Assignment
Cases
Jose Manuel Pitta De Lacerda Aroso v. Coutts & Company
[2001] EWHC Ch 443
Collins LJ
VI Resulting trusts and the nature of the account
22. The starting point is that where a person transfers property, or directs a trustee for him to transfer property, otherwise than for valuable consideration, and where the presumption of advancement does not apply, it is a question of the intention of the transferor in making the transfer whether the transferee was to take beneficially or on trust, and if on trust, what trusts: Vandervell v. IRC [1967] 2 AC 291, at 312, per Lord Hodson. If, as a matter of construction of the document making or directing the transfer, it is possible to discern the intentions of the transferor, that is an end of the matter and no extraneous evidence is admissible to correct and qualify his intentions so ascertained, but if the document is silent, then a resulting trust arises in favour of the transferor, but this is only a presumption and is easily rebutted. All the relevant facts and circumstances can be considered in order to ascertain the intentions of the transferor with a view to rebutting the presumption. Ibid. See also Westdeutsche Bank v. Islington LBC [1996] AC 669, 708: “It is important to stress that this only a presumption, which presumption is easily rebutted either by the counter-presumption of advancement or by direct evidence of…intention to make an outright transfer.”
23. In the present case account A175 was a discretionary investment account, which consisted of bank deposits, i.e. debts due from the bank to the deceased (loosely described as “cash”) and shares or other securities. It is in the nature of a discretionary account that the combination of cash and shares would vary from time to time, and that the identity of shares represented in the account would also vary from time to time. There is, however, in this case no evidence of what the combination was, nor the extent to which shares credited to in account A175 were still in account A371 on the death of the deceased.
24. Shares in United Kingdom companies were held through the bank’s nominee company, and shares in overseas companies were held through the bank’s account with Morgan Guaranty (and Morgan Guaranty may have held them through other institutions, such as CEDEL or Euroclear). The deceased had, therefore, only an equitable interest in the shares or securities (which would likely to be part of larger parcels of shares or securities held for other clients), the legal title to which would have been in the bank’s nominee company or some other institution such as Morgan Guaranty. The legal owner of the shares was a bare trustee, as were intermediate entities such as the bank. What is described as the transfer from account A175 in the sole name of the deceased to A371 in the joint names of the deceased and Sr Champalimaud is therefore a direction to the bank to hold the assets, which were and would be in account A175, in future for the deceased and Sr Champalimaud. To the extent that it is a transfer of the equitable interest in the shares, the transfer must be in writing (Law of Property Act 1925, s. 53(1)(c)), and a direction to the trustee (the bank) is capable of being a disposition in writing: Timpson’s Executors v Yerbury (HM Inspector of Taxes) [1936] 1 KB 645 (CA); Grey v IRC [1958] Ch. 690 (CA). The “cash” credit balances may be transferred by an assignment under Law of Property Act 1925, s.136, and a notice in writing to the debtor (the bank) will be sufficient.
25. A resulting trust will not arise where the relationship between the transferor and the transferee is such as to raise a presumption that a gift was intended and where the presumption is not rebutted, but in this case the relationship between the deceased and Sr Champalimaud was not such as to raise a presumption of advancement. In this case Sr Champalimaud gave no consideration for the transfer to him (and the deceased) of the interests of the deceased in the property standing to the credit of A175. The question therefore is whether there is evidence of the intention of the deceased. That question has been considered in a number of cases relating to property, including bank accounts, in joint names, of which the most relevant for the purposes of this case are the decisions of Rome J. in Young v. Sealey [1949] Ch. 278, Megarry J. in Re Figgis [1969] 1 Ch. 123, and of the High Court of Australia in Russell v. Scott (1936) 55 CLR 440.
VII Joint accounts
26. In Russell v. Scott (1936) 55 CLR 440, 451, where the joint account was also in the joint names of the deceased and a nephew, Dixon and Evatt JJ. began from the position that, as the relationship between them was not such as to raise a presumption of advancement, prima facie there was a resulting trust: “But that is a mere question of onus of proof. The presumption of resulting trust does no more than call for proof of an intention to confer beneficial ownership…” In Marshal v Crutwell (1875) LR 20 Eq. 328 Mr Marshal, when in fading health, called at his bank, drew a cheque on his bank account for the whole amount standing to its credit, and asked the bank to open an account in the joint names of himself and Mrs Marshal, into which he paid the cheque, and further considerable sums. He told the bank manager that the balance of the account would belong to his wife on his death, and she alone drew cheques on the account to pay household expenses. It was held that the evidence showed that it was an arrangement for mere convenience because Mr Marshal was in such poor health that he could not operate the account, and was not intended to be a provision for the wife. It is likely that today the court would have taken a different view of the facts, but the statement of principle (at 329) by Sir George Jessel MR makes it clear that, whether or not the presumption of advancement applies, the court is entitled to take “surrounding circumstances” into consideration to determine whether or not the transferee takes beneficially. See also Re Vinogradoff [1935] WN 68: transfer of War Loan to joint names of deceased and grand-daughter: presumption of resulting trust not rebutted.
27. The fact that one of the joint account holders did not contribute to, nor draw upon, the joint account does not prevent that person from having a beneficial interest. Nor does it matter that that person did not even know of the existence of the joint account: Standing v. Bowring (1885) 31 Ch. D 282; Russell v. Scott (1936) 55 CLR 440, at 453 (citing Re Harrison (1920) 90 L.J.Ch. 186). Nor does it matter that that person was never intended to use the account while the other account holder was alive prevent the former from succeeding to the whole account by survivorship. In Russell v Scott, ante, Miss Russell, who was very wealthy, had a bank account at the Commonwealth Savings Bank. She and her nephew opened a joint account with the bank by the transfer of a large sum from her account. The joint account was kept in funds by payments from her investments, and it was used solely for her needs. The nephew withdrew money for this purpose with withdrawal slips signed by himself and his aunt. The nephew did not contribute to the account. When the account was opened Miss Russell told the nephew and others that any balance remaining in the account at her death would belong to the nephew, and it was found that she intended him to take whatever balance stood to the credit of the account at her death. It was held that the presumption of a resulting trust in her favour (and therefore of her estate) was rebutted, and that the nephew was entitled to the balance on the account by survivorship. The judgments must be read in the light of the fact (which is not so in this case, except to the extent of any cash deposits) that the nephew had a joint legal title to the account. Dixon and Evatt JJ said (at 451-3):
“The right at law to the balance standing at the credit of the account on the death of the aunt was thus vested in the nephew. The claim that it forms part of her estate must depend upon equity. It must depend upon the existence of an equitable obligation making him a trustee for the estate. What makes him a trustee of the legal right which survives to him? It is true a presumption that he is a trustee is raised by the fact of his aunt’s supplying the money that gave the legal right a value. As the relationship between them was not such as to raise a presumption of advancement, prima facie there is a resulting trust. … in the present case satisfactory proof is forthcoming that one purpose of the transaction was to confer upon the nephew the beneficial owner-ship of the sum standing at the credit of the account when the aunt died. As a legal right exists in him to this sum of money, what equity is there defeating her intention that he should enjoy the legal right beneficially? Both upon principle and upon English authority we answer, none. English authority is confined, so far as we can discover, to cases of husband and wife. But there is much authority to the effect that where a joint bank account is opened by husband and wife with the intention that the survivor shall take beneficially the balance at credit on the death of one of them that intention prevails, and, on the death of the husband, the wife takes the balance beneficially, although the deceased husband supplied all the money paid in and during his life the account was used exclusively for his own purposes. …
The fact that these cases arose between husband and wife affects only the burden of proof. In a case where there is no presumption of advancement, satisfactory affirmative proof of an intention to confer a beneficial interest supplies the place of the presumption. …”
28. In Young v. Sealey [1949] Ch. 278 Miss Jarman had two accounts at Lloyds Bank, the balances on which she transferred to a new deposit account in the joint names of herself and one of her nephews. The deposit books allowed either joint account holder to draw. She and her nephew signed a form of authority to the bank, which requested and authorised the bank “To pay any moneys now or hereafter standing to the credit of any account in our joint names including all interest thereon to, or to the order of, all or any one of us, or to, or to the order of, the survivors or survivor of us or the executors or administrators of such survivor.” When she sent her nephew the authority for signature she wrote a letter which said: “They are doing this in case anything happened then there would be no trouble either side.” There were also similar joint accounts with the Somerset and Wilts Savings Bank. Miss Jarman alone made payments into and withdrawals from the accounts. She also had £3000 invested in Building Society shares, with regard to which she was content to take the income for life and ensured she would get it by causing her name to be entered as first of the joint investors. Her intention was that she wished to deal with the accounts and the shares during her lifetime as she wished, and only what was left at her death was to go to her nephew, “who was never expected to pay anything into the account and was not, so long as she was alive, to draw anything out for himself” and “when death should deprive her of any further use of her fortune then the benefits to her [nephew] would crystallise; but they were to remain in suspense until then…” (at 284):-
“Such being…Miss Jarman’s intentions, it would seem at first sight to follow that the defendant has not only a legal, but a beneficial title to the moneys and shares which are now in issue; and none the less because Miss Jarman (as between herself and the defendant) retained control and dominion over the deposit accounts during her own lifetime…[T]he cases which have come before the courts of this country in which a depositor has put funds in the joint names of himself and another, intending to retain control over the funds and to withdraw from them if he thought proper, but with the further intention that the other party (if surviving) should take beneficially whatever might be left of the funds at the death of the depositor, have all, so far as I am aware, resulted in the surviving beneficiary taking free from any trust.” (284, 295)
29. A question which was not raised in this case (for reasons I mention below at paragraph 36) and which was considered in Russell v. Scott and Young v. Sealey, and in a number of decisions in other common law countries (including Australia, Canada, and Ireland) is whether a transfer into a joint account in circumstances in which the transferee is not intended to be allowed to draw until the death of the transfereor is ineffective to confer a beneficial interest on the transferee because it is a disguised testamentary disposition. In Russell v. Scott, ante, it was held at first instance that the balance in the joint account did not pass to the nephew, because the benefit which the donor intended for him was testamentary in nature and had not been made in accordance with New South Wales Wills Act. In the High Court of Australia it was held that, notwithstanding that the aunt only intended the nephew to benefit on her death, he nevertheless had an immediate interest in the joint account: “The vesting of the right and title to the debt or chose in action takes effect immediately, and is not dependant upon the death of either of the persons in whose names the money has been deposited”, at page 448, per Starke J. Dixon and Evatt JJ said (at pages 454-5):
“In equity, the deceased was entitled in her lifetime so to deal with the contractual rights conferred by the chose in action as to destroy all its value, namely, by withdrawing all the money at credit. But the elastic or flexible conceptions of equitable proprietary rights or interests do not require that, because this is so, the joint owner of the chose in action should in respect of the legal right vested in him be treated as a trustee to the entire extent of every possible kind of beneficial interest or enjoyment. Doubtless a trustee he was during her life time, but the resulting trust upon which he held did not extend further than the donor intended; it did not exhaust the entire legal interest in every contingency. In the contingency of his surviving the donor and of the account then containing money, his legal interest was allowed to take effect unfettered by a trust. In respect of his jus accrescendi his conscience would not be bound. For the resulting trust would be inconsistent with the true intention of that person upon whose presumed purpose it must depend.”
30. In Young v Sealey [1949] Ch. 278 Romer J was referred to a number of Canadian and Irish decisions on the point. Romer J. said that he found appealing the reasoning of the Supreme Court of Eire in Owens v. Greene [1932] IR 225 (and some Canadian decisions which were in line with it), to the effect that it was an ineffective ambulatory and postponed gift of such monies as might remain undrawn. He found it difficult to regard the deposit account transactions as voluntary settlements coupled with a power of revocation or as immediately effective gifts of anything, seeing that the nephew had, as between his aunt and himself, no power of withdrawal and she held the entire beneficial interest. But he decided that, because the objection had not been taken in the many cases in which joint accounts had been involved, he would hold the gift valid (as it had been by the Ontario Appellate Division in Re Reid 50 Ont LR 595) and leave the question of principle to the Court of Appeal. He was not referred to the decision in Russell v. Scott, and recently in Lynch v. Burke and Allied Irish Banks plc [1996] 1 ILRM 114 the Irish Supreme Court has overruled the decision in Owens v. Greene, the reasoning of which appealed to Romer J.
31. In Re Figgis [1969] 1 Ch. 123 one of the questions was whether money paid by the husband into a joint account was a lifetime gift on which (as directed by the husband’s will) duty should be paid out of the residuary estate. It was held that it was such a gift. The presumption of advancement was not rebutted. Megarry J. discussed (obiter) the way in which the doctrine of advancement operates in the case of bank accounts. After referring to Russell v. Scott and Young v. Sealey, he said that it seemed quite unreal to regard each deposit in the account as an advancement, subsequent to diminution by the drawing of subsequent cheques. But a gift of whatever stands to the credit of the account ran the peril of being accounted testamentary in nature, so as to require due execution as a will. He concluded that it might be the correct analysis is that there is an immediate gift of a fluctuating and defeasible asset consisting of the chose in action for the time being constituting the balance in the bank account. In the present case that analysis could apply to the cash deposits, but is harder to apply to a changing portfolio of investments. There is, as I have mentioned, no evidence of the extent to which the portfolio had changed between the time of the transfer to account A371 in 1990 and the date of death in July 1993. But I do not see any conceptual difficulty in the gift applying to any assets which might be acquired by the bank for the joint holders of the account, where those assets are actually acquired by the bank and placed to the credit of the joint holders. In such a case the survivor/donee needs to do nothing more to constitute his title and can give instructions to the bank in accordance with the mandate.
VIII Conclusions
32. The re-amended particulars of claim simply assert that Sr Champalimaud had no beneficial interest in the account. The defence pleads that the effect of the transfer instruction and the mandate was to instruct the bank to hold assets then or thereafter transferred into account A371 for the deceased and Sr Champalimaud as joint tenants in equity, and were a disposition by the deceased of his interest under the bare trust comprised by account A175 to the deceased and Sr Champalimaud to hold the same as joint tenants in equity; and to instruct the bank that the assets in account A371 were and would be in their sole beneficial ownership and that the survivor of them would remain and be entitled to all of the assets absolutely.
33. The principal question is whether there are circumstances which displace the presumption of resulting trust in favour of the deceased. As the authorities to which I have referred make clear, the presumption is easily rebutted by evidence of intention by the transferor that the transferee was to take beneficially. The claimant relies, in particular, on the following matters: first, that the relationship between the deceased was a distant one, and not sufficiently close to justify an inference of an intention to benefit Sr Champalimaud; second, the transfer was proposed by the bank for its own convenience, and because Mr Horsley was not sufficiently familiar with the difference between legal and beneficial title, and because the deceased did not speak English, the deceased did not receive an explanation which would have adequate for him to understand that he was benefiting Sr Champalimaud; third, the reference in the investment agreement to beneficial interest does not assist, because there is no evidence that Sr Champalimaud signed it, and it was not to be effective until both account holders had signed; fourth, the mandate only regulates the position as between the account holders and the bank, and in Young v. Sealey, where there was a similar mandate, it was not treated as significant in determining whether the presumption of resulting trust was rebutted; fifth, there is evidence that the deceased treated the account as his exclusively, including the fact that he referred to it as “my new account”, he alone was sent investment reports and he alone conducted correspondence about the account, and that while he was alive, only he was contemplated as the settlor of the Acalens Trust; sixth, Mr Horsley, in connection with his giving of evidence in the Portuguese proceedings, wrote a memorandum to an official of the bank in 1996 that Sr Champalimaud was a second signatory and did not personally benefit in any way from the account, and he stepped in to set up the offshore trust in accordance with the wishes of the deceased.
34. The essence of the claimant’s case is that the investment account was in joint names purely for convenience. The essence of the bank’s case is that the deceased put the account into joint names knowing and intending that Sr Champalimaud should have a beneficial interest: and that the nature of the interest was such that each of them in theory had the immediate right to sever the beneficial joint tenancy, but that in practice it would not have been necessary because some or all of the assets could be dealt with by either of them in accordance with the mandate.
35. In my judgment the bank has adduced sufficient evidence to displace the presumption of resulting trust, and has proved that the deceased intended to give Sr Champalimaud a beneficial interest in the assets in account A371. First, the terms of the mandate are absolutely clear. The deceased spoke English and was supplied with a translation of the mandate into Portuguese, and the words of the mandate are not capable of being other than an expression of intention that the beneficial interest is to be held jointly, and that the survivor is to take all beneficially. They are at least a representation to the bank that the assets in the account are in their joint beneficial ownership, and are not held on trust for any other person (which would include the deceased solely). Second, I do not think it is right to ignore the terms of the investment agreement which refer to the investments and cash being held for the account holders as beneficial joint tenants. Even if (which is doubtful, since a bank such as Coutts & Co. is most unlikely to have operated an investment account without a written agreement from its customers) the bank omitted to obtain the signature of Sr Champalimaud and it therefore has no contractual force, the deceased was prepared to sign it with this statement. Third, there is the uncontradicted and unchallenged evidence of Mr Horsley (who speaks Portuguese) that he explained the effect of a joint account and that the deceased understood him, and that he intended to transfer a beneficial interest to Sr Champalimaud who would be free to deal with the assets in the account as he wished. Fourth, the surrounding circumstances corroborate that evidence. The discussions about a trust and the transfer to account A371 followed what was rightly described by counsel for the bank as a monumental bust up between the deceased and his children, and at a time when they were hardly on speaking terms. Fifth, I do not accept the argument for the claimant that the joint account was established for the convenience of the bank. When Mr Horsley said in his witness statement that the bank “was not in favour of accounts being held in a sole name as this caused complications on the death of the account holder” he plainly meant that it caused complications for the account holder’s estate, which might have to obtain probate in the country of the domicile in order to claim the English account. Sixth, I do not consider that there is any subsequent conduct which is inconsistent with the intention to confer a beneficial interest, and even if there had been, the subsequent conduct of the deceased (except perhaps to the extent it may relate to property acquired after that conduct) is of little or no relevance: cf. Standing v Bowring (1885) 31 Ch. D 282, where the plaintiff, a widow aged 86, transferred £6000 of stock into the joint names of herself and her godson without informing him of the transfer. When she remarried at the age of 88 she asked her godson to retransfer the stock, which was when he first became aware of the transfer to himself and Mrs Standing. But when she made her request for the return of the stock what she said showed that she had originally intended to confer a benefit on him, but that in consequence of something he had done which had displeased her she desired to take back something which she had intended to be a benefit to him.
36. The only persons who knew the true reason for the establishment of the joint account were the deceased and Sr Champalimaud. The deceased left no documents which throw light on the reasons and there is no evidence from Sr Champalimaud. There is no material other than the documents and the oral evidence of Mr Horsley which throws light on the intention of the deceased, and the evidence of Mr Horsley was clear and unchallenged. Even if it were permissible to take account of subsequent events as throwing light on the intentions of the deceased in 1990, they would not show that Sr Champalimaud was not to take a beneficial interest. At most, they would show that (as in Russell v. Scott and Young v. Sealey) the deceased intended to retain control of the account, that Sr Champalimaud was not expected to add to, or draw from, the account, and that on the death of the deceased Sr Champalimaud was to have control of the account in the expectation that he would use it in accordance with the wishes of the deceased. It may be that the reason was that the deceased was reluctant to establish a trust during his lifetime (as the correspondence suggests), but was also reluctant to establish a will trust because that would have entailed the risk of the Portuguese authorities learning of the existence of his offshore assets; and that joint ownership with a wealthy relative who could be relied upon not to operate the account while he was alive and to deal with the assets properly after his death was an attractive solution. But this was no part of either party’s case. If it had arisen, I would have following the reasoning in Russell v. Scott and reached the same result as Young v. Sealey.
37. The issues on breach of trust do not therefore arise, and I will deal shortly with them. They would arise only if the assets in account A371 were held by Sr Champalimaud on resulting trust for the estate of the deceased. It must follow that if they were so held, a transfer by Sr Champalimaud to the trustees of the Acalens Trust would be a breach of trust. But that could not in itself make the bank liable. The claimant originally pleaded that the bank was guilty of knowing receipt of funds transferred in breach of trust. There was, however, on the facts no question of receipt. What the bank did was to follow the instruction of its client, in accordance with the mandate of the deceased and Sr Champalimaud, to hold the assets which were in account A371 to the order of the Acalens trustees in another account. Consequently the claim based on knowing receipt was not pursued at trial.
38. What is pleaded on behalf of the claimant is that the transfer of the assets in account A371 held to the order of Sr Champalimaud to another account in the name of the Acalens trustees was an intermeddling in the estate of the deceased; that it was dishonest on the part of the bank and of Sr Champalimaud; and that, to the knowledge of the bank, it was intended to facilitate a breach of trust by Sr Champalimaud. The particulars of knowledge and dishonesty are that Mr Horsley had intimate knowledge of the affairs of the deceased, and was privy to the intentions of Sr Champalimaud when he dealt with account A371 after the death of the deceased, and that Mr Horsley intended, by the transfer from account A371, to secure the misapplication of assets in the estate of the deceased to the detriment of the persons beneficially interested in such assets.
39. The way it was put in argument was that the bank wilfully shut its eyes to facts which indicated that Sr Champalimaud had no beneficial interest and therefore had no right to direct the assets to be held to the order of the Acalens Trust; and that the bank was guilty of a wrongful distribution of trust assets notwithstanding third party claims or knowingly dealt with the property inconsistently with the terms of the trust. The claimant says that the bank had notice of an adverse claim when some of the children of the deceased wrote to the bank on August 4, 1993 asking the bank to block the account because of a dispute between the heirs. The claimant relies on the principle reflected in, for example, Guardian Trust and Executors Co. of New Zealand v. Public Trustee of New Zealand [1942] AC 115 that a trustee who receives notice that fund in his possession is or may be claimed by a person will be liable to that person if he deals with the fund in disregard of that notice should the claim subsequently prove to be well founded. But in this case the bank was a bare trustee or agent for Sr Champalimaud, and it does not become liable by virtue of mere knowledge of a claim. What is required to make the bank liable is dishonesty (Lee v. Sankey (1873) LR 15 Eq. 204, 211), as in the claimant’s allegation of dishonest assistance.
40. It is of course accepted that the test of dishonesty for these purposes is to be found in Royal Brunei Airlines v. Tan [1995] AC 378, and the claimant relies particularly on this passage (at page 389):
“Unless there is very good and compelling reason, an honest person does not participate in a transaction if he knows it involves a misapplication of trust assets to the detriment of the beneficiaries. Nor does an honest person in such a case deliberately close his eyes and ears, or deliberately not ask questions, lest he learn something he would rather not know, and then proceed regardless.”
The claimant also relies on the statement of Millett LJ in Armitage v. Nurse [1998] Ch 241, 251 that a trustee who acts in a way which he does not honestly believe is in the interests of the beneficiaries is acting dishonestly. But citation of that proposition begs the question whether the bank is trustee for the family of the deceased. Even if Sr Champalimaud held on resulting trust for the estate, the fact that the bank was bare trustee for Sr Champalimaud did not make it a trustee for the estate. The bank was bound contractually to comply with instructions given by the surviving joint holder in accordance with the mandate: see, e.g., Lynch v. Burke and Anglo Irish Banks plc [1996] 1 ILRM 114, applying McEvoy v. Belfast Banking Co. Ltd. [1935] AC 24. A bank is not liable to a third party who claims to have an interest in the funds for complying with the instructions of its customer, in accordance with the mandate, unless it knows, or is on enquiry, that the funds are being misapplied: Gray v Johnston (1868) LR 3 HL 1, 11-13, 14.
41. I cannot of course make any alternative findings on the state of knowledge of the bank in relation to these matters because I have found that there was no breach of trust, and it would be an impossible gymnastic to make findings of knowledge on the hypothesis that there was a breach. But in relation to all of these allegations the claimant would have been in a fundamental difficulty even if I had found that the account was held on resulting trust for the estate. He has put forward a pleading in which it is alleged that Sr Champalimaud intended to commit a breach of trust and that the bank was dishonest because it was privy to his intentions, and because Mr Horsley intended to secure the misapplication of the assets of the estate to the detriment of the heirs, or wilfully shut his eyes to facts which would have indicated that Sr Champalimaud had no beneficial interest. But there is no evidence of Sr Champalimaud’s intention, and it was never put to Mr Horsley in the witness box that he knew Sr Champalimaud was in breach of trust, nor was he asked about Sr Champalimaud’s intentions, nor was it put to him that he intended to secure the misapplication of assets by Sr Champalimaud. Nor was there any material put to Mr Horsley in cross-examination which could have led to a finding that he wilfully shut his eyes to what on this hypothesis would have been a breach of trust. It remains necessary to plead an allegation of dishonesty clearly and with particularity. This was not done in this case, and the allegations of dishonesty were not put to Mr Horsley. In these circumstances the allegations of dishonesty against the bank should not have been made or pursued.
42. I will therefore dismiss the claim.
Hendry v Chartsearch Ltd
[1998] EWCA Civ 1276 [1998] CLC 1382, (2000) 2 TCLR 115
Evans LJ
26 Assignment
The Client [Defendants] shall not be entitled to assign licence or otherwise transfer the benefit of this Agreement whether in whole or in part without the prior written consent of the Interface… Interface shall not be entitled to assign or otherwise transfer this Agreement in whole or in part or to sub-contract any of obligations hereafter without the prior written consent of the Client which shall not be unreasonably withheld”.
9 Interface had not obtained the prior written consent of the Defendants to the Special Resolution of 9 September 1993 which the Plaintiff relied upon as an assignment to him of Interface’s causes of action under the Samms and Namebank Agreements. Nor had any request been made for such consent, and it followed that consent had not been refused, whether reasonably or not. When the Defendants were given notice of the assignment in November 1993, as the Plaintiff alleges that they were, it is not suggested that either party made any reference to the need for consent, or to the fact that it had not been given. Nor, when the Summons was issued on 19 October 1994, had they been asked to give their consent retrospectively.
10 Before the hearing date, however, the Plaintiff’s solicitors did request consent, by a letter dated 24 November 1993, in the following terms:-
“Having considered Interface’s position in this matter, we are instructed to ask your company to give Interface permission to assign the rights to payments under the Samms and Namebank Data Processing Agreements to Ross Hendry a director of Interface. These rights are those which are referred to the Statement of Claim in the action against you by Mr Hendry.”
There followed an express concession that “insofar as the contractual term prevents the assignment of contract, the court is bound to follow Linden Gardens ( Linden Gardens v Linesta [1993]AC 85) and hold that the assignment is not effective as against [the Defendants] at the moment”. The letter continued by reminding the Defendants that their approval was not to be unreasonably withheld, and asking them to approve “the assignment of [Interface’s] right to payment under the terms of the Samms and Namebank Data Processing Agreements which it entered [into] with you.”
11 The Defendant’s solicitor replied by letter on the following day:-
“We have advised our clients that the intended assignment is an abuse of process and/or void. We refer you to paragraph 31 – of the draft Amended Defence. In any event it cannot have been the intention of the parties to expect a consent to the assignment when their commercial relationship is at an end and when they are in dispute.
Without prejudice to our contention that your client cannot seek consent in the circumstances, no consent is given. Further we wish to make it clear that this letter is not intended to be a comprehensive list of our clients reasons for not giving consent.” (25 November 1994)
12 Before the Norglen judgment, which was given on 27 November 1997, there was Court of Appeal authority for the view that an assignment of a cause of action by a company to an individual, who unlike the company could obtain legal aid and was not subject to a potential liability to an order to provide security for the Defendant’s costs, was invalid, but the contrary decision of the Court of Appeal in Norglen itself was upheld by the House of Lords. Hence the “abuse of process” application in the present case, which is no longer pursued. It was in relation to that application, however, that a certain amount of background evidence was placed before the judge. The evidence made it clear what the reason for the assignment was. Interface was insolvent as at 30 June 1993, according to audited accounts, subject to its claims against the Defendants. The Plaintiff was a significant creditor. The Plaintiff’s evidence showed that it was his belief that the Defendants had set out to destroy his, namely Interface’s, business, so that they could enjoy the full fruits of his software development. He says that they starved him of cash – the outstanding debt at 30 June 1993, according to the accounts, was about £16,000 – and that they moved in on 25 June and took the computer equipment from him and induced five of his (Interface’s) six employees who operated the equipment to leave and join the Defendants, as they did shortly afterwards. The Defendants’ version of events is shown by the terms of the Defence. They say, in summary, that they were justified in retrieving the equipment on 25 June because, prior to that date, Interface was in breach of its obligations towards them with regard to confidentially and use of the equipment and software. They deny that they induced the Interface employees to break their contracts of employment. Rather, the employees resigned, with or without the agreement of Interface, and they were interviewed and subsequently employed by the Defendants on or after 28 June.
13 This was the basis on which the defendants made their application on 28 November 1994 to the learned judge. But before the hearing the Plaintiff’s solicitors served on the Defendants and on the court a proposed Re-amended Statement of Claim. No Summons was issued applying for leave to make this re-amendment, but clearly the hearing proceeded as if such an application was being made. There were two significant proposed amendments. The first was to plead an assignment to the Plaintiff of Interface’s claims for money due under and breaches of the exploitation agreement. The assignment relied upon was a further Special Resolution said to have been passed on 20 November 1994, a few days earlier, together with a previous Special Resolution relating to copyright on 6 June 1994, which was also after the date of the Writ. There was no term of the exploitation agreement, written or oral, which barred or restricted the right of assignment. The Defendants submitted that this re-amendment should be disallowed because the assignment or assignments relied upon took place after the issue of the Writ. It followed from this, they submitted, that the Plaintiff had no cause of action under the exploitation agreement at the date when the Writ was issued.
14 The second proposed re-amendment was an application to add Interface as second Plaintiff, but only for a limited purpose, which was to claim, together with Mr Hendry as first plaintiff, a declaration that the Defendants had unreasonably withheld their consent to Interface to assign the benefit of the Samms and Namebank Agreements to Mr Hendry, together with an order that the Defendants should give their written consent to such an assignment and that any sums founds to be due from the Defendants under the said contract should be paid to Mr Hendry. The remaining heads of claim were expressly limited to claims by Mr Hendry, and in each case he was claiming as assignee from Interface.
15 The learned judge gave judgment on 30 January 1995 after receiving certain further written submissions on behalf of the Plaintiff in relation to the Defendants’ objection to the amendments which relied upon a post-writ assignment. The judgment deals clearly and concisely with the issues that were raised before him. The outcome was as follows. The claims made by the Plaintiff as assignee under the Samms and Namebank Agreements were struck out on the ground that the assignments relied upon were ineffective as against the defendants because their prior written consent was not obtained. The claims under the exploitation agreement were likewise struck out because the Plaintiff was not entitled to bring them in his own name. Leave to re-amend the Statement of Claim in order to plead the post-writ assignment was refused, on the grounds that there was no power to allow such an amendment and as a matter of discretion in any event. The claim for damages for inducing breaches of the employees’ contracts of employment, which was “based in tort and not subject to any restrictions or assignment”, was not struck out, but the judge expressed doubts as to its “viability and substance”.
16 ISSUES
Counsel agreed the following three main issues before us:-
(1) Should the claims made by the plaintiff as assignee of the Samms and Namebank Agreements be struck out? The judge did strike them out. The basic ground for doing so was that the defendants did not give their “prior written consent” to the assignment by Interface upon which the Plaintiff relies. A further question is whether the Plaintiff should be given leave to re-amend the Statement of Claim in order to refer to the letter dated 25 November 1994, quoted above, by which the defendants refused their consent to any assignment to the Plaintiff, and to add Interface as Second Plaintiff in order to claim the Declaration and Order referred to above.
(2) Should the Plaintiff be given leave to re-amend the Statement of Claim so as to plead the Special Resolution of 20 November 1994 which is relied upon as an assignment of Interface’s claims under the exploitation agreement? The judge refused leave on the ground that the alleged assignment post-dated the writ.
(3) The defendants cross-appeal against the judge’s refusal to strike out the plaintiff’s claim as assignee of Interface’s claim for damages for the tort of inducing breaches of the five employees’ contracts of employment.
I shall deal with these issues in reverse order.
(A) Inducing breaches of contract
17 The judge said this:-
“…The damages which are claimed is the additional charge which
Interface would have made when costing out the employees, namely 100% of salary. If Interface’s business effectively came to a halt when Chartsearchremoved the equipment, it may be that the loss of Interface’s employees caused it no additional loss because there would have been no work for them. thus it could be that the outcome of any inducing breach of contract was simply to relieve Interface of the salary burden rather than to cause loss. I was not, however, addressed on this basis, and so I say no more about it. The facts may establish otherwise.” (para 40f)
and later, in a different context
“… For reasons which I have indicated but not elaborated I
regard this as a claim which is probably lacking real substance. I do not consider that it should be permitted to be used as a peg on which to hang the rest of the action.” ( para 42e)
The defendants cross-appeal on the specific ground (Respondents Notice under 0.59R.6(1)(A) para(1)) that damages are claimed in the sum of £6,344 whereas the assignment dated 7 September 1993 upon which the plaintiff relies provides that the first £10,000 of any received shall be paid to Interface. “Accordingly, there was no effective assignment in that the whole of the benefit thereof was retained and maintained for the Company” (para 1(c)).
18 In my judgment, this contention does not provide a basis for striking out the claim. There may or may not be reasons for regarding the plaintiff as a nominal plaintiff only, the substantial plaintiff being Interface, with whatever consequences might follow from that. But the claim should not be struck out on this ground. In addition, Mr O’Mahoney indicated that the damages claims may be more substantial than at presently pleaded, though why, if that is the case, the pleading is worded as it is I do not understand. In a separate ground of cross-appeal, the defendants say that the assignment was a “sham, device or stratagem”. Mr Freedman did not pursue this aspect in any detail and in my judgment he was precluded from doing so by the House of Lords judgment in Norglen. For these reasons, I would dismiss the cross-appeal against this part of the judge’s order.
19 (B) Re-amendment: assignment after the date of the visit
The judge refused leave on the ground that Eshelby v Federated European Bank [1922] 1KB254 should be applied. After the hearing but before judgment was given (and after seeing a draft judgment) Mr O’Mahoney made a further submission in writing, relying upon Vax Appliances Ltd vHoover Plc [1990] RPC656 and referring also to Roban Jig and Tool Co Ltd v Elkadart Ltd [1979] FSR 130. The judge said this:-
“… I consider that the principle set out in Eshelby and Roban is
applicable to the circumstances before me. It follows that there should not be leave to amend, or, if it is to be expressed as an exercise of discretion, that my discretion should be exercised to refuse leave”. (para 42b)
20 The Plaintiff appeals on the ground that the judge was wrong to rely upon Eshelby and wrong to exercise his discretion as he did.
Mr Freedmam QC for the respondents accepted that the judge had a discretion and submitted that it was exercised correctly. His eventual reason is simply that the plaintiff had no cause of action or no related or analogous cause of action at the date of the writ.
21 In my judgment, the judge was wrong not adopt the approach spelled out in Vax Appliances Ltd . There, Mummery J considered the earlier judgments both in Eshelby and in Roban Jig and Tool Co Ltd and he took account also of the provisions of the RSC Order 19 Rule 9:-
“Subject to [certain rules which are not material for present purposes] a party may in any pleading plead any matter which has arisen at any time, whether before or since the issue of the Writ.”
This Rule, which was introduced post – Eshelby in 1962, is in the most general terms, as is the court’s general power to grant leave to amend a pleading under Order 20 Rule 5(1). Mummery J so observed (page 661). He effectively distinguished Roban Jig and Tool Co ; where leave to amend was refused, because the “the plaintiff had no cause of action at all at the date of the writ” and “there was no cause of action to add to or be the subject of substitution”. In Vax Appliances , on the other hand, the defendant (seeking leave to amend the counterclaim) did have a cause of action at the date of the service of the counterclaim (page 661).
22 Mr Freedman submits in effect that it follows from this passage and from the judgments in Roban Jig and Tool Co that leave to amend cannot or should not be given unless the party seeking leave to add a fresh cause of action had some cause of action at the date of the Writ (or counterclaim). This would amount to a significant restriction on the apparently general discretion given by Order 20 Rule 5(1) and Order 19 Rule 9.
23 I would reject this submission. The scope of the RSC has been extended since the days when Eshelby was decided in 1932. In accordance with modern practice generally, the court has a general discretion which should not be restricted by hard-and-fast rules of practice, if not of law, such as that which is suggested here. The judge therefore was wrong to consider that the court had no power to give leave to make the re-amendment. In my view, he was wrong also to consider that the discretion was somehow restricted by what he called “the principle set out in Eshelby and in Roban “ (page 22). It is a general power which in modern parlance has to be exercised in accordance with the justice of the case.
24 I therefore proceed to consider whether leave should be granted in the present case. The statement of claim in its original and amended forms contains a clear statement of the causes of action relied upon under the exploitation agreement. The claims are made in the name of the plaintiff although it is also pleaded that the contracting party was Interface. The purpose of the re-amendment is to specify the reason why the plaintiff alleges that he is entitled to bring the claim. The cause of action remains the same: the additional facts cause no prejudice or embarrassment to the defendants. I cannot see any ground for refusing leave to make the re-amendment, and as the exploitation agreement does not contain an assignment clause there is no contractual basis for objecting to the amendment. In any event, I do not consider that the tort claim so lacks “viability and substance” that the case is equivalent to Roban Jig , where the plaintiff had no existing cause of action at the date of the writ.
25 For these reasons, I would allow the appeal and give leave to re-amend the Statement of Claim in this respect. A time bar defence was raised in argument but Mr O’Mahoney agreed on behalf of the plaintiff that the claim would be limited accordingly.
(C) Claims under the Samms and Namebank Agreements
26 Here, the central issue is whether the plaintiff can sue as assignee from Interface when the defendants did not give their prior written consent to the assignment upon which the plaintiff relies. They did not do so in fact, and when they were asked to consent, they refused. The defendants say that they cannot be sued under or for breaches of these Agreements except by Interface, or by an assignee from Interface to whom they cannot reasonably object. They say that they are entitled reasonably to object to an assignee (1) who cannot be ordered or does not offer to provide security for their costs, this being an order which they would seek against Interface under section 726 of the Companies Act 1985, and (2) who being an individual is eligible for legal aid. The plaintiff, they say, is objectionable on both grounds.
27 The central issue, however, is surrounded by a number of other issues, both procedural and substantive, which are raised by the defendants’ application to strike out the existing amended pleading and by the plaintiff’s assumed application to re-amend the statement of claim. These other issues are not easy to disentangle, and it is helpful to set them out here,
28 First, is it fatal to the plaintiff’s claim as assignee from Interface that the defendants were not asked to consent to the assignment, so as to give them the opportunity to give or withhold their consent, before it was made? Is it relevant in this context (1) that at the relevant date Interface was no longer carrying on business and the Agreements for practical purposes were at an end, and (2) that the defendants did not object to the assignment, or to the failure to give them prior notice, when they were notified of it, as the plaintiff alleges, before the writ was issued?
29 Second, are the letters in which consent was asked for and refused in November 1994 relevant to the plaintiff’s claim? If so, should leave to re-amend in order to rely upon them be given? The fact that the correspondence took place after the writ was issued does not prevent this (Vax Appliances , above).
30 Third, is it necessary for Interface to be joined as a party to the proceedings for the plaintiff to rely upon the assignment and to claim the Declaration and Order which he seeks in paragraph (1) and (2) of the proposed re-amended Statement of Claim? If so, there are considerable problems. Interface has been struck off the Register of Companies, although if necessary it could, Mr Hendry asserts, be restored.
31 Again, I will take these three matters in reverse order.
(1) Interface as second plaintiff
If it was necessary for the validity of the plaintiff’s claim as assignee that Interface should become a party to the action, then I would refuse leave to re-amend because of the impracticability of doing this without further cost and delay. But I do not think that it is necessary. The plaintiff claims as an equitable assignee, and the established practice is that the assignor should be made a party to the proceedings whether as co-plaintiff or as co-defendant with the alleged debtor. The reason for this is to ensure that the assignor is bound by the court’s judgment and that the debtor will not be sued for the same debt a second time. That practical consideration does not arise here; if it is raised by the defendants, then whatever order is appropriate can be made. But the inference is clear. The plaintiff’s right of action does not depend upon the assignee being co-plaintiff with him.
