New Perspectives on Property Law: Obligations and Restitution

NEW PERSPECTIVES ON PROPERTY LAW, OBLIGATIONS AND RESTITUTION

Cavendish Publishing Limited London • Sydney • Portland, Oregon

NEW PERSPECTIVES ON PROPERTY LAW, OBLIGATIONS AND RESTITUTION Edited by Alastair Hudson Queen Mary, University of London

Cavendish Publishing Limited London • Sydney • Portland, Oregon

First published in Great Britain 2004 by Cavendish Publishing Limited, The Glass House, Wharton Street, London WCIX 9PX, United Kingdom Telephone: +44 (0)20 7278 8000 Facsimile: +44 (0)20 7278 8080 Email: [email protected] Website: www.cavendishpublishing.com Published in the United States by Cavendish Publishing c/o International Specialized Book Services, 5824 NE Hassalo Street, Portland, Oregon 97213–3644, USA Published in Australia by Cavendish Publishing (Australia) Pty Ltd 3/303 Barrenjoey Road, Newport, NSW 2106, Australia Telephone: +61 (2)9664 0909 Facsimile: +61 (2)9664 5420 Email: [email protected] Website: www.cavendishpublishing.com.au © The Contributors 2004 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, scanning or otherwise, without the prior permission in writing of Cavendish Publishing Limited, or as expressly permitted by law, or under the terms agreed with the appropriate reprographics rights organisation. Enquiries concerning reproduction outside the scope of the above should be sent to the Rights Department, Cavendish Publishing Limited, at the address above. You must not circulate this book in any other binding or cover and you must impose the same condition on any acquirer. British Library Cataloguing in Publication Data Hudson, Alastair New perspectives on property law, obligations and restitution I Property—England 2 Obligations (Law)—England 3 Restitution—Law and legislation—England 4 Property—Wales 5 Obligations (Law)—Wales 6 Restitution—Law and legislation—Wales I Title 346.4’204 Library of Congress Cataloguing in Publication Data Data available ISBN 1-85941-842-2 1 3 5 7 9 10 8 6 4 2 Printed and bound in Great Britain

Preface This collection of essays is a sister publication to New Perspectives on Property Law, Human Rights and the Home. The papers making up these collections were drawn from the 60 papers delivered at the annual WG Hart workshops held at the Institute of Advanced Legal Studies, University of London, between 1 and 3 July 2002 in Russell Square. The symposium was conceived and directed by Dr Alan Dignam and myself. The theme of that symposium was ‘The Idea of Property and Obligations in Law’. Our aim was to consider not only the conceptual notions of property and obligations but also to examine the ways in which those central concepts were applied in different legal contexts—in particular commercial law, family law, human rights law, land law, intellectual property law, the law of restitution and company law. Our central intellectual goal was to compare concept with context. Ideas of property and of obligations are central organising concepts within law but are nevertheless liable to fragmentation and esoteric development when applied in particular contexts. The result is a challenging and progressive series of papers which cohere into an extensive examination of the nature of private law. Whereas collections of essays can often seem diffuse and unconnected, both of the New Perspectives collections offer an interconnected examination of these issues. It remains for me only to thank the contributors to the workshops and the attendees at those workshops for the spirited, challenging and convivial atmosphere in which they have allowed the papers in these two books to develop. To the contributors to this volume I owe a great debt of thanks for their good humour and the speed with which conference papers were fine-tuned and fashioned into the elegant pieces of scholarship you hold in your hands. To Cavendish Publishing a debt of thanks for the enthusiasm with which they assumed the task of realising our vision of a collection of these valuable and tightly-themed conference papers in a high-quality, accessible and affordable format. To the Institute of Advanced Legal Studies, and its director, Prof Barry Rider, many thanks for the opportunity to conduct these workshops and to develop these ideas. My hope is that these essays will constitute for some time to come key statements of the intellectual positions of many of our finest emerging and established legal scholars, with their penetrating insights into the shortcomings and the possibilities of some of our most fundamental legal concepts. In that respect, I anticipate that this collection will entrench itself as an important survey of the past, present and future of the laws of property and of obligations. It should be noted that these papers were delivered in July 2002 and submitted for publication before Easter 2003. Dr Alastair Hudson Queen Mary, University of London May 2003

List of contributors David Campbell is Professor of Law at Cardiff University. His interests are in the law and economics of commercial transactions, the law and economics of corporate governance and in philosophical and social scientific approaches to law generally. He is the author of The Failure of Marxism and joint author of Remedies in Contract and Tort, The Implicit Dimensions of Contract, The Relational Theory of Contract and Promoting Participation: Law or Politics?. Elizabeth Cooke is Reader in Law at Reading University. Having practised as a solicitor since 1988, she is currently researching property law, particularly land registration. She is director of the Centre for Property Law at the University of Reading. Her publications include The Modern Law of Estoppel and The New Law of Land Registration. Simone Degeling teaches law at the University of New South Wales. Her publications include Restitutionary Rights to Share in Damages. Janet Dine is Professor of Law at the University of Essex, Senior Visiting Fellow at the Institute of Advanced Legal Studies and Visiting Professor at Queen’s University Belfast. She is author of The Governance of Corporate Groups. She is currently conducting research into the law of companies, international trade and human rights. Martin Dixon is University Senior Lecturer in Law at the University of Cambridge. His publications include Principles of Land Law, A Textbook on International Law and Cases and Materials on International Law. Paula Giliker is Senior Lecturer in Law at Queen Mary, University of London. She is the author of Tort Law and numerous journal articles. Her research is in the fields of the law of contract, tort law, French law and restitution. Jonathan Griffiths is Lecturer in Law at Queen Mary, University of London. His research interests are in the field of intellectual property and are primarily concerned with copyright, media and information law, and freedom of speech. His publications include a large number of articles and Blackstone’s Guide to the Freedom of Information Act 2000. Steve Hedley is Professor of Law at the University of Cork, having previously been University Lecturer in Law at the University of Cambridge and Fellow of Christ’s College. His research interests are primarily in the history and theory of obligations. His publications include Restitution: Its Division and Ordering and A Critical Introduction to Restitution. Alastair Hudson is Reader in Equity and Law at Queen Mary, University of London. He has written widely on property law as broadly-defined, on the law of finance and on legal theory. His books include Equity & Trusts; The Law on Financial Derivatives; Towards a Just Society; The Law on Homelessness; The Law on Investment Entities; Swaps, Restitution and Trusts; Understanding Equity & Trusts; and contributions to Palmer’s Company Law. Peter Jaffey is Professor of Law at Brunel University, where he teaches trusts law, company law and intellectual property law. He has written on these areas of the law, and on restitution and

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unjust enrichment. His work on restitution and unjust enrichment includes The Nature and Scope of Restitution. David Lametti is an Associate Professor of Law, McGill University and Director of the Institute of Comparative Law, where he teaches and writes in the areas of civil and common law property, intellectual property and legal theory. A book entitled Ethical Aspects of the Theory and Practice of Private Property is forthcoming. He was a clerk to Justice Peter Cory of the Supreme Court of Canada in 1989–90. Gerard McMeel is Professor of Law at the University of Bristol, where he teaches contract and commercial law. He practises as a barrister at Guildhall Chambers, Bristol and from 4 Essex Court, London. He has published two books on restitution: The Modern Law of Restitution and Casebook on Restitution. His most recent book is Financial Advice and Financial Products—Law and Liability. David Pearce is Lecturer in Law at the University of Leeds. His research interests are in the theory of property and obligations in law. Sol Picciotto is Professor of Law at Lancaster University. He has been a Visiting Professor at Nagoya University, Japan, and a Jean Monnet Fellow at the European University Institute, Florence, as well as being Joint Editor of the International Journal of the Sociology of Law and founding Joint Editor of Social and Legal Studies. His publications include International Business Taxation and editing Corporate Control and Accountability; International Regulatory Competition and Coordination and Regulating International Business—Beyond Liberalization. Craig Rotherham is Reader in Law at the University of Nottingham. He is the author, amongst other things, of Proprietary Rights in Context. Ian Snaith is the Nelsons Fellow in Law at the University of Leicester and a consultant solicitor with Cobbetts Solicitors, Manchester. He has been actively involved in writing, teaching and consultancy in the field of co-operatives and mutuals for more than 20 years. Andrew Tettenborn is Bracton Professor of Law at the University of Exeter. His publications include The Law of Restitution in England and Ireland and numerous journal articles. Graham Virgo is Reader in English Law at the Faculty of Law, University of Cambridge and Fellow and Senior Tutor at Downing College. He researches in the fields of criminal law, the law of restitution and trusts. His publications include The Principles of the Law of Restitution and Maudsley and Burn’s Trusts and Trustees: Cases and Materials. Lisa Whitehouse is Senior Lecturer in Law at the University of Hull. Her research interests and publications are in the areas of corporate responsibility and the law of mortgages.

Contents Preface

v

List of contributors

vii

Introduction

xi

THE NATURE OF THE LAW OF PROPERTY AND ITS RELATIONSHIP WITH THE LAW OF OBLIGATIONS 1

The unbearable lightness of property Alastair Hudson

1

2

The (virtue) ethics of private property: a framework and implications 39 David Lametti

3

The relationship between property law and tort law Paula Giliker

69

4

Property and contract: where are we? David Pearce

87

5

The Land Registration Act 2002 and the nature of ownership Elizabeth Cooke

117

6

The reform of property law and the Land Registration Act 2002: a risk assessment 129 Martin Dixon FOUNDATIONAL QUESTIONS IN THE DOCTRINE OF RESTITUTION OF UNJUST ENRICHMENT

7

The taxonomic approach to restitution Steve Hedley

151

8

The theory of unjust enrichment Peter Jaffey

165

9

Property and unjust enrichment: a misunderstood relationship Craig Rotherham

187

10 Vindicating vindication: Foskett v McKeown reviewed Graham Virgo

203

11 Restitution of property you do not own anyway Andrew Tettenborn

223

12 The policy against accumulation and three party cases: Roxborough v Rothmans of Pall Mall A ustralia Simone Degeling

233

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PROPERTY AND OBLIGATIONS IN COMMERCIAL TRANSACTIONS 13 On the redundancy of the concept of bailment Gerard McMeel 14 Whose molecule is it anyway? Private and social perspectives on intellectual property Sol Picciotto and David Campbell

247

279

15 Simplifying copyright law Jonathan Griffiths

305

16 Property rights, international trade and human rights Janet Dine

319

17 The company: property, power and responsibility Lisa Whitehouse

331

18 Mutuals and co-operatives: property, obligations, business and dedicated assets Ian Snaith

345

19 Rapporteur’s overview: between morality and formalism in property, obligations and restitution 359 Alastair Hudson Index

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Introduction Alastair Hudson THE AIM OF THIS COLLECTION The aim of the workshops on which this collection is based was to take stock of the many ways in which the notions of property and of obligations are deployed in legal theory. Our principal interest was the way in which different areas of the law have developed contrasting understandings not only of what constitutes property but also of the manner in which property law and the law of obligations could be deployed in other, contextual legal fields. The structure of the symposium, and consequently of this collection and its sibling,1 was derived from that insight. In consequence the three-day symposium began with a day which focused on the relationship between property and obligations in relation to the trust and to tort, and also on the insurgent doctrine of restitution of unjust enrichment to the extent that it presents a new understanding of the nature of property law and of the law of obligations. The second day took the concerns of the first day into more specific contexts, particularly land law, family law and the home, the nature of a share as property in company law, commercial law and intellectual property law. In each of these contexts the core notion of property and of the obligation was conceived of differently. This particular collection focuses primarily on the line between property law, the law of obligations and the principle of restitution of unjust enrichment. The third day was divided more broadly still between welfare law, human rights law, planning and housing law, and comparative legal questions: these contributions are collected in the sister publication.2

THE BOUNDARIES BETWEEN PROPERTY, OBLIGATIONS AND UNJUST ENRICHMENT Questioning the nature of property in law To begin at the beginning, it is important to know what is meant by property. For the most part the essays in this collection carry out important analyses of the distinction between proprietary and personal rights without needing to consider the anterior questions as to how we justify the existence of rights in property. David Lametti3 reaches back into those philosophical systems which informed Locke and others to identify property law as containing not only rights—as typically understood in the modern practice of property law—but also obligations. Property is identified as being necessarily social and therefore as raising moral questions as well as technical ones as to the composition of our typical ‘bundles of rights’ theories of property.4

1 2 3 4

Hudson (ed), New Perspectives on Property Law, Human Rights and the Home, Cavendish Publishing, 2003. Ibid. Lametti, this collection, 39. The moral content of property ownership is considered in Hudson, ‘Individualisation, equity and social justice’ in the sister publication to this book, Hudson (ed), New Perspectives on Property Law, Human Rights and the Home, Cavendish Publishing, 2003, 1.

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My own contribution5 seeks to question our understandings of the very nature of the property which the law of property currently contains. Whereas the earliest property law is likely to have concerned the segregation of sacred sites away from social use, those forms of property with which modern property law has been required to deal have been intangible, quixotic and difficult to conceptualise.6 A familiar distinction then establishes itself between those for whom property exhibits a lightness and those for whom property is necessarily weighty and burdensome.7 That chapter builds on Richard Sennett’s observation that many of the world’s leading industrial figures consider their property not to be something which carries the ordinary burdens of ownership but rather as something which is comparatively light because it exists only as an expression of cash value.8 Moreover, modern property law contains within it a number of conceptual weaknesses which, taken with the postmodern turn, suggest that its logic is no longer immutable. Models for such developments are to be found within the nature of legal co-operatives and in the manner in which property inevitably is conceived of in terms of its value rather than its essence. Examples of this lightness are identified in assertions that trusts should be considered simply as contracts, with analyses of the unit trust, quasi-property, and so called tangible property theory. By contrast, the domestic mortgage will be shown to be an example of a type of property relationship which, while a mere contract at root, imposes great weight on the mortgagor. Ultimately, it is argued that property law is necessarily organised around the tangible nature of property whereas this paradigm fails to understand the relativity and perpetual change which is a feature of the postmodern world order. This understanding requires nothing less than a re-conceptualisation of the nature of property itself.

Identifying the line between property and the law of obligations A number of contributors attempted a taxonomy of property law and obligations.9 At the symposium itself, although not in this collection, there were contributions concerned to establish the root of the trust as being in the law of obligations as opposed to the law of property. The core of this assertion is the frequency with which trusts are created over merely personal rights, such as

5 6

7

8

9

Hudson, this collection, 1. The electronically-held bank accounts which have been at the heart of most recent tracing cases, for example, have not responded well to principles of trusts law generated centuries ago to deal with title to real property. Equally significantly, the owners of the most modern forms of property consider their property not to create problems of maintenance but rather to be merely assets which can be turned to account. In Milan Kundera’s novel The Unbearable Lightness of Being, it is suggested that the tragedy of human life is that moments of true happiness are too light and too fleeting to be capable of profound enjoyment. The social theorist Zygmunt Bauman draws on Kundera’s theme to suggest that in the postmodern world there are those cosmopolitan enough (in Bauman’s sense) to enjoy life on a plane which makes their existence seem perpetually light. For such people, property exists only as something to be sold or disposed of when it is no longer useful. There is no emotional bond between owner and owned here; rather the attachments are light, and they are financial. It is suggested that this significant feature of property ownership is something which modern property law, as presently organised, is incapable of understanding. Jaffey, this collection, 165; Hedley, this collection, 151.

Introduction

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bank accounts, and the equivocal manner in which we might consider a beneficiary’s interests to constitute proprietary rights when those rights are so frequently established on the basis that equity operates in personam.10 Equally concerned with the re-conceptualisation of the nature of property law, in this case particularly as it overlaps with the law of obligations, is Paula Giliker.11 Her focus is twofold: first on that common territory between property law and the law of torts which requires that the claimant have some right in property to found an action in nuisance and so forth, and secondly on the role which the Human Rights Act 1998 will play in the continuation of that principle. The rights to a family home and to one’s possessions under the European Convention on Human Rights require that, for example, the right to one’s home be respected even if one has no formal, legal right in the property which constitutes that home. The challenge which Paula Giliker identifies is that the development of human rights law therefore throws into question the possibility of continuing to predicate such torts on the pre-existence of a property right. There is a common thread here between David Lametti’s conviction that there is a social and moral content to all property law and Paula Giliker’s identification of the tension between traditional approaches to property torts and the developing notion of human rights law. Paula Giliker is also suggesting that another mode of thought different from traditional tort or property law is likely to penetrate the area of ‘property torts’ in the form of the right to the family home, in Article 8 of the European Convention on Human Rights. My own contribution suggests that there continues to be a moral gap between the law’s treatment of some property as being inherently light and other property as bearing great weight for its owner, particularly while we continue to talk of ‘proprietary rights’ as though they were a single category. Within that dichotomy are the fault lines for another spread of divisions between various forms of property which are in truth very different phenomena even though the law tends to package them under the general heading ‘property’ as though they were identical in essence. Continuing with this theme, David Pearce lays out an analysis of the law of obligations and the law of property.12 His approach is, in effect, an intellectual chronology of property and obligations theory. On the property side he begins with Hohfeld’s ‘bundle of rights’ theory and follows through into the crisis that is prompted in property law—and suggested by Roger Cotterrell13—by virtue of its ‘incoherence’ in failing to connect such rights with identifiable or tangible property. This shapelessness in the one-size-fits-all approach to proprietary rights is identified by Pearce as being epitomised in the slew of banking and tracing cases in the 1990s which have tried to apply concepts developed for tangible property to intangible property. By contrast, contract theory is identified as having a different sort of theoretical discussion from that which informs property law.

10

11 12 13

This issue is addressed further in my final essay in this collection, ‘Between morality and formalism in property, obligations and restitution’, Chapter 19. Maitland refers to the rights of beneficiaries as being merely personal rights on the basis that the ‘Equity’s darling’ principle will operate to defeat an equitable interest even though it is purportedly a proprietary right. For my part, I do not consider this to be a proof of the purely personal nature of such rights but rather a rule of convenience developed by English courts to preserve the sanctity of free markets by reassuring purchasers that they will take good title unless they have acted in bad faith or, possibly, with constructive notice of another person’s rights. Giliker, this collection, 69. Pearce, this collection, 87. Pearce, this collection, 91, 28n.

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The obligation to pay damages in the event of a breach of contract was identified by Holmes as the core of the common law notion of contract, which is in itself an extension of his imprecation not to confuse moral questions with legal questions in this context. In that sense, this chapter returns to David Lametti’s concerns. Elizabeth Cooke14 focuses on Honoré’s celebrated conceptualisation of ‘ownership’ in relation to real property. Her particular concern is the change which the Land Registration Act 2002 introduces into land law. In particular she demonstrates how we can perceive a movement from a multititular system to a unititular system as part of the progressive movement away from fragmentation of title. Comparison is made with the unititular Romanic law code in Scotland and the Roman-Dutch in South Africa to highlight this trend from the multititular to the unititular in England and Wales. Martin Dixon similarly considers the changes which the 2002 Act will bring to land law.

The boundaries between property law and unjust enrichment Craig Rotherham15 has questioned many of the shibboleths of property law in his book Proprietary Claims in Context,16 including the institutional-remedial divide and the source of property rights on the authorities. Akin to Graham Virgo’s contribution, Craig Rotherham analyses the nature of the rights of beneficiaries by focusing on the House of Lords’ decision in Foskett v McKeown.17 In so doing he suggests that we ought not to presume a conceptual gulf between property law thinking and restitution thinking on the basis that each category is to be considered a prescriptive code on which we should base decisions in hard cases. Rather, it is suggested that these distinctions are merely techniques which we use in making decisions. This approach therefore falls outside the urge for taxonomy prevalent in many other contributions to this volume. He takes issue with Birks’s contention that property is not a causative factor founding legal claims, on the basis that property rights often do play a ‘causal role’ in identifying the appropriate remedies. In Craig Rotherham’s essay there are also clear lines of distinction drawn with Graham Virgo’s contribution18 in that Rotherham suggests an open-textured form of academic enquiry whereas Virgo suggests that the property claim in Foskett v McKeown should be categorised as being outwith the grasp of unjust enrichment and should be considered differently from Rotherham. Virgo developed the notion of ‘vindication’ in his Principles of the Law of Restitution19 as being one of the many bases on which the law of unjust enrichment operates. In his essay in this collection,20 Virgo defends the notion of vindication of property rights as a form of unjust enrichment and analyses the deployment of that concept in Foskett v McKeown. Importantly, the decision in Foskett

14 15 16 17 18 19 20

Cooke, this collection, 117. Rotherham, this collection, 187. Rotherham, Proprietary Remedies in Context, Oxford: Hart Publishing, 2002. [2001] 1 AC 102. Virgo, this collection, 203. Virgo, The Principles of the Law of Restitution, Oxford: Oxford University Press, 1999. Virgo, this collection, 203.

Introduction

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demonstrates a focus on value rather than on any particularly identifiable item of property. While this might appear to suggest a flexible approach to the allocation of property rights, Virgo nevertheless contends that he is concerned with ‘logical progression’ and not ‘causation’, which suggests a concern for taxonomy and not morality. Indeed, the tracing claim in general terms demonstrates that English property law is not concerned simply with title in a particular ‘thing’ but is concerned more broadly with establishing a claim over whichever property the rights established in that ‘thing’ eventually come to rest upon. What Virgo argues, in contradiction to Birks and many of the restitution school, is that proprietary rights need not be carved up between ‘real property rights’ [sic] and ‘substitute property’, contending instead that they should be analysed in the same fashion regardless of their source. Andrew Tettenborn asks where the principle of unjust enrichment fits between the law of property and the law of obligations.21 His main focus is on the simple question: if I come into possession of your property in circumstances in which neither common law nor equity will recognise me as having any rights in that property, then how can I be said to be enriched by my possession of your property? This beguilingly simple question throws into stark relief the question where restitution of unjust enrichment fits into private law. If I cannot be demonstrated to have received any unjust enrichment, then on what basis can that principle have any sway in deciding these questions of recovery of property?22 Andrew Tettenborn rightly identifies the solution to this question as being pivotal to the feasibility of the unjust enrichment project. Another contribution to the symposium, not collected here, argued against the utility of the restitutionary resulting trust. At the root of this chapter was a disagreement with Chambers’s assertion23 that the consent of the settlor is all-important in establishing a resulting trust. Necessarily this requires a careful analysis of the many shades of opinion both in the authorities and in the academic literature: in particular those of Megarry J in Vandervell (No 2),24 Lord BrowneWilkinson in Westdeutsche Landesbank v Islington25 and the Privy Council in Air Jamaica v Charlton.26 Resulting trusts are classified differently in this approach between trusts in the form of gifts and trusts which apparently fail. By stripping resulting trusts down to these essentials, it is said, we can rebuild them anew.

KEY CHALLENGES TO THE LOGIC OF UNJUST ENRICHMENT IN RELATION TO THE LAW OF OBLIGATIONS The foregoing contributions, it is suggested, ask profound questions as to the nature of the law of unjust enrichment. There are two key essays in this collection which examine the possible taxonomy of unjust enrichment. The first by Peter Jaffey speaks in support of the principle of

21 22 23 24 25 26

Tettenborn, this collection, 223. The answer, as suggested in my concluding essay, ‘Between morality and formalism in property, obligations and restitution’, might be found in equity’s historical conception of conscience as founding claims in this context. Chambers, Resulting Trusts, Oxford: Oxford University Press, 1997. [1974] 3 WLR 256. [1996] AC 669. [1999] 1 WLR 1399.

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unjust enrichment but questions many of its precepts.27 As with Peter Jaffey’s book The Nature and Scope of Restitution,28 the essay in this collection concentrates on the many illogicalities in the application of the principle of unjust enrichment to the law of contract, and suggests a new understanding of the subject. Jaffey argues that unjust enrichment does not provide an ‘underlying principle’ in itself. However, any imprecision in the notion of unjust enrichment is not in itself considered to be an objection to such a concept, in the same way that the law of contract and the law of tort have similar areas of imprecision at their edges. The quadration theory, purportedly connecting unjust enrichment and restitution, is reassessed and the principle redesignated as a descriptive or a supplementary principle. The other essay which concerns itself with the feasibility of the taxonomy of the law of restitution is Steve Hedley’s contribution to this collection.29 Those academics who cling to the ancient notion of equity as something built on a feasible notion of conscience are frequently dismissed as failing ‘even to think’,30 by which is meant that the open-textured concept of conscience as a foundation for a claim lacks the assumed precision of unjust enrichment thinking.31 What Steve Hedley suggests is that the restitution project has been through so many transformations that it is now in a condition where every contributor has his or her own radically different conception of the subject, such that its core cannot offer a useful model for legal practice, let alone academic debate. This questioning of the doctrine of restitution at the roots is indeed its greatest challenge.32 Hedley gives us here a potted vision of the more complex arguments set out in his two books Restitution—Its Division and Ordering33 and A Critical Introduction to Restitution34 as he seeks to identify the central deficiencies in the restitution project. Simone Degeling stretches our understanding of unjust enrichment again by confronting the policy against accumulations and three-party cases. The problem is that of multiple recovery in claims for damages.35 As Degeling demonstrates, the policy against accumulation has a role to play beyond loss-based circumstances, particularly by reference to the recent decision of the High Court of Australia in Roxborough v Rothmans of Pall Mall Australia.36

27 28 29 30 31 32 33 34 35 36

Jaffey, this collection, 165. Jaffey, The Nature and Scope of Restitution, 2000, Oxford: Hart Publishing. Hedley, this collection, 151. A remarkable suggestion made by one taxonomist at the symposium. On the notion of conscience as a viable legal category, see my concluding essay in this collection, ‘Between morality and formalism in property, obligations and restitution’. See also Hudson, Equity & Trusts (3rd edn), Cavendish Publishing, 2003, chapter 35. Hedley, Restitution: Its Division and Ordering, 2001, London: Sweet & Maxwell. Hedley, A Critical Introduction to Restitution, 2001, London: Butterworths. Degeling, this collection, 233. [2001] HCA 68, 185 ALR 335.

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FROM CONCEPT TO CONTEXT: THE CONTEXTUAL PROJECT OF THIS BOOK Whereas the first two parts of this collection concern themselves with the perspectives on the core concepts of property law, the law of obligations, and the possibility of a coherent law of restitution, the final part is concerned with the commercial application of such conceptual debate to context.37 Gerard McMeel38 doubts whether the concept of bailment adds anything useful as a ‘lump concept’ between contract law and personal property law in its current role as an explanation for circumstances as diverse as honest finders of goods and aircraft leasing. This diversity, it is said, robs the concept of any coherence. One difficulty is the tendency of bailment to treat all property as chattels; another is the frequent tendency in the law to ignore the precise contractual structure of commercial arrangements in favour of standard legal models. Instead, the current category of bailment is divided by Gerard McMeel into the restitution lawyers’ familiar quartet of consent, wrongs, unjust enrichment and property.

OBLIGATIONS OF RESPONSIBILITY IN COMMERCIAL PROPERTY LAW Janet Dine39 takes a very different perspective on property rights by considering the rights of nations under the Universal Declaration of Human Rights and property rights more generally in international trade. Moving beyond the traditional sphere of property law as tied to individual jurisdictions, and moving into the developing territory of human rights law, she contrasts the power of multinational enterprises in manipulating concepts of property and contract law to the detriment of community organisations within nation states or to the detriment of less-developed countries (to quote from the jargon) at the state level.The claims of human rights law offer a unique challenge in this environment for group rights counterbalancing the power of multinational, commercial enterprises. Equally, more technical approaches such as competition perhaps offer equally coherent means of achieving the same goals. Whereas international trade theory tends to think of the corporation as a black box dedicated to the generation of profit at any cost, any student who has read Janet Dine’s textbook on

37

38 39

In private law there are two central concepts: those of property and of obligations. In English law those two central ideas give rise to the foundational legal subjects of land law and personal property law, trusts law, contract law and tort law. It would be possible to argue that most other areas of private law, and subsequent developments on those central concepts, applied to particular contexts: this is the division which this book seeks to establish between central concepts and their contextual application. By way of example, company law drew historically on the partnership contract and the trust to develop joint stock companies and later the company with limited shareholder liability. Even after the development of the company as a separate legal person in the Saloman decision, company law is still a stylised accumulation of contract (the role of the articles and memorandum of association; the directors’ contracts of service; the rights of employees), tort (the liability of the company for the tortious acts of its agents; the personal liability of directors), trust (the liability of directors making secret profits from their fiduciary office) and property (the rights of the shareholders to the company’s assets on winding up). Consequently the concepts of property and of obligations are expressed in central legal and equitable doctrine and also put to work in specific contexts. That insight informs the second half of this collection. McMeel, this collection, 247. Dine, this collection, 319.

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company law40 would know that within such entities are the competing claims and interests of the shareholders. In this vein Lisa Whitehouse41 considers the nature of the share in a company. Her particular concern is with the notion of ‘responsibility’ of companies. Lisa Whitehouse draws on a wealth of legal theory from Giddens’s social theory and Gray’s theory of property, ranging through to Berle and Means’s well-known statement of company law theory. Various facets of responsibility—from personal responsibility, to responsibility as an obligation, through moral and causal responsibility—are modelled to demonstrate the feasibility of closer regulation of corporate responsibility. Ian Snaith42 considers the little analysed43 area of ‘mutuals’ and of industrial and provident societies, a form of entity which has been the subject of recent legislation (the Industrial and Provident Societies Act 2002) and which is held out by the Blair administration as being one means of providing financial services to the socially excluded. Snaith considers the wide range of entities which fall within the notion of a ‘mutual’ and the proposals for their ongoing development for altruistic, communal goals as they fall under the umbrella of the Financial Services Authority—itself perhaps an emblem of their transformation from organs of working-class solidarity into alternatives to mainstream financial services for the socially disenfranchised.

INTELLECTUAL PROPERTY LAW Intellectual property law necessarily presents a great challenge to property law theory precisely because it occupies a place between genuine property rights and a conceit with which one can justify the protection of the means of exploiting commercial know-how or artistic works. Jonathan Griffiths44 maps the process of the simplification of copyright law by judicial analysis at a time when there has been a commoditisation of many forms of information in the practice of intellectual property law. In this way the nature of those rights which will constitute copyright have become clearer—orientated around the protection of the skill and labour of the artist—while the form of action developed to counter breaches of copyright has increasingly come to resemble an action for trespass.45 Ultimately, Jonathan Griffiths is unconvinced by the manner in which the language in these cases of ‘labour of skill’, of input and output, masks a number of highly subjective approaches to the identification and protection of those bundles of rights which come to be commodified as copyrights.

40 41 42 43 44 45

Dine, Company Law, 2000, London: Sweet & Maxwell. Whitehouse, this collection, 331. Snaith, this collection, 345. Except primarily by Snaith, The Law on Co-operatives, Waterlow, 1984. See also Hudson, The Law on Investment Entities, London: Sweet & Maxwell, 2000, p 259. Griffiths, this collection, 305. It is a semantic irony that, while the theories of normative closure referred to by Jonathan Griffiths typically talk of inputs and outputs which are permitted and generated respectively by social discourse, some of the recent cases he discusses use a different test predicated on what input the rightholder has made and the output which the defendant has taken from that copyright. Therefore, while we look for closure of the concepts used in this test, it is the very language of input and output which seems to circumvent it. But I ought not to labour a weak autopoietic joke.

Introduction

xix

Sol Picciotto and David Campbell46 use an analysis of the legal problems concerning ownership of molecules by biotechnology companies who gain patents over them to found a broader consideration of whether or not it is possible to think of private property rights as being truly private at all. Many of the justifications for intellectual property law are considered to be merely consequentialist. This important essay returns us to the question with which we started this collection: the nature of property itself. Compellingly, Picciotto and Campbell argue that private property rights are to be considered as rights underwritten by the state through law as well as simply relationships between people and things. In this sense we are returned to Lametti’s argument that all property is necessarily social at some level. Similarly, my own contribution sought to differentiate between private property, as ordinarily understood, and the common use of property such as Victoria Park in London’s East End or the common ownership of property held by co-operatives, without any individual person in either case being able to establish meaningful ownership of the property in question. Indeed Picciotto and Campbell’s example of the Joensuu, commonly-used bicycles,47 is similar in that sense to my own discussion of the public park.48 From all of these contributions emerges the intractability of establishing any single explanation of property law, obligations or of unjust enrichment—whether in theory or by observation of practice—which will always convince. What we present instead is, taken together, an account of the issues which stand between us and such an understanding: an important undertaking, nevertheless, offering us important new perspectives on property law, obligations and restitution.

46 47 48

Picciotto and Campbell, this collection, 279. Picciotto and Campbell, this collection, 282. Hudson, this collection, 30.

THE NATURE OF THE LAW OF PROPERTY AND ITS RELATIONSHIP WITH THE LAW OF OBLIGATIONS

Chapter 1 The unbearable lightness of property Alastair Hudson

INTRODUCTION Property law is concerned with the recognition of entitlements in relation to land, chattels and intangible property. Such entitlements may reflect possession, the right to take a benefit, the right to prohibit use by others and so forth. It is of course the business of property lawyers to inquire into the different incidents and extents of those various rights. What is suggested here is that the law of property ought also to recognise that different aspects of property have different weight. There are circumstances in which this weight demonstrates itself in the classical sense of property ownership, connoting both exclusive rights of possession and the burdens of ownership: this is most people’s experience of their homes, the maintenance of their cars and the insurance of their other chattels. Alternatively, for the cosmopolitan elite,1 identified in recent social theory, their property indicates a lightness in ownership, either in the sense that its owners do not feel that they are bound to their property by ties of maintenance and sentiment, or in the sense that professional advisers are able to construct sophisticated mechanisms to conceal their ownership for fiscal and other regulatory purposes. Further, it will also be suggested that the ancient principles of property law now evidence a similar conceptual lightness which has begun to render them incoherent. The lightness both of modern forms of property and of the jural responses which have sought to account for them are the forms of this chapter. The basis for suggesting that property has different weight in this way is the work of the sociologist Richard Sennett.2 Every conspiracy theorist logged onto every internet chatroom in the world is aware of the annual meetings in the Swiss resort of Davos at which the premier league of the world’s entrepreneurs, CEOs and industrialists go on retreat with a few carefully selected politicians and influential thinkers.3 In commenting on the meetings at Davos, Sennett records his observations of entrepreneurs like Microsoft’s Bill Gates who, in talking about their assets, do not consider them to be something tangible and heavy, carrying both the incidents of ownership and the burdens of maintenance, but rather as constituting merely an expression of a market value such that they are themselves necessarily disposable. Significantly this property is something which is kept (rather than owned) solely to realise its financial value. Sennett noted that: [Gates] seems free of the obsession to hold on to things. His products are furious in coming forth and as rapid in disappearing, whereas Rockefeller wanted to own oil rigs, buildings, machinery, or railroads for the long term.4

1 2 3 4

Giddens, Beyond Left and Right, Polity, 1992; Bauman, Globalisation, Polity, 1998. Sennett, The Corrosion of Character: The Personal Consequences of Work in the New Capitalism, WW Norton and Co, 1998, p 61. The conspiracy theorists are convinced that it is these meetings which actually run the world. Eg, Pilger, The New Rules of the World, 2002, Verso. Sennett, op cit, fn 2.

2

New perspectives on property law, obligations and restitution

For this ultra-cosmopolitan elite in their Davos seminars, property has a very different quality from that experienced by the lumpen mass of the population about their few possessions, mortgaged to the hilt and, so far as the sociologists can make out, deeply insecure about their place in the world.5 The term ‘cosmopolitan’ is one that is very much in vogue among social theorists.6 It refers to those participants in the global economy who move easily from one jurisdiction to another, trading on their global brands, and finding new and disposable sites for their franchised operations. What is produced, in Bauman’s terms, is a ‘light, free-floating capitalism, marked by the disengagement and loosening of ties linking capital and labour’.7 This is bound up with a perception of globalisation which permits the capitalists to withdraw quickly and tidily from labour markets by relocating their manufacturing franchises elsewhere, thus creating lightness for capital and weight for labour.This contested approach to globalisation and its impact on the individual’s perception of her relationship with her property is also explored here. This chapter seeks to probe both the illogicalities at the heart of English property law and the significant gap between tangibility and separateness—which mainstream English property law still assumes in its core concepts—and the necessarily ephemeral and disposable nature of property in the late capitalist world. What is at issue then is the bedrock of capitalism: the ability to establish and to protect rights to private property, whilst also permitting the capitalists ‘lines of flight’ from disadvantageous entanglements with any particular geographic location.8 To understand the challenges facing property law it is necessary to understand first the nature of that capitalism which, it will be argued, offers weight to some and lightness to others.

THE NATURE OF CAPITALISM The lightness of late capitalism: from franchising to freedom To understand the late capitalists’ use of property it is necessary first to understand those capitalists. By ‘late capitalist’ is meant those entrepreneurs, industrialists and others who own the means of supply in this period of economic history which has seen individuals transformed from citizens and producers into mere consumers;9 a period of time dubbed by many social theorists as ‘postmodernity’. By ‘means of supply’ is meant a connection to this process of consumption whereby the capitalist owns the means of supplying that which is consumed, whether that is the ideology informing consumption—produced by advertising agencies, politicians and public relations consultants—or whether it is the goods which are actually consumed, produced by a range of industries from the traditional hardware metal-bashers to software engineers. This new spread of industrial capitalism into virtual data production has been termed ‘soft capitalism’, a reference to the non-tangible nature of much of the material that is produced.10 However, other theorists prefer to think of this capitalism not as being ‘soft’, because the

5 6 7 8 9

Bauman, Work, Consumerism and the New Poor, Open University Press, 1999; Giddens, Modernity and SelfIdentity, Polity, 1991. Beck, ‘The cosmopolitan society’, in Democracy Without Enemies, Polity, 1998. Bauman, Liquid Modernity, Polity, 2000, p 149. Negri and Hardt, Empire, Harvard University Press, 2001. Mandel, Late Capitalism, 1978, Verso.

