. Certainly it was a largely unconscious process. For, as Fuller noted, fictions and related devices that disguise departures from hallowed premises probably delude those who invent them as much as those who are subsequently exposed to them.81 Similarly, anthropologists argue that many rituals would be ineffective if their real meaning or function were transparent to their participants.82 Just as a particular notion of property is embedded in well-trained lawyers’ practical sense of what is appropriate in legal discourse, they will equally acquire a feel for techniques for sidestepping the apparent constraints of this notion that are intuitively felt to be legitimate. Yet, ultimately, there is no escaping the reality that the fictions, metaphors and evidential devices in question are artifices: their connection with the normative structure of our private law is contrived. While these rituals suggest the continuing importance of a particular conceptual framework in our legal culture, they also suggest that this framework provides insufficient resources to explain and justify our normative intuitions. Fuller observed that “the fiction is the cement that is always at hand to plaster together the weak spots in our intellectual structure”.83 We should consider whether this crumbling edifice is in need of a more thorough restructuring. Perhaps the time has come to rethink some of our most fundamental assumptions about the private law.
4. The Cost of these Rituals We may ask whether such rituals really provide a cause for concern. Indeed, may they not offer an essential service in accommodating necessary change, while enabling society to retain faith in the common law? However, the function performed by these rituals comes at a cost. As the studies of different remedies that follow demonstrate, the obfuscatory approach taken in this area means that innovations in the law of proprietary remedies are neither rationally scrutinised nor characterised in terms that would aid the future application and development of the doctrines in question. 81 82 83
Fuller, supra n. 67 at 54 and 58. Frith, supra n. 71 at 163; Bourdieu, supra n. 15 at 116. Fuller, supra n. 67 at 51.
48 Property and Proprietary Remedies On the other hand, resort to ritual is not found in equal measure in different common law cultures. The following chapter considers developments in other jurisdictions that provide for a more instrumentalist approach to property.
3
The Legacy of Legal Realism: Instrumentalist Approaches to Property to utilise ritual in the law of proprietary remedies is largely related to a legal culture’s commitment to a vision of the judge-made private law as system of corrective justice that is autonomous from politics. To a large degree, this vision of the law was abandoned in American legal thought in the wake of the legal realist movement.1 The rejection of absolutist understandings of property and contract were at the heart of the rise of a new legal methodology that eschewed formalism for a more openly prescriptive style of argument. This has led to an on-going debate regarding the legitimacy of proprietary remedies—a debate that is quite different in character from the treatment of the issue in England. Moreover, trends in Australian, New Zealand and Canadian law suggest a departure from the conventional English approach toward an understanding closer to that found in the United States. These developments suggest a willingness to engage in a more frankly normative approach to legal justification, to transcend unquestioned assumptions inherited from another age, and to accept responsibility for defining the meaning of property.
T
HE TENDENCY
I . PROPERTY IN AMERICAN LEGAL THOUGHT
1. The Rise and Fall of Universal Principles of Common Law The notion that the private law was based on immutable principles of property and freedom of contract exercised great influence in American legal thought from the latter part of the last century until the New Deal. In this period, American legal scholars endeavoured to rationalise the law by revealing immanent principles from which could be deduced more concrete legal rules. Notions of private property and freedom of contract tended to provide much of the conceptual framework of the schemes that were produced in this way.2 In part, this approach can be 1 See generally M Hortwitz, The Transformation of American Law 1870–1960: The Crisis of Legal Orthodoxy (New York, Oxford University Press, 1992). 2 W Wiecek, The Lost World of Classical Legal Thought: Law and Ideology in America, 1886–1937 (New York, Oxford University Press, 1998) 10, 38–41 and 89–93; W Twining, Karl Llewellyn and the Realist Movement (London, Weidenfeld and Nicolson, 1973) 11–14. On the notion that the study of law was analogous to Euclidean geometry in that the whole field of knowledge could be deduced from certain basic axioms, see C Langdell, A Selection of Cases of the Law of Contracts (Boston, Mass., Little, Brown & Co., 1871), pp. vi–vii.
50 Property and Proprietary Remedies attributed to the rise of science in the nineteenth century, which meant that in the United States, as in England, scientific methods came to be seen as a model for the analysis of the law, as well as for economics and the social sciences.3 In addition, American legal culture was shaped by a number of influences not present on the other side of the Atlantic. For one thing, in a multi-jurisdictional country, the notion of universal legal principles was particularly enticing both because it offered the promise of harmonising the common law and because it allowed academics to write for a national audience.4 Furthermore, American legal discourse had been conditioned by the rights consciousness that flourished as a result of a century of judicial review of legislative action.5 In any event, as contemporary observers noted, Americans showed a greater propensity for abstract theorising than did their empiricist English cousins.6 Thus, strange as it may seem today, the seriousness with which American scholars embraced the ideal of legal science and the vigour with which they endeavoured to reveal the systematic structures that supposedly underlay the law was a cause for amusement for their more pragmatic English counterparts.7 The understanding that the common law was based on fundamental legal principles rather than the pronouncements of particular courts found expression in Justice Story’s judgment in Swift v. Tyson8 in the mid-nineteenth century. Story concluded that, when resolving a commercial dispute, the federal judiciary was not bound by determinations on the common law made by the judiciary of the state in which the action arose. Instead the federal courts were to apply “general principles of the common law”.9 By the turn of the century this view was threatened by a more positivistic perspective, exemplified by the analysis of Oliver Wendell Holmes in the Supreme Court in Southern Pacific v. Jensen.10 In his influential dissenting judgment, Holmes ridiculed Story’s position, arguing that, “[t]he common law is not a brooding omnipresence in the sky, but the articulate voice of some sovereign or quasi-sovereign that can be identified”.11 In constitutional law, Holmes emphasised the policy content of judicial decision-making and urged that this should be
3
N Duxbury, Patterns of American Jurisprudence (Oxford, Clarendon Press, 1995) 10–25. For a typically frank assessment see K Llewellyn, “Through Title to Contract and a Bit Beyond” (1938) 15 NYULQR 159 at 159–60. 5 A de Toqueville Democracy in America (London, Fontana, 1994) at 237–40; P Atiyah and R Summers, Form and Substance in Anglo-American Law (Oxford, Clarendon Press, 1987) 238–9. 6 See, e.g., de Toqueville, supra n. 5, 438. For a similar observation by Emerson, see HS Commager (ed.), Britain Through American Eyes (London, The Bodley Head, 1974) 272. 7 See, e.g., Sir Frederick Pollock, Principles of Contract (9th edn., London, Stevens, 1921) at pp. x–xi; cited in P Atiyah, The Rise and Fall of Freedom of Contract (Oxford, Clarendon Press, 1979) 661. 8 16 Pet 1 (1842). 9 See e.g. M Horwitz, The Transformation of American Law 1780–1860 (New York, Oxford University Press, 1977) 245. 10 244 US 205 at 222 (1917). 11 Ibid. at 222. 4
The Legacy of Legal Realism: Instrumentalist Approaches to Property 51 candidly acknowledged.12 Holmes’ views gained wide acceptance, and the Supreme Court eventually overturned Swift v. Tyson in 1938.13
2. The Shift to a Positivist Understanding of Property The evolution of attitudes towards property in American legal thought is evident in the treatment of the question of which resources were afforded proprietary protection. A tension is apparent in the different judgments in the Supreme Court’s decision in International News Service v. Associated Press,14 where the Associated Press sought an injunction in order to prevent a competitor from “stealing” its news. Justice Pitney argued for the majority that, because it was a valuable resource, the plaintiff’s information amounted to property and should be protected as such. Justice Holmes, while siding with the majority, refused to accept his colleague’s method of resolving the matter. Holmes commented: “[p]roperty, a creation of law, does not arise from value, although exchangeable—a matter a fact. Many exchangeable values may be destroyed intentionally without compensation. Property depends upon exclusion by law from interference.”15 Realist scholars subsequently welcomed Holmes’ positivism. It was in this vein that Felix Cohen branded as “transcendental nonsense” the tendency to justify the protection of a novel interest on the basis that it simply was somehow inherently proprietary, rather than by weighing the consequences of imposing a particular degree of protection.16 The recognition of rights in respect of new forms of intangible resources and the characterisation of contractual rights as property encouraged a move beyond the paradigm of property as absolute rights over a particular object.17 While it was convenient to characterise new kinds of intangible wealth as property, it was clear that the protection afforded to resources such as trade-marks and businesses’ good-will often had to be less than absolute.18
12 GE White, Justice Oliver Wendell Homes: Law and the Inner Self (New York, Oxford University Press, 1993) 379. 13 See Erie RR v. Tomkins 304 US 64 (1938). 14 248 US 215 (1918). 15 Ibid. at 246. See also Holmes’ analysis in De Nemours Powder Co. v. Masland 244 US 100 at 102 (1917). 16 F Cohen, “Transcendental Nonsense and the Functional Approach” (1935) 35 Colum L Rev. 809 at 814–17. 17 K Vandervelde, “The New Property of the Nineteenth Century: The Development of the Modern Concept of Property”, (1980) 29 Buffalo L Rev. 325. According to the New Hampshire Supreme Court, “[a] refusal to pay a debt is an injury to the property of the creditor”: Thompson v. Androscoggin River Improvement Co. (1874) 54 NH 544 at 552. Property reasoning was also used to overcome the third party beneficiary rule: Lawrence v. Fox 20 NY 268 (1859)—making the defendant promisor a constructive trustee of the benefit of the promise for the third party beneficiary. See AJ Waters, “The Property in the Promise: A Study of the Third Party Beneficiary Rule” (1985) 98 Harv. L Rev. 1109 at 1196. 18 Vandervelde, supra n. 17, at 341.
52 Property and Proprietary Remedies 3. Notions of Property and the Law of Eminent Domain The role that private property was perceived to play in American constitutional law is apparent in the jurisprudence of eminent domain. The traditional understanding of that doctrine required that “property must be actually taken, in the physical sense of the word”19 before a right to compensation would arise. This understanding— which still prevails in England20—allows for the maintenance of clear, if somewhat arbitrary, limits on such compensation clauses. It suggests that the smallest physical appropriation or invasion would require compensation, while regulation that might wipe out the economic value of property demands no such response. However, in the later part of the nineteenth century, American jurists lamented that this conception of property provided insufficient protection for the individual against state power. John Lewis, a constitutional law professor, argued that the solution was to “look beyond the thing itself, beyond the mere corporeal object, for the true idea of property”.21 Here, again, we see the influence of a conception of property as a prelegal principle setting fundamental limits on state action. In the late nineteenth century, the Supreme Court indicated that it was not prepared to read takings clauses in their “narrowest sense” as requiring physical expropriation.22 This viewpoint was consolidated in Pennsylvannia Coal Co. v. Mahon,23 where Oliver Wendell Holmes introduced the concept of what has become known as “regulatory takings”. In Holmes’ view, even if their land remained physically untouched, owners might be entitled to compensation if state regulation reduced the value of that land by restricting owners’ rights to exploit it commercially. At the same time, he recognised that, unless the hands of the state were to be tied completely, not every regulation that impacted on the value of someone’s land could be categorised as a taking.24 While Holmes rejected the physicalist paradigm of property, he did not conceive of himself as searching for the “true idea of property”. Rather than illuminating some pre-political boundary, he understood the court to be pragmatically setting the limits of state interference with privately owned resources. What constituted a taking was, in Holmes’ words, “a question of degree”: a matter of policy.25 In Holmes’ thought, neat applications of first principles were abandoned in favour of the balancing of competing interests. Perhaps, as Morton Horwtiz has suggested, it is in Holmes’ work that we can see the commencement of “the demise of the late-nineteenth-century system of legal formalism” and “the beginning of modernisim in American legal thought”.26 19 J Lewis, Treatise on the Law of Eminent Domain in the United States (New York, Collaghan, 1888) 45; cited in Hortwitz supra n. 1 at 147. 20 See, e.g., Government of Mauritius v. Union Flacq Sugar Estates Co. Ltd. [1992] 1 WLR 903 at 911. 21 Lewis, supra n. 19 at 45. 22 Pumpelly v. Green Bay Co. 89 US (13 Wall) 166 at 177–8 (1871) per Miller J. 23 260 US 393 (1922). 24 Ibid. at 416 per Holmes J. 25 Ibid. For a more recent statement of this understanding, see Justice Brennan’s judgment in Penn Central Transportation Co. v. New York City 438 US 104 at 128 (1978). 26 Horwitz, supra n. 1 at 131.
The Legacy of Legal Realism: Instrumentalist Approaches to Property 53 Another way in which American law has negotiated the balance between the interests of the state and individuals is through reinvigorating the notion that some property, rather than being purely private, is “affected with a public interest”—a notion that had long since fallen into obsolescence in English law.27 Where particularly significant resources are in private hands, the “public trust” doctrine has allowed the courts to limit the rights that owners may assert over such property.28
4. Property and Due Process That an absolutist conception of private property and the notion of freedom of contract came to be seen as fundamental constitutional principles is also apparent in the “substantive due process” jurisprudence of the Supreme Court. In the late nineteenth century, the constitutional scholar Christopher Tiedeman argued that “society, collectively and intellectually, can attain its highest development by being left free from governmental control, as far as this is possible, provision being made by the government only for the protection of the individual and of society by the punishment of crimes”.29 In cases such as Lochner v. New York,30 the Supreme Court interpreted the right of citizens under the Fourteenth Amendment not to be deprived of rights without due process to preclude state or federal government from abridging rights to exploit property and the freedom to contract. In this spirit, the judiciary interpreted the states’ “police power” to regulate property and contract narrowly to correspond with the limits of property found at common law. According to this understanding, state legislatures could do no more than prevent the “noxious use” of property to ensure that it was not used to interfere with the rights of others.31 This understanding did not survive the New Deal and the coming of the modern regulatory state. In response to the new Zeitgeist, the Supreme Court came to recognise that “neither property rights nor contract rights are absolute”.32 In 1937 the Supreme Court decisively renounced its vision of substantive due process in 27
See P Craig, “Constitutions, Property and Regulation” [1991] Public Law 538. The landmark case was Illinois Central Railroad v. Illinois 146 US 389 (1892). See Rose, “The Comedy of the Commons: Custom, Commerce, and Inherently Public Property” in Property and Persuasion (Bolder, Colo., Westview Press, 1994) 105. A more restrictive approach to the area is apparent in recent Supreme Court rulings: see, e.g., Nollan v. California Coastal Commission 483 US 825 (1987). 29 C Tiedeman, The Unwritten Constitution of the United States (New York, GP Putnam’s Sons, 1890) 76. See Wiecek, supra n. 2 at 96–7. 30 198 US 45 (1905). In Lochner, the Supreme Court concluded that a statute restricting working hours in bakeries was in breach of the Fourteenth Amendment as a violation of the liberty of contract. In the other landmark decision of this era, Adkins v. Children’s Hospital 261 US 525 (1923), a minimum wage for women was struck down for the same reason. See, e.g., J Ely, The Guardian of Every Other Right (2nd edn., New York, Oxford University Press, 1992) 101–18; Horwitz, supra n. 1 at 145–51. 31 See, e.g., Commonwealth v. Alger 7 Cush. 53 at 86 (Mass., 1851) per Shaw J; Village of Euclid v. Amber Realty Co. 272 US 365 (1926); Miller v. Schoene 276 US 272 (1928). 32 Nebbia v. New York 291 US 502 at 526 (1934) per Roberts J. 28
54 Property and Proprietary Remedies West Coast Hotel Co. v. Parish.33 With the abandonment of Swift v. Tyson and its notion of universal principles of common law just a year later in Erie Railroad v. Tompkins,34 the triumph of a new legal consciousness was manifest.
5. The Disintegration of Property The legal realists launched an attack on the conception of property that was central to formalist legal thought.35 This assault was aided by Hohfeld’s analysis of property as a bundle of discrete legal relationships between people.36 Hohfeld observed that the interests collectively known as ownership were separable and that there was no reason why the presence of one interest should imply that of others.37 It followed that it need not be supposed that the protection afforded in respect of a resource should be absolute. Notions of “ownership” came to be regarded with suspicion, with analysis shifting instead to the individual rights in the bundle known as property.38 A number of scholars applied these insights to revolutionise the received understanding of the nature and proper limits of private power. Thus, Robert Hale argued that the judicial regulation of rates set by utilities represented “a legal curb on the power of property owners” that might “very well serve as a model . . . for the revision of other property rights”.39 Similarly, Berle and Means suggested that shareholders’ surrender of control to company managers “released the community from the obligation to protect them to the full extent implied in the doctrine of strict property rights”.40 Closer to traditional common law concerns, Karl Llewellyn observed that, in structuring rights and obligations in complex sales transactions, reliance on absolutist notions of property generated dysfunctional results.41 As a result of this shift in legal consciousness, property is generally no longer understood as providing a boundary between law and politics. As Jennifer Nedelsky notes: “[i]t is now widely accepted that property is not a limit to legitimate governmental action, but a primary subject of it”.42 A New Jersey Supreme 33
300 US 379 (1937). See supra, text accompanying nn. 8–13. 35 See Horwitz, supra n. 1 at 163–6. 36 WN Hohfeld, “Some Fundamental Legal Conceptions As Applied in Judicial Reasoning” (1913) 23 Yale LJ 16; and (1917) 26 Yale LJ 710. On Hohfeld’s influence on the realists, see Twining, supra n. 2 at 34–40. 37 Horwitz, supra n. 1 at 145–67. 38 B Ackerman, Private Property and the Constitution (New Haven, Conn., Yale University Press, 1977) 26. 39 R Hale, “Rate Making and the Revision of the Property Concept” (1922) 22 Colum L Rev 209 at 213. 40 A Berle and G Means, The Modern Corporation and Private Property (New York, Macmillan, 1932) 333–9. 41 K Llewellyn, supra n. 4 at 165–72. See infra ch. 8.I. 42 J Nedelsky, Private Property and the Limits of American Constitutionalism (Chicago, Ill., Chicago University Press, 1990) at 231. 34
The Legacy of Legal Realism: Instrumentalist Approaches to Property 55 Court decision, State v. Shack,43 provides an example of the modern American attitude toward property. There, adopting a view previously expressed by an academic, Weintraub J observed that “[a]n owner must expect to find the absoluteness of his property rights curtailed by the organs of society, for the promotion of the best interests of others for who these organs also operate as protective agencies”.44 Thomas Grey has characterised this shift in understanding as “the disintegration of property” and has concluded that “the substitution of a bundle-of-rights for a thing-ownership conception of property has the ultimate consequence that property ceases to be an important category in legal and political theory”.45 Yet this is not necessarily something to be lamented. It is true that the bundle-of-rights conception of property is essentially devoid of content. However, it is this feature of this perspective that is its very attraction. In post-realist legal analysis, legal concepts are conceived of as tools for the implementation of policy objectives.46 While doctrine remains important, understanding the proper scope of legal principles requires a purposive approach that pays attention to the objectives underlying them.47 According to this view, the content of a particular conception of property should be the conclusion of a process of pursuing particular policy objectives,48 and should not be inhibited by a priori understandings of what property is. Thus, it is accepted that property is a conclusion and not a fundamental justification, a product of the law and not a reason for it. These rights are recognised for reasons of policy and limited where policy demands it.
6. The Influence of these Understandings on the Common Law That the formalist understanding of property has lost much of its hold in American legal culture is apparent in decisions that raise the issue of the redistribution of proprietary rights. In contrast to the English Court of Appeal in Shelfer v. City of London Electric Lighting Co.,49 the New York Supreme Court in Boomer 43
277 A 2d 369 (NJ, 1971). Ibid. at 373 (citing a passage from Rohan (ed.) supra n. 54 at 493–4). 45 T Grey, “The Disintegration of Property” in JR Penncock and JW Chapman (eds.), Nomos XXII: Property (New York, New York University Press, 1980) 69 at 81. 46 A Kronman, The Lost Lawyer (Cambridge, Mass., Harvard University Press, 1993) at 19. 47 This point can be explained in the instrumentalist language of legal realism as focusing on policy. However, it may equally be described in terms of the more formalistic perspective developed by Ronald Dworkin, whereby the application of legal rules is guided by reference to legal principles that are immanent to the common law and that express a community’s moral and political values. See, e.g., Law’s Empire (Cambridge, Mass., Belknap, 1986); R Cotterrell, The Politics of Jurisprudence: A Critical Introduction to Legal Philosophy (London, Butterworths, 1989) 150–81. However, what it clearly does entail is the rejection of a form of positivistic formalism that largely excludes values from the development, interpretation and application of law. 48 See, e.g., J Coleman and J Kraus, “Rethinking the Theory of Legal Rights” (1986) 95 Yale LJ 1335 at 1340. 49 (1895) 1 Ch. 287; see supra ch. 2. II. 2(b). 44
56 Property and Proprietary Remedies v. Atlantic Cement,50 was prepared to refuse to enjoin a factory that was causing a nuisance and to limit the plaintiff to damages. The court was not perturbed by the notion that by so doing it was expropriating the plaintiff’s property rights. Similarly, in contrast to the approach taken by English courts in this area,51 a number of states have developed remedies for the reallocation of property upon the breakdown of relationships akin to marriage.52 Once again, these courts have not regarded this as a usurpation of the legislative function. Generally the approach taken to property in American law is less absolutist than that favoured in English law. This is apparent in a greater willingness to impose duties upon landowners to exercise due care in respect of trespassers.53 This attitude is also demonstrated by the greater readiness of American courts to limit the use that owners may make of their property. In particular, state courts developed common law norms to prohibit malicious use of property54 and anti-competitive conduct55 when the English courts showed little inclination to do so.56 Finally, some state courts have restricted the extent to which private owners who open their premises to the public may exclude others.57 50
257 NE 2d 870 (NY, 1970). See, e.g., Gissing v. Gissing [1971] AC 886; Lloyds Bank v. Rosset [1990] AC 107. See supra nn. 18–19 and accompanying text. 52 See, e.g., Marvin v. Marvin 557 P 2d 106 at 112 (Cal., 1976); Pickens v. Pickens 490 So. 2d 872 (Miss., 1986). See infra ch. 10.II.2 and 4. 53 § 339 of the Restatement of Torts (St Paul, Minn., American Law Institute Publishers, 1934) imposed a duty to trespassing children. § 336 of the Restatement of Torts 2d (St Paul, Minn., American Law Institute Publishers, 1965) provides that where an occupier knows or has reason to know of the presence of a trespasser, an ordinary duty of care is owed. Subsequently, the courts in a number of states have held that landowners owe an ordinary duty of care to trespassers. The seminal decision was Rowland v. Christian 443 P 2d 561 (Cal., 1968). See Jones v. Hansen 867 P 2d 303 at 310 (Kan., 1994) for a recent discussion of developments in the state courts. In England, until comparatively recently, the position at common law was that owners were liable only if they deliberately or recklessly harmed trespassers: Robert Addie and Sons (Collieries) Ltd. v. Dumbreck [1929] AC 358. Subsequently, the House of Lords favoured a duty of common humanity that remained less onerous than the ordinary duty of care: British Railways Board v. Herrington. [1972] AC 877. Eventually, the legislature intervened to provide more wide-ranging protection: Occupiers’ Liability Act 1984. 54 Flaherty v. Moran 45 NW 381 (1890). See PJ Rohan (ed.), Powell’s Real Property (New York, Matthew Bender, 1970) § 62.05. 55 Tuttle v. Buck 119 NW 946 (Minn., 1909). R Peritz, “The ‘Rule of Reason’ in Antitrust law: Property Logic in Restraint of Competition” (1989) 40 Hastings LJ 285 at 289. 56 See, e.g., Mayor of Bradford v. Pickles [1895] AC 587; Mogul Steamship Co. v. McGregor Gow & Co. [1892] AC 25. 57 Most cases have involved attempts to curb free speech challenged on the basis of rights conferred by the First Amendment or state constitutions. See, e.g., PruneYard Shopping Centre v. Robins 447 US 74 (1980); State v. Schmid 423 A 2d 615 (1980); New Jersey Coalition Against War in the Middle East v. JMB Realty Corp. 650 A 2d 757 (NJ, 1994). However, some cases even envisage a general common law principle of reasonable access: see State v. Shack 277 A 2d 369 (NJ, 1971); Uston v. Resorts International Hotel Inc. 445 A 2d 370 (1982). Nonetheless, the orthodoxy remains that, apart from those pursuing common callings and in the absence of statutory restrictions, proprietors of businesses may exclude whom they wish: see, e.g. Brooks v. Chicago Downs Association Inc. 791 F 2d 512 (7th Cir, 1986). English courts have declined to limit rights of exclusion in the context of privately owned property generally open to the public: British Airports Authority v. Ashton [1983] 3 All ER 6; CIN Properties v. Rawlins [1995] 2 EGLR 130. See K Gray and SF Gray, “Private Property and Public Propriety” in J McLean (ed), Property and the Constitution (Oxford, Hart Publishing, 1999) 11. 51
The Legacy of Legal Realism: Instrumentalist Approaches to Property 57 While the absolutist understanding of property still exerts an influence on the American legal imagination,58 its force is muted in comparison with its role in English law. It has long since become obvious in American law that property rights need not be absolute.
II . INSTRUMENTALISM IN PROPRIETARY REMEDIES IN US LAW
1. The Formalism of Early Remedial Constructive Trust Theory The jurist who has most influenced American constructive trust law is Austin W. Scott, an eminent Harvard trusts scholar responsible for the rationalisation of the law of equitable remedies within the framework of the Restatement of Restitution. The Restatement of Restitution was in many ways unique among the Restatements in that it sought to give an authoritative account of a field of law that was so controversial and ill-formed that, in a sense, there was nothing to restate. The task of the commentators was to explain disparate doctrines in terms of restitutionary theory. Much work remained to be done in formulating the theoretical framework of restitution as well as in describing the substantive doctrines. The tendency to employ proprietary reasoning to justify new legal developments was prevalent in this formative period of American restitution law. As Felix Cohen observed, “property” is one of the “magic ‘solving words’ of traditional jurisprudence”.59 The argument that something is the property of the plaintiff seems to carry more power than a justification based on concepts of personal obligation. It was in this light that a leading American restitution scholar, George Palmer, lamented the judicial tendency to justify relief on the basis of equitable ownership, even in instances where relief is apparently available at common law and the plaintiff is not seeking the advantages of proprietary relief. He explained this habit on the basis that “[t]he constructive trust idea stirs the judicial imagination in ways that assumpsit, quantum meruit, and the other terms associated with quasi contract have never quite succeeded in duplicating”.60 As Palmer subsequently observed, Scott’s contribution to the development of the constructive trust reflects an ambivalence between recognising the device as a remedy and conceiving of it in terms of pre-existing proprietary interests.61 As a result, despite the insistence that the constructive trust was a remedy for unjust enrichment, the device was never entirely reduced to remedial status. On the one hand, Scott divorced the constructive trust from its historic association with 58 See Nedelsky, supra n. 42 at 244; J Singer, “The Reliance Interest in Property”, (1988) 40 Stan L Rev 611 at 634. A good example is Loretto v. Teleprompter Manhatten CATV Corp. 458 US 419 (1982). In Loretto, the Sup. Ct. held that all physical invasions of property—no matter how minor—amounted to takings. The case involved the installation of a television cable on the plaintiff’s roof. 59 Cohen, supra n. 16 at 820. 60 Palmer, Law of Restitution, i § 1.3 at 16. 61 Ibid. § 2.14 at 184.
58 Property and Proprietary Remedies fiduciary relationships,62 and characterised it as an equitable remedy that might be declined if legal remedies were adequate.63 On the other hand, he insisted that the proprietary interest of plaintiffs seeking restitution arose automatically upon the occurrence of an unjust enrichment. This made the interest appear to be more akin to a subsisting property right than a simple remedy. Under Scott’s guidance, the Restatement simply provided that “[a] constructive trust is imposed upon a person in order to prevent his unjust enrichment. To prevent such unjust enrichment an equitable duty to convey the property to another is imposed upon him.”64 Scott’s proprietary analysis tended to deflect him and other commentators from examining the constructive trusts in terms of a remedy that conferred priority in insolvency. Thus, nowhere did he explain why proprietary relief was necessary to reverse unjust enrichment.65 Why, after accepting that the remedy should be discretionary, did Scott insist on the counter-intuitive notion that the plaintiff’s proprietary interest arises automatically? He appears to have been beguiled by an idea of the law as based on prelegal rights that the courts recognise rather than create—a notion exemplified by Justice Story’s endorsement in Swift v. Tyson of “general principles of the common law”.66 Scott’s background does much to explain his methodological leanings. His formative years as a legal scholar were in the heyday of the ideal of legal science in the United States. He graduated in 1910 from Harvard, the heartland of this orthodoxy.67 The very fact of Scott’s involvement in the Restatement project points to his methodological tendencies.68 The Restatements are often depicted as the last stand of the formalist conception of legal science.69 Indeed, the effort to explicate the disparate rules of quasi-contract and equitable remedies in terms of a system ordered by the notion of unjust enrichment was an archetypal formalist endeavour. It is not surprising that the leading figure in the academic systematisation of the law of restitution prior to the Restatement was William Keener, a protégé of the doyen of Harvard’s formalists, Christopher Columbus Langdell. Nor is it any surprise that Scott was perceived to be a formalist by realist contemporaries.70 What is more, Scott’s work on the theoretical foundations of proprietary relief took place in the era of the Lochner court when the inviolability of property and freedom of contract were articles of faith for American legal orthodoxy.71 The 62
W Seavey and AW Scott, “Restitution” (1938) 54 LQR 29 at 41. A Scott, The Law of Trust (3rd edn., Boston, Mass., Little, Brown & Co., 1967) v, § 462 at 3416. 64 The Restatement of Restitution commentary to § 160. 65 Scott’s failure to provide any adequate justification for the provision of proprietary remedies is apparent in his account of tracing and its failure to explain why tracing claimants should be given priority over general creditors. See supra ch. 4.III. 66 See supra text accompanying nn. 8–9. 67 W LaPiana, Logic and Experience: the Origin of Modern American Legal Education (New York, Oxford University Press, 1994). 68 Scott was also a reporter for the Restatement of Trusts (St Paul, Minn., American Law Institute Publishers, 1935). 69 Ibid. at 164. 70 See T Arnold, “The Restatement of the Law of Trusts” (1931) 21 Col. L Rev. 800. 71 See supra n. 30 and accompanying text. 63
The Legacy of Legal Realism: Instrumentalist Approaches to Property 59 remedial constructive trust presented a clash between the absolutist conception of private property and that of unjust enrichment. If a reconciliation of these principles was not possible, Scott was liable to take comfort in the characterisation of constructive trusts as arising automatically. The view that the constructive trust arises when declared reinforces the judicial role in determining the allocation of the resources in question. With the acknowledgement of judicial choice comes the responsibility to justify its exercise. In contrast, the automatic vesting conception of the constructive trust suppresses the appearance that the doctrine in question readjusts property rights. It gives, instead, an appearance of the courts’ taking a passive role in enforcing pre-existing rights.
2. Realism about Proprietary Relief With the advent of legal realism, the tide turned against Scott’s vision of the constructive trust. Within a short period of the publication of the Restatement of Restitution, the received wisdom of American legal culture was placed under considerable strain. The very year the Restatement was published saw the Supreme Court’s most decisive departure from the vision of Lochner in West Coast Hotel Co. v. Parish;72 and, the following year, the Court overturned Swift v. Tyson, thereby abandoning the notion of “general principles of the common law”.73 In the new environment, the notion of absolute property rights lost much of its influence. Unmoved by the concerns that had motivated Scott, the next generation of restitution scholars had little sympathy for his analysis of the constructive trust. Few American commentators have been content with Scott’s conceptualisation of the nature of the constructive trust; most concluding instead that the plaintiff’s interest arises only when ordered by the court.74 Precedent in the United States was divided before the Restatement,75 as it has been since.76 72
300 US 379 (1937). Erie RR v. Tompkins 304 US 64 (1938). 74 See, e.g., Palmer, Law of Restitution, i, § 2.13 at 171 and supplement (1990) 10; GG Bogert, The Law of Trusts and Trustees (2nd edn., St Paul, Minn., West, 1977) § 472 at 11. Interestingly, Andrew Burrows asserts that Scott was “forced” to acknowledge that the constructive trust arose automatically, thus pointing to an apparent fundamental contradiction in the US approach: A Burrows, The Law of Restitution at 40. However, the rejection of automatic vesting by other American jurists suggests that any contradiction is to be found in Scott’s work, rather than in the concept of the remedial constructive trust. Scott was “forced” to reason as he did only by his own desire to reconcile the constructive trust with notions of the inviolability of property and in order to avoid certain policy issues that inevitably arise in this context. 75 Supporting Scott’s position was Kemp v. Elmer Co. 56 F 2d 657 (SD Cal., 1932). Favouring the opposite view was Smith v. Township of Au Gres 150 F 257 (6th Cir., 1906). 76 Supporting the view expressed in the Restatement is United States v. Fontana 528 F Supp. 137 (SD NY, 1981). The opposing position is taken in International Refugee Organisation v. Maryland Drydock Co., 179 F 2d 284 (4th Cir., 1949) and Papazian v. American Steel and Wire Co. of New Jersey 155 F Supp. 111 (1957). Authorities in federal bankruptcy courts are divided. Thanks more to precedent and inertia than to reasoned deliberation, Scott’s position still represents the orthodoxy: see E Sherwin, “Constructive Trusts in Bankruptcy” [1989] University of Illinois Law Rev. 297 at 328. However, Scott’s view was 73
60 Property and Proprietary Remedies Increasingly doubting the reasoning underpinning Scott’s treatment of the area, commentators began to question the justice of awarding proprietary remedies in bankruptcy.77 Perhaps the most articulate expression of these concerns came from John Dawson. While Dawson, like Scott, was a Harvard Professor, the differences between the scholarship of the two are stark. Dawson was a legal realist who challenged the formalist vision of the private law.78 In contrast to Scott’s reductionism, Dawson’s work was comparative and historical, emphasising the forces that shape the law in different legal cultures.79 Analysing constructive trust law, Dawson concluded: “we have created a monster”.80 He noted the unfortunate tendency to conceive of the proprietary interest associated with constructive trust relief as automatic. In his view: Our courts have been misled in this whole field, not so much by the direct appeal of an unjust enrichment principle as by a conception of equitable ownership, the product of an essentially new and questionable remedy. Seduced by this conception, they have refused to draw distinctions, to weigh various kinds of equities, or to consider the unjust gain they inevitably produce at the expense of other creditors.81
Critics were similarly ill-disposed to that other device for giving priority in insolvency, the equitable lien. Justice Holmes regarded the reasoning generally given to justify the provision of that remedy as vacuous.82 Another jurist, noting the tendency of this remedy to complicate the distribution of bankrupt estates, concluded that “the equitable lien is a dangerous and elusive enemy of the law of preference”.83
3. Re Omegas and the Unravelling of the Remedial Constructive Trust In 1994, in Re Omegas Group Inc.,84 the Federal Court of Appeals of the Sixth Circuit delivered a controversial decision on the effect of the constructive trust in rejected by the Federal Court of Appeals of the 6th Circuit in the controversial decision of Re Omegas Group Inc. 16 F 3d 1443 (1994). See infra § III.3. The Canadian Supreme Court narrowly favoured Scott’s approach in Rawluk v. Rawluk [1990] DLR (4th) 161. 77 E.g., JP Dawson, Unjust Enrichment: A Comparative Analysis (Boston, Little, Brown & Co., 1956); F Lacey, “Constructive Trusts and Equitable Liens in Iowa” (1954) 40 Iowa L Rev. 107. 78 See, e.g., JP Dawson, “Economic Duress: An Essay in Perspective” (1947) 45 Michigan Law Review 253. 79 This understanding, while apparent in his treatment of the law of restitution: supra n. 77, is best exhibited in his classic work, The Oracles of Law (Ann Arbor, Mich., University of Michigan Law School, 1968). 80 Dawson, supra n. 77 at 30. 81 Ibid. at 32. 82 Thus in Sexton v. Kesser 225 US 90 at 98–99 (1912) Justice Holmes commented: “the phrase equitable lien may not carry the reasoning further or do much more than express the opinion of the Court that the facts give a priority to the party said to have it”; cited in J Phillips, “Equitable Liens—A Search for a Unifying Principle” in NE Palmer and E McKendrick (eds.), Interests in Goods (London, Lloyds of London Press, 1993) 635 at 653. 83 J McLaughlin, “Amendment of the Bankruptcy Act” (1927) 40 Harv. L Rev. 314 at 389. 84 XL/Datacompp Inc. v. Wilson (In Re Omegas Group Inc.) 16 F 3d 1443 (6th Cir., 1994).
The Legacy of Legal Realism: Instrumentalist Approaches to Property 61 bankruptcy. A creditor came to the court in bankruptcy proceedings claiming that the debtor had defrauded it by assuring the creditor of its solvency when in fact the debtor was on the brink of bankruptcy. The creditor argued that it followed that the moneys that the debtor had received from it were held on constructive trust. If this were so, conventional wisdom would have dictated that the creditor was entitled to claim these moneys or their proceeds as its property, thereby gaining priority over the bankrupt debtor’s general creditors. However, the court took a different view. It argued that a mere entitlement to a constructive trust was not an interest that would exclude the assets in question from distribution among creditors in bankruptcy. Observing that “[n]owhere in the Bankruptcy Code does it say, ‘property held by the debtor subject to a constructive trust is excluded from the debtor’s estate’ ”,85 the court concluded that constructive trusts are “anathema to the equities of bankruptcy”.86 The majority’s decision turned in large measure on the question whether the creditor’s entitlement was a fully-fledged property right or something less. The Court concluded that “[b]ecause a constructive trust, unlike an express trust, is a remedy, it does not exist until a plaintiff obtains a judicial decision finding him to be entitled to a judgment”.87 As a matter of precedent and legislative intent, the reasoning in Re Omegas is unsustainable. As Andrew Kull has persuasively argued, the Federal Bankruptcy Code was enacted against the background of the common law’s allocation of proprietary entitlements.88 For a century thereafter, the state and federal courts had enforced rights arising under constructive trusts declared after bankruptcy,89 and even the Supreme Court had recognised that property that was subject to a such a remedy did not form part of the constructive trustee’s estate.90 Of course, this also reflects the position taken in English law. Why then did the court conclude that the traceable proceeds of the claim in question could not be regarded as the property of the creditor, rather than part of the estate of the bankrupt debtor? The best indication is that offered by the Bankruptcy Court in Re Dow Corning Corp.91 In that case, a creditor argued that the debtor held the proceeds of a mistaken payment on constructive trust for the creditor’s benefit.92 While Spector J accepted that he was bound by Re Omegas, he devoted a considerable part of his judgment to an explanation of that decision. Despite his sympathy for the result reached in Re Omegas, Spector J was in no doubt that much of the reasoning offered by the court was untenable. On his 85
Ibid. at 1448. Ibid. 87 Ibid at 1451. 88 A Kull, “Restitution in Bankruptcy: Reclamation and Constructive Trust” (1998) 72 Am. Banky. L Journal 265. 89 See, e.g., American Sugar-Refining Co. v. Fancher 40 NE 206 (NY, 1895); Mitsui Mfrs Bank v. Unicom Computer Corp. (In re Unicom Computer Corp.) 14 F 3d 391 (9th Cir., 1994). See Kull, supra n. 88, at 272. 90 Cunningham v. Brown 265 US 1 at 11 (1923). 91 192 BR 428 (Bankr. ED Mich., 1996). 92 The case involved a mistaken double payment, reminiscent of the facts in the controversial English case, Chase Manhattan Bank NA v. Israel-British Bank (London) Ltd. [1981] 1 Ch. 105. 86
62 Property and Proprietary Remedies analysis, at least in Michigan law, “the constructive trust, once imposed, will have retroactive effect and relate back to the time of the unjust enrichment”.93 This characterisation of the effect of the remedy as operating retrospectively reflects the extent to which Austin Scott’s analysis of the constructive trust as arising automatically has fallen out of favour. Spector J observed that “there has existed for sometime an undercurrent of dissatisfaction concerning the appropriateness of constructive trusts in bankruptcy”.94 He argued that the judgment in Re Omegas “has so many broad statements—some of which are clearly in error—and others which are simply perplexing, that it is . . . important . . . to discern the actual rationale and not be lost by the rhetoric”.95 Commencing from this startlingly realist perspective, he reached the conclusion that “the rationale is solely bankruptcy policy”.96 He argued that the Court in Re Omegas “found there to be a conflict between the federal bankruptcy policy of rateable distribution and state property law on constructive trusts”.97 In his view, Re Omegas was a pragmatic ruling that would mean that “trial courts would no longer have cause to wrestle with some of the more difficult questions of property law”.98 According to this understanding, the principles determining the availability of the constructive trust are vague and it would not be a good idea to invite bankruptcy courts to decide whether a plaintiff merited priority in a particular case. Thus Spector J observed that: Cases in which the remedy of constructive trust are sought run the gamut: some supplicants like . . . [that in Re Omegas] have a dubious call upon equity; while others [perhaps like that in Dow Corning], present far more sympathetic situations. In the middle lie the vast majority of cases, where fine distinctions necessitate extremely subjective determinations. Trial courts are, as a result of Omegas, mercifully spared from this onerous task.99
This is a striking conclusion. After all, it is the capacity of the constructive trust to confer priority in bankruptcy that has largely provided the impetus for its development. Moreover, the solution offered in Re Omegas is a rather arbitrary one. Too much will depend on questions of timing that have nothing to do with the strength of the plaintiff’s case for priority in insolvency. A constructive trust claimant who obtains judgment prior to a defendant’s bankruptcy will be entitled to priority over other creditors if insolvency ensues prior to the enforcement of judgment. This will be true even if it is the constructive trust judgment that drives the defendant into bankruptcy. On the other hand, the constructive trust claimant whose defendant declares bankruptcy the day prior to judgment will be obliged to rejoin the queue of general creditors. 93 94 95 96 97 98 99
192 BR 428 at 436 (Bankr. ED Mich., 1996). Ibid. at 431. Ibid. at 432–3. Ibid. at 440. Ibid. at 441. Ibid. Ibid.
The Legacy of Legal Realism: Instrumentalist Approaches to Property 63 The constructive trust represents an effort by the courts to exempt from the mêlée of general creditors a class of plaintiffs who are thought to have particularly compelling claims for relief. Perhaps, used sparingly, the constructive trust has a valid role to perform in this regard. However, the device has become more widely available than was the case when the first Federal Bankruptcy Code was introduced in 1898. The Restatement of Restitution states simply that the constructive trust is imposed to prevent unjust enrichment.100 As a result, it has become widely accepted in the United States that a constructive trust is available wherever an owner’s intention to transfer property is vitiated by some factor that gives rise to a right to rescind the transaction.101 Perhaps Re Omegas represents an imperfect solution to a problem that has arisen from the indiscriminate interference of the courts in bankruptcy. It is difficult to gauge what lessons Re Omegas may hold for English law. For it remains unclear whether or to what extent proprietary relief is available in English law to remedy mistake, fraud, duress or undue influence.102
III . INSTRUMENTALISM IN OTHER COMMON LAW JURISDICTIONS
1. The Liberation of the Constructive Trust There are signs that, in addition to developments in the United States, other common law jurisdictions are moving toward an understanding of property that is more dynamic than that which can be found in English law. The best indication of this tendency is the willingness of the courts to consider awarding proprietary remedies in a wider set of circumstances, while at the same time accepting that the limits of the remedy have to be determined with reference to its consequences for third parties.103 The Canadian, Australian and New Zealand judiciaries have all reconceptualised the basis for the constructive trust. The courts in these countries have concluded that, beyond its traditional “institutional” role, the constructive trust has a wider remedial function.104 Not content to restrict its role to protecting fiduciary relationships or to limit it to incremental ad hoc growth, these jurisdictions have all offered comprehensive rationales for the remedy. In Canada the constructive trust has been reinterpreted as a response to unjust enrichment105; in Australia it is now viewed as a remedy for unconscionable behaviour106; while in New Zealand 100
The Restatement of Restitution commentary to § 160. See supra n. 64 and accompanying text. Kull, supra n. 88 at 277. 102 See infra ch. 6. 103 See, e.g., D Wright, The Remedial Constructive Trust (Sydney, Butterworths, 1998) 36–73; C Rickett, “The Remedial Constructive Trust in Canadian Restitution Law” [1990] Conv. 125. 104 For the view that the “remedial” constructive trust exists alongside the “institutional” variety, see, e.g., Rawluk v. Rawluk (1990) 65 DLR (4th) 161; Bathurst City Council v. PWC Properties Pty. Ltd. (1998) 157 ALR 414; Fortex Group Ltd. (In Receivership and Liquidation) v. MacIntosh [1998] 3 NZLR 171. 105 See, e.g., Pettkus v. Becker (1980) 117 DLR (3d) 257. 106 See, e.g., Muschinski v. Dodds (1986) 160 CLR 583. 101
64 Property and Proprietary Remedies it has come to be associated with the protection of reasonable expectations.107 None of these rationales suggests a commitment to absolutist understandings of property. Indeed much of the development of these new justificatory foundations for the constructive trust took place in the context of an abandonment of the search for common intention in the determination of property rights on the breakdown of intimate relationships.108 These developments reflect an acknowledgement that proprietary remedies can result in the redistribution of property rights. This was apparent in LAC Minerals v. Corona Ltd.,109 where the Canadian Supreme Court approved the award of a constructive trust in respect of a gold mine that had been acquired by wrongfully exploiting information obtained in confidence. La Forest J commented that: it is not the case that a constructive trust should be reserved for situations where a right of property is recognized. That would limit the constructive trust to its institutional function, and deny to it the status of a remedy, its more important role. Thus, it is not in all cases that a pre-existing right of property will exist when a constructive trust is ordered. The imposition of a constructive trust can both recognise and create a right of property.110
In reinterpreting the law in this area, the Australian courts have altered the nature and effect of property rights. In this regard, Robert Austin has observed that the “courts are . . . making orders which break up” the “set bundle of proprietary consequences” which has hitherto characterised constructive trust jurisprudence.111 In the process, the constructive trust has been reconceptualised as a remedial response. For example, the Australian courts have emphasised the discretionary nature of proprietary estoppel and indicated that proprietary relief should not be granted if a personal remedy would achieve justice.112
2. Determining when Proprietary Relief should be Available Abandoning the notion that proprietary relief is only ever imposed in order to protect pre-existing rights has encouraged reflection on the need to mould the availability of these remedies to accord with the dictates of justice.113 Thus, in LAC Minerals, La Forest J concluded that “a constructive trust should only be awarded if there is reason to grant to the plaintiff the additional rights that flow from a 107 108 109 110 111
See, e.g., Pasi v. Kamana [1986] 1 NZLR 603; Elders Pastoral Ltd. v. BNZ [1989] 2 NZLR 180. See infra ch. 10. (1989) 61 DLR 14. Ibid. at 50; cited and approved by Cory J in Peter v. Beblow (1993) 101 DLR (4th) 621 at 639. RP Austin, “The Melting Down of the Remedial Constructive Trust” (1988) 11 UNSWLR 66
at 67. 112
Giumelli v. Giumelli ((1999) 161 ALR 473 at 485. See, e.g., Sorochan v. Sorochan (1986) 20 DLR (4th) 1 at 7 per Dickson CJ; LAC Mineral 5 v. Corona Ltd. (1989) 61 DLR (4th) 14 at 51 per La Forest J; Rawluk v. Rawluk (1990) 65 DLR (4th) 161 at 185–8 per McLachlin J and 177 per Cory J. 113
The Legacy of Legal Realism: Instrumentalist Approaches to Property 65 recognition of a right of property”.114 The task now is to establish what amounts to a good reason for awarding proprietary relief. While their interests have long been neglected in this area, there are signs that the debate will increasingly focus on the position of unsecured creditors. Thus, in Peter v. Beblow,115 Cory J rather ambiguously noted that a proprietary remedy might be denied where “the rights of bona fide third parties would be affected as the result of granting the constructive trust remedy”.116 Similarly, in her dissenting judgment in Rawluk v. Rawluk,117 McLachlin J noted that the ambit of proprietary remedies should be restricted, given their capacity to prejudice third parties.118 Subsequently, in Soulos v. Korkontzilas,119 the same judge concluded that, while a constructive trust might properly be imposed to protect relationships of trust, it should not be awarded where it would affect the rights of creditors.120 Such caution is apparent in Re 512760 Ontario Inc.,121 where Adams J refused to allow a divorced spouse a beneficial interest in the business that he ran with his wife. His Honour noted that he was “concerned about the important competing interests of unsecured creditors” whose position would have been undermined by the award of a constructive trust.122 On the other hand, this shift in attitude in the law in this area may on occasion lead to the courts extending the availability of proprietary relief to new situations. An example of this is provided by the New Zealand Court of Appeal’s decision in Liggett v. Kensington (Re Goldcorp Exchange Ltd.).123 Goldcorp accepted money from customers on the basis that it would at all times maintain reserves of bullion sufficient to meet its liabilities to them. In fact it breached this promise and went bankrupt with very little in bullion in reserve. The customers claimed that they should be granted an equitable lien over the company’s assets, thereby giving them priority ahead of the Bank of New Zealand’s floating charge. In the customers’ view, this outcome was justified because, even if they had not purported to retain any title to advance payments, Goldcorp had wrongly paid this money into its bank account and had thereby swollen its assets available for distribution in bankruptcy. While the New Zealand Court of Appeal’s decision was given short shrift by the Privy Council,124 it has found influential supporters in Canada and Australia. Justice McLachlin of the Canadian Supreme Court suggested, extra-judicially, that Re Goldcorp would have been decided differently in Canada than it was in the Privy 114 115 116 117 118 119 120 121 122 123 124
Ibid. at 51. (1993) 101 DLR (4th) 621. Ibid. at 638. (1990) 65 DLR (4th) 161. Ibid. at 191 (1997) 146 DLR (4th) 214. Ibid. at 230 and 232. (1992) 91 DLR (4th) 719. Ibid. at 733. [1993] 1 NZLR 257. Re Goldcorp Exchange Ltd. [1995] 1 AC 74.
66 Property and Proprietary Remedies Council.125 In addition, Paul Finn, a noted equity scholar and justice of the Federal Court of Australia,126 described the Privy Council’s decision as an “emblem” of a “flight from the opportunity . . . to develop an intelligible jurisprudence on how properly to settle competition between the creditors”.127 Despite the setback in Re Goldcorp, the New Zealand judiciary continues to express some interest in the notion of the remedial constructive trust.128 A willingness to extend the application of the constructive trust while showing sensitivity to the position of third parties is also apparent in Australian developments in this area. In elaborating a new doctrine governing the availability of the constructive trust in quasi-matrimonial property cases in his seminal opinion in Muschinski v. Dodds, Deane J reflected on the origins and functions of the constructive trust. In his view, the device: has not outgrown its formative stages as an equitable remedy and should still be seen as constituting an in personam remedy attaching to property which may be moulded and adjusted to give effect to the application and interplay of equitable principles in the circumstances of the particular case. In particular, where competing common law or equitable claims are or may be involved, a declaration of constructive trust by way of remedy can properly be so framed that the consequences of its imposition are operative only from the date of judgment or formal court order or from some other specified date.129
In Re Osborn,130 the legal owner of properties transferred them to himself and the respondent, his de facto wife, as joint tenants. This transfer was subsequently challenged as a preference when the respondent’s partner became bankrupt. The respondent argued that, regardless of the transfer, she was entitled to a share of the property in equity and this interest would have entitled her to priority in bankruptcy in any event. In the Federal Court, Pincus J was reluctant to recognise such an interest. He noted Deane J’s observations in Muschinski v. Dodds and commented: There is a degree of inconvenience attaching to the laying down of a rule which would require the trustee, in a case of this sort, to conduct an elaborate investigation of and perhaps litigate about the history of a relationship to determine whether property which is, on the face of it, divisible among the creditors is truly so divisible . . . [K]eeping in mind the remedial character of the doctrine, I do not think that the court should declare a constructive trust in circumstances of this sort, to operate at a date prior to bankruptcy.131 125 B McLachlin, “Restitution in Canada” in WR Cornish, R Nolan, J O’Sullivan and G Virgo (eds.), Restitution: Past, Present and Future: Essays in Honour of Gareth Jones (Oxford, Hart Publishing,1998) 275 at 282. 126 P Finn, “Equitable Doctrine and Discretion in Remedies” in Cornish et al., supra n. 125, at 251. 127 Ibid. at 264. 128 See, e.g., Dickie v. Torbay Pharmacy [1995] 3 NZLR 429 at 441 per Hammond J and, more tentatively, Fortex Group Ltd. (In Receivership and Liquidation) v. MacIntosh [1998] 3 NZLR 171. 129 (1986) 160 CLR 583 at 615. 130 (1989) 91 ALR 135. 131 Ibid. at 142. This approach was followed in Re Popescu (1995) 55 FCR 583. See D Wright, “The Remedial Constructive Trust and Insolvency” in F Rose (ed.), Restitution and Insolvency (London, Mansfield Press, 2000) 206.
The Legacy of Legal Realism: Instrumentalist Approaches to Property 67 This approach is in stark contrast to the view that Sir Peter Millett expressed extrajudicially that, “[e]ither the plaintiff is entitled to a proprietary remedy or he is or not”.132
IV . FORMALISM AND INSTRUMENTALISM CONTRASTED
Speaking extra-judicially, Sir Peter Millett described the remedial constructive trust as “a counsel of despair which too readily concedes the impossibility of propounding a general rationale for the availability of proprietary remedies”.133 This reflects a perception common among English judges and jurists that the approach found outside their jurisdiction is unprincipled. Yet, this very criticism is often directed against the orthodox English vision of the constructive trust. For example, at the heart of Donovan Waters’ analysis of the remedial constructive trust is his objection that English jurists have not been willing to “. . . rationalise the miscellany of remedies that exist” under the rubric of the constructive trust.134 Thus, central to his project has been the development of a comprehensive normative foundation for the remedy that will promote a more systematic approach to its application. In many respects, Waters’ aspirations are no different from those shared by Birks and Millett. What is really at stake and where Waters parts company with his English counterparts is the issue of how we should go about developing a “general rationale” for the law of proprietary remedies. And at the root of this question lies a fundamental dispute about the nature of the common law. English judges and jurists retain faith in the idea that, without entering into a fundamental normative inquiry, we might identify a set of systematic legal principles that structure this area of law. In contrast, Waters takes the view that the existing law has no such immanent order. In his analysis the question of the availability of the constructive trust is one of policy; to rationalise the area one must consider when it would be appropriate to confer the advantages that flow from proprietary relief.135 What is a stake is a clash between two visions of proprietary remedies. English legal culture remains wedded to a “pure trusts law philosophy” that denies the possibility of non-consensual redistribution of property and locates the basis for relief in the intention of owners and the enforcement of existing rights and consensual transfers. This may be contrasted with other common law jurisdictions’ acceptance of a “remedial trusts law philosophy” that recognises that proprietary relief might legitimately be imposed for other rationales.136 132
Sir Peter Millett, “Bribes and Secret Commissions” [1993] RLR 7 at 10; see infra ch. 9.III.2. (1995–6) 6 Kings College LJ 1. D Waters, “The English Constructive Trust: A Look Into the Future” (1966) 19 Vanderbilt L Rev. 1215 at 1215. 135 Ibid. at 1216. 136 See C Rickett, “Different Views on the Scope of the Quistclose Analysis: English and Antipodean Insights” (1991) 107 LQR 608. See supra ch. 7.I.3. 133 134
4
The Normative Foundations of Proprietary Claims and Remedies H I S C H A P T E R considers a number of questions regarding the protection of existing property rights and the recognition of new proprietary interests. First, it asks why, where assets are misappropriated or transferred pursuant to a transaction in which the intention to pass title is vitiated in some way, we would give owners rights not only against the initial recipient of the assets but also against third parties to whom the property is subsequently transferred. Secondly, it briefly considers why we might give owners rights with respect to profits derived from their property by others. Thirdly, it examines the justifications for giving plaintiffs specific relief. Fourthly, it considers why we might give claims arising from the misappropriation of assets priority in bankruptcy.
T
I . CONSIDERATIONS OF JUSTICE AND EFFICIENCY FOR GIVING OWNERS RELIEF AGAINST THIRD PARTIES
1. Rights against Remote Recipients of Misappropriated Assets Why provide that a plaintiff has rights in respect of a particular asset? And why might we give a plaintiff rights that prevail against the world or at least a good part of it, rather than just against any party that dispossesses the plaintiff of the asset in question? A distinction may be made between deontological theories of justice whereby rights are determined without reference to the good and teleological theories of justice in which the rights are determined by their ability to promote some conception of the good.1 Thus, a deontological justification for giving owners rights against third parties might be offered in terms of an account of moral desert without regard to the consequences of those rights. Alternatively, rights might be justified teleologically according to the beneficial consequences that they are likely to generate.
1 See J Rawls, A Theory of Justice (Cambridge, Mass., Harvard University Press, 1971) 24–30; C Fried, Right and Wrong (Cambridge, Mass., Harvard University Press, 1978) 9.
70 Property and Proprietary Remedies (a) Moral Desert Notions of corrective justice are of limited assistance. For corrective justice assumes the existence of a baseline of rights to which a claimant is entitled to be restored, and here the very issue is what rights an owner should have.2 Thus, to determine the baseline that would sustain a system of corrective justice, we must turn to considerations of distributive justice. One such account of property justifies entitlement in terms of autonomy and suggests that owners should be entitled to relief against, not only those who initially misappropriate their assets, but anyone who subsequently culpably deals with those assets in a way which would undermine owners’ autonomy. Determining who is morally culpable in this context requires a judgement about whether a party has failed to show due respect for the autonomy of the owner and so deserves to be accountable for any loss the owner has suffered. Whether a third party’s receipt of property undermined an owner’s autonomy might depend on whether owners were concerned with rights to specific property or merely in safeguarding their level of wealth. Where we are concerned with an owner’s rights to specific assets, the fact that those assets have been transferred into the hands of remote recipients will, in itself, be a reason for holding such parties liable. Consistently with our approach to the attribution of responsibility elsewhere in the law, liability should extend beyond those who knowingly take or receive property to those who ought to know that they have received another’s property. However, it is more difficult to justify holding liable bona fide purchasers without notice—for they cannot be said to have failed to respect the autonomy of the owner of the property that they have purchased. Moreover, where owners have failed to take reasonable steps to prevent wrongdoers holding themselves out to third parties as entitled to deal with the property in question, it may be argued that it is the owners who should bear the risk of any loss that results. For such a failure to take such preventive measures demonstrates a lack of respect for the welfare of third parties that may potentially be affected.3 If our concern was not so much about an interference with particular assets with which an owner had a special relationship but merely about safeguarding the owner’s level of wealth, we might wonder why the law would allow rights against remote recipients of property. Why not leave owners to bring an action against the party that initially deprived them of their property? One reason is that, even where owners have only personal rights of recovery, transfers to remote recipients that are at an undervalue or entirely gratuitous will undermine plaintiffs’ ability to recover their loss. The effect of such a transfer is that the party that initially misappropriated the property is more liable to be insolvent while the remote recipi2 M Mautner, “ ‘The Eternal Triangles of Law’: Toward A Theory of Priorities in Conflicts Involving Remote Parties”, (1991) 90 Mich. L Rev. 95 at 103 (1991); C Rotherham, “Conceptions of Property in Common Law Discourse” [1998] LS 41 at 53–4; H Dagan, “The Distributive Foundation of Corrective Justice”, (1999) 98 Mich. L Rev. 138. 3 Mautner, supra n. 2 at 104.
The Normative Foundations of Proprietary Claims and Remedies 71 ent’s assets are swollen by the transfer in question as a result of an enrichment gained at the expense of the owner. Thus, such transfers demonstrate a lack of respect for the autonomy of owners by undermining their financial security. One way of dealing with this problem would lie in giving an owner a personal right of action against remote recipients. The interests of such recipients will be reasonably safeguarded if purchasers are allowed a defence of bona fide purchase and volunteers are permitted to rely on a bona fide change of position. The concern that a plaintiff’s wealth not be undermined also explains the impulse to give rights to the exchange product of any transactions involving the plaintiff’s property. For the transfer at an undervalue to remote recipients of such exchange proceeds is equally liable to prejudice the plaintiff’s ability to recover compensation from the party that initially misappropriated the plaintiff’s property.4 On the other hand, to the extent that the party that initially misappropriated the assets in question receives value from remote recipients of those assets, it is difficult to see that the plaintiff’s ability to recover damages from the remote recipient is undermined. Thus, such relief does not seem to be demanded by any objective of safeguarding owners’ financial security. In addition, the position of remote recipients’ creditors is unreasonably undermined where owners are given rights of recovery without compelling reason. Nonetheless, it might be thought that conferring rights against third parties without regard to the extent to which the transfer in question undermined the position of owners to recover against the party that initially misappropriated the assets is the best way realistically available of protecting owners’ financial security. It might well be that any rule that took account of such considerations would be too difficult to administer. A different solution to fears that owners’ patrimony may be undermined by transfers to third parties that are gratuitous or at an undervalue is provided by the law of preference. This requires the reversal of transfers made on the brink of bankruptcy that had the effect of benefiting a volunteer or preferring one creditor at the expense of others. The approach taken to this problem varies considerably between jurisdictions. The results are always inevitably relatively arbitrary but perhaps somewhat less so than the results achieved through according owners rights directly against third parties. (b) Utilitarian Justifications A second form of justification approaches the issue, not ex post facto on the basis of moral desert, but from an ex ante perspective, whereby we judge legal norms on the basis of the consequences they produce. Thus, property is often justified for its ability to create incentives for the promotion of economically efficient and/or virtuous behaviour.5 It is in the public interest to deter interference with property 4
For a fuller account of the normative foundations of tracing see infra, ch. 5.IV. See, e.g., D Hume, Enquiries Concerning Human Understanding and Concerning the Principles of Morals (eds. LA Selby-Bigge, and PH Nidditch, 3rd edn., Oxford, Clarendon Press, 1975) at 195. 5
72 Property and Proprietary Remedies and thereby encourage individuals to exploit resources, engage in commercial transactions and avoid disputes that are expensive and socially destabilising.6 Providing owners with a certain level of protection against third parties that come into possession of their property serves this purpose. However, this objective has to be balanced against other policy considerations. Thus, it is also true that commercial transactions are encouraged by a rule that provides that bona fide purchasers who have reasonably relied upon the seller’s right to transfer the property in question obtain good title. The extent to which third party purchasers should be denied proprietary rights because of their failure to ensure the validity of the transferor’s title is a difficult issue. The social benefits of encouraging such efforts must be weighed against the cost of such inquiries. One approach is to ask whether it is owners or remote recipients who are typically the “least cost avoider”.7 Where owners are generally in the best position to prevent wrongful dealing with their property, it may be both unfair (bearing in mind the parties’ relative fault) and inefficient to shift the loss to remote parties. The notion of constructive notice is probably flexible enough to allow the courts to take such factors into account in allocating responsibility.8 (c) To What Extent are these Considerations Reflected in Judicial Doctrine? Often the questions of moral desert and efficiency that arise in relation to third parties in this area can be best dealt with by the institution of registration systems designed to alert potential purchasers and secured creditors of the property rights affecting particular assets. This is likely to be true of land, where the fragmentation of interests makes registration particularly useful, and motor vehicles, where registration can lessen some of the risks that arise as a result of the mobility of these relatively valuable assets. Where the assets in question are not subject to a registration regime, it is the common law and equity that regulate conflicts between owners and remote recipients. For its part, equity deals with these concerns by providing that bona fide third party purchasers of the legal title without notice take free of equitable interests. In addition, the autonomy of third party volunteers might be respected through a change of position defence that excuses those who have in good faith and without notice acted to their detriment in reliance on the validity of a transfer. However, the change of position defence has been late in coming to English law.9 Moreover, it seems that this defence is unlikely to be available for proprietary claims at law or in equity.10 6 See, e.g., L Becker, Property Rights: Philosophic Foundations (London, Routledge and Kegan Paul, 1977) 68. 7 Mautner, supra n. 2 at 100–1. 8 For a discussion see D Fox, “Constructive Notice and Knowing Receipt: An Economic Analysis” [1998] CLJ 391. 9 Lipkin Gorman v. Karpnale Ltd. [1991] AC 548. 10 Foskett v. McKeown [2001] 1 AC 102 at 129 per Lord Millett.
The Normative Foundations of Proprietary Claims and Remedies 73 In contrast, it is difficult to justify the stringency of the common law’s approach to conversion. The common law does not generally protect bona fide purchasers.11 Moreover, it generally takes the view that “an owner of property is entitled to be careless with it if he likes”,12 thereby insulating owners from the consequences that their lack of care may have for third parties. On the other hand, over the past 150 years, the legislature has made the law of sale of goods fairer and more efficient by enacting a number of exceptions to the nemo dat principle. These exceptions protect bona fide purchasers in circumstances in which owners placed wrongdoers in a position that enabled them to represent themselves to third parties as able to give good title to the goods in question.13 Where the law provides remedies in respect of fungible property, it seems that it is more concerned with the protection of owners’ wealth than their enjoyment of specific assets. As mentioned, it is not straightforward to justify the rights given against third parties in respect of property taken and its proceeds as a matter of moral desert. However, such an approach may be readily justified in utilitarian terms on the basis that it would discourage misappropriations by restricting the alienability of misappropriated assets. Both in equity and at common law, concern for owners’ financial security is demonstrated by a willingness to allow actions to be brought in respect of the exchange product of misappropriated assets. It is a subject of controversy whether such claims are subject to precisely the same limitations that apply to claims to enforce pre-existing property rights or whether they may be vulnerable to the change of position defence.14
2. Rights against Third Parties in Respect of Vitiated Transfers15 (a) Considerations of Moral Desert Concerns about the welfare of initial transferees limit the extent to which we allow owners relief in the context of transactions in which their intention to transfer title was vitiated in some way. However, the question arises whether, when we do recognise that owners should be entitled to relief against the party to whom they initially transferred the assets in question, we should also give them relief against remote recipients to whom those assets are subsequently transferred. We may draw a distinction between situations in which assets are misappropriated without 11 Of course, a very significant exception is made in the case of money. See, e.g., Miller v. Race (1758) 1 Burr. 452. In addition, the courts recognised an exception in the case of market overt, since abrogated by Parliament in the Sale of Goods (Amendment) Act 1994. 12 Moorgate Mercantile Ltd. v. Twitchings [1977] AC 890 at 925 per Lord Fraser. 13 Sale of Goods Act 1979, s. 24 (seller in possession) and s. 25 (buyer in possession); Hire Purchase Act 1964, s. 27 as re-enacted by the Consumer Credit Act 1974 (private purchasers take good title from one in possession under a hire purchase arrangement.). 14 Foskett v. McKeown [2001] 1 AC 102 at 129 per Lord Millett. 15 For a fuller discussion of these issues see infra ch. 6.
74 Property and Proprietary Remedies an owner’s consent and situations in which consent is given that is vitiated in some way. We may allow relief against remote third parties in the former case but deny it in the latter. However, such a line would be rather arbitrary. It would seem unreasonable to conclude that owners who have carelessly allowed their property to be stolen should have remedies against third parties, while those who were cleverly defrauded are limited to an action against the rogue who duped them.16 Moreover, where an owner transferred property pursuant to a self-induced mistake, it is not obvious why third parties who are volunteers or have knowledge of the owner’s state of mind ought not be liable to the owner. Again, a reasonable balance between a concern for the autonomy of owners and that of remote recipients could be reached if the defences of bona fide purchase and change of position were available. (b) Utilitarian Considerations An argument for denying relief against third parties on the basis of considerations of efficiency would be difficult to sustain in this context. For one thing, in cases of fraud, holding third parties liable is likely to have some beneficial effect by discouraging fraudulent activity as a result of restricting rogues’ opportunities to dispose of the proceeds of their activities. On the other hand, it may be true that limiting owners to relief against those who defrauded them would strike an optimal balance between giving owners incentives to take precautions and discouraging fraud. However, such an approach will be efficient only if it is true that owners are generally the least-cost avoiders in the context of self-induced mistakes. This may not be true. Liability may be more consistently placed on the least-cost avoider by a rule that provides that remote recipients are made liable if they had constructive notice of the mistake in question. Finally, in cases of self-induced mistakes, if the law were concerned to give owners incentives to avoid mistakes, it seems to make more sense to deny them remedies against anyone and not merely subsequent third party transferees. (c) To what Extent are these Considerations Reflected in the Positive Law? At common law, title tends to pass in the context of transfers in which the owner’s intention to confer title is vitiated.17 This can be justified on the basis that the harsh effect that common law property rights have on third parties18 means that it is better to leave the matter to be dealt with by equity. Where assets are transferred pursuant to a transaction in which the owner’s intention to confer title was 16
See El Ajou v. Dollar Land Holdings plc [1993] 3 All ER 717 at 734 per Millett J. This is not universally true. Thus, certain “fundamental” mistakes are held to render contracts void and thereby prevent property passing—the best example being “identity” mistakes of the type found in Cundy v. Lindsay (1873) 3 App. Cas. 459. However, this approach has been the subject of considerable criticism. See infra, ch. 6.I.1. 18 See supra, text accompanying nn. 11–13. 17
The Normative Foundations of Proprietary Claims and Remedies 75 vitiated, it is not clear to what extent an equitable interest may arise so as to affect subsequent recipients of the assets. One view is that equitable proprietary rights are recognised only where the subject matter of the transfer was unique so that damages would be inadequate.19 A second view is that an interest comes into being only if a recipient’s conscience is affected.20 A third perspective, which has much to recommend it—despite the fact that it has attracted considerable hostility—is that property rights are available in respect of any mistake that gives rise to a right of recovery.21 II . RIGHTS TO PROFITS 22
Judicially developed doctrines readily provide for liability to account for profits derived from the wrongful use of another’s property.23 This state of affairs can be justified ex post, as a matter of moral desertion, because it punishes wrongdoers for interfering with others’ property. Equally, such a rule may be favoured ex ante because it is liable to deter breaches of property rights by a certain sort of entrepreneurial wrongdoer. These rationales may also justify holding third parties liable for the receipt of proceeds of property on the basis that this will discourage breaches of property rights by limiting third parties’ opportunities to benefit at an owner’s expense. III . SHOULD THESE REMEDIES BE SPECIFIC ?
1. Justifying Specific Relief Considerations of justice and efficiency suggest that owners’ economic interest in their property should be safeguarded by the provision of relief where others infringe that interest. However, it does not necessarily indicate that this relief should be specific. Adequate punishment of past wrongs and deterrence of future breaches can generally be achieved by granting an award of damages. On the other hand, a right to specific relief may be merited because the asset in question has, or is likely to have special significance for the plaintiff. One reason this may be so is linked to what has been termed the “endowment effect”: a phenomenon that means that measures of relief linked to market value do not provide what plaintiffs would regard as adequate compensation. Put simply, owners show a predisposition to place a higher value on things to which they have been entitled 19
Sir Peter Millett, “Restitution and Constructive Trusts” (1998) 114 LQR 399. See infra, ch. 6.II.4. Westdeutsche Landesbanke Girozentrale v. Islington London Borough Council [1996] 1 AC 669 at 714–16 per Lord Browne-Wilkinson. See infra, ch. 6.II.2(c). 21 Chase Manhattan v. Israel-British Bank (London) [1981] Ch. 105. See infra, ch. 6.II.2(a). 22 For a fuller treatment of these issues see infra, ch. 9. 23 For an analysis see H Dagan, Unjust Enrichment: A Study in Private Law and Public Values (Cambridge, Cambridge University Press, 1997). 20
76 Property and Proprietary Remedies than to things in which they have never enjoyed an interest.24 Where the defendant is in possession of property taken from the plaintiff, a personal remedy will be sufficient if what was taken was money or an asset of a kind that can readily be obtained from the market. On the other hand, where this is not possible, an award of damages is liable to leave owners feeling aggrieved. In addition, a concern for owners’ autonomy may justify the award of a specific remedy to reflect the special role that particular objects may play in the development of our self-identity.25 The loss of such objects is liable to be felt particularly strongly, and, as a consequence, it is tempting to give owners the right to recover specific property.
2. To what Extent Does the Law Recognise these Concerns? At law rights of specific recovery are largely limited to the enforcement of interests in land. Today, however, recovery of chattels is greatly facilitated by the discretion that Parliament conferred on courts to order delivery up of chattels where justice demands it.26 Equity went further than the common law and provided for rights of delivery up of assets where, because of the nature of the assets in question, damages would be an inadequate remedy. In addition, equity provides for the specific performance of contracts for the transfer of specific assets for the same reason.
3. Rights to Specific Recovery and Bankruptcy One mistake is to assume that rights to specific recovery must necessarily be enforceable in bankruptcy. There is no reason why this must be so. However, there is a tendency in English law to transform rights to specific recovery into fullyfledged property rights through the doctrine of conversion that is viewed as an application of the maxim “equity regards as done that which ought to be done”.27 We may feel that the concern to allow for specific recovery of an asset is sufficiently important to justify holding that a plaintiff’s right should prevail in bankruptcy. However, this question is acutely difficult and may involve the competition of considerations that appear incommensurable.28 Consequently, 24 E Hoffman and M Spitzer, “Willingness to Pay vs. Willingness to Accept, Legal and Economic Implications” (1993) 71 Wash. ULQ 59; JJ Rachlinski and F Jourden, “Remedies and the Psychology of Ownership” (1998) 51 Vanderbilt L Rev. 1541. 25 See, e.g., GWA Hegel, Elements of the Philosophy of Right (ed. Allen Wood, Cambridge, Cambridge University Press, 1991) § 41–64; J Waldron, The Right to Private Property (Oxford, Clarendon Press, 1988) ch. 10; H Dittmar, The Social Psychology of Material Possessions, To Have is to Be (Hemel Hempstead, Harvester Wheatsheaf, 1992). For an analysis of the importance of these issues for legal regulation see M Radin, Reinterpreting Property (Chicago, Ill., University of Chicago Press, 1993) at 35–71. For an account of the relevance of these considerations in the context of restitution for wrongs, see Dagan, supra n. 23 at 40–9 and 63–70. 26 Torts Conversion of Goods Act 1977, s. 3(1). 27 See supra, ch. 2.V.2. 28 For a discussion see, e.g., infra, ch. 10.V.4(a).
The Normative Foundations of Proprietary Claims and Remedies 77 where possible, it would be preferable if we could point to independent reasons justifying giving such plaintiffs priority in bankruptcy. One thing that is clear is that these considerations provide no basis for justifying specific relief in cases where a claim is made in respect of money or other fungible assets. Similarly, these considerations cannot explain the provision of specific relief in respect of assets that plaintiffs did not previously own—as in the case of proceeds or profits. In these cases there is no endowment effect problem or any issue of plaintiffs’ having a special attachment to the assets in question. Rather relief is generally sought to secure priority in bankruptcy and, to achieve this end, plaintiffs would generally be content to have a lien over the assets in question.
IV . SHOULD THESE REMEDIES HAVE PRIORITY IN BANKRUPTCY ?
1. Justifying Remedies in Bankruptcy (a) The Significance of Proprietary Relief in Bankruptcy One of the most significant advantages proprietary relief brings relates to the distribution of entitlements in bankruptcy.29 Those limited to personal claims are obliged to line up as unsecured creditors and share pari passu in whatever is left of a bankrupt’s estate after the claims of secured and preferential creditors have been satisfied. In contrast, the effect of awarding a constructive trust over particular assets is that, in the event of the constructive trustee’s bankruptcy, those assets are not available for distribution among creditors.30 Similarly, an equitable lien gives the plaintiff an interest over assets to secure the amount owed by the defendant. In a contest between those with proprietary remedies and secured creditors, the position of fixed charge holders is clear enough. Holders of fixed legal charges will take priority if they were bona fide purchasers without notice of the interests of parties asserting equitable proprietary rights. The position of floating charge holders is rather more complicated. Even if the assets in question were legally owned by the chargor at the time the floating charge was taken, the defence of bona fide purchase will not apply because the holder of the charge acquires only an equitable interest. Moreover, because this interest is acquired only when the charge crystallises, the holder will be second in priority to any equitable proprietary rights arising prior to the crystallising event.31 On the other hand, it is less clear whether, after a floating charge has crystallised, the charge holder will be affected by equities of rescission.32 29
FH Lawson, Remedies of English Law (2nd edn., London, Butterworths, 1980) at 149. Insolvency Act 1986 s. 283(3)(a) and (5). This was assumed, e.g., in Re Goldcorp [1995] 1 AC 74. See also G McCormack, Proprietary Claims and Insolvency (London, Sweet & Maxwell, 1997) 44. 32 Lord Mustill in Re Goldcorp [1995] 1 AC 74 at 94 distinguishes between the position of chargees and successors in title, which might suggest that the former do not necessarily take subject to equities, but the point is not addressed directly. In Biggerstaff v. Rowatt’s Wharf Ltd. [1896] 2 Ch. 93, the Court 30 31
78 Property and Proprietary Remedies (b) The Circularity of Property-based Justifications It is tempting to say whether plaintiffs should be given priority in insolvency should depend upon whether they have a proprietary interest and that, if that is so, the assets in question do not form part of an insolvent’s estate at all.33 However, to say that an asset is the property of an aggrieved owner is a legal conclusion that is in itself in need of justification. The very question that needs to be resolved in this context is in what circumstances we should confer rights which will have the effect of conferring priority in bankruptcy. It should be borne in mind that proprietary relief is on a continuum: it is possible to give plaintiffs a certain degree of protection without concluding that they have a fully-fledged proprietary interest in respect of the assets in question. Thus, for example, even if it is thought that a plaintiff’s enjoyment of unique assets ought to be protected to some degree, this may be achieved by conferring an entitlement to have the property delivered up that is not enforceable in bankruptcy. Nor should it necessarily follow from the fact that an owner has rights against third parties that those rights should confer priority in bankruptcy. Thus, it is not obvious that, for example, a right to damages for conversion should be enforceable against a trustee in bankruptcy in whom the asset in question vests.34 Some justification is needed for placing claims for personal relief of dispossessed owners ahead of those of others who have suffered wrongs and those of disappointed contractual creditors. (c) Difficulties in Justifying Relief on the Basis of Efficiency Consequentialist justifications for deterring interference with property are unlikely to justify the conferral of priority in bankruptcy. For, there is no question of an insolvent defendant’s retaining the assets in question. Instead, like any claimant with rights against a bankrupt defendant, aggrieved owners are in competition, not with defendants, but with defendants’ other creditors. Given that defendants do not misappropriate or unconscionably retain assets in order to enrich their creditors, the objective of deterring defendants cannot justify giving plaintiffs priority. On the other hand, it is possible that denying creditors a share of assets in bankruptcy may give them an incentive to monitor the activities of their debtors. This may be a plausible view in the context of institutional lenders with floating charges.35 Such lenders are liable to have a need to monitor the activities of their of Appeal held that rights of set-off in respect of contracts arising after the charge was created but prior to its crystallisation did bind the chargee. However, the members of the court largely justified this on the basis of policy considerations that do not necessarily pertain to equities that arise by operation of law. 33 For examples of this tendency see infra, ch. 5.V.1. 34 Although, as the law stands, it seems trustees in bankruptcy are indeed personally liable in conversion or money had and received in these circumstances. See Tooke v. Hollingworth (1793) 5 TR 215; M Scott, “Tracing at Common Law” (1965–66) 7 UWALR 463; D Fox, “Common Law Claims to Substituted Assets” [1999] RLR 55 at 72–3. 35 See, e.g., J Armour and S Frisby, “Rethinking Receivership” (2001) 21 OJLS 73.
The Normative Foundations of Proprietary Claims and Remedies 79 debtors in order to ensure that their debtors retain sufficient assets to enable them to realise their security. Perhaps Re Goldcorp Exchange Ltd.36 provides a good illustration of this point. The Bank of New Zealand sought to enforce its floating charge over the company’s general assets, despite having been in a good position to have realised that its creditor was breaching its obligation to its customers to maintain reserves of bullion. This may well explain the lack of sympathy that the New Zealand Court of Appeal had for the bank’s position.37 However, it will not always be the case that institutional lenders will be able to detect the sort of events that give rise to proprietary remedies. This is probably particularly true of rights arising in the wake of vitiated transactions, for the recovery of profits for which the defendant should account, and rights contingent upon tracing. If this is so, it may well be implausible to justify in terms of efficiency the effect that these remedies have in undermining the utility of devices designed to provide protection against the risks of bankruptcy, such as the floating charge and the negative pledge. In contrast to secured creditors, unsecured creditors are unlikely to be in a position to monitor their debtors’ actions. They will rarely be well placed to acquire the information necessary for this exercise. Moreover, given the relatively small sums typically involved and collective action problems, it would be unlikely to be efficient for unsecured creditors to take on such a task. Finally, proprietary remedies are liable to be inefficient to the extent that they make it difficult for those administering bankrupt estates “to determine whether property which is, on the face of it, divisible among the creditors is truly so divisible”.38 At the very least, the rules that determine the availability of redistributive remedies should be designed to avoid requiring trustees in bankruptcy and official assignees to undertake unduly expensive inquiries. The difficulties in justifying the conferral of proprietary remedies in efficiency terms suggest that we must look to explanations of moral desert if we are to provide a convincing rationale for judicial intervention of this kind.
2. The Swollen Assets Rationale (a) Restitution as Corrective Justice It has long been argued that restitution represents the most compelling of private law claims.39 The correspondence between the plaintiff’s loss and the defendant’s 36
[1995] 1 AC 74. Liggett v. Kensington [1993] 1 NZLR 257. 38 Per Pincus J in Re Osborn (1989) 91 ALR 135. There, Pincus J declined to hold that the constructive trust to which the plaintiff was entitled took effect prior to a judicial recognition of the plaintiff’s rights. This meant that the plaintiff’s interest did not arise at a date prior to the bankruptcy of the legal owner and so did not give the plaintiff priority over the legal owner’s general creditors. 39 See, e.g., LL Fuller and W Purdue, “The Reliance Interest in Contract Damages” (1936) 46 Yale LJ 52 at 56. 37
80 Property and Proprietary Remedies gain that characterises these claims has been thought to justify giving them priority over claims based on loss alone.40 Claims premised upon the defendant’s being enriched as a result of a subtraction from the plaintiff’s wealth provide the paradigm case of corrective justice41; for restitution returns the parties to the position they enjoyed before the enrichment.42 Of course, this is only a good outcome if such a restoration of the status quo ante is justified or, in other words, if the defendant’s enrichment is unjust. It is in the determination of this question that considerations of distributive justice come into the equation.43 As suggested above, the baseline of entitlements that anchors the system of corrective justice found in our private law is derived from the understanding that due respect for the autonomy of owners and/or considerations of utility require some degree of protection from theft and vitiated transfers.44 (b) Proprietary Relief as doing Corrective Justice between Plaintiffs and Defendants’ Creditors The effect of proprietary remedies in conferring priority in bankruptcy points to the importance of property, not just for parties to the action, but also for third parties. Thus, some jurists argue that a proprietary remedy can be justified only if there is something in the nature of a claim that indicates that the plaintiff should be given priority over the defendant’s creditors.45 The fact that the reversal of unjust enrichment involves a restoration of the status quo suggests a basis for giving restitution actions priority over other claims in the event of a defendant’s insolvency. On this view, often characterised as the “swollen assets” rationale for priority, according unjust enrichment claims priority will effect corrective justice between the plaintiff and the defendant’s unsecured creditors. For where the plaintiff’s loss is matched by a corresponding gain in the pool of assets available for distribution in the defendant’s bankruptcy, to give the plaintiff priority to the extent of that gain will do no more than return the plaintiff and the defendant’s
40
E Sherwin, “Constructive Trusts in Bankruptcy” [1989] U Ill. L Rev. 297 at 329. See Aristotle, Nicomachean Ethics at § 5.52, 1132b. It was an indication of the intuitive appeal of the restitutionary claim that Aristotle attempted to force claims for compensation for injury within the restitutionary paradigm. Modern scholars however recognise that such claims do not share the correspondence of loss and gain which characterises restitution claims: see, e.g., J Coleman, “Corrective Justice and Wrongful Gain” (1982) 11 J Legal Stud. 421 at 425. 42 Of course, this is true only if the defendant’s estate continues to be enriched by the subtraction in question. Where this is not the case, we may require some degree of fault before we demand restitution from a defendant or we may allow defendants to avail themselves of the defence of change of position. Consider, e.g., the doctrine of knowing receipt, where a debate rages about which of these alternatives should be favoured. For a discussion see S Gardner, “Knowing Assistance and Knowing Receipt: Taking Stock” (1996) 112 LQR 56. 43 See Dagan supra n. 2. 44 See for instance A Honoré, “Ownership” in AG Guest (ed.), Oxford Essays in Jurisprudence (Oxford, Oxford University Press, 1961) 107 at 119. 45 See, e.g., D Waters, “The English Constructive Trust: A Look into the Future” (1966) 19 Vanderbilt L Rev. 1215 at 1250; Sherwin, supra n. 40. 41
The Normative Foundations of Proprietary Claims and Remedies 81 creditors to the situation that they would have enjoyed were it not for the defendant’s enrichment.46 This point is easiest to understand when claims based on unjust enrichment are compared with those based on tort. While both may be regarded as dealing with the aftermath of “accidents”, they are dealing with different types of accidents. In a tort claim, the court is asked to determine who should bear the cost of an accident. In contrast, in an unjust enrichment action, the court has the opportunity to restore all the parties, including the defendant’s creditors, to the position in which they would have found themselves had the accident never happened. Hence, it is argued that plaintiffs relying on these different causes of action are not “similarly situated” and that there is a case for giving those whose claims are founded on unjust enrichment priority over tort plaintiffs.47 Of course, just as for restitution claims between plaintiffs and solvent defendants, the restoration of the status quo in bankruptcy is a good thing only if the defendant’s creditors do not deserve to be enriched by the wealth that the defendant has gained at the plaintiff’s expense. Much of the impulse for granting proprietary relief is driven by a plausible intuition that to allow creditors to have recourse to assets gained without plaintiffs’ real consent would show a lack of respect for the autonomy of such plaintiffs and so would result in the unjust enrichment of the defendant’s creditors. 3. The Assumption of Risk Rationale: Distinguishing Contract and Restitution Plaintiffs (a) Difficulties with the Assumption of Risk Rationale The swollen assets rationale cannot explain why restitution claims are generally thought to merit priority over contract claims. While the intuition that contract claimants are not entitled to a proprietary remedy is relatively uncontroversial, it is seldom analysed in any depth. Typically, contract creditors will have advanced goods, services or money that will have increased the value of their debtors’ estates. Why then should they not be entitled to priority over tort creditors? It is often said that contract claimants who have failed to avail themselves of the opportunity to obtain some form of security to protect themselves against the possibility of the debtor’s insolvency have assumed the risk of their debtor’s bankruptcy. In contrast, this cannot be said of most restitution claimants48: they are 46 RH Maudsley, “Proprietary Remedies for the Recovery of Money” (1959) 75 LQR 234 at 244–5; Waters supra n. 45 at 1233; Sherwin, supra n. 40 at 364; A Kull, “Rationalising Restitution” (1995) 83 Cal. L Rev. 1191 at 1217. 47 Ibid. at 1217. In fact tort claimants are often in a highly advantageous position in bankruptcy. Tort victims are often protected against vehicle and occupational injuries by schemes that require the tortfeasor to carry insurance. Moreover, sums payable as a result of an insolvent assured’s liability are to be paid directly to tort victims by virtue of the Third Parties (Rights Against Insurers) Act 1930. 48 An exception is claims that arise from invalid contracts in which the plaintiff had not negotiated for security. See Westdeutsche Landesbank Girozentrale v. Islington LBC [1996] AC 669 at at 683–4 per Lord Goff and 704 per Lord Browne-Wilkinson. Their Lordships concluded that a claim for restitution for failure of consideration in the aftermath of an unsecured ultra vires loan did not merit priority, as the plaintiff had chosen to be an unsecured creditor. See infra, ch. 6.II.2(c)(iii).
82 Property and Proprietary Remedies involuntary creditors who did not have the opportunity to protect themselves in this way.49 Strictly speaking, the notion that a creditor can be said to have “assumed a risk” is an inadequate explanation. If it were an adequate justification in itself, assumption of risk could be used to justify completely denying contract creditors any relief in insolvency; for, if that were the rule, voluntary creditors could be said to have assumed whatever risks the law imposes. Risks of bankruptcy are largely endogenous to the law. Consequently, it is circular to use the prevailing risks to justify the law that imposes those risks. The very matter at issue is precisely what risks the law should impose on different classes of creditors. Thus, while voluntary creditors can be said to have assumed whatever risks the law imposes upon them, if those risks are to be justified they must also be reasonable. (b) Assumption of Risk as an Efficient and Fair Distribution of Risk The best explanation that can be offered for denying contract creditors priority is that it is thought appropriate that they should bear the risks that flow from being denied proprietary relief. It may be argued that, because they are voluntary creditors, those making contracts are in a position to respond to these risks, either by isolating themselves from the risk by seeking security or insurance, or by demanding better terms in return for bearing the risk.50 We have a market in security and it would be more efficient to require these parties to make their own arrangements to cover themselves against the risks of bankruptcy than to have the courts intervene to regulate the matter. The allocation of risk can be better dealt with within a system that provides for the registration of security interests, thereby giving notice of such interests, rather than through the judicial imposition of largely undiscoverable priorities. Moreover, once we have defined the risks facing unsecured creditors, where parties are in a position to protect themselves against the risks in question, it is generally fair to say that they have only themselves to blame if they fail to avail themselves of that opportunity.51 The conclusion that security should be bargained for where possible becomes even more compelling when one considers various “second-best considerations” that flow from the inevitable difficulties in identifying traceable proceeds.52 Considerable evidential difficulties and costs will be involved in identifying whether and to what extent a contract creditor has swollen the value of that part
49 On the notion that priority is justified where a restitutionary claimant is an involuntary creditor see, e.g., Palmer, The Law of Restitution i, § 2.14(c) at 185–6; Sherwin, supra n. 45 at 335. The importance of this consideration was recognised in Westdeutsche Landesbank, supra n. 48. 50 See, e.g., SR Scott, “The Constructive Trust and the Recovery of Advance Payments—Neste Oy v. Lloyds Bank Plc” (1991) 14 NZULR 375 at 389. 51 Sherwin, supra n. 40 at 331; D Paciocco, “The Remedial Constructive Trust: A Principled Basis for Priorities over Creditors” (1989) 68 Can. Bar Rev. 315 at 327. 52 See infra, ch. 5.IV.2(a).
The Normative Foundations of Proprietary Claims and Remedies 83 of a debtor’s estate that is available for distribution amongst general creditors in bankruptcy. Thus, where possible, it is better that the risks arising in this context are managed by the parties bargaining for security rather than through judicial intervention. In the light of this, it is reasonable to require voluntary creditors to bargain for protection if they do not wish to share pari passu with other creditors. (c) Considerations of Fault in the Definition of the Voluntary Creditor The concept of assumption of risk is sometimes used to cover a wider class of claimants than those who have knowingly chosen to become creditors.53 This is evident in Emily Sherwin’s use of the notion to justify the availability of the constructive trust in bankruptcy.54 Sherwin applies the rationale, not only to ordinary contract creditors, but also to situations involving mistaken payments or fraud in which plaintiffs’ loss was attributable in part to their carelessness. She argues that the question is whether plaintiffs can fairly be treated as involuntary creditors and that this is determined by asking whether they should have perceived the risk of the mistake or fraud that took place.55 While Sherwin’s explanation is framed in terms that suggest that it is based on voluntariness, she has smuggled in additional normative considerations. Proprietary relief is not denied because plaintiffs have literally assumed a risk, but because they were at fault in failing to safeguard themselves against that risk. When can fault be attributed to a party who has been defrauded? Sherwin argues that distinctions can be made between different cases of fraud. She takes the view that “[t]he nature of the fraud is . . . important in determining whether the constructive trust claimant’s position is essentially voluntary”.56 It is only “[i]f the fraud is such that the claimant did not and could not fairly be expected to perceive the risk of loss” that “the claimant should be treated as an involuntary creditor”.57 In Sherwin’s view, this assessment should depend on factors such as the degree of sophistication of the plaintiff and the commercial nature of the transaction.58 Thus, while institutional players are said to have assumed the risks of bankruptcy if they suffer from fraud,59 individuals will often be excused for their errors. It is possible that workable distinctions could be developed on this basis. There is certainly something to be said for the view that institutional lenders should be encouraged to take effective measures to protect themselves, instead of saddling those administering bankrupts’ estates with more problems in determining which 53 See In re Kountze Bros 79 F 2d 98 at 102 (2d. Cir., 1935) (where a plaintiff seeking restitution for mistake was characterised as a voluntary creditor). 54 Sherwin, supra n. 40 at 350–1 55 Ibid. 56 Ibid. at 352 57 Ibid. at 350–1. 58 Ibid. 59 This is well illustrated by Sherwin’s analysis of Central Trust Co. v. Shepard (In re Shepard) 29 Bankr. 928 (Bankr. M.D Fla., 1983) where the bank operated a system that enabled the defendant to perpetuate the fraud: ibid.
84 Property and Proprietary Remedies assets are available for distribution among creditors. This view reflects an ex ante perspective that emphasises the importance of providing appropriate incentives to discourage mistakes. The contrary view emphasises the difficulties with dealing with mistakes ex post facto. From this perspective, it may be thought that making the test determining the availability of proprietary relief as fact-specific as Sherwin contemplates would create excessive uncertainty for litigants and unduly complicate the position of trustees and assignees in bankruptcy. On the other hand, the courts may award proprietary remedies, even where the risks of a defendant’s bankruptcy were foreseeable, if they are inclined to encourage behaviour by insulating those indulging in it from such risks. This may explain the tenderness shown to beneficiaries in trust law. This is perhaps best exemplified by Lord Templeman’s controversial obiter dictum in Space Investments Ltd. v. Canadian Imperial Bank of Commerce Trust Co.60 His Lordship used assumption of risk reasoning to suggest that beneficiaries unable to identify specific assets as the proceeds of their property which had been misappropriated by their trustees should be entitled to a charge over the trustees’ entire estate in order to secure their claim to relief. In his Lordship’s view, beneficiaries merited priority given that, unlike other creditors, they had never assumed the risk of their trustees’ insolvency.61 Certainly, general creditors may be thought to have accepted certain risks conventionally associated with bankruptcy. Yet, given that the proprietary interest proposed was a novel one, the trustee’s creditors could hardly be said to have assumed the risks that would have followed from its recognition. Moreover, why should those who are sui juris and who choose to allow others to deal with property on their behalf not be said to assume the risk that their fiduciaries may misappropriate their property and subsequently become bankrupt?62 Sherwin argues that the eagerness to give proprietary remedies in this context is motivated by a desire to preserve confidence in fiduciary relationships.63 Yet, it could equally be argued that it would create better incentives for the proper regulation of these relationships if only personal relief were available and beneficiaries were thereby encouraged to protect themselves against the actions of dishonest fiduciaries. (d) Are all Voluntary Creditors Similarly Situated? One difficulty with the assumption of risk explanation for proprietary relief is that it suggests that all voluntary creditors are similarly situated. In particular, it implies that they are in a position to assess the relevant risks and to take appropriate action to protect themselves against those risks. The problem with this premise is that that smaller contract creditors are unlikely to be in much of a position to protect themselves against the risks of insolvency. 60 61 62 63
[1986] 1 WLR 1072. Ibid. at 1074. Waters supra n. 45 at 1232. Sherwin, supra n. 40 at 355–7.