Moreover, in my judgment a plaintiff who claims as assignee has a sufficient interest to enable him to seek a Declaration that the assignment to him was valid.
(2) The letters dated 24/25 November 1994
These were post-assignment as well as post-writ. The plaintiff does not allege that there was a subsequent assignment, or purported assignment, in relation to which he can assert that there was a request for prior consent, which was unreasonably refused. There was no request for retrospective consent to the assignment which, it is alleged, had already been made on 9 September 1993. In these circumstances, it seems to me, the letters add nothing to the plaintiff’s existing claim. He either is or is not entitled to rely upon the earlier assignment for which consent was never sought, given or refused. If the assignment was invalid or ineffective as regards the defendants for want of their prior written consent, then their subsequent refusal does not establish a cause of action. At most, it provides evidence, if evidence is needed, of what the defendants’ attitude would have been, and in this respect the reason given for their refusal (though not their only reason) may be relevant – “it cannot have been the intention of the parties to expect a consent to an assignment when their commercial relationship is at an end and when they are in dispute”. But, as evidence, this need not be pleaded.
(3) No prior request no objection when notice given
These issues arise on the defendant’s strike-out application rather than the plaintiff’s application for leave to re-amend. The material facts are already pleaded. I do not think that the defendant’s failure to object, when notice (as it is alleged) of the assignment was given, can make the assignment valid or effective if it was not so before. The plaintiff’s failure to make a pre-assignment request is bound up with what I have called the central issue, namely, whether there could be a valid and effective assignment without the defendant’s prior written consent. To this central issue I now return.
Prior written consent “not to be unreasonably withheld”
32 This is a striking-out application which should not succeed unless it is clear from the pleaded facts that the plaintiff’s claim must fail, as a matter of law.
33 The pleaded facts are straightforward. There was an assignment, it is alleged, of contractual rights under a contract which contains a bar on assignments in qualified rather than absolute terms.
34 The distinction between ‘absolute’ and ‘qualified’ is important, because Mr O’Mahoney for the plaintiff accepts that, if the bar on assignments was absolute, then a purported assignment in breach of the claims would be ineffective as regards the debtor: Linden Gardens v Lenesta Sludge [1994] AC85 per Lord Browne-Wilkinson at 108F. Lord Browne-Wilkinson made it clear that the clause could bar assignments not only of the contractual rights to require performance by the other party, the primary obligations under the contract, but also claims or causes of action (secondary rights) arising out of breaches of contract (pages 103-106).
35 The judge relied upon the Linden Gardens judgment in holding that the plaintiff’s claims under the Samms and Homebank Agreements should be struck out. Mr O’Mahoney submits that he was wrong to do so. Where the bar is qualified, so that consent is required but may not be unreasonably withheld, then the reasonableness or otherwise of the other party’s refusal, or right to refuse, must be considered in the light of all the circumstances of the case, taking both parties’ interests into account. He submits that this is the correct approach by analogy with landlord and tenant cases, citing International Fluid Drilling Ltd v Louisville Investment [1986] 1 Ch 513, and that since these matters require investigation the claim should not be struck out at the interlocutory stage. He relies in particular upon what he alleges is the fact, namely, that the defendants deliberately sought to destroy the company’s business so as to starve it of funds and thereby prevent it from bringing proceedings on its own account.
36 Mr Freedman QC responds that, without consent, the assignment was a nullity, and alternatively that the defendants were entitled reasonably to withhold their consent, if they had been asked to give it. The trading relationship was at an end, and the proposed assignment was for the purpose of enabling litigation against the defendants, by a legally-aided plaintiff who would not be liable to be ordered to give security for the defendants costs (Respondents’ Skeleton Argument, para 20).
37 In my judgment, there are three separate issues which have to be considered. The first is whether the bar on assignment without consent continues to operate when, as Mr Freedman puts it, the trading relationship has come to an end. I note that the defendants’ solicitors in their letter dated 25 November 1994 refusing consent, quoted above, may have suggested that the clause cannot have been intended to operate in these circumstances, whereas the plaintiff’s solicitors, in their letter which was under reply, expressly conceded that the Linden Gardens decision applied and that the assignment which was pleaded was not effective against the defendants “at the moment”. Putting both these letters to one side, it seems to me that the clause can and does continue to operate, notwithstanding that the parties are no longer trading with each other and their relationship continues only for the purpose of resolving disputes governed by the terms of the Agreement. But the change in the nature of their relationship means that the circumstances which are relevant to the reasonableness or otherwise of refusing consent have changed also. In principle, the party who is entitled to refuse consent may have a legitimate interest in the identity of the other party in litigation or arbitration – see
Yeandle v Wynn Realisations Ltd – [1995] 47 Con LR 1, per
Sir Thomas Bingham MR at 13:-
“The party to whom a contractor pays a sum which he is bound to pay may well be a matter of indifference to him. The same is not necessarily true of the party against whom he finds himself defending a claim in arbitration”.
38 In this connection, we were referred to two recent decisions of this Court which were concerned with the extent to which contractual undertakings may continue to be binding notwithstanding that the contract has “come to an end”, as it is sometimes put, by reason of a repudiatory breach “accepted” by the other party. These authorities are Rock Refrigeration v Jones [1997] 1All ER1 and Hirst v Boyle [1997] 2 All ER 283 (we were told that an appeal to the House of Lords is pending in the latter). This led to submissions as to whether or not the Agreements were terminated in this way in the present case, and if so, when. In my judgment, the question whether a particular undertaking “survives” repudiation and acceptance depends always on the true construction of the contract in the particular case, and for the reasons given above clause 26 is capable of doing so.
39 The second issue is whether the grounds on which consent was or would have been refused in the present case were clearly reasonable, so much so that the plaintiff’s claim as assignee should be struck out. The grounds put forward are that the plaintiff as an individual is entitled to seek legal aid and is not liable to an order to provide security for the defendants’ costs. Apart from these specific matters, it is difficult to see that the defendant can be affected in any way by the fact that the plaintiff is Mr Hendry personally, rather than Interface Ltd, which on any view was his company. A response to this argument is that Mr Hendry having sought the advantages of incorporation for his trading venture should not be permitted to resile from the specific disadvantage, namely, the liability under s.726 of the Companies Act 1985 to provide security for costs, which that corporate status also brings see Norglen [1997] 3WLR 1177 per Lord Hoffman at p1188H). Nevertheless, this could be regarded as “a harsh and unrealistic judgment” (ibid p1187G).
40 In Norglen the House of Lords held that the assignment to an individual was not unlawful or contrary to public policy (though the issue was regarded as one of statutory interpretation: see page 1186C) merely because the assignee was entitled to seek legal aid (page 1189), nor because he could not be ordered to provide security for costs under section 726 (page 1188H). It does not follow from this, however, that the debtor is acting unreasonably if he refuses his consent to an assignment on these grounds.
41 If the eligibility for legal aid objection stood alone, then I should be reluctant to hold that it was reasonable for the debtor to refuse his consent on this ground. The essence of Lord Hoffman’s speech in Norglen, with which the other members of the House of Lords agreed, is that legal aid is available to impoverished litigants who would otherwise be deprived of access to the courts. Even though legal aid is not available to companies, Parliament had not intended to restrict the rights of companies to assign their property to individuals who could be granted legal aid and thereby enabled to pursue their claims. I doubt whether a debtor should rely upon the existence of the legal aid scheme as a reason for objecting to an assignment and thereby ensuring that no proceedings or no effective proceedings could be brought against him.
42 The position with regard to security for costs is, however, different. The debtor has a statutory right, “for better or worse” (page 1188H), which protects him from being in the unenviable position of being sued by an impecunious plaintiff (page 1181C). However great the disadvantages to the creditor, company or individual, I do not see how it could be regarded as unreasonable for the debtor to insist upon this statutory right.
43 For this reason, I would hold that the defendants were entitled to refuse consent in the present case, as they did after the assignment in November 1994 and as they doubtless would have done if asked before 9 September 1993. The third issue, namely, whether the assignment was invalid or ineffective on the ground that no prior request was made, even though consent could not reasonably have been refused, therefore does not arise. Although I have read the judgment of Millett L.J. in draft, I prefer to leave open the question whether the established law concerning leases necessarily applies to assignments of contractual rights. There appears to be no authority on this issue (see e.g. Chitty on Contracts (27th ed.) para. 19-025 where none is cited) and it may be arguable that the debtor cannot object to the validity of an assignment on the ground that he was not asked for his consent, when he could not reasonably have refused it. The distinction between leases and contractual obligations simpliciter may be relevant here, and I note that in Eastern Telegraph Co. Ltd v. Dent [1899] 1 Q.B. 835 the purported assignee in fact had moved into occupation of the premises. I must emphasise, however, that I do not dissent in any way from his analysis of the lease assignment cases.
44 I would add just this. If the individual assignee was willing and able to provide security in accordance with section 726 on the same terms as if he was the company, then it seems to me as at present advised that the debtor could not reasonably refuse his consent on this ground. Moreover, since section 726 gives a discretionary power, the factors urged on us by Mr O’Mahoney would be relevant to any such application, for example, his allegations that the company’s impecuniosity may have been deliberately brought about by the defendants. If therefore a plaintiff was prepared to undertake and could demonstrate that he was willing and able to provide such security as might have been ordered against the company if it was the claimant, then it might be that the claims by him as assignee should be permitted to stand. But that as I understand it is not the position here.
45 I therefore would allow the appeal as regards the exploitation agreement, but not otherwise, and dismiss the cross-appeal.
Lord Justice Henry:
On the point which separates my brother judges, I am of opinion that where an assignment of contractual rights (such as a chose in action) is prohibited without the prior written consent of the other contracting party (such consent not to be unreasonably refused) then there can be no valid assignment until after 1) written consent has been granted, or 2) the court has declared that the consent has been unnecessarily refused. That “prohibition on assignment normally only invalidates the assignment as against the other party to the contract so as to prevent a transfer of a chose in action” ( Linden Gardens Trust Limited -v- Lenesta Sludge Disposals Limited [1994] AC 85 at 108, per Lord Browne-Wilkinson).
The suggestion that the assignor can validly assign in breach of his contract without ever seeking prior consent by asserting that, as such consent could not reasonably be refused, so it is unnecessary, seems to me to be a recipe to promote uncertainty and speculative litigation. I prefer the simple certainty that prior consent never applied for is never withheld or refused (whether reasonably or otherwise). The burden of suing should be on the party who asserts that he is not obliged to ask for prior consent as his contract required him to because it could not reasonably be refused.
That apart, I agree entirely with the judgment of Lord Justice Evans, and the order he proposes.
LORD JUSTICE MILLETT:
I have had the advantage of reading in draft the judgment of Evans LJ. Save in one respect I agree with it and with the orders which he proposes. The one respect in which I venture to differ from him is that I regard it as fatal to the validity of the assignment on which the plaintiff relies that the defendants’ consent was not sought before the assignment was made. The hypothetical question whether if their consent had been sought it could reasonably have been refused is in my opinion irrelevant and is not a proper subject of inquiry.
The law is settled to this effect in relation to the assignment of leasehold land; and while there are significant differences between the assignment of an interest in land and an assignment of the benefit of a contract, they do not bear on this question.
A lease creates a legal estate in land. One of the incidents of ownership is the right to dispose of the property. A condition against alienation which is directly attached to the estate is repugnant to this right and void. It is, therefore, not possible to deprive a lessee of his ability to make an effective assignment of the lease. But it is possible for the lessor to take a covenant against assignment and to reserve a power of re-entry for breach of the covenant. An assignment in breach of covenant is effective to vest the legal estate in the assignee: Old Grovebury Manor Farm v Seymour Plant Sales & Hire (No. 2) [1979] 1 WLR 1397; but the assignee takes a defeasible interest only which is liable to forfeiture for breach of covenant.
A covenant against assignment may be in absolute terms or conditional on obtaining the lessor’s prior consent; and such a condition may be qualified by a proviso that the lessor’s consent shall not be unreasonably withheld. Where the condition is qualified in this way the lessor does not undertake not unreasonably to refuse his consent, but an unreasonable refusal of consent leaves the lessee at liberty to assign without it: Treloar v Bigge (1874), 9 Exch. 151.
But it is essential that the lessor’s consent is sought before the assignment is made. Consent cannot be said to be withheld or refused if it is not asked for: Barrow v Isaacs [1891] 1 QB 417; Eastern Telegraph Co. Ltd. v Dent [1899] 1 QB 835. It is no answer that no reasonable objection could have been made if consent had been sought; the proviso has no application unless it is.
As between the parties to it, an ordinary commercial contract is not property but obligation. There is therefore no objection to making the benefit of the contract non-assignable. There is no need to take a covenant against assignment or reserve a power to treat assignment without consent as a repudiatory breach of contract, neither of which would provide an adequate or appropriate remedy to the other party. It is sufficient to provide, as the present contract does, that a party should not be entitled to assign the benefit of the agreement without the prior written consent of the other.
Such a clause takes effect according to its tenor. The assignment which was made without the prior written consent of the defendants was effective as between assignor and assignee, but was ineffective as between the assignor and the defendants. The making of such an assignment did not put the assignor in breach of contract, let alone in repudiatory breach; it simply did not affect the defendants’ legal position and could be disregarded by them with impunity.
But these differences cannot affect the meaning of the proviso. Whether the subject-matter of the proposed assignment is a term of years or the benefit of a commercial contract, the effect of the proviso is the same. Consent is not withheld if it is not asked for; and if it is not withheld it cannot be said to be unreasonably withheld.
In the case of a lease, the fact that an assignment in breach of covenant is effective to vest the term in the assignee means that it is too late to seek consent; the breach of covenant is complete and the lease is liable to forfeiture. That is not so in the case of the benefit of a contract. The assignment does not constitute a breach of contract and is without legal effect so far as the other party to the contract is concerned. It is not too late for the assignor to ask for consent. But the contract requires the assignor to obtain the prior consent of the other party; retrospective consent, if given, may operate as a waiver, but cannot amount to the consent required by the contract. The proper course is for the assignor to ask for consent to a new assignment and to wait until it is given or unreasonably refused before proceeding to make it.
In my judgment it is wrong in principle to entertain the hypothetical question whether the defendants could have objected to the assignment if they had been asked for it. I would refuse to give the assignment any effect without entering upon this question.
Linden Gardens Trust Ltd v Lenesta Sludge Disposals Ltd
[1993] UKHL 4 [1994] 1 AC 85, [1994] AC 85, [1993] 3 All ER 417, [1993] UKHL 4
Lord Browne Williams
The two cases therefore raise, or potentially raise, the following issues:
1. Does clause 17(1) of the building contracts prohibit the purported
assignment of the benefit of the building contracts?
2. Does clause 17(1) prohibit the assignment of causes of action for
breaches of contract subsisting at the date of the Assignments?
3. Is a prohibition on assignment void as being contrary to public
policy?
Even if the Assignments were validly prohibited, were they
effective to vest causes of action in the assignees?
If so, what is the measure of damages recoverable by the
assignees?
6. If the assignments are ineffective, can the original contracting
party recover substantial damages?
I will deal with these issues in turn, save that on the view I take of the case
issue 5 does not arise since the assignments were invalid and ineffective to
vest any cause of action in the assignees.
1. Does clause 17 prohibit the assignment of the benefit of
building contracts?
Staughton L.J. (dissenting on this point) held that on its true
construction clause 17 did not prohibit the assignment by the employer of the
benefit of the building contract. It was urged before your Lordships on
behalf of Linden Gardens and Investments that his views were correct.
The argument runs as follows. On any basis, clause 17 is unhappily
drafted in that it refers to an assignment of “the contract”. It is trite law that
it is, in any event, impossible to assign “the contract” as a whole, i.e.
including both burden and benefit. The burden of a contract can never be
assigned without the consent of the other party to the contract in which event
such consent will give rise to a novation. Therefore one has to discover what
the panics meant by this inelegant phrase. It is said that the intention of the
parties in using the words “assign this contract” is demonstrated by clause
17(2) which prohibits both the assignment of the contract by the contractor
without the employer’s consent and the sub-letting of any portion of the works
without the consent of the architect. In clause 17(2), the contractor is only
expressly prevented from sub-letting “any portion of the works.” Yet it must
have been the party’s intention to limit the contractor’s rights to sub-let the
whole of the works. Accordingly, the words in clause 17(2) “assign this
contract” have to be read as meaning “sub-let the whole of the works.” If
that is the meaning of the words “assign this contract” in clause 17(2) they
must bear the same meaning in clause 17(1), which accordingly only prohibits
the employer from giving substitute performance and does not prohibit the
assignment of the benefit of the contract.
Like the majority of the Court of Appeal. I am unable to accept this
argument. Although it is true that the phrase “assign this contract” is not
strictly accurate, lawyers frequently use those words inaccurately to describe
an assignment of the benefit of a contract since every lawyer knows that the
burden of a contract cannot be assigned: see, for example. Nokes v.
Doncaster Amalgamated Collieries Ltd. [1940] A. C. 1014, 1019-1020. The
prohibition in clause 17(2) against sub-letting “any portion of the Works”
necessarily produces a prohibition against the sub-letting of the whole of the
works: any sub-letting of the whole will necessarily include a sub-letting of
a portion and is therefore prohibited. Therefore there is no ground for
reading the words “assign this contract” in clause 17(1) as referring only to
sub-letting the whole. Decisively, both clause 17(1) and (2) clearly
distinguish between “assignment” and “sub-letting”: it is therefore impossible
to read the word “assign” as meaning “sub-let.” Finally, I find it difficult to
comprehend the concept of an employer “sub-letting” the performance of his
contractual duties which consist primarily of providing access to the site and
paying for the works.
Accordingly, in my view clause 17(1) of the contract prohibited the
assignment by the employer of the benefit of the contract. This, by itself, is
fatal to the claim by Investments (as assignee) in the St. Martin’s case.
2. Does clause 17(1) prohibit the assignment of accrued rights of
action?
The majority in the Court of Appeal drew a distinction between an
assignment of the right to require future performance of a contract by the
other party on the one hand and an assignment of the benefits arising under
the contract (e.g. to receive payment due under it or to enforce accrued rights
of action) on the other hand. They held that clause 17 only prohibited the
assignment of the right to future performance and did not prohibit the
assignment of the benefits arising under the contract, in particular accrued
causes of action. Therefore, in the Linden Gardens case, where all the
relevant breaches of contract by the contractors pre-dated the Assignment, an
assignment to Linden Gardens of the accrued rights of action for breach was
not prohibited. In contrast, in the St. Martin’s case, where all the breaches
of contract occurred after the date of the Assignment, the majority of the
Court of Appeal held that it was a breach of clause 17 to seek to transfer the
right to future performance.
This distinction between assigning the right to future performance of
a contract and assigning the benefits arising under a contract was largely
founded on a Note entitled “Inalienable Rights?” by Professor Goode ((1979)
42 M.L.R. 553) on Helstan Securities Ltd. v. Hertfordshire County Council
[1978] 3 All E.R. 262. In that case a contract contained a clause prohibiting
the contractor from assigning the contract “or any benefit therein or
thereunder.” The contractors assigned to the plaintiffs the right to a
liquidated sum of money then alleged to be due to the contractors under the
contract. Croom-Johnson J. held that the plaintiffs, as assignees, could not
sue the employers to recover the sum of money.
In his Note, Professor Goode rightly pointed out that where a contract
between A and B prohibits assignment of contractual rights by A. the effect
of such a prohibition is a question of the construction of the contract. There
are at least four possible interpretations, viz.,
that the term does not invalidate a purported assignment by A
to C but gives rise only to a claim by B against A for damages for breach of
the prohibition;
that the term precludes or invalidates any assignment by A to
C (so as to entitle B to pay the debt to A) but not so as to preclude A from
agreeing, as between himself and C, that he will account to C for what A
receives from B: In re Turcan (1888) 40 Ch. D. 5;
that A is precluded not only from effectively assigning the
contractual rights to C. but also from agreeing to account to C for the fruits
of the contract when received by A from B;
that a purported assignment by A to C constitutes a repudiatory
breach of condition entitling B not merely to refuse to pay C but also to refuse
to pay A.
Professor Goode then expressed the view that construction (2) (being
the Helstan case itself) was permissable and effective but that construction (3)
to the extent that it purported to render void not only the assignment as
between B and C but also as between A and C was contrary to law.
I am content to accept Professor Goode’s classification and
conclusions, though I am bound to say that I think cases within categories (1)
and (4) are very unlikely to occur. But Professor Goode’s classification
provides no warrant for the view taken by the majority of the Court of Appeal
in the present case: he does not discuss or envisage a case where a
contractual prohibition against assignment is to be construed as prohibiting an
assignment by A to C of rights of future performance but does not prohibit the
assignment by A to C of “the fruits of performance” e.g., accrued rights of
action or debts. Professor Goode only draws a distinction between the
assignment of rights to performance and the assignment of rights under the
contract in two connections: first in dealing with the effect of a prohibited
assignment as between the assignor and the assignee (in categories (2) and
(3)): secondly, in dealing with contracts for personal services. In the latter,
he rightly points out that, although an author who has contracted to write a
book for a fee cannot perform the contract by supplying a book written by a
third party, if he writes the book himself he can assign the right to the fee –
the fruits of performance. He expressly mentions that such right to assign the
fruits of performance can be prohibited by the express terms of the contract.
However, although I do not think that Professor Goode’s article throws
any light on the true construction of clause 17, I accept that it is at least
hypothetically possible that there might be a case in which the contractual
prohibitory term is so expressed as to render invalid the assignment of rights
to future performance but not so as to render invalid assignments of the fruits
of performance. The question in each case must turn on the terms of the
contract in question.
The question is to what extent does clause 17 on its true construction
restrict rights of assignment which would otherwise exist? In the context of
a complicated building contract, I find it impossible to construe clause 17 as
prohibiting only the assignment of rights to future performance, leaving each
party free to assign the fruits of the contract. The reason for including the
contractual prohibition viewed from the contractor’s point of view must be
that the contractor wishes to ensure that he deals, and deals only, with the
particular employer with whom he has chosen to enter into a contract.
Building contracts are pregnant with disputes: some employers are much
more reasonable than others in dealing with such disputes. The disputes
frequently arise in the context of the contractor suing for the price and being
met by a claim for abatement of the price or cross-claims founded on an
allegation that the performance of the contract has been defective. Say that,
before the final instalment of the price has been paid, the employer has
assigned the benefits under the contract to a third party, there being at the
time existing rights of action for defective work. On the Court of Appeal’s
view, those rights of action would have vested in the assignee. Would the
original employer be entitled to an abatement of the price, even though the
cross-claims would be vested in the assignee? If so, would the assignee be
a necessary party to any settlement or litigation of the claims for defective
work, thereby requiring the contractor to deal with two parties (one not of his
choice) in order to recover the price for the works from the employer? 1
cannot believe that the parties ever intended to permit such a confused position
to arise.
Again, say that before completion of the works the employers assigned
the land, together with the existing causes of action against the contractor, to
a third party and shortly thereafter the contractor committed a repudiatory
breach? On the construction preferred by the Court of Appeal, the right to
insist on further performance, being unassignable, would have remained with
the original employers whereas the other causes of action and the land would
belong to the assignee. Who could decide whether to accept the repudiation,
the assignor or the assignee?
These possibilities of confusion (and many others which could be
postulated) persuade me that panics who have specifically contracted to
prohibit the assignment of the contract cannot have intended to draw a
distinction between the right to performance of the contract and the right to
the fruits of the contract. In my view they cannot have contemplated a
position in which the right to future performance and the right to benefits
accrued under the contract should become vested in two separate people. I
say again that that result could have been achieved by careful and intricate
drafting, spelling out the parties’ intentions if they had them. But in the
absence of such a clearly expressed intention, it would be wrong to attribute
such a perverse intention to the panics. In my judgment, clause 17 clearly
prohibits the assignment of any benefit of or under the contract.
It follows that the purported assignment to Linden Gardens without the
consent of the contractors constituted a breach of clause 17. The claim of
Linden Gardens as assignee must therefore fail unless it can show that the
prohibition in clause 17 was either void as being contrary to public policy or.
notwithstanding the breach of clause 17, the Assignment was effective to
assign the chose in action to Linden Gardens.
3. Is a prohibition on assignment void as being contrary to public
policy?
It was submitted that it is normally unlawful as being contrary to
public policy to seek to render property inalienable. Since contractual rights
are a species of property, it is said that a prohibition against assigning such
rights is void as being illegal.
This submission faces formidable difficulties both on authority and in
principle. As to the authorities, in In re Turcan (supra) a man effected an
insurance policy which contained a term that it should not be assignable in any
case whatever. He had previously covenanted with trustees to settle after-
acquired property. The Court of Appeal held that although he could not
assign the benefit of the policy so as to give the trustees the power to recover
the money from the insurance company, he could validly make a declaration
of trust of the proceeds which required him to hand over such proceeds to the
trustees. This case proceeded, therefore, on the footing that the contractual
restriction on assignment was valid. In Helstan Securities (supra) Croom-
Johnson J. enforced such a prohibition. In Reed Publishing Holdings Ltd. v.
King’s Reach Investments (unreported), 25 May 1983; Court of Appeal (Civil
Division) Transcript No. 121 of 1983, the Court of Appeal had to consider an
application to join as a party to an action an assignee of the benefit of a
contract which contained a prohibition on such assignment. One of their
grounds for refusing the application was that by reason of the prohibition the
assignment was of no effect.
In none of these cases was the public policy argument advanced. But
they indicate a long-term acceptance of the validity of such a prohibition
which is accepted as pan of the law in Chitty on Contracts, 26th ed. (1989).
vol. 1, p. 883, para. 1413. We were referred to a decision of the supreme
court of South Africa, Paiges v. van Ryn Goldmines Estates Ltd. 1920 A.D.
600 in which it was expressly decided that a term prohibiting a workman from
assigning his wages was not contrary to public policy. In Scotland a
covenant against assigning a lease of minerals (which was treated simply as
a contract) was held not to infringe public policy: Duke of Portland v. Baird
and Co. (1865) 4 M. 10. We were referred to certain cases in the United
States, but they give no unequivocal guidance.
In the face of this authority, the House is being invited to change the
law by holding that such a prohibition is void as contrary to public policy.
For myself I can see no good reason for so doing. Nothing was urged in
argument as showing that such a prohibition was contrary to the public interest
beyond the fact that such prohibition renders the chose in action inalienable.
Certainly in the context of rights over land the law does not favour restrictions
on alienability. But even in relation to land law a prohibition against the
assignment of a lease is valid. We were not referred to any English case in
which the courts have had to consider restrictions on the alienation of tangible
personal property, probably because there are few cases in which there would
be any desire to restrict such alienation. In the case of real property there is
a defined and limited supply of the commodity and it has been held contrary
to public policy to restrict the free market. But no such reason can apply to
contractual rights: there is no public need for a market in choses in action.
A party to a building contract, as I have sought to explain, can have a
genuine commercial interest in seeking to ensure that he is in contractual
relations only with a person whom he has selected as the other party to the
contract. In the circumstances, I can see no policy reason why a contractual
prohibition on assignment of contractual rights should be held contrary to
public policy.
To avoid doubt, I must make it clear that I have been considering only
the validity of a restriction which prohibits assignments which have the effect
of bringing the assignee into direct contractual relations with the other party
to the contract. I have not been considering Professor Goode’s category (3),
i.e. an attempt by contractual term to prevent one party making over the fruits
of the contract to a third party. Professor Goode expresses the view that if
the prohibition seeks to prevent the assignor from binding himself to pay over
such fruits to the assignee, such prohibition is pro tanto void. I express no
view on that point.
4. Are the assignments (although prohibited) effective to transfer
the causes of action to the assignees?
It was submitted that, even though the assignments were in breach of
clause 17. they were effective to vest the causes of action in the assignees, i.e.
Professor Goode’s category 1. This argument was founded on two bases:
first, the decision in Tom Shaw and Co. v. Moss Empires Ltd. (1908) 25
T.L.R. 190: second, the fact that an assignment of a leasehold term in breach
of a covenant against assignment is effective to vest the term in the assignee.
In the Tom Shaw case an actor, B, was engaged by Moss Empires
under a contract which prohibited the assignment of his salary. B assigned
10 per cent of his salary to his agent, Tom Shaw. Tom Shaw sued Moss
Empires for 10 per cent of the salary joining B as second defendant. Moss
Empires agreed to pay the 10 per cent of the salary to Tom Shaw or B as the
court might decide i.e. in effect it interpleaded. Darling J. held, at p. 191.
that the prohibition on assignment was ineffective: it could “no more operate
to invalidate the assignment than it could to interfere with the laws of
gravitation.” He gave judgment for the plaintiffs against both B and Moss
Empires, ordering B to pay the costs but making no order for costs against
Moss Empires.
The case is inadequately reported and it is hard to discover exactly
what it decides. Given that both B and Moss Empires were panics and Moss
Empires was in effect interpleading, it may be that the words I have quoted
merely indicate that as between the assignor, B, and the assignee Tom Shaw,
the prohibition contained in the contract between B and Moss Empires could
not invalidate B’s liability to account to Tom Shaw for the monies when
received and that, since B was a party, payment direct to Tom Shaw was
ordered. This view is supported by the fact that no order for costs was made
against Moss Empires. If this is the right view of the case, it is
unexceptionable: a prohibition on assignment normally only invalidates the
assignment as against the other party to the contract so as to prevent a transfer
of the chose in action: in the absence of the clearest words it cannot operate
to invalidate the contract as between the assignor and the assignee and even
then it may be ineffective on the grounds of public policy. If on the other
hand Darling J. purported to hold that the contractual prohibition was
ineffective to prevent B’s contractual rights against Moss Empires being
transferred to Tom Shaw, it is inconsistent with authority and was wrongly
decided.
In the Helstan Securities case Croom-Johnson J. did not follow the
Tom Shaw case and held that the purported assignment in breach of the
contractual provision was ineffective to vest the cause of action in the
assignee. That decision was followed and applied by the Court of Appeal in
the Reed Publishing Holdings case (supra): see also Turcan (supra).
Therefore the existing authorities establish that an attempted assignment
of contractual rights in breach of a contractual prohibition is ineffective to
transfer such contractual rights. I regard the law as being satisfactorily
settled in that sense. If the law were otherwise, it would defeat the legitimate
commercial reason for inserting the contractual prohibition viz. to ensure that
the original parties to the contract are not brought into direct contractual
relations with third parties.
As to the analogy with leases, I was originally impressed by the fact
that an assignment of the term in breach of covenant is effective to vest the
term in the assignee: Williams v. Earle (1868) L.R. 3 Q.B. 739, 750: Old
Grovebury Manor Farm Ltd. v. W. Seymour Plant Sales and Hire Ltd. (No.
2) [1979] 1 WLR 1397. However. Mr Kentridge in his reply satisfied me
that the analogy is a false one. A lease is a hybrid, part contract, part
property. So far as rights of alienation are concerned a lease has been treated
as a species of property. Historically the law treated interests in land, both
freehold and leasehold, as being capable of disposition and looked askance at
any attempt to render them inalienable. However, by the time of Coke
covenants against the assignment of leases had been held to be good, because
the lessor had a continuing interest in the identity of the person who was his
tenant: Holdsworth, A History of English Law, 2nd ed., vol. III. p. 85 and
vol. VII, p. 281. The law became settled that an assignment in breach of
covenant gave rise to a forfeiture, but pending forfeiture the term was vested
in the assignee. In contrast, the development of the law affecting the
assignment of contractual rights was wholly different. It started from exactly
the opposite position viz. contractual rights were personal and not assignable.
Only gradually did the law permitting assignment develop: Holdsworth, vol.
VII, p. 520-521 and 531 etc. It is therefore not surprising if the law
applicable to assignment of contractual rights differs from that applicable to
the assignment of leases.
Therefore in my judgment an assignment of contractual rights in breach
of a prohibition against such assignment is ineffective to vest the contractual
rights in the assignee. It follows that the claim by Linden Gardens fails and
the Linden Garden action must be dismissed.
5. What is the measure of damages recoverable by the assignee?
In view of my decision on the earlier issues, this issue does not arise
for determination. I mention it only to explain that the Court of Appeal
considered that the assignee was entitled to recover what the assignor could
have recovered had there been no assignment. On that basis Staughton L.J.
(who had held that the assignees in both actions could sue) had to consider
what the assignors could have recovered.
6. What is the measure of damages in the claim by Corporation?
McAlpine accept that, since the attempted assignment by Corporation
of its rights under the contract to Investments was ineffective. Corporation has
retained those rights and is entitled to judgment against McAlpine for any
breach of contract. But. McAlpine submits, Corporation is only entitled to
nominal damages. Corporation has suffered no loss: it had parted with its
interest in the property (and therefore with the works when completed) before
any breach of the building contract: moreover Corporation received full value
for that interest on its disposal to Investments. Therefore, it is said, neither
of the plaintiffs has any right to substantial damages: Investments has incurred
damage (being the cost of rectifying the faulty work) but has no cause of
action; Corporation has a cause of action but has suffered no loss. If this is
right, in the words of my noble and learned friend, Lord Keith of Kinkel in
G. U. S. Property Management Ltd. v. Littlewoods Mail Order Stores Ltd.,
1982 S. L. T. 533, 538, “… the claim to damages would disappear…into
some legal black hole, so that the wrongdoer escaped scot-free.”
The Court of Appeal was able to avoid this result by reason of the
continuing liability on Corporation to indemnify Investments against the cost
of remedying the defects. McAlpine accepted, and still accept, that
Corporation is liable to Investments in damages for Corporation’s breach of
contract in failing to obtain the consent of McAlpine to the assignment of the
benefit of the building contract. The measure of the damages payable by
Corporation to Investments for such breach would be the cost of remedying
the defects since, if the Assignment had been valid, Investments could have
recovered such cost from McAlpine. Therefore, the Court of Appeal held.
Corporation have suffered substantial loss by reason of McAlpine’s breach,
such loss being the liability to indemnify Investments.
Attractive as this argument is. Mr Fernyhough for McAlpine has
satisfied me that it is erroneous because the damage being claimed is too
remote. The loss so identified as having been suffered by Corporation flows
from the attempt by Corporation to assign the benefit of the building contract
in breach of clause 17 of the contract. However the rule in Hadley v.
Baxendale (1854) 9 Exch 341 is formulated, in my judgment it is impossible
to say that such damage arose naturally according to the usual course of
things, or was in the contemplation of, or foreseeable by, McAlpine, or that
McAlpine ought to have realised that such damage was “not unlikely”. The
contract for the breach of which damages are sought expressly prohibited
Corporation from making such assignment. One party to a contract cannot be
liable for damages flowing from the doing of an act by the other party which
the contract itself expressly forbids.
It is therefore necessary to consider Mr Fernyhough’s principle
argument in some detail. He starts from the well known proposition that the
measure of damages is generally “that sum of money which will put the party
who has been injured, or who has suffered, in the same position he would
have been in if he had not sustained the wrong for which he is now getting his
compensation or reparation:” per Lord Blackburn in Livingstone v. Rawyards
Coal Company (1880) 5 App.Cas. 25, 39. Since, before the date of any
breach of contract by McAlpine, Corporation had disposed of all its interest
in the property on which the building works were carried out. Corporation has
suffered no loss. Corporation received the full value of the property from
Investments. The measure of damages for defective performance of a
building contract is the diminution in value of the plaintiff’s property, which
diminution is usually properly reflected by the cost of carrying out the repairs
necessary to effect reinstatement: East Ham Corporation v. Bernard Sunley
& Sons Ltd. [1966] A.C. 406. Since at the date of breach Corporation did not
own the property, Corporation suffered no loss by any diminution in its value
nor could Corporation carry out any works of reinstatement. Therefore, it
is said. Corporation has suffered no loss.
Mr Fernyhough accepted that central to his argument is the fact that
at the date of breach Corporation no longer owned the property. He
distinguished the decision in Newton Abbot Development Co. Ltd. v. Stockman
Brothers (1931) 47 T.L.R. 616 on that ground. In that case the plaintiffs, as
developers, had contracted with the defendants as contractors for the
construction of a number of houses. After completion of the works, the
plaintiffs had sold the houses to individual purchasers at a profit. Thereafter
defects due to faulty construction by the defendants appeared in the houses.
The plaintiffs, although under no legal liability to do so, had remedied these
defects. They were held entitled to recover from the defendants not the cost
of effecting the remedial work but the difference between the value of the
houses as they ought to have been completed and their actual value as in fact
completed. Mr Fernyhough explains this case on the basis that, although in
fact the plaintiff suffered no commercial loss, they were the owners of the
houses at the date of breach and therefore entitled to the diminution in value
of that property, the sale on by the plaintiffs being irrelevant as res inter alios
acta. In support of the proposition that only nominal damages are
recoverable by a plaintiff who has parted with ownership of the property at the
date of breach, Mr Fernyhough further relied on two cases concerned with
breach of contract for the carriage of goods. Albacruz v. Albazero, The
Albazero [1977] A.C. 774 and Obestain Inc. v. National Mineral Development
Corporation Ltd. (The “Sanix Ace”) [1987] 1 Lloyd’s Rep. 465.
This is a formidable, if unmeritorious, argument since it is apparently
soundly based on principle and is supported by authority. In The Albazero the
plaintiffs chartered the defendant’s vessel for the carriage of oil. The
carriage was covered by a bill of lading which named the plaintiffs as
consignees. In the course of the voyage the vessel and cargo became a total
loss. However on the day before that loss, the plaintiffs indorsed the bill of
lading to a third party: the property in the goods and the right to sue the
defendants were thereby vested in the third party. The plaintiffs, although
having no property in the goods at the date of breach of the contract of
carriage, sued the defendants for the full value of the goods. This House held
that the plaintiffs were not entitled to substantial damages. Lord Diplock
treated the general rule as being clear: a party who has no property in the
goods at the date of breach has suffered no loss. However he recognised that
there were exceptions to this general rule and I will consider those exceptions
later.
Notwithstanding the apparent logic of Mr Fernyhough’s submission,
I have considerable doubts whether it is correct. A contract for the supply of
goods or of work, labour and materials (a supply contract) is not the same as
a contract for the carriage of goods. A breach of a supply contract involves
a failure to provide the very goods or services which the defendant had
contracted to supply and for which the plaintiff has paid or agreed to pay. If
the breach is discovered before payment of the contract price, the price is
abated by the cost of making good the defects: see as to sale of goods Mondel
v. Steel (1841) 8 M. & W.858 and Sale of Goods Act 1979, section 53(1);
as to building contracts Modern Engineering (Bristol) Ltd. v. Gilbert-Ash
(Northern) Ltd. [1974] A.C. 689. Mr Fernyhough accepted that this right to
abatement of the price does not depend on ownership by the plaintiff of the
goods and it would be odd if the plaintiff’s rights arising from breach varied
according to whether the breach was discovered before or after the payment
of the price. No such similar principle of abatement applies to freight
charges: the freight charges have to be paid in full leaving the consignor to
bring a separate action for damages for breach of the contract of carriage:
Colonial Bank v. European Grain and Shipping Ltd. (The Dominique) [1989]
A.C. 1056, 1067-1068.
In contracts for the sale of goods, the purchaser is entitled to damages
for delivery of defective goods assessed by reference to the difference between
the contract price and the market price of the defective goods, irrespective of
whether he has managed to sell on the goods to a third party without loss:
Slater v. Hoyle & Smith Limited [1920] 2 K.B. 11; see also as to non-delivery
Williams Brothers v. Ed. T. Agius Limited [1914] A.C. 510. In those cases
the judgments contained no consideration of the person in whom the property
in the goods was vested although it appears that some of the sub-contracts had
been made prior to the breach of contract.