Chapter 1: The unbearable lightness of property

3

competitive nature of global markets is typically cut-throat and unrelenting, but rather as responding better to metaphors such as ‘dancing’ or ‘surfing’ as an illustration of its lack of connection with any particular geographic location in which its goods are produced.11 Surfing, in particular, carries with it connotations of being carried along on waves of other elemental forces, with the skill of the surfer being to direct the board successfully and flamboyantly to shore. Surfing is also resonant of the internet, of course, and the ability to ride waves of data so as successfully to manipulate virtual markets. The point relates to the globalisation both of these markets and also of the places of their production. In the globalised industrial world, the capitalists no longer need to own the means of production; rather they prefer to own the trade mark which governs the right to sell that product and to franchise out the task of mechanical production to the cheapest available labour pools in the developing world.12

The value of nothing: the business of late capitalism In the dramatic corporate collapses of 2002, such as Enron and WorldCom, what has been most apparent is that the products generated by these financial giants have been assets which have no tangible existence and a market value calculated only by reference to their reputation or a common belief in that mythical marketplace that they are of a given value. The most obvious is Enron, a corporation which traded energy, or rather traded rights to be delivered amounts of energy the value of which was calculated on the basis of predictions as to future energy demands: that is, it traded on people’s expectations of whether or not it will rain tomorrow.13 Many of the large institutions involved have strayed across that line from inadvertently overstating their worth today based on overly optimistic predictions of their actual worth tomorrow, into deliberately overstating that same worth. Absent the fraud that is present in one case but not the other, the similarity between these cases is based on an ascription of a notional value to property which has no true personality; this is referred to as quasi-property below.14 It is suggested that this constitutes an entirely new conception of property and one which English property law will struggle to conceptualise, as considered below in relation to tangible property theory. This new form of property is ‘light’ in a different sense from that considered above—it is light both in that it is not tangible and in that its value can disappear in an instant. Neither of these facets of property is entirely new; however, it is suggested that the sorts of assets which are conceived of in corporate accounts as bearing value (financial derivatives, future cash flows, and present market value calculations of securitised assets) are different from anything which has gone before.

10 11 12 13 14

Thrift, ‘The rise of soft capitalism’, Cultural Values, 1/1 (April 1997), p 29. Bauman, Liquid Modernity, Polity, 2000. Klein, No Logo, Flamingo, 2000; Bauman, Globalisation, Polity, 1998. This is in addition to the task of servicing customers in call-centres strategically located in previously high unemployment areas of the jurisdictions in which the goods are then sold. For a discussion of energy derivatives, see Hudson, The Law on Financial Derivatives, 3rd edn, Sweet & Maxwell, 2002, 91. See p 23 below.

4

New perspectives on property law, obligations and restitution

What is also important to note here is that the industrialists, particularly in the new hightechnology sectors, do not need to own the means of production any more. They do not need to establish burdensome ties either with the plant which produces the goods or with the workers who populate that plant. Instead, they have the lightness of owning merely the rights to receive the cash flows which derive from exploiting those goods once produced.15 More of this lightness later; first it is important to unpack a little further the postmodern turn in this late capitalism and so to set out the framework through which we can analyse the nature of property in this sense.

PROPERTY AND THE POSTMODERN The model on which this development of capitalism through its modern to its postmodern phase will be based is that found in the work of the social theorist Zygmunt Bauman. Bauman identifies in this expansion of global capitalism a form of liquid modernity in which the old social building blocks have melted away; in their place is a constantly shifting sea of choices, opportunities and risks.16 For the cosmopolitan elite which is free of the ties of geography, for those commercial actors who are able to remove themselves from any particular location without feeling any fetters, there is a lightness about their lifeworld.17 Not for them the ties of place, nor the burdens of creating direct contractual links with the workforce employed by the franchisee in that place. Indeed the spirit of place which was so much a feature of the poetry of Lawrence Durrell and others—themselves considered by literary theorists to have been among the early modernists— appears now to be a hackneyed notion. Why dwell over the experiences in Avignon described in the five volumes of Durrell’s Avignon Quintet when you could move on after a single holiday to Klosters, then Bali, then trekking on Kilimanjaro? The spirit of our age is of short-term consumerism, a fetish for multiculturalism and consequently a disdain for the pedestrian heritage of any particular place or time. Our money is electronically stored and transferred, our allegiances are many and shifting. Our modernity is liquid. The global commercial actor’s being is light. Property has become a means to an end and not a value in itself. To consider an ordinary share in a company to be property in the same way as a home is to stretch one concept of property to fit very different models. A share is many things: an investment, a contingent right in the property of the company on winding up, an expression of a hope that a dividend will be declared.18 The commercial purpose of a share is that it is both intangible and that it is merely an expression of value—not a thing in itself. A home, on the other hand, is more likely intended to be solid, to be reliable, to be an expression of emotional security

15 16 17 18 19

Ibid. Bauman, Liquid Modernity, Polity, 2000. Beck, World Risk Society, Polity, 1999. Hudson, The Law on Investment Entities, Sweet & Maxwell, 2000, p 110. Although, to argue against myself, the performance of the housing market in the UK over recent decades perhaps indicates an element of investment and speculation—particularly in the buy-to-let trend of 2000/ 2001—but that is explained away in the framework employed below to relate, perhaps, to the consumerist determination of the postmodern populace to realise a speculative turn on their homes as well as to live in them precisely because this culture inculcates in us a desire for riches and for access to the inner sanctums of the capitalist playground.

Chapter 1: The unbearable lightness of property

5

in bricks and mortar.19 It also embodies a range of expressions of hope and of anxiety; but the crucial distinction between the home and the share is that the home necessarily embodies those feelings whereas the share merely expresses a value which fluctuates from time to time. Now, clearly property law does accept both of these items as being property. Nevertheless, a property law which is insensitive to these sorts of nuances will not be capable of dealing adequately with the various different circumstances which will be brought before it. More than that, I shall suggest that, while property law is of course sensitive to context in a number of circumstances, many of those examples of relativity advantage commercial interests over other uses of property. What will be important to consider later in this chapter is the fact that property, as dealt with by commercial people in particular in the late capitalist world, does not respond to the old requirements of tangibility or capability of identification. Property in this new world order is identifiable primarily by its ability to generate cash flow and not through any permanence, nor the necessity for separation from other property which has troubled judges in cases like Westdeutsche Landesbank v Islington.20

The development of Bauman’s own thought: from modernism to postmodernism Before leaving the general and delving into the specific, it would be useful to map the intellectual framework borrowed from Bauman which will underpin this notion of weight and lightness. Bauman’s work has moved through two clear phases: the first was his modern phase and the second his postmodern phase.21 Bauman’s modern phase drew on three key theorists: Jurgen Habermas, Antonio Gramsci and Karl Marx. From Marx he took his belief in state socialism and in the inexorable logic of alienation leading to social change. From Gramsci he took an analysis of the subtlety with which hegemonic power is established in civil society by means of communicating a dominant ideology to the populace through the mass media so that the populace comes to adopt those values as their own.22 From Habermas he took the optimism of the latter’s theories of communicative action through which society would achieve its ideal speech situation constituting a consensus of views on that society’s values.23 The modern phase suggested an optimism for social change and for social justice. It was through the 1980s in particular that Bauman lost his faith in progress with the displacement of welfare society in favour of the atomised values of societies based on monetarist economics. At this time Bauman published his great trilogy of works which drew striking parallels between the holocaust

20 21

22 23 24

[1996] AC 669. The role of cash flow is considered below particularly in relation to financial products as items of property in themselves. This is perhaps a distinction between a formalism in property law and a substantive response to the nature of property in the late capitalist era. An analysis presented most cogently by Dennis Smith in Zygmunt Bauman: Prophet of Postmodernity, Polity, 2000. On his appointment to the University of Leeds, Prof Bauman was required to wrestle with his own disenchantment with the state socialist order in Poland which he had championed as an officer in the Polish brigades of the Soviet Red Army in the Second World War and as an academic in Poland. Gramsci, selections from the Prison Notebooks, Lawrence Wishart, 1971, trans Hoare and Nowell Smith. Habermas, Theory of Communicative Action, Beacon Press, 1982. Beginning with Bauman, Modernity and the Holocaust, Polity, 1991.

6

New perspectives on property law, obligations and restitution

and the nature of society.24 Following Freud’s observation in The Future of an Illusion that ‘every civilisation must be built upon coercion and renunciation of instinct’,25 Bauman posited the views in Modernity and the Holocaust that it was the bureaucratisation of society which enabled the Nazi administration to conduct such a genocide without public interference, and that it was the technological modernity embodied by the Ford production line which enabled that administration to conduct the business of executing such an extraordinary number of people in such a short space of time.26 Bauman’s viewpoint shifted in his postmodern phase into a world whose values he saw as having collapsed. In their place came a consumer culture in which people were valued for what they bought. Identity was not something forged in the light of experience, nor through phenomenological perception, nor the crucible of the Freudian triumvirate of ego, id and superego; rather identity was something that was bought and that could be discarded, replaced or updated through the cleansing medium of shopping.27 His influences became Foucault, Lyotard, Adorno and Levinas. From Levinas he derived an ethical understanding of ‘the Other’, in which each individual must be understood as being an ethical self and not merely a social product, and in which a sensitivity to the needs of each individual is considered to be the obligation of every other individual. 28 From Lyotard came an understanding that postmodernity necessitates the deconstruction of value and the possibility of creating new values in their place;29 from Adorno, frankly, a pessimism as to whether this consumer-orientated world could generate the socialist oasis Bauman had striven for in his modern and pre-modern periods.30 From Foucault came a renunciation of Habermas’s dogmatic assertion that the ideal speech situation would be a place of consensual and not contested values. Working beyond Foucault, however, Bauman has embraced a perception that the Panoptic control of the state has been replaced by the Synoptic control of mass culture as the many sit indoors watching, envying and emulating the few on television.31 In short, this postmodern turn places an accent on deconstructing strictures on thought or lifechoices. Ironically, standing in the way of such a liberating project is the all-consuming postmodern world itself. In the postmodern world, property will frequently be part of the individual’s atomistic project, part of a series of acquired identities and short-term life projects which can be discarded without sentiment. This property is of the ephemeral kind for which we would be least likely to litigate: last year’s combat trousers; heroin-chic, v-necked jumpers; or chocolate coloured jeans from that year when brown was the ‘new black’. This is the most common interaction of property and the personal life project: the collection of belongings acquired to constitute an identity. In place of solid social bonds we have now the constant chatter of magazine features telling us who’s in and who’s out with all the enthusiastic, throwaway analysis of the day’s stock market reports: from these polls of whose stock is up and whose is down, we are invited to select our selves. From Bauman we can take a vision of the loneliness of the individual confronted by such choices and not reassured by

25 26 27 28 29 30 31

Bauman, Community, Polity, 2000, p 25. Bauman, Modernity and the Holocaust, Polity, 1991. Bauman, Liquid Modernity, Polity, 2000. Levinas, Otherwise Than Being: Or Beyond Essence, Duquesne University Press, 1998. Lyotard, The Postmodern Condition, Manchester University Press, 1984. Adorno, Negative Dialectics, Routledge, 1973. Mathieson, ‘The viewer society: Michel Foucault’s Panopticon revisited’, Theoretical Criminology, 1/2 (1997), p 215.

Chapter 1: The unbearable lightness of property

7

familiar social expectations, values or organic communities. It is from these observations that Bauman posits the view that the consumer society benefits those cosmopolitans whose lifestyles are lent lightness by the impermanence of property, whereas there is also an excluded class32 for whom the weakening of these social bonds in fact adds greater weight and worry.33 So, how might this notion of lightness and weight further an analysis of property law?

LIGHTNESS AND WEIGHT In Milan Kundera’s novel The Unbearable Lightness of Being,34 the human tragedy is expressed as being the impossibility of holding on to those moments of being which carry with them particular significance, those spots of lighted time which seem more than any other to make life seem worthwhile. A little, if you like, in the way that Albert Camus adapts the Sisyphus myth in relation to that moment when he had hauled the rock to the top of the hill, felt it sit in place for an instant before falling away, and then felt (in Camus’s view) a sense of liberty when walking back down the hill to rejoin his burden.35 Set first in Czechoslovakia before and during the Soviet invasion and latterly in Geneva and Paris after they have fled their homeland, Kundera’s characters in The Unbearable Lightness of Being try to capture these perfect moments. The tragedy is that none of them can overcome the lightness of their lives; those moments slip away and any happiness necessarily dissolves. Whether they be photographers, artists or doctors, none of them can freeze life sufficiently to be able to enjoy completely any particular moment. It is a truly modern novel in that it observes the liquidity of our social and familial structures, by following the émigrés of central Europe in their restless quests for lives with structures. Bauman takes this motif and uses it to demonstrate how the cosmopolitan elite has managed to ride on this lightness precisely because their wealth is freed from ties to the land, to geographic space or to any particular workforce.They operate by means of mobile communications and wealth which is constantly capable of being turned to account. By contrast the remainder of the populace is still encumbered by property—by the need for its maintenance, by the worries that arise from it, and by the need to earn money to pay for it. In Bauman’s worldview, the mass of the populace is left with the weight of property. And so we come to consider the divisions in the way in which property law conceives of property in these senses.

Compulsory obsolescence: consumption of property by nonentrepreneurs Thus far, the notion of property has leant on observations about the use of such property by capitalists like Bill Gates and others with similar ambitions; but what of the perception of property

32 33 34 35

Whether an underclass in western societies, or the mass of the population in the so called developing world. Bauman, Liquid Modernity, Polity, 2000; Bauman, Life in Fragments, Blackwell, 1995. Faber & Faber, 1984. Camus, The Myth of Sisyphus, Penguin, 1985.

8

New perspectives on property law, obligations and restitution

by society more broadly? The difficulty with answering that question is in identifying the society which is meant by the question. In the societies of the so called Third World there is probably little concern about consumer goods in the manner that is understood in Western Europe or North America.36 However, by ‘society’ I mean in this context simply that tier of humanity in the affluent West with access to consumer goods for which their salaries are sufficient. This we shall term the ‘consumer society’ and exclude from it those in poverty—a topic for another time unfortunately37— and also the entrepreneurs who own the means of consumption. Baudrillard’s clearest statement about the consumer society is that nothing is created with permanence in mind: his theory of compulsory obsolescence. It is an essential feature of goods that they will break, that they will be replaced at some time in the future, or (more significantly perhaps) that the onward march of technology will render obsolete the thing which has been bought. Consequently, there is no permanence.38 It is an essential part of the ideology of this marketplace that consumers expect that they will in time reach out to buy goods or lifestyles which are newer, brighter and better: therefore there is no permanence in mind. The ideology is for change. It is suggested that this relates not only to chattels but also to the home. Whether it is the decoration or the garden that can be remodelled, there is also the unerring assumption in our economy that house prices must continue to rise, that the house will probably be sold before the mortgage expires and that the home is no longer just the castle but also the nest-egg. The metaphor for this postmodern age is the most significant scientific breakthrough of the modern age: e=mc2. The relativity principle demonstrates that there is no fixed point in space from which we can perceive any other body in space. Rather, the existence of one body is always relative to the other. Even time is relative in the space-time continuum. It is essential to note that this most widely known but least understood equation suggests that we are never at rest. Instead, change is the most natural aspect of our lives.39 I will come to suggest that property law is focused on the segregation, tangibility and permanence of property, whereas the very fundamentals of the world are orientated around the relativity of one force to another and therefore of change, movement and evolution. What is different is our understanding of what constitutes property. With the development of entirely novel forms of property, from copyright to dematerialised securities, property law has constantly struggled to maintain pace with the world it seeks to describe. Below, we will consider the necessary tangibility of property in the ideology of English law—even in circumstances in which the property is itself intangible. What I will suggest is that the core principles of property law have not only been rendered unstable by these new forms of property but also that they were previously unstable in any event.

36 37 38 39

Whether that Third World is reduced to poverty by a combination of incessant war, the harrowing effects of climate change or exploitation by the affluent West. Hudson, Homelessness and Law, Cavendish Publishing, forthcoming, 2005. Baudrillard, The Consumer Society, Polity, 1998. Buckminster Fuller, Nine Chains to the Moon, Lippincott, 1938.

Chapter 1: The unbearable lightness of property

9

TANGIBLE PROPERTY THEORY English law’s desire for the tangible The expression ‘tangible property theory’ is the label I give to a necessary tendency in English property law to see the property with which it is concerned as being tangible. The reason for this tendency, I would suggest, is bound up with the genesis of property rules in dealings with land— necessarily an immovable and tangible asset—historically before early humans came to assert property-like rights over moveables such as livestock and crops. It is no accident that the word ‘chattel’ has the same etymological root as ‘cattle’ and that even terms dealing with intangible assets like ‘pecuniary’ derive from the Greek ‘pecus’ meaning ‘cow’. The logic of property law is bound up with tangibility. English property law has been, with a few notable statutory exceptions like those of 1925, developed incrementally by the common law. That means that judges have been required to develop the law to deal with complex chattels and intangible property while respecting precedents developed in relation to land and livestock, using ancient rules in new contexts until eventually the logic was likely to be stretched too far.

The problem of transfer of property under void transactions It should therefore come as no surprise that those norms are in difficulty when confronted with a claim for restitution of sums transferred under an interest rate swap contract which was held to have been void ab initio.40 If we were to bear in mind Lord Goff’s complaint in Westdeutsche Landesbank v Islington41 that such cases are concerned merely with the calculation of amounts of money, and that all we ought to be concerned to do is to calculate which party must pay how much to whom, then it throws into relief the antiquity of Lord Browne-Wilkinson’s device for answering the question ‘can the moneys paid over be traced?’. The device used by Lord Browne-Wilkinson was to consider the moneys as though they were a ‘stolen bag of coins’ (the sub-heading used in his Lordship’s speech, no less) and that the question asked of equity was whether or not those very coins could be recovered. Of course, the payments in that case were in fact reciprocally-owed payments of interest under a deep discount interest rate swap in relation to which the seller had made an off-balance sheet loan to the buyer of the swap; the full amounts of ‘interest’ were never actually paid but rather were subject to a set-off, and any amounts ‘paid’ were actually settled by virtue of a recalibration of the values of each party’s electronically-held bank accounts.42 The case could not have been further from a situation in which equity’s detectives were seeking to recover a stolen bag of coins in which the coins had an intrinsic value equal to their face value.43

40 41 42

Westdeutsche Landesbank v Islington [1996] AC 669. [1996] 2 All ER 961, 966. Hudson, The Law on Financial Derivatives, 3rd edn, Sweet & Maxwell, 2002, p 384.

10

New perspectives on property law, obligations and restitution

The loss of the right to trace The clearest expression of this tangible property theory in the law of tracing comes from the loss of the right to trace rule—a tangibility thesis par excellence. In Westdeutsche Landesbank v Islington44 the bank lost its right to trace the deep discount amount transferred to the local authority because the account into which that money had been paid had run overdrawn, and it was impossible to identify any substitute property into which the tracing claim could then pass. This is the loss of the right to trace rule in the banking context: when money passes into an account and that account is run overdrawn before the commencement of the action, the claimant loses its right to trace into that bank account because the money has disappeared.45 The rationale for this rule is that money in a bank account is analogous to tangible property. An overdrawn account means that that specific property is said to have ceased to exist in the same way that a table which is burnt to cinders is said to cease to exist as a table. What the rule does not account for is the fact that the property at issue is not tangible property at all, but rather that it is an amount of value represented by the bank account debt. English law understands payment flows as being made up of movements of tangible property which informs the treatment of restitution of payments, taking security rights over payment flows, and tracing payments generally in financial markets. The courts have tended to see financial transactions not as being made up of choses in action in this way but rather as being mere conduits for transfers of tangible property in the form of money.

Moving beyond ‘tangible money’ and into ‘money as value’ The argument that money in these contexts should be considered to be value and not property has the strength that it becomes easier to establish tracing claims for value in cases of money laundering. There remains the further question as to whether or not the rights ought to be proprietary or merely personal. It is suggested that the distinction in relation to financial transactions is typically a meaningless one. Financial transactions are concerned with the allocation of value to accounts, and not with the establishment of rights in any particular property, because the property does not exist tangibly in any meaningful sense in any event. A bank is not concerned

43

44 45

This example, well-travelled in the literature, highlights a number of oddities in property law. At one level it shows that title in property can pass even if the instrument which purports to transfer title is itself void. It demonstrates that entitlement to compound interest is bound up with title in the asset in issue. It illustrates that even if a contract is carefully drafted to provide for a mechanism to minimise the parties’ loss, in the event that their contract is found to be void it will be ignored and therefore any expression of title in such a document would be ineffective (even though title can pass under that document, as mentioned). Above all, however, it demonstrates that English property law needs to consider all claims to property as relating to something tangible. This is true even of tracing—the tracing process is concerned to identify the traceable product of the original property, or some other traceable proceeds which have come into contact with that property or which have derived their value or existence in some way from that property—as though bound up in some complex, legally formalistic game of ‘tag’. [1996] AC 669. Bishopsgate v Homan [1995] 1 WLR 31, Roscoe v Winder [1915] 1 Ch 62. Cf Virgo, this collection, 206.

Chapter 1: The unbearable lightness of property

11

to recover the ‘specific £2.5 million’ which was transferred; rather they want to recover value equal to ‘£2.5 million plus compound interest’. To talk in language born out of the law relating to tangible property is meaningless here.46

CONFLICTING FORMS AND USES OF PROPERTY IN THE GLOBALISED WORLD Five alternative senses of property This section considers how property is used in ways which do not correlate with tangible property theory and which illustrate instead a lightness with which we can associate late modern approaches to property. There are five senses in which we might consider the comparative weight of various forms of property which are investigated here. First, an acceptance that even non-transferable assets constitute property. Second, the understanding of property as being merely value. Third, offshore tax avoidance structures in which the owners of property seek to conceal their ownership while retaining the value attached to such ownership. Fourth, the example of unit trusts in which the proprietary rights associated with equitable title are intended only as a means of ensuring financial regulation. These four examples, it is suggested, demonstrate the lightness of property due either to its intangibility or to the narrow extent of the obligations which are imposed on its owner. Fifth, by way of contrast, is the very different context of the domestic mortgage which carries with it burdensome obligations of ownership.

46

In relation to insolvency, the ‘property’ which the claimant is seeking to recover is still an amount of value equal to the size of its claim. The question is therefore not one of recovery of property; in truth, it is a question for the policy of insolvency law. In what circumstances should one creditor be entitled to jump the queue in the event of insolvency? The answer must lie in the form of the contract creating the transaction. At this level, it is a question of risk allocation. If the contract has segregated assets and taken some proprietary right over them, insolvency law policy has long held that that claimant should receive preferential treatment to other creditors. The question then is, in truth, whether or not that creditor has agreed to enter into the transaction only on the basis that it would be protected in the event of the insolvency of its counterparty. In relation to money claims, the loss of the right to trace rule terminates those proprietary rights at the moment when the money leaves the account and is dissipated. The difficulty caused by these analyses of money, as Millett J held in Agip v Jackson [1990] Ch 265, affirmed at [1992] 4 All ER 385, is that it is impossible to maintain an action for tracing at common law where money was moved between accounts by means of ‘telegraphic transfer’ [1990] Ch 265, 279. His Lordship held that the property which was being dealt with in Agip was really a transmission of electrons between computers which evidenced debts of money in the form of bank accounts. Similarly, the issues before the House of Lords in Westdeutsche Landesbank v Islington were concerned with the payment, and sought-after repayment, of amounts of money represented by electronic bank accounts and telegraphic transfers. The comments of Lord Templeman, obiter, in the Space Investments case [1986] 1 WLR 1072, 1074 have been much derided. His Lordship commented, in terms, that money should be seen as value which augments the value belonging to its recipient even if it cannot be identified as a specific item of property taken from the original owner. This ‘swollen assets’ approach is the orthodoxy in US legal systems less addicted to property rules. The need to see property rights relating to a specific ‘thing’ is at odds with the operation which tracing aims to perform of identifying ‘value’ in respect of which rights can be enforced.

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New perspectives on property law, obligations and restitution

Disposable does not mean transferable In traditional property law theory the element which distinguishes property from other legal relationships is that property is transferable.47 Therefore, a chose in action is accepted as being property, a copyright is accepted as being property, and an equitable interest under a trust is accepted as being property. All of these relationships, while not being rights of absolute ownership in tangible property, necessarily are property rights in themselves because they are capable of being transferred to third parties. However, there is a further strain of authority which accepts as property rights instruments which are not capable of being transferred. In Don King v Warren48 a partnership was created between two boxing promoters such that any boxing promotion contracts which they (or companies which they controlled) entered into were held on trust for the benefit of the partnership. That much is not exceptional.49 What was interesting was that the individual contracts were expressed as being incapable of being transferred to any third party. However, it was held that the benefits which would accrue to the promoters from their contracts were themselves property rights which could be held on trust for the benefit of the partners. As such two analyses are possible. The first is that non-transferable rights are capable of being property in English law. The second is that the non-transferable rights remain in a category of assets not capable of being considered to be property but that any future entitlement which might flow from that nontransferable right can itself be considered to be property. The point of principle in the Don King case has been applied in cases involving non-transferable assets in the form of quotas to produce milk50 and licences to deal with waste.51 In each of those cases, whereas the non-transferable rights were not capable of transfer, it was held that the parties were entitled to deal with the rights which flowed from them as being property in themselves. This is a very modern acceptance that commercial people are concerned to treat assets according to the cash flows they attract rather than by reference simply to their intrinsic identity as objects of property in themselves. Nevertheless, as a matter of legal principle, this analysis is an old one. In Fletcher v Fletcher52 it was accepted that where a testator entered into a covenant with a trustee to leave property in the hands of that trustee without allocating equitable title in that property to either of the testator’s children, it was not open to that trustee to argue that the testator’s intention was to vest beneficial title in the trustee. Rather, the court held that there was an intention to hold the benefit of the covenant on trust for the testator’s children. By extension, the after-acquired property which was promised under the covenant would flow into that trust subsequently. The principle is clear enough but its application to these facts is less clear because the testator did not make any explicit statement that the benefit of the covenant be held on trust.53 What Is more apparent is that the court was concerned in 1844 not to permit a trustee to take absolute

47 48 49 50 51 52

Penner, The Idea of Property in Law, OUR 1997. [2000] Ch 291. Although on the facts it was not clear that the parties had demonstrated a sufficiently clear intention to create trusts over those boxing promotion contracts, before Lightman J decided that that analysis was open to him despite the surprising inaccuracy of the contracts entered into between the parties. Swift v Dairywise Farms [2000] 1 All ER 320. Re Celtic Extraction Ltd (in Liquidation) [1999] 4 All ER 684. (1844) 4 Hare 67.

Chapter 1: The unbearable lightness of property

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title in the then enormous sum of £66,000.54 Therefore, the court’s purpose was clear: it was concerned to prevent the trustee from acquiring such a large sum of money absolutely. Had that case been decided about 150 years later, it is likely that some form of constructive trust would have been employed to prevent the trustee from unconscionably asserting absolute title to the property.55 What is less clear in Fletcher v Fletcher is the way in which the trust over the benefit of the covenant automatically assumes title over the after-acquired property when it eventually comes into the hands of the settlor or his estate. Accepting that this property subsequently flows automatically into the trust fund is the device by which courts of equity justify the allocation of title to such property. What might appear heretical in the teeth of the core principle of property law, that the identity of the fund must be clear and separate from all other property,56 is the suggestion that perhaps the identity of the property in cases like these is less important than the value of such property. In short, in such cases all that is of importance is that the claimant receive assets of the value which she requires to satisfy that claim. Where the claim is only for money it makes no practical difference whether the money comes from one source or another: it is only as a matter of legal formalism that it is important to be able to identify separate assets and so assert a claim against them together with a claim to compound interest.57 In the House of Lords in Westdeutsche Landesbank v Islington Lord Goff tellingly remarked as follows: …the basic question is whether the law can restore the parties to the position they were in before they entered into the transaction. I feel bound to say that, in the present case, there ought to be no difficulty about that at all. This is because the case is concerned solely with money. All that has to be done is to order that each party should pay back the money that it has received—or more sensibly strike a balance, and order that the party who has received most should repay the balance; and then to make an appropriate order for interest in respect of that balance. It should be as simple as that. And yet we find ourselves faced with a mass of difficult problems, and struggling to reconcile a number of difficult cases.58

Where the case involves an asset of particular value then the law of property is more inclined, through doctrines like tracing, to pursue rights in that particular asset. It is only in circumstances in which the asset is, for example, one’s home that the litigant will be particularly concerned to protect her rights in that particular asset and not to be satisfied with an amount of money by way of remedy. Lord Goff’s observation,59 however, that cases concerning money ought to be

53

54 55 56 57 58 59

An alternative analysis might be that based on the principle put to work in Rochefoucauld v Boustead [1897] 1 Ch 196 that statute or the common law cannot be used as an engine of fraud. Similarly, here the formalities of the Wills Act 1839 are being used as a mask for the unconscionable retention of property. Another version of this same principle would be to establish a constructive trust over the trustee’s unconscionable claim for retention of the tile to property: Westdeutsche Landesbank v Islington [1996] AC 669. By comparison it may be useful to note that the fortune which Darcy stood to inherit in Pride and Prejudice was about £30,000. Westdeutsche Landesbank v Islington [1996] AC 669. Re Goldcorp [1995] 1 AC 74. Westdeutsche Landesbank v Islington [1996] AC 669. [1996] 2 All ER 961, 966. Ibid.

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capable of being disposed of simply is in line with a modern understanding of property as something inherently disposable; it is only property law which continues to insist on the intrinsic personality of property.

Property merely as value Rights over intangible property constitute value, not assets So if it is the mantra of our time, fed to us from the television’s cathode ray nipple every 15 minutes, that property exists only to become obsolescent or to be sold onwards, then how should we think of it? It is suggested that many forms of asset which are accepted by English law as being property may be better considered to constitute an amount of value which is accepted as being secured by reference to some pre-existing, separately identifiable property. At the most basic level we might take the example of an obligation to make payment which is secured over a fund of money. If that fund of money is held in a bank account separately from all other moneys, then that fund will be capable of being the subject matter of a trust.60 If we think carefully about the nature of this property, all that is held on trust is a book debt which the bank acknowledges is held to the account of the accountholder. Examined more closely, that asset is in truth merely a debt claim against the bank which is held on trust—that is, a personal claim which stands as though it were a form of identifiable property. The logic of property law here is clear—that the debt is capable of transfer and therefore ought to be considered to be property in itself—but the reality of the situation is less clear. It is only an acceptance of the formalism bound up in property law which leads to its understanding of such a right as being property.61 It would make more sense to recognise that it is not separately identifiable property which is being held but rather that it is an amount of value represented by the book entry in the bank’s records which is accepted as being held to the account of the rightholder.62

Trusts as contracts From lightness to transparency: tax avoidance and the trust contract The principal challenge to the traditional trust comes not from the law of restitution, which has no need of an explanation of express trusts and little of trusts implied by law, but rather from commercial and tax practice. In commercial practice there is a drive to reduce the perceived uncertainties and illogicalities, in particular of the beneficiary principle in trusts law,63 in favour of the more familiar territory of the law of contract.The chief advocate of this view has been Professor Langbein. Langbein is determined that every trust is part of a contract and therefore that there is no need to consider the nature of the trust in isolation from the contractual matrix of which it forms a part.64

60 61 62 63 64

MacJordan Construction Ltd v Brookmount Erostin Ltd [1992] BCLC 350. Cf. R v Preddy [1996] AC 815. Hudson, ‘Money as property in financial transactions’, JIBL (1999), Issue 14:06, pp 170–77. Re Denley [1969] 1 Ch 373. Langbein, ‘The contractarian basis of the law of trusts’, Yale Law Journal (1995), Vol 105, p 625.

Chapter 1: The unbearable lightness of property

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Before continuing any further with this analysis it would be worth pointing out that this fundamental assertion is wrong on the basis of English authority. Many trusts are not bound up with a contract. In relation to commercial practice it will commonly be the case that there will be a commercial contract which uses a trust as a device to hold security for payment or a contract for services whereby some person will be limiting their liability and identifying their fee in return for acting as trustee. To that extent, yes, there will be a contract. To that extent, the Court of Appeal has held that this contract ought to limit even trustees’ liability for breach of trust if the terms of the contract require that—even where the trustee has been guilty of gross negligence.65 However, many express trusts arise without a contract, in will trusts and in situations such as Paul v Constance66 or Re Kayford67 where the parties do something akin to a trust but which they may not necessarily have described as a trust: these may occur naturally in the wild in great profusion but they are unlikely to have enough at stake to reach the Chancery courts. Furthermore, contracts in and of themselves do not impose fiduciary duties unlike trusts. However, to return to the central argument of Langbein’s essay: trusts should be considered as being contracts at root and therefore it should not matter that there is or is not a beneficiary who can satisfy the beneficiary principle. This is particularly important for a range of vehicles used to hold assets for tax avoidance purposes whereby those who contribute to a fund might wish to appear to have no beneficial interest in that fund for tax purposes but nevertheless wish to be able to rely on the munificence of a discretionary trustee looking favourably upon them when the time comes to distribute the fruits of the fund. It is important that no individual be identifiable as a beneficiary for two reasons. First, so that no revenue authority can identify any profit-generating property in the hands of the participants. Second, so that no individual can claim entitlement to the fund in the absence of any other and so establish a beneficial claim to the fund ahead of the participants. This second feature means that there is no beneficiary capable of satisfying the beneficiary principle.68 The claims of Langbein and others in this line that trusts should be considered to be contracts are therefore intended to serve that well-heeled community of cosmopolitans who wish to increase the lightness of their property ownership not only by converting the solidity of their property entirely into the convenience of cash flow without the wearying difficulties of ownership, but also by denying the very fact of their ownership while still being reassured that they will receive an income stream as though they were the recognised owner of the property. Double the lightness, half the risk. Ownership without ownership, wealth without responsibility, property without weight!

Investment trusts as contracts Aside from the fiscal benefits of the trust-as-contract considered immediately above, there are other analyses of various types of trust as being, in essence, merely contracts. These entities have

65 66 67 68 69

Armitage v Nurse [1998] Ch 241. Cf Walker v Stones [2000] 4 All ER 412. [1977] 1 WLR 527. [1975] 1 WLR 279. Hayton, ‘Developing the obligation characteristic of the trust’, in Hayton (ed), Extending the Boundaries of Trusts and Similar Ring-fenced Funds, Kluwer Law International, 2002. Compare this for example with the development of the unit trust at a time when companies were unlawful associations; and subsequently the creation of the open-ended investment company to mimic civil law jurisdictions’ corporate unit trust: Hudson, ‘Open-ended investment companies’ in Morse (ed), Palmer’s Company Law, Part 5A, Sweet & Maxwell, 2000.

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New perspectives on property law, obligations and restitution

taken the form of trusts for historical reasons69 because the trust was considered to be both safer than the company and because the principles of trusts law were considered to have been sufficiently well-understood for them to operate efficiently and effectively as property management vehicles. What is potentially different about these forms of trust is that the purpose of any investor in such a vehicle is the realisation of a stream of income in accordance with the contract formed between the investor and the investment manager where the latter is generally also the promoter and seller of the scheme. In consequence it is said that any property relationship here is subsidiary to the parties’ principal purpose: that is, the realisation of a speculative financial return. The trust is created solely as a means of satisfying the public policy objective that there be some mechanism for preventing investors from being defrauded by unscrupulous promoters.70 Therefore, the property relationship here is a subsidiary element of a larger transaction. In contrast with the attitude of traditional property law theory, the parties have no particular interest in the identity of the property at issue. Rather, the trust mechanism here is by way of being a belt-andbraces device in the event that the law of contract does not give satisfaction. So, the question arises, is it sufficient to consider such trusts to be merely contracts? The most obvious example of this position is that of Sin in relation to unit trusts. Sin suggests that a unit trust ought not to be considered to be a trust at all but that it ought properly to be considered a purely contractual relationship.71 Sin’s argument is based on the simple proposition that the purpose of entering into a unit trust arrangement is to generate a cash flow for the investor (or ‘participant’). It is this contract effected between the participants and the scheme manager (who conducts all of the investment business on behalf of the participants) which Sin contends is the true substance of the arrangement as opposed to any property law arrangement. It may be worthwhile probing this argument a little further by considering the structure of a unit trust arrangement.72 A collection of (usually) unconnected investors contribute capital to the unit trust’s fund and in return are allocated a given number of units in the total fund. That pool of investment capital is then invested by the scheme manager and the profits, if any, shared out in proportion to each participant’s holding of units. Title in the unit trust rests with the trustee, an officer unconnected with the investment business of the trust but required to be a person distinct from the scheme manager. The policy behind this arrangement is that one fiduciary is thus able to supervise the activities of the other. I cannot agree with Sin’s argument that there is no effective trust here. Further to s 237(1) of the Financial Services and Markets Act 2000 it is clear that ‘…“unit trust scheme” means a collective investment scheme under which the property is held on trust for the participants’.73 That there is a trust is therefore beyond doubt. What is less clear, however, in fairness to Sin, is first, whether or not we would consider such an arrangement to be a trust in the absence of that statutory provision and, second, whether or not the scheme manager is to be considered to be a trustee.

