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The circumstances in which a constructive trust arises in the context of sales transactions are not entirely settled. Commentators agree that a constructive trust arises when a sales contract is enforceable by an order for specific performance. There is disagreement, however, on the question whether a constructive trust will also arise in other circumstances. In addition to the law that developed in relation to sales transactions, we need to take note of a third rule relating to gifts of registered securities. In the context of gifts, a constructive trust arises for the benefit of the donee when the donor has done everything in her power to divest herself of her interest in the securities.57 This is said to be the case when the donor has executed and delivered the transfer forms and the securities certificates to the buyer.

Subsection 2.4.4 discusses the circumstances in which specific performance is granted. This rule is analysed first because it is the least controversial: there is agreement that a constructive trust arises in those circumstances. What follows in subsection 2.4.5 is a discussion of the question as to whether there are instances in which a constructive trust arises when a contract is entered into that cannot be enforced by an order for specific performance. In subsection 2.4.6 the rule giving rise to a constructive trust upon delivery of the transfer documents will be addressed.

2.4.4 Equitable title and specific performance

In this subsection it will be shown that property rights are regulated in English law in an indirect fashion accommodating the dualistic character of English private law. Under the rule discussed here, equitable ownership will arise when a contract becomes specifically enforceable. Lloyd LC wrote in J. Sainsbury plc v. O’Connor (Inspector of Taxes), that ‘[b]y equitable owner is meant, inter alia, the purchaser under a specifically enforceable contract’.58

If a contract is specifically enforceable and if, as a result, a constructive trust arises, the seller becomes the trustee and the buyer becomes the beneficiary of that trust.59 The trust is created by the application of the maxim that equity treats that as done which ought to be done. In

57A. J. Oakley, Parker and Mellows: The Modern Law of Trusts, 8th edn. (London: Sweet & Maxwell, 2003) 440–441.

58[1991] 1 WLR 963 (CA) at 972 (CA).

59Gareth Jones and William Goodhart, Specific Performance, 2nd edn. (London: Butterworth, 1996) 17.

other words, equity, through the lens of trust law, treats the buyer as if she has already acquired the interest contracted to be purchased. The contract is treated as giving the buyer an equitable interest in the property.60

To illustrate this point further, and in particular to highlight the embeddedness of the analysis in trust law, it is helpful to refer to a dictum by Lord Jenkins in Oughtred v. Inland Revenue Commissioners. He said there: ‘The constructive trust in favour of a purchaser which arises on the conclusion of a contract for sale is founded upon the purchaser’s right to enforce the contract in proceedings for specific performance. In other words, he is treated in equity as entitled by virtue of the contract to the property which the vendor is bound under the contract to convey to him. This interest under the contract is no doubt a proprietary interest of a sort, which arises, so to speak, in anticipation of the execution of the transfer for which the purchaser is entitled to call.’61

If the buyer can show that a contract is subject to specific performance, she will be considered the equitable owner from the moment the contract is concluded. In order to determine in which case the buyer of securities acquires equitable title as early as on conclusion of the contract, we need to proceed in a path-consistent fashion. We need to start by analysing the rules governing specific performance.

Specific performance is a remedy for the enforcement of contracts.62 This is why our enquiry will take us briefly into English contract law.

Specific performance is a discretionary remedy, but the courts exercise their discretion according to settled principles.63 The requirements for an order for specific performance are as follows.64 First, there must be an enforceable contract between the parties. Second, the claimant must have furnished actual consideration in that she either has already performed or is now ready and able to perform. Third, the subject matter of the trust must be certain. Fourth, damages for breach of contract must be an inadequate remedy. These requirements will be discussed in turn in subsections 2.4.4.1–2.4.4.4. This discussion is not intended as a comprehensive study of specific performance of contracts, but rather as an illustration of the background of the

60 Smith, Property Law 25. 61 [1960] AC 206 at 240.

62Jones and Goodhart, Specific Performance 9.

63Haywood v. Cope (1858) 25 Beav 140 at 151, 53 ER 589 at 594 per Romilly MR.

64A. J. Oakley, Constructive Trusts, 3rd edn. (London, Sweet & Maxwell, 1997) 277.

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rules governing the acquisition of property rights in securities under English law.