The Normative Foundations of Proprietary Claims and Remedies 85 This may not be such a problem for some trade creditors who may choose to remain “rationally ignorant” of the risk of individual customers going bankrupt. Where the cost involved in making the inquiries needed to obtain useful information and of acting on that information is liable to exceed any resulting benefits, such creditors will instead spread the risks involved by factoring it into the average price charged for extending credit.64 In contrast, consumers making advanced payments for goods are potentially in a very vulnerable position.65 It may have been this insight that prompted the result in Re Kayford,66 where the plaintiff was a consumer who had made an advance payment to a supplier which, concerned about its own solvency, then put the money into a separate account designated the “customer trust account”. Megarry J was willing to conclude that a trust had been created in favour of the consumer and that, moreover, this did not involve a preference.67 However, he commented that different considerations might have applied to trade creditors.68 Concerns regarding the ability of consumers to gauge risk and insure against it may also explain the inclination of courts in some jurisdictions to conclude that, in contracts for the construction of assets, equitable title may pass to the assets prior to their completion.69 (e) Assumption of Risk as a Necessary but not Sufficient Prerequisite for Proprietary Relief The “assumption of risk” may be a necessary condition, but it is certainly not a sufficient one. If the fact that voluntary creditors had the opportunity to safeguard their position and failed to do so were a sufficient justification in itself for giving non-voluntary creditors priority, it would justify giving tort claimants preference over contract creditors. This was the error made by Lord Templeman in Space Investments,70 where he suggested that it would be appropriate to give the defrauded beneficiaries a charge over the defendant’s entire estate to secure their personal claim. Even if it were reasonable to characterise the beneficiaries as involuntary creditors, such a priority could be warranted only if it could also be justified in terms of the “swollen assets” 64 JH Scott, “Bankruptcy, Secured Debtors and Optimal Capital Structure: Reply” (1979) 34 Journal of Finance 253. 65 However, things are not necessarily so grim for consumers making advanced payments. Those who have the foresight or good fortune to pay by credit card are largely protected against the cost of the seller becoming bankrupt before delivering the goods by virtue of the Consumer Credit Act 1974, s. 75. 66 Re Kayford Ltd. (In Liquidation) [1975] 1 WLR 279. See also Re Chelsea Cloisters Ltd. (1981) 41 P & CR 98. 67 A conclusion that is not easy to accept: see McCormack, supra n. 31 at 61–4. 68 Ibid. at 282. See SR Scott, “The Remedial Constructive Trust in Commercial Transactions” [1993] LMCLQ 330 at 345. 69 See, e.g., Hewett v. Court (1983) 57 CLR 211; Taypotat v. Surgeson [1985] 3 WWR 18; Waselenko v. Touche Ross Ltd. [1983] 2 WWR 352, aff’d [1985] 3 WWR 38. See infra, ch. 8.II.2. 70 [1986] 1 WLR 1072. See supra, text accompanying n. 60.
86 Property and Proprietary Remedies rationale. This would indicate that a charge should be granted only to the extent that it could be demonstrated that a trustee’s estate continues to be enriched at the expense of the beneficiaries so that, without the charge, unsecured creditors would enjoy a greater dividend in the defendant’s bankruptcy. It is only this requirement that would provide a basis for distinguishing between aggrieved beneficiaries and other claimants, such as tort victims, who are also involuntary creditors. In conclusion, the justifications for priority in insolvency are by no means as obvious as is often assumed. What is clear, however, is that neither the swollen assets nor the assumption of risk rationales are sufficient in themselves to justify such privileged treatment.71 In combination, however, they offer a plausible justification for conferring priority. Thus, the paradigm case of a situation thought to justify priority involves a plaintiff who has involuntarily enriched the defendant’s estate so that there is an increase in the value of the assets that would be available for distribution in bankruptcy were a proprietary remedy not given.
71 For an example of the analysis of justifications for priority that treats these rationales disjunctively rather than in combination, see W Swadling, “Property and Unjust Enrichment” in JW Harris (ed.), Property Problems: From Genes to Pension Funds (London, Kluwer, 1997) 130 at 142–3.
Part II
Redistributive Proprietary Remedies
5
The Metaphysics of Tracing: Substituted Title and Property Rhetoric M I S A P P R O P R I A T E S a car owned by A and gives it to C in exchange for a motorcycle. Instead of bringing an action based on his title to the car, A may choose to assert title to the motorcycle. That we give property rights in respect of substituted assets is itself of interest. Civil law jurisdictions, in contrast, do not provide for such a result.1 However, more striking is the way in which rights to substitutes are explained in our legal culture. According to our legal discourse, owners have rights in the exchange product of transactions involving their property because “if the property in its original . . . form was [owned by the plaintiff] no change of . . . form can divest it of that [interest]”.2 What is more, the process of asserting rights to a substitute is described using the metaphoric language of “tracing” and “following”. This chapter asks why our legal culture offers an account of this remedy that suggests it follows from the nature of things, rather than in more prosaic terms, explaining the remedy as designed to promote particular objectives. In addition, and perhaps more importantly, it asks what are the consequences of this approach. Functionally, tracing can only properly be regarded as a remedial process that gives rise to new property rights—an understanding which cannot easily be reconciled with traditional notions of property.3 This explains the rather bizarre conceptualisation of tracing in our legal discourse. The traditional analysis of the doctrine in terms of the following of things is imbued with metaphysical rhetoric that serves to obscure the dissonance between a doctrine that provides for the creation of new proprietary rights and understandings of property that apparently preclude such an outcome. Is there really any harm in this? Fictions and related devices have often been praised for assisting legal development. According to this view, deceit in the form of the law is seen as a small price to pay for positive change in the law’s substantive effect. In fact, form and substance are too interdependent to support this conclusion. The obfuscatory concepts developed in this area have their own logic that will at times demand results which diverge from potentially sound normative justifications for redistributing proprietary rights. In attempting to mediate the
B
1 A Gambaro, “Property” in A Candian, A Gambaro and B Pozzo, Property, Propriété, Eigentum (Padua, Cedam, 1992) 1 at 7–9. 2 Taylor v. Plumer (1815) 3 M & S 562 at 575 per Lord Ellenborough. 3 FH Lawson, Remedies of English Law (2nd edn., London, Butterworths, 1980) 149.
90 Redistributive Proprietary Remedies apparent incongruity of tracing doctrine and axiomatic notions of property rights, our judges and jurists have failed to address fundamental issues of moral desert. The primary advantage of tracing is that it often confers priority in bankruptcy 4— an effect that is not easily justified.5 However, the rhetoric employed in this area to suppress the redistributive nature of “tracing” has discouraged the courts from seeking to mould a remedy that would allocate entitlements within limits provided by some defensible normative rationale. In particular, the metaphysical rhetoric of tracing encourages judges and jurists to ignore the consequences that proprietary relief has for third parties and to rely instead on the ultimately circuitous assertion that plaintiffs are entitled to proprietary relief because the contested asset is their property.
I . ANALYSING TRACING
Before we embark on a critical examination of the doctrine, it is worth attempting to clarify the analytical structure of tracing. In particular, it is important to address assertions that have become commonplace that, first, tracing is not a remedy and, secondly, it is a “neutral” process.
1. Is Tracing a Claim or Remedy? In Boscawen v. Bajwa,6 Millett LJ argued that: Tracing properly so-called . . . is neither a claim nor a remedy but a process . . . by which the plaintiff traces what has happened to his property, identifies the persons who have handled or received it, and justifies his claim that the money which they have handled or received . . . can properly be regarded as representing his property. He needs to do this because his claim is based on the retention by him of a beneficial interest in the property which the defendant handled and received.7
This description of tracing has quickly become a standard point of reference for those analysing the area. Yet it poses a number of problems. First, if one wishes to distinguish tracing from claims and remedies, one can hardly do it by describing it as a “process”; for, claims also involve a process—that of establishing entitlement to a remedy. Secondly, it is circular to describe tracing as a process by which one “traces”. Independent terms are required if we are to provide a helpful account of the process. Thirdly, it is unclear what is meant by the assertion that tracing is a process that “justifies” the plaintiff’s claim to proceeds. To suggest that 4
See infra n. 100. For a review of priority-creating proprietary remedies, see S Walt and E Sherwin, “Contribution Arguments in Commercial Law” (1993) 42 Emory LJ 897 at 934–67. 6 [1996] 1 WLR 328. 7 Ibid. at 334. For similar statements, see also Jones & Sons (Trustee) v. Jones [1997] Ch. 159 at 169–70 per Millett LJ; Foskett v. McKeown [2001] 1 AC 102 at 128 per Lord Millett. 5
The Metaphysics of Tracing: Substituted Title and Property Rhetoric 91 tracing “justifies” a plaintiff’s assertion that something “can properly be regarded as representing his property” suggests that it provides an independent reason for the recognition of that right. However, if the doctrine of tracing dictates the assets over which plaintiffs may assert claims, is it not more in the nature of a conclusion than a justification, a rule rather than a reason? In Millett LJ’s analysis we see, first, the assertion that tracing somehow involves plaintiffs demonstrating that the proceeds in question simply “represent” their property; and, secondly, that somehow plaintiffs “retain” an interest in the proceeds. Both of these assertions suggest that no new rights are created. In the following sections we shall see if we can make some sense of the view that tracing is neither a remedy nor constitutive of property rights.
2. Tracing as Part of a Remedial “Process” To start an analysis from ill-defined terms invites confusion. Thus, in deciding whether tracing is a claim or remedy, we must first decide what those concepts mean. (a) Tracing as Part of Process One reason why it might be argued that tracing is not a remedy is that the process is seldom the end of the matter. At common law, tracing places plaintiffs in a position to bring personal actions (for example, for conversion and/or money had and received). It is these actions that give plaintiffs the remedy they are ultimately seeking. Even in equity, tracing is not final. This is obvious where plaintiffs trace in order to claim a personal remedy: either for knowing receipt, where defendants are no longer in possession of traceable proceeds; or for knowing assistance, where defendants never held such proceeds for their own benefit. However, even where plaintiffs can point to traceable proceeds in defendants’ hands, tracing is part of the process, rather than a final remedy. For here the remedy is the constructive trust that is triggered as a result of tracing. This explains why it is argued that tracing is not so much a remedy “as part of the process of establishing the substantive rights of the parties.”8 However, the dichotomy between remedies and substantive rights upon which this argument relies is misconceived. One form that a remedy can take is the conferral of new substantive rights. (b) Primary and Secondary Rules We tend to associate claims and remedies with the enforcement or vindication of primary rules—rules that provide a particular set of rights and obligations, remedies and liabilities. Tracing, in contrast, appears to be a secondary rule—a rule that 8 Sir Robert Megarry and PV Baker (eds.), Snell’s Principles of Equity (27th edn., London, Sweet and Maxwell, 1978) 572.
92 Redistributive Proprietary Remedies provides for a change in the legal status of the parties.9 It is in this light that tracing tends to be characterised as a process whereby existing rights are transferred from one thing to another.10 Yet, can we not view the consequences of a secondary rule—the conferral of new rights—as remedial? It is true that we do not think of the most common instances of rights arising as a result of secondary rules as remedial in nature. For instance, we do not think of the rights arising out of contracts or express trusts in this way. However, we tend to view express trusts as the product of intention to take advantage of facilitative institutions11 provided by the law and to contrast them with constructive trusts that are said to arise by “operation of law” to provide a remedy.12 Rights contingent upon tracing generally arise by operation of law and so may similarly be regarded as remedial. (c) Tracing as an Intermediate Remedy While an analytical distinction may be drawn between tracing and claiming, it makes a good deal of sense to view tracing as part of a remedial process. The claims contingent on the tracing process vindicate entitlements that have arisen as a consequence of plaintiffs electing to assert rights over a new asset. In this light, we may view tracing as an intermediate remedy. It provides a remedy in so far as it changes plaintiffs’ legal status, placing them in the position to bring claims that would have otherwise been unavailable to them. Tracing and claims contingent on tracing may be viewed—as plaintiffs would view them—as parts of a whole. Thus, for example, where a plaintiff must trace in order to bring an action for money had and received, the two steps are parts of a single action. Tracing is an integral part of the action and essential to realisation of the ultimate remedy. In this sense, tracing is not much different from rescission. In seeking rescission, plaintiffs may ask that the property that is revested in them be returned to them. In doing so, they are seeking to exert property rights that are analytically separate from but contingent upon the process of rescission. Yet, in contrast with tracing, we do not hesitate to refer to rescission as a remedy. Structurally, tracing also bears a strong resemblance to subrogation. Both are methods of readjusting rights: subrogation allows plaintiffs to assume the rights of another; whereas tracing allows plaintiffs to assert rights they already enjoy over one thing in respect of something else. Both processes allow plaintiffs to assume rights they would not otherwise have. Interestingly, in Boscawen v. Bajwa, after stating that tracing was not remedial in nature, Millett LJ observed that subroga9
Cf. HLA Hart, The Concept of Law (Oxford, Clarendon Press, 1960) 27. See supra, ch. 1.III.1.b. See, e.g., Smith, The Law of Tracing at 3. See Hart, supra n. 9 at 27. 12 See, e.g., FW Maitland, Equity A Course of Lectures (2nd edn., Cambridge, Cambridge University Press, 1936) 53; cf. CEF Rickett, “The Classification of Trusts” (1999) 18 NZULR 305. On the tendency to think of consensually created rights as something other than remedial, see supra, ch. 1.II.2(b)(ii) and ch. 2.IV. 10 11
The Metaphysics of Tracing: Substituted Title and Property Rhetoric 93 tion was indeed a remedy.13 The remedial status of subrogation is now widely accepted.14 Yet, it was not always so. As recently as the third edition of their treatise on restitution, Goff and Jones lamented that “English judges have hitherto regarded subrogation as a right, not as a remedy”.15 The authors reluctantly treated subrogation as a discrete area of the law but predicted that the day would come when “the development of a generalised right of restitution will ultimately lead to the acceptance of the principle that subrogation is a restitutionary remedy”.16 They have been proved right and, in the latest edition of that treatise, subrogation has taken its place at the front of the book with other remedies.17 The recent intellectual history of subrogation emphasises that we should not be afraid to look beyond the received wisdom regarding the juridical nature of particular doctrines. Perhaps the time will also come when the remedial nature of tracing is recognised.
3. Do Rights to Proceeds Arise Automatically? (a) Tracing as Contingent Upon the Exercise of a Power One notion behind the contention that tracing is neither a claim nor a remedy turns on the idea that the rights it confers arise automatically, independently of plaintiffs’ making a claim. On this analysis, a plaintiff does not need to trace, the process occurs automatically; and, it follows that, in asserting a claim based on title to a traceable asset, the plaintiff is merely enforcing property rights that are already in existence. On the other hand, if tracing does not occur automatically, but only if and when plaintiffs exercise a power to assert title to another asset, tracing seems to resemble rescission—a process that we habitually characterise as remedial. And, if tracing involves the exercise of a power, it makes perfect sense to speak of those who enjoy such a power as having a “right to trace”. There are real difficulties with a view that regards rights generated by tracing as fully-fledged property rights that arise automatically. In particular, there is the problem of what Birks has termed the “geometric multiplication of the plaintiff’s property”.18 An advantage of tracing claims is that they allow plaintiffs a cause of action against more than one defendant. Plaintiffs may assert their title against anyone holding assets that were taken from them. Alternatively plaintiffs may “trace” their title into the exchange product of subsequent transactions. Consider an example where a car owned by A is stolen by B and then sold to C, who is aware of A’s interest. A may assert his title against C, in respect of the car, or against B, 13
[1996] 1 WLR 328 at 335. Indeed, this view recently received the endorsement of the House of Lords in Banque Financière de la Cité v. Parc (Battersea) Ltd. [1999] 1 AC 221 at 231 per Lord Hoffmann. 15 Goff and Jones, The Law of Restitution (3rd edn.) at 56. 16 Ibid. 17 Goff and Jones, The Law of Restitution (5th edn.) at 120. 18 P Birks, An Introduction to the Law of Restitution at 92 and 394. 14
94 Redistributive Proprietary Remedies for the proceeds of the sale. This suggests that A cannot simultaneously assert title against more than one defendant, and that plaintiffs must elect against whom they will enforce their rights.19 On this view, because A cannot simultaneously be the owner of both the original thing and the substitute, it cannot be plausibly argued that, prior to A’s exercise of this election, a full-blown proprietary interest arises in respect of the proceeds of sale held by B. Prior to tracing, B has a defeasible title to the proceeds of the sale—a title that is liable to be lost if A elects to assert title to those proceeds. If A has an interest arising automatically, at the most it can be characterised as an “inchoate” property right—what is commonly termed a “mere equity” rather than a full proprietary interest.20 The analysis of tracing as contingent on the exercise of a power is consistent with the conceptualisation of the doctrine in conventional legal discourse. Tracing is often described as involving a process akin to ratification.21 This is true of the reasoning offered in some of the most seminal tracing decisions. For example, in Re Hallett’s Estate, Jessel MR observed that “[i]f the sale was wrongful, you can take the proceeds of sale, in a sense adopting the sale for the purpose of taking the proceeds”.22 Similarly, more recently, in Lipkin Gorman v. Karpnale Ltd,23 Lord Goff commented, “Of course, tracing or following property into its product involves a decision by the owner of the original property to assert his title to the product in place of his original property”.24 (b) The View that Rights Contingent on Tracing Arise Automatically The view that a title conferred through tracing arises automatically has some judicial support.25 Such an understanding seems to be implicit in Millett LJ’s assertion that the plaintiff’s “claim is based on the retention by him of a beneficial interest in the property which the defendant handled and received.”26 Moreover, this analysis is also apparent in Millett LJ’s judgment in Jones & Sons (Trustee) v. Jones.27 In that case, the wife of a partner withdrew money from the firm’s bank account and invested it. The firm had committed an act of bankruptcy prior to Mrs Jones’ making the investment and the doctrine of relation back meant that title to the firm’s assets were deemed to be vested in the trustee in bankruptcy from the date of the act of bankruptcy. As a result, Millett LJ concluded that Mrs Jones 19
A Burrows, The Law of Restitution at 66. This view was taken, e.g., by Porter MR in Re ffrench’s Estate (1887) 21 LR Ir. 283, the effect of this being that a subsequent purchaser of an equitable interest in the traceable proceeds was not bound by the equity. See also A Everton, “Equitable Interests and Equities—In Search of a Pattern” (1976) 40 Conv. 209. 21 See infra, text accompanying nn. 54–62. 22 (1880) 13 Ch. D 696 at 708. 23 [1991] 2 AC 548. 24 Ibid. at 573. 25 See, e.g., Cave v. Cave (1880) 15 Ch. D 639. 26 Boscawen v. Bajwa [1996] 1 WLR 328 at 334. See supra, text accompanying n. 7. 27 Jones & Sons (Trustee) v. Jones [1997] Ch. 159. For a fuller account of the case, see infra, text accompanying nn. 76–77. 20
The Metaphysics of Tracing: Substituted Title and Property Rhetoric 95 at no time gained any title to the fruits of the investment. Of course, this conclusion is difficult to reconcile with authority, including Lord Goff’s dictum in Lipkin Gorman that describes tracing as a decision to assert rights to proceeds “in place of” the original property—a dictum that Millett LJ quoted in the course of his judgment in Jones.28 The most eloquent defence of the view that rights contingent on tracing arise automatically has been provided by Lionel Smith. He argues that the election required of plaintiffs in the context of tracing must be made, not when they sue, but only when they pursue a judgment to satisfaction.29 On this view, prior to the satisfaction of judgments, plaintiffs have fully-fledged property rights in both the assets they owned originally and the proceeds of those assets, albeit rights that are qualified in that one of them will be lost when plaintiffs make their election. There are several problems with this argument. First, it is misleading to suggest that the law takes a uniform approach to election and always requires satisfaction of a judgment. For example, in cases of undisclosed agency, where a plaintiff has a remedy against either the agent or the principal, the initiation of proceedings has been said to amount to at least prima facie evidence of an election.30 Indeed, there is authority to suggest that even acts short of commencing proceedings, such as the decision to debit the account of one of the parties, may suffice.31 Secondly, Smith proceeds too quickly in drawing an analogy between an election between personal remedies and an election between property rights. The law of election is far from certain. A policy choice is involved in deciding when an irrevocable election takes place and it should not be assumed that it should operate in the same way in all contexts. In part, Smith’s analysis of election relies on the example of “waiver of tort”. However, special reasons pertain in that context for allowing late election. The primary advantage of waiver of tort is procedural. In particular, it was used by the courts to get round the harsh rules governing the survival of actions, thereby allowing actions in quasi-contract to be maintained against defendants’ representatives when tort actions had been extinguished. In contrast, where tracing is used to claim proprietary relief over substituted assets or to sue third parties, it provides substantive advantages. It is far from clear how Smith’s approach would work in circumstances where more than one of the claims that a plaintiff has available generates rights to specific property. There are particular problems with the notion of election between such proprietary rights because of the duties they may impose on constructive trustees and their effect on third parties, such as purchasers, trustees in bankruptcy and creditors. These difficulties make the idea of delaying the time of election to the point of satisfaction of judgment much less attractive. 28
Ibid. at 169. The dictum in question was also quoted in a briefer judgment by Beldam LJ, ibid. at
171. 29
Smith, The Law of Tracing at 380–3. Scarf v. Jardine (1882) 7 App. Cas. 345; Clarkson Booker Ltd. v. Andjel [1964] 2 QB 775; Cyril Lord Carpet Sales Ltd. v. Browne (1966) 111 Sol. Jo. 51. 31 Addison v. Gandassequi (1812) 4 Taunt. 574; Thomson v. Davenport (1829) 9 B & C 78. 30
96 Redistributive Proprietary Remedies Thirdly, not only is Smith’s analysis inconsistent with the way in which tracing has typically been described,32 it sits uneasily with his own assertion that tracing does not create new property rights. While he tends to characterise the rights conferred by tracing as being transferred from one asset to another, that characterisation of the process is difficult to reconcile with the potential for the multiplication of property rights that his account of the timing of the interests arising in this context inevitably entails. (c) Tracing is Remedial Even if it Operates Automatically In any event, the fact that rights might arise automatically does not indicate that they do not amount to remedies. Even if it takes place automatically by operation of law, tracing involves the non-consensual readjustment of rights—rights that may then vindicated by claims that are contingent upon tracing. It is this readjustment of rights that gives tracing its remedial quality. Again we might note the resemblance that tracing bears to subrogation. In several instances, plaintiffs are subrogated automatically to the proprietary rights of another without the need for any election.33 Nonetheless, we do not hesitate to regard subrogation as a remedy.34 It is perhaps surprising how much emphasis has been placed on the question when the interest conferred by tracing arises. Of course, as we have seen, this is also a feature of the debate on the remedial constructive trust.35 Why are so many jurists eager to claim that the legal relationship between a plaintiff and a traceable asset arises automatically? Perhaps it reflects a rather romantic picture of the law— a picture that emphasises that the courts are enforcing our subsisting rights rather than using their power to intervene in our lives. The idea that a legal relationship arises automatically imbues tracing with a rather metaphysical quality, suggesting that the relationship at issue is almost a natural state of affairs—one somehow not involving the courts. However, the rights conferred by tracing are created by the law and, whether they arise automatically or not, they are remedies.
4. Does Tracing Create New Property Rights? Another way in which the remedial character of tracing is often denied is illustrated by Lionel Smith’s assertion that “[t]he exercise of tracing never creates proprietary rights. What it does is allow them to be asserted in different assets.”36 While it is common to conceive of tracing as transferring an existing right to a new asset, it is not clear what should turn on this characterisation. Analysing the matter in Hohfeldian terms, owners have not only existing rights over the assets they 32 33 34 35 36
See supra, text accompanying n. 24. See, e.g., Boscawen v. Bajwa [1996] 1 WLR 328 at 342 per Millett LJ. See supra nn. 13–17 and accompanying text. See supra, ch. 1.III.5. Smith, The Law of Tracing at 320.
The Metaphysics of Tracing: Substituted Title and Property Rhetoric 97 presently own, but also a power to assert similar rights over proceeds of those assets in certain circumstances. The exercise of the power to transfer existing rights to new objects still generates new legal relationships and, for this reason, tracing can properly be characterised as remedial. The conceptualisation of tracing as no more than the transfer of existing rights relies on the understanding that the rights over the initial asset and those enjoyed over any traceable proceeds are identical in content. Thus, Sir Peter Millett has argued that “[t]he effect of a successful tracing exercise is to confer on the parties the same rights and obligations mutatis mutandis in respect of the substituted asset as they . . . had in the original asset”.37 Yet, this is not necessarily so. For one thing, all leading analysts of the area argue that legal owners should be able to trace in equity, and there is some judicial support for this view.38 If this is indeed possible, it is obvious that the interest over the proceeds is not the same as the interest enjoyed over the initial asset; for the right over the proceeds is limited to equitable ownership. The two interests vary in provenance. For, it is generally accepted that an absolute legal owner has no separate equitable interest because such interests arise only where the conscience of the legal owner is affected.39 Thus, there is no equitable interest to transfer to the new object, and it follows that the right the owner obtains over proceeds must be a new interest.40 Of course, this analysis might be thought to be somewhat pedantic. In substance, the rights that arise in equity can be seen as extending to proceeds rights that owners had enjoyed at law over the assets they initially owned. However, perhaps more importantly, the equitable interest conferred also differs in content from the legal interest that the owner previously enjoyed. Rather than being good against all the world, this interest is liable to be defeated by bona fide third party purchasers of the legal interest. Secondly, even in instances where the interest initially enjoyed by plaintiffs was an equitable one, it is difficult to conclude that, upon tracing, they have the same 37 Sir Peter Millett, “Restitution and Constructive Trusts” (1998) 114 LQR 399 at 409. On the other hand, in Foskett v. McKeown [2001] 1 AC 102 at 128, Lord Millett was more tentative in suggesting that a plaintiff “will normally be able to maintain the same claim to the substituted asset as he could have maintained to the original asset”. 38 Westdeutsche Landesbank Girozentrale v. Islington LBC [1996] AC 669 at 716 per Lord BrowneWilkinson. 39 Commissioner for Stamp Duties (Queensland) v. Livingston [1965] AC 694 at 712 per Viscount Radcliffe Re Bond Worth [1980] Ch. 228; DKLR Holdings Co. (No. 2 ) Pty. Ltd. v. Commissioner for Stamp Duties (NSW) (1982) 149 CLR 431 at 463 per Aickin J; Westdeutsche Landesbank Girozentrale v. Islington LBC [1996] AC 669 at 706 per Lord Browne-Wilkinson. See K Gray, “Equitable Property” (1994) 47(2) CLP 157 at 163. 40 An example is the tracing in equity in the aftermath of theft. It is easy to demonstrate that it makes little sense to say that a constructive trust arises at the time of a theft. Victims of theft retain their legal title and thieves gain no interest in the asset in question. Thus, there is no separation of legal and equitable title, and it follows that, at least initially, thieves cannot be constructive trustees. However, subsequently, victims are liable to lose their legal interest if the property in question or its proceeds is placed in a mixed bank account. If victims are, thereafter, permitted the right to trace the proceeds of their property in equity and to enforce constructive trusts in respect of them it is clear that they have been given new proprietary rights.
98 Redistributive Proprietary Remedies right that they had enjoyed before. For, plaintiffs who have successfully traced have the option of asserting a lien over the asset in question.41 Rather than transferring a right enjoyed over one object to another, the lien allows for the creation of a new property right in the second asset to secure a right to be compensated for the breach of the property right the owner enjoyed in the first asset. Thirdly, at law, the rights generated by tracing differ from the rights originally enjoyed by the owner in that an action for conversion will not be available if traceable proceeds find their way into the hands of an innocent third party.42 Instead, the only action that may be maintained at law is one for money had and received— an action not based on a continuing title (or, more precisely, a right to immediate possession) but on a personal right to repayment that we would now generally describe as restitutionary. One consequence of this is that the plaintiff’s right is weakened in that it is susceptible to the defence of change of position.43 The fact that the rights conferred by tracing differ from those initially enjoyed by the owner emphasises that the process is far from neutral. That these rights have been varied where the courts have thought it appropriate emphasises that we should be prepared to consider where and to what extent it is just to allow owners to enjoy rights over the proceeds of their property.
II . THE METAPHYSICS OF TRACING : THE DENIAL OF THE REMEDIAL NATURE OF TRACING IN LEGAL DISCOURSE
1. Tracing Things It is difficult to find a clear justification offered for tracing in contemporary case law.44 The doctrine has long since become part of the juridical landscape and courts do not think it necessary to seek to divine its rationale. Not surprisingly, it is easier to find justifications offered for the practice in early cases dealing with the matter. One of the earliest discussions of the doctrine appears in the decision of Scott v. Surman.45 There, the plaintiff maintained an action for money had and 41
Re Hallett’s Estate (1880) 13 Ch. D 696 at 709 per Jessel MR. Lipkin Gorman v. Karpnale Ltd. [1991] 2 AC 548 at 573. Case law indicated that where withdrawal is made by a person whose instructions a bank is authorised to honour, title will pass even if that person did not in fact have the authority of the account holder to make the withdrawal in question. It was held that, as a result, the account holder is not entitled to bring an action for conversion. See Union Bank of Australia Ltd. v. McClintock & Co. [1922] 1 AC 240; Commercial Banking Co. of Sydney Ltd. v. Mann [1961] AC 1. Lord Goff explained the inability to sue for conversion after tracing by arguing that the election to assert title to assets in another’s possession could not be utilised so as to turn a good faith recipient into a wrongdoer. In contrast, Birks has argued that that conversion is unavailable in these circumstances because plaintiffs who have yet to elect to trace do not have an immediate right of possession to traceable assets. See P Birks, “On Taking Seriously the Difference Between Tracing and Claiming” (1997) 11 Trust Law International 2 at 7. 43 Lipkin Gorman v. Karpnale [1991] 2 AC 548. 44 Although see the detailed account recently offered by Lord Millett in Foskett v. McKeown [2001] 1 AC 102. 45 (1742) Willes 400. 42
The Metaphysics of Tracing: Substituted Title and Property Rhetoric 99 received against the assignees of the estate of a bankrupt who had sold tar as the plaintiff’s agent. The plaintiff claimed promissory notes that were given by purchasers in consideration for the tar. The matter could have been disposed of by trite agency principles. However, the judgment contains dicta that go further and suggest the existence of a right to trace at common law. Willes LCJ asked: why are goods considered still as the owners? Because they remain in specie, and so may be distinguished form the rest of the bankrupts estate. . . . [T]o be sure in reason the thing produced ought to follow the nature of the thing out of which it is produced, if it can be distinguished.46
No argument is actually advanced in support of this view; it is understood to be self-evident. While tracing involves the creation of a new proprietary relationship, rather than the enforcement of an existing one, the conventional description of the doctrine is rather different. This is apparent in the early nineteenth-century decision of Taylor v. Plumer.47 While given money by the defendant to buy Exchequer bills, a broker instead used it to buy gold doubloons and securities for his own purposes and then absconded. The defendant apprehended the broker, who then handed over the gold and securities. Subsequently, the assignee in bankruptcy of the broker sought to recover the property from the defendant. The Court held that defendant had title to the property and so was entitled to resist the assignee’s claim. Lord Ellenborough explained the matter in the following way: [T]he property of a principal entrusted to him by his factor for any special purpose belongs to the principal, notwithstanding any change which that property may have undergone in its point of form, so long as such property is capable of being identified and distinguished from all other property . . . [i]t should seem that if the property in its original state and form was covered with a trust in favour of the principal, no change of that state or form can divest it of such trust, or give the factor or those who represent him in right any more valid claim in respect of it, than they respectively had before such change.48
One particular ambiguity in the use of “property” in legal discourse has long been noted.49 As in common speech, often the term is used to indicate, not the juridical relationship, but the object of that relationship—the thing that is owned. Ellenborough uses “property” in this latter sense, while he refers to the legal relationship using the concepts of trust and belongingness. Accordingly, Ellenborough’s conclusion that the plaintiff’s “property” persists through exchange transactions is somewhat bizarre, as it contemplates that it is not the legal relationship but the object of that relationship—the “thing” itself—which transcends substitutions. In this way, tracing is explained on the basis that 46
Ibid. at 405 (emphasis added). (1815) 3 M & S 562. 48 Ibid. at 575. 49 See, e.g., J Bentham, Introduction to Principles of Morals and Legislation (ed. by JH Burns and HLA Hart, London, Methuen, 1982) at 211. 47
100 Redistributive Proprietary Remedies substitutes simply are the property of the plaintiff, rather than as a rule that alters the parties’ rights and obligations in relation to the asset in question. We can still find the remedy explained in metaphysical terms this century. Thus, in Re Diplock,50 Lord Greene MR reasoned that, where plaintiffs trace to property acquired with money from a fund to which they were entitled, the availability of “equitable remedies presuppose[s] the continued existence of the money . . . as latent in property acquired by means of such a fund”.51 Quite how that which was originally owned by a plaintiff comes to be “latent” in another thing, or even— where there has been a chain of transactions—in a number of things, is obscure to say the least. Much academic analysis of the remedy has followed the tone of Lord Ellenborough’s judgment in Taylor v. Plumer.52 Thus, Samuel Williston, one of the last great American formalists, said of tracing, “[t]his rule simply asserts the right of the true owner to his own property”.53
2. Tracing as Ratification An alternative, or perhaps more often supplementary, account of tracing employs the notion of ratification.54 Perhaps tracing grew out of the tendency to treat beneficially owned property as a fund and from a refusal to crystallise the owners’ rights on misappropriation.55 Thus, it may not seem unreasonable to say that tracing empowers plaintiffs to ratify with retrospective effect an unauthorised transaction involving their property. However, there are two difficulties involved in an attempt to explain tracing in these terms. For one thing, ratification, in itself, cannot provide a justification for tracing. Even if it did provide a useful means of conceptualising the manner in which the remedy operates, it begs the question: “why are plaintiffs allowed to ratify?” In addition, there are real conceptual difficulties in treating tracing as involving ratification. First, as Khurshid and Matthews have cogently argued, tracing cannot be reconciled with conventional ratification principles.56 Tracing is at odds with the rule that ratification is available only where a person professed to be contract-
50
[1948] Ch. 465. Ibid. at 521. 52 See, e.g., AJ Oakley, “Proprietary Claims and Their Priority in Insolvency” [1995] CLJ 377 at 378–9. 53 S Williston, “The Right to Follow Trust Property when Confused with Other Property” (1888) Harv. L Rev. 28 at 39, approvingly citing from the judgment in Re Cavin v. Gleason, 105 NY 256. 54 See, e.g., Sinclair v. Brougham [1914] AC 398 at 419 per Haldane VC; Re Diplock [1948] Ch. 465 at 518. 55 D Osterle, “Deficiencies of the Restitutionary Right to Trace Misappropriated Property in Equity and in UCC § 9–306” (1983) 68 Cornell L Rev. 172 at 177. See also S Evans, “Rethinking Tracing and the Law of Restitution” (1999) 115 LQR 469 at 478. 56 See S Khurshid and P Matthews, “Tracing Confusion” (1979) 95 LQR 78 at 88. 51
The Metaphysics of Tracing: Substituted Title and Property Rhetoric 101 ing on behalf of a third party.57 Secondly, waiver of tort, an action in some ways analogous to tracing,58 is itself now understood, not in terms of ratification—the affirmation of a wrong—but, rather, as an election to sue in quasi-contract to recover restitution, rather than damages in tort.59 Thirdly, the fact that plaintiffs who are entitled to assert a constructive trust over traceable proceeds in the hands of a defendant may instead elect to claim a lien precludes the process being characterised in terms of ratification. For a lien gives plaintiffs rights over new assets to secure the loss of misappropriated assets. Clearly this would not be available if tracing involved the authorisation of the earlier misappropriation. There has been some recognition in recent years that tracing is not properly characterised in terms of ratification. Recently, in the House of Lords’ decision in Lipkin Gorman v. Karpnale,60 Lord Goff noted that tracing was often described using the language of ratification, but observed that: “I myself would not so describe it”.61 Similarly, in Boscawen v. Bajwa, Millett LJ indicated that tracing involves an election between remedies and not ratification.62
3. The New Orthodoxy: Tracing Value According to Birks: there is no such thing as a right to trace, and tracing is not a remedy (if “remedy” can be sensibly contrasted with “right”). Tracing is no more than the means of finding out where at any relevant moment value is located. It is a preliminary or ancillary exercise. There are two quite separate questions. One is whether the value in question can be located. The other is whether, once it has been located, a right of some kind may be exigible in respect of it.63
This passage highlights two claims that are central to Birks’ analysis of tracing: first, the notion that tracing is “neutral as to rights”; and, secondly, the idea that tracing is concerned with the location of value.
57 Keighley v. Maxted & Co. v. Durant [1901] AC 240. Indeed, in Taylor v. Plumer, Lord Ellenborough expressed the view that ratification would not have been available; (1815) 3 M & S 562 at 579–80. 58 Thus, in Sinclair v. Brougham, Haldane VC describes tracing as allowing “a principal to waive his right of action for damage of tort, and, affirming” the exchange transaction in question: [1914] AC 398 at 419. 59 United Australia Ltd. v. Barclays Bank Ltd. [1941] AC 1 at 28 per Lord Atkin. See Khurshid and Matthews, supra n. 56 at 89–90. 60 [1991] 2 AC 548. 61 Ibid. at 573. 62 [1996] 1 WLR 328 at 341. 63 P Birks, “Mixing and Tracing” (1992) 45(2) CLP 69 at 86. See also Birks, An Introduction to the Law of Restitution at 358; Birks “Establishing a Proprietary Base: Re Goldcorp” [1995] RLR 83 at 84.
102 Redistributive Proprietary Remedies (a) Tracing as a Neutral Process Birks argues for: the independence of tracing and the claims which are contingent on tracing. Tracing is neutral as to rights. Successful tracing confers no rights, though it is often a precondition of the exercise of rights. The tracing exercise being successfully completed, there always remains a separate inquiry as to what, if any, rights the facts of the case give rise to in respect of the assets found at the end of the tracing chain.64
Yet if the claims in question are “contingent on tracing”, can these claims be said to be independent of tracing? Can it be that one can trace and yet have no claim in respect of the assets traced? Lionel Smith has also attempted to sever tracing from the rights that it apparently generates. According to Smith, “[t]racing by itself is an exercise which examines the results of substitutions. It does not establish rights”.65 Illustrating this point, he argues that: Just as I can follow even where following is fruitless, so I can trace even where tracing is fruitless. If I want, I can trace the money which I lend to my debtor. I will never establish any rights in the traceable proceeds of the lent money; but that is a question of claiming.66
The assertion is unconvincing. First, that one may, as a matter of fact, follow an asset around does not indicate that one can, as a matter of law, trace to that asset. Secondly, Smith conflates the analytically distinct processes of the transmission of rights and claiming. Tracing is the process by which the foundation to a claim (generally title to a thing) is established. As a result, a plaintiff may bring a claim such as conversion, breach of trust or knowing receipt. Contrary to Smith’s suggestion, to say that tracing generates the right to assert a claim over traceable proceeds does not confuse this process with the claim itself. Birks argues that we must look to the “facts of the case” to determine what rights, if any, plaintiffs will be able to exercise in respect of traceable proceeds. Yet this makes the matter rather more mysterious than it really is. Tracing is largely “concerned with ensuring that the remedies which a plaintiff would otherwise have in respect of an asset are not wholly defeated by the replacement, or mixing, of that asset with other property”.67 If tracing “involves a decision . . . by the owner to assert his title to the product in place of his original property”,68 it follows that we can determine the rights enjoyed at the end of the tracing chain largely by 64 P Birks, “On Taking Seriously the Difference Between Tracing and Claiming” (1997) 11 Trust Law International 2 at 8; see also P Birks, “Equity in the Modern Law: An Exercise in Taxonomy” (1996) 26 Western Australian L Rev. 1 at 82–3. 65 Smith, The Law of Tracing at 132. 66 Ibid. at 131. 67 S Moriarty, “Tracing, Mixing and Laundering” in P Birks (ed.), Laundering and Tracing (Oxford, Oxford University Press, 1995) 73 at 93–4. See also Evans, supra n. 55 at 470. 68 Lipkin Gorman v. Karpnale Ltd. [1991] AC 548 at 573 per Lord Goff.
The Metaphysics of Tracing: Substituted Title and Property Rhetoric 103 reference to the rights found at the beginning of that chain. Given this, it is difficult to understand how tracing can be regarded as a process that “confers no rights”. The claim that tracing is “neutral as to rights” also flies in the face of conventional legal usage. It is contrary to our use of the term to describe a plaintiff who acquires no rights as a result of the process as having “traced”. Indeed, tracing tends to be defined in terms of the situations in which a plaintiff can assert a claim. As Millett LJ put the matter in Jones & Sons (Trustee) v. Jones, “tracing . . . is the process by which the plaintiff . . . establishes what has happened to his property and makes good his claim that the asset which he claims can properly be regarded as representing his property”.69 It follows that, if plaintiffs cannot make good this claim they have not traced.70 If, as Lord Goff observed in Lipkin Gorman, tracing involves an election to assert title to one asset in the place of another asset,71 if we have no power to elect to transfer rights to a substitute asset we cannot be said to be able to trace. If tracing does not tell us whether we have a right in a substitute, what does? We need a word for the process by which plaintiffs establish rights to proceeds that provide the foundation for claims that they may bring in respect of those assets. “Tracing” has always been the term employed to describe this process. We have never bothered to coin a word for the exercise conducted by Smith’s hypothetical lender in the quotation presented above.72 This is hardly surprising; the law does not concern itself with causal connections that have no legal implications. It is true that if I lent someone money I could amuse myself by thinking about the exchange transactions involving it and its proceeds. However, this would be a private pastime and not a legal process. Both Birks’ and Smith’s analyses seem to turn on a confusion about a preliminary stage supposedly involved in the tracing process. It may be true that plaintiffs effectively go through what Birks terms the “preliminary” process of identifying “traceable value” before they decide whether they wish to assert any rights that may be available. However, it is important to realise that this is not a legal process, but rather a factual process of identifying one’s legal options. Of course, plaintiffs who think that they may have a claim that is contingent on tracing will look at the facts of the case in order to determine what recourse the law will provide. And, of course, this assessment will necessarily involve an examination of whether the rules of tracing will enable a claim to be brought in respect of particular assets. But this does not indicate that such plaintiffs have traced. Rather, this preliminary exercise may be compared with tort plaintiffs examining chains of causation in order to determine whether or whom they may sue. A legal process entails legal 69
[1997] Ch. 159 at 169–70. Strangely, Birks concludes that a very similar, if slightly less concise, analysis of tracing by Millett LJ in Boscawen v. Bajwa [1996] 1 WLR 328 at 334 (see supra, text accompanying n. 7) indicated that tracing was “neutral as to rights”: Birks, “Equity in the Modern Law”, supra n. 64 at 83. If anything, the opposite is true. 71 Lipkin Gorman v. Karpnale Ltd. [1991] AC 548 at 573. 72 See supra n. 66. 70
104 Redistributive Proprietary Remedies consequences. Thus, just as a tort claim commences only when one asserts one’s rights by bringing an action, tracing takes place only when one elects to assert rights to a substitute by initiating a claim. (b) Problems for the Account of Tracing Value (i) The Geometric Multiplication of Rights, Causal Indeterminacy and the Importance of Moral Considerations Lionel Smith has justified the view that tracing involves the identification of value in the following way: The only connection which the plaintiff has to the new asset is that it was acquired with the old asset. The defendant acquired the value inherent in the new asset with the value inherent in the old asset. That is why we say that we trace value: it is the only constant that exists before, through and after the substitution through which we trace.73
The first sentence, pointing to the existence of a causal link between the assets, is uncontroversial. However, what follows is a non sequitur. One difficulty with the view that the value of one thing is inherent in its proceeds is a problem that Birks has thrown much light on: that of the “geometric multiplication of rights”.74 Tracing allows plaintiffs to make an election between at least two, but potentially more, different assets that they are permitted to treat as their own. If an election is available between several traceable assets, how can tracing be said to identify the location of the value of an asset? Can the value “inherent” in an asset exist in several places at once? To describe tracing in terms of locating value is unhelpfully metaphysical. Rather, tracing largely involves the allocation of entitlements on the basis of moral desert.75 A second difficulty with Smith’s description of tracing is that it is far from obvious that the value of traceable proceeds will be attributable solely to the value of the assets for which they were exchanged. The value of the exchange product of an asset may also be attributable to the knowledge, skill and industry of the defendant and other factors, such as unpredictable movements in the market. Consider the decision in Jones & Son (Trustee) v. Jones.76 Jones & Son, a firm of potato growers, committed an act of bankruptcy. After this event, but prior to a bankruptcy order 73
Smith, The Law of Tracing at 119. Birks, An Introduction to the Law of Restitution at 92 and 304. See supra, text accompanying nn. 18–20. 75 The moral content of the law’s approach to “identification” is also apparent in the mixing rules that typically work in conjunction with tracing. These rules dictate that those who have no knowledge of the fact that they are in receipt of trust moneys are subject to less stringent evidential presumptions than are their blameworthy counterparts. An innocent volunteer is subject to the rule in Clayton’s Case (1816) 1 Mer. 529 (governing mixing of the moneys of two innocents) rather than those in Re Hallett’s Estate (1880) 13 Ch. D 696 and Re Oatway [1903] 2 Ch. 356 (governing the mixing of the moneys of a trustee and an innocent). See, e.g., Re Diplock [1948] Ch. 465 at 524. Again, this emphasises that the “identification” of property does not involve a neutral process of locating value but a determination of entitlement in which considerations of moral desert are very important. 76 [1997] 1 Ch. 159. 74
The Metaphysics of Tracing: Substituted Title and Property Rhetoric 105 being made, Mrs Jones, the wife of one of the firm’s partners, withdrew £11,700, which she invested in potato futures. Thanks to the doctrine of relation back, title to the money withdrawn by Mrs Jones vested in the trustee in bankruptcy with retrospective effect as from the date of the act of bankruptcy. The investments yielded £50,760, a sum to which the Court of Appeal accepted the trustee in bankruptcy had title. The creditors of Jones & Son were no doubt overjoyed by the success of the potato futures’ market. However, it is not very illuminating to say that the trustee in bankruptcy was allowed to claim the proceeds of the potato futures because the value of the firm’s money withdrawn by Mrs Jones was inherent in them. This metaphysical assertion looks suspiciously more like a conclusion than a justification.77 Jones & Son (Trustee) v. Jones illustrates how little regard is paid to questions of value in tracing cases. A traceable asset may be of considerably greater value than the asset that the plaintiff originally owned.78 This might be justified on the basis that the defendant should not be allowed to profit. However, this justification points to considerations of deterrence and moral desert—the same considerations that apply in respect of enrichment by wrongs.79 It does not indicate that the value of one asset can be found in another asset. This inclination to allow owners who trace to recover more than they have lost may be contrasted with one instance in which the law obviously does take value into consideration. Where a traceable asset is worth less than that originally owned by plaintiffs, they are entitled to have a lien over the traceable asset in order to secure their personal claims for the full value of the original asset.80 Again, this is hardly consistent with the view that the plaintiff traces the value of one thing into that of another.81 (ii) The Circularity of the Notion of Tracing as the Location of Value Birks himself recognises that the process of identification that he takes to be the basis of tracing does not “take place by the light of nature” but is “artificial”.82 This rather begs the question exactly how “artificial” or arbitrary this process can be before it ceases to be meaningful to describe it in terms of the identification of value. 77 On the other hand, it is difficult to object to the outcome of the case. Given that the plaintiff was the trustee in bankruptcy, there was no danger of the remedy prejudicing the interests of the creditors of the bankrupt firm. 78 This is equally true of claims brought in equity. See Foskett v. McKeown [2001] 1 AC 102; Re Tilley’s Will Trusts [1967] Ch. 1179; Birks, An Introduction to the Law of Restitution at 366; Smith, The Law of Tracing at 16–17. 79 This is something explicitly recognised by American commentators. See, e.g., Palmer, The Law of Restitution i, § 2.14 at 181. On the justification for awarding proprietary relief in the context of enrichment by wrongs, see infra, ch. 9.II. 80 Re Hallett’s Estate (1880) 13 Ch. D 696 at 709 per Jessel MR. 81 Recognizing the difficulty that the right to elect to take a lien poses for his analysis, Birks notes that, “[a] free choice between the two may be difficult to justify”; Birks, An Introduction to the Law of Restitution at 91. 82 Ibid. at 6, 84 and 359.
106 Redistributive Proprietary Remedies Birks refers to tracing as a process of identifying “the path of value” through transactions and as an exercise which “aims to discover whether all of those units of value can be said to have passed into other assets so that they, the original units of value, are held by or were received by the defendant in those other assets”.83 The metaphoric nature of the explanation is manifest. When we claim title to a substitute, we do not actually “trace” anything. Talk of tracing would make literal sense only if there were some entity that we are following through the transactions that enjoys an existence apart from the law. For example, to speak of tracing a person makes sense as an expression for the process of identifying the physical location of a particular person over time. Yet what is followed when we trace at law? In tracing, we identify relations between things, and not some mysterious essence that passes from one asset to another. The value of one thing does not enter another thing. Talk of “paths of value” is a metaphorical way of referring to causal links between assets—one having been exchanged for the other. Ultimately, tracing cannot be understood as a process of identification that is separate from the process of ascribing rights. Birks’ very abstract conceptual analysis is circuitous. Consider the description of tracing as “the restitutionary right to reach through substitutions to assets in which given units of value traceably survive”.84 To the question, “what can be traced?”, the answer must be, “surviving value”. However, to the question, “what then is surviving value?”, the answer must be “that which can be traced”. Ultimately what amounts to value “surviving” or “a path of value” is simply the conclusion of the legal rules that dictate to which assets plaintiffs may assert title. Nothing is literally traced in the process metaphorically known as tracing. Rather, rights are created or transferred as a result of the process. We are able to “trace” only because the law gives us rights to proceeds; the law does not give us rights to proceeds because we are able to trace. The sooner this is accepted, the sooner we can approach this area of law in a more rational fashion.
III . AN EXPLANATION OF TRACING RHETORIC : THE RECONCILIATION OF TRACING WITH AXIOMATIC NOTIONS OF PROPERTY RIGHTS
1. The Function of Tracing Rhetoric Viewed functionally, tracing—involving as it does the redistribution of property rights—is obviously difficult to reconcile with absolutist notions of property. This explains the obfuscatory analysis favoured in tracing jurisprudence. The highly formalistic conceptualisation of tracing represents a ritualistic discourse of denial that suppresses the reality of a divergence from axiomatic understandings of property rights. Lord Ellenborough’s conception of things transmuting through 83 84
P Birks, “Persistent Problems in Misdirected Money: A Quintet” [1993] LMCLQ 218 at 230. Ibid. at 232.
The Metaphysics of Tracing: Substituted Title and Property Rhetoric 107 exchange transactions serves to obscure that legal rights are redistributed when something is traced. The word “tracing” itself provides a suggestive metaphor that implies that the plaintiff has an unproblematic claim to relief. The metaphors of “following” and “tracing” suggest there really is something being “traced”—some essence to which title attaches. These operate, as metaphors often do, “to treat as fixed and natural things which are historically contingent and for which human agents are responsible”.85 In this way, what is transitory is eternalised.86 In the process, the distributive consequences of tracing—principally, the conferral of priority in insolvency on a particular class of plaintiffs—are obscured and the pretence that property provides a boundary that ensures the common law’s autonomy from politics is maintained. The other explanations for rights accorded to proceeds are rather less effective. The conceptualisation of tracing as ratification is rather too obviously a conclusion and we tend to find it used, not on its own, but in conjunction with more metaphysical notions of tracings.87 Similarly, the idea of tracing as the identification of value is rather ineffective on its own. While it conveniently suggests an association with the burgeoning field of restitution, it cannot, in itself, connect the relief given to conventional understandings of property in the way that the rhetoric of tracing things does. Consequently, Birks resorts to the assertion that a plaintiff’s “proprietary base” subsists through exchange transactions.88 However, this conceptualisation of the matter is too far removed from orthodox understandings of property as the absolute ownership of discrete objects to provide an effective mechanism for obscuring the reality that rights of property are being readjusted.
2. The Power of Tracing Rhetoric The devices employed in the law of proprietary remedies vary greatly in their capacity to affect their users.89 Of all these obfuscatory mechanisms, tracing possesses a real power to mesmerise. This seems to owe much to the power of metonymy: the tendency to associate one thing with another because they are physically or causally connected in some way.90 In the case of tracing, the fact that one thing was exchanged for another encourages us to elide the two. 85
D Cooper, Metaphor (Oxford, Basil Blackwell, 1986) 42. See R Barthes, Mythologies (London, Cape, 1973) 129 and 142. 87 For an example of a decision in which tracing is explained both in terms of ratification and on the basis that the asset originally owned by the plaintiff remains “latent” in its exchange asset, see Re Diplock [1948] Ch. 465 at 518 and 521. 88 See infra, ch. 15. 89 On some of the different conceptual devices employed in the law of proprietary remedies, see supra, ch. 2.V.2. 90 See E Leach, Culture and Communication: The Logic by which Symbols are Connected (Cambridge, Cambridge University Press, 1976) 31. 86
108 Redistributive Proprietary Remedies The power and prevalence of tracing talk is also attributable to the habit of perceiving legal relations as physical facts.91 There is a tendency to envisage conceptual relations as something concrete in order better to comprehend them.92 In this process, legal relationships between people are reconceptualised as physical facts: as qualities inherent in things. Thus, we find it reassuring to think that we are literally “tracing” something that is “out there”. This phenomenon is also apparent in our habit of requiring that, before obligations concerning land can bind third parties, they must not only “concern” but “touch” the land. Once this requirement is met, obligations that are causally related to realty are seen to become “annexed” to the land, and so “run with it”.93 Of course, the notion of annexation is both metaphoric and conclusory.94 Nonetheless, it crops up in argument as if it were capable of solving what we perceive to be “hard cases”.95 Somehow, it allows us to manipulate the divide between ownership and obligation, while maintaining the appearance that this division is natural and immutable.
IV . THE NORMATIVE BASIS FOR SUBSTITUTED TITLE
1. Reasons for Allowing the Assertion of Proprietary Rights over Substitutes Why allow plaintiffs to assert a claim over something that they neither owned previously, nor purchased from its former owner? Tracing can confer a number of advantages. It may allow plaintiffs to bring actions against additional
91 See, e.g. C Geertz, “Local Knowledge: Fact and Law in Comparative Perspective” in Local Knowledge (London, Fontana Press, 1993) 167 at 189; R Frith, Symbols: Public and Private (London, George Allen and Unwin, 1973) 140. 92 Leach, supra n. 90 at 37. The same tendency is also apparent in Locke’s justification of rights of property to things by extension from the proposition that “every man has a property in his own person”. Locke concluded that where a person “hath mixed his labour with” an object, he has “joyned to it something that is his own, and thereby makes it his property”: see J Locke, Two Treatises of Government (ed. Peter Laslett, Cambridge, Cambridge University Press, 1988) bk II § 27 at 287–8. Hume, in contrast, concluded that our attribution of property rights largely depends on “relations and connexions of the imagination”: see D Hume, A Treatise of Human Nature (ed. LA Selby-Bigge and PH Nidditch, 2nd edn., Oxford, Clarendon Press, 1978) 512. 93 Simpson attributes the understanding that “[t]he covenant must relate to something in being” to “the metaphysical bent of sixteenth century land lawyers”: AWB Simpson, A History of the Land Law (Oxford, Clarendon, 1986) 255. 94 K Gray and S Francis-Gray, Elements of Land Law (3rd edn., London, Butterworths, 2001) 1321–6; See also the discussion of Lord Oliver in Hua Chiao Commercial Bank Ltd. v. Chiapua Industries Ltd. [1987] AC 99 at 112. In the UK, s. 2 of the Landlord and Tenant (Covenants) Act 1995 has removed the “touch and concern” requirement for leases entered into from 1996 onwards. Covenants will pass upon assignment unless it is indicated that it is intended otherwise. 95 On the other hand, perhaps we discern these cases to be particularly difficult because of our inability to transcend the constraints of our normative order without the use of such metaphysics. If, instead, we took the view that the objects of, and protection afforded to, property are socially constructed for pragmatic reasons, we would not concern ourselves with maintaining the illusion that there is a natural line between property and contract.
The Metaphysics of Tracing: Substituted Title and Property Rhetoric 109 defendants,96 to recover more than they have lost,97 and to claim compound interest.98 However, perhaps the most significant advantage it brings relates to the distribution of entitlements in bankruptcy. Plaintiffs who are able to enforce only personal rights are obliged to line up with other unsecured creditors competing for a share in an insolvent’s estate after the claims of secured and preferential creditors are satisfied. In contrast, the effect of awarding a constructive trust over particular assets is that, in the event of the constructive trustee’s bankruptcy, those assets are not available for distribution among unsecured creditors.99 Similarly, an equitable lien gives plaintiffs an interest over traceable proceeds to secure the amount owed by the defendant. Finally, at common law, plaintiffs may be able to bring an action for conversion or money had and received against a trustee in bankruptcy in possession of traceable proceeds of property to which plaintiffs have title.100 While priority is sometimes treated as if it were an incidental consequence of the recognition of the plaintiffs’ rights,101 the provision of priority was the principal motivation for the development of tracing.102 This suggests that, in determining the availability of proprietary relief, we should consider in which circumstances plaintiffs might legitimately be accorded priority. Some support for the “swollen assets”103 rationale for tracing can be found in authoritative sources. The Restatement of Restitution justifies tracing on the basis that creditors “are not entitled to profit because of the wrongful acquisition of property by their debtor through the use of the plaintiff’s property”.104 Similarly, in Re Hallett,105 Sir George Jessel MR argued for extending the evidential presumptions that permit tracing into a mixed bank account on the basis that this would not defeat the legitimate expectations of unsecured creditors. Thus, he reasoned that “no human being ever gave credit to a man on the theory that he would misappropriate trust money and thereby increase his assets”.106 The “swollen assets” rationale for tracing hinted at by Jessel MR in Re Hallett implicitly recognises the need to justify priority vis-à-vis general creditors. It effectively asks whether such creditors would be unjustly enriched were they able to share in the distribution of the assets in question.107 96 See, e.g.s, Banque Belge pour l’Etranger v. Hambrouck [1921] 1 KB 321; El Ajou v. Dollar Land Holdings Plc [1993] 3 All ER 717. 97 See, e.g., Jones & Sons (Trustee) v. Jones [1997] Ch. 159; In Re Tilley’s Will Trust [1967] Ch. 1179; Foskett v. McKeown [2001] 1 AC 102. 98 See, e.g., Westdeutsche Landesbank Girozentrale v. Islington LBC [1996] AC 669. 99 Insolvency Act 1986 s. 283(3)(a) and (5). 100 Tooke v. Hollingworth (1793) 5 TR 215. See M Scott, “Tracing at Common Law” (1965–66) 7 UWALR 463; D Fox, “Common Law Claims to Substituted Assets” [1999] RLR 55 at 72–3; cf. D Cuthbertson, “Tracing at Common Law—Myth or Reality?” (1967–68) 8 UWALR 402. 101 Cf. P Millett, “Bribes and Secret Commissions” [1993] RLR 7 at 10. 102 R Goff and G Jones, The Law of Restitution (5th edn.) at 114. 103 See supra, ch. 4.III.2. 104 Restatement of Restitution at § 202 comment (e). 105 (1880) 13 Ch. D 696. 106 Ibid. at 730. 107 See E Sherwin, “Constructive Trusts in Bankruptcy” [1989] U Ill. L Rev. 297 at 364.
110 Redistributive Proprietary Remedies On the other hand, a different view was recently taken by the House of Lords in Foskett v. McKeown.108 Their Lordships held by a three to two majority that the use of around £20,000 of money held on trust for the plaintiffs to pay insurance premiums gave them the right to claim around £400,000 as their share of the death benefit due under the policy after the policy-holder committed suicide. The majority reached this conclusion despite the fact that the nature of the policy was such that, had the payments in question not been made, the life assurance element of the policy would have been maintained by cancelling units of the investment component of the policy. As a consequence, as events transpired, the death benefit payable to the beneficiaries of the policy would have been unaffected had the premiums at issue not been paid. The majority’s conclusion was justified in part on the basis that “[t]he transmission of a plaintiff’s property rights from one asset to traceable proceeds is part of the law of property, not of the law of unjust enrichment”.109 Lord Millett argued that it followed from this that the change of position defence is not available for actions contingent upon tracing.110 This dichotomy between property and unjust enrichment is misconceived. There is no reason why considerations of unjust enrichment should not play a role in shaping property rights. Indeed, the conferral of rights to proceeds represents an exceptional remedy and considerations of unjust enrichment should be central to the determination of the proper extent of these rights. One indication that the view offered by Lord Millett in Foskett v. McKeown is by no means obvious is that it is inconsistent with the analysis of the matter that he offered when in the Court of Appeal in Boscawen v. Bajwa.111 In that case he assumed that the change of position defence would indeed be available in respect of claims contingent upon tracing.112 In addition, the view taken by Lord Millett in Foskett v. McKeown is difficult to reconcile with the hope expressed by Lord Goff in Lipkin Gorman v. Karpnale that recognition of the change of position defence might lead to “a more consistent approach to tracing claims”.113
2. Dissonance Between Tracing’s Normative Foundations and the Positive Law (a) The Limitations of Form-to-form Tracing English courts have proved reluctant to entertain the possibility of awarding proprietary relief in the absence of the identification of specific assets that represent
108
[2001] 1 AC 102. Ibid. at 127 per Lord Millett. For an account favouring a similarly radical separation between the law of property and unjust enrichment see Virgo, Principles of the Law of Restitution at 592–6. See also R Grantham and C Rickett, “Tracing and Property Rights: The Categorical Truth” (2000) 63 MLR 905. 110 Ibid. at 129. 111 [1995] 4 All ER 769. 112 Ibid. at 782. 113 [1991] 2 AC 548 at 581. 109
The Metaphysics of Tracing: Substituted Title and Property Rhetoric 111 the exchange product of plaintiffs’ original assets.114 Similarly, while a swollen assets theory of tracing has had its supporters, a “form-to-form” approach (also known as “transactional” or “exchange-product” tracing) has generally been favoured in the United States.115 This requires some explanation. The fact that a particular enrichment acquired unjustly at the expense of the plaintiff has resulted in a swelling of the assets available for distribution in the defendant’s insolvency provides a plausible basis for elevating a plaintiff’s claim (a rationale firmly rooted in unjust enrichment theory). In contrast, it is difficult to see that, in itself, evidence of a transactional link can provide a reason for priority.116 Considered in the light of the swollen assets rationale for giving priority in bankruptcy, form-to-form tracing does not appear well designed to effect justice. It is under-inclusive117—denying a remedy when underlying considerations of justice suggest that it is merited. Despite the plaintiff’s inability to point to a transactional link between his or her property and assets currently forming part of the defendant’s estate, the defendant’s assets may have been increased as the result of an enrichment gained at the expense of the plaintiff. Consider the facts of Re Goldcorp Exchange Ltd.118 A company promised customers that it would use all payments to acquire gold bullion that would be deliverable on demand, and that reserves would at all times be sufficient to meet liabilities to customers. Goldcorp did not honour its obligations; when it went bankrupt its reserves of gold did not come close to matching its liabilities to its customers. In the litigation that followed against the background of Goldcorp’s insolvency, the customers were in competition with an institutional lender with a floating charge over the company’s assets. It was clear that personal rights would have been worthless and that the customers could realise what was owed to them only if they could demonstrate that they were entitled to a proprietary remedy that would give them priority ahead of the floating charge. Given that the customers could not point to property rights in specific assets, it is not surprising that one of the grounds of their claim relied on a form of “swollen assets” reasoning to justify their claim to a lien over the company’s assets as a whole. It is easy to have sympathy for the claim. The gist of the customers’ argument was that the only reason that the bank’s floating charge could be said to have crystallised over as large a pool of assets as it did was that Goldcorp had misapplied its customers’ payments. The bank was put in a better position than it otherwise 114 The recent Privy Council decision in Re Goldcorp Exchange [1994] 3 WLR 199 provides a restatement of the orthodox position. The judgment, delivered by Lord Mustill, suggests that the controversial obiter dictum of Lord Templeman in Space Investments Ltd. v. Canadian Imperial Bank of Commerce Trust Co. [1986] 1 WLR 1072 favouring a less rigid approach to proprietary relief will not gain authoritative approval. 115 See Osterle, supra n. 55 at 189. Although for an account of the flexibility of courts in the USA in this context, see infra, text accompanying nn. 183–186. 116 S Walt and E Sherwin, “Contribution Arguments in Commercial Law” (1993) 42 Emory LJ 897 at 951. 117 The analysis and terminology derives from P Atiyah and R Summers, Form and Substance in Anglo-American Law (Oxford, Clarendon, 1987) 13. 118 [1995] 1 AC 74.
112 Redistributive Proprietary Remedies would have been, while, arguably, the customers had not assumed the risks of Goldcorp’s insolvency.119 Nonetheless, the Privy Council overturned the New Zealand Court of Appeal’s decision in favour of the customers and rejected the notion of “swollen assets” tracing. Another example of the limitations of form-to-form tracing is provided by situations where traceable assets are used to pay a due debt. The net effect of such a transaction is that the defendant continues to be enriched at the plaintiff’s expense. Moreover, if the debt would, in any event, have been paid using other assets, the pool of assets available for distribution in bankruptcy continues to be swollen as a result of the defendant’s unjust enrichment at the plaintiff’s expense. Nonetheless, because subsequently the plaintiff will be unable to point to a transactional link between the plaintiff’s property and any particular asset held by defendant, the use of a plaintiff’s property to discharge a debt precludes tracing.120 Form-to-form tracing is also over-inclusive—giving a remedy when it is unmerited. Consider the lack of recognition given to the efforts of defendants in acquiring new assets.121 Transactional tracing provides for proprietary claims even though defendants may have dissipated wealth or labour in order to acquire the assets in question so that, in net terms, it cannot be said that their estates have been enriched at the expense of the plaintiff. There are also real difficulties in trying to square tracing with the swollen assets rationale when the doctrine is employed to enable plaintiffs to sue in respect of the exchange product of their property in the hands of third parties. For these third parties may well have given value for the assets in question. While bona fide purchasers will be excused, other purchasers will take subject to the plaintiff’s right to elect to assert title to proceeds and, if bankruptcy ensues, the creditors of these purchasers will suffer accordingly.122 (b) Form-to-form Tracing as a Second-best Solution From the preceding discussion, it can be seen that form-to-form tracing appears to provide a rather blunt instrument with which to implement legitimate policy 119 SR Scott, “The Remedial Constructive Trust in Commercial Transactions” [1993] LMCLQ 330 at 343. One difficulty with this argument is that, even if Goldcorp had maintained the level of reserves that it had promised, it is difficult to see how this arrangement would have given the customers a proprietary interest in any particular gold. On the other hand, it may be said that, by not complying with its contractual obligations, Goldcorp was able to operate for longer than it otherwise could have, dissipating its assets in the process and undermining the interests of its general creditors. Therefore, it is fair to say that Goldcorp’s actions, at the very least, imposed a greater risk on its customers than that for which they had contracted. 120 This is the orthodoxy. For an analysis of a view that it is possible to trace into the “proceeds of debt” see infra, text accompanying nn. 173–179. 121 See Palmer, The Law of Restitution vol 1 § 212 at 157–66. 122 Consider the following situation. B steals thing 1 from A and exchanges it with C for thing 2. C then exchanges thing 1 for thing 3 in a transaction with D. Tracing potentially allows A equitable proprietary remedies against B and C and the right to assert her original title against D. If A sues C and traces into the product of C’s exchange with D, it is clear that C’s wealth will not have been increased to the value of thing 3; for C had to expend wealth in order to buy thing 1 from B. In these circumstances, to give A property in thing 3 cannot be justified in “swollen assets” terms.
The Metaphysics of Tracing: Substituted Title and Property Rhetoric 113 objectives. Some commentators have defended this approach by focusing on the limited capacity of the law to implement the goals being pursued in this area.123 According to this view, the question should be whether the particular link required for plaintiffs to assert title to new assets provides an effective means of securing the objectives in question. From this perspective, some argue that courts do not have effective means of identifying causal links between a plaintiff’s loss and the value of a defendant’s pool of assets available for distribution in bankruptcy. In practice, a swollen assets approach to tracing is liable to be impossible to administer; for the causal connections at issue are simply too difficult to establish.124 Consequently, in an imperfect world, transactional tracing may be the best substitute for a swollen assets approach. Because it is an imperfect substitute for a swollen assets approach, it is appropriate to limit tracing to those transactional links that are likely to result in an increase in the value of the defendant’s estate available for distribution in bankruptcy. It is this explanation that provides the best justification for declining relief where plaintiffs’ property or proceeds have been used to pay a due debt; for it may be impossible to know whether the debt would have been paid prior to bankruptcy.125 This argument also provides the best justification of the outcome in Re Goldcorp126; for it would have been difficult to determine to what extent the company’s estate had been swelled by its misapplication of the customers’ payments. There is doubtless something to the view that form-to-form tracing is justified as a second-best solution. Yet, as a defence to the law as it now stands, it is ultimately unconvincing. While it is probable that a full-blooded swollen assets approach would be too difficult to administer, we could engraft certain modifications onto the present form-to-form approach, in order to make our law better correspond with convincing normative justifications for giving priority in bankruptcy.127 Two relatively straightforward modifications might include: (1) Instead of granting equitable title over proceeds, relief could be restricted to liens securing the value of the assets originally owned by the plaintiff.128 (2) Reducing the extent to which priority is given to the plaintiff to the extent of any expenditure that a defendant who was not bona fide and without notice has incurred in purchasing the asset in question. More controversially, the law might impose further limitations on tracing, based on certain presumptions regarding causation. Such an approach might, at first 123
See, e.g., Sherwin, supra n. 107 at 333. Although some commentators think otherwise: see, e.g., Evans, supra n. 55; P Jaffey, The Nature and Scope of Restitution (Oxford, Hart Publishing, 2000) 298. 125 See Smith, The Law of Tracing at 316. 126 [1995] 1 AC 74. See supra, text accompanying nn. 118–119 for a discussion. 127 While the “swollen assets” concept was initially developed to increase the availability of proprietary relief in situations where form-to-form tracing was not possible, in this context it would be used to limit relief. 128 See R Goff and G Jones, The Law of Restitution (4th edn.) at 97; Palmer, The Law of Restitution vol 1 § 2.14 at 183. 124
114 Redistributive Proprietary Remedies sight, appear rather arbitrary. Yet form-to-form tracing can itself be justified only on the ground that it provides a reasonable basis for an inference that the defendant’s assets available for distribution in bankruptcy are swollen by the enrichment in question. We should, therefore, welcome further presumptions that, by restricting the scope of form-to-form tracing, would better enable the doctrine to effect justice. Such additional presumptions might involve: (3) Chronological considerations. Just as the notion of preferences pragmatically determines which transactions are voidable in bankruptcy depending on the time at which they were made, the courts might be more reluctant to allow substitution of title to confer priority when a good deal of time had passed. This would reflect a reasonable assumption that the greater the period that has passed the less probable it is that the enrichment in question has increased the assets remaining available for distribution in bankruptcy. (4) A consideration of the background of the insolvency. If the insolvency was due to bad financial management or frivolous personal spending it will be relatively difficult to infer that an enrichment subsists. On the other hand, if the individual or enterprise was otherwise in a good financial state when insolvency was brought on by a single event, such as a large tort action or a natural disaster, the case may be different. In this instance, it may be reasonable to infer that the enrichment survives and that the plaintiff has a sound basis for prevailing over general creditors. Thus, even if considerations of expediency dictate that form-to-form tracing ought to remain a precondition for proprietary relief, additional restrictions should be imposed if they could efficiently mitigate some of the shortcomings of a rigid form-to-form approach.
V . THE CONSEQUENCES OF TRACING DISCOURSE FOR THE SUBSTANTIVE LAW : THE DANGERS OF THE METAPHYSICS OF TRACING
Should we be concerned that there is something nonsensical or even fraudulent about much of “tracing” discourse? Does it do any harm? Many of those who have examined fictions and related devices have done so with a benevolent eye.129 Nonetheless, there are dangers inherent in the use of obfuscatory devices generally, and the notion of “tracing” has affected the way in which we think about the distribution of entitlements in this field. This has resulted in a substantial dissonance between the substantive law of tracing and any plausible justification for the remedy.
129 A notable exception is Jeremy Bentham; see CK Ogden, Bentham’s Theory of Fictions (London, Kegan Paul, Trench, Trubner & Co., 1932); see G Postema, Bentham and the Common Law Tradition (Oxford, Clarendon Press, 1986) at 271–5.
The Metaphysics of Tracing: Substituted Title and Property Rhetoric 115 1. The Privileging of Transactional Tracing How then has thinking about title to proceeds in terms of “tracing” affected the substantive law? As mentioned, two approaches to tracing have competed for acceptance. Proponents of the “swollen assets” approach to tracing130 focus on the extent to which it can be proven that a bankrupt’s estate is “swollen” by an enrichment gained at the expense of the plaintiff and are thus willing to grant a charge over an bankrupt’s assets as a whole. In contrast, “form-to-form tracing” is premised on the ability of plaintiffs to point to an unbroken transactional chain between their original asset and a particular asset in respect of which a proprietary claim is being brought. Many have found the notion of tracing as the following of a thing through changes of form so beguiling that they have concluded that the swollen assets justification for tracing is simply illogical. Thus, rejecting a swollen assets approach to the provision of proprietary relief, Andrew Burrows argues that “without the ownership link, the personal remedy only is justified”.131 This assumes that a transactional link between two assets, in itself, somehow naturally indicates ownership in a way that a causal link does not. Yet the “ownership link” is provided by the law; it is not an independent social fact. That our law does not recognise a causal link as constitutive of title to proceeds cannot demonstrate in itself that it would be unjustified to do so. The revision of property rights provided by the development of tracing was motivated by considerations of justice—largely relating to the distribution of entitlements in bankruptcy. While such considerations might well suggest that it would be appropriate to place limitations on form-to-form tracing, the effort to portray tracing as the following of one thing into another has led to the normative rationale of tracing being ignored altogether. Where this occurs and the right to trace is explained in terms of a reified “ownership link”, form-to-form tracing is inevitably regarded as a necessary and sufficient basis for asserting title, while swollen assets tracing theory is considered arbitrary. David Paciocco, for example, favours a form-to-form approach to tracing on the basis that “[t]here is an undeniable allure in ensuring that a plaintiff who is given a claim to particular property as a matter of remedy, have a claim as a matter of fact”.132 This analysis fails to recognise that, without a theory of moral desert for priority, it remains arbitrary to award a proprietary interest on the basis of a transactional link. Why does a transactional link give a claim as “a matter of fact” while a causal link focusing more directly on considerations of unjust enrichment does not? A similar error is apparent in Lionel Smith’s critique of accounts of tracing that would not limit tracing to the identification of specific proceeds but would, 130
Osterle, supra n. 55 at 189. Burrows, The Law of Restitution at 44. 132 D Paciocco, “The Remedial Constructive Trust: A Principled Basis for Priorities over Creditors” (1989) 68 Can. Bar Rev. 315 at 333. 131
116 Redistributive Proprietary Remedies instead, allow for a charge over the defendant’s estate as a whole.133 Smith’s analysis follows from his tendency to deny the remedial character of tracing. To recall, he argues that tracing does not create new proprietary rights, but only allows them to be asserted in a new thing.134 Smith concludes that, “[s]ince tracing does not create proprietary rights, so it cannot alter the specific nature of proprietary rights by making them into some kind of charge”.135 The analysis is misconceived; tracing does create proprietary rights.136 Indeed, the willingness of the courts to allow plaintiffs who can trace the option of asserting a lien137—albeit a lien over specific assets—suggests that there is more room for flexibility than Smith allows. If we take the notion of “tracing” very literally, the swollen assets approach appears to be analytically misconceived. For, pursuant to that approach, the original asset is not traced into any thing; but, rather, a claim is made over the defendant’s assets as a whole. However, this “analytical error” is an illusion—the consequence of taking the metaphor of tracing too seriously. This tendency results in a vicious circularity in jurists’ attempts to justify the doctrine. An example is a defence of conventional tracing doctrine by Austin Scott, a reporter for the Restatement of Restitution.138 Scott argued, “[i]t is immaterial that the wrongdoer is insolvent, for his creditors, not being purchasers for value, are not entitled to any interest in the plaintiff’s property or product.”139 This is a non sequitur; the argument leaves one of its premises unstated. The claims of the creditors can be ignored only if one assumes the very matter at issue—that the plaintiff has a proprietary interest in the product of his property. When this premise is added, the tautological quality of Scott’s reasoning becomes apparent: the court recognises the product of the exchange as the plaintiff’s property because it is the plaintiff’s property. This sort of circularity is pervasive in tracing jurisprudence. An example of this is Burrows’ “ownership link” justification for form-to-form tracing.140 Similarly, Professor Roy Goode argues that the approach that he advocates, which requires that the plaintiff must have a “proprietary base” in order to be entitled to proprietary relief, is: not only logical but responsive to policy considerations, for to require D to make over that which never belonged to him but was always beneficially owned by P does not diminish D’s estate and thus has no impact on his creditors.141 133
See also L Smith, “Tracing into the Payment of a Debt” (1995) 54 CLJ 290 at 296. See supra n. 36 and accompanying text. 135 Ibid. at 320. 136 As Smith appears to accept elsewhere: see infra at text accompanying n. 155. 137 See Re Hallett’s Estate (1880) 13 Ch. D 696 at 709 per Jessel MR. 138 Scott’s preference for transactional tracing over the competing theory of “swollen assets” tracing is expressed in the Restatement of Restitution at § 202. On Scott’s contribution to the constructive trust, see supra, ch. 3.II.1. 139 Scott, The Law of Trust (3rd edn., Boston, Mass., Little, Brown & Co, 1967) v, § 508 at 3573. 140 See supra, text accompanying n. 131. 141 R Goode, “Property and Unjust Enrichment” in A Burrows (ed.), Essays on the Law of Restitution (Oxford, Clarendon, 1991) 215 at 220. See also R Goode, “Ownership and Obligation in Commercial Transactions” (1987) 103 LQR 433 at 439–41; and “Proprietary Restitutionary Claims” in W Cornish, 134
The Metaphysics of Tracing: Substituted Title and Property Rhetoric 117 Once again, the designation of assets as the plaintiff’s property is presented as having normative force when it is in reality a conclusion. This is the type of reasoning that the American legal realist Felix Cohen characterised as “transcendental nonsense”.142 In the absence of prior recognition, there is nothing which gives a particular relationship a quality of “propertyness” which requires its recognition as property.143 The concept of property is socially constructed and should be developed in response to sound policy considerations. The metaphors of “tracing” and “following” provide a structure for our thought about title to proceeds.144 We have become so used to thinking about this issue in terms of “tracing” that it is difficult for us to consider the matter outside this structure. This limits our imagination and directs us toward particular results.145 Thus, form-to-form tracing has come to be regarded as natural, while the swollen assets approach—because it does not involve the following of a particular asset and its exchange product—has come to seen as unprincipled. Those who have spoken favourably of legal fictions and related obfuscatory devices have emphasised their role in developing the law prior to the invention of more sophisticated justificatory concepts.146 Fuller likened fictions to scaffolding—they are necessary in its construction, but after the erection of a building they should be discarded as they serve only to obscure.147 Yet, Fuller’s own emphasis on the relationship of fictions to axiomatic premises underlying the law suggests that there is liable to be a real reluctance to eliminate such devices. Contrivances of this type allow a legal culture to avoid the rejection of values that it holds to be fundamental.148 They will not be lightly cast aside and, in the long term, their effect is liable to be pernicious.
2. The Suppression of Normative Analysis When a court is asked to extend the institution of property to a novel situation, one may expect a normative argument—a justification of why the advantages that R Nolan, J O’Sullivan and G Virgo (eds.), Restitution: Past, Present and Future: Essays in Honour of Gareth Jones (Oxford, Hart Publishing, 1998) 63 at 65. For similar reasoning, see also Oakley, supra n. 52 at 379. 142 Cohen, supra n. 150 at 814–17. For a similar view, in the context of equitable proprietary rights, see E Weinrib, “The Fiduciary Obligation” (1975) 25 UTLJ 1 at 10–11. 143 See, e.g., A Ross, “Tû-Tû” (1957) 70 Harv. L Rev. 812 at 822–5. 144 See G Lakoff and M Johnson, Metaphors We Live By (Chicago, Ill., University of Chicago Press, 1989) for a discussion of how the manner in which we think about particular problems can become structured by a habitually used group of related metaphors. 145 Cf. J Merryman, “Ownership and Estate” (1974) 48 Tulane L Rev. 916 at 924 . 146 See, e.g., O Mitchell, “The Fictions of the Law: Have they Proved Useful or Detrimental to its Growth?” (1893) 7 Harv. L Rev. 249. 147 LL Fuller, Legal Fictions (Stanford, Cal., Stanford University Press, 1967) 70. 148 Cf. Calabresi’s observations on strategies for dealing with clashes of ideals through subterfuge in American law; G Calabresi and P Bobbit, Tragic Choices (New York, Norton, 1978) at 18; and G Calabresi, Ideals, Beliefs and Attitudes and the Law: Private Law Perspectives on a Public Law Problem (Syracuse, NY, Syracuse University Press, 1985) at 87–114.
118 Redistributive Proprietary Remedies come with proprietary protection should be extended to a new context. However, we often find, instead, the use of metaphysical justification—the argument that something simply is property. This stifles any comprehensive consideration of how the interest in question ought to be protected. The elevation of obfuscatory notions such as “tracing” to the “heaven of legal concepts”,149 encourages the interpretation and development of doctrine in terms of formal abstractions, rather than according to defined policy objectives. Useful as they may be in allowing the courts to achieve desired outcomes in particular cases, such concepts have a logic of their own. Accordingly, when applied in future cases, they are liable to dictate results that cannot be reconciled with the normative considerations that motivated the outcome of the decisions in which these concepts were initially developed. The consequence is dysfunctional law.150 Lionel Smith’s influential work on the subject is characteristic of a failure to offer a justification for the effects of extending rights to proceeds—a failure that tends to follow from the acceptance that tracing is somehow not a remedy but a neutral process. Smith observes that tracing is “sometimes attacked on the ground that it leads to unfairness” between those who can trace to specific assets and those who cannot. However, he responds that “[t]he important point is that the source of any arbitrariness lies not in the ability to claim traceable proceeds, it derives from the nature of proprietary rights themselves”.151 Smith’s analysis relies on an unsustainable distinction between proprietary rights and tracing. Certainly property rights entail a certain degree of discrimination; but how much varies. A legal system that allows owners to exercise rights over any proceeds of their property affords more extensive property rights than does a system that withholds this privilege. Thus, despite Smith’s suggestion to the contrary, in common law systems “the ability to claim traceable proceeds” is part of “the nature of proprietary rights”, and not a distinct issue. The real question is whether and to what extent proprietary rights should extend over assets other than those the plaintiff initially owned. As we have seen, Smith insists that “[t]he exercise of tracing never creates proprietary rights. What it does is allow them to be asserted in a different asset”.152 While this assertion does not stand up to close analysis,153 it is fundamental to his account of the area. It underlies his persistent tendency to characterise the issue of rights to proceeds as concerning the “durability” of proprietary rights, as if it were 149 Cf. R Von Jhering, “In the Heaven of Legal Concepts” (trans. Lowenstein) in M Cohen and F Cohen (eds.), Readings in Jurisprudence and Legal Philosophy (Boston, Mass., Little, Brown, 1951) 678. 150 On the prevalence of this phenomenon see A Watson, “Legal Change: Sources of Law and Legal Culture” in A Watson, Legal Origins and Legal Change (London, Hambledon, 1991) 69 at 82. For a discussion of this problem in relation to property discourse see F Cohen, “Transcendental Nonsense and the Functional Approach” (1935) 35 Colum. L Rev. 809 at 815; and D Stevens, “Restitution, Property and the Cause of Action in Unjust Enrichment: Getting By With Fewer Things” (1989) 39 UTLJ 258 at 277–8. For an illustration in the context of the development of the constructive trust see JP Dawson, Unjust Enrichment: A Comparative Analysis (Boston, Mass., Little, Brown, 1956) at 26–33. 151 Smith, The Law of Tracing at 303–4. 152 Ibid. at 320. 153 See supra, text accompanying nn. 37–42.
The Metaphysics of Tracing: Substituted Title and Property Rhetoric 119 a continuing proprietary relationship that were in question, rather than new legal relationships.154 Smith maintains this analysis even though he observes in a footnote that: “Durable” is used in a loose sense here. It suggests the continuation of the original proprietary rights when at an analytical level, a new right in the traceable proceeds is being created. But at the more general level of theoretical justification, this can be seen as a question of how durable the original right is.155
The recognition that a new right is created is difficult to reconcile with Smith’s insistence that “tracing does not create proprietary rights”. Moreover, while he asserts that it is appropriate to frame the issue in terms of “durability”, he does not tell us why. It is difficult to understand why it might be useful to approach any matter at the “level of theoretical justification” on a basis that is analytically inaccurate. Smith’s insistence that tracing is about the “durability” of existing property rights leads him to argue that the claim that the “swollen assets” rationale provides the best justification for conferring rights to proceeds is “based on a misunderstanding”.156 Because he treats the legal relationship enjoyed over proceeds as the same as that enjoyed over the initial asset, Smith concludes that the same normative considerations must apply to each, and that anyone who argues otherwise misunderstands the matter.157 In his view, because owners will have their rights to the asset they initially owned enforced without regard to issues of continuing unjust enrichment, such issues must be equally irrelevant to the justification of proprietary rights in proceeds. The argument is misconceived. For one thing, the property rights enjoyed over proceeds are not invariably the same as those enjoyed over the initial asset.158 The extension of rights to new assets requires a rationale different from that used to justify the rights over the initial asset. For, as we have seen, quite different considerations pertain—it is much easier to justify entitlement over the initial asset than it is to justify the provision of property rights to proceeds.159 Smith argues that the unfairness of tracing is merely an example of a more general “principle of unfairness” and that the “very specificity of property rights—the fact that they are rights in something, and cannot survive its loss or destruction— guarantees inequality of treatment” among creditors.160 Yet, by providing that owners may elect to assert their rights over more than one object, form-to-form tracing undermines the very notion of specificity of property rights. Moreover, Smith observes that “it is, however, fair to say that proprietary claims based on
154 155 156 157 158 159 160
See especially Smith, The Law of Tracing at 307–9. Ibid. at 308. Ibid. at 318. See ibid. at 309 (criticising Walt and Sherwin, supra n. 116). See supra, text accompanying nn. 37–42. See supra, text accompanying nn. 96–109 and ch. 4. Smith, supra n. 154 at 305.
120 Redistributive Proprietary Remedies tracing can extend the operation of [the] principle [of unfairness]”.161 The question that he fails to answer is whether and to what extent this “principle” should be extended in this way.
3. Illustrations of the Dangers of Formalism (a) The Enforcement of Consensually-created Tracing Rights The consequences for the substantive law of concepts utilised in legal discourse to hide the dissonance between the law in action and axiomatic premises concerning property are evident in the jurisprudence on tracing into proceeds in the context of reservation of title agreements. In Aluminium Industrie Vaassen BV v. Romalpa Aluminium Ltd.,162 the court held that the seller could, by utilising tracing principles, reserve title, not only to goods in the possession of the buyer, but also to the proceeds of those goods. According to this view, if the terms of the contract are such that the buyer is a fiduciary in respect of the proceeds, then the seller may assert ownership over them, pursuant to normal equitable tracing principles. Reservation of title clauses effectively allow sellers to have security in sales transactions. “Proceeds” clauses provide for what is in effect an even more comprehensive security interest. In the United States, Article 9 of the Uniform Commercial Code provides that reservation of title clauses are security interests and, while it excuses them from registration, it limits their effect.163 In contrast, despite the function of these agreements, English jurists are reluctant to characterise them as unregistered securities. The question whether the reservation of title is a security under English law has seen various authors providing their own definitions of what a security interest is and then announcing whether or not these arrangements fit the definition.164 For example, Oditah, taking a functional approach, argues that these agreements can quite reasonably be regarded as conferring security.165 However, most English commentators disagree. Generally functionalism is resisted.166 Goode, for instance, argues that, because a security must be conferred and not retained, reservation of title is not such a device.167 161
Smith, The Law of Tracing at 306. [1976] 1 WLR 676. 163 See R Adhar, “Romalpa’s Empire, the Reception of Reservation of Title Clauses in New Zealand” [1993] LMCLQ 382 at 384. 164 See F Oditah, Legal Aspects of Receivables Financing (London, Sweet & Maxwell, 1991) at 5. 165 Ibid. at 90–4. 166 M Bridge, “Form, Substance and Innovation in Personal Property Security Law” [1992] J Bus. L 1. A striking example of this is McCormack’s comment that “the ‘Crowther Committee on Consumer Credit’ observed that distinctions between one type of transaction and another are drawn on the basis of legal abstractions rather than on the basis of commercial reality” in the context of a defence of a formalist approach: see G McCormack, “Reservation of Title—Past Present and Future” [1994] Conv. 129 at 135. He is apparently unperturbed by the fact that the Committee’s comment was intended as a criticism. 167 R Goode, Legal Problems of Credit and Security (2nd edn., London, Sweet & Maxwell, 1988) at 5. 162
The Metaphysics of Tracing: Substituted Title and Property Rhetoric 121 Unregistrable rights that function as securities are not easy to justify. Nonetheless, an argument can be made for allowing retention of title to goods supplied under an agreement for sale. The seller will generally be in a better position than a receiver or trustee in bankruptcy to realise the value of the assets in question.168 Moreover, the device is so widely used that few people are likely to assume that a retailer’s stock is necessarily free from such arrangements. Thus, retention of title clauses provide a useful means of enabling sellers to safeguard their position and so encourage the provision of credit in this context. Rights to proceeds of sale are a different matter. These rights are sought merely in order to ensure priority in bankruptcy. Moreover, it is much more difficult for third parties to gauge whether or, especially, to what extent, a seller might have retained title to proceeds of property that the buyer has sold on. Consequently, it is difficult to comprehend why these arrangements should be excused from registration. Proceeds clauses are also a concern because they may have effects that go beyond securing the purchase price owed. Where the buyer is a retailer, the proceeds of sale will of course generally be greater than the price the buyer has contracted to pay the seller for the goods. Nonetheless, a seller may in theory assert title to proceeds and thereby remove them from the bankrupt’s estate. This is so even when substantial payments have been made on the purchase price so that the money owed by the buyer is considerably less than the sum of the proceeds. Moreover, the danger of this happening has been increased by the House of Lords’ willingness to recognise “all moneys” clauses whereby title passes only when all debts due to the seller are met.169 Ironically, efforts to limit the effect of the contract to security (so that, for instance, the extent of the seller’s title is limited to the contract price) make a court more likely to hold that the agreement has created an unregistered security.170 Thus, the formalistic approach taken in this context encourages reservation of title agreements that maximise injustice to third party creditors. It has been assumed that the capacity to transcend exchange transactions and persist in proceeds is a natural feature of title, the alienation of which the owner is at liberty to control. The reified notion of a continuing title results in the conclusion that these agreements involve the seller retaining a single title, rather than the buyer granting an interest that will crystallise when the proceeds are obtained. Once the continuing title analysis is accepted, absolutist assumptions of property suggest that an owner should be perfectly entitled to retain title to proceeds, regardless of the consequences for third parties.171 As a result of the reification of the interest conferred by tracing, some jurists have lost sight of the normative 168
Bridge, supra n. 166. Armour v. Thyssen Edelstahlwerke AG [1991] 2 AC 339. See, e.g., Re Weldtech Ltd. [1991] BCC 16 (Hoffmann J striking down a clause, placing emphasis on the phrase “this transfer takes place only for securing our claims against the purchaser”). 171 R Goode, Proprietary Rights and Insolvency in Sales Transaction (2nd edn., London, Sweet & Maxwell, 1989) at 101; and R Bradgate, “Retention of Title in the House of Lords: Unanswered Questions” (1991) 54 MLR 726 at 728. 169 170
122 Redistributive Proprietary Remedies rationale for the practice.172 A different conclusion would result if tracing were understood to be an unusual remedy designed to fulfil particular objectives. A consideration of sound policy justifications for allowing substituted title indicates that allowing sellers unlimited power to “retain title” over proceeds is unsatisfactory. (b) Tracing into “the Proceeds of Debt” The recent call for an extension of tracing to confer rights to the proceeds of debt provides an example of how we may consider whether the benefits of tracing ought to be extended to novel situations. Consider a situation where A acquires an asset on credit from B and subsequently discharges the debt using money that is the property of C or the traceable proceeds of such property. Lionel Smith argues that C should be able to trace into the asset that was acquired on credit.173 (i) Conceptual Objections While the notion of tracing into “the proceeds of debt” has more authority against it than supporting it,174 Smith argues that the logic of tracing dictates that it should be possible. In his analysis, “[p]ayment of debt is just delayed payment, and the traceable proceeds are whatever was acquired in the past when the debt was incurred”.175 There are conceptual objections to this analysis. Analytically, the payment of a debt is not “just delayed payment” of the asset acquired on credit. The asset in question was acquired with the debt itself and the subsequent payment of the debt discharges the debt and is not payment for the already acquired asset. On the other hand, as Smith points out, it is not easy to distinguish between credit sales and those that we would normally think of as involving immediate payment. Thus, he rightly argues that all purchase transactions where payment is not made in advance involve an element of credit. In a transaction at a supermarket, for example, the contract is presumably complete when the seller accepts the buyer’s offer at the till. Thus, payment occurs after the completion of the sale. Yet, it is unrealistic to say that the payment of the debt in question is conceptually indistinguishable from the payment of a debt in circumstances where the seller offers the buyer credit. For, in the example of the supermarket, the seller is not
172 This may be contrasted with German jurisprudence that concludes that any attempt to provide for ownership over proceeds must be treated as a charge. See R Serick, Securities in Moveables in German Law: An Outline (Deventer, Kluwer, 1990) at 3, 61 and 137. This is so even though German law does not demand the registration of personal property security interests. 173 L Smith, “Tracing into the Payment of a Debt” [1995] CLJ 290; Smith, The Law of Tracing at 146–52 and 353–6. 174 For the suggestion that “backwards tracing” may be permissable see Foskett v. McKeown [1997] 3 All ER 392 at 409 per Scott VC. For the conclusion that it is not possible see Denton v. Davies (1812) 18 Ves. 499; Bishopsgate Investment Management Ltd. v. Homan [1995] Ch. 211 at 221 per Leggatt LJ. 175 Smith, supra n. 173 at 292.
