The Impact of Equity and Restitution in Commerce 9781509915644, 9781509915675, 9781509915651

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THE IMPACT OF EQUITY AND RESTITUTION IN COMMERCE Commercial relationships give rise to diverse forms of legal obligation in private law, including contract, tort, agency, company law and partnership. More controversially, equity and the law of restitution have a less defined and somewhat ambulatory role in regulating the affairs of commercial parties. Nevertheless, their impact is manifest in the commercial arena through the distinct types of liability they engender and the remedies that are imposed. This collection draws together the views of leading international scholars and judges to explore the nature and extent of this impact from two perspectives. Five chapters primarily address this impact at a macro-level, focusing on the roles of equity and the law of restitution in terms of legal taxonomy, doctrine and policy. In contrast, the remaining five chapters primarily address this impact at a microlevel, focusing on selected liabilities and remedies within equity and the law of restitution in the context of commerce. This bifocal approach enables a holistic appreciation of some important ways in which equity and the law of restitution affect or may affect commerce, with a view to fostering further debate over the fundamental issues at stake. Volume 29 in the series Hart Studies in Private Law

ii

The Impact of Equity and Restitution in Commerce Edited by

Peter Devonshire and

Rohan Havelock

HART PUBLISHING Bloomsbury Publishing Plc Kemp House, Chawley Park, Cumnor Hill, Oxford, OX2 9PH, UK HART PUBLISHING, the Hart/Stag logo, BLOOMSBURY and the Diana logo are trademarks of Bloomsbury Publishing Plc First published in Great Britain 2019 Copyright © The editors and contributors severally 2019 The editors and contributors have asserted their right under the Copyright, Designs and Patents Act 1988 to be identified as Authors of this work. All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording, or any information storage or retrieval system, without prior permission in writing from the publishers. While every care has been taken to ensure the accuracy of this work, no responsibility for loss or damage occasioned to any person acting or refraining from action as a result of any statement in it can be accepted by the authors, editors or publishers. All UK Government legislation and other public sector information used in the work is Crown Copyright ©. All House of Lords and House of Commons information used in the work is Parliamentary Copyright ©. This information is reused under the terms of the Open Government Licence v3.0 (http://www.nationalarchives.gov.uk/doc/ open-government-licence/version/3) except where otherwise stated. All Eur-lex material used in the work is © European Union, http://eur-lex.europa.eu/, 1998–2019. A catalogue record for this book is available from the British Library. Library of Congress Cataloging-in-Publication data Names: Devonshire, Peter, editor.  |  Havelock, Rohan, editor. Title: The impact of equity and restitution in commerce / edited by Peter Devonshire and Rohan Havelock. Description: Oxford, UK ; Portland, Oregon : Hart Publishing, 2019.  |  Includes index. Identifiers: LCCN 2018031474 (print)  |  LCCN 2018032317 (ebook)  |  ISBN 9781509915668 (Epub)  |  ISBN 9781509915644 (hardback : alk. paper) Subjects: LCSH: Commercial law—English-speaking countries—Congresses.  |  Equity—English-speaking countries—Congresses. | Restitution—English-speaking countries—Congresses. Classification: LCC K1005 (ebook)  |  LCC K1005 .I48 2018 (print)  |  DDC 346/.152107—dc23 LC record available at https://lccn.loc.gov/2018031474 ISBN: HB: 978-1-50991-564-4 ePDF: 978-1-50991-565-1 ePub: 978-1-50991-566-8 Typeset by Compuscript Ltd, Shannon To find out more about our authors and books visit www.hartpublishing.co.uk. Here you will find extracts, author information, details of forthcoming events and the option to sign up for our newsletters.

PREFACE PETER DEVONSHIRE AND ROHAN HAVELOCK Commercial relationships give rise to diverse forms of legal obligation in private law, including contract, tort, agency, company law and partnership. More controversially, equity and the law of restitution1 have a less defined and somewhat ambulatory role in regulating the affairs of commercial parties. Nevertheless, their impact is established and manifest in the commercial arena through the distinct types of liability they engender and the remedies that are imposed. Besides financial and other tangible consequences, the normative rules influence and shape the behaviour of commercial parties ex ante. The chapters in this collection take stock of the multiple and complex ways in which equity and the law of restitution impact modern commerce. Debate in this area has been spurred by a series of controversial appellate judgments in Commonwealth jurisdictions.2 Equity and the law of restitution have been taken together on the basis that they share a distinctly corrective and largely supplementary function in private law. Furthermore, issues of equity and restitution not uncommonly arise on the same facts.3 The theme of this collection raises the perennial question whether distinctions between the common law and equity can be sustained notwithstanding differences in their origins, functions and underlying values.4 Similarly, the impact of the law of restitution in commerce, and the principle of unjust enrichment in particular, raises taxonomic questions concerning its relationship with other areas of private law. A number of the chapters herein take explicit or implicit positions on such issues.

1 ‘Restitution’ is used herein to encompass restitution in respect of unjust enrichment, and restitution (or disgorgement, if that term is preferred) in respect of wrongs. 2 There are many facets to this debate. For example, it has been argued that in recent judgments the United Kingdom Supreme Court has ‘commercialised’ equity with detrimental effects on the integrity of traditional equitable principles: Yip Man and J Lee, ‘The Commercialisation of Equity’ (2017) 37 Legal Studies 647. 3 A recent illustration is Bank of Cyprus UK Limited v Menelaou [2015] UKSC 66, [2016] AC 176 concerning equitable subrogation and unjust enrichment. 4 See generally S Degeling and J Edelman (eds), Equity in Commercial Law (Lawbook Co, Pyrmont, 2005) esp chs 1, 2 and 3.

vi  Preface

I. Equity Historically, equity had little involvement with commerce or commercial wealth and disputes.5 Instead, the ambit of equity was principally confined to the preservation of family property through the vicissitudes of life by means of the trust, the notion of beneficial ownership and the equitable rules relating to dispositions of property and deceased estates.6 The unique concept of the trust, and the array of equitable doctrines with interventional effect, were foreign to commercial transactions. Commerce was primarily governed by the law of contract, and the incursion of equity was perceived as unsettling and disruptive. Moreover, Chancery’s protection of the vulnerable7 was scarcely consistent with mercantile objectives. This was, of course, to change dramatically. As Sir Anthony Mason has observed,8 the rise of the modern commercial economy has raised important issues concerning the extension and application of equitable doctrines and principles. On the one hand, equitable obligations and remedies impose distinctly rigid standards of conduct which serve to facilitate business operations and economic growth by protecting the integrity of commercial relationships and transactions. On the other hand, equitable intervention of a paternalistic kind has the potential to affect detrimentally the security of transactions, which necessarily depend upon certainty and speed.9 The courts and commentators alike have had to grapple with these concerns. Two examples may be mentioned. First, the fiduciary paradigm underlying the private family trust has been expanded to encompass a range of relationships by analogy with the trust.10 In commerce, chief amongst these are agent/principal, director/company, partner/ partnership and solicitor/client. In regulating these and other relationships, equity has played an important supplementary role in entrenching, and indeed strengthening, the trust and confidence indispensable to successful commercial activities. Yet this intervention has been far from a wholesale one. There has been general reluctance to find fiduciary obligations where (sophisticated) commercial parties have adopted contractual or company structures to regulate their relationship and protect their individual interests.11 A frequent caution is that equitable doctrine should not be strained by application here.12 5 See generally J Mummery, ‘Commercial Notions and Equitable Potions’ in S Worthington (ed), Commercial Law and Commercial Practice (Oxford, Hart Publishing, 2003) 29, 42. 6 See generally JH Baker, An Introduction to English Legal History, 4th edn (London, Butterworths, 2002) chs 14, 15 and 16. 7 See FW Maitland, Equity: A Course of Lectures, 2nd edn (Cambridge, Cambridge University Press, 1936) 4–5. 8 A Mason, ‘Equity’s Role in the Twentieth Century’ (1997–1998) 8 King’s College Law Journal 1, 4. 9 See Westdeutsche Landesbank Girozentrale v Islington LBC [1996] AC 669 (HL), 704–05 (Lord Browne-Wilkinson). 10 See P Finn, Fiduciary Obligations (Sydney, Law Book Co, 1977) [7]. 11 See, eg Hospital Products Ltd v United States Surgical Corp (1984) 156 CLR 41, 70 (Gibbs CJ), 149 (Dawson J); Amaltal Corp Ltd v Maruha Corp [2007] NZSC 40, [2007] 3 NZLR 192 [19]–[20]. See also A Mason, ‘The Place of Equity and Equitable Remedies in the Contemporary Common Law World’ (1994) 110 LQR 238, 245. 12 See John Alexander’s Clubs Pty Ltd v White City Tennis Club Ltd [2010] HCA 19, (2010) 241 CLR 1 [101].

Preface  vii Second, the express trust became widely adopted in commercial transactions, overtaking its use in the family and testamentary contexts in which it originally developed. Indeed, it must now be regarded as a practical arrangement indispensable to modern commerce and wealth management, playing a facilitative or bridging role between parties in commercial transactions.13 The trust is an established feature of the commercial landscape in pension funds, collective investment schemes, secured syndicated lending, project financing, and share ownership schemes. Yet the importation of the trust into commerce, with the proprietary consequences it entails, has not been free from difficulties. Two may be mentioned here. One source of protracted debate has been the appropriate classification of the so-called Quistclose trust.14 Its judicial recognition meant that contractual debt and trust, previously regarded as distinct sources of obligations, could be integrated.15 Another more recent and highly controversial issue relates to the erosion of traditional trust doctrine in respect of misapplied funds where the trust in question is used as machinery in a commercial transaction.16 It is in the nature and extent of remedies that equity most tangibly affects commercial parties. Equitable remedies define the consequences of abusing or exploiting commercial relationships, or even simply being implicated in such conduct. The flexibility and unique characteristics of equitable remedies raise profound issues in commercial dealings. An array of personal and proprietary remedies are available, many of which have powerful and sometimes draconian effects. With regard to personal relief, an account of profits plays a pivotal role in disgorging illicit fiduciary gains or profits deriving from a breach of confidence. With regard to proprietary relief, the rules of tracing facilitate claims to substitute assets, even if these have greater value than the plaintiff ’s original interest. A declaration of constructive trust in respect of an asset held by an insolvent defendant may determine the economic viability of a claim, particularly since it will trump the claims of unsecured creditors. The same may be said with reference to less traditional proceedings, such as claims for the proceeds of bribery.17 While it is trite that equity is not a penal jurisdiction,18 its remedies tend to reflect the vigour

13 See AIB Group (UK) plc v Mark Redler & Co Solicitors [2014] UKSC 58, [2015] AC 1503 [70] (Lord Toulson). 14 Barclays Bank Ltd v Quistclose Investments Ltd [1970] AC 567 (HL). See also R Hedlund and AL Rhodes, ‘Loan or Commercial Trust? The Continuing Mischief of the Quistclose Trust’ [2017] Conveyancer and Property Lawyer 254. 15 See Re Australian Elizabethan Theatre Trust (1991) 102 ALR 681, 693 (Gummow J). 16 AIB Group (n 13); Target Holdings Ltd v Redferns [1996] AC 421 (HL). See also PG Turner, ‘The New Fundamental Norm of Recovery for Losses to Express Trusts’ [2015] CLJ 188; M Conaglen, ‘Equitable Compensation for Breach of Trust: Off Target’ (2016) 40 Melbourne University Law Review 126; J Edelman, ‘An English Misturning with Equitable Compensation’ in S Degeling and JNE Varuhas (eds), Equitable Compensation and Disgorgement of Profit (Oxford, Hart Publishing, 2017) 91. 17 See the landmark judgment in FHR European Ventures LLP v Cedar Capital Partners LLC [2014] UKSC 45, [2015] AC 250, in which the Supreme Court overturned longstanding precedent and held that a bribe or secret commission received by an agent is held on trust for the principal. 18 This is evident where, on taking accounts, the court in its discretion grants allowances to a defaulting fiduciary.

viii  Preface of the norms they enforce – most notably the imperatives of prophylaxis and deterrence. Finally, equity has not shied away from imposing personal liability on commercial parties and actors (including banks, solicitors and accountants) implicated in breaches of trust or other fiduciary relationships. Equitable remedies are most exacting with respect to the primary wrongdoers. Where third parties are involved, the remedial response is less intractable. In the commercial sphere and more generally, equity mediates the respective interests of the parties. Thus, secondary liability may be confined to certain types of knowledge, or conduct amounting to dishonesty. The normative demands are refined to save commercial and professional parties from onerous standards of liability. In the case of knowing receipt in particular, fault-based liability strikes a balance between the protection of trust property through the imposition of custodial obligations,19 and the preservation of security of receipt on which commerce depends.20

II.  The Law of Restitution Like equity, the law of restitution has a significant impact in commerce in a range of contexts. In the United Kingdom, this is reflected in judgments concerning a bank’s claim for restitution under a void interest rate swap agreement with a local authority;21 a claim that an instalment under a shipbuilding contract would, if paid, be recoverable for total failure of consideration;22 claims against a bank for rescission of mortgages on the ground of undue influence;23 a claim raising the meaning and scope of the requirement that an enrichment must be ‘at the expense of ’ the claimant in the context of tax paid to investment managers under mistake of law;24 claims to recover tax paid (1) by a building society but demanded ultra vires25 and (2) by an investment bank under a mistake of law;26 a claim raising the appropriate valuation of enrichment in the form of brokerage and advice

19 For this conception of the liability, see C Mitchell and S Watterson, ‘Remedies for Knowing Receipt’ in C Mitchell (ed), Constructive and Resulting Trusts (Oxford, Hart Publishing, 2010) 115. For criticism of this, see W Swadling, ‘The Nature of “Knowing Receipt”’ in PS Davies and J Penner (eds), Equity, Trusts and Commerce (Oxford, Hart Publishing, 2017) 322–26. 20 See the judicial caution in Thanakharn Kasikorn Thai Chamkat v Akai Holdings [2010] HKCFA 63; (2010) 13 HKCFAR 479 [51]–[52] (Lord Neuberger NPJ); Westpac Banking Corp v Savin [1985] 2 NZLR 41 (CA) 53 (Richardson J). See also D Fox, ‘Constructive Notice and Knowing Receipt: An Economic Analysis’ [1998] CLJ 391. 21 Westdeutsche (n 9). 22 Stocznia Gdanska SA v Latvia Shipping Co [1998] 1 WLR 574 (HL). 23 Royal Bank of Scotland plc v Etridge (No 2) [2001] UKHL 44, [2002] 2 AC 773. 24 Investment Trust Companies (in liq) v Revenue and Customs Commissioners [2017] UKSC 29, [2018] AC 275. 25 Woolwich Equitable Building Society v IRC [1993] AC 70 (HL). 26 Deutsche Morgan Grenfell Group plc v IRC [2006] UKHL 49, [2007] 1 AC 558.

Preface  ix services rendered in connection with a company acquisition;27 and a claim for ­disgorgement of secret commission made by an agent in negotiating the purchase of share capital in a hotel.28 At the heart of the law of restitution29 is the principle of unjust enrichment. Especially since its formal recognition by the House of Lords in 1991,30 unjust enrichment has been particularly controversial as a legal principle which purports to unify, in a potentially all-encompassing way, a number of otherwise separate causes of action within the common law and equity.31 In general, these actions arise in the aftermath of defective or failed transfers, although a wider conception of the subject encompasses a broader range of events in respect of which restitution is required.32 This problem of scope raises expansive and complex questions as to the relationship between unjust enrichment and other areas of private law, especially the law of property.33 Leaving this aside, the principle of unjust enrichment has long been assailed with strong criticism and outright scepticism.34 Some maintain that the principle is simply unnecessary or unhelpful, and have posited alternative theories to explain or structure the law of restitution.35 Moreover, one major common law jurisdiction has decided to all but expel unjust enrichment as the basis of restitutionary relief, instead favouring equitable principles.36 Such treatment squarely raises the question whether autonomous unjust enrichment is a necessary category in private law. At the level of operation, the content and application of the four questions37 on which liability in unjust enrichment turns, have proven problematic. Some examples are the validity of certain purported unjust factors (such as free ­acceptance, ignorance and even ‘unconscionable conduct’), the meaning and scope of the requirement that an enrichment must be ‘at the expense of ’ the claimant,38 and the 27 Benedetti v Sawiris [2013] UKSC 50, [2014] AC 938. 28 FHR European Ventures LLP (n 17). 29 Issues concerning restitution for wrongs are discussed in chs 9 and 12 (dealing with account of profits) and 10 (dealing with forfeiture of remuneration). 30 Lipkin Gorman v Karpnale Ltd [1991] 2 AC 548, [1992] 4 All ER 331 (HL). 31 See K Mason, ‘Strong Coherence, Strong Fusion, Continuing Categorical Confusion: The High Court’s Latest Contributions to the Law of Restitution’ (2015) 39 Australian Bar Review 284, 291, ‘the unjust enrichment concept … cuts across the history of the forms of action and the history of the Law-Equity divide’. 32 See ch 5 herein. 33 For an overview, see R Grantham and CEF Rickett, Enrichment and Restitution in New Zealand (Oxford, Hart Publishing, 1999) ch 3. 34 See the scholarship listed in n 15 of ch 5. 35 For an overview of these, see A Burrows, The Law of Restitution, 3rd edn (Oxford, Oxford University Press, 2011) ch 2. 36 Australian Financial Services and Leasing Pty Ltd v Hills Industries Ltd [2014] HCA 14, (2014) 253 CLR 560 [78] (Hayne, Crennan, Kiefel, Bell and Keane JJ). This development is discussed in ch 6. 37 Banque Financiere de la Cite v Parc (Battersea) Ltd [1999] 1 AC 221 (HL), 227 (Lord Steyn). Note, however, that these were characterised as ‘not themselves legal tests’ in Investment Trust Companies (n 24) [41]. 38 See Investment Trust Companies (n 24).

x  Preface approach to valuation of enrichment, including the relevance and significance of objective and subjective factors.39 Whatever their likely root cause or causes,40 these enduring difficulties and uncertainties in relation to liability and remedy operate to the prejudice of commercial parties seeking to gauge potential liability and plan accordingly. This is particularly important in the case of unjust enrichment because liability is strict (subject to limited defences) and arises at the moment of receipt of a qualifying enrichment. Such unrelenting liability has obvious potential to undermine the security of receipt upon which commercial parties routinely rely in engaging with one another.41 Nevertheless, the availability of unjust enrichment claims in commercial contexts is significantly constrained by its subsidiarity to the law of contract, which serves as the primary regulator of rights and liabilities.42 This accords respect for the voluntary allocation of risk between parties,43 and facilitates transactional security and a measure of confidence in the integrity of bargains and the enforceability of their terms.44 In general, it is only where any applicable contract has been disposed of that there is any room for restitution,45 and therefore any role for unjust enrichment. The corollary of this is that where the defendant is legally entitled to the enrichment pursuant to a valid contractual obligation which the claimant owes, any unjust factor will be negated.46 That said, where an unjust enrichment claim is genuinely available in the aftermath of a transaction, security of receipt is still threatened if an overly liberal approach is adopted to the elements of liability. Thus, one trenchant criticism of the central enrichment requirement is that it means unjust enrichment inappropriately targets ‘unearned economic gain’, whereas the common law does not recognise an automatic right to recover such gain.47 39 See Benedetti v Sawiris (n 27). See also RA Havelock, ‘The Valuation of Enrichment in the Supreme Court’ [2013] Restitution Law Review 97. 40 Importantly, the law of unjust enrichment was pioneered without confrontation of its underlying normative basis, and as a result the elements of liability (and associated tests) were developed apace without the mediating influence of a single normative framework. 41 Australian Financial Services (n 36) [92]: ‘the action for money had and received is itself a qualification upon what the law otherwise regards as the overriding importance attached to the security of actual receipts’. 42 See, eg Pan Ocean Shipping Ltd v Creditcorp Ltd (The Trident Beauty) [1994] 1 WLR 161 (HL) 164; Ranger v Great Western Railway Co (1854) 5 HLC 72, 10 ER 824 (Lord Brougham and Lord Cranworth LC). See also R Grantham and C Rickett, ‘On the Subsidiarity of Unjust Enrichment’ (2001) 117 LQR 273. 43 Lumbers v W Cook Builders Pty Ltd (in liq) [2008] HCA 27, (2008) 232 CLR 635 [46], [79] (Gummow, Hayne, Crennan and Kiefel JJ). 44 Charter Reinsurance Co Ltd v Fagan [1997] AC 313 (HL), 388 (Lord Mustill). 45 See, eg Pavey & Matthews Pty Ltd v Paul (1987) 162 CLR 221, 256 (Deane J); Roxborough v Rothmans of Pall Mall Australia Ltd [2001] HCA 68, (2001) 208 CLR 516 [75]. 46 See C Mitchell, P Mitchell and S Watterson (eds), Goff & Jones: The Law of Unjust Enrichment, 9th edn (London, Sweet & Maxwell, 2016) ch 3. 47 P Watts, ‘“Unjust Enrichment” – the Potion that Induces Well-meaning Sloppiness of Thought’ [2016] Current Legal Problems 289, 291–92, 294–95; C Webb, Reason and Restitution: A Theory of Unjust Enrichment (Oxford, Oxford University Press, 2016) 62–66.

Preface  xi Liability in unjust enrichment is not, however, triggered merely by the presence of enrichment. In addition to a relevant unjust factor, the enrichment must be conferred at the expense of the claimant. Recently, the Supreme Court clarified that this requirement is not satisfied merely by the direct provision of a benefit: the claimant must incur a ‘loss’ through the provision of the benefit,48 in the sense of having given up something of economic value.49 On one reading, this amounts to insistence that the claimant has enjoyed a property interest of some kind in the benefit provided. If so, this goes some way towards meeting the criticism that unjust enrichment is prejudiced against mere economic gain.50 It thereby serves to mitigate the potential dangers not only to security of receipt, but to the ability of commercial parties to generate gain without exposure to unrelenting restitutionary liability in respect of incidental or indirect benefits.

III. Structure This collection draws together the views of leading international scholars and judges to explore the nature and extent of the impact of equity and restitution in commerce. As further explained in the two introductory chapters, this theme is considered from two perspectives. Chapters three to seven primarily examine the impact at a macro level, focusing on the roles of equity and restitution in terms of legal taxonomy, doctrine and policy. In contrast, chapters eight to twelve delve into the impact at a micro level, focusing on selected liabilities and remedies within equity and restitution in the context of commerce. This bifocal approach enables a holistic appreciation of some important ways in which equity and restitution affect or may affect commerce, with a view to fostering further debate over the fundamental issues at stake.

IV. Acknowledgements The chapters in the collection arise out of papers presented at a colloquium held at the Faculty of Law, University of Auckland, on 18–19 September 2017. We thank the contributors for attending the colloquium and engaging in collegial and stimulating discussion. The chapters have been revised to reflect those discussions. A number of people made the colloquium and this collection possible. We are very grateful to Andrew Stockley, Craig Elliffe and Gary Patterson of the Faculty

48 Investment Trust Companies (n 24) [52]. 49 ibid [45]. 50 It also implies a significant narrowing of the scope of unjust enrichment, in that it has no application where a claimant retains a property interest in the relevant asset. See further G Virgo, The Principles of the Law of Restitution, 3rd edn (Oxford, Oxford University Press, 2015) 12–17.

xii  Preface of Law for their invaluable support and guidance throughout; Sarah Davidson for organisational assistance; Gina Solloway for support during the colloquium itself; Shih-ta Lee for his conscientious editing of the footnotes; and Charles Rickett for his support and enthusiasm for the project, even though he could not ultimately participate. We thank Sinead Moloney, Rosamund Jubber and the team at Hart for managing the publication of this collection so professionally. Finally, we acknowledge the University of Auckland’s generous financial support. Peter Devonshire Rohan Havelock Faculty of Law, University of Auckland

TABLE OF CONTENTS Preface����������������������������������������������������������������������������������������������������������������������������v Table of Cases��������������������������������������������������������������������������������������������������������������xv Table of Legislation�������������������������������������������������������������������������������������������������� xxxi List of Contributors����������������������������������������������������������������������������������������������� xxxiii 1. Introduction: THe Macro Level������������������������������������������������������������������������������1 Peter Devonshire and Rohan Havelock 2. Introduction: THe Micro Level�����������������������������������������������������������������������������17 Peter Devonshire and Rohan Havelock 3. The Commercial Triple Helix: Contract, Property and Unjust Enrichment�����������������������������������������������������������������������������������������������������������33 Sarah Worthington 4. Proprietary Claims to Recover Mistaken or Unauthorised Payments���������������65 Peter Jaffey 5. Restitution: A New Start?������������������������������������������������������������������������������������91 Lionel Smith 6. Rivalry over Liability for Defective Transfers����������������������������������������������������119 Rohan Havelock 7. Equity and the Value of Certainty in Commercial Life������������������������������������147 Matthew Harding 8. Expansion of the Fiduciary Paradigm into Commercial Relationships: THe Australian Experience���������������������������������������������������������������������������������165 Stephen Gageler 9. Deemed Performance in Account of Profits������������������������������������������������������183 Lusina Ho 10. Forfeiture of Agents’ Remuneration�������������������������������������������������������������������203 Peter Watts

xiv  Table of Contents 11. Third-Party Liability of Recipients of Trust Property���������������������������������������227 David Hayton 12. Account of Profits for Accessory Liability: Still in the Thrall of Fiduciary Doctrine?������������������������������������������������������������������������������������������������������������251 Peter Devonshire Index������������������������������������������������������������������������������������������������������������������������������269

TABLE OF CASES Aas v Benham [1891] 2 Ch 244 (CA)�����������������������������������������������������������������������189 Abbey Glen Property Corp v Stumborg (1978) 9 AR 234 (Alta SC)��������������������262 Accidia Foundation v Simon C Dickinson Ltd [2010] EWHC 3058 (Ch), [2010] All ER (D) 290 (Nov)���������������������������������������������������������������� 25, 199, 222 Achilleas, The. See Transfield Shipping Inc v Mercator Shipping Inc Adamson, Re (1878) 8 Ch D 807 (CA)���������������������������������������������������������������������153 Aerostar Maintenance International Ltd v Wilson [2010] EWHC 2032 (Ch), [2010] All ER (D) 364 (Jul)����������������������������������������������������������������������������������262 Agricultural Land Management Ltd v Jackson (No 2) [2014] WASC 102, (2014) 48 WAR 1��������������������������������������������������� 22, 153, 259 AIB Group (UK) plc v Mark Redler & Co Solicitors [2014] UKSC 58, [2015] AC 1503������������������������������������������������������������������������������������vii, 13, 62, 63, 153, 154, 155, 258 Air Jamaica Ltd v Charlton [1999] 1 WLR 1399 (PC)����������������������������������������������50 Akers v Samba Financial Group [2014] EWHC 540 (Ch), (2014) 16 ITELR 808���������������������������������������������������������������������������������������������227 Akers v Samba Financial Group [2017] UKSC 6, [2017] AC 424������������������� 26, 47, 80, 227, 228, 230, 231, 232, 233, 236 Akita Holdings Ltd v Attorney General of the Turks and Caicos Islands [2017] UKPC 7, [2017] AC 590���������������������������������������������������������������������������258 Alati v Kruger (1955) 94 CLR 216�������������������������������������������������������������������������������57 Amaltal Corp Ltd v Maruha Corp [2007] NZSC 40, [2007] 3 NZLR 192��������������vi Anderson v McPherson (No 2) [2012] WASC 19, 8 ASTLR 321����������������������������49 Andrews Advertising Pty Ltd v Andrews [2014] NSWSC 318, 99 ACSR 164������������������������������������������������������������������������������������������������� 263, 264 Andrews v Ramsay & Co [1903] 2 KB 635 (DC)�������������������������������������� 24, 25, 207, 209, 210, 211, 219 Angove’s Pty Ltd v Bailey [2016] UKSC 47, [2016] 1 WLR 3179��������������������� 14, 59 Armagas Ltd v Mundogas SA (The Ocean Frost) [1985] 1 Lloyd’s Rep 1 (CA)���������������������������������������������������������������������������������207 Armagas Ltd v Mundogas SA (The Ocean Frost) [1986] AC 717 (HL)���������������207 Armstrong DLW GmbH v Winnington Networks Ltd [2012] EWHC 10 (Ch), [2013] Ch 156����������������������������������������������������������������36 Arthur v The Attorney General of The Turks & Caicos Islands [2012] UKPC 30, [2012] All ER (D) 164 (Aug)��������������������������������� 26, 229, 233 Attorney-General for Hong Kong v Reid [1994] 1 AC 324 (PC)����������� 21, 163, 255

xvi  Table of Cases Attorney-General v Blake [2001] 1 AC 268 (HL)������������������������������21, 34, 194, 260 Australia and New Zealand Banking Group Ltd v Westpac Banking Corporation (1988) 164 CLR 662���������������������������������25, 122, 128, 131 Australian Competition and Consumer Commission v CG Berbatis Holdings Pty Ltd [2003] HCA 18, (2003) 214 CLR 51���������������������������� 132, 135 Australian Elizabethan Theatre Trust, Re (1991) 102 ALR 681������������������������������vii Australian Financial Services and Leasing Pty Ltd v Hills Industries Ltd [2014] HCA 14, (2014) 253 CLR 560������������������������������������������� ix, x, 11, 88, 119, 120, 124, 128, 129, 130, 131, 135, 138, 143, 144 Australian Oil & Gas Corporation Ltd v Bridge Oil Ltd (unreported, 12 April 1989) (NSWCA)�������������������������������������������������������������179 Australian Securities and Investments Commission v Citigroup Global Markets Australia Pty Ltd [2007] FCA 963, (2007) 160 FCR 35���������19, 149, 180, 181 Avrahami v Biran [2013] EWHC 1776 (Ch), [2013] All ER (D) 245 (Jun)�������������������������������������������������������������������������� 25, 219 Baden v Société Générale pour Favoriser le Développement du Commerce et de I’Industrie en France SA [1993] 1 WLR 509 (Ch)����������27, 28, 238, 239, 240, 253 Badfinger Music Inc v Evans [2002] EMLR 2 (Ch)������������������������������������������������198 Bagnall v Carlton (1877) 6 Ch D 371 (CA)��������������������������������������������������������������267 Baker v Courage & Co [1910] 1 KB 56���������������������������������������������������������������������119 Baltic Shipping Co v Dillon (1993) 176 CLR 344���������������������������������������������������133 Bank of Credit and Commerce International (Overseas) Ltd v Akindele [2001] Ch 437 (CA)���������������������������������� 26, 62, 229, 233, 238, 240 Bank of Cyprus UK Limited v Menelaou [2015] UKSC 66, [2016] AC 176���������������������������������������������������������������������v, 10, 120, 126, 128, 143 Banque Belge Pour L’Etranger v Hambrouck [1921] 1 KB 321 (CA)���������������������78 Banque Financiere de la Cite v Parc (Battersea) Ltd [1999] 1 AC 221 (HL)�����������������������������������������������������������������ix, 34, 56, 119, 127 Barclays Bank Ltd v Quistclose Investments Ltd [1970] AC 567 (HL)���������� vii, 37, 51, 52, 57, 59, 61, 64 Barclays Bank Ltd v WJ Simms Son & Cooke (Southern) Ltd [1980] QB 677�����56 Barlow Clowes International Ltd (in liq) v Eurotrust International Ltd [2005] UKPC 37, [2006] 1 WLR 1476������������������������������������������������������� 235, 238 Barnes v Addy (1874) LR 9 Ch App 244 (CA)������������������������������������������ 18, 29, 172, 252, 253, 254, 258, 261, 263, 265 Barnes v Eastenders Cash & Carry plc [2014] UKSC 26, [2015] AC 1����������������124 Bathurst City Council v PWC Properties Pty Ltd [1998] HCA 59, (1998) 195 CLR 566����������������������������������������������������������������������������������������������158 Bax, ex parte (1751) 2 Ves Sen 388, 28 ER 248��������������������������������������������������������196 Beach Petroleum NL v Kennedy [1999] NSWCA 408, (1999) 48 NSWLR 1������260

Table of Cases  xvii Beddoe, Re [1893] 1 Ch 547 (CA)����������������������������������������������������������������������������245 Bell v Lever Bros Ltd [1932] AC 161 (HL)�������������������������������������������������������� 57, 189 Bell’s Indenture, Re [1980] 1 WLR 1217 (Ch)������������������������������������������������ 239, 255 Benedetti v Sawiris [2013] UKSC 50, [2014] AC 938����������������������������������� ix, x, 102 Bettel v Yim (1978) 20 OR (2d) 617 (Ontario County Court)��������������������������������91 Bhullar v Bhullar [2003] EWCA Civ 424, [2003] 2 BCLC 241������������������������������189 Birtchnell v Equity Trustees, Executors and Agency Co Ltd (1929) 42 CLR 384�����������������������������������������������������������������������149, 167, 168, 179 Bishopsgate Investment Management Ltd (In Liquidation) v Homan [1995] Ch 211 (CA)�������������������������������������������������������������������������������74 Boardman v Phipps [1967] 2 AC 46 (HL)������������������������������������������������������ 184, 186, 189, 196, 197, 200, 201, 257, 262 Bofinger v Kingsway Group Ltd [2009] HCA 44, (2009) 239 CLR 269��������������124, 127, 128, 130 Bond Worth Ltd, Re [1980] Ch 228����������������������������������������������������������������������������42 Boscawen v Bajwa [1996] 1 WLR 328 (CA)��������������������������������������������������������������74 Boston Deep Sea Fishing & Ice Co v Ansell (1888) 39 Ch D 339 (CA)����������������24, 207, 208, 209 Bray v Ford [1896] AC 44 (HL)��������������������������������������������������������173, 191, 257, 258 Breen v Williams (1996) 186 CLR 71�������������������������������������������������������������� 169, 170 Brickenden v London Loan & Savings Co [1934] 3 DLR 465 (PC)���������������������260 Bridge v Campbell Discount Co Ltd [1962] AC 600 (HL)��������������������������������������11 Bristol and West Building Society v Mothew [1998] Ch 1 (CA)������������ 62, 170, 257 Brook’s Wharf and Bull Wharf Ltd v Goodman Bros [1937] 1 KB 534 (CA)�����107 Brown v De Tastet (1821) Jac 284, 37 ER 858����������������������������������������������������������197 Brown v Litton (1711) 1 P Wms 140, 24 ER 329�������������������������������������������� 197, 198 Brown v Smitt (1924) 34 CLR 160����������������������������������������������������������������������������268 Burke v LFOT Pty Ltd [2002] HCA 17, (2002) 209 CLR 282��������������������������������127 Byrnes v Kendle [2011] HCA 26, (2011) 243 CLR 253������������������������������������������150 Campbell v Kitchen & Sons Ltd (1910) 12 CLR 515����������������������������������������������133 Canada Safeway Ltd v Thompson [1951] 3 DLR 295 (BCSC)�������������������������������262 Canson Enterprises Ltd v Boughton & Co [1991] 3 SCR 534, (1991) 85 DLR (4th) 129����������������������������������������������������������������������������� 187, 195 Car and Universal Finance Co Ltd v Caldwell [1965] 1 QB 525 (CA)�������������������58 Casio Computer Co Ltd v Sayo [2001] EWCA Civ 661, [2001] IL Pr 43����� 29, 255 Cassels v Stewart (1881) 6 App Cas 64 (HL)�����������������������������������������������������������221 Cemcon Constructions Pty Ltd v Hall Concrete Constructions (Vic) Pty Ltd [2009] FCA 696�����������������������������������������������������������������������������������������������������244 Central Trust and Safe Deposit Co v Snider [1916] 1 AC 266 (PC)�����������������������45 Chan v Zacharia (1984) 154 CLR 178���������������������������������������������170, 171, 179, 187 Charity Commission for England and Wales v Framjee [2014] EWHC 2507 (Ch), [2015] 1 WLR 16�������������������������������������������������������66 Charter plc v City Index Ltd [2007] EWCA Civ 1382, [2008] Ch 313���������� 76, 229

xviii  Table of Cases Charter Reinsurance Co Ltd v Fagan [1997] AC 313 (HL)���������������������������������������x Chase Manhattan Bank NA v Israel-British Bank (London) Ltd [1981] Ch 105������������������������������������������������������������ 34, 35, 48, 49, 52, 59, 79, 112 Cheese v Thomas [1994] 1 WLR 129 (CA)��������������������������������������������������������������268 Chen v Lym International Pty Ltd [2009] NSWCA 326, 260 ALR 353����������������200 Cheng Wai Tao v Poon Ka Man Jason (2016) 19 HKCFAR 144������������������ 189, 190 Chirnside v Fay [2006] NZSC 68, [2007] 1 NZLR 433������������������������������������� 19, 23, 149, 198, 200, 201, 205, 220 Clayton’s Case (1815–1816) 1 Mer 572, 35 ER 781���������������������������������������������������67 Club of the Clubs Pty Ltd v King Network Group Pty Ltd (No 2) [2007] NSWSC 574�����������������������������������������������������������������������������������������������264 CMS Dolphin Ltd v Simonet [2001] EWHC 415 (Ch), [2001] 2 BCLC 704��������������������������������������������������������������������������������������� 194, 264 Colbeam Palmer Ltd v Stock Affiliates Pty Ltd (1968) 122 CLR 25������������ 188, 189 Commissioner of Stamp Duties (Queensland) v Livingston [1965] AC 694 (PC)����������������������������������������������������������������������������������������������248 Commissioner of State Revenue (Vic) v Royal Insurance Australia Ltd (1994) 182 CLR 51��������������������������������������������������������������������������������������� 123, 131 Committee on Children’s Television Inc v General Foods Corp 673 P 2d 660 (Cal 1983)�����������������������������������������������������������������������������175 Commonwealth v Amann Aviation Pty Ltd (1991) 174 CLR 64��������������������������122 Consul Development Pty Ltd v DPC Estates Pty Ltd (1975) 132 CLR 373������������������������������������������������������������������������������������ 127, 171, 172, 254, 256, 259, 262 Cook v Deeks [1916] 1 AC 554 (PC)������������������������������������������������������������������������263 Cook v Fountain (1676) 3 Swans 585, 36 ER 984���������������������������������������������������135 Cowan v Scargill [1985] Ch 270������������������������������������������������������������������������� 38, 152 Criterion Properties plc v Stratford UK Properties LLC [2004] UKHL 28, [2004] 1 WLR 1846�������������������������������������������������������� 40, 245 Curtis v Pulbrook [2011] EWHC 167 (Ch), [2011] 1 BCLC 638��������������������������163 Dalgety & Co Ltd v Gray (1919) 26 CLR 249 (PC)�������������������������������������������������207 Daly v Sydney Stock Exchange Ltd (1986) 160 CLR 371�����������������������������������������57 D’Amore v MacDonald (1975) 1 OR (2d) 370 (ONCA)����������������������������������������262 Danyluk v Ainsworth Technologies Inc 2001 SCC 44, [2001] 2 SCR 460�������������91 Dart Industries Inc v Decor Corporation Pty Ltd (1993) 179 CLR 101��������������188, 205, 262 David Securities Pty Ltd v Commonwealth Bank of Australia (1992) 175 CLR 353���������������������������������������������������� 122, 125, 129, 130, 131, 136 Dawson, Re; Union Fidelity Trustee Co Ltd v Perpetual Trustee Co Ltd [1966] 2 NSWLR 211 (SC)�����������������������������������������������������������������������������������195 De Bussche v Alt (1878) 8 Ch D 286 (CA)��������������������������������������������������������������196 Denew v Daverell, Esq (1813) 3 Camp 451, 170 ER 1442��������������������������������������204 Deutsche Morgan Grenfell Group plc v IRC [2006] UKHL 49, [2007] 1 AC 558������������������������������������������������������������������������������������������� viii, 5, 56

Table of Cases  xix Dextra Bank & Trust Co Ltd v Bank of Jamaica [2001] UKPC 50, [2002] 1 All ER (Comm) 193�������������������������������������������������������������������� 56, 58, 78 Diplock, Re [1948] Ch 465 (CA)�������������������������������������������������������������������������������248 Doyle v Olby (Ironmongers) Ltd [1969] 2 QB 158 (CA)���������������������������������������195 Dunne v English (1874) LR 18 Eq 524���������������������������������������������������������������������220 Dyson Technology Ltd v Curtis [2010] EWHC 3289 (Ch)������������������������������������263 Earl of Oxford’s Case (1615) 1 Ch Rep 1, (1615) 21 ER 485������������������������������������24 Edinburgh and District Tramways Co Ltd v Courtenay 1909 SC 99 (IH)������ 97, 98 Edwards v Lee’s Administrators 96 SW 2d 1028 (Ky 1936)���������������������������� 94, 197 El Ajou v Dollar Land Holdings plc [1993] 3 All ER 717 (Ch)���������������� 39, 57, 228 El Ajou v Dollar Land Holdings plc [1993] EWCA Civ 4, [1994] 2 All ER 685���������������������������������������������������������������������������������������� 57, 228 Electrosteel Castings (UK) Ltd v Metalpol Ltd [2014] EWHC 2017 (Ch), [2014] All ER (D) 72 (Jul)������������������������������������������������������������������������������������222 Ellesmere Brewery Co v Cooper [1896] 1 QB 75 (DC)�����������������������������������������107 Equuscorp Pty Ltd v Haxton [2012] HCA 7, (2012) 246 CLR 498����������������������120, 126, 129, 130 Eric V Stansfield v South East Nursing Home Services Ltd [1986] 1 EGLR 29 (QB)����������������������������������������������������������������������������������������214 Estate Realties Ltd v Wignall [1992] 2 NZLR 615 (HC)������������������������������ 189, 196, 198, 201, 205 Evans, Re (1897) 66 LJQB 499���������������������������������������������������������������������������������������9 Evans v European Bank Ltd [2004] NSWCA 82, (2004) 61 NSWLR 75��������������244 Express Electrical Distributors Ltd v Beavis [2016] EWCA Civ 765, [2016] 1 WLR 4783�������������������������������������������������������������������������������������� 231, 232 Farah Constructions Pty Ltd v Say-Dee Pty Ltd [2007] HCA 22, (2007) 230 CLR 89������������������������������������������������������������������������������������������ 28, 30, 126, 127, 161, 172, 230, 235, 239, 253, 261, 265 FC Jones & Sons (Trustee of the Property of) v Jones [1997] Ch 159 (CA)����������78 Featherstonhaugh v Turner (1858) 25 Beav 382, 53 ER 683������������������������� 196, 197 Federal Republic of Brazil v Durant International Corp [2015] UKPC 35, [2016] AC 297������������������������������������������������������������������� 66, 75 Fenwick v Naera [2015] NZSC 68, [2016] 1 NZLR 354�����������������������������������������173 Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd (No 2) (1998) 29 ACSR 290 (NSWSC)���������������������������������������������������������������������������191 FHR European Ventures LLP v Cedar Capital Partners LLC [2014] UKSC 45, [2015] AC 250������������������������������vii, ix, 14, 163, 164, 249, 255 Fibrosa Spolka Akcyjna v Fairbairn Lawson Combe Barbour Ltd [1943] AC 32 (HL)��������������������������������������������������������������������������������� 36, 116, 119 Field, Re [1971] 1 WLR 555 (Ch)��������������������������������������������������������������������� 245, 246 Fletcher v Eden Refuge Trust [2012] NZCA 124, [2012] 2 NZLR 227����������������239 Foran v Wight (1989) 168 CLR 385��������������������������������������������������������������������������121 Foskett v McKeown [1998] Ch 265 (CA)�������������������������������������������������������������������69

xx  Table of Cases Foskett v McKeown [2001] 1 AC 102 (HL)����������������� 3, 66, 67, 69, 72, 73, 246, 259 Fowkes v Pascoe (1875) LR 10 Ch App 343 (DC)�����������������������������������������������������50 Fraser Edmiston v AGT (Qld) Pty Ltd [1988] 2 QD R 1 (QSC)�����������������������������18 Freeman v Jeffries (1869) LR 4 Exch 189�����������������������������������������������������������������134 Friend v Brooker [2009] HCA 21, (2009) 239 CLR 129�������������������������������� 127, 179 Frith v Cartland (1865) 2 H & M 417, 71 ER 525���������������������������������������������������259 Furs Ltd v Tomkies (1936) 54 CLR 583����������������������������������������������������������� 171, 260 Fyffes Group Ltd v Templeman [2000] Lloyd’s Rep 643 (Comm Ct)��������������������30, 261, 266, 267 Fyler v Fyler (1841) 3 Beav 550, 49 ER 216��������������������������������������������������������������265 Gandy v Gandy (1885) 30 Ch D 57 (CA)�����������������������������������������������������������������245 Garland v Consumers’ Gas Co 2004 SCC 25, [2004] 1 SCR 629����������������������������95 Gamatronic (UK) Ltd v Hamilton [2016] EWHC 2225 (QB), [2017] BCC 670���������������������������������������������������������������������������������������������� 25, 225 Gee v Pritchard (1818) 2 Swans 402, 36 ER 670������������������������������������������������������135 Gencor ACP Ltd v Dalby [2000] EWHC 1560 (Ch), [2000] 2 BCLC 734�����������264 Gestmin SGPS SA v Credit Suisse (UK) Ltd [2013] EWHC 3560 (Comm), [2013] All ER (D) 191 (Nov)��������������������������206 Gibson Motorsport Merchandise Pty Ltd v Forbes [2006] FCAFC 44, (2006) 149 FCR 569���������������������������������������������������� 175, 176 Giumelli v Giumelli [1999] HCA 10, (1999) 196 CLR 101��������������������������� 158, 159 Glenko Enterprises Ltd v Keller 2000 MBCA 7, [2001] 1 WWR 229������������������262 Goldcorp Exchange Ltd (In Receivership), Re [1995] 1 AC 74 (PC)���������������������71 Governor & Co of the Bank of Ireland v Jaffery [2012] EWHC 1377 (Ch), [2012] All ER (D) 208 (May)������������������������� 25, 222, 223, 224, 225 Gray v New Augarita Porcupine Mines Ltd [1952] 3 DLR 1 (PC)������������������������191 Great Investments Ltd v Warner [2016] FCAFC 85, (2016) 243 FCR 516�����������������������������������������������������������������������������239, 240, 245 Great Northern Railway Co v Swaffield (1874) LR 9 Exch 132�����������������������������108 Green & Clara Pty Ltd v Bestobell Industries Pty Ltd (No 2) [1984] WAR 32 (WASC)�������������������������������������������������������������������������������������������������������������������197 Griffiths decd, In re [2008] EWHC 118 (Ch), [2009] Ch 162�������������������������������127 Grimaldi v Chameleon Mining NL (No 2) [2012] FCAFC 6, (2012) 200 FCR 296������������������������������������������������������������������������28, 29, 159, 172, 189, 190, 239, 256, 262, 264 Group Seven Ltd v Nasir [2017] EWHC 2466 (Ch), [2018] PNLR 6�������������������235 Grupo Torras SA v Al-Sabah [2001] CLC 221 (CA)����������������������������������������������255 Guinness plc v Saunders [1990] 2 AC 663 (HL)������������������������������������196, 200, 205 Gwembe Valley Development Co Ltd v Koshy [2003] EWCA Civ 1048, [2004] 1 BCLC 131�����������������������������������191, 258, 260 Hagan v Waterhouse (1991) 34 NSWLR 308 (NSWSC)����������������������������������������193 Hallett’s Estate, Re (1880) 13 Ch D 696 (CA)�����������������������������������6, 66, 67, 73, 166 Halpern v Halpern [2007] EWCA Civ 291, [2008] QB 195�����������������������������������267

Table of Cases  xxi Hamond v Holiday (1824) 1 Car & P 384, 171 ER 1241����������������������������������������204 Hampton Capital Ltd, Re [2015] EWHC 1905 (Ch), [2016] 1 BCLC 374�����������245 Harries v Church Commissioners [1992] 1 WLR 1241 (Ch)��������������������������������152 Harris v Digital Pulse Pty Ltd [2003] NSWCA 10, (2003) 56 NSWLR 298�������������������������������������������������������������������������192, 205, 263 Hasler v Singtel Optus Pty Ltd [2014] NSWCA 266, (2014) 87 NSWLR 609��������������������������������������������������������������������������������� 253, 265 Hayim v Citibank NA [1987] AC 730 (PC)�������������������������������������������������������������245 Henderson v Merrett Syndicates Ltd [1995] 2 AC 145 (HL)�����������������������������������31 Hewett v Court (1983) 149 CLR 639��������������������������������������������������������������������������42 Hippisley v Knee Bros [1905] 1 KB 1 (DC)������������������������������������������������������ 25, 211 Homburg Houtimport BV v Agrosin Private Ltd [2003] UKHL 12, [2004] 1 AC 715�����������������������������������������������������������������������������������������������������141 Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41�����������������������������������������������������������������������������vi, 13, 31, 150, 168, 173, 176, 179, 189, 197, 257, 259, 262 Holiday v Sigil (1826) 2 Car & P 176, 172 ER 81����������������������������������������������������105 Hosking v Marathon Asset Management LLP [2016] EWHC 2418 (Ch), [2017] Ch 157������������������������������������������������� 220, 221 Hovenden and Sons v Millhoff (1900) 83 LT 41 (CA)�������������������������������������������265 Howard v Commissioner of Taxation [2014] HCA 21, (2014) 253 CLR 83��������������������������������������������������������������������������������� 21, 190, 260 Hurst v Holding (1810) 3 Taunt 32, 128 ER 13�������������������������������������������������������204 Hurstanger Ltd v Wilson [2007] EWCA Civ 299, [2007] 1 WLR 2351����������������265 Imageview Management Ltd v Jack [2008] EWHC 1421 (QB)�������������������� 205, 206 Imageview Management Ltd v Jack [2009] EWCA Civ 63, [2009] 2 All ER 666����������������������������������������������������������������������������������������� 23, 24, 25, 203, 205, 206, 207, 208, 209, 210, 211, 212, 213, 215, 216, 217, 218, 219, 220, 222, 223, 225 Independent Trustee Services Ltd v GP Noble Trustees Ltd [2012] EWCA Civ 195, [2013] Ch 91����������������������������������������229, 242, 243, 246 Industrial Development Consultants Ltd v Cooley [1972] 1 WLR 443 (HC)����������������������������������������������������������������������191, 258, 260 Investment Trust Companies (in liq) v Revenue and Customs Commissioners [2017] UKSC 29, [2018] AC 275���������������������������������viii, ix, xi, 8, 85, 98, 104, 120, 138, 143, 229, 241 Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896 (HL)����������������������������������������������������������150 Jarvis decd, In re [1958] 1 WLR 815 (Ch)����������������������������������������������������������������197 Jindal Iron and Steel Co Ltd v Islamic Solidarity Shipping Co Jordan Inc [2004] UKHL 49, [2005] 1 WLR 1363��������������������������������������������141

xxii  Table of Cases John Alexander’s Clubs Pty Ltd v White City Tennis Club Ltd [2010] HCA 19, (2010) 241 CLR 1��������������������������������������������������������� vi, 19, 150, 158, 159, 176, 268 Kakavas v Crown Melbourne Ltd [2013] HCA 25, 250 CLR 392���������������� 132, 135 Kao Lee & Yip (a firm) v Koo Hoi Yan [2003] 3 HKLRD 296 (HKCFI)������������������������������������������������������������������������������������������������193, 194, 195 Keech v Sandford (1726) Sel Cas T King 61, 25 ER 223 (C)������������������������� 185, 257 Keith Henry & Co Pty Ltd v Stuart Walker & Co Pty Ltd (1958) 100 CLR 342����������������������������������������������������������������������������������������������167 Kelly v Cooper [1993] AC 205 (PC)��������������������������������������������������������������� 150, 180, 215, 216, 218 Kelly v Solari (1841) 9 M & W 45, 152 ER 24�����������������������������56, 77, 112, 133, 134 Kentucky Caves case. See Edwards v Lee’s Administrator Keppel v Wheeler [1925] 1 KB 577 (CA)��������������������������������������������������������� 25, 214, 215, 216, 217, 218, 219 Kerr v Baranow 2011 SCC 10, [2011] 1 SCR 269����������������������������������������������������108 Kingstreet Investments Ltd v New Brunswick (Department of Finance) 2007 SCC 1, [2007] 1 SCR 3����������������������������������������������������� 95, 108 Kleinwort Benson Ltd v Lincoln City Council [1999] 2 AC 349 (HL)������������������������������������������������������������������������5, 56, 119, 140 LAC Minerals Ltd v International Corona Resources Ltd [1989] 2 SCR 574, (1989) 61 DLR (4th) 14, (1989) 69 OR (2d) 287������������������� 18, 149, 159, 267 Lewis v Averay [1972] 1 QB 198 (CA),�����������������������������������������������������������������������57 Lewis v Nortex Pty Ltd (in liq) [2005] NSWSC 482�����������������������������������������������264 Libertarian Investments Ltd v Hall [2013] HKCFA 93, (2013) 16 HKCFAR 681�����������������������������������������������������������������������153, 243, 259 Lifeplan Australia Friendly Society Ltd v Ancient Order of Foresters in Victoria Friendly Society Ltd [2017] FCAFC 74, (2017) 250 FCR 1���������������������������������������������������������������������������������187, 188, 192 Lifestyles Investment Group v Coral Investments Securities Ltd [2017] NZHC 1639�����������������������������������������������������������������������������������������������239 Lipkin Gorman v Karpnale Ltd [1991] 2 AC 548 (HL), [1992] 4 All ER 331������������������������������������������������������������������������������ ix, 34, 72, 77, 78, 120, 133, 245, 247 Lister & Co v Stubbs (1890) 45 Ch D 1 (CA)������������������������������������������������� 163, 172 Logicrose Ltd v Southend United Football Club Ltd [1988] 1 WLR 1256 (Ch)��������������������������������������������������������������������������������������267 London Allied Holdings Ltd v Lee [2007] EWHC 2061 (Ch), [2007] All ER (D) 153 (Sep)����������������������������������������������������������������������������������14 London Loan & Savings Co of Canada v Brickenden [1933] SCR 257����������������193 Lonrho plc v Fayed (No 2) [1992] 1 WLR 1 (Ch)�����������������������������������������������������39 Lord Napier and Ettrick v Hunter [1993] AC 713 (HL)�������������������������������������������42 Lord Provost of Edinburgh v Lord Advocate (1879) 4 App Cas 823 (HL)����������197

Table of Cases  xxiii Lowick Rose LLP v Swynson Ltd [2017] UKSC 32, [2018] AC 313���������������������107 Lumbers v W Cook Builders Pty Ltd (in liq) [2008] HCA 27, (2008) 232 CLR 635�������������������������������������������������������������������������������� x, 120, 124, 125, 127, 130, 132 Luntley v Royden (1678) Fin H 381, 23 ER 209 (A)�����������������������������������������������197 Lym International Pty Ltd v Chen [2009] NSWSC 167�����������������������������������������201 Macadam, Re [1946] Ch 73����������������������������������������������������������������������������������������197 Macmillan Inc v Bishopsgate Investment Trust plc (No 3) [1995] 1 WLR 978 (Ch)��������������������������������������������������������������������������������������2, 44 Macmillan Inc v Bishopsgate Investment Trust plc (No 3) [1996] 1 WLR 387 (CA)���������������������������������������������������������������������������������������230 Maguire v Makaronis (1997) 188 CLR 449���������������������������������������21, 172, 191, 260 Mahesan s/o Thambiah v Malaysia Government Officers’ Co-Operative Housing Society Ltd [1979] AC 374 (PC)����������������255, 265, 267 Maketu Estates Ltd v Robb [2014] NZHC 2664, (2014) 16 NZCPR 166�������������216 Manchester Trust Ltd v Furness [1895] 2 QB 539 (CA)�������������������������������������������18 Manifest Shipping Co Ltd v Uni-Polaris Insurance Co Ltd [2001] UKHL 1, [2003] 1 AC 469�����������������������������������������������������������������������207 Marine Trade SA v Pioneer Freight Futures Co Ltd BVI [2009] EWHC 2656 (Comm), [2010] 1 Lloyd’s Rep 631�����������������������������������56 Martin v Pont [1993] 3 NZLR 25 (CA)��������������������������������������������������������������������125 Mason v New South Wales (1959) 102 CLR 108�����������������������������������������������������121 Matheson v Smiley [1932] 2 DLR 787 (Man CA)������������������������������������������ 108, 109 MCC Proceeds Inc v Lehman Brothers International (Europe) [1998] 4 All ER 675 (CA)���������������������������������������������������������������������������������������40 McInerney v MacDonald [1992] 2 SCR 138������������������������������������������������������������169 McLennan v Livaja [2017] NZCA 446������������������������������������������������������������ 229, 240 Meinhard v Salmon 249 NY 458, 164 NE 545 (1928)�������������������166, 167, 168, 179 Menelaou v Bank of Cyprus UK Ltd. See Bank of Cyprus UK Ltd v Menelaou Menkens v Wintour [2009] QSC 206�����������������������������������������������������������������������192 Metropolitan Bank v Heiron (1880) 5 Ex D 319 (CA)�������������������������������������������163 Michael Wilson & Partners Ltd v Nicholls [2011] HCA 48, (2011) 244 CLR 427������������������������������������������������������������������������������� 29, 256, 262 Milanese v Leyton Orient Football Club Ltd (Rev 1) [2016] EWHC 1161 (QB), [2016] IRLR 601������������������������������������������������������224 Ministry of Health v Simpson (Re Diplock) [1951] AC 251 (HL)��������������� 127, 248 Montagu’s Settlement Trusts, Re [1987] Ch 264 ��������������������������������������������� 26, 239 Montrose Investments Ltd v Orion Nominees Ltd [2004] EWCA Civ 1032, [2004] WTLR 1133����������������������������������������������������244 Morlea Professional Services Pty Ltd v Richard Walter Pty Ltd (in liq) [1999] FCA 1820, (1999) 96 FCR 217�������������������������������������244 Moses v Macferlan (1760) 2 Burr 1005, 97 ER 676������������������������������������������� 11, 36, 131, 133, 134

xxiv  Table of Cases Murad v Al-Saraj [2005] EWCA Civ 959, [2005] WTLR 1573����������������������� 22, 23, 183, 184, 191, 192, 198, 200, 257, 258, 259 Muschinski v Dodds (1985) 160 CLR 583���������������������������������������������������������������121 National Bank of New Zealand v Waitaki International Processing (NI) Ltd [1999] 2 NZLR 211 (CA)������������������������������������������������������������������������78 National Commercial Banking Corporation of Australia Ltd v Batty (1986) 160 CLR 251������������������������������������������������������������������������������������� 121, 132 National Funds Assurance Co, Re (1878) 10 Ch D 118�����������������������������������������135 Nesté Oy v Lloyd’s Bank plc [1983] 2 Lloyd’s Rep 658 (QB)�����������������������������������59 New Zealand and Australian Land Co v Watson (1881) 7 QBD 374 (CA)�����������18 New Zealand Netherlands Society “Oranje” Inc v Kuys [1973] 1 WLR 1126 (PC)����������������������������������������������������������������������� 19, 180, 189 New Zealand Shipping Co Ltd v AM Satterthwaite & Co Ltd [1975] AC 154 (PC)������������������������������������������������������������������������������������������������33 News Ltd v Australian Rugby Football League Ltd [1996] FCA 870, (1996) 64 FCR 410��������������������������������������������������������������������������������������� 174, 177 Nitedals Taendstikfabrik v Bruster [1906] 2 Ch 671�������������������������24, 25, 211, 212 Noranda Australia Ltd v Lachlan Resources NL (1988) 14 NSWLR 1 (NSWSC)���������������������������������������������������������������������������150 Norwich Pharmacal Co v Customs and Excise Commissioners [1974] AC 133 (HL)����������������������������������������������������������������������������������������������243 Norwich Union Fire Insurance Society Ltd v Price [1934] AC 455 (PC)��������������57 Novoship (UK) Ltd v Mikhaylyuk [2012] EWHC 3586 (Comm), [2012] All ER (D) 158 (Dec)��������������������������������������������������������������������������������266 Novoship (UK) Ltd v Mikhaylyuk [2014] EWCA Civ 908, [2015] QB 499����������������������������������������������������������������������������������29, 30, 256, 257, 259, 260, 261, 266, 267 Nurdin & Peacock plc v D B Ramsden & Co Ltd [1999] 1 WLR 1249 (Ch)���������56 Oatway, Re [1903] 2 Ch 356�������������������������������������������������������������������������������������6, 73 Ocean Frost, The. See Armagas Ltd v Mundogas SA Ogden v Trustees of the RHS Griffiths 2003 Settlement [2008] EWHC 118 (Ch), [2009] Ch 162��������������������������������������������������������������57 Omak Maritime Ltd v Mamola Challenger Shipping Co Ltd [2010] EWHC 2026 (Comm), [2011] 2 All ER (Comm) 155���������������������������80 Omegas Group, Re 16 F 3d 1443 (6th Cir 1994)������������������������������������������������ 81, 82 O’Sullivan v Management Agency and Music Ltd [1985] QB 428 (CA)������������196, 197, 200, 201, 263 Otkritie International Investment Management Ltd v Urumov [2014] EWHC 191 (Comm), [2014] All ER (D) 111 (Feb)�����������������������������255 Ovidio Carrideo Nominees Pty Ltd v The Dog Depot Pty Ltd [2006] VSCA 6, (2006) V ConvR 54-713�������������������������������������������������������������25 Pan Ocean Shipping Ltd v Creditcorp Ltd (The Trident Beauty) [1994] 1 WLR 161 (HL)�������������������������������������������������������������������������������������x, 31

Table of Cases  xxv Panama and South Pacific Telegraph Co v India Rubber, Gutta Percha, and Telegraph Works Co (1875) LR 10 Ch App 515 (DC)���������������������������� 207, 267 Papadimitriou v Crédit Agricole Corporation and Investment Bank [2015] UKPC 13, [2015] 1 WLR 4265�������������������������������������������������������������� 27, 28, 235, 236, 237, 238, 239, 240, 241 Paper Reclaim Ltd v Aotearoa International Ltd [2007] NZSC 26, [2007] 3 NZLR 169�������������������������������������������������������������������������������������������������19 Paragon Finance plc v DB Thakerar & Co [1999] 1 All ER 400 (CA)������������������254 Parker v British Airways Board [1982] QB 1004 (CA)��������������������������������������������42 Parry v Roberts (1835) 3 Ad & E 118, 111 ER 358��������������������������������������������������125 Patel v Brent London Borough Council [2003] EWHC 3081 (Ch), [2004] 3 PLR 1�������������������������������������������������������������������������������������������������������196 Patel v Mirza [2016] UKSC 42, [2017] AC 467�������������������������������������������������������164 Pavey & Matthews Pty Ltd v Paul (1987) 162 CLR 221���������������x, 31, 120, 121, 123 Peel (Regional Municipality) v Canada [1992] 3 SCR 762����������������������������� 95, 105 Pehrsson (a bankrupt) (Trustee of the Property of) v Von Greyerz [1999] 4 LRC 135 (PC)�������������������������������������������������������������������������������������������43 Pennington v Waine [2002] EWCA Civ 227, [2002] 1 WLR 2075�������������� 162, 163 Peppy, The. See Stewart Chartering Ltd v Owners of the Ship ‘Peppy’ Pettkus v Becker [1980] 2 SCR 834, 117 DLR (3d) 257������������������������������������������108 Phipps v Boardman [1964] 1 WLR 993 (Ch)���������������������������������196, 197, 198, 199 Phipps v Boardman [1965] Ch 992 (CA)����������������������������������������196, 197, 198, 199 Pilmer v Duke Group Ltd (in liq) [2001] HCA 31, (2001) 207 CLR 165������������������������������������������������������������������������������������� 169, 170 Pitt v Holt [2011] EWCA Civ 197, [2012] Ch 132����������������������������������������������������57 Pitt v Holt [2013] UKSC 26, [2013] 2 AC 108��������������������������������������52, 57, 58, 163 Polly Peck International plc (in administration) (No 2), Re [1998] 3 All ER 812 (CA)�������������������������������������������������������������������������������������� 14, 81, 82 Potters-Ballotini v Weston-Baker (1977) 94 RPC 202 (CA)����������������������������������193 Pounamu Properties Ltd v Brons [2012] NZHC 590���������������������������������������������239 Powell v Thompson [1991] 1 NZLR 597 (HC)��������������������������������������������������������139 Premium Real Estate Ltd v Stevens [2009] NZSC 15, [2009] 2 NZLR 384����������24, 205, 216, 217, 258 Prest v Petrodel Resources Ltd [2013] UKSC 34, [2013] 2 AC 415����������������������264 Primlake Ltd (in liq) v Matthews Associates [2006] EWHC 1227 (Ch), [2007] 1 BCLC 666������������������������������������������������������������������������������������������������245 Pulvers (A Firm) v Chan [2007] EWHC 2406 (Ch), [2008] PNLR 9�������������������244 Queensland Mines Ltd v Hudson (1978) 18 ALR 1 (PC)��������������������������������������257 R v Brown (1912) 14 CLR 17�������������������������������������������������������������������������������������133 Rahme v Smith & Williamson Trust Corp Ltd [2009] EWHC 911 (Ch), [2009] All ER (D) 239 (Apr)�����������������������������������������������������������24, 25, 217, 218 Ramsay Health Care Australia Pty Ltd v Compton [2017] HCA 28, 345 ALR 534������������������������������������������������������������������������������244 Ranger v Great Western Railway Co (1854) 5 HLC 72, 10 ER 824���������������������������x

xxvi  Table of Cases Regal (Hastings) v Gulliver [1967] 2 AC 134 (HL)��������������������������������������� 183, 186, 189, 191, 192, 196, 257, 262 Reid-Newfoundland Co v Anglo-American Telegraph Co Ltd [1912] AC 555 (PC)����������������������������������������������������������������������������������������������178 Relfo Ltd v Varsani [2012] EWHC 2168 (Ch), [2012] All ER (D) 12 (Aug)�������245 Relfo Ltd v Varsani [2014] EWCA Civ 360, [2015] 1 BCLC 14���������������������� 66, 72, 75, 76, 245 Rhodes v Macalister (1923) 29 Com Cas 19 (CA)����������������������������������������� 212, 213 Richards v Worcestershire County Council [2016] EWHC 1954 (Ch), [2017] WTLR 117�������������������������������������������������������������������������������������������������126 Roberts v Gill & Co [2010] UKSC 22, [2011] 1 AC 240������������������������������� 245, 248 Robinson, Re [1911] 1 Ch 502�������������������������������������������������������������������������� 244, 245 Robinson v Harman (1848) 1 Exch 850, 154 ER 363������������������������������������������������80 Robinson v Robinson (1851) 1 De G M & G 247, 42 ER 547��������������������������������183 Robinson Scammell & Co v Ansell [1985] 2 EGLR 41 (CA)������������������������ 207, 214 Rogers v Price (1829) 3 Y & J 28, 148 ER 1080�������������������������������������������������������109 Roles v Pascall & Sons [1911] 1 KB 982 (CA)�����������������������������������������������������������56 Rolfe v Gregory (1864–1865) 4 De G J & S 576, 46 ER 1042���������������������������������254 Rose, Re [1952] Ch 499 (CA)���������������������������������������������������������������������������������2, 36, 40, 42, 43, 44, 45, 46 Rothko (Estate of), Re 43 NY 2d 305, 372 NE 2d 291 (1977)�������������������������������239 Rover International Ltd v Cannon Film Sales Ltd (No 2) [1989] 1 WLR 912 (CA)���������������������������������������������������������������������������������������116 Roxborough v Rothmans of Pall Mall Australia Ltd [2001] HCA 68, (2001) 208 CLR 516�������������������������������������������������������������������������������� x, 123, 124, 125, 126, 127, 128, 132, 134, 136 Royal Bank of Scotland plc v Etridge (No 2) [2001] UKHL 44, [2002] 2 AC 773����������������������������������������������������������������������������������������������������� viii Royal Brunei Airlines Sdn Bhd v Tan [1995] 2 AC 378 (PC)�������������������������� 28, 29, 30, 238, 240, 253, 254, 256, 261, 265 Sainsbury (J) plc v O’Connor (Inspector of Taxes) [1991] 1 WLR 963 (CA)��������42 Salford Corporation v Lever [1891] 1 QB 168 (CA)�����������������������������������������������265 Salomons v Pender (1865) 3 H & C 639, 159 ER 682����������������������24, 207, 208, 225 Salomons v Pender (1865) 34 LJ (NS) Ex 95������������������������������������������207, 208, 210 Saltman Engineering Co Ltd v Campbell Engineering Co Ltd (1948) 65 RPC 203 (CA)��������������������������������������������������������������������������������������193 Saunders v Vautier (1841) 4 Beav 115, 49 ER 282�����������������������������������������������������71 Saunders v Vautier (1841) Cr & Ph 240, 41 ER 482������������������������������������������������245 Say-Dee Pty Ltd v Farah Constructions Pty Ltd [2005] NSWCA 309�������� 127, 200 Scandinavian Trading Tanker Co AB v Flot Petrolera Ecuatoriana (The Scaptrade) [1983] QB 529 (CA)���������������������������������������������������������� 18, 141 Scaptrade, The. See Scandinavian Trading Tanker Co AB v Flot Petrolera Ecuatoriana Scruttons Ltd v Midland Silicones Ltd [1962] AC 446 (HL)�����������������������������������33

Table of Cases  xxvii Securities and Exchange Commission v Chenery Corp 318 US 80 (1943)���������168 Securities and Exchange Commission v MacDonald 699 F 2d 47 (1st Cir 1983)���������������������������������������������������������������������������������������������������������193 Selangor United Rubber Estates Ltd v Cradock (No 3) [1968] 1 WLR 1555 (Ch)��������������������������������������������������������������������������������������254 Sempra Metals Ltd v IRC [2007] UKHL 34, [2008] AC 561�����������������������������������78 Shalson v Russo [2003] EWHC 1637 (Ch), [2005] Ch 281�������������������������������������66 Shepherd v Mouls (1845) 4 Hare 500, 67 ER 746����������������������������������������������������239 Shogun Finance Ltd v Hudson [2003] UKHL 62, [2004] 1 AC 919�����������������������58 Siddell v Vickers (1892) 9 RPC 152 (CA)����������������������������������������������������������������184 Sinclair v Brougham [1914] AC 398 (HL)�������������������������������������������������������� 48, 119 Sinclair Investments (UK) Ltd v Versailles Trade Finance Ltd [2011] EWCA Civ 347, [2012] Ch 453����������������������������������������27, 163, 164, 235 Soar v Ashwell [1893] 2 QB 390 (CA)����������������������������������������������������������������������265 Soulemezis v Dudley (Holdings) Pty Ltd (1987) 10 NSWLR 247 (NSWCA)�����160 South Australian Cold Stores Ltd v Electricity Trust of South Australia (1957) 98 CLR 65��������������������������������������������������������� 132, 133 Space Investments Ltd v Canadian Imperial Bank of Commerce Trust Co (Bahamas) Ltd [1986] 1 WLR 1072 (PC)�������������������������������������������������������������71 Stern v McArthur (1988) 165 CLR 489��������������������������������������������������������������������122 Stevens v Premium Real Estate Ltd. See Premium Real Estate Ltd v Stevens Stewart Chartering Ltd v Owners of the Ship ‘Peppy’ (The Peppy) [1997] 2 Lloyd’s Rep 722 (QB)�����������������������������������������������������������������������������211 Stocznia Gdanska SA v Latvia Shipping Co [1998] 1 WLR 574 (HL)���������� viii, 116 Stoltze v Fuller [1939] SCR 235, 1 DLR 1�����������������������������������������������������������������114 Streetscape Projects (Australia) Pty Ltd v City of Sydney [2013] NSWCA 2, (2013) 85 NSWLR 196������������������������������������������ 19, 177, 178 Stupples v Stupples & Co (High Wycombe) Ltd [2012] EWHC 1226 (Ch), [2013] 1 BCLC 729���������������������24, 25, 218, 219, 224 Sze Tu v Lowe [2014] NSWCA 462, (2014) 89 NSWLR 317���������������������������������259 Tang Man Sit (Personal Representatives of) v Capacious Investments Ltd [1996] AC 514 (PC)���������������������������������������������������������� 34, 251 Tang Ying Ip v Tang Ying Loi [2017] HKCFA 3, [2017] 2 HKC 502, (2017) 20 HCCFAR 53�������������������������������������������������������������������������183, 186, 260 Tanwar Enterprises Pty Ltd v Cauchi [2003] HCA 57, (2003) 217 CLR 315�������������������������������������������������������� 11, 12, 132, 136, 137, 233 Target Holdings Ltd v Redferns [1996] AC 421 (HL)�������������������������������� vii, 13, 62, 153, 154, 155, 156, 258 Taylor v Blakelock (1886) 32 Ch D 560 (CA)����������������������������������������������������������231 Taylor v Plumer (1815) 3 M & S 562, 105 ER 721�����������������������������������������������������78 Terrapin Ltd v Builders’ Supply Co (Hayes) Ltd (1967) 84 RPC 375 (Ch) 391��������������������������������������������������������������������������������193 Thanakharn Kasikorn Thai Chamkat v Akai Holdings [2010] HKCFA 63, (2010) 13 HKCFAR 479������������������������������������������������������ viii

xxviii  Table of Cases Thornton Hall and Partners v Wembley Electrical Appliances Ltd [1947] 2 All ER 630 (CA)�������������������������������������������������������������������������������������207 Timber Engineering Co Pty Ltd v Anderson [1980] 2 NSWLR 488 (NSWSC)���������������������������������������������������������������� 263, 264 Tinsley v Milligan [1994] 1 AC 340 (HL)��������������������������������������������������������������������4 Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd [2004] HCA 52, (2004) 219 CLR 165����������������������������������������������������������������������������������������������150 Torbay Holdings Ltd v Napier [2015] NZHC 2477������������������������������������������������245 Town & Country Property Management Services Pty Ltd v Kaltoum [2002] NSWSC 166�����������������������������������������������������������������������������������������������187 Traditional Values Management Ltd (in liq) v Who Investments Pty Ltd [2015] VSC 518����������������������������������������������������������������������������������������135 Transfield Shipping Inc v Mercator Shipping Inc (The Achilleas) [2008] UKHL 48, [2009] AC 61��������������������������������������������������������������������������204 Trident Beauty, The. See Pan Ocean Shipping Ltd v Creditcorp Ltd Trident General Insurance Co Ltd v McNiece Bros Pty Ltd (1988) 165 CLR 107��������������������������������������������������������������������������������������� 33, 122 Trustor AB v Smallbone (No 2) [2001] EWHC 703 (Ch), [2001] 1 WLR 1177�����������������������������������������������������������������������������������������������264 Twinsectra Ltd v Yardley [2002] UKHL 12, [2002] 2 AC 164������������������ 29, 52, 254 Ultraframe (UK) Ltd v Fielding [2005] EWHC 1638 (Ch), [2006] FSR 16������������������������������������������������������������������������������������������������� 29, 255, 259, 261, 262, 266 United Dominions Corp Ltd v Brian Pty Ltd (1985) 157 CLR 1���������������� 149, 172, 177, 179 United Pan-Europe Communications NV v Deutsche Bank AG [2000] EWCA Civ 166, [2000] 2 BCLC 461�������������������������������������191, 258, 260 United States Surgical Corporation v Hospital Products International Pty Ltd [1983] 2 NSWLR 157 (NSWCA)�����������������������������������198 University of Canterbury v Attorney-General [1995] 1 NZLR 78 (HC)����������������57 V-Flow Pty Ltd v Holyoake Industries (Vic) Pty Ltd [2013] FCAFC 16, 296 ALR 418���������������������������������������������������������������� 188, 197 Vallejo v Wheeler (1774) 1 Cowp 143, 98 ER 1012��������������������������������������� 141, 147 Vandervell v IRC [1967] 2 AC 291 (HL) 39,��������������������������������������������������������������43 Vandervell’s Trusts (No 2), Re [1974] Ch 269 (CA)��������������������������������������������������43 Vercoe v Rutland Fund Management Ltd [2010] EWHC 424 (Ch), [2010] Bus LR D141������������������������������������������������������������������������������������������������13 Victoria Park Racing & Recreational Grounds Co Ltd v Taylor (1937) 58 CLR 479������������������������������������������������������������������������������������������� 8, 100 Vyse v Foster (1872) LR 8 Ch App 309 (CA)��������������������������������������������������� 23, 188, 204, 205, 262 Wait, Re [1927] 1 Ch 606 (CA)������������������������������������������������������������������������������������18 Walsh v Lonsdale (1882) 21 Ch D 9����������������������������������������������������������������������������42 Wambo Coal Pty Ltd v Ariff [2007] NSWSC 589, 25 ACLC 809��������������������������239

Table of Cases  xxix Warman International Ltd v Dwyer (1995) 182 CLR 544������������������������������ 22, 159, 171, 172, 186, 187, 188, 190, 191, 192, 193, 195, 197, 198, 199, 200, 259, 260, 262, 263, 267 Wee Chiaw Sek Anna v Ng Li-Ann Genevieve [2013] SGCA 36, [2013] 3 SLR 801���������������������������������������������������������������������241 Westdeutsche Landesbank Girozentrale v Islington LBC [1996] AC 669 (HL)��������������������������������������������������������������������vi, viii, 3, 4, 14, 34, 36, 39, 41, 43, 47, 48, 49, 50, 51, 52, 53, 55, 58, 59, 63, 79, 83, 126, 140, 158, 242 Westpac Banking Corp v Bell Group Ltd (in liq) (No 3) [2012] WASCA 157, (2012) 44 WAR 1���������������������������������������������������������������170 Westpac Banking Corp v Savin [1985] 2 NZLR 41 (CA)������������������������������� viii, 239 Westpac New Zealand Ltd v Map & Associates Ltd [2010] NZCA 404, [2011] 2 NZLR 90����������������������������������������������������������������238 Westpac New Zealand Ltd v Map & Associates Ltd [2011] NZSC 89, [2011] 3 NZLR 751�����������������������������������������������������������������238 Williams v Central Bank of Nigeria [2014] UKSC 10, [2014] AC 1189����� 253, 254 Woolwich Equitable Building Society v IRC [1993] AC 70 (HL)���������viii, 108, 248 Wright Hassall LLP v Horton Jr [2015] EWHC 3716 (QB), [2016] All ER (D) 28 (Jan)�������������������������������������������������������������������� 25, 224, 225 Yates v Finn (1880) 13 Ch D 839�������������������������������������������������������������������������������197 Yeatman v Yeatman (1877) 7 Ch D 210��������������������������������������������������������������������246 Yeoman’s Row Management Ltd v Cobbe [2008] UKHL 55, [2008] 1 WLR 1752�����������������������������������������������������������������������������������������������120 Young v Murphy [1996] 1 VR 279 (CA)������������������������������������������������������������������244 Zeital v Kaye [2010] EWCA Civ 159, [2010] 2 BCLC 1�����������������������������������������163 Zhu v Treasurer of the State of New South Wales [2004] HCA 56, (2004) 218 CLR 530������������������������������������������������������������������������������������� 172, 256

xxx

TABLE OF LEGISLATION Australia Commonwealth Consumer and Competition Act 2010 (Cth) s 51AA��������������������������������������������������������������������������������������������������������������������132 Corporations Act 2001 (Cth) (as amended) s 588FA�������������������������������������������������������������������������������������������������������������������231 s 588FB�������������������������������������������������������������������������������������������������������������������231 s 588FC�������������������������������������������������������������������������������������������������������������������231 s 588FE��������������������������������������������������������������������������������������������������������������������231 Queensland Trustee Act 1956 s 35��������������������������������������������������������������������������������������������������������������������������248 Western Australia Trustees Act 1962 s 65��������������������������������������������������������������������������������������������������������������������������248 Canada Civil Code of Lower Canada (in force 1866–1993)������������������������������������������������104 Germany BGB (Civil Code) §812 BGB�������������������������������������������������������������������������������������������������������� 99, 104 New Zealand Administration Act 1969 ss 149–151��������������������������������������������������������������������������������������������������������������248

xxxii  Table of Legislation Companies Act 1993 (NZ) (as amended) s 292(1) ������������������������������������������������������������������������������������������������������������������231 s 297(1)�������������������������������������������������������������������������������������������������������������������231 Contracts Privity Act 1982�������������������������������������������������������������������������������������������33 United Kingdom Contracts (Rights of Third Parties) Act 1999������������������������������������������������������������33 Cross-Border Insolvency Regulations 2006, SI 2006/1030��������������������������� 227, 230 Insolvency Act 1986 s 127���������������������������������������������������������������������������������������� 26, 227, 228, 231, 232 s 238������������������������������������������������������������������������������������������������������������������������232 s 239������������������������������������������������������������������������������������������������������������������������232 s 436������������������������������������������������������������������������������������������������������������������������228 Law of Property Act 1925 s 199(1)(ii)(a)���������������������������������������������������������������������������������������������������������235 Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017, SI 2017/692 Part 3�������������������������������������������������������������������������������������������������������������������������27 Torts (Interference with Goods) Act 1977�����������������������������������������������������������������40 United States Restatement (Third) of Restitution and Unjust Enrichment�����������������������������������82 European and International Regulation 864/2007 on Non-contractual Obligations (Rome II Regulation) Art 10.3�������������������������������������������������������������������������������������������������������������������230 Art 23����������������������������������������������������������������������������������������������������������������������230 UNCITRAL Model Law on Cross-Border Insolvency�������������������������������������������227

LIST OF CONTRIBUTORS Peter Devonshire is Professor of Law at the University of Auckland. Stephen Gageler is a Justice of the High Court of Australia. Matthew Harding is Professor of Law at the University of Melbourne. Rohan Havelock is Senior Lecturer in Law at the University of Auckland. David Hayton is a Justice of the Caribbean Court of Justice, Bencher of Lincoln’s Inn and Fellow of King’s College, London. Lusina Ho is Harold Hsiao-Wo Lee Professor in Trust and Equity at the University of Hong Kong. Peter Jaffey is Professor of Law at the University of Leicester. Lionel Smith is Sir William C Macdonald Professor at McGill University and Visiting Professor at the Faculty of Law, Oxford University. Peter Watts is a Barrister at Bankside Chambers, Auckland and Professor of Law at the University of Auckland and Senior Research Fellow at Harris Manchester College, Oxford. Sarah Worthington is Downing Professor of the Laws of England at the University of Cambridge and Director of the Cambridge Private Law Centre.

xxxiv

1 Introduction: The Macro Level PETER DEVONSHIRE AND ROHAN HAVELOCK

I. Overview It is trite that equity and the law of restitution have made a profound and lasting contribution to the development of the common law. In order to examine and assess their impact in commerce, it is logical to begin with their basic function in the scheme of private law. Any definition of this is necessarily general given that their development has been organic and, in the case of equity, has spanned many centuries. For present purposes, it may be observed that equity and the law of restitution share a basic and distinct function which is: (1) corrective of problems affecting certain relationships, transactions, and other events involving legal actors; and (2) largely but not exclusively, supplementary in the sense of addressing gaps in other areas of private law or enforcing particular normative constructs, such as the trust. This function may be regarded as indispensable to the achievement of justice by  the common law legal system having regard to its origins and development within evolving political, economic and social contexts. However, its effects have caused enduring difficulties in settling, and even simply defining, the precise relationships which equity and restitution have with the areas of private law they intersect, especially the law of contract and the law of property. Bearing on this high-level question are the disparate values and standards informing the application of the rules and principles of equity and the law of restitution. If coherence and stability within commercial law are prized to ensure the effective operation of commerce, then these foundational questions must be carefully worked through. Chapters three to seven of this collection attempt to confront such macro level questions, raising issues of taxonomy, doctrine and policy. The positions taken on these questions will shape, and arguably should determine, the nature and extent of rights, obligations and remedies when equity and the law of restitution are invoked in particular cases. At this stage, the financial and practical outcomes are in view and it is possible to identify concrete consequences for commercial parties. Chapters eight to twelve of this collection are concerned with such micro level issues.

2  Peter Devonshire and Rohan Havelock

II.  An Analytical Framework and the Scope of Proprietary Relief A.  The Boundaries of Contract, Equity and Unjust Enrichment Chapter three, written by Sarah Worthington, aptly sets the stage for the entire collection. In a masterly and extensive analysis, Worthington examines some of the most prominent tensions and difficulties at the intersections of three core areas of private law: contract; property (in which she locates equity); and unjust enrichment. The familiar example of a mistaken payment is used to demonstrate that unjust enrichment and property law (via a trust1) might assist with the same problem yet deliver different responses with different justifications. As a means of reducing such boundary conflicts and making the core areas of private law work together coherently, Worthington carefully articulates four crucial points to assist analysis. First, Worthington emphasises that property questions must necessarily be answered before liability questions. Thus, the location of legal title to assets and the location of any derivative interests (including trust interests) in those assets must be settled first, not least because legal entitlement and factual enjoyment may be in different people. Worthington further argues that when it comes to trust interests, the line between location and liability need not be fraught. By reference to the difficulties posed by Re Rose2 and Macmillan Inc v Bishopsgate Investment Trust plc,3 she demonstrates that identifying who is entitled to the economic benefit of assets is still a property location question which depends fundamentally on the intention and consent of the transferor. Absent such intention or content, the entitlement of the transferor persists despite the transfer of legal title. Although beyond the scope of the chapter, the fundamental question of the normative basis of this entitlement still demands to be settled.4 Second, turning to liability questions, Worthington observes that contract and tort law are concerned with individuals, with remedies designed to reinstate or restore the parties’ positions. In contrast, unjust enrichment and trust law are concerned with assets, with remedies designed to deliver what was expected from the assets assuming their proper handling and management.5 This observation is powerful in its simplicity and clarity, although it needs to be construed in a purely

1 As recognised in the controversial judgment in Chase Manhattan Bank NA v Israel-British Bank (London) Ltd [1981] Ch 105. 2 Re Rose [1952] Ch 499 (CA). 3 Macmillian Inc v Bishopsgate Investment Trust plc [1995] 1 WLR 978 (Ch). 4 The two main accounts lie in corrective justice theory, and in a ‘property-based’ explanation. See further RA Havelock, ‘Justifying Unjust Enrichment’ [2017] LMCLQ 566. 5 See ch 3, section VI.

Introduction: The Macro Level  3 f­unctional sense, to avoid the objection that there can be some crossover in the concerns of these areas. Contractual and tortious rights of individuals are often dependent on, or at least closely intertwined with, property interests. Certain causes of action and remedies may, to differing extents, serve to protect those property interests indirectly through personal liability.6 It might be questioned whether trust law can be explained entirely in terms of asset handling and management. Where a trustee profits from a trust asset, or even from using information or an opportunity belonging in equity to the beneficiaries, it seems strained to say that disgorgement of the profit delivers what was expected from any asset in the stewardship of the trustee, assuming its proper handling and management. Rather, it delivers the particular conduct expected from the trustee: loyalty in discharging his or her trusteeship, including abstention from making unauthorised profit. In relation to unjust enrichment, it might be objected that the orthodox remedy (personal restitution) has a less sophisticated design than that ascribed to it: it corrects an unintended transfer of an asset by requiring the transferee to make restitution of its value to the transferor. What is expected from the asset, in the form of a particular use or otherwise, does not bear on such correction. Third, both trust law and unjust enrichment law are concerned not simply with assets, but with entitlement to the economic benefit of assets. This terminology is intended to distinguish this entitlement from other benefits, including possession, which might be derived from assets. Worthington argues that this core entitlement means that, despite existing authority, remedies for unjust enrichment should be proprietary if the property in question is identifiable, with liability limited by the change of position defence. The result is to align the common law and equitable responses to unjust enrichment.7 This is a strongly fusionist view which assumes: (1) that equitable proprietary claims should be subsumed within unjust enrichment, despite strong authority to the contrary;8 and (2) that the appropriate response to common law and equitable claims alike is a trust interest. These assumptions do not command universal assent. In her analysis, Worthington revisits the vexed debate as to the availability of proprietary restitution,9 famously rejected in Westdeutsche Landesbank ­Girozentrale v Islington LBC in the context of void contracts.10 In the basic case of a voluntary transfer of property from A to B, Worthington is critical of the positive presumption adopted by Lord Browne-Wilkinson (ie that A intended B to hold the 6 In tort, notable examples are negligence involving property, trespass, nuisance, conversion and detinue. 7 See ch 3, section IV. Worthington makes clear that personal claims in unjust enrichment should exist in parallel, and would remain the dominant mode of enforcement given that in most cases the transferee will not retain the originally transferred asset. 8 Foskett v McKeown [2001] 1 AC 102 (HL) 129 (Lord Millett). 9 For an overview of this, see A Burrows, The Law of Restitution, 3rd edn (Oxford, Oxford University Press, 2011) ch 8. 10 Westdeutsche Landesbank Girozentrale v Islington LBC [1996] AC 669 (HL).

4  Peter Devonshire and Rohan Havelock property on resulting trust for A). She opines that, framed this way, the presumption of a resulting trust will usually be ruled out11 because it can be rebutted by evidence of any other type of transfer in which B was not intended to hold the property on trust for A. She elaborates that Lord Browne-Wilkinson’s formulation is unrealistic, since in most transactions, not a thought is given to such a presumption. Instead, Worthington favours a return to the long-standing presumption that ‘A did not intend to make a gift to B’ as delivering simple analyses of common factual scenarios. Worthington’s shift in emphasis may well represent a more realistic approach to property transfers. A resulting trust is sometimes described as an implied trust because it gives effect to a presumed intention that in the absence of evidence to the contrary, property must be restored to the transferor. It is uncommon for property to be transferred to another without contemplation of an ultimate transferee or beneficiary.12 That said, Lord Browne-Wilkinson’s formula depicts a limited class of cases, for example, where the transferee cannot rebut the presumption of resulting trust or the clean hands doctrine impedes him from doing so. Finally, Worthington turns to address when individuals are entitled to the economic benefits of assets.13 In cases where legal title has passed, ­Worthington concludes that restitution for unjust enrichment should only be available to claimants who remain entitled to the economic benefit of an asset where either: (1) the claimant’s consent to transfer was vitiated, meaning capacity was lacking or consent was subjectively flawed for reasons caused by the defendant; or (2) the claimant’s consent to transfer was objectively conditional, and the condition has failed totally. In relation to the latter category, Worthington proposes that one means to distinguish between ‘misconceived transfers’ and mere ‘losing commercial deals’, is to allow recovery only where the transfer is objectively intended as an ‘engagement in some commercial risk, not as the gift that it now turns out to be’.14 Taking an example used by Worthington, this would occur if a gas board customer in error paid the same bill twice. The latter payment, would in ­Worthington’s terms, be an unintended gift. Two observations may be made here. First, Worthington excludes causative mistake altogether as a ground of unjust enrichment,15 instead explaining it under the second category.16 Even if the reasons for this are convincing (being concerns 11 Except in cases where an express trust fails. In Westdeutsche (ibid) this was the second basis espoused by Lord Browne-Wilkinson for a presumed resulting trust. 12 Worthington’s claim that presumed resulting trusts will almost never arise may require qualification in non-commercial contexts where a presumptive resulting trust may coincide with the intent of the transferor: see Tinsley v Milligan [1994] 1 AC 340 (HL). 13 In the case of theft, Worthington argues that the reason an owner is entitled to sue a thief in unjust enrichment is because he or she retains legal entitlement to the asset, but the defendant is exercising practical or factual enjoyment of it. On this analysis, where the thief no longer has the asset, presumably the only remedy would be restitution for the value of that enjoyment (however that is to be quantified), not the value of the asset. 14 See ch 3, text following n 116. 15 See ch 3, text following n 114: ‘Mistake does not come into it’. 16 As have others: see, eg P Matthews, ‘Money Paid under Mistake of Fact’ (1980) 130 New Law Journal 587.

Introduction: The Macro Level  5 as to the causation requirement being problematic; as to mistake being inappro­ priately expansive and undermining security of receipt; and as to analytical difficulties in ‘mistake of law’ cases), the pioneers of autonomous unjust enrichment would baulk at its removal. Mistake is regarded as the paradigm case of unjust enrichment,17 and an independent unjust factor.18 It is questionable whether cases of mistake can be satisfactorily subsumed within a wide conception of failure of condition, which generally requires communication of the condition to the t­ransferee,19 which is not present in the case of un-induced mistaken transfer. There is also the fact that the existence of a mistake is determined at the time of transfer, whereas the existence of a failure of consideration is determined­ afterwards.20 Second, the proposed means to determine whether there can be recovery in the second category may not be sufficiently discriminating, and as a result, overinclusive. In the commercial context, the vast majority of transfers will involve transfers by way of engagement in some risk in return for some benefit, and not by way of ‘unintended gift’. This suggests that it is not so much the characterisation of the transfer that is important, but the (total) failure of the benefit to materialise. This subsequent failure means the condition of the transfer has not been satisfied, justifying restitution.

B.  Proprietary Claims and Remedies In chapter four, Peter Jaffey focuses on the appropriate relief at common law and in equity in response to certain defective transfers: those by mistake or without authority. Like Worthington, he argues that this relief should be proprietary where possible. What is unique about Jaffey’s argument is the type of claim which he advocates. This is not a claim to any specific asset, but to surviving value in the form of an abstract part of the defendant’s estate. This is initially equal to the value of the transfer to the defendant, but it may fall below this value. Jaffey argues that an approach based on the concept of surviving value explains both cases where the claimant’s money has been mixed with money of the defendant, and where the defendant has exchanged the claimant’s asset with another asset of approximately equivalent value. In both cases, the existence of surviving value is to be established as a matter of causation by reference to whether the defendant intended to spend the money received. This, in effect, utilises the premise underlying the change of position 17 P Birks, Unjust Enrichment, 2nd edn (Oxford, Oxford University Press, 2005) 4: ‘The law of unjust enrichment is the law of all events materially identical to the mistaken payment of a non-existent debt’. 18 See, eg Kleinwort Benson Ltd v Lincoln City Council [1999] 2 AC 349 (HL), 375; Deutsche Morgan Grenfell Group plc v Inland Revenue Commissioners [2006] UKHL 49, [2007] 1 AC 558 [21]. 19 See Burrows, Restitution (n 9) 219–21. 20 See G Virgo, Principles of the Law of Restitution, 3rd edn (Oxford, Oxford University Press, 2015) 189.

6  Peter Devonshire and Rohan Havelock defence in order to establish a surviving value claim. Thus, in the case of a mixture, if funds are applied for an expenditure that the defendant would otherwise have incurred, the defendant is regarded as spending his own money; if it is not, then the defendant is regarded as spending the claimant’s money, giving the claimant a claim to surviving value.21 Jaffey’s primary justification for this novel claim is the superior explanatory power of this approach over the orthodox ‘transactional’ theory of tracing.22 First, he says his approach explains the so-called ‘exchange product’ rule: why, upon transfer to the defendant and exchange for another asset, the surviving value in the defendant’s estate remains the same. Second, his approach makes sense of the orthodox understanding that what a claimant traces is the value of the property transferred. Third, in the case of a mixture, it explains why the claimant may have a lien over the mixture for the full value of the transfer even where there has been a loss from the mixture. Fourth, he argues that the existing law in fact reflects his approach: money withdrawn from a mixed account and dissipated is regarded as the defendant’s money,23 and money withdrawn from a mixed account and invested elsewhere is regarded as the claimant’s money.24 Finally, Jaffey observes that the current tracing rules unjustifiably maintain that where trust money is used to discharge a debt, there are no traceable proceeds, even though the defendant has benefited from the discharge (to which a claimant should have a claim in the form of surviving value). The justification is compelling on its own terms, although questions arise as to the form and, more importantly, the operation of such a remedy. As to form, Jaffey explains25 that the claim does not amount to a charge over the defendant’s estate which is insensitive to changes in surviving value after receipt, but is closer to a charge to secure a variable debt in the measure of surviving value. At the same time, it remains a property right rather than a mere charge.26 This makes it a curious creature: a property interest which arises depending on the defendant’s intentions, and hovers over the defendant’s estate in a potentially indeterminate amount. 21 One might question why the existence of a claim to surviving value, or indeed the application of the orthodox change of position defence, should depend on the defendant’s intentions: regardless of intentions, the defendant receives and uses the claimant’s money, from which he benefits in kind. 22 The advantages of a surviving value claim must be balanced against at least two disadvantages. First, an orthodox claim to a traceable asset is defeated only by the defence of bona fide purchaser for value without notice. Although this is debated, the better view is that it is not susceptible to being extinguished, or reduced, depending on the intentions of the defendant at the time of expenditure following receipt: see P Millett, ‘Proprietary Restitution’ in J Edelman and S Degeling (eds), Equity in Commercial Law (Pyrmont (NSW), Lawbook Co, 2005) ch 12. Second, where an asset has been exchanged with another, the surviving value claim necessarily means that (unlike in the case of an orthodox claim) the plaintiff is not entitled to the benefit of any increase in value of the asset, or to a substitute asset of considerably higher value. 23 Re Hallett’s Estate (1880) 13 Ch D 696 (CA). 24 Re Oatway [1903] 2 Ch 356. 25 See ch 4, text following n 17. 26 ibid.

Introduction: The Macro Level  7 The mechanics of the court order required to vindicate a claim to surviving value are unclear. Presumably, it would be necessary to identify a ‘target’ asset within the defendant’s estate, perhaps on the basis of a list of assets disclosed by the defendant. Then the court would declare a constructive trust over that asset, with an order for transfer to the claimant where the value of that asset is equivalent to the claim. Obvious concerns would arise where, as a result of a surviving value claim, the defendant stands to be deprived of real property, such as a family home. As to operation, Jaffey is clear that the proprietary nature of this claim will confer priority in insolvency over the defendant’s unsecured creditors. Jaffey provides a justification for this in the final section of the chapter. The first justification is ‘remedial consistency’: this is the idea that a remedial right should be apt to protect or satisfy the corresponding primary right.27 Since the claim arises from an invalid transfer of property (as opposed to a mere breach of duty between the parties), and the claimant’s property right was a right against the whole world, it follows that the claim should also be proprietary. As a matter of logic, this is compelling, albeit strongly contested by those who adhere to discretionary ­remedialism.28 The second justification is that the surviving value claim is not unfair to ­creditors of the defendant because it does not reduce the value of the estate that would have been available, in the absence of the transfer, to satisfy their claims. Two objections might be made here. First, this seems to assume the conclusion that it seeks to prove: that the mistaken or unauthorised transfer should give the claimant a proprietary, and not merely personal, claim to an abstract part of the estate. This raises the question why, as a matter of principle or policy, the claimant should be privileged over unsecured creditors who have supplied the defendant with v­ aluable goods or services in the course of trade. The second objection is that this presupposes that the normative basis of a claim in respect of an invalid transfer lies in property,29 such that a claimant asserts a property interest (in, eg the use and disposition of the asset) even though in most cases legal title will have passed. This is controversial; a competing, and widely supported, normative basis is given by the theory of corrective justice.30 The presupposition also raises wider and fundamental questions about the (­arbitrary) choices which our system of private property has made with respect to the rules concerning passing of title, and the nature of claims to vindicate a property ­interest.31 If claims to surviving value are to be contemplated, their compatibility with such choices demands consideration in tandem.

27 cf P Birks, ‘Rights, Wrongs, and Remedies’ (2000) 20 OJLS 1, 22–24. 28 See, eg S Evans, ‘Defending Discretionary Remedialism’ (2001) 23 Sydney Law Review 463. 29 This is consistent with Jaffey’s previous scholarship: see, eg P Jaffey, Private Law and Property Claims (Oxford, Hart Publishing, 2007) ch 4. 30 See, eg EJ Weinrib, Corrective Justice (Oxford, Oxford University Press, 2012) chs 1, 6. 31 See further C Webb, Reason and Restitution: a Theory of Unjust Enrichment (Oxford, Oxford University Press, 2016) 70–83, 85–96.

