2

Redistribution and Property Rites

IN COMMON LAW jurisdictions the judiciary has played a vital role in shaping the institution of property. Judge-made doctrine is in large part responsible for deciding which resources may be owned, which social facts give rise to proprietary rights and obligations, and the very content of those rights and obligations. In large part, this book provides an examination and critique of the manner in which courts deal with such questions of entitlement to resources in the context of the

law of proprietary remedies.

I. TWO CONCEPTIONS OF PROPERTY

Much that is perplexing in this area of law can be understood only when we appreciate the constraints imposed by understandings of property that we treat as axiomatic.1 The law in this area cannot be explained without first comprehending the meaning ascribed to and the function performed by property in our legal discourse.

One particular distinction in the use of the term “property” is crucial in this context. From one perspective, “property” can be understood simply as those rules making up the “law of property”: rules established as the consequence of relatively specific deliberations concerning entitlement to resources in particular circumstances. According to this rigidly positivistic view, “property” refers simply to those norms that deal with the regulation of entitlement to resources—this usage does not imply the existence of some unitary conception of property that dictates the proper objects and content of proprietary protection. Thus, if there is a dispute about entitlement to a particular resource, use of such terms as “property” and “ownership” is unlikely to be very enlightening. Instead, the identification of relevant norms is essentially an empirical matter focused upon previous judicial determinations.

This perspective suggests that our analysis of property should be from the “bottom up”.2 We cannot assume any systematic consistency in our approach to property, from which “principles” may be distilled. And any search for such

1See, e.g., P Stein, “The General Notions of Contract and Property in Eighteenth Century Scottish Thought” [1963] Juridical LR 1.

2On the distinction between “top down” (deductive) and “bottom up” (inductive) reasoning, see R Posner, “Legal Reasoning from the Top Down and From the Bottom Up” (1992) 59 U Chi. LR 433. For a discussion of the level of abstraction in the context of property see M Radin, Reinterpreting Property (Chicago, Ill., University of Chicago Press, 1993).

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consistency should be conducted through a process of induction, by examining the concrete rules of our legal system. Moreover, the role of such principles would be in organising our analysis of the law after the event; they would not have a part to play in legal adjudication.

In contrast, “property” can be perceived as a concept that plays a fundamental normative role in a legal system. So understood, it is from a conception of property that we can deduce the more particular rules of a given system’s law of property. Moreover, it is to notions of property and ownership to which we turn when we need guidance in hard cases.

Which of these understandings better characterises “property” in common law thought? Is it true, as Jeremy Waldron suggests, that a legal culture’s “particular conception of ownership [is] constituted by the property rules of the legal system”?3 Or may it be the case that it is at least as true that the conception of property prevailing in a particular legal system plays a role in constituting that system’s rules governing entitlement to resources?

II.PROPERTY IN ENGLISH LEGAL THOUGHT

1.The Absolutist Conception of Property

Property has enjoyed a special place in political thought. Indeed it was often described as the very reason for which governments were created and laws made.4 Notions of fundamental property rights have performed a number of important functions in accounts of the law. Rather than simply denoting a set of conventionally recognised rules that dictate when the state will enforce individuals’ claims to resources, a conception of property is understood to determine these rules.5

First, some have looked to property to indicate the extent to which the state could intervene to legislate to regulate the lives of its subjects—the subject matter of public law. This perspective was particularly evident in constitutional law in the United States at the turn of last century, where, in the context of expanded concepts of “takings” and “due process”, an absolutist conception of property was understood to provide the principal limitation on state power.6

3J Waldron, The Right to Private Property (Oxford, Clarendon Press, 1988) 52.

4See, e.g., J Locke, Two Treatises of Government (ed. Peter Laslett, Cambridge, Cambridge University Press, 1988) bk II § 123 at 350.

5HT Dickson, Liberty and Property (London, Weidenfeld and Nicolson, 1977) 310; P Stein and J Shand, Legal Values in Western Society (Edinburgh, Edinburgh University Press, 1973) 207–11; J Nedelsky, Private Property and the Limits of Constitutionalism: The Madisonian Framework and its Legacy (Chicago, Ill., University of Chicago Press, 1990) 259; C Rotherham, “Conceptions of Property in Common Law Discourse” [1998] LS 41 at 51–3.

6J Nedelsky, Private Property and the Limits of American Constitutionalism (Chicago, Ill., Chicago University Press, 1990); J Ely, The Guardian of Every Other Right (2nd edn., New York, Oxford University Press, 1992) 3.

Redistribution and Property Rites 35

Secondly, a particular notion of property also provides the basis of a theory of how the courts should regulate interaction among its citizens—the subject matter of the private law. In particular, it lends itself to an account of the private law as a system of corrective justice that is independent of concerns of distributive justice. According to this account, property delineates a zone of personal freedom for individuals from their fellow citizens.

Thirdly, such a conception of property has served to differentiate the role of the judiciary from that of the legislature, thereby suggesting that the courts’ powers to shape the common law are subject to important constraints. According to this understanding, the role of the courts is to enforce property rights and contracts; the judiciary has no role in redistributing property—this being a matter of distributive justice and, therefore, within the sole province of the legislature.7 Thus, this conception of property forms part of a formalistic vision of law in which policy has no part to play in judicial decision-making.8

The particular conception of property that has performed these different functions is an absolutist one that Thomas Grey refers to as the notion of “thingownership”,9 Tony Honoré as the “basic model” of the “full liberal conception of ownership”10 and J.W. Harris as “full-blooded ownership”.11 This evokes an image of property as the exclusive and inviolable ownership of discrete things, whereby the owner is invested with absolute powers within rigid boundaries.12 An owner is seen as necessarily enjoying all the entitlements in the bundle of rights that is property: the rights to use, to exchange, to derive income, to exclude and to be immune from expropriation. This suggests a conception of the private law whereby the courts should interfere only to protect individuals’ personal security and integrity and property rights. If no one else’s rights of property or personal security are infringed, the courts will not restrain owners in the exercise of their property rights. What is more, those rights are regarded as inviolable, save by legislative intervention, and only then with due compensation.13

The classical liberal paradigm of property represents one of our legal culture’s “dominant sentiments” or “collective dreams”,14 readily gaining acceptance because of its capacity to legitimate the common law. Such an understanding of property is seldom consciously espoused, let alone justified by judges and jurists.

7See Rotherham, supra n. 5 at 51–3.

8K Llewellyn, The Common Law Tradition—Deciding Appeals (Boston, Mass., Little, Brown, 1960)

38.

9T Grey, “The Disintegration of Property” in JR Penncock and JW Chapman (eds.), Nomos XXII: Property (1980) 69 at 81.

10A Honoré, “Ownership” in A Guest (ed.), Oxford Essays in Jurisprudence (Oxford, Oxford University Press, 1961) 107 at 147.

11JW Harris, Property and Justice (Oxford, Clarendon Press, 1996) 29–30.

12For an account, see J Singer, “No Right to Exclude: Public Accommodations and Private Property” (1996) 90 North Western University Law Review 1283 at 1453.

13See, e.g., WH Blackstone, Commentaries on the Laws of England (Chicago, Ill., Chicago University Press, 1979) i, at 135 and ii, at 9.

14M Loughlin, Sword & Scales: An Examination of the Relationship between Law and Politics

(Oxford, Hart Publishing, 2000) 32.

36 Property and Proprietary Remedies

Indeed, few participants in our legal culture would have given much thought to, let alone systematically studied, notions of property in the abstract. Rather, through study and practice, lawyers are inculcated with a habitus, a set of dispositions that provides them with a “feel for the game”15—an intuitive grasp of the leeways of legal argument. Part of this ingrained understanding involves an acceptance that judicial redistribution of property rights is improper.

2. The Absolutist Conception of Property in English Law

(a) The Rise and Entrenchment of an Absolutist Conception of Property

Absolutist notions of private property and freedom of contract gained prominence in the late eighteenth century and achieved their apotheosis in the following century.16 This development reflected both the political ideology of the day and concerns about the legitimacy of the common law in the face of the growing influence of liberal democratic ideals. The period marked, in the words of one commentator, “the consecration of the spirit of unrestricted egoism”.17 In the first part of the nineteenth century the courts declined to hold landowners liable for causing injury to trespassers by setting spring guns on their property.18 In the last decade of the century the House of Lords refused to hold liable a landowner who had drawn off water running under his own land in order to drain a municipality’s water supply.19 Similarly, their Lordships declined to restrict anti-competitive behaviour in the market place.20

As the twentieth century dawned, the judiciary’s response to the age of “collectivism” that Dicey announced was engulfing the nation21 was to take refuge in positivism, a jurisprudential creed that precluded a commitment to any particular form of morality. Yet, in reality, even as laissez-faire notions lost much of their appeal and the modern regulatory state became institutionalised, the judiciary tended to fall back on the classical liberal vision of the private law when faced with hard questions.22 Thus, while the absolutist conception of property suffered a rather different fate in the United States,23 it has retained considerable vitality in English legal thought.

15See P Bourdieu, Language & Symbolic Power (Cambridge, Polity Press, 1991) 9 and 27.

16The classic study of this is of course P Atiyah, The Rise and Fall of Freedom of Contract (Oxford, Clarendon Press, 1979).

17HC Gutteridge, “Abuse of Rights” (1935) 5 CLJ 22.

18Ivor v. Wilkes (1820) 3 B & Ald 304. See J Finnis, “Intention in Tort Law” in D Owen, Philosophical Foundations of Tort Law (Oxford, Clarendon Press, 1995) 229 at 231–2.

19Mayor of Bradford v. Pickles [1895] AC 587.

20Mogul Steamship Co. v. McGregor Gow & Co. [1892] AC 25.

21AV Dicey, Law and Opinion in England (2nd edn., London, Macmillan, 1914) 211–310.

22M Horwtiz, The Transformation of American Law 1780–1860 (New York, Oxford University Press, 1977) 256–7; Atiyah, supra n. 16 at 235–6.

23See infra ch. 3.I.

Redistribution and Property Rites 37

(b) Illustrations of the Influence of this Conception

The conventional understanding of property in terms of the absolute ownership of particular objects can best be witnessed at work in cases where the judiciary is asked to limit or readjust proprietary entitlements in a manner that conflicts with this orthodoxy. In such cases, the courts will often invoke axiomatic notions of property to provide normative guidance in the resolution of a dispute over rights to possess and use resources.24 Developments in the law of nuisance in the nineteenth century illustrate this. In AG v. Birmingham Corporation,25 the House of Lords indicated that considerations of the public good were irrelevant in determining whether the defendant had committed a nuisance. The fact that enjoining the city’s sewage system might result in its populace being up to their knees in effluent would not sway their Lordships in their decision that this system was causing a nuisance. At issue were the rights of individual citizens—considerations of utility were beside the point.

Subsequently, in Shelfer v. City of London Electric Lighting Co.26 the English Court of Appeal found that the defendant’s electricity generating operation’s interference with the plaintiff’s use and enjoyment of his land amounted to an actionable nuisance. The defendant asked that the court, pursuant to the discretion conferred by Lord Cairns’s Act,27 limit the plaintiff to an award of damages in lieu of granting an injunction. The widespread use of the injunction in nuisance cases was still less than a century old and the scope of the remedy had yet to be decisively determined.28 Nonetheless, the Court rejected the defendant’s plea, concluding that limiting the plaintiff to damages would amount to a taking of property rights—an impermissible result. Lindley LJ reasoned that “[e]xpropriation, even for a money consideration, is only justified where Parliament has sanctioned it”.29 It is apparent that the Court of Appeal reached its conclusion that what was asked involved an interference with the plaintiff’s property rights by starting from the premise that those rights were absolute.

While the influence of these assumptions has diminished somewhat in recent years, they still prove capable of exerting an influence. This was apparent, for example in Gissing v. Gissing,30 where the House of Lords rejected a wife’s claim for a proprietary interest to reward her contributions to the matrimonial home. Lord Morris asserted that “[a]ny power in the court to alter ownership must be found in statutory enactment”.31 Again, the nature of property and its role in

24See also G Samuel, “Property Notions in the Law of Obligations” [1994] CLJ 524 at 539.

25(1859) K & J 528.

26(1895) 1 Ch. 287.

27The Chancery Amendment Act 1858.

28See J McLaren, “Nuisance Law and the Industrial Revolution—Some Lessons from Social History” (1983) 3 OJLS 155.

29Supra n. 26 at 316.

30[1971] AC 886.

31Ibid. at 898.

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delineating the province of the judiciary from that of the legislature was assumed without discussion.

More recently, a similar disinclination to expropriate property rights was apparent in the House of Lords’ decision in Moorgate Mercantile Ltd v. Twitchings.32 The plaintiff, the owner of a motor vehicle in the possession of another under a hirepurchase agreement, had failed to register its interest under a scheme run by the industry. Subsequently, the hirer had sold the car on to the defendant, which had consulted the register in question. When the plaintiff sued the defendant for conversion it was asked whether the defendant took the car subject to the plaintiff’s rights. In finding for the plaintiff, Lord Fraser argued that “an owner of property is entitled to be careless with it if he likes”.33 Thus, in his view, it was axiomatic that property could pass only with consent and that fault was not a basis for denying proprietary protection.

III. THE INFLUENCE OF THESE UNDERSTANDINGS ON THE LAW OF

PROPRIETARY REMEDIES

Absolutist notions of property have done much to shape the substance and form of the English law of proprietary remedies. Their influence is apparent in Mummery LJ’s view in Re Polly Peck (No 2)34 that a constructive trust characterised as remedial should be denied on the basis that the English judiciary has never had the power to take away another’s proprietary rights.35

1. The Influence of Positivism

Amongst jurists, the philosophy underlining the approach to proprietary remedies favoured in English law has received its clearest articulation in the work of Peter Birks. At first glance, Birks’ analysis of the area is marked by a refusal to offer a normative account of property. Instead, he has claimed that property is a concept that “ought never to be deconstructed”.36 In his view, “[t]he conceptual approach” that involves simply asking whether something is someone’s property “creates a barrier between the law and an impossibly difficult political question”.37 Thus, he has argued that:

The question whether a claim deserves priority in insolvency is an impossible question. By contrast, the questions whether the plaintiff has a proprietary interest, and, if so, from

32[1977] AC 890.

33Ibid. at 925.

34[1998] 3 All ER 812

35See supra ch. 1.III.6.

36P Birks, “The End of the Remedial Constructive Trust?” (1998) 12 Trust Law International 202 at

37Ibid.

Redistribution and Property Rites 39

what moment that interest takes its priority, are technical conceptual questions, which a lawyer can hope to answer.

. . . Lawyers have no special competence in distributive justice. They cannot be expected to say who deserves what. But, given a decent law library and some time to do the work, a lawyer can be expected to say . . . whether on given facts a proprietary interest has arisen, and, if so, precisely of what kind.38

On the face of it, this statement represents a plea for positivism, and it is vulnerable to all the criticisms usually directed against that form of legal philosophy. In particular, positivism offers no account of how the law may deal with novel cases, decide between conflicting authorities or reconsider existing rules.39 In the context of the law of proprietary remedies, this represents a very significant failing, as this has proved to be a particularly dynamic and contested field.

Birks’ position is hardly unusual. The mentality, characterised by Robert Stevens as “substantive formalism”, that prevailed in English legal culture for much of this century, did much to limit the evolution of the constructive trust.40 The positivism of this period discouraged the formulation of a systematic justificatory theory for the remedy that might have provided a basis for its rational development. In addition, the slavish adherence to precedent that flourished at this time ensured that any incremental growth of the doctrine was sluggish at best.41

2. The Persistence of Absolutist Assumptions

Despite his strictures against normative reasoning, in practice Birks has never been so constrained. He has consistently shown an inclination to fall back upon the axiom that the judiciary cannot create property rights.42 On the one hand, this has encouraged him to reject new forms of redistributive proprietary remedies.43 In addition, it has led him to conceptualise existing examples of such remedies as something other than redistributive through the notion of the “proprietary base”.44

An acceptance of the possibility that the courts might redistribute property rights would bring with it a responsibility for justifying such intervention—some- thing for which English courts have shown little taste. As a result of the failure of

38Ibid. at 214–15.

39See Rotherham, supra n. 5 at 45–7.

40R Stevens, Law and Politics: The House of Lords as a Judicial Body, 1900–1976 (London, Weidenfeld and Nicolson, 1979). See also A Paterson, The Law Lords (London, Macmillan, 1982); Atiyah, supra n. 16 at 660–71.

41See RH Maudsley, “Restitution in England” (1966) 19 Vanderbilt L Rev 1123 at 1123–4.

42See, e.g., P Birks, “Proprietary Rights as Remedies” in P Birks (ed.), The Frontiers of Liability (Oxford, Oxford University Press, 1994) 214 at 218; ii, “Proprietary Restitution: An Intelligible Approach” (1995) 9 Trusts Law International 43 at 44.

43See, e.g., his opposition to the award of constructive trusts in the context of restitution for wrongs: P Birks, An Introduction to the Law of Restitution at 387–9.

44See infra ch. 15.

40 Property and Proprietary Remedies

the judiciary to justify its treatment of this area according to consequences, the analysis of proprietary rights has tended to remain resolutely bipartite—focused on the rights of the plaintiff and the defendant alone. The result is that little thought is given to the interests of third party creditors. Of course, it would not be true to say that policy considerations are never taken into account. The courts have, at times, proposed restricting the use of proprietary remedies in the context of vitiated transfers on the basis of fairness to creditors.45 However, this concern has not been consistently pursued and often the courts have extended the application of proprietary remedies with little thought for third parties.46

IV. ORTHODOX AND REDISTRIBUTIVE PROPRIETARY REMEDIES

Proprietary remedies may be divided into those that function to protect existing property rights or to enforce consensual transfers and those that create new property rights without reference to the intention of the owner. It is the latter form of remedy that causes so much unease in English legal culture. Thus, trusts that vindicate pre-existing property rights and voluntary transfers tend to be thought of as something other than “remedial”, in contradistinction to those constructive trusts that give rise to new property rights.47

1. Orthodox Proprietary Remedies

The place of the constructive trust in remedying breaches of duties arising under express trusts is obvious enough. According to contemporary understandings of equitable proprietary rights, where there is an existing division of legal and beneficial ownership, the imposition of a constructive trust upon a third party in possession of trust property represents nothing more than the enforcement of an extant proprietary relationship. Here, the constructive trust may be seen as “simply part of the express trust package deal”,48 and the device is no more than a reflection of the duty that all the world, bar bona fide purchasers of a legal interest without notice, has to respect equitable proprietary rights.

Constructive trusts give rise to new property rights wherever they are employed beyond the context of enforcing rights over specific assets arising under express

45See, e.g., Westdeutsche Landesbank Girozentrale v. Islington LBC [1996] AC 669 at 704 per Lord Browne-Wilkinson and 683–4 per Lord Goff.

46See, e.g., Lord Napier & Ettrick v. Hunter [1993] AC 713; AG for Hong Kong v. Reid [1994] 1 AC

47See, e.g., R Goff and G Jones, The Law of Restitution (4th edn.) at 68 (distinguishing between proprietary remedies and pure proprietary claims); A Oakley, Constructive Trusts at 21; M Cope, Constructive Trusts (Sydney, Law Book Co., 1992) at 17; J Glover, “Equity, Restitution and the Proprietary Recovery of Value” (1991) 14 UNSW LJ 247 at 266. See supra ch. 1.II.2(b)(ii).

48S Gardner, An Introduction to the Law of Trusts (Oxford, Clarendon Press, 1990) 232; CEF Rickett, “The Classification of Trusts” (1999) 18 NZULR 305 at 320.

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trusts. Yet, not all such applications of the device are commonly characterised as remedial or thought of as particularly threatening. Constructive trusts that regulate consensual agreements give us little cause for pause.49 This is true of the constructive trust that arises in the context of the sale of land.50 The effect of the device in that context is to determine the point in time at which title is transferred—an issue that is inevitably somewhat arbitrary and one on which classical liberal thought is agnostic.

Something similar may be said of constructive and resulting trusts said to arise where a transferor’s intent is vitiated in some way. In this context, it is argued that, in some circumstances while legal title passes, the transferee may hold the property on trust for the transferor.51 The conclusion that mistakes that vitiate the intent of the transferor should prevent property passing could be reconciled with the emphasis placed on the autonomy of the individual in the ideology that underlies classical liberal notions of property and contract, although it is not demanded by that ideology. Similarly, the Quistclose trust doctrine can be and generally is reconciled with orthodoxy through the argument that it involves the enforcement of the transferor’s will that the transferee receive only a limited right of property.52

Judicial discomfort with the power to use the constructive trust to alter property rights is apparent in the treatment of disputes over the distribution of property following the breakdown of intimate relationships. The common intention constructive trust effectively enforces a promise by legal owners to hold all or part of their property for the benefit of another.53 As such, it is entirely consistent with axiomatic notions of property. Beyond this, the judiciary traditionally disavowed all power to redistribute property other than according to the will of the original owner. This view still holds sway in England. While other common law jurisdictions have moved away from this orthodoxy, they have, in the face of absolutist notions of property, struggled to articulate satisfactory normative foundations upon which to construct their new doctrines.

Proprietary relief as a response to vitiated transfers, the Quistclose trust and the traditional approach to family property disputes can be regarded as consistent with axiomatic notions about property. These may be viewed as being “remedies” only in a weak sense: they involve the enforcement of consensual transfers or the recognition of a lack of “real” consent, rather than a forced redistribution of property rights. This does not mean that they are not or should not be controversial. The provision of proprietary relief in these circumstances is often difficult to justify, particularly given its consequences on third parties. Nonetheless, these remedies do no give rise to the acute anxiety that redistributive remedies are apt to generate.

49See supra ch. 1.II.2(b)(ii).

50See infra ch. 8.II.1.

51See, e.g., Chase Manhattan Bank v. Israel British Bank [1981] Ch. 105. See infra ch. 6.

52See infra ch. 7.I.3.

53See, infra ch. 10.II.1.

42 Property and Proprietary Remedies

2. Redistributive Proprietary Remedies

The other proprietary remedies examined in this book have a more obviously redistributive hue. By virtue of the doctrine of tracing, owners who initially enjoyed rights over certain assets are permitted to assert those rights over assets that did not previously belong to them. Similarly, constructive trusts for enrichment by wrongs, the acquisition of proprietary rights by subrogation, and proprietary remedies arising to prevent over-indemnification all enable plaintiffs to assert rights for which they never bargained. In addition, while proprietary estoppel is often concerned with enforcing informal agreements and promises, it is also used to prevent owners unconscionably taking advantage of another’s mistake.54 Finally, the numerous examples of liens arising by operation of law cannot be accounted for in terms of conventional notions of property.

Each of these doctrines, in substance, provides for the non-consensual readjustment of proprietary rights and so runs counter to the conventional paradigm of property. How do we account for the presence of such doctrines when the understanding of property that runs deep in our legal culture should preclude their existence? The answer lies in an appreciation of the manner in which these doctrines are conceptualised.

V. REASON AND RITUAL IN THE LAW OF PRORIETARY REMEDIES

1. Ritual in Legal Discourse

How are we to understand the rhetoric that pervades the law of proprietary remedies? The formal reasoning employed in these doctrines explains the relief provided in terms that are often so obviously fictional or metaphorical that it is difficult to view them as intelligible.55 However, it would be surprising if such elaborate doctrines were not meaningful on some level. To understand this discourse and to appreciate its power we must grasp its symbolic dimension and its performative function. One way in which we can do this is by understanding these doctrines as rituals.

Ritual is by no means an uncommon feature of legal argument. Anthropologists identify it as a characteristic of the legal discourse of cultures generally regarded as more primitive than our own.56 Closer to home, it has often been observed that the judgments of the French Cour de Cassation are disingenuous in their presentation of decisions as a process of logical deduction from principles that permits

54See, infra ch. 13.II.

55On the meaningless quality of much property talk, see K Gray, “Equitable Property” (1994) 47(2) CLP 157 at 159.

56See, e.g., M Gluckman, The Judicial Process Among the Barotse of Northern Rhodesia (Manchester, Manchester University Press, 1955) 310.

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no scope for judicial discretion and thus removes the dispute from moral and political controversy.57 Another example of ritual was provided by the use of fictions in English law to enable novel claims to be brought within the context of the existing forms of action.58 While we abandoned those forms of action and prohibited the use of fictions in pleading last century, the struggle to free ourselves from their influence has been a long one.59

Rituals colour our view of the world. They form part of, and take their meaning from, the conceptual systems we use to give meaning to our experiences.60 In particular they play a role in the constitution and maintenance of certain key social symbols in a struggle against indeterminacy.61 At times, rituals emphasise, and so reinforce, particular concepts and categories that are central to a symbolic order. We can see this in ceremonies such as traditionally found at weddings, in royal coronations, and in much of the display found in courts of law.62

More important for the purposes of this study, however, are rituals that play a role in defusing the conflict that can arise when we find it difficult to reconcile particular experiences or aspirations with our world vision.63 At such junctures, rituals can allow us to transgress, in substance, the categories we use to organise and understand our social order, while suppressing the nature of that transgression. What is, in substance, a departure from established norms is through ritual presented in a form that complies with the conventions in question.64 Through this process, the order that is apparently under threat may actually be reaffirmed.65 These rituals accommodate the urge for continuity and the desire for change: change is permitted, provided it is not acknowledged.66

It was in this vein that Lon Fuller observed that fictions and related devices serve to reconcile legal rules and decisions with premises to which a legal culture is committed.67 Where the result judges or jurists would like to endorse diverges from a

57 JP Dawson, Oracles of Law (Ann Arbor, University of Michigan Law School, 1968) 375;

K Zweigert and H Kotz, An Introduction to Comparative Law (2nd edn., Oxford, Clarendon Press, 1992) 127.

58JH Baker, An Introduction to English Legal History (London, Butterworths, 1990) 230–2.

59FW Maitland, The Forms of Action at Common Law (ed. AH Chaytor and WJ Whittaker, Cambridge, Cambridge Unitversity Press, 1936).

60G Homans, “Anxiety and Ritual: The Theories of Malinowski and Radcliffe-Brown” (1941) 43

American Anthropologist 164 at 172.

61S Falk Moore, Law as Process (London, Routledge and Kegan Paul, 1978) 40; E Hobsbawn and T Ranger, “Inventing Traditions” in E Hobsbawn and T Ranger (eds.), The Invention of Tradition (Cambridge, Cambridge University Press, 1983) 1 at 9.

62On law as ritual, see S Falk Moore and B Myerhoff, Secular Ritual (Amsterdam, Van Gorcum, 1977) 2.

63See e.g., V Turner, Schism and Continuity in African Society (Manchester, Manchester University Press, 1957); M Gluckman, Order and Rebellion in Tribal Africa (New York, Free Press, 1963).

64R Rappaport, Ritual and Religion in the Making of Humanity (Cambridge, Cambridge University Press, 1999) 130.

65C Bell, Ritual: Perpectives and Dimensions (Oxford, Oxford University Press, 1997) 65; E Leach,

Culture and Communication: The Logic by which Symbols are Connected (Cambridge, Cambridge University Press, 1976).

66P Bourdieu, The Logic of Practice (Cambridge, Polity Press, 1990) 238.

67LL Fuller, Legal Fictions (Stanford, Cal., Stanford University Press, 1967) at 51–3.

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fundamental premise, rather than questioning the validity of that premise, they will manipulate the formal expression of the decision so as to disguise its transgressive quality. These devices ensure that, at the level of formal expression, the law adheres to premises we regard as sacred and, thus, allow us to avoid fundamentally rethinking our normative commitments.68 In this way, in the terms of Thomas Kuhn’s analysis of the processes of accommodation that take place between experience and theoretical structures in science, the appearance is maintained that what is being done is “normal” law and not a “paradigm shift” requiring a change in our “world view”.69

2. Property Rites

Generally, an inclination toward the metaphysical is associated with law in its more primitive forms. We might think that, by now, English law must have shaken off recourse to such rituals. And, it is fair to say that, in general, argument and deliberation in contemporary common law discourse proceed in a reasonably open fashion. However, this is relative; and it is certainly less true of the analysis of proprietary remedies in English law. In this field, there tends to be little reference to policy, and legal argument has a highly formal quality and a tendency toward the metaphysical that is commonly associated with ritual.70 While we reject many of the excesses of our ancestors, some arcane forms of rationalisation still have us in their thrall. Through fiction and metaphor, specific instances of redistribution are secreted in the interstices of existing doctrines that provide for the enforcement of existing property rights and of consensual decisions to transfer property. This process has excused us from developing principles that would, first, allow us to redistribute property rights openly and, secondly, establish the proper limits of redistribution.

It is in light of the symbolic significance of property that we can appreciate the rhetoric found in the jurisprudence of proprietary remedies. This explains why the discomfort engendered by the idea that the judiciary might create or readjust property rights is nowhere more apparent than in the discourse surrounding doctrines that actually permit such intervention. Thus, we find that doctrines that in substance appear to transgress the prohibition against redistribution are wrapped in metaphors, fictions, estoppels and evidential presumptions. These devices suppress the reality that property rights are being readjusted by effecting the appearance that what is involved is simply the enforcement either of an owner’s pre-existing property rights or of a consensual transfer.

68O Barfield, “Poetic Diction and Legal Fiction” in M Black (ed.), The Importance of Language (Englewood Cliffs, NJ, Prentice Hall, 1962) 51 at 60–4.

69Cf. T Kuhn, The Structure of Revolutions in Science (2nd edn., Chicago, Ill., University of Chicago Press, 1970).

70Bell, supra n. 65 at 65.

Redistribution and Property Rites 45

One way this is achieved is through notions of transmutation and substitution.71 Thus, in tracing, an asset over which a plaintiff seeks to assert rights is treated as if it were an asset that the plaintiff already owned. In a similar vein, in subrogation, plaintiffs are treated as if they were someone else and then permitted to exercise that other person’s proprietary rights.

Similar effects are achieved through the use of fictions. Thus, in an alternative description of subrogation, the doctrine is expressed in terms of assignment, as if plaintiffs had themselves bargained for security. We can see this phenomenon elsewhere. For example, the doctrine of prescription came to incorporate the fiction of a “lost ancient grant”, suggesting that it was essentially concerned with the consensual transfer of property.72 Another example is the manner in which the American courts developed the doctrine of the “attractive nuisance” at the turn of the century. This provided, through the artifice of a fictional invitation, liability in negligence for landowners for injury suffered by children who were, in reality, trespassers.73

Evidential devices are also used to maintain conformity with axiomatic notions of property on a formal level, while providing for something quite different in substance. For example, in enrichment by wrongs, we see the use of evidential presumptions manufacturing the appearance of consent. The law presumes fiduciaries who accept bribes to have intended to hold them on trust for their principals.74 Similarly, estoppels may be used to prevent owners from relying on their rights without requiring that those rights be formally qualified.75

Finally, English courts often convert obligations to transfer specific assets into ownership through the use of the doctrine of conversion that gives effect to the maxim that “equity regards as done that which ought to be done”. Through this method, the common law transforms contractual rights that the civilian law treats as purely personal into proprietary interests76—a result that is often contrary to the parties’ immediate intention.77 Even more problematically, this maxim is

71 We may compare these doctrines with rituals of transubstantiation found in religious ceremonies. A familiar example is the Catholic Eucharist, where bread and wine represent the body of Christ. In addition, in part reflecting complex symbolic understandings and in part economic necessity, in the sacrificial ceremonies of many cultures one thing stands in the place of another. Thus, in some cultures a sheep or goat is used as a substitute for a bull. More striking is the triumph of economy and imagination of the Nuer of Sudan, for whom a cucumber stands in for an ox. See, R Frith, Symbols: Public and Private (London, George Allen and Unwin, 1973) 179 and 415.

72WH Blackstone, supra n. 13, ii at 263–6. See AWB Simpson, A History of the Land Law (2nd edn., Oxford, Clarendon Press, 1986) at 109.

73This fiction was subsequently abandoned in the First Restatement of Tort.

74AG for Hong Kong v. Reid [1994] 1 AC 324.

75J Nicholson, “Owning and Owing: In what circumstances will the Responsibilities of Ownership Preclude or Postpone the Assertion of the Rights of an Owner?” (1988) 16 MULR 784.

76A Scots lawyer reflecting on constructive trusts, remarks, “for the English lawyer this transformation is so obvious, so close to his eye, that he often hardly realises that it is a transformation, while for the Scots lawyer—or at least for many Scots lawyers—the transformation seems so strange as to be incomprehensible and unaccountable”. See G Gretton, “Constructive Trusts: I” (1997) 1 ELR 281 at

283.See also K Barker, “Rescuing Remedialism in Unjust Enrichment Law: Why Remedies are Right” [1998] CLJ 301 at 305.

77See, e.g., Walsh v. Lonsdale (1882) LR 21 Ch. D 9.

46 Property and Proprietary Remedies

sometimes combined with other legal rites to create entitlements never contemplated by the parties. Thus, in AG for Hong Kong v. Reid,78 when the maxim was added to the counterfactual evidential presumption that the fiduciary intended to hold the benefit in question on trust for his principal, the bribe became the principal’s property. Similarly, in Lord Napier & Ettrick v. Hunter,79 the equitable lien granted to prevent an assured’s over-indemnification was said to arise from an implied term in the contract of insurance that was then, by virtue of the maxim, converted into a proprietary interest.

Notions of tracing and subrogation, fictions of consent, evidential devices and the doctrine of conversion are employed to redistribute property rights. Yet in each, a departure from the conventional paradigm of property, suggesting a shift from the province of the judiciary into that of the legislature, is obscured. Rhetoric is employed to provide the illusion that these doctrines involve the observance of existing entitlements, rather than a redistribution of the parties’ rights and obligations. In substance, these doctrines depart from, and thus threaten to undermine, the orthodox understanding of property. Yet, at the same time, the rhetorical strategies employed disguise this departure and draw upon the symbolic power of the classical liberal understanding of property to insulate these doctrines from controversy. In these rites of denial, in the very process of transgression, property is affirmed as a powerful cultural symbol—marking an inviolable boundary between law and politics.

Thus, the rituals with which we are concerned are comprehensible not in terms of explanatory logic but as performative acts.80 Take, for instance, the doctrine of tracing and the explanation that plaintiffs are entitled to a proprietary remedy because they are able to “follow” an asset into another asset. We may infer that this is a mere conclusion, a statement of a legal outcome, rather than a true explanation for that outcome: for, to the extent that it is treated literally as an explanation, it is metaphysical nonsense. The power of this explanation lies in its role as a speech act. It not so much an explanation of something that has taken place outside the court, as an act that confers legitimacy upon a judicial redistribution of property by denying its transgressive nature.

3. Rituals and the Normative Framework of the Private Law

In our legal culture, property is not seen merely as the aggregate of isolated decisions about entitlement to resources. Instead we embrace a more abstract conception of property that forms part of a conceptual system that organises and gives meaning to our private law. It is part of a normative order in which notions of

78[1994] 1 AC 324.

79[1993] AC 713.

80JL Austin, How to do Things with Words (2nd edn., Cambridge, Mass: Harvard University Press, 1975); J Searle, Speech Acts (Cambridge, Cambridge University Press, 1969). For a discussion of the application of these principles to the study of ritual, see Bell, supra n. 65 at 68–72.

48 Property and Proprietary Remedies

On the other hand, resort to ritual is not found in equal measure in different common law cultures. The following chapter considers developments in other jurisdictions that provide for a more instrumentalist approach to property.

3

The Legacy of Legal Realism: Instrumentalist Approaches to Property

THE TENDENCY to utilise ritual in the law of proprietary remedies is largely related to a legal culture’s commitment to a vision of the judge-made private law as system of corrective justice that is autonomous from politics. To a large degree, this vision of the law was abandoned in American legal thought in the wake of the legal realist movement.1 The rejection of absolutist understandings of property and contract were at the heart of the rise of a new legal methodology that eschewed formalism for a more openly prescriptive style of argument. This has led to an on-going debate regarding the legitimacy of proprietary remedies—a debate that is quite different in character from the treatment of the issue in England. Moreover, trends in Australian, New Zealand and Canadian law suggest a departure from the conventional English approach toward an understanding closer to that found in the United States. These developments suggest a willingness to engage in a more frankly normative approach to legal justification, to transcend unquestioned assumptions inherited from another age, and to accept responsibil-

ity for defining the meaning of property.

I. PROPERTY IN AMERICAN LEGAL THOUGHT

1. The Rise and Fall of Universal Principles of Common Law

The notion that the private law was based on immutable principles of property and freedom of contract exercised great influence in American legal thought from the latter part of the last century until the New Deal. In this period, American legal scholars endeavoured to rationalise the law by revealing immanent principles from which could be deduced more concrete legal rules. Notions of private property and freedom of contract tended to provide much of the conceptual framework of the schemes that were produced in this way.2 In part, this approach can be

1See generally M Hortwitz, The Transformation of American Law 1870–1960: The Crisis of Legal Orthodoxy (New York, Oxford University Press, 1992).

2W Wiecek, The Lost World of Classical Legal Thought: Law and Ideology in America, 1886–1937

(New York, Oxford University Press, 1998) 10, 38–41 and 89–93; W Twining, Karl Llewellyn and the Realist Movement (London, Weidenfeld and Nicolson, 1973) 11–14. On the notion that the study of law was analogous to Euclidean geometry in that the whole field of knowledge could be deduced from certain basic axioms, see C Langdell, A Selection of Cases of the Law of Contracts (Boston, Mass., Little, Brown & Co., 1871), pp. vi–vii.

50 Property and Proprietary Remedies

attributed to the rise of science in the nineteenth century, which meant that in the United States, as in England, scientific methods came to be seen as a model for the analysis of the law, as well as for economics and the social sciences.3 In addition, American legal culture was shaped by a number of influences not present on the other side of the Atlantic. For one thing, in a multi-jurisdictional country, the notion of universal legal principles was particularly enticing both because it offered the promise of harmonising the common law and because it allowed academics to write for a national audience.4 Furthermore, American legal discourse had been conditioned by the rights consciousness that flourished as a result of a century of judicial review of legislative action.5 In any event, as contemporary observers noted, Americans showed a greater propensity for abstract theorising than did their empiricist English cousins.6 Thus, strange as it may seem today, the seriousness with which American scholars embraced the ideal of legal science and the vigour with which they endeavoured to reveal the systematic structures that supposedly underlay the law was a cause for amusement for their more pragmatic English counterparts.7

The understanding that the common law was based on fundamental legal principles rather than the pronouncements of particular courts found expression in Justice Story’s judgment in Swift v. Tyson8 in the mid-nineteenth century. Story concluded that, when resolving a commercial dispute, the federal judiciary was not bound by determinations on the common law made by the judiciary of the state in which the action arose. Instead the federal courts were to apply “general principles of the common law”.9

By the turn of the century this view was threatened by a more positivistic perspective, exemplified by the analysis of Oliver Wendell Holmes in the Supreme Court in Southern Pacific v. Jensen.10 In his influential dissenting judgment, Holmes ridiculed Story’s position, arguing that, “[t]he common law is not a brooding omnipresence in the sky, but the articulate voice of some sovereign or quasi-sovereign that can be identified”.11 In constitutional law, Holmes emphasised the policy content of judicial decision-making and urged that this should be

3N Duxbury, Patterns of American Jurisprudence (Oxford, Clarendon Press, 1995) 10–25.

4For a typically frank assessment see K Llewellyn, “Through Title to Contract and a Bit Beyond” (1938) 15 NYULQR 159 at 159–60.

5A de Toqueville Democracy in America (London, Fontana, 1994) at 237–40; P Atiyah and R Summers, Form and Substance in Anglo-American Law (Oxford, Clarendon Press, 1987) 238–9.

6See, e.g., de Toqueville, supra n. 5, 438. For a similar observation by Emerson, see HS Commager (ed.), Britain Through American Eyes (London, The Bodley Head, 1974) 272.

7See, e.g., Sir Frederick Pollock, Principles of Contract (9th edn., London, Stevens, 1921) at pp. x–xi; cited in P Atiyah, The Rise and Fall of Freedom of Contract (Oxford, Clarendon Press, 1979)

816 Pet 1 (1842).

9See e.g. M Horwitz, The Transformation of American Law 1780–1860 (New York, Oxford University Press, 1977) 245.

10244 US 205 at 222 (1917).

11Ibid. at 222.

The Legacy of Legal Realism: Instrumentalist Approaches to Property 51

candidly acknowledged.12 Holmes’ views gained wide acceptance, and the Supreme Court eventually overturned Swift v. Tyson in 1938.13

2. The Shift to a Positivist Understanding of Property

The evolution of attitudes towards property in American legal thought is evident in the treatment of the question of which resources were afforded proprietary protection. A tension is apparent in the different judgments in the Supreme Court’s decision in International News Service v. Associated Press,14 where the Associated Press sought an injunction in order to prevent a competitor from “stealing” its news. Justice Pitney argued for the majority that, because it was a valuable resource, the plaintiff’s information amounted to property and should be protected as such. Justice Holmes, while siding with the majority, refused to accept his colleague’s method of resolving the matter. Holmes commented: “[p]roperty, a creation of law, does not arise from value, although exchangeable—a matter a fact. Many exchangeable values may be destroyed intentionally without compensation. Property depends upon exclusion by law from interference.”15 Realist scholars subsequently welcomed Holmes’ positivism. It was in this vein that Felix Cohen branded as “transcendental nonsense” the tendency to justify the protection of a novel interest on the basis that it simply was somehow inherently proprietary, rather than by weighing the consequences of imposing a particular degree of protection.16

The recognition of rights in respect of new forms of intangible resources and the characterisation of contractual rights as property encouraged a move beyond the paradigm of property as absolute rights over a particular object.17 While it was convenient to characterise new kinds of intangible wealth as property, it was clear that the protection afforded to resources such as trade-marks and businesses’ good-will often had to be less than absolute.18

12GE White, Justice Oliver Wendell Homes: Law and the Inner Self (New York, Oxford University Press, 1993) 379.

13See Erie RR v. Tomkins 304 US 64 (1938).

14248 US 215 (1918).

15Ibid. at 246. See also Holmes’ analysis in De Nemours Powder Co. v. Masland 244 US 100 at 102 (1917).

16F Cohen, “Transcendental Nonsense and the Functional Approach” (1935) 35 Colum L Rev. 809 at 814–17.

17K Vandervelde, “The New Property of the Nineteenth Century: The Development of the Modern Concept of Property”, (1980) 29 Buffalo L Rev. 325. According to the New Hampshire Supreme Court, “[a] refusal to pay a debt is an injury to the property of the creditor”: Thompson v. Androscoggin River Improvement Co. (1874) 54 NH 544 at 552. Property reasoning was also used to overcome the third party beneficiary rule: Lawrence v. Fox 20 NY 268 (1859)—making the defendant promisor a constructive trustee of the benefit of the promise for the third party beneficiary. See AJ Waters, “The Property in the Promise: A Study of the Third Party Beneficiary Rule” (1985) 98 Harv. L Rev. 1109 at 1196.

18Vandervelde, supra n. 17, at 341.

52 Property and Proprietary Remedies

3. Notions of Property and the Law of Eminent Domain

The role that private property was perceived to play in American constitutional law is apparent in the jurisprudence of eminent domain. The traditional understanding of that doctrine required that “property must be actually taken, in the physical sense of the word”19 before a right to compensation would arise. This understanding— which still prevails in England20—allows for the maintenance of clear, if somewhat arbitrary, limits on such compensation clauses. It suggests that the smallest physical appropriation or invasion would require compensation, while regulation that might wipe out the economic value of property demands no such response. However, in the later part of the nineteenth century, American jurists lamented that this conception of property provided insufficient protection for the individual against state power. John Lewis, a constitutional law professor, argued that the solution was to “look beyond the thing itself, beyond the mere corporeal object, for the true idea of property”.21 Here, again, we see the influence of a conception of property as a prelegal principle setting fundamental limits on state action.

In the late nineteenth century, the Supreme Court indicated that it was not prepared to read takings clauses in their “narrowest sense” as requiring physical expropriation.22 This viewpoint was consolidated in Pennsylvannia Coal Co. v. Mahon,23 where Oliver Wendell Holmes introduced the concept of what has become known as “regulatory takings”. In Holmes’ view, even if their land remained physically untouched, owners might be entitled to compensation if state regulation reduced the value of that land by restricting owners’ rights to exploit it commercially. At the same time, he recognised that, unless the hands of the state were to be tied completely, not every regulation that impacted on the value of someone’s land could be categorised as a taking.24 While Holmes rejected the physicalist paradigm of property, he did not conceive of himself as searching for the “true idea of property”. Rather than illuminating some pre-political boundary, he understood the court to be pragmatically setting the limits of state interference with privately owned resources. What constituted a taking was, in Holmes’ words, “a question of degree”: a matter of policy.25 In Holmes’ thought, neat applications of first principles were abandoned in favour of the balancing of competing interests. Perhaps, as Morton Horwtiz has suggested, it is in Holmes’ work that we can see the commencement of “the demise of the late-nineteenth-century system of legal formalism” and “the beginning of modernisim in American legal thought”.26

19J Lewis, Treatise on the Law of Eminent Domain in the United States (New York, Collaghan, 1888) 45; cited in Hortwitz supra n. 1 at 147.

20See, e.g., Government of Mauritius v. Union Flacq Sugar Estates Co. Ltd. [1992] 1 WLR 903 at 911.

21Lewis, supra n. 19 at 45.

22Pumpelly v. Green Bay Co. 89 US (13 Wall) 166 at 177–8 (1871) per Miller J.

23260 US 393 (1922).

24Ibid. at 416 per Holmes J.

25Ibid. For a more recent statement of this understanding, see Justice Brennan’s judgment in Penn Central Transportation Co. v. New York City 438 US 104 at 128 (1978).

26Horwitz, supra n. 1 at 131.

The Legacy of Legal Realism: Instrumentalist Approaches to Property 53

Another way in which American law has negotiated the balance between the interests of the state and individuals is through reinvigorating the notion that some property, rather than being purely private, is “affected with a public inter- est”—a notion that had long since fallen into obsolescence in English law.27 Where particularly significant resources are in private hands, the “public trust” doctrine has allowed the courts to limit the rights that owners may assert over such property.28

4. Property and Due Process

That an absolutist conception of private property and the notion of freedom of contract came to be seen as fundamental constitutional principles is also apparent in the “substantive due process” jurisprudence of the Supreme Court. In the late nineteenth century, the constitutional scholar Christopher Tiedeman argued that “society, collectively and intellectually, can attain its highest development by being left free from governmental control, as far as this is possible, provision being made by the government only for the protection of the individual and of society by the punishment of crimes”.29 In cases such as Lochner v. New York,30 the Supreme Court interpreted the right of citizens under the Fourteenth Amendment not to be deprived of rights without due process to preclude state or federal government from abridging rights to exploit property and the freedom to contract. In this spirit, the judiciary interpreted the states’ “police power” to regulate property and contract narrowly to correspond with the limits of property found at common law. According to this understanding, state legislatures could do no more than prevent the “noxious use” of property to ensure that it was not used to interfere with the rights of others.31

This understanding did not survive the New Deal and the coming of the modern regulatory state. In response to the new Zeitgeist, the Supreme Court came to recognise that “neither property rights nor contract rights are absolute”.32 In 1937 the Supreme Court decisively renounced its vision of substantive due process in

27See P Craig, “Constitutions, Property and Regulation” [1991] Public Law 538.

28The landmark case was Illinois Central Railroad v. Illinois 146 US 389 (1892). See Rose, “The Comedy of the Commons: Custom, Commerce, and Inherently Public Property” in Property and Persuasion (Bolder, Colo., Westview Press, 1994) 105. A more restrictive approach to the area is apparent in recent Supreme Court rulings: see, e.g., Nollan v. California Coastal Commission 483 US 825 (1987).

29C Tiedeman, The Unwritten Constitution of the United States (New York, GP Putnam’s Sons, 1890) 76. See Wiecek, supra n. 2 at 96–7.

30198 US 45 (1905). In Lochner, the Supreme Court concluded that a statute restricting working hours in bakeries was in breach of the Fourteenth Amendment as a violation of the liberty of contract. In the other landmark decision of this era, Adkins v. Children’s Hospital 261 US 525 (1923), a minimum wage for women was struck down for the same reason. See, e.g., J Ely, The Guardian of Every Other Right (2nd edn., New York, Oxford University Press, 1992) 101–18; Horwitz, supra n. 1 at 145–51.

31See, e.g., Commonwealth v. Alger 7 Cush. 53 at 86 (Mass., 1851) per Shaw J; Village of Euclid v. Amber Realty Co. 272 US 365 (1926); Miller v. Schoene 276 US 272 (1928).

32Nebbia v. New York 291 US 502 at 526 (1934) per Roberts J.

54 Property and Proprietary Remedies

West Coast Hotel Co. v. Parish.33 With the abandonment of Swift v. Tyson and its notion of universal principles of common law just a year later in Erie Railroad v. Tompkins,34 the triumph of a new legal consciousness was manifest.

5. The Disintegration of Property

The legal realists launched an attack on the conception of property that was central to formalist legal thought.35 This assault was aided by Hohfeld’s analysis of property as a bundle of discrete legal relationships between people.36 Hohfeld observed that the interests collectively known as ownership were separable and that there was no reason why the presence of one interest should imply that of others.37 It followed that it need not be supposed that the protection afforded in respect of a resource should be absolute. Notions of “ownership” came to be regarded with suspicion, with analysis shifting instead to the individual rights in the bundle known as property.38

A number of scholars applied these insights to revolutionise the received understanding of the nature and proper limits of private power. Thus, Robert Hale argued that the judicial regulation of rates set by utilities represented “a legal curb on the power of property owners” that might “very well serve as a model . . . for the revision of other property rights”.39 Similarly, Berle and Means suggested that shareholders’ surrender of control to company managers “released the community from the obligation to protect them to the full extent implied in the doctrine of strict property rights”.40 Closer to traditional common law concerns, Karl Llewellyn observed that, in structuring rights and obligations in complex sales transactions, reliance on absolutist notions of property generated dysfunctional results.41

As a result of this shift in legal consciousness, property is generally no longer understood as providing a boundary between law and politics. As Jennifer Nedelsky notes: “[i]t is now widely accepted that property is not a limit to legitimate governmental action, but a primary subject of it”.42 A New Jersey Supreme

33300 US 379 (1937).

34See supra, text accompanying nn. 8–13.

35See Horwitz, supra n. 1 at 163–6.

36WN Hohfeld, “Some Fundamental Legal Conceptions As Applied in Judicial Reasoning” (1913) 23 Yale LJ 16; and (1917) 26 Yale LJ 710. On Hohfeld’s influence on the realists, see Twining, supra n. 2 at 34–40.

37Horwitz, supra n. 1 at 145–67.

38B Ackerman, Private Property and the Constitution (New Haven, Conn., Yale University Press, 1977) 26.

39R Hale, “Rate Making and the Revision of the Property Concept” (1922) 22 Colum L Rev 209 at

40A Berle and G Means, The Modern Corporation and Private Property (New York, Macmillan, 1932) 333–9.

41K Llewellyn, supra n. 4 at 165–72. See infra ch. 8.I.

42J Nedelsky, Private Property and the Limits of American Constitutionalism (Chicago, Ill., Chicago University Press, 1990) at 231.

The Legacy of Legal Realism: Instrumentalist Approaches to Property 55

Court decision, State v. Shack,43 provides an example of the modern American attitude toward property. There, adopting a view previously expressed by an academic, Weintraub J observed that “[a]n owner must expect to find the absoluteness of his property rights curtailed by the organs of society, for the promotion of the best interests of others for who these organs also operate as protective agencies”.44

Thomas Grey has characterised this shift in understanding as “the disintegration of property” and has concluded that “the substitution of a bundle-of-rights for a thing-ownership conception of property has the ultimate consequence that property ceases to be an important category in legal and political theory”.45 Yet this is not necessarily something to be lamented. It is true that the bundle-of-rights conception of property is essentially devoid of content. However, it is this feature of this perspective that is its very attraction. In post-realist legal analysis, legal concepts are conceived of as tools for the implementation of policy objectives.46 While doctrine remains important, understanding the proper scope of legal principles requires a purposive approach that pays attention to the objectives underlying them.47 According to this view, the content of a particular conception of property should be the conclusion of a process of pursuing particular policy objectives,48 and should not be inhibited by a priori understandings of what property is. Thus, it is accepted that property is a conclusion and not a fundamental justification, a product of the law and not a reason for it. These rights are recognised for reasons of policy and limited where policy demands it.

6. The Influence of these Understandings on the Common Law

That the formalist understanding of property has lost much of its hold in American legal culture is apparent in decisions that raise the issue of the redistribution of proprietary rights. In contrast to the English Court of Appeal in Shelfer v. City of London Electric Lighting Co.,49 the New York Supreme Court in Boomer

43277 A 2d 369 (NJ, 1971).

44Ibid. at 373 (citing a passage from Rohan (ed.) supra n. 54 at 493–4).

45T Grey, “The Disintegration of Property” in JR Penncock and JW Chapman (eds.), Nomos XXII: Property (New York, New York University Press, 1980) 69 at 81.

46A Kronman, The Lost Lawyer (Cambridge, Mass., Harvard University Press, 1993) at 19.

47This point can be explained in the instrumentalist language of legal realism as focusing on policy. However, it may equally be described in terms of the more formalistic perspective developed by Ronald Dworkin, whereby the application of legal rules is guided by reference to legal principles that are immanent to the common law and that express a community’s moral and political values. See, e.g., Law’s Empire (Cambridge, Mass., Belknap, 1986); R Cotterrell, The Politics of Jurisprudence: A Critical Introduction to Legal Philosophy (London, Butterworths, 1989) 150–81. However, what it clearly does entail is the rejection of a form of positivistic formalism that largely excludes values from the development, interpretation and application of law.

48See, e.g., J Coleman and J Kraus, “Rethinking the Theory of Legal Rights” (1986) 95 Yale LJ 1335 at 1340.

49(1895) 1 Ch. 287; see supra ch. 2. II. 2(b).

56 Property and Proprietary Remedies

v. Atlantic Cement,50 was prepared to refuse to enjoin a factory that was causing a nuisance and to limit the plaintiff to damages. The court was not perturbed by the notion that by so doing it was expropriating the plaintiff’s property rights. Similarly, in contrast to the approach taken by English courts in this area,51 a number of states have developed remedies for the reallocation of property upon the breakdown of relationships akin to marriage.52 Once again, these courts have not regarded this as a usurpation of the legislative function.

Generally the approach taken to property in American law is less absolutist than that favoured in English law. This is apparent in a greater willingness to impose duties upon landowners to exercise due care in respect of trespassers.53 This attitude is also demonstrated by the greater readiness of American courts to limit the use that owners may make of their property. In particular, state courts developed common law norms to prohibit malicious use of property54 and anti-competitive conduct55 when the English courts showed little inclination to do so.56 Finally, some state courts have restricted the extent to which private owners who open their premises to the public may exclude others.57

50257 NE 2d 870 (NY, 1970).

51See, e.g., Gissing v. Gissing [1971] AC 886; Lloyds Bank v. Rosset [1990] AC 107. See supra nn. 18–19 and accompanying text.

52See, e.g., Marvin v. Marvin 557 P 2d 106 at 112 (Cal., 1976); Pickens v. Pickens 490 So. 2d 872 (Miss., 1986). See infra ch. 10.II.2 and 4.

53§ 339 of the Restatement of Torts (St Paul, Minn., American Law Institute Publishers, 1934) imposed a duty to trespassing children. § 336 of the Restatement of Torts 2d (St Paul, Minn., American Law Institute Publishers, 1965) provides that where an occupier knows or has reason to know of the presence of a trespasser, an ordinary duty of care is owed. Subsequently, the courts in a number of states have held that landowners owe an ordinary duty of care to trespassers. The seminal decision was Rowland v. Christian 443 P 2d 561 (Cal., 1968). See Jones v. Hansen 867 P 2d 303 at 310 (Kan., 1994) for a recent discussion of developments in the state courts. In England, until comparatively recently, the position at common law was that owners were liable only if they deliberately or recklessly harmed trespassers: Robert Addie and Sons (Collieries) Ltd. v. Dumbreck [1929] AC 358. Subsequently, the House of Lords favoured a duty of common humanity that remained less onerous than the ordinary duty of care: British Railways Board v. Herrington. [1972] AC 877. Eventually, the legislature intervened to provide more wide-ranging protection: Occupiers’ Liability Act 1984.

54Flaherty v. Moran 45 NW 381 (1890). See PJ Rohan (ed.), Powell’s Real Property (New York, Matthew Bender, 1970) § 62.05.

55Tuttle v. Buck 119 NW 946 (Minn., 1909). R Peritz, “The ‘Rule of Reason’ in Antitrust law: Property Logic in Restraint of Competition” (1989) 40 Hastings LJ 285 at 289.

56See, e.g., Mayor of Bradford v. Pickles [1895] AC 587; Mogul Steamship Co. v. McGregor Gow & Co.

[1892] AC 25.

57Most cases have involved attempts to curb free speech challenged on the basis of rights conferred by the First Amendment or state constitutions. See, e.g., PruneYard Shopping Centre v. Robins 447 US 74 (1980); State v. Schmid 423 A 2d 615 (1980); New Jersey Coalition Against War in the Middle East v.