If the law were to be established that damages for breach of a supply
contract were not quantifiable by reference to the beneficial ownership of
goods or enjoyment of the services contracted for but by reference to the
difference in value between that which was contracted for and that which is
in fact supplied, it might also provide a satisfactory answer to the problems
raised where a man contracts and pays for a supply to others, e.g., a man
contracts with a restaurant for a meal for himself and his guests or with a
travel company for a holiday for his family. It is apparently established that,
if a defective meal or holiday is supplied, the contracting party can recover
damages not only for his own bad meal or unhappy holiday but also for that
of his guests or family; see Jackson v. Horizon Holidays Ltd. [1975] 1
W.L.R. 1468 as explained in Woodar In vestment Development Ltd. v. Wimpey
Construction U.K. Ltd. [1980] 1 WLR 277, 283-284. 293-294. 297 and
300-301.
There is therefore much to be said for drawing a distinction between
cases where the ownership of goods or property is relevant to prove that the
plaintiff has suffered loss through the breach of a contract other than a
contract to supply those goods or property and the measure of damages in a
supply contract where the contractual obligation itself requires the provision
of those goods or services. I am reluctant to express a concluded view on
this point since it may have profound effects on commercial contracts which
effects were not fully explored in argument. In my view the point merits
exposure to academic consideration before it is decided by this House. Nor
do I find it necessary to decide the point since, on any view, the facts of this
case bring it within the class of exceptions to the general rule to which Lord
Diplock referred in The Albazero.
In The Albazero Lord Diplock said (at p. 846B):
“Nevertheless, although it is exceptional at common law that a plaintiff
in an action for breach of contract, although he himself has not
suffered any loss, should be entitled to recover damages on behalf of
some third person who is not a party to the action for a loss which that
third person has sustained, the notion that there may be circumstances
in which he is entitled to do so was not entirely unfamiliar to the
common law and particularly to that part of it which, under the
influence of Lord Mansfield and his successors. Lord Ellenborough
and Lord Tenterden, had been appropriated from the law merchant.
“I have already mentioned the right of the bailee, which has been
recognised from the earliest period of our law, to sue in detinue or
trespass for loss or damage to his bailor’s goods although he cannot be
compelled by his bailor to do so and he is not himself liable to the
bailor for the loss or damage: The Winkfield [1902] P.42.
Nevertheless, he becomes accountable to his bailor for the proceeds of
the judgment in an action by his bailor for money had and received.
So too the doctrine of subrogation in the case of insurers, which was
adopted from the law merchant by the common law in the eighteenth
century, involved the concept of the nominal party to an action at
common law suing for a loss which he had not himself sustained and
being accountable to his insurer for the proceeds to the extent that he
had been indemnified against the loss by the insurer. In this instance
of a plaintiff being able to recover as damages for breach of contract
for the benefit of a third person a loss which that person has sustained
and he had not, the insurer is entitled to compel an assured to whom
he has paid a total or partial indemnity to bring the action. A third
example, once again in the field of mercantile law, is the right of an
– assured to recover in an action on a policy of insurance upon goods the
full amount of loss or damage to them, on behalf of anyone who may
be entitled to an interest in the goods at the time when the loss or
damage occurs, provided that it appears from the terms of the policy
that he intended to cover their interest.”
In addition, the decision in The Albazero itself established a further exception.
This House was concerned with the status of a long-established principle based
on the decision in Dunlop v. Lambert (1839) 6 Cl. & F. 600 that a consignor
of goods who had parted with the property in the goods before the date of
breach could even so recover substantial damages for the failure to deliver the
goods. Lord Diplock (at p.847E) identified the rationale of that rule as being:
“The only way in which I find it possible to rationalise the rule in
Dunlop v. Lambert so that it may fit into the pattern of the English law
is to treat it as an application of the principle, accepted also in relation
to policies of insurance upon goods, that in a commercial contract
concerning goods where it is in the contemplation of the parties that
the proprietary interests in the goods may be transferred from one
owner to another after the contract has been entered into and before
the breach which causes loss or damage to the goods, an original party
to the contract, if such be the intention of them both, is to be treated
in law as having entered into the contract for the benefit of all persons
who have or may acquire an interest in the goods before they are lost
or damaged, and is entitled to recover by way of damages for breach
of contract the actual loss sustained by those for whose benefit the
contract is entered into.”
In The Albazero it was held that the principle in Dunlop v. Lambert no
longer applied to goods consigned under a bill of lading because both the
property in the goods and the cause of action for breach of the contract of
carriage passes to the consignee or indorsee by reason of the consignment or
indorsement: therefore, since the consignee or indorsee will in any event be
entitled to enforce the contract direct there is no ground on which one can
impute to the parties an intention that the consignor is entering into the
contract for the benefit of others who will acquire the property in the goods
but no right of action for breach of contract.
However, this House was careful to limit its decision to cases of
carriage by sea under a bill of lading, leaving in force the principle in Dunlop
v. Lambert in relation to other contracts for the carriage of goods where such
automatic assignment of the rights of action for breach does not take place.
Lord Diplock. after the passage referring to the exceptions which I have
already quoted, said (at p. 846G):
“My Lords, in the light of these other exceptions, particularly in the
field of mercantile law, to the general rule of English law that apart
from nominal damages the plaintiff can only recover in an action for
breach of contract the actual loss he has himself sustained. I do not
think that the fact that the rule which it is generally accepted was laid
down by this House in Dunlop v. Lambert. 6 Cl. & F. 600 would add
one more exception would justify your Lordships in declaring the rule
to be no longer law. Nor do I think that the almost complete absence
of reliance on the rule by litigants in actions between 1839 and 1962
provides a sufficient reason for abolishing it entirely. The
development of the law of negligence since 1839 does not provide a
complete substituted remedy for some types of loss caused by breach
of a contract of carriage. Late delivery is the most obvious example
of these. The Bills of Lading Act 1855 and the subsequent
development of the doctrine laid down in Brandt v. Liverpool, Brazil
and River Plate Steam Navigation Co. Ltd. [1924] 1 K.B. 575, have
reduced the scope and utility of the rule in Dunlop v. Lambert . . .
where goods are carried under a bill of lading. But the rule extends
to all forms of carriage including carriage by sea itself where no bill
of lading has been issued, and there may still be occasional cases in
which the rule would provide a remedy where no other would be
available to a person sustaining loss which under a rational legal
system ought to be compensated by the person who has caused it.
For my part, I am not persuaded that your Lordships ought to go out
of your way to jettison the rule.”
In my judgment the present case falls within the rationale of the
exceptions to the general rule that a plaintiff can only recover damages for his
own loss. The contract was for a large development of property which, to
the knowledge of both Corporation and McAlpine, was going to be occupied,
and possibly purchased, by third parties and not by Corporation itself.
Therefore it could be foreseen that damage caused by a breach would cause
loss to a later owner and not merely to the original contracting party,
Corporation. As in contracts for the carriage of goods by land, there would
be no automatic vesting in the occupier or owners of the property for the time
being who sustained the loss of any right of suit against McAlpine. On the
contrary, McAlpine had specifically contracted that the rights of action under
the building contract could not without McAlpine’s consent be transferred to
third parties who became owners or occupiers and might suffer loss. In such
a case, it seems to me proper, as in the case of the carriage of goods by land,
to treat the parties as having entered into the contract on the footing that
Corporation would be entitled to enforce contractual rights for the benefit of
those who suffered from defective performance but who. under the terms of
the contract, could not acquire any right to hold McAlpine liable for breach.
It is truly a case in which the rule provides “a remedy where no other would
be available to a person sustaining loss which under a rational legal system
ought to be compensated by the person who has caused it.”
Mr Fernyhough submitted that it would be wrong to distort the law in
order to meet what he described as being an exceptional case. He said that
this was a one-off or exceptional case since the development was sold before
any breach of contract had occurred and there was an express contractual
prohibition on assignment. He submitted that to give Corporation a right to
substantial damages in this case would produce chaos when applied to other
cases where the contractors have entered into direct warranties with the
ultimate purchasers of the individual parts of a development. I am not
impressed by these submissions. I am far from satisfied that this is a one-off
or exceptional case. We are concerned with standard forms of building
contracts which prohibit the assignment of the benefit of building contracts to
the ultimate purchasers. In the prolonged period of recession in the property
market which this country has experienced many developments have had to be
sold off before completion, thereby producing the risk that the ownership of
the property may have become divided from the right to sue on the building
contract at a date before any breach occurs. As to the warranties given by
contractors to subsequent purchasers, they will not, in my judgment, give rise
to difficulty. If, pursuant to the terms of the original building contract, the
contractors have undertaken liability to the ultimate purchasers to remedy
defects appearing after they acquired the property, it is manifest the case will
not fall within the rationale of Dunlop v. Lambert, 6 Cl. & F. 600. If the
ultimate purchaser is given a direct cause of action against the contractor (as
is the consignee or indorsee under a bill of lading) the case falls outside the
rationale of the rule. The original building owner will not be entitled to
recover damages for loss suffered by others who can themselves sue for such
loss. I would therefore hold that Corporation is entitled to substantial
damages for any breach by McAlpine of the building contract.
7. The answer to the preliminary issues
The Linden Gardens Case
The preliminary issues directed were as follows:
“(1). Are the plaintiffs entitled by virtue of the deed of assignment
pleaded at paragraph 1F. of the amended statement of claim to recover
damages against the defendants in respect of the various causes of action and
heads of loss pleaded
where the loss was incurred by Stock Conversion prior to
the said Deed of Assignment.
where the loss was incurred by the plaintiffs subsequent
thereto?
“(2). Were Stock Conversion precluded from lawfully assigning
rights of action to the plaintiffs against second defendants by clause
17(1) of contract dated 19 July 1979 made between Stock Conversion
and the second defendants? . . . “
Logically these questions should be posed in the opposite order. If, as I
would hold, the benefit to the rights of action were not effectively assigned to
Stock Conversion at all. there can be no question of the defendants being
liable to Stock Conversion for any loss whenever the breach occurred. I
would therefore answer question 2 “yes” and question 1 “does not arise”.
I would accordingly allow this appeal with costs both here and below.
The St. Martin’s Case
The issues in this case are rather more complex and I will so far as
necessary explain each issue.
” 1. Was the benefit of the contract dated 29 October 1974 between
the first plaintiff (Corporation) and the defendant (McAlpine)
validly assigned by the first plaintiff to the second plaintiff
(Investments)?”
This is straightforward: the answer is “no.”
“2. Was there an implied term in the deed of assignment dated 25
March 1976 and in the agency agreement dated 1976 and 1983
as pleaded in paragraph 7 and 7A of amended statement of
claim?”
The statement of claim alleges that there were implied terms under
which Corporation undertook to obtain McAlpine’s consent to the assignment
(paragraph 7) or to enforce the building contract for the benefit of Investments
(paragraph 7A). Since these points would only be relevant if, contrary to my
view, Corporation could claim damages by reference to obligations undertaken
in the Deed of Assignment by Corporation to Investment, I would answer this
issue “does not arise”.
“3. On the assumption that the matters pleaded in paragraph 8 of
the statement of claim are correct then
Does the second plaintiff (Investments) have a valid
claim against the defendants for damages, other than
nominal damages, for breach of the contract dated 29
October 1974 as pleaded in paragraph 10 of the
statement of claim?
Does the first plaintiff (Corporation) have a valid claim
against the defendant for damages, other than nominal
damages, for breach of the contract dated 29 October
1974 as pleaded in paragraph 11 of the statement of
claim?
(c) Does the first plaintiff (Corporation) have a valid claim
for damages other than nominal damages for breach of
the contract dated 29 October 1974 as pleaded in
paragraph 12 of the statement of claim?”
Questions (a) and (b) are self-explanatory. I would answer them
(a) “no” (b) “yes.” Question (c) raises the question whether Corporation can
claim damages as constructive trustee for Investments or because of
Corporation’s liability to Investment under terms implied in the Deed of
Assignment. Since in my judgment Corporation is entitled to substantial
damages in any event, I would answer question (c) “does not arise”,
although, as I have explained. I would if necessary have answered it “no”.
I would therefore dismiss the appeal by McAlpine and the cross-appeal
by Investments, save that the order of the Court of Appeal be varied by
substituting the answers to the issues which I have indicated. McAlpine’s
must pay the costs of the appeal to this House and Investments the costs of its
own cross-appeal.
Barbados Trust Company Ltd v Bank of Zambia & Anor
[2007] EWCA Civ 148 [[2007] 1 Lloyd’s Rep 495, [2007] EWCA Civ 148
Waller LJ
Issue (2) the Declaration of Trust
The Declaration of Trust recited as follows:
“(1)The Trustee was one of a number of banks participating in an Oil Import Facility dated 19th July 1985 (“the Facility”) pursuant to which credit was extended to Bank of Zambia by the authorising of the issue of a letter of credit identified in the Schedule (“Letter of Credit”). By means of an Assignor Notice of Assignment and Assignee Agreement to be Bound dated 10 December 1999, The Trustee received an assignment of the rights, title, interest and benefits in respect of Bank of Zambia’s obligations under the Facility in respect of the Letter of Credit from Masstock (International) Limited in consequence of which Bank of Zambia became indebted to the Trustee.”
(2) By means of an Assignor Notice of Assignment and Assignee Agreement to be Bound dated 10 December 1999 the Trust intended to assign its rights, title, interest and benefits in respect of Bank of Zambia’s obligations to it under the Facility in respect of the Letter of Credit to GMO Emerging Country Debt LP. By means of an Assignor Notice of Assignment and Assignee Agreement to be Bound dated 18 October 2003, GMO Emerging Country Debt LP intended to assign such rights, title, interest and benefits to FH International Financial Services Inc.
(3) The Beneficiary is the latest intended assignee of such rights, title, interest and benefits pursuant to an Assignment Agreement dated 26th December 2003 made between FH International Financial Services Inc, as intended assignor, and the Beneficiary as intended.
(4) The validity of the chain of assignments from the Trustee to the Beneficiary has been challenged and the Trustee and the Beneficiary have agreed that for the avoidance of doubt the Trustee shall execute this Declaration of Trust declaring itself the trustee of all such rights, title, interest and benefits.
The Declaration was then in the following terms:-
“(1) The Trustee hereby irrevocably declares that as from the date of this Declaration of Trust it will hold all of its rights, title, interest and benefits (if any) as it may have in respect of Bank of Zambia’s obligations to it under the Facility in respect of the Letter of Credit on trust for the Beneficiary absolutely.”
(2) The Trustee acknowledges that the Beneficiary shall have the right to take all such lawful steps in its own name as it may consider necessary in any jurisdiction (whether by legal action or otherwise) against Bank of Zambia (or an assignee or successor in title) to recover the outstanding principal amounts (US$405,290.35 and US$404,096.67) due under the Letter of Credit, together with all interest, costs or other expenses payable thereunder in connection with such liabilities.
(3) The Trustee shall forthwith execute all such further documents and do all such other things as the Beneficiary may reasonably required to enable the Beneficiary to secure payment by Bank of Zambia of the aforesaid sums due under the Letter of Credit.
Before the judge, this aspect was argued on the basis that it was accepted that Article 12 applied to an assignment of a debt and that because BT was not a bank or a financial institution and had not sought or obtained consent, any assignment would have been ineffective. The argument was on the basis that Article 12 did not however cover a Declaration of Trust, and thus that BT were entitled to succeed. This led the judge to start his consideration of this aspect with these words:-
“54. The Claimant was (and is) not a bank or a “financial institution”. It was therefore expressly excluded from taking a valid assignment of the Asset and acquiring a right to claim to recover it from Bank of Zambia by Article 12.01(A) of the Facility. As I have said (paragraph 10) this provision restricted the type of institution which would be entitled to enforce the obligations of Bank of Zambia. If it were the case that such a provision could be circumvented by the use of a Declaration of Trust it would be a matter of some concern. If the Claimant is right, the express restriction in Article 12.01(A) would achieve very little. Any Bank could declare itself to be a trustee of the Asset for any third party which could then claim the Asset in, in substance, the same way as if it were an assignee. Contracts outlawing or limiting assignment would have to be drafted so as also to outlaw declarations of trust or at least such declarations giving a direct right of action against the obligor.”
Ultimately after reviewing the relevant authorities the judge concluded in the following way:-
“73. As the submissions developed, I think (unsurprisingly) they demonstrated a measure of agreement that the real key to this claim was the construction and effect of Article 12.01(A). I agree. I have stated what I think to be the commercial rationale of that Article (paragraph 10). By its terms, and whatever the status of the Facility, it decrees that, at least absent express consent, a claimant such as the present Claimant shall not be entitled to claim payment from Bank of Zambia as an assignee of the Asset. To permit such a claim to be made as the beneficiary of a declaration of trust of the Asset would in my judgment be to permit the use of the decision in Vandepitte in a commercial context in which it has no place because it would achieve a result which would be inconsistent with the terms of the Facility.”
Mr Brodie QC initially ran the argument differently in the Court of Appeal from the way it had been run in the court below. He argued that Article 12 had no application to an acknowledged debt. Article 12 he submitted was concerned to provide “for the accession to the syndicate of banks of a new bank or financial institution . . . in place of an existing member”. It was designed to protect BoZ from having foisted on them as a lender any party other than a bank or financial institution and even then only a bank or financial institution to which they could not reasonably object. He drew a distinction between “the right to repayment under the facility and the right to sue for a debt which has arisen from a breach of that right”. Thus, he submitted, Article 12.01(a) did not relate to the assignment of an acknowledged debt arising from the subsequent default, or a debt arising from a failure of the borrower to repay the monies advanced, or to pay interest. This involved submitting that all parties who had up until then sought consent pursuant to Article 12, and those who in the court below had accepted that consent to an assignment was necessary had simply misunderstood Article 12.
That was a bold submission, and as we indicated ultimately during the hearing one we simply could not accept on the construction of Article 12. A very similar argument was run in Linden Gardens Trust [1994] 1 AC 85 on a clause in the contract in that case but was roundly dismissed by the House of Lords: see in particular the speech of Lord Browne-Wilkinson at page 105 and following. But what lay behind Mr Brodie’s submission i.e. what he described as the complete lack of interest that BoZ was entitled to have in an acknowledged debt which was simply a piece of property with which an owner should on the whole be able to deal as he liked, had some relevance to the points considered hereafter.
It is right to say that our rejection of Mr Brodie’s primary argument placed Mr Handyside in a position of rearguing the case as it had been argued before Langley J. That was an argument which understandably his written skeleton before us did not address in any detail. However, Mr Handyside, with commendable skill and patience addressed the points and arguments, which were pursued in large measure by the court with him. Indeed, overnight he marshalled his arguments in compelling form.
The issue that arises in this case can be put in these terms. (1) If BoA had attempted to assign the debt to BT by a legal assignment and BT had sued, BoZ would have been entitled to have refused to pay BT, since it was not a bank or financial institution and since consent had not been obtained. [A somewhat half-hearted attempt was made by Mr Brodie to argue that BT was a bank or financial institution, but since the whole case in the court below had been conducted on the basis that they were not, I take the view it was not open to Mr Brodie to argue that point in this court.] (2) If BoA were to declare a trust of the proceeds when received and then sue for the debt in its own name, since BoZ could have no interest in the proceeds once in BoA’s hands, BoZ would have no answer to BoA’s claim and BoA would have to answer to BT’s claim once it had received the proceeds. (3) If, however, BoA declares a trust in the right to the debt in favour of BT, and if BoA does not sue, will the court hold, by virtue of the fact that BT sues in its own name, joining BoA as a defendant, that the Declaration of Trust is simply an assignment in another name, enabling BoZ to refuse to pay, or will the court hold that, since BT’s only remedy in order to enforce the trust between it and BoA is to sue in its own name joining BoA, the effect is to put BoZ in the same position as if BoA itself had sued?
It is important to bear in mind when considering the above questions that what has for shorthand been referred to as the Vandepitte short cut is a matter of procedure to enable a beneficiary under a trust to obtain what he is beneficially entitled to in a situation in which the trustee will not sue – will not sue for what the trustee is legally entitled to but which if he succeeds he must hold for the beneficiary. It would be understandable if the court would not allow the procedure to be misused to obtain rights that the beneficiary is not otherwise entitled to, but otherwise if the beneficiary has an unanswerable right under a trust and the trustee has an unanswerable claim, why should the court’s procedure not be available to enable the rights to be established or brought to fruition? The focus ultimately has to be on which contract governs the entitlement of the beneficiary and the true construction of that contract.
As my Lord, Rix LJ, pointed out during the argument it is necessary to take matters in stages. To spell out the stages consideration has to be given to the following questions. First what is the proper construction of Article 12? Does it seek to prohibit a declaration of trust by the legal owner of a debt, BoA, in favour of BT without the consent of BoZ? Does Article 12 seek to prohibit BoA suing BoZ on the debt once the declaration of trust in favour of BT has been entered into i.e. would BoZ have any answer to a claim by BoA once the declaration of Trust has been entered into? If BoZ would have no answer to a claim by BoA, does Article 12 seek to prohibit BT using the Vandepitte procedure if BoA refuses to sue? If the declaration of Trust is valid as between BoA and BT is it a term of that declaration of Trust that BoA will not sue in its own name and if so what difference would that make? On the assumption that so far the answers are in favour of BT being able to sue with BoA joined as a defendant, are the circumstances such that the court will hold that the use of the Vandepitte procedure should not be available in this case?
The judge set out relevant citations from various cases. The most helpful seem to me to be Lightman J in Don King [2000] Ch 291 at 321
“Mr Sumption further submitted that, where a contract contains a provision prohibiting assignment, a party cannot by a declaration of trust or otherwise make himself the trustee of the benefit of that contract because this would defeat the whole purpose of the non-assignment obligation which is to ensure that the other contracting party alone, and no one else, can enforce the obligations contained in the contract against him; and that if a trust is created and if the trust refuses to enforce an obligation, the beneficiary may sue for enforcement, joining the trustee as a defendant : see Vandepitte v Preferred Accident Insurance Corporation of New York [1933] AC 70, 79.
This contention likewise fails for (amongst others) the following reasons. (1) If one party wishes to protect himself against the other party declaring himself a trustee, and not merely against an assignment, he should expressly so provide. That has not been done in this case. (2) The applicable principles of trust law in this situation are the basic principles and those (and only those) whose rationale have application in this commercial context: see Target Holdings Ltd v Redferns [1996] AC 421, 436. The courts will accordingly be astute to disallow use of the procedural short-cut sanctioned in the Vandepitte case [1933] AC 70 in a commercial context where it has no proper place. A beneficiary cannot be allowed to abrogate the fullest protection that the parties to the contract have secured for themselves under the terms of the contact from intrusion into their contractual relations by third parties. (3) A declaration of trust cannot prejudice the rights of the obligor. If the contract requires any judgment to be exercised whether by the obligor or the obligee an assignment cannot alter who is to exercise it or how that judgment is to be exercised or vest the right to make that judgment in the court. (4) The rule in Saunders v Vautier (1841) Cr. & Ph 240 (which enables the sole beneficiary or beneficiaries to give directions to the trustee) only applies if the beneficiary is entitled to wind up the trust and require the trustee to assign to him the subject matter of the trust. If the trust cannot be determined because the trustee has under the contract held as a trust asset outstanding obligations and has no power to transfer the trust asset to the beneficiary or his order, the rule does not apply: see In re Brockbank [1948] Ch 206. Accordingly in a case where the subject matter of the trust is a non-assignable contract and there are outstanding obligations to be performed by the trustee, the beneficiary under the trust cannot interfere.
Accordingly in principle I can see no objection to a party to contracts involving skill and confidence or containing non-assignment provisions from becoming trustee of the benefit of being the contracting party as well as the benefit of the rights conferred. I can see no reason why the law should limit the parties’ freedom of contract to creating trusts of the fruits of such contracts received by the assignor or to creating an accounting relationship between the parties in respect of the fruits. The broader approach which I favour appears to be in accord with the authorities, so far as they go.”
In the Court of Appeal in the same case Morritt LJ at page 335 of the same report said:-
“25. I reject the second submission for similar reasons. The question whether, in the terms of s.20 Partnership Act 1890 an asset is “brought into the partnership stock or acquired….on account of the firm…or for the purposes and in the course of the partnership business..” does not depend on whether it is assignable at law. In both Ambler v Bolton (1872) 14 Eq. 427 and Pathirana v Pathirana [1967] AC 233 the asset was inalienable. In both cases the inalienable asset had been acquired by the individual partner in his own name during the subsistence of the partnership but was still treated as acquired on account of the firm. In my view it would make no difference if the asset had been acquired before the commencement of the partnership but the partner in question was required by the terms of the partnership to bring it into the common stock. The reason is quite simply that partnership property within s.20 Partnership Act 1890 includes that to which a partner is entitled and which all the partners expressly or by implication agree should, as between themselves, be treated as partnership property. It is immaterial, as between the partners, whether it can be assigned by the partner in whose name it stands to the partners jointly.
26. Of course, if one partner seeks to avoid the agreement he has made with his partners then questions may arise as to how the interests of the other partners are to be protected. But there are many ways in which that may be done without the need to interfere in the performance of the contract. I agree with the judge that Re Turcan (1888) 40 Ch.D.5 at p. 10 shows clearly that the court will protect the interests of those contractually entitled to have the benefit of an inalienable asset before the fruits of the asset have been realised. In that case, as the House of Lords considered in Linden Gardens Ltd v Lenesta Ltd [1994] 1 AC 85, 106, the court gave effect to the intention of the parties by means of a declaration of trust. But, it is objected, the existence of such a trust would enable one partner to interfere in the management of the personal contract made by a third party with the other partner. I do not agree. The other partner cannot insist on rendering vicarious performance of the personal obligations arising under the contract. Rules and procedures designed to enable a beneficiary to sue in respect of a contract held in trust for him would not be applied so as to jeopardise the trust property. As Lord Browne-Wilkinson observed in Target Holdings Ltd v Redferns [1996] 1 AC 421 at p.435
“In my judgment it is in any event wrong to lift wholesale the detailed rules developed in the context of traditional trusts and then seek to apply them to trusts of quite a different kind. In the modern world the trust has become a valuable device in commercial and financial dealings. The fundamental principles of equity apply as much to such trusts as they do to the traditional trusts in relation to which those principles were originally formulated. But in my judgment it is important, if the trust is not to be rendered commercially useless, to distinguish between the basic principles of trust law and those specialist rules developed in relation to traditional trusts which are applicable only to such trusts and rationale of which has no application to trusts of quite a different kind.”
I also found helpful the speech of Lord Browne-Wilkinson in Linden Gardens and what my Lord Rix LJ said in Explora Group Plc v Hesco Bastion [2005] EWCA Civ 646 from paragraph 104 and onwards.
Mr Handyside also referred us to Regina v Chester and North Wales Legal Aid Area Office (no 12), ex parte Floods of Queensferry Ltd [1998] 1 WLR 1496. In that case a company had assigned its cause of action against the defendants to a director contrary to a prohibition against assignment. The company had brought the proceedings and the court held that the company was not suing as a “fiduciary” for the individual director so as to entitle it to legal aid. Millett LJ at 1501F to H said this:-
“It was submitted before us that the assignment was effective in equity to transfer the beneficial interest in the company’s cause of action, so that it was effective as an equitable but not a legal assignment. I do not accept this. The subcontract expressly prohibits any assignment of the claim, not merely any legal assignment, and in my opinion an equitable assignment is as much within the prohibition as a legal assignment. It is not necessary to consider whether the company could have declared itself a trustee of its claim, for it has not done so. But it could not have assigned the beneficial interest to Mr Flood by contracting to do so, since equity will not enforce the performance of an obligation which constitutes a breach of a prior contract with a third party.”
Mr Handyside ultimately argued the matter in this way.
1) First he submitted that Article 12 prevented assignment both before and after default. He submitted that Don King was authority for the proposition that equity would not allow the Vandepitte procedure to be used to enable a beneficiary to gain a benefit which he could not have as an assignee. On that basis alone he submitted the appeal should be dismissed.
2) Second he submitted that, on the true construction of the Declaration of Trust, BT was not entitled to force BoA to sue, and thus on that basis the Vandepitteprocedure was not available.
3) Third he submitted that Article 12, on its proper construction, prohibited Declarations of Trust, save possibly of the proceeds once received.
4) Fourth he submitted a Declaration of Trust was, in effect, an equitable assignment, and thus was prohibited by the express language of Article 12.
5) Fifth he submitted that ex parte Floods was authority for the proposition that the court would not construe a contract effective as between assignor and assignee but ineffective as a legal assignment, as an equitable assignment, so as to enable the assignee to force the assignor to sue. Thus, he submitted, the court should equally not allow the use of the Vandepitte procedure so as to enable a beneficiary of a Declaration of Trust to sue BoZ, even though the trust may be valid as between the trustee (BoA) and the beneficiary (BT).
Mr Handyside also referred us to certain articles. First he referred us to the article of Professor Goode in the Modern Law Review, quoted by Lord Browne-Wilkinson in Linden at page 104. The importance of that article is that it emphasises the fact that even in cases of assignment the court must focus on which contract it is dealing with. The contract under which A assigns a debt of C to B may well be enforceable as between A and B, even if, when A seeks to sue C he may fail.
Second he referred us to two articles by Professor Tettenborn. The first article is in Lloyds Maritime and Commercial Law Quarterly 1998 at page 498 and is critical of the reasoning of Lightman J in Don King. The other is in the 1999 edition of the same publication at page 353 and is critical of the reasoning in the Court of Appeal in the same case. The author suggests that there should be no distinction between an equitable assignment and “other equitable interests”. He suggests there is a distinction between a trust of the benefit of a promise and a trust of the fruits of the promise. In the latter the interests of third parties are not involved, but in the first he suggests they are because the promise is still to be enforced.
Since the hearing before us, when seeking to gain some assistance in this area from Chitty on Contracts (29th Edition) I noticed that the third cumulative supplement contained a comment on Langley J’s decision in this case. At paragraph 19-045 it set out the reasoning of Langley J to the effect that:-
“To permit such a claim to be made as the beneficiary of a declaration of trust of the asset would, in my judgment, be to permit the use of [the law on such a trust] in a commercial context in which it has no place, because it would achieve a result which would be inconsistent with the terms of the facility.”
It continued:-
“Langley J reasoned that Re Turcan (1888) 40 Ch D 5 and Don King did not dictate a contrary result. He also reasoned – but with respect that seems incorrect – that, in any event, the claimant, even though a beneficiary under the trust, could not itself enforce contractual rights despite the fact that it had joined the trustee as defendant”
The above comment was counterbalanced by a note, which draws attention to an article criticising the decision in Don King entitled “Charges of Unassignable Rights”, written by Professor Turner in 20 JCL 97 in 2004. The article covers many pages and would be difficult to summarise but in relation to Don King says this:-
“The decision has been well received, particularly by leading academics . . . Others have been neutral or unenthusiastic.”
The article undoubtedly in its reasoning thereafter would provide support for Mr Handyside’s argument. Putting the argument in very simple terms, it would suggest (1) that rights which are personal for the purpose of assignment should also be considered personal for the purpose of a declaration of trust, and as such be “inalienable”; and (2) that a contractual provision against assignability should identify those rights which the parties have agreed as personal. Thus the article would support the view that BoZ and BoA had identified those rights which were personal and inalienable and would support the argument that such rights could no more be the subject of a declaration of trust than they could be the subject of an assignment without the consent of BoZ.
All the above articles are helpful in seeking to answer the questions that have to be considered in this case, but at the end of the day each case must be considered by reference to its own context and by reference to the terms of the agreements or contracts, the subject of the case.
The most important and thus the first question to consider is the true construction of Article 12. It seems to me that if an embargo was to be placed on a participating bank declaring a trust in relation to sums due or creating a charge over sums due, words could have been used so as to make that clear, (see the first point made by Lightman J above). As regards Mr Handyside’s submission that a declaration of trust was in effect an “equitable assignment”, I would for my part accept that if it was it would be caught by the prohibition – the word assignment includes assignments both legal and equitable. But a declaration of trust is not an equitable assignment. An equitable assignment if in writing can be converted into a legal assignment under Section 136 of the Law of Property Act and that is simply not true of a declaration of trust. The language of Article 12 does not in terms include within the prohibition a declaration of trust, and it seems to me that since one is concerned with the question whether a restriction should be placed on the transfer of a piece of property, an acknowledged debt, the court should be slow to contemplate that the parties ever intended such to be within the prohibition.
If, however, that were wrong, I am not sure it is a complete answer in this case because I cannot see how BoZ would by reference to Article 12 have any answer to a claim by BoA simply because they had declared a trust of the right to a debt or the proceeds of the debt in favour of a third party, about the existence of whom BoZ was unaware and to whom thus BoZ had not consented. It would thus still leave open two questions, first whether, despite having no answer to a claim by BoA, Article 12 prevents the use of the Vandepitteprocedure by BT, or, if not, the second question, whether the court should allow use of the Vandepitte procedure so as to enable BT to enforce its rights against BoA.
It is said that BoZ has, by Article 12, a right to decree by whom it should be sued and that to allow the bringing of an action using the Vandepitte procedure on an acknowledged debt would be to allow interference in BoZ’s contract with its lenders under the facility. This argument seems to me to be a false one. The procedure is “procedure” and it simply provides a short cut to prevent litigation under which BoA could be forced to sue followed by an action under which BoA sues. In other words albeit BT is the claimant, it is as if BoA were claimant seeking to recover that which is due in law which they will then hold for BT. There is thus no interference by BT. In any event to construe suing on an acknowledged debt as interfering in BoZ’s contract with its lenders seems to me far fetched. Thus Article 12, on its true construction, does not, in my view, prevent the use of the Vandepitte procedure.
What then should be the attitude of the court? In that regard one should first consider the terms of the Declaration of Trust. The Declaration of Trust certainly does not provide in terms for BoA not being prepared to sue in its own name, nor is any assistance to be gained from the letters which preceded the declaration in that regard. The Declaration recognises that BT will sue, but it also seems to recognise that there does exist the very situation in which the Vandepitte procedure should be available in normal circumstances.
That brings me to the final question, which is whether, if as I am now assuming, Article 12 contains some prohibition on alienability, what attitude should the court take to the use of the Vandepitte procedure? In my view procedure is then to enable BT to enforce its rights against BoA. It is not a measure of substantive law which might affect the asset, the subject of the declaration of trust. There is no reason why the court should hold that BoZ should be entitled to a defence which it would not have had if some longer and more tortuous form of procedure, compelling BoA to sue, were used. The court has to recognise that it is concerned in this instance both with the enforcement of the trust declared as between BoA and BT as well as with the contract as between BoA and BoZ. I see no reason for the court not to assist BT or any reason why it should provide BoZ with a defence which BoZ does not have against BoA.
I would thus allow the appeal.
Foamcrete (Uk) Ltd v Thrust Engineering Ltd
[2000] EWCA Civ 351 Mummery LJ
2. The Unlawful Assignment Point
22. If, contrary to my view, clause 18.1 of the Principal Agreement does apply to the assignment of a debt arising under the Purchase of Stock agreement, it is necessary to address the contention of Thrust Engineering that the debt due from it to PTE was unassignable and that any purported assignment of it by PTE was unlawful and ineffective.
23. Mr Green, on behalf of Thrust Engineering, pointed out that Foamcrete was not a party to the Purchase of Stock agreement and was not entitled to sue on it as such. He also submitted that it was not a legal assignee of the debt arising under that agreement, either directly from PTE or indirectly via the transfer of the Debenture granted by PTE to the Midland Bank. It could not be a legal assignee for the simple reason that the debt claimed by Foamcrete was unassignable. At most the purported assignment to it could only be effective as between the parties to the transfer of the Debenture i.e. the Midland Bank and Foamcrete. Thrust Engineering was not party to that transfer. It had not given written consent to it. It had never agreed to pay any sum of money to Foamcrete. The judge was right to dismiss the claim for that reason.
24. In my judgment, this point is misconceived. It is based on a misreading of the decision of the House of Lords in Linden Gardens Trust Limited v. Lenesta Sludge Disposals Limited [1994] 1 AC 85 and on a fundamental misunderstanding of the juristic nature of the floating charge contained in the debenture.
25. Mr Green cited Linden Gardens as authority for the proposition that clause 18.1 was effective to prevent assignment without consent. That proposition fails to reflect fully the law as laid down in that case and the particular facts of this case.
26. Linden Gardens is authority for the proposition stated by Lord Browne -Wilkinson at p. 109C-D that
“….an assignment of contractual rights in breach of a prohibition against such assignment is ineffective to vest the contractual rights in the assignee.”
In an earlier passage at p.108F-G he said
” Therefore the existing authorities establish that an attempted assignment of contractual rights in breach of a contractual prohibition is ineffective to transfer such contractual rights. I regard the law as being satisfactorily settled in that sense. If the law were otherwise, it would defeat the legitimate commercial reason for inserting the contractual prohibition, viz, to ensure that the original parties to the contract are not brought into direct contractual relations with third parties.”
27. This case is not caught by that principle. It is not a case in which PTE, after entering into the Principal Agreement (and the related agreements) on 3 June 1994, made an assignment of its contractual rights to a third party, Foamcrete, in breach of the contractual prohibition in clause 18.1.
28. Foamcrete claims as transferee of the charge conferred on the bank by PTE in the Debenture executed 2 years before the Principal Agreement was made. The grant of the Debenture and the creation of the fixed and floating charges in it could not possibly constitute a breach of the contractual prohibition against assignment in clause 18.1, as that contractual prohibition did not then exist.
29. The bank’s security rights over the debt due from Thrust Engineering to PTE, now vested in Foamcrete, do not derive from any assignment made by PTE in breach of the prohibition in clause 18.1. They derive from the antecedent floating charge. That charge was lawfully created by the Debenture before the joint venture was entered into with the Thrust companies. The Debenture was effective to vest in the bank the security of an immediate equitable charge over all the present and future property of PTE , without in the meantime restricting its right to engage in trading activities prior to the occurrence of a crystallising event (i.e. the liquidation of PTE) , when it was converted into a fixed charge on PTE’s assets, including the debt due from Thrust Engineering.
30. By virtue of the floating charge the bank acquired an immediate beneficial interest in all the property, present and future, subject to the equitable charge prior to the creation of the debt due to PTE from Thrust Engineering. The bank acquired a beneficial interest in that future debt : Re Margart Pty Ltd [1985] BCLC 314 at 318, a decision of the Supreme Court of New South Wales, (Equity Division). That interest of the bank was not subject to the prohibition against assignment in clause 18.1 of the Principal Agreement.
31. I prefer this analysis of the position to the surprising implications of the analysis proposed by Mr Green. For example, on his case PTE acted in breach of the prohibition in clause 18.1 of the Principal Agreement either (a) by the very act of entering into the Principal Agreement containing the prohibition against assignment at a time when its assets were subject to a prior floating charge or (b) by being put into liquidation and suffering a crystallisation of the floating charge in accordance with the terms of the pre-existing debenture.
32. It also seems that on his case a company could, without the consent of the chargee, remove assets entirely from the reach of an existing floating charge by agreeing that property (of whatever kind) subsequently created and vested in it from time to time should be subject to a contractual prohibition against assignment, either at all or without consent. I know of no authority for that proposition and it does not seem to be consistent with the nature and purpose of a floating charge, which is to secure the indebtedness of the company by means of a present charge to the lender over existing and future assets of the company, while leaving the company free to deal with the charged assets in the ordinary course of business. It might be possible, I suppose, for the chargee to seek to guard against such actions by the company by insertion of a suitably worded provision in the Debenture creating the charge.
33. For the above reasons I would allow the appeal.
LORD JUSTICE KEENE: I agree
Pearson Education Ltd v Prentice Hall of India Private Ltd
[2005] EWHC 655
Gloster J
First, he submitted, that even without a straightforward assignment from PHI, PHI’s rights under the Agreements became vested in IBDI (and, later, in IBD2 and then the claimant) because PHI entered into the Agreements as agent for IBD1 as undisclosed principal.