8  Peter Devonshire and Rohan Havelock

III.  Perceptions of Unjust Enrichment A.  Unity or Disunity? The next two chapters are concerned with the principle of unjust enrichment. Chapter five, by Lionel Smith, comprises a stimulating and methodical analysis of the unity (and, by implication, the validity) of unjust enrichment as a category of the private law of obligations, with transformative implications for how liability for defective transfers should be rationalised and regulated. Commencing with an observation in the vein of Marcellus in Hamlet,32 Smith considers that ‘something has gone wrong in the law of restitution for unjust enrichment’.33 In the first half of the chapter, Smith argues that this has occurred because of a systemic assumption that all examples of liability in the law of unjust enrichment necessarily fall under a single ‘cause of action’ consisting of three liability-related questions. On this assumption, the examples must be treated alike in a ‘strong’ sense, such that the elements of liability and available defences are the same. Smith condemns this as an overgeneralisation. In reality, Smith explains, the law of unjust enrichment comprises several causes of action which are different because the essential elements of the claims, and the reasons for liability, are different. As examples of this problem, Smith posits three factual scenarios where undoubtedly liability does not arise, yet which seem to satisfy the three-part test for liability.34 Smith further contends that this problem is such that it cannot be solved by qualifying the test with limiting factors. There may be reason to doubt whether these hypothetical scenarios do indeed satisfy the three-part test. In the first case, of ‘heat rising’, it is difficult to maintain that the plaintiff has made a genuine mistake by leaving his heater on; this seems more a case of forgetfulness or carelessness. Specifying that the plaintiff genuinely believed the ceiling was so well-insulated that no heat could get through it, means the plaintiff has turned his mind to this issue and arguably assumed the risk of error. In the case of the ‘destroyed stamp’, the defendant has not been enriched at the expense of the plaintiff because there has been no receipt of a benefit from the plaintiff,35 and indeed no interaction whatsoever between the parties. 32 W Shakespeare, Hamlet, Act I, Scene IV, line 89 (‘Something is rotten in the state of Denmark.’). 33 See ch 5, section I. 34 The three scenarios are as follows. First, heat from a ground floor flat rises and the tenant above is better off because his heating bills are reduced. Second, the claimant and defendant each own the only two examples of a rare and valuable stamp. The claimant accidentally destroys his stamp and consequently the value of the defendant’s stamp increases significantly. Third, the defendant builds a platform on land overlooking the claimant’s race course and profits by contemporaneously broadcasting the events, causing the claimant loss of business (cf Victoria Park Racing & Recreational Grounds Co Ltd v Taylor (1937) 58 CLR 479). 35 See Lord Reed in Investment Trust Companies (in liq) v Revenue and Customs Commissioners [2017] UKSC 29, [2018] AC 275 [51]: ‘Where … the defendant has not received a benefit directly

Introduction: The Macro Level  9 The evident reason for the defendant’s enrichment is the operation of market forces triggered fortuitously by the plaintiff ’s mishap. Finally, in the case of the ‘stolen spectacle,’ the plaintiff suffers a loss (of business) due to the actions of the defendant, but is not deprived of any benefit. This is therefore not a case of restitution for unjust enrichment at all. It is also difficult to identify any valid unjust factor, other than ‘ignorance’, which has never been judicially recognised as an unjust factor in its own right.36 Even if these rather atypical examples37 fairly illustrate the claim being made, it might be objected that they do not mean the entire law of unjust enrichment is afflicted by overgeneralisation fatal to its existence, and that it should therefore be developed afresh on the basis of a plurality of causes of action. If it is accepted that there is some overgeneralisation, the immediate question might be whether the extent of this justifies the abandonment of unjust enrichment altogether, as opposed to the narrowing of its scope, particularly with regard to other categories of private law. In the second half of the chapter, Smith offers the beginning of a way forward by (provisionally) identifying the multiple causes of action in what he calls ‘small unjust enrichment’. This category encompasses those causes of action which do not involve interference with a pre-existing right.38 Smith posits two examples: the supposedly ‘paradigm’ case of mistaken payment; and personal (non-subrogation) claims against a person primarily liable for a debt by someone secondarily liable who has paid the debt. Using these, he argues convincingly that the underlying reasons for restitution are quite different, as are the causes of action. This analysis assumes that an advocate of unjust enrichment would in fact locate the second example within the realm of unjust enrichment.39 In relation to a portion of claims within ‘small’ unjust enrichment, Smith acknowledges that there is some normative unity as to the reasons for liability. However, significantly, he maintains that the reasons for liability encompass both plaintiff-sided factors (designed to protect the integrity of choices) and defendantsided factors (which respect the defendant’s choices and expectations). Here, Smith draws on corrective justice theory as articulated by Ernest Weinrib. This theory of liability regards the parties as owing correlative rights and duties, and interacting with each other as free and equal agents. As Smith explains, the defendant will be liable where he has requested the benefit,40 or has ‘accepted’ the benefit after from the claimant … it is generally difficult to maintain that the defendant has been enriched at the claimant’s expense’. 36 See, eg Virgo, Principles (n 20) ch 8; R Grantham and CEF Rickett, Enrichment and Restitution in New Zealand (Hart Publishing, Oxford, 1999) ch 12. 37 And Smith’s further example concerning improvements to the property of another. 38 As opposed to what Smith labels ‘big unjust enrichment’: the expansive Birksian conception which includes such claims. 39 As opposed to, for example, a miscellaneous category of ‘other events’. For the historic position, see Re Evans (1897) 66 LJQB 499. 40 In such cases, it may be possible to imply a contract on the facts, making a non-contractual account of liability unnecessary.

10  Peter Devonshire and Rohan Havelock it has been conferred but with a genuine opportunity to reject it. Where the conferral of services and improvements cannot be rejected, no liability will arise. The proposed category of acceptance-based liability, not arising at the moment of receipt, raises a number of challenging questions.41 In some cases, including mistaken payment, it will be difficult to conclude that a defendant has ‘accepted’ a benefit, especially if the defendant has no choice as to its receipt.42 If the answer is that retention beyond a reasonable time triggers liability by operation of law, then such fact-dependent liability creates uncertainty and unpredictability, not least for commercial parties. The timing of acceptance is no trivial matter: it affects when the cause of action arises, and attendant questions such as when time runs for limitation purposes, and the accrual of interest on judgment sums.

B.  Anglo-Australian Divergence In chapter six, Rohan Havelock assumes that unjust enrichment does unify at least some defective transfer situations, in contrast to Smith and others who take a ­sceptical view of unjust enrichment as a unifying principle.43 The implication is that there is no need for the ‘new start’ which Smith advocates. It seems that, after a period of adjustment, the courts are becoming increasingly familiar with the nature and operation of unjust enrichment.44 Its abandonment in favour of a plurality of disparate causes of action – including ‘acceptance’-based liability in the case of core defective transfer cases – would be unsettling, especially for commercial parties. It would also involve something of a regression to the state of affairs – the ‘wilderness of individual instances’45 – which Birks and the other pioneers of an autonomous law of unjust enrichment sought to rationalise. To the extent unjust enrichment is premised on illegitimate overgeneralisation, this might be countered in a less dramatic manner by more explicit definition of its boundaries in relation to other areas of private law. Havelock’s chapter analyses two rival doctrines governing liability in respect of defective transfers. In Australia, ‘equitable principles’ are said to explain liability, whereas in England the orthodox explanation is unjust enrichment based 41 For an overview of these, see Havelock, ‘Justifying Unjust Enrichment’ (n 4) 570–74. 42 Payment of a debt by direct credit into the wrong bank account readily illustrates this. The bank automatically credits the payee’s account with the payment, making the funds available to that party. However, the recipient may not become aware of the credit until some time later. The choice to disclaim the payment could only arise at that later date. 43 See references collated in n 15 of ch 5. 44 See Bank of Cyprus UK Ltd v Menelaou [2015] UKSC 66, [2016] AC 176 [109] (Lord Carnwath): ‘Conversely, in the light of some decades of academic discussion and of the authorities reviewed by Lord Clarke, it is surely time for the principles of restitution or unjust enrichment to be allowed to stand on their own feet.’ 45 E McKendrick, ‘Taxonomy: Does it Matter?’ in D Johnston and R Zimmermann, Unjustified Enrichment: Key Issues in Comparative Perspective (Cambridge, Cambridge University Press, 2002) 627, 632.

Introduction: The Macro Level  11 on a four-question formula. Havelock first charts the recognition and development of unjust enrichment in Australia, the reasons for the judicial scepticism, and the hostility it has encountered there. As Havelock notes, the present status of unjust enrichment in Australia is uncertain: while it has been rejected as a ‘principle of direct application’ in light of increased scepticism at the turn of the twenty-first century, it retains a non-substantive (possibly nominal) function peculiar to the Australian jurisdiction. Challenging views to the contrary, Havelock argues that the two doctrinal approaches are unquestionably rivals. This is principally because unjust enrichment is premised on a structured application of four elements, whereas liability based on ‘equitable principles’ seemingly turns on potentially conclusory applications of historically legitimate but indeterminate notions of ‘conscience’ and ‘unconscionability’. In the last section of the chapter, Havelock contrasts the implications of these approaches for commerce. It is concluded that unjust enrichment is more suited to regulating liability, in that it is strict and operates by reference to four elements or questions, which provide some degree of certainty and predictability to (commercial) parties entangled in a defective transfer, both ex ante and ex post. This, he argues, is consistent with like cases being treated alike through the application of relatively settled rules. It is evident that Havelock views the notion of ‘conscience’ and its cognates (as well as the undefined ‘equitable principles’ featuring in Australian Financial Services v Hills Industries Ltd46) with deep scepticism, if not negativity. Others have regarded these notions as having a positive, and indeed fundamental, role and effect.47 These notions have, after all, featured in many of the cases foundational to the law of unjust enrichment, including Moses v Macferlan,48 and their historic significance cannot be dismissed out of hand. Moreover, they seem to mean something to lawyers and judges, even if that ‘something’ is intuitive and difficult to reduce to definition. Thus, it has been said that none of these terms ‘is an adequate description, let alone definition, of what equity is about’.49 Havelock also gives little credence to the possibility that the notion of ‘conscience’ can be appropriately controlled through specific and defined rules and principles, rather than operating as an ill-defined notion applied directly to facts in a conclusory way. The High Court of Australia50 envisaged this when faced with 46 Australian Financial Services and Leasing Pty Ltd v Hills Industries Ltd [2014] HCA 14, (2014) 253 CLR 560. 47 See, eg, M Halliwell, Equity & Good Conscience in a Contemporary Context (London, Old Bailey Press, 1997) ch 1; J Dietrich, ‘Giving Content to General Concepts’ (2005) 29 Melbourne University Law Review 218; H Delany and D Ryan, ‘Unconscionability: A Unifying Theme in Equity’ [2008] Conveyancer and Property Lawyer 401. 48 Moses v Macferlan (1760) 2 Burr 1005, 97 ER 676. 49 W Gummow, ‘Equity: Too Successful?’ (2003) 77 Australian Law Journal 30, 31. 50 Tanwar Enterprises Pty Ltd v Cauchi [2003] HCA 57, (2003) 217 CLR 315 (Gleeson CJ, McHugh, Gummow, Kirby, Hayne and Heydon JJ). See also Bridge v Campbell Discount Co Ltd [1962] AC 600 (HL) 626 (Lord Radcliffe).

12  Peter Devonshire and Rohan Havelock an allegation by a purchaser that the vendors had used their right to terminate sale of land contracts in an ‘unconscientious’ way. The plurality noted: [The terms ‘unconscientious’ and ‘unconscionable’] describe in their various applications the formation and instruction of conscience by reference to well developed principles. … It is to those principles that the court has first regard rather than entering into the case at that higher level of abstraction involved in notions of unconscientious conduct in some loose sense where all principles are at large.51

The problem is that, in the context of liability for defective transfers, the specific principles which inform and instruct ‘equitable principles’ are yet to be fully articulated. A central issue here is the nature of such liability. If liability is not strict, then it is presumably fault-based. The question, then, is to define what ‘fault’ consists of beyond mere receipt.52

IV.  Equity and Commercial Certainty Concerns as to certainty are by no means limited to the law of restitution. As the chapters in this collection demonstrate, transactional and remedial certainty in equity is as desired as it is elusive. Some argue that the flexibility and discretionary nature of equity is at odds with the need for certainty in commercial transactions. The issue has attracted critical attention. Lord Millett, writing extracurially, opined: Commerce needs the kind of bright line rules which the common law provides and which equity abhors. Resistance to the intrusion of equity into the business world is justified by concern for the certainty and security of commercial transactions.53

In chapter seven, Matthew Harding challenges this view and argues that equity fosters, rather than impedes, certainty in commercial transactions. He notes that in this setting equity uses fiduciary obligations as a vehicle for imposing legally enforceable norms. Given that most commercial relationships are grounded in contract, Harding begins by analysing the relationship between contract and fiduciary doctrine. He observes that equity may override a contractual bargain, thereby unsettling agreed terms. However, Harding maintains that the attendant uncertainty should not be ascribed to equity and should instead be understood in terms of contractual interpretation, or more precisely, the parties’ failure to recognise that fiduciary norms are engaged with respect to their agreement. It is appropriately acknowledged that this is undermined by the fact that courts are generally reluctant to impose fiduciary obligations between parties to commercial contracts. 51 Tanwar Enterprises (ibid), [20]. 52 cf the ‘acceptance-based’ liability proposed by Smith: ch 5, section II D ii. 53 PJ Millett, ‘Equity’s Place in the Law of Commerce’ (1998) 114 LQR 214, 214. The view expressed also assumes that common law rules and principles are ‘certain’, or at least substantially more so than their equitable counterparts.

Introduction: The Macro Level  13 The authorities he cites in fact go further. Between the two great private law systems of contract and equity, the former, as a matter of doctrinal choice, usually enjoys primacy, in the absence of grounds for equitable intervention. This is particularly evident where express terms have been agreed between commercial parties as equal and independent actors. Whilst contractual and fiduciary relationships may co-exist, Mason J’s oft-quoted dictum reminds us: [I]t is the contractual foundation which is all important because it is the contract that regulates the basic rights and liabilities of the parties. … The fiduciary relationship cannot be superimposed upon the contract in such a way as to alter the operation which the contract was intended to have according to its true construction.54

From this perspective, equity does not significantly contribute to uncertainty in commercial transactions because it has limited scope to oust the terms of a bargain. It may be added, cynically, that this is reinforced by the fact that equitable standards are less cogent in a realm where ‘a degree of self-seeking and ruthless behaviour is expected’.55 More expansively, Harding maintains that equity facilitates commercial certainty by providing enforceable normative structures, such as the trust, which commercial parties can adopt ex ante in arranging their affairs. This is premised on the view that equity’s prescriptions provide an orderly basis for planning and risk assessment. Harding acknowledges that this will not always be so. The concession is appropriately made given that most legal systems are more organic than fixed. This is illustrated in Harding’s critique of Target Holdings Ltd v Redferns56 and AIB Group (UK) plc v Mark Redler & Co Solicitors,57 which, he observes, disrupt the traditional expectation that trustees are strictly accountable for restoring unauthorised disbursements. That is, strict in the sense that causation and limiting principles are excluded on taking an account in common form. Harding objects that these prominent judgments of the House of Lords and United Kingdom Supreme Court respectively, have introduced uncertainty to commercial trusts by applying common law methodology, focusing on breach, causation and loss. Target Holdings and AIB Group are controversial decisions. As  Harding concedes, to the extent that they hold sway,58 they undermine his thesis that equity supplies predictable norms and transactional certainty in respect of custodial fiduciaries. That said, it remains true that those entrusted with funds are liable to compensate for established losses. Uncertainty surrounds the status of the more absolute – and challenged – rule that trustees should be liable to restore funds in any event, unimpeded by causal enquiry.59 54 Hospital Products Ltd v United States Surgical Corp (1984) 156 CLR 41, 97. 55 Vercoe v Rutland Fund Management Ltd [2010] EWHC 424 (Ch), [2010] Bus LR D141 [343]. 56 Target Holdings Ltd v Redferns [1996] AC 421 (HL). 57 AIB Group (UK) plc v Mark Redler & Co Solicitors [2014] UKSC 58, [2015] AC 1503. 58 In England, of course, the judgments are binding precedent. 59 Whilst Target (n 56) and AIB Group (n 57) have profoundly undermined this rule, the judgments have attracted vigorous academic criticism and there are indications that Target and AIB Group may not be readily followed in other jurisdictions. See, eg W Gummow, ‘Three Cases of Misapplication

14  Peter Devonshire and Rohan Havelock As Harding points out, from an ex post perspective, parties seeking adjudication of their disputes may have greater remedial options as a result of these decisions. However, this may principally prove to the advantage of the defendant trustee for whom a breach of stewardship may not automatically result in an ­obligation to restore funds. Given that equity is both a discretionary and conscience-based jurisdiction, in the final section Harding addresses the role of judicial discretion. This must necessarily be reconciled with his central thesis that equity fosters transactional certainty and security of dealings. Harding argues that private law is a ‘justificatory exercise’ where the underlying reasons for discretionary rulings are explained in the judgments. This is reinforced by adherence to precedent. In the final analysis, this reasoning assumes that the vestiges of the Chancellor’s foot have been banished and that discretion is exercised on a principled basis. He goes further and suggests that the institutional framework within which judges operate renders equitable discretion more certain and predictable than fixed and determinate rules. Harding cites the remedial constructive trust as an example of discretionary relief which is granted with circumspection, having regard to third-party interests and other available remedial options.60 He maintains here that constraints on judicial decision-making in private law are conducive to a degree of certainty. The question is what sort of ‘certainty’ this is and its implications for commercial parties. A form of certainty may be promoted in that discretionary relief is based on the weighing of defined factors or considerations, rather than by application of uncontrolled discretion.61 However, the very existence of this remedy raises an issue of certainty on a different, and more fundamental, level. The staple concern is that, regardless of how the award of the remedy is controlled, it empowers judicial redistribution of property rights62 and subversion of statutory insolvency regimes.63 This example therefore highlights the importance of careful definition of parameters and nuanced analysis in approaching questions of certainty in this area.64 of a Solicitor’s Trust Account’ (2015) 14 Australian Bar Review 5; J Edelman, ‘An English Misturning with Equitable Compensation’ in S Degeling and JNE Varuhas (eds), Equitable Compensation and Disgorgement of Profit (Oxford, Hart Publishing, 2017) 91. 60 Some jurisdictions do not empower the courts to adjust property rights in this manner. Contrast the adoption of the remedial constructive trust in Australia and New Zealand with the English position which confines the constructive trust to the institutional model (Westdeutsche (n 10) 714–16; FHR European Ventures LLP v Cedar Capital Partners LLC [2014] UKSC 45, [2015] AC 250 [47]; Angove’s Pty Ltd v Bailey [2016] UKSC 47, [2016] 1 WLR 3179 [27]; cf London Allied Holdings Ltd v Lee [2007] EWHC 2061 (Ch), [2007] All ER (D) 153 (Sep) [247]. 61 In the model employed by Edelman, this would be a ‘pure’ or ‘absolute’ discretion, as opposed to a ‘guided discretion’ or even a ‘rules-based discretion’: see J Edelman, ‘Judicial Discretion in Australia’ (2000) 19 Australian Bar Review 285. 62 As Nourse LJ observed in Re Polly Peck International plc (in administration) (No 2) [1998] 3 All ER 812 (CA) 830, ‘You cannot grant a proprietary right to A, who has not had one beforehand, without taking some proprietary right away from B’. 63 See P Birks, ‘Three Kinds of Objection to Discretionary Remedialism’ (2000) 29 University of Western Australia Law Review 1, 12. 64 For an in-depth analysis of the meaning of legal certainty, and of responses to uncertainty, see I MacNeil, ‘Uncertainty in Commercial Law’ (2009) 13 Edinburgh Law Review 68.

Introduction: The Macro Level  15

V. Conclusion This collection addresses the impact of two systems of law in commerce. Equity’s historical lineage contrasts with the emergence of the modern law of restitution and, within it, the controversial principle of unjust enrichment. Sometimes their respective doctrines occupy the same ground. This calls into question the relationship of each to the other, and even the preference or familiarity of one mode of reasoning over the other. However, this tends to understate the nature of the enquiry. There is more at stake than a clash of doctrine. More broadly, equity and restitution intersect with other core areas of private law and generate profound issues of taxonomy, doctrine and policy. The first five chapters assess equity and the law of restitution from this perspective. This places in context their functional aspects, which are ultimately manifested as duty, liability and remedy. Reduction to an orderly and workable analytical framework is of singular importance to commercial parties for whom transactional certainty and security of receipt are paramount objectives. In the second half of this collection where attention turns to micro-level rules and principles, it is evident that equity and the law of restitution achieve these objectives in varying degrees, and in some contexts override or subordinate them in favour of other imperatives, such as prophylaxis and deterrence.

16

2 Introduction: The Micro Level PETER DEVONSHIRE AND ROHAN HAVELOCK

I. Overview In the preceding chapter it was observed that positions taken on macro level questions can, and arguably should, influence the nature and extent of particular rights and remedies in equity and restitution. These questions broadly revolve around: (1) taxonomic enquiry as to their relationship with other areas of private law; and (2) the foundational values and standards that inform equity and restitution. For example, if it is claimed that both trust law and unjust enrichment concern entitlement to the economic benefit of assets, it may follow that proprietary remedies should, in principle, be available to vindicate the rights protected.1 From the perspective of commercial parties, it is at this ground or micro level that the impact of equity and restitution is most tangible. Provided the stakes are high enough for litigation and a claim is sufficiently meritorious, extant rights, liabilities and available remedies, will necessarily translate (through judgment or settlement) into a financial or practical benefit for one party and a corresponding detriment to the other. Proprietary relief in particular will have unsettling, and, in some cases, punitive effects. But this observation understates the extent of the impact which equity and restitution may have. That impact is manifested ex ante in that the very existence of particular rights, liabilities and available remedies, and the judicial approach taken to these, will regulate, or at least influence, the conduct of commercial actors (especially those well-advised) prior to any dispute arising. For example, if an overly paternalistic approach is taken to the imposition of fiduciary obligations in the context of commercial joint ventures, this is likely to induce parties to consider adopting particular contractual and other legal structures at the outset in order to ward off the prospect of equitable intervention if the relationship fails and a dispute arises.



1 See

the argument by Worthington in ch 3, section IV.

18  Peter Devonshire and Rohan Havelock Chapters eight to twelve in this collection delve into particular rights, liabilities and remedies within equity and restitution, and their associated impacts on commerce. These chapters span two main areas: fiduciary obligations and remedies (predominantly restitutionary in effect); and third-party liability.

II.  Fiduciary Law in Commerce It has been observed that fiduciary doctrine has been ‘the spearhead of equity’s incursions into the area of commerce’.2 Fiduciary obligations have become a feature of a wide variety of commercial relationships. They regulate not only relationships between clients and professionals (notably, agents, solicitors, certain financial advisers and, in some jurisdictions, medical practitioners), but those in commerce more generally, including directors, partners, joint venturers and (potentially) even parties in abortive negotiations.3 Nevertheless, particularly in relation to the category of joint venturers, equity’s entry in this arena has to some extent been regarded as objectionable trespass rather than a welcome arrival.4 As the case law and academic scholarship testify, this is a subject beset by profound disagreement and controversy.

A.  The Bounds of Fiduciary Doctrine Commencing the second half of this collection is an illuminating survey by Stephen Gageler of fiduciary law in Australia as applied to commercial relationships. Gageler structures this by means of five key questions, taken in two stages: (1) ‘what’ (ie the scope of fiduciary obligations) and ‘so what’ (ie available remedies); and (2) ‘who’, ‘when’, and ‘in what respect’ (ie the definition of a ­fiduciary, and the criteria used to determine the existence of a fiduciary ­relationship). Questions within both stages present difficulties, but those associated with the second stage are particularly formidable. The fiduciary concept has proved recalcitrant in the face of attempts to formulate criteria by which to ­determine whether a particular relationship, or particular obligations within it,5 should be 2 A Mason, ‘The Place of Equity and Equitable Remedies in the Contemporary Common Law World’ (1994) 110 LQR 238, 245. 3 See, eg Fraser Edmiston v AGT (Qld) Pty Ltd [1988] 2 QD R 1 (QSC). Contrast Lac Minerals Ltd v International Corona Resources Ltd [1989] 2 SCR 574, (1989) 61 DLR (4th) 14. 4 See the judicial disfavour expressed in Barnes v Addy (1874) LR 9 Ch App 244 (CA) 251; New Zealand and Australian Land Co v Watson (1881) 7 QBD 374 (CA) 382; Manchester Trust Ltd v Furness [1895] 2 QB 539 (CA); Re Wait [1927] 1 Ch 606 (CA) 625, 635–36; Scandinavian Trading Tanker Co AB v Flot Petrolera Ecuatoriana [1983] QB 529 (CA) 540–41. 5 While this determination is usually made in respect of the entire relationship, in limited cases certain aspects of a relationship may attract fiduciary obligations while the relationship is otherwise

Introduction: The Micro Level  19 c­ lassified as fiduciary. The concept is susceptible to varied, and indeed inconsistent, applications. In addressing the fundamental questions of ‘when’ and ‘in what respect’, Gageler emphasises the monumental contribution of Paul Finn (former Justice of the Federal Court of Australia) in this area, including his landmark work, ­Fiduciary Obligations.6 Crucially, according to Finn, one party must be entitled to expect the other to act in his interests and for the purposes of the relationship.7 The reposition of trust and confidence is simply evidence of such an entitlement, and is not determinative per se.8 Viewed from a different perspective, this entitlement might be said to result from the exclusion by one party of its self-interest in favour of servitude of the interest of the other. Such exclusion goes beyond mere subordination, a term which implies residual scope for pursuit of self-interest. A test which emphasises such exclusion is consistent with the widely accepted theory that the purpose of fiduciary relationships is to ensure loyalty, and in particular the loyal exercise of judgment.9 In Australia, Gageler observes, it is only rarely that fiduciary obligations have been imposed, ex post, on commercial parties outside the traditional categories and their close analogues. This is not because the relationship is commercial per se, but because the relevant criteria are not usually satisfied.10 In particular, it is assumed that commercial parties both can and should look after their own interests. As the examples of John Alexander’s Clubs v White City Tennis Club Ltd11 and Streetscape Projects (Australia) Pty Ltd v City of Sydney12 demonstrate, the existence of a contract or formal structure does not necessarily preclude the finding of a fiduciary relationship, but the court will have to consider carefully whether the contract or structure mandates the exclusion of self-interest by one party in a certain respect (or respects). At the end of the chapter, Gageler focuses on one thorny issue of considerable relevance in the commercial context: the effect of attempts to contract out of fiduciary relationships or obligations. Gageler first notes that the use of labels, such as ‘joint venture’, will carry little weight. The presence of express exclusions is more problematic. The discussion here centres on Australian Securities and Investments

treated as being non-fiduciary. See New Zealand Netherlands Society “Oranje” Inc v Kuys [1973] 1 WLR 1126 (PC) 1130. 6 PD Finn, Fiduciary Obligations: 40th Anniversary Republication with Additional Essays (Annandale (NSW), Federation Press, 2016). 7 ibid, [736]. 8 This is why the prevailing approach in New Zealand is arguably unsatisfactory: see Chirnside v Fay [2006] NZSC 68, [2007] 1 NZLR 433 [78]–[80]; Paper Reclaim Ltd v Aotearoa International Ltd [2007] NZSC 26, [2007] 3 NZLR 169 [31]. 9 See, eg L Smith, ‘Fiduciary Relationships: Ensuring the Loyal Exercise of Judgement on Behalf of Another’ (2014) 130 LQR 608. 10 See JRF Lehane, ‘Fiduciaries in a Commercial Context’ in PD Finn (ed), Essays in Equity (North Ryde (NSW), Law Book Co, 1985) 95, 104. 11 John Alexander’s Clubs Pty Ltd v White City Tennis Club Ltd [2010] HCA 19, (2010) 241 CLR 1. 12 Streetscape Projects (Australia) Pty Ltd v City of Sydney [2013] NSWCA 2, (2013) 85 NSWLR 196.

20  Peter Devonshire and Rohan Havelock Commission v Citigroup Global Markets Australia Pty Ltd (No 4).13 In that case, a letter of engagement relating to a proposed takeover stated that an investment bank was engaged ‘as an independent contractor and not in any other capacity, including as fiduciary’.14 The trial judge held that this exclusion prevented a fiduciary relationship arising, approaching the issue as one of construction.15 Agreeing with the premise of Paul Finn’s criticism of the decision,16 Gageler observes that ‘whether a relationship is fiduciary is a question of attributing a legal character to the relationship which has been formed in fact’.17 In other words, it is not possible for parties on the one hand to form a relationship or enter into a transaction of a certain legal character, and on the other, to transform its legal status through use of a mere contractual label or term. That said, Gageler acknowledges that sometimes a contractual description may, as a matter of construction, tailor the ‘incidents of the relationship with the effect of removing the basis for fiduciary obligations’.18 Viewed side by side, these two propositions may at first seem contradictory: a term in a contract surely forms part of the legal character or substance of the relationship created by that contract. It is suggested that they may be reconciled by asking whether the contractual term concerns the specific incident of the relationship which requires one party to exclude its selfinterest in subjection to the interest of the other. If it does, only then should the term be effective.

B.  The Normative Underpinnings of Account of Profits The expansion of the fiduciary principle into commerce raises corresponding questions as to the integrity of the remedial regime which underpins it. The principal remedy for breach of fiduciary duty is an account of profits, which is a powerful weapon in the litigator’s arsenal. In chapter nine, Lusina Ho sheds light on the nature of fiduciary duty and the obligation to disgorge unauthorised gains. Ho’s central thesis is that the disgorgement rules should be mediated by the concept of ‘deemed performance’, being a legal fiction that the fiduciary has always performed his task loyally in the best interests of the beneficiary. Ho’s analytical platform is the historical procedure known as account of administration in common form. This is merely a procedural step to establish the state of accounts and ensure due administration of a trust. An account of profits is a subset of this process in that an account in common form may result in an obligation to

13 Australian Securities and Investments Commission v Citigroup Global Markets Australia Pty Ltd [2007] FCA 963, (2007) 160 FCR 35. 14 ibid [16]. 15 ibid [322]. 16 Finn, Fiduciary Obligations (n 6) [805]–[19]. 17 See ch 8, text following n 84. 18 ibid.

Introduction: The Micro Level  21 account for gains which should properly be imputed to the trust.19 The accounting exercise is not a remedy but a vehicle for enforcing performance of an obligation. Ho notes that when a trustee has abused his position without reference to trust property, an account of profits operates as an independent remedy. In taking accounts, adjustments are intended to reflect the due performance of the trustee’s duties. The core of this thinking has migrated to the independent remedy of an account of profits. Regardless of the true state of affairs, it is assumed that a fiduciary has acted throughout with fidelity. From this, Ho extrapolates ‘deemed performance’ as a general principle of fiduciary doctrine. This provides a further perspective on the received view that a fiduciary is disabled from asserting rights inconsistent with his duty to the principal.20 Put bluntly, equity insists on due performance.21 Ho describes the paramount goal of an account of profits as the protection of the beneficiary’s performance interest. But this seemingly absolute principle must be reconciled with factors that cause uncertainty and inhibit the measure of recovery. These include causation, allowances and the moral complexion of the breach. These are sometimes applied impressionistically by reference to broad notions of fairness, unjust enrichment and equitable discretion. Ho perceives the deemed performance model as a precise unifying principle rendering a fiduciary accountable ‘for all profits arising from acts that could fairly be deemed as part of the strict performance of his primary duty’.22 At the same time this must be qualified to the extent that it is often difficult to distinguish the content of a duty from the nature of the position which confers that duty. Liability for gains is commonly framed by reference to a fiduciary’s office or position23 or an opportunity or knowledge arising from that position.24 Guidance can be provided from the nature of the principal’s undertaking and the expectations that are reposed on the fiduciary. With these perspectives in mind, Ho’s thesis can be understood as a unitary model directed to performance or as a more contextual determination, focusing on the nature of the fiduciary’s office. Whilst the latter may depart from a strict application of deemed performance, it is perhaps an acceptable via media between the singularity of deemed performance and an impressionistic appeal to fairness and good conscience. 19 An account can be surcharged on the ground that the trustee has failed to account for the receipt of a trust asset or its fruits. See M Conaglen, ‘Equitable Compensation for Breach of Trust: Off Target’ (2016) 40 Melbourne University Law Review 126. 20 P Millett, ‘Bribes and Secret Commissions’ [1993] Restitution Law Review 7; D Hayton, ‘No Proprietary Liability for Bribes and Other Secret Profits?’ (2011) 25 Trust Law International 3; Lord Millett, ‘Bribes and Secret Commissions Again’ [2012] CLJ 583. See further PD Finn (ed), Essays on Restitution (Sydney, Law Book Co, 1990) 221. 21 See, eg the landmark case of Attorney-General for Hong Kong v Reid [1994] 1 AC 324 (PC) 337. 22 See ch 9, text preceding n 28. 23 Attorney-General v Blake [2001] 1 AC 268 (HL) 280. 24 Maguire v Makaronis (1997) 188 CLR 449, 468; Howard v Commissioner of Taxation [2014] HCA 21, (2014) 253 CLR 83 [62].

22  Peter Devonshire and Rohan Havelock Ho’s reference to account in common form is a useful analogue for deemed performance, although the comparison cannot be pressed too far. An account of administration is not dependent on wrongdoing or fault25 and the duty to make good any deficiency is strict.26 In this rarefied setting, causation and limiting principles are, depending upon one’s view, either irrelevant or only marginally engaged. This may perhaps overstate the position in respect of relief for breaches involving an element of infidelity or disloyalty. Ho accepts that liability based on deemed performance must necessarily factor in an element of causation. Turning to the celebrated case of Warman International Ltd v Dwyer,27 it is argued that the High Court of Australia implicitly adopted a ‘but for’ test for causation.28 The facts in brief are that the defendant, whilst serving as general manager for his employer, diverted an agency agreement to his own newly formed business, as well as inducing other employees to defect. In subsequent proceedings, the employer sought an account of profits in respect of the defendant’s revenues for the four years preceding trial. The High Court of Australia granted an account of profits for the first two years. Some passages in the judgment indicate that the apportionment was simply a matter of fairness, or that it would be inequitable to compel the errant fiduciary to account for the whole profit for an extended period. However, other statements are more consistent with a rationale of c­ausation. It is submitted that the latter is the preferable view and that revenues from the first two years of the defendant’s business were causally attributable to the breach of fiduciary duty. For that period he was fully accountable for net gains. Thereafter, liability ceased because causation was spent.29 Ho reaches a similar conclusion and asserts that deemed performance provides a stable reference for placing causal limits on the duty to account. It is argued that for this purpose recourse to remoteness is unnecessary. Finally, Ho tests the implications of deemed performance against the vexed topic of allowances. On the taking of accounts, a court will invariably deduct expenses from gross receipts and may, in addition, remunerate the defaulting fiduciary for industry, enterprise and skill in respect of the unauthorised activity. Allowances for the latter are anomalous in that they effectively reward the errant fiduciary for wrongdoing. This is philosophically adrift from the deterrent principle and the traditional normative expectations of fiduciary duty. Ho considers that allowances can be understood in terms of desert and recompense. The central principle of deemed performance is invoked to reinforce this view. In effect, equitable allowances treat the faithless fiduciary as if he had acted with authority and his deemed performance sets the quantum of allowances. Ho reasons 25 Although an account of administration on the basis of wilful default requires an element of fault or neglect. 26 Agricultural Land Management Ltd v Jackson (No 2) [2014] WASC 102, (2014) 48 WAR 1, [334]ff. 27 Warman International Ltd v Dwyer (1995) 182 CLR 544. 28 The nature of the duty to account in Warman is not without controversy. See, eg, the contrasting views in Murad v Al-Saraj [2005] EWCA Civ 959, [2005] WTLR 1573. 29 See further P Devonshire, Account of Profits (Wellington, Thomson Reuters, 2013) 67–71.

Introduction: The Micro Level  23 that the principle of deemed performance should produce a consistent scale of allowances because culpability becomes irrelevant if a fiduciary is deemed to have performed his duty. One merit of this approach is that it circumvents the debate as to whether misconduct should serve to reduce or disentitle an award.30

C.  Forfeiture of Remuneration: The Domain of Contract? An agent engaged for commercial services will typically receive remuneration from his or her principal. Where the agent has defaulted in some way, by act or omission, it is open for the principal to seek forfeiture of such remuneration. However, it has proven remarkably difficult to articulate the circumstances in which forfeiture should be granted. Judgments have applied both common law and equity, and the case law is neither consistent nor coherent. Needless to say, forfeiture has dire consequences for commercial parties acting as agents, who stand to lose the fruits of their labour. It is therefore of vital importance to commerce that the circumstances in which forfeiture is required are defined with certainty, and the applicable test is applied consistently. In chapter ten, Peter Watts addresses the problem by reference to first principles. He argues that questions of forfeiture can, and should, be primarily resolved by general contract law rather than equity. If the agreed remuneration has not yet become payable, the question is whether the agent’s conduct amounted to a repudiatory breach. If the remuneration has already been paid, the question is whether the breach involves a failure of consideration. In the remainder of the chapter, Watts surveys in detail the case law before and after the controversial judgment of the Court of Appeal in Imageview Management Ltd v Jack,31 which espoused a rule of automatic forfeiture for breach of fiduciary duty. Watts criticises the doctrinal basis of the Court’s reasoning and characterises the outcome as ‘spectacularly punitive’. On Watts’ proposed approach, there is only a minor and residual role for equity in this context. As Watts explains, the two possibilities are: (1) where the contract of agency is voidable or terminable due to the agent having an undisclosed conflict of interest at the time of appointment; and (2) where a third party purporting to make a contract with the principal through an agent, is aware at the time of an undisclosed conflict of interest. The significantly restricted role for equity which Watts advocates is certainly consistent with the familiar canon that equity and penalty are strangers.32 It is also the antithesis of the rule of ‘automatic forfeiture’ promoted by Imageview. Moreover, a constrained role for equity is consistent with its supplementary function 30 Paradoxically, notwithstanding such debate, it is common for delinquent fiduciaries to be granted allowances in even the most egregious cases. See, eg Murad v Al-Saraj (n 28); Chirnside v Fay (n 8). 31 [2009] EWCA Civ 63, [2009] 2 All ER 666. 32 Vyse v Foster (1872) LR 8 Ch App 309 (CA) 333.

24  Peter Devonshire and Rohan Havelock in relation to the common law.33 Watts’ model recognises that remuneration is a matter of agreement, and as such, the agreement and default contractual remedies, should ordinarily govern. Imageview is central to Watts’ critique on forfeiture. The facts in brief are that the defendant, a professional footballer, engaged the plaintiff to act as his agent to obtain employment with a UK football club. The plaintiff was to receive an agreed commission for this and additional services over a two-year term. The plaintiff successfully negotiated a contract for the defendant. The defendant required a work permit and the football club paid the plaintiff £3,000 for procuring this. The plaintiff did not disclose the arrangement to the defendant. Upon discovering this, the defendant stopped paying commission under the agency agreement. It was held that the plaintiff had a conflict of interest and had acted in breach of fiduciary duty. As a result, the defendant was relieved of liability with respect to past and future commissions and the plaintiff was required to surrender the £3,000 commission to the defendant as a secret profit.34 Watts argues that the nineteenth-century cases relied on by the Court of Appeal in Imageview are unsound as a basis for the forfeiture of commission for breach of fiduciary duty.35 This is followed by an account of the significant twentieth-century cases leading up to Imageview. Whilst these decisions had a more direct bearing on the forfeiture of an agent’s remuneration, they are not, in Watts’ view, persuasive. For example, in Andrews v Ramsay & Co36 auctioneers engaged by the seller received a bribe from a buyer. Their conduct was characterised as dishonest and their commission was forfeited. Unlike Imageview, where forfeiture flowed from a breach of fiduciary duty, Andrews was heard in King’s Bench and equitable relief was not sought.37 Watts assesses two lines of post-Imageview authorities where, respectively, forfeiture was ordered and forfeiture was declined. These are first instance decisions,38 which therefore stand in the shadow of the appellate authority of Imageview. These cases disclose diverse approaches to the normative basis of forfeiture. Some involved calculated dishonesty as well as breach of fiduciary duty,39 in which case forfeiture of remuneration was predictable on either basis. 33 See the foundational Earl of Oxford’s Case (1615) 1 Ch Rep 1, (1615) 21 ER 485. 34 The Court’s strict approach to breach of fiduciary duty was reflected in the refusal to award allowances in respect of the plaintiff ’s services. 35 It is noted that some of the leading decisions were not equity cases and did not necessarily engage equitable principles. For example, Salomons v Pender (1865) 3 H & C 639, 159 ER 682, concerned self-dealing at common law. Similarly, Boston Deep Sea Fishing & Ice Co v Ansell (1888) 39 Ch D 339, 359–61 was decided on the limited ground that a company director could not claim a proportionate part of his salary where, by the terms of his employment contract, such payment was neither due nor payable. 36 [1903] 2 KB 635. 37 An intriguing detail is that it was not until 1906 that one of the forfeiture cases under review was heard in the Chancery Division (Nitedals Taendstikfabrik v Bruster [1906] 2 Ch 671). 38 With the exception of Stevens v Premium Real Estate Ltd [2009] NZSC 15, [2009] 2 NZLR 384. 39 For example, Rahme v Smith & Williamson [2009] EWHC 911 (Ch) where an agent engaged to negotiate a property settlement accepted a secret commission from the counterparty, and Stupples v Stupples & Co (High Wycombe) Ltd [2012] EWHC 1226 (Ch), [2013] 1 BCLC 729, where an agent received a bribe from his principal’s client and diverted business to a company that the agent controlled.

Introduction: The Micro Level  25 Not surprisingly, following Imageview, forfeiture was rationalised as preeminently an equitable remedy for breach of fiduciary duty. However, there has been a patent lack of consensus as to the threshold requirements. On one view – and contrary to Watts’ thesis – breach of fiduciary duty per se suffices for forfeiture and even an honest breach may suffice.40 Alternatively, some cases insist on a level of dishonesty amounting to a total failure of consideration.41 Even when this finding is made, comprehensive forfeiture has sometimes been refused.42 This contrasts with Imageview, which stripped an agent of all benefits deriving from its relationship with the principal, for conduct which was considerably less venal.43 Watts rejects the unqualified claim that equity imposes forfeiture of remuneration as a remedy for breach of fiduciary duty. In his view, such relief is only justified as a response to serious breaches that equate to a failure to perform the services for which remuneration is payable. To that extent, equity can follow the law in denying payment to an agent. The advantage of this simplified approach to forfeiture is that it avoids the uncertainties of determining the nature and effect of a breach of fiduciary duty and averts the punitive effects of a rule of automatic forfeiture. Watts deliberately refrains from entering the debate as to whether the failure of consideration must be total.44 If a total failure of consideration is required, this will substantially narrow the scope of forfeiture. In many cases it will be difficult to maintain that the agent’s services confer no benefit whatsoever on the principal.45 This is only likely to arise in more extreme cases, typically where the agent’s services are profoundly dishonest and prove to be worthless.46

III.  Third-party Liability A.  The Complexities of Recipient Liability In chapter eleven, David Hayton offers an invaluable perspective on the liability of recipients of trust property, stemming from consideration of the ­commercially 40 Stupples, ibid [25]. 41 Keppel v Wheeler [1925] 1 KB 577 (CA), 588, 592. 42 Governor & Co of the Bank of Ireland v Jaffery [2012] EWHC 1377 (Ch), [2012] All ER (D) 208 (May). 43 A typical intermediate position, applied in Accidia Foundation v Simon C Dickinson Ltd [2010] EWHC 3058 (Ch), [2010] All ER (D) 290 (Nov), was to grant allowances to an agent who failed to disclose certain information to the principal, in breach of fiduciary duty. 44 See generally A Burrows, The Law of Restitution, 3rd edn (Oxford, Oxford University Press, 2011) 330–34. 45 Besides Imageview, several of the cases surveyed fall into this category, including Hippisley v Knee Bros [1905] 1 KB 1 (DC), Nitedals Taendstikfabrik (n 37), Rahme (n 39), Bank of Ireland v Jaffery [2012] EWHC 1377 (Ch), [2012] All ER (D) 208 (May), Wright Hassall LLP v Horton Jr [2015] EWHC 3716 (QB), [2016] All ER (D) 28 (Jan) and Gamatronic (UK) Ltd v Hamilton [2016] EWHC 2225 (QB), [2017] BCC 670. 46 As arguably the case in Andrews v Ramsay & Co [1903] 2 KB 635 (DC) and Avrahami v Biran [2013] EWHC 1776 (Ch). The point is exemplified if the principal elects to rescind the agency contract, although a defence of good consideration may limit or extinguish an agent’s liability to effect r­ estitution: ANZ Banking Group Ltd v Westpac Banking Corporation (1988) 164 CLR 662, 673; Ovidio Carrideo Nominees Pty Ltd v The Dog Depot Pty Ltd [2006] VSCA 6, (2006) V ConvR 54-713, [20].

26  Peter Devonshire and Rohan Havelock significant judgment of the United Kingdom Supreme Court in Akers v Samba Financial Group.47 This case involved disposition by a trustee of intangibles held on trust for a Cayman company which was being compulsorily wound up. The transferee was Samba, a Saudi company, which under the Saudi lex situs, became full owner of the shares free from any interest of the Cayman company. The Supreme Court ruled that although the equitable proprietary interest of the Cayman company was capable of being a ‘disposition of the company’s property’ for the purposes of the applicable insolvency legislation,48 there had been no such ‘disposition’ since the trustee had no power to make a disposition of the equitable proprietary interest. As Hayton explains, the case brings into focus the somewhat fraught relationship between the use of corporate trustee regimes and the application of creditor protection provisions under insolvency legislation. In the absence of either statutory liability under the insolvency legislation or proprietary liability in equity, the only liability of the transferee would be a personal one, either for knowing receipt (what Hayton calls liability for ‘unconscionable conduct’ in light of Arthur v ­Attorney-General of the Turks & Caicos Islands49) or possibly strict liability in unjust enrichment (if it could be shown that the transferor had no power to confer sole title to the shares upon the transferee, or there was no legal basis for the transferee having such title). As Hayton notes, the equitable liability of a trustee or fiduciary following breach of trust encourages cross-border transactions in the sense that such liability is not affected by the fact that the trust assets are located in jurisdictions which do not recognise trusts or equitable interests. In the remainder of the chapter, Hayton analyses the nature and extent of the liability of recipients of trust property. A number of important issues are explored here, and deserve brief comment. The first concerns the practical difference, if any, between the concepts of ‘notice’ (relevant to the proprietary liability of purchasers but not donees) and ‘knowledge’ (relevant to the personal liability of purchasers and donees). H ­ istorically, there has been a clear difference between the two. The equitable concept of ‘notice’ – and in particular the exacting standard of ‘constructive notice’ – is primarily relevant in the context of property transactions.50

47 Akers v Samba Financial Group [2017] UKSC 6, [2017] AC 424. 48 The provision in issue in the case was section 127 of the Insolvency Act 1986 (UK). 49 Arthur v Attorney-General of The Turks & Caicos Islands [2012] UKPC 30, [2012] All ER (D) 164 (Aug) [33]. It is to be noted, however, that the judgment which introduced the concept of ‘unconscionability’ in this context, Bank of Credit and Commerce International (Overseas) Ltd v Akindele [2001] Ch 437 (CA), did not employ the phrase ‘unconscionable conduct’ but instead referred to a ‘state of knowledge [which] should be such as to make it unconscionable for [a recipient] to retain the benefit of the receipt’ (455). 50 See C Harpum, ‘The Stranger as Constructive Trustee: Part 1’ (1986) 102 LQR 114, 121; S Gardner, ‘Knowing Assistance and Knowing Receipt: Taking Stock’ (1996) 112 LQR 56, 57–64; Re Montagu’s Settlement Trusts [1987] Ch 264 (Ch) 276–82.

Introduction: The Micro Level  27 Nevertheless, at least in the context of the bona fide purchaser defence to proprietary liability,51 in Papadimitriou v Crédit Agricole Corporation and Investment Bank52 the Privy Council replaced the concept of constructive notice with a test based on, but not identical to, that proposed by Lord Neuberger MR in Sinclair Investments (UK) Ltd v Versailles Trade Finance Ltd,53 in which his Lordship had asked: [W]hether, on the facts known … a reasonable person with [the defendant’s] attributes … should either have appreciated that a proprietary claim probably existed or should have made enquiries or sought advice, which would have revealed the probable existence of such a claim.

Delivering the advice of the Board, Lord Clarke held that the defendant must make inquiries in these circumstances: ‘[I]f there is a serious possibility of a third party having such a right or, put in another way, if the facts known to the [defendant] would give a reasonable [defendant] in the position of the particular [defendant] serious cause to question the propriety of the transaction.’54

It is evident that the scope of the test has enlarged from ‘the probable existence of [a proprietary] claim’ to a ‘serious cause to question the proprietary of the ­transaction’. This casts the net beyond the relevant matter alleged to affect the conscience of the defendant (ie the existence of an adverse proprietary claim) and in effect fixes the defendant with positive obligations akin to required customer due diligence measures under money laundering regulations.55 The concern is whether this impairs security of receipt more than is necessary. Viewed from a different perspective, the burden of such obligations might deter fiduciaries from misapplying funds in the first place. The second issue concerns the abandonment of the five-fold classification of forms of knowledge in Baden v Societe Generale56 still relied on in Australia and (until recently) in New Zealand. Hayton expresses the opinion that the test outlined by Lord Clarke in Credit Agricole ‘produced … specific clearer guidance than the generality of the types of knowledge as to when a recipient would have

51 In Papadimitriou v Crédit Agricole Corporation and Investment Bank [2015] UKPC 13, [2015] 1 WLR 4265 [33], Lord Sumption suggested that for both proprietary liability, and personal liability in knowing receipt, ‘the question what constitutes notice or knowledge is the same’. 52 ibid. 53 Sinclair Investments (UK) Ltd v Versailles Trade Finance Ltd [2011] EWCA Civ 347, [2012] Ch 453 [109]. 54 Papadimitriou (n 51) [20]. 55 The Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (UK), Part 3. 56 Baden v Société Générale pour Favoriser le Développement du Commerce et de I’Industrie en France SA [1993] 1 WLR 509 (Ch).

28  Peter Devonshire and Rohan Havelock notice of a claimant’s equitable interest’.57 It is difficult to deny that the Baden categories are overly subtle, and somewhat arcane, insofar as the third, fourth and fifth categories lack clear distinction and tend to coalesce. Nevertheless, arguably the first and second categories alone – being actual knowledge and wilful blindness (tantamount to actual knowledge) respectively – constitute a simplified test consonant with commercial certainty and predictability. The Credit Agricole test is still, at root, a test of constructive knowledge as adjudged by the court, with potentially paralytic effects on commerce if applied too liberally. The third issue is the extensively debated, and now rather stale, issue of whether liability for receipt of trust property should lie in unjust enrichment.58 Such liability would mean that a plaintiff need not establish knowledge on the part of a recipient. Hayton does not see the justification for such a claim given that a beneficiary already has powerful equitable proprietary and personal claims against third parties. As Hayton explains in some detail, it is ordinarily the trustee, not the beneficiary, who is the legal title-holder exercising rights to sue for the benefit of the beneficiaries. Yet Hayton is also critical of the fusionist argument on its own terms. Following others,59 he points out that the argument ignores the very existence of a trust and the separation of legal and equitable ownership upon which it is premised. A general principle against unjust enrichment is, therefore, inappropriately applied here.

B.  Demarcation of Account of Profits for Dishonest Assistance The theme of secondary liability is continued in Peter Devonshire’s chapter on account of profits for dishonest assistance.60 While it is relatively settled that third parties who assist a breach of fiduciary duty are liable in damages or equitable compensation, controversy surrounds the nature of liability for gains resulting from participation in the primary wrong. It is argued that an account of profits should only be granted in limited circumstances, having regard to the fact that an accessory is a stranger to the fiduciary relationship and its unique normative regime.

57 See ch 11, text following n 57. 58 See, eg P Birks, ‘Receipt’ in P Birks and A Pretto, Breach of Trust (Oxford, Hart Publishing, 2002) 213. 59 See L Smith, ‘Unjust Enrichment, Property and the Structure of Trusts’ (2000) 116 LQR 412, 428–35. 60 There are different formulations of the wrong, which is reflected in its varied description. For example, ‘knowing assistance’ (Australia) and ‘dishonest assistance’ (England). Australia adopts knowledge falling within levels 1–4 of the Baden scale (Baden (n 56)). See Farah Constructions Pty Ltd v Say-Dee Pty Ltd [2007] HCA 22, (2007) 230 CLR 89 at [177]; Grimaldi v Chameleon Mining NL (No 2) [2012] FCAFC 6, (2012) 200 FCR 296 at [262]. In contrast, English law imposes a threshold of dishonesty (Royal Brunei Airlines Sdn Bhd v Tan [1995] 2 AC 378 (PC)).

Introduction: The Micro Level  29 As Devonshire points out, the two limbs of Barnes v Addy61 drive different remedial responses. Unlike knowing receipt, where intermeddling with trust property can be approached in proprietary terms rendering the recipient subject to ‘trustee-like obligations’,62 accessory liability is assessed against the indeterminate backdrop of personal wrongs.63 It is argued that an account of profits is unwarranted, with the exception of gains directly attributable to complicity in the fiduciary’s breach, or transactions in which the third party is a co-principal.64 A contrary view is that gain-based relief should not be so constrained because a dishonest assister can be regarded as a primary wrongdoer.65 However, this overlooks the distinct conceptual underpinnings of the primary wrong and the nature of accessory liability. An accessory has not assumed a fiduciary duty to the principal and it cannot be said that an account of profits is a proxy for ­enforcing a performance interest. The stringent policy which strips a fiduciary of unauthorised gains is status-driven and reflects the imperatives of that unique relationship.66 Moreover, a more expansive approach to gain-based relief is unnecessary in a setting where equity casts a wide net in respect of loss-based claims. For example, trustee and accessory incur joint and several liability67 and there is no requirement for a causal link between the accessory’s actions and the principal’s loss.68 It is concluded that fiduciary doctrine is misplaced as a rationale for gain-based relief for accessory liability. Devonshire notes that an account of profits is a distinct remedial vehicle for equity’s governance of relationships of trust. To apply this remedy to strangers to that relationship is conceptually unsound. At the very least it must be acknowledged that to do so is a paradigm shift which raises profound questions as to the reach of equitable wrongs. Australian courts are receptive to granting an account of profits for accessory liability69 and there is growing support for this view in England.70 Devonshire challenges this trend and explores the juristic basis of the remedy. Starting from first principles he analyses the role of causation and remoteness in defining – and demarcating – the liability of fiduciaries and accessories. Although the point is not 61 Encompassing recipient and accessory liability (Barnes v Addy (1874) LR 9 Ch App 244 (CA) 251–52). 62 C Mitchell, P Mitchell and S Watterson (eds), Goff and Jones: The Law of Unjust Enrichment, 9th edn (London, Sweet & Maxwell, 2016) [8-123]–[8-130]. 63 Royal Brunei (n 60); Twinsectra Ltd v Yardley [2002] UKHL 12, [2002] 2 AC 164 [104]–[109]. 64 Including cases where the third party procures or induces a breach of trust. 65 P Davies, ‘Bribery’ in P Davies and J Penner (eds) Equity, Trusts and Commerce (Hart Publishing, Oxford, 2017) 240–41. 66 See further P Devonshire, ‘Account of Profits for Secondary Liability: How Far is Too Far?’ [2015] Restitution Law Review 59 and P Devonshire ‘Account of Profits for Dishonest Assistance’ [2015] CLJ 222. 67 Ultraframe (UK) Ltd v Fielding [2005] EWHC 1638 (Ch), [2006] FSR 16, [1600]. 68 Casio Computer Co Ltd v Sayo [2001] EWCA Civ 661, [2001] IL Pr 43, [15] and [52]. 69 Michael Wilson & Partners Ltd v Nicholls [2011] HCA 48, (2011) 244 CLR 427 [106]; Grimaldi v Chameleon Mining NL (n 60) [557]. 70 Novoship (UK) Ltd v Mikhaylyuk [2014] EWCA Civ 908, [2015] QB 499.

30  Peter Devonshire and Rohan Havelock free from controversy,71 the preponderant view is that a fiduciary’s duty to account is not exempt from the requirements of causation,72 although for policy reasons a low threshold is set. Devonshire considers that it is misconceived to elide strict expectations of fiduciary duty and the obligations of a stranger to the trust relationship. Whilst a less onerous regime should apply to accessories, this must be weighed against the fact that accessory liability entails a factual determination of knowledge73 or honesty,74 which cannot logically be divorced from causal enquiry. The standard should not be equated with the narrow test applied to fiduciaries and should be placed on a different basis.75 Accessorial liability to account should be determined by common law standards of causation and remoteness. Cases such as Fyffes Group Ltd v Templeman76 and Novoship (UK) Ltd v Mikhaylyuk77 support this reasoning. In Fyffes and Novoship, the accessory entered into contractual arrangements with the principal and liability to account was rigorously interrogated by causation and remoteness. If this approach is adopted when accessory and principal are in direct relations, it is anomalous to apply stricter standards for secondary liability. Finally, Devonshire turns to the related question whether fiduciary and accessory should be jointly or severally liable in respect of unauthorised gains. The general rule is that an errant fiduciary is only accountable for what he received from a breach of duty. From this perspective it would be inequitable to subject an accessory to a greater burden than the primary wrongdoer.78

IV. Conclusion The remaining chapters shift the lens of inquiry from the macro-level themes introduced in the first five chapters, to focus on particular duties, liabilities and remedies within equity and the law of restitution and their effects on commerce.

71 Some scholars place the enquiry on a different basis. For example, Smith argues that the no-profit rule is a rule of ‘primary attribution’, with the effect that when a profit is acquired, the fiduciary immediately comes under a primary duty to surrender it to the principal. See Smith, ‘Fiduciary Relationships’ (n 9) 628. 72 See further R Lee, ‘Disgorgement of Unauthorised Fiduciary Gains: An Exercise in Causation?’ (2017) 11 Journal of Equity 29; and ch 9 herein. 73 Farah Constructions (n 60). 74 Royal Brunei (n 60). 75 It is generally held that the accessory’s conduct must have some causative effect on the breach of fiduciary duty, although a more rigorous ‘but for’ causal test is not necessary. See J Dietrich and P Ridge, Accessories in Private Law (Cambridge, Cambridge University Press, 2015) 250–51. 76 Fyffes Group Ltd v Templeman [2000] Lloyd’s Rep 643 (Comm). 77 Novoship (n 70). 78 On this basis neither party is accountable for the gains of the other, subject to certain exceptions, for example, where the accessory is effectively a co-principal or initiates a breach of trust.

Introduction: The Micro Level  31 The concepts arise in an ambivalent setting: in the main, commercial relationships are neither autonomous nor strictly and heavily regulated.79 Parties are generally at liberty to define their rights and duties, and even available remedies, through the institution of contract. Despite the pervasive influence of equity and the now well-established law of unjust enrichment, the terms of an adopted contract will govern in the absence of circumstances or gaps triggering intervention.80 This exposes some blunt dynamics. The practical and sometimes divergent outcomes in equity and the law of restitution have generated intense scholarly discourse. Selected aspects have been considered in the present collection. The occasionally draconian remedial implications of certain normative models have been analysed from the perspective of an account of profits and forfeiture of agents’ remuneration. And more broadly, the limits of relief are explored by reference to accessory and recipient liability. In concert, these chapters provide valuable insight into the bounds - and impact - of equity and the law of restitution in the field of commerce.

79 Except to the extent that certain statutory regimes apply. 80 In respect of fiduciary obligations, see Henderson v Merrett Syndicates Ltd [1995] 2 AC 145 (HL) 206 and Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41, 97. In respect of restitution for benefits, see Pavey & Matthews Pty Ltd v Paul (1987) 162 CLR 221, 256 and Pan Ocean Shipping Ltd v Creditcorp Ltd (The Trident Beauty) [1994] 1 WLR 161 (HL) 164.

32

3 The Commercial Triple Helix: Contract, Property and Unjust Enrichment SARAH WORTHINGTON

I. Introduction The core of commercial law is contract. Yet commercial relationships are also profoundly affected by other branches of private law, in particular property law, tort law and unjust enrichment law. All these different rules must work together, coherently, to provide a framework within which commerce can be conducted confidently and efficiently. If the interfaces between the different branches of private law are disconnected or disjointed, then the edifice of commercial law is itself correspondingly weakened and the rule of law is compromised. In some areas there are few concerns. The interface between contract law and tort law provides relatively few problems. At this interface, where tort claims and an existing contract between the parties co-exist, there is a ready appreciation that the general demands of tort law may be supplemented or minimised by agreement between the parties. Where concerns did exist, they were more likely to focus on the effect of contract terms designed for the benefit of non-contracting parties, and whether such terms were effective to protect those parties in the context of their tort liabilities.1 By contrast, every single interface between the remaining branches of private law – contract, property and unjust enrichment – displays tensions and ­difficulties. These disjunctions mark many of the continuing controversies in the broad ­structural framework of private law generally and commercial law in particular. Some of the most prominent of these are the subject of this chapter.

1 Scruttons Ltd v Midland Silicones Ltd [1962] AC 446 (HL); New Zealand Shipping Co Ltd v AM Satterthwaite & Co Ltd [1975] AC 154 (PC); Trident General Insurance Co Ltd v McNiece Bros Pty Ltd (1988) 165 CLR 107. Now see the Contracts (Rights of Third Parties) Act 1999 (UK) and Contracts Privity Act 1982 (NZ), and similar legislation in other Commonwealth jurisdictions.

34  Sarah Worthington The types of problems in issue are readily illustrated by the familiar example of the mistaken customer who pays her gas bill twice. Or if a more commercial illustration is needed, the bank that mistakenly executes its instructions twice, paying over an unnecessary additional $2m to a recipient bank that is then discovered to be insolvent.2 Both payors will undoubtedly expect to recover their second payments. Neither contract law nor tort law can help: there is no contract governing the second payments, and the recipients have committed no wrong. But precedent suggests that both unjust enrichment law3 and property law (via a trust)4 might assist. The fact that different branches of the law may be called into play on the same set of facts, and may indeed deliver different responses to the perceived issues, is not of itself a problem. There are numerous instances where the same facts generate potential claims in contract, tort and unjust enrichment (and perhaps also in other areas of law such as breach of confidence or breach of fiduciary obligations).5 The general rule is then simply that the claimant may elect which remedies to pursue, but is not permitted to recover twice for the same harm, nor to pursue recoveries for inconsistent claims.6 In the context of our mistaken gas customer, however, there does seem to be a problem – a real boundary issue – in that both unjust enrichment law and trusts law (via equity’s rules on resulting trusts) appear to be responding to exactly the same impetus for intervention, yet delivering quite different responses. Both seem concerned that the recipient cannot be entitled to keep the benefit of the second payment. Unjust enrichment law’s response is personal, and subject to a change of position defence; trust law’s is proprietary, and not subject to the same defence. The difference has attracted concern, and rightly so.7 It is not the same as having different responses in contract and tort to the same facts. Then, although the responses may well be different, so too are their justifications. Here, too, of course, all would be solved if the justifications were different. Indeed, perhaps the nub of that idea can be seen in counsel’s arguments in the Chase Manhattan Bank NA v IsraelBritish Bank (London) Ltd case itself,8 where it was suggested that either the payor never parted with the equitable ownership of the property (a property question, answered by using a resulting trust), or, alternatively, that the payee had no claim in conscience to receive or retain the money (what we would now call an unjust 2 Chase Manhattan Bank NA v Israel-British Bank (London) Ltd [1981] Ch 105. 3 Lipkin Gorman v Karpnale Ltd [1991] 2 AC 548 (HL); Banque Financière de la Cité v Parc (Battersea) Ltd [1999] AC 221 (HL) 227 (Lord Steyn). 4 Chase Manhattan (n 2). But this decision was heavily criticised and subjected to re-analysis in Westdeutsche Landesbank Girozentrale v Islington LBC [1996] AC 669 (HL). 5 Recall the various different claims advanced in A-G v Blake [2001] 1 AC 268 (HL) as it made its way to the House of Lords. 6 Tang Man Sit v Capacious Investments Ltd [1996] AC 514 (PC). 7 Indeed, some authors suggest this is the most difficult problem in the law of unjust enrichment: A Burrows, ‘Unravelling Proprietary Restitution: A Response to Professor Lionel Smith’ (2005) 41 Canadian Business Law Journal 424, 424; P Millett, ‘Proprietary Restitution’ in S Degeling and J Edelman (eds), Equity in Commercial Law (Pyrmont (NSW), Law Book Co, 2005) ch 12, 312. 8 Chase Manhattan (n 2) 109.

The Commercial Triple Helix  35 enrichment question, answered – on the Chase Manhattan facts – by a­ sserting a constructive trust9). But that magnifies the problem rather than eliminating it: is there a difference between the property question and the unjust enrichment ­question,10 and when, if ever, should the unjust enrichment question be answered by declaring a constructive trust rather than ordering a personal remedy? The various contract/property/unjust enrichment boundary problems raised by this illustration are pursued in more detail in this chapter, with the goal being to find a sensible and defensible accommodation of the existing legal rules. This particular focus and its purpose explain the title of this chapter. The ‘commercial triple helix’ is made up of commercial law’s three core strands of private law – contract, property and unjust enrichment law – and my objective is to ­examine the interfaces between these three strands, on the assumption that unless these different strands can be wound together to form a strong and unified ­structure we will continue to be beset by boundary disputes which interfere with the secure operation of commercial law. This book, with its explicit focus on the same range of legal material, provides an ideal forum to address the issues. Unlike the book’s title, this chapter’s title refers to ‘property’ rather than to ‘equity’. This choice reflects a long-held view that equity is not a separate branch of private law.11 Nevertheless, my property focus is primarily on equitable property interests, and trust interests in particular, as that aspect concerns some of the most difficult boundary disputes between contract, unjust enrichment and property. In the end, therefore, the difference may not seem terribly significant. There is no need for suspense in revealing the conclusions, and perhaps some advantage in describing the destination before mapping out the route. The observations lead to four very particular points about the difficult boundary issues examined here. If we ignore these problems, then the inevitable result is to visit unnecessary confusion on legal analysis in the commercial arena. These four points might be summarised as follows: 1.

First, consider property and its distinct interface with contract, tort and unjust enrichment law. The simple point made here is that, in any legal analysis, property questions must be answered before liability questions. That means that the location of legal title to assets and the location of any derivative interests in those assets (eg the rights to possession, to trust interests or to security interests) must all be settled before considering liability questions. The location of derivative interests, especially trust interests, typically proves the most difficult. This is the issue that is hardest to segregate from liability questions,

9 Although never directly described as ‘constructive’, most of Goulding J’s supporting analysis used this term. 10 In particular, any resort to conscience seems to go no further than an assertion that you should not keep what you should not have received. If so, then it is not so much an assertion of a separate claim as simply the logical consequence of the property question. 11 S Worthington, Equity, 2nd edn (Oxford, Oxford University Press, 2006).

36  Sarah Worthington yet once established it is also the issue that will have great impact on ­liability outcomes. All this is readily illustrated by our gas board customer, and the property and liability questions that arise on those facts. By contrast, the location of legal title can often seem purely adventitious: generous donors can be unsuccessful in divesting themselves of legal title,12 yet those without capacity may nevertheless deal successfully;13 similarly, fraudsters can deprive their victims of legal title,14 but fully paid-up purchasers may not have obtained it. Perhaps it should come as no surprise, then, that legal title is so often of little real consequence.15 2. Secondly, consider the troubling interface between property and unjust enrichment, already noted in the context of the gas board customer. This section seeks to draw out the crucial point that both trusts law and unjust enrichment law are not merely concerned with assets, but with entitlements to the benefit of those assets – or, more particularly, with entitlement to the economic benefit of those assets.16 The goal of restitution for unjust enrichment is put in various ways, but all articulate the same core corrective justice idea that requires the economic benefit derived from transferred assets to be restored to the original owner in circumstances where she, and not the new legal owner, is seen as entitled to that benefit.17 Where the transferred asset is identifiable, this assertion of consequences is itself apt to describe a trust.18

12 Re Rose [1952] Ch 499 (CA). 13 Westdeutsche (n 4), where Islington LBC lacked capacity to enter into the swaps contract, but could nevertheless effectively transfer legal title to the money payments to Westdeutsche. 14 Armstrong DLW GmbH v Winnington Networks Ltd [2012] EWHC 10 (Ch), [2013] Ch 156. 15 Consider insolvency. This is one of the toughest battlegrounds for assessing the importance of property interests. Yet on X’s insolvency the issue of legal title is of little consequence. X may have legal title to an asset, but if X does not also have the beneficial interest in the asset then his creditors will be no better off. Alternatively, X may lack legal title to the asset, but if he nevertheless has the beneficial interest in it, then his creditors will benefit; similarly, he may lack legal title but if he has a security interest or the right to possession, then again his creditors will benefit. It might thus seem that the main function of legal title is simply to raise the presumption – and no more than that – that its holder has the right to the full economic benefit of the asset and, if the asset is tangible, the right to possession. However, before the analysis can proceed it is necessary to determine whether the presumption matches the reality. In short, property questions must be determined before liability questions can be addressed. 16 This terminology is intended to distinguish the entitlement from entitlement to possession, or to a security interest, or to any other of a number of different benefits that might be derived from assets. The choice of terminology is deliberate: see section II below. 17 Moses v Macferlan (1760) 2 Burr 1005, 1012; 97 ER 676, 681 (Lord Mansfield); Fibrosa Spolka Akcyjna v Fairbairn Lawson Combe Barbour Ltd [1943] AC 32 (HL) 61 (Lord Wright). See also L Smith, ‘Restitution: The Heart of Corrective Justice’ (2001) 79 Texas Law Review 2115; K Barker, ‘Understanding the Unjust Enrichment Principle in Private Law: A Study of the Concept and its Reasons’ in JW Neyers, M McInnes and SGA Pitel (eds), Understanding Unjust Enrichment (Oxford, Hart Publishing, 2004) ch 5; E Weinrib, ‘Correctively Unjust Enrichment’ in R Chambers, C Mitchell and J Penner (eds), Philosophical Foundations of the Law of Unjust Enrichment (Oxford, Oxford University Press, 2009) ch 2. 18 Though not one where any fiduciary duties are owed if the legal owner is ignorant of the arrangement.

The Commercial Triple Helix  37

3.

4.

It seems to follow inevitably that when an unjust enrichment remedy is warranted, it should be proprietary if the context permits it (ie if the relevant property is identifiable). This would have the added advantage of recognising that ‘entitlement to the economic benefit of the transferred assets’ is limited by the change of position defence, and thus so too is the related resulting trust.19 That leads directly to the third comment, concerning when a claimant is entitled to the economic benefit of an asset. In this section it is suggested that the current unjust enrichment approach has strayed too far in suggesting that entitlement to restitution arises whenever there has been a transfer motivated by mistake, and then taking an overly generous view of what counts as a mistake.20 Instead, it is suggested, unjust enrichment law should be contained within the narrower bounds suggested by its clear policy and doctrinal objectives. On that basis it would seem preferable to hold that restitution for unjust enrichment is only warranted where the transferor’s consent to the transfer was vitiated (adopting the same test for that as is adopted in contract law) or, alternatively, the transferor’s consent to the transfer was clearly conditional and the condition has failed totally (most typically where the transfer was intended to meet a liability when none existed, but also where particular purposive conditions are imposed but are undelivered21). In both cases legal title will often have passed to the transferee (see 1 above), yet it is equally plain in both cases that the transferor has neither intended nor consented to giving up her entitlement to the economic benefit of the transferred asset in the given circumstances. Limiting the scope of unjust enrichment in this way would have the twin advantages of aligning the notion of consent and mistake in contract and unjust enrichment law, and also reducing the insecurity of receipt associated with a wide and subjective view of mistake. In short, it would reduce the frictions at the interfaces of contract law, unjust enrichment law and property law. The final comment concerns the liability rules generally, and the broad focus of contract and tort law when compared with unjust enrichment law and much of trusts law. The significant point here is that contract and tort law focus on the economic position of individuals, with remedies designed to reinstate or restore the parties’ positions, whilst trusts law and unjust enrichment law focus on the assets, with remedies designed to deliver what was expected from the assets assuming their proper handling and management. If this point was clearly recognised, then some of the controversies surrounding liability questions might disappear.

19 The resulting trust/constructive trust terminology is difficult. See section II below. 20 A Burrows, A Restatement of the English Law of Unjust Enrichment (Oxford, Oxford University Press, 2012) 63–69, and the cases and examples cited there. 21 This is effectively what a Quistclose trust does: Barclays Bank Ltd v Quistclose Investments Ltd [1970] AC 567 (HL). See the discussion at the text to nn 84 and 119 below.

38  Sarah Worthington If these four points were accommodated within the current structure, the result would be a better integrated alignment of the three strands of private law – contract, property and unjust enrichment – and thus a more secure, stable and rational framework for commercial law. Of course, each of these four points can also travel much further into the analysis of commercial contracts than indicated here. They may affect the approach that ought to be taken to remote recipients and to accessories, to rules on tracing, and to insolvency and limitation issues, although this is not the place to venture so far. Each of these points is considered in turn, but first two matters of terminology may assist.

II. Terminology This chapter uses the expression ‘entitlement to the economic benefit of the asset’ throughout. The choice of language is deliberate. It seems particularly apt to highlight an important but underappreciated feature of both trusts and unjust enrichment liabilities, as discussed later. For the moment, simply notice that an assertion that someone has a trust interest, or is the beneficiary of a trust, is the equivalent of saying that the person is entitled to the economic benefits derived from the trust asset.22 And vice versa: if an individual is entitled to the economic benefits of a defined asset, then she has a trust interest. Secondly, an absolute owner of property has both the legal title and the beneficial interest in the asset: she is entitled to all the economic benefits to be derived from the asset. If she holds the asset on trust, those economic benefits are held for someone else: there is then a separation of legal title and entitlement to the economic benefit (a trust interest). Moreover, notice that this separation happens in the context of trusts in just the same way as it might, in different circumstances, happen in the context of possession, where there can be a separation of legal title and entitlement to possession (a possessory interest). This analogy with possession, and other similar analogies with security interests, turn out to be useful in thinking about trusts. Finally, and relatedly, notice that it is in the nature of all derivative interests (possessory interests, trust interests and security interests) that they involve a sharing arrangement between the legal owner and the derivative interest-holder, with it being essential that the particular details of the sharing arrangement be defined, either expressly or by operation of law. Moreover, the terms defining the arrangement must indicate both the particular allocations in the property split (eg a trust interest, and its extent and terms) as well as the particular obligational terms undertaken by

22 And if that were doubted, then the finding that trustees are compelled to deliver that objective reinforces the point: Cowan v Scargill [1985] Ch 270. In express trusts, the trust deed may define the extent of the economic benefit so that the beneficiary takes entirely, or takes only some defined part.

The Commercial Triple Helix  39 each party to the other, even if all those elements are defined by operation of law. This requirement is roundly illustrated by the enormous variety in parties’ arrangements for leases, trusts and security interests, and their equivalents arising by operation of law.23 For different reasons it is also necessary to say something about resulting and constructive trust terminology. The terms are used inconsistently in different cases, sometimes by the same judges.24 There is no functional difference between the two types of trust, and the practical ‘direction of travel’ of the trust benefits is not determinative of the label.25 What is significant is simply that the response is proprietary, by way of trust interest, delivered by operation of law. Accordingly, it may be better to settle on a particular usage and adopt it consistently so that the labels then have some purpose. The approach adopted here is to use ‘resulting trust’ whenever A’s entitlement to the economic benefit of an asset rests on her asserting a presumption that she never relinquished her entitlement to that benefit despite her transfer of legal title in the asset to B: ie, for all practical purposes, and despite the transfer of legal title, A simply has uninterrupted entitlement to the economic benefit of the underlying asset.26 The gas board customer and Chase Manhattan Bank might both advance such claims. Logic suggests the presumption would be rebutted by evidence that A did relinquish her entitlement, although the precise form of the presumption and thus the basis of its rebuttal are deeply contested.27 This approach embraces automatic resulting trusts, presumed resulting trusts and purchase money resulting trusts. This approach aligns with the history of the terminology, but it is obviously at odds with the approach advocated by Lord Browne-Wilkinson in Westdeutsche.28 In all other cases, the trust arising by operation of law is considered to be constructive, being found when it can be said (as with all trusts) that X must hold the asset for Y, or must deliver the economic benefit of the asset to Y, and Y can 23 See the discussion in S Worthington, ‘Revolutions in Personal Property: Redrawing the Common Laws Conceptual Map’ in S Worthington, A Robertson and G Virgo (eds), Revolution and Evolution in Private Law (Oxford, Hart Publishing, 2018) ch 11. 24 For an example in rescission cases, see Millett J in Lonrho plc v Fayed (No 2) [1992] 1 WLR 1 (Ch) 12 (constructive trust). cp El Ajou v Dollar Land Holdings plc [1993] 3 All ER 717 (Ch) 734 (resulting trust). The trust is plainly resulting in pattern (it returns assets to their source), but it certainly does not fit the very narrow view of resulting trusts adopted in Westdeutsche (n 4). The same unstable terminology is seen in many unjust enrichment cases. 25 As the inconsistent terminology in the rescission cases, (n 24), illustrates: ‘constructive trust’ is used in one of the cases even though the trust interest ‘results back’ to the transferor. 26 If the finding did not rest on presumption, but on positive intention, then the trust would be express. Moreover, I appreciate the tension between this assertion and the orthodoxy that an equitable interest cannot be ‘retained’: Westdeutsche (n 4) 706; Vandervell v IRC [1967] 2 AC 291 (HL) 311, 317. Yet the reality is as stated here, and it may be preferable to recognise – as here – that as lawyers we would never say that the absolutely entitled legal owner has both legal title and a trust interest in her asset (or both legal title and a lease interest in her home), but we would quite properly say that she has legal title and the right to the entire economic benefit of the asset, or legal title and the absolute right to possession of her house. That is all that is being said here. 27 See the detailed discussion at section IV below. 28 Westdeutsche (n 4) 705–06. See the detailed discussion at section IV below.

40  Sarah Worthington insist that this obligation is implemented.29 In the context of trusts arising by operation of law, this embraces vendor-purchaser constructive trusts, Re Rose gifts,30 and constructive trusts in respect of a fiduciary’s disloyal gains. Apart from the last of these, all play a part in the discussion that follows.

III.  Property Questions and Liability Questions: Location then Liability The first issue to be addressed concerns property, and its interface with the other branches of private law. The point being made is the simple one that property questions and liability questions must be kept distinct, and property questions must be addressed first. This aim is not to make a clever category distinction or use the language of ‘events’ and ‘responses’ as Peter Birks did.31 The point is a far more pragmatic one, and is simply that issues of potential liability cannot be addressed before knowing who has legal entitlements to the assets in question.32 In many contexts we understand this point instinctively. For example, it is necessary to decide whether title to goods has passed to the purchaser before the purchaser can contemplate any action against the vendor for delivery of goods of inadequate quality. Similarly, it is necessary to decide whether a retention of title clause is effective to retain title before determining whether the vendor can recover her goods from the non-paying buyer. Equally, it is necessary to decide who has the right to possession of goods before a claimant can sue in conversion,33 or who has security interests before deciding how property is distributed on insolvency. However, three related issues have caused distraction and created difficulties. Two are straightforward, the third is not. The first mistake is to assume that the necessary focus is on legal title alone.34 That is plainly wrong, as illustrated by the conversion and security examples. It is necessary to determine the location 29 Since otherwise the crunch is immediately obvious: although the X–Y constructive trust could not invariably be termed a resulting trust, the A–B resulting trust will invariably also fit the constructive trust model – B must hold the underlying asset for the benefit of A, and A can insist that obligation is met. It follows that Millett J’s ‘inconsistent’ labelling, noted in (n 24), may be readily rationalised. 30 Re Rose (n 12). 31 P Birks, ‘Property and Unjust Enrichment: Categorical Truths’ [1997] New Zealand Law Review 623. In response, see RB Grantham and CEF Rickett, ‘Property and Unjust Enrichment: Categorical Truths or Unnecessary Complexity?’ [1997] New Zealand Law Review 668, suggesting at, 671, that property can be both an event and a response. 32 See, eg Criterion Properties plc v Stratford UK Properties LLC [2004] UKHL 28, [2004] 1 WLR 1846, requiring the court to determine first whether the contract was binding before deciding whether the counterparty was liable to restore any benefits received. 33 See the UK statutory version in Torts (Interference with Goods) Act 1977 (UK). It thus follows that the beneficiary under a trust typically cannot bring a claim in conversion against the thief or fraudster who absconds with trust property; only the trustee can do that: MCC Proceeds Inc v Lehman Brothers International (Europe) [1998] 4 All ER 675 (CA). 34 This simple issue is the cause of any number of common law/equity problems, especially when combined with a failure to appreciate that trust interests, like possessory interests and security interests, are all merely derivative interests in the underlying asset, even if trust interests have a special tendency to enthral.

The Commercial Triple Helix  41 of legal title, but also the location of rights to possession, rights to the economic benefit of the asset (by way of trust interests), rights to security interests, and so on. Sometimes the legal owner has the entire bundle of rights, but not always. Only after all the interested parties have been identified is it possible to determine the various claims they might advance. The second mistake is to confuse legal entitlement and factual enjoyment. Again, possession provides a simple illustration. A thief has possession of the stolen goods, and factual enjoyment of the benefits of them, but the right to possession and the right to the economic benefit of the goods35 remain with the original owner. Plainly, issues of liability depend on legal entitlement not on factual ­entitlement: might does not deliver right. It follows, in this example, that the legal owner with the right to possession has the right to sue in conversion. Similarly, if a trustee delivers the trust assets to Y rather than to the rightful beneficiary X, it remains X, not Y, who has the right to the economic benefit of the trust assets (assuming Y is a donee, not a bona fide purchaser for value without notice). This is despite the fact that Y clearly has the practical enjoyment of the economic benefits on the facts. The fact that this last example turns on priority rules does not convert the ­question from a property question to a liability question.36 The issue was no ­different in the context of the thief: as between the thief and the original owner, who has legal title and who has the right to possession? These are both priority questions. It may be necessary to go to court to confirm the answer, but even that does not convert the issue from one of property to one of liability. It is the same in determining whether there is a binding contract, or a binding trust: those ­questions may require a judicial decision, but that decision is designed to settle the location of assets (whether those assets are contractual rights or rights to economic benefits). The subsequent question is then what liability might follow, for example for breach of contract or for breach of trust. To put the point another way, this investigation of the location of legal entitlement to property is typically required precisely because the legal entitlement and its factual enjoyment are in different people, and the claimant seeks to identify that divergence and assert her continuing legal entitlement as a precursor to making claims against the party in factual enjoyment. The third mistake is a closely related one. Its sentiment emerged in the earlier discussion of priority. This mistake is to assume that legal entitlement is not merely ‘identified’, but is awarded by way of remedy to rectify a problem that has emerged on the facts. Interestingly, we never fall into this error when locating legal title. Then we simply apply the legal rules. Who is registered? What does the contract say about transfer of title? Indeed, rigid and certain rules are needed precisely 35 Notice that this point may provide the easy justification for Lord Browne-Wilkinson’s constructive trust of proceeds in cases of theft and other forms of fraud: see Westdeutsche (n 4) 716. There is no need for, and no possibility of, a constructive trust of the stolen assets themselves, since the victim of the theft retains both legal title and the associated right to the economic benefit of the assets. 36 Although it may mean that the subsequent liability question is not one in unjust enrichment. This issue is not addressed in this chapter, although its analysis is implicit in what is said here.

42  Sarah Worthington because hard choices must be made, often between equally innocent parties. For example, either the original owner has legal title, or the bona fide purchaser from the thief has it. With goods the rule goes one way; with currency it goes the other way. The outcome may not always seem fair, but in determining the ­ownership of property and entitlement to all its derivative interests, collective certainty is valued even more than individual fairness. Similarly with possession. The ‘finders keepers’ rule is not a remedy awarded to a finder; it is the determined outcome of a priorities conflict in the absence of the legal owner.37 This segregation of ‘location’ and ‘liability’ questions is maintained even when the right to possession is one arising by operation of law and not by agreement between the parties. Consider equitable leases. The location of the right to possession is determined first, whether that right to possession is as intended by the parties under a fully executed legal lease, or is a right to possession as divined by the court on the facts.38 And from that outcome it is then possible to determine liability for rent or for execution of the repairing covenant.39 It is the same with ‘constructive possession’ or possessory liens: the fact of the property interest is established first, then the ensuing liability is determined next.40 The approach remains exactly the same in more complicated factual scenarios. Consider a typical retention of title case. The ‘location’ question requires a determination of whether the vendor has legal title and the right to recover possession, or whether the purchaser has acquired both but subject to a charge in favour of the vendor.41 Only then can liability claims be pursued. Similarly in tax cases: the court must first determine the location of property interests, and tax liability then follows accordingly, or does not.42 In all these instances, the location and liability questions do not carelessly and casually merge into one. The first step is invariably location of the property interest and, if necessary, a declaration of that fact; the second step is assessment of consequential liability. It is the same when identifying equitable security interests, whether arising consensually or by operation of law: see the retention of title example cited earlier, or the analysis pursued in cases where consensual security arrangements have been put in place, or where the court determines whether an equitable lien arises by operation of law.43 37 Parker v British Airways Board [1982] QB 1004 (CA). 38 In this context the discussion in the text following n 43 below is relevant by analogy: it concerns the use of resulting and constructive trusts in the context of determining the right to the economic benefit of assets, rather than, as here, the right to possession. 39 Walsh v Lonsdale (1882) 21 Ch D 9. 40 See M Bridge, L Gullifer and G McMeel, The Law of Personal Property (London, Sweet & Maxwell, 2013) ch 7, and now M Bridge, L Gullifer, G McMeel and K Low, The Law of Personal Property, 2nd edn (London, Sweet & Maxwell, 2017) ch 15; D Sheehan, The Principles of Personal Property Law, 2nd edn (Oxford, Hart Publishing, 2017) 10ff. 41 Re Bond Worth Ltd [1980] Ch 228. 42 Re Rose (n 12); J Sainsbury plc v O’Connor (Inspector of Taxes) [1991] 1 WLR 963 (CA). 43 Not that the law on equitable liens is easy, so identification may be fraught. See, eg Lord Napier and Ettrick v Hunter [1993] AC 713 (HL); Hewett v Court (1983) 149 CLR 639. The leading commentators are cited in Sheehan (n 40) 312–16.

The Commercial Triple Helix  43 Although we know all this, somehow it seems more doubtful in the context of trust interests, especially trust interests arising by operation of law. Then the line between location and liability seems fraught. There is no reason for this. The process of investigation and identification is precisely the same, with the focus now turned to who has entitlement to the economic benefit of the asset rather than entitlement to its possession or its legal title or some security interest in it. Consider the facts that might generate such trusts. An express trust can be created by declaration, but if the three certainties are not met, then, despite the owner’s intention, she will remain holding both legal title and the entitlement to economic benefit. It is the same with a transfer on trust. To the extent that the nominated entitlements do not absorb the entire economic benefit, then what is not disposed of is regarded as kept by the settlor by way of an ‘automatic resulting trust’.44 It is irrelevant that this may not be what the settlor intended:45 the court must simply decide who has legal title and who is entitled to the economic benefit of the underlying assets, and it does that by working from the simple premise that entitlements that are not disposed of are regarded as being kept by their original holders.46 But sometimes this simple resulting trust approach is not adequate to deal with the facts. Re Rose47 provides an illustration. There the donor’s intention was clearly an absolute transfer of registered shares by way of gift from A to B. Equally clearly that had not been achieved, since the underlying shares remained registered in A’s name. However, at the critical time for tax purposes, the facts indicated that B had both the share certificates and the signed share transfer forms, and had those quite properly, as intended and delivered by A. In those circumstances B was in a position to obtain legal title by getting himself registered, and A was powerless to stop him.48 At that stage it seems fanciful to say that A had not given up her 44 A term coined by Megarry J in Re Vandervell’s Trusts (No 2) [1974] Ch 269 (CA) 294; see also Vandervell v IRC (n 26) 329 (Lord Wilberforce), 313 (Lord Upjohn). This is sometimes referred to as the ‘proprietary arithmetic’ argument: J Hackney, Understanding Equity and Trusts (London, Fontana Press, 1987) 153–54. Also see JE Penner, ‘Resulting Trusts and Unjust Enrichment: Three Controversies’ in C Mitchell (ed), Constructive and Resulting Trusts (Oxford, Hart Publishing, 2010); and C Webb, ‘Property, Unjust Enrichment, and Defective Transfers’ in R Chambers, C Mitchell and JE Penner (eds), Philosophical Foundations of the Law of Unjust Enrichment (Oxford, Oxford University Press, 2009) ch 12. Advocates of the unjust enrichment view of automatic resulting trusts do not like this argument, although the two theories appear to have little dividing them in practice: see C Webb and T Akkouh, Trusts Law, 5th edn (London, Palgrave Macmillan, 2017) 193. Both find the basis of resulting trusts as lying in the fact that A did not intend or consent to B receiving the property beneficially. 45 As dramatically illustrated by Vandervell v IRC (n 26); Re Vandervell’s Trusts (No 2) (n 44). But on the modern law, now see Westdeutsche (n 4) 708. 46 It was this which led Megarry J in Re Vandervell’s Trusts (No 2) (n 44), to coin the terminology of presumed and automatic resulting trusts (the ones under discussion here being automatic resulting trusts), which was for many years regarded as resulting trust orthodoxy until challenged by Lord Browne-Wilkinson in Westdeutsche (n 4), with his Lordship’s suggestion that both these types of trusts gave effect to the common intention of the parties. 47 Re Rose (n 12). 48 As rather neatly put by Lord Hoffmann in a different case: equity regards the gift as completed when ‘No further act on the part of the donor is needed to vest the legal title in the beneficiary and the donor has no power to prevent it’: Trustee of the Property of Pehrsson (a bankrupt) v Von Greyerz [1999] 4 LRC 135 (PC) 144.

44  Sarah Worthington legal entitlement to the economic benefit of the shares: A had intentionally and irretrievably delivered complete dominion over the shares to B, who thus had the practical and legal right to control the destination of their economic benefit. This is so even though B did not yet have legal title. The Court of Appeal in Re Rose agreed, finding B entitled to the economic benefit, and therefore requiring A to hold the shares on constructive trust for B. This constructive trust analysis might equally be advanced in a more complicated priority context. Recall that if A holds shares on trust for B, but in breach of trust transfers those shares to C, then C takes free of B’s equitable interest provided C is a bona fide purchaser for value of the legal estate without notice of B’s prior equities, but not otherwise. In the former case the priority rule regards C as ‘equity’s darling’. Otherwise the appropriate priority rule is ‘first in time if the equities are equal’, and B’s interest will defeat C’s. The puzzle is what priority rule should apply in the intermediate position, where C is a bona fide purchaser of the ­equitable interest (so it would seem the first in time rule should apply), but at that stage C also has the share certificates and the transfer forms (as in Re Rose, so has the means of obtaining legal title independently of A), but, crucially, at the time C actually obtains registration C is alert to B’s earlier interest (so is not, strictly, a bona fide purchaser for value of the legal estate without notice of B’s prior equity). Millett J in Macmillan Inc v Bishopsgate Investment Trust plc49 held that in those circumstances the equity’s darling defence was available even though C was on notice of B’s earlier interest by the time legal title was obtained. That is in line with the analysis advanced in this chapter, and might be more fully explained by noticing that what really matters here, as with all property questions, is who was entitled to the legal title (and, in the priority context, C’s state of knowledge at that stage). The significance of entitlement is an important point to notice, although admittedly the facts in this case are unusual. Millett J was reassured by the fact that his conclusion was in accord with commercial needs: shares are commonly used as security by delivering up the right to obtain registration – ie giving C the legal entitlement to registration – but not requiring C to register in order to preserve priority, since that would generally be impractical.50 That was what had been done in this case. But then, with respect, all his analysis seemed to be completely undermined by the closing obiter suggestion that the outcome would have been completely different had C not actually become the registered owner.51

49 Macmillan Inc v Bishopsgate Investment Trust plc (No 3) [1995] 1 WLR 978 (Ch). 50 ibid 1003–04. 51 ibid 1016. Millett J suggested an injunction would have been granted to prevent C’s registration if that had been requested prior to C’s actual registration. However, that seems doubtful. It would necessarily have been an injunction ordered in the face of C’s entitlement to become registered, an entitlement that must be a continuing one, despite later knowledge, given the actual conclusion in this case. By contrast, if the entitlement had not been a continuing one, then surely the newly registered but unentitled owner would have held the registered shares on constructive trust for the party entitled to their benefit.

The Commercial Triple Helix  45 If all this seems a stretch, it should be noticed that the analysis is on all fours with that adopted with an equitable lease or a common law lien (where possessory interests are in issue), or with an equitable mortgage (where security interests are in issue), and indeed also with vendor–purchaser constructive trusts (although then it is far more complicated to decide which particular property interests arise and when52), and indeed also with constructive trusts requiring disloyal fiduciaries to disgorge their profits. If it seems that these final examples go too far in asserting that the issue is location, not liability, consider that an equitable lease is equally effective to give the intending lessee a possessory interest in assets in which he had no previous interest (ie the model for finding ‘location’ does not have to be ‘resulting’ only, as indeed is clear from Re Rose). In all these instances, the question to be decided is who, if anyone, has derivative interests in the property by way of possessory interests, security interests, or trust interests (being interests in the economic benefit of the underlying asset). But the focus here is not to revisit all these particular complicated rules on resulting and constructive trusts. It is merely to make the point that the question of who is entitled to the economic benefit of assets is a property location question, for which the law has certain rules. It is not a liability question which is typically subject to argument about context and quantum. Two further questions might then be addressed before leaving this section. First, it might be asked where the boundary lies for this ‘location’ question: is every finding of a derivative interest in property the result of answering a location question, not a liability question? That might indeed turn out to be true. What is noticeable about all the location questions is that, bar those relating to the location of legal title, they depend fundamentally on the intention and consent of the transferor in disposing of her entitlements to her property. Absent that intention or consent, and despite any effective transfer of legal title, it is typically the case that the entitlement to any derivative benefits associated with the asset are retained. This is true in the case of theft; and in the case of incomplete dispositions on trust; and with voidable transactions once avoided.53 The conclusion only fails if the original asset can no longer be identified.54 Notice that in these scenarios the underlying 52 The purchaser’s equitable interest is said to be ‘commensurate … with what would be decreed to him by a Court of Equity in specifically performing the contract’: Central Trust and Safe Deposit Co v Snider [1916] 1 AC 266 (PC) 272. For what this might mean at various stages in the life of the contract until the transfer is finally fully executed, see the discussion in S Worthington, Proprietary Interests in Commercial Transactions (Oxford, Clarendon Press, 1996) 194–215; PG Turner, ‘Understanding the Constructive Trust between Vendor and Purchaser’ (2012) 128 LQR 582. 53 S Worthington, ‘The Proprietary Consequences of Rescission’ (2002) 10 Restitution Law Review 28; D O’Sullivan, S Elliott and R Zakrzewski, The Law of Rescission, 2nd edn (Oxford, Oxford University Press, 2014). 54 Note that priority questions are subsequent. For example, suppose the trustee holds on trust for B, and the trustee intends to and does transfer legal and beneficial title to C. That second transfer is not compromised by limitations or conditionalities in the trustee’s consent. The fact that the transfer is a breach of trust does not prevent the transfer being effected at law, or fully intended in fact. But the priority question then kicks in. Given the inconsistent dealings – the trustee’s holding for B and the trustee’s transfer to C – who wins? This is where the ‘equity’s darling’ and ‘first in time’ rules come into play.

46  Sarah Worthington question is invariably who is entitled to the particular derivative benefit. Where the transferor has not intended or consented to its transfer, the answer is that the transferor remains entitled. The way in which that is recognised in property law is to hold that the entitlement persists despite the transfer of legal title.55 The result is that the transferor has the relevant derivative interest in the property in the face of the transferee’s legal title. On the other hand, where the transferor’s intention or consent to the transfer of her entitlement is present, then, despite her failure to transfer legal title as intended, it is possible (although not inevitable) to find that the entitlement to derivative interests in the asset has been conveyed successfully to the intended transferee. This is true in the context of incomplete gifts in the limited Re Rose scenario,56 to ‘equitable leases’ of real property, to vendor–purchaser constructive trusts, to possessory or equitable security interests arising by operation of law, and so on. These are all constructive trusts. Notice that in these scenarios the underlying question is, again, who is entitled to the particular derivative benefit: who can demand its receipt. In these contexts, unlike those in the previous paragraph, the answer depends not only on the transferor’s intention to give up her entitlement (the easier question) but also on the transferee’s ability to enforce that intention.57 If that ability to enforce is not present, then there will be no cause for finding a constructive trust arising by operation of law. That was the critical issue in the Re Rose analysis above, and is also the reason the other illustrations in the above list are confined to contracts where the intended transfer is specifically enforceable.58 To repeat, what is noticeable about all the location questions is that, bar those relating to the location of legal title, they depend fundamentally on the intention or consent of the transferor in dealing with entitlements to her property and any derivative benefits that can be extracted from it. By contrast, liability questions depend on the behaviour of the defendant recipient, sometimes behaviour that need amount to no more than innocent receipt of assets or benefits to which others are entitled. This location/liability division is true across the field of contract, tort and unjust enrichment claims against defendants. Typically, the claimant first establishes her property rights, and then the defendant’s liability for some form of inconsistent dealing with them needs to be proved. Secondly, what is the practical advantage of this segregation between location questions and liability questions? The principal practical advantage is, of 55 See again n 26 above. 56 Notice that this analysis simply does not get off the ground where the transferor is in complete control of delivering an effective disposition, as is the case with gifts of tangibles. The Re Rose analysis is restricted to intended legal transfers depending on third party registration for their completion. 57 In the contexts in the previous paragraph, a transferor who has not given up her entitlements can enforce them. In this paragraph, a transferor who has not given up the interest she intended to give up (ie absolute legal and beneficial title), can only be forced by the transferee to give it up if her intention to give is unqualified and the underlying transaction is specifically enforceable by the transferee. See n 58 below. 58 See the detailed articulation of this requirement in the context of vendor-purchaser constructive trusts in Worthington, Proprietary Interests (n 52) 194–215.