JMB Realty Corp. 650 A 2d 757 (NJ, 1994). However, some cases even envisage a general common law principle of reasonable access: see State v. Shack 277 A 2d 369 (NJ, 1971); Uston v. Resorts International Hotel Inc. 445 A 2d 370 (1982). Nonetheless, the orthodoxy remains that, apart from those pursuing common callings and in the absence of statutory restrictions, proprietors of businesses may exclude whom they wish: see, e.g. Brooks v. Chicago Downs Association Inc. 791 F 2d 512 (7th Cir, 1986). English courts have declined to limit rights of exclusion in the context of privately owned property generally open to the public: British Airports Authority v. Ashton [1983] 3 All ER 6; CIN Properties v. Rawlins

[1995] 2 EGLR 130. See K Gray and SF Gray, “Private Property and Public Propriety” in J McLean (ed), Property and the Constitution (Oxford, Hart Publishing, 1999) 11.

The Legacy of Legal Realism: Instrumentalist Approaches to Property 57

While the absolutist understanding of property still exerts an influence on the American legal imagination,58 its force is muted in comparison with its role in English law. It has long since become obvious in American law that property rights need not be absolute.

II.INSTRUMENTALISM IN PROPRIETARY REMEDIES IN US LAW

1.The Formalism of Early Remedial Constructive Trust Theory

The jurist who has most influenced American constructive trust law is Austin W. Scott, an eminent Harvard trusts scholar responsible for the rationalisation of the law of equitable remedies within the framework of the Restatement of Restitution. The Restatement of Restitution was in many ways unique among the Restatements in that it sought to give an authoritative account of a field of law that was so controversial and ill-formed that, in a sense, there was nothing to restate. The task of the commentators was to explain disparate doctrines in terms of restitutionary theory. Much work remained to be done in formulating the theoretical framework of restitution as well as in describing the substantive doctrines.

The tendency to employ proprietary reasoning to justify new legal developments was prevalent in this formative period of American restitution law. As Felix Cohen observed, “property” is one of the “magic ‘solving words’ of traditional jurisprudence”.59 The argument that something is the property of the plaintiff seems to carry more power than a justification based on concepts of personal obligation. It was in this light that a leading American restitution scholar, George Palmer, lamented the judicial tendency to justify relief on the basis of equitable ownership, even in instances where relief is apparently available at common law and the plaintiff is not seeking the advantages of proprietary relief. He explained this habit on the basis that “[t]he constructive trust idea stirs the judicial imagination in ways that assumpsit, quantum meruit, and the other terms associated with quasi contract have never quite succeeded in duplicating”.60

As Palmer subsequently observed, Scott’s contribution to the development of the constructive trust reflects an ambivalence between recognising the device as a remedy and conceiving of it in terms of pre-existing proprietary interests.61 As a result, despite the insistence that the constructive trust was a remedy for unjust enrichment, the device was never entirely reduced to remedial status. On the one hand, Scott divorced the constructive trust from its historic association with

58See Nedelsky, supra n. 42 at 244; J Singer, “The Reliance Interest in Property”, (1988) 40 Stan L Rev 611 at 634. A good example is Loretto v. Teleprompter Manhatten CATV Corp. 458 US 419 (1982). In Loretto, the Sup. Ct. held that all physical invasions of property—no matter how minor—amounted to takings. The case involved the installation of a television cable on the plaintiff’s roof.

59Cohen, supra n. 16 at 820.

60Palmer, Law of Restitution, i § 1.3 at 16.

61Ibid. § 2.14 at 184.

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fiduciary relationships,62 and characterised it as an equitable remedy that might be declined if legal remedies were adequate.63 On the other hand, he insisted that the proprietary interest of plaintiffs seeking restitution arose automatically upon the occurrence of an unjust enrichment. This made the interest appear to be more akin to a subsisting property right than a simple remedy.

Under Scott’s guidance, the Restatement simply provided that “[a] constructive trust is imposed upon a person in order to prevent his unjust enrichment. To prevent such unjust enrichment an equitable duty to convey the property to another is imposed upon him.”64 Scott’s proprietary analysis tended to deflect him and other commentators from examining the constructive trusts in terms of a remedy that conferred priority in insolvency. Thus, nowhere did he explain why proprietary relief was necessary to reverse unjust enrichment.65

Why, after accepting that the remedy should be discretionary, did Scott insist on the counter-intuitive notion that the plaintiff’s proprietary interest arises automatically? He appears to have been beguiled by an idea of the law as based on prelegal rights that the courts recognise rather than create—a notion exemplified by Justice Story’s endorsement in Swift v. Tyson of “general principles of the common law”.66 Scott’s background does much to explain his methodological leanings. His formative years as a legal scholar were in the heyday of the ideal of legal science in the United States. He graduated in 1910 from Harvard, the heartland of this orthodoxy.67 The very fact of Scott’s involvement in the Restatement project points to his methodological tendencies.68 The Restatements are often depicted as the last stand of the formalist conception of legal science.69 Indeed, the effort to explicate the disparate rules of quasi-contract and equitable remedies in terms of a system ordered by the notion of unjust enrichment was an archetypal formalist endeavour. It is not surprising that the leading figure in the academic systematisation of the law of restitution prior to the Restatement was William Keener, a protégé of the doyen of Harvard’s formalists, Christopher Columbus Langdell. Nor is it any surprise that Scott was perceived to be a formalist by realist contemporaries.70

What is more, Scott’s work on the theoretical foundations of proprietary relief took place in the era of the Lochner court when the inviolability of property and freedom of contract were articles of faith for American legal orthodoxy.71 The

62W Seavey and AW Scott, “Restitution” (1938) 54 LQR 29 at 41.

63A Scott, The Law of Trust (3rd edn., Boston, Mass., Little, Brown & Co., 1967) v, § 462 at 3416.

64The Restatement of Restitution commentary to § 160.

65Scott’s failure to provide any adequate justification for the provision of proprietary remedies is apparent in his account of tracing and its failure to explain why tracing claimants should be given priority over general creditors. See supra ch. 4.III.

66See supra text accompanying nn. 8–9.

67W LaPiana, Logic and Experience: the Origin of Modern American Legal Education (New York, Oxford University Press, 1994).

68Scott was also a reporter for the Restatement of Trusts (St Paul, Minn., American Law Institute Publishers, 1935).

69Ibid. at 164.

70See T Arnold, “The Restatement of the Law of Trusts” (1931) 21 Col. L Rev. 800.

71See supra n. 30 and accompanying text.

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remedial constructive trust presented a clash between the absolutist conception of private property and that of unjust enrichment. If a reconciliation of these principles was not possible, Scott was liable to take comfort in the characterisation of constructive trusts as arising automatically. The view that the constructive trust arises when declared reinforces the judicial role in determining the allocation of the resources in question. With the acknowledgement of judicial choice comes the responsibility to justify its exercise. In contrast, the automatic vesting conception of the constructive trust suppresses the appearance that the doctrine in question readjusts property rights. It gives, instead, an appearance of the courts’ taking a passive role in enforcing pre-existing rights.

2. Realism about Proprietary Relief

With the advent of legal realism, the tide turned against Scott’s vision of the constructive trust. Within a short period of the publication of the Restatement of Restitution, the received wisdom of American legal culture was placed under considerable strain. The very year the Restatement was published saw the Supreme Court’s most decisive departure from the vision of Lochner in West Coast Hotel Co. v. Parish;72 and, the following year, the Court overturned Swift v. Tyson, thereby abandoning the notion of “general principles of the common law”.73 In the new environment, the notion of absolute property rights lost much of its influence.

Unmoved by the concerns that had motivated Scott, the next generation of restitution scholars had little sympathy for his analysis of the constructive trust. Few American commentators have been content with Scott’s conceptualisation of the nature of the constructive trust; most concluding instead that the plaintiff’s interest arises only when ordered by the court.74 Precedent in the United States was divided before the Restatement,75 as it has been since.76

72300 US 379 (1937).

73Erie RR v. Tompkins 304 US 64 (1938).

74See, e.g., Palmer, Law of Restitution, i, § 2.13 at 171 and supplement (1990) 10; GG Bogert, The Law of Trusts and Trustees (2nd edn., St Paul, Minn., West, 1977) § 472 at 11. Interestingly, Andrew Burrows asserts that Scott was “forced” to acknowledge that the constructive trust arose automatically, thus pointing to an apparent fundamental contradiction in the US approach: A Burrows, The Law of Restitution at 40. However, the rejection of automatic vesting by other American jurists suggests that any contradiction is to be found in Scott’s work, rather than in the concept of the remedial constructive trust. Scott was “forced” to reason as he did only by his own desire to reconcile the constructive trust with notions of the inviolability of property and in order to avoid certain policy issues that inevitably arise in this context.

75Supporting Scott’s position was Kemp v. Elmer Co. 56 F 2d 657 (SD Cal., 1932). Favouring the opposite view was Smith v. Township of Au Gres 150 F 257 (6th Cir., 1906).

76Supporting the view expressed in the Restatement is United States v. Fontana 528 F Supp. 137 (SD NY, 1981). The opposing position is taken in International Refugee Organisation v. Maryland Drydock Co., 179 F 2d 284 (4th Cir., 1949) and Papazian v. American Steel and Wire Co. of New Jersey 155 F Supp. 111 (1957).

Authorities in federal bankruptcy courts are divided. Thanks more to precedent and inertia than to reasoned deliberation, Scott’s position still represents the orthodoxy: see E Sherwin, “Constructive Trusts in Bankruptcy” [1989] University of Illinois Law Rev. 297 at 328. However, Scott’s view was

60 Property and Proprietary Remedies

Increasingly doubting the reasoning underpinning Scott’s treatment of the area, commentators began to question the justice of awarding proprietary remedies in bankruptcy.77 Perhaps the most articulate expression of these concerns came from John Dawson. While Dawson, like Scott, was a Harvard Professor, the differences between the scholarship of the two are stark. Dawson was a legal realist who challenged the formalist vision of the private law.78 In contrast to Scott’s reductionism, Dawson’s work was comparative and historical, emphasising the forces that shape the law in different legal cultures.79

Analysing constructive trust law, Dawson concluded: “we have created a monster”.80 He noted the unfortunate tendency to conceive of the proprietary interest associated with constructive trust relief as automatic. In his view:

Our courts have been misled in this whole field, not so much by the direct appeal of an unjust enrichment principle as by a conception of equitable ownership, the product of an essentially new and questionable remedy. Seduced by this conception, they have refused to draw distinctions, to weigh various kinds of equities, or to consider the unjust gain they inevitably produce at the expense of other creditors.81

Critics were similarly ill-disposed to that other device for giving priority in insolvency, the equitable lien. Justice Holmes regarded the reasoning generally given to justify the provision of that remedy as vacuous.82 Another jurist, noting the tendency of this remedy to complicate the distribution of bankrupt estates, concluded that “the equitable lien is a dangerous and elusive enemy of the law of preference”.83

3. Re Omegas and the Unravelling of the Remedial Constructive Trust

In 1994, in Re Omegas Group Inc.,84 the Federal Court of Appeals of the Sixth Circuit delivered a controversial decision on the effect of the constructive trust in

rejected by the Federal Court of Appeals of the 6th Circuit in the controversial decision of Re Omegas Group Inc. 16 F 3d 1443 (1994). See infra § III.3.

The Canadian Supreme Court narrowly favoured Scott’s approach in Rawluk v. Rawluk [1990] DLR (4th) 161.

77E.g., JP Dawson, Unjust Enrichment: A Comparative Analysis (Boston, Little, Brown & Co., 1956); F Lacey, “Constructive Trusts and Equitable Liens in Iowa” (1954) 40 Iowa L Rev. 107.

78See, e.g., JP Dawson, “Economic Duress: An Essay in Perspective” (1947) 45 Michigan Law Review

79This understanding, while apparent in his treatment of the law of restitution: supra n. 77, is best exhibited in his classic work, The Oracles of Law (Ann Arbor, Mich., University of Michigan Law School, 1968).

80Dawson, supra n. 77 at 30.

81Ibid. at 32.

82Thus in Sexton v. Kesser 225 US 90 at 98–99 (1912) Justice Holmes commented: “the phrase equitable lien may not carry the reasoning further or do much more than express the opinion of the Court that the facts give a priority to the party said to have it”; cited in J Phillips, “Equitable Liens—A Search for a Unifying Principle” in NE Palmer and E McKendrick (eds.), Interests in Goods (London, Lloyds of London Press, 1993) 635 at 653.

83J McLaughlin, “Amendment of the Bankruptcy Act” (1927) 40 Harv. L Rev. 314 at 389.

84XL/Datacompp Inc. v. Wilson (In Re Omegas Group Inc.) 16 F 3d 1443 (6th Cir., 1994).

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bankruptcy. A creditor came to the court in bankruptcy proceedings claiming that the debtor had defrauded it by assuring the creditor of its solvency when in fact the debtor was on the brink of bankruptcy. The creditor argued that it followed that the moneys that the debtor had received from it were held on constructive trust. If this were so, conventional wisdom would have dictated that the creditor was entitled to claim these moneys or their proceeds as its property, thereby gaining priority over the bankrupt debtor’s general creditors. However, the court took a different view. It argued that a mere entitlement to a constructive trust was not an interest that would exclude the assets in question from distribution among creditors in bankruptcy. Observing that “[n]owhere in the Bankruptcy Code does it say, ‘property held by the debtor subject to a constructive trust is excluded from the debtor’s estate’ ”,85 the court concluded that constructive trusts are “anathema to the equities of bankruptcy”.86

The majority’s decision turned in large measure on the question whether the creditor’s entitlement was a fully-fledged property right or something less. The Court concluded that “[b]ecause a constructive trust, unlike an express trust, is a remedy, it does not exist until a plaintiff obtains a judicial decision finding him to be entitled to a judgment”.87 As a matter of precedent and legislative intent, the reasoning in Re Omegas is unsustainable. As Andrew Kull has persuasively argued, the Federal Bankruptcy Code was enacted against the background of the common law’s allocation of proprietary entitlements.88 For a century thereafter, the state and federal courts had enforced rights arising under constructive trusts declared after bankruptcy,89 and even the Supreme Court had recognised that property that was subject to a such a remedy did not form part of the constructive trustee’s estate.90 Of course, this also reflects the position taken in English law.

Why then did the court conclude that the traceable proceeds of the claim in question could not be regarded as the property of the creditor, rather than part of the estate of the bankrupt debtor? The best indication is that offered by the Bankruptcy Court in Re Dow Corning Corp.91 In that case, a creditor argued that the debtor held the proceeds of a mistaken payment on constructive trust for the creditor’s benefit.92 While Spector J accepted that he was bound by Re Omegas, he devoted a considerable part of his judgment to an explanation of that decision. Despite his sympathy for the result reached in Re Omegas, Spector J was in no doubt that much of the reasoning offered by the court was untenable. On his

85Ibid. at 1448.

86Ibid.

87Ibid at 1451.

88A Kull, “Restitution in Bankruptcy: Reclamation and Constructive Trust” (1998) 72 Am. Banky. L Journal 265.

89See, e.g., American Sugar-Refining Co. v. Fancher 40 NE 206 (NY, 1895); Mitsui Mfrs Bank v. Unicom Computer Corp. (In re Unicom Computer Corp.) 14 F 3d 391 (9th Cir., 1994). See Kull, supra n. 88, at 272.

90Cunningham v. Brown 265 US 1 at 11 (1923).

91192 BR 428 (Bankr. ED Mich., 1996).

92The case involved a mistaken double payment, reminiscent of the facts in the controversial English case, Chase Manhattan Bank NA v. Israel-British Bank (London) Ltd. [1981] 1 Ch. 105.

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analysis, at least in Michigan law, “the constructive trust, once imposed, will have retroactive effect and relate back to the time of the unjust enrichment”.93 This characterisation of the effect of the remedy as operating retrospectively reflects the extent to which Austin Scott’s analysis of the constructive trust as arising automatically has fallen out of favour.

Spector J observed that “there has existed for sometime an undercurrent of dissatisfaction concerning the appropriateness of constructive trusts in bankruptcy”.94 He argued that the judgment in Re Omegas “has so many broad statements—some of which are clearly in error—and others which are simply perplexing, that it is . . . important . . . to discern the actual rationale and not be lost by the rhetoric”.95 Commencing from this startlingly realist perspective, he reached the conclusion that “the rationale is solely bankruptcy policy”.96 He argued that the Court in Re Omegas “found there to be a conflict between the federal bankruptcy policy of rateable distribution and state property law on constructive trusts”.97 In his view, Re Omegas was a pragmatic ruling that would mean that “trial courts would no longer have cause to wrestle with some of the more difficult questions of property law”.98 According to this understanding, the principles determining the availability of the constructive trust are vague and it would not be a good idea to invite bankruptcy courts to decide whether a plaintiff merited priority in a particular case. Thus Spector J observed that:

Cases in which the remedy of constructive trust are sought run the gamut: some supplicants like . . . [that in Re Omegas] have a dubious call upon equity; while others [perhaps like that in Dow Corning], present far more sympathetic situations. In the middle lie the vast majority of cases, where fine distinctions necessitate extremely subjective determinations. Trial courts are, as a result of Omegas, mercifully spared from this onerous task.99

This is a striking conclusion. After all, it is the capacity of the constructive trust to confer priority in bankruptcy that has largely provided the impetus for its development. Moreover, the solution offered in Re Omegas is a rather arbitrary one. Too much will depend on questions of timing that have nothing to do with the strength of the plaintiff’s case for priority in insolvency. A constructive trust claimant who obtains judgment prior to a defendant’s bankruptcy will be entitled to priority over other creditors if insolvency ensues prior to the enforcement of judgment. This will be true even if it is the constructive trust judgment that drives the defendant into bankruptcy. On the other hand, the constructive trust claimant whose defendant declares bankruptcy the day prior to judgment will be obliged to rejoin the queue of general creditors.

93192 BR 428 at 436 (Bankr. ED Mich., 1996).

94Ibid. at 431.

95Ibid. at 432–3.

96Ibid. at 440.

97Ibid. at 441.

98Ibid.

99Ibid.

The Legacy of Legal Realism: Instrumentalist Approaches to Property 63

The constructive trust represents an effort by the courts to exempt from the mêlée of general creditors a class of plaintiffs who are thought to have particularly compelling claims for relief. Perhaps, used sparingly, the constructive trust has a valid role to perform in this regard. However, the device has become more widely available than was the case when the first Federal Bankruptcy Code was introduced in 1898. The Restatement of Restitution states simply that the constructive trust is imposed to prevent unjust enrichment.100 As a result, it has become widely accepted in the United States that a constructive trust is available wherever an owner’s intention to transfer property is vitiated by some factor that gives rise to a right to rescind the transaction.101 Perhaps Re Omegas represents an imperfect solution to a problem that has arisen from the indiscriminate interference of the courts in bankruptcy. It is difficult to gauge what lessons Re Omegas may hold for English law. For it remains unclear whether or to what extent proprietary relief is available in English law to remedy mistake, fraud, duress or undue influence.102

III.INSTRUMENTALISM IN OTHER COMMON LAW JURISDICTIONS

1.The Liberation of the Constructive Trust

There are signs that, in addition to developments in the United States, other common law jurisdictions are moving toward an understanding of property that is more dynamic than that which can be found in English law. The best indication of this tendency is the willingness of the courts to consider awarding proprietary remedies in a wider set of circumstances, while at the same time accepting that the limits of the remedy have to be determined with reference to its consequences for third parties.103

The Canadian, Australian and New Zealand judiciaries have all reconceptualised the basis for the constructive trust. The courts in these countries have concluded that, beyond its traditional “institutional” role, the constructive trust has a wider remedial function.104 Not content to restrict its role to protecting fiduciary relationships or to limit it to incremental ad hoc growth, these jurisdictions have all offered comprehensive rationales for the remedy. In Canada the constructive trust has been reinterpreted as a response to unjust enrichment105; in Australia it is now viewed as a remedy for unconscionable behaviour106; while in New Zealand

100The Restatement of Restitution commentary to § 160. See supra n. 64 and accompanying text.

101Kull, supra n. 88 at 277.

102See infra ch. 6.

103See, e.g., D Wright, The Remedial Constructive Trust (Sydney, Butterworths, 1998) 36–73; C Rickett, “The Remedial Constructive Trust in Canadian Restitution Law” [1990] Conv. 125.

104For the view that the “remedial” constructive trust exists alongside the “institutional” variety, see, e.g., Rawluk v. Rawluk (1990) 65 DLR (4th) 161; Bathurst City Council v. PWC Properties Pty. Ltd. (1998) 157 ALR 414; Fortex Group Ltd. (In Receivership and Liquidation) v. MacIntosh [1998] 3 NZLR 171.

105See, e.g., Pettkus v. Becker (1980) 117 DLR (3d) 257.

106See, e.g., Muschinski v. Dodds (1986) 160 CLR 583.

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it has come to be associated with the protection of reasonable expectations.107 None of these rationales suggests a commitment to absolutist understandings of property. Indeed much of the development of these new justificatory foundations for the constructive trust took place in the context of an abandonment of the search for common intention in the determination of property rights on the breakdown of intimate relationships.108

These developments reflect an acknowledgement that proprietary remedies can result in the redistribution of property rights. This was apparent in LAC Minerals v. Corona Ltd.,109 where the Canadian Supreme Court approved the award of a constructive trust in respect of a gold mine that had been acquired by wrongfully exploiting information obtained in confidence. La Forest J commented that:

it is not the case that a constructive trust should be reserved for situations where a right of property is recognized. That would limit the constructive trust to its institutional function, and deny to it the status of a remedy, its more important role. Thus, it is not in all cases that a pre-existing right of property will exist when a constructive trust is ordered. The imposition of a constructive trust can both recognise and create a right of property.110

In reinterpreting the law in this area, the Australian courts have altered the nature and effect of property rights. In this regard, Robert Austin has observed that the “courts are . . . making orders which break up” the “set bundle of proprietary consequences” which has hitherto characterised constructive trust jurisprudence.111 In the process, the constructive trust has been reconceptualised as a remedial response. For example, the Australian courts have emphasised the discretionary nature of proprietary estoppel and indicated that proprietary relief should not be granted if a personal remedy would achieve justice.112

2. Determining when Proprietary Relief should be Available

Abandoning the notion that proprietary relief is only ever imposed in order to protect pre-existing rights has encouraged reflection on the need to mould the availability of these remedies to accord with the dictates of justice.113 Thus, in LAC Minerals, La Forest J concluded that “a constructive trust should only be awarded if there is reason to grant to the plaintiff the additional rights that flow from a

107See, e.g., Pasi v. Kamana [1986] 1 NZLR 603; Elders Pastoral Ltd. v. BNZ [1989] 2 NZLR 180.

108See infra ch. 10.

109(1989) 61 DLR 14.

110Ibid. at 50; cited and approved by Cory J in Peter v. Beblow (1993) 101 DLR (4th) 621 at 639.

111RP Austin, “The Melting Down of the Remedial Constructive Trust” (1988) 11 UNSWLR 66

at 67.

112Giumelli v. Giumelli ((1999) 161 ALR 473 at 485.

113See, e.g., Sorochan v. Sorochan (1986) 20 DLR (4th) 1 at 7 per Dickson CJ; LAC Mineral 5 v. Corona Ltd. (1989) 61 DLR (4th) 14 at 51 per La Forest J; Rawluk v. Rawluk (1990) 65 DLR (4th) 161 at 185–8 per McLachlin J and 177 per Cory J.

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recognition of a right of property”.114 The task now is to establish what amounts to a good reason for awarding proprietary relief. While their interests have long been neglected in this area, there are signs that the debate will increasingly focus on the position of unsecured creditors. Thus, in Peter v. Beblow,115 Cory J rather ambiguously noted that a proprietary remedy might be denied where “the rights of bona fide third parties would be affected as the result of granting the constructive trust remedy”.116 Similarly, in her dissenting judgment in Rawluk v. Rawluk,117 McLachlin J noted that the ambit of proprietary remedies should be restricted, given their capacity to prejudice third parties.118 Subsequently, in Soulos v. Korkontzilas,119 the same judge concluded that, while a constructive trust might properly be imposed to protect relationships of trust, it should not be awarded where it would affect the rights of creditors.120 Such caution is apparent in Re 512760 Ontario Inc.,121 where Adams J refused to allow a divorced spouse a beneficial interest in the business that he ran with his wife. His Honour noted that he was “concerned about the important competing interests of unsecured creditors” whose position would have been undermined by the award of a constructive trust.122

On the other hand, this shift in attitude in the law in this area may on occasion lead to the courts extending the availability of proprietary relief to new situations. An example of this is provided by the New Zealand Court of Appeal’s decision in

Liggett v. Kensington (Re Goldcorp Exchange Ltd.).123 Goldcorp accepted money from customers on the basis that it would at all times maintain reserves of bullion sufficient to meet its liabilities to them. In fact it breached this promise and went bankrupt with very little in bullion in reserve. The customers claimed that they should be granted an equitable lien over the company’s assets, thereby giving them priority ahead of the Bank of New Zealand’s floating charge. In the customers’ view, this outcome was justified because, even if they had not purported to retain any title to advance payments, Goldcorp had wrongly paid this money into its bank account and had thereby swollen its assets available for distribution in bankruptcy.

While the New Zealand Court of Appeal’s decision was given short shrift by the Privy Council,124 it has found influential supporters in Canada and Australia. Justice McLachlin of the Canadian Supreme Court suggested, extra-judicially, that Re Goldcorp would have been decided differently in Canada than it was in the Privy

114Ibid. at 51.

115(1993) 101 DLR (4th) 621.

116Ibid. at 638.

117(1990) 65 DLR (4th) 161.

118Ibid. at 191

119(1997) 146 DLR (4th) 214.

120Ibid. at 230 and 232.

121(1992) 91 DLR (4th) 719.

122Ibid. at 733.

123[1993] 1 NZLR 257.

124Re Goldcorp Exchange Ltd. [1995] 1 AC 74.

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Council.125 In addition, Paul Finn, a noted equity scholar and justice of the Federal Court of Australia,126 described the Privy Council’s decision as an “emblem” of a “flight from the opportunity . . . to develop an intelligible jurisprudence on how properly to settle competition between the creditors”.127 Despite the setback in Re Goldcorp, the New Zealand judiciary continues to express some interest in the notion of the remedial constructive trust.128

A willingness to extend the application of the constructive trust while showing sensitivity to the position of third parties is also apparent in Australian developments in this area. In elaborating a new doctrine governing the availability of the constructive trust in quasi-matrimonial property cases in his seminal opinion in Muschinski v. Dodds, Deane J reflected on the origins and functions of the constructive trust. In his view, the device:

has not outgrown its formative stages as an equitable remedy and should still be seen as constituting an in personam remedy attaching to property which may be moulded and adjusted to give effect to the application and interplay of equitable principles in the circumstances of the particular case. In particular, where competing common law or equitable claims are or may be involved, a declaration of constructive trust by way of remedy can properly be so framed that the consequences of its imposition are operative only from the date of judgment or formal court order or from some other specified date.129

In Re Osborn,130 the legal owner of properties transferred them to himself and the respondent, his de facto wife, as joint tenants. This transfer was subsequently challenged as a preference when the respondent’s partner became bankrupt. The respondent argued that, regardless of the transfer, she was entitled to a share of the property in equity and this interest would have entitled her to priority in bankruptcy in any event. In the Federal Court, Pincus J was reluctant to recognise such an interest. He noted Deane J’s observations in Muschinski v. Dodds and commented:

There is a degree of inconvenience attaching to the laying down of a rule which would require the trustee, in a case of this sort, to conduct an elaborate investigation of and perhaps litigate about the history of a relationship to determine whether property which is, on the face of it, divisible among the creditors is truly so divisible . . . [K]eeping in mind the remedial character of the doctrine, I do not think that the court should declare a constructive trust in circumstances of this sort, to operate at a date prior to bankruptcy.131

125B McLachlin, “Restitution in Canada” in WR Cornish, R Nolan, J O’Sullivan and G Virgo (eds.),

Restitution: Past, Present and Future: Essays in Honour of Gareth Jones (Oxford, Hart Publishing,1998) 275 at 282.

126P Finn, “Equitable Doctrine and Discretion in Remedies” in Cornish et al., supra n. 125, at 251.

127Ibid. at 264.

128See, e.g., Dickie v. Torbay Pharmacy [1995] 3 NZLR 429 at 441 per Hammond J and, more tentatively, Fortex Group Ltd. (In Receivership and Liquidation) v. MacIntosh [1998] 3 NZLR 171.

129(1986) 160 CLR 583 at 615.

130(1989) 91 ALR 135.

131Ibid. at 142. This approach was followed in Re Popescu (1995) 55 FCR 583. See D Wright, “The Remedial Constructive Trust and Insolvency” in F Rose (ed.), Restitution and Insolvency (London, Mansfield Press, 2000) 206.

The Legacy of Legal Realism: Instrumentalist Approaches to Property 67

This approach is in stark contrast to the view that Sir Peter Millett expressed extrajudicially that, “[e]ither the plaintiff is entitled to a proprietary remedy or he is or not”.132

IV. FORMALISM AND INSTRUMENTALISM CONTRASTED

Speaking extra-judicially, Sir Peter Millett described the remedial constructive trust as “a counsel of despair which too readily concedes the impossibility of propounding a general rationale for the availability of proprietary remedies”.133 This reflects a perception common among English judges and jurists that the approach found outside their jurisdiction is unprincipled. Yet, this very criticism is often directed against the orthodox English vision of the constructive trust. For example, at the heart of Donovan Waters’ analysis of the remedial constructive trust is his objection that English jurists have not been willing to “. . . rationalise the miscellany of remedies that exist” under the rubric of the constructive trust.134 Thus, central to his project has been the development of a comprehensive normative foundation for the remedy that will promote a more systematic approach to its application.

In many respects, Waters’ aspirations are no different from those shared by Birks and Millett. What is really at stake and where Waters parts company with his English counterparts is the issue of how we should go about developing a “general rationale” for the law of proprietary remedies. And at the root of this question lies a fundamental dispute about the nature of the common law. English judges and jurists retain faith in the idea that, without entering into a fundamental normative inquiry, we might identify a set of systematic legal principles that structure this area of law. In contrast, Waters takes the view that the existing law has no such immanent order. In his analysis the question of the availability of the constructive trust is one of policy; to rationalise the area one must consider when it would be appropriate to confer the advantages that flow from proprietary relief.135

What is a stake is a clash between two visions of proprietary remedies. English legal culture remains wedded to a “pure trusts law philosophy” that denies the possibility of non-consensual redistribution of property and locates the basis for relief in the intention of owners and the enforcement of existing rights and consensual transfers. This may be contrasted with other common law jurisdictions’ acceptance of a “remedial trusts law philosophy” that recognises that proprietary relief might legitimately be imposed for other rationales.136

132Sir Peter Millett, “Bribes and Secret Commissions” [1993] RLR 7 at 10; see infra ch. 9.III.2.

133(1995–6) 6 Kings College LJ 1.

134D Waters, “The English Constructive Trust: A Look Into the Future” (1966) 19 Vanderbilt L Rev. 1215 at 1215.

135Ibid. at 1216.

136See C Rickett, “Different Views on the Scope of the Quistclose Analysis: English and Antipodean Insights” (1991) 107 LQR 608. See supra ch. 7.I.3.

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(a) Moral Desert

Notions of corrective justice are of limited assistance. For corrective justice assumes the existence of a baseline of rights to which a claimant is entitled to be restored, and here the very issue is what rights an owner should have.2 Thus, to determine the baseline that would sustain a system of corrective justice, we must turn to considerations of distributive justice. One such account of property justifies entitlement in terms of autonomy and suggests that owners should be entitled to relief against, not only those who initially misappropriate their assets, but anyone who subsequently culpably deals with those assets in a way which would undermine owners’ autonomy. Determining who is morally culpable in this context requires a judgement about whether a party has failed to show due respect for the autonomy of the owner and so deserves to be accountable for any loss the owner has suffered.

Whether a third party’s receipt of property undermined an owner’s autonomy might depend on whether owners were concerned with rights to specific property or merely in safeguarding their level of wealth. Where we are concerned with an owner’s rights to specific assets, the fact that those assets have been transferred into the hands of remote recipients will, in itself, be a reason for holding such parties liable. Consistently with our approach to the attribution of responsibility elsewhere in the law, liability should extend beyond those who knowingly take or receive property to those who ought to know that they have received another’s property. However, it is more difficult to justify holding liable bona fide purchasers without notice—for they cannot be said to have failed to respect the autonomy of the owner of the property that they have purchased. Moreover, where owners have failed to take reasonable steps to prevent wrongdoers holding themselves out to third parties as entitled to deal with the property in question, it may be argued that it is the owners who should bear the risk of any loss that results. For such a failure to take such preventive measures demonstrates a lack of respect for the welfare of third parties that may potentially be affected.3

If our concern was not so much about an interference with particular assets with which an owner had a special relationship but merely about safeguarding the owner’s level of wealth, we might wonder why the law would allow rights against remote recipients of property. Why not leave owners to bring an action against the party that initially deprived them of their property? One reason is that, even where owners have only personal rights of recovery, transfers to remote recipients that are at an undervalue or entirely gratuitous will undermine plaintiffs’ ability to recover their loss. The effect of such a transfer is that the party that initially misappropriated the property is more liable to be insolvent while the remote recipi-

2M Mautner, “ ‘The Eternal Triangles of Law’: Toward A Theory of Priorities in Conflicts Involving Remote Parties”, (1991) 90 Mich. L Rev. 95 at 103 (1991); C Rotherham, “Conceptions of Property in Common Law Discourse” [1998] LS 41 at 53–4; H Dagan, “The Distributive Foundation of Corrective Justice”, (1999) 98 Mich. L Rev. 138.

3Mautner, supra n. 2 at 104.

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ent’s assets are swollen by the transfer in question as a result of an enrichment gained at the expense of the owner. Thus, such transfers demonstrate a lack of respect for the autonomy of owners by undermining their financial security. One way of dealing with this problem would lie in giving an owner a personal right of action against remote recipients. The interests of such recipients will be reasonably safeguarded if purchasers are allowed a defence of bona fide purchase and volunteers are permitted to rely on a bona fide change of position.

The concern that a plaintiff’s wealth not be undermined also explains the impulse to give rights to the exchange product of any transactions involving the plaintiff’s property. For the transfer at an undervalue to remote recipients of such exchange proceeds is equally liable to prejudice the plaintiff’s ability to recover compensation from the party that initially misappropriated the plaintiff’s property.4

On the other hand, to the extent that the party that initially misappropriated the assets in question receives value from remote recipients of those assets, it is difficult to see that the plaintiff’s ability to recover damages from the remote recipient is undermined. Thus, such relief does not seem to be demanded by any objective of safeguarding owners’ financial security. In addition, the position of remote recipients’ creditors is unreasonably undermined where owners are given rights of recovery without compelling reason. Nonetheless, it might be thought that conferring rights against third parties without regard to the extent to which the transfer in question undermined the position of owners to recover against the party that initially misappropriated the assets is the best way realistically available of protecting owners’ financial security. It might well be that any rule that took account of such considerations would be too difficult to administer.

A different solution to fears that owners’ patrimony may be undermined by transfers to third parties that are gratuitous or at an undervalue is provided by the law of preference. This requires the reversal of transfers made on the brink of bankruptcy that had the effect of benefiting a volunteer or preferring one creditor at the expense of others. The approach taken to this problem varies considerably between jurisdictions. The results are always inevitably relatively arbitrary but perhaps somewhat less so than the results achieved through according owners rights directly against third parties.

(b) Utilitarian Justifications

A second form of justification approaches the issue, not ex post facto on the basis of moral desert, but from an ex ante perspective, whereby we judge legal norms on the basis of the consequences they produce. Thus, property is often justified for its ability to create incentives for the promotion of economically efficient and/or virtuous behaviour.5 It is in the public interest to deter interference with property

4For a fuller account of the normative foundations of tracing see infra, ch. 5.IV.

5See, e.g., D Hume, Enquiries Concerning Human Understanding and Concerning the Principles of Morals (eds. LA Selby-Bigge, and PH Nidditch, 3rd edn., Oxford, Clarendon Press, 1975) at 195.

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and thereby encourage individuals to exploit resources, engage in commercial transactions and avoid disputes that are expensive and socially destabilising.6 Providing owners with a certain level of protection against third parties that come into possession of their property serves this purpose. However, this objective has to be balanced against other policy considerations. Thus, it is also true that commercial transactions are encouraged by a rule that provides that bona fide purchasers who have reasonably relied upon the seller’s right to transfer the property in question obtain good title.

The extent to which third party purchasers should be denied proprietary rights because of their failure to ensure the validity of the transferor’s title is a difficult issue. The social benefits of encouraging such efforts must be weighed against the cost of such inquiries. One approach is to ask whether it is owners or remote recipients who are typically the “least cost avoider”.7 Where owners are generally in the best position to prevent wrongful dealing with their property, it may be both unfair (bearing in mind the parties’ relative fault) and inefficient to shift the loss to remote parties. The notion of constructive notice is probably flexible enough to allow the courts to take such factors into account in allocating responsibility.8

(c) To What Extent are these Considerations Reflected in Judicial Doctrine?

Often the questions of moral desert and efficiency that arise in relation to third parties in this area can be best dealt with by the institution of registration systems designed to alert potential purchasers and secured creditors of the property rights affecting particular assets. This is likely to be true of land, where the fragmentation of interests makes registration particularly useful, and motor vehicles, where registration can lessen some of the risks that arise as a result of the mobility of these relatively valuable assets. Where the assets in question are not subject to a registration regime, it is the common law and equity that regulate conflicts between owners and remote recipients.

For its part, equity deals with these concerns by providing that bona fide third party purchasers of the legal title without notice take free of equitable interests. In addition, the autonomy of third party volunteers might be respected through a change of position defence that excuses those who have in good faith and without notice acted to their detriment in reliance on the validity of a transfer. However, the change of position defence has been late in coming to English law.9 Moreover, it seems that this defence is unlikely to be available for proprietary claims at law or in equity.10

6See, e.g., L Becker, Property Rights: Philosophic Foundations (London, Routledge and Kegan Paul, 1977) 68.

7Mautner, supra n. 2 at 100–1.

8For a discussion see D Fox, “Constructive Notice and Knowing Receipt: An Economic Analysis” [1998] CLJ 391.

9Lipkin Gorman v. Karpnale Ltd. [1991] AC 548.

10Foskett v. McKeown [2001] 1 AC 102 at 129 per Lord Millett.

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In contrast, it is difficult to justify the stringency of the common law’s approach to conversion. The common law does not generally protect bona fide purchasers.11 Moreover, it generally takes the view that “an owner of property is entitled to be careless with it if he likes”,12 thereby insulating owners from the consequences that their lack of care may have for third parties. On the other hand, over the past 150 years, the legislature has made the law of sale of goods fairer and more efficient by enacting a number of exceptions to the nemo dat principle. These exceptions protect bona fide purchasers in circumstances in which owners placed wrongdoers in a position that enabled them to represent themselves to third parties as able to give good title to the goods in question.13

Where the law provides remedies in respect of fungible property, it seems that it is more concerned with the protection of owners’ wealth than their enjoyment of specific assets. As mentioned, it is not straightforward to justify the rights given against third parties in respect of property taken and its proceeds as a matter of moral desert. However, such an approach may be readily justified in utilitarian terms on the basis that it would discourage misappropriations by restricting the alienability of misappropriated assets.

Both in equity and at common law, concern for owners’ financial security is demonstrated by a willingness to allow actions to be brought in respect of the exchange product of misappropriated assets. It is a subject of controversy whether such claims are subject to precisely the same limitations that apply to claims to enforce pre-existing property rights or whether they may be vulnerable to the change of position defence.14

2. Rights against Third Parties in Respect of Vitiated Transfers15

(a) Considerations of Moral Desert

Concerns about the welfare of initial transferees limit the extent to which we allow owners relief in the context of transactions in which their intention to transfer title was vitiated in some way. However, the question arises whether, when we do recognise that owners should be entitled to relief against the party to whom they initially transferred the assets in question, we should also give them relief against remote recipients to whom those assets are subsequently transferred. We may draw a distinction between situations in which assets are misappropriated without

11Of course, a very significant exception is made in the case of money. See, e.g., Miller v. Race (1758) 1 Burr. 452. In addition, the courts recognised an exception in the case of market overt, since abrogated by Parliament in the Sale of Goods (Amendment) Act 1994.

12Moorgate Mercantile Ltd. v. Twitchings [1977] AC 890 at 925 per Lord Fraser.

13Sale of Goods Act 1979, s. 24 (seller in possession) and s. 25 (buyer in possession); Hire Purchase Act 1964, s. 27 as re-enacted by the Consumer Credit Act 1974 (private purchasers take good title from one in possession under a hire purchase arrangement.).

14Foskett v. McKeown [2001] 1 AC 102 at 129 per Lord Millett.

15For a fuller discussion of these issues see infra ch. 6.

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an owner’s consent and situations in which consent is given that is vitiated in some way. We may allow relief against remote third parties in the former case but deny it in the latter. However, such a line would be rather arbitrary. It would seem unreasonable to conclude that owners who have carelessly allowed their property to be stolen should have remedies against third parties, while those who were cleverly defrauded are limited to an action against the rogue who duped them.16 Moreover, where an owner transferred property pursuant to a self-induced mistake, it is not obvious why third parties who are volunteers or have knowledge of the owner’s state of mind ought not be liable to the owner. Again, a reasonable balance between a concern for the autonomy of owners and that of remote recipients could be reached if the defences of bona fide purchase and change of position were available.

(b) Utilitarian Considerations

An argument for denying relief against third parties on the basis of considerations of efficiency would be difficult to sustain in this context. For one thing, in cases of fraud, holding third parties liable is likely to have some beneficial effect by discouraging fraudulent activity as a result of restricting rogues’ opportunities to dispose of the proceeds of their activities. On the other hand, it may be true that limiting owners to relief against those who defrauded them would strike an optimal balance between giving owners incentives to take precautions and discouraging fraud. However, such an approach will be efficient only if it is true that owners are generally the least-cost avoiders in the context of self-induced mistakes. This may not be true. Liability may be more consistently placed on the least-cost avoider by a rule that provides that remote recipients are made liable if they had constructive notice of the mistake in question. Finally, in cases of self-induced mistakes, if the law were concerned to give owners incentives to avoid mistakes, it seems to make more sense to deny them remedies against anyone and not merely subsequent third party transferees.

(c) To what Extent are these Considerations Reflected in the Positive Law?

At common law, title tends to pass in the context of transfers in which the owner’s intention to confer title is vitiated.17 This can be justified on the basis that the harsh effect that common law property rights have on third parties18 means that it is better to leave the matter to be dealt with by equity. Where assets are transferred pursuant to a transaction in which the owner’s intention to confer title was

16See El Ajou v. Dollar Land Holdings plc [1993] 3 All ER 717 at 734 per Millett J.

17This is not universally true. Thus, certain “fundamental” mistakes are held to render contracts void and thereby prevent property passing—the best example being “identity” mistakes of the type found in Cundy v. Lindsay (1873) 3 App. Cas. 459. However, this approach has been the subject of considerable criticism. See infra, ch. 6.I.1.

18See supra, text accompanying nn. 11–13.

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vitiated, it is not clear to what extent an equitable interest may arise so as to affect subsequent recipients of the assets. One view is that equitable proprietary rights are recognised only where the subject matter of the transfer was unique so that damages would be inadequate.19 A second view is that an interest comes into being only if a recipient’s conscience is affected.20 A third perspective, which has much to recommend it—despite the fact that it has attracted considerable hostility—is that property rights are available in respect of any mistake that gives rise to a right of recovery.21

II. RIGHTS TO PROFITS22

Judicially developed doctrines readily provide for liability to account for profits derived from the wrongful use of another’s property.23 This state of affairs can be justified ex post, as a matter of moral desertion, because it punishes wrongdoers for interfering with others’ property. Equally, such a rule may be favoured ex ante because it is liable to deter breaches of property rights by a certain sort of entrepreneurial wrongdoer. These rationales may also justify holding third parties liable for the receipt of proceeds of property on the basis that this will discourage breaches of property rights by limiting third parties’ opportunities to benefit at an owner’s expense.

III.SHOULD THESE REMEDIES BE SPECIFIC?

1.Justifying Specific Relief

Considerations of justice and efficiency suggest that owners’ economic interest in their property should be safeguarded by the provision of relief where others infringe that interest. However, it does not necessarily indicate that this relief should be specific. Adequate punishment of past wrongs and deterrence of future breaches can generally be achieved by granting an award of damages.

On the other hand, a right to specific relief may be merited because the asset in question has, or is likely to have special significance for the plaintiff. One reason this may be so is linked to what has been termed the “endowment effect”: a phenomenon that means that measures of relief linked to market value do not provide what plaintiffs would regard as adequate compensation. Put simply, owners show a predisposition to place a higher value on things to which they have been entitled

19Sir Peter Millett, “Restitution and Constructive Trusts” (1998) 114 LQR 399. See infra, ch. 6.II.4.

20Westdeutsche Landesbanke Girozentrale v. Islington London Borough Council [1996] 1 AC 669 at 714–16 per Lord Browne-Wilkinson. See infra, ch. 6.II.2(c).

21Chase Manhattan v. Israel-British Bank (London) [1981] Ch. 105. See infra, ch. 6.II.2(a).

22For a fuller treatment of these issues see infra, ch. 9.

23For an analysis see H Dagan, Unjust Enrichment: A Study in Private Law and Public Values

(Cambridge, Cambridge University Press, 1997).

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than to things in which they have never enjoyed an interest.24 Where the defendant is in possession of property taken from the plaintiff, a personal remedy will be sufficient if what was taken was money or an asset of a kind that can readily be obtained from the market. On the other hand, where this is not possible, an award of damages is liable to leave owners feeling aggrieved. In addition, a concern for owners’ autonomy may justify the award of a specific remedy to reflect the special role that particular objects may play in the development of our self-identity.25 The loss of such objects is liable to be felt particularly strongly, and, as a consequence, it is tempting to give owners the right to recover specific property.

2. To what Extent Does the Law Recognise these Concerns?

At law rights of specific recovery are largely limited to the enforcement of interests in land. Today, however, recovery of chattels is greatly facilitated by the discretion that Parliament conferred on courts to order delivery up of chattels where justice demands it.26 Equity went further than the common law and provided for rights of delivery up of assets where, because of the nature of the assets in question, damages would be an inadequate remedy. In addition, equity provides for the specific performance of contracts for the transfer of specific assets for the same reason.

3. Rights to Specific Recovery and Bankruptcy

One mistake is to assume that rights to specific recovery must necessarily be enforceable in bankruptcy. There is no reason why this must be so. However, there is a tendency in English law to transform rights to specific recovery into fullyfledged property rights through the doctrine of conversion that is viewed as an application of the maxim “equity regards as done that which ought to be done”.27

We may feel that the concern to allow for specific recovery of an asset is sufficiently important to justify holding that a plaintiff’s right should prevail in bankruptcy. However, this question is acutely difficult and may involve the competition of considerations that appear incommensurable.28 Consequently,

24E Hoffman and M Spitzer, “Willingness to Pay vs. Willingness to Accept, Legal and Economic Implications” (1993) 71 Wash. ULQ 59; JJ Rachlinski and F Jourden, “Remedies and the Psychology of Ownership” (1998) 51 Vanderbilt L Rev. 1541.

25See, e.g., GWA Hegel, Elements of the Philosophy of Right (ed. Allen Wood, Cambridge, Cambridge University Press, 1991) § 41–64; J Waldron, The Right to Private Property (Oxford, Clarendon Press, 1988) ch. 10; H Dittmar, The Social Psychology of Material Possessions, To Have is to Be (Hemel Hempstead, Harvester Wheatsheaf, 1992). For an analysis of the importance of these issues for legal regulation see M Radin, Reinterpreting Property (Chicago, Ill., University of Chicago Press, 1993) at 35–71. For an account of the relevance of these considerations in the context of restitution for wrongs, see Dagan, supra n. 23 at 40–9 and 63–70.

26Torts Conversion of Goods Act 1977, s. 3(1).

27See supra, ch. 2.V.2.

28For a discussion see, e.g., infra, ch. 10.V.4(a).

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where possible, it would be preferable if we could point to independent reasons justifying giving such plaintiffs priority in bankruptcy.

One thing that is clear is that these considerations provide no basis for justifying specific relief in cases where a claim is made in respect of money or other fungible assets. Similarly, these considerations cannot explain the provision of specific relief in respect of assets that plaintiffs did not previously own—as in the case of proceeds or profits. In these cases there is no endowment effect problem or any issue of plaintiffs’ having a special attachment to the assets in question. Rather relief is generally sought to secure priority in bankruptcy and, to achieve this end, plaintiffs would generally be content to have a lien over the assets in question.

IV. SHOULD THESE REMEDIES HAVE PRIORITY IN BANKRUPTCY?

1. Justifying Remedies in Bankruptcy

(a) The Significance of Proprietary Relief in Bankruptcy

One of the most significant advantages proprietary relief brings relates to the distribution of entitlements in bankruptcy.29 Those limited to personal claims are obliged to line up as unsecured creditors and share pari passu in whatever is left of a bankrupt’s estate after the claims of secured and preferential creditors have been satisfied. In contrast, the effect of awarding a constructive trust over particular assets is that, in the event of the constructive trustee’s bankruptcy, those assets are not available for distribution among creditors.30 Similarly, an equitable lien gives the plaintiff an interest over assets to secure the amount owed by the defendant. In a contest between those with proprietary remedies and secured creditors, the position of fixed charge holders is clear enough. Holders of fixed legal charges will take priority if they were bona fide purchasers without notice of the interests of parties asserting equitable proprietary rights. The position of floating charge holders is rather more complicated. Even if the assets in question were legally owned by the chargor at the time the floating charge was taken, the defence of bona fide purchase will not apply because the holder of the charge acquires only an equitable interest. Moreover, because this interest is acquired only when the charge crystallises, the holder will be second in priority to any equitable proprietary rights arising prior to the crystallising event.31 On the other hand, it is less clear whether, after a floating charge has crystallised, the charge holder will be affected by equities of rescission.32

29FH Lawson, Remedies of English Law (2nd edn., London, Butterworths, 1980) at 149.

30Insolvency Act 1986 s. 283(3)(a) and (5).

31This was assumed, e.g., in Re Goldcorp [1995] 1 AC 74. See also G McCormack, Proprietary Claims and Insolvency (London, Sweet & Maxwell, 1997) 44.

32Lord Mustill in Re Goldcorp [1995] 1 AC 74 at 94 distinguishes between the position of chargees and successors in title, which might suggest that the former do not necessarily take subject to equities, but the point is not addressed directly. In Biggerstaff v. Rowatt’s Wharf Ltd. [1896] 2 Ch. 93, the Court

78 Property and Proprietary Remedies

(b) The Circularity of Property-based Justifications

It is tempting to say whether plaintiffs should be given priority in insolvency should depend upon whether they have a proprietary interest and that, if that is so, the assets in question do not form part of an insolvent’s estate at all.33 However, to say that an asset is the property of an aggrieved owner is a legal conclusion that is in itself in need of justification. The very question that needs to be resolved in this context is in what circumstances we should confer rights which will have the effect of conferring priority in bankruptcy.

It should be borne in mind that proprietary relief is on a continuum: it is possible to give plaintiffs a certain degree of protection without concluding that they have a fully-fledged proprietary interest in respect of the assets in question. Thus, for example, even if it is thought that a plaintiff’s enjoyment of unique assets ought to be protected to some degree, this may be achieved by conferring an entitlement to have the property delivered up that is not enforceable in bankruptcy. Nor should it necessarily follow from the fact that an owner has rights against third parties that those rights should confer priority in bankruptcy. Thus, it is not obvious that, for example, a right to damages for conversion should be enforceable against a trustee in bankruptcy in whom the asset in question vests.34 Some justification is needed for placing claims for personal relief of dispossessed owners ahead of those of others who have suffered wrongs and those of disappointed contractual creditors.

(c) Difficulties in Justifying Relief on the Basis of Efficiency

Consequentialist justifications for deterring interference with property are unlikely to justify the conferral of priority in bankruptcy. For, there is no question of an insolvent defendant’s retaining the assets in question. Instead, like any claimant with rights against a bankrupt defendant, aggrieved owners are in competition, not with defendants, but with defendants’ other creditors. Given that defendants do not misappropriate or unconscionably retain assets in order to enrich their creditors, the objective of deterring defendants cannot justify giving plaintiffs priority.

On the other hand, it is possible that denying creditors a share of assets in bankruptcy may give them an incentive to monitor the activities of their debtors. This may be a plausible view in the context of institutional lenders with floating charges.35 Such lenders are liable to have a need to monitor the activities of their

of Appeal held that rights of set-off in respect of contracts arising after the charge was created but prior to its crystallisation did bind the chargee. However, the members of the court largely justified this on the basis of policy considerations that do not necessarily pertain to equities that arise by operation of law.

33For examples of this tendency see infra, ch. 5.V.1.

34Although, as the law stands, it seems trustees in bankruptcy are indeed personally liable in conversion or money had and received in these circumstances. See Tooke v. Hollingworth (1793) 5 TR 215; M Scott, “Tracing at Common Law” (1965–66) 7 UWALR 463; D Fox, “Common Law Claims to Substituted Assets” [1999] RLR 55 at 72–3.

35See, e.g., J Armour and S Frisby, “Rethinking Receivership” (2001) 21 OJLS 73.

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debtors in order to ensure that their debtors retain sufficient assets to enable them to realise their security. Perhaps Re Goldcorp Exchange Ltd.36 provides a good illustration of this point. The Bank of New Zealand sought to enforce its floating charge over the company’s general assets, despite having been in a good position to have realised that its creditor was breaching its obligation to its customers to maintain reserves of bullion. This may well explain the lack of sympathy that the New Zealand Court of Appeal had for the bank’s position.37

However, it will not always be the case that institutional lenders will be able to detect the sort of events that give rise to proprietary remedies. This is probably particularly true of rights arising in the wake of vitiated transactions, for the recovery of profits for which the defendant should account, and rights contingent upon tracing. If this is so, it may well be implausible to justify in terms of efficiency the effect that these remedies have in undermining the utility of devices designed to provide protection against the risks of bankruptcy, such as the floating charge and the negative pledge.

In contrast to secured creditors, unsecured creditors are unlikely to be in a position to monitor their debtors’ actions. They will rarely be well placed to acquire the information necessary for this exercise. Moreover, given the relatively small sums typically involved and collective action problems, it would be unlikely to be efficient for unsecured creditors to take on such a task.

Finally, proprietary remedies are liable to be inefficient to the extent that they make it difficult for those administering bankrupt estates “to determine whether property which is, on the face of it, divisible among the creditors is truly so divisible”.38 At the very least, the rules that determine the availability of redistributive remedies should be designed to avoid requiring trustees in bankruptcy and official assignees to undertake unduly expensive inquiries.

The difficulties in justifying the conferral of proprietary remedies in efficiency terms suggest that we must look to explanations of moral desert if we are to provide a convincing rationale for judicial intervention of this kind.

2. The Swollen Assets Rationale

(a) Restitution as Corrective Justice

It has long been argued that restitution represents the most compelling of private law claims.39 The correspondence between the plaintiff’s loss and the defendant’s

36[1995] 1 AC 74.

37Liggett v. Kensington [1993] 1 NZLR 257.

38Per Pincus J in Re Osborn (1989) 91 ALR 135. There, Pincus J declined to hold that the constructive trust to which the plaintiff was entitled took effect prior to a judicial recognition of the plaintiff’s rights. This meant that the plaintiff’s interest did not arise at a date prior to the bankruptcy of the legal owner and so did not give the plaintiff priority over the legal owner’s general creditors.

39See, e.g., LL Fuller and W Purdue, “The Reliance Interest in Contract Damages” (1936) 46 Yale LJ 52 at 56.

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gain that characterises these claims has been thought to justify giving them priority over claims based on loss alone.40 Claims premised upon the defendant’s being enriched as a result of a subtraction from the plaintiff’s wealth provide the paradigm case of corrective justice41; for restitution returns the parties to the position they enjoyed before the enrichment.42 Of course, this is only a good outcome if such a restoration of the status quo ante is justified or, in other words, if the defendant’s enrichment is unjust. It is in the determination of this question that considerations of distributive justice come into the equation.43 As suggested above, the baseline of entitlements that anchors the system of corrective justice found in our private law is derived from the understanding that due respect for the autonomy of owners and/or considerations of utility require some degree of protection from theft and vitiated transfers.44

(b) Proprietary Relief as doing Corrective Justice between Plaintiffs and Defendants’ Creditors

The effect of proprietary remedies in conferring priority in bankruptcy points to the importance of property, not just for parties to the action, but also for third parties. Thus, some jurists argue that a proprietary remedy can be justified only if there is something in the nature of a claim that indicates that the plaintiff should be given priority over the defendant’s creditors.45 The fact that the reversal of unjust enrichment involves a restoration of the status quo suggests a basis for giving restitution actions priority over other claims in the event of a defendant’s insolvency. On this view, often characterised as the “swollen assets” rationale for priority, according unjust enrichment claims priority will effect corrective justice between the plaintiff and the defendant’s unsecured creditors. For where the plaintiff’s loss is matched by a corresponding gain in the pool of assets available for distribution in the defendant’s bankruptcy, to give the plaintiff priority to the extent of that gain will do no more than return the plaintiff and the defendant’s

40E Sherwin, “Constructive Trusts in Bankruptcy” [1989] U Ill. L Rev. 297 at 329.