Second he submitted that the claimant’s rights as eventual equitable assignee of the rights under the Agreements were converted into legal rights because the claimant gave effective notice to the defendant of the relevant assignments as required by the Law of Property Act 1925 section 136. He submitted that there was no requirement under section 136 that specific notice of each successive intermediate assignment had to be given to the debtor, and no authority directly on the point. He relied, amongst other cases, upon Colonial Insurance v ANZ Banking Ltd. [1995] 1 WLR 1140 at 1144-45 (a case relating to notice affecting the priority of successive equitable assignments under the Rule in Dearle v Hall) and Mannai Investment Co Limited -v- Eagle Star Life Assurance Co Limited [1997] AC 749 as authority for the proposition that, in a modern commercial context, where the substance of the communication is more important than its form, and particularly where what is involved is successive “internal” assignments between members of the same corporate group, it suffices for the purposes of section 136 if the debtor is given relevant information about the last assignment in the chain, from which it is perfectly apparent that the original assignor and its successor will have made intermediate assignments.
Third, he submitted, by reference to correspondence in the bundles before me in the period December 1998 to 4 November 2003, that express notice had in fact been given to the defendant of the relevant assignments. He submitted that that appeared from the cumulative communications which had to be construed by reference to factual matrix material such as the defendant’s knowledge of the arrangements by which Pearson had acquired the business of Simon & Schuster in 1998 and the claimant had acquired the titles in 1998-9.
Fourth, Mr Houseman submitted that, even if the claimant did not give the required form of express notice to the defendant, the defendant is nonetheless estopped from denying that the claimant is the legal assignee of the relevant rights. It was common ground before me that it is legally possible for a debtor to be estopped from relying, in answer to a claim by an assignee of a chose in action, on a defence arising from a failure to comply with the requirements of section 136; see e.g. Technocrats International v Fredic [2004] EWCH 692 (QB) at paragraph 56.
Fifth, he submitted that, even if the claimant was not the legal assignee at the time it issued the default notices, the notices were nonetheless effective because legitimately issued by the equitable assignee, or were subsequently (and retrospectively) given effect when the claimant became the legal assignee.
Finally, in further written submissions supplied after the hearing, Mr Houseman contended that, irrespective of the position under section 136 of the Law of Property Act, a validassignment of copyright takes place when there is a written assignment signed by the assignor. There is no requirement for notice to be given to any licensee of the copyright to make such a transfer effective; see section 36(3) of the Copyright Act 1956 (“the 1956 Act”) and section 90(3) of the Copyright, Designs and Patents Act 1988 (“the 1988 Act”) (between them covering the period when the Agreements were created in 1986-1997 and when the assignments occurred in 1998-1999); see also Copinger at 8-52. The assignee of the copyright (its new owner) becomes bound by any pre-existing licence of the copyright, provided only that he (the assignee/owner) has notice of the licence; see section 36(4) of the 1956 Act; and section 90(4) of the 1988 Act. Without notice to the licensee, the new copyright owner thus becomes the new licensor by statutory novation. The licensee enjoys all the same rights against the new owner/licensor as he did against the original owner/licensor: see section 92(2) of the 1988 Act.
Thus, Mr Houseman contended that, in the present case, the claimant became the copyright owner of all 97 Titles in July 1999 (or, it is said, this is, at least, seriously arguable); so the claimant is bound by the terms of the Agreements without any question of notice of assignment to the defendant ever arising. The question therefore is whether, in those circumstances, the claimant had capacity to give a notice under clause 7 requiring remedy of breaches of the Agreements. The answer which Mr Houseman puts forward is that the claimant did have such capacity, because “Proprietor” in the Agreements referred to, or included, the copyright owner, whether original or by assignment; this, he submits, is supported by clause 7 itself (rights could only revert to the copyright owner); clause 8 (allowing unfettered assignment on the Proprietor’s side); and clause 9 (reserving future rights, which could only mean to the copyright owner). He also submitted that this construction is supported by Mr Ghosh’s evidence, where he says he only intended to contract with the copyright owner.
In support of this argument, Mr Houseman pointed out that, if the claimant, as copyright owner and with the obligations of licensor under the Agreements, did not have capacity to give a notice under clause 7, then the Agreements would create commercially unsound results: the original licensor (IBD1), which might well have been dissolved or wound up many years before, would possess the only right to invoke clause 7, despite the fact that the breaches by the licensee (the defendant) cause damage only to the copyright owner (the claimant), and it is only the claimant who has any commercial interest in the invocation of clause 7, because it is to the claimant (and only to the claimant) that the relevant rights revert upon termination of the Agreements. Thus, he submitted, it is seriously arguable that the letter sent by the claimant to the defendant on 4 November 2003 was a valid notice under clause 7.
In addition, Mr Houseman argued that the claimant was entitled to seek permission to serve Amended Particulars of Claim to reflect new factual information, although not to alter its cause of action (Grupo Torras SA v Al-Sabah [1995] 1 Lloyd’s Rep 374). Such amended Particulars, he suggested, would enable it to make extended arguments in support of its title to sue and right to issue default notices (and authorities to the contrary, such as Smith v Henniker-Major & Co (a firm) [2003] Ch 182, could be distinguished on the facts as being concerned with title transfers taking place after the commencement of proceedings).
In response to these arguments, Mr Gerrans, on behalf of the defendant, made detailed submissions on the facts and on the relevant law, for the purpose of demonstrating that the claimant had no reasonable prospect at trial of succeeding in relation to any of the above issues. I accept that the burden is on the claimant to satisfy the Court that it does indeed have a reasonable prospect of success in relation to its claims. It is no discourtesy to counsel that I do not set out, in this judgment, his detailed submissions which were all carefully rehearsed both orally and in his two written skeleton arguments.
The legal arguments advanced by both parties at the hearing confirmed that the relevant legal issues are not straightforward. Some involve controversial and often novel points of law. More importantly, the resolution of many of the legal issues depends on a prior determination of genuine disputes of fact. Having heard the arguments, I am satisfied that the claimant has discharged the burden of satisfying the Court that it does indeed have a reasonable prospect of success in relation to the undoubted causes of action that it has against the defendant.
In particular, I consider that it is seriously arguable, in the light of the judgment of Peter Gibson LJ in Three Rivers District Council v Bank of England [1996] QB 292, in particular at pages 307F – 315F, and the provisions of the 1956 Act and the 1988 Act referred to in Mr Houseman’s post-hearing submissions, that the claimant, even if it had not given written notice of the assignments at the time of its service of default notices under clause 7 of the Agreements, was indeed in a contractual relationship with the defendant, such as to entitle it, in its capacity as legal proprietor of the Titles, to serve such notices. Otherwise there would be an imbalance between the position of the assignee/ new licensor on the one hand and the licensee on the other; thus, for example, the latter, as exclusive licensee, would be entitled to exercise its rights under the Agreements against the latter under section 92(2) of the 1988 Act, irrespective of the formality of written notice, but the assignee/new licensor would not, unless it had given prior written notice of the assignment of the licence agreements under section 136 of the Law of Property Act. In these circumstances it appears to me that it is seriously arguable that there are grounds for distinguishing Warner Bros Records Inc v Rollgreen Ltd [1976] 1 QB 430 (CA), which was the cornerstone of Mr Gerrans’ arguments in relation to the termination issue. Moreover, as Peter Gibson LJ pointed out in Three Rivers, the decision in that case has been the subject of considerable academic criticism.
Sheehan -v- Breccia & Ors
[2016] IEHC 67
Houghton J
Assignment Subject to the Equities
138. In considering the issue of equitable estoppel it is part of the plaintiff’s case that IBRC/the Special Liquidators had become estopped from recovering surcharge interest before the loans and security were sold and transferred to Breccia, and that the assignment was “subject to the equities” i.e. that Breccia was also bound by any equitable rights affecting IBRC’s interest. This is a principle with a long pedigree. In Mangles v. Dixon (1852) 3 HL Cas 702, St. Leonards L.J. at p. 731 stated:-
“If there is one rule more perfectly established in a court of equity than another, it is, that whoever takes an assignment of a chose in action, which this charter-party was, for it is not assignable in law, although it is in equity, takes it subject to all the equities of the person who made the assignment.”
And at p. 735 he stated:-
“The authorities upon this subject, as to liabilities, show that if a man does take an assignment of a chose in action he must take his chance as to the exact position in which the party giving it stands.”
139. In the context of an assignment of debt Chitty on Contracts, Vol. 1, 31st Ed. (London: Sweet & Maxwell, 2012) states the law thus at para. 19-070:-
“Assignments normally take effect ‘subject to the equities’. This was always so in equity…Thus, where a claim arises out of a contract under which the debt arises, and the claim affects the value or amount of the debt which one of the parties purported to assign for value, then if the assignee subsequently sues, the other party to the contract may set up that claim (including the right to set the contract aside) by way of defence against the assignee as cancelling or diminishing the amount to which the assignee asserts his rights under the assignment.” [Footnotes omitted]
And at para. 19-074 Chitty notes:-
“…[a] further aspect of the idea that an assignee takes an assignment ‘subject to the equities is the principle that an assignee cannot recover more from the debtor than the assignor could have done had there been no assignment.”
140. In Technotrade Ltd. v. Larkstore Ltd. [2006] EWCA Civ 1079 the Court quoted the discussion in an earlier edition of Chitty and Mummery L.J. adopted and applied these principles.
Similarly Treitel’s The Law of Contract, Peel (ed), 14th Ed. (London: Sweet & Maxwell, 2015) states at para. 15-067:-
“An assignee takes ‘subject to the equities’, i.e. subject to any defects in the assignor’s title and subject to certain claims which the debtor has against the assignor. He takes subject to such defects and claims whether they arise at law or in equity, and whether or not he knew of their existence when he took his assignment. And he cannot recover more than the assignor could have recovered. The object of these rules is to ensure that the debtor is not prejudiced by the assignment.” [Footnotes omitted]
141. That the position is the same in this jurisdiction is reflected by McDermott in Contract Law (Dublin: Tottel, 2001) where the author states at para. 18.118:-
“An assignee takes subject to any equities that have matured at the time of notice to the debtor. The effect is that the debtor may plead against the assignor all defences that the debtor could have pleaded at the time when he received notice of the assignment.”
142. I did not take these legal principles to be disputed by Breccia. Accordingly, it follows that if IBRC was estopped from recovering default surcharge interest that might otherwise have been contractually recoverable from 31st December, 2010 up to 10th December, 2014 (the date of completion of the assignment of debt) then it follows that Breccia is likewise estopped from recovering surcharge for that period.
R Griggs Group Ltd & Ors v Evans & Ors (No 2)
[2004] EWHC [2004] FSR 48, [2005] 2 WLR 513, [2005] Ch 153, [2004] EWHC 1088 (Ch) Prescott QC
THE DOCTRINE OF THE PURCHASER WITH NOTICE.
The English Rule.
In this country the general rule is well known but the reason for it sometimes forgotten. First, let us recall the rule. It is that where a vendor has entered into an obligation to transfer property to a purchaser, being an obligation which can be enforced in specie, a third party who has notice of that obligation may not validly acquire the property from the vendor, without the consent of the original purchaser. Put more accurately, the third party is defeated unless he was a purchaser for value of the legal estate in good faith without actual or constructive notice of the equity in favour of the prior purchaser, or is one claiming under such purchaser. The rule may be modified or overridden by a statutory scheme for the registration of interests in property. Absent such a scheme, the general rule applies.
Every law student is taught about the rule, but nowadays if asked to explain why it is so he might be reduced to retorting: “Well, it just is”. That will not do for the purposes of our case. For I am being asked to apply the rule to property which has no existence except under the laws of foreign states – more than 150 of them. Therefore I need to understand the inwardness of the rule.
The rule was evolved by our courts of equity. Nobody has been able to come up with a satisfactory definition of ‘equity’, save to say that it is that body of rules and principles which, before 1875, were the peculiar province of certain special courts notably the Court of Chancery. From the beginning the courts of equity regarded themselves as courts of conscience (per Viscount Haldane LC in Nocton v . Lord Ashburton [1914] AC 932 at 954). They ordered the defendant to behave as a righteous man would have done in that particular situation. Over time they came to accept that ‘conscience’ was too elastic a concept to be employed by itself (as Deane J was to put it much later in Muschinski v. Dodds (1985) 160 CLR 583 at 615, it would open the door to “idiosyncratic notions of fairness and justice”). But from that starting principle they evolved a detailed and precise body of rules. What they achieved was a kind of supplementary jurisprudence which was intended to fill up the gaps in the common law.
The upshot was that the result of a case might easily differ, depending on whether it was heard by a court of common law or a court of equity. Despite this, when both sets of courts were merged in 1875 it was found that there were very few rules upon which law and equity were in conflict (Maitland, Lectures on Equity, 1909, 16-18). This seems an amazing paradox at first sight, but is resolved once it is appreciated that equity did not create titles rival to those of the common law, but instead acted in personam. A simple example will serve to bring out several of the features which were characteristic of equity, and are pertinent to our case.
Suppose a man had agreed to sell his estate Blackacre yet refused to complete by the due date. The courts of common law would have said: “You have broken your contract, and must pay damages to the buyer”. But the buyer did not want the money: he wanted Blackacre. No two estates are alike and so an award of damages was not an adequate remedy. No other remedy was available in the courts of common law. So the buyer might decide to bring a suit in a court of equity: for specific performance. I suspect that the origin of this equitable remedy is lost in the mists of time, but I believe that, originally, the court of equity would have said to the vendor something along these lines: “If you were a man of good conscience you would not keep this estate – leaving the plaintiff to his inadequate remedy. You would keep to your bargain and convey Blackacre to him. And that is what you must do, or we shall hold you in contempt of court”.
But now suppose that the vendor had already conveyed the estate to a third party – before the court of equity had made any order, of course. The courts of common law would have said: “Well, the vendor could have chosen to pay damages and keep his estate. Then he could have sold Blackacre to anyone. Therefore he must still pay damages, but the conveyance in favour of the third party is good and effective”. In contrast, a court of equity, while not denying that the third party was the legal owner – they would have admitted that none but he could bring proceedings against a trespasser – would have added : “It is fine if you acquired this estate as a purchaser for value without notice. But a righteous man in your position would not have acquired Blackacre if he had known that the vendor had already agreed to convey it to the original buyer. So, if you did have notice of the prior contract, we shall order you to convey the estate to the original buyer.”
This illustration brings out several features characteristic of equity. Note, first, that the equity judges never sought to overrule the decisions of their common law brethren. They had not the power to do so. They were not a superior court with power to quash decisions of inferior tribunals, as in proceedings for judicial review nowadays. Instead, they achieved their aim by compelling the wrongdoing litigant himself to comply with the rule prescribed by equity. Thus equity acted in personam. It ‘fastened upon the conscience’ of the defendant and compelled him to act accordingly. The distinction may sound like mere sophism, but it was not. Show me the third party purchaser, and I will show you the difference. If equity had tried to make the third party purchaser liable, irrespective of any notice, it would not have been acting in personam. It would have been creating a title in the original purchaser good as against the whole world. Thus it would have been acting in rem. It would have been ousting the common law, not supplementing it. Hence, as Lord Browne-Wilkinson said in Barclays Bank plc v. O’Brien [1994] AC at 195: “The doctrine of notice lies at the heart of equity”.
Why did notice make all the difference? It was because if the second contract was entered into with notice, and I mean actual notice, equity considered it to be a fraud on the first. I must stress that ‘fraud’ in this context does not mean common law fraud, which, in essence, involves lying. For that reason the word has acquired an opprobrious connotation in law and business; and it is a cardinal rule of pleading that if fraud (in that sense) is going to be alleged, it must be set forth distinctly. In contrast, when courts of equity referred to something as ‘fraud’ it might have nothing to do with deceit: see Nocton v. Lord Ashburton (citation as above). It might have been conduct which today would best be described as unconscionable.
Story’s Equity Jurisprudence was, perhaps, the most systematic work on equity ever achieved, at least until modern times: its author was not only Dane Professor of Law at the University of Harvard, but a Justice of the Supreme Court of the United States, and his treatise was based largely on the decisions of the English courts of equity. It is a classic work of authority which explains the reasons for doctrines which are nowadays sometimes taken for granted. Chapter VII concerns constructive fraud, that is to say, those kinds of fraud which, although perhaps not so according to the courts of common law, were considered to be such by the courts of equity. Paragraph 333[3] states as follows:
But the great class of cases, in which relief is granted, under this head, is whether the contract or other act is substantially a fraud upon the rights, interests, duties or intentions of third persons. And, here, the general rule is, that particular persons, in contracts, and other acts, shall not only transact bona fide between themselves but shall not transact mâla fide in respect to other persons, who stand in such a relation to either, as to be affected by the contract or the consequences of it.
Story then proceeds to illustrate the doctrine, and at §395-397 he insists:
Another class of constructive frauds consists of those where a person purchases with full notice of the legal or equitable title of other persons to the same property. In such cases he will not be permitted to protect himself against such claims: but his own title will be postponed, and made subservient to theirs. It would be gross injustice to allow him to defeat the just rights of others by his own iniquitous bargain. He becomes, by such conduct, particeps criminis with the fraudulent grantor…
The same principle applies to cases of a contract to sell lands, or to grant leases thereof. If a subsequent purchaser has notice of the contract, he is liable to the same equity, and stands in the same place, and is bound to do the same acts, which the person who contracted, and whom he represents, would be bound to do.
… The ground of the doctrine is (as Lord Hardwicke has remarked) plainly this: “That the taking of a legal estate, after notice of a prior right, makes a person a mâla fide purchaser; and not that he is not a purchaser for valuable consideration in every other respect. This is a species of fraud and dolus malus itself; for he knew that the first purchaser had the clear right of the estate, and, after knowing that, he takes away the right of another person, by getting the legal title. And this exactly agrees with the definition of the civil law of dolus malus.”
When I drew these passages to the attention of counsel Mr Onslow strongly objected. How dare the epithet ‘fraud’ be applied to his clients, he urged, seeing that fraud had not been pleaded? But, in the first place, I doubt that his clients are in a position to adopt a lofty tone (for I do not know what application might have been made by Mr Hacon to amend his pleadings, and what evidence he might have produced, had Mr Onslow’s point been taken in a timely manner). Much more pertinently, Story was not writing about common law fraud, as I have already observed, but about equitable fraud; and the traditional rule always was that the onus to plead and prove a purchase for value in good faith without notice lay on he who alleged it: Snell’s Equity (30th ed) §4-09. But, Mr Onslow goes on to say, this is all out of date, because nowadays constructive fraud is confined to three branches (illegality, undue influence and breach of fiduciary duty). For present purposes I do not mind how one classifies it. The point is that in the eyes of equity the purchaser with actual notice is considered to be guilty of fraud or, if one prefers to call it so, unconscionable behaviour. Numerous authorities make the same point. Story himself is quoting from the judgment of Lord Hardwicke[4] in the leading case of Le Neve v. Le Neve 3 Atk 647 at 654-5 (also available to generations of law students in 2 White & Tudor’s Leading Cases on Equity e.g. 9th ed, 1928, 157). The point was later repeated by the Court of Appeal in Northern Counties Fire Insurance Co v. Whipp (1884) 26 Ch D 482 at 487-491. It was thus taught to his students by Maitland (Lectures on Equity, 1909, pp.128-9). More recently we have it on the authority of the House of Lords in Midland Bank plc v. Green [1981] AC 513 at page 528D-H, where Lord Wilberforce said:
My Lords, the character in the law known as the bona fide (good faith) purchaser for value without notice was the creation of equity. In order to affect a purchaser for value of a legal estate with some equity or equitable interest, equity fastened upon his conscience and the composite expression was used to epitomise the circumstances in which equity would or rather would not do so. I think that it would be generally true to say the words “in good faith” related to the existence of notice. Equity, in other words, required not only absence of notice, but genuine and honest absence of notice. As the law developed, this requirement became crystallised in the doctrine of constructive notice …
Hence the courts of equity held it was also equitable fraud for a man deliberately to refrain from making any enquiries, in order to be able to say “Notice? I had no notice.” That was the origin of the doctrine of constructive notice. I do not want to go into this topic unnecessarily, but for present purposes the point is that by the end of the 19th century matters had developed to a stage where it was no longer necessary to establish equitable fraud, which concept ceased to be stressed in textbooks when addressing the topic. The courts had found an easier route. It was enough to prove that the third party purchaser had been careless in making his enquiries (often labelled “gross negligence”). It could consist of a failure to make such enquiries as were standard in a conveyancing transaction of the sort in question. The later doctrine of constructive notice arose as follows. First, as I have said, it was held that deliberately to refrain from making enquiries with the object of being able to deny notice was itself equitable fraud (“not only absence of notice, but genuine and honest absence of notice”, per Lord Wilberforce; and see the passage from the judgment of Fry LJ quoted in paragraph 50 below). But although there is an obvious difference between deliberately shutting one’s eyes (on the one hand) and mere negligence in making enquiries (on the other), the territory between those two extremes was not always easy to map. Negligence might give rise to a suspicion of turning a blind eye; and, if it were gross enough, the inference might be strong, perhaps irresistible. But these were refined distinctions, and the courts had to be practical. For, a prudent man acting in his own best interests would anyway have made proper enquiries before purchasing an estate. It was eventually decided[5] that if he failed to do so this was negligence so gross that the courts would not help him. Even though his motive was, not a desire to outdo some suspected prior purchaser, but mere laziness. In that sense one might say that there came to be at least two doctrines of the purchaser with notice: one (actual notice) which was equitable fraud pure and simple, and the other (constructive notice) where it might not be.
But the fact that, as a practical matter, litigants no longer had to establish equitable fraud in no way overthrew the principle that, if there was actual notice – enough notice to cause an honest man to stop his hand – it was equitable fraud just as much as it ever had been. In Midland Bank v. Green (same page reference) Lord Wilberforce continued:
[I]t would be a mistake to suppose that the requirement of good faith extended only to the matter of notice, or that when notice came to be regulated by [the pre-1925 statutes] the requirement of good faith became obsolete. Equity still retained its interest in and power over the purchaser’s conscience. The classic judgment of James LJ in Pilcher v. Rawlins (1872) LR 7 Ch App 259, 269 is clear authority that it did: good faith is there stated as a separate test which may have to be passed even though absence of notice is proved. And there are many references in cases subsequent to [the Conveyancing Act 1882] which confirm the proposition that honesty or bona fides remained something which might be inquired into (see Berwick & Co v. Price [1905] 1 Ch 632, 639; Taylor v. London and County Banking Co [1901] 2 Ch 231, 256; Oliver v. Hinton [1899] 2 Ch 264, 273).
In Northern Counties Fire Insurance Co v. Whipp the question was whether a company which had a legal mortgage had lost its priority to a subsequent equitable mortgage which had been created because the company’s manager (who was on a frolic of his own) had a duplicate key to the safe where the title deeds were kept. The Court of Appeal therefore had to decide whether the company’s carelessness should be equated to equitable fraud. I agree with Mr Onslow that that was a different class of case from the present: it concerns those cases in which the owner of a legal right is defeated by a subsequent equitable interest because he has improperly connived in the creation of that later interest. But the starting point of the Court of Appeal’s judgment was an examination of cases which do fall into the present class. At page 487 Fry LJ (who delivered the judgment of the court), after referring to “The cases which assist in answering the question”, which fell into two categories, went on describe the first class, as follows:
In the case of a person taking the legal estate, and not seeking for or obtaining the title deeds from the mortgagor [i.e. not inspecting the title], the question may arise between the legal mortgagee and either a prior or a subsequent incumbrancer or purchaser. But in such a transaction the fraud about which the Courts are most solicitous is that which is practised when a man takes the legal estate with knowledge of a prior equitable sale or incumbrance, and yet strives to place himself in a position to show that he took without notice – that kind of fraud which Lord Hardwicke explained in Le Neve v. Le Neve, when he said:- “The taking of a legal estate after notice of a prior right, makes a person a mala fide purchaser … This is a species of fraud, and dolus malus itself; for he knew the first purchaser had the clear right of the estate, and after knowing that, he takes away the right of another person by getting the legal estate.”
Mr Onslow contends that Fry LJ’s remarks were obiter. I cannot agree. In any case the submission presupposes that Fry LJ, who had a deep knowledge of equity, was uttering an eccentricity. On the contrary I believe he was summarising what was, by that date, well-established doctrine.
I therefore believe that it has been established for at least 250 years that a purchaser who takes a legal estate with actual notice of facts which have created a prior equitable interest, or who deliberately refrains from pursuing obvious enquiries for fear of learning the truth about same, is guilty of equitable fraud or, if one prefers to say so, conduct which is unconscionable; always provided that the concept has not been modified by the legislature: see paragraph 58 below. The equitable interest may consist of a right to specific performance arising out of a prior contract between the vendor and another. (There was one immaterial quasi-exception – where the purchaser with notice was himself the successor to a purchaser for value without notice; for else the innocent purchaser might find the land to be unsaleable – but I do not need to go into that here.)
I have not overlooked that in our case there was not one contract, but two. There was the contract between Mr Evans and the advertising agency, and the contract between that agency and Griggs (followed by a formal assignment of the copyrights from the agency to Griggs). I consider that the distinction is immaterial for present purposes.
A Parochial Rule?
In theory, I am entitled to presume that the doctrine of acquisition with actual notice not only exists, but is exactly the same in all other countries of the world, since no evidence of foreign law has been adduced by Raben and they have taken their point between the stirrup and the ground. Even though I know perfectly well that there must be many countries whose laws do not recognise such concepts as “equitable jurisdiction”, “constructive trust”, and so forth. But I believe I must proceed with some caution, because Mr Onslow’s point concerns international comity. It would not be right to trample upon the sovereignty of foreign states and the jurisdictions of their respective courts just because the parties here have refrained from adducing evidence of foreign law. I have said that I shall assume the necessary propositions in Griggs’ favour unless it would be unreasonable to do so. I should ask myself, therefore, whether our rule about purchasers for value with notice would seem to be nothing more than a quaint, parochial concept which is unlikely to commend itself to courts in other lands.
I do not think so. In the first place, I conceive that our rule, although originally developed by our courts of equity, does not reflect a concept which is peculiar to the jurisprudence of those courts. If equity had never been invented I am sure that, over time, the courts of common law would have arrived at the same result. In fact, I suspect they have done so. As I understand it, it is a common law tort knowingly to have contractual dealings which are inconsistent with a prior contract (see the judgment of Jenkins LJ in D.C. Thomson & Co Ltd v. Deakin [1952] Ch 646, 694; see also H Lauterpacht, ‘Contracts to break a contract’ 52 LQR 494). Or take a field even more remote from equity, the sale of goods. In the interests of commercial security there have to be special cases in which a buyer of goods can acquire a good title even though the vendor is not their real owner, but looks to the outside world as if he is. But this is so if, and only if, the buyer is a purchaser for value without notice. The Sale of Goods Act 1893 was a codification of the common law and contained several provisions to that effect: s.22 (sale in market overt); s.23 (sale under a voidable title); s.25 (seller or buyer in possession after sale). In each instance there was employed the concept of the purchaser for value in good faith. Passing now to pure creatures of statute law, the concept is employed in ss.90 and 91 of the Copyright, Designs and Patents Act 1988 (purchaser of a copyright is bound by a licence granted in favour of a third party by the previous owner unless he was a purchaser for value without notice); and in s.33 of the Patents Act 1977 (already mentioned). And the concept may be found elsewhere in statute law. For instance, a conveyance to defeat a man’s creditors might be valid if made in favour of a purchaser for value without notice.
Going further afield, in Bank of Montreal v. Sweeny (1887) 12 App Cas 617, P.C. (an appeal from Canada in which Quebec law, that is to say, a system of law derived from France, had to be applied) a bank received property from a trustee knowing it to be trust property, although they knew not that the trustee was acting improperly, nor anything else, and made no enquiries. The bank was ordered to restore the property to the rightful beneficiary. Lord Halsbury LC said:
Their Lordships are led to this conclusion by the ordinary rules of justice as between man and man, and the ordinary expectations of mankind in transacting their affairs. [My emphasis.]
So that is an instance where the concept was applied in a civil law environment. The civil law is, of course, that body of learning (originally derived from Roman law) on which were founded not only the modern property systems of France and French-speaking Canada but also those of most Continental countries, not to mention Scotland, South Africa, Louisiana, Sri Lanka, Japan and many other lands. It is interesting that the last sentence of the passage I have quoted from Story cites Lord Hardwicke’s explanation of the doctrine of purchaser with notice which “exactly agrees with the civil law definition of dolus malus”. Having cited a passage from Justinian’s Digest, Lord Hardwicke continues:
Now, if a person does not stop his hand, but gets the legal estate when he knew that the right was in another, machinatur ad circumveniendum…
Fraud, or mala fides, therefore, it is the true ground on which the Court is governed in the cases of notice …
I mention these illustrations merely in order to stress that the result of the present case, insofar as it concerns the British copyright, should not be seen as arising from some refined technical point derived from an arcane body of jurisprudence (“equity”) which is peculiar to English law. The concept that no upright citizen acquires unique property which, to his knowledge, has already validly been contracted to be transferred to another, and that the second transaction ought to be ineffective, is, on its face, neither arcane nor parochial. The man on the Clapham omnibus would think the law ought to be so, and I have no reason to believe the passenger on the Japanese bullet train would think otherwise. It would appear to be, as Lord Halsbury said, “part of the ordinary rules of justice as between man and man”.
Of course, this is to presuppose that the concept has not been modified by the legislature. As already mentioned, this may happen where the legislature has decided to substitute some scheme for registration of title. In such cases – in what I have called a ‘pure’ registration scheme – the law may be that the purchaser of an asset is entitled to rely on what is stated in the register, and nothing else, and does not have to worry about what may lie behind it. Even if he should happen to have actual notice of the true circumstances, he is considered to act honestly, because the legislature has altered “the ordinary expectations of mankind in transacting their affairs” (per Lord Halsbury LC in the Bank of Montreal case), and “it is not fraud to take advantage of legal rights, the existence of which may be taken to be known to both parties” (a dictum cited by Lord Wilberforce in the Midland Bank case at page 530G).
However, in our case we are reasonably safe in assuming that no foreign legislature can have set up such a registration scheme. I repeat that a requirement for registration of copyrights would be contrary to the Berne Convention.
I therefore consider that Griggs, in demanding that Raben assign to them the foreign copyrights in the Logo, are not seeking a result which would seem to be peculiar to English law, yet possibly astonishing and offensive to the laws of other countries of the world. And, seeing that the alternative would be for Griggs to sue Raben in some 150 of those countries, it is by no means apparent that to deal with the whole question in England, here and now, would strike the courts of those countries as an invasion of their judicial sovereignty.
But that is not the end of the story. For it still remains to discover whether to order Raben to assign the foreign copyrights in the Logo to Griggs would be regarded as a breach of comity according to our own case law. Furthermore, the fact that English equity may consider itself to be acting in personam does not prove that a foreign court would think the same if confronted by the actual result. Conceivably the foreign court might regard it as the exercise of a jurisdiction in rem. Thus there are many equitable interests which can be registered and, if registered, are good as against the whole world. Then they are rights in rem.
VI. FOREIGN IMMOVABLES.
The Moçambique Case.
Suppose the dispute concerned land outside England, instead of copyright. Except where they felt able to exercise their equitable in personam jurisdiction (see below) the English courts refused to decide questions of title to foreign land. This was so even if the defendant was otherwise properly before the English court. In the first place, it would have been pointless to assert such a jurisdiction: how could our courts order foreign peace officers to put the successful claimant in possession of the land? In the second place, they considered that to try title to foreign land would have been disrespectful to their foreign judicial colleagues, as by seeming to undermine their jurisdiction and authority.
The leading case is British South Africa Company v. Companhia de Moçambique. Two companies, the one Portuguese, the other British and controlled by Cecil Rhodes, were in dispute about a territory called Manica, which I believe is three times larger than Wales. The Portuguese company complained that they owned lands and mineral rights in Manica yet the British company had invaded the territory with a military force and seized the lands and minerals, doing injury to their business. The House of Lords held that the Portuguese company was not entitled to maintain its claims in the English courts, for that would be to try a question of title to foreign land.
It is instructive to contemplate what would have happened had it been decided otherwise. The British company was claiming a title to the mineral rights granted by the native ruler Umtasa, while the Portuguese insisted that Umtasa was a vassal of an overlord who owed allegiance to Portugal. A more political dispute can scarcely be imagined. The incident led to a serious diplomatic confrontation and eventually the British government told Cecil Rhodes to back off. Thus Manica became a province of Mozambique, not Rhodesia (Zimbabwe), and is so to this day. But the Moçambique rule has frequently been applied in less exacting circumstances. I shall examine its rationale later.
In Personam Jurisdiction in Relation to Property Situate Abroad.
The Moçambique case was about rights in rem. I do not doubt that if the British company had admittedly been the owner of the land in Manica, but had agreed to sell it to the Portuguese company, a court of equity might have decreed specific performance. For that would have been to enforce a right in personam. The House of Lords was not purporting to overrule a long line of equity cases to that effect.
The equitable jurisdiction in personam touching land abroad has existed for at least 250 years. Notice the difference. In the Moçambique case the Portuguese company was saying, in so many words: “Please decide that under the local law we were already the owners of the Manica lands and minerals”. In contrast, under the in personam jurisdiction of equity the claimant would be saying: “I fully admit the defendant is the owner of this land. That’s my very complaint. You see, he has signed a contract to sell it to me. Please compel him to fulfil his bargain.” Then the court of equity would ‘act upon the conscience’ of the recalcitrant party by ordering him to transfer the land to the claimant according to the forms of local law. The jurisdiction is not over the property, but over the person. The defendant signs the requisite documents for fear of being held in contempt of court, but the result is to alter the ownership of foreign land all the same.
This equitable jurisdiction of our courts is both undoubted and long-standing. So much so that the original Mason-Dixon line, which demarcated boundaries between the privately-owned territories of Maryland, Pennsylvania and Delaware, and whose very name afterwards came to symbolise the difference between slavery and freedom, was drawn by an English astronomer and surveyor as a result of a decree of our Court of Chancery in 1750 (Penn v. Lord Baltimore 1 Ves. Sen. 447). The Court did not claim to interfere with the land laws of colonial North America: those were the exclusive province of the local judges. It merely compelled Lord Baltimore to comply with the obligations he had assumed to the Penn family.
A court of equity would decline to act if it were proved that the local law forbade the owner to sell his own property. Such property is said to be inalienable. (For example, in our country Blenheim Palace is inalienable.) It would not order the defendant to defy the laws of the foreign state; an exercise not only pointless, but disrespectful to the authority of the sovereign of that state. But usually the local sovereign does permit privately owned land to be alienated. Then there can be nothing wrong in its owner deciding to do so of his own free will. Suppose he has assumed such an obligation by entering into a contract governed by English law. For my part I cannot see why in such case it should be considered to be a breach of international comity, even remotely, for an English court to compel him to comply with his obligation. I would interject that, even if there are parties to the Berne Convention whose laws declare copyright to be a right of the author which is inalienable (which ought not really to be the case, see Article 2(6) of that Convention), it can have no material effect on what I have to decide. For, supposing Mr Evans to be incapable of alienating the copyright in the Logo by the laws of State X, that is something of which Raben are in no position to complain.
Thus when our courts of equity exercise their in personam jurisdiction they are not questioning the local land laws. They are not setting up a rival title. There is in truth no conflict at all between English equity acting in personam and the foreign land laws, less if anything than there was between equity and the common law before the Judicature Act. The foreign land laws allow a man to assume personal obligations with respect to that land. Of course, it is open to a foreign sovereign to enact that no land in that State may be sold save pursuant to a contract to be governed by the local law, the courts of that State to have exclusive jurisdiction. On that being shown, I apprehend, our courts would decline to intervene. But that is not the general case, nor this case.
There is another way in which our courts may make orders which affect ownership of foreign land. It often happens that an Englishman dies having made a will disposing of his property both in this country and abroad, including land. In those circumstances our courts may be called upon to administer the estate and, in so doing, to adjudicate upon this question: who succeeds to the title to the foreign land? Two famous examples concern Admiral Lord Nelson (land in Sicily) and the Duke of Wellington (land in Spain): Nelson v.Bridport (1846) 8 Beav. 547; Re Duke of Wellington [1948] Ch 118, C.A.. I shall revert to this aspect later, but it will be obvious that this particular jurisdiction, whatever may be its intellectual superstructure, rests on practical considerations. A man may die leaving property in many countries, and it would not be sensible to compel his executors to institute a diversity of proceedings. (A certain analogy with our case is apparent.)
Of course, Mr Onslow does not dispute the existence of our equitable jurisdiction to make orders in personam which result in the transfer to another of foreign land or intellectual property. But he contends that there is a limit to that power. It does not exist unless the defendant has assumed a personal obligation to do it, and it is his case that Raben have not done so.
Rationale of the Moçambique Rule.
At various times several reasons have been advanced in justification of the Moçambique rule. In my judgment the only rationale which survives today (apart from the court’s possible incapacity to execute its order abroad, which is not applicable in our case) is that it would be a breach of international comity to try questions of title to foreign land in rem, save incidentally: see, for example, the judgment of the Court of Appeal in Pearce v. Ove Arup Partnership Ltd [1999] FSR 525, 548. But we still have to discover precisely why it would be considered a breach of comity.
It cannot be merely because, in trying title to foreign land, we would be delving into a right of property which is granted by and exists under the laws of a foreign sovereign. For instance, it is clear that no equivalent to the Moçambique rule has ever applied to chattels. They might be ships, or jumbo jets. The contrast is neatly illustrated by the decision of the House of Lords in Hesperides Hotels Ltd v. Aegean Turkish Holidays Ltd [1979] AC 508, which held that no English action lay for trespass[6] to a hotel on the island of Cyprus, but that an action did lie for the conversion of the chattels present in that same hotel. Now, when chattels are present in a foreign jurisdiction they, and the rights of their owner, are subject to the protection of the foreign law. If it is complained that they have been misappropriated, the claimant in an English court necessarily undertakes to show that the conduct of the defendant was contrary to the laws of the country in which the events occurred. The court may have to consider the existence or scope of the nearest foreign equivalent to what we call the law of conversion, which may be very different from ours. Yet nobody objects that the bringing of the action is forbidden because it may call into question the existence or scope of laws created by a foreign sovereign. The foreign law is treated as a question of fact. The foreign law is created at the will of the sovereign, and when we find the fact we are trying to respect his will, not defy it.
Hence it must be clear that the proper justification for the Moçambique rule cannot rest on a general proposition that our courts do not entertain disputes concerning the existence or scope of laws made by a foreign sovereign. They do it all the time. This is so even if the courts of that country are themselves at odds on the very same question. Thus in the case of In re Duke of Wellington [1947] Ch 506, 515 Wynn-Parry J said:
It would be difficult to find a harder task than that which faces me, namely, of expounding for the first time either in this country or Spain the relevant law of Spain as it would be expounded by the Supreme Court of Spain, which up to the present time has made no pronouncement on the subject, and having to base that exposition on evidence which satisfies me that on this subject there exists a profound cleavage of legal opinion in Spain, and two conflicting decisions of courts of inferior jurisdiction.
Indeed, since he had to make up his mind as between two conflicting Spanish court decisions, Wynn-Parry had necessarily to decide that one of them was wrong; which he did, saying its reasoning was not “at all satisfactory”. There are strong reasons for believing that the courts of Spain – a proud and noble country, which nobody has accused of feebleness when it comes to justly resenting an usurpation of its prerogatives – would have not thought this to be disrespectful to their authority and jurisdiction[7].
Furthermore our court may have to decide that the law of the foreign country, when properly expounded, will import a rule of English law, and act on that English law. It may do so even where the result of the case is going to determine which of two parties under the jurisdiction of our courts is going to be the owner of foreign land. This happens all the time in cases about succession, and happened in the Duke of Wellington case itself, which concerned the fate of Spanish estates which had been granted to the first Duke together with a title of nobility.