The Metaphysics of Tracing: Substituted Title and Property Rhetoric 123 offering credit in any meaningful sense. The parties understand that seller’s acceptance is conditional on the buyer’s tendering payment immediately and, if this does not occur, the buyer will not be in a position to take the goods from the premises. This may be explained in a number of ways. The seller may be seen as rescinding the contract for a misrepresentation that the buyer had the means to pay and the intention of paying for the goods. Alternatively, the seller may be viewed as still in possession of the goods and able to exercise a lien and a right to terminate the contract, thereby revesting title. Thus, there are very real conceptual and practical differences between an ordinary credit sale and an immediate payment transaction. In the latter case, in a very real sense, rights to goods are not acquired on credit but only at the time of payment. Smith rightly argues that payments by cheque even more obviously involve the provision of credit. In writing a cheque, the buyer is giving a chose in action, a debt, as consideration for the goods purchased. When the buyer’s account is debited and the seller paid, the payment is discharging the debt and not buying the goods. Nonetheless, we have never hesitated to allow tracing in the context of assets acquired by cheque.176 There are, however, important differences between a credit sale in the ordinary sense of the term and a sale where the purchase price is paid by cheque in return for the goods. As Goode has observed, the cheque “is primarily a payment direction, not a credit instrument”.177 To the extent that there is judicial support for “backwards tracing”, those adherents to the notion have suggested that it can be justified only where “there was an inference that when the borrowing was incurred it was the intention that it should be repaid by misappropriations of . . . [the claimant’s] money”.178 In the context of credit sales, it will relatively seldom be the case that defendants have formed a clear view at the time that they incurred the debt that they would subsequently discharge it using the plaintiff’s money. In contrast, where payment is made by cheque, there is at the time of payment a clear direction that the debt be discharged from a particular source. (ii) Policy Objections There is clearly a causal connection between assets used to pay a debt and any property acquired in incurring the debt. Thus, logically, a case can be made for “backwards” tracing. But can it be justified as a matter of policy? The perceived inability to trace money used to discharge debts has been regarded as an indicator of the shortcomings of form-to-form tracing. However, while the payment of a debt may well result in the defendant’s creditors being enriched in the event of the defendant’s bankruptcy, this will not necessarily be true. This will be the case only if the defendant would, in any event, have paid the debt prior to bankruptcy using other assets. Thus, while examples of property being used to pay debts can illustrate that the conventional limits on transactional tracing provide imperfect 176
For a discussion, see Jones & Sons (Trustee) v. Jones [1996] Ch. 159 at 169. R Goode, Commerical Law (2nd edn., London, Penguin, 1995) 580. 178 Bishopsgate Investment Management v. Homan [1995] Ch. 211 at 216 per Dillon LJ. See also Fostkett v. McKeown [1998] Ch. 265 at 283–4 per Scott VC. 177
124 Redistributive Proprietary Remedies justice, they do not demonstrate that it would be a good thing if plaintiffs could trace into the “proceeds of debt”. It should be remembered that any set of tracing rules will result in a degree of arbitrariness. Consider a situation where a defendant has not a cent to his name and has two contract creditors. He owes X £500 for a package holiday that he enjoyed recently. He also owes Y £500 for an antique vase, which is sitting in his rented house. At this point the defendant embezzles £500 of trust property. Before he has the opportunity to spend the money, he becomes bankrupt. The plaintiff, the beneficiary of the trust, would like a remedy. On these facts, the plaintiff would be entitled to the £500 in the hands of the defendant, and X and Y would be required to line up for a pro rata share of the remaining estate. If the vase has kept its value, they would receive £250 each. This result could be justified because the plaintiff did not choose to become the defendant’s creditor and because, but for the proprietary remedy, an extra £500 would have been made available for distribution to general creditors in the defendant’s bankruptcy. But what if, before bankruptcy, the defendant had used the trust money to pay the debt owed to Y, who was pressing him for payment? According to Smith’s analysis, the result would be that the plaintiff would be entitled to claim the vase and X would get nothing. Yet it would be difficult to justify this outcome; for it cannot be said that X would have been unjustly enriched if he had been allowed to share pari passu with the plaintiff.179 Behind the call for the recognition of the validity of tracing into the proceeds of debt is a formalistic impulse. The assumption is that if we can trace in the context of one type of causal connection we should be able to trace in the context of another. This is misguided. In deciding whether we should develop the law in a particular direction, we should pay more regard to the justice of the outcomes that would result than to the supposed internal logic of tracing. Tracing should be available in this context only if the transactional link in question is likely to indicate that that part of the defendant’s estate that is available for distribution in bankruptcy continues to be swollen at the plaintiff’s expense. In contrast to a situation where property is used to acquire an asset directly, it is less likely that a 179 Simon Evans has recently written in support of tracing the proceeds of debt on the basis that the defendant’s estate would remain enriched because the payment of the debt using the plaintiff’s assets or their traceable product would be voidable as a preference. See Evans, supra n. 55 at 497. However the law relating to preferences differs considerably between jurisdictions. In England, a payment is recoverable only if the debtor intended to give a preference. See s. 240 of the Insolvency Act 1986; A Keay, “The Recovery of Voidable Preferences: Aspects of Restoration” in Rose (ed.), Restitution and Insolvency (London, Mansfield Press, 2000) 237. As a result, the payment by the defendant to Y in the above example would almost certainly not be a preference. In any event, payments are regarded as preferences only if they are made within a particular period before bankruptcy that is defined by statute (in English law the period is 6 months, as provided for by s. 240(3) of the Insolvency Act 1986). The relevant period is necessarily somewhat arbitrary and payments of the debts in question would not necessarily fall within this period. Finally, in terms of the swollen assets rationale, where the payment of a debt by a defendant using the plaintiff’s property or its traceable product is actually voidable, there is no need to allow the plaintiff to trace into the proceeds of the debt. Rather, it would make more sense simply to let the plaintiff trace into the property recovered by the trustee in bankruptcy as a result of the transaction being void. After all, this would be the proceeds of the plaintiff’s property.
The Metaphysics of Tracing: Substituted Title and Property Rhetoric 125 payment of a debt would have this result. For, as mentioned, this would only be the case if the debt in question would have been paid by the defendant prior to bankrutpcy in any event—a matter which may be difficult, if not impossible, to determine. Given this, it is difficult to understand why we would wish to extend the advantages of tracing to the proceeds of debt.
VI . SOME REALISM ABOUT TRACING
Given the more instrumentalist approach to property apparent in American legal thought,180 it is not surprising that tracing issues are not always treated in the United States in the same way as they are in English law. The most marked difference involved a dalliance with swollen assets tracing that saw some American courts willing to allow proprietary relief even in the absence of the identification of a transactional link between the assets in question.181 While such an approach proved to be unworkable in practice, it reflected a tendency to focus on the policy rationale for giving proprietary relief rather than on more formal justifications. Reflecting this attitude, contemporary American commentators tend to understand the insistence on a transactional connection between specific assets as an imperfect surrogate for a swollen assets approach favoured because of the intractable evidential difficulties that stand in the way of the implementation of such an approach.182 This difference in understanding the normative foundations of proprietary rights in proceeds may have practical implications. This can be seen in the reluctance to employ the evidential presumptions used to provide for tracing out of mixed bank accounts to allow some fraud victims to trace the proceeds of their assets and claim priority over other fraud victims. In US v. Durham183 the United States Court of Appeals for the Fifth Circuit declined to overturn a decision of a circuit judge not to impose a constructive trust in favour of a victim of fraud. While the defendants had defrauded a number of parties, the plaintiff was able to identify sums owed to the defendants by their bank as the product of its money, largely because it had been swindled just a few days before the defendants were arrested. Nonetheless, the circuit judge took the view that it would be inappropriate to give the plaintiff priority over other victims of fraud merely because, according to the evidential rules applied for identifying withdrawals from mixed bank accounts, the defendant had spent the proceeds of other victims’ money first.184 Instead, the plaintiff was required to share pro rata with other fraud victims. In 180
See supra ch. 3. For a good account of swollen assets theory and for references to the extensive literature on tracing theory prior to victory of orthodoxy in the Restatement of Restitution (1937), see Osterle, supra n. 55 at 189. 182 See supra, IV.2(b). 183 86 F 3d 70 (5th Circ., 1996). 184 Ibid. at 73. 181
126 Redistributive Proprietary Remedies US v. Real Property,185 the Court of Appeals for the Ninth Circuit took a similar view. The Court allowed the Securities and Exchange Commission to put into effect a scheme agreed with the defendant to pool the proceeds of fraud derived from several victims for pro rata distribution. In so doing, the Court refused to allow the plaintiff to assert a lien over the proceeds of its money. In the view of Van Sickle J, it was inappropriate to permit the use of “tracing fictions” where “its use would promote unequal and therefore inequitable treatment of similarly situated victims”.186 This reflects a perspective that the existence of a transactional link between a plaintiff’s property and other assets is not in itself a reason for giving a proprietary claim. It suggests that tracing and the evidential presumptions associated with it should not be permitted to extend unduly what Lionel Smith refers to as “the principle of unfairness” that comes with the recognition of proprietary rights.
VII . CONCLUSION
A survey of the law of tracing is likely to lead one to echo the unease Maitland experienced when reviewing the area a hundred years ago. He expressed: great doubts of the convenience of all this. It may be hard that a cestui que trust should not have “his” property, but is also hard that creditors should go unpaid. Courts of Equity, which in this matter have had the upper hand, have thought a great deal of the cestui que trust, much less of the creditors.187
Maitland’s use of inverted commas in referring to the cestui que trust’s claim to “his” property suggests that he viewed the attribution of title in this context as somewhat arbitrary. Unfortunately, English judges and jurists have seldom shared this scepticism.188 From Lord Ellenborough’s judgment in Taylor v. Plumer 189 to the discussion of tracing in the context of Romalpa clauses,190 the analysis of the area is littered with patently circular attempts to justify tracing on the basis that plaintiffs should be permitted to assert title to the assets because they are their property. The conceptualisation of tracing in a manner that suppresses the conflict between the function of the remedy and sacred axioms of property has had the effect of burying key normative issues. We are enslaved by concepts whose primary function is to obscure. As a result, the law of tracing has never rested upon sound normative foundations.
185
89 F 3d 551 (9th Cir., 1996). Ibid. at 553. FW Maitland, Equity: a Course of Lectures (ed. Chaytor and Whittaker, 2nd edn., revd by Brunyate, Cambridge, Cambridge University Press, 1936) at 220. 188 For a notable exception see Lawson, supra n. 3 at 160. 189 (1815) 3 M & S 562. See supra, text accompanying nn. 47–49. 190 See supra, text accompanying nn. 162–172. 186 187
6
The Proprietary Consequences of a Vitiated Intention to Transfer Property: “An Intolerable Reproach to Our System of Jurisprudence”? T I S A basic axiom of the common law that property will pass only when an owner intends it.1 It is this premise upon which the maxim of nemo dat non quod habet rests. However, it cannot tell us what should follow in circumstances where an owner intended to transfer title, but that intention was vitiated in some way. There have been two approaches to this issue. One method advances upon the assumption that, by focusing on the nature of the owner’s intent or on the transferee’s state of mind, one can deduce whether or not property passes as a matter of “principle”. The second is an instrumentalist or pragmatic approach that focuses upon the consequences that follow from the determination whether or not title passes and asks in what circumstances such consequences are merited.
I
I . THE POSSIBLE LEGAL RESPONSES TO A VITIATED CONSENT TO PASS TITLE
Where an owner’s intent to transfer property is vitiated by some factor, such as mistake, duress, unconscionability or undue influence, our law has at least five responses to choose between.
1. Transfers Void at Law Where a transfer is void at law, the result is that no title passes and the transferor may bring an action for conversion against the initial transferee or anyone to whom the asset in question is subsequently transferred. Thus, where the transfer is void from the outset, unless the subject matter is money,2 the transferor will 1 See, e.g., WH Blackstone, Commentaries on the Laws of England 4 (Chicago, Ill., Chicago University Press, 1979) ii, at 9. Virgo, Principles of the Law of Restitution at 602. 2 The availability of a defence of bona fide purchase in the context of money was established in Miller v. Race (1758) 1 Burr 452. See D Fox, “Bona Fide Purchase and the Currency of Money” [1996] CLJ 547.
128 Redistributive Proprietary Remedies prevail against even subsequent bona fide purchasers. In addition, a trustee in bankruptcy who receives an asset that is the subject matter of such a transfer will be personally liable to the transferor, effectively giving the transferor priority over general creditors.3 Traditionally, very few types of mistake have been regarded as sufficiently “fundamental” to render a transfer of property completely void. The general view is that, where the intention of owners to pass title is vitiated by a mistake about their liability to make the transfer in question, title will nevertheless pass.4 It is, however, well established that where a promisor makes a material mistake about the identity of the promisee the contract will be void. As a result, title will not pass to any property if the transfer of title is dependent upon the contract or if an owner’s intention to pass title in a transfer made pursuant to the void contract is equally vitiated by the same mistake.5 The cases have tended to turn on artificial and elusive distinctions as to whether sellers intended to deal with the particular person in front of them or, instead, intended to deal with a third party whom a rogue impersonated. The state of the authorities that has resulted does the law no credit.6 In addition, there is some authority from the criminal law to support the view that, where the transferor is mistaken about the quantity of goods or money delivered, legal title does not pass in any excess.7 There are conceptual difficulties with this analysis.8 Moreover, while a recipient who knowingly fails to account for any 3 Tooke v. Hollingworth (1793) 5 TR 215. See M Scott, “Tracing at Common Law” (1965–66) 7 UWALR 463; D Fox, “Common Law Claims to Substituted Assets” [1999] RLR 55 at 72–3. 4 See, e.g., transfers made in performance of a contract that the transferor assumes to be valid when it is in reality void (as in Westdeutsche Landesbank Girozentrale v. Islington Borough Council [1996] AC 669) or where a mistake is made in the performance of a valid contract, such as an overpayment (as in Chase Manhattan v. Israel-British Bank (London) [1981] Ch. 105). The view that title passes in such cases may be contrasted with Lord Wright’s analysis in Norwich Union Fire Insurance Society v. Price [1934] AC 455 at 461 that suggests that any material mistake will prevent property passing. Lord Wright apparently assumed that recovery was available in respect of payments made pursuant to a mistake because they were void and that as a result property has not passed. In fact, as Goff J observed in Barclays Bank v. Simms [1980] QB 677 at 689, restitution is available for a “far wider [range of mistakes] than the kind of mistake which would vitiate intention to transfer property”. 5 See, e.g., Cundy v. Lindsay (1878) 3 App. Cas. 459. 6 For cases where property was held not to have passed: see Cundy v. Lindsay (1878) 3 App. Cas. 459 (rogue purporting to be the owner of a reputable business) and Ingram v. Little [1960] 3 All ER 332 (rogue impersonating third party). See, in contrast, cases in which property was held to have passed: Phillips v. Brooks Ltd. [1919] 2 KB 243 (rogue impersonating third party of high social standing); Lewis v. Averay [1971] 3 All ER 907 (seller required proof of identity from rogue purporting to be film actor) and Kings Norton Metal Co. Ltd. v. Eldridge, Merret & Co. Ltd. (1897) 14 TLR 98 (seller defrauded by a rogue who pretended to be a non-existent person). 7 Russell v. Smith [1958] 1 QB 27; and Illich v. R (1987) 162 CLR 110. See D Fox, “The Transfer of Legal Title to Money” [1996] RLR 60; Virgo, Principles of the Law of Restitution at 608. On the other hand, there are cases that suggest that the recipient obtains good title in these circumstances: see Moynes v. Cooper [1956] 1 QB 439. To complete the confusion, there is authority that suggests that title does pass at law, and that, at most, the transferor obtains an equitable title: see, e.g., R v. ShadrokhCigari [1988] Crim LR 465. See also G McCormack, “Mistaken Payments and Proprietary Claims” [1996] Conv. 86 at 88. 8 If a transferor means to pay the transferee £500, but accidentally hands over six £100 notes, for which note does title not pass?
The Proprietary Consequences of a Vitiated Intention to Transfer Property 129 excess unquestionably acts unconscionably, it is hardly clear that this is tantamount to theft. Finally, it has been suggested that a mistake about the identity of the asset being transferred will mean that legal title to the property in question does not pass.9 Thus, it has been indicated that contracts will be void ab initio as the result of a common mistake if facts existing at the time the contract is entered into are such that they render “the subject matter of the contract essentially and radically different from the subject matter which the parties believed to exist”.10 It is difficult to see why the particular categories of mistake that the law has seized upon as sufficient to prevent title passing possess any quality that can justify the consequences that ensue.11 Typically, the real contest is not between transferors and the initial transferees, but between transferors and parties into whose hands the assets are subsequently passed. The exclusive focus on the intention of one or both of the parties to the initial transfer completely fails to take account of the interests of these remote parties.12
2. Voidable Transfers In some situations, while a transfer is effective to pass title, it may be voidable either at law or in equity, so that the title obtained by the transferee is defeasible. Nonetheless, prior to any attempt by the transferor to rescind the transaction, the transferee may pass good title to a bona fide purchaser.13 On the other hand, volunteers, including trustees in bankruptcy, take subject to any equities, and so are bound by a transferor’s right of rescission.14 The common law has traditionally taken a stricter approach to rescission than has equity in two respects. First, equity provides for rescission in response to a wider range of vitiating factors than does the common law. Thus, while at law rescission is available only for those misrepresentations that were fraudulently induced,15 equity equally allows for rescission in cases of innocent misrepresentations.16 In addition, equity provides for the rescission of contracts vitiated by a common mistake that is “fundamental”—a criterion that is understood to set a
9 Illich v. R (1987) 162 CLR 110 at 126 per Wilson and Dawson JJ. While neither provides a straightforward application of this principle, cases supporting this view might include R v. Ashwell (1885) 16 QBD 190 and R v. Davies [1982] 1 All ER 513. 10 Associated Japanese Bank (International) Ltd. v. Crédit du Nord SA [1989] 1 WLR 255 at 268 per Steyn J. 11 S Stoljar, Mistake and Misrepresentation: A Study in Contractual Principles (London, Sweet & Maxwell, 1968) 69 and 72–3. 12 M Mautner, “ ‘The Eternal Triangles of Law’: Toward A Theory of Priorities in Conflicts Involving Remote Parties” (1991) 90 Mich. L Rev. 95 at 98–9. 13 See, e.g., Babcock v. Lawson (1880) 5 QBD 284; Lewis v. Averay [1971] 3 All ER 907. 14 Johnson v. Smiley (1853) 17 Beav 223; Re Beeston [1899] 1 QB 626. 15 See Kennedy v. Panama, New Zealand, and Australian Royal Mail Co. Ltd. (1867) LR 2 QB 580. 16 Redgrave v. Hurd (1881) 20 Ch. D 1.
130 Redistributive Proprietary Remedies lower threshold than that demanded at law.17 Similarly, in equity, a plaintiff may set a contract aside on the grounds of undue influence or unconscionable bargain.18 Secondly, equity takes a more flexible approach in determining when it is possible to unwind a partially performed transaction. At common law, the requirement that restitutio in integrum must be possible is interpreted to mean that rescission will not be permitted if judicial assistance is required to restore the status quo.19 For this reason, rescission will be denied if plaintiffs have received any benefit under the contract in question. In contrast, equity allows for rescission on terms that ensure that the status quo can be substantially restored.
3. Transfers Giving Rise to a Beneficial Interest The position might be taken that legal title passes (although it might be voidable at law and/or equity) but that an equitable title arises immediately in favour of the transferor. It may be asked whether there is a real difference between plaintiffs having an equitable right to rescind and an immediate equitable interest. Certainly, the distinction seems to have collapsed in the United States. The assumption in American legal thought is that a right to rescind and an equitable interest are two sides of the same coin—the presence of one implies that of the other.20 As a result, the Restatement of Restitution makes little reference to rescission, instead explaining rights to specific relief almost exclusively in terms of the constructive trust. In English law, there is some judicial precedent and academic support for the same perspective.21 However, the more widely accepted view is that the right to rescind is not indicative of an existing equitable interest. Elaborating this view recently in Twinsectra Ltd. v. Yardley,22 Potter LJ observed that: the transferor may elect whether to avoid or affirm the transaction and, until he elects to avoid it, there is no constructive (resulting) trust. . . . The result . . . is that, before rescission, the owner has no proprietary interest in the original property; all he has is the mere equity of his right to set aside the voidable contract.23 17
Solle v. Butcher [1949] 2 All ER 1107. Perhaps because the area was well developed at common law, it is less clear whether such a remedy is available to a victim of duress in equity. However, in principle, there seems no reason why equitable rescission should not be available in this context. 19 R Goff and G Jones, The Law of Restitution (5th edn.) at 81. 20 Thus, AW Scott argued that a beneficiary under a constructive trust “is not compelled to convey the property because he is a constructive trustee; it is because he can be compelled to convey it that he is a constructive trustee”: AW Scott, The Law of Trusts (3rd edn., Boston, Mass., Little, Brown & Co., 1967) v, § 462 at 3413. This view is also apparent in more recent scholarship: see, e.g., in A Kull, “Restitution in Bankruptcy: Reclamation and Constructive Trust” (1998) 72 American Bankruptcy LJ 265. 21 Stump v. Gaby (1852) 2 De G M & G 623; Gresley v. Mousley (1859) 4 De G & J 78. See Chambers, Resulting Trusts 171–84; P Birks, “Property and Unjust Enrichment: Categorical Truths” [1997] NZLR 623 at 638; M Neave and M Weinberg, “The Nature and Function of Equities” (1978–9) 6 U of Tas. L Rev. 24 at 26–7. 22 [1999] Lloyd’s Banking Rep. 438. 23 Ibid. at 463. See also Bristol and West Building Society v. Mothew [1998] Ch. 1 at 22–3 per Millett LJ. 18
The Proprietary Consequences of a Vitiated Intention to Transfer Property 131 At first sight, the distinction between an equity of rescission and an equitable interest may appear quite slight. There is a small difference in the extent of protection afforded against third party purchasers. In addition to being unenforceable against bona fide purchasers of the legal title in the same way as an equitable interest, mere equities are defeasible by a third party’s bona fide purchase of the equitable title of the assets in question.24 However, a potentially much more important distinction may exist in relation to tracing. While those with a full equitable interest can assert claims against the proceeds of their property, those with a mere equity may not be able to follow the product of any exchanges of the property affected by the equity that took place prior to rescission.25
4. Transfers Pursuant to Which Title Passes but a Right to Personal Relief Arises Another response available to a vitiated intention to transfer property is to allow transferees to receive an unqualified title, leaving transferors with only personal claims. This would mean that transferors would have no rights against third party recipients of any assets that formed the subject matter of the transaction. Thus, in the event of a transferee’s bankruptcy, the only recourse available to transferors would be to line up to prove their personal claim and share pari passu with other unsecured creditors.
5. Transfers where Title Passes and the Transferor is Denied any Remedy Finally, the law may, of course, hold that the fact that their intention was vitiated in some way entitles transferors to no relief whatsoever. This approach has been taken where one party enters into a contract as a result of a self-induced unilateral mistake, even if the other party is aware of this fact.26 In addition, this is the response generally favoured where gifts are motivated by a self-induced mistake.27
24 Phillips v. Phillips (1862) 4 De G F & J 208; Latec Investments Ltd. v. Hotel Terrigal Pty. Ltd. (1965) 113 CLR 265. See Birks, supra n. 21. 25 See infra, text accompanying nn. 66–93. 26 Bell v. Lever Brothers Ltd. [1932] AC 161. The matter is different where one party to a contract is mistaken about what the other party is promising and the other party is aware of that error: see, e.g., Smith v. Hughes (1871) LR 6 QB 597. See J Beatson, Anson on Contract (27th edn., Oxford, Oxford University Press, 1998) 308–10. 27 Ogilvie v. Littleboy (1897) 13 TLR 399 at 400.
132 Redistributive Proprietary Remedies
II . VITIATED INTENT AND EQUITABLE TITLE : DOCTRINAL RESPONSES
1. The Availability of Proprietary Relief: Millett J’s Framing of the Issue in El Ajou v. Dollar Land Holdings More than anything else, two advantages flow from the award of proprietary relief in the context of a vitiated intention to transfer property. First, the recognition of a proprietary interest, in conjunction with equity’s approach to tracing, enables plaintiffs to have remedies against remote parties who are not bona fide purchasers of the legal title. Secondly, proprietary remedies allow plaintiffs to obtain priority in bankruptcy against the initial transferee or remote parties in whose hands the subject matter of the transfer or its proceeds are identifiable. In El Ajou v. Dollar Land Holdings,28 Millett J reflected on the fortunes of two classes of victims of a fraudulent scheme. The plaintiff was an investor whose money was channelled without his permission into a fraudulent share-selling scheme by a Swiss investment manager, who had been bribed by the unscrupulous Canadians running the scheme. Some of the proceeds of this scheme had been invested in a property development project in conjunction with the defendant company. The plaintiff sought to hold the defendant liable for receiving these proceeds. While the plaintiff had not consented to his money being used in this way, it was impossible for him to assert legal title to the proceeds of his money because these had been mixed so that they were no longer identifiable at common law.29 To claim a remedy from the defendant, the plaintiff needed to establish that the defendant was in possession of assets that were the traceable proceeds of property that belonged to the plaintiff in equity. This could be done by establishing a breach of a fiduciary duty that gave rise to a constructive trust and then utilising equitable tracing principles to identify the proceeds of the original property. However, Millett J paused to consider the position of other victims who had been defrauded into investing directly into the scheme. It is far from clear that proprietary relief would have been available in these circumstances. However, Millett J concluded that “[i]t would, of course, be an intolerable reproach to our system of jurisprudence if the plaintiff were the only victim who could trace and recover his money”.30 The premise of Millett J’s argument is that it should not make a difference whether victims made a mistake in investing money with a rogue or made a mistake in employing an unscrupulous agent who subsequently defrauded them. In either case, proprietary relief should be available. Of course, there are two ways in which we might reform the law to ensure that these apparently “like cases are 28
[1993] 3 All ER 717. For the view that the identity of money will be lost at common law after being credited to a bank account in respect of which others have deposited money see Re Diplock [1948] Ch. 465 at 520 per Greene MR. 30 Ibid. at 734. 29
The Proprietary Consequences of a Vitiated Intention to Transfer Property 133 treated alike”. We could equally ensure consistency by not granting a proprietary interest in the first type of case rather than extending it to the second type of case.31 However, this was not the starting point of Millett J’s quest. Instead, he sought some way to make the benefits of proprietary remedies and tracing in equity more widely available. He has hardly been alone in this endeavour. The solution that Millett J offered for the problem he posed in El Ajou is only one of a number of attempts to find an approach that would make proprietary remedies more freely available in this context without appearing unprincipled. The following sections examine these other attempts before returning to Millett’s contribution to this area.
2. Three Attempts to Determine the Availability of Proprietary Relief in Response to a Vitiated Intention to Transfer Property (a) Goulding J’s Analysis in Chase Manhattan In Chase Manhattan Plc v. Israel-British Bank (London),32 the plaintiff bank mistakenly paid £2,000,000 to another bank for the account of the defendant bank. Received wisdom would have had it that the only recourse available to it was to bring an action for money had and received at common law. The problem was that, because of the defendant’s bankruptcy, this would not have proved to be a very effective remedy. The only way the plaintiff would have been able to obtain a satisfactory remedy was if it could demonstrate that it had an equitable interest in the money transferred and that it could identify the traceable proceeds of that money. Goulding J concluded that, because the defendant could not have retained the money in good conscience, a trust arose as soon as it was received.33 At a stroke, this provided both the proprietary right in the money and the fiduciary relationship necessary for the plaintiff to trace. Goulding J’s analysis in Chase Manhattan has never been anything other than controversial and it is highly questionable that it represents good law.34
31 Cf. D Waters, “The English Constructive Trust: A Look into the Future” (1966) 19 Vanderbilt L Rev. 1215 at 1232. 32 [1980] Ch. 105. 33 Ibid. at 118–20. While Goulding J treated the plaintiff’s proprietary interest as a constructive trust, others have since characterised it as a resulting trust. Whatever label is attached to it, the practical implications of awarding proprietary relief are the same. 34 The decision was most seriously called into question in Lord Browne-Wilkinson’s analysis in Westdeutsche Landesbank Girozentrale v. Islington London Borough Council [1996] 1 AC 669. See infra text accompanying nn. 55–58. Subsequently, in Bank of America v. Arnell [1999] Lloyd’s Bank Rep. 399 at 405, Aikens J was not prepared to accept “in the light of Lord Browne-Wilkinson’s critique, that it [i.e. Chase Manhattan] is still good law”.
134 Redistributive Proprietary Remedies (b) The Resulting Trust as a Response to a Vitiated Intention to Transfer: Chambers’ Analysis (i) The Traditional Understanding of the Resulting Trust Conventionally, resulting trusts have been divided into two principal categories.35 First, there is the class of presumed resulting trusts that give effect to a transferor’s presumed intention to retain rights in the property transferred. Secondly, automatic resulting trusts are understood to arise quite independently from the intention of settlors in situations where they have failed to dispose completely of their beneficial interest in the property in question. There has been a tendency of late to collapse this distinction and to treat both classes of trust as arising from a presumption as to the intention of the transferor.36 However, if what were formerly regarded as automatic resulting trusts are going to be recharacterised in this way, any presumption would seem to be directed at what settlors would have intended if they had considered a contingency that they clearly had not taken into account. This is quite different from a presumption as to what transferors actually did intend. The effect of the conventional analysis of the resulting trust is that the remedy has little or no application in cases of a vitiated intention to transfer property: for evidence of a mistaken intention to pass an interest will rebut the presumption that transferor intended to retain an interest in the property.37 On this view, any work that is to be done in providing specific relief in cases of vitiated intent is to be done through rescission and the constructive trust. (ii) Expansive Accounts of the Role of the Resulting Trust Building on the work of Peter Birks,38 Robert Chambers has recently reinterpreted the basis of the resulting trust.39 In contrast to the conventional understanding of the doctrine, Chambers argues that all that is required for a resulting trust to arise is that a transferor of property did not positively intend to benefit the recipient.40 His analysis represents a shift away from the received wisdom that presumed resulting trusts arise from a presumption “that the provider intended not to benefit the recipient” to a “presumption that the provider did not intend to benefit the recipient”.41 Chambers’ account has the attraction of providing a single explanation for all the circumstances in which resulting trusts are recognised. Certainly, it is consis35 The authoritative statement of this orthodoxy is generally regarded as that provided by Megarry J in Re Vandervell No 2 [1974] 1 Ch. 269 at 289. 36 See, in particular, Lord Browne-Wilkinson in Westdeutsche Landesbank Girozentrale v. Islington LBC [1996] AC 669 at 708. 37 W Swadling, “A New Role for Resulting Trusts” [1996] LS 110 at 117. 38 See, in particular, P Birks, “Restitution and Resulting Trusts” in Goldstein (ed.), Equity: Contemporary Legal Developments (Jerusalem, Hebrew University, 1992) 335. 39 Chambers, The Resulting Trust. For an analysis and evaluation of Chambers’ account, see Virgo, Principles of the Law of Restitution at 618–21. 40 Ibid. at 2. 41 Ibid. at 21.
The Proprietary Consequences of a Vitiated Intention to Transfer Property 135 tent with the conventional explanation for the automatic resulting trust and provides a more convincing rationale for that remedy than recent efforts to characterise it as arising from a presumption as to the transferor’s positive intent. Chambers’ analysis also offers a more realistic explanation of presumed resulting trust cases than that which is traditionally given. This is particularly true of the use of the resulting trust in intimate relationships, where efforts to attribute intention appear particularly artificial but a presumption that a transferor lacked the requisite intention would be entirely plausible.42 Furthermore, this analysis explains why a resulting trust might arise where a transferor lacked capacity.43 Here, clearly the issue is not so much about transferors’ actual intentions, but rather about their inability to form any intention that the law is prepared to treat as meaningful. On the other hand, it is unlikely that Chambers’ analysis will gain general acceptance.44 For one thing it is inconsistent with judicial analysis of the standard purchase money resulting trust.45 Moreover, there are fundamental normative objections to Chambers’ account. If the parties to a transfer are sui juris and not in an intimate relationship, there is much to be said for the view that the law should respond to the transferor’s intentions and not to any failure to think about the matter.46 Perhaps what is needed in this area is not an analysis of the resulting trust that is capable of explaining all instances of the remedy in terms of single rationale, but rather a more nuanced understanding of the remedy that recognises the need for certain exceptions to the conventional analysis. Chambers’ analysis has the potential for destabilising our understanding of this area of the law in an interesting way. By reformulating the rationale for relief, his account brings with it a temptation to make relief more widely available. If the absence of an intention to confer an absolute title upon the transferee is all that is required, why should the resulting trust not also be a response to situations where, while the transferee had such an intention, it was vitiated in some way? Chambers and Birks argue that the resulting trust should be available in these circumstances.47 The fact that the resulting trust has traditionally been understood not to arise in these circumstances rather suggests that Chambers’ analysis is more revolutionary than he would claim. 42 For an analysis of a constructive trust arising on this basis in the context of intimate relationships see Muschinski v. Dodds (1985) 160 CLR 583 at 620. For an analysis see infra, ch. 10.II.4. 43 Chambers, The Resulting Trust at 23. 44 As mentioned in Westdeutsche Landesbanke Girozentrale v. Islington LBC [1996] AC 669 at 690, Lord Browne-Wilkinson characterised all resulting trusts as responding to the transferor’s presumed intention. See also Virgo, Principles of the Law of Restitution at 617–21. Lord Millett has accepted Chambers’ analysis in part. See Air Jamaica Ltd. v. Charlton [1999] 1 WLR 1399 at 1412, Lord Millett argued that the resulting trust “responds to the absence of any intention on his [ie the transferor’s] intention to pass a beneficial interest to the recipient”. See also Sir Peter Millett, “Restitution and Constructive Trusts” (1998) 114 LQR 399 at 401. 45 For a restatement see Westdeutsche Landesbank Girozentrale v. Islington LBC [1996] AC 669 at 690 per Lord Browne-Wilkinson. 46 See infra, ch. 7.I.2(c)(i). 47 Birks, supra n. 38 ; Chambers, The Resulting Trust at 23. On this point Millett parts company with Chambers: see Millett, supra n. 44 at 413.
136 Redistributive Proprietary Remedies (c) Constructive Trusts Arising in Response to the Unconscionable Retention of Property: Lord Browne-Wilkinson’s Analysis of the Constructive Trust in Westdeutsche Landesbank (i) The Issue Westdeutsche Landesbank Girozentrale v. Islington LBC 48 concerned the aftermath of an interest swap transaction which, it transpired,49 was ultra vires the Council and so void ab initio. What then of the money that the bank had paid to the Council pursuant to the contract before the parties became aware of its invalidity? The House of Lords accepted that the bank was entitled to recover in an action for money had and received on the basis of a failure of consideration. However, the bank sought to establish that it was entitled to compound rather than merely simple interest, a right that their Lordships accepted would logically follow if the defendant were a constructive trustee on the basis that it would have to be prevented from making any profit from its position.50 (ii) Effects on Third Parties Lord Browne-Wilkinson was sensitive to the implications of finding a resulting or constructive trust. For one thing, he expressed concern that rights arising as a consequence of a resulting trust would bind third party transferees other than bona fide purchasers for value of the legal title without notice. He was particularly concerned that such interests would bind someone who purchased an equitable interest from the initial transferee.51 Secondly, Lord Browne-Wilkinson noted that, had the transferee been insolvent, the effect of finding that an equitable proprietary interest arose would be that the money transferred and its traceable product would not be available for distribution among general creditors. His Lordship pointed out that the effect of the evidential presumptions concerning the ownership of money in a mixed bank account would mean that: in practice one may well reach the position where the moneys in the bank of . . . [a transferee] in reality reflect the price paid by creditors for goods not yet delivered by . . . [the 48
[1996] AC 669. A matter established in Hazell v. Hammersmith and Fulham LBC [1992] 2 AC 1. 50 [1996] AC 669. The principle was that applied against profits improperly made by a trustee, as stated in Burdick v. Garrick (1870) LR 5 Ch. App. 233 at 241 per Lord Hatherley LC. On the other hand, the indication of two members of the court was that compound interest should be made more broadly available, so that it may be that for plaintiffs’ seeking proprietary relief this distinction may be eliminated before long. See ibid. at 697–8 per Lord Goff and 720 per Lord Woolf. Lord Browne-Wilkinson simply observed that it had been established that equity’s jurisdiction had been limited in this way, without indicating why this might not change (ibid. at 701–2). Lord Slynn and Lord Lloyd concluded that, given that Parliament had legislated in this field and in the process had declined to extend the courts’ jurisdiction to award compound interest, it would be improper for the courts to extend the law in this way (ibid. at 719 and 740). In addition, Lord Lloyd justified his position on the basis that the point was not fully argued before the court (ibid. at 738). 51 Ibid. On the other hand, it is not clear that this is necessarily the case. See supra, ch. 1.I. 49
The Proprietary Consequences of a Vitiated Intention to Transfer Property 137 transferee]: yet, under the tracing rules, those moneys are to be treated as belonging in equity to . . . [the transferor].52
This effect of proprietary relief is a cause for disquiet.53 However, in itself, the concern mentioned provides a good argument against the tracing rules generally, rather than specifically against their application in the circumstances at issue. Unless Lord Browne-Wilkinson intended to offer an outright condemnation of tracing, what was actually required was an explanation of why this result would be less acceptable in this context than it would be in others. (iii) The Relevance of the Plaintiff’s Conduct Where a plaintiff had accepted the risk of the defendant’s insolvency in a transaction that is void or voidable, the courts should not then award a remedy that would isolate the plaintiff from that very risk at the expense of the defendant’s creditors. Westdeutsche Landesbank illustrates this. The bank wanted the repayment of the money it had paid the council. Yet, the bank had chosen to become the council’s unsecured creditor under the interest swaps arrangement. Lords Goff and Browne-Wilkinson agreed that it was difficult to see why, when claiming for failure of consideration, the bank should have been promoted to the status of a secured creditor.54 (iv) The Relevance of the Defendant’s State of Mind In Lord Browne-Wilkinson’s view, a constructive trust could come into being only if the recipient had knowledge of the transferor’s position.55 Moreover, he thought that such knowledge was not only necessary but sufficient to make the recipient a constructive trustee. Thus, while he admitted that it was difficult to find authority to support the proposition, he argued that a constructive trust was available in the context of fraud.56 Yet, why should this be so? Are not personal remedies and rescission sufficient? As his Lordship’s analysis of the policy reasons against awarding proprietary relief in Westdeutsche Landesbank aptly demonstrates, proprietary relief assumes significance principally in insolvency in the context of the competition between the plaintiff and the defendant’s creditors. In determining who should prevail between these parties, the state of mind of the defendant is not a very relevant consideration.57
52
Ibid. at 704. Although, it should be noted that Lord Browne-Wilkinson exaggerates the consequences of allowing a constructive trust in these circumstances by suggesting that the rule in Re Hallett would apply: ibid. at 705. It is, however, established law that the harsh presumptions imposed against trustees in that case will not apply to innocent recipients: Re Diplock [1948] Ch. 465 at 524 per Greene MR. 54 [1996] AC 669 at 683–4 per Lord Goff and 704 per Lord Browne-Wilkinson. 55 Ibid. at 705. 56 Ibid. at 716. 57 See D Pacciocco, “The Remedial Constructive Trust: A Principled Basis for Priorities over Creditors” (1989) 68 Can. Bar Rev. 315 at 347; G McCormack, “Proprietary Claims and Insolvency in the Wake of Westdeutsche” [1997] JBL 48 at 55. 53
138 Redistributive Proprietary Remedies Applying his analysis of the constructive trust, Lord Browne-Wilkinson offered a new interpretation of Chase Manhattan.58 In his view, Goulding J’s analysis that a proprietary interest arose immediately on the bank’s receipt of the mistaken payment was unsupportable. Nevertheless, he thought that the case was probably rightly decided, because the bank became aware of the plaintiff’s mistake only two days after the transfer. At that point, according to Lord Browne-Wilkinson, the bank became a constructive trustee. There is little to be said for this reinterpretation. The mere fact that the defendant in Chase Manhattan became aware that it was holding the proceeds of a mistaken transfer does not in itself indicate that it should have held those proceeds on constructive trust for the plaintiff. As between the plaintiff and the defendant, a personal remedy would have been perfectly satisfactory. Moreover, the idea that the defendant could not have in good conscience retained the proceeds of the mistaken payment is absurd. No one in the defendant’s position would feel morally obliged to identify the proceeds of the mistaken payment and to return them to the plaintiff in specie. Rather, a morally upright person in the defendant’s position would feel obliged to account for the sum that he or she had received as a result of the plaintiff’s mistake. Even the loosest application of the maxim “equity regards as done that which ought to be done”59 could not convert this moral obligation into a duty that the defendant should hold the proceeds of the payment on trust for the plaintiff. (v) The Practical Consequences of this Analysis Lord Browne-Wilkinson’s judgment in Westdeutsche Landesbank demonstrates how misguided it is to focus upon the conscience of the initial recipient in cases of a transfer where the owner’s intention to pass title was vitiated in some way. While he took seriously the policy issues that were at stake, he drew an unfortunate distinction between these issues and legal principle.60 Thus, he observed that “[b]efore considering the legal merits of the submissions it is important to appreciate the practical consequences which ensue if the bank’s arguments are correct”.61 This understanding blights his Lordship’s judgment. Ultimately, his intelligent policy analysis was completely undermined by his formalistic account of constructive trust principles. While Lord Browne-Wilkinson rejected the Chambers’ resulting trust model, his analysis did not preclude the constructive trust operating in circumstances such as those that arose in Westdeutsche Landesbank. On his Lordship’s analysis that a constructive trust arises when the conscience of the recipient is affected, the local authority could not have been liable as a constructive trustee before it was aware of the fact that the interest swap arrangement was void. Yet, it seems that 58
[1996] AC 669 at 714–15. Supra, ch. 2.V.2. 60 This same flaw is apparent in Lindley MR’s analysis of the availability of proprietary remedies in the context of secret commissions in Lister v. Stubbs [1990] Ch. 1. See infra, ch. 9.II. 61 [1996] AC 669 at 705. 59
The Proprietary Consequences of a Vitiated Intention to Transfer Property 139 this analysis would not have precluded the local authority tracing the proceeds of the moneys paid, once the parties were aware that the transaction was ultra vires. This is apparent in Lord Browne-Wilkinson’s explanation of the unavailability of a constructive trust on the basis that the moneys had become untraceable before the defendant had the requisite knowledge to make it a constructive trustee.62 Thus, he concluded, “[t]he latest time at which there was any possibility of identifying the ‘trust property’ was the date on which the moneys in the mixed bank account of the local authority ceased to be traceable . . .”.63 Thus, if at any time the local authority had been made aware of the mistake in question while it was still in possession of any traceable proceeds of the payments, the bank would have been entitled to trace and claim a constructive trust.64 Of course, this conclusion is completely at odds with Lord Browne-Wilkinson’s preceding policy-based analysis that apparently pointed out the injustice of allowing proprietary relief in these circumstances. It would be difficult to point to a better example of the pitfalls of reasoning from formal propositions without a view to practical consequences. Ultimately, Lord Browne-Wilkinson’s approach to the area would generally lead to the same results with respect to the provision of priority in bankruptcy as that taken by Goulding J in Chase Manhattan. For, while his Lordship argued that it was probably true that the recipient bank became a constructive trustee before it became bankrupt, it is difficult to see that the timing of events was crucial. Presumably, provided traceable proceeds of the mistaken payment were still identifiable in their hands, the liquidators would have been equally bound to recognise the plaintiff’s claim once they had knowledge of the relevant facts. One situation in which the analysis would make a difference would be where the transferee’s assets were subject to a floating charge that was liable to crystallise on bankruptcy. Where this is the case, the floating chargee takes priority over a mistaken transferor if the transferee did not have notice of the mistake prior to the crystallisation of the charge. Lord Browne-Wilkinson’s analysis of rights arising in respect of traceable proceeds is rather difficult to comprehend. In particular, it is not clear why he took the view that transferors should be able to trace into the product of exchanges that took place prior to a constructive trust arising in their favour. This account appears to rely on the rather bizarre assumption that, once recipients acquire the 62
Ibid. at 707. Ibid. at 706. 64 Unlike Lord Browne-Wilkinson, Lord Goff apparently concluded that tracing would not be available in these circumstances. In his view, because “the identity of the money is immediately lost by mixing with other assets of the payee”, it followed that “[b]y the time that . . . the conscience of the payee may . . . be affected, there will therefore be no identifiable fund to which a trust can attach”: ibid. at 689. Strictly speaking, the view that mixing prior to a defendant’s conscience being affected necessarily prevents tracing is unsustainable. If the assets received are already subject to a trust, the defendant’s state of mind will at most mean that plaintiffs will be able to rely on less stringent evidential presumptions in seeking to identify traceable proceeds: see Re Diplock [1948] Ch. 465 at 524. However, the matter may be different if, as on Lord Browne-Wilkinson’s analysis, a proprietary interest only arises upon the defendant’s conscience being affected. 63
140 Redistributive Proprietary Remedies requisite knowledge, good conscience requires them to return in specie, not only the money originally transferred, but any proceeds. Given that fungible property is involved and that the notion of making specific restitution makes little sense in the context of money credited to a transferee’s bank account, it is difficult to understand why an obligation to account for the money originally received would not be a sufficient remedy. An approach that determines the availability of the constructive trust on the basis of recipients’ unconscionability alone is capable of supporting proprietary relief in a very broad range of circumstances. For example, it could equally be said to support the award of a constructive trust on the facts of Re Goldcorp.65 It was, surely, unconscionable for Goldcorp to use the money paid by its customers for its own benefit, given that it did not have the reserves of gold bullion that it was contractually obliged to maintain. Thus, on Lord Browne-Wilkinson’s analysis, a constructive trust should have arisen to prevent such unconscionable use of the money in question. That the availability of such a remedy was denied in that case is merely another indication that Lord Browne-Wilkinson’s account of the remedy is unsustainable.
3. Millett J’s Analysis in El Ajou: The Proprietary Consequences of Rescission (a) Proprietary Consequences of Rescission: The Expansive View Where a contract is set aside, it is clear enough that the underlying transaction is treated retrospectively as if it were void ab initio. But what effect does this have on the passing of property? As mentioned, while there is some authority for the view that the mere right to rescind indicates the existence of a resulting or constructive trust, the more orthodox view is that a trust relationship will not arise until the plaintiff elects to rescind.66 What is not quite so clear is with respect to what assets a trust will arise upon rescission. Much of the significance of the issue of the proprietary consequences of rescission turns on the availability of tracing in the wake of the remedy. While surprisingly little thought had been paid to the matter in the past, more recently a good deal of attention has been given to an analysis that would make tracing widely available in the aftermath of rescission. (i) Tracing after Rescission: Brennan J’s Analysis in Daly v. Sydney Stock Exchange Millett J’s solution to the problem he posed in El Ajou67 was to argue that claimants who rescinded a contract could rely upon the consequences of the process in order to establish a right to proprietary relief. On this view, once a 65 [1995] 1 AC 74. See supra, ch. 5.IV.2(a) for an account of the case and infra, text accompanying nn. 89–90 for its relevance in this context. 66 See supra, text accompanying nn. 20–23. 67 Supra, text accompanying n. 30.
The Proprietary Consequences of a Vitiated Intention to Transfer Property 141 contract has been rescinded, because the process operates retrospectively to avoid the contract, any property transferred pursuant to it would be treated as if it were held for the benefit of the transferor from the moment of receipt. It is thought to follow from this premise that transferors will have the right to elect to trace and assert their property rights in the exchange product of any transactions involving the assets transferred under the contract. Millett J’s account draws upon an analysis offered by Brennan J in the Australian High Court in Daly v. Sydney Stock Exchange.68 The plaintiff in that case had taken the advice of a firm of stockbrokers to lend money to the firm as a prelude to it investing the money in the share market when conditions were more advantageous. However, the firm had not told the plaintiff that it was in a parlous financial state. Subsequently, the firm became insolvent and was unable to repay the loan. The plaintiff applied for relief from an industry fidelity fund established to provide compensation in the event of defalcation of property held on trust by stockbrokers.69 However, the claim failed because the money that Daly advanced to the firm was not held by it on trust for the lender. It was common ground amongst the members of the court that the stockbrokers had breached their fiduciary duty to the plaintiff and that he could have rescinded the transaction on this basis. However, Brennan J’s analysis suggests that, in claiming from the fidelity fund, Daly had taken the wrong course of action. In his view, someone in Daly’s position, upon rescinding the contract, would then be in a position to “assert his title to the . . . property transferred assuming it still exists in specie or, being money, can be traced”.70 This was the view adopted by Millett J in El Ajou v. Dollar Land Holdings Plc.71 He argued that, where a transfer is induced by fraud, plaintiffs “are entitled to rescind the transaction and revest the equitable title to the purchase money in themselves”. Such a plaintiff “can then invoke the assistance of equity to follow property of which he is the equitable owner”.72 (ii) Gibbs CJ’s Analysis It is interesting to compare Brennan J’s reasoning in Daly v. Sydney Stock Exchange with that of Gibbs CJ, who offered the court’s only other full judgment. For, while favouring the same outcome on the facts of this particular case, Gibbs CJ’s judgment is informed by a policy analysis that suggests that proprietary relief is difficult to justify in this context. Thus, he argued that, even if rescission had been sought: the demands of justice and good conscience could have been satisfied without the creation of a constructive trust. In deciding whether or not the money should be held to 68
(1986) 160 CLR 371. Pursuant to s. 97 of the Securities Industry Act 1975. 70 (1986) 160 CLR 371 at 388. 71 [1993] 3 All ER 717. 72 El Ajou v. Dollar Land Holdings plc [1993] 3 All ER 717 at 734. See also Lonrho plc v. Fayed (No 2) [1992] 1 WLR 1 at 11. 69
142 Redistributive Proprietary Remedies have been subject to a constructive trust it is not unimportant that the ordinary legal remedy of a creditor would have been adequate to prevent the firm from being benefited at the expense of the appellant.73
Thus, Gibbs CJ took the view that there needed to be a good reason for granting a proprietary remedy, and the objective of the reversal of unjust enrichment could not, in itself, provide such a justification. He then turned his attention to the strength of Daly’s claim relative to those of the stockbrokers’ other creditors. In his view: the consequences of holding the money to be subject to a constructive trust and thereby transforming the creditor into a beneficiary suggest that it would be contrary to principle to recognise the existence of a constructive trust in a case such as the present. One consequence would be that the money, and any property acquired with it, would, on the firm’s bankruptcy, be withdrawn from the general body of creditors.74
He noted that similar concerns had motivated Lindley LJ’s refusal to find that an employee held a secret commission on constructive trust for his employer in Lister & Co. v. Stubbs.75 In his view, “the reasons of Lindley LJ appear to me to be impeccable when applied to the case in which the person claiming the money has simply made an outright loan to the defendant”.76 (iii) The Nature of the Trust A year before El Ajou, in Lonhro plc v. Fayed (No 2),77 Millett J had followed Brennan J in Daly v. Sydney Stock Exchange in characterising the interest in question as a constructive trust.78 In contrast, in El Ajou, Millett J described the interest as an instance of “an old-fashioned institutional resulting trust”.79 Why a resulting trust should arise in these circumstances is not really explained. Perhaps Millett J assumed that, where a contract is avoided with retrospective effect, the transfer in question must be treated as gratuitous, thereby giving rise to a presumption of a resulting trust. Yet, it is hardly clear that the fact that the contract is void means that the intention of the transferor to benefit the transferee should be ignored entirely. (iv) The Acceptance of the Expansive Analysis As well as gaining academic acceptance,80 Millett J’s account of the proprietary consequences of rescission was subsequently endorsed judicially in Halifax Building Society v. Thomas.81 The Court of Appeal quite rightly concluded that justice did not 73 74 75 76 77 78 79 80 81
(1986) 160 CLR 371 at 379. Ibid. (1890) 45 Ch. D 1. For an analysis of that decision and Lindley LJ’s judgment see infra, ch 9.II. (1986) 160 CLR 371 at 379. [1992] 1 WLR 1. Ibid. at 11. [1993] 3 All ER 717 at 735. See, e.g., Virgo, The Principles of the Law of Restitution at 634–5. [1996] 1 Ch. 217. See infra, ch. 9.III.3(b).
The Proprietary Consequences of a Vitiated Intention to Transfer Property 143 demand that the defendant held the profits made from a mortgage fraud on trust for the mortgagee. Nonetheless, Peter Gibson LJ suggested that, if the building society had not affirmed the mortgage into which the defendant had fraudulently induced it to enter, it could have rescinded the transaction and traced any proceeds of the money advanced.82 This analysis is unduly formalistic. It is difficult to see why a result that the court had characterised as unmerited would have had anything more to recommend it merely because it was sought in the aftermath of rescission. (b) Difficulties with this Account: a More Restrictive View of the Remedies Arising Upon Rescission (i) An Incomplete Solution? At best, the analysis offered by Millett J in El Ajou appears to provide an incomplete solution in dealing with transfers of property in which an owner’s intention to confer title is vitiated. The problem is that the analysis is entirely dependent on the supposed effects of rescission. Because rescission is a mechanism for unwinding contracts, the analysis seems to be relevant only in relation to mistakes in the formation of a contract. Thus, it appears to have no place in relation to mistaken transfers outside a contractual context. Nor does it seem to have any role in the context of mistakes in the performance of a valid contract.83 This is apparent in the judgment of Jessel MR in Lamb v. Cranfield.84 The plaintiff had purchased goods at an auction on terms that required him to pay 10 per cent of the purchase price, on the basis that this deposit would be forfeited in the event that he failed to pay the balance the following month. The plaintiff, apparently by mistake, handed over a sum that was almost twice that required for the deposit. Thereafter, he had the misfortune to be confined to a lunatic asylum and, understandably, failed to pay the remainder of the purchase price. Subsequently, the plaintiff sought to recover the balance of the money paid over and above the required deposit. Jessel MR refused to entertain the plaintiff’s action for rescission of a mistaken overpayment, indicating that the only remedy available in the circumstances was an action at law for money had and received. There is no reason why proprietary relief should be available only for those types of mistake for which rescission is an appropriate remedy. Consequently, Millett J’s analysis in El Ajou provides an arbitrary basis for determining the proprietary consequences of mistake. (ii) Remedies in Respect of Money Transferred Pursuant to a Rescinded Contract The analysis in Daly v. Sydney Stock Exchange and El Ajou is fundamentally misconceived in its assumption that rescission gives rise to proprietary rights in respect of money transferred in consideration of rescinded contracts. 82 83 84
Ibid. at 226. See Palmer, The Law of Restitution ii, § 11.2(d) at 491. (1873) 43 LJ 408.
144 Redistributive Proprietary Remedies Rescission of a contract, whether it is achieved entirely at the instance of the party entitled to rescind or with the assistance of the court, is best understood as a process that brings a contract to an end. However, this does not in itself indicate that transfers of property pursuant to such an arrangement are invalidated. Thus, where parties rescind a contract in circumstances in which they have received nothing from the defendant, the proper form of action for relief in respect of money passed pursuant to the contract is not a claim for rescission but an action for money had and received.85 Similarly, while a purchaser rescinding a contract for specific property may be required to return the property itself, the associated liability for any profits made from the property in the intervening period is described in terms of account and not of constructive trusteeship.86 According to the view that a constructive or resulting trust arises on rescission, parties who were induced by a negligent misrepresentation or a common mistake into giving an unsecured loan would, by rescinding the arrangement, revest in themselves property in the money transferred or its proceeds. In doing so, in the event of the transferee’s bankruptcy, they could put themselves ahead of general creditors. It is, however, difficult to reconcile this view with the House of Lords decision in Westdeutsche Landesbank.87 There, the parties were induced to enter into an interest swaps arrangement by a mutual mistake of law. Lord Goff remarked that “there is no general rule that the property in money paid under a void contract does not pass to the payee”.88 It would indeed be peculiar if the proprietary consequences resulting from the rescission of transactions that were merely voidable were more marked than those that result from transactions that were void ab initio. At the very least, the court should consider whether the plaintiff had assumed the risks of the defendant’s insolvency. The view that proprietary remedies arise with respect to money transferred pursuant to a rescinded contract was rejected quite emphatically in Re Goldcorp Exchange Ltd.89 The purchasers of unallocated gold reasonably claimed that they were the victims of a misrepresentation. They argued that it followed from this that they could rescind their contracts of purchase and assert title to the money they had advanced or its traceable proceeds. It was held that, because the purchasers had affirmed the contract, they were not in a position to rescind. However, Lord Mustill concluded that, even if this were not so: Whilst it is convenient to speak of the customers “getting their money back” this expression is misleading. Upon payment by the customers the purchase moneys became, and rescission or no rescission remained, the unencumbered property of the company. What 85 See Spencer Bower and Turner, The Law of Actionable Misrepresentation (3rd edn. by Sir Alexander Kingcome Turner, London, Butterworths, 1974) 286. 86 See, e.g., Stepney v. Biddulph (1865) 13 WR 676; Haygarth v. Wearing LR 12 Eq 320 (realty); Addis v. Campbell (1841) 4 Beav. 401; Spence v. Crawford [1939] 3 All ER 271 (shares). See Spencer Bower and Turner , supra n. 85 at 279. 87 [1996] AC 669. See supra, text accompanying nn. 48–63. 88 Ibid. at 689. 89 [1995] 1 AC 74. For an account of the case, see supra, ch. 5.IV.2(a).
The Proprietary Consequences of a Vitiated Intention to Transfer Property 145 the customers would recover on rescission would not be “their” money, but an equivalent sum . . .90
(iii) Explaining Rights to Recover Specific Property In trying to understand why specific relief might not invariably be available to effect restitution, it is worth bearing in mind the view that, in rescinding a transaction, “the court must fix its eyes on the goal of doing what is practically just”.91 There are several reasons why a plaintiff might seek to set aside a transaction. For one thing, rescission is a very useful remedy where a contract remains unperformed. This has encouraged the courts to conceptualise rescission as something that parties with a right to rescind do themselves.92 Where the contract remains executory in whole or part, a party with the right to rescind can effect rescission without any judicial assistance by declining to perform. In these circumstances, rescission provides a far more practical remedy than damages, allowing aggrieved parties to restore the status quo while avoiding recourse to the judicial process and all the difficulties associated with it. The capacity for rescission to allow parties to resolve matters themselves without the need for judicial assistance explains why the courts have been content to allow rescinding sellers to retake possession of goods.93 Like the unpaid seller’s lien and the seller’s right to stop goods in transit, the right of recaption provides a useful self-help remedy. These remedies reflect our law’s practical approach to the sale of goods that eschews an absolutist, once-and-for-all, approach to the transfer of property.94 We should not think that, from such rights to specific recovery available to sellers rescinding contracts of sale of goods, we can readily deduce the rights available to a plaintiff who, in the aftermath of rescission, is seeking relief in respect of a monetary payment. Even when judicial assistance is required, rescission on terms provides a very useful means of unwinding bilateral arrangements that have been wholly or partly performed by the parties. In contrast, where performance has been one-sided and all that is sought is relief for monetary payments made pursuant to the transaction, rescission is not needed to restore the parties to the position they enjoyed before the transaction. This outcome can be achieved through an action for money had and received. A second advantage of rescission is that it provides plaintiffs with the opportunity of recovering assets to which they may attach a worth that exceeds its market value. Thus, specific recovery would have significance, beyond the question of any priority it may be thought to confer in bankruptcy, where a plaintiff’s intention to 90
Ibid. at 102. Spence v. Crawford [1939] 3 All ER 271 at 288 per Lord Wright, quoting Lord Blackburn in Erlanger v. New Sombrero Phosphate Co. (1878) 3 App. Cas. 1218 at 1278. 92 Alati v. Kruger (1955) 94 CLR 216 at 223–4. Cf. J O’Sullivan, “Rescission as a Self-Help Remedy: A Critical Analysis” (2000) 59 CLJ 509. 93 See, e.g., Clough v. The London and North Western Ry. Co. (1871) 7 LR 26. 94 See infra, ch. 8.I. 91
146 Redistributive Proprietary Remedies transfer property was vitiated by something more than a mistake about the transferee’s willingness or ability to pay the price negotiated. For this reason, rescission is particularly appropriate for unwinding transactions that have been induced by undue influence or duress. Rights to specific relief arising upon rescission are enforceable in bankruptcy on the basis that the trustee in bankruptcy, as a volunteer, takes property subject to equities.95 It may be thought that the concern that plaintiffs be able to recover specific property is sufficiently important to justify binding the transferee’s trustee in bankruptcy. However, it is not entirely obvious that this should be so, and, while the courts tend to assume that a right to specific recovery entails priority in insolvency,96 there is no reason why this should be so. More importantly, the concerns that may justify the recovery of specific property because it may have special significance for a plaintiff have no relevance where relief is sought in respect of money that has been transferred pursuant to a voidable contract.
4. Millett’s New Analysis (a) The Availability of Resulting Trusts More recently, writing extra-judicially, Sir Peter Millett has offered a vision of the role of the resulting trust in the wake of vitiated transactions that is more restrictive than that provided in his analysis in El Ajou v. Dollar Land Holdings Plc. He embraces Chambers’ account of resulting trusts as a response to an absence of intention to transfer a beneficial interest, rather than of a positive intention to obtain such an interest.97 Nonetheless, Millett does not accept that this analysis indicates that the device has a wider role than has conventionally been understood. In his view, contrary to Chambers’ account and the analysis of Goulding J in Chase Manhattan,98 where owners form an intention to pass title, no vitiation of that intention will result in their acquisition of proprietary rights.99 It is not obvious why, once we have reconceptualised the normative foundations of the resulting trust, we should accept Millett’s view of where the line is to be drawn rather than that of Chambers. Case law does not offer a great deal of assistance in resolving this dilemma. Chambers and Birks seize upon Chase Manhattan and Neste Oy v. Lloyds Bank plc.100 These cases are reinterpreted as resulting trust decisions that support the view that the remedy should be widely available. On the other hand, Millett argues that the weight of the law is against this analysis and that 95
Johnson v. Smiley (1853) 17 Beav. 223. See supra. ch. 2.V.2, ch. 4.III.3 and infra, text accompanying n. 103. 97 For an analysis of Chambers’ account of the resulting trust, see supra, text accompanying nn. 38–47. 98 See supra, text accompanying nn. 32–34. 99 Millett, supra n. 44 at 402 and 413. 100 P Birks, “Trusts Raised to Reverse Unjust Enrichment: The Westdeutsche Case” [1996] RLR 3 at 6 and 15. 96
The Proprietary Consequences of a Vitiated Intention to Transfer Property 147 Chase Manhattan provides rather unstable foundations for his opponents’ theory.101 This is perhaps true. However, it is likely that the question of the limits of the resulting trust in cases of vitiated intention has received relatively little judicial attention precisely because the device has always been understood as a response to a positive intention to obtain a beneficial interest in the property transferred. If we are now to redefine the justificatory foundations of the resulting trust, such case law as there is does not resolve the issue of the proper operation of the doctrine.102 Once reconceptualised in the way proposed by Chambers and embraced by Millett, the resulting trust could quite easily be extended. The question is whether it should be. (b) The Availability of the Constructive Trust Millett has also substantially modified his views on the scope of the constructive trust. He now takes the view that a constructive trust will arise in only two circumstances. First, it is available as a response to breaches of fiduciary duties. Secondly, constructive trusts arise in recognition of a right to specific recovery of an asset. Thus, in the absence of a breach of fiduciary duty, a constructive trust will arise in the aftermath of a vitiated intention to transfer property only “where the original transfer is rescinded and special retransfer is ordered because monetary restitution would not be an adequate remedy”.103 This analysis makes the right to specific recovery of an asset the foundation of a constructive trust rather than vice versa. On this view, there is no scope for tracing the proceeds of unique property if it happens to have been transferred prior to rescission. Rather a right to trace will be available to recover proceeds only if two requirements are satisfied. First, the plaintiff must have already rescinded the contract. Secondly, a right to specific recovery must have arisen because, due to the nature of the property in question, monetary restitution would be inadequate (thereby giving rise to a constructive trust). Consider, for example, a plaintiff who is duped into selling an antique to an expert buyer who misrepresented the provenance and value of the item in question. If the plaintiff does not rescind the contract before the antique is exchanged, she will not have the right to trace the proceeds in order to obtain a priority over the defendant’s general creditors. (c) Specific Relief and Proprietary Remedies Lord Millett’s new conceptualisation of the basis of proprietary remedies seems to amount to nothing less than a wholesale rejection of the position that he promoted in El Ajou v. Dollar Land Holdings Plc.104 The conclusion that a constructive trust 101
Millett argues that Chase Manhattan was wrongly decided: supra n. 44 at 412–13. Although the decision in Westdeutsche Landesbank perhaps gives a good indication that its outer bounds are not likely to stretch as far as Birks and Chambers would have it. 103 Millett, supra n. 44 at 417. 104 [1993] 3 All ER 717. 102
148 Redistributive Proprietary Remedies arises only after rescission and only where, because of the nature of the asset in question, damages would not be an adequate remedy, means that the constructive trust offers few advantages over the equity to rescind that precedes it. The conclusion that rights to recover specific assets should be enforceable in bankruptcy might be thought to be difficult to justify. Of course, such a conclusion could be characterised as consistent with the approach taken toward the availability and effect of the remedy of specific performance.105 However, these remedies apply in rather different contexts. While plaintiffs typically seek specific performance because they want particular unique assets, plaintiffs more often seek rescission either because they have not received the contract price at all or because they have not received what it is worth. Consequently, there is a good argument that the right to rescind in these circumstances should be limited to a personal right to specific relief that is not enforceable in bankruptcy. (d) An Apology for El Ajou In Bristol & West Building Society v. Mothew,106 Millett LJ gave an explanation of his analysis in El Ajou. He claimed that his account in the earlier case was driven by the desire “to circumvent the supposed rule that there must be a fiduciary relationship or retained beneficial interest before resort may be had to the tracing rules”.107 He has recently argued extra-judicially that: The existence of a breach of trust of fiduciary duty should not be a precondition for the application of equitable tracing rules, which may be necessary to establish a claim to any remedy whether personal or proprietary. But in the absence of a right to specific performance or reconveyance after rescission (which may depend on the nature of the property) it should be a necessary precondition for proprietary relief.108
Thus, Millett has suggested that his analysis that a resulting trust arises in the wake of the rescission of a contract was intended, not to make a proprietary remedy available, but to avoid the unwarranted restrictions presently placed on the right to trace. This implies that, if a fiduciary relationship were not regarded as a prerequisite for tracing, the fraud victims in El Ajou would have been able to trace and claim a personal remedy without any need to argue that the money transferred was held on a constructive or resulting trust. Even if this were true, why should those who had invested directly into the fraudulent scheme have been denied a proprietary remedy, when those whose fiduciaries were part of the fraud were entitled to a beneficial interest in the money transferred?
105 Corbin argued that the remedy of specific performance should not be issued so as effectively to prefer one creditor in insolvency. See A Corbin, Corbin on Contracts (St Paul, Minn., West Publishing Co., 1964) v A at § 1156. However, there is little evidence that such a view might attract support in English law. 106 [1998] Ch. 1. 107 Ibid. at 23. 108 Supra n. 44 at 417.
The Proprietary Consequences of a Vitiated Intention to Transfer Property 149 In any event, Millett LJ’s analysis that those defrauded into investing in the scheme could have traced and claimed a personal remedy against the defendant cannot be right. If they could not point to a proprietary interest in the money in the hands of the defendant, such victims of fraud would not have been able to have established that the defendant was liable for knowing receipt of their property. Thus, to give the fraud victims a remedy against remote parties, it would be necessary to find that they were the beneficiaries of a constructive or resulting trust. As already noted, Millett J’s analysis in El Ajou that a resulting trust arose in respect of the money transferred was misconceived and he has now abandoned it. Equally, he has rejected at length the alternative analyses of Goulding J in Chase Manhattan and Lord Browne-Wilkinson in Westdeutsche Landesbank—either of which would at least entail that a constructive trust arises in favour of fraud victims. Thus, it is impossible to avoid the conclusion that Millett’s new analysis leaves fraud victims without a proprietary remedy and thus entails the very result that he had previously concluded would represent “an intolerable reproach to our system of jurisprudence”.109
III . PROPRIETARY RELIEF FOR VITIATED TRANSFERS : RELEVANT POLICY CONSIDERATIONS
1. The Importance of Identifying Involuntary Restitution Claimants As mentioned, the paradigm case for giving a plaintiff priority over a defendant’s unsecured creditors in bankruptcy is one where the plaintiff is an involuntary creditor whose mistake is likely to have resulted in a swelling of that part of the defendant’s estate that would otherwise be available for distribution in bankruptcy.110 The key issue in this context is whether the plaintiff can properly be characterised as an involuntary creditor. If the mistake in question takes place against the background of a consensual relationship, the question is whether plaintiffs had the opportunity to protect themselves against the risk of the defendant’s insolvency in the context of the vitiated transaction. This issue arises where, as was the case in Westdeutsche Landesbank, a transferor makes a loan to the transferee that is unsecured. If it transpires that the transferor’s consent was vitiated in some way, for example, by lack of capacity, it would be improper to give the transferor the right to trace the proceeds of the loan and claim priority over the transferee’s unsecured creditors. It is more difficult to determine whether other restitution claimants should be entitled to a proprietary claim. The best argument in favour of Goulding J’s holding in Chase Manhattan v. British-Israel Bank (London)111 is that the plaintiff had 109
El Ajou v. Dollar Land Holdings Plc [1993] 3 All ER 717 at 734. See supra, text accompanying
n. 30. 110 111
See supra, ch. 4.III.3(e). [1980] Ch. 105.
150 Redistributive Proprietary Remedies not accepted the risk of the defendant’s bankruptcy and the mistaken double payment resulted in the defendant’s estate being enriched. This combination of features suggests that a proprietary remedy might have been justified.
2. Distinguishing between Involuntary Creditors We can justify the denial of relief to certain involuntary restitution creditors in this context only if we are satisfied that there are good reasons for distinguishing between different instances of vitiated intention to transfer property. We may be inclined to do this because of the costs that recognising proprietary interests impose in the administration of bankruptcy, the dangers of ostensible ownership associated with proprietary remedies and the arbitrariness generated by our rules for identifying traceable assets. These considerations make it tempting to deny relief to those victims of mistakes or misappropriations who were partly responsible for their misfortune and/or to withhold proprietary relief where it may lead to greater efficiency by deterring mistakes.112 (a) Denying Relief to Careless Plaintiffs One approach would involve focusing directly upon the degree of fault of plaintiffs by asking whether they could reasonably have been expected to have perceived the risk of the loss in question.113 This approach would distinguish between plaintiffs, not so much on the basis of the form of mistake they made, but according to their means for preventing such mistakes from occurring. This would tend to place a higher burden on institutional players: first, because they could have been expected to put systems in place to avoid mistakes; and, secondly, because organisations are more likely than individuals to have the knowledge and resources to respond to incentives generated by legal norms. While such an approach has its attractions, it may well be thought to be liable to introduce an unjustifiably high degree of uncertainty into the litigation process and to make the task of those distributing bankrupt estates unduly difficult. (b) Distinguishing between Different Classes of Claimant (i) Different Categories of Claimants A different approach would involve distinguishing between different types of misappropriation and mistake. Thus we may ask whether we should distinguish between the following. (1) those who have had assets that they legally own stolen or misappropriated; 112
See supra, ch. 4.III.3(c). E Sherwin, “Constructive Trusts in Bankruptcy” [1989] U Ill. L Rev. 297 at 350–2. See supra, ch. 4.III.3(c). 113
The Proprietary Consequences of a Vitiated Intention to Transfer Property 151 (2) those who have had their property misappropriated by a fiduciary who was entrusted with its control; (3) those owners who were themselves duped into transferring their property; (4) those whose consent to transfer their property was induced by an innocent misrepresentation; (5) those who transferred property under a mistake that was entirely self-induced. Two questions should be determinative in this exercise. The first issue is whether compelling distinctions of moral desert can be drawn between the conduct that typically characterises the different types of mistake in question. Secondly, it must be asked whether drawing a line between particular classes of vitiated intention is liable to promote the certainty prized by litigants and those administering bankrupt estates. (ii) Drawing Moral Distinctions between these Classes of Misappropriation or Mistake Are there any compelling moral distinctions to be drawn between any of these classes of vitiated transfer? As mentioned, Millett J argued in El Ajou v. Dollar Land Holdings that it would be unacceptable to draw a line between those who were defrauded by their fiduciaries and those who dealt directly with a rogue.114 On the other hand, a distinction that depended upon whether misrepresentations were fraudulent or innocent would make the error of determining the availability of relief according to the defendant’s state of mind.115 In contrast, at least at first sight, it would seem more plausible to argue that, in contrast to victims of fraud, those who suffer from self-induced mistakes should bear the costs of those mistakes and not be promoted to the status of a secured creditor. Yet, on closer inspection, such a distinction would be difficult to justify. After all, the mistakes made by those who are defrauded are often more egregious than self-induced errors. (iii) Distinctions Drawn on the Basis of Considerations of Administrative Efficiency If it is difficult to draw compelling moral distinctions between different forms of misappropriation or mistake, it would be preferable that the test seized upon for determining whether a plaintiff is entitled to proprietary relief should be one that is relatively straightforward for those administering bankrupt estates. If this is not the case, the standard chosen is liable to promote wasteful recourse to lawyers and to encourage litigation. If a line is to be drawn at some point other than liability mistakes, then, at first sight, the limitation of proprietary relief in this context to unauthorised transfers in breach of fiduciary duty might result in a distinction that would be relatively easy to administer. It may be that, where the existence of a fiduciary relationship is established, it will generally be relatively easy to determine whether the conduct 114 115
[1993] 3 All ER 717 at 734. Supra, text accompanying nn. 28–30. See supra, text accompanying nn. 56–59.
152 Redistributive Proprietary Remedies of which the plaintiff complains amounts to a misappropriation. However, a tendency to define fiduciary relationships loosely in order to make relief more widely available may make the provision of proprietary relief rather unpredictable. It would make a good deal of sense if the quality of conduct or state of mind selected to determine the availability of proprietary relief was one that was already relevant for the determination of liability. Those administering bankrupt estates would need to investigate such considerations, even if plaintiffs were proving in bankruptcy for a purely personal claim. Consequently, were such determinations permitted to have proprietary consequences, the increased burden placed on administrators in bankruptcy would be less than that which would result were they forced to have regard to factors that are not relevant to liability per se. This would support allowing proprietary relief for self-induced mistakes that give a right of recovery. It also suggests that, if the courts were to insist upon a more stringent standard, it would be preferable to allow proprietary recovery where the bankrupt defendant induced the plaintiff’s consent by making a misrepresentation. In contrast, it would be liable to make life more difficult for those administering bankrupt estates if proprietary relief were available only for those misrepresentations that were fraudulent, given that such a distinction will generally be irrelevant in personal claims. Equally, this consideration indicates that it would be an error to accept Lord Browne-Wilkinson’s invitation in Westdeutsche Landesbank to make the availability of proprietary relief depend upon the defendant’s knowledge of the plaintiff’s claim.116 For, again, such considerations are irrelevant in the determination of liability. (iv) Conclusion The difficulties in drawing satisfactory distinctions between different types of mistakes on the basis of either moral desert or efficiency suggest that it would make a good deal of sense to allow proprietary relief for all liability mistakes. The anxiety about taking such a generous approach to proprietary remedies does not arise as a result of an objection to allowing such relief in respect of the assets initially transferred. Rather, as Lord Browne-Wilkinson’s policy analysis in Westdeutsche Landesbank suggests,117 the concern that arises in this context is generated primarily by dissatisfaction with the arbitrary nature of the evidential presumptions that allow for the identification of proceeds after money is deposited in a mixed bank account. Perhaps, without a reappraisal of the law’s approach to identification, we are unlikely to develop a coherent approach to the award of proprietary relief.
116 Westdeutsche Landesbank Girozentrale v. Islington Borough Council [1996] AC 669 at 705. See supra, text accompanying nn. 54–58. 117 See supra text accompanying n. 52.
7
Qualified Consent to Transfer Property: The Mysterious Basis of the Quistclose Trust transfer property to another with the intention that it be used only for a particular purpose the courts have recognised that they may reclaim the property transferred in the event that the purpose cannot be fulfilled. The Quistclose trust has proved particularly useful in enabling lenders to protect themselves against the risks of borrowers’ insolvency without taking security. But how should this doctrine be conceptualised? Obviously a key question for the purposes of this study is whether the Quistclose trust should be regarded as a proprietary remedy. One view is that it should not and that this doctrine belongs within the law of express trusts. According to this analysis, plaintiffs will succeed only if they can demonstrate that an express trust was created, so that the transferee never enjoyed the equitable title to the property in question. Nonetheless it is not easy to explain the doctrine in conventional express trust terms. At times the doctrine is explained in terms of purpose trusts or as involving a “quasi-trust”. In addition, there is support for the view that the remedy provided is best characterised as a form of constructive trust. Once again, we can distinguish between different analyses of this area according to the extent to which they are based on “principle” or “policy”. While the former type of analysis is predicated on an inquiry into whether owners have preserved a right of property as a matter of abstract principle, the latter approach brings broader concerns of justice and efficiency to bear. Regardless of how the doctrine is conceptualised, we may ask whether it is appropriate to allow owners to reserve rights in this way. Generally, there has been too little consideration of the policy implications of intervention of this kind.
W
HERE OWNERS
I . CONCEPTUALISING THE QUISTCLOSE TRUST
1. Barclays Bank v. Quistclose Investments Modern discussion of this issue centres on the decision in Barclays Bank v. Quistclose Investments.1 The case concerned the legal consequences of a loan by 1
[1968] 1 Ch. 540 (CA); [1970] AC 567 (HL).
154 Redistributive Proprietary Remedies Quistclose to Rolls Razor Ltd. The loan was advanced for the purpose of paying a dividend declared at a time when Rolls Razor’s solvency was in doubt. The borrower banked the cheque and, as the lender required, instructed Barclays Bank that it was to be credited to a special account and used only for the purpose for which it had been lent. The dispute arose when the borrower became insolvent before paying the dividend and the bank set off the sums in the dividend account against the borrower’s overdraft in another account. At issue was the ownership of the money in question (or more precisely of the chose in action represented by the bank’s liability to repay the sums notionally held in the dividend account). If the borrower had absolute title to the money, the bank was entitled to set off this asset against the borrower’s liabilities. However, the Court of Appeal and House of Lords shared the view that, at least once the purpose for the loan failed, the beneficial interest in the money lay with the lender.
2. Interpretations of the Basis of the Quistclose Trust It is difficult to isolate an “orthodox” interpretation of the doctrinal basis of the Quistclose trust. Several plausible interpretations of the device have emerged. While none of these accounts is entirely consistent with judicial analysis of the doctrine, all are broadly in line with the results of the cases. (a) An Express Trust Analysis One strain of analysis has seen the Quistclose trust explained in terms of what Charles Rickett has characterised as a “pure trust philosophy”.2 According to this perspective, the Quistclose trust is an orthodox application of express trust principles and is created by the lender and not by operation of law. For example, Peter Millett, prior to his elevation to the bench, proffered a “simple and orthodox” analysis of Quistclose arrangements in terms of express private trusts.3 In his view, the best explanation for the rights recognised in this context is generally that lenders create a trust in their own favour but give borrowers, who are holding the money as trustees, a mandate allowing them to use the money for a specified purpose.4 If the purpose is carried out, the parties’ relationship is thereafter governed by a simple unsecured loan arrangement. If, however, the purpose fails, so too does the mandate; and all that remains are the lender’s rights under the express trust. According to this account, the typical Quistclose trust is not remedial, and there is no need to explain the relief given in terms of resulting or constructive trust concepts. A court enforcing the Quistclose trust is merely giving effect to the 2 CEF Rickett, “Different Views on the Scope of the Quistclose Analysis: English and Antipodean Insights” (1991) 107 LQR 608. 3 P Millett, “The Quistclose Trust: Who Can Enforce It?” (1985) 101 LQR 269 at 284. 4 Ibid.
The Mysterious Basis of the Quistclose Trust 155 wishes of the settlor. On this view, the device is entirely consistent with orthodox notions of property. While this is a neat analysis with some judicial support,5 it is not without its difficulties. For one thing, it suggests that the doctrine is limited to situations where the parties make it reasonably clear that a trust is intended; and it is far from clear that this is true in many of the relevant cases. Re EVTR6 illustrates the difficulties that arise in explaining some Quistclose trust cases in terms of such an analysis.7 A loan was given to a company to enable it to acquire equipment and a dispute arose when the borrower went into receivership about whether the money advanced formed part of its general assets. While Dillon LJ accepted the observation of the court at first instance that “nobody gave a conscious thought” to the possibility that the purpose for which the loan was advanced might not be fulfilled, he did not think that this precluded the recognition of a proprietary interest in the lender’s favour.8 Yet, if it were indeed true that the lender did not reflect on the consequences of the failure of the purpose of the loan, it is very difficult to see how the court could divine any intention to create a trust. And, even if the court were to imply an obligation to repay the loan upon the failure of the arrangement, such an obligation could be personal rather than proprietary in nature. On what basis can the courts infer an intention to create a trust where lenders have not themselves recognised the importance of reserving proprietary rights to protect themselves against the risks of the borrower’s bankruptcy? Dillon LJ dismissed the significance of the lender’s lack of foresight on the basis that “a resulting or constructive trust most normally arises by implication of law when circumstances happen to which the parties had not addressed their minds”.9 This differs from Millett’s analysis in its assumption that relief arises by operation of law rather than pursuant to an express trust. However, on most analyses of the Quistclose trust, the use of a resulting trust is contingent on the finding of an initial express trust.10 And, if a lender completely failed to consider the advantages that would flow from the creation of an express trust relationship, it is difficult to see how one could be inferred from the loan arrangement. It follows that what Dillon LJ appears to be contemplating in Re EVTR is a response that might be characterised as a remedial constructive trust.11
5 The analysis was adopted by the New Zealand Court of Appeal in General Communications Ltd. v. Developmental Finance Corporation of New Zealand [1990] 3 NZLR 406. It was also accepted in Box v. Barclays Bank plc [1998] Lloyd’s Banking Rep. 185 at 193 per Ferris J. 6 [1987] BCLC 646. 7 For similarly loose applications of the Quistclose trust see Guardian Ocean Cargoes Ltd. v. Banco do Brasil SA [1991] 2 Lloyd’s Rep. 68; Tropical Capital Investment Ltd. v. Stanlake Holdings Ltd. (unreported, 24 May 1991) analysed by C Rickett [1992] LMCLQ 3. See also G McCormack, Proprietary Claims and Insolvency (London, Sweet & Maxwell, 1997) 68. 8 Supra n. 6 at 650. 9 Ibid. 10 See infra, text accompanying nn. 19–31. 11 It might, however, be explained in terms of Chambers’ resulting trust analysis. However there are formidable objections of principle and policy to this analysis. See infra, text accompanying nn. 27–40.
156 Redistributive Proprietary Remedies More fundamentally, Millett’s analysis apparently demands that a lender should have all of the powers of a beneficiary under a trust. This would entail that the lender’s powers go beyond the right to restrain any unauthorised use of the funds by a borrower—a right that is often characterised as the full extent of the power reserved by the lender prior to any failure of the purpose of the loan. Thus, the lender, as a beneficiary, appears to have a power to revoke the loan and require the trustee to repay the money advanced, even in the absence of any default.12 Given that the rights that would follow from the lender’s status as a beneficiary appear to be in tension with the terms of the loan, it seems odd to infer a trust of the type contemplated by Millett from the parties’ arrangement.13 A second example of an analysis of Quistclose arrangements in terms of conventional express private trust theory is provided by Gummow J’s analysis in Re Australian Elizabethan Theatre Trust.14 In his view, such cases involve a trust whereby, provided they remain solvent, borrowers hold for the benefit of the creditors. In the event of a borrower’s insolvency this gift fails, and the property is returned to the settlor pursuant to what Lord Wilberforce referred to in Quistclose as a “secondary trust”15—an arrangement that Gummow regarded as an express gift over.16 On this analysis, the borrower never obtains anything more than “a dry legal interest”.17 This account is difficult to accept. If creditors have a beneficial interest in the property transferred, it is hard to see why this trust should fail on the insolvency of the borrower.18 (b) A Private Purpose Trust/Resulting Trust Analysis A different interpretation treats these arrangements as examples of private purpose trusts that may be explained in much the same way as the trust recognised in Re Denley.19 The latter case is generally thought to hold that some trusts may be valid despite being purpose trusts, provided that they are “outside the mischief of the beneficiary principle”.20 This will be so where there is a class of individuals who, while not strictly speaking beneficiaries, have a sufficiently direct interest in the performance of the trust that they would be likely to come to court to enforce 12 J Payne, “Quistclose and Resulting Trusts” in P Birks and FD Rose (eds.), Restitution and Equity Vol 1: Resulting Trusts and Equitable Compensation (London, Mansfield Press, 2000) 77 at 89. 13 Perhaps this conclusion could be avoided by an application of a form of the “contract holding theory”, whereby beneficiaries’ exercise of their property rights are constrained by the loan contract (cf the use of the doctrine in the context of gifts to members of an unincorporated associations in, e.g., Neville Estates v. Madden [1962] Ch. 832). 14 (1981) 102 ALR 681 (Fed Ct). 15 [1970] AC 567 at 582. 16 (1981) 102 ALR 681 at 691–3. 17 Ibid. at 692. 18 Gummow J’s interpretation has not gained wide acceptance in Australia. Thus, the notion that Quistclose arrangements generally confer a beneficial interest on the creditors is rejected in Mercantile Mutual Insurance (Australia) Ltd. v. Farrington (1996) 44 NSWLR 634 at 646 per Bryson J. See also VR Dye & Co. (a firm) v. Peninsula Hotels Pty. Ltd. (in liq.) (1998) 28 ACSR 167. 19 [1969] 1 Ch. 373. 20 Ibid. at 384.
The Mysterious Basis of the Quistclose Trust 157 the arrangement if they were given the standing to do so.21 Analysed in these terms, in the event that the purpose of a Quistclose trust fails, the property is thereafter held for the settlor on an automatic resulting trust.22 This conceptualisation explains the cases plausibly enough. It is true that the liberalisation of private purpose trusts that took place in Re Denley occurred decades after the decisions relied upon in Quistclose.23 Nonetheless, those cases may reasonably be seen to reflect an innovation that is best explained in the same terms. Some support for this reading is offered by Potter LJ’s description of the arrangement as an “express purpose trust” in Twinsectra Ltd. v. Yardley.24 Adopting an analysis developed by Peter Gibson J in Carreras Rothmans Ltd. v. Freeman Matthews Treasure Ltd.,25 Potter LJ concluded that, “so long as the primary purpose trust continues, the beneficial interest in the monies lent is ‘in suspense’ until applied for that purpose”.26 (c) A Quasi-trust/Resulting Trust Analysis (i) Intervention Arising from a Resulting Trust on the Failure of a “Quasi-trust” In Twinsectra, Potter LJ argued that if the purpose trust analysis were thought to be misconceived, the matter might be better explained “on the basis of the broad jurisdiction of equity”.27 This reflects an account of Quistclose arrangements that explains them, not in terms of conventional express trusts, but as instances of “quasi-trusts”.28 According to this analysis, the rights of lenders in these circumstances arise not from a trust relationship but from their rights to restrain the borrower’s use of the funds in question. Robert Chambers, for example, argues that borrowers obtain an outright interest in the property, albeit one that is qualified by the lender’s right to restrain their use of the property.29 Moreover, the interest enjoyed by borrowers is defeasible in that it will be lost if it becomes impossible for them to use the property for the purpose for which it was provided. For when the purpose behind these quasi-trusts is defeated, a resulting trust arises in favour of the lender.30
21 Of course, there is not universal agreement about precisely what Re Denley decided. Millett has argued that Goff J decided the case on the basis that the particular gift in question was actually a trust for individuals and not a purpose trust at all. It is not surprising then that he rejects the private purpose trust analysis of Quistclose. See Millett, supra n. 4 at 281. 22 Re Northern Developments (Holdings) Ltd. (Unreported, 6 Oct. 1978); Carreras Rothman Ltd. v. Freeman Mathews Treasure Ltd. [1985] Ch. 207. See C Rickett, supra n. 2. 23 The cases primarily relied upon by the House of Lords were Toovey v. Milne (1819) 2 B & A 683 and Edwards v. Glyn (1859) 2 E & E 29. 24 [1999] Lloyd’s Banking Rep. 438. 25 [1985] Ch. 207. 26 [1999] Lloyd’s Banking Rep. 438 at 456. 27 Ibid. 28 Chambers, The Resulting Trust at 73. 29 Ibid. at 77. 30 Ibid. at 83–5.
158 Redistributive Proprietary Remedies (ii) Deriving Resulting Trusts from an Absence of an Intention to Benefit the Borrower Consistently with Chambers’ understanding of the basis of the resulting trust,31 the interest arises in this context because the lender never intended the borrower to have the beneficial interest in the property in the event that the purpose for which the money was lent failed. This is controversial. For one thing, if, as Chambers suggests, the lender’s right is initially a mere contractual right to restrain the use to which the borrower puts the money advanced, it is difficult to see that the lender did not intend the borrower to take beneficially. More fundamentally, Chambers’ analysis of the resulting trust is unconvincing. Elsewhere, the courts insist on either a positive intention to create a trust or a failure to dispose of the beneficial interest in the property in question as the basis for a resulting trust. Why, in the context of parties dealing at arm’s length in a commercial setting, would we recognise a proprietary interest arising in favour of lenders on any basis other than that they positively intended to create such an interest? It would hardly seem a satisfactory approach to the passage of title if recipients’ rights were defeated in the event of a contingency that the transferor had not considered. (iii) Deriving a Quasi-trust from Personal Rights In Chambers’ analysis, the difficult issue of the ownership of moneys after they are advanced and prior to any failure of the purpose for which they were lent is explained by reference to lenders’ rights to restrict borrowers in their use of the funds.32 According to this analysis, the borrower essentially obtains ownership of the funds and it is the personal rights of the lender that restrain the borrower in the use of the money. This interpretation cannot be reconciled with the analysis of the House of Lords in Quistclose, which clearly assumes that a trust was created prior to any failure of purpose. Thus, Lord Wilberforce remarked that the fact that Barclays Bank was aware that the money in question had been lent on the basis that it was to be used only for a specific purpose gave it “notice that it was trust money and not assets of Rolls Razor Ltd”.33 More fundamentally it is difficult to accept the logic of Chambers’ account. While his analysis would provide a plausible explanation for a lender’s right to prevent the borrower using the funds for purposes other than those for which they were provided, it does not explain other rights that the courts have attributed to lenders. Chambers argues that lenders’ rights to restrain borrowers in their use of the funds also bind borrowers’ trustees in bankruptcy, as they take subject to equities attaching to the property. Certainly, there are some cases that suggest that a lender’s entitlement to an injunction indicates that the property advanced does not vest in the trustee in bankruptcy.34 However, it is difficult to comprehend why 31 32 33 34
For an analysis of Chambers’ account of the resulting trust, see supra ch. 6.II.2(b). Ibid. at 71. [1970] AC 567 at 582. E.g., Re Rogers (1891) 8 Morrell 243 at 248 per Lindley LJ.
The Mysterious Basis of the Quistclose Trust 159 this should be so, unless the lender has retained a proprietary interest in the money lent.35 If a proper trust relationship is not created, it is hardly clear that there is a right that should be regarded as an “equity” that attaches to property, rather than a purely personal right, in these circumstances. That the availability of injunctive relief need not necessarily indicate the existence of rights that would give a claimant priority in bankruptcy can be illustrated by reference to the facts of Re Goldcorp Exchange Ltd.36 Consider what the position might have been if the company had initially complied with its obligations to maintain sufficient levels of gold bullion to meet the orders of its “non-allocated” purchasers but had thereafter purported to sell a quantity of bullion that would have reduced its reserves below that level. While it is clear that the customers would have had no proprietary interest in the reserves of bullion,37 there is every reason to think that a court would have granted an injunction to prevent the company’s taking this action. However, the mere right to an injunction to constrain the company’s dealing with the gold while it was solvent in no way entails that the purchasers had rights that would have given them priority over other creditors in the event of the company’s insolvency. The purchasers would have been able to establish that their rights bound the company’s assignee in bankruptcy only by demonstrating that they enjoyed proprietary rights in the gold. There are similar difficulties with the suggestion that a lender’s ability to restrain the borrower’s use of the funds advanced entails a right to trace the proceeds of the funds should they be misapplied.38 It is well established that contractual restrictions do not necessarily impose a trust relationship on the parties.39 It is difficult to see why lenders would have the right to the proceeds of the transferred property if it were used for unauthorised purposes unless they had a proprietary interest in that property. While it is true to say that some nineteenth-century cases provide support for the view that the lender’s remedies against third parties arise from personal rights, this perspective is unconvincing. The modern orthodoxy, crystallised in the House of Lords decision in Quistclose itself, is that lenders either have a property right or they do not.40 If this analysis is not accepted, the rights recognised in this context are best regarded as remedial in a strong sense. The flaw in Chambers’ argument can be demonstrated by reference to the law of contractual licences. The courts will prevent breaches of such licences by awarding an injunction where it is implicit in the arrangement that it is not to be terminated without cause. Moreover, applying the maxim “equity regards as done that 35
See, e.g. Millett, supra n. 4 at 273 and 287. [1995] 1 AC 74. See supra ch. 5.IV.2(a) for an account of the case. It is unlikely the position would be altered by the implementation of s. 20A of the Sale of Goods Act 1979 as it does not seem that the obligation to maintain a certain level of bullion reserves would result in a sufficiently identified bulk. 38 This suggestion is made by North J in Gibert v. Gonard (1885) 54 LJ Ch. 439. See S Worthington, Proprietary Interests in Commercial Transactions (Oxford, Clarendon Press, 1996) 47. 39 Hospital Products International v. United States Surgical Corporation (1984) 58 ALJR 587; Re Goldcorp Exchange [1995] 1 AC 74. 40 For a criticism of the Twinsectra decision on this basis see S Baughen, “ ‘Quistclose Trusts’ and Knowing Receipt” [2000] Conv. 351 at 357. 36 37
160 Redistributive Proprietary Remedies which ought to be done”, the courts have held that the availability of such relief means that these arrangements are irrevocable.41 However, this protection in no way indicates that the licencee has an interest that will bind third parties.42 In this context, and others, the courts have made it clear that proprietary protection cannot be assumed from the availability of specific relief to protect personal rights.43 (d) A Constructive Trust Analysis The preceding examination of three interpretations of this area makes it apparent that there are acute difficulties in reconciling the judicial enforcement of Quistclose arrangements with conventional trust principles. Rather, it seems that the courts have recognised a novel proprietary interest.44 If this is accepted, the courts’ regulation of this context is best characterised as a constructive trust. According to this account, the lender’s interest is explained as a trust that arises, not because the lender intended it, but because it would be unconscionable for the borrower or a third party to use the property for any purpose other than that specified. This analysis has gained limited support in the United States45 and New Zealand.46 In addition, a constructive trust analysis also appears to have been favoured by the English Court of Appeal in Re EVTR47 and more explicitly (although probably merely obiter) by Hirst J in Guardian Ocean Cargoes Ltd. v. Banco do Brasil SA.48 Equally, the Quistclose trust could be explained in terms of Lord BrowneWilkinson’s account of the constructive trust in Westdeutsche Landesbank as based on the conscience of the recipient.49 Such an analysis is sufficiently flexible to accommodate relatively easily instances in which property is given for a limited purpose.
3. Proprietary Remedy or Orthodox Trust? As Charles Rickett has observed, there is a tension in the analysis of Quistclose arrangements between a “pure trusts law philosophy” and a “remedial trusts law philosophy”.50 In pure trust law philosophy, the Quistclose trust is “a facilitative 41 Hurst v. Picture Theatres Ltd. [1915] 1 KB 1; Winter Garden Theatre (London) Ltd. v. Millenium Productions Ltd. [1946] 1 All ER 678; Hounslow LBC v. Twickenham Garden Developments Ltd. [1971] Ch. 233. 42 Ashburn Anstalt v. Arnold [1989] Ch. 1. 43 National Provincial Bank v. Ainsworth [1965] AC 1175. 44 Payne, supra n. 12 at 30. 45 See, e.g., Cass v. Jones (In re Jones) 50 Bankr 911 (Bank. ND Tex., 1985). 46 Dines Construction Ltd. v. Perry Dines Corp (1989) 4 NZCLC 65,298 (HC). See CEF Rickett, “Trusts and Insolvency: The Nature and Place of the Quistclose Trust” in D Waters (ed.), Equity, Fiduciaries and Trusts (Scarborough, Ont., Carswell, 1993) 325 at 340. 47 [1987] BCLC 646. See supra, text accompanying nn. 6–11. 48 [1991] 2 Lloyd’s Rep. 68. 49 For an account and critique of that analysis, see supra ch. 6.II.2(c). 50 Rickett, supra n. 2 at 608.