Whether a unit trust is a trust Sin centres on four areas in which classic trusts law thinking does not apply to the unit trust: the absence of a settlor, the bicameral nature of the trustee function, the unsuitability of the rule in

70 71 72 73

Cf Gluckstein v Barnes [1900] AC 240. Sin, The Legal Nature of the Unit Trust, Oxford University Press, 1997. Hudson, The Law of Investment Entities, Sweet & Maxwell, 2000, p 199. Cf the position under the old Financial Services Act 1986.

Chapter 1: The unbearable lightness of property

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Saunders v Vautier74 in this context, and the non-applicability of many of the rules of formality. To focus on the question of whether or not there needs to be a settlor or any of the ordinary formalities, the Australian caselaw has expressed the manager, who creates and markets the unit trust commercially, as being in fact a settlor.75 In New Zealand there is authority for the proposition that when the manager brings the unit trust into existence that is an act which is sufficient to qualify the manager as a settlor.76 The New Zealand authorities accept that there is a trust but that the value contributed to the unit trust results from the subscriptions of the participants and not from the original action of the manager in creating the trust. However, that is no different, it is suggested, from the creation of a pension fund trust. There is English law authority for the proposition that the participant is not settling property when subscribing for units within s 64(1) of the Law of Property Act 1925;77 rather that contribution is in consideration for the receipt of contractual rights derived from the investment of the unit trust. It is important to understand the three forms of express trust which might be said to exist. The first form is the conscious express trust which arises in circumstances in which a settlor has an explicit intention to create a trust. The unconscious express trust arises in circumstances in which the settlor does not understand that she is creating a trust but a court of equity subsequently orders that the thing which the settlor intended to do ought to bear the legal label ‘trust’.78 The complex commercial trust arises in situations in which (usually) commercial people decide to build a trust structure into their relations generally to cater for the stewardship of some property perhaps while an underlying commercial transaction is completed. Such trusts do not require the existence of a traditional, single settlor expressing a donative intention to take effect as trusts. Rather, the trust is part of a contract or similar arrangement whereby a number of parties create the trust: that trust becomes properly constituted once the property is vested with the person who is to act as trustee. The question which arises is then the extent to which the trustee of a complex commercial trust ought to be subject to identical investment and other obligations of the trustee under a simple institutional trust—there is an argument to suggest that in the complex commercial trust the trustee ought to be governed in the first place by the terms of any contract giving effect to the trust, and only in the absence of such agreement to any general rules of the law of trusts. However, that does not make the complex commercial trust any less a trust. Rather, the question which governs whether or not there will be found to be a trust is whether or not the conscience of the trustee is so affected as to impress that person with the office of trustee.79 For Sin’s assertion that the unit trust is not a trust because it lacks a settlor is simply to say that it is not a simple institutional trust. It does not follow that it cannot fall to be construed to be some other form of trust. Were that argument correct, no complex commercial trust would be a trust at all. Similarly, no pension fund would be a trust.80 What is clear after the Financial Services and Markets Act 200081 is that a unit

74 75 76 77 78 79

(1841) 4 Beav 115. Truesdale v FCT [1969] 120 CLR 353, a case involving the tax effects of settlement; Famel Pty Ltd v Burswood Management Ltd [1989] 15 ACLR 572, per French J. Baldwin v CIR [1965] NZLR 1; Tucker v CIR [1965] NZLR 1027: both cases concerning the question of creating a trust in the context of taxation. Re AEG Unit Trust (Managers) Ltd’s Deed [1957] 1 Ch 415, 420, per Wynn-Parry. As in Paul v Constance [1977] 1 WLR 527 where the ‘unsophisticated’ settlor did not understand the legal effect of his actions although the court was prepared to consider them to be a trust. Westdeutsche Landesbank v Islington [1996] AC 669.

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New perspectives on property law, obligations and restitution

trust is a trust82 and, it is suggested, it is clear in trusts law theory in any event outwith the statute. The question then is as to the nature of the duties of the trustee and the scheme manager.

Whether or not the scheme manager is a trustee Sin’s argument rests on the notion that the scheme manager is not to be considered a trustee and that it is only the contractual relationship which is of significance. The Financial Services and Markets Act 2000 provides that: The participants must be entitled to have their units redeemed in accordance with the scheme at a price related to the net value of the property to which the units relate and determined in accordance with the scheme.83

Therefore, the central right of the participant is that of redemption and at that level we might consider its aim to be primarily contractual. Without redemption of the unit, and payment out of the value of the unit, the unit trust would be commercially useless. The commercial purpose of the unit trust is the ability of the participant to redeem her units by ensuring that she is entitled to sell them for their market value at any given time. The Australian courts have accepted that an analogy can be made between the allotment of shares in an ordinary company and an allotment of units in a unit trust.84 Similarly, on transfer of a unit, the transferor participant is entitled to have the transferee accepted as being a good transfer of the rights attaching to the unit to the transferee.85 Under statute, good title attaches to the holder of the unit from the moment that person is entered on the register as owner of the unit.86 The rights of the participants against the unit trustee are similarly a mixture of contract, based on the issuance of the units in parallel to an issue of shares,87 and based on trust given the custodianship duties of the unit trustee.88 The potential weakness of Sin’s argument is that, in the case of a unit trust, the manager does assume the position of a person bearing all the hallmarks of a trustee by directing the ‘unit trustee’89 as to how to deal with the property. The unit trustee is then required to obey those

80

81 82 83 84 85 86 87 88 89 90

Pension funds are treated as trusts albeit with particular rules as to equitable title in the surplus and a particular regulatory regime. That they are at root to be described as trusts is not at issue. Therefore, it is suggested that the unit trust is a trust albeit of a particular type and with its own rules of construction and so forth, in the same vein as a pension fund trust. S 237(1): ‘…“unit trust scheme” means a collective investment scheme under which the property is held on trust for the participants.’ It is suggested that it was clear before the passage of that legislation, Financial Services Act 1986, s 75(8): a ‘unit trust scheme’ is ‘a collective investment scheme under which the property in question is held on trust for the participants’. Financial Services and Markets Act 2000, s 243(10). Graham Australia Pty Ltd v Corporate West Management Pty Ltd [1990] 1 ACSR 682, 687. Elkington v Moore Business Systems Australia Ltd [1994] 15 ACSR 292, 296. Financial Services (Regulated Schemes) Regulations 1991, reg 6.03. Elkington v Moore Business Systems Australia Ltd [1994] 15 ACSR 292. West Merchant Bank Ltd v Rural Agricultural Management Ltd, noted in Sin, op cit, 82. That is, the person named as ‘trustee’ in unit trust jargon. See Sin, op cit; Maurice, ‘The office of custodian trustee’ (1960) 24 Conv 196; Stephenson, ‘Co-trustees or several trustees?’ (1942) 16 Temple ULQ 249, 250.

Chapter 1: The unbearable lightness of property

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directions.90 The acid test would therefore appear to be: what would happen if there were a breach of the investment obligations of the unit trust? Given that the unit trustee is required to obey, the manager must be intermeddling either as an express trustee entitled to direct the investment of the trust fund, or as a delegate of the person who is the trustee91, or as a trustee de son tort,92 or as a dishonest assistant in the treatment of the trust property.93 It would be odd to consider that someone who was delegated (or appointed in the trust document) to have the specific task of making investment decisions would not be the person who would be subject to the general trusts law obligations of investment. Suppose there were a breach of the investment powers set out in the trust document, it would be odd for the person who was responsible for carrying out the investment decisions to argue ‘while I have breached the investment obligations binding on the trustees, I am merely responsible for investment on the basis of contract’. If this were true, the manager would not be responsible under the law of trusts for breach of trust to reconstitute the trust fund or pay equitable compensation to the participants.94 It would seem more sensible to suggest: ‘you bear the investment obligations of the trustee and therefore you should be liable as a trustee for any breach of those obligations’. In consequence, the scheme manager is a trustee with specific powers in relation to the operation of the unit trust. It is suggested that equitable principles relating to the scheme manager’s fiduciary duties which define his obligations, within the confines of any limitation on her liability in the contract, in exactly the same way as any ordinary trustee with investment powers.95

Financial regulation and the mooted trust enforcer As considered above, it has been suggested that the beneficiary principle in the law of trusts96 could be circumvented by the use of an enforcer97 whose presence would ensure that there was someone in whose favour the court could decree performance of the trust.98 This device would mean that there need not be any person standing as a beneficiary with proprietary rights in the trust property. In relation to trusts, such as unit trusts, which are subject in any event to formal financial regulation,99 it could be argued further that the regulator could stand in for the enforcer in this new model trust. The current obstacle to such a position is that the regulator’s powers in relation to authorised entities do not take the form of a power to bring civil actions in relation to individual trusts; rather the regulator has its own web of enforcement powers and penalties set out by the Financial Services and Markets Act 2000 and its complex web of delegated legislation and regulatory rules. However, it is suggested, similar problems arise in relation to the enforcer as with the regulator. One of the criticisms of financial regulation is that it produces an expectations gap in

91 92 93 94 95 96 97 98 99

Whoever that would be, because it appears that it is not the unit trustee. Mara v Browne [1896] 1 Ch 199; Dubai Aluminium v Salaam [2003] 1 All ER 97. Royal Brunei Airlines v Tan [1995] 2 AC 378; Twinsectra v Yardley [2002] 2 All ER 377. Target Holdings v Redferns [1996] 1 AC 421, [1995] 3 WLR 352, [1995] 3 All ER 785. Armitage v Nurse [1998] Ch 241. Re Denley [1969] 1 Ch 373. Hayton, ‘Developing the obligation characteristic of the trust’ (2001) 117 LQR 96. Morice v Bishop of Durham (1805) 10 Ves 522. Financial Services and Markets Act 2000, s 237(1).

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that investors assume the regulator will protect them from loss, whereas all that is ever possible is the maintenance of a general overview of the marketplace facilitated by requiring a steady flow of financial information from regulated entities as to market exposures, capital coverage and liquidity. It is not clear how an enforcer would fare better in this sense. Even quasi-formal procedures like audits of ordinary companies have generated this expectations gap.100 Therefore, whether the enforcer be a public official akin to a regulator or a privately appointed person charged with the responsibility of carrying out regular checks of the investment fund, it is not clear that this can ever truly displace the need for some person in the capacity of a beneficiary to be entitled to enforce the terms of the trust and to recover any loss which she has suffered. Ultimately there can be no justification, even on policy grounds, for removing the requirement that there must be some person with properly vested title in whose favour the court can decree performance.

The weight of the domestic mortgage By way of contrast with those types of property we have considered so far—the investment assets of the rich and famous, offshore trust funds, rights under unit trusts—there is no form of property which offers a greater contrast to these unbearably light forms of property than the home. To underline the extent to which the home exhibits weight where the others show only lightness, I will focus on the mortgage. The mortgage, self-evidently, constitutes most homeowners’ largest form of expenditure, the most burdensome contract they will create, in short their greatest worry. To begin at the beginning. The mortgage is a contract of loan. At root then the mortgage itself is born of contract although it grants rights to possession and sale for the mortgagee in a range of circumstances. However, unlike the categories considered above, this root in contract does not limit the mortgage to a non-proprietary relationship, primarily because of the mortgagee’s rights of possession. It is these rights to possession which demonstrate the very different approach of English law to this ubiquitous, quotidian form of property right from even the most abstract of the quasi-property rights considered below.

Defeasibility of the mortgage contract dependent on context So, is English property law prepared to accept that rules can be created in recognition of context in this way, or must we accept that property law will always identify one form of property as being much the same as any other? The equity of redemption cases are instructive here. In that context the courts have been prepared to accept that there ought to be a clear distinction drawn between situations in which a mortgage taken out by an ordinary member of the public should be treated differently from a mortgage contract effected between two commercial parties where there is no material inequality of bargaining power. In Knightsbridge Estates Trust v Byrne101 the question arose whether or not a deed of mortgage, which provided that repayments were to be made on half-year days over a period of 40 years such that the agreement could not be terminated within 40 years, constituted a fetter on the equity of

100 Eg, Cadbury Report, Report of the Committee on the Financial Aspects of Corporate Governance, Gee, 1992. 101 [1938] Ch 741.

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redemption. The Court of Appeal held that this provision was not a clog on the equity of redemption because the parties were commercial people who had been properly advised as to the effect of the contract. Significantly the Court of Appeal was of the view that the courts could not introduce notions of reasonableness to the agreements of commercial people and that intervention could only be permitted if the terms of the mortgage were ‘oppressive’ or ‘unconscionable’. By contrast, in Fairclough v Swan Brewery,102 a case concerning a mortgage taken out by an individual from a brewery as part of a larger agreement under which the mortgagor took over the running of licensed pub premises for the brewery, it was held that there was a clog on the equity of redemption where the mortgagor was precluded from terminating the agreement within a contractually specified time. Lord Macnaghten held that ‘equity will not permit any contrivance…to prevent or impede redemption’.103 Beyond this, the court was clear in its view that the inequality of bargaining power between the parties—that is, the context of the arrangement—rendered this situation different from other decided cases. This division between parties of equal and unequal bargaining strength is pursued in relation to cases in which the mortgagee seeks some collateral advantage after redemption of the mortgage. In Noakes & Co Ltd v Rice104 the contract contained a covenant that the mortgagor, who was a publican, would continue to buy all its beer from the mortgagee even after the redemption of a mortgage. This was found to be a void collateral advantage on the basis that, once the mortgage amount is paid off, there is no obligation on the mortgagor to continue to provide security or to continue to make payments to the mortgagee. In that context the court was apparently influenced by the lack of equality of bargaining power between the parties. By contradistinction, in Kreglinger v New Patagonia Meat Co Ltd,105 a mortgage was created between wool-brokers who made a loan to a company which sold meat. It was a term of the agreement that the loan could not be redeemed within its first five years. The meat-sellers contracted that as part of this agreement they would sell sheepskins to no one other than the lender wool-brokers even after the expiration of the contract. It was held that this agreement was collateral to the mortgage and was in fact a condition precedent to the wool-broker’s entering into the mortgage in the first place. In other words the wool-broker would not have lent the money to the meat-seller unless the meat-seller agreed to provide these sheepskins. Importantly, because the parties were both commercial parties it was held that the provision was not a clog on the equity of redemption.

The rights of possession and sale It is a remarkable feature of the law of mortgages that the mortgagee has a right to possession of the mortgaged property even before the ink is dry on the contract, to borrow a colourful phrase from the cases.106 A right to possession entitles the mortgagee to vacant possession of the property either to generate income from that property (perhaps by leasing it out to third parties) or as a precursor to exerting its power of sale over the property.107 The mortgagee has a legal estate in the

102 103 104 105 106

[1912] AC 565. Ibid. [1902] AC 24. [1914] AC 25. Four Maids Ltd v Dudley Marshall Ltd [1957] Ch 317; Esso v Alstonbridge Properties [1975] 1 WLR 1474; Western Bank v Schindler [1977] Ch 1.

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property108 from the date of the mortgage and can enter into possession as soon as the ink is dry, unless there is an express contractual term excluding such a right of possession.109 So, in Western Bank v Schindler110 the mortgagee was held to be entitled to possession despite an express term in the mortgage contract that there would be no repayment required on an endowment mortgage within the first 10 years of the life of the mortgage. In National Westminster Bank v Skelton111 this sentiment was expressed to the effect that the mortgagee always has an unqualified right to possession except where there is a contractual or statutory rule to the contrary. There are powers to stay such powers of possession under s 36 of the Administration of Justice Act 1970 and s 8 of the Administration of Justice Act 1973. However, despite attempts in cases such as Cheltenham & Gloucester Building Society v Norgan112 to effect such a stay over the remainder of the term of the mortgage, the preponderance of authority is for possession to be awarded even under those statutory powers by reference to a period of time selected arbitrarily by the court. Similarly, the courts’ decisions on the exercise of the power of sale under s 91 of the Law of Property Act 1925 have given priority to the wishes of the mortgagee in deciding whether or not to order sale. So in Cheltenham & Gloucester Building Society v Krausz,113 Millett LJ held that control of the sale remained with the mortgagee provided that it was taking ‘active steps’ in relation to its powers.114 Significantly the mortgagee’s property rights are dependent solely on the commercial context: in this instance, whether or not the mortgagee considers that a sale of the property would raise sufficient capital to discharge the mortgage debt. The approach of the courts to sales under the old s 30 of the Law of Property Act 1925 were similarly slewed in favour of creditors and mortgagees.115 What is evident from the exercise of these powers is that there is no ‘one size fits all’ approach to property rights: while this is self-evident to an English lawyer, it remains an anathema to civilian lawyers used to the one-dimensional dominium surrounded by personal claims against the owner of the property which would not be considered to be proprietary rights in the same way. In relation to the mortgage contract, there is a comparatively greater burden for the rightholder primarily due to the range of remedies which are available to the mortgagee under statute and which the courts have shown themselves prepared to expand in favour of the mortgagee’s commercial expectations. What is observable from the foregoing is the weight of burden which attends the mortgage contract. Whereas other forms of property arguably connected to contract—whether in the form of unit trusts or Langbein’s tax avoidance trust—present a lightness to the rightholder, the mortgage contract presents only the risk of losing the litigant’s home.

107 108 109 110 111 112 113 114

S 91 or s 101 of the Law of Property Act 1925. In line with the Law of Property Act 1925, s 1 (2)(c) if the mortgage complies with the LPA, s 85 or s 86. Four Maids Ltd v Dudley Marshall Ltd [1957] Ch 317. [1977] Ch 1. [1993] 1 All ER 242. [1996] 1 All ER 449. [1997] 1 All ER 21. Noticeably, in that case,‘active steps’ appeared to include allowing a period of four years to pass in which no sale was effected. 115 Eg, Re Citro [1991] Ch 142.

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THE PROBLEMS OF QUASI-PROPERTY The phenomenon of quasi-property By ‘quasi-property’ I mean those forms of property which are accepted by English law as being property but which do not in fact relate to any identifiable asset, for all that their legal treatment still conforms to the tangible property theory outlined above. The purpose of considering quasiproperty as a distinct category in this fashion is to suggest that there are categories of property outwith the ordinary categories of property, that there are conceptual and logical problems with quasi-property which challenge the essential claim to logic of much property law, and that there are forms of relationship outwith those ordinarily understood as being proprietary which warrant inclusion in that category given the extensions proffered by quasi-property. So, what is this quasi-property? The clearest example is the chose in action. A chose in action is a claim which is in action; that is, a personal claim which is capable of being enforced by one person against another person not in relation to the delivery or treatment of any particular item of property. The argument in favour of this relationship in itself being accepted as being proprietary is that it is capable of transfer: that is, the benefit of the transactions—for example, the right to receive money or to acquire the performance of some obligation—can be transferred to another person so that that transferee acquires the right to receive that money or that performance. What is transferred is the right to receive. The ordinary parlance suggests that the entire arrangement is transferred. The entire debt, for example, is treated as being a chose in action and thereby property whereas, in that example, it is only the right to receive payment which is transferred subject to all the conditions as to payment which were incumbent on the transferor. That the benefit of a non-transferable transaction is now accepted as being property at English law was demonstrated by the Don King v Warren116 decision, by Swift v Dairywisel17 and Re Celtic Extraction118 whereby contracts or entitlements which were clearly expressed as not being transferable were nevertheless capable of being held on trust or otherwise treated as being property, provided that it was understood that it was the right to receive a benefit from the transaction which constituted the property in this instance. These cases were considered earlier. What these cases demonstrate is the peculiarity at the heart of the argument that a chose in action is property. Nothing is transferred in Don King. Rather, an obligation is created whereby the promisor will transfer to the other party any benefit received under that contract. This is a promise to pay an amount of money calculated by reference to a floating indicator; to whit the size of the benefit received under the contract.

Choses in action as quasi-property and resultant unpleasantness A chose in action, similarly, is a right to receive judgment for a personal claim. By treating the chose in action as an item of property in itself, all that is being said is that the right to receive that benefit

116 [2000] Ch 291. 117 Swift v Dairywise Farms [2000] 1 All ER 320. 118 Re Celtic Extraction Ltd (in Liquidation) [1999] 4 All ER 684.

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is capable of being transferred to another person. However, all that that transferee actually receives is the same personal right to enforce that judgment, which is in itself a purely personal right which is dependent on the solvency of the defendant, her presence in the jurisdiction and so forth: precisely all of the features which make personal claims less attractive than proprietary claims. Therefore, a chose in action is quasi-property because it is treated as being property in itself even though the right itself is a right merely to sue on a personal claim. That much is a self-evident feature of the nature of a chose in action. There are, it is suggested, contexts in which this analysis demonstrates the less acceptable features of quasi-property. The case of Fletcher v Fletcher,119 considered above, is instructive in this regard. In that case it was held that where a testator had been incapable of declaring a valid trust over after-acquired property, a trust had nevertheless been created where the court was prepared to accept that it was the testator’s intention to create a trust over the covenant which the testator had created with his intended trustee to hold such after-acquired property on trust for the testator’s sons. The sleight of hand necessary to give flesh to this bony argument was twofold. First, that the trust came into existence once the covenant was created and the testator had evinced an intention to have that covenant held on trust (even though such an intention is difficult to identify on the facts). Second, that as soon as the after-acquired property was received by the testator and/or the trustee it was automatically to constitute the trust fund of that trust which hitherto had held only the benefit of the covenant. The logic, not expressed in the case but evident nonetheless, is an extension of the familiar Walsh v Lonsdale120 principle deployed by Lord Templeman in Attorney-General for Hong Kong v Reid121 to the effect that once property is received by the testator, say, under the terms of the covenant with the trustee, the testator is obliged in equity to give specific performance of that covenant and so equitable title is said to move automatically to the trust. The testator is deemed to have transferred beneficial title in that after-acquired property whether or not a formally valid transfer of the absolute title has been effected. This is, in truth, one of two phenomena. Either the court is acting on the conscience of the testator to require him to recognise a constructive trust;122 or the testator is simply subject to a claim for specific performance against him personally to carry out the obligations in the covenant. In either case, the order is not a proprietary right in itself, but a personal claim with proprietary consequences, a claim which arises solely between two people and which may carry with it a remedy requiring a transfer of, or some dealing with, property. The logical problem is not this question of personal claims carrying proprietary consequences; that is considered below. The issue is that such a personal claim, in the form of the covenant, is able to found a secured, proprietary right in the after-acquired property which would have to be effective in the event of an insolvency even though its basis is in a merely personal claim to transfer property. That is to say, a personal claim can be elevated to the status of a property claim while that property claim concerns an asset which itself carries entitlement only to receive judgment in a personal claim. That much is to defeat the spirit of the insolvency laws which seek to rank pari passu all those personal claims which exist against an insolvent person, and exempting from such

119 120 121 122

(1844) 4 Hare 67. (1882) 21 Ch D 9. [1994] 1 AC 324. If we believe Attorney-General for Hong Kong v Reid [1994] 1 AC 324.

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treatment only those claims under which the claimant can demonstrate a pre-existing right to a separately identifiable item of property which the claimants are entitled to abstract from the insolvency proceedings because it is already ‘theirs’. The right to the after-acquired property, however, exists as a result of Fletcher v Fletcher123 against whatever property comes into the fund, even that property which was not separately identifiable before being paid into that fund (as was considered above). The problem here is not that the law is in some way ‘wrong’ but rather that it is either operating without the logical coherence which it would ordinarily claim for itself or that the various legal categories (trusts law, insolvency law, commercial law) offer no coherence between themselves. In either case, therefore, property law does not have the coherent logic which otherwise it might wish to have.

CONDITIONS PRECEDENT TO THE VESTING OF RIGHTS From that seed comes another problem at the heart of trusts law. Beyond the well-understood intricacies of after-acquired property and incompletely constituted trusts, there are the anterior questions about certainty of objects and certainty of subject matter: the requirement that the beneficiaries under a trust be clearly known and similarly the identity of the trust fund. The beneficiary principle requires that there be someone for whose benefit the court can decree performance.124 In effect, the logic of trusts law is that the only means of keeping trustees in line is if there is a beneficiary who can sue them so that the court can be appraised of any breaches of trust and so forth.125 In parallel with this principle are the rules as to certainty of objects. Notably the case of McPhail v Doulton,126 dealing with a discretionary trust, upholds the principle that a trust is sufficiently certain if it is possible to say of any given postulant that that person is or is not within the intended class of beneficiaries. And yet, where there is a class of persons all of whom in theory fall within the beneficial class, it is not at all clear that those people will satisfy the beneficiary principle themselves because none of them would appear to have any vested right in the trust fund until the trustee makes an appointment or exercises her discretion in favour of one or more of them. The problem is that of conditions precedent, in short. If I declare that a person shall have a vested beneficial interest in a trust fund provided that she goes to the foot of my stair, does that mean that before going to the foot of my stair there is no person in whose favour the court can decree performance, or does the decision in Saunders v Vautier127 entitle that person to override my express wish as settlor and seize that property? If the example is more difficult and I provide that the first of a number of class of people to go to the foot of my stair becomes entitled to the fund, is there any beneficiary with a vested interest before anyone reaches that place? It seems that the rule in Saunders v Vautier provides a convenient answer to that question by suggesting that, for example, a trust to preserve trees is determinable so that beneficiaries under another part of that

123 124 125 126 127

(1844) 4 Hare 67. Knight v Knight (1840) 3 Beav 148. Morice v Bishop of Durham (1805) 10 Ves 522. [1970] 2 WLR 1110. (1841) 4 Beav 115.

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trust are entitled to take absolute title in the trust fund.128 What this approach does not answer is the question: why should those people be so entitled if they have not satisfied the condition precedent of such entitlement, to whit being a tree or having reached the foot of my stair? What if the beneficial class is drafted in such a way that it is not possible to know before the foot of my stair is reached which individuals would constitute the whole of that beneficial class: suppose that the trust provides that all those people who attended some event in the future would constitute that total class—that is, they will be sufficiently identifiable at some point in the future but their identities cannot yet be known? I would suggest that trusts law does not have coherent answers to the condition precedent question. The reason for this is primarily because there is no perfect answer. There are a number of questions in our world which have no perfect answer. For example, the question whether or not to regulate financial institutions has two probable answers: no, because that will encourage people to invest here; or yes, because that will prevent abuse of markets. There is no perfect answer in the sense that it is impossible to know objectively which is the correct answer. Similarly, either the beneficiary has a right in property before the condition is satisfied, so defeating the settlor’s purpose of denying such a right until the satisfaction of the condition; or the beneficiary has no right before satisfaction of the condition but then Saunders v Vautier is ignored and so is the beneficiary principle.129 A rare example of a perfect answer might be Descartes’s answer to the question ‘how do I know that I exist?’ by means of saying ‘I know I exist because I am thinking’.130 And that is the epistemological point here: property law cannot provide perfect answers simply by extension of its own logic, and therefore it should be more prepared to draw dividing lines on the basis of explicit value judgments where the logic ceases to work. That is, judges should acknowledge these situations in which the logic has broken down. They should then be prepared to plug the gaps but always subject to the proviso that they be explicit about the value judgments they use in so doing. Another, similar problem131 from trusts law, it is suggested, is the following. From Re Goldcorp132 we know that there must be sufficient certainty of subject matter before a trust can be valid. On the one hand is the requirement that property rights will only attach to a specified item of property; while on the other hand is the possibility that property rights might be granted to one person simply on the basis of another person’s unconscionable treatment of them. This problem gnaws away at the very heart of property law. Those, like Birks, who demand certainty conflict with those, like Lord Templeman, who insist on good behaviour by reference to some opaque moral standard recognisable by judges only when they are called upon to activate it.133 Those moral questions are rejoined elsewhere below.

128 Re Bowes [1896] 1 Ch 507. 129 Although, it must be said, one could always fudge that one by suggesting that the beneficiary’s future rights would be adversely affected by some wrongful act of the trustee, for example, in not preventing a breach of trust, and so such an answer is justified. ‘Justified’ but not ‘perfect’. 130 The only other perfect answer is to the question ‘what in this world is perfect?’; to which the answers are biscuits, the novels of PG Wodehouse and the Stone Roses’ first album. 131 Or, perhaps, parlour game. 132 [1995] AC 75. 133 Attorney-General for Hong Kong v Reid [1994] 1 AC 324, [1993] 3 WLR 1143; Space Investments Ltd v Canadian Imperial Bank of Commerce Trust Co (Bahamas) Ltd [1986] 1 WLR 1072, [1986] 3 All ER 75.

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CERTAINTY OF SUBJECT MATTER: A QUESTION OF CONTEXT So, what of this problem relating to certainty of subject matter? If I were to declare that the £20 I hold in my hands, in the form of two £ 10 notes, were to be settled on two completely different trusts so that each trust should comprise a fund of £10, then there would be a problem of lack of certainty because neither trust would know which £10 note was to be held on trust for it. The rationale for the rule, so far as one can tell, is that a general principle which provided that it should not matter which £10 is held for which trust would mean that in the event of an insolvency where there were obligations to hold £30 or more on trust (such that my mere £20 could not possibly satisfy those claims) then it would be to the disadvantage of other creditors to give effect to either trust. Suppose now a different situation. A settlor has created one single trust over two £10 notes and transferred legal title in those banknotes to a single trustee. The terms of the trust are that the money is to be held for two beneficiaries in equal shares and paid to them on reaching the age of 18. On the beneficiaries’ birthday (let us suppose them to be twins) the trustee gives one £10 note to one beneficiary and the other £10 note to the other. The law of trusts does not bat an eyelid. The answer on the basis of principle is that the trust itself has been validly created, so that the entire fund is sufficiently identifiable to justify segregating it from third parties but that there is no perceived conceptual problem with permitting the trustee to decide who gets which £ 10 note. In practice there is unlikely to be any dispute over the first example of two trusts being settled without severance of the £20. But it is no answer to the theoretical question to say that there is unlikely to be a practical problem. The problem is a failure in property law simply to admit what is really troubling it and to verbalise its real concern that in cases of insolvency such laissez-faire attitudes are unacceptable, whereas in cases where all of the parties are solvent and there is sufficient value to satisfy all claims that ought not to negate any claims to property rights. This is, in truth, the only sensible distinction between the Re Goldcorp134 and Hunter v Moss135 line of cases. Within property law’s internal logic there is no good reason for holding that intangible property can have a different rule from tangible property simply on the basis that individual items of property are indistinguishable one from another. Such a principle would not explain, for example, why identical, mass-manufactured chattels should be treated the same as other tangible property which is not interchangeable. The only explanation for the decision in Hunter v Moss136 is that it was considered in each case to be unfair to allow the defendant to renege on his contractual obligations in circumstances in which there was sufficient property to satisfy all claims.

Paradigms in property law: morality or a priori concepts Grantham has explored the Hohfeldian context of these principles.136a In Attorney-General for Hong Kong v Reid137 the decision of the Privy Council was based entirely on a moral condemnation of

134 135 136 136a

[1995] AC 75. [1994] 1 WLR 452; Harvard Securities Ltd, re; Holland v Newbury [1997] 2 BCLC 369. [1994] 1 WLR 452. Grantham, ‘Doctrinal bases for the recognition of proprietary rights’ (1996) OJLS 561. Cf Rotherham, this collection, 196. 137 [1994] 1 AC 324.

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receiving bribes and a determination to punish the defendant. That element of punishment emerged not only from the tortured logic of the Walsh v Lonsdale138 point considered above, that equity ought to look upon as done that which ought to have been done, but also from the fact that the constructive trust which was necessarily found to bite on the bribes from the moment of their receipt extended into a liability to make good any loss realised on an investment of the bribes and not simply a liability to return any traceable proceeds of the original bribes, whatever their worth at the time. Here, proprietary rights are vested in the claimants whosoever they may have been (the good people of Hong Kong? The ‘state’ of Hong Kong?) on the basis of the defendant’s wrongful act and not because of the satisfaction of any pre-existing right. This is a particularly queer proposition where there is no evident ‘desert’ on the part of the claimants other than some ethereal harm that has been caused to their common spirit. No: punishment is the only explanation for the decision. That decision is to be compared with the dry logic of Re Goldcorp139 and the purportedly icy logic of Westdeutsche Landesbank v Islington.140 In the former case, no one who could not demonstrate as a matter of fact (and of luck) that property was held separately to their account received any secured remedy in the insolvency of the bullion exchange in that case, even though all of the customers appeared to have one of a number of standard form contracts in which the exchange undertook that the bullion paid for in their orders must be physically acquired and held to each customer’s account. Consequently, luck was the device which decided in practice who was the recipient of a proprietary award and who not. In the latter case, the attempt by Lord BrowneWilkinson to displace the logic of resulting trusts achieving restitution with a trust based on essential notions of conscience left open as many questions as it answered. The purported establishment of ‘conscience’ as an a priori concept which identifies when trusts will arise ‘by operation of law’ served only to highlight that knowing when someone has or has not acted unconscionably may be difficult in many cases. Consequently, the notion of conscience may have to be left to the discretion of the judge to apply, and thereby it would be necessary to accept that the idea of conscience is an epistemologically imprecise one—not arising a priori but only by virtue of judicial perception. Otherwise, conscience will only be applied by reference to a set of principles to be developed in the future or to be divined from past judgments—in which case it is not an a priori concept but rather one that is generated by judicial legislation or by reference to an actively created set of rules. The logic of property law here is therefore diffuse: there is no central organising principle. Rather there is lightness. In Reid we see a moral decision; in Goldcorp a decision based on insolvency law and economic policy; and in Westdeutsche Landesbank one based on technical rules as to the time at which the defendant acquired knowledge and arguably the immorality of holding such an innocent to account. It is suggested that this sort of flexibility is commendable. What is clear is that just these few high-profile decisions do not respond to any a priori principle of property law. Instead, this weighty and fundamental legal code is in truth very light.

138 (1882) 21 Ch D 9. 139 [1995] 1 AC 74. 140 [1996] AC 669.

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OTHER FORMS OF CONTROL AS QUASI-PROPERTY Property rights as ‘rights’ The term ‘right’ is frequently used carelessly in relation to political property theory, as distinguished from legal theory.141 At a political level, one might claim or assert that one ought to have a right to ramble across agricultural land or to demonstrate in a public place. In these contexts the expression ‘right’ is a synonym for a political aspiration or a rhetorical assertion of a civil liberty. It is not a right in the sense of being a legal right enforceable in a court. In Raz’s conception of a legal understanding of the term, a ‘right’ should be recognised as something which enables the rightholder to impose a duty on another in order to protect her interest.142 The most obvious difference between the two is that the legal right constitutes an entitlement recognised by law, whereas the former category merely constitutes an assertion that the claimant wishes a right to be recognised.143 However, that is not simply to draw a distinction between those claims which are recognised by law and those which are not. There may be claims recognised by law whose provenance as ‘rights’ we may question.144 At one level it might be that the law’s willingness to enforce a particular claim is problematic either because the detail of the law is unclear or because a rule is considered to be anachronistic and unlikely to be enforced in future.145 At another level the objection might be political. In relation to the allocation of claims to property in English law we might question the very existence of rights in private property as opposed to more redistributive mechanism for recognising claims to property.146 There is then the problem of where these ‘rights’ are said to originate. In truth, legal rights are claims which are recognised by the courts147 as being rights. The word ‘recognised’ in this context is revealing. Some ancient theorists of the common law suggest that judges do not make law; rather they are merely instruments for the recognition of laws which are in some way innate, whether derived from God or some grundnorm of principle.148 In this sense ‘recognition’ is meant in the sense of uncovering or re-discovering, not creating anew. Recognition is carried out by judges who

141 Penner, The Idea of Property in Law, Oxford University Press, 1997, p 13. 142 Raz, The Morality of Freedom, Oxford University Press, 1984, p 199. 143 Even in the company it is suggested that the understanding of the share as simply a ‘bundle of rights’ constituting property is insufficient to explain the complex web of relationships which exist in a company and which constitute both effective entitlements and also assertions of rights against the assets of the company. 144 Many human rights are capable of such open-textured interpretation as to be incapable of prediction and so potentially would not constitute ‘rights’ in any meaningful sense prior to a court judgment in each individual case. 145 Fuller, The Morality of Law, Yale University Press, 1964. 146 Witness, for example, claims over land rights in Australia on behalf of its indigenous peoples and claims to—and government expropriation of—agricultural land in post-colonial Zimbabwe. 147 Alternatively, law which has effect as a result of lawyers giving advice to their clients and thus controlling the activities of those clients for many practical purposes. See the comments of Lord Browne-Wilkinson in Kleinwort Benson v Lincoln City Council [1998] 3 WLR 1095 in relation to the frequent role of the advising lawyer as both accepting decided law as being ‘the law’ and also in creating a market’s acceptance of what the law would be in a particular context, as considered in Hudson, Swaps, Restitution and Trusts, Sweet & Maxwell, 1999, p xii. 148 Cotterrell, The Politics of Jurisprudence, Butterworths, 1993.

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are themselves recognised as having the authority so to do because of the qualifications which they have received. This ability which the legal system and its actors have to confer qualifications on lawyers and judges, the legitimacy to pronounce judgment and to allocate rights, are all facets of power in those particular social institutions.149 For many post-Marxist social commentators many of the problems of the modern world are bound up with the reduced authority which these actors are able to command.150 It is a question of legitimacy in the legal system to pronounce that assertions have reached a level of recognition as entitlements.