41See Aristotle, Nicomachean Ethics at § 5.52, 1132b. It was an indication of the intuitive appeal of the restitutionary claim that Aristotle attempted to force claims for compensation for injury within the restitutionary paradigm. Modern scholars however recognise that such claims do not share the correspondence of loss and gain which characterises restitution claims: see, e.g., J Coleman, “Corrective Justice and Wrongful Gain” (1982) 11 J Legal Stud. 421 at 425.

42Of course, this is true only if the defendant’s estate continues to be enriched by the subtraction in question. Where this is not the case, we may require some degree of fault before we demand restitution from a defendant or we may allow defendants to avail themselves of the defence of change of position. Consider, e.g., the doctrine of knowing receipt, where a debate rages about which of these alternatives should be favoured. For a discussion see S Gardner, “Knowing Assistance and Knowing Receipt: Taking Stock” (1996) 112 LQR 56.

43See Dagan supra n. 2.

44See for instance A Honoré, “Ownership” in AG Guest (ed.), Oxford Essays in Jurisprudence (Oxford, Oxford University Press, 1961) 107 at 119.

45See, e.g., D Waters, “The English Constructive Trust: A Look into the Future” (1966) 19 Vanderbilt L Rev. 1215 at 1250; Sherwin, supra n. 40.

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creditors to the situation that they would have enjoyed were it not for the defendant’s enrichment.46

This point is easiest to understand when claims based on unjust enrichment are compared with those based on tort. While both may be regarded as dealing with the aftermath of “accidents”, they are dealing with different types of accidents. In a tort claim, the court is asked to determine who should bear the cost of an accident. In contrast, in an unjust enrichment action, the court has the opportunity to restore all the parties, including the defendant’s creditors, to the position in which they would have found themselves had the accident never happened. Hence, it is argued that plaintiffs relying on these different causes of action are not “similarly situated” and that there is a case for giving those whose claims are founded on unjust enrichment priority over tort plaintiffs.47 Of course, just as for restitution claims between plaintiffs and solvent defendants, the restoration of the status quo in bankruptcy is a good thing only if the defendant’s creditors do not deserve to be enriched by the wealth that the defendant has gained at the plaintiff’s expense. Much of the impulse for granting proprietary relief is driven by a plausible intuition that to allow creditors to have recourse to assets gained without plaintiffs’ real consent would show a lack of respect for the autonomy of such plaintiffs and so would result in the unjust enrichment of the defendant’s creditors.

3.The Assumption of Risk Rationale: Distinguishing Contract and Restitution Plaintiffs

(a)Difficulties with the Assumption of Risk Rationale

The swollen assets rationale cannot explain why restitution claims are generally thought to merit priority over contract claims. While the intuition that contract claimants are not entitled to a proprietary remedy is relatively uncontroversial, it is seldom analysed in any depth. Typically, contract creditors will have advanced goods, services or money that will have increased the value of their debtors’ estates. Why then should they not be entitled to priority over tort creditors?

It is often said that contract claimants who have failed to avail themselves of the opportunity to obtain some form of security to protect themselves against the possibility of the debtor’s insolvency have assumed the risk of their debtor’s bankruptcy. In contrast, this cannot be said of most restitution claimants48: they are

46RH Maudsley, “Proprietary Remedies for the Recovery of Money” (1959) 75 LQR 234 at 244–5; Waters supra n. 45 at 1233; Sherwin, supra n. 40 at 364; A Kull, “Rationalising Restitution” (1995) 83 Cal. L Rev. 1191 at 1217.

47Ibid. at 1217. In fact tort claimants are often in a highly advantageous position in bankruptcy. Tort victims are often protected against vehicle and occupational injuries by schemes that require the tortfeasor to carry insurance. Moreover, sums payable as a result of an insolvent assured’s liability are to be paid directly to tort victims by virtue of the Third Parties (Rights Against Insurers) Act 1930.

48An exception is claims that arise from invalid contracts in which the plaintiff had not negotiated for security. See Westdeutsche Landesbank Girozentrale v. Islington LBC [1996] AC 669 at at 683–4 per

Lord Goff and 704 per Lord Browne-Wilkinson. Their Lordships concluded that a claim for restitution for failure of consideration in the aftermath of an unsecured ultra vires loan did not merit priority, as the plaintiff had chosen to be an unsecured creditor. See infra, ch. 6.II.2(c)(iii).

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involuntary creditors who did not have the opportunity to protect themselves in this way.49

Strictly speaking, the notion that a creditor can be said to have “assumed a risk” is an inadequate explanation. If it were an adequate justification in itself, assumption of risk could be used to justify completely denying contract creditors any relief in insolvency; for, if that were the rule, voluntary creditors could be said to have assumed whatever risks the law imposes. Risks of bankruptcy are largely endogenous to the law. Consequently, it is circular to use the prevailing risks to justify the law that imposes those risks. The very matter at issue is precisely what risks the law should impose on different classes of creditors. Thus, while voluntary creditors can be said to have assumed whatever risks the law imposes upon them, if those risks are to be justified they must also be reasonable.

(b) Assumption of Risk as an Efficient and Fair Distribution of Risk

The best explanation that can be offered for denying contract creditors priority is that it is thought appropriate that they should bear the risks that flow from being denied proprietary relief. It may be argued that, because they are voluntary creditors, those making contracts are in a position to respond to these risks, either by isolating themselves from the risk by seeking security or insurance, or by demanding better terms in return for bearing the risk.50 We have a market in security and it would be more efficient to require these parties to make their own arrangements to cover themselves against the risks of bankruptcy than to have the courts intervene to regulate the matter. The allocation of risk can be better dealt with within a system that provides for the registration of security interests, thereby giving notice of such interests, rather than through the judicial imposition of largely undiscoverable priorities. Moreover, once we have defined the risks facing unsecured creditors, where parties are in a position to protect themselves against the risks in question, it is generally fair to say that they have only themselves to blame if they fail to avail themselves of that opportunity.51

The conclusion that security should be bargained for where possible becomes even more compelling when one considers various “second-best considerations” that flow from the inevitable difficulties in identifying traceable proceeds.52 Considerable evidential difficulties and costs will be involved in identifying whether and to what extent a contract creditor has swollen the value of that part

49On the notion that priority is justified where a restitutionary claimant is an involuntary creditor see, e.g., Palmer, The Law of Restitution i, § 2.14(c) at 185–6; Sherwin, supra n. 45 at 335. The importance of this consideration was recognised in Westdeutsche Landesbank, supra n. 48.

50See, e.g., SR Scott, “The Constructive Trust and the Recovery of Advance Payments—Neste Oy

v.Lloyds Bank Plc” (1991) 14 NZULR 375 at 389.

51Sherwin, supra n. 40 at 331; D Paciocco, “The Remedial Constructive Trust: A Principled Basis for Priorities over Creditors” (1989) 68 Can. Bar Rev. 315 at 327.

52See infra, ch. 5.IV.2(a).

The Normative Foundations of Proprietary Claims and Remedies 83

of a debtor’s estate that is available for distribution amongst general creditors in bankruptcy. Thus, where possible, it is better that the risks arising in this context are managed by the parties bargaining for security rather than through judicial intervention. In the light of this, it is reasonable to require voluntary creditors to bargain for protection if they do not wish to share pari passu with other creditors.

(c) Considerations of Fault in the Definition of the Voluntary Creditor

The concept of assumption of risk is sometimes used to cover a wider class of claimants than those who have knowingly chosen to become creditors.53 This is evident in Emily Sherwin’s use of the notion to justify the availability of the constructive trust in bankruptcy.54 Sherwin applies the rationale, not only to ordinary contract creditors, but also to situations involving mistaken payments or fraud in which plaintiffs’ loss was attributable in part to their carelessness. She argues that the question is whether plaintiffs can fairly be treated as involuntary creditors and that this is determined by asking whether they should have perceived the risk of the mistake or fraud that took place.55 While Sherwin’s explanation is framed in terms that suggest that it is based on voluntariness, she has smuggled in additional normative considerations. Proprietary relief is not denied because plaintiffs have literally assumed a risk, but because they were at fault in failing to safeguard themselves against that risk.

When can fault be attributed to a party who has been defrauded? Sherwin argues that distinctions can be made between different cases of fraud. She takes the view that “[t]he nature of the fraud is . . . important in determining whether the constructive trust claimant’s position is essentially voluntary”.56 It is only “[i]f the fraud is such that the claimant did not and could not fairly be expected to perceive the risk of loss” that “the claimant should be treated as an involuntary creditor”.57 In Sherwin’s view, this assessment should depend on factors such as the degree of sophistication of the plaintiff and the commercial nature of the transaction.58 Thus, while institutional players are said to have assumed the risks of bankruptcy if they suffer from fraud,59 individuals will often be excused for their errors.

It is possible that workable distinctions could be developed on this basis. There is certainly something to be said for the view that institutional lenders should be encouraged to take effective measures to protect themselves, instead of saddling those administering bankrupts’ estates with more problems in determining which

53See In re Kountze Bros 79 F 2d 98 at 102 (2d. Cir., 1935) (where a plaintiff seeking restitution for mistake was characterised as a voluntary creditor).

54Sherwin, supra n. 40 at 350–1

55Ibid.

56Ibid. at 352

57Ibid. at 350–1.

58Ibid.

59This is well illustrated by Sherwin’s analysis of Central Trust Co. v. Shepard (In re Shepard) 29 Bankr. 928 (Bankr. M.D Fla., 1983) where the bank operated a system that enabled the defendant to perpetuate the fraud: ibid.

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assets are available for distribution among creditors. This view reflects an ex ante perspective that emphasises the importance of providing appropriate incentives to discourage mistakes. The contrary view emphasises the difficulties with dealing with mistakes ex post facto. From this perspective, it may be thought that making the test determining the availability of proprietary relief as fact-specific as Sherwin contemplates would create excessive uncertainty for litigants and unduly complicate the position of trustees and assignees in bankruptcy.

On the other hand, the courts may award proprietary remedies, even where the risks of a defendant’s bankruptcy were foreseeable, if they are inclined to encourage behaviour by insulating those indulging in it from such risks. This may explain the tenderness shown to beneficiaries in trust law. This is perhaps best exemplified by Lord Templeman’s controversial obiter dictum in Space Investments Ltd. v.

Canadian Imperial Bank of Commerce Trust Co.60 His Lordship used assumption of risk reasoning to suggest that beneficiaries unable to identify specific assets as the proceeds of their property which had been misappropriated by their trustees should be entitled to a charge over the trustees’ entire estate in order to secure their claim to relief. In his Lordship’s view, beneficiaries merited priority given that, unlike other creditors, they had never assumed the risk of their trustees’ insolvency.61 Certainly, general creditors may be thought to have accepted certain risks conventionally associated with bankruptcy. Yet, given that the proprietary interest proposed was a novel one, the trustee’s creditors could hardly be said to have assumed the risks that would have followed from its recognition. Moreover, why should those who are sui juris and who choose to allow others to deal with property on their behalf not be said to assume the risk that their fiduciaries may misappropriate their property and subsequently become bankrupt?62 Sherwin argues that the eagerness to give proprietary remedies in this context is motivated by a desire to preserve confidence in fiduciary relationships.63 Yet, it could equally be argued that it would create better incentives for the proper regulation of these relationships if only personal relief were available and beneficiaries were thereby encouraged to protect themselves against the actions of dishonest fiduciaries.

(d) Are all Voluntary Creditors Similarly Situated?

One difficulty with the assumption of risk explanation for proprietary relief is that it suggests that all voluntary creditors are similarly situated. In particular, it implies that they are in a position to assess the relevant risks and to take appropriate action to protect themselves against those risks. The problem with this premise is that that smaller contract creditors are unlikely to be in much of a position to protect themselves against the risks of insolvency.

60[1986] 1 WLR 1072.

61Ibid. at 1074.

62Waters supra n. 45 at 1232.

63Sherwin, supra n. 40 at 355–7.

The Normative Foundations of Proprietary Claims and Remedies 85

This may not be such a problem for some trade creditors who may choose to remain “rationally ignorant” of the risk of individual customers going bankrupt. Where the cost involved in making the inquiries needed to obtain useful information and of acting on that information is liable to exceed any resulting benefits, such creditors will instead spread the risks involved by factoring it into the average price charged for extending credit.64

In contrast, consumers making advanced payments for goods are potentially in a very vulnerable position.65 It may have been this insight that prompted the result in Re Kayford,66 where the plaintiff was a consumer who had made an advance payment to a supplier which, concerned about its own solvency, then put the money into a separate account designated the “customer trust account”. Megarry J was willing to conclude that a trust had been created in favour of the consumer and that, moreover, this did not involve a preference.67 However, he commented that different considerations might have applied to trade creditors.68 Concerns regarding the ability of consumers to gauge risk and insure against it may also explain the inclination of courts in some jurisdictions to conclude that, in contracts for the construction of assets, equitable title may pass to the assets prior to their completion.69

(e) Assumption of Risk as a Necessary but not Sufficient Prerequisite for Proprietary Relief

The “assumption of risk” may be a necessary condition, but it is certainly not a sufficient one. If the fact that voluntary creditors had the opportunity to safeguard their position and failed to do so were a sufficient justification in itself for giving non-voluntary creditors priority, it would justify giving tort claimants preference over contract creditors.

This was the error made by Lord Templeman in Space Investments,70 where he suggested that it would be appropriate to give the defrauded beneficiaries a charge over the defendant’s entire estate to secure their personal claim. Even if it were reasonable to characterise the beneficiaries as involuntary creditors, such a priority could be warranted only if it could also be justified in terms of the “swollen assets”

64JH Scott, “Bankruptcy, Secured Debtors and Optimal Capital Structure: Reply” (1979) 34 Journal of Finance 253.

65However, things are not necessarily so grim for consumers making advanced payments. Those who have the foresight or good fortune to pay by credit card are largely protected against the cost of the seller becoming bankrupt before delivering the goods by virtue of the Consumer Credit Act 1974, s. 75.

66Re Kayford Ltd. (In Liquidation) [1975] 1 WLR 279. See also Re Chelsea Cloisters Ltd. (1981) 41 P & CR 98.

67A conclusion that is not easy to accept: see McCormack, supra n. 31 at 61–4.

68Ibid. at 282. See SR Scott, “The Remedial Constructive Trust in Commercial Transactions” [1993] LMCLQ 330 at 345.

69See, e.g., Hewett v. Court (1983) 57 CLR 211; Taypotat v. Surgeson [1985] 3 WWR 18; Waselenko v. Touche Ross Ltd. [1983] 2 WWR 352, aff’d [1985] 3 WWR 38. See infra, ch. 8.II.2.

70[1986] 1 WLR 1072. See supra, text accompanying n. 60.

Part II

Redistributive Proprietary Remedies

5

The Metaphysics of Tracing: Substituted

Title and Property Rhetoric

BMISAPPROPRIATES a car owned by A and gives it to C in exchange for a motorcycle. Instead of bringing an action based on his title to the car, A may choose to assert title to the motorcycle. That we give property rights in respect of substi-

tuted assets is itself of interest. Civil law jurisdictions, in contrast, do not provide for such a result.1 However, more striking is the way in which rights to substitutes are explained in our legal culture. According to our legal discourse, owners have rights in the exchange product of transactions involving their property because “if the property in its original . . . form was [owned by the plaintiff] no change of . . .

form can divest it of that [interest]”.2 What is more, the process of asserting rights to a substitute is described using the metaphoric language of “tracing” and “following”. This chapter asks why our legal culture offers an account of this remedy that suggests it follows from the nature of things, rather than in more prosaic terms, explaining the remedy as designed to promote particular objectives. In addition, and perhaps more importantly, it asks what are the consequences of this approach.

Functionally, tracing can only properly be regarded as a remedial process that gives rise to new property rights—an understanding which cannot easily be reconciled with traditional notions of property.3 This explains the rather bizarre conceptualisation of tracing in our legal discourse. The traditional analysis of the doctrine in terms of the following of things is imbued with metaphysical rhetoric that serves to obscure the dissonance between a doctrine that provides for the creation of new proprietary rights and understandings of property that apparently preclude such an outcome.

Is there really any harm in this? Fictions and related devices have often been praised for assisting legal development. According to this view, deceit in the form of the law is seen as a small price to pay for positive change in the law’s substantive effect. In fact, form and substance are too interdependent to support this conclusion. The obfuscatory concepts developed in this area have their own logic that will at times demand results which diverge from potentially sound normative justifications for redistributing proprietary rights. In attempting to mediate the

1A Gambaro, “Property” in A Candian, A Gambaro and B Pozzo, Property, Propriété, Eigentum (Padua, Cedam, 1992) 1 at 7–9.

2Taylor v. Plumer (1815) 3 M & S 562 at 575 per Lord Ellenborough.

3FH Lawson, Remedies of English Law (2nd edn., London, Butterworths, 1980) 149.

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apparent incongruity of tracing doctrine and axiomatic notions of property rights, our judges and jurists have failed to address fundamental issues of moral desert. The primary advantage of tracing is that it often confers priority in bankruptcy4— an effect that is not easily justified.5 However, the rhetoric employed in this area to suppress the redistributive nature of “tracing” has discouraged the courts from seeking to mould a remedy that would allocate entitlements within limits provided by some defensible normative rationale. In particular, the metaphysical rhetoric of tracing encourages judges and jurists to ignore the consequences that proprietary relief has for third parties and to rely instead on the ultimately circuitous assertion that plaintiffs are entitled to proprietary relief because the contested asset is their property.

I. ANALYSING TRACING

Before we embark on a critical examination of the doctrine, it is worth attempting to clarify the analytical structure of tracing. In particular, it is important to address assertions that have become commonplace that, first, tracing is not a remedy and, secondly, it is a “neutral” process.

1. Is Tracing a Claim or Remedy?

In Boscawen v. Bajwa,6 Millett LJ argued that:

Tracing properly so-called . . . is neither a claim nor a remedy but a process . . . by which the plaintiff traces what has happened to his property, identifies the persons who have handled or received it, and justifies his claim that the money which they have handled or received . . . can properly be regarded as representing his property. He needs to do this because his claim is based on the retention by him of a beneficial interest in the property which the defendant handled and received.7

This description of tracing has quickly become a standard point of reference for those analysing the area. Yet it poses a number of problems. First, if one wishes to distinguish tracing from claims and remedies, one can hardly do it by describing it as a “process”; for, claims also involve a process—that of establishing entitlement to a remedy. Secondly, it is circular to describe tracing as a process by which one “traces”. Independent terms are required if we are to provide a helpful account of the process. Thirdly, it is unclear what is meant by the assertion that tracing is a process that “justifies” the plaintiff’s claim to proceeds. To suggest that

4See infra n. 100.

5For a review of priority-creating proprietary remedies, see S Walt and E Sherwin, “Contribution Arguments in Commercial Law” (1993) 42 Emory LJ 897 at 934–67.

6[1996] 1 WLR 328.

7Ibid. at 334. For similar statements, see also Jones & Sons (Trustee) v. Jones [1997] Ch. 159 at 169–70 per Millett LJ; Foskett v. McKeown [2001] 1 AC 102 at 128 per Lord Millett.

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provides for a change in the legal status of the parties.9 It is in this light that tracing tends to be characterised as a process whereby existing rights are transferred from one thing to another.10 Yet, can we not view the consequences of a secondary rule—the conferral of new rights—as remedial?

It is true that we do not think of the most common instances of rights arising as a result of secondary rules as remedial in nature. For instance, we do not think of the rights arising out of contracts or express trusts in this way. However, we tend to view express trusts as the product of intention to take advantage of facilitative institutions11 provided by the law and to contrast them with constructive trusts that are said to arise by “operation of law” to provide a remedy.12 Rights contingent upon tracing generally arise by operation of law and so may similarly be regarded as remedial.

(c) Tracing as an Intermediate Remedy

While an analytical distinction may be drawn between tracing and claiming, it makes a good deal of sense to view tracing as part of a remedial process. The claims contingent on the tracing process vindicate entitlements that have arisen as a consequence of plaintiffs electing to assert rights over a new asset. In this light, we may view tracing as an intermediate remedy. It provides a remedy in so far as it changes plaintiffs’ legal status, placing them in the position to bring claims that would have otherwise been unavailable to them. Tracing and claims contingent on tracing may be viewed—as plaintiffs would view them—as parts of a whole. Thus, for example, where a plaintiff must trace in order to bring an action for money had and received, the two steps are parts of a single action. Tracing is an integral part of the action and essential to realisation of the ultimate remedy.

In this sense, tracing is not much different from rescission. In seeking rescission, plaintiffs may ask that the property that is revested in them be returned to them. In doing so, they are seeking to exert property rights that are analytically separate from but contingent upon the process of rescission. Yet, in contrast with tracing, we do not hesitate to refer to rescission as a remedy.

Structurally, tracing also bears a strong resemblance to subrogation. Both are methods of readjusting rights: subrogation allows plaintiffs to assume the rights of another; whereas tracing allows plaintiffs to assert rights they already enjoy over one thing in respect of something else. Both processes allow plaintiffs to assume rights they would not otherwise have. Interestingly, in Boscawen v. Bajwa, after stating that tracing was not remedial in nature, Millett LJ observed that subroga-

9Cf. HLA Hart, The Concept of Law (Oxford, Clarendon Press, 1960) 27. See supra, ch. 1.III.1.b.

10See, e.g., Smith, The Law of Tracing at 3.

11See Hart, supra n. 9 at 27.

12See, e.g., FW Maitland, Equity A Course of Lectures (2nd edn., Cambridge, Cambridge University Press, 1936) 53; cf. CEF Rickett, “The Classification of Trusts” (1999) 18 NZULR 305. On the tendency to think of consensually created rights as something other than remedial, see supra, ch. 1.II.2(b)(ii) and ch. 2.IV.

The Metaphysics of Tracing: Substituted Title and Property Rhetoric 93

tion was indeed a remedy.13 The remedial status of subrogation is now widely accepted.14 Yet, it was not always so. As recently as the third edition of their treatise on restitution, Goff and Jones lamented that “English judges have hitherto regarded subrogation as a right, not as a remedy”.15 The authors reluctantly treated subrogation as a discrete area of the law but predicted that the day would come when “the development of a generalised right of restitution will ultimately lead to the acceptance of the principle that subrogation is a restitutionary remedy”.16 They have been proved right and, in the latest edition of that treatise, subrogation has taken its place at the front of the book with other remedies.17 The recent intellectual history of subrogation emphasises that we should not be afraid to look beyond the received wisdom regarding the juridical nature of particular doctrines. Perhaps the time will also come when the remedial nature of tracing is recognised.

3. Do Rights to Proceeds Arise Automatically?

(a) Tracing as Contingent Upon the Exercise of a Power

One notion behind the contention that tracing is neither a claim nor a remedy turns on the idea that the rights it confers arise automatically, independently of plaintiffs’ making a claim. On this analysis, a plaintiff does not need to trace, the process occurs automatically; and, it follows that, in asserting a claim based on title to a traceable asset, the plaintiff is merely enforcing property rights that are already in existence. On the other hand, if tracing does not occur automatically, but only if and when plaintiffs exercise a power to assert title to another asset, tracing seems to resemble rescission—a process that we habitually characterise as remedial. And, if tracing involves the exercise of a power, it makes perfect sense to speak of those who enjoy such a power as having a “right to trace”.

There are real difficulties with a view that regards rights generated by tracing as fully-fledged property rights that arise automatically. In particular, there is the problem of what Birks has termed the “geometric multiplication of the plaintiff’s property”.18 An advantage of tracing claims is that they allow plaintiffs a cause of action against more than one defendant. Plaintiffs may assert their title against anyone holding assets that were taken from them. Alternatively plaintiffs may “trace” their title into the exchange product of subsequent transactions. Consider an example where a car owned by A is stolen by B and then sold to C, who is aware of A’s interest. A may assert his title against C, in respect of the car, or against B,

13[1996] 1 WLR 328 at 335.

14Indeed, this view recently received the endorsement of the House of Lords in Banque Financière de la Cité v. Parc (Battersea) Ltd. [1999] 1 AC 221 at 231 per Lord Hoffmann.

15Goff and Jones, The Law of Restitution (3rd edn.) at 56.

16Ibid.

17Goff and Jones, The Law of Restitution (5th edn.) at 120.

18P Birks, An Introduction to the Law of Restitution at 92 and 394.

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for the proceeds of the sale. This suggests that A cannot simultaneously assert title against more than one defendant, and that plaintiffs must elect against whom they will enforce their rights.19 On this view, because A cannot simultaneously be the owner of both the original thing and the substitute, it cannot be plausibly argued that, prior to A’s exercise of this election, a full-blown proprietary interest arises in respect of the proceeds of sale held by B. Prior to tracing, B has a defeasible title to the proceeds of the sale—a title that is liable to be lost if A elects to assert title to those proceeds. If A has an interest arising automatically, at the most it can be characterised as an “inchoate” property right—what is commonly termed a “mere equity” rather than a full proprietary interest.20

The analysis of tracing as contingent on the exercise of a power is consistent with the conceptualisation of the doctrine in conventional legal discourse. Tracing is often described as involving a process akin to ratification.21 This is true of the reasoning offered in some of the most seminal tracing decisions. For example, in Re Hallett’s Estate, Jessel MR observed that “[i]f the sale was wrongful, you can take the proceeds of sale, in a sense adopting the sale for the purpose of taking the proceeds”.22 Similarly, more recently, in Lipkin Gorman v. Karpnale Ltd,23 Lord Goff commented, “Of course, tracing or following property into its product involves a decision by the owner of the original property to assert his title to the product in place of his original property”.24

(b) The View that Rights Contingent on Tracing Arise Automatically

The view that a title conferred through tracing arises automatically has some judicial support.25 Such an understanding seems to be implicit in Millett LJ’s assertion that the plaintiff’s “claim is based on the retention by him of a beneficial interest in the property which the defendant handled and received.”26 Moreover, this analysis is also apparent in Millett LJ’s judgment in Jones & Sons (Trustee) v. Jones.27 In that case, the wife of a partner withdrew money from the firm’s bank account and invested it. The firm had committed an act of bankruptcy prior to Mrs Jones’ making the investment and the doctrine of relation back meant that title to the firm’s assets were deemed to be vested in the trustee in bankruptcy from the date of the act of bankruptcy. As a result, Millett LJ concluded that Mrs Jones

19A Burrows, The Law of Restitution at 66.

20This view was taken, e.g., by Porter MR in Re ffrench’s Estate (1887) 21 LR Ir. 283, the effect of this being that a subsequent purchaser of an equitable interest in the traceable proceeds was not bound by the equity. See also A Everton, “Equitable Interests and Equities—In Search of a Pattern” (1976) 40

Conv. 209.

21See infra, text accompanying nn. 54–62.

22(1880) 13 Ch. D 696 at 708.

23[1991] 2 AC 548.

24Ibid. at 573.

25See, e.g., Cave v. Cave (1880) 15 Ch. D 639.

26Boscawen v. Bajwa [1996] 1 WLR 328 at 334. See supra, text accompanying n. 7.

27Jones & Sons (Trustee) v. Jones [1997] Ch. 159. For a fuller account of the case, see infra, text accompanying nn. 76–77.

The Metaphysics of Tracing: Substituted Title and Property Rhetoric 95

at no time gained any title to the fruits of the investment. Of course, this conclusion is difficult to reconcile with authority, including Lord Goff’s dictum in Lipkin Gorman that describes tracing as a decision to assert rights to proceeds “in place of” the original property—a dictum that Millett LJ quoted in the course of his judgment in Jones.28

The most eloquent defence of the view that rights contingent on tracing arise automatically has been provided by Lionel Smith. He argues that the election required of plaintiffs in the context of tracing must be made, not when they sue, but only when they pursue a judgment to satisfaction.29 On this view, prior to the satisfaction of judgments, plaintiffs have fully-fledged property rights in both the assets they owned originally and the proceeds of those assets, albeit rights that are qualified in that one of them will be lost when plaintiffs make their election. There are several problems with this argument. First, it is misleading to suggest that the law takes a uniform approach to election and always requires satisfaction of a judgment. For example, in cases of undisclosed agency, where a plaintiff has a remedy against either the agent or the principal, the initiation of proceedings has been said to amount to at least prima facie evidence of an election.30 Indeed, there is authority to suggest that even acts short of commencing proceedings, such as the decision to debit the account of one of the parties, may suffice.31

Secondly, Smith proceeds too quickly in drawing an analogy between an election between personal remedies and an election between property rights. The law of election is far from certain. A policy choice is involved in deciding when an irrevocable election takes place and it should not be assumed that it should operate in the same way in all contexts. In part, Smith’s analysis of election relies on the example of “waiver of tort”. However, special reasons pertain in that context for allowing late election. The primary advantage of waiver of tort is procedural. In particular, it was used by the courts to get round the harsh rules governing the survival of actions, thereby allowing actions in quasi-contract to be maintained against defendants’ representatives when tort actions had been extinguished. In contrast, where tracing is used to claim proprietary relief over substituted assets or to sue third parties, it provides substantive advantages. It is far from clear how Smith’s approach would work in circumstances where more than one of the claims that a plaintiff has available generates rights to specific property. There are particular problems with the notion of election between such proprietary rights because of the duties they may impose on constructive trustees and their effect on third parties, such as purchasers, trustees in bankruptcy and creditors. These difficulties make the idea of delaying the time of election to the point of satisfaction of judgment much less attractive.

28Ibid. at 169. The dictum in question was also quoted in a briefer judgment by Beldam LJ, ibid. at

29Smith, The Law of Tracing at 380–3.

30Scarf v. Jardine (1882) 7 App. Cas. 345; Clarkson Booker Ltd. v. Andjel [1964] 2 QB 775; Cyril Lord Carpet Sales Ltd. v. Browne (1966) 111 Sol. Jo. 51.

31Addison v. Gandassequi (1812) 4 Taunt. 574; Thomson v. Davenport (1829) 9 B & C 78.

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Thirdly, not only is Smith’s analysis inconsistent with the way in which tracing has typically been described,32 it sits uneasily with his own assertion that tracing does not create new property rights. While he tends to characterise the rights conferred by tracing as being transferred from one asset to another, that characterisation of the process is difficult to reconcile with the potential for the multiplication of property rights that his account of the timing of the interests arising in this context inevitably entails.

(c) Tracing is Remedial Even if it Operates Automatically

In any event, the fact that rights might arise automatically does not indicate that they do not amount to remedies. Even if it takes place automatically by operation of law, tracing involves the non-consensual readjustment of rights—rights that may then vindicated by claims that are contingent upon tracing. It is this readjustment of rights that gives tracing its remedial quality. Again we might note the resemblance that tracing bears to subrogation. In several instances, plaintiffs are subrogated automatically to the proprietary rights of another without the need for any election.33 Nonetheless, we do not hesitate to regard subrogation as a remedy.34

It is perhaps surprising how much emphasis has been placed on the question when the interest conferred by tracing arises. Of course, as we have seen, this is also a feature of the debate on the remedial constructive trust.35 Why are so many jurists eager to claim that the legal relationship between a plaintiff and a traceable asset arises automatically? Perhaps it reflects a rather romantic picture of the law— a picture that emphasises that the courts are enforcing our subsisting rights rather than using their power to intervene in our lives. The idea that a legal relationship arises automatically imbues tracing with a rather metaphysical quality, suggesting that the relationship at issue is almost a natural state of affairs—one somehow not involving the courts. However, the rights conferred by tracing are created by the law and, whether they arise automatically or not, they are remedies.

4. Does Tracing Create New Property Rights?

Another way in which the remedial character of tracing is often denied is illustrated by Lionel Smith’s assertion that “[t]he exercise of tracing never creates proprietary rights. What it does is allow them to be asserted in different assets.”36 While it is common to conceive of tracing as transferring an existing right to a new asset, it is not clear what should turn on this characterisation. Analysing the matter in Hohfeldian terms, owners have not only existing rights over the assets they

32See supra, text accompanying n. 24.

33See, e.g., Boscawen v. Bajwa [1996] 1 WLR 328 at 342 per Millett LJ.

34See supra nn. 13–17 and accompanying text.

35See supra, ch. 1.III.5.

36Smith, The Law of Tracing at 320.

The Metaphysics of Tracing: Substituted Title and Property Rhetoric 97

presently own, but also a power to assert similar rights over proceeds of those assets in certain circumstances. The exercise of the power to transfer existing rights to new objects still generates new legal relationships and, for this reason, tracing can properly be characterised as remedial.

The conceptualisation of tracing as no more than the transfer of existing rights relies on the understanding that the rights over the initial asset and those enjoyed over any traceable proceeds are identical in content. Thus, Sir Peter Millett has argued that “[t]he effect of a successful tracing exercise is to confer on the parties the same rights and obligations mutatis mutandis in respect of the substituted asset as they . . . had in the original asset”.37 Yet, this is not necessarily so.

For one thing, all leading analysts of the area argue that legal owners should be able to trace in equity, and there is some judicial support for this view.38 If this is indeed possible, it is obvious that the interest over the proceeds is not the same as the interest enjoyed over the initial asset; for the right over the proceeds is limited to equitable ownership. The two interests vary in provenance. For, it is generally accepted that an absolute legal owner has no separate equitable interest because such interests arise only where the conscience of the legal owner is affected.39 Thus, there is no equitable interest to transfer to the new object, and it follows that the right the owner obtains over proceeds must be a new interest.40 Of course, this analysis might be thought to be somewhat pedantic. In substance, the rights that arise in equity can be seen as extending to proceeds rights that owners had enjoyed at law over the assets they initially owned. However, perhaps more importantly, the equitable interest conferred also differs in content from the legal interest that the owner previously enjoyed. Rather than being good against all the world, this interest is liable to be defeated by bona fide third party purchasers of the legal interest.

Secondly, even in instances where the interest initially enjoyed by plaintiffs was an equitable one, it is difficult to conclude that, upon tracing, they have the same

37Sir Peter Millett, “Restitution and Constructive Trusts” (1998) 114 LQR 399 at 409. On the other hand, in Foskett v. McKeown [2001] 1 AC 102 at 128, Lord Millett was more tentative in suggesting that a plaintiff “will normally be able to maintain the same claim to the substituted asset as he could have maintained to the original asset”.

38Westdeutsche Landesbank Girozentrale v. Islington LBC [1996] AC 669 at 716 per Lord BrowneWilkinson.

39Commissioner for Stamp Duties (Queensland) v. Livingston [1965] AC 694 at 712 per Viscount Radcliffe Re Bond Worth [1980] Ch. 228; DKLR Holdings Co. (No. 2 ) Pty. Ltd. v. Commissioner for Stamp Duties (NSW) (1982) 149 CLR 431 at 463 per Aickin J; Westdeutsche Landesbank Girozentrale v.

Islington LBC [1996] AC 669 at 706 per Lord Browne-Wilkinson. See K Gray, “Equitable Property” (1994) 47(2) CLP 157 at 163.

40An example is the tracing in equity in the aftermath of theft. It is easy to demonstrate that it makes little sense to say that a constructive trust arises at the time of a theft. Victims of theft retain their legal title and thieves gain no interest in the asset in question. Thus, there is no separation of legal and equitable title, and it follows that, at least initially, thieves cannot be constructive trustees. However, subsequently, victims are liable to lose their legal interest if the property in question or its proceeds is placed in a mixed bank account. If victims are, thereafter, permitted the right to trace the proceeds of their property in equity and to enforce constructive trusts in respect of them it is clear that they have been given new proprietary rights.

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right that they had enjoyed before. For, plaintiffs who have successfully traced have the option of asserting a lien over the asset in question.41 Rather than transferring a right enjoyed over one object to another, the lien allows for the creation of a new property right in the second asset to secure a right to be compensated for the breach of the property right the owner enjoyed in the first asset.

Thirdly, at law, the rights generated by tracing differ from the rights originally enjoyed by the owner in that an action for conversion will not be available if traceable proceeds find their way into the hands of an innocent third party.42 Instead, the only action that may be maintained at law is one for money had and received— an action not based on a continuing title (or, more precisely, a right to immediate possession) but on a personal right to repayment that we would now generally describe as restitutionary. One consequence of this is that the plaintiff’s right is weakened in that it is susceptible to the defence of change of position.43

The fact that the rights conferred by tracing differ from those initially enjoyed by the owner emphasises that the process is far from neutral. That these rights have been varied where the courts have thought it appropriate emphasises that we should be prepared to consider where and to what extent it is just to allow owners to enjoy rights over the proceeds of their property.

II. THE METAPHYSICS OF TRACING: THE DENIAL OF THE REMEDIAL NATURE OF

TRACING IN LEGAL DISCOURSE

1. Tracing Things

It is difficult to find a clear justification offered for tracing in contemporary case law.44 The doctrine has long since become part of the juridical landscape and courts do not think it necessary to seek to divine its rationale. Not surprisingly, it is easier to find justifications offered for the practice in early cases dealing with the matter. One of the earliest discussions of the doctrine appears in the decision of Scott v. Surman.45 There, the plaintiff maintained an action for money had and

41Re Hallett’s Estate (1880) 13 Ch. D 696 at 709 per Jessel MR.

42Lipkin Gorman v. Karpnale Ltd. [1991] 2 AC 548 at 573. Case law indicated that where withdrawal is made by a person whose instructions a bank is authorised to honour, title will pass even if that person did not in fact have the authority of the account holder to make the withdrawal in question. It was held that, as a result, the account holder is not entitled to bring an action for conversion. See Union Bank of Australia Ltd. v. McClintock & Co. [1922] 1 AC 240; Commercial Banking Co. of Sydney Ltd. v.

Mann [1961] AC 1. Lord Goff explained the inability to sue for conversion after tracing by arguing that the election to assert title to assets in another’s possession could not be utilised so as to turn a good faith recipient into a wrongdoer. In contrast, Birks has argued that that conversion is unavailable in these circumstances because plaintiffs who have yet to elect to trace do not have an immediate right of possession to traceable assets. See P Birks, “On Taking Seriously the Difference Between Tracing and Claiming” (1997) 11 Trust Law International 2 at 7.

43Lipkin Gorman v. Karpnale [1991] 2 AC 548.

44Although see the detailed account recently offered by Lord Millett in Foskett v. McKeown [2001]

1AC 102.

45(1742) Willes 400.

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received against the assignees of the estate of a bankrupt who had sold tar as the plaintiff’s agent. The plaintiff claimed promissory notes that were given by purchasers in consideration for the tar. The matter could have been disposed of by trite agency principles. However, the judgment contains dicta that go further and suggest the existence of a right to trace at common law. Willes LCJ asked:

why are goods considered still as the owners? Because they remain in specie, and so may be distinguished form the rest of the bankrupts estate. . . . [T]o be sure in reason the thing produced ought to follow the nature of the thing out of which it is produced, if it can be distinguished.46

No argument is actually advanced in support of this view; it is understood to be self-evident.

While tracing involves the creation of a new proprietary relationship, rather than the enforcement of an existing one, the conventional description of the doctrine is rather different. This is apparent in the early nineteenth-century decision of Taylor v. Plumer.47 While given money by the defendant to buy Exchequer bills, a broker instead used it to buy gold doubloons and securities for his own purposes and then absconded. The defendant apprehended the broker, who then handed over the gold and securities. Subsequently, the assignee in bankruptcy of the broker sought to recover the property from the defendant. The Court held that defendant had title to the property and so was entitled to resist the assignee’s claim. Lord Ellenborough explained the matter in the following way:

[T]he property of a principal entrusted to him by his factor for any special purpose belongs to the principal, notwithstanding any change which that property may have undergone in its point of form, so long as such property is capable of being identified and distinguished from all other property . . . [i]t should seem that if the property in its original state and form was covered with a trust in favour of the principal, no change of that state or form can divest it of such trust, or give the factor or those who represent him in right any more valid claim in respect of it, than they respectively had before such change.48

One particular ambiguity in the use of “property” in legal discourse has long been noted.49 As in common speech, often the term is used to indicate, not the juridical relationship, but the object of that relationship—the thing that is owned. Ellenborough uses “property” in this latter sense, while he refers to the legal relationship using the concepts of trust and belongingness. Accordingly, Ellenborough’s conclusion that the plaintiff’s “property” persists through exchange transactions is somewhat bizarre, as it contemplates that it is not the legal relationship but the object of that relationship—the “thing” itself—which transcends substitutions. In this way, tracing is explained on the basis that

46Ibid. at 405 (emphasis added).

47(1815) 3 M & S 562.

48Ibid. at 575.

49See, e.g., J Bentham, Introduction to Principles of Morals and Legislation (ed. by JH Burns and HLA Hart, London, Methuen, 1982) at 211.

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substitutes simply are the property of the plaintiff, rather than as a rule that alters the parties’ rights and obligations in relation to the asset in question.

We can still find the remedy explained in metaphysical terms this century. Thus, in Re Diplock,50 Lord Greene MR reasoned that, where plaintiffs trace to property acquired with money from a fund to which they were entitled, the availability of “equitable remedies presuppose[s] the continued existence of the money . . . as latent in property acquired by means of such a fund”.51 Quite how that which was originally owned by a plaintiff comes to be “latent” in another thing, or even— where there has been a chain of transactions—in a number of things, is obscure to say the least.

Much academic analysis of the remedy has followed the tone of Lord Ellenborough’s judgment in Taylor v. Plumer.52 Thus, Samuel Williston, one of the last great American formalists, said of tracing, “[t]his rule simply asserts the right of the true owner to his own property”.53

2. Tracing as Ratification

An alternative, or perhaps more often supplementary, account of tracing employs the notion of ratification.54 Perhaps tracing grew out of the tendency to treat beneficially owned property as a fund and from a refusal to crystallise the owners’ rights on misappropriation.55 Thus, it may not seem unreasonable to say that tracing empowers plaintiffs to ratify with retrospective effect an unauthorised transaction involving their property. However, there are two difficulties involved in an attempt to explain tracing in these terms. For one thing, ratification, in itself, cannot provide a justification for tracing. Even if it did provide a useful means of conceptualising the manner in which the remedy operates, it begs the question: “why are plaintiffs allowed to ratify?”

In addition, there are real conceptual difficulties in treating tracing as involving ratification. First, as Khurshid and Matthews have cogently argued, tracing cannot be reconciled with conventional ratification principles.56 Tracing is at odds with the rule that ratification is available only where a person professed to be contract-

50[1948] Ch. 465.

51Ibid. at 521.

52See, e.g., AJ Oakley, “Proprietary Claims and Their Priority in Insolvency” [1995] CLJ 377 at 378–9.

53S Williston, “The Right to Follow Trust Property when Confused with Other Property” (1888) Harv. L Rev. 28 at 39, approvingly citing from the judgment in Re Cavin v. Gleason, 105 NY 256.

54See, e.g., Sinclair v. Brougham [1914] AC 398 at 419 per Haldane VC; Re Diplock [1948] Ch. 465 at 518.

55D Osterle, “Deficiencies of the Restitutionary Right to Trace Misappropriated Property in Equity and in UCC § 9–306” (1983) 68 Cornell L Rev. 172 at 177. See also S Evans, “Rethinking Tracing and the Law of Restitution” (1999) 115 LQR 469 at 478.

56See S Khurshid and P Matthews, “Tracing Confusion” (1979) 95 LQR 78 at 88.

The Metaphysics of Tracing: Substituted Title and Property Rhetoric 101

ing on behalf of a third party.57 Secondly, waiver of tort, an action in some ways analogous to tracing,58 is itself now understood, not in terms of ratification—the affirmation of a wrong—but, rather, as an election to sue in quasi-contract to recover restitution, rather than damages in tort.59 Thirdly, the fact that plaintiffs who are entitled to assert a constructive trust over traceable proceeds in the hands of a defendant may instead elect to claim a lien precludes the process being characterised in terms of ratification. For a lien gives plaintiffs rights over new assets to secure the loss of misappropriated assets. Clearly this would not be available if tracing involved the authorisation of the earlier misappropriation.

There has been some recognition in recent years that tracing is not properly characterised in terms of ratification. Recently, in the House of Lords’ decision in Lipkin Gorman v. Karpnale,60 Lord Goff noted that tracing was often described using the language of ratification, but observed that: “I myself would not so describe it”.61 Similarly, in Boscawen v. Bajwa, Millett LJ indicated that tracing involves an election between remedies and not ratification.62

3. The New Orthodoxy: Tracing Value

According to Birks:

there is no such thing as a right to trace, and tracing is not a remedy (if “remedy” can be sensibly contrasted with “right”). Tracing is no more than the means of finding out where at any relevant moment value is located. It is a preliminary or ancillary exercise. There are two quite separate questions. One is whether the value in question can be located. The other is whether, once it has been located, a right of some kind may be exigible in respect of it.63

This passage highlights two claims that are central to Birks’ analysis of tracing: first, the notion that tracing is “neutral as to rights”; and, secondly, the idea that tracing is concerned with the location of value.

57 Keighley v. Maxted & Co. v. Durant [1901] AC 240. Indeed, in Taylor v. Plumer, Lord Ellenborough expressed the view that ratification would not have been available; (1815) 3 M & S 562 at 579–80.

58Thus, in Sinclair v. Brougham, Haldane VC describes tracing as allowing “a principal to waive his right of action for damage of tort, and, affirming” the exchange transaction in question: [1914] AC 398 at 419.

59United Australia Ltd. v. Barclays Bank Ltd. [1941] AC 1 at 28 per Lord Atkin. See Khurshid and Matthews, supra n. 56 at 89–90.

60[1991] 2 AC 548.

61Ibid. at 573.

62[1996] 1 WLR 328 at 341.

63P Birks, “Mixing and Tracing” (1992) 45(2) CLP 69 at 86. See also Birks, An Introduction to the Law of Restitution at 358; Birks “Establishing a Proprietary Base: Re Goldcorp” [1995] RLR 83 at 84.

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(a) Tracing as a Neutral Process

Birks argues for:

the independence of tracing and the claims which are contingent on tracing. Tracing is neutral as to rights. Successful tracing confers no rights, though it is often a precondition of the exercise of rights. The tracing exercise being successfully completed, there always remains a separate inquiry as to what, if any, rights the facts of the case give rise to in respect of the assets found at the end of the tracing chain.64

Yet if the claims in question are “contingent on tracing”, can these claims be said to be independent of tracing? Can it be that one can trace and yet have no claim in respect of the assets traced?

Lionel Smith has also attempted to sever tracing from the rights that it apparently generates. According to Smith, “[t]racing by itself is an exercise which examines the results of substitutions. It does not establish rights”.65 Illustrating this point, he argues that:

Just as I can follow even where following is fruitless, so I can trace even where tracing is fruitless. If I want, I can trace the money which I lend to my debtor. I will never establish any rights in the traceable proceeds of the lent money; but that is a question of claiming.66

The assertion is unconvincing. First, that one may, as a matter of fact, follow an asset around does not indicate that one can, as a matter of law, trace to that asset. Secondly, Smith conflates the analytically distinct processes of the transmission of rights and claiming. Tracing is the process by which the foundation to a claim (generally title to a thing) is established. As a result, a plaintiff may bring a claim such as conversion, breach of trust or knowing receipt. Contrary to Smith’s suggestion, to say that tracing generates the right to assert a claim over traceable proceeds does not confuse this process with the claim itself.

Birks argues that we must look to the “facts of the case” to determine what rights, if any, plaintiffs will be able to exercise in respect of traceable proceeds. Yet this makes the matter rather more mysterious than it really is. Tracing is largely “concerned with ensuring that the remedies which a plaintiff would otherwise have in respect of an asset are not wholly defeated by the replacement, or mixing, of that asset with other property”.67 If tracing “involves a decision . . . by the owner to assert his title to the product in place of his original property”,68 it follows that we can determine the rights enjoyed at the end of the tracing chain largely by

64P Birks, “On Taking Seriously the Difference Between Tracing and Claiming” (1997) 11 Trust Law International 2 at 8; see also P Birks, “Equity in the Modern Law: An Exercise in Taxonomy” (1996) 26 Western Australian L Rev. 1 at 82–3.

65Smith, The Law of Tracing at 132.

66Ibid. at 131.

67S Moriarty, “Tracing, Mixing and Laundering” in P Birks (ed.), Laundering and Tracing (Oxford, Oxford University Press, 1995) 73 at 93–4. See also Evans, supra n. 55 at 470.

68Lipkin Gorman v. Karpnale Ltd. [1991] AC 548 at 573 per Lord Goff.

The Metaphysics of Tracing: Substituted Title and Property Rhetoric 103

reference to the rights found at the beginning of that chain. Given this, it is difficult to understand how tracing can be regarded as a process that “confers no rights”.

The claim that tracing is “neutral as to rights” also flies in the face of conventional legal usage. It is contrary to our use of the term to describe a plaintiff who acquires no rights as a result of the process as having “traced”. Indeed, tracing tends to be defined in terms of the situations in which a plaintiff can assert a claim. As Millett LJ put the matter in Jones & Sons (Trustee) v. Jones, “tracing . . . is the process by which the plaintiff . . . establishes what has happened to his property and makes good his claim that the asset which he claims can properly be regarded as representing his property”.69 It follows that, if plaintiffs cannot make good this claim they have not traced.70 If, as Lord Goff observed in Lipkin Gorman, tracing involves an election to assert title to one asset in the place of another asset,71 if we have no power to elect to transfer rights to a substitute asset we cannot be said to be able to trace.

If tracing does not tell us whether we have a right in a substitute, what does? We need a word for the process by which plaintiffs establish rights to proceeds that provide the foundation for claims that they may bring in respect of those assets. “Tracing” has always been the term employed to describe this process. We have never bothered to coin a word for the exercise conducted by Smith’s hypothetical lender in the quotation presented above.72 This is hardly surprising; the law does not concern itself with causal connections that have no legal implications. It is true that if I lent someone money I could amuse myself by thinking about the exchange transactions involving it and its proceeds. However, this would be a private pastime and not a legal process.

Both Birks’ and Smith’s analyses seem to turn on a confusion about a preliminary stage supposedly involved in the tracing process. It may be true that plaintiffs effectively go through what Birks terms the “preliminary” process of identifying “traceable value” before they decide whether they wish to assert any rights that may be available. However, it is important to realise that this is not a legal process, but rather a factual process of identifying one’s legal options. Of course, plaintiffs who think that they may have a claim that is contingent on tracing will look at the facts of the case in order to determine what recourse the law will provide. And, of course, this assessment will necessarily involve an examination of whether the rules of tracing will enable a claim to be brought in respect of particular assets. But this does not indicate that such plaintiffs have traced. Rather, this preliminary exercise may be compared with tort plaintiffs examining chains of causation in order to determine whether or whom they may sue. A legal process entails legal

69[1997] Ch. 159 at 169–70.

70Strangely, Birks concludes that a very similar, if slightly less concise, analysis of tracing by Millett LJ in Boscawen v. Bajwa [1996] 1 WLR 328 at 334 (see supra, text accompanying n. 7) indicated that tracing was “neutral as to rights”: Birks, “Equity in the Modern Law”, supra n. 64 at 83. If anything, the opposite is true.

71Lipkin Gorman v. Karpnale Ltd. [1991] AC 548 at 573.

72See supra n. 66.

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consequences. Thus, just as a tort claim commences only when one asserts one’s rights by bringing an action, tracing takes place only when one elects to assert rights to a substitute by initiating a claim.

(b)Problems for the Account of Tracing Value

(i)The Geometric Multiplication of Rights, Causal Indeterminacy and the Importance of Moral Considerations

Lionel Smith has justified the view that tracing involves the identification of value in the following way:

The only connection which the plaintiff has to the new asset is that it was acquired with the old asset. The defendant acquired the value inherent in the new asset with the value inherent in the old asset. That is why we say that we trace value: it is the only constant that exists before, through and after the substitution through which we trace.73

The first sentence, pointing to the existence of a causal link between the assets, is uncontroversial. However, what follows is a non sequitur.

One difficulty with the view that the value of one thing is inherent in its proceeds is a problem that Birks has thrown much light on: that of the “geometric multiplication of rights”.74 Tracing allows plaintiffs to make an election between at least two, but potentially more, different assets that they are permitted to treat as their own. If an election is available between several traceable assets, how can tracing be said to identify the location of the value of an asset? Can the value “inherent” in an asset exist in several places at once? To describe tracing in terms of locating value is unhelpfully metaphysical. Rather, tracing largely involves the allocation of entitlements on the basis of moral desert.75

A second difficulty with Smith’s description of tracing is that it is far from obvious that the value of traceable proceeds will be attributable solely to the value of the assets for which they were exchanged. The value of the exchange product of an asset may also be attributable to the knowledge, skill and industry of the defendant and other factors, such as unpredictable movements in the market. Consider the decision in Jones & Son (Trustee) v. Jones.76 Jones & Son, a firm of potato growers, committed an act of bankruptcy. After this event, but prior to a bankruptcy order

73Smith, The Law of Tracing at 119.

74Birks, An Introduction to the Law of Restitution at 92 and 304. See supra, text accompanying nn. 18–20.

75The moral content of the law’s approach to “identification” is also apparent in the mixing rules that typically work in conjunction with tracing. These rules dictate that those who have no knowledge of the fact that they are in receipt of trust moneys are subject to less stringent evidential presumptions than are their blameworthy counterparts. An innocent volunteer is subject to the rule in Clayton’s Case (1816) 1 Mer. 529 (governing mixing of the moneys of two innocents) rather than those in Re Hallett’s Estate (1880) 13 Ch. D 696 and Re Oatway [1903] 2 Ch. 356 (governing the mixing of the moneys of a trustee and an innocent). See, e.g., Re Diplock [1948] Ch. 465 at 524. Again, this emphasises that the “identification” of property does not involve a neutral process of locating value but a determination of entitlement in which considerations of moral desert are very important.

76[1997] 1 Ch. 159.

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being made, Mrs Jones, the wife of one of the firm’s partners, withdrew £11,700, which she invested in potato futures. Thanks to the doctrine of relation back, title to the money withdrawn by Mrs Jones vested in the trustee in bankruptcy with retrospective effect as from the date of the act of bankruptcy. The investments yielded £50,760, a sum to which the Court of Appeal accepted the trustee in bankruptcy had title. The creditors of Jones & Son were no doubt overjoyed by the success of the potato futures’ market. However, it is not very illuminating to say that the trustee in bankruptcy was allowed to claim the proceeds of the potato futures because the value of the firm’s money withdrawn by Mrs Jones was inherent in them. This metaphysical assertion looks suspiciously more like a conclusion than a justification.77

Jones & Son (Trustee) v. Jones illustrates how little regard is paid to questions of value in tracing cases. A traceable asset may be of considerably greater value than the asset that the plaintiff originally owned.78 This might be justified on the basis that the defendant should not be allowed to profit. However, this justification points to considerations of deterrence and moral desert—the same considerations that apply in respect of enrichment by wrongs.79 It does not indicate that the value of one asset can be found in another asset.

This inclination to allow owners who trace to recover more than they have lost may be contrasted with one instance in which the law obviously does take value into consideration. Where a traceable asset is worth less than that originally owned by plaintiffs, they are entitled to have a lien over the traceable asset in order to secure their personal claims for the full value of the original asset.80 Again, this is hardly consistent with the view that the plaintiff traces the value of one thing into that of another.81

(ii) The Circularity of the Notion of Tracing as the Location of Value

Birks himself recognises that the process of identification that he takes to be the basis of tracing does not “take place by the light of nature” but is “artificial”.82 This rather begs the question exactly how “artificial” or arbitrary this process can be before it ceases to be meaningful to describe it in terms of the identification of value.

77On the other hand, it is difficult to object to the outcome of the case. Given that the plaintiff was the trustee in bankruptcy, there was no danger of the remedy prejudicing the interests of the creditors of the bankrupt firm.

78This is equally true of claims brought in equity. See Foskett v. McKeown [2001] 1 AC 102; Re Tilley’s Will Trusts [1967] Ch. 1179; Birks, An Introduction to the Law of Restitution at 366; Smith, The Law of Tracing at 16–17.

79This is something explicitly recognised by American commentators. See, e.g., Palmer, The Law of Restitution i, § 2.14 at 181. On the justification for awarding proprietary relief in the context of enrichment by wrongs, see infra, ch. 9.II.

80Re Hallett’s Estate (1880) 13 Ch. D 696 at 709 per Jessel MR.

81Recognizing the difficulty that the right to elect to take a lien poses for his analysis, Birks notes that, “[a] free choice between the two may be difficult to justify”; Birks, An Introduction to the Law of Restitution at 91.

82Ibid. at 6, 84 and 359.

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Birks refers to tracing as a process of identifying “the path of value” through transactions and as an exercise which “aims to discover whether all of those units of value can be said to have passed into other assets so that they, the original units of value, are held by or were received by the defendant in those other assets”.83 The metaphoric nature of the explanation is manifest. When we claim title to a substitute, we do not actually “trace” anything. Talk of tracing would make literal sense only if there were some entity that we are following through the transactions that enjoys an existence apart from the law. For example, to speak of tracing a person makes sense as an expression for the process of identifying the physical location of a particular person over time. Yet what is followed when we trace at law? In tracing, we identify relations between things, and not some mysterious essence that passes from one asset to another. The value of one thing does not enter another thing. Talk of “paths of value” is a metaphorical way of referring to causal links between assets—one having been exchanged for the other.