Theoretically, a foreign state might misunderstand the nature of our equitable in personam jurisdiction, and perhaps resent it as being an invasion of its sovereignty. But so far as I know this has not happened. Obviously our own courts do not regard it to be such. Nor do they so regard the other instances I have mentioned. Why is that? The answer must be that, according to the usage of nations, it is not considered to be so. Thus in the Ove Arup case the Court of Appeal said (at 549-550):
It is, we think, clear from an analysis of the judgments in the Moçambique case that the House of Lords treated the question whether the English courts should entertain an action for trespass to foreign land as one of justiciability. The English courts should not claim jurisdiction to adjudicate upon matters which, under generally accepted principles of private international law, were the peculiar province and competence of another state…
We think that the approach of the House of Lords was, in substance, the same as that of Lord Esher MR in the Court of Appeal. He had identified the question … as:
“… whether, in regard to an action of trespass done to land situated outside its territory, there is evidence to justify the inference that by the comity of nations the jurisdiction to determine the rights resulting from such an act has been allowed by other nations to this country, and has been accepted by this country.” [My emphasis.]
So the reason it is perfectly in order for our courts to decide that the defendant has misappropriated or dispossessed chattels situate in a foreign state, contrary to the laws of that state; to decide that the defendant is liable for personal injuries or damage to property inflicted by his breach of the local road traffic or ship navigation laws; to decide that A but not B shall succeed under an English will made by the owner of foreign land; to order that X must convey to Y land situate in a foreign state in accordance with his obligation; must be because, according to the usages of nations, it is not considered to be a breach of comity to do these things.
Even so, it is apparent that to litigate a title in rem to land situate abroad is regarded as a special case. Why is it a special case? It is partly because the court cannot enforce its judgment and partly because it is felt the local sovereign might object. But why might he object? Why can one bring a claim that says “According to the laws of the sovereign the chattel is mine”, but not “According to the laws of the sovereign the land is mine”? The answer must be that it is understood that in the case of land the sovereign is or may be asserting a double prerogative. It is not only a prerogative to make laws for his own country, but a prerogative to have those laws adjudicated in his own courts exclusively. That was the traditional understanding when it came to land. Thus in the Ove Arup case the Court of Appeal cited from another work of Story to show that according to the Roman law the judge of the place where the land was situate had exclusive jurisdiction. It is perhaps not hard to see why this arose, and I shall revert to this in paragraph 118 below.
What, then, if the claim is not in rem, but in personam? The understanding must be that the local sovereign would say: “I do not mind if A agrees to sell and B agrees to buy land situate in my country, and they vindicate their personal rights under the contract in the courts of another state”. The question that then arises is: would he start to mind if it was a case of a third party purchaser with notice? For the rationale of the purchaser with notice doctrine is that he comes under a personal obligation arising out of his equitable fraud upon the contract between A and B.
International Developments.
The question resolves itself into discovering what is internationally acceptable. What may not have been acceptable in 1908, may be so in 2004. And a helpful source to go to, absent an actual decision of our courts which can be regarded as still applicable today, is the usages of nations as evidenced by widely respected conventions or treaties. There is no convention, universally adhered to, which governs the question; but there are certain regional conventions, notable for the fact that they have been adhered to by States which possess very different legal systems and traditions, and which were founded on the works of legal scholars of international distinction. I refer, of course, to the Brussels and Lugano Conventions. I should stress that I am interested in these, not as a source of positive law, but as evidence of the usages of at least an important group of civilised nations on a particular point (compare the observations of Lord Esher quoted in the above extract from the judgment of the Court of Appeal in the Ove Arup case). Mr Hacon submits that it would be absurd if our country had one policy concerning foreign land when it came to the Brussels and Lugano Conventions and another policy when it came to the other States of the world. I think that is to go too far. The Brussels and Lugano Conventions are just that – conventions. They consist of accommodations voluntarily entered into between sovereign states. Their precepts cannot be exported so as blindly to affect States who are not parties. All the same, I find their doctrine to be instructive within the limits I have described.
In general, those Conventions require proceedings to be brought in the courts of the state where the defendant is domiciled. But there are certain exceptions, and for the moment I am interested in that exception which concerns land. Article 16(1) of the Brussels convention provides that, in proceedings ‘which have as their object rights in rem in immovable property’, or tenancies of immovable property, the courts of the Contracting State in which the property is situate shall have exclusive jurisdiction. (There is now a partial exception for short lets). The Lugano Convention is the same. The Jenard Report and the ECJ have explained why this rule was adopted. Ignoring leases (which may involve locally sensitive policy questions concerning tenants’ rights), it was partly because convenience frequently requires that the decision be made by the man on the spot, and partly because prior German and Italian public policy had required exclusivity.
Now, it turns out that Article 16(1) is narrow. It is only where the principal purpose of the proceedings is to assert rights in rem, that is to say, rights which are good as against the whole world (as opposed to rights which are good as against certain persons only), that the court of the country where the land is situate has exclusive jurisdiction. See the next paragraph below. Otherwise, the proceedings not only may, but very possibly must, be brought in a state where the land is not situated.
As to that, Dicey & Morris refers to an important authority and contains an important observation (§23-012):
In Webb v. Webb[8] the European Court ruled that an action for a declaration that a person holds immovable property as a trustee and for an order requiring that person to execute such documents as are required to vest legal ownership under the lex situs in the plaintiff does not involve rights in rem within the meaning of Article 16(1). It was held to be irrelevant that the ultimate purpose of the plaintiff was to obtain ownership of an immovable; what is important is whether rights in rem are the object of the proceedings. Since the plaintiff did not claim that he already enjoyed rights directly relating to the property which were enforceable as against the whole world, but sought only to assert rights against the defendant, the action was not a right in rem within the meaning of Article 16(1), but an action in personam. This ruling suggests that, even if the object of the proceedings is to vindicate equitable rights against a third party (for example, where the claimant seeks to establish that a purchaser of trust property holds it as constructive trustee), the proceedings should not be regarded as involving rights in rem. [My emphasis.]
Lack of Jurisdiction Contrasted with Forum Non Conveniens or Choice of Law.
When reviewing the older English cases concerning the limits to the court’s in personam jurisdiction in cases concerning land situate abroad, upon which Mr Onslow relies, it is worth bearing in mind that they were decided before the formulation of the modern doctrine of forum non conveniens, and at a time when the topic of private international law was, by present standards, comparatively underdeveloped by our courts.
Forum Non Conveniens.
Even though our courts may have jurisdiction to hear a case or make an order concerning property situate abroad, it does not necessarily follow that they will do so. They have a discretion. Nowadays, and subject to any mandatory rules prescribed by European legislation, our courts may decline to exercise their jurisdiction if they consider that there is a court in a foreign country in which the dispute can be tried more conveniently. For example, if the witnesses are numerous and live there; or if the case is all about a point of foreign law, best tried in a court versed in that system of law. Then England is said to be a forum non conveniens.
Now, so far as English law is concerned this doctrine is relatively recent: its development began in 1974 and it was not formally recognised until 1984. This is well known to every lawyer in our field and it is conveniently summarised in Lord Diplock’s speech in The Abidin Daver [1984] AC 398, 407-411. The old rule was expressed thus:
[The cases] support the general proposition that a foreign plaintiff, who can establish jurisdiction against a foreign defendant by any method recognised by English law, is entitled to pursue his action in the English courts if he genuinely thinks that will be to his advantage and is not acting merely vexatiously. Neither the parties nor the subject matter of the action need have any connection with England. There may be proceedings on the same subject matter in a foreign court. It may be a far more appropriate forum. The defendant may have to suffer great expense and inconvenience in coming here. In the end the decisions of the English and foreign courts may conflict. But nevertheless the plaintiff has a right to obtain the decision of an English court. He must not act vexatiously or oppressively or in abuse of the process of the English court, but those terms have been narrowly construed.
Although The Abidin Daver was about lis alibi pendens (litigation pending simultaneously in two jurisdictions), I believe it is nevertheless true that we had no formal doctrine of forum non conveniens until quite late in the twentieth century. Before that, a defendant to a suit could not plead: “Do not exercise jurisdiction over me, because there is a foreign court where the case can be tried more conveniently”. Instead, he would have had to make out, if he could, that the English court had no power to try the case; or that the court’s decree would be ineffectual, because its enforcement would have required the co-operation of the foreign court; or that the proceedings were vexatious and oppressive (itself a tough test to pass).
Choice of Law.
Similarly, there are grounds for believing that what would nowadays be regarded as a problem about choice of law would, in those days, have been presented as a problem about lack of jurisdiction. I shall revert to this later.
With those preliminary observations in mind, I now turn to review the authorities relied upon by Mr Onslow concerning the limits to the court’s equitable in personam jurisdiction in cases concerning foreign land.
Norris v. Chambres.
In Norris v. Chambres (1861) 29 Beav. 246, affirmed 3 De G.F. & J. 583, a company director had committed suicide; the claim was brought by his estate. The company had been established in England to work a Prussian coal mine, and the director had personally advanced a large sum towards its purchase. The company agreed to buy the Prussian mine, as planned, but the director’s suicide intervened before completion. The result was that his estate was temporarily short of funds, further instalments he was supposed to pay according to the contract were not paid, and the property was in danger of being lost. Accordingly, the other directors caused the contract to be cancelled and they set up a new company instead, which acquired the mine under a replacement contract. The shortfall was made up by crediting the vendor with the monies already advanced by the deceased director.
In other words, the injustice to the deceased director’s estate was this: it had no shares in the new company, and nothing to show for the large sum he had already advanced. The plaintiff brought two suits, one in Prussia and the other in England. The English claim was for a declaration that the plaintiff had a lien on the coal mine, an account, and a declaration that the defendants had purchased the mine subject to the lien and as his trustees, and that unless the money was repaid the mine should be sold in order to generate the sum required for that purpose. It will be obvious to the modern reader of the reports that England was a forum non conveniens. Indeed by the date of the first-instance hearing the Prussian suit had already succeeded.
At first instance Sir John Romilly MR said (29 Beav 246 at 254):
I am told that according to late decisions, and according to the law of England, if a man sell an estate to B and receive part of the purchase-money, and then repudiate the contract, and sell the estate to C, who has notice of the first contract and of the payment of part of the purchase-money by B, B shall, in that case, have a lien on the estate in the hands of C, for the money paid to the original owner. But assume this to be so, this is purely a lex loci which attaches to persons resident here and dealing with land in England. If this be not the law of Prussia, I cannot make it so, because two out of the three parties dealing with the estate are Englishmen, and I have no evidence before me that this is the Prussian law on this subject, and it if it be so, the Prussian Courts of Justice are the proper tribunals to enforce these rights. If the owner of an estate in Prussia mortgage that estate to an Englishman, it is new to me that the Courts of Equity in this country will administer, as between those persons, the law obtaining in England with relation to mortgages, and foreclose or direct a sale of the Prussian estate, if payment be not made of the amount due…
[T]here is no equity between the parties; here the Plaintiff is entitled to no decree against the Defendants for payment of any sum of money, nor is any such claimed, but the equity and relief sought begin and end with a prayer to make a certain transaction between other persons, one of whom is a stranger to the Plaintiff, an interest to an estate in Prussia, belonging to that stranger, and this independently of all personal equities attaching upon him. I never heard of any such case, and I will not be the first Judge to create such a precedent, which if adopted, for ought I see, would go to assert a right in the Courts here to determine questions between foreigners, relating exclusively to immoveable property in their own country.
On appeal Lord Campbell LC said (3 De G.F. & J. 583 at 584):
With respect to this advance, I think that, upon the authority of Penn v. Lord Baltimore, which has often been acted upon, the Plaintiff would have been entitled to succeed if he could have proved that the claim for a declaration of the proposed charge or lien on the Maria Anna mine was founded on any contract or privity between him or the deceased [director] and the Defendants, the purchasers of the mine, and if there had not been a suit in the Prussian Courts, in which the same question was raised and had been decided in the Plaintiff’s favour.
But I agree in thinking with the Master of the Rolls that the Plaintiff has failed to shew any such contract or privity. Upon the evidence adduced the purchasers of the mine, whom he sues, are to be considered as mere strangers, and any notice which they may have had of the transactions between [the deceased director] and [the old company] (which has now ceased to exist) cannot give this Court jurisdiction to declare the proposed lien or charge on lands in a foreign country. An English Court ought not to pronounce a decree, even in personam, which can have no specific operation without the intervention of a foreign Court, and which in the country where the lands to be charged by it lie would probably be treated as a brutum fulmen. I do not think that the Court of Chancery would give effect to a charge on land in the county of Middlesex so created by a Prussian Court sitting as Dusseldorf or Cologne.
But another objection is lis alibi pendens, a suit pending before the proper tribunal in Prussia, and that by this tribunal, a decree has actually been pronounced in favour of the Plaintiff, giving him what he seeks… We must suppose that the Court at Dusseldorf has ample means to enforce the whole of its decree, and that the Plaintiff will have the full benefit of that decree, which may be considered as creating a debt for which the opposite parties are personally liable and a charge upon the property sold.
If we strip out the complications caused by the difficulty of enforcing a lien on foreign land and by the existence of parallel proceedings in Prussia (obviously the forum conveniens) it seems to have been decided that there was no equity against a purchaser for value with notice because the land was situate in a foreign State. But this enshrouds a conundrum, and I shall return to that case later.
Deschamps v. Miller.
In Deschamps v. Miller [1908] 1 Ch 856 the dispute was over land in India. The claimant offered to prove the following facts. His parents, a French couple, had married in France in community of property. So according to the French marriage contract the wife was supposed to be entitled to one half of the husband’s after-acquired property. The husband left the wife, went to India, and bigamously married a lady who, for want of a briefer expression, I shall refer to as his de facto wife. He acquired business premises in Madras and other lands there. After living a great many years in India (and having been separated from his de jure wife for 30 years) he put them in trust for the benefit of the de facto wife. These lands, it was said, were after-acquired property within the meaning of the marriage contract, and had been transferred to the benefit of the de facto wife other than for valuable and sufficient consideration, in breach of that contract.
After the death of all three members of the triangle, the de jure wife’s son, who claimed as her successor according to the law of France, took out English letters of administration of her estate. He claimed to be entitled to a share of the Indian property, and sued the trustees of the Indian settlement. However, according to Indian law the estate of the de facto wife was vested in the Administrator-General of Madras. The parties were personally subject to the jurisdiction of the English court. But the Administrator-General was not a party – even though the point had been taken in the defendant’s pleadings. Parker J held that, even on the facts as alleged by the claimant, the English court ought not to entertain jurisdiction, because the lands were situate in India.
Pausing there, how might those facts strike a lawyer now, in 2004? Why had there been no divorce, seeing that the parties to the French marriage had been separated for 30 years? The wife may have been entitled to support. But could she refuse to divorce him, stand by while he acquired a fortune in India over many years, then claim half of it? Did French law in those days permit a divorce at all? If not, would that rule be recognised universally? Nowadays, would this perhaps be regarded as a problem touching on family law? In any event, why was not the case brought in the courts of Madras? Surely they knew all about Indian land law, and was not the de facto wife’s property vested in an Indian official?
However that may be, let us consider the case as one about property. At page 862 Parker J said:
But it is alleged that the conveyances of the husband under which the defendants claim title were not made for good consideration according to French law [i.e. were made at an undervalue], and that consequently, according to the same law, the wife could follow the property and claim it in the defendants’ hands. It is obvious, however, that whether or not the wife could assert any interest against land outside France would be governed entirely by the law of the place where the land is situate. If, for example, the land were in England, it would not be enough to prove that according to French law the wife had an interest. In order to assert such an interest against the defendants it would have to be made out either that the defendants were not purchasers for value, or that, though they were purchasers for value, they had notice of the wife’s interest under the French contract. Of course a purchase for value under the English law may have a totally different meaning from a purchase for good consideration according to French law; and I am told in the present case that in France good consideration for such a purpose as this means full consideration in money or money’s worth. In order, therefore, to decide whether the plaintiff can succeed in following the property into the hands of the defendants I should have to consider the law relating to immovable property in India. Not only may that law differ from the law of England in the extent to which equitable interests are recognized, but also in the importance which attaches to the presence or absence of notice. It may also contain provisions such as the statutes for the limitation of actions or suits, or for the registration of title, which would materially affect the matter I have to decide.
If the wife’s interest in the Indian land was indeed “governed entirely” by Indian law, why not receive evidence about Indian law? However, Mr Onslow relies on the following proposition enunciated by Parker J at page 863:
In my opinion the general rule is that the Court will not adjudicate on questions relating to the title to or the right to possession of immovable property out of the jurisdiction. There are, no doubt, exceptions to that rule, but, without attempting to give an exhaustive statement of those exceptions, I think it will be found that they all depend on the existence between the parties to the suit of some personal obligation arising out of contract or implied contract, fiduciary relationship or fraud, or other conduct which, in the view of a Court of Equity in this country, would be unconscionable, and so not depend for their existence on the law of the locus of the immovable property. Thus, in cases of trusts, specific performance of contracts, foreclosure, or redemption of mortgages, or in the case of land obtained by the defendant by fraud, or other such unconscionable conduct as I have referred to, the Court may very well assume jurisdiction. But where there is no contract, no fiduciary relationship, and no fraud or other unconscionable conduct giving rise to a personal obligation between the parties, and the whole question is whether or not according to the law of the locus the claim of title set up by one party, whether a legal or equitable claim in sense of those words as used in English law, would be preferred to the claim of another party, I do not think the Court ought to entertain jurisdiction to decide the matter.
In the present case there is, in my opinion, no such personal obligation as above mentioned, and I do not think I could assume jurisdiction in this case without acting contrary to the decision in Norris v. Chambres.
Mr Hacon at first contended that Raben owe a personal obligation to his clients which is not derived from the law of the locus of the intellectual property, but from English law, which I take to be a reference to our doctrine of purchaser with notice. But I thought that this was much the same argument as would appear to have been rejected by Parker J in Deschamps v. Miller. We need to delve further.
Now, Parker J was an equity judge of great eminence, and he who presumes to question his reasoning may well be regarded as foolhardy indeed. However, what I need to know is, not whether the case was correctly decided in 1908, or whether the actual result would be the same in 2004 (albeit, perhaps, by a different route). I need to know and understand precisely what was its reasoning in the first place, being the reasoning upon which Mr Onslow relies, and whether it holds good in 2004. For I am being asked to marry what is said to be a rule concerning foreign immovables with one of intellectual property: which is (as the rubric advises, although in another context) a task “not by any to be enterprised, nor taken in hand, unadvisedly, lightly, or wantonly … like brute beasts that have no understanding”. Therefore I must try to understand why Parker J ruled as he did; and I confess that there is one aspect of his reasoning I have not found altogether easy to understand. I must now explain the difficulty.
If the land had been situate in England, not India, apparently the claim would have succeeded, unless it transpired that the de facto wife was a purchaser for value without notice of the de jure’s wife’s equitable interest. That much Parker J himself acknowledged in the passage bridging pages 862-3. If the wife’s interest had prevailed it would be because the de facto wife had had notice of it; her conscience would be affected; she would have known that she was taking property already contracted to belong to another. But, if that is so, why should it make all the difference that the lands were in India instead of England? Assuming there was no overriding specialty of the local land law e.g. overreaching of interests under a registration system, how could the mere geographical location of the property affect the wholly different question, namely whether (in Parker J’s words) there was “some personal obligation” between the parties?
It is not an answer to say that the obligation would be governed entirely by the lex situs. For, as Parker J himself explained, a “personal obligation” – sufficient to permit the English court of equity to grant relief – might arise from “fraud, or other conduct which, in the view of a Court of Equity in this country, would be unconscionable, and so not depend for their existence on the law of the locus of the immovable property”. [My emphasis.]
By “fraud” Parker J cannot have meant just common law fraud – the tort of deceit – for the books show that the concept was not so restricted. He must have had in mind, at least, the case on equitable fraud which was cited to him: the leading case of Cranstown v. Johnston (1796) 3 Ves 170. Lord Cranstown, who was the absentee owner of a valuableestate in a Caribbean island, owed the defendant Johnston a modest amount of money. Johnston caused a suit for the money to be brought in the appropriate court of that island, whose laws permitted a form of substituted service. You just nailed the writ on a post and on the courthouse door. Thus, as Johnston had intended all along, Lord Cranstown received no actual notice of the proceedings, with the result that judgment was given against him by default, the estate was put up for auction to satisfy the judgment, and Johnston, who was the only bidder, acquired the property for the amount of the debt, which was far less than the value of the estate. From beginning to end Johnston uttered no false representation to anyone, nor did he violate any law of the island, nor did he owe any contractual obligation to Lord Cranstown; but he did know that he was going behind Lord Cranstown’s back in getting the estate for a pittance. In a suit brought in England to recover the estate, Arden MR held that, although he would not question the jurisdiction of the foreign court, or the regularity of its proceedings, and although he would not presume that the local laws would set aside the transaction, it was a fraud all the same according to English rules of equity, and that the defendant Johnston must restore the estate upon being repaid the original debt and expenses.
So that is one example of equitable fraud. What, then, about the equity that arises in the case of a second purchaser with notice?
Now, as explained by Story (a text I chose deliberately because I believe it reflects the understanding of equity judges towards the end of the nineteenth century), and by Fry LJ writing for a unanimous Court of Appeal well within the professional lifetime of Parker J, and as was being taught by Maitland to his students at the same time as Deschamps v.Miller was decided, the very reason the third party purchaser with actual notice is held liable is because his contract is considered to be unconscionable by an English court of equity, as being a fraud on the party who had been the first to agree to purchase the land. In plain language, by covertly entering into the second contract they are going behind his back to do him down. Furthermore, in deciding whether there is such a personal obligation as to affect the defendant’s conscience, the English courts have until now applied their own notions, and not those of the foreign state: Cheshire & North’s Private International Law, 12th ed, pp.258-9; Dicey & Morris The Conflict of Laws, 13th ed, §23-044; and note Parker J himself in Deschamps v. Miller (“conduct which, in the view of a Court of Equity in this country, would be unconscionable”).
Since it must be impossible to believe that Parker J and his predecessors were not well aware of the conventional basis of the rule concerning second purchasers with actual notice (indeed, the plaintiff explicitly claimed that the settlement on the de facto wife was a fraud on the French marriage contract), how are we to account for the reasoning in the cases of Deschamps v. Miller and Norris v. Chambres upon which Mr Onslow relies? Why would a purchaser with notice succeed in the case of foreign lands when he would have failed if the land had been English? Why, at the least, was the foreign law not presumed to be the same as English law, absent evidence to the contrary; or, if that is putting it too high, why was it apparently assumed by Parker J that the claimant would not have been allowed to tender evidence of the foreign law? In short, why was the problem treated as one of lack of jurisdiction, and not as one of choice of law? Despite a careful perusal of the judgments in those cases, I have not discovered in them an answer to these questions founded on a principled explanation which accords with modern ideas.
However, I believe the answer is to be found in Macmillan Inc v. Bishopsgate Trust (No. 3) [1995] 1 WLR 978 (affirmed on other grounds [1996] 1 WLR 387, C.A. but not so as to affect the principle cited hereunder). There Millett J (as he then was), referring to Norris v. Chambres, said at 989:
A suit in equity was instituted between two parties resident in England to enforce an equitable lien to land situate abroad. The court declined to entertain the suit. It held that, although a purchaser to whom land out of the jurisdiction of the court had been agreed to be sold by a person within the jurisdiction may obtain an order for specific performance against the vendor … he cannot obtain an order against a third party to whom the vendor has conveyed the property even though such person took with notice of the contract and is within the jurisdiction. The case was treated as one of jurisdiction, but it would today more properly be regarded as one of choice of law; whether the claim be brought against the vendorhimself or against his transferee, the plaintiff would be invoking the in personam jurisdiction of the court against a defendant who was amenable to that jurisdiction. The difference between the two cases is that in the second case there is no equity or privity between the parties which the court can enforce except such equity, if any, as may arise from the transferee’s notice; while the sufficiency of such notice to affect the transferee’s title is a matter for the lex situs. If, by that law, the transfer to the defendant extinguished the plaintiff’s interest notwithstanding the defendant’s notice, the plaintiff no longer has any proprietary interest upon which he can base his suit in England.’
When I drew that authority to the attention of counsel Mr Onslow argued that it might be so in a case about movables (Norris v. Chambres) but not in a case about land (Deschamps v. Miller). I do not agree. The first was a case seeking to declare a lien on foreign land, and Parker J followed it in the second.
I gratefully adopt the reasoning of Millett J (as he then was) which I have emphasised in the above-quoted passage. In my respectful judgment, it is the only way to account for my difficulty. Private international law has moved on. Today we should treat the fact that the land is situate abroad as affecting the choice of law, not jurisdiction, if the case is one in which it is sought to enforce an equitable claim in personam. At least in cases where the original contract is governed by English law, the third party purchaser with actual notice is considered to behave unconscionably, unless of course the law of the State where the land is situate provides otherwise, as it might well do according to some scheme for the registration of titles, because in that case it would not be unconscionable to acquire the land even with notice, for the reasons I have summarised in paragraph 58 above.
It would follow that today, in 2004, a claim to have foreign land conveyed to one, based on an English contract and made against a purchaser of the land with prior notice of that contract, could in principle succeed, provided the foreign law would not overreach our doctrine of notice. It would be a claim in personam, not in rem. The claimant would succeed, not by proving that he already had a title to the land arising out of the foreign land law, but upon a personal obligation owed to him by the defendant (compare Dicey & Morris, op cit, §23-012) arising out of the contract and his unconscionable conduct. Internationally, it would be classified under the rubric ‘Obligations’. There would be no question of trying title to foreign land, for it would be common ground that the defendant was the legal owner. The claimant would simply be asking the court to compel the defendant to sign the documents required by the foreign land law, so as to transfer the title to him. He would be relying on a personal obligation: an equity arising from the English contract which had not been extinguished by the lex situs.
It is true that other considerations might intrude. If it were (say) just a claim about land in India, brought against a purchaser with notice, it might well be that an English court would decline to entertain it because India, not England, was the forum conveniens. But that is a different objection. As I understand it the doctrine was not available to Parker J in 1908.
It is also true that until now our courts have applied English notions of equity in these cases, unaffected by foreign law. But, as Spry suggests (op cit, pages 40-41):
[I]t is necessary for conflict of law rules to be applied and developed in cases where equitable remedies are sought. These limitations have received little express consideration in English and Australian decisions… Because these difficulties have generally been passed over sub silentio by the courts, they cannot be regarded as resolved; doubtless more precise rules that will accept the applicability of foreign laws in appropriate cases will be established in the course of time.
Dr Spry’s views are entitled to great respect.
In this case I do not have to investigate those questions. I am entitled to presume or (at least) procedural fairness compels me to presume, that the laws under which the foreign copyrights exist would not extinguish Griggs’ equity arising from the doctrine of purchase with notice. This seems reasonable: given that there is no registration system I cannot easily imagine why the foreign law should be otherwise. Maybe Raben might have identified countries in which it is not so, but they have not.
Conclusion on Immovable Property.
I would therefore have held that in the circumstances of this case Griggs would have succeeded, even if the foreign property had been land, not copyright, always supposing there were no local rules which served to extinguish the equity (for example, arising out of some scheme for registration of title). Put more generally, in the absence of such local rules I can see no sound reason why a claim in personam in respect of foreign immovables arising out of a prior contract, brought against a third party purchaser who had had actual notice of that contract and who is otherwise properly before the court, should fail; at any rate, where the contract is governed by English law and the immovables are located in manifold jurisdictions.
It would follow that the first step in Mr Onslow’s argument fails and that I do not need to examine his second step, viz. that the Moçambique doctrine has been extended from land to intellectual property. However, I am not content to found my judgment on that point alone. I shall assume that I may be wrong, and ask myself if his point applies to foreign intellectual property.
VII. OWNERSHIP OF FOREIGN INTELLECTUAL PROPERTY.
Truly Analogous to Land?
I have sought to distinguish cases like Deschamps v. Miller on the basis of modern doctrines of private international law. An alternative view may be that the answer to the questions I have posed in paragraphs 102 and 107 above is to be found in the reluctance of our courts in the nineteenth century to be perceived to meddle unduly in property disputes concerning foreign land, albeit through the medium of a suit in personam. As Lord Esher thought, the equitable jurisdiction “seems to be open to the strong objection that the court is doing indirectly what it dare not do directly” (Companhia de Moçambique v. British South Africa Co [1892] 2 QB 358, 404-5, C.A.). While Lord Esher was not an equity lawyer by training and I doubt that his opinion would have been regarded as conventional in a court of equity, it is nevertheless possible that, because of that reluctance, the equity judges may have felt that they ought to draw the line somewhere, and that any line would have been, and in the event was, somewhat arbitrary (see Dicey & Morris, op cit, §23-045). On this view they chose to draw the line when it came to the purchaser with notice (but not when it came to the other species of equitable fraud).
If that was so it would not be very logical; but the underlying emotion would be comprehensible. According to deeply held notions of mankind, land, the surface of the earth, has a very special, I am almost tempted to say, sacral character – which cannot be said of most intellectual property. Even as I write there are men and women who are prepared to kill or maim innocent people, all because of what an outsider might call a tract of arid desert or mountain; yet who would, perhaps, scorn to do so over money of equivalent value. In former times ownership of land might confer obligations of a military character. In unruly times the very puissance of the sovereign might depend on his ability tightly to control land ownership. Later on, ownership of land might confer a right to vote or to seek election to the legislature. For a foreign court to determine titles to land might amount to undermining the constitution of the country. Those considerations are obsolete now in civilised states, but may have shaped the law. In §23-003 of Dicey & Morris it is stated that:
In a broad sense [Rule 113] is based on a general principle found in most legal systems that, where the action concerns immovable property, the courts of the country where the land is situated have exclusive jurisdiction… There are various reasons for the principle… land still has a rather special position in most legal systems …
Intellectual property rights are not ‘immovables’, and indeed s.90 of our Copyright Act states that ‘Copyright is transmissible by assignment, by testamentary disposition or by operation of law, as personal or moveable property’. Likewise a patent is described as ‘personal property’ or, in Scotland, ‘incorporeal moveable property’ (Patents Act 1977, ss. 30, 31); and similar expressions are employed in statutes concerning other species of intellectual property. Even so, there may be some ways in which foreign intellectual property rights in point of comity are analogous to foreign immovables. For example, if a court in State X were to grant injunctions restraining people from infringing patents in State Y, there being no treaty between those States which allowed it, it is easy to see that the sovereign of State Y might resent it: see paragraph 132 below. For that would be to assume a jurisdiction to control important aspects of the internal trade of another sovereign state. But that is not the case before me.
Tyburn Productions v. Conan Doyle.
Nevertheless, the second step in Mr Onslow’s argument is that the Moçambique rule has been extended to foreign intellectual property by the decision of Vinelott J in Tyburn Productions Ltd v. Conan Doyle [1991] Ch 75. The actual point underlying that case was whether, many years after the death of Sir Arthur Conan Doyle, there still existed copyrights or other intellectual property rights under the laws of the United States, or under state laws, which could be asserted to prevent the distribution of a film about Sherlock Holmes in that country. It was held that the issue was not justiciable in England and that, in any event, the proceedings were pointless since there was nothing to show that the courts in America would pay any attention to the result of the English case supposing it had been allowed to go ahead.
It was thus a dispute which, on one view, called into question the existence of intellectual property rights said to have been granted by a foreign sovereign. I do not think so myself, for it would merely have been a question of receiving evidence about the will of that sovereign; I doubt that the sovereign could be assumed to be asserting a prerogative to have claims of that sort decided exclusively in its own courts. But, however that may be, on any showing it was a pure matter in rem. It was not a dispute where, it being common ground that the rights did exist, one party claimed that he had the better title to them than the other. Much less did the case concern the point which exercises me here, namely, the existence or scope of this court’s equitable in personam jurisdiction as against a purchaser with notice of foreign intellectual property rights already contracted to be transferred to another by contracts governed by English law.
Mr Onslow nevertheless asks me to apply the reasoning in Tyburn to the present case. Before I proceed to examine that reasoning, I must note some legal developments which have occurred since the date of that case, or which were not cited to the court there.
First, the significance of Article 16(4) of the Brussels and Lugano Conventions, respectively. Doubtless those conventions were not cited to Vinelott J because their relevance was not perceived, seeing that the United States is not a party; nor was it very likely that their relevance would have been perceived at that date, when we were unaccustomed to the novel concept that in certain circumstances a claim for infringement of foreign copyright not only may, but must, be brought before the English courts. I have already reviewed matters touching Article 16(1), which concerns foreign immovables, and have felt them to be useful source of evidence concerning developing international practice about judicial comity in such cases. I consider that the same approach may be useful with regard to Article 16(4), which concerns foreign intellectual property. It provides that ‘in proceedings concerning the registration or validity of patents, trade marks, designs, or other similar rights required to be deposited or registered’, the courts of the Contracting State where the deposit or registration is supposed to take place shall have exclusive jurisdiction.
Once again the narrowness of that exception should be noted. In the first place, it does not apply to copyrights since these are not required to be deposited or registered. Secondly, and though not directly pertinent for present purposes, it does not apply even in the case of the rights which are so required, so long as the proceedings do not concern their registration or validity. Thus in Case 288/82 Duijnstee v. Goderbauer [1983] ECR 3663, E.C.J. there was a dispute between an inventor and the liquidator of a company concerning ownership of patents. The liquidator’s claim was that under Dutch law the inventions had been made on terms that the patents ought to belong to the company. He demanded that the inventor should be ordered to transfer not only the Dutch patent, but also the corresponding patents in 22 other countries, including five which had adhered to the Brussels Convention. The European Court of Justice held that to make the order would not violate Article 16(4) of the Convention. The validity of the patents was not being challenged. Nor, for that matter, was the conduct of the various national authorities whose business it was to keep the patent registers. Nor was the liquidator seeking an order directing those authorities to rectify their registers in the light of Dutch law. Instead, the liquidator was asking for an order which would have required the inventor himself to apply to rectify the registers: an order in personam.
While it is true that the ECJ’s decision was not concerned with the laws of those countries which were not parties to the Convention, I nevertheless regard it as helpful evidence of modern international practice. Furthermore, it is clear that the Dutch courts in that case were prepared to make in personam orders which would have affected title to intellectual property in non-Convention countries, which is further evidence of the usages of nations. Evidently the Dutch courts, at least, thought it would not be a breach of international comity.
At any rate, it follows from the Brussels convention that, in certain circumstances, our courts not only may, but must, entertain proceedings for infringements of foreign copyright (Pearce v. Ove Arup). If that is so it is hard to see why they should object to adjudicate upon a case concerning their ownership, said to arise from a contract governed by English law. The more so in the light of the usages of nations as evidenced by the decisions of the ECJ and the Dutch courts in Duijnstee v. Goderbauer.
The second legal development since the date of the Tyburn case is the abolition of the so-called double-actionability rule. It was interpreted to mean that infringements of foreign intellectual property rights could not be sued for in England. In order to understand that rule, which had nothing to do with comity, it is helpful to remember that, historically, it was developed back-to-front. It quite often happened that one Englishman injured another while both were abroad: it might have been an assault, say, or destroying his sailing ship. When both returned to England the injured party could sue the culprit; and, originally, English courts would merely apply their own rules in tort without bothering to enquire what was the law in the foreign country.
This was all very well for simple torts e.g. assault; but, as life became more sophisticated it was appreciated that it would not be right to hold a man liable for doing something which was not wrong according to the laws of the foreign country. Eventually the rule was developed that, for the action to lie in England, it was necessary to show, not only that an English tort had been committed, but that the act in question was actionable in the foreign country. In a more rational world the rule would not have been developed back-to-front. It would simply have been enquired whether a tort had been committed in the foreign country, according to the law of that country, and English tort concepts might have served as a mere backstop, to prevent exotic claims succeeding contrary to the policy of our law. But that is not what happened.
So, when I write “an English tort had been committed”, I mean that the act in question would actually have amounted to a tort had it been done in England. All ingredients of the cause of action as required by English law had to be present. It followed that, irrespective of any question about comity or forum non conveniens, it was out of the question to sue in this country for infringement of a foreign patent or other intellectual property right. Suppose you had sued in England for infringement of a French patent. It is obvious that if you owned no equivalent British patent your action would have been bound to fail, because the working of the invention in France would not be a tort in England. Patents are territorial, as are all other intellectual property rights. The French patent was a monopoly limited to France, impossible to be infringed by working the invention in England. Now suppose you also owned an equivalent British patent. According to the double-actionability rule your claim would fail all the same. This was because it is an essential ingredient of the tort – infringement of the British patent – that the act be done within the territorial limits of the United Kingdom. Since this was not the case, no liability. That was what was decided in Def Lepp Music v. Stuart-Brown [1986] RPC 273. However, it has now been questioned by the Court of Appeal in Pearce v. Ove Arup [1999] FSR 525, 560-1.
In any case the double-actionability rule was abolished by s.10 of the Private International Law (Miscellaneous Provisions) Act 1995, with the effect that, in general, it is now enough to show that the act complained of is actionable according to the law of the country where the event took place. Hence (questions of Convention, comity and forum conveniens apart) it is now sometimes possible to sue in England for infringement of a foreign intellectual property right.
I have said: “questions of comity apart”. It still may well be a breach of comity to challenge the validity of a foreign patent, compare Article 16(4) of the Brussels and Lugano conventions; and in cases actually within that Article it is expressly forbidden.
There is a sense in which our courts may consider that to adjudicate on foreign intellectual property rights, absent a requirement imposed by an international convention, is indeed a breach of comity. Suppose an action is brought in England for an injunction to restrain the defendant from infringing a foreign patent. This is not only an action in rem: the effect of the injunction, if granted, may be to drive up prices for the patented product in the foreign state. This, conceivably, may annoy the citizens of that state. See Plastus Kreativ AB v.Minnesota Mining and Manufacturing Co [1995] RPC 438 at 447 per Aldous J. But however true that may be, it is not in any meaningful sense analogous to our case.
On the other hand, in one sense it has always been possible to call into question both the validity and the scope of a foreign intellectual property right. For instance, where the defendant has agreed to pay royalties to the claimant on any product covered by a valid claim of a foreign patent and the agreement is governed by English law and confers jurisdiction upon the English courts. A recent instance is Celltech Chiroscience Ltd v. MedImmune Inc [2003] EWCA Civ 1008: indeed at first instance Jacob J said “I found myself receiving submissions on US case law just as if I were a US District Judge”: [2002] EWHC 2167 (Pat) §8. When this happens our courts are not considered to act in breach of comity. Even though they might appear to be enquiring into the validity or scope of an intellectual property right granted by a foreign sovereign. But in truth, they are not purporting to tell the American public, say, that one of their patents is invalid or that the scope of its claims is not what it might appear to be. They are merely settling the rights of two private litigants who have chosen to submit their dispute to the adjudication of our courts. Once again, rights in personam, not rights in rem. However, once again that is not this case, for Griggs and Raben had no antecedent agreement to submit their differences to the adjudication of this court.
Happily, I do not have to decide whether (and if so, in what circumstances) it would be a breach of comity to entertain an action for infringement of a foreign intellectual property right, or call in question the existence of that right in a non-registration case.
With those observations in mind, I return to Tyburn Productions v. Conan Doyle.
Now, I believe that Vinelott J’s reasoning, insofar as it may be said to assist Mr Onslow, can be summarised as follows.
(1) The rule in the Moçambique case precludes English courts from determining title to foreign immovables.
(2) The High Court of Australia in Potter v. Broken Hill Pty Co Ltd (1906) 3 CLR 479 held that the Moçambique rule applies by analogy where the validity or infringement of a patent is in issue, for that would be to enquire into the validity of an act of a foreign sovereign.
(3) The principle was supported by a more recent decision of the High Court of Australia in Norbert Steinhardt & Son Ltd v. Meth (1961) 105 CLR 440.
(4) Furthermore it was conceded by counsel for the claimants in the Tyburn case that, if this was right, the same principle must apply to other intellectual property rights such as copyright.
(5) The court would be reluctant to decline to follow decisions of the High Court of Australia unless convinced that circumstances had so changed as a result of social or economic developments or statutory intervention that the rule should now be confined to actions in which title to land is in issue.
