Is it possible to classify the events from which non-consensual property rights arise?

In any case, the facts of Boardman need to be looked at carefully.  Mr Boardman was a solicitor acting for the trustees of a trust that included shares in a particular manufacturing company.  He and one of the beneficiaries told the other beneficiaries that the best way to realize the value of the shares would be to make a takeover bid.  In the end, Mr Boardman made such a bid, successfully, in his personal capacity.  However, this became an event giving rise to non-consensual property rights, a wrong, because he only gained the opportunity to do this and the information necessary while purportedly (or actually) acting in the capacity of adviser to the trustees.  Mr Boardman did not act dishonestly in the sense that he deliberately set out to deceive the beneficiaries.  After his actions they effectively ‘doubled their money’.  Viscount Dilhorne, who dissented, was prepared to hold that the authority of Regal v Gulliver  (a case with similar facts which he distinguished on the ground that there the fiduciary held assets originally belonging to the trust which wasn’t the case in Boardman) required ‘wrongdoing’ which was absent in the case before him because the trust had not suffered a loss.  The reasoning of the majority did indeed beget a strict rule; that an agent is liable to account for profits he makes out of trust property if there is a possibility (my italics) of conflict between his interest and his duty to the principal (Lord Cohen).  

AG for Hong Kong v Reid concerned conduct that was a ‘wrong’ in the ordinary sense and also the equitable wrong of breach of fiduciary duty.  The defendant was the public prosecutor in Hong Kong who took bribes and invested some of the profits in farmland in New Zealand, which appreciated in value.  The Privy Council declined to follow Lister v Stubbs and hold that the taker of a bribe who is acting as a fiduciary has only a personal liability to account to his principal.  This would have meant that the wrongdoer could keep hold of his property in New Zealand, and be allowed to profit from his wrong, so it was decided that he held the property on a constructive trust for the Crown.  In order to ask how the property right arose, which we need to know in order to compare the other wrongs cases and assess the classification, it is necessary to look at the reasoning of Lord Templeman.  

He holds that the fiduciary is not allowed to benefit from his own breach of duty, that the fiduciary should account for the bribe as soon as he receives it and that equity regards as done that which ought to be done.  These need a little unpacking, especially the last premise, which can be done with help from the Millett article which Lord Templeman quotes and explicitly improves.  The article contrasted Holmes’ ‘bad man theory’ of common law with what is described as a ‘good man’ theory of equity – a fiduciary is never to be considered as acting against the interest of his principal.  It assumes that he is always acting in accordance with his duty, and so if he is paid a bribe, equity assumes that the payment is for the benefit of his principle and it does not ‘lie in the mouth of’ the false fiduciary to say that it was a bribe.  If this is a rule of equity, which Millett suggested and the Privy Council agreed with, it follows that it operates on receipt of a bribe.  True, he ‘ought to hand it over’, and failing to do so is a breach of duty, but this is the point of the maxim ‘equity regards as done that which ought to be done’.  At the moment of receipt the principal becomes owner in equity of the bribe.    

The Daraydan Holdings case also concerned a bribed fiduciary.  However, the judge in High Court, Lawrence Collins J, did not have to apply Reid because the facts were different.  In Daraydan, the contractors bribed the defendant, but the claimants were invoiced for the amount as a commission, and it was found that the bribe was paid out of the money paid by the claimants for what they thought was the price.  Therefore, the judge was able to hold that the claimants had a persisting proprietary interest in the money.  The approach taken by the judge makes the case look like one of vitiation of consent to give rise to an unjust enrichment.  On the facts this was an entirely reasonable reading of the case, because the claimants thought they were paying a service commission when in fact they were paying a bribe, a vitiation of consent of the genus of Chase Manhattan, where the mistake means that the payor retains an (equitable) proprietary interest in the payment.  

The problem with the judge adopting this approach is that it makes the process of classification more difficult and perhaps somewhat artificial.  On the authority (even if it is only persuasive) of Reid, it would have been possible to hold that the bribe was held on a constructive trust the moment it was received because it was a bribe rather than because the claimant company paid for it, and the trial judge would not have wasted ink on the considerations of policy that disallow the keeping of bribes.  The results is the same in any case, but it is better if our classification project is based on the holdings of the judge rather than some idea of what the ‘right’ reading of the facts is.

The cause of this confusion is that it is that judges seem to prefer to find a continuing property interest.  There is a general reluctance to accept that new property rights can be created to ‘right the wrong’, probably for the very good reason that it is often suggestive of judges deciding the matter using a strong discretion to apply ‘woolly notions of fairness and justice’.  In fact perhaps it is the case that many judges would still really like to stay within Lister v Stubbs, as the decision of Lawrence Collins J seems to (because the bribe was paid by subtraction from the claimant’s wealth).  Yet this reluctance is not necessary, especially in the narrow field of property rights responding to wrongs.  The main submission of this part of the answer is that if the Millett/Templeman rule of equity derived from the maxim ‘equity regards that as done…’, that the beneficial interest in the bribe vests in the principal on receipt, is good law, which it seems that it must be, then there is no need to be unduly worried about property rights being created by discretion – a rule that bribes vest in principles in equity is just that – a rule, fixed in advance and just as at home in Halsbury’s Laws as any other.