The Commercial Triple Helix  47 course, clarity in analysis. But there is also something about our description of trust interests that seems to lend itself to confusion. By contrast, location questions concerning rights to possession or rights to security interests (whether common law possessory security interests or equitable security interest by way of charge) cause far less confusion. So perhaps the other benefit in the approach articulated here is simply to describe trust interests as entitlements to the economic benefit of an asset. If a person has that entitlement, then by definition they have a trust ­interest;59 equally, if they have a trust interest, that means that they have an ­entitlement to the economic benefit of the asset. That reinforces the important point that the goal of trusts law and of trust interests is not to deliver an asset to the beneficiary, but to deliver ‘the economic benefit of the asset’ so far as the trustee (including the resulting or constructive trustee) has it.60

IV.  The Interface between Property and Unjust Enrichment: Resulting Trusts and Proprietary Restitutionary Remedies If the previous section is right, and property questions must be answered before liability questions, then the next issue is the link between property and liability. In particular, what is the connection between property questions delivering resulting trust answers that suggest the claimant has not lost her entitlement to the economic benefit of her original assets, and liability questions delivering restitution answers that ensure the defendant makes restitution of any factual economic benefit derived from the transferred assets? Moreover, can the latter remedy be proprietary? So much has been written on this issue that there is inevitably a degree of nervousness in revisiting the topic anew.61 Nevertheless, the enquiry is foundational and hence unavoidable in the context of this present discussion. It is also difficult,62 controversial, and overshadowed completely by the strong findings in Westdeutsche.63 That case holds that neither the initial property question nor any 59 Subject to the qualification noted above in n 26, in the context of absolute legal owners. 60 All of this then has the potential to simplify still further the approach taken in cases such as Akers v Samba Financial Group [2017] UKSC 6, [2017] AC 424, and more generally, to explain and justify particular outcomes in the fraught issue of the potential liabilities of third-party recipients of trust property. 61 See generally, the following texts and their citation of commentators: G Virgo, The Principles of the Law of Restitution, 3rd edn (Oxford, Oxford University Press, 2015) pt V; A Burrows, The Law of Restitution, 3rd edn (Oxford, Oxford University Press, 2011) ch 8; P Birks, Unjust Enrichment, 2nd edn (Oxford, Oxford University Press, 2005) ch 8; E Bant and M Bryan (eds), Principles of Proprietary Remedies (Pyrmont (NSW), Lawbook Co, 2013); Burrows, Restatement (n 20). 62 Andrew Burrows once suggested it was the most difficult problem in all the law of unjust enrichment: Burrows, ‘Unravelling Proprietary Restitution’ (n 7) 424. 63 Westdeutsche (n 4).

48  Sarah Worthington associated liability question, however they might be linked, should be answered in terms that give the claimant the protection of a proprietary interest. The policy reasoning in that case was overtly against any expansion in proprietary remedies, and clearly favoured contraction, overruling certain earlier cases64 and doubting others.65 Nevertheless, the case remains controversial, and a contrary argument is put here. The crucial question can be put in a number of ways. As already noted, trusts law and unjust enrichment law are both concerned with entitlements to the economic benefit of assets. That connection is plain with trusts. Similarly, unjust enrichment law seeks to allocate the economic benefit of an asset to the person entitled to it. If we are prepared to say, in both cases, that a defendant is not entitled to the economic benefit of the asset, then should we not remedy the acquisition of that economic benefit in the same way in both cases? And, in that case, should there be no property in the answer, or lots of property? Since the underlying concept – entitlement to the economic benefit of an asset – is a property concept in English law, the answer might seem obvious. The illustrative case remains Chase Manhattan,66 perhaps because a liability mistake so obviously grounds a restitutionary claim, and because the court in that case granted a proprietary remedy. That analysis came under severe attack from Lord Browne-Wilkinson in Westdeutsche.67 He insisted that the remedial response can only be proprietary after the defendant’s conscience is affected, and seemed to come close to insisting that a remedy is thus only proprietary when a wrong has been committed. In short, he would have answered the property location question in the defendant’s favour, finding the defendant was the absolute legal owner of the transferred assets, but then answered the liability question in the claimant’s favour, finding her entitled to a personal remedy in unjust enrichment. However, these proprietary conclusions in Westdeutsche contradict and conflict with swathes of equitable precedent, and indeed even conflict with Lord Browne-Wilkinson’s own obiter comments.68 Bar the findings in Westdeutsche and its criticisms of earlier cases, equitable responses are typically and unrelentingly proprietary. This is readily illustrated by cases on presumed resulting trusts and

64 Sinclair v Brougham [1914] AC 398 (HL). 65 Chase Manhattan (n 2). 66 ibid. 67 Westdeutsche (n 4). 68 ibid 715. There Lord Browne-Wilkinson suggests the decision in Chase Manhattan may well have been right (ie a proprietary conclusion giving Chase Manhattan insolvency protection), on the basis that ‘Although the mere receipt of the moneys, in ignorance of the mistake, gives rise to no trust, the retention of the moneys after the recipient bank learned of the mistake may well have given rise to a constructive trust’. But if there is no proprietary interest on receipt, then the received funds belong to the bank absolutely and are swept into the insolvency pot. It is then too late to impose constructive trusts that provide any insolvency protection – unless those constructive trusts are then deemed to have arisen from the date of receipt, and to attract all the incidents that follow from that, which rather defeats the core analysis adopted in Westdeutsche.

The Commercial Triple Helix  49 purchase money resulting trusts,69 cases where rescission is ordered,70 and – prior to Westdeutsche – cases of void contracts.71 As discussed in the next section, all of these examples can be united analytically under the head of ‘unintended gifts’ made by the transferor: put generically, these are all transactions where the objective conditionality of the intended transfer has failed completely, with the result that the transferor has made an unintended gift.72 By contrast, in Westdeutsche, Lord Browne-Wilkinson adopted a new approach to these proprietary issues. He began in an orthodox manner, suggesting that where there was a voluntary transfer from A to B, there was a long-recognised rebuttable presumption that ‘A did not intend to make a gift to B’.73 That presumption, he held, could be rebutted by ‘direct evidence of A’s intention to make an outright transfer’. Notice that, as stated, the presumption and its rebuttal do not quite match. Strictly speaking, it might be thought that the stated presumption (that A did not intend to make a gift to B) could only be rebutted by direct evidence that A did indeed intend to make an outright transfer to B by way of gift. So reformulated, this approach would appear to justify a presumed resulting trust on the facts of Chase Manhattan and on those of Westdeutsche itself. But Lord Browne-Wilkinson was clearly not of this view. He thought that this would give rise to presumed resulting trusts in a very wide range of circumstances, and regarded that as commercially unacceptable. Whether he is right on either the practical outcome or the policy issue is debatable.74 In any event, this formulation was not the one adopted by Lord Browne-Wilkinson. Instead, Lord Browne-Wilkinson held that the relevant presumption was the positive presumption that A intended B to hold the transferred property on trust for A,75 not the negative presumption that A did not intend a gift to B. It followed that the presumption could be rebutted by any evidence suggesting that A intended any type of transfer other than one where B was intended to hold the asset on trust. On this basis, presumed resulting trusts will almost never arise. They would not arise on the facts of either Chase Manhattan or Westdeutsche, since in both those cases it is plain that the funds were not transferred to B to hold on trust for A. Indeed, on this formulation it seems these trusts will arise only when a positively intended express trust fails. That is the only context in which there will not be 69 See Worthington, Equity (n 11) 257–61. 70 Worthington, ‘The Proprietary Consequences of Rescission’ (n 53); O’Sullivan, Elliott and Zakrzewski, The Law of Rescission (n 53). 71 Sinclair (n 64), now overruled by Westdeutsche (n 4). 72 See text to n 116 below. 73 Westdeutsche (n 4) 708. 74 See the discussion in Worthington, ‘Proprietary Interests’ (n 52) Addendum at vii and following. 75 Adopting the view of W Swadling, ‘A New Role for Resulting Trusts?’ (1996) 16 Legal Studies 110. He favoured those views over the views of P Birks, ‘Restitution and Resulting Trusts’ in SR Goldstein (ed), Equity and Contemporary Legal Developments (Hebrew University of Jerusalem, 1992). Birks’ views were adopted and expanded in R Chambers, Resulting Trusts (Oxford, Clarendon Press, 1997). Of the same view as Lord Browne-Wilkinson, see Anderson v McPherson (No 2) [2012] WASC 19, 8 ASTLR 321 [106] (Edelman J). For a clear discussion of the issues, see Penner, ‘Resulting Trusts and Unjust Enrichment’ (n 44).

50  Sarah Worthington presumption-rebutting proof that the claimant did not intend a trust. This double negative will rarely reflect reality. Despite this strong finding in Westdeutsche, many cases since then appear to adopt the more lenient presumption that A did not intend to benefit B.76 This presumption is rebutted by any evidence that A did indeed intend B to take the property beneficially. However, despite first impressions, this leaves only marginally more scope for presumed resulting trusts, since it is clear that the ‘intention to benefit’ test is deemed to be met even if the intention is founded on the mistaken assumption, as in Westdeutsche, that there is a binding contract to deliver agreed counter-performance.77 In such a case, the claimant’s intention is undoubtedly to benefit the defendant; the mistake is to assume that the defendant will be contractually bound to provide counter performance. But a strong argument can be made that this is inappropriate. As it stands, this test of intention pays no regard to any conditionality in intention to benefit; in particular, it does not permit the qualification that A does not intend to benefit B unless there is quid pro quo. This more nuanced approach to ‘intention to benefit’ accords with the law’s approach to intention in other areas: parties will not be held to objectively valid demonstrations of intention where that intention was induced inappropriately, or was conditional or contingent. With unjust enrichment claims, for example, mistaken transfers are not treated in the same way as intended transfers. Such mistakes are sufficient to vitiate the intention to transfer, and it is because of this that there is a remedy in unjust enrichment. Better then, surely, to see intention as legally effective on precisely the same tests in both contractual and non-contractual contexts, and instead to recognise that the facts suggest that A did intend the transfer, and did intend it to benefit B, but only on the condition that B was compelled to make counter-performance.78 That brings us full circle to the more orthodox presumption first articulated by Lord Browne-Wilkinson, noted earlier. This presumption, that A did not intend to benefit B by gift, reflects the history of the operation of this presumption in equity, and indeed was matched by the counter-presumption of advancement (ie that in certain circumstances a gift was intended). Historically, these cases (and their purchase money resulting trust analogues), were not at all concerned with the claimant’s subjective or objective intentions to benefit the defendant. Indeed, in the face of perfectly properly intended transfers, equity simply presumed that, if they were gratuitous, the defendant held the asset on resulting trust for the claimant. The defendant could only rebut the presumption by showing that a gift was indeed intended.79 On this presumption, in just the way Lord Browne-Wilkinson found so 76 See especially Air Jamaica Ltd v Charlton [1999] 1 WLR 1399 (PC) 1412 (Lord Millett). 77 See P Millett, ‘Restitution and Constructive Trusts’ in WR Cornish et al (eds), Restitution: Past, Present and Future: Essays in Honour of Gareth Jones (Oxford, Hart Publishing, 1998); Millett, ‘Proprietary Restitution’ (n 7). 78 See Worthington, Equity (n 11) 281–83; C Webb, ‘Intention, Mistakes and Resulting Trusts’ in C Mitchell (ed), Constructive and Resulting Trusts (Oxford, Hart Publishing, 2010); Webb, ‘Property’ (n 44). 79 Fowkes v Pascoe (1875) LR 10 Ch App 343 (DC).

The Commercial Triple Helix  51 unattractive, mistaken payers or claimants who had transferred assets under void or voidable contracts would be allowed to recover their misconceived transfers using the presumed resulting trust vehicle. More than 20 years after Westdeutsche, these now confused distinctions between void and voidable contracts and dispositions have still not been adequately explained.80 It is therefore not surprising that, following Westdeutsche, a great deal has been written on presumed resulting trusts, although nothing so far that has put a stop to the debates. It is suggested that there are a number of obvious concerns with the current orthodoxy as it is set out in this leading case. First, the starting and now orthodox presumption is manifestly unreal. A legal presumption is generally selected because it represents the likely reality. By contrast, the open-ended proposition that on a transfer from A to B, there will be a presumption that A intended B to hold on trust for A, seems so far from representing the common reality that the presumption must surely have additional constraints on its incidence, otherwise it clearly fails to accommodate the vast array of transactions where not a thought is given to such a presumption. Secondly, this presumption is not aligned with any principled proprietary response to particular sets of facts. On its own terms it would seem to generate a presumed resulting trust only when the facts are insufficient to rebut the presumption that A intended B to hold on trust for A. This is a category which appears to have no content other than an expressly intended trust of this precise form which fails to meet the formalities requirements (and therefore by definition can only be a trust of land). The presumption, worded this way, is thus even more restrictive than the presumptions operating with automatic resulting trusts (which would in any event have covered the preceding scenario) and with Quistclose trusts, both of which are founded on the notion that A did not intend B to take beneficially. Unless the principles underpinning presumed resulting trusts are exposed, this debate will have no end. At its heart, the relevant issues concern the interrelationship between A’s proprietary rights to control the disposition of her own assets, and the proprietary and unjust enrichment responses when the disposition is flawed, typically because intention to dispose is mistaken or coerced or conditional. It is suggested here that the early orthodoxy had the presumptive rule formulated appropriately: ie, in the context of gratuitous transfers,81 the presumption is that A did not intend to benefit B by way of gift. The presumption is rebutted by proof that A did intend a gift. And, very significantly, the presumption itself is displaced by the presumption of advancement in circumstances where the context favours gifts rather than contradicting them. Whatever might be said about the

80 See Worthington, Equity (n 11) 308–09. 81 Imposing a constraint on the operation of the doctrine is clearly essential. All the history indicates that this was the essential factual constraint. It has the advantages of principle, but also of practicality. Note that the context includes transfers rendered gratuitous because the underlying transaction is void, or voidable and has been avoided, or is terminated on a total failure of consideration (in circumstances where the remedy claimed is restitution, not damages for breach of contract).

52  Sarah Worthington patriarchal form of the presumption of advancement, the mere existence of two presumptions dealing with two distinct contexts reinforces the idea that presumptions accepted by the law should be chosen to reflect likely reality. To test whether using this earlier presumption as the governing presumption makes principled sense, a comparison with analogous proprietary responses is instructive. Automatic resulting trusts rest on the notion that in a transfer to B on express trust (ie again, a tightly defined context), the automatic but rebuttable presumption is that B is not intended to benefit, so if the entire beneficial interest is not allocated, then the unallocated residue is held for A. This consequence is justified because A, as owner, has full power of disposition over her own assets, and what is not given is presumed to be retained.82 This accords with the ‘proprietary arithmetic’ idea.83 The presumption is rebutted by evidence that B was indeed intended to benefit. Similarly with Quistclose trusts. These only arise where the transfer from A to B is not intended to benefit B to the knowledge of B (this being the crucial constraint on the operation of the principles in play, since typically the commercial context would not itself serve to make that restriction obvious84). In those circumstances, if B is not to benefit, and the intended beneficiary is not specified (or the only specification is a purpose, which amounts to the same thing), then the unallocated residue, perhaps being the totality, is held on resulting trust for A.85 This return to the old orthodoxy would deliver simple analyses of common factual scenarios. However, the disadvantage of this, as perceived in Westdeutsche, is that it provides proprietary remedies and their attractive incidents in what might seem to be a wide variety of circumstances. Two comments might be made in response. First, in reality the circumstances are limited to mistaken gratuitous dispositions (eg Chase Manhattan) and to contractual cases where the contractual underpinnings have been removed.86 Both illustrate a transfer transacted on the basis of a flawed perception as to its fundamental nature. In other contexts, such flawed perceptions of the fundamental nature of the transaction being undertaken are sufficient to render the engagement amenable to being unravelled, and unravelled in a proprietary sense.87 It is difficult to defend these responses and yet support the conclusions in Westdeutsche. The flaw in the analysis, it is suggested, lies in confusing A’s practical and apparent ‘intention to benefit B’ in handing over assets to B, with the type of intention the law regards as sufficient to attract

82 Simon Gardner’s term for this is ‘proprietary inertia’: S Gardner, An Introduction to the Law of Trusts, 3rd edn (Oxford, Oxford University Press, 2011) 295–302. 83 See n 44 above. 84 This can be contrasted with the implicit notice to B with transfers of assets by way of gift where gifts are less likely, or with transfers on express trust. 85 Barclays Bank Ltd (n 21); Twinsectra Ltd v Yardley [2002] UKHL 12, [2002] 2 AC 164. 86 Because the contract is held to be void, voidable, or – with less confidence – terminated on a total failure of consideration. On the latter, see Worthington, Equity (n 11) 278–88. 87 With Pitt v Holt [2013] UKSC 26, [2013] 2 AC 108, being the leading authority.

The Commercial Triple Helix  53 responsibility for the consequences of what is done. In innumerable instances the law draws precisely this distinction between actions which are factually intended (as perhaps a scientist would judge them) and actions for which the law will hold an individual responsible. It is suggested that the factual intention to benefit in Westdeutsche does not meet the test of an action which binds A to the intentional disposition of its assets. This is discussed further in the next section. For now, a closing comment might be made. Westdeutsche stands as binding authority. Nevertheless, against its power is a long and different history, and also a good number of seemingly contradictory examples of proprietary remedies awarded in only marginally different fact situations.88 The crucial insight in determining which approach is preferable seems to be this. The entire body of unjust enrichment law is directed at protecting the claimant’s economic interest in an asset in circumstances where protection is seen as warranted even though the defendant has acquired legal title. In short, unjust enrichment affords protection where the defendant should not have the economic benefit typically associated with legal ownership, but the claimant should. This is precisely the formulation for every single type of trust. With an express trust, the trustee has legal title, but holds the economic benefit for nominated beneficiaries; with resulting and constructive trusts, the trustee has legal title, but by operation of law is deemed to hold the economic benefit derived from the trust assets for the benefit of nominated beneficiaries. So, here too, a trust would seem warranted. The resulting alignment – or merging – of the common law and equitable responses to unjust enrichment would have the added advantage of recognising, explicitly, that the formula ‘entitlement to the economic benefit of the transferred assets’ is a formula limited by the change of position defence, and, put that way, so too is the related resulting trust.89 Indeed, this change of position defence is not as exceptional in the trust context as is commonly perceived: even with express trusts, the beneficiary’s entitlement to the economic interest in the trust assets is a net entitlement.90 That would meet yet another source of friction in the proprietary/personal or equity/unjust enrichment responses to identical contexts. As an aside, this alignment would do nothing to deny the importance and impact of personal claims in unjust enrichment. Although nothing has been said of that liability, it would inevitably remain the dominant mode of enforcement of claims in unjust enrichment for the simple reason that in most cases the original transferred asset is rarely still identifiable in the transferee’s hands. That fact makes a proprietary claim impossible. But the personal unjust enrichment claim

88 The cases on voidable contracts illustrate the largest group. 89 See R Chambers, ‘Proprietary Restitution and Change of Position’ in A Dyson, J Goudkamp and F Wilmot-Smith (eds), Defences in Unjust Enrichment (Oxford, Hart Publishing, 2016). 90 Accordingly, the trustee has a lien against the trust assets for necessary expenditure in trust management, and the trust of a business charges expenses against the trust fund. By analogy, the defendant in an unjust enrichment case, when required to account for the benefits received from the underlying assets, is only required to account for the net benefit. Hence the change of position defence.

54  Sarah Worthington remains one assessed according to precisely the same underpinning principles: the defendant is liable to restore to the claimant the economic benefit he derived from the transferred asset, since that is an economic benefit to which the claimant was entitled, not him. As noted earlier, his liability is to a net economic benefit, and in particular is subject to a change of position defence.91 In short, if this second point can be summarised, it is to draw attention to the notable commonality that all of unjust enrichment law and much of the law of trusts arising by operation of law is concerned to ensure the appropriate allocation of the economic benefits of assets. In that sense, unjust enrichment law and trusts law are, unlike contract and tort law, not especially concerned with protecting the general status of the person making the claim, but rather with protecting her entitlements to the benefits of particular assets. That insight is picked up in my final section. But there is an intermediate issue that should come first.

V.  Consent and Intention in Private Law: When is a Claim in Unjust Enrichment Available? This section seeks to build on the two earlier sections. Those recognised that ‘location’ questions that are concerned with trust interests and ‘liability’ questions that are concerned with unjust enrichment are both motivated by precisely the same underpinning principle. That principle is one of ensuring that entitled individuals are recognised as having a legal entitlement to the economic benefits of an asset (the location question) and being able to recover those benefits from third parties who happen to be in factual enjoyment of them (the liability question). If that principle is to be put to work, then the obvious question is when are individuals entitled to the economic benefits to be derived from assets. That is the focus of this section. Some assertions seem obvious. An absolute legal owner is entitled to the economic benefit of the assets owned. It would appear to follow automatically that if those assets fall into a third party’s hands without the owner losing her entitlements (as is the case with theft), then the owner is entitled to sue the thief in unjust enrichment. Despite that logic, the suggestion is considered wrong by a number of well-regarded commentators.92 Focusing on the parties’ legal rights, they point out that the owner has lost nothing and the thief has not been enriched by receipt of any interest in the asset, and therefore a claim in unjust enrichment is impossible. That approach tellingly exemplifies one of the analytical traps identified earlier.93 91 ibid. 92 W Swadling, ‘Ignorance and Unjust Enrichment: The Problem of Title’ (2008) 28 OJLS 627; R Grantham and C Rickett, ‘Restitution, Property and Ignorance – A Reply to Mr Swadling’ [1996] LMCLQ 463 and also, R Grantham and C Rickett, ‘On the Subsidiarity of Unjust Enrichment’ (2001) 117 LQR 273, 282–84. For a critique, see Burrows, The Law of Restitution (n 61) ch 8. 93 See the text at n 35 above.

The Commercial Triple Helix  55 The better analysis is to recognise that it is of the very nature of a claim based on proprietary interests that the claimant must herself have (and indeed, must prove she has) the particular legal entitlement in issue, but that her defendant is nevertheless exercising practical or factual enjoyment of it: that is why the claim is being made.94 That is exactly the case here: it is the very reason the legal owner sues for recovery of the economic benefit being enjoyed by the defendant thief.95 Similarly, if legal title has passed but legal entitlement to the economic benefit of the asset has not, then the original owner may enforce her legal entitlement to the economic benefit against the recipient who currently has the factual enjoyment of that benefit.96 As noticed in the previous section, if the asset is identifiable then a trust interest ensures that the claimant has her entitlement in specie: it is effectively enforced by recognising the trust interest in the asset in question. Only when the asset is no longer in the defendant’s hands is a personal claim in unjust enrichment necessary to remedy the earlier failings in property transfers.97 But these scenarios assume we have the answer to the difficult question of when a legal owner can make a claim in unjust enrichment: when will a person who has successfully transferred legal title to another be able to sue that other in unjust enrichment on the basis that the transferor nevertheless remains entitled to the economic benefit of the transferred asset notwithstanding its legal transfer? In describing the answer, unjust enrichment lawyers typically divide the relevant contexts into two classes: those where the claimant’s consent was impaired, qualified or absent; and those where, even when it was not, there is good reason why the enrichment should be seen as unjust.98 The former category is said to include cases where the claimant’s transfer is mistaken, made under duress, made without capacity, and so on. The latter category includes cases of legal necessity, legal compulsion and such like. The first category appears to focus entirely 94 It is the same for other property-based claims. Consider the claims in conversion made to protect the claimant’s right to possession against the defendant’s factual possession; or the trust beneficiary’s enforcement of a priority claim against the third-party donee currently enjoying the factual benefits of the trust interest. 95 It might be thought that the remedy ought to be exclusively in conversion, but that liability is protecting a different derivative interest (although, as with all concurrent claims, the claimant will not be able to recover twice for the same loss). The unjust enrichment claim is supported by Lord BrowneWilkinson’s analysis in Westdeutsche (n 4) 716. 96 See the approach taken by Virgo, Principles (n 61) chs 21, 22. Again, for a critique see (n 61) ch 8. 97 Here care is needed to ensure that the claimant does indeed have an unjust enrichment claim to enforce. The issue is not simply whether the claimant was entitled to the economic benefit of the asset (her trust interest showed she was), but whether she can sue this defendant as being inappropriately enriched by it. That depends on whether her apparently successful transfer was made to this defendant (eg the successful transfer of her legal title), but nevertheless in circumstances where she can be regarded as not properly intending or consenting to the transfer of her entitlements to the benefits of her property. This is the model of all the cases considered so far, with the mistaken gas board customer being the prime example. But notice it is not apt to describe the quite different potential claim between the beneficiary of an express trust and the donee receiving trust assets when not entitled to them. See n 54 above. 98 Burrows, Restatement (n 20) 5, s 3(2)(a) and (b) respectively. And then the sub-classes are ­elaborated in s 3(3) and (4).

56  Sarah Worthington on the claimant, and considers whether her intention to transfer was flawed or conditional; if it was, she is allowed to recover. By contrast, the second category appears to focus entirely on the defendant: it concedes that the claimant’s intention to transfer was neither flawed nor conditional, but nevertheless holds that the defendant should pay for the benefit received (perhaps on the basis of a novel policy that makes it compulsory to compensate those who have rescued you or saved you from harm). This latter category is not considered further. On its face it appears motivated by a completely different policy from the first category. The first category might be summarised as allowing restitution for unjust enrichment where the transfer was without the claimant’s consent, or where the transfer was mistaken.99 Moreover, it is suggested by unjust enrichment law scholars and by the cases that if the mistake is ‘causative’ in inducing the transfer, then restitution is possible.100 That lays a heavy burden on the task of discovering what is causative.101 Moreover, the range of transfers within its ambit is potentially very broad. That can be problematic. The jurisdiction to correct misconceived transfers is necessary, but potentially troublesome. If the jurisdiction is too wide, then too many transactions will be upset and commercial and social life will suffer: parties will not know which arrangements they can depend upon and which are likely to be unwound. On the other hand, if the jurisdiction is too narrow, individuals will lose their property (or, more specifically, its economic benefit) when the common perception is that they should not. In the gas board example cited earlier, most people would think it unfair if the gas board could keep the second payment simply because it acquired it innocently: the customer’s error should be one that permits recovery. Even if all these issues could be resolved, to use ‘mistake’ as a category still appears fraught. Assuming we could readily determine which mistakes caused the claimant’s transfer, that causal link would not necessarily indicate much else about the transfer.102 In particular, it would not seem to differentiate between mistakes leading to completely misconceived transfers (where recovery in unjust enrichment might feasibly be allowed) and mistakes leading to losing commercial deals

99 Kelly v Solari (1841) 9 M & W 45, 58–59; 152 ER 24, 26 (mistake as an unjust factor), but also see 59 (absence of basis), 58–59 (unconscionability). 100 Barclays Bank Ltd v WJ Simms Son & Cooke (Southern) Ltd [1980] QB 677 695; Banque Financière (n 3); Kleinwort Benson v Lincoln City Council [1999] 2 AC 349 (HL) 408; Dextra Bank & Trust Co Ltd v Bank of Jamaica [2001] UKPC 50, [2002] 1 All ER (Comm) 193; Deutsche Morgan Grenfell plc v IRC [2006] UKHL 49, [2007] 1 AC 558. See Burrows, Restitution (n 61) 207–09. 101 Marine Trade SA v Pioneer Freight Futures Co Ltd BVI [2009] EWHC 2656 (Comm), [2010] 1 Lloyd’s Rep 631; Kelly v Solari (n 99); Nurdin & Peacock plc v D B Ramsden & Co Ltd [1999] 1 WLR 1249 (Ch); Deutsche Morgan Grenfell (n 100). See too G Virgo ‘Causation and Remoteness within the Law of Unjust Enrichment’ in S Degeling and J Edelman (eds), Unjust Enrichment in Commercial Law (Pyrmont (NSW), Lawbook Co, 2008) ch 8. 102 Roles v Pascall & Sons [1911] 1 KB 982 (CA) 987 (Buckley LJ): ‘A mistake exists when a person erroneously thinks that one state of facts exists when, in reality, another state of facts exists’. See also D Sheehan, ‘What is a Mistake?’ (2000) 20 Legal Studies 538; W Seah, ‘Mispredictions, Mistakes and the Law of Unjust Enrichment’ (2007) 15 Restitution Law Review 93.

The Commercial Triple Helix  57 (where recovery would surely not be allowed). As matters stand, the breadth of seemingly relevant mistakes is vast.103 Moreover, the unjust enrichment lawyers detect subtle differences between the sort of ‘mistake’ that defeats a contract, the sort that affects payments responding to a perceived liability (whether in debt or a tax liability), and the sort that operates in outright or unconditional gift cases. All concede that a contracting claimant cannot ignore the contract and simply turn around and recover a remedy in unjust enrichment unless the contract can first be avoided (ie is found to be void or voidable) or can be terminated (and even then, unjust enrichment claims are not inevitably possible). This severely limits the availability of unjust enrichment claims in commercial contexts. Such claims can only be advanced if the contract was founded on a fundamental mistake as to the identity of the counterparty or the existence of the subject matter of the contract,104 or, alternatively, the contract was based on the absence of consent from the claimant, or, again alternatively, the contract was based on the flawed consent of the claimant,105 that flaw being induced by the defendant, even if innocently.106 In the latter context the contract is voidable,107 not void, with all the proprietary and practical consequences that then ensue. By contrast, unjust enrichment claims appear to be available on increasingly broad grounds outside the confines of contract. This seems to have been achieved by amalgamating ideas of ‘no consent’ and ‘failure of basis’ to produce a compound assertion that unjust enrichment claims can be sustained whenever the claimant ‘did not intend the transfer in the circumstances’.108 But this formulation is then readily subject to inappropriate expansion. It may extend well beyond situations where the claimant did not intend the transfer at all, or did not intend a transfer of the type which it has turned out to be (eg a gift where contractual counter performance was expected, or a transfer to rescue the defendant in particular circumstances which turn out not to exist, making the rescue impossible, with analogies with Quistclose trusts109 being readily apparent).110 It may, less appropriately, include contexts where the claimant can at best be described as having unmet

103 Other than with the mistaken liability cases, the difference between these last two categories is difficult, and their sheer breadth quite uncertain. See, eg Ogden v Trustees of the RHS Griffiths 2003 Settlement [2008] EWHC 118 (Ch), [2009] Ch 162, although doubted in Pitt v Holt (n 87) [114]. See also University of Canterbury v A-G [1995] 1 NZLR 78 (HC), where the purpose/motive distinction is difficult: see Virgo, Restitution (n 61) 173. 104 Bell v Lever Bros Ltd [1932] AC 161 (HL); Norwich Union Fire Insurance Society Ltd v Price [1934] AC 455 (PC). 105 Either at law, Lewis v Averay [1972] 1 QB 198 (CA), or in equity. 106 These flaws include fraud, duress, misrepresentation and undue influence. 107 For contracts voidable in equity, see El Ajou (n 24), rev’d on other grounds [1993] EWCA Civ 4; Daly v Sydney Stock Exchange Ltd (1986) 160 CLR 371; Alati v Kruger (1955) 94 CLR 216. Note that before the contract is rescinded there is only a mere equity to rescind, not a constructive trust. 108 See n 102. 109 Barclays Bank Ltd (n 21). And see the text to n 116 below. 110 This aligns with the limited view of mistake adopted by the Court of Appeal in Pitt v Holt [2011] EWCA Civ 197, [2012] Ch 132, but that view was overturned in the Supreme Court: Pitt v Holt (n 87).

58  Sarah Worthington motivations for the gift, or at worst as simply having second thoughts about the transfer in the light of circumstances discovered some time later.111 The problems with this are obvious. The common justification for this much more liberal approach to unjust enrichment claims outside the context of contract is that restitution does not hurt the defendant, or cause him any harm, since he is simply required to give up something he has not paid for, and he is in any event protected by the change of position defence. But the underlying principle matters, and the wider the remit of unjust enrichment, the less secure is receipt. Moreover, since unjust enrichment does not rest on a legal wrong, we should be careful about the breadth of the circumstances in which it is deemed ‘unjust’ to allow the defendant to keep the economic benefit of assets that have been successfully transferred to him at law by the claimant.112 The discussion in the earlier sections would seem to provide the appropriate limiting rule: the claimant should only be able to recover in unjust enrichment in circumstances where, objectively, she cannot be regarded as having transferred her entitlement to the economic benefit of her assets. That is true whether her remedy is personal or proprietary, since the same entitlement to benefit is the basis of her claim in both cases. And since the underlying question is one of property rights (her entitlement to the economic benefit of the asset), its answers need to be clear and predictable, especially since third parties will feel the impact. On that basis, a claimant could not be regarded as having transferred her ­entitlement to benefit if she lacked the capacity to consent to the transfer,113 or if her apparent consent was subjectively flawed for reasons caused by the ­defendant.114 This is orthodox law, and in these circumstances it is perhaps obvious that the claimant simply has not consented to the transfer of her beneficial interest. Mistake does not come into it. Indeed, in the circumstances of mistake, the claimant typically does intend the transfer, but not on the basis that obtains.115 111 Some bounds are sought to be imposed by allowing restitution where the transfer is motivated by a ‘causal mistake’ (where the claimant’s intention is vitiated) but not where it is motivated by a ‘causal misprediction’ (where the claimant has simply miscalculated the commercial risk): Dextra Bank (n 100). But the distinction is challenging. On the risks of getting this wrong, and the need for the mistake to be ‘serious’, see the obiter comments of Lord Walker in Pitt v Holt (n 87) [126]. Also see Burrows, Restatement (n 20) 9, art 10(4)(a). 112 See, eg HW Tang, ‘Restitution for Mistaken Gifts’ (2004) 20 Journal of Contract Law 1, suggesting a tougher test of mistake might be appropriate in the context of gifts in order to protect ‘the moral economy’. 113 ie either lacked the capacity in fact, or lacked it by virtue of some statute or other law denying the claimant capacity to act in the circumstances, as with the Islington LBC in Westdeutsche (n 4). 114 Typically by way of fraud, duress, misrepresentation, undue influence, etc. Note that in these circumstances the contract (and the underlying transfer) is valid until avoided by the claimant. See Car and Universal Finance Co Ltd v Caldwell [1965] 1 QB 525 (CA), suggesting that title passes, but there is revesting at law once the contract is avoided. Also see Shogun Finance Ltd v Hudson [2003] UKHL 62, [2004] 1 AC 919 [6] (Lord Nicholls dissenting). 115 The only wrinkle in this is in relation to mistakes as to the assets being transferred or the identity of the transferee, and in those circumstances the orthodox rule, at least in relation to goods, is that legal title will not pass to the transferee, and the remedies are grounded in property, or in tort for misdealing with another’s property.

The Commercial Triple Helix  59 Reformulating the second mechanism is trickier. I have attempted it e­ lsewhere.116 The difficulty is that orthodox ‘mistake’ (or even ‘failure of basis’ or ‘failure of consideration’) cannot easily draw a defensible distinction between misconceived transfers and binding transfers without over-extending the compass of the former. The problem is not the claimant’s intention, but the qualification of it. One clear way to distinguish between completely misconceived transfers (where recovery is allowed) and losing commercial deals (where it is not) is to allow recovery only when the claimant did intend the transfer, but objectively intended it as an engagement in some commercial risk, not as the gift that it now turns out to be. An unintended gift is qualitatively, and dramatically, different from a failed commercial risk. Notice that if this model were adopted, our mistaken gas board customer would be dealt with under this second mechanism, not the first. Her transfer is perfectly properly intended, or consented to, but – objectively – it is intended as a commercial engagement, not as the gift it now turns out to be. The same is equally true of the paying banks in Chase Manhattan,117 and Westdeutsche.118 In the particular and rather unexpected circumstances of those cases, the claimant might sensibly be regarded as not intending to give up her entitlement to the economic benefit of her assets, and the defendant as not entitled to keep the factual enjoyment of that benefit. It is a small step from there to recognise that precisely the same analysis is appropriate where Quistclose-style purposes were settled and have not been carried out.119 If this seems a stretch beyond what unjust enrichment law typically delivers, then consider the vanishingly thin difference between this scenario and a Quistclose trust itself,120 or even an automatic resulting trust. Indeed, put the Quistclose or automatic resulting trust proprietary response against the proprietary response to unjust enrichment advocated in the previous section, and notice the parallels. This simple reformulation, resorting to the mechanisms of ‘unintended transfers’ (ie no legally acceptable consent to the transfer, or no legally acceptable intention to effect the transfer) and ‘failure of objective conditionalities’ (ie where the transferor’s consent to the transfer was clearly conditional and the condition has failed totally, most typically where the transfer was intended to meet a liability when none existed, or where Quistclose-style purposes were settled and have not been carried out121), delivers results that are consistent with decided cases. 116 Worthington, Equity (n 11) ch 9. 117 Chase Manhattan (n 2). And for more difficult instances, see the older case of Nesté Oy v Lloyd’s Bank plc [1983] 2 Lloyd’s Rep 658 (QB), now overruled by Angove’s Pty Ltd v Bailey [2016] UKSC 47, [2016] 1 WLR 3179. 118 Westdeutsche (n 4). Note that Westdeutsche could not argue lack of consent/capacity, as the Islington LBC could, but, because of the latter’s lack of capacity, the contract between the parties was void, and so each party made payments under it by way of gift with no right to receive counter performance from the other party. 119 Barclays Bank Ltd (n 21). 120 ibid. 121 ibid.

60  Sarah Worthington Significantly, it does so using the same concepts of intention and consent used throughout the rest of the law of obligations: absent proper consent, a contract would be either void or voidable (depending on whether consent was entirely absent because of incapacity, or merely flawed for reasons relating to the defendant’s conduct), and once the contract had been avoided, restitution could be obtained. For the same reasons, precisely the same approach would apply in the context of gifts. That has a neatness not achieved if contract, gift and unjust enrichment all regard the claimant’s consent to disposing of her property interests as different beasts operating in different contexts. Perhaps most importantly and more surprisingly, however, it also subtly mirrors the precise rationales adopted in equity to explain its delivery of proprietary remedies for unjust enrichment.122 It therefore makes it possible to effect a sensible and coherent integration of trust interests and personal liability in unjust enrichment. By contrast, ‘mistake’, or ‘causative mistake’ is not up to this task of rigorously defining the circumstances where it can be said, objectively, that the claimant should retain her entitlement to the economic benefit of the asset, and that it would be unjust for the defendant to enjoy the practical or factual benefit despite the legally effective title transfer to him. In addition, the unadorned label of ‘mistake’ leads to all sorts of analytical difficulties that appear completely unnecessary. Consider the ‘mistake of law’ cases where tax has been paid when it turns out not to be due.123 If these situations are analysed as mistaken payments, then there is a good deal of circularity in whether the transferor was indeed mistaken (eg was there an existing House of Lords or Supreme Court decision indicating liability but that was later overturned, or was there no case at all, so certain assumptions might be made when tax demands were made by the authorities?). Moreover, difficult limitation problems would be generated because time would not start to run until the mistake was discovered, thus potentially opening up unjust enrichment claims decades after the original transfer. Finally, since remedies are proprietary as well as personal, the unacceptable consequences magnify. Yet the recovery of tax that has been paid when it was not due seems eminently justifiable, and should not need any further qualifying detail about whether or not it was a mistake on the part of the transferor to think that there was a sound basis for the demand.124 In complete contrast to the ‘mistake analysis’, the ‘failure of conditionalities’ approach would deal with the situation very simply: a self-evident assertion can be made that the tax payment has turned out to be a payment to the government by way of gift when the payment was clearly intended at the time to meet a liability to the government and not to make a voluntary donation to the government’s coffers. 122 See section IV above. 123 See the extended analysis in Virgo, Restitution (n 61) 183–86. 124 On these policy issues, see the cautious Australian judicial approach described in E Bant, ‘Reflections on the Restitution Revolution: Australia’ in S Worthington, A Robertson and G Virgo (eds), Revolution and Evolution in Private Law (Oxford, Hart Publishing, 2018) 198.

The Commercial Triple Helix  61 Restitution would then follow (subject to the usual time restrictions on advancing the claim imposed by the limitation rules). In short, if there is to be strong and stable engagement between contract, property and unjust enrichment rules, then there must be some coherence in the assessment of entitlement to the economic benefit of property in the context of legal transfers of that property. Too wide an unjust enrichment jurisdiction undermines all of that. Here, going against the current trend in the cases, it is suggested that restitution for unjust enrichment should only be available to claimants who remain entitled to the economic benefit of their previously owned assets notwithstanding that legal title has been transferred elsewhere. On that basis, restitution ought to be available only where the claimant’s consent to the transfer was vitiated (adopting the same test for that as is adopted in contract law) or where the objective conditionality of the transfer has failed totally (most typically where the transfer was intended to meet a liability when none existed, or where Quistclose-style purposes were settled and have not been carried out125). This more restrained approach would eliminate a good number of difficult boundary issues between contract, property and unjust enrichment, as exemplified by the famous gas board customer who appeared at the start of this chapter.

VI.  Liability Rules: Focus on the Parties or Focus on the Underlying Asset This final section is focused on commercial law’s liability rules. It seeks to identify the broad structural similarities and differences in approach across the various strands of private law under discussion here. To start with the obvious, liability in contract law and tort law focuses on the parties to the relationship. The remedies are designed, so far as money can do it, to put the parties in the position they would have been in had the wrongs not been committed. This form of words is apt to cover the forward-looking perspective of contract law and the backward-looking perspective of tort law. So familiar is this that it can be tempting to think that it is the normal order of events, and that all commercial remedies are focused on repairing the harm suffered by the victim of the wrong. But the approach is not universal. By contrast, trusts law and unjust enrichment law focus on the underlying assets, not the individual parties with interests in those assets.126 In these areas the remedies are designed to restore the assets

125 Barclays Bank Ltd (n 21). 126 The one exception concerns fiduciaries appointed not merely to manage assets, but also to advise the principal. It is rare for this to arise in the context of trustees and their beneficiaries, but is more common with solicitors and their clients, or directors and their companies. In these contexts, liability

62  Sarah Worthington to the position that would have obtained in the absence of the particular failings that have occurred. Consider trusts law. The trust interest is a derivative interest: it gives the beneficiary an entitlement to a defined economic benefit from nominated assets owned by the trustee. The scope and value of the property interest in issue – ie the beneficiary’s entitlement – can only be determined by examining the particular underlying trust relationship.127 This can range from one extreme where trustees have full management responsibilities for a complex parcel of trust assets, and where the trustees are subject to duties of strict compliance with the terms of the trust, duties concerning their discretions, duties of care, and duties of fiduciary loyalty. At the other extreme, innocent donees found to be holding assets on constructive trust will owe none of these personal obligations, although when informed that they are holding assets which are subject to the beneficiary’s proprietary interest, they will then be exposed to claims to restore those assets either to the beneficiary directly or to the proper trustees, and moreover will become personally liable if they then dispose of or cause loss to the assets once they have this knowledge.128 Pursuing this a little further, the key feature of these property-management obligations is their remedial focus on the managed assets, not on the individual beneficiaries entitled to the economic rewards. Liability for breach of trust focuses on the diminution in value of the economic interest in the managed property, and the remedy is designed, either in specie or so far as money can do it, to restore the managed asset to the state it would have been in had the trustee acted properly.129 By contrast, as noted earlier, contract and tort focus on the economic loss to the individual defendant affected by the breach. In this latter category, since the focus is on an individual, the potential economic loss caused by any breach can be at large. As a result, both contract law and tort law have developed rules on foreseeability and remoteness. There is no equivalent risk with trustees and fiduciary managers: the managed property is known, and the manager knowingly takes responsibility

in respect of the managed assets must be analysed separately from liability in respect of the advice to the principal. With the former, remedies are focused on restoring the assets to their proper state; with the latter, remedies are focused on restoring the principal’s position. The advice may be in breach of duty for any number of reasons (eg it is negligent, or given for improper purposes, or is self-interested). In all these cases, liability follows the normal tort model, and the normal tort rules, and is focused on the harm caused to the client or the company: see the discussion in Bristol and West Building Society v Mothew [1998] Ch 1 (CA). 127 This feature is true of all consensual derivative interests, whether trust interests, security interests or possessory interests. Consider the many arrangements that are possible if legal title and possession are divided: loans, hire purchase, retention of title, pledges, and each of those subject to their own individual variations. Security and trust arrangements are similarly varied. It follows that the entitlement of the derivative interest-holder can be defined only by detailed resort to the individual relationship in issue, even though useful generalisations may be made about ‘family’ characteristics. 128 Bank of Credit and Commerce International (Overseas) Ltd v Akindele [2001] Ch 437 (CA). 129 Target Holdings Ltd v Redferns [1996] AC 421 (HL); AIB Group (UK) plc v Mark Redler & Co Solicitors [2014] UKSC 58, [2015] AC 1503.

The Commercial Triple Helix  63 for changes in its economic value caused by the breach.130 Every regime of course demands causation: defendants should only be liable for the damage caused by their wrongdoing, not damage caused otherwise.131 In short, responsibility in contract law and tort law is concerned with individuals; in unjust enrichment law and trust law, it is concerned with assets. Where there is liability, the appropriate remedies are accordingly directed, respectively, at restoring the parties or the assets to what would have been their standing if all had been done properly. This difference in focus clearly has important and significant practical consequences.

VII. Conclusion What this chapter has attempted to do is revisit some of the enduring controversies affecting the interface between contract, property and unjust enrichment. Unless these controversies are settled satisfactorily, the framework for commercial law will be weak. Having trawled through the detail, the particular instances meriting close attention can be summarised relatively briefly. They are laid out in a more appropriate order now that the groundwork has been undertaken. Four points are made to assist analysis in these areas: 1. Property questions must be answered before liability questions. The location of legal title and the existence of derivative interests (both common law possessory interests and equitable security and trust interests) must be settled before considering liability questions. 2. Turning to liability questions, contract law and tort law are concerned with individuals; unjust enrichment law and trust law are concerned with assets. Remedies respectively ‘restore’ either the parties or the assets to what would have been their standing absent the failings that have occurred. The difference in focus has important practical consequences. 3. Unjust enrichment law and trusts law are not concerned with assets generally, but with entitlement to the economic benefit of those assets. That is plain with trusts. Similarly, unjust enrichment law seeks to allocate the economic benefit 130 And if the trustee does not know of the trust, then this personal liability does not exist. Recall the position of donees receiving unauthorised trust distributions from trustees. These donees hold the assets on constructive trust for the entitled beneficiaries. But if they dispose of the assets in ignorance of the trusts, they are not personally liable. It is otherwise if they have knowledge: they are then liable as knowing third-party recipients. It was perhaps a concern with these personal obligations and their associated liabilities that warned Lord Browne-Wilkinson off resulting trusts in Westdeutsche, but of course – despite any trust – those personal liabilities would not arise until the defendant was made aware of the mistaken receipt, at which stage Lord Browne-Wilkinson was prepared to find a constructive trust. This is all unduly complicated, given the existing rules already provide the necessary protections. See Westdeutsche (n 4) 703–05. 131 AIB Group (n 129).

64  Sarah Worthington of an asset to the person entitled to it. If the asset is identifiable, then the assertion itself describes a trust.132 It follows that unjust enrichment remedies should be proprietary whenever the property in question is identifiable.133 In addition, notice that the goal of both trusts law and unjust enrichment law is not to deliver an asset to the claimant, but to deliver ‘the economic benefit of the asset’ so far as the defendant has it. This inherently acknowledges that the relevant assessment in both cases is qualified by a change of position defence. 4. Finally, it is implicit in the previous point that restitution for unjust enrichment should only be available to claimants with a continuing entitlement to the economic benefit of their previously owned assets despite the legal title being transferred elsewhere. This narrows the jurisdiction beyond that suggested by modern cases. This narrower basis would confine restitution to cases where the claimant did not consent to the transfer (adopting the same test for vitiated consent that as is adopted in contract law) or where the claimant’s consent to the intended transfer was objectively conditional and the condition has failed totally (most typically where the transfer was intended to meet a liability when none existed, or where Quistclose-style purposes were settled and have not been carried out134). This more restrained approach would eliminate a good number of difficult boundary issues between contract, property and unjust enrichment, as exemplified by the familiar gas board customer who appeared at the start of this chapter. In summary, this chapter ignores the detail of individual commercial doctrines, and instead takes a step back to examine the broad tensions at the boundaries of contract, property and unjust enrichment. One of the foundational problems in commercial law is how to wind together these three strands – contract, p ­ roperty and unjust enrichment – into a strong and effectively functioning structure. At present, there are still too many unresolved conflicts. Perhaps there would be fewer if these four points were noticed.

132 Though not one where any fiduciary duties are owed, if the legal owner is ignorant of the arrangement. 133 At this point the location question and the liability question merge, in that there is no work to be done by the liability question. 134 Barclays Bank Ltd (n 21).

4 Proprietary Claims to Recover Mistaken or Unauthorised Payments PETER JAFFEY*

I. Introduction When C makes a payment by mistake, or a payment of his money is made without authority by an agent or trustee, or his money is misappropriated by a stranger, should his claim to recover the money be personal or proprietary? This is important if the recipient, D, is insolvent, or if D is or may be an indirect recipient of the payment. It is of course a controversial question, and indeed it touches on a number of different contested issues in the law. The claim could arise at common law or in equity. Where the mistaken or unauthorised payment to D is a payment in breach of fiduciary duty by a trustee or fiduciary of C, C has an equitable proprietary claim to recover the money or its traceable proceeds (if D is not a bona fide purchaser). The equitable proprietary claim is an assertion of C’s beneficial ownership, persisting and binding the ­recipient D (direct or indirect). Here, generally, the issue is to determine the relevant tracing rules to identify the traceable proceeds of the payment. At common law, when there is a mistaken or unauthorised payment of C’s money to D (in the absence of a breach of trust or fiduciary duty), the usual understanding is that ownership of the money necessarily passes to D and therefore that there is no basis for a claim against D arising from C’s original ownership of the money. Thus it is generally said that the claim is an unjust enrichment claim, and that it is a personal claim against D, which means that there is no priority in insolvency, and no possibility of tracing the money and recovering it from an indirect recipient. It will appear to some that it is indefensible to have such different approaches to what is essentially the same sort of claim, arising in different contexts, to correct

* I am grateful to the participants in the colloquium at the University of Auckland on 18–19 September 2017 for their comments and to the organisers, Peter Devonshire and Rohan Havelock. Thanks also to Greg Allan and Janet Ulph for their comments.

66  Peter Jaffey the same sort of injustice. On this view, the existence of these two separate regimes is an accident of history, arising from the fact that they developed in the separate courts of law and equity. Others may insist that the difference is justified in principle, by virtue of the significance of the presence or absence of a trust or ­fiduciary relationship. The issue is most likely to arise in practice in connection with the availability of a proprietary claim in situations where traditionally there has been only a personal claim at common law. I shall come back to this type of case later: I shall begin with the equitable proprietary claim, and the problem of tracing.

II.  Explaining Tracing A.  The Tracing Puzzle If C has an equitable proprietary claim to an asset in D’s estate,1 and the asset is exchanged for a new asset by D, C can trace into the new asset, and assert his equitable proprietary claim over it (I shall refer to this as the ‘exchange product rule’).2 This will generally seem a fair outcome, and is generally uncontroversial, but there has nevertheless been persistent controversy over how exactly it should be understood: why is it that the equitable proprietary claim is transmitted to the new asset? The conventional view appears to be that the claim in respect of traceable proceeds vindicates C’s original right of ownership,3 but it is also usually thought that it is in the nature of a property right that it subsists in a specific asset, and so must be lost if the asset is lost. Why then is it appropriate for the property right in the original asset to be preserved by transmission to a new asset? One might argue that instead there should be a personal claim based on unjust enrichment, as at common law. This question is not purely speculative. In the absence of a clear justification for tracing, one might argue that in giving C a proprietary claim to a new asset that would otherwise have been available to satisfy D’s debts to his creditors, the tracing rules give unfair preference to C over D’s creditors, and that at the same time they subvert the statutory rules on distribution amongst creditors in bankruptcy. Furthermore, as some cases in recent years have shown,4 in some situations the

1 For convenience, I use ‘estate’ to refer to all of D’s property taken together, though this is not a standard usage in all contexts. I use ‘asset’ to refer to an object of ownership, which could be (amongst other things) a tangible thing or a right to payment or investment. 2 Re Hallett’s Estate (1880) 13 Ch D 696 (CA). 3 Foskett v McKeown [2001] 1 AC 102 (HL). 4 See, eg Shalson v Russo [2003] EWHC 1637 (Ch), [2005] Ch 281; Relfo Ltd v Varsani [2014] EWCA Civ 360, [2015] 1 BCLC 14; Federal Republic of Brazil v Durant International Corp [2015] UKPC 35, [2016] AC 297; Charity Commission for England and Wales v Framjee [2014] EWHC 2507 (Ch), [2015] 1 WLR 16.

Proprietary Claims to Recover Mistaken or Unauthorised Payments  67 tracing rules are unclear and open to development, and in the interests of clarity and sound development it is important to establish what the justification for ­tracing is. There have been a number of attempts to provide such a justification, but I think it is fair to say that none has attracted very widespread support.5

B.  How to Explain Tracing In proposing an explanation of tracing,6 I shall begin, not with the case where the beneficiary C’s equitable proprietary claim is transmitted to an exchange product, but with the case where C’s money is mixed with the recipient D’s money. The standard tracing rule here is the pari passu rule, the rule for a fungible mixture, according to which C is entitled to a proportionate share of the mixture.7 If any part of the mixture is lost, the loss is shared by C and D in proportion to their contributions to the mixture. The rule would seem appropriate because C’s money and D’s money are indistinguishable in the mixture. However, there is an objection to the pari passu rule for mixtures. If C1’s money is transferred to D and mixed by D with money coming from C2, C1 and C2 both being innocent parties, the pari passu rule would appear appropriate as between them, because they are in exactly equivalent positions. But the pari passu rule for mixtures is conventionally also applied where C’s money is paid to D, who is himself also an innocent party, and mixed with D’s money. In this case, if D spends money from the mixture, it would surely be more appropriate to say that this money is D’s own money, at least with respect to expenditure that he would in any case have incurred, that is to say, expenditure that he would have incurred even if he had not received the money from C. There is surely no reason to say that D is spending C’s money. But with respect to expenditure that D would not otherwise have incurred, expenditure that he incurred purely as a result of the receipt, because he was wealthier by the value of the transfer, it seems right to say that it is C’s money that D is spending. In other words, C should be entitled to that part of the mixture that is derived from the transfer, in the sense that it would not have been there but for the transfer. He should be entitled to a share of the

5 There is quite a large literature, but see, eg L Smith, ‘Philosophical Foundations of Proprietary Remedies’ in R Chambers, C Mitchell and J Penner (eds), Philosophical Foundations of the Law of Unjust Enrichment (Oxford, Oxford University Press, 2009); J Penner, ‘Value, Property and Unjust Enrichment: Trusts of Traceable Proceeds’ in R Chambers, C Mitchell and J Penner (eds), Philosophical Foundations of the Law of Unjust Enrichment (Oxford, Oxford University Press, 2009); S Evans, ‘Rethinking Tracing and the Law of Restitution’ (1999) 115 LQR 469. 6 I am drawing on previous discussions of tracing, in particular in P Jaffey, The Nature and Scope of Restitution: Vitiated Transfers, Imputed Contracts and Disgorgement (Oxford, Hart Publishing, 2000) ch 9; P Jaffey, Private Law and Property Claims (Oxford, Hart Publishing, 2007) ch 6. 7 See Re Hallett’s Estate (n 2); Foskett (n 3). For a mixture of money in a current active bank account, traditionally the applicable rule is the ‘first in-first out’ rule: see Clayton’s case (1815–1816) 1 Mer 572, 35 ER 781.

68  Peter Jaffey mixture, but according to this rule rather than the pari passu rule. I shall refer to this as the ‘surviving value’ rule of tracing. On this approach, often the best way of ­determining whether C’s money has been spent is to ask whether D intended to spend the money received when he made a withdrawal from the mixture. (I shall come back to whether there is any support for the surviving value rule of tracing). There is a further problem with the tracing rule for mixtures in this type of case (irrespective of which version of the rule, surviving value or pari passu, is adopted). Say D puts the money received in Account A. Under the tracing rules, C  is treated as having a share of this account, but not any other account. The mixture is confined to this specific asset. But should we not treat the mixture of C’s and D’s money as encompassing all of D’s accounts and other forms of money, so that C has a share in this wider mixture, encompassing two or more assets? If so, the surviving value rule should operate across all the forms of money in D’s estate. Say you receive money from your aunt at Christmas and you put it in a bank account. Later you decide to spend the money from your aunt on an expensive meal as a special treat, but you actually withdraw money from a cash machine to pay for the meal, and this money comes from a different account. Have you spent the money you received from your aunt? Alternatively, what if the gift from your aunt was made in notes and you spent these notes on the shopping on the way home, but only for convenience, not having any other cash readily available, and intending to use the gift from your aunt for something else? Have you spent your aunt’s money? It seems to me that intuitively one would say that the money is where you take it to be, so that you spend your aunt’s money when you intend to. You might point out that it doesn’t matter legally whether or how you have spent your aunt’s gift (though you may wish to be able to tell your aunt honestly how you spent it). However, if, unbeknownst to you, the money was actually trust money paid to you by your aunt in breach of trust, it would be important whether it has been spent or not, or whether it has been paid on to someone else, because this would determine whether you or the indirect recipient is subject to a proprietary claim. It seems to me that because money is entirely fungible, that is to say, units of money are completely indistinguishable from each other, one can say of the money received by D from C only that it forms some part of all the money in D’s estate or patrimony or general assets – his property, as a whole – namely that part of the money in D’s estate that is derived from the transfer, and would not have been there but for the receipt of C’s money. The surviving value tracing rule should be understood in this way. Surviving value is an abstract part of D’s estate, rather than a specific asset or a share of a specific asset, and it is to be established as a matter of causation.8 It can be located in a specific asset with respect to a certain 8 Some commentators refer to a causational approach under which a proprietary claim necessarily attaches to a specific asset, but according to which assets are linked not transactionally but causally: see, eg Evans, ‘Rethinking Tracing’ (n 5). This is not how to understand the suggested approach: see also C Mitchell, ‘Unjust Enrichment’ (n 30) below.

Proprietary Claims to Recover Mistaken or Unauthorised Payments  69 disposal or consumption, and usually the best way of establishing this is by reference to D’s intention. As mentioned above, the law actually uses, not the surviving value tracing rule understood in this way, but tracing rules that always presuppose that C’s proprietary claim attaches to a specific asset or to a share of a specific asset, and in consequence are always concerned with a link between one asset and another asset, ie in the standard case, the exchange product rule. This is the so-called ‘transactional’ theory of tracing.9 In my view, the tracing rules are bound to cause injustice where they depart from the surviving value rule. Because money is ­fungible, only a surviving value test applied across the estate can really say whether there is money derived from C in D’s estate, and any rule that departs from this is liable to be arbitrary and unfair to C or to D or D’s creditors. If C recovers less than the surviving value, some of the property transferred from him to D remains with D. Conversely, if C’s claim exceeds the surviving value of the transfer, C will recover some property from D’s estate that was not derived from C, and in D’s bankruptcy D’s creditors will be deprived of property that ought to have been available to satisfy their claims. The exchange product rule is, however, explicable on the suggested approach. When money belonging beneficially to C in the form of a specific asset is transferred to D, and then the asset is exchanged by D for another asset, the surviving value in D’s estate remains approximately the same if one assumes that the exchange product is of approximately the same value as the original transfer.10 Under the transactional theory, it is necessary to identify a specific asset for the proprietary claim to attach to, and so it makes sense for it to be attached to the exchange ­product, but there is no reason why C should be entitled to the exchange product itself, as opposed to its value as a measure of the surviving value of the original transfer.11 On the suggested approach it would not be right to say, fundamentally, that a property right in one asset is transmitted to another. This chapter is concerned with payments of money, but more generally all forms of property can be treated as wealth or money’s worth. The recipient D may regard his tangible assets as wealth or money’s worth, and if so the surviving value of a payment of money received by him might be located in such an asset under a causation test. Tracing in general is based on the idea that all property should be treated as mutually fungible, so that for any type of property transfer, whatever 9 A standard account of the modern law of tracing is L Smith, The Law of Tracing (Oxford, Clarendon Press, 1997). 10 If the exchange product is worth less than the original property, there is a loss of surviving value only if the exchange occurred only because of the receipt of the transfer. 11 The issue is important where the exchange product is worth significantly more than the original product, as in the case of an insurance payout or bet. Under the transactional theory it would seem that C should be entitled to the exchange product, as was decided in the House of Lords in Foskett (n 3). On the suggested approach, property resulting from D’s good judgement or luck in making an exchange should not be treated as the surviving value of the transfer, though arguably C should have a ‘use claim’ in respect of D’s use of C’s money. This approach is closer to the position of the Court of Appeal in Foskett v McKeown [1998] Ch 265 (CA).

70  Peter Jaffey form it takes, C should be able to recover its surviving value as an abstract part of D’s estate under a causation test.12

C.  An Objection to the ‘Surviving Value’ Measure as a Tracing Rule The argument made above for the suggested surviving value tracing rule might prompt the objection that a claim to surviving value is actually just a claim to value or money out of D’s estate and must therefore be a personal claim, just like a debt or damages claim. A proprietary claim, it might be thought, must relate to a specific asset, whether this is a tangible thing or a pecuniary asset or investment.13 This, it would seem, is why the tracing rules always operate to link one specific asset to another, whether C is entitled to the whole asset, or, where it is a mixture, to a certain share of it. But there is no reason in logic or principle why the equitable proprietary claim must relate to a specific asset. It is true that a right of absolute ownership, meaning a right to all the benefit of a thing, including control over it, which is what ownership means at common law, must relate to a specific asset. But the equitable proprietary claim is not a claim of absolute ownership, and it does not involve a right of control over a specific asset. There is no reason why there cannot be a proprietary claim to an abstract part of D’s estate, though it must operate with a separation of title, under a constructive trust;14 in other words, legal title, representing control of specific assets, is with D, and C has a claim in equity, a claim to the benefit of a part of D’s estate, that is to say surviving value.15 Of course it is true that, to satisfy C’s claim, a specific asset must in the end be identified and transferred to C, but it is not of any consequence which asset it is.16 The claim to surviving value is thus a claim to a part of D’s estate, though an abstract part of the estate rather than a specific asset, and this is not the same thing as a personal claim. A personal claim is simply a claim against D, which will in due course fall to be executed against whatever property D may have at that time. Thus the measure of liability for the personal claim may exceed the value of whatever property is available to satisfy it. This is not true of a claim to an abstract part of D’s estate. An abstract part could be, as mentioned above, a certain share of the

12 This raises additional issues that are not relevant for money, such as whether the original asset is recoverable, which I will not discuss. 13 This view is very common: see, eg D Jensen, ‘Reining in the Constructive Trust’ (2010) 32 Sydney Law Review 87, 93. 14 ie the constructive trust that binds a recipient of trust property transferred in breach of trust, if he is not a bona fide purchaser. Some would prefer to describe it as a resulting trust: see n 59 below. 15 This reflects the approach to equitable property and the trust taken in P Jaffey, ‘Explaining the Trust’ (2015) 131 LQR 377. 16 cf text to n 56 below.

Proprietary Claims to Recover Mistaken or Unauthorised Payments  71 estate, or it could be a ‘top-slice’ from the estate, where C is entitled to a charge against the estate, up to a certain amount, which is the effect of a floating charge. These are abstract parts of an estate rather than specific assets, but they are nevertheless well-defined and determinate parts of the estate. The same is true of the surviving value of a transfer. It is in principle well-defined in terms of causation. In principle, one can say, by the application of a causation test, whether or to what extent there is surviving value still in the estate, or whether it has been transferred to someone else. The surviving value approach is not equivalent to treating the equitable proprietary claim as a charge over D’s estate for the value of the transfer to D, which is how the theory of tracing to ‘swollen assets’ is sometimes understood.17 A claim in this form would be insensitive to changes in surviving value occurring after receipt, and so would give C undue priority over D or D’s creditors when the measure of recovery exceeds the true surviving value. The right to surviving value is closer to a charge to secure a variable debt, in the measure of surviving value, but strictly speaking it is not a charge to secure a debt at all, simply a property right to an abstract part of D’s estate. The concept of a property right to some abstractly defined part of a body of property is implicit in the express trust. Under an express trust, a beneficiary’s property right in the trust property can be defined in terms of any possible part of the present or future benefit of the trust property; that is to say, it can be a right to the benefit of any conceivable way of allocating the trust property, including, for example, a concurrent share, or a deferred or conditional interest, or even an ­interest under a discretion.18 It is sometimes said that a beneficiary has only a personal right against the trustee to have the property distributed in accordance with the trust instrument, correlated with the duty of the trustee to make the distribution, rather than a property right in the trust property. This approach may appeal to some commentators because they may consider that it is not possible to have a property right to an abstract part of the trust property.19 They may think that instead the trustee must be the absolute owner of the property, bound only by a personal duty of distribution. But this cannot be the case, because it is inconsistent with the fact that the trust property is not available to satisfy the trustee’s personal debts, and the fact that the beneficiary has a proprietary claim against third parties who receive trust property transferred in breach of trust.20 17 This seems to be how the theory was understood when it was rejected in the case law: see Re Goldcorp Exchange Ltd (In Receivership) [1995] 1 AC 74 (PC). There was some support for the swollen assets theory from Lord Templeman in Space Investments Ltd v Canadian Imperial Bank of Commerce Trust Co (Bahamas) Ltd [1986] 1 WLR 1072 (PC) 1074. See Smith, The Law of Tracing (n 9) 315ff, distinguishing different versions of the swollen assets theory. 18 Some may baulk at this, but it is implicit in Saunders v Vautier (1841) 4 Beav 115, 49 ER 282; see further Jaffey, ‘Explaining the Trust’ (n 15). 19 This might be true of proponents of the obligational theory of trusts, or the ‘persistent right’ theory: see B McFarlane, The Structure of Property Law (Oxford, Hart Publishing, 2008) 23–27; B McFarlane and R Stevens, ‘The Nature of Equitable Property’ (2010) 4 Journal of Equity 1. 20 See further Jaffey, ‘Explaining the Trust’ (n 15).

72  Peter Jaffey

D.  The Tracing Rules The surviving value approach to tracing suggested above provides a coherent account of the concept of tracing. It makes sense of the idea that C traces into the value of the property transferred as traceable proceeds in D’s estate.21 I doubt whether any version of the transactional theory can succeed in this, though I have not discussed the question here.22 The biggest departure of the surviving value approach from the established tracing rules is that, under the surviving value rule, if D disposes of the original property without any exchange, there may still be surviving value in D’s estate, whereas the established rule based on the transactional theory is that there are no traceable proceeds. Conversely, if D disposes of different property, this may reduce surviving value if it happened in consequence of the receipt, whereas the transactional theory would imply that the original proceeds will be necessarily untouched and fully recoverable. However, in the former case there is likely to be a personal claim to surviving value,23 and in the latter case the claim may be reduced by change of position,24 so there may not be as significant a divergence as one might think. On the surviving value approach, the significance of a disposal by D lies in the way it affects abstract surviving value, under a causation test. Since surviving value is an abstract part of D’s estate, it cannot be equated with a specific asset, but it can be located in a specific asset with respect to a particular transaction if D treats the specific asset as embodying surviving value. Thus D’s intention to dispose of surviving value – to dispose of some part of the money received – is relevant. By contrast, on the transactional theory, D’s intention is irrelevant because the question is simply whether the disposal is of the original asset received or a specific asset linked to it transactionally. There is some support for the view that whether a disposal by D is a disposal of traceable proceeds can depend on whether this was D’s intention.25 There are a number of other established tracing rules that are anomalous under a transactional or specific assets approach, but explicable under the suggested surviving value approach. For example, although the usual rule for a mixture is 21 See Foskett (n 3) 128 (Lord Millett). 22 See nn 5 and 6 above. 23 See, eg Lipkin Gorman v Karpnale Ltd [1991] 2 AC 548 (HL). See section E below. 24 Under the transactional theory, the issue in this situation would be whether a defence of change of position might be available, and it is commonly thought that there is no room for it because it would seem to amount to a sort of expropriation: see, eg P Birks, ‘Overview: Tracing, Claiming and Defences’ in P Birks (ed), Laundering and Tracing (Oxford, Clarendon Press, 1995). Under the surviving value approach change of position is incorporated into the tracing rules. 25 This seems to be the implication in Relfo Ltd (n 4). See Evans, ‘Rethinking Tracing’ (n 5). As I understand this approach, it presupposes the transactional theory, because it assumes that a proprietary claim is a claim in respect of a specific asset, or a share of a specific asset, which means that the role of tracing is to establish a link between one asset and another. Thus it does not treat intention or causation as relevant in the way suggested here.

Proprietary Claims to Recover Mistaken or Unauthorised Payments  73 said to be the pari passu rule, it is also said that C may have a lien over the mixture for the full value of the transfer when there has been a loss from the mixture, so that D has to bear the loss.26 This is consistent with the suggested approach if the loss from the mixture is expenditure that D would have incurred anyway, so that surviving value is not affected by it. If the trust money received by D is paid into an account, and money is ­withdrawn from the account, under the suggested approach we cannot necessarily say whether, at the time of the withdrawal, any determinate part of the surviving value either remains in or has been withdrawn from the account. We may only be able to say what the surviving value is in the estate as a whole. By contrast, under the transactional theory we should be able to identify the traceable proceeds in the form of a specific asset at the time of withdrawal. Here the law, in the light of Re Hallett’s Estate27 and Re Oatway,28 seems to reflect the surviving value approach rather than the transactional approach. Re Hallett’s Estate held that money ­withdrawn from the mixed account and subsequently dissipated was D’s own money, and Re Oatway held that money withdrawn from the mixed account and then invested was C’s money. Applying these rules together, it would be impossible to say, at the time of a withdrawal, whether or not the money withdrawn includes traceable proceeds, because it could not be known at the time whether the money would subsequently be dissipated or invested.29 This is at odds with the transactional theory, and seems to presuppose some form of the abstract surviving value approach, because traceable proceeds of the trust money can be found in any part of an extended mixture consisting of the original account together with ­withdrawals from it, and mixtures incorporating these withdrawals, and it may not be possible to say that traceable proceeds are in any specific asset within the extended mixture at any particular time.30 26 Re Hallett’s Estate (n 2) 709; Foskett (n 3) 131. 27 Re Hallett’s Estate (n 2). 28 Re Oatway [1903] 2 Ch 356. 29 In these cases, the tracing rules are taken to depend on whether the defendant acted wrongfully. In this respect they differ from the suggested approach. In principle, there is no reason why the position of D’s creditors vis-à-vis C should depend on whether D acted wrongfully towards C. It should in principle depend on causation and the remedy for a wrong should be personal: see the discussion of ‘remedial consistency’ following text to n 51 below. 30 Similarly, under the transactional theory it would seem that C might have a claim to the original asset in the hands of an indirect recipient and also to a substitute asset in the hands of the direct recipient. There might be a possibility of a ‘geometrical expansion’ in C’s entitlement. To deal with this problem, it has been suggested that C does not have an interest in the asset but a power to crystallise the interest in the asset. According to C Mitchell, ‘Unjust Enrichment’ in A Burrows (ed), English Private Law, 3rd edn (Oxford, Oxford University Press, 2013) para 18.267, ‘This power floats over the chain of substitutions’. If this means that the power floats over a specific asset, and then floats over a new asset following a transaction, then it is open to the objections made against the transactional theory above. If it floats over the estate as a whole, it seems to be a version of the suggested approach. If the approach I have suggested is adopted, it is not necessary to postulate a power. It is difficult to say that the claimant actually exercises a power at any point, and it is not clear why it is appropriate for the availability of a remedy to depend on the exercise of a power; one would think that the remedy would simply depend directly on the events and circumstances.

74  Peter Jaffey There has been particular controversy over the case where trust money ­ elonging beneficially to C is received by D and used to pay off a debt. It is said b that in this situation there are no traceable proceeds: the trust money is lost in the discharge of the debt, since there is no exchange product.31 However, D is certainly benefitted by the discharge of the debt. If this benefit takes the form of an abstract part of D’s estate – surviving value – C should have a claim to it. It would seem that the current tracing rules fail to recognise this. But take the case where the debt discharged was secured by a charge. It is easy to see here that, although there is no exchange product, D is benefitted by an increase in the value of the estate, in the measure of the debt (or the total value of the estate if this is less). This ‘top slice’ of the estate is what D would certainly have lost to the creditor through the enforcement of the security, and it is the surviving value of the transfer, and in fact C can trace into it. This is the effect of the rule by which C is entitled to be subrogated to the position of the creditor. It is important to remember that C does not actually acquire the pre-existing rights of the creditor by subrogation. There is no longer any actual debt or any security once the debt has been discharged. Subrogation is a technique by which C can be treated as if he were a creditor with security. Given that there is no actual debt and no actual security, it is clear that C actually has a proprietary claim to an abstract part of D’s estate, ie the top slice. Subrogation is an appropriate form for the remedy because it exactly measures and secures for C the abstract part of D’s estate that represents the surviving value of the transfer.32 What if the debt is not secured? Here we cannot say that C is entitled to trace into the top slice. On the suggested approach, C is entitled to the surviving value in D’s estate, which is the amount by which D benefits from the discharge of the debt, through the increase in the value of the estate. But what part of the estate is this? At the time of discharge, it would seem to be the amount of the debt, as surviving value in D’s estate. More generally, the answer is that it is that part of the estate that would otherwise have gone in due course to pay the debt that was in fact discharged with C’s money. This means that normally it is the face value of the debt, but if D is insolvent or at risk of insolvency, the surviving value in the estate declines to reflect the amount that the debt would actually have been worth in those circumstances – the amount that the debt would have realised in the bankruptcy, or the amount that the creditor would have accepted for it or traded it for. Thus, again, the way to give C a claim to surviving value is to subrogate him to the position of the creditor. C is treated as if he had a personal claim, though he is not actually a creditor. Again we should recall that the effect of subrogation is to treat C as if he were a creditor. C actually has a proprietary claim to surviving value in D’s estate, but the measure of surviving value declines just as if it were a personal claim, because this is appropriate to reflect the benefit accruing to D from

31 See, eg Bishopsgate Investment Management Ltd (In Liquidation) v Homan [1995] Ch 211 (CA). 32 See, eg Boscawen v Bajwa [1996] 1 WLR 328 (CA). See also Jaffey, The Nature and Scope (n 6) 302–07.

Proprietary Claims to Recover Mistaken or Unauthorised Payments  75 the discharge of an unsecured debt. Here again in my view the law confirms the suggested approach.33 Developments in connection with so-called ‘backwards tracing’ also give support to the suggested surviving value approach. Say D acquired property on credit before receiving the trust money, and then, on receiving the trust money, uses it to pay off the debt to the credit company. A backwards tracing rule allows C to trace into the property acquired. On the traditional, transactional or specific assets approach, this is difficult to defend. The trust money is used to pay off the debt, and there is no transactional link with the property acquired on credit, since this was acquired by D before he received the trust money. Backwards tracing has indeed generally been rejected, but it has been allowed in the case where the property was acquired in anticipation of the receipt of the trust money.34 Under the transactional theory this seems to be anomalous, because the objection that there is no transactional link still applies. Under the surviving value approach, the fundamental question again is whether there is surviving value derived from the trust money in D’s estate. It seems clear that there is, and that, at the least, when the trust money is used to pay the debt, C should be subrogated to the position of the creditor, giving C the equivalent of a personal claim against D (which as discussed above is actually a claim to surviving value). If particular property was bought on credit in anticipation of the receipt of the trust money, should we go further and give C a fully fledged proprietary claim over the property acquired on credit, in the sense of the surviving value theory, meaning that the property is taken to represent surviving value? We may be able to say that, if the anticipated receipt had not materialised, D would have disposed of the property and in fact retains it only as a result of the receipt, and so the property can indeed be taken to represent surviving value under the surviving value approach. Backwards tracing with respect to property acquired on credit appears to be crucial to the recovery of money paid through bank accounts. A bank sometimes enters a credit on an account before the payment is received, and a bank that is instructed to receive and relay a payment may make the onward payment before it has received the incoming payment. If the money is trust money, and the beneficiary C is to be able to trace into the money paid on to the next bank as the exchange product of the trust money, it appears that he must be able to backwards trace, ie he must be able to trace into the money paid on even though it was paid on before the receipt of the trust money. This was accepted in Relfo Ltd v Varsani35 and Federal Republic of Brazil v Durant International,36 essentially on the ground

33 If subrogation is available in the case of the discharge of a secured debt, it should presumably be available in the case where the debt is not secured, though it might seem paradoxical for an equitable proprietary claim to end up as a personal claim after the tracing process. 34 Relfo Ltd (n 4); Federal Republic of Brazil (n 4). 35 Relfo Ltd (n 4). 36 Federal Republic of Brazil (n 4).

76  Peter Jaffey that it reflected D’s intentions with respect to the transfer of the money. Furthermore, in Relfo Ltd v Varsani the court recognised that where misappropriated trust money is paid to an intermediary, X, who puts it into Account A, and then a payment is made by X on to D from another account, Account B, it is possible to trace through to D even though there is no transactional link through the transfer of a specific asset.37 In general, it seems very doubtful that the tracing rules can be confined to identifying a specific asset on the basis of a link to the original trust property through a chain of transactions, and there is support for saying that they are capable of identifying money as surviving value in any part of a recipient’s estate on the basis of the recipient’s intentions with respect to the money.

E.  Personal Claims to Surviving Value There are some circumstances in which, under the current law, reflecting the transactional theory, C has no equitable proprietary claim because no specific asset can be identified as the traceable proceeds, but there would be an equitable proprietary claim to surviving value under the suggested approach. In such circumstances, there will be a claim in respect of this surviving value, but it is a personal claim for knowing receipt rather than a proprietary claim. This is regarded by some as a type of unjust enrichment claim.38 On the suggested approach, there would be no need for the knowing receipt claim in this type of case. There would still be a role for knowing receipt, however, because sometimes knowing receipt is concerned not with the recovery of surviving value, but with compensation for loss, where ­surviving value in D’s estate has been reduced or eliminated by disposal or consumption by D.39 The theory of unjust enrichment is thus closely linked to the transactional theory of tracing. With respect to the recovery of property transfers, the transactional theory draws a fundamental distinction between a claim to a specific asset and a claim to surviving value. This has been described as the distinction between ‘rights’ cases, where C is entitled to recover the right to an asset, and ‘value’ cases.40 The claim to surviving value is understood not as a claim to recover 37 Indeed in Relfo Ltd (n 4) the trust money was paid to one party and then by arrangement a payment was made on to D by a different party. In that case there were incomplete records of the movement of the money and the court relied in part on the intentions of the parties in establishing that the money had actually arrived at the intended destination. 38 See, eg A Burrows, The Law of Restitution, 3rd edn (Oxford, Oxford University Press, 2011) 427–31. 39 Knowing receipt as it stands is, on this analysis, a sort of composite claim. The knowledge requirement is only justified where the claim serves to recover compensation and leaves D out of pocket. The law of knowing receipt distinguishes between actual surviving value and original value lost through consumption or disposal in the context of D’s contributory negligence: see, eg Charter plc v City Index Ltd [2007] EWCA Civ 1382, [2008] Ch 313; see further Jaffey, ‘Explaining the Trust’ (n 15). 40 See R Chambers, ‘Two Kinds of Enrichment’ in R Chambers, C Mitchell and J Penner (eds), Philosophical Foundations of the Law of Unjust Enrichment (Oxford, Oxford University Press, 2009).

Proprietary Claims to Recover Mistaken or Unauthorised Payments  77 property transferred, but as a personal claim to value based on unjust enrichment. On the suggested approach, by contrast, this is not a fundamental distinction, because in both cases the underlying basis for the claim is the recovery of property transferred or its traceable proceeds, and the claim should in principle always be proprietary, whether it is a claim to recover a specific asset or an abstractly-defined part of D’s property. There is no need to invoke the idea of unjust enrichment to explain the claim to recover surviving value. The important division, instead, is between, on the one hand, these types of case concerning the recovery of property, whether a specific asset or abstract surviving value, and, on the other hand, cases where D  has received a benefit that does not become any part of the property making up his estate, for example, a benefit in the form of an experience provided by services.41

III.  The Common Law Claim for Restitution A.  How to Understand the Claim At common law, C has a personal claim to recover a mistaken or unauthorised payment.42 Although the payment is mistaken or unauthorised, ownership of the money nevertheless passes to D. In the usual case, where the money is paid into D’s bank account, ownership must pass because D as the account-holder must be the owner of the money, and in other cases ownership passes to protect third parties dealing with D, or because the money has ceased to be identifiable.43 On this understanding, since the claim cannot be based on C’s continuing ownership of the money, which has passed to D, it is said to be an unjust enrichment claim, and since the claim cannot be a claim to assert ownership of the money as property, it would seem that it must be a personal claim. I shall come back to the unjust enrichment approach, but, first, is it right to say that the claim cannot be explained

41 As well as introducing an unnecessary division into the law of property, the unjust enrichment approach wrongly equates a claim to recover abstract surviving value in D’s estate with a personal claim against D for payment for a service. This feature of unjust enrichment law has long been the subject of criticism: see, eg SJ Stoljar, The Law of Quasi-Contract, 2nd edn (Sydney, Law Book Co, 1989) 197–99; S Hedley, ‘Unjust Enrichment as the Basis of Restitution – an Overworked Concept’ (1985) 5 Legal Studies 56; Jaffey, The Nature and Scope (n 6) 10. 42 Kelly v Solari (1841) 9 M & W 54, 152 ER 24; Lipkin Gorman (n 23). I have not touched on the debate over what sort of mistake should give rise to a restitutionary claim. Some commentators have taken the view that the claim to recover an unauthorised payment arises from the claimant’s ‘ignorance’ as an ‘unjust factor’: see, eg P Birks, An Introduction to the Law of Restitution, rev edn (Oxford, Clarendon Press, 1989) 140ff. For criticism of this approach, in favour of the ‘lack of authority’ approach: see Jaffey, The Nature and Scope (n 6) 160–62. 43 G Virgo, The Principles of the Law of Restitution, 3rd edn (Oxford, Oxford University Press, 2015); Burrows, The Law of Restitution (n 38). Ownership of coins as currency passes to protect the function of money as currency. See generally D Fox, ‘The Transfer of Legal Title to Money’ (1996) 4 Restitution Law Review 60. As to ownership of the money in the form of the account, see n 70 below.

78  Peter Jaffey as a matter of property law? Let us consider how the law might be interpreted in the light of the earlier discussion. The measure of recovery for the common law claim is the value of the payment, subject to any reduction required by the change of position defence, that is to say, any loss to D that has occurred only as a result of the receipt.44 Thus C is actually entitled to the measure of surviving value, in the sense explained above, save that the claim is personal.45 Aside from this fact, the claim is exactly equivalent to the equitable proprietary claim, understood in the way suggested above. On the equitable analysis, one would say that legal title to the money passes to D, but C retains the equitable or beneficial ownership of the money, in the form of an equitable proprietary claim, which on the account above is a claim to the surviving value in D’s estate.46 The claim could not be understood in this way using only the conceptual resources of the common law. The common law recognises only ownership of the money, which is with either C or D, and no other sort of property right. This is why, if ownership passes to D, C’s claim must be personal. The suggested approach is available only if we can draw on equity, that is to say on the separation of title or constructive trust and a right to beneficial ownership in the form of the equitable proprietary claim, and of course it also involves accepting the interpretation of tracing suggested above. One might object that, since the common law claim developed independently of equity, this cannot be the right way to understand it. However, the character of the common law claim has long been contested, and there is plenty of support in the language used to describe the claim for treating it as essentially a matter of property.47 It seems to me that, lacking the resources of equity, the common law has never been able to provide an adequate account of the claim or give adequate effect to it; it has only been able to recognise the claim imperfectly, and in a way that obscures its true nature. We can give proper effect to 44 The effect of the change of position defence is to ensure that D is not adversely affected by the receipt of the transfer: it means D can rely on the payment as an increase in his wealth: see, eg Dextra Bank and Trust Co v Bank of Jamaica [2001] UKPC 50, [2002] 1 All ER (Comm) 193 [38]. 45 On this approach, change of position goes to the measure of the enrichment. It corresponds to treating change of position as an aspect of tracing to determine the subject matter of the proprietary claim. It also means that the restitutionary claim should not be affected by the defendant’s bad faith, and that there should be a separate claim for loss if the defendant uses up or disposes of surviving value when he knows or ought to know of the claim, as there is in equity by way of knowing receipt. 46 It is worth pointing out that Lord Goff ’s analysis in Lipkin Gorman (n 23) 573–74 appeared to rely on two distinct titles held by different people, one who took receipt and had control of the money, and the other who was entitled to its value: see Jaffey, The Nature and Scope (n 6) 318. This is not possible at common law but reflects the approach in equity. Lipkin Gorman (n 23) was originally begun in equity and the problem is said to have been the absence of knowledge for the purposes of knowing receipt, but it is also the problem of tracing to a specific asset, which is not of course a problem at common law. 47 eg Lipkin Gorman (n 23); Banque Belge Pour L’Etranger v Hambrouck [1921] 1 KB 321 (CA); Taylor v Plumer (1815) 3 M & S 562, 105 ER 721; Trustee of the Property of FC Jones & Sons v Jones [1997] Ch 159 (CA). See also Sempra Metals Ltd v IRC [2007] UKHL 34, [2008] AC 561, in connection with liability to pay for the use of money, and National Bank of New Zealand v Waitaki International Processing (NI) Ltd [1999] 2 NZLR 211 (CA), in connection with a responsibility to look after money received.

Proprietary Claims to Recover Mistaken or Unauthorised Payments  79 the claim only with the assistance of equity, and in doing so we can see what sort of claim it really is, which is to say that it is a claim to recover a transfer of money as property.48 Some commentators might object that this involves the substantive fusion of law and equity, but it is not necessary to go this far for present purposes.49 It is quite conventional to draw on equity to provide an appropriate remedy in a situation where the common law does not have the necessary tools to do justice, and in my view the personal claim for restitution does indeed fall short of doing justice and the equitable proprietary claim is the appropriate remedy.

B.  Extending the Availability of the Equitable Proprietary Claim The suggested approach amounts to abandoning the traditional limitation on the availability of the equitable proprietary claim to transfers in breach of trust or fiduciary duty, and allowing the equitable proprietary claim to expand into the traditional sphere of the common law claim. It has been said that it would be ‘analytical nihilism’ to abandon the traditional limitation,50 but it is not clear why in principle the availability of a proprietary claim should be subject to the limitation. Strictly speaking, the proprietary claim does not actually arise from the breach of trust or fiduciary duty, even in the traditional case. This follows from what I will refer to as the requirement of ‘remedial consistency’.51 The requirement of remedial consistency is the requirement that a remedial right should be apt to protect or satisfy the primary right, or in other words, that it should be such as to correct the injustice that has arisen relative to, or as defined by, the primary relation. Typically in private law there is a primary relation consisting of a right of C against D and a correlative duty of D owed to C, and C has a claim when D breaches the duty. The remedy should be such as to protect C’s primary 48 For other versions of the proprietary theory, see Stoljar, Quasi-Contract (n 41); P Watts, ‘Restitution – A Property Principle and a Services Principle’ (1995) 3 Restitution Law Review 49; C Webb, Reason and Restitution: A Theory of Unjust Enrichment (Oxford, Oxford University Press, 2016), especially at 75–76. 49 This chapter will not discuss substantive fusion in general, though I would support it as part of the natural process of development over time of the common law. 50 M Conaglen, Fiduciary Loyalty: Protecting the Due Performance of Non-Fiduciary Duties (Oxford, Hart Publishing, 2007) 28. An equitable proprietary claim was famously awarded for the recovery of a mistaken payment in Chase Manhattan Bank NA v Israel-British Bank (London) Ltd [1981] Ch  105. The decision was doubted in Westdeutsche Landesbank Girozentrale v Islington LBC [1996] AC  669 (HL), which largely retained the traditional limitation on the availability of equitable ­proprietary claims. 51 I have used the concept of remedial consistency in a similar way in earlier work, ­including Jaffey, ‘Explaining the Trust’ (n 15). The same or a similar idea has appeared under the guise of ­remedial monism, continuity, vindication, or corrective justice. See, eg M Tilbury, ‘Remedies and the Classification of Obligations’ in A Robertson (ed), The Law of Obligations: Connections and Boundaries (London, UCL Press, 2004); EJ Weinrib, Corrective Justice (Oxford, Oxford University Press, 2012) ch 3.

80  Peter Jaffey right so far as possible in all the circumstances. Usually this will be compensation from D, the measure of which should be such as to give C the benefit of the primary duty owed to him, so far as possible, or, in other words, the measure of the loss caused by the breach of duty. This is of course the usual position in contract and tort.52 In connection with remedial consistency, it is important to distinguish in principle between a claim arising from a breach by D of a duty owed to C, and a claim arising from an invalid transfer of property from C to D, that is to say a transfer of control or possession of property unsupported by a valid exercise of a power of transfer.53 The breach of a duty owed by D to C is a matter arising as between C and D, and as a matter of remedial consistency the remedy for a breach of duty should affect only C and D, which means that it must be a personal remedy binding only D, typically compensation. If D has acquired property from C through a breach of duty, and C’s claim is based purely on the breach of duty, C might have a personal claim against D to recover the property, which would give way to pecuniary compensation if D were bankrupt. By contrast, with respect to a claim arising from an invalid transfer of property from C to D, C’s primary right to the property was a right against the whole world, and if the transfer was invalid vis-à-vis the direct recipient D it must equally be invalid vis-à-vis the rest of the world, and so, as a matter of remedial consistency, the claim should be proprietary. In an express trust, the trustee has a duty to the beneficiaries to hold and manage the property and distribute it in accordance with the trust instrument. When the trustee transfers trust property to a third-party recipient contrary to the terms of the trust, the trustee commits a breach of duty, but it is not, strictly speaking, the breach of duty by the trustee that generates the beneficiary’s proprietary claim against the recipient. As a matter of remedial consistency, the trustee’s breach of duty can generate only a claim against the trustee, or against an accessory to the breach of trust, for a personal remedy to restore the loss to the trust. The equitable proprietary claim against the recipient actually arises from the invalidity of the transfer, that is to say, from the fact that the transfer was beyond the authority of the trustee under the trust, by virtue of the beneficiary’s right of beneficial ownership in the trust property. Generally by acting beyond his authority under the trust the trustee does commit a breach of duty, but the invalidity of the transfer is distinct from the trustee’s wrong.54 52 See, eg Robinson v Harman (1848) 1 Exch 850, 154 ER 363; Omak Maritime Ltd v Mamola Challenger Shipping Co Ltd [2010] EWHC 2026 (Comm), [2011] 2 All ER (Comm) 155. 53 A transfer may be invalid because it was procured by D in breach of duty, and D may commit a breach of duty by using or disposing of property invalidly transferred to him, but there is nevertheless a distinction in principle between a claim arising from a breach of duty and a claim arising from an invalid transfer, and the distinction is important with respect to remedial consistency. 54 To explain the trust, and the remedies available to the beneficiary, we have to recognise both the personal relation between the beneficiary and the trustee, and the proprietary relations between the beneficiary and the rest of the world with respect to the trust property: see further Jaffey, ‘Explaining the Trust’ (n 15) above. There is support for distinguishing between the personal and property rights of the beneficiary in Akers v Samba Financial Group [2017] UKSC 6, [2017] AC 424.

Proprietary Claims to Recover Mistaken or Unauthorised Payments  81 Thus, even in the case of an express trust, the proprietary claim does not strictly speaking arise from a breach of trust, but from an invalid transfer. The implication is that the availability of the proprietary claim should not in principle depend on whether there was a breach of trust or a breach of fiduciary duty. Nor is there any reason why it should depend on the prior existence of a trust (indeed, there is no prior trust in the standard case where the claim arises from a transfer in breach of fiduciary duty). In principle, any invalid transfer of property should generate a proprietary claim, as a matter of remedial consistency, not only a transfer by a trustee beyond his authority under the trust, but any transfer that is invalid by virtue of a mistake or lack of authority. The traditional limitation on the availability of a proprietary claim is not based on any analytical argument or argument of principle, but on the fact that to give effect to a proprietary claim with respect to money it is necessary to draw on concepts that were not available to the common law courts. Normally one would think of the proprietary claim as arising in respect of a specific asset transferred, but if it is right, as argued above, and as the law of tracing implies, to understand an invalid payment of money, or property generally, as entering D’s estate and becoming an abstract part of it, as a matter of remedial consistency there should in principle be a proprietary claim to this abstract part of D’s estate, the surviving value of the transfer.55 The traditional limitation to transfers in breach of trust or fiduciary duty has been discarded in US law, and in the case of a mistaken payment from C to D a court can declare what is said to be a ‘remedial constructive trust’ over an asset in D’s estate, the value of which corresponds to the measure of C’s claim, giving C a proprietary claim to it.56 As the law is normally understood, ownership of the money passed at the time of the transfer, and then later the court creates a new property right for C through its order. The standard objection to this is that the law does not allow for a property right simply to arise out of nothing as a remedy for a personal claim, and furthermore that a court does not have a discretionary power to create such a property right.57 The underlying objection here is actually remedial inconsistency, because as a matter of remedial consistency a 55 It is also said that, before a trust comes into existence, there is no beneficial interest in the sense of an equitable beneficial interest and so it cannot be correct to say that C retains a beneficial interest: see, eg W Swadling, ‘Explaining Resulting Trusts’ (2008) 124 LQR 72; J Mee, ‘The Past, Present, and Future of Resulting Trusts’ (2017) 70 Current Legal Problems 189. Although one can reasonably say that there is no equitable interest without a separation of title, the absolute owner’s right before there was a separation of title certainly included the right to the benefit of the property that the equitable interest now represents. 56 See Re Omegas Group 16 F 3d 1443 (6th Cir 1994): see further E Sherwin, ‘Why In Re Omegas Group was Right: An Essay on the Legal Status of Equitable Rights’ (2012) 92 Boston University Law Review 885; H Dagan, The Law and Ethics of Restitution (Cambridge, Cambridge University Press, 2004) 318–21; A Kull, ‘Restitution in Bankruptcy: Reclamation and Constructive Trust’ (1998) 72 American Bankruptcy Law Journal 265. 57 See, eg S Gardner, ‘Remedial Constructive Trusts: The Element of Discretion’ in P Birks (ed), Frontiers of Liability, vol 2 (Oxford, Oxford University Press, 1994); P Birks, ‘Proprietary Rights as Remedies’ in P Birks (ed), Frontiers of Liability, vol 2 (Oxford, Oxford University Press, 1994); Re Polly Peck International plc (No 2) [1998] 3 All ER 812 (CA).

82  Peter Jaffey personal right against D cannot give rise to a proprietary right that binds third parties. But, understood in accordance with the suggested approach, the remedial ­constructive trust is not open to this objection, at least in this situation.58 The court order merely crystallises, in the form of a specific asset, that abstract part of D’s estate to which C has been entitled all along, from the time of the transfer, that is to say the surviving value of the payment. It does not conjure up a new property right out of nothing, though it appears to do so because the proprietary right to abstract surviving value is not understood or explicitly recognised. Indeed, there is no reason to think of the remedial constructive trust in this context as any different from the ordinary equitable proprietary claim or constructive trust claim, though it is free (as it ought to be) of the traditional limitation to transfers in breach of trust or fiduciary duty.59

C.  Objections to the Proprietary Claim It has appeared to some commentators that allowing C the benefit of a remedial constructive trust in this situation is unfair to D’s creditors. It is said that creating a new property right in place of a personal right amounts to an expropriation of property that was or would have been available to satisfy the claims of D’s ­creditors,60 and that at the same time it in effect displaces the statutory rules on the distribution of a bankrupt’s estate amongst personal creditors.61 The same 58 However, there is no reason for the court to have a discretion. I shall not consider the controversy over the remedial constructive trust more generally. 59 Some would say that what is in issue here is the resulting trust, not the constructive trust: see, eg R Chambers, Resulting Trusts (Oxford, Clarendon Press, 1997), following P Birks ‘Restitution and Resulting Trusts’ in SR Goldstein (ed), Equity and Contemporary Legal Developments (Hebrew University of Jerusalem, 1992). See also PJ Millett ‘Restitution and Constructive Trusts’ (1998) 114 LQR 399. The starting point for this approach is the traditional resulting trust case where C makes a voluntary transfer to D, but without an expressed intention to benefit D, and there is a resulting trust for C which is said to be based on a presumption (subject to contrary evidence) that C intended to keep the beneficial interest. According to Chambers, this reflects a general principle that there should be a resulting trust where a transfer is made in the absence of an intention to benefit (a ‘non-beneficial transfer’), which according to Chambers also encompasses the case where a payment of C’s money is made without authority or by mistake. But the resulting trust is really concerned with a valid transfer where some aspect of the transaction has not been settled, for which a default rule is required. There is no suggestion that the transfer was invalid, as in the case of a mistaken or unauthorised transfer. For this reason, it is more appropriate to refer to the trust as a constructive trust, by analogy with the case where a trustee makes a transfer in breach of trust. See further Jaffey, Property Claims (n 6) ch 9. A similar objection is made by B Hacker, ‘Proprietary Restitution after Impaired Consent Transfers: A Generalised Power Model’ [2009] CLJ 324, 345. For a different objection to the resulting trust analysis, see Swadling, ‘Explaining Resulting Trusts’ (n 55). 60 See Sherwin, In Re Omegas Group (n 56), discussing Re Omegas Group and the Restatement (Third) of Restitution and Unjust Enrichment; Dagan, The Law and Ethics (n 56); Kull, ‘Restitution in Bankruptcy’ (n 56); R Goode, ‘Proprietary Restitutionary Claims’ 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); Hacker, ‘Proprietary Restitution’ (n 59). See also DM Paciocco, ‘The Remedial Constructive Trust: A Principled Basis for Priorities over Creditors’ (1989) 68 Canadian Bar Review 315. 61 See, eg Re Polly Peck International plc (No 2) (n 57) 827 (Mummery LJ); see also Dagan, The Law and Ethics of Restitution (n 56) 305.

Proprietary Claims to Recover Mistaken or Unauthorised Payments  83 objection is made of any proprietary claim for restitution (whether or not explicitly discussed in terms of a remedial constructive trust), because the assumption is that the claim to surviving value is essentially a personal claim, and that to recognise a proprietary claim is in reality to give preferential treatment to a personal claim. Again, however, once it is recognised that C had a proprietary claim to surviving value from the time of the transfer, it is clear that the objection is misplaced. If C’s property is invalidly transferred to D, it is not unfair to D’s creditors to allow C to recover it, nor is it in tension with the bankruptcy rules, since these rules are not concerned with the recovery of property belonging to C. Indeed, according to the suggested approach, the effect of denying C a proprietary claim is to expropriate C’s property right for the benefit of D’s creditors. The reason why the claim may seem unfair to D’s creditors is of course that C  may recover a different specific asset from the one originally transferred. However, under the suggested approach C nevertheless recovers his own property, defined as an abstract part of D’s estate (as it should be for the reasons discussed earlier). The claim is not unfair to D’s creditors because it does not reduce the value of the estate that would have been available, in the absence of the transfer, to satisfy their claims. It is worth noting that this is not necessarily the case with respect to tracing under the transactional or specific assets theory, according to which a proprietary claim must be attached continuously to a specific asset, whether the original asset transferred or another asset traceable from it. For example, under this theory if C has a proprietary claim to a specific asset in D’s hands, and D incurs expenditure on the assumption that he is the owner of the asset, and C is then allowed to recover the asset, D and his creditors will be left worse off than if the transfer had never happened. Furthermore, if the law adopts a transactional or specific assets approach without a convincing explanation for it, it remains open for argument that the effect of tracing is to pre-empt and undermine the statutory bankruptcy rules, because it simply gives C a preferential claim to an asset that ought to be part of the general assets available to creditors in general.62 The debate in the unjust enrichment literature on the availability of a ­proprietary claim starts from the position that in passing title the transfer necessarily eliminates C’s original proprietary interest.63 The issue is then whether a new proprietary right should arise under a principle of unjust enrichment. From this starting point, it does seem attractive to argue that there should not be a proprietary claim at all, because it would involve creating a property right out of a personal right, contrary to remedial consistency and contrary to the rights of creditors.64 62 Another general concern about proprietary claims is the apparent wealth argument that creditors should be able to rely on the apparent wealth of D including any part of his estate to which C has a proprietary claim. This took the form of an argument against ‘off-balance sheet liabilities’ in Westdeutsche Landesbank Girozentrale (n 50), which was relied on in resisting the expansion of proprietary claims, but the argument applies in the same way to traditional proprietary claims: see further Jaffey, Property Claims (n 6) 175–76. 63 See generally Hacker, ‘Proprietary Restitution’ (n 59), distinguishing three different analyses of a proprietary claim on the unjust enrichment approach. 64 See, eg W Swadling, ‘Rescission, Property and the Common Law’ (2005) 121 LQR 123.