Quasi-property rights:‘transferable personal claims’ I suggested earlier that property law does recognise as property some phenomena which in truth constitute only personal claims. Their status as property is said to rest primarily on their transferability or ‘separability’,151 although that does not account for situations in which nontransferable contracts have been held to be capable of being settled on trust.152 Within the law of property there is an awkward distinction drawn between those claims which are considered to be property and those claims which are not. The following section advances the argument that there is a further category of relationship which ought to be considered to be proprietary, given English law’s attachment to conceiving of transferable personal claims as being property: that is, the status of democratic control over property as being a form of property right.

Control as a property right: property which cannot be owned There are many forms of resource which can readily be identified as being property without too much debate but which nevertheless do not conform to the proprietary rights thesis that all property is owned at law by some person. Take for example Victoria Park in London’s East End. Victoria Park sits on the border between Hackney and Tower Hamlets and is now connected to the River Thames by the Mile End Park land-bridge. It is undoubtedly land. It is undoubtedly capable of constituting property in legal terms. And yet, as I cycle through it every morning, seeking a short-lived haven of safety from the chaotic traffic of Hackney, I have great difficulty in identifying its owner. I do know that the park was laid out by the Corporation of London and the Council for

149 Foucault points out the phenomenon of power at this micro-level in all of those bodies who have the reflexive power to confer legitimacy on their own membership by awarding them the qualifications which are then recognised in the broader society as entitling them to make definitive pronouncements on the matters in question: Foucault, The Archaeology of Knowledge, 1972, Routledge. 150 See, for example, Habermas, Legitimation Crisis, Polity, 1988. 151 The latter is the argument considered by Penner, The Idea of Property in Law, Oxford University Press, 1997, p 105. 152 Don King Productions Inc v Warren [2000] Ch 291. The most common example of this phenomenon was said to be the chose in action. What is peculiar about this form of property is that ownership of the right does not in itself give rise to any right in any identifiable property. Rather it is a claim which entitles the holder of the right to receive some property, in the form of money, which is recognised not by its identity but rather by its value. To put it crudely, it does not matter which pound coins are handed over provided that they have the same value as the value of the claim. The transferable personal claim is therefore property with no identifiable proprietary base.

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the recreation of the disadvantaged inhabitants of the East End, and named after Queen Victoria. I know that Tower Hamlets London Borough Council has responsibility devolved to it by statute to maintain the park. In law, those persons are empowered to exercise the rights of the owners. I am also aware that, in some shadowy sense, the Crown has ultimate title in it and every other piece of land over which we are estate-holders or tenants of the Crown. And yet that does not explain to me in any meaningful way the ownership of the park. Each summer the park fills with migrating geese and other birds who clearly consider its ornamental ponds to be home. In winter, large number of squirrels forage in the bins, having given up on hibernation now that the temperature does not fall low enough to drive them into warm nests for the winter. The most common occupants of the park are men with pitbulls, mothers taking a turn with babies in prams, and young boys playing football on Saturday mornings in front of enthusiastic parents vicariously living out their own faded sporting ambitions. If you tried to deny any of them access to the park they would tell you that they had a right to be there. They use this land unhindered: they think it is their right to move freely through here. So who ‘owns’ this park? In (non-legal) truth no one owns it. This is a more difficult question for property theory than the easy cases of redistribution of land. The lawyer will point to the legal entitlement in the local council to maintain the park as they see fit and to close it at night when they think it convenient, or to the occasional leasing of the park to hold concerts and open air film showings in the summer. A political theorist might talk about the freedom of people to use the park as part of their democratic entitlement to use municipal property. But none of them will focus on the real notion of Victoria Park as property: namely, its mundane day-to-day use when no one has closed it off or declared an emergency or taken it into common ownership. It is a park—merely an expanse of grass and trees bounded in by a strip of tarmac—hemmed in by the human community which would not want to live without it. Its owners are those who use it. Ultimately it is ‘owned’ by its spontaneous democratic and anarchic use. This form of property right through control rather than through legal entitlement is a vital extra dimension for this discussion of property. To overlook this is to ignore the way in which resources are used in society and the way in which law interacts with that. Cotterrell is right: we cannot divorce law from this sociological setting.153 Maybe the only way to understand property such as this is simply by its control and use. Title in a park is unlikely to be of much moment—what might be of more importance is the manner in which members of a commune or co-operative use property which they have each surrendered voluntarily to the common purpose, and that is an issue to which I shall turn shortly. First, it is worth considering whether democracy can ever encroach into property law.

Democracy as a property right? That democracy might be considered as a means of exercising property rights is not, in fact, as surprising a notion as it may appear. There are well-trodden examples of democratic control being the most efficient explanation of proprietary rights of the rights of shareholders in ordinary companies, the rights of partners inter se, and of beneficiaries in some types of trust. As is considered below, co-operatives in the form of industrial and provident societies have democratic

153 Cotterrell, The Sociology of Law, Butterworths, 1992.

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features in relation to their use of property. As will emerge, in the same way that it is not possible or even meaningful to try to identify the owner of Victoria Park, it is not always meaningful to identify the owner of property which is held in common as part of a co-operative. The rights of the members of the co-operative under common law and under statute are not in the capital of the cooperative (even though those members will have provided that capital initially) but rather property rights in that capital are exercised by the collective will of those members as expressed through the contract in which they set out the constitution of their co-operative. Control over this property is based on democracy and not on specific rights attaching to any particular thing. It is to these cooperatives that we turn next.

OTHER VISIONS OF PROPERTY: COMMUNITY AND DEMOCRACY Property and organic solidarity As considered above, Durkheim’s view of property relations was that they were socially divisive because they identified which property could and which property could not be used by given classes of people.154 In relation to private property they meant that the use of property was reserved entirely to the owner. In relation to civil code notions of dominium, it is easy to see why property law would occupy such a binary position. However, English property law does recognise a broader spectrum of legal relationships as being property rights. That is, it recognises the holder of an easement, the holder of an equitable interest and the holder of a lease as all having proprietary rights and not purely personal rights against the holder of the legal title. What this section seeks to explore is the creative aspect of property law and its possible uses as means of promoting social solidarity. This requires a conception of law as being something which is owned by the people and not simply as something which is done to them. If law is thought of as belonging to the people then it is possible to think of property law as generating a series of models of behaviour which enable people to share property. For example, the ability to use trusts for charitable purposes offers a model for groups seeking to provide purposes beneficial-to-thecommunity to receive the fiscal benefits of charitable status; it also offers a model for the means by which such social activity can be made possible. Historically, the working class has needed to combine to provide for their common security in parallel with the ways in which the propertied classes were concerned to combine to increase their wealth. For the working classes the units which they used were what would now be termed unincorporated associations, in the form of friendly societies or industrial and provident societies. At the time they were first created there was no term of art to describe them. From the late 18th century, co-operative movements were formed in England.155 It was thought to be dangerous for

154 Cotterrell, Emile Durkheim: Law in a Moral Domain, Edinburgh University Press, 1999, p 94. 155 Identifying the first such organisation is all but impossible. EP Thompson rejects the common assertion that the first working class political association was the London Corresponding Society in 1792; see Thompson, The Making of the English Working Class, Penguin, 1968, p 22. The beginnings of widespread working class combination are placed at the time of the ‘American war’ in the late 18th century: ibid, p 22. There is evidence that rudimentary groups of labourers or tradesmen had been formed in secret (due to the laws on sedition) as early as the 1670s: ibid, p 28.

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the working classes to combine because it might enable them to form rebellious groups, and so the Combination Acts were passed to criminalise such associations. They were considered seditious, and were illegal until their decriminalisation in 1874. Over time, in the white heat of the industrial revolution and at the height of Victorian enthusiasm for imperial capitalism, the justifications for the criminalisation of such associations, and subsequently for making them liable in tort for any loss they caused to employers, were economic rather than to do with public order. What such associations sought to achieve was a measure of security for their membership against loss of income through illness, infirmity or otherwise. The Victorians saw the benefits in enabling the working classes to maintain the available pool of labour and in reducing the pressure on the workhouses by allowing such associations to spring up organically, or to be formed by the Gradgrinds156 of local communities to ensure the proper behaviour of the proletariat.

Co-operatives and credit unions: the common bond and genuine community An industrial and provident society takes deposits from its members to aim to fulfil the purposes identified in the society’s objectives. A registered industrial and provident society specifically is organised as a corporation,157 having operated as either a partnership or an unincorporated association before 1862. Industrial and provident societies are necessarily corporations with a minimum of seven members.158 This requirement mirrors the number of members originally required to make up a joint-stock company159 and indicates the antiquity of the industrial and provident society legislation.160 The most significant facet of industrial and provident societies is that they are obliged to be organised on co-operative principles or to carry on business ‘for the benefit of the community’.161 In deciding whether or not a society is indeed a ‘bona f ide co-operative society’ the legislation provides that: …the expression ‘co-operative society’ does not include a society which carries on, or intends to carry on, business with the object of making profits mainly for the payment of interest, dividends or bonuses on money invested or deposited with, or lent to, the society or any other person.162

Beyond straightforward industrial and provident societies come the credit unions. Credit unions in truth form a kind of co-operative which fall within the class of industrial and provident societies. An

156 157 158 159 160

Cf Charles Dickens, Hard Times. IPSA 1965, s 3. IPSA 1965, s 2(1)(a). Joint Stock Companies Act 1856, s 3. Minor legislative amendments were effected by the Friendly Societies Act 1992. More substantial changes were introduced by the Deregulation (Industrial and Provident Societies) Order 1996 (SI 1996 No 1738). For administrative fees see the Industrial and Provident Societies (Amendment of Fees) Regulations 1998 (SI 1998 No 676). For new forms and procedures see the Industrial and Provident Societies (Forms and Procedure) Regulations 1996 (SI 1996 No 3121). See also the Industrial and Provident Societies Act 2002. 161 IPSA 1965, s 1(2)(b); see generally the excellent Snaith, The Law on Co-operatives, Waterlow, 1984. 162 IPSA 1965, s 1(3).

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entity can only be recognised at law as being a ‘credit union’ if that entity is an industrial and provident society163 and registered under the Credit Unions Act 1979 as such.164 The credit union is identified as such by the presence of five key factors: an objective of the promotion of thrift amongst its members, the numbers of members, a common bond with a local community or other restricted category of persons, prescribed rules, and compulsory insurance.165 Credit unions are local initiatives. That is, they are ‘local’ in that they are required by legislation to have a link with the community which they serve. They are ‘initiatives’ in that, in practice, credit unions will be formed by sufficiently motivated local people to pool resources from that community in the form of deposits (or subscriptions) so that the credit union can make loans to members of the union. The subscriptions made by members will typically be small. The aim is that those without access to more mainstream financial services (such as bank loans and overdraft facilities) will be able to generate capital from within their local community.166 The depositor may receive a low rate of interest in return for the subscription. However, the principal aim is to provide a pool of capital for local people. Credit unions create pools of social capital available for the use of their members because of their membership and not because of their status as either consumers or as owners of rights in property. Significantly, members of a credit union do not take rights in property. Rather, their rights are restricted to rights of use—that is, borrowing—in accordance with the constitution of the union. Similarly, their rights are the rights not of owners of shares in accordance with the size of their shareholding, but rather as members entitled to one vote in accordance with their membership as an individual. There was a requirement in the 1979 legislation that there be a common bond between those people who are the members of the credit union and, in turn, between the credit union and the communal impact of its activities. Therefore, the Credit Union Act 1979 provided for what were described as appropriate ‘qualifications to admission to membership’: (a) (b) (c) (d) (e)

following a particular occupation; residing in a particular locality;167 being employed in a particular locality; being employed by a particular employer; being a member of a bona f ide organisation or being otherwise associated with other members of the society for a purpose other than that of forming a society to be registered as a credit union; and such other qualifications as are for the time being approved by the appropriate registrar.168

Therefore, credit unions have a broader definition of their communities than simply the geographic areas which they serve. That the membership resides in a particular locality is, however, one of the

163 CUA 1979, s 3. 164 Ibid. 165 Registration as a credit union removes such an entity from the need to comply with the regulation of ordinary banking business. 166 On the effects of denial of access to financial services for the socially excluded see HM Treasury, Access to Financial Services, November 1999, as part of the National Strategy for Neighbourhood Renewal initiative. 167 The term ‘residence’ is generally taken to be the place where someone habitually lives: R v St Leonard’s, Shoreditch, Inhabitants (1865) LR 1 QB 463; R v Glossop Union (1866) LR 1 QB 227; Levenue v IRC [1928] AC 217.

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possibilities.169 Therefore, it is likely that credit unions will continue to be most important in relation to initiatives in small, geographically defined communities. In Bauman’s conception, the sort of community which is important in the late modern world is that form of community which arises organically through local action and not that which is imposed externally by government diktat.170 The attraction of credit unions is precisely that they offer such organic, local action. What is significant about these structures is that they suggest the use of property norms in a way that is socially useful. They are more akin to that form of communal use of property without a care as to title in it and so forth which traditional property law debates have associated with innocent tribes whose members take only according to their need without ever needing to ask ‘who owns this?’. What is required for the effective existence of a credit union is a collective of individuals whose distinct personality nevertheless permits them to come together as a coherent unit to pursue their common, benevolent goals. With what has been said above about the atomising effects of postmodern society, it is important to consider the nature of such collective entities as spontaneous accumulations of individual aspirations into a socialised form. Given that industrial and provident societies are required to operate on co-operative grounds it is important to understand the principles on which those co-operatives are distinguishable from other entities making communal investment and the different form of ownership which they represent.

Compulsory membership of the middle class Whereas these forms of self-help group had their genesis in working class solidarity, public policy is orientated at using these structures to provide financial services for those people who cannot access bank accounts, private pensions and all the other ephemera of the affluence of 21st century living. Such people are Bauman’s dispossessed.171 The aim of public policy is to offer a form of the services to them which other, more affluent people are able to acquire on the High Street so that they can be included within the government’s demographic which wishes bank accounts for everyone, private pensions for everyone and at least some experience of university for half of the population under the age of 30 by 2010. In effect, it is a set of policies which is directed at making everyone middle class by enabling everyone to access those features of life which have been historically the preserve of the middle classes. At one level it is an egalitarian mission whereas at another it is a project which hopes to enrich us all without requiring us to pay for it.

168 CUA 1979, s 1(4). 169 The employment-based credit unions are likely to become less important as occupational pension schemes become more prevalent, and with the introduction of a minimum wage. 170 Bauman, Community, Polity, 2000. 171 Bauman, Work, Consumerism and the New Poor, Open University Press, 1999.

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CONCLUSION The question of perception and relativity This discussion has taken its central motif from Bauman: specifically the observation that social bonds are breaking down and becoming more liquid. In relation to property law this has manifested itself in the problematic application of principles, developed originally in relation to land, to very different forms of property which do not conform to traditional patterns of tangibility or identifiability. Rather, these new forms of property are generally created by commercial activity—from copyright to electronic payment systems—and property law is challenged to cope with them armed only with its traditional implements. What emerges further by extension of Bauman’s ideas is a sense that these new forms are ‘light’ both in terms of their intangibility and the restricted level of legal obligation which they impose on their owners. Mooted developments in the legal attitude to offshore trusts and to various forms of investment trust would tend to exacerbate this tendency. By contrast there remain other property relationships which are burdensome, for example the domestic mortgage. This bears out Bauman’s thesis that there are some property relationships which are ‘unbearably light’ and yet other property relationships which are comparatively ‘heavy’. However, in spite of this drift in property law towards an increasing emancipation of the privileged from the burdens associated with property, there are other models of property relations which can now be embraced. It was suggested that there are contexts in which property law will accept title being taken over ‘quasi-property’, thus presenting a range of logical and theoretical questions. Furthermore, once quasi-property is recognised as being part of property it must also be recognised that there are other forms of property which it is more difficult to fit meaningfully into any kind of property law matrix. One example of this latter phenomenon is Victoria Park: an area of open land which is ‘used’ more meaningfully than it is ‘owned’. Alternatively, property held on behalf of co-operatives remains an area in which (perhaps within the law dealing with unincorporated associations) there is no single ‘owner’ of any property: rather such property is ‘controlled’ by the democratic will of the membership (none of whom are themselves owners) in accordance with their core benevolent aims. Of course, the familiar joint tenancy over concurrently owned land is itself a form of property ownership without ownership: the joint tenants together own everything but individually own nothing, thus expressing the possibility of having meaningful rights without any vested rights at all.172 The very concept of property at English law and in equity is unbearably light. It lacks the ostensible certainty imposed by decisions like Re Goldcorp which purport to draw immovable lines in the sand between ‘property’ and ‘not property’. However, lines in the sand are always liable to be washed away by the tide or blown away by the wind. In this way Penner’s admirably sensible ‘transferability thesis’173 as an explanation of what is ‘property’ and what is not ‘property’ has had its clear lines washed away by the Don King case’s acceptance that the benefits which flow from non-transferable property can themselves be treated as property. The central metaphor here then is one of evolution. As forms of property evolve our previously weighty concepts become as light

172 Hammersmith v Monk [1992] 1 AC 478. 173 Penner, The Idea of Property in Law, Oxford University Press, 1997.

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as air. The challenge posed to property law is then to identify whether a changed world requires a change in legal norms to keep pace, or a determined respect for long-standing principle. The line between these two approaches is difficult. In relation to the recognition that the future cash flow which may derive from a capital asset is itself property in the present, a change in the category of phenomena which are considered to be property is perhaps necessary, to keep pace with the modern commercial understanding that cash flow value is itself capable of being turned to account and can thus be property. Whereas, it is suggested, property law should stand its ground when the cosmopolitan few seek fiscal advantage from an argument that trusts should be treated as being only contracts when they have always been accepted as constituting equitable property rights. The difficult choice is between a pragmatic decision not to interfere with the development of legitimate commercial activity and a refusal to permit an undeserved fiscal advantage to pass to those powerful enough to retain others to lobby in their interests. The perception of property which is maintained by property law, that of the tangible object in space, is only possible as a relic of a time when perception was understood as emanating from the individual. Husserl encapsulated that viewpoint: If walking begins, all worldly things therefore continue to appear to me to be orientated about my phenomenally stationary, resting organism. That is, they are orientated with respect to here and there, left and right, etc, whereby a firm zero of orientation persists, so to speak, as absolute here.

Virilio points out that Husserl wrote this in 1934 before our perception of the world changed; that is, before Einstein’s relativity and space travel explained to us how our perceptions are based on phenomena which are in fact relative and not absolute.174 The nature of property as understood by property law must similarly be understood as being relative to other social forces. It must be understood that those forms of rights understood by the law of property which entitle the rightholder to take a benefit from property, or to transfer the benefit which might be derived from property even if the property itself is not capable of transfer, are very different from those property rights which attach immutably to an identified item of property. Further, property rights which relate to items of property held only for investment purposes or only for the value to be derived from that investment differ greatly from property which is held for its intrinsic value. Each of these forms of property is relative to the intentions of the property-holder; further, each of the types of right is similarly relative to the purpose for which the property is held.

The perception of lightness The central metaphor of this chapter has been that in some circumstances property is heavy and that in others it is light. By lightness is meant the ability to abandon property by turning it to value, or simply by refusing to be bound by it, and the sensation in the owner that title in that property does not connote burdensome responsibility.

174 Virilio, Polar Inertia, Sage, 2000; L’Inertia Polare, Bourgois, 1990.

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In this discussion we have encountered three principal situations in which such lightness was apparent and in which it was deliberately sought by the property owner. First, the cosmopolitans who organise their businesses by using franchising operations so that their assets are merely the contracts they create with manufacturers, their property being principally bound up in the trade marks they licence and the cash flows they receive from such licences. Second, the offshore tax avoidance communities who seek to rely on the trust structure as a convenient vehicle for holding property but who contend that the proprietary nature of rights in such a trust should be capable of dilution into mere contractual claims so that investors can avoid any liability to tax which would otherwise have come as part and parcel of their equitable ownership. Third, and related to the second, investment in a unit trust, which is considered by some to be equivalent to a mere contract on the basis that the proprietary aspect of the investment arrangement is of no practical benefit to the investor, who would prefer to rely on financial regulatory protection and the law of contract in most circumstances. There were also situations in which some property relationships appeared to have lightness by virtue of their vagueness. First, situations in which proprietary rights are asserted over assets which are in themselves merely evidence of personal claims: examples were choses in action generally, title to bank accounts and rights in financial products. Second, situations in which assets have been accepted as constituting property even though they represented merely cash flows derived from choses in action which were themselves not transferable, and therefore not property within the traditional conception of a right in property.175 Contexts in which property relations appear to have weight were those in which ordinary human beings interact with their homes—all of the burdens of insurance, maintenance and protection; the emotional investment in a home, the attention lavished on a car, the kitchen drawer full of warranties for electrical goods. All of these are the measures of modern life; these slips of paper and promises to make payment if chattels (real or personal) do not perform as warranted are the little additions that populate our lives. As we hide within the frailties of our ‘phenomenally stationary, resting organisms’, perhaps we need to reflect on a property law which is currently conspiring to mark the lines of flight of the cosmopolitan elite and to mark the perimeter fence of the ambitions of everyone else.

175 The latter is the argument considered by Penner, The Idea of Property in Law, Oxford University Press, 1997, p 105.

Chapter 2 The (virtue) ethics of private property: a framework and implications David Lametti1

INTRODUCTION The time is ripe to stop thinking about private property solely in terms of rights. The nefarious impact of seeing human interaction with social resources, whether tangible or intangible, only in terms of rights and without some sense of either the limitations on private property or the responsibilities that must be attached to private property holding can be readily seen all around us. Environmental challenges, resource depletion and vast inequalities of wealth seem to be as omnipresent as the commonly-accepted beneficial aspects of the private property institution: efficient use of resources, increased creation of social resources, development of personhood, etc. It is relatively uncontroversial to state that private property has limits; it is less accepted that private property may have obligations, as I believe it does. In either assertion, a rights-based theory does not account for the fullness of the private property institution, either practically, conceptually or theoretically. While a number of property writers are doing interesting work in the field, identifying and explicating property norms or analysing other forms of common or quasi-common property holding, none has attempted to set out in a systematic manner a basis for private property which encompasses more than individual rights, and linking the institution of private property to a more fundamental set of justificatory theories. As a response to this challenge, this chapter is part of a larger attempt to retrieve elements of the justification for private property that too frequently have been played down in legal and political discourse.2 These elements of justificatory argument are crucial to an adequate understanding of the institution of private property, its various practical manifestations, as well as its evolution and role in contemporary Western society. The argument here defended is that the concept of private property has an ethical dimension that is inherent in its very essence: in lay terms, private property is as much about duties, obligations and ends as it is about rights. This chapter will sketch some of the theoretical underpinnings of such a reconstructive project, as well as set out some of the implications of the analysis at both conceptual and justificatory level. Related texts outline some of these elements and demonstrate how they are essential to the theoretical

1

2

I would like to thank Audrey Boctor and Justin Howell (BCL, LLB expected 2004) for their assistance in revising this text. I would also like to thank Jim Harris for his comments on an earlier version of this text, and his ongoing interest in this work. Research support has been generously provided by the McGill Faculty of Law’s Wainwright Trust, the Fern Gertrude Kennedy Fund in Legal Theory and the McGill University Travel Assistance Fund. D Lametti, The Deon-Telos of Private Property: Ethical Aspects of the Theory and Practice of Private Property (D Phil thesis, 1999, Oxford University; forthcoming McGill-Queen’s UP): hereinafter Deon-Telos. An applied version of the justificatory arguments is set out in D Lametti, ‘Property and (perhaps) justice’ (1998) 43 McGill LJ 663 (hereinafter PPJ).

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underpinnings and practical modalities of property rights and obligations,3 and set out definitional amendments consistent with the larger argument.4 As a group, these studies will attempt to restore this group of non-rights-based aspects to their proper position alongside the rights-based elements of this institution, arguing that the former contribute to a larger functional moralism in the institution of private property, as these elements are directly related to societal goals and values. The project is in part a study of the theory of and justifications for private property,5 and in part an analysis of how the justifications and explanations for private property should inform, and be informed by, legal discourse. It is a self-consciously revisionist argument that seeks to retell the theoretical and practical ‘story’ of private property.6 As the story is retold, it will be clear that there are elements of private property that are clustered around certain standards of conduct inhering in the concept and oriented by the general goals or virtues governing the way property ought to be used. These include not only the requirements that a community can place on specific property owners for the good of the community and the justifications for doing so, but also those requirements that emanate from the nature of the property relationship and the nature and characteristics of the particular resource. In addition, these normative claims bear not only on the use of resources but, even more directly, on their allocation. At the level of legal doctrine, the dominant paradigm for the understanding of private property is ‘rights-based’.7 More specifically, the legal discourse of private property is generally framed in terms of individual rights. Thus, a student traditionally begins the study of law by learning that the law of private property is about rights—specifically a ‘bundle of rights’ in some resource—and that the largest possible grouping of these rights, namely ownership, is in principle absolute. Blackstone quite famously wrote that property is ‘that sole and despotic dominion which one man claims and exercises over the external things in the world, in total exclusion of the right of any other in the universe’.8 The original Code Napoléon did likewise; Article 544 stated that property was ‘the right of enjoying and disposing of things in the most absolute manner’. By absolute one means either that property rights entail an unrestricted range of powers in that they are not subject to

3 4 5 6

7 8

See ‘The Destine of Destination’ (unpublished manuscript on file with author: hereinafter Destino) and Deon-Telos, Ch 3. ‘The concept of property relations through objects of social wealth’ (2003) U of Toronto Law Journal (forthcoming) (hereinafter The Concept of Property). In this sense, it shares similarities with LC Becker, Property Rights: Philosophic Foundations (London: RKP, 1977: hereinafter PR:PF); JO Grunebaum, Private Ownership (London: RKP, 1987); and R Schlatter, Private Property: The History of an Idea (London: Allen & Unwin, 1951). In this sense, it remains true to the project of AM Honoré, first embodied in a seminal article entitled ‘Ownership’, published in English for the first time in AG Guest (ed), Oxford Essays in Jurisprudence (Oxford: OUP, 1961: hereinafter Ownership cited to Honoré, Making Law Bind: Essays Legal and Philosophical (Oxford: OUP, 1987)) and a subsequent article entitled ‘Property, title and redistribution’ published for the first time in (1977) 10 ARSP, New Series 107 (hereinafter Redistribution cited to Making Law Bind). John Christman’s The Myth of Ownership (New York: OUP, 1994: hereinafter The Myth) is a more recent example of the general approach taken here. However, this project attempts to go further than does Christman’s as it does more than point out that private property rights have inherent limits. The organizing terms ‘right-based’, ‘duty-based’ and ‘goal-based’ are borrowed from Ronald Dworkin and are discussed below. I shall generally use, for reasons articulated below, ‘rights-based’ in place of ‘right-based’. Sir William Blackstone, Commentaries on the Laws of England, 11th edn (London, 1791: hereinafter Commentaries) Vol II at p 2.

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limitations, or that property rights have absolute weight in that they will always ‘trump’ other considerations.9 Yet, as the student discovers almost immediately, in both the common law and the Civil law,10 both of these senses of ‘absolute’ have faded: the scope of property rights is limited. They can be outweighed by other types of individual and non-individual interests, especially in factual situations where property rights are treated as merely prima facie. Moreover, property owners can also be required to fulfill specific functions with their allocated resource, in particular, duties to others. Thus, property rules yield a mixture of duties and obligations as well as rights. Although property discourse fully understood does not actually support the traditional picture of the absoluteness of ownership rights, the discussion is nevertheless still framed in terms of rights. While there is increasing scepticism about the ‘bundle of rights’ metaphor,11 the majority of recent theoretical treatments of private property continue to be explicitly or implicitly rights-based. This is particularly true in North America, and the entrenchment of property rights in the Fifth Amendment to the United States Constitution has influenced the discussion of private property well beyond American borders. In general, the idea of private property is always associated at some level with the concept of individual rights. In most of these discussions, an explicit or implicit connection is drawn between private property and individual rights at the level of justification: the origin or the existence of private property is explained or justified in terms of such rights. This is often accomplished by regarding the acquisition and use of private property as a power within the individual’s control, justified as an extension of the actor’s freedom or his development, or which forms a part of the individual’s aspiration to achieve other goals such as material wealth or security, or combinations thereof. At other times the acquisition of property rights is explained as part of a narrative whose central character is the seemingly self-justificatory ‘possessive individual’.12 Yet, a historical study of the concept of private property in the development of the theory of property at the political and social levels, as well as the practice of regulating property from within legal systems, shows an institution with a variety of justifications, not all of which are predicated on individual rights. Important aspects of the nature, justification and structure of private property cannot be explained by an institution concerned only, or even primarily, with these rights. Nonrights-based justifications for private property, and non-rights-protecting elements of property theory and practice have been present in the institution as we know it in Western culture, from its origins in Greek society and philosophy to present-day discussions of environmental protection and land-use planning.13

9 10

11 12

Christman, The Myth at p 29. Honoré frames a similar observation on the ‘slippery’ meaning of ‘absolute’, framing its import in terms of ownership’s (infinite) duration, (alleged) indefeasibility, and (supposed) exemption from social control: Ownership at pp 189–90. Blackstone admitted the ‘control and diminution’ of the laws of the land: Commentaries, Vol 1 at p 138. The French Code civil also subjects propriété to legal limits: Article 544. I shall follow the convention recommended by John Brierley and Roderick Macdonald of capitalizing ‘Civil’ in English when it refers to the legal system founded on the Roman or continental civil codes and their traditions. See JEC Brierley and RA Macdonald (eds), Quebec Civil Law: An Introduction to Quebec Private Law (Toronto: Emond Montgomery, 1993) at pp 2–3. For a conceptual critique on private property terms, see J Penner, ‘The “bundle of rights” picture of property’ (1996) 43 UCLA L Rev 711. For a wider critique encompassing different types of private property, see M Heller, ‘Three faces of private property’ (2000) 79 Oregon L Rev 417. The term comes from CB MacPherson, The Political Theory of Possessive Individualism: Hobbes to Locke (Oxford: OUP, 1962).

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There can be no doubt that deeply-held beliefs about the origins and nature of private property are fundamental to the way society is organized. Tony Honoré begins Ownership thus: Ownership is one of the key institutions of human society. It is also, in western culture, the most important legal conception. A people to whom ownership was unknown, or who accorded it a minor place in their arrangements, who meant by meum or tuum no more than ‘what you or I presently hold’ would live in a world that is not ours.14

In practice, laws are indeed promulgated to protect persons and their property. In theory, some— most famously Blackstone and Locke—have argued that the protection of property is the critical

13

14 15

Examples of more recent identification of such elements can be found in Deon-Telos, Ch 3. Although a thorough study of the intellectual history of private property would complement this text, it is too vast to undertake here. (I do hope to include this in a future monograph.) Briefly, such a history would expose numerous attempts at identifying and incorporating what I am calling deontelos in the theory and justification of private property. Classical writers such as Plato and Aristotle examined the role which the virtues of generosity, liberality and moderation generally played in understanding private property. Aristotle, in particular, coined the maxim ‘private in ownership, common in use’: The Politics, B Jowett (trans), S Everson (ed), Cambridge: CUP, 1988 (Bk II, 1263bl at p 26). A similar sentiment was echoed by Plato in Laws: Laws, T Pangle (trans), Chicago: University of Chicago Press, 1980 (Bk V, 740a at p 127). Early medieval attempts at justifying private property, notably that of Thomas Aquinas and those contained in the debates on medieval poverty, also exhibit strong deontological and teleological aspects. See, eg, Aquinas’s theory of property, situated in his theories of law and definition of ius: Summa Theologiae II–II, q 66, q 94 and Summa Contra Gentiles, VJ Bourke (trans), Notre Dame: UNO Press, 1975 (Bk III: 1333 at p 177). See also the writings of William of Ockham: The Work of Ninety Days and A Dialogue: III in A Letter to the Friars Minor and Other Writings, AS McGrade and J Kilcullen (eds), J Kilcullen (trans), Cambridge: CUP, 1995, and A Short Discourse on Tyrannical Government, AS McGrade (ed), J Kilcullen (trans), Cambridge: CUP, 1992. All of these, in my view, clearly elaborate on the natural (theological) teleology of certain forms of property, and the human determinations of other forms. Republican conceptions of private property, such as those of Machiavelli and James Harrington, focus on the limited nature of property rights. In this tradition, a polis must create space, physically and metaphorically, for the exercise of rights. Therefore, property, like everything else, comes after one’s duty to the community has been fulfilled and a civil society has been created. (See, eg, Harrington, The Commonwealth of Oceana, JGA Pocock (ed), Cambridge: CUP, 1992, and Pocock, The Machiavellian Moment, Princeton: PUP, 1975 at pp 383–400.) The continuing Natural Law tradition of the Second Scholastics, Grotius, Leibniz, Pufendorf, Hobbes and Locke, in particular, continue with this theistic approach. If Buckle is correct, these roots extend into the Scottish Enlightenment via Hume (S Buckle, Natural Law and the Theory of Property; Grotius to Hume, Oxford: OUP, 1991: hereinafter Grotius to Hume); the work of another Scottish Enlightenment thinker, Thomas Reid, is the most obvious example. (See T Reid, Essays on the Active Powers, RE Beanblossom and K Lehrer (eds), Inquiry and Essays, Indianapolis: Hackett, 1983, Essay V.) Utilitarians such as Bentham and Mill clearly stated that individual interests could be overridden, if not too blatantly in the case of the latter: see Deon-Telos, Ch 4. Kant’s theory of property in the Doctrine of Right, in my view, is modified by his Doctrine of Virtue: see Metaphysics of Morals, infra note 42 and accompanying text. And Hegel’s work and sui generis system is also teleological; property fits into this system (see GWF Hegel, Elements of the Philosophy of Right, HB Nisbet (trans), AW Wood (ed), Cambridge: CUP, 1991 at pp 73–103). Even from this quick glimpse, it is fair to argue that private property in the Western tradition has never been as rights-based as our modern conceptions now tend to be. Rather, it is only in a relatively modern turn towards the primacy of individual rights that private property has been regarded in this overly absolute, rights-based fashion. Ownership at p 161. Locke’s famous analysis is contained in the Second Treatise, in Two Treatises of Government, P Laslett (ed), 2nd edn, Cambridge: CUP, 1967: hereinafter Second Treatise (Bk IX at pp 350–51): men unite under a commonwealth for the great chief end of ‘the preservation of their property’. In the same vein wrote Blackstone: ‘Necessity begat property and, in order to insure property, recourse was had to civil society’ (Commentaries,Vol II, p 1).

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impetus to enter civil society.15 Thus, private property becomes a justification, or indeed a prerequisite, for civil society and perhaps even civility.16 A central question is whether, at the level of justification, private property can be justified adequately by an appeal to rights alone. A related question, equally paradigmatic, is whether at the conceptual level a rights-based definition of private property is adequate. At the level of justification, rights-based theorists hold, explicitly or implicitly, that the ultimate basis of private property is to be grounded in and explicable by such an appeal. These rights are anchored to a large extent in the notion of personal autonomy: that is, property rights protect interests that ultimately foster the ability of individuals to make meaningful choices in their lives.17 While these rights-based aspects and justifications for private property are a necessary part of both the description of private property and its ultimate justifications, they are insufficient on their own. Some might argue that private property norms (and justifications) might still be articulated in terms of rights, independently of whether the institution can best be understood as grounded primarily in the substance and discourse of individual rights.18 Extreme care must be exercised in doing so, as the resort to the language of rights will likely precondition or even distort one’s view of the explanation or justification. At the conceptual level, a rights-based discourse does not capture the totality of the property picture, namely those aspects of the institution whose presence is not explainable or understandable in terms of rights. At the level of practice, there are quite specific and unique duties that attach to certain objects of social wealth that a formal or otherwise individual rights-based stance cannot explain. More specifically, the idea of private property contains not only rights but also specific and general duties and obligations which cannot be adequately articulated in terms of correlative rights and duties between and among individuals. At the level of theory, rights-based justifications must resort to other types of non-rights-based arguments in order to account for the contours of private property—in particular, its scarcity, its allocative impact and its social aspect—in order to be persuasive. At the level of definition, property definitions and metaphors must account for this component.19 It is these understated or neglected elements of property discourse that are captured by what I am calling the ‘deon-telos’ of private property. While these non-rights-based ‘elements’ and ‘fragments’20 of the institution of private property exist in practice, and while various theoretical works allude to them or incorporate them, they are often treated as a random, less-than-coherent part of the institution. They are treated as not necessarily connected to private property and even extrinsic to it.21 Yet they are ubiquitous in practice and play an important and systematic theoretical role in justifying private property and explaining its origins, its distribution, and its usage. In other

16 17 18

19 20

Aristotle had said that those who lived outside of the polity were either gods or beasts: The Politics, note 12, Bk 1, 1253a4 at p 3. The most notable writer in this tradition is Joseph Raz: see The Morality of Freedom (Oxford: OUP, 1986: hereinafter MF). For example, John Finnis attempts to articulate aspects of his conception of Natural Law in terms of rights in Natural Law and Natural Rights (Oxford: OUP, 1981: hereinafter NLNR), and, in my view, fails to escape the individualism of rights-based approaches. For another illustration of the pitfalls of articulating a nonrights-based theory in terms of rights, see my views in Deon-Telos, Ch 4 of Jeremy Waldron’s discussion of Locke and Hegel in The Right to Private Property (Oxford: OUP, 1987: hereinafter RPP). I take this up explicitly in The Concept of Property. These terms are discussed in Deon-Telos, Ch 3.