The Mysterious Basis of the Quistclose Trust 161 device”, giving effect to the intention of the transferor.51 In contrast, remedial trusts law philosophy acknowledges “the need for justificatory principles reflecting decisions on general policy grounds”.52 The first two analyses of the Quistclose trust examined above are broadly consistent with a pure trust law philosophy. According to the first construction, the trust in question is a standard express private trust. More controversially, on the second account, the device is a purpose trust. However, in both cases, the Quistclose trust is conceived of as a facilitative device that is intentionally created by the transferor. In Chambers’ account, the Quistclose trust appears to take on a more remedial hue. It remains, however, a limited remedy in that it responds to an absence of an intention to transfer beneficial ownership. As such, it is broadly reconcilable with conventional notions of property. In contrast, the explanation of judicial intervention in the context of loans for purposes as involving a constructive trust represents a more radically remedial analysis. On this view, the transferor’s interest is not created by agreement but arises as a result of the perceived unfairness of requiring the transferor to share pari passu with general creditors. Rickett observes that “[t]he future development and use of the Quistclose analysis will be determined by whichever philosophy gains the ascendency”.53 At present, pure trust law philosophy is apparently favoured. On the other hand, the dichotomy between these philosophies can be over-drawn. Conclusions drawn regarding intention are highly impressionistic and the courts seem relatively willing to infer an intention to create a trust where it is thought that it would achieve a fair result.54 Thus, the importance of pure trust law philosophy may be more rhetorical than practical. The characterisation of intervention in express trust terms allows the law to be presented as consistent with conventional understandings of property and thereby allows the courts to avoid addressing difficult policy questions.
II . CONSIDERATIONS OF JUSTICE AND EFFICIENCY
The argument for the recognition of Quistclose trusts in terms of fairness is obvious enough. As one writer has observed, “If A wishes to see certain of B’s creditors paid and is prepared to put up his own money for the purpose then doing so by the Quistclose method leaves none of B’s other creditors worse off”.55 In other words, to deny a borrower’s general creditors recourse to money advanced only for a specified purpose restores the status quo ante between the lender, the borrower and the borrower’s creditors by leaving them in the same position they 51
Ibid. at 646. Ibid. at 647. 53 Ibid. 54 Worthington, supra n. 38 at 51. 55 Mr Justice LJ Priestly, “The Romalpa Clause and the Quistclose Trust” in P Finn, Equity and Commercial Relationships (Sydney, Law Book Co., 1987) 217 at 230. 52
162 Redistributive Proprietary Remedies would have been in had the loan not been made. This then makes the case for these trusts on the basis that they effect corrective justice in bankruptcy—the “swollen assets” rationale for priority.56 Furthermore, if we choose to give effect to these arrangements and to protect only those who have deliberately taken advantage of them, it will follow that relief will be given to lenders who have not assumed the risk of the borrower’s bankruptcy. There are also strong arguments of efficiency for allowing Quistclose trusts on the basis that they provide a facility for the provision of short-term credit in circumstances in which the creditor would not otherwise extend it.57 The recognition of this quasi-security device accords with a view that favours the recognition of security in circumstances where it enables new assets to be brought into the debtor’s estate and is suspicious of the enforcement of security that does not serve this function.58 Certainly, if the matter is considered ex ante, rather than examined in the context of a particular borrower’s bankruptcy, rational unsecured creditors would surely favour the availability of such a facility. After all, these trusts can be employed for the purpose of satisfying the claims of general creditors and it makes it more likely that, instead of being forced to prove in bankruptcy for a dividend, such creditors will have their debts paid in full.59 The consequences of imposing such a trust are striking. If a borrower uses the money for improper purposes the lender will be able to trace into the proceeds of any unauthorised transactions employing the generous evidentiary presumptions that equity provides for the identification of misappropriated trust moneys through mixed current accounts.60 Of course, if this were thought to be unfair, this would be more a criticism of the tracing rules than of Quistclose trusts. However, it might be objected that allowing a right to trace gives lenders less incentive to monitor borrowers to ensure that they apply the funds advanced only for the purpose for which they were lent. These trusts may also pose problems of ostensible ownership. One particular danger is illustrated by the facts of the Quistclose case itself. Barclays Bank was providing an overdraft and there was a real danger that it was liable to extend it further on the assumption that it could have recourse to all the funds that Rolls Razor had deposited with the bank to set off against the overdraft.61 In that case, this risk was averted because the borrower informed the bank of the circumstances in which the money had been lent and why it was being placed in a separate account. While in Quistclose some emphasis was placed on the fact that the bank had notice
56
See supra, ch. 4.IV.2. M Bridge, “The Quistclose Trust in a World of Secured Transactions” (1992) 12 OJLS 333 at 361. 58 See, e.g., V Finch, “Security, Insolvency and Risk: Who Pays the Price?” (1999) 62 MLR 633. 59 A Belcher and W Beglan, “Jumping the Queue” [1997] JBL 1 at 2. 60 Gibert v. Gonard (1884) 54 LJ (Ch.) 439. 61 On the other hand, if a bank without notice of a Quistclose arrangement sought a charge over the account in which the lender’s money had been placed, it would, as a bona fide purchaser, defeat the lender’s interest. The enforceability of such charges was recognised recently in Re BCCI (No 8) [1998] AC 214. 57
The Mysterious Basis of the Quistclose Trust 163 of facts that dictated that the money was held on trust for the lender, it is difficult to see that this can have made any difference to the outcome of the case.62 The injustices that can be generated by Quistclose trusts and the justifications of fairness and efficiency for the recognition of the device all suggest that it should be recognised only where it is indeed apparent that the lender actually intended to make use of it.63 For only when this true can it be said that the lender has not assumed the risks of the borrower’s bankruptcy and that the device serves to facilitate the provision of credit that otherwise might well not be extended. It is difficult to justify the extension of proprietary relief to those who have not intentionally made use of this facility, given that lenders in these cases tend to be relatively experienced commercial players. Perhaps the best indication of such an intention, short of express language, is evidence that borrowers were obliged to keep the money lent separate from their own funds—something that was a feature of Quistclose itself and the importance of which has been emphasised in other decisions.64
62 Knowledge may of course be relevant in determining whether defendants are liable for knowing receipt if they are no longer in possession of the trust property or its proceeds. However, it is difficult to see that this can be an issue in circumstances in which a bank seeks to set off a liability to a customer in respect of one account against the customer’s liability to it in respect of another, overdrawn, account. 63 Rickett, supra n. 46 at 332; Bridge, supra n. 57 at 358. 64 See, e.g., Re Nanwa Gold Mines [1955] WLR 1080.
8
Obligation into Ownership: Constructive Trusts and Liens in Arrangements to Assign Property is an agreement to transfer property in an asset, at precisely what point does obligation mature into ownership? The question may not seem to have much relevance to the issues relating to the non-consensual redistribution of property that are central to this book. At whatever point property is held to pass in a contract of assignment, its transfer can readily be attributed to the intention of the parties and may, as a result, be viewed as essentially uncontroversial. However, things are not quite so simple. For one thing, law and equity differ in the determination of the timing of passing of title, with equity employing constructive trusts to treats “as done that which ought to be done”. For this reason, to attribute the timing of the transfer of property to the parties’ intention is somewhat unconvincing. In addition, while in the period from the conclusion of a contract of sale to the transfer of physical possession the law holds that title resides with one of the parties, it also provides that the other party has certain proprietary rights that make it difficult to regard either party as the absolute owner. The appearance of such proprietary interests arising by operation of law to regulate the transitional stages of sales transactions demands that this area be examined in the context of a study of proprietary remedies.
W
HEN THERE
I . THE DISTRIBUTION OF ENTITLEMENTS IN SALE OF GOODS TRANSACTIONS
While, initially, the common law fixed on physical transfer as the determinative event, the courts subsequently took the view that property generally passes at some earlier point.1 Perhaps the primary significance of the determination of the point at which title passes lies in its affect on the allocation of certain risks. The timing of the passing of title is liable to affect the risks that flow from goods perishing or being lost, stolen or damaged. In addition, the decision may determine who bears 1 JH Baker, An Introduction to English Legal History (3rd edn., London, Butterworths, 1990) 433–4. Passing of title is determined by the intention of the parties: s. 17 of the Sales of Goods Act 1979. The Act provides rules for divining the parties’ intent in the absence of evidence to the contrary. If a contract is for the transfer of a particular good in a deliverable state, property passes once the contract is complete: s. 18 r. 1. If the contract is for unascertained or future goods, property passes when those goods are unconditionally appropriated to the contract: s. 18 r. 5.
166 Redistributive Proprietary Remedies the risk when a seller in possession of property who is already subject to a contract of sale sells those goods to third party. Finally, the timing of the passing of property will also be relevant in the event of the bankruptcy of either party to the sale transaction. The fact that property generally passes prior to possession has had some unfortunate consequences in the allocation of the risks of loss of or damage to goods. Where property has passed to the buyer, in the absence of any contractual term to the contrary, the buyer also takes the risk.2 As a result, the burden falls upon the buyer to insure against the risk of loss or damage. This is less than ideal. Sellers will often be in a better possession to insure the property or will already have insurance that would cover the risk in question were it to be placed on them. In addition, a seller in possession is obviously in a better position to take steps to protect the property in question. Buyers’ interests are protected somewhat by the fact that sellers who remain in possession of goods after title has passed are liable if they negligently damage those goods. However, it would make sense for sellers to be given an additional incentive to take care of such goods by providing that risk of loss follows possession or control rather than title.3 Among American commentators, Karl Llewellyn argued that title was not a very useful tool for allocating entitlements in sales transactions. In particular, he criticised the tendency to treat title as a “lump-concept” that required the allocation of all the incidents of property to one of the parties and thereby precluded a sensible distribution of risks and benefits during transitional stages of sales transactions.4 Subsequently, when Llewellyn supervised the drafting of Article 2 of the Uniform Commercial Code, he provided for a sales code that makes little or no use of the concept of title. Instead, risk is principally determined by reference to which party is in control of goods and which party “can be expected to insure his interest in” those goods.5 On the other hand, the common law was more effective at insulating the parties from other types of risk with a series of exceptions that were subsequently codified in sale of goods legislation. Thus, at law, the title that passes to a buyer of goods prior to either taking possession or paying the purchase price is a qualified one. First, unpaid sellers have a lien that permits them to retain the goods if the buyer has either failed to tender the price as agreed or has become insolvent, and this right prevails against the buyer’s trustee in bankruptcy.6 Secondly, where the buyer has become insolvent, an unpaid seller also has a right to stop goods in transit.7 In either case, unpaid sellers have a right to rescind the sale and revest the title in themselves or a new buyer.8 Finally, a buyer may 2
Sale of Goods Act 1979, s. 20. R Goode, Commercial Law (London, Penguin, 1995) 248. 4 K Llewellyn, “Through Title to Contract and a Bit Beyond” (1938) 15 NYULQLR 159. 5 Uniform Commercial Code § 2–509, comment 3. See A Schwartz and R Scott, Commercial Transactions: Principles and Policies (Westbury, NY, The Foundation Press, 1991) 86. 6 See, e.g., Re Edwards (1873) 8 Ch. App. 289. Sale of Goods Act 1979, ss. 38–39. 7 Bloxam v. Saunders (1825) 4 B & C 941. Sale of Goods Act 1979, ss. 44–46. 8 Sale of Goods Act 1979, s. 48. 3
Constructive Trusts and Liens in Arrangements to Assign Property 167 choose to reject the goods in question if there is a breach of a condition of the sale contract, in which case property in the goods will revest in the seller.9 This demonstrates how flexible even the supposedly rigid courts of common law could be in regulating property rights. In addition, the common law provided for certain exceptions to the nemo dat quod non habet rule. First, purchasers took title where goods were sold in market overt.10 Secondly, owners could be estopped from relying on their title where they had represented that a seller could give good title.11 Thirdly, the doctrine of ostensible authority meant that third parties might obtain good title from agents who had exceeded their actual authority by selling their principals’ property.12 Subsequently, Parliament provided for further exceptions to the nemo dat rule to protect bona fide purchasers. Thus, such purchasers may acquire title from a seller whom an owner has allowed to retain possession of goods.13 In addition, title may be acquired where an owner has given possession to one who has agreed to buy the goods prior to any property passing or who has acquired a defeasible title under a voidable contract.14 Finally, and most recently, Parliament provided that title may be obtained by a bona fide purchaser who acquired goods from a seller in possession under a hire purchase arrangement.15
II . THE PASSAGE OF TITLE IN EQUITY : CONSTRUCTIVE TRUSTS AND LIENS ARISING IN THE CONTEXT OF CONTRACTS OF SALE
Equity provides for the allocation of rights in contracts of assignment in a number of situations in which the law does not. For example, unlike at law, where there is a contract for the assignment of future property and consideration has been given, the interest in such property will pass in equity to the purchaser as soon as it is 9
Sale of Goods Act 1979, s. 35. See Kwei Tek Chao v. British Traders & Shippers Ltd. [1954] 2 QB
459. 10 Although that title was liable to be lost if the party responsible for the loss of the goods was subsequently convicted of obtaining the goods by false pretences or larceny. This position was altered somewhat under the Sale of Goods Act 1893, s. 24, which provided that title could be revested only upon conviction for larceny. That section was repealed by the Theft Act 1967. The market overt rule was abolished by the Sale of Goods (Amendment) Act 1994. 11 Simm v. Anglo-American Telegraph Co. (1879) 5 QBD 188 at 206 per Brett LJ. 12 Pickering v. Busk (1812) 15 East 38. This protection is now provided by s. 2 of the Factors Act 1889. The statutory exception goes further in protecting bona fide pledgees as well as purchasers (pledging goods was said to be outside the agent’s ostensible authority: Paterson v. Task (1743) 2 Str. 1178). See P Atiyah The Sale of Goods (9th edn., London, Pitman, 1995) 333. 13 Sale of Goods Act 1979, s. 24 (an exception of this type was first enacted in the Factors Act 1877, and s. 24 is derived in substance, from s. 8 of the Factors Act 1889). For the position at common prior to this legislative reform see Johnson v. Crédit Lyonnais Co. (1877) 3 CPD 32 at 40. 14 Sale of Goods Act 1979, s. 25. See Lee v. Butler [1893] 2 QB 318 (conditional sale); Newtons of Wembley Ltd. v. Williams [1965] 1 QB 560 (voidable title). 15 Hire Purchase Act 1964, s. 27, as reenacted by the Consumer Credit Act 1974. This exception applies only to private purchasers. For the position under the old law see Helby v. Matthews [1895] AC 471.
168 Redistributive Proprietary Remedies acquired.16 In addition, property may also pass in equity in respect of purported legal assignments that fail because of a want of formality or assignments of rights that cannot be assigned at law but can be in equity.17 In all these cases, if no formal conveyance is required, equity simply gives effect to the intention of the parties to transfer title. However, the position is more complex where an immediate transfer of the legal title is not possible by contract alone because a separate conveyance is required or where the property to be transferred under the contract is yet to be completed. In these circumstances, equity intervenes to provide a rather more elaborate allocation of proprietary rights among the parties to a contract of sale and purchase.
1. Equitable Interests Arising in Anticipation of a Legal Conveyance of Property where the Contract is Specifically Enforceable or Consideration has been Paid (a) The Doctrine Equitable doctrines play an important role in the context of transactions where the use of title documents means that it makes sense to continue to draw a distinction between the contract by which the parties bound themselves and the conveyance itself. At law, property does not pass until the conveyance of the documents of title. If the vendor refuses to complete, the buyer’s only remedy is damages for breach of contract. Equity, in contrast, is prepared to order specific performance where the subject matter of the contract is unique, thereby reflecting the view that the buyer’s expectation interest is to be valued above the interest of the reneging seller. In addition, where there is a specifically enforceable contract, the purchaser is characterised as having an interest in the property by way of a constructive trust. The most important application of this principle concerns contracts for the sale of land, but it applies equally to contracts for the sale of shares in a private company.18 It is commonly argued that a constructive trust arises immediately upon the conclusion of a specifically enforceable contract.19 Thus, in Lysaght v. Edwards,20 Jessel MR concluded that: 16 E.g., Holroyd v. Marshall (1862) 10 HLC 191. Where the contract that is created is one that is specifically enforceable, this result is consistent with the doctrine that provides for the passing of title for such contracts pursuant to the maxim “equity regards as done that which ought to be done” that is widely used to explain the passing of property elsewhere. However, the courts have gone beyond this and held that title will vest in the purchaser immediately, even if the contract is not one for which specific performance would normally be granted. See Tailby v. Official Receiver (1888) 13 App. Cas. 523; Re Gillott’s Settlement [1934] Ch. 97. For a discussion on the relationship between specific performance and the interests that arise in this context see RP Meagher, WMC Gummow and JRF Lehane, Equity, Doctrine and Remedies (3rd edn., Sydney, Butterworths, 1992) 182–5. 17 Ibid. at 166. 18 See, e.g., Oughtred v. IRC [1960] AC 206. 19 See Oakley, Constructive Trusts at 282. 20 (1876) 2 Ch. D 499.
Constructive Trusts and Liens in Arrangements to Assign Property 169 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, the vendor having a right to the purchase-money, a charge or lien on the estate for the security of that purchase-money, and a right to retain possession of the estate until the purchase-money is paid, in the absence of express contract as to the time of delivering possession.21
However, the interest in question is a special sort of constructive trust and no ordinary property right. This is made apparent by the fact that there is always a risk that the contract may never be completed, in which case the interest will lapse.22 What may be regarded as a fully-fledged constructive trust arises only upon the payment of the purchase price.23 And indeed, if consideration has been paid in full, it seems that property passes even if the contract is not one for which specific performance would ordinarily be granted.24 (b) Shifting the Right to Dispose of the Property to the Purchaser It is sometimes suggested that the description of the vendor as a constructive trustee is nothing more than a reflection of the fact that the contract of sale is specifically enforceable.25 This is not so. The availability of specific performance tells us nothing about what rights purchasers have when vendors put the performance of the contract beyond their means by selling the property to another purchaser. It is in giving the buyer rights against subsequent purchasers that equity provides a solution that takes us out of the realm of contract and into that of property. By holding that the vendor is a constructive trustee, the courts gave birth to a new property right: the estate contract. This constructive trust is rationalised as an application of the maxim that “equity looks on as done that which ought to be done”. As a result, it is said that the vendor becomes a trustee as soon as a specifically enforceable contract is concluded.26 This is better regarded as a rather formal description of what takes place, rather than an explanation of why it takes place. For the maxim in question is used selectively when it is found convenient and little can be deduced directly from it.27 Moreover, the maxim operates only in a limited way in this context in that the purchaser becomes the owner of the property in question only for certain purposes. Thus, while vendors are said to become trustees of the property in their 21
Ibid. at 506. The most common causes of this are the vendor’s failure to make good title (see, e.g., Wroth v. Tyler [1974] Ch. 30) and the buyer’s failure to raise the purchase price. For an indication of the harshness of the judicial approach to purchasers who claim relief after failing to pay the purchase price on time see Union Eagle Ltd. v. Golden Achievement Ltd. [1997] AC 514. 23 See, e.g., S Worthington, “Equitable Liens in Commercial Transactions” [1994] CLJ 263 at 265. 24 See Tailby v. Official Receiver (1888) 13 App. Cas. 523 and Chinn v. Collins [1981] AC 533. See N Hopkins, The Informal Acquisition of Rights in Land (London, Sweet & Maxwell, 2000) 76–77. 25 See, e.g., Sir Peter Millett, “Restitution and Constructive Trusts” (1998) 114 LQR 399 at 404. 26 Lysaght v. Edwards (1876) 2 Ch. D 499 at 506 (see supra, text accompanying n. 21). 27 For an account and criticism of the use of the maxim elsewhere see supra, ch. 2.V.2 and infra, ch. 9.III.4(b) and ch. 12.I.2(c). 22
170 Redistributive Proprietary Remedies possession, they are entitled to retain possession of the property and enjoy any profits that it generates before completion.28 The operation of the maxim in this context can be explained only in terms of a decision that the interests of one who has contracted to acquire unique property should be given priority over those both of the vendor and of subsequent purchasers who have notice of the transaction. Such a rule has much to recommend it. Viewing the matter ex post facto, in the context of a conflict between a plaintiff who contracted to purchase property and a defendant who is a third party purchaser who subsequently acquired legal title to the property, the rule might be defended as a matter of moral desert. It is right that vendors should be held to their promises and that those with notice should not interfere with others’ contracts. Equally, the rule serves an important function ex ante by discouraging the breach of such contracts, thus promoting certainty in these transactions. At the same time, risks are reasonably allocated between the initial buyer and subsequent purchasers by the protection afforded to bona fide purchasers of the legal title without notice.29 (c) Allocating the Risks of Insolvency The rights that arise in this context also serve to allocate the risks that may result from the insolvency of purchasers, vendors and third party successors in title. Vendors enjoy a lien over the property in question until they receive the purchase price. This right arises by operation of law to ensure that this particular form of constructive trust has relatively limited consequences in the event of insolvency. Should the buyer become insolvent, the lien gives the unpaid seller the status of a secured creditor. Another risk associated with insolvency relates to the danger that, after the purchaser has paid a deposit, the contract may not be completed. The problem may arise from the failure of the vendor to give good title, because the vendor has committed a breach that enabled the purchaser to rescind the contract,30 or because a court would not award specific performance because of the purchaser’s delay in seeking a remedy.31 Where purchasers seek to recover purchase moneys paid to the seller in these circumstances, they will have a personal right to recover for failure of consideration. However, in addition, purchasers have an equitable lien over the property that was the subject of the contract to secure the repayment of the purchase moneys, thereby making them secured creditors in the event of their vendor’s bankruptcy.32 Perhaps it is not obvious why a purchaser should be given 28
Cuddon v. Tite (1858) 1 Giff. 395. See Oakley, supra n. 19 at 292. Of course, a contest between purchasers is now largely determined by registration regimes. In the case of unregistered land, estate contracts are void as against third party purchasers unless registered as a class C(iv) land charge: see Lloyds Bank plc v. Carrick [1996] 4 All ER 630. In registered land, unregistered estate contracts are similarly ineffective against third parties, save for the unlikely event that the purchaser is in actual occupation of the land in question and so able to rely on the Land Registration Act, s. 70(1)(g). 30 See, e.g., Whitbread & Co. Ltd. v. Watt [1902] 1 Ch. 835. 31 See, e.g., Levy v. Stogdon [1898] 1 Ch. 478. 32 A point that is also illustrated by Levy v. Stogdon, ibid. 29
Constructive Trusts and Liens in Arrangements to Assign Property 171 the status of a secured creditor in this way. The position of purchasers of real estate is certainly privileged when compared with that enjoyed by those who make advance payments for non-specific property. Whitbread & Co. Ltd. v. Watt 33 illustrates how the purchaser’s lien can confer a remedy against third party purchasers. The case unfolded in the aftermath of a contract for the sale of land that required the vendor to build 300 houses on the land before the plaintiff was to take possession and gave the plaintiff the opportunity to rescind the contract if this requirement was not met. The vendor not only failed to build the houses, but sold the land on to the defendant, who had notice of the plaintiff’s estate contract. It would have made little sense for the plaintiff to seek to enforce its beneficial interest against the new legal owner of the land, given that the development for which it had negotiated had not taken place. Thus, instead, the plaintiff rescinded the contract and successfully claimed a lien over the land in question thereby securing against the defendant a right to the repayment of the deposit that the plaintiff had paid the vendor under the contract. (d) The Allocation of Risk of Damage The courts have viewed it as a natural consequence of the fact that buyers acquire the beneficial interest in an estate in land between exchange of contracts and taking possession that they also acquire the risk that it may be damaged during this interval. Thus in Rayner v. Preston,34 the Court of Appeal rejected the notion that the vendor held not only the property but any contract of insurance on trust for the purchaser. It also concluded that the purchaser could not be subrogated to the position of the vendor for the purpose of enforcing any insurance policy that the latter might have over the property. Instead, if the vendor has claimed under the insurance policy, it is the insurer who has the right to be subrogated to the vendor’s claim to the purchase price. This is an unfortunate state of affairs that is unlikely to conform to the parties’ expectations. Vendors are likely to have insurance already, and, given that they are in possession of the property in question, there are obvious advantages in giving them the incentive to see that the property comes to no harm. The common law position is somewhat mitigated by section 47 of the Law of Property Act 1925 that allows a purchaser to recover any insurance money paid to the vendor. However, the section is somewhat ambiguous and may do nothing more than allow for those purchasers who have acquired an interest in the property under the contract for sale and purchase to take over the benefit of the vendor’s insurance policy by paying a proportion of the premium.35 It has been suggested that, if the contract for sale and purchase does not require the vendor to insure the property for the purchaser’s benefit, the vendor is unable to recover for the destruction of the property.36 33 34 35 36
[1902] 1 Ch. 835. (1881) 18 Ch. D 1. See Oakley, Constructive Trusts at 300. Lonsdale & Thompson Ltd. v. Black Arrow Group PLC [1993] 2 WLR 815.
172 Redistributive Proprietary Remedies The common law rule has been criticised by the Law Commission, which argued that the vendor should be obliged to convey the property in the state in which it was at the time of the contract.37 Mercifully, this is not an area in which parties draw up their own contracts ab initio. As a result, the hazards posed by judicially-developed doctrine are now largely avoided by the standard form real estate sale contract used in England and Wales that follows the Law Commission proposal and places the risk on the vendor.38 Thus, the position is that today parties to virtually all residential property sales and most commercial property sales contract around the default position that the Courts of Chancery settled upon in allocating risk in this context.39 The shortcomings of equity’s regulation of contracts for the sale and purchase of land mirror those that attracted the criticism of Karl Llewellyn in sale of goods transactions.40 In both cases, the “lump-concept” of property provides too inflexible a tool for sensibly allocating the variety of risks that arise between the making of the contract to assign and the transfer of title to the asset in question. It is hardly surprising then that the state of affairs generated by the use of the equitable doctrine of conversion has been criticised in the United States.41 Thus, it has been objected that, “[t]o say that equity will specifically enforce the contract certainly does not compel one to disregard the reality and view the contract as already performed”.42 In any event, courts in the United States are more inclined to impose a constructive trust on any insurance proceeds claimed by the vendor.43 In addition, the Uniform Vendor and Purchaser Risk Act places the risk of loss on the vendor,44 and, indeed, most sale and purchase agreements favour this approach.45 Moreover, some American courts have rejected the rule and placed the risk of loss on the vendor prior to the purchaser’s taking possession.46
2. Equitable Proprietary Interests in Incomplete Property A further question concerns whether a purchaser may acquire a proprietary interest in the subject-matter of a contract to assign property in circumstances in which specific performance is not possible because the property in question is not completed or is part of a bulk. Where purchasers have yet to pay all or part of the 37 Law Commission, Transfer of Land: Risk of Dammages after Contract for Sale (Report No 191) (London, HMSO, 1990) para. 2.25. 38 Standard Conditions of Sales (3rd edn.) 5. 39 Oakley, supra n. 19 at 298–300. 40 Llewellyn, supra n. 4. See supra, text accompanying nn. 4–5. 41 J Singer, Property Law: Rules, Policies and Practices (2nd edn., New York, Aspen Law & Business, 1997) 939; R Cunningham, W Stoebuck and D Whitman, The Law of Property (St Paul, Minn., West Publising Co., 1993) 743. 42 Ibid. at 736. 43 Ibid. at 708. 44 The Act had been adopted by 10 states by 1993: ibid. at 743. 45 Singer, supra n. 41 at 939. 46 See, e.g., Skelly Oil Co. v. Ashmore 365 SW 2d 582 (Mo., 1963).
Constructive Trusts and Liens in Arrangements to Assign Property 173 purchase price, there is perhaps little reason for investing them with proprietary rights. However, where purchasers have paid some or all of the purchase moneys, the courts are sometimes tempted to conclude that they acquire an interest through a constructive trust or equitable lien. The issue was addressed relatively recently by the Australian High Court in Hewett v. Court.47 The case concerned a contract for the construction, delivery and installation of a prefabricated house. Pursuant to sale of goods law, unless the parties evinced a contrary intention, property would not pass in the house until it was completed. However, after the purchaser had paid more than $20,000 of the $34,000 due under the contract, the seller became insolvent. Subsequently, the parties entered into a new agreement by which the purchaser was to take possession of the unfinished house upon a further payment to reflect the unpaid value of the work already done. When the liquidator argued that this represented a preference, the purchaser responded that the arrangement reflected the fact that he had been entitled to an equitable lien to secure the repayment of the money paid under the contract. One difficulty with this argument was that a proprietary interest could not be said to have arisen by virtue of the doctrine of conversion—for this was not a contract for which specific performance would have been available.48 Nonetheless, a majority of the High Court accepted the purchaser’s argument. Among the majority, Deane J’s judgment provides the most ambitious statement of principle. In his view, entitlement to proprietary relief was not dependent upon the availability of specific performance.49 Instead, when sellers had incurred a debt to a purchaser and property had been appropriated to the contract, an equitable lien would arise if sellers would be acting unfairly if they were to deal with the property as their own without discharging the liability in question.50 The arrangement in Hewett v. Court, as a contract to install an article that would become a fixture, was treated as a contract for work and materials.51 The issue of whether the matter might apply to contracts for the sale of goods was left unanswered. This question takes on most relevance in the context of contracts for the construction of a particular asset. A good example is contracts for the construction 47 (1983) 149 CLR 639. See IJ Hardingham, “Equitable Liens for the Recovery of Purchase Money” (1985) 15 MULR 65; J Phillips,. “Equitable Liens—a Search for a Unifying Principle” in N Palmer and E McKendrick (eds.), Interests in Goods (London, Lloyds, 1993) 635. 48 Wilkinson v. Clements (1872) 8 Ch. App. 96 at 112 per Mellish LJ. This was because the contract was treated as one for work and materials. It might be argued that the contract could have been regarded as in part a contract for the sale of goods: see, e.g., Hyundai Heavy Industries Co. Ltd. v. Papadopoulos [1980] 1 WLR 1129. Nonetheless, the fact that it was also in part a contract for services that remained to be performed would make the courts reluctant to order specific performance: see Woverhampton Corp. v. Emmons [1901] 1 KB 515 at 525 per Romer LJ. Indeed, even if the goods in question were complete, it is not clear that the courts would necessarily think that specific performance was appropriate. See, e.g., Société des Industries Métallurgiques SA v. Bronx Engineering Co. Ltd. [1975] 1 Lloyd’s Rep. 465 (specific performance of a contract for the sale of a ship denied). 49 (1983) 149 CLR 639 at 664–7. 50 Ibid. at 668. 51 Ibid. at 647 per Gibbs CJ, 650 per Murphy J, 665 per Wilson and Dawson JJ, 662 per Deane J. See Clark v. Bulmer (1843) 11 M & W 243.
174 Redistributive Proprietary Remedies of ships that are at least in part treated as contracts for the sale of goods.52 The general rule at law is that, if the contract does not provide otherwise, property does not pass until the ship is complete,53 although the parties are free to specify that property should pass to the materials as they are appropriated to the contract.54 If the parties have not specified that property should pass at law in this way, may the purchaser be substantially insulated from the consequences of the seller’s bankruptcy by the imposition of an equitable lien or constructive trust? The view favoured by the English judiciary is that sale of goods legislation provides a complete code and equity has no independent role in the passage of title in this context.55 However, a plausible case can certainly be made for the opposite view.56 Much turns on the interpretation given to the savings provision that is now found in section 62(2) of the Sale of Goods Act 1979 that provides that “[t]he rules of the common law . . . except insofar as they are inconsistent with the provisions of this Act . . . apply to contracts for the sale of goods”. And, indeed, there are signs that courts in other jurisdictions with legislation derived from the English sales codes may be in favour of a continuing role for equity in this context.57 On the other hand, irrespective of the context in which the approach in Hewett v. Court is applied, it may be asked whether it produces a just result or whether it instead represents an unwarranted interference with the pari passu principle. In delivering their dissenting opinion, Wilson and Dawson JJ concluded that the majority’s approach would generate arbitrary results.58 Indeed, it is not obvious why those purchasers who can point to materials appropriated to their contracts should be given priority in bankruptcy over those who cannot. It has never been suggested, for example, that sellers of goods who have not chosen to retain title but remain unpaid and who can point to the goods they have supplied in the hands of an insolvent purchaser should be entitled to a proprietary remedy. Why then should a purchaser who has paid for unfinished goods but failed to bargain for property in them be treated any better? One answer may be that, compared with sellers, purchasers typically will not have the same opportunity or knowledge to construct a bargain in this way. Thus, it is possible to have sympathy for the outcome in Hewett v. Court, where the purchasers were a couple seeking an inexpensive home. The relevance of such considerations was made explicit by the Saskatchewan Court of Appeal in Taypotat v. Surgeson,59 which was prepared to allow a restitutionary proprietary claim in the context of contracts to build
52
Hyundai Heavy Industries Co. Ltd. v. Papadopoulos [1980] 1 WLR 1129. Reid v. Macbeth [1904] AC 223. 54 Re Blyth Shipbuilding Co. [1926] Ch. 494. 55 Re Wait [1927] 1 Ch. 606 at 629 per Atkin LJ; Transport & General Credit Co. Ltd. v. Morgan [1939] 1 Ch. 531 at 546 per Simonds J. 56 See, e.g., Worthington, supra n. 23 at 268–70. 57 See, e.g., Electrical Enterprise Retail Pty. Ltd. v. Rodgers (1989) 15 NSWLR 473 at 492–3 per Kearney J. 58 (1983) 149 CLR 639 at 658–9. 59 [1985] 3 WWR 18. 53
Constructive Trusts and Liens in Arrangements to Assign Property 175 houses.60 After noting the array of security devices protecting those in the construction industry, the court acerbically suggested that “[p]erhaps the legislature in its wisdom may take the necessary steps to protect people who are often unsophisticated and unsuspecting when dealing with matters in the commercial world”.61 In contrast it would be difficult to support such an interventionist approach in the context of, for example, a contract for the construction of a ship entered into by sophisticated commercial players.
III . CONCLUSION
In the context of sales transactions, efficient and just allocation of risks cannot necessarily be derived from the intention of the parties and it certainly cannot be achieved against the background of an absolutist approach to property. Indeed, as is apparent in the approach taken to the purchaser’s liability for damage to property in land contracts, where an absolutist approach is adopted, it is likely that injustice will result. The fact that the constructive trusts and equitable liens employed in this context arise against the background of a consensual transfer should not disguise the fact that they are not the product of the intention of the parties but remedies that arise by operation of law. It is unfortunate that these remedies are not always tailored to provide a defensible allocation of risk in transitional stages of sale transactions. Nonetheless, the relatively nuanced approach taken to the distribution of risk in the context of contracts of assignment gives an indication of how flexible property can be. An extension of this wisdom to other areas of the law may do something to lead to the rejection of a monolithic concept of property and to allay anxiety over the spectre of the redistribution of property rights.
60 The court was able to base its holding on a finding of an intention of the parties to pass title to the materials in question as they were appropriated to the contract. Nonetheless, it concluded that, had this not been so, it would have reached the same outcome by imposing a restitutionary proprietary remedy. The court approved such a proprietary remedy in affirming the decision of the court below in Waselenko v. Touche Ross Ltd. [1983] 2 WWR 352, aff’d [1985] 3 WWR 38. 61 Ibid. at 38 per curiam.
9
Proprietary Relief for Enrichment by Wrongs: the Shifting Boundary between Ownership and Obligation of proprietary relief to recover profits made from a wrong is difficult to reconcile with the absolutist paradigm of property. To use the example of a bribe taken by a fiduciary,1 the person making the payment intended it to benefit the fiduciary, and this was also the fiduciary’s intention. Any proprietary interest conferred upon the principal in these circumstances is acquired in a manner contrary to accepted modes of acquisition. Not surprisingly, the discourse in this area often betrays an anxiety about the redistribution of property rights. English courts have at times denied that proprietary rights arise in favour of the victim of a wrong. At other times, the courts have assuaged their sense that some fundamental legal postulate was being transgressed by conceptualising the basis for relief in terms that denied that they were countenancing a non-consensual readjustment of property rights. This chapter examines the law in this area in the light of normative justifications that may be offered for awarding proprietary rights over the profits of wrongdoing. On the one hand, a complete denial of proprietary relief in this context would be unfortunate, as it may be justified in some circumstances. On the other hand, the concepts from which the obfuscatory techniques employed where proprietary remedies are made available are fashioned are liable to impose certain logical constraints on the subsequent development of these doctrines. These constraints are liable to dictate outcomes that are anomalous when compared with the normative justifications that initially motivated a court to make a proprietary remedy available. Finally, this chapter examines the treatment of this area in North American legal thought. On the one hand, the courts in the United States and Canada have been prepared to accept quite openly that the provision of proprietary relief in this context amounts to a redistribution of proprietary rights. On the other hand, North American jurists have increasingly suggested that the relief granted should not affect third party creditors. This suggests that, by openly confronting the issues that arise with respect to the redistribution of property rights, a legal culture will be better able to reach a reasonable accommodation between the interests that are inevitably brought into tension in this context.
T
1
HE AVAILABILITY
See, e.g., Attorney General for Hong Kong v. Reid [1994] 1 AC 324.
178 Redistributive Proprietary Remedies
I . PROPRIETARY RELIEF FOR ENRICHMENT BY WRONGS : A NORMATIVE ANALYSIS
1. Justifications for Priority in Bankruptcy Defendants may be unjustly enriched either “by subtraction” or “by wrongs”.2 Where a claim is made for enrichment “by subtraction” the defendant’s gain is equal to the plaintiff’s loss. In terms of moral desert, the plaintiff in such a situation has a particularly compelling case for relief.3 After all, an award of restitution will do no more than return the parties to the status quo ante. On the other hand, actions for enrichment “by wrongs” assert that the defendant’s enrichment represents a profit derived from a wrong to the plaintiff, without relying on establishing that the plaintiff has suffered loss. Justifying the provision of personal relief on such a basis is harder. The task of justifying proprietary relief in enrichment by wrongs cases is even more difficult. It is relatively difficult to justify proprietary relief for claims in respect of which the legal relationship between the plaintiff and the thing sought to be recovered did not pre-date the events that brought the parties to court.4 In such cases, plaintiffs will generally have had no psychological attachment to the assets in respect of which they seek proprietary relief, and the readjustment of property rights may tend to interfere with commercial certainty. Where an explanation is offered, the priority that results from according restitutionary remedies priority is often justified on the basis that the correspondence between the plaintiff’s loss and the defendant’s gain justifies giving certain claims priority. The argument goes that giving these claims priority would effect corrective justice in bankruptcy by restoring the parties (the plaintiff, the defendant and the defendant’s creditors) to the position they were in before the events that led to the unjust enrichment.5 While such a correspondence of gain and loss is a feature of enrichment by subtraction, it is not generally found in enrichment by wrongs claims. What then can be the justification for granting proprietary relief for claims based purely on defendants’ wrongful enrichment? Plaintiffs in this context can neither point to a pre-existing property right nor rely on the corrective justice rationale that underlies subtractive enrichment claims. Instead, the principal rationale for priority must be a weaker claim based on the fact that the defendant profited from breaching the plaintiff’s rights. It may be asked whether any remedy should be available for claims that do not rely on evidence of tangible loss. Is not adequate protection for rights provided by criminal law, the availability of civil compensatory damages and injunctive relief? There are, however, two plausible 2 Birks, An Introduction to the Law of Restitution at 6; Restatement of Restitution 2d, Tentative Draft No 1 (1983) 7. 3 LL Fuller and W Purdue, “The Reliance Interest in Contract Damages” (1936) 46 Yale LJ 42; E Sherwin, “Constructive Trusts in Bankruptcy” [1989] U Ill. L Rev. 297 at 329. 4 See supra, ch. 4. 5 Sherwin, supra n. 3 at 329.
Proprietary Relief for Enrichment by Wrongs 179 justifications for relief. The first rationale derives from a desire to protect legal institutions such as property or fiduciary relationships from abuse.6 This view justifies stripping defendants of profits earned from wrongs as a means of deterring future breaches.7 The second justification focuses upon questions of conduct and desert of particular defendants and seeks to punish them by denying them an unjust enrichment.8 Both these perspectives justify relief not so much on the basis of the plaintiff’s moral desert, but, in the first instance, on the need to protect legal institutions, and, in the second, on the defendant’s unworthiness. Do these considerations of deterrence and punishment suggest that a claim to recover the profits of a wrong ought to be accorded priority in bankruptcy? Because they are not in a position to enjoy the profits of their wrongdoing, bankrupt defendants will be indifferent about who gets priority in the division of their estates. Rather, it is unsecured creditors who will be prejudiced if plaintiffs are given priority.9 It follows that proprietary relief cannot further the objectives of punishing defendants and deterring future wrongdoing more effectively than can personal relief. Consequently, these objectives cannot provide a justification for giving enrichment by wrongs claims priority over the claims of third party creditors. What then can be the basis for giving priority in this context? It is sometimes argued that the plaintiffs have a better claim to any enrichment gained at their expense then do defendants’ unsecured creditors because those creditors would be enjoying an unmerited windfall if the enrichment were made available for distribution.10 According to this view, creditors would have little cause for complaint if assets obtained only as the result of a wrong to another were not available for distribution in bankruptcy. Thus, Sir Peter Millett has stated that it is “[b]etter that the principal receive a windfall than that the creditors should obtain any benefit from an asset which ought never to have formed part of their debtor’s estate”.11 The assertion is not persuasive. If there is a “windfall” to be distributed it is not clear why the sins of debtors should be visited upon their creditors. There is a good 6
See IM Jackman, “Restitution for Wrongs” (1989) 48 CLJ 302. Birks, An Introduction to the Law of Restitution at 332. 8 Justifying relief in this context primarily by reference to the defendant’s unworthiness, George Palmer comments: “The retention of the benefit is clearly unjust, there is no one else who has a valid claim, and the only feasible means of preventing the unjust enrichment is to grant restitution in favour of the principal”. See Palmer, Law of Restitution i, § 2.11 at 141. See also D Paciocco, “The Remedial Constructive Trust: A Principled Basis for Priorities over Creditors” (1989) 68 Can. Bar Rev. 315 at 350; D Stevens, “Restitution, Property and the Cause of Action in Unjust Enrichment: Getting By With Fewer Things” (1989) 39 UTLJ 258 at 279–80. This justification is explicitly invoked in the Restatement of Restitution which provides for a distinction between wrongdoers and innocent converters. § 202 provides that wrongdoers are to be stripped of any profits made from use of the plaintiff’s property by means of tracing and the imposition of a constructive trust. Consistently with this understanding, § 203 provides that a plaintiff tracing into profits made by an innocent convertor is limited to a lien to the value of the original assets. 9 See: Sherwin, supra n. 3 at 346; Paciocco, supra n. 8 at 349–50; and Palmer, supra n. 8, i, § 2.14 at 183 and 190–1. 10 RH Maudsley, “Proprietary Remedies for the Recovery of Money” (1959) 75 LQR 234 at 244–5. 11 Sir Peter Millett, “Bribes and Secret Commissions” [1993] RLR 7 at 17. 7
180 Redistributive Proprietary Remedies argument that those unsecured creditors who stand to lose money have at least as strong a claim to relief as a plaintiff whose claim does not depend upon proof of deprivation.12 Moreover, the notion that profits earned from a wrong remain as a “windfall” to be distributed will often be rather implausible. It ignores the risks borne by the general creditors and the effect of the wrong upon them. In bribes and secret commission cases, such as Attorney General for Hong Kong v. Reid,13 employees gamble with their position in the hope of making a profit. While their general creditors do not in any real sense share the profits of these wrongs, they do bear the consequences of this risk when such wrongdoers are dismissed from their employment, lose their income and expend much of their wealth in the course of court proceedings. When the matter is put into context, it is likely that any benefit that has accrued to creditors from a wrong would be outweighed by the effects upon them of the punishment meted out on the wrongdoer. Thus, it is improbable that there will be any net windfall.
2. Limitations in the Law’s Ability to do Justice: Difficulties in Identifying Unjust Enrichment Even if we were to accept, in principle, the “windfall” argument as grounds for giving claims to the profits of wrongdoing priority in insolvency, we ought to take account of the ability of the courts to do justice in practice. The argument in favour of giving enrichment by wrongs claims priority advanced by Millett presumes that the law has an adequate method of identifying the enrichment that the defendant has made at the expense of the plaintiff. In fact, the law’s approach to such issues is highly arbitrary at best and liable to treat wrongdoers and their creditors particularly harshly. In particular, the courts tend to discount the defendant’s contribution to the acquisition of the wealth in question. Thus, of defendants who have profited from a wrong, only those who have acted in good faith are likely to have their efforts taken into account.14 For other defendants, regardless of their efforts, it is likely that the plaintiff will be held to be entitled to a proprietary remedy over the entire profit.15 While this may seem a reasonable approach as between the parties to the action, it fails to give due regard to the interests of third party creditors. In addition to problems relating to the initial identification of enrichment, the law is not well adapted to assessing whether the defendant’s estate continues to be 12
A Burrows, The Law of Restitution at 42. [1994] 1 AC 324. 14 See, e.g., Boardman v. Phipps [1967] 2 AC 46. There the court held that the defendants, while liable to account for profits made, were entitled to set-off the reasonable expenses of a profitable transaction that was conducted in good faith but, nonetheless, in conflict of their duties as trustees; see Birks, An Introduction to the Law of Restitution at 420. See supra n. 7 for the position according to the Restatement of Restitution. 15 See Palmer, Law of Restitution i, § 2.12 at 157–66. 13
Proprietary Relief for Enrichment by Wrongs 181 enriched. Thus, the rules of transactional tracing and mixing provide a rather haphazard method of identifying value, with the applicability of particular evidential presumptions and the availability of defences heavily determined by considerations of good faith. It may be that defendants have changed their position in reliance on the enrichment in question, by increasing their expenditure and thus dissipating the assets that would have been available to general creditors in insolvency. Obviously it is right that defendants in bad faith should not be allowed to rely on such a change of position to reduce their liability.16 However, ideally, innocent creditors ought to be able to cite such a change to reduce the extent to which the plaintiff is entitled to assume priority over them. If we were to conclude that, in practice, such a change of position defence would be administratively unworkable, it ought to be asked whether it would not be more appropriate to refuse to give priority altogether. Of course, these criticisms apply generally to claims for priority and, thus, just as much to restitution by subtraction cases.17 Is there any basis for providing priority in that context and yet denying it in respect of restitution for wrongs? Such a distinction would be tenable on the ground that enrichment by wrongs actions present less compelling claims for justice than those based on subtraction.18 The plaintiff’s claim to priority must be weighed against the administrative cost of providing such relief and against the potential injustice to defendants and third parties as a result of the limited tools available to effect justice.19 The stronger the plaintiff’s claim to relief, the more prejudice to defendants and third parties may be tolerated. Enrichment by subtraction claims may continue to be regarded as meriting priority in insolvency because the compelling nature of the plaintiff’s claim justifies the unfair consequences that this provision of priority will inevitably visit upon some creditors. In contrast, in the absence of accurate means of identifying the extent to which the insolvent defendants’ estates have been swelled by their wrongdoing, the weak claim to priority underlying a restitution by wrongs action cannot justify the prejudice to creditors that would necessarily result from preferring such plaintiffs. This is a pragmatic approach, focusing on the justice of competing claims against the background of rather arbitrary legal tools for giving effect to the parties’ interests.
3. Proprietary Relief Sought for Reasons other than Priority Up to this point, the normative analysis of this area suggests that claims based on enrichment for wrongs do not merit priority in insolvency. But what if claimants, 16
Restatement of Restitution § 142; Lipkin Gorman v. Karpnale Ltd. [1991] 2 AC 548. For a discussion of these issues in the context of tracing, see supra, ch. 5.IV. 18 Goff and Jones, for instance, formerly regarded the strength of the plaintiff’s claim as crucial where the claim is not based on pre-existing title; R Goff and G Jones, The Law of Restitution (4th edn.) at 101. 19 D Dobbs, The Law of Remedies (2nd edn., St. Paul, Minn., West Publishing Co., 1993) i at 35. 17
182 Redistributive Proprietary Remedies while not being able to demonstrate an enrichment by subtraction, seek proprietary relief for reasons other than priority? In some situations such reasons might provide sound justifications for the recognition of property rights. Outside the field of enrichment by wrongs, the desire to recognise property interests for reasons other than priority is apparent in the context of the quasi-matrimonial property jurisprudence that has developed in various commonwealth jurisdictions.20 In that context a plaintiff’s desire to be recognised as owner may derive in large part from a psychological attachment to the assets in question. It may also be that in some rare instances such considerations will justify proprietary relief in the context of enrichment by wrongs claims.21
II . LISTER V . STUBBS AND THE OWNERSHIP / OBLIGATION DISTINCTION
1. Secret Commissions and the Limits of Proprietary Relief In Lister & Co. v. Stubbs,22 the plaintiff company sued a former employee for accepting secret commissions in return for arranging contracts with suppliers. The plaintiff sought an injunction restraining the defendant from dealing with investments made with the commissions, arguing that any gain obtained by the defendant from abusing his position as a fiduciary was held on trust for his principal. The Court of Appeal rejected this contention, concluding that the defendant’s liability was purely personal. In his judgment, Lindley LJ concluded that to have held that the defendant was a constructive trustee would have involved “confounding ownership with obligation”,23 suggesting that he assumed there to be a sharp and fundamental distinction between these two categories. The basis of the plaintiff’s case was not that it had pre-existing title to the assets in question, but that the law ought to vest the property in those assets in the plaintiff. The Court regarded this claim as misconceived. It accepted the conclusion of the trial judge, Stirling J, that the principal was entitled to a constructive trust only if it was seeking money that it owned before any wrongful act was committed by the fiduciary.24 On this view, in the absence of a pre-existing title, the plaintiff’s claim had to one for personal relief, based on principles of obligation.
20
See infra, ch. 10. See infra, text accompanying nn. 31–34. (1890) 45 Ch. D 1. For a helpful discussion of the case and this area of the law generally, see M Cope, “Ownership, Obligation and the Constructive Trust” in, M Cope (ed.), Equity: Issues and Trends (Sydney, Federation Press, 1995) 91. 23 Ibid. at 15. 24 Ibid. at 9–11. 21 22
Proprietary Relief for Enrichment by Wrongs 183 2. Policy Concerns Motivating the Principle A striking feature of the judgments delivered by Cotton and Lindley LJJ was the considerable sympathy that they expressed for the plaintiff’s claim.25 Lindley LJ’s rejection of the plaintiff’s appeal appears to have been driven, not by any sympathy with the defendant’s position, but by his unease with the consequences that granting proprietary relief would have had for third parties. In particular, he commented: One consequence, of course, would be that, if Stubbs were to become bankrupt, this property acquired by him with the money . . . would be withdrawn from the mass of his creditors and handed over bodily to Lister. Can that be right?26
Thus, Lindley LJ seized upon the distinction between ownership and obligation as a means of preventing injustice in bankruptcy.
3. Divergence between the Formal Principle and Normative Justifications How well does the principle formulated by Lindley LJ give effect to the normative rationales to which he adverted? In this context, a doctrine delimiting the availability of proprietary relief may be said to be under-inclusive where it allows such relief to be granted in situations in which, considered in terms of the normative considerations that motivated it, relief is unmerited.27 In contrast, such a doctrine is over-inclusive where it denies a proprietary remedy when such relief is, in the same terms, deserved. A degree of over- and under-inclusiveness is the inevitable cost of providing formal standards that limit the inquiry of decision-making officials to particular facts, thus lowering administrative costs and restricting officials’ discretion. However, it is difficult to see that a divergence between a 25
Ibid. at 14 per Cotton LJ; and 14 and 15–16 per Lindley LJ. Ibid. at 15. More difficult to comprehend is the other policy justification Lindley LJ advanced against the recognition of proprietary rights. He commented: 26
“Another consequence of that would be that, if the appellants are right, Lister could compel Stubbs to account to them, not only for the money with interest, but for all the profits which he might have made by embarking in trade with it. Can that be right?” This reasoning conflicts with Lindley LJ’s suggestion that “[i]f we were to accede to this application, I don’t think that Stubbs could complain”. In any event it is not clear why Lindley LJ believed that profits made from investing the secret commission would be recoverable in a proprietary claim but not in a personal action. Perhaps he was of the view that the fact that the profits were derived by using illgotten gains was outweighed by the consideration that they were the product of defendants’ labour and consequently would be regarded as irrecoverable in a personal action for reasons of causation or remoteness. He may have thought that, in contrast, the mechanical approach taken in tracing claims would have ensured that the plaintiff was entitled to anything that was the product of its property. Yet, it is not clear that the issue would really be dealt with so differently in the two types of actions: Burrows, The Law of Restitution at 411–12. 27 See P Atiyah and R Summers, Form and Substance in Anglo-American Law (Oxford, Clarendon Press, 1987) at 13.
184 Redistributive Proprietary Remedies doctrine and its normative foundations could be justified for any other reason. Moreover, even if well motivated, any discrepancy between rationales and results should be kept within acceptable bounds. (a) The Ownership/Obligation Doctrine as Over-inclusive It was suggested above that, in determining which claims are more than deserving of priority than others, it is important to distinguish claims based on enrichment by subtraction from those founded on enrichment by wrongs.28 It is then a cause for concern that the doctrine that Lindley LJ promulgated in Lister v. Stubbs does not rest on such a distinction. While a rigid division between ownership and obligation would preclude proprietary relief for enrichment by wrongs, it would also deny such relief in some cases of enrichment by subtraction. Indeed, there is a good argument that secret commission cases involve enrichment by subtraction.29 A supplier is willing to pay a particular price in order to get a contract. In economic terms, third parties bidding for a supply contract will be indifferent whether the price extracted from them is paid to the employer or to the employee arranging the contract. This means that, where a secret commission is paid, third parties tendering for a supply contract would have been prepared to settle for a price that was higher than the price for which they actually contracted by at least the amount of the secret commission. Thus, those taking secret commissions take a cut from their employers’ profits. If one accepts that enrichment by subtraction claims merit priority, it follows that proprietary relief is appropriate in cases involving secret commissions.30 Another problem with Lindley LJ’s doctrine is that it is not well adapted to deal with cases where proprietary relief is sought for reasons other than priority. Consider, for instance, Keech v. Sandford.31 There a lessor declined a trustee’s request to renew a lease for the benefit of the beneficiary, a minor. The trustee then leased the property for his own benefit. When the beneficiary sued, the Court held that the trustee had acted in conflict of interest and was obliged to hold the lease on trust for the beneficiary. This was so even though the beneficiary did not have a subsisting interest in the property—a fact that suggests that Keech v. Sandford collides with the principle stated in Lister v. Stubbs. Yet, the two decisions may be distinguished on the grounds that a proprietary remedy was especially important in Keech v. Sandford and that it is unlikely that, in deciding that case, Lord King LC
28
See supra, text accompanying nn. 2–19. Interestingly, this suggests that secret commission cases should be regarded as being fundamentally different from other bribes cases, whereas they have generally been treated as essentially the same. 30 Of course the question in Lister v. Stubbs was more difficult because proprietary relief was sought in respect of investments made using the secret commission—raising issues regarding causation and remoteness of damage. However, if one accepts that restitution by subtraction claims merit priority, it follows that in Lister v. Stubbs it would have been appropriate to give the plaintiff at least a lien over the investments to the value of the secret commission. 31 (1728) Sel. Cas. t King 61. 29
Proprietary Relief for Enrichment by Wrongs 185 was faced with any of the policy considerations which subsequently troubled Lindley LJ in Lister v. Stubbs. While an account of profits was awarded in Keech v. Sandford, it will not be an easy matter in such a case to prove that the trustee has profited. If the trustee has purchased the property in question at market value it will often be impossible to point to any objective profit. Yet relief may still be sought because the trustee has come into possession of property that has some special significance for the plaintiff.32 This may well have been the case in Keech v. Sandford where the beneficiary had previously enjoyed a lease over the property. In such circumstances, not only would an account of profits generally be ineffectual, it would be an affront to the claimant to allow the trustee to retain the property. Moreover, where the asset in question is not fungible, specific relief may be necessary to provide adequate deterrence. Fiduciaries who covet an asset above its market value will not be deterred from acquiring the asset for themselves by a threat of damages.33 In such circumstances, the only satisfactory remedy is a constructive trust. Such an approach can be defended as a principled departure from the general rule that limits claimants to personal relief—an exception that is consistent with the approach taken to specific performance in contract.34 An additional consideration is that in some cases where property is wrongfully acquired by fiduciaries to the exclusion of their principal it may be that the fiduciary’s creditors will not necessarily be prejudiced by the provision of proprietary relief. In Keech v. Sandford, for instance, the effect of the remedy was that the plaintiff still had to pay for the lease of the property. As a result, the concerns that vexed Lindley LJ in Lister v. Stubbs did not arise in Keech v. Sandford. The defendant’s estate did not necessarily suffer a net loss and it is not apparent that there was any danger of injustice to the defendant’s creditors in the event of insolvency. This provides a basis for reconciling Keech v. Sandford with the outcome of and much of the reasoning in Lister v. Stubbs. At the same time, it casts doubt on the wisdom of Lindley LJ’s efforts to distil a formal principle from worthy policy concerns by a process of deductive logic. 32 Perhaps it is unlikely that the asset in Keech v. Sandford was of some special importance to the plaintiff because of its role in the development of his self-identify. For the lease in question was over a market—an asset that was probably valued more for its capacity to generate income than for more subjective reasons. Nonetheless, the plaintiff is still likely to have attached a worth to it that exceeded its market value because of the “endowment effect”. See supra, ch. 4.II.1. 33 This justification may also explain the Canadian Supreme Court decision in LAC Minerals Ltd. v. International Corona Resources Ltd. (1989) 61 DLR 14. There the plaintiff shared valuable information with the defendant as they negotiated with a view to entering into a joint venture to acquire mining rights. The defendant then acquired the rights for itself. The majority of the Court took the view that the appropriate remedy was a constructive trust rather than damages. La Forest J emphasised the breach of obligation that had taken place and argued that the restoration of the asset would serve to deter such breaches of duty and to strengthen “the social fabric those duties are imposed to protect”: ibid. at 48. Such reasoning was also apparent in a later Canadian Supreme Court decision in Korkontzilas v. Soulos (1997) 146 DLR (4th) 214 at 221 per McLachlin J. 34 See, e.g., G Jones and W Goodhart, Specific Performance, (2nd edn., London, Sweet & Maxwell, 1996) at 24.
186 Redistributive Proprietary Remedies It may be argued that the doctrine in Lister v. Stubbs is justified, despite the fact that it dictates results that are over-inclusive in terms of the policy concerns to which Lindley LJ referred. According to this view, maintaining a rigid division between ownership and obligation by regarding property interests as absolutely inviolable will lower administrative costs and promote certainty. Yet, on balance, such a restriction seems too extreme to be justified. Provided it is possible to indicate relatively easily identified categories in respect of which a rule allowing judicial interference with property rights would be justified, the courts should not be preoccupied with maintaining a rigid line between ownership and obligation.
4. The Premises and Methodology Underlying the Principle in Lister v. Stubbs As mentioned, Lindley LJ expressed disquiet in relation to the practical consequences of awarding a constructive trust.35 He argued that these repercussions suggested that the plaintiff’s argument was contrary to legal principle. He then deduced the nature of the principle violated, commenting: It appears to me that those consequences show that there is some flaw in the argument. If by logical reasoning from the premises conclusions are arrived at which are opposed to good sense, it is necessary to go back and look again at the premises and see if they are sound. I am satisfied that they are not sound—the unsoundness consists in confounding ownership with obligation.36
Lindley LJ’s view reflects the understanding, characteristic of his period, that any error in legal argument can be traced back to a failure to advance logically by deduction from axiomatic first principles.37 However, it should not be inferred that he and his fellow judges opportunistically seized upon a formal principle in 35
Supra at text accompanying n. 26. (1890) 45 Ch. D 1 at 15. 37 For a helpful discussion of this tendency, see P Atiyah, The Rise and Fall of Freedom of Contract (Oxford, Clarendon, 1979) 351–3. Lindley typified a tendency prevalent among nineteenth-century lawyers to view law as a systematic science. As the son of a professor of botany, Lindley was very likely influenced by nineteenth-century scientific ideals. Indeed he translated Thibaut’s System de Pandektenrechts, while still in his twenties, an indication of his familiarity with and empathy for the rigorous legal science of the German Pandecists: see Ashton, “Lord Nathaniel Lindley” in HWG Davis and JRH Weaver (eds.), Dictionary of National Bibliography 1912–1921 (Oxford, Oxford University Press, 1927) 335–7. This suggests an enthusiasm for continental legal concepts and methodology, the influence of which has been identified as one of the leading causes of the systematic rationalisation of English common law in the nineteenth century: see AWB Simpson, “Innovation in Nineteenth Century Contract Law” in Legal Theory and Legal History (London, Hambledon, 1987) at 273; and Atiyah, above at 399. Lindley was part of the explosion of treatise writing that was integral to this process of rationalisation, contributing a leading text on the law of partnership, published in 1860. Lindley was the pupil master of Frederick Pollock, who became one of the greatest of the writers in the textbook tradition and who credited Lindley for teaching him that “the law . . . is neither a trade nor a solemn jugglery, but a science”: see D Sugarman, “Legal Theory, The Common Law Mind and the Making of the Textbook Tradition” in W Twining (ed.), Legal Theory and the Common Law (Oxford, Oxford University Press, 1986) at 36. Lindley’s efforts were rewarded by promotion to the House of Lords in 1900. 36
Proprietary Relief for Enrichment by Wrongs 187 order to imbue with an aura of legality that outcome which they considered fair. Both members of the court giving judgments indicated that they thought that to give the plaintiff the remedy it sought would do no injustice in this particular instance. Indeed, Cotton LJ was of the view that in “the circumstances of the case, it would be highly just to make the order”.38 Nonetheless, both judges felt constrained to find for the defendant. Unlike Lindley LJ, Cotton LJ did not delve into questions of policy in his judgment. His decision was based firmly on the conclusion that finding in favour of the plaintiff would have involved the recognition of a “new and wrong principle”.39 The conclusion of Stirling J at first instance was that the proper question was “[w]hose money was it before the wrongful act?”.40 The choice of this premise and the distinction between ownership and obligation relied upon by the Court of Appeal rest on the assumption that the judiciary enforces pre-existing property rights and the consensual bargains of individuals and does not create new property rights. It was an understanding to which both Lindley and Stirling were to allude further on occasion during their careers on the bench.41 It is unfortunate that the decision in Lister v. Stubbs was based upon an abstract principle, rather than pragmatically constructed to provide a rule to implement the policy concerns to which Lindley LJ alluded. Doctrines based on the inviolability of property do not get to the heart of the issues of justice involved in claims for priority in bankruptcy. Instead, the focus on the ownership/obligation distinction has deflected discussion from the key issue of the merit of plaintiffs’ claims for priority. Lindley LJ’s conclusion that the plaintiff in Lister v. Stubbs was “confounding ownership and obligation” has an intuitive appeal. The notion that private property rights are inviolable seems so obvious as to require no further explanation. Yet the argument is premised on the notion that the common law is committed to a policy that prohibits any interference with private property rights. When one searches for evidence of such policy in judicial practice, one is likely to find naïve the assumption of a fundamental distinction between ownership and obligation. As this book as a whole demonstrates, controversies across numerous doctrines attest to the fact that this putative boundary is often blurred.42 38
(1890) 45 Ch. D 1 at 14. Ibid. 40 (1890) 45 Ch. D 1 at 11. 41 E.g., Lindley relied upon such assumptions in refusing to give damages in lieu of an injunction in Shelfer v. City of London Electric Lighting Co. [1895] 1 Ch. 287 (discussed supra, ch. at 2.II.2(b)) and in refusing to allow prescriptive easements against leaseholds in Wheaton v. Maple Co. [1893] 3 Ch. 48. Subsequently, as a member of the Court of Appeal in Stearns v. Village Main Reef Gold Mining Co. (1905) 10 Com. Cas. 89, Stirling cited Lister v. Stubbs to deny a proprietary remedy to an insurer that was seeking recovery of a payment made under an insurance contract to an assured who had already been partially indemnified by a third party: (see infra, ch. at 12.I.3). 42 Even if the view were taken that a line must be drawn between ownership and obligation, where that line should fall involves a difficult policy choice. This was demonstrated last century by the development of the restrictive covenant and the tort of interference with contractual relation; this century it has been apparent in controversies over the enforcement of charterparty contracts and contractual licences against third parties. See H Lauchterpacht, “Contracts to Breach a Contract” (1936) 52 LQR 494. 39
188 Redistributive Proprietary Remedies
III . DEDUCING OWNERSHIP FROM OBLIGATION : AG FOR HONG KONG V . REID
1. The Principle in Reid After holding a series of positions of considerable responsibility in Hong Kong’s legal administration, Warwick Reid43 was convicted under that country’s Prevention of Bribery Ordinance and ordered to make restitution of HK$ 12.4 million. Reid had apparently acquired three properties in New Zealand with the proceeds of bribes. The Attorney General argued that, because they were purchased with the proceeds of a breach of fiduciary duty, Reid held these properties on trust for the Hong Kong Government.44 Both the New Zealand High Court and Court of Appeal, following Lister v. Stubbs, found that Reid’s obligation to make restitution was purely personal.45 However, the Privy Council upheld the Hong Kong Government’s appeal.46 The Privy Council decision, delivered by Lord Templeman, was based primarily on reasoning previously developed extra-judicially by Sir Peter Millett, then a justice of the High Court.47 The obligation of fiduciaries to account to their principals for any unauthorised profit made from their position is well established. However, in order to determine that the liability of the fiduciary was proprietary in nature, the Privy Council in Reid employed two legal fictions. First it argued that “false fiduciaries” were estopped from denying that they received the bribe for the benefit of their principals. To this was applied the equitable maxim “equity considers done that which ought to have been done”. From this, it was argued, it followed that: “As soon as the bribe was received . . . the false fiduciary held the bribe on a constructive trust for the person injured”.48
2. The Interests of Creditors Both Sir Peter Millett’s article and Lord Templeman’s judgment in Reid largely denied that the interests of third party creditors were relevant in determining the availability of proprietary relief. Millett, when arguing against limiting proprietary claims to cases of unjust enrichment by subtraction, commented:
43
[1994] 1 AC 324. The constructive trust argument was made in this case because the Hong Kong government sought to demonstrate that it had an interest in property sufficient to enable it to lodge caveats against dealing on the titles of the real estate prior to a full civil trial on the matter. 45 [1992] 2 NZLR 385. See C Rotherham, “The Redistributive Constructive Trust: Confounding Ownership with Obligation?” (1992) 5 Canta. LR 84. 46 [1994] 1 AC 324. 47 Millett, supra n. 11. 48 [1994] 1 AC 324 at 331. This passage may of course be criticised for its used of the expression “injured”. Liability follows from the breach of duty; proof of injury is not necessary or relevant. 44
Proprietary Relief for Enrichment by Wrongs 189 [I]t is illogical. If proof of loss is necessary at all, it should be necessary to found liability [and not to determine the availability of remedies]. The fact that it is unnecessary shows that the law’s purpose is not compensatory. Moreover, the distinction makes the nature of the remedy depend on the consequences to the plaintiff, whereas the usual objection to the proprietary remedy is based upon its effect on the creditors of the defendant.49
Millett’s argument is misconceived. First, a conclusion that relief should be available to reverse enrichment by wrongs in no way logically implies that the relief granted should be proprietary. The questions of liability and the type of remedy available can properly be treated as distinct.50 Thus, proprietary recovery is generally not available in contract or tort. It is no more illogical to limit constructive trust relief to particular restitution claims than it is to restrict, for example, the availability of specific performance to particular contracts. Secondly, the argument that it is improper to determine the availability of proprietary relief according to the nature of the plaintiff’s claim is equally mistaken. Where priority in insolvency is concerned, the key issue is the relative merits of the claim of the plaintiff compared with those of the defendant’s creditors. It follows that the strength of the plaintiff’s claim will always be a relevant consideration. In Reid, Lord Templeman did not even attempt to counter the policy arguments against proprietary relief. Instead he concluded that: The unsecured creditors cannot be in a better position than their debtor. The authorities show that the property acquired by a trustee . . . belong[s] in equity to the cestui que trust and not to the trustee personally whether he is solvent or insolvent.51
The assertion that the authorities established that the respondent had a proprietary interest is unconvincing. The New Zealand Court of Appeal had also used the argument of “settled authority” to justify their refusal to investigate issues of policy, but had relied on a different line of precedent in denying proprietary relief. In any event, the Privy Council is able to reconsider the law in a particular area. In this instance, no explanation was given for its disinclination to do so. The traditional justification of an institutionalised reliance on the doctrine in question could carry little weight here.52 The law was too unclear to induce reliance and, in any event, parties do not plan their affairs around breaches of fiduciary relationships.
49
Millett, supra n. 11 at 14. J Coleman, “Corrective Justice and Wrongful Gain” (1982) 11 J Legal Stud. 421 at 425. 51 [1994] 1 AC 324 at 331. Millett favoured a similar view, concluding that “[e]ither the plaintiff is entitled to a proprietary remedy or he is not. If he is then the insolvency of the defendant is not a sufficient reason for withholding it from him; the defendant’s creditors should be in no better position than the defendant himself”: Millett, supra n. 11 at 10. 52 See, e.g., the discussion of the development of the doctrine of stare decisis in the House of Lords since the 1967 practice statement recognising the Court’s right to overturn its own decisions in A Paterson, The Law Lords (London, Macmillan, 1982). 50
190 Redistributive Proprietary Remedies 3. Divergence between Formal Principle and Policy Concerns (a) The Principle in Reid as Over-inclusive In Reid, the Privy Council concluded that a constructive trust arises the moment a profit is made in breach of a fiduciary duty. Logically, this entails certain dubious consequences. Consider a situation where A employs B who is given a secret commission in gold bullion by C. B sells the bullion to D, who is aware of the circumstances in which it was obtained. According to Reid, the moment B receives the bullion he holds it on trust for A. Under normal tracing principles, A could argue that B has the traceable proceeds of trust property and elect to follow her equitable title in the bullion into the proceeds of the sale. This election requires that A give up equitable ownership of the bullion.53 Reid, however, suggests that A has a more profitable alternative. A, by relying on the rule in Reid, may focus on the fact that, in selling the bullion, B was (once again) attempting to profit from trust property. For, according to Reid, the moment he receives them, B holds the proceeds of the sale of bullion on trust for A. This property interest arises automatically without any need for A to exercise any power of election. The fact that D is also holding trust property (the bullion) then becomes a separate issue. The result is that A does not have to elect between suing B and D in enforcing title; both are liable as constructive trustees. Yet, A’s case for being granted proprietary relief against both parties is very weak. She is regarded as suffering a further wrong to her property (profits derived from the bullion) in addition to a subtraction (the bullion taken by D) only because of the rule in Reid which dictated that the bullion became trust property the moment it was handed over. To make D liable as a constructive trustee of the bullion would be very harsh on any creditors that D might have. D’s estate can have been swelled by the transaction only to the extent that D did not pay B the full market value for the bullion. Given that the only relationship A ever had with the bullion was jurally constructed and arose without regard for the parties’ intentions, this situation does not present a compelling case for relief. It is unlikely that the Privy Council wished to provide for this consequence. However, the internal logic of the doctrine employed appears to demand it. (b) The Principle as Under-inclusive Reid threatens to breathe new life into the view that pre-existing fiduciary relationships are a necessary pre-condition for proprietary relief.54 Lord Templeman’s analysis suggests that a fiduciary relationship may now be a prerequisite for the award of a constructive trust in enrichment by wrongs cases. The property right in Reid arose only as the result of the intricate set of presumptions and maxims that were said to follow from the nature of the parties’ fiduciary relationship. 53 54
See supra, ch. 5.I.3(a). See supra, ch. 1.III.2.
Proprietary Relief for Enrichment by Wrongs 191 Accordingly, actions to recover profits made from breaches of duties arising at common law, under statute or from non-fiduciary equitable obligations are likely to be restricted to personal claims. This proved to be the case in the subsequent Court of Appeal decision in Halifax Building Society v. Thomas.55 The plaintiff was a building society, which had been defrauded into giving a loan secured by a mortgage to enable the rogue to purchase a flat. After the borrower defaulted Halifax took possession of the property and sold it. It then sought to retain not only the sums owed under the loan but the surplus of the mortgagee sale on the basis that because these represented the profits of a wrong they belonged beneficially to the building society. The Court rejected the claim on the basis that Halifax had affirmed the mortgage.56 In addition, however, it distinguished Reid on the basis that the rogue in the case before it was not a fiduciary of the building society.57 Peter Gibson LJ made it apparent how difficult he thought it was to justify the provision of proprietary relief in this context by endorsing the remark made by Auld J in the court below that “in many instances to strip a wrongdoer of his property will serve only to deprive other creditors”.58 The fiduciary relationship precondition produces a doctrine that is incapable of giving full effect to the policy arguments that were advanced to justify the provision of proprietary relief in Reid. If it is true that third party creditors have no legitimate interest in the proceeds of wrongs, and that it is more equitable that the plaintiff should have priority, then it is difficult to understand why proprietary relief should not be available for all wrongs.
4. The Premises and Methodology Underlying Reid (a) The Evidential Presumption Courts seldom construct legal institutions on the basis of perceived societal needs alone.59 Rather, common law development is heavily influenced by the extent to which jurists are able to manipulate existing legal concepts to achieve the result for which they are striving.60 In so doing, jurists seek what Lon Fuller termed 55
[1996] 1 Ch. 217. See P Watts, “Halifax Building Society v. Thomas” (1996) LQR 219. Surprisingly, it was accepted that the building society could have succeeded had it rescinded the mortgage and claimed the surplus of the sale as the proceeds of the money loaned. See supra, ch. 6.II.3(a)(iv). 57 Ibid. at 229 per Peter Gibson LJ. 58 Ibid. at 234. 59 See generally A Watson, Society and Legal Change (Edinburgh, Scottish Academic Press, 1977); and “Legal Change: Sources of Law and Legal Culture” in A Watson (ed.), Legal Origins and Legal Change (London, Hambledon, 1991) 69 at 82–94. 60 Thus, Milsom observes that change in law is brought about largely through reclassification. “The life of the law” he comments, “has been in the abuse of its elementary ideas. If the rules of property give what now seems an unjust answer, try obligation; and equity has proved that from the materials of obligation you can counterfeit the phenomena of property. If the rules of contract give what now seems an unjust answer, try tort”; SFC Milsom, The Historical Foundations of the Common Law (2nd edn., London, Butterworths, 1981) at 6. 56
192 Redistributive Proprietary Remedies “doctrinal bridges” to bring an established legal institution to bear on a perceived social problem to which that institution has not previously been applied.61 By developing the law through existing conceptual apparatus, what is sought is a connection with the past that belies the originality of the outcome. Thus, in Reid, proprietary relief was justified in terms of that well-established legal institution, the fiduciary relationship, and an equitable maxim of some antiquity.62 According to Kekewich J in Re Smith,63 another bribes case, “the Court in cases of this kind does not proceed on the basis of punishment, but treats the trustee as having received such a bribe not on his own behalf, but on behalf of and as agent for the trust estate”.64 Yet is this presumption anything other than a rather stilted way of describing a duty coupled with a liability for any breach of that duty? The presumption was developed at the turn of the century, at a time when the conceptual foundations of restitution had yet to be elaborated in English legal thought and unjust enrichment was not understood as providing a principled basis for relief.65 The courts employed devices of the type expounded by Kekewich J as “doctrinal bridges” to allow them to utilise concepts they readily understood, such as trusteeship and agency. A similar device employed in this context was a presumption that the principal had been damaged to the amount of the bribe, so that the action could be framed as a compensatory one.66 Now that restitution has gained acceptance as a branch of the private law in its own right,67 we can afford to be wary of such tools. Evidential presumptions and related devices disguise the foundation of punishment and deterrence that underlies the imposition of liability in this context. Moreover, they divert attention from key issues of justice such as the interests of third party creditors. It was only by relying on an obfuscatory analysis of the basis for relief that the Privy Council in Reid was able to reason that a constructive trust arose automatically. Where the basis of liability in bribery cases is described more realistically, the foundation for the automatic proprietary interest disappears. This demonstrates that the evidential presumption relied upon by Millett and the Privy Council is a slight and opportunistic basis for justifying proprietary relief.
61 LL Fuller , “American Legal Realism” (1934) 82 U Penn. L Rev. 429 at 441–2. See also K Llewellyn, “Through Contract to Title and a Bit Beyond” (1938) 15 NYULQR 159 at 181. 62 This tendency is apparent in Millett’s article. While Millett did advance normative justifications for the imposition of proprietary relief, he assumed that there had to be fundamental legal principles that determined the outcome. Thus after completing his policy analysis he commented: “It would, however, be deeply unsatisfying if the availability of a proprietary remedy could be explained only on the grounds of policy”. See Millett, supra n. 11 at 17. As already mentioned, Lindley LJ’s judgment in Lister v. Stubbs was premised on the same presumption; see supra II. 4. 63 [1906] 1 Ch. 71. 64 Ibid. at 77. 65 Atiyah, supra n. 37 at 455; Stevens, supra n. 8 at 286. 66 See, e.g., Slade J in Industries & General Mortgage Co. Ltd. v. Lewis [1949] 2 All ER 573 at 578. 67 See the House of Lords’ acceptance of unjust enrichment as a general principle in Lipkin Gorman v. Karpnale Ltd. [1991] 2 AC 548.
Proprietary Relief for Enrichment by Wrongs 193 (b) “Equity Regards as Done that Which Ought to Have Been Done” Lon Fuller examined the maxim “equity regards as done that which ought to have been done” in his classic study of legal fictions. He expressed some relief that “[h]appily such ‘short dark maxims’ are not so common as they once were”.68 To Fuller, fictions of this type were the tools of “undeveloped systems of law”.69 Writing in the United States in 1930, Fuller assumed that American legal culture had attained a state of sophistication such that it no longer needed to resort to such primitive devices. He regarded such expressions as obscure and inadequate attempts to describe legal reality and as without real explanatory value. As he put it, “For particulars I must look elsewhere.”70 Fuller’s view is borne out in Reid. In developing the analysis that Lord Templeman employed in Reid, Sir Peter Millett argued that the application of the maxim in the context of the remedy of specific performance provided a basis for its use in the context of bribes and secret commissions. However, Millett refers to specific performance being available “provided there is no bar” and “in appropriate circumstances”.71 This demonstrates that liability cannot be deduced directly from the maxim. The questions of what may amount to a “bar” to specific performance and what are “appropriate circumstances” for granting relief must be decided in order to determine the remedy’s availability. This must be true for constructive trusts that are said to result from the application of the maxim as much as it is for specific performance. One consideration that should be taken into account in determining whether relief is appropriate is potential prejudice to third parties. In considering the application of the maxim “equity regards as done that which ought to be done”, the Privy Council should have had regard to the maxim “no fiction shall be allowed to work an injury”.72 The Privy Council’s approach is at odds with the historical background of equitable maxims. The substantive law was not deduced from equitable maxims. To the contrary, equitable maxims were derived from the law by a process of induction in the eighteenth century.73 These maxims are, at best, broad statements of principle, too indeterminate to be applied to particular factual situations to dictate specific legal outcomes. The particular maxim at issue in this context is so vague that it can be understood only against the background of the doctrines said to exemplify it. Generally it has been used to explain a group of doctrines that 68
LL Fuller, Legal Fictions (Stanford, Cal., Stanford University Press, 1967) at 34. Indeed Fuller, in seeking a comparison for the fiction in question, comments: “For example in the jurisprudential language of a tribe of east Africa, the statement ‘woman is a hyena’ is intended as an expression of the notion of woman’s legal incapacity”: Ibid. Maine had earlier expressed similar sentiments. In his view, “Fictions . . . have had their day . . . It is unworthy of us to effect an admittedly beneficial object by so rude a device”. See H Maine, Ancient Law (London, Dent and Dutton, 1861) at 27. 70 Ibid. 71 Millett, supra n. 11 at 19 and 20. 72 WH Blackstone, Commentaries on the Laws of England (Chicago, Ill., Chicago University Press, 1979) iii at 43. 73 RP Meagher, WMC Gummow and JRF Lehane, Equity: Doctrines and Remedies (3rd edn., London, Butterworths, 1992) at 71. 69
194 Redistributive Proprietary Remedies provide for the legal recognition and enforcement of consensual transactions, despite some want of formality or the non-occurrence of a contemplated event.74 In Reid, to support the extension of the maxim to impose a liability to which the defendant had never consented, a stronger justification was needed than that offered. (c) Obscuring Interference with Property Rights Courts are often tempted to reason from formal premises when they would rather not deal with the difficulties that would arise from an open exploration of the particular normative issues raised by the dispute with which they are dealing. As we have seen, this is especially likely to be so when a particular outcome that is regarded as merited conflicts with a premise which is fundamental to the legal vision accepted (explicitly or tacitly) by a legal culture.75 This accounts for the abstruse quality of much of the discourse found on the question of the availability of proprietary relief over the profits of wrongdoing. The award of a constructive trust in this context puts into question the notion that the courts do not create new property rights. As Paul Finn has observed extra-judicially, the reasoning adopted in Reid was designed “to maintain some form of harmony with property law concepts”.76 Lord Templeman constructed a doctrine that suppresses the reality that the outcome of that case is inconsistent with the orthodox paradigm of property.77 By the combined operation of an evidential presumption and an equitable maxim, the profits earned from the breach of a fiduciary duty automatically become the property of the principal, without any apparent judicial intervention and supposedly consistently with the intention of the parties.78 In this way, even though its position has 74 RP Meagher, WMC Gummow and JRF Lehane, Equity: Doctrines and Remedies (3rd edn., London, Butterworths, 1992) at 94. 75 Fuller, supra, n. 68 at 51–3. See supra, ch. 2.V. 76 P Finn, “Equitable Doctrine and Discretion in Remedies” in W Cornish, R Nolan, J O’Sullivan and G Virgo (eds.), Restitution: Past, Present and Future: Essays in Honour of Gareth Jones (Oxford, Hart Publishing, 1998) 251 at 263. 77 In Reid the Privy Council carefully avoided any discussion of the argument that, by ignoring the distinction between ownership and obligation, it was interfering with property rights. Lord Templeman’s judgment described Lindley LJ’s argument in the following terms: “It is said that if the fiduciary is in equity a debtor to the person injured, he cannot also be a trustee of the bribe . . .”. See AG for Hong Kong v. Reid [1994] 1 AC 324 at 331. This is a misleading characterisation of the principle expounded in Lister v. Stubbs suggesting that it was in substance merely an objection to concurrent liability. Further evidence of judicial reluctance to face the issue can be found in the House of Lords’ decision in Lord Napier & Ettrick v. Hunter [1993] AC 713. See infra, ch. 12.I.2. 78 More recently Grantham and Rickett have argued that the trust in Reid reflected the intention of the parties as a result of Warwick Reid’s acceptance of fiduciary obligations. See R Grantham and C Rickett, Enrichment and Restitution in New Zealand (Oxford, Hart Publishing, 2000) 409. To suggest that those in fiduciary relationships actually accept the duties imposed on them is rather fanciful. At most the matter can be explained in terms of assumption of risk. However, it would first need to be explained why these risks should include the imposition of a constructive trust. Ultimately, Grantham and Rickett’s characterisation of the matter in consensual terms reflects the anxiety engendered by the spectre of the redistribution of property.
Proprietary Relief for Enrichment by Wrongs 195 shifted, the supposedly fundamental boundary between ownership and obligation is apparently maintained.
IV . PROPRIETARY RELIEF FOR ENRICHMENT BY WRONGS IN NORTH AMERICAN LEGAL THOUGHT
In the aftermath of legal realism, American jurists are unlikely to be concerned with the notion that, in awarding proprietary relief in this context, they may be “confounding ownership and obligation”.79 Given the understanding that property is a divisible “bundle of rights”,80 a sharp distinction between ownership and obligation hardly remains tenable. And, indeed, American courts have long been prepared to grant proprietary relief in this context. The difference between the formalist and post-realist approaches is nowhere better illustrated than by a comparison of the judgments of the Canadian Supreme Court in Lac Minerals v. Corona Ltd.81 and that of the Privy Council in Attorney General for Hong Kong v. Reid. The Court in Lac Minerals was faced by the same problem that confronted the Privy Council in Reid: awarding proprietary relief would have been inconsistent with the notion that the judiciary cannot create property rights. In contrast to the convoluted formalism of Lord Templeman’s judgment in Reid, in Lac Minerals La Forest J confronted sacred notions about property directly and rejected them. He indicated, first, that the courts may create property rights as well as enforce them82; and that, secondly, proprietary remedies should be given only “if there is a reason to grant the plaintiff the additional rights that flow from a recognition of property”.83 More recently, the disquiet that has grown in North America regarding the consequences of proprietary relief has been expressed perhaps most strongly and unanimously with regard to the use of the constructive trust over the profits of wrongdoing. Most commentators reflecting upon the matter subsequent to the Restatement of Restitution have concluded that, in this context, the constructive trust should “abate” in bankruptcy.84
79 The distinction between obligation and ownership is not lost on the American judiciary. In relation to federal legislation providing sanctions against mail fraud, courts have refused to convict in circumstances where defendants have profited from abuses of office or breaches of other duties. The view has been taken that the legislation was designed to deal with taking of property and did not extend to situations where profits were made by violating “intangible rights”. See, e.g., McNally v. US 483 US 350 (1987); US v. Ochs 842 F 2d 515 (1st Cir., 1988). 80 See supra, ch. 3.I. 81 (1989) 61 DLR 14. 82 Ibid. at 50. 83 Ibid. at 51. 84 Palmer, Law of Restitution i, § 2.14 at 183; Sherwin, supra n. 3 at 346; D Paciocco, “The Remedial Constructive Trust: A Principled Basis for Priorities over Creditors” (1989) 68 Can. Bar Rev. 333 at 350.
196 Redistributive Proprietary Remedies
V . CONCLUSION : THE LIMITS AND PRICE OF FORMALISM
Assumptions about property developed in an era that gave modern private law much of its structure remain with us. The decisions in Lister v. Stubbs and Attorney General for Hong Kong v. Reid illustrate the different ways in which those assumptions can influence the form and substance of our law. The decision in Lister v. Stubbs provides an example of absolutist notions of property applied to prevent judicial redistribution of proprietary rights. Ultimately, such reasoning is unconvincing. Any determination of the extent of property rights is a decision about how and in whose favour the courts will use their coercive power, and, as such, demands justification. In any event, the reality is that in many areas the law corresponds with absolutist notions of property in form only. This is an indication that these assumptions are not as intuitively satisfying as they once were and suggests it is time that they were openly reconsidered. Unfortunately this did not happen in Reid. Reid provides a typical example of an effort to evade the rigours of the orthodox paradigm of property without bringing its validity into question. The wisdom that the “progeny” of equity “must be legitimate—by precedent out of principle”85 leads to efforts to rationalise outcomes as the consequence of exercises in deduction from formal premises found in the existing law. The danger is that, in being hidden from view, the normative concerns that motivate the court are not fully examined. The dangers of formalism become even more apparent in the context of the subsequent application and development of these new doctrines manufactured from old notions. A particular doctrine may have been reasonably well tailored to meet the normative concerns underlying the area in which it was developed. Subsequently, its extension to a new area is often inspired by the promise of providing justice in a specific situation before the court. However, these borrowed concepts have their own logic that is liable to impose constraints that correlate imperfectly with the policy concerns that arise in the new contexts into which they are transplanted.86 This tendency for technical legal discourse to lose connection with underlying normative considerations has been described as “the dark side of legal positivism”.87 The result is dysfunctional law. This phenomenon is illustrated by the use of the fiduciary concept in Reid to provide a justification that ultimately dictates results that are inconsistent with any coherent policy rationale. Reid demonstrates that, adopting a formalistic approach, the judiciary can continue to, in the words of Milsom, “counterfeit the phenomena of property” from “the materials of obligation”.88 But at what cost? 85
Cowcher v. Cowcher [1972] 1 WLR 425 at 430 per Bagnall J. A Watson, “Legal Change: Sources of Law and Legal Culture” in Watson, supra n. 59, at 82; SFC Milsom, “Reason and the Development of the Common Law” (1965) 81 LQR 491 at 498; Stevens, supra n. 8 at 277–8. 87 Ibid. at 278. 88 See Milsom, supra n. 60. 86
10
The Division of Assets on the Breakdown of Intimate Relationships: the Limits of Private Ordering the common law world, courts have struggled with claims by those who, in the course of a relationship with another, have made substantial contributions to property legally owned by the other party. Do such contributions give rise to any rights, and, if so, do they generate any proprietary entitlement? Judicial treatment of these issues has taken place in the shadow of what has been termed “the private ordering paradigm”1: a complex of norms reflecting an absolutist conception of property and notions of freedom of contract.2 In particular, two axioms have shaped much of the debate in this area: first, “that property rights arise only if there has been an actual intention expressed or implied to create them”3; and, secondly, that “a person is not required to become an obligor unless he or she so desires”.4 In the face of this vision of the private law, the judiciary has struggled to formulate an adequate basis for the provision of relief. This chapter argues that a re-examination of the normative foundations of the private ordering paradigm can explain why it should not prevail in the context of intimate relationships.
T
HROUGHOUT
I . INTRODUCTION
Section II examines the diverse responses to this issue developed in different common law jurisdictions. On the one hand, English appellate courts have taken the essentially libertarian stance that there can be no transfer of property without the 1 M Trebilcock, The Limits of Freedom of Contract (Cambridge, Mass., Harvard University Press, 1993) 1–22. 2 For a historical account of these norms and the ideology from which they are derived, see P Atiyah, The Rise and Fall of Freedom of Contract (Oxford, Clarendon Press, 1979). Atiyah notes that freedom of contract and absolutist notions of property are essentially two sides of the same coin: ibid. at 85. For an analysis of the premises of this paradigm see C Rotherham, “Conceptions of Property in Common Law Discourse” [1998] Legal Studies 41. 3 Gillies v. Keogh [1989] 2 NZLR 327 at 340 per Richardson J. See infra n. 11 and accompanying text for the views expressed by Lords Morris, Hodson and Upjohn in Gissing v. Gissing [1971] AC 886. See also Burns v. Burns [1984] 1 All ER 244 at 255 per Fox LJ. 4 Gillies v. Keogh [1989] 2 NZLR 327 at 347 per Richardson J. See also N Simmonds “The Possibility of Private Law” in J Tasioulas (ed.), Law, Values and Social Practices (Aldershot, Dartmouth, 1997) 129.
198 Redistributive Proprietary Remedies owner’s consent. Elsewhere, particularly in Canada, a rather less restrictive standard has been favoured that does not require some act of will on the part of the owner, but instead focuses on the plaintiff’s expectations. An even more significant divergence from the private ordering paradigm has seen the development of norms that do not make relief dependent on the parties’ actual states of mind at the time of the contributions in question. Thus, the judiciary in Australia and in some jurisdictions in the United States determines entitlement according to norms used to regulate the distribution of property on the breakdown of commercial partnerships and joint ventures. These norms do not require evidence that plaintiffs expected a proprietary interest in return for their contributions. Finally, in an approach still further removed from traditional norms, courts, particularly in New Zealand, have distributed proprietary entitlements according to standards that are said to reflect community understandings of fairness. Section III observes that attempts to develop a basis for relief have been stifled by the power of the understanding that it would be unprincipled for the courts to impose obligations or, even more so, to readjust proprietary entitlements without consent. Where this attitude has not caused relief to be denied altogether, it has nonetheless had a marked effect. Courts have been encouraged to recharacterise informal domestic arrangements in the terminology of market transactions in order to bring them within conventional doctrines. They have also tended to water down the requirements of those doctrines and to exercise little rigour in their application. These tendencies threaten to debase doctrines that have functioned well enough in other contexts. Moreover, as long as judicial intervention is justified on the basis of principles that are manifestly ill-suited to providing relief in this area, there will be confusion over the basis for and the proper measure of relief. The development of a satisfactory normative foundation for relief is a prerequisite for the formulation of legal principles that can describe, direct and justify judicial action in this area. In particular, if relief is to be given which is inconsistent with the axiomatic premises that obligations are not to be imposed involuntarily and that private property is immune from non-consensual redistribution, this normative foundation should be capable of explaining why this should be so. Section IV notes that the private ordering paradigm does not prevail in all areas of social life. The informal social norms that regulate intimate relationships tend to focus on need and reciprocity, and generally displace standards that emphasise private ordering. Such communitarian norms are also found in older common law doctrines and in contemporary legislation. Today, however, while courts in some jurisdictions suggest that property and contract have little relevance in this area, they are seldom prepared to develop legal standards that explicitly reflect the more communitarian norms so prevalent in the regulation of intimate relations our society. Redistributive norms allocating the parties’ entitlement on the breakdown of intimate relationships can be justified. There is nothing natural about private property; it is a social institution with its own set of justifications. In situations where the factual premises upon which these justifications depend are not present, these
The Division of Property on the Breakdown of Intimate Relationships 199 justifications lose their power and exceptions may legitimately be made. The private ordering paradigm rests on certain assumptions about human nature: we are assumed to be autonomous individuals who act rationally to safeguard our selfinterest. Empirically, it seems that this premise does not generally hold in the context of intimate relationships. In such a setting, by and large, we do not act as autonomous individuals; for we do not generally draw a sharp distinction between our own welfare and that of our partners. Nor are we rational; for we fail to calculate judiciously the risks involved in “investing” in relationships. As a consequence, there is little reason to believe that we can rely on private ordering to provide an efficient or just mechanism for rewarding contribution to relationships in this context. In addition, it would be perverse to insist that parties should contract to determine their separate legal rights; for, on a normative level, we do not believe that partners in intimate relationships should be rational maximisers of their self-interest. Such a selfserving attitude is contrary to contemporary western ideals of intimacy. Finally, section V considers why the courts have been prepared to give proprietary rather than personal relief in this area. Much may be explained by the intuition that rights of ownership are likely to have a special significance for plaintiffs in this context. Nonetheless, there is cause for concern at the courts’ tendency to shroud their analysis in a transcendental rhetoric of property that has precluded a rational consideration of the consequences of granting proprietary relief. In particular, attention ought to be paid to the dangers that the recognition of property rights in this sphere poses for third parties. First, it is difficult to justify giving a plaintiff who claims an equitable proprietary interest priority over the defendant’s general creditors. Secondly, we must consider the effects such interests may have for third party purchasers, something that will depend to a large degree on the extent to which the registration regime favoured in a particular jurisdiction provides that purchasers’ rights prevail over unregistered interests.