84  Peter Jaffey However, some commentators have argued that, comparing the restitutionary claim with contract claims and tort claims, there is good reason to give priority in bankruptcy to restitutionary claims by way of a proprietary claim. It is said that this is because, first, in the restitutionary case value passes from C to D, so that D’s estate is increased in value; and secondly C did not accept the risk of D’s insolvency when he made the payment. The combination of these two factors means, it is argued, that the restitutionary claimant should be preferred, so as to give him in effect a proprietary claim. By contrast, in a contract case, although there may be a payment from C to D that increases the value of D’s estate, in making a voluntary, unvitiated payment under the contract, C accepts the risk of insolvency; and in a tort case, where C acquires a claim from a wrong by D, although C does not accept the risk of insolvency, there is no transfer of value from C to D. The discussion in the literature over this argument appears to assume that it is not about whether C has a proprietary claim to some abstract part of D’s estate prior to the bankruptcy, but about the order of priority of claims against the estate in bankruptcy, on the assumption, it would seem, that the claims are essentially personal claims, at least going into the bankruptcy. There may well be good reasons to give priority to one type of personal claim, in effect giving it the status of a proprietary claim, instead of treating them equally in bankruptcy.65 However, this is exactly the issue that is regulated by the statutory rules on distribution in bankruptcy, and to convert a personal claim into a proprietary claim for these types of reason would appear to undermine these rules. It is more plausible to understand the argument as implicitly recognising, or at least moving towards recognising, a property right to surviving value as an abstract part of D’s estate, as argued above.66 This is surely the best way to understand the idea that C should have a right, as against third parties, to the increase in the value of D’s estate. Similarly, the argument that C should not have a claim when he has accepted the risk of D’s insolvency should really be understood as the argument that C retains a right to his property, in the form of a right to surviving value, if he does not make a valid transfer. Where the transfer is valid, C is taken to accept the risk of having a personal claim that diminishes in bankruptcy, though it would be better to say that C is bound by the consequences of a valid transfer irrespective of whether he actually appreciated the risk that followed from making it. If C makes a valid payment to D under a contract, for example, the legal consequence is that he now has only the prospect of a personal claim in the event of breach, and this is because the transfer was valid, and does not depend on whether C understood this and so knew the risk involved.67 65 For discussion of policy-oriented approaches: see, eg Dagan, The Law and Ethics (n 56) 320; C Rotherham, ‘Policy and Proprietary Remedies: Are we all Formalists now?’ (2012) 65 Current Legal Problems 529. 66 The arguments in Swadling, ‘Rescission, Property and the Common Law’ (n 64), do not apply against this approach. 67 Contracts are liable to be constructed to limit such risks, eg by structured payments or retention of title.

Proprietary Claims to Recover Mistaken or Unauthorised Payments  85 If the restitutionary claimant, C, were to have a proprietary claim to the money invalidly transferred, in the form of surviving value (as I have argued he should), this would adversely affect creditors in D’s bankruptcy, but whether there should be a proprietary claim is not a matter of the policy of distribution amongst creditors in bankruptcy. It is a matter independent of and prior to the bankruptcy. The availability of the proprietary claim is also crucial with respect to claims against indirect recipients, irrespective of whether there is a bankruptcy. Where money is paid without authority or by mistake and then surviving value is paid on by the direct recipient to an indirect recipient, on the suggested approach there should also be a claim against the indirect recipient. As the law stands, however, there is no such claim because there is only a causal link to the receipt by the indirect recipient, and a causal link is not enough to establish a claim.68 It seems to me a serious weakness in the law that it cannot provide a claim against an indirect recipient in this type of case, which would include the ordinary case where money is paid out of a bank account by mistake or without authority, including bank fraud. The discussion above suggests that the main reason why the law has ended up in this position is that it has failed to develop the law of property and proprietary claims, including tracing, to deal adequately with mistaken and unauthorised money payments. Instead it has adopted the law of unjust enrichment to fill the gap. This is particularly regrettable in the light of the fact that English law, with its law of trusts and proprietary claims as they have been developed in equity, is actually very well placed to deal with money in its modern intangible form, in exactly the appropriate way, through a proprietary claim to traceable proceeds in the form of abstract surviving value.

D.  The Unjust Enrichment Approach to Common Law Restitution As I have said, at present English law adopts an unjust enrichment approach.69 It is said that a mistaken payment of money is a valid transfer as a matter of property law since it conveys ownership of the money, but because of the mistake the 68 The liability of an indirect or remote recipient is a controversial issue in the unjust enrichment literature: see, eg C Mitchell, ‘Unjust Enrichment’ (n 30) paras 18.42–45. In the recent Supreme Court decision in Investment Trust Companies (in liq) v Revenue and Customs Commissioners [2017] UKSC 29, [2018] AC 275, a customer paid VAT to a supplier, which it turned out later was not actually due. The customer claimed from the tax commissioners because the supplier had accounted for the tax received. It was held that if the supplier had kept the money received in a separate fund there could have been a trust and a claim against the commissioners if money from the fund or traceable proceeds had been paid on to them. In fact the money became part of the supplier’s general assets and so there was no claim on this basis ([71]–[72]). Even if there had been a causal link, it seems that this would not have been enough to establish a claim ([51]–[52]). (It seems that there was actually no causal link because the supplier’s liability to account for the VAT arose when it charged the customer, not from the receipt of the payment from the customer.) 69 See, eg Virgo, Principles (n 43); Burrows, Restitution (n 38).

86  Peter Jaffey payment is vitiated so as to give rise to a claim in unjust enrichment. However, if the transfer is valid as a matter of property law, that is to say if it is made pursuant to a valid exercise of C’s power to transfer his money, there is no reason why C should have a claim at all. If what C had before the transfer was ownership of the money – if this is what it means to say that it was his money that was transferred – and if he has lost ownership of the money by way of a valid transfer, what reason can there be for him to have a claim?70 Furthermore, to say that the transfer is vitiated is really to say that the exercise of the power of transfer is vitiated, and what power can be in issue here, other than the power to transfer the property? One cannot possibly say that there was a power to transfer the property, which was validly exercised, and another, distinct power to transfer its value, which was not validly exercised, so as to give rise to an unjust enrichment claim. If a claim is justified, it must be because the transfer was not valid, that is to say there was no valid exercise by or on behalf of the owner of the power of transfer, because of the mistake. The reason why ownership passes is not that the transfer was valid, but that, even if a transfer is invalid, at common law ownership passes to protect third parties or because the specific asset is no longer identifiable. This point is even clearer in the case where the payment is made by an agent without authority, or the money is taken by a stranger, or is lost and found. Here it is obvious that there cannot have been a valid transfer of property. It seems to me that the only plausible basis for the claim is that the payment was a transfer of property to D, now identifiable as surviving value in D’s estate, and that the transfer was unsupported by a valid exercise of a power of transfer binding C as the owner (just as for the equitable proprietary claim, where C is the beneficial owner). It may sometimes be a convenient usage to say that D would be left unjustly enriched if no claim is allowed, or that the claim removes an unjust enrichment, but nevertheless this is a misleading usage insofar as it implies that there is an alternative basis for the claim in a distinct principle of unjust enrichment. There is no basis for a claim in anything that D has done, or failed to do, and no other reason to impose liability on D, apart from the fact that he has received

70 See further P Jaffey, ‘Two Theories of Unjust Enrichment’ in JW Neyers, M McInnes and SGA Pitel (eds), Understanding Unjust Enrichment (Oxford, Hart Publishing, 2004); Webb, Reason and Restitution (n 48) 80–81. Where the mistaken or unauthorised payment is paid to D from C’s bank account, one might object that C could not have had a right of ownership of the money paid, because all C ever had was a contractual right against the bank. But, first, if an account-holder’s legal position with respect to his bank account is exclusively a matter of contract, a mistaken or unauthorised payment from the account can only ever give rise to a claim against the bank under the contract (if there is a claim at all). As a matter of remedial consistency, there is no basis for any claim against a third-party recipient. Secondly, money in the form of a right to a bank account can be held on trust, as trust property in which the beneficiary has beneficial ownership, and a payment from the account in breach of trust is a transfer of trust property that can give the beneficiary a proprietary claim. This is incompatible with a purely contractual analysis of the account. This issue is part of a more general question concerning the nature of property rights, and in particular in what way a contractual right can be property, and in what sense a payment from one account to another can be a transfer of property, as to which: see Jaffey, Property Claims (n 6) 82–83, 95–99.

Proprietary Claims to Recover Mistaken or Unauthorised Payments  87 C’s money and that it remains in his estate as surviving value. The supposed ­alternative basis in unjust enrichment is an illusion arising from the inability of the common law to recognise the proprietary claim, and in particular a proprietary claim to surviving value.71 In other words, we should say of the restitutionary claim to recover a mistaken or unauthorised payment that the category of claim or cause of action, or, one might say, the doctrinal category, is property law rather than unjust enrichment. A category of claim or cause of action such as contract or negligence or (as I suggest) private property is based on a certain principle of justice and the distinctive type of injustice that arises by virtue of it. This is why the various types of case falling into the category are often said to be analogous to each other, and why it is appropriate to have a common set of conditions for all claims falling into the category, reflecting the nature of the underlying injustice – ie the elements of the cause of action.72 An invalid transfer of property is a distinctive type of injustice for which it is appropriate to have common treatment under a common set of conditions, just as for breach or non-performance of a contract, or the failure to meet a reasonable standard of care in negligence. For money as property, the relevant issues (at common law as in equity) are whether there was a prior right of ownership, whether there was an invalid transfer, and whether there is traceable value.73 It has been said that it cannot be correct to characterise a claim as propertybased in this way because a claim necessarily arises from an event, and there is no ‘property event’ from which the claim arises, whereas the receipt of the money by D is an event that constitutes unjust enrichment.74 But, first, there is certainly a relevant event in property law, namely the invalid transfer. Secondly, although a claim arises from an event, it also arises from the primary right by virtue of which the event is legally relevant. The event generates the claim by virtue of the primary right. In contract, for example, a breach of contract is an event that generates a claim by virtue of the primary right to performance of the contract. The primary right in the case of the invalid transfer is the original ownership of the money, by virtue of which the invalid transfer generates the claim. It is a problem for the unjust enrichment approach that it either altogether fails to identify a primary right, or instead it relies on C’s right of ownership as the primary right, which makes the unjust enrichment approach redundant.

71 We should distinguish between C’s claim to recover the property transferred as surviving value and a personal claim for compensation for the loss of surviving value disposed of or consumed by D. One would think that the compensation claim should be fault-based: cf knowing receipt, text at nn 38–39 above. One might try and explain the common law claim for restitution as a strict liability compensation claim, though this claim really presupposes a proprietary claim to surviving value. This is how one might understand Webb’s approach: see Webb, Reason and Restitution (n 48). 72 I referred to such a category as a ‘justificatory category’ in Jaffey, Property Claims (n 6) ch 2. 73 Of course, this calls for a much fuller consideration of private property law and in particular money as private property, as to which see Jaffey, ibid ch 3. 74 See P Birks, ‘Property and Unjust Enrichment: Categorical Truths’ [1997] New Zealand Law Review 623.

88  Peter Jaffey The recognition of unjust enrichment as a category of claim or cause of action implies that unjust enrichment is also a distinct type of injustice, for which a ­standard set of conditions is appropriate, and of course the theory of unjust enrichment offers the three stage framework for unjust enrichment.75 According to Peter Birks, the category of unjust enrichment claims consists of all the claims that are analogous to what is taken to be the core case, the claim to recover a mistaken payment.76 The category is taken to include, along with this claim, some other ostensibly different types of claim, including a claim arising to recover a contractual prepayment on a breach of contract, or a claim for payment for services rendered in the absence of a contract. The argument above casts doubt on the unjust enrichment analysis of the mistaken payment claim, and in consequence also on the idea of a general category of unjust enrichment based on this claim as its paradigm case.77

E. Unconscionability In Australian Financial Services and Leasing Pty Ltd v Hills Industries Ltd,78 the High Court of Australia rejected the unjust enrichment analysis adopted by the English courts in favour of an analysis in terms of ‘conscience’. On this approach, the recipient of a mistaken payment is liable to repay it because his conscience is affected. This approach is, at least with respect to its language, a distinctively equitable approach, and the court relied on what it considered were the equitable origins of the claim, or at least the equitable influence on its development. If one accepts the approach suggested above, one might invoke the equitable concept of conscience as a formula for importing the equitable approach to property into the common law, but of course in Hills, ‘conscience’ is invoked as the basis for a personal claim, as an alternative to the unjust enrichment approach. This is in my view no more convincing than the unjust enrichment approach – indeed, it suffers from essentially the same flaw. It amounts to no more than an equitable formula for holding that, in the circumstances, justice requires that D return the payment, just as to say that D is unjustly enriched is to say that, in the circumstances, justice requires D to return the payment. The conscience approach does not succeed

75 See generally n 69. 76 P Birks, Unjust Enrichment, 2nd edn (Oxford, Clarendon Press, 2005) 3. 77 See further P Jaffey, ‘The Unjust Enrichment Fallacy and Private Law’ (2013) 26 Canadian Journal of Law and Jurisprudence 115. Various commentators have rejected the theory of unjust enrichment, including J Dietrich, Restitution: A New Perspective (Leichhardt (NSW), Federation Press, 1998); S Hedley, Restitution: Its Division and Ordering (London, Sweet & Maxwell, 2001); IM Jackman, The Varieties of Restitution (Leichhardt (NSW), Federation Press, 1998); Stoljar, ‘Quasi-Contract’ (n 41); CT Wonnell, ‘Replacing the Unitary Principle of Unjust Enrichment’ (1996) 45 Emory Law Journal 153. 78 Australian Financial Services and Leasing Pty Ltd v Hills Industries Ltd [2014] HCA 14, [2014] 253 CLR 560. The case was concerned more specifically with the availability of change of position.

Proprietary Claims to Recover Mistaken or Unauthorised Payments  89 in identifying a distinct basis for a claim, any more than the unjust enrichment approach. In both cases, it is simply assumed that C has a right to the return of the payment from the time when it is paid – otherwise why would D’s conscience be affected by the receipt of the payment, and why would D be unjustly enriched by it? Neither approach offers a basis for C’s right to recover the payment.79 One might object that the reason why there is an unjust enrichment, or D’s conscience is affected, is the fact that the payment was mistaken or unauthorised, and that these ‘unjust factors’ or (as one might describe them) ‘conscience-affecting factors’ have the effect of vitiating or invalidating the payment so as to generate the right to repayment. But, as argued above, the significance of finding that one of these factors is present is that C’s power of transfer has not been validly exercised, and the power of transfer is an incident of C’s ownership of his money. If the transfer is invalid, the claim arises as a matter of property law, and, as a matter of remedial consistency, ought in principle to be proprietary and not personal.

IV. Conclusion This chapter has focused on the basic concepts and principles in the law governing restitutionary claims to recover mistaken or unauthorised payments, rather than the detail of the case law. The discussion suggests that, if we are to develop the law in a principled and coherent way, we should recognise that both the equitable proprietary claim and the common law restitutionary claim can take the form of a claim to abstract surviving value, as a part of the defendant’s estate; that the claim should be proprietary even though it is not necessarily a claim to a specific asset; and that the rationale for the claim is not the principle or doctrine of unjust enrichment or conscience, but the justice of correcting an invalid transfer of property.80

79 This is the ‘circularity objection’ to unjust enrichment. 80 Or, more fundamentally, the ‘private property principle’, as discussed in Jaffey, Property Claims (n 6) ch 3.

90

5 Restitution: A New Start? LIONEL SMITH*

I.  The Problem In my view, something has gone wrong in the law of restitution for unjust ­enrichment. In this chapter, I aim to explain what I think has gone wrong, and to propose the beginning of a solution. The first part aims to describe the problem and why it is a serious one. The second part offers the beginning of a way forward. Private law in the common law is oriented around causes of action. Causes of action are normative packages that justify liability. The phrase ‘cause of action’ is actually quite ambiguous and in my view has three distinct meanings or senses.1 The first meaning is the most abstract and general. An example of it is in the sentence, ‘the cause of action in battery consists of the intentional infliction upon the body of another of a harmful or offensive contact’.2 This is a statement that if any conduct occurs that fits this general description, a claim will arise (subject to defences). The second meaning focuses on facts. It is often found in judicial definitions, like this one: A cause of action has traditionally been defined as comprising every fact which it would be necessary for the plaintiff to prove, if disputed, in order to support his or her right to the judgment of the court.3

On this definition, a cause of action is not a general statement but a collection of particular facts that have happened. This definition is important when, for example, you have to know where or when a cause of action arose, as you might for * I thank Professor Robert Stevens for sharing many ideas, in particular from his recent unpublished work. I also thank Professor Peter Devonshire and Mr Rohan Havelock for their kind invitation to and hospitality at the Faculty of Law, University of Auckland on 18–19 September 2017, where a version of this chapter was presented. 1 For a fuller argument, see L Smith, ‘Defences and the Disunity of Unjust Enrichment’ in A Dyson, J Goudkamp and F Wilmot-Smith (eds), Defences in Unjust Enrichment (Oxford, Hart Publishing, 2016) 27. In the current chapter I discuss the common law, but the earlier paper looks at this question comparatively and notes that civilian systems have an approach that is not dissimilar. 2 See Bettel v Yim (1978) 20 OR (2d) 617 (Ontario County Court) 621. 3 Danyluk v Ainsworth Technologies Inc 2001 SCC 44, [2001] 2 SCR 460 [54].

92  Lionel Smith jurisdictional reasons or in relation to concerns about the limitation of actions. The third and final meaning is also particular: a lawyer might say, ‘you have a cause of action in libel against that publisher’. She is not referring to a general proposition about how liability can arise (the first sense), nor to a set of facts (the second sense). She is saying that because certain facts have occurred (a cause of action in the second sense), those facts, when combined with a general rule (a cause of action in the first sense), create a claim by this particular plaintiff against this particular defendant. Her claim is thus both normative and very particular: that defendant is liable to this plaintiff. My concern is with the first sense: general statements of the conditions on which claims will arise. A cause of action in this sense exists to protect something valuable, something we consider worthy of protection. The cause of action in libel protects our reputations, while the cause of action in battery protects our bodily integrity. Those are usually treated as different rights that we have, founded on different aspects of personality that are worthy of protection. This is why committing the tort of libel is different from committing the tort of battery. This explains why the defences to the two are different, and why a battery is much more likely to be a crime than a libel. Other causes of action may be founded on constitutional values, which are also things that are valuable and worthy of protection. In the law of unjust enrichment, some of us have failed to articulate the causes of action. The majority of scholars in the field, and some courts, have avoided this issue. I am here speaking principally of the approach pioneered by Peter Birks, an approach to which I have largely adhered. In my view, many scholars have avoided this issue unintentionally. They have avoided it by simultaneously acting as if there is only one cause of action in unjust enrichment, while also acting as if there are multiple causes of action in unjust enrichment. Many textbooks on unjust enrichment contain a discussion as to whether unjust enrichment is itself a cause of action, or rather a ‘principle’ that might contain multiple causes of action. In general, this question is then dismissed as unimportant.4 In my view, it is very important. In the next sections I will aim to explain why this is so. Before getting to that, it is important to say that different scholars use the term ‘unjust enrichment’ in different ways. Some include a great deal more in it than others. Some think it is only a principle; still others do not think it is useful at all. I will say something about this only because I think that the problem which I wish to highlight exists among all of those who treat unjust enrichment as a ground of liability.

A.  Big Unjust Enrichment Among those who write about unjust enrichment, even if we confine ourselves to those taking what might be called a Birksian approach, there is a somewhat

4 Smith,

‘Defences’ (n 1) 41.

Restitution: A New Start?  93 hidden diversity of views as to what is the scope of this field. Peter Birks himself had a very expansive view of its scope; indeed, one which grew during his career.5 In his final book, he included the following among claims in unjust enrichment: (i) a claim by a person who had made a mistaken or compelled payment to recover it from the payee; (ii) a claim by a person to recover the value of benefits conferred under a contract that was later set aside or frustrated; (iii) a claim by a person who had paid taxes not due, without mistake, to recover them; (iv) a claim by a person who had discharged a debt, but who was not primarily liable, to recover from the person who was primarily or co-equally liable (including a claim by the first person to take over rights of discharged creditors of the person primarily liable); (v) a claim by a person who had acted under necessity, against a person who had benefited from that act; (vi) a claim by a person for the benefit acquired by another person from the use, without authority, of an asset in which the first person held legal or equitable rights. In what follows I will call this ‘big unjust enrichment’. In my view, one difficulty about Birks’s project is this: he was unclear about causes of action. He frequently invoked the maxim that ‘like cases must be treated alike’, as part of an argumentative strategy for the development of the law.6 But what is a ‘like case’? We do not assume that defences that are available to the tort of inducing breach of contract – such as ‘justification’ – must be available to the tort of false imprisonment. Those are not ‘like cases’, in the relevant sense, even though both are torts. Phrased in terms of causes of action, the problem is this: Birks, and others, have assumed or taken for granted that all examples of liability in the law of unjust enrichment fall under a single cause of action, and so must be treated alike in a strong sense: the elements of the claim must be the same, the defences must be the same, the things that are not relevant (such as the defendant’s ignorance of the conferral of a benefit) must be the same. So far as I know, Birks never expressly

5 I examined how Birks’s view of unjust enrichment evolved over time precisely to include more and more claims within its scope in L Smith, ‘Tracing’ in AS Burrows and A Rodger (eds), Mapping the Law: Essays in Memory of Peter Birks (Oxford, Oxford University Press, 2006) 119. Birks rejected any requirement that the plaintiff have transferred its rights to the defendant – indeed any requirement that the plaintiff have suffered any loss at all – and he rejected any requirement that the plaintiff show a positive reason for restitution. 6 One prominent example was Birks’s conviction that since the common law provides strict liability for a mistaken payment, a defendant should be strictly liable for receipt of trust property, even though in the latter case the claim only lies if the plaintiff ’s interest survives: see, eg P Birks, ‘Receipt’ in P Birks and A Pretto (eds), Breach of Trust (Oxford, Hart Publishing, 2002) 213.

94  Lionel Smith said that there is only one cause of action. But consciously or not, he took this for granted, because if there are multiple causes of action in unjust enrichment, as there are in the law of torts, then all these causes of action can be expected to reveal diversity in relation to all these aspects, just as is the case in the law of torts. Within ‘big unjust enrichment’, it seems quite clear that there are multiple causes of action. Take claim (vi) in the list above. On the expansive view that Birks took, this includes cases of the unauthorised infringement of the property rights of the plaintiff, such as the famous Kentucky Caves case;7 liability for the receipt of trust property; and proprietary claims to the traceable proceeds of trust property. In his view, even a situation in which one person simply takes another’s assets could be analysed as revealing a claim in unjust enrichment (though, like the Kentucky Caves case, it might also reveal a tort).8 But a moment’s reflection shows that these cannot be examples of the same cause of action as the cause of action that applies in the case of a payment of money by mistake. In claim (vi) above, it is essential that the plaintiff had a right in, or in relation to, some particular asset that the defendant received or employed, and moreover that the plaintiff ’s right survived the defendant’s infringement. It is quite clear that this is not necessary in a case of liability to repay a mistaken payment. There, the claim arises even though all of the plaintiff ’s rights of property pass to the defendant. The causes of action are different because the essential elements of the claim are different.9 When that is true, the argument that ‘like cases must be treated alike’ falls away almost into irrelevance. It has no more force than it would if one was reasoning between a case of the tort of conversion and a case of the tort of misfeasance in public office. Both are torts, but there the commonality ends.

B.  Small Unjust Enrichment Many members of the Birksian school, including myself, have held a smaller vision of the law of unjust enrichment, in an effort to preserve a stronger normative unity for the subject. This view excludes any situation in which part of the plaintiff ’s claim is that a pre-existing right of property (in a broad sense, that includes equitable rights) subsists through the claim; it excludes them on the ground that those are cases in which the defendant’s interference with the plaintiff ’s pre-existing right forms the foundation of the claim, which is clearly not true in, for example, the case of liability for the receipt of a mistaken payment. This view says that claim 7 Edwards v Lee’s Administrator (1936) 96 SW 2d 1028 (Ky CA); see P Birks, Unjust Enrichment, 2nd edn (Oxford, Oxford University Press, 2005) 84. 8 Burrows follows Birks in this respect: AS Burrows, The Law of Restitution, 3rd edn (Oxford, Oxford University Press, 2011) 67–69; 77–76; 194–98. 9 See W Swadling, ‘Ignorance and Unjust Enrichment: The Problem of Title’ (2008) 28 OJLS 627. In rejecting this analysis, Burrows (ibid) argues (194–98) that it is immaterial whether or not the plaintiff retains its rights in the asset, while also arguing (77–76) that in some cases, it is essential that the plaintiff does retain those rights.

Restitution: A New Start?  95 (vi) in the list in the preceding section is not part of the law of unjust enrichment. It places at least some such cases into what has been called ‘restitution for wrongs’ or ‘disgorgement for wrongs’, outside of unjust enrichment.10 But it permits the retention of claims (i)–(v). To describe it more positively, this approach posits that every claim in unjust enrichment is founded on a transfer: a transfer which is somehow defective or problematic in the eyes of the law. The enrichment of the defendant is not simply a measure of recovery; it is one side of a transfer, the other side of which is the plaintiff ’s deprivation. Canadian common law seems to have aligned itself with this approach, inasmuch as it holds that the plaintiff must show that the defendant has been enriched and that the plaintiff has suffered a ‘corresponding deprivation’. ‘Corresponding’ means corresponding to the defendant’s enrichment, and this represents a view of unjust enrichment as being concerned with normatively defective transfers.11 This narrower view is also popular among scholars.12 It is not necessary here to say much more about the differences between big and small unjust enrichment, because the problem that is evident within big unjust enrichment is also present within small unjust enrichment. I repeat my description of that problem: some scholars, and some courts, have assumed or taken for granted that all of the law of unjust enrichment falls under a single cause of action, and so must be treated alike in a strong sense: the elements of the claim must be the same, the defences must be the same, the things that are not relevant (such as the defendant’s ignorance of the conferral of a benefit) must be the same. But if there are multiple causes of action, as there are in the law of torts, then all these things can also have a range of answers, just as they do in torts. I used to think that small unjust enrichment contained a single cause of action, the cause of action in unjust enrichment.13 This is a view that has been adopted by the Supreme Court of Canada.14 Since the appearance of Birks’s first book on restitution, some scholars have been sceptical of the utility of a principle of unjust enrichment.15 There have been many others who were comfortable with a p ­ rinciple 10 This was Birks’s position in P Birks, An Introduction to the Law of Restitution, rev edn (Oxford, Clarendon Press, 1989). In Unjust Enrichment (n 7), he still took the view that gain-based recovery for wrongs was a separate possibility, but that most cases could also give rise to liability in unjust enrichment. The earlier book sometimes used the phrase ‘subtractive unjust enrichment’ in a way that corresponds to what I am calling small unjust enrichment. 11 Kingstreet Investments Ltd v New Brunswick (Department of Finance) 2007 SCC 1, [2007] 1 SCR 3 [32]. 12 See, eg the Review Article that followed the publication of Unjust Enrichment (n 7): A Burrows et al, ‘The New Birksian Approach to Unjust Enrichment’ (2004) 12 Restitution Law Review 260, 265–67. 13 L Smith, ‘The Province of the Law of Restitution’ (1992) 71 Canadian Bar Review 672. 14 Peel (Regional Municipality) v Canada [1992] 3 SCR 762, 784, 788; Garland v Consumers’ Gas Co 2004 SCC 25, [2004] 1 SCR 629 [30]. 15 An early and consistent sceptic was Steve Hedley: see S Hedley, ‘Unjust Enrichment as the Basis of Restitution – An Overworked Concept’ (1985) 5 Legal Studies 56; S Hedley, Restitution: Its Division and Ordering (London, Sweet & Maxwell, 2001). See also P Watts, ‘Restitution – A Property Principle and a Services Principle’ (1995) 3 Restitution Law Review 49 and now P Watts,

96  Lionel Smith of unjust enrichment, but refused to treat unjust enrichment as a cause of action that could be applied directly to the facts to determine liability.16 I am now of the view that it is incorrect to think that there is a single cause of action even for small unjust enrichment. I have both positive and negative reasons for changing my mind. The positive reason has arisen from a reflection on the nature of a cause of action as a set of elements that are individually necessary and collectively sufficient to make a defendant liable. As noted above, a cause of action is a kind of normative package that justifies liability. As I will argue below, the reasons for liability in a case of a mistaken payment are quite different from the reasons for liability in a case in which a guarantor, having paid the debt, sues the person who was primarily liable. The negative reason is that the assumption – stated or, more often, unstated – that there is a single cause of action for all of the law of unjust enrichment has led to some indefensible outcomes. This is what I call the problem of overgeneralisation.

C.  The Problem of Overgeneralisation I have distinguished ‘big’ unjust enrichment from ‘small’ unjust enrichment mainly to make it clear that while there are important differences between them, the problem of overgeneralisation arises in both. The problem arises when one, consciously or not, treats the whole field (whether big or small) as governed by a single cause of action. This has happened through the adoption of a single test for liability that is supposed to govern all cases within the field, however the field is defined. Robert Goff and Gareth Jones published the first edition of The Law of Restitution in 1966.17 In 1985, Peter Birks published the first edition of his Introduction to the Law of Restitution.18 Birks said that his book was ‘pre-occupied with the task of finding the simplest structure on which the material in Goff and Jones can hang’.19 To achieve this goal, he set out an agenda of five points, one of which was the acquisition of ‘a stable set of large questions capable of breaking all problems down into instantly recognisable phases’.20 Many people, myself included, joined in this ‘‘Unjust Enrichment’ – the Potion that Induces Well-meaning Sloppiness of Thought’ (2016) 69 Current Legal Problems 289; J Dietrich, Restitution: A New Perspective (Leichhardt (NSW), Federation Press, 1998); I Jackman, The Varieties of Restitution, 2nd edn (Sydney, Federation Press, 2017); P Jaffey, The Nature and Scope of Restitution: Vitiated Transfers, Imputed Contracts and Disgorgement (Oxford, Hart Publishing, 2000). 16 PD Maddaugh and JD McCamus, The Law of Restitution, looseleaf edn (Toronto, Canada Law Book, 2004); American Law Institute, Restatement of the Law Third: Restitution and Unjust Enrichment, 2 vols (Philadephia, American Law Institute, 2011). 17 R Goff and GH Jones, The Law of Restitution (London, Sweet & Maxwell, 1966). 18 Birks, Law of Restitution (n 10). 19 ibid 3. 20 The five points are at Birks (ibid) 6–7, and the quotation is from point 4 at p 7.

Restitution: A New Start?  97 exciting project. Birks achieved great success with the goal of creating a stable set of large questions. Among a wide range of commentators, and also a wide range of courts, there has been acceptance that one can decide whether or not a defendant is liable in unjust enrichment by asking a series of questions, usually three questions on liability and one about defences. The three liability questions are whether the defendant was enriched; whether that enrichment was at the expense of the plaintiff; and whether the enrichment was unjust, or unjustified.21 But the three-part test has created the problem of overgeneralisation. If it was never intended to be a cause of action, then no one should ever have tried to apply it directly to the facts of cases. If it was only a principle that unified a diverse group of causes of action, then it was like the principle that says ‘you should not violate other people’s (extracontractual) rights’ that unifies the law of torts. We do not apply that principle directly to the facts of cases. Instead, the three-part test was treated as applicable to the facts. It was treated as a cause of action. This has led to some puzzles and difficulties.

i.  Three Non-Liability Cases In this section I will discuss three cases which must be cases in which the defendant is not liable. And yet, they seem to satisfy the three-part test. Thus they are examples of the problem of overgeneralisation. a.  Rising Heat Peter Birks himself was conscious of the problem of overgeneralisation when he discussed the case of Rising Heat, which is traceable to a dictum of Lord President Dunedin.22 The ground-floor tenant moves in and starts heating his flat; heat rises; the tenant above is enriched because his heating bills go down. No one thinks this is a case for liability. But there is an enrichment, at the plaintiff ’s expense, and it is not obvious that there is a legal basis for it. Birks said it was a grudging gift, but this is not satisfactory. We can change the case so that the ground-floor tenant was acting under a causative mistake; perhaps he genuinely believed that the ceiling was so well-insulated that no heat could get through it. That mistaken plaintiff might be able to prove that had he known how much heat was rising, he would have lowered the thermostat or moved. Now we have a causative mistake on the plaintiff ’s part, and we have excluded any kind of gift. It doesn’t matter; it is still a no-liability case.

21 Sometimes a separate question is added to the list, about whether restitution should be personal or proprietary. 22 Edinburgh and District Tramways Co Ltd v Courtenay 1909 SC 99 (IH) 105–06, extracted in J Beatson and EJH Schrage (eds), Cases, Materials and Texts on Unjustified Enrichment (Oxford, Hart Publishing, 2003) 87–88, discussed in Birks (n 7) 158.

98  Lionel Smith An advocate of small unjust enrichment might say that this case reveals no loss of the plaintiff.23 But this is not clear. The plaintiff had to pay for the heating, including the benefit to the defendant. If the plaintiff had, by mistake, paid the defendant’s heating bill, that would be a loss. So the idea that the plaintiff did not suffer a loss in Rising Heat must be put differently. It might be said that the plaintiff ’s loss was one that he would in any event have incurred. But this is not true in the variation that includes a mistake about the insulation. It might be said that the plaintiff had to heat his own flat anyway. But there is nothing in the three questions that disqualifies a plaintiff who, while enriching the defendant, did something that he had to do anyway. Indeed, if the compulsory discharge of another person’s obligation can give rise to a claim in unjust enrichment, the contrary must be true. When a guarantor pays the guaranteed debt, he generally has to do so, but he still has a claim against the primary debtor. Another approach would be to accept that the plaintiff suffered a loss, but to argue that the resulting benefit to the defendant was only incidental. This approach was recently invoked by the Supreme Court of the United Kingdom in Investment Trust Companies v Revenue and Customs Commissioners.24 This case raised a question about who could recover from a taxing authority: was it only the taxpayer (TP) who had paid the tax, or could there be direct recovery by a plaintiff who had paid TP’s bill to the plaintiff, that included the tax? The court held that only TP could recover from the taxing authority, and the plaintiff had to recover from TP. In so doing, the Court held that a benefit was not ‘at the expense of ’ the plaintiff if it was an ‘incidental benefit’, and a benefit is incidental if the plaintiff conferred it while acting in its own self-interest.25 Such an approach is also found in Edinburgh and District Tramways Co Ltd, where Lord President Dunedin said there could be no recovery where ‘the thing done was as much for the benefit of the man who did it as for that of the other person’.26 Just like the attempt to solve the problem of Rising Heat by saying that the plaintiff had to heat his own flat anyway, this argument does not work as a general limiting factor. The reason is that there are many, many cases in which plaintiffs can recover even though they are acting in their own self-interest. Think of all the cases of restitution that arise in the context of work done or money paid under a contract which is discharged by breach or frustration. Typically, the plaintiff is trying to obtain some benefit by performing her side of the contract. To paraphrase the Lord President, she acts as much for her own benefit as for that of the defendant. And yet she can recover. Paying a debt for which you stand surety is 23 This was one part of the analysis of Lord President Dunedin. 24 The Commissioners for Her Majesty’s Revenue and Customs v Investment Trust Companies (in liquidation) [2017] UKSC 29, [2018] AC 275. 25 ibid [52]–[58], discussing Edinburgh and District Tramways Co Ltd and indeed Rising Heat. 26 Edinburgh and District Tramways Co Ltd (n 22) 106. For another example of the invocation of self-interest as barring recovery, see the analysis of a former judge of the Supreme Court of Canada, regarding the law of Quebec: P-B Mignault, ‘L’enrichissement sans cause’ (1934) 13 Revue de Droit 157, 168.

Restitution: A New Start?  99 also a case in which you act for your own benefit as much as for that of the primary debtor, and yet you have a claim against him. In other words, a great many cases studied in the law of restitution are inconsistent with any disqualifying factor of acting in your own interest. Andrew Tettenborn saw years ago that the test of self-interest does not work, at least if there is to be a general principle of unjust enrichment.27 He advocated an ‘admittedly imprecise’ test of directness, as had John Dawson from a comparative perspective many years earlier.28 A guarantor pays the creditor; surely the benefit to the creditor is direct, while the benefit to the primary debtor is indirect or even incidental. And yet a claim lies by the guarantor against the primary debtor, a claim that is understood to be explained by the three-part test. The reason a rule of directness is always going to be imprecise is the same reason that one cannot solve these problems by saying that the plaintiff cannot succeed when he acts in his own self-interest, which is the same reason that one cannot solve these problems by saying that the plaintiff did not suffer a loss if he needed in any event to do whatever he did. That reason is this: overgeneralised limiting factors cannot solve the problem of overgeneralised liability conditions. In other words, you do not need a general requirement of directness, or a disqualifying rule about acting in your own self-interest, if you do not have a very wide general formula for liability that on its face points to liability in far too many cases. b.  Destroyed Stamp Another hypothetical has been generated recently in which the plaintiff and the defendant each own the only two examples of a rare and valuable stamp.29 The plaintiff gets mixed up during a purge of his stamp collection and mistakenly destroys his example. The defendant’s example rises astronomically in value. This reveals an enrichment, at the plaintiff ’s expense, caused by a mistake, and for which there is no legal basis; and there is a clear loss to the plaintiff here. It seems to satisfy the three-part test, but like Rising Heat, Destroyed Stamp must

27 AM Tettenborn, The Law of Restitution in England and Ireland, 3rd edn (London, Cavendish, 2002) 30–31. 28 JP Dawson, Unjust Enrichment: A Comparative Analysis (Boston, Little, Brown and Company, 1951) 120–27. My reading of the development of German law is that Dawson was just going out of date in saying (119–23) that it uses a requirement of directness. German law tried that system, when §812 BGB (which came into force in 1900) was read as creating a single, very general claim. The famous ‘Wilburg/von Caemmerer taxonomy’ was completed in the 1950s; by treating §812 as containing four distinct causes of action (Ansprüche), it did away with any need for a general requirement of directness. See R Zimmermann and J du Plessis, ‘Basic Features of the German Law of Unjustified Enrichment’ (1994) 2 Restitution Law Review 14, 24–27; G Dannemann, The German Law of Unjustified Enrichment and Restitution: A Comparative Introduction (Oxford, Oxford Unversity Press, 2009) 21–25. 29 I first heard of it from Robert Stevens, but he notes that a version of it was formulated by Daniel Friedmann: D Friedmann, ‘Restitution of Benefits Obtained through the Appropriation of Property or the Commission of a Wrong’ (1980) 80 Columbia Law Review 504, 532 fn 144.

100  Lionel Smith be a no-liability case. One might try to square this case with the three-part test by saying (again) that the enrichment is not at the plaintiff ’s expense in the relevant sense, or that the plaintiff ’s deprivation does not ‘correspond’ to the defendant’s enrichment in the relevant sense. And yet the causal connection between the two could not be clearer, and that is usually what we look for. There is nothing in the three questions that explains why there is no liability. c.  Stolen Spectacle In my third no-liability case, the plaintiff runs a horse-racing track and the defendant builds a platform, on his own land, from which the races can be seen. This allows the defendant to make a profit by broadcasting the proceedings in real time. The plaintiff suffers a loss as a result, because it is no longer necessary for interested customers to pay for admission to the plaintiff ’s grounds.30 Again, this seems to satisfy at least one version of the three-part test: there is an enrichment of the defendant, at the plaintiff ’s expense, and no obvious legal basis. The plaintiff ’s loss is clear and directly causally related to the defendant’s gain. And yet there is no liability in this case, and the only obvious way to find it would be through some kind of intellectual property analysis, not as a claim in restitution. Some analysts might say that there is no positive reason for restitution here, but it has been argued by Birks and Burrows that since mistake on the part of the plaintiff is a reason for restitution, total helplessness and ignorance on the part of the plaintiff should be seen as a fortiori cases.31 At least one of those seems to be present in Stolen Spectacle. d. Implication In all of these cases, something is missing from the plaintiff ’s case. In all of them, one could appeal to an absence of ‘directness’ or say that the benefit is only ‘incidental’. We have seen the difficulties with those approaches: they are ad hoc. They posit a general limiting factor, but the general limiting factor does not apply generally, or to say the same thing another way, it applies differently in different kinds of case. The alternative is to accept that the three-part test is too general. If instead of trying to cover the field with a single formula, we realised that there are multiple causes of action, we might well find that in each of these three cases, none of the causes of action could be established. 30 This is of course based on the famous case of Victoria Park Racing & Recreation Grounds Co Ltd v Taylor (1937) 58 CLR 479. The original idea for this example, however, came from a different hypothetical for which I thank Lusina Ho. 31 Burrows, The Law of Restitution (n 8) 403–08, citing Birks’s arguments. In my view, this a fortiori argument is simply another example of the problem of overgeneralisation. Once it is seen that the three-part test is too general to be a cause of action, the a fortiori argument largely falls away. See also Swadling, ‘Ignorance and Unjust Enrichment’ (n 9).

Restitution: A New Start?  101

ii.  The Travails of Enrichment One other illustration of the problem of overgeneralisation comes from the difficult field of improvements to the property of another. This is the subject of a recent article by Mitchell McInnes, discussing developments in Canadian law.32 McInnes takes a thoroughly Birksian approach, as he does also in his monumental textbook on Canadian law.33 McInnes’s article makes a great deal of room for balancing the improver’s interest in having restitution for his outlay of work or assets, against the defendant’s interest in having freedom of choice as to how to spend his resources. He deploys Birks’s idea of ‘subjective devaluation’, which tells us that it is not enough that the defendant has been enriched in the sense that the market value of his land has gone up. He might not like the improvement, and he cannot be forced to spend his money on things he never wanted. An enrichment in money is always enriching; it is an ‘incontrovertible benefit’. But improvements to land are not like that. They are liable to subjective devaluation. When it is deployed successfully, this idea leads to the conclusion that the defendant was not enriched, even though the value of his land has gone up. That gives a negative answer to one of the three high-level questions that together establish liability, on the model that I have called an overgeneralisation. In other words, it is a way to explain an absence of liability within the three-part test, even though the defendant has been enriched in one sense and thus the three-part test seems to be established. Why would we let the defendant decide whether an element of the plaintiff ’s claim is made out? It sounds perfectly right to say that the plaintiff cannot make choices for the defendant as to how the defendant shall spend his money. But let us be careful: that is inconsistent with another axiom of the approach through the three questions. In a case involving the payment of money or the discharge of the defendant’s debt, it is said that the defendant’s liability is justified even though the defendant did not do anything wrongful, because the liability makes the defendant no worse off.34 In other words, we can ignore the defendant’s interests and choices, as long as we don’t make him worse off. And yet, if the defendant’s interest in land is now worth more as a result of the improvement, he is objectively enriched, and will not be made financially worse off if he is liable for the increment. McInnes adds a concern that a person should not have to sell, or presumably mortgage, their home to meet a liability for an improvement they did not want.35 But this also seems odd. If a person is rightly liable, do we take away the plaintiff ’s claim because the defendant has trouble paying? And why would we make a general rule denying liability to deal with a problem that only some defendants will have? 32 M McInnes, ‘Improvements to Land, Equity, Proprietary Estoppel, and Unjust Enrichment’ (2016) 2 Canadian Journal of Comparative and Contemporary Law 421. 33 M McInnes, The Canadian Law of Unjust Enrichment and Restitution (Markham (Ontario), LexisNexis Canada, 2014) ch 2. 34 eg McInnes, ‘Improvements’ (n 32) 438–40. 35 ibid 434.

102  Lionel Smith I now think that when explaining why the defendant is liable, we must always consider, and can never ignore, the defendant’s role in the events that generate liability.36 Building on this, to say that we worry about the defendant’s choices only makes sense if we accept that there will be at least some cases of non-liability even though there has been an enrichment. The difficulty about unwanted improvements arises because the defendant has indeed been objectively enriched. If he is allowed to subjectively devalue, he is allowed to avoid liability despite being objectively enriched. In other words, he is allowed to avoid liability even though making him liable would not make him financially worse off. It is a mistake to ignore this and to pretend that a defendant is never allowed to retain an enrichment. He is.37 That mistake arises from overgeneralisation, from a conviction that the same framework of analysis that governs a mistaken payment of money must govern an unrequested improvement to land. Within the three-part framework, if a defendant is not to be liable for a mistaken improvement, we have to say that the defendant was not enriched, even though he is enriched on any normal use of the word. This point is amply supported by looking at the academic debate within the Birksian school that has arisen as to the frontiers of subjective devaluation. Imagine the case of a defendant who did not want the improvement – who could have subjectively devalued it – but who has sold the improved property and realised the improvement into money. This, on the Birksian account, is no different from a case in which the defendant had been paid money, and so he is liable.38 The debate was, and is, around the intermediate case: the defendant has not sold the property and turned the improvement into cash, but he could. Even though the gain has not been ‘realised’, some still say that the defendant can be liable if it is ‘realisable’ or perhaps ‘readily realisable’.39 In my view, this debate shows that a wrong turn was taken long ago. How can it be right to say that an owner of improved property is not liable to pay for improvements because we do not want to force him to sell (or mortgage) his property to pay for the improvements, but at the same time to say that if by chance he does sell, or maybe could sell, he is after all liable? Surely the logically prior question is whether he has to pay for the improvements or not. If he has to pay for them, he has to pay for them whether he sells the property or not. If he does not, he does not, and can do whatever he wants with his property without changing that. In his article, McInnes aims to address some of these perplexities by suggesting that the potentially liable defendant can avoid these difficulties by waiting until 36 EJ Weinrib, ‘Correctively Unjust Enrichment’ in R Chambers, C Mitchell, and J Penner (eds), Philosophical Foundations of the Law of Unjust Enrichment (Oxford, Oxford University Press, 2009) 31; EJ Weinrib, Corrective Justice (Oxford, Oxford University Press, 2012) ch 6. In this I retract part of my argument in L Smith, ‘Restitution: The Heart of Corrective Justice’ (2001) 79 Texas Law Review 2115. I return to this below. 37 Compare Benedetti v Sawiris [2013] UKSC 50, [2014] 1 AC 938 [117]–[118]. 38 Discussed by McInnes, ‘Improvements’ (n 32) 440–41. 39 eg McInnes (ibid); Burrows, The Law of Restitution (n 8) 48–49; both citing different editions of Goff and Jones.

Restitution: A New Start?  103 the limitation period expires before selling the property.40 But how can this be consistent with supposedly respecting the defendant’s freedom of choice? And anyway, this does not make sense because on the subjective devaluation approach, there is no enrichment until the sale takes place, and on the three-part test, there is no cause of action until there is an enrichment. Limitation periods only start running when the cause of action is complete.

D. Conclusion This section has aimed to show what has gone wrong through the assumption that the three-part test can function like a cause of action across all of even small unjust enrichment (let alone big unjust enrichment). It is only by thinking that there is a single cause of action that we have ended up with ad hoc reasoning about incidental benefits and acting in one’s own self-interest, and with the muddle of subjective devaluation, its exceptions, and the arguments about realised and realisable enrichments. The recognition of a plurality of causes of action within even small unjust enrichment can solve the problem of overgeneralisation. It abandons the idea that there is one giant claim that must be applied consistently across diverse situations. On the contrary, it posits that there are diverse claims that rightly have different contours. Some, but not all of them, may be inapplicable if a plaintiff was acting in its own self-interest. Some of them will address the defendant’s freedom of choice in different ways from others, with the result that it is revealed to be a mistake to try to have a grand unified theory of how we address the defendant’s freedom of choice. If two cases are governed by different causes of action, then it is simply fallacious to reason that since one of them has some feature or characteristic, then the other must also have it. That is the problem of overgeneralisation in a nutshell. It may have it, but this requires an argument that takes account of the structure and justification of the two causes of action. What will become of the three-part test for unjust enrichment if we stop treating it as a cause of action? Some common lawyers call that test, or one version of it, a ‘civilian’ approach.41 If this is meant to suggest that the civil law treats the field of even small unjust enrichment as governed by a single claim, it is based on a profound misunderstanding. In German and French law, a claim for improvements to another’s property is not treated as part of the law of unjust enrichment if the improver believes the property to be his, or wishes it to be, as in the case of a squatter.42 Nor are claims arising through subrogation when one person pays 40 ibid. 41 Birks, Unjust Enrichment (n 7) 102ff; McInnes, ‘Improvements’ (n 32) 459. 42 For the propositions in this paragraph, see for German law G Dannemann, The German Law of Unjustified Enrichment and Restitution (n 28) 13–18. For French law, improvements are

104  Lionel Smith a debt for which another is primarily liable. In French law and related systems, a claim to recover a mistaken payment, a claim to recover performance made under a contract that is set aside, and a claim to recover a non-money benefit conferred outside of any contractual framework are likely to be governed by three different sets of principles. German law may seem to be a little more unified, since there is a ‘general’ action in unjustified enrichment in paragraph §812 of the BGB, the German Civil Code. But this is misleading. Claims to restitution arising in the context of contracts discharged for breach are not considered part of the law of unjust enrichment. And even §812 itself is understood to contain four different claims, each governed by different principles.43 Indeed, the German history can teach us something. For some years after the BGB came into force in 1900, §812 was viewed as containing a single, general claim, at least for some part of small unjust enrichment.44 Only decades later did the modern position evolve, in which it is understood to contain four distinct claims. Speaking of the early interpretation, Gerhard Dannemann has described it in words which could be applied to the common law’s three-part test: [I]n this generality, the clause took German law back to the times of von Savigny, by describing what unjustified enrichment is about rather than defining who is entitled to restitution. … In this reading, the general clause serves predominantly as a description of an area of case law rather than as a definition of a claim.45

The three-part test cannot be a cause of action. It is a mistake to think it can be applied directly to the facts to answer questions about liability.46 It is simply a description of an area of the law.

II.  The Way Forward There are multiple causes of action and they must be identified, because it is causes of action that are applied to the facts of a case to decide whether a defendant is liable. Moreover, it is the differences between the different causes of action that help us to understand how we can take account of the defendant’s freedom of choice in different ways as suits the case. considered part of the law of property; subrogation and the restitution of contractual performance are seen as two different parts of the general theory of obligations; and the claim to recover a mistaken payment is separate from the claim in unjust enrichment. For discussion in English of the (similar) law of Quebec as it was under the prior Civil Code of Lower Canada (in force 1866–1993), see JEC Brierley and RA Macdonald (eds), Quebec Civil Law: An Introduction to Quebec Private Law (Toronto, Emond Montgomery, 1993) paras 266, 441–44, 504–13, 544. 43 R Zimmermann and J du Plessis, ‘Basic Features of the German Law of Unjustified Enrichment’ (n 28) 24–27; G Dannemann, ‘The German Law’ (n 28) 21–25. 44 Again, most improvement cases, subrogation, and claims in the context of discharged contracts are not part of the German law of unjust enrichment. 45 Dannemann, ‘The German Law’ (n 28) 22–23. 46 Lord Reed said for the UK Supreme Court in Commissioners for Her Majesty’s Revenue and Customs v Investment Trust Companies (n 24) [41] that the high-level questions ‘are not themselves legal tests’.

Restitution: A New Start?  105 The goal of this part of the chapter is to say something about the causes of action in the common law of restitution. These are packages of normatively significant facts, described generically, that are individually necessary and collectively sufficient to generate a liability.

A.  Lessons from the Past In the days of the forms of action, trespass included assumpsit, the wrong of breaking a promise; assumpsit included indebitatus assumpsit, the wrong of breaching a promise to pay an existing debt; and the promise to pay a debt became a legal fiction after 1602. This was on the basis that every debt imports a promise; in other words, every debt should be actionable just as if the debtor had promised to pay, even if he had not. Thus you could bring indebitatus assumpsit so long as you could show a debt. Debts, meanwhile, included debts arising by consent, or by operation of law. At the time of the abolition of the forms of action in 1853, there were seven principal ‘common counts’, which were ways of establishing a debt that would allow a claim in indebitatus assumpsit.47 Four of those included some of the law of restitution (only some, inasmuch as some of it came from Chancery): they were quantum meruit (for services rendered), quantum valebat (for goods provided), ‘money had and received to the use of the plaintiff ’ (for payments to the defendant), and ‘money paid to the use of the defendant’ (for payments to another that benefited the defendant). Those common counts should by now have passed into legal history, with the death of the forms of action that they unlocked. At least, they should have been changed, like the torts of conversion or trespass to chattels, into causes of action: general rules that can justifiably, in combination with certain sets of facts, generate claims and liabilities. That did not happen. Quantum meruit, a label still used by some, has contractual and non-contractual aspects so it is not a single cause of action. Money had and received could be deployed for mistaken payments, but also for some three-party cases involving the enforcement of promises regarding money,48 and even for the unlawful taking of a bank note.49 That one alone, in other words, contained elements of what we would now classify as tort, contract, and others. It is not a cause of action in the modern sense. In articulating causes of action, we should bear in mind the advice of the Supreme Court of Canada in Peel (Regional Municipality) v Canada,50 that the 47 JH Baker, An Introduction to English Legal History, 4th edn (London, Butterworths, 2002) 348. As Baker explains in fn 7 on p 348, there could be eight or even nine, depending upon how one enumerates them. 48 JH Baker, ‘The History of Quasi-Contract in English Law’ 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) 37. 49 Holiday v Sigil (1826) 2 Car & P 176, 172 ER 81. 50 Peel (Regional Municipality) (n 14) 786.

106  Lionel Smith traditional categories of recovery are not determinative but can be instructive. We cannot use the common counts but we should mine them for wisdom.

B.  Big and Small Unjust Enrichment, Again In my view, the following proposition is too clear to need argument: any claim which requires that the plaintiff show an interference with some existing right is founded on a cause of action that is different from any claim that does not require such a showing.51 The core of a cause of action is a reason for a finding of liability; the interference with a pre-existing right is a perfectly intelligible example of such a reason. The difference between big and small unjust enrichment is the exclusion from the latter of such cases. I now leave those cases aside to focus on the remaining causes of action, those in small unjust enrichment, which do not involve interference with a pre-existing right.52

C.  The Plurality of Small Unjust Enrichment i.  The Adjustment of Liabilities Even within small unjust enrichment, there is a range of causes of action. In an earlier section, I noted that the subject so circumscribed includes many claims.53 Let me explain why I believe this reveals many causes of action, using two cases. One is the mistaken payment, which is almost always a case for restitution in the common law and the civil law, and which is considered part of the law of unjust enrichment by almost everyone who uses that category.54 The other is the case in which one person who is only secondarily liable on a debt pays that debt, and then claims against the person who was primarily liable.55 Why does the mistaken payment create an obligation owed by the r­ ecipient? I will argue later – not very originally – that the value being protected by the law 51 Section I A above. 52 Some might note that in German law, enrichments acquired by interference with the plaintiff ’s rights are considered part of the law of unjust enrichment. This actually proves my point, because the principles governing such cases are quite different from those governing, for example, mistaken payments. To say, in German law, that both are part of unjust enrichment is not to say that they are governed by the same principles, but only to say that they both belong to the law of gains that cannot be kept. 53 See the list of claims in ‘big’ unjust enrichment in Section I A. Only item (vi) is excluded for present purposes to make ‘small’ unjust enrichment. 54 In fact, in the French legal tradition, which covers a huge number of countries, a mistaken payment is not considered a case of unjust enrichment in a technical sense, although it might be considered so in a wide or loose sense. That tradition views unjust enrichment, in a technical sense, as a narrow residual category, much smaller than in the common law or in German law. 55 I am here primarily concerned with the direct personal claim that arises at common law, not with subrogation. I will however suggest that my point is even stronger in relation to subrogation.

Restitution: A New Start?  107 is the integrity of the plaintiff ’s decision-making, although I will aim to incorporate respect for the defendant’s decisions as well. Why does the payment of a debt for which one is only secondarily liable create an obligation owed by the person primarily liable? Well, because the second person, the defendant, was primarily liable. It is not because anyone’s consent was impaired. There can be more than one explanation for why the defendant was primarily liable: it may be based on the interpretation of contracts, as in the case of a guarantee, or the interpretation of a statute, as in the famous case of Brook’s Wharf and Bull Wharf Ltd v Goodman Bros.56 But once you have concluded that, before the plaintiff ’s payment to the creditor, the plaintiff was – as between the plaintiff and the defendant – only secondarily liable, you have explained the defendant’s liability. It arises out of a pre-existing relationship, not out of the circumstances of the payment. It protects and enforces that relationship, rather than protecting the integrity of the plaintiff ’s consent in relation to the payment. Therefore, the reasons for restitution are quite different. In my terms, this means the causes of action are different. The values and interests that the law is protecting are different. The defences may be different. The facts that need to be proved to substantiate the claim are not at all the same. It is even possible to argue that in the adjustment of liabilities, we are not concerned with restitution. If a guarantor pays the debt and sues the primary debtor, is he seeking restitution? Restitution would come from the person he paid. We are not putting things back the way they were; we are putting things in order as they should be. This is clearer in the case of contribution among co-guarantors: if one has paid the whole debt, he may recover half from the other co-guarantor. The claim is not designed to reverse a transfer or even an enrichment: the co-guarantor has been relieved of all his liability to the creditor, not half of it. Rather, it is a claim designed to make the right persons pay the right shares in accordance with their pre-existing relationship. This may be even clearer when we consider a recondite rule: if two co-guarantors gave guarantees with different limits, they must share liability in the proportions of the limits.57 Thus if one guarantor paid a guaranteed debt of $1,000, and the limit of his guarantee was $4,000, and there was a co-guarantor whose guarantee was limited to $1,000, the one who paid would have a claim for contribution that would adjust the liabilities into the ratio 1:4; the claim would be for $200. That does not look like restitution. In this context, subrogation to the rights of the creditor also does not look like restitution. The one who paid the debt gets, not a claim to recover something, but an ability to take over rights (personal rights or security rights) formerly held by the creditor.58 In this way, the law again aims to protect a pre-existing

56 Brook’s Wharf and Bull Wharf Ltd v Goodman Bros [1937] 1 KB 534 (CA). 57 Ellesmere Brewery Co v Cooper [1896] 1 QB 75 (Divisional Court). 58 See, in the context of a different kind of subrogation, Lowick Rose LLP v Swynson Ltd [2017] UKSC 32, [2018] AC 313 [30]: ‘Subrogation … does not restore the parties to their pre-transfer position.’

108  Lionel Smith relationship: the creditor cannot harm the guarantor by foregoing the creditor’s own rights against the debtor.59

ii.  Division of Cohabitational Property In Canada, the courts have used unjust enrichment to divide property rights between cohabitants for almost 40 years.60 In 2011, the Supreme Court of Canada restated the foundation of such claims, holding that they arise out of a ‘joint family venture’.61 Where such a venture is established, the parties have operated as a single economic unit. This can justify a division of rights held by the parties at the end of the relationship, either equally or according to some other formula. The Court continues to describe the claim that arises as one in unjust enrichment, but again it seems that all that is happening is the enforcement of a pre-existing relationship. The finding of the joint family venture does all of the normative work needed to establish the plaintiff ’s claim.

iii.  The Recovery of Undue Taxes A person who pays money as a tax can recover it if it was collected without Parliamentary authority.62 It does not matter whether the payer was mistaken. Again, this shows that this is a different cause of action, because the reason for liability is quite different. This cause of action does not make a defendant liable in the pursuit of protecting the plaintiff ’s decision-making, but in the pursuit of upholding the constitution. This is underlined by the consensus that the defendant in such a case – the Crown or State – cannot deploy the defence of change of position.63 When a defence is never available, it seems the claim must be founded on a different cause of action.

iv.  Necessitous Intervention There has been a lot of discussion as to whether the common law allows claims for necessitous intervention, in the absence of any request from the defendant. It certainly does sometimes: in extreme cases, the law may oblige the plaintiff to intervene, granting at the same time a right of indemnity.64 It is arguable whether 59 JA Dieckmann, ‘The Normative Basis of Subrogation and Comparative Law: Select Explanations in the Common Law, Civil Law and in Mixed Legal Systems of the Guarantor’s Right to Derivative Recourse’ (2012) 27 Tulane European and Civil Law Forum 49, 76–83. The doctrine of marshalling (which no one, to my knowledge, has suggested is an example of restitution or unjust enrichment) rests on the same basis. 60 The starting point was Pettkus v Becker [1980] 2 SCR 834, 117 DLR (3d) 257. 61 Kerr v Baranow 2011 SCC 10, [2011] 1 SCR 269. 62 Woolwich Equitable Building Society v IRC [1993] AC 70 (HL); Kingstreet Investments Ltd (n 11). 63 E Bant, The Change of Position Defence (Oxford, Hart Publishing, 2009) 203–04. 64 Great Northern Railway Co v Swaffield (1874) LR 9 Exch 132; Matheson v Smiley [1932] 2 DLR 787 (Man CA).

Restitution: A New Start?  109 this kind of claim depends at all on enrichment.65 Another kind of case is one in which the defendant had an obligation, but the plaintiff did not; for example, the plaintiff buried a body that the defendant was obliged to bury.66 Liability in such a case must be based on something like necessitous intervention. This, like a claim to recover undue taxes, is a claim that does not rest on any misunderstanding on the plaintiff ’s part. It must rest on a decision that certain kinds of valued interventions, even if not legally obligatory, should be indemnified. In the case of an unburied body, for example, this has much more to do with public health and the dignity of the deceased than on whether the plaintiff was somehow compelled by circumstances. If a doctrine of necessity were to reach, perhaps sometimes, to actions that are only factually necessary (that is, neither the defendant nor the plaintiff was under a duty to act), it would be approaching the civilian doctrine of negotiorum gestio. Under the three-part test, such cases may be discussed in relation to enrichment, because if the defendant did not request the intervention, the concern about ‘subjective devaluation’ arises. This may lead some scholars to say that even a ‘factually necessary expense’ amounts to an ‘incontrovertible benefit’.67 But while the defendant’s freedom of choice is important, it is not always addressed in the same way. The very concept of allowing recovery for necessitous intervention must contend with the potential for overriding the defendant’s freedom of choice, and must resolve it in relation to the decisions about which interventions shall be actionable. It is not necessary to address it separately through an enrichment enquiry.

v. Implication That makes four causes of action within small unjust enrichment, and more could be identified, such as illegality in its role as the basis of a plaintiff ’s claim, or claims between co-owners for expenses incurred. And we still have not got to the main attraction: all of the law of mistaken or compelled transfers or enrichments, and all of the law on failure of consideration or basis. This suggests that unjust enrichment – even small unjust enrichment – has no normative unity in relation to the reason for liability. There is no unifying explanation for why the defendant is liable; on the contrary, there is a range of reasons. Steve Hedley has been saying something like this for decades.68 I think it is fair to put his point in this way: if you take all of the cases in which the common law allows claims for restitution, even confining oneself to reversing transfers (thus to small unjust enrichment), they

65 In Matheson (n 64), for example, the plaintiff doctor was entitled to payment from the estate of the deceased, even though the doctor’s intervention had failed and was almost certainly undesired (since the defendant committed suicide). 66 Rogers v Price (1829) 3 Y & J 28, 148 ER 1080. 67 See, eg McInnes, ‘Improvements’ (n 32) 439. 68 As have others: see n 15.

110  Lionel Smith are a conceptual miscellany in relation to the reason that restitution is required. Sometimes Hedley puts this point rather strongly, once calling restitution ‘the miscellaneous rubbish of the law’.69 But rhetoric apart, the point is sound.

D.  The Normative Unity of a Portion of Small Unjust Enrichment The large number of liability situations that I have not yet addressed do, it seems to me, have some normative unity as to the reasons for liability. They are cases in which the plaintiff ’s claim is founded on protecting the integrity of the plaintiff ’s choices, while also paying due attention to the choices and expectations of the defendant. This area includes mistaken and compelled enrichments, and failures of consideration or basis. Even within this more modest field, there is diversity. My objection to overgeneralisation is that it is a mistake to assign a single normative foundation to a set of claims that have different normative foundations. Within this more modest field, I will aim to make a provisional claim that even though there is probably more than one cause of action, the basic reasons for liability in each of them are similar. Unlike in the law of torts, these reasons cannot be formulated in terms of the infringement of a pre-existing right. A great deal has been written aimed at providing philosophical justifications for liabilities in unjust enrichment. I do not directly engage with that literature for two reasons. One is that the subject matter which I am aiming to address here is different: it is a subset of the set of liabilities that many theorists have addressed, and even within that subset I will identify more than one basis for the defendant’s liability. The other reason is that this is only a provisional account.

i.  The Plaintiff ’s Complaint In his Introduction, Birks divided the reasons for restitution into three families. When he presented them with Robert Chambers, each family was given a name in what they called ‘nursery terms’. The first was ‘I didn’t mean it’; the second, ‘it was bad of you to receive it’; the third, ‘Mother says give it back anyway’.70 In this story, Mother stands for the policy of the law, standing apart from the choices of the parties. Those ‘policy-based’ cases involve their own causes of action, some of which have already been discussed. For the first two families, my suggestion is that they are one. Birks’s understanding of ‘free acceptance’ evolved. In the Introduction, he argued that it played two roles.71 In the enrichment inquiry, it could disqualify a defendant from

69 Hedley,

Restitution (n 15) 228. Research Resource’ (1997) Restitution Law Review (2nd supp). 71 Birks, An Introduction (n 10) ch 8. 70 ‘Restitution

Restitution: A New Start?  111 pleading subjective devaluation. But it could also serve as a reason for restitution, the sole member of the family ‘it was bad of you to receive it’. Andrew Burrows argued that in this setting, in the framework that Birks had created, it was ­superfluous.72 Birks agreed, reluctantly I think, although he later went one better than Burrows by abandoning reasons for restitution altogether, a step in which Burrows has not followed him to date. I have come to agree with Weinrib:73 where the plaintiff ’s claim is founded on the protection of the integrity of his own choices, those of the defendant must also be considered. ‘I didn’t mean it’ leads to recovery only if, at the same time, ‘it was bad of you to take it’, or at least, ‘and you chose to take it anyway’. Outside of what Birks called policy-based restitution, there is only one family of reasons for restitution. This leaves a question on which Birks changed his mind. Does the plaintiff need to show a reason for restitution, or does liability follow where there is no legal justification or basis for an enrichment that has been conferred? In my view, once the defendant’s choices are properly considered, this question becomes much less important. On the plaintiff ’s side, the claim rests on the conferral of a benefit which in one way or another the plaintiff did not intend to confer. The plaintiff ’s intention was undermined by mistake or compulsion or undue influence, or it was conditioned on an agreement which may or may not have been contractual. If the plaintiff ’s volition was not affected in any way, the plaintiff generally cannot recover.74 Such a plaintiff has accomplished what he intended. So one way to exclude that possibility is for the plaintiff herself to show mistake, compulsion, undue influence, or failure of an agreed basis. Another way is to say that, subject to the protection of the defendant, an enrichment needs to be restored if it did not have any juridical justification. As one part of German law shows us, this does not make a huge difference in practice: the plaintiff needs to provide some plausible explanation as to why she conferred an enrichment when she had no reason to. Examples of plausible explanations would be, using common law terms: mistake, compulsion, undue influence or failure of basis. And in German law it is open to the defendant to show, by way of defence, that the plaintiff knew very well that the enrichment was not due and conferred it anyway.75

ii.  The Defendant’s Involvement To repeat, liability cannot arise unless the defendant’s autonomy is also considered. We should always be worried about the defendant’s involvement in the story. 72 AS Burrows, ‘Free Acceptance and the Law of Restitution’ (1988) 104 LQR 576. 73 Weinrib, ‘Correctively Unjust Enrichment’ and Corrective Justice (n 36). 74 Note that this is quite irrelevant, and does not bar recovery, in the four causes of action described in the previous section. 75 In the civil law, a valid gift is considered to have a contractual framework, and so the transfer of the gift is considered to be the performance of an obligation. A claim to recover a mistaken gift starts by annulling the contract of gift on the ground of mistake, which makes the gift not due and so recoverable. Conversely in the common law, a mistaken gift can be recovered even though it was never due.

112  Lionel Smith People are generally responsible for things that they have done, not for things that have just happened to them. If the defendant has requested the action that was taken by the plaintiff, even advocates of ‘subjective devaluation’ agree that concerns about the defendant’s choices rightly fall away. This goes further than they realise, because it means that the defendant can be made liable whether or not the defendant was objectively enriched; as a result, it is not obvious that such cases depend upon the defendant’s enrichment at all. The defendant, for example, may have requested a service that diminished the value of his property, or may have requested that the plaintiff perform some action that enriched some party other than the defendant. But this is not the only way to address the defendant’s participation. In many cases, the defendant will not have requested a benefit, but will have accepted it. Acceptance in this sense occurs only after the benefit was conferred, but still with a genuine opportunity to reject it. This may not be evident in cases like mistaken payments, where a funds transfer might be made without the defendant’s awareness. But in all such cases, the defendant has necessarily made a choice to accept the transfer before the question is litigated. The law of gifts tells us that a defendant can always refuse to accept a gift. The same must be true of any transfer of rights.76 If you owe me $100 and you try to pay me $100, I must be able to refuse. That is why we have the defence called ‘tender’: you cannot make me take the money against my will. You can only offer it to me. A fortiori, it is the same if you pay me $150 because you think you owe me $150 when you only owe me $50. Cases of mistaken payments can reveal both request and acceptance. In the famous case of Kelly v Solari,77 the defendant both requested the payment, and accepted it. Some mistaken payment cases will not involve a request: we can think of the famous case of Chase Manhattan Bank v Israel-British Bank,78 which involved a good payment and then a second, mistaken payment of the same amount. But even in a case like Chase Manhattan, where there was no request, there comes a time (between payment and litigation) when the defendant becomes aware that the payment has been made and received. Just as in the law of gifts, the defendant has a choice to accept or reject the payment. Rejecting it means giving it back. Accepting it means that the defendant has made a decision to acquire the rights in question. If, before the defendant ever becomes aware of the payment, it has already been somehow lost or stolen, he never had a chance to accept it, and so cannot be liable on that basis. This is a kind of change of position, one that owes nothing to detrimental reliance. 76 In the context of unjust enrichment, this may have first been pointed out by Edelman and Bant in the first edition (2006) of their text: see now J Edelman and E Bant, Unjust Enrichment, 2nd edn (Oxford, Hart Publishing, 2016) 62–64. 77 Kelly v Solari (1841) 9 M & W 54, 152 ER 24. 78 Chase Manhattan Bank NA v Israel-British Bank (London) Ltd [1981] Ch 105.

Restitution: A New Start?  113 In improvements to property, there is a range of possibilities. The defendant might have requested the improvement, as in the case of an anticipated, discharged or void contract. There may be cases of acquiescence, which might constitute estoppels. Unlike in the case of a rights transfer, however, in the case of improvements of which the defendant is unaware, there is never an acceptance with an opportunity to reject. It is not obvious that one can apply the logic of rights transfers to cases of unrequested and unknown improvements. Lining them up is an example of the problem of overgeneralisation, represented by the approach to all cases through the three big questions. The differences – normative differences, not structural ones – point the other way. A defendant who has requested a service can rightly be made liable to pay for it, without having done anything wrong, if the plaintiff did not intend to confer it in the relevant sense. Request is important, because it covers failure of consideration, as well as undue influence and compulsion. The difference between request and duress is largely one of manners. Neither defendant can rationally say that he did not want the benefit, or deny responsibility for its conferral. The alternative, as we have seen, is acceptance by the defendant. Acceptance, to be meaningful as an alternative way of ensuring that the defendant’s choices are consulted equally with the plaintiff ’s, must mean acceptance with an opportunity to refuse.79 And this reveals a critical difference between enrichments that are in the form of transfers of rights and enrichments that are not.80 A transfer of rights can always be rejected. Services and improvements cannot. To my mind, this implies that the common law has been right to take a restrictive approach to unrequested improvements. The defendant may be enriched in an important sense, but even if the plaintiff was (for example) mistaken, the defendant has never had a chance to reject this unrequested benefit. As I argued earlier, to explain this by saying that the defendant was not enriched is to miss the point. Note what happens if we insist that the defendant either requested the benefit of the plaintiff, or accepted a transfer of rights with the opportunity to reject it. The cases of Rising Heat, Destroyed Stamp and Stolen Spectacle become what they should be: they are not difficult puzzles, but instead they are total non-starters. There is no basis on which the defendant can be made liable, even though he has been enriched.

iii.  The Link between Plaintiff and Defendant Some years ago, I argued that the nexus of transfer from the plaintiff to the defendant was an essential ingredient to finding liability without wrongdoing in 79 Acceptance as a basis for making a defendant responsible is doubted by F Wilmot-Smith, ‘Should the Payee Pay?’ (2017) 37 OJLS 1, 14–17. Although I cannot develop the argument here, my view is that with some elaboration, acceptance can justify the defendant’s liability. 80 See R Chambers, ‘Two Kinds of Enrichment’ in R Chambers, C Mitchell and J Penner (eds), Philosophical Foundations of the Law of Unjust Enrichment (Oxford, Oxford University Press, 2009) 242.

114  Lionel Smith such cases.81 As explained above, this made a smaller law of unjust enrichment than Birks’s view, because it limits us to cases in which the plaintiff suffers a deprivation that corresponds to the defendant’s enrichment.82 In general, when enrichment passes down a chain, this smaller view implies that personal unjust enrichment claims lie only between adjacent links (while other claims, such as proprietary ones, may be different). But I now think that my idea of a transfer of wealth was probably too wide. I did not mean transfer literally, but rather in a more economic sense. For example, it includes an electronic funds transfer, in which there is no assignment or other literal transfer. I meant it also to include the provision of valuable services, which some people would say cannot be fairly described as a transfer. Being myself caught up in the problem of overgeneralisation, I was also willing to see transfers where there was only a causal link between the defendant’s enrichment and the plaintiff ’s deprivation. This leads to the problems of Rising Heat, Destroyed Stamp, and Stolen Spectacle. I am now minded to think that the link between the plaintiff and the defendant is different in different kinds of case. Where the defendant made a request of one kind or another, the plaintiff has rendered some performance of one kind or another in response. What the plaintiff claims is the value of what was done at the defendant’s request (even if it benefited someone other than the defendant, or even if it did not make anyone materially better off). Even if there has been no request, the alternative is that the defendant can be liable for having accepted a transfer of rights when he had the option to refuse. What the plaintiff claims here is either the transferred rights or their value. Applying this to the case of the Stolen Spectacle helps us to see how the different elements of the claim are not independent but interdependent, and also warns of some of the dangers of reasoning a fortiori when that interdependency is not borne in mind. A defendant can be liable if she requested a benefit; a fortiori, someone might say, a defendant who simply took a benefit must be liable. This works in the case where a defendant, by threats, extorts a rights transfer from the plaintiff.83 But in the case of the Stolen Spectacle, the defendant simply took what he wanted. That might seem a fortiori; and yet, there is no liability. There is no liability because the plaintiff did nothing in response to the defendant’s actions, nor was there any accepted rights transfer. A claim might exist based on an interference with a pre-existing property right (as in the case of the spectacle stealer who was a trespasser, or copyright infringer) but not by analogy to what would have happened in a case of a benefit conferred by the plaintiff in response to a threat or a request.



81 Smith,

‘Restitution’ (n 36). I B. 83 Stoltze v Fuller [1939] SCR 235, 1 DLR 1. 82 Section

Restitution: A New Start?  115

iv.  Implication: Causes of Action How is all of this to be formulated in causes of action? There are many possible approaches. One would be to preserve at least some of the language of the old common counts.84 I have already said that in my view, this is not a good solution, although we may find wisdom in the old pleadings. I note that in q­ uantum meruit, quantum valebat, and ‘money paid to the use of the defendant’, the plaintiff would allege that he acted ‘at the special instance and request’ of the defendant.85 This was not necessary in ‘money had and received by the defendant to the use of the plaintiff ’, which in my terms always revealed a transfer of rights that could be rejected. The old claims thus reveal the two ways I have mentioned in which a defendant can be properly liable where the plaintiff ’s intention was somehow imperfect.86 One common approach is to treat separately all the various ways in which the plaintiff ’s consent may have been undermined: mistake, undue influence, duress, failure of consideration. One reason that this has, in my view, created the difficulties that I described above is that it is often assumed implicitly that these are merely different ways in which a single very general claim can be made out. Not all who treat these situations separately, however, make this implicit assumption.87 On the other hand, I do not think that these authors assume that there are as many separate causes of action as the situations that they outline. In my view, a small number of causes of action – one to three of them – could be articulated for the field of claims that protect the plaintiff ’s choices as to the deployment of her resources, while also respecting the defendant’s choices. A full analysis would need to include the elements of these causes of action, the situations in which they can and cannot apply, who are the proper plaintiffs and defendants in different factual patterns, and the relationship between them. There are at least two distinct reasons for making the defendant liable: request and acceptance. Those could be the foundation of a pair of causes of action. Of course, claims lie only when the plaintiff ’s intention was somehow undermined, by mistake and so on. But if those are understood to be only variations on a theme, they would not multiply the causes of action. That is, mistake might be a way of establishing either the cause of action for requested benefits or the cause of action for accepted transfers. One important question is whether cases involving an agreement between the parties must stand apart. This is the field of failure of consideration, writ large in the

84 See Halsbury’s Laws of England, 5th edn (2012) vol 88, 305, retaining quantum meruit and quantum valebat. 85 Birks, ‘An Introduction’ (n 10) 111–13. 86 I thank the Honourable Justice Stephen Gageler AC for this point. 87 Here I would give as examples Maddaugh and McCamus, The Law of Restitution (n 16) and the Restatement of the Law Third: Restitution and Unjust Enrichment (n 16).

116  Lionel Smith sense of the recovery of benefits conferred pursuant to some kind of ­understanding. Many, but not all, of these cases arise in relation to contracts that have been set aside or discharged, or are void or unenforceable. Benefits conferred in such situations are requested, and so these claims might fall under the cause of action for requested benefits. But some of these cases involve rights transfers. More importantly, these cases have their own particular features. The agreement, even though it is not being enforced as a set of contractual promises, dominates. It may allow recovery for benefits conferred even if they were legally owing, on the ground that under the agreement they had not been earned. This is what led to the puzzle of the coronation cases,88 and more recently has led to difficulties in cases that involve a schedule of payments.89 There is also a strong argument that the defence of change of position is not available in these cases.90 If that were the case, it would suggest very strongly that this is a different cause of action.

III. Conclusion Unjust enrichment sceptics think that there is nothing that unifies the material in Goff and Jones in relation to the reason for liability. Unjust enrichment enthusiasts think, on the contrary, that the principle or cause of action in unjust enrichment unifies all of it in relation to the reason for liability. I like big ideas, but even I have some idea of when it is time to give up. In this chapter, not quite giving up completely on finding some unity in this field of law, I have tried to find a middle way. Trying to find a middle way usually pleases no one. I am ready for that. I have aimed to find some unity in those cases of restitution that are based on the parties’ intentions and understandings surrounding the conferral of a benefit. It is hard to find a name for it, but maybe it is the law of unintended, as opposed to unjust, benefits. ‘Benefits’ seems better than ‘enrichments’, since a person who requested some action can be liable to pay for it, whether it enriched him or not. I was one of many people inspired by Peter Birks, and I remain so. He changed his mind sometimes, and so have I. Unlike Birks, I do not think this means that

88 Discussed and overruled in Fibrosa Spolka Akcyjna v Fairbairn Lawson Combe Barbour, Ltd [1943] AC 32 (HL). 89 See Rover International Ltd v Cannon Film Sales Ltd (No 2) [1989] 1 WLR 912 (CA) and the cases discussed therein, and Stocznia Gdanska SA v Latvian Shipping Co [1998] 1 WLR 574 (HL). 90 See P Hellwege, ‘Unwinding Mutual Contracts: Restitutio In Integrum v The Defence of Change of Position’ in D Johnston and R Zimmermann (eds), Unjustified Enrichment: Key Issues in Comparative Perspective (Cambridge, Cambridge University Press, 2002) 243; R Stevens, ‘Is there a Law of Unjust Enrichment?’ in S Degeling and J Edelman (eds), Unjust Enrichment in Commercial Law (Pyrmont (NSW), Lawbook Co, 2008) 11, 32. Other authors would say that the defence is available in principle but may be ruled out if the particular facts show that the defendant knew the payment was conditional: see Bant, The Change of Position Defence (n 63) 197–98; Burrows, Restitution (n 8) 546–47.

Restitution: A New Start?  117 everything I wrote now needs to be burned, nor do I think that of anything he wrote.91 When you conclude that you were wrong, you have to change your mind. If the two positions are inconsistent, then logically, I think, there are three possibilities: you were wrong, and now are right; you were right, and now are wrong; or you were wrong, and you still are. We must take our chances.



91 Birks,

Unjust Enrichment (n 7) xii.

118

6 Rivalry over Liability for Defective Transfers ROHAN HAVELOCK

I. Introduction The common law recognises a third category of claim alongside contract and tort.1 This category encompasses situations where (in broad terms) a person has transferred money or other property to another,2 but for some reason the transfer is defective, and the transferee is required to make personal restitution. Where liability is imposed, this is necessarily a significant qualification to the security of receipt which the transferee typically expects and depends on, particularly if the transfer was in the course of commerce.3 In England and other jurisdictions, the doctrine governing this situation is unjust enrichment, which purports to have both explanatory and unifying force in relation to the case law.4 Liability in unjust enrichment is strict (subject to certain defences) and arises at the moment of receipt,5 turning on the application of four specific elements or questions,6 including ‘unjust factors’ explaining why a transfer is defective.7 1 See Fibrosa Spolka Akcyjna v Fairbairn Lawson Combe Barbour, Ltd [1943] AC 32 (HL) 61 (Lord Wright). The statement reflects those in Lord Wright’s extra-judicial writing: ‘Restatement of the Law of Restitution’ (1937) 51 Harvard Law Review 369, 370 and ‘Sinclair v Brougham’ [1938] CLJ 305, 306. 2 The conceptualisation of ‘services’ as an enrichment has been criticised: see R Grantham and CEF Rickett, Enrichment and Restitution in New Zealand (Oxford, Hart Publishing, 2000) 164; J Beatson, The Use and Abuse of Unjust Enrichment: Essays on the Law of Restitution (Oxford, Clarendon Press, 1991) 30–31. 3 See Australian Financial Services and Leasing Pty Ltd v Hills Industries Ltd [2014] HCA 14, (2014) 253 CLR 560 [92] (Hayne, Crennan, Kiefel, Bell and Keane JJ). 4 P Birks, An Introduction to the Law of Restitution, rev edn (Oxford, Clarendon Press, 1989) 19; P Birks, Unjust Enrichment, 2nd edn (Oxford, Oxford University Press, 2005) ch 11. 5 Kleinwort Benson Ltd v Lincoln City Council [1999] 2 AC 349 (HL) 385 (Lord Goff); Baker v Courage & Co [1910] 1 KB 56, 65–66; P Birks, ‘Rights, Wrongs, and Remedies’ (2000) 21 OJLS 1, 1. 6 First adopted in England in Banque Financiére de la Cité v Parc (Battersea) Ltd [1999] 1 AC 221 (HL) 227 (Lord Steyn). 7 Primarily in the sense of involving a defect in the claimant’s consent or intention. This chapter does not address which defects properly qualify for this purpose, although will generally assume that defects supplied by defendant-sided equitable doctrines, such as undue influence and unconscionable bargain, should not be regarded as within the province of unjust enrichment.

120  Rohan Havelock Following the formal recognition of unjust enrichment by the House of Lords in 1991,8 claims in unjust enrichment have been prevalent in a range of commercial contexts.9 Since its establishment, the Supreme Court of the United Kingdom has adopted and applied a liberal conception of unjust enrichment, extending its application to areas traditionally governed by equitable principles.10 This has prompted criticism that the liability is premised on an open-ended conception of ‘enrichment’11 and is illegitimately prejudiced against mere economic gain.12 At the other end of the globe, increased scepticism as to the legitimacy of the very notion of ‘unjust enrichment’ has prompted the High Court of Australia to reject it outright as ‘a principle which can be taken as a sufficient premise for direct application in particular cases’,13 and to confine it to a mere ‘taxonomical function’ in describing categories of case in which benefits may be recovered.14 That said, it is doubtful from the most recent High Court judgment15 that it enjoys even this diminutive status. This open hostility towards unjust enrichment makes it difficult to believe that the High Court was a pioneer in the common law world in recognising unjust enrichment as a concept in 1987,16 some four years before its formal recognition as a principle in England.17 Instead, the High Court has adamantly characterised liability for defective transfers as based on ‘equitable principles’18 (seemingly turning on ‘unconscionability’, ‘unconscientiousness’ or ‘unconscionable retention’), or, in the case of claims in respect of work and labour specifically, as governed by quantum meruit based on the presence of a request.19 This chapter will assess to what extent these two approaches are different, and, on the basis that they are indeed rivals, examine their implications for commerce. It comprises four sections. First, to set the scene, the rise and fall of unjust enrichment in Australia is charted, along with the increasing adherence to ‘equitable principles’. Secondly, the meaning and effect of ‘unconscionability’ – as the core notion underpinning the Australian approach – is analysed. Thirdly, the

8 In Lipkin Gorman v Karpnale Ltd [1991] 2 AC 548 (HL) 572, 578 (Lord Goff). 9 See the authorities surveyed by P Watts, ‘“Unjust Enrichment” – the Potion that Induces Well-meaning Sloppiness of Thought’ (2016) 69 Current Legal Problems 289, 303–24. 10 See, eg Menelaou v Bank of Cyprus UK Ltd [2015] UKSC 66, [2016] AC 176. 11 Watts, ‘“Unjust Enrichment”’ (n 9) 315. See, however, Investment Trust Companies (in liq) v Revenue and Customs Commissioners [2017] UKSC 29, [2018] AC 275 [51]–[52] where the Supreme Court adopted a restrictive conception of the ‘at the expense of requirement’. 12 Watts (n 9) 291–92, 294–95. 13 Lumbers v W Cook Builders Pty Ltd (in liq) [2008] HCA 27, (2008) 232 CLR 635 [85]. See also Hills Industries (n 3) [20] (French CJ). 14 Equuscorp Pty Ltd v Haxton [2012] HCA 7, (2012) 246 CLR 498 [30] (French CJ, Crennan and Kiefel JJ); Hills Industries (n 3) [20]. 15 Hills Industries (n 3) [78]. 16 Pavey & Matthews Pty Ltd v Paul (1987) 162 CLR 221, 256–57 (Deane J). 17 In Lipkin Gorman (n 8). 18 Hills Industries (n 3) [78]. 19 Lumbers (n 13) [79]–[80], [86], [90]. Contrast Yeoman’s Row Management Ltd v Cobbe [2008] UKHL 55, [2008] 1 WLR 1752 [42] (Lord Scott). It is beyond the scope of this chapter to address such claims.

Rivalry over Liability for Defective Transfers  121 key ­question of the extent to which the two approaches are different in form and substance is addressed. Finally, the two approaches are evaluated with particular reference to their implications for commerce.

II.  Unjust Enrichment in Australia A.  Recognition and Development The authority habitually cited as marking the initial reception of unjust enrichment as a concept in Australia is Pavey & Matthews Pty Ltd v Paul.20 But in fact the concept first appeared in 1959 in Mason v New South Wales.21 Windeyer J used ‘unjust enrichment’ in a descriptive label for the action for money had and received: Provided it be recognized that the action for money had and received is not only the origin of but, as developed, still determines the scope of the English law of quasicontract, it seems to me not inapt to describe it as a law of ‘unjust enrichment’.22

Further, two years prior to Pavey & Matthews, Deane J in Muschinski v Dodds tentatively embraced ‘unjust enrichment’ as a unifying term: The most that can be said at the present time is that ‘unjust enrichment’ is a term commonly used to identify the notion underlying a variety of distinct categories of case in which the law has recognized an obligation on the part of a defendant to account for a benefit derived at the expense of a plaintiff.23

In Pavey & Matthews,24 the High Court decisively rejected the ‘implied contract’ theory, and ushered in ‘unjust enrichment’. Deane J was rather definitive in recognising ‘unjust enrichment’ as a concept underlying restitutionary relief: [U]njust enrichment … constitutes a unifying legal concept which explains why the law recognizes, in a variety of distinct categories of case, an obligation on the part of a defendant to make fair and just restitution for a benefit derived at the expense of a plaintiff and which assists in the determination, by the ordinary processes of legal reasoning, of the question whether the law should, in justice, recognize such an obligation in a new or developing category of case.25 20 Pavey & Matthews (n 16) 256–57 (Deane J). 21 Mason v New South Wales (1959) 102 CLR 108. 22 ibid 146 (emphasis added). His Honour also employed the phrase ‘improperly enriched’ in the same passage. 23 Muschinski v Dodds (1985) 160 CLR 583, 617. Notably, no reference was made to equitable principles or unconscionability. See also National Commercial Banking Corporation of Australia Ltd v Batty (1986) 160 CLR 251, 268 (Gibbs CJ), explaining that unjust enrichment rested on justice and equity. 24 Pavey & Matthews (n 16). 25 ibid 256–57. In two subsequent cases, his Honour equated a claim for ‘restitution’ with ‘unjust enrichment. In Foran v Wight (1989) 168 CLR 385, involving a claim for return of a deposit upon a rescinded contract, his Honour stated, ‘If it be necessary to clothe that claim in a nomenclature, the

122  Rohan Havelock Shortly thereafter, in Australia and New Zealand Banking Group Ltd v Westpac Banking Corporation,26 the Court unanimously accepted that: The basis of the common law action of money had and received for recovery of an amount paid under fundamental mistake of fact should now be recognized as lying not in implied contract but in restitution or unjust enrichment.27

The Court expanded on this by distinguishing two stages of the inquiry into liability: It is a common law action for recovery of the value of the unjust enrichment and the fact that specific money or property received can no longer be identified in the hands of the recipient or traced into other specific property which he holds does not of itself constitute an answer in a category of case in which the law imposes a prima facie liability to make restitution. Before that prima facie liability will be displaced, there must be circumstances [such as a change of position] which the law recognizes would make an order for restitution unjust. The prima facie liability to make restitution is imposed by the law on the person who has been unjustly enriched.28

B.  Approximating the Birksian Conception? In David Securities Pty Ltd v Commonwealth Bank of Australia, the High Court took a further step towards the Birksian conception of unjust enrichment when it affirmed29 that unjust enrichment is a ‘unifying legal concept’ (although not a ‘definitive legal principle according to its own terms’), reinforced the two-stage framework in Westpac,30 and emphasised that an award of restitution depends on an unjust factor. Thus: [I]t is not legitimate to determine whether an enrichment is unjust by reference to some subjective evaluation of what is fair or unconscionable. Instead, recovery depends upon the existence of a qualifying or vitiating factor such as mistake, duress or illegality.31 appropriate one in a modern context is “restitution” for, or of, “unjust enrichment”’: 438 (Deane J). In Commonwealth v Amann Aviation Pty Ltd (1991) 174 CLR 64, in the context of restitution for ­failure of consideration, his Honour stated, ‘There are, however, circumstances in which the doctrine of ­restitution or unjust enrichment overlays the ordinary general rule as to the assessment of damages and gives rise to a direct right of action to recover from the other party money paid under the contract to that other party for a consideration which has failed completely’: 117 (Deane J). 26 Australia and New Zealand Banking Group Ltd v Westpac Banking Corporation (1988) 164 CLR 662. 27 ibid 673 (emphasis added). See also the references in Trident General Insurance Co Ltd v McNiece Bros Pty Ltd (1988) 165 CLR 107 [8] (Deane J) and Stern v McArthur (1988) 165 CLR 489 [11] (Deane and Dawson JJ). 28 ibid 673 (emphasis added). 29 David Securities Pty Ltd v Commonwealth Bank of Australia (1992) 175 CLR 353, 375 (Mason CJ, Deane, Toohey, Gaudron and McHugh JJ), 389–92 (Brennan J), 406 (Dawson J). 30 Westpac (n 26) 673 (Mason CJ, Wilson, Deane, Toohey and Gaudron JJ). 31 David Securities (n 29) 379.

Rivalry over Liability for Defective Transfers  123 Notwithstanding that (as at that time) the High Court had treated unjust ­enrichment merely as a (unifying) concept and not as a definitive principle on its own terms, in late 1994 Mason CJ ostensibly applied unjust enrichment as a principle in Commissioner of State Revenue (Vict) v Royal Insurance Australia Ltd.32 His Honour framed the crucial question as: ‘was the Commissioner unjustly enriched at the expense of Royal?’33 and then addressed whether the orthodox elements of unjust enrichment were satisfied on the facts: That the Commissioner was unjustly enriched there can be no doubt. The Commissioner received payments to which the State revenue was not entitled under the Act. The question remains whether the enrichment was at the expense of Royal. And here the fact that Royal charged the duty to its insured again becomes significant. The suggestion is that the enrichment of the Commissioner has taken place not at the expense of Royal but at the expense of its policy holders. They are the persons who have suffered a detriment; Royal has suffered no detriment and, if it recovers, it will make a windfall gain. Indeed, it might be said that, if Royal recovers, it will be unjustly enriched.34

This analysis was expressly premised on the Birksian conception of unjust enrichment by subtraction from the plaintiff ’s wealth.35 In substance, Mason CJ asked whether the basic elements of unjust enrichment were present. This marks the apex of the Australian embracement of unjust enrichment as a guiding principle.36 From there, it was increasingly but severely marginalised, arguably to the point of expulsion.

III.  The Turning of the Tide in Australia Although the High Court had recognised unjust enrichment as a ‘unifying legal concept’ in the late 1980s and into the early 1990s, the tide turned markedly in the 2000s.37 In this period, unjust enrichment faced an increasing level of scepticism,

32 Commissioner of State Revenue (Vic) v Royal Insurance Australia Ltd (1994) 182 CLR 51. In his separate judgment, Brennan J (with whom Toohey and McHugh JJ agreed) also stated, ‘It would therefore be unjust that the Commissioner should retain these amounts; they were recoverable under the general law of restitution’: 89. 33 ibid 68 (footnote omitted). 34 ibid 68–69 (emphasis added). 35 ibid 75. 36 Between 1994 and 2000, there are no High Court judgments considering unjust enrichment in a substantive way. It should be noted that in Roxborough v Rothmans of Pall Mall Australia Ltd [2001] HCA 68, (2001) 208 CLR 516, the majority (Gleeson CJ, Gaudron and Hayne JJ) did apply restitutionary principles and indeed cited the decision of Mason CJ in Commissioner of State Revenue (n 32) 66, in which his Honour arguably applied unjust enrichment as a principle. 37 See K Mason, ‘Strong Coherence, Strong Fusion, Continuing Categorical Confusion: The High Court’s Latest Contributions to the Law of Restitution’ (2015) 39 Australian Bar Review 284, 305 describing an ‘observable cooling towards the unjust enrichment concept as perceived in Pavey’.

124  Rohan Havelock and ultimately relegation (if not rejection) in favour of ‘equitable principles’.38 The seeds of this change were sown by the judgment of Gummow J in R ­ oxborough v Rothmans of Pall Mall Australia Ltd,39 which had an enduring influence, as demonstrated below. There was no single reason for this fundamental shift. Broadly, the concerns and criticisms expressed in the relevant case law can be grouped into two categories: those relating to the nature of unjust enrichment as a concept, and those relating to the effects of ‘unjust enrichment’ on other areas of law. In tandem, the High Court has been adamant that ‘equitable principles’ are an adequate means of regulating liability for defective transfers.

A.  The Reasons for Hostility i.  The Unjust Enrichment Concept In Australia, the concept of ‘unjust enrichment’ has been condemned on three fronts. The first criticism is that its application amounts to illegitimate ‘top-down reasoning’ in the sense that it is a general concept which is imposed to explain case law. In Roxborough, Gummow J put the objection this way: To the lawyer whose mind has been moulded by civilian influences, the theory may come first, and the source of the theory may be the writing of jurists not the decisions of judges. However, that is not the way in which a system based on case law develops; over time, general principle is derived from judicial decisions upon particular instances, not the other way around.40

This objection, however, is a strawman.41 The concept of unjust enrichment does not operate in this way. The stated objective of Peter Birks was to ‘look downwards to the cases’ in order to reveal the ‘skeleton of principle’ holding them together,42 rather than to impose such a principle on those cases. Indeed, the very existence of unjust enrichment as a category is premised on the existence of a body of case law which seemed to lack unified explanation. 38 Hills Industries (n 3) [78]. 39 Roxborough (n 36). 40 Roxborough (n 36) [72]. See also Lumbers (n 13) 662; Bofinger v Kingsway Group Ltd [2009] HCA 44, (2009) 239 CLR 269 [90]. 41 See A Burrows, ‘The Australian Law of Restitution: Has the High Court Lost its Way?’ in E Bant and M Harding (eds), Exploring Private Law (Cambridge, Cambridge University Press, 2010) 73–74. See also K Mason, ‘Do Top-down and Bottom-up Reasoning Ever Meet?’ in E Bant and M Harding (eds), Exploring Private Law (Cambridge, Cambridge University Press, 2010). 42 Birks, Introduction (n 4) 19. See also C Mitchell, P Mitchell and S Watterson (eds), The Law of Unjust Enrichment, 9th edn (London, Sweet & Maxwell, 2016) para 1-08, ‘In other words, unjust enrichment is not an abstract moral principle to which the courts must refer when deciding cases; it is an organising concept that groups decided authorities on the basis that they share a set of common features’. This was quoted with approval in Barnes v Eastenders Cash & Carry plc [2014] UKSC 26, [2015] AC 1 [102] (Lord Toulson).