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words, my claim is that these aspects of property discourse are highly under-represented. In my view, then, rights-based theories alone are inadequate in shedding light on private property, missing not only aspects of the institution that serve important societal values and goals, but also the aspects that one might call ‘duty-based’, whether these duties serve values in society or whether they are grounded in more individualized theories of right (as in good or moral) action. It is these non-rights-based justifications for private property and their manifestation in legal practice that this dissertation shall identify and bring to the fore, grouping them under the label deon-telos.

THE DEON-TELOS OF PRIVATE PROPERTY: A NEW FRAMEWORK The deon-telos of private property includes what one might label the ‘deontology of private property’. The deon of deon-telos—from the Greek, meaning ‘duty’ or ‘that which binds’—identifies specific duties and responsibilities contained in legal property norms and their justification, emanating from a variety of sources, whether universal imperatives or more specific types of moral and ethical duties. On the other hand, the telos of deon-telos—from the Greek, meaning ‘goal’ or ‘endpoint’—refers to the inclusion of societal goals and values in the discourse of private property and is, perhaps, the integral component of this definition. Essentially, I view as part of the deon-telos of private property the societal goals which the institution of private property is meant to serve. What one might ordinarily call the ‘teleology’ of private property is in part utilitarian: a particular goal may be the simple good administration of society, or may be more substantively concerned with the fostering of certain individual and collective goods or virtues. In either case, however, the institution of private property is placed at the service of larger purposes, in theory and in practice. Therefore, a substantial part of the institution’s explanation or justification must be assessed in moral functionalist terms. That is not to say that all duties, or even the most important categories of duty-based aspects of private property, find their origins in societal goals. Indeed, some dutybased imperatives might influence the framing of societal goals and values traditionally considered goal-based. The component parts of private property grounded in either traditional deontology or traditional teleology are often interrelated. For this reason, the traditional labels of deontology and teleology are difficult to apply, and necessitate a new term: deon-telos. As the neologism indicates, I am trying to capture a multiplicity of justifications which do not fall exclusively into one or the other of the two branches of the dichotomy of theories of right action postulated in the tradition of analytical philosophy: deontological and teleological. Traditional deontological theories hold that there are certain acts which are wrong in and of themselves regardless of any consequences that might result from those acts. An agent acts rightly when she does not commit those acts that are wrong, accepting that certain constraints or rules limit her actions. The determination of right and wrong, and the subsequent demarcation of constraints on action, might come from common moral intuitions or religious imperatives, or from a more fundamental, universal moral principle. This latter approach has its clearest expression in Kant’s

21

James Harris, for example, identifies property-limitation rules, property-duty rules and propertyexpropriation rules as part of the property institution, admitting they usually exist in virtually every private property institution, but still labels them as not conceptually necessary to the institution. See JW Harris, Property and Justice (Oxford: OUP, 1996: hereinafter P&J) at pp 33–38.

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Categorical Imperative, or a derivation or recasting of it.22 In contrast, traditional teleological theories do not consider actions as intrinsically right or wrong, but rather require the assessment of actions in terms of their consequences. Actions are right only insofar as they produce positive or better results and, specifically, insofar as they advance certain values. This analysis of actions might be framed in terms of the comparative assessment of values or the more regimented calculation of costs and benefits aimed at maximizing utility. Teleological theories are often termed ‘consequentialist’, particularly those teleological theories that are ‘utilitarian’, that is, those which are aimed at the maximization of utility. Strictly speaking, the traditional deontological/teleological divide is meant to apply only to theories of right action; the dichotomy is a subdivision of what political philosophers call ‘the right’.23 Others have taken the schema further. John Rawls has quite famously applied this schema not as a subdivision of the right, but effectively as a synonym for another traditional dichotomy in ethics, that of the right and the good: The two main concepts of ethics are those of the right and the good… The structure of an ethical theory is, then, largely determined by how it defines and connects these two basic notions… The simplest way of relating them is taken by teleological theories: the good is defined independently of the right, and the right is defined as that which maximizes the good. … A deontological theory is one that either does not specify the good independently from the right, or does not interpret the right as maximizing the good.24

Teleological theories place the good ahead of the right, while deontological theories place the right before the good. Whether this usage by Rawls has actually extended the application of the terms beyond theories of right action to the whole of ethical and moral discourse is debatable.25 However, a great deal of modern political and ethical discourse has unquestioningly followed Rawls’s approach.26 Even so, the very notion of deon-telos presupposes that we need not understand these terms as mutually exclusive in the strong sense of being inherently conflictual. Part of the project herein will be to show that these elements can co-exist; specific circumstances will render salient

22

23 24 25 26

The primary articulation of this is described in Kant’s Foundations of the Metaphysics of Morals, LW Beck (trans) (New York: MacMillan, 1985: hereinafter Groundworks) at pp 3–94. One of the more famous neoKantian accounts in moral theory belongs to Alan Donagan, and in political theory, John Rawls. See A Donagan, The Theory of Morality (Chicago: University of Chicago Press, 1977) and J Rawls, A Theory of justice (Cambridge, Mass: HUP, 1971: hereinafter ATJ). See P Pettit, ‘The contribution of analytical philosophy’, in RE Goodin and P Pettit, A Companion to Contemporary Political Philosophy (Oxford: Blackwell, 1993) 7 at p 30 ff. ATJ at p 24. See Pettit, supra note 23 at p 32, counselling against such an application. Contra NA Davis, ‘Contemporary deontology’, in P Singer (ed), A Companion to Ethics (Oxford: Blackwell, 1991) 205 at p 206 ff, who does apply Rawls’s schema to larger theories of right action. Michael Sandel, for example, has used Rawls’s categories in his influential critique of deontological theories of the right: see Liberalism and the Limits of Justice (Cambridge, Mass: HUP, 1982). Much of the debate between ‘liberals’ and ‘communitarians’ takes place on these terms, the former advancing the right over the good, and the latter group advancing the good over the right. Understanding such debates in terms of mutually exclusive concepts—right/good or deontological/teleological—has, in my view, fuelled the intractable nature of these debates. Overly dichotomized categories have stymied debate.

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different aspects of both the deon and the telos. At this stage, one might at least agree that these elements are not inevitably contradictory. In their monistic forms—that is, where each approach appeals to a singular principle such as the Kantian Categorical Imperative for traditional deontological theories or utility for traditional teleological theories—both of these views attract debilitating criticism.27 In a sense, the extreme forms of each view are mollified by the other: there are instances where right action results in disastrous consequences or where the pursuit of consequences beneficial to the greater good requires quite drastic restrictions of individual action or violations of individual rights. Thus, there is a strong intuitive basis for arguing for the idea that neither view sufficiently captures either moral action or ethics generally. Indeed, philosopher Bernard Williams has arrived at this very conclusion: both deontological and utilitarian moral theory offer true but partial perspectives on ethical life, but it is a mistake to consider either as having furnished either simple prescriptions for action or a complete theory of moral actions.28 A stronger claim is that there are some aspects of traditional deontology in teleological theories and vice versa. Put another way, there may even be some forms of the good or the right that are linked to each other. Some circumstances will call for ends-based reasoning, others will call for rights-based reasoning and many others will require balancing and weighing both kinds of considerations. Even if it proves to be impossible for everyone to agree on the precise contours of moral ground embracing aspects of both the right and the good, this does not mean that such moral ground does not exist. Deon-telos is a label for this space.29 This moral space is also occupied by a host of writers in the tradition of Continental philosophy, who do not posit the same type of distinction between the right and the good advanced by analytical philosophy, and to some extent by so-called communitarians like Sandel. More importantly, a number of writers in the Anglo-American ethical philosophy have, in the neoAristotelian tradition, called the alternative approach ‘virtue ethics’, focusing on concepts such as respect, sympathy, loyalty and fidelity.30 For my part, I am increasingly inclined to believe that this alternative manner of understanding property theory operates on the same plane, although I appreciate that the parallel has its limitations, in particular in the translation of virtuous behaviour into binding norms. Moreover, with respect to property theory, I recognize that virtue ethics

27 28 29 30

There is a wealth of literature on the reciprocal critique. On problems for deontological views, see Davis, supra note 25 at pp 210–18. On problems for consequentialism, see S Scheffler, The Rejection of Consequentialism (Oxford: OUP, 1982). See, eg, B Williams, Ethics and the Limits of Philosophy: An Introduction to Ethics (Cambridge, Mass.: HUP, 1985) at pp 15–18. See, eg, J Dancy, ‘An ethic of prima facie duties’, in Singer, supra note 25 at p 219. The best introductions are R Hursthouse, On Virtue Ethics (Oxford: OUP, 1999), D Statman (ed), Virtue Ethics: A Critical Reader (Edinburgh: Edinburgh UP, 1997) and R Crisp and M Slote (eds), Virtue Ethics (Oxford: OUP, 1997). See also O O’Neill, Towards Justice and Virtue (Cambridge: CUP, 1996) and C Taylor, The Sources of the Self (Cambridge, Mass: HUP, 1989). Another attempt to ground a similar argument analytically is persuasively elaborated by Iris Murdoch in Metaphysics as a Guide to Morals (London: Penguin, 1992). One might say, as Richard Flathman has, that HLA Hart appears to combine teleological and deontological justifications in ‘Are there any natural rights?’, in J Waldron (ed), Theories of Rights (Oxford: OUP, 1984) at p 76: see RE Flathman, ‘On the alleged impossibility of an unqualified disjustificatory theory of property rights’, in JR Pennock and JW Chapman (eds), Property: NOMOS XXII (New York: NYU Press, 1980: hereinafter NOMOS XXII) 221 at p 242, note 26 and accompanying text. Christman might also be implicated in this (worthwhile) attempt (The Myth at p 43), as well as Harris (P&J at pp 177–81), though in the end I believe both lean a bit too heavily, through an emphasis on autonomy, in favour of ‘deontological liberalism’.

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focuses on agents and their actions and my thesis rests on determining the morality inherent in the use of resources. Hence, while I am not yet ready to remove the parentheses from the title of this chapter, I am certainly moving in that direction. With respect to the argument that follows, it is taken as a given that such moral ground exists, even if one might argue about its contours, and that acting according to the dictates of virtue might have an application in helping us to understand private property rules and their justification. In addition to rights (in the traditional deontological sense and their corresponding correlative duties), other goals, duties and responsibilities (both teleological and deontological) serve at once to help justify private property and to describe practical rules consistent with its justification. This is usually achieved by regulating the allocation of property resources and by defining limits on the exercise of property rights. As such, I view as part of the deon-telos of private property the societal goals or teleology which the institution of private property is meant to serve, as well as the moral or social function that is meant to be fostered by the choice of private property over other means to allocate and regulate the use of social wealth. Those aspects of private property captured by the rubric of deon-telos are, in my view, an intrinsic component of the concept of private property itself; any discussion of private property, whether in theory or in practice, is incomplete without them.31 Rights-based theories not only fail to capture this richness, but are also unable to discern a larger coherence among all these aspects of the institution. Without these elements included in such accounts, the explanatory force of any descriptive project is weakened. What is more, the discourse of rights itself, by characterizing private property only or primarily in terms of rights, forces these other ever-present deontological and teleological elements into the background. The same is also true, I believe, of the arguments used to justify private property. The over-emphasis of property rights (and the under-emphasis of property obligations and the teleology which generates such obligations) in modern expositions of property theory is a relatively recent turn.32 Such a rights-oriented perspective, while valuable in justifying and explaining the importance (perhaps even the necessity) of private property to individuals and societies, misses a significant part of the historic justifications for, and evolution of, the institution. For example, this perspective understates the explicit role that the Classical and Natural Law traditions have played in the genesis and evolution of private property theory, omitting the insights of writers like Aristotle, Thomas Aquinas and Francisco Suàrez, all of whose views profoundly influenced writers like Grotius and Locke and continue to be relevant to understanding and justifying private property.33 The same can be said for the insights contained in what one might call ‘developmental’ or ‘personhood’ explanations for private property, Hegel’s being the most celebrated, which also cannot be explained adequately in terms of rights alone.34 In all of these explanations and theories, the idea of rights, as well as the interplay between the right and the good, rests on a set of assumptions vastly different from those found in rights-based theories. As a result, rights-based

31 32

33

Roland Pennock appears to argue for a bolstered role for utilitarian argument: see JR Pennock, ‘Thoughts on the right to private property’, in NOMOS XXII 171 at p 176. According to Reinhold Noyes, this view reached its apex in the era of the Social Contract and the Rights of Man (in the late 18th and early 19th centuries): see CR Noyes, The Institution of Property (New York: Longmans, 1936: hereinafter The Institution) at pp 296–97. According to Christman, this period lasted but a short time before it began to decline: see The Myth at p 18. I have presented indirectly my views on Locke through a critique of Waldron in Deon-Telos, Ch 4. See generally, supra note 18 and accompanying text.

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theories alone are, at best, inadequate to describe fully the modern institution, and, at worst, may distort how we view the institution and its associated rights and obligations. In my view, then, the initial intuitive position that traditional deontological and teleological theories undertaken separately do not encompass either the whole of theories of right action, or ethical theory generally, is supported by the conclusion that they do not adequately describe the fullness of the discourse surrounding private property. This is particularly true of the dominant subset of this analytic paradigm, namely deontological rights-based theories. Deon-telos, then, acts as a placeholder or category for the rich variety of arguments that are not captured by the mainstream rights-based perspectives. In addition, deon-telos is more than a mere placeholder: it designates a conceptual argumentative vantage point or position. Specifically, it is the argumentative position that I wish to occupy. This position at once lies between and connects the traditional deontological and teleological spaces, drawing on aspects of the ethics or morality of private property from both parts of the traditional dichotomy. I shall attempt to situate property discourse in the space between these two poles; the idea that all theories of right action are captured by the accepted uses of the terms deontological and teleological, or, more widely, the idea that one must opt for either the right or the good. Deontology and teleology, the right and the good, are linked to each other: they infuse and inform each other. The discourse of justifying private property cannot be adequately grounded in a recourse to a singular, monistic principle, whether it be ‘the greatest good for the greatest number’ or the Kantian Categorical Imperative. Rather, this discourse will be situated in the interstices of the right and the good, drawing on duties and goals, as well as rights. Rights are included in the overall picture, but not to the exclusion of these other elements. Or, to phrase the challenge using related terms from the analytical tradition, there will be times when we must not only ‘honour’ certain acts (by restricting all in the goal of protecting equally the option of all to so act), but also ‘promote’ certain acts (requiring some positive act in the service of some necessary virtues).35 Moreover, this middle ground is a moral space. A number of writers have identified a social aspect to private property. In my view, private property is a necessarily social institution, bridging the traditional legal dichotomies of public and private, corrective and distributive. Distributing ultimate control of some item of social wealth to one individual must have an impact on others. Private property confers power in the property-holder over others. It mediates the relation that each individual has with others, often forming the objects of our interactions with others. Furthermore, it mediates the relationship that all persons have with the State. As such, private property is a necessarily moral institution. By virtue of the function of private property, proper justification of it will be grounded in the recognition of an underlying moral discourse, and property’s normativity will reflect it. In this sense, the title of this chapter could just as well have been ‘the morality of private property’ or ‘the virtues of private property’.36 One may attempt to state the same position, drawing on some of Lawrence Becker’s insights and viewing his conclusions

34 35

Hegel, Philosophy of Right, supra note 13. For a modern reading of Hegel, see MJ Radin, Reinterpreting Property (Chicago: University of Chicago Press, 1993) Ch 1, ‘Property and personhood’. See also JW Singer, Entitlement: The Paradoxes of Property (New Haven: Yale University Press, 2000). On this distinction between ‘honouring’ and ‘promoting’ see Pettit, supra note 23 at pp 32–33, and works cited therein. According to Pettit, ‘honouring’ belongs to traditional deontological theories, and ‘promoting’ to traditional teleological theories.

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in a different light. According to Becker, the more general the level for justification of private property—that is, the more directly the discourse poses the question of whether or not there should be private property as opposed to some alternative—the more ‘moral’ that justification necessarily becomes: The moral basis [of property rights], as I conceive it, is a set of facts about the human condition: facts about human needs, propensities, and behaviour from which (together with judgments about values, duties, and virtues) moral arguments for and against property rights can be built up.37

This view reflects the idea that the discourse of justification will, at its most fundamental level, tell us something about the shared values and morality of our polity. In traditional justifications, the more power one possesses, the more responsibility one has. As property was power—witness the etymology of dominus and dominium—it would not be surprising to find that property discourse was tied to a larger moral discourse, carrying obligations and serving purposes as well as conferring (powerful) rights. In addition, as the argument has implied thus far, this moral space is complex. The moral background which infuses and informs the discourse which justifies and explains private property finds its source in a number of different places. In some cases, there may be a natural or naturalistic moral realism that imbues certain resources with a specific destination or intrinsic worth. Land is a primary example, and owners might be best viewed as stewards with deep responsibilities to manage and preserve the resource for future ‘owners’.38 In other cases, the moral discourse is truly a discourse, and is the product of some ongoing, evolving social convention that informs the worth we give to societal resources and the scope of powers and responsibilities we accord to it. An example might be socially valuable patents where an owner might be required to make a prescription drug available to the public (as opposed to merely preventing others from exploiting the patent) lest she lose it outright or be forced to license it.39 Thus this is at once the space occupied by deon-telos (as placeholder) and the source of property’s deon-telos (as substantive set of elements). This argumentative space is therefore pluralistic. The moral guideposts by which human societies orient their property institutions and its justifications are many: some of these beacons appear as given while others appear constructed. No one justification will suffice to explain or defend all aspects of the private property institution. The particular mix of the deon and the telos will differ across institutions and societies, and evolve over time. As a result, there is no need to

36

37

38 39

In this sense, I am occupying the same moral space as writers like Lon Fuller or Michael Moore, even if the works of either writer do not enter this dissertation directly. See LL Fuller, The Morality of Law, revised edn (New Haven: Yale UP, 1969) and M Moore, ‘Moral reality’ (1982) Wisconsin L Rev 1061. I also believe this is consistent with the general thrust of Honoré’s conclusions in Redistribution, at pp 223–26. L Becker, ‘The moral basis of property rights’, in NOMOS XXII 187 at p 188. Becker’s characterization of moral argument as an argument ‘all-things-considered’ encompasses neither prudence nor duty nor utility alone, and hence appears consistent with my approach. Nevertheless, as I believe was the case with Harris and Christman, Becker is too rights-based, in this case evidenced by his emphasis on egoism: ibid at p 200, p 212 ff. William Lucy and Catharine Mitchell, ‘Replacing private property: the case for stewardship’ (1996) 55 Cambridge LJ 566. See also K Gray, ‘Equitable property’ (1996) CLP 157 at p 161. Most modern patent Acts allow for the taking away of the patent in such circumstances, or what is less extreme, compulsory licensing: see, eg, s 66 of the Canadian Patent Act, RSC 1985, c P-4.

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posit a ‘true’ property institution which perfectly reflects a universal morality—even modern Natural lawyers make no such claim with respect to the relationship between morality and legal institutions40—which stands as the perfect measure by which particular property institutions are judged. Rather, it is sufficient in a given assessment to identify what is commonly, if not universally, understood to be the ‘focal meaning’ of central cases or ideal types.41 Deon-telos as a conceptual argumentative space posits a number of potential vantage points linked by their inclusion of more than individual rights. Such an argument for identifying and explaining the impact of the non-rights-based aspects of private property necessarily requires, to a certain extent, the use of traditional vocabulary. Only in using familiar terms as reference points can one attempt to isolate perceived deficiencies or proffer modifications. I propose, however, to depart in certain ways from traditional usages of deontology and teleology in order to reflect some of the concerns I have expressed in the preceding paragraphs, namely to articulate more accurately what I argue is the fuller interrelationship between deon and telos. In short, the term deon-telos will be used widely to mean the duties, goals and responsibilities associated with the institution of private property, either generally in the sense of ethical or moral, or more specifically as a particular deontological or teleological imperative. These latter terms—deontological and teleological—will not be used in the narrow analytical sense, but in the more robust, non-monistic form presented above.42 That is, deontology refers to widely-based duties grounded not only in a Kantian universalisable principle, but also in more specific and non-all-encompassing sources of duty, often some sort of shared, but partial, morality, while teleology will refer to more than just the utilitarian value of happiness, but some richer aspects of the good. In neither case are deontological or teleological theories insulated from one another. Certain aspects of property-talk may find their justification in the ends of society, while others may find it in the duties incumbent on all property-holders, and still others in some mixture. In conclusion, it is argued that conceptualising the relation between teleological and deontological justifications for and elements of private property is central to an understanding of the institution, and that these elements should take their place alongside rights as a part of a more complete understanding of private property. I will attempt to weave these theoretical and practical fragments together in a modern theory which is generally compatible with individual property rights. In calling certain theories rights-based, I am of course alluding to Ronald Dworkin’s famous categories of right-based, goal-based and duty-based.43 Mine is not the first application of the schema to property discourse.44 Nevertheless, while Dworkin’s schema is not unproblematic,45 it does serve to focus on the individual as the starting point, and does tend to point towards deontological justifications. Moreover, Dworkin’s method and schema helps to identify the tendency of modern analyses to focus on right-based conceptions, which in turn are based on atomistic conceptions of human society anchored for the most part on the form of right. These are

40 41 42

Notably John Finnis in NLNR, c 1. Ibid at pp 9–11. When I use the terms in the traditional sense, I shall typically furnish an appropriate adjective, usually ‘traditional’. I will, however, continue to use ‘consequentialism’ in the traditional sense, as it has a long critical history and can be taken to represent the most utilitarian form of teleological theories.

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so inclined, to the exclusion or weakening of other valuable methods of analysis more inclined to stress more substantive concerns such as the imperatives of community goals or duties. The

43

The terms ‘rights-based’, ‘duty-based’ and ‘goals-based’ are developed by R Dworkin in Taking Rights Seriously (Cambridge, Mass: HUP, 1977: hereinafter TRS) at p 171. Dworkin argues that goals, rights and duties may all serve to justify political decisions. That is to say, each of the three justifications can serve as a complete basis for political action. Sometimes the different pairings of rights, duties and goals are correlative; for example, a right to privacy and a duty to respect that right. However, they need not be correlative; more importantly, it is often the case that the justifications are derived from each other. Thus an initial justification for political action will ultimately lead to a further examination, at deeper levels, of its own justification, and so on. These more basic justifications can be appeals to rights, goals or duties. In this way, Dworkin says, more basic goals can justify a complex web of other goals, rights or duties, as can more basic rights or more basic duties. In the end, a political theory can be traced to and based on an ultimate notion of right, duty or goal: Political theories will differ from one another, therefore, not simply in the particular goals, rights, and duties each sets out, but also in the way each connects the goals, rights and duties it employs. In a wellweighted theory some consistent set of these, internally ranked or weighted, will be taken as fundamental or ultimate within the theory. It seems reasonable to suppose that any particular theory will give ultimate pride of place to just one of these concepts; it will take some overriding goal, or some set of fundamental rights, or some set of transcendent duties, as fundamental and show other goals, rights and duties as subordinate and derivative. (TRS at p 171.)

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It is upon this ‘reasonable supposition’ that Dworkin grounds his ‘tentative’ initial classification. It follows, then, that for a goal-based theory, some goal or set of goals is fundamental, like improving the general welfare; for a duty-based theory, some duty or set of duties is fundamental, like those set out in the Decalogue; and for a right-based theory, a right or set of rights is fundamental, like the right of all persons to the greatest possible liberty. ‘Pure’ or ‘nearly pure’ examples of each theory are given by Dworkin: utilitarianism is an example of a goal-based theory, Kant’s Categorical Imperative is a duty-based theory, and Thomas Paine’s theory of revolution is a right-based theory. A ‘rights-based’ analysis has been explicitly applied to property arguments by Waldron: RPP, passim. First, the sources of rights and duties emanate from an impoverished view of human interests and social ordering. If it were true that rights and duties are correlative, as Dworkin implies, then it makes little sense to argue that either a right or a duty is the ultimate starting point; the classification as a right or duty merely depends upon the form in which the right or duty is framed. (The objection was initially raised by N MacCormick, Legal Right and Social Democracy: Essays in Legal and Political Philosophy (Oxford: OUP, 1982) at pp 142–43. Waldron engages in a defence of the distinction on the grounds that certain rights may not be based on duties, based in part on MacCormick’s objection: see RPP at pp 69–73.) Second, the substantive nuance of an individualized theory of justification is not always classifiable according to the distinction between right- and duty-based theories. Ethical theories traditionally have been divided into the deontological and the teleological, and doing so would conflate duty-based and right-based. For instance, Dworkin’s example of Kant’s Categorical Imperative as a duty-based theory is questionable on this ground. While the Categorical Imperative—‘Act only according to that maxim by which you can at the same time will that it should become a universal law’ (Kant, Groundworks at p 44)—and subsequent reformulations are framed as unconditional imperatives from which all duty stems, Kant’s whole theoretical structure is as much grounded in the assumption that all rational beings are free and equal, and that in the necessary exercise and protection of these inherent, individuated faculties and qualities, they will arrive at the conclusion that they must submit themselves to the duty of law in order to maintain the freedom and equality of all. Thus, Kantian formal duty finds its justification as much in rational, individuated claims to freedom as it does in the duties incumbent on rational beings. At the formal level of Kant’s theory, they cannot be separated. Moreover, consistent with my overall ethical stance in Part II, one might also find elements of a moral teleology in Kant’s work: the second part of the Metophysics of Morals, the ‘Doctrine of Virtue’, does just that, in my view, adding a great deal of substance of the more formal ‘Doctrine of Right’: Kant, The Metaphysics of Morals, M Gregor (trans) (Cambridge: CUP, 1991). This represents the first complete English language translation of both books in one work, the Rechtslehre (Doctrine of Right) and the Tugenlehre (Doctrine of Virtue). In my view, there is a context of deon-telos even in the most formal of theories.

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typology also helps to identify the aspects of duty and goals that are lost or distorted in the move to classify past political theories as right-based. In other words, while one cannot completely divorce duties and goals from rights in any given theory, one can profitably use Dworkin’s distinction to say that certain theories do not take adequate account of, for example, duty- and goal-based (or at least, duty- and goal-oriented) justifications. The conclusion to be drawn is that the ultimate foundation of any given theory is not always clear or easily distilled from the context of the general theory, and distortion may have to occur in order to squeeze a theory or thinker into one of the three categories. Dworkin’s schema also forces the (property) theorist to confront squarely the source of political morality. Specifically, Dworkin distinguishes two models of ‘coherence theories of morality’: a ‘natural’ model and a ‘constructive’ model, which roughly46 cohere to what others (and I, earlier in this discussion) have labelled ‘moral realism’ and ‘moral conventionalism’.47 Harris calls similar categories ‘moral realism’ and ‘moral conventionalism’,48 although it is fair to say that Harris does not posit the same level of coherence, his overall stance being pluralistic. Dworkin concludes that the constructive model is the more appropriate since it requires coherence for reasons independent of substantive political morality; it does not require a moral ontology because the model does not give objective standing to any of its convictions. For Dworkin, coherence is required not because it is necessitated by some objective political morality, but because it is needed as a goal only in order to constrain public officials to act consistently according to their own moralities: what he has elsewhere called the criteria of ‘fit’ and ‘best light’.49 Thus, individual observations need not be accurate; rather, the system is constructed from the various observations and applications of diverse participants. Dworkin claims that this stance is well suited to group considerations of the problems of justice (and presumably social ordering generally) since it could accommodate the community’s common convictions without claiming to identify an objective moral universe. By contrast, on the natural model, an individual’s convictions which did not accord with the community’s common convictions,

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‘Roughly’ because not everyone agrees on the required degree of coherence; Dworkin has been labelled a ‘coherence theorist’ by Raz and others. See, eg, Raz, ‘The relevance of coherence’, in Ethics in the Public Domain (Oxford: OUP, 1994) c 12 at p 260, note 3, accompanying text and the works cited therein. TRS at p 160. These models define coherence between moral theory and moral intuition and explain why it is required. A natural model, according to Dworkin, presupposes an objective moral reality underlying human existence. This moral reality is ‘discovered’ by human beings through time, through the use of a moral faculty which all human beings possess and which produces concrete intuitions of political morality. These concrete judgments are assembled in the right order to produce fundamental principles of moral philosophy. Thus, the link between accurate observations and the moral order is important. The constructive model treats moral intuitions not as clues to a great order, but as pieces from which the fundamental pictures are to be constructed and reconstructed. The two models, according to Dworkin: represent different standpoints from which theories of justice might be developed. The natural model…looks at intuitions from the personal standpoint of the individual who holds them, and who takes them to be discrete observations of moral reality. The constructive model looks at these intuitions from a more public standpoint; it is a model that someone might propose for the governance of a community each of whose members has strong convictions that differ, though not greatly, from the convictions of others. (Ibid at p 163.)

48 49

P&J at pp 177–80. RM Dworkin, Law’s Empire (Cambridge, Mass: HUP, 1986: hereinafter LE).

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according to Dworkin, would lead an individual to conclude either that accurate observations were being disregarded or false ones taken into account. In the end, the structure of Dworkin’s argument in Taking Rights Seriously and the rejection of natural models makes it appear that Dworkin has grafted his right-, duty- and goal-based theories onto the constructive account.50 What else can we hope to accomplish by including property’s non-rights-based aspects in our understanding of the institution? In my view, the inclusion of non-rights-based elements in our discussion of private property has the effect of shifting the terms of the discourse, moving the starting points of the analysis from relatively absolute rights to a more balanced view of rights and duties. While beyond the purview of this chapter, such an enterprise might have an impact on the larger political and moral discourse, given the points in common between the origins of rights and the origins of property rights. That is, an account of the reasons why private property is important and justified—a fuller, more complete account—might shed light on liberalism, in the same way that medieval debates on private property and the poverty of Christ and the Church shed light on the whole of social and political discourse (as well as being a turning point in the origins of rights discourse).51 For example, if it can be shown that rights-based theories of property are inadequate, this conclusion might lend support to Sandel’s critique of Rawls’s narrow ‘deontological liberalism’52 or of the pervasive (and perverse) idea of ‘rights as trumps’.53 The alternative approach offered by adding deon-telos expands the sources of political morality to both natural and constructed accounts, and in both versions, in terms larger than individual

50

51

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Dworkin’s articulation of the natural/constructive distinction is problematic. On the constructive model, the individually-held beliefs that form part of the beliefs of the ‘community’, and upon which the moral and political order is erected, are not much different in practice from saying that the individually-held beliefs based on observations might be common to a number of individuals and might, therefore, form the basis for a natural model political community. The natural model’s moral reality is not necessarily immutable under this reading; it just evolves more slowly as recent reinterpretations gain ascendance. Following on this point, Dworkin does not take into account human faculties, most notably the ability to reason practically, which have the effect of ordering observations, allowing human beings to construct and modify the ‘natural’ social order over time according to the dictates of reason. (See, eg, Finnis, NLNR, Part II, and especially c V for a detailed discussion of this faculty.) Practical reasonableness, in a natural model, would help to identify the ways in which human goods could be identified and a viable social order created. While ‘natural’ in the sense that such an order is coherent with some picture of unfolding, transcendental truths, the reality of the order is no less constructed. Finally, assuming quite reasonably that some members of the community will be using ‘natural’ models, does this mean that the coherence model is some sort of meta-structure to mediate between claims? If so, some natural elements, and their underlying bases, have been incorporated into the coherence model. As Michael Moore points out, we argue ‘as if there is a moral reality: ‘A Natural Law theory of interpretation’ (1985) 58 S Cal L Rev 277 at pp 322–28. What society will construct in trying to mediate between different models of meaning may not differ over time from what the proponent of the so-called natural model derives rationally from the natural order. In this way, the distinction between ‘natural’ and ‘constructed’ coherence models is less clear. At the very least, a good moral theory will at least attempt to account for both types of coherence. Moreover, moral justification, in a pluralistic setting, may not need the degree of coherence that Dworkin’s theory explicitly requires. See, eg, the writing of William of Ockham, supra note 13. On this debate, see generally R Tuck, Natural Rights Theories (Cambridge: CUP, 1979); M Villey, Leçons d’Histoire de la Philosophic du Droit, 2nd edn (Paris: Dalloz, 1962) c 10; and J Coleman, ‘Property and poverty’, in JH Burns (ed), The Cambridge History of Medieval Political Thought c.350—c.1450 (Cambridge: CUP, 1988), p 607. The term is Sandel’s. See Liberalism and the Limits of Justice, supra note 26, Ch 1. The term is commonly attributed to Ronald Dworkin: see TRS.

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rights. Thus, rights, duties and goals may come from natural sources as discovered by the observation of human experience mediated through the dictates of reason, as well as from moral agreements forged by convention. They may come from theological or moral imperatives which human beings consider as binding. The right to acquire property, for example, is a natural right in the theories of Grotius, Pufendorf and Locke because of the natural and theological imperative to survive and multiply, using the resources God has put at humanity’s disposal.54 In a secular setting, one might posit the necessity of human beings to have prima facie equal access to resources. Indeed, the idea of individual human rights based on the fundamental worth and dignity of all human beings, an idea which grounds a number of right-based theories including Dworkin’s constructive theory, is an idea that finds its roots in the natural law and theology of the JudeoChristian tradition. Dworkin’s example of the Decalogue, as an example of a duty-based set of principles, illustrates that the schema can just as easily be applied to natural as well as constructive theories. As a consequence, a duty may not merely be an individuated political aim, as Dworkin maintains, but an individual response to a collective aim or the common good. The point is that although Dworkin’s recourse is to a restricted morality, which in turn gives moral and political legitimacy only to individualized interests and particularly right-based interests, this need not be the case; one can expand the moral base and still use the structure in a fruitful way. Dworkin’s framework is useful because it presents traditional ethical debates in relatively accessible terms. In turn, the structure allows for the advantages of taking deontelos into account to be clearly visible. While the framework is far from exhaustive and is less than watertight—especially when rights and duties may be purely correlative, and thus the attribution of an imperative to either a right or a duty is tenuous—the classification is still a relevant conceptual device. First, the structure explicitly harkens to the political, moral discourse behind legal ordering. Indeed, it is fair to say that the general thrust of the corpus of Dworkin’s work is that law is an exercise in interpreting our common morality.55 His moral assumptions are therefore very important, as they point to the sources of his tripartite schema. Where I disagree, as argued above, is on the range of and weight given to the sources. Second, while identifying the ultimate or basic justification is bound to be simplistic in an area where justifications are complex at best, and in all likelihood overlapping or pluralistic as well, the attempt is useful. The division of theories of political justification into right-based, duty-based and goal-based theories, and their subsequent application as justifications for a right to private property, is still a positive tool for heuristic purposes because it helps to identify an important—if not primary—element of the attempted justification. Third, applied to property theory, the framework is useful because by implicitly excluding the whole of property’s deon-telos, it clearly demonstrates the outlines and assumptions of a radically different idea of property. Therefore, if it can be shown that the concept of private property entails more than individual rights and interests, and that these aspects of private property find their animation elsewhere, then the positing of a role for deon-telos will have succeeded. Most clearly, deon-telos can be conveniently portrayed, both substantively and methodologically, as the opposite of a rights-based theory. The neologism can be used simply as meaning ‘non-rights-based’,

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On this point see S Buckle, Grotius to Hume, passim. Buckle’s thesis is that, in addition to these writers, Hume fits into the Natural Law tradition as regards property, notwithstanding his scepticism and theory of knowledge. See, eg, LE, passim.

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capturing all of what Dworkin has put in the duty- and goal-based categories, as well as what he might have put in the right-based. As a result, for the purposes of this thesis, the distinction between right-based justifications and the sum of all other justifications, whether containing aspects of duty or obligation, primacy of goals, and doctrines of virtue—what I call deon-telos—can be usefully employed as a pointer. Finally, both ‘rights-based’ and ‘right-based’ are used in the literature, often interchangeably. Following what I believe is the spirit of Dworkin’s chosen example, I will use ‘right-based’ in connection to those rights-based (traditional deontological) theories which refer to a universal, formal principle of Right, such as Kant’s. More generally, I will use ‘rights-based’ as meaning a larger category of individual rights. As a result, Dworkin’s framework is a useful complement to the substance and method of the deon-telos viewpoint. When the schema is applied to private property, and its contours and justifications examined, one finds that goal- and duty-based elements co-exist alongside rights-based elements. Therefore, I believe it leads to the conclusion that a rights-based theory of property is insufficient, in and of itself, to justify the continued existence of private property. More specifically, some account for the deon-telos of private property must be incorporated into any analysis of justification. As with rights, these are an irreducible element of private property. That is, there are reasons for acting with respect to private property, or reasons about the way in which we conceive private property, that do not trace their origin to the idea of individual rights. In Dworkin’s terminology, private property needs to be explained or justified in non-individualised duty-based and goal-based, as well as in right-based, arguments. The pluralism will not be merely a pluralism of rights-based theories (as one might call Harris’s and Munzer’s56 pluralistic accounts), but a more wide-ranging pluralism. To the extent that Dworkin claims justificatory theories must be reducible to one of these three typologies, I disagree. Nevertheless, since some purported justifications are exclusively or predominantly rights-based, Dworkin’s typology remains useful. In the end, deon-telos as a method serves to correct the bias of any analysis that only trades in rights by injecting other necessary and desirable elements from moral discourse (conveniently grouped under the substance of deon-telos). Certainly other ways of expressing this point are possible, and indeed the framework for what might be a virtue ethics theory of private property needs to be filled in by more substance at both the justificatory and the practical levels. I hope that my related and future projects, as well the work of other scholars in the field, help to develop this contextualised view of property relations. The conclusion to be drawn at this stage is that a more complete framework for understanding private property—composed of both rights-based and nonrights-based elements—is not only possible using the familiar constructs of analytic legal philosophy supplemented by the vantage point of deon-telos (or some analogous concept or set of concepts), but is highly desirable and indeed necessary. This conclusion on private property mirrors the wider conclusion drawn by Joseph Raz on the grounding of moral theories generally: ‘[N]either morality nor political morality is right-based:…if morality has a foundation it includes duties, goals, virtues, etc.’ This conclusion is based on the ‘humanistic principle’ that claims ‘that the explanation or justification of the goodness or badness of anything derives ultimately from its contribution, actual or possible, to human life and its quality.’57 The point here is that there is a wide basis for moral action, based on a virtuous and

56

These are discussed in Deon-Telos, Ch 5. Harris’s theory is discussed in PPJ.