2.4.4.1 Enforceable contract

The courts will grant an order for specific performance of a contract only if there exists a valid subsisting contract between seller and buyer. The first requirement for an order for specific performance of a contract is that it be enforceable. This is, therefore, also the requirement for there to arise a constructive trust by operation of law and for the buyer to acquire equitable title to the securities. A contract is enforceable if it is valid, unconditional and possible. These requirements will be briefly analysed below.

The first requirement to be analysed is the requirement for a valid contract. Validity of contracts raises many questions which are general to the law of contracts and do not bear discussion here.65 In the context of this book, we need only note that embedded in the analysis is contract law and briefly look at a few of the authorities relating to contracts for the purchase of shares.

The contract for the sale of securities does not have to be in writing. However, if a written transfer is executed the transfer is subject to stamp duty.66 If one of the parties is a broker or an agent, she must send a written contract note to her principal,67 but failure to send the contract note does not affect the validity of the contract.68 Moreover, a buyer will not obtain equitable title under an otherwise valid contract if that would be inconsistent with its terms. This may be so where the parties intend that the transferor should retain the benefit of the shares.69

The second requirement to be satisfied for an order for specific performance is the existence of an unconditional contract of sale. Jenkins LJ said in Parway Estates Ltd v. Commissioners of Inland Revenue that there is a well-established principle ‘that once a contract of sale is executed, the

65Treatment of these questions may be found in all of the standard text books: Treitel, The Law of Contract; Jack Beatson, Anson’s Law of Contract, 27th edn. (Oxford: Oxford University Press, 2002).

66Oughtred v. Inland Revenue Commissioners [1960] AC 206.

67COB 8.1.3, FSA Handbook as of 26 May 2006, available from http://fsahandbook.info/ FSA/html/handbook/ (last visited 6 June 2006).

68A. Alcock [23.9], in Rt Hon. Lord Millet (ed.), Gore-Browne on Companies, 50th edn. (Bristol: Jordans, 2004).

69Hood Barrs v. Commissioner of Inland Revenue (No. 3) (1960) 39 T C 209.

subject-matter – the share in the present case – becomes in equity the property of the purchaser’.70 Equitable ownership vests in the buyer at the date on which the unconditional contract of sale is signed. By the same token, equitable ownership is not transferred unless there is an unconditional contract.71

The requirement for an unconditional contract seems to be a difficult one to meet when securities are sold that have been issued subject to transfer restrictions. The London Stock Exchange will not list securities that are subject to transfer restrictions.72 The impact of transfer restrictions on the sale of listed shares is therefore a question of no interest from the point of view of this book.

It is, nevertheless, worth noting that restrictions on transfers contained in the issuer’s documentation do not as such prevent courts from ordering specific performance.73 No order will normally be granted, however, if the directors of the issuing company have already exercised their authority to refuse to register a transfer. The cases then distinguish between contracts made on the stock exchange and contracts made privately outwith the stock exchange.74 Contracts made outwith the stock exchange, which tend to involve shares in private companies, are not enforceable by an order for specific performance if the company refuses to register a transfer.75

Different rules apply to contracts made on the stock exchange. These rules go back to a time when transfer restrictions were no hinderance to a listing. There is no English case in which an order for specific performance of such a contract has been granted; there are, however, cases holding that the seller under a contract for the sale of shares at the stock exchange is not liable for breach of the contract if the company refuses to register the buyer.76 There also two Scottish cases supporting

70(1958) 45 TC 135 at 148 (CA).

71Hare v. Nicoll [1966] 2 QB 130 (CA); J. Sainsbury plc v. O’Connor (Inspector of Taxes) [1991] 1 WLR 963 (CA).

72Rule 3.15, Stock Exchange Listing Rules as of June 2006, http://www.fsa.gov.uk/pubs/ ukla/chapt03-3.pdf (last visited 4 July 2006).

73Evans v. Wood (1867) LR 5 Eq 9; Paine v. Hutchinson (1868) LR 3 Ch App 388.

74George Northcote, Fry on Specific Performance, 6th edn. (London: Sweet & Maxwell, 1985) 689–690.

75Bermingham v. Sheridan (1864) 33 Beav 660, 55 ER 525; Wilkinson v. Lloyd (1845) 7 QB 27, 115 ER 398.

76Stray v. Russell (1859) 1 El&El 888, 120 ER 1144; London Founders Association, Limited v. Clarke (1888) 20 QBD 576 (CA); Hichens, Harrison, Woolston & Co v. Jackson & Sons [1943] AC 266 at 279 per Thankerton LJ.