Ultimately, tracing cannot be understood as a process of identification that is separate from the process of ascribing rights. Birks’ very abstract conceptual analysis is circuitous. Consider the description of tracing as “the restitutionary right to reach through substitutions to assets in which given units of value traceably survive”.84 To the question, “what can be traced?”, the answer must be, “surviving value”. However, to the question, “what then is surviving value?”, the answer must be “that which can be traced”. Ultimately what amounts to value “surviving” or “a path of value” is simply the conclusion of the legal rules that dictate to which assets plaintiffs may assert title.

Nothing is literally traced in the process metaphorically known as tracing. Rather, rights are created or transferred as a result of the process. We are able to “trace” only because the law gives us rights to proceeds; the law does not give us rights to proceeds because we are able to trace. The sooner this is accepted, the sooner we can approach this area of law in a more rational fashion.

III. AN EXPLANATION OF TRACING RHETORIC: THE RECONCILIATION OF TRACING

WITH AXIOMATIC NOTIONS OF PROPERTY RIGHTS

1. The Function of Tracing Rhetoric

Viewed functionally, tracing—involving as it does the redistribution of property rights—is obviously difficult to reconcile with absolutist notions of property. This explains the obfuscatory analysis favoured in tracing jurisprudence. The highly formalistic conceptualisation of tracing represents a ritualistic discourse of denial that suppresses the reality of a divergence from axiomatic understandings of property rights. Lord Ellenborough’s conception of things transmuting through

83P Birks, “Persistent Problems in Misdirected Money: A Quintet” [1993] LMCLQ 218 at 230.

84Ibid. at 232.

The Metaphysics of Tracing: Substituted Title and Property Rhetoric 107

exchange transactions serves to obscure that legal rights are redistributed when something is traced.

The word “tracing” itself provides a suggestive metaphor that implies that the plaintiff has an unproblematic claim to relief. The metaphors of “following” and “tracing” suggest there really is something being “traced”—some essence to which title attaches. These operate, as metaphors often do, “to treat as fixed and natural things which are historically contingent and for which human agents are responsible”.85 In this way, what is transitory is eternalised.86 In the process, the distributive consequences of tracing—principally, the conferral of priority in insolvency on a particular class of plaintiffs—are obscured and the pretence that property provides a boundary that ensures the common law’s autonomy from politics is maintained.

The other explanations for rights accorded to proceeds are rather less effective. The conceptualisation of tracing as ratification is rather too obviously a conclusion and we tend to find it used, not on its own, but in conjunction with more metaphysical notions of tracings.87 Similarly, the idea of tracing as the identification of value is rather ineffective on its own. While it conveniently suggests an association with the burgeoning field of restitution, it cannot, in itself, connect the relief given to conventional understandings of property in the way that the rhetoric of tracing things does. Consequently, Birks resorts to the assertion that a plaintiff’s “proprietary base” subsists through exchange transactions.88 However, this conceptualisation of the matter is too far removed from orthodox understandings of property as the absolute ownership of discrete objects to provide an effective mechanism for obscuring the reality that rights of property are being readjusted.

2. The Power of Tracing Rhetoric

The devices employed in the law of proprietary remedies vary greatly in their capacity to affect their users.89 Of all these obfuscatory mechanisms, tracing possesses a real power to mesmerise. This seems to owe much to the power of metonymy: the tendency to associate one thing with another because they are physically or causally connected in some way.90 In the case of tracing, the fact that one thing was exchanged for another encourages us to elide the two.

85D Cooper, Metaphor (Oxford, Basil Blackwell, 1986) 42.

86See R Barthes, Mythologies (London, Cape, 1973) 129 and 142.

87For an example of a decision in which tracing is explained both in terms of ratification and on the basis that the asset originally owned by the plaintiff remains “latent” in its exchange asset, see Re Diplock [1948] Ch. 465 at 518 and 521.

88See infra, ch. 15.

89On some of the different conceptual devices employed in the law of proprietary remedies, see supra, ch. 2.V.2.

90See E Leach, Culture and Communication: The Logic by which Symbols are Connected (Cambridge, Cambridge University Press, 1976) 31.

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The power and prevalence of tracing talk is also attributable to the habit of perceiving legal relations as physical facts.91 There is a tendency to envisage conceptual relations as something concrete in order better to comprehend them.92 In this process, legal relationships between people are reconceptualised as physical facts: as qualities inherent in things. Thus, we find it reassuring to think that we are literally “tracing” something that is “out there”. This phenomenon is also apparent in our habit of requiring that, before obligations concerning land can bind third parties, they must not only “concern” but “touch” the land. Once this requirement is met, obligations that are causally related to realty are seen to become “annexed” to the land, and so “run with it”.93 Of course, the notion of annexation is both metaphoric and conclusory.94 Nonetheless, it crops up in argument as if it were capable of solving what we perceive to be “hard cases”.95 Somehow, it allows us to manipulate the divide between ownership and obligation, while maintaining the appearance that this division is natural and immutable.

IV. THE NORMATIVE BASIS FOR SUBSTITUTED TITLE

1. Reasons for Allowing the Assertion of Proprietary Rights over Substitutes

Why allow plaintiffs to assert a claim over something that they neither owned previously, nor purchased from its former owner? Tracing can confer a number of advantages. It may allow plaintiffs to bring actions against additional

91 See, e.g. C Geertz, “Local Knowledge: Fact and Law in Comparative Perspective” in Local Knowledge (London, Fontana Press, 1993) 167 at 189; R Frith, Symbols: Public and Private (London, George Allen and Unwin, 1973) 140.

92Leach, supra n. 90 at 37. The same tendency is also apparent in Locke’s justification of rights of property to things by extension from the proposition that “every man has a property in his own person”. Locke concluded that where a person “hath mixed his labour with” an object, he has “joyned to it something that is his own, and thereby makes it his property”: see J Locke, Two Treatises of Government (ed. Peter Laslett, Cambridge, Cambridge University Press, 1988) bk II § 27 at 287–8. Hume, in contrast, concluded that our attribution of property rights largely depends on “relations and connexions of the imagination”: see D Hume, A Treatise of Human Nature (ed. LA Selby-Bigge and PH Nidditch, 2nd edn., Oxford, Clarendon Press, 1978) 512.

93Simpson attributes the understanding that “[t]he covenant must relate to something in being” to “the metaphysical bent of sixteenth century land lawyers”: AWB Simpson, A History of the Land Law (Oxford, Clarendon, 1986) 255.

94K Gray and S Francis-Gray, Elements of Land Law (3rd edn., London, Butterworths, 2001) 1321–6; See also the discussion of Lord Oliver in Hua Chiao Commercial Bank Ltd. v. Chiapua Industries Ltd. [1987] AC 99 at 112. In the UK, s. 2 of the Landlord and Tenant (Covenants) Act 1995 has removed the “touch and concern” requirement for leases entered into from 1996 onwards. Covenants will pass upon assignment unless it is indicated that it is intended otherwise.

95On the other hand, perhaps we discern these cases to be particularly difficult because of our inability to transcend the constraints of our normative order without the use of such metaphysics. If, instead, we took the view that the objects of, and protection afforded to, property are socially constructed for pragmatic reasons, we would not concern ourselves with maintaining the illusion that there is a natural line between property and contract.

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defendants,96 to recover more than they have lost,97 and to claim compound interest.98 However, perhaps the most significant advantage it brings relates to the distribution of entitlements in bankruptcy. Plaintiffs who are able to enforce only personal rights are obliged to line up with other unsecured creditors competing for a share in an insolvent’s estate after the claims of secured and preferential creditors are satisfied. In contrast, the effect of awarding a constructive trust over particular assets is that, in the event of the constructive trustee’s bankruptcy, those assets are not available for distribution among unsecured creditors.99 Similarly, an equitable lien gives plaintiffs an interest over traceable proceeds to secure the amount owed by the defendant. Finally, at common law, plaintiffs may be able to bring an action for conversion or money had and received against a trustee in bankruptcy in possession of traceable proceeds of property to which plaintiffs have title.100 While priority is sometimes treated as if it were an incidental consequence of the recognition of the plaintiffs’ rights,101 the provision of priority was the principal motivation for the development of tracing.102 This suggests that, in determining the availability of proprietary relief, we should consider in which circumstances plaintiffs might legitimately be accorded priority.

Some support for the “swollen assets”103 rationale for tracing can be found in authoritative sources. The Restatement of Restitution justifies tracing on the basis that creditors “are not entitled to profit because of the wrongful acquisition of property by their debtor through the use of the plaintiff’s property”.104 Similarly, in Re Hallett,105 Sir George Jessel MR argued for extending the evidential presumptions that permit tracing into a mixed bank account on the basis that this would not defeat the legitimate expectations of unsecured creditors. Thus, he reasoned that “no human being ever gave credit to a man on the theory that he would misappropriate trust money and thereby increase his assets”.106

The “swollen assets” rationale for tracing hinted at by Jessel MR in Re Hallett implicitly recognises the need to justify priority vis-à-vis general creditors. It effectively asks whether such creditors would be unjustly enriched were they able to share in the distribution of the assets in question.107

96See, e.g.s, Banque Belge pour l’Etranger v. Hambrouck [1921] 1 KB 321; El Ajou v. Dollar Land Holdings Plc [1993] 3 All ER 717.

97See, e.g., Jones & Sons (Trustee) v. Jones [1997] Ch. 159; In Re Tilley’s Will Trust [1967] Ch. 1179;

Foskett v. McKeown [2001] 1 AC 102.

98See, e.g., Westdeutsche Landesbank Girozentrale v. Islington LBC [1996] AC 669.

99Insolvency Act 1986 s. 283(3)(a) and (5).

100Tooke v. Hollingworth (1793) 5 TR 215. See M Scott, “Tracing at Common Law” (1965–66) 7 UWALR 463; D Fox, “Common Law Claims to Substituted Assets” [1999] RLR 55 at 72–3; cf. D Cuthbertson, “Tracing at Common Law—Myth or Reality?” (1967–68) 8 UWALR 402.

101Cf. P Millett, “Bribes and Secret Commissions” [1993] RLR 7 at 10.

102R Goff and G Jones, The Law of Restitution (5th edn.) at 114.

103See supra, ch. 4.III.2.

104Restatement of Restitution at § 202 comment (e).

105(1880) 13 Ch. D 696.

106Ibid. at 730.

107See E Sherwin, “Constructive Trusts in Bankruptcy” [1989] U Ill. L Rev. 297 at 364.

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On the other hand, a different view was recently taken by the House of Lords in Foskett v. McKeown.108 Their Lordships held by a three to two majority that the use of around £20,000 of money held on trust for the plaintiffs to pay insurance premiums gave them the right to claim around £400,000 as their share of the death benefit due under the policy after the policy-holder committed suicide. The majority reached this conclusion despite the fact that the nature of the policy was such that, had the payments in question not been made, the life assurance element of the policy would have been maintained by cancelling units of the investment component of the policy. As a consequence, as events transpired, the death benefit payable to the beneficiaries of the policy would have been unaffected had the premiums at issue not been paid. The majority’s conclusion was justified in part on the basis that “[t]he transmission of a plaintiff’s property rights from one asset to traceable proceeds is part of the law of property, not of the law of unjust enrichment”.109 Lord Millett argued that it followed from this that the change of position defence is not available for actions contingent upon tracing.110

This dichotomy between property and unjust enrichment is misconceived. There is no reason why considerations of unjust enrichment should not play a role in shaping property rights. Indeed, the conferral of rights to proceeds represents an exceptional remedy and considerations of unjust enrichment should be central to the determination of the proper extent of these rights.

One indication that the view offered by Lord Millett in Foskett v. McKeown is by no means obvious is that it is inconsistent with the analysis of the matter that he offered when in the Court of Appeal in Boscawen v. Bajwa.111 In that case he assumed that the change of position defence would indeed be available in respect of claims contingent upon tracing.112 In addition, the view taken by Lord Millett in Foskett v. McKeown is difficult to reconcile with the hope expressed by Lord Goff in Lipkin Gorman v. Karpnale that recognition of the change of position defence might lead to “a more consistent approach to tracing claims”.113

2. Dissonance Between Tracing’s Normative Foundations and the Positive Law

(a) The Limitations of Form-to-form Tracing

English courts have proved reluctant to entertain the possibility of awarding proprietary relief in the absence of the identification of specific assets that represent

108[2001] 1 AC 102.

109Ibid. at 127 per Lord Millett. For an account favouring a similarly radical separation between the law of property and unjust enrichment see Virgo, Principles of the Law of Restitution at 592–6. See also R Grantham and C Rickett, “Tracing and Property Rights: The Categorical Truth” (2000) 63 MLR 905.

110Ibid. at 129.

111[1995] 4 All ER 769.

112Ibid. at 782.

113[1991] 2 AC 548 at 581.

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the exchange product of plaintiffs’ original assets.114 Similarly, while a swollen assets theory of tracing has had its supporters, a “form-to-form” approach (also known as “transactional” or “exchange-product” tracing) has generally been favoured in the United States.115 This requires some explanation. The fact that a particular enrichment acquired unjustly at the expense of the plaintiff has resulted in a swelling of the assets available for distribution in the defendant’s insolvency provides a plausible basis for elevating a plaintiff’s claim (a rationale firmly rooted in unjust enrichment theory). In contrast, it is difficult to see that, in itself, evidence of a transactional link can provide a reason for priority.116

Considered in the light of the swollen assets rationale for giving priority in bankruptcy, form-to-form tracing does not appear well designed to effect justice. It is under-inclusive117—denying a remedy when underlying considerations of justice suggest that it is merited. Despite the plaintiff’s inability to point to a transactional link between his or her property and assets currently forming part of the defendant’s estate, the defendant’s assets may have been increased as the result of an enrichment gained at the expense of the plaintiff.

Consider the facts of Re Goldcorp Exchange Ltd.118 A company promised customers that it would use all payments to acquire gold bullion that would be deliverable on demand, and that reserves would at all times be sufficient to meet liabilities to customers. Goldcorp did not honour its obligations; when it went bankrupt its reserves of gold did not come close to matching its liabilities to its customers. In the litigation that followed against the background of Goldcorp’s insolvency, the customers were in competition with an institutional lender with a floating charge over the company’s assets. It was clear that personal rights would have been worthless and that the customers could realise what was owed to them only if they could demonstrate that they were entitled to a proprietary remedy that would give them priority ahead of the floating charge. Given that the customers could not point to property rights in specific assets, it is not surprising that one of the grounds of their claim relied on a form of “swollen assets” reasoning to justify their claim to a lien over the company’s assets as a whole.

It is easy to have sympathy for the claim. The gist of the customers’ argument was that the only reason that the bank’s floating charge could be said to have crystallised over as large a pool of assets as it did was that Goldcorp had misapplied its customers’ payments. The bank was put in a better position than it otherwise

114The recent Privy Council decision in Re Goldcorp Exchange [1994] 3 WLR 199 provides a restatement of the orthodox position. The judgment, delivered by Lord Mustill, suggests that the controversial obiter dictum of Lord Templeman in Space Investments Ltd. v. Canadian Imperial Bank of Commerce Trust Co. [1986] 1 WLR 1072 favouring a less rigid approach to proprietary relief will not gain authoritative approval.

115See Osterle, supra n. 55 at 189. Although for an account of the flexibility of courts in the USA in this context, see infra, text accompanying nn. 183–186.

116S Walt and E Sherwin, “Contribution Arguments in Commercial Law” (1993) 42 Emory LJ 897 at 951.

117The analysis and terminology derives from P Atiyah and R Summers, Form and Substance in Anglo-American Law (Oxford, Clarendon, 1987) 13.

118[1995] 1 AC 74.

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would have been, while, arguably, the customers had not assumed the risks of Goldcorp’s insolvency.119 Nonetheless, the Privy Council overturned the New Zealand Court of Appeal’s decision in favour of the customers and rejected the notion of “swollen assets” tracing.

Another example of the limitations of form-to-form tracing is provided by situations where traceable assets are used to pay a due debt. The net effect of such a transaction is that the defendant continues to be enriched at the plaintiff’s expense. Moreover, if the debt would, in any event, have been paid using other assets, the pool of assets available for distribution in bankruptcy continues to be swollen as a result of the defendant’s unjust enrichment at the plaintiff’s expense. Nonetheless, because subsequently the plaintiff will be unable to point to a transactional link between the plaintiff’s property and any particular asset held by defendant, the use of a plaintiff’s property to discharge a debt precludes tracing.120

Form-to-form tracing is also over-inclusive—giving a remedy when it is unmerited. Consider the lack of recognition given to the efforts of defendants in acquiring new assets.121 Transactional tracing provides for proprietary claims even though defendants may have dissipated wealth or labour in order to acquire the assets in question so that, in net terms, it cannot be said that their estates have been enriched at the expense of the plaintiff.

There are also real difficulties in trying to square tracing with the swollen assets rationale when the doctrine is employed to enable plaintiffs to sue in respect of the exchange product of their property in the hands of third parties. For these third parties may well have given value for the assets in question. While bona fide purchasers will be excused, other purchasers will take subject to the plaintiff’s right to elect to assert title to proceeds and, if bankruptcy ensues, the creditors of these purchasers will suffer accordingly.122

(b) Form-to-form Tracing as a Second-best Solution

From the preceding discussion, it can be seen that form-to-form tracing appears to provide a rather blunt instrument with which to implement legitimate policy

119SR Scott, “The Remedial Constructive Trust in Commercial Transactions” [1993] LMCLQ 330 at 343. One difficulty with this argument is that, even if Goldcorp had maintained the level of reserves that it had promised, it is difficult to see how this arrangement would have given the customers a proprietary interest in any particular gold. On the other hand, it may be said that, by not complying with its contractual obligations, Goldcorp was able to operate for longer than it otherwise could have, dissipating its assets in the process and undermining the interests of its general creditors. Therefore, it is fair to say that Goldcorp’s actions, at the very least, imposed a greater risk on its customers than that for which they had contracted.

120This is the orthodoxy. For an analysis of a view that it is possible to trace into the “proceeds of debt” see infra, text accompanying nn. 173–179.

121See Palmer, The Law of Restitution vol 1 § 212 at 157–66.

122Consider the following situation. B steals thing 1 from A and exchanges it with C for thing 2. C then exchanges thing 1 for thing 3 in a transaction with D. Tracing potentially allows A equitable proprietary remedies against B and C and the right to assert her original title against D. If A sues C and traces into the product of C’s exchange with D, it is clear that C’s wealth will not have been increased to the value of thing 3; for C had to expend wealth in order to buy thing 1 from B. In these circumstances, to give A property in thing 3 cannot be justified in “swollen assets” terms.

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objectives. Some commentators have defended this approach by focusing on the limited capacity of the law to implement the goals being pursued in this area.123 According to this view, the question should be whether the particular link required for plaintiffs to assert title to new assets provides an effective means of securing the objectives in question. From this perspective, some argue that courts do not have effective means of identifying causal links between a plaintiff’s loss and the value of a defendant’s pool of assets available for distribution in bankruptcy. In practice, a swollen assets approach to tracing is liable to be impossible to administer; for the causal connections at issue are simply too difficult to establish.124 Consequently, in an imperfect world, transactional tracing may be the best substitute for a swollen assets approach.

Because it is an imperfect substitute for a swollen assets approach, it is appropriate to limit tracing to those transactional links that are likely to result in an increase in the value of the defendant’s estate available for distribution in bankruptcy. It is this explanation that provides the best justification for declining relief where plaintiffs’ property or proceeds have been used to pay a due debt; for it may be impossible to know whether the debt would have been paid prior to bankruptcy.125 This argument also provides the best justification of the outcome in Re Goldcorp126; for it would have been difficult to determine to what extent the company’s estate had been swelled by its misapplication of the customers’ payments.

There is doubtless something to the view that form-to-form tracing is justified as a second-best solution. Yet, as a defence to the law as it now stands, it is ultimately unconvincing. While it is probable that a full-blooded swollen assets approach would be too difficult to administer, we could engraft certain modifications onto the present form-to-form approach, in order to make our law better correspond with convincing normative justifications for giving priority in bankruptcy.127 Two relatively straightforward modifications might include:

(1)Instead of granting equitable title over proceeds, relief could be restricted to liens securing the value of the assets originally owned by the plaintiff.128

(2)Reducing the extent to which priority is given to the plaintiff to the extent of any expenditure that a defendant who was not bona fide and without notice has incurred in purchasing the asset in question.

More controversially, the law might impose further limitations on tracing, based on certain presumptions regarding causation. Such an approach might, at first

123See, e.g., Sherwin, supra n. 107 at 333.

124Although some commentators think otherwise: see, e.g., Evans, supra n. 55; P Jaffey, The Nature and Scope of Restitution (Oxford, Hart Publishing, 2000) 298.

125See Smith, The Law of Tracing at 316.

126[1995] 1 AC 74. See supra, text accompanying nn. 118–119 for a discussion.

127While the “swollen assets” concept was initially developed to increase the availability of proprietary relief in situations where form-to-form tracing was not possible, in this context it would be used to limit relief.

128See R Goff and G Jones, The Law of Restitution (4th edn.) at 97; Palmer, The Law of Restitution vol 1 § 2.14 at 183.

The Metaphysics of Tracing: Substituted Title and Property Rhetoric 115

1. The Privileging of Transactional Tracing

How then has thinking about title to proceeds in terms of “tracing” affected the substantive law? As mentioned, two approaches to tracing have competed for acceptance. Proponents of the “swollen assets” approach to tracing130 focus on the extent to which it can be proven that a bankrupt’s estate is “swollen” by an enrichment gained at the expense of the plaintiff and are thus willing to grant a charge over an bankrupt’s assets as a whole. In contrast, “form-to-form tracing” is premised on the ability of plaintiffs to point to an unbroken transactional chain between their original asset and a particular asset in respect of which a proprietary claim is being brought.

Many have found the notion of tracing as the following of a thing through changes of form so beguiling that they have concluded that the swollen assets justification for tracing is simply illogical. Thus, rejecting a swollen assets approach to the provision of proprietary relief, Andrew Burrows argues that “without the ownership link, the personal remedy only is justified”.131 This assumes that a transactional link between two assets, in itself, somehow naturally indicates ownership in a way that a causal link does not. Yet the “ownership link” is provided by the law; it is not an independent social fact. That our law does not recognise a causal link as constitutive of title to proceeds cannot demonstrate in itself that it would be unjustified to do so.

The revision of property rights provided by the development of tracing was motivated by considerations of justice—largely relating to the distribution of entitlements in bankruptcy. While such considerations might well suggest that it would be appropriate to place limitations on form-to-form tracing, the effort to portray tracing as the following of one thing into another has led to the normative rationale of tracing being ignored altogether. Where this occurs and the right to trace is explained in terms of a reified “ownership link”, form-to-form tracing is inevitably regarded as a necessary and sufficient basis for asserting title, while swollen assets tracing theory is considered arbitrary.

David Paciocco, for example, favours a form-to-form approach to tracing on the basis that “[t]here is an undeniable allure in ensuring that a plaintiff who is given a claim to particular property as a matter of remedy, have a claim as a matter of fact”.132 This analysis fails to recognise that, without a theory of moral desert for priority, it remains arbitrary to award a proprietary interest on the basis of a transactional link. Why does a transactional link give a claim as “a matter of fact” while a causal link focusing more directly on considerations of unjust enrichment does not?

A similar error is apparent in Lionel Smith’s critique of accounts of tracing that would not limit tracing to the identification of specific proceeds but would,

130Osterle, supra n. 55 at 189.

131Burrows, The Law of Restitution at 44.

132D Paciocco, “The Remedial Constructive Trust: A Principled Basis for Priorities over Creditors” (1989) 68 Can. Bar Rev. 315 at 333.

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instead, allow for a charge over the defendant’s estate as a whole.133 Smith’s analysis follows from his tendency to deny the remedial character of tracing. To recall, he argues that tracing does not create new proprietary rights, but only allows them to be asserted in a new thing.134 Smith concludes that, “[s]ince tracing does not create proprietary rights, so it cannot alter the specific nature of proprietary rights by making them into some kind of charge”.135 The analysis is misconceived; tracing does create proprietary rights.136 Indeed, the willingness of the courts to allow plaintiffs who can trace the option of asserting a lien137—albeit a lien over specific assets—suggests that there is more room for flexibility than Smith allows.

If we take the notion of “tracing” very literally, the swollen assets approach appears to be analytically misconceived. For, pursuant to that approach, the original asset is not traced into any thing; but, rather, a claim is made over the defendant’s assets as a whole. However, this “analytical error” is an illusion—the consequence of taking the metaphor of tracing too seriously. This tendency results in a vicious circularity in jurists’ attempts to justify the doctrine. An example is a defence of conventional tracing doctrine by Austin Scott, a reporter for the Restatement of Restitution.138 Scott argued, “[i]t is immaterial that the wrongdoer is insolvent, for his creditors, not being purchasers for value, are not entitled to any interest in the plaintiff’s property or product.”139 This is a non sequitur; the argument leaves one of its premises unstated. The claims of the creditors can be ignored only if one assumes the very matter at issue—that the plaintiff has a proprietary interest in the product of his property. When this premise is added, the tautological quality of Scott’s reasoning becomes apparent: the court recognises the product of the exchange as the plaintiff’s property because it is the plaintiff’s property.

This sort of circularity is pervasive in tracing jurisprudence. An example of this is Burrows’ “ownership link” justification for form-to-form tracing.140 Similarly, Professor Roy Goode argues that the approach that he advocates, which requires that the plaintiff must have a “proprietary base” in order to be entitled to proprietary relief, is:

not only logical but responsive to policy considerations, for to require D to make over that which never belonged to him but was always beneficially owned by P does not diminish D’s estate and thus has no impact on his creditors.141

133See also L Smith, “Tracing into the Payment of a Debt” (1995) 54 CLJ 290 at 296.

134See supra n. 36 and accompanying text.

135Ibid. at 320.

136As Smith appears to accept elsewhere: see infra at text accompanying n. 155.

137See Re Hallett’s Estate (1880) 13 Ch. D 696 at 709 per Jessel MR.

138Scott’s preference for transactional tracing over the competing theory of “swollen assets” tracing is expressed in the Restatement of Restitution at § 202. On Scott’s contribution to the constructive trust, see supra, ch. 3.II.1.

139Scott, The Law of Trust (3rd edn., Boston, Mass., Little, Brown & Co, 1967) v, § 508 at 3573.

140See supra, text accompanying n. 131.

141R Goode, “Property and Unjust Enrichment” in A Burrows (ed.), Essays on the Law of Restitution (Oxford, Clarendon, 1991) 215 at 220. See also R Goode, “Ownership and Obligation in Commercial Transactions” (1987) 103 LQR 433 at 439–41; and “Proprietary Restitutionary Claims” in W Cornish,

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Once again, the designation of assets as the plaintiff’s property is presented as having normative force when it is in reality a conclusion. This is the type of reasoning that the American legal realist Felix Cohen characterised as “transcendental nonsense”.142 In the absence of prior recognition, there is nothing which gives a particular relationship a quality of “propertyness” which requires its recognition as property.143 The concept of property is socially constructed and should be developed in response to sound policy considerations.

The metaphors of “tracing” and “following” provide a structure for our thought about title to proceeds.144 We have become so used to thinking about this issue in terms of “tracing” that it is difficult for us to consider the matter outside this structure. This limits our imagination and directs us toward particular results.145 Thus, form-to-form tracing has come to be regarded as natural, while the swollen assets approach—because it does not involve the following of a particular asset and its exchange product—has come to seen as unprincipled.

Those who have spoken favourably of legal fictions and related obfuscatory devices have emphasised their role in developing the law prior to the invention of more sophisticated justificatory concepts.146 Fuller likened fictions to scaffold- ing—they are necessary in its construction, but after the erection of a building they should be discarded as they serve only to obscure.147 Yet, Fuller’s own emphasis on the relationship of fictions to axiomatic premises underlying the law suggests that there is liable to be a real reluctance to eliminate such devices. Contrivances of this type allow a legal culture to avoid the rejection of values that it holds to be fundamental.148 They will not be lightly cast aside and, in the long term, their effect is liable to be pernicious.

2. The Suppression of Normative Analysis

When a court is asked to extend the institution of property to a novel situation, one may expect a normative argument—a justification of why the advantages that

R Nolan, J O’Sullivan and G Virgo (eds.), Restitution: Past, Present and Future: Essays in Honour of Gareth Jones (Oxford, Hart Publishing, 1998) 63 at 65. For similar reasoning, see also Oakley, supra n. 52 at 379.

142Cohen, supra n. 150 at 814–17. For a similar view, in the context of equitable proprietary rights, see E Weinrib, “The Fiduciary Obligation” (1975) 25 UTLJ 1 at 10–11.

143See, e.g., A Ross, “Tû-Tû” (1957) 70 Harv. L Rev. 812 at 822–5.

144See G Lakoff and M Johnson, Metaphors We Live By (Chicago, Ill., University of Chicago Press, 1989) for a discussion of how the manner in which we think about particular problems can become structured by a habitually used group of related metaphors.

145Cf. J Merryman, “Ownership and Estate” (1974) 48 Tulane L Rev. 916 at 924 .

146See, e.g., O Mitchell, “The Fictions of the Law: Have they Proved Useful or Detrimental to its Growth?” (1893) 7 Harv. L Rev. 249.

147LL Fuller, Legal Fictions (Stanford, Cal., Stanford University Press, 1967) 70.

148Cf. Calabresi’s observations on strategies for dealing with clashes of ideals through subterfuge in American law; G Calabresi and P Bobbit, Tragic Choices (New York, Norton, 1978) at 18; and G Calabresi, Ideals, Beliefs and Attitudes and the Law: Private Law Perspectives on a Public Law Problem

(Syracuse, NY, Syracuse University Press, 1985) at 87–114.

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come with proprietary protection should be extended to a new context. However, we often find, instead, the use of metaphysical justification—the argument that something simply is property. This stifles any comprehensive consideration of how the interest in question ought to be protected. The elevation of obfuscatory notions such as “tracing” to the “heaven of legal concepts”,149 encourages the interpretation and development of doctrine in terms of formal abstractions, rather than according to defined policy objectives. Useful as they may be in allowing the courts to achieve desired outcomes in particular cases, such concepts have a logic of their own. Accordingly, when applied in future cases, they are liable to dictate results that cannot be reconciled with the normative considerations that motivated the outcome of the decisions in which these concepts were initially developed. The consequence is dysfunctional law.150

Lionel Smith’s influential work on the subject is characteristic of a failure to offer a justification for the effects of extending rights to proceeds—a failure that tends to follow from the acceptance that tracing is somehow not a remedy but a neutral process. Smith observes that tracing is “sometimes attacked on the ground that it leads to unfairness” between those who can trace to specific assets and those who cannot. However, he responds that “[t]he important point is that the source of any arbitrariness lies not in the ability to claim traceable proceeds, it derives from the nature of proprietary rights themselves”.151

Smith’s analysis relies on an unsustainable distinction between proprietary rights and tracing. Certainly property rights entail a certain degree of discrimination; but how much varies. A legal system that allows owners to exercise rights over any proceeds of their property affords more extensive property rights than does a system that withholds this privilege. Thus, despite Smith’s suggestion to the contrary, in common law systems “the ability to claim traceable proceeds” is part of “the nature of proprietary rights”, and not a distinct issue. The real question is whether and to what extent proprietary rights should extend over assets other than those the plaintiff initially owned.

As we have seen, Smith insists that “[t]he exercise of tracing never creates proprietary rights. What it does is allow them to be asserted in a different asset”.152 While this assertion does not stand up to close analysis,153 it is fundamental to his account of the area. It underlies his persistent tendency to characterise the issue of rights to proceeds as concerning the “durability” of proprietary rights, as if it were

149Cf. R Von Jhering, “In the Heaven of Legal Concepts” (trans. Lowenstein) in M Cohen and F Cohen (eds.), Readings in Jurisprudence and Legal Philosophy (Boston, Mass., Little, Brown, 1951) 678.

150On the prevalence of this phenomenon see A Watson, “Legal Change: Sources of Law and Legal Culture” in A Watson, Legal Origins and Legal Change (London, Hambledon, 1991) 69 at 82. For a discussion of this problem in relation to property discourse see F Cohen, “Transcendental Nonsense and the Functional Approach” (1935) 35 Colum. L Rev. 809 at 815; and D Stevens, “Restitution, Property and the Cause of Action in Unjust Enrichment: Getting By With Fewer Things” (1989) 39 UTLJ 258 at 277–8. For an illustration in the context of the development of the constructive trust see JP Dawson, Unjust Enrichment: A Comparative Analysis (Boston, Mass., Little, Brown, 1956) at 26–33.

151Smith, The Law of Tracing at 303–4.

152Ibid. at 320.

153See supra, text accompanying nn. 37–42.

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a continuing proprietary relationship that were in question, rather than new legal relationships.154 Smith maintains this analysis even though he observes in a footnote that:

“Durable” is used in a loose sense here. It suggests the continuation of the original proprietary rights when at an analytical level, a new right in the traceable proceeds is being created. But at the more general level of theoretical justification, this can be seen as a question of how durable the original right is.155

The recognition that a new right is created is difficult to reconcile with Smith’s insistence that “tracing does not create proprietary rights”. Moreover, while he asserts that it is appropriate to frame the issue in terms of “durability”, he does not tell us why. It is difficult to understand why it might be useful to approach any matter at the “level of theoretical justification” on a basis that is analytically inaccurate.

Smith’s insistence that tracing is about the “durability” of existing property rights leads him to argue that the claim that the “swollen assets” rationale provides the best justification for conferring rights to proceeds is “based on a misunderstanding”.156 Because he treats the legal relationship enjoyed over proceeds as the same as that enjoyed over the initial asset, Smith concludes that the same normative considerations must apply to each, and that anyone who argues otherwise misunderstands the matter.157 In his view, because owners will have their rights to the asset they initially owned enforced without regard to issues of continuing unjust enrichment, such issues must be equally irrelevant to the justification of proprietary rights in proceeds. The argument is misconceived. For one thing, the property rights enjoyed over proceeds are not invariably the same as those enjoyed over the initial asset.158 The extension of rights to new assets requires a rationale different from that used to justify the rights over the initial asset. For, as we have seen, quite different considerations pertain—it is much easier to justify entitlement over the initial asset than it is to justify the provision of property rights to proceeds.159

Smith argues that the unfairness of tracing is merely an example of a more general “principle of unfairness” and that the “very specificity of property rights—the fact that they are rights in something, and cannot survive its loss or destruction— guarantees inequality of treatment” among creditors.160 Yet, by providing that owners may elect to assert their rights over more than one object, form-to-form tracing undermines the very notion of specificity of property rights. Moreover, Smith observes that “it is, however, fair to say that proprietary claims based on

154See especially Smith, The Law of Tracing at 307–9.

155Ibid. at 308.

156Ibid. at 318.

157See ibid. at 309 (criticising Walt and Sherwin, supra n. 116).

158See supra, text accompanying nn. 37–42.

159See supra, text accompanying nn. 96–109 and ch. 4.

160Smith, supra n. 154 at 305.

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tracing can extend the operation of [the] principle [of unfairness]”.161 The question that he fails to answer is whether and to what extent this “principle” should be extended in this way.

3. Illustrations of the Dangers of Formalism

(a) The Enforcement of Consensually-created Tracing Rights

The consequences for the substantive law of concepts utilised in legal discourse to hide the dissonance between the law in action and axiomatic premises concerning property are evident in the jurisprudence on tracing into proceeds in the context of reservation of title agreements. In Aluminium Industrie Vaassen BV v. Romalpa Aluminium Ltd.,162 the court held that the seller could, by utilising tracing principles, reserve title, not only to goods in the possession of the buyer, but also to the proceeds of those goods. According to this view, if the terms of the contract are such that the buyer is a fiduciary in respect of the proceeds, then the seller may assert ownership over them, pursuant to normal equitable tracing principles.

Reservation of title clauses effectively allow sellers to have security in sales transactions. “Proceeds” clauses provide for what is in effect an even more comprehensive security interest. In the United States, Article 9 of the Uniform Commercial Code provides that reservation of title clauses are security interests and, while it excuses them from registration, it limits their effect.163 In contrast, despite the function of these agreements, English jurists are reluctant to characterise them as unregistered securities. The question whether the reservation of title is a security under English law has seen various authors providing their own definitions of what a security interest is and then announcing whether or not these arrangements fit the definition.164 For example, Oditah, taking a functional approach, argues that these agreements can quite reasonably be regarded as conferring security.165 However, most English commentators disagree. Generally functionalism is resisted.166 Goode, for instance, argues that, because a security must be conferred and not retained, reservation of title is not such a device.167

161Smith, The Law of Tracing at 306.

162[1976] 1 WLR 676.

163See R Adhar, “Romalpa’s Empire, the Reception of Reservation of Title Clauses in New Zealand” [1993] LMCLQ 382 at 384.

164See F Oditah, Legal Aspects of Receivables Financing (London, Sweet & Maxwell, 1991) at 5.

165Ibid. at 90–4.

166M Bridge, “Form, Substance and Innovation in Personal Property Security Law” [1992] J Bus. L

1.A striking example of this is McCormack’s comment that “the ‘Crowther Committee on Consumer Credit’ observed that distinctions between one type of transaction and another are drawn on the basis of legal abstractions rather than on the basis of commercial reality” in the context of a defence of a formalist approach: see G McCormack, “Reservation of Title—Past Present and Future” [1994] Conv. 129 at 135. He is apparently unperturbed by the fact that the Committee’s comment was intended as a criticism.

167R Goode, Legal Problems of Credit and Security (2nd edn., London, Sweet & Maxwell, 1988) at 5.

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Unregistrable rights that function as securities are not easy to justify. Nonetheless, an argument can be made for allowing retention of title to goods supplied under an agreement for sale. The seller will generally be in a better position than a receiver or trustee in bankruptcy to realise the value of the assets in question.168 Moreover, the device is so widely used that few people are likely to assume that a retailer’s stock is necessarily free from such arrangements. Thus, retention of title clauses provide a useful means of enabling sellers to safeguard their position and so encourage the provision of credit in this context. Rights to proceeds of sale are a different matter. These rights are sought merely in order to ensure priority in bankruptcy. Moreover, it is much more difficult for third parties to gauge whether or, especially, to what extent, a seller might have retained title to proceeds of property that the buyer has sold on. Consequently, it is difficult to comprehend why these arrangements should be excused from registration.

Proceeds clauses are also a concern because they may have effects that go beyond securing the purchase price owed. Where the buyer is a retailer, the proceeds of sale will of course generally be greater than the price the buyer has contracted to pay the seller for the goods. Nonetheless, a seller may in theory assert title to proceeds and thereby remove them from the bankrupt’s estate. This is so even when substantial payments have been made on the purchase price so that the money owed by the buyer is considerably less than the sum of the proceeds. Moreover, the danger of this happening has been increased by the House of Lords’ willingness to recognise “all moneys” clauses whereby title passes only when all debts due to the seller are met.169 Ironically, efforts to limit the effect of the contract to security (so that, for instance, the extent of the seller’s title is limited to the contract price) make a court more likely to hold that the agreement has created an unregistered security.170 Thus, the formalistic approach taken in this context encourages reservation of title agreements that maximise injustice to third party creditors.

It has been assumed that the capacity to transcend exchange transactions and persist in proceeds is a natural feature of title, the alienation of which the owner is at liberty to control. The reified notion of a continuing title results in the conclusion that these agreements involve the seller retaining a single title, rather than the buyer granting an interest that will crystallise when the proceeds are obtained. Once the continuing title analysis is accepted, absolutist assumptions of property suggest that an owner should be perfectly entitled to retain title to proceeds, regardless of the consequences for third parties.171 As a result of the reification of the interest conferred by tracing, some jurists have lost sight of the normative

168Bridge, supra n. 166.

169Armour v. Thyssen Edelstahlwerke AG [1991] 2 AC 339.

170See, e.g., Re Weldtech Ltd. [1991] BCC 16 (Hoffmann J striking down a clause, placing emphasis on the phrase “this transfer takes place only for securing our claims against the purchaser”).

171R Goode, Proprietary Rights and Insolvency in Sales Transaction (2nd edn., London, Sweet & Maxwell, 1989) at 101; and R Bradgate, “Retention of Title in the House of Lords: Unanswered Questions” (1991) 54 MLR 726 at 728.

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rationale for the practice.172 A different conclusion would result if tracing were understood to be an unusual remedy designed to fulfil particular objectives. A consideration of sound policy justifications for allowing substituted title indicates that allowing sellers unlimited power to “retain title” over proceeds is unsatisfactory.

(b) Tracing into “the Proceeds of Debt”

The recent call for an extension of tracing to confer rights to the proceeds of debt provides an example of how we may consider whether the benefits of tracing ought to be extended to novel situations. Consider a situation where A acquires an asset on credit from B and subsequently discharges the debt using money that is the property of C or the traceable proceeds of such property. Lionel Smith argues that C should be able to trace into the asset that was acquired on credit.173

(i) Conceptual Objections

While the notion of tracing into “the proceeds of debt” has more authority against it than supporting it,174 Smith argues that the logic of tracing dictates that it should be possible. In his analysis, “[p]ayment of debt is just delayed payment, and the traceable proceeds are whatever was acquired in the past when the debt was incurred”.175 There are conceptual objections to this analysis. Analytically, the payment of a debt is not “just delayed payment” of the asset acquired on credit. The asset in question was acquired with the debt itself and the subsequent payment of the debt discharges the debt and is not payment for the already acquired asset.

On the other hand, as Smith points out, it is not easy to distinguish between credit sales and those that we would normally think of as involving immediate payment. Thus, he rightly argues that all purchase transactions where payment is not made in advance involve an element of credit. In a transaction at a supermarket, for example, the contract is presumably complete when the seller accepts the buyer’s offer at the till. Thus, payment occurs after the completion of the sale. Yet, it is unrealistic to say that the payment of the debt in question is conceptually indistinguishable from the payment of a debt in circumstances where the seller offers the buyer credit. For, in the example of the supermarket, the seller is not

172This may be contrasted with German jurisprudence that concludes that any attempt to provide for ownership over proceeds must be treated as a charge. See R Serick, Securities in Moveables in German Law: An Outline (Deventer, Kluwer, 1990) at 3, 61 and 137. This is so even though German law does not demand the registration of personal property security interests.

173L Smith, “Tracing into the Payment of a Debt” [1995] CLJ 290; Smith, The Law of Tracing at 146–52 and 353–6.

174For the suggestion that “backwards tracing” may be permissable see Foskett v. McKeown [1997] 3 All ER 392 at 409 per Scott VC. For the conclusion that it is not possible see Denton v. Davies (1812) 18 Ves. 499; Bishopsgate Investment Management Ltd. v. Homan [1995] Ch. 211 at 221 per Leggatt LJ.

175Smith, supra n. 173 at 292.

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offering credit in any meaningful sense. The parties understand that seller’s acceptance is conditional on the buyer’s tendering payment immediately and, if this does not occur, the buyer will not be in a position to take the goods from the premises. This may be explained in a number of ways. The seller may be seen as rescinding the contract for a misrepresentation that the buyer had the means to pay and the intention of paying for the goods. Alternatively, the seller may be viewed as still in possession of the goods and able to exercise a lien and a right to terminate the contract, thereby revesting title. Thus, there are very real conceptual and practical differences between an ordinary credit sale and an immediate payment transaction. In the latter case, in a very real sense, rights to goods are not acquired on credit but only at the time of payment.

Smith rightly argues that payments by cheque even more obviously involve the provision of credit. In writing a cheque, the buyer is giving a chose in action, a debt, as consideration for the goods purchased. When the buyer’s account is debited and the seller paid, the payment is discharging the debt and not buying the goods. Nonetheless, we have never hesitated to allow tracing in the context of assets acquired by cheque.176 There are, however, important differences between a credit sale in the ordinary sense of the term and a sale where the purchase price is paid by cheque in return for the goods. As Goode has observed, the cheque “is primarily a payment direction, not a credit instrument”.177 To the extent that there is judicial support for “backwards tracing”, those adherents to the notion have suggested that it can be justified only where “there was an inference that when the borrowing was incurred it was the intention that it should be repaid by misappropriations of . . . [the claimant’s] money”.178 In the context of credit sales, it will relatively seldom be the case that defendants have formed a clear view at the time that they incurred the debt that they would subsequently discharge it using the plaintiff’s money. In contrast, where payment is made by cheque, there is at the time of payment a clear direction that the debt be discharged from a particular source.

(ii) Policy Objections

There is clearly a causal connection between assets used to pay a debt and any property acquired in incurring the debt. Thus, logically, a case can be made for “backwards” tracing. But can it be justified as a matter of policy? The perceived inability to trace money used to discharge debts has been regarded as an indicator of the shortcomings of form-to-form tracing. However, while the payment of a debt may well result in the defendant’s creditors being enriched in the event of the defendant’s bankruptcy, this will not necessarily be true. This will be the case only if the defendant would, in any event, have paid the debt prior to bankruptcy using other assets. Thus, while examples of property being used to pay debts can illustrate that the conventional limits on transactional tracing provide imperfect

176For a discussion, see Jones & Sons (Trustee) v. Jones [1996] Ch. 159 at 169.

177R Goode, Commerical Law (2nd edn., London, Penguin, 1995) 580.

178Bishopsgate Investment Management v. Homan [1995] Ch. 211 at 216 per Dillon LJ. See also

Fostkett v. McKeown [1998] Ch. 265 at 283–4 per Scott VC.

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justice, they do not demonstrate that it would be a good thing if plaintiffs could trace into the “proceeds of debt”. It should be remembered that any set of tracing rules will result in a degree of arbitrariness.

Consider a situation where a defendant has not a cent to his name and has two contract creditors. He owes X £500 for a package holiday that he enjoyed recently. He also owes Y £500 for an antique vase, which is sitting in his rented house. At this point the defendant embezzles £500 of trust property. Before he has the opportunity to spend the money, he becomes bankrupt. The plaintiff, the beneficiary of the trust, would like a remedy. On these facts, the plaintiff would be entitled to the £500 in the hands of the defendant, and X and Y would be required to line up for a pro rata share of the remaining estate. If the vase has kept its value, they would receive £250 each. This result could be justified because the plaintiff did not choose to become the defendant’s creditor and because, but for the proprietary remedy, an extra £500 would have been made available for distribution to general creditors in the defendant’s bankruptcy.

But what if, before bankruptcy, the defendant had used the trust money to pay the debt owed to Y, who was pressing him for payment? According to Smith’s analysis, the result would be that the plaintiff would be entitled to claim the vase and X would get nothing. Yet it would be difficult to justify this outcome; for it cannot be said that X would have been unjustly enriched if he had been allowed to share pari passu with the plaintiff.179

Behind the call for the recognition of the validity of tracing into the proceeds of debt is a formalistic impulse. The assumption is that if we can trace in the context of one type of causal connection we should be able to trace in the context of another. This is misguided. In deciding whether we should develop the law in a particular direction, we should pay more regard to the justice of the outcomes that would result than to the supposed internal logic of tracing. Tracing should be available in this context only if the transactional link in question is likely to indicate that that part of the defendant’s estate that is available for distribution in bankruptcy continues to be swollen at the plaintiff’s expense. In contrast to a situation where property is used to acquire an asset directly, it is less likely that a

179 Simon Evans has recently written in support of tracing the proceeds of debt on the basis that the defendant’s estate would remain enriched because the payment of the debt using the plaintiff’s assets or their traceable product would be voidable as a preference. See Evans, supra n. 55 at 497. However the law relating to preferences differs considerably between jurisdictions. In England, a payment is recoverable only if the debtor intended to give a preference. See s. 240 of the Insolvency Act 1986; A Keay, “The Recovery of Voidable Preferences: Aspects of Restoration” in Rose (ed.), Restitution and Insolvency (London, Mansfield Press, 2000) 237. As a result, the payment by the defendant to Y in the above example would almost certainly not be a preference. In any event, payments are regarded as preferences only if they are made within a particular period before bankruptcy that is defined by statute (in English law the period is 6 months, as provided for by s. 240(3) of the Insolvency Act 1986). The relevant period is necessarily somewhat arbitrary and payments of the debts in question would not necessarily fall within this period. Finally, in terms of the swollen assets rationale, where the payment of a debt by a defendant using the plaintiff’s property or its traceable product is actually voidable, there is no need to allow the plaintiff to trace into the proceeds of the debt. Rather, it would make more sense simply to let the plaintiff trace into the property recovered by the trustee in bankruptcy as a result of the transaction being void. After all, this would be the proceeds of the plaintiff’s property.

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payment of a debt would have this result. For, as mentioned, this would only be the case if the debt in question would have been paid by the defendant prior to bankrutpcy in any event—a matter which may be difficult, if not impossible, to determine. Given this, it is difficult to understand why we would wish to extend the advantages of tracing to the proceeds of debt.

VI. SOME REALISM ABOUT TRACING

Given the more instrumentalist approach to property apparent in American legal thought,180 it is not surprising that tracing issues are not always treated in the United States in the same way as they are in English law. The most marked difference involved a dalliance with swollen assets tracing that saw some American courts willing to allow proprietary relief even in the absence of the identification of a transactional link between the assets in question.181 While such an approach proved to be unworkable in practice, it reflected a tendency to focus on the policy rationale for giving proprietary relief rather than on more formal justifications. Reflecting this attitude, contemporary American commentators tend to understand the insistence on a transactional connection between specific assets as an imperfect surrogate for a swollen assets approach favoured because of the intractable evidential difficulties that stand in the way of the implementation of such an approach.182

This difference in understanding the normative foundations of proprietary rights in proceeds may have practical implications. This can be seen in the reluctance to employ the evidential presumptions used to provide for tracing out of mixed bank accounts to allow some fraud victims to trace the proceeds of their assets and claim priority over other fraud victims. In US v. Durham183 the United States Court of Appeals for the Fifth Circuit declined to overturn a decision of a circuit judge not to impose a constructive trust in favour of a victim of fraud. While the defendants had defrauded a number of parties, the plaintiff was able to identify sums owed to the defendants by their bank as the product of its money, largely because it had been swindled just a few days before the defendants were arrested. Nonetheless, the circuit judge took the view that it would be inappropriate to give the plaintiff priority over other victims of fraud merely because, according to the evidential rules applied for identifying withdrawals from mixed bank accounts, the defendant had spent the proceeds of other victims’ money first.184 Instead, the plaintiff was required to share pro rata with other fraud victims. In

180See supra ch. 3.

181For a good account of swollen assets theory and for references to the extensive literature on tracing theory prior to victory of orthodoxy in the Restatement of Restitution (1937), see Osterle, supra n. 55 at 189.

182See supra, IV.2(b).

18386 F 3d 70 (5th Circ., 1996).

184Ibid. at 73.

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US v. Real Property,185 the Court of Appeals for the Ninth Circuit took a similar view. The Court allowed the Securities and Exchange Commission to put into effect a scheme agreed with the defendant to pool the proceeds of fraud derived from several victims for pro rata distribution. In so doing, the Court refused to allow the plaintiff to assert a lien over the proceeds of its money. In the view of Van Sickle J, it was inappropriate to permit the use of “tracing fictions” where “its use would promote unequal and therefore inequitable treatment of similarly situated victims”.186 This reflects a perspective that the existence of a transactional link between a plaintiff’s property and other assets is not in itself a reason for giving a proprietary claim. It suggests that tracing and the evidential presumptions associated with it should not be permitted to extend unduly what Lionel Smith refers to as “the principle of unfairness” that comes with the recognition of proprietary rights.

VII. CONCLUSION

A survey of the law of tracing is likely to lead one to echo the unease Maitland experienced when reviewing the area a hundred years ago. He expressed:

great doubts of the convenience of all this. It may be hard that a cestui que trust should not have “his” property, but is also hard that creditors should go unpaid. Courts of Equity, which in this matter have had the upper hand, have thought a great deal of the cestui que trust, much less of the creditors.187

Maitland’s use of inverted commas in referring to the cestui que trust’s claim to “his” property suggests that he viewed the attribution of title in this context as somewhat arbitrary. Unfortunately, English judges and jurists have seldom shared this scepticism.188 From Lord Ellenborough’s judgment in Taylor v. Plumer189 to the discussion of tracing in the context of Romalpa clauses,190 the analysis of the area is littered with patently circular attempts to justify tracing on the basis that plaintiffs should be permitted to assert title to the assets because they are their property. The conceptualisation of tracing in a manner that suppresses the conflict between the function of the remedy and sacred axioms of property has had the effect of burying key normative issues. We are enslaved by concepts whose primary function is to obscure. As a result, the law of tracing has never rested upon sound normative foundations.

18589 F 3d 551 (9th Cir., 1996).

186Ibid. at 553.

187FW Maitland, Equity: a Course of Lectures (ed. Chaytor and Whittaker, 2nd edn., revd by Brunyate, Cambridge, Cambridge University Press, 1936) at 220.

188For a notable exception see Lawson, supra n. 3 at 160.

189(1815) 3 M & S 562. See supra, text accompanying nn. 47–49.

190See supra, text accompanying nn. 162–172.

6

The Proprietary Consequences of a Vitiated Intention to Transfer Property: “An Intolerable Reproach to Our System of Jurisprudence”?

IT IS A basic axiom of the common law that property will pass only when an owner intends it.1 It is this premise upon which the maxim of nemo dat non quod habet rests. However, it cannot tell us what should follow in circumstances where an owner intended to transfer title, but that intention was vitiated in some

way.

There have been two approaches to this issue. One method advances upon the assumption that, by focusing on the nature of the owner’s intent or on the transferee’s state of mind, one can deduce whether or not property passes as a matter of “principle”. The second is an instrumentalist or pragmatic approach that focuses upon the consequences that follow from the determination whether or not title passes and asks in what circumstances such consequences are merited.

I. THE POSSIBLE LEGAL RESPONSES TO A VITIATED CONSENT TO PASS TITLE

Where an owner’s intent to transfer property is vitiated by some factor, such as mistake, duress, unconscionability or undue influence, our law has at least five responses to choose between.

1. Transfers Void at Law

Where a transfer is void at law, the result is that no title passes and the transferor may bring an action for conversion against the initial transferee or anyone to whom the asset in question is subsequently transferred. Thus, where the transfer is void from the outset, unless the subject matter is money,2 the transferor will

1 See, e.g., WH Blackstone, Commentaries on the Laws of England 4 (Chicago, Ill., Chicago University Press, 1979) ii, at 9. Virgo, Principles of the Law of Restitution at 602.

2The availability of a defence of bona fide purchase in the context of money was established in Miller

v.Race (1758) 1 Burr 452. See D Fox, “Bona Fide Purchase and the Currency of Money” [1996] CLJ 547.

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prevail against even subsequent bona fide purchasers. In addition, a trustee in bankruptcy who receives an asset that is the subject matter of such a transfer will be personally liable to the transferor, effectively giving the transferor priority over general creditors.3

Traditionally, very few types of mistake have been regarded as sufficiently “fundamental” to render a transfer of property completely void. The general view is that, where the intention of owners to pass title is vitiated by a mistake about their liability to make the transfer in question, title will nevertheless pass.4

It is, however, well established that where a promisor makes a material mistake about the identity of the promisee the contract will be void. As a result, title will not pass to any property if the transfer of title is dependent upon the contract or if an owner’s intention to pass title in a transfer made pursuant to the void contract is equally vitiated by the same mistake.5 The cases have tended to turn on artificial and elusive distinctions as to whether sellers intended to deal with the particular person in front of them or, instead, intended to deal with a third party whom a rogue impersonated. The state of the authorities that has resulted does the law no credit.6

In addition, there is some authority from the criminal law to support the view that, where the transferor is mistaken about the quantity of goods or money delivered, legal title does not pass in any excess.7 There are conceptual difficulties with this analysis.8 Moreover, while a recipient who knowingly fails to account for any

3Tooke v. Hollingworth (1793) 5 TR 215. See M Scott, “Tracing at Common Law” (1965–66) 7 UWALR 463; D Fox, “Common Law Claims to Substituted Assets” [1999] RLR 55 at 72–3.

4See, e.g., transfers made in performance of a contract that the transferor assumes to be valid when it is in reality void (as in Westdeutsche Landesbank Girozentrale v. Islington Borough Council [1996] AC 669) or where a mistake is made in the performance of a valid contract, such as an overpayment (as in Chase Manhattan v. Israel-British Bank (London) [1981] Ch. 105). The view that title passes in such cases may be contrasted with Lord Wright’s analysis in Norwich Union Fire Insurance Society v. Price [1934] AC 455 at 461 that suggests that any material mistake will prevent property passing. Lord Wright apparently assumed that recovery was available in respect of payments made pursuant to a mistake because they were void and that as a result property has not passed. In fact, as Goff J observed in Barclays Bank v. Simms [1980] QB 677 at 689, restitution is available for a “far wider [range of mistakes] than the kind of mistake which would vitiate intention to transfer property”.

5See, e.g., Cundy v. Lindsay (1878) 3 App. Cas. 459.