During the discussion of Daraydan the boundary between property rights created by wrongs and those created by unjust enrichment has already been briefly discussed.  An unjust enrichment arises where the defendant is enriched by holding wealth or assets representing that wealth at the expense of the claimant – that is, by subtraction from his assets, and without the claimant’s consent.  Usual examples of vitiated consent include mistake, and failure of consideration.  Mistake was the ground in Chase Manhattan v Israel British Bank where the claimant bank mistakenly made two payments rather than one, and the defendant bank became insolvent, so the claimant obviously wanted a declaration that the second payment was held on trust in its favour in order to trump the claims of other creditors.  The property interest in the money was held to have persisted, and the claimant got more than a creditor’s right because the money did not belong to the defendant beneficially.  It is important to point out at this stage that the fact that there was a continuing property interest in the money does not mean that a claim in unjust enrichment is not sustainable – the Birks article cited above goes to great lengths to show that a property right and an unjust enrichment are not logically opposed.

The article was a response to the decision of the House of Lords in Foskett v McKeown.  The species of unjust enrichment that this constituted, is, according to Birks, a non-consensual substitution. The trust property (money) was taken and paid into a life insurance policy, where it formed ‘part of’ a chose in action – the right to payment on death of the policyholder, belonging to the next of kin of the policyholder.  The trustee policyholder committed suicide and his family received a payment of over £1m.  Two of five payments were made with trust money, and the beneficiaries claimed a two-fifths share of the £1m.  

The House held that a continuing property interest in the payment could be founded, and therefore unjust enrichment had nothing to say.  The Lords seemed to take the words unjust enrichment as a synonym for discretionary property rights.  Lord Browne-Wilkinson held that it was a case of ‘hard-nosed property rights’ and that merely because property rights are equitable, it does not mean that their existence is within the discretion of the court.  Perhaps he is attempting to resile from some of the statements in Westdeutsche about conscience having to be sufficiently affected for property rights to arise.  In any case, the approach of the court is reminiscent of the approach of Lawrence Collins J (well vice versa) because there seems to be a need to find a continuing property interest.  This is what Birks calls the ‘leech theory’, the leech being the original interest and the different passing legs the different things the interest attaches to through substitutions.  Birks says that the property interest in the new thing (here the payout) cannot simply be explained by the original property interest in the trust money because it does not explain why the beneficiary gets any rights at all in the substitute (which is a new thing) and how the content of the right can differ (it may be a lien or a proportionate share).  This leads Birks the conclusion that the substitution is the causative event that gives rise to property rights in the new thing.  

The continuing proprietary interest is not necessary for a claim in unjust enrichment, but at the same time it does not preclude one.  One thing that is odd is that in Trustee of Jones v Jones Millett LJ found that the trustees in bankruptcy continued to have full title to the money, and that Mrs Jones was unjustly enriched at their expense.  There was no suggestion that the two were in opposition to each other, yet four years later at least two members of the house, on very similar facts, held that the two were in opposition.    

So a fundamental problem for our three part classification is that the House of Lords seems reluctant to recognise that the second part of our classification can ever give rise to non-consensual property rights, Lord Browne-Wilkinson in particular, who rejected out of hand an unjust enrichment analysis in Westdeutsche.  Foskett has been widely welcomed for deciding that property rights are subject to fixed rules, and also for ‘roughing up’ the distinction between equitable and legal tracing rules (though not abandoning it).  However, the reluctance of the House to accept an unjust enrichment analysis is disappointing, particularly seen as Lords Browne-Wilkinson and Hoffmann both seemed to assume that it rests on a discretion based on ‘woolly notions’.  Yet they must accept that the facts before them at all created non-consensual property rights.  The beneficiaries of the trust had an interest in the trustee’s insurance policy proceeds that cannot have been created by consent.  The interest was not capable of being created by the manifestation of consent that occurred when their trust was created, because that would be absurd – we do not even know that the insurance policy existed at this point.  So, what ‘event’ was it that made these rights in the proceeds arise?  It hardly needs the authority of Birks to point out that subsisting property rights are not ‘events’.  It must have been the payment of trust money into the policy.  A breach of trust must be capable of creating non-consensual property rights as we already know that profits made in breach of trust are held for the beneficiaries so a fortiori the theft of trust money and the resulting windfall must be subject to the interest of the beneficiaries.  Looking at it this way it becomes clear that it is possible to hold that the beneficiaries have an interest in the proceeds without having to suggest that their original interest in the trust fund somehow survived the substitution.

However, though we may have solved Lord Browne-Wilkinson’s problem, we have made our own more difficult. This is a breach of trust, and a breach of trust is an equitable wrong.  On the same facts, do we have both a wrong and an unjust enrichment?  How do we decide which is the correct classification?

Firstly, the ‘wrongs’, though equitable, have all concerned the wrong of breach of fiduciary duty rather than a breach of trust (Mr Boardman was not a trustee himself).  The rule espoused in Boardman, that the property is held on trust for the person to whom the duty is owed at the moment the fiduciary puts himself in the position where a conflict of interest can happen could not apply to a trustee because it would not make sense.  The trustee is already holding the money on trust.  The moment he forms the intention to defraud the beneficiaries, he is still holding on trust for them, so the conflict of interest test makes no sense – it will not aid our case because he already has a personal and proprietary liability to the beneficaires.  Further, and more importantly, the trust property disappeared when it was paid into the policy and became mixed with the other payments – it was a mixed substitution.  That event created the property right in the resulting payout.  

The key is to look carefully at the facts.  It sounds very simple, but it is not because the facts are often complex and the temptation to confuse the remedy – the constructive trust with the causative event by concentrating on an already existing trust relationship must be overcome.  It is possible to classify the events that give rise to non-consensual property rights.  What is necessary is to focus on exactly those events, why they give rise to the rights, and not to be confused by the eventual remedy.