(6) The application of the rule to intellectual property could be supported by other authority, namely the decision of Sir Nicolas Browne-Wilkinson V-C in Def Lepp Music v. Stuart-Brown [1986] RPC 273, where it was held that a claim to infringement of copyright by acts performed in the Netherlands and Luxembourg was not justiciable in England, because such a claim cannot satisfy the double-actionability rule, namely, that the relevant acts must be actionable in the foreign state and England.
(7) Finally, the principle was further supported by the decision in Rey v. Lecouturier [1908] 2 Ch 715; [1910] AC 262, where it was held that a ruling by the French courts that the ownership of the trade mark Chartreuse (formerly belonging to the monastery of Grand Chartreuse) had passed to a liquidator under French law, could not affect the title to the English trade mark, since the French courts had no jurisdiction to determine title to this English property.
I would be slow to depart from the reasoning of that experienced (and, I would add, genial) judge Vinelott J. However, it has not escaped learned criticism: see Cheshire and North, Private International Law, 12th ed, 263-4; Dicey & Morris, op cit, §§35-027 to 35-031, see also footnote 38; Fawcett and Torremans, Intellectual Property and Private International Law, 286 et seq. Furthermore it was analysed by the Court of Appeal in Pearce v. Ove Arup Partnership [1999] FSR 525, 546, 556-7, who were not enthusiastic and concluded as follows:
We can derive little or no assistance from the decision in the Tyburn Productions case on the question whether an action for alleged infringement of a foreign copyright by acts done outside the United Kingdom, in a case where the existence and validity of the right is not in issue, is justiciable in an English court. [My emphasis.]
I must therefore make up my own mind, and I shall express my views concerning each of the steps in Vinelott J’s reasoning as set forth above.
(1) (Moçambique rule precludes English courts from determining title to foreign immovables.) This is not applicable to the present case, which concerns the scope of the court’s equitable in personam jurisdiction. See the previous section of this Judgment. Even if that is wrong, the point was not before Vinelott J. He was being asked to say the rights did not exist at all.
(2) (Potter v. Broken Hill extends Moçambique rule to validity or infringement of patents). That was a case in which the plaintiff sued in the state of Victoria for infringement of a patent granted by the state of New South Wales. The defendant challenged the validity of the patent. In so doing he was necessarily calling into question the validity of an act of the local sovereign i.e. the state of New South Wales. He was contending that the authorities of that State had been wrong to grant the patent, or had been wrong to grant it in that form. This could not be allowed. But that, of itself, in no way establishes that an action for infringement could not have been entertained if the validity of the patent had not been in question. See the analysis of the case by the Court of Appeal in the Ove Arup [1999] FSR at 551-554. Much less does it establish that a dispute over the right to a patent could not be entertained under the in personam jurisdiction.
(3) (Principle further supported by the more recent Australian decision in Norbert Steinhardt.) That case was an action for threats, uttered in England, to sue on an Australian patent in Australia. The action failed because a threat uttered in England was not within the scope of the Australian Patents Act. See the analysis of the case by the Court of Appeal in the Ove Arup case at page 554. (With respect, the Court appears somewhat to have misunderstood the nature of the cause of action, which was for the statutory tort of threatening to bring patent proceedings, not for threats to infringe a patent. But that error is irrelevant to its reasoning.) The Norbert Steinhardt case, therefore, adds nothing to the matter in hand.
(4) (Concession by counsel that, if Moçambique rule applies to patents, it must also apply to copyright.) It does not follow. Unlike patents, copyrights are not registered. Compare Art. 16(4) of the Brussels and Lugano conventions. Hence the Court of Appeal in the Ove Arup case held that an action lay in England for infringement of Dutch copyrights.
(5) (Court would be reluctant to decline to follow decisions of the High Court of Australia unless convinced that circumstances had so changed as a result of social or economic developments or statutory intervention that the rule should now be confined to actions in which title to land is in issue.) I have already pointed out that:-
Times have changed seeing that we now do entertain actions for infringement of foreign copyrights, at least in some instances.
The Australian decisions are not authority on the point before me: neither the existence nor validity of foreign patents, let alone copyrights, is in issue.
Land may indeed be a special case (see paragraph 118, above).
(6) (Principle is further supported by Def Lepp Music v. Stuart-Brown.) If anything, Def Lepp is against Mr Onslow’s contention, for it serves to explain why proceedings for infringements of foreign intellectual property rights could not be brought in the past. It was a rule about double-actionability and implied nothing about justiciability in the sense of comity. Anyway the rule has now been abolished by Parliament.
(7) (Rey v. Lecouturier is further support for the principle since French courts had no jurisdiction to determine title to English trade marks.) In the first place, what had happened in France was a decree of confiscation of the Carthusian monks’ property. It is trite law that, in general, foreign penal acts of a confiscatory nature are not recognised in England. In the second place, the actual observation relied on, that the French court “had no jurisdiction to determine what ought to be the entries in the register of trade marks in England”, while correct, is not in point. Of course the French court had no jurisdiction in rem – to give directions to our Registrar. But the case has nothing to do with what would have happened – in a case not about penal confiscation – if a French court had held that the monks were under an obligation, enforceable in personam, to transfer the trade marks.
In my respectful opinion, the actual result in the Tyburn Productions case was correct. The court was being asked to embark on an analysis of the laws of some 50 American states, and to grant a declaration concerning those laws for the elucidation of its citizens, in circumstances where the Americans would have paid no attention to the English court’s decision. However I do not find that the rest of the court’s decision helps me in what I have to decide, for the reasons I have ventured to set forth above.
In my judgment, prima facie it is not a breach of comity today, if ever it was, to adjudicate in personam on rights to foreign intellectual property arising out of a contract, even as against a third party purchaser with actual notice thereof, or sufficient notice to cause an honest man to make better enquiries or else stop his hand. This is especially so where the contract is governed by English law and the rights exist in manifold jurisdictions. Absent some special rule in any particular jurisdiction which serves to extinguish the English equity (and in a non-registration system, such as applies to copyright, it is not easy to imagine one) such a claim, if otherwise well founded, ought to succeed.
VIII. CONCLUSION.
Raben’s objection to the jurisdiction fails. In my judgment it is not a breach of international comity to order Raben to assign the foreign copyrights in the Logo to Griggs, instead of leaving Griggs to bring parallel proceedings in numerous countries. Furthermore Griggs have an equity arising out of English contracts which, were the property situate in England, Griggs could enforce against Raben; as regards the property situate abroad, it is not shown that the laws of the foreign countries would extinguish that equity; and it is not unreasonable to proceed on that basis. Hence Griggs are entitled to succeed. In my judgment the assignment in escrow must be delivered by Raben’s solicitors to the order of Griggs.
Note 1 Even if Mr Evans told Raben that he was the beneficial owner because his fee did not cover use of the Logo by Griggs for all purposes, but only for use on point-of-sale material in the UK, and even if Raben believed him (which last point was not explored at the trial), that would not have been a sufficient countervailing factor. For the reason why, see paragraphs 45-57 of my previous judgment, particularly the last. [Back]
Note 2 Also, it is possible to enter into an agreement by which the legal title to the copyright in a prospective work will vest as soon as it is created (s.91 of the Copyright, Patents and Designs Act 1988); but the Act applies to British copyrights only. [Back]
Note 3 Third English edition. The text I have quoted is, I believe, the work of Story himself. [Back]
Note 4 The actual result in that case was regarded as controversial by some, because it might seem to overrule a statute concerning the registration of land in the County of Middlesex. But it was always followed on that point. Moreover, that particular issue is not pertinent for present purposes. [Back]
Note 5 Oliver v. Hinton [1899] 2 Ch 264, 274, C.A. [Back]
Note 6 The second limb of the Moçambique rule (that damages may not be sought for trespass to foreign land even though the title thereto is not in issue, save incidentally) has since been abrogated by section 30 of the Civil Jurisdiction and Judgments Act 1982. [Back]
Note 7 Inre the estate of Adams, unreported, Browne-Wilkinson V-C, 31 July 1985 similarly had to decide what the Spanish Supreme Court would decide if faced with a similar question, and he did so. When the point did come before the Spanish Supreme Court (Denney, 5 May 1999) that tribunal, far from objecting, paid careful attention to our case law, and held that our Vice-Chancellor had been right.
Macmillan Inc v Bishopgate Investment Trust Plc & Ors
[1995] EWCA Civ 55 [1996] 1 WLR 387, [1996] 1 All ER 585, [1996] WLR 387, [1998] 1 WLR 387, [1995] EWCA Civ 55, [1996] BCC 453
Staughton LJ
Stage 1: Characterisation
Macmillan contend, as they did before the judge, that their claim is restitutionary in nature; and that in consequence the appropriate Conflict rule is rule 201 in Dicey & Morris:
“201 (1) The obligation to restore the benefit of an enrichment obtained at another person’s expense is governed by the proper law of the obligation.
(2) The proper law of the obligation is (semble) determined as follows:
(a) If the obligation arises in connection with a contract, its proper law is the law applicable to the contract;
(b) If it arises in connection with a transaction concerning immovable (land), its proper law is the law of the country where the immovable is situated (lex situs);
(c) If it arises in any other circumstances, its proper law is the law of the country where the enrichment occurs.”
The rule appears in the section of Dicey & Morris which deals with the law of obligations. It is sub-paragraph (c) which is said to be relevant here.
The case of Chase Manhattan Bank NA v. Israel-British Bank (London) Ltd (1981) Ch. 105 was cited in support of the rule. That was a case of money paid under a mistake of fact; but, the defendants being in liquidation, there was a proprietary claim to trace the money asserted as well as a common law claim for money had and received. It was, as Goulding J. said (at p.115):
“common ground that the legal effects of the mistaken payment must in the first instance be determined in accordance with New York law as the lex causae.”
Counsel (Mr Chadwick) had cited the predecessor of rule 201(2)(c) from the 9th edition of Dicey & Morris. El Ajou v. Dollar Land Holdings plc (1993) 3 All ER 717 was about a claim to trace the proceeds of fraud. Millett J., at first instance, held that (p.736)
“the law governing such claims is the law of the country where the defendant received the money,”
and referred to Dicey & Morris (11th edn) and the Chase Manhattan case. In the Court of Appeal (1994) 2 All ER 685 the decision was reversed, but not upon any consideration of the applicable law – perhaps because there had been no evidence of foreign law.
In re Jogia (1988) 1 WLR 484 concerned claims for money paid under a mistake and/or for money had and received. Sir Nicolas Browne-Wilkinson V-C said this (at p.495):
“As at present advised, I am of the view that quasi-contactual obligations of this kind arise from the receipt of the money. I find it difficult to see how such obligation can be said to be ‘made’ or ‘arise’ in any place other than that of receipt. As to the proper law, Dicey & Morris, the Conflict of Laws, 10th edn. (1980), p.921 expresses the view that, save in cases where the obligation to repay arises in connection with a contract or an immoveable, the proper law of the quasi-contact is the law of the country where the enrichment occurs. This accords with the American Restatement and seems to me to be sound in principle.”
This passage was not essential to the decision, but rather obiter. Rule 201 was followed by Hwang JC in the High Court of Singapore in Hongkong & Shanghai Banking Corporation v. Overseas Bank Ltd (1992) 2 SLR 495 in relation to money purloined from a bank account.
Millett J. in the present case accepted (as he had done in El Ajou) that Dicey’s rule applied to some restitutionary claims; but he held that it did not apply to all. He drew a distinction between the claim of an equitable owner to recover his property, or compensation for the failure to restore it, from the person into whose hands it had come, and a claim by a plaintiff in resect of a breach of a fiduciary obligation owed to him. Whilst the latter class of a case would be within Rule 201(2) (c) , the former would not. The issue in the former case was one of priority, to be governed by the law selected by a Conflict rule as appropriate to that issue.
It is clear that Macmillan’s claims in the present case are to some extent proprietary. Mr Oliver asserts that they are receipt based. But he needs to do more than show that the defendants received the shares; he must also plead, in effect, that they are Macmillan’s shares; and the Statement of Claim does indeed say that. Millet J. described this requirement as “an undestroyed proprietary base.” Against that it is said that, whilst Macmillan do have an equitable title to the shares, equity acts in personam and gives effect to that title only by orders directed at those who would disturb it. Hence the fact that, while the English courts do not have jurisdiction to decide questions of title to foreign land (Dicey & Morris rule 116) , there are many instances where they will grant a remedy against defendants who are here and who are sued here: Mercantile Investment & General Trust Co v.River Plate Trust, Loan & Agency Co, (1892) 2 Ch.303, Webb v.Webb (1994) 3 WLR 801. Mr Oliver points out that Macmillan claim not only a declaration as to their proprietary rights, but also an order that the defendants restore the shares to Macmillan and compensation or damages.
In my judgment the considerable learning directed at those issues does not need to be considered in the present case. This part of this appeal is not in my opinion the place to confront the law of restitution “in a logical, consistent and coherent fashion”. (Bird (1995) LMCLQ 313). I am prepared to accept that Macmillan’s claim is restitutionary in nature; and I would accept without deciding that rule 2 01 of Dicey & Morris determines what system of law governs such a claim. But the issue is not, or not any longer, whether Macmillanhave a cause of action for restitution; it is whether the defendants have a defence on the ground that they were purchasers for value in good faith without notice of Macmillan’sclaim. As the judge said, and Mr Oliver asserts, “Shearson Lehman cannot resist Macmillan’s claim unless it can establish the defence of bona fide purchaser for value without notice.” The same applies to Credit Suisse and Swiss Volksbank. Mr Oliver went so far as to submit that, once one has determined the law which governs the cause of action, that same system governs all issues which arise in the suit. That cannot be right. Procedure, for instance, which sometimes includes limitation, is governed by the law of the place of trial; or, to take a rare example, a contract to exchange one currency for another may be invalid by its proper law, or by the law of the place of performance, or by the law of the forum, or by the law of the country whose currency is involved! I would regard it as plain that the rules of Conflict of Laws must be directed at the particular issue of law which is in dispute, rather than at the cause of action which the plaintiff relies on. We should translate lex causae as the law applicable to the issue, rather than the suit. In this case the issue is whether in law the defendants were purchasers for value in good faith without notice, so as to obtain a good title to the shares.
Macmillan still assert, against Credit Suisse only, a claim in conversion, although the judge thought that it had been abandoned during the trial. That claim, it is said, must be governed by English law. But again it is the defence which identifies the issue. If Credit Suisse have by New York law a good title as purchasers for value in good faith and without notice, they are not liable in damages; or if for some reason they became liable at one stage, there are now no damages. That, I suppose, is an issue to be determined at a later stage of this appeal; so we must not be taken to have made a definite ruling upon it. But Mr Oliver mentioned the point in his reply, and I feel that we should make it plain that it has not been overlooked.
Stage 2: the appropriate Conflict rule
(i) For property issues in general
The general rule, which is subject to exceptions, appears to me to be that issues as to rights of property are determined by the law of the place where the property is. That is shown in relation to land (including priorities) by the case of Norton v. Florence Land & Public Works Co (1877) 7 Ch.D 332.
The same applies to chattels: see Cammell v. Sewell (1860) 5 H & N 728 at p. 744, where Crompton J. quoted Pollock CB in the court below:
“If personal property is disposed of in a manner binding according to the law of the country where it is, that disposition is binding everywhere.”
This was treated as the general rule, although subject to exceptions, in Winkworth v. Christie Manson & Woods Ltd (1990) Ch.496. It was applied by the House of Lords to a dispute about priority in Inglis v. Robertson (1898) AC 616, although the purist might say that the decision was as to the Scots as opposed to English rules of Conflict. As was pointed out by Mr Blair, for Swiss Volksbank, the law of the place of the transaction (lex loci actus) , in the case of the sale of a chattel, will almost invariably be the same as the law of the place where the chattel is (lex situs) . But the courts have chosen situs as the test rather than locus actus.
There is in my opinion good reason for the rule as to chattels. A purchaser ought to satisfy himself that he obtains a good title by the law prevailing where the chattel is, for example in Petticoat Lane, but should not be required to do more than that. And an owner, if he does not wish to be deprived of his property by some eccentric rule of foreign law, can at least do his best to ensure that it does not leave the safety of his own country.
Thirdly, there are negotiable instruments. These are assimilated to chattels, so that the lex situs applies; see Alcock v. Smith (1892) 1 Ch.238 (although arguably this supports the law of the place of the transaction), Embericos (sic) v. Anglo-Austrian Bank (1904) 2 KB 870. See also Dicey & Morris p.1420:
“In the conflict of laws, negotiable instruments are therefore treated as chattels, ie. as tangible movables.”
In Brown v. Beleggings-Societeit NV (1961) 29 DLR (2nd) 673, a Canadian Court held that title to bearer shares in a company should be determined by the law of the place of incorporation, not the law where the certificates are. This decision might appear to be out of line, unless (as Mr Mortimore for Credit Suisse suggests) the certificates had ceased to be negotiable.
Then a question arises as to which system of law is to determine whether an instrument is negotiable. One might have thought that in principle this should be the lex fori, since one is still at the stage of choosing a lex causae. Dicey & Morris p. 1420 appear to suggest otherwise, and to prefer the law of the place where negotiation is said to have occurred. I find this a difficult question, and we do not need to decide it. By English law, whether as the law of the forum or the law of the place of alleged negotiation, the share certificates are not negotiable; so English law is not applicable. By New York law they may be negotiable; but New York is not the forum nor the place of alleged negotiation. So one must look elsewhere for a choice of law rule in this case, and not apply the rule for negotiable instruments.
I turn now to other movable but intangible property, that is to say choses in action. The general rule for this kind of property is stated by Dicey & Morris as follows:
“Rule 120 (1) The mutual obligations of assignor and assignee under a voluntary assignment of a right against another person (“the debtor”) are governed by the law which applies to the contract between the assignor and assignee.
(2) The law governing the right to which the assignment relates determines its assignability, the relationship between the assignee and the debtor, the conditions under which the assignment can be invoked against the debtor and the question whether the debtor’s obligations have been discharged.”
Paragraph (1) of the Rule raises a topic to which I shall have to return later in relation to the case of Cady. It also leaves a question as to what happens if there is no contract between the assignor and the assignee; but that does not arise in the present case. The Rule is based on Article 12 of the Rome Convention on the Law Applicable to Contractual Conventions, and the Contracts (Applicable Law) Act 1990. It is said by Dicey & Morris p. 979 to represent the common law.
The law governing the right to which the assignment relates, in paragraph (2) of the Rule, in the case of a debt points to the proper law of the contract or other obligation by which the debt was created. The corresponding rule in the 11th edition of Dicey & Morris was as follows:
“Rule 123 The priority of competing assignments of a debt or other intangible thing is governed by the proper law of the debt or the law governing the creation of the thing.”
The commentary has this passage (p.965):
“It is obvious that questions of priorities cannot be governed by the lex loci actus of the assignment or by its proper law, because the assignments may have been made in different countries or may be governed by different proper laws and there is no reason why one law should govern rather the other.”
The commentary in the 12th edition reads:
“Since the law governing the creation of the right assigned determines the rights and obligations of the debtor that result from the assignment, it must also decide questions of priorities between competing assignments.”
Cheshire & North’s Private International Law (12th edn) p. 812 makes the same point:
“Where there have been assignments in different countries, no confusion can arise from a conflict of laws since all questions are referred to a single legal system. The same merit is not shared by the law of the situs, since this follows the residence of the debtor and is not therefore a constant. … It is suggested, then, that the most appropriate law to govern the question at any rate of priorities is the law governing the transaction by which the subject-matter of the various assignments was created.”
In the case of a simple contract debt the lex situs is thus rejected, because it is uncertain. That was not always Dicey’s view. In re Maudslay Sons & Field (1900) 1 Ch 602 was a case concerning competing claims to a debt from a French firm. Cozens-Hardy J. said (at p.610):
“It seems to me that I am bound to hold that that assignment which alone is recognised by the law of France ought to prevail . . . This is the view taken by Mr Dicey in his work on the Conflict of Laws, rule 141: “An assignment … of a debt, giving a good title thereto according to the lex situs of the debt (in so far as by analogy a situs can be attributed to a debt) is valid.”
Situs is now replaced by the proper law of the contract by which the debt was created. But with other monetary obligations the choice of “the law governing the creation of the thing” approximates closely, in my opinion, to the lex situs. Thus in Kelly v. Selwyn (1905) 2 Ch 117 there was a contest between competing assignees of an interest in reversion under a will. Warrington J said (at p.122):
“The ground upon which I decide it is that, the fund here being an English Trust and this being the Court which the testator may have contemplated as the Court which would have administered that trust fund, the order in which the parties are to be held entitled to the trust fund must be regulated by the law of the Court which is administering the fund.”
The obligees in such a case are not likely to be mobile, and there is less risk that the lex situs will turn out to be transient.
Another example is to be found in the case of In re Queensland Mercantile & Agency Company (1891) ICh 536, which was concerned with competing claims to moneys due to the company in respect of unpaid calls on its shares. North J said (at p.545):
“There is another equally well-known rule of law, viz., that a transfer of moveable property, duly carried out according to the law of the place where the property is situated, is not rendered ineffectual by showing that such transfer as carried out is not in accordance with what would be required by law in the country where its owner is domiciled.”
His decision was upheld on appeal, (1892) ICh.219. But it seems that there had been a stay of proceedings in Scotland on terms that the dispute should be decided in England in exactly the same way as it would have been decided in Scotland. As Lindley LJ observed (p.22 6) that involved the application of Scots rules of the Conflict of Laws, even if they led to a different view from that which an English court would take. But at all events, for choses in action in general the lex loci actus has been rejected. So has the proper law of the assignment except for the limited purposes of rule 120(1).
There have been cases where other solutions have been reached: see for example Canada Deposit Insurance Corporation v. Canadian Commercial Bank (1993) 3 WLR 302, where it was held that priorities were governed by the law of the forum – an invitation to forum shopping if ever there was one; and United States Surgical Corporation v. Hospital Products International Pty Ltd (1982) 2 NSWLR 766, where it appears to have been held that the availability of equity and equitable remedies was governed by the law of the forum, provided the defendant was in New South Wales (but we were told that the case had gone to a higher court) . I would not follow either of those decisions,
(ii) Shares in particular
I now turn to the specific case of an issue as to the ownership of shares in a company. It is not argued that shares are within Article 12 of the Rome convention, and therefore within Rule 12 0 of Dicey & Morris. Indeed it may be that shares have a rule of their own. I must consider the authorities as to shares separately, but against the background of the law relating to land, chattels, negotiable instruments and other debts which has already been discussed. We have the authority of the House of Lords for the proposition that to some extent, as between transferor and transferee, the effect of an assignment of shares is determined by the law of the place where the assignment takes place. As with Rule 120(1) in Dicey & Morris, it is important to determine the limits of that proposition. The case is Williams v. Colonial Bank (1888) 38 Ch.D 388 in the Court of Appeal, and The Colonial Bank v. Cady (18 90) 15 App Cas. 267 in the House of Lords. The plaintiffs were the executors of the deceased holder of shares in New York Central and Hudson River Railroad Company. In order that the shares might be registered in their names, the executors signed blank transfers together with powers of attorney, which were endorsed on the certificates. Those would entitle the rightful holder of the certificates to be registered by the company as owner of the shares, provided that the company was satisfied as to the genuiness of the signatures. The executors handed the certificates to their brokers, who fraudulently deposited them with the defendant banks as a security for money due from the brokers. At the time when the action was commenced the shares were still registered in the name of the deceased, and the transfers were still blank as to the transferee.
The evidence of American law was that the certificates were not negotiable instruments; but that the banks obtained a good title in law and equity because the owners had “so dealt with the certificates as to lead a purchaser for value to believe honestly that he was taking a good title to it. In other words the foundation rests in the principle of estoppel” (p.399).
In those circumstances it is scarcely surprising that the law of England was held to be applicable. Cotton LJ (at p 3 99) said that the question whether the bank obtained a good title “depends on transactions in England” and so must be governed by English law, although the law of America would be
“properly referred to for the purpose of deciding what would be the effect of a valid effective transfer of the certificates on the title to shares in an American company.”
Lindley LJ (at p 403) said:
“We must look to the American law for the purpose of understanding the constitution of the railway company and the proper mode of becoming a shareholder in it. Moreover, it may be that the consequences of having acquired a title to the certificate may depend on American law, but the question how a title is to be acquired to a certificate by a transaction in this country does not depend on American law at all.”
The judgement of Bowen LJ (at p 408) is to the same effect.
He said:
“The key to this case is whether the Defendants have a right to hold these pieces of paper, these certificates. What the effect upon their ulterior rights in America would be, if we were to declare that they were entitled to these pieces of paper, is another system.”
So the Court of Appeal hold that the issue was to be determined by the law of England, which was the locus of the transaction (and also the situs of the certificates). Other problems would have to be decided by American law, sc. as the law of the place of incorporation, if they arose. In the House of Lords Lord Halsbury LC (at p. 272) recorded the transaction of loan took place in London. He added:
“If it were necessary to consider what law must govern, as between these parties, the right to these certificates on the one hand, and the right to detain them as pledged for the money advanced on them on the other, though the certificates themselves were the certificates of shares in a foreign corporation, I should not doubt that it is to the law of England you must look, and nor to the law of the United States.”
Lord Watson said (at p. 276) :
“That the interest in the railway company’s stock, which possession of these certificates confers upon a holder who has lawfully acquired them, must depend upon the law of the Company’s domicile, seems clear enough, and has not been disputed by the respondents. But the parties to the various transactions, by means of which the certificates passed from the possession of the respondents into the hands of the appellants, are all domiciled in England; and it is in my opinion equally clear that the validity of the contracts of pledge between Blakeway and the appellants, and the right of the latter to retain and use the documents as their own, must be governed by the rules of English law.”
Lord Bramwell (at p. 281) :
“The shares being of an American company domiciled in one of the United States of America, an act effectual by the law of that state to transfer the property, and no other, would transfer it.”
Lord Herschell (p. 283) :
“I agree that the question, what is necessary or effectual to transfer the shares in such a company, or to perfect the title to them, where there is or must be held to have been an intention to transfer them, must be answered by reference to the law of the State of New York. But I think that the rights arising out of a transaction entered into by parties in this country, whether, for example, it operated to effect a binding sale or pledge as against the owner of the shares, must be determined by the law prevailing here.”
Four points are clear from that decision. First, there is a dual conflict rule, which allocates some issues to one country and others to another. Secondly, the issue in the Cady case was as to who was entitled to the certificates, not as negotiable instruments but as pieces of paper. Thirdly, that issue was to be decided by English law, since the transaction took place here or (per Lord Watson) the parties to it were domiciled here. Fourthly, any issue as to the effect of possession of the certificates, or as to how shares could be transferred, should be decided by the law of the company’s domicile or (it would seem) its place of incorporation.
I do not find it easy to determine the precise borderline between points three and four in that case, or for that matter between paragraphs (1) and (2) in Rule 12 0 of Dicey & Morris. But what is in my judgment clear is that the issue in the present case comes in the second class, and must be decided by the law of New York. It is not an issue as to the validity of a contract between MacMillan and one or other of the defendants; so far as the facts go they had never met each other and there was no contract between them. Nor is there any issue as to the validity of the contract of loan between one of the Maxwell companies and one or other of the defendants, or as to the validity of the pledge as between those parties. The issue is whether, in the words of Lord Bramwell and Lord Herschell, there has been an act effectual by New York law to transfer the property in the shares.
We were referred to a number of transatlantic cases. In some of them the question was decided by the law of the place where the certificates were, apparently on the ground that by the law of the place of incorporation the company was given power to issue certificates having that effect. Subject to that, the preponderance of authority is that the ownership of shares is to be determined by the law of the situs, which for this purpose is the place of incorporation.
See Jellinek v Huron Copper Mining Co (1900) 177 US 1,13 (United States Supreme Court, Justice Harlan), Direction Disconto-Gesellschaft v United States Steel Corporation (1925) 267 US 22, 28 (United States Supreme Court, Justice Holmes), United Cigarette Machinery Co v Canadian Pacific Railways Co. (1926) 12 FR (2nd) 634, 636, Pennsylvania Co. v United Railways of Havana & Regla Warehouses (1939) 26 F.Supp. 3 7 9,390 Morson v. Second National Bank of Boston (1940) 29 N.E. 2d 19, 20 Brawn v The Custodian (1944) 3 DLR 412, 428, (1944) 4 DLR 209, 214, Hunt v The Queen (1968) 67 DLR (2nd) 373, 378, Oliner v Canadian Pacific Railway Co. (1970) 34 AD 2d 310, 313.
I conclude that an issue as to who has title to shares in a company should be decided by the law of the place where the shares are situated (lex situs) . In the ordinary way, unless they are negotiable instruments by English law, and in this case, that is the law of the place where the company is incorporated. There may be cases where it is arguably the law of the place where the share register is kept, but that problem does not arise to-day. The reference is to the domestic law of the place in question; at one time there was an argument for renvoi, but mercifully (or sadly, as the case may be) that has been abandoned.
Stage 3 – The System of Law
Whether it be situs, place of incorporation or place of share register, the answer is the law of and prevailing in the state of New York. I therefore agree with the conclusion reached by Millett J, although I have reached it by a somewhat different route. It is unnecessary to pursue the issue as to where the relevant events took place, as I have not adopted the lex loci actus. It seems to me that situs and incorporation have the advantage of pointing to one system of law which is very unlikely to be transient, and cannot be manipulated by a purchaser of shares in order to gain priority. If a lender of money chooses to take as security shares in companies incorporated in a number of different jurisdictions, he may have to make different enquiries so as to satisfy himself as to his title. He does not deserve much sympathy on that account – particularly as I do not know whether lenders are particularly diligent in making any enquiries at all.
Subject to what counsel may say, I would answer the preliminary question in these appeals by saying that the issue as to whether the defendants have title to the shares as purchasers in good faith for value without notice of adverse claims should be decided by the law of New York, not including its conflict rules. That in effect involves that the appeals thus far have failed.
LORD JUSTICE AULD: The question between the parties to this appeal is “Who has the better right to ownership of shares in a corporation?”. The question in this part of the appeal is “How, in the English Conflict of Laws, is the applicable law for such an issue to be determined?” Is it a matter of property to be governed by the location of the shares or the incorporation of the company? Or is it to be determined by one or other of the rules governing obligations? If the latter, does it come within the existing rules governing choses in action, or does it form, as Millett J. held, at [1995] 1 WLR 992G-H, “a special sub-species of chose in action with its own rules”?
Macmillan was a Delaware company controlled by the late Robert Maxwell through Maxwell Communications Corporation plc. It owned about 55.6% of Berlitz International Inc., a company incorporated in New York. Mr Maxwell, contrary to Macmillan’s interests, through a series of transfers and other corporate vehicles, agreed in London with Lehman, Credit Suisse and Swiss Volksbank to pledge Berlitz shares as security for loans made by them to his private interests. The shares were immediately or ultimately transferred to Shearson Lehman as assignee of Lehman, Swiss Volksbank and Credit Suisse in New York in accordance with its law. New York law treats the shares in the manner in which they were transferred there as negotiable instruments.
The loan and security transactions were negotiated and concluded in London. Such notice as the banks, as I shall call them, received of Macmillan’s interest in the shares, they received in London. Some of the share transfers, namely that to Lehman and part of that to Credit Suisse, were by way of delivery of share certificates and an executed transfer form in London followed by transfer in New York. Some, that to Swiss Volksbank and part of that to Credit Suisse, were made directly in New York.
Mr Maxwell’s private interests defaulted on the loans, and there is a dispute between Macmillan and the three banks as to who has the better claim to the Berlitz shares. Macmillan claims that it is the equitable owner. Each of the banks says that at the time of each relevant transfer in New York it was a transferee for value in good faith without notice of Macmillan’s interest. Each says that it had no notice, or in Shearson Lehman’s case no effective notice under New York law, which affects its entitlement.
As to the applicable law, Macmillan maintains that it is English law because the transactions giving rise to the issue had their closest and most real connection to England. Shearson Lehman and Credit Suisse contend that New York law applies because it is the law of the country of incorporation of Berlitz. Alternatively, they contend for New York as the lex situs, the place where the shares were. Swiss Volksbank maintains, as the Judge held, that the applicable law is the lex loci actus, namely that of New York where the transfer of the shares took place, coinciding in the circumstances with the law of incorporation and the lex situs.
The parties are at odds as to whether it is the claim or the issue that has to be characterized in order to determine the connecting factor for identification of the applicable law. Macmillan says it is the claim; the banks say it is the issue. To add to the problems the parties are also not agreed as to the nature of the transaction giving rise to the claim or the issue.
As to the claim, Macmillan says it is based on obligation not property. It describes it as a restitutionary claim, albeit based on its equitable property in the shares. The banks say that it is a proprietary claim, not one arising out of an obligation since there was no contract or equity between the parties. Millett J, while accepting Macmillan’s description of the claim as restitutionary, held that it was the issue that mattered and that it was one of priority of property rights. He held, at 994B-D and 1011B, that that issue is governed by the lex loci actus, which he described as –
“… the law of the place where the transaction took place on which the later assignee relies for priority over the claim of the original owner”
namely New York where the transfers took place. He also said that he saw no reason in the circumstances to distinguish the lex loci actus from the lex situs or the law of incorporation, because the shares were also in New York, Berlitz’ place of incorporation.
I agree that the issue provides the starting point. It is whether each bank can resist Macmillan’s equitable claim to return of the shares by showing that it was a bona fide transferee for value without notice and thus acquired an interest in them superior to that of Macmillan. More specifically, the issue is whether the banks can show that they acquired the shares without notice of Macmillan’s interest.
As to the transaction, on Macmillan’s approach it was the lending and security arrangements made in London, and the alleged notice there to the banks of Macmillan’s prior interest, leading to the transfer of the shares in New York. For the banks, the transaction was solely the transfer of the shares in New York.
Subject to what I shall say in a moment, characterization or classification is governed by the lex fori. But characterization or classification of what? It follows from what I have said that the proper approach is to look beyond the formulation of the claim and to identify according to the lex fori the true issue or issues thrown up by the claim and defence. This requires a parallel exercise in classification of the relevant rule of law. However, classification of an issue and rule of law for this purpose, the underlying principle of which is to strive for comity between competing legal systems, should not be constrained by particular notions or distinctions of the domestic law of the lex fori, or that of the competing system of law, which may have no counterpart in the other’s system. Nor should the issue be defined too narrowly so that it attracts a particular domestic rule under the lex fori which may not be applicable under the other system. See Cheshire & North, 12th ed., 45-46, and Dicey & Morris, 12th ed., 38-43 and 45-48.
The dispute about the nature of the issue in this case, whether it is about restitution, stemming from the developing notion of a “receipt-based restitutionary claim”, or about property, is a good example of the danger of looking at the problem through domestic eyes. There is a long and growing line of cases, recently comprehensively reviewed by Hobhouse J in the Westdeutsche case [19 94] 4 All ER 8 90, indicating a right to restitution flowing from the circumstances of receipt regardless of the knowledge of or notice to the recipient. See also Lipkin Gorman v. Karpmale Ltd [1991] 2 AC 548, HL, per Lord Goff at 570-572 and 577-581; and Royal Brunei Airlines v. Tan [1995] 3 WLR 64, PC, per Lord Nicholls at 70 (“Recipient liability is restitution-based; …”). Charles Harpum, a Law Commissioner, writing in 1995 LQR 545, at 546, suggested that the Royal Brunei case vindicates the school of thought that treats receipt-based claims as restitutionary as against that which bases them on equitable wrongdoing.
The “receipt-based restitutionary claim” is a notion of English domestic law that may not have a counterpart in many other legal systems, and is one that it may not be appropriate to translate into the English law of conflict. In my view, it would wrong to attempt to graft this equitable newcomer onto the class of cases where English courts will intervene to enforce an equity in respect of property abroad. Adrian Briggs made the point, albeit a little more diffidently, in an article prompted by Millett J’s judgment in this case, entitled “Restitution Meets The Conflict Of Laws” in [1994] Restitution Law Review, 94, at 97:
“It is a commonplace that conceptual divisions in domestic law do not necessarily translate into the conflict of laws. … To take a distinction which is struggling to define itself within the domestic law of restitution and project this into the realm of choice of law may be unwise.”
As to land, the normal rule in England is that the lex situs applies to competing claims. See Rule 116(3), Dicey and Morris, 12th ed. , pp. 946 and 952-5; and British South Africa Co. v. Companhia de Mocambique [1893] AC 602, HL; and Hesperides Hotels Ltd. v. Aegean Turkish Holidays Ltd. [1979] AC 508, HL. Cf. the position in Canada where the lex fori is said to determine such questions of priority, Canada Deposit Insurance Corp. v. Canadian Commercial Bank [1993] 3 WWR 3 02.
One of the exceptions to Rule 116(3), expressed in subparagraph (a) , is “where the action is based on a contract or equity between the parties”. See Dicey and Morris, pp. 952-5; and Deschamps v. Miller [1908] 1 Ch 856, per Parker J. at 863; and e.g. Penn v. Lord Baltimore (1750) 1 Ves Sen 444; Lord Cranstown v. Johnston (1800) 3 Ves 170; Ex p. Holthausen (1874) LR 9 Ch. App 722; Paget v. Ede (1874) LR 18 Eq 118; and Mercantile Investment Co. v. River Plate Co. {1892] 2 Ch 303, at 311, in which an English court ruled that it had jurisdiction to enforce a foreign charge on foreign land against its English owners. Cf. Norris v. Chambres (1861) 29 Beav. 246, 3 De G.F. & J. 583, CA, where the court declined jurisdiction to enforce a claimed equitable lien on foreign land sold to a third party with notice. See also United States Surgical Corporation v. Hospital Products International PTY Ltd 1982] 2 NSWLR 766, reversed without consideration of the question of choice of law (1984) 156 CLR 41; and cf. Webb v. Webb [1994] 3 WLR 801 [ECJ] at 819.
Moving from land to other forms of property, my view is that the concept of a “receipt-based restitutionary claim” would not, in any event, provide a firm basis in the circumstances of this case for identifying the appropriate connecting factor. I say that for the following reasons.
First, the importance to Macmillan’s case that the claim or issue should be regarded as restitutionary rather than proprietary is its reliance on the tentative Dicey and Morris Rule 201(2)(c), op. cit., p 1471, that the proper law of a non-contractual obligation relating to movables arising from unjust enrichment is that of the country where the enrichment occurs. I say “tentative” Rule because, as the commentary in Dicey and Morris, at pp 1476-8, makes plain, the authority on which it is said to be based, Chase Manhattan Bank NA v. Israel-British Bank (London) Ltd. [1981] Ch 105, does not expressly decide it; and the other authorities applying it appear to rest on that insecure foundation. It is true that in In re Jogia (A Bankrupt) [1988] 1 WLR 484, Sir Nicholas Browne-Wilkinson, at 495, expressed the view that the Rule accorded with the American Restatement and seemed to be sound in principle, but that was a case concerning service out of the jurisdiction under the then RSC 0 11(1) (f) , and his view was obiter. In El Ajou v. Dollar Land Holdings plc [1993] 3 All E.R. 717, at 736, Millett J relied, without discussion, on the Rule and the Chase Manhattan case as authorities for the proposition that the law governing “receipt-based restitutionary claims” is the law of the country where the defendant received the money. So also did Hwang JC in Honkkong & Shanghai Banking Corp Ltd v. United Overseas Bank Ltd [1992] Sing. LR 495, at 500. At the highest, as Mr David Oliver, QC, on behalf of Macmillan, put it, there is “a tendency in the cases to endorse Dicey’s proposition”. None of them binds this Court, and, as will appear, I do not consider it necessary to express a view on it. In any event, acceptance and application of the proposition would not assist Macmillan on the facts. Such enrichment or benefit as the banks received, they received in New York on the transfer to them there of the shares. I shall return to that aspect in another context in a moment.
Second, even if Dicey’s Rule is valid, it is difficult to see what unjust enrichment the banks have had, since they gave full value.