Rivalry over Liability for Defective Transfers  125 Secondly, the concept of unjust enrichment is said to be too abstract and narrowly confined.43 Thus, the joint judgment in Lumbers44 refers to (1) the ­‘difficulties of definition’ with concepts such as ‘benefit’, ‘acceptance’ and ‘expense’ and (2) the need to define or apply these by deciding whether attention is to be confined to the party conferring the benefit and the recipient, or whether account must be taken of the legal relationships between one or other of the parties, and third parties. This objection also lacks merit. The elements of ‘unjust enrichment’ have been articulated in both academic writing and the case law; although there are naturally difficulties in their application to particular facts, as with many other concepts in private law. Further, on the orthodox account, unjust enrichment is a subsidiary doctrine45 which respects subsisting contracts unless and until they are fully disposed of. Thirdly, the explanatory ability of unjust enrichment is criticised. Example cases involving money had and received are cited, in which a plaintiff has recovered despite the absence of enrichment by the defendant.46 Similar criticisms of the notion of ‘enrichment’ have been made recently.47 The ‘enrichment’ requirement is said to be not only superfluous in certain contexts,48 but disadvantageous to otherwise meritorious claimants who are denied recovery due to its absence.49 As will be argued herein, these criticisms do not, however, justify the outright rejection of unjust enrichment as an explanation of liability for defective transfers. Instead, to the extent they are valid, they signal the need for its scope to be clearly delineated.

ii.  Effects of Unjust Enrichment on Other Areas of Law The next objections cannot be dismissed so easily. They concern the ‘reach’ of unjust enrichment and its (detrimental) effects on other areas of law. a.  The (All-Embracing) Reach of Unjust Enrichment In his influential judgment in Roxborough, Gummow J viewed unjust enrichment in these unfavourable terms: Unless, as this Court indicated in David Securities Pty Ltd v Commonwealth Bank of Australia, unjust enrichment is seen as a concept rather than a definitive legal principle, 43 See 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) 252, ‘[unjust enrichment] is capable of concealing rather than revealing why the law would want to attribute a responsibility to one party to provide satisfaction to the other’. 44 Lumbers (n 13) [75] (Gummow, Hayne, Crennan and Kiefel JJ). 45 See R Grantham and C Rickett, ‘On the Subsidiarity of Unjust Enrichment’ (2001) 117 LQR 273. 46 See Roxborough (n 36) [71] (Gummow J). 47 Watts (n 9) 298–303. 48 For example, where a principal claims against an agent to recover money entrusted for a purpose not carried out: Parry v Roberts (1835) 3 Ad & E 118, 111 ER 358; Martin v Pont [1993] 3 NZLR 25 (CA). 49 Watts (n 9) 325.

126  Rohan Havelock substance and dynamism may be restricted by dogma. In turn, the dogma will tend to generate new fictions in order to retain support for its thesis. … Then various theories will compete, each to deny the others. There is support in Australasian legal scholarship for considerable scepticism respecting any all-embracing theory in this field, with the treatment of the disparate as no more than species of the one newly discovered genus.50

His Honour expressed a similar view in Farah Constructions Pty Ltd v Say-Dee Pty Ltd: The restitution basis reflects a mentality in which considerations of ideal taxonomy prevail over a pragmatic approach to legal development. … The restitution basis was imposed as a supposedly inevitable offshoot of an all-embracing theory. To do that was to bring about an abrupt and violent collision with received principles without any assigned justification.51

On close examination, these are overstatements. As Birks himself came to recognise, ‘unjust enrichment’ as a legal event does not encompass all cases of restitution; for there is also restitution for wrongs and restitution in respect of miscellaneous events.52 Moreover, on the orthodox view, unjust enrichment is a subsidiary doctrine in the law of obligations.53 However, the statements do have some validity. The incursion of unjust enrichment has the potential to clash with and disrupt settled areas of law, and has been criticised on this basis. Examples include: the recognition of unjust enrichment claims upon the discharge of a contract for breach despite the existence of contractual remedies;54 the strained application of unjust enrichment to cases of equitable contribution and subrogation;55 the argument that the resulting trust is a proprietary response to unjust enrichment;56 and the application of unjust enrichment in subversion of statute.57

50 Roxborough (n 36) [74] (footnotes omitted). 51 Farah Constructions Pty Ltd v Say-Dee Pty Ltd [2007] HCA 22, (2007) 230 CLR 89 [154]. To similar effect, see Equuscorp Pty Ltd v Haxton (n 14) [32]. See also W Gummow, ‘Equity: Too Successful?’ (2003) 77 Australian Law Journal 30, 31, ‘The reduction of complex bodies of rights and remedies in the law to apparently simple all-embracing terms is productive of definitional disputation which does not assist the resolution of cases as they arise’. 52 P Birks, ‘Misnomer’ in Restitution (n 43) 9–17. 53 In Roxborough (n 36) [75], Gummow J himself referred to the ‘gap-filling and auxiliary role’ of restitutionary remedies. 54 P Jaffey, ‘Restitutionary Remedies in the Contractual Context’ (2013) 76 MLR 429, 438. 55 See G Virgo, ‘Restitution and Unjust Enrichment in the Supreme Court: Reflections on Bank of Cyprus UK Ltd v Menelaou’ (2016) University of Cambridge Faculty of Law Legal Studies Research Paper 10/2016. ssrn.com/abstract=2724024. 56 As first articulated by P Birks, ‘Restitution and Resulting Trusts’ in SR Goldstein (ed), Equity and Contemporary Legal Developments (Jerusalem, Hebrew University of Jerusalem, 1992) 335. This was rejected in Westdeutsche Landesbank Girozentrale v Islington LBC [1996] AC 669 (HL) 716 (Lord Browne-Wilkinson). 57 See Richards v Worcestershire County Council [2016] EWHC 1954 (Ch), [2017] WTLR 117, which held that it was arguable that the claimant’s ignorance of a statutory entitlement to services had enriched the defendant local authority.

Rivalry over Liability for Defective Transfers  127 b. Distortion The closely related criticism is that the application of unjust enrichment positively distorts other areas of law. As Gummow J stated in Roxborough: It also may distort well settled principles in other fields, including those respecting equitable doctrines and remedies, so that they answer the newly mandated order of things. Then various theories will compete, each to deny the others.58

Similarly, the majority in Lumbers stated59 that the unjust enrichment framework ‘creates a serious risk of producing a result that is discordant with accepted principle, thus creating a lack of coherence with other branches of the law’. This criticism is sound, but (as will be argued herein) not a ground to reject unjust enrichment. Two examples will be given of the distorting effects of the extension of unjust enrichment into equitable doctrine. First, it has been vigorously argued in England that third-party liability in knowing receipt should be subsumed within unjust enrichment,60 or that a parallel cause of action in unjust enrichment should be recognised.61 The application of unjust enrichment in knowing receipt situations was rejected outright by the High Court of Australia in Farah Constructions Pty Ltd v Say-Dee Pty Ltd62 on the basis that for equity to follow the law (ie adopt the restitutionary basis) would cut down traditional protection for the holders of equitable interests.63 This is questionable: arguably strict restitutionary liability better protects these holders in that they need not prove knowledge on the part of the recipient. In any event, the more persuasive argument is that orthodox unjust enrichment simply does not fit the pattern of typical third-party recipient situations, making its transplantation both forced and artificial.64 Secondly, the equitable doctrines of contribution and subrogation can operate comfortably without needing to be subsumed within, or explained by, unjust enrichment. This was the position taken in the leading Australian contribution and subrogation cases.65 For example, in Bofinger66 the High Court stated, 58 Roxborough (n 36) [74]. 59 Lumbers (n 13) [78] (Gummow, Hayne, Crennan and Kiefel JJ). 60 For the details, see A Burrows, The Law of Restitution, 3rd edn (Oxford, Oxford University Press, 2011) 424–31. 61 D Nicholls, ‘Knowing Receipt: The Need for a New Landmark’ in Restitution (n 43) 236–39; P Birks, ‘Receipt’ in P Birks and A Pretto (eds), Breach of Trust (Oxford, Hart Publishing, 2002) 223. In Australia, see Say-Dee Pty Ltd v Farah Constructions Pty Ltd [2005] NSWCA 309 [232]. 62 Farah Constructions (n 51) [140]–[47], [148]–[58], following Consul Development Pty Ltd v DPC Estates Pty Ltd (1975) 132 CLR 373. 63 Farah Constructions (n 51) [153]. There are of course some examples of equity imposing strict liability: Ministry of Health v Simpson (Re Diplock) [1951] AC 251 (HL); Re Griffiths (decd) [2008] EWHC 118 (Ch), [2009] Ch 162. 64 See L Smith, ‘Unjust Enrichment, Property and the Structure of Trusts’ (2000) 116 LQR 412, 428–35. 65 Namely, Friend v Brooker [2009] HCA 21, (2009) 239 CLR 129; Bofinger (n 40). 66 Bofinger (n 40) [91], expressly rejecting the unjust enrichment analysis in Banque Financiere de la Cite v Parc (Battersea) Ltd (n 6). See also Burke v LFOT Pty Ltd [2002] HCA 17, (2002) 209 CLR 282 [112] (Kirby J), ‘Affixation of the label “unjust enrichment” only comes at the end of a correct analysis of the requirements of equitable contribution’.

128  Rohan Havelock ‘Such all-embracing theories may conflict in a fundamental way with well-settled equitable doctrines and remedies’. Conversely, the United Kingdom Supreme Court has been willing to analyse cases of equitable subrogation in terms of unjust enrichment. Thus, in Menelaou, a third party who pays the purchase price of property may be subrogated to the vendor’s lien for the purchase price, if the purchaser would otherwise have been unjustly enriched.67 This development has attracted strong criticism. Virgo minced no words in deeming Menelaou ‘arguably the worst decision in the history of the Supreme Court’68 which ‘illustrates the confusion, unnecessary complexity and artifice which arises from abuse of [unjust enrichment]’.69 Unjust enrichment was, in effect, twisted to fit the facts of the case in order to yield an illegitimate proprietary remedy.70 Instead, the case could and should have been dealt with in accordance with traditional equitable principles,71 whereby the remedy of subrogation followed from the bank’s proprietary interest in the money held on trust (by the parents’ solicitors) which was used to discharge the unpaid vendor’s lien.72

IV.  Unjust Enrichment in Australia: Dead or Alive? Giving a definitive account of the present status of ‘unjust enrichment’ in Australia is a formidable task. This is because dicta in judgments of the High Court (since Gummow J’s influential judgment in Roxborough in 2001) are (at best) difficult to reconcile and (at worst) conflicting. There is the added complication that what the Court has said about the status of unjust enrichment does not always accord with how it has been treated. Three possibilities will be canvassed.

A.  A Framework? First, the High Court has regarded ‘unjust enrichment’ as a framework for determining claims based on the ‘two-stage analysis’73 first formulated in Westpac and

67 Menelaou (n 10). Lord Carnwath, [107]–[08], expressed similar sentiment to the High Court of Australia in Bofinger: his Lordship was concerned that forcing an unjust analysis onto historic decisions might distort the traditional rules of subrogation. 68 Virgo, ‘Restitution and Unjust Enrichment in the Supreme Court’ (n 55) 1. 69 G Virgo, ‘“All the World’s a Stage”: The Seven Ages of Unjust Enrichment’ (2016) University of Cambridge Faculty of Law Research Paper 51/2016, 9. ssrn.com/abstract=2845462. 70 Virgo, ‘Restitution and Unjust Enrichment in the Supreme Court’ (n 55) 14–19. 71 This was the approach taken by Lord Carnwath in Menelaou (n 10) [107]–[108]. 72 Virgo, ‘Restitution and Unjust Enrichment in the Supreme Court’ (n 55) 19–22. 73 To adopt the description used by Gageler J in Hills Industries (n 3) [106]–[07], [138].

Rivalry over Liability for Defective Transfers  129 confirmed in David Securities. Thus, in Equuscorp, the majority summarised the framework as follows: [Stage One] • recovery depends upon enrichment of the defendant by reason of one or more recognised classes of ‘qualifying or vitiating’ factors; • the category of case must involve a qualifying or vitiating factor such as mistake, duress, illegality or failure of consideration, by reason of which the enrichment of the defendant is treated by the law as unjust; • unjust enrichment so identified gives rise to a prima facie obligation to make restitution; [Stage Two] • the prima facie liability can be displaced by circumstances which the law recognises would make an order for restitution unjust.74 Turning to the joint judgment in David Securities from which the ‘two-stage analysis’ derives, we find that the passage in which the change of position defence is accepted (as reaffirmed in Hills Industries)75 makes repeated reference to the elements of unjust enrichment: If we accept the principle that payments made under a mistake of law should be prima facie recoverable, in the same way as payments made under a mistake of fact, a defence of change of position is necessary to ensure that enrichment of the recipient of the payment is prevented only in circumstances where it would be unjust. This does not mean that the concept of unjust enrichment needs to shift the primary focus of its attention from the moment of enrichment. From the point of view of the person making the payment, what happens after he or she has mistakenly paid over the money is irrelevant, for it is at that moment that the defendant is unjustly enriched. However, the defence of change of position is relevant to the enrichment of the defendant precisely because its central element is that the defendant has acted to his or her detriment on the faith of the receipt.76

This strongly resembles the strict, but fragile, liability of orthodox unjust ­enrichment.77 The basic elements of ‘enrichment’, ‘vitiating’ (unjust) factors78 and countervailing ‘circumstances’ (defences) are employed: all that is missing is a reference to the ‘at the expense of ’ requirement.

74 Equuscorp (n 14) [30] (French CJ, Crennan and Kiefel JJ). 75 Hills Industries (n 3) [17] (French CJ), [72] (Hayne, Crennan, Kiefel, Bell and Keane JJ). 76 David Securities (n 29) 385 (emphasis added). 77 Birks, Unjust Enrichment (n 4) 7. 78 See J Edelman and S Degeling, ‘What is an Unjust Factor?’ in J Edelman and S Degeling (eds), Unjust Enrichment in Commercial Law (Pyrmont (NSW), Lawbook Co, 2008) 177, ‘The references to the existence of these qualifying or vitiating factors is a reference to unjust factors’.

130  Rohan Havelock

B.  A Taxonomical or other Non-Substantive Function? Secondly, in Lumbers and the subrogation cases, the High Court has firmly rejected unjust enrichment as a ‘definitive legal principle according to its own terms’ which can be taken as a sufficient premise for ‘direct application’ in a particular case. Instead, the concept is confined as follows: Unjust enrichment … has a taxonomical function referring to categories of cases in which the law allows recovery by one person of a benefit retained by another. In that aspect, it does not found or reflect any ‘all-embracing theory of restitutionary rights and remedies’. It does not, however, exclude the emergence of novel occasions of unjust enrichment supporting claims for restitutionary relief.79

The relegation of unjust enrichment to a ‘taxonomical function’ which may assist in the above sense is difficult to reconcile with the immediately preceding summary of David Securities which the Court gave. That summary is predicated on unjust enrichment serving as a framework for analysis. To this ‘taxonomical’ function must be added two other non-substantive functions given in Bofinger: 1. 2.

Unjust enrichment ‘may provide a means for comparing and contrasting various categories of liability’. Unjust enrichment ‘may assist in the determination by the ordinary processes of legal reasoning of the recognition of obligations in a new or developing category of case’.80

These statements are indefinite to the point of affording unjust enrichment an ancillary but in reality meaningless role. They give the impression that the High Court is straining to preserve some role for unjust enrichment in light of earlier decisions viewing the concept favourably.81

C.  Expelled Altogether? This said, from the most recent judgment concerning unjust enrichment, Hills Industries, it is doubtful whether unjust enrichment presently enjoys any of these minor residual functions. As Keith Mason vividly puts it, on one reading ‘the [unjust enrichment] concept has been expelled root and branch; and the High

79 Equuscorp (n 14) [30] per French CJ, Crennan and Kiefel JJ (emphasis added) (footnotes omitted). 80 Bofinger (n 40) [88], [89] respectively. 81 It has been suggested that this position can only be rationalised as a means of avoiding the need to confront, and overrule, earlier dicta of the High Court which assigned it a more meaningful role: see P Watts, ‘Are Banks Winners from the Madness that is the English Law of “Unjust Enrichment”?’ (Banking and Financial Services Association Annual Conference, Queenstown (NZ), August 2016) 18.

Rivalry over Liability for Defective Transfers  131 Court’s earlier jurisprudence explaining its positive role has also been summarily ­jettisoned’.82 This is because the majority maintained emphatically that: [T]he concept of unjust enrichment is not the basis of restitutionary relief in Australian law. … [T]he enquiry undertaken in relation to restitutionary relief in Australia is directed to who should properly bear the loss and why. That enquiry is conducted by reference to equitable principles.83

Several points should be noted. First, this seems to assume that restitutionary relief is a matter of apportioning responsibility between the parties (presumably by way of a discretionary balancing), but this seems at odds with what is said earlier about the relevant enquiry: ‘any reference to equitable notions does not invite a balancing of competing equities as between the parties, based on considerations such as fault’.84 Secondly, this statement focuses not on restoration of value but on loss suffered by the plaintiff, which is not what restitution entails, and also contradicts Mason CJ’s previous statement85 that ‘Restitutionary relief … does not seek to provide compensation for loss’. Thirdly, the means of conducting the inquiry – ‘equitable principles’ – is asserted but not elaborated on, although reinforced elsewhere in the judgments.86 Arguably, this reference should be read in tandem with the prominence given to ‘unconscionability’ and ‘unconscionable retention’.87 If the dictum in Hills Industries is taken literally, and cannot be tempered by a less radical interpretation,88 the Australian law of restitution is truly on a course of its own.

V.  The Australian Adherence to ‘Equitable Principles’ In light of the development in Hills Industries, it is necessary to make an educated guess as to the content of the governing ‘equitable principles’. These are not defined or explained in Hills Industries, although some indication might be garnered from

82 Mason, ‘Strong Coherence, Strong Fusion, Continuing Categorical Confusion’ (n 37) 318. 83 Hills Industries (n 3) [78] (Hayne, Crennan, Kiefel, Bell and Keane JJ), in the context of rejection of the so-called ‘disenrichment’ explanation of the change of position defence. By contrast, in his separate judgment, Gageler J [138], saw a continued role for the concept of unjust enrichment in explaining the two-stage analysis in Westpac and David Securities. 84 Hills Industries (n 3) [69]. 85 In Royal Insurance (n 32) 75. 86 Hills Industries (n 3) [20] (French CJ), ‘the equitable norm underlying the concept of unjust enrichment is to be found in Moses v Macferlan’ and [68] (Hayne, Crennan, Kiefel, Bell and Keane JJ), ‘There can be no denying the equitable roots of the principle by which a claim for restitution of money had and received to the use of the payer is to be determined’. 87 Hills Industries (n 3) [65]. 88 Mason surmises that the intention may have been to reject unjust enrichment only ‘as a principle of direct application’: Mason (n 37) 318–19.

132  Rohan Havelock the following statement of the majority, made after citing National Commercial Banking Corporation of Australia v Batty:89 This is not to suggest that a subjective evaluation of the justice of the case is either necessary or appropriate. The issues of conscience which fall to be resolved assume a conscience ‘properly informed and instructed’ by established equitable principles and doctrines. As was said in Kakavas v Crown Melbourne Ltd, ‘[t]he conscience spoken of here is a construct of values and standards against which the conduct of “suitors” – not only defendants – is to be judged’.90

Although subsequent High Court judgments do not share uniform terminology, their common premise is that the equitable standard of ‘unconscionability’ suffices to govern at least claims for money had and received.91 Of central significance here is Gummow J’s influential judgment in Roxborough, in which his Honour regarded money had and received as an action which was equitable in nature but which happened to be enforced by the common law.92 With reference to the 1957 judgment of the High Court in South Australian Cold Stores,93 his Honour stated: In this Court, emphasis was placed by Dixon CJ, McTiernan, Williams, Webb and Taylor JJ upon unconscientious retention by the defendant of the sum claimed by the plaintiff as ‘the reason of the rule under which an action of money had [and] received lies in cases of payment by mistake’.94

In accordance with this, his Honour framed, and somewhat peremptorily answered, the key issue in the case as follows: Is it unconscionable for Rothmans to enjoy the payments in respect of the tobacco licence fee, in circumstances in which it was not specifically intended or specially provided that Rothmans should so enjoy them? The answer should be in the affirmative.95

As an aside, it is ironic that here ‘unconscionability’ is applied to the facts in a conclusory way, which is the very criticism later levelled at ‘unjust enrichment’ (not a ‘sufficient premise for direct application in particular cases’).96

89 Batty (n 23). 90 Hills Industries (n 3) [76] (footnotes omitted). 91 See ibid [68] (Hayne, Crennan, Kiefel, Bell and Keane JJ), ‘There can be no denying the equitable roots of the principle by which a claim for restitution of money had and received to the use of the payer is to be determined’. 92 Roxborough (n 36) [83]–[100], especially [92], ‘there was a movement away [by Lord Mansfield in Moses v Macferlan (1760) 2 Burr 1005, 97 ER 676] from the common law pleading of standard fictitious promises. Further, and in turn, this involved a shift in favour of the more substantive principles of legal liability adopted in the equity courts, and a preference for substance over form.’ 93 South Australian Cold Stores Ltd v Electricity Trust of South Australia (1957) 98 CLR 65, 75. 94 Roxborough (n 36) [89]. 95 ibid [104]. 96 Lumbers (n 13) [85]. The use of ‘unconscionable’ here is difficult to reconcile with previous dicta in judgments to which Gummow J was party: see Australian Competition and Consumer Commission v CG Berbatis Holdings Pty Ltd [2003] HCA 18, (2003) 214 CLR 51 [43] (in the context of s 51 AA of the Consumer and Competition Act 2010); Tanwar Enterprises Pty Ltd v Cauchi [2003] HCA 57, (2003) 217 CLR 315 [20].

Rivalry over Liability for Defective Transfers  133

A.  The Meaning and Effect of Unconscionability ‘Conscience’ and its cognate ‘unconscionability’ are notions with an air of historic legitimacy. The cases regarded as foundational to the modern law of unjust enrichment, including Moses v Macferlan,97 justify the action for money had and received by reference to these very notions.98 Thus in Kelly v Solari, which is considered the foundational authority on restitution in respect of mistaken payment, Parke B stated, ‘I think that where money is paid to another under the influence of a mistake … an action will lie to recover it back, and it is against conscience to retain it’.99 Even 150 years later in Lipkin Gorman v Karpnale, Lord Goff explicitly related the action for money had and received to Lord Mansfield’s invocation of ‘conscience’ in Moses v Macferlan: [The action] is founded simply on the fact that, as Lord Mansfield said, the third party cannot in conscience retain the money – or, as we say nowadays, for the third party to retain the money would result in his unjust enrichment at the expense of the owner of the money.100

This indicates that ‘unjust enrichment’ is nothing more than the modern equivalent of saying ‘it is against conscience for you to retain the money’. The underlying basis of liability presumably remains in ‘conscience’101 or is at least equitable.102 If that is the case, the question that immediately arises is what is meant by the notion of conscience and its cognates, and whether they are conducive to effective regulation of liability in defective transfer situations, including in commerce. ‘Conscience’ has been subjected to strong criticism. Birks, for instance, lambasted the notion (and its cognates) as concealing a ‘private and intuitive evaluation’ and

97 Moses v Macferlan (n 92) 1012; 680. This passage contains a variety of references and scholars are divided as to what it reveals about the origins of this action. See further W Swain, ‘Moses v Macferlan (1760)’ in C Mitchell and P Mitchell (eds), Landmark Cases in the Law of Restitution (Oxford, Hart Publishing, 2006) 19. 98 See G Virgo, ‘Restitution Through the Looking Glass: Restitution within Equity and Equity within Restitution’ in J Getzler (ed), Rationalizing Property, Equity and Trusts: Essays in Honour of Edward Burn (London, LexisNexis UK, 2003) 87–88. 99 Kelly v Solari (1841) 9 M & W 54, 58; 152 ER 24, 26 (emphasis added). 100 Lipkin Gorman (n 8) 572 (emphasis added). 101 The House of Lords and Supreme Court authorities since Lipkin Gorman do not specifically invoke conscience, perhaps because the principle of unjust enrichment is now firmly established as the ‘foundation of a coherent law of restitution’, and reference to its underlying basis is regarded as unnecessary. In Australia, see Baltic Shipping Co v Dillon (1993) 176 CLR 344, 359 (Mason CJ), 376 (Deane and Dawson JJ); South Australian Cold Stores Ltd (n 93) 75. 102 In R v Brown (1912) 14 CLR 17, 25 Griffith CJ observed, ‘The action for money had and received lay whenever the defendant had received money which in justice and equity belonged to the plaintiff and when nothing remained to be done except pay over the money’. In Campbell v Kitchen & Sons Ltd (1910) 12 CLR 515, 531 Barton J observed, ‘The action for money had and received, and that is the gist of this action, depends largely on the question whether it is equitable for the plaintiff to demand or for the defendant to retain the money’.

134  Rohan Havelock as giving rise to indeterminable debate.103 Nevertheless, various attempts have been made to imbue ‘conscience’ with substantive meaning. These have been by appeal to history; by recourse to the (traditional) concerns of equity; and by reference to broad normative concepts. These will be considered in turn.

i.  Appeal to History Writing in defence of the primacy given to ‘conscience’ and cognate notions by Gummow J in Roxborough, Ben Kremer104 makes two related arguments grounded in history. It is suggested that both are unconvincing. First, he explains that these notions are not a ‘recent invention’ but in fact the ‘touchstone’ of the historic cases involving money had and received, starting with those of Lord Mansfield.105 Further, the actual determinant in these cases was the ‘judge’s evaluation of the defendant’s conduct, measured against “conscience”.’106 Kremer concludes that the approach adopted in Roxborough is merely a ‘return to orthodoxy’.107 It is true that the historic cases108 contain references to ‘conscience’ (with its ecclesiastical connotations), although there is good reason to doubt the extent to which ‘conscience’ was the primary determinant of judicial decision-making, especially after the Reformation.109 In relation to his equation of conscience with ‘unfairness’ in the defendant retaining the moneys,110 Kremer does not explain what ‘unfairness’ means here. For example, does it lie in the plaintiff ’s consent in transferring the moneys being in some way flawed? Or in the defendant receiving property which was that of the plaintiff? Or is ‘unfairness’ essentially indefinable because it always involves fact-dependent evaluation? Secondly, Kremer observes that the term ‘unconscientious’ specifically has a long equitable pedigree and involves no great uncertainty of application.111 However, its pedigree is doubtful, for ‘unconscientious’ scarcely features in the English Reports.112 In any event, Kremer makes no attempt to define what this

103 P Birks, ‘Equity in the Modern Law: An Exercise in Taxonomy’ (1996) 26 University of Western Australia Law Review 1, 17. 104 B Kremer, ‘Restitution and Unconscientiousness: Another View’ (2003) 119 LQR 188. 105 ibid 189. 106 ibid 190. 107 ibid. 108 Prominent examples being Moses v Macferlan (n 92); Kelly v Solari (n 99); Freeman v Jeffries (1869) LR 4 Exch 189 197. 109 See RA Havelock, ‘The Evolution of Equitable ‘Conscience’’ (2014) 8 Journal of Equity 128, 148–59. 110 Kremer, ‘Restitution and Unconscientiousness’ (n 104) 190. 111 ibid. 112 Thus, in the English Reports for the years 1220–1865, there are only 56 hits in Chancery cases (searched using Westlaw.com). References to ‘unconscionable’ in Chancery cases are similarly scarce: see RA Havelock, ‘Conscience and Unconscionability in Modern Equity’ (2015) 9 Journal of Equity 1, 12–15.

Rivalry over Liability for Defective Transfers  135 term means in concrete terms, or to explain how it differs from ‘conscience’. The uncertainty in its application is addressed below.113 The other difficulty with appealing to historic usage is that such usage was not static but in flux. The Chancellors came to reject ‘conscience’ in its ecclesiastical sense (directed at the prevention of sin) as a legitimate basis for intervention. Considerations of ‘conscience’ became instantiated in rules and principles,114 and no longer varied like the Chancellor’s foot.115 The modern incantation of indeterminate notions of ‘conscience’ is, in a sense, regressive to a bygone era.

ii.  Appeal to the ‘Concerns’ of Equity Kremer’s other argument is that ‘conscience’ does not involve unstructured discretion, but is informed by the ‘interests which equity is seeking to protect’ and ‘operates by reference to substantive principles’.116 With respect, this begs the question as to what those ‘interests’ are, and their relative weight.117 As the contents page of any reputable textbook will demonstrate, equity undeniably protects a broad range of interests – both personal and proprietary – in relation to a range of different persons and transactions.118 To claim that ‘conscience’ is informed by this diversity of interests hardly advances things. It is worth noting that a very similar account of ‘conscience’ was given by the High Court itself in Hills Industries, ‘As was said in Kakavas v Crown Melbourne Ltd, “[t]he conscience spoken of here is a construct of values and standards against which the conduct of ‘suitors’ – not only defendants – is to be judged.”’119 Such ‘judgment’ also potentially involves an assessment of (moral) qualities of conduct,120 whereas in defective transfer cases, apart from receipt, the defendant usually has not done anything (let alone anything ‘blameworthy’) and does not

113 Section VII B. 114 See, eg Lord Nottingham in Cook v Fountain (1676) 3 Swans 585, 600; 36 ER 984, 990, ‘With such a conscience as is only naturalis et interna this Court has nothing to do; the conscience by which I am to proceed is merely civilis et politica, and tied to certain measures’; Lord Eldon in Gee v Pritchard (1818) 2 Swans 402, 414; 36 ER 670, 674, ‘The doctrines of this court ought to be as well settled and made as uniform almost as those of the common law’; Jessel MR in Re National Funds Assurance Co (1878) 10 ChD 118, 128, Chancery was not ‘a Court of conscience, but a Court of Law’. 115 F Pollock (ed), Table Talk of John Selden (London, Quaritch, 1927) 43. 116 Kremer (n 104) 191. 117 See Traditional Values Management Ltd (in liq) v Who Investments Pty Ltd [2015] VSC 518 [18]. 118 See those enumerated in Australian Competition & Consumer Commission (n 96) [42]–[43], in the context of the various grounds of equitable intervention which the term ‘unconscionable’ is said to describe. See also S Hedley, ‘Rival Taxonomies within Obligations: Is there a problem?’ in J Edelman and S Degeling (eds), Equity in Commercial Law (Pyrmont (NSW), Lawbook Co, 2005) 85. 119 Hills Industries (n 3) [76] (Hayne, Crennan, Kiefel, Bell and Keane JJ) (footnotes omitted). See also FT Roughley, ‘The Development of the Conscience of Equity’ in JT Gleeson, JA Watson and RCA Higgins (eds), Historical Foundations of Australian Law: Institutions, Concepts and Personalities, vol 1 (Annandale (NSW), Federation Press, 2013) 167, defining the ‘conscience of equity’ as ‘the institutionalisation of a virtue-seeking value’. 120 See also Havelock, ‘Conscience and Unconscionability’ (n 112) 21–23.

136  Rohan Havelock even know the purpose of the payment.121 Usually the defendant is passive (as in the paradigm case of uninduced mistaken payment). So to focus on the position of the defendant – let alone his or her (post-receipt) conduct and its character – is, with respect, misconceived.122 As for Kremer’s contention that conscience ‘operates by reference to substantive principles’, this is undoubtedly the case as a result of the systematisation of equity, and indeed has been emphasised by the High Court.123 The problem is that Kremer does not explain which ‘substantive principles’ control or guide the operation of conscience in the particular context in Roxborough and now under examination: liability for defective transfers.

iii.  Appeal to Normative Concepts Virgo has strongly contended that the foundation of unjust enrichment lies in ‘fairness’, to which, he says, ‘conscience’ responds. He asks in somewhat dramatic terms: [W]hy cannot fairness provide the normative justification for the recognition of unjust enrichment? It is this notion of fairness which imbued the old language of conscience (and equity and justice). If you have received something from me in circumstances where I did not intend you to have it then it is only fair that you should pay for it, save if your circumstances have changed as a consequence of the receipt of the enrichment. … now is the time to reinstate the language of conscience as the justification for the recognition of unjust enrichment. … It is unjust enrichment which provides the beating heart of the law of restitution, but it is conscience which justifies its existence’.124

And further: [I]t is entirely appropriate to regard conscience and unconscionability as the foundation of the modern law of unjust enrichment. It is the essential fairness of restoring the status quo which justifies the imposition of liability.125

This might seem to raise more questions than it answers. It is unclear whether the base justification is ‘fairness’, or ‘conscience’, or ‘unconscionability’. Virgo seems to use these notions interchangeably, as if they illuminate each other. It seems too simplistic to equate equitable ‘conscience’ with ‘fairness’, and in any event, what does ‘fairness’ mean exactly in the specific context of defective transfers? The reference to ‘restoration of the status quo’ connotes the Aristotelian conception of corrective justice,126 but even this (without more) does not answer why 121 See J Getzler, ‘Unconscionable Conduct and Unjust Enrichment as Grounds for Judicial Intervention’ (1990) 16 Monash University Law Review 283, 319. 122 In David Securities (n 29) 378, the High Court rejected the proposition that the plaintiff should be required to prove that retention of the moneys by the recipient would be unjust in all the circumstances. 123 Tanwar Enterprises (n 96) [20] (Gleeson CJ, McHugh, Gummow, Hayne and Heydon JJ). 124 Virgo, ‘The Seven Ages of Unjust Enrichment’ (n 69) 25. 125 ibid 26. 126 Aristotle, Nicomachean Ethics (Terence Irwin, Indianapolis, Hackett Pub Co 1985) book V, ch 2.

Rivalry over Liability for Defective Transfers  137 restoration is justified, having regard to the parties and/or their pre-transaction entitlements.127 Further, on the orthodox account of unjust enrichment, restoration of the status quo is not invariably the outcome, for defences (such as change of position) may mean that the status quo is not restored in full, or indeed at all. If such defences are accepted, they must necessarily affect what is meant by ‘fairness’ or ‘conscience’ or ‘unconscionability’. A narrower version of this justification equates ‘unconscionability’ with ‘exploitation’, which is said to involve taking ‘unfair advantage of others’.128 It is posited that this sense of unconscionability offers a ‘very plausible moral explanation’ of the duty to make restitution, for two reasons.129 First, that ‘unconscionability’ can predict better than ‘unjust enrichment’ when restitutionary duties arise. This will be addressed below.130 Secondly, that exploitation gives unconscionability a ‘moral’ weight, which unjust enrichment lacks. Cases of undue influence and unconscionable dealing are said to be ‘the cases of restitution for unjust enrichment’ which ‘best fit’ this analysis.131 Even if ‘exploitation’ imports a moral weight which ‘unjust enrichment’ does not (which is to be doubted132), the selective focus on these equitable doctrines ignores the dynamics of other defective transfer situations, including uninduced mistaken payment where the defendant is passive.

B. Conclusion It is submitted that none of these attempts to assign meaning to ‘conscience’ and cognate notions are satisfactory. Their failure simply confirms the indeterminate and conclusory nature of this language. The mere invocation of these notions, without more, does not of itself explain the reason for restitution.133 This is not to say that what counts as ‘unconscionable’ in particular contexts is not, in theory, capable of being appropriately defined and delimited by rules or principles.134 But that has not yet occurred in the context of defective transfer situations.

127 See also RA Havelock, ‘Justifying Unjust Enrichment’ [2017] LMCLQ 566, 571–74. 128 P Saprai, ‘Unconscionable Enrichment’ in R Chambers, C Mitchell and JE Penner (eds), Philosophical Foundations of the Law of Unjust Enrichment (Oxford, Oxford University Press, 2009) 418. 129 ibid 417. 130 Section VII B. 131 Saprai, ‘Unconscionable Enrichment’ (n 128) 419. This of course assumes that these equitable doctrines are validly subsumed within the law of unjust enrichment. 132 The dominant justifications of unjust enrichment both have, or arguably have, a moral basis. A corrective justice account appeals to Kantian ideas of rational agency: see EJ Weinrib, The Idea of Private Law, rev edn (Oxford, Oxford University Press, 2012) ch 4; EJ Weinrib, Corrective Justice (Oxford, Oxford University Press, 2012) ch 1. A property-based account may appeal to social and economic necessity: see LC Becker, ‘The Moral Basis of Property Rights’ (1980) 22 Nomos 187. 133 K Hayne, ‘Letting Justice be Done without the Heavens Falling’ (2001) 27 Monash University Law Review 12, 16. 134 As the High Court itself contemplated in Tanwar Enterprises (n 96) [86].

138  Rohan Havelock ‘­Unconscionability’ here is little more than a fifth wheel on the coach,135 with latent risk of misuse.136

VI.  The Extent of the Rivalry Before we evaluate the respective implications of the English and Australian approaches to liability for defective transfers, it is necessary to address the logically prior question of whether these approaches are in fact rivals at all. Some have characterised the difference as one of form but not substance. As Virgo puts it: As a matter of form, the divide between English and Australian restitution law seems more significant than ever following the decision of the High Court in Hills Industries, with England relying on unjust enrichment and Australia on conscience. But, as a matter of substance, the difference [between England and Australia] is vanishingly small. In England unjust enrichment operates to establish whether receipt of the enrichment is unconscionable in a principled sense, whereas in Australia unconscionability can only be interpreted in a principled way with reference to unjust enrichment.137

Virgo goes on to explain that the principle of unjust enrichment can serve the purpose of guiding the court in determining unconscionability, as opposed to licensing arbitrarily chosen outcomes on the facts.138 The italicised sentence above imputes to the two jurisdictions the ultimate objectives of establishing ‘unconscionability’ and ‘unjust enrichment’ respectively. The problem is that in England the courts do not see the ultimate question as one of ‘unconscionability’. It is enough to ask if the elements of unjust enrichment139 are present on the facts. Similarly, in Australia the High Court has not used unjust enrichment to interpret unconscionability; assuming it survives Hills Industries, unjust enrichment is a mere ‘framework’ or ‘taxonomical concept’. There is also the lingering question why the (supposedly) broad and flexible standard of unconscionability can only be interpreted with reference to unjust enrichment, but not other notions or criteria.

135 See Birks, ‘Receipt’ (n 61) 226. 136 Havelock, ‘Conscience and Unconscionability’ (n 112) 29. 137 G Virgo, The Principles of the Law of Restitution, 3rd edn (Oxford, Oxford University Press, 2015) 55 (emphasis added). In a more moderate assessment, Joachim Dietrich argues that the legal positions in the two jurisdictions are not ‘that dissimilar’ but there are some significant differences of substance, especially in relation to the application of equitable principles: J Dietrich, ‘Unjust Enrichment versus Equitable Principles in England and Australia’ in J Glister and P Ridge (eds), Fault Lines in Equity (Oxford, Hart Publishing, 2012) 9. 138 Virgo, Principles (n 137) 54–55. 139 Note, however, that in Investment Trust Companies (n 11) [41], the Supreme Court cautioned that ‘the questions are not themselves legal tests, but are signposts towards areas of inquiry involving a number of distinct legal requirements’.

Rivalry over Liability for Defective Transfers  139 The two doctrines may both be supplementary in function, but their differences in substance are undeniable.140 Liability in unjust enrichment is strict (subject to defences) and turns on the presence of four elements. These elements apply across a range of defective transfer situations (involving both assets and, arguably, services). The remedial response to unjust enrichment is invariably restitution. By contrast, ‘equitable principles’ are heterogeneous (developed in an ad hoc manner to correct deficiencies in the parallel common law) and have their own elements. Equitable liability is generally not strict,141 but often turns on assessment of a party’s knowledge or conduct (most obviously, fiduciary liability, so-called ‘unconscionable transactions’, knowing receipt and dishonest assistance).142 There are multiple remedial responses to equitable liability; restitution of value is but one. In conclusion, in doctrinal terms there is a world of difference between the two approaches. It is not possible to regard them as the same in substance, and merely downplay any differences. These differences reflect the probable reasons why the doctrines were developed (in the case of equitable liability founded on conscience, to correct the generality of the common law in individual cases; in the case of unjust enrichment, to explain and unify circumstances giving rise to restitution). The conflation of different concepts with different origins and rationales results in needless confusion and complexity,143 with detrimental effects on commerce.

VII.  Implications for Commerce The reality that the two approaches are rivals in their nature and effect will necessarily affect commercial parties involved in defective transfers differently. This is fundamentally because (at the risk of over-simplification) unjust enrichment is (in effect) sympathetic to the plaintiff transferor,144 whereas an unconscionability-based approach is (in effect) unsympathetic to the position or conduct of the defendant transferee.145 This section will examine the implications of the above two approaches for commerce from two perspectives. First, from the point of view 140 See further Getzler, ‘Unconscionable Conduct and Unjust Enrichment’ (n 121) 287–300, for a detailed analysis of the differences, with reference to unilateral mistake, unconscionable dealing and undue influence. 141 This is to say nothing of the equitable maxims, and miscellaneous equitable doctrines which do not create liability per se, such as equitable priorities, marshalling, election, and merger. 142 See further J Glover, ‘Equity and Restitution’ in P Parkinson (ed), The Principles of Equity, 1st edn (Sydney, Lawbook Co, 1996) 103. 143 In the context of knowing receipt, see dicta in Powell v Thompson [1991] 1 NZLR 597 (HC), ‘In the “knowing receipt” class of case the underlying basis of the defendant’s liability is the unjust enrichment of the defendant at the expense of the plaintiff ’ (607) and ‘whether, in all the circumstances, the conscience of equity is offended by the unjust enrichment of the defendant at the expense of the plaintiff ’ (609). 144 See Havelock, ‘Justifying Unjust Enrichment’ (n 127) 579–80. 145 Both approaches recognise a change of position defence, so are neutral in this respect.

140  Rohan Havelock of the (normative) interests that transferors and transferees of property and other assets have or expect to have. Secondly, from the point of view of the (presumptive) importance of legal certainty for parties in commerce.

A.  Mediating Competing Interests A transferor and a transferee of property have competing interests. The t­ransferor has parted with an interest in property – usually but not always by a bank ­transfer146 – in favour of another, but without intending to do so, for some reason. Insofar as the law responds to this lack of intention, it is arguably based on a fundamental presumption that people, as autonomous agents,147 are entitled to what is theirs until they freely part with it.148 The provision of a category of liability for defective transfers seems to recognise (or at least presuppose) the significance of the plaintiff ’s ownership of property.149 In turn, this seems to assume that property rights themselves are normatively justified.150 Conversely, the transferee has received property – again, commonly but not always in the form of money – from the plaintiff or an intermediate party. The transferee typically has a strong interest in security of receipt. This is the idea that the transferee must have the ability to treat the property transferred as his or her own, and to make decisions or take actions accordingly.151 Security of receipt is said to be vital to the flow of commerce.152 As stated at the outset of this chapter, liability in respect of defective transfers (regardless of what form the liability takes) is a necessary qualification to the overriding importance attached to the security of receipt.153 The position taken herein is that this qualification vindicates the interest the plaintiff has in only parting with property freely.154 The unjust factors – serving to establish the absence of such freedom in one way or another – explain why the plaintiff ’s claim overrides

146 It is assumed herein that a transfer of money in a bank account is a transfer of property, either because it involves a chose in action, or because the transfer involves the idea of handing over cash: see D Fox, Property Rights in Money (Oxford, Oxford University Press, 2008) para 1.39. 147 This is premised on Kantian rational agency: see Weinrib, The Idea of Private Law (n 132) 115–20; Weinrib, Corrective Justice (n 132) 11–12, 15. 148 A Drassinower, ‘Unrequested Benefits in the Law of Unjust Enrichment’ (1998) 48 University of Toronto Law Journal 459, 477; EJ Weinrib, ‘The Normative Structure of Unjust Enrichment’ in C Rickett and R Grantham (eds), Structure and Justification in Private Law: Essays for Peter Birks (Oxford, Hart Publishing, 2008) 35. 149 See C Webb, Reason and Restitution: A Theory of Unjust Enrichment (Oxford, Oxford University Press, 2016) 94–95. 150 This is a contested question which cannot be explored here: see generally J Waldron, The Right to Private Property (Oxford, Clarendon Press, 1988) 51–52. 151 Kleinwort Benson (n 5) 359, 395. 152 Westdeutsche Landesbank Girozentrale (n 56) 704–05 (Lord Goff). 153 See text to (n 3) above. 154 See also Havelock, ‘Justifying Unjust Enrichment’ (n 127) 578.

Rivalry over Liability for Defective Transfers  141 the defendant’s interest in security of receipt.155 The justification for this is at its strongest where there is no pre-existing relationship between the parties, such as with uninduced mistaken payment. Whereas the strict liability of unjust enrichment directly recognises the plaintiff ’s interest in only parting with property freely, liability on the basis of ‘equitable principles’ does not, because it is seemingly concerned with the position or conduct of the defendant, not the plaintiff.156 Unless the plaintiff can demonstrate ‘unconscionable retention’ by the defendant, he or she will not be entitled to restitution. In relation to the defendant, however, both approaches protect his interest because they allow a change of position defence, although in Australia the availability of the defence is perhaps less certain as a result of the nature of the liability itself being less certain.

B.  Commercial Certainty It is commonly said that certainty in legal rules and principles (sometimes termed ‘legal certainty’) is of the utmost importance to commercial parties.157 The idea of ‘certainty’ bears different meanings in different contexts, and for the purposes of this chapter it will be assumed that certainty is concerned, therefore, not with the substance of the law, but with the general predictability of judicial decisions.158 This was made clear by Lord Mansfield in Vallejo v Wheeler: In all mercantile transactions the great object should be certainty: and therefore, it is of more consequence that a rule should be certain, than whether the rule is established one way or the other. Because speculators in trade then know what ground to go upon.159

More recently in Scandinavian Trading Tanker Co AB v Flota Petrolera ­Ecuatoriana, Goff LJ stated: [T]he English courts have time and again asserted the need for certainty in commercial transactions – for the simple reason that the parties to such transactions are entitled to know where they stand, and to act accordingly.160

Legal certainty enables commercial parties (or more realistically, their lawyers) to predict how the law will be applied to the facts, and to use this to regulate their 155 Where the change of position defence applies to either negate or limit recovery, that interest is subordinated to the defendant’s interest in security of receipt. 156 See further Mason (n 37) 86. 157 LS Sealy and RJA Hooley, Commercial Law: Text, Cases and Materials, 3rd edn (London, LexisNexis, 2003) 10, ‘Businessmen have special needs … they require the decisions of the courts on commercial issues to be predictable so that they know where they stand’. 158 Treating like cases alike is integral to any abstract conception of justice: HLA Hart, The Concept of Law, 2nd edn (PA Bulloch and J Raz eds, Oxford, Clarendon Press, 1994) 157–67. 159 Vallejo v Wheeler (1774) 1 Cowp 143, 153; 98 ER 1012, 1017. 160 Scandinavian Trading Tanker Co AB v Flota Petrolera Ecuatoriana [1983] QB 529 (CA) 540–41; Homburg Houtimport BV v Agrosin Private Ltd [2003] UKHL 12, [2004] 1 AC 715, 738; Jindal Iron and Steel Co Ltd v Islamic Solidarity Shipping Co Jordan Inc [2004] UKHL 49, [2005] 1 WLR 1363, 1370.

142  Rohan Havelock behaviour in two main ways. First, ex ante by anticipating, and then preparing for, any given situation with legal implications (eg structuring transactions to comply with the law) and attendant risks. Secondly, ex post by deciding how to react to any given situation with legal implications and attendant risks that has in fact arisen (eg by taking action to avert a dispute, or to settle a dispute in advance of litigation or judgment). A defective transfer is generally not something that a party anticipates, or indeed can anticipate, in any specific way. It is an anomalous transaction which has (inadvertently) gone wrong in some way. As a result, it is the ex post regulation of behaviour by the parties, and their advisers, that is primarily relevant.161 Accordingly, a transferor must know what they need to prove (and the defences they may need to rebut) to recover the value of the transfer, and make an assessment of what to settle for. At the same time, a transferee must know what the transferor needs to prove (and the defences they may rely on), so they can make an informed assessment as to whether to make restitution. Similarly, if a dispute escalates to litigation, the lawyers advising the parties must know what their client needs to plead and prove in order to succeed in the claim or defence. For all of these purposes, the law relating to liability for defective transfers must be generally predictable. If it is not, then ex post regulation of behaviour is difficult, if not impossible. Moreover, the parties may be left to the whim of arbitrary decision-making, with associated risk and cost. The question is how judicial decision making in this area can best facilitate this type of legal certainty. It is often assumed that legal rules, rather than principles or standards, increase legal certainty.162 As Joseph Raz observes: Since the law should strive to balance certainty and reliability against flexibility, it is on the whole wise legal policy to use rules as much as possible for regulating human behaviour because they are more certain than principles and lend themselves more easily to uniform and predictable applications.163

While the application of rules may sometimes yield harsh or unjust results, at the same time it has been said that there cannot be justice without rules – that is, ­without commitment to the like treatment of like cases which is their h ­ allmark.164 Where the type of action being regulated is stable (ie not changing unpredictably) and does not involve large economic interests, it has been said that rules regulate with greater certainty than principles.165 With the possible e­ xception of the less 161 See C Webb, ‘The Myth of the Remedial Constructive Trust’ (2016) 69 Current Legal Problems 353, 358, ‘For in these settings [mistaken transfers and other unjust enrichments], the concern that the law be clear so that we might arrange our affairs in its light, if applicable at all, is less strong’. 162 J Braithwaite, ‘Rules and Principles: A Theory of Legal Certainty’ (2002) 27 Australian Journal of Legal Philosophy 47, 51. 163 J Raz, ‘Legal Principles and the Limits of Law’ (1971–1972) 81 Yale Law Journal 823, 841. 164 See Webb, ‘Remedial Constructive Trust’ (n 161) 372. 165 Braithwaite, ‘Rules and Principles’ (n 162) 54. Braithwaite does not elaborate on the nature of ‘large economic interests’, other than remarking that they are ‘the staples of state regulatory practice and of private litigation in the appellate courts’.

Rivalry over Liability for Defective Transfers  143 determinate policy-motivated unjust factors, this is the case with defective transfers. They exhibit the same core features: a transfer with lack of intention on the part of the transferor, and a receipt of property (often, money) by the t­ ransferee.166 If it is accepted that legal certainty is best achieved through rule-based judicial decision, then unjust enrichment is arguably more likely to facilitate this than an approach based on ‘equitable principles’ or ‘unconscionable retention’. Notwithstanding the Supreme Court’s recent caution that the elements of unjust enrichment are not ‘legal tests’ but simply ‘broad headings for ease of exposition’ or ‘signposts towards areas of inquiry’,167 these elements resemble rules for application to the facts. Although their scope remains unsettled in some respects168 and there are inevitable difficulties in application, they at least provide an analytic framework for resolving liability in the aftermath of a defective transfer. This is conducive to the parties and their advisers knowing where they stand ex post, and more fundamentally, to like cases being treated alike. The strict (albeit fragile) nature of liability in unjust enrichment reinforces legal certainty here, because the court has no residual discretion to reach a different result.169 In contrast, it is not at all clear that an approach based on ‘equitable principles’ or ‘unconscionable retention’ is capable of facilitating legal certainty, whether through rule-based judicial decision or otherwise. As things stand, these notions remain undefined, and the elements that must be pleaded and proved cannot even be formulated, let alone structured in an analytic framework. Alternatively, if ‘equitable principles’ require a determination as to whether the defendant’s retention of what he or she has received would be ‘unconscionable’ (according to ‘standards and values’ against which conduct is judged170), this does not meaningfully advance matters. In this sense, ‘unconscionable’ is indeterminate and variable in its application; in theory, it means a plaintiff may be denied restitution even, for example, where there is no defence. For all these reasons, it is a source of legal uncertainty in this area, to the detriment of commercial parties, other than those wishing to exploit this uncertainty to their advantage to dispute liability and/or prolong litigation.171 Against this, it has been argued that the adoption of general standards of conduct will ‘allow for more transparent – and hence predictable and certain – decisionmaking processes by the courts’.172 It has even been said that the uncertainty of a ‘conscience-based’ assessment is no greater than that which can emanate from

166 One of the merits of utilising the category of unjust enrichment is that it is said to replace obscure and fragmentary historic forms of action and related language: see Birks, Unjust Enrichment (n 4) ch 11. 167 Investment Trust Companies (n 11) [41]. This characterisation is regrettable insofar as it dilutes a more systematic approach to determining liability. 168 Particularly in relation to the enrichment requirement, and the ‘at the expense of ’ requirement. 169 Although note the contrary suggestions by Lord Neuberger in Menelaou (n 10) [77], [81]. 170 Hills Industries (n 3) [76], [16] (French CJ). 171 Birks, ‘Equity in the Modern Law’ (n 103) 1. 172 J Dietrich, ‘Giving Content to General Concepts’ (2005) 29 Melbourne University Law Review 218, fn 5.

144  Rohan Havelock a formal rule steeped in ‘technicality and uncertain penumbra’.173 With respect, such views are questionable. General standards may appear transparent (in the sense that they can be easily articulated and intuitively grasped), but unless their application is informed by rules, they plague the law with indeterminacy, and are not conducive to achieving legal certainty. Further, there is also a fundamental difference between: (1) determining whether a particular rule is satisfied on the facts; and (2) determining whether a particular standard such as ‘conscience’ or ‘unconscionability’ has been transgressed on the facts. In the former situation, the content of the law (ie the rule) is certain, although there may be scope for difference as to whether and how it applies on the facts. Conversely, in the latter situation, the law (ie the standard) represents a sliding scale, not constrained by rules,174 and in this sense is uncertain.

VIII. Conclusion It has been argued above that the prevailing English and Australian approaches to liability for defective transfers are materially different not only in form but in substance, and must necessarily be regarded as rivals. Most obviously, on the English approach, ‘unjust enrichment’ operates as a legal principle constituted by four elements and with recognised defences, whereas on the Australian approach, ‘unjust enrichment’ is not a legal principle but (at best) either provides a framework for analysis or has a ‘taxonomical function’, or (at worst, in light of Hills Industries) has been expelled from Australian law. As a result, it can safely be said that Australia has retreated into a state of ‘restitutionary exceptionalism’.175 To ask ‘who should properly bear the loss and why’176 in this situation is, with respect, to adopt a focus inconsistent with what has occurred in a defective transfer: the plaintiff has transferred property in favour of another. The plaintiff does not seek to avoid a loss, but to recover the value of the property. Moreover, to determine liability by reference to undefined ‘equitable principles’ or ‘unconscionable retention’ is not only a regression to equitable notions of a bygone age, but affords considerably less certainty to commercial parties involved in defective transfers than the strict but fragile liability imposed by unjust enrichment.

173 S Hepburn, ‘The Discourse of Conscience in the Assessment of Voluntary Assignments in Equity’ (2006) 1 Journal of Equity 117, 119. 174 In the sense described by Webb, ‘The Myth of the Remedial Constructive Trust’ (n 161) 369, ‘The ideal of rule-determined decision-making is of a system of rules that fully resolves all relevant practical questions, such that, once those rules are in place and the facts known, the decision-maker knows what he is to do without further inquiry. Discretionary decision-making differs in that it rejects this aim. While it has rules which exist to guide the decision-maker, these rules stop short – and stop short by design – of settling the decision he is to reach’. 175 A phrase coined by B Mason, ‘Australia is Different: Restitution and the Australian Constitution’ (2016) 90 Australian Law Journal 120, 121. 176 Hills Industries (n 3) [78].

Rivalry over Liability for Defective Transfers  145 The four elements of unjust enrichment may be difficult to apply in practice, but they at least constitute a structured means of regulating liability for defective transfers. They enable a party (or the party’s lawyers) to make a reasonable prediction of where he stands in the aftermath of a defective transfer. The plaintiff is informed of what he must plead and prove in order to recover. With that same knowledge, as well as being informed as to the availability of defences, the defendant can make a basic assessment of whether he should make restitution or not, both before or after proceedings. This, it has been argued, is its decisive advantage.

146

7 Equity and the Value of Certainty in Commercial Life MATTHEW HARDING*

I. Introduction It is sometimes suggested that certain aspects of equity are inconsistent with the value of certainty in commercial life. To an extent, such suggestions are entailed in a broader argument that equity is to some degree generally inconsistent with values associated with the rule of law.1 And to some extent, the charge that equity is at odds with the value of commercial certainty seems to be linked to other, more specific, propositions about commercial life, such as the proposition that simplicity and finality are especially important to commercial parties,2 and the related proposition that courts in common law jurisdictions should strive to keep law relevant and appealing to commercial parties, lest they take their litigation elsewhere.3

* My thanks to Michael Bryan for helpful comments on a draft. A version of this chapter was presented at the 2017 Kirby Seminar at the University of New England, and I am grateful to Mark Lunney for his perceptive comments and for his hospitality during my visit to Armidale. And my sincere thanks go to Peter Devonshire and Rohan Havelock for the opportunity to participate in an interesting and collegial colloquium at the University of Auckland on 18–19 September 2017, and for including this chapter in this collection. 1 See, eg JN Pomeroy, Pomeroy’s Equity Jurisprudence, 5th edn, vol 1 (SW Symons ed, Union (NJ), Lawbook Exchange, 2002) § 43: ‘Since the combination of legal and equitable remedies in one judicial proceeding which has been effected in many of the states, the notion seems to have been revived, somewhat vague and undefined perhaps, but still widely diffused among the legal profession, that Equity is nothing more or less than the power possessed by judges – and even the duty resting upon them – to decide every case according to a high standard of morality and abstract right; that is, the power and duty of the judge to do justice to the individual parties in each case. … It needs no argument to show that if this notion should become universally accepted as the true definition of Equity, every decision would be a virtual arbitration, and all certainty in legal rules and security of legal rights would be lost’. 2 A proposition of some antiquity: see Vallejo v Wheeler (1774) 1 Cowp 143, 153; 98 ER 1012, 1017 (Lord Mansfield). 3 See, eg Lord Neuberger, ‘Equity – The Soul and Spirit of All Law or a Roguish Thing?’ (Lehane Lecture, Sydney, 4 August 2014); Lord Neuberger, ‘The Remedial Constructive Trust – Fact or Fiction?’ (Banking Services and Finance Law Association Conference, Queenstown (NZ), 10 August 2014), both available at www.supremecourt.uk/news/speeches.html.

148  Matthew Harding The suggestion that equity is inconsistent with commercial certainty is sometimes used to ground a critique of equity,4 but it is also accepted by some who would defend equity against its critics, for example by pointing out that certain values outweigh commercial certainty when equity operates on the facts of a case.5 In this chapter, I aim to question the suggestion that equity lacks consistency with the value of commercial certainty. In doing so, I concentrate on two aspects of equity. First, I consider equity’s role in imposing legally enforceable norms on commercial parties. To the extent that equity does this, it might be thought that equity interrupts and interferes with freely formed bargains and injects a degree of uncertainty into those bargains as a result. Nonetheless, I argue that in some cases where equity imposes norms on commercial parties, uncertainty is generated not by equity but rather by contract law; I then argue that in other cases, far from undermining commercial certainty, equity’s imposition of norms might in fact contribute to it. Secondly, I consider the role of judicial discretion in equity. To the extent that findings of liability in equity and the award of equitable remedies turn on exercises of judicial discretion, it might be suggested that in equity the outcomes of litigation are in some significant sense uncertain because they are unpredictable; and this unpredictability might be thought especially unwelcome to commercial parties who are repeat users of the courts and seek to factor litigation risk into their business planning. Nonetheless, I argue that there are reasons to question the proposition that equity tends to undermine commercial certainty because of the judicial discretion that is entailed in it. These reasons point to the institutional settings in which judges exercise discretion in equity.

II.  Equity’s Imposition of Norms on Commercial Parties A.  Equity’s Norms, Contract Law and Commercial Uncertainty Perhaps the best-known way in which equity imposes legally enforceable norms in the commercial setting is via fiduciary law. In many cases, fiduciary norms are imposed on commercial actors because they occupy roles that are recognised in law as fiduciary in character; these roles include trustee, solicitor, partner and company director.6 In other cases, parties do not occupy traditional fiduciary roles  but fiduciary norms are imposed on one or both of them because of the factual incidents of their relationship. Where the foundation of that relationship

4 ibid. 5 See, eg M Halliwell, Equity and Good Conscience in a Contemporary Context (London, Old Bailey Press, 1997) 6. 6 See further PB Miller, ‘The Idea of Status in Fiduciary Law’ in PB Miller and AS Gold (eds), Contract, Status, and Fiduciary Law (Oxford, Oxford University Press, 2016) 25.

Equity and the Value of Certainty in Commercial Life  149 is a commercial  contract, parties may find, after entering into the contract, that their relationship is a fiduciary one even though neither of them wanted or anticipated this at the time of contracting. In this sort of case, it might be thought that equity is at odds with the value of commercial certainty insofar as it overrides a contractual bargain that parties thought determined the contours of their legal relationship. In some respects, this picture of equity overriding contract and potentially generating commercial uncertainty seems broadly accurate. For example, where a party has undertaken to serve the interests of another party in pre-contractual dealings, such an undertaking may generate a fiduciary relationship.7 Moreover, in certain cases that fiduciary relationship may subsist upon entry into the contract in question, so that if the contract contains terms purporting to exclude or limit fiduciary undertakings, the contract may be set aside unless the pre-contractual fiduciary makes full disclosure of the self-interested nature of those terms and seeks informed consent to their inclusion in the contract.8 To take another example, where parties to a commercial contract have pursued a ‘course of dealing’ according to which one party has undertaken to act in the interests of the other, equity may recognise a fiduciary relationship that reflects the post-contractual undertaking and not the initial contract.9 In cases such as these, parties strike a contractual bargain, but equity overrides that bargain because equity recognises facts that are either anterior or posterior to the bargain as normatively salient to the case. That said, in other cases the picture of equity overriding contract and generating commercial uncertainty seems simplistic and potentially misleading. For example, and most obviously, a contract may expressly stipulate that the relationship between the parties is to some extent fiduciary; in such a case, equity’s imposition of fiduciary standards can hardly be said to undermine the certainty of the parties’ bargain as it is consistent with the express terms of that bargain.10

7 See, eg Lac Minerals Ltd v International Corona Resources Ltd [1989] 2 SCR 574, 61 DLR (4th) 14; United Dominions Corp Ltd v Brian Pty Ltd (1985) 157 CLR 1; Chirnside v Fay [2006] NZSC 68, [2007] 1 NZLR 433, although note that in the latter case Blanchard and Tipping JJ doubted that what triggered the fiduciary relationship was in the nature of an undertaking: at [81]–[83], [85]. 8 See P Finn, ‘Contract and the Fiduciary Principle’ (1989) 12 University of New South Wales Law Journal 76, 92–96. This possibility was not considered in Australian Securities and Investments Commission v Citigroup Global Markets [2007] FCA 963, (2007) 160 FCR 35, in which a contract term excluding any fiduciary undertaking was upheld. 9 Birtchnell v Equity Trustees, Executors and Agency Co Ltd (1929) 42 CLR 384, 407–08 (Dixon J). 10 In saying this, I do not mean to subscribe to the view, expressed most forcefully by Edelman J in his extra-judicial writings, that fiduciary obligations are implied terms of voluntary undertakings, including contracts: see J Edelman, ‘When Do Fiduciary Duties Arise?’ (2010) 126 LQR 302; J Edelman, ‘The Importance of the Fiduciary Undertaking’ (2013) 7 Journal of Equity 128. I think that fiduciary obligations are imposed on parties for a range of reasons that are ultimately grounded in public policy, and therefore that describing fiduciary obligations as implied terms of voluntary undertakings obscures analysis. However, I also think that where a contractual bargain expressly stipulates that one of the contracting parties is to be fiduciary in relation to some matter, the imposition of fiduciary obligations on that party is consistent with the contractual bargain.

150  Matthew Harding Similarly, even in cases where a contract does not expressly stipulate that the relationship between the contracting parties is fiduciary, principles of contractual interpretation may demand that such a term be implied into the contract taken as a whole.11 Admittedly, the likelihood of an implied contractual term generating a fiduciary relationship in a commercial setting is not great, and this seems to be reflected in the reluctance of courts in certain key cases to recognise fiduciary relationships between parties to commercial contracts.12 But neither is it inconceivable that a fiduciary relationship might be implied into a commercial contract: as Paul Finn has written: In commercial bargains struck at arms length [sic] between sophisticated parties with equal bargaining power, the need to make one part of their agreement fiduciary may be the only means reasonably available to them if they are to be able to enter into a detailed commercial arrangement the principal object of which is to promote their separate – and non-fiduciary – interests.13

Everything turns on the facts of the case. Because the methods and techniques of contractual interpretation are ­objective,14 it is possible that the meaning of contractual terms generating a fiduciary relationship might diverge from the subjective understanding of the parties to the contract, and that this divergence might generate commercial uncertainty. This divergence and concomitant uncertainty seems especially likely where courts recognise implied contractual terms generating fiduciary relationships. For present purposes, the key point to note is that the cause of uncertainty in such circumstances is not the operation of equity; it is, rather, the objective nature of contractual interpretation. Equity sets out the legally enforceable norms that will be applied to fiduciaries, as well as the test for ascertaining whether or not, and in respect of what matters, a person is a fiduciary.15 But if those norms are imposed on a party to a commercial contract because the contract in question is interpreted as entailing a fiduciary undertaking that satisfies equity’s test, any  resulting uncertainty does not arise because equity overrides bargains. 11 For completeness, I note that other interpretive possibilities militate against the existence of a fiduciary relationship. For example, an express stipulation that a fiduciary relationship is present may not have the breadth expressed, Noranda Australia Ltd v Lachlan Resources NL (1988) 14 NSWLR 1 (NSWSC), and an implied term may exclude any fiduciary undertaking, Kelly v Cooper [1993] AC 205 (PC). See generally M Leeming, ‘The Scope of Fiduciary Obligations: How Contract Informs, But Does Not Determine, the Scope of Fiduciary Obligations’ (2009) 3 Journal of Equity 181. 12 See, eg Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41, 70 (Gibbs CJ), 99 (Mason J), 118–119 (Wilson J), 149–150 (Dawson J); John Alexander’s Clubs Pty Ltd v White City Tennis Club Ltd [2010] HCA 19, (2010) 241 CLR 1 [92]. 13 P Finn, ‘Fiduciary Reflections’ (2014) 88 Australian Law Journal 127, 135–136. 14 See, eg Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896 (HL) 912 (Lord Hoffmann); Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd [2004] HCA 52, (2004) 219 CLR 165 [40]; Byrnes v Kendle [2011] HCA 26, (2011) 243 CLR 253 [98]–[101] (Heydon and Crennan JJ), but note also D McLauchlan, ‘The Contract That Neither Party Intends’ (2012) 29 Journal of Contract Law 26. 15 On the nature of this test, see further M Harding, ‘Fiduciary Undertakings’ in Miller and Gold, Contract, Status, and Fiduciary Law (n 6) 71.

Equity and the Value of Certainty in Commercial Life  151 It  arises because the party’s understanding of her bargain does not reflect the true meaning of that bargain as determined by contract law.

B.  Norms and Equity’s Contribution to Commercial Certainty Like private law generally, equity performs at least two broad functions in the legal system. First, equity provides people with remedies in circumstances where disputes have been adjudicated in their favour in a court of law. This aspect of equity is often emphasised in scholarship and teaching, which is perhaps understandable given equity’s history and the case-based method of teaching law. But secondly, like the law of property and the law of contract, equity provides people with legal tools that they may employ in planning their affairs and realising their goals. For example, by recognising, enabling and enforcing the various rights, duties and powers that may be packaged together under a trust, and by empowering people to create these trust packages, equity facilitates the achievement of people’s wealth management goals in a multitude of ways. Arguably, an understanding of equity that does not appreciate its facilitative side is incomplete,16 just as an account of law generally that does not appreciate what HLA Hart famously called its ‘powerconferring’ aspects is unsatisfying.17 Moreover, equity’s facilitative function seems appealing when viewed in light of at least some traditions of private law theory: for example, from a law and economics perspective that function arguably assists in maximising efficiency;18 and in the perfectionist and pluralist tradition best exemplified in the work of Hanoch Dagan, that function enables people to act in self-determining ways by choosing among meaningful options.19 In thinking about ways in which equity’s imposition of legally enforceable norms can contribute to commercial certainty, I want to focus on this facilitative side of equity. When approaching equity with its facilitative function in view, the proper perspective is that of a party who seeks to utilise legal facilities in the ordering of her affairs. What can be said about equity’s imposition of norms on commercial parties from this ex ante perspective? The example of equity’s imposition of fiduciary norms will once again serve to illustrate. One of the key insights of the law and economics school is the idea that fiduciary law sometimes operates as default law, entailed in structures and arrangements from their inception except to the extent that it is specifically excluded.20 Thus, the norms that equity imposes on fiduciaries 16 See further PB Miller, ‘Equity as Supplemental Law’ in D Klimchuk, I Samet and HE Smith (eds), Philosophical Foundations of the Law of Equity (Oxford, Oxford University Press, forthcoming). 17 HLA Hart, The Concept of Law, 3rd edn (Oxford, Oxford University Press, 2012) ch 3. 18 The locus classicus of law and economics is RA Posner, Economic Analysis of Law, 9th edn (New York, Wolters Kluwer Law & Business, 2014). 19 See, eg H Dagan, ‘Pluralism and Perfectionism in Private Law’ (2012) 112 Columbia Law Review 1409. 20 See, eg JH Langbein, ‘The Secret Life of the Trust: The Trust as an Instrument of Commerce’ (1997) 107 Yale Law Journal 165, 182–83; RH Sitkoff, ‘An Economic Theory of Fiduciary Law’ in Gold

152  Matthew Harding may be viewed, at least sometimes, as part of a pre-formed package of norms that people may take up and employ to suit their objectives. For example, the settling of an express trust in which the trustee enjoys administrative discretions necessarily entails the imposition of fiduciary obligations on the trustee except to the extent excluded by the trust instrument. Thus, a person who chooses to pursue wealth management goals by settling an express trust that confers administrative discretions on the trustee may subject the trustee to fiduciary obligations simply by choosing that structure.21 To the extent that fiduciary law is embedded in structures and arrangements, people can know that, if they utilise those structures and arrangements, they are thereby importing fiduciary norms into their dealings. From the ex ante perspective of a person who seeks to employ law’s facilities in ordering her commercial affairs, this sort of certainty about the implications of choosing one or another structure or arrangement is valuable. It enables such a person to transact by using structures and arrangements in a modular fashion, removing the need to negotiate bespoke contractual terms that might never be agreed; it also enables such a person to avoid implementing potentially costly ex post strategies for monitoring and controlling counterparties. In law and economics language, transaction and agency costs can be minimised.22 Moreover, the embedding of fiduciary norms in structures and arrangements via default law generates another, more generalised, sort of certainty. It creates conditions under which relevant communities of practice develop a sense that certain roles and offices are fiduciary in character, and this then contributes to certainty within the communities in question about what is expected in these roles and offices. Thus, role-occupants such as lawyers and professional trustees might come to view themselves and their transactions from the perspective of the fiduciary. And to the extent that the fiduciary perspective is internalised in this way, transaction and agency costs may be minimised even further, as efforts to utilise the structures and arrangements that embed fiduciary norms are less likely to be met with resistance on the part of would-be fiduciaries. The ex ante perspective of the person who seeks to use law’s facilities helps to illuminate not only arguments about ways in which equity might contribute to commercial certainty by imposing norms, but also arguments about what is at stake when certainty in relation to such norms is diminished. In this regard, it is instructive to consider recent developments in relation to a trustee’s liability to monetary remedies following the taking of an account in common form. and  Miller, Philosophical Foundations of Fiduciary Law (Oxford, Oxford University Press, 2014) 197, 204. There is some disagreement among economists of law as to the extent to which fiduciary law operates or should operate as mandatory law (see, eg FH Easterbrook and DR Fischel, ‘Contract and Fiduciary Duty’ (1993) 36 Journal of Law and Economics 425, arguing that fiduciary law is never mandatory law; and contrast Sitkoff at 205), but this disagreement does not affect the points in the text, which apply to fiduciary law qua default and mandatory law. 21 Although exactly what the obligations require may vary depending on other characteristics of the trust: see Cowan v Scargill [1985] Ch 270; Harries v Church Commissioners [1992] 1 WLR 1241 (Ch). 22 Sitkoff (n 20) 199.

Equity and the Value of Certainty in Commercial Life  153 On the traditional view, where a common account is taken and an unauthorised disbursement is thereby revealed, the trustee is personally liable to restore the trust assets to the extent of that unauthorised disbursement. This liability is considered analogous to liability in debt or to an order for specific performance.23 Thus, on the traditional view, equity is uninterested in questions about consequences that might have been caused by the unauthorised disbursement, and insists on restoration of that disbursement even if, as matters have turned out, no loss to the trust was occasioned by it.24 The underpinning of this liability, with its peculiar lack of interest in questions of causation, appears to be a norm of stewardship according to which a trustee is required to preserve the trust assets and to deal with those assets only according to her mandate and in no other way.25 Modern decisions in the United Kingdom have departed from equity’s traditional view of trustees’ liability in common account cases.26 In Target Holdings Ltd v Redferns, there had been an unauthorised disbursement of trust assets.27 In the House of Lords, Lord Browne-Wilkinson stated that the question for decision was as follows: Is the trustee liable to compensate the beneficiary not only for losses caused by the breach but also for losses which the beneficiary would, in any event, have suffered even if there had been no breach?28

This framing of the case was a substantial departure from the traditional view and its indifference to causal relations between trustees’ actions and beneficiaries’ losses. Similarly, in the more recent case of AIB Group (UK) plc v Mark Redler & Co Solicitors, where once again there had been an unauthorised disbursement and a dispute over the extent to which the trustee’s actions had caused loss to the beneficiary, the United Kingdom Supreme Court adopted an approach that focused on questions of breach, causation and loss.29 In particular, Lord Reed stated that ‘the loss must be caused by the breach of trust’,30 and Lord Toulson went even further: It is one thing to speak of an ‘equitable debt or liability in the nature of a debt’ in a case where a breach of trust has caused a loss; it is another thing for equity to impose 23 Ex p Adamson (1878) 8 Ch D 807 (CA) 819 (James and Baggallay LJJ); Libertarian Investments Ltd v Hall [2013] HKCFA 93, (2013) 16 HKCFAR 681 (Lord Millett NPJ); Agricultural Land Management Ltd v Jackson [No 2] [2014] WASC 102, (2014) 48 WAR 1 [336] (Edelman J). 24 Matters are otherwise when an account is taken on the basis of wilful default: Libertarian Investments Ltd (n 23) [170] (Lord Millett NPJ); Agricultural Land Management Ltd (n 23) [348] (Edelman J). See also L Ho, ‘An Account of Accounts’ (2016) 28 Singapore Academy of Law Journal 849 [16]. 25 For the language of ‘stewardship’, see C Mitchell, ‘Stewardship of Property and Liability to Account’ [2014] The Conveyancer and Property Lawyer 215. On the duty to preserve trust assets, see J Edelman, ‘An English Misturning with Equitable Compensation’ in S Degeling and JNE Varuhas (eds), Equitable Compensation and Disgorgement of Profit (Oxford, Hart Publishing, 2017) 91, 98–100. 26 For an overview of the developments, see M Conaglen, ‘Equitable Compensation for Breach of Trust: Off Target’ (2016) 40 Melbourne University Law Review 126. 27 Target Holdings Ltd v Redferns [1996] AC 421 (HL). 28 ibid 428 (Lord Browne-Wilkinson). 29 AIB Group (UK) plc v Mark Redler & Co Solicitors [2014] UKSC 58, [2015] AC 1503. 30 ibid [136] (Lord Reed).

154  Matthew Harding or recognise an equitable debt in circumstances where the financial position of the beneficiaries, actual or potential, would have been the same if the trustee had properly performed its duties. … [A] monetary award which reflected neither loss caused nor profit gained by the wrongdoer would be penal.31

These passages show clearly that the traditional view of common account cases no longer represents the law in the United Kingdom. When viewed from the ex ante perspective of the person seeking to utilise legal facilities in ordering her affairs, the departure from equity’s traditional view in Target Holdings and AIB is arguably of concern having regard to the value of commercial certainty. Consider the position of a party seeking to enter into a commercial transaction pursuant to which her funds will be held by a trustee pending instructions as to their ultimate disbursement. In a jurisdiction where equity’s traditional view in common account cases prevails, this party will know – or be able to find out by consulting a lawyer – that the choice of a trust in order to facilitate the holding and disbursement of the funds in question imports, by default, a norm demanding that the funds be preserved and disbursed only in accordance with her instructions. Moreover, this party will know that equity guarantees adherence to this norm by requiring the restoration of the trust funds in circumstances where the norm has not been conformed to, irrespective of the consequences of the non-conformity.32 By building a trust into the transaction, the party may thus gain certainty, ex ante, that the trustee will adhere to a norm of stewardship in relation to the funds, whether voluntarily or by compulsion. In contrast, consider the position of the party in the United Kingdom who is to entrust funds pursuant to a transaction in a post-Target Holdings and AIB environment. Ex ante, such a party has assurance that the trustee will be compelled to compensate for losses occasioned by any failure to adhere to instructions in relation to the disbursement of the funds. But what assurance will this party have that the trustee will conform to a norm of stewardship in respect of those funds? She lacks any guarantee that her instructions themselves will be followed, whether voluntarily or by compulsion; compensating for losses occasioned by a failure to conform to instructions is not the same as guaranteeing that c­onformity.33 There are thus reasons to think that this party enjoys less certainty in relation to the transaction she is about to enter than a party who enjoys the guarantee of conformity that characterises equity’s traditional approach to common account cases. In particular, where a party enjoys a guarantee of conformity, she need not 31 ibid [61], [64] (Lord Toulson). 32 See further J Getzler, ‘“As If.” Accountability and Counterfactual Trust’ (2011) 91 Boston University Law Review 973; Ho, ‘An Account of Accounts’ (n 24); M Harding, ‘An Argument for Limited Fission’ in  J Goldberg, P Turner and HE Smith (eds), Equity and Law: Fusion and Fission (Cambridge, Cambridge University Press, forthcoming 2018), on the notion of a guarantee of conformity. 33 This distinction is sometimes framed with reference to primary and secondary obligations: see,  eg  L Smith, ‘The Measurement of Compensation Claims Against Trustees and Fiduciaries’ in E Bant and M Harding (eds), Exploring Private Law (Cambridge, Cambridge University Press, 2010) 363, 369–70.

Equity and the Value of Certainty in Commercial Life  155 attempt to work through various counterfactual scenarios when assessing the risk associated with a transaction. Moreover, a guarantee of conformity sends a clear signal to those to whom funds are to be entrusted that they are expected simply to adhere to their mandate. The approach taken in Target Holdings and AIB, on the other hand, seems to tempt trustees to deviate from their mandate so long as the consequences of doing so are not adverse to the beneficiary. Where trustees believe that the law permits them this latitude, they may also come to believe that they are not, as a practical matter, required to adhere to a norm of stewardship in the first place. This change of perspective on the part of trustees may compound the uncertainty associated with entrusting funds pursuant to transactions by contributing to the erosion of trust, in the non-legal sense, reposed in commercial parties that perform trustee functions. In Target Holdings, Lord Browne-Wilkinson appealed to commercial imperatives in justifying the departure in that case from equity’s traditional approach to the common account. His Lordship stated that it would render trusts ‘commercially useless’ to apply to them ‘specialist rules developed in relation to traditional trusts which are applicable only to such trusts and the rationale of which has no application to trusts of quite a different kind’.34 Specifically, Lord Browne-Wilkinson sought to question the suitability of equity’s traditional approach to the common account in circumstances where trusts arise to facilitate commercial transactions; why insist on trustees adhering to a norm of stewardship after the transactions in which their trusts are embedded have come to an end?35 On this view, remedies are all that are desired, or desirable, in such cases; there is no occasion for equity to ensure that trust assets are preserved so that a trustee’s mandate in relation to them may be carried out over time. Lord Browne-Wilkinson’s observations in Target Holdings have been described recently, by Yip Man and James Lee, as an instance of the ‘­commercialisation of equity’, being the reinterpretation and reshaping of equity so as to render it more sensitive to a perceived commercial demand for greater flexibility in ­adjudication.36 Such flexibility is undoubtedly of value to commercial parties. However, it seems desirable only from the ex post perspective of parties who are before the courts seeking to have their disputes adjudicated. From the ex ante perspective of the party seeking to utilise legal facilities in transaction planning, flexibility in adjudication may not be the first priority. Instead, of greater importance might be a high degree of certainty about the implications of adopting one or another legal structure or arrangement and its entailed norms. Presumably such certainty is especially prized by parties who seek to entrust funds to others pending the completion of transactions; a fortiori where parties lack the means to police the stewardship of funds once entrusted, a scenario that is not unlikely



34 Target

Holdings (n 27) 435 (Lord Browne-Wilkinson). 434–36. 36 Yip Man and J Lee, ‘The Commercialisation of Equity’ (2017) 37 Legal Studies 647. 35 ibid

156  Matthew Harding in a complex and fast-paced commercial world. Arguably, then, Lord BrowneWilkinson’s appeal to commercial imperatives in Target Holdings identified only some such imperatives and failed to acknowledge others; while commercial flexibility suggests that a departure from equity’s traditional view in common account cases might be a welcome development, the value of commercial certainty supports a more critical evaluation of that departure.37

III.  Judicial Discretion in Equity In this part of the chapter I want to develop a line of argument in order to cast doubt on the proposition that judicial discretion in equity is inconsistent to a worrying extent with the certainty in decision-making that commercial parties are said to prize. This argument points to some aspects of the institutional framework within which judges make decisions in equity. First, I consider the constraints placed upon judicial discretion in equity by the structure of private law litigation. And secondly, I consider the constraints placed upon judicial discretion in equity by the judicial practices of giving written reasons for decision and adhering to the doctrine of precedent.

A.  The Structure of Private Law Litigation One of the key lessons to emerge from debates in private law theory between economists of law on the one hand and Kantian corrective justice theorists on the other, is that private law litigation typically has a bipolar structure.38 In other words, when a private law matter is before a court, there is usually a plaintiff and a defendant and a dispute – in the sense of claims arising from events implicating both parties – that demands adjudication.39 There is much debate among theorists about the implications of private law bipolarity for judicial decision-making. For Kantian corrective justice theorists, the character of private law as a distinctive moral practice demands that judges refrain from adjudicating private law disputes except by realising corrective justice between the parties.40 For others, private law bipolarity demands only that judges adjudicate by giving reasons that explain the 37 Yip Man and Lee point to other reasons to critique the commercialisation of equity when they argue that it generates doctrinal incoherence and unintended consequences beyond the commercial setting: ibid 669–71. 38 See H Dagan, ‘The Limited Autonomy of Private Law’ (2008) 56 American Journal of Comparative Law 809. 39 This is not always the case, as equity well demonstrates. For example, when trustees seek judicial advice on matters relating to the administration of their trust, no adjudication is called for. 40 See, eg EJ Weinrib, The Idea of Private Law, rev edn (Oxford, Oxford University Press, 2012); A  Beever, Forgotten Justice: Forms of Justice in the History of Legal and Political Theory (Oxford, Oxford University Press, 2013).

Equity and the Value of Certainty in Commercial Life  157 defendant’s liability to the plaintiff in light of the facts of the case, reasons that may or may not refer to the demands of corrective justice.41 On this more relaxed view of the demands of bipolarity, a finding of liability may, for example, be justified by the requirements of localised distributive justice.42 Alternatively, such a finding may be grounded in norms that do not refer to justice at all, even if the finding then justifies the application of a norm of rectification in order to achieve corrective justice.43 Whatever the precise normative implications of the bipolar structure of private law litigation, it seems uncontroversial to suggest that those implications limit the range of doctrinal and remedial options that are available to judges when deciding cases. To the extent that judges in private law cases must adjudicate the disputes of the parties before them, those judges must reason in ways that demonstrate sufficient connections between findings of liability, the award of remedies, and the interactions and positions of the parties before the court. As Ernest ­Weinrib puts  it, ‘private law is a justificatory enterprise that articulates normative connections between controversies and their conclusions’.44 And articulating such connections is what is required by the judicial function of adjudication.45 For example, findings of liability cannot ordinarily be grounded in considerations that do not show the defendant’s conduct to be normatively salient. Equally, such findings must usually explain why the defendant’s liability is to the plaintiff, as opposed to some other person or class of persons. Remedies cannot typically be awarded for reasons unconnected with the parties who are before the court, and only in exceptional cases may third-party interests influence a determination of the appropriate remedy to award. Propositions like these take the form of reasons that guide and constrain judicial decision-making in private law. They are so well embedded in private law practice that they are easily overlooked. But they ought not to be. Judges respond in different ways to reasons informed by the bipolar structure of private law litigation. Most notably, judges respond to those reasons by setting 41 See, eg Dagan, ‘Limited Autonomy’ (n 38). 42 I develop this point further in M Harding, ‘The Limits of Equity in Disputes over Family Assets’ in J Glister and P Ridge (eds), Fault Lines in Equity (Oxford, Hart Publishing, 2012) 193; M Harding, ‘Constructive Trusts and Distributive Justice’ in E Bant and M Bryan (eds), Principles of Proprietary Remedies (Pyrmont (NSW), Thomson Reuters, 2013) 19. See also J Gardner, ‘What is Tort Law For? Part 1. The Place of Corrective Justice’ (2011) 30 Law and Philosophy 1, 12–13. 43 See further Gardner, ‘What is Tort Law For?’ (ibid); J Gardner, ‘Torts and Other Wrongs’ (2011) 39 Florida State University Law Review 43. 44 Weinrib, Private Law (n 40) 12. 45 John Finnis makes a similar point using the language of distributive justice: ‘For the submission of an issue to the judge itself creates a kind of common subject-matter, the lis inter partes, which must be allocated between parties, the gain of one party being the loss of the other. The biased or careless judge violates distributive justice by using an irrelevant criterion (or by inappropriately using a relevant criterion) in apportioning the merits and awarding judgment and/or costs’: J Finnis, Natural Law and Natural Rights, 2nd edn (Oxford, Oxford University Press, 2011) 179. I would only add that the bipolar structure of private law litigation informs the criteria of relevance to which Finnis alludes in this passage.

158  Matthew Harding and refining the doctrinal architecture of private law; this work is carried out principally in leading cases in which major doctrinal developments take place. The architecture in question employs concepts – key examples include duty, breach, causation and remoteness – that aim to express normatively salient connections between the plaintiff and the defendant in light of established facts. In equity, other mediating concepts are used, such as the concepts that give content to accounting relationships. But of more relevance for present purposes are the ways in which judges, when they exercise discretion, respond to reasons informed by private law bipolarity. Where judicial discretion is exercised, mediating supports in the form of determinate doctrinal rules are unavailable, but reasons informed by the bipolar structure of private law litigation remain applicable to the case. When determining questions of liability, the judge must still exclude a range of factors that are irrelevant or pay insufficient regard to the interactions and positions of the plaintiff and/or the defendant. And even if the judge enjoys the freedom to select a remedy from a set of options, that selection must be sufficiently sensitive to the positions of the plaintiff and the defendant and cannot respond wholly or even primarily to the concerns of parties who are not before the court. To the extent that judges are constrained by these sorts of demands, their exercises of discretion are circumscribed in significant ways. Consider, for example, the treatment of third-party interests in the decision whether or not to award a remedial constructive trust under Australian law.46 There can be no doubt that such interests are taken into account by Australian courts when determining whether to award a remedial constructive trust, say for breach of fiduciary duty, knowing receipt, or in a case of proprietary estoppel. But in taking third-party interests into account, Australian courts are required to be mindful of the bipolar structure of private law litigation. This requirement has been set out by the High Court of Australia in several leading cases. For example, in Bathurst City Council v PWC Properties Pty Ltd, the Court stated that ‘before the court imposes a constructive trust as a remedy, it should first decide whether, having regard to the issues in the litigation, there are other means available to quell the controversy’.47 In Giumelli v Giumelli, the Court said that ‘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’.48 And in John Alexander’s Clubs Pty Ltd v White City Tennis Club Ltd, the Court declared that ‘A constructive trust ought not to be imposed if there are other orders capable of doing full justice’.49 Statements such as these are often interpreted as licensing courts to deny a plaintiff a remedial constructive trust because third-party interests are in play. However, they equally reveal that it is not permissible for a court, 46 As is well known, the Australian position differs from that in other jurisdictions: see Westdeutsche Landesbank Girozentrale v Islington LBC [1996] AC 669 (HL) 714–15. 47 Bathurst City Council v PWC Properties Pty Ltd [1998] HCA 59, (1998) 195 CLR 566 [42]. 48 Giumelli v Giumelli [1999] HCA 10, (1999) 196 CLR 101 [10]. 49 John Alexander’s Clubs Pty Ltd (n 12) [128].

Equity and the Value of Certainty in Commercial Life  159 in order to protect third-party interests, to withhold a remedial constructive trust in a way that fails to achieve justice as between the parties to the case.50 Instead, the court is required to select, from the range of remedies that is capable of achieving justice between the parties, the remedy that will be minimally detrimental to third-party interests. In a case where a remedial constructive trust is the only remedy capable of achieving justice between the parties, a remedial constructive trust should be awarded, irrespective of the implications for third parties. In a case where the remedial constructive trust is not the only such remedy, other remedial options must be explored.51 I do not want to suggest that the treatment of third-party interests in the award of remedial constructive trusts renders Australian discretionary remedialism consistent with the value of commercial certainty. There are many factors that feed into the inquiry whether a remedial constructive trust is an appropriate remedy to award on the facts of a particular case,52 and to the extent that it cannot be predicted with confidence which factors will be recognised by a judge and how those that are recognised will be weighed and balanced, commercial uncertainty may be created. However, in assessing the overall impact of Australian discretionary remedialism on commercial certainty, constraints generated by the bipolar structure of private law litigation should not be ignored altogether. Judges in equity are not free to let third-party interests determine the question whether or not to award a remedial constructive trust; they must arrive at a remedial solution that achieves justice between the parties to the case, and solutions that protect third-party interests at the cost of such justice are simply not available. This in itself is a significant constraint on the exercise of judicial discretion in a remedial setting in Australian law. And to the extent that it operates as such a constraint, it tends to promote commercial certainty by giving parties assurance that certain remedial options will not be selected by judges who are exercising their discretion.

50 In John Alexander’s Clubs, the Court came perilously close to asserting that third-party interests should override justice as between the parties to the case when it stated that authority ‘does not permit a constructive trust to be declared in a manner injurious to third parties merely because the plaintiff has no other useful remedy against a defendant’: ibid [129]. In that case the Court stated that third parties who stand to be affected by the award of a remedial constructive trust should be joined as parties to the litigation, thus bringing their claims within the dispute that the court is required to adjudicate: at [131]. See further M Bryan, ‘Constructive Trusts: Understanding Remedialism’ in J Glister and P Ridge (eds), Fault Lines in Equity (Oxford, Hart Publishing, 2012) 215, 233–35. For obvious reasons such three-party cases are not best described as bipolar, but nonetheless adjudication demands that normative weight be given to the interactions and positions of all parties before the court and that the court not disregard the position of any party in determining the case. 51 In Giumelli, for example, the remedy ultimately selected was an order to pay the value of the land in dispute, secured by a charge over that land: Giumelli (n 48) [58]. 52 These include whether the trust, if declared, will be over a non-substitutable asset; whether declaring the trust will compel the parties to carry on an unwanted relationship; and whether declaring the trust will be punitive given the facts of the case: see Warman International Ltd v Dwyer (1995) 182 CLR 544, 554; Grimaldi v Chameleon Mining NL (No 2) [2012] FCAFC 6, (2012) 200 FCR 296 [672]–[82]. Considerations of convenience may also play a role: Lac Minerals Ltd (n 7) 49 (La Forest J), discussed in Bryan, ‘Constructive Trusts’ (n 50) 225.

160  Matthew Harding

B.  Judicial Practices In addition to the constraints on the exercise of judicial discretion that are generated by private law bipolarity, there are constraints generated by judicial practices themselves. To begin with, consider the judicial practice of producing written reasons for decision.53 This practice demands that judges spell out the considerations that they have taken into account in making findings of liability and in awarding remedies. When those findings and awards are the product of judicial discretion, written reasons expose the factors that have influenced the exercise of that discretion and thereby explain and justify the outcome. Such reasons also expose the ways in which factors have been weighed and balanced when judicial discretion has been exercised. In other words, written reasons lay bare the inner workings of judicial discretion.54 And they do so in a way that is publicly available, because judges’ written reasons for decision are published and available to anyone who cares to read them. Thus, the person who seeks to know which factors have influenced the exercise of judicial discretion in past cases may consult the written reasons issued by those judges; most likely this consultation will be mediated by a legal adviser who will be able, in light of her training and experience, to interpret the written reasons in question and render them sensible to her client.55 Of course, from the mere fact that a person knows of the factors that influenced judicial discretion in past cases, it does not follow that the person has certainty about how judicial discretion may be exercised in her own case. Indeed, it is in the nature of judicial discretion that a discretionary decision made in one case might be different from a discretionary decision made in another case even though the two cases have the same facts.56 And it might be thought that it is precisely because a person cannot extrapolate from how judicial discretion has been exercised in the past that she lacks certainty about the likely implications of judicial discretion for her case. However, arguably, such a thought is insufficiently sensitive to elements of the institutional framework within which judges make decisions, elements 53 For a superb overview of this practice and its normative underpinnings, see J Bosland and J Gill, ‘The Principle of Open Justice and the Judicial Duty to Give Public Reasons’ (2014) 38 Melbourne University Law Review 482. 54 It is sometimes suggested that the exercise of judicial discretion does not entail acts of reasoning: see, eg P Birks, ‘Three Kinds of Objection to Discretionary Remedialism’ (2000) 29 University of Western Australia Law Review 1, 17. However, the better view is that judicial discretion is distinctive as a response to indeterminacy precisely insofar as it is characterised by reasoning: I elaborate further on this point in M Harding, ‘Equity and the Rule of Law’ (2016) 132 LQR 278, 289–92. And see HLA Hart, ‘Discretion’ (2013) 127 Harvard Law Review 652. 55 See Bosland and Gill, ‘Principle of Open Justice’ (n 53) 499, discussing McHugh JA’s judgment in Soulemezis v Dudley (Holdings) Pty Ltd (1987) 10 NSWLR 247 (NSWCA). At 505–06, Bosland and Gill argue that the publication of written reasons is especially important in cases where judicial discretion is exercised, so that members of the public have access to the patterns of reasoning underpinning such exercises. 56 See Hart, ‘Discretion’ (n 54) 665, describing exercises of discretion as ‘rational without being conclusive’.

Equity and the Value of Certainty in Commercial Life  161 which, once brought into view, show the exercise of judicial discretion to be more certain and predictable than might at first be assumed. Gerald Postema describes judicial decision-making as ‘system-oriented’, by which he means that judges seek to render their decisions sensible within an overall system that maintains a degree of unity and coherence over the course of time.57 The production and publication of written reasons for decision is itself evidence of the system-oriented nature of judicial decision-making; by rendering reasons visible and accessible, judges ensure that parties and judges in future cases may engage with those reasons, thus increasing the likelihood of conformity to them. Perhaps the clearest example of the system-orientation of judicial decisionmaking is provided by the doctrine of precedent and the practices that are associated with it. When students first learn of the doctrine of precedent, they are taught about the binding force of the rationes decidendi of judicial decisions (and, in Australia, of the ‘seriously considered’ dicta of the High Court), and of the persuasive force of the reasoning of other superior courts.58 These aspects of the doctrine of precedent constitute its core, but the contours of the doctrine are far broader than a narrow focus on its core might suggest, because the doctrine informs a range of judicial practices and attitudes beyond that core. For example, because they are working in a system in which precedent is accorded authoritative weight or force, judges are disposed to engage respectfully and carefully with the reasoning laid down in past cases, especially those which are thought to be analogous to the case at hand. This disposition applies whether the reasoning takes the form of binding rationes decidendi, persuasive dicta, or indeed something more diffuse. Importantly for present purposes, the disposition applies when judges engage with the reasoning that judges in past cases have undertaken in the exercise of discretion and have set out in their written reasons for decision. Thus, judges exercising discretion are likely to take seriously the written reasons for decision of judges who have exercised discretion in similar cases in the past. They are also likely to reason by analogy to those past cases and thereby adopt patterns of reasoning used in the past cases when exercising their discretion in the case before them. In these ways, the exercise of judicial discretion is itself s­ ystem-oriented when it occurs within an institutional framework in which the doctrine of precedent operates, along with practices and dispositions that ­typically accompany that doctrine.59 57 GJ Postema, ‘Law’s System: The Necessity of System in Common Law’ [2014] New Zealand Law Review 69, 91–97; see also J Waldron, ‘The Concept and the Rule of Law’ (2008) 43 Georgia Law Review 1, 32–36. Ronald Dworkin emphasises the system-orientation of adjudication in his interpretive theory of law: see R Dworkin, Law’s Empire (London, Fontana, 1986). But one need not subscribe to Dworkin’s account of law, nor even to an account of adjudication informed by the constraints of what he calls ‘integrity’, in order to accept that judge-made law is system-oriented in the ways Postema describes. 58 On the binding nature of ‘seriously considered’ High Court dicta, see Farah Constructions Pty Ltd v Say-Dee Pty Ltd [2007] HCA 22, (2007) 230 CLR 89, 151. 59 See also P Loughlan, ‘No Right to the Remedy?: An Analysis of Judicial Discretion in the Imposition of Equitable Remedies’ (1989) 17 Melbourne University Law Review 132, making similar arguments against a Dworkinian theoretical backdrop.

162  Matthew Harding The production and publication of written reasons for decision, coupled with practices and attitudes associated with the doctrine of precedent, contribute in substantial ways to conditions under which commercial parties may predict with a degree of confidence the likely outcomes of cases in which judges exercise discretion in equity. Commercial parties contemplating litigation and its likely consequences rarely seek to make predictions on their own; they typically engage lawyers to advise them. In preparing this sort of advice, lawyers will look to written reasons for decision in past analogous cases, seeking to draw from those reasons guidance for the client in the case at hand. Because of their training, lawyers are able to interpret the relevant materials with an understanding of the systemoriented setting in which those materials have been produced and in which they will be understood and utilised by judges in future cases. When making written and oral submissions in cases in which judges will have to exercise discretion in equity, lawyers will draw, indeed are obligated to draw, to the judges’ attention written reasons for decision in past analogous cases, thus ensuring that judges can engage with those reasons in system-oriented ways. At the same time, lawyers will continue to advise their clients on likely outcomes, having evaluated judicial responses to the arguments and materials presented. In all these ways, commercial litigants who have legal advice and representation will be able to benefit from the system-orientation of judge-made law and achieve a degree of certainty when predicting what will happen in their case. Arguably, the exercise of judicial discretion in system-oriented ways contributes to commercial certainty in another, more diffuse, way as well. In circumstances where judges repeatedly, over time, exercise their discretion by identifying certain patterns of reasoning in past analogous cases and then applying those patterns of reasoning to the case at hand, the cumulative effect may be the production of more or less determinate principles, even rules, on which parties can come to rely with a high degree of confidence.60 Historically, something like this seems to have happened in relation to the equitable remedy of specific performance, a remedy that is now widely considered to be ‘discretionary’ only in a nominal sense and that is awarded according to principles that operate in a determinate way.61 ­Similarly, the recent English jurisprudence on incomplete gifts seems to display the same tendency towards greater determinacy. In Pennington v Waine, the Court of Appeal ruled that in equity an incomplete gift may be perfected where a donor acts unconscionably by resiling from it notwithstanding that her donative intention was clear.62 At the time, this emphasis on unconscionability was thought to render the treatment of incomplete gifts in equity highly indeterminate

60 Note A Mason, ‘Themes and Prospects’ in PD Finn (ed), Essays in Equity (North Ryde (NSW), Law Book Co, 1985) 242, 244, arguing that, in equity, inchoate references to ‘conscience’ tend to mature over time into more determinate rules and principles. 61 Note Birks, ‘Three Kinds of Objection’ (n 54) 13; A Burrows, ‘We Do This At Common Law But That In Equity’ (2002) 22 OJLS 1, 2, acknowledging the determinate character of specific performance. 62 Pennington v Waine [2002] EWCA Civ 227, [2002] 1 WLR 2075.

