Trespass to Goods

Cases

Circuit Systems Ltd and Another v. Zuken-Redac (U.K) Ltd (Formerly Racal-Redac (UK) Ltd)

[1997] UKHL 51 87 BLR 1, [1997] UKHL 51, [1998] 1 BCLC 176, [1999] 2 AC 1, [1998] BCC 44, [1998] 1 All ER 218, [1997] 3 WLR 1177

 Lord Hoffman

Assignment of causes of action in bankruptcy

          The law is traditionally hostile to the assignment of causes of action in return for a share of the proceeds. Such transactions were described as champerty (division of the field) and regarded as illegal and unenforceable. It is unnecessary to examine the reasons: judges said that it would encourage malicious suits, but treating such arrangements as criminal was also, before the introduction of legal aid, an effective way of preventing poor people from obtaining legal redress. The position of liquidators and trustees in bankruptcy is however quite different. The courts have recognised that they often have no assets with which to fund litigation and that in such case the only practical way in which they can turn a cause of action into money is to sell it, either for a fixed sum or a share of the proceeds, to someone who is willing to take proceedings in his own name. In this respect they are of course no different from many other people. But because trustees and liquidators act on behalf of creditors, the courts have for the past century construed their statutory powers as placing them in a privileged position.

          So in Seear v. Lawson [1880] 15 Ch.D. 426, 433, Sir George Jessel M.R. said:

“If the trustee gets a right of action, why is he not to realise it? The proper office of the trustee is to realise the property for the sake of distributing the proceeds among the creditors. Why should we hold as a matter of policy that it is necessary for him to sue in his own name? He may have no funds, or he may be disinclined to run the risk of having to pay costs, or he may consider it undesirable to delay the winding up of the bankruptcy until the end of the litigation.”

Nearly a century later, in Ramsey v. Hartley [1977] 1 W.L.R. 686, 698, Lawton L.J. said:

“Now, the sale of a cause of action by a trustee can only be effected by an assignment. It vests in the trustee in the first place because it is deemed to have been duly assigned to him. . . . The legal process by which it gets to him must operate to vest it in the person to whom he sells it. If this were not so, such a cause of action would be of no value to the creditors unless the trustee himself tried to enforce it. To do so, unless success was assured, would require the expenditure of money which would otherwise be available for distribution among the creditors. To assign the cause of action for good consideration to another person who was willing to try to enforce it could be a sensible way of disposing of the bankrupt’s assets.”

These cases both happened to have concerned trustees in bankruptcy, but the powers of liquidators have been given a similar construction and in Guy v. Churchill (1888) 40 Ch.D. 481 Chitty J. held that there could be no objection to an assignment in return for a share of the proceeds, which “apart from the bankruptcy law. . . is plainly void for champerty.” In the face of this line of authority, counsel for both appellants accepted that apart from the impact of legal aid and the effect on the defendant’s right to security for costs, the assignments could not be challenged.

          4. Legal aid

          The chief question in both appeals was therefore whether the assignments were void or unenforceable because they would enable a company to benefit indirectly from legal aid. This, as I have said, was the view of the Court of Appeal in Advanced Technology Structures Ltd. v. Cray Valley Products Ltd. [1993] B.C.L.C. 723.

          Hirst L.J. said that the assignment was:

“a mere stratagem or device to enable the company to carry on the proceedings, with the support of Mr. Pratt’s [the assignee] legal aid, which manifestly neither they nor he could afford to do otherwise. . . The sole purpose of the assignment was therefore to tap the resources of the legal aid fund, which are available to Mr. Pratt only because of his own impecuniosity.”

This, said Hirst L.J., demonstrated that the assignment was “a sham.” The give effect to the assignment would conflict with “the underlying policy of the Act,” which was that “legal aid should not be available to corporate plaintiffs.”

          Leggatt L.J. said:

“When Parliament decided that legal aid should not be available to corporations, it cannot have been its intention that a corporation should be able to nominate an employee, to whom it has assigned a right of action, to conduct the litigation on its behalf with the assistance of legal aid for which he was eligible.”

Glidewell L.J. agreed with both judgments.

          Mr. Rupert Jackson and Mr. Roger Henderson, counsel for the appellants in the Norglen and Circuit Systems appeals respectively, relied upon this reasoning but explained it somewhat differently. They both accepted, as Morritt J. had done in the Norglen case, that when Hirst L.J. described the assignment as a “sham,” he could not have meant what is ordinarily meant by that expression, namely, a transaction which is not what it pretends to be: Snook v. London and West Riding Investments Ltd. [1967] 2 Q.B. 786. The transaction was intended to be exactly what it purported to be, namely a transfer to the assignee of the legal and beneficial interest in the cause of action in return for the right to a share in the proceeds. If it was unenforceable, it could only be because such a transaction was in some way illegal or contrary to public policy.

          Mr. Jackson said that the introduction of legal aid for individuals in 1949 had the effect of restricting the power of liquidators and trustees to assign causes of action. They could no longer assign them to individuals on terms that the company or bankrupt’s estate would receive part of the proceeds if it was intended that the action should be pursued with the benefit of legal aid. Such a restriction on the statutory power to sell the assets of the company or bankrupt had to be implied in order to make the insolvency legislation consistent with the Legal Aid and Advice Act 1949 and subsequent legislation to the same effect. Alternatively, the policy expressed in the Legal Aid and Advice Act 1949 had created a head a public policy which required such assignments to be treated as invalid.

          Mr. Henderson said that the Legal Aid Act 1988 prohibited the grant of legal aid to a corporation and that it followed, upon the true construction of that Act, that a grant of legal aid to an assignee for the benefit of the company, as in a case like this, would also be unlawful. The assignment had therefore been executed for an unlawful purpose and was unenforceable under the principle that the courts would not lend their assistance to the achievement of an unlawful purpose.

          My Lords, these two very different arguments advanced in support of the decision of the Court of Appeal in Advanced Technology Structures Ltd. v. Cray Valley Products Ltd. [1993] B.C.L.C. 723 illustrate the difficulties in analysing its reasoning. If the question is whether a given transaction is such as to attract a statutory benefit, such as a grant or assistance like legal aid, or a statutory burden, such as income tax, I do not think that it promotes clarity of thought to use terms like stratagem or device. The question is simply whether upon its true construction, the statute applies to the transaction. Tax avoidance schemes are perhaps the best example. They either work (Inland Revenue Commissioners v. Duke of Westminster [1936] AC 1) or they do not (Furniss v. Dawson [1984] A.C. 484.) If they do not work, the reason, as my noble and learned friend Lord Steyn pointed out in Inland Revenue Commissioners v. McGuckian [1997] 1 WLR 991, 1000, is simply that upon the true construction of the statute, the transaction which was designed to avoid the charge to tax actually comes within it. It is not that the statute has a penumbral spirit which strikes down devices or stratagems designed to avoid its terms or exploit its loopholes. There is no need for such spooky jurisprudence.

          Wallersteiner v. Moir (No. 2) [1975] 1 Q.B. 373, upon which Mr. Henderson relied, is a good example of such straightforward construction applied to the legal aid legislation. The question was whether Mr. Moir would be entitled to legal aid to bring a derivative action on behalf of a company against its majority shareholder. The Court of Appeal held that as he was asserting the company’s cause of action on the company’s behalf, the effect of what is now section 2(10) of the Legal Aid Act 1988 prevented the grant of legal aid.

          But the question of whether, upon the true construction of that subsection, the Legal Aid Board is entitled to make legal aid available to the assignees in these appeals, is not a matter which is before your Lordships for decision. In fact, Mr. Jackson and Mr. Henderson were not even agreed upon the answer. Mr. Jackson proceeded upon the assumption that if the assignment was valid, the Board could properly grant legal aid. Taking this position appeared to him to give better support to his argument that, in order to avoid such a result, the liquidator’s power to assign should be restricted. Mr. Henderson, on the other hand, submitted that the grant of legal aid to the plaintiff in his appeal was unlawful and he mentioned that judicial review proceedings had been instituted against the Board to enforce this claim. This position appeared to him to support the argument that the assignment was an attempt to further an unlawful purpose.

          For reasons which I shall give in a moment, I do not think that it is necessary for your Lordships to decide whether Mr. Jackson or Mr. Henderson is right. The Legal Aid Act 1988 appears on its face to be concerned with whether the party to whom aid is provided is an individual or a corporation and not with how he got his cause of action or what he is going to do with the proceeds. The Lord Chancellor is given power in section 34(1) to make regulations “for preventing abuses” of the Act and the Board has power under section 15(3)(a) to refuse representation for the purpose of proceedings if in all the circumstances it appears to the Board “unreasonable” that the applicant should be granted representation. In Reg. v.The Law Society, Ex parte Nicholson, (unreported), 22 February 1985, Hodgson J. decided that a legal aid committee could not refuse legal aid under this provision solely on the ground that the applicant had acquired the cause of action by assignment from an insolvent company, without having regard to the other circumstances of the case. But there is no doubt that such an assignment is a matter which the Legal Aid Board is entitled to take into account. Furthermore, since the grant of legal aid in these appeals, the Lord Chancellor has pursuant to section 34(1) of the Legal Aid Act 1988, made the Civil Legal Aid (General)(Amendment)(No. 2) Regulations 1996 (S.I. 1996 No. 1257) which insert a new Regulation 33A into the Civil Legal Aid (General) Regulations 1989:

“Without prejudice to regulation 28 [requirement of eligibility on the merits] an application may be refused where it appears to the Area Director that

(a) any cause of action in respect of which the application was made has been transferred to the applicant by assignment or otherwise from a body of persons corporate or unincorporate, or by another person who would not be entitled to receive legal aid; and

(b) the assignment or transfer was entered into with a view to allowing the action to be commenced or continued with the benefit of a legal aid certificate.”

This regulation might appear to reverse Reg. v. The Law Society, Ex parte Nicholson and permit a refusal on the specified ground irrespective of the other circumstances of the case. But your Lordships’ Appellate Committee invited the comments of the Legal Aid Board on the issues in these appeals and received a helpful letter, which was made available to the parties, from the Board’s legal adviser Mr. Colin Stutt. He said that the powers to make regulations conferred upon the Lord Chancellor by section 34(1) did not entitle him altogether to proscribe legal aid in the circumstances stated in the new regulation 33A. It followed that in his view the Board would still have to have regard to all the circumstances of the case. If the Board had to take a general view of the merits of the application, the answer was by no means obvious. One view was that an assignment by an insolvent company was “simply an abuse of the legal aid scheme:” people who chose to take the advantages of limited liability had to accept the disadvantages, including the absence of state benefits such as legal aid. On the other hand, another view was that this was a harsh and unrealistic judgment. Few people who decided to incorporate their businesses would realise that the result could be a form of outlawry, excluding them from access to justice. In most of the assignment cases which came before the Board, the individual was a shareholder who had an overwhelming interest in the outcome of the proceedings and a claim which had strong merits. Considerations of this kind frequently persuaded Area Committees to grant legal aid to assignees despite the discretion to refuse conferred by rule 33A. Mr. Stutt said that the discretion entrusted to the Board by the new rule was “problematic” and any guidance from your Lordships by way of clarification of the law would be welcome.

          Looking at the matter in a wider perspective, Mr. Stutt also drew your Lordships’ attention to the proposals for reform of civil legal aid announced by the Lord Chancellor on 18 October 1997. These include the abolition of civil legal aid for money claims and the substitution of a right to enter into conditional fee agreements with solicitors. Such agreements would be open to companies as well as individuals and would remove the difference in treatment which has given rise to these appeals.

          My Lords, I think that the way in which this matter comes before your Lordships makes it undesirable for the House to express any opinion on the way in which the Legal Aid Board should deal with cases such as the present under the existing scheme. The Board has not been a party to these proceedings and although your Lordships will, I am sure, have been assisted by Mr. Stutt’s letter, the legality of the Board’s exercise of its public powers and discretions is not an issue in either of these appeals. It is concerned solely with the validity,as a matter of private law, of the assignments by the two companies to Mr. and Mrs. Rodgers and Mr. Basten respectively. For this purpose, the question of how the Board should have exercised its discretion in granting them legal aid or whether, as a matter of construction of the Legal Aid Act 1988, it had such a discretion, is not relevant. For the Board either had such a power or it did not. If Parliament conferred such a power, there seems to me no ground for saying that it must be taken impliedly to have prohibited such assignments or that the Act requires this to be done as a matter of public policy. The Act recognises in general terms the possibility of abuse but leaves it to the rule-making power of the Lord Chancellor and the discretion of the Board to identify such abuses and deal with them. The legal aid scheme can look after itself and does not require the courts to strike down private transactions which would otherwise be valid. On the other hand, if upon the true construction of the Act there is, as Mr. Henderson argues, no power to grant legal aid to assignees in the position of Mr. and Mrs. Rodgers or Mr. Basten, then there is by definition no possibility of abuse. The foundation for an argument that the assignments are for an illegal purpose disappears. They are valid as a matter of insolvency law and give the assignees a cause of action but there is no mischief in them because they do not enable the companies to derive benefits from legal aid. Mr. Henderson said that although this might in theory be true, it was in practice very difficult to challenge the exercise of discretion by the Legal Aid Board. The fact was that legal aid had been granted and his clients had the disadvantage of being faced by a legally aided plaintiff. But this argument seems to me fallacious, because to say that the Legal Aid Board has a discretion in the matter means that there are circumstances in which it could properly grant legal aid. In that case, as I have said, the question of whether such a grant would be an abuse of the scheme is a matter for the Lord Chancellor’s regulations and the Board. For these reasons, Advanced Technology Structures Ltd v. Cray ValleyProducts Ltd [1993] B.C.L.C. 723 was in my view wrong to hold that the assignment was invalid.

          Like the Court of Appeal in the Norglen case, I also think that there is nothing in the point that the assignment is invalid because it deprives the defendants of the right to apply for security for costs under section 726 of the Companies Act 1985. For better or worse, the law entitles a defendant to be protected against incurring irrecoverable costs in litigation brought against him by an impecunious company but not by an impecunious individual. But that cannot prevent companies from assigning property to individuals.

          It follows that the Circuit Systems appeal, in which the only issue is the validity of the assignment, must in my opinion be dismissed.

          5. Conduct of the liquidator

          Mr. Peter Smith advanced an alternative argument for the appellants in the Norglen appeal based on what he said was misconduct on the part of the liquidator in assigning the company’s cause of action to Mr. and Mrs. Rodgers. He said that until the hearing before Morritt J. the liquidator took no steps to set aside the purported transfer of the company’s property to Mrs. Rodgers, he gave Mr. and Mrs. Rodgers uncontrolled conduct of the litigation which deprived the company of the value of the restrictive covenant and forced through the assignment in the face of opposition from creditors. My Lords, I make no comment upon the factual basis of any of these allegations because, even if true, they have no present relevance. The liquidator had a statutory power to assign the company’s cause of action and has exercised that power. If his exercise of the power was a breach of duty to the company and its creditors, that is a matter of which the creditors may complain in the Companies Court. It does not affect the validity of the assignment.

          6. Discretion and security for costs

          There are two further points which arise only in the Norglen appeal. Both concern the exercise of the discretion to substitute Mr. and Mrs. Rodgers as plaintiffs pursuant to R.S.C. Ord. 15, r. 7(2). The rule reads:

“Where at any stage of the proceedings in any cause or matter the interest or liability of any party is assigned or transmitted to or devolves upon some other person, the Court may, if it thinks it necessary in order to ensure that all matters in dispute in the cause or matter may be effectually and completely determined and adjudicated upon, order that other person to be made a party to the cause or matter and the proceedings to be carried on as if he had been substituted for the first mentioned party.”

Mr. Jackson accepted that if, as I think, the assignment was effective to transfer the cause of action from the company to Mr. and Mrs. Rodgers, their joinder as parties was necessary. They were the only people who could prosecute the action. But Mr. Jackson submitted that the rule gives the court a discretion and that the Court of Appeal failed to consider the exercise of that discretion in two ways. First, he says that it should simply have refused to make an order on the ground that the prosecution of the action by the Rodgers would be an abuse of legal aid. Alternatively, he says that the order should have been subject to a condition that Norglen provide security for costs in the amount ordered by Morritt J.

(a) Discretionary refusal

          I do not think it escaped the attention of the Court of Appeal that the rule confers a discretion. But the discretion must be exercised judicially and in my view, once it is accepted that, in spite of the finding that the assignment was a “stratagem or device” to obtain legal aid, it is nevertheless valid, there are no grounds upon which joinder can properly be refused. If the question of whether the assignment is an abuse of legal aid is a matter for the discretion of the Legal Aid Board, it must follow that it should not be a ground for the court refusing to join a plaintiff who has a good title to sue. Otherwise one could have a situation in which the Board decided that in all the circumstances there was no abuse and that legal aid should be granted while the court refused joinder on the ground that the prosecution of the action with legal aid would be an abuse. Sir Thomas Bingham M.R. dealt with the matter shortly and in my respectful opinion correctly when he said:

---

Kapoor v National Westminster Bank Plc & Anor

[2011] EWCA Civ 1083  [2011] BPIR 1680, [2011] NPC 97, [2012] 1 All ER 1201, [2011] EWCA Civ 1083, [2012] Bus LR D25

Etherton LJ

The factual situation at the creditors’ meeting at which Mr Kapoor’s IVA was approved was that, by the terms of the Assignment, Crosswood had expressly agreed that it would not prove for, or vote in respect of, or assert any claim to any part of the Crosswood Debt in excess of £4.5 million, and it would not exercise any rights of a creditor in respect of the Assigned Debt. Mr Chouhen had agreed to pay a considerable sum for those promises. The implicit agreement was that Mr Chouhen alone would be entitled to vote in respect of the Assigned Debt. By sending their respective proxies, with the Assignment attached, both Crosswood and Mr Chouhen notified Mr Tan of their agreement. The Judge found ([124]) that Mr Kapoor “was intimately involved” in the making of the arrangements which were given effect by the Assignment. He attended the creditors’ meeting, and was obviously content with the Assignment and the proxies of Crosswood and Mr Chouhen since he had promoted them and they were intended for his benefit so as to achieve the passing of the resolution to approve the IVA. The Proposal itself was written on the basis that Mr Chouhen was a creditor in respect of £4 million, and entitled to vote in respect of that value of debt. In the circumstances, from a purely practical and non-technical perspective, there is no reason why Mr Tan should not have been willing, and indeed bound, to recognise Mr Chouhen as the person entitled to vote in respect of the Assigned Debt. He was not at any risk of any criticism, or exposed to any legal recrimination, from Mr Kapoor, Mr Chouhen or Crosswood if he did so.

The law does not, in my judgment, require a different conclusion. The current state of the authorities, binding on this court, is that an equitable assignee of debt is entitled in its own right and name to bring proceedings for the debt. The equitable assignee will usually be required to join the assignor to the proceedings in order to ensure that the debtor is not exposed to double recovery, but that is a purely procedural requirement and can be dispensed with by the Court. By contrast, the assignor cannot bring proceedings to recover the assigned debt in the assignor’s own name for the assignor’s own account. The assignor can sue as trustee for the assignee if the assignee agrees, and, in that event the claim must disclose the assignor’s representative capacity. In any other case, the assignor must join the assignee, not because of a mere procedural rule but as a matter of substantive law in view of the insufficiency of the assignor’s title. These points emerge clearly from the following authorities.

In Central Insurance Co Ltd v Seacalf Shipping Corporation (The “Aiolos”) [1983] 2 Lloyd’s Rep 25 Oliver LJ, with whom Ackner LJ agreed, said (at pp. 33 and 34):

“That there is a long-standing practice that, before giving judgment in an action at the suit of an equitable assignee, the Court will normally require him to bring his assignor before the Court is beyond doubt. But it does not follow from that that there is no cause of action vested in the assignee and capable of being asserted by him alone or, indeed, that the assignor has in all cases, and necessarily to be a party. The reason for the requirement is not that the assignee has no right which he can assert independently, but that the debtor ought to be protected from the possibility of any further claim by the assignor who should therefore be bound by the judgment. A further reason given by Lord Justice Chitty in Durham Brothers v Robertson, [1898] 1 QB 765 is that the assignor ought to be given the opportunity to challenge the assignment if he wishes, though this probably comes to the same thing. The concept behind the rule is that the debtor should not be put in double jeopardy.

…

These cases by themselves demonstrate the subsistence of a cause of action in the assignee, but in fact the authorities go further. In William Brandt’s Son & Co Ltd v Dunlop Rubber Co Ltd [1905] AC 454, judgment was given for the assignee although the assignor was not made party to the action. The case was, it is true, an exceptional one, for the debtor had in fact settled with the assignor and disclaimed any desire to have him there. Nevertheless, it demonstrates that the requirement is a procedural and not a substantive one upon which the assignee’s cause of action depends.”

In Three Rivers District Council v Governor and Company of the Bank of England [1996] QB 292 Staughton LJ said (at p. 303B) that he accepted that The Aiolos established that an equitable assignee has a cause of action which it can enforce on its own. He said that it is a cause of action in equity; and, if the assignee chooses to exercise it, its claim prevails over that of the assignor. The same point was made by Peter Gibson LJ, with whom Waite LJ agreed. Peter Gibson LJ said (at p. 307C):

“It is now more that 120 years since the confluence of the separate streams of common law and equity through the Judicature Act 1873. As its modern version (section 49 of the Supreme Court Act 1981) makes clear, every civil court has to administer law and equity on the basis that whenever there is any conflict between common law and equity, the rules of equity shall prevail, every court is to continue to give effect to equitable rights and subject thereto to common law rights and the court’s jurisdiction is to be exercised so as to secure that as far as possible all matters in dispute are completely and finally determined and multiplicity of proceedings is avoided.”

Peter Gibson LJ then said (at pp. 307H-308B):

“For my part, I regard it as sufficient to look at the position as established by the authorities since 1873. In doing so, it is important to distinguish between what is a requirement of substantive law and what is merely a procedural requirement. It is, in my judgment, elementary that where, as here, there is an agreement to assign a legal chose, in equity the assignee becomes the owner and controller of the legal chose. He is entitled to sue for the recovery of the chose, but as a matter of practice he will normally be required by the court to join the assignor either as plaintiff or, if he refuses to give his consent to this, as defendant. All this seems to me to be in conformity with section 49 of the Act of 1981. An assignor, if the assignment is known, will not be allowed to sue in his own name for himself. He may sue as trustee for the assignee if the assignee so wishes, but in that event he should reveal his representative capacity … and if he attempts to recover for himself, even if, for example, only part of the debt has been assigned, he will be required to join the assignee.”

The reference in those passages to the Supreme Court Act 1981 s.49 is a reference to what is now the Senior Courts Act 1981 s.49.