6For cases where property was held not to have passed: see Cundy v. Lindsay (1878) 3 App. Cas. 459 (rogue purporting to be the owner of a reputable business) and Ingram v. Little [1960] 3 All ER 332 (rogue impersonating third party). See, in contrast, cases in which property was held to have passed: Phillips v. Brooks Ltd. [1919] 2 KB 243 (rogue impersonating third party of high social standing); Lewis

v.Averay [1971] 3 All ER 907 (seller required proof of identity from rogue purporting to be film actor) and Kings Norton Metal Co. Ltd. v. Eldridge, Merret & Co. Ltd. (1897) 14 TLR 98 (seller defrauded by a rogue who pretended to be a non-existent person).

7Russell v. Smith [1958] 1 QB 27; and Illich v. R (1987) 162 CLR 110. See D Fox, “The Transfer of Legal Title to Money” [1996] RLR 60; Virgo, Principles of the Law of Restitution at 608. On the other hand, there are cases that suggest that the recipient obtains good title in these circumstances: see Moynes v. Cooper [1956] 1 QB 439. To complete the confusion, there is authority that suggests that title does pass at law, and that, at most, the transferor obtains an equitable title: see, e.g., R v. ShadrokhCigari [1988] Crim LR 465. See also G McCormack, “Mistaken Payments and Proprietary Claims” [1996] Conv. 86 at 88.

8If a transferor means to pay the transferee £500, but accidentally hands over six £100 notes, for which note does title not pass?

The Proprietary Consequences of a Vitiated Intention to Transfer Property 129

excess unquestionably acts unconscionably, it is hardly clear that this is tantamount to theft.

Finally, it has been suggested that a mistake about the identity of the asset being transferred will mean that legal title to the property in question does not pass.9 Thus, it has been indicated that contracts will be void ab initio as the result of a common mistake if facts existing at the time the contract is entered into are such that they render “the subject matter of the contract essentially and radically different from the subject matter which the parties believed to exist”.10

It is difficult to see why the particular categories of mistake that the law has seized upon as sufficient to prevent title passing possess any quality that can justify the consequences that ensue.11 Typically, the real contest is not between transferors and the initial transferees, but between transferors and parties into whose hands the assets are subsequently passed. The exclusive focus on the intention of one or both of the parties to the initial transfer completely fails to take account of the interests of these remote parties.12

2. Voidable Transfers

In some situations, while a transfer is effective to pass title, it may be voidable either at law or in equity, so that the title obtained by the transferee is defeasible. Nonetheless, prior to any attempt by the transferor to rescind the transaction, the transferee may pass good title to a bona fide purchaser.13 On the other hand, volunteers, including trustees in bankruptcy, take subject to any equities, and so are bound by a transferor’s right of rescission.14

The common law has traditionally taken a stricter approach to rescission than has equity in two respects. First, equity provides for rescission in response to a wider range of vitiating factors than does the common law. Thus, while at law rescission is available only for those misrepresentations that were fraudulently induced,15 equity equally allows for rescission in cases of innocent misrepresentations.16 In addition, equity provides for the rescission of contracts vitiated by a common mistake that is “fundamental”—a criterion that is understood to set a

9Illich v. R (1987) 162 CLR 110 at 126 per Wilson and Dawson JJ. While neither provides a straightforward application of this principle, cases supporting this view might include R v. Ashwell (1885) 16 QBD 190 and R v. Davies [1982] 1 All ER 513.

10Associated Japanese Bank (International) Ltd. v. Crédit du Nord SA [1989] 1 WLR 255 at 268 per

Steyn J.

11S Stoljar, Mistake and Misrepresentation: A Study in Contractual Principles (London, Sweet & Maxwell, 1968) 69 and 72–3.

12M Mautner, “ ‘The Eternal Triangles of Law’: Toward A Theory of Priorities in Conflicts Involving Remote Parties” (1991) 90 Mich. L Rev. 95 at 98–9.

13See, e.g., Babcock v. Lawson (1880) 5 QBD 284; Lewis v. Averay [1971] 3 All ER 907.

14Johnson v. Smiley (1853) 17 Beav 223; Re Beeston [1899] 1 QB 626.

15See Kennedy v. Panama, New Zealand, and Australian Royal Mail Co. Ltd. (1867) LR 2 QB 580.

16Redgrave v. Hurd (1881) 20 Ch. D 1.

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lower threshold than that demanded at law.17 Similarly, in equity, a plaintiff may set a contract aside on the grounds of undue influence or unconscionable bargain.18 Secondly, equity takes a more flexible approach in determining when it is possible to unwind a partially performed transaction. At common law, the requirement that restitutio in integrum must be possible is interpreted to mean that rescission will not be permitted if judicial assistance is required to restore the status quo.19 For this reason, rescission will be denied if plaintiffs have received any benefit under the contract in question. In contrast, equity allows for rescission on terms that ensure that the status quo can be substantially restored.

3. Transfers Giving Rise to a Beneficial Interest

The position might be taken that legal title passes (although it might be voidable at law and/or equity) but that an equitable title arises immediately in favour of the transferor. It may be asked whether there is a real difference between plaintiffs having an equitable right to rescind and an immediate equitable interest. Certainly, the distinction seems to have collapsed in the United States. The assumption in American legal thought is that a right to rescind and an equitable interest are two sides of the same coin—the presence of one implies that of the other.20 As a result, the Restatement of Restitution makes little reference to rescission, instead explaining rights to specific relief almost exclusively in terms of the constructive trust. In English law, there is some judicial precedent and academic support for the same perspective.21 However, the more widely accepted view is that the right to rescind is not indicative of an existing equitable interest. Elaborating this view recently in Twinsectra Ltd. v. Yardley,22 Potter LJ observed that:

the transferor may elect whether to avoid or affirm the transaction and, until he elects to avoid it, there is no constructive (resulting) trust. . . . The result . . . is that, before rescission, the owner has no proprietary interest in the original property; all he has is the mere equity of his right to set aside the voidable contract.23

17Solle v. Butcher [1949] 2 All ER 1107.

18Perhaps because the area was well developed at common law, it is less clear whether such a remedy is available to a victim of duress in equity. However, in principle, there seems no reason why equitable rescission should not be available in this context.

19R Goff and G Jones, The Law of Restitution (5th edn.) at 81.

20Thus, AW Scott argued that a beneficiary under a constructive trust “is not compelled to convey the property because he is a constructive trustee; it is because he can be compelled to convey it that he is a constructive trustee”: AW Scott, The Law of Trusts (3rd edn., Boston, Mass., Little, Brown & Co., 1967) v, § 462 at 3413. This view is also apparent in more recent scholarship: see, e.g., in A Kull, “Restitution in Bankruptcy: Reclamation and Constructive Trust” (1998) 72 American Bankruptcy LJ 265.

21Stump v. Gaby (1852) 2 De G M & G 623; Gresley v. Mousley (1859) 4 De G & J 78. See Chambers, Resulting Trusts 171–84; P Birks, “Property and Unjust Enrichment: Categorical Truths” [1997] NZLR 623 at 638; M Neave and M Weinberg, “The Nature and Function of Equities” (1978–9) 6 U of Tas. L Rev. 24 at 26–7.

22[1999] Lloyd’s Banking Rep. 438.

23Ibid. at 463. See also Bristol and West Building Society v. Mothew [1998] Ch. 1 at 22–3 per Millett

LJ.

The Proprietary Consequences of a Vitiated Intention to Transfer Property 131

At first sight, the distinction between an equity of rescission and an equitable interest may appear quite slight. There is a small difference in the extent of protection afforded against third party purchasers. In addition to being unenforceable against bona fide purchasers of the legal title in the same way as an equitable interest, mere equities are defeasible by a third party’s bona fide purchase of the equitable title of the assets in question.24 However, a potentially much more important distinction may exist in relation to tracing. While those with a full equitable interest can assert claims against the proceeds of their property, those with a mere equity may not be able to follow the product of any exchanges of the property affected by the equity that took place prior to rescission.25

4.Transfers Pursuant to Which Title Passes but a Right to Personal Relief Arises

Another response available to a vitiated intention to transfer property is to allow transferees to receive an unqualified title, leaving transferors with only personal claims. This would mean that transferors would have no rights against third party recipients of any assets that formed the subject matter of the transaction. Thus, in the event of a transferee’s bankruptcy, the only recourse available to transferors would be to line up to prove their personal claim and share pari passu with other unsecured creditors.

5. Transfers where Title Passes and the Transferor is Denied any Remedy

Finally, the law may, of course, hold that the fact that their intention was vitiated in some way entitles transferors to no relief whatsoever. This approach has been taken where one party enters into a contract as a result of a self-induced unilateral mistake, even if the other party is aware of this fact.26 In addition, this is the response generally favoured where gifts are motivated by a self-induced mistake.27

24Phillips v. Phillips (1862) 4 De G F & J 208; Latec Investments Ltd. v. Hotel Terrigal Pty. Ltd. (1965) 113 CLR 265. See Birks, supra n. 21.

25See infra, text accompanying nn. 66–93.

26Bell v. Lever Brothers Ltd. [1932] AC 161. The matter is different where one party to a contract is mistaken about what the other party is promising and the other party is aware of that error: see, e.g., Smith v. Hughes (1871) LR 6 QB 597. See J Beatson, Anson on Contract (27th edn., Oxford, Oxford University Press, 1998) 308–10.

27Ogilvie v. Littleboy (1897) 13 TLR 399 at 400.

132 Redistributive Proprietary Remedies

II.VITIATED INTENT AND EQUITABLE TITLE: DOCTRINAL RESPONSES

1.The Availability of Proprietary Relief: Millett J’s Framing of the Issue in El Ajou v. Dollar Land Holdings

More than anything else, two advantages flow from the award of proprietary relief in the context of a vitiated intention to transfer property. First, the recognition of a proprietary interest, in conjunction with equity’s approach to tracing, enables plaintiffs to have remedies against remote parties who are not bona fide purchasers of the legal title. Secondly, proprietary remedies allow plaintiffs to obtain priority in bankruptcy against the initial transferee or remote parties in whose hands the subject matter of the transfer or its proceeds are identifiable.

In El Ajou v. Dollar Land Holdings,28 Millett J reflected on the fortunes of two classes of victims of a fraudulent scheme. The plaintiff was an investor whose money was channelled without his permission into a fraudulent share-selling scheme by a Swiss investment manager, who had been bribed by the unscrupulous Canadians running the scheme. Some of the proceeds of this scheme had been invested in a property development project in conjunction with the defendant company. The plaintiff sought to hold the defendant liable for receiving these proceeds. While the plaintiff had not consented to his money being used in this way, it was impossible for him to assert legal title to the proceeds of his money because these had been mixed so that they were no longer identifiable at common law.29

To claim a remedy from the defendant, the plaintiff needed to establish that the defendant was in possession of assets that were the traceable proceeds of property that belonged to the plaintiff in equity. This could be done by establishing a breach of a fiduciary duty that gave rise to a constructive trust and then utilising equitable tracing principles to identify the proceeds of the original property. However, Millett J paused to consider the position of other victims who had been defrauded into investing directly into the scheme. It is far from clear that proprietary relief would have been available in these circumstances. However, Millett J concluded that “[i]t would, of course, be an intolerable reproach to our system of jurisprudence if the plaintiff were the only victim who could trace and recover his money”.30

The premise of Millett J’s argument is that it should not make a difference whether victims made a mistake in investing money with a rogue or made a mistake in employing an unscrupulous agent who subsequently defrauded them. In either case, proprietary relief should be available. Of course, there are two ways in which we might reform the law to ensure that these apparently “like cases are

28[1993] 3 All ER 717.

29For the view that the identity of money will be lost at common law after being credited to a bank account in respect of which others have deposited money see Re Diplock [1948] Ch. 465 at 520 per Greene MR.

30Ibid. at 734.

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treated alike”. We could equally ensure consistency by not granting a proprietary interest in the first type of case rather than extending it to the second type of case.31 However, this was not the starting point of Millett J’s quest. Instead, he sought some way to make the benefits of proprietary remedies and tracing in equity more widely available. He has hardly been alone in this endeavour. The solution that Millett J offered for the problem he posed in El Ajou is only one of a number of attempts to find an approach that would make proprietary remedies more freely available in this context without appearing unprincipled. The following sections examine these other attempts before returning to Millett’s contribution to this area.

2.Three Attempts to Determine the Availability of Proprietary Relief in Response to a Vitiated Intention to Transfer Property

(a) Goulding J’s Analysis in Chase Manhattan

In Chase Manhattan Plc v. Israel-British Bank (London),32 the plaintiff bank mistakenly paid £2,000,000 to another bank for the account of the defendant bank. Received wisdom would have had it that the only recourse available to it was to bring an action for money had and received at common law. The problem was that, because of the defendant’s bankruptcy, this would not have proved to be a very effective remedy.

The only way the plaintiff would have been able to obtain a satisfactory remedy was if it could demonstrate that it had an equitable interest in the money transferred and that it could identify the traceable proceeds of that money. Goulding J concluded that, because the defendant could not have retained the money in good conscience, a trust arose as soon as it was received.33 At a stroke, this provided both the proprietary right in the money and the fiduciary relationship necessary for the plaintiff to trace.

Goulding J’s analysis in Chase Manhattan has never been anything other than controversial and it is highly questionable that it represents good law.34

31Cf. D Waters, “The English Constructive Trust: A Look into the Future” (1966) 19 Vanderbilt L Rev. 1215 at 1232.

32[1980] Ch. 105.

33Ibid. at 118–20. While Goulding J treated the plaintiff’s proprietary interest as a constructive trust, others have since characterised it as a resulting trust. Whatever label is attached to it, the practical implications of awarding proprietary relief are the same.

34The decision was most seriously called into question in Lord Browne-Wilkinson’s analysis in

Westdeutsche Landesbank Girozentrale v. Islington London Borough Council [1996] 1 AC 669. See infra text accompanying nn. 55–58. Subsequently, in Bank of America v. Arnell [1999] Lloyd’s Bank Rep. 399 at 405, Aikens J was not prepared to accept “in the light of Lord Browne-Wilkinson’s critique, that it [i.e. Chase Manhattan] is still good law”.

134Redistributive Proprietary Remedies

(b)The Resulting Trust as a Response to a Vitiated Intention to Transfer:

Chambers’ Analysis

(i) The Traditional Understanding of the Resulting Trust

Conventionally, resulting trusts have been divided into two principal categories.35 First, there is the class of presumed resulting trusts that give effect to a transferor’s presumed intention to retain rights in the property transferred. Secondly, automatic resulting trusts are understood to arise quite independently from the intention of settlors in situations where they have failed to dispose completely of their beneficial interest in the property in question. There has been a tendency of late to collapse this distinction and to treat both classes of trust as arising from a presumption as to the intention of the transferor.36 However, if what were formerly regarded as automatic resulting trusts are going to be recharacterised in this way, any presumption would seem to be directed at what settlors would have intended if they had considered a contingency that they clearly had not taken into account. This is quite different from a presumption as to what transferors actually did intend.

The effect of the conventional analysis of the resulting trust is that the remedy has little or no application in cases of a vitiated intention to transfer property: for evidence of a mistaken intention to pass an interest will rebut the presumption that transferor intended to retain an interest in the property.37 On this view, any work that is to be done in providing specific relief in cases of vitiated intent is to be done through rescission and the constructive trust.

(ii) Expansive Accounts of the Role of the Resulting Trust

Building on the work of Peter Birks,38 Robert Chambers has recently reinterpreted the basis of the resulting trust.39 In contrast to the conventional understanding of the doctrine, Chambers argues that all that is required for a resulting trust to arise is that a transferor of property did not positively intend to benefit the recipient.40 His analysis represents a shift away from the received wisdom that presumed resulting trusts arise from a presumption “that the provider intended not to benefit the recipient” to a “presumption that the provider did not intend to benefit the recipient”.41

Chambers’ account has the attraction of providing a single explanation for all the circumstances in which resulting trusts are recognised. Certainly, it is consis-

35The authoritative statement of this orthodoxy is generally regarded as that provided by Megarry J in Re Vandervell No 2 [1974] 1 Ch. 269 at 289.

36See, in particular, Lord Browne-Wilkinson in Westdeutsche Landesbank Girozentrale v. Islington LBC [1996] AC 669 at 708.

37W Swadling, “A New Role for Resulting Trusts” [1996] LS 110 at 117.

38See, in particular, P Birks, “Restitution and Resulting Trusts” in Goldstein (ed.), Equity: Contemporary Legal Developments (Jerusalem, Hebrew University, 1992) 335.

39Chambers, The Resulting Trust. For an analysis and evaluation of Chambers’ account, see Virgo,

Principles of the Law of Restitution at 618–21.

40Ibid. at 2.

41Ibid. at 21.

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tent with the conventional explanation for the automatic resulting trust and provides a more convincing rationale for that remedy than recent efforts to characterise it as arising from a presumption as to the transferor’s positive intent. Chambers’ analysis also offers a more realistic explanation of presumed resulting trust cases than that which is traditionally given. This is particularly true of the use of the resulting trust in intimate relationships, where efforts to attribute intention appear particularly artificial but a presumption that a transferor lacked the requisite intention would be entirely plausible.42 Furthermore, this analysis explains why a resulting trust might arise where a transferor lacked capacity.43 Here, clearly the issue is not so much about transferors’ actual intentions, but rather about their inability to form any intention that the law is prepared to treat as meaningful.

On the other hand, it is unlikely that Chambers’ analysis will gain general acceptance.44 For one thing it is inconsistent with judicial analysis of the standard purchase money resulting trust.45 Moreover, there are fundamental normative objections to Chambers’ account. If the parties to a transfer are sui juris and not in an intimate relationship, there is much to be said for the view that the law should respond to the transferor’s intentions and not to any failure to think about the matter.46 Perhaps what is needed in this area is not an analysis of the resulting trust that is capable of explaining all instances of the remedy in terms of single rationale, but rather a more nuanced understanding of the remedy that recognises the need for certain exceptions to the conventional analysis.

Chambers’ analysis has the potential for destabilising our understanding of this area of the law in an interesting way. By reformulating the rationale for relief, his account brings with it a temptation to make relief more widely available. If the absence of an intention to confer an absolute title upon the transferee is all that is required, why should the resulting trust not also be a response to situations where, while the transferee had such an intention, it was vitiated in some way? Chambers and Birks argue that the resulting trust should be available in these circumstances.47 The fact that the resulting trust has traditionally been understood not to arise in these circumstances rather suggests that Chambers’ analysis is more revolutionary than he would claim.

42For an analysis of a constructive trust arising on this basis in the context of intimate relationships see Muschinski v. Dodds (1985) 160 CLR 583 at 620. For an analysis see infra, ch. 10.II.4.

43Chambers, The Resulting Trust at 23.

44As mentioned in Westdeutsche Landesbanke Girozentrale v. Islington LBC [1996] AC 669 at 690, Lord Browne-Wilkinson characterised all resulting trusts as responding to the transferor’s presumed intention. See also Virgo, Principles of the Law of Restitution at 617–21. Lord Millett has accepted Chambers’ analysis in part. See Air Jamaica Ltd. v. Charlton [1999] 1 WLR 1399 at 1412, Lord Millett argued that the resulting trust “responds to the absence of any intention on his [ie the transferor’s] intention to pass a beneficial interest to the recipient”. See also Sir Peter Millett, “Restitution and Constructive Trusts” (1998) 114 LQR 399 at 401.

45For a restatement see Westdeutsche Landesbank Girozentrale v. Islington LBC [1996] AC 669 at 690 per Lord Browne-Wilkinson.

46See infra, ch. 7.I.2(c)(i).

47Birks, supra n. 38 ; Chambers, The Resulting Trust at 23. On this point Millett parts company with Chambers: see Millett, supra n. 44 at 413.

136Redistributive Proprietary Remedies

(c)Constructive Trusts Arising in Response to the Unconscionable Retention of Property: Lord Browne-Wilkinson’s Analysis of the Constructive Trust in

Westdeutsche Landesbank

(i) The Issue

Westdeutsche Landesbank Girozentrale v. Islington LBC48 concerned the aftermath of an interest swap transaction which, it transpired,49 was ultra vires the Council and so void ab initio. What then of the money that the bank had paid to the Council pursuant to the contract before the parties became aware of its invalidity? The House of Lords accepted that the bank was entitled to recover in an action for money had and received on the basis of a failure of consideration. However, the bank sought to establish that it was entitled to compound rather than merely simple interest, a right that their Lordships accepted would logically follow if the defendant were a constructive trustee on the basis that it would have to be prevented from making any profit from its position.50

(ii) Effects on Third Parties

Lord Browne-Wilkinson was sensitive to the implications of finding a resulting or constructive trust. For one thing, he expressed concern that rights arising as a consequence of a resulting trust would bind third party transferees other than bona fide purchasers for value of the legal title without notice. He was particularly concerned that such interests would bind someone who purchased an equitable interest from the initial transferee.51

Secondly, Lord Browne-Wilkinson noted that, had the transferee been insolvent, the effect of finding that an equitable proprietary interest arose would be that the money transferred and its traceable product would not be available for distribution among general creditors. His Lordship pointed out that the effect of the evidential presumptions concerning the ownership of money in a mixed bank account would mean that:

in practice one may well reach the position where the moneys in the bank of . . . [a transferee] in reality reflect the price paid by creditors for goods not yet delivered by . . . [the

48[1996] AC 669.

49A matter established in Hazell v. Hammersmith and Fulham LBC [1992] 2 AC 1.

50[1996] AC 669. The principle was that applied against profits improperly made by a trustee, as stated in Burdick v. Garrick (1870) LR 5 Ch. App. 233 at 241 per Lord Hatherley LC. On the other hand, the indication of two members of the court was that compound interest should be made more broadly available, so that it may be that for plaintiffs’ seeking proprietary relief this distinction may be eliminated before long. See ibid. at 697–8 per Lord Goff and 720 per Lord Woolf. Lord Browne-Wilkinson simply observed that it had been established that equity’s jurisdiction had been limited in this way, without indicating why this might not change (ibid. at 701–2). Lord Slynn and Lord Lloyd concluded that, given that Parliament had legislated in this field and in the process had declined to extend the courts’ jurisdiction to award compound interest, it would be improper for the courts to extend the law in this way (ibid. at 719 and 740). In addition, Lord Lloyd justified his position on the basis that the point was not fully argued before the court (ibid. at 738).

51Ibid. On the other hand, it is not clear that this is necessarily the case. See supra, ch. 1.I.

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transferee]: yet, under the tracing rules, those moneys are to be treated as belonging in equity to . . . [the transferor].52

This effect of proprietary relief is a cause for disquiet.53 However, in itself, the concern mentioned provides a good argument against the tracing rules generally, rather than specifically against their application in the circumstances at issue. Unless Lord Browne-Wilkinson intended to offer an outright condemnation of tracing, what was actually required was an explanation of why this result would be less acceptable in this context than it would be in others.

(iii) The Relevance of the Plaintiff’s Conduct

Where a plaintiff had accepted the risk of the defendant’s insolvency in a transaction that is void or voidable, the courts should not then award a remedy that would isolate the plaintiff from that very risk at the expense of the defendant’s creditors. Westdeutsche Landesbank illustrates this. The bank wanted the repayment of the money it had paid the council. Yet, the bank had chosen to become the council’s unsecured creditor under the interest swaps arrangement. Lords Goff and Browne-Wilkinson agreed that it was difficult to see why, when claiming for failure of consideration, the bank should have been promoted to the status of a secured creditor.54

(iv) The Relevance of the Defendant’s State of Mind

In Lord Browne-Wilkinson’s view, a constructive trust could come into being only if the recipient had knowledge of the transferor’s position.55 Moreover, he thought that such knowledge was not only necessary but sufficient to make the recipient a constructive trustee. Thus, while he admitted that it was difficult to find authority to support the proposition, he argued that a constructive trust was available in the context of fraud.56 Yet, why should this be so? Are not personal remedies and rescission sufficient? As his Lordship’s analysis of the policy reasons against awarding proprietary relief in Westdeutsche Landesbank aptly demonstrates, proprietary relief assumes significance principally in insolvency in the context of the competition between the plaintiff and the defendant’s creditors. In determining who should prevail between these parties, the state of mind of the defendant is not a very relevant consideration.57

52Ibid. at 704.

53Although, it should be noted that Lord Browne-Wilkinson exaggerates the consequences of allowing a constructive trust in these circumstances by suggesting that the rule in Re Hallett would apply: ibid. at 705. It is, however, established law that the harsh presumptions imposed against trustees in that case will not apply to innocent recipients: Re Diplock [1948] Ch. 465 at 524 per Greene MR.

54[1996] AC 669 at 683–4 per Lord Goff and 704 per Lord Browne-Wilkinson.

55Ibid. at 705.

56Ibid. at 716.

57See D Pacciocco, “The Remedial Constructive Trust: A Principled Basis for Priorities over Creditors” (1989) 68 Can. Bar Rev. 315 at 347; G McCormack, “Proprietary Claims and Insolvency in the Wake of Westdeutsche” [1997] JBL 48 at 55.

138 Redistributive Proprietary Remedies

Applying his analysis of the constructive trust, Lord Browne-Wilkinson offered a new interpretation of Chase Manhattan.58 In his view, Goulding J’s analysis that a proprietary interest arose immediately on the bank’s receipt of the mistaken payment was unsupportable. Nevertheless, he thought that the case was probably rightly decided, because the bank became aware of the plaintiff’s mistake only two days after the transfer. At that point, according to Lord Browne-Wilkinson, the bank became a constructive trustee.

There is little to be said for this reinterpretation. The mere fact that the defendant in Chase Manhattan became aware that it was holding the proceeds of a mistaken transfer does not in itself indicate that it should have held those proceeds on constructive trust for the plaintiff. As between the plaintiff and the defendant, a personal remedy would have been perfectly satisfactory. Moreover, the idea that the defendant could not have in good conscience retained the proceeds of the mistaken payment is absurd. No one in the defendant’s position would feel morally obliged to identify the proceeds of the mistaken payment and to return them to the plaintiff in specie. Rather, a morally upright person in the defendant’s position would feel obliged to account for the sum that he or she had received as a result of the plaintiff’s mistake. Even the loosest application of the maxim “equity regards as done that which ought to be done”59 could not convert this moral obligation into a duty that the defendant should hold the proceeds of the payment on trust for the plaintiff.

(v) The Practical Consequences of this Analysis

Lord Browne-Wilkinson’s judgment in Westdeutsche Landesbank demonstrates how misguided it is to focus upon the conscience of the initial recipient in cases of a transfer where the owner’s intention to pass title was vitiated in some way. While he took seriously the policy issues that were at stake, he drew an unfortunate distinction between these issues and legal principle.60 Thus, he observed that “[b]efore considering the legal merits of the submissions it is important to appreciate the practical consequences which ensue if the bank’s arguments are correct”.61 This understanding blights his Lordship’s judgment. Ultimately, his intelligent policy analysis was completely undermined by his formalistic account of constructive trust principles.

While Lord Browne-Wilkinson rejected the Chambers’ resulting trust model, his analysis did not preclude the constructive trust operating in circumstances such as those that arose in Westdeutsche Landesbank. On his Lordship’s analysis that a constructive trust arises when the conscience of the recipient is affected, the local authority could not have been liable as a constructive trustee before it was aware of the fact that the interest swap arrangement was void. Yet, it seems that

58[1996] AC 669 at 714–15.

59Supra, ch. 2.V.2.

60This same flaw is apparent in Lindley MR’s analysis of the availability of proprietary remedies in the context of secret commissions in Lister v. Stubbs [1990] Ch. 1. See infra, ch. 9.II.

61[1996] AC 669 at 705.

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this analysis would not have precluded the local authority tracing the proceeds of the moneys paid, once the parties were aware that the transaction was ultra vires. This is apparent in Lord Browne-Wilkinson’s explanation of the unavailability of a constructive trust on the basis that the moneys had become untraceable before the defendant had the requisite knowledge to make it a constructive trustee.62 Thus, he concluded, “[t]he latest time at which there was any possibility of identifying the ‘trust property’ was the date on which the moneys in the mixed bank account of the local authority ceased to be traceable . . .”.63

Thus, if at any time the local authority had been made aware of the mistake in question while it was still in possession of any traceable proceeds of the payments, the bank would have been entitled to trace and claim a constructive trust.64 Of course, this conclusion is completely at odds with Lord Browne-Wilkinson’s preceding policy-based analysis that apparently pointed out the injustice of allowing proprietary relief in these circumstances. It would be difficult to point to a better example of the pitfalls of reasoning from formal propositions without a view to practical consequences.

Ultimately, Lord Browne-Wilkinson’s approach to the area would generally lead to the same results with respect to the provision of priority in bankruptcy as that taken by Goulding J in Chase Manhattan. For, while his Lordship argued that it was probably true that the recipient bank became a constructive trustee before it became bankrupt, it is difficult to see that the timing of events was crucial. Presumably, provided traceable proceeds of the mistaken payment were still identifiable in their hands, the liquidators would have been equally bound to recognise the plaintiff’s claim once they had knowledge of the relevant facts. One situation in which the analysis would make a difference would be where the transferee’s assets were subject to a floating charge that was liable to crystallise on bankruptcy. Where this is the case, the floating chargee takes priority over a mistaken transferor if the transferee did not have notice of the mistake prior to the crystallisation of the charge.

Lord Browne-Wilkinson’s analysis of rights arising in respect of traceable proceeds is rather difficult to comprehend. In particular, it is not clear why he took the view that transferors should be able to trace into the product of exchanges that took place prior to a constructive trust arising in their favour. This account appears to rely on the rather bizarre assumption that, once recipients acquire the

62Ibid. at 707.

63Ibid. at 706.

64Unlike Lord Browne-Wilkinson, Lord Goff apparently concluded that tracing would not be available in these circumstances. In his view, because “the identity of the money is immediately lost by mixing with other assets of the payee”, it followed that “[b]y the time that . . . the conscience of the payee may . . . be affected, there will therefore be no identifiable fund to which a trust can attach”: ibid. at 689. Strictly speaking, the view that mixing prior to a defendant’s conscience being affected necessarily prevents tracing is unsustainable. If the assets received are already subject to a trust, the defendant’s state of mind will at most mean that plaintiffs will be able to rely on less stringent evidential presumptions in seeking to identify traceable proceeds: see Re Diplock [1948] Ch. 465 at 524. However, the matter may be different if, as on Lord Browne-Wilkinson’s analysis, a proprietary interest only arises upon the defendant’s conscience being affected.

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requisite knowledge, good conscience requires them to return in specie, not only the money originally transferred, but any proceeds. Given that fungible property is involved and that the notion of making specific restitution makes little sense in the context of money credited to a transferee’s bank account, it is difficult to understand why an obligation to account for the money originally received would not be a sufficient remedy.

An approach that determines the availability of the constructive trust on the basis of recipients’ unconscionability alone is capable of supporting proprietary relief in a very broad range of circumstances. For example, it could equally be said to support the award of a constructive trust on the facts of Re Goldcorp.65 It was, surely, unconscionable for Goldcorp to use the money paid by its customers for its own benefit, given that it did not have the reserves of gold bullion that it was contractually obliged to maintain. Thus, on Lord Browne-Wilkinson’s analysis, a constructive trust should have arisen to prevent such unconscionable use of the money in question. That the availability of such a remedy was denied in that case is merely another indication that Lord Browne-Wilkinson’s account of the remedy is unsustainable.

3. Millett J’s Analysis in El Ajou: The Proprietary Consequences of Rescission

(a) Proprietary Consequences of Rescission: The Expansive View

Where a contract is set aside, it is clear enough that the underlying transaction is treated retrospectively as if it were void ab initio. But what effect does this have on the passing of property? As mentioned, while there is some authority for the view that the mere right to rescind indicates the existence of a resulting or constructive trust, the more orthodox view is that a trust relationship will not arise until the plaintiff elects to rescind.66 What is not quite so clear is with respect to what assets a trust will arise upon rescission. Much of the significance of the issue of the proprietary consequences of rescission turns on the availability of tracing in the wake of the remedy. While surprisingly little thought had been paid to the matter in the past, more recently a good deal of attention has been given to an analysis that would make tracing widely available in the aftermath of rescission.

(i)Tracing after Rescission: Brennan J’s Analysis in Daly v. Sydney Stock Exchange

Millett J’s solution to the problem he posed in El Ajou67 was to argue that claimants who rescinded a contract could rely upon the consequences of the process in order to establish a right to proprietary relief. On this view, once a

65[1995] 1 AC 74. See supra, ch. 5.IV.2(a) for an account of the case and infra, text accompanying nn. 89–90 for its relevance in this context.

66See supra, text accompanying nn. 20–23.

67Supra, text accompanying n. 30.

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contract has been rescinded, because the process operates retrospectively to avoid the contract, any property transferred pursuant to it would be treated as if it were held for the benefit of the transferor from the moment of receipt. It is thought to follow from this premise that transferors will have the right to elect to trace and assert their property rights in the exchange product of any transactions involving the assets transferred under the contract.

Millett J’s account draws upon an analysis offered by Brennan J in the Australian High Court in Daly v. Sydney Stock Exchange.68 The plaintiff in that case had taken the advice of a firm of stockbrokers to lend money to the firm as a prelude to it investing the money in the share market when conditions were more advantageous. However, the firm had not told the plaintiff that it was in a parlous financial state. Subsequently, the firm became insolvent and was unable to repay the loan. The plaintiff applied for relief from an industry fidelity fund established to provide compensation in the event of defalcation of property held on trust by stockbrokers.69 However, the claim failed because the money that Daly advanced to the firm was not held by it on trust for the lender.

It was common ground amongst the members of the court that the stockbrokers had breached their fiduciary duty to the plaintiff and that he could have rescinded the transaction on this basis. However, Brennan J’s analysis suggests that, in claiming from the fidelity fund, Daly had taken the wrong course of action. In his view, someone in Daly’s position, upon rescinding the contract, would then be in a position to “assert his title to the . . . property transferred assuming it still exists in specie or, being money, can be traced”.70 This was the view adopted by Millett J in El Ajou v. Dollar Land Holdings Plc.71 He argued that, where a transfer is induced by fraud, plaintiffs “are entitled to rescind the transaction and revest the equitable title to the purchase money in themselves”. Such a plaintiff “can then invoke the assistance of equity to follow property of which he is the equitable owner”.72

(ii) Gibbs CJ’s Analysis

It is interesting to compare Brennan J’s reasoning in Daly v. Sydney Stock Exchange with that of Gibbs CJ, who offered the court’s only other full judgment. For, while favouring the same outcome on the facts of this particular case, Gibbs CJ’s judgment is informed by a policy analysis that suggests that proprietary relief is difficult to justify in this context. Thus, he argued that, even if rescission had been sought:

the demands of justice and good conscience could have been satisfied without the creation of a constructive trust. In deciding whether or not the money should be held to

68(1986) 160 CLR 371.

69Pursuant to s. 97 of the Securities Industry Act 1975.

70(1986) 160 CLR 371 at 388.

71[1993] 3 All ER 717.

72El Ajou v. Dollar Land Holdings plc [1993] 3 All ER 717 at 734. See also Lonrho plc v. Fayed (No 2)

[1992] 1 WLR 1 at 11.

142 Redistributive Proprietary Remedies

have been subject to a constructive trust it is not unimportant that the ordinary legal remedy of a creditor would have been adequate to prevent the firm from being benefited at the expense of the appellant.73

Thus, Gibbs CJ took the view that there needed to be a good reason for granting a proprietary remedy, and the objective of the reversal of unjust enrichment could not, in itself, provide such a justification. He then turned his attention to the strength of Daly’s claim relative to those of the stockbrokers’ other creditors. In his view:

the consequences of holding the money to be subject to a constructive trust and thereby transforming the creditor into a beneficiary suggest that it would be contrary to principle to recognise the existence of a constructive trust in a case such as the present. One consequence would be that the money, and any property acquired with it, would, on the firm’s bankruptcy, be withdrawn from the general body of creditors.74

He noted that similar concerns had motivated Lindley LJ’s refusal to find that an employee held a secret commission on constructive trust for his employer in Lister & Co. v. Stubbs.75 In his view, “the reasons of Lindley LJ appear to me to be impeccable when applied to the case in which the person claiming the money has simply made an outright loan to the defendant”.76

(iii) The Nature of the Trust

A year before El Ajou, in Lonhro plc v. Fayed (No 2),77 Millett J had followed Brennan J in Daly v. Sydney Stock Exchange in characterising the interest in question as a constructive trust.78 In contrast, in El Ajou, Millett J described the interest as an instance of “an old-fashioned institutional resulting trust”.79 Why a resulting trust should arise in these circumstances is not really explained. Perhaps Millett J assumed that, where a contract is avoided with retrospective effect, the transfer in question must be treated as gratuitous, thereby giving rise to a presumption of a resulting trust. Yet, it is hardly clear that the fact that the contract is void means that the intention of the transferor to benefit the transferee should be ignored entirely.

(iv) The Acceptance of the Expansive Analysis

As well as gaining academic acceptance,80 Millett J’s account of the proprietary consequences of rescission was subsequently endorsed judicially in Halifax Building Society v. Thomas.81 The Court of Appeal quite rightly concluded that justice did not

73(1986) 160 CLR 371 at 379.

74Ibid.

75(1890) 45 Ch. D 1. For an analysis of that decision and Lindley LJ’s judgment see infra, ch 9.II.

76(1986) 160 CLR 371 at 379.

77[1992] 1 WLR 1.

78Ibid. at 11.

79[1993] 3 All ER 717 at 735.

80See, e.g., Virgo, The Principles of the Law of Restitution at 634–5.

81[1996] 1 Ch. 217. See infra, ch. 9.III.3(b).

144 Redistributive Proprietary Remedies

Rescission of a contract, whether it is achieved entirely at the instance of the party entitled to rescind or with the assistance of the court, is best understood as a process that brings a contract to an end. However, this does not in itself indicate that transfers of property pursuant to such an arrangement are invalidated. Thus, where parties rescind a contract in circumstances in which they have received nothing from the defendant, the proper form of action for relief in respect of money passed pursuant to the contract is not a claim for rescission but an action for money had and received.85 Similarly, while a purchaser rescinding a contract for specific property may be required to return the property itself, the associated liability for any profits made from the property in the intervening period is described in terms of account and not of constructive trusteeship.86

According to the view that a constructive or resulting trust arises on rescission, parties who were induced by a negligent misrepresentation or a common mistake into giving an unsecured loan would, by rescinding the arrangement, revest in themselves property in the money transferred or its proceeds. In doing so, in the event of the transferee’s bankruptcy, they could put themselves ahead of general creditors. It is, however, difficult to reconcile this view with the House of Lords decision in Westdeutsche Landesbank.87 There, the parties were induced to enter into an interest swaps arrangement by a mutual mistake of law. Lord Goff remarked that “there is no general rule that the property in money paid under a void contract does not pass to the payee”.88 It would indeed be peculiar if the proprietary consequences resulting from the rescission of transactions that were merely voidable were more marked than those that result from transactions that were void ab initio. At the very least, the court should consider whether the plaintiff had assumed the risks of the defendant’s insolvency.

The view that proprietary remedies arise with respect to money transferred pursuant to a rescinded contract was rejected quite emphatically in Re Goldcorp Exchange Ltd.89 The purchasers of unallocated gold reasonably claimed that they were the victims of a misrepresentation. They argued that it followed from this that they could rescind their contracts of purchase and assert title to the money they had advanced or its traceable proceeds. It was held that, because the purchasers had affirmed the contract, they were not in a position to rescind. However, Lord Mustill concluded that, even if this were not so:

Whilst it is convenient to speak of the customers “getting their money back” this expression is misleading. Upon payment by the customers the purchase moneys became, and rescission or no rescission remained, the unencumbered property of the company. What

85 See Spencer Bower and Turner, The Law of Actionable Misrepresentation (3rd edn. by Sir Alexander Kingcome Turner, London, Butterworths, 1974) 286.

86See, e.g., Stepney v. Biddulph (1865) 13 WR 676; Haygarth v. Wearing LR 12 Eq 320 (realty); Addis

v.Campbell (1841) 4 Beav. 401; Spence v. Crawford [1939] 3 All ER 271 (shares). See Spencer Bower and Turner , supra n. 85 at 279.

87[1996] AC 669. See supra, text accompanying nn. 48–63.

88Ibid. at 689.

89[1995] 1 AC 74. For an account of the case, see supra, ch. 5.IV.2(a).

The Proprietary Consequences of a Vitiated Intention to Transfer Property 145

the customers would recover on rescission would not be “their” money, but an equivalent sum . . .90

(iii) Explaining Rights to Recover Specific Property

In trying to understand why specific relief might not invariably be available to effect restitution, it is worth bearing in mind the view that, in rescinding a transaction, “the court must fix its eyes on the goal of doing what is practically just”.91 There are several reasons why a plaintiff might seek to set aside a transaction. For one thing, rescission is a very useful remedy where a contract remains unperformed. This has encouraged the courts to conceptualise rescission as something that parties with a right to rescind do themselves.92 Where the contract remains executory in whole or part, a party with the right to rescind can effect rescission without any judicial assistance by declining to perform. In these circumstances, rescission provides a far more practical remedy than damages, allowing aggrieved parties to restore the status quo while avoiding recourse to the judicial process and all the difficulties associated with it.

The capacity for rescission to allow parties to resolve matters themselves without the need for judicial assistance explains why the courts have been content to allow rescinding sellers to retake possession of goods.93 Like the unpaid seller’s lien and the seller’s right to stop goods in transit, the right of recaption provides a useful self-help remedy. These remedies reflect our law’s practical approach to the sale of goods that eschews an absolutist, once-and-for-all, approach to the transfer of property.94 We should not think that, from such rights to specific recovery available to sellers rescinding contracts of sale of goods, we can readily deduce the rights available to a plaintiff who, in the aftermath of rescission, is seeking relief in respect of a monetary payment.

Even when judicial assistance is required, rescission on terms provides a very useful means of unwinding bilateral arrangements that have been wholly or partly performed by the parties. In contrast, where performance has been one-sided and all that is sought is relief for monetary payments made pursuant to the transaction, rescission is not needed to restore the parties to the position they enjoyed before the transaction. This outcome can be achieved through an action for money had and received.

A second advantage of rescission is that it provides plaintiffs with the opportunity of recovering assets to which they may attach a worth that exceeds its market value. Thus, specific recovery would have significance, beyond the question of any priority it may be thought to confer in bankruptcy, where a plaintiff’s intention to

90Ibid. at 102.

91Spence v. Crawford [1939] 3 All ER 271 at 288 per Lord Wright, quoting Lord Blackburn in

Erlanger v. New Sombrero Phosphate Co. (1878) 3 App. Cas. 1218 at 1278.

92Alati v. Kruger (1955) 94 CLR 216 at 223–4. Cf. J O’Sullivan, “Rescission as a Self-Help Remedy: A Critical Analysis” (2000) 59 CLJ 509.

93See, e.g., Clough v. The London and North Western Ry. Co. (1871) 7 LR 26.

94See infra, ch. 8.I.

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transfer property was vitiated by something more than a mistake about the transferee’s willingness or ability to pay the price negotiated. For this reason, rescission is particularly appropriate for unwinding transactions that have been induced by undue influence or duress.

Rights to specific relief arising upon rescission are enforceable in bankruptcy on the basis that the trustee in bankruptcy, as a volunteer, takes property subject to equities.95 It may be thought that the concern that plaintiffs be able to recover specific property is sufficiently important to justify binding the transferee’s trustee in bankruptcy. However, it is not entirely obvious that this should be so, and, while the courts tend to assume that a right to specific recovery entails priority in insolvency,96 there is no reason why this should be so. More importantly, the concerns that may justify the recovery of specific property because it may have special significance for a plaintiff have no relevance where relief is sought in respect of money that has been transferred pursuant to a voidable contract.

4. Millett’s New Analysis

(a) The Availability of Resulting Trusts

More recently, writing extra-judicially, Sir Peter Millett has offered a vision of the role of the resulting trust in the wake of vitiated transactions that is more restrictive than that provided in his analysis in El Ajou v. Dollar Land Holdings Plc. He embraces Chambers’ account of resulting trusts as a response to an absence of intention to transfer a beneficial interest, rather than of a positive intention to obtain such an interest.97 Nonetheless, Millett does not accept that this analysis indicates that the device has a wider role than has conventionally been understood. In his view, contrary to Chambers’ account and the analysis of Goulding J in Chase Manhattan,98 where owners form an intention to pass title, no vitiation of that intention will result in their acquisition of proprietary rights.99

It is not obvious why, once we have reconceptualised the normative foundations of the resulting trust, we should accept Millett’s view of where the line is to be drawn rather than that of Chambers. Case law does not offer a great deal of assistance in resolving this dilemma. Chambers and Birks seize upon Chase Manhattan and Neste Oy v. Lloyds Bank plc.100 These cases are reinterpreted as resulting trust decisions that support the view that the remedy should be widely available. On the other hand, Millett argues that the weight of the law is against this analysis and that

95Johnson v. Smiley (1853) 17 Beav. 223.

96See supra. ch. 2.V.2, ch. 4.III.3 and infra, text accompanying n. 103.

97For an analysis of Chambers’ account of the resulting trust, see supra, text accompanying nn. 38–47.

98See supra, text accompanying nn. 32–34.

99Millett, supra n. 44 at 402 and 413.

100P Birks, “Trusts Raised to Reverse Unjust Enrichment: The Westdeutsche Case” [1996] RLR 3 at 6 and 15.

The Proprietary Consequences of a Vitiated Intention to Transfer Property 147

Chase Manhattan provides rather unstable foundations for his opponents’ theory.101 This is perhaps true. However, it is likely that the question of the limits of the resulting trust in cases of vitiated intention has received relatively little judicial attention precisely because the device has always been understood as a response to a positive intention to obtain a beneficial interest in the property transferred. If we are now to redefine the justificatory foundations of the resulting trust, such case law as there is does not resolve the issue of the proper operation of the doctrine.102 Once reconceptualised in the way proposed by Chambers and embraced by Millett, the resulting trust could quite easily be extended. The question is whether it should be.

(b) The Availability of the Constructive Trust

Millett has also substantially modified his views on the scope of the constructive trust. He now takes the view that a constructive trust will arise in only two circumstances. First, it is available as a response to breaches of fiduciary duties. Secondly, constructive trusts arise in recognition of a right to specific recovery of an asset. Thus, in the absence of a breach of fiduciary duty, a constructive trust will arise in the aftermath of a vitiated intention to transfer property only “where the original transfer is rescinded and special retransfer is ordered because monetary restitution would not be an adequate remedy”.103

This analysis makes the right to specific recovery of an asset the foundation of a constructive trust rather than vice versa. On this view, there is no scope for tracing the proceeds of unique property if it happens to have been transferred prior to rescission. Rather a right to trace will be available to recover proceeds only if two requirements are satisfied. First, the plaintiff must have already rescinded the contract. Secondly, a right to specific recovery must have arisen because, due to the nature of the property in question, monetary restitution would be inadequate (thereby giving rise to a constructive trust). Consider, for example, a plaintiff who is duped into selling an antique to an expert buyer who misrepresented the provenance and value of the item in question. If the plaintiff does not rescind the contract before the antique is exchanged, she will not have the right to trace the proceeds in order to obtain a priority over the defendant’s general creditors.

(c) Specific Relief and Proprietary Remedies

Lord Millett’s new conceptualisation of the basis of proprietary remedies seems to amount to nothing less than a wholesale rejection of the position that he promoted in El Ajou v. Dollar Land Holdings Plc.104 The conclusion that a constructive trust

101Millett argues that Chase Manhattan was wrongly decided: supra n. 44 at 412–13.

102Although the decision in Westdeutsche Landesbank perhaps gives a good indication that its outer bounds are not likely to stretch as far as Birks and Chambers would have it.

103Millett, supra n. 44 at 417.

104[1993] 3 All ER 717.

148 Redistributive Proprietary Remedies

arises only after rescission and only where, because of the nature of the asset in question, damages would not be an adequate remedy, means that the constructive trust offers few advantages over the equity to rescind that precedes it.

The conclusion that rights to recover specific assets should be enforceable in bankruptcy might be thought to be difficult to justify. Of course, such a conclusion could be characterised as consistent with the approach taken toward the availability and effect of the remedy of specific performance.105 However, these remedies apply in rather different contexts. While plaintiffs typically seek specific performance because they want particular unique assets, plaintiffs more often seek rescission either because they have not received the contract price at all or because they have not received what it is worth. Consequently, there is a good argument that the right to rescind in these circumstances should be limited to a personal right to specific relief that is not enforceable in bankruptcy.

(d) An Apology for El Ajou

In Bristol & West Building Society v. Mothew,106 Millett LJ gave an explanation of his analysis in El Ajou. He claimed that his account in the earlier case was driven by the desire “to circumvent the supposed rule that there must be a fiduciary relationship or retained beneficial interest before resort may be had to the tracing rules”.107 He has recently argued extra-judicially that:

The existence of a breach of trust of fiduciary duty should not be a precondition for the application of equitable tracing rules, which may be necessary to establish a claim to any remedy whether personal or proprietary. But in the absence of a right to specific performance or reconveyance after rescission (which may depend on the nature of the property) it should be a necessary precondition for proprietary relief.108

Thus, Millett has suggested that his analysis that a resulting trust arises in the wake of the rescission of a contract was intended, not to make a proprietary remedy available, but to avoid the unwarranted restrictions presently placed on the right to trace. This implies that, if a fiduciary relationship were not regarded as a prerequisite for tracing, the fraud victims in El Ajou would have been able to trace and claim a personal remedy without any need to argue that the money transferred was held on a constructive or resulting trust. Even if this were true, why should those who had invested directly into the fraudulent scheme have been denied a proprietary remedy, when those whose fiduciaries were part of the fraud were entitled to a beneficial interest in the money transferred?

105Corbin argued that the remedy of specific performance should not be issued so as effectively to prefer one creditor in insolvency. See A Corbin, Corbin on Contracts (St Paul, Minn., West Publishing Co., 1964) v A at § 1156. However, there is little evidence that such a view might attract support in English law.

106[1998] Ch. 1.

107Ibid. at 23.

108Supra n. 44 at 417.

The Proprietary Consequences of a Vitiated Intention to Transfer Property 149

In any event, Millett LJ’s analysis that those defrauded into investing in the scheme could have traced and claimed a personal remedy against the defendant cannot be right. If they could not point to a proprietary interest in the money in the hands of the defendant, such victims of fraud would not have been able to have established that the defendant was liable for knowing receipt of their property. Thus, to give the fraud victims a remedy against remote parties, it would be necessary to find that they were the beneficiaries of a constructive or resulting trust. As already noted, Millett J’s analysis in El Ajou that a resulting trust arose in respect of the money transferred was misconceived and he has now abandoned it. Equally, he has rejected at length the alternative analyses of Goulding J in Chase Manhattan and Lord Browne-Wilkinson in Westdeutsche Landesbank—either of which would at least entail that a constructive trust arises in favour of fraud victims. Thus, it is impossible to avoid the conclusion that Millett’s new analysis leaves fraud victims without a proprietary remedy and thus entails the very result that he had previously concluded would represent “an intolerable reproach to our system of jurisprudence”.109

III. PROPRIETARY RELIEF FOR VITIATED TRANSFERS: RELEVANT

POLICY CONSIDERATIONS

1. The Importance of Identifying Involuntary Restitution Claimants

As mentioned, the paradigm case for giving a plaintiff priority over a defendant’s unsecured creditors in bankruptcy is one where the plaintiff is an involuntary creditor whose mistake is likely to have resulted in a swelling of that part of the defendant’s estate that would otherwise be available for distribution in bankruptcy.110 The key issue in this context is whether the plaintiff can properly be characterised as an involuntary creditor.

If the mistake in question takes place against the background of a consensual relationship, the question is whether plaintiffs had the opportunity to protect themselves against the risk of the defendant’s insolvency in the context of the vitiated transaction. This issue arises where, as was the case in Westdeutsche Landesbank, a transferor makes a loan to the transferee that is unsecured. If it transpires that the transferor’s consent was vitiated in some way, for example, by lack of capacity, it would be improper to give the transferor the right to trace the proceeds of the loan and claim priority over the transferee’s unsecured creditors.

It is more difficult to determine whether other restitution claimants should be entitled to a proprietary claim. The best argument in favour of Goulding J’s holding in Chase Manhattan v. British-Israel Bank (London)111 is that the plaintiff had

109El Ajou v. Dollar Land Holdings Plc [1993] 3 All ER 717 at 734. See supra, text accompanying

n. 30.

110See supra, ch. 4.III.3(e).

111[1980] Ch. 105.

150 Redistributive Proprietary Remedies

not accepted the risk of the defendant’s bankruptcy and the mistaken double payment resulted in the defendant’s estate being enriched. This combination of features suggests that a proprietary remedy might have been justified.

2. Distinguishing between Involuntary Creditors

We can justify the denial of relief to certain involuntary restitution creditors in this context only if we are satisfied that there are good reasons for distinguishing between different instances of vitiated intention to transfer property. We may be inclined to do this because of the costs that recognising proprietary interests impose in the administration of bankruptcy, the dangers of ostensible ownership associated with proprietary remedies and the arbitrariness generated by our rules for identifying traceable assets. These considerations make it tempting to deny relief to those victims of mistakes or misappropriations who were partly responsible for their misfortune and/or to withhold proprietary relief where it may lead to greater efficiency by deterring mistakes.112

(a) Denying Relief to Careless Plaintiffs

One approach would involve focusing directly upon the degree of fault of plaintiffs by asking whether they could reasonably have been expected to have perceived the risk of the loss in question.113 This approach would distinguish between plaintiffs, not so much on the basis of the form of mistake they made, but according to their means for preventing such mistakes from occurring. This would tend to place a higher burden on institutional players: first, because they could have been expected to put systems in place to avoid mistakes; and, secondly, because organisations are more likely than individuals to have the knowledge and resources to respond to incentives generated by legal norms. While such an approach has its attractions, it may well be thought to be liable to introduce an unjustifiably high degree of uncertainty into the litigation process and to make the task of those distributing bankrupt estates unduly difficult.

(b)Distinguishing between Different Classes of Claimant

(i)Different Categories of Claimants

A different approach would involve distinguishing between different types of misappropriation and mistake. Thus we may ask whether we should distinguish between the following.

(1) those who have had assets that they legally own stolen or misappropriated;

112See supra, ch. 4.III.3(c).

113E Sherwin, “Constructive Trusts in Bankruptcy” [1989] U Ill. L Rev. 297 at 350–2. See supra, ch. 4.III.3(c).

154 Redistributive Proprietary Remedies

Quistclose to Rolls Razor Ltd. The loan was advanced for the purpose of paying a dividend declared at a time when Rolls Razor’s solvency was in doubt. The borrower banked the cheque and, as the lender required, instructed Barclays Bank that it was to be credited to a special account and used only for the purpose for which it had been lent. The dispute arose when the borrower became insolvent before paying the dividend and the bank set off the sums in the dividend account against the borrower’s overdraft in another account. At issue was the ownership of the money in question (or more precisely of the chose in action represented by the bank’s liability to repay the sums notionally held in the dividend account). If the borrower had absolute title to the money, the bank was entitled to set off this asset against the borrower’s liabilities. However, the Court of Appeal and House of Lords shared the view that, at least once the purpose for the loan failed, the beneficial interest in the money lay with the lender.

2. Interpretations of the Basis of the Quistclose Trust

It is difficult to isolate an “orthodox” interpretation of the doctrinal basis of the Quistclose trust. Several plausible interpretations of the device have emerged. While none of these accounts is entirely consistent with judicial analysis of the doctrine, all are broadly in line with the results of the cases.

(a) An Express Trust Analysis

One strain of analysis has seen the Quistclose trust explained in terms of what Charles Rickett has characterised as a “pure trust philosophy”.2 According to this perspective, the Quistclose trust is an orthodox application of express trust principles and is created by the lender and not by operation of law. For example, Peter Millett, prior to his elevation to the bench, proffered a “simple and orthodox” analysis of Quistclose arrangements in terms of express private trusts.3 In his view, the best explanation for the rights recognised in this context is generally that lenders create a trust in their own favour but give borrowers, who are holding the money as trustees, a mandate allowing them to use the money for a specified purpose.4 If the purpose is carried out, the parties’ relationship is thereafter governed by a simple unsecured loan arrangement. If, however, the purpose fails, so too does the mandate; and all that remains are the lender’s rights under the express trust. According to this account, the typical Quistclose trust is not remedial, and there is no need to explain the relief given in terms of resulting or constructive trust concepts. A court enforcing the Quistclose trust is merely giving effect to the

2CEF Rickett, “Different Views on the Scope of the Quistclose Analysis: English and Antipodean Insights” (1991) 107 LQR 608.

3P Millett, “The Quistclose Trust: Who Can Enforce It?” (1985) 101 LQR 269 at 284.

4Ibid.

The Mysterious Basis of the Quistclose Trust 155

wishes of the settlor. On this view, the device is entirely consistent with orthodox notions of property.

