[1996] A.C. 669, [1996] 2 All E.R. 961
House of Lords (3-2)
(main majority speech Lord Browne-Wilkinson; main minority speech
Lord Goff)
Summary, trusts and conscience, retention of title, separation of legal and equitable title, proprietary overkill, reductiones ad absurdum, authorities relied on by the bank, categorisation of resulting trusts, the stolen bag of coins
Quotes: fundamentals of a trust, retention of title, separation of title, requirements for a resulting trust
These notes were last update on 09 May 98
Lord Browne-Wilkinson's view, in essence, was fundamentally opposed to that of the bank as to how trusts, and in particular resulting trusts, are created. The bank had argued that the trust arose automatically, on the separation of the legal and equitable titles, at the latest when the money was mixed into the local authority's account. There was no need for the conscience of the local authority to be affected.
Lord Browne-Wilkinson's view, by contrast, was that equity operates on the conscience of the owner of the legal interest, and that trusts do not arise unless the conscience of the legal owner is affected (see the fundamantals of a trust quote). Furthermore, the conscience of the legal owner cannot be affected as long as he is ignorant of the facts alleged to affect his conscience. In the particular case, the conscience of the local authority was unaffected, at the time of payment, and at the time of mixing, because the local authority had no knowledge that the swap agreement was void.
By the time it did know that, some four years later, when swap agreements entered into by local authorities were held to be void, the mixed account had gone into overdraft, and there was therefore no trust property (the trust property ceased to be identifiable at the latest in June 1987 when the mixed account became overdrawn, but the conscience of the local authority was not affected until 1989, when the Divisional Court held that contracts of this type were void). At no time therefore, while the trust property continued to exist, was the conscience of the local authority affected. Since in Lord Browne-Wilkinson's view, the existence of identifiable trust property was also fundamental to the creation of a trust (except possibly for knowing assistance claims), there was no time when all the basic requirements of a trust were satisfied. See further the quote from the judgment.
Lord Browne-Wilkinson therefore necessarily rejected any notion that a trust could arise automatically by retention of the equitable title by the person solely entitled in law and in equity. In his view, the equitable title had no existence prior to the separation of the legal and equitable estates. Therefore, the bank's argument that it had retained equitable title when legal title was conferred on the local authority, at latest when the money was placed in the mixed account, was fallacious. See further the quote from the judgment.
Thus Lord Browne-Wilkinson did not accept that an equitable title can exist at all unless there is a separation of legal of equitable title. So it is absurd to talk of the bank conveying legal and retaining equitable title - there was no equitable title at all prior to the transfer of the money, and transfer of legal title, to the local authority. Note that Lord Browne-Wilkinson uses Vandervell v IRC as an authority, at pp. 311 and 317 (Lords Upjohn and Donovan).
A diagrammatic representation of the "correct" view will follow.
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See also Sinclair v. Brougham.
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The bank had (necessarily) argued that whenever legal title is in A and equitable title in B, A holds as trustee for B. Lord Browne-Wilkinson was unattracted by this argument, citing as contrary examples restrictive covenants over land, the equitable right to redeem, equitable easements, the right to rectification and the Napier and Ettrick right. Examples where the whole equitable title was in B, but where there was still no trust, included title to land acquired by estoppel, the mortgagee redemption action, rather than the breach of trust action. Even where there is a pre-existing trust, where legal title is transferred to someone not who is not a bona fide purchaser for value without notice, Lord Browne-Wilkinson says the transferee is not necessarily trustee - unless there is the requisite knowledge for knowing receipt - he cites Re Montagu with approval, where Megarry V-C drew a clear distinction between the knowledge requirement for tracing and that for knowing receipt, a distinction which can be justified if tracing does not, but knowing receipt does lead to the imposition of trust liability. Millett had taken a very different view in his 1991 LQR article (Tracing the proceeds of fraud (1991) LQR 71), arguing that in principle, even a volunteer who holds property which (without his knowledge) is subject to a trust, and the justification for knowing receipt liability is that when he later disposes of the property, this constitutes a breach of trust, justifying the imposition of personal liability, even though he no longer retains the property. Millett's view is no longer tenable if the majority view in Westdeutsche is correct.
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This page was last updated on 09 May 98.
Although the case was only about compound (as opposed to simple) interest, in Lord Browne-Wilkinson's view the bank's argument was actually very broad, since the existence of a trust leads not only to the personal liability of the trustee, but also to an equitable proprietary interest defeated only by a bona fide purchaser for value of legal title without notice.
Lord Browne-Wilkinson emphasised the insolvency issues if there was a trust. He also argued against the importation of equitable principles into commercial transactions, citing cases such as Manchester Trust v Furness and The Scaptrade. Similar sentiments have also been expressed in Polly Peck.
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This page was last updated on 09 May 98.
Lord Browne-Wilkinson advanced the following reductiones ad absurdum to show that the bank's resulting trust argument was wrong (the relevant passage is at p. 987 of the All England report of the case). The idea of a reductio ad absurdum, of course, is that it takes an argument to its logical conclusion and shows that the conclusion is absurd. Since the conclusion logically follows from the argument, it must follow that the argument is wrong. Examples of reductiones ad absurdum are quite rare, but Lord Browne-Wilkinson provides a very good one in Westdeutsche.