Third, even if the facts could support a claim for unjust enrichment, it is the issue that determines the matter. As I have said, it is essentially a proprietary one, whether the banks could defeat Macmillan’s interest by establishing that they were bona fide transferees for value without notice. In my view, Rule 201(2) (c) has no application to such an issue. It, the issue, is more within the sphere of the rules governing priority of ownership.
Before I turn to those rules, I should consider the alternative argument of Macmillan that the lex loci actus should govern the matter, namely the law of England, because that is where the transaction took place. As I have said, on Macmillan’s approach, the transaction was the lending and security arrangements made in London, part of which involved the transfer of the shares in New York, the banks deriving the benefit through the documentation in London to secure their title to the shares elsewhere. London also was where the banks received such notice as they did of Macmillan’s interest. For the banks, the transaction was solely the transfer of shares immediately or ultimately in New York.
Mr Oliver cited a number of authorities in support of his submission that the court should consider the underlying transaction, including: Rodick v. Gandel (1852) 1 De GM & G 763; Holroyd v. Marshall (1862) 10 HLC 191; In re Queensland Land and Coal Company – Davis v. Martin [1894] 3 Ch 181; Simultaneous Colour Printing Syndicate v.Foweraker [1901] 1 QB 7 71; and Swiss Bank Corporation v. Lloyds Bank Ltd. [1982] AC 584, HL.
Millett J was driven to reject that submission by his identification of the issue as one or priority of property rights rather than one arising out of an obligation. At 991D-E, he accepted as a general proposition that the governing law should be that which has “the closest and most real connection with the transaction”, but stated that
” [i] t is in order to identify the relevant transaction and ascertain the law which has the closest and most real connection with it that it is necessary to undertake the process of identifying and characterising the issue in question between the parties.”
He identified the transaction, at 994B-C:
“issues of priority in a case such as present fall to be determined by the law of the place where the transaction took place on which the later assignee relies for priority over the claim of the original owner. This does not lead to the adoption of English law in respect of every transaction in the present case, as Macmillan contends. The relevant transaction is not the contract to grant security, which affects only the parties to the contract, but the actual delivery of possession or transfer of title which created the security interest on which the particular defendant relies.”
In my view, the Judge correctly identified the transaction for this purpose via his identification of the issue. The authorities relied on by Mr Oliver were all cases where there was privity of contract or some fiduciary relationship between the parties stemming from more than mere receipt of property with notice of another’s claim to an interest in it. That is not so here. The negotiations and agreements in England preceding the transfer were not with Macmillan; there was no privity of contract between the parties, and, apart from the claimed equity which Macmillan relies upon to support its “receipt-based restitutionary claim”, no equitable or other fiduciary relationship between them.
The question remains whether Millett J was correct to take the lex loci actus of the transaction, the transfer, as the means of identifying the applicable law. In general, disputes about the ownership of land and of tangible and intangible movables, including negotiable instruments, are governed by the lex situs. See: in relation to land, Norton v. Florence Land and Public Works Co. (1877) 7 Ch D 332; in relation to tangible movables, Rule 118, Dicey and Morris, pp 965 and 967, Cammell v. Sewell (1860) 5 H & N 728, at 742-7, and Winkworth v. Christie [1980] Ch 496, at 501B and 512G-514B; in relation to intangible movables, including negotiable instruments, see e.g Alcock v. Smith [1892] 1 Ch 238; In re Maudslay, Sons & Field [1900] 1 Ch 602 in which Cozens- Hardy J., at 609-610, expressed the view that the principle of Norton v. Florence Land applies to a debt, even though it is a chose in action, because a debt has a “quasi-locality”, and Embericos v. Anglo-Austrian Bank [1904] 2 KB 870, [1905] 1 KB 677, CA.
Swiss Volksbank, albeit contending for the lex loci actus, maintains that the same principle applies to shares in a company when by the law of the place where they are situate at the time of transfer they are treated as negotiable.
Shearson Lehman and Credit Suisse contend for the law of incorporation, relying in large part on the commentary in the current edition of Dicey and Morris to Rule 120(2) that the priority of competing assignments of an intangible thing is governed by the law governing the creation of the thing. Rule 120(2) which reproduces article 12.2 of the Rome Convention on the Law Applicable to Contractual Obligations, states:
“The law governing the right to which an assignment relates determines its assignability, the relationship between the assignee and the debtor, the conditions under which the assignment can be invoked against the debtor and any questions whether the debtor’s obligations have been discharged.”
The commentary, at 981, reproducing the former Dicey and Morris Rule 123, is that:
“Since the law governing the creation of the right assigned determines the rights and obligations of the debtor that result from the assignment, it must also decide questions of priorities between competing assignments. Thus, if the same right is assigned twice to different assignees, the law under which the right was created decides which assignment prevails.”
See also Cheshire and North, 12th ed. 811-2 and 816.
Millett J’s view was that such a principle or rule does not apply to the priority of competing claims to interests in the shares of a corporation. He said, at 9 92H, that he regarded it as limited to successive assignments by the same assignor of the same debt or fund or other chose in actions governed in English domestic law by the rule in Dearie v. Hall (1828) 3 Russ. 1. That also appears to be the context in which the editors of Cheshire & North, 12th ed., at 811-2 and 816 argue, in support of the same proposition.
As Millett J. observed, at 993A-D, none of the authorities cited in support of the old Rule 123 concerned the shares in a corporation. Le Feuvre v. Sullivan, (1855) 10 Moo PC 1, was a dispute about the deposit of a life insurance policy as security for a loan. It contains no statement of principle and is explicable on one of several bases, lex loci actus of the deposit and grant of the security, the law of domicile of the lender or the lex loci actus of the making of the contract of insurance. Kelly v. Selwyn [1905] 2 Ch 117, concerned an English trust fund created by an English testator with trustees in England, in which the expressed ratio was that the English law applied because it must have been contemplated by the testator that an English court would administer the fund. Two other authorities relied upon by Mr Charles Aldous, QC, for Shearson Lehman in this context, In re Queensland Land and Coal Company, Davis v. Martin [1891] 1 Ch. 536, [1892] 1 Ch. 219, CA; and In re Maudslay Sons & Field [1900] 1 Ch 682, do not appear to me to throw any light on the subject where, as here, the competing claims do not result from successive assignments or dispositions by the same person. And, as Millett J. also noted, the Rule in Dearie v.Hall does not apply to dealings by the owner of shares in an English company.
Accordingly, I agree with Millett J. that former Dicey and Morris Rule 123 is not a suitable route for selecting the applicable law in this case.
In my view, there is authority and much to be said for treating issues of priority of ownership of shares in a corporation according to the lex situs of those shares. That will normally be the country where the register is kept, usually but not always the country of incorporation. If the shares are negotiable the lex situs will be where the pieces of paper constituting the negotiable instruments are at the time of transfer. As to the law determining negotiability, the views of Dicey and Morris, op cit., p. 1420, and Cheshire and North, op. cit., pp. 523 and 823, are that it is determined by the law of the country where the alleged transfer by way of “negotiation” takes place, namely where the instrument is at the time. The logical result is that beneficial ownership is extinguished by an act of transfer recognised in the jurisdiction in which it occurs.
See Goodwin v. Robarts [1875] LR 10 Ex Ch 337, affirmed (1875) 1 App Cas 476; Picker v. The London and County Banking Co. Ltd. (1887) 18 QBD 515, CA; and London Joint Stock Bank v. Simmons [1892] AC 201, HL. As negotiability is just a step on the way to determining situs for this purpose, the reasoning may appear, in the abstract, to be circular. However, it should be an obvious enough exercise when applied to the facts of most cases. And, in my view, there is judicial support and good common-sense for it and for treating the lex situs of shares at the time of the last relevant transfer as the applicable law in disputes about priority.
The judicial support is to be found in Alcock v. Smith [1892] 1 Ch. 238, per Romer J. at 255, affirmed in the Court of Appeal – see, in particular Lopes LJ at 2 66; Embiricos v.Anlgo-Austrian Bank [1904] 2 K.B. 870, affirmed [1905] 1 K.B. 677, CA; and Koechlin v. Kestenbaum [1927] 1 K.B. 889.
See also Picker, supra. The common-sense of determining negotiability according to the lex situs and of treating the lex situs of the last relevant transfer as the applicable law in priority disputes is, first, that it treats shares as other property, situate at and subject to the law of the place where they are at the time of the transaction in issue. Second, it provides certainty in cases of successive or competing assignments in different countries, also a characteristic of the law of incorporation. That is so even where, according to the lex situs, some other law, say that of the country of incorporation, applies. It may be burdensome in a single transaction involving transfers of parcels of shares in a number of countries to have to check the law of the place where each is at the time of transfer. However, that requirement, which is a matter of common commercial prudence, applies to all the tests of applicability contended for in this appeal.
I, therefore, conclude that the shares are in the same position as chattels and that the dispute as to priority of ownership of them should be determined by the law of New York as the lex situs.
That, in my view, is enough to dispose of the matter. However, I should not leave the matter without referring to the decision of the House of Lords in Colonial Bank v. & Cady & Williams (18 90) 15 App Cas 20, and to some North American authorities.
Cady was a case in which the London brokers of owners of shares in a New York company dishonestly deposited the [non-negotiable] share certificates with banks in London to secure a loan. In a dispute between the share owners and the banks, the latter claiming to have no notice of the dishonesty, the House of Lords held that if it had to decide whether the matter was governed by New York or English law it would have held that English law applied, but that as the law of New York and England on the issue appeared to be the same, there was no need to determine the matter.
The dispute was as to the validity of the transfer of the share certificates, not in the event as to priority of ownership of the shares. Lords Halsbury LC and Lord Watson, in common with Cotton, Lindley and Bowen LJJ in the court below, (1888) 38 Ch D 388) , appear to have preferred English law because the property in issue was the share certificates in London not the shares in New York. Lords Bramwell and Morris did not consider it necessary to express a view. Both Lords Watson and Lord Herschell, however, distinguished between the formal requirements of, and contractual rights connected with, the transfer of shares, the former being governed by the law of incorporation, the latter by the place of the transaction. Lord Watson distinguished between ownership of the shares and rights deriving from ownership of the share certificates representing them. He said as to the latter, at 277-8:
“… delivery passes, not the property of the shares, but a title, legal and equitable, which will enable the holder to vest himself with the shares without risk of his right being defeated by any other person deriving title from the registered owner.”
Lord Herschell said, at 283:
“I agree that the question, what is necessary or effectual to transfer the shares …, or to perfect the title to them, where there is or must be held to have been an intention to transfer them, must be answered by a reference to the law of the State of New York. But I think that the rights arising out of a transaction entered into by parties in this country, whether, for example, it operated to effect a binding sale or pledge as against the owner of the shares, must be determined by the law prevailing here.”
The case supports the proposition that where there is delivery of possession of property, in that case certificates, the law of the country where the property was at the time of delivery, governs the question whether the transferee is entitled to retain them as against the true owner. As to the shares themselves, the remarks of Lords Watson and Herschell were not, and had no need to be, directed at the law of incorporation as distinct from the law of situs; there, as in this appeal, they were the same. To the extent, if at all, that those remarks point to the former rather than the latter, they were obiter.
As to the North American jurisprudence, it provides support for the law of incorporation, and also, by derivation for the lex situs where the law of incorporation makes or permits transfer of shares elsewhere. It also distinguishes, as did the House of Lords in Cady, between shares and non-negotiable share certificates evidencing them. As to the latter, see e.g Direction Disconto- Gessellschaft v. United States Steel Corporation (1924) 300 F 741, (1925) 267 US 22 – an expropriation case in which Mr Justice Holmes in the United States Supreme Court said, in a dispute as to title to share certificates:
“… the question who is the owner of the paper depends upon the law of the place where the paper is.”
As to the combined operation of the law of incorporation and lex situs where the former makes the shares assignable in other countries; see Pennsylvania Co. for Insurance v.United Railways of Havana (1939) 26 F Supp 379, a decision of the Maine District Court; and Morson v. Second National Bank of Boston (1940) 29 NER (2d) 19, a decision of the Supreme Court of Massachusetts. As to the primacy of the law of incorporation where it does not permit the shares to be assigned elsewhere, see, as a starting point, Jellenik v.Huron Copper Mining Co. (1889) 177 US 1. That was a decision of the Supreme Court of the United States in which the shares were situate in the state where the company was incorporated. The other cases cited to us were in the main expropriation cases, namely: United Cigarette Machine Co, Inc. v. Canadian Pacific Railway Co. (1926) 12 FR (2d) 634; Braun v. The Custodian [1944] 3 DLR 412, [1944] 4 DLR 209, note per Thorson J. at 421, distinguishing between title to the property in the share and that in the share certificate; Brown, Gow Wilson v. Beleggings-Societeit NV (1961) 29 DLR (2d) 673; Olner v. Canadian Pacific Railway Co. (197) 34 AD (2d) 310; see also Hunt v. The Queen (1968) 67 DLR (2d) 373, a succession duty case.
For my part, I do not derive much direct assistance from the North American jurisprudence. However, it confirms the distinction between shares and share certificates where the latter are non-negotiable and, overall, it is as consistent with selection of the lex situs as of the law of incorporation as the applicable law to disputes about the ownership of shares.
In the preliminary question for decision before us, we are concerned with the transfer of shares in New York, not the transfer of share certificates in England, the distinction made in Cady and many of the North American cases. For the reasons I have given, my view is that the applicable law for determination of the issue of priority of ownership of those shares is the domestic law of New York because it was the lex situs of the shares at the time of transfer. It so happens, on the facts, that it was also the law of incorporation and of the lex loci actus. Accordingly, I would reject Macmillan’s submission on the preliminary issue, but for different reasons than those given by Millett J.
LORD JUSTICE ALDOUS: Macmillan appeal from an Order of Millett J in an action in which it was the Plaintiff and the relevant Defendants were Shearson Lehman Bros Holdings plc, Swiss Volksbank and Credit Suisse. The action was concerned with shares in a New York company called Berlitz International Inc. The shares in question had been owned by Macmillan, but were transferred into the name of Bishopsgate Investment Trust plc [BIT] which held those shares on trust for Macmillan under an agreement governed by New York law. In breach of that trust agreement, BIT pledged the shares to the Defendant Banks in consideration of loans. After default, and after the collapse of the Maxwell organisation, the action was started to recover the shares. Macmillan claimed restoration of the shares, but that was resisted by the Defendants who contended that they were the owners of the shares and their title had priority over any claim of Macmillan because they were bona fide purchasers for value without notice of the legal estate in the shares. They also contended that the question of whether they had notice should be determined according to New York law. The reason being that under New York law the test is actual knowledge or suspicion and deliberate abstention from inquiry less the truth be discovered; whereas under English law it is sufficient if the purchaser had reason to know or cause to suspect.
The Judge concluded that the question as to whether the Defendants were bona fide purchasers for value of the legal estate without notice should be decided pursuant to New York law and applying that law he held that the Defendants’ right to the shares in Berlitz ranked in priority to the equitable title of Macmillan. Macmillan believe the conclusion of the Judge to be wrong and appealed, but we were only concerned with the issue as to what was the appropriate law to apply to decide whether the Defendants were bona fide purchasers for value of the legal estate without notice. In particular whether the appropriate law was English or New York law.
Pearson Education Ltd v Prentice Hall of India Private Ltd
[2005] EWHC 655 Gloster J
However, the defendant’s concession leaves the termination issues untouched. Mr Gerrans argued that the analysis applied in relation to past breaches could not save the claims based on termination of the Agreements. He relied on Warner Bros Records Inc v Rollgreen Ltd [1976] 1 QB 430 (CA), where it was held that an equitable assignee could not exercise an option under the assigned contract, without first getting in the legal title; until then, the option had to be exercised by the legal assignor. He submitted that, accordingly, there was no entitlement in the claimant to serve the default notices under clause 7.
Most of the claimant’s arguments at the hearing were directed at this issue. As I have already said, an application on jurisdictional issues is not the occasion for a final determination of the merits of the underlying claim. The claimant merely needs to show that it has an arguable case with reasonable prospects of success. In order to demonstrate this, Mr Houseman, on behalf the claimant advanced various alternative arguments, including (but not limited to) the following.
First, he submitted, that even without a straightforward assignment from PHI, PHI’s rights under the Agreements became vested in IBDI (and, later, in IBD2 and then the claimant) because PHI entered into the Agreements as agent for IBD1 as undisclosed principal.
Second he submitted that the claimant’s rights as eventual equitable assignee of the rights under the Agreements were converted into legal rights because the claimant gave effective notice to the defendant of the relevant assignments as required by the Law of Property Act 1925 section 136. He submitted that there was no requirement under section 136 that specific notice of each successive intermediate assignment had to be given to the debtor, and no authority directly on the point. He relied, amongst other cases, upon Colonial Insurance v ANZ Banking Ltd. [1995] 1 WLR 1140 at 1144-45 (a case relating to notice affecting the priority of successive equitable assignments under the Rule in Dearle v Hall) and Mannai Investment Co Limited -v- Eagle Star Life Assurance Co Limited [1997] AC 749 as authority for the proposition that, in a modern commercial context, where the substance of the communication is more important than its form, and particularly where what is involved is successive “internal” assignments between members of the same corporate group, it suffices for the purposes of section 136 if the debtor is given relevant information about the last assignment in the chain, from which it is perfectly apparent that the original assignor and its successor will have made intermediate assignments.
Third, he submitted, by reference to correspondence in the bundles before me in the period December 1998 to 4 November 2003, that express notice had in fact been given to the defendant of the relevant assignments. He submitted that that appeared from the cumulative communications which had to be construed by reference to factual matrix material such as the defendant’s knowledge of the arrangements by which Pearson had acquired the business of Simon & Schuster in 1998 and the claimant had acquired the titles in 1998-9.
Fourth, Mr Houseman submitted that, even if the claimant did not give the required form of express notice to the defendant, the defendant is nonetheless estopped from denying that the claimant is the legal assignee of the relevant rights. It was common ground before me that it is legally possible for a debtor to be estopped from relying, in answer to a claim by an assignee of a chose in action, on a defence arising from a failure to comply with the requirements of section 136; see e.g. Technocrats International v Fredic [2004] EWCH 692 (QB) at paragraph 56.
Fifth, he submitted that, even if the claimant was not the legal assignee at the time it issued the default notices, the notices were nonetheless effective because legitimately issued by the equitable assignee, or were subsequently (and retrospectively) given effect when the claimant became the legal assignee.
Finally, in further written submissions supplied after the hearing, Mr Houseman contended that, irrespective of the position under section 136 of the Law of Property Act, a valid assignment of copyright takes place when there is a written assignment signed by the assignor. There is no requirement for notice to be given to any licensee of the copyright to make such a transfer effective; see section 36(3) of the Copyright Act 1956 (“the 1956 Act”) and section 90(3) of the Copyright, Designs and Patents Act 1988 (“the 1988 Act”) (between them covering the period when the Agreements were created in 1986-1997 and when the assignments occurred in 1998-1999); see also Copinger at 8-52. The assignee of the copyright (its new owner) becomes bound by any pre-existing licence of the copyright, provided only that he (the assignee/owner) has notice of the licence; see section 36(4) of the 1956 Act; and section 90(4) of the 1988 Act. Without notice to the licensee, the new copyright owner thus becomes the new licensor by statutory novation. The licensee enjoys all the same rights against the new owner/licensor as he did against the original owner/licensor: see section 92(2) of the 1988 Act.
Thus, Mr Houseman contended that, in the present case, the claimant became the copyright owner of all 97 Titles in July 1999 (or, it is said, this is, at least, seriously arguable); so the claimant is bound by the terms of the Agreements without any question of notice of assignment to the defendant ever arising. The question therefore is whether, in those circumstances, the claimant had capacity to give a notice under clause 7 requiring remedy of breaches of the Agreements. The answer which Mr Houseman puts forward is that the claimant did have such capacity, because “Proprietor” in the Agreements referred to, or included, the copyright owner, whether original or by assignment; this, he submits, is supported by clause 7 itself (rights could only revert to the copyright owner); clause 8 (allowing unfettered assignment on the Proprietor’s side); and clause 9 (reserving future rights, which could only mean to the copyright owner). He also submitted that this construction is supported by Mr Ghosh’s evidence, where he says he only intended to contract with the copyright owner.
In support of this argument, Mr Houseman pointed out that, if the claimant, as copyright owner and with the obligations of licensor under the Agreements, did not have capacity to give a notice under clause 7, then the Agreements would create commercially unsound results: the original licensor (IBD1), which might well have been dissolved or wound up many years before, would possess the only right to invoke clause 7, despite the fact that the breaches by the licensee (the defendant) cause damage only to the copyright owner (the claimant), and it is only the claimant who has any commercial interest in the invocation of clause 7, because it is to the claimant (and only to the claimant) that the relevant rights revert upon termination of the Agreements. Thus, he submitted, it is seriously arguable that the letter sent by the claimant to the defendant on 4 November 2003 was a valid notice under clause 7.
In addition, Mr Houseman argued that the claimant was entitled to seek permission to serve Amended Particulars of Claim to reflect new factual information, although not to alter its cause of action (Grupo Torras SA v Al-Sabah [1995] 1 Lloyd’s Rep 374). Such amended Particulars, he suggested, would enable it to make extended arguments in support of its title to sue and right to issue default notices (and authorities to the contrary, such as Smith v Henniker-Major & Co (a firm) [2003] Ch 182, could be distinguished on the facts as being concerned with title transfers taking place after the commencement of proceedings).
In response to these arguments, Mr Gerrans, on behalf of the defendant, made detailed submissions on the facts and on the relevant law, for the purpose of demonstrating that the claimant had no reasonable prospect at trial of succeeding in relation to any of the above issues. I accept that the burden is on the claimant to satisfy the Court that it does indeed have a reasonable prospect of success in relation to its claims. It is no discourtesy to counsel that I do not set out, in this judgment, his detailed submissions which were all carefully rehearsed both orally and in his two written skeleton arguments.
The legal arguments advanced by both parties at the hearing confirmed that the relevant legal issues are not straightforward. Some involve controversial and often novel points of law. More importantly, the resolution of many of the legal issues depends on a prior determination of genuine disputes of fact. Having heard the arguments, I am satisfied that the claimant has discharged the burden of satisfying the Court that it does indeed have a reasonable prospect of success in relation to the undoubted causes of action that it has against the defendant.
In particular, I consider that it is seriously arguable, in the light of the judgment of Peter Gibson LJ in Three Rivers District Council v Bank of England [1996] QB 292, in particular at pages 307F – 315F, and the provisions of the 1956 Act and the 1988 Act referred to in Mr Houseman’s post-hearing submissions, that the claimant, even if it had not given written notice of the assignments at the time of its service of default notices under clause 7 of the Agreements, was indeed in a contractual relationship with the defendant, such as to entitle it, in its capacity as legal proprietor of the Titles, to serve such notices. Otherwise there would be an imbalance between the position of the assignee/ new licensor on the one hand and the licensee on the other; thus, for example, the latter, as exclusive licensee, would be entitled to exercise its rights under the Agreements against the latter under section 92(2) of the 1988 Act, irrespective of the formality of written notice, but the assignee/new licensor would not, unless it had given prior written notice of the assignment of the licence agreements under section 136 of the Law of Property Act. In these circumstances it appears to me that it is seriously arguable that there are grounds for distinguishing Warner Bros Records Inc v Rollgreen Ltd [1976] 1 QB 430 (CA), which was the cornerstone of Mr Gerrans’ arguments in relation to the termination issue. Moreover, as Peter Gibson LJ pointed out in Three Rivers, the decision in that case has been the subject of considerable academic criticism.
Accordingly, in my judgment, the claimant has satisfied this requirement of CPR 6.21(1)(b).
In re McClement, a Bankrupt.
[1960] I.R. 141
BUDD J. :
16 Jan. 1960
The Official Assignee in this case seeks a declaration pursuant to s. 313 of the Irish Bankrupt and Insolvent Act, 1857, that the bankrupt, at the time he became bankrupt had, by the consent and permission of the true owners thereof, in his possession order or disposition 930 shares in the Cork Greyhound Race Co. Ltd., of which he was the reputed owner. He further seeks an order that the Munster and Leinster Bank Ltd. should be ordered to deliver up to him the certificates relating to the shares or the proceeds of sale thereof.
The bankrupt was adjudicated on the 16th May, 1958. Prior to the year 1950 he had become the registered owner of the shares in question in the books of the Cork Greyhound Race Co. Ltd. He had long prior to his bankruptcy deposited the share certificates with the Munster and Leinster Bank Ltd., at their Cork office, to secure his overdraft account. He had handed over with the certificates transfers thereof in blank duly executed by him. The Bank later, on the 7th May, 1958, sealed the blank transfers with their seal, and, on the 10th May, 1958, new share certificates in respect of these shares were issued in the name of the Bank. The shares have since been sold and the proceeds are held, pending the outcome of the present proceedings, on a joint account in the name of the Official Assignee’s solicitor and the Bank’s solicitor. It is relevant to note that the share certificates held by the bankrupt did not bear any endorsement to the effect that a transfer of the shares would not be registered without the production of the certificates themselves, but did state that the bankrupt was the registered owner subject to the memorandum of association and the rules and regulations thereof. The articles of association of the Company embodied article 20 of Table A under the Companies Consolidation Act, 1908, which, in so far as relevant, is as follows: “The directors may decline to recognise any instrument of transfer unless . . . (b) The instrument of transfer is accompanied by the certificate of t,he shares to which it relates, and such other evidence as the directors may reasonably require to show the right of the transferor to make the transfer.”
With regard to certain of the shares above mentioned, the bankrupt, on the 17th November, 1941, entered into what has been described as a declaration of trust in the form of an indenture made by the bankrupt, his father, R. McClement, and Patrick J. Murphy. The indenture recites that the bankrupt, therein described as “the trustee,” is the registered owner of 185 shares in the Cork Greyhound Race Co. Ltd., of which he owns 100 shares absolutely and that the remaining 85 shares are held by him in trust as follows, namely, for Robert McClement, 50 shares, and for Patrick J. Murphy, 35 shares. The bankrupt in the deed acknowledged that he held the shares in trust for these two persons and covenanted and agreed (a) to sell or transfer the said shares so held in trust when required by any of the subscribers and in accordance with their directions subject to the approval of the Company and in accordance with the articles of association of the Company and to pay over the proceeds to the said subscribers; (b) to pay to each of the subscribers any dividends declared in respect of the shares so held in trust; (c) to vote at any meeting of the Company in accordance with the wishes of the subscribers; (d) in the event of the death of any of the subscribers to hold his lot of shares in trust for his personal representatives or as such subscriber shall by deed or will direct. There was a free bonus issue of shares made by the Company in 1949 and it is claimed on behalf of Patrick J. Murphy that 70 shares, part of this free bonus issue, were also held by the bankrupt on the same trusts. The dividends on all the shares standing in the bankrupt’s name were paid by the Company to the bankrupt, but Mr. Murphy says that, as regards the shares covered by the deed of trust, the bankrupt accounted to him for the dividends thereon in certain cash accounts, including other items as well, up to 1958, at any rate, after which the accounts became irregular. He says, however, that he had no knowledge of the free bonus issue until after the bankruptcy. Mr. Murphy was represented at the hearing and claimed that the proceeds of sale of the original shares and the free bonus issue were his property. Mr. Robert McClement died after the date of the deed of trust. His executors were not served with the notice of motion and were not represented at the hearing.
In order to succeed in the present case the Official Assignee must satisfy me that at the time when he became bankrupt the bankrupt had the shares in question in his order or disposition; that he was the reputed owner thereof; and that he had the shares in his order or disposition as reputed owner by the consent and permission of the Bank. At first sight the section does not readily lend itself to a constructioncovering shares in a company, but it is too late in the day to make the contrary contention now. In the past the Irish Courts have made orders of the kind now sought with respect to such shares and in circumstances similar to those existing in the present case. Mr. O’Neill relied on these cases as supporting his contention that the shares in question were in the possession of the bankrupt as reputed owner with the consent of the Bank at the time of the bankruptcy.
The first of these cases was In re Grehan (1), a decision of Miller J., a very experienced bankruptcy judge. It was also a case of the equitable deposit of the certificates of shares in a company with a bank. The shares stood up to the date of filing of the petition in the name of the bankrupt in the company’s register. No proof was given that under the rules of the company a valid transfer could not be made without production of the certificates, although that was alleged to be the position. Miller J., at p. 86, stated that the only question was whether the bankrupt, at the time he became bankrupt, had, by the consent and permission of the true owner, in his possession, order or disposition, the shares in question, as reputed owner. I refer to this because Mr. Liston said that Miller J. had never considered reputed ownership or possession by the consent of the true owner. Later Mr. Justice Miller said that the legal title in the shares consists in being registered owner thereof in the books of the company. He then points out that there was no rule of the company preventing transfer without production of the certificate, and, having referred to a case where property was disposed of apart from the title deeds which evidenced the title to the property, he points out that a mere lien upon such deeds may prove wholly valueless as a security. Can scrip certificates, he asks, be put higher than or considered differently from the title deeds in that case? He then distinguishes the position between the title to shares and the possession of the share certificates in these words (at p. 88):”And, although the certificates of these shares may have been put out of the power of the bankrupt and of his assignees by the deposit in this case, was not the right to the shares themselves vested in the assignees, and are not the directors of the Mining Company bound to recognise their title?” Finally, he says: “Where so large an amount of property is now held by companies who issue scrip certificates to the holders of shares, if it was once decided that a trader could, as against his assignees in bankruptcy, cover such property by a secret deposit with his banker of such certificates, without imposing any necessity on the part of the creditors of putting themselves in any way into privity with such companies, the 313th section of the Bankruptcy Act, relating to property being in the reputed ownership, order, or disposition of the bankrupt, might as well, for the most part, be struck out of the Bankruptcy Act.” He held that the shares were in the order and disposition of the bankrupt.
The learned Judge had thus in his mind all the matters necessary to consider under the section. He must be taken, having regard to his observations, as finding that being registered and thus having title, gave the bankrupt reputed ownership. Further, if the Bank instead of taking a transfer, allowed the bankrupt to remain registered as owner and thus to have the disposition of the shares in his power, there were grounds on which he could have inferred that the Bank impliedly consented to his retaining the power of disposition and since the Judge clearly had the requirements of the section in mind, I feel that his decision is only consistent with his having come to the conclusion, even if not expressed, that the disposition was left in the bankrupt’s hands by the tacit consent of the Bank.
Two further portions of the judgment require comment. The head-note is to the effect that a deposit of share certificates in a company without notice to the company will not take them out of the order and disposition of the owner while they remain registered in his name, “although, according to the practice of the company, shares in it cannot be transferred without the production of the certificates.” The latter portion of the head-note is not quite accurate. What Mr. Justice Miller actually said was that it was not ever alleged that such rules, if any, were more than rules for the convenience of the directors. He did not expressly find the practice to be as alleged. He had in fact previously negatived the existence of any such rule. The most that can be said is that the implication appears to be that it was his view that if such a rule in the form, as I understand it, of a practice existed, it did not prevent the shares from being in the order and disposition of the registered owner. Mr. Justice Boyd, later, in In re Butler (1) construes the judgment as being as stated in the head-note but goes in that respect, it seems to me, a little too far. But it can, I think, be fairly said that Mr. Justice Miller’s judgment amounted to this, that if such was the practice then it would not be sufficient in his opinion to take the shares out of the order and disposition of the true owner, a view, it would seem, that had the approval of Mr. Justice Boyd. That view has some bearing on the facts of the present case. In addition, Mr. Justice Miller said, at p. 86:”It may also be stated as a general rule, before considering the facts of this case, that in order to take out of the reputed ownership, order, and disposition of a bankrupt, within the meaning of the 313th section of the Bankruptcy Act, any ‘chose in action or chattel’which was once in the possession of such bankrupt, as against his assignees in bankruptcy, it would be necessary that the change of possession should be made as complete as it is capable of being made; and that in order to take it out of such ownership, order, or disposition of the bankrupt, notice of any transfer thereof should be given to the debtor or person liable to pay in respect of such chose in action.” He therefore regarded notice as one of the steps whereby the change of possession can be made as complete as possible.
After that case came the decision of the House of Lords in Colonial Bank v. Whinney (1), another case of the deposit of share certificates. It was held, having regard to the note contained on the particular certificates to the effect that in the event of sale the certificates must be surrendered with the deed of transfer before the transfer could be registered, that the shares were not in the order or disposition of the bankrupt under such circumstances as to make him the reputed owner.
There are certain passages in the speeches of the Law Lords that give support to the suggestion that the decision might have been the same apart entirely from the note on the certificates. That is to say, that in similar cases where share certificates had been pledged, even without such a note, by a person later becoming bankrupt, such shares should not be held to be in the order and disposition of the bankrupt as reputed owner, because anyone dealing with the bankrupt before purchasing the shares, or giving credit thereon, would be put on the inquiry as to where the certificates were and would have no good ground for assuming that the bankrupt was the full owner unless the certificates were produced or accounted for.
Lord Blackburn, for example, said that persons intending to give credit to the bankrupt as being the owner of the shares ought to know that they had no good grounds for so believing without the certificates being accounted for and that any inquiry as to where the certificates were would lead to the disclosure that they were pledged. But just previously he had referred to the note on the certificates in such fashion as to show that it was the note that affected his view. Lord Watson also came to the conclusion that the certificates were not left with the bankrupt in such circumstances, that as reputed owner he could have sold them or obtained credit upon them, but did so because in his view the appellants had become equitable owners of the shares and held the certificates which bore the note upon them, amounting to an assurance by the company upon which a lawful holder of the certificates was entitled to rely, to the affect that, according to their usual practice the company would decline to register a transfer until the relative certificates were produced or accounted for. Since their absence could not have been honestly accounted for save by revealing the pledge, Lord Watson took the view that they were not in the order and disposition of the bankrupt as reputed owner. Lord FitzGerald came to the conclusion that the shares were not in the order and disposition of the bankrupt because he had not the power of disposal unless by the commission of a fraud. In coming to that conclusion, however, he said that he adhered to what he had said in Société Générale de Paris v. Walker (1) as to the nature of these certificatesthat is, as I understand it, to their nature having regard to the certificates having this note upon them and his conclusion is thus apparently also based upon the note on the certificates. Lord Ashbourne again says also that the note on the certificates had been rightly pressed in argument. It was, at all events, he says, an authoritative assurance by the company of their practice and course of dealing. He repeats very much what Lord Blackburn had stated as to persons dealing with the bankrupt and what would have been the result of any inquiry, and said that he saw no valid ground for holding that the bankrupt was the reputed owner.
While a certain amount of support may be found in the speeches for the wider proposition contended for, it seems to me that in each case the note on the certificate was a determining factor. After all, if the Law Lords had intended to convey that it was their view that, in all cases of the deposit of share certificates by a registered owner, the pledgor could not be deemed to have in him the order and disposition of the shares as reputed owner, because those dealing with him could and should make proper inquiry which would reveal the absence of the certificates, presumably they would have said so without any particular emphasis on the note in the certificates. The real gist of the decision appears to be that the bankrupt had not got the certificates in his order and disposition as reputed owner either because the note was an assurance that the company would refuse to transfer the shares without production of the certificates or because the pledgees, having the certificates in their possession with that note upon them, could not in the circumstances properly be said to have consented to the pledgor having the reputation of ownership. The two Irish decisions to which I am next about to refer certainly proceeded on the narrower interpretation of the judgments and have not been questioned for upwards of fifty years.
The first of these two cases is another decision of Mr. Justice Miller, that of In re Stevenson (1), similarly a case of deposit of shares and an absconding bankrupt. Mr. Justice Miller certainly had reputed ownership in his mind in that case because, having referred to extracts from a judgment of Lord Selborne on this very point, he says (at p. 321):”The three shares referred to in the notice of motion remained upon the public register of the Alliance Gas Co. (who appear to be the largest creditors in this matter), in the same name of the bankrupt, until after he had absconded on the 3rd September, 1889, and therefore in the possession of the bankrupt in those circumstances which necessarily created a reputation that the bankrupt was the owner of these three shares, inasmuch as it has not been pretended that the Alliance Gas Co. had, at any time up to the date of such absconding of the bankrupt, received any notice whatever of any sale or transfer of those three shares, or of any claim whatsoever by any other person in respect of such three shares; and the situation of those three shares was necessarily such as to convey to the mind of any person who chose, up to the date of the bankrupt absconding from this country, to make enquiry from the Alliance Gas Co. or its register, or to the Gas Co. itself, the absolute ownership in the bankrupt of those three shares.” Thus, while admittedly relying on the absence of notice, the learned Judge makes it clear that, in his view, the name of the owner appearing on the register creates, unless there be something to prevent that result, a reputation of ownership. He finally found the shares in the order and disposition of the bankrupt and ordered their sale for benefit of creditors.
Mr. Justice Boyd later, in 1900, had occasion to apply the House of Lords decision of Colonial Bank v. Whinney (2) in In re Butler (3). In that case there were two types of certificates. In one type the certificates had a statement on them that the certificate must be produced on the registration of a transfer; in the other type the certificates had no such note.
Mr. Justice Boyd found that the shares without the statement on them were in the order and disposition of the bankrupt, but, following Colonial Bank v. Whinney (1) he decided that the shares with the statement on them were not in the order and disposition of the bankrupt. He also regarded notice as being necessary to complete the equitable title of the true owner. Having cited the view of the Vice-Chancellor in Assignees of Dunne v. Hibernian Joint Stock Company (2) that “choses in action and other property of that nature must be dealt with in analogy to the rule which, irrespective of bankruptcy, prevails with respect to such property; and whether such be trust funds vested in a trustee for the bankrupt or shares remaining in the books of a company in the name of a bankrupt, they do not come within the operation of the 313th section if everything has been done to complete the equitable title of the person alleged to be the true owner,” he proceeds thus (at p. 159):”What is necessary to complete the equitable title of the person alleged to be the true owner? That he should have given notice, in this case to the companies, before the bank knew that the shareholder had committed an act of bankruptcy: Dearle v. Hall .” (3)
Mr. Liston suggests that Miller J. and Boyd J. appear to have had somewhat of a predilection for what he says they regarded as the salutary nature of the powers conferred by the 313th section. He much prefers the approach of some Chancery judges who regarded the provisions of the section as exceedingly harsh. There are, of course, two sides to the question. I cannot do better than quote what Miller J. says in In re Stevenson (4) as putting the other view.”The present motion,” he said (at p. 322), “presents two considerations of public interest to which some reference should be made. On the one hand, I cannot but know that there is a tendency abroad to disparage the clause generally known as the ‘order and disposition clause’ as it has stood, and still stands, in our Irish bankruptcy code, upon the bare and abstract idea that it is not just that the property of one man should by any process of law be applied to the discharge of the debts of another man without his consent. There is, however, a very different side to that picture which should be very carefully considered before arriving at any such vague view of such a matter as being applicable generally, namely, that it is by many degrees more unjust that such an owner of property should place that property in the absolute possession of another person to whom it did not belong, and enable that other person to exhibit himself to the unsuspecting public as having visible means for discharging his debts and liabilities, whereby he acquires unmerited credit, which would not otherwise have been extended to him; and upon this subject it should be further borne in mind by any reflecting person that the broad and sound principles, for the giving effect to which that order and disposition clause was designed, namely, ‘that the property suffered to remain in the visible possession of a party, should upon his bankruptcy be divisible among his creditors,’ has existed from the very commencement of the law of bankruptcy in this country, and that it is still the guiding principle in that respect, and should not lightly be meddled with. I do not propose to detail all the benefits which could be enumerated as having been conferred by that order and disposition clause as above referred to in the administration of bankruptcy law, but it may here be mentioned that it has proved a very effective weapon for enabling this Court, for the protection of the rights of the general creditors, to encounter the too frequent scrambles on all sides attempted by claimants to the possession of all the visible property of a debtor who absconds from his creditors, carrying off with him (as often happens) at the same time much of the direct and best means of testing such claims.” Even if I were to agree with Mr. Liston that there was some penal element in the section, I would still be faced with the fact that, despite that element, this section has been applied in bankruptcy in numerous cases similar to the present, and, sitting in this Court, it is not open to me to depart from the line of authority cited to me, until it be shown to me that some superior Court has clearly taken the view that these decisions were in some way erroneous. If I were construing the section for the first time I might indeed be tempted to consider whether the Legislature intended by the words used to cover the cases of shares in companies at all. It might possibly be said that the section as worded more aptly applies to such types of chattel property as cattle or furniture, but the established authority is quite against that view.