While this is a neat analysis with some judicial support,5 it is not without its difficulties. For one thing, it suggests that the doctrine is limited to situations where the parties make it reasonably clear that a trust is intended; and it is far from clear that this is true in many of the relevant cases. Re EVTR6 illustrates the difficulties that arise in explaining some Quistclose trust cases in terms of such an analysis.7 A loan was given to a company to enable it to acquire equipment and a dispute arose when the borrower went into receivership about whether the money advanced formed part of its general assets. While Dillon LJ accepted the observation of the court at first instance that “nobody gave a conscious thought” to the possibility that the purpose for which the loan was advanced might not be fulfilled, he did not think that this precluded the recognition of a proprietary interest in the lender’s favour.8 Yet, if it were indeed true that the lender did not reflect on the consequences of the failure of the purpose of the loan, it is very difficult to see how the court could divine any intention to create a trust. And, even if the court were to imply an obligation to repay the loan upon the failure of the arrangement, such an obligation could be personal rather than proprietary in nature. On what basis can the courts infer an intention to create a trust where lenders have not themselves recognised the importance of reserving proprietary rights to protect themselves against the risks of the borrower’s bankruptcy?

Dillon LJ dismissed the significance of the lender’s lack of foresight on the basis that “a resulting or constructive trust most normally arises by implication of law when circumstances happen to which the parties had not addressed their minds”.9 This differs from Millett’s analysis in its assumption that relief arises by operation of law rather than pursuant to an express trust. However, on most analyses of the Quistclose trust, the use of a resulting trust is contingent on the finding of an initial express trust.10 And, if a lender completely failed to consider the advantages that would flow from the creation of an express trust relationship, it is difficult to see how one could be inferred from the loan arrangement. It follows that what Dillon LJ appears to be contemplating in Re EVTR is a response that might be characterised as a remedial constructive trust.11

5The analysis was adopted by the New Zealand Court of Appeal in General Communications Ltd.

v.Developmental Finance Corporation of New Zealand [1990] 3 NZLR 406. It was also accepted in Box

v.Barclays Bank plc [1998] Lloyd’s Banking Rep. 185 at 193 per Ferris J.

6[1987] BCLC 646.

7For similarly loose applications of the Quistclose trust see Guardian Ocean Cargoes Ltd. v. Banco do Brasil SA [1991] 2 Lloyd’s Rep. 68; Tropical Capital Investment Ltd. v. Stanlake Holdings Ltd. (unreported, 24 May 1991) analysed by C Rickett [1992] LMCLQ 3. See also G McCormack, Proprietary Claims and Insolvency (London, Sweet & Maxwell, 1997) 68.

8Supra n. 6 at 650.

9Ibid.

10See infra, text accompanying nn. 19–31.

11It might, however, be explained in terms of Chambers’ resulting trust analysis. However there are formidable objections of principle and policy to this analysis. See infra, text accompanying nn. 27–40.

156 Redistributive Proprietary Remedies

More fundamentally, Millett’s analysis apparently demands that a lender should have all of the powers of a beneficiary under a trust. This would entail that the lender’s powers go beyond the right to restrain any unauthorised use of the funds by a borrower—a right that is often characterised as the full extent of the power reserved by the lender prior to any failure of the purpose of the loan. Thus, the lender, as a beneficiary, appears to have a power to revoke the loan and require the trustee to repay the money advanced, even in the absence of any default.12 Given that the rights that would follow from the lender’s status as a beneficiary appear to be in tension with the terms of the loan, it seems odd to infer a trust of the type contemplated by Millett from the parties’ arrangement.13

A second example of an analysis of Quistclose arrangements in terms of conventional express private trust theory is provided by Gummow J’s analysis in Re Australian Elizabethan Theatre Trust.14 In his view, such cases involve a trust whereby, provided they remain solvent, borrowers hold for the benefit of the creditors. In the event of a borrower’s insolvency this gift fails, and the property is returned to the settlor pursuant to what Lord Wilberforce referred to in Quistclose as a “secondary trust”15—an arrangement that Gummow regarded as an express gift over.16 On this analysis, the borrower never obtains anything more than “a dry legal interest”.17 This account is difficult to accept. If creditors have a beneficial interest in the property transferred, it is hard to see why this trust should fail on the insolvency of the borrower.18

(b) A Private Purpose Trust/Resulting Trust Analysis

A different interpretation treats these arrangements as examples of private purpose trusts that may be explained in much the same way as the trust recognised in Re Denley.19 The latter case is generally thought to hold that some trusts may be valid despite being purpose trusts, provided that they are “outside the mischief of the beneficiary principle”.20 This will be so where there is a class of individuals who, while not strictly speaking beneficiaries, have a sufficiently direct interest in the performance of the trust that they would be likely to come to court to enforce

12J Payne, “Quistclose and Resulting Trusts” in P Birks and FD Rose (eds.), Restitution and Equity Vol 1: Resulting Trusts and Equitable Compensation (London, Mansfield Press, 2000) 77 at 89.

13Perhaps this conclusion could be avoided by an application of a form of the “contract holding theory”, whereby beneficiaries’ exercise of their property rights are constrained by the loan contract (cf the use of the doctrine in the context of gifts to members of an unincorporated associations in, e.g.,

Neville Estates v. Madden [1962] Ch. 832).

14(1981) 102 ALR 681 (Fed Ct).

15[1970] AC 567 at 582.

16(1981) 102 ALR 681 at 691–3.

17Ibid. at 692.

18Gummow J’s interpretation has not gained wide acceptance in Australia. Thus, the notion that Quistclose arrangements generally confer a beneficial interest on the creditors is rejected in Mercantile Mutual Insurance (Australia) Ltd. v. Farrington (1996) 44 NSWLR 634 at 646 per Bryson J. See also VR Dye & Co. (a firm) v. Peninsula Hotels Pty. Ltd. (in liq.) (1998) 28 ACSR 167.

19[1969] 1 Ch. 373.

20Ibid. at 384.

The Mysterious Basis of the Quistclose Trust 157

the arrangement if they were given the standing to do so.21 Analysed in these terms, in the event that the purpose of a Quistclose trust fails, the property is thereafter held for the settlor on an automatic resulting trust.22

This conceptualisation explains the cases plausibly enough. It is true that the liberalisation of private purpose trusts that took place in Re Denley occurred decades after the decisions relied upon in Quistclose.23 Nonetheless, those cases may reasonably be seen to reflect an innovation that is best explained in the same terms. Some support for this reading is offered by Potter LJ’s description of the arrangement as an “express purpose trust” in Twinsectra Ltd. v. Yardley.24 Adopting an analysis developed by Peter Gibson J in Carreras Rothmans Ltd. v. Freeman Matthews Treasure Ltd.,25 Potter LJ concluded that, “so long as the primary purpose trust continues, the beneficial interest in the monies lent is ‘in suspense’ until applied for that purpose”.26

(c)A Quasi-trust/Resulting Trust Analysis

(i)Intervention Arising from a Resulting Trust on the Failure of a “Quasi-trust”

In Twinsectra, Potter LJ argued that if the purpose trust analysis were thought to be misconceived, the matter might be better explained “on the basis of the broad jurisdiction of equity”.27 This reflects an account of Quistclose arrangements that explains them, not in terms of conventional express trusts, but as instances of “quasi-trusts”.28 According to this analysis, the rights of lenders in these circumstances arise not from a trust relationship but from their rights to restrain the borrower’s use of the funds in question. Robert Chambers, for example, argues that borrowers obtain an outright interest in the property, albeit one that is qualified by the lender’s right to restrain their use of the property.29 Moreover, the interest enjoyed by borrowers is defeasible in that it will be lost if it becomes impossible for them to use the property for the purpose for which it was provided. For when the purpose behind these quasi-trusts is defeated, a resulting trust arises in favour of the lender.30

21Of course, there is not universal agreement about precisely what Re Denley decided. Millett has argued that Goff J decided the case on the basis that the particular gift in question was actually a trust for individuals and not a purpose trust at all. It is not surprising then that he rejects the private purpose trust analysis of Quistclose. See Millett, supra n. 4 at 281.

22Re Northern Developments (Holdings) Ltd. (Unreported, 6 Oct. 1978); Carreras Rothman Ltd. v. Freeman Mathews Treasure Ltd. [1985] Ch. 207. See C Rickett, supra n. 2.

23The cases primarily relied upon by the House of Lords were Toovey v. Milne (1819) 2 B & A 683 and Edwards v. Glyn (1859) 2 E & E 29.

24[1999] Lloyd’s Banking Rep. 438.

25[1985] Ch. 207.

26[1999] Lloyd’s Banking Rep. 438 at 456.

27Ibid.

28Chambers, The Resulting Trust at 73.

29Ibid. at 77.

30Ibid. at 83–5.

158 Redistributive Proprietary Remedies

(ii)Deriving Resulting Trusts from an Absence of an Intention to Benefit the Borrower

Consistently with Chambers’ understanding of the basis of the resulting trust,31 the interest arises in this context because the lender never intended the borrower to have the beneficial interest in the property in the event that the purpose for which the money was lent failed. This is controversial. For one thing, if, as Chambers suggests, the lender’s right is initially a mere contractual right to restrain the use to which the borrower puts the money advanced, it is difficult to see that the lender did not intend the borrower to take beneficially. More fundamentally, Chambers’ analysis of the resulting trust is unconvincing. Elsewhere, the courts insist on either a positive intention to create a trust or a failure to dispose of the beneficial interest in the property in question as the basis for a resulting trust. Why, in the context of parties dealing at arm’s length in a commercial setting, would we recognise a proprietary interest arising in favour of lenders on any basis other than that they positively intended to create such an interest? It would hardly seem a satisfactory approach to the passage of title if recipients’ rights were defeated in the event of a contingency that the transferor had not considered.

(iii) Deriving a Quasi-trust from Personal Rights

In Chambers’ analysis, the difficult issue of the ownership of moneys after they are advanced and prior to any failure of the purpose for which they were lent is explained by reference to lenders’ rights to restrict borrowers in their use of the funds.32 According to this analysis, the borrower essentially obtains ownership of the funds and it is the personal rights of the lender that restrain the borrower in the use of the money. This interpretation cannot be reconciled with the analysis of the House of Lords in Quistclose, which clearly assumes that a trust was created prior to any failure of purpose. Thus, Lord Wilberforce remarked that the fact that Barclays Bank was aware that the money in question had been lent on the basis that it was to be used only for a specific purpose gave it “notice that it was trust money and not assets of Rolls Razor Ltd”.33

More fundamentally it is difficult to accept the logic of Chambers’ account. While his analysis would provide a plausible explanation for a lender’s right to prevent the borrower using the funds for purposes other than those for which they were provided, it does not explain other rights that the courts have attributed to lenders. Chambers argues that lenders’ rights to restrain borrowers in their use of the funds also bind borrowers’ trustees in bankruptcy, as they take subject to equities attaching to the property. Certainly, there are some cases that suggest that a lender’s entitlement to an injunction indicates that the property advanced does not vest in the trustee in bankruptcy.34 However, it is difficult to comprehend why

31For an analysis of Chambers’ account of the resulting trust, see supra ch. 6.II.2(b).

32Ibid. at 71.

33[1970] AC 567 at 582.

34E.g., Re Rogers (1891) 8 Morrell 243 at 248 per Lindley LJ.

The Mysterious Basis of the Quistclose Trust 159

this should be so, unless the lender has retained a proprietary interest in the money lent.35 If a proper trust relationship is not created, it is hardly clear that there is a right that should be regarded as an “equity” that attaches to property, rather than a purely personal right, in these circumstances.

That the availability of injunctive relief need not necessarily indicate the existence of rights that would give a claimant priority in bankruptcy can be illustrated by reference to the facts of Re Goldcorp Exchange Ltd.36 Consider what the position might have been if the company had initially complied with its obligations to maintain sufficient levels of gold bullion to meet the orders of its “non-allocated” purchasers but had thereafter purported to sell a quantity of bullion that would have reduced its reserves below that level. While it is clear that the customers would have had no proprietary interest in the reserves of bullion,37 there is every reason to think that a court would have granted an injunction to prevent the company’s taking this action. However, the mere right to an injunction to constrain the company’s dealing with the gold while it was solvent in no way entails that the purchasers had rights that would have given them priority over other creditors in the event of the company’s insolvency. The purchasers would have been able to establish that their rights bound the company’s assignee in bankruptcy only by demonstrating that they enjoyed proprietary rights in the gold.

There are similar difficulties with the suggestion that a lender’s ability to restrain the borrower’s use of the funds advanced entails a right to trace the proceeds of the funds should they be misapplied.38 It is well established that contractual restrictions do not necessarily impose a trust relationship on the parties.39 It is difficult to see why lenders would have the right to the proceeds of the transferred property if it were used for unauthorised purposes unless they had a proprietary interest in that property. While it is true to say that some nineteenth-century cases provide support for the view that the lender’s remedies against third parties arise from personal rights, this perspective is unconvincing. The modern orthodoxy, crystallised in the House of Lords decision in Quistclose itself, is that lenders either have a property right or they do not.40 If this analysis is not accepted, the rights recognised in this context are best regarded as remedial in a strong sense.

The flaw in Chambers’ argument can be demonstrated by reference to the law of contractual licences. The courts will prevent breaches of such licences by awarding an injunction where it is implicit in the arrangement that it is not to be terminated without cause. Moreover, applying the maxim “equity regards as done that

35See, e.g. Millett, supra n. 4 at 273 and 287.

36[1995] 1 AC 74. See supra ch. 5.IV.2(a) for an account of the case.

37It is unlikely the position would be altered by the implementation of s. 20A of the Sale of Goods Act 1979 as it does not seem that the obligation to maintain a certain level of bullion reserves would result in a sufficiently identified bulk.

38This suggestion is made by North J in Gibert v. Gonard (1885) 54 LJ Ch. 439. See S Worthington,

Proprietary Interests in Commercial Transactions (Oxford, Clarendon Press, 1996) 47.

39Hospital Products International v. United States Surgical Corporation (1984) 58 ALJR 587; Re Goldcorp Exchange [1995] 1 AC 74.

40For a criticism of the Twinsectra decision on this basis see S Baughen, “ ‘Quistclose Trusts’ and Knowing Receipt” [2000] Conv. 351 at 357.

160 Redistributive Proprietary Remedies

which ought to be done”, the courts have held that the availability of such relief means that these arrangements are irrevocable.41 However, this protection in no way indicates that the licencee has an interest that will bind third parties.42 In this context, and others, the courts have made it clear that proprietary protection cannot be assumed from the availability of specific relief to protect personal rights.43

(d) A Constructive Trust Analysis

The preceding examination of three interpretations of this area makes it apparent that there are acute difficulties in reconciling the judicial enforcement of Quistclose arrangements with conventional trust principles. Rather, it seems that the courts have recognised a novel proprietary interest.44 If this is accepted, the courts’ regulation of this context is best characterised as a constructive trust. According to this account, the lender’s interest is explained as a trust that arises, not because the lender intended it, but because it would be unconscionable for the borrower or a third party to use the property for any purpose other than that specified. This analysis has gained limited support in the United States45 and New Zealand.46 In addition, a constructive trust analysis also appears to have been favoured by the English Court of Appeal in Re EVTR47 and more explicitly (although probably merely obiter) by Hirst J in Guardian Ocean Cargoes Ltd. v. Banco do Brasil SA.48

Equally, the Quistclose trust could be explained in terms of Lord BrowneWilkinson’s account of the constructive trust in Westdeutsche Landesbank as based on the conscience of the recipient.49 Such an analysis is sufficiently flexible to accommodate relatively easily instances in which property is given for a limited purpose.

3. Proprietary Remedy or Orthodox Trust?

As Charles Rickett has observed, there is a tension in the analysis of Quistclose arrangements between a “pure trusts law philosophy” and a “remedial trusts law philosophy”.50 In pure trust law philosophy, the Quistclose trust is “a facilitative

41Hurst v. Picture Theatres Ltd. [1915] 1 KB 1; Winter Garden Theatre (London) Ltd. v. Millenium Productions Ltd. [1946] 1 All ER 678; Hounslow LBC v. Twickenham Garden Developments Ltd. [1971] Ch. 233.

42Ashburn Anstalt v. Arnold [1989] Ch. 1.

43National Provincial Bank v. Ainsworth [1965] AC 1175.

44Payne, supra n. 12 at 30.

45See, e.g., Cass v. Jones (In re Jones) 50 Bankr 911 (Bank. ND Tex., 1985).

46Dines Construction Ltd. v. Perry Dines Corp (1989) 4 NZCLC 65,298 (HC). See CEF Rickett, “Trusts and Insolvency: The Nature and Place of the Quistclose Trust” in D Waters (ed.), Equity, Fiduciaries and Trusts (Scarborough, Ont., Carswell, 1993) 325 at 340.

47[1987] BCLC 646. See supra, text accompanying nn. 6–11.

48[1991] 2 Lloyd’s Rep. 68.

49For an account and critique of that analysis, see supra ch. 6.II.2(c).

50Rickett, supra n. 2 at 608.

The Mysterious Basis of the Quistclose Trust 161

device”, giving effect to the intention of the transferor.51 In contrast, remedial trusts law philosophy acknowledges “the need for justificatory principles reflecting decisions on general policy grounds”.52

The first two analyses of the Quistclose trust examined above are broadly consistent with a pure trust law philosophy. According to the first construction, the trust in question is a standard express private trust. More controversially, on the second account, the device is a purpose trust. However, in both cases, the Quistclose trust is conceived of as a facilitative device that is intentionally created by the transferor. In Chambers’ account, the Quistclose trust appears to take on a more remedial hue. It remains, however, a limited remedy in that it responds to an absence of an intention to transfer beneficial ownership. As such, it is broadly reconcilable with conventional notions of property. In contrast, the explanation of judicial intervention in the context of loans for purposes as involving a constructive trust represents a more radically remedial analysis. On this view, the transferor’s interest is not created by agreement but arises as a result of the perceived unfairness of requiring the transferor to share pari passu with general creditors.

Rickett observes that “[t]he future development and use of the Quistclose analysis will be determined by whichever philosophy gains the ascendency”.53 At present, pure trust law philosophy is apparently favoured. On the other hand, the dichotomy between these philosophies can be over-drawn. Conclusions drawn regarding intention are highly impressionistic and the courts seem relatively willing to infer an intention to create a trust where it is thought that it would achieve a fair result.54 Thus, the importance of pure trust law philosophy may be more rhetorical than practical. The characterisation of intervention in express trust terms allows the law to be presented as consistent with conventional understandings of property and thereby allows the courts to avoid addressing difficult policy questions.

II. CONSIDERATIONS OF JUSTICE AND EFFICIENCY

The argument for the recognition of Quistclose trusts in terms of fairness is obvious enough. As one writer has observed, “If A wishes to see certain of B’s creditors paid and is prepared to put up his own money for the purpose then doing so by the Quistclose method leaves none of B’s other creditors worse off”.55 In other words, to deny a borrower’s general creditors recourse to money advanced only for a specified purpose restores the status quo ante between the lender, the borrower and the borrower’s creditors by leaving them in the same position they

51Ibid. at 646.

52Ibid. at 647.

53Ibid.

54Worthington, supra n. 38 at 51.

55Mr Justice LJ Priestly, “The Romalpa Clause and the Quistclose Trust” in P Finn, Equity and Commercial Relationships (Sydney, Law Book Co., 1987) 217 at 230.

162 Redistributive Proprietary Remedies

would have been in had the loan not been made. This then makes the case for these trusts on the basis that they effect corrective justice in bankruptcy—the “swollen assets” rationale for priority.56 Furthermore, if we choose to give effect to these arrangements and to protect only those who have deliberately taken advantage of them, it will follow that relief will be given to lenders who have not assumed the risk of the borrower’s bankruptcy.

There are also strong arguments of efficiency for allowing Quistclose trusts on the basis that they provide a facility for the provision of short-term credit in circumstances in which the creditor would not otherwise extend it.57 The recognition of this quasi-security device accords with a view that favours the recognition of security in circumstances where it enables new assets to be brought into the debtor’s estate and is suspicious of the enforcement of security that does not serve this function.58 Certainly, if the matter is considered ex ante, rather than examined in the context of a particular borrower’s bankruptcy, rational unsecured creditors would surely favour the availability of such a facility. After all, these trusts can be employed for the purpose of satisfying the claims of general creditors and it makes it more likely that, instead of being forced to prove in bankruptcy for a dividend, such creditors will have their debts paid in full.59

The consequences of imposing such a trust are striking. If a borrower uses the money for improper purposes the lender will be able to trace into the proceeds of any unauthorised transactions employing the generous evidentiary presumptions that equity provides for the identification of misappropriated trust moneys through mixed current accounts.60 Of course, if this were thought to be unfair, this would be more a criticism of the tracing rules than of Quistclose trusts. However, it might be objected that allowing a right to trace gives lenders less incentive to monitor borrowers to ensure that they apply the funds advanced only for the purpose for which they were lent.

These trusts may also pose problems of ostensible ownership. One particular danger is illustrated by the facts of the Quistclose case itself. Barclays Bank was providing an overdraft and there was a real danger that it was liable to extend it further on the assumption that it could have recourse to all the funds that Rolls Razor had deposited with the bank to set off against the overdraft.61 In that case, this risk was averted because the borrower informed the bank of the circumstances in which the money had been lent and why it was being placed in a separate account. While in Quistclose some emphasis was placed on the fact that the bank had notice

56See supra, ch. 4.IV.2.

57M Bridge, “The Quistclose Trust in a World of Secured Transactions” (1992) 12 OJLS 333 at 361.

58See, e.g., V Finch, “Security, Insolvency and Risk: Who Pays the Price?” (1999) 62 MLR 633.

59A Belcher and W Beglan, “Jumping the Queue” [1997] JBL 1 at 2.

60Gibert v. Gonard (1884) 54 LJ (Ch.) 439.

61On the other hand, if a bank without notice of a Quistclose arrangement sought a charge over the account in which the lender’s money had been placed, it would, as a bona fide purchaser, defeat the lender’s interest. The enforceability of such charges was recognised recently in Re BCCI (No 8) [1998] AC 214.

8

Obligation into Ownership: Constructive Trusts and Liens in Arrangements to Assign Property

WHEN THERE is an agreement to transfer property in an asset, at precisely what point does obligation mature into ownership? The question may not seem to have much relevance to the issues relating to the non-consensual redistri-

bution of property that are central to this book. At whatever point property is held to pass in a contract of assignment, its transfer can readily be attributed to the intention of the parties and may, as a result, be viewed as essentially uncontroversial. However, things are not quite so simple. For one thing, law and equity differ in the determination of the timing of passing of title, with equity employing constructive trusts to treats “as done that which ought to be done”. For this reason, to attribute the timing of the transfer of property to the parties’ intention is somewhat unconvincing. In addition, while in the period from the conclusion of a contract of sale to the transfer of physical possession the law holds that title resides with one of the parties, it also provides that the other party has certain proprietary rights that make it difficult to regard either party as the absolute owner. The appearance of such proprietary interests arising by operation of law to regulate the transitional stages of sales transactions demands that this area be examined in the context of a study of proprietary remedies.

I. THE DISTRIBUTION OF ENTITLEMENTS IN SALE OF GOODS TRANSACTIONS

While, initially, the common law fixed on physical transfer as the determinative event, the courts subsequently took the view that property generally passes at some earlier point.1 Perhaps the primary significance of the determination of the point at which title passes lies in its affect on the allocation of certain risks. The timing of the passing of title is liable to affect the risks that flow from goods perishing or being lost, stolen or damaged. In addition, the decision may determine who bears

1 JH Baker, An Introduction to English Legal History (3rd edn., London, Butterworths, 1990) 433–4. Passing of title is determined by the intention of the parties: s. 17 of the Sales of Goods Act 1979. The Act provides rules for divining the parties’ intent in the absence of evidence to the contrary. If a contract is for the transfer of a particular good in a deliverable state, property passes once the contract is complete: s. 18 r. 1. If the contract is for unascertained or future goods, property passes when those goods are unconditionally appropriated to the contract: s. 18 r. 5.

166 Redistributive Proprietary Remedies

the risk when a seller in possession of property who is already subject to a contract of sale sells those goods to third party. Finally, the timing of the passing of property will also be relevant in the event of the bankruptcy of either party to the sale transaction.

The fact that property generally passes prior to possession has had some unfortunate consequences in the allocation of the risks of loss of or damage to goods. Where property has passed to the buyer, in the absence of any contractual term to the contrary, the buyer also takes the risk.2 As a result, the burden falls upon the buyer to insure against the risk of loss or damage. This is less than ideal. Sellers will often be in a better possession to insure the property or will already have insurance that would cover the risk in question were it to be placed on them. In addition, a seller in possession is obviously in a better position to take steps to protect the property in question. Buyers’ interests are protected somewhat by the fact that sellers who remain in possession of goods after title has passed are liable if they negligently damage those goods. However, it would make sense for sellers to be given an additional incentive to take care of such goods by providing that risk of loss follows possession or control rather than title.3

Among American commentators, Karl Llewellyn argued that title was not a very useful tool for allocating entitlements in sales transactions. In particular, he criticised the tendency to treat title as a “lump-concept” that required the allocation of all the incidents of property to one of the parties and thereby precluded a sensible distribution of risks and benefits during transitional stages of sales transactions.4 Subsequently, when Llewellyn supervised the drafting of Article 2 of the Uniform Commercial Code, he provided for a sales code that makes little or no use of the concept of title. Instead, risk is principally determined by reference to which party is in control of goods and which party “can be expected to insure his interest in” those goods.5

On the other hand, the common law was more effective at insulating the parties from other types of risk with a series of exceptions that were subsequently codified in sale of goods legislation. Thus, at law, the title that passes to a buyer of goods prior to either taking possession or paying the purchase price is a qualified one. First, unpaid sellers have a lien that permits them to retain the goods if the buyer has either failed to tender the price as agreed or has become insolvent, and this right prevails against the buyer’s trustee in bankruptcy.6 Secondly, where the buyer has become insolvent, an unpaid seller also has a right to stop goods in transit.7 In either case, unpaid sellers have a right to rescind the sale and revest the title in themselves or a new buyer.8 Finally, a buyer may

2Sale of Goods Act 1979, s. 20.

3R Goode, Commercial Law (London, Penguin, 1995) 248.

4K Llewellyn, “Through Title to Contract and a Bit Beyond” (1938) 15 NYULQLR 159.

5Uniform Commercial Code § 2–509, comment 3. See A Schwartz and R Scott, Commercial Transactions: Principles and Policies (Westbury, NY, The Foundation Press, 1991) 86.

6See, e.g., Re Edwards (1873) 8 Ch. App. 289. Sale of Goods Act 1979, ss. 38–39.

7Bloxam v. Saunders (1825) 4 B & C 941. Sale of Goods Act 1979, ss. 44–46.

8Sale of Goods Act 1979, s. 48.

Constructive Trusts and Liens in Arrangements to Assign Property 167

choose to reject the goods in question if there is a breach of a condition of the sale contract, in which case property in the goods will revest in the seller.9 This demonstrates how flexible even the supposedly rigid courts of common law could be in regulating property rights.

In addition, the common law provided for certain exceptions to the nemo dat quod non habet rule. First, purchasers took title where goods were sold in market overt.10 Secondly, owners could be estopped from relying on their title where they had represented that a seller could give good title.11 Thirdly, the doctrine of ostensible authority meant that third parties might obtain good title from agents who had exceeded their actual authority by selling their principals’ property.12 Subsequently, Parliament provided for further exceptions to the nemo dat rule to protect bona fide purchasers. Thus, such purchasers may acquire title from a seller whom an owner has allowed to retain possession of goods.13 In addition, title may be acquired where an owner has given possession to one who has agreed to buy the goods prior to any property passing or who has acquired a defeasible title under a voidable contract.14 Finally, and most recently, Parliament provided that title may be obtained by a bona fide purchaser who acquired goods from a seller in possession under a hire purchase arrangement.15

II. THE PASSAGE OF TITLE IN EQUITY: CONSTRUCTIVE TRUSTS AND LIENS ARISING

IN THE CONTEXT OF CONTRACTS OF SALE

Equity provides for the allocation of rights in contracts of assignment in a number of situations in which the law does not. For example, unlike at law, where there is a contract for the assignment of future property and consideration has been given, the interest in such property will pass in equity to the purchaser as soon as it is

9Sale of Goods Act 1979, s. 35. See Kwei Tek Chao v. British Traders & Shippers Ltd. [1954] 2 QB

10Although that title was liable to be lost if the party responsible for the loss of the goods was subsequently convicted of obtaining the goods by false pretences or larceny. This position was altered somewhat under the Sale of Goods Act 1893, s. 24, which provided that title could be revested only upon conviction for larceny. That section was repealed by the Theft Act 1967. The market overt rule was abolished by the Sale of Goods (Amendment) Act 1994.

11Simm v. Anglo-American Telegraph Co. (1879) 5 QBD 188 at 206 per Brett LJ.

12Pickering v. Busk (1812) 15 East 38. This protection is now provided by s. 2 of the Factors Act 1889. The statutory exception goes further in protecting bona fide pledgees as well as purchasers (pledging goods was said to be outside the agent’s ostensible authority: Paterson v. Task (1743) 2 Str. 1178). See P Atiyah The Sale of Goods (9th edn., London, Pitman, 1995) 333.

13Sale of Goods Act 1979, s. 24 (an exception of this type was first enacted in the Factors Act 1877, and s. 24 is derived in substance, from s. 8 of the Factors Act 1889). For the position at common prior to this legislative reform see Johnson v. Crédit Lyonnais Co. (1877) 3 CPD 32 at 40.

14Sale of Goods Act 1979, s. 25. See Lee v. Butler [1893] 2 QB 318 (conditional sale); Newtons of Wembley Ltd. v. Williams [1965] 1 QB 560 (voidable title).

15Hire Purchase Act 1964, s. 27, as reenacted by the Consumer Credit Act 1974. This exception applies only to private purchasers. For the position under the old law see Helby v. Matthews [1895] AC

168 Redistributive Proprietary Remedies

acquired.16 In addition, property may also pass in equity in respect of purported legal assignments that fail because of a want of formality or assignments of rights that cannot be assigned at law but can be in equity.17 In all these cases, if no formal conveyance is required, equity simply gives effect to the intention of the parties to transfer title. However, the position is more complex where an immediate transfer of the legal title is not possible by contract alone because a separate conveyance is required or where the property to be transferred under the contract is yet to be completed. In these circumstances, equity intervenes to provide a rather more elaborate allocation of proprietary rights among the parties to a contract of sale and purchase.

1.Equitable Interests Arising in Anticipation of a Legal Conveyance of Property where the Contract is Specifically Enforceable or Consideration has been Paid

(a) The Doctrine

Equitable doctrines play an important role in the context of transactions where the use of title documents means that it makes sense to continue to draw a distinction between the contract by which the parties bound themselves and the conveyance itself. At law, property does not pass until the conveyance of the documents of title. If the vendor refuses to complete, the buyer’s only remedy is damages for breach of contract. Equity, in contrast, is prepared to order specific performance where the subject matter of the contract is unique, thereby reflecting the view that the buyer’s expectation interest is to be valued above the interest of the reneging seller.

In addition, where there is a specifically enforceable contract, the purchaser is characterised as having an interest in the property by way of a constructive trust. The most important application of this principle concerns contracts for the sale of land, but it applies equally to contracts for the sale of shares in a private company.18 It is commonly argued that a constructive trust arises immediately upon the conclusion of a specifically enforceable contract.19 Thus, in Lysaght v. Edwards,20

Jessel MR concluded that:

16E.g., Holroyd v. Marshall (1862) 10 HLC 191. Where the contract that is created is one that is specifically enforceable, this result is consistent with the doctrine that provides for the passing of title for such contracts pursuant to the maxim “equity regards as done that which ought to be done” that is widely used to explain the passing of property elsewhere. However, the courts have gone beyond this and held that title will vest in the purchaser immediately, even if the contract is not one for which specific performance would normally be granted. See Tailby v. Official Receiver (1888) 13 App. Cas. 523; Re Gillott’s Settlement [1934] Ch. 97. For a discussion on the relationship between specific performance and the interests that arise in this context see RP Meagher, WMC Gummow and JRF Lehane, Equity, Doctrine and Remedies (3rd edn., Sydney, Butterworths, 1992) 182–5.

17Ibid. at 166.

18See, e.g., Oughtred v. IRC [1960] AC 206.

19See Oakley, Constructive Trusts at 282.

20(1876) 2 Ch. D 499.

Constructive Trusts and Liens in Arrangements to Assign Property 169

the moment you have a valid contract for sale the vendor becomes in equity a trustee for the purchaser of the estate sold, and the beneficial ownership passes to the purchaser, the vendor having a right to the purchase-money, a charge or lien on the estate for the security of that purchase-money, and a right to retain possession of the estate until the purchase-money is paid, in the absence of express contract as to the time of delivering possession.21

However, the interest in question is a special sort of constructive trust and no ordinary property right. This is made apparent by the fact that there is always a risk that the contract may never be completed, in which case the interest will lapse.22 What may be regarded as a fully-fledged constructive trust arises only upon the payment of the purchase price.23 And indeed, if consideration has been paid in full, it seems that property passes even if the contract is not one for which specific performance would ordinarily be granted.24

(b) Shifting the Right to Dispose of the Property to the Purchaser

It is sometimes suggested that the description of the vendor as a constructive trustee is nothing more than a reflection of the fact that the contract of sale is specifically enforceable.25 This is not so. The availability of specific performance tells us nothing about what rights purchasers have when vendors put the performance of the contract beyond their means by selling the property to another purchaser. It is in giving the buyer rights against subsequent purchasers that equity provides a solution that takes us out of the realm of contract and into that of property. By holding that the vendor is a constructive trustee, the courts gave birth to a new property right: the estate contract.

This constructive trust is rationalised as an application of the maxim that “equity looks on as done that which ought to be done”. As a result, it is said that the vendor becomes a trustee as soon as a specifically enforceable contract is concluded.26 This is better regarded as a rather formal description of what takes place, rather than an explanation of why it takes place. For the maxim in question is used selectively when it is found convenient and little can be deduced directly from it.27

Moreover, the maxim operates only in a limited way in this context in that the purchaser becomes the owner of the property in question only for certain purposes. Thus, while vendors are said to become trustees of the property in their

21Ibid. at 506.

22The most common causes of this are the vendor’s failure to make good title (see, e.g., Wroth v. Tyler [1974] Ch. 30) and the buyer’s failure to raise the purchase price. For an indication of the harshness of the judicial approach to purchasers who claim relief after failing to pay the purchase price on time see Union Eagle Ltd. v. Golden Achievement Ltd. [1997] AC 514.

23See, e.g., S Worthington, “Equitable Liens in Commercial Transactions” [1994] CLJ 263 at 265.

24See Tailby v. Official Receiver (1888) 13 App. Cas. 523 and Chinn v. Collins [1981] AC 533. See N Hopkins, The Informal Acquisition of Rights in Land (London, Sweet & Maxwell, 2000) 76–77.

25See, e.g., Sir Peter Millett, “Restitution and Constructive Trusts” (1998) 114 LQR 399 at 404.

26Lysaght v. Edwards (1876) 2 Ch. D 499 at 506 (see supra, text accompanying n. 21).

27For an account and criticism of the use of the maxim elsewhere see supra, ch. 2.V.2 and infra, ch. 9.III.4(b) and ch. 12.I.2(c).

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possession, they are entitled to retain possession of the property and enjoy any profits that it generates before completion.28 The operation of the maxim in this context can be explained only in terms of a decision that the interests of one who has contracted to acquire unique property should be given priority over those both of the vendor and of subsequent purchasers who have notice of the transaction. Such a rule has much to recommend it. Viewing the matter ex post facto, in the context of a conflict between a plaintiff who contracted to purchase property and a defendant who is a third party purchaser who subsequently acquired legal title to the property, the rule might be defended as a matter of moral desert. It is right that vendors should be held to their promises and that those with notice should not interfere with others’ contracts. Equally, the rule serves an important function ex ante by discouraging the breach of such contracts, thus promoting certainty in these transactions. At the same time, risks are reasonably allocated between the initial buyer and subsequent purchasers by the protection afforded to bona fide purchasers of the legal title without notice.29

(c) Allocating the Risks of Insolvency

The rights that arise in this context also serve to allocate the risks that may result from the insolvency of purchasers, vendors and third party successors in title. Vendors enjoy a lien over the property in question until they receive the purchase price. This right arises by operation of law to ensure that this particular form of constructive trust has relatively limited consequences in the event of insolvency. Should the buyer become insolvent, the lien gives the unpaid seller the status of a secured creditor.

Another risk associated with insolvency relates to the danger that, after the purchaser has paid a deposit, the contract may not be completed. The problem may arise from the failure of the vendor to give good title, because the vendor has committed a breach that enabled the purchaser to rescind the contract,30 or because a court would not award specific performance because of the purchaser’s delay in seeking a remedy.31 Where purchasers seek to recover purchase moneys paid to the seller in these circumstances, they will have a personal right to recover for failure of consideration. However, in addition, purchasers have an equitable lien over the property that was the subject of the contract to secure the repayment of the purchase moneys, thereby making them secured creditors in the event of their vendor’s bankruptcy.32 Perhaps it is not obvious why a purchaser should be given

28Cuddon v. Tite (1858) 1 Giff. 395. See Oakley, supra n. 19 at 292.

29Of course, a contest between purchasers is now largely determined by registration regimes. In the case of unregistered land, estate contracts are void as against third party purchasers unless registered as a class C(iv) land charge: see Lloyds Bank plc v. Carrick [1996] 4 All ER 630. In registered land, unregistered estate contracts are similarly ineffective against third parties, save for the unlikely event that the purchaser is in actual occupation of the land in question and so able to rely on the Land Registration Act, s. 70(1)(g).

30See, e.g., Whitbread & Co. Ltd. v. Watt [1902] 1 Ch. 835.

31See, e.g., Levy v. Stogdon [1898] 1 Ch. 478.

32A point that is also illustrated by Levy v. Stogdon, ibid.

Constructive Trusts and Liens in Arrangements to Assign Property 171

the status of a secured creditor in this way. The position of purchasers of real estate is certainly privileged when compared with that enjoyed by those who make advance payments for non-specific property.

Whitbread & Co. Ltd. v. Watt33 illustrates how the purchaser’s lien can confer a remedy against third party purchasers. The case unfolded in the aftermath of a contract for the sale of land that required the vendor to build 300 houses on the land before the plaintiff was to take possession and gave the plaintiff the opportunity to rescind the contract if this requirement was not met. The vendor not only failed to build the houses, but sold the land on to the defendant, who had notice of the plaintiff’s estate contract. It would have made little sense for the plaintiff to seek to enforce its beneficial interest against the new legal owner of the land, given that the development for which it had negotiated had not taken place. Thus, instead, the plaintiff rescinded the contract and successfully claimed a lien over the land in question thereby securing against the defendant a right to the repayment of the deposit that the plaintiff had paid the vendor under the contract.

(d) The Allocation of Risk of Damage

The courts have viewed it as a natural consequence of the fact that buyers acquire the beneficial interest in an estate in land between exchange of contracts and taking possession that they also acquire the risk that it may be damaged during this interval. Thus in Rayner v. Preston,34 the Court of Appeal rejected the notion that the vendor held not only the property but any contract of insurance on trust for the purchaser. It also concluded that the purchaser could not be subrogated to the position of the vendor for the purpose of enforcing any insurance policy that the latter might have over the property. Instead, if the vendor has claimed under the insurance policy, it is the insurer who has the right to be subrogated to the vendor’s claim to the purchase price.

This is an unfortunate state of affairs that is unlikely to conform to the parties’ expectations. Vendors are likely to have insurance already, and, given that they are in possession of the property in question, there are obvious advantages in giving them the incentive to see that the property comes to no harm. The common law position is somewhat mitigated by section 47 of the Law of Property Act 1925 that allows a purchaser to recover any insurance money paid to the vendor. However, the section is somewhat ambiguous and may do nothing more than allow for those purchasers who have acquired an interest in the property under the contract for sale and purchase to take over the benefit of the vendor’s insurance policy by paying a proportion of the premium.35 It has been suggested that, if the contract for sale and purchase does not require the vendor to insure the property for the purchaser’s benefit, the vendor is unable to recover for the destruction of the property.36

33[1902] 1 Ch. 835.

34(1881) 18 Ch. D 1.

35See Oakley, Constructive Trusts at 300.

36Lonsdale & Thompson Ltd. v. Black Arrow Group PLC [1993] 2 WLR 815.

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The common law rule has been criticised by the Law Commission, which argued that the vendor should be obliged to convey the property in the state in which it was at the time of the contract.37 Mercifully, this is not an area in which parties draw up their own contracts ab initio. As a result, the hazards posed by judicially-developed doctrine are now largely avoided by the standard form real estate sale contract used in England and Wales that follows the Law Commission proposal and places the risk on the vendor.38 Thus, the position is that today parties to virtually all residential property sales and most commercial property sales contract around the default position that the Courts of Chancery settled upon in allocating risk in this context.39

The shortcomings of equity’s regulation of contracts for the sale and purchase of land mirror those that attracted the criticism of Karl Llewellyn in sale of goods transactions.40 In both cases, the “lump-concept” of property provides too inflexible a tool for sensibly allocating the variety of risks that arise between the making of the contract to assign and the transfer of title to the asset in question. It is hardly surprising then that the state of affairs generated by the use of the equitable doctrine of conversion has been criticised in the United States.41 Thus, it has been objected that, “[t]o say that equity will specifically enforce the contract certainly does not compel one to disregard the reality and view the contract as already performed”.42 In any event, courts in the United States are more inclined to impose a constructive trust on any insurance proceeds claimed by the vendor.43 In addition, the Uniform Vendor and Purchaser Risk Act places the risk of loss on the vendor,44 and, indeed, most sale and purchase agreements favour this approach.45 Moreover, some American courts have rejected the rule and placed the risk of loss on the vendor prior to the purchaser’s taking possession.46

2. Equitable Proprietary Interests in Incomplete Property

A further question concerns whether a purchaser may acquire a proprietary interest in the subject-matter of a contract to assign property in circumstances in which specific performance is not possible because the property in question is not completed or is part of a bulk. Where purchasers have yet to pay all or part of the

37Law Commission, Transfer of Land: Risk of Dammages after Contract for Sale (Report No 191) (London, HMSO, 1990) para. 2.25.

38Standard Conditions of Sales (3rd edn.) 5.

39Oakley, supra n. 19 at 298–300.

40Llewellyn, supra n. 4. See supra, text accompanying nn. 4–5.

41J Singer, Property Law: Rules, Policies and Practices (2nd edn., New York, Aspen Law & Business, 1997) 939; R Cunningham, W Stoebuck and D Whitman, The Law of Property (St Paul, Minn., West Publising Co., 1993) 743.

42Ibid. at 736.

43Ibid. at 708.

44The Act had been adopted by 10 states by 1993: ibid. at 743.

45Singer, supra n. 41 at 939.

46See, e.g., Skelly Oil Co. v. Ashmore 365 SW 2d 582 (Mo., 1963).

Constructive Trusts and Liens in Arrangements to Assign Property 173

purchase price, there is perhaps little reason for investing them with proprietary rights. However, where purchasers have paid some or all of the purchase moneys, the courts are sometimes tempted to conclude that they acquire an interest through a constructive trust or equitable lien.

The issue was addressed relatively recently by the Australian High Court in Hewett v. Court.47 The case concerned a contract for the construction, delivery and installation of a prefabricated house. Pursuant to sale of goods law, unless the parties evinced a contrary intention, property would not pass in the house until it was completed. However, after the purchaser had paid more than $20,000 of the $34,000 due under the contract, the seller became insolvent. Subsequently, the parties entered into a new agreement by which the purchaser was to take possession of the unfinished house upon a further payment to reflect the unpaid value of the work already done. When the liquidator argued that this represented a preference, the purchaser responded that the arrangement reflected the fact that he had been entitled to an equitable lien to secure the repayment of the money paid under the contract. One difficulty with this argument was that a proprietary interest could not be said to have arisen by virtue of the doctrine of conversion—for this was not a contract for which specific performance would have been available.48 Nonetheless, a majority of the High Court accepted the purchaser’s argument. Among the majority, Deane J’s judgment provides the most ambitious statement of principle. In his view, entitlement to proprietary relief was not dependent upon the availability of specific performance.49 Instead, when sellers had incurred a debt to a purchaser and property had been appropriated to the contract, an equitable lien would arise if sellers would be acting unfairly if they were to deal with the property as their own without discharging the liability in question.50

The arrangement in Hewett v. Court, as a contract to install an article that would become a fixture, was treated as a contract for work and materials.51 The issue of whether the matter might apply to contracts for the sale of goods was left unanswered. This question takes on most relevance in the context of contracts for the construction of a particular asset. A good example is contracts for the construction

47(1983) 149 CLR 639. See IJ Hardingham, “Equitable Liens for the Recovery of Purchase Money” (1985) 15 MULR 65; J Phillips,. “Equitable Liens—a Search for a Unifying Principle” in N Palmer and E McKendrick (eds.), Interests in Goods (London, Lloyds, 1993) 635.

48Wilkinson v. Clements (1872) 8 Ch. App. 96 at 112 per Mellish LJ. This was because the contract was treated as one for work and materials. It might be argued that the contract could have been regarded as in part a contract for the sale of goods: see, e.g., Hyundai Heavy Industries Co. Ltd. v. Papadopoulos [1980] 1 WLR 1129. Nonetheless, the fact that it was also in part a contract for services that remained to be performed would make the courts reluctant to order specific performance: see Woverhampton Corp. v. Emmons [1901] 1 KB 515 at 525 per Romer LJ. Indeed, even if the goods in question were complete, it is not clear that the courts would necessarily think that specific performance was appropriate. See, e.g., Société des Industries Métallurgiques SA v. Bronx Engineering Co. Ltd. [1975]

1Lloyd’s Rep. 465 (specific performance of a contract for the sale of a ship denied).

49(1983) 149 CLR 639 at 664–7.

50Ibid. at 668.

51Ibid. at 647 per Gibbs CJ, 650 per Murphy J, 665 per Wilson and Dawson JJ, 662 per Deane J. See Clark v. Bulmer (1843) 11 M & W 243.

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of ships that are at least in part treated as contracts for the sale of goods.52 The general rule at law is that, if the contract does not provide otherwise, property does not pass until the ship is complete,53 although the parties are free to specify that property should pass to the materials as they are appropriated to the contract.54 If the parties have not specified that property should pass at law in this way, may the purchaser be substantially insulated from the consequences of the seller’s bankruptcy by the imposition of an equitable lien or constructive trust? The view favoured by the English judiciary is that sale of goods legislation provides a complete code and equity has no independent role in the passage of title in this context.55 However, a plausible case can certainly be made for the opposite view.56 Much turns on the interpretation given to the savings provision that is now found in section 62(2) of the Sale of Goods Act 1979 that provides that “[t]he rules of the common law . . . except insofar as they are inconsistent with the provisions of this Act . . . apply to contracts for the sale of goods”. And, indeed, there are signs that courts in other jurisdictions with legislation derived from the English sales codes may be in favour of a continuing role for equity in this context.57

On the other hand, irrespective of the context in which the approach in Hewett v. Court is applied, it may be asked whether it produces a just result or whether it instead represents an unwarranted interference with the pari passu principle. In delivering their dissenting opinion, Wilson and Dawson JJ concluded that the majority’s approach would generate arbitrary results.58 Indeed, it is not obvious why those purchasers who can point to materials appropriated to their contracts should be given priority in bankruptcy over those who cannot. It has never been suggested, for example, that sellers of goods who have not chosen to retain title but remain unpaid and who can point to the goods they have supplied in the hands of an insolvent purchaser should be entitled to a proprietary remedy. Why then should a purchaser who has paid for unfinished goods but failed to bargain for property in them be treated any better? One answer may be that, compared with sellers, purchasers typically will not have the same opportunity or knowledge to construct a bargain in this way. Thus, it is possible to have sympathy for the outcome in Hewett v. Court, where the purchasers were a couple seeking an inexpensive home. The relevance of such considerations was made explicit by the Saskatchewan Court of Appeal in Taypotat v. Surgeson,59 which was prepared to allow a restitutionary proprietary claim in the context of contracts to build

52Hyundai Heavy Industries Co. Ltd. v. Papadopoulos [1980] 1 WLR 1129.

53Reid v. Macbeth [1904] AC 223.

54Re Blyth Shipbuilding Co. [1926] Ch. 494.

55Re Wait [1927] 1 Ch. 606 at 629 per Atkin LJ; Transport & General Credit Co. Ltd. v. Morgan

[1939] 1 Ch. 531 at 546 per Simonds J.

56See, e.g., Worthington, supra n. 23 at 268–70.

57See, e.g., Electrical Enterprise Retail Pty. Ltd. v. Rodgers (1989) 15 NSWLR 473 at 492–3 per

Kearney J.

58(1983) 149 CLR 639 at 658–9.

59[1985] 3 WWR 18.

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I. PROPRIETARY RELIEF FOR ENRICHMENT BY WRONGS: A NORMATIVE ANALYSIS

1. Justifications for Priority in Bankruptcy

Defendants may be unjustly enriched either “by subtraction” or “by wrongs”.2

Where a claim is made for enrichment “by subtraction” the defendant’s gain is equal to the plaintiff’s loss. In terms of moral desert, the plaintiff in such a situation has a particularly compelling case for relief.3 After all, an award of restitution will do no more than return the parties to the status quo ante. On the other hand, actions for enrichment “by wrongs” assert that the defendant’s enrichment represents a profit derived from a wrong to the plaintiff, without relying on establishing that the plaintiff has suffered loss. Justifying the provision of personal relief on such a basis is harder. The task of justifying proprietary relief in enrichment by wrongs cases is even more difficult.

It is relatively difficult to justify proprietary relief for claims in respect of which the legal relationship between the plaintiff and the thing sought to be recovered did not pre-date the events that brought the parties to court.4 In such cases, plaintiffs will generally have had no psychological attachment to the assets in respect of which they seek proprietary relief, and the readjustment of property rights may tend to interfere with commercial certainty. Where an explanation is offered, the priority that results from according restitutionary remedies priority is often justified on the basis that the correspondence between the plaintiff’s loss and the defendant’s gain justifies giving certain claims priority. The argument goes that giving these claims priority would effect corrective justice in bankruptcy by restoring the parties (the plaintiff, the defendant and the defendant’s creditors) to the position they were in before the events that led to the unjust enrichment.5 While such a correspondence of gain and loss is a feature of enrichment by subtraction, it is not generally found in enrichment by wrongs claims.

What then can be the justification for granting proprietary relief for claims based purely on defendants’ wrongful enrichment? Plaintiffs in this context can neither point to a pre-existing property right nor rely on the corrective justice rationale that underlies subtractive enrichment claims. Instead, the principal rationale for priority must be a weaker claim based on the fact that the defendant profited from breaching the plaintiff’s rights. It may be asked whether any remedy should be available for claims that do not rely on evidence of tangible loss. Is not adequate protection for rights provided by criminal law, the availability of civil compensatory damages and injunctive relief? There are, however, two plausible

2Birks, An Introduction to the Law of Restitution at 6; Restatement of Restitution 2d, Tentative Draft No 1 (1983) 7.

3LL Fuller and W Purdue, “The Reliance Interest in Contract Damages” (1936) 46 Yale LJ 42; E Sherwin, “Constructive Trusts in Bankruptcy” [1989] U Ill. L Rev. 297 at 329.

4See supra, ch. 4.

5Sherwin, supra n. 3 at 329.

Proprietary Relief for Enrichment by Wrongs 179

justifications for relief. The first rationale derives from a desire to protect legal institutions such as property or fiduciary relationships from abuse.6 This view justifies stripping defendants of profits earned from wrongs as a means of deterring future breaches.7 The second justification focuses upon questions of conduct and desert of particular defendants and seeks to punish them by denying them an unjust enrichment.8 Both these perspectives justify relief not so much on the basis of the plaintiff’s moral desert, but, in the first instance, on the need to protect legal institutions, and, in the second, on the defendant’s unworthiness.

Do these considerations of deterrence and punishment suggest that a claim to recover the profits of a wrong ought to be accorded priority in bankruptcy? Because they are not in a position to enjoy the profits of their wrongdoing, bankrupt defendants will be indifferent about who gets priority in the division of their estates. Rather, it is unsecured creditors who will be prejudiced if plaintiffs are given priority.9 It follows that proprietary relief cannot further the objectives of punishing defendants and deterring future wrongdoing more effectively than can personal relief. Consequently, these objectives cannot provide a justification for giving enrichment by wrongs claims priority over the claims of third party creditors.

What then can be the basis for giving priority in this context? It is sometimes argued that the plaintiffs have a better claim to any enrichment gained at their expense then do defendants’ unsecured creditors because those creditors would be enjoying an unmerited windfall if the enrichment were made available for distribution.10 According to this view, creditors would have little cause for complaint if assets obtained only as the result of a wrong to another were not available for distribution in bankruptcy. Thus, Sir Peter Millett has stated that it is “[b]etter that the principal receive a windfall than that the creditors should obtain any benefit from an asset which ought never to have formed part of their debtor’s estate”.11 The assertion is not persuasive. If there is a “windfall” to be distributed it is not clear why the sins of debtors should be visited upon their creditors. There is a good

6See IM Jackman, “Restitution for Wrongs” (1989) 48 CLJ 302.

7Birks, An Introduction to the Law of Restitution at 332.

8Justifying relief in this context primarily by reference to the defendant’s unworthiness, George Palmer comments: “The retention of the benefit is clearly unjust, there is no one else who has a valid claim, and the only feasible means of preventing the unjust enrichment is to grant restitution in favour of the principal”. See Palmer, Law of Restitution i, § 2.11 at 141. See also D Paciocco, “The Remedial Constructive Trust: A Principled Basis for Priorities over Creditors” (1989) 68 Can. Bar Rev. 315 at 350; D Stevens, “Restitution, Property and the Cause of Action in Unjust Enrichment: Getting By With Fewer Things” (1989) 39 UTLJ 258 at 279–80.

This justification is explicitly invoked in the Restatement of Restitution which provides for a distinction between wrongdoers and innocent converters. § 202 provides that wrongdoers are to be stripped of any profits made from use of the plaintiff’s property by means of tracing and the imposition of a constructive trust. Consistently with this understanding, § 203 provides that a plaintiff tracing into profits made by an innocent convertor is limited to a lien to the value of the original assets.

9See: Sherwin, supra n. 3 at 346; Paciocco, supra n. 8 at 349–50; and Palmer, supra n. 8, i, § 2.14 at 183 and 190–1.

10RH Maudsley, “Proprietary Remedies for the Recovery of Money” (1959) 75 LQR 234 at 244–5.

11Sir Peter Millett, “Bribes and Secret Commissions” [1993] RLR 7 at 17.

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argument that those unsecured creditors who stand to lose money have at least as strong a claim to relief as a plaintiff whose claim does not depend upon proof of deprivation.12

Moreover, the notion that profits earned from a wrong remain as a “windfall” to be distributed will often be rather implausible. It ignores the risks borne by the general creditors and the effect of the wrong upon them. In bribes and secret commission cases, such as Attorney General for Hong Kong v. Reid,13 employees gamble with their position in the hope of making a profit. While their general creditors do not in any real sense share the profits of these wrongs, they do bear the consequences of this risk when such wrongdoers are dismissed from their employment, lose their income and expend much of their wealth in the course of court proceedings. When the matter is put into context, it is likely that any benefit that has accrued to creditors from a wrong would be outweighed by the effects upon them of the punishment meted out on the wrongdoer. Thus, it is improbable that there will be any net windfall.

2.Limitations in the Law’s Ability to do Justice: Difficulties in Identifying Unjust Enrichment

Even if we were to accept, in principle, the “windfall” argument as grounds for giving claims to the profits of wrongdoing priority in insolvency, we ought to take account of the ability of the courts to do justice in practice. The argument in favour of giving enrichment by wrongs claims priority advanced by Millett presumes that the law has an adequate method of identifying the enrichment that the defendant has made at the expense of the plaintiff. In fact, the law’s approach to such issues is highly arbitrary at best and liable to treat wrongdoers and their creditors particularly harshly. In particular, the courts tend to discount the defendant’s contribution to the acquisition of the wealth in question. Thus, of defendants who have profited from a wrong, only those who have acted in good faith are likely to have their efforts taken into account.14 For other defendants, regardless of their efforts, it is likely that the plaintiff will be held to be entitled to a proprietary remedy over the entire profit.15 While this may seem a reasonable approach as between the parties to the action, it fails to give due regard to the interests of third party creditors.

In addition to problems relating to the initial identification of enrichment, the law is not well adapted to assessing whether the defendant’s estate continues to be

12A Burrows, The Law of Restitution at 42.

13[1994] 1 AC 324.

14See, e.g., Boardman v. Phipps [1967] 2 AC 46. There the court held that the defendants, while liable to account for profits made, were entitled to set-off the reasonable expenses of a profitable transaction that was conducted in good faith but, nonetheless, in conflict of their duties as trustees; see Birks,

An Introduction to the Law of Restitution at 420. See supra n. 7 for the position according to the Restatement of Restitution.

15See Palmer, Law of Restitution i, § 2.12 at 157–66.

Proprietary Relief for Enrichment by Wrongs 181

enriched. Thus, the rules of transactional tracing and mixing provide a rather haphazard method of identifying value, with the applicability of particular evidential presumptions and the availability of defences heavily determined by considerations of good faith. It may be that defendants have changed their position in reliance on the enrichment in question, by increasing their expenditure and thus dissipating the assets that would have been available to general creditors in insolvency. Obviously it is right that defendants in bad faith should not be allowed to rely on such a change of position to reduce their liability.16 However, ideally, innocent creditors ought to be able to cite such a change to reduce the extent to which the plaintiff is entitled to assume priority over them. If we were to conclude that, in practice, such a change of position defence would be administratively unworkable, it ought to be asked whether it would not be more appropriate to refuse to give priority altogether.