Step 1
The first step is to suppose that a transferor (T) transfers £1 million, and 100 shares, to a recipient (R1) under a contract which both suppose valid but which is in fact void. R1 pays £1 million into a mixed account. R1 pays £50,000 from the mixed the account to a second recipient (R2), not for value (but not necessarily having notice of the origin of the money). R2 is some kind of business, and pays the £50,000 into his own bank account. Later R2 goes insolvent with debts to trade creditors who have paid R2 for goods which have not been supplied.
As for the shares, R1 transfers them to R3 on an equitable charge in return for a loan. R3 is also unaware of the origin of the money.
Under the bank's argument, T takes in priority to all R2's trade creditors. R2 as a volunteer takes subject to T's equitable interest, which T has retained, never having transferred equitable title to R1. Since there is therefore a separation of legal and equitable titles, R2 therefore becomes trustee (and a fiduciary) for T; in tracing the £50,000 into the account of R2, R2 will be treated (on the basis of the reasoning in Re Hallett’s Estate) as having drawn out his own moneys first, leaving T's in the account. T also takes in priority to R3, because R3 has only equitable and not legal title, and therefore takes subject to R2’s prior legal title. Yet neither R2 nor R3 know anything about T, or T's dealings with R1, and they are not in any meaningful sense unjustly enriched at T's expense. The result, in Lord Browne-Wilkinson’s view is absurd, but since all we have done is to apply the bank’s argument, it must therefore follow that the bank's argument is wrong.
Step 2
The absurdity becomes even clearer if we consider that if the contract had been valid T would have had purely personal rights against R1; it is obviously absurd that he should be so much better off just because the contract is void.
Comment
A possible reaction to this reductio ad absurdum is that it proves too much, since the argument could be used to justify the removal altogether of trusts from commercial transactions, and there is no disapproval in the case of Romalpa, Quistclose, etc, or the trust receipt used to protect banks from bankruptcy in international trade. However, although the R3 result is the same for any trust, R2's position in the example depends also on the other part of the bank's argument, that whenever there is a separation of legal and equitable title there is a trust. This part of the argument is necessary to attract the reasoning in Re Hallett's Estate, whereby R2 is taken to have spent his own money in preference to that of T. In fact, even R1 had accepted the money as express trustee for T, R2 as a volunteer would not be a fiduciary, and could not necessarily be taken to have expended his own money first. It is therefore only the combination of both these argument advanced by the bank that leads to the absurd result in the example.
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1. Personal action - see Sinclair notes.
2. He only discusses Lords Haldane and Parker.
3. HL really only purporting to decide on particular facts, how the assets of that particular society in that particular liquidation were to be dealt with.
4. No single ratio.
5. No application where trade creditors.
6. Although property rights involved in Sinclair, unlikely to have given rise to long-settled titles, which would be disturbed by overruling it.
7. So Sinclair overruled, but no doubt cast on Diplock (and therefore presumably on the requirement for a fiduciary relationship for equitable tracing).
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Chase Manhattan
1. Goulding J was asked to assume that the moneys paid were able to be traced into the hands of the defendant - so the only question was, was there a proprietary claim over the mixed fund?
2. Goulding J thought that mere receipt (of the second mistaken payment) by the recipient constituted the recipient trustee. Lord Browne-Wilkinson disagreed because:
3. The payer does not retain an equitable interest, because there is no equitable interest before the mistaken payment is made.
4. The recipient's conscience is not affected until he is aware of the mistake.
5. The conclusion that New York and English law are the same is surprising given that the remedial constructive trust is recognised in New York but not in the U.K. Cites Metall und Rohstoff.
6. But the decision in Chase Manhattan is probably correct, although the reasoning is wrong, because the recipient knew of the mistake 2 days after payment made, and before the winding up, so his conscience was affected from that time.
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Facts of Ames:
Marriage settlement for income to H for life, then W for life or until re-marriage, then remainder to issue, with ultimate trust for artificial class of H's next of kin. Marriage occurred, then declared nullity - void ab initio. Income paid to H until he (later) died, and question arose what to do with capital - ultimate trust or settlor's estate?
Held - resulting trust for settlor's estate.
Lord Browne-Wilkinson says:
1. Not clear from the confused judgment whether the ultimate trust failed because the condition precedent had become impossible (failure of issue of non-existent marriage), or the consideration (intended marriage) had wholly failed.
2. Either way it was irrelevant to the case before him, because it was a resulting trust in category (B), but that depends on an express trust, and there was no express trust in Westdeutche.
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Lord Browne-Wilkinson also rejected the bank’s resulting trust arguments - there is no such thing as an automatic resulting trust - all are based on presumed intention, and if there is no presumed intention, then bona vacantia is a possible conclusion - see West Sussex. Here the intention of the parties at the time of receipt was clearly to transfer title absolutely to the LA. He prefers Swadling’s 1996 LS arguments to those of Peter Birks (in a rather obscure publication of proceedings of a conference at the Hebrew University of Jerusalem in 1990), although Swadling would almost certainly not have supported the conscience view of resulting trusts. Birks had argued for a wider restitutionary role on the resulting trust (as did Millett in 1991 LQR).