Peter Gibson LJ then referred to William Brandt’s Son & Co v Dunlop Rubber Co [1905] AC 454, Performing Right Society Ltd v London Theatre of Varieties Ltd [1924] AC 1, Walter & Sullivan Ltd v Murphy & Sons Ltd [1955] 2 QB 584, The Aiolos, Weddell v JA Pearce & Major [1988] Ch 26 and Deposit Protection Board v Dalia [1994] 2 AC 367. He then said (at p. 313F):

“These authorities, in my judgment, clearly establish that the equitable assignee can be regarded realistically as the person entitled to the assigned chose and is able to sue the debtor on that chose, but that save in special circumstances the court will require him to join the assignor as a procedural requirement so that the assignor might be bound and the debtor protected. If, unusually, the assignor sues, he will not be allowed to maintain the action in the absence of the assignee.”

He then referred to Warner Bros Records Inc v Rollgreen Ltd [1976] QB 430, a case heavily relied upon by Mr Smith before us. He said (at p. 315A) that the reasoning of Roskill LJ in that case was not a complete or accurate analysis of the effect of an equitable assignment:

“as in my judgment it is clear from the line of authorities to which I have referred that an equitable assignment creates in the equitable assignee the right to sue the debtor, subject to the procedural rule requiring the joinder of the assignor.”

Peter Gibson LJ said that (p. 315B), in any event, the comments of Roskill LJ, like those of Sir John Pennycuick in Warner Bros Records, had to be read in context, namely that the decision was confined to the particular preliminary issue which it determined.

Peter Gibson LJ dismissed (at p.315E-F) the view expressed by the authors of “Meagher, Gummow and Lehane on Equity: Doctrines and Remedies” (see now 4th ed at 6-520), which reflects the view expressed by Mr Marcus Smith in his work to which I have referred, that the joinder of the legal owner as a necessary party to an action by the equitable assignee is a substantive and not merely a procedural requirement. Peter Gibson LJ took the view that Brandt’s case, which was binding on the Court of Appeal, had decided the contrary.

That view of Brandt’s case had been the view of the Court of Appeal in The Aiolos, as is shown by the second of the two paragraphs of the judgment of Oliver LJ which I have quoted earlier. It also seems to have been the view of the Court of Appeal in Raiffeisen Zentralbank Osterreich AG v Five Star Trading LLC [2001] QB 825, in which Brandt’s case was cited in argument. Mance LJ, with whom the other members of the court agreed, said ([60]), citing The Aiolos and Weddell :

“There is a rule of practice that the assignor should be joined, but that rule will not be insisted upon where there is no need, in particular if there is no risk of a separate claim by the assignor.”

In terms of principle, I do not share the doubts and misgivings expressed by Mr Smith and the academic commentators whose opinions support his argument. There is no good reason of policy or principle for the courts to refuse to recognise the title of the undisputed equitable assignee of part of a debt, and every good reason for the courts to refuse to recognise the bare legal title of the assignor, except where the assignor is a trustee for the assignee and expressly suing as such or the assignee joins in the proceedings. As the Court of Appeal in Three Rivers said, that approach is entirely consistent with section 49 of the Senior Courts Act 1981.

The procedural requirement to join an assignor in an action by an equitable assignee does not prevent an equitable assignee, without joining the assignor, presenting a winding up petition since the concerns giving rise to the procedural rule have no application in such a case. As PO Lawrence J said in Re Steel Wing Co Ltd [1921] Ch 349 (at p. 357):

“The main reason why an assignee of a part of a debt is required to join all parties interested in the debt in an action to recover the part assigned to him is in my opinion because the Court cannot adjudicate completely and finally without having such parties before it. The absence of such parties might result in the debtor being subjected to future actions in respect of the same debt, and moreover might result in conflicting decisions being arrived at concerning such debt. In my opinion, however, this reasoning does not apply to a winding up petition. After a winding up order has been made the Court in all cases when it is necessary will investigate, adjudicate upon, and settle the petitioner’s debt as well as the debts of the other creditors. In the case of an assignee of part of a debt the Court in adjudicating upon his claim can and will do so in the presence of the persons entitled to the remainder of the debt, and the rights of all parties interested in the debt will be completely and finally settled once and for all.”

That reasoning was applied by the Privy Council in Parmalat in holding that an equitable assignor has a sufficient interest to present a petition without joining the assignee. As Lord Hoffmann said, delivering the judgment of the judicial committee, having quoted PO Lawrence J in Re Steel Wing:

“[8] In other words, a winding-up order does not affect the legal rights of the creditors or the company. It only puts into effect a process of collective execution against the assets of the company, for the benefit of all creditors. In the course of that process, the rights of creditors may have to be determined. But such a determination is not necessary at the stage when the order is made. An equitable assignor therefore has a sufficient interest without joining the assignee.”

In the light of that explanation, I cannot agree with the Judge that Parmalat is any support for the proposition that only the equitable assignor of a debt, and not the equitable assignee, is the creditor in respect of the assigned debt for the purposes of voting at the creditors’ meeting called to approve an IVA. Parmalat and Re Steel Wing show merely that both an equitable assignor and an equitable assignee can, for the reasons given by PO Lawrence J and Lord Hoffmann, present a winding up petition (and, by parity of reasoning, apply for a bankruptcy order) without joining the other. By contrast, the chairman of the creditors’ meeting called to consider the approval of the IVA will have to decide which creditor is owed a debt by the debtor and is entitled to vote in respect of it. In my judgment, that focuses attention on the person who, subject to approval of the IVA or the debtor’s bankruptcy, would be entitled to recover the debt in court proceedings. As the authorities I have cited clearly show, the consistent line of authority, binding on this court, is that the equitable assignee of a debt, and not the equitable assignor, has the substantive legal right to sue for the assigned debt. Although there is a procedural requirement that the assignee should join the assignor in order to protect the debtor from successive actions and to prevent conflicting decisions, even that procedural requirement will not apply or may be dispensed with by the court in appropriate circumstances, most particularly where those concerns do not apply.

By parity of reasoning, the Nominee chairing the creditors’ meeting called to consider the approval of an IVA should recognise the undisputed assignee of part of a debt as the creditor owed the assigned debt, at least in circumstances in which it is clear that the debtor has been informed of the assignment and the assignor agrees to the equitable assignee being so treated and exercising the right to vote as such creditor. That is the situation in the present case, in which Crosswood, Mr Chouhen and Mr Kapoor all intended and agreed that Mr Chouhen alone should have the right to vote in respect of the Assigned Debt; they communicated that intention and consensus to Mr Tan, as chairman of the creditors’ meeting; and Mr Tan was at no risk of any legal challenge or recrimination from any of them by permitting Mr Chouhen to vote.

I would, therefore, set aside paragraph 3 of the Judge’s order by which he set aside the decision of Mr Tan to admit the claim of Mr Chouhen as a creditor.

Material irregularity

The heart of Mr Harbottle’s argument on this issue, and of his criticism of the Judge, is that the expression “material irregularity” in IA s.262(1)(b) is directed at the documents and processes by which an IVA comes into being, and the rules in the IRR and the IA which relate to those documents and processes. It has, he submitted, nothing to do with agreements, like the Assignment in the present case, which do not form part of those documents and processes.

In a similar vein, Mr Harbottle submitted that Mr Tan had no discretion or entitlement to ignore the vote of Mr Chouhen since there had been no breach of the IRR or the IA and, on the basis of the IRR, Mr Chouhen was perfectly entitled to vote in respect of the assigned part of the Assigned Debt. He submitted that there is no place in the legislative scheme for some broad principle of good faith, as applied by the Judge, unrelated to material non-compliance with the IRR or the IA. There is no reference in the relevant provisions of the IRR or the IA to “good faith”. He emphasised that the chairman of the creditors’ meeting will be an insolvency practitioner, and not a lawyer, and must take quick decisions in the conduct of the meeting. IRR 5.22(1), he said, is inconsistent with any general discretion, since it requires the chairman of the creditors’ meeting, once the entitlement of those wishing to vote has been ascertained, “to admit or reject their claims accordingly”. All those considerations indicate, he submitted, that the expression “material irregularity at or in relation to [the creditors’] meeting” in IA s.262(1)(b) is a reference to what may broadly be described as prescribed procedural matters.

In support of those points, Mr Harbottle cited the following passages in the judgment of Harman J in Re a debtor (No 222 of 1990) ex parte the Bank of Ireland [1992] BCLC 137 at (pp. 144 and 145) (in which the approval of an IVA was revoked because the chairman of the creditors’ meeting had wrongly not allowed certain creditors to vote):

“The scheme is quite clear. The chairman has power to admit or reject; his decision is subject to appeal; and if in doubt he shall mark the vote as objected to and allow the creditor to vote. That is easily carried out upon the basis advanced by Mr Moss QC, Mr Mann and Mr Trace. It provides a simple clear rule for the chairman, not a lawyer, faced at a large meeting with speedy decisions necessary to be made to enable the meeting to reach a decision. On that basis the chairman must look at the claim; if it is plain or obvious that it is good he admits it, if it is plain or obvious that it is bad he rejects it, if there is a question, a doubt, he shall admit it but mark it as objected.”

“It was my first thought that it must be a matter giving rise plainly to prejudice if a creditor who is prima facie entitled to have his vote admitted, even if marked ‘objected’, was refused any right to vote in that his interest would be severely prejudiced. It further seemed to me prima facie that the exercise of a decision making power vested in the chairman was not prima facie naturally described as ‘an irregularity’. I was however, greatly impressed by the argument of Mr Trace for Victoria Deep Water Terminal Ltd and Scruttons plc. He advanced the proposition that linguistically ‘irregular’ relates to ‘rule’ and that the provisions elsewhere show that voting at the meeting is a matter of the rules a departure from which is truly an ‘irregularity’.”

On the same point, Mr Harbottle referred to the following passage in the judgment of Rimer J in Re a debtor (No 87 of 1993) (No 2) [1996] 1 BCLC 63 at 95 :

” … this interpretation of s 262(1)(b) results in my view in s 262 forming a coherent and comprehensive code of remedies. Section 262(1)(a) permits a challenge based on the substantive terms of the arrangement; and s 262(1)(b) permits a challenge based on the existence of irregular shortcomings in the documentation provided to creditors for the purpose of making their decision at the s 257 meeting as well in the convening and conducting of such meeting.”

I do not agree that the expression “material irregularity” in IA s. 262(1)(b) is so limited as to exclude entirely the application of a principle of good faith. Neither Harman J nor Rimer J was concerned with that issue. It was, however, directly addressed in Cadbury Schweppes plc v Somji [2001] 1 BCLC 498 (Anthony Boswood QC, sitting as a deputy High Court Judge) and [2001] 1 WLR 615 (CA). In that case a friend of the debtor, with the debtor’s agreement, made a secret deal with two creditor banks, under which a company with which the friend was associated was to purchase their debt and the two banks would vote in favour of the proposal for the debtor’s IVA. The IVA was approved. A dissentient creditor, Cadbury Schweppes plc, applied to the court under IA s.262(1)(a) for revocation of the IVA on the ground that the arrangement unfairly prejudiced its interests. It also petitioned for the debtor’s bankruptcy on the ground that it was a person for the time being bound by an approved IVA ( IA s 264(1)(c)), and information made available by the debtor to his creditors at or in connection with the meeting to approve the IVA was false or misleading in a material respect or contained material omissions (IA s. 276(1)(b)).

At first instance, the deputy judge analysed a number of old authorities, starting with Cockshott v Bennett (1788) 2 Term Rep 763, 100 ER 411 and ending with Re EAB [1902] 1 KB 457. He extracted from them six principles relating to secret deals made in connection with a composition, or other similar arrangement for the settlement of debts, by which a creditor was to receive more than the other creditors in return for supporting (or not opposing) the composition or arrangement. Those principles were that (1) the deal was illegal and void; (2) its existence rendered the composition or arrangement voidable at the instance of an aggrieved creditor; (3) the deal was wholly unenforceable between the parties to it; (4) the principle was of entirely general application, and covered all forms of composition and arrangement, whether statutory or otherwise; (5) “the principle was based on the fundamental rule that there must be equality between creditors in the distribution of the debtor’s assets, and additionally on the equally fundamental rule that there should be complete good faith between the debtor and his creditors, and between the creditors inter se”, and it was therefore irrelevant that the inducement to the creditor came from a third party, and not out of the debtor’s estate; and (6) if the secret deal was not made by the debtor himself, all that was required was that it should have been made to his knowledge: [2001] BCLC 498 at 510.

The Court of Appeal considered ([34]) that the deputy judge had over-relied on the old law, and paid insufficient regard to the terms and policy of the IVA provisions in IA Part VIII in concluding that the IVA in that case was void. Under those provisions, the only routes for challenging or circumventing the approval of an IVA at the creditors’ meeting are a direct challenge under IA s.262(1) or an indirect challenge by means of a bankruptcy petition under IA s.276(1). Further, the Court of Appeal declined ([36]) to express any view on the deputy judge’s rejection of the application of IA s.262(1)(a). The Court of Appeal did, however, dismiss the appeal and upheld the bankruptcy order made by the deputy judge pursuant to IA s.276(1)(b). In doing so, Robert Walker LJ, giving the leading judgment of the Court of Appeal, with which Sir Christopher Staughton and Judge LJ agreed, referred to and relied upon the fifth principle articulated by the deputy Judge (“the good faith principle”). He rejected the argument of counsel for the debtor, who relied on Re MC Bacon Ltd [1990] BCC 78, 87 and Re Smith (A Bankrupt), Ex p Braintree District Council [1990] 2 AC 215, 238, that the court was restricted to interpreting and applying the new statutory scheme for IVAs in the IA without reference to any of the principles derived from the earlier authorities. He quoted the following comment of Hoffmann LJ on those cases in Re A Debtor (No 784 of 1991) [1992] Ch 554, at 558–559:

“Those authorities show that, in approaching the language of the 1986 Act, one must pay particular attention to the purposes and policies of its own provisions and be wary of simply carrying over uncritically meanings which had been given to similar words in the earlier Act. It does not, however, mean that the language of the new Act comes to one entirely free of any of the intellectual freight which was carried by words and phrases in earlier bankruptcy or other legislation.”

Walker LJ then continued as follows:

“[24] The intellectual freight least likely to be jettisoned includes the basic doctrines (such as proportionate treatment of unsecured creditors, and the principle of set-off) which have been features of English bankruptcy law since its earliest days. Although the English law of bankruptcy now has the appearance of a complete statutory code, it is built on foundations which owe much to past judicial creativity and development of far more meagre statutory material going back to Elizabethan times, the first “modern” statutes being the Bankruptcy Act 1869 (32 & 33 Vict c 71) and the Debtors Act 1869 (32 & 33 Vict c 62). The deputy judge’s impressive survey of the old law shows that in relation to compositions and arrangements with creditors the court did impose a strict requirement of good faith as between competing unsecured creditors, and prohibited any secret inducement to one creditor even if that inducement did not come from the debtor’s own estate. There is no strong presumption that a similar principle must be found in the new regime set out in Part VIII of the 1986 Act, but (to put it at its lowest) it would be no great surprise to find it there in one form or another.”

Walker LJ said ([29]) that the deputy judge had been right to reject the suggestion that the transactions between the bank and the company purchasing their debts was an ordinary debt purchase transaction. He also said ([30]) that the fact that there were advanced negotiations with the banks was a highly material fact for the other creditors to be told. He said that the fact that what was on offer was not to be part of the IVA did not affect its materiality; it was not right for the secret deal between the banks and the company to be kept secret from the other creditors. The nominee had said before the vote that the debtor had no further offers to make. Walker LJ observed:

“[32] That statement must have been made on behalf of Mr Somji. “Take it or leave it” was the message which it gave, and it was a material omission not to state that two of the previously dissentient creditors were at an advanced stage in negotiations for a better deal outside the IVA.”

For those reasons, Walker LJ considered that the deputy judge was right to conclude that that he had jurisdiction to make a bankruptcy order under IA s. 276(1)(b).

Judge LJ, agreeing with Walker LJ, said ([40]) that:

“the effect of section 276 of the Insolvency Act 1986, and the Insolvency Rules 1986 made under it, is to ensure that every proposal for an individual voluntary arrangement should be characterised by complete transparency and good faith by the debtor.”

He said ([43]) with regard to the requirements of IA s. 276:

“Information” must not be provided by the debtor which is false or misleading in any material particular, and the “information” that is provided by him must be complete. This obligation continues up to the date of and during the meeting of creditors itself. Properly fulfilled this obligation enables the creditors to make an informed decision about the proposal for a voluntary arrangement.

Judge LJ referred to the continuing relevance of the principles in the old cases, as follows:

“[44] The principles laid down in the cases decided in the 18th and 19th centuries, accurately summarised by the judge below, have not, as he rightly put it, “become outmoded or unnecessary in modern times”. By contrast with the simple language of the section perhaps some of the eloquent flourish in these judgments may appear a little extravagant to us. Nevertheless section 276 and the Rules encapsulate the principles of transparency and good faith and make proposed secret deals or confidential arrangements of the kind referred to by Robert Walker LJ as unacceptable today as they were in Victorian England.”

In his skilful submissions, Mr Harbottle, for Mr Kapoor, distinguished Somji on several grounds. IA s. 262(1)(b) was not a ground of the application in Somji. Moreover, all the old cases analysed by the deputy judge, and on the basis of which he extracted his six principles, were cases of secret deals. Mr Harbottle further submitted that the analysis of the Court of Appeal in Somji did not rest on finding an independent good faith principle qualifying the statutory IVA scheme. Rather, he argued, the Court of Appeal had found the former principle of transparency and full disclosure, and, to that extent, good faith, in the express provisions of the IRR and IA s.276.

By contrast, Mr Harbottle emphasised, there is no question in the case of Mr Kapoor’s IVA of any inaccurate or incomplete information having been given to creditors prior to the vote on his IVA. The arrangements between Crosswood and Mr Chouhen were disclosed with their proxies. There was no secret deal, let alone one which conferred a benefit on Mr Chouhen additional to those receivable by other creditors pursuant to the IVA. On the contrary, by executing the Assignment, he placed himself financially in a worse position than other creditors since he was paying more for the Assigned Debt than he was projected to obtain from future distributions under the IVA.

In short, Mr Kapoor’s case is that the arrangement between Crosswood and Mr Chouhen was a perfectly open, and lawful, way to ensure that the resolution for the IVA was approved. Mr Harbottle argued that there is nothing unlawful about a friend of an insolvent debtor voting in favour of an IVA even if it is against the friend’s financial or commercial interests. If that can be done in relation to a debt which has always been owed to the friend, there is nothing in the statutory provisions or the rules to preclude it being done in relation to an assigned part of a debt, whether that assignment was by an associate of the debtor or an independent creditor.

Further, Mr Harbottle submitted, it would be dangerous and unprincipled for the outcome to rest on the motive for the assignment. That would create legal and commercial uncertainty, and would present difficulties in analysing and reaching conclusions about mixed motives, mental states generally and the commerciality or otherwise of different transactions. Mr Harbottle illustrated those points with the following examples in his skeleton argument, to which he referred in the course of his oral submissions:

“For example, suppose that A and B (not being associates) have contracted jointly with C on terms that the contract terminates automatically on either A or B becoming bankrupt. A owes £250,000 to X, which has issued a statutory demand. A proposes an IVA. There are other creditors, including Y who is owed £150,000 and is hostile. There are other friendly creditors such that if B pays off Y, the IVA will go through. If B paid Y would that be an irregularity? It is submitted that that would be a surprising result to most people. Yet how does that differ from Mr Kapoor’s case?

Second, it is not clear what degree of intention would be required. Consider the case of an agreement the main aim of which is a particular object which has nothing to do with the IVA but which the parties know is bound to affect the voting: is this an irregularity?”

“Third, what transactions are included and what excluded? Can there be an irregularity even before the date of the proposal? Does a transaction many months before the proposal which is entered into in the knowledge that there may be a proposal count for these purposes?”

Mr Harbottle dismissed as irrelevant the fact that the arrangement between Crosswood and Mr Chouhen was intended to avoid the consequences of IRR 5.23(4). He referred, in that connection, to the following statement of Lord Hoffmann in Norglen Ltd v Reeds Rains Prudential Ltd [1999] 2 AC 1 (at pp. 13G-14A):

“If the question is whether a given transaction is such as to attract a statutory benefit, such as a grant or assistance like legal aid, or a statutory burden, such as income tax, I do not think that it promotes clarity of thought to use terms like stratagem or device. The question is simply whether upon its true construction, the statute applies to the transaction. Tax avoidance schemes are perhaps the best example. They either work … or they do not … If they do not work, the reason … is simply that upon the true construction of the statute, the transaction which was designed to avoid the charge to tax actually comes within it. It is not that the statute has a penumbral spirit which strikes down devices or stratagems designed to avoid its terms or exploit its loopholes. There is no need for such spooky jurisprudence. “

Those are formidable submissions. I have nevertheless reached the conclusion that the good faith principle applies to the facts of the present case and, by virtue of its application, there was a material irregularity within IA s.262(1)(b) at or in relation to the creditors’ meeting which approved Mr Kapoor’s IVA. The irregularity was in treating the resolution approving Mr Kapoor’s IVA as passed when, for the purposes of IRR r.5.23(4), more than half in value of Mr Kapoor’s creditors voted against it, if Mr Chouhen’s vote was excluded as it should have been.

The good faith principle articulated in the authorities considered by the deputy judge in Somji, and acknowledged by the Court of Appeal in that case, is not restricted to the non-disclosure of secret deals benefiting one or some of the creditors. Although the facts in all those authorities did concern such a situation, the good faith principle, as articulated by the deputy judge and approved by the Court of Appeal, encapsulated “the fundamental rule that there should be complete good faith between the debtor and his creditors, and between the creditors inter se”. In Dauglish v Tennent (1866) LR 2 QB 49, for example, in which the court declared void a deed by which the defendant assigned all his estate to trustees on trust for distribution equally amongst all his creditors, Cockburn CJ said (at p. 53):

“In order that such a deed should be binding on the creditors, it is essential that there should be the most perfect good faith between the debtor and all his creditors. “

In Mare v Sandford Stuart V-C said (at p.926):

“The principles of this Court, which stamp a transaction of this kind with illegality, are not of a very refined kind. They are consistent with the ordinary principles of morality recognised by all mankind. And, moreover, where the Court has interfered to set aside such a transaction, it has done so on the ground of public policy, and of the transaction being such as the law should, in the highest degree, discountenance. The object of the bankrupt laws is to secure an equal distribution of property among the creditors, so that none shall have any advantage over another.”

That reference to public policy is significant. An IVA is a means by which an insolvent debtor can escape the full and rigorous consequences of a bankruptcy order, including the right of the creditors to select the trustee in bankruptcy, the supervision of the trustee by the creditors and the court, the ascertainment, collection and distribution of bankruptcy estate by the trustee, and the possibility of holding a public or private examination of the bankrupt on oath. In cases, such as the present, where independent creditors have doubts as to whether the debtor has been full and frank in the information he has provided, and, in particular, as to the full extent of his assets, an IVA has potentially severe disadvantages for those creditors. That is no doubt the reason why, when the new statutory scheme for IVAs was introduced by the IA, it was expressly provided in IRR r.5.23(4) that the resolution approving the IVA would be invalid if more than half in value of the independent creditors, that is non-associates of the debtor, voted against the resolution.