II . FROM CONTRACT TO STATUS : JUSTIFICATIONS FOR JUDICIAL INTERVENTION
1. “The Cold Legal Question”: The Requirement of an Agreement or Promise In England, in particular, the courts have continued to abide by private-ordering norms. According to received wisdom, a plaintiff seeking to establish a right in property legally owned by another can succeed in one of two ways. A contribution to the acquisition of a home leads, in the absence of evidence to the contrary, to the inference that, rather than advancing the purchase money gratuitously, the plaintiff intended to have a beneficial interest in the assets that it was to be used to acquire. The expectation inferred in this way is protected by means of a resulting trust.5 5 Dyer v. Dyer (1788) 2 Cox Eq. Cas. 92; Pettitt v. Pettitt [1970] AC 777 at 794 per Lord Reid, and 815 per Lord Upjohn; Gissing v. Gissing [1971] AC 886 at 902 per Lord Pearson. See J Mee, The Property Rights of Cohabitees: An Analysis of Equity’s Response in Five Common Law Jurisdictions (Oxford, Hart Publishing, 1999) 35.
200 Redistributive Proprietary Remedies While the judicial approach to inferring intent is highly artificial, on this analysis, the courts are enforcing the subsisting property rights of the plaintiff. Alternatively, plaintiffs can claim relief where they can prove either that the parties had agreed that the ownership of the home was to be shared or that the defendant had made a representation to the same effect. Where plaintiffs have acted to their detriment in reliance on such an agreement or representation, the courts will declare a constructive trust or grant other relief to prevent defendants from unconscionably asserting their legal rights.6 Thus, in addition to detrimental reliance, what is required here is evidence that the owner expressed an intention to confer proprietary rights on another.7 The modern English approach was established by the House of Lords in the early 1970s in Pettitt v. Pettitt 8 and Gissing v. Gissing 9 and substantially reasserted two decades later in Lloyds Bank plc v. Rosset.10 This stance was informed by the belief voiced most clearly by Lord Morris in Gissing, that “[a]ny power to alter ownership must be found in statutory enactment”.11 This understanding of the division between the role of the judiciary and that of the legislature was also manifest in the opinion of Lord Dilhorne VC in Gissing. In his opinion, if the divorce courts are “not armed with adequate powers to make provision for the wife on the breakdown of marriage, that is a matter for the legislature”.12 According to this view, unless Parliament directs otherwise, courts redistribute property only where the owner has consented to it. In the words of Lord Dilhorne VC: Determination of the cold legal question is not in my opinion to be affected by the conduct of the parties during the marriage save and in so far as that may indicate an intention as to ownership.13 6 Pettitt v. Pettitt [1970] AC 777; Lloyds Bank v. Rosset [1990] AC 107 at 118–19 per Lord Bridge. These decisions fail to clarify the relationship of the common intention constructive trust and proprietary estoppel. For different academic views on this relationship, see, e.g., P Ferguson, “Constructive Trusts—A Note of Caution” (1993) 109 LQR 114; G Battersby, “Contractual and Estoppel Licences as Proprietary Interests in Land” [1991] Conv. 36. For accounts of the dubious provenance of the common intention constructive trust see Mee supra n. 5 at 115–75; N Glover and P Todd, “The Myth of Common Intention” [1996] LS 235. 7 Indeed, one view is that these cases involve nothing more than the enforcement of agreements that lack the formalities that are normally required for the transfer of interests in land: see S Moriarty, “Licences and Land Law” (1984) 100 LQR 376. 8 [1970] AC 777. 9 [1971] AC 886. 10 [1990] AC 107. There is however, an important difference in the analysis of Lord Bridge. Previously, a contribution to the acquisition of the home served as the basis for inferring the contributor’s intention not to benefit the other party, and thus establishing a purchase-money resulting trust. In contrast, Lord Bridge treated such a contribution as giving rise to the inference of a common intention and so establishing a constructive trust. This approach was taken further in the Court of Appeal decision of Midland Bank plc v. Cooke [1995] 4 All ER 562. There, Waite LJ took the view that, once a common intention was inferred from a contribution to the acquisition of the home, any additional contributions to the relationship could be taken into account in determining the plaintiff’s share: ibid. at 574–6. For a further indication of the relative irrelevance of the resulting trust today see Drake v. Whipp [1996] 1 FLR 826. 11 [1971] AC 886 at 898. For similar remarks see Pettitt v. Pettitt [1970] AC 777 at 805 per Lord Morris, 811 per Lord Hodson, and 817 per Lord Upjohn. 12 Ibid. at 901. 13 Ibid.
The Division of Property on the Breakdown of Intimate Relationships 201 That the requirement of evidence of such an intention presents a formidable barrier in the way of giving relief was made apparent in Lloyds Bank plc v. Rosset.14 There, the plaintiff had been in the process of restoring a house as a joint venture, in order for it to be used as the family home. Lord Bridge concluded that the understanding that the parties would “share the practical benefits of occupying the matrimonial home whoever owns it” was “something quite distinct from sharing the beneficial interest in the property asset which the matrimonial home represents”.15 A similar view has been taken by the courts in some American states. Thus, in Morone v. Morone,16 the New York Court of Appeals indicated that, in order to obtain a remedy for services contributed in the course of the parties’ relationship, a plaintiff would need to point to an agreement. Moreover, it suggested that where there was no express agreement, it was improper to infer a common intention from the conduct of the parties. In the view of Meyer J: For courts to attempt through hindsight to sort out the intentions of the parties and affix jural significance to conduct carried out within an essentially private and generally noncontractual relationship runs too great a risk of error.17
The rigid approach consistently favoured by the House of Lords was subsequently undermined by the Court of Appeal in Midland Bank v. Cooke.18 Waite LJ considered whether the fact that Mrs Cooke had testified that she had not considered the question of the parties’ proprietary entitlement prevented the court finding a constructive trust. He concluded that it did not. In his view, it would be unreasonable to hold that such plaintiffs “were beyond the pale of equity’s assistance in formulating a fair presumed basis for the sharing of beneficial title, simply because they had been honest enough to admit that they never gave ownership a thought or reached any agreement about it”.19 This is difficult to accept. The basis for relief reiterated by the Lord Bridge in Lloyds Bank v. Rosset 20 is based on a presumption of what the parties intended. His Lordship rejected a more generous approach precisely because “[s]pouses living in amity will not normally think it necessary to formulate or define their respective interests in property in any precise way”.21 The view expressed in Midland Bank v. Cooke that the presumption of intention arising in this context cannot be rebutted by evidence that the parties formed no such intention indicates that ascription of intention in this context is entirely fictional. If this were so, the restrictive approach taken by the English courts in this area would not only be unjust, but unprincipled. 14 [1991] 1 AC 107. The case involved a wife’s efforts, not so much to be awarded relief at the expense of her husband (against whom she could have relied on the protection offered by the Matrimonial Proceedings and Property Act 1970 and the Matrimonial Causes Act 1973), but to establish a pre-existing proprietary right that might have allowed her to resist the claim of a mortgagee. 15 Ibid. at 128. 16 413 NE 2d 1154 (NY, 1980). 17 Ibid. at 1157. 18 [1995] 4 All ER 562. 19 Ibid. at 575. 20 [1991] 1 AC 107. 21 Ibid. at 127–8.
202 Redistributive Proprietary Remedies 2. A Shift Away from the Intention of the Legal Owner: Restitution and Estoppel (a) Shifting the Focus to the Plaintiff ’s Expectations In contrast to the English approach, other jurisdictions have developed doctrines that allow plaintiffs to succeed on something less than proof that owners intended to confer upon them an interest in the property in question. In these jurisdictions, the courts have formulated tests that require merely that plaintiffs’ contributions were motivated by a reasonable expectation that they would result in a proprietary interest. One example is the doctrine that the Canadian Supreme Court introduced in Pettkus v. Becker,22 which it characterised as providing restitutionary relief for unjust enrichment. In considering the plaintiff’s claim for relief on the basis of very significant contributions to property legally owned by the defendant, the Court faced difficulties in assessing the parties’ actual states of mind at the time of the contributions. While the Court accepted the plaintiff’s assertion that her contributions were made in the expectation of being entitled to an interest in the property, it was difficult to demonstrate that the defendant had been aware of this understanding. Thus, a key issue was whether the defendant could be liable, even if he had not been aware of the assumptions that motivated the plaintiff’s contributions. In holding that the defendant was liable in these circumstances, Dickson J concluded that: where one person in a relationship tantamount to spousal prejudices herself in the reasonable expectation of receiving an interest in property and the other person in the relationship freely accepts benefits conferred by the first person in circumstances where he knows or ought to have known of that reasonable expectation, it would be unjust to allow the recipient of the benefit to obtain it.23
Thus, plaintiffs are not required to prove that defendants had actual knowledge. Dickson J apparently thought it enough that the defendant was at fault in failing to perceive and give effect to the plaintiff’s expectations. Since Pettkus v. Becker, the use of unjust enrichment as a justification for relief in this context has also found some support in the Australian High Court.24 More recently, in a similar development, some members of the New Zealand Court of Appeal have indicated that a broad doctrine of estoppel should provide the basis for judicial intervention in this area.25 As with the Canadian approach, and in contrast to orthodox estoppel doctrine, it seems that all that is required is that defendants ought to have known of plaintiffs’ expectations.26 22
(1980) 117 DLR (3d) 251. Ibid. at 274 (emphasis added). 24 Baumgartner v. Baumgartner (1987) 164 CLR 137 at 154 per Toohey J. However, the majority of that court have favoured a different doctrinal basis for their intervention: see infra nn. 53–63 and accompanying text. 25 See infra nn. 37–40 and n. 50 and accompanying text. 26 See Phillips v. Phillips [1993] 3 NZLR 159 at 168 per Cooke P. English authority requires that defendants have actual knowledge of plaintiffs’ expectations and that the person making the representation 23
The Division of Property on the Breakdown of Intimate Relationships 203 (b) Surmounting Evidential Difficulties Doctrines that focus on the plaintiff’s expectations will be easier to satisfy than those that require either an explicit agreement by the parties or an unequivocal promise on the part of the defendant. Nonetheless, it may still be difficult for the courts to find the existence of an expectation of entitlement to property.27 The plaintiff may have made contributions in anticipation of being able to enjoy the fruits of these efforts in the context of an on-going relationship, without considering the possibility of the relationship ending and the issue of the parties’ individual legal rights.28 It was for this reason that, in Jordan v. Mitchell,29 the Court of Civil Appeals of Alabama held that a plaintiff could not make out her claim for unjust enrichment. The plaintiff had contributed more than US$20,000 toward the construction of a house on property already owned by the defendant. Crawley J concluded that, in the absence of a mistake by the plaintiff or misconduct by the defendant, the enrichment received by the defendant could not be characterised as unjust.30 The approach of the Canadian courts to this problem is best illustrated by the reasoning of Cory J in Peter v. Beblow.31 There, referring to the dictum of Dickson J in Pettkus v. Becker, quoted above,32 Cory J observed: The test put forward is an objective one. The parties entering a marriage or a common law relationship will rarely have considered the question of compensation for benefits. If asked, they might say that because they loved their partner, each worked to achieve the common good of creating a home and establishing a good life for themselves. It is just and reasonable that the situation be viewed objectively and that the inference be made that, in the absence of evidence establishing a contrary intention, the parties expected to share in the assets created in a matrimonial or quasi-matrimonial relationship should it end.33
It is far from clear in what sense Cory J’s account of the test for unjust enrichment can be regarded as “objective”. The test formulated by Dickson J in Pettkus v. intended the plaintiff to act upon it: see Willmott v. Barber (1880) 15 Ch. D 96 at 105 per Fry J; JT Development Ltd. v. Quinn (1991) P & CR 33 at 46 per Ralph Gibson LJ. In the Australian High Court, in Waltons Stores v. Maher (1987) 76 ALR 513 at 540, Brennan J required actual knowledge on the part of the defendant. However, in Commonwealth v. Verwayen (1990) 95 ALR 321 at 347–9, Deane J suggested that such knowledge would not always be required. The view that it is enough that the defendant ought to have known of the plaintiff’s expectations is consistent with the formulation of estoppel in § 90 of the Restatement of Contract 2d (St Paul, Minn., American Law Institute, 1977). For an analysis of proprietary estoppel, see infra, ch. 13. 27 Thus, in a case such as Pointon v. Baines (unreported CP 213/87, NZHC, 1991), where it was found that the plaintiff formed no expectation of an interest, no relief would be available if the Canadian approach was taken. 28 This point is made by Lord Bridge in Lloyds Bank plc v. Rosset [1991] AC 107 at 128; see supra, text accompanying n. 15. 29 705 So. 2d 453 (Ala. Civ. App., 1997). 30 Ibid. at 458. 31 (1993) 101 DLR (4th) 621. 32 Supra, text accompanying n. 23. 33 Ibid. at 635.
204 Redistributive Proprietary Remedies Becker was objective only with respect to the question of the defendant’s knowledge of the plaintiff’s expectation. It, nonetheless, required that the plaintiff had actually formed an expectation. Cory J’s approach readily attributes to plaintiffs expectations that they may have never formed, and which—as Cory J himself apparently recognises—few people in their situation ever form. Objectivity here can only refer to a more interventionist approach—such as that generally favoured in New Zealand law34—that gives relief on the basis of what reasonable people would have thought if they had considered the matter. A test of this nature is hardly implicit in Dickson J’s dictum. Nonetheless, Cory J’s account provides a realistic description of how the test developed in Pettkus v. Becker is being applied in practice. It appears that Canadian courts will spend little time searching for evidence of an expectation. Instead, they have developed a presumption that an expectation of entitlement is to be inferred from the fact that substantial contributions were made in a relationship akin to marriage.35 Evidential difficulties are thus brushed aside. A similar approach underlies the promotion of estoppel as a basis for relief in New Zealand.36 Thus, in Gillies v. Keogh,37 Richardson J intimated that the evidential difficulties potentially associated with the doctrine would be circumvented through a generous presumption not unlike that favoured in Canada. Thus, he commented: Whatever the position in other countries, it seems to me that social attitudes in New Zealand readily lead to expectations, by those within apparently stable and enduring de facto relationships, that family assets are ordinarily shared, . . . unless it is agreed or otherwise made plain.38
The difference between actual expectations and expectations that would have been reasonable if they had been formed is a significant one. It can be bridged only by courts making unwarranted assumptions about people’s states of mind. In Phillips v. Phillips,39 Cooke P, recognising the shortcomings of doctrines that require a subjective expectation on the part of the plaintiff, argued that the proposed use of estoppel in this context amounted to: an indirect and abstruse way of creating rights which a system of law claiming to be based on integrity of principle should be prepared to acknowledge more candidly; the notion of an implied representation or acquiescence and an acting upon it has a fictional quality reminiscent of inferred common intention.40 34
See infra at nn. 48–50 and accompanying text. Thus, in Everson v. Rich (1988) 53 DLR (4th) 470 at 473, the Saskatchewan Court of Appeal adopted the view that “no one should expect, in general, spousal services for free. They are given, in the absence of an indication to the contrary, with the expectation of something in return and should be received as such”. See also S Gardner, “Rethinking Family Property” (1993) 109 LQR 263 at 274. 36 For a critique see Mee, supra n. 5 at 115–16. 37 [1989] 2 NZLR 327. 38 Ibid. at 347. See also Lankow v. Rose [1995] 1 NZLR 277 at 282 per Hardie Boys J. 39 [l993] 3 NZLR 159. 40 Ibid. at 168. However, Cooke’s own approach hardly bears the hallmarks of a system “based on integrity of principle”; see supra, text accompanying nn. 48–51. 35
The Division of Property on the Breakdown of Intimate Relationships 205 Much the same can be said of the celebrated Californian Supreme Court decision of Marvin v. Marvin.41 The Court indicated that, where there is insufficient evidence of an explicit agreement or even tacit understandings, the proper inference to be drawn is that “the parties expect . . . the courts will fairly apportion property accumulated through mutual effort” and, similarly, it should be presumed “that the parties intend to deal fairly with each other”.42 (c) Doubts About the Measure of Relief The proper measure of relief for doctrines based on disappointed expectations is somewhat unclear. A remedy is given because the defendant was at fault in not becoming aware of the plaintiff’s expectations. In the absence of a mutual agreement, or an explicit promise on the part of the defendant, it might be thought that the doctrine is essentially fault-based and that the appropriate remedy, as in tort, would be compensatory damages. However, in Canada, the defendant’s fault is, instead, seen as an ingredient of an action based on unjust enrichment. Nonetheless, rather than awarding restitution, the courts have quantified relief on the basis of contributions to the relationship.43 This is so despite the fact that it is often difficult to demonstrate one or more of the elements required for an unjust enrichment claim. First, once the relationship has ended, it may not be easy to demonstrate that relationship-specific contributions in the nature of a sacrifice have enriched the defendant. Rather, the question raised in this context is who should bear the loss that results from a relationship-specific investment.44 Secondly, where the defendant is enriched as the result of a rising real estate market it is not clear that this enrichment can be said to have been gained at the expense of the plaintiff.45 Thirdly, difficulties arise where the plaintiff can be said to have derived benefits from the relationship, for instance, by living rent-free in a house legally owned by the defendant. In these circumstances, it may be difficult to establish that any enrichment the defendant has enjoyed from the relationship is matched by a corresponding deprivation suffered by the plaintiff.46 41 557 P 2d 106 (1976). See D Rhode, Justice and Gender (Cambridge, Mass., Harvard University Press, 1989) 135–40. 42 Ibid. at 121. 43 See, for instance, Pettkus v. Becker (1980) 117 DLR (3d) 257 at 277 per Dickson J. 44 See, e.g., L Cohen, “Marriage, Divorce, and Quasi Rents; or ‘I Gave Him the Best Years of My Life’ ” (1989) 16 Jnl. of Legal Studies 267; Ellman, “The Theory of Alimony” (1989) 77 Cal. L Rev. 1 at 41. 45 In Rawluk v. Rawluk (1990) 65 DLR (4th) 161 the Canadian Supreme Court by a narrow majority allowed the plaintiff to share in the increase in the value of land originally acquired by the defendant due not to the contributions of either of the parties, but as a result of a rise in real estate prices. In dissent, McLachlin J convincingly countered that, while it was clear enough that the husband was enriched by the appreciation in value, it was difficult to connect this with any deprivation on the part of the plaintiff: ibid. at 190. 46 Thus, some controversy surrounds the notion of “set-off” which requires any benefits derived from the relationship to be subtracted from any losses suffered in order to assess whether the plaintiff suffered a net deprivation: see Everson v. Rich (1988) 53 DLR (4th) 470 at 474–5. In Peter v. Beblow (1993) 101 DLR (4th) 621 at 631, Cory J concluded that evidence of an enrichment would invariably lead to a finding of a corresponding deprivation. For difficulties in applying the concept, compare the
206 Redistributive Proprietary Remedies Problems also arise with the use of estoppel in this context. Reflecting doubts about the true rationale of the doctrine and its origins as a rule of evidence, the approach to relief for estoppel remains indeterminate. The basis for quantifying relief and determining the remedy given remains the question-begging formula of “the minimum equity required to do justice”.47
3. Focusing upon Objective Expectations As we have seen, the courts in a number of jurisdictions have made relief more widely available in this context by blurring the distinction between subjective states of mind and objective considerations of justice. This shift to objective expectations has been carried still further elsewhere. Thus, in the New Zealand Court of Appeal decision of Pasi v. Kamana,48 Cooke P concluded that, in determining whether relief should be available, a court might “ask whether a reasonable person in the shoes of the claimant would have understood that his or her efforts would naturally result in an interest in the property”.49 The real advantage of such an approach is that it removes the need to demonstrate that the plaintiff actually formed an expectation of an interest at the time of the contributions in question.50 As a result, it gives the courts wide powers to give such relief as would reflect commonly held notions of fairness. On the other hand, this “inominate analysis”51 bears so little resemblance to orthodox causes of actions that it seems unprincipled. It is not surprising that there are those on the New Zealand Court of Appeal who favour a retreat to more conventional doctrines, such as proprietary estoppel.52
majority and dissenting judgments in Crick v. Ludwig (1994) 117 DLR (4th). It seems that, in practice, set-off will not be applied with any rigour: see P Parkinson, “Intention, Contribution and Reliance in the De Facto Cases” (1991) 5 AJFL 268 at 271; Mee, supra n. 5 at 219. 47 See infra, ch. 13.III.1. 48 [1986] 1 NZLR 603. 49 Ibid. at 605. 50 In Gillies v. Keogh [1989] 2 NZLR 327 at 330–3, Cooke P emphasised that the court did not need to search for the parties’ subjective states of mind, but could impute to them intentions or expectations that reasonable people in the parties’ position would have formed. He reiterated this view in Phillips v. Phillips [1993] 3 NZLR 159 at 168. 51 See Gardner, supra n. 35 at 279. 52 See supra nn. 37–40 and accompanying text. This is apparent in Richardson J’s approach in Gillies v. Keogh [1989] 2 NZLR 327 at 347, which was based on estoppel and required a subjective expectation. In its last exploration of this area of the law, in Lankow v. Rose [1995] 1 NZLR 277, the New Zealand Court of Appeal continued to be divided on whether an actual expectation should be required. Cooke P himself thought it unnecessary to add to his previous discussions on the matter: ibid. at 280. Gault J preferred Cooke P’s objective expectations doctrine: ibid. at 288. Tipping J (with McKay J concurring) favoured a subjective expectations approach: ibid. at 294. Hardie Boys J was of a similar mind and repeated Richardson J’s dicta from Gillies v. Keogh (supra, at text accompanying n. 38) to the effect that the courts should readily infer such an expectation: ibid. at 282.
The Division of Property on the Breakdown of Intimate Relationships 207 4. Analogies with Joint Ventures and Commercial Partnerships A different approach to this area has seen courts analogising intimate relationships with commercial partnerships or joint ventures.53 In the seminal Australian decision of Muschinski v. Dodds,54 in a rather Dworkinian fashion,55 Deane J drew together several different lines of precedent as examples of a “more general principle of equity”.56 In his view, upon the failure of a joint venture, the parties are entitled to share in the property provided for the purposes of the relationship in proportion to their contributions to the relationship.57 Deane J explained the doctrine in the following way: The principle operates in a case where the substratum of a joint relationship or endeavour is removed without attributable blame58 and where the benefit of money or property contributed by one party on the basis and for the purposes of the relationship or endeavour would otherwise be enjoyed by the other in circumstances in which it was not specifically intended or specifically provided that the other party should so enjoy it. The content of the principle is that, in such a case, equity will not permit the other party to assert or retain the benefit of the relevant property to the extent that it would be unconscionable for him so to do.59
Subsequently, Deane J’s analysis was applied by the High Court in Baumgartner v. Baumgartner.60 By demanding simply that there be a “joint venture” which has failed, this doctrine avoids the problems that result from a focus on subjective intentions or expectations. Rather than attempting to gauge the parties’ subjective states of mind, the courts are able to focus on the relationship and ask whether the parties were living their lives in such a way that it could be said they had embarked on a joint venture.61 Deane J’s formula effectively reverses the orthodox approach by providing that plaintiffs will be entitled to an interest as long as they did not 53 The role of the common law on quasi-matrimonial property disputes in Australia has been significantly limited by the passing of legislation in four jurisdictions: De Factos Relationships Act 1984 (NSW); the Property Law Act 1958 (as amended in 1988) (Victoria); the De Facto Relationships Act 1991 (Northern Territory); the Domestic Relationships Act 1994 (ACT). 54 (1985) 160 CLR 583 at 618–19. 55 Cf. R Dworkin, Taking Rights Seriously (London, Duckworth, 1977) at 14. 56 Ibid. at 620. Deane J relied upon the following examples: the recovery of contractual payment following a complete failure of consideration; the refunding of premiums paid by a fixed term partner on the termination of the partnership; the sharing of assets in proportion to capital contributions following the termination of a commercial joint venture. 57 (1985) 160 CLR 583 at 619 per Deane J. 58 The phrase “without attributable blame” raises interesting questions. Will plaintiffs responsible for the relationship ending be disentitled to relief? While this consideration may well have a place in relation to commercial joint ventures, its dangers in this context are obvious. The requirement is largely ignored in the cases, suggesting it will not be applied strictly; P Parkinson, “Doing Equity Between De Facto Spouses: From Calverly v. Green to Baumgartner” (1988) 11 Adelaide L Rev. 370 at 393; Mee, supra n. 5 at 244. 59 (1985) 160 CLR 583 at 620. 60 (1987) 164 CLR 137. 61 Parkinson, supra n. 58 at 404; M Neave, “The New Unconscionability Principle—Property Disputes Between De Facto Partners” (1991) 5 AJFL 185 at 192.
208 Redistributive Proprietary Remedies actually intend the defendant to have the sole benefit of their contributions.62 Consequently, partners who have not formed any expectation about their separate legal entitlement will, in the event of the relationship coming to an end, still be entitled to an interest reflecting their contributions.63 A similar approach has been favoured in certain jurisdictions in the United States. One example is Mississippi, which is remarkable in that the state legislature has not provided for the division of property on the breakdown of marriage. Instead, the state judiciary has been solely responsible for liberalising the law in this area. In Pickens v. Pickens,64 the Mississippi Supreme Court extended this process to relationships akin to marriage and ordered an equitable division of property accumulated in the course of such a relationship without searching for any agreement to that effect.65 Robertson J explained that the common law of the state: authorises and sanctions an equitable division of property accumulated by two persons as a result of their joint efforts. This would be the case were a common law business partnership breaking up. It is equally the case where a man and woman, who have accumulated property in the course of a non-marital cohabitation, permanently separate.66
Similarly, in Jones v. Jones,67 the Court was content to base relief on the fact that “the wife contributed her money and labor toward the economic success of the marriage”.68 The Court was not concerned that the contributions were not necessarily made in the expectation of gaining a proprietary interest. III . THE INADEQUACY OF JUSTIFICATIONS OFFERED FOR INTERVENTION IN THIS AREA
Despite the quite different formulae used to justify intervention, it is striking that the judiciary in Canada, Australia, New Zealand, and in a number of jurisdictions 62 This may be contrasted with the requirement of positive intention not to benefit the defendant required in English law: see, e.g., Lloyds Bank plc v. Rosset [1990] AC 107 at 128 per Lord Bridge. See supra n. 15 and accompanying text. In this respect, Deane J’s formulation resembles Chambers’ analysis of the resulting trust. See supra, ch. 6.II.2(b)(ii) and ch. 7.I.2(c)(ii). 63 Thus in Muschinski v. Dodds (1985) 160 CLR 583 at 614, Deane J remarked that “[v]iewed in its modern context the constructive trust can properly be described as a remedial institution which equity imposes regardless of actual or presumed intention”. The shift from intention is apparent in Baumgartner v. Baumgartner (1987) 164 CLR 137 at 146–9, where the High Court gave relief despite its conclusion that the evidence did not support a finding of a common intention that the plaintiff have an interest in the property. See also Lindy Willmott, De Factos Relationship Law (Sydney, Law Book Company, 1996) 64. This is probably best understood as a default position that the parties can bargain around if they so choose. Thus, relief should be denied where, from the outset of their relationships, defendants have actually informed plaintiffs that the plaintiffs’ contributions would not give rise to any legal entitlement. However, thus far, decisions in Australian state courts do not bear out this view: see Mee, supra n. 5 at 245–8. 64 490 So. 2d 872 (Miss., 1986). 65 Ibid. at 876. This approach has been extended to confer rights on the death of one of the parties in a long-term cohabitive relationship: Williams v. Mason 556 So. 2d 1045 (Miss., 1990). 66 Ibid. at 875. 67 532 So. 2d 574 (Miss., 1988). 68 Ibid. at 580.
The Division of Property on the Breakdown of Intimate Relationships 209 in the United States has adopted what is, in substance, the same approach. First, the plaintiff’s interest generally flows, not from an act of will by the legal owner, but rather from contributions made in the course of an intimate relationship. Secondly, instead of being based on traditional measures of expectations, reliance or unjust enrichment, relief is quantified in proportion to contributions made to the relationship.69 The various doctrines developed in this context should, if strictly applied, deliver different results. However, in practice, they are generally applied in such a way that they produce similar outcomes. In the case of the Canadian doctrine of unjust enrichment and the broad doctrine of equitable estoppel, this effect is achieved largely by fudging evidential questions by making unwarranted assumptions about the parties’ states of mind. Similarly, in Canada, relief reflects contributions only as a result of the courts’ failure to apply restitutionary criteria. In the case of estoppel, on the other hand, the ability of the courts to focus on contributions in quantifying relief can be attributed to the doctrine’s “flexibility”.70 Yet, this very flexibility is a consequence of the doctrine’s lacking any settled justificatory basis capable of guiding those responsible for its application. Doctrines that focus on actual intentions or expectations are normatively inadequate. Consider the argument advanced by the defendant in Peter v. Beblow that, because what was involved was a relationship based on love, there was not, or should not have been, any expectation of gain on the part of the plaintiff.71 The argument exploits an intuition deeply embedded in our social consciousness. At an empirical level, it seems plausible that a good number of those in intimate relationships contribute to the relationship without any expectation of separate legal entitlement. If this were the case, norms that required a subjective intention or expectation on the part of the plaintiff would not, if strictly applied, yield a remedy in this context.72 At a normative level, the defendant’s argument draws upon the notion that, in an intimate relationship, there is something unsavoury about one’s actions being influenced by financial considerations.73 We can appreciate this if we ask whether someone in such a relationship, whose actions were motivated by an expectation of the acquisition of separate legal entitlement, would be more deserving of a remedy than someone who was not driven by the same motivations. If the answer is “no”,74 then why should we insist on such an expectation as a prerequisite for relief?
69 See C Rotherham, “The Contribution Interest in Quasi-Matrimonial Property Disputes” (1991) 4 Canta. LR 407. 70 See infra, ch. 13.III. 71 (1993) 101 DLR (4th) 621 at 633. 72 See A Lawson, “The Things we Do for Love: Detrimental Reliance in the Family Home” (1996) 16 LS 218 at 223. 73 A view that is often reflected in literature: see, e.g., R Dabney, Love and Property in the Novels of Dickens (London, Chatto & Windus, 1967). 74 It is apparent from his judgment in Midland Bank plc v. Cooke [1995] 4 All ER 562 at 575 that Waite LJ would have given this answer. See supra nn. 18–21.
210 Redistributive Proprietary Remedies In Peter v. Beblow, the Court rejected the defendant’s argument despite the obvious plausibility of both its empirical and normative premises.75 Nonetheless, it accepted the starting point of the defendant’s argument that relief was not available in the absence of intention or expectations. A more productive approach would lie in attempting to understand why, in practice, the courts have been willing to give relief in this context despite the absence of those elements. The judicial formula that comes closest to suggesting the rationale for the approach taken in jurisdictions that have been prepared to give relief in this context is the Australian “joint venture” doctrine. This doctrine explicitly focuses on the parties’ relationship, rather than intentions or expectations. In addition, it openly provides for quantification of relief on the basis of contribution. What has not been made sufficiently clear, however, is why analogies with commercial joint ventures are apposite.76 In a commercial venture, there is an understanding shared by the parties that they are involved in a profit-making endeavour. The provision of relief generally involves providing default terms in order to construct a rational bargain that includes provision for the contingency of the venture coming to an end. In contrast, in intimate relationships, particularly outside marriage, the parties are unlikely to conceive of their relationship in the same terms. Whereas for commercial joint ventures the issue tends to concern the distribution of an unallocated surplus, on the breakdown of intimate relationships the question concerns a readjustment of property rights in circumstances in which legal owners did not necessarily understand that their title was at risk. Moreover, with its commercial undertones, the joint venture analogy is not a million miles away from the rhetoric of women investing risk-capital in relationships that the Canadian Supreme Court found so offensive in Pettkus v. Becker.77 Thus, some scholars fear that the analogy may have an unfortunate influence on our understanding of the problems that arise in this area,78 and have suggested that it “merely serves to ritualize the imposition of a result”.79 Perhaps it is fairer to say that while notions of partnership or joint ventures provide helpful metaphors, they should not be accepted at face value.80 While cohabitive relationships are joint ventures of a sort, they are rather different from co-operative commercial endeavours. Consequently, we still need to explain why the same standards should apply to both. Finally, the other doctrinal formulation in this area, the “reasonable claimant” test formulated by the New Zealand judiciary, is rather unenlightening. Why would a reasonable person expect a contribution to result “naturally” in an 75
(1993) 101 DLR (4th) 621at 635 per Cory J. See Mee, supra n. 5 at 264. 77 (1980) 117 DLR (3d) 257 at 271. Dickson J scathingly noted the first instance judge’s conclusion that the plaintiff’s “contribution to the household expenses during the first few years of their relationship was in the nature of risk capital invested in the hope of seducing a younger defendant into marriage”. 78 See R Solomon, Love: Emotion, Myth and Metaphor (Garden City, NY, Anchor Press, 1981) 18. 79 MA Glendon, The New Family and the New Property (Toronto, Butterworths, 1987) 54–66. 80 For a helpful analysis of the model of partnership see K Gray, The Reallocation of Property on Divorce (Abingdon, Professional Books, 1977). 76
The Division of Property on the Breakdown of Intimate Relationships 211 interest in property? If reasonable people in a relationship did actually consider their own separate entitlement, would they not raise the matter with their partners and clarify it? Ultimately, apart from the question whether parties do actually form expectations in these circumstances, there is a difficulty inherent in using expectations as the foundational justification for legal reform. After all, to some extent at least, expectations are endogenous to the law; if we actually form expectations of legal entitlement, we form them “in the shadow of the law”.81 How then do we justify the leap from the pre-Pettkus v. Becker or Pasi v. Kamana world—where, on the whole, no relief was provided for cohabitees upon the breakdown of their relationships—to the new regime? Why would reasonable plaintiffs ever have thought the law would come to their aid when it never had in the past? The language of expectations serves a rhetorical function, providing a tenuous link with traditional concepts. While it suggests that a “legal” standard is being applied, it is in reality a rather circular way of incorporating broader considerations of justice.82 Beyond this rhetorical role, the notion of “the reasonable claimant” is not particularly useful. Ultimately, it begs the question. A reasonable claimant will think he or she is entitled to relief because it would be just. The question then to be asked is “why would it be just?”. Until this issue is addressed directly and answered satisfactorily the law is liable to remain unsettled. What is required is a doctrine that is expressed in a manner that discloses its normative foundations, and thereby indicates the manner in which it is to be applied. It may be thought unnecessary to offer an explanation of why a coherent justification of judicial intervention in this area is thought desirable. After all, it seems cynical to suggest that it is legitimate to use the coercive force of the state to enforce legal norms without offering a good justification for those norms.83 Beyond this, however, it is possible to identify particular dangers that may follow from the continued failure to present a coherent justification for intervention in this area. One fear is that, without clear foundations, there is the danger of confusion and inconsistent application of norms. This may occur at all or any of three levels: the formulation of the cause of action; the quantification of relief 84; and choosing between personal and proprietary remedies. Another concern is that the courts risk doing violence to the integrity of existing legal norms.85 The temptation to frame a cause of action generously in order to bring quasi-matrimonial 81 See, e.g., R Moonkin and L Kornhauser, “Bargaining in the Shadow of the Law: the Case of Divorce” (1979) 88 Yale LJ 950. 82 Mee, supra n. 5 at 282. 83 R Dworkin, Law’s Empire (Cambridge, Mass., Belknap, 1986) 93. 84 Thus, in a detailed study of Canadian case law, Patrick Parkinson concludes that “it is possible to discern in the decided cases a number of distinct bases for quantifying relief”. As a result, “[a]pparently similar cases are dealt with different by courts even in the same province”: P Parkinson, “Beyond Pettkus v. Becker: Quantifying Relief for Unjust Enrichment” (1993) 43 U Toronto LJ 217 at 218. For a criticism of the tendency of Australian courts to analyse situations in restitutionary terms when in reality they appear to involve expectation or reliance loss: see J Carter, “Contract, Restitution and Promissory Estoppel” (1989) 12 UNSW LJ 30 at 45. 85 See D Stevens, “Restitution, Property and the Cause of Action in Unjust Enrichment: Getting By with Fewer Things” (1989) 39 U Toronto LJ 258 at 282–3; Carter, ibid. at 57.
212 Redistributive Proprietary Remedies cases within its scope may be unfortunate if a more demanding version is generally more effective in other contexts. Similarly, there is reason to fear that the lax manner in which the requirements of various relatively orthodox doctrines have been applied in the quasi-matrimonial context may be imported into areas where those norms have traditionally been applied more rigorously. Finally, by obscuring the basis for intervention in this area, we lose the possibility of developing a justification that may serve as an analogue for other contexts and assist us in developing a richer jurisprudence of property and obligation. IV . THE LIMITS OF THE PRIVATE ORDERING PARADIGM : THE CASE AGAINST APPLYING CONVENTIONAL PROPERTY NORMS IN THE CONTEXT OF INTIMATE RELATIONSHIPS
1. Spheres of Justice: Distributive Norms in Intimate Relations Research from anthropology and social psychology indicates that human interaction in all societies is regulated by diverse norms.86 In diverse areas of life, different social goods are distributed and distinct standards of distribution prevail. Norms of free-exchange, desert and need that are incommensurable compete for acceptance and are legitimate to varying degrees in different spheres of social life.87 The understanding that we associate distinct goods with different areas of social life and, in turn, with diverse norms of distributive justice led the political theorist, Michael Walzer, to develop his influential theory of “spheres of justice”.88 According to Walzer’s account of “complex equality”, we should respect the autonomy of each distributive sphere by regulating it pursuant to the norms which are internal to it. Conversely, the importation of the norms of one sphere into another represents “tyranny’’.89 Research in contemporary western societies emphasises that norms of free exchange—of autonomy and desert—dominate the economic domain.90 However, there are some things that money cannot buy, some things for which it is wrong to bargain. In intimate relationships, norms of “communal sharing”—reflecting notions of equality and need—predominate as the legitimate standards of distribution.91 Typically, those in intimate relationships do not bargain to ensure that their contributions are rewarded. Instead, “trusting couples come to expect that reciprocity of contributions will emerge over the longer term in a relatively unstructured, spontaneous way”.92 Moreover, the 86
AP Fiske, Structures of Social Life (New York, Free Press, 1991). Ibid. at 21–6. 88 M Walzer, Spheres of Justice (New York, Basic Books, 1983). 89 Ibid. at 17–20. 90 J Hochschild, What’s Fair? American Beliefs About Distributive Justice (Carnbridge, Mass., Harvard University Press, 1981) at 182; discussed in M Regan Jr., “Spouses and Strangers: Divorce Obligations and Property Rhetoric” (1994) 82 Geo. Law Jnl. 2303 at 2358. 91 See, e.g., Fiske, supra n. 86 at ix; Hochschild, supra n. 90. 92 J Holmes and S Boon, “Developments in the Field of Close Relationships: Creating the Foundations for Intervention Strategies” (1990) 16 Personality and Social Psychology Bulletin 23 at 27. 87
The Division of Property on the Breakdown of Intimate Relationships 213 promotion of an “exchange orientation” may actually inhibit the development of intimacy.93 This, in part, explains the distaste that many still feel toward the use of contracts in this sphere.
2. The Treatment of Intimate Relationships in Legal Doctrine (a) The Regulation of Property in the Domestic Sphere in English Law An historical perspective of the legal treatment of property in intimate relationships throws into sharp relief the contingency of the modern legal orthodoxy that proprietary entitlements must arise by agreement. The understanding of the norms that are proper to this sphere has altered over time. In particular, in the past, entitlements often arose by custom or by operation of law, and it was not unusual for the courts to refuse to enforce bargains between spouses. (i) Women’s Rights to Property Until the late nineteenth century, domestic relations were regulated less by private ordering than according to status.94 By the early thirteenth century, the common law dictated that women could neither hold property nor enter into contracts—a disability often explained on the basis that, in the law’s eyes, wives did not have an existence separate from that of their husbands.95 The notion of coverture reflected the inferior social status of women and the power husbands were customarily given over their wives. The doctrine dictated that any personal property a woman brought into marriage immediately became the property of the husband, while any real property was held by the husband “in the right of his wife”. However, a wife’s welfare was not left entirely to her husband’s whim. Indeed, marriage was understood as a union not so much of two individuals as of two families, and this union was protected by a range of mechanisms both social and legal.96 Status brought with it obligations as well as privileges; custom and law obliged the husband to provide for his wife and family. In her husband’s lifetime, the common law accorded a wife a right of support, allowing her to sue for alimony in the event of separation.97 Reflecting Anglo-Saxon custom, the early 93 B Murstein and MG MacDonald, “The Relationships of Exchange-orientation and Commitment Scales to Marriage Adjustment” (1983) 18 International Jnl. of Psychology 297. 94 For a summary of the different norms prevailing in common law, equity, manorial custom and ecclesiastical law, see A Erickson, Women and Property in Early Modern England (London, Routledge, 1993) 24. 95 WH Blackstone, Commentaries on the Law of England (Chicago, Ill., Chicago University Press, 1765–1769, reprinted 1979) i, at 430. On the other hand, local custom sometimes allowed women to contract on their own behalf: see WR Cornish and G de N Clark, Law and Society in England 1750–1950 (London, Sweet and Maxwell, 1989) at 368. 96 U Beck and E Beck-Gernsheim, The Normal Chaos of Love (Cambridge, Polity Press, 1995) 79–80. 97 The right was available only as long as separation was not the result of the wife’s adultery. On the duty of support see Manby v. Scott (1659) 86 ER 781; Countess of Strathmore v. Bowes (1789) 2 Cox 28 at 33 per Lord Thurlow. See Baker. An Introduction to English Legal History (3rd edn., London,
214 Redistributive Proprietary Remedies common law allowed the wife a third of her husband’s goods upon his death. This right appears to have survived at common law until Tudor times; thereafter it persisted widely as local custom.98 Similarly, pursuant to the right of dower, widows were entitled to a life interest in a third share in any freehold land held by their husbands at any time during the marriage. At law, this right applied notwithstanding any attempt to bar its operation. Moreover, it bound third parties who acquired the freehold from the husband.99 The wife’s rights of inheritance both to realty brought into the marriage and to dower were recognised in the Magna Carta.100 The framework built on Anglo-Saxon custom and feudal norms that regulated this area came under stress from pressures to make land more readily alienable and to give owners greater freedom. While the old regime gave way, it was a gradual process. In the name of testamentary freedom, the legislature brought an end to widespread customs that dictated that set shares of a man’s personal property had to be left to his wife and children.101 It went further in 1833 by allowing for the operation of dower to be barred by will or by inter vivos transfer,102 before eliminating it altogether in 1925.103 The Courts of Chancery had already, in the eighteenth century, greatly reduced the significance of the law of dower by refusing to apply it in respect of uses.104 Indeed, it was equity that was at the forefront of this movement from status toward contract. From the renaissance, amongst the elite, property was regulated primarily by “jointure”. These settlements, which the courts allowed to bar the operation of dower, generally provided for a right to income from land that was held on trust for the benefit of the couple during the life of the husband and thereafter for the wife. The Courts of Chancery also allowed wives to retain separate equitable estates in land for their own use. Furthermore, equity took the stance that, while it would assist a husband to collect property that had become due to him as a result of having been given to his wife, it would require him to hold a portion on trust for his wife and children.105 The causes of these innovations by the Courts of Chancery are ambiguous and their effects mixed. This is particularly true of the willingness to allow the barring of dower. This was of importance mainly for wealthy families. In that context, it Butterworths, 1990) at 435 and 551. The courts also held that, in the event of hardship, a wife had her husband’s implied authority to pledge his credit for necessaries for her own support: Sir Thomas Gardner’s Case (1615) Roll Abr. v 1 p 351; Dent v. Scott (1648) Aleyn 61. See JH Baker, ibid 556. 98 Cornish and Clark, supra n. 95 at 366; Erickson, supra n. 76 at 170. 99 Baker, supra n. 97 at 308–9; Cornish and Clark, supra n. 95 at 359. 100 Magna Carta 1217, c. 7. 101 Baker, supra n. 97 at 436. 102 Dower Act 1833, c. 105. 103 Administration of Estates Act 1925, c. 23. 104 Chaplin v. Chaplin (1733) 3 P Wms. 229. This was despite the fact that they allowed widowers to enjoy a right to a life interest in all the real property that they had held in their wives’ right in respect of a use. See S Staves, Married Women’s Separate Property in England, 1660–1833 (Cambridge, Mass., Harvard University Press, 1990) 37. 105 Beresford v. Hobson (1816) 1 Mod. 373. See Cornish and Clark, supra n. 95 at 369.
The Division of Property on the Breakdown of Intimate Relationships 215 generally had the effect of ensuring that wives received less, and often significantly less, than the third to which they were customarily entitled.106 Moreover, if the free alienability of land was the objective behind the reform, the courts were selective in pursuing this policy. For example, they showed less interest in limiting the strict settlement, the device that tied up land in favour of male heirs. In any event, the freedom that equity afforded to women was limited. In particular, wives were restricted in their capacity to enjoy beneficial ownership of money. Even by the end of the seventeenth century only pin-money (an annuity for household and personal spending) could be owned by wives under a trust. On the other hand, the courts were still prepared to intervene paternalistically to protect women. A realisation of the vulnerable position of wives was apparent in the Courts of Chancery’s treatment of settlements that provided that a wife’s interest could not be sold, even with her consent. The courts were prepared to enforce such a restriction even though it represented a restraint on alienation that, in any other context, would have been regarded as void.107 More thoroughgoing reform came from the legislature. In the late nineteenth century, the legal position of women was transformed.108 In this new environment women were permitted to own property of all forms and to enter into contracts. (ii) The Regulation of Agreements The judicial treatment of agreements to marry or of agreements between those already married has also changed through time. Reflecting the shift from status to contract, the common law gave relief for breaches of promises to marry from the late seventeenth century.109 In these cases, damages were to a large degree calculated pursuant to orthodox contract principles, according to the extent to which the defendant’s breach caused a diminution in the plaintiff’s value in the marriage market.110 In contrast, the courts were suspicious of premarital contracts that limited the property rights that one partner might acquire in the event that the relationship should come to an end.111 In their view such arrangements
106
Staves, supra n. 104 at 36. See, e.g., Pybus v. Smith (1791) 3 Bro CC 340. Cornish and Clark, supra n. 95 at 368; Baker, supra n. 97 at 554. 108 The key reforms were effected in the Married Women’s Property Acts of 1870 and 1882. See L Holcombe, Wives and Property: Reform of the Married Women’s Property Law in the Nineteenth Century (Toronto, University of Toronto Press, 1983). 109 See, for instance, L Stone, Road to Divorce: England 1530–1987 (Oxford, OUP, 1995) 82, 85–95; G Frost, Promises Broken: Courtship, Class, and Gender in Victorian England (Charlottesville, Va., University of Virginia, 1995). Initially the objection to the action was less substantive than jurisdictional. The question was not whether such promises should be enforced, but whether the ecclesiastical courts had sole jurisdiction over such matters. The changing perception on this question is reflected in Blackstone’s conclusion that “[o]ur law considers marriage in no other light than as a civil contract”: Blackstone, supra n. 95 vol 1 at 421. 110 Stone, supra n. 108 at 82. 111 Cartwright v. Cartwright (1853) 3 De GM & G 982. See B Bix, “Bargaining in the Shadow of Love: The Enforcement of Premarital Agreements and How We Think About Marriage” (1998) 40 William and Mary Law Rev 145 at 150–1. 107
216 Redistributive Proprietary Remedies encouraged “failure . . . in the performance of duties in the fulfilment of which society has an interest”.112 Similarly, the judiciary was disinclined to sanction contracts between spouses that altered the terms of their marriage settlement, a reluctance also justified squarely on grounds of public policy.113 Thus, it seems that the marriage contract was, to a significant degree, understood as a financial proposition and it was thought proper that those who broke the contract pay for the loss they caused. On the other hand, marriage was a solemn commitment unlike any other contract, and the courts would not enforce either those agreements made before the event that gave either party an incentive for leaving the union or those made after the event that renegotiated the terms of engagement. It can be seen that, while marriage was treated as a private sphere into which the courts would not intrude, it was not a perception that spouses were too romantic to want their understandings legally enforced that made the judiciary weary of enforcing such contracts between spouses. Rather, it was a fear of encouraging bargains that would undermine the sanctity of the union that accounted for this judicial reticence. The individualism of the nineteenth century brought limited freedom for women.114 As the home came to be seen as a refuge from the workplace, women were increasingly celebrated for stereotypically feminine qualities: as selfless providers of emotional support. As a result, while changing attitudes led to marriage being understood less in terms of patriarchal hierarchy and more as a union of equals, they also saw the union romanticised in a fashion that made it more difficult to conceive of it as a proper place for striking bargains.115 A reflection of this is the disuse into which the action for a breach of promise to marry fell in the late nineteenth century.116 This uneasy combination of individualism and romanticism meant that, while they were not inclined to impose paternalistic duties of support, nor were the courts eager to enforce agreements between spouses. This is apparent in the development of the doctrine of intention to create legal relations. In the seminal decision of Balfour v. Balfour,117 Lord Aitken commented: The common law does not regulate the form of agreements between spouses. Their promises are not sealed with sealing wax. The consideration that really obtains for them is that natural love and affection which counts for so little in these cold courts . . . In
112
Cartwright v. Cartwright supra n. 111, at 988–9 per Knight Bruce LJ. See Lord St John v. Lady St John (1805) 11 Ves. Jun. 526 at 530–2 per Lord Eldon; Fletcher v. Fletcher (1788) 2 Cox 99 at 103 per Buller J. See Staves, supra n. 104 at 7. 114 Beck and Beck-Gernsheim, supra n. 96 at 57. 115 On the rise of romantic love see L Stone, The Family, Sex and Marriage in England from 1500–1800 (London, Weidenfeld and Nicolson, 1977); E Shorter, The Making of the Modern Family (London, Fontana, 1977). On the tension between Victorian values of romance and individualism in breach of promise actions: see Frost, supra n. 109 at 10. 116 The action was abolished only with the Law Reform (Miscellaneous Provisions) Act 1970: see S Cretney, (1970) 33 MLR 534. 117 [1919] 2 KB 571. 113
The Division of Property on the Breakdown of Intimate Relationships 217 respect of these promises each house is a domain into which the King’s writ does not seek to run, and to which his officers do not seek to be admitted.118
It is not obvious where the line between those arrangements that should be subject to judicial enforcement and those that should not is to be drawn.119 Even in the commercial sphere, parties have little regard for the legalities of their interaction, and generally avoid recourse to the courts; instead, they regulate their dealings according to informal norms of reciprocity and trust.120 Nonetheless, the courts readily enforce commercial agreements. Moreover, it is apparent from earlier justifications offered for refusing to enforce agreements between spouses that the vision of the marital home as a sphere regulated by ties of natural love and affection is one that seized the judicial imagination relatively recently. It seems that Lord Aitken’s judgment in Balfour v. Balfour was driven not so much by the conclusion that, as an empirical matter, spouses do not intend to be legally bound, as by a prescriptive conclusion that the courts have no place in the domestic sphere.121 That the courts are at times still prepared to recognise that dealings made against a background of intimate relationships should be accorded special treatment is apparent in the recent decision of Barclays Bank Plc v. O’Brien.122 There, the House of Lords was prepared to prevent a third party creditor from enforcing a mortgage securing the overdraft of a husband’s business in circumstances in which the wife’s consent to the arrangement was induced by a misrepresentation by her husband. The Court recognised a particular class of sureties who were to be treated with special tenderness as a result of the vulnerability that can arise from living together.123 The principle reflects the view expressed by Dixon J in the Australian High Court that relationships in the nature of marriage, while not giving rise to a presumption of undue influence, nevertheless have “never been divested completely of what may be called equitable presumptions of an invalidating tendency”.124 Here, we have judicial recognition of the darker side of contracts made in intimate relationships: they are suspect, not necessarily because they are made out of love, but because of an underlying danger of exploitation. (iii) The Limits of Judicial Intervention Balfour v. Balfour and Barclays Bank v. O’Brien mark the limits of judicial willingness to interfere in these relationships. Intervention in these contexts tends to be justified by reference to the parties’ intentions: in Balfour the parties never 118
Ibid. at 579. S Hedley, “Keeping Contract in its Place—Balfour v. Balfour and the Enforceability of Informal Agreements” [1985] OJLS 391 at 394–5; H Collins, The Law of Contract (2nd edn., London, Butterworths, 1993) at 94–7. 120 See, e.g., S Macaulay, “Non-contractual Relations in Business” (1963) 28 American Sociology Review 45. 121 Hedley and Collins, supra n. 94. 122 [1994] AC 140. 123 Ibid. at 198 per Lord Browne-Wilkinson. 124 Yerkey v. Jones (1939) 63 CLR 649 at 675. 119
218 Redistributive Proprietary Remedies intended the agreement to be legally binding; in O’Brien the wife’s will was overborne in circumstances in which the bank should have been aware that this was a danger. The courts have proved willing to deal with problems arising from intimate relationships using conventional “principles” of property and contract. Despite the reluctance apparent in Balfour, the courts will enforce most agreements to share property in this context,125 while they will set aside arrangements that smack of exploitation. However, beyond this, the judiciary tends to disclaim any responsibility for positively determining rights and obligations within the domestic sphere. While, particularly since the end of the Second World War, there has been a marked rise of intervention in family affairs at a legislative level, this has not flowed through to judge-made law. Legislative intervention is generally seen as giving rise to “family law”: a body of norms derived from “policy” and hence, by implication, unprincipled. Lord Denning was a notable exception to this orthodoxy.126 A biologically essentialist vision of women as weaker and more sentimental creatures than men127 encouraged Denning to reform various common law doctrines and to read hitherto unforeseen discretionary powers into statutory provisions.128 In the course of developing spousal rights of occupation,129 the “new model constructive trust’’130 and contractual licences that paid no respect to the doctrine of privity of contract,131 Lord Denning turned axiomatic notions of property on their head. However, amongst English appellate judges, he was a maverick, and it is not surprising that his reforms in this area were subsequently largely discredited and reversed. This extreme judicial reticence toward intervention in the domestic sphere is unfortunate. With the breakdown of traditional community belief systems, it has 125 In Pettitt v. Pettitt ([1970] AC 777 four of their Lordships took the view that a lack of intention to create legal relations might provide a difficulty in recognising a constructive trust in response to a common intention. For his view, Lord Diplock in his dissenting judgment rejected the suggestion that the principle in Balfour v. Balfour had any application in this context: ibid. at 822. 126 See S Parker, Informal Marriage, Cohabitation and the Law, 1750–1989 (London, Macmillan, 1990) 136–7. 127 Lord Denning, The Due Process of Law (London, Butterworths, 1980) 194: see Parker, supra n. 126. 128 Lord Denning read s. 17 of the Married Women’s Property Act to permit the courts to redistribute property as they saw fit: see, e.g., Fribance v. Fribance [1957] 1 WLR 384 (reversed in Pettitt v. Pettitt [1970] AC 777). 129 Bendall v. McWhirter [1952] 2 QB 466. The right was something of a two-edged sword, deriving from the duty of spouses to live together; see Weldon v. Weldon (1883) 9 PD 52; Shipman v. Shipman [1924] 2 Ch. 140. After some effort by Lord Denning to give this right proprietary effect, it was held to be a sui generis personal right by the House of Lords in National Provincial Bank v. Ainsworth [1965] AC 1175. Legislative intervention soon followed that allowed the right to be protected by registration, and this right is now regulated by ss. 30–31 of the Family Law Act 1996. 130 See Hussey v. Palmer [1972] 3 All ER 744 at 747; Eves v. Eves [1975] 3 All ER 768 at 771. A return to the conservative position favoured in Pettitt v. Pettitt [1970] AC 777 commenced in the Court of Appeal soon after Denning’s departure in Burns v. Burns [1984] Ch. 317 and was completed by the House of Lords in Lloyds Bank plc v. Rosset [1990] AC 107. 131 See Errington v. Errington and Woods [1952] 1 KB 290 at 298; Binions v. Evans [1972] Ch. 359 at 367–9. Orthodoxy was restored in Ashburn Anstalt v. Arnold [1989] Ch. 1.
The Division of Property on the Breakdown of Intimate Relationships 219 become difficult to justify paternalistic intervention in an individualistic world.132 Yet, while the old status-based scheme of duties may have little place in contemporary society,133 this does not mean that some strategy of intervention in this area would not be appropriate. It is ironic that a judiciary, which once participated so actively in regulating this area, now throws up its hands and pronounces itself powerless in the face of demands for reform. (b) Learning from Legislation The understanding that special criteria should govern distribution of entitlements in intimate relationships is apparent in the legislation readjusting the property rights of spouses that is to be found in most common law jurisdictions. Reflecting a realist understanding that emphasises the political dimension of the common law,134 the courts in Canada135 and New Zealand136 have shown a willingness to look to such legislation as a guide for the development of common law doctrine. In contrast, English courts have tended to insist that the roles of the judiciary and the legislature are radically distinct.137 As a result, in developing the common law, they have shown little interest in looking for inspiration to legislation that recognises the justice of contribution-based claims in the domestic sphere. Several innovations in English legislation suggest a change in philosophy that may offer lessons for the common law in this context. For example, section 25(2)(f) of the Matrimonial Causes Act 1973 makes clear the importance of 132
Beck and Beck-Gernsheim, supra n. 96 at 46. However, Jack Goody, for one, laments the decline of these norms and the consequences of the ideology of romantic love for the interests of women. See J Goody, The Development of the Family and Marriage in Europe (Cambridge, Cambridge University Press, l983) 209; “Dowry and the Rights of Women to Property” in C Hann, Property Relations (Cambridge, Cambridge University Press, 1997) 20l. 134 See R Pound, “Common Law and Legislation” (1907) 21 Harv. L Rev. 383; J Landis, “Statutes and Sources of the Law” in Harvard Legal Essays (Cambridge, Mass., Harvard University Press, 1934) 213; G Calabresi, A Common Law For an Age of Statutes (Cambridge, Mass., Harvard University Press, 1982) at 85. 135 Thus, in Pettkus v. Becker (1980) 117 DLR (3d) 257 at 275, Dickson J commented that he saw “no basis for any distinction, in dividing property and assets, between marital relationships and those more informal relationships which subsist for a lengthy period”. See also Murray v. Roty (1982) l34 DLR (3d) 507 at 515, where the fact that under the Family Law Reform Act 1980 partners qualified for maintenance after five years of common law marriage was regarded as a useful guide to courts considering whether a relationship was long enough to justify the provision of relief pursuant to the developing doctrine of unjust enrichment. 136 In Day v. Mead [1987] 2 NZLR 443 at 451, Cooke P noted “the principle to which we in New Zealand are increasingly giving weight that the evolution of Judge-made law may be influenced by the ideas of the legislature as reflected in contemporary statutes and by other current trends . . .”. An example of this principle in action in this context is Gillies v. Keogh [1989] 2 NZLR 327 at 334, where Cooke P looked to provisions of the Matrimonial Property Act 1976 for an analogy as to how the court should respond to evidence that at the outset of the relationship one party had indicated that the other would never be entitled to an interest in the property in question. 137 See, e.g., supra nn. 11–13 and accompanying text. As Patrick Atiyah observes, the English judiciary has a tendency “to look at the common law as the repository of principle, and Statute law as a series of modifications, exceptions, and anomalous cases not based on an coherent social philosophy”: Atiyah, supra, n. 2 at 235. 133
220 Redistributive Proprietary Remedies contribution as a criterion for the distribution of property on the breakdown of a marriage. Under this provision, the court is directed to consider “the contributions which each of the parties has made or is likely in the foreseeable future to make to the welfare of the family, including any contribution by looking after the home or caring for the family”. In addition, section 37 of the Matrimonial Proceedings and Property Act 1970 provides proprietary entitlement for spouses who have made substantial improvements to the matrimonial home.138 Finally, recent legislative reform of inheritance law also recognises the importance of these considerations. Previously, in the absence of a will, the Inheritance (Provision for Family and Dependants) Act 1975 was interpreted so that relief would be available only to plaintiffs who could be characterised as the dependants of their deceased partners.139 However, since 1996, contribution is a factor that is to be considered by the court in determining the entitlement of widows and unmarried partners alike.140 We may also learn something from what is absent in legislation. The perception that contractual norms have a limited role to play in this context is reinforced by the fact that the Matrimonial Causes Act does not provide spouses the opportunity to contract out of the effect of the Act.141
3. The Premises of the Absolutist Conception of Private Property The absolutist conception of property is generally defended on the basis that it rewards labour and in the process promotes autonomy, virtue and efficiency.142 Justifications may focus on deontological notions of liberty or desert or have a more teleological focus on the consequences of observing a system of private property. Perhaps the most celebrated liberty-based argument for property appears in John Locke’s Two Treatises of Government. Locke argued for a right to property on the basis that, where we “mix” our labour with things in the external world, these things become an extension of ourselves.143 More recently, the libertarian political theorist, Robert Nozick, offered a less metaphysical justification for a connection between private property and liberty. In Nozick’s view: patterned principles of distributive justice involve appropriating the actions of other persons. Seizing the results of someone’s labor is equivalent to seizing hours from him and directing him to carry on various activities. . . . This process whereby they take this 138 This was essentially a legislative response to the failure of the courts to provide a remedy in Pettitt v. Pettitt [1970] AC 777. See infra at n. 5 and accompanying text. 139 The Inheritance (Provisions for Family and Dependants) Act 1975, s. 3 as interpreted in Re Beaumont, decd. [1980] Ch. 444. 140 Ibid. s. 3A (as amended by the Law Reform Succession Act 1995). 141 This may be contrasted with the position in New Zealand, e.g., where s. 21 of the Matrimonial Property Act 1976 regulates premarital contracts. 142 See, e.g., L Becker, Property Rights: Philosophic Foundations (London, Routledge and Kegan Paul, 1977). 143 J Locke, Two Treatises of Government (ed. P I.aslett, Cambridge, Cambridge University Press, 1988) bk II § 27–8 at 287–9.
The Division of Property on the Breakdown of Intimate Relationships 221 decision from you makes them a part-owner of you; it gives them a property right in you.144
David Hume, in contrast, provided a more pragmatic defence of private property, focusing on its consequences. In his Treatise, Hume regarded the absolutist conception of property as “a convention entered into by all members of society to bestow stability on the possession of . . . external goods, and leave every one in the peaceable enjoyment of what he may acquire by his fortune and industry”.145 In the Enquires, Hume explained that an individual would favour this convention, “in order to give him encouragement to . . . useful habits and accomplishments”.146 Accounts based on liberty or utility are generally premised upon a particular conception of human nature, according to which rational individuals do not expend their labour unless they are assured of getting a return. By assigning things to particular owners and enforcing only those personal obligations and transfers of property that are bargained for, the law both rewards past labour and encourages future endeavour. Thus, according to this perspective, an absolutist conception of private property and the principle that people should be subject only to those obligations that they choose to assume are justified by considerations of both desert and efficiency. On this account, people are depicted as autonomous subjects who look to maximise their own welfare. Yet is this an accurate picture of human behaviour in intimate relationships, and does it reflect the social norms that regulate behaviour in this context?
4. The Premises Controverted (a) Intimacy as a Loss of Autonomy Legal doctrine fails to reflect adequately the widely felt judicial motivation for intervention in this context largely because of the inability of the courts to break free of the private ordering paradigm. The courts go through the convoluted exercise of analysing contributions made in the course of intimate relationships as if they were part of something resembling a market transaction. This involves what one commentator has described as “a perverse recharacterization of the parties as self-seeking strangers impersonally bargaining over market services in a commodity exchange”.147 In this way, “[l]ove is commodified into a commercial exchange 144
R Nozick, Anarchy, State and Utopia (New York, Basic Books, 1974) at 172. D Hume, A Treatise of Human Nature (2nd edn., ed. LA Selby-Bigge and PH Nidditch, Oxford, Clarendon Press, 1978) at 482. 146 D Hume, Enquiries Concerning Human Understanding and Concerning the Principles of Morals (3rd edn., ed. LA Selby-Bigge and PH Nidditch, Oxford, Clarendon Press, 1975) at 195. 147 B Horsburgh, “Redefining the Family: Recognizing the Altruistic Caretaker and the Importance of Relational Needs” (1992) 25 U of Mich. Jnl. of Law Reform 423 at 428; See also M Radin, Reinterpreting Property (Chicago, Ill., University of Chicago Press, 1993) 33. 145
222 Redistributive Proprietary Remedies of services for money”.148 What we need in contrast is an understanding of how obligations can arise outside exchange transactions, as a consequence of the parties’ connectedness and interdependence. Traditionally, private law is understood to safeguard interests that protect plaintiffs as individuals. An obligation is incurred to another only as a result of a wrongful interference with the other’s legal rights or by an agreement to alienate property or labour. According to this analysis, plaintiffs and defendants are treated, for all relevant purposes, as quite autonomous legal subjects. However, even Hume, who placed such value on the stability of property,149 noted that “common experience and observation” tell us that “[it]is easy to remark, that a cordial affection renders all things common among friends; and that married people in particular lose their marital property, and are unacquainted with the mine and thine which are so necessary, and yet cause such disturbance in human society”.150 The modern ideal of love may be seen as part of the process of individualisation that has transformed our understanding of our place in the world.151 Yet, at the same time, it tends to subvert this process: for, to a large degree, intimacy is in tension with independence.152 It is artificial to analyse the participants in romantic relationships as independent actors. Thus, notions of “unity” and “merging” pervade our discourse on love.153 Our spouse becomes not just our partner, but our “other half”, and we live in state of “marital symbiosis”.154 This reflects an understanding that intimacy involves a loss of autonomy, of a clear distinction between self and other—an understanding that is found in philosophical analyses of the concept of love155 and is supported by research in social psychology. Because parties in intimate relationships are likely to regard their interests as inextricably linked, they cannot be expected to safeguard their individual interests separately.156 They are more likely to have regard to their collective welfare and, because of this, the legalities of individual proprietary entitlement may appear
148
Horsburgh, supra n. 147 at 456. Hume, supra n. 145 at 514. 150 Ibid. at 495. Hegel made much the same claim, albeit rather more abstractly, in arguing that family property was, in its nature, common property: see GWA. Hegel, Elements of the Philosophy of Right (ed. Allen W. Wood, Cambridge, Cambridge University Press, 1991) § 167–71; see Radin, supra n. 147 at 46. 151 See Stone and Shorter, supra n. 115. 152 Beck and Beck-Gernsheim, supra n. 96 at 145. 153 See, e.g., I Singer, The Nature of Love: Vol 3, The Modern World (Chicago, Ill., Chicago University Press, 1987) 16–20; S Kerns, The Culture of Love: Victorians to Moderns (Cambridge, Mass., Harvard University Press, 1992) 281–93; Solomon, supra n. 78 at 112. 154 Beck and Beck-Gernsheim, supra n. 96 at 51 and 67. 155 M Fisher, Personal Love (London, Duckworth, 1990) 26. 156 A Aron et al., “Close Relationships as Including the Other in the Self” (1991) 60 Journal of Personality and Social Psychology 241; A Aron et al., “Falling in Love: Prospective Studies of Self Concept Change” (1995) 69 Jnl. of Personality and Social Psychology 1102; Agnew et al., “Cognitive Interdependence: Commitment and the Mental Representation of Close Relationships” (1998) 74 Jnl. of Personality and Social Psychology 939. 149
The Division of Property on the Breakdown of Intimate Relationships 223 irrelevant.157 This presents a challenge to the dominant Western understanding of personhood in terms of the “bounded individual”158 and the assumption that the individual is necessarily the appropriate unit for the ascription of rights and responsibilities.159 The courts have used different phrases to characterise the relationships that they perceive as demanding special treatment: “partnership’’,160 “consortium’’,161 “joint venture’’,162 and “joint endeavour”163 are a few. All of these expressions encapsulate, however awkwardly, the notion of a relationship in which those involved are, in some significant way, leading their lives as a co-operative endeavour, rather than acting autonomously. In considering parties’ entitlement to assets used and accumulated in the course of their relationship, what is at issue is whether the parties have conducted their lives in such a way that it would be unreasonable to treat them as independent actors protecting their individual selfinterest. In asking this question, the courts have tended to look for factors that demonstrate that the parties understood that their lives were integrated, in that they would enjoy the fruits of the relationship together and, equally, share its hazards.164 While the understanding of intimate relationships in terms of the integration of individuals’ lives is no doubt grounded to a real degree in empirical observation, the departure from conventional understandings of autonomy in this context also has a significant normative dimension.165 The approach of the courts, particularly in Australia and in some American states, reflects a view that the parties involved should treat their cohabitive relationships as joint ventures. The courts will not sanction exploitation or opportunism. In this way, the law mirrors and, to a certain extent, guides the values of the wider community. It reflects and consolidates our ideal of love as involving a fusion of interests and the absence of selfishness. 157 Moreover, where parties do have regard to their own interests, often what takes place is not a straightforward bargaining process but involves the use of tactics that are designed to avoid open conflict: T Falbo and L A Peplau, “Power Strategies in Intimate Relationships” (1980) 38 Jnl. of Personality and Social Psychology 618. 158 See C Geertz, “From the Native’s Point of View: On the Nature of Anthropological Understanding” in P Rabinow and WM Sullivan (eds.), Interpretive Social Science (Berkeley, Cal., University of California Press, 1979) 225 at 229. 159 This may be compared with Derek Parfit’s analysis in Reasons and Persons (Oxford, Clarendon Press, 1984). There, Parfit challenged the dominant physically-based conception of the self, with a psychologically-based conception that emphasised the importance of psychological continuity through time, and so recognised the possibility of “successive selves”, thereby rendering problematic the ascription of responsibility for past acts. This inquiry, in contrast to Parfit’s diachronic perspective, can be understood as attacking the orthodox synchronic perspective of the self as a bounded individual. 160 Pickens v. Pickens 490 So. 2d 872 (Miss., 1986) at 876. 161 Oliver v. Bradley [1987] 1 NZLR 586 at 590. 162 Muschinski v. Dodds (1985) 160 CLR 583 at 618. 163 Pettkus v. Becker (1980) 117 DLR (3d) 257 at 277. 164 Ultimately, this requires an overall evaluation of the parties’ relationship; inevitably this will be a very fact-specific inquiry. For a catalogue of factors frequently taken account of by courts in the course of this inquiry see Rotherham, supra n. 69 at 424–5. 165 See J Eekelaar, “Non-matrimonial Property” in P Birks (ed.), The Frontiers of Liability (Oxford, Clarendon Press, 1990) 204 at 208.
224 Redistributive Proprietary Remedies Of course we may take a different view and regard as harmful the “loss of self” that occurs in intimate relationships.166 Indeed, much self-help literature is directed at encouraging partners to adopt more individualistic attitudes in their relationships and to negotiate openly their roles, rights and obligations.167 However, a more pervasive view is one reflected in Lord Hodson’s remark in Pettitt v. Pettitt that the thought that couples may reach agreements as to their separate legal rights is “grotesque”.168 Thus, while the courts have frequently observed that those in relationships are unlikely to strike self-interested bargains, they do not suggest that this is a cause for criticism. The post-romantic vision of intimate relationships apparently involves an expansion of the market-place into the personal sphere,169 which many of us find alarming. For example, most of us—and not least the courts—remain wary of pre-marital contracts that make divorce a “wedding guest”.170 The notion that intimate relationships provide a haven from the calculating world of commerce retains great power.171 (b) Love and Irrationality People are prone to underestimating significantly the risks they face in life generally.172 However, this tendency is particularly acute in the context of intimate relationships. The product of the romanticism of modern western ideals of intimacy is a culturally induced irrationality in decision-making about close relationships.173 This leads to a systematic failure to maximise self-interest, both in the exercise of choice in the “market” for prospective partners and in subsequently making risk-laden investment decisions in the course of relationships. Research suggests that those in intimate relationships tend to idealise their partners and the quality of their relationships.174 It is also probable that those in intimate relationships spectacularly miscalculate the likelihood of their relationships ending. For example, in a study of applicants for marriage licences in the United States, those interviewed accurately estimated the national rate of divorce at 50 per cent; and yet, when asked of the probability that their own marriages would fail, the median 166 See, e.g., J Hampton, “Selflessness and the Loss of Self” in EF Paul, F Miller and J Paul, Altruism (Cambridge, Cambridge University Press, 1993) 135; A Giddens, The Transformation of Intimacy: Sexuality, Love and Eroticism in Modern Societies (Cambridge, Polity, 1992) 90. 167 Beck and Beck-Gernsheim, supra n. 96 at 54. See also Giddens, supra n. 166 at 92. 168 Pettitt v. Pettitt [1970] l AC 777 at 810. 169 B Ehrenreich and D English, For Her Own Good: 150 Years of the Experts’ Advice for Women (London, Pluto Press, 1979) 276; Beck and Beck-Gernsheim, supra n. 96 at 157. 170 Beck and Beck-Gernsteim, supra n. 96. at 155. 171 Ibid. at 141. 172 See, e.g., Z Kunda, “Motivated Inference: Self-Serving Generation and Evaluation of Causal Theories” (1987) 53 Journal of Personality and Social Psychology 636; C Sunstein, “Behavioral Analysis of Law” (1997) 64 U Chi. L Rev. 1175 at 1183. 173 See, e.g., Goody, supra n. 133. 174 P Van Lange and C Rusbult, “My Relationship is Better Then—and Not as Bad As—Yours Is: The Perception of Superiority in Close Relationships” (1995) 21 Personality and Social Psychology Bulletin 21 at 32.
The Division of Property on the Breakdown of Intimate Relationships 225 response was 0 per cent.175 If the expectations of those cohabiting outside marriage are remotely as optimistic, we can predict that parties will tend to fail to face up to the dangers of making unremunerated contributions in the course of their relationships. As a consequence, partners will fail to bargain rationally to safeguard their position. Perhaps it would be unfortunate if it were different; for it seems that a lack of realism about the probability of a relationship enduring increases the likelihood that it will survive.176 (c) Problems of Information Those in intimate relationships face a further difficulty in making informed decisions about their relationships. To a significant degree, such decisions depend on information to which they have limited access, namely the true personality, motivation and commitment of the other partner. Parties to a relationship may convey misleading signals either deliberately or as a consequence of misinterpreting their own feelings. Even if both parties in a relationship are committed, they may not be prepared to co-operate with each other in an optimal fashion because of their inability to be sure of the motivations of their partner.177 The result is that very often those in intimate relationships are not in possession of the facts necessary to make informed decisions. 5. Intimacy as Market Failure (a) The Economics of Intimacy A striking feature of neo-classical economics has been its spread into areas of social life that would not normally be regarded as functioning as a market.178 Intimate relationships and the problems surrounding the division of property following their breakdown have not escaped this trend. Leading the way, Gary Becker of the University of Chicago has argued that “since men and women compete as they seek mates, a market in marriages can be presumed to exist. Each person tries to find the best mate, subject to the restrictions imposed by market conditions”.179 175 L Baker and R Emery, “When Every Relationship is Above Average: Perceptions and expectations of Divorce at the Time of Marriage” (1993) 17 Law and Human Behavior 439 at 443. Also see Regan, supra n. 90 at 2385; Beck and Beck-Gernsheim, supra n. 96 at 99. 176 SL Murray, JG Holmes and DW Griffin, “The Benefits of Positive Illusions: Idealization and the Construction of Satisfaction in Close Relationships” (1996) 70 Jnl. of Personality & Social Psychology 79 and “The Self-fulfilling Nature of Positive Illusions in Romantic Relationships: Love Is Not Blind, but Prescient” (1996) 71 Jnl. of Personality & Social Psychology 1155. On the benefits of self-deception more generally see S Taylor, Positive Illusion: Creative Self-Deception and the Healthy Mind (New York, Basic Books, 1989) 10–11. 177 E Posner, Law and Social Norms (Cambridge, Mass., Harvard University Press, 2000) 17. 178 For an account see N Duxbury, Patterns of American Jurisprudence (Oxford, Clarendon Press, 1995) 377–81. 179 G Becker, The Economic Approach to Human Behaviour (Chicago, Ill., University of Chicago Press, 1976) 206, quoted in Duxbury, supra n. 178 at 378.
226 Redistributive Proprietary Remedies Becker describes marriage as “the term for a written or customary long-term contract between a man and a woman to produce children, food, and other commodities in a common household”.180 Similarly, behaviour within these relationships is also analysed on the basis that partners’ decisions within the relationship can largely be understood in terms of rational investment and efficient division of labour.181 The presence or absence of rationality in this sphere is not an immutable feature of human nature. The practices of selecting marital partners found in some societies more closely resemble an ideal market than do those in others. This may have been true of, for example, sixteenth-century England, where, according to Lawrence Stone, “romantic love and lust were strongly condemned as ephemeral and irrational grounds for marriage”.182 In contrast, the romantic ideals prevalent in modern Western society mean that the model of the self-interested rational individual provides a poor predictor of behaviour in intimate relationships. As a consequence, the conclusions reached through the application of economic analysis in this area are often rather bizarre.183 This sphere of life does not resemble a properly functioning market largely because we would not wish it to. (b) Market Failure and its Consequences While it contains more than a grain of truth, the analogy between behaviour in intimate relationships and markets needs to be approached carefully. It can provide a useful heuristic device if one considers the extent to which the “marriage market” does not function efficiently. The economic concept that best explains the problems faced in this context is that of “market failure”.184 The lack of rationality in selecting partners and planning for the eventuality of separation, the relative absence of autonomy within intimate relationships and problems of information found in this context mean that decisions taken in this sphere cannot be regarded as consistently maximising the welfare of the decision-maker. Where there is a properly functioning market, norms emphasising private property and freedom of contract are thought to promote efficient outcomes, as parties bargain and reach agreements that they understand to be to their mutual advantage. In such conditions, the market is often considered “a morally free zone’’,185 within which people 180 G Becker, A Treatise on the Family (enlarged edn., Cambridge, Mass., Harvard University Press, 1991) 43. 181 Ibid. at 30–79. 182 Stone, supra n. 87 at 86. For an account of the prosiac attitudes toward marriage that prevailed in eighteenth-century New England, see F Cancian, Love in America: Gender and Self-Development (Cambridge, Cambridge University Press, 1987) 17. For a summary of German social historical analysis of this field see Beck and Beck-Gernsheim, supra n. 96 at 48. 183 For an account of some of the literature see Regan, supra n. 90 at 2331–3. 184 The concept is widely used in transaction cost economics, see, e.g., G Calabresi and D Melamed, “Property Rules, Liability Rules and Inalienability: One View of the Cathedral” (1972) 85 Harv. L Rev. 1089 at 1106–10; L Becker, Property Rights (London, Routledge and Kegan Paul, 1977) 68–74. 185 See, e.g., J Coleman, Risks and Wrongs (Cambridge, Cambridge University Press, 1992) at 4; R Epstein, “Property and Necessity” (1990) 13 Harv. Jnl. of Law and Pub. Policy 2 at 4.
The Division of Property on the Breakdown of Intimate Relationships 227 can be left to get on with their lives. However, where markets do not function properly, ethical dilemmas arise. A particular danger of using market norms in the presence of systematic irrationality is that they may create opportunities for exploitation. Thus, it has been observed that the traditional approach to property division on the breakdown of intimate relationships “often operates to the great advantage of the cunning and the shrewd”.186 Carol Rose describes how those with a “taste for co-operation” are liable to over-invest in a relationship, while the selfish wealth-maximiser is liable to free-ride.187 Research suggests that women are more inclined to co-operate than are men.188 It seems that women are more prone to idealising their relationships than are men,189 and apparently in all cultures, wage-earning women tend to devote a greater part of earnings to the family than do men.190 Whether these traits are a product of biology or acculturation is unclear. What is obvious is that an insistence on private ordering norms is liable to disadvantage women systematically. Even if there is not conscious exploitation at the outset of a relationship, social conditions are such that women tend to be left in a vulnerable position anyway. Much of this is the result of specialisation of labour. While in pre-industrial societies couples generally worked together as a team, they are now often divided by work.191 Equality can turn partners into rivals, raising the question of who will make the sacrifices involved in assuming a domestic role. The idea that there must be specialisation of labour within the family has long been pervasive. Moreover, some, such as Talcott Parsons, have argued, more specifically, that a wellfunctioning family requires an instrumental father and an expressive mother.192 Certainly, women are more liable to make the type of investments in a relationship that function as sunk costs in that they will be, in monetary terms, essentially worthless if the relationship ends. In particular, women are disproportionately likely to accept responsibilities for child care, while men are likely to pursue career paths that increase their future earning potential. In part, this is a product of culturally generated expectations, and in part it is due to the reality of institutionalised discrimination that means that those women who dedicate themselves to a 186 West v. Knowles 311 P 2d 689 (Wash., 1957) per Finley J . See also Watts v. Watts 405 NW 2d 303 at 313 (Wis., 1987) per Abrahamson J. 187 See especially C Rose, Property and Persuasion (Boulder, Colo., Westview Press, 1994) at 233. See also M Neave, “Resolving the Dilemma of Difference: A Critique of ‘The Role of Private Ordering in Family Law”’ (1994) 44 University of Toronto LJ 97 at 123–5. 188 See generally C Gilligan, In a Different Voice (Cambridge, Mass., Harvard University Press, 1982); JB Miller, Toward a New Psychology of Women (Boston, Mass., Beacon Press, 1986); R West, “Gender and Jurisprudence” (1988) 55 U of Chi. L Rev. 1; E Rasmusen and J Evans Stake, “Lifting the Veil of Ignorance: Personalising the Marriage Contract” (1998) 73 Ind. LJ 453 at 472–3. 189 C Rusbult et al., “What Do We Really Want: Mental Models of Ideal Romantic Involvement Explored Through Multidimensional Scaling” [1993] Journal of Experimental Social Psychology 493. 190 J Pahl, “His Money, Her Money: Recent Research on Financial Organisation in Marriage” (1995) 16 Journal of Economic Psychology 361 at 373. 191 Beck and Beck-Gernsheim, supra n. 96 at 144. 192 See Cancian, supra n. 182 at 37; Beck and Beck-Gernsheim, supra n. 96 at 61.
228 Redistributive Proprietary Remedies career are likely to earn less than similarly situated men. Thus, if partners in an intimate relationship accept that it makes sense for one of them to specialise in the market sector and the other in the family sector, the harsh realities of discrimination against women in the workplace mean that efficient specialisation of labour will, more often than not, involve the woman accepting the domestic role.193 Social psychologists have noted that an important factor in determining commitment to a relationship is the extent to which a partner has made investments the value of which will be lost if the relationship comes to an end.194 The outcome of the tendency for women to make greater relationship-specific investments is that, unless there are norms in place that provide for a redistribution of resources in response to their contributions, women are more likely to suffer economically in the wake of the dissolution of intimate relationships.195 Men, in contrast, are more likely to have invested in their own labour capital. As a result, their economic prospects and their prospects for remarriage are typically much brighter.196 A consequence of this is that women have less opportunity to “exit” a relationship than do men.197 Where the risks associated with investments in a relationship are distributed in such a way that they tend to be borne by women alone, we are effectively encouraging unequal commitment to relationships. The situation is not so much one of interdependence as one in which there is asymmetrical vulnerability that disempowers women. (c) The Case for Intervention Ultimately, justifications for absolutist conceptions of private property and freedom of contract are predicated on a view of human behaviour that is not consistent with the social practices found in intimate relationships. As we saw, one justification for private property would have it that the institution is required in order to promote our liberty by safeguarding us in the enjoyment of the fruits of our labour. However, this justification breaks down where people do not act as autonomous individuals. Because those in intimate relationships generally fail to bargain rationally to ensure some separate entitlement in return for their efforts, 193
Ellman, supra n. 44 at 46; Becker, supra n. 180 at 63; Regan, supra n. 90 at 2329–34. C Rusbult, “A Longitudinal Test of the Investment Model: the Development (and Deterioration) of Satisfaction and Commitment in Heterosexual Involvements” (1983) 45 Journal of Personality and Social Psychology 101; JA Simpson, “The Dissolution of Romantic Relationships: Factors Involved in Relationship Stability and Emotional Distress” (1987) 53 Journal of Personality and Social Psychology 683. 195 See, e.g., L Weitzman, The Divorce Revolution (New York, Free Press, 1985); J Eekelaar and M MacLean, Maintenance after Divorce (Oxford, Clarendon Press, 1986). On the cost to women of staying at home to rear children see M Oldham, “Homemaker Services and the Law” in D Pearl and R Pickford (eds.), Frontiers of Family Law II (Chicester, Wiley, 1995) 270 at 282. 196 See A Wax, “Bargaining in the Shadow of the Market: Is there a Future for Egalitarian Marriage?” (1998) 84 Virginia L Rev. 509 at 547. 197 See SM Okin, Justice, Gender and the Family (New York, Basic Books, 1989) 137–9; J Bernard, Women, Wives, Mothers: Values and Options (Chicago, Ill., Aldine, 1975) 223; C Rusbult et al., “Accommodation Processes in Close Relationships: Theory and Preliminary Empirical Evidence” (1991) 60 Jnl. of Personality & Social Psychology 53 at 56, 74. 194
The Division of Property on the Breakdown of Intimate Relationships 229 judicial intervention can be justified as doing no more than ensuring that partners are rewarded for their industry and as giving effect to the “trite but deeply felt socio-economic and philosophical conviction that one should not reap what others have sown”.198 In contrast, to treat property as providing an unbreachable sphere of freedom would give rise to unfairness and the danger of exploitation. The other popular justification for private property is based on utility, demanding that property be inviolable in order to encourage the productive use of resources. In the context of intimate relationships, the problem is that an absolutist approach to property may not offer the most effective means of maximising utility. First, to the extent that parties in an intimate relationship do not consider the legal consequences of their interaction, a rule that does not provide for absolute freedom from expropriation is not liable to affect the parties’ conduct significantly. Secondly, to the extent that the parties are aware of the risks involved in investing in these relationships, there is a danger that an absolutist rule will discourage such investment. Of course the parties have the option of bargaining to protect their position. However, the stigma attached to such negotiations in our society will preclude many parties from taking this action.199 The tendency for those in intimate relationships—and particularly women—to avoid conflict means that such issues are unlikely to be addressed directly.200 Moreover, there is a collective action problem: whether, because of distaste felt toward the idea of bargaining about these matters or selfinterest, men are liable to avoid commitment to those who insist upon the contractual regulation of their relationships.201 Given this, a rule that rewards contribution even without agreement actually seems to be the most efficient way of encouraging productive investment in a relationship.202 If this approach were taken, the autonomy of the individual would still be respected in that those who positively wished to safeguard their separate entitlement to property might bargain for this right. Thus, consistently with the notion of market failure, there is a case for intervention to simulate a well functioning market: giving effect to that set of entitlements for which rational decision-makers would themselves have contracted. The result would be what might be regarded as a default contract—a set of rights and obligations which applies unless the parties choose to bargain around it. This “contract” would reward contributions to relationships and prevent the exploitation of co-operative behaviour.203 If we cannot ensure that parties are fully 198 Litman, “The Emergence of Unjust Enrichment as a Cause of Action and the Remedy of Constructive Trust” (1988) 26 Alberta L Rev. 407 at 408. 199 On the “signalling” problem posed by premarital agreements see Bix, supra n. 111 at 198. 200 See E. Kirchler, “Spouses Joint Purchase Decisions: Determinants of Influence Tactics for Muddling Through the Process” (1993) 14 Journal of Economic Psychology 405 at 430–1. 201 Wax, supra n. 196 at 649. 202 On the importance of the “interdependence structure underlying a relationship” for fostering prosocial behaviour, see P Van Lange et al., “From Game Theory to Real Life: How Social Value Orientation Affects Willingness to Sacrifice in Ongoing Close Relationships” (1997) 73 Journal of Personality and Social Psychology 330 at 333. 203 See M Trebilcock and R Keshvani, “The Role of Private Ordering in Family Law: A Law and Economics Perspective” (1991) 41 U. of Tor. LJ 533 at 556; Trebilcock, supra n. 1 at 46–7; Rose, supra n. 187 at 256–7; Ellman, supra n. 44 at 50.
230 Redistributive Proprietary Remedies informed and rational, we can at least create a set of entitlements that encourages the prosocial behaviour needed for healthy relationships by ensuring that the risks that parties bear are commensurate with the investments they have made.
6. Institutional Considerations Of course, even if it were accepted that intervention was justified in this context, questions of institutional competence and legitimacy would inevitably arise.204 Is the judiciary capable of successfully effecting such reform and, if so, is this a proper task for it to undertake in a democratic society? The experience of Australia, Canada and New Zealand suggests that the courts can implement effective reform in this area. Ultimately, the willingness of the judges to formulate innovative bases for relief has, to a large degree, turned on their views on the limits of the common law and its role in effecting social justice. Those who have promoted doctrines that markedly depart from classical liberal understandings of property and contract have emphasised the extent of historical development that the law has already undergone in this area205 and have argued that the common law must reflect changing societal values.206 In contrast, some judges have suggested that such a programme of social reform would be more appropriately left to the legislature.207 Yet, it is difficult to see that it would be more legitimate to leave the common law in the state in which it arrived after centuries of judicial innovation than to sanction further change. Moreover, the legislature ultimately has the power to modify or reverse any common law intervention. Unless the courts are going to abdicate their responsibility for developing the common law, there is little excuse for not effecting change that judges might regard as necessary for promoting social justice in this context.
V . IS PROPRIETARY RELIEF JUSTIFIED ?
The doctrines that have been developed in this area have tended to result in the award of proprietary relief. This section considers why this is so and whether it should be the case.
204 See, e.g., Trebilcock, supra n. 1 at 248–53 (arguing that the courts are not generally in a position to deal effectively with market failures). 205 This is illustrated by all the seminal judgments in the jurisdictions that have taken more innovative approaches. See Dickson J in Pettkus v. Becker (1980) 117 DLR (3d) 257 at 313; Cooke J in Hayward v. Giordani [1983] NZLR 141 at 148; Deane J in Muschinski v. Dodds (1985) CLR 583 at 616. 206 See, e.g., Hayward v. Giordani [1983] NZLR 141 at 148 per Cooke J (“a function of the Courts must be to develop common law and equity so as to reflect the reasonable dictates of social facts”). 207 See, e.g., Pettitt v. Pettitt [1970] AC 777 at 805 per Lord Morris, 811 per Lord Hodson, and 817 per Lord Upjohn; Gissing v. Gissing [1971] AC 886 at 898 per Lord Morris and 901 per Dilhorne VC; Gillies v. Keogh [1989] 2 NZLR 327 at 348 per Richardson J.
The Division of Property on the Breakdown of Intimate Relationships 231 1. The Significance of a Causal Connection between Contributions and Assets (a) The Causal Connection Requirement A persistent controversy in this area concerns the judiciary’s tendency to require a causal link between a plaintiff’s contributions and the assets in respect of which a proprietary remedy is sought. The basis for such a link is clear enough in the case of the purchase money resulting trust, which can perhaps best be understood as involving a continuing proprietary interest.208 However, a connection of this kind seems less relevant to doctrines that focus on the parties’ common intention or the plaintiff’s expectations. Thus, it is entirely appropriate that English authority on the common intention constructive trust holds that, once the existence of a shared understanding can be demonstrated, any contributions may be taken into account for the purposes of quantifying the plaintiff’s proprietary interest.209 On the other hand, causal connections play an important evidential role in English law. In the absence of any express agreement, in order to infer a common intention to share beneficial ownership of particular assets, the courts require a financial contribution to those assets.210 Apart from direct contributions to the purchase price, it also seems that payments of mortgage instalments will suffice.211 Yet this insistence on direct financial contributions appears arbitrary when one considers research on patterns of money management in intimate relationships.212 Even when both partners’ wages are necessary to the operation of the household, men tend to contribute to “essentials” such as mortgages, while women’s wages are spent on what are understood to be “luxuries’’.213 This pattern reflects the stereotype of the male as breadwinner and is not closely related to couples’ understandings of how their earnings and any property acquired with them are owned.214 Surprisingly, those jurisdictions that have developed doctrines that, in part or whole, eschew a focus on subjective states of mind have tended to continue to insist on such causal connections. In Sorochan v. Sorochan, Dickson CJ concluded that, short of a contribution to the acquisition of the assets in question, the plaintiff’s contributions had to relate “to the preservation, maintenance or improvement of the property” so that “the services rendered have a ‘clear proprietary 208
Supra n. 5 and accompanying text. See Midland Bank v. Cooke [1995] 4 All ER 562; discussed supra n. 10. 210 Lloyds Bank v. Rosset [1991] AC 107. See supra n. 5 and accompanying text. 211 See, e.g., Gissing v. Gissing [1971] AC 886 at 906 per Lord Diplock; Burns v. Burns [1984] Ch. 317 at 327 per Fox LJ; Lloyds Bank v. Rossett [1990] AC 107 at 133 per Lord Bridge; cf. Springette v. Defoe [1992] 2 FLR 388 at 392 per Dillon LJ. See K Gray and S Francis, Elements of Land Law (3rd edn., London, Butterworths, 1993) 691–7. 212 A Morris and S Nott, With All My Worldly Goods: A Feminist Perspective on the Legal Regulation of Wealth (Aldershot, Dartmouth, 1995) 205. 213 Ibid. at 190–2. 214 J Pahl, “Earning, Sharing, Spending: Married Couples and Their Money” in R Walker and G Parker (eds.), Money Matters (London, Sage, 1987) 195 at 197. 209
232 Redistributive Proprietary Remedies relationship’’’.215 Yet, on reflection, it is far from obvious why a direct contribution to specific assets should be understood as establishing a “clear proprietary relationship” with those assets, while some other sort of causal connection should not. Given that the focus of the Canadian doctrine is on the plaintiff’s expectations, should it not be sufficient that the defendant was benefited as a result of the plaintiff’s expectation of receiving an interest in the particular asset, regardless of whether the contribution in question was made directly to that asset? While it is difficult to understand why it should be required by the Australian “joint venture” doctrine, the New South Wales Court of Appeal has also taken the view that a causal link between the plaintiff’s contributions and specific property is a precondition for proprietary relief.216 This position had already found support in the New Zealand Court of Appeal. Thus, in Pasi v. Kamana, Cooke P concluded that the courts’ “inquiry must focus on whether there has been a sufficient direct or indirect contribution by one de facto partner to a specific property. . . to carry an interest in it”.217 Again, this precondition seems out of place with a doctrine based on objectively reasonable expectations.218 It would have been more consistent with the “reasonable claimant” test to ask whether one would reasonably expect an interest in property to follow from the contributions in question.219 (b) “Indirect” Causal Connections Ultimately, it may be that the requirement of a causal connection has little effect. It is accepted that it is enough for contributions to an asset to be “indirect”.220 Almost any contribution can be said to be referable to property. For example, it may be said that domestic endeavours contribute indirectly to the maintenance of the home221 or to the defendant’s material wealth.222 Observers of Canadian law note, with some concern but also a degree of sympathy, that the causal connection demand has been applied unpredictably and loosely in quasi-matrimonial property cases.223 215 (1986) 29 DLR (4th) 1 at 10. Dickson CJ was adopting a phrase used by McLeod in an annotation of an earlier decision: Herman v. Smith (1984) 42 RFL (2d) 154. This view was reiterated in Peter v. Beblow (1993) 101 DLR (4th) 621 at 650, where McLachlin J commented that “there must be a link between the services rendered and the property in which the trust is claimed”. 216 Bryson v. Bryant (1992) 29 NSWLR 188 at 231 per Samuels JA. 217 [1986] 1 NZLR 603 at 605. 218 Supra nn 48–52 and accompanying text. See Mee, supra n. 5 at 278 219 On the other hand, as already mentioned, the “reasonable claimant” test begs the question (see supra, text accompanying nn. 81–82). We must first ask in what circumstances it would be reasonable to expect a proprietary interest; and this question invites us to consider the matter from first principles of justice. 220 See, e.g., Lankow v. Rose [1995] 1 NZLR 277 at 295 per Tipping J. On the other hand, in Peter v. Beblow (1993) 101 DLR (4th) 621 at 650, McLachlin J commented that “[a] minor or indirect contribution is insufficient” to establish a constructive trust”. However, this is difficult to reconcile with decisions cited supra at n. 223. 221 Herman v. Smith (1984) 34 Alta. LR (2d) 90 at 93. 222 Rosenich v. Rosenich (1989) 75 Alta. LR (2d) 327 at 337. 223 The rule was invoked to deny a proprietary interest in Davidson v. Worthing (1987) 26 ETR 26 and Everson v. Rich (1988) 53 DLR (4th) 470 at 475. Yet there is no sound basis for distinguishing the
The Division of Property on the Breakdown of Intimate Relationships 233 For example, in Murray v. Roty, Cory J concluded: It may well be necessary and appropriate to scrutinize closely the contributions of business partners to the acquisition of property. It is unnecessary and inappropriate to scrutinize the contributions of married couples or couples in a relationship such as this one in the same way.224
Subsequently, in Peter v. Beblow, three members of the Canadian Supreme Court were prepared to do away with the requirement of a causal connection altogether in this context.225 Ultimately, however, orthodoxy prevailed and an exception was not developed. Generally, New Zealand courts also seem to favour a generous approach to this issue.226 “Indirect” causal attributions are highly arbitrary. At least two issues emerge. First, we may ask to what is the running of the home a contribution? Where the parties have children, the contribution of the homemaker will obviously have been central to their upbringing. The homemaker’s contribution may also be said to have facilitated the payment of a mortgage. Yet it may equally be said to have enabled the parties to take the holidays they enjoyed during the relationship. Secondly, even when we are prepared to conclude that, without the other partner’s contribution, the parties could not have afforded both to meet mortgage payments and to support a family, this does not necessarily indicate that the contribution in question was a sine qua non for the discharge of the mortgage. This will depend upon the parties’ priorities. It may be likely that, if the plaintiff had declined to make the contribution in question, the result would not have been that the home would have been lost but that the parties would not have had children. (c) The “Proprietary Link” as Transcendental Nonsense The understanding that a causal connection—and that alone—establishes “a clear proprietary relationship”227 gives judicial intervention in this context an appearance of orthodoxy by suggesting a connection with the doctrine of tracing. The existence of a causal connection suggests that plaintiffs may “trace” their contributions into a particular asset, which they may then claim as their own.228 The requirement suggests that the plaintiff is claiming his or her own property rather contributions made in those cases (substantial domestic contributions) from those made in other cases in which proprietary relief was awarded. See, e.g., Herman v. Smith (1984) 34 Alta. LR (2d) 90; Rosenich v. Rosenich (1989) 75 Alta. LR (2d) 327 and Sorochan v. Sorochan (1986) 29 DLR (4th) 1. 224 (1983) 147 DLR (3d) 438 at 444. This dictum was approvingly quoted by Dickson CJ in Sorochan v. Sorochan (1986) 29 DLR (4th) 1 at 9. See also D Paciocco, “The Remedial Constructive Trust: A Principled Basis for Priorities over Creditors” (1989) 68 Can. Bar Rev. 315 at 334. 225 (1993) 101 DLR (4th) 621. 226 See, e.g., Lankow v. Rose [1995] 1 NZLR 277 at 282 per Hardie Boys J. On the other hand, more recently, in Nuthall v. Heslop [1995] NZFLR 755 at 758, Tipping J, having returned to the High Court after giving one of the judgments in Lankow v. Rose, indicated that the claims of “passive” contribution to assets had to be approached with some caution. 227 See supra n. 215. 228 See, e.g., Paciocco, supra n. 224 at 331–3. For an account of rhetoric of tracing and its relationship with axiomatic understandings about property, see supra, ch. 5.