An exhaustive categorisation of resulting trusts was advanced, which is narrower in some respects than the earlier Vandervell (No. 2) categorisation. I would suggest, however, that the ratio of Westdeutsche relates to conscience; the categorisation of resulting trusts does not seem to be very well thought out, leads to a number of undesirable consequences, and is not in my view a necessary part of the decision.
Quote on categorisation of resulting trusts
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Questions on the categorisation
1. Are category 2 Rosset cases within category (A) here? What happens in a Rosset category 2 case where the recipient of the money thinks it is a gift, and the provider of the money intends a beneficial interest?
2. How do you explain Hodgson v. Marks?
3. Is Re Gillingham Bus Disaster Fund correct?
4. There was a resulting trust of some of the property in West Sussex - but was any property transferred on express trust?
5. Were there really express trusts declared in Quistclose?
General conclusion on resulting trusts
In Lord Browne-Wilkinson's view, the development of restitution by means of the resulting trust can cause great unfairness - a remedial constructive trust would be a better way forward - imposed on conscience and without any necessary attendant property consequences. But he was not sure whether we should in fact follow the USA and Canada route.
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See also Sinclair v. Brougham.
The bank argued that where a thief steals a bag of coins and mixes them in a mixed account, or with other coins, those coins should be traceable. They are not traceable at common law, because mixed, so must be traceable in equity. But they are only traceable in equity if there is a trust (or initial fiduciary relationship). So there must be a resulting trust arising on receipt or mixing.
Lord Browne-Wilkinson agrees that there is an equitable right to trace in these circumstances, but on the basis of a constructive not resulting trust. Where property is obtained by fraud, equity imposes a constructive trust on the fraudulent recipient. Cites Stocks v Wilson [1913] 2 KB 235, R Leslie v Sheill [1914] 3 KB 607, Bankers Trust v Shapira [1980] 1 WLR 1274, [1980] 3 All ER 353, and McCormick v Grogan.
Details of the argument
A consequence of the narrow Westdeutsche categorisation of resulting trusts is that the stolen bag of coins must be dealt with on constructive trust rather than resulting trust principles. This still leaves a lacuna, where the thief does not mix the money but gives it to an innocent donee (who would hold it for the victim were there a resulting trust, but does not on constructive trust principles).
Suppose first that the thief (T) mixes the money stolen from the victim (V) with his or her own. The logic of Westdeutsche itself, where the property passed to the LA at the latest on being paid into the mixed account, suggests that V's legal title is lost and (we presume from Westdeutsche) passes to T. T's conscience is affected so (on Lord Browne-Wilkinson's view) T becomes constructive trustee. Hence a fiduciary relationship is established, enabling subsequent tracing in equity. (This is new law, by the way, and was not certain prior to Westdeutsche; indeed, the authorities cited do not really support the proposition.)
Millett (Tracing the Proceeds of Fraud (1991) LQR 71) would have come to the same conclusion but on resulting trust reasoning - equitable title remaining with V. Millett's view is no longer sustainable after Westdeutsche, although it would have been had Lord Browne-Wilkinson not adopted so narrow a categorisation of resulting trusts - nor did he need to, because T's conscience is obviously affected, so the case is clearly distinguishable from the bank's argument in Westdeutsche itself.
If T does not mix the money but passes it to a recipient (R), legal title cannot pass to T, but at this stage remains with V. Legal title will however pass to R if either the money passes as currency, or (on the same basis as above) if R mixes it with his own money. Millett's view would be that equitable title still remains with V, but after Westdeutsche it is clear that there will only be a trust if R's conscience is affected, in which case R will become constructive trustee. Millett's resulting trust reasoning can therefore reach different conclusions in this case, since R would be a trustee whether or not his conscience is affected, but this reasoning is no longer sustainable in the light of Westdeutsche.
Of course, if (and only if) legal title passes to R, then there will also be the possibility of a money had and received action (against R). If legal title does not pass to R, then V will be able to trace at common law (the proprietary form of tracing). It follows that in any circumstance where the money had and received claim is available, the proprietary claim is not, and vice versa.
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These notes were last updated on 17 May 97.
Lord Goff dissented, essentially on the grounds that equitable jurisdiction remained sufficiently flexible to allow it to award compound interest where justice so required, even in the absence of a trust or other fiduciary relationship.
However, Lord Goff agreed with the majority that there was no trust. He was unhappy in principle about the resulting trust claim, but did not think Sinclair relevant, because there was no trust there, except on Lord Parker's view, which Lord Goff clearly thought wrong. But he was not prepared to overrule Sinclair.
Lord Goff's views were applied in another context in Brennan v Brighton Borough Council, Times, 15 May 97.
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See also Sinclair v. Brougham.
This page was last updated on 09 May 98.
Mail Paul Todd : SLAPNT@cf.ac.uk