On a fair summary, the cases I have referred to appear to indicate that where share certificates relating to shares in a company, which do not contain any note on them requiring their production on a transfer, have been pledged by the registered owner, who later becomes bankrupt, and the pledgee has allowed the pledgor’s name to remain on the register of shareholders of the company in question, the shares may properly be regarded as being in the order and disposition of the bankrupt as reputed owner by the consent of the pledgee, unless, of course, some evidence be adduced rebutting the inference prima facie to be drawn. If, however, there is a note of the kind referred to on the certificates so pledged, then such share cannot properly be regarded as being in the order and disposition of the bankrupt with the consent of the true owner.
Mr. Liston has submitted that the learned judges who decided the cases relied on by Mr. O’Neill had their minds so much directed to the question of order and disposition that they do not appear to have attached sufficient importance to the proof of “reputed ownership” and of “consent.”Citing Ex parte Rose (1) and observations in other cases, he says that evidence should in each case be given that some persons actually regarded the bankrupt as the owner before reputed ownership can be established. It may be desirable in some instances, no doubt, that actual evidence of this kind should be adduced but it is sufficient to my mind if, in any individual case, evidence is put before the Court of such a nature that the proper inference to draw from it is that the bankrupt was the reputed owner. Where a bankrupt’s name appears on the register of shareholders of a company as an owner of shares, that indicates to my mind that he is the owner and must necessarily create the reputation of ownership.
Then Mr. Liston says, rightly, that it is also necessary to show that the chattels remain in the order and disposition of the bankrupt by the “consent” of the true owner. He referred to the stress which Christian L.J. laid on the importance of this in In re Hickey (2). “Mens volens,”Christian L.J. said, “is essential for incurring the forfeiture imposed by” the section. I agree with Mr. Liston’s contention, but again it is sufficient if the facts put before the Court are such that the proper inference to be drawn from them is that the true owner did consent to the bankrupt having the chattels in his order and disposition. Assuming for the moment that these shares were in the bankrupt’s order and disposition, they were so because the bankrupt had been originally registered as owner of the shares and the Bank saw fit to allow that state of affairs to continue after the deposit. The Bank could have taken a transfer but did not do so nor did the Bank give notice of its interest to the Company. Having allowed the bankrupt to remain the registered owner the Bank must, it seems to me, be deemed to have thus consented to his having such disposing power over the shares as he in fact had, the nature of which has yet to be considered.
The kernel of this case lies in determining whether these shares were in the order and disposition of the bankrupt in the somewhat equivocal circumstances existing. There was no note of the kind above referred to on the certificates in question and therefore the case falls, prima facie, not within Colonial Bank v. Whinney (1) but rather within the decisions of Miller J. and Boyd J. to which I have referred, unless the provision in Table A, as set out earlier, is to be held to have a similar affect to the note on the certificates in the Colonial Bank Case (1). The provision does not, however, say that the directors will not register the transfer unless it is accompanied by the relevant certificate, but merely that they may decline to do so. There is thus no absolute bar nor is any assurance impliedly given to the pledgee that a transfer will not be registered until the relative certificates are produced. The bankrupt might therefore have successfully transferred the shares without production of the certificates; it would depend on what attitude the directors took up. It is relevant on this aspect of the matter to say that there was no evidence before me as to what the practice of the directors was.
Mr. O’Neill, finally, in this state of affairs places reliance on the decision of Mr. Justice Boyd in In re Mackay (2) as, at least, indicating the view of that learned Judge that shares in similar circumstances were within the order and disposition of the bankrupt, although his order was upset on another point. The case was yet another of the deposit of share certificates, but the Court of Appeal decided that since the bankrupt held the share certificates himself at the crucial date, i.e., when he committed an act of bankruptcy, he, and not the bank, was the true owner at that date and the section accordingly had no application. It was, however, stated on the certificates that the registered owner held them subject to the provisions of the memorandum and articles of the association of the respective companies. The articles of association of each company stated that the directors might decline to recognise a transfer unless accompanied by the relevant certificate. Mr. Justice Boyd on the ex parteapplication of the assignees made an order directing that the shares should be sold for the benefit of the creditors and, later, on a motion on notice to the bank, made an order that the bank should deliver over the certificates to the assignees, thus apparently taking the view that the provisions in the articles of association did not prevent the shares from being in the order and disposition of the bankrupt. Since the Court of Appeal was not called upon to say whether
his view was right or wrong in the circumstances, it expressed no view on the matter. Lord Justice Ronan did, however, call attention to one well-known doctrine applied by Palles C.B. in Curran v. Midland Great Western Railway Co. (1)”that a state of facts once proved to have existed is presumed in the absence of evidence to the contrary to continue.” He pointed out that that doctrine was applied to reputed ownership in Lingard v. Messiter (2) and was referred to as well by Lord Selborne in Société Général de Paris v. Walker (3)at p. 31, in these words:”The case is not like those under the bankrupt laws, in which the fact, or presumption, of a continuance (after a change in the equitable title) of the prior state of ‘order and disposition,’ or reputed ownership ‘with the consent of the true owner’ has to be in some way disapproved.”
Apart from the decision of Boyd J. in In re Mackay (4)the facts of this case are not covered by precise authority. The report does not reveal the grounds on which he came to his decision, but since the motion was on notice to the bank the point was presumably argued. The fact that Boyd J. was reversed on another point leaves his decision on this matter still standing. Admittedly, it is not a very satisfactory authority to rely on in all the circumstances, but still it is there and it is in favour of the Official Assignee’s contentions as far as it goes. On the merits of the case the Bank appears to have taken no step in the way of giving notice to the Company to do what it could to perfect its title. If the directors of the Company had not seen fit to call for the production of the certificates on an attempted transfer by the bankrupt, the bankrupt could have apparently transferred the shares successfully, and, with his name on the register, might have obtained a delusive credit on the strength of his apparent ownership. There was no proof of any practice by the Company to call for the production of certificates on a transfer, and, even if there had been, both Miller J., in In re Grehan (5), and Boyd J., in In re Butler (6),seem to have taken the view that that could not affect the position. Whether, had he attempted a transfer, the Company would have called for the certificates, remains a matter for speculation. The Bank, however, saw fit to allow his name to remain on the register when they could have completed the transfer of the shares to themselves and thus left him with what may be described as at least a prima faciepower of transfer. Mr. Justice Boyd, in In re Mackay (4) appears to have taken the view that in similar circumstances shares were to be regarded as in the order and disposition of the bankrupt.
Finally, on the basis of the doctrine referred to by Palles C.B. and Lord Selborne, and noticed in In re Mackay (1),the onus is on the Bank to show that these shares, having been in the order and disposition of the bankrupt prior to the deposit, were in some way, by the act of depositing them, taken out of his order and disposition. Certainly, the Bank did nothing to achieve that result and there is no evidence that the Bank even knew that Article 20 of Table A had been incorporated in the Company’s articles of association. Since there was no proof of any practice of the Company to call for certificates on a transfer it seems at least open to me to hold that the existence of the power in the directors to call for the certificates does not discharge the onus on the Bank of showing that the deposit had changed the existing state of affairs, so as to take the shares out of the existing order and disposition of the bankrupt, and, in all the circumstances, I have come to the conclusion that I should so hold. In doing so I am influenced by the consideration that in holding the shares to be in the order and disposition of the bankrupt, in so far as the position between the Bank and the Official Assignee is concerned, I am following the trend of Irish authority exemplified in the judgments of Miller J. and Boyd J., above referred to, including that of In re Mackay (1).In these circumstances I should make the order sought unless I find that the claim of Patrick J. Murphy has been sustained to portion of the shares.
I have therefore now to deal with the particular circumstances relating to the shares purchased with Patrick J. Murphy’s money and the bonus issue made later. The question arises as between the Official Assignee and Mr. Murphy as to whether these shares were captured by s. 313. Different considerations apply to the two classes of shares. I will deal with the original shares first. It is not easy to arrive at a conclusion as to when shares registered in the name of a trustee, who becomes a bankrupt, will fall within the order and disposition section. It seems reasonably clear that, when shares or other chattel property are held by a trustee with active duties to perform and so that he can resist the claim of the cestui que trust to make over the property in them, he will then be in the position of “true owner” so that the section does not apply. I have in mind such cases as trustees under a will, who have to administer trust property for a certain period not elapsed, or, say, the
trustees of a marriage settlement. But not every person who might be described in a sense as a “trustee” is in the same position. Persons holding the property of another without any duties to perform are sometimes referred to as”trustees” and one is indeed familiar with the type of action where a claim is made on behalf of a plaintiff for a declaration that the defendant holds certain goods or chattels as a “trustee” for the plaintiff on the basis that the goods and chattels are in truth and in fact the property of the plaintiff and are held wrongfully by the defendant. Persons in the position of such a defendant could scarcely properly be described as the “true owners” of the chattels. Persons who leave their property in the hands of persons only notionally or nominally trustees may find that the section operates against them.
Mr. O’Neill submitted that Patrick J. Murphy was the true owner of the shares within the meaning of the section and had allowed the shares to be in the order and disposition of the bankrupt in such circumstances as to bring the case within the section. He said that property held by a bankrupt trustee as reputed owner was only excluded from the operation of the section where the bankrupt is the proper person to have possession of the property and was entitled to hold possession of it against the beneficiaries, as in the case of the executor of an unadministered estate. He relied on Ex parte Moore and Another (1) and Kitchen v. Ibbetson (2). In Ex parte Moore and Another (1), a widow executrix having a duty under the terms of her husband’s will to convert his property into money and to lay it out in an annuity, instead took the property herself and retained it. In the meantime she married a second husband and brought some of the property to his house where it was used and enjoyed by him. He later became bankrupt. It was held that the trust had no existence at the time when the bankruptcy occurred, fourteen years after the death of the first husband, and the claim of the assignee in bankruptcy to hold the property was upheld. In that case, however, the property had ceased to be assets and had ceased to be the subject-matter of a trust at the relevant time so that it cannot be regarded as authority for the precise proposition that the section captures goods in the hands of a bare trustee, because the widow had really committed a “devastavit” and made the goods her own. In Kitchen v. Ibbetson (2) the holders for value of an unregistered bill of sale over goods supplied to an innkeeper for use in his business allowed them to remain in
the hands of his administratrix after his death. She continued the business and remained in possession of the goods for fifteen months after taking out letters of administration to him. She then became bankrupt. It was held that the goods were in the order and disposition of the bankrupt with the consent of the true owners, but the Vice-Chancellor, Sir R. Malins, held that while the widow was in the first instance a trustee of the property as administratrix of her husband, nevertheless, when she carried on the business herself she did so on her own account and dismissed the character of administratrix. She thus did not hold as a trustee at the time of the bankruptcy. Again, that case does not seem authority for the proposition that the section captures goods in the hands of a bare trustee, and indeed the Vice-Chancellor did say that as a general rule trust property does not pass to a trustee in bankruptcy because it is not property which can be said to be in the order and disposition of the bankrupt with the consent of the true owner. The implication to be drawn from both cases is, it seems to me, that in the case of certain properly constituted trusts, as where an administrator is administering an estate, the section will not apply. It does however capture property held by a person who might be said in one way to be a trustee in the sense that he holds the goods of another person.
In the case of the Great Eastern Railway Co. v. Turner (1),cited by Mr. Hamill, Lord Selborne, the Lord Chancellor, states what he conceives to be the general rule that “where there is a bona fide trust the trustee does not hold the property in his order and disposition with the consent of the true owner, or with such a reputation of ownership as to cause the property to be treated as his own in case of bankruptcy.”The principle of the exceptions to the general rule, he says, is “that there being no bona fide reason for the creation of any trust, the forms of a trust were gone through in order to conceal the true ownership of the property. That has been held to be in truth,” he said, “an abuse of the forms of a trust for the purpose of creating a reputation of ownership, and placing the property within the order and disposition of another with the consent of the true owner of the property.” In that case shares were purchased in the name of the chairman of a company and registered in his name. The purchase was not authorised in law. The chairman was, however, a trustee of the shares for the company. The chairman became bankrupt and the Lord Chancellor held that the shares were not in his order and disposition with the consent of the true owner because the trust was unauthorised. This case, however, cannot be regarded as authority for the proposition that the fact that a person, holding the property of another, is a bare trustee will be sufficient to prevent the operation of the section because the ratio decidendi was that the consent of the true owner was wanting. The Lord Chancellor, however, does indicate his view that where there was no bona fide reason for the creation of any trust, the forms of a trust having been gone through to conceal the true ownership, the section will apply. There does not seem to be any distinction in principle, in so far as the operation of the section is concerned, where the result is to conceal the ownership, even though there may have been no similar object.
Mr. Hamill also relied on In re Bankhead’s Trust (1). A trustee had taken trust money, the subject-matter of a marriage settlement, and not replaced it. He had a policy on his own life and with the object of repaying the trust monies he put the policy in a box with a note to the effect that if anything happened to him the policy was to go towards repaying the trust money. The trustee having later become bankrupt it was held that the policy did not fall within the order and disposition clause. Mr. Hamill suggested that he was in the position of a bare trustee. It was, however, held that the memorandum was a valid declaration that the policy was to be subject to the trusts of the settlement. The trustee was in fact the trustee of the marriage settlement and thus presumably held the policy subject to the terms thereof and therefore was not properly describable as a bare trustee. Reliance was also placed on Ex parte Sibeth (2).Under the terms of a marriage contract made in Prussia a wife became entitled to certain property for her separate use. Her husband later became bankrupt and had certain articles in his possession at the time belonging to his wife. Under English law, however, a husband was then a trustee for his wife of her separate property if there was no other trustee. Brett M.R. held that property in the possession of a bankrupt as trustee does not pass to his trustee in bankruptcy. Mr. Hamill submitted that the case was authority for the proposition that the section does not operate to capture goods in the hands of a bare trustee. I do not think that it can be relied on as such. The husband as trustee in that case was the true legal owner of the property in law. The wife could not have called for a transfer of the legal estate in the property from her husband to her and it could not therefore be said that the property was in the hands of the husband with the consent of the true owner.
It is difficult to extract a stateable principle from these cases. Despite the rather wide wording of the judgment of Brett M.R. it does not seem to me to be right to say, as a general proposition, that whenever goods are held by a person who might be described as a trustee, who becomes bankrupt, such goods can never be captured by the provisions of the section. It depends upon the facts. If, for example, the forms of a trust are gone through to conceal real ownership then the words of the section would seem properly to apply to such a case. On the other hand, where there is a bona fide trust for a proper purpose and the trustee is given some functions proper for a trustee to perform, the section would not seem to apply because the trustee is in fact the true owner.
Ex parte Burbridge and another (1) seems to me to come close to the facts of the present case. Two shares in a company were registered in the name of a person who became bankrupt. He held under a declaration of trust very similar to that in the present case, except that it did not provide for the trustee voting as the owner should direct. The bankrupt held the certificates, received the dividends and voted as a shareholder. Vice-Chancellor Shadwell said that the shares were held for no open and honest purpose such as to pay debts or anything of that kind. The trustee was able to hold himself out as the true owner and the trust was created for his own purposes, namely, that of voting. I observe, in passing, that in Patrick J. Murphy’s affidavit he states that the object of the declaration of trust in this case was to give the bankrupt voting rights. It was held that this was a secret trust and that the shares were in the order and disposition of the bankrupt with the consent of the true owner. I do not think that anything turns upon the clause in the declaration of trust to the effect that the trustee agrees to vote in accordance with the wishes of Mr. Murphy. Even without such a stipulation he would be subject to dismissal if he did not carry out the beneficiaries’ wishes. It is true that Ex parte Burbridge and another (1) was distinguished in the Great Eastern Railway Co. v. Turner (2) under the name of Ex parte Watkins ,presumably on the basis of being one of the exceptions there referred to, that there was no bona fide reason for the trust being gone through so that it might be said that there was an abuse of the process of creating a trust. Nevertheless the decision comes very near to the present case. The person who owned the shares, in the sense of having paid for them, was held not entitled to an assignment of the shares by the assignees in bankruptcy on the basis that the shares were in the order and disposition of the bankrupt.
Turning to the facts of the present case it is not suggested that Mr. Murphy had any dishonest purpose in entering into this so-called trust. On the other hand, it was not an open transaction in that no one save the bankrupt and the subscribers to the deed of trust could know that McClement held these shares in trust for Mr. Murphy, nor was the trust created for the ordinary purposes for which trusts are properly created in law, where a trustee has active duties to perform in protecting the trust property and in seeing to its administration. The trust was created purely for the purpose apparently of allowing Mr. McClement to vote and Mr. Murphy appears to have been quite willing to allow him to have the legal ownership of the shares vested in him. He allowed him to be the registered owner of the shares and to be to all appearances to the rest of the world the owner of the shares. It seems to me therefore that the original shares were in the order and disposition of the bankrupt with the consent of the true owner and in such circumstances that the bankrupt was the reputed owner.
Different considerations seem to me however to affect the bonus issue. It is of course essential before the section can operate that the chattel property, in this case shares, must be in the order and disposition of the bankrupt with the consent of the true owner. In Ex parte Ford (1) a question arose as to whether certain property acquired by an undischarged debtor was in his order and disposition with the consent of the true owner. Jessel M.R. said at p. 528:”But there is another doctrine on which the appellant relies, namely, the doctrine in bankruptcy of reputed ownership. The words used in the Act are ‘consent and permission.’ Those words imply knowledge. You cannot consent to a thing unless you have knowledge of it. It is impossible to suppose that these words do not imply that the true owner has at least a knowledge of the events which happened; but I think that they imply something more, there must be a voluntary allowance on the part of the true owner of that mode of dealing with the property.” These words are equally applicable in this case to the state of affairs arising with regard to the shares comprised in the bonus issue. Mr. Murphy knew nothing of the issue and could not in my view therefore have consented to the shares allotted to him on that issue being in the order and disposition of the bankrupt. That being so they are not captured by the Official Assignee under the section.
I shall therefore make the declaration sought save as regards the shares comprised in the bonus issue to Patrick J. Murphy and order that the proceeds of sale of the shares in question, other than those comprised in the bonus issue to Mr. Murphy, be handed over to the Assignee. I do not however purport to deal in any way with such claims as the Executors of the late R. McClement may have, as against the Official Assignee, to the proceeds of sale of such shares as were stated in the deed of trust to be the property of the Bankrupt’s father.
Re Harvard Securities
[1997] EWHC Comm 371 [1997] 2 BCLC 369, [1997] EWHC Comm 371, [1998] BCC 567
[
THE HON. MR JUSTICE NEUBERGER
THE RELEVANT ENGLISH AUTHORITIES ON BENEFICIAL INTEREST
In Re Wait [1927] 1 Ch. 606, Wait bought 1,000 tons of wheat ex Challenger under the main contract and, a day later, by a sub-contract, he sold 500 tons to sub-purchasers. After the wheat had been shipped to its destination, the bill of lading for the 1,000 tons was forwarded to Wait and, the day before the purchase money was due from him, he received the sub-purchasers’ cheque due in respect of the sub-contract. Wait paid this cheque into the bank and hypothecated the bill of loading. He then went bankrupt. Reversing the Divisional Court, the majority of the Court of Appeal held that the subpurchasers had no interest in any of the 1,000 tons, and were left to their remedy in damages.
The sub-purchasers relied on the Sale of Goods Act 1893 (whose successor plays no part in the present case) and also on more general equitable principles. At 627, Atkin LJ said in relation to the sub-purchase contract that in his opinion
“a tender of documents of wheat of the contract description per motor vessel Challenger dated in accordance with the contract would be good tender however and from whosoever the sub-seller obtained the wheat”.
At 629-630 he said this:
“[N]o 500 tons of wheat have ever been earmarked, identified or appropriated as the wheat to be delivered to the claimants under the contract. The claimants have never received any bill of loading, warrant, delivery order or any document of title representing the goods. Nor can 500 tons or any less quantity be ascertained by subtracting from the bulk in the trustee’s possession known quantities the property of the purchasers. The trustee has in his possession in warehouse 530 tons of … wheat. It is not suggested that this is not an ordinary commercial commodity. It is, however, said: (a) that the [sub-purchasers] are entitled to have the [sub contract] specifically performed… or (b) that the transactions between the parties have resulted in an equitable assignment to the [sub-purchasers] of either the whole bulk of 530 tons or at any rate of 500 tons of it, so as to entitle the [subpurchasers] to have 500 tons delivered to them; or to have a charge upon the bulk or 500 tons of it to secure the sum… which the [sub-purchasers] paid in advance. … I am of the opinion that the [subpurchasers] fail and that to grant the relief claimed would violate well established principles of common law and equity. It would also appear to embarrass to a most serious degree the ordinary operations of buying and selling goods, and the banking operations which attend them.”
Atkin LJ then expanded his reasoning. Having considered the sub-purchaser’s claim under the 1893 Act, Atkin LJ at 634-635, turned to consider the argument that:
“There was in this case an equitable assignment to [the subpurchasers] of 500 tons of flour which entitled them to claim from the trustee delivery of 500 tons out of the 530 tons remaining in his possession, and, indeed, gave the [sub-purchasers] a charge or lien over the 1,000 tons to which [Wait] was entitled under his contract with [the original vendors]. In the view that I have taken of the facts of this case, I have already said that the goods were never so ascertained that specific performance could have been ordered of them. This consideration would appear to defeat the supposed equitable assignment… I have already indicated my own view of the [sub contract] and suggested that [Wait] does not in fact agree to sell to [the sub-purchasers] any aliquot part of the 1,000 tons which in fact he had agreed to buy from [the vendors].”
At 637-638, he went on to hold that the fact that the purchase money had been paid under the contract in advance of the due date made no difference, in his view, to the result.
Lord Hanworth MR also gave a judgment substantially agreeing with Atkin LJ. At 632 he quoted with approval the observations of Lord Wensleydale in Hoare -v- Dresser 7 HLC 290 at 324:
“I take it to be perfectly clear that in order to create an equitable assignment, the obligation must be to deliver a particular chattel, not to deliver any chattel.”
Sargant LJ reached the opposite conclusion, describing at 641 his disagreement with the majority as “complete and fundamental”. He pointed out that if, under the sub-contract, Wait had agreed to sell the whole of the 1,000 tons the subject of the main contract, then, at least on his view as to the proper construction of the sub-contract (see towards the bottom of 641) the sub-purchaser would have had an equitable interest in the 1,000 tons. He then said this:
“Is there then any real difference in the equitable position of the [sub-purchasers] because they agreed to buy not the whole 1,000 tons parcel but 500 tons or one half only of that parcel? I think not… It would be a fraud for [Wait] to sell or deal with the 1,000 tons in any manner that would prevent 500 tons part thereof be it left available to satisfy the claim of the [sub-purchasers].”
I now turn to Re London Wine Company (Shippers) Limited [1986] PCC 121, a decision of Oliver J. In that case, a company had substantial stocks of wine in a number of warehouses. Most of these stocks had been sold to customers, who received from the company a “Certificate of Title” in respect of the wine for which they had paid, and each such certificate described the customer as “the sole and beneficial owner” of the wine in question. There was no appropriation from the bulk of any wine to answer any particular contracts. When receivers were appointed in respect of the company, it had sufficient stocks of wine to answer the claims of all of its customers. Oliver J held that the company did not hold any of the wine in trust for its customers’, he further held that the customers had no proprietary right in respect of any of the wine, even though they had paid for the wine. He reached this conclusions even where the customer had purchased the company’s total stock of a particular wine. At 137, mirroring similar observations of Atkin LJ in Wait, Oliver J said this at lines 23-40:
“I cannot see how, for instance, a farmer who declares himself to be a trustee of two sheep (without identifying them) can be said to have created a perfect and complete trust whatever rights he may confer by such declaration as a matter of contract. And it would seem to me to be immaterial that at the time he has a flock of sheep out of which he could satisfy the interest. Of course, he could by appropriate words, declare himself to be a trustee of the specified proportion of his whole flock and thus create an equitable tenancy in common between himself and the name beneficiary… . But the mere declaration that a given number of animals would be held upon trust could not… without very clear words pointing to such an intention, result in the creation of an interest… at the time of the declaration. And where the mass from which the numerical interest is to take effect is not ascertainable at the date of the declaration such conclusion becomes impossible.”
At 142 line 45 to 143 line 3, Oliver said that the observation (of Sir John Romilly MR in Pooley -v- Budd (1851) 14 Beav 34) “that a trust was created of unascertained goods” could not “stand today in light of the decision of the Court of Appeal in Re Waif. He then went on to consider the judgments of Lord Hanworth MR and Atkin LJ in Re Wait. He emphasised that the goods in the case before him had not been ascertained any more than, at least in the view of the majority, the grain the subject of the sub-contract had been ascertained in Wait: see at 152 lines 1-24.
I note in passing that in Re Stapylton Fletcher Limited [1994] 1 WLR 1181, Jodge Paul Baker QC, sitting as a Deputy Judge of the High Court, applied the reasoning of Oliver J in another case involving claims by customers of a wine company which had got into difficulties. However, in relation to claims by some of the customers in that case, Judge Baker concluded that they had an equitable interest because, on the facts, the wine purchased by those customers had been kept separately or segregated from the company’s other stock: in those circumstances, the subject matter of the alleged equitable interest had been sufficiently identified for the judge to conclude that an equitable interest did indeed exist.
I now turn to Re Goldcorp Exchange Limited (in Receivership) [1995] 1 AC 74, a decision of the Privy Council allowing an appeal from the Court of Appeal in New Zealand. In that case, the company, which dealt in bullion, sold to its customers bullion, which it stored for them. Each customer received an invoice certificate verifying his ownership, and had the right to require physical delivery to his order on seven days notice and payment of delivery charges. Although the company assured customers that it would maintain sufficient stock of bullion to meet all their demands, it failed to do so. The question which fell to be considered was whether or not the customers had any interests in the bullion owned and stored by the company.
In giving the judgment of the Privy Council, Lord Mustill began at 89G-90A with the following observations:
“It is common ground that the contracts in question were for the sale of unascertained goods. For present purposes, two species of unascertained goods may be distinguished. First there are “generic goods”. These are sold on terms which preserve the seller’s freedom to decide for himself how and from what source he would obtain goods answering the contractual description. Secondly, there are “goods sold ex-bulk”. By this expression their Lordships denote goods which are by express stipulation to be supplied from a fixed and pre determined source, from within which the seller may make his own choice… . Approaching these situations a priori common sense dictates that the buyer cannot acquire title until it is known to what goods the title relates. Whether the property then passes will depend upon the intention of the parties and in particular on whether there has been a consequential appropriation of particular goods to the contract. …Their Lordships have laboured this point, about which there has been no dispute, simply to show that any attempt by the non-allocated claimant to asset the legal title passed by virtue of the sale would have been defeated not by some added legal technicality but by what Lord Blackburne called “the very nature of things”. The same conclusions applies, and for the same reason, to any argument that a title in equity was created by the sale, taken in isolation from the collateral promises.”
Having explained that it was strictly unnecessary to consider Re Wait, because that case involved a contract for a sale ex-bulk, Lord Mustill (at 9IB) suggested that the reasoning in the whole of the judgment of Atkin LJ was “irresistible”.
In those circumstances, he turned “to consider whether there is anything in the collateral promises which enables the customers to overcome the practical objections to an immediate transfer of title” (at 9ID), and said this:
“The question then immediately arises – what was the subject matter of the trust? The only possible answer, so far as concerns an immediate transfer of title on sale, is that the trust related to the company’s current stock of bullion answering the contractual description; for there was no other bullion to which the trust could relate… The company cannot have intended to create an interest in its general stock of gold which would have inhibited any dealings with it otherwise and for the purpose of delivery under the non-allocated sale contract. Conversely the customer, who is presumed to have intended that somewhere in the bullion held by or on behalf of the company there would be stored a quantity representing “his” bullion, cannot have contemplated that its rights would be fixed by reference to a combination of the quantity of bullion that the relevant description which the company happened to have in stock at the relevant time and the number of purchasers who happened to have opened contracts at that time for the goods of that description. .. .Nor is the argument improved by reshaping the trust, so as to contemplate that the property in the res vendita did pass to the customer, albeit in the absence of delivery, and then merged in a general equitable title to the pooled stock of bullion. Once again the argument contradicts the transaction. The customer purchased for the physical delivery on demand of the precise quantity of bullion fixed by his contract, not a shifting proportion of the shifting bulk, prior to delivery.” (91D-H).
Lord Mustill went on to consider a number of other arguments raised on behalf of the customers, all of which he rejected and many of which, in his view, ran into the same sort of problems discussed in the passage I have quoted.
In the result, the Privy Council rejected the contention on behalf of the customers that they had any equitable interest in the bullion. At 100A-B, Lord Mustill referred to the judgment in London Wine and said:
“The facts of that case were not precisely the same as the present, and the arguments on the present appeal have been more far-reaching than with there deployed. Nevertheless their Lordships are greatly fortified in their opinion by the close analysis of the authorities and principles by Oliver J, and in other circumstances their Lordships would have been content to do little more than summarise it and express their entire agreement.”
The final authority to which I must refer on this aspect in Hunter -v- Moss [1994] 1 WLR 452, which was argued and decided after argument had been concluded, but before the decision had been given, in Goldcorp. The defendant was the registered holder of 950 shares in a company with an issued share capital of 1,000 shares. In the course of a conversation, the defendant agreed “that he would henceforth hold five percent, of the [issued shares in the company] either for, or in trust for, the plaintiff” (see at 456D). The main question before the Court of Appeal was whether the judge was right to conclude that in the circumstances the defendant held 50 of his 950 shares on trust for the plaintiff. Dillon LJ (with whom Mann and Hirst LJJ agreed) said that more was a valid oral declaration of trust. At 457H he observed:
“It is plain that a bequest by the defendant to the plaintiff of 50 of his ordinary shares… would be a valid bequest on the defendant’s death which his executors or administrators will be bound to carry into effect.”
At 458B he went on to say:
“It seems to me… that if a person holds, say, 200 ordinary shares in ICI and he executes a transfer of 50 ordinary shares in ICI either to an individual donee or to trustees, and hands over the certificate for his 200 shares and the transfer to the transferees or to brokers to give effect to the transfer, there is a valid gift to the individual or trustees/transferees of the 50 shares without any further identification of their numbers. It will be a completed gift without waiting for registration of the transfer: see in Re Rose [1952] Ch 499. In the ordinary way a new certificate would be issued for the 50 shares to the transferee and the transferrer would receive a balance certificate in respect of the rest of his holding. I see no uncertainty at all in those circumstances.”
Dillon LJ then referred to London Wine, and having summarised the facts, he said this at 458H:
“It seems to me that that case is a long way from the present. It is concerned with the appropriation of chattels and when the property in chattels passes. We are concerned with a declaration of trust, accepting that the legal title remained in the defendant and was not intended, at the time the trust was declared, to pass immediately to the plaintiff. The defendant was to retain the shares as trustee for the plaintiff.”
In those circumstances, in agreement with the judge in the first instance, the Court of Appeal held that there was an effective declaration of trust.
After the decision in Goldcorp had been given, the House of Lords refused the defendant in Hunter leave to appeal: see at [1994] 1 WLR 614.
CONCLUSIONS ON BENEFICIAL INTERESTS IN ENGLISH LAW
On behalf of the liquidator, Mr Halpern, to whose argument I am much indebted, suggests that I should hold that the former clients of Harvard have no beneficial interest in the shares in English law, in light of the decision and reasoning in Wait, London Wine, and Goldcorp. So far as Hunter is concerned, he submits that I should either refuse to follow it or distinguish it.
Should I refuse to follow Hunter? At page 61 of the current, Fifteenth, Edition of Underhill and Hayton “Law of Trusts and Trustees” there is strong adverse criticism of the decision and reasoning in Hunter. It is said that Dillon LJ’s reliance on the analogy of testamentary dispositions was inappropriate, because:
“On death a testator is totally divested of all his legal and beneficial title in all his assets in favour of his executor who becomes subject to equitable obligations to effect the testator’s wishes so far as practicable… . In his lifetime a settlor is only divested in his benefit or entitlement to his assets where one knows to which assets such divestments relates.”
In addition, as Mr Halpern points out, the reliance by Dillon LJ on the decision in Re Rose appears to overlook the fact that, in the relevant document, Mr Rose had specifically identified the shares which were intended to be the subject matter of the gift (see towards the bottom of page 500). Underhill and Hay ton conclude their discussion as follows:
“In view of the weak reasoning in Hunter -v- Moss and of the ringing endorsement in Re London Wine Shippers Limited by the Privy Council in Re Goldcorp Exchange Limited… it is respectfully submitted that Hunter -v-Moss should not be followed: there is no sound reasoning for distinguishing trusts of goods from trusts of intangibles.”
I see the force of these points. However, the decision in Hunter is binding on me, unless I am satisfied that it is per incuriam or that it has been overruled by a subsequent decision.
As to Hunter being per incuriam, Mr Halpern argues that it is inconsistent with the reasoning in London Wine and Wait. London Wine is a decision of a lower court, and in any event it was expressly considered and distinguished by the Court of Appeal in Hunter. On the other hand, Wait was also a decision of the Court of Appeal, and was not expressly referred to, let alone distinguished, by the Court of Appeal in Hunter. Nonetheless, I do not think that it is properly open to me to hold that the decisions in Wait and Hunter are inconsistent and that I can choose between them or to conclude that, had the Court of Appeal in Hunter properly considered the decision in Wait, they would have reached a different conclusion. First, it is clear that the decision in Wait was cited to the Court of Appeal in Hunter (see at 453 A/B): I must therefore presume that it was considered by them. Secondly, in view of the way in which Dillon LJ distinguished London Wine, it seems to me that he was impliedly distinguishing, or would have distinguished, Wait in the same way.
Equally, I do not consider that I can hold that Hunter is not binding on the basis that it has been effectively overruled by Goldcorp. First, it appears to me that while the decision in Hunter is undoubtedly binding on me in principle, the decision in Goldcorp, being that of the Privy Council and not of the House of Lords, is not binding on me, and would not have been binding on the Court of Appeal in Hunter. Secondly, I refer again to the way in which Dillon LJ distinguished London Wine: he said it was “concerned with the appropriation of chattels and when the property in chattels passes”, whereas in Hunter the Court of Appeal was concerned with shares and a declaration of trust. In my judgment, therefore, the ground upon which the Court of Appeal in Hunter distinguished London Wine is substantially the same ground upon which Goldcorp can be distinguished from Hunter.
Mr Halpern’s alternative argument was that Hunter could be properly distinguished from Wait, London Wine and Goldcorp on a ground on which the present case could be properly distinguished from Hunter, namely that Hunter was concerned with an express declaration of trust, whereas the other cases (including the present one) are not. While it is true that this is a point mentioned by Dillon LJ when distinguishing London Wine (see at 458H) I have come to the conclusion that it is not a proper ground for distinguishing Hunter from Wait, London Wine and, indeed, Goldcorp and the present case. First, it is clear from the reasoning in Wait and London Wine that this is not a valid ground for distinction. The point is well illustrated by Oliver J’s inability to see how “a farmer who declares himself to be trustee of two sheep (without identifying them) can be said to have created a perfect and complete trust of whatever rights he may confer by such declaration as a matter of contract” and from his disagreement with Sir John Romilly. Secondly, it appears to me that the suggested ground for distinguishing Hunter runs into difficulties in light of the passage I have quoted from the judgment of Dillon LJ in that case at 458B: as part of the reasoning for rejecting the defendant’s argument, he said in terms that the execution of a document, by way of gift, of some of the proposed donors shares (with no identification as to precisely which shares) would nonetheless be sufficient to create an enforceable trust. Thirdly, in my view the suggested distinction between Hunter, on the one hand, and Wait and London Wine (and indeed Goldcorp) on the other hand is not logically defensible, a view clearly consistent with the general thrust of the observations to which I have referred in Underhill and Hay ton, and in Meagher Gummow & Lehane, referred to below.
Furthermore, in Hunter itself, the judge did not decide that an express declaration of trust, in terms, was made. He merely concluded that “the sense of what [the defendant] then said was that he would henceforth hold the shares on such a trust” (see at 457E). (Indeed in the present case, I have already quoted from correspondence from Harvard to its clients in which Harvard described the holding of Australian and US shares, sold to the relevant client, as being held “on your behalf” and “being your shares”).
While I am not particularly convinced by the distinction, it appears to me that a more satisfactory way of distinguishing Hunter from the other cases is that it was concerned with shares, and not with chattels. First, that is a ground which is consistent with Dillon LJ’s reliance on Re Rose (a case concerned with shares) and his ground for distinguishing London Wine (and, by implication, Wait) which, it will be remembered, he described as being “concerned with the appropriation of chattels and when property in chattels passes”. Secondly, it is on this basis that the editors of Underhill and Hayton believe that Hunter is explained (although they regard it on an unsatisfactory basis). Thirdly, the observations of Atkin LJ in Wait at 630 referring to the “ordinary operations of buying and selling goods” could be said to provide a policy ground for there being one rule for chattels and another for shares.
Fourthly, as the editors of Meagher Gummow & Lehane on “Equity Doctrines & Remedies” (Third Edition) point out, the need for appropriation before any equitable interest can exist in relation to chattels can be contrasted with the absence of any such need before there can be an effective equitable assignment of an unascertained part of a whole debt or fund (see at paragraphs 679 to 682). This distinction is described by the editors as “very difficult to see”; nonetheless, they accept that, despite the criticism to which cases such as Wait have been subjected, it is unlikely that they will be overruled. The editors conclude:
“What must be appreciated, despite what has sometimes been said in reliance on the judgment of Atkin LJ…, is the narrow scope of the principle for which those cases stand: it applies only to contracts for the sale of an unascertained part of a mass of goods. So limited, the principle may still be regarded as anomalous but, perhaps, commercially convenient: see Re Wait at 636, 639, 640 per Atkin LJ.”
The description of the sub-contracted grain in Wait, the client’s wine in London Wine, and the customer’s bullion in Goldcorp as “an unascertained part of a mass of goods” is quite apt. It would not, however, be a sensible description of the 50 shares in Hunter or, indeed, the shares in the present case. Mr Halpern pointed out that it is not really possible to identify, whether physically or by words, a proportion of a debt, whereas it is possible to identify chattels (by labelling or segregation) or shares (by reference to their number); he also pointed out that part of a debt or fund is fungible with the balance. For those two reasons, he submitted that the inconsistency suggested in Meagher Gummow & Lehane is not valid. There is obvious force in that point, but, in the end, it seems to me that, given that the distinction exists between an assignment of part of a holding of chattels and an assignment of part of a debt or fund, the effect of the decision in Hunter is that, in this context, shares fall to be treated in this context in the same way as a debt or fund rather than chattels.
In all the circumstances, therefore, it seems to me that the correct way for me, at first instance, to explain the difference between the result in Hunter, and that in Wait, London Wine and Goldcorp, is on the ground that Hunter was concerned with shares, as opposed to chattels.
To my mind, the provisions of Clause 5 and the correspondence and other documentation to which I have referred show that, as between Harvard and its former clients, a particular number of unidentified shares of a particular class in a particular company were being treated as the beneficial property of the client. Had the correspondence and internal records of Harvard gone one stage further, and identified the share numbers the subject of this arrangement, Mr Halpern accepts (quite rightly in my judgment) that the beneficial interest in the relevant shares would have been vested in the client. The only reason for contending that this is not the case is that the precise shares were not identified. In light of the decision and reasoning in Hunter, and the above discussion, I do not consider that it is open to me to hold that that aspect prevents Harvard’s former clients having a beneficial interest in the shares, so far as English law is concerned.