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teleological view of human ordering. This is reminiscent of Fuller’s ‘morality of aspiration’.58 Private property is essential to the relations between individuals, and contributes to the quality of human life; it too must have a wider grounding. Properly conceived, the concept of private property makes a contribution to the autonomy, development and freedom of individuals, and serves the common good. Only the fullest justification of private property based on rights, duties and goals, as well as other ethical imperatives and impulses, can fulfill this task.

IMPLICATIONS ON THE CONCEPTUAL STRUCTURE OF PRIVATE PROPERTY The presence of deon-telos has a profound impact on both the structure and practice of private property. In The Concept of Property, the issue was raised with an analysis of the definitions, and surrounding debate, of property, private property and ownership. In Property and (Perhaps) Justice I argued that deon-telos has an impact on the justifications for private property. Finally, in DeonTelos59 and Destino, I have argued that there are practical implications as well. If this analysis is correct, one would expect to find inconsistencies in systematic treatments of property systems at the conceptual level. This section will focus on one such example; using James Penner’s conceptual structure, I submit that this is in fact the case. As discussed in The Concept of Property, the notion of property must deal with how human beings relate to resources, capturing the intensity of the relationship a person can have vis-à-vis a resource. The concept must also deal with how a person deals with others with respect to the resource. Harris advances two fundamental organizing features of any property institution: an ‘ownership spectrum’ and ‘trespassory rules’. Recall that Harris’s ownership spectrum is the range of groupings of use privileges and controlling powers over social wealth, ranging from ‘mere property’ to ‘full-blooded ownership’, while trespassory rules are those rules which protect, from the invasion of others, those points along the ownership spectrum. The ownership spectrum presupposes and is delimited by trespassory rules.60 Penner, for his part, frames these ideas in part in terms of the Exclusion Thesis, and the in rem duties that protect the exclusionary rights to control and use.61 Both of these means of articulating the relationship to property and to others through resources62 are affected by the identification of property’s deon-telos, in practice and in theoretical justification. First, difficulties arise with the exclusion thesis in trying to understand the intensity of the relationship to resources. These difficulties, in my view, stem from the inordinate weight given by

57 58 59 60 61 62

MF at pp 193–94. LL Fuller, The Morality of Law, supra note 36, part I. Deon-Telos, Ch 3. P&J. The Idea of Private Property (Oxford: OUP, 1997: hereinafter The Idea). My proposed re-definition of private property in The Concept of Property is as follows: Private property is a social institution that comprises a variety of contextual relationships among individuals through objects of social wealth and meant to serve a variety of individual and collective purposes. It is characterized by allocating to individuals a measure of control over the use and alienation of, some degree of exclusivity in the enjoyment of, and some measure of obligation to and responsibilities for scarce and separable objects of social wealth.

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Penner to (rights-based) ownership as an organizing principle or normative idea. Honoré’s inclusion of duties in his standard incidents was thus a good first step in recognizing this weakness. Second, the presence of deon-telos (and its social, contextual setting) underscores the need to reconsider the way human beings relate to each other through resources. In other words, property structures need to account for duties and goals as a conceptual element of the institution. Thus, deon-telos requires that Harris widen this category of rules intrinsic or necessary to private property to encompass more than just trespassory rules. In terms of Penner’s analytic framework, the degree of exclusivity of the Exclusion Thesis needs to be toned down and adapted to fit other property entitlements and different resources. For Penner, it will mean accepting that private property is a limited concept. For all rights-based writers, it will mean an acceptance of the positive channelling function that certain resources will require of their owners with respect to others.

Identifying and characterizing the property norm: Penner’s norms in rem The presence of deon-telos or non-rights-based elements of private property has an impact on our conceptual understanding of private property. For the purposes of this chapter, I shall limit the discussion to one important aspect of James Penner’s elaboration of the property concept. Penner has, I believe unwittingly, offered the key analytic step to understanding how deon-telos can be included in the property institution. In his attempts to characterize the property norm, Penner has identified the critical asymmetry in property relations. This helps us to understand, in my view, the role the resource plays in determining the nature of the property relationship. This understanding leads not only to Penner’s duties in rem owed to an owner, but also duties in rem owed by an owner. Penner’s characterization of property norms is highly original and, in my view, of capital importance to property theory. Recall that Hohfeld’s analysis had cast all juridical relations as relations between and among persons: ‘A right in rem is not a right “against a thing” …All proceedings, like all rights, are really against persons. Whether they are proceedings or rights in rem depends on the number of persons affected.’63 On this view, a property right is actually a multitude of similar rights against every individual in the world. However, this admittedly legal view does not represent how we, as lay persons, deal with our property and view the property of other persons. When Smith sells his house to Jones, other persons have not perceived any change in the state of their relationships to Smith or Jones: all still have a duty not to trespass in the house. All must respect the property institution, framed in terms of a duty to the house. Building on the antibundles argument, Penner claims that it is more accurate to categorize certain norms as ‘norms in rem’: To understand rights in rem we must not only discard Hohfeld’s dogma that rights are always relations between two persons, but also the idea that a right in rem is a simple relation between one person and a set of indefinitely many others. …

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WN Hohfeld, Fundamental Legal Conceptions (New Haven:Yale UP, 1919).

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New perspectives on property law, obligations and restitution The point, however, is that to conceive of a right in rem as a single relation flowing to some vast set of duty-owers…is to hold a quasi-Hohfeldian view of rights in rem that makes sense of the right only at the expense of treating the duty-ower as the holder of millions of duties, as many duties as there are property-holders and pieces of property. This is no improvement on Hohfeld. But if we pay attention to the fact that rights and duties in rem do not refer to persons, not in the sense that property is not owned by persons, but in the sense that nothing to do with any particular individual’s personality is involved in the normative guidance they offer, we may get somewhere.64

Penner’s point is that the in rem/in personam distinction applies to all categories of norms, and is the basis for our interactions with things. This analysis of norms in rem is opposed to the Hohfeldian view and builds on the anti-bundles picture. This critical analysis is predicated on thingness; a norm in rem requires a relationship to a thing, that is, the relationship is essentially an impersonal one, focused as it is on an object: ‘Things’, then, whether physical things or states of affairs such as bodily security, mediate between rights in rem and duties in rem, blocking any content which has to do with the specific individuality of particular persons from entering the right-duty relation. How then, do rights in rem correlate with duties in rem? A duty in rem is a duty not to interfere with the property of others, or some state to which all others are equally entitled. Thus a person is a holder of a right in rem when he benefits from that general duty. The holder of a right in rem benefits from the existence of an exclusionary reason, but one which does not apply to him alone. Note that in some sense the correlativity here is not symmetrical. The duty-ower’s duty applies to more cases than that of the individual right-holder. That is not a failing, I hasten to add. Rather it makes sense given the way that the reasons work.65

The critical insight is this idea of norms applying in a special, impersonal way through objects to other persons. The correlativity between persons is a mediated one; one might say the object acts as a filter for the relationship between resources. As such, the object can bring with it special types of rights and duties. The characteristic duty, according to Penner, is one of non-interference with the objects of property. The identification of this asymmetry might very well stand as Penner’s major contribution to property discourse. Equally important is the assumption, also correct in my view, that there is some relatively objective value to a resource. If resources can be the object of a relationship, it stands to reason

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The Idea at pp 25–26. See also The Bundle Picture at p 720 ff. Ibid at p 29. The idea of ‘exigeability’ fills in the gaps left by the connecting of asymmetrical rights and duties over things to people, as well as the procedural vindication of norms in rem against individual persons, thus correcting an apparent imbalance. Penner elaborates, at p 31: Exigeability explains that while rights and powers in rem bind the world, and correlate to duties in rem which relate to property in general, not to particular pieces of property, nevertheless when there is a violation of a right in rem it is an individual that does it, and so remedial norms like claims to compensation will be personal, ie in personam. Penner takes the idea from PBH Birks, An Introduction to the Law of Restitution (Oxford: OUP, 1985) at pp 49–50.

66

Penner noted in his Introduction to The Idea at p 5 that this question is the more interesting and difficult distributive question.

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that there is some way of assessing and assigning or evaluating what the object brings to the relationship.66 That is, this assumption that valuation is possible stands behind the view that a person is able to have an impersonal relation to a resource. The common mode of evaluation in Western market society is the exchange mechanism. The rules of economics, embodying formally the allocation function of private property, allow the excess demands for resources to be balanced off against supply in order to determine a relatively objective market value. More importantly, though, for my purposes, is the idea that we also value resources according to some relatively objective standards according to the intrinsic qualities of the object or its purpose in society. This intrinsic value may reflect non-market concerns, often because in the social context the object is too important to be governed by the market mechanism. As seen in Chapter 3 of Deon-Telos, such was the case with land and water, certain movable and intangible resources such as patented medicines or paintings, and is increasingly the case for non-exchangeable interests such as environmental concerns. The process of assigning value is a complex one; yet it is undertaken nevertheless. In my view, this valuation process is precisely the domain of deontelos: the nature of the resource is accounted for, its role in human social ordering, and the determination to allocate it to the sphere of private property, and then to a certain individual, in order to foster specific common and individual goals related in some necessary manner to the object. Similar conclusions could be seen in Destino with respect to the explicit and implicit use of the concept of destination in Civil law legal systems. The determination of value is rooted in both moral realism and moral conventionalism, and can evolve over time. Implicitly, this discourse takes place in property discourse, and identifies the deficiency of Hohfeldian analysis with respect to property; objects of property bring a contextual dimension imbued with shared notions of value to jural relations that are not captured in relationships framed only as between individuals. Penner uses his insight to attempt to articulate the fundamental interest underlying property norms. According to Penner, the interest protected by property rules is grounded on the use of objects of property (identified using the separability thesis) and characterized by the exclusion of others. Private property is predicated on the interest in the exclusive use of the objects of property. Property norms protect this interest by framing norms in terms of exclusion. This characterization Penner calls the ‘exclusion thesis’, and was contained in his definition of property in The Idea.67 This interest in use is the property interest, according to Penner; the norm protects the interest of use through exclusion. Furthermore, from Penner’s own characterization of norms in rem, the in rem rights to property use are individuated—characteristically identified—and framed in terms of a duty in rem to exclude oneself from the property of others. This has been based on protecting the exclusive interest in ownership. Here we see the relationship we all have to things, or more accurately through things to others (and not to others with respect to things). This is the characteristic structure of a property norm, and looks a great deal like what underlies Harris’s category of trespassory rules, except that the focus of the protecting norm is on only the widest possible interest, ownership.

67

Penner writes in The Idea at p 152: [Property is the right to exclusive use, which is] the right to determine the use or disposition of a separable thing (ie a thing whose contingent association with any particular person is essentially impersonal and so imports nothing of normative consequence), in so far as that can be achieved or aided by excluding others from it, and includes the rights to abandon it, to share it, to license it to others (either exclusively or not), and to give it to others in its entirety.

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As we have seen, the implication of the presence of deon-telos is that property interests are indeed wider. If my previous analysis has been correct, then the substance of the property interest must be expanded to include more than those individualized interests protected by exclusion and trespassory rules, and in a related point, to a wider view of the contents of proprietary entitlements: ownership and lesser entitlements. If so, the type of interest protected by an in rem norm is wider than Penner anticipates. Instead of being restricted to in rem duties of exclusion of non-owners, private property might very well include in rem duties on owners. Duties in rem, intrinsically attached to property, might not merely protect exclusivity, but might also attach to resources as against owners, protected interests of non-owners and the community generally. A duty of stewardship or preventing waste is an example of such a duty in rem, as is Honoré’s duty to prevent harm.68 Indeed, elements of Penner’s analysis hint that other interests are served by property rules. In his identification of the interest served by property, Penner also maintains the view that the interests in the use of property are social: The right to property is like a gate, not a wall. The right to property permits the owner not only to make solitary use of his property, by excluding all others, but also permits him to make a social use of his property, by selectively allowing some to enter.69

This observation is important and original, although not necessarily in the manner perceived by Penner.70 Rather, in my view, the idea that property is a relationship mediated through social wealth, and characterized by norms in rem, allows us to see that the use of resources or social wealth, even the exclusive use by an individual, is necessarily social. Any act on an object of property—even its consumption—changes the normative status of another person. That is, a person can unilaterally eliminate or change the duties owed to a particular object. This recognition of property’s social aspect requires human beings to explain private property and justify its power and, in particular, forces everyone to focus on the uses made of objects of property and the general purpose of the property institution. Despite having identified in part this social function of property, Penner becomes side-tracked in an admirable attempt to draw a line between contract and property, and consequently fails to see the full importance of his insight. The social aspect of property, manifested in how we use property, imports certain moral imperatives. Indeed, the social aspect seems to imply a picture where the underlying interest in property cannot be framed in Raz’s legal terms (as interpreted by Penner,71 at least), without some examination of first-order, moral, values. Yet Penner’s definition is silent on these issues. Instead, Penner’s structuring of the property norm focuses on exclusivity. As such, despite the glimpse offered through the gate, is property becoming a wall again? Unless Penner admits the implications of recognizing the social interest in property, the answer can only be in the affirmative. Nevertheless, the asymmetry and possibility of norms in rem are exceptionally important analytic tools: however one conceives of private law categories, the perceptiveness of Penner’s categorization remains intact.

68 69 70 71

See Lucy and Mitchell, supra note 38. Ibid at p 74. Ibid at p 74 ff. Penner uses the observation to argue that this aspect of the ownership interest makes the right to confer gifts on others a part of property’s necessary normative structure, while saying nothing about contractual exchanges. I take no position here. Ibid at pp 32–63. The question of source of normativity is touched on briefly at pp 65–66 of this chapter.

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Fundamentally, the institution of private property must regulate the relationship that persons have to scarce objects of social wealth, and the relationship persons have with others through objects of social wealth. Since Hohfeld at least, property discourse has stressed the relationship among individuals over the role of things. Yet as the lay person knows, and as Honoré implicitly and Penner explicitly have stressed, the relationship through things cannot be escaped. Property’s deontelos, as we have seen in practice, will often force us to look at the object of social wealth in order to assess its value. In this optic, we must always begin with the resource if we are going to be able to understand the full panoply of rights and duties that emanate from the resource and the context in which that resource is to be distributed and used. To this, Penner adds a critical analytic tool: the characterization of property as an asymmetrical relationship through resources. In particular, correlative rights and duties do not exhaust the possible relationships people have with others through their property, and indeed misunderstand how we relate to resources. Penner’s discussion of duties in rem is important in this regard, and creates the possibility that such duties might emanate from the nature of the resource and the justification for its distribution. Penner’s analytic structure allows us to focus on the duties that arise on distribution. In this case, society says implicitly (in the case of a resource with an obvious natural destiny) or explicitly (in a social convention): ‘You may have this unique resource, but only if you use the resource (or do not use it) in this way.’

Honoré’s intuition: conclusions The general structure of the private property institution is multi-faceted. Using Harris’s useful categories (slightly but importantly modified), it is composed of entitlements of varying powers, protected by trespassory rules and limited by property-limitation rules, duty-imposing rules and expropriation rules. The presence of deon-telos changes and de-emphasizes rights and makes these other elements necessary parts of the property picture without altering the essential components of the structure. Private property thus consists of a grouping of entitlements and duties, including something approaching full-blooded ownership for some objects of social wealth, set in a social context. Conceptually tied to the grouping of entitlements and presupposing it are trespassory rules, property-duty rules, and expropriation rules. So while I disagree on the interpretation given to these components by rights-based thinking, I do not disagree on most of their substance, including the rights and powers accorded to individuals and contained therein. Penner’s contribution is in providing the analytic framework to characterize and understand these other types of unique property norms—property’s asymmetry—that are too often excluded in Hohfeldian views (and also in Penner’s non-Hohfeldian view). Honoré has provided a useful, if intuitive, starting point for all of this. In Ownership, Honoré included in his list of incidents a duty to prevent harm, and a liability to execution. Regarding the duty to prevent harm, after listing examples, Honoré states: These and similar limitations on the use of things and on permission to use them are so familiar and so clearly essential to the existence of an orderly community that they are often not thought of as incidents of ownership. Some of them are imposed on all who use a thing, whether owners or non-owners. Others are confined to owners, or to those, such as the occupiers of land, who are in most cases also owners.72 72

Ownership at p 174.

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This insight was based on a study of the way ownership and other entitlements to resources work in practice. It is, I believe, an intuitive claim grounded in the deon-telos of property, a deon in service of a telos, ‘so clearly essential to an orderly community’. Nevertheless, analytic jurisprudence has had difficulty accepting and incorporating this inherently obvious and familiar aspect of the practice of private property into its theory. The method and substance of deon-telos bolsters Honoré’s intuition. Moreover, in ‘Social Justice’73 and Redistribution,74 Honoré identifies what he calls the social aspect of property. In these articles, Honoré speaks of justice in the distribution of resources, and the moral persuasiveness of various property allocation arguments. In particular, in the latter piece, Honoré points out that sharing and stewardship are morally defensible elements of non-Western property systems,75 even in systems where titles of acquisition are much the same as in Western systems and types of transfer need not be dissimilar. Only the interest acquired is different, as it included a trust or stewardship duty to share. In such societies, ‘there is nothing unnatural about distributive property arrangements’.76 Once again this insight has found difficulty entering Western property discourse, even if that is clearly Honoré’s intention. The method of deon-telos can be put to this service. By focusing on property’s teleologies, it allows Western property discourse to make explicit its animating assumptions, and aids in identifying the dominance of rights-based arguments and their assumptions within property discourse. Moreover, the substance of deon-telos—its elements and fragments—once identified, allows us to see that rights-based discourse does not capture the whole of the property picture, and allows us to ask how the discourse can be amended to capture the picture more accurately, as well as to balance its rights-based biases. A number of writers have pointed out that property has a social aspect.77 Moreover, virtually all writers point to its relative scarcity, its distributive impact and impact on justice, as well as its inherent controversiality. All of these factors point clearly to a concept of property which is based on more than individual rights to exclusive use. Any attempt to describe the institution, or frame its normative structure and assess its normative weight, must take these wider interests into account.

IMPLICATIONS ON THE NORMATIVITY OF PRIVATE PROPERTY If the foregoing framework analysis is correct, the presence of deon-telos will have an impact on our understanding of the normativity of private property. In The Concept of Property, I have argued that Harris’s descriptive characteristics of ownership are by no means neutral and non-normative terms. (In Property and (Perhaps) Justice I have argued that his justifications exhibit the same rights-based tendencies.) In my view, the fact of working within the rights-based paradigm causes Harris to mischaracterize important normative aspects of the institution of private property. The descriptive importance or weight given to various component parts reflects certain normative rights-based assumptions. The downplaying of what I have called property’s deon-telos has a significant impact.

73 74 75 76 77

In Making Law Bind, supra note 6 at p 193 (Ch 9). Originally published in (1962) 8 McGill LJ. Ibid at p 215 (Ch 10). Ibid at pp 222–25. Ibid at p 225. See, eg, Christman, The Myth at p 10; and Becker, PR:PF, c 6.

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Hence, Harris’s project—while self-consciously descriptive—contains de facto a strong set of normative claims, which become clear only when one understands Harris’s assumptions as a rightsbased theorist. While parts of the dominant mindset of western society, they are by no means a given. The structure of Penner’s description of private property is centred around the criteria of separability and exclusion.78 Unlike Harris, Penner makes no pretence of achieving neutral description; rather, he claims that his anti-bundles approach to property, properly applied, captures the inherent internal normativity of private property. This claim is more difficult to assess, as the attempt to identify private property’s normativity is built upon a complex theoretical foundation. Nevertheless, there is an element of desired objectivity in this analysis as well. In my view, Penner’s idea of ‘normativity’ is in fact a formal one, resembling what is in effect Kelsen’s ‘objective’, descriptive ‘ought’.79 Despite this apparent objectivity, an enhanced understanding of Penner’s steps in elucidating the form and substance of this norm shows that it indeed is based on some very strong moral assumptions, which, even more than Harris’s, are rights-based. Indeed, they may be even more controversial. The deficiencies of both arguments, coupled with the presence of deon-telos, point to an inescapable conclusion: the normativity of property is omnipresent in the strong sense of why we ought to follow property rules, and is not to be found only in some internal or formal norm. Rather private property’s normativity can only—necessarily—be located in the moral discourse underlying private property and which serves to justify it. Harris implicitly points to this larger moral discourse behind the justification of property: given the controversial features of private property, it needs to be justified by moral argument. Penner claims what is potentially the opposite, depending on the meaning of normativity. Taking deon-telos into account, I am not convinced by Penner’s claim that property’s normativity can be discussed without some resort to justificatory discourse. In my view, external justifications are necessary to explain property rules and their normative weight.80 The moral and political justice reasons behind the interests protected by the institution of private property need to be articulated and defended. Implicitly, Penner assumes a position based on one (controversial) view of the very justificatory claims he tries to avoid making directly; that private property has instrumentally led us to the good life, and was obviously justified. It is circular simply to assume the veracity of a claim, particularly one which is as controversial as the claim that the legitimacy of property rights is indisputable, because property norms protect a liberty exclusively to determine the use of things. Even if this liberty ‘has proved marvellously productive in contributing to the good life of many’,81 Penner’s claim goes to the very heart of debates about the legitimacy of private property in principle, and, as Harris and others illustrate, goes also to the very outlines— the limits and institutional design—of the manifestations of the property institution. Therefore, it seems relatively clear that the rationale for an institution which confers powers and benefits over some but not others (and often at the expense of others), and which has such a profound impact on the nature and quality of human associations, must be justified. The reasons must be

78 79 80 81

The Idea at p 152. H Kelsen, Pure Theory of Law (Los Angeles: University of California Press, 1967) at pp 1–7. See, eg, JM Kelly, A Short History of Western Legal Theory (Oxford: OUP, 1992) at p 385. I have made this argument more completely in Property and (Perhaps) Justice at pp 674–85. The Idea at pp 206–07.

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discussed, and continually revisited and re-discussed. These issues are part of the idea of property. Perhaps the discourse of justification does not encompass all of the contours of the institution, but it is a necessary part of it. It is explicitly in Harris’s recognition of property’s controversially, and implicitly in his analysis of the traditional justifications for private property and their connections to the design of the institution, that the necessity and role of the discourse of justification become clear. In conclusion, the only way to make sense of the normativity of private property is to understand the specific contextual morality of the institution, that is, its role and function in social ordering balanced against its relative scarcity. External justifications are necessary for explaining property rules and their normative weight. The moral and political justice reasons behind the interests protected by the institution of private property need to be articulated and defended. Property needs to be explained and justified with a moral ‘ought’.

The morality of private property I am now in a position to sketch a first argument on the nature of property’s morality or perhaps its (virtue) ethics. The insights gained from the discussion of Penner (and, implicitly, Harris) can be organized with a view to building an argument describing the nature and the source of the normativity of private property. This will be found not merely internally or formally, as Penner has tried to show, but will be located beneath the surface in property’s justifying arguments. In my view, unlike other areas of private law, private property norms are necessarily a product of a moral discourse of justification. This discussion is focused on the justice of private property and is animated by a shared and deep morality: it explains why we can learn a great deal about our (or any) society by looking at its property scheme. For the time being, I shall set out the ensuing argument in the following propositions.

Deon-telos and justif ication First, it has been argued that private property exhibits what I have called deon-telos. The duties, obligations, goals and virtues protected and promoted by private property exist in practice, and exist, explicitly and implicitly, in many forms of justificatory argument. In order to capture the totality and complexity of the property institution, justificatory arguments will need to take these non-rights-based aspects of private property into account. That is to say, the discourse justifying and explaining private property must take into account more than rights. It must balance nonindividuated goals and duties based thereupon, as well as take into account any other duties emanating from other, individuated interests. In short, property discourse requires that one put into the balance the deon and telos of private property. Second, and against Penner, private property must be justified and re-justified. From Harris, as well as many others, we conclude that private property is controversial. It is physically or artificially limited and often scarce, and contains some measure of objective intrinsic or exchange value. By definition, private property involves the distribution of resources and allocation of powers of control and use to a privileged person. Its distribution will necessarily exclude others to some extent. Its distribution will also confer social and political power to some over others, all of which has an ongoing distributional impact. It also confers a great deal of autonomy to the individual.

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These last two points indicate that private property also has a social aspect, framed in a number of different manners by different writers, ranging from at least the ability to be shared to at most the duty to share, from a negatively-framed duty to preserve to a positively-framed duty to use a unique resource to create. One could go further to argue, as I have done, that property is necessarily social: given that it is necessarily distributive, all our ‘acts’ of ownership or other entitlement on objects of property, even merely holding without using or consumption, have an impact on others, if only by simple exclusion. Yet access to resources is required for basic human existence as well as for human flourishing. Assuming that all human beings are presumptively equal in terms of access to a share in the community’s resources, therefore, the distribution to some and not to others must be justified, as Harris and Honoré point out.82 A persuasive analysis of the property institution can only proceed on assumptions which do not favour at the outset one type of justification over another; rather, the various interests promoted and protected by private property must be taken into account, and competing justifications weighed. Given the complexity of human affairs and the myriad ways in which property can be valuable and used, in all likelihood, a persuasive justification of private property will be pluralistic. In all cases, the discourse will be contextual. It is here that there is a tie between justification and property’s ‘teleology’ and ‘deontology’. Part of a persuasive justification for private property will have to deal with the interests based on societal goals, imperatives and aspirations, as well as individual goals. Only by acknowledging deon-telos or some other idea capturing a similar content will the threshold of adequate justification ever be met. This discourse, given all of the above, will be a moral discourse.

The (moral) source of property’s normativity The contextual contours of private property, especially its scarcity and its distributive and social aspects, force us into a continual discourse of justification. This discourse in turn forces us to look at the sources of property’s normativity. It is my view that the source of private property’s normativity—its bindingness—will be a product of this moral discourse of justification. The conclusion arrived at is that the characteristics of private property and the required justification of private property necessitate an ongoing discourse that contains the source of property’s normativity. That is, the binding nature of property rules will be explainable because they are ultimately grounded on this moral discourse. This is true for both general rules and specific rules. Along with rights-based interests, duty- and goal-based interests ground the normativity—and the morality—of private property. That is, both the rights-based interests and arguments explicitly posited by Penner and others, as well as the arguments from deon-telos, which I have tried to illuminate explicitly, will frame the private property institution and justify it. Private property is thus a moral or ethical institution. This does not mean that there is a ‘true’ property right that we can somehow identify or use as a standard: rather it means that private property is not socially, politically and legally neutral. It will always reflect the moral and ethical standards of the society in which it is found. That these elements exist in practice, and that so many writers, as Gray points out,83 are arguing in favour of a robust expanding of the ambit of these sorts

82

P&J at p 171; and Honoré, ‘Social justice’ supra note 73 at p 195 ff.

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of rules, is good evidence that such aspects of property discourse exist. If I am correct in saying that the dominant justificatory theories for private property of recent years are all rights-based, then it perhaps indicates that our society is too rights-based as well. That is a question best left for another day. Finally, the normativity of other areas of private law may or may not be grounded in the same source. That is, the presence of a moral discourse justifying private property—exhibiting both rights-based elements and elements grounded in deon-telos—is the source of normativity of private property rights and duties, and perhaps even explains the uniqueness of property rules in contradistinction to the other areas of private law ordering: contract, tort and perhaps restitution. Unlike these other areas of private law, which may very well be understandable in formal terms, with an immanent rationality and normativity based on a Kantian form of equality and corrective justice,84 private property’s normativity finds its source in the morality required to promulgate and justify (property) rules that are fundamentally distributive and exclusive. While a tort or contract paradigm can presuppose a distribution that can then be ‘corrected’ where transgressions occur, the property paradigm, given its groundedness or contextuality, cannot make such distributional presuppositions, but rather in both theory and practice must explain them. It is only in this way that one can, in my view, begin to understand the role of private property in social and legal ordering.

CONCLUSION: THE (VIRTUE) ETHICS OF PRIVATE PROPERTY The fundamental argument in this framework discussion is that deon-telos is part of the discourse of property. As place-holder or perspective, deon-telos acts as an alternative ethical perspective to rights-based discourse, without being trapped in the stifling traditional dichotomy of deontological and consequentialist thinking. It may very well be an application of what virtue ethicists are arguing in terms of general ethical foundations. As a substantive concept, deon-telos represents all those aspects and elements of property discourse—substantive doctrines and principles as well as justificatory arguments supporting them—whose ultimate basis is neither in traditional rights-based thinking nor in simplistic utilitarian constructs. I submit that deon-telos captures a variety of comments made about property and property rules: its necessary distribution, social aspect, its limitations, its channelling by larger supereminent principles. All of these ethical aspects of private property are inadequately dealt with by rights-based discourse. The primary implications or imperatives of deon-telos are in the analysis of the concept of property and its justification. Most obviously, private property will have to be seen to be as much about duties and goals as it is about rights. In addition to being considered as an institution with limitations, it will have to be seen as an institution where positive duties of stewardship and proper use may also be required. The content of the various rights and duties for any given resource will have to be filled out by the justificatory moral discourse. Also rather clearly, the perspective of deon-telos forces us to focus first on the objects of property, a decreasing trend in modern property discourse. Whether that object be a book, a Van Gogh, a piece of valuable farmland, a patent on

83 84

EP, passim. See, most notably, E Weinrib, The Idea of Private Law (Cambridge, Mass: HUP, 1995).

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a vaccine for AIDS or a mutual fund portfolio, the examination must begin with the characteristics— intrinsic or objective—which give it value. This determination too will be a product of property discourse. The practice of private property does both of these to a certain extent already. However, the presence of a more coherent body of justificatory arguments means that such duties at present no longer need to be seen as idiosyncratic or accessory to private property. It bears repeating: private property is only justifiable because it has inherent limits and duties and because it serves certain societal goals. This recognition will allow for a fuller treatment of the positive duties that go along with the ownership of some important resources. In terms of the larger private property discourse, the presence of deon-telos in justificatory discourse, coupled with the inherent preconditions and contours of social wealth effectively means that the discourse justifying private property will be a moral one. This ultimately may be the source of property’s normativity, and I have advanced, rather skeletally, the reasons why this is likely to be the case. If the arguments throughout this chapter are sensible, and especially those observations regarding the practice of private property elsewhere, then property is about more than mere exclusion and control. Thus, it is at least intuitively plausible that individual interests or autonomy do not account, on their own, for property’s normativity. In conclusion, I hope that an appreciation of deon-telos of private property will force our society to re-examine our relationship to resources and rights. In particular, I would like to see property discourse more thoroughly infused with discussions of virtuous notions such as responsibility, justice and stewardship. These notions reflect how we ought to deal with resources and with each other. If property does indeed reflect our communal morality, I am not content with what I now see. Rather, it should be incumbent on owners and other title-holders to use certain types of resources in ways which are consistent with the naturally-or societally-determined destination of the resource (productively or otherwise); to use all resources according to negative limitations imposed by the community; to use resources in a manner harmonious with the environment (even before negative limits are imposed by the State); and to share the use of certain resources or aspects thereof. Violations of any of these conditions should be seen as negating the very principles and conditions justifying private ownership. Moreover, on a wider ethical level, and even within ‘productive’ and ‘environmentally-friendly’ uses, there will be times, in my view, when one uses resources in ways generally acceptable and beneficial to the community, to promote the common good and individual flourishing. Fragments of these virtues exist already. My hope is that in time we will all comprehend that the fragments are, and must be, linked by a deeper moral understanding of the institution of private property.

Chapter 3 The relationship between property law and tort law Paula Giliker

INTRODUCTION This chapter will focus on the nature of the relationship between property law and modern tort law. This is obviously an enormous topic and it is important, first of all, to establish a focus. I will therefore concentrate on torts which specifically seek to protect interests in property or possession, namely the torts of private nuisance,1 trespass to land and the rule in Rylands v Fletcher,2 which may be collectively termed ‘property torts’. As will be seen, I have chosen to confine my study to torts which protect real property. While torts such as conversion and trespass to goods protect personal property, these torts have a closer relationship with contract law and thus fall outside this study.3 The courts have also traditionally drawn a distinction between property torts and ‘personal’ torts such as negligence, defamation and trespass to the person, which protect rights to self-determination, physical integrity and reputation.4 Whilst a claimant may sue under a ‘personal’ tort for harm to the person, logically only those with a right to property would be able to sue under a ‘property’ tort.5 This position, re-affirmed recently by the House of Lords,6 may lead on occasion to harsh results, but serves to preserve the historical connection between tort law and rights in, or possession over, land. Yet, this view has not gone unchallenged. The common law courts have in the past been willing to extend the application of torts such as nuisance, the rule in Rylands v Fletcher and trespass to a wide variety of situations ranging from harassment7 to fairground accidents.8 It is, however, the implementation of the Human Rights Act 1998 (‘the Act’), which currently presents the most significant challenge to the status quo. The courts in two recent cases have faced the task of reconciling existing tort principles with Article 8 (right to respect for private and family life and the home) and Article I, Protocol I (right to peaceful enjoyment of possessions) of the European

1

2 3 4

5 6 7 8

It is important here to distinguish private nuisance from public nuisance, which is primarily a crime and is not related to the protection of proprietary interests but wider social issues, and readily awards damages for personal injury: see RA Buckley, The Law of Nuisance (Butterworths, 1996), 2nd edn; G Kodilinye, ‘Public nuisance and particular damage in the modern law’ (1986) 6 LS 182. (1865) 3 H & C 774 (Court of Exchequer); (1866) 1 LR 1 Ex 265 (Court of Exchequer Chamber), (1868) LR 3 HL 330 (House of Lords). For a discussion of these torts, see Clerk & Lindsell on Torts (Sweet & Maxwell, 2000), 18th edn, Ch 13. This distinction is not, however, without difficulties. Whilst there is a logical division between ‘personal’ and ‘property’ torts, certain torts lie on the margin of this divide. A good example is that of occupiers’ liability, which represents an interesting compromise between the protection of persons entering the property of another and the rights of the property owner to be free to enjoy his or her own property. See FH Newark, ‘The boundaries of nuisance’ (1949) 65 LQR 480. See Hunter v Canary Wharf [1997] AC 655. See Khorasandjian v Bush [1993] QB 727. Hale v Jennings Brothers [1938] 1 All ER 579.

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Convention on Human Rights.9 It is accepted law that the English courts must consider the jurisprudence of these provisions at the very least in actions against public authorities.10 In examining these judgments and considering how the courts will seek to integrate Convention principles into the common law, it will be argued that English tort law can no longer afford to ignore the implications of the Act or dismiss it simply as a question of freedom of speech or public authority liability. As will be shown, the Act has the potential to strike at the very heart of liability for torts protecting real property and change their fundamental character and long-standing relationship with property law.

HISTORICAL BACKGROUND It is helpful to commence with a brief examination of the roots of nuisance, trespass and the rule in Rylands v Fletcher. The current legal position reflects the historical relationship between property and tort which has existed from medieval times. The tort of private nuisance may be traced back to the 13th century and derives from the Assize of Nuisance, a real property action supplementary to the Assize of novel disseisin. As recognised by Lord Wright in Sedleigh-Denf ield v O’Callaghan:11 The Assize of Nuisance was a real action supplementary to the Assize of novel disseisin. The latter was devised to protect the plaintiff’s seisin of his land, and the former aimed at vindicating the plaintiff’s right to the use and enjoyment of his land. The Assize became early superseded by the less formal procedure of an action on the case for nuisance, which lay for damages… With possibly certain anomalous exceptions, not here material, possession or occupation is still the test.12

Although the action was initially confined to freeholders of land, it became available to other occupiers of land when the action on the case for nuisance superseded the earlier Assize of Nuisance. The action nevertheless retained its original character and continued to require some injury to the land or its appurtenances.13 Trespass has equally been recognised from medieval times, and again focusses on protecting proprietary interests. Ibbetson notes that ‘From its earliest roots, the action of trespass protected property rights’.14 Fifoot has also remarked that ‘the plaintiffs in the early cases of Trespass almost always complained of an unlawful entry upon land, and the asportation of crops and other chattels and even any personal assault were accessory to the principal cause of action’.15

9 10 11 12 13 14 15

Marcic v Thames Water Utilities Ltd [2002] QB 929 and McKenna v British Aluminium Ltd [2002] Env LR 30; The Times, April 25, 2002, discussed below. See section 6(1): ‘it is unlawful for a public authority to act in a way which is incompatible with a Convention right’ and section 2 of the Act. [1940] AC 880 at 902–03. See also JS Loengard, ‘The assize of nuisance: Origins of an action at common law’ [1978] CLJ 144; PH Winfield, ‘Nuisance as a tort’ (1930–32) 4 CLJ 189; JPS McLaren, ‘Nuisance law and the industrial revolution—Some lessons from social history’ (1983) 3 OJLS 155. CHS Fifoot, History and Sources of the Common Law (Stevens & Co, 1949) at 95. See also Lord Simonds in Read v J Lyons & Co Ltd [1947] AC 156 at 183 and Lord Templeman in Tate & Lyle Industries Ltd v Greater London Council [1983] 2 AC 509 at 536–37. D Ibbetson, A Historical Introduction to the Law of Obligations (OUP, 1999) at 66. Fifoot op cit at 47. See also SFC Milsom, ‘Trespass from Henry II to Edward III’ (1958) 74 LQR 195, 407 and 561; GDG Hall, ‘Some early writs of trespass’ (1957) 73 LQR 65.