234 Redistributive Proprietary Remedies than benefiting from a judicially-directed readjustment of proprietary rights. Yet, given that relatively indirect contributions may give rise to a proprietary remedy, the link with traditional tracing doctrine is tenuous.229 There is no reason why a direct contribution to particular property should be understood as naturally indicating “a clear proprietary relationship”.230 The importance attached to causal connections in this context is rather reminiscent of Locke’s metaphysical justification of property in terms of assets being “mixed” with labour.231 It reflects a tendency to base proprietary rights on what Hume referred to as “relations and connexions of the imagination”.232 It also illustrates our tendency to employ property as a “magic solving word”,233 whereby the statement that something simply is the property of the plaintiff is offered as if it were a fundamental justification rather than a legal conclusion. The judicial response to this area supports George Palmer’s contention that “[t]he constructive trust idea stirs the judicial imagination in ways that . . . terms associated with quasi contract have never quite succeeded in duplicating”.234 The result is that, despite the fact that it should be much more difficult to provide a convincing justification for giving property rights, we are often more ready to grant proprietary remedies than we are to give personal relief. While judges have taken some comfort from basing their reasoning on the ground that the assets in dispute are the plaintiff’s property, such logic is ultimately circuitous and obfuscatory. What is required is a justification for giving proprietary relief in these, and not other, circumstances. Preferable to the transcendental nonsense that accounts for the insistence on causal connections between contributions and the assets claimed would be a two-stage inquiry that asked, first, whether relief was merited and, secondly, whether that relief should be proprietary.235 This latter stage ought to take account of, first, the competing interests of the plaintiff and the defendant and, secondly, those of third parties who may be affected by the recognition of these property rights.
229 WMC Gummow, “Unjust Enrichment, Restitution and Proprietary Remedies” in P Finn (ed.), Essays in Equity (Sydney, Law Book Co, 1985) 47 at 77. 230 See Sorochan v. Sorochan (1986) 29 DLR (4th) 1 at 10 per Dickson CJ. See supra n. 215 and accompanying text. 231 J Locke, Two Treatises of Government (ed. P Laslett, Cambridge, Cambridge University Press, 1988) bk II § 27 at 287–8. 232 D Hume, A Treatise of Human Nature (2nd edn., ed. LA Selby-Bigge and PH Nidditch, Oxford, Clarendon Press, 1978) 512. 233 F Cohen, “Transcendental Nonsense and the Functional Approach (1935) 35 Col. L Rev. 809 at 820. 234 Palmer, Law of Restitution i § 1.3 at 16. See supra, ch. 3.II.1 235 This is a view with considerable support in both Australia and Canada. For Australia: see, e.g., Re Osborn (1989) 91 ALR 135 per Pincus J; and R Austin, “The Melting Down of the Remedial Constructive Trust” (1988) 11 UNSW LR 66 at 85. For Canada: see, e.g. LAC Minerals v. Corona (1989) 61 DLR (4th) 14 at 51 per La Forest J; and P Maddaugh and J McCamus, The Law of Restitution (Aurora, Ont., Canada Law Book, 1990) at 95.
The Division of Property on the Breakdown of Intimate Relationships 235 2. Plaintiffs’ Psychological Connection with Property (a) The Psychology of Ownership Certain aspects of our psychological connection with things suggest that the task of determining the remedy appropriate in this context is agonisingly difficult. As mentioned, owners tend to exhibit the “endowment effect”: a predisposition to placing a higher value on things in respect of which they enjoy some entitlement than on things in which they have never had an interest.236 As a consequence, owners will often require an offer well above the market price before they will part with their property. Similarly, owners will feel aggrieved if their rights are limited to an entitlement to compensation for deprivation, rather than to the protection of their use and enjoyment of the specific thing.237 The endowment effect can be observed in relation to the most mundane objects. However, the aversion to parting with an asset becomes even more marked when the object in question is something unique to which one has formed a strong psychological attachment.238 Property is not only important for its instrumental value; it can serve to provide “symbolic expressions of aspects of self, such as personal and social identity”.239 Among legal scholars, Margaret Radin has most closely explored the nature and significance of such attachments. She argues that, while much of what we own is essentially fungible and prized by us only for its exchange value, certain objects have a special role in the development of our personal identity. Such objects can become so central to our sense of self that their loss is felt as striking at who we are.240 It may be, however, that the sexes are not equally prone to such reactions. Women, it seems, tend to identify more personally with their possessions, becoming more emotionally attached to them. Men, in contrast, tend to take a more instrumental and utilitarian perspective toward their possessions.241 Radin reasons that certain person-object relationships merit, and indeed often do receive, special treatment in our legal system. This is a justification for property that does not necessarily point to owners’ rights being unqualified and free from redistribution at all costs. Where one has enjoyed the benefit of particular 236
See supra, ch. 4.II.1. D Cohen and J Knetsch, “Judicial Choice and Disparities Between Measures of Economic Values” (1992) 36 Osgoode Hall LJ 737. 238 See the summary of the research in J Rachlinski and F Jourden, “Remedies and the Psychology of Ownership” (1998) 51 Vanderbilt L Rev. 1541 at 1553. 239 H Dittmar, The Social Psychology of Material Possessions, To Have is to Be (Hemel Hempstead, Harvester Wheatsheaf, 1992) 61. 240 Radin, supra n. 147 at 35–71. For a survey and analysis of empirical research on this question, see Dittmart, supra n. 239 at 41–64. For a study of the differing protection given to diverse resources depending on their importance to our sense of self see H Dagan, Unjust Enrichment: A Study in Private Law and Public Values (Cambridge, Cambridge University Press, 1997) 40–9 and 63–70. 241 For a summary of the research see F Rudmin, “Gender Differences in the Semantics of Ownership: A Qualitative Phenomenological Survey Study” (1994) 15 Jnl. of Economic Psychology 487 at 489. 237
236 Redistributive Proprietary Remedies property and had assumed that this would continue to be so, one might find the deprivation of further access to that property as traumatic as or even more traumatic than would the owner.242 This is likely to be particularly true where one believes that one has earned a right to the property in question, as research suggests that in these circumstances the endowment effect is felt especially acutely.243 Critics have doubted both the normative significance of the connection between property and self-identity and whether it offers a workable basis for determining in what way particular person-object relationships should be treated legally. The fact that a particular object is central to a given person’s sense of identity does not indicate that this relationship is a good thing. Radin, for instance, does not offer a comprehensive theory of personhood that would enable us to determine which person-object relationships are central to healthy self-development.244 Given that the strength of bonds to material possessions and the particular possessions that are most valued vary across cultures,245 at a normative level, Radin’s theory is open to charges of conservatism and cultural relativism. It suggests that we are dependent upon the prevailing values of our own community, a conclusion that is liable to cause some disquiet in pluralistic societies.246 On the other hand, it is difficult to comprehend where else our courts can look, other than to local societal values, for norms to regulate this situation or social life generally. There may be cases in which it is very difficult to draw the line between those classes of person-object relationships that are to be specially protected and those that are not. However, this is not true of the relationships at issue in this context; for the home that we consider our own provides a particularly strong example of an object that is central to our sense of self.247 In intimate relationships, where it is common (and indeed socially encouraged) to lose a sense of “mine and thine”, it is—regardless of the strict legal position—quite normal to think of the home as “ours”. More than a shelter, the home is regarded as a “powerful symbol . . . [giving] a sense of place or physical belonging”.248 Typically, the home will both reflect and be constitutive of its occupiers’ self identity; for “[p]eople endow 242 Thus, in a much-quoted dictum, Oliver Wendell Holmes justified the doctrine of adverse possession on the basis that “[a] thing which you have enjoyed and used as your own for a long time . . . takes root in your being and cannot be torn away without your resenting the act and trying to defend yourself, however you came by it”: OW Holmes, “The Path of Law” (1897) 10 Harv. L Rev. 457 at 477. For a more recent defence of adverse possession on this basis see Radin, supra n. 116 at 111–12. 243 G Loewenstein and S Issacharoff, “Source Dependence in the Valuation of Objects” (1994) 7 Behav. Decision Making 157. 244 N Duxbury, “Law, Markets and Valuation” (1995) 61 Brooklyn L Rev. 657 at 666–7. 245 Dittmar, supra n. 239 at 28–30. On the relationship between the value systems of different cultures, their conceptions of property and their private law, see Dagan, supra n. 240. 246 See, generally, S Schnably, “Property and Pragmatism: A Critique of Radin’s Theory of Property and Personhood” (1993) 45 Stan. L Rev. 347; Duxbury, supra n. 244 at 667. 247 See, e.g., H Arendt, The Human Condition (Chicago, Ill., University of Chicago Press, 1958) 58–67; P Saunders, A Nation of Home Owners (London, Unwin Hyman, 1990) ch. 5; R Belk, “The Ineluctable Mysteries of Possessions” in F Rudmin (ed.), “To Have Possessions” (1991) 6 Jnl. of Social Behaviour and Personality (Special Issue) 17 at 24–5. 248 R Rakoff, “Ideology in Everyday Life” (1977) 7 Politics and Society 85 at 94; quoted in Saunders, supra n. 247 at 270.
The Division of Property on the Breakdown of Intimate Relationships 237 their homes with meaning and, in turn, use these meanings to define themselves”.249 Any correlation between the directness of a plaintiff’s contribution to the acquisition of an asset and the degree of psychological attachment to that asset is likely to be comparatively slight. Indeed, those who have worked outside the home and used their earnings to make direct financial contributions to its acquisition are less liable to view the home as an extension of the self than are those who undertake a primarily domestic role. “Homemakers” are likely to have a particular attachment to the home because, as the term suggests, they are responsible for making the house into a home, investing it with a special character by infusing it with their identity.250 Under such circumstances, where one of the parties has no formal rights in the property, it may be thought unjust to allow the formal owner to retake exclusive control of it. In the context of the division of property on the breakdown of intimate relationships, plaintiffs may have quite reasonably formed such strong psychological attachments to the assets in question that the parties’ proprietary rights should be adjusted to reflect this.251 Emphasis is seldom explicitly placed on such understandings in judicial argument, but an exception can be found in the majority judgment in the Canadian Supreme Court decision of Rawluk v. Rawluk.252 There, Cory J noted justifications for giving proprietary relief that went beyond protecting the plaintiff’s wealth by conferring priority in insolvency. In his view: Ownership encompasses far more than a mere share in the value of the property. It includes additional legal rights, elements of control and increased legal responsibilities. In addition, it may well provide psychological benefits derived from the pride of ownership.253
Consistently with this sentiment, Cory J regarded the question whether the plaintiff has any “special attachment to the property in question” as important to the determination of whether proprietary relief was appropriate.254 Of course, in this context, the home that is the subject matter of the dispute will also be bound up with defendants’ self-identity, and they will also feel the qualification of their property rights as a deprivation. However, it may be argued that it would comport better with the parties’ sense of justice to require parties who initially enjoyed sole ownership of the house to share their interest in it with 249 A Joy and RR Dholakia, “The Meaning of Home and Possessions of Indian Professionals in Canada” in Rudmin, supra n. 247 at 386. See also C Clark, The American Family Home, 1800–1960 (Chapel Hill, NC, University of North Carolina Press, 1986). 250 H Lopata, Occupation: Housewife (New York, Oxford University Press, 1971) 181; A Myrdal and V Klein, Women’s Two Roles (2nd edn., London, Routledge, 1968) 181; Gray, supra n. 80 at 39. 251 E Sherwin, “Constructive Trusts in Bankruptcy” [1989] U of Illinois L Rev. 297 at 335. 252 (1990) 65 DLR (4th) 161. 253 Ibid. at 177. 254 Ibid. at 638 (citing B Hovius and T Youdan, The Law of Family Property (Toronto, Carswell, 1991) at 147).
238 Redistributive Proprietary Remedies the partners with whom they had in fact shared its possession in a long relationship. This division of entitlement would reflect the perception that in the course of that relationship the parties would have or should have lost their sense of separate legal entitlement, so that it would be unreasonable to insist on holding the parties to the rights that prevailed prior to their relationship. In weighing this clash of interests, we can perhaps say little more than that there seems something appropriate about the symmetry that is present where the rupture in a long-term relationship is accompanied by a division of the objects that were central to that union. In contrast, the conclusion that the plaintiff’s contributions gives rise to nothing more than a right to a payment for services rendered would appear harsh.255 It is, in large measure, this intuition that underlies the judicial readiness to give proprietary remedies in this area. (b) The Endowment Effect and the Normative Significance of a “Causal Connection” The endowment effect suggests an explanation for why it may be appropriate to insist on a direct causal connection between the plaintiff’s contribution and the property in question before a proprietary remedy is granted. Even if successful plaintiffs are unlikely to be in a position to buy out the defendant and gain outright control of the home, it may be more just to award proprietary relief than damages. Where the plaintiff has contributed directly to the present value of an asset, the best way to assess the subjective value that this contribution has for the parties is to grant the plaintiff a proprietary interest in the asset. Where damages are awarded, relief is objective: based on the market value of the contributions in question. In contrast, where proprietary relief is awarded, defendants will be encouraged to indicate their subjective valuation of plaintiffs’ contribution to the property in negotiations that will determine who will buy out whom. This may be contrasted with proprietary relief given for contributions that did not lead directly to the acquisition or improvement of the asset in question. In this context, there is no reason to think that any price offered in subsequent negotiations by either party for the other’s interest in the asset will provide a better indication of the worth that the parties attach to the contributions in question than would a market valuation. Indeed, the endowment effect means that the plaintiff may extract a price from the defendant that is out of proportion to the value that the defendant would attach to the plaintiff’s contributions.
3. The Danger of Strategic Behaviour The endowment effect suggests that proprietary relief may be important to plaintiffs, even if the defendant’s solvency is not in question. On the other hand, the 255 Indeed it is when loss is experienced, such as the breakdown of a relationship, that a party’s need for reassurance from material possessions is likely to be at its greatest: Dittmar, supra n. 239 at 44–5.
The Division of Property on the Breakdown of Intimate Relationships 239 Coase theorem may suggest that inter partes there is little real consequence of choosing one form of relief rather than another. In the absence of transaction costs, the parties will negotiate and the entitlement to the resource in question will end up with the party that places the highest value on it (provided he or she can produce the money to buy it).256 Of course, one problem is that invariably there are transaction costs to hamper such negotiations. A particularly common form of transaction cost arises from the presence of private information, in the form of the parties’ subjective valuations of the resource in question. Consider a legal rule that dictates that A, who has contributed to the parties’ relationship, should be limited to compensation alone, leaving B as the sole owner of the house in which they lived together. If A places a higher value on the house than B and is able to fund its purchase, we may anticipate that the parties will agree that B should sell his interest to A. However, the parties will have a strong incentive to misrepresent their valuation of the property in order to do as well out of the bargain as they can. Such strategic behaviour is likely, at best, to protract negotiations and, at worst, to result in parties’ failing to exploit the opportunity of reaching a mutually beneficial bargain.257 In contrast, where ownership of the home is divided, if A makes an offer that is lower than her true valuation of B’s interest, she risks B responding that if that reflects A’s valuation of the property, B would be happy to purchase her interest.258 And, if B demands too high a price for the property, he runs the risk that A will respond that she would happily sell her interest at a price that reflected his valuation. In short, a divided entitlement lessens the likelihood of strategic behaviour by giving the parties an incentive to represent their valuations of the property more truthfully. In the wake of the breakdown of an intimate relationship, where tensions are liable to run high, this is obviously to be valued. On the other hand, other considerations may militate against the award of proprietary relief. It may well be that typically upon the breakdown of an intimate relationship the partner with the smaller share of the property will be in no position to buy out the other’s interest but will, nonetheless, be inclined to engage in strategic behaviour if given the opportunity. This is liable to involve a refusal to sell a share, even at a price that corresponds to the holder’s own valuation of it. Such a refusal may be motivated either by an intention to exploit a special attachment that the other has for the asset in question or simply out of spite. While there is always a danger of such conduct, it is particularly acute in this context in light of the animosity that will have often developed between the parties. In these circumstances, it may be thought that the very presence of a proprietary remedy, necessitating further negotiations between the parties over specific assets, will tend to exacerbate the tensions that are liable to be present. 256
R Coase, “The Problem of Social Cost” (1960) 3 JL & Econ. 1. See I Ayres and E Talley, “Solomonic Bargaining: Dividing a Legal Entitlement to Facilitate a Coasean Trade” (1995) 104 Yale LJ 1027. 258 Ibid. at 1031. 257
240 Redistributive Proprietary Remedies However, such problems are apt to arise wherever co-ownership exists, regardless of how it arises, and they are not insuperable. If matters cannot be resolved by negotiation, the courts have the power to make such orders as they think appropriate.259 Pursuant to this jurisdiction, the courts may make an order that the defendant buy out the plaintiff’s share at a price that reflects the market valuation of the property.260
4. The Interests of Third Parties (a) Purchasers and Mortgagees What consequences will a flexible approach to the provision of proprietary relief have for third party purchasers in this context? One result will be greater uncertainty in the identification of the existence of equitable interests. However, it should not be assumed that the consequences of this will be the same in all jurisdictions. The risks that will flow from such uncertainty depend upon the extent of protection given to third party purchasers in particular jurisdictions. The dangers that equitable interests provide for third party purchasers are particularly acute in English law. In unregistered land, purchasers with constructive notice of equitable interests will take subject to them. Purchasers who fail to make inquiries of those in occupation of the property in question will be held to have constructive notice of any interests that those occupiers may have.261 In the context of registered land, the position of equitable owners has been preserved by a class of overriding interests that provides that, even in the absence of registration, the rights of those in actual occupation of property will bind purchasers.262 259 In England, this power is conferred by s. 14 of the Trusts of Land and Appointment of Trustees Act 1996. In New Zealand it is provided by s. 140 of the Property Law Act 1952. For the position in the various Australian states see MA Neave, CJ Rossiter and MJ Stone, Sackville and Neave, Property Law: Cases and Materials (5th edn., Sydney, Butterworths, 1994) 789–92. For the position in the Canadian jurisdictions see B Ziff, Principles of Property Law (2nd edn., Scarborough, Ont., Carswell, 1996) at 304. 260 This is relatively common in New Zealand. See, e.g., Lankow v. Rose [1995] 1 NZLR 277 (where the order was sought by the plaintiff in her cross-appeal); Burns v. Burns [1998] NZFLR 654 at 661 (sale ordered pursuant to the plaintiff’s application, but the sale was postponed for 6 months to give the defendant the opportunity to pay out the plaintiff). A similar approach is sometimes taken in Canada: see, e.g., Murray v. Roty (1982) 134 DLR (3d) 507 at 518. In some cases, the courts have been prepared to require defendants to pay plaintiffs a sum representing the value of their share in property. This is apparently approached as compensation, with the proprietary interest treated as if it were a lien rather than a full-blown constructive trust. See, e.g., Rosenich v. Rosenich (1989) 75 Alta. LJ (2d) 327 at 340 (where the plaintiff asked both for a declaration that she was entitled to a proprietary interest and for damages). The provenance of the jurisdiction for such relief in equity is not clear, but certainly the same result could be reached pursuant to the courts’ statutorily conferred powers. 261 Hunt v. Luck [1902] 1 Ch. 428. The courts were initially averse to extending this principle to wives’ interests in the family home: Caunce v. Caunce [1969] 1 WLR 286. However, this reluctance has since been overcome: Kingsnorth Finance Co. Ltd. v. Tizard [1986] 1 WLR 783. 262 Land Registration Act 1925 s. 70(1)(g). Such interests will bind purchasers provided they have not been “overreached”, a process that most commonly occurs as a result of the purchase price having been paid to two trustees of land: Law of Property Act s. 2(1)(ii). See Williams & Glyn Bank v. Boland
The Division of Property on the Breakdown of Intimate Relationships 241 The difficulties in determining whether a party has an interest in property are particularly likely to affect institutional lenders who seek to use real property as security. However, the relevance of notice and the system of registration in a particular system are not the only factors affecting lenders. The House of Lords’ decision in Barclays Bank v. O’Brien263 has created difficulties for lenders who ask one co-owner to consent to a mortgage where the loan sought is primarily for the benefit of the other co-owner (for example, where the loan is for a business owned by that co-owner alone). Where the co-owners are in an intimate relationship, the lender is put on notice that consent to such an arrangement is liable to be vitiated by misrepresentation or undue influence. If the lender does not take steps to ensure that this is not the case, a victim of such equitable misconduct will be able to escape the arrangement.264 Lenders can best ensure that the consent in question is both informed and freely given by explaining the effect of the arrangement in question to vulnerable co-owners and then urging them to seek independent legal advice or by simply demanding that they consult a solicitor.265 Thus, it is easy to understand the reluctance to make proprietary relief more readily available in this context. The difficulty in assessing whether a cohabitee has an interest in the property in question may cause lending institutions to feel that they have little choice but to insist that all cohabitees both give their consent to mortgages and receive separate legal advice. The danger is that, in this way, institutional lenders will pass the cost of covering themselves against the law’s uncertainty onto their customers. The result of this is likely to be that one seeking mortgage finance in England will find the costs involved in obtaining a loan more expensive than would otherwise be the case. This may be contrasted with jurisdictions that have adopted the Torrens system that provides that holders of equitable interests who have failed to register their rights have no protection against subsequent purchasers.266 As a result, mortgagees need concern themselves only with obtaining the informed consent of those who have registered their interests in the property in question. [1981] 1 AC 487 (purchaser bound by interest of those in actual occupation after a sale by a sole trustee of land); cf. City of London Building Society v. Flegg [1988] AC 54 (no overriding interest in context of a sale by two trustees). 263 [1994] AC 140. 264 The same principles apply whether the co-owner consents to be a mortgagor, to give the mortgagee’s interest priority or to give personally guarantee the loan. 265 Barclays Bank v. O’Brien [1994] AC 140 at 196–8 per Lord Browne-Wilkinson; Royal Bank of Scotland plc v. Etridge (No 2) [2001] 3 WLR 1021. 266 See e.g., the Land Transfer Act 1952 s. 62, for this principle in New Zealand law. While the Canadian provinces have enacted Torrens systems of registration, like the English system, they recognise certain interests as overriding. However, the class of interests accorded this special protection is typically much less extensive in Canada than is the case in England. See Ziff, supra n. 259 at 420. On the other hand, only three states in the United States give priority to third party purchasers who have notice of prior unregistered interests. In most states, purchasers can take free of a prior but unregistered interest only if they are bona fide and without notice. See G Nelson, W Stoebuck and D Whitman, Contemporary Property (St Paul, Minn., West Publishing Co., 1996) 976. The implications of this, however, depend on the view taken by the courts in particular states on whether a purchaser has constructive notice of quasi-matrimonial property rights.
242 Redistributive Proprietary Remedies Consequently, compared with the position in English law,267 lenders need be concerned much less often with whether an equitable interest exists and whether an equitable co-owner’s consent may be vitiated by undue influence. As a result, it is understandable that the courts in New Zealand, Australia and Canada should have shown less reluctance about extending equitable proprietary rights in this context than have their English counterparts. (b) General Creditors The effect of awarding a constructive trust over particular assets is that, in the event of the constructive trustee’s bankruptcy, those assets are not available for distribution among unsecured creditors. Can such priority be justified in the context of claims made on the dissolution of intimate relationships? As we have seen, it is often argued that priority in bankruptcy can be justified where the plaintiff is an involuntary creditor who is seeking the restitution of an enrichment that has had the effect of swelling the defendant’s assets that are available for distribution in bankruptcy.268 For it is thought that it would be unfair to allow general creditors to enjoy a benefit that they would not have received but for the defendant’s unjust enrichment at the expense of a plaintiff who did not assume the risk of the defendant’s bankruptcy. The first question to be asked is whether plaintiffs who seek proprietary relief in recognition of their contribution to intimate relationships are properly characterised as involuntary creditors; or whether they have, to the contrary, assumed the risk of the defendant’s bankruptcy. If the defendant’s financial woes developed in the course of the parties’ relationship, it seems more realistic to say that the latter was the case. There is something ironic in the idea that plaintiffs may rely on notions of partnership or joint venture to claim the benefits of an intimate relationship and then argue that they should not be exposed to its risks. The second issue concerns whether plaintiffs’ contributions will have increased the value of the assets that would, if a proprietary remedy were not made available, be available for distribution in bankruptcy. This may be true for direct financial contributions. However, other contributions are unlikely to have this effect. It is in the nature of intimate relationships that they do not tend to be profit-making ventures. Is there some other reason why it may be argued that plaintiffs in this context merit priority in bankruptcy? It may be thought that where plaintiffs have a particularly intense psychological attachment to the assets in question their claim to those assets should be recognised ahead of the claims of those who are interested 267 This is apparent in the fact that the two most important decisions in the area in the last decade took place in the context of a conflict between a mortgagee and a wife claiming an interest under a constructive trust. See Lloyds Bank v. Rosset [1990] AC 107 and Midland Bank plc v. Cooke [1995] 4 All ER 562. 268 Sherwin, supra n. 251 at 364; RH Maudsley, “Proprietary Remedies for the Recovery of Money” (1959) 75 LQR 234 at 244–5; A Kull, “Rationalising Restitution” (1995) 83 Cal. Law Rev. 1191 at 1217. See supra ch. 4. IV.
The Division of Property on the Breakdown of Intimate Relationships 243 only in ensuring that they receive adequate compensation. Perhaps there is something in this; yet it seems hard on general creditors. Finally, it may be observed that any extension of the availability of proprietary remedies will lead to greater uncertainty in the administration of bankruptcy. These devices make it more difficult for assignees and trustees in bankruptcy “to determine whether property which is, on the face of it, divisible among the creditors is truly so divisible”.269 The costs of seeking legal advice for uncertain claims will tend to be passed on to those with floating charges and to unsecured creditors. (c) Reducing the Impact of Proprietary Remedies on Third Parties Even if we were to accept that some form of proprietary relief is justified in this context, we might ask whether it needs to be as far-reaching in effect as the remedies traditionally awarded. After all, one of the lessons of the understanding that property is a bundle of rights is that it should not be assumed that the different rights need to appear in conjunction with one another. The fact that it may be thought essential for plaintiffs to have a right against defendants in respect of a particular asset does not necessarily mean that plaintiffs should also prevail against third parties. There has been some limited enthusiasm expressed for this view in recent years. In Muschinski v. Dodds,270 Deane J argued that the constructive trust: has not outgrown its formative stages as an equitable remedy and should still be seen as constituting an in personam remedy attaching to property which may be moulded and adjusted to give effect to the application and interplay of equitable principles in the circumstances of the particular case. In particular, where competing common law or equitable claims are or may be involved, a declaration of constructive trust by way of remedy can properly be so framed that the consequences of its imposition are operative only from the date of judgment or formal court order or from some other specified date.271
Applying this reasoning, it has been argued in both Australia and in the United States that the plaintiff’s interest should not be given effect to if not recognised prior to the defendant’s bankruptcy.272 A different solution would be to favour the suggestion of Lord Browne-Wilkinson that the way forward in this area might lie
269
Re Osborn (1989) 91 ALR 134 at 142 per Pincus J. (1985) CLR 583. Ibid. at 616. 272 For the Australian position see Re Osborn (1989) 91 ALR 134 at 142; and Re Popescu (1995) 55 FCR 583. For a similar line of authority in the Federal Courts in the USA see XL/Datacomp Inc. v. Wilson (In re Omegas Group Inc.) 16 F 3d 1443 (6th Cir., 1994): see supra, ch. 3.II.3. Even if the interest in question is regarded as a mere equity, rather than a full-blown property right, these decisions are difficult to reconcile with the view taken in English law that the trustee in bankruptcy takes the bankrupt’s estate “subject to equities”. Thus, it is generally understood that rights such as those to rescind or to specific performance bind the trustee in bankruptcy. See, e.g., Roxburghe v. Cox (1881) 17 Ch. D 520. 270 271
244 Redistributive Proprietary Remedies in the development of a constructive trust that did not bind third parties at all.273 A right of this kind might resemble spousal rights of occupation.274
VI . CONCLUSION
The judicial response in this area has been constrained by the premises and rhetoric of the private ordering paradigm. There is a perception that innovations that permit the redistribution of property rights are “unprincipled”. This reflects an understanding that the law-making powers of the courts are constrained by a regime of corrective justice, the parameters of which are defined by principles of private property and freedom of contract. Nonetheless, the courts have generally succumbed to the urge to give relief in this context. This has tended to result in the fudging of the doctrines with which relief is being provided in order for it to appear as if intervention in this area can be explained in terms of orthodox notions of property. The resulting confusion is unnecessary. Judicial practice in this area could be openly justified if we could develop an explanation of why the private ordering paradigm should not apply in this context. While it is often perceived as such, the absolutist conception of private property should not be treated as an immutable precept. Private property performs a social function and at times the justifications for its use run out. When this is so, we should look for other norms to regulate entitlement to resources.
273 Westdeutsche Landesbank Girozentrale v. Islington LBC [1996] AC 669 at 716. On the other hand, Lord Browne-Wilkinson’s remarks on the “remedial constructive trust” appear to be based on the mistaken view that such a limited proprietary remedy has found favour outside England. See supra, ch. 1.III.3(c). Presumably this conclusion is based on a misreading of the line of cases of which the authorities in the previous footnote are representative. 274 See supra n. 129 and accompanying text.
11
Subrogation: Stepping into the Shoes of Secured Creditors “subrogation” is used “to describe a process by which one party is substituted for another so that he may enforce that other’s rights against a third party for his own benefit”.1 In some circumstances this will enable plaintiffs to acquire proprietary rights, most commonly by allowing them to exercise another’s rights of security over particular assets. The rationale and precise limits of the remedy are notoriously difficult to identify.2 While a right of subrogation may be conferred expressly by contract, in many circumstances it arises without agreement. This chapter examines the discourse of subrogation and asks what may justify the redistribution of proprietary rights in this way.
T
HE TERM
I . EXPLAINING SUBROGRATION
1. The Function and Effect of Subrogation Reasoning (a) Obscuring the Creation of New Rights There is something odd about our resort to the notion of subrogation, portraying the relief provided as a process by which the plaintiff stands in the position of another in order to exercise existing rights (rights which have often ostensibly been extinguished). Why do we not simply conceptualise the outcome achieved as being effected by a remedy that gives plaintiffs new rights? Where the rights in question do not arise out of contract, subrogation involves subjecting a defendant to a liability to the plaintiff to which the defendant never agreed—a result that in substance appears to conflict with one of the basic axioms of the common law.3 Moreover, where subrogation results in the redistribution of proprietary rights it is doubly controversial. The idea of the plaintiff “standing in the shoes” of the 1
C Mitchell, The Law of Subrogation at 3. See, e.g., A Burrows, The Law of Restitution at 77. 3 For an illustration of the effect of this axiom, consider the denial of relief for “officious intervention” in, e.g., Falcke v. Scottish Imperial Insurance Co. (1886) 34 Ch. D 234 at 248 per Bowen LJ. See H Dagan, “In Defense of the Good Samaritan” (1999) 97 Mich. L Rev. 1152 at 1159. Consider also the traditional tendency to deny a remedy on the breakdown of an intimate relationship to those who have contributed in the course of the relationship, as expressed in, e.g., Gillies v. Keogh [1989] 2 NZLR 327 at 347 per Richardson J. See also supra, ch. 10. 2
246 Redistributive Proprietary Remedies holder of existing rights obscures this tension by suggesting that no new rights or obligations are being created. Thus, the metaphor of subrogation provides for what is, in substance, a departure from tenets that are regarded as fundamental, while ensuring that, in form, the law remains faithful to these tenets. On the other hand, the notion of subrogation is not particularly successful in itself in diverting attention away from the remedial nature of the process. This is apparent in a recent suggestion by Millett LJ that, in contrast to tracing, subrogation is indeed a remedy.4 In fact, the two devices are structurally similar, both involving the extension of rights through notions of substitution.5 While tracing treats one thing as if it were another, subrogation involves the substitution of one person for someone else. Nonetheless, in comparison with tracing, subrogation somehow appears more patently to be a conclusion rather than a justification in itself.6 (b) The Dangers of Taking Subrogation Too Literally We may ask whether there is really any harm in the mode in which this remedy is conceptualised. One source of difficulty has been that, taken literally, the notion of subrogation and the metaphor associated with it of stepping into the shoes of another suggest subrogated parties should be placed in precisely the position enjoyed by the person whose shoes they are allowed to fill.7 In particular, there has been a tendency to assume that plaintiffs who are subrogated to the position of a creditor must be permitted to exercise any security that the creditor might have enjoyed, and not simply any personal claim that the creditor had against the defendant.8 In some instances, this has led to proprietary rights being awarded with little consideration of whether this was appropriate.9 In other cases, when courts have thought it inappropriate to allow plaintiffs to assume another’s proprietary rights, they have been inclined to deny relief altogether.10 This problem was apparent in Re Wrexham Mold and Connah’s Quay Ry. Co.11 A bank advanced a loan that was ultra vires the borrowing company and so void. The company had used some of the money advanced to discharge legitimate debts, and the lender asked to be subrogated to the position of the discharged creditors. 4
Boscawen v. Bajwa [1996] 1 WLR 328. Indeed, one Scots commentator, who observes that lawyers from his jurisdiction do not understand the term “tracing”, concludes that it means “real subrogation”: G Gretton, “Constructive Trusts: I” (1997) 1 ELR 281 at 291. 6 On the beguiling quality of tracing, see supra, ch. 5.III. 7 Thus, e.g., in Castellain v. Preston (1883) 11 QBD 380 at 388, Brett LJ stated that “[i]n order to apply the doctrine of subrogation, it seems to me that the full and absolute meaning of the word must be used, that is to say, the insurer must be placed in the position of the assured”. 8 R Goff and G Jones, The Law of Restitution (5th edn.) at 125. 9 See, e.g., Blackburn Building Society v. Cunliffe, Brooks & Co.(1882) 22 Ch. D 61: infra, text accompanying n. 51. 10 See, e.g., Thurstan v. Nottingham Permanent BS [1902] 1 Ch. 1 at 12 per Romer J (denying the plaintiff a lien or charge without considering whether it might exercise a vendor’s personal rights). 11 [1899] 1 Ch. 440. 5
Subrogation: Stepping into the Shoes of Secured Creditors 247 One difficulty with this claim was that, while the lender had not required any security for the loan, the discharged debts had been secured. The court was prepared to give the lender relief by treating the loan as valid to the extent that the money advanced had been spent on the company’s legitimate debts. However, it characterised the outcome, not as the result of allowing the plaintiff to assume another’s rights, but as an independent personal remedy. For, in the court’s view, subrogating the lender to the position of the creditors would have inevitably conferred upon the lender all the creditors’ rights, including rights of security—whether the lender had bargained for such advantages or not. Lindley MR suggested that, while subrogation rhetoric had been used in prior ultra vires lending cases, in his view: that theory was not really wanted in order to justify them. It was, however, adequate for the purposes for which it was used, and as applied to the cases before the Courts it led to just results. But, if logically followed out in other cases, it leads to consequences not only not foreseen by those who had recourse to it, but to results so startling that I cannot accept the theory as sound.12
Lindley MR’s assessment effectively represents recognition that relief could be provided where it was needed without recourse to subrogation reasoning. Nonetheless, the concept of subrogation did not disappear from legal discourse. The courts have continued to use it opportunistically wherever it seems to endorse a just outcome. An overly literal understanding of the notion of subrogation was one of the reasons the Court of Appeal denied relief in Banque Financière de la Cité v. Parc (Battersea) Ltd.13 The court concluded that, if subrogation were allowed, it would inevitably have allowed the plaintiff to assume not merely personal rights but also secured rights for which it had never bargained.14 However, this view was rejected on appeal by the House of Lords.15 Lord Hoffmann examined the notion that, in some circumstances, where a plaintiff had advanced money that was used to pay off a charge, that interest might be “kept alive” for the plaintiff’s benefit. He concluded that the phrase “is not a literal truth but rather a metaphor or analogy”.16 Furthermore, he continued, When judges say that the charge is “kept alive” for the benefit of the plaintiff, what they mean is that his legal relations with a defendant . . . are regulated as if the benefit of the charge had been assigned to him. It does not by any means follow that the plaintiff must for all purposes be treated as an actual assignee of the benefit of the charge.17
Accordingly, Lord Hoffmann was content to conclude that plaintiffs might be allowed to assume only some of the rights of a mortgagee—rather as if they were 12
Ibid. at 447. Unreported. See the note by C Mitchell, “Subrogation and Part Payments of Another’s Debt” [1998] LMCLQ 14. For the facts and an analysis of the case see infra, text accompanying nn. 34–40. 14 Ibid. at 18. 15 Banque Financière de La Cité v. Parc (Battersea) Ltd. [1999] 1 AC 221. 16 Ibid. at 236. 17 Ibid. 13
248 Redistributive Proprietary Remedies stepping into only one of the creditor’s shoes. This is obviously a rather different approach from that taken by Lindley MR in Re Wrexham Mold and Connah’s Quay Ry. Co.18 Rather than accepting that the concept had to be applied strictly and recognising the unfortunate results it could generate if taken to logical extremes, Lord Hoffmann suggested that it was nothing more than a metaphor that need not be taken too seriously. Yet, if this is so, what is the rationale for, and the limitations upon, intervention in “subrogation” cases and what purpose other than obfuscation does the concept serve? When the metaphoric nature of subrogation reasoning is recognised, the need to provide a more prosaic justification of the remedy becomes all the more apparent.
2. Traditional Explanations for the Provision of Proprietary Relief Where plaintiffs are permitted to assume others’ proprietary rights, talk of subrogation can do little more than give a rather metaphoric description of the remedy; it does nothing to explain why the remedy is given. As a consequence, additional obfuscatory devices are often employed to suggest a basis for the court’s intervention that is consistent with orthodox notions of the sanctity of property and freedom of contract. Thus, where plaintiffs are allowed to exercise the rights of security enjoyed by a defendant’s creditor after paying the defendant’s debt or enabling the defendant to pay it, the justification often offered for this result is that these plaintiffs intended to keep the original security alive for their own benefit.19 This is thoroughly unconvincing. For one thing, it is apparent that plaintiffs in these cases generally intend nothing of the sort. For example, it is hardly what plaintiffs who acquire rights by subrogation had in mind when they lent money to pay off an existing mortgage after negotiating for the loan to be secured by a new charge only to find that they are not entitled to such an interest.20 Moreover, if plaintiffs intended to take the benefit of the mortgage they were paying off, why did they not enter into a contract of assignment to achieve this effect? After all, how exactly does one “keep a security alive” in these circumstances other than by actually having it assigned it in a manner that conforms with any requisite formalities? Why can a plaintiff take the benefit of a charge merely by wishing it? Attempts to justify subrogation openly tend to feature vague references to natural justice, buttressed with rather tenuous analogies.21 At other times, English 18
[1899] 1 Ch. 440. See, e.g., Morley v. Morley (1855) 5 De GM & G 610 at 620; Butler v. Rice [1910] 2 Ch. 277; Ghana Commercial Bank v. Chandiram [1960] AC 732. 20 See, e.g., Butler v. Rice [1910] 2 Ch. 277; Chetwynd v. Allen [1899] 1 Ch. 353. For a discussion see Banque Financière de la Cité v. Parc (Battersea) Ltd. [1999] 1 AC 221 at 231–4 per Lord Hoffmann. 21 Thus Lord Eldon concluded that the surety’s right of subrogation rests upon the same “principle of natural justice . . . upon which one surety is entitled to contribution from another”: Craythorne v. Swinburne (1807) 14 Ves. 160 at 169. Not only did this have the advantage of connecting the remedy with an established legal doctrine, it excused Lord Eldon from the need further to define the “principle 19
Subrogation: Stepping into the Shoes of Secured Creditors 249 courts have eschewed any attempt to justify the remedy that goes beyond reliance on precedent. Thus, in Orakpo v. Manson Investments Ltd.,22 Lord Salmon argued that: The test as to whether the courts will apply the doctrine of subrogation to the facts is entirely empirical. It is, I think, impossible to formulate any narrower principle than that the doctrine will be applied only when the courts are satisfied that reason and justice demand that it should be.23
It is difficult to understand how a test of when a doctrine will be applied could be “empirical” and yet depend on considerations of “reason and justice”. Even less satisfying is the suggestion that the decision whether to extend the doctrine to a novel situation should be based on a court’s sense of fairness. We need a more satisfactory account of what amounts to justice in this context, not only to provide us with some explanation for the law of subrogation as it stands, but to guide its future development.
3. Subrogation as Restitution While, in recent years, much attention has focused on explaining the remedy in terms of unjust enrichment, it was not long ago that the disorderly law of subrogation appeared to provide a stumbling block to the recognition of a discrete and systematic law of restitution. Thus, in Orakpo, Lord Diplock observed that: there is no general doctrine of unjust enrichment in English law. What it does is to provide specific remedies in particular cases of what might be classified as unjust enrichment in a legal system that is based upon the civil law. There are some circumstances in which the remedy takes the form of “subrogation”, but this expression embraces more than one concept in English law. . . . This makes particularly perilous any attempt to rely upon analogy to justify applying to one set of circumstances which would otherwise result in unjust enrichment a remedy of subrogation which has been held to be available for that purpose in a different set of circumstances.24
Of course, things have changed. As interest in the study of restitution flourished, the concept of unjust enrichment offered an antidote to the positivism of Lords Salmon and Diplock. After the House of Lords’ acceptance of the place of unjust enrichment in English law in Lipkin Gorman v. Karpnale,25 it was perhaps of natural justice” in question. The incremental process of developing the law by piling one tenuous analogy upon another is apparent in Lord Blackburn’s justification of an indorser’s right to exercise any securities that a holder of a bill of exchange might happen to enjoy against the acceptor by reference to sureties’ rights of subrogation. See Duncan Fox & Co. v. North and South Wales Bank (1880) 6 App. Cas. 1 at 19. 22 [1978] AC 95. 23 Ibid. at 110. 24 Ibid. at 104. 25 [1990] 1 AC 548.
250 Redistributive Proprietary Remedies inevitable that the courts would attempt to explain subrogation in these terms, as indeed commentators had been doing for some time.26 So it was that recently, in Banque Financière de la Cité v. Parc (Battersea) Ltd.,27 the House of Lords endorsed the view that subrogation is concerned with the reversal of unjust enrichment.28 The shift beyond the justifications conventionally offered for subrogation is apparent in Lord Hoffmann’s judgment. He argued that: it is a mistake to regard the availability of subrogation as a remedy to prevent unjust enrichment as turning entirely upon the question of intention. Such an analysis has inevitably to be propped up by presumptions which can verge on outright fictions more appropriate to a less developed system than we now have.29
This analysis suggests that we may abandon—or at least take less seriously—the fictions and metaphors that adorn this area and explain it instead in terms of restitution. As a consequence, their Lordships were able to hold that the remedy did not require that plaintiffs be permitted to assume all the rights enjoyed by the person into whose shoes they are figuratively to stand. However, with this shift comes a need to explain why any enrichment gained by a defendant is unjust and why claimants should be permitted to acquire proprietary rights. The analysis that unjust enrichment is at the heart of subrogation is rather unhelpful. For one thing, while many instances of subrogation can be relatively easily analysed as effecting the reversal of an enrichment, there may be difficulties in identifying a satisfactory “unjust factor”.30 Moreover, plaintiffs asking to be subrogated to the position of another will generally have ample other causes of action, apart from subrogation, to reverse any enrichment that defendants have received at their expense. In these circumstances, subrogation is generally sought in order to enable plaintiffs to obtain the advantages that come with the acquisition of another’s proprietary rights. In common with other proprietary remedies, where subrogation provides proprietary relief, the result cannot be justified purely in terms of a conventional bilateral restitutionary analysis.31 4. Shifting the focus to third party creditors (a) Subrogation as a Remedy for Unjust Enrichment at the Expense of Whom? Some attempts to explain proprietary subrogation have focused on the relationship of the plaintiff and the defendant who owns the assets in respect of which the 26
See, e.g., R Goff and G Jones, The Law of Restitution (1st edn.), at 376. [1999] 1 AC 221. 28 This is so, at least where the right is not expressly or impliedly provided for by contract between the plaintiff and defendant: see Lord Hoffmann, ibid. at 231. 29 Ibid. at 234. Similar observations are made by Lord Hutton at 241. While the notion that fictions are creatures of legal cultures less advanced than our own is a popular one, it is hardly borne out by the law of proprietary remedies. 30 See, e.g., the difficulty in identifying an unjust factor that would justify allowing sureties to assume lenders’ securities: infra, text accompanying nn. 108–109. 31 See supra, ch. 4.IV. 27
Subrogation: Stepping into the Shoes of Secured Creditors 251 plaintiff is seeking to exercise the rights of a secured creditor who has been paid at the plaintiff’s expense. This is apparent in Boscawen v. Bajwa,32 where a building society’s money was used rather prematurely to discharge a first mortgage over the defendant’s property before the sale of that property that the money was to finance was completed. Subsequently the sale fell through. Millett LJ argued that the subrogation claim was brought “in order to deprive Mr Bajwa [the mortgagor] . . . of the unjust enrichment which he would thereby otherwise obtain at the Abbey National’s [the lender’s] expense”.33 This makes little sense. Here, as elsewhere in the law of proprietary remedies, the relief sought cannot be explained in terms of two-party restitution. After all, the building society could have brought an action directly against Bajwa for failure of consideration or knowing receipt after the transaction broke down. This action would have been quite sufficient to require the mortgagor to make restitution of any enrichment gained at the Abbey National’s expense. Some other explanation is required to justify the provision of proprietary relief. A different attempt to explain subrogation in terms of unjust enrichment has seen it analysed on the basis that the remedy is required to prevent the unjust enrichment of third party creditors. This shift in analysis is apparent in the Banque Financière decision.34 The case unfolded in the aftermath of several interrelated commercial transactions. The plaintiff gave a loan to Parc to enable it to repay part of a prior loan secured by a mortgage over real estate owned by Parc. The loan was negotiated by the chief financial officer of Parc’s holding company who gave an undertaking that another subsidiary company would not enforce a second charge that it enjoyed over the same real estate before the plaintiff had been repaid in full. However, the second mortgagee had not given the authorisation necessary for this undertaking to be effective. After Parc had become insolvent, and when it became clear to the plaintiff that the letter of postponement that it had received was unenforceable, it sought to be subrogated to the rights of the first mortgagee. As mentioned, the Court of Appeal had denied the claim, concluding that it would hardly be fair on third party creditors if the plaintiff were subrogated to the position of the first mortgagee, given that the plaintiff had never bargained for a charge. However the House of Lords allowed the appeal on the basis that subrogation was acceptable provided that the plaintiff was permitted to obtain only a personal right to rank in priority to the second mortgagee—a right effective only as between the plaintiff and the second mortgagee.35 The first mortgagee would of course be permitted to enforce its first charge to recoup the money it was still owed by Parc. Thereafter, before the second mortgagee could have recourse to any money realised by the sale of the land in question, a sum representing the money advanced by the plaintiff would be set aside. The plaintiff would have a right to prove for this sum along with all other unsecured creditors (including the second 32 33 34 35
[1996] 1 WLR 328. For a fuller account of the case see supra, text accompanying nn. 55–60. Ibid. at 335. Banque Financière de la Cité v. Parc (Battersea) Ltd. [1999] 1 AC 221. Ibid. at 237 per Lord Hoffmann.
252 Redistributive Proprietary Remedies mortgagee, if its second charge proved to be insufficient to ensure recovery of that which was owed to it). This represents such a poor way for a lender to protect itself against the contingency of the borrower’s insolvency that it is not surprising that at least one commentator has doubted that the arrangement was supposed to operate in the event of Parc’s bankruptcy.36 While it is not entirely obvious at first sight, Banque Financière is essentially an example of subrogation allowing a plaintiff to exercise another’s proprietary rights.37 The first mortgagee enjoyed only one right that we would conventionally characterise as personal: the right to have its loan repaid by Parc. All the rights it enjoyed against other parties were part of a bundle of rights that made up its proprietary interest. Thus, although the plaintiff was given a right enforceable against the second mortgagee alone, the right that it was allowed to assume was one of the sticks in the bundle of rights that made up the proprietary interest that the first mortgagee enjoyed in Parc’s property. What is striking about their Lordships’ analysis in Banque Financière is that it proceeds on the basis that the subrogation of the plaintiff to one of the first mortgagee’s rights against Parc required an explanation of why the second mortgagee would be unjustly enriched if the remedy were not given. This is clearest in the judgment of Lord Steyn, who was content to develop his analysis without the aid of any case law, analysing the matter entirely on the basis of Birksean unjust enrichment theory. On his view, the matter could be dealt with in terms of a direct claim for restitution by the plaintiff against the second mortgagee. He observed that he would have “reach[ed] the same conclusion in terms of the principles of subrogation”,38 seemingly suggesting that these principles have been rendered redundant by the new analytical tools provided by notions of unjust enrichment. Thus, Lord Steyn concluded that the matter could be determined by answering the following questions: “(1) Has . . . [the second mortgagee] benefited or been enriched? Was the enrichment at the expense of . . . [the plaintiff]? (3) Was the enrichment unjust? (4) Are there any defences?”39 The focus of the House of Lords in Banque Financière on the contest between the plaintiff and third party creditors has the capacity to illuminate the issues that arise in subrogation. However, this shift in perspective represents a radical development given that, elsewhere in their analysis of proprietary remedies, English courts have tended to disregard the interests of third party creditors. If applied more generally, the approach taken in Banque Financière would completely transform the judicial approach to proprietary remedies.40
36 M Bridge, “Failed Contracts, Subrogation and Unjust Enrichment: Banque Financière de la Cité v. Parc (Battersea) Ltd.” [1998] JBL 323 at 329. 37 P Watts, “Subrogation—A Step Too Far?” (1998) 114 LQR 34; T Villiers, “A Path through the Subrogation Jungle: Whose Right is it Anyway?” [1999] LMCLQ 223 at 235. 38 [1999] 1 AC 221 at 228. 39 Ibid. at 227. 40 Villiers, supra n. 37 at 239.
Subrogation: Stepping into the Shoes of Secured Creditors 253 (b) A Discretionary Proprietary Remedy? In Banque Financière, Lord Hoffmann stated that: I think it should be recognised that one is here concerned with a restitutionary remedy and that the appropriate questions are therefore, first, whether the defendant would be enriched at the plaintiff’s expense; secondly, whether such enrichment would be unjust; and, thirdly, whether there are reasons of policy for denying a remedy.41
Does the recognition that policy considerations play a role in determining whether it is appropriate to grant subrogation indicate that the remedy is a discretionary one? If this were so, given that subrogation often allows for the transfer of property rights, we would have an instance in English law of that most dreaded juridical phenomenon: a discretionary proprietary remedy.42 It may be that the exercise of a significant degree of discretion in this context will be employed only in the process of fashioning the proper limits of the doctrine in particular contexts, developing rules that will bind in subsequent cases of a similar type. However this will be true only if the courts are prepared to accept the responsibility for building the framework for a more rationally systematic law of subrogation. If this proves to be the case, this sort of discretion will simply be part of the growing pains that accompany the development of a new normative structure in a particular field of law.43 The rest of this chapter evaluates the existing law of subrogation with a view to how it might be accommodated within such a justificatory framework. II . IDENTIFYING CREDITORS ’ ENRICHMENT IN SUBROGATION CASES
Subrogation is permitted in the context of a variety of security interests whether created by conveyance (mortgages),44 by contract accompanied by possession (legal pledges),45 by contract without possession (equitable charges) or by operation of law (equitable liens).46 Many of the cases in this area involve a plaintiff seeking subrogation in order to gain priority over security interests that already existed at the time the interest that the plaintiff seeks to assume was ostensibly discharged.47 In addition, the remedy is sometimes sought where the property in 41
[1999] 1 AC 221. On the importance of discretion in the identification of a constructive trust as “remedial” or otherwise, see supra, ch. 1.III.4. 43 Cf. the development of the remedial constructive trust in Canada. See supra, ch. 1.III.4. 44 See, e.g., Butler v. Rice [1910] 2 Ch. 277. 45 See, e.g. Duncan Fox & Co. v. North and South Wales Bank (1880) 6 App. Cas. 1. 46 Thus, a lender who could enforce neither its loan nor its purchase money security interest because of the borrower’s minority was permitted to acquire the lien that arises in favour of an unpaid vendor of land: Thurstan v. Nottingham Permanent Building Society [1902] 1 Ch. 1. Cf. Orakpo v. Manson Investments Ltd. [1978] AC 95 (subrogation denied). 47 Thus, subrogation is employed where the property in question is already affected by a second charge. See, e.g., Carlisle Banking Co. v. Thompson (1884) 28 Ch. D 398; Re Mutual Trust Co. and Creditview Estate Homes Ltd. (1997) 149 DLR (4th) 385. 42
254 Redistributive Proprietary Remedies question is subsequently affected by a charging order granted in favour of a judgment creditor.48 At other times, the process is employed where plaintiffs desire to be subrogated in order to acquire a security interest to place them ahead of unsecured creditors generally.49 As Banque Financière recognises, in determining whether the acquisition of proprietary rights by subrogation is appropriate, it makes sense to focus on the plaintiff’s position, not in relation to the owner of the assets affected by the charge in question, but in relation to the owner’s creditors. According to this analysis, priority can be justified only where the swollen assets requirement is likely to be satisfied.50 That is to say that an enrichment gained at the expense of the plaintiff must be likely to have had the effect of increasing the value of that part of the defendant’s estate that would be available for distribution among creditors in the event of bankruptcy were subrogation not granted. This will be so where money advanced by a plaintiff is used to discharge a secured obligation that would have prevented the distribution of the assets secured amongst the defendant’s unsecured creditors. In these circumstances, provided plaintiffs are permitted to do no more to assume the same rights enjoyed by the discharged creditor to secure what is owed them, subrogation does no more than to restore the status quo. If, in contrast, subrogation were denied, other creditors would be enriched at the expense of the plaintiff. The swollen assets requirement is met in almost all instances of subrogation found in English law. Subrogation is permitted only after the plaintiff has paid, or has provided money that is used to pay, a secured debt. An exception is the decision in Blackburn Building Society v. Cunliffe, Brooks & Co.51 In that case, a building society gave its bank certain title deeds to secure its overdraft. While the overdrawing of the account was ultra vires, the Court of Appeal held that the bank could hold the deeds as security for any moneys that the building society had applied to repay existing debts. While described as such, this result cannot readily be conceptualised as subrogation: after all, these were not rights of security enjoyed by the discharged creditors in question. In any event, it is difficult to justify. If the advance had not been used to repay secured debts, the result of subrogation in this context may well have been to put general creditors in a worse position than they would have been in had the ultra vires loan not been made.
48
See, e.g., Ghana Commercial Bank v. Chandiram [1960] AC 732; Boscawen v. Bajwa [1996] 1 WLR
328. 49
See, e.g., Duncan Fox & Co. v. North and South Wales Bank (1880) 6 App. Cas. 1. On this rationale for conferring priority in bankruptcy see supra, ch. 4.IV.2. 51 (1882) 22 Ch. D 61. See also Re Durham County Permanent Investment Land and Building Society (1871) LR 12 Eq. 516; Re Harris Calculating Machine Co. [1914] 1 Ch. 920. 50
Subrogation: Stepping into the Shoes of Secured Creditors 255
III . DETERMINING WHETHER CREDITORS WOULD BE UNJUSTLY ENRICHED I : CASES IN WHICH THE PLAINTIFF MAY BE CHARACTERISED AS AN INVOLUNTARY UNSECURED CREDITOR
Should a plaintiff be allowed to acquire the rights of a secured creditor merely because the defendant has gained an enrichment at the plaintiff’s expense, thereby swelling the pool of assets that would be available for distribution among the defendant’s general creditors in bankruptcy? Certainly, the courts often suggest that something more is required. As we have seen, courts have quite rightly been inclined to limit plaintiffs to personal relief where they have not bargained for security.52 On this view, proprietary relief can be justified only where the plaintiff is an involuntary unsecured creditor.53 Certainly, several situations in which the law provides for the acquisition of proprietary rights by subrogation can be explained in these terms.
1. Where Plaintiffs’ Property is Used without their Consent to Discharge a Secured Debt The requirement that the plaintiff has not assumed the risks of the debtor’s insolvency is most obviously satisfied where the security in question was discharged using the plaintiff’s property without the plaintiff’s consent. The principle operates where a plaintiff retains legal title to property. Thus, where the defendant uses money (or proceeds of that money traceable at law) stolen from the plaintiff to discharge a mortgage, the plaintiff is entitled to be subrogated to the position of the mortgagee.54 The principle also applies where a secured debt is discharged using money that belongs to the plaintiff in equity. Boscawen v. Bajwa55 provides a recent example of subrogation in these circumstances. A prospective purchaser had exchanged contracts for the sale of a property with the defendant, Bajwa. The sale was to be financed by a loan from the Abbey National Building Society that was to be secured by a mortgage over the property. The Abbey National transferred to the purchaser’s solicitor the sum that was payable on completion of the sale. However, the purchaser’s solicitor initially sent a cheque for slightly less than the required amount. When asked to forward the balance, the purchaser’s solicitor sent a further cheque. The defendant’s solicitors then used the proceeds of the funds it had received pursuant to the first cheque to pay the sums owed by Bajwa on a loan secured by a mortgage over the 52 Re Wrexham Mold and Connah’s Quay Ry. Co. [1899] 1 Ch. 440. See supra text accompanying nn. 11–12. 53 For an analysis of this justification for proprietary remedies see supra, ch. 4.IV. 54 See, e.g., the Canadian decision of McCullough v. Marsden (1919) 45 DLR 645. See also Mitchell, The Law of Subrogation at 114–5. 55 [1996] 1 WLR 328.
256 Redistributive Proprietary Remedies property in question enjoyed by Halifax Building Society. However, this proved to be rather premature, as the second cheque was dishonoured and it transpired that the purchaser’s solicitor was insolvent. The sale was never completed. As a result, the Abbey National never received the charge over the property for which it had bargained. As Bajwa himself became financially embarrassed, a contest emerged between the Abbey National and a judgment creditor who had obtained a charging order on the property. Was the Abbey National entitled to exercise the Halifax’s mortgage by virtue of subrogation? Or was it to be left with an unsecured debt, along with claims against the two firms of solicitors? The Court of Appeal agreed with the court below that the Abbey National was entitled to take priority over the judgment creditor. The defendant’s solicitors had committed a breach of trust when they prematurely paid off the Halifax’s mortgage.56 As a result of the combined effect of tracing and subrogation, Millett LJ concluded that “[a]t law, Mr Bajwa became the owner of an unencumbered freehold interest in the property; but he never did, even for an instant, in equity”.57 However, Millett LJ was not simply content to conclude that the Abbey National had obtained the right to exercise the ostensibly discharged mortgage by operation of law. Rather, he suggested that, in the circumstances, the defendant’s solicitors’ “intention must have been to keep the charge alive for the benefit of the Abbey National pending completion”.58 This is rather absurd; such an idea was hardly likely to have been within the contemplation of the solicitors. If they really had been attuned to safeguarding the position of their principal, they would not have transferred the money so prematurely. However, Millett LJ was able to impute this intention as a result of reasoning that the solicitors, “[a]s fiduciaries, . . . could not be heard to say that they paid out their principal’s money otherwise than for the benefit of their principal”.59 This prescriptive and fictional presumption of intention rather resembles that employed in AG for Hong Kong v. Reid.60 In both cases fictions are employed to manufacture the appearance of consent, while giving relief for reasons that, in truth, have little to do with the parties’ intentions. Moreover, the use of estoppellike reasoning to infer a counterfactual intention is even more striking in Boscawen v. Bajwa, since the fiduciaries were not parties to the action and were not seeking to benefit from their wrong. Rather, the effect of turning a blind eye to their negligence and imputing to them an intention to protect the interests of their principal was to allow the principal to take priority over third party creditors. Finally, the implication of an intention on the part of the fiduciaries to acquire the security in question for the benefit of their principal does nothing to explain why the law would give any effect to such an intention in the absence of a duly
56 57 58 59 60
[1996] 1 WLR 328 at 332 per Millett LJ. Ibid. at 342. Ibid. at 339. Ibid. [1994] AC 324. See supra, ch. 2.V.2 and infra, ch. 9.III.
Subrogation: Stepping into the Shoes of Secured Creditors 257 formalised assignment of the interest in question.61 Surely, this is an unduly convoluted and ultimately unsatisfying way of justifying proprietary relief. The outcome in Boscawen v. Bajwa might be justified on the basis that the plaintiff had a claim that deserved to take priority over Bajwa’s creditors. The plaintiff did not assume the risk of Bajwa’s bankruptcy; it had bargained for a first charge over the property in question. Through no fault of its own, it did not acquire this interest. In these circumstances, if the plaintiff had not been permitted to assume the security that was discharged using an enrichment gained at the plaintiff’s expense, the defendant’s unsecured creditors would have enjoyed an unmerited windfall.
2. Subrogation and Mistakes (a) Instances of Subrogation Providing Relief for Mistake (i) Authorised loans In Butler v. Rice,62 Rice borrowed money from Butler for the purpose of discharging an existing mortgage. Rice had represented that the property in question was his own and promised to grant Butler a new security. In fact, as the land belonged to his wife, Rice was not entitled to give such an interest. After Rice used the advance to pay off the first mortgagee, his wife refused to grant a new charge in Butler’s favour. Warrington J held that Butler was entitled to be subrogated to the position of the first mortgagee. Some commentators have argued that Mrs Rice adopted the transaction in some way by claiming to be free of the first mortgage.63 Yet, it is unlikely that the case was decided on this basis: Mrs Rice had no need to make such an assertion, as there is no suggestion that the first mortgagee made any further demands on her after her husband purported to discharge the loan. Instead, the result is better explained on the basis that, first, the plaintiff’s advance was induced by a mistake64 and, secondly, that Mrs Rice’s position was not unfairly prejudiced by the remedy given. As Warrington J explained: “The only alteration in her position is that instead of owing the money to A she will in future owe it to B”.65 Similarly, subrogation has been permitted in the context of coowned land where one co-owner has fraudulently obtained a loan in order to pay off an existing mortgage and purported to grant a new mortgage by forging the signature of the other co-owner.66 Similar arguments may be used to justify those cases where subrogation is used to assist lenders who had been promised that, in return for financing the discharge 61
See supra, text accompanying n. 20. [1910] 2 Ch. 277. See also Chetwynd v. Allen [1899] 1 Ch. 353. P Birks and J Beatson, “Unrequested Payment of Another’s Debt” (1976) 92 LQR 188 at 205. 64 Mitchell, The Law of Subrogation at 135. 65 [1910] 2 Ch. 277 at 282–3. 66 National Guardian Mortgage Corporation v. Roberts [1993] NPC 149. See also, Mitchell, The Law of Subrogation at 123–4. 62 63
258 Redistributive Proprietary Remedies of a first mortgage, they would be granted a new first mortgage over the property in question. Where it transpires that the security granted to the plaintiff is lower in priority to other charges that, without the plaintiff’s knowledge, were already in existence, the plaintiff is subrogated to the position of the first mortgagee.67 This outcome may be justified on the basis that such lenders obtained a less valuable security than that for which they bargained. Without a remedy, they would have imposed upon them a higher level of risk than they had intended to assume. Thus, as with the priority enjoyed with respect to general creditors, the justification for promoting plaintiffs over other secured creditors in this context is based on a lack of assumption of risk and the prevention of the unjust enrichment of other creditors. A third example of subrogation in this context is provided by Banque Financière de la Cité v. Parc (Battersea) Ltd.68 The plaintiff entered into the loan in question in reliance on a security subordination arrangement, only to find that the arrangement was made without due authority. Again, the result of the mistake in question was that the plaintiff assumed a higher level of risk than it had intended. (ii) Unauthorised Loans In a variety of situations where money advanced pursuant to unauthorised loans is used to discharge a legitimate secured debt lenders have been allowed to assume creditors’ rights by subrogation. Again, such relief could generally be seen as a response to a mistake that lenders have made in believing that the purported secured loans they made were enforceable. Relief provided in the context of a number of different types of unauthorised loan may be analysed on this basis. For example, subrogation is available in the aftermath of loans made to agents who lack the authority to bind their principal to the arrangement69; with respect to loans given to a company that are ultra vires the articles of association70; and in relation to loans that are rendered void or unenforceable by statute.71 Those who have assumed the risk of the borrower’s bankruptcy will not be allowed to acquire the rights of a secured creditor by subrogation. Most obviously, a plaintiff who intended to give an unsecured loan will not be permitted to assume the secured rights of creditors repaid with the money advanced.72 In addition, subrogation may be denied where an unauthorised loan was made in the expectation that it would subsequently be ratified. The issue arose in Re Cleadon Trust,73 in which the appellant was a company director who purported to discharge a debt owed by the company’s subsidiaries and guaranteed by the company itself. While the payments were made without the company’s authorisation, the appellant was 67 See, e.g., Armatage Motors Ltd. v. Royal Trust Corp. of Canada (1997) 149 DLR (4th) 398. See infra, text accompanying n. 138. 68 [1999] 1 AC 221. See supra, text accompanying n. 34. 69 See, e.g., Reversion Fund & Insurance Ltd. v. Maison Cosway Ltd. [1913] 1 KB 364. 70 See, e.g., Re Wrexham Mold and Connah’s Quay Ry. Co. [1899] 1 Ch. 440. 71 See, e.g., Thurstan v. Nottingham Permanent Building Society [1902] 1 Ch. 1. 72 Re Wrexham Mold and Connah’s Quay Ry. Co. [1899] 1 Ch. 440. 73 [1939] Ch. 286.
Subrogation: Stepping into the Shoes of Secured Creditors 259 assured by fellow company officers that the matter would be ratified at a later point. In fact, a subsequent resolution confirming the payments was invalid. After the company went into liquidation, a majority of the Court of Appeal denied the appellant’s claim for subrogation on the basis that the payment was voluntary, thereby suggesting that the appellant had taken the risk that the company might not ratify the payment.74 On the other hand, it is difficult to reconcile this with the willingness of courts to subrogate lenders who, although they knew that agents did not have authority to bind their principal to the loan, nonetheless advanced them money for the purpose of discharging their principal’s debts.75 Difficult issues arise in the context of loans that are void or voidable pursuant to statute. In Thurstan v. Nottingham Permanent Building Society,76 the plaintiff advanced money that enabled the defendant to purchase a house, only to find that, because of the defendant’s youth, the loan was unenforceable and the charge the defendant had granted void.77 Nonetheless, the plaintiff was permitted to assume by subrogation the equitable lien that arises in favour of an unpaid vendor upon the conclusion of a specifically enforceable contract for the sale of land.78 By contrast, in Orakpo v. Manson Investments Ltd.,79 the House of Lords refused to allow the plaintiff even a personal remedy where the agreement pursuant to which it had advanced money was rendered unenforceable by a failure to observe a statutorily imposed requirement for writing.80 Lord Edmund Davies concluded that a different approach would have been in conflict with the policy of the legislation in question.81 On the other hand, Lord Keith, with whom Lord Salmon concurred, placed considerable emphasis on the notion that the right of subrogation was a creature of contract. It followed in his view that the right sought was essentially a security “given by the borrower” and consequently was void if not mentioned in writing.82 Yet, this conclusion relies on the fiction that subrogation is necessarily a product of common intention—an understanding that was subsequently sharply criticised by Lord Hoffmann in Banque Financière de la Cité v. Parc (Battersea) Ltd.83 74
Ibid. at 312 per Scott LJ. Reversion Fund & Insurance Ltd. v. Maison Cosway Ltd. [1913] 1 KB 364 at 379 per Buckley LJ. 76 [1902] 1 Ch. 1; affirmed on another point by the House of Lords [1903] AC 6. 77 Infants Relief Act 1874 s 1. This has now been repealed by the Minors’ Contracts Act 1987. 78 However, the ratio of the case is obscure. The Court of Appeal’s analysis suggests that it was crucial that the plaintiff was acting as the borrower’s agent when it paid the money in question to the vendor. In the view of the Court, the plaintiff was entitled to a remedy because it was not permissible for the principal to adopt an agent’s acts without any incurring any obligation to repay that agent: [1902] 1 Ch. 1 at 9 per Vaughn Williams LJ. 79 [1978] AC 95. 80 The Moneylenders Act 1927, s. 6(1). 81 In his view, Thurstan could be distinguished because the security given in that case was void, while the contract in the case before their Lordships was valid but unenforceable. Yet, it is difficult to see that this really provides a sound basis for distinguishing between the cases. In each case, as a result of legislation, the lender was unable to obtain the security for which it had bargained. If anything, given that the Infants Relief Act 1874 was more protective of the class of borrower in question than is the Moneylenders Act 1927, there should have been more concern about giving relief in Thurstan than in Orakpo. See A Burrows, The Law of Restitution at 90. 82 [1978] AC 95 at 119–20. 83 [1999] 1 AC 221 at 234. 75
260 Redistributive Proprietary Remedies Ultimately, the question that needs to be addressed is whether the provision of relief would undermine the objective of the invalidating legislation.84 In the past, a possibility of a direct personal claim for restitution was rejected because it “would be an attempt to enforce the contract for repayment of the money lent”.85 However, in Westdeutsche Landesbank Girozentrale v. Islington LBC, Lord Goff rejected this view, noting that “such an action would be unaffected by any of the contractual terms governing the borrowing, and moreover would be subject (where appropriate) to any available restitutionary defences”.86 If this perspective were to be accepted, plaintiffs would no longer need to resort to the convoluted process of subrogation to obtain a personal remedy. A direct restitutionary action would be available if the invalidity meant that there was a failure of consideration or if it could be said that the plaintiff, in being unaware of the invalidity, was the victim of a mistake of fact or law.87 On the other hand, the question would remain whether proprietary rights ought to be made available through subrogation. (iii) A Bank’s Unauthorised Payment of a Customer’s Creditor Where a bank transfers money to a third party in the mistaken belief that it has been authorised to do so by a customer and the transfer has the effect of discharging a debt owed by the customer, the bank is subrogated to the rights that the discharged creditor enjoyed against that customer. This principle was established in B Liggett (Liverpool) Ltd. v. Barclays Bank Ltd.88 The bank honoured cheques that were drawn on the account of its customer, Liggett Ltd., in favour of a creditor. The cheques were not duly authorised by two properly appointed directors and consequently Liggett Ltd. demanded that the bank recredit its account. The bank, in turn, claimed to be subrogated to the creditor’s remedies against Liggett Ltd. Wright J justified the bank’s right to subrogation by analogy to cases involving invalid loans. In his view, “[t]he customer in such a case is really no worse off because the legal liability which has to be discharged is discharged”.89 (b) The Relevance of Fault As we have seen elsewhere, the fact that a plaintiff is an involuntary restitution creditor may not provide a sufficient justification for the provision of proprietary relief.90 This is illustrated by the suspicion presently directed at the holding in Chase Manhattan Plc v. Israel-British Bank (London)91 that a constructive trust
84 See, e.g., P Birks, “Recovering Value Transferred Under an Illegal Contract” (2000) 1 Theoretical Inquiries in Law 155. 85 [1978] AC 95 at 120. 86 Ibid. at 688. 87 See Kleinwort Benson Ltd. v. Lincoln CC [1999] 2 AC 349. 88 [1928] 1 KB 48. 89 Ibid. at 64. 90 See supra, ch. 4.III.3(c). 91 [1980] Ch. 105.
Subrogation: Stepping into the Shoes of Secured Creditors 261 arises over property transferred as the result of a self-induced mistake.92 One of the objections to conferring proprietary relief on plaintiffs in such circumstances is that they are in part responsible for their plight. This has led some to develop an account of the assumption of risk that incorporates elements of fault so that, “[a]t some point, extreme lack of care in disposing of property may be comparable to a voluntarily extension of credit and an assumption of the risk of the transferee’s insolvency”.93 However, if we were disinclined to come to the rescue of those whose misfortune is the product of their own carelessness, there could be few less deserving supplicants than the plaintiff in Banque Financière de la Cité v. Parc (Battersea) Ltd.94 The plaintiff in that case chose to be an unsecured creditor and to attempt to protect itself only by a subordination arrangement because it did not want to subject itself to the disclosure requirements that Swiss banking regulations demanded when security was taken. Moreover, the plaintiff was manifestly careless in its failure to ensure that the officer of the holding company with which it dealt had the authority to bind the second mortgagee to the subordination arrangement that it negotiated. Given that the plaintiff was a large institutional lender, it is difficult to have much sympathy for its plight. There is much to be said for the view that it should have been left to a remedy against the holding company’s officer for misrepresentation. Nonetheless, the House of Lords was prepared to subordinate the second mortgagee to the rights of the plaintiff. In allowing a negligent mistaken payor to take priority over a third party, Banque Financière suggests a very liberal approach to proprietary relief, whereby any liability mistake should be sufficient to give a plaintiff a proprietary remedy. Lord Steyn disposed of the point by remarking that “restitution is not a fault based remedy . . . In any event, the neglect of [the plaintiff] is akin to the carelessness of a mistaken payor: it does not by itself undermine the ground of restitution”.95 This is not very helpful. Lord Steyn’s analysis confounds two quite different cases: a mistaken payor’s claim against a recipient and a claim by a mistaken payor against a third party. That negligence does not undermine the first type of claim does not necessarily throw much light on the question whether it should affect the second kind of claim. For one thing, it is not clear that the law can provide for change of position by third parties. If such protection is not available it may be thought unfair that innocent third parties may be affected by rights that arise in response to a mistake made in a transaction in which they took no part.96
92
See supra, ch. 6.II.2(a). E Sherwin, “Constructive Trusts in Bankruptcy” [1989] U of Ill. L Rev. 297 at 358. See supra, ch. 4.III.3(c). 94 [1999] 1 AC 221. 95 Ibid. at 227. 96 See infra § V.1. 93
262 Redistributive Proprietary Remedies 3. Practical Compulsion as a Ground for Subrogation Where plaintiffs with a partial interest in a property repay a debt that is secured by a charge over the property, they are thereafter allowed to exercise the rights formerly enjoyed by the charge holder against others who have an interest in the property.97 This remedy has often been used in the context of life tenants’ repaying secured debts over the property in which they enjoy an interest. While the courts in these cases do not describe the relief as subrogation, it takes effect in the same way and commentators sometimes analyse it in those terms.98 Occasionally a payment by one with a partial interest in land may have been induced by a mistake.99 However, most of the cases can be explained only on the basis that plaintiffs were effectively compelled to pay the debt in order to protect their interest in the property.100 Payment of the debt in these cases will generally give rise to a right of contribution where plaintiffs have paid more than their share of a common debt or a right of recoupment where plaintiffs have paid a debt for which another was primarily liable. However, the question remains why such plaintiffs should acquire creditors’ rights of security. For it might be argued that, while the plaintiffs did not have any real choice whether they would become creditors per se, in failing to negotiate an assignment of the creditor’s rights of security, they have voluntarily assumed the status of unsecured creditors. At times in these cases the courts have resorted to fictions of implied intent. Thus, the rights of plaintiffs in this context are explained on the basis that they intend that any security should be preserved for their own benefit, thereby suggesting that there was an implied assignment of the rights in question.101 In this context, as in others, this fiction is implausible; for, in many cases, it is clear that the plaintiff gave this matter no thought. The courts have essentially favoured a default rule whereby “something will be required to manifest an intention to exonerate” the successors in title from liability.102 Thus, if the plaintiff has positively disclaimed the rights of security in question, subrogation will not be available.103 Otherwise, “[a] simple payment of the charge without more, is sufficient
97 See e.g., Countess of Shrewsbury v. Earl of Shrewsbury (1790) 1 Ves. Jun. 227; Morley v. Morley (1855) 5 De G M & G 610; Burrell v. The Earl of Egremont (1844) 7 Beav. 205; In re Harvey [1896] 1 Ch. 137. For a discussion see R Sutton, “Payment of Debts Charged Upon Property” in A Burrows (ed.), Essays on the Law of Restitution (Oxford, Clarendon Press, 1991) 71 at 82. 98 See, e.g., Mitchell, The Law of Subrogation at 112 and 169. 99 See, e.g., Earl of Buckinghamshire v. Hobart (1818) 3 Swans. 186 (tenant in tail paid off mortgage in the belief that he was tenant in fee simple, when in fact another had been given a life tenancy under the former owner’s will). 100 This may be said to be the case where a lessee meets a debt owed by his landlord in order to safeguard his own interest: see Tarn v. Turner (1888) 34 Ch. D 456. See Mitchell, The Law of Subrogation at 169; Burrows, The Law of Restitution at 210. 101 See, e.g., Morley v. Morley (1855) 5 De GM & G 610 at 619. 102 Burrell v. The Earl of Egremont (1844) 7 Beav. 205 at 232. 103 Parry v. Wright (1823) 1 Sim. & St. 369 at 379 per Sir J Leach VC, Mitchell, The Law of Subrogation at 169.
Subrogation: Stepping into the Shoes of Secured Creditors 263 to establish the right of a tenant for life to have the charge raised out of the estate”.104 Thus, subrogation in this context is best regarded as a sui generis dispensation given to those with a partial interest in property. In part, the preference accorded to plaintiffs in this context may result from the recognition that those acting under practical compulsion did not choose to become creditors. It may well be that those acting under such pressure do not realise at the time that they have the opportunity to acquire the very rights that the creditor is using to exhort payment from them. Moreover, in these circumstances, the plaintiffs in question will generally have little bargaining power, and if creditors were bloody minded enough to refuse to assign their rights of security, plaintiffs would be unlikely to be in a position to resist.
IV . DETERMINING WHETHER CREDITORS WOULD BE UNJUSTLY ENRICHED II : CASES IN WHICH THE PLAINTIFF CANNOT READILY BE CHARACTERISED AS AN INVOLUNTARY UNSECURED CREDITOR
1. Sureties’ Acquisition of the Rights of Secured Creditors (a) The Doctrine Where sureties are called on to meet a loan, the law allows them to seek redress from the principal debtor. Since the eighteenth century, sureties have been able to bring an action at common law in quasi-contract against a principal debtor to recoup any sum paid for which the principal debtor was primarily liable. However, in addition, sureties are also entitled to be subrogated to the rights of the creditor, including any securities.105 While this right may be specified in the contract of guarantee, even in the absence of such a term, a right of subrogation has been recognised in equity since the seventeenth century.106 The remedy appears to contradict the notion that the law does not impose obligations upon individuals without their consent. Indeed, toward the end of the nineteenth century, Lord Blackburn wondered whether “it would not have been better to say that every one should have the full extent of his rights given by contract, express or implied and no more”.107
104
Burrell v. The Earl of Egremont (1844) 7 Beav. 205 at 232. This common law rule has had a statutory footing since the enactment of s. 5 of the Mercantile Law Amendment Act 1856. The law obliges a creditor to give a surety who pays off a mortgage the documents of security that he holds: Corpis v. Middleton (1823) 1 T & R 224. 106 Morgan v. Seymour (1637/1638) 1 Chan. Rep. 120; Parsons & Cole v. Briddock (1708) 2 Vern. 608; Craythorne v. Swinburne (1807) 14 Ves. 160. 107 Duncan, Fox, & Co. v. North and South Wales Bank (1880) 6 App. Cas. 1 at 20–1. 105
264 Redistributive Proprietary Remedies (b) Justifying Sureties’ Personal Remedies While today restitution scholars have claimed this area as their own, they have great difficulty in pointing to an “unjust factor” that would justify even personal relief. Andrew Burrows claims that the right is “straightforwardly explicable as unjust enrichment. The unjust factor is the legal compulsion on the surety and the enrichment is the discharge of the debtor’s liability to his creditor”.108 Birks offers a similar explanation.109 Yet this ignores the fact that the legal compulsion in question is the consequence of the enforcement of an obligation that was voluntarily assumed. A surety agrees to meet the obligations of the principal debtor in the event that the latter fails to do so. Given the surety’s consent to this responsibility, how can the principal debtor be said to be unjustly enriched at the expense of the surety should this contingency arise? It may be thought that if sureties want rights against principal debtors they should bargain for them. (c) Justifying the Acquisition of Secured Rights What is the justification for subrogating a surety to the securities held by the creditor? The suggestion that the right stands “upon a principle of natural justice”110 is hardly helpful. Nor does the conclusion that sureties are presumed to keep the rights in question alive for their own benefit111 explain why the law confers this remedy. After all, sureties are doing no more than performing their obligations under the contract of guarantee. Why should the law treat this as if it gave rise to an assignment? There are at least three difficulties with the notion that a charge can be kept alive in this way. First, any suggestion that the parties have such an intention is wholly implausible. It has been recognised that sureties, “seldom, if ever, stipulated for the benefit of the security which the principal debtor has given”.112 Secondly, the remedy is available in some circumstances in which it is clear the parties could not have formed this intention. In particular, sureties are entitled to enforce both securities the existence of which they were unaware at the time they guaranteed the loan and securities that were given after they gave their guarantee.113 Thirdly, in the absence of an assignment, it is not obvious why rights of security should be thought to subsist for the benefit of sureties. These rights are better understood as being conferred by operation of law. Restitution scholars have struggled to explain the availability of proprietary relief. Noting that the surety is a voluntary unsecured creditor, Charles Mitchell concludes that, “where the surety and the principal debtor have made no mention 108
Burrows, The Law of Restitution at 82. P Birks, An Introduction to the Law of Restitution at 21. 110 Craythorne v. Swinburne (1807) 14 Ves. 160, 169 per Lord Eldon, adopting the argument of counsel Sir Samuel Romilly. 111 Re Davison’s Estate (1893) 31 LR Ir. 249 at 255, aff’d. [1894] 1 IR 56; R Goff and G Jones, The Law of Restitution (5th edn.), at 134. 112 Yonge v. Reynell (1852) 9 Hare 809 at 818–9 per Turner VC. 113 Craythorne v. Swinburne (1807) 14 Ves. 160 at 169. 109
Subrogation: Stepping into the Shoes of Secured Creditors 265 of security in their agreement . . . the conclusion must be drawn that it is unjustifiable to allow the surety to acquire the creditor’s secured rights”.114 This conclusion reflects an impoverished conception of the possible justifications for proprietary remedies similar to that which has contributed to the restrictive approach that characterises the judicial regulation of property rights on the breakdown of intimate relationships.115 Just as a plausible case can be made for allowing relief in the absence of an agreement in the latter field, good reasons may be offered in support of the rights accorded to sureties who have not bargained for them. Considerations of justice and efficiency warrant affording sureties rights against the principal debtor, unless the parties should choose to displace it. Subrogation offers a reasonable way of facilitating surety arrangements, minimising their costs and protecting sureties from exploitation. In many situations, sureties are prepared to assume liability because they know the principal debtor intimately. Where sureties are guaranteeing obligations owed by their children or spouses, they are unlikely to take steps to safeguard their position by entering into a separate contract with the principal debtor. The surety’s actions are motivated by a sense of responsibility and a sense of trust. This explains why the surety both accepts the obligation and does not seek formal protection against the principal debtor’s failure. For the parties to interpose into such a relationship of intimacy a formal arrangement dictating their legal rights and obligations would often seem unsavoury. In a very real sense, the parties are not autonomous and so it would be a mistake to demand that they act as if they were. A different conception of justice prevails in this context; norms of the market are replaced by norms of trust and reciprocity.116 In these circumstances, if the debtor were to let the surety down, it would be appropriate for the courts to step in and impose terms that reasonable people in the position of the parties would have accepted had they considered the matter.117 Of course, guarantees are also common in the commercial context, and here it may be thought more reasonable to restrict the parties to the rights for which they have contracted. However, it may be that, even in this context, sureties would rather not have to resort to formal legal arrangements.118 Beyond a certain degree of social discomfort that may be seen as one of the transaction costs involved with such arrangements, parties forced to bargain for security in these circumstances will inevitably incur costs from employing lawyers. Thus, as well as being socially 114 Mitchell, The Law of Subrogation at 59. Andrew Burrows favours a similar view: Burrows, The Law of Restitution at 83. Birks’ explanation of why it is right that the surety should acquire the lender’s proprietary rights is examined infra, in ch. 15.I.5. 115 See supra, ch. 10. 116 M Walzer, Spheres of Justice (New York, Basic Books, 1983) 242. See supra, ch. 10.IV.1. 117 Cf. the approach taken in the redistribution of property on the breakdown of intimate relationships in Pasi v. Kamana [1986] 1 NZLR 603 at 605 per Cooke P. 118 At least since Macaulay’s research on the question, we have understood that parties in commerce rely heavily on trust. See S Macaulay, “Non-contractual Relations in Business” (1963) 28 American Sociology Review 45.
266 Redistributive Proprietary Remedies convenient, it is very likely to be economically efficient to give sureties a right of recoupment against the principal debtor as a default term in surety arrangements. This reflects an understanding, increasingly found in American contract scholarship, that implied terms should be understood, not so much as reflecting the parties’ actual intention, but as a standard set of economically efficient default rules that the parties can bargain around if they choose to do so.119 If it were appropriate to favour a default term in this way, exactly what rights should it confer? Surely, the best indication of what will be reasonable will be the terms of the loan contract into which the principal debtor has entered with the lender. Moreover, permitting sureties to assume the creditor’s rights in this way will mean that the principal debtor’s estate will be burdened by security interests to the same extent that it would have been had the surety not been called upon to meet the obligation in question. In any event, even if the initial decision to give rights of security to commercially sophisticated parties is difficult to justify, it has now been part of the landscape of commercial law for so long that its removal could not be contemplated. 2. Bills of Exchange: An Indorser’s Right to a Holder’s Securities An indorser of a bill of exchange, who as a result of the acceptor’s failure to honour the bill is required to pay out on it, is entitled to take possession of the bill and sue as a holder.120 In addition, the indorser is entitled to the benefit of any securities that the acceptor had given the holder. Duncan Fox & Co. v. North & South Wales Bank121 illustrates how such a situation may arise. In that case, Radford & Sons deposited title deeds for freehold property with the defendant bank in order to secure any debts due to the bank. Subsequently, Radford & Sons asked the plaintiff to take bills of exchange as consideration for a consignment of wheat. After reaching an arrangement with the bank, which it had approached upon the suggestion of Radford & Sons, the plaintiff agreed to take the bills in return for the wheat. Pursuant to the arrangement reached between the parties, the bank discounted the bills after the plaintiff had indorsed them. Subsequently, the bills were dishonoured and the bank (the holder) demanded payment from the plaintiff (the indorser). Soon after, Radford & Sons (the acceptor) became bankrupt. In the meantime, the plaintiff learned of the securities held by the bank. A dispute developed between it and certain unsecured creditors about whether the plaintiff was entitled to the deeds to secure the bankrupt acceptor’s obligation to it or whether the property secured should instead be made available for distribution among the acceptor’s general creditors. The House of Lords found for the plaintiff. 119 See e.g., J Coleman, D Heckathorn, and S Maser, “A Bargaining Theory Approach to Default Provisions and Disclosure Rules in Contract Law” (1989) 12 Harv Jnl of Law and Pub Policy 639; R Craswell, “Contract Law, Default Rules and the Philosophy of Promising” (1989) 88 Mich. L Rev. 489. 120 See Mitchell, The Law of Subrogation at 86–96; Goff and Jones, The Law of Restitution (5th edn.), at 135–7. 121 (1880) 6 App. Cas. 1.
Subrogation: Stepping into the Shoes of Secured Creditors 267 Lord Selborne LC and Lord Watson justified the indorser’s rights by analogy with a surety’s entitlement to assume any rights of security that the creditor enjoyed against the principal debtor.122 The analogy is not entirely convincing. It is true that indorsers are liable to the holder of a bill in a similar way to a surety. However, it does not necessarily follow that it is equally appropriate to confer proprietary rights in the context of bills of exchange. After all, indorsers and acceptors are liable to be more consistently at arm’s length than are sureties and principal debtors. Nonetheless, just as the provision of personal rights is no doubt a sensible default rule that facilitates the negotiability of these instruments, subrogation to rights of security may be justified on the same basis. It is, however, difficult to see that there can be any justification for allowing plaintiffs to acquire securities of which they were unaware at the time they indorsed a bill of exchange. Such plaintiffs have taken the risk that they would have to line up with the acceptor’s unsecured creditors in the event that the bill should be dishonoured. Why should the law come to their aid merely because it transpires, quite fortuitously, that the acceptor has deposited securities with the holder? On the other hand, the law as it stands may be justified on the grounds of efficiency. A rule allowing indorsers to exercise any security held by the holder without regard to whether they were aware of its existence may well be less expensive to administer than one that would require those administering a bankrupt acceptor’s estate to discover what indorsers knew at the time they indorsed a bill.
3. Subrogation of Creditors of a Trust Business to the Trustees’ Lien123 On occasion a trustee may run a trust business. This situation arises, for example, where executors manage the business of a deceased trader. While trustees are personally liable for their acts and omissions, they enjoy the right to be indemnified by the trust estate for any costs incurred in carrying out their duties, and any liability that arises in this way is secured by a lien over the trust assets.124 On the other hand, creditors dealing with a trust business do not have any direct remedy against the trust assets. However, if in administering a trust business in an authorised fashion, a trustee incurs debts, the creditors in question are entitled to be subrogated to the trustee’s rights against the trust estate—both personal and proprietary.125 The rule that creditors acquire personal rights against the trust estate in these circumstances is unobjectionable. As Sir George Jessel MR explained in Re 122 Ibid. at 12 and 22. In addition, Lord Selborne LC justified the outcome by analogy with the doctrine that permits a creditor of a trust business has to exercise the trustee’s lien: ibid. at 13. For a critique of that doctrine see infra nn. 125–131. 123 HAJ Ford, “Trading Trusts and Creditors’ Rights” (1981) 13 MULR 1; B MacPherson, “The Insolvent Trading Trusts” in P Finn (ed.), Essays in Equity (Sydney, Law Book Co., 1985) 142. 124 See infra, ch. 14.II.3(a). 125 On creditors’ rights to exercise the trustee’s lien see Farhall v. Farhall (1871) 7 Ch. App. 123; Owen v. Delamere (1872) LR 15 Eq. 134.
268 Redistributive Proprietary Remedies Johnson:126 “[t]he trust assets having been devoted to carrying on the trade, it would not be right that the cestui que trust should get the benefit of the trade without paying the liabilities”.127 On the other hand, this explanation in no way indicates that these creditors should be entitled to exercise the trustee’s lien over trust assets. It is difficult to see that there can be any justification for allowing those who have voluntarily become unsecured creditors in a commercial context to acquire a better right through subrogation. To hold otherwise raises difficult questions about the order of priority among subrogated creditors and the beneficiaries’ other secured and unsecured creditors. What can account then for the judicial willingness to permit proprietary subrogation in this context? The normative discourse in this area is marred by a tendency to employ inapposite analogies and an inability to escape the metaphor of subrogation. In Re Johnson, Sir George Jessel MR suggested that the subrogation permitted in this context was “a mere corollary to those numerous cases in equity in which persons are allowed to follow trust assets”.128 This explanation appears to be based on a very tenuous analogy. While similar justifications may be offered for tracing and some instances of subrogation, this hardly indicates that the one is “a mere corollary of the other”. In addition, this form of subrogation has been supported by drawing a parallel with the right of sureties to assume the securities of a creditor after discharging the liability of the principal debtor.129 Once again, the analogy is not a strong one. There is little similarity between the transactions that give rise to the right to subrogation in these different contexts. The right of creditors to assume the trustee’s lien illustrates the dangers of taking the notion of subrogation too literally. This tendency encourages the conclusion that plaintiffs must be placed in exactly the same position as that enjoyed by those in whose shoes they are permitted to stand.130 If some rationality is to be brought to this area, an effort ought to be made to identify plausible rationales for doctrines that are presently explained using metaphor and fiction. It would perhaps be preferable if creditors of trustees running a business trust were given relief through the recognition of a direct claim against the beneficiaries so that the use of subrogation reasoning could be abandoned altogether in this context. Presumably, in the light of the discussion of subrogation that took place in Banque Financière,131 the time might be right for a review of this doctrine.