The arrangement given effect by the Assignment in the present case was patently intended, and intended only, for the purpose of subverting that legislative policy. The contrary is not asserted on behalf of Mr Kapoor. It is at one extreme end of a spectrum of transactions of questionable legitimacy, that is to say consistency with the legislative policy underlying IRR 5.23(4). The Assignment was not a sham, but it does not fall far short of it. Not only was the arrangement wholly uncommercial, from Mr Chouhen’s perspective, in that it inevitably involved him paying more for the assignment than he would ever realise and retain in respect of the Assigned Debt, but, as Mr Smith forcibly submitted, the obligation to return to Crosswood 80 per cent of the distributions received by Mr Chouhen under the IVA meant that in reality Crosswood only ever parted with a small part of its economic interest in the Assigned Debt. The Assignment was designed to confer voting rights on Mr Chouhen with a value of £4 million, but to part with only a fraction of the true financial value of the Assigned Debt.

The expression “material irregularity” is not defined. I agree with Mr Smith that the well established good faith principle applicable to agreements between a debtor and creditors is capable of colouring, and should colour, the meaning of that expression. That reflects the approach of the Court of Appeal in Somji. In my judgment, interpreting IA s.262(1)(b) against the background of the good faith principle and the legislative policy reflected in IRR r.5.23(4), it was a “material irregularity at or in relation to … [the] meeting” approving Mr Kapoor’s IVA to take into account Mr Chouhen’s vote for the purposes of IR 5.23(4) when to do so would give effect to an arrangement solely, patently and irrefutably designed to subvert the legislative policy underlying that provision and without any commercial benefit intended or claimed for Mr Chouhen. It was an uncommercial arrangement inconsistent with any notion of good faith between Mr Kapoor and his independent creditors, or between Mr Chouhen and Crosswood, on the one hand, and the independent creditors, on the other, and was designed solely to subvert a critical principle of legislative policy as to the conditions for approval of an IVA. That is a perfectly apposite example of “irregularity”, giving the word one of its normal meanings as something which is lacking in conformity to rule, law or principle (see the Shorter Oxford English Dictionary).

I do not consider that Lord Hoffmann’s observations about tax avoidance schemes in Norglen are of any relevance since, unlike compositions and arrangements between an insolvent debtor and the debtor’s creditors, including an IVA, there is no good faith principle between a taxpayer and the state, and between a taxpayer and other taxpayers, in relation to legal tax avoidance schemes.

Nor is it necessary or appropriate to speculate about the legal consequences for the approval of an IVA of an assignment of debt or part of a debt by a debtor’s associate where the facts are different from those in the present case. This is a paradigm case.

Nor does this approach present a practical difficulty for the conduct of the creditors’ meeting by the chairman. The chairman will, in a clear case, accept or reject a vote. If the position is unclear, the chairman will, in accordance with IRR r.5.22(4), mark it as objected to, but will allow the creditor to vote. Any dispute about the vote will then be resolved by the court.

For those reasons, I would dismiss the appeal against the Judge’s order revoking the approval of Mr Kapoor’s IVA on the ground of a material irregularity at or in relation to the creditors’ meeting, and against the Judge’s order that the Bank be at liberty to present a petition for Mr Kapoor’s bankruptcy.

Conclusion

For the reasons I have given, I would set aside paragraph 3 of the Judge’s order, but would otherwise dismiss the appeal.

SIR MARK POTTER

I agree.

LORD JUSTICE PILL

I agree with Etherton LJ on the first issue he considers and confine my remarks to the second issue, that of material irregularity.

Etherton LJ has fully set out the submissions of Mr Harbottle, for the appellant, at paragraphs 46 to 49 and 59 to 63 of his judgment. I agree that the submissions are formidable. A purpose of the Insolvency Act 1986 (“the 1986 Act”) and the Insolvency Rules 1986 (“the 1986 Rules”) is to provide a debtor, who follows the statutory procedures, with a means of avoiding the consequences of a bankruptcy order by making an individual voluntary arrangement (“IVA”) with that proportion of his creditors identified by Etherton LJ in paragraph 6 of his judgment. The procedure is not necessarily invalidated by the demonstration of goodwill towards the debtor by particular creditors.

The Rules permit a situation in which a substantial body of creditors, opposed to the IVA and considering themselves adversely affected by it, may be bound by its terms. They have a remedy under section 262(1)(a) of the 1986 Act if their interests are “unfairly prejudiced” by the IVA.

The issue in this appeal is whether there was a material irregularity, within the meaning of section 262(1)(b) of the 1986 Act, at, or in relation to, the creditors’ meeting at which the IVA was approved by appropriate majorities. Mr Smith, for the respondents, submitted that Mr Chouhen’s vote, essential to obtaining the appropriate majority, should have been excluded.

I agree with Etherton LJ that the requirement of good faith is carried forward into the scheme of the 1986 Act (Walker LJ in Cadbury Schweppes plc v Somji [2001] 1 WLR 615). I also agree that the requirement is not confined to a requirement of transparency, a requirement satisfied in the present case but not in Somji where there was a secret deal. Even where all elements of the proposed arrangements are known to all creditors, the duty of good faith “between the debtor and all his creditors” (Cockburn CJ in Dauglish v Tennent (1866) LR 2 QB 49, at 53) can render irregular “at or in relation to” the creditors’ meeting an arrangement such as the present. The concept of “unfairness” also appears in section 262(1)(a), already mentioned.

The assignment involved an act of friendship by Mr Chouhen which made no sense commercially for him. As the judge found, the arrangement (by which in context I assume the judge meant the assignment) was promoted by the appellant and he was intimately involved in its making (paragraph 124 of judgment). When considering the significance of the transaction, I too attach importance to the retention by Crosswood of a major economic interest in the assigned debt. The appellant’s involvement in this transaction, effected with the purpose of conferring voting rights on Mr Chouhen, demonstrated, in this context, a lack of that good faith to creditors in general required of a person seeking an IVA.

I confine my judgment to a consideration of the present facts. A material irregularity at or in relation to the meeting is established and I agree that the appeal should be dismissed.

---

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.

---

Borealis Ab v. Stargas Limited and Others and Bergesen D.Y. A/S

[2001] UKHL 17; [2001] 2 All ER 193 [2001] 1 LLR 663, [2001] 2 All ER 193, [2001] 2 WLR 1118, [2001] UKHL 17, [2001] 1 All ER (Comm) 673, [2001] 1 Lloyd’s Rep 663, [2002] 2 AC 205, [2001] CLC 1084

 Lord Hobhouse

The Passing of “Property” “upon or by Reason of” the Endorsement:

22.       This problem was the subject of the decision of your Lordships’ House in Sewell v Burdick (1884) 10 App Cas 74. It has two aspects. The first is what does the word “property” encompass. Is it limited to the general property in the goods, that is, the legal title to the goods as is transferred by a sale? Or does it include the special property which signifies the right to possession? In Sewell v Burdick it was decided that it should be limited to the passing of the general property. The primary reason for reaching that conclusion was that bills of lading are as often as not used as security documents facilitating the financing by banks of merchants’ sale transactions (eg under documentary letters of credit). A bank’s interest is to use the possessory right to the document and the goods it represents as security; its interest is not to enter into contractual relations with the carrier, still less, to undertake contractual obligations towards the carrier. The decision in Sewell v Burdick was that a transaction of pledge accompanied by the endorsement of the bill of lading over to the pledgee did not come within the scope of s.1 and did not transfer to the pledgee any contractual rights nor subject the pledgee to any contractual liabilities under the bill of lading.

    23. The other aspect was that the passing of the property had to be “upon or by reason of [the] consignment or endorsement”. But property under a contract of sale passes when the parties to that contract intend it to pass; it passes by reason of the contract of sale, not by reason of the endorsement of the bill of lading. (Section 18 of the Sale of Goods Acts 1893 and 1971.) Under an FOB contract, the property in the goods prima facie passes upon shipment not upon the endorsement of or other dealing with the bills of lading. A contract for the international sale of goods commonly includes an express term covering the transfer of title. Similarly, s.18(2) and s.19(2) of the Sale of Goods Acts made relevant the question whether the seller has by taking a bill of lading making the goods deliverable to his own order reserved the right of disposal. The difficulties of using the criterion in the 1855 Act were increased by simple logistics. The goods would arrive and be discharged and delivered before the documents had completed their progress down the chain of the intermediate buyers and sellers and their banks. The endorsement of those documents ceases to have any role in relation to the possession or legal ownership of the goods. (The Delfini [1990] 1 Lloyd’s 252) In the present case, by January 1994, the cargo of propane had probably long since been processed at Terneuzen and had ceased to exist.

    24. There were cases therefore where the 1855 Act could not be used and where the tool of inferring a Brandt v Liverpool contract became less and less useful. (eg The Aramis [1989] 1 Lloyd’s 213 ) There were related problems arising from changed patterns of trade. Cargoes were shipped in bulk. Bills of lading were issued for quantities out of undivided consignments and those quantities were then sold to different buyers and the various bills of lading endorsed over to them. Such endorsements were ineffective to pass the legal title in part of an undivided whole to a purchaser. (In re Wait [1927] 1 Ch 606: See now the Sale of Goods (Amendment) Act 1995.) Further, the practice of issuing delivery orders for parcels out of a bulk cargo were similarly ineffective and the intended buyers were left without remedy against the carrier. (Margarine Union v Cambay Prince [1969] 1 QB 219, Leigh & Sillavan v Aliakmon [1986] AC 785.)

“Subject to the Same Liabilities”:

25.       The use of this phrase in the 1855 Act gave rise to immediate difficulty. What was the position of an endorser after he had endorsed over the bill of lading to another? How did endorsement affect the liabilities of the shipper? The answer was given in Fox v Nott (1861) 6 H&N 630 and Smurthwaite v Wilkins (1862) 11 CB(ns) 842. The endorser is not liable after he has endorsed over the bill of lading to another who is; the shipper remains liable as an original party to the contract. Two considerations seem to have weighed with the courts in these and the later cases. (See per Lord Lloyd of Berwick in Effort Shipping v Linden Management [1998] AC 605, at p 615-8.) The words “subject to the same liabilities” were to be contrasted with the words “have transferred to him”. The liability of the endorsee was to be additional to that of the original contracting party. The other was to follow the reasoning which underlay the Allen v Coltart line of authority. It is the use of the bill of lading to demand and take delivery of the goods which is the basis of liability. Thus Erle CJ said in Smurthwaite v Wilkins at p.848:

“Looking at the whole statute it seems to me that the obvious meaning is that the assignee who receives the cargo shall have all the rights and bear all the liabilities of a contracting party; but that if he passes on the bill of lading by indorsement to another, he passes on all the rights and liabilities which the bill of lading carries with it.”

He rejected the argument that the endorser having passed on all his rights to the endorsee should retain all his liabilities in respect of the goods, saying (p.849) –

“Such a construction might be very convenient for the shipowner but it would be clearly repugnant to one’s notions of justice.”

The judgment of Erle CJ was approved by the Earl of Selborne LC in Sewell v Burdick at pp.86-8 (see also p 83) and he echoed his language when he referred to a person who had had the bill of lading endorsed to him while the goods were at sea and who then chooses to take advantage of his possession of the bill of lading to “take the position of full proprietor upon himself with its corresponding burdens if he thinks fit”;

“and that he actually does so as between himself and the shipowner if and when he claims and takes delivery of the goods by virtue of that title.”

The Drafting of the 1992 Act:

    26. By 1980 the difficulties in the 1855 Act had assumed serious proportions and the Act was failing to meet the needs of the mercantile community and the changed pattern of international trade and carriage by sea. There were other points of concern as well. In certain trades the use of paper bills of lading was becoming increasingly obsolete. Electronic documents were coming into use. Documents other than bills of lading were being used for the purposes previously served by bills of lading. Another related question which had to be considered particularly in the drafting of any new legislation was the concept when a bill of lading became ‘accomplished’, ie ceased to be capable of transferring rights to an endorsee (save by estoppel). This was always a potential problem under the 1855 Act but did not cause significant problems in practice. It was however a problem which would have to be faced by the draftsman of a replacement for the 1855 Act.

    27. The existing state of the law having been recognised to be unsatisfactory, the question was referred to the Law Commission and the Scottish Law Commission. Their Joint Report, “Rights of Suit in respect of Carriage of Goods by Sea” (Law Com No 196; Scot Law Com No 130), was published in March 1991 and appended a draft Bill. They concentrated upon the carriage of goods by sea and the adequacy of the 1855 Act and did not in that Report make recommendations for the amendment of the Sale of Goods Act. They reviewed in detail the various aspects to which I have referred. They made recommendations for reform. They rejected as inadequate amendments to s.1 of the 1855 Act which would simply have removed the requirement that the holder should have become the owner of the goods “upon or by reason of” the endorsement or which would have removed all reference to property in s.1, so that it sufficed for the purposes of both rights and liabilities that the person was the holder of the bill of lading. They preferred instead an approach which severed the link between property and right of action and transferred the rights of suit to the holder without more, but not the liabilities. They recommended that there should not be an automatic linking of contractual rights and liabilities; pledgees would not be liable “unless they sought to enforce their security”. (§2.31) In support of their recommendation they said:

“The statutory assignment model of the 1855 Act is familiar to international traders. … Our reform is an evolutionary one which recognises that those parts of the 1855 Act which have worked well should be retained. …” (§2.34(iv))

As regards the point at which the bill of lading ceases to be a transferable document of title, they adopted the existing test of delivery of the goods to the person entitled to receive them. (§2.42) As regards the liability of the holder under the bill of lading, their recommendation was in essence that a holder who seeks to take the benefit of the contract of carriage should not be permitted to do so without the corresponding burdens. (§§3.15 to 3.22) I will come back later to what they said.

    28. The recommendations are summarised in Part VII of the Report and the appended draft bill was designed to reflect those recommendations. The Bill was enacted without substantive amendment. Your Lordships are entitled to look at the Report in order to identify the mischief to which the Act is directed and, in the case of ambiguity, to help in resolving any such ambiguity.

The 1992 Act:

29.       Not the whole of the Act is relevant to the present appeal. It is not necessary to quote those provisions which extend the descriptions of documents which are to be recognised as having a similar function to bills of lading nor the sections which revise s.3 of the 1855 Act. I will confine my quotation to what is directly relevant to bills of lading and the present appeal.

“An Act to replace the Bills of Lading Act 1855 with new provision with respect to bills of lading and certain other shipping documents.

1.

This Act applies to … any bill of lading …

Rights under Shipping Documents

            2. (1) Subject to the following provisions of this section, a person

            who becomes-

(a) the lawful holder of a bill of lading; …… shall (by virtue of becoming the holder of the bill …….) have transferred to and vested in him all rights of suit under the contract of carriage as if he had been a party to that contract. (2) Where, when a person becomes the lawful holder of a bill of lading, possession of the bill no longer gives a right (as against the carrier) to possession of the goods to which the bill relates, that person shall not have any rights transferred to him by virtue of subsection (1) above unless he becomes the holder of the bill – (a) by virtue of a transaction effected in pursuance of any contractual or other arrangements made before the time when such a right to possession ceased to attach to possession of the bill; or (b) as a result of the rejection to that person by another person of goods or documents delivered to the other person in pursuance of any such arrangements. (4) Where, in the case of any document to which this Act applies – (a) a person with any interest or right in or in relation to goods to which the document relates sustains loss or damage in consequence of a breach of the contract of carriage; but (b) subsection (1) above operates in relation to that document so that rights of suit in respect of that breach are vested in another person, the other person shall be entitled to exercise those rights for the benefit of the person who sustained the loss or damage to the same extent as they could have been exercised if they had been vested in the person for whose benefit they are exercised. (5) Where rights are transferred by virtue of the operation of subsection (1) above in relation to any document, the transfer for which that subsection provides shall extinguish any entitlement to those rights which derives – (a) where that document is a bill of lading, from a person’s having been an original party to the contract of carriage; or (b) in the case of any document to which this Act applies, from the previous operation of that subsection in relation to that document;

Liabilities under Shipping Documents

3.         (1) Where subsection (1) of section 2 of this Act operates in relation to any document to which this Act applies and the person in whom rights are vested by virtue of that subsection – (a) takes or demands delivery from the carrier of any of the goods to which the document relates; (b) makes a claim under the contract of carriage against the carrier in respect of any of those goods; or (c) is a person who, at a time before those rights were vested in him, took or demanded delivery from the carrier of any of those goods, that person shall (by virtue of taking or demanding delivery or making the claim or, in a case falling within paragraph (c) above, of having the rights vested in him) become subject to the same liabilities under that contract as if he had been a party to that contract. (3) This section, so far as it imposes liabilities under any contract on any person, shall be without prejudice to the liabilities under the contract of any person as an original party to the contract. Interpretation etc 5.     (1) In this Act “the contract of carriage” – (a) in relation to a bill of lading ….. means the contract contained in or evidenced by that bill; “holder”, in relation to a bill of lading, shall be construed in accordance with subsection (2) below; (2) References in this Act to the holder of a bill of lading are references to any of the following persons, that is to say – (a) a person with possession of the bill who, by virtue of being the person identified in the bill, is the consignee of the goods to which the bill relates; (b) a person with possession of the bill as a result of the completion, by delivery of the bill, of any indorsement of the bill or, in the case of a bearer bill, of any other transfer of the bill; (c) a person with possession of the bill as a result of any transaction by virtue of which he would have become a holder falling within paragraph (a) or (b) above had not the transaction been effected at a time when possession of the bill no longer gave a right (as against the carrier) to possession of the goods to which the bill relates; and a person shall be regarded for the purposes of this Act as having become the lawful holder of a bill of lading wherever he has become the holder of the bill in good faith. (3) References in this Act to a person’s being identified in a document include references to his being identified by a description which allows for the identity of the person in question to be varied, in accordance with the terms of the document, after its issue; and the reference in section 1(3)(b) of this Act to a document’s identifying a person shall be construed accordingly. (4) Without prejudice to sections 2(2) and 4 above, nothing in this Act shall preclude its operation in relation to a case where the goods to which a document relates – (a) cease to exist after the issue of the document; or (b) cannot be identified (whether because they are mixed with other goods or for any other reason); and references in this Act to the goods to which a document relates shall be construed accordingly. 6.      (2) The Bills of Lading Act 1855 is hereby repealed.”

    30. This Act, in accordance with the view expressed in the Report, retains much of the basic structure of the 1855 Act. Much of its increased length and complexity derives from the fact that it covers other documents – way bills and delivery orders – besides bills of lading. It makes separate provision for the rights and the liabilities of a bill of lading holder. S.2(1) makes being the lawful holder of the bill of lading the sole criterion for the right to enforce the contract which it evidences and this transfer of the right extinguishes the right of preceding holders to do so: s.2(5). There are two qualifications: in simplified terms, the holder can sue and recover damages on behalf of another with an interest in the goods, s.2(4), and the transfer of a bill of lading after it has ceased to give a right to the possession of the goods does not confer any right of suit against the carrier unless the transfer was pursuant to an earlier contract or to the revesting of that right after a rejection by a buyer, s.2(2) and s.5(2). In the present case the provisions of s.2 do not give rise to any problem. Until, anyway, the discharge of the propane from the vessel at Terneusen to Dow Europe in the second half of November 1993, the bills of lading remained effective to give a right to the possession to the cargo as against Bergesen. Both the contract between Stargas and Borealis and that between Borealis and Dow Europe were made before that time. Therefore, Borealis and Dow Europe were in January 1994 successively holders of the bills of lading who came within the provisions of s.2(1) and (2) and the extended definition of “holder” in s.5(2).

    31. S.2 of the Act has adopted a different and more generous approach to the transfer of contractual rights than that adopted by s.1 of the 1855 Act in that it wholly omits the ‘property’ criterion. A party who takes a bill of lading as security, as a pledgee, has the contractual rights transferred to him under s.2. He can enforce them against the carrier or not as he chooses and may, if he chooses to do so, recover from the carrier also on behalf of the person with the full legal title (s.2(4)). This leaves the question whether the pledgee or similar person should come under any liability to the carrier. Under the 1855 Act he did not because he did not come within s.1 of that Act and acquired neither rights nor liabilities. The draftsman of the 1992 Act respected the commercial reasoning upon which Sewell v Burdick was based and did not require bankers and others taking the documents as security to have to accept any liabilities merely by reason of being the holders of the bills of lading. S.3(1) imposes additional requirements before a holder of a bill of lading comes under any contractual liability to the carrier. The solution adopted by the draftsman was to use the principle that he who wishes to enforce the contract against the carrier must also accept the corresponding liabilities to the carrier under that contract. This was the view expressed by the Earl of Selborne (sup.). It is the rationale of the cases leading up to Brandt v Liverpool. It is a principle of mutuality. It was spelled out in the Commissions’ Report.

“However, where the holder of the bill of lading enforces any rights conferred on him under the contract of carriage he should do so on condition that he assumes any liabilities imposed upon him under that contract.” (§3.15)

“We see in general no unfairness in making the person who either claims delivery or who takes delivery of the goods from being subject to the terms of the contract of carriage since in both cases the person is enforcing or at least attempting to enforce rights under the contract of carriage.” (§3.18)

“Furthermore it is unfair that the carrier should be denied redress against the indorsee of the bill of lading who seeks to take the benefit of the contract of carriage without the corresponding burdens.” (§3.22)

But it must be observed that all these statements in the Report, like the terminology used in the Act, are expressed in terms which refer explicitly to “the contract of carriage” and not to the right of the holder of the endorsed bill of lading to the possession of the goods as the bailor as against the bailee. It is thus categorising the delivery up of the goods in this context as the performance of a contractual obligation not a bailment obligation. This is not objectionable since where there is a contract of carriage the contract certainly includes a contractual obligation to deliver the goods. A bill of lading invariably includes words evidencing the carrier’s agreement to deliver the goods at destination to “or order or assigns” or words to that effect; the bailment is a contractual bailment. The relationship of the original parties to the contract of carriage is a contractually mutual relationship, each having contractual rights against the other. The important point which is demonstrated by this part of the Report, and carried through into the Act is that it is the contractual rights, not the proprietary rights (be they general or special), that are to be relevant. The relevant consideration is the mutuality of the contractual relationship transferred to the endorsee and the reciprocal contractual rights and obligations which arise from that relationship.

    32. In giving effect to this intention, s.3 of the Act postulates first that the holder in question must be a person in whom the contractual rights of suit have been vested by s.2(1). The language of s.2(1) adopts and is identical to the corresponding words in the 1855 Act: “shall have transferred [to] and vested in him all rights of suit”. Section 3(1) paragraphs (a) and (b) relate to a person who, being a person who has those rights, chooses to exercise them either (a) by taking or demanding delivery of the goods or (b) by making a claim under the contract of carriage contained in or evidenced by the bill of lading. Both involve an enforcement by the endorsee of the contractual rights against the carrier transferred to him by s.2(1). Under (a) it is by enjoying or demanding the performance of the carrier’s contractual delivery obligation. Under (b) it is by claiming a remedy for some breach by the carrier of the contract of carriage. Each of (a) and (b) involves a choice by the endorsee to take a positive step in relation to the contract of carriage and the rights against the carrier transferred to him by s.2(1). It has the character of an election to avail himself of those contractual rights against the carrier. There are however difficulties which neither the drafting nor the Report faces up to. Whilst taking delivery is a clear enough concept – it involves a voluntary transfer of possession from one person to another – making a “demand” or “claim” does not have such a specific character and, what is more, may be tentative or capable of being resiled from, a point commented upon by Millett LJ in the Court of Appeal at [1999] QB 884C-D. Delivery brings an end to the actual bailment of the goods and is (save in special circumstances) the final act of contractual performance on the part of the carrier. Claims or demands may on the other hand be made at any stage (although usually only made after the end of the voyage) and there may at the time still be performance obligations of the carrier yet to be performed.