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The exception is inevitably the 19th century rule in Rylands v Fletcher. As a response to contemporary difficulties arising from the industrial revolution, it would appear to have little in common with the two established torts discussed above. Nevertheless, it is now accepted that its roots lie in the law of nuisance and trespass.16 Further, Ibbetson has commented that the case ‘was consciously argued on property grounds, it seems to have been accepted from the beginning that, had the action been for personal injury, it would have been essential to show negligence’.17 All three torts thus have strong historical links with the rules of property law, and this has been relied upon by the courts and academics to distinguish them from ‘personal’ torts such as negligence. There is a logical distinction between the development of negligence in the 19th and 20th centuries—typified by Lord Atkin’s judgment in Donoghue v Stevenson18—and the earlier growth of property torts. Although Professor Winfield has noted certain underlying ideas of negligence and fault from medieval times,19 such cases were not at the time considered in terms of a separate tort of negligence.20 On this basis, one may contrast the general protection from negligently inflicted physical harm developed from Donoghue v Stevenson in 1932,21 which is inevitably influenced by the social concerns of the 20th century, with the more traditional development of the property torts. Nevertheless, the influence of negligence-based reasoning in the 20th century has extended beyond such ‘personal’ torts, and, combined with concerns as to distributive justice, has made some impact on the development of the property torts.22 I have discussed elsewhere the impact of fault-based liability on the development of the tort of private nuisance23 and highlighted examples where fault is determinant of liability, despite clear dicta stipulating that a line must be drawn between these different forms of liability.24 For example, in relation to private nuisance, where an action is brought against an occupier for interference resulting from the actions of third party

16 17 18

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20 21 22 23

24

See Cambridge Water Co v Eastern Counties Leather plc [1994] 2 AC 264; Newark loc cit 487–88; Read v J Lyons & Co Ltd [1947] AC 156, 173 and 183 per Lords Macmillan and Simonds respectively. Op cit at 186, citing arguments at first instance reported in (1865) 3 H & C 774 (Court of Exchequer) and at (1866) 1 LR 1 Ex 265, especially 266 (Court of Exchequer Chamber). ‘Who, then, in law is my neighbour? The answer seems to be—persons who are so closely and directly affected my act that I ought reasonably to have them in contemplation as being so affected when I am directing my mind to the acts or omissions which are called in question’: [1932] AC 562, 580 per Lord Atkin. See PH Winfield, ‘The history of negligence in the law of torts’ (1926) 42 LQR 184; PH Winfield, ‘Duty in tortious negligence’ (1934) 34 Col LR 41. See also D Kretzner, ‘Transformation of tort liability in the nineteenth century’ (1984) 4 OJLS 46 and W Holdsworth, A History of English Law (Methuen & Co, 1937) Vol 8, pp 449–51. It may be argued, however, that they give an indication of the courts’ gradual acceptance that liability should rest in certain circumstances where the defendant has acted negligently. The first real suggestion of a more generalised concept came from Brett MR in the 19th century case of Heaven v Pender (1883) 11 QBD 503, 509, although this had been rejected by the majority (see Cotton and Bowen LJJ at 506). Newark loc cit at 487 notes ‘cross-infection’ dating from the 19th century. Ch 8, ‘Marking the boundary: The relationship between private nuisance, negligence and fault’ in Environmental Protection and the Law (Hart, 2000), J Lowry and R Edmunds (eds), pp 161–78. See also C Gearty. ‘The place of private nuisance in the modern law of torts’ (1989) 48 CLJ 214, who suggests that indirect physical harm should be viewed as part of the tort of negligence and nuisance confined to the protection of indirect non-physical harm, and contrast G Cross, ‘Does only the careless polluter pay? A fresh examination of the nature of private nuisance’ (1995) 111 LQR 445. The most notable example being that of Hunter v Canary Wharf [1997] AC 655, discussed below.

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trespassers or natural events, fault has been accepted as central to liability. In the leading case of Sedleigh-Denf ield v O’Callaghan,25 decided a mere eight years after Donoghue v Stevenson, the House of Lords accepted that an occupier could be liable for damage caused to the defendants’ land where he or she had either adopted or continued the nuisance. The court rejected strict liability: …an occupier is not prima facie responsible for a nuisance created without his knowledge and consent. If he is to be liable a further condition is necessary, namely, that he had knowledge or means of knowledge, that he knew or should have known of the nuisance in time to correct it and obviate its mischievous effects. The liability for a nuisance is not, at least in modern law, a strict or absolute liability.26

Further evidence of the influence of fault may be found in the common rules of remoteness adopted in negligence, private and public nuisance and under the rule in Rylands v Fletcher in preference to a test of strict liability.27 The rationale is clear in the judgment of Lord Goff in Cambridge Water.28 …the development of the law of negligence in the past 60 years points strongly towards a requirement that such foreseeability should be a prerequisite of liability in damages for nuisance, as it is of liability in negligence. For if a plaintiff is in ordinary circumstances only able to claim damages in respect of personal injuries where he can prove such foreseeability on the part of the defendant, it is difficult to see why, in common justice, he should be in a stronger position to claim damages for interference with the enjoyment of his land where the defendant was unable to foresee such damage.

In both cases, the courts have sought to develop the law of nuisance and the rule in Rylands v Fletcher by analogy to that of negligence. In so doing, they import the values of the latter tort and its underlying ideology. The fact that this changes the established position is not considered a sufficient objection to the attainment of a just result. This serves to highlight the impact of changing contemporary attitudes on the development of English tort law. It also raises a significant question which this chapter will address: to what extent should ‘property torts’ alter their essential character to meet modern social and political needs? Whilst their historical origins may be confined to the protection of proprietary interests, this does not necessarily indicate that courts in the 21st century should continue to adopt such an approach. Courts today are required to intervene to protect a wide range of interests from a variety of litigants and it may be questioned whether, in such circumstances, the courts may choose to ignore the wider social consequences following the commission of torts such as nuisance and trespass. Nevertheless, the House of Lords in Hunter v Canary Wharf chose to continue to adhere to the traditional approach. A brief examination of this familiar case will highlight the nature of the debate.

25 26 27 28

[1940] AC 880. See also Goldman v Hargrave [1967] 1 AC 645; Leakey v National Trust [1980] QB 485; Holbeck Hall Hotel Ltd v Scarborough BC (No 2) [2000] QB 836. Ibid, at 904 per Lord Wright. See The Wagon Mound (No 2) (Overseas Tankships (UK) Ltd v Miller Steamship Co Pty) [1967] 1 AC 617; Cambridge Water Co v Eastern Counties Leather plc [1994] 2 AC 264. Ibid, at 300.

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THE CURRENT APPROACH: HUNTER v CANARY WHARF29 Hunter v Canary Wharf—decided at the end of the 20th century—represents the accepted legal position. The facts will be familiar to many. In this case, local residents had complained that the erection of the Canary Wharf tower in the London Docklands had interfered with their television reception. The tower, now a London landmark, is nearly 250 metres in height and over 50 metres square with a metallic surface (and is, indeed, visible from the Law School of Queen Mary itself). Complainants included local house-owners, tenants, lodgers and licensees. The preliminary question before the House of Lords concerned entitlement to sue for private nuisance, assuming of course that such interference amounted to a nuisance.30 The majority found that, due to the historical roots of private nuisance, only litigants with a right to land could bring a claim.31 The action would be confined to claimants with an interest in land or exclusive possession. Whilst landowners, tenants, the grantee of an easement or prof it à prendre or a party with a right to exclusive possession of the land would meet these requirements, any lesser right would not suffice. This limitation was justified by Lord Hoffmann on the following basis: Exclusive possession distinguishes an occupier who may in due course acquire title under the Limitation Act 1980 from a mere trespasser. It distinguishes a tenant holding a leasehold estate from a mere licensee. Exclusive possession de jure or de facto, now or in the future, is the bedrock of English land law.32

By confining the right to sue to those with rights to land and approving the traditional approach towards nuisance,33 the majority affirmed the ongoing relationship between ‘torts to land’ and the principles of land law. Any other ruling was seen to distort the nature of the tort and fundamentally change its nature and scope.34 Lord Goff believed that this would not unduly prejudice other parties living on the premises. They would still be able to bring an action under a ‘personal’ tort such as negligence and, if nuisance proceedings were necessary, it would not cause undue inconvenience to expect them to contact the person with the requisite right to land.35 In the

29

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[1997] AC 655. Comment PA Cane, ‘What a nuisance’ (1997) 113 LQR 515; S Hedley, ‘Nuisance, dust and the right to good TV reception’ (1997) 3 Web JCLI; P Giliker, ‘Hunter v Canary Wharf, a return to the roots of private nuisance’ (1997) 48 NILQ 389; K Oliphant, ‘Unblurring the boundaries of nuisance’ (1998) 6 Tort L Rev 21. In any event, the court considered that, by analogy to cases which refused liability for blocking a view (see Aldred’s Case (1610) 9 Co Rep 57b and Dalton v Angus (1881) 6 App Cas 740), the interference did not amount to an actionable nuisance and, subject to planning controls and any easements in the claimants’ favour, the defendant was free to build what it wanted on its land irrespective of its interference with its neighbours’ use and enjoyment of land. This did little, however, to resolve the position where the interference is caused by another source, for example electrical interference as in Bridlington Relay v Yorkshire Electricity Board [1965] Ch 436. ‘On the authorities as they stand, an action in private nuisance will only lie at the suit of a person who has a right to the land’ per Lord Goff supra at 692. Supra at 703 per Lord Hoffmann. See Malone v Laskey [1907] 2 KB 14. The decision in Foster v Warblington UDC [1906] 1 KB 648, which had been interpreted by the lower courts as favouring a wider right to sue, was classified by the majority as an ‘exceptional’ case relating to exclusive possession. See Lord Lloyd supra at 696 and Lord Goff supra at 693.

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words of Newark, ‘the essence of nuisance was, therefore, that it was a tort to land’.36 Following Hunter, this is still very much the case. It is important, nevertheless, to recognise the strong dissenting judgment of Lord Cooke, who was critical of the arguments stated above. Whilst recognising the historical role of nuisance, his Lordship chose to focus on its position in modern society. This corresponded with the view of the majority in Khorasandjian v Bush,37 rejected by the majority in Hunter, that ‘[t]he court has at times to reconsider earlier decisions in the light of changed social conditions’.38 Lord Cooke favoured the test adopted in Khorasandjian and by the Court of Appeal in Hunter that a substantial link with the land should suffice to bring an action for private nuisance. In so doing, Lord Cooke viewed the case as raising a question of policy: should the law adopt a flexible approach or adhere to strict precedent? in answering this question, his Lordship gained assistance from North American and human rights law: International standards such as this may be taken into account in shaping the common law… I think this is a legitimate consideration in support of treating residence as an acceptable basis of standing at common law in the present class of case.39

In turning to North American case law40 and, of particular interest in this chapter, Article 16 of the United Nations Convention on the Rights of the Child41 (and, by analogy, Article 8 of the Convention),42 his Lordship strove to develop nuisance beyond its historical roots into a tort capable of meeting contemporary social needs. This presents an obvious contrast to the majority view. It is perhaps helpful to interpret these different approaches in terms of what Peter Cane has described as the inherent conflict in nuisance between obligation-based principles which seek to compensate the victim, and property-based principles which seek to vindicate the claimant’s rights in land.43 Lord Cooke is clearly favouring the former, the majority the latter. Inevitably, the case has received a mixed reception, particularly from parties eager to see the tort of nuisance move away from its historical roots and develop in a more flexible manner.44 In a

35 36 37 38

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Supra at 694. Loc cit at 482. Lord Goff, at least, is clearly influenced by this work (see references at 687, 688 and 692). [1993] QB 727. Ibid, at 735 per Dillon LJ, relying on the Canadian case of Motherwell v Motherwell (1976) 73 DLR (3d) 62. Comment E Cooke, ‘A development in the tort of private nuisance’ (1994) 57 MLR 289 and J Bridgman and MA Jones, ‘Harassing conduct and outrageous acts: A cause of action for intentionally inflicted mental distress’ (1994) 14 LS 180. See also Pill LJ in the Court of Appeal in Hunter [1997] AC 655 at 675. Supra at 714. Motherwell v Motherwell (1976) 73 DLR (3d) 62, Devon Lumber Co Ltd v MacNeill (1987) 45 DLR (4th) 300, Hosmer v Republic Iron and Steel Co (1913) 60 So 801, Bowers v Westvaco Corp (1992) 419 SE (2d) 661. Article 16: No child shall be subjected to arbitrary or unlawful interference with his or her privacy, family, home or correspondence, nor to unlawful attacks on his or her honour and reputation. The child has the right to the protection of the law against such interference or attacks.

42 43 44

Citing Arrondelle v United Kingdom (1982) 26 DR 5 (aircraft noise); López Ostra v Spain (1994) 20 EHRR 277 (fumes and smells from a waste treatment plant). PA Cane, Tort Law and Economic Interests (OUP, 1996) 2nd edn, at 33. See J Wightman, ‘Nuisance—the environmental tort? Hunter v Canary Wharf in the House of Lords’ (1998) 61 MLR 870 and J O’Sullivan, ‘Nuisance in the House of Lords—normal service resumed’ (1997) 56 CLJ 483.

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system dominated by the tort of negligence, whose influence, as seen above, extends beyond mere personal torts, notable unease has been expressed at this result. In a liberal democratic society, concern will always be raised by a legal rule which so blatantly distinguishes between property owners and non-property owners.45 On a positive note, however, it has provided practitioners with a clearer set of guidelines.46 At a time when the courts seek to encourage negotiated settlements, Lord Goff notes that Hunter will enable the defendant to identify the relevant claimants with a greater degree of precision than that provided by the ‘substantial link’ or ‘occupation’ tests favoured by the Court of Appeal.47 Further, the decision avoids possible multiplicity of litigation and vexatious claims by those desirous to obstruct the defendant’s activities. This will always be a risk with a tort where proof of fault is not required, and Hunter may thus be justified on a practical level in providing a means of limiting claims. The merits of the decision remain therefore a matter for dispute. One is left with a choice between the traditional approach which imports into tort law the relative certainty of proprietary interests, or a more interventionist approach which advocates that tort should move away from its roots and respond to contemporary social needs. It is inevitable that one’s view of Hunter will depend largely on which of these arguments one finds more persuasive. It is clear that the current law adopts a view of private nuisance based on historical accuracy, rather than social protection. This leads to the conclusion that all torts which protect proprietary interests should be confined to those possessing the requisite interest in land. Those without such interests must seek protection elsewhere in the law of torts, either in the common law (for example, under the tort of negligence) or in statute (for example, the Protection from Harassment Act 1997). The tort of trespass at least seems consistent with this view. It is long established that a claimant must assert a possessory right to bring an action for trespass, that is that he or she must lawfully be in actual possession at the time of the trespass.48 A property right alone will not suffice without actual possession of the land.49 Hence where the land is leased, the tenant will be the appropriate claimant. Nevertheless, property rights will support the right to sue; for example, if the land is vacant, the right to sue will fall on the owner.50 Equally, where possession is unclear, the law will generally rule in favour of the party with title to the property.51 However, the law relating to claims under the rule in Rylands v Fletcher has, until recently, been less certain. The few cases decided on this matter did seem to indicate that an interest in land was not an essential requirement to establish liability.52 Nevertheless, in the leading case of Cambridge Water, Lord Goff sought to minimise the differences between the torts. In his Lordships’s view:

45 46 47 48 49 50 51 52

Described by Fleming as ‘invidious discrimination’: JG Fleming, The Law of Torts (LBC Information Services, 1998) 9th edn, at 475. Kidner suggests that following Hunter, the nature of the interests protected by nuisance and its function in law should be clearer: R Kidner ‘Nuisance and rights of property’ [1998] Conv 267. See Lord Goff supra at 693. I am grateful to Professor Andrew Tettenborn for emphasising the commercial significance of this point in discussion. Smith v Milles (1786) 1 Term Rep 475, 99 ER 1205; Barton v Cordy (1825) M’Cle & Yo 278, 148 ER 417; Topham v Dent (1830) 6 Bing 515, 130 ER 1379. Wallis v Hands [1893] 2 Ch 75. R v St Pancras Assessment Committee (1877) 2 QBD 581 at 588 per Lush J. Canvey Island Comrs v Preedy [1922] 1 Ch 179; Jones v Chapman (1849) 2 Exch 803 at 821, 154 ER 717 at 724 per Maule J; Lows v Telford (1876) 1 App Cas 414 at 426 per Lord Selborne, HL. See, for example, dicta in Shiffman v Order of the Hospital of St John of Jerusalem [1936] 1 All ER 557 (although decided on negligence), Perry v Kendricks Transport Ltd [1956] 1 WLR 85, 92 and Lawton J in British Celanese Ltd v AH Hunt (Capacitors) Ltd [1969] 1 WLR 959.

76

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On this basis, it would seem that coherence would require the same rules of standing to apply in both torts. This question was considered by Neuberger J in Nora McKenna v British Aluminium Ltd.54 Here, an application had been made to strike out claims brought in nuisance and under the rule in Rylands v Fletcher on the basis that the claimants did not satisfy the Hunter locus standi requirements. Neuberger J accepted that the same rule of standing would apply to both torts. In the light of Lord Goff’s statement in Cambridge Water55 and comments in the latest edition of Clerk & Lindsell,56 the judge found it ‘logically inescapable’57 that a claimant bringing an action under the rule in Rylands v Fletcher must have an interest in land which would be sufficient to justify his bringing a claim in nuisance. Significantly, however, Neuberger J then proceeded to consider the common law position in the light of the Human Rights Act 1998. This will be examined below.

THE HUMAN RIGHTS DIMENSION As indicated by Neuberger J above, the next logical step in considering the relationship between property and tort law must be to consider the impact of the Human Rights Act. Following its implementation on 2 October 2000, the Act has been applied in areas as diverse as rape,58 planning law,59 and the unauthorised taking of wedding photographs.60 It is perhaps inevitable that the first challenges under the Act will take place in more controversial (or well-funded) litigation, but as Jane Wright has indicated in her work, Tort Law and Human Rights, its impact on the law of tort cannot be ignored.61 In two recent cases, the judiciary has addressed the impact of the Act on torts such as private nuisance and the rule in Rylands v Fletcher, regarding, in particular, Article 8 and Article 1, Protocol 1 of the Convention. These provisions grant protection for rights in the home and for the peaceful enjoyment of possessions and must be considered in the context of the jurisprudence of the European Court of Human Rights. Although the two cases discussed below deal relatively briefly with this point, it is possible to derive from the judgments a valuable indication of the approach that will be taken in future cases and, most importantly, whether the Act will, in fact, force the courts to reconsider their treatment of ‘property’ torts.

53

54 55 56 57 58 59 60 61

Cambridge Water Co v Eastern Counties Leather plc [1994] 2 AC 264, 306. Contrast the position in Australia where the High Court of Australia in Burnie Port Authority v General Jones Pty Ltd (1994) 179 CLR 520 decided (5:2) that the rule in Rylands v Fletcher could be subsumed into negligence. Comment RFV Heuston and RA Buckley. ‘The return of Rylands v Fletcher’ (1994) 110 LQR 506. [2002] Env LR 30; The Times, April 25, 2002, Neuberger J (Birmingham District Registry)—complaints concerning pollution from a neighbouring factory and for invasion of privacy. Cited above. See also [1994] 2 AC 264, 304. Clerk & Lindsell on Torts (Sweet & Maxwell, 2000) 18th edn, para 20.14. Para 21. R v A (No 2) [2002] 1 AC 45. R (Alconbury Developments Ltd) v Secretary of State for the Environment, Transport and the Regions [2001] 2 WLR 1389. Douglas and Others v Hello! Ltd [2001] QB 967. See, generally, D Nicol, ‘Are Convention rights a no-go zone for Parliament?’ [2002] PL 438. Wright, Tort Law and Human Rights (Hart, 2001).

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Case One: Marcic v Thames Water Utilities Ltd62 Peter Marcic brought a claim against his statutory water and sewage undertaker, Thames Water Utilities Ltd (TWUL), complaining of its failure, since 1992, to prevent persistent external flooding and backflow of foul water from its sewer system into his home at times of heavy rain. Although it was reasonably practicable for TWUL to prevent the flooding, it had refused to do so. Under its existing scheme of priorities, there was no prospect of such works being undertaken in the foreseeable future. After nine years, Marcic turned to law and brought this action for damage to his property in nuisance and under the 1998 Act. The claim for nuisance was dismissed at first instance.63 Judge Richard Havery QC held that such a claim was contrary to pre-existing authority, which had declined to find a statutory undertaker liable for a failure to prevent the escape or discharge of sewage due to increased usage of the drainage system.64 In the light of such authority, the judge distinguished cases such as SedleighDenf ield65 and Leakey66 in which the courts had been prepared to impose fault-based liability for failing to take reasonable steps to prevent a nuisance affecting the property of another. The Court of Appeal overturned this judgment. The authorities cited had been decided at a time when the law of nuisance drew a clear distinction between misfeasance and nonfeasance, and had been overtaken by the impact of Sedleigh-Denf ield in 1940 and Goldman v Hargrave67 in 1966. On this basis, landowners would be required to intervene to prevent hazards on their land, however they might arise.68 In the words of Lord Phillips MR: ‘The Court of Appeal could not have approached the facts in Glossop’s case in the way that they did, had they been considering those facts today.’69 In view of its decision, the Court of Appeal was not required to go any further. Where an

62 63 64 65 66 67 68

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[2001] 3 All ER 698 (Havery QC); [2002] QB 929 (CA). Comment RA Buckley, ‘Nuisance and the public interest’ (2002) 118 LQR 508; B Parker, ‘A continued nuisance’ [2002] CLJ 260. The judge additionally rejected claims based on negligence, breach of statutory duty and under the rule in Rylands v Fletcher. Relying on Glossop v Heston and Isleworth Local Board (1879) 12 Ch D 102, [1874–80] All ER Rep 836, Robinson v Mayor and Corp of the Borough of Workington [1897] 1 QB 619 and Hesketh v Birmingham Corp [1924] 1 KB 260, [1922] All ER Rep 243. Sedleigh-Denfield v O’Callaghan [1940] AC 880. Leakey v National Trust [1980] 1 QB 485. [1967] AC 645. A private undertaker operating a system as a commercial venture would therefore be treated in the same manner as any landowner and be subject to the same common law duties, although, in the case of TWUL, its large resources would be taken into account when assessing its duty to take reasonable care in the circumstances: see Lord Wilberforce in Goldman v Hargrave [1967] AC 645, 663 and Megaw LJ in Leakey supra at 526. More controversially, once the claimant has proved that the nuisance has emanated from the land, the burden would lie on the defendants to demonstrate that it had taken all reasonable steps to prevent the nuisance, which, here, it had failed to do: supra at 994–95. This appears to take the law a step further than Sedleigh-Denfield/Leakey where ‘the duty asserted is, in effect, a duty to take reasonable care’: see Megaw LJ in Leakey supra at 514. The Court of Appeal expressly left open the question of liability under the rule in Rylands v Fletcher. Supra at 997. Glossop was also distinguished on the basis that Marcic was not attempting to indirectly force a local authority to perform a public duty. Note that the claim for breach of statutory duty was rejected by both courts. Section 8(3): ‘No award of damages is to be made unless, taking account of all the circumstances of the case, including—(a) any other relief or remedy granted, or order made, in relation to the act in question (by that or any other court)…the court is satisfied that the award is necessary to afford just satisfaction to the person in whose favour it is made.’

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adequate remedy exists at common law, section 8(3) of the Act renders any further claim under the Act unnecessary.70 Nevertheless, Havery QC had been prepared to award damages under the Act,71 and the Court refused to overrule this finding of liability. In so doing, it gave valuable guidance as to the application of the Act to a nuisance-based claim.

Marcic and the Human Rights Act 1998 Havery QC at first instance had found that TWUL had infringed the claimant’s rights to a private and family life (Article 8) and to peaceful enjoyment of his possessions (Article 1, Protocol 1). Relying on jurisprudence from the European Court of Human Rights, the judge held that the failure of TWUL to deal with the increasingly frequent flooding of Marcic’s property amounted to a prima facie infringement of his human rights, which required justification.72 Repeated flooding had interfered with his rights in the home and had deprived Marcic, at any rate in part, of the peaceful enjoyment of his possessions.73 However, both Article 8 and Article 1, Protocol 1 are qualified rights for which the court must also consider ‘the protection of the rights and freedoms of others’74 and ‘the public interest’.75 This required the court to strike a fair balance between the demands of the general interest of the community (here the other customers of TWUL) and the protection of the individual’s fundamental rights. TWUL’s somewhat highhanded approach in asserting its own expertise in the matter failed to satisfy the judge that, even allowing for its margin of discretion, a fair balance had been struck between the interests involved. The fact that the current system of priorities did not obviously fail to strike a fair balance between these interests was not sufficient. The Court of Appeal concurred with this view. It held that TWUL had failed to establish that Havery QC had been incorrect, and therefore approved his reasoning on this point. Further, the court doubted whether TWUL could ever have justified its scheme of priorities. In the light of S v

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In Marcic v Thames Water Utilities Ltd (No 2) [2001] 4 All ER 326, Havery QC subsequently found that to ‘afford just satisfaction’ as required under section 8(3), the court would award damages for future wrongs, even though the usual common law rule was that the claimant would be compelled to issue proceedings from time to time to enforce his rights. Section 8(4) required the court to take into account the principles applied by the European Court of Human Rights, which permitted greater intervention than that provided in the national court. Damages would thus be assessed by reference to the difference between the claimant’s actual position and his imagined position in the absence of infringement of his rights. The court relied on Baggs v UK (1987) 9 EHRR 235, (nuisance caused by noise from Heathrow airport affecting the applicant’s enjoyment of his home); S v France (1990) 65 DR 250 (effect of nuclear power station near home); Guerra v Italy (1998) 26 EHRR 357 (toxic emissions from a factory, which was particularly relevant in that it concerned a failure to act); López Ostra v Spain (1994) 20 EHRR 277 (fumes and smells from a waste treatment plant). Where there is a demonstrable and significant fall in the value of the property, without proper compensation, this amounted to a partial expropriation, satisfying Article 1 of Protocol 1: see S v France (1990) 65 DR 250 at 261. Article 8, para 2: ‘There shall be no interference by a public authority with the exercise of this right except such as is in accordance with the law and is necessary in a democratic society in the interests of national security, public safety or the economic well-being of the country, for the prevention of disorder or crime, for the protection of health or morals, or for the protection of the rights and freedoms of others.’ Article 1, Protocol 1: ‘No one shall be deprived of his possessions except in the public interest and subject to the conditions provided for by law and by the general principles of international law. The preceding provisions shall not, however, in any way impair the right of a State to enforce such laws as it deems necessary to control the use of property in accordance with the general interest or to secure the payment of taxes or other contributions or penalties.’ (1990) 65 DR 250 at 263.

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France,76 the Court concluded that to strike a fair balance between the competing interests of the community as a whole and a private individual, the defendant might, in any event, be required to pay compensation to ensure that one person did not bear an unreasonable burden.77

The impact of Marcic It remains to be seen how radical a change Marcic will make to the common law. As Kate Cook remarked in a recent article, ‘it is probably fair to say that [Marcic] raises as many questions as it answers’.78 TWUL has recently obtained leave to appeal to the House of Lords,79 where it will undoubtedly challenge the ruling on the basis of its interpretation of the common law and the unwillingness of the court to take account of the cost implications of this judgment.80 Other local authorities will thus have to wait anxiously to ascertain their potential liability for future nonfeasance claims.81 The claim under the Act was additionally fairly straightforward one. The defendant was a statutory water and sewerage undertaker and therefore a public authority satisfying section 6 of the Act. Section 6(6) expressly includes failures to act, and the jurisprudence from the European Court of Human Rights supported use of Article 8 and Article 1 of Protocol 1 in this context.82 For the purpose of our analysis, the impact of Marcic is therefore limited. It gives no guidance as to possible claims against non-public bodies, or as to the application of the Act in less straightforward circumstances, notably where the claimant is not complaining about physical loss to property. Nevertheless, the case should be noted. It is significant in highlighting the fact that property torts are not immune from the challenges introduced by the Act, and that tort and property lawyers should face the prospect of the limitations of the common law being overturned by claims under the Act. As Lord Phillips MR warns: ‘modification may, however, be necessary if our common law is to march in step with the requirements of the convention.’83

Case Two: Nora McKenna v British Aluminium Ltd84 In this second case, over 30 children from a number of households had brought actions for private nuisance and under the rule in Rylands v Fletcher. It was alleged that emissions and noise from the

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Supra at 1001–02. K Cook, ‘Environmental rights as human rights’ [2002] EHRLR 196, 213. See also J Morgan, ‘Nuisance, property and human rights’ (2002) 118 LQR 27 and M Stallworthy, ‘Public service providers—Private law obligations to customers’ [2002] ICCLR N47. [2002] 1 WLR 2274. Judge Havery had found (supra at 724 and 726) that it would cost TWUL £1 billion to alleviate the flooding problems of all its customers in a similar position to Marcic; TWUL serving approximately 5.4 million households and a population of some 12 million. In the financial year 1999–2000, the profits of the whole group (of which TWUL formed only a part) amounted to £344 million after tax. This did not, however, lead either court to dismiss liability. D Rook, ‘Property law and the Human Rights Act 1998’ [2002] Conv 316, 325 notes that in view of the cumulative effect of the positive obligations imposed under Article 8, local authorities may find themselves potentially liable not only for nuisances caused, adopted or continued by themselves, but for failing to intervene to stop nuisances caused by their own tenants. This may require the courts to review the decisions reached in Hussain v Lancaster CC [2000] QB 1 and Mowan v Wandsworth (2001) 33 HLR 56. See López Ostro v Spain (1994) 20 EHRR 277 and Guerra v Italy (1998) 26 EHRR 357. Supra at 1001. [2002] Env LR 30; The Times, April 25, 2002.

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defendants’ neighbouring factory had caused them mental distress, physical harm and an invasion of privacy. The defendants sought to strike out their claims on a number of bases: first, on the ground that in the absence of any proprietary right, the claimants had no right to sue; secondly, that this would bar not only a claim in private nuisance, but also any claim under the rule in Rylands v Fletcher, thirdly, that the claimants could not rely on the Human Rights Act 1998 where it would conflict with the views of the majority in Hunter v Canary Wharf. As stated earlier, Neuberger J found for the defendants on the first two grounds. The judge held that if it was accepted that the rule in Rylands v Fletcher was in fact an extension or branch of the law of nuisance,85 as a matter of logic, the same rules of standing should apply. That is, only claimants with a proprietary right should be able to sue. This would, prima facie, appear to exclude any common law action based on a property tort. Nevertheless, Neuberger J did not accept that a negative finding on the first two grounds would exclude a claim under the Act. The judge accepted that there was a ‘powerful argument’86 that the majority view in Hunter would oppose any extension of the law, but that, in the light of the broad dicta of the Court of Appeal in Douglas and Others v Hello! Ltd,87 the common law should be developed in a manner conforming with the Convention. Here, there was a ‘real possibility’88 that a court might find it necessary to extend or change the existing law. The decision would ultimately be for the court at trial, but Neuberger J indicated that, in his view, the present law was not Convention-compliant: There is obviously a powerful case for saying that effect has not been properly given to Article 8.1 if a person with no interest in the home, but who has lived in the house for some time and had his enjoyment of the home interfered with, is at the mercy of the person who owns the home, as the only person who can bring proceedings.89

It is clear that in approving a claim by those ‘who have lived in the house for some time’, the court is prepared to contradict the ruling in Hunter and, in effect, resurrect the ‘substantial link or occupation’ test favoured by the Court of Appeal in Hunter90 and Khorasandjian v Bush.91

The impact of McKenna This case has potentially a greater impact on the law than the first case of Marcic above. It should be noted that the defendants were not a public authority within section 6 of the Act and that the judge accepted that the existing common law rules of tort might be subject to challenge in spite of contrary House of Lords authority and acceptance of a property-based rationale. The rights set out by the Act thus ‘trump’92 the common law rules set by precedent and current legal practice. It must be conceded that this is, as yet, limited authority. It is a striking out decision from the Birmingham District Registry, which has only been reported in the Environmental Law

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See Lord Goff in Cambridge Water Co v Eastern Counties Leather plc [1994] 2 AC 264, 306. Para 49. [2001] QB 967. Para 52. Para 53 (my emphasis). Neuberger J leaves open the question whether the common law should be extended by reference to the law of nuisance, the rule in Rylands v Fletcher, negligence or a common law tort analogous to nuisance. [1997] AC 655, 675 per Pill LJ. [1993] QB 727, 735 per Dillon LJ. See RM Dworkin, Taking Rights Seriously (Harvard University Press, 1977), revd edn.

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Reports.93 Nevertheless, it is an important step forward in raising expressly the question whether the traditional relationship between torts protecting property and property law can withstand the implementation of the Act.

TORT, PROPERTY AND THE HUMAN RIGHTS ACT 1998 In this final section, I will examine four factors which suggest that Marcic and McKenna do in fact forebode a significant challenge to the status quo ante. It will be argued that these elements, combined together, indicate that the common law position in Hunter, and related property torts, is likely to be subject to challenge and that its traditional relationship with property law will have to adapt to ensure compliance with Convention rights.

The wide ambit of Article 8 and Article 1, Protocol 1 The first difficulty raised by the Convention rights is that they differ from the interests recognised by the common law. Private nuisance, the rule in Rylands v Fletcher and trespass to land are confined to the protection of proprietary and possessory interests, thereby maintaining their historical connection with the protection of property rights. As recognised in Marcic and McKenna, Article 8 and Article 1 of Protocol 1 protect wider interests. The latter provides that ‘Every natural or legal person is entitled to the peaceful enjoyment of his possessions.’ The term ‘right to property’ or ‘possessions’, translated from the broader French terms of ‘biens’ or ‘propriété’, has been applied to a wide range of economic interests, including the protection of contractual rights.94 In extending its protection beyond traditional proprietary rights, there is clearly a possible conflict with the authority of Hunter. Yet, it is unlikely that this latter provision will cause significant problems. In Rayner v United Kingdom,95 the Commission indicated that Article 1 of Protocol 1 did not ‘in principle guarantee a right to the peaceful enjoyment of possessions in a pleasant environment’.96 Intervention will therefore be confined to circumstances where there is a diminution in value of the applicant’s possessions for which adequate compensation is not provided.97 Purely aesthetic qualities such as peace, comfort and the enjoyment of possessions—a common cause of complaint in nuisance—will not suffice.98 This will reduce considerably the impact of this particular provision. However, Article 8, in protecting a right to respect for private and family life, the home and correspondence in the home is not so restricted. ‘Home’ would here appear to signify a dwelling

93 94 95 96 97 98

Neuberger J does, however, set out to determine a point of principle and suggests that it may be appropriate to treat his judgment as a decision on a preliminary issue. See Association of General Practitioners v Denmark (1989) 62 DR 226 and Gasus Dosier und Fordertechnik GmbH v The Netherlands (1995) 20 EHRR 403 (right of retention in goods). (1986) 9 EHRR 375 (E Com HR). Ibid, at 378, para 6. See S v France (1990) 65 DR 250. See D Rook, Property Law and Human Rights (Blackstone Press, 2001) at 8.8.3.1, p 226; R Churchill, ‘Environmental rights in existing human rights treaties’ in Human Rights Approaches to Environmental Protection (Clarendon Press, 1996), AE Boyle and MR Anderson (eds) at 95.

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with which the applicant has a sufficient degree of connection and permanence, or to use the phrase of the Court, a ‘sufficient and continuous link’.99 For example, Feldman defines it in the following way: Home is a wide term, including any place which is in fact currently used (rather than intended for use) as a private home, even if the use as a home is unlawful as long as the public do not have access to the place otherwise than for private business.’100

Article 8 additionally requires not only that the state does not interfere with the claimant’s rights, but that it takes positive steps to ensure such rights receive respect.101 On this basis, Mrs López Ostra was able to bring a claim for pollution on behalf of herself and her family for the nuisance caused by the operation of a privately-run waste treatment plant 12 metres from her home.102 In Guerra v Itay,103 the Strasbourg court recognised that liability could rest on a failure to notify local residents of the risks inherent in the running of a nearby chemical factory.104 Applicants therefore had a right to information which could alert them of potential dangers and permit them to make informed decisions how to act. Although both rights are qualified by the requirement of ‘the fair balance that has to be struck between the competing interests of the individual and of the community as a whole, and in any case the State enjoys a certain margin of appreciation’,105 they represent a broader view of the ‘victim’ suffering from interference with his or her rights. Notably, the broad test for ‘home’ under Article 8 is reminiscent of the ‘substantial link’ test used by the Court of Appeal in Hunter.106 This would suggest an obvious conflict with the majority position in Hunter.