Equity and the Value of Certainty in Commercial Life  163 because it  left to the discretion of the judge the identification and weighing of factors going to the question of unconscionability.63 However, in cases decided since P ­ ennington, English courts have emphasised the fact of donee reliance when working out the demands of conscience in incomplete gift cases.64 This, arguably, renders the conscience test from Pennington more determinate than it was when that case was first decided. And, given the system-orientation of judge-made law, one might expect to see similar trends towards greater determinacy in areas of equity that, at the present time, rely on exercises of judicial discretion that remain unguided by patterns of reasoning in past cases.65 In passing, it is interesting to contrast the picture of relatively stable, predictable, exercises of judicial discretion that I have just painted with the state of affairs that might obtain where judges eschew discretionary approaches to liability and remedies in equity, and instead seek to articulate fixed and determinate rules with the value of commercial certainty in view. Undoubtedly such an approach is capable of generating legal conditions under which parties may plan and assess litigation risk with a high degree of assurance about the likely outcomes of cases. However, pathologies can emerge where judges seek determinacy, but cannot agree on what the determinate rules ought to be. Arguably, this is what happened recently in English law in relation to the availability of proprietary remedies against bribe-taking fiduciaries. For many years the view was that such remedies were never available, and that a plaintiff would be confined to an account of profits against a bribe-taking fiduciary.66 In 1993, the Privy Council, in a decision of great persuasive weight for English courts, found that proprietary relief should always be available against a bribe-taking fiduciary on the basis that the bribe is held on trust for the principal from the moment of its receipt.67 In 2011, the English Court of Appeal declined to follow the Privy Council, preferring instead to follow the earlier English authorities according to which proprietary relief is not available.68 However, in 2014, the United Kingdom Supreme Court overruled the 2011 Court of Appeal decision and found that proprietary relief is always available against the bribe-taking fiduciary.69 Thus, in a two-year period, one fixed and determinate rule (no proprietary relief) was announced and then replaced by another, different, fixed and determinate rule (proprietary relief). Such an abrupt and fundamental change to rules defies the system-orientation of judge-made law, and uncertainty

63 See, eg M Halliwell, ‘Perfecting Imperfect Gifts and Trusts: Have We Reached the End of the Chancellor’s Foot?’ [2003] Conveyancer and Property Lawyer 192. 64 See Zeital v Kaye [2010] EWCA Civ 159, [2010] 2 BCLC 1; Curtis v Pulbrook [2011] EWHC 167 (Ch), [2011] 1 BCLC 638. 65 eg the treatment of mistaken voluntary dispositions according to the approach set out in Pitt v Holt [2013] UKSC 26, [2013] 2 AC 108. 66 Metropolitan Bank v Heiron (1880) 5 Ex D 319 (CA); Lister & Co v Stubbs (1890) 45 Ch D 1 (CA). 67 Attorney-General for Hong Kong v Reid [1994] 1 AC 324 (PC). 68 Sinclair Investments (UK) Ltd v Versailles Trade Finance Ltd [2011] EWCA Civ 347, [2012] Ch 453. 69 FHR European Ventures LLP v Cedar Capital Partners LLC [2014] UKSC 45, [2015] AC 250 [46]–[50]. Heiron, Lister and Sinclair were all overruled at [50].

164  Matthew Harding is thus bound to result.70 Arguably this is or ought to be of greater concern to commercial parties than the modest, interstitial uncertainty that is generated by system-oriented, cumulative exercises of judicial discretion across time.71

IV. Conclusion If there is one lesson to be taken from this chapter, it is that the proposition that equity is inconsistent with the value of commercial certainty can only be properly assessed once it is considered from a range of perspectives. In circumstances where equity imposes legally enforceable norms on commercial parties, the role of equity in generating uncertainty about bargains can be understood only once the intersection of equity and the law of contract is taken into account. In evaluating how equity might affect commercial certainty via the imposition of norms, it is not sufficient to adopt the ex post standpoint of the party seeking remedies in adjudicative settings; the ex ante perspective of the person who would use legal facilities in transaction planning should also be taken up. When considering the extent to which judicial discretion in equity affects commercial certainty, attention must be given to the institutional settings within which judges exercise discretion in equity, settings that complicate and render implausible the view that judicial discretion entails intuitive decision-making unconstrained by reasons. None of this is to say that equity could not perform better, or even that equity meets a threshold of success, when evaluated in light of the value of certainty that commercial parties are said to prize. But it is to insist that, as is so often the case in law, the question of equity’s performance when measured against the value of commercial certainty is more complex and multi-faceted than is sometimes suggested.

70 Arguably, such uncertainty was compounded in these cases because the same judge, Lord Neuberger, delivered the judgment of the Court in both Sinclair and FHR. 71 Indeed, this seems to have been recognised by a majority of the United Kingdom Supreme Court in Patel v Mirza [2016] UKSC 42, [2017] AC 467, in which competing fixed and determinate rules dealing with illegality as a defence to private law claims were rejected in favour of an approach calling for the exercise of system-oriented judicial discretion. In places, the majority explicitly acknowledged that the value of certainty is more likely to be advanced by system-oriented discretion than by fixed and determinate rules whose application generates arbitrary results: at [90], [113] (Lord Toulson – with whom Lady Hale, Lord Kerr, Lord Wilson and Lord Hodge agreed); [136] (Lord Kerr). Lord Neuberger, who was with the majority, took a more equivocal view of what might best serve the value of certainty: at [157]–[158], [174]–[175]. And contrast the minority judgments of Lord Mance ([206]), Lord Clarke ([215], [217], [219]) and Lord Sumption ([261], [263], [265]), associating the value of certainty with fixed and determinate rules.

8 Expansion of the Fiduciary Paradigm into Commercial Relationships: The Australian Experience STEPHEN GAGELER*

I. Introduction Before he wrote The Wealth of Nations,1 the enlightenment philosopher and founder of the modern discipline of economics, Adam Smith, wrote The Theory of Moral Sentiments.2 Each book was a study of human interaction. The focus of the earlier book was on dynamic and interactive relationships in which Smith saw principles of behaviour as governed by conscience attuned to the interests of others. The focus of the later book was on the creation of wealth through the pursuit of self-interest. There is no inherent contradiction between those two perspectives. Individuals create wealth through participation in a market economy ordinarily by pooling their resources and co-ordinating their actions. Their pursuit of selfinterest is the pursuit of mutual self-interest. By the time Smith wrote at the end of the eighteenth century, the judge-made law of England had taken form as two distinct streams. As Smith foreshadowed, each was peculiarly adapted to contribute to the development of the market economy of the nineteenth century. Equity, with its focus on conscience, its emphasis on principle and its flexible application of remedies, was peculiarly adapted to provide a law of business organisations. Common law, with its focus on the external perception of conduct, its emphasis on rules, and its relatively certain ability to provide monetary compensation for proved compensable loss, was peculiarly adapted to provide a law of the marketplace. * My thanks to Glyn Ayres for his research assistance. My thanks also to Paul Finn for his comments. I trust he will forgive me for not sharing his pessimism. 1 A Smith, An Inquiry into the Nature and Causes of the Wealth of Nations (London, W Strahan and T Cadell, 1776). 2 A Smith, The Theory of Moral Sentiments (London, printed for A Millar, A Kincaid and J Bell, 1759).

166  Stephen Gageler Equity went on in the nineteenth century to evolve into something resembling a law of business organisations essentially by analogising a range of emergent commercial relationships to the historically familiar and distinctly uncommercial relationship of beneficiary and trustee. Those analogised commercial relationships came by the end of the nineteenth century uncontroversially to include the relationships of company and director, of principal and commercial agent, of employer and employee, and of partners between each other. Persons in what were considered sufficiently ‘trust-like’ commercial relationships came in that way to be subjected to ‘trust-like’ duties which, for want of a better word, came by common acceptance to be labelled ‘fiduciary’. A relationship would warrant that label, it came to be said with a circularity of language borne of reasoning solely by analogy, if the relationship was one in respect of which a ‘wrong’ would result in the same remedy against the ‘wrongdoer’ as a beneficiary would have against a ­trustee.3 Common law went on in the same period to evolve a law of the marketplace, essentially through the development of the law of contract. There was an obvious overlap in the application of common law and of equity to business organisations in that it was engagement by or pursuant to contract which commonly gave rise to a relationship which equity then treated as sufficiently analogous to the relationship of beneficiary and trustee to result in the imposition of trust-like duties. There could never have been any doubt that trustlike duties could be imposed in respect of a relationship formed for commercial purposes independently of contract. Equally, there appears never to have been any doubt that trust-like duties could be imposed in equity in virtue of the trust-like character of a commercial relationship formed by contract, in which case these duties would co-exist with and transcend such duties as were imposed at common law in virtue of the contract. Neither source of obligation was wholly dependent on the other. By the beginning of the twentieth century, so complete was the assimilation of principles applicable historically to the relationship of trustee and beneficiary to the subject-matter of business organisations that when Cardozo CJ wrote famously in Meinhard v Salmon4 of a ‘trustee’ being held to ‘something stricter than the morals of the marketplace’ and went on to refer to ‘the level of conduct for fiduciaries’ being ‘kept at a level higher than that trodden by the crowd’, he was not referring to any duty which arose in the circumstances of that case from the traditional relationship of beneficiary and trustee. He was referring to a duty which he explained that ‘Joint adventurers, like copartners, owe to one another’, a duty which he went on to describe in characteristically evocative language as ‘the duty of the finest loyalty’ requiring a standard of behaviour comprising ‘Not honesty alone, but the punctilio of an honor the most sensitive’.5 The following year, in



3 eg

Re Hallett’s Estate (1880) 13 Ch D 696 (CA) 712–13. v Salmon 249 NY 458, 164 NE 545 (1928) 546. 5 ibid 546. 4 Meinhard

Expansion of the Fiduciary Paradigm into Commercial Relationships  167 Birtchnell v Equity Trustees, Executors and Agency Co Ltd,6 Dixon J wrote that the relationship between partners ‘is, of course, fiduciary’, adding that ‘a stronger case of fiduciary relationship cannot be conceived than that which exists between partners’ and explaining that the fiduciary nature of the relationship between partners ‘is based, in some degree, upon a mutual confidence that the partners will engage in some particular kind of activity or transaction for the joint advantage only’. Nearly thirty years later, Birtchnell was explained by a court which included Dixon CJ7 as an instance of the ‘rule’ applicable ‘to all cases in which one person stands in a fiduciary relation to another’ that ‘a trustee must not use his position as trustee to make a gain for himself ’. Meinhard and Birtchnell were both what might be described as ‘business opportunity’ cases. The miscreant ‘joint adventurer’ in Meinhard and the miscreant partner in Birtchnell were each ultimately held liable to disgorge a benefit obtained as a result of their individual exploitation of an opportunity for investment found to fall within the scope of the joint undertaking to which they had subscribed. The ‘joint adventurer’ in Meinhard was liable through the mechanism of a remedial constructive trust; the partner in Birtchnell was liable initially through the mechanism of an account of profits (with the question of whether other relief might be ordered being reserved for further consideration). Meinhard and Birtchnell share features which together provide a theme for some of the discussion which follows. One was that there was no dispute in either case as to the existence of a fiduciary duty not to take individual advantage of a business opportunity within the scope of the joint undertaking. The dispute was whether the advantage obtained fell within the scope of the joint undertaking. Another was that in neither case was determination of the scope of the joint undertaking seen to rest solely on an examination of the terms of the contract between the parties. Rather, as Dixon J explained in Birtchnell, the subject matter over which the fiduciary obligations extended were determined by the ‘character of the venture or undertaking’ for which the business relationship existed, which fell to be ascertained ‘not merely from the express agreement of the parties, whether embodied in written instruments or not, but also from the course of dealing actually pursued by the firm’.8 In Meinhard, the determinative question was whether a joint undertaking to manage a hotel leased for twenty years encompassed an opportunity, which arose after the end of the lease, for the lessee to take on a new lease of a substantially enlarged building at a much higher rent. In Birtchnell, the determinative question was whether a joint undertaking of conducting a real estate business extended to encompass an opportunity to engage in land speculation. Another common feature of Meinhard and Birtchnell was that resolution of the determinative question involved the court in a detailed examination of the factual relationship between the participants in the joint undertaking. Both courts were

6 Birtchnell

v Equity Trustees, Executors & Agency Co Ltd (1929) 42 CLR 384, 407–08. Henry & Co Pty Ltd v Stuart Walker & Co Pty Ltd (1958) 100 CLR 342, 350. 8 Birtchnell (n 6) 408 (Dixon J). 7 Keith

168  Stephen Gageler closely divided. In Meinhard, the Court of Appeals of New York split four–three. In Birtchnell, the High Court of Australia split three–two. When, in 1994, Sir Anthony Mason referred to ‘the fiduciary relationship’ as having been ‘the spearhead of equity’s incursions into the area of commerce’,9 he cannot be taken to have been referring to some recent foray. He was alluding to the problem – highlighted by the decision of the High Court ten years earlier in Hospital Products Ltd v United States Surgical Corporation,10 in which he had dissented – of arriving at a satisfactory principle for determining when trust-like duties will arise in respect of a relationship formed by contract that is outside the standard business relationships of corporation, agency, employment and partnership. The premise on which issue had been joined in Hospital Products was that a relationship formed by contract outside those standard business relationships was not incapable of bearing a fiduciary character. Hospital Products had demonstrated that the time had come when merely analogical reasoning had ceased to provide a satisfactory basis to explain and to extend established categories. The problem which the case had exposed was the absence of established criteria by reference to which the existence or non-existence of a fiduciary relationship was to be determined in a novel commercial setting. The ‘fiduciary relationship’, Sir Anthony Mason had written the year after Hospital Products, was ‘a concept in search of a principle’.11 In the decades since 1994, the quest for the ‘fiduciary principle’ has continued across many jurisdictions. The field of inquiry, as was not long ago observed, has been ‘characterised, in the law reports, and in the law reviews, by disagreement, uncertainty and controversy’.12 Yet one of the strengths of the methodology of the common law, within which for present purposes can be located the methodology of equity, is its ability to function in spite of, or perhaps as a result of, incomplete theorisation. The quest to distil the essence of the ‘fiduciary relationship’ would have the contemporary relevance of an Arthurian legend were it pursued independently of the practical question of what follows from a relationship of that character being found. Frankfurter J, no respecter of abstract legal categories, made that point more than half a century ago when he said: [T]o say that a man is a fiduciary only begins analysis; it gives direction to further inquiry. To whom is he a fiduciary? What obligations does he owe as a fiduciary? In what respect has he failed to discharge these obligations? And what are the consequences of his deviation from duty?13 9 A Mason, ‘The Place of Equity and Equitable Remedies in the Contemporary Common Law World’ (1994) 110 LQR 238, 245. 10 Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41. 11 A Mason, ‘Themes and Prospects’ in PD Finn (ed), Essays in Equity (North Ryde (NSW), Law Book Co, 1985) 246. 12 L Smith, ‘Fiduciary Relationships: Ensuring the Loyal Exercise of Judgement on behalf of Another’ (2014) 130 LQR 608, 608. 13 Securities and Exchange Commission v Chenery Corp 318 US 80 (1943) 85–86.

Expansion of the Fiduciary Paradigm into Commercial Relationships  169 Sarah Worthington recently made essentially the same point in linking the question of ‘Who is a fiduciary?’ to the questions of ‘What distinctive obligations rest on a fiduciary’s shoulders?’ and ‘What particular and distinguishing consequences follow upon a breach of these special restrictions?’.14 In short: ‘who, what, and so what?’ The answer to the first question can have no practical consequence, and the question itself cannot meaningfully be framed, other than in light of the answers to the other two. Turning to survey the current state of what is on any view a complex and dynamic field of law, there is utility in starting with the question of ‘what’, touching briefly on the question of ‘so what’, and then coming back to the difficult question of ‘who’, and the related questions of ‘when’ and ‘in what respect’. What can be seen is that, notwithstanding historical and continuing disputation, a measure of consensus concerning the ‘fiduciary principle’ has emerged in Australia. That consensus has centred on the pioneering scholarship of Paul Finn15 and has benefited from his later judicial elaboration of principle as a judge of the Federal Court of Australia. Contributing to the emergence of that consensus has also been a series of decisions of the High Court since the mid-1990s which have resolved some related issues and clarified others.

II.  What, and So What? At least in Australia, the question of what obligations are imposed on a fiduciary now yields a straightforward answer based on binding authority. In Breen v Williams,16 the High Court rejected the proposition that a doctor owes an affirmative fiduciary duty to provide medical records to a patient, refusing to follow the approach taken to the issue by the Supreme Court of Canada in McInerney v  MacDonald.17 The basis of the holding in Breen was that any fiduciary duties owed by a doctor must be limited to ‘proscriptive obligations – not to obtain any unauthorised benefit from the relationship and not to be in a position of conflict’.18 ‘[T]he law of this country’, it was said, ‘does not otherwise impose positive legal duties on the fiduciary to act in the interests of the person to whom the duty is owed’.19 Breen was followed in Pilmer v Duke Group Ltd (in liq),20 resulting in rejection of the proposition that an accountant owed a fiduciary duty to a company 14 S Worthington, ‘Four Questions on Fiduciaries’ (2016) 2 Canadian Journal of Comparative and Contemporary Law 723. 15 Now conveniently collected in PD Finn, Fiduciary Obligations: 40th Anniversary Republication with Additional Essays (Annandale (NSW), Federation Press, 2016). 16 Breen v Williams (1996) 186 CLR 71, 83. 17 McInerney v MacDonald [1992] 2 SCR 138, 149–51. 18 Breen (n 16) 113. 19 ibid 113. See also 83, 93–95, 137–38. 20 Pilmer v Duke Group Ltd (in liq) [2001] HCA 31, (2001) 207 CLR 165.

170  Stephen Gageler not to act contrary to the interests of the company in preparing a report to be placed before a meeting of shareholders concerning whether a price being offered to take over the company was fair and reasonable in all the circumstances. Breen was said in Pilmer to have determined, ‘by way of contrast to what is said in some of the Canadian judgments, that fiduciary obligations are proscriptive rather than prescriptive in nature; there is not imposed upon fiduciaries a quasi-tortious duty to act solely in the best interests of their principals’.21 Just before the decision in Breen, and conforming to and reinforcing the holding in that case, came the influential reasoning of Millett LJ in Bristol and West Building Society v Mothew22 in support of the conclusion that failure of a fiduciary, in that case a company director, to use proper skill and care in the discharge of his duties was not a breach of any fiduciary duty. The reasoning in Mothew explained that a person in a fiduciary relationship was capable of coming under a range of statutory, common law and equitable obligations which were not fiduciary. Not every breach of an obligation by a fiduciary is a breach of a fiduciary obligation. That the source of an obligation is in equity is insufficient to make the obligation a fiduciary obligation. The precise formulation of the proscriptive obligations identified in Breen and Pilmer – not to obtain any unauthorised benefit and not to be in a position of conflict – reflected the pervasive influence of the earlier analysis of Deane J in Chan v Zacharia.23 In that case, concerning partnership, his Honour had identified two overlapping but distinct ‘themes’ informing ‘the general principle of equity requiring a person in a fiduciary relationship to account for personal benefit or gain’.24 One was that which ‘appropriates for the benefit of the person to whom the fiduciary duty is owed any benefit or gain obtained or received by the fiduciary in circumstances where there existed a conflict of personal interest and fiduciary duty or a significant possibility of such conflict’, the objective of which is ‘to preclude the fiduciary from being swayed by considerations of personal interest’.25 The other was that which ‘requires the fiduciary to account for any benefit or gain obtained or received by reason of or by use of his fiduciary position or of opportunity or knowledge resulting from it’, the objective of which is ‘to preclude the fiduciary from actually misusing his position for his personal advantage’.26 Not to obtain an unauthorised benefit and not to be in a position of conflict together 21 ibid [74]. The holding in Breen and Pilmer that fiduciary duties are limited to proscriptive duties was departed from by the Court of Appeal of the Supreme Court of Western Australia in Westpac Banking Corp v Bell Group Ltd (in liq) (No 3) [2012] WASCA 157, (2012) 44 WAR 1. The High Court granted special leave to appeal on the question of whether the affirmative duties of directors found to have been breached in that case were fiduciary. The case was settled before the appeal could be heard. For a discussion of this aspect of the case: see W Gummow, ‘The Equitable Duties of Company Directors’ (2013) 87 Australian Law Journal 753. 22 Bristol and West Building Society v Mothew [1998] Ch 1 (CA) 16–17. 23 Chan v Zacharia (1984) 154 CLR 178. 24 ibid 198. 25 ibid 198. 26 ibid 198–99.

Expansion of the Fiduciary Paradigm into Commercial Relationships  171 defined the content of the obligations of one partner to another which were properly and uniquely ‘fiduciary’, albeit that neither obligation was immutable. ‘[T]he implication, by statute or the general law, of general or particular obligations or standards is, as between the partners, ordinarily subject to any contrary provision in the agreement between them’, Deane J had explained, with the result that, ‘It is conceivable that the effect of the provisions of a particular partnership agreement, in the context of the nature of the particular partnership, could be that any fiduciary relationship between the partners was excluded’.27 Embedded within the analysis of Deane J in Chan, and speaking directly at the level of principle to the question of ‘so what’, is the critical point that what follows from a breach of one or other of those proscriptive obligations not to obtain an unauthorised benefit from the relationship and not to be in a position of conflict, is the enlivening of what has historically been described in general and generic terms as a secondary or consequential obligation to ‘account’. That term, in its relevant and most generic usage, has not been tied to a particular personal or proprietary remedy but has been used to refer more generally to the identification and disgorgement of gain.28 The significance which a secondary or consequential obligation to ‘account’ has to an understanding of the primary proscriptive obligations was given emphasis by Mason CJ, Brennan, Deane and Gaudron JJ in Warman International Ltd v Dwyer,29 where, under the heading ‘The consequences of a breach of a fiduciary obligation’, the general rule was stated that: A fiduciary must account for a profit or benefit if it was obtained either (1) when there was a conflict or possible conflict between his fiduciary duty and his personal interest, or (2) by reason of his fiduciary position or by reason of his taking advantage of opportunity or knowledge derived from his fiduciary position.30

With specific reference to the analysis of Deane J in Chan, their Honours added that ‘The objectives which the rule seeks to achieve are to preclude the fiduciary from being swayed by considerations of personal interest and from accordingly misusing the fiduciary position for personal advantage’.31 To the criticism that the rule might appear over-inclusive in so far as it operates irrespective of whether the fiduciary is in fact swayed by any consideration of personal interest, the traditional answer has been that ‘justice and policy’ justify blanket prophylactic proscription ‘beyond which it is neither wise nor practicable for the law to look for a criterion of liability’.32 Australian authorities have not encountered conceptual difficulty in holding a fiduciary liable to ‘account’ for an unauthorised benefit or gain, according to the

27 ibid

196. Consul Development Pty Ltd v DPC Estates Pty Ltd (1975) 132 CLR 373, 395. 29 (1995) 182 CLR 544. 30 ibid 557. 31 ibid 557–58. 32 Furs Ltd v Tomkies (1936) 54 CLR 583, 592. 28 cf

172  Stephen Gageler justice of the case, either by the ordering of the personal remedy of an account of profits or by the declaration of a remedial constructive trust.33 Embracing of the remedial constructive trust has led, perhaps more easily than elsewhere, to the ultimate rejection of the longstanding rule34 that a fiduciary in receipt of a bribe or secret commission in the form of money could be held to account only as a debtor: a bribed fiduciary can be held to a remedial constructive trust, and will be so held where other orders are incapable of doing complete justice.35 Other potential remedies include rescission of an affected transaction,36 declaratory or injunctive relief to prevent the fiduciary from relying on rights gained in breach of duty,37 and an award of equitable compensation.38 In each instance, the objective of holding the fiduciary to account for an unauthorised benefit or gain can be seen to be at work. Held also to account, albeit in more confined circumstances than the fiduciary, are third parties who participate in or benefit from a breach by the fiduciary.39 The liability of a third party who knowingly participates in a breach of fiduciary duty to account to the person to whom the duty is owed by the fiduciary has been explained as being based in part on the need to deter third-party conduct that undermines the ‘higher standard of conduct’ required of the fiduciary and in part on the inequity of permitting the third party to retain a benefit or gain which results from such conduct.40

III.  Who, When and in What Respect? The relative clarity which has come to attend the answers to the questions of ‘what, and so what’ has in turn provided focus to the question of ‘who’. The orthodox understanding is that fiduciary obligations are imposed in equity by reference to the character of the relationship which has come to exist in fact41 (and are not, for 33 See Grimaldi v Chameleon Mining NL (No 2) [2012] FCAFC 6, (2012) 200 FCR 296 [503]–[11]. 34 Lister & Co v Stubbs (1890) 45 Ch D 1 (CA). 35 See Grimaldi (n 33) [569]–[84]; W Gummow, ‘Bribes and Constructive Trusts’ (2015) 131 LQR 21. 36 Maguire v Makaronis (1997) 188 CLR 449. 37 eg United Dominions Corp Ltd v Brian Pty Ltd (1985) 157 CLR 1, 13–14. 38 Warman International Ltd (n 29) 559. 39 The principles stated by Lord Selborne LC in Barnes v Addy (1874) LR 9 Ch App 244 (CA) 251–52, have commonly been assumed to extend to ‘persons dealing with at least some other types of fiduciary’: Farah Constructions Pty Ltd v Say-Dee Pty Ltd [2007] HCA 22, (2007) 230 CLR 89 [113]. For a list of cases dealing with the applicability of Barnes v Addy to breaches of fiduciary duty other than by a trustee: see JD Heydon, MJ Leeming and PG Turner, Meagher, Gummow & Lehane’s Equity: Doctrines and Remedies, 5th edn (Chatswood (NSW), LexisNexis Butterworths, 2015) 219 fns 656, 657. For a discussion of the liability of a third-party participant in a breach of fiduciary duty: see W Gummow, ‘Knowing Assistance’ (2013) 87 Australian Law Journal 311. 40 Zhu v Treasurer of the State of New South Wales [2004] HCA 56, (2004) 218 CLR 530 [121], referring to Consul Development Pty Ltd (n 28) 397. 41 See generally M Leeming, ‘The Scope of Fiduciary Obligations: How Contract Informs, But Does Not Determine, the Scope of Fiduciary Obligations’ (2009) 3 Journal of Equity 181.

Expansion of the Fiduciary Paradigm into Commercial Relationships  173 example, merely obligations expressed or implied into voluntary undertakings42). Again, it can be accepted that fiduciary obligations are limited to proscriptive obligations not to obtain unauthorised benefits and not to place oneself in a position of conflict, breach of which may result in proprietary relief. On the basis of these assumptions, the identification of a fiduciary is critically informed by an understanding of a scheme of strong but limited proscriptive obligations of that strong but limited nature. ‘Who’ becomes ‘why’: why only proscriptive obligations, and (more importantly) why only these two remarkably astringent and prophylactic proscriptive obligations, breach of which enlivens a secondary or consequential obligation to ‘account’, rather than lesser or less potent proscriptive obligations which might be imposed at common law through an implied term43 (or perhaps through a doctrine of good faith recast as an obligation to refrain from acting in bad faith) or in equity through the operation of the distinct doctrine of unconscionability? That compound question was isolated and explored in an important work of scholarship which appeared in print in 1989. Paul Finn, whose pioneering research into fiduciary law had begun nearly two decades before, then proffered the view that the proscriptive obligations are imposed in order to extract selfless and undivided loyalty from someone expected to act exclusively in the interests of another or in their joint interests.44 There was nothing especially novel about that perspective: it accorded with Lord Herschell’s description at the end of the nineteenth century of equity’s imposition of obligations on ‘a person in a fiduciary position’ as being based not on ‘principles of morality’ but ‘on the consideration that, human nature being what it is, there is danger … of the person holding a fiduciary position being swayed by interest rather than by duty, and thus prejudicing those whom he was bound to protect’.45 The same perspective has been carried through in this century in the scholarship of Matthew Conaglen, emphasising that ‘Removing the fruits of temptation is designed to neutralise the temptation itself by rendering it pointless’.46 In economic terms, the proscriptive obligations coupled with the secondary or subsidiary obligation to account for their breach can be seen to create an incentive 42 cf J Edelman, ‘When Do Fiduciary Duties Arise?’ (2010) 126 LQR 302; M Conaglen, ‘Fiduciary Duties and Voluntary Undertakings’ (2013) 7 Journal of Equity 105. 43 Stripped of the secondary obligation to ‘account’ for breach, the distinction between the proscriptive content of a contractual obligation and a proscriptive fiduciary obligation could in some cases be exceedingly subtle. Compare, for example, the scope of the distributor’s contractual obligation which arose under the implied term of the distribution agreement found in Hospital Products (n 10) (that the distributor would not do anything inimical to the market in Australia for the manufacturer’s products) with the scope of the fiduciary obligations which would have arisen had the dissenting view of Mason J prevailed with the result that the distributor was a fiduciary of the manufacturer in respect of the protection and promotion of the manufacturer’s Australian product goodwill. 44 PD Finn, ‘The Fiduciary Principle’ in TG Youdan (ed), Equity, Fiduciaries and Trusts (Toronto, Carswell, 1989), now reproduced in Finn, Fiduciary Obligations (n 15) ch 25. 45 Bray v Ford [1896] AC 44 (HL) 51. 46 M Conaglen, ‘The Nature and Function of Fiduciary Loyalty’ (2005) 121 LQR 452, 463. See also Fenwick v Naera [2015] NZSC 68, [2016] 1 NZLR 354 [73].

174  Stephen Gageler structure within which self-interest directs that the fiduciary act only in the interests of another or in their joint interests.47 The significance of the contribution which Paul Finn then made to the emergent understanding of the nature of the fiduciary relationship lay in him being the first to make an explicit link between ‘why’ and ‘who’. To ask whether a particular relationship warranted the description of a fiduciary, he suggested, was to ask ‘Against the background of the relationship, its nature and its purpose … for what purpose one party has acquired rights, powers and duties in the relationship: to promote his own interests, the joint interest, or the interests of the other party alone’. He concluded that ‘Insofar as it is either of the latter two, the relationship will be fiduciary to that extent’.48 To establish a fiduciary relationship: What must be shown … is that the actual circumstances of a relationship are such that one party is entitled to expect that the other will act in his interests in and for the purposes of the relationship. Ascendancy, influence, vulnerability, trust, confidence or dependence doubtless will be of importance in making this out, but they will be important only to the extent that they evidence a relationship suggesting that entitlement.49

The Full Court of the Federal Court quoted in full, and specifically endorsed, that statement seven years later in News Ltd v Australian Rugby Football League Ltd as identifying ‘an important question – if not the question’ in determining the existence or non-existence of a fiduciary relationship in a novel commercial setting.50 No court in Australia has since disagreed or attempted to propound an alternative conceptual approach. Difficulty and attendant controversy has arisen less in relation to the articulation of the relevant principle than in relation to its application. Interests of parties in complex commercial relationships rarely lend themselves to compartmentalisation into the interests of one party alone as distinct from the parties’ joint interests. More often than not, the interests of the parties are several, the objectively discerned commercial expectation of each party being that its own self-interest will be promoted by the other party pursuing that other party’s own self-interest within the confines set by their agreement. Paul Finn anticipated that difficulty of application in a preamble to his articulation of principle. Having noted that in ordinary contractual dealings such as a distributorship or a franchise each party will be required to do acts for the benefit of the other, he continued: Cooperation, often in a high degree as in long-term contracts, may be necessary if the anticipated benefits of the contract are to be realised. One party’s hopes in the dealing’s

47 R Cooter and BJ Freedman, ‘The Fiduciary Relationship: Its Economic Character and Legal Consequences’ (1991) 66 New York University Law Review 1045. 48 Finn, Fiduciary Obligations (n 15) para 714. 49 ibid para 736. 50 News Ltd v Australian Rugby Football League Ltd [1996] FCA 870, (1996) 64 FCR 410, 541.

Expansion of the Fiduciary Paradigm into Commercial Relationships  175 outcomes may well be informed by his trust in the integrity, reliability, skill or fairness of the other. In any of these matters there may be disappointed expectations: expectations which may explain why the dealing has come about or how it is hoped it will work. But none of these matters, ordinarily, will alter the essential nature and purpose of the relationship itself – to serve the several interests of each party. For it to become fiduciary, ‘something more is needed’.51

In the search for that ‘something more’, the devil has more often than not been in the detail. Courts have repeatedly acknowledged that fiduciary relationships may exist outside the traditional categories and their very close analogues. Yet in Australia, in contrast perhaps to New Zealand where from across the Tasman it appears that courts may have been ‘bolder’,52 such relationships have not often been found to exist. The decision of the Full Court of the Federal Court in Gibson Motorsport Merchandise Pty Ltd v Forbes53 provides a useful illustration. The parties there had cooperated in various ways for nearly a year with a view to the possibility of establishing a motor-racing business. Ultimately, some of the parties proceeded with the establishment of such a business to the exclusion of the others. Upholding the conclusion of the primary judge, the Full Court unanimously rejected an argument that the relationship between the parties was fiduciary in character on the basis that they had ‘reposed in the others mutual trust and confidence’. One of the members of the Full Court was Finn J. Summarising the Australian law of fiduciary obligations, Finn J explained: It is accepted in this country that a fiduciary’s duty of loyalty is essentially proscriptive in character … and embodies the twin themes of precluding undisclosed conflict of duty and interest (or of duty and duty), and of prohibiting misuse of fiduciary position … Put compendiously the duty of loyalty can be said to oblige a fiduciary to act in the interests of the other party to the relationship or, in the case of a partnership or a joint venture having fiduciary incidents, in their joint interests to the exclusion of his or her own interests … If there be trust and confidence present in a business relationship and if it be claimed that that trust and confidence is a building block in establishing that the relationship was a fiduciary one … it must be shown that that trust was given, that that confidence was reposed, in a context which was capable of attracting, and did attract, a duty of loyalty. … Put shortly, if trust and confidence in another is to be relevant, it must relate to a reasonable expectation of loyalty.54

To argue that the parties reposed ‘mutual trust and confidence’, Finn J went on to explain, was unhelpful because it presupposed the answer to the real issue: whether (and if so in respect of what matters) each of the parties was entitled to

51 Finn, Fiduciary Obligations (n 15) para 706 (footnotes omitted), quoting Committee on Children’s Television Inc v General Foods Corp 673 P 2d 660 (Cal 1983) 675. 52 Heydon, Leeming and Turner, Meagher, Gummow & Lehane’s Equity (n 39) 153. 53 Gibson Motorsport Merchandise Pty Ltd v Forbes [2006] FCAFC 44, (2006) 149 FCR 569. 54 ibid [12] (citations omitted).

176  Stephen Gageler expect loyalty from the others. As to the resolution of that issue on the facts of the case, Finn J said: Whatever may have been the courses open to be taken by the parties in defining their relationship given the business opportunity identified … that in fact taken and pursued was not one in which they established, or agreed to, mutual rights and obligations (or joint interests). The relationships they actually sought to establish in exploiting the business opportunity were ones based on severally owned assets, individual contracts and distinct business structures which served the several interests of the contractors. They may well have reposed a trust and confidence in each other reflecting an expectation that they could bring to an acceptable finalisation the various arrangements they had in contemplation. But that trust and confidence, if it was there, was not directed to the subordination of self interest to joint interest. There was nothing fiduciary about it.55

In Gibson the parties had not entered into a contract. The existence of a contract gives rise to another level of complexity. The observations of Mason J in Hospital Products are instructive. Perhaps ironically, given that he was in dissent in holding that the contractual relationship in that case resulted in a distributor being constituted a fiduciary in respect of the Australian product goodwill of a foreign manufacturer, Mason J identified the central impediment to the recognition of a fiduciary relationship in many contractual settings: In these situations it is the contractual foundation which is all important because it is the contract that regulates the basic rights and liabilities of the parties. The fiduciary relationship, if it is to exist at all, must accommodate itself to the terms of the contract so that it is consistent with, and conforms to, them. The fiduciary relationship cannot be superimposed upon the contract in such a way as to alter the operation which the contract was intended to have according to its true construction.56

This was unanimously endorsed in John Alexander’s Clubs Pty Ltd v White City Tennis Club Ltd,57 where the High Court refused to hold that a memorandum of understanding between a property developer and a sporting club was fiduciary in nature. French CJ, Gummow, Hayne, Heydon and Kiefel JJ prefaced this finding by endorsing58 two further points which had been made by John Lehane in the immediate aftermath of Hospital Products.59 One was that although the criterion of acting ‘for or on behalf of ’ (or ‘in the interests of ’) another could be used to explain most if not all of the cases in which a fiduciary relationship had traditionally been held to exist, this formula had traditionally been ‘understood in a reasonably strict sense’ and needed to continue to be so understood lest it become ‘circular’.60

55 ibid [13]. 56 Hospital Products (n 10) 97. 57 John Alexander’s Clubs Pty Ltd v White City Tennis Club Ltd [2010] HCA 19, (2010) 241 CLR 1 [91]. 58 ibid [88]–[90]. 59 JRF Lehane, ‘Fiduciaries in a Commercial Context’ in PD Finn (ed), Essays in Equity (North Ryde (NSW), Law Book Co, 1985) ch 5. 60 ibid 101.

Expansion of the Fiduciary Paradigm into Commercial Relationships  177 The other, made after emphasising that any distinction between commercial transactions and non-commercial transactions ‘must be a red herring’, was that: [T]he reason why, in commercial contexts, transactions outside the traditional categories do not give rise to fiduciary duties is that most such transactions do not, as a matter of fact, satisfy the criteria (whatever precisely they are) which lead courts to characterise a relationship between private parties as fiduciary.61

Both of those points are illustrated by the circumstances considered by the Full Court of the Federal Court in News Ltd.62 There football clubs contractually committed to participate in the New South Wales Rugby League (NRL) for a period of five years were held not to be in a fiduciary relationship with the NRL. Their relationship, it was held, was wholly contractual. Features which led the Full Court to conclude that no fiduciary relationship existed were: (i) the NRL was incorporated and the clubs were not members of the incorporated body;63 (ii) the board of the NRL was the ‘major decision-making body’ and, while the clubs were consulted on significant issues and participated in a ‘general committee’ of the NRL that conferred on them at least the possibility of exerting substantial control, in practice the board was able to make decisions independently of the interests of the clubs;64 (iii) the individual clubs also acted in their own interests in commercial matters, separately from the NRL;65 (iv) notwithstanding the five-year commitment, the rules of the NRL allowed the clubs to withdraw from the NRL by not applying for admission (which was done annually);66 (v) the parties cooperated in some ways, but operated independently and in competition with one another in a number of important respects;67 and (vi) while the NRL distributed some of its profits to the clubs by discretionary ‘administration grants’, the clubs ‘had no entitlement to receive the whole or a fixed proportion of the net revenue derived by’ the NRL.68 A more recent illustration, notable because it has attracted criticism from Paul Finn, is the decision of the Court of Appeal of the Supreme Court of New South Wales in Streetscape Projects (Australia) Pty Ltd v City of Sydney.69 The City of Sydney had information (intellectual property and know-how) which it had acquired in the period leading up to the 2000 Olympic Games relating to the manufacture for erection in streets and other public places of multipurpose poles known as ‘Smartpoles’. Following a public tender process and a period of negotiation, the City entered into a licence agreement with Streetscape under which



61 ibid

104. Ltd (n 50). 63 News Ltd (n 50) 542. 64 ibid 545, distinguishing United Dominions Corporation Ltd (n 37). 65 News Ltd (n 50) 545. 66 ibid 546–47. 67 ibid 547–48. 68 ibid 548. 69 Streetscape Projects (Australia) Pty Ltd v City of Sydney [2013] NSWCA 2, (2013) 85 NSWLR 196. 62 News

178  Stephen Gageler Streetscape was licensed to manufacture and sell Smartpoles in Australia as well as in New Zealand and Spain. The primary judge found the resultant relationship to be fiduciary on the basis that Streetscape was provided with the information for the purposes circumscribed by the licence agreement in circumstances where the City was unable to supervise the manner in which the information was used so as to ensure compliance. The primary judge also held that Streetscape’s breaches of the licence agreement, by using the information to manufacture and sell Smartpoles in the Middle East, constituted a breach of fiduciary duty. This rendered Streetscape and its knowingly concerned sole director liable to account for the profits gained. The Court of Appeal disagreed, finding that the comprehensive terms of the licence agreement between the parties left no room for Streetscape to be characterised as the custodian of information to be used in a manner which subordinated its own interests to those of the City. The interests of the parties in respect of the licenced information were several, and were precisely and exhaustively defined by the terms of their contract. The several natures of the interests created and protected under the contractual arrangement so found by the Court of Appeal in Streetscape can perhaps be contrasted with the contractual arrangement which the Privy Council held to give rise to a fiduciary relationship in the much earlier case of Reid-­Newfoundland Co v Anglo-American Telegraph Co Ltd.70 There a telegraph company had in 1888 acquired under a contract with a railway company the exclusive right to erect along the railway company’s rights-of-way telegraph lines to be used for the telegraph company’s own business of supplying telegraph services to the public. The telegraph company also contracted to erect a ‘special wire’ of which the railway company was to have exclusive use subject to its agreement ‘not to pass or transmit any commercial messages over the said special wire, except for the benefit and account of the telegraph company’.71 The Privy Council held that the effect of the contract was that each time the railway company’s successor in title used the special wire to transmit a commercial message, it came under a fiduciary obligation ‘to keep an account of the profits accruing from such use of the wire, and to set those profits aside as moneys belonging’ to the telegraph company.72 Paul Finn’s criticism of Streetscape lies in what he regards as the failure of the Court of Appeal to address the question of whether Streetscape was a fiduciary ‘in consequence of the limited, the circumscribed, use it could properly make of ’ the information which it obtained from the City under the agreement.73 A question of that nature could be asked of the position of anyone who has been granted a limited contractual licence to exploit the (tangible or intangible) property of another. That it has not been asked highlights the ‘reasonably strict sense’ in which



70 Reid-Newfoundland

Co v Anglo-American Telegraph Co Ltd [1912] AC 555 (PC). 558. 72 ibid 559. 73 Finn (n 15) paras 823, 792–93. 71 ibid

Expansion of the Fiduciary Paradigm into Commercial Relationships  179 the notion of a fiduciary being a person expected to act ‘in the interests of ’ another has been understood. Contractual labels alone have been found to carry little weight. Of the expression ‘joint venture’, for example, Mason, Brennan and Deane JJ in United Dominions Corporation Ltd v Brian Pty Ltd consciously departed from Cardozo CJ’s view of ‘joint adventurers’ in Meinhard.74 Their Honours stated that: One would need a more confined and precise notion of what constitutes a ‘joint venture’ than that which the term bears as a matter of ordinary language before it could be said by way of general proposition that the relationship between joint venturers is necessarily a fiduciary one … The most that can be said is that whether or not the relationship between joint venturers is fiduciary will depend upon the form which the particular joint venture takes and upon the content of the obligations which the parties to it have undertaken.75

The relationship contractually labelled a ‘joint venture’ was in that case found to be a fiduciary relationship on the basis that, both after and for some time before a formal agreement was entered into between the participants, each of the participants (Mason, Brennan and Deane JJ here using language drawn from Dixon J in Birtchnell76) was ‘associated for … a common end’ and the relationship between them was ‘based … upon a mutual confidence’ that they would ‘engage in (the) particular … activity or transaction for the joint advantage only’.77 Contrasting in result but not in principle was Australian Oil & Gas Corporation Ltd v Bridge Oil Ltd,78 in which the New South Wales Court of Appeal refused to recognise fiduciary obligations in the context of a resources joint venture, finding that the arrangement had been ‘entered into between parties who negotiated at arms length [sic] and defined their respective financial rights and obligations carefully’.79 ‘If the Court were to strain to superimpose fiduciary notions in a case such as this’, the Court of Appeal opined, ‘it would defeat, rather than give effect to, the legitimate expectations of commercial people’.80 To similar effect, in Friend v Brooker, it was held that equity did not impose fiduciary duties between parties to what was characterised as ‘a deliberate commercial decision to adopt a corporate structure in which they would owe duties, but to the corporation and as directors’.81 On the other hand, consistently with what was said by Deane J in Chan and by Mason J in Hospital Products, express contractual exclusions of fiduciary

74 See United Dominions Corp Ltd (n 37); Meinhard (n 4). cf Chirnside v Fay [2006] NZSC 68, [2007] 1 NZLR 433 [14], [74]–[75]. 75 United Dominions Corp Ltd (n 37) 10–11. 76 Birtchnell (n 6). 77 ibid 12–13. 78 Australian Oil & Gas Corporation Ltd v Bridge Oil Ltd (unreported, NSWCA, Gleeson CJ, Kirby P and Clarke JA, 12 April 1989). 79 ibid 21. 80 ibid 21. 81 Friend v Brooker [2009] HCA 21, (2009) 239 CLR 129 [86] (French CJ, Gummow, Hayne and Bell JJ), Heydon J agreeing at [92].

180  Stephen Gageler ­ bligations have generally been found to be effective.82 One illustration, notable o again because it has attracted criticism from Paul Finn, is the decision of ­Jacobson J in Australian Securities and Investments Commission v Citigroup Global Markets Australia Pty Ltd (No 4).83 A letter of retainer by which Citigroup was engaged by Toll to advise on a proposed takeover was expressed in terms that the engagement was ‘as an independent contractor and not in any other capacity including as a fiduciary’. Jacobson J held the express exclusion in the letter to be effective to prevent such a fiduciary relationship from arising. Paul Finn’s criticism of the decision is to the effect that Jacobson J approached the question of the existence of a fiduciary relationship as a matter of construction rather than as a matter of characterisation: the state of affairs which the letter acknowledged was that Citigroup was retained as Toll’s adviser, meaning that within the scope of the retainer Citigroup was contracted to perform a function which required it to act solely in the interests of Toll. That state of affairs alone was sufficient to result in Citigroup coming under fiduciary obligations to Toll, and nothing in the letter changed the character of the function Citigroup was contracted to perform: the mere contractual description of Citigroup as ‘not a fiduciary’ did not recast the function which Citigroup was retained to perform in a way which included new incidents or authorisations that took the relationship outside the fiduciary paradigm; rather the letter misdescribed that relationship.84 Without descending into the merits of the outcome in Citigroup, the premise of Paul Finn’s criticism must surely be correct: whether a relationship is fiduciary is a question of attributing a legal character to the relationship which has been formed in fact. Contracting parties do not alter the legal character of a relationship they have formed or a transaction into which they have entered merely by giving that relationship or transaction some different contractual label: a negative label ought in principle to be no more effective than a positive label. That said, a contractual description can sometimes be used as a shorthand description of the incidents of the relationship or transaction into which contracting parties have in fact entered. The contractual description of Citigroup as ‘not a fiduciary’ could have been interpreted as expressing an agreement that Citigroup remained free to benefit from the relationship without seeking the further consent of Toll and that Citigroup was at liberty to place itself in a position where its contractual duty to advise Toll conflicted with its own commercial interests.85 On this approach, in the absence of some basis in law or in equity for holding that the agreement was not binding or that it was capable of avoidance by Citigroup, it is strongly arguable that the contractual description could have binding effect. This would reflect a contractual

82 See generally Leeming, ‘The Scope of Fiduciary Obligations’ (n 41) 12–13, 19–21. 83 Australian Securities and Investments Commission v Citigroup Global Markets Australia Pty Ltd (No 4) [2007] FCA 963, (2007) 160 FCR 35. 84 Finn, Fiduciary Obligations (n 15) paras 805–19. 85 cf New Zealand Netherlands Society ‘Oranje’ Inc v Kuys [1973] 1 WLR 1126 (PC); Kelly v Cooper [1993] AC 205 (PC).

Expansion of the Fiduciary Paradigm into Commercial Relationships  181 tailoring of the incidents of the relationship with the effect of removing the basis for fiduciary obligations. The issue joined between the parties in Citigroup and tendered for the determination of Jacobson J was whether, in the context in which Toll and Citigroup dealt with each other, the contractual description could and should be so read. There was no suggestion that a fiduciary relationship arose independently of the letter of retainer. Nor was there any suggestion that the factual matrix, or the object or purpose, of the letter of retainer bore on its proper construction.

IV.  Concluding Reflections Paul Finn has recently contrasted the ‘untilled field’ of fiduciary law which he first surveyed more than 40 years ago with the ‘large and noisy development site’ that it has become.86 Dyson Heydon has given a recent diagnosis of the fiduciary as ‘the sick man of equity’.87 Those comments are reflections of jurists whose long association and close familiarity with the subject allows them more readily than others to see the blemishes which inevitably come with maturity. The fiduciary case law remains untidy. The result in many an individual case might be contested. But so it is in many fields of law, and so it has always been. The principles of common law and of equity have shown themselves capable of adapting to the changing commercial relationships of the late twentieth and early twenty-first centuries, much as they did in the nineteenth century. The future is not bleak. There has emerged in contemporary Australian law something that can fairly be described as a functional and functioning fiduciary principle. Mixing the metaphors of others with a personal dash of optimism, the fiduciary in Australia might be lean and confined in his duties, but he has marked out his designated patch, and in working it he has not lost his vigour.

86 Finn (n 15) para 756. 87 JD Heydon, ‘Modern Fiduciary Liability: The Sick Man of Equity?’ (2014) 20 Trusts & Trustees 1006.

182

9 Deemed Performance in Account of Profits LUSINA HO*

I. Introduction It is a well-established principle in equity that a trustee or fiduciary must not make any personal profit by using his fiduciary position. If he does so, he will be stripped of all gains made.1 However, while the goal of disgorgement is clear, its basis and operation remain disputed. It has been said that the beneficiary has a valid claim to profits because they are made in the sphere of fiduciary management and are therefore attributable to the beneficiary, much in the same way as the beneficiary has the option to treat all profits made by a defaulting trustee as a natural increment of the trust estate.2 Such a metaphysical explanation asserts rather than justifies the conclusion. A related approach is to deem the fiduciary as having always acted loyally in respect of the beneficiary and therefore having made the profits on account of the beneficiary.3 Formulated in this broad manner, the legal fiction at most explains why the fiduciary is accountable; it still does not answer the central issue in the attribution exercise, namely to what extent can his ipso facto unauthorised acts be regarded as in adherence to his fiduciary management? Deterrence4

* I am grateful to Peter Chau, Simone Degeling, Jessica Hudson, Joe Lau, Rebecca Lee, Kelvin Low, Nicholas McBride, Richard Nolan, Yeo Tiong Min, Yip Man, and participants in the colloquium on ‘The Impact of Equity and Restitution in Commerce’ held at The University of Auckland in September 2017 for discussion on ideas proposed in this paper. Research for this chapter was funded by the RGC General Research Fund 2017–2018 (project number: 17611917). 1 See, eg Regal (Hastings) v Gulliver [1967] 2 AC 134 (HL); Murad v Al-Saraj [2005] EWCA Civ 959, [2005] WTLR 1573. 2 L Smith, ‘Deterrence, Prophylaxis and Punishment in Fiduciary Obligations’ (2013) 7 Journal of Equity 87, 101–02; Robinson v Robinson (1851) 1 De G M & G 247, 257, 42 ER 547, 551; more recently Tang Ying Ip v Tang Ying Loi [2017] HKCFA 3, (2017) 20 HKCFAR 53. 3 P Millett, ‘Bribes and Secret Commissions’ (1993) 1 Restitution Law Review 7, 20, albeit Lord Millett considers this assumption as based on estoppel rather than legal fiction: 21 fn 71. 4 J Edelman, Gain-Based Damages: Contract, Tort, Equity and Intellectual Property (Oxford, Hart Publishing, 2002) 83–85, 212; M Conaglen, ‘The Nature and Function of Fiduciary Loyalty’ (2005) 121 LQR 452, 463; A Duggan, ‘Gain-Based Remedies and the Place of Deterrence in the Law of Fiduciary

184  Lusina Ho and corrective justice theories have also been put forward,5 but no consensus has emerged.6 Further, it is unclear what causal test, if at all, is applicable to attribute profits to the use of the fiduciary position,7 and whether disgorgement can be limited by remoteness. Finally, the basis and scope of equitable allowances are vague.8 Their award seems inconsistent with the purist exhortation that all profits must be disgorged. There are also conflicting decisions as to whether dishonest fiduciaries can avail themselves of the award. These controversies are reflected in the severe criticism by Lindley LJ in Siddell v Vickers as follows: I do not know any form of account which is more difficult to work out … than an account of profits. … I believe in almost every case people get tired of it and get disgusted.9

In light of these issues, this chapter has two chief aims. First, it argues that important insights can be gained from an historical enquiry into the remedy of account of profits.10 It is a contraction of the taking of common accounts, which operates on the basis of the deemed performance of the fiduciary’s primary duty in compliance with his duty of loyalty.11 This basis will be referred to herein as ‘deemed performance’. The legal fiction assumes that the fiduciary has always performed his task loyally (even though he did not), and obtained the profits on account of the beneficiary. This insight is not novel, but it is rarely pursued in detail to explain the central issue in the attribution exercise, viz, since the law surely does not attribute all profits that are causally linked to the unauthorised acts, what are the determining criteria to limit accountability? Second, this chapter advocates the normative thesis that equity should continue to utilise the historical mechanism of deemed performance to lay down

Obligations’ in A Robertson and HW Tang (eds), The Goals of Private Law (Oxford, Hart Publishing, 2009) ch 15. 5 PB Miller, ‘Justifying Fiduciary Remedies’ (2013) 63 University of Toronto Law Journal 570; PB Miller, ‘The Fiduciary Relationship’ in AS Gold and PB Miller (eds), Philosophical Foundations of Fiduciary Law (Oxford, Oxford University Press, 2014) ch 3. 6 For a recent critique of deterrence, see Smith, ‘Deterrence, Prophylaxis and Punishment’ (n 2); L Smith, ‘Fiduciary Relationships: Ensuring the Loyal Exercise of Judgement on Behalf of Another’ (2014) 130 LQR 608. 7 Murad (n 1). On account of profits generally, see P Devonshire, Account of Profits (Wellington, Thomson Reuters, 2013). 8 Boardman v Phipps [1967] 2 AC 46 (HL). 9 Siddell v Vickers (1892) 9 RPC 152 (CA) 162–63, in a decision involving patent infringement, where assessment of profits can be particularly tedious. 10 For the author’s proposal of this basis of equitable accounting, see L Ho, ‘An Account of Accounts’ (2016) 28 Singapore Academy of Law Journal 849, paras 12–15. See also CC Langdell, ‘A Brief Survey of Equity Jurisdiction’ (1889) 2 Harvard Law Review 241; J Getzler, ‘“As if.” Accountability and Counterfactual Trust’ (2011) 91 Boston University Law Review 973; W Strachan, ‘Compensation for Breach of Trust’ (1918) 34 LQR 168; Smith, ‘Deterrence, Prophylaxis and Punishment’ (n 2) 100–01. 11 This chapter adopts the distinction drawn by Matthew Conaglen between the primary duty undertaken by the fiduciary and the subsidiary fiduciary duty that ensures the performance of the primary duty: see Conaglen, ‘Fiduciary Loyalty’ (n 4).

Deemed Performance in Account of Profits  185 the criteria for limiting account of profits. There are sound reasons to employ the concept of ‘deemed performance’ as an intermediate tool to devise these criteria, because deeming involves a judgment as to whether the unauthorised acts could be treated as part of the fiduciary’s duty. And it is only fair to hold him accountable for those profits that he was supposed to make for the beneficiary. Because of its ability to focus the enquiry on the performance of the fiduciary’s undertaking, deemed performance is a useful legal tool to align the disgorgement rules to their underlying policies, namely to ensure that the fiduciaries are kept to their duties and in turn to protect the institution of trust. This chapter will show how deemed performance provides better guidance to flesh out apparently ad hoc policy-based limitations such as scope of duty, causation, and remoteness. Deemed performance also provides an appropriate yardstick for measuring the requisite level of any equitable allowance to be awarded. Part II of this chapter begins with an historical survey of the remedy of account of profits as a sub-set of the taking of accounts. It will investigate the underlying principle of deemed performance that shapes and provides the boundaries of disgorgement. Part III argues that the concept of deemed performance can explain existing rules of disgorgement, and also provide solutions to unsettled aspects of these rules. In particular, it will demonstrate that existing rules as to scope of duty and causal requirements can be explained as serving the goal of deemed performance. Crucially, recognising this goal also resolves controversies as to the availability of remoteness rules and equitable allowances in account of profits. Lastly, it explores the tension between the goal of deemed performance and considerations of desert and deterrence. The chapter concludes, in Part IV, by positioning the principle of deemed performance in the competing theoretical justifications for account of profits. While deemed performance also explains the availability of proprietary claims for gains made from the use of trust assets12 or specific assets obtained from breach of fiduciary duty,13 this chapter focuses on the disgorgement remedy of account of profits. It is also confined to the account of profits made by fiduciaries, and does not deal with this remedy in relation to breach of confidence, breach of contract or infringement of intellectual property rights.

II.  The Principle of Deemed Performance It is well established that the fiduciary is liable to account for every benefit obtained by him by virtue of his fiduciary position without the beneficiary’s knowledge



12 These 13 Such

gains are typically recoverable via the tracing process. as Keech v Sandford (1726) Sel Cas T King 61, 25 ER 223 (C).

186  Lusina Ho and consent.14 In an oft-cited passage, Lord Russell in Regal (Hastings) Ltd v Gulliver held that fiduciaries must account for profits made: [B]y reason and only by reason of the fact that they were directors of Regal and in the course of the execution of that office.15

Yet this incantation of abstract principle is no less vague than saying, in the context of breach of contract, that the wrongful party is liable for loss arising from the breach. It does not tell us how profits are measured, let alone what remedial rules govern scope of duty, causation, remoteness, and allowances. The answer to these questions can be found by an examination of the historical origin of account of profits in the remedy of taking accounts. Account of profits originates as part of the equitable remedy of taking accounts in common form, but it can also be pleaded as an independent remedy for a specific account of profits.16 In relation to the former, account of profits is a natural component in the equitable taking of an account, which involves producing an account of credits and debits (or profits and losses). Through this administrative process, equity awards remedies in a radically different way from the common law, by treating as done that which ought to be done, and requiring the trustee to account as if he had acted with authorisation.17 Where loss is incurred, an unauthorised disbursement is treated as having never been made and an omitted investment is treated as having been made and the value credited to the trust account at the proper time.18 Where unauthorised profits are made, as Lord Millett has recently affirmed in Tang v Tang,19 the deeming mechanism also applies. Thus, if a trustee breaches his duty and makes profits out of the use of trust assets, it is not necessary for the beneficiary to make an independent claim for account of profits. The profits will simply be treated as having been made loyally, on account of the beneficiary, and thus accruing to the trust assets as if by natural accretion.20 It is submitted that the same approach should also apply where account of profits is pleaded as an independent remedy without accounting in full. After all, a specific account of profits is but a contraction of the taking of account where no property has been entrusted with the defendant and hence no capital is to be 14 W Ashburner, Principles of Equity (London, Butterworth, 1902) 444–45; M Conaglen, ‘Fiduciaries’ in J McGhee (ed), Snell’s Equity, 33rd edn (London, Sweet & Maxwell, 2015) ch 7 paras [7-054]– [7-056]. 15 Regal (n 1) 149 (Lord Russell) (emphasis added). See also 145 (Lord Russell), 149 (Viscount Sankey), 153 (Lord Macmillan), 154 (Lord Wright). See also Boardman v Phipps (n 8) 127 (Lord Upjohn); Warman International Ltd v Dwyer (1995) 182 CLR 544. 16 J Watson, The Duty to Account: Development and Principles (Annandale (NSW), The Federation Press, 2016) paras 169, 200. 17 Langdell, ‘Equity Jurisdiction’ (n 10). 18 Strachan, ‘Compensation’ (n 10); Ho, ‘Accounts’ (n 10). 19 Tang (n 2). 20 GT Bispham, The Principles of Equity: A Treatise on the System of Justice Administered in Courts of Chancery (Philadelphia, Kay & Brother, 1874) para 479; see also SJ Stoljar, ‘The Transformations of Account’ (1964) 80 LQR 203, 211.

Deemed Performance in Account of Profits  187 returned.21 There is no reason why a different basis should be adopted. Logically, all that is needed is to specify the content of what is being deemed to suit the context of the claim. In compensatory claims against a trustee, he is deemed to have performed his primary duty to abide by the terms of the trust, which include keeping custody of the trust fund or getting in trust property. In account of profits for unauthorised use of the trust estate, since the trust estate defines the boundary of his primary duty, the trustee is deemed to have utilised trust property loyally, on account of the beneficiary. In ordering account of profits against a fiduciary who is entrusted with a task rather than capital, his unauthorised acts are deemed as having been done in adherence to his task and in the interests of the beneficiary, even though they were not. Not only is such an approach historically justified, it is in line with the policy of protecting the trust that is unique in fiduciary relationships.22 By deeming the fiduciary’s unauthorised acts as part of his duty, equity strips him of any unauthorised personal profits and renders it futile for him to act in any other way. This way, it removes one of the most significant incentives for unauthorised acts. From the perspective of the beneficiary, deemed performance also ensures that the fiduciary is kept to his duty in remedial terms even if he has failed to do so. This robust mechanism in effect provides a legal guarantee of performance, and in doing so promotes confidence in the trust institution. Having identified the paramount goal of account of profits as protection of the beneficiary’s performance interest through deemed performance, the next part will show how this goal can explain existing rules and tackle challenges in the development of this remedy.

III.  Disgorgement of Gains Notwithstanding the absolutist principle that a fiduciary must account for all unauthorised gains obtained by the use of his position, recovery is typically limited by a host of factors such as the scope of the fiduciary’s duty, causal requirements,23 and recognition for his contribution to the ultimate profits, where his moral turpitude may be a relevant consideration. However, the case law has tended to justify these limitations in an impressionistic manner, by resorting to broad notions of fairness, unjust enrichment, and equitable discretion.24 A recent example of this type of approach can be found in Lifeplan Australia Friendly Society Ltd v Ancient Order of Foresters in Victoria Friendly Society 21 Watson, The Duty to Account (n 16) para 200; Town & Country Property Management Services Pty Ltd v Kaltoum [2002] NSWSC 166 [84] (Campbell J). 22 Canson Enterprises Ltd v Boughton & Co [1991] 3 SCR 534, (1991) 85 DLR (4th) 129. 23 Reference to the causal requirement in this chapter is not limited to the necessary (but-for) cause, but also includes sufficient but not necessary causes. 24 Warman International (n 15) 567; Chan v Zacharia (1984) 154 CLR 178, 204–05 (Deane J).

188  Lusina Ho Ltd.25 In this case, the Full Court of the Federal Court of Australia refrained from endorsing any single test for causation, such as the but-for test, and merely laid down the appropriate approach for determining causation. It opined that the causal inquiry involves assessing whether the rule and policy of account of profits will be undermined if the causal connection is adjudged to be inadequate and a liability to account not attributed.26 In other words, whether causation is treated as established and hence liability should be imposed depends on whether doing so would promote the policy of account of profits. An alternative to this broad, and somewhat circular, approach, as repeatedly advocated by academic commentators, is to rationalise the rules on a more principled basis by utilising controlling techniques adopted in compensatory damages such as causation, scope of duty, and remoteness.27 While this is a step in the right direction, an overarching principle on the measure of disgorgement is still needed to shape these open-ended concepts, or else they may operate as little more than ad hoc considerations of policy. This chapter goes further and proposes that the measure of disgorgement should  be based on deemed performance, such that the fiduciary is liable to account for all causally connected profits arising from acts that fall within the task he has undertaken to perform. This ensures that the fiduciary is required to disgorge the profits that he was supposed to make for the beneficiary. It also encompasses profits he was not tasked to obtain for the benefit of the beneficiary, but which would have compromised the decision-making process prior to his performance if he is allowed to keep them. Such a measure is in line with ­influential judicial thinking that the purpose of account of profits is not to punish the wrongdoer,28 but to prevent unjust enrichment.29

A.  Scope of Duty As this chapter argues, the central issue of attributing profits to the fiduciary’s office requires judgment as to whether the unauthorised acts could be regarded 25 Lifeplan Australia Friendly Society Ltd v Ancient Order of Foresters in Victoria Friendly Society Ltd [2017] FCAFC 74, (2017) 250 FCR 1. An appeal to the High Court of Australia was allowed on 20 October 2017. 26 ibid [64]. 27 Edelman, Gain-Based Damages (n 4); C Mitchell, ‘Causation, Remoteness, and Fiduciary Gains’ (2006) 17 King’s College Law Journal 325, 327–28; G Virgo, ‘Restitutionary Remedies for Wrongs: Causation and Remoteness’ in CEF Rickett (ed), Justifying Private Law Remedies (Oxford, Hart Publishing, 2008) ch 12; Devonshire, Account of Profits (n 7) ch 3. 28 Vyse v Foster (1872) LR 8 Ch App 309 (CA) 333 (James LJ); Dart Industries Inc v Decor Corporation Pty Ltd (1993) 179 CLR 101, 111, 114 (Mason CJ, Deane, Dawson and Toohey JJ); Warman International (n 15) 557. 29 Dart Industries (n 28); Colbeam Palmer Ltd v Stock Affiliates Pty Ltd (1968) 122 CLR 25, 34 (Windeyer J); Warman International (n 15) 557; V-Flow Pty Ltd v Holyoake Industries (Vic) Pty Ltd [2013] FCAFC 16, 296 ALR 418 [57]; Lifeplan Australia (n 25) [65]; Devonshire (n 7) [3.3.3], [3.3.4]; P Millett, ‘Bribes and Secret Commissions Again’ [2012] CLJ 583, 590.

Deemed Performance in Account of Profits  189 as in adherence to his primary duty, as it is only fair to hold him accountable for those profits that he was supposed to make for the beneficiary. Conversely, it would not be fair to require him to account for profits that he has not undertaken to obtain on account of the beneficiary, even though they were causally linked to his fiduciary position. Lord Upjohn’s famous example in Boardman v Phipps concerning Blackacre and Whiteacre illustrates the point.30 If the trustees and beneficiaries of Blackacre are not interested in a possible purchase of the adjacent Whiteacre, the trustees ‘have no duties to perform in respect thereof ’,31 and one trustee should not be held liable for purchasing Whiteacre for himself. In fact, the imposition of liability in the absence of actual conflict in Regal32 can also be explained by a scope of duty analysis. As it was the directors’ duty to act in the best interests of Regal in the scheme to acquire leases in two other cinemas, the profits they obtained through acquiring shares in the subsidiary company formed to hold those leases fell squarely within the scope of their duty. It did not matter that in fact the company could not afford to pay the capital required and hence there was no actual conflict on the facts. In this connection, the basis of deemed performance provides a powerful justification for limiting accountability by the scope of the fiduciary’s (primary) duty. In the prominent cases, the requirement is reflected in a somewhat muted manner in expressions such as ‘the company has no concern’,33 or ‘in the course of execution’ of the fiduciary office.34 It enjoys a much clearer status in partnership cases, as an avowed rule laid down in Aas v Benham, that the principle of accountability does not apply when a partner used partnership information for the purpose of a separate business of a nature ‘wholly without the scope of the firm’s business’.35 It has been authoritatively accepted that this principle is of general application beyond the context of partnership,36 and the scope of the fiduciary duty is moulded ‘according to the nature of the relationship and the facts of the case’.37 The word ‘duty’ here refers to ‘the function, the responsibility, the fiduciary has … undertaken to perform for … his or her beneficiary’,38 in other words his primary 30 Boardman v Phipps (n 8) 130 (Lord Upjohn). Cf Bhullar v Bhullar [2003] EWCA Civ 424, [2003] 2 BCLC 241, where the company’s business was in property development, even though it had resolved to suspend such activity for a period of time. It was still within the directors’ scope of duty to report the potential purchase of adjacent land to the company. 31 Boardman v Phipps (n 8) 130 (Lord Upjohn). 32 Regal (n 1). 33 Bell v Lever Brothers Ltd [1932] AC 161 (HL) 194. 34 Regal (n 1) 149 (Lord Russell). 35 Aas v Benham [1891] 2 Ch 244 (CA) 256 (Lindley LJ). 36 New Zealand Netherlands Society ‘Oranje’ Inc v Kuys [1973] 1 WLR 1126 (PC) 1130 (Lord Wilberforce), cited with approval in Cheng Wai Tao v Poon Ka Man Jason (2016) 19 HKCFAR 144 [79] (Spigelman NPJ). See also Estate Realties Ltd v Wignall [1992] 2 NZLR 615 (HC) 631, and in the context of infringement of trade mark, Colbeam Palmer (n 29) (profits not calculated on the basis of the selling of the defendant’s products, but the selling of such products under the infringed trademark). 37 Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41, 102 (Mason J). 38 Grimaldi v Chameleon Mining NL (No 2) [2012] FCAFC 6, (2012) 200 FCR 296 [179] (Finn, Stone and Perram JJ).

190  Lusina Ho task. One needs to look no further than Warman International Ltd v Dwyer for an illustration of this limitation.39 Here, Mr Dwyer diverted to himself an agency contract for the distribution of gearboxes in Australia and additionally provided local assembly for those products. Significantly, the interest of the principal extended only to its distributor goodwill, but not the third-party supplier’s goodwill over its products and its local assembly rights, which the supplier had always retained ownership over. Accordingly, only profits earned from exploitation of the principal’s distributor goodwill were accountable. Even though Mr Dwyer’s fiduciary position led him to the business over local assembly rights, profits from this aspect of Mr Dwyer’s business did not have to be disgorged.40 The scope of duty requirement was also applied by the High Court of Australia in Howard v Commissioner of Taxation of the Commonwealth of Australia, albeit the decision can also be justified in terms of causation.41 In this case, directors of Disctronics Ltd (of which the appellant was one) had participated, in their personal capacity, in a joint venture which proposed to purchase, lease, and on-sell a golf course. The appellant obtained equitable compensation when the proposed purchase was thwarted by two co-venturers. The directors had earlier decided that they should endeavour to have Disctronics purchase the golf course from the joint venture. The issue was whether the appellant had breached the no-conflict rule such that he held this compensation on constructive trust for the company. Relevantly, Gageler J, following Grimaldi v Chameleon Mining NL (No 2),42 emphasised the need to identify the undertaking over which the fiduciary’s obligations extended for conflict of duty and interest purposes, and opined that it was only in respect of that undertaking that the director had the responsibility of acting for and on behalf of the company.43 As the director’s undertaking did not extend beyond taking appropriate steps to give effect to the company’s decision to seek the purchase of the golf course, there was no relevant fiduciary obligation preventing him from taking a share of the profits from the joint venture.44 The Hong Kong Court of Final Appeal dealt squarely with the issue of defining the scope of fiduciary duty in Cheng Wai Tao v Poon Ka Man Jason.45 It considered whether a director of a company in a restaurant chain, which operated on the basis of using a separate company in respect of each restaurant operation, only owed a fiduciary duty towards the single company and was free to develop other restaurants by the same name. Delivering the judgment of the bare majority, Spigelman NPJ held that the scope of fiduciary duty should take into account not 39 Warman International (n 15). 40 As compared to the distributorship, the assembly business was relatively small in scale, employing only one man full-time and a few part-timers, but it was still excluded from the fiduciary’s liability to account. 41 Howard v Commissioner of Taxation [2014] HCA 21, (2014) 253 CLR 83. I am grateful to Jessica Hudson for pointing this case to me. 42 Grimaldi (n 38) [179]. 43 ibid [110]–[11] (Gageler J). 44 ibid [4] (French CJ and Keane J), [94], [100] (Hayne and Crennan JJ), [111]–[16] (Gageler J). 45 Cheng Wai Tao (n 36).

Deemed Performance in Account of Profits  191 just the parties’ shareholder agreement in relation to the single company, but also the interconnected expectation that the company would be the first of a series of corporate vehicles of a new line of business. As such, the scope of the director’s fiduciary duty was not confined to the single company alone.46

B.  Causal Connection between the Fiduciary Position and Profits Appreciation of the principle of deemed performance also militates in favour of a more nuanced approach to causation than those currently available in the case law. Thus far, courts have derived the causal requirement from the broad expression used in Regal (Hastings) Ltd v Gulliver, that the profits were obtained ‘by reason and in course of ’ the fiduciary office.47 This expression has been understood as requiring the breach to be one of the causes of the profits, but not necessarily the necessary or dominant cause.48 For example, in Murad v Al-Saraj, the Court of Appeal relied on Regal (Hastings) and held that it was not open for the fiduciary to argue that but for the breach, he would have obtained the profits in any event.49 In Murad, a fiduciary who had undertaken to contribute cash towards the joint purchase of a hotel with the plaintiffs breached his fiduciary duty by suppressing the fact that his contribution to the purchase had come from offsetting unenforceable debts owed to him by the vendor. At first instance and on appeal, the fiduciary was required to account for the full amount of his profits, which represented 50 per cent of the capital profits from the resale of the hotel as specified in the parties’ written agreement. When he argued that he should only account for the difference between his profit share and the smaller share the principals would still have given him had he disclosed the breach, the majority of the Court of Appeal was adamant that such a hypothetical inquiry was not relevant to an account of profits, although the inflexible nature of the no-profit rule was questioned.50

46 ibid [113]–[15]. 47 Regal (n 1) 143 (Lord Russell) (emphasis added), as well as 149 (Viscount Sankey), 153 (Lord Macmillan), 154 (Lord Wright). Maguire v Makaronis (1997) 188 CLR 449, 468; Warman International (n 15). 48 The relative importance of contributory causes was not examined in Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd (No 2) (1998) 29 ACSR 290 (NSWSC). 49 Murad (n 1). For criticism of Murad: see Virgo, ‘Restitutionary Remedies for Wrongs’ (n 27); Mitchell, ‘Causation’ (n 27); R Lee, ‘Causation and Account of Profits for Breach of Fiduciary Duty’ [2006] Singapore Journal of Legal Studies 488. In support of Murad: see Smith, ‘Deterrence, Prophylaxis and Punishment’ (n 2) 100–03; Devonshire, Account of Profits (n 7) 238. Murad is in line with a string of authorities including Bray v Ford [1896] AC 44 (HL) 51; Gray v New Augarita Porcupine Mines Ltd [1952] 3 DLR 1 (PC) 15; Industrial Development Consultants Ltd v Cooley [1972] 1 WLR 443 (HC) 453; United Pan-Europe Communications NV v Deutsche Bank AG [2000] EWCA Civ 166, [2000] 2 BCLC 461; and Gwembe Valley Development Co Ltd v Koshy [2003] EWCA Civ 1048, [2004] 1 BCLC 131. 50 See Murad (n 1) [82]–[83] (Arden LJ), [121] (Parker LJ).

192  Lusina Ho However, Murad should not be treated as the last word on the causal test. On closer examination, it is submitted that Mason CJ’s reasoning in Warman International Ltd v Dwyer implicitly adopts but-for causation.51 Here, where the benefits acquired by the fiduciary took the form of an ongoing business, the High Court of Australia rejected the trial judge’s order to disgorge the profits of the business for four years. It observed that ‘were it not for Dwyer’s breach of fiduciary duty, Warman’s Bonfiglioli distributorship would probably have continued for, but only for, a further period of one year’, and therefore that the advantage obtained by Dwyer from his exploitation of the distributorship agreement must encompass the profits for that year.52 In saying that the fiduciary’s profits in the first year would have continued to be earned by the principal were it not for the breach, the court was in effect adopting but-for causation. The same analysis can explain the High Court’s decision to add one more year of profits as a ball-park estimation for the advantages obtained from acquiring the experience, contacts, know-how and services of Warman’s employees, and to make its final order to account of net profits for two years. This is because had it not been for the wrongful wooing of these employees, it would have taken Dwyer time to build expertise in his new employees. Admittedly, the High Court did not articulate the justification for limiting the accounting period on the explicit basis of but for causation. Instead, it appealed to broad notions of justice and unjust enrichment to justify the temporal limit on account of profits.53 When the Federal Court of Australia was presented with the opportunity to consider the but-for test in Lifeplan Australia, it recited the Regal formulation and shied away from a direct response. The court accepted that satisfaction of the but-for test fulfilled the necessary causal connection on the facts.54 However, it did not commit to any test of causation, and merely postulated the methodology on how to devise the causal test, namely that the causal requirement should be one that conforms with the policy behind attributing gains (and hence liability) to the fiduciary. Put crudely, causation is established if it is appropriate to hold the fiduciary liable. With respect, such an opaque, if not also circular, approach provides little guidance to future courts. It is submitted that recognition of deemed performance as the measure of disgorgement provides a stable basis for identifying the causal test. It justifies the attribution of liability based on but-for causation in Lifeplan Australia. It is also 51 Warman International (n 15). See R Nolan, ‘What to Take into Account’ [1996] CLJ 201; R Lee, ‘Disgorgement of Unauthorised Fiduciary Gains: An Exercise in Causation?’ (2017) 11 Journal of Equity 29. 52 Warman International (n 15) 567 (emphasis added), applied in Menkens v Wintour [2009] QSC 206 [58] to allow the defendants to plead that some of the diverted clients would have transferred their business to them in any event. 53 ‘It is for the defendant to establish that it is inequitable to order an account of the entire profits’: Warman International (n 15) 561. Since ordinarily a person subject to criminal punishment bears no burden, this suggests that the refusal of an order for profit sharing or for an allowance is not punitive: see Harris v Digital Pulse Pty Ltd [2003] NSWCA 10, (2003) 56 NSWLR 298 [336]. 54 Lifeplan Australia (n 25) [66].

Deemed Performance in Account of Profits  193 consistent with the reasoning in Warman International v Dwyer, which attributed to Warman profits that, had Dwyer adhered to his duty and developed the opportunity for Warman, he would have been required to account for. Dwyer was also to be left neither worse nor better off than he would have been in had there been no breach.55 Finally, and most importantly, by attributing profits on the basis of what the fiduciary would have accounted for if he had adhered to his duty, deemed performance ensures that if he defaults, the fiduciary will be kept to his duty in remedial terms. This provides a powerful apparatus for promoting the underlying policy behind the fiduciary rule, namely to protect the institution of trust. Relative to Australia, one court in Hong Kong might have taken a step even further. In Kao Lee & Yip (a firm) v Koo Hoi Yan, Ma J, as he then was, explicitly referred to the doctrines of causation and remoteness in limiting the accounting period.56 In this case, the defendant solicitor took steps to set up a new law firm (obtaining legal advice, renting the premises and wooing employees over) whilst still employed by the principal, and opened the new firm to take over the business of a major client shortly after resignation. Ma J ordered an account of profits for one year, on the basis that had the defendant not acted in breach, but resigned in order to set up his own law firm to compete lawfully, it would have taken the client about one year to divert the business to the new firm. Significantly, Ma J justified the one-year cap on the need to ‘focus on causation and remoteness when examining the link between the breach of duty and the gain’.57 This echoes the ‘springboard doctrine’ commonly adopted in trade secrets cases to reflect the advantage that the infringing defendant obtains by misusing trade secrets instead of acting lawfully to reverse engineer the plaintiff ’s products.58 His Honour did not clarify whether the cap was based on causation or remoteness, but his emphasis on the profits that the law firm would have continued to enjoy had the duty been complied with militates in favour of but-for causation. It is submitted that Murad can be reconciled with Warman International and Kao Lee & Yip. There was already a consensual bargain in Murad to share the profits in a particular way, thus leaving no gap for equity to step in to fill. But this was not so in Warman International or Kao Lee & Yip. In the absence of a consensual bargain, the court resorts to deemed performance and takes into account but-for causation.59 Besides, the courts are now much better equipped with the rules of evidence and procedure to assess counterfactuals than they were at the times when the absolutist exhortation in London Loan & Savings Co of Canada v Brickenden 55 See Hagan v Waterhouse (1991) 34 NSWLR 308 (NSWSC). 56 Kao Lee & Yip (a firm) v Koo Hoi Yan [2003] 3 HKLRD 296 (HKCFI). 57 ibid 340. 58 Saltman Engineering Co Ltd v Campbell Engineering Co Ltd (1948) 65 RPC 203 (CA); Terrapin Ltd v Builders’ Supply Co (Hayes) Ltd (1967) 84 RPC 375 (Ch) 391 (Roxburgh J); Potters-Ballotini v Weston-Baker (1977) 94 RPC 202 (CA) 206–07 (Lord Denning); Securities and Exchange Commission v MacDonald 699 F 2d 47 (1st Cir 1983). 59 I thank Richard Nolan for this point.

194  Lusina Ho was laid down.60 Concerns that the fiduciary alone is in possession of the evidence can be addressed by shifting the burden of disproving absence of but-for causation to him.

C. Remoteness The exhortation that the fiduciary must account for all profits obtained by reason of his fiduciary position would suggest excluding the relevance of remoteness in limiting disgorgement. Notwithstanding this, there appears to be some support for limiting recovery by remoteness. In Kao Lee & Yip (a firm) v Koo Hoi Yan, Ma J referred to notions of causation and remoteness to limit disgorgement to one year, albeit without elaborating how remoteness was relevant to his ruling.61 In comparison, Lawrence Collins J appeared less equivocal in CMS Dolphin Ltd v Simonet.62 His Lordship clearly considered as recoverable consequential gains such as downstream profits that flowed from the opportunity or cash-flow benefits that were unlawfully obtained. He limited the extent of recovery by requiring a ‘reasonable connection’ between the breach and such profits, albeit the defendant was liable on a more restrictive basis in that case.63 Lawrence Collins J’s obiter remark was taken up by Edelman to propose a remoteness test of reasonable foresight for honest fiduciaries, citing as another reason analogy to tortious damages.64 With respect to deliberate and cynical fiduciaries, Edelman considered that the deterrence rationale justified holding them accountable for all direct gains. In comparison, Virgo supports a single remoteness test of all direct profits arising from the breach.65 Virgo,66 Lee,67 and Grantham and Rickett68 also regard the imposition of a temporal limit on account of profits as based on remoteness, whereas Burrows proposes controlling remoteness of gain through equitable allowances.69

60 London Loan & Savings Co of Canada v Brickenden [1933] SCR 257, discussed in M Conaglen, ‘Brickenden’ in S Degeling and JNE Varuhas (eds), Equitable Compensation and Disgorgement of Profits (Oxford, Hart Publishing, 2017) ch 6. For a convincing argument in support of this view, see R Cunnington, ‘The Assessment of Gain-Based Damages for Breach of Contract’ (2008) 71 MLR 559, 584; Nolan, ‘What to take into Account’ (n 51). 61 Kao Lee & Yip (a firm) (n 56) 340. 62 CMS Dolphin Ltd v Simonet [2001] EWHC (Ch) 415, [2001] 2 BCLC 704. 63 ibid [97], [140]–[42]. 64 Edelman, Gain-Based Damages (n 4) 108ff. 65 Virgo, ‘Restitutionary Remedies’ (n 27) 306; see also, in the context of account of profits for breach of contract, Cunnington (n 60) 584. The same test was adopted by Lord Woolf MR in A-G v Blake [1998] Ch 439 (CA) for breach of contract. 66 Virgo, ‘Restitutionary Remedies’ (n 27) 309. 67 Lee, ‘Disgorgement of Unauthorised Fiduciary Gains’ (n 51) 43. 68 R Grantham and CEF Rickett, Enrichment and Restitution in New Zealand (Oxford, Hart Publishing, 2000) ch 20, 486–87. 69 A Burrows, The Law of Restitution, 3rd edn (Oxford, Oxford University Press, 2011) 688.

Deemed Performance in Account of Profits  195 Three responses are in order. First, in tackling this issue, one must begin by clarifying what ‘remoteness’ means. Profits arising beyond a certain period of time are temporally remote, but can be both directly and reasonably foreseeable and hence not remote under the tests proposed by the same authors. Even if a remoteness rule is adopted, it is more preferable to apply these tests in each case rather than to draw a line of remoteness based on time alone. In any event, there is very limited judicial support for the view that the time caps adopted in Warman International and Kao Lee & Yip (a firm) were based on remoteness. They were imposed in these two cases based on profits that the principal would have continued to obtain had the fiduciary acted lawfully and resigned before competing with the principal; this is causal reasoning rather than the application of remoteness. Second, appreciation of the basis of account of profits as deemed performance shows that the tort analogy is inapposite. Since the duty in the tort of negligence is to take reasonable steps to prevent reasonably foreseeable harm on the part of the plaintiff, it is consistent with the nature of the duty to limit liability to reasonably foreseeable losses. But the duty of loyalty is not confined to averting reasonably foreseeable profits; it is to refrain from making any personal profits from the fiduciary office. Third, deemed performance does entail accountability for all direct gains, for if the fiduciary had adhered to his duty and developed the relevant business opportunity for the principal, he would also have accounted for downstream profits that flowed directly from it. But the requirement of ‘directness’ is not typically treated as concerning remoteness for the purposes of either common law damages or equitable compensation. For example, tortious damages for fraud, which are not limited by the remoteness rule, extend to all direct loss.70 In Canson Enterprises Ltd v Boughton & Co,71 McLachlin J endorsed the statement in Re Dawson72 that foresight and remoteness were irrelevant, and suggested in connection with the test of common sense causation that there be a direct link between the breach and the loss.73 Although the use of terminology in compensatory claims does not dictate that used for the purposes of disgorgement, confusion is best avoided by consistency across the board in private law.

D.  Just Allowances for Skill and Effort Ever since the early days of equitable accounting, equity had regularly awarded allowances for costs or efforts to the credit of the accounting party.74 There was little explanation as to the basis for such awards, but equitable account has always

70 Doyle

v Olby (Ironmongers) Ltd [1969] 2 QB 158 (CA). Enterprises (n 22). 72 Re Dawson; Union Fidelity Trustee Co Ltd v Perpetual Trustee Co Ltd [1966] 2 NSWLR 211 (SC). 73 Canson Enterprises (n 22) 163. 74 Watson, The Duty to Account (n 16) para 183, and the cases cited in fn 33. 71 Canson

196  Lusina Ho been moulded as ex aequo et bono requires, according to what is just and fair.75 This vague76 and broad rationale has been restated in modern case law by invoking the maxim ‘he who seeks equity … must do equity’.77 There has also been recent academic attention to the justification of fiduciary allowances.78 This part will take stock of the justifications offered thus far and show that appreciation of the underlying principle of deemed performance provides a more precise basis for the award of equitable allowances for costs and efforts expended by the fiduciary. To begin with, a distinction needs to be made between allowances for necessary and reasonable expenses incurred in obtaining the profits, and those for the fiduciary’s time, skill and effort. Justification for the former is relatively self-evident. After all, a performing fiduciary only needs to account for net profits.79 Deducting such cost from the account ensures that the beneficiary will not be unjustly enriched by saving the necessary expenses that the fiduciary would have incurred on his account. In comparison to allowances for necessary expenses, which have an objective value, allowances for fiduciary skill and effort require stronger justification, for this involves giving credit to the work of an errant fiduciary and the possible impression of the court sanctioning wrongdoing. This inevitably conflicts with the absolutist principle that the fiduciary must disgorge all profits.80 Notwithstanding its unclear juristic basis, the availability of such allowances is indisputable. Wilberforce J’s decision in Boardman v Phipps is typically cited as the modern origin of the award of equitable allowance for skill and effort contributed by an errant fiduciary, but the jurisdiction is much more deep-rooted, albeit the early cases involved trustees or analogy to trustee liability. As far back as 1678, in 75 Ex parte Bax (1751) 2 Ves Sen 388, 28 ER 248. 76 W Kearney, ‘Accounting for a Fiduciary’s Gain in Commercial Contexts’ in PD Finn (ed), Equity and Commercial Relationships (Sydney, Law Book Co, 1987) 195. 77 Estate Realties (n 36) 630 (Tipping J). See also references to broad notions of justice and fairness in Phipps v Boardman [1964] 1 WLR 993 (Ch) 1018 (Wilberforce J) and [1965] Ch 992 (CA) 1020, affd sub nom Boardman v Phipps [1967] 2 AC 46 (HL); O’Sullivan v Management Agency and Music Ltd [1985] QB 428 (CA) 467–68 (Fox LJ). 78 L Aitken, ‘Reconciling “Irreconcilable Principles” – A Revisionist’s View of the Defaulting Fiduciary’s “Generous Equitable Allowance”’ (1993) 5 Bond Law Review 49; Edelman, Gain-Based Damages (n 4); J Palmer, ‘The Availability of Allowances in Equity: Rewarding the Bad Guy’ (2004) 21 New Zealand Universities Law Review 146; M Harding, ‘Justifying Fiduciary Allowances’ in A Robertson and HW Tang (eds), The Goals of Private Law (Oxford, Hart Publishing, 2009) ch 14; B Arnold, ‘What Shall We Do with the Dishonest Fiduciary? The Unpredictability of Allowances for Work and Skill’ (2016) 2 UniSA Student Law Review 1; A Kantic, ‘Allowances for Breaching Fiduciaries to Ensure that the Principal Who Seeks Equity Must do Equity: Why not Quantum Meruit?’ (2016) 2 UniSA Student Law Review 26. 79 Patel v Brent LBC [2003] EWHC 3081 (Ch), [2004] 3 PLR 1 [29]; Regal (n 1) 154; De Bussche v Alt (1878) 8 Ch D 286 (CA) 307; Featherstonhaugh v Turner (1858) 25 Beav 382, 389; 53 ER 683, 685–86, albeit in the context of allowances for skill and labour. 80 See Lord Goff ’s attempt to confine allowance for skill and effort to situations which ‘cannot have the effect of encouraging trustees … to put themselves in a position where their interests conflict with their duties as trustees’: Guinness plc v Saunders [1990] 2 AC 663 (HL) 701 (Lord Goff). For the view that this exception is a red herring, see Aitken, ‘Reconciling “Irreconcilable Principles”’ (n 78) 61; Harding, ‘Fiduciary Allowances’ (n 78) 344.

Deemed Performance in Account of Profits  197 Luntley v Royden, when an executor who wrongfully continued to trade on the brewery bequeathed by the testatrix was required to account for profits, the court directed the Master to report ‘specially’ on the executor’s ‘labour and pains’ in carrying on the trade in order to give further directions in the account.81 In 1711 in Brown v Litton, when the captain of a vessel set for a trading voyage died, and the succeeding captain undertook to invest his predecessor’s money on his behalf, he was required to account for the profits made from the trade by analogy to a trustee. But reasonable allowance was given for his ‘pain and trouble’.82 There are plenty of other pre-Boardman authorities awarding such allowances, mostly in the context of partnership. For example, the allowance can be given in response to a specific item on the account83 or as an award upon an overall assessment of the evidence.84 After Boardman v Phipps, the court might also refuse or reduce the award for dishonest fiduciaries.85

i.  Justifications for Allowances Broadly speaking, three views have been put forward to justify the award of equitable allowances for skill and effort, each of which deserves closer examination. The first view, advocated by Virgo but eloquently rebutted by Harding, sees allowances for skill and effort as reflecting the proportionate contribution of the fiduciary’s skills in generating the profits, and hence grounded on principles of causation.86 In Warman International v Dwyer, the High Court suggested the need to ascertain whether ‘the relevant proportion of the increased profits is not the product or consequence of the plaintiff ’s property but the product of the fiduciary’s skill, efforts, property and resources’.87 However, the court was referring to apportionment of profits precisely as an alternative approach to awarding allowances, and grounding such apportionment on the existence of an antecedent agreement to share profits.88 The second view is to see allowances as based on the principle of requiring the beneficiary to make counter-restitution to the fiduciary who disgorges his unlawful gains.89 This analysis may have been inspired by the remark of Mason

81 Luntley v Royden (1678) Fin H 381, 23 ER 209 (A). 82 Brown v Litton (1711) 1 P Wms 140, 142; 24 ER 329, 329–30. 83 ibid; Yates v Finn (1880) 13 Ch D 839. 84 Brown v De Tastet (1821) Jac 284, 37 ER 858; Featherstonhaugh (n 79); Lord Provost of Edinburgh v Lord Advocate (1879) 4 App Cas 823 (HL); In Re Macadam [1946] Ch 73; and Re Jarvis decd [1958] 1 WLR 815 (Ch). 85 Phipps v Boardman (n 77), affd sub nom Boardman v Phipps (n 8); Hospital Products (n 37); Green & Clara Pty Ltd v Bestobell Industries Pty Ltd (No 2) [1984] WAR 32 (WASC); Edwards v Lee’s Administrators 96 SW 2d 1028 (Ky 1936); V-Flow (n 29), allowance denied on the sole and explicit ground that the defendants were deliberately dishonest. However, see O’Sullivan (n 77). 86 Virgo, ‘Restitutionary Remedies for Wrongs’ (n 27) 309–10, 325–26; Harding (n 78) 345–48. 87 Warman International (n 15) 561. 88 ibid 562. 89 Kantic, ‘Why not Quantum Meruit?’ (n 78).

198  Lusina Ho CJ in Warman International Ltd v Dwyer, that allowances are awarded to prevent account of profits from being transformed into ‘a vehicle for the unjust enrichment of the plaintiff ’.90 At first glance, this is a very attractive hypothesis, for the intended effect in awarding an allowance is indeed the same as that of counterrestitution, namely to prevent the plaintiff from being better off as the result of a claim. However, the rationales behind their common intended effect are very different.91 While it is easy to understand the logic behind making counterrestitution to a recipient who is restoring benefits in a mutual process not based on fault, strong grounds are needed to save fiduciaries from ‘the just results of [their] own gross misconduct’.92 Besides, counter-restitution returns benefits already conferred to put both parties back to the pre-payment situation, whereas equitable allowances set off benefits that the plaintiff will otherwise obtain in order to put him into the position he would have been in had the duty been lawfully performed. They are forward-looking. The third, and better view, supported by numerous commentators albeit with variations in emphasis, is that equitable allowances are based on desert or serve as recompense for the fiduciary’s skill and labour.93 This view has the most support in judicial decisions.94 Explicit reference to this notion can be found in Brown v Litton, where the court stated that ‘to recompense the defendant for his care in trading with [the money of the deceased captain], the Master should settle a proper salary for the pains and trouble he had been at in the management thereof ’.95 In Featherstonhaugh v Turner, Sir John Romilly MR considered the role of the Court to ascertain the amount of net profits ‘after making a liberal allowance and compensation to [the defendant] for his knowledge, time and trouble in carrying on the business’.96 In O’Sullivan v Management Agency and Music Ltd, Fox LJ observed, in relation to a dishonest music manager who had made a significant contribution to the success of a musical performer: I am not satisfied that it would be proper to exclude [the defendants] from all reward for their efforts. … It would be unjust to deny them a recompense for that.97

Notions of ‘desert’ and ‘recompense’ seem to resonate strongly in the contexts in which allowances have been awarded, but additional reasons are needed to justify allowing a fiduciary to avail himself of an allowance despite his ­wrongdoing. 90 Warman International (n 15) 561. 91 See also the critique of this view in Harding (n 78) 358 fn 75. 92 United States Surgical Corporation v Hospital Products International Pty Ltd [1983] 2 NSWLR 157 (NSWCA) 243, quoting from Story on Equity, 3rd edn (London, Sweet & Maxwell, 1920) para 697. 93 Harding, ‘Justifying Fiduciary Allowances’ (n 78) (desert); Aitken, ‘Reconciling “Irreconcilable Principles”’ (n 78) (compensation); M Conaglen, ‘The Extent of Fiduciary Accounting and the Importance of Authorisation Mechanisms’ [2011] CLJ 548, 568–69 (remuneration). 94 See also Chirnside v Fay [2006] NZSC 208, [2007] 1 NZLR 433 [80] (Elias CJ), [104] (Blanchard and Tipping JJ) referring to the allowance as recompense; Murad (n 1); Estate Realties (n 36); Badfinger Music Inc v Evans [2002] EMLR 2 (Ch); Phipps v Boardman (n 77) 1020 (Lord Denning). 95 Brown (n 82) 142; 329 (emphasis added). 96 Featherstonhaugh (n 79) 389; 686. 97 O’Sullivan (n 77) 468.

Deemed Performance in Account of Profits  199 Besides, desert can only explain the making of equitable allowances when the fiduciary’s labour has benefited the beneficiary, but not otherwise. The real impact of the principle of deemed performance can be seen in the answers it offers to these questions. Specifically, it provides a yardstick for measuring the quantum of the allowance to be awarded should the court be minded to do so. The measure can be justified on the basis that if the fiduciary had been authorised to develop a new business opportunity not originally contemplated by the parties, he might conceivably be given remuneration for this additional service. Further, the court will award the reasonable market value of the service unless there is evidence that the parties have agreed to the contrary. In this way, deemed performance allows us to see the natural limit of disgorgement, being the net profits after deducting recompense for the fiduciary’s services. This is succinctly captured in Mason CJ’s warning in Warman International against using disgorgement to give the plaintiff a windfall.98 Furthermore, on this view, it is not necessary for the service to have resulted in any actual benefit to the beneficiary, for remuneration for service is available upon performance. A closer examination of the calculation of the award by Wilberforce J in the landmark case of Phipps v Boardman bears out this thinking, and deserves to be set out in full: If Boardman had not assumed the role of seeing [the share acquisition] through, the beneficiaries would have had to employ (and would, had they been well advised, have employed) an expert to do it for them. … It seems to me that it would be inequitable now for the beneficiaries to step in and take the profit without paying for the skill and labour which has produced it.99

In referring to the (hypothetical) cost of engaging an expert to carry out the work which the fiduciary did, Wilberforce J was, in effect, considering what the position would have been had the work been authorised. His Lordship then ordered an enquiry into the allowance, suggesting that it should be awarded on a ‘liberal scale’,100 largely because the fiduciaries had acted honestly throughout. A more recent example of the same deliberation process could be found in Accidia Foundation v Simon C Dickinson Ltd,101 where an art dealer who arranged the sale of the ‘Geneva Drawing’ by Leonardo da Vinci at US $7m did not disclose to the seller the identity of the buyer, or the US $1m commission he received. The commission represented the difference between the ‘net return price’ agreed by the seller and the actual purchase price that was concealed from the seller. In requiring the dealer to account for his profit, Vos J proceeded on the basis of what the seller would have agreed had the dealer discharged his duty of disclosure. His Lordship considered that the seller would have agreed to a maximum of 98 Warman International (n 15) 561. 99 Phipps v Boardman (n 77) 1018. Lord Denning in the Court of Appeal based the award on broad grounds of justice: 1020–21. 100 Phipps v Boardman (n 77) 1018. 101 Accidia Foundation v Simon C Dickinson Ltd [2010] EWHC 3058 (Ch), [2010] All ER (D) 290 (Nov) [95].