    33. To ‘make a claim’ may be anything from expressing a view in the course of a meeting or letter as to the liability of the carrier to issuing a writ or arresting the vessel. A ‘demand’ might be an invitation or request, or, perhaps, even implied from making arrangements; or it might be a more formal express communication, such as would have sufficed to support an action in detinue. From the context in the Act and the purpose underlying s.3(1), it is clear that s.3 must be understood in a way which reflects the potentially important consequences of the choice or election which the bill of lading holder is making. The liabilities, particularly when alleged dangerous goods are involved, may be disproportionate to the value of the goods; the liabilities may not be covered by insurance; the endorsee may not be fully aware of what the liabilities are. I would therefore read the phrase “demands delivery” as referring to a formal demand made to the carrier or his agent asserting the contractual right as the endorsee of the bill of lading to have the carrier deliver the goods to him. And I would read the phrase “makes a claim under the contract of carriage” as referring to a formal claim against the carrier asserting a legal liability of the carrier under the contract of carriage to the holder of the bill of lading.

    34. But this is not the end of this problem. The use of the word “demand” is problematic as is the phrase “or at least attempting to enforce rights” in §3.18 of the Report. (It seems that those who wrote §3.18 had in mind such exceptional situations as where the cargo is destroyed while the vessel is waiting to discharge at the discharge port and after a demurrage liability recoverable under the bill of lading has arisen – an intriguing and, if I may be forgiven for saying so, a relatively unilluminating example.) If the carrier accedes to the demand and gives delivery as demanded, the demand is subsumed in the taking of delivery. If the carrier rejects the demand, a new scenario arises: is the endorsee going to make a claim against the carrier for refusing to comply with the demand? If the endorsee chooses to let the matter drop and not to make a claim, what significance of the demand remains? What principle of mutuality requires that the endorsee shall nevertheless be made subject to the liabilities of a contracting party? What if the endorsee chooses to endorse over the bill of lading to another to whom the carrier is willing to and does deliver the goods? The task of the judge, arbitrator or legal adviser attempting to construe s.3(1) is not an easy one and it is necessary to try and extract from it some self-consistent structure.

    35. So far I have been concentrating on paragraphs (a) and (b). Paragraph (c) presents further problems. It raises the relatively common situation where the vessel and its cargo arrive at the destination before the bills of lading have completed their journey down the chain of banks and buyers. The intended receiver has not yet acquired any rights under s.2(1). He is not entitled to demand delivery of the goods from the carrier. He may or may not be the owner of the goods but he quite probably will not at that time have the right to the possession of the goods; an earlier holder of the bill of lading may be a pledgee of the goods. This situation is dealt with commercially by delivering the goods against a letter of indemnity provided by the receiver (or his bank) which will include an undertaking by the receiver to surrender the bill of lading to the carrier as soon as it is acquired and will include any other stipulations and terms which the situation calls for. It may well at that time, either expressly or by implication, give rise to a Brandt v Liverpool type of contract on the terms of the bill of lading. But again the question arises: what is the character and the role of the demand referred to in paragraph (c)? Ex hypothesi, the intended receiver had no right to make the demand and the carrier had no obligation to accede to it unless there was some other contract between the receiver and the carrier, eg a charter party, which gave rise to that right and obligation in which case sections 2 and 3 have no application to that transaction. Paragraph (c) clearly involves an anticipation that the s.2(1) rights will be transferred to the receiver. The parenthesis which follows emphasises this: “by virtue of having the rights vested in him”. This shows that it is a necessary condition of the receiver’s becoming liable under s.3(1) that the rights are vested in him by the operation of s.2(1). The inclusion of the word “demanded” remains problematical. A rightly rejected demand for delivery by one who is not entitled to delivery is an act devoid of legal significance. What is significant is if the carrier decides (voluntarily) to accede to the demand and deliver the goods to the receiver notwithstanding the non-arrival of the bill of lading. Paragraph (c) does not include the making of a claim. The draftsman has accepted the irrelevance of a claim made by one who has no contractual standing to make it. Unless facts occur which give a relevance to the inclusion of the word “demanded” in paragraph (c), in my view the scheme of sections 2 and 3 requires that any such demand be treated as irrelevant for the purposes of s.3(1) and that the Act be construed accordingly. A ‘demand’ made without any basis for making it or insisting upon compliance is not in reality a demand at all. It is not a request made “as of right”, which is the primary dictionary meaning of “demand”. It is not accompanied by any threat of legal sanction. It is a request which can voluntarily be acceded to or refused as the person to whom it is made may choose. Accordingly it will be unlikely in the extreme that paragraph (c) will ever apply save where there has been an actual delivery of the cargo.

    36. Taking delivery in paragraphs (a) and (c) means, as I have said, the voluntary transfer of possession from one person to another. This is more than just cooperating in the discharge of the cargo from the vessel. Discharge and delivery are distinct aspects of the international carriage of goods. (See generally Scrutton on Charterparties, 20th ed (1996): Section XIII) Although the normal time for delivering cargo to the receiver may be at the time of its discharge from the vessel, that is not necessarily so. There may be a through contract of carriage. The goods may need to be unpacked from a container. The vessel may need to discharge its cargo without delay into a terminal. The discharge of the vessel is a necessary operation in the interests of the ship as well as of the cargo and requires the cooperation of others besides the shipowner. Providing that cooperation should not be confused with demanding delivery. The unloading of one cargo is for the shipowner the necessary preliminary to the loading of the next. Damaged or contaminated cargoes may need especial discharge because they may cause damage or pollution. Any unnecessary delays will cost the shipowner money and a loss to the charterer through incurring demurrage or forfeiting dispatch. Where the vessel is operating under a charter party it is more likely than not that the obligation to discharge will be that of the charterer. The charterer will be responsible for providing or arranging a berth at which the vessel can discharge. Where the cargo is a bulk cargo which has been sold by the charterer to the intended receiver, the contract of sale may require the buyer to perform the seller’s charter party obligations in relation to the discharge of the vessel. The delivery to which s.3 is referring is that which involves a full transfer of the possession of the relevant goods by the carrier to the holder of the bill of lading. The surrender of the relevant endorsed bill of lading to the carrier or his agent before or at the time of delivery will ordinarily be an incident of such delivery. Where that is not done, the carrier will ordinarily require a letter of indemnity. The letter of indemnity will probably be the best evidence of what arrangement has been made and will probably contain appropriate express terms.

---

Lynch v. Burke

 [1995] IESC 2; [1995] 2 IR 159; [1996]

O’Flahery J SC

9. The case as pleaded and apparently presented in the High Court on the plaintiff’s behalf was to say that the monies on deposit were held on an implied or resulting trust by Moira Burke for the benefit of the estate of the deceased. As already pointed out, the learned trial judge felt that he was constrained by the decision in Owens v. Greene and Freeley v. Greene [1932] I.R. 225, to uphold this submission.

20. Since historically the concept of an implied or resulting trust was an invention of equity to defeat the misappropriation of property as a consequence of potentially fraudulent or improvident transactions, it would surely be paradoxical if the doctrine is allowed to be invoked to defeat the clear intention of the donor as found by the trial judge, an intention so clear, as the Chief Justice observed in the course of the debate before us, that he could not possibly have made any other finding as regards the donor’s intention than the one that he did make. In this regard it is apposite to recall what Lindley L.J. said in Standing v. Bowring (1886)31 Ch.D. 282 at 289:-

“Trusts are neither created nor implied by law to defeat the intentions of donors or settlors; they are created or implied or are held to result in favour of donors or settlors in order to carry out and give effect to their true intentions, expressed or implied. It appears to me there are no equitable as distinguished from legal grounds on which the plaintiff can obtain relief.”

As to Owens v. Greene and Freeley v. Greene [1932] I.R. 225, the requirement that that case seems to lay down for a donee to benefit, is that the deposit receipt is a joint one and that it is payable to the parties or the survivor thus putting it out of the depositor’s power to deal with the fund without the concurrence of his co-owner during his lifetime. This certainly appears from the judgment of Fitzgibbon J. at pp. 245 and 246 of the report. This concept appears to be implicit, also, in the judgment of Kennedy C.J. (the relevant passage is quoted at length by the learned trial judge); or, at the least, that the donee should be entitled equally with the donor to resort to the funds during the joint lives. The judgments were also concerned to emphasise the importance in the legal scheme of things that testamentary dispositions should be required to comply with the relevant statutory requirements. Of course, if one were dealing with a testamentary disposition there would have to be compliance with the relevant requirements of the legislation in question. But that is to beg the question; if the arrangement made was not testamentary (which in my judgment it was not) then the legislative provisions (see Part VIII of the Succession Act, 1965) have no application.

21. Towards the end of his submissions, Mr. McCann, no doubt in the light of the trial judge’s finding about the donor’s intentions, came to submit that his client’s claim rested in law and to say that the case was not concerned with a trust, express or implied. He says the situation is simply that the monies on deposit belonged to the estate of the deceased. However, I believe that at law the niece had a legal interest in the monies on deposit either by reason of the contractual relationship of the parties or, in the alternative, as a gift which admittedly was not a completed gift in the conventional sense but is nonetheless one that should be upheld as being a gift subject to a contingency viz, that of the death of the donor which contingency does not disqualify it as being a proper gift.

22. It seems to me that Owens v. Greene and Freeley v. Greene [1932] I.R. 255, gives cause for unease on a number of grounds. In the first place, the judgments contain a number of severe criticisms of witnesses in the case which sound strange to us since we are accustomed to holding that matters of primary fact are exclusively for the trial judge and even in regard to inferences of fact respect must always be afforded to the trial judge’s finding. ( Hay v . O’Grady [1992] 1 I.R. 210). But since no report of the judgment of the trial judge (Meredith J.) is existant, we do not know what findings of fact he made. Further, criticisms are made in the course of the judgments concerning counsel’s submissions which are difficult to square with the manner in which the case was pleaded and, indeed, the account of the argument put forward for the donees as it appears in the report. The case pleaded was that the deceased declared that the monies on deposit were to belong beneficially to the plaintiff in the event of the death of the deceased and would not in that event form any part of his estate. The argument apparently presented to the Court was that the sole question was whether the trial judge was justified in finding as a fact, as he did find, that the donor intended and expressed the intention that each (donee) should be entitled beneficially to the property of which he became the legal owner on the death of the donor, thus rebutting the presumption of a resulting trust.

23. As his last stand, Mr. McCann has urged that if it is thought that the concept of trust must be considered (and in my view because of the course that the case took in the High Court it is clear that we must deal with the relevance of the trust concept) that we should not overrule Owens v. Greene and Freeley v. Greene [1932] I.R. 225 since it has stood for so long and, therefore, has been relied upon over the years by practitioners in advising clients. In the circumstances, since I believe – a view shared by all members of the Court – that the decision was wrongly decided it should be overruled. ( The Attorney General v. Ryan’s Car Hire Ltd. [1965] I.R. 642; Mogul of Ireland v. Tipperary (N.R.) County Council [1976] I.R. 260 and Finucane v. McMahon [1990] 1 I.R. 165).

24. This will introduce a measure of consistency in our jurisprudence: it restores equity to the high ground which it should properly occupy to ameliorate the harshness of common law rules on occasion rather than itself to be an instrument of injustice. Further, it brings us into line with other common law jurisdictions.

25. I would allow the appeal.

Egan J.

I agree.

Blayney J.

I agree

Denham J .

I agree.

---

Murungaru v Secretary of State for the Home Department & Ors

[2008] EWCA Civ 1015 (

: [2009] INLR 180, [2008] EWCA Civ 1015

Mr Justice Lewison:

In the court below the Secretary of State was treated as having conceded (1) that Dr Murungaru’s contractual rights amounted to a chose in action and (2) that any chose in action was property or a possession for the purposes of Article 1 of the First Protocol to the European Convention on Human Rights and Fundamental Freedoms (“A1 P1”). In my judgment the first of these concessions was at best dubious and the second was wrong.

The classic definition of a chose in action is that of Channel J in Torkington v Magee [1922] 2 KB 427: it is a personal right of property which can only be claimed or enforced by action, and not by taking physical possession. To use this definition to decide whether a contractual right counts as a possession for the purposes of A1 P1 is, to some extent circular. If the rights that Dr Murungaru enjoys under his contract are rights of property, they will be choses in action. Looked at from the other end of the telescope, if they are choses of action, they will be rights of property. It is a necessary condition of the existence of a chose in action that there is a remedy for its enforcement; and it is usually the case that a chose in action is something that is capable of being turned into money: Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 898, 915 (usually cited for other reasons).

Some of the characteristics of the contract in the present case are not in doubt. First, the benefit of the contract is incapable of assignment. Dr Murungarucould not confer the right to medical treatment on anyone else. Second, as a contract for personal services it cannot be vicariously performed. No other doctor could perform the treatment. Third, if, for example, Dr Murungaru were to become bankrupt under English law, the contract would not vest in his trustee. If he died, his personal representatives would not be able to take advantage of the contract. Fourth, it is incapable of being enforced by injunction or specific performance. Fifth, there is no suggestion that Dr Murungaru has paid for any medical treatment in advance. If, having received medical treatment, Dr Murungaru refused to pay for it, the doctors would be entitled to recover the agreed payment by action. The debt would be a chose in action which the doctors would be entitled to assign to someone else. Likewise, if the doctors refused to treat Dr Murungaru, he would be entitled, at least in theory, to recover damages for breach of contract, and his right to damages would itself be a chose in action capable of being assigned to someone else. But although breach of the contract may give rise to claims capable of being choses in action, I doubt whether the underlying contract itself is a chose in action. To take an analogy: a claim for damages for personal injury (say, a broken leg) is undoubtedly a chose in action. But one would hardly say that the fracture itself is property.

However, this probably does not matter. It is common ground that the concept of “possessions” or “property” for the purposes of A1 P1 is independent of classifications in domestic law. It is an autonomous concept of the Convention itself. In Gasus Dosier v Netherlands (1995) 20 EHRR 403 the European Court of Human Rights said at para 53:

“The Court recalls that the notion “possessions” (in French: biens) in Article 1 of Protocol No. 1 has an autonomous meaning which is certainly not limited to ownership of physical goods: certain other rights and interests constituting assets can also be regarded as “property rights” and thus as “possessions” for the purposes of this provision.”

The touchstone here is whether the rights and interests can be regarded as constituting “assets”.

The Strasbourg jurisprudence establishes that the mere fact that rights are contractual does not disqualify them from counting as property or possessions. Thus in Association of General Practitioners v Denmark (1989) 62 DR 226 the contractual entitlement of Danish GPs under a collective agreement to indexation of their remuneration was accepted by the Commission as amounting to a possession. This was a contractual right in the nature of a debt. But the converse: viz. that all contractual rights are property or possessions, does not follow. Mr Rabinder Singh QC accepted that the logic of his argument entailed that conclusion.

As Mr Rabinder Singh QC pointed out, a claim may count as a possession even though no court has yet adjudicated on its validity. But a claim justiciable in domestic law can amount to a possession for the purposes of A1 P1 only if it is sufficiently established to be enforceable. By contrast, a claim may amount to an assignable chose in action in domestic law, even if it is not established. Indeed it may be a speculative claim, but it would still be classified, domestically, as a chose in action. In my judgment this demonstrates that there is no necessary coincidence between the autonomous Convention concept of property or possessions and the domestic concept of property.

Mr Rabinder Singh QC relied on the decision of the European Court of Human Rights (“ECHR”) in Tre Traktörer Aktiebolag v Sweden (1989) EHRR 309 for the proposition that a non-transferable licence could amount to a possession. That analysis is supported by Harris, O’Boyle and Warbrick on Human Rights p. 518. To see whether this analysis is correct it is necessary to examine that case more closely. Tre Traktörer Aktiebolag (“TTA”) managed a restaurant called Le Cardinal. It had the benefit of a liquor licence. The licence was not transferable. The authorities withdrew the liquor licence after complaints about the management (including the financial management) of the restaurant. One of the questions was whether there had been a breach of A1 P1 by withdrawing the licence. The ECHR said (para 53):

“The Government argued that a licence to serve alcoholic beverages could not be considered to be a “possession” within the meaning of Article 1 of the Protocol (P1-1). This provision was therefore, in their opinion, not applicable to the case.

Like the Commission, however, the Court takes the view that the economic interests connected with the running of Le Cardinal were “possessions” for the purposes of Article 1 of the Protocol (P1-1). Indeed, the Court has already found that the maintenance of the licence was one of the principal conditions for the carrying on of the applicant company’s business, and that its withdrawal had adverse effects on the goodwill and value of the restaurant (see paragraph 43 above).

Such withdrawal thus constitutes, in the circumstances of the case, an interference with TTA’s right to the “peaceful enjoyment of [its] possessions”.” (Emphasis added)

However, in my judgment, the possession which the ECHR recognised was not the licence itself; but the economic interests connected with the running of the restaurant, including its goodwill. These economic interests also included a lease and property assets (para 55). That the licence itself was not the relevant possession is borne out by the fact that the ECHR held that the withdrawal of the licence was not a deprivation of property but a measure of control of the use of property (para 55). If the licence itself had been the relevant possession, it is impossible to see how its withdrawal did not amount to a deprivation. Likewise in Karni v Sweden (1988) 55 DR 157 it was the doctor’s “vested interests in the … medical practice” rather than his exclusion from the social security system that were regarded as his “possessions”.

In R (on the application of Malik) v. Waltham Forest NHS Primary Care Trust [2007] 1 WLR 2092 this court held that A1 P1 did not apply to a right to future earnings unless those earnings could be capitalised and a present financial value ascribed to them. Where there was no possibility of realising that financial value, that was a powerful factor against the conclusion that the right in question could amount to a possession.

Mr Rabinder Singh QC also relied on the statement of Auld LJ in Malik at para 36:

“However, before looking at the jurisprudence, it may be helpful to step back for a moment to remember that possessions may be tangible or intangible and that the reach of human rights goes beyond economic protection. In the case of tangible objects, such as land or goods, and also in the case of certain intangible assets, an individual’s right to enjoy them as possessions may not be, or not just be, of an economic nature. Something may have value to a person though it may have no value in the market. One cannot comprehensively define possession for this purpose by reference to a person’s ability or wish to sell it.”

Auld LJ elaborated on this in the next two paragraphs of his judgment. In para 37 he referred to tangible property, saying that no elaborate argument based on an analysis of its value is needed. What is more germane to this case is how he dealt with intangible property in para 38. He said:

“Where, however, the possessory right claimed is, as here, to some intangible entitlement conferred by a licence or other form of permission to the grantee to continue to follow an activity to his advantage, it seems to me that some additional factor is necessary to render it a “possessory” entitlement as distinct from the broader concept of a legal right to do so. In many or most cases, such identification is likely to depend on the existence of some present economic value of the entitlement to the individual claiming it conferred by a licence or other form of permission.” (Auld LJ’s emphasis)

In para 39 he posed the question:

“whether economic value is a distinguishing feature of a possessory right and whether it can only be identified in the sense of marketability.”

Subject to one point, he approved the reasoning of Mr Kenneth Parker QC in R (Nicholds) v Security Industry Authority [2007] 1 WLR 2067 in which the deputy judge had held that there was a distinction to be drawn between rights which had a monetary value and could be marketed for consideration and rights which could not. Only the former were “assets” for the purposes of A1 P1. It is true that in para 44 Auld LJ said that “transmissibility cannot always be the touchstone of a possessory entitlement under article 1”. But although not necessarily the touchstone, it is a highly relevant factor. Thus Auld LJ distinguished a previous case concerned with a licence to fish on the ground that that licence was transferable with the fishing boat, whereas Dr Malik’s ability to practice was not. If transmissibility had not been a relevant factor, there would have been no ground for the distinction. Rix LJ referred to the statutory prohibition on selling the goodwill of a medical practice and said that that prohibition:

“effectively means that an NHS doctor’s goodwill has no economic value. As such, I do not see how it can be regarded as an asset or, therefore, a possession for the purposes of article 1 of the First Protocol. It is neither a physical thing (land or chattels) nor a right or other chose in action, nor an asset of any kind. In Aston Cantlow and Wilmcote with Billesley Parochial Church Council v Wallbank [2004] 1 AC 546 Lord Hobhouse of Woodborough said, at para 91, that “possessions” in article 1 of the First Protocol applied “to all forms of property and is the equivalent of ‘assets’.” See also Van Marle 8 EHRR 483, para 41: “an asset and, hence, a possession.”

Moses LJ agreed with both judgments.

In the present case, Dr Murungaru’s contractual rights have none of the indicia of possessions. They are intangible; they are not assignable; they are not even transmissible; they are not realisable and they have no present economic value. They cannot realistically be described as an “asset”. That is the touchstone of whether something counts as a possession for the purposes of A1 P1. In my judgment Dr Murungaru’s contractual rights do not.

---

Cater Allen Ltd, Re

[2002] EWHC 3147 (Ch)

Laddie J

However, Mr. Martin Moore, Q.C., who appears before me on behalf of both the transferor and the transferee, very fairly draws my attention to the fact that identical words to those contained in section 111 are to be found in section 427 of the Companies Act and have been the subject of consideration by the House of Lords in Nokes v. Doncaster Amalgamated Collieries Ltd. [1940] A.C. 1014. The latter case concerned the transfer of a colliery from one company to another under a scheme of arrangement. In the more anti-employee environment which existed at that time, one of the employees of the transferred colliery was fined by Magistrates for non-attendance at work. He objected that the fine could only be levied if he was employed by the transferee company. He argued that the scheme of arrangement which had been sanctioned by Crossman J. in that case under the equivalent provisions of the then Companies Act was ineffective to transfer his contract of employment because a contract of employment was not transferable without the consent of the employee. At all stages up to the House of Lords the courts unanimously held that the equivalent words in the Companies Act which deal with schemes of arrangement entitled the court to sanction the transfer of all property and business and that included the benefits and duties under contracts including contracts of employment. But in the House of Lords by a majority of four to one, Lord Romer dissenting, a rather more narrow view was adopted.