126
(1880) 15 Ch. D 548. Ibid. at 552. Ibid. 129 Yonge v. Reynell (1852) 9 Hare 809 at 819 per Sir GJ Turner VC. See Burrows, The Law of Restitution at 84. 130 See supra nn. 7–13 and accompanying text. 131 See supra nn. 15–17 and accompanying text. 127 128
Subrogation: Stepping into the Shoes of Secured Creditors 269 4. Subrogation and the Doctrine of Marshalling Subrogation is also employed to give effect to the doctrine of marshalling. In Webb v. Smith132 Cotton LJ described that doctrine on the basis that: If A has a charge upon Whiteacre and Blackacre, and if B also has a [second] charge upon Blackacre only, A must take payment of his charge out of Whiteacre, and must leave Blackacre, so that B the other creditor, may follow it and obtain payment of his debt out of it.133
Subrogation takes effect in the event that a secured creditor does not observe this rule. If, pursuant to the example outlined above, A exercises his charge over Blackacre to realise the debt owed to him, B will be subrogated to the position of A, thereby allowing B to enforce the charge that A enjoyed over Whiteacre.134 Goode has explained this doctrine on the basis that it prevents the unjust enrichment of the debtor.135 However, this cannot be right. In the above example, the balance of the debtor’s assets and liabilities remains the same. It is the debtor’s other creditors who will be primarily affected by the remedy given to B. Thus, the doctrine of marshalling represents a decision to redistribute property rights in order to privilege the position of secured creditors (mainly institutional lenders) over that of unsecured creditors (generally, smaller contract creditors). That this remedy effects justice or advances any worthy economic objective is far from obvious.
V . PROTECTING THIRD PARTIES : DEFENCES AND REGISTRATION
1. A Change of Position Defence? The recognition of a change of position defence represents one of the most important developments in the English law of restitution in recent years.136 As between plaintiff and defendant, this defence obviously softens the blow of imposing liability on those who have neither voluntarily assumed it nor wrongfully injured another. The defence ensures that, where defendants have changed their position without blame, it is not they but restitution claimants who bear the cost of this. If the justification for allowing plaintiffs to be subrogated to the position of a secured creditor is to prevent the defendant’s general creditors being unjustly enriched, it would be reassuring if those general creditors were able to avail themselves of some form of change of position defence. Yet, it is difficult to see how this could work. 132
(1880) 30 Ch. D 192. Ibid. at 200. Lanoy v. Duke and Duchess of Atholl (1742) 2 Atk. 444; Wallis v. Woodyear (1855) 2 Jur. NS 179; Noyes v. Pollock (1886) 32 Ch. D 53. See T Cleaver, “Marshalling” (1991) 21 VUWLR 275; Mitchell, The Law of Subrogation at 143. 135 Roy Goode, Commercial Law (2nd edn., London, Penguin, 1995) 697. 136 See Lipkin Gorman v. Karpnale Ltd. [1990] 1 AC 548. 133 134
270 Redistributive Proprietary Remedies (a) Change of Position and Secured Creditors In Banque Financière, Lord Steyn reasoned that, before it could be determined that the remedy sought was needed to prevent the second mortgagee being unjustly enriched, it had to be established whether there were any defences. He noted that the second mortgagee had not relied upon any special defence.137 Presumably, his Lordship had in mind the standard defences and, in particular, that of change of position. On this basis, the second mortgagee could have relied on the defence if it could have shown that it had altered its circumstances to its detriment in the belief that it was entitled to rely on the ostensible state of the debtor’s security arrangements. For example, a party in the position of the second mortgagee, in the belief that its position in the event of its debtor’s insolvency was stronger than was actually the case, might have delayed calling in its loan and exercising its security despite its debtor’s failure to make due payments. If the debtor’s financial position had worsened as a result, so that that second mortgagee received a smaller dividend in the debtor’s bankruptcy, then, in theory, the second mortgagee should have been able to rely on the defence. However, there must be serious doubt about the administrative workability of the defence in this context. The matter need not necessarily be analysed in terms of a defence to a claim based on unjust enrichment. An alternative approach to the issue is apparent in Armatage Motors Ltd. v. Royal Trust Corp. of Canada,138 a decision of the Ontario Court of Appeal in which detrimental reliance was viewed as a basis for denying subrogation. RTC advanced money to enable the mortgagor to discharge a first mortgage over its property, on the basis that the loan would be secured by a new mortgage. Because a search conducted by RTC’s solicitor had failed to reveal the presence of a second mortgage held by AML, RTC had assumed that it would acquire a first mortgage. State law suggested that, ordinarily in these circumstances, RTC would have been entitled to be subrogated to the position of the holder of the discharged first mortgage. However, the plaintiff argued that this outcome would not be appropriate because, in the interim, AML had discovered the existence of RTC’s interest and sought advice from its solicitor. The solicitor, presumably unfamiliar with the finer points of the doctrine of subrogation, advised AML that its mortgage took priority over RTC’s interest. To the extent that AML’s defence was based on change of position, it was perhaps not a particularly convincing one. It sought a sale very soon after the mortgagor defaulted on the loan, and it is difficult to see how it could have done anything to improve its position if it had known of the danger that its mortgage might not have priority. On the other hand, AML did put itself to some expense in seeking to enforce its mortgage. Ultimately, in refusing RTC’s subrogation claim, the court placed as much emphasis on the fact that RTC had an alternative claim in negligence against its solicitor for failing to discover AML’s interest. In Armatage Motors Ltd., unlike 137 138
[1999] 1 AC 221 at 227. (1997) 149 DLR (4th) 398.
Subrogation: Stepping into the Shoes of Secured Creditors 271 Banque Financière, the court did not analyse the claim in terms of unjust enrichment. Rather, it treated the matters relied upon by AML as factors to be considered in exercising its discretion whether the remedy of subrogation should be granted. (b) Change of Position and Unsecured Creditors Armatage Motors Ltd. essentially involved a contest for priority between two mortgagees. How such contests are resolved will not affect the position of unsecured creditors. On the other hand, the change of position analysis proves to be wholly unworkable in cases in which plaintiffs would, in the absence of subrogation, be left without any secured interest and would have to line up with the mortgagor’s general creditors in the event of the latter’s bankruptcy. One situation in which change of position may be an issue in the context of subrogation would be where a creditor had lent money on the assumption that the fact that there was no extant security registered over particular assets was a good indicator of the defendant’s credit-worthiness. Another danger is that third parties with claims against the defendant might bring an action on the understanding that they would be able to obtain a charging order over valuable assets only to find that such orders are rendered worthless by the plaintiff’s subrogation to an apparently discharged security. This was the background to the dispute in Boscawen v. Bajwa.139 It is difficult to conclude that it would not have been fairer to have required the building society to pursue the remedies it had against the defendant’s solicitors for breach of trust rather than allowing it to undermine the legitimate expectations of the judgment creditor. There would be real difficulties in dealing with this unfairness through the defence of change of position. It is a feature of property rights that they bind the world (or at least a good part of it). Inevitably, in cases in which proprietary rights are claimed, all third parties that would be affected by the award of those rights cannot be expected to be parties to the action. Emily Sherwin argues that trustees in bankruptcy could raise claims of reliance on behalf of unsecured creditors.140 However, the administrative costs of this are likely to be quite significant. The prospect of such additional duties would be enough to make those administering bankrupt estates anxious. If change of position is a relevant consideration for proprietary remedies and a defence based on such concerns cannot be satisfactorily administered in this context, this is a reason for restricting the proprietary effect of subrogation.
139
[1996] 1 WLR 328. See supra nn. 55–61. Sherwin, supra n. 93 at 360–1. A third approach to the problem is offered by Emily Sherwin’s analysis of the issue of detrimental reliance, as it arises in the context of constructive trusts. She envisages these considerations being taken account of through the defences of laches and estoppel. Perhaps this would require a more robust use of those defences than can presently be discerned in English law. 140
272 Redistributive Proprietary Remedies 2. Subrogation and Registration It would be reassuring if we were able to conclude that subrogation in this context does not unreasonably prejudice the interests of third parties. The discourse in this area conceptualises the plaintiff as acquiring a proprietary interest that was already in existence.141 Nonetheless, it is likely that the rights acquired by the plaintiff through subrogation will be subject to any interests acquired in the property in any period in which the interest which is being acquired by subrogation was ostensibly discharged so that the interest was essentially undiscoverable. In unregistered land, the bona fide purchaser principle will presumably apply and prevent a plaintiff obtaining priority over a third party purchaser or mortgagee who has acquired an interest for value without notice in the meantime. In registered land, if the rights in question are no longer on the register, purchasers will generally be free of the rights of the plaintiff, even if they have notice of those rights.142 The lien that arises in favour of unpaid vendors of land poses few relatively risks to third parties. Traditionally, purchasers were liable to have constructive notice of the interest only as long as the vendor retained possession of the property. In unregistered land, the vendor’s lien must be registered as a charge to be enforceable against subsequent purchasers.143 Under the English land registration system, while registerable as a minor interest, in the absence of registration, the lien may be protected, as an overriding interest by virtue of being a right of someone in actual occupation of land.144 However, given that a subrogated lender will seldom be in actual occupation of the property, without registration, such a lien will seldom bind subsequent third party purchasers and mortgagees, even if they had notice of the facts that gave rise to it. On the other hand, difficult questions arise where a lender has advanced money intending to receive a first mortgage but finds that the security granted is affected by prior interests. As already mentioned, there is a good deal of authority to support the view that the lender should be subrogated to the position of the holder of a security that was discharged using the money advanced. While it is true that the other secured creditors would be enriched as a result of the lender’s mistake, lenders will have had constructive notice of the prior interest by virtue of its registration. If so, why should they be accorded such privileged treatment? There is something to be said for treating the register as conclusive so as to enable interested parties to be as certain as possible about their rights. One context in which the courts have been unwilling to allow subrogation is where security has been granted but is unenforceable because of the lender’s 141
See, e.g., Boscawen v. Bajwa [1995] 4 All ER 769 at 784 per Millett LJ. Although there is the danger that these rights are capable of being characterised as overriding interests under s. 70(1)(g) of the Land Registration Act in those rare situations in which a subrogated plaintiff is in actual possession of the property. 143 Land Charges Act 1972, s. 2(4). 144 Land Registration Act 1925, s. 70(1)(g). See London and Cheshire Insurance Co. Ltd. v. Laplagrene Property Co. Ltd. [1971] Ch. 499 at 502. 142
Subrogation: Stepping into the Shoes of Secured Creditors 273 failure to register it. Thus, subrogation was denied to a lender in Burston Finance Ltd. v. Speirway Ltd.,145 where a charge granted to the lender was void against the liquidator because of a failure to register it as required by company law.146 Walton J argued that the lender had received what it had bargained for under the loan contract and its inability to enforce the security was entirely its own doing. It is difficult to argue with this conclusion: to allow subrogation in these circumstances would be contrary to the policy that promotes registration as the most fair and efficient basis for the protection of rights of security.
VI . CONCLUSION
English law provides for the acquisition of proprietary rights through subrogation in a wide variety of situations. Stripped free of metaphor and fiction, this area of law gives the lie to suggestions that the judiciary has no role in redistributing property. The myriad of circumstances in which the remedy is used reflects how frequently readjustment of proprietary rights may be appropriate. However, the rhetorical obfuscation associated with subrogation has had two important effects. First, it has meant that there has been little effort to explore openly the justifications for granting the remedy. And, secondly, it has ensured that subrogation has been understood as a sui generis form of judicial intervention that cannot offer us any lessons for the provision of proprietary relief in other contexts. On the other hand, recent developments provide some hope for a rationalisation of the law of subrogation that may ultimately influence our treatment of other remedies.147 In particular, the willingness to confer proprietary rights in response to a mistake and the recognition of the need to justify the effects of subrogation on third parties would have important implications if applied more generally in the law of proprietary remedies.
145 146 147
[1974] 1 WLR 1648. Companies Act 1948, s. 95(1). See Banque Financière de la Cité v. Parc (Battersea) Ltd. [1999] 1 AC 221. See supra nn. 34–40.
12
Constructive Trusts over Sums Obtained from Third Parties to Prevent Over-compensation C O N S T R U C T I V E T R U S T or equitable lien may be imposed upon those who are entitled to recover from one party with respect to a tort or breach of contract but are obliged to account to another to the extent that sums recovered would go beyond compensating them for any loss they have suffered. This chapter considers four situations in which proprietary rights may be redistributed in this way.
A
I . INSURERS ’ RIGHTS AGAINST AN INDEMNIFIED ASSURED
1. The Nature of an Insurer’s Rights against an Indemnified Assured The right of an insurer to be subrogated to the rights of an indemnified assured is well established.1 Insurers who have fully indemnified an assured for any loss suffered may enforce the assured’s rights of action for their own benefit. This allows indemnity insurers to recoup the loss they have suffered in fulfilling their obligations under a contract of indemnification and ensures that assured parties are not over-compensated for their loss. The position is more complex where those assured are not fully indemnified (for instance, where the insurance policy provides for an excess to be borne by the assured). In this situation, assured parties retain the right to sue any party responsible for their loss. However, assured parties in this position must account to their insurers for any amount received that would go beyond indemnifying them for their loss (taking account of any prior insurance payout). Moreover, the House of Lords recently rather controversially held that, where the contract of insurance provides for an excess, any fund received from a third party liable for the assured’s loss must be first applied to reimburse the insurer. Only when insurers have recouped their loss can assured parties have recourse to the fund to compensate themselves for any loss borne as the result of an excess clause.2 Until recently, the nature of an insurer’s rights against a partially indemnified assured in this context was unclear. However, dicta from various cases referred to 1 2
Cuddon v. Tite (1858) 1 Giff. 395. Lord Napier and Ettrick v. Hunter [1993] 1 AC 713.
276 Redistributive Proprietary Remedies assured parties as holding such sums on trust for their insurers.3 Recently, the House of Lords addressed the matter in Lord Napier and Ettrick v. Hunter.4 The litigation developed out of the heavy losses suffered by certain Lloyd’s Names (the assured) and their underwriters (the insurers) in the late 1980s. The underwriters paid out under a contract with the Names that provided for an excess. Given that they had not been fully indemnified, the Names were entitled to bring actions against any third parties responsible for their loss. In pursuing this right, they settled a negligence action that they had brought against the managers of their syndicates. Subsequently, a dispute arose between the Names and the underwriters that eventually found its way to the House of Lords. One matter at issue was whether the underwriters had any proprietary right in any money paid under the Names’ settlement with the syndicate managers. Their Lordships accepted the underwriters’ claim that they had a proprietary interest in respect of any moneys paid to the Names pursuant to the settlement that went beyond compensating them for their loss.
2. Justifying the Insurer’s Proprietary Interest in Money Recovered by the Assured from Third Parties (a) Difficulties in Justifying the Insurer’s Proprietary Right In Napier v. Hunter, the decision to give the underwriters a proprietary interest had to be explained in the light of the notion that property rights should not be conferred without an owner’s consent. The Names clearly relied upon this understanding. They argued that the underwriters were not entitled to any interest in the moneys transferred pursuant to the settlement, given that they had no pre-existing proprietary interest in those moneys and cited Lister v. Stubbs5 to support this contention. And, indeed, in the Court of Appeal, Dillon LJ accepted that the decision in Lister v. Stubbs indicated that the underwriters’ claim for proprietary relief was misconceived.6 While counsel for the Names relied upon that case again in the House of Lords,7 no mention was made of it in their Lordships’ judgments. What then can be the justification for recognising a proprietary interest in these circumstances? One thing that is clear is that the provision of such rights cannot be explained in terms of subrogation. The matter is different from other instances of subrogation, where the process allows claimants to obtain the rights of a secured 3 E.g., Commercial Union Assurance Co. v. Lister (1874) LR 9 Ch. App. 483 per Sir George Jessel MR; Re Miller, Gibb & Co. Ltd. [1957] 1 WLR 703. 4 [1993] 1 AC 713. See M Luey, “Proprietary Remedies in Insurance Subrogation” (1995) 25 VUWLR 449. 5 (1890) 45 Ch. D 1. See supra, ch. 9.II. Of course, both the Court of Appeal and House of Lords decisions in this case preceded the Privy Council’s rejection of Lister v. Stubbs in AG for Hong Kong v. Reid [1994] 1 AC 324. See supra, ch. 9.IV. 6 Ibid. at 718. 7 Ibid. at 720–2.
Constructive Trusts over Sums Obtained from Third Parties 277 creditor and thereby enables them to take priority over the debtor’s general creditors. In contrast, if an insurer were placed in the shoes of the assured, in the event of the assured’s bankruptcy, the insurer’s claim to the proceeds of the claims in question would not have priority over those of the assured’s unsecured creditors.8 Three forms of justification were offered by the House of Lords in Napier v. Hunter to explain the provision of proprietary relief. First, all their Lordships justified the result with reference to precedent. Secondly, Lord Browne-Wilkinson employed doctrinal logic to explain the result in terms of an implied contractual term and equity’s habit of converting personal obligations into property rights.9 Finally, Lord Templeman justified the result as a matter of policy. None of the explanations are satisfactory. In addition, there are real difficulties in reconciling the formal justifications offered by Lord Browne-Wilkinson with the conclusion that the interest that arose in favour of the underwriters was a lien rather than a constructive trust. (b) The Authorities Of all of those giving fully reasoned judgments in Napier v. Hunter, Lord Goff was the most equivocal in his acceptance of the view that the underwriters were entitled to proprietary relief. Recognising the implications of this outcome and the difficulties in justifying it, he cited a passage from Bowstead on Agency,10 where its editor observed that: a central question, perhaps too often overlooked (because not directly an issue), is whether the rights of the principal are sufficiently strong, and differentiable from other claims, for him to be entitled to a prior position in respect of them on the agent’s bankruptcy.11
Having identified the issue, it might have been expected that Lord Goff would address it directly. Instead, he was content to conclude that judges in the past who had referred to the assured’s obligation in proprietary terms must have decided that priority was justified.12 On closer analysis it becomes clear that this is wishful thinking. The oldest of the decisions relied upon is Randal v. Cockran,13 a midseventeenth-century decision that takes up less than half a page in the English Reports. An insurer had indemnified the assured after the latter’s ship was captured by the Spanish. The court was asked to determine whether the insurer had standing to take advantage of a scheme established by Royal Proclamation to compensate those who had suffered such losses. Lord Hardwicke concluded that the insurer stood in the place of the indemnified assured, and that the assured was a 8 9 10 11 12 13
Luey, supra n. 4 at 468. See supra, ch. 2.V.2. F Reynolds (ed.), Bowstead on Agency (5th edn., London: Sweet and Maxwell, 1985). Ibid. at 162–3. [1993] AC 713 at 744. (1748) 1 Ves. Sen. 98.
278 Redistributive Proprietary Remedies trustee for the insurer for any sum paid under the scheme. However, what was essentially at issue was locus standi. The question of priorities in insolvency did not arise on the facts and was not discussed. The next of these cases, White v. Dobinson,14 takes up the best part of one page of the English Reports. Sir Lancelot Shadwell VC accepted that the plaintiff insurer had the right to a lien over any damages that were to be paid to the assured, the first defendant, to secure the value of the sum that the plaintiff had paid under the policy. For this reason, the Vice Chancellor was prepared to grant an injunction to prevent the second defendant, who was being sued by the assured in a tort action, from paying over damages to the assured without first reimbursing the plaintiff. Again, there is nothing in the report to suggest that insolvency was an issue and, again, the court did not turn its mind to the question whether the plaintiff deserved to stand ahead of the defendant’s general creditors. Indeed, the Vice Chancellor was quite content to deal with the question on the basis that it had been determined in Randal v. Cockran, while observing that he did “not recollect that it arose during the whole of my practice at the Bar”.15 The issue arose again 30 years later in Commercial Union Assurance Co. v. Lister.16 Again, the issue was primarily one of standing. The assured, the owner of a building that suffered fire damage that exceeded the value for which it was insured, sued a third party for negligence. Sir George Jessel MR concluded that the assured was entitled to maintain the action, even though his insurer had paid out under the policy—a view endorsed by the Court of Appeal. However, Jessel did suggest that the assured would hold on trust for the insurer any sum in excess of the difference between the amount paid by the insurer and the value of the damage to the building.17 Again, insolvency was not an issue. On appeal, Sir W.M. James LJ was more cautious, leaving open the precise nature of the assured’s duty to his insurer.18 The final decision upon which their Lordships in Napier v. Hunter placed some significance was Re Miller, Gibb & Co. Ltd.19 This was the only decision of those examined that was made against a background of bankruptcy. The applicant, the Board of Trade, had undertaken to cover a company for 90 per cent of any loss arising from certain export contracts. The applicant paid out in respect of one such contract. Subsequently, the company did receive payment under the contract in question, although not before having gone into liquidation. The litigation arose after the liquidator refused the applicant’s claim to a beneficial interest in 90 per cent of the sum received under the contract. Wynn-Parry J accepted the Board of Trade’s claim. He based his decision in large part on the principle established in 14 (1844) 14 Sim. 273. Lord Browne-Wilkinson took the view that this was the decisive authority on this point. 15 Ibid. 16 (1874) LR 9 Ch. App. 483. 17 Ibid. at 484. 18 Ibid. at 486–7. 19 [1957] 2 All ER 266.
Constructive Trusts over Sums Obtained from Third Parties 279 Randal v. Cockran that, after recovering under an insurance policy, any sum that assureds received in litigation that would go beyond making good their loss would be held on trust for their insurer. Despite the circumstances in which the litigation arose, Wynn-Parry J made no further effort, beyond his examination of the authorities, to explain why the applicant’s claim merited priority in bankruptcy. This is perhaps not surprising. Even if he had been curious about their merit, it is unlikely that he would have thought that it was within his power to depart from the existing authorities. What is apparent then is that, despite Lord Goff’s assumption to the contrary, the courts had never directly considered the relative merits of the competing claims of insurers and other creditors in this context. Lord Templeman completed his recital of the authorities in question by remarking, “I am not prepared to treat authorities which span over two centuries in a cavalier fashion. The principles which dictated the decisions of our ancestors . . . are discernible and immutable.”20 It would have been preferable if his Lordship had been prepared to venture beyond such rhetoric of ancestor worship and notions of principles generating decisions (rather than vice-versa) and to ask what rationale there may be for granting insurers so powerful a remedy in this context. As J.P. Dawson once noted, justifications based on notions of equitable ownership tend to emerge from cases in which the defendant is solvent and priority in bankruptcy is not actually at issue. In his view, “[t]he modern cases that hold this factor irrelevant seem to me to provide the most perfect example of circularity”.21 (c) Formal Justifications Lord Browne-Wilkinson explained the insurers’ proprietary rights in a highly formalistic fashion by first conceptualising the assured’s obligations as arising out of contract and, secondly, converting those contractual rights into a proprietary interest by use of the maxim, “equity regards as done that which ought to be done”. The rights that insurers have to recover sums that go beyond indemnifying the assured arise even where insurance contracts do not explicitly provide for them. Where this is so, the courts have tended to characterise these rights as arising as a result of implied contractual terms.22 In Napier v. Hunter such reasoning provided the starting point of Lord Browne-Wilkinson’s explanation of how the underwriters came to have a proprietary interest in the settlement moneys. He argued that: 20
[1993] AC 713 at 738. JP Dawson, Unjust Enrichment: A Comparative Analysis (Boston, Mass., Little, Brown & Co., 1956) 32. 22 This view was taken by Lord Diplock in Yorkshire Insurance Co. Ltd. v. Nisbet Shipping Co. Ltd. [1962] 2 QB 330; Hobbs v. Marlowe [1978] AC 16 at 39. Similarly, in Banque Financière de la Cité v. Parc [1999] 1 AC 221 at 231, Lord Hoffmann took the view that “the doctrine of subrogation in insurance rests upon the common intention of the parties and gives effect to the concept of indemnity embodied in the contract”. 21
280 Redistributive Proprietary Remedies The contract of insurance contains an implied term that the assured will pay to the insurer out of the moneys received in reduction of the loss the amount to which the insurer is entitled by way of subrogation. That contractual obligation is specifically enforceable in equity against the defined fund (i.e. the damages) in just the same way as are other contracts to assign or charge specific property e.g. equitable assignments and equitable charges. Since equity regards as done that which ought to be done under a contract, this specifically enforceable right gives rise to an immediate proprietary interest in the moneys recovered from the third party.23
This analysis presents several difficulties. First, it depends upon the rather questionable implication of a term into the contract. Certainly the extent of the obligation imposed in Napier v. Hunter that required the assured to account to the insurer before recovering any loss resulting from an excess is an obligation that would hardly satisfy the tests for implying contractual terms.24 Secondly, the analysis then relies on a rather dubious application of the maxim “equity regards as done that which ought to be done” to convert obligation into ownership.25 The use of the maxim perhaps follows from Lord Browne-Wilkinson’s view that this particular contractual term was enforceable “in just the same way as are other contracts to assign or charge specific property”.26 Thus, his Lordship treated the term implied as one to assign future property. Yet it is hardly obvious why the term implied should be seen as one of assignment rather than an obligation to account. This was a flaw equally apparent in the Privy Council decision in AG for Hong Kong v. Reid.27 If the obligation assumed was merely to account, there is no reason why ensuring that this is done need result in a proprietary interest. Given these objections, the outcome in Napier v. Hunter is not explicable as anything other than a right arising by operation of law, reflecting a judicial decision to give insurers preferential treatment. (d) Policy Considerations The question that remains unanswered is why insurers should receive rights that would give them priority in bankruptcy over their assureds’ general creditors. In Napier v. Hunter only Lord Templeman tackled this issue directly. While he offered a formal explanation of the insurers’ proprietary interest that resembled that presented by Lord Browne-Wilkinson, Lord Templeman seemed less convinced of this analysis. Consequently, he proceeded to provide an argument focusing on the moral desert of the underwriters relative to a Name’s unsecured creditors. In his view, a proprietary interest was required because, “[i]n the case of 23
[1993] AC 713 at 752. The difficulties with explaining the implication of rights are reflected in Lord Templeman’s rather tentative view that “[i]t may be that the common law invented and implied in contracts of insurance . . . a promise by the insured person to account to the insurer for moneys recovered from a third party in respect of the insured loss”: ibid. at 736. 25 See supra, ch. 2.V.2. 26 [1993] AC 713 at 752 (emphasis added). 27 [1994] 1 AC 324. 24
Constructive Trusts over Sums Obtained from Third Parties 281 the bankruptcy of the name, the right of the insurer would be useless unless equity protects that right”.28 Yet, in itself, this justifies nothing—after all, the same could be said of any unsecured creditor’s rights. Some additional reason is needed to justify conferring secured status upon a creditor who has not bargained for the right. In terms of the considerations most commonly advanced to justify the conferral of priority in bankruptcy,29 it is easy enough to understand one element of the intuitive attraction of allowing a proprietary claim in this context. It is a reasonable inference that the value of Names’ estates available for distribution in bankruptcy would be liable to have been swollen as a result of their receipt of any money that went beyond indemnifying them for their loss.30 On the other hand, it is less clear that insurers in this context could plausibly be regarded as involuntary creditors. Lord Templeman apparently thought that they could. Thus, he remarked that: The . . . insurers will be in a worse position than an unsecured creditor because the insurers could not resist payment under the policy whereas an unsecured creditor may choose whether to advance money or not.31
Yet the underwriters were liable to pay under the policy only because they had chosen to assume a liability to indemnify the assured if a particular contingency arose; and, what is more, they charged a premium for taking this risk. If they had wanted priority over general creditors they could have bargained for it. Consequently, commentators reflecting on the decision have generally taken the view that the underwriters’ claim did not merit priority in bankruptcy.32 A further justification advanced by Lord Templeman in favour of the award of proprietary relief was that many of the underwriters were overseas and that it would be much more difficult to enforce a personal claim.33 However, difficulties of enforcement may arise in the context of any type of claim. Something more should be required before a proprietary remedy is preferred to a personal obligation to account. (e) Why a Lien? The explanation of the underwriters’ rights offered by Lord Browne-Wilkinson is difficult to reconcile with the precise remedy given in Napier v. Hunter. If the term implied was really in the nature of a promise to assign the proceeds of the claim, the logical outcome would have been that the Names would have held that part of the fund in question on trust for the underwriters. Instead, their Lordships restricted the remedy to an equitable lien: a charge over the fund securing the 28
[1993] AC 713 at 737. On the normative justifications for granting priority in bankruptcy see supra, ch. 4.III. A point that Lord Templeman noted: supra n. 28 at 737. 31 Ibid. 32 Mitchell, The Law of Subrogation at 83; R Goff and G Jones, The Law of Restitution (5th edn.) at 86; A Burrows, The Law of Restitution at 82. 33 [1993] AC 713 at 737. 29 30
282 Redistributive Proprietary Remedies Names’ obligation to account. It is difficult to comprehend how in this situation the application of the maxim “equity regards as done that which ought to done” could convert an agreement to assign into a charge. Certainly, it is unclear why the maxim should have generated this result in Napier v. Hunter, while it produced a constructive trust when subsequently applied by the Privy Council in AG for Hong Kong v. Reid.34 Lord Goff remarked: I am very content that the equitable proprietary right of the insurer should be classified as a lien. . . . Indeed a lien is the more appropriate form of proprietary right in circumstances, where, as here, its function is to protect the interest of the insurer in an asset only to the extent that its retention by the assured will have the effect that he is more than indemnified . . .35
Lord Goff was evidently relieved that the form of relief should be limited to a lien rather than a fully-fledged trust relationship. However, if their Lordships’ intention was merely to ensure that the Names were not over-indemnified, this could have been equally well achieved by granting a personal remedy. (f) A “Remedial” Proprietary Right? There is a strong trace of “remedial trusts law philosophy” apparent in Napier v. Hunter, especially in Lord Templeman’s judgment.36 This is evident in his analysis of the justifications for giving the insurer priority over the assured’s general creditors. This philosophy is in stark contrast with the assumption more typically favoured by English courts that “either the plaintiff is entitled to a proprietary remedy or he is not”37 and that, as a result, issues of insolvency do not come into the equation. A more instrumentalist attitude is also apparent in the assumption shared by all their Lordships in Napier v. Hunter that the court enjoyed a degree of discretion in deciding the appropriate type of proprietary interest. This is difficult to reconcile with the aversion to judicial discretion in awarding proprietary relief expressed in the context of the debate on the “remedial constructive trust”.38 On the other hand, it is consistent with the degree of flexibility exercised by the courts in proprietary estoppel39 and the English judiciary’s treatment of maritime liens.40
34
[1994] 1 AC 324. See supra, ch. 9.III.1. [1993] AC 713 at 744–5. 36 See CEF Rickett, “Different Views on the Scope of the Quistclose Analysis: English and Antipodean Insights” (1991) 107 LQR 608 at 608. See supra, ch. 3.IV. 37 Sir Peter Millett, “Bribes and Secret Commissions” [1993] RLR 7 at 10. 38 See supra, ch. 1.III.4. 39 See infra, ch. 13.III. 40 The Halcyon Isle [1981] AC 221. See infra, ch. 14.I. 35
Constructive Trusts over Sums Obtained from Third Parties 283 3. Rights Arising from an Overpayment by the Insurer Questions of over-indemnification in the insurance context do not arise solely in situations in which the assured receives a payment from a third party after being indemnified wholly or in part by the insurer. Such issues may also be relevant where a payment is first received from the third party, and the insurer, in ignorance of this, makes a payment that goes beyond indemnifying the assured. These were the facts in Stearns v. Village Main Reef Gold Mining Co.41 The plaintiff insurers paid the defendant under a contract of insurance for the full value of gold expropriated by the Transvaal Government in the Boer War. Thereafter, the insurers discovered that the defendant had already received substantial compensation from the expropriator. The insurers argued, not only that their overpayment was motivated by a mistake of fact that gave rise to an action for money had and received, but that the defendants held the overpayment on trust for them and, as a consequence, were liable to pay compound interest. Only Stirling LJ considered the question whether the insurers had a proprietary interest at any length. His judgment has been the source of considerable confusion. A number of commentators have assumed that the proprietary claim was in respect of the payment by the Transvaal Government, rather than the later overpayment.42 Yet this would have made little sense: the defendant was perfectly entitled to receive the earlier sum for its own benefit; its fault was in causing the insurers to make an overpayment as a result of a failure to inform them of the prior payment. A close reading of the decision suggests that Stirling LJ made no such error. First, the claim for interest was from the date of the overpayment. Secondly, the summary of the argument of counsel for the insurers that appears in the report indicates that the basis of their action was that the defendants were liable to pay interest from the date of the overpayment on the grounds that “[t]hat portion, which was in fact an over-payment, ought to have been returned at once by the defendant”.43 Much of the confusion concerning the judgment results from Stirling LJ’s assertion that “the position seems to me exactly the same as in Lister v. Stubbs, where an agent obtained by means of a secret bargain with a customer of his principal a sum of money”.44 Yet this should not be taken to indicate that Stirling LJ considered that the case before him also concerned a sum paid by a third party. Rather, he was merely referring to Lister v. Stubbs as another situation in which liability was properly personal rather than proprietary, and not because of any particular similarity between the facts of the cases. Presumably the Court of Appeal’s view in Stearns was that the claim was a simple one, based on a mistaken overpayment. The traditional basis for such an action was for money had and received, and this 41 42 43 44
(1905) 10 Com. Cas. 89. Mitchell, The Law of Subrogation at 82; Burrows, The Law of Restitution at 82. (1905) 10 Com. Cas. 89 at 92. Ibid. at 97–8.
284 Redistributive Proprietary Remedies gave rise to personal liability alone. This is entirely consistent with the fact that, at least prior to Chase Manhattan NA v. Israel-British Bank (London) Ltd.,45 there was little or no authority for the view that a trust arose in the event of a mistaken overpayment. Can the result in Stearns be reconciled with the outcome in Napier v. Hunter? Lord Browne-Wilkinson evidently thought that the cases could be distinguished. Thus he remarked that, in Stearns, “[s]o far as trusteeship was concerned, there was no fund capable of being the subject matter of the trust . . .”.46 Yet, it is difficult to see why this should be so. Certainly, on the facts of Stearns, a constructive trust would surely arise if Chase Manhattan were followed. And, indeed, there can be little doubt that a constructive trust would be found to exist on the basis of the controversial analysis subsequently offered by Lord Browne-Wilkinson himself in Westdeutsche Landesbank Girozentrale v. Islington LBC.47 Moreover, in any event, it is difficult to see why the approach taken in Napier v. Hunter should not produce a proprietary interest in a case in which the over-compensation came from the insurer rather than a third party. There is no reason why a court should not conclude that the implied contractual term that the court relied upon in Napier v. Hunter should not extend to any payment that, regardless of its source, went beyond indemnifying the assured. Equally there is no reason to think that the maxim “equity regards as done that which ought to be done” should not apply in the same way it did in Napier v. Hunter to create a proprietary right. It is unfortunate then that the House of Lords in Napier v. Hunter did not consider more carefully the difficulties that it faced in reconciling the holding in Stearns with its own decision to give proprietary relief.
II . AN ASSURED ’ S RIGHTS AGAINST AN OVER - INDEMNIFIED INSURER
1. Lonhro v. Export Credit Guarantee Department Insurers with the right to pursue actions in their own name are not entitled to keep any sums that go beyond what is necessary for recouping any losses resulting from indemnifying assured parties pursuant to the contract of insurance. But is an insurer’s obligation to make restitution to the assured in these circumstances personal or proprietary? The issue arose in Lonhro v. Export Credit Guarantee Department.48 The defendant department had guaranteed the plaintiff company 95 per cent of various foreign debts that included obligations incurred by Zambian buyers in respect of sale of goods contracts. Payment under the contracts was not made as a result of currency restrictions introduced by the Zambian government. After meeting its 45 46 47 48
[1981] 1 Ch. 105. See supra, ch. 6.II.2(a). [1994] AC 713 at 751. [1996] AC 669 at 705. See supra, ch. 6.II.2(c). [1996] 2 Lloyd’s Rep. 649.
Constructive Trusts over Sums Obtained from Third Parties 285 obligations under the guarantee arrangement, the defendant successfully negotiated with the Zambian government for the recovery of the money due under the contracts. It was accepted that, after recovering the debts and recouping its own loss, the defendant was obliged to account to the plaintiff for any additional sums. What was not so clear was whether the defendant also had to account for compound interest on such sums in the period between the receipt of the money and payment being made to the plaintiff. This was thought to depend on “whether an insurer, who recovers a sum in excess of that which he is entitled to retain in recoupment of his payment to the insured, holds the balance as trustee for the assured”.49
2. Formal Justifications Lightman J considered the rule established in Lord Napier and Ettrick v. Hunter that an insurer has a lien over money due to it from an overindemnified assured. In his view, it followed that, where an insurer brought an action against a third party to recoup losses resulting from indemnifying the assured, the insurer has no more than a right of security over the proceeds recovered. Accordingly, “[t]he moneys in the hands of the insurer belong to the assured, subject only to the right of the insurer to retain the sum secured in his own favour”.50 As a result, Lightman J argued that the parties’ rights in this context could be determined by analogy with the rule that mortgagees who have exercised their rights of sale hold any surplus moneys on trust for the mortgagor.51 This analysis is not entirely convincing. A real difficulty is that it rests on the determination in Napier v. Hunter that insurers have a lien rather than a constructive trust—a conclusion which was not adequately explained.52 It seems more logical to conclude that insurers who are entitled to sue in their own name are absolutely entitled to any amount recovered up to the extent to which they have indemnified the assured. On this analysis, an obligation to account to the assured arises only if the amount recovered exceeds the figure that insurers are entitled to recoup. Accordingly, the question would still remain to be answered whether the assured should have a proprietary right in respect of such an amount. However, even on this analysis, in light of Napier v. Hunter, the courts would be likely to find that an assured was entitled to an equitable lien over any sums in respect of which an insurer was obliged to account.
49 50 51 52
Ibid. at 651. Ibid. at 661. Ibid. See supra, text accompanying nn. 34–35.
286 Redistributive Proprietary Remedies 3. Policy Arguments In Lightman J’s view: There is no reason why the assured’s part of recoveries in the hands of the insurer should form part of the cash flow of the insurer available for the insurer’s creditors. Equity has intervened to lend assistance to the insurer, not to deny the assured his equitable proprietary title to recoveries.53
This makes sense to a degree. Insurers’ rights of subrogation are an exceptional remedy provided to assist them to recoup payments made under insurance policies. There is no reason why these rights should give insurers a proprietary interest in money recovered in excess of their losses. Moreover, where the right of subrogation arises by operation of law, rather than contractually, it is perhaps unrealistic to expect the parties to bargain for the allocation of property rights in any excess sums recovered by the insurer. The need for these rights arises as a result of the operation of highly technical legal rules and we should not be surprised if it is not in the forefront of the minds of those purchasing insurance. Even where the right arises contractually, the contingency in question will arise so rarely that it may be unrealistic to expect the parties to turn their minds to the issue. If this matter is not addressed in standard-form insurance contracts, we should not infer too readily that those taking out insurance have assumed the risk of their insurer’s bankruptcy. On the other hand, such arguments rather miss the point. What was at stake in Lonhro was not bankruptcy; and, indeed, this will seldom be an issue in this particular context, as insurers will generally be quite stable financial institutions. The real issue in Lonhro was whether the assured ought to have received compound interest for the moneys for which its insurer was liable to account. It is difficult to see why the answer to this question should turn on whether the assured is characterised as a having a proprietary right in the money in question.54 III . CONSTRUCTIVE TRUSTS OVER SUMS RECOVERED FOR THE BENEFIT OF ANOTHER
The general rule is that plaintiffs are allowed to recover only in respect of their own loss. Difficulties arise where a party to whom contractual duties are owed suffers no loss from a breach of contract because the subject matter of the contract has been assigned to another or is otherwise at the risk of a third party. If that third party is unable to sue the party in breach because of a lack of privity, there is a danger that a legitimate claim will disappear into “a legal black hole”.55 To prevent this 53
[1996] 2 Lloyd’s Rep. 649 at 661. For the state of the law on compound interest see Westdeutsche Landesbank Girozentrale v. Islington LBC [1996] 1 WLR 669. See infra, ch. 6.II.2(c)(i). 55 GUS Property Management Ltd. v. Littlewoods Mail Order Stores Ltd., 1982 SC (HL) 157 at 166 per Lord Stewart; McAlpine Construction v. Panatown [2000] 3 WLR 946 at 955 per Lord Clyde. H Unberath, “Third Party Losses and Black Holes: Another View” (1999) 115 LQR 535. 54
Constructive Trusts over Sums Obtained from Third Parties 287 outcome, the courts have in some cases permitted plaintiffs to sue for losses ensuing from the performance of a contract, despite the fact that the risk of such losses was borne by a third party. One such exception to the general rule can be found in the context of shipping contracts. Thus, in The Albazero,56 Lord Diplock concluded that: the consignor may recover substantial damages against the shipowner if there is privity of contract between him and the carrier for the carriage of goods; although, if the goods are not his property or at his risk, he will be accountable to the true owner for the proceeds of his judgment.57
Lord Diplock explained this rule (in a rather tortuous sentence) on the basis that: In a commercial contract concerning goods where it is in the contemplation of the parties that the proprietary interest in the goods may be transferred from one owner to another after the contract has been entered into and before the breach which causes loss or damage to the goods, an original party to the contract, if such be the intention of them both, is to be treated as having entered into the contract for the benefit of all persons who have or may acquire an interest in the goods before they are lost or damaged, and is entitled to recover by way of damages for breach of contract the actual loss sustained by those for whose benefit the contract is entered into.58
The attribution of this right to the intentions of the contracting parties reflects judicial unease with non-consensual redistribution of rights. It is highly implausible that parties in such transactions form any such intention. The only convincing evidence that such a matter was in the contemplation of the parties would be the incorporation of terms dealing with it in their written contract. Subsequently, in McAlpine Construction Ltd. v. Panatown Ltd.,59 Lord Clyde was sceptical that it was necessary that the matter be within the contemplation of the parties to the contract. In his view, it was “preferable to regard it as a solution imposed by the law and not as arising from the supposed intention of the parties, who may in reality not have applied their minds to the point”.60 Whatever the basis for allowing plaintiffs to recover for the benefit of another in this context, the question remains whether plaintiffs are merely under an obligation to account for the proceeds of such an action or whether they are subject to a constructive trust. There is some support for the latter view. Thus, in the context of consignors’ rights to bring an action against a carrier for the loss suffered by the owner of goods, Lord Ellenborough suggested that consignors in these circumstances “will hold the sum recovered as trustees for the real owner”.61 Consistently with this analysis, albeit more ambiguously, Lord Browne-Wilkinson, in Linden Gardens Trust Ltd. v. Lenesta Sludge Disposals Ltd.,62 described the plaintiffs in this 56 57 58 59 60 61 62
[1977] AC 774. Ibid. at 844. [1977] AC 774 at 847. [2000] 3 WLR 946. Ibid. at 955. Joseph v. Knox (1813) 3 Camp. 320 at 322. [1994] 1 AC 85.
288 Redistributive Proprietary Remedies context as “entitled to enforce contractual rights for the benefit of those who suffered from defective performance . . .”.63 On the other hand, in The Albazero, Lord Diplock apparently assumed that the basis for liability would be an action for money had and received.64 A rule that provides that a constructive trust arises in this context is unlikely to cause any injustice to third parties. Rather, such a rule is likely to function in much the same way as subrogation does for indemnity insurers, allowing the party beneficially entitled to the proceeds of the action to control the litigation. As a result, the proceeds of the litigation are never likely to come into the hands of the party that is nominally the plaintiff and, consequently, problems of ostensible ownership are unlikely to arise. Thus, while the outcome is difficult to reconcile with orthodox conceptions of property, it is a sensible solution that should not provoke any real anxiety.
IV . CONSTRUCTIVE TRUSTS ARISING IN FAVOUR OF CARERS OF TORT VICTIMS OVER DAMAGES DUE FROM TORTFEASORS
Another example of proprietary rights imposed to prevent excessive recovery while ensuring that those at fault are liable for the damage they have caused can be found in the constructive trust that arises in favour of those who provide voluntary care to victims of accidents.65 A tort victim is entitled “to recover as . . . damages the reasonable value of services rendered to him gratuitously by a relative or friend in the provision of nursing care or domestic assistance of a kind rendered necessary by the injuries . . . suffered”.66 The rationale of this rule is to provide for the compensation of the voluntary caregiver, who is not permitted to claim against the tortfeasor directly.67 In order to ensure that the carer is duly compensated, any damages recovered under this head are to be held by the victim on trust for the carer.68 The rule was developed by Lord Denning MR in Cunningham v. Harrison.69 He argued that: when a husband is grievously injured—and is entitled to damages—then it is only right and just that, if his wife renders services to him, instead of a nurse, he should recover
63
[1994] 1 AC 85 at 115. [1977] AC 774 at 845–6. See P Matthews and M Lunney, “A Tortfeasor’s Lot is not a Happy One?” (1995) 58 MLR 395. 66 Hunt v. Severs [1994] 2 AC 350 at 355 per Lord Bridge. 67 Best v. Samuel Fox & Co. Ltd. [1952] AC 716. 68 Cunningham v. Harrison [1973] QB 942; Hunt v. Severs [1994] 2 AC 350 at 363 per Lord Bridge. In Hunt v. Severs, the voluntary care had been rendered by the tortfeasor himself. The court concluded that, to avoid any circuity, the tortfeasor’s obligation to compensate the victim should be reduced to reflect the value of care provided. See S Degeling, “Carers’ Claims: Unjust Enrichment and Tort (Law Com No 262)” [2000] RLR 172. 69 [1973] QB 942. 64 65
Constructive Trusts over Sums Obtained from Third Parties 289 compensation for the value of the services that his wife has rendered. It should not be necessary to draw up a legal agreement for them.70
The view that a proprietary remedy would be just in these circumstances, even where the services provided are apparently voluntary, reflects the perception that it would be unreal to insist that parties who are in an intimate relationship should have bargained to determine their mutual rights and obligations. This view is certainly defensible,71 and support for it may be drawn by analogy with other doctrines.72 However, this is, of course, difficult to reconcile with the approach taken by the English courts to the division of property on the breakdown of intimate relationships.73 Indeed, Cunningham v. Harrison appears to be nothing other than an application of Lord Denning’s much maligned “new model constructive trust”.74 What is odd is that this particular development has survived unquestioned, while so many of Lord Denning’s other innovations in the field have been swept aside.75
70 71 72 73 74 75
Ibid. at 952. See supra, ch. 10.IV.4. For an analysis of sureties’ rights in these terms see supra, ch. 11.IV.1(b). See, supra, ch. 10.II.1. Hussey v. Palmer [1972] 3 All ER 744 at 747. See supra, ch. 10.IV.2(a)(iii).
13
Proprietary Estoppel E H A V E A L R E A D Y encountered the doctrine of proprietary estoppel as one of the devices employed to regulate property rights on the breakdown of intimate relationships.1 This chapter examines the development and conceptual structure of the doctrine and asks to what extent it is “remedial” in a sense that is apt to provoke anxiety.
W
I . RULE OF EVIDENCE OR SUBSTANTIVE DOCTRINE ?
Strictly speaking, an estoppel is an evidential device that prevents people asserting their strict legal rights without formally qualifying those rights. Provided it performs this limited function, estoppel can only be “a shield and not a sword”:2 it is not a cause of action in itself.3 There are several reasons why it has proved tempting to conceptualise the outcomes in question as resulting from the operation of rules of evidence alone. First, if estoppel generated substantive rights, it would be difficult to reconcile with the principle that representations of intention are not actionable.4 Secondly, emphasising the evidential dimension of estoppel has allowed it to be viewed as less of a threat to the notion that promises must be supported by consideration to be legally enforceable.5 Thirdly, the characterisation of proprietary estoppel as part of the law of evidence downplays the extent to which the doctrine appears to disregard the formality requirements that the law demands for transfers of interests in land.6 Finally, and most importantly for the purposes of this study, this mode of conceptualisation serves to obscure the reality that in some instances proprietary estoppel operates to redistribute property rights without the consent of owners. Early last century, Spencer Bower argued that proprietary estoppel is not a special rule but an example of the general law of estoppel.7 Moreover, he was unequivocally of the view that estoppel was a rule of evidence and nothing more. Thus, he argued: 1
Supra, ch. 10.II. Coombe v. Coombe [1951] 2 KB 215 at 219 per Denning LJ. 3 Seton Laing Co. v. Lafone (1887) 19 QBD 68; Re Otto Kopje Diamond Mines Ltd. [1893] 1 Ch. 618 at 628 per Bowen LJ. 4 Jordan v. Money (1854) 5 HLC 185. 5 See, e.g., Coombe v. Coombe [1951] 2 KB 215 at 220 per Denning LJ. 6 See LJ Priestly J, “Estoppel: Liability and Remedy?” in Youdan (ed.), Equity, Fiduciaries and Trusts (Toronto, Carswell, 1989) 273 at 290. 7 G Spencer Bower, Estoppel by Representation (London, Sweet & Maxwell, 1923) 13. 2
292 Redistributive Proprietary Remedies Emphatically it is not a cause of action in itself, it does not create one, though the application of this, as of any other rule of evidence in the course of litigation, may result in a total or partial establishment, or disestablishment of the case.8
The claim that proprietary estoppel cannot provide a cause of action is implausible.9 It may be argued that in some cases plaintiffs could rely on possessory rights to provide the basis of an action and seek to use estoppel as a shield to prevent owners’ asserting their rights. However, it is clear that the remedy afforded in proprietary estoppel does not result merely from the fact that owners are prevented from relying on their rights. For the appropriate remedy would still have to be determined, as the courts have a discretion to tailor a remedy that will do justice in the circumstances.10 Moreover, where plaintiffs are seeking to exercise either lesser proprietary rights that can arise only by grant or prescription or mere licences to use land, proprietary estoppel must provide a substantive right if they are to be able to bring an action. Finally, it is difficult to see that estoppel can be merely an evidential device if it binds, not only the party that made an assurance or acquiesced in a plaintiff’s mistake, but also any successors in title.11 Nonetheless, the notion that estoppel functions merely as a rule of evidence persists. Thus, relatively recently in Commonwealth of Australia v. Verwayen,12 Deane J described the doctrine in such terms, arguing that it could not provide a cause of action in itself.13 This characterisation of estoppel as evidentiary may have assuaged concerns Deane J had that his conclusion that the remedy granted by the court should generally fulfil plaintiffs’ expectations posed a threat to the doctrine of consideration in contract. In contrast, other members of the court made it clear that they viewed the developing principle of equitable estoppel as performing a substantive role and providing a cause of action in some circumstances.14 Unsurprisingly, they took the position that it was necessary to limit the remedy for estoppel to that which was needed to relieve plaintiffs’ detriment in order to ensure that the doctrine of consideration was not unduly undermined.15
8
G Spencer Bower, Estoppel by Representation (London, Sweet & Maxwell, 1923) 13 at 2. See also S Wilken and T Villiers, Waiver, Variation and Estoppel (Chichester, John Wiley & Sons, 1998) 104–8. 10 The extent of this discretion remains a matter of some controversy. See infra, text accompanying nn. 39–80. 11 For a clear statement that estoppel, as a rule of evidence, affects the rights only of those who were parties to the statement in question see Simm v. Anglo-American Telegraph Co. (1879) 5 QBD 188 at 206–7 per Brett LJ. 12 (1990) 170 CLR 394. 13 Ibid. at 445–7. See Priestly, supra n. 6 at 288. 14 Ibid. at 416–7 per Mason CJ, 454 per Dawson J, and 501 per McHugh J. See Priestly, supra n. 13 at 289. This view was recently endorsed by the High Court in Giumelli v. Giumelli (1999) 196 CLR 101. 15 See, e.g., (1990) 170 CLR 394 at 454 per Dawson J. 9
Proprietary Estoppel 293
II . THE BASIS FOR INTERVENTION : IS PROPRIETARY ESTOPPEL LIMITED TO THE ENFORCEMENT OF CONSENSUAL ARRANGEMENTS ?
Another way in which judges and scholars attempt to reconcile proprietary estoppel with the orthodoxy that the law does not redistribute property without the consent of owners is to depict the doctrine as involving the enforcement of informal agreements to confer an interest in land.16 The burden of this section is to demonstrate that this analysis does not stand up to close examination. 1. Enforcing Informal Transfers Certainly the relief given in estoppel cases often has the effect of enforcing informal agreements. In Ramsden v. Dyson,17 one of the seminal cases in the development of proprietary estoppel, Lord Kingsdown described the doctrine in the following terms: If a man under a verbal agreement with a landlord for a certain interest in land, or what amounts to the same thing, under an expectation, created or encouraged by the landlord, that he shall have a certain interest, takes possession of such land, with the consent of the landlord, and upon the faith of such promise or expectation, with the knowledge of the landlord, and without objection by him, lays out money upon the land, a Court of Equity will compel the landlord to give effect to such promise or expectation.18
Thus, estoppel is used to confer proprietary rights where owners have made promises that would have conferred a property interest had the requisite formalities been fulfilled.19 Similarly, the doctrine can also be used to enforce promises to transfer property in the future.20 This conception of proprietary estoppel is consistent with the approach of English courts to resulting and constructive trusts, whereby the basis for intervention is explained in terms of the parties’ intentions.21 2. Estoppel in Unilateral Mistake Cases There are, however, other cases in which estoppel is employed that cannot easily be said to involve the enforcement of agreements. These cases essentially involve 16 See, e.g., S Moriarty, “Licences and Land Law: Legal Principles and Public Policies” (1984) 100 LQR 376; M Howard and J Hill, “The Informal Creation of Interests in Land” [1995] LS 356. 17 (1866) LR 1 HL 129. 18 Ibid. at 170. 19 See, e.g., Dillwyn v. Llewellyn (1862) 4 De GF & J 517; ER Ives Investment v. High [1967] 2 QB 379; Pascoe v. Turner [1979] 1 WLR 431; Yaxley v. Gotts [1999] 2 FLR 941. 20 See, e.g., Gillett v. Holt [2001] Ch. 210; Re Basham [1986] 1 WLR 1498. See also the doctrine that is at least closely akin to proprietary estoppel, whereby a constructive trust may be awarded to prevent one party unconscionably reneging on a joint venture to acquire specific property. See Banner Homes Group Plc v. Luff Developments Ltd. [2000] Ch. 372; Pallant v. Morgan [1953] Ch. 43. 21 See supra, ch. 10.II.1.
294 Redistributive Proprietary Remedies the attempt by one party to take advantage of a mistake. Lord Cranworth analysed one type of such a case in Ramsden v. Dyson. In his view: If a stranger begins to build on my land supposing it to be his own, and I, perceiving his mistake, abstain from setting him right, and leave him to persevere in his error, a Court of equity will not allow me afterwards to assert my title to the land on which he had expended money on the supposition that the land was his own. It considers that, when I saw the mistake into which he had fallen, it was my duty to be active and to state my adverse title; and that it would be dishonest in me to remain wilfully passive on such an occasion, in order afterwards to profit from the mistake I might have prevented.22
In Lord Cranworth’s view, the basis for judicial intervention is not a breach of promise but fault in failing to act. Despite the apparent focus on equitable fraud in the judicial analysis of proprietary estoppel cases involving mistake, an effort has been made to characterise such cases as involving the enforcement of informal agreements. This view is taken by Mark Howard and Jonathan Hill, who conclude that proprietary estoppel is consistent with the “general principle that interests in property are transferred consensually”.23 They argue that, because defendants must have knowledge both of the plaintiff’s mistaken belief and of their own rights, it is “possible to say that there is a representation or understanding (albeit an imputed one)”.24 That these writers feel it important enough to resort to ambiguous notions of imputed agreement to force estoppel by acquiescence within the understanding that a proprietary interest can be transferred only with the owner’s consent is a testament to the continuing force of this axiom. However, mistake cases cannot always be readily characterised as involving the enforcement of an agreement or understanding. After all, if plaintiffs already believed they enjoyed the rights in question, they can hardly have believed they were acquiring them. Thus, the basis of judicial intervention in unilateral mistake cases is not agreement—for there is no meeting of minds—but the unconscionable opportunism involved in the defendant’s attempt to exploit the plaintiff’s error.
3. Estoppel in Common Mistake Cases (a) Fry J’s Probanda in Willmott v. Barber A further problem with explaining proprietary estoppel as enforcing informal consensual transfers results from recent developments that, contrary to Howard and Hill’s suggestion, mean that defendants may be liable even when they were not aware of their legal rights. This represents a reversal of Willmott v. Barber,25 where Fry J took the position that the courts would prevent owners asserting their strict legal rights only if they had, from the outset, been conscious of the error under 22 23 24 25
(1866) LR 1 HL 129 at 140–1. Supra n. 16 at 356. Ibid. at 367. (1880) 15 Ch. D 96.
Proprietary Estoppel 295 which the plaintiff laboured. He laid down a restrictive approach to the doctrine, setting out what were to long stand as the definitive “probanda” that had to be satisfied before relief would be granted. According to this approach, before he could be prevented from insisting on his legal rights, “the defendant . . . must know of the plaintiff’s mistaken belief as to his own rights”.26 Furthermore, Fry J insisted that “the defendant . . . must know of the existence of his own right which is inconsistent with the right claimed by the plaintiff”.27 (b) The Relaxation of the Grounds for Relief in Taylors Fashions The watershed case in the relaxation of Fry J’s requirements for proprietary estoppel was Taylors Fashions Ltd. v. Liverpool Victoria Trustees Co. Ltd.28 Oliver J heard two related cases together. The plaintiff in the first case, Taylors Fashions Ltd., purchased the residue of a 28-year lease over 22 Westover Road in Bournemouth. It purchased the property in the belief that it was acquiring a valid option to renew the lease for a period of 14 years that would be exercisable in the event that it installed a lift on the premises. Liverpool Victoria Trustees, the defendants in both actions, acquired the freehold of the property shortly after the commencement of the lease. In addition, the defendants granted the plaintiff in the second action, Old & Campbell Ltd., a 42-year lease over an adjacent property, number 21. This lease agreement reserved for the landlord a right to bring the relationship to an end after 28 years if the tenant of number 22 failed to exercise its option to renew. Fourteen years later, Old & Campbell negotiated a lease over another adjacent property, number 20, that was to run for 14 years, with an option to renew for an additional 14 years that was dependent, once again, on the tenant of number 22 exercising its option to renew its lease. The plaintiffs and the defendants had shared the misconception that the option to renew the lease of number 22 did not have to be registered to be enforceable against a purchaser of the reversion—a misconception that reflected the received wisdom of practising lawyers at the time.29 In the first action, Taylors Fashions argued that it was encouraged by this mistaken belief to install a lift on its premises. Subsequently, when Taylors Fashions sought to renew its lease over number 22, the defendants became aware that the option to renew was void 26
Ibid. at 105. Ibid. 28 [1982] QB 133. Oliver J’s test was subsequently approved by both the Court of Appeal in Amalgamated Investment & Property Co. Ltd. v. Texas Commerce International Bank Ltd. [1982] QB 84 and the Privy Council in AG of Hong Kong v. Humphrey’s Estate (Queen’s Gardens) Ltd. [1987] AC 114. A similarly broad approach has been favoured in Australia Waltons Stores (Interstate) v. Maher (1988) 164 CLR 387 and Commonwealth of Australia v. Verwayen (1990) 170 CLR 394. The Canadian judiciary had already favoured a liberal approach in Canadian Superior Oil Ltd. v. Paddon-Hughes Development Co. Ltd. (1970) 12 DLR (3d) 247. Finally, the approach in Taylors Fashions influenced the New Zealand Court of Appeal in its relaxation of the requirements for estoppel in New Zealand in Burbery Finance v. Hindsbank Ltd. [1989] 1 NZLR 356; Gillies v. Keogh [1989] 2 NZLR 327. 29 The need to register these interests was established in Beesly v. Hallwood Estates [1960] 1 WLR 549. 27
296 Redistributive Proprietary Remedies against them for want of registration and refused to allow the renewal. The defendants then used the unenforceability of the option to renew as a basis for exercising its right to end Old & Campbell’s lease of number 21 after 28 years. Similarly, they argued that the same logic dictated that Old & Campbell was also unable to exercise its right to renew its lease of number 20. The cases largely turned on whether it was necessary that the defendants knew that the plaintiffs were mistaken about their legal rights at the time that they encouraged or acquiesced in the plaintiff’s reliance on this mistake. Oliver J took the view that the conditions that Fry J adumbrated in Willmott v. Barber should not be regarded as definitive. Instead, he favoured “a very much broader approach which is directed . . . at ascertaining whether . . . it would be unconscionable for a party to be permitted to deny that which, knowingly or unknowingly, he has allowed or encouraged another to assume to his detriment . . .”.30 Oliver J accepted that, in cases of pure acquiescence, plaintiffs might have to demonstrate that defendants knew of their legal rights.31 However, he concluded that there was no such requirement in cases where defendants had actively encouraged plaintiffs to act to their detriment.32 Ultimately, Oliver J decided the first case against Taylors Fashions. Given that the defendants had not been involved in negotiating the lease, but rather acquired the reversion from an earlier landlord, it was difficult to say that they had encouraged the first plaintiff to act in reliance on the term in question. As the defendants had merely acquiesced in the first plaintiff’s expenditure, without knowledge of the mistake that motivated the plaintiff’s actions, they came under no duty to disabuse the plaintiff of its error.33 Moreover, because, even without the option, the lease was a relatively long one, Oliver J concluded that it was quite plausible that the tenant might have undertaken the work in any event.34 On the other hand, the plaintiff in the second action succeeded. The defendants’ involvement in negotiating the two leases in question meant that they had actively encouraged Old & Campbell to believe that it would be able to rely on the option.35 The effect of the estoppel in this instance was to prevent the defendants relying on the fact that, strictly speaking, the conditions that would have enabled their tenant to exercise its option were not and indeed could not be fulfilled. (c) Can These Cases be Characterised in Terms of the Consensual Transfer of Proprietary Rights? There is a tendency to elide mistake cases with cases based on informal promises— a tendency apparent in Lord Kingsdown’s suggestion in Ramsden v. Dyson that an 30 31 32 33 34 35
[1982] QB 133 at 151–2. Although he suggested that even “this must now be open to doubt”: ibid. at 147. Ibid. at 147–52. Ibid. at 155. Ibid. at 156. Ibid. at 157–8.
Proprietary Estoppel 297 expectation encouraged by the defendant “amounts to the same thing” as an agreement.36 Could the decision in favour of Old & Campbell Ltd. be characterised in terms of the consensual transfer of a property right? Because of a common mistake about the validity of a right enjoyed by a third party, the plaintiff and the defendant had bargained for a property right that turned out to be unexercisable. While the remedy had the effect of fulfilling the spirit of the agreement in question, it achieved this only by effectively granting the plaintiff a new right that was not contemplated by the parties. Thus, proprietary estoppel in this context is not enforcing promises; rather, it provides a remedy for reliance upon expectations caused by an error that the defendant had encouraged the plaintiff to share. The departure from orthodoxy is most apparent in cases involving a common mistake in which the defendants’ encouragement of the plaintiff’s reliance on the shared error was less active than the Liverpool Victoria Trustees’ actions in inducing Old & Campbell Ltd. into signing the leases in question. In Stiles v. Cowper,37 for example, a remainderman attempted to rely on the invalidity of a lease granted by a deceased life tenant only after having accepted rent for a period of time during which the tenant expended money on the property. It is not suggested in the report that the remainderman knew of the invalidity of the lease at the time of encouraging the tenant’s belief by accepting the rent. Nonetheless, he was prevented from enforcing his rights. It seems that the remainderman promised the tenant nothing and the fact that he had accepted rent was regarded as sufficient encouragement to give the tenant a right to relief. Apparently it was thought unconscionable that the remainderman should attempt to enforce his legal rights after having unknowingly encouraged the tenant to act in reliance on a mistaken understanding of his legal position. On closer examination, it becomes clear that only some instances of proprietary estoppel can be characterised as effecting a consensual transfer of property rights. The rationale for the relief given in estoppel actions in cases of unilateral and common mistake is best explained in terms of a duty to ensure the reliability of expectations encouraged in others.38 Where proprietary relief is awarded in the context of such claims, the effect is to redistribute property rights without the owner’s consent. III . REMEDIAL DISCRETION
It is said that proprietary estoppel gives rise to an equity, and it is for the court to decide how this equity is to be satisfied.39 There is some support in the older cases 36
(1866) LR 1 HL 129 at 170. See supra, text accompanying n. 18. (1748) 3 Atk. 692. See M Spence, Protecting Reliance: The Emergent Doctrine of Equitable Estoppel (Oxford, Hart Publishing, 1999) 1–14; A Robertson, “Situating Equitable Estoppel Within the Law of Obligations” (1997) 19 Sydney LR 32 at 56. 39 This terminology appears to have originated in Plimmer v. Mayor of Wellington (1884) 9 App. Cas. 699 at 714. 37 38
298 Redistributive Proprietary Remedies for the view that the court should “compel the [party estopped] to give effect to . . . [the relevant] promise or expectation”.40 However, the modern orthodoxy is framed in the terms that, having satisfied itself that an equity has arisen, the court must conduct a separate inquiry to determine “the extent of the equity” and “the relief needed to satisfy it”.41 According to Goff LJ in Griffith v. Williams 42: If [the court] finds that there is an equity, then it must determine the nature of it, and then, guided by that nature and exercising discretion in all the circumstances, it has to determine what is the fair order to make between the parties for the protection of the claimant.43
On this analysis, the courts exercise considerable discretion in making a choice between the extent and type of remedy awarded. Two principal issues emerge: the first concerns the proper measure of relief; the second turns on whether relief should be personal or take the form of a proprietary interest.
1. The Measure of Relief (a) A Detriment-Focused Approach? Generally, the courts have apparently felt little need to reduce their discretion to rules that would determine whether they should tailor the remedy to fulfilling plaintiffs’ expectations or whether it should instead be limited to repairing any detriment suffered. If the matter at issue is the “minimum equity to do justice”,44 this may suggest that the remedy need not generally involve the fulfilment of plaintiffs’ expectations. Such a view has its attractions. On the one hand, a focus on the relief of detriment would ensure that proprietary estoppel posed less of a threat to the requirement of consideration in contract. In addition, if relief were typically given by way of damages rather than rights in land, the doctrine would be less in tension with the formalities requirements for transfers of such interests. Finally, the fact that proprietary estoppel has extended beyond the enforcement of promises suggests that the fulfilment of expectations may not be the appropriate remedy. Certainly, where the doctrine is used to provide relief in the wake of a common mistake or in circumstances in which an owner was merely at fault in not becoming aware of the plaintiff’s expectations, there is a case for limiting the remedy to that which is necessary to relieve the detriment suffered by the plaintiff.
40 41 42 43 44
Ramsden v. Dyson (1866) LR 1 HL 129 at 170 per Lord Kingsdown. See also Moriarty, supra n. 16. See, for instance, Crabb v. Arun DC [1976] Ch. 179 at 193 per Scarman LJ. [1977] 248 EG 947. Ibid. at 949. Crabb v. Arun DC [1976] Ch. 179 at 188.
Proprietary Estoppel 299 (b) The Approach of English Courts Recently, in Gillett v. Holt,45 Robert Walker LJ indicated that, in determining the proper remedy for proprietary estoppel, the court should determine “the maximum extent of the equity” by identifying the nature and content of the expectation engendered by the owner’s representation or encouragement. Thereafter, he argued, “[t]he court’s aim is, having identified the maximum, to form a view as to what is the minimum required to satisfy it [i.e. the equity] and do justice in all the circumstances . . .”.46 The potential of such a flexible attitude had been realised a few years earlier in the Court of Appeal’s decision in Sledmore v. Dalby.47 The case involved an attempt by the plaintiff to take possession of a property left to her in her mother’s will. The defendant resisted the action on the basis that the testator, his mother in law, had promised him the property in question and he had done considerable work on the premises in reliance on this assurance. The court accepted that the detrimental reliance on the testator’s representation or encouragement might have initially given rise to a right to relief. However, it concluded that this right could be lost if the defendant had received counterveiling benefits in the meantime so that, by the time relief was sought, the defendant had not suffered any net detriment.48 It would be possible to distinguish decisions of this kind on the basis that they do not involve a judgement about the appropriate level of relief but rather a conclusion that no detriment was suffered and therefore no remedy was appropriate. However, even where they are not sufficient completely to negate any detriment suffered, it is difficult to see why countervailing benefits received should not be equally relevant in the determination of the level of relief.49 And, indeed, in Sledmore v. Dalby, Hobhouse LJ approvingly cited dicta from the Australian High Court to support the view that relief in this area should be focused on relieving plaintiffs’ detriment.50 Sledmore v. Dalby provides a further indication of the extent of judicial discretion in this context in its recognition that the court may legitimately take into account considerations beyond the encouragement, the expectation it generated and the extent of detriment suffered. Thus, the Court of Appeal was influenced by the fact that the need of the successor in title against whom the rights said to arise by proprietary estoppel were asserted was greater than that of the defendant.51 In practice, despite the wide discretion to tailor relief and regardless of the attractions of an approach that focuses on detriment, English courts have tended 45
[2001] Ch. 210. Ibid. at 237. 47 (1996) P & CR 196. 48 For a similar approach see E & L Berg Homes Ltd. v. Grey [1980] 253 EG 473; Lee-Parker v. Izzet (No 2) [1972] 1 WLR 775; Watts & Ready v. Storey (1984) 134 NLJ 631; Lovett v. Fairclough (1990) 61 P & CR 385. See Campbell v. Griffin [2001] EWCA Civ 990 at 32–35 per Walker LJ. 49 See also Jackson v. Crosby (No 2) (1979) 21 SASR 280. 50 (1996) P & CR 196 at 208–9. 51 See especially ibid. at 205 per Roch LJ. 46
300 Redistributive Proprietary Remedies to fulfil expectations in proprietary estoppel cases.52 Thus, by and large, it seems that the courts’ discretion in this context is principally directed at the question of how the plaintiff’s expectations may best be fulfilled. The often vague nature of the expectations of the parties in these cases may mean that a certain amount of judicial creativity is demanded. However, where the plaintiff is limited to a monetary award, it is likely to be because the fulfilment of the expectation would be impossible, inequitable or inconvenient.53 This is likely to be the case where the expectation at issue involves a right of shared occupation but the exercise of this right is rendered infeasible because the parties are no longer on amicable terms.54 Alternatively, damages may be appropriate because the property in question has been transferred to a third party without notice. Yet, even in these circumstances, the measure of damages will in all likelihood be calculated with reference to plaintiffs’ expectation loss rather than the extent of their detrimental reliance.55 The court is likely to apply a more restrictive level of relief only where plaintiffs are claiming rights not against the owner who encouraged their expectations of an interest in land but against an innocent successor in title and the relief claimed is disproportionate to the detriment they have suffered.56 (c) Australian Developments It may be that the approach of the English courts in this regard largely corresponds to judicial practice elsewhere. Some of the dicta in Walton Stores v. Maher 57 and Commonwealth of Australia v. Verwayen,58 the seminal decisions in the Australian High Court’s development of an integrated doctrine of equitable estoppel suggested that the proper role of the doctrine was limited to the relief of detriment. On the other hand, other interpretations suggest a more flexible approach.59 Recently, in Giumelli v. Giumelli,60 the Australian High Court blurred the distinction between the measures of relief altogether. In that case, the plaintiff built a house on land owned by his parents in reliance on their promise that they would subdivide the land and transfer a portion of it to him. However, when the plaintiff made a marriage of which they did not approve, the parents declined to make good their promise. The judge at first instance had limited the plaintiff’s relief to compensation for the loss he suffered in relying on his parents’ undertaking. On appeal, the Supreme Court of Western Australia declared that the defendants held 52 E Cooke, “Estoppel and the Protection of Expectations” [1997] LS 258; S Gardner, “The Remedial Discretion in Proprietary Estoppel” (1999) 115 LQR 438. 53 See, e.g., Burrows & Burrows v. Sharpe (1989) 23 HLR 82 at 92 per Dillon LJ: “It is often appropriate to satisfy the equity by granting the plaintiff the interest he or she was intended to have. If that is not practicable, however, the court has to do the best it can”. 54 See, e.g., Dodsworth v. Dodsworth [1973] 228 EG 1115. 55 See, e.g., Baker v. Baker (1993) 25 HLR 408; Holiday Inns Inc v. Broadhead [1974] 232 EG 951. 56 See, e.g., Sledmore v. Dolby (1996) P & CR 196; Campbell v. Griffin [2001] EWCA Civ 990. 57 (1988) 164 CLR 387 at 427 per Brennan J. 58 (1990) 170 CLR 394. See, e.g., Mason J at 412–16; Brennan J at 429. 59 See, in particular, Commonwealth of Australia v. Verwayen (1990) 170 CLR 394 at 445–7 per Deane J. 60 (1999) 161 ALR 473.
Proprietary Estoppel 301 the relevant portion of the property on trust for the plaintiff. The parents appealed, arguing that this remedy was inappropriate because it went beyond compensating the plaintiff for his reliance loss. The High Court approved the view taken by the majority of the court immediately below that, “even if it be conceded that [the plaintiff] had not suffered an appreciable loss of income by remaining in the partnership, the detriment suffered by him was the loss of the property which he worked to improve . . .”.61 This is difficult to accept. The detriment to which the court referred is nothing other than the plaintiff’s disappointment at not having his expectations fulfilled. On this analysis, any disappointed expectation could be characterised in terms of reliance loss. Thus, while speaking of detriment, the court was clearly focusing upon expectations. It seems then that the Australian courts are moving away from the more restrictive approach apparently favoured by some members of the High Court in Walton Stores and Verwayen and toward the more generous interpretation favoured by Deane J in the latter case. In his view: Prima facie, the operation of an estoppel by conduct is to preclude departure from the assumed state of affairs. It is only where relief framed on the basis of that assumed state of affairs would be inequitably harsh, that some lesser form of relief should be awarded.62
Thus, it appears that Australian courts are likely to hesitate to award relief that fulfils the plaintiff’s expectations only where doing so would provide a remedy that is manifestly disproportionate to the plaintiff’s reliance loss.63 (d) The Practice in the United States The position in the United States is less clear. The reporters for the first Restatement of Contract took the view that the proper measure of relief for promissory estoppel was the plaintiff’s expectation loss.64 In contrast, some courts65 and, more particularly, academics66 favoured a detriment-focused approach. A compromise was reached in the second Restatement, which indicated that “[t]he remedy granted for breach may be limited as justice requires”.67 Nonetheless, the view that had more recently come to be accepted among scholars was that the judiciary showed little interest in limiting relief to reliance loss. Scholars argued that American courts were willing to employ promissory estoppel without requiring detrimental reliance and that they consistently based relief on 61 Ibid. at 479. More convincingly the court also focused on the opportunity costs suffered by the plaintiff: ibid. at 480. 62 (1990) 170 CLR 394 at 445. 63 A Robertson, “Satisfying the Minimum Equity: Equitable Estoppel Remedies after Verwayen” (1996) 20 MULR 805; and “Reliance and Expectation in Estoppel Remedies” [1998] LS 360 at 368. 64 Restatement of Contract (St Paul, Minn., American Law Institute Publishers, 1932), § 90(1). 65 See, e.g., Hoffman v. Red Owl Stores 133 NW 2d 267 (Wis., 1965). 66 See, e.g., S Henderson, “Promissory Estoppel and Traditional Contract Doctrine” (1969) 78 Yale LJ 343; C Knapp, “Reliance in the Revised Restatement: The Proliferation of Promissory Estoppel” (1981) 81 Colum. L Rev. 52. 67 Restatement of Contract 2d (St Paul, Minn., American Law Institute Publishers, 1979) § 90(1).
302 Redistributive Proprietary Remedies plaintiffs’ expectation loss.68 However, this “new consensus” has recently been brought into question in a study by Robert Hillman that provides a more rigorous statistical analysis of judicial outcomes than has prior research.69 Hillman concludes that the courts do indeed generally require a degree of detrimental reliance before they will give a remedy for promissory estoppel. In addition, Hillman argues that the courts take a flexible approach toward the quantification of relief.70 On the other hand, American law has long had a single substantive doctrine of promissory estoppel that performs the work done by several disparate doctrines in English law. It is possible that, in the type of case in which proprietary estoppel is employed in English law, American courts will also typically give effect to plaintiffs’ expectations. (e) The Case for Current Judicial Practice If the typical judicial response in a proprietary estoppel case does indeed involve giving effect to plaintiffs’ expectations, there is certainly something to be said for this position. First, the fulfilment of plaintiffs’ expectations is arguably the best way of ensuring that plaintiffs are compensated for their reliance on a representation or misunderstanding.71 After all, plaintiffs’ losses will not necessarily be limited to financial or physical expenditure. Plaintiffs are likely to have incurred opportunity costs and to have suffered disappointment as a result of not having their expectations fulfilled. The sense of loss associated with that disappointment is likely to be acute given the endowment effect: the high value attached to rights that one presently enjoys or at least believed one enjoyed.72 Moreover, the judicial willingness to grant a right in specie where possible is consistent with the understanding that plaintiffs are liable to form a pyschological attachment to the land in question so that the interest at issue has a significance for them that goes beyond its exchange value.73
68 E Yorio and S Thel, “The Promissory Basis of Section 90” (1991) 101 Yale LJ 111; D Farber and J Matheson, “Beyond Promissory Estoppel: Contract Law and the ‘Invisible Handshake’” (1985) 52 Chi. L Rev. 903. 69 R Hillman, “Questioning the ‘New Consensus’ on Promissory Estoppel: An Empirical and Theoretical Study” (1998) 98 Colum. L Rev. 580. 70 In a number of the cases the courts explicitly favour reliance loss over expectation loss as the proper measure of relief. Hillman notes that the cases are not conclusive on this point, largely because very often the expectancy and reliance measures of relief coincide in a particular case. Nonetheless, it is difficult to argue with the conclusion that Hillman tentatively offers that the data show “that courts take seriously the admonition of the second Restatement to award damages as justice requires”: ibid. at 610. 71 LL Fuller and W Purdue, “The Reliance Interest in Contract Damages” (1936) 46 Yale LJ 52 at 60; Robertson, “Reliance and Expectation in Estoppel Remedies”, supra n. 63 at 366. 72 See supra, ch. 4.III.1. 73 Ibid.
Proprietary Estoppel 303 2. Personal or Proprietary Relief? In satisfying a proprietary estoppel claim, a court may award a proprietary interest or a personal right to use the land or even limit the plaintiff to damages.74 That the courts have a discretion in determining whether or not to give a proprietary remedy may be thought surprising when it is remembered that discretion has at times been identified as the quality that makes proprietary relief “remedial” in an objectionable way.75 Indeed, when a constructive trust is granted as a remedy in proprietary estoppel cases, can this be regarded as anything other than an instance of the much-maligned “remedial constructive trust”? It seems that, in most cases, the courts will not find the decision to award or deny proprietary rights difficult. The nature of the plaintiff’s expectations, the circumstances in which these expectations were induced and the extent of the plaintiff’s detrimental reliance may make it obvious that these expectations should be fulfilled through the recognition of a particular proprietary right. Thus, when proprietary estoppel is used in the context of intimate relationships, it often operates to enforce informal agreements in the same way as the “common intention” constructive trust.76 Indeed, the two doctrines were not clearly differentiated in the landmark cases of Pettitt v. Pettitt 77 and Gissing v. Gissing 78 and have tended to be used interchangeably since.79 However, in some cases, the courts may decline to fulfil a plaintiff’s expectations. This is liable to be so in situations where plaintiffs are relying on promises that are so vague that some thought is needed in order to decide how they may best be realised. Similarly, a real degree of discretion is likely to be exercised where the detrimental reliance upon which a plaintiff relies is so slight that to give effect to the defendant’s promise would result in an unwarrantedly generous remedy. This is illustrated by Pascoe v. Turner,80 where Turner relied upon an informal assurance by Pascoe that the property in question should belong to her but could point only to relatively minor acts of detrimental reliance. The Court of Appeal indicated that it would have been inclined to have limited her remedy to a licence but concluded that, because Pascoe was liable to attempt to undermine such a right, it was appropriate to give an order that he should transfer the fee simple to her. Its decision in Giumelli v. Giumelli 81 suggests that the Australian High Court viewed itself as having considerable discretion in determining the form of remedy 74
See, e.g., Dodsworth v. Dodsworth [1973] 228 EG 1115. See supra, ch. 1.III.4. On the interrelationship of these doctrines: see D Hayton, “Equitable Rights of Cohabitees” [1990] Conv. 370; P Ferguson, “Constructive Trusts—A Note of Caution” (1993) 109 LQR 109. 77 [1970] AC 777 at 815 and 818 per Lord Upjohn. 78 [1971] AC 886. Much of Lord Diplock’s influential judgment is phrased in estoppel terms, although elsewhere he suggests that common intention is a prerequisite for relief: ibid. at 905. 79 See, e.g., Austin v. Keele (1987) 61 ALJR 605 at 609 per Lord Oliver; Lloyds Bank plc v. Rosset [1990] AC 105 at 132 per Lord Bridge. 80 [1979] 1 WLR 431. 81 (1999) 161 ALR 473. 75 76
304 Redistributive Proprietary Remedies in proprietary estoppel cases. Ultimately, the court took the view that it would have been improper to order specific relief, given that the plaintiff’s younger brother, in particular, had done considerable work on the property in question. In its view, the proper remedy in the circumstances was a monetary sum reflecting the value of the interest in land that the plaintiff had been promised. In addition, this view could be supported because the award of a constructive trust would have required partitioning the property in question. The arrangement agreed between the parties was made in circumstances in which they formed a functional family and it only really made sense while that continued to be the case. Given that the plaintiff was estranged from his family, it made more sense to limit his relief to a monetary award designed to compensate him for his frustrated expectations.
IV . THE PROPRIETARY STATUS AND EFFECT OF THESE REMEDIES
At the heart of the issue of the proprietary status of rights generated by proprietary estoppel are two questions that are perhaps seen as more closely related than they should be. First, it must be asked whether, prior to any judicial declaration, rights arising in this context may be asserted against third parties who have acquired an interest in the property in question from the former owner whose conduct gave rise to the estoppel. The practical implications of this are obvious. Secondly, it is sometimes asked whether, even prior to their recognition by the courts, rights to relief arising from estoppel amount to fully-fledged proprietary interests. It is less clear what should turn on this latter question.
1. Proprietary Estoppel and Third Parties (a) Licences If the fulfilment of a plaintiff’s expectation would result or has resulted in a right of occupation short of exclusive possession, it is unlikely that third parties will be bound by the plaintiff’s rights, whether inchoate or crystallised. However, the issue is far from resolved. In Inwards v. Baker,82 the Court of Appeal held that a successor in title was bound by an estoppel licence. However, this decision is perhaps best understood in the light of the state of the law of contractual licences at the time. In a number of decisions in this period, the Court of Appeal displayed a willingness to enforce contractual licences against third parties.83 Subsequently, in Ashburn Anstalt v. Arnold,84 the Court of Appeal largely restored the traditional 82
[1965] 2 QB 29. See also Williams v. Staite [1979] Ch. 291. See, e.g., Errington v. Errington and Woods [1952] 1 KB 290 at 298 per Denning LJ; Binions v. Evans [1972] Ch. 359 at 367–9 per Lord Denning MR. 84 [1989] 1 Ch. 1. See K Gray and SF Gray, Elements of Land Law (London, Butterworths, 2001) 1017. 83
Proprietary Estoppel 305 line between contract and property in reasserting the conventional judicial wisdom that contractual licences cannot bind third parties.85 Given this view, it seems illogical to give proprietary effect to estoppel licences that arise out of less formal arrangements than do contractual licences.86 It now seems improbable that courts will hold that estoppel licences bind successors in title.87 (b) Conventional Interests in Land Awarded in Estoppel Cases On the other hand, the courts are often prepared to award a proprietary interest in land to fulfil the minimum equity required to do justice. This may be done in various ways. Parties against whom estoppel is raised may be required to transfer their entire interest in a property to the other party.88 Alternatively, the court may declare that the plaintiff is an equitable co-owner under a constructive trust.89 Finally, the court may recognise a lesser interest, such as an easement.90 While these are fully-fledged proprietary interests, the question remains whether, prior to their declaration, they will bind third parties. One objection to the suggestion that rights arising from proprietary estoppel should bind third parties prior to their declaration is the fact that the courts have a degree of discretion in determining the appropriate form of relief. It has been suggested that, as a result, prior to any curial resolution of the matter, the plaintiff cannot be said to have anything more than an inchoate interest, as opposed to a crystallised property right. Moreover, it is said to follow from this that the plaintiff’s rights cannot bind third parties.91 However, this does not necessarily follow. Rights arising in this context may be treated in a similar way to equities to rescind or trace—rights that clearly bind third parties even though the person enjoying those rights may not elect to exploit them. A more serious objection is that the interest that the plaintiff will ultimately be granted is not predictable enough to be said to be sufficiently “identifiable by third parties”92 to safeguard potential purchasers from the danger of unpredictable claims. The contrary view is that the discretion exercised by the courts in proprietary estoppel is sufficiently constrained
85
See, e.g., King v. David & Allen Sons, Billposting [1916] 2 AC 54. See G Battersby, “Contractual and Estoppel Licences as Proprietary Interests in Land” [1991] Conv. 36. 87 Some dicta from the Court of Appeal suggest that estoppel licences are likely to be brought in line with contractual licences in this regard: Canadian Imperial Bank of Commerce v. Bello (1992) 64 P & CR 48 at 52 per Dillon LJ; United Bank of Kuwait plc v. Sahib [1997] Ch. 107 at 142 per Peter Gibson LJ. The point was noted but left unresolved in recent Court of Appeal decisions in Habermann v. Koehler (1996) 73 P & CR 515 and Birmingham Midshires Mortgage Services Ltd. v. Sabherwal (2000) 80 P & CR 256 at 262 per Walker LJ. 88 See, e.g., Pascoe v. Turner [1979] 1 WLR 431. 89 See, e.g., the discussion in Grant v. Edwards [1986] Ch. 638; Lloyds Bank plc v. Rosset [1990] AC 105. 90 See, e.g., ER Ives. Investment v. High [1967] 2 QB 379. 91 Hayton, supra n. 76 at 384. 92 National Provincial Bank v. Ainsworth [1965] AC 1175 at 1248 per Lord Wilberforce. 86
306 Redistributive Proprietary Remedies for there to be no real objection to holding third parties to be bound by rights arising in this context.93 The issue of the effect of these interests on third parties should ultimately be treated as one of policy. There is obviously something to be said for favouring the welfare of those who have informally formed expectations of proprietary rights over the interests of particular purchasers and the benefits of certainty for the conveyancing system as a whole.94 In unregistered land, these rights may be enforceable against all but bona fide purchasers for value without notice.95 However, the issue is perhaps now unlikely to be resolved. With unregistered land quickly disappearing, priorities will be dealt with according to the regime governing registered land. Two principal issues emerge in this regard: first, are these inchoate interests capable of registration; and, secondly, can these rights (coupled with actual occupation, if necessary) amount to overriding interests? The prevailing view is that both of these questions should be answered in the affirmative. Certainly, it has long been thought that interests arising by estoppel can indeed bind third parties who have acquired an interest in the land in question prior to a judicial determination of how the equity should be satisfied. Writing in the seventeenth century, Coke took the view that estoppels bound successors in title.96 And there is nineteenth-century authority in which purchasers with notice are bound by rights arising in this way.97 Recent case law is perhaps too equivocal to regard the matter as conclusively decided. ER Ives Investment Ltd. v. High98 may be thought to favour the view that estoppel rights bind third parties in much the same way as other proprietary interests. In that case, a purchaser with express notice of the relevant facts was bound by an easement that arose as a result of the conduct of his predecessor in title.99 However, the case has also been interpreted as turning on a holding that the purchaser himself was estopped pursuant to some concept of mutual benefit and burden.100 The position seems clearer, on the other hand, where proprietary estoppel is used to generate an interest by way of constructive trust on the breakdown of intimate relationships. In this context, the courts have generally assumed that, even prior to any curial intervention, plaintiffs will have rights that, when coupled with actual occupation, amount to overriding interests. This perception was apparent in Lord Bridge’s judgment in Lloyds Bank v. Rosset,101 where he simply presumed that a mortgagee would be bound by the rights of an equitable 93 See R Smith, ‘How Proprietary is Proprietary Estoppel?” in FD Rose (ed.), Consensus ad idem: Essays in the Law of Contract in Honour of Guenter Treitel (London, Sweet & Maxwell, 1996) 235 at 246. 94 G Battersby, “Informally Created Interests in Land” in S Bright and J Dewar, Land Law: Themes and Perspectives (Oxford, Oxford University Press, 1998) 487. 95 See, e.g., ER Ives. Investment v. High [1967] 2 QB 379. 96 Co Litt 352 a, b. See Smith, supra n. 93 at 237. 97 See, e.g., Duke of Beaufort v. Patrick (1853) 17 Beav. 60. 98 [1967] 2 QB 379. 99 The land in question was unregistered. The court held that the interest in question was not registerable as a land charge and so was not void for lack of registration. 100 Ibid. at 795 per Lord Denning MR and 800 per Dankwerts LJ. 101 [1990] AC 105.
Proprietary Estoppel 307 co-owner, regardless of whether those rights arose as a result of a common intention constructive trust or proprietary estoppel.102
2. The Nature of Plaintiffs’ Rights Prior to any Judicial Declaration (a) The Notion that Any Proprietary Rights Recognised must have Arisen Prior to their Declaration Some attention has been focused on the question whether a court’s decision that a plaintiff has a proprietary interest is merely declaratory or actually gives rise to that interest. We may wonder why we would dwell on this issue. However, as we have seen, there is a tendency to take comfort from the characterisation of property rights as arising prior to any judicial intervention. Indeed, the notion that an interest may arise only when declared is taken to be one of the hallmarks of remedial constructive trust jurisprudence.103 The authorities lean toward the view that interests recognised by the courts in estoppel actions do indeed arise automatically prior to any judicial declaration. In a number of cases the courts have observed that they were merely recognising a right that had already arisen, even when the matter was not strictly relevant.104 At times, to support this conclusion, we encounter once again the maxim “equity looks on as done that which ought to be done” employed to transform obligation into ownership.105 This rather ignores the fact that precisely what ought to be done will not be apparent until the court has determined how the equity should be satisfied. The fullest discussion of this question appears in Re Sharpe.106 The plaintiff had sold her home so that she could advance her nephew a loan to help him purchase a property. In return for this contribution, the nephew promised the plaintiff that she could live with him and his wife for as long as she wished. However, when the nephew became bankrupt, his trustee in bankruptcy contracted to sell the property with vacant possession. The plaintiff claimed that the trustee and the purchaser were affected by an equity that arose in her favour. The trustee in bankruptcy objected that, until the court had exercised its discretion to determine the minimum equity to do justice, the plaintiff did not enjoy an interest that was capable of binding third parties. Applying a line of authority now discredited,107 Browne-Wilkinson J concluded that a licence raised by estoppel could bind third parties because it was rather mysteriously coupled with a constructive trust. 102
Ibid. at 129. See supra, ch. 1.III.5. 104 Sen v. Headley [1991] Ch. 425 at 440 per Nourse LJ; Voyce v. Voyce (1991) 62 P & CR 290 at 294 per Dillon LJ. 105 Commonwealth of Australia v. Verwayen (1990) 170 CLR 394 at 437 per Deane J. See supra, ch. 2.V.2. 106 [1980] 1 WLR 219. 107 See supra nn. 83–84 and accompanying text. 103
308 Redistributive Proprietary Remedies Browne-Wilkinson J could have reached this decision without dwelling on the question whether the plaintiff enjoyed a fully-fledged property right prior to the court’s declaration that she was protected by a constructive trust. Neither authority nor principle dictates that third parties could not be bound by a plaintiff’s uncrystallised equity. However, Browne-Wilkinson J suggested that in all cases in which the courts recognise a proprietary interest, that interest must, as a matter of abstract principle, have arisen prior to the court’s consideration of the matter. In his view, the suggestion “that the courts can impose a constructive trust as a remedy” amounted to “a novel concept in English law”.108 (b) The Implausibility of this Assumption Browne-Wilkinson J’s conclusion that “[t]he right must have arisen at the time of the transaction in order for the plaintiff to have any right the breach of which can be remedied”109 is misconceived. Even if a right to relief did demand the recognition of a particular proprietary right, this does not mean that the right must take effect automatically, rather than at the time of judgment. The plaintiff’s right may be treated as a mere equity to claim a proprietary interest, rather than a fullyfledged interest. The courts may legitimately conclude that it is more appropriate that remedies take effect when declared rather than on the occurrence of the events that give rise to the cause of action in question.110 In any event, the degree of judicial discretion involved in the determination of the appropriate remedy makes it difficult to conceive of any interest declared in a proprietary estoppel action as having arisen automatically. As Peter Birks argues, where a remedy is discretionary, “it cannot logically be said that the particular form of practical help which the remedy implies is part of the plaintiff’s preexisting entitlement”.111 In Re Sharpe Browne-Wilkinson J observed that “in order to provide a remedy the court must find a right which has been infringed”.112 Yet the existence of a right arising by estoppel does not necessarily mean that the court is obliged to award a particular interest. Proprietary estoppel claims do not merely involve the remedying of a breach of a right; they also involve a determination whether this remedy should take the form of the grant of a new proprietary interest. It is particularly difficult to regard interests awarded in proprietary estoppel cases as arising automatically given the willingness of courts to decline a remedy where, after incurring detrimental reliance on an expectation encouraged by an owner of land, a party has received substantial benefits from the owner.113 Some 108
Ibid. at 225. Ibid. See, e.g., Muschinski v. Dodds (1986) 160 CLR 583 at 615 per Deane J. 111 P Birks, “Proprietary Rights as Remedies” in P Birks (ed.), Frontiers of Liability 214 at 217. See also Smith supra n. 93 at 244. 112 [1980] 1 WLR 219 at 225. 113 Sledmore v. Dalby (1996) P & CR 196. Supra, text accompanying nn. 47–50. 109 110
Proprietary Estoppel 309 commentators have objected to such a result, arguing that, if an equity has arisen, subsequent events should not affect the court’s choice of a remedy.114 If property rights arise automatically in this context, it follows that the decision to deny relief in response to counterveiling benefits represents an expropriation of a proprietary interest. (c) The Practical Consequences of this Assumption The conception of these interests as automatic apparently reassures the courts that they are not exceeding their proper role by creating property rights. However, this understanding is also likely to have a practical impact, in that it is likely to influence the determination of the question whether these rights bind third parties even prior to their declaration. As mentioned, the conceptualisation of a right as an inchoate interest need not entail the conclusion that third party purchasers cannot be affected by such a right. Instead, it could be held that, while an equity arising by estoppel crystallises into a substantive interest only when the court determines the minimum relief required to do justice, it nonetheless binds those who have notice of the relevant facts. On the other hand, there is a danger that the tendency to characterise rights awarded in proprietary estoppel cases as arising automatically may encourage the courts to assume that those rights bind third parties without a real consideration of the implications of this conclusion. An indication that a more “remedial” conception of proprietary estoppel may have practical implications is provided by the Australian High Court decision in Giumelli v. Giumelli.115 The court indicated that the constructive trust imposed in proprietary estoppel cases “is a remedial response to the claim to equitable intervention made out by the plaintiff”.116 Moreover, it concluded that “[b]efore a constructive trust is imposed, the court should first decide whether, having regard to the issues in the litigation, there is an appropriate equitable remedy which falls short of the imposition of a trust”.117 While the court below had granted a constructive trust, the High Court was concerned that this remedy was rather harsh on the defendants and a younger son who had made substantial improvements to the property in question since the plaintiff had left. Consequently, it limited the plaintiff’s remedy to an award of damages. The Australian High Court in Giumelli v. Giumelli eschewed an absolutist perspective of property rights. Instead, it favoured an approach that balanced the respective claims of the parties and gave the fairest remedy in the circumstances. It would have been difficult for the court to reach the same conclusion if it had started from the position that constructive trusts awarded in the context of proprietary estoppel arise automatically. 114
JE Adams, “Is Equitable Estoppel a Wasting Asset?” [1997] Conv. 458 at 463. (1999) 161 ALR 473. For the facts of the case see supra, accompanying text to nn. 60–61. 116 Ibid. at 475. 117 Ibid. at 476 citing Bathurst City Council v. PWC Properties Pty Ltd. (1998) 195 CLR 566. See also Lord Napier & Ettrick v. Hunter [1993] AC 713. 115
310 Redistributive Proprietary Remedies
V . CONCLUSION
The growing pains that proprietary estoppel has endured in recent years have in large part been due to the difficulties that we face in reconciling the emerging remedy with axiomatic notions of property and contract. There is a temptation to conceptualise the doctrine so as to suppress the extent of the difficulties that we face in this regard. The characterisation of proprietary estoppel as an evidential device obscures the significance of the doctrine by suggesting that it is not part of the substantive law. A second strategy involves the depiction of proprietary estoppel as involving nothing more than the enforcement of agreements and promises, thereby suggesting that it does not threaten the understanding that property rights can be redistributed only with consent. Finally, the view that the rights that are recognised by the courts arise prior to their declaration assuages our fears of discretionary proprietary remedies. Ultimately, none of these strategies should be permitted to obscure the possibilities for the judicial redistribution of property underlined by proprietary estoppel.