Of course, these criticisms apply generally to claims for priority and, thus, just as much to restitution by subtraction cases.17 Is there any basis for providing priority in that context and yet denying it in respect of restitution for wrongs? Such a distinction would be tenable on the ground that enrichment by wrongs actions present less compelling claims for justice than those based on subtraction.18 The plaintiff’s claim to priority must be weighed against the administrative cost of providing such relief and against the potential injustice to defendants and third parties as a result of the limited tools available to effect justice.19 The stronger the plaintiff’s claim to relief, the more prejudice to defendants and third parties may be tolerated. Enrichment by subtraction claims may continue to be regarded as meriting priority in insolvency because the compelling nature of the plaintiff’s claim justifies the unfair consequences that this provision of priority will inevitably visit upon some creditors. In contrast, in the absence of accurate means of identifying the extent to which the insolvent defendants’ estates have been swelled by their wrongdoing, the weak claim to priority underlying a restitution by wrongs action cannot justify the prejudice to creditors that would necessarily result from preferring such plaintiffs. This is a pragmatic approach, focusing on the justice of competing claims against the background of rather arbitrary legal tools for giving effect to the parties’ interests.

3. Proprietary Relief Sought for Reasons other than Priority

Up to this point, the normative analysis of this area suggests that claims based on enrichment for wrongs do not merit priority in insolvency. But what if claimants,

16Restatement of Restitution § 142; Lipkin Gorman v. Karpnale Ltd. [1991] 2 AC 548.

17For a discussion of these issues in the context of tracing, see supra, ch. 5.IV.

18Goff and Jones, for instance, formerly regarded the strength of the plaintiff’s claim as crucial where the claim is not based on pre-existing title; R Goff and G Jones, The Law of Restitution (4th edn.) at 101.

19D Dobbs, The Law of Remedies (2nd edn., St. Paul, Minn., West Publishing Co., 1993) i at 35.

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while not being able to demonstrate an enrichment by subtraction, seek proprietary relief for reasons other than priority? In some situations such reasons might provide sound justifications for the recognition of property rights. Outside the field of enrichment by wrongs, the desire to recognise property interests for reasons other than priority is apparent in the context of the quasi-matrimonial property jurisprudence that has developed in various commonwealth jurisdictions.20 In that context a plaintiff’s desire to be recognised as owner may derive in large part from a psychological attachment to the assets in question. It may also be that in some rare instances such considerations will justify proprietary relief in the context of enrichment by wrongs claims.21

II.LISTER V. STUBBS AND THE OWNERSHIP/OBLIGATION DISTINCTION

1.Secret Commissions and the Limits of Proprietary Relief

In Lister & Co. v. Stubbs,22 the plaintiff company sued a former employee for accepting secret commissions in return for arranging contracts with suppliers. The plaintiff sought an injunction restraining the defendant from dealing with investments made with the commissions, arguing that any gain obtained by the defendant from abusing his position as a fiduciary was held on trust for his principal. The Court of Appeal rejected this contention, concluding that the defendant’s liability was purely personal.

In his judgment, Lindley LJ concluded that to have held that the defendant was a constructive trustee would have involved “confounding ownership with obligation”,23 suggesting that he assumed there to be a sharp and fundamental distinction between these two categories. The basis of the plaintiff’s case was not that it had pre-existing title to the assets in question, but that the law ought to vest the property in those assets in the plaintiff. The Court regarded this claim as misconceived. It accepted the conclusion of the trial judge, Stirling J, that the principal was entitled to a constructive trust only if it was seeking money that it owned before any wrongful act was committed by the fiduciary.24 On this view, in the absence of a pre-existing title, the plaintiff’s claim had to one for personal relief, based on principles of obligation.

20See infra, ch. 10.

21See infra, text accompanying nn. 31–34.

22(1890) 45 Ch. D 1. For a helpful discussion of the case and this area of the law generally, see M Cope, “Ownership, Obligation and the Constructive Trust” in, M Cope (ed.), Equity: Issues and Trends (Sydney, Federation Press, 1995) 91.

23Ibid. at 15.

24Ibid. at 9–11.

Proprietary Relief for Enrichment by Wrongs 183

2. Policy Concerns Motivating the Principle

A striking feature of the judgments delivered by Cotton and Lindley LJJ was the considerable sympathy that they expressed for the plaintiff’s claim.25 Lindley LJ’s rejection of the plaintiff’s appeal appears to have been driven, not by any sympathy with the defendant’s position, but by his unease with the consequences that granting proprietary relief would have had for third parties. In particular, he commented:

One consequence, of course, would be that, if Stubbs were to become bankrupt, this property acquired by him with the money . . . would be withdrawn from the mass of his creditors and handed over bodily to Lister. Can that be right?26

Thus, Lindley LJ seized upon the distinction between ownership and obligation as a means of preventing injustice in bankruptcy.

3. Divergence between the Formal Principle and Normative Justifications

How well does the principle formulated by Lindley LJ give effect to the normative rationales to which he adverted? In this context, a doctrine delimiting the availability of proprietary relief may be said to be under-inclusive where it allows such relief to be granted in situations in which, considered in terms of the normative considerations that motivated it, relief is unmerited.27 In contrast, such a doctrine is over-inclusive where it denies a proprietary remedy when such relief is, in the same terms, deserved. A degree of overand under-inclusiveness is the inevitable cost of providing formal standards that limit the inquiry of decision-making officials to particular facts, thus lowering administrative costs and restricting officials’ discretion. However, it is difficult to see that a divergence between a

25Ibid. at 14 per Cotton LJ; and 14 and 15–16 per Lindley LJ.

26Ibid. at 15. More difficult to comprehend is the other policy justification Lindley LJ advanced against the recognition of proprietary rights. He commented:

“Another consequence of that would be that, if the appellants are right, Lister could compel Stubbs to account to them, not only for the money with interest, but for all the profits which he might have made by embarking in trade with it. Can that be right?”

This reasoning conflicts with Lindley LJ’s suggestion that “[i]f we were to accede to this application, I don’t think that Stubbs could complain”. In any event it is not clear why Lindley LJ believed that profits made from investing the secret commission would be recoverable in a proprietary claim but not in a personal action. Perhaps he was of the view that the fact that the profits were derived by using illgotten gains was outweighed by the consideration that they were the product of defendants’ labour and consequently would be regarded as irrecoverable in a personal action for reasons of causation or remoteness. He may have thought that, in contrast, the mechanical approach taken in tracing claims would have ensured that the plaintiff was entitled to anything that was the product of its property. Yet, it is not clear that the issue would really be dealt with so differently in the two types of actions: Burrows,

The Law of Restitution at 411–12.

27 See P Atiyah and R Summers, Form and Substance in Anglo-American Law (Oxford, Clarendon Press, 1987) at 13.

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doctrine and its normative foundations could be justified for any other reason. Moreover, even if well motivated, any discrepancy between rationales and results should be kept within acceptable bounds.

(a) The Ownership/Obligation Doctrine as Over-inclusive

It was suggested above that, in determining which claims are more than deserving of priority than others, it is important to distinguish claims based on enrichment by subtraction from those founded on enrichment by wrongs.28 It is then a cause for concern that the doctrine that Lindley LJ promulgated in Lister v. Stubbs does not rest on such a distinction. While a rigid division between ownership and obligation would preclude proprietary relief for enrichment by wrongs, it would also deny such relief in some cases of enrichment by subtraction.

Indeed, there is a good argument that secret commission cases involve enrichment by subtraction.29 A supplier is willing to pay a particular price in order to get a contract. In economic terms, third parties bidding for a supply contract will be indifferent whether the price extracted from them is paid to the employer or to the employee arranging the contract. This means that, where a secret commission is paid, third parties tendering for a supply contract would have been prepared to settle for a price that was higher than the price for which they actually contracted by at least the amount of the secret commission. Thus, those taking secret commissions take a cut from their employers’ profits. If one accepts that enrichment by subtraction claims merit priority, it follows that proprietary relief is appropriate in cases involving secret commissions.30

Another problem with Lindley LJ’s doctrine is that it is not well adapted to deal with cases where proprietary relief is sought for reasons other than priority. Consider, for instance, Keech v. Sandford.31 There a lessor declined a trustee’s request to renew a lease for the benefit of the beneficiary, a minor. The trustee then leased the property for his own benefit. When the beneficiary sued, the Court held that the trustee had acted in conflict of interest and was obliged to hold the lease on trust for the beneficiary. This was so even though the beneficiary did not have a subsisting interest in the property—a fact that suggests that Keech v. Sandford collides with the principle stated in Lister v. Stubbs. Yet, the two decisions may be distinguished on the grounds that a proprietary remedy was especially important in Keech v. Sandford and that it is unlikely that, in deciding that case, Lord King LC

28See supra, text accompanying nn. 2–19.

29Interestingly, this suggests that secret commission cases should be regarded as being fundamentally different from other bribes cases, whereas they have generally been treated as essentially the same.

30Of course the question in Lister v. Stubbs was more difficult because proprietary relief was sought in respect of investments made using the secret commission—raising issues regarding causation and remoteness of damage. However, if one accepts that restitution by subtraction claims merit priority, it follows that in Lister v. Stubbs it would have been appropriate to give the plaintiff at least a lien over the investments to the value of the secret commission.

31(1728) Sel. Cas. t King 61.

Proprietary Relief for Enrichment by Wrongs 185

was faced with any of the policy considerations which subsequently troubled Lindley LJ in Lister v. Stubbs.

While an account of profits was awarded in Keech v. Sandford, it will not be an easy matter in such a case to prove that the trustee has profited. If the trustee has purchased the property in question at market value it will often be impossible to point to any objective profit. Yet relief may still be sought because the trustee has come into possession of property that has some special significance for the plaintiff.32 This may well have been the case in Keech v. Sandford where the beneficiary had previously enjoyed a lease over the property. In such circumstances, not only would an account of profits generally be ineffectual, it would be an affront to the claimant to allow the trustee to retain the property. Moreover, where the asset in question is not fungible, specific relief may be necessary to provide adequate deterrence. Fiduciaries who covet an asset above its market value will not be deterred from acquiring the asset for themselves by a threat of damages.33 In such circumstances, the only satisfactory remedy is a constructive trust. Such an approach can be defended as a principled departure from the general rule that limits claimants to personal relief—an exception that is consistent with the approach taken to specific performance in contract.34

An additional consideration is that in some cases where property is wrongfully acquired by fiduciaries to the exclusion of their principal it may be that the fiduciary’s creditors will not necessarily be prejudiced by the provision of proprietary relief. In Keech v. Sandford, for instance, the effect of the remedy was that the plaintiff still had to pay for the lease of the property. As a result, the concerns that vexed Lindley LJ in Lister v. Stubbs did not arise in Keech v. Sandford. The defendant’s estate did not necessarily suffer a net loss and it is not apparent that there was any danger of injustice to the defendant’s creditors in the event of insolvency. This provides a basis for reconciling Keech v. Sandford with the outcome of and much of the reasoning in Lister v. Stubbs. At the same time, it casts doubt on the wisdom of Lindley LJ’s efforts to distil a formal principle from worthy policy concerns by a process of deductive logic.

32Perhaps it is unlikely that the asset in Keech v. Sandford was of some special importance to the plaintiff because of its role in the development of his self-identify. For the lease in question was over a market—an asset that was probably valued more for its capacity to generate income than for more subjective reasons. Nonetheless, the plaintiff is still likely to have attached a worth to it that exceeded its market value because of the “endowment effect”. See supra, ch. 4.II.1.

33This justification may also explain the Canadian Supreme Court decision in LAC Minerals Ltd. v. International Corona Resources Ltd. (1989) 61 DLR 14. There the plaintiff shared valuable information with the defendant as they negotiated with a view to entering into a joint venture to acquire mining rights. The defendant then acquired the rights for itself. The majority of the Court took the view that the appropriate remedy was a constructive trust rather than damages. La Forest J emphasised the breach of obligation that had taken place and argued that the restoration of the asset would serve to deter such breaches of duty and to strengthen “the social fabric those duties are imposed to protect”: ibid. at 48. Such reasoning was also apparent in a later Canadian Supreme Court decision in Korkontzilas v. Soulos (1997) 146 DLR (4th) 214 at 221 per McLachlin J.

34See, e.g., G Jones and W Goodhart, Specific Performance, (2nd edn., London, Sweet & Maxwell, 1996) at 24.

186 Redistributive Proprietary Remedies

It may be argued that the doctrine in Lister v. Stubbs is justified, despite the fact that it dictates results that are over-inclusive in terms of the policy concerns to which Lindley LJ referred. According to this view, maintaining a rigid division between ownership and obligation by regarding property interests as absolutely inviolable will lower administrative costs and promote certainty. Yet, on balance, such a restriction seems too extreme to be justified. Provided it is possible to indicate relatively easily identified categories in respect of which a rule allowing judicial interference with property rights would be justified, the courts should not be preoccupied with maintaining a rigid line between ownership and obligation.

4. The Premises and Methodology Underlying the Principle in Lister v. Stubbs

As mentioned, Lindley LJ expressed disquiet in relation to the practical consequences of awarding a constructive trust.35 He argued that these repercussions suggested that the plaintiff’s argument was contrary to legal principle. He then deduced the nature of the principle violated, commenting:

It appears to me that those consequences show that there is some flaw in the argument. If by logical reasoning from the premises conclusions are arrived at which are opposed to good sense, it is necessary to go back and look again at the premises and see if they are sound. I am satisfied that they are not sound—the unsoundness consists in confounding ownership with obligation.36

Lindley LJ’s view reflects the understanding, characteristic of his period, that any error in legal argument can be traced back to a failure to advance logically by deduction from axiomatic first principles.37 However, it should not be inferred that he and his fellow judges opportunistically seized upon a formal principle in

35Supra at text accompanying n. 26.

36(1890) 45 Ch. D 1 at 15.

37For a helpful discussion of this tendency, see P Atiyah, The Rise and Fall of Freedom of Contract (Oxford, Clarendon, 1979) 351–3. Lindley typified a tendency prevalent among nineteenth-century lawyers to view law as a systematic science. As the son of a professor of botany, Lindley was very likely influenced by nineteenth-century scientific ideals. Indeed he translated Thibaut’s System de Pandektenrechts, while still in his twenties, an indication of his familiarity with and empathy for the rigorous legal science of the German Pandecists: see Ashton, “Lord Nathaniel Lindley” in HWG Davis and JRH Weaver (eds.), Dictionary of National Bibliography 1912–1921 (Oxford, Oxford University Press, 1927) 335–7. This suggests an enthusiasm for continental legal concepts and methodology, the influence of which has been identified as one of the leading causes of the systematic rationalisation of English common law in the nineteenth century: see AWB Simpson, “Innovation in Nineteenth Century Contract Law” in Legal Theory and Legal History (London, Hambledon, 1987) at 273; and Atiyah, above at 399. Lindley was part of the explosion of treatise writing that was integral to this process of rationalisation, contributing a leading text on the law of partnership, published in 1860. Lindley was the pupil master of Frederick Pollock, who became one of the greatest of the writers in the textbook tradition and who credited Lindley for teaching him that “the law . . . is neither a trade nor a solemn jugglery, but a science”: see D Sugarman, “Legal Theory, The Common Law Mind and the Making of the Textbook Tradition” in W Twining (ed.), Legal Theory and the Common Law (Oxford, Oxford University Press, 1986) at 36. Lindley’s efforts were rewarded by promotion to the House of Lords in 1900.

Proprietary Relief for Enrichment by Wrongs 187

order to imbue with an aura of legality that outcome which they considered fair. Both members of the court giving judgments indicated that they thought that to give the plaintiff the remedy it sought would do no injustice in this particular instance. Indeed, Cotton LJ was of the view that in “the circumstances of the case, it would be highly just to make the order”.38 Nonetheless, both judges felt constrained to find for the defendant. Unlike Lindley LJ, Cotton LJ did not delve into questions of policy in his judgment. His decision was based firmly on the conclusion that finding in favour of the plaintiff would have involved the recognition of a “new and wrong principle”.39

The conclusion of Stirling J at first instance was that the proper question was “[w]hose money was it before the wrongful act?”.40 The choice of this premise and the distinction between ownership and obligation relied upon by the Court of Appeal rest on the assumption that the judiciary enforces pre-existing property rights and the consensual bargains of individuals and does not create new property rights. It was an understanding to which both Lindley and Stirling were to allude further on occasion during their careers on the bench.41

It is unfortunate that the decision in Lister v. Stubbs was based upon an abstract principle, rather than pragmatically constructed to provide a rule to implement the policy concerns to which Lindley LJ alluded. Doctrines based on the inviolability of property do not get to the heart of the issues of justice involved in claims for priority in bankruptcy. Instead, the focus on the ownership/obligation distinction has deflected discussion from the key issue of the merit of plaintiffs’ claims for priority.

Lindley LJ’s conclusion that the plaintiff in Lister v. Stubbs was “confounding ownership and obligation” has an intuitive appeal. The notion that private property rights are inviolable seems so obvious as to require no further explanation. Yet the argument is premised on the notion that the common law is committed to a policy that prohibits any interference with private property rights. When one searches for evidence of such policy in judicial practice, one is likely to find naïve the assumption of a fundamental distinction between ownership and obligation. As this book as a whole demonstrates, controversies across numerous doctrines attest to the fact that this putative boundary is often blurred.42

38(1890) 45 Ch. D 1 at 14.

39Ibid.

40(1890) 45 Ch. D 1 at 11.

41E.g., Lindley relied upon such assumptions in refusing to give damages in lieu of an injunction in Shelfer v. City of London Electric Lighting Co. [1895] 1 Ch. 287 (discussed supra, ch. at 2.II.2(b)) and in refusing to allow prescriptive easements against leaseholds in Wheaton v. Maple Co. [1893] 3 Ch. 48. Subsequently, as a member of the Court of Appeal in Stearns v. Village Main Reef Gold Mining Co. (1905) 10 Com. Cas. 89, Stirling cited Lister v. Stubbs to deny a proprietary remedy to an insurer that was seeking recovery of a payment made under an insurance contract to an assured who had already been partially indemnified by a third party: (see infra, ch. at 12.I.3).

42Even if the view were taken that a line must be drawn between ownership and obligation, where that line should fall involves a difficult policy choice. This was demonstrated last century by the development of the restrictive covenant and the tort of interference with contractual relation; this century it has been apparent in controversies over the enforcement of charterparty contracts and contractual licences against third parties. See H Lauchterpacht, “Contracts to Breach a Contract” (1936) 52 LQR 494.

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III.DEDUCING OWNERSHIP FROM OBLIGATION: AG FOR HONG KONG V. REID

1.The Principle in Reid

After holding a series of positions of considerable responsibility in Hong Kong’s legal administration, Warwick Reid43 was convicted under that country’s Prevention of Bribery Ordinance and ordered to make restitution of HK$ 12.4 million. Reid had apparently acquired three properties in New Zealand with the proceeds of bribes. The Attorney General argued that, because they were purchased with the proceeds of a breach of fiduciary duty, Reid held these properties on trust for the Hong Kong Government.44 Both the New Zealand High Court and Court of Appeal, following Lister v. Stubbs, found that Reid’s obligation to make restitution was purely personal.45 However, the Privy Council upheld the Hong Kong Government’s appeal.46

The Privy Council decision, delivered by Lord Templeman, was based primarily on reasoning previously developed extra-judicially by Sir Peter Millett, then a justice of the High Court.47 The obligation of fiduciaries to account to their principals for any unauthorised profit made from their position is well established. However, in order to determine that the liability of the fiduciary was proprietary in nature, the Privy Council in Reid employed two legal fictions. First it argued that “false fiduciaries” were estopped from denying that they received the bribe for the benefit of their principals. To this was applied the equitable maxim “equity considers done that which ought to have been done”. From this, it was argued, it followed that: “As soon as the bribe was received . . . the false fiduciary held the bribe on a constructive trust for the person injured”.48

2. The Interests of Creditors

Both Sir Peter Millett’s article and Lord Templeman’s judgment in Reid largely denied that the interests of third party creditors were relevant in determining the availability of proprietary relief. Millett, when arguing against limiting proprietary claims to cases of unjust enrichment by subtraction, commented:

43[1994] 1 AC 324.

44The constructive trust argument was made in this case because the Hong Kong government sought to demonstrate that it had an interest in property sufficient to enable it to lodge caveats against dealing on the titles of the real estate prior to a full civil trial on the matter.

45[1992] 2 NZLR 385. See C Rotherham, “The Redistributive Constructive Trust: Confounding Ownership with Obligation?” (1992) 5 Canta. LR 84.

46[1994] 1 AC 324.

47Millett, supra n. 11.

48[1994] 1 AC 324 at 331. This passage may of course be criticised for its used of the expression “injured”. Liability follows from the breach of duty; proof of injury is not necessary or relevant.

Proprietary Relief for Enrichment by Wrongs 189

[I]t is illogical. If proof of loss is necessary at all, it should be necessary to found liability [and not to determine the availability of remedies]. The fact that it is unnecessary shows that the law’s purpose is not compensatory. Moreover, the distinction makes the nature of the remedy depend on the consequences to the plaintiff, whereas the usual objection to the proprietary remedy is based upon its effect on the creditors of the defendant.49

Millett’s argument is misconceived. First, a conclusion that relief should be available to reverse enrichment by wrongs in no way logically implies that the relief granted should be proprietary. The questions of liability and the type of remedy available can properly be treated as distinct.50 Thus, proprietary recovery is generally not available in contract or tort. It is no more illogical to limit constructive trust relief to particular restitution claims than it is to restrict, for example, the availability of specific performance to particular contracts. Secondly, the argument that it is improper to determine the availability of proprietary relief according to the nature of the plaintiff’s claim is equally mistaken. Where priority in insolvency is concerned, the key issue is the relative merits of the claim of the plaintiff compared with those of the defendant’s creditors. It follows that the strength of the plaintiff’s claim will always be a relevant consideration.

In Reid, Lord Templeman did not even attempt to counter the policy arguments against proprietary relief. Instead he concluded that:

The unsecured creditors cannot be in a better position than their debtor. The authorities show that the property acquired by a trustee . . . belong[s] in equity to the cestui que trust and not to the trustee personally whether he is solvent or insolvent.51

The assertion that the authorities established that the respondent had a proprietary interest is unconvincing. The New Zealand Court of Appeal had also used the argument of “settled authority” to justify their refusal to investigate issues of policy, but had relied on a different line of precedent in denying proprietary relief. In any event, the Privy Council is able to reconsider the law in a particular area. In this instance, no explanation was given for its disinclination to do so. The traditional justification of an institutionalised reliance on the doctrine in question could carry little weight here.52 The law was too unclear to induce reliance and, in any event, parties do not plan their affairs around breaches of fiduciary relationships.

49Millett, supra n. 11 at 14.

50J Coleman, “Corrective Justice and Wrongful Gain” (1982) 11 J Legal Stud. 421 at 425.

51[1994] 1 AC 324 at 331. Millett favoured a similar view, concluding that “[e]ither the plaintiff is entitled to a proprietary remedy or he is not. If he is then the insolvency of the defendant is not a sufficient reason for withholding it from him; the defendant’s creditors should be in no better position than the defendant himself”: Millett, supra n. 11 at 10.

52See, e.g., the discussion of the development of the doctrine of stare decisis in the House of Lords since the 1967 practice statement recognising the Court’s right to overturn its own decisions in A Paterson, The Law Lords (London, Macmillan, 1982).

Proprietary Relief for Enrichment by Wrongs 191

Accordingly, actions to recover profits made from breaches of duties arising at common law, under statute or from non-fiduciary equitable obligations are likely to be restricted to personal claims.

This proved to be the case in the subsequent Court of Appeal decision in Halifax Building Society v. Thomas.55 The plaintiff was a building society, which had been defrauded into giving a loan secured by a mortgage to enable the rogue to purchase a flat. After the borrower defaulted Halifax took possession of the property and sold it. It then sought to retain not only the sums owed under the loan but the surplus of the mortgagee sale on the basis that because these represented the profits of a wrong they belonged beneficially to the building society. The Court rejected the claim on the basis that Halifax had affirmed the mortgage.56 In addition, however, it distinguished Reid on the basis that the rogue in the case before it was not a fiduciary of the building society.57 Peter Gibson LJ made it apparent how difficult he thought it was to justify the provision of proprietary relief in this context by endorsing the remark made by Auld J in the court below that “in many instances to strip a wrongdoer of his property will serve only to deprive other creditors”.58

The fiduciary relationship precondition produces a doctrine that is incapable of giving full effect to the policy arguments that were advanced to justify the provision of proprietary relief in Reid. If it is true that third party creditors have no legitimate interest in the proceeds of wrongs, and that it is more equitable that the plaintiff should have priority, then it is difficult to understand why proprietary relief should not be available for all wrongs.

4. The Premises and Methodology Underlying Reid

(a) The Evidential Presumption

Courts seldom construct legal institutions on the basis of perceived societal needs alone.59 Rather, common law development is heavily influenced by the extent to which jurists are able to manipulate existing legal concepts to achieve the result for which they are striving.60 In so doing, jurists seek what Lon Fuller termed

55[1996] 1 Ch. 217. See P Watts, “Halifax Building Society v. Thomas” (1996) LQR 219.

56Surprisingly, it was accepted that the building society could have succeeded had it rescinded the mortgage and claimed the surplus of the sale as the proceeds of the money loaned. See supra, ch. 6.II.3(a)(iv).

57Ibid. at 229 per Peter Gibson LJ.

58Ibid. at 234.

59See generally A Watson, Society and Legal Change (Edinburgh, Scottish Academic Press, 1977); and “Legal Change: Sources of Law and Legal Culture” in A Watson (ed.), Legal Origins and Legal Change (London, Hambledon, 1991) 69 at 82–94.

60Thus, Milsom observes that change in law is brought about largely through reclassification. “The life of the law” he comments, “has been in the abuse of its elementary ideas. If the rules of property give what now seems an unjust answer, try obligation; and equity has proved that from the materials of obligation you can counterfeit the phenomena of property. If the rules of contract give what now seems an unjust answer, try tort”; SFC Milsom, The Historical Foundations of the Common Law (2nd edn., London, Butterworths, 1981) at 6.

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“doctrinal bridges” to bring an established legal institution to bear on a perceived social problem to which that institution has not previously been applied.61 By developing the law through existing conceptual apparatus, what is sought is a connection with the past that belies the originality of the outcome. Thus, in Reid, proprietary relief was justified in terms of that well-established legal institution, the fiduciary relationship, and an equitable maxim of some antiquity.62

According to Kekewich J in Re Smith,63 another bribes case, “the Court in cases of this kind does not proceed on the basis of punishment, but treats the trustee as having received such a bribe not on his own behalf, but on behalf of and as agent for the trust estate”.64 Yet is this presumption anything other than a rather stilted way of describing a duty coupled with a liability for any breach of that duty? The presumption was developed at the turn of the century, at a time when the conceptual foundations of restitution had yet to be elaborated in English legal thought and unjust enrichment was not understood as providing a principled basis for relief.65 The courts employed devices of the type expounded by Kekewich J as “doctrinal bridges” to allow them to utilise concepts they readily understood, such as trusteeship and agency. A similar device employed in this context was a presumption that the principal had been damaged to the amount of the bribe, so that the action could be framed as a compensatory one.66 Now that restitution has gained acceptance as a branch of the private law in its own right,67 we can afford to be wary of such tools.

Evidential presumptions and related devices disguise the foundation of punishment and deterrence that underlies the imposition of liability in this context. Moreover, they divert attention from key issues of justice such as the interests of third party creditors. It was only by relying on an obfuscatory analysis of the basis for relief that the Privy Council in Reid was able to reason that a constructive trust arose automatically. Where the basis of liability in bribery cases is described more realistically, the foundation for the automatic proprietary interest disappears. This demonstrates that the evidential presumption relied upon by Millett and the Privy Council is a slight and opportunistic basis for justifying proprietary relief.

61LL Fuller , “American Legal Realism” (1934) 82 U Penn. L Rev. 429 at 441–2. See also K Llewellyn, “Through Contract to Title and a Bit Beyond” (1938) 15 NYULQR 159 at 181.

62This tendency is apparent in Millett’s article. While Millett did advance normative justifications for the imposition of proprietary relief, he assumed that there had to be fundamental legal principles that determined the outcome. Thus after completing his policy analysis he commented: “It would, however, be deeply unsatisfying if the availability of a proprietary remedy could be explained only on the grounds of policy”. See Millett, supra n. 11 at 17. As already mentioned, Lindley LJ’s judgment in Lister v. Stubbs was premised on the same presumption; see supra II. 4.

63[1906] 1 Ch. 71.

64Ibid. at 77.

65Atiyah, supra n. 37 at 455; Stevens, supra n. 8 at 286.

66See, e.g., Slade J in Industries & General Mortgage Co. Ltd. v. Lewis [1949] 2 All ER 573 at 578.

67See the House of Lords’ acceptance of unjust enrichment as a general principle in Lipkin Gorman

v.Karpnale Ltd. [1991] 2 AC 548.

Proprietary Relief for Enrichment by Wrongs 193

(b) “Equity Regards as Done that Which Ought to Have Been Done”

Lon Fuller examined the maxim “equity regards as done that which ought to have been done” in his classic study of legal fictions. He expressed some relief that “[h]appily such ‘short dark maxims’ are not so common as they once were”.68 To Fuller, fictions of this type were the tools of “undeveloped systems of law”.69 Writing in the United States in 1930, Fuller assumed that American legal culture had attained a state of sophistication such that it no longer needed to resort to such primitive devices. He regarded such expressions as obscure and inadequate attempts to describe legal reality and as without real explanatory value. As he put it, “For particulars I must look elsewhere.”70 Fuller’s view is borne out in Reid. In developing the analysis that Lord Templeman employed in Reid, Sir Peter Millett argued that the application of the maxim in the context of the remedy of specific performance provided a basis for its use in the context of bribes and secret commissions. However, Millett refers to specific performance being available “provided there is no bar” and “in appropriate circumstances”.71 This demonstrates that liability cannot be deduced directly from the maxim. The questions of what may amount to a “bar” to specific performance and what are “appropriate circumstances” for granting relief must be decided in order to determine the remedy’s availability. This must be true for constructive trusts that are said to result from the application of the maxim as much as it is for specific performance. One consideration that should be taken into account in determining whether relief is appropriate is potential prejudice to third parties. In considering the application of the maxim “equity regards as done that which ought to be done”, the Privy Council should have had regard to the maxim “no fiction shall be allowed to work an injury”.72

The Privy Council’s approach is at odds with the historical background of equitable maxims. The substantive law was not deduced from equitable maxims. To the contrary, equitable maxims were derived from the law by a process of induction in the eighteenth century.73 These maxims are, at best, broad statements of principle, too indeterminate to be applied to particular factual situations to dictate specific legal outcomes. The particular maxim at issue in this context is so vague that it can be understood only against the background of the doctrines said to exemplify it. Generally it has been used to explain a group of doctrines that

68LL Fuller, Legal Fictions (Stanford, Cal., Stanford University Press, 1967) at 34.

69Indeed Fuller, in seeking a comparison for the fiction in question, comments: “For example in the jurisprudential language of a tribe of east Africa, the statement ‘woman is a hyena’ is intended as an expression of the notion of woman’s legal incapacity”: Ibid. Maine had earlier expressed similar sentiments. In his view, “Fictions . . . have had their day . . . It is unworthy of us to effect an admittedly beneficial object by so rude a device”. See H Maine, Ancient Law (London, Dent and Dutton, 1861) at 27.

70Ibid.

71Millett, supra n. 11 at 19 and 20.

72WH Blackstone, Commentaries on the Laws of England (Chicago, Ill., Chicago University Press, 1979) iii at 43.

73RP Meagher, WMC Gummow and JRF Lehane, Equity: Doctrines and Remedies (3rd edn., London, Butterworths, 1992) at 71.

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provide for the legal recognition and enforcement of consensual transactions, despite some want of formality or the non-occurrence of a contemplated event.74 In Reid, to support the extension of the maxim to impose a liability to which the defendant had never consented, a stronger justification was needed than that offered.

(c) Obscuring Interference with Property Rights

Courts are often tempted to reason from formal premises when they would rather not deal with the difficulties that would arise from an open exploration of the particular normative issues raised by the dispute with which they are dealing. As we have seen, this is especially likely to be so when a particular outcome that is regarded as merited conflicts with a premise which is fundamental to the legal vision accepted (explicitly or tacitly) by a legal culture.75 This accounts for the abstruse quality of much of the discourse found on the question of the availability of proprietary relief over the profits of wrongdoing. The award of a constructive trust in this context puts into question the notion that the courts do not create new property rights.

As Paul Finn has observed extra-judicially, the reasoning adopted in Reid was designed “to maintain some form of harmony with property law concepts”.76 Lord Templeman constructed a doctrine that suppresses the reality that the outcome of that case is inconsistent with the orthodox paradigm of property.77 By the combined operation of an evidential presumption and an equitable maxim, the profits earned from the breach of a fiduciary duty automatically become the property of the principal, without any apparent judicial intervention and supposedly consistently with the intention of the parties.78 In this way, even though its position has

74 RP Meagher, WMC Gummow and JRF Lehane, Equity: Doctrines and Remedies (3rd edn., London, Butterworths, 1992) at 94.

75Fuller, supra, n. 68 at 51–3. See supra, ch. 2.V.

76P Finn, “Equitable Doctrine and Discretion in Remedies” in W Cornish, R Nolan, J O’Sullivan and G Virgo (eds.), Restitution: Past, Present and Future: Essays in Honour of Gareth Jones (Oxford, Hart Publishing, 1998) 251 at 263.

77In Reid the Privy Council carefully avoided any discussion of the argument that, by ignoring the distinction between ownership and obligation, it was interfering with property rights. Lord Templeman’s judgment described Lindley LJ’s argument in the following terms: “It is said that if the fiduciary is in equity a debtor to the person injured, he cannot also be a trustee of the bribe . . .”. See AG for Hong Kong

v.Reid [1994] 1 AC 324 at 331. This is a misleading characterisation of the principle expounded in Lister

v.Stubbs suggesting that it was in substance merely an objection to concurrent liability.

Further evidence of judicial reluctance to face the issue can be found in the House of Lords’ decision in Lord Napier & Ettrick v. Hunter [1993] AC 713. See infra, ch. 12.I.2.

78More recently Grantham and Rickett have argued that the trust in Reid reflected the intention of the parties as a result of Warwick Reid’s acceptance of fiduciary obligations. See R Grantham and C Rickett, Enrichment and Restitution in New Zealand (Oxford, Hart Publishing, 2000) 409. To suggest that those in fiduciary relationships actually accept the duties imposed on them is rather fanciful. At most the matter can be explained in terms of assumption of risk. However, it would first need to be explained why these risks should include the imposition of a constructive trust. Ultimately, Grantham and Rickett’s characterisation of the matter in consensual terms reflects the anxiety engendered by the spectre of the redistribution of property.

Proprietary Relief for Enrichment by Wrongs 195

shifted, the supposedly fundamental boundary between ownership and obligation is apparently maintained.

IV. PROPRIETARY RELIEF FOR ENRICHMENT BY WRONGS IN

NORTH AMERICAN LEGAL THOUGHT

In the aftermath of legal realism, American jurists are unlikely to be concerned with the notion that, in awarding proprietary relief in this context, they may be “confounding ownership and obligation”.79 Given the understanding that property is a divisible “bundle of rights”,80 a sharp distinction between ownership and obligation hardly remains tenable. And, indeed, American courts have long been prepared to grant proprietary relief in this context.

The difference between the formalist and post-realist approaches is nowhere better illustrated than by a comparison of the judgments of the Canadian Supreme Court in Lac Minerals v. Corona Ltd.81 and that of the Privy Council in Attorney General for Hong Kong v. Reid. The Court in Lac Minerals was faced by the same problem that confronted the Privy Council in Reid: awarding proprietary relief would have been inconsistent with the notion that the judiciary cannot create property rights. In contrast to the convoluted formalism of Lord Templeman’s judgment in Reid, in Lac Minerals La Forest J confronted sacred notions about property directly and rejected them. He indicated, first, that the courts may create property rights as well as enforce them82; and that, secondly, proprietary remedies should be given only “if there is a reason to grant the plaintiff the additional rights that flow from a recognition of property”.83

More recently, the disquiet that has grown in North America regarding the consequences of proprietary relief has been expressed perhaps most strongly and unanimously with regard to the use of the constructive trust over the profits of wrongdoing. Most commentators reflecting upon the matter subsequent to the Restatement of Restitution have concluded that, in this context, the constructive trust should “abate” in bankruptcy.84

79The distinction between obligation and ownership is not lost on the American judiciary. In relation to federal legislation providing sanctions against mail fraud, courts have refused to convict in circumstances where defendants have profited from abuses of office or breaches of other duties. The view has been taken that the legislation was designed to deal with taking of property and did not extend to situations where profits were made by violating “intangible rights”. See, e.g., McNally v. US 483 US 350 (1987); US v. Ochs 842 F 2d 515 (1st Cir., 1988).

80See supra, ch. 3.I.

81(1989) 61 DLR 14.

82Ibid. at 50.

83Ibid. at 51.

84Palmer, Law of Restitution i, § 2.14 at 183; Sherwin, supra n. 3 at 346; D Paciocco, “The Remedial Constructive Trust: A Principled Basis for Priorities over Creditors” (1989) 68 Can. Bar Rev. 333 at 350.

196 Redistributive Proprietary Remedies

V. CONCLUSION: THE LIMITS AND PRICE OF FORMALISM

Assumptions about property developed in an era that gave modern private law much of its structure remain with us. The decisions in Lister v. Stubbs and Attorney General for Hong Kong v. Reid illustrate the different ways in which those assumptions can influence the form and substance of our law.

The decision in Lister v. Stubbs provides an example of absolutist notions of property applied to prevent judicial redistribution of proprietary rights. Ultimately, such reasoning is unconvincing. Any determination of the extent of property rights is a decision about how and in whose favour the courts will use their coercive power, and, as such, demands justification. In any event, the reality is that in many areas the law corresponds with absolutist notions of property in form only. This is an indication that these assumptions are not as intuitively satisfying as they once were and suggests it is time that they were openly reconsidered. Unfortunately this did not happen in Reid. Reid provides a typical example of an effort to evade the rigours of the orthodox paradigm of property without bringing its validity into question.

The wisdom that the “progeny” of equity “must be legitimate—by precedent out of principle”85 leads to efforts to rationalise outcomes as the consequence of exercises in deduction from formal premises found in the existing law. The danger is that, in being hidden from view, the normative concerns that motivate the court are not fully examined. The dangers of formalism become even more apparent in the context of the subsequent application and development of these new doctrines manufactured from old notions. A particular doctrine may have been reasonably well tailored to meet the normative concerns underlying the area in which it was developed. Subsequently, its extension to a new area is often inspired by the promise of providing justice in a specific situation before the court. However, these borrowed concepts have their own logic that is liable to impose constraints that correlate imperfectly with the policy concerns that arise in the new contexts into which they are transplanted.86 This tendency for technical legal discourse to lose connection with underlying normative considerations has been described as “the dark side of legal positivism”.87 The result is dysfunctional law. This phenomenon is illustrated by the use of the fiduciary concept in Reid to provide a justification that ultimately dictates results that are inconsistent with any coherent policy rationale. Reid demonstrates that, adopting a formalistic approach, the judiciary can continue to, in the words of Milsom, “counterfeit the phenomena of property” from “the materials of obligation”.88 But at what cost?

85Cowcher v. Cowcher [1972] 1 WLR 425 at 430 per Bagnall J.

86A Watson, “Legal Change: Sources of Law and Legal Culture” in Watson, supra n. 59, at 82; SFC Milsom, “Reason and the Development of the Common Law” (1965) 81 LQR 491 at 498; Stevens, supra n. 8 at 277–8.

87Ibid. at 278.

88See Milsom, supra n. 60.

10

The Division of Assets on the Breakdown of Intimate Relationships: the Limits of Private Ordering

THROUGHOUT the common law world, courts have struggled with claims by those who, in the course of a relationship with another, have made substantial contributions to property legally owned by the other party. Do such contributions give rise to any rights, and, if so, do they generate any proprietary entitlement? Judicial treatment of these issues has taken place in the shadow of what has been termed “the private ordering paradigm”1: a complex of norms reflecting an absolutist conception of property and notions of freedom of contract.2 In particular, two axioms have shaped much of the debate in this area: first, “that property rights arise only if there has been an actual intention expressed or implied to create them”3; and, secondly, that “a person is not required to become an obligor unless he or she so desires”.4 In the face of this vision of the private law, the judiciary has struggled to formulate an adequate basis for the provision of relief. This chapter argues that a re-examination of the normative foundations of the private ordering paradigm can explain why it should not prevail in the context of intimate

relationships.

I. INTRODUCTION

Section II examines the diverse responses to this issue developed in different common law jurisdictions. On the one hand, English appellate courts have taken the essentially libertarian stance that there can be no transfer of property without the

1M Trebilcock, The Limits of Freedom of Contract (Cambridge, Mass., Harvard University Press, 1993) 1–22.

2For a historical account of these norms and the ideology from which they are derived, see P Atiyah, The Rise and Fall of Freedom of Contract (Oxford, Clarendon Press, 1979). Atiyah notes that freedom of contract and absolutist notions of property are essentially two sides of the same coin: ibid. at 85. For an analysis of the premises of this paradigm see C Rotherham, “Conceptions of Property in Common Law Discourse” [1998] Legal Studies 41.

3Gillies v. Keogh [1989] 2 NZLR 327 at 340 per Richardson J. See infra n. 11 and accompanying text for the views expressed by Lords Morris, Hodson and Upjohn in Gissing v. Gissing [1971] AC 886. See also Burns v. Burns [1984] 1 All ER 244 at 255 per Fox LJ.

4Gillies v. Keogh [1989] 2 NZLR 327 at 347 per Richardson J. See also N Simmonds “The Possibility of Private Law” in J Tasioulas (ed.), Law, Values and Social Practices (Aldershot, Dartmouth, 1997) 129.

198 Redistributive Proprietary Remedies

owner’s consent. Elsewhere, particularly in Canada, a rather less restrictive standard has been favoured that does not require some act of will on the part of the owner, but instead focuses on the plaintiff’s expectations. An even more significant divergence from the private ordering paradigm has seen the development of norms that do not make relief dependent on the parties’ actual states of mind at the time of the contributions in question. Thus, the judiciary in Australia and in some jurisdictions in the United States determines entitlement according to norms used to regulate the distribution of property on the breakdown of commercial partnerships and joint ventures. These norms do not require evidence that plaintiffs expected a proprietary interest in return for their contributions. Finally, in an approach still further removed from traditional norms, courts, particularly in New Zealand, have distributed proprietary entitlements according to standards that are said to reflect community understandings of fairness.

Section III observes that attempts to develop a basis for relief have been stifled by the power of the understanding that it would be unprincipled for the courts to impose obligations or, even more so, to readjust proprietary entitlements without consent. Where this attitude has not caused relief to be denied altogether, it has nonetheless had a marked effect. Courts have been encouraged to recharacterise informal domestic arrangements in the terminology of market transactions in order to bring them within conventional doctrines. They have also tended to water down the requirements of those doctrines and to exercise little rigour in their application. These tendencies threaten to debase doctrines that have functioned well enough in other contexts. Moreover, as long as judicial intervention is justified on the basis of principles that are manifestly ill-suited to providing relief in this area, there will be confusion over the basis for and the proper measure of relief. The development of a satisfactory normative foundation for relief is a prerequisite for the formulation of legal principles that can describe, direct and justify judicial action in this area. In particular, if relief is to be given which is inconsistent with the axiomatic premises that obligations are not to be imposed involuntarily and that private property is immune from non-consensual redistribution, this normative foundation should be capable of explaining why this should be so.

Section IV notes that the private ordering paradigm does not prevail in all areas of social life. The informal social norms that regulate intimate relationships tend to focus on need and reciprocity, and generally displace standards that emphasise private ordering. Such communitarian norms are also found in older common law doctrines and in contemporary legislation. Today, however, while courts in some jurisdictions suggest that property and contract have little relevance in this area, they are seldom prepared to develop legal standards that explicitly reflect the more communitarian norms so prevalent in the regulation of intimate relations our society.

Redistributive norms allocating the parties’ entitlement on the breakdown of intimate relationships can be justified. There is nothing natural about private property; it is a social institution with its own set of justifications. In situations where the factual premises upon which these justifications depend are not present, these

The Division of Property on the Breakdown of Intimate Relationships 199

justifications lose their power and exceptions may legitimately be made. The private ordering paradigm rests on certain assumptions about human nature: we are assumed to be autonomous individuals who act rationally to safeguard our selfinterest. Empirically, it seems that this premise does not generally hold in the context of intimate relationships. In such a setting, by and large, we do not act as autonomous individuals; for we do not generally draw a sharp distinction between our own welfare and that of our partners. Nor are we rational; for we fail to calculate judiciously the risks involved in “investing” in relationships. As a consequence, there is little reason to believe that we can rely on private ordering to provide an efficient or just mechanism for rewarding contribution to relationships in this context. In addition, it would be perverse to insist that parties should contract to determine their separate legal rights; for, on a normative level, we do not believe that partners in intimate relationships should be rational maximisers of their self-interest. Such a selfserving attitude is contrary to contemporary western ideals of intimacy.

Finally, section V considers why the courts have been prepared to give proprietary rather than personal relief in this area. Much may be explained by the intuition that rights of ownership are likely to have a special significance for plaintiffs in this context. Nonetheless, there is cause for concern at the courts’ tendency to shroud their analysis in a transcendental rhetoric of property that has precluded a rational consideration of the consequences of granting proprietary relief. In particular, attention ought to be paid to the dangers that the recognition of property rights in this sphere poses for third parties. First, it is difficult to justify giving a plaintiff who claims an equitable proprietary interest priority over the defendant’s general creditors. Secondly, we must consider the effects such interests may have for third party purchasers, something that will depend to a large degree on the extent to which the registration regime favoured in a particular jurisdiction provides that purchasers’ rights prevail over unregistered interests.

II. FROM CONTRACT TO STATUS: JUSTIFICATIONS FOR JUDICIAL INTERVENTION

1.“The Cold Legal Question”: The Requirement of an Agreement or Promise

In England, in particular, the courts have continued to abide by private-ordering norms. According to received wisdom, a plaintiff seeking to establish a right in property legally owned by another can succeed in one of two ways. A contribution to the acquisition of a home leads, in the absence of evidence to the contrary, to the inference that, rather than advancing the purchase money gratuitously, the plaintiff intended to have a beneficial interest in the assets that it was to be used to acquire. The expectation inferred in this way is protected by means of a resulting trust.5

5 Dyer v. Dyer (1788) 2 Cox Eq. Cas. 92; Pettitt v. Pettitt [1970] AC 777 at 794 per Lord Reid, and 815 per Lord Upjohn; Gissing v. Gissing [1971] AC 886 at 902 per Lord Pearson. See J Mee, The Property Rights of Cohabitees: An Analysis of Equity’s Response in Five Common Law Jurisdictions (Oxford, Hart Publishing, 1999) 35.

200 Redistributive Proprietary Remedies

While the judicial approach to inferring intent is highly artificial, on this analysis, the courts are enforcing the subsisting property rights of the plaintiff. Alternatively, plaintiffs can claim relief where they can prove either that the parties had agreed that the ownership of the home was to be shared or that the defendant had made a representation to the same effect. Where plaintiffs have acted to their detriment in reliance on such an agreement or representation, the courts will declare a constructive trust or grant other relief to prevent defendants from unconscionably asserting their legal rights.6 Thus, in addition to detrimental reliance, what is required here is evidence that the owner expressed an intention to confer proprietary rights on another.7

The modern English approach was established by the House of Lords in the early 1970s in Pettitt v. Pettitt8 and Gissing v. Gissing9 and substantially reasserted two decades later in Lloyds Bank plc v. Rosset.10 This stance was informed by the belief voiced most clearly by Lord Morris in Gissing, that “[a]ny power to alter ownership must be found in statutory enactment”.11 This understanding of the division between the role of the judiciary and that of the legislature was also manifest in the opinion of Lord Dilhorne VC in Gissing. In his opinion, if the divorce courts are “not armed with adequate powers to make provision for the wife on the breakdown of marriage, that is a matter for the legislature”.12 According to this view, unless Parliament directs otherwise, courts redistribute property only where the owner has consented to it. In the words of Lord Dilhorne VC:

Determination of the cold legal question is not in my opinion to be affected by the conduct of the parties during the marriage save and in so far as that may indicate an intention as to ownership.13

6Pettitt v. Pettitt [1970] AC 777; Lloyds Bank v. Rosset [1990] AC 107 at 118–19 per Lord Bridge. These decisions fail to clarify the relationship of the common intention constructive trust and proprietary estoppel. For different academic views on this relationship, see, e.g., P Ferguson, “Constructive

Trusts—A Note of Caution” (1993) 109 LQR 114; G Battersby, “Contractual and Estoppel Licences as

Proprietary Interests in Land” [1991] Conv. 36. For accounts of the dubious provenance of the common intention constructive trust see Mee supra n. 5 at 115–75; N Glover and P Todd, “The Myth of Common Intention” [1996] LS 235.

7Indeed, one view is that these cases involve nothing more than the enforcement of agreements that lack the formalities that are normally required for the transfer of interests in land: see S Moriarty, “Licences and Land Law” (1984) 100 LQR 376.

8[1970] AC 777.

9[1971] AC 886.

10[1990] AC 107. There is however, an important difference in the analysis of Lord Bridge. Previously, a contribution to the acquisition of the home served as the basis for inferring the contributor’s intention not to benefit the other party, and thus establishing a purchase-money resulting trust. In contrast, Lord Bridge treated such a contribution as giving rise to the inference of a common intention and so establishing a constructive trust. This approach was taken further in the Court of Appeal decision of Midland Bank plc v. Cooke [1995] 4 All ER 562. There, Waite LJ took the view that, once a common intention was inferred from a contribution to the acquisition of the home, any additional contributions to the relationship could be taken into account in determining the plaintiff’s share: ibid. at 574–6. For a further indication of the relative irrelevance of the resulting trust today see Drake v. Whipp [1996] 1 FLR 826.

11[1971] AC 886 at 898. For similar remarks see Pettitt v. Pettitt [1970] AC 777 at 805 per Lord Morris, 811 per Lord Hodson, and 817 per Lord Upjohn.

12Ibid. at 901.

13Ibid.

The Division of Property on the Breakdown of Intimate Relationships 201

That the requirement of evidence of such an intention presents a formidable barrier in the way of giving relief was made apparent in Lloyds Bank plc v. Rosset.14 There, the plaintiff had been in the process of restoring a house as a joint venture, in order for it to be used as the family home. Lord Bridge concluded that the understanding that the parties would “share the practical benefits of occupying the matrimonial home whoever owns it” was “something quite distinct from sharing the beneficial interest in the property asset which the matrimonial home represents”.15

A similar view has been taken by the courts in some American states. Thus, in Morone v. Morone,16 the New York Court of Appeals indicated that, in order to obtain a remedy for services contributed in the course of the parties’ relationship, a plaintiff would need to point to an agreement. Moreover, it suggested that where there was no express agreement, it was improper to infer a common intention from the conduct of the parties. In the view of Meyer J:

For courts to attempt through hindsight to sort out the intentions of the parties and affix jural significance to conduct carried out within an essentially private and generally noncontractual relationship runs too great a risk of error.17

The rigid approach consistently favoured by the House of Lords was subsequently undermined by the Court of Appeal in Midland Bank v. Cooke.18 Waite LJ considered whether the fact that Mrs Cooke had testified that she had not considered the question of the parties’ proprietary entitlement prevented the court finding a constructive trust. He concluded that it did not. In his view, it would be unreasonable to hold that such plaintiffs “were beyond the pale of equity’s assistance in formulating a fair presumed basis for the sharing of beneficial title, simply because they had been honest enough to admit that they never gave ownership a thought or reached any agreement about it”.19 This is difficult to accept. The basis for relief reiterated by the Lord Bridge in Lloyds Bank v. Rosset20 is based on a presumption of what the parties intended. His Lordship rejected a more generous approach precisely because “[s]pouses living in amity will not normally think it necessary to formulate or define their respective interests in property in any precise way”.21 The view expressed in Midland Bank v. Cooke that the presumption of intention arising in this context cannot be rebutted by evidence that the parties formed no such intention indicates that ascription of intention in this context is entirely fictional. If this were so, the restrictive approach taken by the English courts in this area would not only be unjust, but unprincipled.

14[1991] 1 AC 107. The case involved a wife’s efforts, not so much to be awarded relief at the expense of her husband (against whom she could have relied on the protection offered by the Matrimonial Proceedings and Property Act 1970 and the Matrimonial Causes Act 1973), but to establish a pre-existing proprietary right that might have allowed her to resist the claim of a mortgagee.

15Ibid. at 128.

16413 NE 2d 1154 (NY, 1980).

17Ibid. at 1157.

18[1995] 4 All ER 562.

19Ibid. at 575.

20[1991] 1 AC 107.

21Ibid. at 127–8.

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2. A Shift Away from the Intention of the Legal Owner: Restitution and Estoppel

(a) Shifting the Focus to the Plaintiff ’s Expectations

In contrast to the English approach, other jurisdictions have developed doctrines that allow plaintiffs to succeed on something less than proof that owners intended to confer upon them an interest in the property in question. In these jurisdictions, the courts have formulated tests that require merely that plaintiffs’ contributions were motivated by a reasonable expectation that they would result in a proprietary interest. One example is the doctrine that the Canadian Supreme Court introduced in Pettkus v. Becker,22 which it characterised as providing restitutionary relief for unjust enrichment. In considering the plaintiff’s claim for relief on the basis of very significant contributions to property legally owned by the defendant, the Court faced difficulties in assessing the parties’ actual states of mind at the time of the contributions. While the Court accepted the plaintiff’s assertion that her contributions were made in the expectation of being entitled to an interest in the property, it was difficult to demonstrate that the defendant had been aware of this understanding. Thus, a key issue was whether the defendant could be liable, even if he had not been aware of the assumptions that motivated the plaintiff’s contributions. In holding that the defendant was liable in these circumstances, Dickson J concluded that:

where one person in a relationship tantamount to spousal prejudices herself in the reasonable expectation of receiving an interest in property and the other person in the relationship freely accepts benefits conferred by the first person in circumstances where he knows or ought to have known of that reasonable expectation, it would be unjust to allow the recipient of the benefit to obtain it.23

Thus, plaintiffs are not required to prove that defendants had actual knowledge. Dickson J apparently thought it enough that the defendant was at fault in failing to perceive and give effect to the plaintiff’s expectations.

Since Pettkus v. Becker, the use of unjust enrichment as a justification for relief in this context has also found some support in the Australian High Court.24 More recently, in a similar development, some members of the New Zealand Court of Appeal have indicated that a broad doctrine of estoppel should provide the basis for judicial intervention in this area.25 As with the Canadian approach, and in contrast to orthodox estoppel doctrine, it seems that all that is required is that defendants ought to have known of plaintiffs’ expectations.26

22(1980) 117 DLR (3d) 251.

23Ibid. at 274 (emphasis added).

24Baumgartner v. Baumgartner (1987) 164 CLR 137 at 154 per Toohey J. However, the majority of that court have favoured a different doctrinal basis for their intervention: see infra nn. 53–63 and accompanying text.

25See infra nn. 37–40 and n. 50 and accompanying text.

26See Phillips v. Phillips [1993] 3 NZLR 159 at 168 per Cooke P. English authority requires that defendants have actual knowledge of plaintiffs’ expectations and that the person making the representation

The Division of Property on the Breakdown of Intimate Relationships 203

(b) Surmounting Evidential Difficulties

Doctrines that focus on the plaintiff’s expectations will be easier to satisfy than those that require either an explicit agreement by the parties or an unequivocal promise on the part of the defendant. Nonetheless, it may still be difficult for the courts to find the existence of an expectation of entitlement to property.27 The plaintiff may have made contributions in anticipation of being able to enjoy the fruits of these efforts in the context of an on-going relationship, without considering the possibility of the relationship ending and the issue of the parties’ individual legal rights.28 It was for this reason that, in Jordan v. Mitchell,29 the Court of Civil Appeals of Alabama held that a plaintiff could not make out her claim for unjust enrichment. The plaintiff had contributed more than US$20,000 toward the construction of a house on property already owned by the defendant. Crawley J concluded that, in the absence of a mistake by the plaintiff or misconduct by the defendant, the enrichment received by the defendant could not be characterised as unjust.30

The approach of the Canadian courts to this problem is best illustrated by the reasoning of Cory J in Peter v. Beblow.31 There, referring to the dictum of Dickson J in Pettkus v. Becker, quoted above,32 Cory J observed:

The test put forward is an objective one. The parties entering a marriage or a common law relationship will rarely have considered the question of compensation for benefits. If asked, they might say that because they loved their partner, each worked to achieve the common good of creating a home and establishing a good life for themselves. It is just and reasonable that the situation be viewed objectively and that the inference be made that, in the absence of evidence establishing a contrary intention, the parties expected to share in the assets created in a matrimonial or quasi-matrimonial relationship should it end.33

It is far from clear in what sense Cory J’s account of the test for unjust enrichment can be regarded as “objective”. The test formulated by Dickson J in Pettkus v.

intended the plaintiff to act upon it: see Willmott v. Barber (1880) 15 Ch. D 96 at 105 per Fry J; JT Development Ltd. v. Quinn (1991) P & CR 33 at 46 per Ralph Gibson LJ. In the Australian High Court, in Waltons Stores v. Maher (1987) 76 ALR 513 at 540, Brennan J required actual knowledge on the part of the defendant. However, in Commonwealth v. Verwayen (1990) 95 ALR 321 at 347–9, Deane J suggested that such knowledge would not always be required. The view that it is enough that the defendant ought to have known of the plaintiff’s expectations is consistent with the formulation of estoppel in § 90 of the Restatement of Contract 2d (St Paul, Minn., American Law Institute, 1977). For an analysis of proprietary estoppel, see infra, ch. 13.