200  Lusina Ho ten per cent of the purchase price to be split between the defendant and another art dealer. He therefore began with a figure of $70,000, set off $50,000 that had already been paid to the other dealer, and reached a figure of $20,000 for the ­defendant. The court’s focus on the commission that the seller would have paid had the defendant performed his duty clearly reflects a calculation process based on deemed performance. Probably because the award is discretionary, the courts also show greater willingness in this context to engage in the assessment of counterfactual situations, even though they refuse to do so in assessing causation.102 While these cases support the relevance of deemed performance in measuring equitable allowance, often courts are swayed by broad considerations of justice or the moral turpitude of the fiduciary to override this goal.

ii.  The Relevance of Dishonesty? Judicial practice differs on whether an allowance should be refused or reduced where a fiduciary is dishonest. Australian jurisprudence following Warman International Ltd v Dwyer generally pays little attention to the fiduciary’s dishonesty when it orders an allowance, as was the case with English decisions preBoardman.103 They give higher priority to the need to prevent unjust enrichment on the part of the plaintiff. In contrast, English authorities have followed Boardman v Phipps in distinguishing between innocent and dishonest fiduciaries, refusing or reducing the award for the latter. Nonetheless, there are cases where equitable allowance was denied to an honest director (Guinness plc v Saunders104), but granted to a dishonest fiduciary (O’Sullivan v Management Agency and Music Ltd) with little explanation.105 If the principle of deemed performance were strictly adhered to, there should be a consistent scale of allowances for all fiduciaries. This is because once deemed to have performed their duty, the fiduciaries’ culpability becomes irrelevant. Deemed performance therefore best explains the orthodox approach in preBoardman authorities and the Australian approach laid down by Warman ­International. Besides, orthodox accounting rules on falsification and surcharging also do not make a distinction between honest and dishonest trustees. There is no reason why equity’s approach to disgorgement claims should be any different. Support for deviating from this principle where dishonest fiduciaries are concerned is typically based on arguments external to the nature of the a­ ccounting 102 Murad (n 1); but see the discussion in Part III B of this chapter. I thank Peter Devonshire for this point. 103 Warman International (n 15), but see Say-Dee Pty Ltd v Farah Constructions Pty Ltd [2005] NSWCA 309 (dishonesty relevant); Chen v Lym International Pty Ltd [2009] NSWCA 326, 260 ALR 353 [335] (Young JA) (dishonesty irrelevant). The Supreme Court of New Zealand has regarded dishonesty as relevant: Chirnside v Fay (n 94). 104 Guinness (n 80) 693–94. 105 O’Sullivan (n 77).

Deemed Performance in Account of Profits  201 process, such as desert,106 the balance of justice between the parties,107 and ­deterrence,108 but none proves conclusive. Even the strongest amongst them, that a person who violates his moral duty loses his desert, may not justify a blanket denial of recompense in all cases of dishonesty, especially when his act generates enormous profits for both himself and the principal, and more so than when he breaches his duty honestly. This may explain why the English Court of Appeal in O’Sullivan v Management Agency and Music Ltd unanimously awarded reasonable remuneration to dishonest defendants with a small profit element, albeit one that was less than market rate.109 In the final analysis, deemed performance itself does not entail treating fiduciaries differently depending on their moral turpitude. Rather, judges have at times been swayed by ad hoc considerations of justice, deterrence, or even punishment arising from the facts of the cases before them. In particular, they are more ready to invoke deemed performance in favour of the beneficiary in order to ensure that the defaulting fiduciary is kept to his duty in remedial terms. In sharp contrast, judges are willing to forsake this goal when it would benefit the defaulting fiduciary.

IV. Conclusion This chapter has argued that account of profits by an errant fiduciary is best conceived as based on the principle of deemed performance. This principle shows that the sacrosanct principle requiring a fiduciary to account for all profits obtained as the result of his fiduciary position is too broadly stated; it is better formulated by saying that an errant fiduciary is liable to account for profits that fall within the scope of the task he has undertaken to perform. Typically, this includes profits that, if he had adhered to his primary duty loyally, he would have been required to account to the principal for. Not only is such a basis justified by the historical lineage of account of profits in the taking of common accounts, it is also well grounded on fiduciary policy. Because of its ability to focus the enquiry on the performance of the fiduciary’s undertaking, deemed performance is an extremely useful legal 106 Harding, ‘Justifying Fiduciary Allowances’ (n 78) 360–63; M Bryan, ‘Boardman v Phipps (1967)’ in C Mitchell and P Mitchell (eds), Landmark Cases in Equity (Oxford, Hart Publishing, 2012) 581, 609. 107 Estate Realties (n 36); O’Sullivan (n 77); Chirnside v Fay (n 94) [134]. Although favoured by the court, there is little explanation as to why the injustice in giving an allowance for work done by a deliberate wrongdoer outweighs the injustice of allowing the plaintiff to keep a windfall. It is also easy to slide from rebuking the fiduciary’s conduct to penal thinking, which is not the concern of equity. 108 Lym International Pty Ltd v Chen [2009] NSWSC 167 [14], but overruled on appeal, Chen (n 103); see A Kull, ‘Restitution’s Outlaws’ (2003) 78 Chicago-Kent Law Review 17, 32; Aitken, ‘Reconciling “Irreconcilable Principles”’ (n 78) 67. The effect of deterrence may be overstated. The availability of the award is irrelevant, ex ante, to an innocent fiduciary. In theory, the withholding of an allowance from a conscious wrongdoer adds a disincentive to breach, but to such a calculating fiduciary who has not been deterred by the prospect of disgorgement, the effect of this disincentive is negligible. 109 O’Sullivan (n 77).

202  Lusina Ho tool to align the disgorgement rules to their underlying policy, namely to ensure that the fiduciaries are kept to their duties and in turn to protect the institution of trust that is core to the fiduciary relationship. Not only does the concept of deemed performance explain the theoretical nature of the remedy of account of profits, it also provides a practical framework for developing remedial rules on causation, scope of duty, remoteness, and equitable allowance. As compared to the alternative approaches of limiting disgorgement by broad notions of justice or ad hoc analogy with common law damages, deemed performance resolves the fundamental question of the appropriate measure of recovery for account of profits. Once the measure of disgorgement is clear, detailed remedial rules can be devised transparently and consistently.

10 Forfeiture of Agents’ Remuneration PETER WATTS*

I. Introduction The case law on forfeiture of agents’ remuneration in some Commonwealth ­jurisdictions can be said to lack focus.1 This is most manifest in England and Wales where the spectacularly punitive reasoning and result in Imageview Management Ltd v Jack2 in 2009 was bound to cause problems. While subsequent English case law shows that there remains considerable room for manoeuvre, it is likely that only the Supreme Court could restore a first-principles approach in that jurisdiction. Imageview seems not yet to have featured in Australian jurisdictions. New Zealand case law appears ambivalent about the case. This chapter opens with a brief account of what is suggested should be the law’s approach to the subject of forfeiture, using first principles of law and equity. Central to that account are general principles of the law of contract and restitution, in particular the concepts of repudiatory breach and failure of consideration. The chapter then turns to look more closely at the Imageview case. The next section looks at the nineteenth century cases relied on in Imageview in order to show that they were misunderstood. What follows is an account of the most significant ­twentieth-century cases in the line that led to Imageview. This leaves the postImageview case law to be analysed, with an eye to promoting the solution argued for herein.

II.  A First-Principles Approach to Forfeiture What a first-principles analysis might entail can be stated in a series of short propositions. That an agent is entitled to remuneration at all is normally a matter of agreement. Where no third-party interests intrude, and they normally will not, the parties to the agreement should also be the ones to determine whether any * The author is grateful for the comments of Alan Sorrell on a draft of this paper. 1 See too ch 12 herein. 2 Imageview Management Ltd v Jack [2009] EWCA Civ 63, [2009] 2 All ER 666.

204  Peter Watts right to remuneration has been forfeited. Ideally, questions of forfeiture would be determined by the express terms of the contract. But while contracting parties usually take the trouble to spell out what is to be done by each of them (and indeed are generally obliged to), they are often not very good at spelling out what is to be done when things go wrong. The courts are used to filling remedial gaps, but the better view is that in so doing they are still engaged in solving a question of construction,3 a quest for intention. Sophisticated tools have been developed for these purposes within the law of contract. These general principles of the law of contract should be applicable in determining whether remuneration is forfeited. So, where the agreed remuneration has not yet become payable, one needs to ask whether the agent’s conduct amounted to a repudiatory breach. Where the remuneration has already been paid, one needs to consider whether the breach involves a failure of consideration. Examples of such an approach in relation to forfeiture of agents’ remuneration can be traced back into the early nineteenth century.4 It is not obvious that there is much role for equity in this process. Two possibilities do, however, arise. First, if an agent had an undisclosed conflict of interest at the time of appointment, or one was in train, the contract of agency itself might be voidable, or capable of being terminated. Secondly, if a third party, purporting to make a contract with the principal through an agent, is aware at the time of an undisclosed conflict of interest,5 the contract is likely to be voidable. In each case, were the relevant contract to be avoided, consequential orders at equity might leave open an argument that there had been a total failure of consideration under the agency contract. But, in each case, there would not normally be a forfeiture of remuneration unless rescission or cancellation of the relevant contract had taken place. Otherwise, equity supplies the prophylactic fiduciary principles that supplement an agency contract, and provides the remedies of account of profits and constructive trust in support of them. It thereby prevents enrichment from wrongdoing. Beyond that, equity would traditionally not go. It is almost a maxim that equity does not act punitively. Often-cited is the dictum of James LJ in Vyse v Foster, of which the following is the core: This Court is not a Court of penal jurisdiction. It compels restitution of property unconscientiously withheld; it gives full compensation for any loss or damage through 3 Transfield Shipping Inc v Mercator Shipping Inc (The Achilleas) [2008] UKHL 48, [2009] AC 61 [11]–[12]. B Coote (R Bigwood ed), Contract as Assumption: Essays on a Theme (Oxford, Hart Publishing, 2010) ch 8; A Kramer, ‘An Agreement-Centred Approach to Remoteness and Contract Damages’ in N Cohen and E McKendrick (eds), Comparative Remedies for Breach of Contract (Oxford, Hart Publishing, 2004) 249. cf A Burrows, ‘Lord Hoffmann and Remoteness in Contract’ in PS Davies and J Pila (eds), The Jurisprudence of Lord Hoffmann: A Festschrift in Honour of Lord Leonard Hoffmann (Oxford, Hart Publishing, 2015) 262. 4 See Hurst v Holding (1810) 3 Taunt 32, 128 ER 13 (purchasing agent’s culpable omission allows principal to disown contract of purchase and commission); Denew v Daverell, Esq (1813) 3 Camp 451, 170 ER 1442 (auctioneer carelessly omits terms that permit buyer to escape); Hamond v Holiday (1824) 1 Car & P 384, 171 ER 1241. 5 As to conflicts arising post-contract, see P Watts and FMB Reynolds (eds), Bowstead and Reynolds on Agency, 21st edn (London, Sweet & Maxwell, 2018) para [8-223].

Forfeiture of Agents’ Remuneration  205 failure of some equitable duty; but it has no power of punishing any one. In fact, it is not by way of punishment that the Court ever charges a trustee with more than he actually received, or ought to have received, and the appropriate interest thereon.6

To forfeit remuneration where the services that have been performed conform to the requirements of the contract of agency, as Imageview sanctions, is penal. Such a remedy has no pedigree. In this regard, we should note that it is only trustees and directors whom equity assumes work for nothing.7 Otherwise, the default position is that the common law will imply a right to remuneration for professional agents,8 and equity does nothing to undermine that position. So, one cannot justify forfeiture on the basis that it is only stripping a defaulting fiduciary of unauthorised profits.9

III.  Imageview Management v Jack A.  The Decision Turning then to Imageview, it is useful to look at both the judgment of Jacob LJ, who gave the principal judgment in the Court of Appeal, and that of Underhill J in the Court of Queen’s Bench,10 although that judgment was itself an appeal from the Leeds County Court, where the facts had been found. Underhill J suggested that the judge at first instance, Mr Recorder Walker, had failed to apply the correct principles.11 It is difficult to know what those principles are if one looks only to the miscellany of cases that England has produced on this topic since 1900. It appears that not much of that case law was cited to the Recorder, but it is respectfully suggested nonetheless that it is only he who produced the right outcome using the right reasoning on the facts as he found them to be. The claimant company had been appointed as agent for the defendant, a ­Trinidad and Tobago footballer, to find him a place with a British football club and provide ongoing support services for two years thereafter. The agency agreement provided for the claimant to receive ten per cent of the defendant’s earnings. The claimant found him a place with the Dundee Football Club. At the same time as that deal was being concluded, the Club saw that it needed to procure a work 6 Vyse v Foster (1872) LR 8 Ch App 309 (CA) 333. See also Estate Realties Ltd v Wignall [1992] 2 NZLR 615 (HC) 629 (Tipping J); Dart Industries Inc v Decor Corp Pty Ltd (1993) 179 CLR 101; Harris v Digital Pulse Pty Ltd [2003] NSWCA 10, (2003) 56 NSWLR 298 [299] (Heydon JA). 7 It was for this reason that the claimant company succeeded in recovering remuneration paid to the defendant director in Guinness plc v Saunders [1990] 2 AC 663 (HL); the remuneration had not been properly authorised. 8 Watts and Reynolds, Bowstead and Reynolds on Agency (n 5) Art 55, paras [7-003]–[7-013]. 9 But see (in error) Tipping J in Chirnside v Fay [2006] NZSC 68, [2007] 1 NZLR 433 [133]. cf Premium Real Estate Ltd v Stevens [2009] NZSC 15, [2009] 2 NZLR 384 [90] (Blanchard, McGrath and Gault JJ). 10 [2008] EWHC 1421 (QB). 11 ibid [17].

206  Peter Watts permit in order to employ the defendant and asked the claimant to obtain one. The claimant did so and charged the Club £3,000 for its services. This was a sum well above normal standards, but there was urgency involved in getting the defendant in position. There was a clash of evidence at trial as to whether the claimant had told the defendant that it was being paid by the Club to get his work permit, which the Recorder had resolved by concluding that the defendant had not been told. Nonetheless, Underhill J thought that in these circumstances, to call the £3,000 payment a ‘secret profit’ or ‘a bribe’, as the defendant had submitted, had ‘a tendency to give rise to more heat than light’.12 The defendant subsequently learned about the £3,000 payment and argued that the work permit contract created a conflict of interest that justified forfeiture of the claimant’s remuneration under the agency agreement as well as an accounting in respect of the £3,000. Mr Recorder Walker agreed that the claimant had placed itself in a position of conflict of interest. He held that the claimant was accountable for the £3,000 less an allowance for the minimum value of the services in getting the work permit, namely £750. He held that there was no basis for forfeiting the remuneration under the agency agreement. The defendant was not attempting to rescind that agreement, and nor had he any complaint about his contract with the Club. On appeal, Underhill J held that the authorities supported forfeiture of remuneration for breach of fiduciary duty in such circumstances, notwithstanding that there had been no finding of dishonesty in the agent, and the fact that the principal had received due performance from the agent of the agreed services. With some reluctance, his Lordship concluded that the defendant was in addition entitled to an account from the claimant of the work permit fee without any allowance for the value of the services performed. These holdings were upheld on further appeal to the Court of Appeal, the only difference being that Jacob LJ exhibited no hesitancy about the outcome. He said, ‘Once a conflict of interest is shown … the right to remuneration goes’.13 Mummery LJ, in a short concurring judgment, also saw forfeiture as merely one of the armoury of ‘legal consequences flowing from breaches of an agent’s fiduciary obligations’.14 It is respectfully submitted that Underhill J’s qualms were directed at the wrong issue. The claimant was prima facie accountable in equity for the £3,000. There was, however, no basis for forfeiting the remuneration earned under the agency contract. There was no failure of consideration, and no repudiatory conduct that 12 ibid [10]. See also [12], and his Lordship’s conclusion at [8] that there was no reason to think there was any collateral purpose attached to obtaining the work permit contract. Jacob LJ, on the other hand, seems ([2009] EWCA Civ 63 [15]) to have treated the agent’s testimony that he had told the principal about the work permit contract as a ‘lie’, merely on the basis that the trial judge had preferred the evidence of the principal. It may well have been only a matter of inaccuracy of recall: Gestmin SGPS SA v Credit Suisse (UK) Ltd [2013] EWHC 3560 (Comm), [2013] All ER (D) 191 (Nov) [16]. See also the description of events, [57], as ‘surreptitious’. 13 Imageview (n 2) [44]. 14 ibid [65].

Forfeiture of Agents’ Remuneration  207 the common law would recognise. There was no finding of dishonesty. Rescission of the agency contract at equity would have required putting the claimant back in its pre-contract position (ie restitutio in integrum), something the defendant was not in a position to do.15

B.  The Nineteenth-century Cases Relied on in Imageview The Court in Imageview was not compelled by prior authority to reach the conclusions it did. In this regard, some important dicta were not discussed. However, it has also to be said that Imageview did not altogether come out of the blue. What is clear is that the attempt in Imageview to drive the origins of a harsh doctrine of forfeiture of remuneration back into nineteenth-century case law was an error. At least, neither of the cases on which Underhill J and Jacob LJ relied – Salomons v Pender,16 and Boston Deep Sea Fishing and Ice Co v Ansell17 – support such an approach. In fairness to their Lordships, we will see that these two cases were also misunderstood in Andrews v Ramsay & Co,18 at the start of the twentieth century. This was the case that set in train the concept of forfeiture of remuneration for misconduct. Salomons is a leading case on self-dealing at common law. It is not an equity case. It is authority that agents who secretly purchase from, or sell to, their principal cannot claim a commission for negotiating the contract. A fortiori, they cannot, without consent, claim a commission when they not only ‘negotiated’ the contract but actually purported to conclude it with themselves. But in such circumstances they do not forfeit remuneration; they are simply not entitled to it. Such agents step outside their authority. Martin B said in argument, ‘A man cannot be an agent for another and a principal in the same contract’.19 Bramwell B stated that such transactions are (prima facie) unauthorised, ‘And if he had no authority to make it he cannot have earned commission’.20 If the principal affirms the transaction, the

15 If the agency contract was formed before the work permit contract was entered into, cancellation de futuro, not rescission, may have been the appropriate remedy: see Armagas Ltd v Mundogas SA [1985] 1 Lloyd’s Rep 1 (CA) 22 (Staughton J), reversed on appeal on other grounds; Thornton Hall and Partners v Wembley Electrical Appliances Ltd [1947] 2 All ER 630 (CA) 634; Manifest Shipping Co Ltd v Uni-Polaris Insurance Co Ltd [2001] UKHL 1, [2003] 1 AC 469 [52]. There was a difference of view on this issue in Panama and South Pacific Telegraph Co v India Rubber, Gutta Percha, and Telegraph Works Co (1875) LR 10 Ch App 515, 521–22 (Malins V-C at first instance), 526 (James LJ), 532 (Mellish LJ). 16 Salomons v Pender (1865) 3 H & C 639, 159 ER 682. 17 Boston Deep Sea Fishing and Ice Co v Ansell (1888) 39 Ch D 339 (CA). 18 Andrews v Ramsay & Co [1903] 2 KB 635 (DC). 19 Salomons v Pender (1865) 34 LJ(NS) Ex 95, 96 (not included in official reports cited in n 16). In Robinson Scammell & Co v Ansell [1985] 2 EGLR 41 (CA), Robert Goff LJ considered that Martin B had taken the view that a conflict of interest might bar entitlement to remuneration, but it is doubtful whether this is a correct interpretation of the judgment. 20 Salomons (n 16) 642; 683–84. There can be cases where it was understood that the agent could sell to the principal: see Dalgety & Co Ltd v Gray (1919) 26 CLR 249 (PC).

208  Peter Watts agent contracts as principal, and has no status as agent on which to claim commission. Salomons is, therefore, not authority that agents forfeit remuneration merely because they procure a transaction in which they have a simple conflict of interest. Such transactions are voidable only at equity. If avoided, the agent would ordinarily lose commission because the transaction on which it was earned has been set aside. If the principal chooses to affirm the contract, forfeiture of remuneration will not follow unless despite the affirmation there has essentially been a failure of consideration in relation to the agency services. It can sometimes be difficult drawing the line between cases where the agent is self-dealing and cases where the agent merely has a conflict of interest. S­ alomons itself illustrates this. The relevant contract was one of sale and purchase of land owned by the principal in Manchester. The land was bought by a company in which the agent for sale was a shareholder and director. This was treated as selfdealing even though the agent was not the direct purchaser. It appears from the Law ­Journal report of the case that the principal was submitting that the agent was one of the promoters of the company, and Martin B, the judge at trial but also sitting on appeal, directed the jury that they should give a verdict for the principal if they thought the agent was a ‘partner’ with the other promoters of the company.21 What is clear is that Imageview would not be covered by the selfdealing principle. There was no suggestion that the agent there had any equity interest in the Dundee Football Club. Boston Deep Sea Fishing was not a case of self-dealing but of secret commissions and other profiting from position. In particular, the claimant’s managing director, Ansell, was paid undeclared commissions by the counterparty to certain ship-building contracts made with the claimant. Ansell was also paid bonuses by two companies in which he was a shareholder, payable to shareholders who owned fishing vessels and in that capacity bought goods and services from the companies. In fact, it was the claimant which owned the vessels, not Ansell, but the companies paid him the bonuses nonetheless. The claimant dismissed Ansell (initially on other grounds, but, having discovered the secret profiting, also on those grounds) and sued to recover the secret profits and damages for his misconduct. Ansell counterclaimed for salary. Ansell was held not entitled to salary. But the ratio decidendi was that at the time of his dismissal he was not owed any salary; it was neither due nor payable. On the proper construction of his employment contract, salary was payable only at the end of each year even if in practice the company had been paying it quarterly. The Court expressly left open what the position would have been had some salary been due, but one of the bench, Fry LJ, indicated that he thought the defendant might have succeeded in such circumstances.22 Furthermore, the defendant did



21 Salomons 22 Boston

(n 19) 96. Deep Sea Fishing (n 17) 369.

Forfeiture of Agents’ Remuneration  209 succeed in that component of his remuneration package which gave commissions on off-market sales of fish by the company, since those had accrued.23 The reasoning is very different to that in Imageview.

IV.  The Twentieth-century Case Law The idea that an agent’s remuneration might be forfeited for misconduct commences in earnest only in the twentieth century. It is not necessary to consider every relevant case, but the line of authorities ought to be surveyed.

A.  Andrews v Ramsay The first in the modern line is Andrews v Ramsay & Co,24 a three-judge decision of the Divisional Court of King’s Bench. This was a straightforward case of a secret commission; really a bribe. The defendants were auctioneers and estate agents who were appointed to sell on commission land owned by the plaintiff. The price set was £2,500, with a commission of £50. The defendants told the plaintiff that they had a buyer at £1,900. This buyer was well-known to the defendants from previous dealings. When this offer was declined, the agents returned with an offer of £2,100, saying this was the best price they could get. The plaintiff agreed to this price, allowing the defendants their £50 commission. He subsequently learned that the defendants had also been paid £20 by the buyer as a secret commission. This was a dishonest transaction, and it was so characterised by the Court. Not only was it plain that the defendants were working more in the interests of the buyer than their principal, but the statement that this was the best price that could be obtained was an obvious falsehood because at the least their £20 commission could have been added to the price had they not taken it. The defendants surrendered the £20 before trial but resisted the plaintiff ’s demand for the return of the £50 commission. The plaintiff ’s claim for the £50 was upheld. It is important to observe that in suing to recover the £50 the plaintiff appears to have been suing in money had and received, not in equity. The proceedings were commenced in the Clerkenwell County Court, but the appeal was to the King’s Bench Division, not the Chancery Division. The report of argument by the defendant strongly, if not conclusively, suggests that the basis of the plaintiff ’s claim was that there had been a total failure of consideration for the agent’s services. The Court did not require the plaintiff, as appellant, to make submissions, and proceeded to give an oral judgment in his favour. The lead judgment was given



23 ibid

352.

24 Andrews

(n 18).

210  Peter Watts by Lord Alverstone CJ. He, like the County Court judge, thought the case was governed by Salomons v Pender. The two fact patterns, however, were not quite on all fours. In Salomons, the transaction was found to be of a type outside the scope of the agency services the defendants were employed to perform. In technical language, there was an absence of consideration. That could not be said of Andrews. But there was probably a total failure of consideration since the transaction the principal had been persuaded to enter into appears to have been below market. The agency services were worthless. The reported facts of the case do not actually reveal whether the plaintiff left the contract with the buyer on foot. Counsel for the defendant is reported as submitting that there had not been a total failure of consideration because by choosing to collect the £20 paid the defendants by the buyer, the plaintiff had ‘approbated the transaction’. But this submission was wrong in law. The plaintiff was entitled to that sum whether or not he kept the contract of sale on foot. Nonetheless, other remarks in the judgment leave the impression that the plaintiff had chosen not to rescind the sale contract. But affirming the sale did not necessarily entail that there had not been a total failure of consideration (a somewhat flexible concept) in relation to the services performed under the agency contract. It should be accepted that Lord Alverstone did not quite put things in the foregoing way. He did recognise the irrelevance of the plaintiff retaining the £20, ‘I cannot see how that fact has anything to do with the matter’.25 He then proceeded, as indicated already, to find Salomons squarely on point even though its ratio decidendi was different. But he took the point that there was a strong chance that the sale contract was a bad one, a point that would have been consistent with a finding of total failure of consideration. His Lordship stated: It is clear that the purchaser was willing to give [£20] more than the price which the plaintiff received, and it may well be that he would have given more than that. It is impossible to gauge in any way what the plaintiff has lost by the improper conduct of the defendants.26

However, his Lordship also treated the defendant’s dishonesty as sufficient to warrant forfeiture, ‘A principal is entitled to have an honest agent, and it is only the honest agent who is entitled to any commission’.27 This could be argued to be still consistent with total-failure reasoning; honesty in the performance of services is treated as a condition precedent to any right to payment for them. Wills and ­Channell JJ agreed with the Chief Justice, and added nothing substantive. Once again, Andrews would not support forfeiture in a case like Imageview, where there was no finding of dishonesty nor any objection to the services that the agent had performed for the principal.



25 ibid

636. 637–38. 27 ibid 638. 26 ibid

Forfeiture of Agents’ Remuneration  211

B.  Hippisley v Knee Bros Shortly after Andrews, another claim for forfeiture of remuneration came before the King’s Bench Divisional court. In Hippisley v Knee Bros28 the claimant employed the defendant auctioneers to sell some pictures on the basis of a minimum commission plus out-of-pocket expenses for printing and advertising. The defendants charged for these expenses at the gross figures, failing to reveal that they had been offered a trade discount. The claimant sued for an account of the difference and to recover the commission paid. Although once more the claim was brought in a common law court, this time the claimant did invoke equity. In relation to the undeclared discounts, the claimant relied upon both the terms of the contract and equity’s prohibition on an agent’s profiting from position. As for forfeiture, the claimant simply invoked the Andrews decision. Since that case had also been brought at common law, perhaps that was seen as a good enough precedent. The Court upheld the claims for the undeclared discounts, but disallowed the claim for forfeiture of commission. The lead judgment was another of Lord Alverstone CJ’s. He distinguished Andrews on the basis that the agents in the present case had acted honestly, albeit mistakenly; trade discounts of this sort were routine, albeit not acceptable if not disclosed to the customer. But his Lordship also took the point that the profiting was incidental to the selling of the goods.29 The benefit was not received from the principal’s counterparty. Kennedy J placed even more weight on the latter point, expressly indicating that where the profiting was not incidental, honesty might not rescue the agent from forfeiture of remuneration. Kennedy J’s judgment, in particular, can be used to provide some support for Imageview since there the relevant profiting was derived from a counterparty to the main contract. It was not, however, a case of a secret commission. And in any event, Kennedy J’s judgment remains a slender foundation for Imageview. The relevant reasoning was all obiter, and the fact that there had not been a total failure of consideration was not discussed.

C.  Nitedals Taendstikfabrik v Bruster Nitedals Taendstikfabrik v Bruster,30 decided the next year, was the first of the ­forfeiture decisions to be heard in the Chancery Division. The claimant was a Norwegian match manufacturer who by written agreement had appointed the defendant its sole agent to sell its products in the United Kingdom. The contract contained a clause forbidding him from selling any other manufacturer’s matches. 28 Hippisley v Knee Bros [1905] 1 KB 1 (DC). 29 For a similar case, see Stewart Chartering Ltd v Owners of the Ship ‘Peppy’ (The Peppy) [1997] 2 Lloyd’s Rep 722 (QB) 729. 30 Nitedals Taendstikfabrik v Bruster [1906] 2 Ch 671.

212  Peter Watts Across the following four years the defendant did sell other makers’ matches, and also on occasion secretly increased the stipulated sale price of the claimant’s matches and pocketed the difference. The claimant sued for an account of the profits made from these breaches of undertaking, and also claimed to forfeit the agent’s remuneration for the entire period of the agency. The defendant effectively conceded the liability to account but resisted the claim for forfeiture. Neville J rejected the claim for forfeiture except on those sales where the agent had secretly increased the sale price. He treated the honest sales, which were the majority, as separable from the dishonest ones, even though they were all performed under a single contract of appointment. The facts of Nitedals are not absolutely on all fours with Imageview, insofar as the agent’s misconduct in the former did not involve a conflict of duty-and-duty, whereas it did in the latter. But Neville J’s reasoning fits uncomfortably with Jacob LJ’s in Imageview. Arguably, the agent in Nitedals was in a morally weaker position than the one in Imageview, yet forfeiture was not awarded. In Nitedals, most of the agent’s work for the principal was unobjectionable, but in Imageview it is possible, indeed likely, that all of the agency work was unobjectionable. In Nitedals the agent was dishonest, and there was no finding of dishonesty in Imageview. Neville J did not address the underlying basis of forfeiture, but his reasoning is consistent with a failure of consideration analysis, once one allows for the fact that he treated bad transactions as severable from the rest.

D.  Rhodes v Macalister The next important case is Rhodes v Macalister.31 Again, this was not a case at equity. This time, however, the relevant agents were having to sue for their remuneration, which made the King’s Bench Division the obvious starting place. The judgments in the Court of Appeal appear to have been delivered orally, albeit at the end of a hearing extending into a second day. None of the panel was an equity judge, but it did comprise the dream team of Bankes, Scrutton and Atkin LJJ. The relevant agents were employed to negotiate for their principals the purchase of certain mining properties in the Forest of Dean. They identified two properties, the owner of one of which, at least, had a pre-existing connection to one of the agents. The agents told the principals that they believed that the properties ‘could be obtained for £8,000 to £10,000, but this is a very difficult question to answer’. The principals agreed that if the agents could procure the properties for less than £9,000 the agents could keep the difference. In fact, the properties were bought for £6,625 and the agents claimed for £2,375 commission. The agents had also received commission from the vendors in the sum of £550. Scrutton LJ reported that Lush J at first instance had appeared to accept that before the £9,000 figure

31 Rhodes

v Macalister (1923) 29 Com Cas 19 (CA).

Forfeiture of Agents’ Remuneration  213 was set, one of the agents had told the principals that ‘there was not the slightest prospect of the properties being purchased for less than £8,500’. If the facts were as Scrutton LJ reported,32 at least one of the agents had done more than receive a secret commission. He had defrauded the principals, which deceit would have given a prima facie right to rescind the contract of agency. The principals had been led to believe that the agents were likely to get a commission of about £500 on a deal at £9,000. Whether any quantum meruit might have arisen in relation to securing the purchase at £6,625 would be a difficult question. However, it seems that the Court rested its decision not on the deceit but on the dishonest receipt of the £550 secret commission. Scrutton LJ stated: The law I take to be this: that an agent must not take remuneration from the other side without both disclosure to and consent of his principal. If he does take such remuneration he acts so adversely to his employer that he forfeits all remuneration from the employer, although the employer takes the benefit and has not suffered a loss by it.33

His Lordship went on to state that taking a payment in such circumstances was dishonest.34 Atkin LJ spoke in similar terms: One thing is clear, and ought to be quite definitely understood, and that is that the rule of law has no relation at all to any money damage or other damage suffered by the principal. It is dishonest of an agent to take a bribe from the other side, and for that act of dishonesty he is, if he is discovered, liable to be summarily dismissed by his employer, and he is precluded from recovering any remuneration for his conduct as agent in respect of the transaction in which he in fact acted dishonestly …35

The foregoing reasoning supports forfeiture where the agent has committed a dishonest breach of fiduciary duty, whether or not the principal has suffered loss by the dishonesty. But, it is hard to put out of mind the fact that the very large profit the agents made in this case was due to their deceit as to the likely sale price, not the secret commissions they received. In this regard, there was no evidence that the agents had agreed to split their commission with the briber. That deceit undermined the whole basis of the agency contract, and it would have provided a much better explanation for the conclusion the Court reached than the breach of fiduciary duty. In any event, what Rhodes does not do is say that a mere conflict of interest leads to forfeiture. The case, in other words, does not go as far as the Court of Appeal went in Imageview. All three members of the Court in Rhodes considered it important that the agents had acted dishonestly in taking secret commissions from the vendors.36

32 See

also ibid 25 (Bankes LJ). 27. 34 ibid 28. 35 ibid 29. 36 ibid 24 (Bankes LJ), 28 (Scrutton LJ), 29 (Atkin LJ). 33 ibid

214  Peter Watts

E.  Keppel v Wheeler Shortly after Rhodes came Keppel v Wheeler.37 Once more the case started in the King’s Bench Division, but the principal’s main aim was to recover damages, not forfeit remuneration, so not much can be made of this point in the present context. The panel of the Court of Appeal again included Bankes and Atkin LJJ, this time joined by Sargant LJ. The claimant owned a tenanted property which he wished to sell, and for that purpose put it in the hands of the defendant agent. The agent included the tenant among those to whom he sent the particulars of the proposed sale. While the tenant was away, the agent procured an offer of £6,150 from a third party, E, which the claimant accepted subject to exchange of formal contracts. Four days after this non-binding agreement was made, the tenant returned and contacted the agent. He was very keen to purchase the property. He asked the agent to see whether E would on-sell to him. The agent then commenced to act for E and they settled an on-sale to the tenant at £6,950, on which deal the agent got another commission. Later on, the claimant learned of the second transaction and sued the agent for damages for not putting him in touch with the tenant so that he could sell to him rather than E. The justification for this claim was that the owner was not legally obligated to E until contracts had been exchanged and that had not taken place until at least a week had passed from the time the tenant registered his interest. The owner also argued that the agent’s breach of duty meant that he had forfeited any entitlement to commission. The judge at first instance (Finlay J) found, and it was not challenged on appeal, that the agent had acted honestly. He thought his first agency had terminated with the informal agreement between the claimant and E. The Court of Appeal held, nonetheless, that the agent had to pay damages for failing to bring to the attention of the claimant the tenant’s interest in the property. In essence, the agent had not met his contractual duty of care. At the same time, the Court declined to rule that the agent had forfeited his entitlement to commission. Bankes LJ provided little explanation for this conclusion. One is left to infer that the finding that the agent had made only an honest mistake meant forfeiture was not warranted.38 Sargant LJ said nothing on this question. But Atkin LJ said the following: Now I am quite clear that if an agent in the course of his employment has been proved to be guilty of some breach of fiduciary duty, in practically every case he would forfeit any right to remuneration at all. That seems to me to be well established. On the other hand, there may well be breaches of duty which do not go to the whole contract, and which 37 Keppel v Wheeler [1927] 1 KB 577 (CA). 38 See too Robinson Scammell (n 19) (mere careless talk in breach of contract not grounds for forfeiture of remuneration); Eric V Stansfield v South East Nursing Home Services Ltd [1986] 1 EGLR 29 (QB) (agent for purchaser entitled to commission when breaches, unproven, were committed without bad faith).

Forfeiture of Agents’ Remuneration  215 would not prevent the agent from recovering his remuneration; and as in this case it is found that the agents acted in good faith, and as the transaction was completed and the appellant has had the benefit of it, he must pay the commission.39

With great respect, there is a kitchen-sink aspect to this passage. Honest mistake or not, the agent put himself in a position of having conflicting interests. He in fact earned another commission on the second sale. So, a breach of fiduciary occurred. One is left to infer that the combination of the agent’s breach being honest and the fact that the principal was not disowning the sale meant forfeiture was not warranted. A simpler conclusion would have been that the principal could not maintain that there had been a failure of consideration in respect of the agent’s services when the principal had sought and obtained expectation damages from the agent. On any basis, Imageview fits poorly with Keppel. The agent allowed himself to act for both sides to the same contract, albeit that he thought his first retainer had finished. He obtained a second commission from the purchaser. The conflict of interest was more palpable than in Imageview.

F.  Kelly v Cooper Although there are relevant cases after Keppel, some of which are noted in the ­footnotes, few new cases surfaced between that case and Imageview. Not ­surprisingly, Imageview has provoked a rash of decisions, as we shall shortly see. We should first conclude this section by noting some dicta in Kelly v Cooper,40 given that it is a decision of the Privy Council. This not unproblematic decision is best known for confirming that estate agents are generally permitted to act for competing vendors in the same market. They are not, of course, permitted to act for both vendor and purchaser. In the result, no breach of duty was established against the relevant agent. However, Lord BrowneWilkinson for the Board did briefly discuss the claim for forfeiture of commission that had been made. He was of the view that had there been a breach of fiduciary duty the agent would still have been entitled to her commission, given that no findings of dishonesty had been made against her. In this, his Lordship followed Keppel.41 This dictum was not referred to in Imageview.

V.  The Post-Imageview Case Law Since Imageview, about ten cases involving claims for forfeiture of remuneration have been decided in the England and Wales jurisdiction. Nearly all are

39 Keppel

(n 37) 592. v Cooper [1993] AC 205 (PC). 41 ibid 216–17. 40 Kelly

216  Peter Watts first-instance decisions, so none involves a challenge to the reasoning in the case. By the same token, the Court in Imageview was not in a position to overrule Keppel, so the case law as it currently stands allows room for manoeuvre. Before looking at the more significant of these cases, it is proposed first to consider the decision of the New Zealand Supreme Court in Premium Real Estate Ltd v Stevens.42 This was perhaps the first Commonwealth case to take note of Imageview, being decided just three weeks later.

A.  Premium Real Estate Ltd v Stevens One can note immediately that the Court in Premium Real Estate did confirm that the relevant agent should forfeit its commission. There were, however, findings of dishonesty. The appellant estate agency was appointed by the respondent vendors to sell their house. The employee of the appellant who was handling the sale was found to have prevaricated when asked by the vendors what she knew about the purchaser, and to have misled them into thinking that the purchaser wanted the relevant house as a private residence. She well knew that the purchaser was a property developer whose routine was to let it be understood that he was buying for personal use as a method of keeping the price down. The appellant was not formally acting for both the vendors and the purchaser, but it had frequently acted for the purchaser in the sale of other properties that he had acquired, and as a result staff of the appellant had developed something of a loyalty to him. The appellant did in fact act as agent for him when he on-sold the house some six months later (some work having been done on it) at a price 38 per cent higher than the vendors had received. Elias CJ, who dissented on the measure of damages, agreed with the majority on the issue of forfeiture. She said that forfeiture was ‘a stand-alone remedy for the breach of fiduciary duty, one that is available irrespective of compensation for any loss’.43 She saw the trigger for the remedy as ‘disloyalty’, referring to Kelly v Cooper. She also said, relying on Keppel, that ‘breaches which “do not go to the whole contract”, by an agent acting in good faith (as through honest mistake), would not result in such forfeiture’.44 This could be taken as an allusion to the relevance of failure of consideration. Her Honour added a footnote reference to Imageview, but without remarking on its much more aggressive approach to forfeiture compared to Keppel. Blanchard J (delivering the judgment of McGrath, Gault JJ and himself) ­considered that where dishonesty was shown, forfeiture would follow even if the principal had not in the event suffered loss or had been compensated with 42 Premium Real Estate Ltd v Stevens [2009] NZSC 15, [2009] 2 NZLR 384. For a similar case, reaching a similar result, see Maketu Estates Ltd v Robb [2014] NZHC 2664, (2014) 16 NZCPR 166. 43 Premium Real Estate (n 42) [12]. 44 ibid [30].

Forfeiture of Agents’ Remuneration  217 damages. He based himself on the reasoning in Keppel. This was ‘equity’s method of deterring disloyal behaviour by fiduciaries’.45 He also referred to Imageview with apparent approval, although he did not advert to Jacobs LJ’s broader dicta, nor did he notice the inconsistency, or lack of fit, between Imageview and Keppel. It is apparent that Blanchard J saw forfeiture as an equitable remedy, which as argued here it is not in origin. One infers also that his Honour did not see the remedy as tied to there being a total failure of consideration. However, it is clear that the Court on the facts of the case did consider that a total failure of consideration had occurred. The deal promoted by the agent was a bad one. In the result, the claimant succeeded in forfeiting the appellant’s commission and getting reliance loss damages. The final judgment was given by Tipping J. He did not refer to Imageview and rested forfeiture firmly on the dishonesty of the agent. He also said that the agent had not ‘earned’ the commission.46 If, as argued herein, one were to see the basis of forfeiture as connected to a failure of consideration, it would as a matter of historical procedure have been difficult for a claimant to combine recovery of payments on a total failure with a damages remedy. But there is no logical problem with that combination so long as there is no double counting. There would be were a court to combine forfeiture with expectation damages. In the result, the judgments in Premium are not a wholesale endorsement of the Imageview approach. Imageview may have come too late to be fully absorbed by their Honours; there cannot have been any oral argument on it and it was too early for any considered commentary to have appeared.

B.  Cases from England and Wales We can now turn to the cases from England and Wales. Those where forfeiture was ordered are taken first, since they in a sense build on Imageview. Then those that distinguish it can be reviewed. Commentary will be offered along the way. Given that there are cases which follow Imageview, and those that distinguish it, the overall picture is not altogether clear. But it is possible to predict that the cases that have essentially softened the impact of Imageview will come to prevail. The methods they have devised for containing Imageview are not as optimal as an overruling of Imageview would be, but they do lead to outcomes that can be called just.

i.  Rahme v Smith & Williamson The first case, Rahme v Smith & Williamson Trust Corp Ltd,47 is a relatively routine case of a dishonest agent whose conflicting interests meant his services were not

45 ibid

[89]. [109]–[10]. 47 Rahme v Smith & Williamson Trust Corp Ltd [2009] EWHC 911 (Ch). 46 ibid

218  Peter Watts valuable. The agent had been appointed to assist the negotiation of a property settlement with his principal’s former wife, who was much wealthier than the principal. The agent was to receive 25 per cent of the settlement as reward. He had, however, also accepted substantial secret commissions from the wife, aimed at keeping the settlement at or below £2.5m. Morgan J held that the agent lost his right to remuneration and was accountable for the bribes. He followed Imageview. He noted that forfeiture occurred even if the services performed were valuable.48 But on the facts, there must have been real doubt as to the value of the agent’s work.

ii.  Stupples v Stupples & Co (High Wycombe) Ltd The next case, Stupples v Stupples & Co (High Wycombe) Ltd,49 has quite complex facts. At the beginning of his judgment, HHJ David Cooke explained that the relevant agent was a consultant to the principal. He had received a secret commission from one of the principal’s clients. He had also persuaded that client to take its business away from the principal and give it to a company that the agent controlled. His Lordship ruled that the consultant’s actions justified forfeiture of his fees. His Lordship not only followed Imageview but undertook an analysis of most of the leading cases that were discussed in Part III above. It is symptomatic of how far the courts’ thinking has drifted on this topic that his Lordship felt able to conclude that forfeiture was centrally an equitable remedy for breach of fiduciary duty. Mere breach of, or failure to perform, a contract would not justify forfeiture. On the other hand, a breach of fiduciary duty would usually suffice, even if it had been an honest breach. This, of course, is diametrically opposed to the argument presented here. In fairness, his Lordship did not exactly say that no breach of contract would justify forfeiture. But if the possibility of forfeiture for a failure of consideration was not foreclosed, it was an option additional to breach of fiduciary duty. His Lordship’s starting point allowed him to explain Keppel as a case where breach of fiduciary duty was not relied upon but rather the mere contractual failure to tell the vendor that a higher offer had come in. This also permitted him to doubt the dictum in Kelly v Cooper, referred to above, which had suggested that dishonesty was required. In his Lordship’s view, this requirement was founded too strongly on Keppel. He stated: I venture to suggest that [the dictum] overstates the position in Keppel v Wheeler, since the report of that case does not, as far as I can see, record any admission of a breach of fiduciary duty, and as I set out above the decision in Keppel seems to have been founded rather on breach of contract.50

48 ibid

[141]. v Stupples & Co (High Wycombe) Ltd [2012] EWHC 1226 (Ch), [2013] 1 BCLC 729. 50 ibid [17]. 49 Stupples

Forfeiture of Agents’ Remuneration  219 His Lordship’s analysis looks plausible enough, but with respect, it is not ­compelling.51 It is equally plausible, and perhaps more likely, that the Court in Keppel did not focus on breach of fiduciary duty because in that period forfeiture was seen as a common law remedy not an equitable one. Recall that Andrews, which his Lordship endorsed, was also a case at common law. Hence, the focus on the seriousness of the breach of contract in Keppel. Since the claimant in Keppel was seeking and obtained expectation damages it was inappropriate to forfeit the defendant’s remuneration. Moreover, if his Lordship was correct, the fact that the principal failed in his claim for forfeiture in that case could only have been because of poor pleading and argument by his counsel. This is because the actions of the agent in Keppel, as we have seen, certainly involved a breach of fiduciary duty.

iii.  Avrahami v Biran Avrahami v Biran52 can be briefly noted for its apparent approval of a set of principles set out in Snell’s Equity: If a fiduciary acts dishonestly he will forfeit his right to fees paid or payable by the principal. He will also forfeit his right to such fees if he takes a secret profit from a third party which is directly related to performance of the duties in respect of which the fees were payable, even if the principal has benefited from the fiduciary’s performance of those duties. A fiduciary will also lose his or her right to fees if the fiduciary’s breach of duty is so grave that there has effectively been no performance at all, on the basis of total failure of consideration.53

These principles were applied to forfeit the defendant’s entitlement to management fees in respect of a joint venture project in which he was a co-investor. His conduct was found to have been dishonest in relation to the project throughout its seven years, including by misappropriating funds belonging to the parties. ­Forfeiture did not affect his equity interest in the project. Taking Imageview as good law, there can be no objection to Snell’s formulation of principles. They were then straightforwardly applied to a dishonest fiduciary in Avrahami. We will see below that the following edition of Snell’s elaborated the principles somewhat. But a single failure-of-consideration test would still be simpler and more satisfactory. Dishonesty and breach of fiduciary duty could provide strong indications that the agent’s services had not been valuable to the principal.

51 In Imageview (n 2) [44], Jacob LJ also treated Keppel as involving ‘just an honest breach of contract’. 52 Avrahami v Biran [2013] EWHC 1776 (Ch) [339]. 53 J McGhee (ed), Snell’s Equity, 32nd edn (London, Sweet & Maxwell, 2010) para [7-062]. Now J McGhee (ed), Snell’s Equity, 33rd edn (London, Sweet & Maxwell, 2015).

220  Peter Watts

iv.  Hosking v Marathon Asset Management LLP In Hosking v Marathon Asset Management LLP,54 Newey J opened his judgment by saying, ‘It is well established that there are circumstances in which a fiduciary (in particular, an agent) who acts in breach of his fiduciary duties can lose his right to remuneration’.55 Given Imageview and the cases in which it has been applied, it is hard to gainsay this. The question of pedigree and principle, of course, is whether the ‘circumstances’ of forfeiture are in fact directly tied to breach of fiduciary duty. The facts of the case make a good model for testing this issue. The immediate, and novel, issue that Newey J had to address was whether forfeiture could be applied to a defaulting partner’s share of partnership profits. Mr Hosking was a member of a limited liability partnership that ran an immensely profitable investment management business. It had executive and non-executive members. The partnership deed required executive partners to employ themselves in the business diligently, and to devote all their time to it. Non-executive partners were former executive partners. Each executive partner was allocated double the share of profits of a non-executive partner. Mr Hosking gave six months’ notice of his intention to become a non-executive partner. In that period, in breach of his contractual and fiduciary duties, Mr Hosking began to prepare to run another business and encouraged some key employees of the partnership to leave and move to his proposed new business. When his partners learned of his disloyal conduct, they commenced arbitration proceedings against him. The arbitrator awarded the partners £1.38m in compensation for the wrongful enticement of the employees, but then also forfeited 50 per cent of Mr Hosking’s profit share for the six-month period on the basis that that half was effectively remuneration for services. His breach of fiduciary duty was said to warrant that result. The relevant sum forfeited was £10,389,957. This eye-watering figure reflected the total profits for the relevant year of £146m. The arbitrator had accepted that only such profits as were attributable to the partner’s remuneration for work performed could be forfeited. Hence Mr Hosking was permitted to keep the 50 per cent he would have received even if he had not been working. These rulings were accepted by Newey J on appeal. A line of Commonwealth cases supported the view that even serious breaches of fiduciary duty did not entail a partner forfeiting his or her interest in the ­partnership. A leading case is Dunne v English,56 where a partner deceived his partner into selling partnership property to him, suppressing the fact that he intended to, and did, on-sell the assets for a massive profit. The defaulting partner was held ­accountable for the private profit he had attempted to make, but it was 54 Hosking v Marathon Asset Management LLP [2016] EWHC 2418 (Ch), [2017] Ch 157. 55 ibid [1]. 56 Dunne v English (1874) LR 18 Eq 524. See too in a situation where there was a joint venture relationship falling short of a partnership, Chirnside v Fay (n 9). For an analysis of the case, see P Watts, ‘Commercial Decisions in the Supreme Court of New Zealand’ in A Stockley and M Littlewood (eds), The New Zealand Supreme Court: The First Ten Years (Wellington, LexisNexis, 2015) 198–201.

Forfeiture of Agents’ Remuneration  221 accepted that the proceeds of the accounting would be partnership property and the defaulter would maintain his share in them. It is true that the claimant did not in fact attempt to argue for forfeiture, but the result is consistent with principle (the same normally applies when a defaulting director who is a shareholder is required to account for authorised profits to his or her company). Both the arbitrator and Newey J considered that this line of cases could be distinguished where it was possible to tie a partner’s particular entitlements to the actual performance of services. Much of Newey J’s judgment was taken up with a discussion of the nature of the partnership relationship. Partners are agents of one another, and Newey J cited Lord Blackburn for the proposition that it is because partners are agents of one another that they owe one another fiduciary duties.57 In these circumstances, his Lordship said, ‘it is hard to see why the mere fact that someone is a partner or LLP member as well as an agent should preclude the operation of a principle [ie of forfeiture] which affects agents more generally’.58 With great respect, the facts and reasoning in Hosking provide compelling evidence that forfeiture of remuneration on the basis of breach of fiduciary duty is misconceived. As soon as one kicks away from the case the stool of fiduciary duty, its reasoning is left dangling. For one thing, if breach of fiduciary duty suffices for forfeiture, it is very difficult to see why forfeiture should be confined only to a defaulting partner’s ‘remuneration’ and not to his or her share of all partnership profits for the period in question. The reasoning in Hosking has the odd result that there would be no forfeiture of profits where, as is the standard position, the partnership agreement made no distinction between working and non-working partners. Then, once the claimant is also entitled to full compensation for any loss caused by the breach of duty, as is the case, it becomes impossible to deny that the remedy of forfeiture is penal. Furthermore, as a penalty, wholesale forfeiture is arbitrary; in Hosking to the tune of £10m. With prospects of windfalls like that, one is likely to find people trying to trap their colleagues into breaching their duties. If the established remedy of account of profits is not sufficiently deterrent then it would make more sense to award exemplary damages for breach of fiduciary duty than to forfeit all remuneration. It might remain possible for the parties expressly to provide for forfeiture on the basis of any breach of fiduciary duty, but it is not a remedy the courts should imply of their own motion. In contrast, forfeiture on the basis of a failure of consideration is rational and proportionate. If in a partnership like that in Hosking it is required that partners devote their time and effort to the business and a partner does nothing, then it would be right that nothing would be payable. Equally, if the partner’s services were worthless, remuneration might not be payable. Whether it would be appropriate to provide for partial forfeiture where there was partial failure to do what was agreed is another question. That question has not been addressed in this

57 Cassels

v Stewart (1881) 6 App Cas 64, 79. (n 54) [43].

58 Hosking

222  Peter Watts chapter, but it is suggested that the ability to give a partial refund is likely to be a development preferable to enshrining automatic forfeiture of all remuneration for a mere breach of fiduciary duty. In this light, we can now turn to review the cases where, despite Imageview, defaulting fiduciaries have been allowed remuneration. They are again taken in temporal order.

v.  Accidia Foundation v Simon C Dickinson Ltd The first case, Accidia Foundation v Simon C Dickinson Ltd,59 did not strictly involve forfeiture, but rather involved the award of remuneration to a sub-agent even though that agent had not properly informed the principal of the unauthorised remuneration arrangement it had agreed with the head agent. The facts are quite messy, but in short the case involved the sale of a drawing by Leonardo da Vinci owned by the claimant using an agent who had been granted an exclusive agency. That agent, without authority, engaged the defendant as sub-agent on the basis that it could keep whatever price it obtained above US $6m. The defendant managed a price of US $7m and hence believed it was entitled to US $1m commission. Once the facts emerged, the claimant challenged this arrangement, arguing that the sub-agent was not entitled to any remuneration given its failure to disclose the price the drawing was being sold at and the fact that it was to receive as remuneration everything above the $6m figure. It relied on Imageview. Vos J accepted the claimant’s argument that the defendant was accountable for the money received on the sale of the painting, but also held that the defendant should be given an allowance for its work in securing a buyer at $7m. The defendant had not acted surreptitiously in not revealing the arrangement it had made with the head agent, since it assumed that the head agent would tell the principal. At the same time, it ought to have known that the head agent did not have authority to make a sub-agency agreement on such terms. It was profiting from its appointment as sub-agent without having first secured a binding agreement for remuneration. It had argued in the alternative for a quantum meruit. This is a rather peculiar fact pattern which attracted some debatable argumentation. But it is clear that Vos J was reluctant to deny an honest agent remuneration even if there had been a breach of fiduciary duty.

vi.  Bank of Ireland v Jaffery The next case, Governor and Co of the Bank of Ireland v Jaffery,60 is another decision of Vos J. Again the facts were complex, but in brief an executive of the Bank 59 Accidia Foundation v Simon C Dickinson Ltd [2010] EWHC 3058 (Ch), [2010] All ER (D) 290 (Nov). 60 Governor and Co of the Bank of Ireland v Jaffery [2012] EWHC 1377 (Ch), [2012] All ER (D) 208 (May). A similar case involving dishonest profiting from position not going to the entirety of a director’s work is Electrosteel Castings (UK) Ltd v Metalpol Ltd [2014] EWHC 2017 (Ch), [2014] All ER (D) 72 (Jul), where, however, no ruling was needed.

Forfeiture of Agents’ Remuneration  223 was found to have promoted the provision of financial accommodation by the bank in respect of borrowers connected to him and in relation to projects in which he had a personal interest without disclosing his conflict of interest. He was also found in respect of one transaction, but not others, to have taken a bribe. Among the remedies sought by the Bank, were forfeiture of his salary and bonuses over the relevant period. Notwithstanding these findings of serious breaches of fiduciary duty, including dishonesty, Vos J declined to forfeit either salary or bonuses. The main reason given was that, apart from the tainted transactions, the defendant conducted a lot of good business for the bank, ‘In other respects, he seems to have been a valuable and diligent employee promoting the Bank’s interests successfully’.61 The Bank argued that had it known of the breaches (and the defendant had a duty to disclose his own breaches of duty) it would have dismissed the defendant and he would not have got any bonuses. His Lordship responded to this by saying that nonetheless the defendant was also doing a good job for the Bank and the bonuses were accordingly earned under the contract, ‘The bonuses were paid for the good job he was doing to improve and promote the Bank’s business generally. The Bank can be fully and properly compensated by requiring Mr Jaffery to disgorge his profits or paying equitable compensation’.62 It would be ‘disproportionate and inequitable’ to impose forfeiture of some five years of bonuses and salary as well as requiring the defendant to disgorge profits and pay compensation.63 His Lordship distinguished Imageview on the basis that the agent there had ‘betrayed the trust of his principal in relation to the sole subject matter of the agency’.64 It is doubtful whether this is an accurate account of the facts of Imageview, even if it chimes somewhat with the rhetoric of Jacob LJ. For one thing, the agency agreement in Imageview was for two-years, with the agent undertaking ongoing duties to provide advice and representation in relation to the contract or renewal of the contract with the football club, and to use its reasonable endeavours to promote the principal throughout the term of the contract. There was no suggestion that the agent had not done a good job for the principal in procuring him a place with the football club and in providing services thereafter. While there was undoubtedly a conflict of interest at the date the contract was made, in that the agent accepted work from the counterparty to his principal, there was no finding of corruption. While Jacob LJ referred to a ‘secret deal’,65 we have seen that Underhill J preferred not to call what happened a ‘secret profit’. The payment was certainly not a plain ‘backhander’, but rather a payment for discrete services that were essential if the principal were to be able to play football in the United ­Kingdom. That did not mean the agent could keep the amount charged, but it is

61 Bank

of Ireland (n 60) [371]. [372]. 63 ibid [373]. 64 ibid [371]. 65 Imageview (n 2) [1]. 62 ibid

224  Peter Watts quite astonishing that he should have lost not only that but also all the remuneration under the main contract. In any event, Jaffery seems to have led the authors of Snell’s Equity to modify the book’s treatment of forfeiture of remuneration for breach of fiduciary duty by adding to the 33rd edition the following qualification, ‘However, a fiduciary’s fees may not be forfeit if the betrayal of trust has not been in respect of the entire subject matter of the fiduciary relationship and where forfeiture would be disproportionate and inequitable’.66 While Vos J’s conclusion in the Bank of Ireland case is, with respect, sensible, the current position remains unsatisfactory. What his Lordship had to do was to add a yet further rider to the supposed starting point of forfeiture. The far simpler explanation for reaching the same conclusion would have been to say that there had not been the total failure of consideration necessary for forfeiture.67 Breach of fiduciary duty is not a separate ground of forfeiture. Or to the extent that equity sanctions forfeiture, it is addressing the same issue, failure of consideration. On this basis, forfeiture is not a starting point following breach of fiduciary duty that has then to be cut down.

vii.  Wright Hassall LLP v Horton Jr In Wright Hassall LLP v Horton Jr,68 the relevant fiduciary was a firm of solicitors suing for their fees. Its defendant clients were the shareholders in a company and they had guaranteed the rent on premises occupied by the company. The defendants had sought legal advice on a range of issues, including liability to the lessor of the premises. The firm had an ongoing relationship with the lessor, which owned other properties, although it was not acting for it in relation to the defendants and their company. Before accepting instructions, the firm disclosed that its property department had acted for the lessor in unrelated transactions, but the defendants alleged that the firm had said that the department advising them (the insolvency department) had not acted for the lessor. That would not have been strictly accurate, although there was no allegation that any inaccuracy was deliberate. The defendants were using the incomplete disclosure as a ground for denying liability for the fees. The defendants failed in their forfeiture argument. The judge was HHJ David Cooke, the judge in the Stupples case, above. The defendants had accepted that they had suffered no loss from the non-disclosure or from the fact that the firm may have acted for the lessor in other matters. It appears that they also did not argue that they would not have instructed the firm had full disclosure been given. 66 McGhee, Snell’s Equity, 33rd edn (n 53) para [7-062]. 67 A failure-of-consideration approach seems to have been taken in Milanese v Leyton Orient Football Club Ltd (Rev 1) [2016] EWHC 1161 (QB), [2016] IRLR 601 [140], but the treatment was brief without citation of authority. 68 Wright Hassall LLP v Horton Jr [2015] EWHC 3716 (QB), [2016] All ER (D) 28 (Jan).

Forfeiture of Agents’ Remuneration  225 His Lordship accepted that there was an arguable case of breach of fiduciary duty. However, that was not enough to justify forfeiture. He stated: At worst these matters amount to no more than trivial breaches of the claimant’s fiduciary duty, if they are breaches at all, which did not affect the performance by the claimant of its services to the defendants and had no adverse impact on them. They do not ‘go to the whole contract’ but were in Jacob LJ’s phrase, matters of ‘harmless collaterality’.69

Again, there can be no objection to the result in this case. No failure of consideration had been pleaded. But once more reliance is being placed upon an exception, ‘harmless collaterality’, when really there is, or should be, no rule in the first place.

viii.  Gamatronic (UK) Ltd v Hamilton The last case to be considered, Gamatronic (UK) Ltd v Hamilton,70 involved an action by the claimant company against its former managing directors who had held 49 per cent of its shares. The company alleged that the defendants had secretly helped to set up, and acquired a beneficial interest in, a competing business. They were alleged to have concealed their actions by lying and by destroying documents. Amongst the remedies that the company sought was forfeiture of the directors’ remuneration for the period in which they had been in breach of their duties. The judge, Akhlaq Choudhury QC, adopted the qualifications to the Imageview forfeiture principle that Vos J had identified in Jaffery. He also considered those qualifications applied to the case before him, as they had in Jaffery itself. Despite their actions, the directors had continued diligently to do good work for the claimant. Forfeiture of salary was not awarded.

VI. Conclusion The notion that equity sanctions forfeiture of remuneration as a remedy for breach of fiduciary duty is an invasive weed within its territory. Seeing the damage it can do, some judges have attempted to check it. It would be much better to root it out. Only one principle, or perhaps set of principles, is needed. If, as a result of the agent’s defaults, the basis for the agent’s remuneration has failed, then remuneration has not been earned.71 Many serious breaches of fiduciary duty will coincide with a failure to perform that which the agent was being paid for. There can be little harm in such circumstances in equity following the law, and not requiring the claimant to rely on common law pleadings within the law of contract in order

69 ibid [62]. 70 Gamatronic (UK) Ltd v Hamilton [2016] EWHC 2225 (QB), [2017] BCC 670. 71 There is also the possibility that a transaction that involves self-dealing is outside the scope of the agency contract altogether: as in Salomons (n 16).

226  Peter Watts to deny the agent his or her remuneration. Relatedly, a breach of fiduciary duty might sometimes permit the principal to rescind or cancel either the contract of agency or the contract with the third party on which the agent had been ­working, thereby also removing the basis for the agent’s remuneration. Even then, work that has produced value for the principal before the cancellation might need to be recompensed as part of the unravelling of the relevant contract. On this approach, forfeiture is not a standalone remedy, but a simple by-product of general principle. Nothing in the argument made here attempts to erode the strictness of equity’s fiduciary principles, notwithstanding the commercial context. However, a rule of automatic forfeiture, as Imageview promotes, is not only not called for by fiduciary principle, but results in outcomes that could fairly be characterised as ­uncommercial.

11 Third-Party Liability of Recipients of Trust Property DAVID HAYTON

I. Introduction This chapter is the result of reflection upon the United Kingdom Supreme Court’s judgment in Akers v Samba Financial Group,1 relating to third party liability. At first sight, Akers is a surprising decision. A Saudi Arabian resident citizen had declared himself trustee of Saudi shareholdings worth US $318m on a Cayman law trust for a Cayman company, which was his family investment vehicle. Shortly after a winding-up petition had been presented against that company, the Saudi Arabian trustee transferred the Saudi shareholdings to Samba, a Saudi company with a registered London office, in order to discharge his personal indebtedness to Samba of which he had earlier been a director. According to English conflicts of law rules, under the Saudi lex situs, Samba, as registered shareholder, became full owner of the Saudi shares free from any interest of the Cayman company, Saudi law knowing nothing of trusts and equitable interests, and Saudi courts not applying foreign law.2 Akers and the other joint liquidator of the Cayman company sought to have the transfer to Samba declared void under s 127 of the Insolvency Act 1986.3 This requires the court to declare void any ‘disposition of the company’s property’ made after the presentation of a petition to wind up the company unless the court orders otherwise. Should not this claim fail on the simple and obvious ground that the company under the Saudi lex situs had no property interest that could be disposed of? The Supreme Court disagreed because from the viewpoint of the English courts’ equitable in personam jurisdiction, as opposed to the viewpoint of Saudi 1 Akers v Samba Financial Group [2017] UKSC 6, [2017] AC 424. 2 Akers v Samba Financial Group [2014] EWHC 540 (Ch), 16 ITELR 808 [44]–[47]; Akers (n 1) [80]. 3 The UNCITRAL Model Law on Cross-Border Insolvency implemented by the Cross-Border Insolvency Regulations 2006 enabled s 127 to be invoked: see Akers v Samba Financial Group [2014] EWHC 540 (Ch) [5]–[10].

228  David Hayton courts, the Cayman company had a valid equitable proprietary interest and the benefit of equitable rules requiring a trustee to perform his trust, restore trust assets or provide equitable compensation, and making third parties liable to account as constructive trustees. The Court4 endorsed the statement of Millett J in El Ajou v Dollar Land Holdings plc: An English court of equity will compel a defendant who is within the jurisdiction to treat assets in his hands as trust assets if, having regard to their history and his state of knowledge, it would be unconscionable for him to treat them as his own.5

Nevertheless, the Court held that, even though the Cayman company had an equitable proprietary interest capable of being the subject of a disposition, there had been no disposition of such interest by a disponor to any disponee because the trustee-disponor of the legal title had no power in breach of trust to make a disposition of the equitable interest to any disponee. Essentially, it was a case of ‘nemo dat quod non habet’, and, as owner only of the legal title, the trustee could only transfer that title to the shares to Samba and not the Cayman company’s separate equitable interest.6 Of course, the equitable interest would automatically be overridden and become extinguished under the Saudi lex situs upon Samba becoming entire registered owner of the Saudi shares,7 though in common law countries this would occur upon a recipient qualifying as ‘Equity’s darling’, ie a bona fide purchaser of legal title to shares without notice of the equitable interest (which I will refer to as ‘the bona fide purchaser rule’). In each case, however, the extinguishment of the equitable interest would not arise from any disposal by the trustee of any equitable interest but by operation of law. Thus, s 127 was unavailable to the liquidators and it might be thought that the Saudi settlor-trustee had escaped from his personal liabilities by validly satisfying his own major creditor at the expense of the Cayman company. However, since a breach of trust was involved, the Court, rather than staying or striking out the liquidators’ claim, offered them the opportunity of having the matter remitted to the High Court to see if an amendment of the pleadings could put matters back on track. It might be alleged that because Samba had received the shares in breach of trust but had not given them up to the company’s liquidators, Samba’s conscience was affected so that it could be personally liable as a constructive trustee to restore to the liquidators the shares (an in personam ad rem adquirendam claim) or their value (an in personam claim).8 It can be seen that this was not a straightforward proprietary claim that Samba had title to the Saudi shares and must restore them to the Cayman company, as 4 Akers (n 1) [86] (Lord Sumption), [24]–[34] (Lord Mance). 5 El Ajou v Dollar Land Holdings plc [1993] 3 All ER 717 (Ch) 737, reversed only on whether the defendant had the requisite knowledge in El Ajou v Dollar Land Holdings plc [1993] EWCA Civ 4. 6 The company’s personal equitable rights, ranking as ‘property’ defined in Insolvency Act 1986, s 436, remained with it. 7 Akers (n 1) [20], [41], [51], [80]. 8 Akers (n 1) [57] (Lord Mance), [89] (Lord Sumption).

Third-Party Liability of Recipients of Trust Property  229 absolute equitable owner thereof, unless Samba ranked as a bona fide purchaser without notice of the company’s equitable interest. Such proprietary interest had been extinguished under the Saudi lex situs upon Samba becoming sole entire registered owner of the Saudi shares. Priority of competing property interests did not arise, so the bona fide purchaser rule was inapplicable. Samba’s liability, based upon its conscience being affected, could not be a proprietary in rem liability, only a personal liability pursuant to an order of the English court requiring an account to be taken to establish the amount of monetary value or compensation payable to the company or, if the company preferred, an order requiring the shareholdings to be transferred to the company. The basis for such personal liability of Samba is the same as that for the personal liability of a beneficial recipient of trust property who had disposed of the property by way of gift, and who then could only be personally liable to provide monetary value or compensation if his state of knowledge of the relevant circumstances at the time of the gift had made it unconscionable for him to make the gift because he knew he was not the rightful owner of the property to whom he was obliged to return the property.9 The shorthand expression, liability for ‘knowing receipt’ of trust property, was originally used to cover the personal liability of a beneficial recipient of trust property where the recipient knew that the receipt was traceable to a breach of fiduciary duty, either at the time of receipt or at the time of dealing with the property inconsistently with its provenance as trust property. Nowadays, since a recipient’s liability for his conduct depends upon the state of his conscience at the time of such conduct, it is perhaps more appropriate to use the shorthand expression, liability for ‘unconscionable conduct’.10 No consideration was given by their Lordships to the question whether, ­without having to establish such a claim in equity for unconscionable conduct, Samba could be strictly liable to an unjust enrichment claim. This requires consideration of four questions:11 1. 2. 3. 4.

Was the defendant enriched? Was the defendant’s enrichment at the claimant’s expense? Was the enrichment unjust? Do any defences apply?

Superficially, it might appear that Samba had been unjustly enriched at the Cayman company’s expense. It seems to me, however, that the English courts would accept 9 Charter plc v City Index Ltd [2007] EWCA Civ 1382, [2008] Ch 313, 321; Bank of Credit and Commerce International (Overseas) Ltd (in liq) v Akindele [2001] Ch 437 (CA) 448, 455 (Nourse LJ); Independent Trustee Services Ltd v GP Noble Trustees Ltd [2012] EWCA Civ 195, [2013] Ch 91 [76], [84] (Lloyd LJ). 10 As used in Arthur v Attorney General of The Turks & Caicos Islands [2012] UKPC 30, [2012] All ER (D) 164 (Aug) [33]. ‘Unconscionable receipt’ was used in McLennan v Livaja [2017] NZCA 446 [40], but the receipt may be innocent, liability only arising when, after having sufficient knowledge of the property being trust property, the recipient claims to retain the property or disposes of it. 11 Investment Trust Companies (in liq) v Revenue and Customs Commissioners [2017] UKSC 29, [2018] AC 275 [24], [41]–[42].

230  David Hayton that Saudi Arabian law would be the governing law of the obligation to make restitution for an unjust enrichment. This is because the enrichment of Samba at the Cayman company’s expense took place in Saudi Arabia where the transfer of Saudi shares took place, and where the shares were situated and where the trusteetransferor and Samba had their base.12 In any event, whether applying the English or Saudi law, it seems that for there to be a successful unjust enrichment claim it would need to be shown that the Saudi settlor-trustee had no power to confer sole entire title to the Saudi shares upon Samba or that there was no legal basis for Samba having such title. This, however, cannot be shown when Saudi Arabian law was the lex situs and the law of the place where the transfer occurred and where the trustee-transferor was habitually resident and domiciled and Samba was incorporated and kept its share register. Thus, it was not unjust for Samba to have sole entire title to the shares when this was fully justified by Saudi law. It follows that, to establish Samba’s liability, the liquidators would have to prove equitable wrongdoing arising from Samba’s unconscionable conduct. Nevertheless, it may well be that the above analysis will be tested if the liquidator, in seeking permission to amend the pleadings to allege that Samba is liable on the basis of unconscionable conduct (with apt knowledge) in not restoring the shares or their value to the Cayman company, also tries to avoid such a burden by an alternative pleading that Samba is strictly liable for having been unjustly enriched at the expense of the Cayman company. The availability of such strict liability to the extent that a change of position has not reduced the enrichment is a controversial issue on which much has been written,13 but before dealing with this it is worthwhile looking at the commercial significance of Akers.

12 See Art 10.3 of the Rome II Regulation 864/2007 on Non-contractual Obligations reflecting the English position in Macmillan Inc v Bishopsgate Investment Trust plc (No 3) [1996] 1 WLR 387 (CA) 397 (Staughton LJ). There seems no scope for application of the prior Art 10.2 concerned with both parties having ‘habitual residence’ (defined in Art 23) in the same country at the time the event giving rise to unjust enrichment occurred when, under the Cross-Border Insolvency Regulations, the joint liquidators were ‘foreign representatives’ of a company habitually resident in Cayman and the event giving rise to the damage occurred in Saudi. 13 See, inter alia, Lord Nicholls, ‘Knowing Receipt: The Need for a New Landmark’ 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) 230; L Smith, ‘Unjust Enrichment, Property and the Structure of Trusts’ (2000) 116 LQR 412; A Burrows, Fusing Common Law and Equity: Remedies, Restitution and Reform (Hong Kong, Sweet & Maxwell Asia, 2002) 26; A Burrows, The Law of Restitution, 3rd edn (Oxford, Oxford University Press, 2011) 424–31; P Birks, ‘Receipt’ in P Birks and A Pretto, Breach of Trust (Oxford, Hart Publishing, 2002) ch 7, 228; P Millett, ‘Proprietary Restitution’ in J Edelman and S Degeling (eds), Equity in Commercial Law (Pyrmont (NSW), Lawbook Co, 2005) ch 12, 311–12; R Walker, ‘Dishonesty and Unconscionable Conduct in Commercial Life – Some Reflections on Accessory Liability and Knowing Receipt’ (2005) 27 Sydney Law Review 187, 202; S Worthington, Equity, 2nd edn (Oxford, Oxford University Press, 2006) 179–89; J Edelman and E Bant, Unjust Enrichment, 2nd edn (Oxford, Hart Publishing, 2016) 289–91, strict liability having been rejected by the High Court of Australia in Farah Constructions Pty Ltd v Say-Dee Pty Ltd [2007] HCA 22, (2007) 230 CLR 89 [148]–[58]; C Mitchell, P Mitchell and S Watterson (eds), Goff & Jones: The Law of Unjust Enrichment, 9th edn (London, Sweet & Maxwell, 2016) ch 8.

Third-Party Liability of Recipients of Trust Property  231

II.  The Commercial Significance of Akers A.  Insolvency Law Akers brings into focus problems arising from the interplay between the common modern practice of legal title to intangibles being held by a trustee on trust for a company, and creditor protection provisions in corporate insolvency laws concerned with dispositions of property by companies (as in England) or transactions of companies or transactions entered into by companies or transactions to which the companies were parties (as in Australia and New Zealand).14 Akers makes clear that such provisions will be of no assistance if the trustee disposes of the trust property in breach of trust, though where the trustee acts within its powers there may be some scope for arguing that since this was enabled by the company it should be regarded as a disposition of property by the company within the meaning of the English legislation. There seems little scope for this under the Australian and New Zealand legislation: where a trustee under the authority in the trust deed itself disposes of trust property without the company being a party to the transaction, the company is not to be treated as having entered into the transaction. In Akers their Lordships had an excuse for leaving insolvency law in a murky state because the focus in all the courts was whether there could be an equitable proprietary interest in Saudi shares that could be ‘property’ capable of being disposed of under s 127. It was after the oral hearing in the Supreme Court that written submissions were requested as to the meaning of ‘disposition’ with the associated ‘disponor’ and ‘disponee’. Nevertheless, if their Lordships had not taken such a strict approach and had been prepared to treat extinguishment of the equitable interest in shares as a disposition of the interest, the trustee’s transfer of the shares would have been declared void ‘unless the court otherwise orders’. Their Lordships could then have remitted this discretionary issue to the High Court for further fact-finding. Indeed, if there had been the opportunity for an oral hearing perhaps their Lordships might have provided some guidance as to whether there were exceptional circumstances making it just and practical to uphold the disposition. Relevant factors are whether the transferee had probable cause for believing that the transferor was a trustee and whether the transferee had provided new consideration for the transfer as opposed to having a much-pursued debt discharged15 (even though such discharge traditionally ranks as ‘value’ for the purpose of the bona fide purchaser rule favouring a purchaser of a legal interest for value without notice of an equitable interest).16 14 See the Corporations Act 2001 (AU) (as amended), ss 588FA, 588FB, 588FC and 588 FE, and the Companies Act 1993 (NZ) (as amended), ss 292(1) and 297(1). 15 Express Electrical Distributors Ltd v Beavis [2016] EWCA Civ 765, [2016] 1 WLR 4783 [56]. 16 Taylor v Blakelock (1886) 32 Ch D 560 (CA) 568, 570.

232  David Hayton Further difficulties flow from it having been established that a trustee cannot, by disposing of the legal title in breach of trust, also dispose of the company’s separate equitable interest, even though the trustee will have extinguished that interest in cases where the bona fide purchaser rule applies. This principle applies equally to a trustee who is not in breach of trust when disposing of the legal title because the company’s interest is extinguished by operation of the law of overreaching. Normally, overreaching is by an authorised sale such that the beneficiaries’ interests are transposed to the proceeds of sale. Nevertheless, on an authorised payment of a debt or an authorised appointment of capital, the recipient receives title free from the overreached interests of the beneficiaries. Where a company expressly or impliedly authorises the trustee holding shares on trust for it to make a gratuitous payment to a subsidiary or affiliated company or to prefer a creditor, this can be undone under ss 238 and 239 of the Insolvency Act 1986 if made before presentation of a winding-up petition. After such presentation, however, when there is no scope for ss 238 and 239, the operation of s 127 only has the restricted scope explained in Akers. Therefore, it appears that where a trustee makes an authorised overreaching disposition of the legal title that is a gratuitous payment or a preference of a creditor, this disposition cannot be undone. Lord Neuberger’s judgment, however, may indicate a way to avoid such an unsatisfactory conclusion when he explained exceptional cases where an extinguishment can be regarded as a disposition. He pointed out17 that it was fair to treat the extinguishment brought about by the surrender of a lease or of contractual rights or of a life interest, to be a disposition within s 127. In these cases the disponor is the same person as the loser of the property and is aware that extinguishment is the purpose of the transaction. Can the courts therefore regard a trustee’s expressly or impliedly overreaching disposition as an instance of a company disposition because it was aware that extinguishment of its equitable interest was the purpose – and inevitable result – of the transaction it had enabled the trustee to carry out? If so, s 127 applies when the rule is that: [S]ave in exceptional circumstances, a validation order should only be made … if there is some special circumstance which shows that the disposition in question will be (in a prospective application case) or has been (in a retrospective application case) for the general body of unsecured creditors, such that it is appropriate to disapply the usual pari passu principle.18

B.  Encouragement of Cross-Border Trusts Under Which Assets are Located in ‘Non-Trust’ Jurisdictions Cross-border transactions are encouraged by Akers. This is because in the case of trusts used for commercial or family purposes and in the case of persons in

17 Akers

(n 1) [74]. Electrical Distributors Ltd (n 15) [56].

18 Express

Third-Party Liability of Recipients of Trust Property  233 ­ duciary positions in respect of property (such as company directors), the final fi appellate court has made it clear that if a defendant trustee or fiduciary can be sued in a country in which the legal system includes equitable in personam or in personam ad rem jurisdiction, it does not matter that the trust assets are located in one of the large number of countries that know nothing of trusts and equitable proprietary interests, so that the owner of these foreign assets holds them free from any equitable proprietary rights. Where a country’s courts have this equitable jurisdiction against a defendant, not only will defendant trustees or other fiduciaries be compelled to carry out their accepted fiduciary duties, but third parties having traceable trust assets in their hands will be compelled to restore the trust assets or their value if their state of knowledge would make it unconscionable for them to retain the benefit of the receipt.

C.  When is the Conduct of Third-party Recipients of Trust Property Unconscionable? Of course, to say that a state of affairs is ‘unconscionable’ creates a practical problem because this is to state a conclusion without it having been made clear how that conclusion was reached upon some real and substantial principles.19 The courts thus focus upon well-developed principles, both specific and flexible in character,20 to determine whether a beneficial recipient of trust assets is liable on the basis of having sufficient knowledge so as to make it unconscionable for him to retain the benefit of the receipt.21 What are these principles and, where the recipient is a purchaser claiming to be a bona fide purchaser without notice, to what extent does the concept of ‘notice’ differ from that of ‘knowledge’?

i. Purchasers Leaving aside the special position in Akers where, despite Samba’s retention of the Saudi shares, no proprietary claim was available, only a personal claim, the general rule as to priority of property interests is that where purchasers retain title to the transferred trust property or its traced product, they will take free from equitable rights under the trust where they prove they were bona fide purchasers of a legal 19 See K Hayne, ‘Letting Justice be Done without the Heavens Falling’ (2001) 27 Monash University Law Review 12, 16: ‘Identifying some conduct as unconscionable or unconscientious is a statement of conclusion which would sit as well in the discourse of an ethicist, as it does in reasons for judgment. But, in the law, they are not terms that invite, or even permit, recourse to a judge’s idiosyncratic sense of justice. What sets apart the two fields of discourse of the ethicist and the judge is the need for the judge to articulate what it is that leads him or her to the conclusion that the conduct in question should wear this label’. 20 See Tanwar Enterprises Pty Ltd v Cauchi [2003] HCA 57, (2003) 217 CLR 315 [20]. 21 As now required in England: Akindele (n 9) 455; Arthur v Attorney General of the Turks & Caicos Islands [2012] UKPC 30 [33].

234  David Hayton interest in the property without notice of such rights at the time of acquiring the legal title. Having then become absolute beneficial owners of the legal interest, purchasers can subsequently deal freely with the property, ignoring the trust that no longer affects the property, even if by then they had acquired knowledge of the beneficiaries’ equitable rights under the trust. Where, however, purchasers no longer have the trust property or its traced product and cannot establish they were initially purchasers without notice, they will be liable to a personal monetary liability if the state of their knowledge of the circumstances when disposing of the property inconsistently with the beneficiaries’ interests made such disposition unconscionable. One important question, discussed herein, is whether, outside the special case of conveyancing and mortgages, there really is a distinction between notice and knowledge.

ii. Donees So far as concerns gratuitous beneficial recipients of trust property, who are not beneficiaries under the trust but third parties, such recipients automatically hold the property or its traced product subject to the equitable interests of the beneficiaries. Thus, once they are cognisant of this, the property must be restored to its rightful owners and basic steps taken for its preservation in the meantime. Once they no longer have the trust property or its traced product they cannot be liable to such a proprietary in rem obligation. They can, however, be liable to a personal monetary liability, if the state of their knowledge when dealing with such property inconsistently with the trust was such as to make such conduct unconscionable.

iii.  ‘Knowledge’ and ‘Notice’ In brief, ‘notice’ is relevant for the proprietary liability of purchasers but irrelevant for the proprietary liability of third-party donees. ‘Knowledge’ of the circumstances, so as to make a recipient’s conduct unconscionable in dealing with the trust property inconsistently with the beneficiary’s interests, is required for the personal liability of such donees and also for the personal liability of purchasers who were not purchasers without notice. Is there any practical difference between ‘notice’ and ‘knowledge’? Superficially, there appears to be a clear difference when one considers the artificiality of constructive notice in conveyancing or mortgaging transactions. A purchaser’s negligence in not making standard inquiries and inspections22 is sufficient to burden him with constructive notice of an equitable interest so that he immediately acquires the property subject to such interest eg a restrictive



22 As

set out in conveyancing guides in every jurisdiction.

Third-Party Liability of Recipients of Trust Property  235 covenant or an equitable easement, charge or proprietary estoppel interest. The equitable doctrine encapsulated in s 199(1)(ii)(a) of the Law of Property Act 1925 (UK) is that: A purchaser shall not be prejudicially affected by notice of … any other instrument or matter or any fact or thing unless … it is within his own knowledge, or would have come to his knowledge if such inquiries and inspections had been made as ought reasonably to have been made by him.23

Thus, knowledge of an interest is attributed to the purchaser not because of any actual knowledge of any particular circumstances, but just because the standard inquiries and inspections required on a purchase would have brought relevant matters to the purchaser’s knowledge.24 Taking account of such standard procedures, it is clearly right that the onus of proving that a purchase was without notice is placed upon the purchaser as the driving force in the transaction of which the holder of an equitable interest is usually ignorant. However, in English law outside the real property context, for a purchaser to have constructive notice of an equitable interest he must have actual knowledge of factual circumstances (eg of an uncommercial nature) which make an honest25 reasonable person suspect that there is at least a serious possibility of the existence of such an interest or serious cause to question the propriety of the transaction so as to require him to make further investigations that are reasonable in the ­circumstances. The leading case is Papadimitriou v Crédit Agricole Corporation and Investment Bank,26 where Lord Clarke delivered the advice of the Privy Council holding that the Bank had constructive notice of a beneficiary’s equitable interest under a trust and so had proprietary liability. Lord Clarke endorsed27 the remarks of Lord Neuberger MR in Sinclair Investments Ltd v Versailles Trade Finance Ltd that a bank would have constructive notice of a proprietary interest where: [A] reasonable person with their attributes (ie those of a responsible large bank with the benefit of highly experienced insolvency practitioners as their appointed administrative receivers) should either have appreciated that a proprietary claim probably existed or should have made inquiries or sought advice, which would have revealed the probable existence of such a claim.28 23 Emphasis added. 24 See M Bryan, ‘Notice and Knowledge in Private Law Claims’ (2009) 3 Journal of Equity 204, 207–08, distinguishing this narrow meaning of constructive notice from that arising where a purchaser must actually know of facts imposing a duty to inquire further. 25 See Farah Constructions Pty Ltd (n 13) [177], ‘the morally obtuse cannot escape by failure to recognise an impropriety that would have been apparent to an ordinary person applying the standards of such persons’. See also Barlow Clowes International Ltd (in liq) v Eurotrust International Ltd [2005] UKPC 37, [2006] 1 WLR 1476 [10]; Group Seven Ltd v Nasir [2017] EWHC 2466 (Ch), [2018] PNLR 6 [483]. 26 Papadimitriou v Crédit Agricole Corporation and Investment Bank [2015] UKPC 13, [2015] 1 WLR 4265. 27 ibid [18]. 28 Sinclair Investments (UK) Ltd v Versailles Trade Finance Ltd [2011] EWCA Civ 347, [2012] Ch 453 [109]. In context, the reference to a ‘proprietary claim’ refers to a proprietary right or interest: [18].

236  David Hayton As to when these inquiries or advice are required, Lord Clarke stated in a central passage: The bank must make inquiries if there is a serious possibility of a third party having such a right or, put in another way, if the facts known to the bank would give a reasonable banker in the position of the particular banker serious cause to question the propriety of the transaction.29

He considered this approach consistent with the conclusion in Lewin on Trusts30 that a purchaser in commercial contexts would have notice if he has ‘been put upon inquiry by knowledge of suspicious circumstances indicative of wrongdoing on the part of the transferor, but has failed to make inquiries that are reasonable in the circumstances’. Lord Sumption added one paragraph to supplement Lord Clarke’s judgment: I agree that this appeal should be dismissed for the reasons given by Lord Clarke … [w]hether a person claims to be a bona fide purchaser of assets without notice of a prior interest in them, or disputes a claim to make him accountable as a constructive trustee on the footing of knowing receipt, the question what constitutes notice or knowledge is the same. … If there are features of the transaction such that if left unexplained they are indicative of wrongdoing, then an explanation must be sought before it can be assumed that there is none.31

Subsequently, in Akers, Lord Sumption32, though dealing only with a possible in personam liability of Samba as a constructive trustee on the basis of unconscionable conduct, treated this as turning upon whether or not Samba had notice of the Cayman company’s equitable interest, thus treating notice and knowledge as the same. From Lord Clarke’s judgment and Lord Sumption’s perception of it, it appears that in England, leaving aside conveyancing and mortgaging transactions (or other special transactions) where recognised standard procedures must be followed, the concept of a ‘purchaser without notice’ has become the concept of a ‘purchaser without knowledge’. Such knowledge is that which arises where either (1) there is a serious possibility of a third party having a proprietary right or (2) the facts within the actual knowledge of the purchaser would give a reasonable purchaser in the position of that purchaser serious cause to question the propriety of the transaction.33 In such circumstances, the purchaser cannot refrain from making inquiries. He would surely be acting recklessly if he did so refrain.

29 Crédit Agricole (n 26) [20]. 30 L Tucker, N Le Poidevin and J Brightwell, Lewin on Trusts, 19th edn (London, Sweet & Maxwell, 2015) para 41–134. 31 Crédit Agricole (n 26) [33]. 32 Akers (n 1) [85], [89], [90]. 33 See Crédit Agricole (n 26) [20].

Third-Party Liability of Recipients of Trust Property  237 For a claimant to establish such liability, one can envisage a cross-examination of a defendant purchaser proceeding as follows: ‘You’re fairly sensible, would you say?’ ‘Yes.’ ‘Fairly bright, too – not dim? ‘Yes, of course.’ ‘An honest man, too, with ordinary standards of right and wrong – not morally obtuse?’ ‘Yes, of course.’ ‘Thus, you’d accept the expert witness evidence – there was serious cause to question the propriety of the transaction and a need to investigate the serious possibility of a third party having adverse rights.’ ‘Yes, I suppose so.’ ‘So, why on earth did you not look into the matter?’ ‘[Bluster – bluster].’34 ‘You didn’t want to run the risk of discovering the truth, did you? ‘[No answer].’ As Lord Sumption indicated, what amounts to ‘notice’ for the purpose of priority of property interests in issue in Crédit Agricole, surely can amount to ‘knowledge’ for the purposes of personal liability for unconscionable conduct, originally known as ‘knowing receipt’. As to onus of proof of notice or knowledge, however, in Crédit Agricole it was ‘common ground’35 that the onus was on the purchaser to prove he was a purchaser without ‘notice’. To protect a beneficiary’s equitable interest, it is presumed that the beneficiary has a proprietary right that he can enforce unless the purchaser can prove he had no notice of it: what the purchaser did and considered in the course of purchasing the property is within his knowledge and easy for him to evidence, but very difficult for the equitable interest-holder. By way of contrast, if the claimant claims that the defendant incurs personal liability as a result of beneficial receipt of property, the onus is on the claimant to prove that the defendant had sufficient knowledge for liability for knowing receipt. There is no presumption to this effect. It is to be noted that a claimant cannot succeed if he can only show that the circumstances revealed a mere possibility of the received property resulting from 34 An exceptional valid excuse could be that the purchaser had the relevant knowledge but before he could make inquiries he was involved in an accident putting him in a temporary coma and someone else without the relevant knowledge completed the transaction. 35 Crédit Agricole (n 26) [2].

238  David Hayton a breach of trust or fiduciary duty.36 BCCI v Akindele37 – in which the English Court of Appeal abandoned the Baden Delvaux38 categories of knowledge for the purposes of ‘knowing receipt’ in favour of asking whether the recipient’s state of knowledge was such as to make it unconscionable for him to retain the benefit of the receipt – may be regarded as such a case. The defendant, Chief Akindele, was a prominent Nigerian businessman who believed himself in 1985 to be involved in an arm’s-length business transaction with a reputable major bank, for whom he was one of a select group of high net worth customers, contractually providing the bank with US $10m. After three years and five months, he was paid US $16,679m, an excellent return on his investment. The bank’s liquidator failed in claiming the US $6,679m profit. The Court of Appeal upheld the trial judge, finding that Chief Akindele had not been dishonest since his knowledge of the circumstances was not such as to render his participation contrary to normally acceptable standards of conduct39 and so he could not be personally liable for ‘knowing assistance’ (now called ‘dishonest assistance’ in England and New Zealand40). Nor was he liable for ‘knowing receipt’: his state of knowledge was not such as to make his conduct unconscionable when claiming to retain the benefit of the receipt,41 this being regarded by the Court of Appeal as less than that required for liability for dishonest assistance. In my view, however, in light of Crédit Agricole and the greater responsibilities engendered by extensive anti-money-laundering legislation, where the circumstances are such that a defendant knows – or would know but for his moral obtuseness – that there is either a serious possibility of a third party having an adverse right or where the facts known to the defendant would give a reasonable person in the defendant’s position serious cause to question the propriety of the transaction, he is not entitled to take a risk to the prejudice of the third party’s rights by completing a transaction without having made inquiries to see if it would be safe for such completion to take place. If he does recklessly or deliberately take such a risk, should he not be regarded as acting with sufficient knowledge not just for the purpose of making him liable for ‘knowing receipt’ or ‘unconscionable conduct’, but also for ‘knowing assistance’ or ‘dishonest assistance’? As Lord Nicholls has stated, ‘imprudence may be carried recklessly to lengths which call into question the honesty of the person making the decision’.42

36 Crédit Agricole (n 26) [17]. 37 Akindele (n 9). 38 Baden v Société Générale pour Favoriser le Développement du Commerce et de l’Industrie en France SA [1993] 1 WLR 509 (Ch). 39 Following Royal Brunei Airlines Sdn Bhd v Tan [1995] 2 AC 378 (PC); and now Barlow Clowes (n 25). 40 Westpac New Zealand Ltd v Map & Associates Ltd [2010] NZCA 404, [2011] 2 NZLR 90, on appeal [2011] NZSC 89, [2011] 3 NZLR 751. 41 No common law action reflecting unjust enrichment principles was brought, though it would seem such action would, anyhow fail, the valid contract justifying the retention. 42 Royal Brunei Airlines (n 39) 389.

Third-Party Liability of Recipients of Trust Property  239 Indeed, in Australia, the Full Court of the Federal Court has stated, ‘As with assistance liability, recipient liability should be seen as fault based and as making the same knowledge/notice demands as in assistance cases’.43 It should be noted here that in Australia,44 assistance liability is ‘assistance in a dishonest breach of trust or fiduciary duty’ rather than ‘dishonest assistance in a breach of trust or fiduciary duty’, as in England and New Zealand.45 Focusing, however, only upon recipient liability, the alignment of notice for proprietary claims and knowledge for personal claims has the advantage of resolving the position of a purchaser at the time of purchase. The exception, in temporal terms, is the status of a purchaser without notice who subsequently acquires full knowledge of equitable rights. In these cases the purchaser can freely deal as ­absolute owner of the property. The liability of a purchaser of trust property with notice/knowledge also becomes similar to that of a donee of trust property. They both are obliged to deliver up the trust property or its traced product to the rightful owner, the purchaser immediately and the donee once having knowledge of the trust. The purchaser, if no longer having the property or its product by virtue of having disposed of it with notice/knowledge, will be personally accountable for the value of the property, as will a donee who had knowledge of the trust before disposing of the property inconsistently with the trust. Being treated (under the burden of constructive trusteeship) as if custodial trustees46 they will be liable for the market value of the property at the date of disposition47 or, if a higher sum, the market value at the date of judgment.48 They can also be made liable to account for gains made by them after having the requisite knowledge of the trust.49

iv. The Baden Delvaux Five Types of Knowledge It will have been noted that no reference was made in Crédit Agricole to the five types of ‘knowledge’ that the High Court of Australia,50 the Full Court of the Federal Court of Australia51 and the New Zealand Court of Appeal52 have been 43 Grimaldi v Chameleon Mining NL (No 2) [2012] FCAFC 6, (2012) 200 FCR 296 [267] but only the first four heads of Baden Delvaux (n 38) knowledge set out below suffice, [267]–[70]. See also Wambo Coal Pty Ltd v Ariff [2007] NSWSC 589, 25 ACLC 809 [44]. 44 Farah Constructions Pty Ltd (n 13). 45 Fletcher v Eden Refuge Trust [2012] NZCA 124, [2012] 2 NZLR 227; Lifestyles Investment Group v Coral Investments Securities Ltd [2017] NZHC 1639. 46 See C Mitchell and S Watterson, ‘Remedies for Knowing Receipt’ in C Mitchell (ed), Constructive and Resulting Trusts (Oxford, Hart Publishing, 2010) ch 4. 47 Shepherd v Mouls (1845) 4 Hare 500, 504; 67 ER 746, 747. 48 Re Bell’s Indenture [1980] 1 WLR 1217 (Ch), 1233; as sought in Re Montagu’s Settlement Trusts [1987] Ch 264. 49 Re Estate of Rothko 43 NY 2d 305, 372 NE 2d 291 (1977). 50 Farah Constructions Pty Ltd (n 13) [174]–[78]. 51 eg Grimaldi (n 43); Great Investments Ltd v Warner [2016] FCAFC 85, (2016) 243 FCR 516. 52 Westpac Banking Corporation v Savin [1985] 2 NZLR 41 (CA), applied in Pounamu Properties Ltd v Brons [2012] NZHC 590 [169]–[72], to establish the proprietary and personal liability of W when

240  David Hayton prepared to rely upon, being knowledge according to Baden v Société Générale pour Favoriser le Développement du Commerce et de l’Industrie en France SA that results from:53 (i) actual knowledge; (ii) wilfully shutting one’s eyes to the obvious; (iii) wilfully and recklessly failing to make such inquiries as an honest and ­reasonable person would make; (iv) knowledge of circumstances which would indicate the facts to an honest and reasonable person; (v) knowledge of circumstances which would put an honest and reasonable person on inquiry. These five types of knowledge were agreed by counsel in a case involving knowing assistance. While it is natural to assume that they were formulated primarily with reference to knowing assistance, counsel and Gibson J agreed they were relevant to knowing receipt as well.54 In Royal Brunei Airlines,55 Lord Nicholls found the types of knowledge to be ‘best forgotten’ in dealing with ‘assistance in a dishonest design on the part of the trustees’ and converting this head of liability into a liability for ‘dishonest assistance in a breach of trust or fiduciary duty’. The English Court of Appeal56 agreed with this, while having ‘grave doubts about [the utility of the Baden categorisation] in cases of knowing receipt’. In Crédit Agricole,57 the five types of knowledge were ignored when Lord Clarke, through examining the case law, produced, in my opinion, specific clearer guidance than the generality of the types of knowledge as to when a recipient would have notice of a claimant’s equitable interest. In Great Investments Ltd v Warner,58 the Full Court of the Federal Court of Australia in a case concerned with strict liability to a company for receipt of its assets without authority, cited the core passage from Lord Clarke’s judgment and opined that the approach in Crédit Agricole ‘corresponds to an acceptance of both the fourth and fifth types of knowledge described in Baden’ as being sufficient to amount to notice for the purposes of the bona fide purchaser defence.59 In my view, the Crédit Agricole approach refines matters by indicating that the fourth and fifth types of knowledge treat a purchaser of trust property as having notice only if, on the facts actually known to the purchaser, at the time of receipt H as manager/de facto director of a company had it transfer a house to W on her paying an amount just over half its value. More recently, however, the New Zealand Court of Appeal in McLennan v Livaja [2017] NZCA 446 [40]–[45], has moved away from the Baden Delvaux types of knowledge. Where there has been an ‘unconscionable receipt’ of trust property ‘The core duty of that liability is to restore misapplied assets, or their equivalent, to the beneficiaries’: [40]. 53 Baden Delvaux (n 38) [246]–[53]. 54 See Akindele (n 9) 454 (Nourse LJ). 55 Royal Brunei Airlines (n 39) 392. 56 Akindele (n 9) 455. 57 See Crédit Agricole (n 26) [20]. 58 Great Investments (n 51). 59 ibid [118].