Mr. Moore has suggested to me that Nokes can be seen to be limited in that it is really concerned with answering a very narrow question, that is to say whether or not contracts of employment can be transferred without the consent of the employee. It is undoubtedly true that that was the question which was put before the House of Lords and which it was necessary for the House of Lords to answer. It is also undoubtedly true that Viscount Simon restricted his speech to a consideration of that point. This is clear from the following passage:

“In short, s. 154” — that is the equivalent to section 427 under the current Act –“when it provides for ‘transfer’ is providing in my opinion for the transfer of those rights which are not incapable of transfer and is not contemplating the transfer of rights which are in their nature incapable of being transferred. I must make it plain that my judgment is limited to contracts of personal service with which the present appeal is concerned. It may well be that current contracts for the supply and purchase of goods are subject to what I may call a statutory novation, except contracts for the supply of ‘your requirements’ or the like which, like contracts to obey ‘your orders’, do not seem to me capable of automatic transfer.” (p. 1024)

Thus Viscount Simon clearly limited his speech to the question of transfer of contracts of employment. That would have no bearing in this case because the way in which CAPBL and CAL are run does not involve them having any relevant employees.

Mr. Moore says that the same underlying theme can be discerned in the speech of Lord Atkin. It is true that Lord Atkin’s speech starts off with a vigorousand strongly worded defence of an employee’s right not to have his contract of employment transferred to a new employer without his agreement. However, notwithstanding that, it seems to me that Lord Atkin construed the equivalent words in the then Companies Act rather more broadly than simply in relation to contracts of employment, see pp 1028, 1030 and 1033 of the report. In the end Lord Atkin summarised his conclusions in a terse sentence as follows:

“I am satisfied that this in the main procedural section should not be construed so as to transfer rights which in their nature are by law not transferable.”

Lord Thankerton also appears to have approached the question before him rather more broadly than simply by reference to rights of employment and expresses himself accordingly. Similarly Lord Porter appears to have approached the question as one which had to be looked at as a matter of broad principle. He came to the conclusion, as Lord Atkin did, that the provisions in the Companies Act did not bestow upon the court a power to sanction the transfer of rights or duties which were expressly or implicitly not transferable.

Certainly the wider interpretation of the decision of the majority in Nokes appears to have been adopted by Utwood J. in Re ‘L’ Hotel Company Ltd. and Langham Hotel Company Ltd. [1946] 1 All E.R. 319 and by Sachs J. (as he then was) in Re Skinner [1958] 1 W.L.R. 1043.

In my view it would be difficult for me to come to a different conclusion on construction in relation to the identical words used in the FSMA. For reasons which will become apparent in a moment, I do not think it is necessary for me to do so.

One of the issues which was discussed at some length in the speeches in the House of Lords amongst the majority who came to the conclusion that non-transferrable rights could not be transferred under the scheme of arrangement provisions was the principle that, had the legislature intended to give the court power to sanction the transfer of property which was not transferable, it would need to do so in express terms. Mr. Moore says that even if Nokes is not limited to contracts of employment and even if the same approach should be adopted to the construction of the provisions of section 111 of the FMSA as had been applied by the House of Lords to the identical wording in the Companies Acts relating to schemes of arrangement, nevertheless under the FMSA the legislature has put in place express provisions to allow courts to sanction just those sorts of transfers which the House of Lords held were not transferable in Nokes. This arises under section 112(2) which provides so far as relevant as follows:

“(2) An order under subsection (1)(a) may —

(a) transfer property or liabilities whether or not the authorised person concerned otherwise has the capacity to effect the transfer in question; …”

Mr. Moore argues that the purpose of the FMSA was to avoid the necessity for passing a private Act of Parliament when there was to be a transfer of banking business. The FMSA is designed to achieve a more convenient mechanism for allowing such transfers to take place, and s 112(2) should be construed accordingly. It is for that reason that s 112(2)(a) makes it permissible for the order to include a provision for the transfer of property or liabilities even when the authorised person otherwise would have not power to do so. In other words, when the property or liabilities are otherwise non-transferable. He concedes that it is possible to read s 112(2)(a) as being concerned only with matters of constitutional capacity. But he argues that were that to be the case it would be odd for two reasons. First, it would appear to be addressing simply a matter of ultra vires, which is a very minor matter, if it exists at all, in these sort of cases. Second, it would mean that s 112(2) does not get round the problem created by the decision in Nokes with the result that in most cases transfers of banking business would continue to need to proceed either by private Act of Parliament as in the past or by the transferor and transferee having to engage in wholesale renegotiation of contracts.

In my view, Mr. Moore’s points are good. S 112(2) should be construed widely and gives the court power to sanction, where it considers in all the circumstances that it is justified, the transfer of property or liabilities even in cases where those properties or liabilities might otherwise be non-transferable, for example by reason of express contractual provision. In my view section 112(2) does therefore provide a distinct and clear difference as between the provisions under the FMSA and the equivalent provisions under the Companies Act which were considered in Nokes. It bestows on the court the power to transfer just the sort of banking business which is at issue before me.

I have been taken with some care by Mr. Moore through this issue. He has been clearly aware of his duty to draw to the court’s attention any matter which might be argued against the grant of the transfer. His skeleton argument has also clearly and helpfully taken me through the nature of the contractual arrangements in place between the two companies. I am satisfied that not only do I have power to sanction the transfer but that this is a case in which a transfer should be sanctioned.

In those circumstances I will make the order which Mr. Moore has requested on behalf of his clients.

---

Armstrong DLW GmbH v Winnington Networks Ltd

 [2012] EWHC 10 (Ch) [2012] 3 WLR 835, [2012] 3 All ER 425, [2013] Ch 156, [2012] Bus LR 1199, [2012] Env LR D4

Morris QC

(A)       The Nature of EUAs as property

There is no dispute between the parties that EUAs are capable of constituting, and do constitute, property as a matter of law. What is in issue, however, is their precise nature and characterisation as property, because, so Winnington contends, EUAs are not a type of property which the common law protects by a relevant cause of action. In particular the “common law proprietary claim” is not available in respect of property of the nature of an EUA. For this reason I have received detailed and wide- ranging submissions from counsel on the fundamental nature of the concept of “property”, the classification of categories of “property” in English law and on the nature of the EUAs as property.

At the heart of the legal difficulties to which this case gives, or may give, rise is the somewhat novel nature of a European Union Allowances (EUA). This novelty arises from two particular features: the first is that an EUA is a creature of European legislation and the second is that an EUA exists only in electronic form. So, for example, if an EUA could be characterised as tangible property (or indeed as a documentary intangible), it could be subject to an action for conversion and, broadly, liability would be strict; there would be no defence at all available to an innocent purchaser in the circumstances arising in the present case. On the other hand, as is common ground, a pure chose in action cannot be the subject of an action for conversion: OBG v Allan [2008] 1 AC 1.

The nature of property

At common law, the characteristics of property were described by Lord Wilberforce in National Provincial Bank v Ainsworth [1965] 1 AC 1175 at 1247-8 as follows:

“Before a right or an interest can be admitted into the category of property, or of a right affecting property, it must be definable, identifiable by third parties, capable in its nature of assumption by third parties and have some degree of permanence or stability”

Categories of property recognised in English law

The traditional categorisation of property in English law is, first, a division between real and personal property. Personal property is described in Halsbury’s Law’s of England (4th edn) Vol 35 para 1201 as “roughly … all forms of property, movable or immovable, corporeal or incorporeal, other than freehold estates and interests in land…”. Personal property is then divided into chattels real and chattels personal. Here we are concerned with “chattels personal”. These are sub-divided into “tangible” and “intangible” property.

Tangible property, otherwise referred to as “choses in possession”, are corporeal things, which are tangible, moveable and visible and of which possession can be taken. They are capable of transfer by delivery.

Choses in action and intangible property

“Choses in action” are described in Halsbury’s Laws of England (5th edn) Vol 13 para. 1 as follows:

“The expression “chose in action” or “thing in action” in the literal sense means a thing recoverable by action, as contrasted with a chose in possession, which is a thing of which a person may have physical possession. The meaning … has expanded over time, and is now used to describe all personal rights of property which can only be claimed or enforced by action, and not by taking physical possession”

In a footnote to that paragraph, Halsbury’s Laws goes on to state that:

“it is impossible to give an accurate and complete definition of what it means and may include at the present day. The various kinds of property included under the term have little in common beyond the characteristic fact of their not being subjects of actual physical possession.”

A chose in action is capable of being the subject matter of theft, but not, as indicated above, of conversion.

Halsbury’s Laws goes on to identify certain classes of chose in action: debts, rights under a contract, rights or causes of action, shares, intellectual property, equitable rights and leases. Debts include negotiable instruments, including bills of exchange, promissory notes and cheques. Then at para. 12, Halsbury’s Laws specifically identifies “Rights which are not choses in action”, stating “A number of other rights and forms of property have been held not to be choses in action”. It includes in that class an export quota (citing the Nai-Keung case (see below)). Such property rights might be described as intangible property other than choses in action.

Documentary intangibles

A particular sub-category of property is constituted by what are sometimes described as “documentary intangibles”: Goode on Commercial Law (4th edn) p32 and Bridge: Personal Property Law (3rd edn) p6. They have a somewhat hybrid nature. Goode describes documentary intangibles as “rights to money, goods or securities which are ”locked up” in paper in such a way that the document is considered to represent the right, which thus becomes transferable by transfer of the document itself. These include documents of title to the payment of money (instruments) (including bills of exchange, promissory notes and cheques), to negotiable securities (eg bearer bonds and notes) and to goods (eg bills of lading). Documentary intangibles that can be transferred by endorsement (rather than mere delivery) are termed “negotiable”. According to Goode, the significance of “documentary intangibles” is that the document which evidences the rights is itself to be equated with goods and is susceptible to the same remedies for specific delivery and damages for conversion. Halsbury’s Laws (4th edn) Vol. 35 para 1205 describes a bill of exchange or promissory note as partly a chose in possession and partly a chose in action. The debt secured by them is a chose in action, but the actual document is a chose in possession. They can be the subject of an action for conversion, because of the chose in possession aspect of their nature: see Clerk & Lindsell on Torts (20th edn) §§17-34 and 17-37.

The precise nature of an EUA

As a matter of substance, I do not consider that the holder of an EUA has a “right” which he or she can enforce by way of civil action. It is not a “right” (in the Hohfeldian sense) to which there is a correlative obligation vested in another person. It does not give the holder a “right” to emit CO2 in this sense. Rather it represents at most a permission (or liberty in the Hohfeldian sense) or an exemption from a prohibition or fine. But for the entitlement to the EUA, the holder would either be prohibited from emitting CO2 beyond a certain level or at least would be required to pay a fine if he did so. In this way, the holding of the EUA exempts the holder from the payment of that fine.

An EUA is a creature of the ETS. As a matter of form an EUA exists only in electronic form. It is transferable automatically by electronic means within the registry system. Under the ETS legislation it is transferable under the terms of the ETS Directive. It has economic value, first because it can be used to avoid a fine, and secondly, because there is an active market for trade in EUAs. The evidence before me establishes that substantial amounts of money change hands between a transferor and a transferee. Each EUA has its own unique number and can be located by reference to that number.

EUA as property

Applying the test enunciated by Lord Wilberforce in NPB v Ainsworth, in my judgment, an EUA is “property” at common law. It is definable, as being the sum total of rights and entitlements conferred on the holder pursuant to the ETS. It is identifiable by third parties; it has a unique reference number. It is capable of assumption by third parties, as under the ETS, an EUA is transferable. It has permanence and stability, since it continues to exist in a registry account until it is transferred out either for submission or sale and is capable of subsisting from year to year.

EUA as tangible property

There are elements of an EUA which might suggest that it is property akin to a chose in possession. Certainly if represented by a physical certificate (as opposed to a purely electronic document), it might well be said that, to that extent, an EUA was a chattel or at least a documentary intangible, and on that basis, capable of being subject to a claim for conversion. Furthermore, each EUA is unique and specifically identifiable, by a specific number. For my part, I can see arguments why they might be regarded as similar to, or a modem version of, a chose in possession. However, ultimately it was not contended by either party, and I am not prepared to find, that, on the present state of the law, an EUA is a chose in possession. Whilst there has been debate in the context of electronic bills of lading and other electronic documents, the current state of the law has not developed to the point where something which exists in electronic form only is to be equated with a physical thing of which actual possession is possible.

EUA as intangible property

Rather I am satisfied that an EUA is “intangible” property. Three decided cases are of particular relevance to this issue: A-G for Hong Kong v Nai-Keung [1987] 1 WLR 1339, In Re Rae [1995] BCC 102, and most significantly In re Celtic Extraction [2001] Ch 487. A fourth case, Swift v Dairywise Farms Ltd [2000] 1 WLR 1177 provides further insight, both generally and in the context of trust property. For present purposes, it is necessary to refer in detail only to these latter two cases.

In re Celtic Extraction concerned waste management licences granted pursuant to a statutory scheme for waste management under the Environmental Protection Act 1990. The issue was whether such a licence constituted “property” for the purposes of s.436 Insolvency Act 1986. Section 436 provides that “property” includes money, goods, things in action, land and every description of property wherever situated…”

Addressing this issue, Morritt LJ (as he then was) referred first to both the Nai-Keung and Rae cases in the following terms:

“In Attorney General of Hong Kong v Nai-Keung [1987] 1 WLR 1339 the Privy Council considered that textile export quotas were property within the definition in the Theft Ordinance of Hong Kong and therefore capable of being stolen. The definition was: “property includes money and all other property, real and personal, including things in action and other intangible property.” The export of textiles from Hong Kong was prohibited except under licence. A licence would be granted to the holder of a valid quota allocation certificate. Such quotas were registered with the Department of Trade and Industry and were transferable for valueeither temporarily or permanently. The Judicial Committee considered that the benefit of an export quota was not a thing in action but was a form of “other intangible property”. As Lord Bridge of Harwich observed, at p 1342:

“In summary, to be registered as the holder of an appropriate quota is a prerequisite to obtaining an export licence; it confers an expectation that, in the ordinary course, a corresponding licence will be granted, though not an enforceable legal right …It would be strange indeed if something which is finely bought and sold… were not capable of being stolen.”

A similar conclusion was reached by Warner J in In re Rae [1995] BCC 102. In that case a bankrupt had been licensed under the Sea Fish (Conservation) Act 1967 in respect of four fishing vessels. The licences terminated on his bankruptcy. But the Ministry of Agriculture, Fisheries and Food, the department which issued such licences, recognised an “entitlement” in the holder or the person to whom he “waived” his entitlement to be considered for the grant of new licences. Such an entitlement had value. The question was whether the benefit of the entitlement remained with the bankrupt or passed to his trustee for the benefit of his creditors. Warner J decided that the “entitlement” was within the definition of “property” as a present interest in property, namely the vessels. He considered it to be immaterial that the entitlement was also incidental to other things, such as the exercise of the minister’s discretion”

Morritt LJ then referred to the Australian case of Commonwealth of Australia v WMC Resources Ltd (1998) 194 CLR 1, concerning petroleum exploration permits, as follows:

“By the time this case reached the High Court of Australia it was common ground that a permit to explore for petroleum in an area in the continental shelf granted under the Petroleum (Submerged Lands) Act 1967 was property within the meaning of the Petroleum (Australia-Indonesia Zone of Cooperation) (Consequential Provisions) Act 1990 which required the Commonwealth to provide “just terms” for any acquisition of property. Brennan CJ indicated his agreement with the views of the lower courts. He observed, at pp 13-14:

“Those rights were susceptible of exercise during the currency of the permit. As a permit may be transferred and interests in a permit may be created or assigned subject to approval, the interests of the permittee and the interests of WMC were susceptible of sale and assignment. These qualities of the permit and WMC’s interest in it are indicative of the proprietorial character of the rights possessed respectively by the permittee and WMC.”

Toohey J, at p 27, cited with approval the test applied by Black CJ in the court below, namely: “the rights … were clearly identifiable, assignable, stable, potentially of very substantial value and were not, because of their statutory foundation, inherently defeasible

Morritt LJ concluded by identifying a three fold test for property in the following terms:

“It appears to me that these cases indicate the salient features which are likely to be found if there is to be conferred on an exemption from some wider statutory prohibition the status of property. First, there must be a statutory framework conferring an entitlement on one who satisfies certain conditions even though there is some element of discretion exercisable within that framework: Attorney General of Hong Kong v Nai-Keung [1987] 1 WLR 1339; In re Rae [1995] BCC 102; Commonwealth of Australia v WMC Resources Ltd 194 CLR 1. This condition is satisfied by the provisions of sections 35(2), 36(3) and 43 of the Environmental Protection Act 1990. Second, the exemption must be transferable: National Provincial Bank Ltd v Hastings Car Mart Ltd [1965] AC 1175; Attorney General of Hong Kong v Nai-Keung [1987] 1 WLR 1339; Commonwealth of Australia v WMC Resources Ltd 194 CLR 1; de Rothschild v Bell [2000] 2 QB 33. This is satisfied by the terms of section 40(1) of the 1990 Act. The requirement that the transferor and transferee should join in the application demonstrates the transferability of the waste management licence even though it takes the form of a surrender and regrant by the agency. Third, the exemption or licence will have value: Attorney General of Hong Kong v Nai-Keung [1987] 1 WLR 1339; In re Rae [1995] BCC 102; Commonwealth of Australia v WMC Resources Ltd 194 CLR 1. In In re Mineral Resources Ltd [1999] 1 All ER 746, 753, Neuberger J commented that there is a market in waste management licences. There was no evidence to that effect in these cases and the agency did not agree that there was any market. However it was common ground that money does change hands as between transferor and transferee. Further the very substantial fees the agency is entitled to charge and in fact receives is a good indication of the substantial value a waste management licence possesses for the owners or occupants of the land to which it relates.

In my view a waste management licence comes within the definition of “property” contained in section 436 of the Insolvency Act 1986. It is in my view “property”properly so called. In the alternative I consider that it is an ” interest… incidental to, property,” namely the land to which it relates.”

In Swift v Dairywise, the question was whether milk quota under the EU legislative regime was property which could be held on trust (i.e in which equitable interests could subsist). Under the scheme, a holder of “quota” was exempt from a levy which would otherwise be payable in respect of milk production. Quota could only be attached to a holding of land from which milk could be produced. The issue was whether a farm company which did have a land holding could be said to hold that quota on trust for its sister company which did not have any such land holding. Jacob J held that quota could be subject to a trust, applying in the course of his analysis, the reasoning in In re Celtic Extraction. He said (at 1183H-1184C and 1184G-1185C):

“The first question therefore is whether quota can be the subject of a trust. The respondents submit that it is not by its nature capable of forming the subject matter of a trust. They say this follows because it is not a free standing and finely marketable asset. Because it is merely an exemption from a levy and must be attached to a producer’s holding, it cannot be held by a producer on trust.

I reject those submissions. Quota has commercial value and a legal effect. Merely because there are limitations on how it may be held or conveyed is not a reason for equity to refuse to impose a trust where conscience so requires. Take a simple case. A asks B, who has a euroholding, to acquire quota for him and to hold it on trust. He pays B to do so and B duly acquires quota. It seems to me elementary that A can call upon B to deal in that quota in any manner permitted by the rules applicable to quota. A, assuming he has no euroholding, could not require B to transfer the quota to him but he could require B to realise the quota and transfer the proceeds to him. And if A acquired a euroholding he could call upon B to set in train the machinery described by Rattee J. for transfer to A’s euroholding

…

I am reinforced in my conclusion by the reasoning in In re Celtic Extraction Ltd…

All of those tests [identified by Morritt LJ] are satisfied by quota. It is “property ” within the statutory definition. I can see no reason why equity, by analogy, should not also treat quota as “property'” capable of being the subject of a trust and every reason as to why it should. The fact that quota must be attached to land merely means that the trustee (who necessarily will also hold the land) cannot deal in his land as though the trust was non­existent. But that is a consequence of his becoming a trustee, not a reason for equity to say there cannot be a trust. And there really is no hardship – after all he can free any particular parcel of land from the quota by use of the established methods by which farmers deal in quota. “

Conclusion

Thus in my judgment, applying the three fold test identified by Morritt LJ in In re Celtic Extraction leads to the conclusion that an EUA is certainly “property” and intangible property under the statutory definition there in place. First, there is, here, a statutory framework which confers an entitlement on the holder of an EUA to exemption from a fine. Secondly, the EUA is an exemption which is transferable, and expressly so, under the statutory framework. Thirdly the EUA is an exemption which has value: see paragraph 49 above.

Whilst the cited case law concerned the meaning of “property” as specifically defined in various statutes, in my judgment, the reasoning of Morritt LJ applies equally to the characteristics of property at common law. Indeed, Morritt LJ himself relied upon National Provincial Bank v Ainsworth. Moreover the terms used in statutory definitions are themselves derived from common law concepts – for example in In re Celtic, the s.436 statutory definition refers to “things in action” and “every description of property”; the meaning of these terms, in turn, must be derived from the common law notion of “property”. Further, applying the reasoning of Jacob J in Swift v Dairywise, an EUA is also capable of forming the subject matter of a trust and thus something in which equitable ownership can be held. There is a close analogy between the exemption conferred by milk quota and the exemption conferred by an EUA. Accordingly an EUA constitutes “property” and it is “intangible property”.

The final issue here is whether an EUA is to be regarded as a “chose in action” or, instead, some form of other intangible property. Armstrong suggests it may be a “chose in action”; Winnington contends strongly that it cannot be a chose in action. On the one hand, in Nai-Keung, the Privy Council concluded that the quota there was not a chose in action, but rather fell within the term “other intangible property” as that term appeared in the statutory definition in that case. On the other hand, in In re Celtic Extraction, the statutory definition in question did not have such an additional category of property, but was confined to “things in action” and “every description of property”. Morritt LJ did not specify into which of these two categories the waste management licence fell.

In my judgment, strictly an EUA is not a chose in action in the narrow sense, as it cannot be claimed or enforced by action. However to the extent that the concept encompasses wider matters of property, then it could be so described. For reasons set out below, ultimately I do not consider that it matters whether an EUA is a chose in action or merely some form of “other intangible property”.

(B)       Common law claims

Two distinct claims?

Mr Harris puts Armstrong’s case for “restitution” at common law on two distinct bases: a “proprietary restitutionary claim” to vindicate the claimant’s persisting legal property in the EUAs, and alternatively, a claim in restitution for “unjust enrichment”. Decided cases and some leading authors and textbooks make the distinction between these two types of claim: see, in particular, Trustee of FC Jones and Foskett v McKeown [2001] 1 AC 102 and Chitty on Contracts (30th edn) (chapter editor G. Virgo) Vol 1 §§29-010, 29-017, 29-158 and 29-170 to 171 and Goff and Jones: The Law of Restitution (7th edn) Chapter 2, and in particular §§2-003 and 2-004. Dr Lionel Smith in his book Smith: The Law of Tracing (1997) distinguishes (at pp285- 286) between “Type A claims” and “Type B claims”, which correspond, respectively, with restitution for unjust enrichment and proprietary restitutionary claim. He describes a “Type B claim” as a personal claim which depends for its creation on the prior violation of (or interference with) a proprietary right, and cites a claim for the tort of conversion as an illustration of such a Type B claim (as indeed does Chitty §29-170).

