[1914] A.C. 398.
House of Lords
(overruled in Westdeutsche v Islington BC).
Facts, the problem, personal action, real action, distribution method
A building society set up a banking business which was held (in the case itself) to be ultra vires the building society. The society became insolvent, and the question arose how to divide up assets. By the time of the action, the only live issue was between some of the "B" shareholders and the depositors in the bank, the position of the "A" shareholders and trade creditors having been settled by agreement.
As far as is possible to tell from the figures in the report, about £11 million had been invested by the bank depositors, and about £1 million by the building society shareholders. Something like £5 million were left. If the depositors had won their personal action, they would have taken in priority to the building society shareholders, who would have got nothing. But if the depositors had no action, the shareholders would have been entitled to the entirety of the £5 million, so would not only have recovered all their money, but would have received a substantial windfall.
In the House of Lords the possibility of tracing in equity was contemplated for the first time. The problem was the rule in Hallett’s Estate, the effect of which would have entitled the depositors to take to the exclusion of the shareholders (the shareholders having mixed depositors’ money with their own, must have been regarded as spending their own money first). The House clearly wanted to, and did, arrive at a pari passu solution, but the methods of avoiding the consequences of Hallett’s Estate are really what gives rise to the difficulty in this case. None are really supportable, although this really does appear to be a case where the House strove to find the just solution. The case has now been overruled by the majority in Westdeutsche.
Top of case, trusts, tracing into mixed funds
The bank depositors' contracts were ultra vires. Therefore, there could be no simple contract action. The House of Lords therefore also refused to grant a restitutionary claim based on an implied contract. But clearly in the absence of any action, the shareholders would have been unjustly enriched.
In Westdeutsche, Lord Browne-Wilkinson rejected the view that a money had and received claim is based on an implied contract, so the argument against using an implied contract to avoid the consequences of the express contract being ultra vires and void cannot stand up. The personal action was not really an issue in Westdeutsche, at any rate in the House of Lords, since the local authority did not resist the bank’s personal claim, but Lord Browne-Wilkinson cited Fibrosa Spolka Akcyjna v Fairbairn Lawson Combe Barbour Ltd [1943] AC 32, where a money had and received claim succeeded for a total failure of consideration, where advance payment had been made under a contract later frustrated (and hence rendered void) by the outbreak of World War 2. He also cited Lipkin Gorman v. Karpnale [1991] 2 AC 548, [1991] 3 WLR 10 (although in that case the action was not brought by one of the contracting parties).
Lord Browne-Wilkinson in Westdeutsche thought that the personal claim in Sinclair should have succeeded, with the depositors ranking pari passu with unsecured creditors, but taking priority over the shareholders.
Top of case, trusts, list of cases, tracing into mixed funds
In Guinness v Saunders [1990] 2 A.C. 663 the House of Lords (or at least Lord Templeman) held that quantum meruit was based on implied contract, and rejected Sauders’ claim on arguments very similar to those that had succeeded in Sinclair v. Brougham. Different reasoning was accepted by Lord Goff, however, and also elsewhere by Lord Templeman (in relation to Craven-Ellis). Burrows (in his introductory book on restitution) disapproves of Lord Templeman’s reasoning because based on an outdated implied contract view - he prefers an essentially public policy based conflict of interest argument - see p. 308.
Saunders also failed in Guinness v. Saunders on an equitable charge, the criteria for which appear to be similar to those for a quantum meruit claim, but this aspect of Guinness v Saunders has to be reconciled with Boardman v Phipps [1967] 2 A.C. 46, where a similar restitutionary claim succeeded, although there may have been a conflict of interest. It may be a matter of degree - the conflict was much more serious in Guinness.
It is interesting that in Sinclair v. Brougham the House of Lords appears to have construed the law creatively in order to reach a solution which most people would probably think fair. The case was overruled in Westdeutsche, where Lord Browne-Wilkinson's preferred outcome in Sinclair would have given the shareholders nothing. It is also interesting to observe that the majority of the H.L. in Westdeutsche most certainly did not strive to reach a "fair" result in the case itself.
Top of case, trusts, list of cases, tracing into mixed funds
Decision : the depositors and members of the society (i.e., the "B" shareholders) ranked pro rata according to their respective payments to the society. The problem was reaching a basis for this decision, and in particular not attracting the rule in Hallett (see tracing into mixed funds).
Viscount Haldane L.C. (with whom Lord Atkinson agreed) treated it as an equitable tracing claim - he said the shareholders held the depositors’ money on resulting trust, but not of an active character, whatever this may mean. Unlike Lord Parker (see below), Lord Haldane treated the society itself, not the directors, as having mixed the fund, but distinguished Hallett because (in his view) there was no breach of fiduciary duty by society, since they had consent of depositors: "the society should be entitled to deal with [the depositors' money freely as its own".
Lord Browne-Wilkinson’s view of this in Westdeutsche was that:
1. There are only 2 ways conventionally of getting a resulting trust (see the quote in the notes on the case), all resulting trusts therefore falling into two categories, (A) and (B).
2. Lord Haldane's no fiduciary breach conclusion would rebut the presumption of resulting trust under category (A) - the conclusion would then have been that the shareholders would have obtained the entirety of the beneficial interest, as well as legal title to the deposits.
3. It is also inconsistent with the express trust requirement under category (B), because there is no identifiable trust fund.
4. Therefore Lord Haldane's no fiduciary breach conclusion is inconsistent with any conventional view of resulting trusts (or at any rate the view stated in Westdeutsche).
5. The unconventional "inactive" resulting trust would raise all the problems of Lord Browne-Wilkinson’s earlier reductio ad absurdum.
6. Also, it woudl be inconvenient for all trade creditors, since all money deposited in this way would be on trust, and hence not company money - depositors would always take priority to trade creditors - Lord Haldane addressed but did not resolve his issue.
Lord Parker said that the depositors' money and shareholders' money had been received by the directors of the society as fiduciaries, not by the society itself, allowing for equitable tracing claim. There were no Hallett problems because there was no mixing of any trust money with fiduciary money. The trust was similar to Quistclose, with the directors agreeing to make valid deposits (which were of course impossible).
Lord Parker’s view was also adopted in Diplock. But in Westdeutsche Lord Browne-Wilkinson noted that:
1. No other member of the House used the same reasoning.
2. Receipt by directors is artificial, since the society had power to receive (if not to repay) the depositors' money.
3. There was the same problem with trade creditors as before. Lord Parker was aware of this - but left it to be dealt with in a future case where the matter was raised - he seems to lean towards discretion on individual cases.
Lord Dunedin used a broad equity of restitution (super-eminent equity). He seems to have adopted the Parker approach but concurred with Haldane. His view appears to be based on a broad jurisdiction to do justice. Lord Sumner's view was broadly similar to that of Lord Dunedin (broad brush justice in administering).
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The distribution method was pari passu, although these were effectively running bank accounts, so no enquiry was made into the timing of the deposits and withdrawal. Possibly not too much should be read into this, however, because
the decision was expressly subject to any tracing application by any individual depositor or shareholder. Really the case only decided that neither creditors nor depositors as a group had priority over the other.
‘The claims of each class are equal, and, I think, for the present purpose identical.' (Lord Sumner)
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These notes were last updated on 21 Apr 98.
Mail Paul Todd : SLAPNT@cf.ac.uk