Third-Party Liability of Recipients of Trust Property  241 an honest reasonable purchaser would suspect that there is at least a serious ­possibility of the existence of an equitable interest or serious cause to question the propriety of the transaction, so that he must make further reasonable inquiries, in default of which he will have notice of the equitable interest that such inquiries would ­probably have revealed. This approach can also be interpreted as justifying making a purchaser with such notice liable to a personal monetary liability for knowing receipt on the basis that the state of his knowledge was such as to make unconscionable his conduct in dealing with the property inconsistently with the interest of which he had notice. Indeed, Lord Sumption observed that the question as to what constitutes notice or knowledge is the same.60 What, however, if a recipient’s state of knowledge is not sufficient to enable a beneficiary to exercise his direct right to render the recipient personally accountable on the footing of unconscionable conduct? Can the beneficiary take advantage of the modern law of unjust enrichment to make the recipient strictly liable to make restitution? If so, this is an independent cause of action that a claimant can rely upon without needing to prove a recipient’s knowledge sufficient enough to establish a more extensive liability.61

D.  Application of Unjust Enrichment Over the last 50 years, increasing momentum has gathered for achieving the outcome of making a person unjustly enriched at the expense of another person strictly liable to reverse such enrichment except to the extent that it was ousted by a change of position. Such outcome has a natural appeal under any system of law, but it needs to be borne in mind that the utility of having a ‘law of unjust enrichment’ with its four questions62 is to provide a taxonomical function for a variety of heads of strict liabilities under a common heading. It is not in itself a general principle of law capable of being applied to whatever appears to come within its ambit so as to provide a just result. As Lord Reed stated, the ‘questions are not themselves legal tests, but are signposts towards areas of inquiry involving a number of distinct legal requirements’.63 His Lordship also stated: [T]here are centuries’ worth of relevant authorities, whose value should not be underestimated. The wisdom of our predecessors is a valuable resource, and the doctrine of precedent continues to apply. The courts should not be reinventing the wheel.64

There are plenty of nineteenth and twentieth century cases on the need for a beneficiary to establish knowledge on the part of a recipient of property before



60 Crédit

Agricole (n 26) [33]. Chiaw Sek Anna v Ng Li-Ann Genevieve [2013] SGCA 36, [2013] 3 SLR 801 [138]–[39]. 62 Investment Trust Companies (n 11) [24], [41]–[42]. 63 Investment Trust Companies (n 11) [41]. 64 ibid [40]. 61 Wee

242  David Hayton the recipient could be subject to a personal liability for dealing with it inconsistently with those equitable proprietary rights. Such cases strongly indicate that an innocent recipient of trust property cannot be under a strict personal liability to a beneficiary to make restitution. If there were such a strict liability, why would a claimant beneficiary take on the burden of proving knowledge on the part of the recipient when seeking restitution (leaving aside special cases where it is necessary to establish constructive trusteeship in order to justify the full range of remedies available against an express trustee, so that there may be disgorgement of gains or accounting for losses)? The position in equity of a recipient of trust property who had disposed of the property before becoming cognisant of its nature as trust property was summarised by Lloyd LJ in Independent Trustee Services Ltd v GP Noble Trustees Ltd.65 Here the court was concerned only with an equitable proprietary claim that the claimant was beneficially entitled to the traceable proceeds of £1.481m received by the defendant. The only question for the court was whether the defendant was a purchaser for value. She was not: she was, however, an innocent donee of monies in breach of trust. Speaking of her liability in equity to the trustee,66 Lloyd LJ stated: [S]he would not have had a defence to a proprietary claim by the trustee for the recovery of the money. Being innocent, she would not, on the other hand, be liable to a personal claim. Thus, to the extent she had any of the money, or its traceable product, in her hands at the time she received notice of the trustee’s claim, she could be ordered to pay it over to the trustee. On the other hand, to the extent that, before she had notice of the claim to the funds, she had disposed of any of the money without receiving traceable proceeds, she would not be liable to the trustee.67

Nor in this latter case could there be any liability to a beneficiary. As Lord BrowneWilkinson has stated: If X has the necessary degree of knowledge, X may himself become a constructive trustee for B on the basis of knowing receipt. But unless he has the requisite degree of knowledge, he is not personally liable to account as trustee.68

Immediately when X gratuitously receives legal title to assets subject to an equitable beneficial interest of which he has no knowledge, these assets remain subject to the beneficiaries’ interests under that trust. Thus, once X becomes cognisant of the trust (eg by being given notice by a beneficiary) he comes under a duty to explain what he did with the trust property: he is liable to account for the property.

65 Independent Trustee Services Ltd v GP Noble Trustees Ltd [2012] EWCA Civ 195, [2013] Ch 91 [75]–[76]. 66 In fact, a new trustee after replacement of the original trustee, but wrongdoing trustees can sue to recover wrongfully distributed trust property: see cases cited in n 73 below. 67 Independent Trustee Services (n 65) [75]–[76]. 68 Westdeutsche Landesbank Girozentrale v Islington LBC [1996] AC 669 (HL) 707.

Third-Party Liability of Recipients of Trust Property  243 If he shows that he had previously disposed of the property without receiving any traceable product he is free from any liability, but if after becoming cognisant of the trust he had disposed of the trust property inconsistently with the trust he becomes personally liable to account for the value of that property. As Lloyd LJ pointed out in Independent Trustee Services when speaking of an innocent donee of pension trust money received in breach of trust: [S]he would, in my view, have been a trustee of the money, that is to say a constructive trustee, holding it on trust for the beneficiaries under the pension fund trusts. She would have been under no relevant duty as regards the money until she had notice of the interest of the beneficiaries. Once she had such notice, she would be under a duty not to part with the remaining funds (and the traceable proceeds in her hands of any which had already gone) otherwise than by restoring them to or for the benefit of the beneficiaries, in the present case by payment to the new trustee.69

Once she had been given notice that she had been involved in receipt of property subject to an equitable interest under a trust, so that she had not been beneficial owner, but a constructive trustee, then if the plaintiff asked for an inquiry, she would have to provide an account of what she had done with the money, this being necessary to give effect to such interest70 and to determine whether she could then be strictly liable in a proprietary claim to the money or its traceable product. The claimant in Independent Trustee Services was the new trustee who had replaced errant trustees and was seeking to recover trust assets for pension fund beneficiaries. However, where there is an absolutely beneficially entitled beneficiary – or a group between themselves beneficially entitled and of full capacity – such beneficiaries can claim that a defendant received trust assets in breach of trust so as to be regarded by equity as a constructive trustee of such assets.71 This is necessary to enable the beneficiaries to see if the assets or their traced product can be recovered. There is a strict liability of a gratuitous recipient to restore to the beneficiary or group any remaining trust assets or their traceable product, but there is no personal monetary liability if the recipient had disposed of such assets without receiving any traceable product before acquiring knowledge of the trust. Before the fusion of law and equity, there were two exceptional cases where a beneficiary could bring a direct equitable action justiciable in the Chancery Court against someone other than their trustee. The Court, in order to protect its greatest 69 Independent Trustee Services (n 65) [81]. 70 Libertarian Investments Ltd v Hall [2013] HKCFA 93, (2013) 16 HKCFAR 681 [167]–[69] (Lord Millett NPJ). Indeed, orders under the principle established in Norwich Pharmacal Co v Customs and Excise Commissioners [1974] AC 133 (HL), can be made against third parties innocently mixed up in wrongdoing, forcing them to provide documents or information to assist the applicant bringing legal proceedings against persons believed to have wronged the applicant. 71 Libertarian Investments (n 70) [169]. The accounting mechanisms for making a recipient liable for knowing receipt are the same as those for making an express trustee liable: see C Mitchell and S Watterson, ‘Remedies for Knowing Receipt’ in C Mitchell (ed), Constructive and Resulting Trusts (Oxford, Hart Publishing, 2010) ch 4, 128–31.

244  David Hayton achievement, the trust, was prepared constructively to treat a third-party defendant as if a trustee. This ousted the protection given by the common law courts to the recipient’s legal title72 and enabled an extensive range of remedies available against an express trustee to be used against the constructive trustee. The first exceptional case is the strict liability that is imposed where a beneficiary, usually an absolutely entitled beneficiary, brings a proprietary claim against a gratuitous recipient of trust property in breach of trust so that the recipient is made to deliver up the trust property to the beneficiary as the beneficiary’s property. Second, there is the case where a beneficiary, usually an absolutely entitled one, brings a personal monetary claim against a gratuitous recipient of property in breach of trust who, with the requisite knowledge, dealt with it inconsistently with the trust and so must out of his own pocket restore the value of the property where he had disposed of it without receiving equivalent traced property that can be recovered. One needs fully to appreciate how exceptional it was for a beneficiary, as opposed to the trustee, to bring an action relating to legal title to trust property or its value in the hands of a third party. There are two crucial reasons for this. First, an historical reason. Because a beneficiary only had an equitable interest in property he could only bring proceedings relating to it in the Court of Chancery, leaving it to the trustee to bring proceedings in the common law courts against third parties, eg actions to recover wrongfully distributed trust property or for torts affecting trust property. Second, the core of the trust is ownership-management of the trust fund for the beneficiaries by the trustee, usually over a lengthy period, there usually being successive beneficiaries with fixed interests or a wide range of discretionary beneficiaries. It is the trustee who runs the show, distributing income or capital as the case may be to the beneficiaries and dealing with third parties in his stewardship of the trust property so as to sue them or be sued by them, as appropriate. Even if the trustee is at fault in distributing property to the wrong persons, he, like any successor trustee, is under a duty to recover trust property and remedy breaches of trusts, and so can recover property dealt with either without authorisation or mistakenly.73 Moreover, it will have been the trustee, not the beneficiary, who had entered into the contract or paid over the money or owned a stolen trust chattel,

72 As Edelman J stated in Ramsay Health Care Australia Pty Ltd v Compton [2017] HCA 28, 345 ALR 534 [102], ‘[i]n summary, the Court of Chancery had powers to restrain the practical operation of legal rules in almost any circumstances considered, as a matter of principle, to be unconscionable’. One can enlarge this to ‘to restrain or oust the practical operation of legal rules’. 73 Re Robinson [1911] 1 Ch 502 507–08; Pulvers v Chan [2007] EWHC 2406 (Ch), [2008] PNLR 9 [29], [387]; Montrose Investment Ltd v Orion Nominees Ltd [2004] EWCA Civ 1032, [2004] WTLR 1133 [24]–[25]; Young v Murphy [1996] 1 VR 279, 283–84; Morlea Professional Services Pty Ltd v Richard Walter Pty Ltd (in liq) [1999] FCA 1820, (1999) 96 FCR 217 [51]; Evans v European Bank Ltd [2004] NSWCA 82, (2004) 61 NSWLR 75 [116]; Cemcon Constructions Pty Ltd v Hall Concrete Constructions (Vic) Pty Ltd [2009] FCA 696 [20].

Third-Party Liability of Recipients of Trust Property  245 so that only the trustee can bring the action.74 Where there are some uncertainties as to whether the trustees have good grounds for bringing or defending a claim, eg for negligence, the trustees can apply to the court so that if the court approves this course, they will be able to recover their costs from the trust fund if they ­ultimately lose the case.75 There are, however, exceptional cases where a beneficiary may enforce the trustee’s right to sue at common law. Where one or more beneficiaries (B and C) are between themselves the exclusive beneficial owner of the trust property and are of full capacity they can exercise their Saunders v Vautier76 power, on giving an indemnity to the trustee, to require the trustee to let the beneficiary or beneficiaries assert the trustee’s legal rights in his name. Alternatively, if the trustee refuses to sue the relevant third party, B can sue in his own name or B and C in their names as exclusive equitable co-owners, joining the trustee since it is the trustee’s right that is being enforced and the trustee who is responsible for all beneficiaries receiving what is due to them, not just B and C if there are other beneficiaries.77 Where it is not such a simple trust, B, if permitted to sue by joining the trustee, is suing in the shoes of the trustee so the benefits of the action accrue for the benefit of all the successive or discretionary beneficiaries, not just B. This is a further reason for it being normal only for the trustee to have locus standi to sue. Dealing with common law actions against third parties, Lord Templeman has stated: [A] beneficiary has no cause of action against a third party save in special circumstances which embrace a failure, excusable or inexcusable, by the trustees in the performance of the duty owed by the trustees to the beneficiary to protect the trust estate or to protect the interests of the beneficiary in the trust estate.78

As Lord Walker has stated, ‘what has to be special about the circumstances – is that the derivative action is needed to avoid injustice’.79 A mere refusal to sue is not in itself an exceptional circumstance. In such a case the test for whether a party can 74 cf the cases where there has been an unauthorised or mistaken transfer of a company’s assets by a director to a third party and the company can make the third party strictly liable to the company: Criterion Properties plc v Stratford UK Properties LLC [2004] UKHL 28, [2004] 1 WLR 1846 [3]–[4]; Primlake Ltd (in liq) v Matthews Associates [2006] EWHC 1227 (Ch), [2007] 1 BCLC 666 [335]; Relfo Ltd v Varsani [2012] EWHC 2168 (Ch), affd [2014] EWCA Civ 360, [2015] 1 BCLC 14; Re Hampton Capital Ltd [2015] EWHC 1905 (Ch), [2016] 1 BCLC 374 [26]–[30], relying upon the seminal Lipkin Gorman v Karpnale Ltd [1991] 2 AC 548 (HL) on disposal of partnership money; Torbay Holdings Ltd v Napier [2015] NZHC 2477 [164]ff; Great Investments (n 51) [68]–[69]. 75 Known as ‘Beddoe applications’ after Re Beddoe [1893] 1 Ch 547 (CA). 76 Saunders v Vautier (1841) Cr & Ph 240, 41 ER 482. 77 On the bare trust position: see Gandy v Gandy (1885) 30 Ch D 57 (CA) 74; Re Robinson (n 73) 508; Re Field [1971] 1 WLR 555 (Ch) 561; Tucker, Le Poidevin and Brightwell, Lewin on Trusts (n 30) paras [43-003]–[43-004]; D Hayton, P Matthews and C Mitchell (eds), Underhill and Hayton: Law of Trusts and Trustees, 19th edn (London, LexisNexis, 2016) Article 68. On the need to join the trustee, see Roberts v Gill & Co [2010] UKSC 22, [2011] 1 AC 240 [56], [62], [69], [86], [95]. 78 Hayim v Citibank NA [1987] AC 730 (PC) 748, endorsed in Roberts (n 77) [53]; Tucker, Le Poidevin and Brightwell (n 30) paras [43-006]–[43-009]. 79 Roberts (n 77) [110].

246  David Hayton sue in his own name, joining the trustee as a defendant is: if an administration action had been brought with an inquiry as to whether any and what proceedings should be taken, the court would conclude that it was a proper case to take proceedings, even though it may be uncertain whether the proceedings will be successful.80

E.  What Follows from the above Analyses? In the case of an absolutely entitled beneficiary, B, and a gratuitous donee of wrongfully distributed trust property, D, B has a direct equitable proprietary right to recover the trust property or its traced product81 from D. This is a strict proprietary liability. If D no longer has such property or its traceable product, then only upon B proving that D had disposed of such in circumstances where D had the requisite state of knowledge to make this unconscionable does B have a direct equitable personal claim against D as if D had been a trustee acting in breach of trust. If the trustee, T, has a legal claim against D, eg an action for money had and received or for conversion, T can directly enforce T’s right for the benefit of B. If T, in breach of trust, does not sue D when B demands this to safeguard B’s interest, this is a clear case where it is proper for B to sue D, joining T as co-defendant so that all interested parties will be bound by the court record. Where there are many beneficiaries with successive or discretionary interests, almost invariably the ‘kingpin’ trustee-owner-manager of the trust assets will resolve matters assisted by the paternalistic jurisdiction of the court82, whether such trustee is the original trustee or a replacement or successor trustee. In an extremely exceptional case where some of such beneficiaries are permitted by the court to bring an action for money had and received, the defendant recipient will be strictly liable to pay money over to the trustee who, having the right to sue must have been joined as a co-defendant in the proceedings, or to a replacement trustee. When a beneficiary is so strongly protected as above, there should be no scope for also treating the beneficiary as having the same legal right as the trustee to sue in instances of unjust enrichment to make recipients of trust property personally 80 Yeatman v Yeatman (1877) 7 Ch D 210, 216; Re Field (n 77) 559. If the beneficiaries dispute whether an action would be in their best interests an administration action will need to be brought to determine the matter. 81 This is the conventional wisdom, based on Foskett v McKeown [2001] 1 AC 102 (HL), as indicated in the above-quoted passages from Independent Trustee Services: see (n 67) and (n 69), but quaere whether an equitable lien for the value of the originally received property would be a more apt remedy as suggested by Peter Jaffey in ch 4 herein. 82 eg to advise whether a proposed course of action is within the scope of a power or whether a proposed momentous exercise of a power is a proper exercise or whether, if pursuing or defending legal proceedings, the trustee will be able to recover its costs out of the trust fund if on the losing side. The court may also confer extra powers on trustees where expedient in the best interests of the trust beneficiaries, or vary beneficial interests under legislation allowing variation of trusts.

Third-Party Liability of Recipients of Trust Property  247 strictly liable. To raise the equitable beneficiary’s status to that of a legal title-holder is inconsistent with the fundamental role of a trustee as the ‘kingpin’ of the trust, having the exclusive rights of a legal title-holder which are exercised for the benefit of the beneficiaries. If the dynamics within a group of family beneficiaries justify the trustee in the best interests of the family as a whole not to sue a particular beneficiary in respect of a wrong or mistaken payment or a debt, surely a vindictive beneficiary cannot directly take proceedings to recover the money on behalf of the trust fund. Andrew Burrows has stated: It cannot be correct that if X takes money from C’s pocket and transfers it to D, D is strictly liable to make restitution to C, subject to defences, whereas if X as a trustee takes money from a trust fund held for C and transfers it to D, D is only liable to make restitution to C if it knew, or ought to have known, that the money was transferred in breach of trust.83

However, where X as trustee for C transfers money to D, D is strictly liable to make restitution not just to X in an action for money had and received, but also to C if C simply joins X as a defendant with D because in breach of trust X refuses to protect C’s interest by suing D. There is surely no need to provide a further strict personal liability of D to C to ensure C has the benefit of the money. Moreover, where X takes money from C’s pocket and gives it to D, C as legal beneficial owner has direct rights to recover it, but where X as legal owner on trust for C gives it to D one cannot regard C as if a legal owner with such direct rights without ignoring the very existence of the trust where the trustee has the exclusive rights as legal owner that he is required to exercise for his beneficiaries’ benefit. I do not find Lipkin Gorman v Karpnale Ltd84 as providing support for the strict personal liability of recipients to a beneficiary. The partners of the solicitors’ firm, Lipkin Gorman, started with legal title to the chose in action in its account with its bank and this could be traced into the cash that the dishonest Cass obtained from the bank, making him a trustee thereof for the firm,85 before he gave the money to the Playboy Club, an innocent donee receiving the money in breach of trust. The firm was thus able directly to exercise its common law right to recover the amount of the money so as to prevent the Club from enriching itself at the firm’s expense.86 The firm as Cass’s beneficiary could theoretically seek to exercise the right that Cass had at law to sue the Club so as derivatively to recover the wrongfully distributed money by joining Cass as co-defendant. But this would never be allowed by the court when the firm had its own direct right and had no need to sue by virtue of the derivative right of Cass. The case does not support the view that the firm in its capacity as a beneficiary had a direct right to sue the Club at law.

83 Burrows,

The Law of Restitution (n 13) 431. Gorman (n 74). 85 ibid 572 (Lord Goff). 86 ibid 574 (Lord Goff), 562–66 (Lord Templeman). 84 Lipkin

248  David Hayton One needs to remember that the development of the common law is based on inductive reasoning after examining case law and the justifications for decided cases. It is not based on deductive reasoning from a general principle such as that of preventing a person from being unjustly enriched at another’s expense. In this respect I support the well-articulated views of Lionel Smith.87 Like him, I find Ministry of Health v Simpson88 to be an unhelpful case, uniquely decided to deal with, and restricted to, special circumstances arising in the administration of a deceased’s estate when the law was in an unsatisfactory, undeveloped state. We now know that claimants can sue for mistakes of law as well as mistakes of fact, subject to a change of position defence,89 and that a deceased’s residuary legatees have only a right to due administration against the personal representatives who are the legal and beneficial owners of the deceased’s estate.90 It is their fundamental role to manage the collection of the deceased’s assets, the payment of debts and expenses, the distribution of the deceased’s net assets and the recovery of any wrongfully distributed assets as assets that they are under a duty to collect so as properly to fulfil their distributive duties. If in breach of their equitable administration duties the personal representatives do not sue to recover wrongfully distributed assets (whether because of a mistake of law or fact) the residuary legatees can (like beneficiaries suing a trustee for breach of trust) sue the personal representatives for failure to recover the value of the assets for the benefit of the estate.91 Alternatively, the residuary legatees can add the personal representatives as defendants92 so that they can exercise the personal representatives’ rights as legal beneficial owner against the wrongful distributees and recover the assets or their value to be held as part of the estate still requiring to be administered and distributed. Most interestingly, only three of the 48 next of kin were plaintiffs and their successful claim was that the recovered money be paid to a judicial trustee, their co-plaintiff, ‘to be dealt with by him in due course of administration of the estate’.93 He had earlier been appointed by the court in an order compromising the claims against the executors, one of whom had committed suicide. I thus do not regard the case as supporting the proposition that recipients of trust property in breach of trust are strictly liable to a direct claim from a trust beneficiary (subject to a change of position defence). 87 Smith, ‘Unjust Enrichment’ (n 13). 88 Ministry of Health v Simpson (Re Diplock) [1951] AC 251 (HL). It led to further distortion of principles in Western Australia’s Trustees Act 1962, s 65, Queensland’s Trustee Act 1956, s 35, and New Zealand’s Administration Act 1969, ss 149–151. 89 Woolwich Equitable Building Society v IRC [1993] AC 70 (HL). 90 Commissioner of Stamp Duties (Queensland) v Livingston [1965] AC 694 (PC). Quaere if the fact that the right to have the estate duly administered can be assigned or subjected to a trust might suffice to justify the in rem tracing process in Re Diplock [1948] Ch 465 (CA). 91 The Ministry of Health (n 88) requirement that the beneficiaries first exhaust their rights against the personal representatives before looking elsewhere seems unjustifiable. 92 See Roberts (n 77); Livingston (n 90) 714. 93 Ministry of Health (n 88) 277 (Lord Simonds).

Third-Party Liability of Recipients of Trust Property  249 I might also add that my views are unaffected by the argument that if an innocent volunteer receiving trust money before becoming cognisant of the trust used the money to discharge his mortgage then, by way of subrogation, the volunteer’s formerly mortgaged property automatically becomes subject to a mortgage in favour of the claimant, creating a strict proprietary liability. This proprietary liability is perfectly explicable when one considers the same proprietary liability arising if the volunteer had invested the trust money in purchasing a mortgage or a shareholding.

III. Conclusion To end, as appropriate for a serving judge, and particularly one with no judicial notice of Australian or New Zealand case law, I emphasise that my above opinions are not final views but provisional views in the absence of full forensic argument presented to me. They are proffered on the basis stated by Lord Neuberger that it is ‘highly desirable’ for all common law jurisdictions ‘to learn from each other, and at least to lean in favour of harmonising the development of the common law round the world’.94 The law continually has to adapt to meet commercial needs, incremental developments primarily being the province of the courts, leaving to the legislature major developments, though sometimes also incremental developments where construction of a statute cannot achieve them, as discussed above in the case of dispositions by a trustee of intangibles held on trust for a company in the throes of a compulsory winding-up.



94 FHR

European Ventures LLP v Mankarious [2014] UKSC 45, [2015] AC 250 [45].

250

12 Account of Profits for Accessory Liability: Still in the Thrall of Fiduciary Doctrine? PETER DEVONSHIRE

I. Introduction A fiduciary’s duty to a beneficiary stands at the apex of equitable obligations. A defaulting fiduciary is subject to both gain-based and compensatory relief.1 With respect to the former, an account of profits is a paradigmatic remedy for enforcing strict equitable obligations of trusteeship and analogous duties. In contrast, where a third party participates in a breach of fiduciary duty, it is more problematic to characterise the nature of the wrong. As a result, the remedial response to dishonest assistance is mired in controversy. It is relatively settled that both a fiduciary and an accessory are liable in damages or equitable compensation. The more vexing issue is whether, and to what extent, an accessory is accountable for gains resulting from assistance in the primary wrong.2 In this chapter, it will be argued that an account of profits is only appropriate in certain defined circumstances and that the default rule is that liability should be confined to a compensatory measure. The next section, ‘Secondary Liability’, introduces the foundational concepts of knowing receipt and dishonest assistance. This is followed by ‘The Remedial Focus’, which contrasts the status of a fiduciary and an accessory and considers the purpose of the remedies against each. This leads to the central enquiry, namely 1 The claimant is required to exercise an election between an account of profits and equitable compensation. See Personal Representatives of Tang Man Sit v Capacious Investments Ltd [1996] AC 514 (PC). 2 In this chapter, ‘primary wrong’ and ‘primary liability’ denote the wrong committed by the fiduciary in breach of his duty to the principal. The terms ‘secondary wrong’ and ‘secondary liability’ denote dishonest assistance in the primary wrong. In most cases secondary liability is parasitic on a primary wrong by a fiduciary (cf section IV D, ‘Procuring or Inducing a Breach of Trust’, below). The classification of dishonest assistance and its relationship to the primary wrong has attracted considerable academic debate. See SB Elliott and C Mitchell, ‘Remedies for Dishonest Assistance’ (2004) 67 MLR 16; P Ridge, ‘Justifying the Remedies for Dishonest Assistance’ (2008) 124 LQR 445.

252  Peter Devonshire liability to disgorge gains resulting from dishonest assistance. In ‘Gains Directly Attributable to Participation in a Breach of Fiduciary Duty’, attention turns to equity’s anomalous treatment of an accessory’s gains, having regard to the fact that an accessory is a stranger to the fiduciary relationship and the normative regime which underpins it. It is therefore necessary to weigh in the scales more o ­ rthodox legal principles and the traditional framework of liability. This is assessed in ‘Causation and Limiting Principles’, which addresses the nature of the causal enquiry with respect to accessory liability. In contrasting primary and secondary liability, it is argued that with respect to the latter, causation and remoteness should approximate to a common law standard. A related question, addressed in ‘Joint or Several Liability?’, is whether the fiduciary and accessory should be jointly or severally liable with respect to the disgorgement of illicit gains. It is argued that the latter should apply unless the accessory acted as a co-principal. This is developed further in ‘Procuring or Inducing a Breach of Trust’. Discussion then turns to ‘Gains Indirectly Attributable to Participation in a Breach of Fiduciary Duty’. Recent judgments have thrown into focus the status of gains made by a dishonest assistant as a result of entering into direct legal relations with the principal. If the principal has been compensated with respect to losses flowing from the breach of fiduciary duty, this raises the question whether there is any basis for imposing further liability for the disgorgement of gains from subsequent dealings with the principal. It is concluded that this is unwarranted unless the transaction is vitiated by the accessory’s prior misconduct and the principal moves to rescind the contract.

II.  Secondary Liability Discussion of secondary liability usually originates with Lord Selborne LC’s classic dictum in Barnes v Addy: That responsibility may no doubt be extended in equity to others who are not properly trustees, if they are found either making themselves trustees de son tort, or actually participating in any fraudulent conduct of the trustee to the injury of the cestui que trust. But, on the other hand, strangers are not to be made constructive trustees merely because they act as the agents of trustees in transactions within their legal powers … unless those agents receive and become chargeable with some part of the trust property, or unless they assist with knowledge in a dishonest and fraudulent design on the part of the trustees.3

This passage defines the two so-called limbs of Barnes v Addy, encompassing recipient and accessory liability. The first limb describes the liability of a third party who has knowingly received trust property. The second limb describes accessory liability, where a third party assists a trustee ‘with knowledge in a dishonest and

3 Barnes

v Addy (1874) LR 9 Ch App 244 (CA) 251–52.

Account of Profits for Accessory Liability  253 fraudulent design on the part of the trustees’.4 In this context, ‘assistance’ is predicated on a primary wrong committed by another. Australian law applies the two limbs of Barnes v Addy for recipient and accessory liability. For the purpose of accessory liability, knowledge falls within levels 1–4 of the Baden5 scale of knowledge.6 Liability for procuring or inducing a breach of fiduciary duty is recognised as a distinct head of third-party liability which operates independently from the second limb of Barnes v Addy.7 The act of procuring or inducing a breach of duty is directed to the unilateral conduct of a third party8 and is not dependent on the fiduciary’s dishonesty.9 This is borne out in the following example: Take a case where a dishonest solicitor persuades a trustee to apply trust property in a way the trustee honestly believes is permissible but which the solicitor knows full well is a clear breach of trust. The solicitor deliberately conceals this from the trustee. In consequence, the beneficiaries suffer a substantial loss. It cannot be right that in such a case the accessory liability principle would be inapplicable because of the innocence of the trustee.10

In contrast, the modern English view assimilates the categories of dishonest assistance and procuring or inducing a breach, which are expressed as a general principle of accessory liability.11 In the leading modern authority, Royal Brunei Airlines Sdn Bhd v Tan, Lord Nicholls of Birkenhead stated: A liability in equity to make good resulting loss attaches to a person who dishonestly procures or assists in a breach of trust or fiduciary obligation. It is not necessary that, in addition, the trustee or fiduciary was acting dishonestly, although this will usually be so where the third party who is assisting him is acting dishonestly.12

The three forms of participation in a breach of fiduciary duty are distinct. This must be borne in mind in addressing the remedial responses to each. 4 ibid 252. 5 Baden v Société Générale pour Favoriser le Développement du Commerce et de l’Industrie en France SA [1993] 1 WLR 509 (Ch). cf Royal Brunei Airlines Sdn Bhd v Tan [1995] 2 AC 378 (PC) 392. 6 Farah Constructions Pty Ltd v Say-Dee Pty Ltd [2007] HCA 22, (2007) 230 CLR 89 [174]–[178]. For discussion of the divergent English and Australian approaches post-Farah Constructions, see P Ridge and J Dietrich, ‘Equitable Third Party Liability’ (2008) 124 LQR 26. 7 Farah Constructions (ibid) [161], [163]; Hasler v Singtel Optus Pty Ltd [2014] NSWCA 266, (2014) 87 NSWLR 609 [76]–[78]. 8 The third party may be more appropriately treated as the sole wrongdoer if she induces the trustee to innocently commit a breach of fiduciary duty. 9 Royal Brunei Airlines (n 5) 392; Williams v Central Bank of Nigeria [2014] UKSC 10, [2014] AC 1189 [35]. 10 Royal Brunei Airlines (n 5) 384 (Lord Nicholls), delivering the advice of the Board. 11 Arguably, the term ‘accessory liability’ is a misnomer where the third party procures an innocent fiduciary to commit a breach of trust: see Farah Constructions (n 6) [161], [163]. 12 Royal Brunei Airlines (n 5) 392 (Lord Nicholls). As a result of these different formulations, the standards for liability differ between jurisdictions. In England, a threshold of dishonesty by a third party is a requirement for both accessory liability and procuring a breach of trust. In Australia, the threshold of a dishonest and fraudulent design on the part of the trustee is not required for inducing or procuring a breach of trust because this is distinct from the second limb of Barnes v Addy: see Farah Constructions (n 6) [161]; Hasler (n 7) [76]–[78].

254  Peter Devonshire

III.  The Remedial Focus Barnes v Addy addresses distinct proprietary and personal wrongs. With respect to the first limb, equity’s response to a party who intermeddles with trust property is predictably rigorous.13 Whilst the act of knowingly receiving trust property does not, in a formal sense, render the recipient a trustee,14 he or she is treated in a similar manner15 and subject to ‘trustee-like’ obligations16 associated with a breach of trust,17 including disgorgement and compensation.18 Placing the remedies in context, it has been observed: The essence of a liability to account on the footing of knowing receipt is that the defendant has accepted trust assets knowing that they were transferred to him in breach of trust and that he had no right to receive them. His possession is therefore at all times wrongful and adverse to the rights of both the true trustees and the beneficiaries. No trust has been reposed in him. … His sole obligation of any practical significance is to restore the assets immediately. It is true that he may be accountable for any profit that would have been made or any loss that would have been avoided if the assets had remained in the hands of the true trustees and been dealt with according to the trust.19

Different considerations attend personal liability under the second limb of Barnes v Addy.20 Unlike knowing receipt, there is no direct proprietary nexus with the subject matter of the wrong: [A]ccessory liability is concerned with the liability of a person who has not received any property. His liability is not property-based. His only sin is that he interfered with the due performance by the trustee of the fiduciary obligations undertaken by the trustee. These are personal obligations.21

Nevertheless, loss-based claims are exacting. If a principal sustains a loss from a breach of fiduciary duty, the trustee and an accessory to the breach are jointly and 13 See, eg Rolfe v Gregory (1864–1865) 4 De G J & S 576, 578; 46 ER 1042, 1043, where Lord Westbury LC explained: ‘wrongful receipt and conversion of trust property place the receiver in the same situation as the trustee from whom he received it, and by the principles of this Court he becomes subject in a Court of Equity to the same rights and remedies as may be enforced by the parties beneficially entitled against the fraudulent trustee himself ’. 14 Williams v Central Bank of Nigeria (n 9) [31], [57], [64]. 15 Selangor United Rubber Estates Ltd v Cradock (No 3) [1968] 1 WLR 1555 (Ch) 1579; Paragon Finance plc v DB Thakerar & Co [1999] 1 All ER 400 (CA) 409. 16 C Mitchell, P Mitchell and S Watterson (eds), Goff & Jones: The Law of Unjust Enrichment, 8th edn (London, Sweet & Maxwell, 2011) paras [8-123]–[8-130]; C Mitchell and S Watterson, ‘Remedies for Knowing Receipt’ in C Mitchell (ed), Constructive and Resulting Trusts (Oxford, Hart Publishing, 2010) 115. 17 Paragon Finance (n 15) 409; Selangor United Rubber Estates (n 15) 1582. 18 Consul Development Pty Ltd v DPC Estates Pty Ltd (1975) 132 CLR 373; Paragon Finance (n 15). 19 Williams v Central Bank of Nigeria (n 9) [31] (Lord Sumption JSC). 20 See further C Mitchell, ‘Dishonest Assistance, Knowing Receipt, and the Law of Limitation’ (2008) 3 Conveyancer and Property Lawyer 226. 21 Royal Brunei Airlines (n 5) 387 (Lord Nicholls). His Lordship elaborated that ‘Recipient liability is restitution-based; accessory liability is not’ (386). See also Twinsectra Ltd v Yardley [2002] UKHL 12, [2002] 2 AC 164 [104]–[107] (Lord Millett).

Account of Profits for Accessory Liability  255 severally liable for equitable compensation.22 It is not necessary to prove a direct causal link between the accessory’s actions and the principal’s loss.23 It is sufficient if the principal can establish that the third party assisted a breach of fiduciary duty.24 If this threshold is met, loss is recoverable from the accessory notwithstanding that only the fiduciary’s actions were the effective cause of the loss.25 The additional sanction of an account of profits should be narrowly circumscribed. An account of profits is a remedial response to the breach of a distinct equitable duty26 and reflects the imperatives which underlie that duty. The fiduciary’s exposure to disgorgement is the counterpart of the beneficiary’s vulnerability. The stringent policy which strips a fiduciary of unauthorised gains is strictly statusdriven and is animated by the unique constraints of trusteeship. The o ­ bligation does not extend beyond the immediate fiduciary relationship and is generally inapplicable to strangers to that relationship.27 The analogy between a fiduciary and a dishonest assistant is therefore unsound. This is evident when fiduciary doctrine is propounded as a rationale for gain-based relief for accessory liability. A fiduciary is accountable for gains attributable to the misuse of trust property or a breach of duty, such as the profit rule or the conflict rule. This is sometimes explained in terms of a fiduciary being disabled from acquiring or asserting rights inconsistent with his duty to the principal.28 On this model, equity disregards actual wrongdoing and effectively imposes an irrebuttable presumption of probity in respect of the fiduciary’s conduct.29 A strict duty in this form is misplaced outside the fiduciary paradigm. An accessory is not the custodian of another’s property and has not entered into a relationship which engenders proscriptive fiduciary duties. It follows that the 22 Ultraframe (UK) Ltd v Fielding [2005] EWHC 1638 (Ch), [2006] FSR 16 [1600]. See also Re Bell’s Indenture [1980] 1 WLR 1217 (Ch). 23 The recovery of loss is expansive. For example, if an agent has been bribed, the principal has direct recourse against the briber for a sum representing the bribe: Mahesan s/o Thambiah v Malaysia Government Officers’ Co-Operative Housing Society Ltd [1979] AC 374 (PC). 24 Casio Computer Co Ltd v Sayo [2001] EWCA Civ 661, [2001] IL Pr 43 [15] and [52]; Otkritie International Investment Management Ltd v Urumov [2014] EWHC 191 (Comm), [2014] All ER (D) 111 (Feb) [79]. 25 Grupo Torras SA v Al-Sabah [2001] CLC 221 (CA) [119]. 26 An account of profits can be applied in different settings, but for present purposes, discussion of the remedy is confined to trust obligations and fiduciary relationships. 27 Ridge, ‘Justifying the Remedies for Dishonest Assistance’ (n 2). 28 A refinement of this view is that equity does not permit a fiduciary to rely on his own wrongdoing to justify the retention of a benefit. See FHR European Ventures LLP v Cedar Capital Partners LLC [2014] UKSC 45, [2015] AC 250 [30]. 29 This finds modern expression in the ‘good person’ fiction. In the eyes of equity, the impugned conduct is not a wrong in that equity refuses to countenance it as a wrongful act or allow the errant fiduciary to cite his own misconduct. To that extent, equity is not reversing a wrong but refusing to accept its status as a wrong. Perhaps the most celebrated judicial statement of this view is found in Attorney General for Hong Kong v Reid [1994] 1 AC 324 (PC) 337, citing Sir Peter Millett, ‘Bribes and Secret Commissions’ (1993) 1 Restitution Law Review 7, 20. See D Hayton, ‘No Proprietary Liability for Bribes and Other Secret Profits?’ (2011) 25 Trust Law International 3; Lord Millett, ‘Bribes and Secret Commissions Again’ [2012] CLJ 583. See further PD Finn (ed), Essays on Restitution (Sydney, Law Book Co, 1990) 221.

256  Peter Devonshire prophylactic principle which prevents a trustee from asserting a personal interest in unauthorised gains cannot apply in the same way to an accessory. The deterrent principle is similarly misconceived in this setting, notwithstanding judicial30 and academic31 views to the contrary. The deterrent principle reinforces the unique expectations of fidelity which inform fiduciary duties. Beyond the relationship which creates that duty, the objective of deterrence is spent. The counter-argument is that those who assist a breach of fiduciary duty should be discouraged from exploiting the greater opportunities for advantage-taking arising from the fiduciary relationship. However, this is a tenuous foundation for a general principle of gain-based relief and undermined by the fact that the nature of a third party’s involvement in a fiduciary relationship will be context-specific. It is the trustee and not the third party who has undertaken to act in the interests of another and the deterrent principle is most obviously aligned with the party who has assumed that obligation. In adopting a liberal approach to third-party liability under the guise of deterrence, it can be objected that courts have unduly allowed fiduciary doctrine to dominate their thinking.32 The observations of the High Court of Australia in Zhu v Treasurer of NSW exemplify this approach: Intervention against persons who knowingly assist other fiduciaries to breach their duty is based on the need to deter conduct that directly undermines the ‘high standard’ required of fiduciaries, and on the inequitable character of permitting those persons to retain benefits resulting from their conduct.33

It must be questioned whether, and to what extent, the dictates of fiduciary duty apply to accessories and whether disgorgement has a legitimate role in this domain. In Australia it has been held that an account of profits can be granted against a knowing assistant.34 English law has adopted a more cautious approach, although there is growing support for this view.35 It is submitted that a third party’s liability to disgorge illicit gains should be confined to limited forms of participation in the primary wrong. With this qualification in mind, this chapter will now consider the circumstances in which an account of profits is an appropriate response to a third party’s involvement in a breach of fiduciary duty.

30 Royal Brunei Airlines (n 5) 386–87; Consul Development (n 18) 397. 31 Ridge, ‘Justifying the Remedies for Dishonest Assistance’ (n 2) 446, 452; J Dietrich and P Ridge, Accessories in Private Law (Cambridge, Cambridge University Press, 2015) 17. 32 See further PL Loughlan, ‘Liability for Assistance in a Breach of Fiduciary Duty’ (1989) 9 OJLS 260, 264. 33 Zhu v Treasurer of the State of New South Wales [2004] HCA 56, (2004) 218 CLR 530 [121] (per curiam). 34 Michael Wilson & Partners Ltd v Nicholls [2011] HCA 48, (2011) 244 CLR 427 [106]. See further Consul Development (n 18) 397; Grimaldi v Chameleon Mining NL (No 2) [2012] FCAFC 6, (2012) 200 FCR 296 [557]. 35 Novoship (UK) Ltd v Mikhaylyuk [2014] EWCA Civ 908, [2015] QB 499.

Account of Profits for Accessory Liability  257

IV.  Gains Directly Attributable to Participation in a Breach of Fiduciary Duty A. Overview The first and perhaps most obvious consideration is the status of profits directly attributable to participation in a breach of fiduciary duty. Despite the instinctive appeal of gain stripping relief, caution is needed with respect to accessory liability. It has been noted, first, that an account of profits is a vehicle for maintaining the fidelity of fiduciary relationships, and second, that this normative model has no obvious parallel to strangers to the trust relationship. A case must therefore be made for departing from the traditional measure of relief, namely compensation for loss.36 As the fiduciary principle enforces a duty of loyalty,37 the only wrong required for this purpose is failure to act with undivided loyalty.38 Liability arises regardless of the moral complexion of the fiduciary’s conduct and irrespective of whether harm is sustained by the beneficiary. A fiduciary must not make a profit from his office and it is no defence that the profit could have been properly made by the fiduciary or that if the principal had been duly informed, he would have consented to the arrangement on the same or amended terms.39 It is irrelevant if the beneficiary has renounced, or is unable to pursue the profit-making a­ ctivity.40 This regime is based on the fiduciary’s obligations in a particular and defined relationship.41 The sanction of an account of profits is status-driven. In contrast, secondary liability does not arise from a relationship with the principal or the assumption of a duty. Accessory liability must be placed in context and modified to reflect the third party’s status as a stranger to the fiduciary relationship. It is therefore necessary to revisit the founding concepts of causation and remoteness to define the boundaries of liability. This will be followed by a related question, namely the nature of fiduciary–accessory liability inter se and whether such ­liability

36 If an account of profits is invoked for assisting a breach of fiduciary duty, the nature of an accessory’s liability will depend on the status of the assisted party. If the latter is a trustee, the accessory will potentially be exposed to a full range of equitable remedies, including a duty to account for gains. On the other hand, if the assisted party is not a fiduciary, this form of relief is unavailable. 37 Bristol and West Building Society v Mothew [1998] Ch 1 (CA) 18. 38 Murad v Al-Saraj [2005] EWCA Civ 959, [2005] WTLR 1573 [57]; Novoship (n 35) [95]. 39 Murad v Al-Saraj (n 38). 40 Boardman v Phipps [1967] 2 AC 46 (HL); Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134 (HL). The absolute nature of this rule has been modified to the extent that the court must be satisfied that there is ‘a real sensible possibility of conflict’: Boardman v Phipps, 124 (Lord Upjohn, dissenting). See further Queensland Mines Ltd v Hudson (1978) 18 ALR 1 (PC) 5; Hospital Products Ltd v United States Surgical Corp (1984) 156 CLR 41, 103. 41 The disgorgement of unauthorised gains is often strictly applied. Classic authorities include Keech v Sandford (1726) Sel Cas T King 61, 25 ER 223 (C); Bray v Ford [1896] AC 44 (HL); Boardman v Phipps (n 40).

258  Peter Devonshire should be joint or several. Finally, discussion turns to the wrong of procuring or inducing a breach of trust, which operates independently from the second limb of Barnes v Addy.

B.  Causation and Limiting Principles The scope of an account of profits must be placed in context. In the case of a fiduciary, the role of causation and limiting principles such as foreseeability, remoteness and intervening cause is curtailed in relation to both compensatory42 and gainbased relief. With respect to the latter, it has been held that these factors are largely irrelevant in determining liability to surrender unauthorised gains.43 On one view, a fiduciary’s liability to account for unauthorised gains is not dependent on any notion of causation44 and it is sufficient if the profit falls within the scope of a fiduciary’s duty of loyalty. As Morritt LJ expressed this: If there is a fiduciary duty of loyalty and if the conduct complained of falls within the scope of that fiduciary duty … then I see no justification for any further requirement that the profit shall have been obtained by the fiduciary ‘by virtue of his position’. Such a condition suggests an element of causation which neither principle nor the authorities require.45

Lionel Smith argues that the profit rule does not have any prophylactic or deterrent function but is merely a primary rule of attribution.46 An unauthorised profit is not imputed to the beneficiary on the basis of the fiduciary’s wrongdoing but to vindicate the beneficiary’s primary right to such receipts.47 Consequently, the fiduciary’s loyalty is strict and all gains must be disgorged.48 It is unnecessary to 42 See, eg Target Holdings Ltd v Redferns [1996] AC 421 (HL); AIB Group (UK) plc v Mark Redler & Co [2014] UKSC 58, [2015] AC 1503. 43 Bray v Ford (n 41) 51–52; Industrial Development Consultants Ltd v Cooley [1972] 1 WLR 443 (HC) 453; Gwembe Valley Development Co Ltd v Koshy [2003] EWCA Civ 1048, [2004] 1 BCLC 131 [145]; Premium Real Estate Ltd v Stevens [2009] NZSC 15, [2009] 2 NZLR 384 [32]. 44 See text to n 58 below, where it is argued that some element of causation must be present to establish a duty to account. 45 United Pan-Europe Communications NV v Deutsche Bank AG [2000] EWCA Civ 166, [2000] 2 BCLC 461 (CA) 484. See also Murad v Al-Saraj (n 38) [57]; Akita Holdings Ltd v Attorney General of the Turks and Caicos Islands [2017] UKPC 7, [2017] AC 590 [17]. 46 L Smith, ‘Deterrence, Prophylaxis and Punishment in Fiduciary Obligations’ (2013) 7 Journal of Equity 87; L Smith, ‘Fiduciary Relationships: Ensuring the Loyal Exercise of Judgement on Behalf of Another’ (2014) 130 LQR 608. Smith distinguishes between the no-conflict rule and the no-profit rule. The former applies the deterrent principle and fulfils a prophylactic function by ensuring that the fiduciary acts in a disinterested manner. Causation and remoteness are necessarily engaged. In contrast, the profit rule is exempt from these considerations. 47 Smith, ‘Deterrence, Prophylaxis and Punishment in Fiduciary Obligations’ (n 46) 100; Smith, ‘Fiduciary Relationships: Ensuring the Loyal Exercise of Judgement on Behalf of Another’ (n 46) 628–29. 48 Similarly, Charles Mitchell argues that on one view, liability is not wrong-based, but derives from the rule that a fiduciary is disabled from retaining unauthorised gains. The corollary is that the relationship of trustee and beneficiary is governed by proscriptive rules preventing certain conduct, rather

Account of Profits for Accessory Liability  259 determine whether there is a sufficient causal link between the breach and the gain,49 and considerations of remoteness are similarly irrelevant.50 On the other hand, it is axiomatic that causation is a cornerstone of civil liability and that some element of causation must usually be found. An account of profits is a response to a genus of wrongs concerning failure to observe the duties of ­trusteeship.51 From this perspective the profits for which an account is ordered must bear some relationship to a breach of duty.52 It has rightly been acknowledged that: The question of causation has a bearing on the fashioning of the account. Even in the case of a fiduciary the cases stress the importance of identifying as precisely as possible the extent of the benefit or profit attributable to the breach of duty.53

Thus, the requirement for causation, at least in vestigial form, must be present. This is begrudgingly acknowledged even when fiduciary duty is propounded in the strictest terms.54 A test of causation can also be seen inferentially through the burden of proof. If a delinquent fiduciary asserts that certain gains belong to him, and not the beneficiary, the onus lies on the fiduciary to identify profits that are not causally connected to the trust.55 In shifting the onus of proof, the liability of the fiduciary becomes the default rule.56 As the High Court of Australia observed in the leading case of Warman International Ltd v Dwyer: It is for the defendant to establish that it is inequitable to order an account of the entire profits. If the defendant does not establish that that would be so, then the than rules requiring the trustee to perform positive duties: C Mitchell, ‘Causation, Remoteness and Fiduciary Gains’ (2006) 17 King’s College Law Journal 325, 329. 49 Account of administration in common form engages a similar duty with respect to unauthorised disbursements. Trustees are accounting parties who can be required to render an account of receipts and disbursements in respect of the administration of the trust. The accounting exercise is not a remedy but a vehicle for enforcing performance of an obligation. Causation and limiting principles are irrelevant because the principal is not alleging loss. This is merely a procedural step to establish the state of accounts. If an account of administration discloses an unauthorised disbursement, the principal can falsify or surcharge it. In the case of falsification, the disbursement is disallowed and the trustee is required to make good the deficit. See Libertarian Investments Ltd v Hall [2013] HKCFA 93, (2013) 16 HKCFAR 681 [168]; Agricultural Land Management Ltd v Jackson (No 2) [2014] WASC 102, (2014) 48 WAR 1 [339], [347]. 50 For an opposing perspective, see R Lee, ‘Disgorgement of Unauthorised Fiduciary Gains: An Exercise in Causation?’ (2017) 11 Journal of Equity 29. 51 The remedy has wider application, eg breach of confidence. However, its pre-eminent role is in relation to trusts and fiduciary duty. 52 Ultraframe (n 22) [1588]. 53 Novoship (n 35) [109] (Longmore LJ). 54 For example, in Gibbs J’s oft-cited dictum, a dishonest assistant is ‘liable to account to the person to whom the duty was owed for any benefit he has received as a result of such participation’: Consul Development (n 18) 397 (emphasis added). This qualification suggests a causal enquiry to determine the proximity of the gain and the dishonest assistance. See further Novoship (n 35) [95]. 55 Frith v Cartland (1865) 2 H & M 417, 420; 71 ER 525, 526; Hospital Products (n 40) 109–10; Foskett v McKeown [2001] 1 AC 102 (HL) 133; Sze Tu v Lowe [2014] NSWCA 462, (2014) 89 NSWLR 317 [457]. 56 Murad v Al-Saraj (n 38) [77] (Arden LJ).

260  Peter Devonshire ­ efendant must bear the consequences of mingling the profits attributable to the d defendant’s breach of fiduciary duty and the profits attributable to those earned by the defendant’s efforts and investment, in the same way that a trustee of a mixed fund bears the onus of distinguishing what is his own.57

On balance, a fiduciary’s liability to account is not exempt from causal enquiry.58 However, the test for causation is expressed in broad terms to capture profits falling within the scope of a duty of loyalty,59 or gains derived from a fiduciary’s office or position60 or an opportunity or knowledge arising from that position.61 Attempts to constrain this standard or equate the causal enquiry with equitable compensation have been resisted.62 Again, a fiduciary is accountable for gains if there is an apparent conflict between interest and duty. If the actual consequences of such a conflict are not evident, the court will decline to investigate or enter into speculation.63 In sum, a fiduciary’s liability to account is subject to the requirements of causation, but for well-rehearsed policy reasons a low causal threshold is set and the test is readily satisfied. A less onerous regime should apply to accessories. Whilst some commentators maintain that the deterrent principle should extend to those who interfere with the proper discharge of a trustee’s duties,64 it is unrealistic to elide strict expectations of fiduciary duty and the obligations of a stranger to the trust relationship. Dishonest assistance usually connotes active rather than passive conduct.65 It is necessary to examine the nature and effect of the accessory’s conduct, not least because the accessory may have provided legitimate services to the fiduciary or only assisted the breach in a peripheral way. The evidential foundation of the wrong suggests that a more demanding test for causation should be applied for an account of profits. Australia has adopted levels 1 to 4 of the Baden scale of

57 Warman International Ltd v Dwyer (1995) 182 CLR 544, 561–62 (per curiam) (footnotes omitted). While this passage indicates that profits may be apportioned if it would otherwise be ‘inequitable’, it is clear that the trustee must first distinguish gains that are, or might be, attributable to his personal activities. 58 On an alternative analysis, the determination of profits is purely an exercise of attribution. See text to n 46 above. 59 Novoship (n 35) [96]. See also United Pan-Europe Communications NV (n 45) [47]. 60 Attorney General v Blake [2001] 1 AC 268 (HL) 280. 61 Maguire v Makaronis (1997) 188 CLR 449, 468; Howard v Commissioner of Taxation [2014] HCA 21, (2014) 253 CLR 83 [62]. 62 Tang Ying Ip v Tang Ying Loi [2017] HKCFA 3, [2017] 2 HKC 502. More generally, enquiry as to whether an illicit gain would have been obtained but for the breach has been rejected. See Brickenden v London Loan & Savings Co [1934] 3 DLR 465 (PC); Industrial Development Consultants Ltd v Cooley (n  43); Gwembe Valley Development Co Ltd v Koshy (n 43); Beach Petroleum NL v Kennedy [1999] NSWCA 408, (1999) 48 NSWLR 1. 63 As the High Court of Australia remarked, ‘Both justice and policy are against their investigation’: Furs Ltd v Tomkies (1936) 54 CLR 583, 592 (Rich, Dixon and Evatt JJ). 64 See, eg Ridge, ‘Justifying the Remedies for Dishonest Assistance’ (n 2) 452. 65 Dietrich and Ridge, Accessories in Private Law (n 31) 242. It is moot whether acquiescence suffices for participatory liability.

Account of Profits for Accessory Liability  261 knowledge66 for liability under the second limb in Barnes v Addy.67 In England the touchstone for liability is dishonesty.68 It would be anomalous to interrogate the respective degrees of knowledge and honesty without close reference to their factual matrix. It is submitted that the key questions are: (i) whether an accessory’s intention was substantively reflected in an improper course of conduct, (ii) whether that conduct contributed to the fiduciary’s unlawful design, and (iii) whether the accessory’s wrong and the gain are sufficiently connected. The burden of proof should lie on the principal, applying ordinary principles of causation. An accessory should only disgorge profits directly attributable to participation in a breach of fiduciary duty, with the obvious proviso that gains that are remote from the primary wrong should be excluded. Causation and remoteness should approximate to a common law standard when determining accessory liability. As will be discussed below, where an accessory enters into direct relations with the principal, liability to account is vigorously examined by limiting principles.69 Thus, in Fyffes Group Ltd v Templeman70 and Novoship (UK) Ltd v Mikhaylyuk,71 a dishonest assistant was allowed to retain profits arising from transactions with the principal where: (i) it was likely that the principal would have entered into the agreement with that party if it had not been dishonest; and (ii) applying common law principles, the profit was not causally connected with the accessory’s participation in the original breach of fiduciary duty.72 If causation and remoteness modify the liability of an accessory who enters into contractual or other arrangements with the principal, it would be anomalous to apply a stricter standard to an accessory who is not in a direct legal relationship with the principal. A related question in defining the boundary of gain stripping relief is whether fiduciary and accessory liability should be joint or several. This will be addressed in the next section.

C.  Joint or Several Liability? Where a fiduciary and accessory have collaborated in a breach of fiduciary duty, the authorities suggest that the parties are jointly and severally liable for losses caused by their wrong.73 However, the status of an account of profits is less clear. 66 See further P Ridge, ‘Equitable Accessorial Liability: Moving Beyond Barnes v Addy’ (2014) 8 Journal of Equity 28. 67 Farah Constructions (n 6) [174]–[78]. 68 Royal Brunei Airlines (n 5) 387. 69 Novoship (n 35). The Court of Appeal considered that these principles should be applied as for a common law wrong, [107]. 70 Fyffes Group Ltd v Templeman [2000] Lloyd’s Rep 643 (Comm Ct). 71 Novoship (n 35). 72 See further section V, ‘Gains Indirectly Attributable to Participation in a Breach of Fiduciary Duty’, below. 73 Ultraframe (n 22) [1600].

262  Peter Devonshire The elements of the respective wrongs must be disengaged. Equitable accessory liability is derivative in the sense that it is contingent on the commission, by another (the fiduciary), of a primary wrong. However, the accessory’s liability for profits is not duplicative. There is limited judicial support for imposing joint liability with respect to a fiduciary’s unauthorised profits.74 As a general rule, neither party should be accountable for the gains of the other.75 Although joint liability has gained some traction in Canada,76 it has not been followed elsewhere. The preponderant view in England and Australia is that each party is only accountable for their personal gains.77 This is a logical corollary of the distinct bases of liability for primary and secondary wrongs. A fiduciary’s receipt of an unauthorised profit is the primary wrong, whereas a third party’s liability to account is a remedy for committing the wrong of dishonest assistance.78 This is reinforced by the factual and normative distinctions between these wrongs: [R]elief that is awarded against a defaulting fiduciary and a knowing assistant will not necessarily coincide in either nature or quantum. So, for example, the claimant may seek compensation from the defaulting fiduciary (who made no profit from the default) and an account of profits from the knowing assistant (who profited from his or her own misconduct). And if an account of profits were to be sought against both the defaulting fiduciary and a knowing assistant, the two accounts would very likely differ.79

There is a further, rather basic reason, why joint liability is inappropriate. Despite authoritative statements that a fiduciary is strictly accountable for unauthorised gains,80 there are limits to this principle. Equity is not a court of penal ­jurisdiction81 and an errant fiduciary must only account for what he actually received from a breach of duty.82 As typically expressed, ‘the general rule of equity is that if a person obtains a profit from his fiduciary position he is accountable for

74 See further P Davies, Accessory Liability (Oxford, Hart Publishing, 2015) 264–67. 75 See further Dietrich and Ridge, Accessories in Private Law (n 31) 22–25. 76 This principally derives from a line of cases originating from Canada Safeway Ltd v Thompson [1951] 3 DLR 295 (BCSC). The decision has been adopted in a number of Canadian appellate decisions. See D’Amore v MacDonald (1975) 1 OR (2d) 370 (ONCA); Abbey Glen Property Corp v Stumborg (1978) 9 AR 234 (Alta SC); Glenko Enterprises Ltd v Keller 2000 MBCA 7, [2001] 1 WWR 229. 77 Grimaldi (n 34) [557]; Ultraframe (n 22) [1595]; Aerostar Maintenance International Ltd v Wilson [2010] EWHC 2032 (Ch) [201]–[06]. 78 J Glister, ‘Account of Profits and Third Parties’ in S Degeling and JNE Varuhas (eds), Equitable Compensation and Disgorgement of Profit (Oxford, Hart Publishing, 2017) 189. 79 Michael Wilson & Partners Ltd v Nicholls (n 34) [106] (Gummow A-CJ and Hayne, Crennan and Bell JJ). See also Consul Development (n 18) 397–98; Grimaldi (n 34) [557]; Warman International (n 57) 569. 80 Boardman v Phipps (n 40); Regal (Hastings) Ltd v Gulliver (n 40). 81 Vyse v Foster (1872) LR 8 Ch App 309 (CA) 333. It is arguable that some manifestations of the deterrent principle have punitive consequences. See further P Devonshire, ‘Account of Profits for Breach of Fiduciary Duty’ (2010) 32 Sydney Law Review 389. 82 As Mason J observed in Hospital Products (n 40) 110, ‘[i]n each case the form of inquiry to be directed is that which will reflect as accurately as possible the true measure of the profit or benefit obtained by the fiduciary in breach of his duty’. See similarly Warman International (n 57) 565; Dart Industries Inc v Decor Corp Pty Ltd (1993) 179 CLR 101, 111.

Account of Profits for Accessory Liability  263 that profit’.83 To impose additional burdens beyond the benefit a defaulting fiduciary has received is oppressive and inconsistent with the general objectives of equity.84 If this is the standard with respect to a fiduciary, comparative fairness suggests that a third party’s liability should be similarly limited to personal gains. There is no obvious justification for subjecting an accessory to a greater burden than the primary wrongdoer. It is only appropriate to depart from this principle if the parties shared a common design in which the accessory acts as a co-principal. Mere assistance in another’s wrong should not suffice. While this proposition can be simply expressed, the status of the third party’s conduct will often rest on inferences drawn from certain relationships. For example, a close family member85 or a company controlled by the fiduciary86 may be deemed co-principals where they are instrumental in the breach of duty87 and jointly interested in the proceeds.88 Andrews Advertising Pty Ltd v Andrews89 is illustrative. In this case a personal defendant (A) was a director of the plaintiff company. In breach of contractual and fiduciary duties, he diverted customers to a company (AMC) controlled by his wife (B). Subsequently AMC provided services to the customers. The income derived from these activities benefited A and B, who shared the profits equally. With respect to the parties’ status, A was a fiduciary and B was an accessory to his breach of duty. Darke J found that B had the requisite degree of knowledge of a serious breach of A’s duty of loyalty to the plaintiff. It followed that B was liable under the second limb of Barnes v Addy for assisting with knowledge of a dishonest and fraudulent design on the part of a defaulting fiduciary. As B was an accessory, liability was contingent on establishing a breach of fiduciary duty by another.90 Although relief against each party will not necessarily coincide, his Honour concluded that joint liability should be imposed: Whilst I consider that it is necessary to keep in mind the separate positions of the defaulting fiduciary and the knowing assistant, I have concluded that in this case it is appropriate to regard Mr and Mrs Andrews as having equally shared the benefit of the profit which AMC derived from the work … I accept … that Mr and Mrs Andrews should be placed on the same footing vis-à-vis the profit made by AMC. That is, that such profit was a benefit to both of them personally. Whilst AMC was the vehicle chosen to perform the work, it was agreed between Mr and Mrs Andrews (either expressly or tacitly) that the financial benefit which accrued would be directed towards the purposes 83 O’Sullivan v Management Agency and Music Ltd [1985] QB 428 (CA) 464–65 (Fox LJ). 84 Harris v Digital Pulse Pty Ltd [2003] NSWCA 10, (2003) 56 NSWLR 298 [53]. 85 Dyson Technology Ltd v Curtis [2010] EWHC 3289 (Ch); Warman International (n 57); Timber Engineering Co Pty Ltd v Anderson [1980] 2 NSWLR 488 (NSWSC). 86 Cook v Deeks [1916] 1 AC 554 (PC). 87 The two may in fact be interconnected, where family members hold an interest in a company that has been formed as a vehicle for the fiduciary’s wrongdoing. 88 There is a heightened need for deterrence in this setting. See Ridge, ‘Justifying the Remedies for Dishonest Assistance’ (n 2) 452. 89 Andrews Advertising Pty Ltd v Andrews [2014] NSWSC 318, 99 ACSR 164. 90 ibid [132].

264  Peter Devonshire of their family, and thus to their mutual benefit. In my view, this is not a case where it would be appropriate to regard the defaulting fiduciary as having obtained benefits which are different from those obtained by the knowing assistant …91

As cases like Andrews demonstrate, joint liability counters the dispersal of illicit gains between related parties.92 Such arrangements take different forms and the conceptual boundaries are sometimes blurred. To this point it has been assumed that fiduciaries and dishonest assistants are independent parties. On that basis it has been argued that an accessory’s liability should be confined to personal gains unless he is effectively a co-principal. In the latter case, it may be more accurate to adopt the term ‘co-principal’ in preference to ‘accessory’ because the third party’s conduct subsumes the primary wrong. There are other situations where joint liability should be imposed. First, an accessory may be the alter ego of the fiduciary.93 Where a fiduciary acts through a company he controls, the court may pierce the corporate veil and treat the delinquent fiduciary and the company as the same party.94 In such cases, receipts in the hands of either party will be treated in the same manner for the purpose of disgorgement.95 Second, a third party may be independent from the delinquent fiduciary (both juristically and f­actually96), but the fiduciary may be the guiding mind of a company, or exert personal control over certain individuals. Here, the third party may be fixed with ‘transmitted fiduciary obligations’,97 engendering liability to account to the same extent as the fiduciary.98

D.  Procuring or Inducing a Breach of Trust It has been argued that as a default rule, a delinquent fiduciary and a dishonest assistant should be severally, but not jointly, liable for their respective gains. A case must be made for joint liability, for example, where the accessory acts as a co-principal.

91 ibid [135], [142]. 92 See CMS Dolphin Ltd v Simonet [2001] EWHC 415 (Ch), [2001] 2 BCLC 704 (Ch), where directors were jointly liable with a company they had formed to exploit unlawfully diverted business opportunities. 93 In Grimaldi (n 34) [558], the Full Federal Court identified exceptions to the rule confining liability to personal gains. These included alter ego cases and arrangements where fiduciaries and third parties act in concert for mutual advantage. 94 Gencor ACP Ltd v Dalby [2000] EWHC 1560 (Ch), [2000] 2 BCLC 734; Trustor AB v Smallbone (No 2) [2001] EWHC 703 (Ch), [2001] 1 WLR 1177. For a recent discussion, see J Glister, ‘Diverting Fiduciary Gains to Companies’ (2017) 40 University of New South Wales Law Journal 4. 95 However, the court may be reluctant to pierce the corporate veil unless other remedial options are unavailable: Prest v Petrodel Resources Ltd [2013] UKSC 34, [2013] 2 AC 415. 96 Thereby falling outside the ‘alter ego’ category. 97 Timber Engineering Co (n 85) 495; Club of the Clubs Pty Ltd v King Network Group Pty Ltd (No 2) [2007] NSWSC 574 [58]. 98 Lewis v Nortex Pty Ltd (in liq) [2005] NSWSC 482 [33].

Account of Profits for Accessory Liability  265 Joint liability is also appropriate where a third party99 instigates a breach of fiduciary duty. It has been noted that liability for procuring or inducing a breach of fiduciary duty originated as a distinct head of liability,100 which is not dependent on a dishonest and fraudulent design on the part of the trustee.101 The focus is on the conduct of a third party in bringing about a breach of the fiduciary’s duty. In some instances the third party may be regarded as the sole wrongdoer, for example, where, for personal gain, a corrupt professional advisor induces a trustee to innocently breach his duty to the beneficiary.102 By instigating the breach, the third party is effectively a primary wrongdoer.103 As such, the third party should be subject to the full gamut of remedies associated with the substantive wrong. This includes joint and several liability for both gains and losses resulting from intermeddling in the administration of a trust or other fiduciary relationship.104

V.  Gains Indirectly Attributable to Participation in a Breach of Fiduciary Duty Thus far, discussion has been directed to the immediate consequences of accessory liability. However, the enquiry can be placed in a wider context. Recent judgments have thrown into focus the status of gains made by a dishonest assistant who subsequently enters into direct legal relations with the principal. Suppose an agent is bribed as an inducement to favour the briber in placing contracts with the principal. The briber has participated in a breach of fiduciary duty105 and incurs liability on that basis.106 To what extent is that conduct relevant to profits flowing 99 In this section the term ‘third party’ is used advisedly. It is a misnomer to describe the third party as an accessory because he would effectively be an accessory to his own wrong. 100 In Australia, this distinction is still recognised: Farah Constructions (n 6) [161], [163]. 101 Royal Brunei Airlines (n 5) 392. 102 In an early case, Fyler v Fyler (1841) 3 Beav 550, 568; 49 ER 216, 223–24, Lord Langdale MR stated that a person could be liable for knowingly procuring a breach of trust where the breach was committed in good faith. It is submitted that in such cases, a third party should be solely liable for any resultant gains or losses. 103 In Farah Constructions (n 6) [161], it was observed that cases in this category fall outside the two limbs of Barnes v Addy. For further analysis, see Hasler (n 7) [76]–[82]. 104 An analogy can be drawn with a trustee de son tort, where the full incidents of trusteeship may be extended to third parties, Barnes v Addy (n 3) 251. Whilst the analogy can be usefully drawn, a person who procures or induces a breach of trust may fall short of the requirements of a trustee de son tort. Strictly, a person becomes a trustee de son tort where they either assume the position of a trustee although not appointed as such, or where they acquire control of trust property: Soar v Ashwell [1893] 2 QB 390 (CA) 405. It does not automatically follow that a party who subverts a trust relationship has acted as a trustee in any form. 105 Depending on the nature of the parties’ dealings, the third party may be regarded as having induced or procured the wrong. 106 Hurstanger Ltd v Wilson [2007] EWCA Civ 299, [2007] 1 WLR 2351 [34], [38]. The principal can also bring proceedings at law against the briber for fraud and money had and received: see Salford Corporation v Lever [1891] 1 QB 168 (CA); Hovenden and Sons v Millhoff (1900) 83 LT 41 (CA); Mahesan (n 23).

266  Peter Devonshire from a subsequent contract between the briber and the principal? If, as a result of prior acts of dishonest assistance, the principal sustains a loss in respect of the contract, then this can be redressed by equitable compensation. However, if the accessory has faithfully performed the contract and there are no further losses to the principal, is there any basis for imposing liability for the disgorgement of profits flowing from that transaction? In Fyffes Group Ltd v Templeman107 and Novoship (UK) Ltd v Mikhaylyuk,108 it was accepted that in principle, a party who dishonestly assists a breach of fiduciary duty may be required to disgorge profits arising from subsequent dealings with the principal. Both cases involved faithless employees who received bribes to betray their employer’s interests. In Fyffes, the plaintiff employed T as its chartering manager. In that capacity, T engaged Seatrade to provide shipping services to the plaintiff. T received secret commissions from Seatrade expressed as a percentage of the freight earned. T had clearly breached his fiduciary duties to his employer and Seatrade was an accessory to that wrong. The question arose whether Seatrade should account for the profit it had made in providing services to the plaintiff. Toulson J decided in the affirmative,109 but on the particular facts declined to make an award because the profit was not causally connected with Seatrade’s prior acts of dishonest assistance. The second case, Novoship (UK) Ltd v Mikhaylyuk, concerned a complex commercial fraud. The broad setting and the legal conclusions are not dissimilar to Fyffes. In Novoship, the first defendant, M, was a senior employee of the claimant group of companies (‘the claimant’) who was responsible for arranging the charter of its vessels. In breach of fiduciary duty, M, and others, received bribes for ­favouring certain parties. The sixth and eighth defendants (N and A respectively) made substantial profits from the subsequent charters. At first instance,110 it was held that various parties, including N and A, had dishonestly assisted M in committing breaches of fiduciary duty. In addition to being required to pay the claimant a sum representing the bribe monies, N and A were ordered to account for the profits (variously estimated at US $100–150m) made by A from the charters. The Court of Appeal reversed this finding but accepted that in principle disgorgement can be granted in respect of secondary gains.111 This was qualified in an important respect. An accessory is not a fiduciary and it was necessary to apply common law rules of causation, remoteness and measure of damages.112 As a result, N and A’s profits from the charters were deemed too remote. It was concluded that 107 Fyffes Group (n 70). 108 Novoship (n 35). 109 In Ultraframe (n 22) [1594], Lewison J approved this finding and opined that an account of profits was not confined to bribery cases. The remedy was applicable to any gains that are attributable to dishonest assistance. 110 Novoship (UK) Ltd v Mikhaylyuk [2012] EWHC 3586 (Comm), [2012] All ER (D) 158 (Dec). 111 ‘Secondary gains’ denotes profits generated from a direct transaction between the principal and accessory. 112 Novoship (n 35) [107].

Account of Profits for Accessory Liability  267 the charters were merely the occasion to make the profit, not the effective cause of the gains.113 While Fyffes and Novoship considered that an account of profits could be granted if the wrong and the gain were sufficiently proximate, there was reluctance in both judgments to find the necessary proximity on the particular facts.114 It is submitted that disgorgement founded entirely on the original act of dishonest assistance is unwarranted. The principal has already been compensated for any losses resulting from the accessory’s complicity in the employee’s breach of fiduciary duty. Thus, in Fyffes, the award of damages negated certain benefits obtained by the accessory as a result of its contract with the principal. Alternatively, the principal may not have suffered any economic harm in its subsequent dealings with the accessory. In Novoship, the principal’s agent appeared to have acted in the principal’s best interests in negotiating the parties’ agreement.115 If the accessory faithfully performs its obligations under the contract there is no basis for an account of profits. In this setting the remedy merely confers opportunistic gains on a party who has not sustained any (uncompensated) loss. However, an account of profits can be appropriately invoked where the agreement itself is vitiated by the accessory’s misconduct and the principal elects to rescind the contract.116 A typical context is where the accessory dishonestly assists a breach of fiduciary duty by bribing an agent to advance the accessory’s interests in awarding a contract with the principal.117 An essential feature of rescission is that the parties must be restored to their pre-contract position. Benefits are adjusted to achieve restitutio in integrum118 and an account of profits is integral to that process.119 If a contract is rescinded, an accessory should be treated analogously to a fiduciary. Where an agreement is set aside following a breach of fiduciary duty, relief is tempered to avoid unjust enrichment to the plaintiff.120 This mirrors the expectation that an applicant for equitable relief must not unfairly deny value provided by the defendant.121 Thus, allowances may be granted in respect of a fiduciary’s 113 ibid [114]. 114 See further W Gummow, ‘Dishonest Assistance and Account of Profits’ [2015] CLJ 405; P Devonshire, ‘Account of Profits for Dishonest Assistance’ [2015] CLJ 222. 115 Novoship (n 35) [50], [65]. 116 See further P Devonshire, ‘Account of Profits for Secondary Liability: How Far is Too Far?’ (2015) 23 Restitution Law Review 59. 117 Panama and South Pacific Telegraph Co v India Rubber, Gutta Percha, and Telegraph Works Co (1875) LR 10 Ch App 515 (DC); Bagnall v Carlton (1877) 6 Ch D 371 (CA); Mahesan (n 23). 118 Logicrose Ltd v Southend United Football Club Ltd [1988] 1 WLR 1256 (Ch). There are distinctions between rescission at common law and proceedings in equity to set aside a contract to recover property acquired in breach of a fiduciary relationship. Whilst the common law traditionally insists on strict restitutio in integrum, equity takes a more flexible approach to counter-restitution and grants relief where it is impossible to exactly place the parties in their former position. See Halpern v Halpern [2007] EWCA Civ 291, [2008] QB 195 [60]. 119 See further P Devonshire, Account of Profits (Wellington, Thomson Reuters, 2013) 79–83. 120 If a windfall is unavoidable, the court is likely to favour the party wronged. See LAC Minerals Ltd v International Corona Resources Ltd [1989] 2 SCR 574, (1989) 69 OR (2d) 287. 121 Warman International (n 57) 561. This may be equated with the equitable maxim ‘He who seeks equity must do equity’.

268  Peter Devonshire post-contract services.122 The interests of an accessory have no lesser claim to recognition – perhaps more so, given that such parties have not assumed the onerous office of trusteeship.

VI. Conclusion An account of profits responds to the breach of a distinct equitable duty and reflects the imperatives which underlie that duty. It is a potent corrective where a fiduciary exploits a position of trust. The stringent policy which strips a fiduciary of unauthorised gains is status-driven. An accessory is a stranger to the trust relationship and is not, in any formal sense, an accounting party. Caution is needed before expanding liability beyond the traditional compensatory measure. While a third party should be liable for gains directly attributable to dishonest assistance, liability cannot be determined by the strictures of fiduciary duty. A common law standard of causation and remoteness should be applied and liability should be confined to personal gains unless the accessory is a co-principal123 or instigates the primary wrong by procuring or inducing a breach of trust. This reasoning applies a fortiori to an accessory’s gains from direct dealings with the principal. If there are no uncompensated losses from prior acts of dishonest assistance, there is no residual basis for liability. The subsequent transaction stands and falls on its own merits. If the accessory is without fault in the performance of his contractual obligations, it is a concession to opportunism to allow further claims by the principal. An obvious exception is where the contract is vitiated by the accessory’s prior misconduct and the principal elects to rescind. In this distinct setting an account of profits is instrumental in achieving restitutio in integrum. An account of profits reflects the prophylactic design of fiduciary duty. As such, it has limited application beyond the realm of trust obligations. It is sufficient and proportionate to strip an accessory of immediate personal gains. However, if this remedy is extended to the more distant consequences of the wrong, it will lose its way as a coherent doctrine and expose third parties to a sanction which goes beyond the necessities of the case.124

122 Cheese v Thomas [1994] 1 WLR 129 (CA) 136–38. See further Brown v Smitt (1924) 34 CLR 160. 123 For discussion of other forms of wrong attracting joint liability, see section IV C, ‘Joint or Several Liability?’, above. 124 To adopt the language of John Alexander’s Clubs Pty Ltd v White City Tennis Club Ltd [2010] HCA 19, (2010) 241 CLR 1 [129] (per curiam).

INDEX acceptance: benefit, of, 112 defendant, by, 113 free, 110–11 liability and, 10 accessory: co-principal, acts as, 263–4 misconduct of and account of profits, 267 accessory liability, 29, 30, 252–3 account of profits for, 29, 30, 251–68 Australian law, in, 253 causation and, 261 definition, 254 remoteness and, 261 UK law, in, 261 account of profits, 20–3 accessory’s liability for, 262–3 accessory’s misconduct and, 267 breach of equitable duty and, 255 breach of undertaking and, 211–12 (case law) deemed performance in, 183–202 definition, 20–1 dishonest assistance for, 28–30 factors affecting, 183–4 joint liability and, 262 origin of, 186 performance, deemed in 183–202 trust property and, 186–7 unjust enrichment, limited by, 192 administration of estates and residuary legatees’ rights, 248 agents’ remuneration: forfeiture of, 203–26 loss of right to, 217–18 Akers judgment see third-party liability (trust property) allowances: counter-restitution by beneficiaries and, 197–8 fiduciaries, for, 196–7 fiduciary’s skill and labour, for, 198–200 justifications for, 197–200 necessary expenses for, 196 skill and effort for, 196–7

assets: defendant’s and surviving value claims, 7 economic benefit of see economic benefit of assets ‘non-trust’ jurisdictions, in, 232–3 specific and equitable proprietary claim, 70–1 unjust enrichment and, 37 wrongly distributed, recovery of, 248 assistance, 252–3 dishonest see dishonest assistance liability, 239 Australia (Aus): accessory liability in, 253 commercial relationships see commercial relationships (Australia) defective transfers, approach to, 138 fiduciary doctrine in, 18–20 fiduciary obligation in, 175 liability inquiry, 122 unconscionability in, ix, 10–12, 120, 124, 131–8 unjust enrichment in see unjust enrichment (Aus) backwards tracing, 75–6 property acquired on credit and, 75–6 (case law) trust money and, 75 Baden Delvaux knowledge categories (knowing receipt), 238, 239–41 bankruptcy, priority of claims in, 84 beneficial interest in competing business, 255 (case law) beneficiaries: counter-restitution by and allowances, 197–8 direct equitable action and, 243–4 equitable interest of and constructive notice, 235–6 equitable status of, 246–7 personal liability of recipients to, 247 profits, claim to, 183 right to sue and trustees, 245 trustee, relationship with, 166–8 (case law)

270  Index benefit: defendant’s acceptance of, 112 Rising Heat, under, 98 ‘big’ unjust enrichment, 92–4 multiple causes of action, 94 ‘small’ unjust enrichment distinguished from, 95–6 breach of duty claim distinguished from invalid transfer of property claim, 80 breach of fiduciary duty: case law, 24–5, 177–9, 215, 219, 222–5, 266–7 compensation for loss and, 257 dishonest, 212–13 (case law) forfeiture and, 218–19 (case law) gains under, 257–65 partnership profits and, 220–2 profits from, 265–8 received property and, 237–8 relief following, 267–8 third-party liability and, 237–8 breach of trust: disposal of legal title and, 232 disposal of trust property and, 231 pension trust money received in, 243 received property and, 237–8 suing for, 246 third party’s and joint liability, 264–5 breach of undertaking and account of profits, 211–12 (case law) but-for test or causation, 188, 192, 193–4 (case law) causal test and deemed performance, 192–3 (case law) causation, 193 (case law) accessory liability and, 261 but-for test, 188, 192, 193–4 (case law) fiduciary and, 259–60 profits and, 191–2 (case law) test of, 259–60 cause of action: unjust enrichment and, 94 common counts and, 115 common law of restitution and, 105–16 core of, 106 definitions, 91–2 restitution and, 107, 115–16 three-part test as, 103–4 unjust enrichment and, 92, 93–4 certainty: commerce, in, 12–13 defective transfers and, 141–5

discretionary relief and, 14 equity and, 147–64 legal see legal certainty claims: priority of in bankruptcy, 84 proprietary, to invalidly transferred money, 65–89 unjust enrichment as, 88 co-principal acts as accessory, 263–4 (case law) commerce: certainty in, 12–13 fiduciary law in, 18–25 unjust enrichment and, 11 commercial affairs and fiduciary norms, 152 commercial and non-commercial transactions and fiduciary relationships, 177 commercial certainty see legal certainty commercial law boundaries and unjust enrichment see unjust enrichment and commercial law boundaries commercial parties: equitable remedies and, vii–viii fiduciary obligations on, 19 norms and, 148–56 commercial relationships (Aus), 165–81 express trusts and, vii introduction, 165–9 commercial uncertainty: contractual interpretation and, 150–1 equity and, 149 commission, forfeiture of, 216–17 (case law) common account cases and trustees’ liability, 153–6 common counts, 105–6 causes of action and, 115 quantum meruit, 105 common law: actions against third parties, 245–6 development of, 165–6 equitable proprietary claim and, 3, 70 common law claim: explanation of, 77–8 measure of recovery of, 78 ownership of money and, 78–9 common law of restitution: cause of action and, 105–16 claim, 77–84 unjust enrichment approach to, 85–8 conflict of interest: non-disclosure of, 222–4 (case law) recovery of damages and, 214–15 (case law)

Index  271 ‘conscience’: courts’ interpretation of, 88–9 criticism of, 133–4 equity and, 135–6 historic cases, in, 134–5 mistaken payment and (Aus), 88 notion, 133–4 property, approach to, 88 unjust enrichment and, 11–12 consent: intention and (private law), 54–61 plantiff ’s considered, 115 consideration, failure of, 115–16 constructive notice, 26–7, 234–5 beneficiary’s equitable interest, of, 235–6 constructive trust, 40, 44–5 (case law), 46, 159 contract and contracts: contractual interpretation and commercial uncertainty, 150–1 effects and fiduciary relationship, 176 law, emphasis on individuals, 62–3 tort law and, individuals and, 37 void and voidable, 60 contribution (equitable doctrine), 127–8 counter-restitution of beneficiaries and allowances, 197–8 creditors: rights and restitution, 107–8 surviving value claims and, 7 cross-border trusts, 232–3 damages, recovery of and conflict of interest, 214–15 (case law) debt, discharge of and trust money, 74–5 deemed performance, 189, 193–4 (case law), 199–200 account of profits, in, 183–202 accountability and, 195 case law, 22 causal test and, 192–3 (case law) dishonesty and, 200–1 equity and, 184–5 fiduciary doctrine and, 21–3 principle of, 185–7 defective transfers, 10–11 English and Australian approaches, 138–9 defendant: acceptance by, 113 assets and surviving value claims, 7 benefit, acceptance of, 112 enrichment of, 9 knowing receipt, liability for, 237

liability of, 102, 115 plaintiff ’s action recognised by, 112 restitution, involvement in, 111–13 service, request for, 113 derivative interests and sharing arrangements, 38–9 desert (allowances), 198–9 Destroyed Stamp, 99–100 three-part test and, 99–100 determinacy and determinate principles: judicial discretion and, 162–3 uncertainty and, 163–4 deterrent principle, 255–6 directness, rule of, 99 disbursement and loss, 186 discretionary relief and certainty, 14 disgorgement and remoteness, 194 (case law) disgorgement of gains, 187–201 case law, 187–8 dishonest assistance, 253, 260–1 account of profits for, 28–30 fiduciary and, 255 third party liability and, 262–3 dishonesty, 200–1 deemed performance and, 200–1 forfeiture for, 209–10 (case law) disposal: surviving value rule and, 72 transactional theory and, 72 doctrine of precedent, 161 donees and trust property, 234 economic benefit and legal entitlement, 55 economic benefit of assets, 36–7, 54–5 claimant’s under unjust enrichment, 58–9 entitlement to and consent to transfer, 58 individuals and, 4 terminology used, 38–9 unjust enrichment and, 3 economic gain and unjust enrichment, x–xi enrichment, 101–3 defendant’s, 9 defendant’s liability in, 102 land improvement and, 101 necessitous intervention and, 109 non-liability in cases of, 102 entitlement and factual enjoyment, 41 equitable action, direct and beneficiaries, 243–4 equitable allowance, skill and effort, for, 196–7 (case law) equitable claim and common law, 3

272  Index equitable duty, breach of and account of profits, 255 equitable interest, 228 beneficiary’s and constructive notice, 235–6 shares, in, 231 equitable personal claim, 246 equitable principles (Aus), 10–11, 131–8 definition, 131–2 legal certainty and, 142–3 unjust enrichment, differences between, 139 equitable proprietary claim: availability of extended, 79–82 specific assets and, 70–1 equitable proprietary rights, 246 recipient’s personal liability for, 241–3 (case law) equitable remedies, vii–viii commercial parties and, vii–viii primary liability and, viii equity, vi–viii development of, 165–6 facilitative function of, 151 function, 1 exchange product rule, 6, 66–7, 69 exploitation and unconscionability, 137 express trusts, vii, 43, 80–1 factual enjoyment and entitlement, 41 ‘failure of basis’ claim, 57–8 ‘failure of conditionalities’, 60–1 fairness, 136 fiduciaries: allowances for, 196–7 causation and, 259–60 obligations of, 169–72 (case law) skill and labour, allowances for, 198–200 unauthorised gains, liability for, 258–9 fiduciary: accessory liability and, 261–4 concept of, 18–19 dishonest assistant and, 255 holding to account, 171–2 law in commerce and, 18–25 office, profits from, 195 position and profits, 191–4 profits, accountability for, 188–9 fiduciary doctrine: Australia, in, 18–20 deemed performance and, 21–3 fiduciary duty, 167 (case law), 169–70 (case law), 189–91 (case law), 256 breach of see breach of fiduciary duty

fiduciary norms: commercial affairs and, 152 equity and, 151–2 fiduciary obligations, 170–1, 172–4 Australia, in 175 (case law) commercial parties, on, 19 contracting out of, 19–20 contractual exclusions of, 179–80 described, 170–1 fiduciary principle, 168 profit and, 257 fiduciary relationships, 149–50, 167 (case law), 168 (case law), 256 Citigroup, concluding comments on, 180–1 commercial and non-commercial transactions and, 177 (case law) contract affects, 176 contracting out of, 19–20 entitlement to, 19 equity and, 170–1 exclusion from self-interests, 19 joint ventures and, 17–19, 179, 190, 220 Paul Finn’s consideration of, 19, 174–9 (case law) requirements for, 174 ‘finders-keepers’ rule, 42 forfeiture: agents’ remuneration, of, 203–26 breach of fiduciary duty and, 218–19 (case law) commission, of, 216–17 (case law) dishonesty, for, 209–10 (case law) equity and, 23–4, 204–5 first-principles approach, 203–5 law of contract and, 203–4 no justification for, 224–5 (case law) forfeiture of remuneration, 23–5, 211 (case law) agents’ see forfeiture, agents’ remuneration post-Imageview case law, 215–25 resolution of, 23 salary, of, 225 (case law) four-question formula (unjust enrichment) (UK), 11 free acceptance, 110–11 gains: breach of fiduciary duty, under, 257–65 disgorgement of, 187–201 gain-based relief, 29 unauthorised, fiduciary’s liability for, 258–9

Index  273 general standards of conduct and unconscionability, 143–4 gifts: incomplete, 46, 162–3 law of, 112 resulting trusts and, 49–51, 59 unintended, 59 void, 60 Imageview management decision, 205–7 discussion of, 205–9 nineteenth-century case law, 207–9 post-Imageview case law and forfeiture of remuneration, 215–25 twentieth-century case law, 209–25 improvement claim: unjust enrichment and, 103–4 unwanted from realisable gain, 102 insolvency law, 231–2 intention and consent (private law), 54–61 intention to benefit, 50–1, 52–3 invalid transfer of property, 80–1, 87, 89 joint liability: account of profits and, 262 third party’s breach of trust and, 264–5 joint undertakings, 167 (case law) joint ventures and fiduciary relationship, 17–19, 179, 190, 220 judges: liability, discretionary approaches to, 163 private law litigation and, 157–8 remedies in equity, discretionary approaches to, 163 judges’ written decisions: lawyers’ reliance on, 162 reasons for, 160 judicial decision-making: bipolarity of private law and, 156–7 legal certainty and, 142–3 written reasons for, 160 judicial discretion: determinacy and determinate principles, 162–3 equity, in, 156–64 judges’ written reasons for decision, 160–1 legal certainty and, 162–3 (case law) system-orientation of, 161–2 judicial practices, 160–4 ‘knowing assistance’, liability for, 238 ‘knowing receipt’, 237 defendant’s liability for, 237

knowledge of recipient of property, 234–9 Baden Delvaux five types see Baden Delvaux knowledge categories (knowing receipt) case law, 235–8 classification of, 27–8 (case law) definition, 234 interest, of, 235 notice, same as, 236 land improvement and enrichment, 101 law of contract and forfeiture, 203–4 legal certainty, 141–4 equitable principles and, 142–3 equity and, 12–13 ex ante, 142 ex post, 142 judicial decision-making and, 142–3 judicial discretion and, 162–3 (case law) role of 141–2 unjust enrichment and, 142–3 legal entitlement: award of, 41–2 economic benefit and, 55 factual enjoyment and, 41 legal title: disposal of and breach of trust, 232 location of, 45–6 rights and, 40–1 liability: acceptance-based, 10 accessory, 29, 30 assistance, 239 defendant’s, reasons for, 115 defendant’s for enrichment, 102 equity, in, 253 fact-dependent, 10 inquiry (Aus) into, 122 judges’ discretionary approach to, 163 mistake and restitution, 48–9 (case law) mistaken payment, for, 106–7 necessitous intervention and, 109 personal see personal liability property and, 40–7 recipient see recipient liability secondary see secondary liability small unjust enrichment and, 9–10, 106–8, 109–10 third party, 25–30 trust property and, 28 trustee’s and restoration of trust assets, 153 unjust enrichment and, 8, 11, 119–45

274  Index liability questions: property questions for, 2, 35–6 unjust enrichment, on, 97 liability rules (commercial law), 61–3 location: legal title, of, 45–6 liability and, 42–7 loss: compensation for and breach of fiduciary duty, 257 disbursement and, 186 Rising Heat, under, 98 loss-based claims, 254–5 ‘mistake’: considered, 60 unjust enrichment and, 4–5, 56–7 mistaken payments, 60 case law, 112 conscience and (Aus), 88 funds transfer and, 112 liability for, 106–7 remedial constructive trust and, 81 repayment and receipt of, liability for, 94 money: invalidly transferred and proprietary claim, 85 necessary expenses, allowances for, 196 ownership and common law claim, 78–9 ownership of and equity, 78–9 trust see trust money necessitous intervention, 108–9 enrichment and, 109 liability and, 109 ‘no consent’ claim, 57–8 normative unity in small unjust enrichment, 110–16 norms: commercial parties and, 148–56 fiduciary, 148–9 notice, 234–9 case law, 235–8 constructive see constructive notice definition, 234 knowledge and, 26–7, 236 property transactions, 26–7 overgeneralisation (unjust enrichment), 8, 9, 10, 96–103, 110 causes of action, 103 literature sources, 96–7 ownership and tracing, 66–7

pari passu rule, 67–8 partnership profits and breach of fiduciary duty, 220–2 (case law) payments: category of restitutional claim for unauthorised is property law, 87 mistaken or unauthorised, proprietary claims for, 65–89 pension trust money received in breach of trust, 243 performance, deemed see deemed performance personal claims and surviving value, 76–7 personal liability: recipient’s for equitable proprietary rights, 241–3 recipient’s to beneficiary, 247 trust property’s beneficial recipient, 229 plaintiff: complaint of, 110–11 consent of considered, 115 defendant recognises plaintiff ’s action, 112 restitution, reason for, 111 plaintiff and defendant: link between, 113–14 Stolen Spectacle and, 114 presumption (trusts), 51–2 private law: bipolarity of and judicial decision-making, 156–7 consent and intention see consent, intention and (private law) private law litigation: judges and, 157–8 structure of, 156–9 profits: beneficiaries’ claim to, 183 breach of fiduciary duty, from, 265–8 causation and, 191–2 (case law) fiduciary office, from, 195 fiduciary position and, 191–4 fiduciary principle and, 257 fiduciary’s accountability for, 188–9 property: claim from invalid transfer of, 80 cohabitational property (Canada), 108 conscience and, 88 credit, acquired on and backwards tracing, 75–6 (case law) decisions and legal analysis, 35–6 liability and, 40–7 received see received property

Index  275 right of unjust enrichment, 94–5 transfer, voluntary as gift, 49–51 (case law) trust, transfer to third party, 80–1 trust and account of profits, 186–7 unjust enrichment and, 47–54 property improvements, 113 property interests and surviving value claims, 7 property questions: consideration of, 2 liability questions before, 2, 35–6 property rights: interests and, surviving value claims and, 6 personal rights, in place of, 82 surviving value, to, 84 trust property, in, 71 proprietary claim: availability of, 83 common law and, 70 invalidly transferred money, to, 85 mistaken or unauthorised payments, recovery of for, 65–89 objections to, 82–5 remedies and, 5–7 restitution, for, 83 shares, to, 228–9 proprietary interest, 47–54 (case law) proprietary relief: analysis of, 2–5 judicial decision on, 163–4 proprietary restitution, 3–4 (case law) purchaser without knowledge, purchaser without notice is now, 236–7 purchaser without notice: purchaser without knowledge, becomes, 236–7 purchaser’s proof of, 237 purchasers and trust property, 233–4 quantum meruit (common count), 105 Quistclose trusts, vii, 37, 51–2, 57, 59, 61, 64 received property: breach of fiduciary duty and, 237–8 breach of trust and, 237–8 receiving trust property, remedies for, 254 recipient liability, 25–8, 239 equitable proprietary rights, for, 241–3 (case law) knowledge of, see knowledge of recipient of property trust property, of, case law, 25–6

recompense (allowances), 198–9 relief following breach of fiduciary duty, 267–8 remedial consistency, 79–80 breach of duty and invalid transfer of property claims, 80 remedial constructive trusts, 81–2 mistaken payment and, 81 third party liability and (Aus), 158–9 remoteness, 193 (case law), 194–5 accessory liability and, 261 definition, 195 disgorgement and, 194 (case law) test, 194 remuneration: agents’ see agents’ remuneration award of, 222 (case law) forfeiture of see forfeiture of remuneration residuary legatees’ rights in administration of estates, 248 restitution, 91–117 causes of action for, 107, 115–16 common law see common law of restitution creditors’ rights in, 107–8 defendant’s involvement in, 111–13 definition, 1 liability and mistake, 48–9 (case law) limiting factors, 98–9 personal, 3 plaintiff ’s reason for, 111 proprietary, 3–4 (case law) proprietary claim for, 83 reasons for, 110 restitutionary claims, priority of in bankruptcy, 84 resulting trusts, 3–4, 34, 37, 39, 43, 45, 47–54, 59, 126 right to sue, beneficiaries and trustees’, 245 Rising Heat, 97–9 benefit under, 98 loss under, 98 secondary liability, 28, 252–3 basis of, 252 parts of, 252–3 service, defendant’s request for, 113 shares: equitable interest in, 231 liquidators, restored to, 228 proprietary claim to, 228–9 transfer, 43–4 (case law)

276  Index skill and effort, just allowances for, 195–201 ‘small’ unjust enrichment, 9, 94–6 ‘big’ unjust enrichment distinguished from, 95–6 liability and, 9–10, 106–8, 109–10 normative unity of, 110–16 Rising Heat and, 98 status quo and unjust enrichment, 136–7 Stolen Spectacle, 100 defendant and plaintiff and, 114 three-part test and, 100 subjective devaluation, 101, 102 subordination defined, 19 subrogation (equitable doctrine): not subsumed within unjust enrichment, 127–8 trust money and, 74 surviving value, property right to, 84 surviving value claims, 5–7 creditors and, 7 defendant’s assets and, 7 justification of, 6 personal and surviving value, 76–7 property rights and interests, 6, 7 tracing rules and, 6 surviving value measure, tracing rule, as, 70–1 surviving value rule, 72–3 case law, 73 disposal and, 72 withdrawals under, 73 third party: breach of trust and joint liability, 264–5 common law actions against, 245–6 trust property transferred to, 80–1 third party liability, 25–30 dishonest assistance and, 262–3 fiduciary duty, breach of and, 253, 237–8 remedial constructive trusts (Aus) and, 158–9 unjust enrichment, applied to, 127 third party liability (trust property), 227–49 Akers case details, 227–8 introduction, 227–30 three-part test: cause of action, as, 103–4 Destroyed Stamp and, 99–100 inconsistency in, 101 Stolen Spectacle and, 100 tracing, 66–77 backwards see backwards tracing explanation of, 67–70

ownership and, 66–7 ‘transactional’ theory of, 69 tracing rules, 72–6 surviving value, 68–9 surviving value claims and, 6 ‘surviving value’ measure as, 70–1 transactional certainty and security of dealings, 14 transactional theory and disposal, 72 transfer, unjust enrichment claim founded on, 95 transfer of property: breach of duty claim and, 80 invalid, 80–1, 87, 89 power of, 86–7 transferees and transferors of property, competing interests of, 140–1 transfers: binding and misconceived distinguished, 59 defective see defective transfers funds, of and mistaken payments, 112 mistaken under unjust enrichment, 56 ‘unintended transfers’, 59 trust assets, trustee’s restoration of, 153 trust interest, 61–2 trust money: backwards tracing and, 75 debt discharge and, 74–5 subrogation and, 74 withdrawal of, 73 (case law) trust property: account of profits and, 186–7 disposal of and breach of trust, 231 donees and, 234 liability and, 28 personal liability and, 229 purchasers and, 233–4 receiving, remedies for, 254 recipient liability, 25–6 (case law) returned to owner, 239 third party liability of see third party liability (trust property) third party recipients of, 233–41 trustees: liability of and common account cases, 153–6 relation with beneficiary, 166–8 (case law) right to sue beneficiaries, 245 trusts: commercial transactions and express trusts, vii constructive trust, 40, 44–5 (case law), 46, 159

Index  277 equity and, 166 express, vii, 43, 80–1 ownership-management of, 244–5 private family, and equity, vi resulting and constructive, terminology used, 39–40 resulting, see resulting trusts two-stage analysis framework, (unjust enrichment) (Aus), 128–9 uncertainty and determinacy, 163–4 ‘unconscientious’, history of, 134–5 unconscionability, 132 as basis of liability of recipient of mistaken payment, 88–89 certainty and, 143–4 criticism of, 134–8 exploitation and, 137 general standards of conduct and, 143–4 incomplete gifts and, 162–3 in Australia, 120, 131–2 knowing receipt and, 26, 229, 233–9, 241, 246 meaning and effect of, 133–4 undue taxes, recovery of, 108 unjust enrichment and commercial law boundaries, 33–64 legal rules under, 34–5 unjust enrichment in Australia, 120–3 big unjust enrichment, 92–4 multiple causes of action, 94 small unjust enrichment distinguished from, 95–6 Birksian conception, 122–3 concept of, 125–6 (case law), 130–1 (case law) criticisms of, 124–5 (case law) current status of, 128–31 definitive principle, as, 122–3 distortion by, 127–8 non-substantive functions, 130 (case law) ‘reach’ of, 125–8 recognition and development of, 121–2 (case law) scepticism and hostility towards, 123–8 taxonomical function of, 130 (case law) two-stage analysis framework, 128–9 (case law)

unjust enrichment, ix–xi, 121, 241–6 account of profits, limit on and, 192 application of, 241–6 assets and, 37 cause of action and, 92, 93–4 claimant’s economic benefit of assets under, 58–9 cohabitational property, division of (Canada) and, 108 commerce and, 11 commercial implications, 139–44 commercial transactions and, x common law restitution, approach to, 85–8 ‘conscience’ and, 11–12 contribution (equitable doctrine), not subsumed within, 127–8 economic benefit of assets and, 3 economic gain and, x–xi equitable principles, differences between, 139 improvement claim, as, 103–4 legal certainty and, 142–3 legitimacy of questioned, 120 liability and, 8, 11, 97, 119–45 mistake and, 4–5, 56–7 mistaken transfers under, 56 non-liability cases, 97–100 overgeneralisation see overgeneralisation property and, 47–54 right of property and, 94–5 scope of claims, 93 small see small unjust enrichment status quo and, 136–7 subrogation not subsumed within, 127–8 third party liability, applied to, 127 UK generally, in, 119–20 unjust enrichment claims, 88, 229–30 classes of, 55–6 commercial context, in, 57 ‘failure of basis’ claim, 57–8 ‘no consent’ claims and, 57–8 non-contract context, 57–8 transfer as foundation for, 95 transfer without claimant’s consent, 56 unjust enrichment law, claimant protected under, 53–4 ‘value’ cases and ‘rights’ cases, 76–7

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