Restitution for unjust enrichment is based upon the notion that the defendant has been “enriched” at the claimant’s expense. It gives rise to a personal remedy to disgorge or pay the amount of the enrichment to the extent that it is unjust. By definition, such a claim would suggest that the claimant has lost, and the defendant has gained, property in a relevant asset. By contrast, a proprietary restitutionary claim is based on the notion that the claimant has, at all times, retained legal title to the relevant asset, which asset has been transferred away from the claimant and it (or its substitute) has found its way into the hands of the defendant. Here the claimant can claim restitution of value from the indirect recipient of the asset, regardless of the fact that the recipient has not retained the assets or its substitute: Chitty, supra, §§29-158 and 29-170. In this way the claim is described as “proprietary” even though the remedy remains “personal”. The distinction between the two types of claim is made at its clearest, by Lord Millett in Foskett v McKeown, supra, in the passage headed “The cause of action” set out in paragraph 81 below.

This analysis has not been universally accepted by leading academic commentators. The other school of academic thought disputes the existence of such a clear separation of these two types of claim, considering, instead, that the claims are both aspects of “unjust enrichment”: see Burrows: The Law’ of Restitution (3rd edn) Chapters 8 and 16,     and especially at pp l68-172. Much of the debate has centred upon analysis of the House of Lords decision in Lipkin Gorman and in particular whether it is a case of “unjust enrichment” or a case of a “proprietary restitutionary claim”. That issue in turn gives rise to debate about the nature of the defences available to such a claim.

Following and tracing

A key element in the leading cases and academic analysis is the concept of, and effect of the rules on, “tracing”. Many of the cases involve claims in respect of an asset in the hands of the defendant which asset is not the original asset held by the claimant. Two points are now clearly established. First, “tracing” is neither a basis for a claim (or a cause of action) nor a remedy granted by a court. Rather it is a means, or process, of identifying an asset as being a substitute for an asset originally held by the claimant. It is a “step along the way” in the bringing of a claim. Secondly, “tracing” is to be distinguished from “following”. Burrows, supra, at pi 17, puts this distinction in this way:

“Following refers to where there is no substitution of an asset, merely a change of personnel: for example B steals A’s bike and gives it to C and C gives it to D. The asset is the original asset and it is that which is being followed into different hands”

These points are made by Lord Millett in Foskett v McKeown (at 127B-C and 128D- E):

“Following is the process of following the same asset as it moves from hand to hand. Tracing is the process of identifying a new asset as the substitute for the old’

“Tracing is also distinct from claiming … It enables the claimant to substitute the traceable proceeds for the original asset as the subject matter of his claim. But it does not affect or establish his claim”

In my judgment, this distinction is very important in the present case. Initially, Armstrong put its case on the basis that the EUAs which were received by Winnington on 28 January 2010 into its registry account were different EUAs from those which had been lodged in Armstrong’s account, and, in this way, were “substitutes” for Armstrong’s EUAs. Accordingly in the Particulars of Claim and in opening submissions, some emphasis was placed on the concept of “tracing”. However in Mr Harris’ final submissions, this distinction was not emphasised and it appeared to be accepted that the EUAs in the two accounts were the same EUAs. In my judgment, given the unique reference number of each EUA, and their transferability between accounts, a specific numbered EUA transferred from one registry account to another constitutes the same “asset” or item of property. (This is confirmed by the evidence of Mr Pursell at paragraph 10 of his witness statement). Thus, to the extent that Armstrong’s claim is based upon receipt by Winnington of the EUAs into its account, then that claim does not involve any question of tracing, but rather it is a case of “following” the original asset.

On the other hand, to the extent that Armstrong’s claim is made in respect of the proceeds of Winnington’s onward sale of the EUAs to TFS Green (in the sum of €271,266.25), then such a claim would necessarily involve “tracing” the EUAs into the money or chose in action which represents those proceeds.

By contrast, the three leading cases, central to the debate as to the nature of the common law restitutionary claims, each involved “tracing” properly so called. The asset or property received by the defendant was not the same asset in respect of which the claimant had originally held property. Burrows, supra, at pl22, a proponent of the “unjust enrichment” analysis of these cases, nevertheless accepts that, in a “following” case the claimant is asserting a pre-existing property right in the original asset and for that reason the claim does indeed fall outside the law of unjust enrichment, and rather truly within the sphere of property law, on the basis of the vindication of property rights.

The three leading cases

I turn to address the three principal cases relevant to the common law claims.

Lipkin Gorman v Karpnale

Cass, a partner in the plaintiff firm of solicitors, drew cash, without authority, from the firm’s client account at a bank. He then took that cash to the defendant gambling club, where he gambled away most of the cash (although he did receive back some winnings). The solicitors brought an action against the club seeking to recover the moneys which Cass had stolen. The contracts between Cass and the club were held to be void as gaming and wagering contracts. The House of Lords held that the firm was entitled to trace its original property subsisting in the chose in action, constituted by its bank balance, into its product, the cash held by Cass, which was then paid over to the defendant club. On that basis, the firm was entitled to recover the money from the club, to the extent of the club’s winnings from Cass. The House of Lords recognised, in general, the defence of change of position to a claim for restitution based on unjust enrichment, and held, on the facts that, to the extent that the club had paid out gambling winnings to Cass, the club was entitled to rely on such a defence. The House of Lords further held that, on the facts, the club had not given “valuable consideration” for the cash it received from Cass, because of the fact that the contract between Cass and the club was a gaming and wagering contract rendered void by statute.

I make the following observations on Lipkin Gorman. First, it was a claim based on “tracing”. The solicitors’ original asset was the chose in action represented by its own bank balance. They then “traced” their property rights in that asset into the cash which Cass obtained as the proceeds of the cheque.

Secondly, the case was special on its facts, because of the invalidity of the contractual arrangements between Cass (B) and the club (C). So in fact, the club gave “no consideration” for Cass’s cash and was in the position of a “donee” from B. On that basis, the club was “enriched” at the solicitor’s expense. Lord Templeman’s view, at least, was that if it had given valuable consideration, it would not have been enriched at all and, it is certainly arguable, that there could have been no case of unjust enrichment at all: see in particular at 560A-B and 566G-H.

Thirdly, their Lordships in terms characterised the claim as being a claim in “unjust enrichment at the solicitor’s expense”: see Lord Templeman at 559E-560A, 566H and Lord Goff at 572E, 577H and 578C-E. Further the solicitors’ claim in these circumstances was stated to be a common law action for money had and received, in respect of the cash in the hands of the club.

Fourthly, however, a crucial element in Lord Goffs analysis was that the solicitors had legal title, not only to the original chose in action, but also to the cash held by Cass and given to the defendant club: se 572B-C, F and H. For this reason, those who support the distinction between the two types of claim (see paragraph 62 above) consider that Lipkin Gorman is, in substance, a case of a “proprietary restitutionary claim”: see Chitty, supra, at §29-174 fn 977. Mr Harris submitted, and Mr Joffe did not seriously dispute, that the subsequent analysis of Lord Millett in Trustee of FC Jones and Foskett represents the current state of the law. These cases vindicated the academic view that Lipkin Gorman is in substance a case of a “proprietary restitutionary claim” and not a claim for restitution for unjust enrichment. In this regard, Mr Harris pointed in particular to the analysis of Professor Virgo in Principles of the Law of Restitution (2nd edn) at p.645-646. On the basis that this analysis currently represents the law as a matter of decided authority, I accept this submission.

Finally I deal below with what was said in Lipkin Gorman about the defences of change of position and bona fide purchase for value.

Trustee of FC Jones & Sons v Jones

FC Jones & Sons was a firm of potato growers that went into bankruptcy. After the act of bankruptcy but before adjudication, the defendant, the wife of one of the partners, received the proceeds of cheques to the value of £11,700 drawn by her husband on a partnership bank account and invested them with commodity brokers for dealing in potato futures. The defendant then received £50,760 from those dealings by the brokers and paid the sum into her own bank account at Raphael’s bank. The firm’s trustee in bankruptcy claimed the sum of £50,760 from Raphael’s. Raphael’s then interpleaded and paid the sum into court.

The Court of Appeal upheld the trustee in bankruptcy’s claim to the entire amount (including the profit made from futures dealing), holding that the defendant wife had never had any title at all to the original sum or the enhanced sum. The trustee’s claim arose at common law; he could trace his original property in the chose in action, represented by the balance in the partnership bank account, into the proceeds of the defendant’s dealings with the money, and into the balance at the Raphael’s bank. Millett LJ, giving the leading judgment, held (at 164E-H, 166H-167B and 168C-D) that the plaintiffs claim was based in common law and not equity. The plaintiff had retained legal title to the relevant assets throughout. By contrast the husband and the defendant never obtained any title and had not been constituted a constructive trustee. Millett LJ further held (at 170F) that the appropriate cause of action was simply an action for debt against Raphael’s bank, and, specifically, (at 164G-H, 168E-G) was not a claim for money had and received. It was a proprietary claim as distinct from a claim for money had and received. By contrast, Nourse LJ (at 172C-F) considered that the claim was a claim for money had and received, but did not go further to explain the legal basis for his view that the claim was based on “conscience”.

It is particularly worthy of note that the asset in respect of which the trustee eventually asserted his claim was the balance standing in the defendant’s name at Raphael’s bank, i.e. a chose in action: see per Millett LJ at 163D,167A-B 170F-G and Beldam LJ at 171H. As it was put at 170F, the issue was whether the trustee (or the defendant) had legal title to the chose in action in the Raphael’s account. (Although ultimately by way of the interpleader proceedings, the bank paid the balance as moneys into court). Finally, I note that Beldam LJ (at 171G-H) cites Lipkin Gorman as authority for a claim arising on the basis of vindication of legal property rights.

Foskett v McKeown

A Mr Murphy effected a whole-life policy held on trust for his children. Before he died, five premiums had been paid, some of which had been paid from deposits which he held on trust for the claimants, who were potential purchasers of land in Portugal. The House of Lords held that the policy moneys paid on Murphy’s death were held on trust for the claimants and Murphy’s children pro rata according to their respective contributions to the premiums. The claimants could trace their moneys into the premiums and the insurance policy (a chose in action) and then into the insurance moneys held in the policy trustees’ bank account. It is worth noting again, that the claimants could trace their property rights from one chose in action to another and that the claim they made was a claim against the balance standing to the credit of the defendant policy trustees in their bank account, another chose in action.

Lord Millett gave the leading speech of the majority. After examining the nature of tracing and following, he held that the cause of action was one based on vindication of property rights and not one based on restitution for unjust enrichment. He said (at 127D-F, 128F-G and 129 D-H):

“Having completed this exercise, the plaintiffs claim a continuing beneficial interest in the insurance money. Since this represents the product of Mr Murphy’s own money as well as theirs, which Mr Murphy mingled indistinguishably in a single chose in action, they claim a beneficial interest in a proportionate part of the money only. The transmission of a claimant’s property rights from one asset to its traceable proceeds is part of our law of property, not of the Iom> of unjust enrichment. There is no “unjust factor” to justify restitution (unless “want of title” be one, which makes the point). The claimant succeeds if at all by virtue of his own title, not to reverse unjust enrichment. Property rights are determined by fixed rules and settled principles. They are not discretionary. They do not depend upon ideas of what is “fair, just and reasonable”. Such concepts, which in reality mask decisions of legal policy, have no place in the law of property.

…

The successful completion of a tracing exercise may be preliminary to a personal claim (as in El Ajou v Dollar Land Holdings plc [1993] 3 All ER 717 ) or a proprietary one, to the enforcement of a legal right (as in Trustee of the Property of F C Jones & Sons vJones [1997] Ch 159 ) or an equitable one.

…

The cause of action

As I have already pointed out, the plaintiffs seek to vindicate their property rights, not to reverse unjust enrichment. The correct classification of the plaintiffs’ cause of action may appear to be academic, but it has important consequences. The two causes of action have different requirements and may attract different defences.

A plaintiff who brings an action in unjust enrichment must show that the defendant has been enriched at the plaintiffs expense, for he cannot have been unjustly enriched if he has not been enriched at all. But the plaintiff is not concerned to show’ that the defendant is in receipt of property belonging beneficially to the plaintiff or its traceable proceeds. The fact that the beneficial ownership of the property has passed to the defendant provides no defence; indeed, it is usually the very fact which founds the claim. Conversely, a plaintiff who brings an action like the present must show that the defendant is in receipt of property which belongs beneficially to him or its traceable proceeds, but he need not show that the defendant has been enriched by its receipt. He may, for example, have paid full value for the property, but he is still required to disgorge it if he received it with notice of the plaintiff’s interest.

Furthermore, a claim in unjust enrichment is subject to a change of position defence, which usually operates by reducing or extinguishing the element of enrichment. An action like the present is subject to the bona fide purchaser for value defence, which operates to clear the defendant’s title. “

Lord Hoffmann (at 115G) and Lord Browne-Wilkinson (at 108F-G) both expressly endorsed Lord Millett’s view that the claim was one to vindicateproperty rights, and not a claim in unjust enrichment.

Whilst it is the case that on the facts the claimants were seeking to enforce their equitable property rights (arising under the pre-existing trust of their purchase moneys), it seems to me that there is no reason why the distinction drawn by Lord Millett between the two types of action does not apply with equal force where the claimant is seeking to enforce his subsisting legal title to property. Lord Millett’s first statement (at 127E-F) about the nature of a claim based on property rights is general in nature, and not confined to beneficial ownership only. Moreover, his general observation (at 128F-G), referring to Trustee of FC Jones as a claim to enforce a legal right, is made as one example, amongst others, of the type of claim he is considering.

The Proprietary Restitutionary Claim

In my judgment, on the current state of the authorities and in particular the three leading cases referred to above, there is a basis of claim which can conveniently be labelled a “proprietary restitutionary claim” which is distinct from a claim for restitution on grounds of unjust enrichment. Burrows, a proponent of the contrary argument, concedes (at pp 170-171) that the effect of Lord Millett’s speech in Foskett v McKeown is in line with Professor Virgo’s analysis and makes acceptance of his own view “more difficult”.

The essence of such a claim at common law is that the claimant is seeking to enforce his subsisting legal property rights in an asset held by the defendant. The asset in respect of which the claimant is asserting a claim may be identified by “following” the claimant’s original asset into the defendant’s hands or by “tracing” it into a substitute asset in the defendant’s hands. Furthermore, in a case of “following”, where the asset claimed is the claimant’s original asset, there is no scope for the conceptual difficulties identified in the academic debate surrounding the “tracing” claims.

This type of claim does not arise where the relevant asset is a chattel or land or even a documentary intangible, because there are other distinct causes of action in tort covering these types of property. It does arise where the asset in the hands of the defendant is money (possibly, under the old common law action for money had and received).

Mr Joffe however submits that, whatever the position as regards money, there is no authority for there being such a basis of claim (or cause of action) where the asset in respect of which the claimant brings his claim is a chose in action or other intangible property. In such a case, he submits, there is no identifiable “cause of action” known to law. The only possible cause of action is “money had and received” and that only applies to money in the hands of the defendant. (The issue is not, as Mr Harris suggested, the nature of the original asset, but the nature of the asset received by the defendant) There is, he submits, no warrant for extending the law to cover such a cause of action, particularly in the light of the firm view of the majority in the House of Lords in OBG v Allan, supra, rejecting the possibility of there being a common law claim for conversion of a chose in action.

I do not agree with this submission. In my judgment, there is no reason why, in an appropriate case, a claimant does not have a personal claim at law to vindicate his legal proprietary rights in respect of a chose in action or form of other intangible property. Nor does any authority preclude such a claim.

First, Trustee of FC Jones positively supports the existence of such a claim. The claim there was a common law proprietary restitutionary claim. The asset in respect of which the claimants (originally) asserted their legal title was balance of sums standing in the bank account at Raphael’s bank. That was a chose in action. It was not money.

Secondly, I do not accept that the proprietary restitutionary claim has to be characterised as, or brought in the form of, an action for money had and received. It is no longer necessary to fit any particular claim into any particular “form” of action: see Letang v Cooper [1965] 1 QB 232. What is required is a legal basis for a claim (or cause of action). That there is such a legal basis is established by Trustee of FC Jones case (and probably also Lipkin v Gorman). In fact, Millett LJ, giving the leading judgment in Trustee of FC Jones indicated expressly that the claim is not an action for money had and received, but rather a claim in simple debt. On the other hand, Nourse LJ in his judgment did describe the claim as being one for money had and received. This observation was not accompanied by any detailed analysis, nor did he give any specific consideration as to why he considered that an action for money had and received could lie in respect of a chose in action (which, on analysis, he did). Nevertheless the “label” or “form” of the action does not matter. Even though Millett LJ and Nourse LJ appeared to disagree about the “label” or “form”, it is clear that the Court of Appeal held, unanimously, that there was a legal basis of claim (a cause of action).

Thirdly, the issue has been addressed by Dr Smith in his textbook The Law’ of Tracing (cited with approval by Lord Millett in Foskett v McKeown). Dr Smith says (p337) of a claimant’s legal proprietary right into traceable proceeds:

“It is a property right less than ownership, which does not carry with it a right to immediate possession; hence it will not generate liability in conversion. Moreover, although it will generate a Type B personal liability in money had and received on the part of a subsequent recipient, it will not generate that liability on the part of a trustee in bankruptcy…. Of course, the cases involve money, since they are about money had and received… But it would be possible for another type of case to arise: for example, assume that in Lipkin Gorman, the rogue Cass had used the withdrawn money to buy a car. If he gave it away, it might be appropriate for the donee to be liable, but if he sold it for value to a good faith buyer, it might not.”

Dr Smith then footnotes the words “donee to be liable” in the last sentence with the following comment:

‘In such a case, the form of action in money had and received might be inappropriate. In the old language, the plaintiff could use another sub­category of indebitatus assumpsit, namely quantum valebat, meaning „as much as it was worth ” This can be seen roughly as “goods had and received”

Dr Smith (at p372) further discusses the nature of the common law claim which arises upon receipt of the claimant’s property:

“It is … unclear whether this limited common law proprietary right can be asserted in respect of a subject matter other than money. For example, assume that if someone gets hold of the plaintiff’s car, sells it, and gives the proceeds to the defendant, the defendant is liable to the plaintiff in money had and received. Assume instead that someone gets hold of the plaintiffs money, and uses it to buy a car which he then gives to the defendant. If we want money and other assets to be treated alike, then it appears that this should generate a Type B liability on the part of the defendant. It may be that such a claim could be framed as one in “goods had and received”, or perhaps, to use the old language, quantum valebat. Again, it might also be possible that a claim in “goods had and retained”could be established so as to yield liability in the second measure.”

(emphasis added)

In these passages, Smith contemplates that a claim might lie for receipt of property other than money which are the traceable proceeds of the claimant’s legal property. Whilst he does not, in terms, address the position of intangible property other than money (nor consider the “label” of such a claim), nevertheless, in addressing the position in relation to goods, he is using “goods” as an example to illustrate a broader proposition of general application covering Type B claims (ie proprietary restitutionary claims) in respect of money and all other forms of assets.

Finally, the fact that there can be no claim in conversion in respect of choses in action or other intangibles does not mean that there can be no proprietary restitutionary claim in respect of choses in action or other intangibles. Conversion is a strict liability tort with no room for defences of bona fide purchase. That is not the position with a proprietary restitutionary claim. Lord Hoffmann’s observations in OBG v Allan (at §§95-97 and 102-106) on the statutory modification of the law of conversion and on the extension of conversion to documentary intangibles are to be seen in the context of whether, as a matter of policy, there should be strict liability in respect of such documents and thus for choses in action (and not whether there should be no claim at law at all). There is no reason why the law should provide protection for land, chattels, documentary intangibles and money but not for other intangibles.

In my judgment, as a matter of authority and principle, if and where legal title remains with the claimant, a proprietary restitutionary claim at common law is available in respect of receipt by the defendant of a chose in action or other intangible property.

Unjust enrichment claim

If, on the facts of the present case, there is a proprietary restitutionary claim, then in my judgment, there is no claim for restitution based on unjust enrichment. This follows from my acceptance of the two distinct types of claim, based on Lord Millett’s analysis in Foskett v McKeown and upon the view that Lipkin Gorman is a proprietary restitutionary claim. Based on that separation, the present case falls clearly on the side of being a proprietary restitutionary claim.

A key element of a claim based on unjust enrichment is that the defendant has been “enriched”. Where the defendant has given full value for the benefit received, it is hard to see that he has been enriched at all: see Lord Templeman at 560A-B. The present case is very different on the facts from Lipkin Gorman .

Further, the general rule is that a claim in unjust enrichment is only generally available where the benefit has been provided directly by the claimant to the defendant, and not where it has been provided indirectly via a third party. In the latter case, the defendant will have been enriched at the third party’s expense. Burrows, supra, pp75-76 identifies, as an exception to this rule, the case where the claimant has title and can trace through the third party. But this exception only applies if Burrows’ view of Lipkin Gorman is accepted and the proprietary restitutionary claim is not accepted as a separate claim.

So if, contrary to my conclusion above, Lipkin Gorman were to be correctly analysed as a restitutionary claim for unjust enrichment (because for example Foskett v McKeown cannot be said to apply to legal title, as opposed to equitable title), then I would have accepted that, in the present case, Armstrong’sclaim in the present case could have been made on this basis, if legal title to the EUAs did not pass to anyone.

Defences: Availability

(1)        Propriety Restitutionary Claim

I agree with Mr Joffe that bona fide purchase for value without notice is a defence to a proprietary restitutionary claim. As a matter of principle, given the proprietary nature of this cause of action, then bona fide purchase for value should be available.

In support of his argument, Mr Joffe relied heavily upon passages from the speeches of Lord Templeman and Lord Goff in Lipkin Gorman. I agree that certain passages in Lord Goffs speech (in particular at 571A, 572C-D, 577A-B, 580H-581 A) do support the argument. I am less sure about Lord Templeman’s speech. In my judgment the section of his speech dealing with this issue is in the context of the question whether, in that case, the defendant club could be said to have been “enriched” at all, for the purposes of a claim which he analysed in terms of unjust enrichment: see 560A and 560F. The question was whether the club had given good consideration for the benefit it received, and if it had, then it could not have been enriched.

Nevertheless, I consider that bona fide purchase is a defence to the proprietary restitutionary claim. First, Lord Millett took this view in clear terms in Foskett v McKeown (at 129D-H set out at paragraph 81 above). Secondly, that it should be a defence follows as a matter of principle from the proprietary basis of the claim: see Chitty, supra, §29-175. Thirdly, if, as I accept above, Lipkin Gorman is to be analysed in substance as a proprietary restitutionary claim, then, on the basis of Foskett, Lord Templeman’s analysis can and should properly be framed in terms of a defence of bona fide purchase for value. Fourthly, Goff & Jones, supra, §42-001 supports this conclusion.

Armstrong’s principal argument is that bona fide purchase operates to “clear” only equitable title and does not clear legal title (and that Foskett vMcKeown was, of course, a case based on assertion of equitable proprietary rights). However, on the basis that Lipkin Gorman is a proprietary restitutionary claim, and if, as I find, bona fide purchase for value was considered to be a defence in Lipkin Gorman, then if that defence had been established there, it necessarily would have cleared “legal title” because the plaintiff firm retained legal title and not just equitable title. Burrows ‘ view, supra, at pp.573-575 supports this analysis.