27Thus, in a case such as Pointon v. Baines (unreported CP 213/87, NZHC, 1991), where it was found that the plaintiff formed no expectation of an interest, no relief would be available if the Canadian approach was taken.

28This point is made by Lord Bridge in Lloyds Bank plc v. Rosset [1991] AC 107 at 128; see supra, text accompanying n. 15.

29705 So. 2d 453 (Ala. Civ. App., 1997).

30Ibid. at 458.

31(1993) 101 DLR (4th) 621.

32Supra, text accompanying n. 23.

33Ibid. at 635.

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Becker was objective only with respect to the question of the defendant’s knowledge of the plaintiff’s expectation. It, nonetheless, required that the plaintiff had actually formed an expectation. Cory J’s approach readily attributes to plaintiffs expectations that they may have never formed, and which—as Cory J himself apparently recognises—few people in their situation ever form. Objectivity here can only refer to a more interventionist approach—such as that generally favoured in New Zealand law34—that gives relief on the basis of what reasonable people would have thought if they had considered the matter. A test of this nature is hardly implicit in Dickson J’s dictum. Nonetheless, Cory J’s account provides a realistic description of how the test developed in Pettkus v. Becker is being applied in practice. It appears that Canadian courts will spend little time searching for evidence of an expectation. Instead, they have developed a presumption that an expectation of entitlement is to be inferred from the fact that substantial contributions were made in a relationship akin to marriage.35 Evidential difficulties are thus brushed aside.

A similar approach underlies the promotion of estoppel as a basis for relief in New Zealand.36 Thus, in Gillies v. Keogh,37 Richardson J intimated that the evidential difficulties potentially associated with the doctrine would be circumvented through a generous presumption not unlike that favoured in Canada. Thus, he commented:

Whatever the position in other countries, it seems to me that social attitudes in New Zealand readily lead to expectations, by those within apparently stable and enduring de facto relationships, that family assets are ordinarily shared, . . . unless it is agreed or otherwise made plain.38

The difference between actual expectations and expectations that would have been reasonable if they had been formed is a significant one. It can be bridged only by courts making unwarranted assumptions about people’s states of mind. In Phillips v. Phillips,39 Cooke P, recognising the shortcomings of doctrines that require a subjective expectation on the part of the plaintiff, argued that the proposed use of estoppel in this context amounted to:

an indirect and abstruse way of creating rights which a system of law claiming to be based on integrity of principle should be prepared to acknowledge more candidly; the notion of an implied representation or acquiescence and an acting upon it has a fictional quality reminiscent of inferred common intention.40

34See infra at nn. 48–50 and accompanying text.

35Thus, in Everson v. Rich (1988) 53 DLR (4th) 470 at 473, the Saskatchewan Court of Appeal adopted the view that “no one should expect, in general, spousal services for free. They are given, in the absence of an indication to the contrary, with the expectation of something in return and should be received as such”. See also S Gardner, “Rethinking Family Property” (1993) 109 LQR 263 at 274.

36For a critique see Mee, supra n. 5 at 115–16.

37[1989] 2 NZLR 327.

38Ibid. at 347. See also Lankow v. Rose [1995] 1 NZLR 277 at 282 per Hardie Boys J.

39[l993] 3 NZLR 159.

40Ibid. at 168. However, Cooke’s own approach hardly bears the hallmarks of a system “based on integrity of principle”; see supra, text accompanying nn. 48–51.

The Division of Property on the Breakdown of Intimate Relationships 205

Much the same can be said of the celebrated Californian Supreme Court decision of Marvin v. Marvin.41 The Court indicated that, where there is insufficient evidence of an explicit agreement or even tacit understandings, the proper inference to be drawn is that “the parties expect . . . the courts will fairly apportion property accumulated through mutual effort” and, similarly, it should be presumed “that the parties intend to deal fairly with each other”.42

(c) Doubts About the Measure of Relief

The proper measure of relief for doctrines based on disappointed expectations is somewhat unclear. A remedy is given because the defendant was at fault in not becoming aware of the plaintiff’s expectations. In the absence of a mutual agreement, or an explicit promise on the part of the defendant, it might be thought that the doctrine is essentially fault-based and that the appropriate remedy, as in tort, would be compensatory damages. However, in Canada, the defendant’s fault is, instead, seen as an ingredient of an action based on unjust enrichment. Nonetheless, rather than awarding restitution, the courts have quantified relief on the basis of contributions to the relationship.43 This is so despite the fact that it is often difficult to demonstrate one or more of the elements required for an unjust enrichment claim. First, once the relationship has ended, it may not be easy to demonstrate that relationship-specific contributions in the nature of a sacrifice have enriched the defendant. Rather, the question raised in this context is who should bear the loss that results from a relationship-specific investment.44 Secondly, where the defendant is enriched as the result of a rising real estate market it is not clear that this enrichment can be said to have been gained at the expense of the plaintiff.45 Thirdly, difficulties arise where the plaintiff can be said to have derived benefits from the relationship, for instance, by living rent-free in a house legally owned by the defendant. In these circumstances, it may be difficult to establish that any enrichment the defendant has enjoyed from the relationship is matched by a corresponding deprivation suffered by the plaintiff.46

41557 P 2d 106 (1976). See D Rhode, Justice and Gender (Cambridge, Mass., Harvard University Press, 1989) 135–40.

42Ibid. at 121.

43See, for instance, Pettkus v. Becker (1980) 117 DLR (3d) 257 at 277 per Dickson J.

44See, e.g., L Cohen, “Marriage, Divorce, and Quasi Rents; or ‘I Gave Him the Best Years of My Life’ ” (1989) 16 Jnl. of Legal Studies 267; Ellman, “The Theory of Alimony” (1989) 77 Cal. L Rev. 1 at 41.

45In Rawluk v. Rawluk (1990) 65 DLR (4th) 161 the Canadian Supreme Court by a narrow majority allowed the plaintiff to share in the increase in the value of land originally acquired by the defendant due not to the contributions of either of the parties, but as a result of a rise in real estate prices. In dissent, McLachlin J convincingly countered that, while it was clear enough that the husband was enriched by the appreciation in value, it was difficult to connect this with any deprivation on the part of the plaintiff: ibid. at 190.

46Thus, some controversy surrounds the notion of “set-off” which requires any benefits derived from the relationship to be subtracted from any losses suffered in order to assess whether the plaintiff suffered a net deprivation: see Everson v. Rich (1988) 53 DLR (4th) 470 at 474–5. In Peter v. Beblow (1993) 101 DLR (4th) 621 at 631, Cory J concluded that evidence of an enrichment would invariably lead to a finding of a corresponding deprivation. For difficulties in applying the concept, compare the

206 Redistributive Proprietary Remedies

Problems also arise with the use of estoppel in this context. Reflecting doubts about the true rationale of the doctrine and its origins as a rule of evidence, the approach to relief for estoppel remains indeterminate. The basis for quantifying relief and determining the remedy given remains the question-begging formula of “the minimum equity required to do justice”.47

3. Focusing upon Objective Expectations

As we have seen, the courts in a number of jurisdictions have made relief more widely available in this context by blurring the distinction between subjective states of mind and objective considerations of justice. This shift to objective expectations has been carried still further elsewhere. Thus, in the New Zealand Court of Appeal decision of Pasi v. Kamana,48 Cooke P concluded that, in determining whether relief should be available, a court might “ask whether a reasonable person in the shoes of the claimant would have understood that his or her efforts would naturally result in an interest in the property”.49

The real advantage of such an approach is that it removes the need to demonstrate that the plaintiff actually formed an expectation of an interest at the time of the contributions in question.50 As a result, it gives the courts wide powers to give such relief as would reflect commonly held notions of fairness. On the other hand, this “inominate analysis”51 bears so little resemblance to orthodox causes of actions that it seems unprincipled. It is not surprising that there are those on the New Zealand Court of Appeal who favour a retreat to more conventional doctrines, such as proprietary estoppel.52

majority and dissenting judgments in Crick v. Ludwig (1994) 117 DLR (4th). It seems that, in practice, set-off will not be applied with any rigour: see P Parkinson, “Intention, Contribution and Reliance in the De Facto Cases” (1991) 5 AJFL 268 at 271; Mee, supra n. 5 at 219.

47See infra, ch. 13.III.1.

48[1986] 1 NZLR 603.

49Ibid. at 605.

50In Gillies v. Keogh [1989] 2 NZLR 327 at 330–3, Cooke P emphasised that the court did not need to search for the parties’ subjective states of mind, but could impute to them intentions or expectations that reasonable people in the parties’ position would have formed. He reiterated this view in Phillips v. Phillips [1993] 3 NZLR 159 at 168.

51See Gardner, supra n. 35 at 279.

52See supra nn. 37–40 and accompanying text. This is apparent in Richardson J’s approach in Gillies

v.Keogh [1989] 2 NZLR 327 at 347, which was based on estoppel and required a subjective expectation. In its last exploration of this area of the law, in Lankow v. Rose [1995] 1 NZLR 277, the New Zealand Court of Appeal continued to be divided on whether an actual expectation should be required. Cooke P himself thought it unnecessary to add to his previous discussions on the matter: ibid. at 280. Gault J preferred Cooke P’s objective expectations doctrine: ibid. at 288. Tipping J (with McKay J concurring) favoured a subjective expectations approach: ibid. at 294. Hardie Boys J was of a similar mind and repeated Richardson J’s dicta from Gillies v. Keogh (supra, at text accompanying n. 38) to the effect that the courts should readily infer such an expectation: ibid. at 282.

The Division of Property on the Breakdown of Intimate Relationships 207

4. Analogies with Joint Ventures and Commercial Partnerships

A different approach to this area has seen courts analogising intimate relationships with commercial partnerships or joint ventures.53 In the seminal Australian decision of Muschinski v. Dodds,54 in a rather Dworkinian fashion,55 Deane J drew together several different lines of precedent as examples of a “more general principle of equity”.56 In his view, upon the failure of a joint venture, the parties are entitled to share in the property provided for the purposes of the relationship in proportion to their contributions to the relationship.57 Deane J explained the doctrine in the following way:

The principle operates in a case where the substratum of a joint relationship or endeavour is removed without attributable blame58 and where the benefit of money or property contributed by one party on the basis and for the purposes of the relationship or endeavour would otherwise be enjoyed by the other in circumstances in which it was not specifically intended or specifically provided that the other party should so enjoy it. The content of the principle is that, in such a case, equity will not permit the other party to assert or retain the benefit of the relevant property to the extent that it would be unconscionable for him so to do.59

Subsequently, Deane J’s analysis was applied by the High Court in Baumgartner v. Baumgartner.60 By demanding simply that there be a “joint venture” which has failed, this doctrine avoids the problems that result from a focus on subjective intentions or expectations. Rather than attempting to gauge the parties’ subjective states of mind, the courts are able to focus on the relationship and ask whether the parties were living their lives in such a way that it could be said they had embarked on a joint venture.61 Deane J’s formula effectively reverses the orthodox approach by providing that plaintiffs will be entitled to an interest as long as they did not

53 The role of the common law on quasi-matrimonial property disputes in Australia has been significantly limited by the passing of legislation in four jurisdictions: De Factos Relationships Act 1984 (NSW); the Property Law Act 1958 (as amended in 1988) (Victoria); the De Facto Relationships Act 1991 (Northern Territory); the Domestic Relationships Act 1994 (ACT).

54(1985) 160 CLR 583 at 618–19.

55Cf. R Dworkin, Taking Rights Seriously (London, Duckworth, 1977) at 14.

56Ibid. at 620. Deane J relied upon the following examples: the recovery of contractual payment following a complete failure of consideration; the refunding of premiums paid by a fixed term partner on the termination of the partnership; the sharing of assets in proportion to capital contributions following the termination of a commercial joint venture.

57(1985) 160 CLR 583 at 619 per Deane J.

58The phrase “without attributable blame” raises interesting questions. Will plaintiffs responsible for the relationship ending be disentitled to relief? While this consideration may well have a place in relation to commercial joint ventures, its dangers in this context are obvious. The requirement is largely ignored in the cases, suggesting it will not be applied strictly; P Parkinson, “Doing Equity Between De Facto Spouses: From Calverly v. Green to Baumgartner” (1988) 11 Adelaide L Rev. 370 at 393; Mee, supra n. 5 at 244.

59(1985) 160 CLR 583 at 620.

60(1987) 164 CLR 137.

61Parkinson, supra n. 58 at 404; M Neave, “The New Unconscionability Principle—Property Disputes Between De Facto Partners” (1991) 5 AJFL 185 at 192.

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actually intend the defendant to have the sole benefit of their contributions.62 Consequently, partners who have not formed any expectation about their separate legal entitlement will, in the event of the relationship coming to an end, still be entitled to an interest reflecting their contributions.63

A similar approach has been favoured in certain jurisdictions in the United States. One example is Mississippi, which is remarkable in that the state legislature has not provided for the division of property on the breakdown of marriage. Instead, the state judiciary has been solely responsible for liberalising the law in this area. In Pickens v. Pickens,64 the Mississippi Supreme Court extended this process to relationships akin to marriage and ordered an equitable division of property accumulated in the course of such a relationship without searching for any agreement to that effect.65 Robertson J explained that the common law of the state:

authorises and sanctions an equitable division of property accumulated by two persons as a result of their joint efforts. This would be the case were a common law business partnership breaking up. It is equally the case where a man and woman, who have accumulated property in the course of a non-marital cohabitation, permanently separate.66

Similarly, in Jones v. Jones,67 the Court was content to base relief on the fact that “the wife contributed her money and labor toward the economic success of the marriage”.68 The Court was not concerned that the contributions were not necessarily made in the expectation of gaining a proprietary interest.

III. THE INADEQUACY OF JUSTIFICATIONS OFFERED FOR INTERVENTION IN

THIS AREA

Despite the quite different formulae used to justify intervention, it is striking that the judiciary in Canada, Australia, New Zealand, and in a number of jurisdictions

62This may be contrasted with the requirement of positive intention not to benefit the defendant required in English law: see, e.g., Lloyds Bank plc v. Rosset [1990] AC 107 at 128 per Lord Bridge. See supra n. 15 and accompanying text. In this respect, Deane J’s formulation resembles Chambers’ analysis of the resulting trust. See supra, ch. 6.II.2(b)(ii) and ch. 7.I.2(c)(ii).

63Thus in Muschinski v. Dodds (1985) 160 CLR 583 at 614, Deane J remarked that “[v]iewed in its modern context the constructive trust can properly be described as a remedial institution which equity imposes regardless of actual or presumed intention”. The shift from intention is apparent in Baumgartner v. Baumgartner (1987) 164 CLR 137 at 146–9, where the High Court gave relief despite its conclusion that the evidence did not support a finding of a common intention that the plaintiff have an interest in the property. See also Lindy Willmott, De Factos Relationship Law (Sydney, Law Book Company, 1996) 64. This is probably best understood as a default position that the parties can bargain around if they so choose. Thus, relief should be denied where, from the outset of their relationships, defendants have actually informed plaintiffs that the plaintiffs’ contributions would not give rise to any legal entitlement. However, thus far, decisions in Australian state courts do not bear out this view: see Mee, supra n. 5 at 245–8.

64490 So. 2d 872 (Miss., 1986).

65Ibid. at 876. This approach has been extended to confer rights on the death of one of the parties in a long-term cohabitive relationship: Williams v. Mason 556 So. 2d 1045 (Miss., 1990).

66Ibid. at 875.

67532 So. 2d 574 (Miss., 1988).

68Ibid. at 580.

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in the United States has adopted what is, in substance, the same approach. First, the plaintiff’s interest generally flows, not from an act of will by the legal owner, but rather from contributions made in the course of an intimate relationship. Secondly, instead of being based on traditional measures of expectations, reliance or unjust enrichment, relief is quantified in proportion to contributions made to the relationship.69

The various doctrines developed in this context should, if strictly applied, deliver different results. However, in practice, they are generally applied in such a way that they produce similar outcomes. In the case of the Canadian doctrine of unjust enrichment and the broad doctrine of equitable estoppel, this effect is achieved largely by fudging evidential questions by making unwarranted assumptions about the parties’ states of mind. Similarly, in Canada, relief reflects contributions only as a result of the courts’ failure to apply restitutionary criteria. In the case of estoppel, on the other hand, the ability of the courts to focus on contributions in quantifying relief can be attributed to the doctrine’s “flexibility”.70 Yet, this very flexibility is a consequence of the doctrine’s lacking any settled justificatory basis capable of guiding those responsible for its application.

Doctrines that focus on actual intentions or expectations are normatively inadequate. Consider the argument advanced by the defendant in Peter v. Beblow that, because what was involved was a relationship based on love, there was not, or should not have been, any expectation of gain on the part of the plaintiff.71 The argument exploits an intuition deeply embedded in our social consciousness. At an empirical level, it seems plausible that a good number of those in intimate relationships contribute to the relationship without any expectation of separate legal entitlement. If this were the case, norms that required a subjective intention or expectation on the part of the plaintiff would not, if strictly applied, yield a remedy in this context.72 At a normative level, the defendant’s argument draws upon the notion that, in an intimate relationship, there is something unsavoury about one’s actions being influenced by financial considerations.73 We can appreciate this if we ask whether someone in such a relationship, whose actions were motivated by an expectation of the acquisition of separate legal entitlement, would be more deserving of a remedy than someone who was not driven by the same motivations. If the answer is “no”,74 then why should we insist on such an expectation as a prerequisite for relief?

69See C Rotherham, “The Contribution Interest in Quasi-Matrimonial Property Disputes” (1991) 4 Canta. LR 407.

70See infra, ch. 13.III.

71(1993) 101 DLR (4th) 621 at 633.

72See A Lawson, “The Things we Do for Love: Detrimental Reliance in the Family Home” (1996) 16 LS 218 at 223.

73A view that is often reflected in literature: see, e.g., R Dabney, Love and Property in the Novels of Dickens (London, Chatto & Windus, 1967).

74It is apparent from his judgment in Midland Bank plc v. Cooke [1995] 4 All ER 562 at 575 that Waite LJ would have given this answer. See supra nn. 18–21.

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In Peter v. Beblow, the Court rejected the defendant’s argument despite the obvious plausibility of both its empirical and normative premises.75 Nonetheless, it accepted the starting point of the defendant’s argument that relief was not available in the absence of intention or expectations. A more productive approach would lie in attempting to understand why, in practice, the courts have been willing to give relief in this context despite the absence of those elements.

The judicial formula that comes closest to suggesting the rationale for the approach taken in jurisdictions that have been prepared to give relief in this context is the Australian “joint venture” doctrine. This doctrine explicitly focuses on the parties’ relationship, rather than intentions or expectations. In addition, it openly provides for quantification of relief on the basis of contribution. What has not been made sufficiently clear, however, is why analogies with commercial joint ventures are apposite.76 In a commercial venture, there is an understanding shared by the parties that they are involved in a profit-making endeavour. The provision of relief generally involves providing default terms in order to construct a rational bargain that includes provision for the contingency of the venture coming to an end. In contrast, in intimate relationships, particularly outside marriage, the parties are unlikely to conceive of their relationship in the same terms. Whereas for commercial joint ventures the issue tends to concern the distribution of an unallocated surplus, on the breakdown of intimate relationships the question concerns a readjustment of property rights in circumstances in which legal owners did not necessarily understand that their title was at risk. Moreover, with its commercial undertones, the joint venture analogy is not a million miles away from the rhetoric of women investing risk-capital in relationships that the Canadian Supreme Court found so offensive in Pettkus v. Becker.77 Thus, some scholars fear that the analogy may have an unfortunate influence on our understanding of the problems that arise in this area,78 and have suggested that it “merely serves to ritualize the imposition of a result”.79 Perhaps it is fairer to say that while notions of partnership or joint ventures provide helpful metaphors, they should not be accepted at face value.80 While cohabitive relationships are joint ventures of a sort, they are rather different from co-operative commercial endeavours. Consequently, we still need to explain why the same standards should apply to both.

Finally, the other doctrinal formulation in this area, the “reasonable claimant” test formulated by the New Zealand judiciary, is rather unenlightening. Why would a reasonable person expect a contribution to result “naturally” in an

75(1993) 101 DLR (4th) 621at 635 per Cory J.

76See Mee, supra n. 5 at 264.

77(1980) 117 DLR (3d) 257 at 271. Dickson J scathingly noted the first instance judge’s conclusion that the plaintiff’s “contribution to the household expenses during the first few years of their relationship was in the nature of risk capital invested in the hope of seducing a younger defendant into marriage”.

78See R Solomon, Love: Emotion, Myth and Metaphor (Garden City, NY, Anchor Press, 1981) 18.

79MA Glendon, The New Family and the New Property (Toronto, Butterworths, 1987) 54–66.

80For a helpful analysis of the model of partnership see K Gray, The Reallocation of Property on Divorce (Abingdon, Professional Books, 1977).

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interest in property? If reasonable people in a relationship did actually consider their own separate entitlement, would they not raise the matter with their partners and clarify it? Ultimately, apart from the question whether parties do actually form expectations in these circumstances, there is a difficulty inherent in using expectations as the foundational justification for legal reform. After all, to some extent at least, expectations are endogenous to the law; if we actually form expectations of legal entitlement, we form them “in the shadow of the law”.81 How then do we justify the leap from the pre-Pettkus v. Becker or Pasi v. Kamana world—where, on the whole, no relief was provided for cohabitees upon the breakdown of their rela- tionships—to the new regime? Why would reasonable plaintiffs ever have thought the law would come to their aid when it never had in the past? The language of expectations serves a rhetorical function, providing a tenuous link with traditional concepts. While it suggests that a “legal” standard is being applied, it is in reality a rather circular way of incorporating broader considerations of justice.82 Beyond this rhetorical role, the notion of “the reasonable claimant” is not particularly useful. Ultimately, it begs the question. A reasonable claimant will think he or she is entitled to relief because it would be just. The question then to be asked is “why would it be just?”. Until this issue is addressed directly and answered satisfactorily the law is liable to remain unsettled.

What is required is a doctrine that is expressed in a manner that discloses its normative foundations, and thereby indicates the manner in which it is to be applied. It may be thought unnecessary to offer an explanation of why a coherent justification of judicial intervention in this area is thought desirable. After all, it seems cynical to suggest that it is legitimate to use the coercive force of the state to enforce legal norms without offering a good justification for those norms.83 Beyond this, however, it is possible to identify particular dangers that may follow from the continued failure to present a coherent justification for intervention in this area. One fear is that, without clear foundations, there is the danger of confusion and inconsistent application of norms. This may occur at all or any of three levels: the formulation of the cause of action; the quantification of relief84; and choosing between personal and proprietary remedies. Another concern is that the courts risk doing violence to the integrity of existing legal norms.85 The temptation to frame a cause of action generously in order to bring quasi-matrimonial

81See, e.g., R Moonkin and L Kornhauser, “Bargaining in the Shadow of the Law: the Case of Divorce” (1979) 88 Yale LJ 950.

82Mee, supra n. 5 at 282.

83R Dworkin, Law’s Empire (Cambridge, Mass., Belknap, 1986) 93.

84Thus, in a detailed study of Canadian case law, Patrick Parkinson concludes that “it is possible to discern in the decided cases a number of distinct bases for quantifying relief”. As a result, “[a]pparently similar cases are dealt with different by courts even in the same province”: P Parkinson, “Beyond Pettkus v. Becker: Quantifying Relief for Unjust Enrichment” (1993) 43 U Toronto LJ 217 at 218. For a criticism of the tendency of Australian courts to analyse situations in restitutionary terms when in reality they appear to involve expectation or reliance loss: see J Carter, “Contract, Restitution and Promissory Estoppel” (1989) 12 UNSW LJ 30 at 45.

85See D Stevens, “Restitution, Property and the Cause of Action in Unjust Enrichment: Getting By with Fewer Things” (1989) 39 U Toronto LJ 258 at 282–3; Carter, ibid. at 57.

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cases within its scope may be unfortunate if a more demanding version is generally more effective in other contexts. Similarly, there is reason to fear that the lax manner in which the requirements of various relatively orthodox doctrines have been applied in the quasi-matrimonial context may be imported into areas where those norms have traditionally been applied more rigorously. Finally, by obscuring the basis for intervention in this area, we lose the possibility of developing a justification that may serve as an analogue for other contexts and assist us in developing a richer jurisprudence of property and obligation.

IV. THE LIMITS OF THE PRIVATE ORDERING PARADIGM: THE CASE AGAINST

APPLYING CONVENTIONAL PROPERTY NORMS IN THE CONTEXT OF

INTIMATE RELATIONSHIPS

1. Spheres of Justice: Distributive Norms in Intimate Relations

Research from anthropology and social psychology indicates that human interaction in all societies is regulated by diverse norms.86 In diverse areas of life, different social goods are distributed and distinct standards of distribution prevail. Norms of free-exchange, desert and need that are incommensurable compete for acceptance and are legitimate to varying degrees in different spheres of social life.87

The understanding that we associate distinct goods with different areas of social life and, in turn, with diverse norms of distributive justice led the political theorist, Michael Walzer, to develop his influential theory of “spheres of justice”.88 According to Walzer’s account of “complex equality”, we should respect the autonomy of each distributive sphere by regulating it pursuant to the norms which are internal to it. Conversely, the importation of the norms of one sphere into another represents “tyranny’’.89 Research in contemporary western societies emphasises that norms of free exchange—of autonomy and desert—dominate the economic domain.90 However, there are some things that money cannot buy, some things for which it is wrong to bargain. In intimate relationships, norms of “communal sharing”—reflecting notions of equality and need—predominate as the legitimate standards of distribution.91 Typically, those in intimate relationships do not bargain to ensure that their contributions are rewarded. Instead, “trusting couples come to expect that reciprocity of contributions will emerge over the longer term in a relatively unstructured, spontaneous way”.92 Moreover, the

86AP Fiske, Structures of Social Life (New York, Free Press, 1991).

87Ibid. at 21–6.

88M Walzer, Spheres of Justice (New York, Basic Books, 1983).

89Ibid. at 17–20.

90J Hochschild, What’s Fair? American Beliefs About Distributive Justice (Carnbridge, Mass., Harvard University Press, 1981) at 182; discussed in M Regan Jr., “Spouses and Strangers: Divorce Obligations and Property Rhetoric” (1994) 82 Geo. Law Jnl. 2303 at 2358.

91See, e.g., Fiske, supra n. 86 at ix; Hochschild, supra n. 90.

92J Holmes and S Boon, “Developments in the Field of Close Relationships: Creating the Foundations for Intervention Strategies” (1990) 16 Personality and Social Psychology Bulletin 23 at 27.

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promotion of an “exchange orientation” may actually inhibit the development of intimacy.93 This, in part, explains the distaste that many still feel toward the use of contracts in this sphere.

2. The Treatment of Intimate Relationships in Legal Doctrine

(a) The Regulation of Property in the Domestic Sphere in English Law

An historical perspective of the legal treatment of property in intimate relationships throws into sharp relief the contingency of the modern legal orthodoxy that proprietary entitlements must arise by agreement. The understanding of the norms that are proper to this sphere has altered over time. In particular, in the past, entitlements often arose by custom or by operation of law, and it was not unusual for the courts to refuse to enforce bargains between spouses.

(i) Women’s Rights to Property

Until the late nineteenth century, domestic relations were regulated less by private ordering than according to status.94 By the early thirteenth century, the common law dictated that women could neither hold property nor enter into contracts—a disability often explained on the basis that, in the law’s eyes, wives did not have an existence separate from that of their husbands.95 The notion of coverture reflected the inferior social status of women and the power husbands were customarily given over their wives. The doctrine dictated that any personal property a woman brought into marriage immediately became the property of the husband, while any real property was held by the husband “in the right of his wife”.

However, a wife’s welfare was not left entirely to her husband’s whim. Indeed, marriage was understood as a union not so much of two individuals as of two families, and this union was protected by a range of mechanisms both social and legal.96 Status brought with it obligations as well as privileges; custom and law obliged the husband to provide for his wife and family. In her husband’s lifetime, the common law accorded a wife a right of support, allowing her to sue for alimony in the event of separation.97 Reflecting Anglo-Saxon custom, the early

93B Murstein and MG MacDonald, “The Relationships of Exchange-orientation and Commitment Scales to Marriage Adjustment” (1983) 18 International Jnl. of Psychology 297.

94For a summary of the different norms prevailing in common law, equity, manorial custom and ecclesiastical law, see A Erickson, Women and Property in Early Modern England (London, Routledge, 1993) 24.

95WH Blackstone, Commentaries on the Law of England (Chicago, Ill., Chicago University Press, 1765–1769, reprinted 1979) i, at 430. On the other hand, local custom sometimes allowed women to contract on their own behalf: see WR Cornish and G de N Clark, Law and Society in England 1750–1950 (London, Sweet and Maxwell, 1989) at 368.

96U Beck and E Beck-Gernsheim, The Normal Chaos of Love (Cambridge, Polity Press, 1995) 79–80.

97The right was available only as long as separation was not the result of the wife’s adultery. On the duty of support see Manby v. Scott (1659) 86 ER 781; Countess of Strathmore v. Bowes (1789) 2 Cox 28 at 33 per Lord Thurlow. See Baker. An Introduction to English Legal History (3rd edn., London,

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common law allowed the wife a third of her husband’s goods upon his death. This right appears to have survived at common law until Tudor times; thereafter it persisted widely as local custom.98 Similarly, pursuant to the right of dower, widows were entitled to a life interest in a third share in any freehold land held by their husbands at any time during the marriage. At law, this right applied notwithstanding any attempt to bar its operation. Moreover, it bound third parties who acquired the freehold from the husband.99 The wife’s rights of inheritance both to realty brought into the marriage and to dower were recognised in the Magna Carta.100

The framework built on Anglo-Saxon custom and feudal norms that regulated this area came under stress from pressures to make land more readily alienable and to give owners greater freedom. While the old regime gave way, it was a gradual process. In the name of testamentary freedom, the legislature brought an end to widespread customs that dictated that set shares of a man’s personal property had to be left to his wife and children.101 It went further in 1833 by allowing for the operation of dower to be barred by will or by inter vivos transfer,102 before eliminating it altogether in 1925.103

The Courts of Chancery had already, in the eighteenth century, greatly reduced the significance of the law of dower by refusing to apply it in respect of uses.104 Indeed, it was equity that was at the forefront of this movement from status toward contract. From the renaissance, amongst the elite, property was regulated primarily by “jointure”. These settlements, which the courts allowed to bar the operation of dower, generally provided for a right to income from land that was held on trust for the benefit of the couple during the life of the husband and thereafter for the wife. The Courts of Chancery also allowed wives to retain separate equitable estates in land for their own use. Furthermore, equity took the stance that, while it would assist a husband to collect property that had become due to him as a result of having been given to his wife, it would require him to hold a portion on trust for his wife and children.105

The causes of these innovations by the Courts of Chancery are ambiguous and their effects mixed. This is particularly true of the willingness to allow the barring of dower. This was of importance mainly for wealthy families. In that context, it

Butterworths, 1990) at 435 and 551. The courts also held that, in the event of hardship, a wife had her husband’s implied authority to pledge his credit for necessaries for her own support: Sir Thomas Gardner’s Case (1615) Roll Abr. v 1 p 351; Dent v. Scott (1648) Aleyn 61. See JH Baker, ibid 556.

98Cornish and Clark, supra n. 95 at 366; Erickson, supra n. 76 at 170.

99Baker, supra n. 97 at 308–9; Cornish and Clark, supra n. 95 at 359.

100Magna Carta 1217, c. 7.

101Baker, supra n. 97 at 436.

102Dower Act 1833, c. 105.

103Administration of Estates Act 1925, c. 23.

104Chaplin v. Chaplin (1733) 3 P Wms. 229. This was despite the fact that they allowed widowers to enjoy a right to a life interest in all the real property that they had held in their wives’ right in respect of a use. See S Staves, Married Women’s Separate Property in England, 1660–1833 (Cambridge, Mass., Harvard University Press, 1990) 37.

105Beresford v. Hobson (1816) 1 Mod. 373. See Cornish and Clark, supra n. 95 at 369.

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generally had the effect of ensuring that wives received less, and often significantly less, than the third to which they were customarily entitled.106 Moreover, if the free alienability of land was the objective behind the reform, the courts were selective in pursuing this policy. For example, they showed less interest in limiting the strict settlement, the device that tied up land in favour of male heirs. In any event, the freedom that equity afforded to women was limited. In particular, wives were restricted in their capacity to enjoy beneficial ownership of money. Even by the end of the seventeenth century only pin-money (an annuity for household and personal spending) could be owned by wives under a trust. On the other hand, the courts were still prepared to intervene paternalistically to protect women. A realisation of the vulnerable position of wives was apparent in the Courts of Chancery’s treatment of settlements that provided that a wife’s interest could not be sold, even with her consent. The courts were prepared to enforce such a restriction even though it represented a restraint on alienation that, in any other context, would have been regarded as void.107

More thoroughgoing reform came from the legislature. In the late nineteenth century, the legal position of women was transformed.108 In this new environment women were permitted to own property of all forms and to enter into contracts.

(ii) The Regulation of Agreements

The judicial treatment of agreements to marry or of agreements between those already married has also changed through time. Reflecting the shift from status to contract, the common law gave relief for breaches of promises to marry from the late seventeenth century.109 In these cases, damages were to a large degree calculated pursuant to orthodox contract principles, according to the extent to which the defendant’s breach caused a diminution in the plaintiff’s value in the marriage market.110 In contrast, the courts were suspicious of premarital contracts that limited the property rights that one partner might acquire in the event that the relationship should come to an end.111 In their view such arrangements

106Staves, supra n. 104 at 36.

107See, e.g., Pybus v. Smith (1791) 3 Bro CC 340. Cornish and Clark, supra n. 95 at 368; Baker, supra n. 97 at 554.

108The key reforms were effected in the Married Women’s Property Acts of 1870 and 1882. See L Holcombe, Wives and Property: Reform of the Married Women’s Property Law in the Nineteenth Century

(Toronto, University of Toronto Press, 1983).

109See, for instance, L Stone, Road to Divorce: England 1530–1987 (Oxford, OUP, 1995) 82, 85–95; G Frost, Promises Broken: Courtship, Class, and Gender in Victorian England (Charlottesville, Va., University of Virginia, 1995). Initially the objection to the action was less substantive than jurisdictional. The question was not whether such promises should be enforced, but whether the ecclesiastical courts had sole jurisdiction over such matters. The changing perception on this question is reflected in Blackstone’s conclusion that “[o]ur law considers marriage in no other light than as a civil contract”: Blackstone, supra n. 95 vol 1 at 421.

110Stone, supra n. 108 at 82.

111Cartwright v. Cartwright (1853) 3 De GM & G 982. See B Bix, “Bargaining in the Shadow of Love: The Enforcement of Premarital Agreements and How We Think About Marriage” (1998) 40 William and Mary Law Rev 145 at 150–1.

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encouraged “failure . . . in the performance of duties in the fulfilment of which society has an interest”.112 Similarly, the judiciary was disinclined to sanction contracts between spouses that altered the terms of their marriage settlement, a reluctance also justified squarely on grounds of public policy.113

Thus, it seems that the marriage contract was, to a significant degree, understood as a financial proposition and it was thought proper that those who broke the contract pay for the loss they caused. On the other hand, marriage was a solemn commitment unlike any other contract, and the courts would not enforce either those agreements made before the event that gave either party an incentive for leaving the union or those made after the event that renegotiated the terms of engagement. It can be seen that, while marriage was treated as a private sphere into which the courts would not intrude, it was not a perception that spouses were too romantic to want their understandings legally enforced that made the judiciary weary of enforcing such contracts between spouses. Rather, it was a fear of encouraging bargains that would undermine the sanctity of the union that accounted for this judicial reticence.

The individualism of the nineteenth century brought limited freedom for women.114 As the home came to be seen as a refuge from the workplace, women were increasingly celebrated for stereotypically feminine qualities: as selfless providers of emotional support. As a result, while changing attitudes led to marriage being understood less in terms of patriarchal hierarchy and more as a union of equals, they also saw the union romanticised in a fashion that made it more difficult to conceive of it as a proper place for striking bargains.115 A reflection of this is the disuse into which the action for a breach of promise to marry fell in the late nineteenth century.116

This uneasy combination of individualism and romanticism meant that, while they were not inclined to impose paternalistic duties of support, nor were the courts eager to enforce agreements between spouses. This is apparent in the development of the doctrine of intention to create legal relations. In the seminal decision of Balfour v. Balfour,117 Lord Aitken commented:

The common law does not regulate the form of agreements between spouses. Their promises are not sealed with sealing wax. The consideration that really obtains for them is that natural love and affection which counts for so little in these cold courts . . . In

112Cartwright v. Cartwright supra n. 111, at 988–9 per Knight Bruce LJ.

113See Lord St John v. Lady St John (1805) 11 Ves. Jun. 526 at 530–2 per Lord Eldon; Fletcher v. Fletcher (1788) 2 Cox 99 at 103 per Buller J. See Staves, supra n. 104 at 7.

114Beck and Beck-Gernsheim, supra n. 96 at 57.

115On the rise of romantic love see L Stone, The Family, Sex and Marriage in England from 1500–1800 (London, Weidenfeld and Nicolson, 1977); E Shorter, The Making of the Modern Family (London, Fontana, 1977). On the tension between Victorian values of romance and individualism in breach of promise actions: see Frost, supra n. 109 at 10.

116The action was abolished only with the Law Reform (Miscellaneous Provisions) Act 1970: see S Cretney, (1970) 33 MLR 534.

117[1919] 2 KB 571.

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respect of these promises each house is a domain into which the King’s writ does not seek to run, and to which his officers do not seek to be admitted.118

It is not obvious where the line between those arrangements that should be subject to judicial enforcement and those that should not is to be drawn.119 Even in the commercial sphere, parties have little regard for the legalities of their interaction, and generally avoid recourse to the courts; instead, they regulate their dealings according to informal norms of reciprocity and trust.120 Nonetheless, the courts readily enforce commercial agreements. Moreover, it is apparent from earlier justifications offered for refusing to enforce agreements between spouses that the vision of the marital home as a sphere regulated by ties of natural love and affection is one that seized the judicial imagination relatively recently. It seems that Lord Aitken’s judgment in Balfour v. Balfour was driven not so much by the conclusion that, as an empirical matter, spouses do not intend to be legally bound, as by a prescriptive conclusion that the courts have no place in the domestic sphere.121

That the courts are at times still prepared to recognise that dealings made against a background of intimate relationships should be accorded special treatment is apparent in the recent decision of Barclays Bank Plc v. O’Brien.122 There, the House of Lords was prepared to prevent a third party creditor from enforcing a mortgage securing the overdraft of a husband’s business in circumstances in which the wife’s consent to the arrangement was induced by a misrepresentation by her husband. The Court recognised a particular class of sureties who were to be treated with special tenderness as a result of the vulnerability that can arise from living together.123 The principle reflects the view expressed by Dixon J in the Australian High Court that relationships in the nature of marriage, while not giving rise to a presumption of undue influence, nevertheless have “never been divested completely of what may be called equitable presumptions of an invalidating tendency”.124 Here, we have judicial recognition of the darker side of contracts made in intimate relationships: they are suspect, not necessarily because they are made out of love, but because of an underlying danger of exploitation.

(iii) The Limits of Judicial Intervention

Balfour v. Balfour and Barclays Bank v. O’Brien mark the limits of judicial willingness to interfere in these relationships. Intervention in these contexts tends to be justified by reference to the parties’ intentions: in Balfour the parties never

118Ibid. at 579.

119S Hedley, “Keeping Contract in its Place—Balfour v. Balfour and the Enforceability of Informal Agreements” [1985] OJLS 391 at 394–5; H Collins, The Law of Contract (2nd edn., London, Butterworths, 1993) at 94–7.

120See, e.g., S Macaulay, “Non-contractual Relations in Business” (1963) 28 American Sociology Review 45.

121Hedley and Collins, supra n. 94.

122[1994] AC 140.

123Ibid. at 198 per Lord Browne-Wilkinson.

124Yerkey v. Jones (1939) 63 CLR 649 at 675.

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intended the agreement to be legally binding; in O’Brien the wife’s will was overborne in circumstances in which the bank should have been aware that this was a danger. The courts have proved willing to deal with problems arising from intimate relationships using conventional “principles” of property and contract. Despite the reluctance apparent in Balfour, the courts will enforce most agreements to share property in this context,125 while they will set aside arrangements that smack of exploitation. However, beyond this, the judiciary tends to disclaim any responsibility for positively determining rights and obligations within the domestic sphere. While, particularly since the end of the Second World War, there has been a marked rise of intervention in family affairs at a legislative level, this has not flowed through to judge-made law. Legislative intervention is generally seen as giving rise to “family law”: a body of norms derived from “policy” and hence, by implication, unprincipled.

Lord Denning was a notable exception to this orthodoxy.126 A biologically essentialist vision of women as weaker and more sentimental creatures than men127 encouraged Denning to reform various common law doctrines and to read hitherto unforeseen discretionary powers into statutory provisions.128 In the course of developing spousal rights of occupation,129 the “new model constructive trust’’130 and contractual licences that paid no respect to the doctrine of privity of contract,131 Lord Denning turned axiomatic notions of property on their head. However, amongst English appellate judges, he was a maverick, and it is not surprising that his reforms in this area were subsequently largely discredited and reversed.

This extreme judicial reticence toward intervention in the domestic sphere is unfortunate. With the breakdown of traditional community belief systems, it has

125In Pettitt v. Pettitt ([1970] AC 777 four of their Lordships took the view that a lack of intention to create legal relations might provide a difficulty in recognising a constructive trust in response to a common intention. For his view, Lord Diplock in his dissenting judgment rejected the suggestion that the principle in Balfour v. Balfour had any application in this context: ibid. at 822.

126See S Parker, Informal Marriage, Cohabitation and the Law, 1750–1989 (London, Macmillan, 1990) 136–7.

127Lord Denning, The Due Process of Law (London, Butterworths, 1980) 194: see Parker, supra n.

126.

128Lord Denning read s. 17 of the Married Women’s Property Act to permit the courts to redistribute property as they saw fit: see, e.g., Fribance v. Fribance [1957] 1 WLR 384 (reversed in Pettitt v. Pettitt [1970] AC 777).

129Bendall v. McWhirter [1952] 2 QB 466. The right was something of a two-edged sword, deriving from the duty of spouses to live together; see Weldon v. Weldon (1883) 9 PD 52; Shipman v. Shipman [1924] 2 Ch. 140. After some effort by Lord Denning to give this right proprietary effect, it was held to be a sui generis personal right by the House of Lords in National Provincial Bank v. Ainsworth [1965] AC 1175. Legislative intervention soon followed that allowed the right to be protected by registration, and this right is now regulated by ss. 30–31 of the Family Law Act 1996.

130See Hussey v. Palmer [1972] 3 All ER 744 at 747; Eves v. Eves [1975] 3 All ER 768 at 771. A return to the conservative position favoured in Pettitt v. Pettitt [1970] AC 777 commenced in the Court of Appeal soon after Denning’s departure in Burns v. Burns [1984] Ch. 317 and was completed by the House of Lords in Lloyds Bank plc v. Rosset [1990] AC 107.

131See Errington v. Errington and Woods [1952] 1 KB 290 at 298; Binions v. Evans [1972] Ch. 359 at 367–9. Orthodoxy was restored in Ashburn Anstalt v. Arnold [1989] Ch. 1.

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become difficult to justify paternalistic intervention in an individualistic world.132 Yet, while the old status-based scheme of duties may have little place in contemporary society,133 this does not mean that some strategy of intervention in this area would not be appropriate. It is ironic that a judiciary, which once participated so actively in regulating this area, now throws up its hands and pronounces itself powerless in the face of demands for reform.

(b) Learning from Legislation

The understanding that special criteria should govern distribution of entitlements in intimate relationships is apparent in the legislation readjusting the property rights of spouses that is to be found in most common law jurisdictions. Reflecting a realist understanding that emphasises the political dimension of the common law,134 the courts in Canada135 and New Zealand136 have shown a willingness to look to such legislation as a guide for the development of common law doctrine. In contrast, English courts have tended to insist that the roles of the judiciary and the legislature are radically distinct.137 As a result, in developing the common law, they have shown little interest in looking for inspiration to legislation that recognises the justice of contribution-based claims in the domestic sphere.

Several innovations in English legislation suggest a change in philosophy that may offer lessons for the common law in this context. For example, section 25(2)(f) of the Matrimonial Causes Act 1973 makes clear the importance of

132Beck and Beck-Gernsheim, supra n. 96 at 46.

133However, Jack Goody, for one, laments the decline of these norms and the consequences of the ideology of romantic love for the interests of women. See J Goody, The Development of the Family and Marriage in Europe (Cambridge, Cambridge University Press, l983) 209; “Dowry and the Rights of Women to Property” in C Hann, Property Relations (Cambridge, Cambridge University Press, 1997) 20l.

134See R Pound, “Common Law and Legislation” (1907) 21 Harv. L Rev. 383; J Landis, “Statutes and Sources of the Law” in Harvard Legal Essays (Cambridge, Mass., Harvard University Press, 1934) 213; G Calabresi, A Common Law For an Age of Statutes (Cambridge, Mass., Harvard University Press, 1982) at 85.

135Thus, in Pettkus v. Becker (1980) 117 DLR (3d) 257 at 275, Dickson J commented that he saw “no basis for any distinction, in dividing property and assets, between marital relationships and those more informal relationships which subsist for a lengthy period”. See also Murray v. Roty (1982) l34 DLR (3d) 507 at 515, where the fact that under the Family Law Reform Act 1980 partners qualified for maintenance after five years of common law marriage was regarded as a useful guide to courts considering whether a relationship was long enough to justify the provision of relief pursuant to the developing doctrine of unjust enrichment.

136In Day v. Mead [1987] 2 NZLR 443 at 451, Cooke P noted “the principle to which we in New Zealand are increasingly giving weight that the evolution of Judge-made law may be influenced by the ideas of the legislature as reflected in contemporary statutes and by other current trends . . .”. An example of this principle in action in this context is Gillies v. Keogh [1989] 2 NZLR 327 at 334, where Cooke P looked to provisions of the Matrimonial Property Act 1976 for an analogy as to how the court should respond to evidence that at the outset of the relationship one party had indicated that the other would never be entitled to an interest in the property in question.

137See, e.g., supra nn. 11–13 and accompanying text. As Patrick Atiyah observes, the English judiciary has a tendency “to look at the common law as the repository of principle, and Statute law as a series of modifications, exceptions, and anomalous cases not based on an coherent social philosophy”: Atiyah, supra, n. 2 at 235.

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contribution as a criterion for the distribution of property on the breakdown of a marriage. Under this provision, the court is directed to consider “the contributions which each of the parties has made or is likely in the foreseeable future to make to the welfare of the family, including any contribution by looking after the home or caring for the family”. In addition, section 37 of the Matrimonial Proceedings and Property Act 1970 provides proprietary entitlement for spouses who have made substantial improvements to the matrimonial home.138 Finally, recent legislative reform of inheritance law also recognises the importance of these considerations. Previously, in the absence of a will, the Inheritance (Provision for Family and Dependants) Act 1975 was interpreted so that relief would be available only to plaintiffs who could be characterised as the dependants of their deceased partners.139 However, since 1996, contribution is a factor that is to be considered by the court in determining the entitlement of widows and unmarried partners alike.140 We may also learn something from what is absent in legislation. The perception that contractual norms have a limited role to play in this context is reinforced by the fact that the Matrimonial Causes Act does not provide spouses the opportunity to contract out of the effect of the Act.141

3. The Premises of the Absolutist Conception of Private Property

The absolutist conception of property is generally defended on the basis that it rewards labour and in the process promotes autonomy, virtue and efficiency.142 Justifications may focus on deontological notions of liberty or desert or have a more teleological focus on the consequences of observing a system of private property. Perhaps the most celebrated liberty-based argument for property appears in John Locke’s Two Treatises of Government. Locke argued for a right to property on the basis that, where we “mix” our labour with things in the external world, these things become an extension of ourselves.143 More recently, the libertarian political theorist, Robert Nozick, offered a less metaphysical justification for a connection between private property and liberty. In Nozick’s view:

patterned principles of distributive justice involve appropriating the actions of other persons. Seizing the results of someone’s labor is equivalent to seizing hours from him and directing him to carry on various activities. . . . This process whereby they take this

138This was essentially a legislative response to the failure of the courts to provide a remedy in Pettitt

v.Pettitt [1970] AC 777. See infra at n. 5 and accompanying text.

139The Inheritance (Provisions for Family and Dependants) Act 1975, s. 3 as interpreted in Re Beaumont, decd. [1980] Ch. 444.

140Ibid. s. 3A (as amended by the Law Reform Succession Act 1995).

141This may be contrasted with the position in New Zealand, e.g., where s. 21 of the Matrimonial Property Act 1976 regulates premarital contracts.

142See, e.g., L Becker, Property Rights: Philosophic Foundations (London, Routledge and Kegan Paul,

1977).

143J Locke, Two Treatises of Government (ed. P I.aslett, Cambridge, Cambridge University Press, 1988) bk II § 27–8 at 287–9.

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decision from you makes them a part-owner of you; it gives them a property right in you.144

David Hume, in contrast, provided a more pragmatic defence of private property, focusing on its consequences. In his Treatise, Hume regarded the absolutist conception of property as “a convention entered into by all members of society to bestow stability on the possession of . . . external goods, and leave every one in the peaceable enjoyment of what he may acquire by his fortune and industry”.145 In the Enquires, Hume explained that an individual would favour this convention, “in order to give him encouragement to . . . useful habits and accomplishments”.146

Accounts based on liberty or utility are generally premised upon a particular conception of human nature, according to which rational individuals do not expend their labour unless they are assured of getting a return. By assigning things to particular owners and enforcing only those personal obligations and transfers of property that are bargained for, the law both rewards past labour and encourages future endeavour. Thus, according to this perspective, an absolutist conception of private property and the principle that people should be subject only to those obligations that they choose to assume are justified by considerations of both desert and efficiency. On this account, people are depicted as autonomous subjects who look to maximise their own welfare. Yet is this an accurate picture of human behaviour in intimate relationships, and does it reflect the social norms that regulate behaviour in this context?

4. The Premises Controverted

(a) Intimacy as a Loss of Autonomy

Legal doctrine fails to reflect adequately the widely felt judicial motivation for intervention in this context largely because of the inability of the courts to break free of the private ordering paradigm. The courts go through the convoluted exercise of analysing contributions made in the course of intimate relationships as if they were part of something resembling a market transaction. This involves what one commentator has described as “a perverse recharacterization of the parties as self-seeking strangers impersonally bargaining over market services in a commodity exchange”.147 In this way, “[l]ove is commodified into a commercial exchange

144R Nozick, Anarchy, State and Utopia (New York, Basic Books, 1974) at 172.

145D Hume, A Treatise of Human Nature (2nd edn., ed. LA Selby-Bigge and PH Nidditch, Oxford, Clarendon Press, 1978) at 482.

146D Hume, Enquiries Concerning Human Understanding and Concerning the Principles of Morals

(3rd edn., ed. LA Selby-Bigge and PH Nidditch, Oxford, Clarendon Press, 1975) at 195.

147B Horsburgh, “Redefining the Family: Recognizing the Altruistic Caretaker and the Importance of Relational Needs” (1992) 25 U of Mich. Jnl. of Law Reform 423 at 428; See also M Radin, Reinterpreting Property (Chicago, Ill., University of Chicago Press, 1993) 33.

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of services for money”.148 What we need in contrast is an understanding of how obligations can arise outside exchange transactions, as a consequence of the parties’ connectedness and interdependence.

Traditionally, private law is understood to safeguard interests that protect plaintiffs as individuals. An obligation is incurred to another only as a result of a wrongful interference with the other’s legal rights or by an agreement to alienate property or labour. According to this analysis, plaintiffs and defendants are treated, for all relevant purposes, as quite autonomous legal subjects. However, even Hume, who placed such value on the stability of property,149 noted that “common experience and observation” tell us that “[it]is easy to remark, that a cordial affection renders all things common among friends; and that married people in particular lose their marital property, and are unacquainted with the mine and thine which are so necessary, and yet cause such disturbance in human society”.150

The modern ideal of love may be seen as part of the process of individualisation that has transformed our understanding of our place in the world.151 Yet, at the same time, it tends to subvert this process: for, to a large degree, intimacy is in tension with independence.152 It is artificial to analyse the participants in romantic relationships as independent actors. Thus, notions of “unity” and “merging” pervade our discourse on love.153 Our spouse becomes not just our partner, but our “other half”, and we live in state of “marital symbiosis”.154 This reflects an understanding that intimacy involves a loss of autonomy, of a clear distinction between self and other—an understanding that is found in philosophical analyses of the concept of love155 and is supported by research in social psychology. Because parties in intimate relationships are likely to regard their interests as inextricably linked, they cannot be expected to safeguard their individual interests separately.156 They are more likely to have regard to their collective welfare and, because of this, the legalities of individual proprietary entitlement may appear

148Horsburgh, supra n. 147 at 456.

149Hume, supra n. 145 at 514.

150Ibid. at 495. Hegel made much the same claim, albeit rather more abstractly, in arguing that family property was, in its nature, common property: see GWA. Hegel, Elements of the Philosophy of Right (ed. Allen W. Wood, Cambridge, Cambridge University Press, 1991) § 167–71; see Radin, supra n. 147 at 46.

151See Stone and Shorter, supra n. 115.

152Beck and Beck-Gernsheim, supra n. 96 at 145.

153See, e.g., I Singer, The Nature of Love: Vol 3, The Modern World (Chicago, Ill., Chicago University Press, 1987) 16–20; S Kerns, The Culture of Love: Victorians to Moderns (Cambridge, Mass., Harvard University Press, 1992) 281–93; Solomon, supra n. 78 at 112.

154Beck and Beck-Gernsheim, supra n. 96 at 51 and 67.

155M Fisher, Personal Love (London, Duckworth, 1990) 26.

156A Aron et al., “Close Relationships as Including the Other in the Self” (1991) 60 Journal of Personality and Social Psychology 241; A Aron et al., “Falling in Love: Prospective Studies of Self Concept Change” (1995) 69 Jnl. of Personality and Social Psychology 1102; Agnew et al., “Cognitive Interdependence: Commitment and the Mental Representation of Close Relationships” (1998) 74 Jnl. of Personality and Social Psychology 939.

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irrelevant.157 This presents a challenge to the dominant Western understanding of personhood in terms of the “bounded individual”158 and the assumption that the individual is necessarily the appropriate unit for the ascription of rights and responsibilities.159

The courts have used different phrases to characterise the relationships that they perceive as demanding special treatment: “partnership’’,160 “consortium’’,161 “joint venture’’,162 and “joint endeavour”163 are a few. All of these expressions encapsulate, however awkwardly, the notion of a relationship in which those involved are, in some significant way, leading their lives as a co-operative endeavour, rather than acting autonomously. In considering parties’ entitlement to assets used and accumulated in the course of their relationship, what is at issue is whether the parties have conducted their lives in such a way that it would be unreasonable to treat them as independent actors protecting their individual selfinterest. In asking this question, the courts have tended to look for factors that demonstrate that the parties understood that their lives were integrated, in that they would enjoy the fruits of the relationship together and, equally, share its hazards.164

While the understanding of intimate relationships in terms of the integration of individuals’ lives is no doubt grounded to a real degree in empirical observation, the departure from conventional understandings of autonomy in this context also has a significant normative dimension.165 The approach of the courts, particularly in Australia and in some American states, reflects a view that the parties involved should treat their cohabitive relationships as joint ventures. The courts will not sanction exploitation or opportunism. In this way, the law mirrors and, to a certain extent, guides the values of the wider community. It reflects and consolidates our ideal of love as involving a fusion of interests and the absence of selfishness.

157Moreover, where parties do have regard to their own interests, often what takes place is not a straightforward bargaining process but involves the use of tactics that are designed to avoid open conflict: T Falbo and L A Peplau, “Power Strategies in Intimate Relationships” (1980) 38 Jnl. of Personality and Social Psychology 618.

158See C Geertz, “From the Native’s Point of View: On the Nature of Anthropological Understanding” in P Rabinow and WM Sullivan (eds.), Interpretive Social Science (Berkeley, Cal., University of California Press, 1979) 225 at 229.