14
Liens Arising from the Acquisition, Preservation or Improvement of Assets law provides for the acquisition of proprietary rights as the result of work done in the acquisition, salvage, maintenance or improvement of another’s assets. Such rights are usually provided through what is described as lien, although there is considerable controversy about whether this term is always apt. This remedy is given in different contexts that have not generally been regarded as providing illustrations of a general principle, but, rather, tend to be viewed as the product of ad hoc and perhaps even anomalous doctrines. However, a different reading is certainly possible. In many respects, these miscellaneous remedies exemplify the richness of judicially developed approaches to the allocation of property rights. In the context of such contributions to assets, where considerations of efficiency and justice support it, even in the absence of the consent of the owner, the courts have relatively consistently been willing to grant a lien. We would perhaps gain a better understanding of other proprietary remedies if we saw such a pragmatic approach to property rights as exemplary rather than aberrant.
A
T TIMES THE
I . MARITIME LIENS
1. Liens in Maritime Law Maritime law favours a far more flexible approach to the redistribution of property than does the common law or even equity. Proprietary relief is provided most prominently through liens awarded over vessels. In the words of Gorrell Barnes J: such a lien is a privileged claim upon a vessel in respect of service done to it, or injury caused by it, to be carried into effect by legal process. . . . It is, so to speak, a subtraction from the absolute property of the owner in the thing.1
These rights may be thought to be outside the scope of this book because they are understood to be products, not of English common law, but rather of an international body of norms governing maritime trade. However, given the acceptance of this system by English admiralty courts and the important role of these courts in the evolution of the norms in question, it would be surprising if the philosophy underlying the regulation of proprietary rights in maritime law did not exercise 1
The Ripon City [1897] P 226 at 242.
312 Redistributive Proprietary Remedies some influence on domestic law. And, indeed, from time to time, there are efforts to explain existing common law norms or to create new norms by analogy with principles found in maritime law. The principal maritime liens recognised under the general law of the sea arise in the context of salvage, bottomry (the provision of necessaries), seamen’s wages and damage.2 The right that masters have to a lien to secure their rights to be indemnified for disbursements and liabilities may be compared with the rights that trustees enjoy over trust property.3 It is more difficult to identify any common law equivalent to other instances of maritime liens. Liens securing masters’ and seamen’s rights to wages reflect a decision to make employees preferential creditors in a manner similar to that found in domestic insolvency legislation. The recognition of these rights perhaps reflects the fact that it is difficult to treat a seaman’s decision to continue to provide services when unpaid as voluntary given that the realities of life at sea mean that there will often be practical and moral difficulties in withdrawing such services. Perhaps the strangest of maritime liens is that arising in favour of the owner of a ship wrongfully damaged by a collision with another vessel. The owner’s personal right to compensation may be enforced against the defendant’s vessel and will bind innocent purchasers of the vessel.4 It is difficult both to identify the origins of this lien and to justify its existence. Its recognition probably owed something to the same instinct that gave rise to the law of deodands that existed at common law until its abolition in the middle of the nineteenth century.5 Chattels that were the instrument of the death of a person could be seized as “deodands” by the courts and used for charitable purposes, such as providing for the welfare of the deceased’s dependants. This seems to reflect a primitive tendency to endow inanimate objects with personality and therefore responsibility.6 Whatever its origins, the survival of this property right is no doubt largely due to its usefulness as a means of circumventing practical difficulties that arise in attempting to obtain redress for accidents that occur on the high seas. Nonetheless, it is difficult to see why, in the event of shipowners becoming bankrupt, these victims should have priority over their contract creditors and the rights of tortfeasors whose claims arise under domestic law.7 2 Liens in respect of masters’ wages and disbursements and liabilities were added by statute in the 19th century. 3 See infra, text accompanying nn. 30–34. 4 The Bold Buccleugh (1851) 7 Moo. PC 267; Currie v. M’Knight [1897] AC 97. 5 See, e.g., JH Baker, An Introduction to English Legal History (3rd edn., London, Butterworths, 1990) 437. 6 O Wendell Holmes, The Common Law (Boston, Mass., Little, Brown, & Co, 1881) 26–28. 7 There is some suggestion that a damage lien will take priority over prior mortgages and other liens. See K McGuffie, Admiralty Practice (London, Stevens, 1964) 1574. Certainly there are cases in which a damage lien has taken priority over prior charges: see, e.g., The Aline (1839) 1 Wm. Rob. 111 at 118 per Dr Lushington (contest with the holder of a bottomry bond); The Benares (1850) 14 Jur. 581 (contest with wages claimants). However, in The Inna [1938] P 148 it was held that a salvage lien had priority over an earlier damage lien. Moreover, there is considerable support for the view that there is a significant degree of discretion involved in determining priority between competing charges: see DR Thomas, Maritime Liens (London, Stevens, 1980) 234; The Ruta [2000] 1 WLR 2068 at 2075–6 per David Steel J.
Liens Arising from the Aquisition, Preservation or Improvement of Assets 313 The most important lien for the purposes of this study is that arising over salvaged property. The right allows salvors to have such property sold to provide security for their claims for remuneration for their services. While it is difficult to regard the salvor as an involuntary creditor, it may be thought unreal and inappropriate to require potential salvors to pause either to negotiate for secured rights or to evaluate the risks that they would assume as unsecured creditors. Moreover, given that a salvor’s claim is limited by the value of the property saved, this can be said to be part of a defendant’s estate that would not be available for distribution amongst creditors were it not for the salvor’s intervention. It is presumably for this same reason that the salvor’s lien is given priority over prior liens8 and, perhaps, even over earlier mortgages.9
2. The Nature of the Maritime Lien Rather controversially, the House of Lords concluded in The Halcyon Isle10 that a repairer’s maritime lien granted under US law was a mere remedy rather than a substantive right. The issue arose for the purposes of determining the applicable law for resolving which of two competing charges had priority in the context of the distribution of the proceeds of sale of a ship arrested and sold in Singapore. The competition was between a lienee (a US ship repairer) and a mortagee (an English bank). While the repairer would have had priority under US law, the mortgagee would have had priority under Singaporean (and English) law. The House of Lords concluded that the matter was to be determined by the law of the forum deciding the matter, rather than the law of the jurisdiction in which the events that gave rise to the lien occurred. This was explained on the basis that the determination of priorities was a question of procedure rather than substantive property rights.11 Moreover, the majority made much of the fact that, in their view, a potential lienee’s right could only be charactertised as inchoate prior to any judicial intervention.12 There is much to be said for the view of the minority that these remedies are available as of right and that, as a consequence, they are properly regarded as substantive rights.13 More importantly, the reasoning of the minority implicitly recognises that the difficulties raised by the inter-jurisdictional enforcement of proprietary remedies cannot be adequately addressed by formalistically focusing 8
See, e.g., The Inna [1938] P 148 (earlier damage lien); The Veritas [1901] P 304 (earlier salvage
lien). 9
The Veritas [1901] P 304 at 313 per Gorell Barnes J (obiter). [1981] AC 221. See also supra n. 7. 11 Ibid. at 234 per Lord Diplock. 12 This may be compared with the tendency of English courts to ignore this issue elsewhere—a tendency that is especially apparent in the law of proprietary estoppel. See supra, ch. 13.IV.2. 13 Ibid. at 250 per Lords Salmon and Scarman. See also D Jackson, Enforcement of Maritime Claims (2nd edn., London, LLP, 1996) 221–3; W Tetley, Maritime Liens and Claims (London, Business Law Communications, 1985) 541. 10
314 Redistributive Proprietary Remedies on the juridical nature of the right in question. The minority accepted that such questions of priority would inevitably give rise to acutely difficult conflict of laws issues if maritime nations did not adopt a harmonious approach to the issue. Nonetheless, they noted that the priority afforded to the repairer’s lien under US law was defensible, given that “these repairs must have added to the value of the ship and therefore to the value of the security of the appellant mortgagees”.14 In addition, they observed that, had the ship-repairers not believed that their rights would be determined by US law, “they would never have allowed the ship to leave their yard without payment”.15 Supporting this conclusion was the fact that in England, where such a lien is not available, ship-repairers “rarely allow the ship to leave their yard until they are paid, or have arranged other security for the repairs”.16
II . EQUITABLE LIENS :
“A
THEMELESS RAGBAG ” ? 17
1. Introduction The term “equitable lien” is generally used to describe a right that gives the holder a charge over a particular asset to secure a liability incurred by the owner of that asset. Unlike a common law lien, an equitable lien does not generally require that the lienee have possession of the asset. The right binds subsequent purchasers of the asset and is enforceable in bankruptcy. Equitable liens arise in a number of specific instances, many of which have little in common. At times it is used as a remedy in the context of quite broad-reaching doctrines. We have already seen how those who are able to trace the proceeds of their property in equity have the right to choose between a constructive trust and a lien.18 Similarly, the lien is often used as a remedy in the context of doctrines that provide for the distribution of proprietary rights on the breakdown of intimate relationships.19 Elsewhere, the lien is employed in a more ad hoc fashion. Thus, as we have also seen, the lien is used along with the constructive trust to distribute rights and obligations between vendors and purchasers in the transitional stages of specifically enforceable arrangements to assign property.20 Finally, the remedy is used in certain circumstances that have in common the fact that the plaintiff has contributed to the acquisition, salvage, maintenance or
14 15 16 17 18 19 20
Ibid. at 246. Ibid. Ibid. D Waters, “Where is Equity Going?” (1988) 18 UWALR 3 at 24. Re Hallett’s Estate (1880) 13 Ch. D 696 at 709 per Jessel MR . See supra, ch. 5. See supra, ch. 10.V.3. See supra, ch. 8.II.
Liens Arising from the Aquisition, Preservation or Improvement of Assets 315 improvement of the defendant’s property. These liens arise where, although the plaintiff cannot be said to be an involuntary creditor, the award of a proprietary interest can be defended on the basis that it encourages those in the position of the plaintiff to contribute their services.
2. A General Right to a Lien over Salvaged Property? From time to time it is suggested that English law may provide for a general right to a lien over property salvaged or preserved through a plaintiff’s efforts. Thus, the lien that solicitors have over property recovered for their clients to secure sums due for their services is sometimes explained by analogy to the salvor’s lien.21 Nonetheless, the courts have generally resisted the suggestion that a general salvor’s lien should be recognised in domestic law.22 In cases where one beneficiary of a life assurance arrangement has, by paying premiums, kept the policy alive, thereby profiting another who has a beneficial interest in the policy, the courts have refused a right to contribution, let alone given a lien. Thus, in Falke v. Scottish Imperial Insurance Company,23 Bowen LJ rejected the suggestion that principles applicable to salvage in maritime law had any application in English domestic law.24 In Re Leslie,25 Fry LJ concluded that such a lien would arise only: (a) “[b]y contract with a beneficial owner of the policy”; (b) “[b]y reason of the right of trustees to an indemnity out of . . . trust property for money expended by them in its preservation”; (c) “[b]y subrogation to this right of trustees of some person who may at their request have advanced money for the preservation of the property”; and (d) “[b]y reason of the right vested in mortgagees, or other persons having a charge upon the policy, to add to their charge any moneys which have been paid by them to preserve the property”.26 This amounts simply to an enumeration of different cases in which a lien arises rather than an effort to explain why the right should be available in these cases and why it should be denied in others. For example, no explanation is provided for the right of creditors dealing with a trustee to enjoy the trustee’s rights to a lien over trust property. Similarly, the right of anyone with a charge on the policy to “add” sums spent on the policy to their charge remains unexplained. Why should a co-owner not equally be allowed to add money spent on the policy to his or her interest under the policy? It may be objected that such co-owners are volunteers or that their contribution is motivated by a desire to preserve their own property. Yet, where those with a partial interest in land repay a secured debt 21
Scholey v. Peck [1893] 1 Ch. 709 at 711 per Romer J. See, e.g., Nicholson v. Chapman (1793) 2 H Bl 254 at 258–9 per Eyre CJ; Falke v. Scottish Imperial Insurance Co. (1886) 34 Ch. 234. 23 Ibid. 24 Ibid. at 248–9. 25 (1883) 23 Ch. 552. 26 Ibid. at 560. 22
316 Redistributive Proprietary Remedies in order to protect their own interest, such considerations do not prevent their subrogation to the position of the creditor, thereby allowing them to exercise rights of security against others who have an interest in the property.27 Recently, denying that principles applicable to salvage in maritime law have any role to play in domestic English law, the House of Lords refused to recognise a right of remuneration for services provided in salvaging a vessel on the Thames.28 Ultimately, their Lordships concluded that such a fundamental change of the law was a matter for the legislature.29
3. Particular Equitable Liens arising from the Acquisition, Preservation or Improvement of Assets (a) The Trustee’s Lien As Lindley LJ explained in Re Beddoe 30: a trustee is entitled as of right to full indemnity out of his trust estate against all his costs, charges, and expenses properly incurred: such an indemnity is the price paid by cestuis que trust for the gratuitous and onerous services of trustees; and in all cases of doubt, costs incurred by a trustee ought to be borne by the trust estate and not by him personally.31
Thus, trustees who incur expenses in performing their trust duties are entitled to a lien over trust assets that will bind the receiver or trustee in bankruptcy. For example, trustees who properly bring or defend an action on behalf of the trust have a lien over the trust’s assets for the costs incurred.32 Similarly, before accounting for rents received from trust property, trustees may set off any expenses incurred in discharging their duties.33 In addition, debts incurred by trustees running the business of a deceased for the benefit of the deceased’s beneficiaries will be secured by a lien over the business’s assets.34 The lien that arises in these circumstances provides an effective mechanism for ensuring that trustees are not left out of pocket and thereby gives an incentive for people to accept the office. It makes sense that trustees are not left to do so. There would often be difficulties with a rule that requires them to do so. It may be awkward to gain the fully informed consent of beneficiaries, who will not always have much understanding of the business in question. Moreover, 27
See e.g., Countess of Shrewsbury v. Earl of Shrewsbury (1790) 1 Ves. Jun. 227. See supra, ch. 11. The Goring [1988] AC 831. 29 Ibid. at 857 per Lord Brandon. 30 [1893] 1 Ch. 547. 31 Ibid. at 558. 32 Cf. Re Beddoe [1893] 1 Ch. 547 (where the trustee’s resistance of a beneficiary’s claim was unwarranted). 33 Stott v. Milne (1884) 25 Ch. D 710. 34 Benett v. Wyndham (1862) 4 De GF & J 259; Re Johnson (1880) 15 Ch. D 548. For creditors’ rights to acquire these rights by subrogation see supra, ch. 11.IV.3. 28
Liens Arising from the Aquisition, Preservation or Improvement of Assets 317 beneficiaries will not always be sui juris and it would be cumbersome to seek the leave of the court to allow trustees to act in these circumstances. (b) The Solicitor’s Lien (i) The Nature of Solicitors’ Rights over Property They Have Helped to Recover or Preserve Solicitors are entitled to a lien over property, other than real estate,35 recovered or preserved in litigation, arbitration or even by way of compromise36 to secure payment of their costs.37 While the lien is sometimes described as a common law lien, it seems in truth to be a creature of equity and differs from common law liens in that it does not depend upon possession and may be actively enforced.38 Presumably, the rationale for the right lies in the notion that, without it, impecunious litigants would have trouble obtaining representation. The lien has been equated with rights arising from salvage.39 However, compared with the salvage situation, it is not clear why solicitors are not required to bargain for such a right, should they think it necessary to protect themselves against the risks of clients’ bankruptcy. Perhaps, then, it is best explained as a sui generis privilege extracted by an interest group that is in a particularly good position to convince the courts of its need for special protection. What is the nature of the interest that solicitors have in the proceeds of a judgment secured through their efforts? The issue was addressed in Mercer v. Graves,40 where a defendant was ordered to pay the plaintiff’s costs after a case in Ireland was nonsuited. The defendant responded that the plaintiff was still indebted to him for a similar sum for various unsatisfied judgments in the Irish courts and claimed the right to set this off against the plaintiff’s claim. However, the plaintiff’s solicitor responded that set-off ought not be allowed because it would undermine the solicitor’s right to a lien over the sum that the defendant was liable to pay to the plaintiff. Moreover, the plaintiff’s solicitor claimed that the plaintiff was a trustee for his solicitor of his right to the money due under the judgment. The court rejected the plaintiff’s solicitor’s contention. Blackburn J analysed the matter as follows: I do not think the attorney, when he has conducted an action to judgment, for which costs are owing to him, stands in the position of a cestui que trust, having an equitable interest in the proceeds of the judgment. The attorney having successfully brought a suit 35
Shaw v. Neale (1885) 6 HL Cas. 581. Ross v. Buxton (1889) 42 Ch. D 190. However, the lien does not arise in respect of property recovered by mere negotiation: Meguerditchian v. Lightbound [1917] 1 KB 298. 37 Bozon v. Bolland (1839) 4 My. Ch. 354; Mackenzie v. Mackintosh (1891) 64 LT 706; Lann v. Church (1820) 4 Madd. 491; Stephens v. Weston (1824) 3 B & C 535; Watson v. Maskell (1834) 1 Bing. NC 366. 38 Barker v. St Quintin (1844) 12 M & W 441; Fairfold Properties Ltd. v. Exmouth Docks [1993] Ch. 196. 39 Scholey v. Peck [1893] 1 Ch. 709 at 711 per Romer J. 40 (1872) LR 7 QB 499. 36
318 Redistributive Proprietary Remedies to judgment, has a right to retain any documents in his hands, and the effect is that the money, the fruits of the judgment, passes through his hands, and then he has a right to retain his costs, and any other costs due to him. To some extent the Courts, both of law and equity, will protect the attorney’s interests, so as not to deprive him of his costs. But the protection the Courts afford to the attorney stops very far short of putting him in the position of cestui que trust to his client.41
While the conclusion that solicitors are not beneficiaries with respect to assets recovered by their efforts is surely correct, it hardly follows that they have no equitable interest in those assets. The real issue is whether, before the client actually receives any money, a solicitor entitled to a “lien” has a more contingent proprietary interest in the nature of a charge. Rather strangely, courts have often asserted that the solicitor’s entitlement in these circumstances amounts to nothing more than a right to apply to the court to impose a charge, and that, until such an application is made, the solicitor has no proprietary interest.42 This view and its implications are apparent in the decision of the divisional court of King’s Bench in James Bibby Ltd. v. Woods and Howard.43 There, judgment creditors of the plaintiff solicitor’s client obtained a garnishee order in respect of money that the garnishee had agreed to pay to the client under a compromise of actions between the parties. While this obviously undermined the solicitor’s own claim to the money due to their client pursuant to the compromise, the Court showed little sympathy. Goddard CJ remarked of the solicitor’s claim: It was said that he had a lien or charge on it because he had a right to apply to the court for a charging order. . . . But until he got the charging order he only had at the most an inchoate right to apply for one; he had not a lien on the money. That is clear if the nature of his so-called “lien” is understood. A “lien,” in the strict sense of the word, can only exist where the person claiming the lien has the property which he claims to be subject to the lien in his possession.
(ii) Are Liens Limited to Possessory Rights? Goddard CJ’s suggestion that, properly speaking, liens exist only where a claimant has possession of the property in question reflects a widely held misconception.44 Thus, it was largely on the basis of this understanding that, in Shaw v. Neale,45 the House of Lords held that a lien does not arise in respect of real estate recovered through a solicitor’s efforts. In the view of Chelmsford LC, solicitors could not enjoy a lien over real estate because they never took possession of it: at the most, they could have a lien over documents of title.46 However this perception is plainly 41
(1872) LR 7 QB 499 at 504. Barker v. St Quintin (1844) 12 M. & W. at 451; Mercer v. Graves (1872) LR 7 QB 499; James Bibby Ltd. v. Woods and Howard [1949] 2 KB 449. 43 Ibid. 44 For observations to the same effect see Mercer v. Graves (1872) LR 7 QB 499 at 503 per Cockburn CJ. 45 (1885) 6 HL Cas. 581. 46 Ibid. at 601–2. 42
Liens Arising from the Aquisition, Preservation or Improvement of Assets 319 wrong. In part, it results from the understanding that these liens were a product of the courts of common law rather than equity—a view that has long since been rejected. In addition, this misunderstanding reflects a view that only possessory liens are worthy of the term and that equitable liens are a lesser right. Thus, in Brunsdon v. Allard,47 Erle J remarked that the word, “ ‘[l]ien’ properly applies to a chattel, and saying an attorney has a lien is only metaphorical, and the words ‘equitable lien’ are intensely undefined”.48 In fact, non-possessory equitable liens represent an important form of proprietary right conferring rights in assets that are enforceable against third parties in a wide range of circumstances. An example is the purchaser’s right to a lien over land to secure the repayment of any deposit held by the vendor in the event that the conveyance should not be completed through no fault of the purchaser.49 In principle, there is no reason why solicitors’ rights should not equally be treated as being enforceable in the absence of possession. (iii) Are a Solicitor’s Rights “Inchoate” and Does it Matter? The conclusion that, before seeking judicial assistance, solicitors have merely an inchoate right is dubious. Given that solicitors are entitled to the right unless they have done something that would make it inequitable to enforce it, it is difficult to see why there is any need to characterise the right as inchoate rather than arising prior to any judicial intervention. Indeed, the analysis of the right as inchoate is odd given the insistence of English courts in other contexts that proprietary remedies pre-exist judicial intervention.50 More importantly, even if the right is “inchoate” this does not in itself indicate that it should not take priority over other claims. Thus, while the right to rescind, the right to claim traceable proceeds and rights to relief for proprietary estoppel may all be characterised as inchoate rights, they are all effective to give claimants priority over all but bona fide purchasers.51 (iv) What Makes a Right Proprietary? What should determine whether the solicitor’s lien is properly characterised as proprietary? In Mercer v. Graves, Blackburn J relied upon an earlier dictum of Baron Parke that “[t]he lien which an attorney is said to have on a judgment (which is, perhaps, an incorrect expression), is merely a claim to the equitable interference of the Court to have that judgment held as a security for his debt”.52 This is not terribly helpful. Ultimately, a property right reflects nothing more than the fact that the courts will come to the aid of individuals in recognition of their rights to a particular asset. If, as in the context of the solicitor’s lien, the courts will 47
(1859) E & E 19. Ibid. at 27. See supra, ch. 8.II.1(c). 50 See, e.g., Re Sharpe [1980] 1 WLR 219 at 225 per Browne Wilkinson J. See especially supra, ch. 1.III.5 and ch. 13.IV.2. 51 For a discussion of this issue in relation to proprietary estoppel see supra, ch. 13.IV. 52 Barker v. St Quintin (1844) 12 M & W at 451. 48 49
320 Redistributive Proprietary Remedies habitually uphold a right against third parties it is difficult to see that the right in question should not be termed proprietary. (v) Protection against Third Parties Goddard CJ’s view that the solicitor’s “lien” is not an existing property right but, rather, merely a form of judicially granted execution order, left him disinclined to accept that it might take priority over a competing garnishee order. In his view, “[g]arnishee proceedings are one form of execution and . . . it not infrequently happens that, where there are several claims, or may be several claims, against money, the person who gets in first gets the fruits of his diligence”.53 It is odd to equate the solicitor’s lien with other forms of execution such as charging orders. A charging order sought by a judgment creditor is very much treated as a remedy that lies within the discretion of the court and which may be refused if it would be unduly prejudicial to other creditors.54 In contrast, the solicitor’s lien is not dependent upon the court’s discretion in any strong sense. It is clear from case law that, even prior to any judicial intervention, solicitors’ rights affect third parties. For one thing, if the solicitor’s lien could really be equated with charging orders given to judgment creditors, it would be unlikely that the courts would impose a lien in favour of a solicitor after his or her client has become bankrupt. However, it is well established that solicitors have the right to have a lien recognised and enforced in insolvency.55 Confusion about the relationship of liens and charging orders is apparent in the judgment of Farwell J in Re Born.56 There, solicitors acting for a private company succeeded in establishing a claim against an estate in the course of administration by the court. Before the claim had been paid, the company went into compulsory liquidation. The solicitors then applied for a charging order on the company’s share of the fund held by the court. Farwell J granted the order on the ground that, as the solicitors were already entitled to a lien, he was not giving them a new right, but merely enabling them to enforce a right they already had.57 This suggests that the solicitors had an existing proprietary right and not a mere claim to ask the court for relief. On the other hand, it is difficult to see why it was necessary to award a charging order if the plaintiff already had a proprietary right in the nature of a lien. The suggestion that the solicitor’s lien is merely a form of execution is also difficult to reconcile with authorities holding that the rights of a solicitor who has yet to seek the assistance of a court take priority over the rights of creditor who has obtained a garnishee order nisi.58 What is it that allows a solicitor to intervene and 53
Barker v. St Quintin 12 M & W at 455. Charging Orders Act 1979, s. 1(5). See, e.g., Rainbow v. Moorgate Properties Ltd. [1975] 2 All ER 821; Roberts Petroleum Ltd. v. Bernard Kenny Ltd. [1983] 2 AC 192; Harman v. Glencross [1986] Fam. 81. 55 See, e.g., Ex parte Cleland (1867) LR 2 Ch. App. 808. 56 [1900] 2 Ch. 433. 57 Ibid. at 435. 58 See, e.g., Sympson v. Prothero (1857) 26 LJ (Ch.) 671; Eisdell v. Coningham (1859) 28 LJ (Ex.) 213; Dallow v. Garrold (1884) 14 QBD 543; Loescher v. Dean [1950] Ch. 491. 54
Liens Arising from the Aquisition, Preservation or Improvement of Assets 321 ensure that any order absolute be made subject to the solicitor’s lien, if not the fact that the solicitor has a property right in the assets in question? Moreover, even more difficult to reconcile with the notion that a solicitor has no proprietary right that pre-exists judicial intervention are cases that give a solicitor’s lien priority over mortgages. The solicitor’s lien will prevail over mortgages that were granted prior to the point in time at which the action in question was brought where that action served to preserve the interest mortgaged.59 This was the case in Scholey v. Peck.60 The beneficiary of a marriage settlement had three properties conveyed to him by way of mortgage. Subsequently, without the knowledge of his trustees, the beneficiary entered into an estate contract to convey the properties to Scholey. He in turn mortgaged his interest under the estate contract to a Miss Cardale. Subsequently, the trustees, acting as mortgagees, attempted to sell the properties by auction. Scholey then sought a remedy in respect of a property for which he had paid the purchase price. After specific performance was awarded, the question arose whether Scholey’s solicitors’ lien took priority over Cardale’s interest. Romer J concluded that it did, observing that: Here undoubtedly the property was preserved by the action brought by these solicitors on behalf of the plaintiff [the mortgagor], and but for the proceedings taken by them the mortgagee would have lost her security. . . . [Thus] the solicitors are entitled to the charge for which they ask, not only against the plaintiff, but also against the mortgagee, who is taking the benefit of the action, and over whose mortgage they must have priority.61
Finally, the notion that, prior to seeking judicial assistance, solicitors have no proprietary interest whatsoever is difficult to square with authority that third parties may be liable for interfering with property affected by such a lien if they have notice of that interest.62 Thus in Ross v. Buxton,63 the defendant had paid £50 into court in satisfaction of all damages to which the plaintiff might have been entitled.64 However, before the trial, the defendant and his solicitors settled the matter with the plaintiff without his solicitor on the basis that the plaintiff should receive the money that had been paid into court. The plaintiff’s solicitor gave the defendant’s solicitors notice that they should not pay the plaintiff any money until his costs in the action had been paid. Nonetheless, upon obtaining payment out to themselves of the money, the defendant’s solicitors paid it over directly to the plaintiff. It was held that the defendant’s solicitors and the plaintiff were liable, given that they had express notice of the plaintiff’s solicitor’s lien. Thus, the court treated the solicitor’s rights as binding third parties despite the fact that there had been no prior judicial recognition of those rights.
59
See, e.g., Faithfull v. Ewen (1878) 7 Ch. D 495. [1893] 1 Ch. 709. Ibid. at 711. 62 See, for an early example, Ormerod v. Tate (1801) 1 East 464. 63 (1889) 42 Ch. D 190. 64 This money was viewed by the court in Ross v. Buxton as money recovered with the assistance of the solicitor and thus subject to a lien. 60 61
322 Redistributive Proprietary Remedies (vi) Limitations on the Solicitor’s “Lien” Mercer v. Graves illustrates one reason why there is a reluctance to describe the rights in question as proprietary. The claim that solicitors have to the proceeds of any judgment is more contingent than a typical right of security because the courts have, perhaps quite rightly, recognised that in some circumstances it is liable to be lost in a way that other property rights are not. Thus, as in Mercer v. Graves, the solicitor’s lien may be lost because another party is allowed to exercise rights of set-off enjoyed against the solicitor’s client.65 Similarly, provided that it is done in good faith, solicitors’ clients are free to compromise actions in a way that would undermine solicitors’ rights to any proceeds that might have eventuated from the action. It follows that the solicitor’s lien is vulnerable in a way in which, for example, an ordinary mortgage would not be. However, just because a particular right will not be enforced against certain third parties does not necessarily mean that it should not be regarded as a right of property. Property rights vary widely in their effect. It should be remembered that the rights arising from express and implied trusts came to be regarded as proprietary despite the fact that they are vulnerable to the claims of bona fide purchasers of the legal title.66 In the final analysis, the solicitor’s lien is enforced against a sufficiently wide class of third parties in a sufficiently predictable manner for it to be properly regarded as a proprietary right.67 (c) Liens over Mistakenly Improved Land In Cooper v. Phibbs,68 an uncle incurred considerable expense in developing a salmon fishery. He subsequently granted a lease of the property to his nephew. When it transpired that the property had belonged to the nephew all along, the nephew understandably sought to rescind the lease. The court held that the defendant was entitled to a lien to secure his expenditure on the fisheries. While it may be tempting to subsume this decision into the law of proprietary estoppel, this would be difficult. For one thing, the uncle’s acts to his detriment in reliance on the mistake in question were not encouraged by his nephew. As a result, the uncle’s claim would not satisfy even the generous approach favoured by Oliver J in Taylors Fashions Ltd. v. Liverpool Victoria Trustees Co. Ltd.69 Moreover, while the remedies given by the court in proprietary estoppel actions are typically aimed at fulfilling claimants’ expectations, the remedy in Cooper v. Phibbs was designed merely to ensure that the nephew was not enriched by his uncle’s mistake. One thing is quite clear: this was a remedy that had the effect of redistributing the nephew’s property rights without his consent. 65 However, the outcome in Mercer v. Graves is difficult to reconcile with the decision in Ex parte Cleland (1867) LR 2 Ch. App. 808, where the court refused to allow a defendant to set off a debt that the solicitor’s client owed him against costs that he had been ordered to pay to the solicitor’s client on the grounds that the solicitor enjoyed a lien on those costs. 66 See supra, ch. 1.I. 67 A Honoré, “Rights of Exclusion and Immunities against Divesting” (1960) 34 Tulane L Rev 453 at 466. 68 (1867) LR 2 HL 149. 69 [1982] QB 133. See supra, ch. 13.II.2.
Part III
Restitution and Property Rites
15
Proprietary Relief as Restitution years much work has been done to distil from the disorderly material of case law a logical structure that can explain and justify restitution as a discrete category within the private law. Most of these efforts have been directed at the task of revealing the hidden structure of the law of proprietary remedies, which has emerged as “the most difficult question in the law of restitution”.1 This chapter explores the limits of this endeavour. At the forefront of contemporary restitution scholarship is Professor Peter Birks. His analysis of the law of restitution in terms of a relatively crystalline logical framework has done much to contribute to the boom in interest the subject has enjoyed in England and elsewhere in the Commonwealth. Birks notes the difficulties that result from the “too rich growth” of techniques for thinking our way from events to remedies and of “obscure terms which have an unstable reference hovering between event and technique”.2 Citing the metaphor of “Occam’s razor”,3 he sets out to cut through this verbiage. In the process, he claims to reveal the nature of proprietary remedies, the principles determining their availability and their place within the law of restitution. The gist of this chapter is that things are not so simple. Proprietary remedies resist explanation in terms of restitution. The fact that these remedies involve judicial readjustment of property rights has tended to generate a good deal of unease among jurists, and the strange rhetoric found in the jurisprudence of the area owes much to an impulse to obscure the reality that sacred axioms of property are being contravened. The rhetorical strategies deployed to assuage fears about interference with property rights have imposed a logic of their own on the development of the substantive law in this area, often leading to dysfunctional results. Consequently, if we are to rationalise the law of proprietary remedies, we must be prepared to engage directly the policy issues that arise in this context.
I
N RECENT
I . BIRKS ’ ACCOUNT OF PROPRIETARY REMEDIES
Birks offers a rather radical interpretation of proprietary remedies. He recognises that these doctrines involve, not the enforcement of existing property rights, but 1 Sir Peter Millett, “Book Review” (1995) 111 LQR 517. For a similar view see A Burrows, The Law of Restitution at 35. 2 P Birks, An Introduction to the Law of Restitution at 75. 3 Ibid.
326 Restitution and Property Rites the creation of new ones.4 However, he seeks explanations, not in the policy considerations that may pertain in particular contexts, but in formal principles that supposedly underlie the judicial treatment of these doctrines. In his analysis, property is not to be used instrumentally as a remedy. Instead, a plaintiff seeking proprietary relief must be able to point to a “proprietary base”.5 We can appreciate the role this concept plays in Birks’ account of the law of restitution by examining his analysis of particular proprietary remedies.
1. Tracing Value (a) Tracing Metaphors Lord Mansfield once observed that “nothing in law is so apt to mislead as a metaphor”.6 Subsequently, Judge Benjamin Cardozo commented that “metaphors in law are to be narrowly watched, for starting out as devices to liberate thought, they end often by enslaving it”.7 The truth of this observation is borne out by the law of tracing.8 While it may be true that we can never escape metaphor and that it may play an indispensable role in our thought, we should be wary of being beguiled by unexamined metaphors. While a metaphor may help us to grasp an explanation or justification, it cannot, in itself, explain or justify.9 We should be able to appreciate just why a metaphor is apposite before we give it a place in legal doctrine.10 I have already criticised Birks’ influential claim that tracing is a neutral process of identifying value as metaphoric and misleading.11 Nonetheless, Birks places considerable importance on clarity of language. In his view: No subject can ever be rationally organised or intelligibly applied so long as it is dominated by the language of fiction, of deeming, and of unexplained analogy. Hence terms such as “quasi-contract” and “constructive trust” must be rooted out, except to the 4 See, e.g., Birks, An Introduction to the Law of Restitution, at 15 and 69. See also Burrows, The Law of Restitution at 372. 5 Birks, An Introduction to the Law of Restitution at 378. 6 Quoted by Lord Westbury in Knox v. Gye (1872) LR 5 HL 656 at 675. 7 Berkey v. Third Avenue Railway Co. 244 NY 84, 94 (Ct. App. 1926); cited in Mitchell, The Law of Subrogation at 145. 8 See supra, ch. 5.II–III. 9 While the description does not fully capture their complexity, metaphors often are understood as a form of analogy, and, when used in legal reasoning, metaphors and unexamined analogies give rise to very similar considerations. In themselves they are inadequate modes of justification. See R Posner, “Rhetoric, Legal Advocacy, and Legal Reasoning” in Overcoming the Law (Cambridge, Mass., Harvard University Press, 1994) 498 at 518; N McCormick, Legal Reasoning and Legal Theory (Oxford, Clarendon Press, 1978) 186. 10 For a good example of how one may gauge whether a metaphor is apposite, see Ernest Weinrib’s account of how the fiction of an employer acting through an employee found in the doctrine of respondeat superior essentially reflects a view that enterprises should be responsible for accidents that result from their activities: E Weinrib, The Idea of Private Law (Cambridge, Mass., Harvard University Press, 1995) 185–7. 11 See supra, ch. 5.II.3.
Proprietary Relief as Restitution 327 extent, if any, that they can be shown to do work which is necessary and in which their fictions are openly recognisable and demonstrably harmless.12
Yet, Birks’ explanation of tracing as identifying “units of value [that] can be said to have passed into other assets”13 is, indeed, “the language of fiction, of deeming, and of unexplained analogy”. Birks criticises “obscure terms which have an unstable reference between event and technique”, giving as examples the terms “quasicontract”, “constructive trust” and “subrogation”.14 Yet, the ink that has been spilt on the question of its precise juridical nature suggests that there is no better instance of such an expression than “tracing”. In common with traditional analyses of this remedial process, Birks eschews a functional analysis of tracing as the allocation of entitlement to substituted assets, and focuses instead on that which is “traced” as an entity with a life of its own. The metaphor of tracing suggests that there is something “out there” being followed— some essence to which title attaches. Ultimately, it is difficult to see the advantage of exchanging talk of tracing things for talk of tracing value; the latter is as irredeemably metaphysical as the former.15 Birks’ own lapse into metaphor reflects the impossibility of simply “weeding out” such usage from legal doctrine and replacing it with more prosaic language without changing the law in the process. Often, such metaphorical reasoning brings with it its own form of logic that may lead the law in directions in which the courts would not otherwise venture. If we were to remove the metaphors completely we would be liable to feel utterly lost. Without the metaphysics, these doctrines need fresh justifications—and we would find that the positive law corresponds only imperfectly with any we might offer. (b) Is Tracing Restitutionary? What then is the attraction of depicting the doctrine in terms of tracing value? After rejecting the vivid rhetoric of transmuting things, why not shift to a description of the law as it functions—as the exercise of a power to assert title to particular assets as provided by the positive law? Why move instead to the metaphorical conceptualisation of the law as the process of identifying “paths of value” through transactions and claiming “surviving value”? A great attraction of analysing tracing in terms of value is that it suggests that the doctrine should be placed quite squarely in the law of restitution. Just as the metaphor of tracing things gains its power from its capacity to suggest that this form of judicial intervention is linked to conventional notions of property, the notion of tracing value is beguiling
12 Birks, An Introduction to the Law of Restitution at 7; and, for similar sentiments, see ibid. at 22 and 39. 13 P Birks, “Persistent Problems in Misdirected Money: A Quintet” [1993] LMCLQ 218 at 230. 14 Birks, An Introduction to the Law of Restitution at 75. 15 Similarly, Lionel Smith argues that talk of tracing things is metaphoric but assumes somehow that talk of tracing value is not: L Smith, The Law of Tracing at 15.
328 Restitution and Property Rites because it implies a connection with the law of restitution. Yet, ultimately, in both cases, the connection is a chimera. Birks regards tracing as “a restitutionary right”16 and the notion that tracing involves the identification of value suggests that it is essentially concerned with the reversal of unjust enrichment. Yet, is this necessarily so? While very often tracing will have this effect, by no means will this always be the case. Consider a situation in which B steals A’s car, and exchanges it for a motorcycle with C, who in turn exchanges it for a van with D. Our law allows A to bring a claim based on her rights to the van (the exchange-product of the car) against C through the process of tracing. Yet has C been enriched? B has obviously been enriched, as he now owns the motorcycle, which he acquired only as a result of trading it with the car he stole from A. On the other hand, if C had given full value for the car, the net worth of C’s estate would be unaffected by the fact that A’s property passed through his hands. A is given a remedy against C in these circumstances, not because C has been unjustly enriched, but because the rules of tracing provide that A may treat the van as if it were her property. The fact that tracing is not invariably restitutionary highlights how arbitrary it is. We can understand why we might choose to allow A a personal claim against C.17 This would serve to deter people improperly dealing with the property of others. Of course, this claim would be for compensation rather than restitution. However, the rules of tracing allow A to claim a constructive trust over the van.18 If the effect of the remedy is not restitutionary, it is difficult to see that there is any justification for giving A priority over C’s general creditors in bankruptcy.19 (c) The Retention of a Proprietary Base Another attraction of the metaphorical language of tracing is that it tends to obscure a lacuna in Birks’ analysis. He does not explain why the fact that one thing is exchanged for another indicates that the plaintiff should have a claim to it. In traditional tracing discourse, the gist of the justification is clear enough, if thoroughly metaphysical20: plaintiffs are able to trace their original asset into its proceeds and, consequently, they can enforce their property rights over those proceeds. In contrast, in Birks’ analysis, we are told in very formal terms that, where a particular asset has been acquired in exchange for another asset without
16
Birks, “Persistent Problems in Misdirected Money”, supra n. 13 at 232. Because of the view that an election to trace cannot retrospectively give rise to a claim of conversion, presumably the personal claim in this case would be for money had and received. See Lipkin Gorman v. Karpnale Ltd. [1991] AC 548 at 573 per Lord Goff. 18 While there is little authority for this proposition given the tendency to insist on a fiduciary relationship, the view that the proceeds of theft will be held on constructive trust was recently promoted by Lord Browne-Wilkinson in Westdeutsche Landesbank Girozentrale v. Islington LBC [1996] AC 669 at 716. 19 See supra, ch. 4.III. 20 See supra, ch. 5.II.1. 17
Proprietary Relief as Restitution 329 the owner’s consent, the proprietary base remains extant and hence a proprietary remedy is available. Yet we are not told why.21 Birks indicates that the only basis for asserting a proprietary claim to proceeds is by demonstrating that “at the beginning of the story he had a proprietary right in the subject matter, and that nothing other than substitutions or intermixtures happened to deprive him of that right”.22 Yet this conveniently assumes that the proprietary base subsists through substitutions and intermixtures without explaining why this should be so. Talk of tracing value tends to obscure this omission. As long as we think in terms of plaintiffs as tracing value from one thing to another, it seems convincing to say that a proprietary base must subsist—this base can be found in the value that is being traced. If, however, we were to drop the rhetoric of tracing and no longer assume that there is something that is actually followed from one asset to another, it becomes entirely unclear why we should say that the plaintiff’s “proprietary base” subsists. 2. Vitiated Transfers The proprietary base analysis seems to have little utility in this context. Where proprietary relief is made available in the aftermath of a vitiated transfer, it will often be easy enough to analyse the response as enforcing a subsisting proprietary base. However, this analysis will do nothing to assist us to explain or predict such outcomes. For the only indication of whether it may be said that a proprietary base survives is that a proprietary remedy is available. Certainly, Birks’ own analysis in this area has not proved very prescient. Conventional analysis of the resulting trust views the remedy as arising in order to give effect to the transferor’s intention to retain a beneficial interest in the property transferred or its proceeds.23 Birks challenged this view, arguing instead that, wherever an owner did not have the intention to pass title to the transferee, a resulting trust arises. In his view, the absence of a positive intention to confer title ensured that the transferor’s proprietary base subsisted.24 Moreover, Birks argued that a resulting trust would arise where an owner’s intention to transfer title was vitiated in some way. This suggested a role for the remedy that was far greater than had previously been envisaged. Ultimately, however, this view was rejected in large part for policy reasons by the House of Lords in Westdeutsche Landesbank Girozentrale v. Islington LBC.25 It is such considerations that should guide us in this context. 21 As Burrows observes, the idea of tracing as the identification of value surviving is not persuasive because, “without the link of ownership, it is hard to see what the force of value surviving is meant to be”: Burrows, The Law of Restitution at 373. 22 Birks, An Introduction to the Law of Restitution at 379. 23 W Swadling, “A New Role for Resulting Trusts?” [1996] LS 110. 24 P Birks, “Restitution and Resulting Trusts” in Goldstein (ed.), Equity: Contemporary Legal Developments (1992) 335; “Trusts Raised to Reverse Unjust Enrichment: The Westdeutsche Case” [1996] RLR 3. This view was further developed in R Chambers, The Resulting Trust (Oxford, Oxford University Press, 1997). For an analysis, see supra, ch. 6.II.2(b). 25 [1996] AC 669. See supra, ch. 6.II.2(c)(ii).
330 Restitution and Property Rites 3. Enrichment by Wrongs While in the case of tracing and subrogation it is rather difficult to understand why there is a subsisting proprietary base, in the context of enrichment for wrongs it is easy enough to appreciate Birks’ view that plaintiffs making such claims do not enjoy such a base. Thus, in terms of Birks’ analysis, because the plaintiff in Lister & Co v. Stubbs26 had never owned the secret commission received by his employee, he could not point to a proprietary base and his claim had to fail.27 A difficulty, of course, is that the decision in AG for Hong Kong v. Reid 28 runs counter to this analysis and so threatens the plausibility of the concept of the proprietary base. It is hard to see how the Hong Kong government could be said to have had a proprietary base in a bribe that the defendant received from a third party. On the other hand, since Reid, Birks has tentatively suggested that the case may be explained as an instance in which the events in question gave rise to a proprietary base.29 Yet if this is so, the same explanation could be offered in any situation in which a proprietary remedy is made available. This indicates that the concept is too malleable to provide a useful explanatory or predictive tool. To the extent that Birks takes account of policy considerations, he demonstrates a concern that proprietary rights “must not be lightly conceded” in view of their importance in insolvency.30 Subsequently, Professor Roy Goode has vigorously espoused the merits of the proprietary base concept as a means of limiting the potential of the constructive trust and other forms of proprietary relief to work injustice in bankruptcy.31 Yet, in this context, the “proprietary base” analysis is poorly designed to deal with such concerns. For instance, Birks suggests that, even where there is no subtraction from plaintiffs’ wealth, the fact that profits have been earned as a result of misusing their property may satisfy the requirement of a proprietary base and entitle them to proprietary relief.32 This conclusion is consistent with an essentialist view of property that any profits derived from the use of an object must belong to the owner of that object.33 Yet why should the distinction between those wrongs that breach property rights and wrongs which breach personal rights determine whether proprietary relief is available? It is not obvious that 26
(1890) 45 Ch. D 1. See supra, ch. 9.II. Birks, An Introduction to the Law of Restitution at 387–9. [1994] 1 AC 324. See supra, ch. 9.III. 29 See, e.g., P Birks, “Establishing a Proprietary Base: Re Goldcorp” [1995] RLR 83 at 84. 30 Ibid. at 378. 31 See R Goode, “Ownership and Obligation in Commercial Transactions” (1987) 103 LQR 433; “Property and Unjust Enrichment” in A Burrows (ed.), Essays on the Law of Restitution (Oxford, Clarendon Press, 1995) 215; “The Recovery of Directors’ Improper Gains” in E McKendrick (ed.), Commercial Aspects of Trusts and Fiduciary Obligations (Oxford, Clarendon Press, 1992) 135. 32 Birks, An Introduction to the Law of Restitution at 474. 33 See H Dagan, Unjust Enrichment (Cambridge, Cambridge University Press, 1997) 18; and “The Distributive Foundation of Corrective Justice” (1999) 98 Mich. L Rev. 138 at 148–9; C Rotherham, “Property and Justice” in M Kramer (ed.), Rights, Wrongs and Responsibilities (London, Macmillan, 2001) (forthcoming); cf. E Weinrib, “Restitutionary Damages as Corrective Justice” (2000) 1 Theoretical Inquiries in Law 1 at 11–12. 27 28
Proprietary Relief as Restitution 331 cases of enrichment resulting from the former type of wrongs present a stronger claim to priority than those flowing from the latter.
4. Quasi-matrimonial Property Relief Birks has invested little energy in this subject. He does not regard the judicial response in this area as restitutionary. In his view it is “a special class” of action for “‘economically oppressed quasi-spouses’, on behalf of whom public policy required a robust protective response”.34 This is just one example of a technique Birks has adopted to characterise some doctrines as policy motivated. In analysing the law of restitution, this has enabled him to isolate some doctrines from the “principled” mainstream of restitution that consists only of those doctrines that can be analysed in volitional terms as responding to non-voluntary transfers or free acceptance, or as reversing enrichment for wrongs.35 Birks is right to argue that judicial intervention in this area is not restitutionary.36 However, while his reliance on a dichotomy between policy and principle reflects a perspective that is pervasive in the analysis of proprietary remedies,37 it is ultimately unsustainable and unhelpful.38
5. Subrogation Perhaps no doctrine throws the inadequacies of Birks’ account of proprietary remedies into sharper relief than does subrogation. For very few instances in which the courts permit a plaintiff to assume the proprietary rights of another by subrogation can be forced within the proprietary base theory. Birks suggests that we should cast the language of subrogation aside. In his view, “[t]he metaphorical nature” of subrogation: is brought out by the fact that exactly the same conclusion can be expressed without speaking of any substitution. It could be said simply that I acquire a right having characteristics and content identical to that formerly enjoyed by the [lender]. . . . [T]he notion of a substitution is vivid. But strictly speaking it is unnecessary.39
34 Birks, An Introduction to the Law of Restitution at 57. See also brief discussions of the area at 127–8 and 285. That Birks did not characterise the area as responding to the parties’ common intention perhaps reflects that fact that his monograph was written at a time in which, thanks largely to the contribution of Lord Denning MR, the basis for judicial intervention in this context was unsettled. See supra, ch. 10.IV.2(a)(iii). 35 Also analysed in this way, e.g., are cases that reflect a policy of “encouragement of rescue at sea”: ibid. at 304. 36 See supra, ch. 10.II.2. See also Burrows, The Law of Restitution at 38. 37 See supra, ch. 3.IV. 38 See supra, ch. 10.VI. 39 Birks, An Introduction to the Law of Restitution at 95.
332 Restitution and Property Rites This is surely right. Yet we could make the same observation about the rhetoric of tracing. However, not only has Birks clung to “vivid” notions of substitution that pervade tracing discourse rather than abandoning them for a more prosaic account of the remedy, he has sought to import those notions into the analysis of subrogation. While rejecting the metaphoric language of subrogation, Birks has turned to the equally metaphorical language of tracing. Thus, for Birks, subrogation is about the capture of surviving enrichment. The debtor is enriched to the extent that the surety has met the debtor’s obligations, and the surety should be able to recover this enrichment. In Birks’ view, “the plaintiff’s money” may be “traced into this negative species of surviving enrichment”.40 Thus, proprietary claims should be available where money paid by or received at the expense of the plaintiff has had the effect of discharging a security. To Birks, this is no different from a plaintiff asserting rights over a car acquired by the defendant using the plaintiff’s money.41 He concludes that: if the plaintiff’s circumstances were such that, had the money which was received from him been spent on some corporeal asset or been put into a mixed fund, he would have been entitled to a claim in rem in the enrichment identified as surviving at the time of the claim, then, if the money is instead traced into a discharged mortgage, he ought to be able to revive that security. . . . The crucial fact is that the money passed to you through an event in which my proprietary base was preserved.42
There is something conclusory about this explanation. Why is the plaintiff’s proprietary base “preserved” in these circumstances? While this issue arises in relation to tracing generally, it is particularly puzzling in this context. We apparently have to be content with Birks’ view that the absence of any tangible thing into which we may trace is no obstacle to the preservation of the plaintiff’s proprietary base. Thus, in Birks’ account, subrogation is effectively reduced to a form of tracing. Yet, if this is so, why has it not conventionally been characterised in these terms? The problem with any account of tracing something into a “negative species of enrichment”, such as an extinguished security, is that the interest into which we trace is too abstract for the metaphor of tracing to capture our imagination in the same way as it does with claims made against subsisting assets. Tracing is not capable of performing the ritual of obfuscation that is needed to shift our attention from the readjustment of property rights that takes place in this context. Consequently, instead of employing tracing, which puts the matter in terms of the substitution of the locus of enrichment, we employ subrogation, which conceptualises the matter in terms of the substitution of right holders. 40
Birks, An Introduction to the Law of Restitution at 96. Ibid. 42 Birks, An Introduction to the Law of Restitution at 390. Birks refers to situations in which the plaintiff “for reasons of his own pays off the defendant’s mortgage” (citing Ghana Commercial Bank v. Chandiram [1960] AC 732). Presumably he may apply the same reasoning to explain the rights conferred upon sureties who have been called upon to fulfil the principal debtor’s obligations (see supra, ch. 11.IV.1). However, the ascription of such an intention to sureties in these circumstances would be even more artificial than it is in other contexts. 41
Proprietary Relief as Restitution 333 Whatever other difficulties Birks’ account of subrogation possesses, it fails comprehensively as an analysis of the positive law. There are some instances in which the law allows a plaintiff to revive a vendor’s lien or a mortgagee’s interest in which the plaintiff clearly has a proprietary right until the point that the interest in question is discharged.43 However, the law goes beyond this and permits subrogation when plaintiffs were motivated to make the payment in question by a mistake. Birks offers two explanations for this result. First, where there is a contract between the lender and the mortgagee, he is content to rely on the presumption that such plaintiffs intend to keep the security in question alive for their own benefit.44 Not only is this plainly an unsatisfactory fiction,45 it sits uneasily with Birks’ own criticism of such devices.46 Secondly, where there is no valid contract between the lender and the mortgagor or mortgagee, Birks argues that the effect of a mistake is that the lender retains a proprietary base.47 Yet, it is unlikely that such a mistake would, in itself, give the plaintiff a proprietary interest in the money transferred.48
6. Rights Preventing Over-indemnification or Over-compensation Birks suggests that Lord Napier and Ettrick v. Hunter 49 “may be the rare exception” to the rule that “the claimant must have an orthodox proprietary base” in order to establish a proprietary remedy and that the case is “not a model for future judicial action”.50 However, this analysis has not been heeded by the courts, which have indeed used that case as a guide for development.51 Moreover, Napier v. Hunter need not be regarded as an entirely isolated example of a proprietary remedy arising by operation of law to prevent over-indemnification or over-compensation. A parallel may be drawn between the approach taken in that case and the trust arising in favour of a carer of a tort victim over moneys recovered from a tortfeasor.52 In addition, there is some suggestion that, where a plaintiff is allowed to recover for a breach of contract where the risk of loss is actually with another, the moneys recovered will be held on trust for the benefit of the party who has actually suffered the loss.53
43 See, e.g., Boscawen v. Bajwa [1995] 4 All ER 769; McCullough v. Marsden (1919) 45 DLR 645. See supra, ch. 11.III.1. 44 Birks, An Introduction to the Law of Restitution at 390. 45 See supra, ch. 11.I.2. 46 See supra, text accompanying n. 12 . 47 Birks, An Introduction to the Law of Restitution at 393. 48 See, e.g., Morley v. Morley (1855) 5 De GM & G 610; Butler v. Rice [1910] 2 Ch. 277; Ghana Commercial Bank v. Chandiram [1960] AC 732. See supra, ch. 11.III.2. 49 Lord Napier and Ettrick v. Hunter [1993] 1 AC 713. See supra, ch. 12.I. 50 “Proprietary Restitution: An Intelligible Approach” (1995) 9 Trusts Law International 43 at 44. 51 Lonhro v. Export Credit Guarantee Department [1996] 2 Lloyd’s Rep. 649. See supra, ch. 12.II. 52 Cunningham v. Harrison [1973] QB 942; Hunt v. Severs [1994] 2 AC 350. See supra, ch. 12.IV. 53 Joseph v. Knox (1813) 3 Camp. 320. See supra, ch. 12.III.
334 Restitution and Property Rites 7. Proprietary Estoppel Birks accepts that, to the extent that proprietary estoppel is concerned with the enforcement of expectations, it “belongs to contract and has nothing to do with restitution”.54 However, he argues that estoppel by acquiescence is concerned with the reversal of unjust enrichment. In making this distinction, he draws a line between “inducing” and “not undeceiving” expectations.55 This distinction is understandable. Fulfilling expectations in acquiescence cases is objectionable in terms of a vision of the private law according to which obligations arise only where they are voluntarily assumed or are imposed to provide compensation or restitution for a breach of another’s rights. Equally, the provision of proprietary relief in estoppel by acquiescence cases conflicts with the notion that property rights are to be redistributed only with an owner’s consent. Thus, Birks’ analysis envisages a limitation on the relief provided in cases in which it is difficult to say that the owner promised the interest claimed.56 Nonetheless, the distinction favoured by Birks is certainly not one consistently drawn by the judiciary. Indeed, in many cases involving acquiescence, the courts have given relief that has enforced the defendant’s expectations.57 Consequently, Birks has been criticised for “dismembering presently intelligible doctrines to satisfy restitution’s imperialism”.58 Ultimately, there has been little support for the suggestion that restitution should be the proper measure of relief in this area. In fact, courts and scholars have shown more interest in examining the extent to which relief in estoppel cases should be limited to reliance loss.59 Birks is particularly concerned with the “remedial uncertainty” that marks this field of law.60 He notes that the discretion that the courts have countenanced in proprietary estoppel poses “special intellectual difficulties for the organisation of Restitution, because at the moment it is impossible to say, till after the court has spoken, whether a restitutionary or a non-restitutionary response will be made”.61 Indeed, the discretionary nature of the process of awarding proprietary relief in this area poses real problems for his account of proprietary remedies. For one thing, given the use of the constructive trust as a remedy in proprietary estoppel cases, it is difficult to accept Birks’ assertion that the remedial constructive trust is not part of English law.62 Secondly, it is equally difficult to see that the provision 54
Birks, An Introduction to the Law of Restitution at 292. Ibid. at 291. 56 On the difficulties in analysing estoppel by acquiescence cases as involving an informal agreement see supra, ch. 13.II.1. 57 See, e.g., ER Ives. Investment v. High [1967] 2 QB 379. See J Dietrich, Restitution: A New Perspective (Sydney, Federation Press, 1998) 86. 58 P Finn, “Mr Beatson’s ‘Unfinished Business’ ’’ (Unpublished Paper delivered to Restitution Group SPTL Conference Aberdeen 1991) 15–16; cited in Deitrich, supra n. 57, at 84. 59 See supra, ch. 13.III.1. 60 Birks, An Introduction to the Law of Restitution at 290. 61 Ibid. at 293. 62 See, e.g., P Birks, “The End of the Remedial Constructive Trust?” (1998) 12 Trust Law International 202. See also supra, ch. 1.III.4–5 and ch. 2.III.1. 55
Proprietary Relief as Restitution 335 of proprietary relief in estoppel by acquiescence cases can be explained in terms of Birks’ proprietary base analysis.
II . THE
“ PROPRIETARY
BASE ” AS AN EXPLANATION FOR PROPRIETARY REMEDIES
Birks argues that “[i]f we know the reason for restitution, we know where to find the cases on how property behaves in relation to that reason”.63 His rhetoric is oddly both positivistic and naturalistic; while he aims “to look downward to the cases”,64 his language rather suggests that property is an entity with a life of its own, and not simply a set of rules determined for instrumental reasons. In his view, the courts “must discover the proprietary base on orthodox principles”.65 Yet what is orthodox in this convoluted area? Elsewhere, Birks suggests that the issues surrounding the availability of proprietary remedies should be resolved through “tough legal reasoning . . . in the traditional style of the law of property, with the emphasis on legal certainty, against a background in which it is taken for granted that property rights must be closely defined precisely because they hurt third parties”.66 Yet, how can it be said that the fictions and metaphors that litter this area of the law represent “tough legal reasoning”? And what does Birks’ newly developed proprietary base concept have to do with “the traditional style of the law of property”? The proprietary base has a strange relationship with the more familiar concept of property. This new entity seems to amount to some odd residue of property— something which “subsists”, even when it is clear that there is no continuing proprietary interest. The concept is used to fulfill a similar function to property in delineating a sphere of legitimate judicial action.67 The attraction of the notion of a subsisting proprietary base seems to lie in its capacity to suggest that the courts are not involved with the redistribution of property rights.68 However, the proprietary base is too anæmic and unfamiliar a concept to convince us in this regard. In Birks’ theory the line between ownership and obligation begins to blur. Ultimately it begs the question. If property is less than inviolable, what is a “proprietary base” and why is it a necessary prerequisite for proprietary relief? We intuitively understand the rationale behind a claim to protect pre-existing rights to particular assets. However, when described in terms of the proprietary base, the basis for the remedies of tracing and subrogation remain obscure. It is difficult not to conclude that the notion of the proprietary base breaches one of the fundamental tenets of Birks’ own method, as is apparent in his adoption of the principle of “Occam’s razor” according to which: “entities are not to be 63
P Birks, “Trusts Raised to Reverse Unjust Enrichment”, supra n. 24 at 5. Birks, Introduction at 23. Birks, “Establishing a Proprietary Base”, supra n. 29 at 85. 66 Birks, “Trusts Raised to Reverse Unjust Enrichment”, supra n. 24 at 15. 67 See supra, ch. 2.II.1. 68 In Birks’ view, such exercises should be undertaken only by the legislature: Birks, “Establishing a Proprietary Base”, supra n. 29 at 84. 64 65
336 Restitution and Property Rites multiplied without necessity”.69 From another point of view, it could be said that the concept provides a rather less effective ritual than those that it is intended to replace. Notions of “tracing things”, of subrogation and of fictional intention, connect the remedies given with the conceptual system that structures private law discourse.70 In contrast, the unfamiliar notion of the proprietary base says nothing to us.71 What is more, malleable as it is, the proprietary base does not appear capable of accommodating a number of doctrines that permit interference with property rights. Thus, it is difficult to see how, for example, proprietary estoppel, many instances of subrogation, the relief given in AG for Hong Kong v. Reid, proprietary relief in cases of overindemnification or over-compensation and the approach taken in the context of equitable liens can be reconciled with Birks’ prescriptions. Birks argues that, while “[c]ivilian systems do not like the idea of unjust enrichment reversed through proprietary as opposed to personal rights, . . . the common law takes a different view”.72 This is a misconception. From the fact that we interfere with property rights, it does not follow that we are quite comfortable with the matter. Indeed, the great difficulty we have in openly recognising redistributive remedies does much to explain the contorted jurisprudence in this area. Fictions and similar contrivances allow the law to function in ways that diverge from ideals that a legal culture would like to regard as inviolable. However, the cost of such formal consistency is a degree of substantive irrationality that precludes the possibility of deducing a logical normative structure from the law.
III . RATIONALISING RESTITUTION : THE LIMITS OF THE PROJECT
Birks’ analysis of the law of proprietary remedies can be understood as the product of a broader methodological vision. His work reflects a positivistic stance combined with a commitment to revealing the underlying logic of the law.73 Suspicious of legal realism and its legacy, Birks is sanguine about the prospects of “a rational science of the common law” and of what can be achieved through “a sound taxonomy”.74 He draws parallels between his endeavour to reveal the “anatomy” of the law of restitution and that of the writers of nineteenth-century contract treatises.75 The comparison is apposite but problematic, for that tradition 69
Birks, An Introduction to the Law of Restitution at 75. See supra, ch. 2.IV.3. 71 An indication of this is that Birks does not connect the proprietary base with his analysis of “unjust factors” that indicate when restitution should be available. See Burrows, The Law of Restitution at 372. 72 P Birks, “Overview, Claiming and Defences” in P Birks (ed.), Laundering and Tracing (Oxford, Oxford University Press, 1995) 317. 73 His analysis of unjust enrichment is not designed to “lead or change the law but only to provide a text to structure the analysis of all the circumstances in which the cases incoherently require that restitution should happen”. P Birks, “Restitution and Freedom of Contract” [1983] CLP 141 at 159. 74 P Birks, “Equity in the Modern Law: An Exercise in Taxonomy” (1996) 26 UWALR. 1 at 4. 75 Birks, An Introduction to the Law of Restitution at 2. 70
Proprietary Relief as Restitution 337 has recently been reinterpreted as having brought unity to the private law largely by imposing upon it a framework derived from a particular vision of social order.76 Consequently, others have recalled the rationalisation of contract law in that period in order to question the legitimacy of contemporary developments in restitution scholarship.77 In Birks’ view, his analysis of restitution “is a scheme for better ordering specific instances” of restitution and “adds nothing to the existing law and effects no change except what comes from better understanding what is there already”.78 It was in response to this assertion that the Australian academic and Federal Court Judge W.M.C. Gummow observed: The difficulty is that the formulation of a scheme for better ordering specific instances in the decided cases involves the making of exceptions and qualifications so that in the end the outlines of the scheme are Gothic rather than classical. Further, in the quest for symmetry, there will also be a temptation to fit decided cases within the scheme when this can only be done by adding or subtracting from what in truth, on any proper reading, the case really decided.79
This is a fair criticism of Birks’ project. As an explanation for legal rules, he tends to seek not policy rationales, but legal principles: underlying concepts that generate legal rules. This reflects the assumption that the doctrines that he is examining form a coherent system developed as a response to the logical dictates of unjust enrichment. The analysis crumbles if it can be shown that the law in this area has been shaped by less logical considerations. The reality is that the common law has developed in a piecemeal fashion under the influence of judges and jurists of divergent legal and political visions. Moreover, the norms that have been handed down to us are often the result of highly metaphysical musings of a variety that would be better left in the past. Birks’ efforts to deduce principles from the positive law have been most successful when the principles he has offered have some intuitive normative appeal. For instance, his account of the law of enrichment by subtraction is both plausible as an interpretation of the positive law and normatively persuasive because it is structured largely by notions of volition.80 We are likely to find the concepts upon which he relies intuitively plausible because we understand that volition must play an important role in any adequate moral theory and because it seems likely that
76 The classic analysis is, of course, P Atiyah, The Rise and Fall of Freedom of Contract (Oxford, Clarendon Press, 1979). 77 S Hedley, “Restitution: Contract’s Twin?” in DF Rose (ed.), Failure of Contracts: Contractual, Restitutionary and Proprietary Consequences (Oxford, Hart Publishing, 1997) 247. See also P Atiyah, “Contracts, Promise, and the Law of Obligations” in Essays on Contract (Oxford, Clarendon Press, 1990) 10 at 48. 78 Birks, supra n. 2 at 27. 79 WMC Gummow, “Unjust Enrichment, Restitution and Proprietary Remedies” in P Finn (ed.), Essays on Restitution (Sydney, Law Book Co, 1990) 47 at 55. 80 In Birks’ account, transfers may be regarded as being non-voluntary in the sense that the plaintiff’s intention was either completely absent, vitiated or qualified. See Birks, supra n. 2 at 100–3.
338 Restitution and Property Rites judges, in deciding cases, must have felt the pull of considerations of this nature.81 In contrast, some of the concepts that Birks has formulated do not have such resonance. Not only do some of these concepts not appear to turn on any moral distinction that we would readily recognise as significant, they sometimes seem too malleable to assist us to explain or predict the law. An example is Birks’ thesis that the availability of restitution for wrongs could be explained by a distinction between anti-harm and anti-enrichment wrongs.82 According to Birks, where the purpose of recognising the wrong was the prevention of harm as opposed to the prevention of enrichment, recovery would be restricted to compensation for loss. Yet, in general, it seems impossible to judge in the abstract whether a wrong is one type or the other. Whether a wrong is directed at enrichment or harm can only really be determined by examining the remedies that are given. It follows that Birks’ analysis produces an unhelpfully circular explanation: restitution is given because what is involved is an anti-enrichment wrong—a conclusion that can be deduced only from the fact that restitution is given. If we want to understand why a particular remedy is or should be given, we would do better to focus on the policy considerations that motivated the recognition of the wrong in question. Moreover, the availability of restitutionary damages may well be linked not simply to the type of wrong involved, but to additional considerations such as the blameworthiness of the defendant.83 Indeed, Birks eventually conceded that, in explaining this area of law, “there is no hope of certainty in the pursuit of a purely conceptual line” and, instead, offered a compelling analysis of the policy concerns at issue in this context.84 A similar change of direction would improve Birks’ analysis of the law of proprietary remedies. Constructs such as “surviving value” and the “proprietary base”, like the notion of anti-enrichment wrongs, are unlikely to shed much light on the problems faced in this context. The sooner we recognise the limits of conceptual analysis and shift our focus to the questions of policy at issue, the better. IV . CONCLUSION
The law of proprietary remedies reflects some of our anxieties about social order and the legitimacy of judicial law-making. The strange doctrines that we find in this area are best understood as rituals for assuaging these anxieties. As Felix Cohen noted long ago, property is one of the “magic ‘solving words’ of jurisprudence”, and reasoning about property is apt to degenerate into “transcendental nonsense”.85 Much of the reasoning found in this area of law is essentially 81 Thus, Birks’ account of this area is very much the same as that offered by Ernest Weinrib in his more openly normative account of restitution as a form of corrective justice. See Weinrib, supra n. 33. 82 Birks, An Introduction to the Law of Restitution at 328. 83 See, e.g., Dagan, supra n. 33 at 101–5. 84 P Birks, Civil Wrongs: A New World (London, Butterworths, 1991) 97. 85 F Cohen, “Transcendental Nonsense and the Functional Approach” (1935) 35 Col L Rev 809 at 820.
Proprietary Relief as Restitution 339 irrational. As a consequence, the quest to distill from this area some underlying rational structure is misconceived. Ultimately, a jurisprudence built on metaphors, fictions and obfuscatory evidential devices is apt to deflect our attention from fundamental normative questions. If we are to rationalise this area, to a large degree we must remake it anew.
Part IV
Conclusion
16
Conclusion: Redistributive Proprietary Remedies and the Moral Limits of Property I . REDISTRIBUTIVE PROPRIETARY REMEDIES AND THE ABSOLUTIST PARADIGM OF PROPERTY
1. The Diversity of Property and the Implausibility of the Absolutist Paradigm to understanding the law of proprietary remedies lies in grasping the centrality of an absolutist conception of property in English legal thought. Much of the complexity of the law in this area arises from the fact that often these remedies cannot be reconciled with the notion that property cannot be redistributed without an owner’s consent. The second part of this book offers an examination of doctrines that provide for the creation or transfer of rights of ownership and security. While this does not purport to provide an exhaustive account of the ways in which judicially developed doctrines provide for the redistribution of property rights,1 it provides an indication that the doctrines in question need not be regarded as anomalous. Rather, these doctrines can be understood as part of a rich tradition within our law that recognises the moral limits of property.
T
HE KEY
2. The Obfuscation of Redistribution and its Consequences What most of the doctrines that provide for the redistribution of property have in common is that they are clothed in fictions, metaphors and convoluted evidential 1 A full account of judicial redistribution of property would include means of acquiring easements through prescription. See, e.g., J Gaunt and P Morgan, Gale on Easements (16th edn., London, Sweet & Maxwell, 1997) 169–234. It would also discuss self-help remedies such as the common law possessory lien and the law of distress. In addition, such an account would have to consider the readiness of the courts to limit owners to damages in lieu of an injunction to prevent a continuing breach of property rights thereby effectively either awarding positive easements (see e.g., Jaggard v. Sawyer [1995] 1 WLR 269) or abrogating negative easements (see, e.g., Carr Saunders v. Dick McNeil & Associates [1986] 1 WLR 922). Finally, such a work would require an account of defences available to bona fide purchasers. See, e.g., W Swadling, “Restitution and Bona Fide Purchase” in W Swadling (ed.), The Limits of Restitutionary Claims: A Comparative Analysis (London, UKNCCL, 1997) 79.
344 Redistributive Proprietary Remedies devices. The obfuscatory manner in which these doctrines are framed attests to the power that the axiom that the judiciary cannot redistribute property continues to exercise in our legal culture. Given the centrality of the notion that property rights are free from expropriation in our legal tradition, it may be thought that particularly cogent reasons will be needed to support a redistributive remedy. However, the unease generated by the spectre of redistribution promotes an arcane discourse that obscures rather than explains judicial practice in this context. The result is that judicial intervention to redistribute property is generally not openly justified. The question whether a proprietary remedy should be provided in particular circumstances is not subjected to adequate scrutiny by those who are participants in the process of initiating, maintaining and extending these remedies, who are often beguiled by the fictions and metaphors that litter this area.
II . THE NEED FOR A NORMATIVE DISCOURSE OF PROPERTY
1. Property and Justice David Hume once commented that: Those . . . who make use of the word, property, or right, or obligation, before they have explain’d the origin of justice, or even make use of it in that explication, are guilty of a very gross fallacy, and can never reason upon any solid foundation. A man’s property is some object related to him: This relation is not natural, but moral and founded upon justice. ’Tis very preposterous, therefore, to imagine, that we can have any idea of property, without fully comprehending the nature of justice . . . The origin of justice explains that of property.2
The discourse that characterises the law of proprietary remedies bears out Hume’s analysis. The development of legal concepts, such as property, inevitably gives rise to basic questions of justice. When these issues are suppressed, as they often are in English law, two observations may be made. First, we have failed to offer a legitimate justification for the outcome in the case before us and for the precedent it creates. Secondly, we have failed to provide a defensible rationale or principle to guide the application and development of the relevant legal norm in the future. When developing new norms or explaining the principles underlying particular doctrines in order to determine their proper limits, we need some notion of the interests that property rights serve to promote. Without such an understanding, in working with a particular doctrine, future decision-makers, as Hume observed, “can never reason upon any solid foundation”.
2 D Hume, A Treatise of Human Nature (ed. LA Selby-Bigge and PH Nidditch, 2nd edn., Oxford, Clarendon Press, 1978) 491.
Conclusion: The Moral Limits of Property 345 Consequently, it would be wise to treat much property talk with caution. For, as Kevin Gray—who has explored the moral limits of property in relation to rights of exclusion so fruitfully3—has noted: We are still not far removed from the primitive, instinctive cries of identification which resound in the playgroup or playground: ‘That is not yours; it’s mine . . . Almost all of our everyday reference to the property concept is unthinking, naive and relatively meaningless. Property talk is generally careless and vacuous; property talk is mutual deception. In our crude way we are seldom concerned to look behind the immediately practical or functional sense in which the term is employed.4
This criticism is particularly true of the law of proprietary remedies, where the analysis of judges and jurists is littered with metaphor and fiction.
2. From the Absolutist Paradigm to a New Discourse The notion that property is inviolable serves to delineate neatly the power of the judiciary from that of the legislature. However, when the obfuscatory discourse pervading the law of proprietary remedies is peeled away, it becomes clear that the notion that the judiciary has no role in redistributing property rights is not tenable. The multitude of situations in which judicially created doctrines provide for the readjustment of proprietary interests makes it apparent that in some circumstances the judiciary cannot resist the urge to intervene in this way. The recognition of this is an essential preliminary step to a more rational discourse in this area. The possibilities offered by such a shift in legal discourse are illustrated by a tendency of courts in the United States, Canada, Australia and New Zealand to consider redistributive proprietary remedies openly.5 This change in attitude has its roots in the thought and practices of American legal realism that emerged partly as a cause, and partly as an effect, of the breakdown of the classical legal vision in the United States. In legal realist discourse, property is viewed less as a fundamental limit to judicial intervention than as a product of it. The benefits of and obstacles to a shift toward a more open discourse in this area in English law are apparent when one compares the state of the doctrine of subrogation with that of tracing. In analysing subrogation, the judiciary has to some extent managed to extricate itself from the enslavement by metaphors and fictions that continues to mar the law of tracing. We have managed to accept that subrogation does not require plaintiffs to be given all the privileges enjoyed by those into
3 See K Gray, “Property in Thin Air” [1991] CLJ 252; K Gray, “Equitable Property” (1994) 47(2) CLP 157; K Gray and SF Gray, “Private Property and Public Propriety” in J McLean (ed.), Property and the Constitution (Oxford, Hart Publishing, 1999) 11. See also J Singer, “The Reliance Interest in Property” (1988) 40 Stan. L Rev. 611; J Singer, “No Right to Exclude: Public Accommodations and Private Property” (1996) 90 North Western University L Rev. 1283. 4 K Gray, “Equitable Property”, supra n. 3 at 159. 5 See supra, ch. 3.
346 Redistributive Proprietary Remedies whose shoes they step.6 On the other hand, we are unable to take the metaphor of tracing less literally, as illustrated by the assumption that plaintiffs who trace must be entitled to recover the product of their property regardless of its value.7 We have recently witnessed judicial efforts to deconstruct subrogation: to get behind the rhetoric that beguiled our forebears and to identify a rationale that could be used to explain existing case law and to guide future development. In contrast, our efforts to understand tracing continue to be hampered by metaphor.
3. The Nature of the New Discourse A willingness to recognise the redistributive nature of some proprietary remedies need not require us to abandon completely our understanding of what property entails. If property is to remain a meaningful concept, there will have to be consequences that customarily follow from the fact that particular resources are owned by one party. In this way, we can accept what is one of the core premises of our legal tradition—that we should have a private law: a body of norms that provides the basis of a sphere of individual freedom and that is relatively free from distributive considerations. However, through convention we may establish exceptions where, in the interests of justice, the ordinary consequences of property will not apply. The private ordering model associated with the absolutist conception of property may not be natural, but it contains a core of good sense. While the absolutist paradigm of property generally provides an effective means of maintaining a just distribution of entitlements, there are situations in which departures from it may be merited.8 The absolutist approach to property serves us well enough where the market functions properly. Where this is the case, the market may be regarded as “a morally free zone”.9 However we should be prepared to intercede when the premises upon which our faith in markets is based are absent. For example, the intervention of the courts in distributing property rights in the context of intimate relationships may be justified because those in such relationships do not generally act as rational welfare-maximising individuals and there may be problems with asymmetries of information.10 In addition, redistribution of property may be justified in order to confer priority in bankruptcy. A different set of considerations arises here, as bankruptcy already represents an interference with the market: assets are marshalled and distributed equally to creditors of the same class. Against this background, courts have stepped in and readjusted property rights in order to give priority to certain claimants rather than leaving them to share pari passu with unsecured creditors. 6 7 8 9 10
Banque Financière de la Cité v. Parc (Battersea) Ltd. [1999] 1 AC 221 at 236 per Lord Hoffmann. Foskett v. McKeown [2001] 1 AC 102; Jones & Sons (Trustee) v. Jones [1997] Ch. 159. See, e.g., supra, ch. 10.IV.3–5. See, e.g., J Coleman, Risks and Wrongs (Cambridge, Cambridge University Press, 1992) at 4. See supra, ch. 10.IV.5, ch. 11.IV.1(b) and 12.IV.
Conclusion: The Moral Limits of Property 347 Here we must have regard to considerations of desert on the part of both plaintiffs and general creditors. In particular, we need to determine the extent to which involuntary restitution creditors should have privileged treatment in this context, taking into account the costs imposed on those administering insolvent estates. At present there is little consistency across the law of proprietary remedies. Thus, while the suggestion that a mistake may give rise to a constructive trust has attracted great suspicion,11 it is well established that mistakes of different kinds allow plaintiffs to acquire proprietary rights by subrogation.12 It is time that some consistency was brought to the judicial treatment of these issues.
4. Toward a Jurisprudence of Redistribution The determination of the objects and content of property rights plays a role in the distribution of resources and in setting the limits of personal freedom. It is too important a task to be shrouded in a discourse of fiction and metaphor. It is time to embrace fully the implications of the fact that property is socially constructed and to take responsibility for its content. This requires a willingness to engage in normative argument that has been largely absent from the law of proprietary remedies. This, however, need not require us to rethink the law of property anew. By more openly acknowledging instances where the law departs from the absolutist paradigm of property, rather than hiding such departures through an array of obfuscatory devices, we may formulate a better understanding of the normative foundations of property. In the process we may develop what the common law has long lacked: a justificatory theory for the redistribution of property rights.
11 12
See supra, ch. 6.II.2(a). See supra, ch. 11.III.2.
Index Australia: proprietary estoppel, 300–1 Bankruptcy: priority, justification for, 77–86 assumption of risk rationale, 81–7 circularity of property-based justifications, 78 contract and restitution plaintiffs distinguished, 81–7 efficiency, 78–9 fault and voluntary creditors, 83–4 justice between creditors, 80–1 justification for remedies, 77–9 restitution as corrective justice, 79–80 swollen assets rationale, 79–81 voluntary creditors, 83–5 significance of proprietary relief, 77 specific relief, 76–7 voluntary creditors, 83–5 Beneficiaries: constructive trusts: rights, 23–4 Bills of exchange: subrogation, 266–67 Change of position defence: subrogation, 269–71 secured creditors, 270–71 unsecured creditors, 271 tracing: actions for money had and received, 98 availability of defence, 110 normative justifications for rights against third parties, 71–4 Coke, 7 Constructive trusts: automatic vesting of rights, 26–31 basis for institutional/remedial constructive trust distinction, 26 legal certainty, 28 merits, 29–31 requirement, 26–7 sanctity of property, interests contrary to, 28–9 timing of interest, 27–8 beneficiaries: rights, 23–4 content, 20–4 beneficiaries rights, 23–4
innocent trustees, liability of, 22–3 trustee’s duties, 20–2 different uses, 10–12 discretionary remedy, whether, 24–6 duties of trustees, 20–2 facilitative institutions and remedies, 14–16 fiduciary relationships, protection of, 16–20 outside fiduciary relationships, use, 18–20 innocent trustees, liability of, 22–3 over-compensation, sums obtained from third parties to prevent, 275–89, 333 assured’s rights over over-indemnified insurer, 284–86 benefit of another, sums recovered for, 286–88 carers of tort victims rights, 288–89 insurers’ rights against indemnified assured, 275–83 remedial: automatic vesting of rights, 26–31 Chancery courts, development by, 8–9 content of trust, 20–4 different uses, 10–12 discretionary, whether, 24–6 distrust of notion, 7 facilitative institutions and remedies, 14–16 fiduciary relationships, protection of, 16–20 historical development, 6–10 origins, 6 Re Omegas, 60–3 redistributive, as, 31–2 remedial/institutional dichotomy, 12–33 repugnant to legal certainty, interests, 28 rights and remedies, dichotomy between, 13–16 sanctity of property, interests contrary to, 28–9 timing of interest, 27–8 United States, 60–3 uses, 10–12 remedial/institutional dichotomy, 12–33 rights and remedies, 13–16 sanctity of property, interests contrary to, 28–9 trustees: duties, 20–2 innocent, liability of, 22–3 United States: formalism in theory, 57–9 remedial constructive trust, 60–3 uses, 10–12
350 Index Eminent domain, law of, 52–4 Enrichment by wrongs, 177–96, 330–31 AG for Hong Kong v. Reid, 188–95 deducing ownership from obligation, 188–95 creditors, interests of, 188–90 equity regards as done that which ought to be done, 193–94 evidential presumption of fiduciary’s intention, 191–92 divergence between formal principle and policy, 190–91 North American thought, 195–96 principle in Reid, 188 formalism, 196 Lister v. Stubbs, 182–88 ownership/obligation distinction, 182–88 divergence between formal and normative justifications, 183–86 methodology underlying, 186–88 ownership/obligation distinction, 182–88 policy concerns motivating, 183 premises underlying, 186–88 secret commissions, 182 normative analysis, 178–82 bankruptcy, justification for priority in, 178–80 identification difficulties, 180–81 reasons other than priority, 181 North American legal thought, 195–96 secret commissions, 182 Equitable liens, 314–22 meaning, 314 mistakenly improved land, 322 salvaged property, 315–16 solicitor’s, 317–22 inchoate nature of rights, 319 limitations, 322 meaning of proprietary rights, 319–20 nature of solicitor’s rights, 317–18 possessory rights, 318–19 third party protection, 320–21 trustee’s lien, 316–17 uses, 314–15 Estoppel, see Proprietary estoppel Fiduciary relationships: constructive trusts, 16–20 North American law, 18 Formalism: enrichment by wrongs, 196 instrumentalism contrasted, 67–9 Instrumentalism: approaches to property, 49–69 common law jurisdictions, 63–7 availability of proprietary relief, 64–7 liberation of constructive trust, 63–4 formalism contrasted, 67–9
property, 49–69 American legal thought, 49–57 common law jurisdictions, 63–7 formalism and instrumentalism contrasted, 67–9 proprietary remedies in US law, 57–63 United States, 57–63 early remedial constructive trust theory, 57–9 realism, 59–60 remedial constructive trusts, 60–3 Intimate relationships, division of assets on breakdown of, 197–244, 331 absolutist conception of property, 220–21 agreement or promise, requirement for, 199–201 autonomy, intimacy as loss of, 221–24 causal connection between contributions and assets, 231–35 economics of intimacy, 225–26 evidential difficulties, 203–5 expectations of plaintiff, 202 generally, 197–99 inapplicability of conventional property norms, 212–30 absolutist conception of property, 220–21 distributive norms, 212–13 institutional considerations, 230–31 legal doctrine, 213–20 market failure, intimate relationships as, 225–30 premises, 221–25 information problems, 225 institutional considerations, 230 judicial intervention, justification for, 199–208 agreement or promise, requirement for, 199–201 commercial partnership analogy, 207–8 inadequacy, 208–12 intention of legal owner, 202–6 joint venture analogy, 207–8 objective expectations, 206 legal doctrine, 213–20 legislation, 219–20 love and irrationality, 224–25 market failure, intimate relationships as, 220–25 measure of relief, 205–6 psychological connection with property, 235–38 regulation of property in domestic sphere, 213–19 spheres of justice, 212–13 strategic behaviour, 238–40 third party interests, 240–44 creditors, 242–43 mortgagees, 240–42
Index 351 purchasers, 240–42 reducing impact of proprietary remedies, 243–44 Legal realism, 49–69 instrumentalist approaches, 49–69 Licences: proprietary estoppel, 304–5 Liens: equitable, see Equitable liens maritime, 311–14 nature, 313–14 mistakenly improved land, 322 solicitor’s, 317–22 trustees, 316–17 Loans: subrogation: authorised, 257–58 unauthorised, 258–60 Maritime liens, 311–14 nature, 313–14 Marshalling, 269 Mistake: lien over mistakenly improved land, 322 proprietary estoppel: common, 294–97 unilateral, 293–94 subrogation, 257–62 see also Vitiated intention to transfer property Moral desert: proprietary remedies, 70–1, 73–4 Policy: enrichment by wrongs, 183 vitiated intention to transfer property, 149–52 involuntary creditors, distinguishing between, 150–52 involuntary restitution claimants, 149–50 Positivism: property, influence on concept of, 38–9 Private ordering: generally, 197–99 limits of regime, 212–30 meaning, 197 see also Intimate relationships, division of assets on breakdown of Profits: right to, 75 Property: absolutist conception, 34–8 entrenchment, 36 illustrations, 37–8 implausibility, 342 intimate relationships, 220–21 new discourse, 345–47 persistence of assumptions, 39–40 rise of, 36
American legal thought, 49–57 disintegration of property, 54–5 due process, 53–4 eminent domain, law of, 52–4 influences on common law, 55–7 instrumentalism in proprietary remedies, 57–63 positivist understanding, shift towards, 51 universal principles of common law, 49–51 analysis, 33–4 arrangements to assign, 165–75 generally, 175 incomplete property, 172–75 rights where contract is specifically enforceable or consideration has been paid, 168–72 liens, 167–75 sale of goods transactions, 165–67 concepts, 33–4 constructive trusts. See Constructive trusts English legal thought: absolutist conception, 34–8 instrumentalism, 49–69 American legal thought, 49–57 common law jurisdictions, 63–7 formalism and instrumentalism contrasted, 67–9 proprietary remedies in US law, 57–63 justice, 344–45 normative discourse, need for, 344–47 positivism, influence of, 38–9 redistribution, see Redistribution of property use of term, 33 vitiated intention to transfer property, see Vitiated intention to transfer property Proprietary estoppel: Australia, 300–1 basis of intervention: common mistake, 294–97 informal transfers, 293 unilateral mistake cases, 293–94 common mistake, 294–97 consensual arrangements, enforcement of, 293–97 conventional interests in land, 305–7 current judicial practice, 302 detriment-focused approach, 298 English courts, 299–300 evidential rule, whether, 291–92 informal transfers, 293 licences, 304–5 mistake: common, 294–97 unilateral, 293–94 nature of plaintiff’s rights prior to judicial declaration, 307–9
352 Index Proprietary estoppel (cont.): remedial discretion, 297–304 measure of relief, 298–303 personal or proprietary relief, 303–4 substantive doctrine, whether, 291–92 third parties, 304–7 unilateral mistake cases, 293–94 United States, 301–2 Proprietary remedies: bankruptcy, 76–86 assumption of risk rationale, 81–7 contract and restitution plaintiffs distinguished, 81–7 fault and voluntary creditors, 83–4 justice between creditors, 80–1 justification for remedies, 77–9 restitution as corrective justice, 79–80 swollen assets rationale, 79–81 voluntary creditors, 83–5 moral desert, 70–1, 73–4 normative foundations, 69–87 bankruptcy, 77–86 assumption of risk rationale, 81–6 justification for remedies, 77–9 swollen assets rationale, 79–81 justice and efficiency, 69–75 misappropriated assets, 69–73 moral desert, 70–1, 73–4 profits, right to, 75 specific remedies: bankruptcy, 76–7 justification, 75–6 recognition of concerns, 76 utilitarian justifications, 71–2, 74 vitiated transfers, 73–5 profits, right to, 75 property rites, 44–6 proprietary bases as explanation for, 335–36 reason and ritual in, 42–9 redistributive, 42 restitution, as, 325–39 Birks’ account, 326–35 enrichment by wrongs, 330–31 over-indemnification or over-compensation, rights preventing, 333 proprietary estoppel, 334–35 quasi-matrimonial property relief, 331 subrogation, 331–33 tracing value, 326–29 vitiated transfers, 329 ritual, 42–9 cost, 47 legal discourse, in, 42–4 normative framework of private law, 46–7 utilitarian justifications, 71–2, 74 Quistclose trust, 153–63 absence of intention to benefit borrower, 158
basis, 153–63 conceptualisation, 153–60 constructive trust analysis, 160 efficiency, 161–63 express trust analysis, 154–56 interpretation of basis, 154–60 justice, 161–63 nature, 160–61 personal rights, 158–60 private purpose trust analysis, 156–57 proprietary remedy or orthodox trust, whether, 160–61 quasi-trust analysis, 157 personal rights, 158–60 resulting trust analysis, 156–57 absence of intention to benefit borrower, 158 Redistribution of property: conceptions of property, 33–4 jurisprudence, 347 orthodox proprietary remedies, 40–2 redistributive proprietary remedies, 42 Redistributive proprietary remedies: diversity of property, 343 enrichment by wrongs, see Enrichment by wrongs Quistclose trust, see Quistclose trust tracing, see Tracing vitiated intention to transfer property, see Vitiated intention to transfer property wrongs, enrichment by, see Enrichment by wrongs Registration: subrogation, 272–73 Remedial trusts: constructive trusts, see Constructive trusts development of trust, 7–10 hostility towards, 7 terminology, 7 see also Property Restitution: proprietary remedies as, 325–39 Birks’ account, 325–35 enrichment by wrongs, 330–31 over-indemnification or over-compensation, rights preventing, 333 proprietary estoppel, 334–35 quasi-matrimonial relief, 331 subrogation, 331–33 tracing value, 326–29 vitiated transfers, 329 rationalising, 336–38 subrogation as, 249–50, 331–33 Ritual: legal discourse, 42–4 proprietary remedies, 42–9 cost, 47–9
Index 353 legal discourse, in, 42–4 normative framework of private law, 46–7 property rites, 42–4 Sale of goods transactions: distributions of entitlements, 165–67 Secured creditors: subrogation, see Subrogation Solicitor’s lien, 317–22 Subrogation, 245–73, 331–33 authorised loans, 257–58 bills of exchange, 266–67 change of position defence, 269–71 discretionary proprietary remedy, 253 effect, 245–48 express right, 245 fault, 260–61 function of rhetoric, 245–48 identifying creditors’ enrichment, 253–55 involuntary unsecured creditor, plaintiff as, 255–63 mistakes, 257–62 practical compulsion as ground, 262–63 use of property without consent to discharge secured debt, 255–57 involuntary unsecured creditor, plaintiff not readily characterised as, 263–73 bills of exchange, 266–67 marshalling, 269 sureties’ acquisition of rights of secured creditors, 263–66 trust business, creditors of, 267–69 literal interpretation, 246–48 loans: authorised, 257–58 unauthorised, 258–60 marshalling, 269 meaning, 245 mistake, 257–62 obscuring creation of new rights, 245–46 practical compulsion as ground, 262–63 registration, 272–73 restitution, as, 249 sureties’ acquisition of rights of secured creditors, 263–66 third party creditors, 250–52 traditional explanation, 248–49 unauthorised loans, 258–60 unjust enrichment, determining, 255–63 involuntary unsecured creditor, plaintiff as, 255–63 involuntary unsecured creditor, plaintiff not readily characterised as, 263–73 subrogation as remedy for unjust enrichment, 250–51 Tracing, 89–126 analysis, 89–97
claim or remedy, whether, 90–1 new property rights, creation of, 96–7 proceeds, rights to, 93–6 remedial process, as part of, 91–3 automatic vesting of contingent rights, 94–6 Birks, 327–29 claim or remedy, whether, 90–1 consensually created rights, 120–22 contingent upon exercise of power, 93–4 explanation of rhetoric, 107–8 function of rhetoric, 106–7 intermediate remedy, as an 92–3 metaphors, 106–8, 326–27 neutral process, as, 102–4 new property rights, creation of, 96–7 normative foundations: positive law, dissonance with, 111–14 reasons for allowing assertion of proprietary remedies, 108–10 primary and secondary remedies, 91–2 proceeds of debt, 122–25 proceeds, rights to, 93–6 ratification, tracing as, 100 realism, 125–26 remedial nature, denial of, 98–106 ratification, tracing as, 100 things, tracing, 98–100 value, tracing, 101–5 remedial process, as part of, 91–3 restitutionary, whether, 327–28 retention of proprietary base, 328–29 rhetoric: function, 106–7 power of, 107–8 substantive law, consequences of discourse for, 117–25 formalism, dangers of, 120–25 privileging of transactional tracing, 115–17 suppression of normative analysis, 117–20 things, 98–100 value, 101–5, 326–29 Trustees: constructive trusts: duties, 20–2 innocent, liability of, 22–3 innocent, 22–3 liens, 316–17 United States: American legal thought, 49–57 due process, 53–4 instrumentalism, 57–63 early remedial constructive trust theory, 57–9 realism, 59–60 remedial constructive trusts, 60–3
354 Index United States (cont.): property: instrumentalism: proprietary remedies, 57–63 Uses, 8 Utilitarian justifications: proprietary remedies, 71–2, 74 Value: tracing, 101–5, 326–29 Vitiated intention to transfer property, 127–52 Birks, 329 consent to pass title, 127–31 policy considerations, 149–52 involuntary creditors, distinguishing between, 150–52 involuntary restitution claimants, 149–50 possible legal responses, 127–32
beneficial interest, transfers giving rise to, 130–31 title passing but right to personal relief, 131 void at law, transfers, 127–29 voidable transfers, 129–30 proprietary relief , 132–49 availability of proprietary relief, 132 determining availability, 133–40 Millett’s analysis, 132–49 rescission, proprietary consequences of, 133–40 title passing but right to personal relief, 131 void at law, transfers, 127–29 voidable transfers, 129–30 Voluntary creditors: bankruptcy, 83–5 Wrongs, enrichment by, see Enrichment by wrongs