As regards change of position, whilst both counsel appear to accept that this too is a defence to a proprietary restitutionary claim, I am less sure. Change of position is essentially a defence to a claim for restitution based on unjust enrichment. Change of position was certainly discussed, and accepted in principle, as a defence in Lipkin Gorman. However Lord Goffs consideration of the defence was in the context of his view that the case was to be analysed as one of unjust enrichment. If Lipkin Gorman is in substance to be analysed as a proprietary restitutionary claim, then it does not follow, as a matter of principle, that change of position is or should be a defence to the latter form of claim. Lord Millett’s analysis in Foskett v McKeown (at 129H) and Chitty, §29-175 support this conclusion. It is hard to see why, if the defendant purchases with notice, he should still be able to rely on change of position to defeat the claimant’s legal title.

(2) Unjust enrichment

Change of position is a defence to a claim for restitution based on unjust enrichment. This is clearly established: see Lipkin Gorman and Foskett vMcKeown.

As regards bona fide purchaser for value as a defence to claim for unjust enrichment, it is plain that there are two schools of thought: see Burrows, supra, pp573-580. These two schools of thought mirror the two different views of the Lipkin Gorman case and the nature of the propriety restitutionary claim. If, as I consider, the law as it currently stands is that set out by Lord Millett in Foskett and there are two distinct strands of claim and, Lipkin Gorman is in substance a proprietary restitutionary claim, then in my judgment, bona fide purchase is not strictly a defence to an unjust enrichment claim. On this basis, in an unjust enrichment case, the passing of title to the defendant is the very basis for the claim in the first place. See Chitty supra §§29- 175 and Lord Millett in Foskett v. McKeown above.

Defences: content

(1)        Good faith change of position

Change of position is a defence to a common law restitutionary claim based on unjust enrichment. On the foregoing analysis that the common law claim here is a proprietary restitutionary claim, change of position does not arise in the present case. However, if that conclusion is wrong, and indeed in any event, one particular aspect of this defence, upon which I heard substantial argument, merits consideration: that is the issue of “good faith” or absence of it. Change of position is only available to a defendant who acted in good faith. The leading case on the content of “good faith” or its absence is the Niru Battery case and in particular the Court of Appeal’s approval of the first instance judgment of Moore-Bick J.

The Court of Appeal rejected a submission that bad faith or absence of good faith only arose if there was dishonesty. Conduct which was honest could nonetheless be in bad faith: see Clarke LJ at §§144 and 163 and Sedley LJ §§181 to 184. Clarke LJ (at §§164 and 165) then went on to address the content of the requirement of good faith, by expressly approving the following two passages from the judgment of Moore-Bick J:

“I do not think that it is desirable to attempt to define the limits of good faith; it is a broad concept, the definition of which, in so far as it is capable of definition at all, will have to be worked out through the cases. In my view it is capable of embracing a failure to act in a commercially acceptable way and sharp practice of a kind that falls short of outright dishonesty as well as dishonesty itself. The factors which will determine whether it is inequitable to allow the claimant to obtain restitution in a case of mistaken payment will vary from case to case, but where the payee has voluntarily parted with the money much is likely to depend on the circumstances in which he did so and the extent of his knowledge about how the payment came to be made. Where he knows that the payment he has received was made by mistake, the position is quite straightforward: he must return it. This applies as much to a banker who receives a payment for the account of his customer as to any other person: see, for example, the comment of Lord Mersey in Kerris on v Glyn Mills Currie & Co (1912) 81 LJKB 465, 472. Greater difficulty may arise, however, in cases where the payee has grounds for believing that the payment may have been made by mistake, but cannot be sure. In such cases good faith may well dictate that an inquiry be made of the payer. The nature and extent of the inquiry called for will, of course, depend on the circumstances of the case, but I do not think that a person who has, or thinks he has, good reason to believe that the payment was made by mistake will often be found to have acted in good faith if he pays the money away without first making inquiries of the person from whom he received it.”

“The need to make inquiries of Bank Sepah is not a matter to be viewed in terms of a duty owed by one banker to another; it is a matter to be viewed in terms of a duty of good faith which a person who has received a payment that he has good reason to think was made under a mistake owes to the person who made it. If under those circumstances the payee fails to make inquiry of the payer before disposing of the money he can properly be described as failing to act in good faith because he acts in the knowledge that he may be infringing the rights of another despite having the means of avoiding that consequence.”

(emphasis added)

Thus, bad faith is not limited to dishonesty, but is capable of embracing a failure to act in a commercially acceptable way and sharp practice of a kind falling short of outright dishonesty. Further, good faith might require a duty to make further inquiries, not only where the defendant has good reason to believe that the payment was made – in that case – by mistake, but where he thinks he has such good reason.

Mr Harris submitted that the duty to inquire based on Niru Battery arises not only where the defendant appreciates that a payment was mistaken, but where he ought to have so appreciated. He relied upon the decision in Jones v Churcher [2009] EWHC 722 (QB) [2009] 2 Lloyd’s Rep 94, where HH Judge Havelock Allan QC after setting out §164 of Niru Battery, continued at §46 of his judgment.

”’The principle which I derive from the Niru Battery case is that where the payee has sufficient knowledge of how the payment came to be made as to cause a reasonable person to doubt whether it was an intended payment, but does not have actual knowledge that it was a payment made under a mistake, good faith requires that he should at least make some inquiry into the circumstances before disposing of the money.”

However I accept Mr Joffe’s submission that “good faith” does not go so far as to require the making of inquiries which a reasonable person would have realised should be made, but which the defendant did not in fact so realise. Mere negligence is not sufficient to establish bad faith. Where Moore-Bick J referred to the payee having “good reason” to believe (or think), I consider that he was referring to what the payee actually knows or believes i.e. knowledge of circumstances which give rise to actual suspicion or doubt on the part of the payee. This is borne out by the fact that he was referring to the payee who had “grounds for believing … but cannot be sure”. If, which I am not sure is the case, HH Judge Havelock Allan QC was referring to doubts that would have been caused to the reasonable person but not to the payee himself, then I do not think that this gloss on Niru Battery is borne out by Moore-Bick J’s judgment.

(2)        Bona fide purchaser for value

In order to establish this defence, the defendant must show a purchase for value of the legal estate in property in good faith and without notice: Lewin on Trusts (18th edn) §41-114.

In present case, the key element is “notice”. I make two initial observations. First, there is little authority on the concept of notice where bona fide purchaser is relied upon as a defence to a common law claim to defeat legal title. Most, if not all, of the authorities relate to cases where bona fide purchase is relied upon in equity to defeat equitable title. Secondly, there is often an overlap between, and sometimes a mixing of, the concept of “notice” for this defence and the concept of “knowledge” in the context of knowing or unconscionable receipt of trust property. However in present circumstances, I do not consider that there is any relevant distinction to be drawn between “notice” and “knowledge”: see further on this Lewin, supra, §§42-50 and 42-56.

Much of the argument has centred upon the well known classification of five types of knowledge (or notice) identified by Peter Gibson J in the Baden case, supra. Those five types are (1) actual knowledge (2) wilfully shutting one’s eyes to the obvious (3) wilfully and recklessly failing to make such inquiries as an honest and reasonable man would make (4) knowledge of circumstances which would indicate the facts to an honest and reasonable man; and (5) knowledge of circumstances which would put an honest and reasonable man on inquiry. Commonly, types (1) to (3) are regarded as forms of “actual knowledge” or notice and types (4) and (5) are regarded as forms of “constructive knowledge” or notice.

Both parties accept that Baden types (1) to (3) knowledge (or notice) constitute “notice” so as to defeat the bona fide purchaser defence. There is a dispute as to whether, and to what extent, other lesser degrees of knowledge do so too. Armstrong contends that Baden types (4) and (5) are sufficient. Winningtoncontends that they are not enough; or alternatively if they are, then only in limited circumstances.

Lewin, supra, §41-131 (cited by both parties) considers that the rules concerning “notice” require special consideration in the context of commercial transactions. As regards “constructive notice” in the commercial context, Lewin states:

“the purchaser may be fixed with notice, in the absence of actual knowledge, only where in the particular commercial context involved he has failed to draw inferences which ought reasonably to have been drawn in that context or has been put on inquiry by knowledge of suspicious circumstances indicative of wrongdoing on the part of the transferor, but has failed to make inquiries that are reasonable in the circumstances.”

Lewin, in a footnote to this passage, then cross-refers forward to §42-58 of the text (in a section dealing with “knowing receipt”). §42-58 again states that the rules about knowledge in the context of commercial transactions are different:

“One view is that in the context of commercial transactions knowledge within types (1) to (3) of the Baden classification is requisite; the alternative view is that, while types (4) and (5) knowledge are sufficient, the inferences which should be drawn and the inquiries which should be made must be considered in the particular context involved and it is only if in that particular context the inquiries in question ought reasonably to be made that the defendant may be fixed with knowledge [citing here Macmillan v BIT]. Even if types (4) and (5) knowledge suffice in the commercial context, this may be only where the facts actually known to the defendant point to the probability (as distinct from the possibility) of a breach of trust and where the defendant has been guilty of commercially unacceptable conduct in the particular context involved”.

The reference to “commercially unacceptable conduct” is derived from the view of Knox J in Cowan de Groot Properties v Eagle Trust plc [1992] 4 All ER 700 at 761 h-j.

The application of the concept of notice in a commercial context was considered by Millett J in Macmillan Inc v Bishopsgate Investment Trust plc (No 3) [1995] 1 WLR 978 at 1014.

“Worse still, Macmillan attempted to establish constructive notice on the part of each of the defendants by a meticulous and detailed examination of every document, letter, record or minute to see whether it threw any light on the true ownership of the Berlitz shares which a careful reader — with instant recall of the whole of the contents of his files — ought to have detected. That is not the proper approach. Account officers are not detectives. Unless and until they are alerted to the possibility of wrongdoing, they proceed, and are entitled to proceed, on the assumption that they are dealing with honest men. In order to establish constructive notice it is necessary to prove that the facts known to the defendant made it imperative for him to seek an explanation, because in the absence of an explanation it was obvious that the transaction was probably improper. In this regard it is necessary to bear in mind what Bowen L.J. said in Sanders Bros. v. Maclean & Co. (1883) 11 QBD 327, 343:

“But the practice of merchants, it is never superfluous to remark, is not based on the supposition of possible frauds. The object of mercantile usages is to prevent the risk of insolvency, not of fraud; and any one who attempts to follow and understand the law merchant will soon find himself lost if he begins by assuming that merchants conduct their business on the basis of attempting to insure themselves against fraudulent dealing. The contrary is the case. Credit, not distrust, is the basis of commercial dealings … “

This was cited and expanded upon by Lord Neuberger MR in Sinclair Investments (UK) Ltd v Versailles Trade Finance Ltd [2011] EWCA Civ 347 at §§97 et seq, who said, in particular, at §109.

“In this case it appears to me that the question which the judge had to determine was whether, on the facts known to the banks as at the three dates identified in para 95 above, a reasonable person with their attributes (ie those of a responsible large bank with the benefit of highly experienced insolvency practitioners as their appointed administrative receivers) should either have appreciated that a proprietary claim probably existed or should have made inquiries or sought advice, which would have revealed the probable existence of such a claim”

In my judgment, these cases do support the alternative view that Baden type (4) and knowledge or notice will be sufficient to render the defendant liable, but only on a modified basis. On the other hand, I agree with Mr Harris’ submission here that these two cases are considering the circumstances when “constructive” notice in the Baden (4) and (5) sense will arise; and do not apply where there is actual (including “blind eye”) notice.

Mr Harris submits that, since the elements of “without notice” and “good faith” are distinct, even if the defendant did not have notice, the defence will not be available if he was acting in bad faith and that, as a matter of fact, it is possible for a defendant not to have notice and yet still be acting otherwise than in good faith. This can arise because, adopting the test for good faith in Niru Battery, bad faith includes failure to act in a commercially acceptable way and sharp practice (which is conduct “more than” notice in Baden types (4) and (5). In support of this submission he relies upon a passage from Lipkin Gorman (at 580C-D).

In my judgment, the passage cited from Lipkin Gorman does not support Armstrong’s submission here. Further, whilst I accept that in principle the ingredients of “notice” and “good faith” are distinct, it is difficult to envisage a situation in practice where a defendant is found not to have notice and yet still to have acted in bad faith. This is particularly so on the basis that notice does include Baden type (4) and (5) notice on the modified basis above and further on the basis, contrary to Armstrong’s submission above, that “good faith” does not extend to mere negligence or “objective” reason to believe.

On the other hand, there is much to be said for aligning the relevant “states of mind” in all three types of claim. Given both the analysis of Moore-Bick J in Niru and the view of Lewin that in the commercial context, “commercially unacceptable conduct” might be regarded as sufficient to establish the modified Baden types (4) and (5) notice or knowledge, it seems to me that where a defendant with knowledge of certain facts has acted in a “commercially unacceptable way”, this should be sufficient to defeat the defence of bona fide purchaser and to establish “unconscionability” for the purposes of receipt of trust property, as well as defeating the defence of change of position.

In my judgment, the position, in a commercial context, can be summarised as follows:

(1)        Baden types (1) to (3) knowledge constitute “notice” so as to defeat the defence. In order to defeat the defence on this basis, it is not necessary to show that the defendant realised that the transaction was “obviously” or “probably” improper or fraudulent; the possibility of impropriety or the claimant’s interest is sufficient.

(2)        In other circumstances, mere negligence is not sufficient. Baden types (4) and (5) knowledge constitute “notice” such as to defeat this defence only if, on the facts actually known to this defendant, a reasonable person would either have appreciated that the transaction was probably fraudulent or improper, or would have made inquiries or sought advice which would have revealed the probability of impropriety.

(C)       Personal claim in equity

Armstrong’s further alternative claim is a claim for personal liability for unconscionable (or knowing receipt) of trust property. The requirements for such liability are (1) a disposal of the plaintiffs assets in breach of trust (2) the beneficial receipt by the defendant of assets which are traceable as representing the assets of the plaintiff and (3) knowledge on the part of the defendant that the assets he received are traceable to a breach of trust: Hoffmann LJ in El Ajou vDollar Holdings Plc [1994] 2 All ER 685 at 700 as approved by Nourse LJ in Bank of Credit and Commerce International (Overseas) Ltd v Akindele [2001] Ch 437 at 448B-C. In the present case the first and third elements call for elaboration.

(1)        Property subject to a trust

As regards item (1), Lewin, supra, §42-22 breaks this down into a further three elements: the existence of property subject to a trust, the transfer of that property and the transfer being in breach of trust. In my judgment, the property which the defendant receives must, at the point of receipt, be “trust property”; it must be “subject to a trust”. Legal and equitable title must have become separated by the time of receipt of the property by the defendant. The question is: where B steals A’s intangible property and then transfers it to C, has legal and equitable title to the property become separated, and if so, how?

Mr Harris submits, effectively, that, assuming legal title to the EUAs did not remain with Armstrong, then at the point of receipt of the EUAs by Winnington, Winnington itself was constituted as constructive trustee of the EUAs for the benefit of Armstrong; that this was the requisite separation of legal and equitable interests; and that, therefore, what Winnington was receiving was “property subject to a trust”. Thus, he submits, Armstrong’s”beneficial interest under a (constructive) trust was created at the very instant that [the EUAs] were registered with Winnington at the UK registry”. I do not accept this analysis. Knowing receipt is concerned with the receipt by a third party of property already subject to a trust. I cannot see how the very same act of receipt can create, for the first time, the alleged trust and, at the very same time, constitute third party receipt of trust property.

Mr Joffe puts forward an alternative analysis, which I prefer. It is the thief, B, who becomes the trustee of the property held on constructive trust for A, and when C receives the property he is receiving property from B which is already subject to a trust. This analysis is supported by the well known observation of Lord Browne- Wilkinson in Westdeutsche Landesbank Girozentrale v. Islington LBC [1996] AC 669 at 715, when considering the example of a stolen bag of coins:

“I agree that the stolen moneys are traceable in equity. But the proprietary interest which equity is enforcing in such circumstances arises under a constructive, not a resulting, trust. Although it is difficult to find clear authority for the proposition, when property is obtained by fraud equity imposes a constructive trust on the fraudulent recipient: the property is recoverable and traceable in equity. Thus, an infant who has obtained property by fraud is bound in equity to restore it: Stocks v. Wilson [1913] 2 K.B. 235, 244; R. Leslie Ltd. v. Sheill [1914] 3 K.B. 607. Moneys stolen from a bank account can be traced in equity: Bankers Trust Co. v. Shapira [1980] 1 W.L.R. 1274, 1282C-E: see also McCormick v. Grogan (1869) L.R. 4 H.L. 82, 97.”

Thus on this analysis, at the point of the theft, B becomes constructive trustee for A, and it is at that point that legal and equitable title to the property has become separated. Then, when the property is transferred to C, C is a recipient of property which has already become subject to a pre-existing trust.

Lord Browne-Wilkinson’s observation has subsequently been the subject of substantial judicial and academic analysis and comment (upon which I did not receive any detailed submission from the parties). Nevertheless, in my judgment, in so far as it relates specifically to the case of theft or a bare transfer (and perhaps also where there is a contract between A and B which is void), it is accepted as representing the law: see Goff & Jones, supra, §4-040, and Chitty, supra, §29-160.

(2)        “Knowing” or “unconscionable ” receipt

The current position as to the circumstances in which receipt of trust property by a defendant will render that person liable to the owners of the beneficial interests is now to be found in the Court of Appeal’s decision in Bank of Credit and Commerce International (Overseas) Ltd v Akindele [2001] Ch 437 where, after concluding that there was no need for the Baden categorisation, Nourse LJ said:

“All that is necessary is that the recipient’s state of knowledge should be such as to make it unconscionable for him to retain the benefit of the receipt.

… I have come to the view that, just as there is now a single test of dishonesty for knowing assistance, so ought there to be a single test of knowledge for knowing receipt. The recipient’s state of knowledge must be such as to make it unconscionable for him to retain the benefit of the receipt. A test in that form, though it cannot, any more than any other, avoid difficulties of application, ought to avoid those of definition and allocation to which the previous categorisations have led. Moreover, it should better enable the courts to give commonsense decisions in the commercial context in which claims in knowing receipt are now frequently made…””

Lewin, supra at §42-49 (and others – Goff & Jones, supra, §33-029) comment that, despite what the Court of Appeal said in BCCI v Akindele, the Baden classification of knowledge is still useful in distinguishing different types of knowledge for the purpose of determining what kind of knowledge makes it unconscionable for the defendant to retain the trust property. Both parties agreed that it was thus helpful (and indeed necessary) to consider which types of Baden “knowledge” would render receipt of trust property “unconscionable” and then each made arguments in line with their arguments on the issue of “notice” for the bona fide purchaser defence, suggesting that the tests for knowledge and for notice overlap considerably. I agree. Lewin suggests that this is the case (by its express cross-reference between the two issues in the commercial context, see paragraphs 115 and 116 above).

In my judgment, the position, in a commercial context, can be summarised as follows:

(1)        Baden types (1) to (3) knowledge on the part of a defendant render receipt of trust property “unconscionable”. It is not necessary to show that the defendant realised that the transaction was “obviously” or “probably” in breach of trust or fraudulent; the possibility of impropriety or the claimant’s interest is sufficient.

(2)        Further Baden types (4) and (5) knowledge also render receipt “unconscionable” but only if, on the facts actually known to this defendant, a reasonable person would either have appreciated that the transfer was probably in breach of trust or would have made inquiries or sought advice which would have revealed the probability of the breach of trust.

---

Your Response Ltd v Datateam Business Media Ltd

 [2014] EWCA Civ 281 [2014] WLR(D) 131, [2014] 3 WLR 887, [2014] 4 All ER 928, [2014] EWCA Civ 281, [2015] QB 41, [2014] CP Rep 31, [2014] 2 All ER (Comm) 899, [2015] 1 QB 41

MooreBick LJ

Possessory lien

The judge was clearly aware of the need for the law to keep abreast of technological developments and he appears to have been struck by the analogy that can be drawn between information kept in hard copy in the form of ledgers (over which a book keeper could exercise control by means of physical possession) and information kept in electronic form, over which a data manager could exercise control by electronic means. Thus in paragraph 111 of his judgment he said:

“It seems to me in the present case that a lien can apply to the electronic data which was in the possession of the Claimant. It would not be appropriate for the law to ignore the development in the real world of record keeping moving from hard copy records into electronic media. The decision which I have to reach today is of limited purview and no doubt this topic may arise again in other cases in other contexts. But for the purpose of the particular decision which I have to reach in this case, I do not accept the submissions by counsel for the Defendant that a lien cannot exist over the electronic data which was in the Claimant’s possession in just the same way as it could exist over the hard copy records in the Claimant’s possession.”

I have some sympathy for that view, but the judge did not have his attention drawn to some of the leading authorities, in particular OBG Ltd v Allan [2007] UKHL 21, [2008] 1 AC 1, and in any event I think it is necessary to examine whether it is consistent with principle.

In this case the court is concerned only with the exercise of a common law lien, which, in its origin, permits a bailee in possession of chattels to refuse to redeliver them to the bailor until he has received payment of outstanding sums due to him. In Tappenden v Artus [1964] 2 Q.B. 185 the owner of a vanallowed a customer to use it pending completion of a hire-purchase agreement. The van broke down and was delivered to the defendant for repairs. The price of the repairs remained outstanding and a question arose whether the garage could exercise a lien over it against the owner. At page 194-1995 Diplock L.J. described the common law possessory lien in the following terms:

“The common law lien of an artificer is of very ancient origin, dating from a time when remedies by action upon contracts not under seal were still at an early and imperfect stage of development: see the old authorities cited by Lord Ellenborough C.J. in Chase v. Westmore (1816) 5 M. & S. 180. Because it arises in consequence of a contract, it is tempting to a twentieth-century lawyer to think of a common law lien as possessing the characteristics of a contractual right, express or implied, created by mutual agreement between the parties to the contract. But this would be to mistake its legal nature. Like a right of action for damages, it is a remedy for breach of contract which the common law confers upon an artificer to whom the possession of goods is lawfully given for the purpose of his doing work upon them in consideration of a money payment. If, pursuant to the contract, the artificer does his work, he is entitled to retain possession of the goods so long as his charges, whether agreed in advance or (if not so agreed) payable upon a quantum meruit, are satisfied. The remedy can be excluded by the terms of the contract made with the artificer either expressly or by necessary implication from other terms which are inconsistent with the exercise of a possessory lien; cf. Forth v. Simpson (1849) 13 Q.B. 680, in the same way as the common law remedy in damages for breach of contract may be excluded or modified by the terms of the contract itself. But this does not mean that the remedy of lien, any more than the remedy in damages, is the result of an implied term in the contract to which what we may conveniently call the Moorcock (1889) 14 P.D. 64 criteria relevant to implying terms in a contract apply. The test whether or not the remedy exists is not whether or not its existence is necessary to give business efficacy to the contract. Judged by this test there would in modern times never be an artificer’s lien.

The common law remedy of a possessory lien, like other primitive remedies such as abatement of nuisance, self-defence or ejection of trespassers to land, is one of self-help. It is a remedy in rem exercisable upon the goods, and its exercise requires no intervention by the courts, for it is exercisable only by an artificer who has actual possession of the goods subject to the lien. Since, however, the remedy is the exercise of a right to continue an existing actual possession of the goods, it necessarily involves a right of possession adverse to the right of the person who, but for the lien, would be entitled to immediate possession of the goods. A common law lien, although not enforceable by action, thus affords a defence to an action for recovery of the goods by a person who, but for the lien, would be entitled to immediate possession.

Since a common law lien is a right to continue an existing actual possession of goods (that is to say, to refuse to put an end to a bailment) it can only be exercised by an artificer if his possession was lawful at the time at which the lien first attached.”

The emphasis in this description on the “actual possession of goods” makes it necessary to consider a number of questions: what at common law is understood by actual possession, whether it is possible to have actual possession of an intangible thing, whether it is open to this court to recognise the existence of a possessory lien over intangible property and if so, whether it would be right for it to do so.

In the protection of rights of personal property the common law historically drew a distinction between tangible and intangible property. Tangible property, usually referred to as chattels but sometimes as choses in possession, could be the subject of physical possession and thereby physical control, whereas intangible property, consisting of rights to benefits obtainable only by action (and thus known as choses in action), could not. Thus, in Torkington v Magee [1902] 427, Channell J. was able to describe a “chose in action” as meaning “all personal rights of property which can only be claimed or enforced by action and not by taking physical possession.” The view hitherto established has been that the common law does not recognise any third kind of property: see Colonial Bank v Whinney (1885) 30 Ch. D. 261, (1886) 11 App. Cas. 426, to which I shall refer in more detail later in this judgment.

In OBG v Allan receivers invalidly appointed by the claimant’s creditors terminated by negotiation a number of contracts between the claimant and various sub-contractors. The question arose whether wrongful interference with contractual rights could constitute the tort of conversion. The House of Lords held that it could not, because the tort of conversion applies only to chattels and not to choses in action. Lord Hoffmann, who gave the leading speech of the majority, pointed out that historically conversion was a tort against a person’s interest in a chattel and expressed the view (paragraph 97) that the whole of the statutory modification of the law of conversion had proceeded on the assumption that it applies only to chattels. He also noted that in its 18th Report (Conversion and Detinue) in 1971 (Cmnd 4774) the Law Revision Committee had treated detinue and conversion as confined to wrongful interference with chattels, an assumption reflected in the Torts (Interference with Goods) Act 1977, which defines wrongful interference with goods as including “conversion of goods” (section 1) and “goods” as including “all chattels personal other than things in action and money”. Lord Brown of Eaton-under-Heywood rejected the suggestion of Lord Nicholls and Lady Hale that the tort of conversion should be extended to cover the appropriation of things in action partly on the grounds that it would sever the link between the tort of conversion and the wrongful taking of physical possession of property.

As OBG v Allan makes clear, the essence of conversion is a wrongful interference with the possession of tangible property. For these purposes the common law draws a sharp distinction between tangible and intangible property. Even in the case of the conversion of valuable documents (cheques etc.), to which several of their Lordships referred, there is an unlawful interference with a physical object to which a commercial value can be attached. In contrast to chattels, choses in action are intangible things and incapable of the physical possession necessary to support a claim for conversion.

As Diplock L.J. observed in Tappenden v Artus, the essential nature of a common law artificer’s lien (which is the nearest analogy to the lien which the data manager sought to exercise in the present case) is a right to retain possession of goods delivered to him for the purpose of carrying out work on them. Although the right to exercise such a lien has been recognised in a wide variety of cases (see Halsbury’s Laws of England, 5th edition. volume 68, paragraph 845), the respondent was unable to identify any case in which a right to exercise a lien over intangible property has been recognised. The reason is not difficult to find: whereas it is possible to transfer physical possession of tangible property by simple delivery, it is not possible to deal with intangible property in the same way. Although it is now possible by virtue of statutory provisions to transfer the legal title to choses in action, it is not possible to transfer possession of them in any physical sense. (I ignore for these purposes negotiable instruments and other documentary securities which take a physical form and are thus capable of being converted, their value being treated as the value of the obligation which they embody.) Indeed, I do not think that the concept of possession in the hitherto accepted sense has any meaning in relation to intangible property.

In addition there are indications elsewhere that information of the kind that makes up a database (usually, but not necessarily, maintained in electronic form), if it constitutes property at all, does not constitute property of a kind that is susceptible of possession or of being the subject of the tort of conversion. The Copyright and Rights in Databases Regulations 1997 implement the provisions of European Council Directive No. 96/9/EC. Their primary purpose is to grant protection to the authors of databases by extending to them the protection accorded to literary works by the Copyright, Designs and Patents Act 1988 (“the 1988 Act”). A database for this purpose includes a collection of data arranged in a systematic or methodical way which are individually accessible by electronic or other means (section 3A of the 1988 Act, as inserted by Regulation 6). The author of a database may therefore enjoy copyright in it and may be able to sue third parties for infringement. By virtue of Regulation 13(1) the maker of a database (whether or not it is a copyright work) acquires a property right called a “database right”, if he has made a substantial investment in obtaining, verifying, or presenting its contents. By Regulation 16 a person infringes that database right if, without the consent of the owner, he extracts or re-utilises all or a substantial part of the contents of the database. The sections of the 1988 Act relating to dealing with rights in copyright works and the rights and remedies of copyright owners apply in relation to a database right and the database in which that right subsists (Regulation 23). The nature of the protection accorded to the makers of databases by the 1988 Act and the Regulations reflects a clear recognition that databases do not represent tangible property of a kind that is capable of forming the subject matter of the torts that are concerned with an interference with possession.

Mr. Cogley put forward four separate arguments in opposition to that analysis. The first was that the database in the present case should be regarded as a physical object, because it exists in a physical form on the data manager’s servers. The second was that the essence of possession is physical control coupled with an intention to exclude others and that a person can properly be said to possess something if he is able to exercise complete control over access to it. An example might be the possession of goods in a warehouse to which there is only one key. The third was that a database can be regarded as a document and can be treated as if it were one for all purposes. The fourth was that there is a distinction to be drawn between choses in action, properly so called, and other kinds of intangible property, such as an electronic database, to which the principles enunciated on OBG v Allan do not apply.

As to the first of these submissions, I fully accept that entering information into an electronic data storage system results in an alteration to the physical characteristics of the equipment. It is unnecessary to discuss the details of the processes by which information is stored in, and retrieved from, computers. It is sufficient for present purposes to say that in one way or another (depending on the storage medium) physical changes are brought about in the storage medium which embody the entry of the information and enable it to be recalled. In that sense the process is similar to making a manuscript entry in a ledger: there is a physical change in the condition of the ledger by the application of ink to a sheet of paper. However, that does not in my view render the information itself a physical object capable of possession independently of the medium in which it is held and in the electronic world the distinction is of some importance because of the ease of making and transmitting intangible copies.

The distinction between a disk or other medium on which data is held (which is a tangible object) and the data itself (which is not) was clearly recognised by this court in St Alban’s City & District Council v International Computers Ltd [1996] 4 All E R 481. It was followed and applied by Patten J. (as he then was) in Thunder Air Ltd v Hilmarsson [2008] EWHC 355 (Ch) (unreported), in which an application was made under section 4 of the Torts (Interference with Goods) Act 1977 for an interim order for the delivery up of various materials, including documents held in electronic form, in connection with a claim for conversion and an order for delivery up under section 3. The relevant documents were alleged to be in the possession or control of the defendant, but it was accepted that documents stored in electronic form do not constitute goods within the meaning of the legislation. The judge held (paragraph 29) that there could therefore be no claim under the Act for wrongful interference with (and thus for delivery up of) any documents stored on the defendant’s computers.

The contract in the present case is silent on the mechanics of the transaction. As a result, it is not clear exactly what was to be transferred by the publisher to the data manager, or how, or what was to happen when the contract came to an end. However, the appeal was argued on the basis that the parties intended the relevant data to be transferred electronically by the publisher to the data manager (i.e. without the use of physical media such as disks or other forms of portable storage devices) and held by the data manager on its own computers or computers to which it had unrestricted access and I am content to assume that that was so. No one suggested, therefore that there was to be a physical transfer of equipment of any kind at any stage. In my view, therefore, the fact that the transfer of the data to the data manager resulted in a physical alteration to its own systems or to systems to which it had access takes the case nowhere.

The second of Mr. Cogley’s submissions has greater attraction. The range of circumstances in which a lien has been held to arise is broad, encompassing many different circumstances in which work has been carried out on, or in the production of, property of one kind or another: see the paragraph in Halsbury to which I referred earlier. I am willing to assume for present purposes that, if the database in this case were tangible property, the data manager would in principle be entitled to exercise a lien over it for outstanding fees. Mr. Cogley submitted that in those circumstances it is irrelevant that the database is incapable of physical possession; what matters is whether the data manager is able to exercise effective control over it as against the publisher.

Although an analogy can be drawn between control of a database and possession of a chattel, I am unable to accept Mr. Cogley’s argument. It is true that practical control goes hand in hand with possession, but in my view the two are not the same. Possession is concerned with the physical control of tangible objects; practical control is a broader concept, capable of extending to intangible assets and to things which the law would not regard as property at all. The case of goods stored in a warehouse, the only key to which is held by the bailee, does not in my view undermine that distinction, because the holder of the key has physical control over physical objects. In the present case the data manager was entitled, subject to the terms of the contract, to exercise practical control over the information constituting the database, but it could not exercise physical control over that information, which was intangible in nature. For the same reason the withholding of the database by the data manager could not, even if wrongful, constitute the tort of conversion.

Next Mr. Cogley submitted that a database can and should be treated for all purposes as a document, drawing the court’s attention to the decision of VinelottJ. in Derby & Co. Ltd v Weldon (No. 9) [1991] 1 W.L.R. 652. In my view this argument proceeds on a false basis. The former Rules of the Supreme Court, and now the Civil Procedure Rules, provide for the disclosure in proceedings of documents in the possession, custody or power of the parties. The rules originated long before the creation and storage of documents in electronic form had been conceived of and, not surprisingly, once electronic documents came into existence steps were taken to ensure that documents stored on electronic media were subject to the same rules. It was unnecessary for that purpose for the rule makers or the courts to concern themselves with the precise nature of the information or the manner in which it was held. They were not concerned with the niceties of possession but with the ability of parties to provide, usually, but not necessarily, in paper form, copies of documents held in electronic media. There was no difficulty in understanding what “possession, custody or power” meant in that context, but it is a far cry from that to hold that documents held in electronic form are capable of being possessed in the sense in which that the word applies to chattels. In my view no assistance is to be gained from this line of argument.

Mr. Cogley’s fourth argument was that, if the database cannot be regarded as a physical object for these purposes, it is a form of intangible property different from a chose in action. As such, it is capable of being possessed and wrongful interference with it will constitute the tort of conversion. I am unable to accept that. In Colonial Bank v Whinney (1885) 30 Ch. D. 261, the court had to decide whether shares in a joint stock company were to be classified as choses in action for the purposes of the proviso to section 44(iii) of the Bankruptcy Act 1883, by which property in the order or disposition of the bankrupt in his trade or business with the consent of the true owner, other than choses in action, was made available for the satisfaction of his debts. In the Court of Appeal the case provoked a great deal of learned debate about the history and nature of choses in action, much of it contrasting choses in action with choses in possession. In the end Cotton and Lindley L.JJ. held that shares were not choses in action for the purposes of the statute, although they both regarded them as a form of intangible personal property. Fry L.J. dissented. In his view “all personal things are either in possession or in action. The law knows no tertium quid between the two.” He therefore held that shares were choses in action.

The view of Fry L.J. was subsequently preferred by the House of Lords (1886) 11 App. Cas. 426. Lord Blackburn, who gave the principal speech, noted that there had always been a difference between personal property, which was capable of being stolen, taken, and carried away, and thus the subject of larceny at common law, and other kinds of personal property which could not be the subject of larceny or be taken in execution, because they could not be seized. In my view that decision makes it very difficult to accept that the common law recognises the existence of intangible property other than choses in action (apart from patents, which are subject to statutory classification), but even if it does, the decision in OBG v Allan prevents us from holding that property of that kind is susceptible of possession so that wrongful interference can constitute the tort of conversion. It follows, in my view, that it is equally not susceptible to the exercise of a possessory lien.

Many of Mr. Cogley’s arguments owed a debt to a scholarly volume entitled The Tort of Conversion, in which Sarah Green and John Randall Q.C. make a powerful case for recognising that the essential elements of possession can be exercised over digitised materials, of which a database is a prime example, which should therefore be amenable to the tort of conversion. They also make a powerful case for reconsidering the dichotomy between choses in possession and choses in action and recognising a third category of intangible property, which may also be susceptible of possession and therefore amenable to the tort of conversion. Inevitably they are critical of the decision in OBG v Allan, which they regard as a wasted opportunity to set the law on a modern footing. In my view there is much force in their analysis, which, if accepted, would have the beneficial effect of extending the protection of property rights in a way that would take account of recent technological developments. However, to take the course which they propose would involve a significant departure from the existing law in a way that is inconsistent with the decision in OBG v Allan. That course is not open to us – indeed, it may now have to await the intervention of Parliament – and I do not think that any purpose would therefore be served by embarking on a fuller discussion of their suggestions here.

Mr. Susman submitted that there were two other reasons why the data manager in this case could not exercise a lien over the database. The first was that the work it carried out in this case was more in the nature of maintenance than improvement of the database and that for that reason alone it was not capable of supporting a lien: see Hatton v Car Maintenance Co Ltd [1915] 1 Ch. 621. The database consists of many individual pieces of information stored in a structured manner which renders them capable of systematic search and retrieval. The data manager’s task was to make whatever amendments were necessary from time to time to ensure that the information it contained was (so far as reasonably practicable) correct at all times. The line between maintenance and improvement can be a fine one. If the database had not been updated regularly, it would soon have lost much of its value. In that sense it might be described as a wasting asset as the information it contained became more and more out of date. On the other hand, the updating necessarily involved the entry of new information and to that extent it can be said that it involved improvement. In the end I do not think that this question is determinative of the appeal, but if it were, I would be inclined to hold that the updating of the database was more in the nature of improvement than mere maintenance.

The second reason was that it would be contrary to the contract for the data manager to exercise a lien. It was common ground that if, on its true construction, the contract under which the property is delivered to the bailee is inconsistent with the exercise of a lien, no such right will arise. One difficulty in the present case, however, is that the contract says nothing about the publisher’s right of access to the database during the currency of the contract or how the database will be dealt with when the contract comes to an end. Nor, unfortunately, were findings made by the judge below which provide much assistance towards resolving this aspect of its construction.

However, it seems to have been accepted by both parties that the publisher was entitled to have access to the database at will during the currency of the contract and the data manager apparently provided it with a password for that purpose. That may have reflected a recognition on both sides that access was necessary for the purposes of the publisher’s business, in which case it is likely that a term giving the publisher a right to unrestricted access might easily be implied. The contract is so brief and informal that a full understanding of the background would almost certainly lead to the implication of a number of terms, simply to give effect to what the parties must be taken to have intended, but we do not have the benefit of the kind of findings that would enable us to reach a conclusion on such matters with any degree of confidence. All we know is that the data manager did not in fact exercise exclusive control over the database during the currency of the contract, although, as events later demonstrated, it could effectively have done so by changing the password and withholding the new password from the publisher.

Before he can exercise a lien at common law a bailee must have obtained a continuing right of possession which he is entitled to exercise against the bailor. Thus a racehorse trainer cannot exercise a lien over a racehorse for his fees if the contract reserves to the owner (expressly or by implication) the right to decide the places at which and the jockeys by whom it is to be raced: see Forth v Simpson (1849) 13 Q.B. 680. Likewise, one reason given for denying to a keeper of livery stables the right to exercise a lien for his charges is that he is obliged to give possession of the horse to the bailor whenever requested: see Scarfe vMorgan (1838) 4 M. & W. 270. (Another is that feeding and stabling does not improve the horse: see Judson v. Etheridge (1833) 1 Cromp. & M. 743 and In re Southern Livestock Producers Ltd. [1964] 1 W.L.R. 24.) Although the contract in the present case contained no express provision for the publisher to have access to the data, neither did it contain any provision, express or implied, excluding him from it and the fact that the data manager did in fact make access to it freely available by the provision of a password is in my view inconsistent with the conclusion that he was in fact exercising the kind of exclusive control that would equate to the continuing possession required for the exercise of a lien. In view of the other conclusions to which I have come it is not necessary to reach a final decision on this point, but if necessary I would hold that in this case the data manager did not exercise the degree of control necessary to entitle it to exercise a lien.

In those circumstances it is unnecessary to discuss at any length the question whether, if it were open to us to do so, it would be desirable extend the reach of the common law lien to electronic data. In Scarfe v Morgan Parke B. expressed the view that particular liens “being consistent with the principles of natural equity, are favoured by the law, which is construed liberally in such cases.” That may be so, but I cannot see any basis on which the extension of the right to exercise a lien over intangible property could rationally be confined to electronic databases and for my own part I am not persuaded that it is necessary or desirable to extend this form of self-help, based on control rather than possession, to intangible property generally. The majority view in OBG v Allan suggests the contrary. Transfers of intangible property, whether in electronic or other forms, will almost invariably be covered by contracts which, if the parties so wish, may provide expressly for situations of the kind that arose in this case.

For the reasons I have given I would hold that the data manager was not entitled to exercise a common law lien on the database. It may well be that a fuller understanding of the background to the contract would support the conclusion that the parties intended the publisher to have access to the database at will, but whether that is so or not, it must have been implicit in the contract that when it came to an end the data manager was under an obligation to send the publisher by electronic means a copy of the database in its latest form. (We are not concerned with any term that might be implied in relation to the removal of the copy of the database remaining in the data manager’s own systems.) It was therefore in breach of contract in refusing to do so, unless the contract impliedly gave it a right to withhold that information from the publisher and to exclude the publisher from its systems until it had received payment of any outstanding fees. For my part I do not think that there is a sufficient basis for implying a term of that kind.

Although a right to withhold access to the database would not give the data manager any proprietary interest in it, it could in the case of an insolvency effectively enable him to assert a preferential position to the disadvantage of other creditors. Whether an extension of the tort of conversion to cover interference with intangible property is desirable, I am not persuaded that it is desirable to extend the scope of the common law lien in the way suggested in this case. Although in former times the law may have looked with favour on possessory liens as reflecting a form of natural equity, the parties to a contract of the kind under consideration in this case are free to make express provision for their rights and obligations on termination of their relationship and an extension of the right of self-help is to that extent less justifiable. In any event, for the reasons I have given I do not think it is open to us to take that course, even if we wished to.

Reasonable notice

The contract made no provision for the manner of its termination, but the parties accepted that by implication reasonable notice was required on either side and the judge so held. The only remaining question was what constituted a reasonable period for those purposes. The judge held, correctly, that that was a question of fact, not a question of law, and therefore he was entitled to consider any evidence that could properly be regarded as having a bearing on it. In reaching his decision the judge relied quite heavily on an assertion made by Mr. Kayani, the publisher’s managing director, during a telephone conversation with Mr. Hooker in May 2011 that three months’ notice would be reasonable. In my view he was entitled to do so, despite the fact that the conversation took place some time after the contract had been made. At that stage the judge’s task was not to construe the contract; it was to decide as a matter of fact what was a reasonable period of notice.

Conclusion

For the reasons I have given I would allow the publisher’s appeal to the extent of holding that the data manager was not entitled to refuse to provide the publisher on request with a copy of the database in its current form and was in breach of contract in doing so. I would dismiss its appeal in relation to the period of notice.

Lord Justice Davis :

I also would allow this appeal to the extent indicated, for the reasons given by Moore-Bick L.J., with whose judgment I wholly agree.

The sub-text of Mr. Cogley’s submissions was that the courts should not leave the common law possessory lien stuck in its eighteenth and nineteenth century origins and development; rather the courts should go on to give it a twenty-first century application, appropriate to modern times and modern commercial activities. That appeal to modernism has its attractions: indeed, it was that approach which seems to have decided matters on this issue so far as the district judge was concerned.

But I think the court should resist those attractions. I say that for two connected reasons.

(i)         The first reason is that, although that approach found favour, in a context analogous to the present case, with the minority in OBG and Allen, it did not find favour with the majority.

(ii)        The second reason is this. The law of unintended consequences is no part of the law of England and Wales. But it is worth paying attention to it, in an appropriate case, all the same. If a common law possessory lien can arise in a case such as the present, it would be a right in rem, not a right in personam. Probably, I would have thought, it would not be registrable as a charge. At all events, the right to such a possessory lien, if it exists, could have an impact on other creditors of the company (or individual) concerned and could confer rights in an insolvency which other creditors would not have. Further, the position of lenders could be affected: for they may well have ordered their lending arrangements and drafted their securities on the law as it is currently understood to be. Overall, given the number of IT companies and businesses in existence and the number of IT contracts being made the impact of the respondent’s arguments – if accepted – could therefore be significant. Moreover, if, as Mr. Cogley says as one part of his argument, a database is to be regarded as tangible property, that may have possible implications for other areas of the law altogether – for example, the law of theft (as contrasted with the legislation relating to misuse of computers). These are but illustrations of at least possible implications, going beyond the present case, which may bring about unjust and unanticipated consequences in other contexts.

The present case, at all events, underlines the desirability of parties to business dealings such as these including express contractual provisions to cover the position in the event of termination.

Lord Justice Floyd :

I agree with Moore-Bick L.J. that, for the reasons he has given, the publisher’s appeal must be allowed to the extent he has indicated. I also agree with Davis L.J. that the potential unintended consequences constitute a further reason for not taking the step which we were invited to take by the respondent.

I would add only one observation in connection with the wider implications of Mr. Cogley’s submission that the electronic database was a type of intangible property which, unlike choses in action, was capable of possession and thus of being subject to a lien. An electronic database consists of structured information. Although information may give rise to intellectual property rights, such as database right and copyright, the law has been reluctant to treat information itself as property. When information is created and recorded there are sharp distinctions between the information itself, the physical medium on which the information is recorded and the rights to which the information gives rise. Whilst the physical medium and the rights are treated as property, the information itself has never been. As to this, see most recently per Lord Walker in OBG Ltd v Allan [2007] UKHL 21, [2008] 1 AC 1 at [275], where he is dealing with the appeal in Douglas v Hello, and the discussion of this topic in Green & Randall, The Tort of Conversion at pages 141-144. If Mr. Cogley were right that the database could be possessed and could be the subject of a lien and that its possession could be withheld until payment and released or transferred upon payment, one would be coming close to treating information as property. That observation further underlines the significance of the step we were invited to take.