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See Buckley v United Kingdom (1997) 23 EHRR 101, paras 52–55 (even illegal occupation will not necessarily prevent occupation of a ‘home’), Niemetz v Germany (1992) 16 EHRR 97 (may include the office of a professional) and Gillow v United Kingdom (1989) 11 EHRR 335 (absence of 19 years did not necessarily signify abandonment of ‘home’). Note also the recent case of Qazi v Harrow LBC [2002] HLR 14 (comment 1 Loveland [2002] PL 221) where the Court of Appeal found that a former council tenant, whose lease had been determined, could still complain under Article 8. This has since been applied in Kensington and Chelsea RLBC v O’Sullivan [2002] 10 CL 261 (CC (Central London)) affirmed (2003) 1 FCR 687 (CA), in favour of a wife, who became a trespasser in the premises once her husband’s tenancy had been terminated. As noted by Waller LJ in the Court of Appeal at paras 81–82: The courts have recognised that a tenant and even a trespasser may establish that particular premises constitute a home within article 8(1). On that there is no dispute…The question, as the authorities demonstrate, is whether article 8(2) justifies the action of the claimaints.’ D Feldman, Civil Liberties and Human Rights in England and Wales (OUP, 2002) 2nd edn, at 527. See also DJ Harris, M O’Boyle and C Warbrick, Law of the European Convention on Human Rights (Butterworths, 1995) at 319: ‘the state will facilitate the right to live in one’s home, rather than merely protect it as a possession or property right.’ See Marckx v Belgium (1979) 2 EHRR 330 (although phrased in the context of ‘private and family life’, it applies equally to respect for the home); Harris et al, op cit at 321–24. López Ostra v Spain (1994) 20 EHRR 277. The applicant’s claim under Article 3 (prohibition on torture and inhuman or degrading treatment) had been rejected. (1998) 26 EHRR 357. The risks were not inconsiderable. The Guerras lived 1 kilometre from a ‘high risk’ chemical factory and an accident in 1976 had affected 150 people who were admitted to hospital with acute arsenic poisoning. The Court rejected, however, the applicants’ claims under Articles 2 (right to life) and 10 (freedom of expression). López Ostra v Spain (1994) 20 EHRR 277, para 51. Although it should be noted that in that case the court reasoned by analogy to North American case law rather than the Convention: see Pill LJ supra at 674.

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Developments in the common law A second factor in assessing the nature of the current debate is recent case law adopting a broader view of Hunter. In Pemberton v Southwark LBC,107 the Court of Appeal extended the protection of Hunter to ‘tolerated trespassers’108 with an exclusive right to occupy the premises. This term derives from Burrows v Brent LBC,109 where the House of Lords was careful to distinguish such occupants from tenants or licensees. Nevertheless, the Court in Pemberton held that, bearing in mind the claimant’s exclusive possession and the policy reasons which led to the evolution of this special status, the claimant would be deemed to have a sufficient interest to sue for nuisance or trespass.110 Whilst this is a limited extension of Hunter, it does indicate that, even at common law, the question of standing is not set in stone. Further, it should be noted that, in reaching its judgment, the Court accepted Article 8 as a ‘relevant factor’ in determining whether the claimant would have a right to sue the local authority.111

Hunter in the European Commission of Human Rights Examination of the law is also assisted by consideration of Hunter by the Commission. The case under consideration in Khatun v United Kingdom112 related to dust emanating from construction work in the London Docklands, and raised again the question of who could sue. Applicants included non-property owning spouses, children, other relatives and lodgers. The Commission noted that: …in domestic proceedings, a distinction was made between those applicants with a proprietary interest in the land and those without such an interest. For the purposes of Article 8 (Art 8) of the Convention, there is no such distinction. ‘Home’ is an autonomous concept which does not depend on classification under domestic law. Whether or not a particular habitation constitutes a ‘home’…will depend on the factual circumstances, namely, the existence of sufficient and continuous links.113

107 [2000] 1 WLR 1672 (leave to appeal denied by the House of Lords: [2001] 1 WLR 538). 108 See K Gray and SF Gray, Elements of Land Law (Butterworths, 2001) 3rd edn, pp 361–62. This term refers to the situation where a local authority landlord, having obtained a possession order against a defaulting former secure tenant, allows that tenant to remain in occupation so long as all instalments of rent arrears and future rent are paid. It has been described as ‘an improbable, if not inexplicable, concomitant of severely pressured regimes of modern public housing’: Gray and Gray op cit at 362. 109 [1996] 1 WLR 1448. See J Murdoch, ‘Trespass against us’ [2000] 25 EG 140. 110 See Roch LJ supra at 1681. 111 Supra at 1681 and 1684 (Roch and Clarke LJJ respectively). 112 (1998) 26 EHRR CD 212. The applicants complained here of dust arising from construction of the Limehouse Link Road from November 1989 to May 1993 and that such work disrupted their rights under Article 8 (home and family life) and Article 14 (discrimination on the grounds of poverty in that due to the low value of their homes, any diminution of the market value was minimal). 113 Ibid, at 215. 114 Rook op cit at 8.8.4.1, p 231 also suggests that the rejection by the House of Lords in Hunter of a claim for interference with television reception by analogy to loss of prospect may also need reconsideration (see above). In S v France supra, the Commission found a violation of Article 8(1) due to the construction of a nuclear power station 300 metres from the applicant’s chateau. It was claimed, inter alia, that the high cooling towers caused a visual intrusion. However, the intrusion was deemed justifiable under Article 8(2) and Rook herself doubts whether such a loss would be itself be sufficient to invoke Article 8.

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On this basis, the applicants could raise a complaint under Article 8.114 However, the Commission ruled that the defendants’ activities had pursued a legitimate and important aim. Given the importance of the public interest in the development of the London Docklands and the limited nature of the interference, a fair balance had been achieved under Article 8(2).115 Article 8 is a qualified right and the defendant will be given the opportunity to justify his or her interference with the parties’ rights. The impact of the Convention must therefore be judged in the light of the potential ability of the defendant to prove that the correct balance has in fact been struck between the competing interests in his or her case. Nevertheless, as seen in Marcic above, the burden is on the defendant, and it will not necessarily be an easy task to convince the court that the interference has a legitimate purpose and is a necessary and proportionate response.116

Horizontal effect Finally, there remains the difficult question of horizontal effect. This factor will have an important role in determining the extent to which the Act will be able to challenge existing common law principles. Section 6 clearly states that ‘it is unlawful for a public authority to act in a way which is incompatible with a Convention right’. The term ‘public authority’ is only partially defined in the Act.117 It is uncontroversial that it will include statutory undertakers such as Thames Water in Marcic and local authorities, but the question remains whether it will be confined to this limited number of defendants. If, as has been suggested by a number of academics, the Act imposes a duty on courts, as ‘public authorities’, to give judgment in a ‘convention-compliant’ manner, its impact

115 The Commission additionally rejected the claim under Article 14, on the basis that there were no other persons in ‘relevantly’ similar situations to the applicants. 116 See, generally, Feldman op cit pp 536–42. A Garwood-Gowers, ‘Improving protection against indirect interference with the use and enjoyment of home: Challenging the legacy of Hunter v Canary Wharf using the European Convention on Human Rights and Human Rights Act 1998’(2002) 11 Nott LJ 1, 10–11 suggests that it is unlikely that the courts would permit defendants to justify the position taken in Hunter. Note also the ruling of the European Court of Human Rights in Hatton v UK (2002) 34 EHRR 1, where the court adopted a more interventionist approach towards claims under Article 8—claim for nuisance by local residents caused by night flights to and from Heathrow airport (compare with Powell and Rayner v UK (1990) 12 EHRR 355). The British Government has since sought to refer this case to the Grand Chamber of the European Court of Human Rights: [2002] JPL 285. 117 See section 6(3): ‘In this section “public authority” includes—(a) a court or tribunal, and (b) any person certain of whose functions are functions of a public nature [see also section 6(5)], but does not include either House of Parliament or a person exercising functions in connection with proceedings in Parliament.’ ‘Parliament’ does not include the House of Lords in its judicial capacity: section 6(4). Generally, see Feldman op cit 95–98. 118 Counsel for the defendants accepted that for the purposes of his striking out application, the court should proceed on the basis that the court should develop the law to be Convention-compliant. 119 There is extensive academic research in this field, but of particular note are the works of: HWR Wade, ‘The United Kingdom’s Bill of Rights’ in J Beatson, C Forsyth and I Hare, Constitutional Reform in the United Kingdom: Practice and Principles (Hart, 1998) pp 62–64 and ‘Horizons of horizontality’ (2000) 116 LQR 217 (supported recently by J Morgan, ‘Questioning the “true effect” of the Human Rights Act’ (2002) 22 LS 259), M Hunt, ‘The “horizontal effect” of the Human Rights Act’ [1998] PL 423 and G Phillipson. ‘The Human Rights Act, “horizontal effect” and the common law: a bang or a whimper?’ (1999) 62 MLR 824. Whilst the former argues for direct horizontal effect, the other two authors argue for strong and weak indirect horizontality respectively. For an opposing view see R Buxton, ‘The Human Rights Act and private law’ (2000) 116 LQR 48.

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will be significant. Not only will the Act apply to public bodies, but will influence, to a greater or lesser extent, judgments involving all defendants. It must be stated that this question has yet to be resolved. The point was not argued in McKenna118 and there is an ongoing academic debate as to the effect of the Act on actions between private individuals.119 However, recent case law suggests that the courts are moving towards acceptance of at least indirect horizontal effect, that is, that the law should be interpreted in a manner compatible with Convention rights.120 For example, in the well-known Court of Appeal decision in Douglas and Others v Hello! Ltd,121 Keene LJ remarked that: Since the coming into force of the Human Rights Act 1998, the courts as a public authority cannot act in a way which is incompatible with a Convention right: section 6(1).That arguably includes their activity in interpreting and developing the common law, even where no public authority is a party to the litigation.122

Dame Elizabeth Butler-Sloss P in Venables v News Group Newspapers Ltd123 gave further support to this view, commenting that ‘[t]he duty on the court, in my view, is to act compatibly with Convention rights in adjudicating upon existing common law causes of action’. On this basis, it seems likely that the courts will accept that the Act will have an impact even in litigation involving two private individuals. In view of the clear conflict between Convention principles and the House of Lords ruling in Hunter v Canary Wharf, it would appear that it will only be a matter of time before courts face a concerted attempt to overcome the proprietary interest requirement in this case.

CONCLUSIONS In view of the above analysis, it would appear inevitable that, despite the traditional relationship between property and tort law and the certainty and predictability this provides, the law relating to torts protecting property interests will be subject to change. Marcic and McKenna both suggest that a challenge to the rules confining claims to those with proprietary or possessory interests in land is imminent. To those critical of the historical approach adopted by their Lordships in Hunter, this opens an obvious window of opportunity. The courts will be faced with a choice between the strict proprietary roots of the torts and the social concerns of the Human Rights Act 1998. It remains to be seen whether McKenna and Marcic provide the forum for reform. It is unclear whether the former will go to full trial, and the latter is likely to be appealed on the basis of private nuisance. Nevertheless, both cases highlight the impact of the Act in this area of law and that, in view of the previous section, the current legal position is likely to have to change, subject only to the ability of the defendant to justify any interference caused.

120 The difference between strong and weak indirect horizontality lies in whether the court has a duty or merely a power to interpret the common law in a Convention-compliant manner. 121 [2001] QB 967. See A Young, ‘Remedial and substantive horizontality: the common law and Douglas v Hello! Ltd’ [2002] PL 232. 122 Supra at 1011. 123 [2001] 2 WLR 1038, 1049. See also Lord Woolf CJ in A v B plc [2003] QB 195, 202: ‘under section 6 of the 1998 Act, the court, as a public authority, is required not to act “in a way which is incompatible with a Convention right”. The court is able to achieve this [in this case] by absorbing the rights which Articles 8 and 10 protect into the long-established action for breach of confidence’ and dicta in R v Lambert [2002] 2 AC 545, notably Lord Hope at para 114. 124 Supra at 714.

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Lord Cooke, dissenting in Hunter in 1997, stated that: ‘[Article 8 is] aimed, in part, at protecting the home and [is] construed to give protection against nuisances… The protection is regarded as going beyond possession or property rights.’124 At the time of the ruling, his Lordship was in the minority and was the only judge in the case to consider English law in terms of international conventions. As Jane Wright stated in her recent study of the impact of the 1998 Act on English tort law: ‘it is time for English law to move beyond the straitjacket of the forms of action, so that the boundaries of private nuisance are determined by the link with one’s home.’125 The 21st century may thus mark the severing of the link between property torts and land law with the result that it is the torts protecting property interests which are finally being ‘brought home’.126

125 Tort Law and Human Rights (Hart, 2001), 194. 126 The phrase derives from the Labour Party Consultation Paper published in December 1996 entitled Bringing Rights Home: Labour’s Plans to Incorporate the European Convention on Human Rights into UK Law. Following the 1997 election, this was followed in the same year by a White Paper entitled Rights Brought Home: The Human Rights Bill (Cm 3782).

Chapter 4 Property and contract: where are we? David Pearce1

INTRODUCTION This chapter undertakes an examination of proprietary and contractual rights, with particular reference to, first, the claim that the concept of property is disintegrating and, second, the idea that English law generally recognises a duty to perform a contract. The two principal conclusions which are drawn are: first, that the division between property rights and contract rights at the primary level, particularly in terms of amenability to specific relief, remains as stark as ever; and, second, that at the secondary level the division between the two categories of rights is being broken down by a broader process of assimilation of remedial rights. At one level, property and contract are the same: proprietary and personal rights can both be conceived of as constituting assets. On another level, property and contract are distinct: the former equates to owning something, the latter to being owed something. For lawyers, English lawyers at any rate, it is the differences between the two concepts which loom largest.2 The aim of this chapter is to examine the extent to which these differences remain. That examination is carried out with particular reference to two ideas, one relating to property rights, the other to contract. The former is that the concept of property is disintegrating. The second is that English law really does recognise a duty to perform a contract, that pacta sunt servanda. Both these ideas are considered in the light of academic writing and court decisions. The first part considers the concept of property rights. It begins by outlining the traditional view of property rights as rights to things, and then examines the two principal factors which have undermined this conventional approach. The first of these is that property rights are merely bundles of personal rights. The second is that the proliferation of property interests has rendered the broader concept incoherent. The conclusion which is reached, however, is that talk of the ‘demise of property’ is misplaced, and that property as a concept is not dying but thriving. The second part considers contractual rights and aims to establish the extent to which a contract confers on each party a right to receive the actual performance promised by the other. In particular, reference is made to the sceptical view advocated by Holmes to the effect that the primary right in contract is largely devoid of substantive legal content, that parties generally are not required to render the performance promised, merely to compensate for loss caused. While the

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I would like to thank Alastair Hudson for his help and patience in the preparation of this chapter and for giving me the opportunity to present an earlier version at the WG Hart workshop. Thanks are also due to David Campbell, Michael Cardwell, Peter Jaffey, Horton Rogers, Geoffrey Samuel and Andrew Tettenborn. Sadly, all errors etc are my own. ‘English law sharply distinguishes property rights from mere personal rights…’: Goode, ‘Ownership and obligation in commercial transactions’ (1987) 103 LQR 433. Generally, see Birks, ‘Introduction’ in Birks (ed), English Private Law (Oxford: OUP, 2000) (hereafter English Private Law) Vol 1 xxxviii; Birks, ‘Before we begin: Five keys to land law’ in Bright and Dewar (eds), Land Law: Themes and Perspectives (Oxford: OUP, 1998) (hereafter Birks, ‘Five keys’) 457; Birks, ‘Rights, wrongs, and remedies’ (2000) 20 OJLS 1; and Samuel, ‘Property notions in the law of obligations’ [1994] CLJ 524.

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sceptical approach has generally been rejected, it is argued that it is both consistent with much of modern contract theory and vindicated by recent case law. On the basis of the preceding discussion, the third section begins with the conclusion that at the level of primary rights, the division between property and contract remains as stark as ever. The argument is then put forward that private law rights are, nevertheless, undergoing a process of assimilation, albeit at the secondary level. The claim made is that, once the claimant establishes his entitlement to a remedy, the courts appear increasingly willing to play down the precise taxonomy of the primary right in order to achieve practical justice. In this way, a claim for breach of contract may attract a remedy more usually associated with one based on interference with property rights.

PROPERTY RIGHTS Roman law recognised two separate types of action—actions in rem and actions in personam. In the former action the claimant would assert ownership of a thing.3 In the latter action the claim would be directed primarily against the defendant personally. Whereas the Roman lawyer tended to think in terms of actions, his modern counterpart sees the law in terms of rights and duties.4 While modern law has retained the dichotomy of in rem and in personam, the distinction has been transposed to the concepts of rights and duties.5 The right in rem becomes a right in, to, or over, a thing which is available against persons generally and the right in personam one available against a specific person or persons. According to this formulation, then, the difference inherent in the division between property and obligation is as to the nature of the jural relation. The law of property primarily concerns a person’s relation in, to, or over, a thing. The law of obligations primarily concerns a person’s relations with another person. Corbin tells us that there ‘can be no such thing as a legal relation between a person and a thing’.6 So how did the view that such a relation could exist come about? According to

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Thus the formula of the vindicatio action went as follows: ‘If it appears that the thing in question belongs to the claimant at civil law, then unless at the direction of the judge the defendant restores the thing, let the judge condemn the defendant to pay the value of it to the claimant. If it does not so appear, let the judge absolve the defendant.’ Generally, see Nicholas, An Introduction to Roman Law (Oxford: OUP, 1962) 101. Ibid, 100. ‘The law of property is the law of proprietary rights and the law of obligations is the law of personal rights.’ Birks, ‘Introduction’ in English Private Law, Vol 1 xxxix. In this chapter, save where the context otherwise requires, in relation to rights the terms ‘contractual’ and ‘personal’ are treated as synonymous and used interchangeably. Tuck identifies Johannes Bassianus, writing at the end of the 12th century, and the teacher of Azo, as the source of the modern division of rights into rights in rem and in personam (see Tuck, Natural Rights Theories (Cambridge: CUP, 1981) 14). It is probably the case, although it may not be widely accepted as such, that the concepts of rights in rem and in personam are best confined to legal, as opposed to equitable, rights: see, eg, Hohfeld, Fundamental Legal Conceptions (New Haven: Yale University Press) (hereafter Hohfeld) 23, citing Bacon and Coke, and Maitland, Equity, 2nd edn (London: CUP, 1936) 115–16. No distinction is drawn in this chapter between legal and equitable rights in this context. Corbin, ‘Legal analysis and terminology’ (1919–20) 29 Yale LJ 165. In his study of the Roman concept of obligations. The two-volume work has been largely ignored by lawyers and has not been translated into English (although an extract is contained in Hagerstrom, Inquiries into the Nature of Law and Morals, Olivecrona (ed), Broad (trans) (Stockholm: Almqvist & Wiksell, 1953)). Hagerstrom’s approach is described and discussed in Ross, Towards a Realistic Jurisprudence (Copenhagen: Einar Munskgaard, 1946) (hereafter Ross).

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Hagerstrom,7 to understand primitive Roman attitudes to law one must relinquish the more modern ideas based on law as a series of commands. For, to the early Roman: …the law is a world of invisible supersensual, but therefore no less real forces, which in the literal sense of the word ‘bind’ or ‘dominate’ things and persons. These legal forces may be adjured by means of magico-ritual acts for the benefit of certain persons who by this means obtain a dominion, a power, the source of which is, indeed, outside the individual himself and his physical nature and therefore is a legal, not a natural dominion.8

A real right, then, to a Roman is an ‘independent mystical legal dominion over a thing not due to compulsory execution conditioned by process’.9 Hagerstrom’s views as to the nature of legal rights in primitive legal systems are consistent with those of various anthropologists.10 It is Ross’s view11 that the concept of real rights has remained unaltered from the days of Roman law until now. When the study of Roman law began to flourish in Europe in the 12th and 13th centuries, the glossators were able, Ross says,12 to accept the Roman concept of immediate legal control of an object without difficulty. This view was facilitated by the development of actual powers of recovery and execution. It is in the late 12th century that we first meet the term ius in re.13 From there through to the 19th century and to date, Ross says, real rights have persisted as rights existing directly between a person and a thing.14 But despite its clear intuitive appeal and utility as an expository tool, this view of property has been overtaken as the paradigm perspective by what is generally termed the ‘bundle of rights’ approach.This change may be linked to the perceived strength of at least two claims. The first is the claim that a property right is not a right in, to or over, a thing, but rather is a relation or set of relations between persons concerning a thing. The second is that the proliferation in scope of so called proprietary interests has fatally undermined the coherence of property as a concept. Property as a concept is said to be disintegrating.

Property as bundles of personal rights The first idea is generally regarded as stemming from Hohfeld’s analysis of the nature of rights and duties generally and of rights and duties in rem and in personam15 in particular. Hohfeld considers a right in personam as a claim availing against a single person whereas a right in rem is always one

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Ross, 217. Ibid, 219. See, eg, Mauss, The Gift (London: Routledge, 2002) 15, 63–64, 83–85; Hoebel, The Law of Primitive Man (Cambridge, MA: Harvard University Press, 1967) 260–61, 274; and Malinowski, Crime and Custom in Savage Society (Totowa, New Jersey: Littlefield, Adams & Co, 1972) 86. Ross, 256. Ibid, 245. See fn 5 supra. Ross, 252. Thus Pothier, in his Traité de Droit et du Domaine de Propriété, writes of ‘le droit que nous avons dans une chose, qu’on appelle jus in re’ (see ibid, 247). Similarly, Article 544 of the Code Civil states that ‘propriété est le droit de jouir et disposer des choses de la manière la plus absolue…’. Which Hohfeld preferred to call ‘multital’ and ‘paucital’ rights respectively; Hohfeld, 67. Ibid, 72.

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of a large class of fundamentally similar yet separate rights availing respectively against persons constituting a very large and indefinite class of people.16 Thus, if Bowes A £1,000, then A has a right in personam that B shall do what is necessary to transfer to A the legal ownership of that amount of money. By contrast, if A owns and occupies Blackacre, not only B but also a great many other persons are under a duty not to enter A’s land.17 Hohfeld goes on to stress that a right in rem is not a right ‘against a thing’: to think otherwise is simply ‘crude and fallacious’.18 He maintains: A man may indeed sustain close and beneficial physical relations to a given physical thing: he may physically control and use such thing, and he may physically exclude others from any similar control or enjoyment. But, obviously, such purely physical relations could as well exist quite apart from, or occasionally in spite of, the law of organised society: physical relations are wholly distinct from jural relations.19

Hohfeld cites with approval the statement of Holmes that all ‘proceedings, like all rights, are really against persons. Whether they are proceedings or rights in rem depends on the number of persons affected’.20 He also endorses Austin’s statement that the ‘phrase in rem denotes the compass, and not the subject of the right. It denotes that the right in question avails against persons generally; and not that the right in question is a right over a thing…’.21 Hohfeld’s work is taken as the startingpoint for the ‘bundle of rights’ view of property. That is, the view that my ownership of a book should not be viewed as comprising rights in the book, but as consisting of a series of separate rights which I hold against all others generally, each of whom owes me correlative duties. Even those who doubt the utility of the bundle of rights approach accept that the ‘prevalence of the paradigm is undeniable’.22 Further, there is some evidence of its impact on judicial reasoning. The defendants in R v Preddy23 had obtained mortgage advances from building societies by means of applications containing false statements, and each was convicted at trial of obtaining property by deception, contrary to s 15(1) of the Theft Act 1968. The issue before the House of Lords was whether the defendants obtained ‘property of another’ as specified by the Act. Did the debiting of the building societies’ bank accounts and the corresponding crediting of the defendants’ accounts amount to a transfer or appropriation of the building societies’ monies? In a ‘bombshell’24 decision, the House of Lords held not and quashed the convictions. Lord Goff, with whom the other members of the Appellate Committee agreed, ruled that the defendants had not obtained the

17 18 19 20 21 22 23 24 25 26

Ibid, 73. Ibid, 74. Ibid, 75 (emphasis in the original). (1900) 175 Mass, 71, 76 (emphasis is Hohfeld’s). See Hohfeld, 82. Penner, ‘The “bundle of rights” picture of property’ (1996) 43 UCLA L Rev 711, 713. [1996] AC 815. R v Klineberg [1999] 1 Cr App R 427, 430 per Maurice Kay J. [1996] AC 815, 834. Ibid, 841. Lord Jauncey continued: When a sum of money leaves A’s account his chose in action quoad that sum is extinguished. When an equivalent sum is transferred to B’s account there is created in B a fresh chose in action being the right to demand payment of that sum from his bank…Thus although the borrower has acquired a chose in action quoad a sum of money of equal value to that which the lender had right, he has not acquired the property of the lender which was the latter’s right against his own bank.

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building societies’ choses in action when their own accounts were credited. ‘On the contrary, that chose in action is extinguished or reduced pro tanto, and a chose in action is brought into existence representing a debt in an equivalent sum owed by a different bank to the defendant.’25 Lord Jauncey said that viewing the defendants as obtaining property of the building societies would be to ‘adopt a simplistic approach ignoring the nature of the precise transactions which are involved’.26 The House of Lords in Preddy ignored the superficial ‘propertiness’ of the dealings and adopted a strict analysis of the particular rights and duties involved. This revealed a nexus of personal rights and obligations; property had no role.27

Property as an incoherent concept The bundle of rights approach is not the only factor contributing to the supposed demise of property. A second feature is the idea that property has lost its coherence as a unifying concept. Cotterrell has described the heart of this ‘property is dead’ claim as ‘the assertion that the notion of “thing” ownership—the notion that property rights can be understood as rights against other persons in relation to things—has become incoherent and with it the basis of property itself, since so-called property rights now also exist in relation to benefits far too intangible or diffuse to be considered “things”’.28 In his article, The Disintegration of Property,29 Grey argues that property rights ‘cannot any longer be characterised as…“rights in things”’ given that ‘most property in a modern capitalist economy is intangible’.30 Grey lists some of the common forms of modern wealth: ‘shares of stock in corporations, bonds, various kinds of commercial paper, bank accounts, insurance policies—not to mention more arcane intangibles such as trade marks, patents, copyrights, franchises, and business goodwill.’31 The concept of property has, he argues, collapsed. Such a collapse, he continues, can best be understood as a process internal to the development of capitalism itself. ‘Proprietors subdivide and recombine the bundles of rights that make up their original ownership, creating by private agreement the complex of elaborate and abstract economic institutions and claims characteristic of industrial capitalism, particularly the financial institutions and the industrial corporations.’32 The role of the state has largely been reduced by this process, Grey claims, to that of enforcer of private agreements. In his earlier article, Reich similarly drew attention to the disparate forms of wealth in the modern western economy, in particular, the role played by ‘government largess’ in the form of welfare benefits, jobs, contracts, licenses, franchises, and subsidies. But government largess was ‘only one small corner of a far vaster problem. There are many other new forms of

27 28 29 30 31 32 33 34

A similar approach was adopted in an earlier reference to the Court of Appeal by the Attorney General (Attorney General’s Reference (No 1 of 1985) [1986] QB 491). Cotterrell, ‘The law of property and legal theory’ in Twining (ed), Legal Theory and Common Law (Oxford: Blackwell, 1986) (hereafter Cotterrell) 81, 86–87. In Pennock and Chapman (eds), Property: Nomos XII (New York: New York University Press, 1980) 69. Ibid, 70–71. Ibid, 70. Ibid, 75. Reich, ‘The new property’ (1964) 73 Yale LJ 733 (hereafter Reich), 786. Cotterrell, 86.

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wealth: franchises in private business, equities in corporations, the right to receive privately furnished utilities and services, status in private organizations’.33 As Cotterrell notes, Reich’s article argued not that these new forms of wealth ‘should be recognized as giving rise to rights and duties of the same nature as those associated with traditional forms of private property, but that their modern importance showed the inadequacy of existing conceptualizations’; 34 hence Reich’s impassioned call for a new property which would ensure ‘that the wealth which results from government largess confers upon its recipients an independence equivalent to that which private property possesses’.35 Other writers, though, have sought to attach ‘property solutions’ to rights which are not proprietary in the traditional sense. Harris notes the extended concept of property employed by economists, that ‘all rights are property rights’.36 He also refers to writing on constitutional law. He notes that the US Supreme Court has given a broad interpretation of property as contained in the 14th Amendment to the Constitution, so as to prevent the state depriving citizens of the right to welfare payments without due process of law.37 Writers such as Ackerman argue for a similar, if not wider, interpretation of the fifth amendment—the so-called ‘just takings’ clause. Following Ackerman’s line, Harris argues, would entail takings problems on laws relating to narcotics, gun-law and speeding.38 Where does this leave the property right? Might one not plausibly conclude that property is in some sort of crisis, that it is suffering ‘from a distinct collapse of self-esteem’, that it has become ‘a quivering, wavering, normative phantasm, without any home, without anything to call [its] own but an album full of fading and tattered images of vitality and consequence and meaning’?39

Property is not dying… There is, of course, no crisis; property is not dying, but thriving. That talk of property’s demise is misplaced is suggested by at least five factors. First, as Friedmann has noted, it ‘has always been inherent in the common law concept of property…[that] property is not confined to the control of “things”, but extended to the whole field of legitimate economic interests and expectations’.40 As

35

36 37 38 39 40 41

Harris, Property and Justice (Oxford: OUP, 1996) (hereafter Harris) 150. Reich concludes his article with the following plea: ‘If the individual is to survive in a collective society, he must have protection against its ruthless pressures. There must be sanctuaries or enclaves where no majority can reach. To shelter the solitary human spirit does not merely make possible the fulfillment of individuals; it also gives society the power to change, to grow, and to regenerate, and hence to endure. These were the objects which property sought to achieve, and can no longer achieve. The challenge of the future will be to construct, for the society that is coming, institutions and laws to carry on this work…We must create a new property.’ Reich, 787. Harris, 146. Ibid, 152. Ibid, 154. Penner, The Idea of Property in Law (Oxford: OUP, 2000) (hereafter Penner) 1. Cited in Cotterrell, 87. Ibid. Cotterrell quotes Pollock and Maitland (The History of English Law (Cambridge: CUP, 1968)): the ‘realm of medieval law is rich with incorporeal things. Any permanent right which is of a transferable nature, at all events if it has what we may call a territorial ambit, is thought of as a thing that is very like a piece of land’ (ibid).

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Cotterrell comments, ‘it seems clear that English law has for centuries been thoroughly familiar with the notion that the most abstract of entitlements can be encompassed by property law’.41 Kohler also dismisses the argument that the intangible nature of much of what constitutes property is fatal to the coherence of the property concept. ‘As Bentham noted our habit of referring to “a man’s property” rather than “the object of a man’s property” has conflated the object with the property and resulted in our focusing on the thing rather than the rights in the thing. Once one accepts that all property is intangible it does not much matter whether the thing which is the subject of that property is intangible too…’42 Nor, it is submitted, does the popularity of contractual vehicles for the creation and distribution of wealth, of itself, undermine the concept of property:43 there is no indication that the key characteristics of property rights, in terms of impact on third parties, amenability to specific relief, and immunity to insolvency, have been affected. Second, the concept of property must be placed in its proper context within English law. Swadling, having noted the use of the term ‘ownership’ to describe that right ‘which gives its holder the highest degree of access and control’,44 concedes that the ‘concept of ownership is redundant in English property law’.45 English law has no equivalent of the vindicatio.46 So while Roman law required a claimant to demonstrate that the relevant thing belonged to him, English law remains satisfied with proof merely that the claimant had the thing in his possession at the relevant time. Rather than going to the trouble of formulating a set of full-blooded property principles, the common law was content to rely on the resourcefulness of the Chancery court to provide adequate remedies to particular types of problem.47 But this policy of according primacy to remedies over substantive rights, of promoting possession over ownership, can lead to the occasional counter-intuitive outcome.48 And while a right in property may be conceived as a right of dominion, of control over a thing, English law has long regarded the essence of a property right as alienability. Thus Lord Upjohn noted that it has been ‘the policy of the law for over a hundred years to simplify and facilitate transactions in real property’.49 Such policy underlay the 1925 legislation and has continued with the Land Registration Act 2002. And while the concept of proprietary rights remains of great significance in, say, insolvency law, it is probably fair to say that

42 43 44 45 46 47

48

49 50 51

Kohler, ‘The death of ownership and the demise of property’ (2000) 53 CLP 237 (hereafter Kohler), 240. A point which Reich appears to acknowledge. Swadling, ‘Property: general principles’ in English Private Law, Vol 1, 218. Ibid. Ibid, 219. As Maine notes, the ‘Court of Chancery created a special proprietorship for the Mortgagor, for the Cestui que Trust, for the Married Woman who had the advantage of a particular kind of settlement, and for the purchaser who had not yet acquired a complete legal ownership.’ Maine, Ancient Law, 3rd edn (London: J Murray, 1866) 294. So in Costello v Chief Constable of Derbyshire Constabulary [2001] 1 WLR 1437 the claimant was in possession of a stolen car which, at all relevant times, he knew to be stolen. The police lawfully seized the car pursuant to statutory powers but were unable to trace the rightful owner. The Court of Appeal held that possession, whether obtained lawfully or not, vested in the claimant a possessory title good against the world save as against anyone setting up or claiming under a better title. The claimant was thus entitled to an order for the delivery up of the vehicle and damages for its wrongful detention. Mere possession of stolen property ‘remains a title to which the law affords protection’ (per Lightman J at 1450). National Provincial Bank Ltd v Ainsworth [1965] AC 1175, 1233 per Lord Upjohn. See the 5th and 14th Amendments to the US constitution and related case law. Pound, The Spirit of the Common Law (Boston: Beacon Press, 1963) (hereafter Pound), 21.

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the concept in the UK has, to date, lacked the constitutional significance it holds elsewhere, for example in the US.50 This apparent half-heartedness towards property may reflect some relational strain from the feudalist past. Roscoe Pound refers to the ‘central idea’ of relation, which pervades English law, and is, according to Pound, a legacy of feudal law.51 Thus the feudal tenant may be viewed not so much as owning rights in land, but rather as being a party to a relation with consequent rights and duties. Milsom notes that ‘we have imagined seignorial courts in the 12th century as dealing in rights in rem, rights good against the world. But rights cannot be good against a seignorial world, only against a Roman or a modern world’.52 Thus as between lord and tenant ‘proprietary language is out of place. There is a relationship of reciprocal obligations… The appropriate language is that of obligation’.53 Whereas the Roman lawyer speaks of a letting and hiring of land, his English counterpart speaks of the relation of landlord and tenant.54 The third factor critical to an accurate portrayal of property involves a brief return to Hohfeld. Portraying Hohfeld as ‘de-proprietising’ property is, it is submitted, too simplistic. Hohfeld’s principal concern is to elucidate the proper meaning of legal terms, a task made no easier by the ‘ambiguity and looseness’55 of legal language. The term ‘property’, he notes, is sometimes employed to indicate the physical object to which rights relate, and sometimes, and with ‘far greater discrimination and accuracy’ the legal interest appertaining to the object. This last statement hints at what, it is submitted, is Hohfeld’s true view: that, while it is vital to bear in mind that property rights can only operate as between persons, it is legitimate and helpful to view them in the context of the object or thing to which they relate.56 The fourth point to be borne in mind is that while R v Preddy may demonstrate the influence of the bundle of rights view on judicial approaches within the criminal law, it is unclear whether that influence extends so readily to private rights. In Agip (Africa) Ltd v Jackson57 the claimant company, Agip, was the victim of a fraud whereby monies were paid out of its bank account with Banque du Sud to unauthorised recipients. Unlike the House of Lords in Preddy, the Court of Appeal very much focused on the ‘propertiness’ of the various transactions. While noting that ‘[n]othing passes

52 53

54 55 56

57 58 59 60

Milsom, The Legal Framework of English Feudalism (Cambridge: CUP, 1976) 37. Ibid, 39. One, albeit unintended, consequence of the introduction of the assize of novel disseisin was that it precipitated ‘a movement from a world in which the central concept was one of reciprocal obligations, to one in which lord and tenant were conceived of as independently holding property rights good against the world’: Simpson, A History of the Land Law, 2nd edn (Oxford: OUP, 1986) (hereafter Simpson, Land Law) 71 (emphasis in the original). Pound, 22. Hohfeld, 28. Thus Hohfeld endorses Austin’s statement that ‘[p]roperty is the right of any person to possess, use, enjoy, and dispose of a thing’ and Pothier’s use of the terms rights in re and ad rem: ‘[a] ius in re is a right, or property in a thing, valid as against all mankind. A ius ad rem is a valid claim on one or more persons to do something, by force of which a ius in re will be acquired’ (ibid, 29, 87). [1991] Ch 547. Ibid, 56l. Ibid. Ibid. Fox LJ endorsed the view of Millett J at first instance that ‘the fact remains that the Banque du Sud paid out the plaintiff’s money and not its own’ (ibid, 561).

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in specie’,58 Fox LJ thought that ‘[i]n practical terms the Banque du Sud paid with Agip’s money…the substance of the matter was that money standing to the credit of Agip’s account was paid to a third party in accordance with the order…’.59 That Banque du Sud paid with its own funds ‘while true as far as it goes, only tells half the story… The reality is payment by the customer’.60 The fifth and final factor is the level of academic output advocating more conventional approaches to property. In his seminal analysis of the incidents of ownership, Honoré sets out ‘those legal rights, duties, and other incidents which apply, in the ordinary case, to the person who has the greatest interest in a thing admitted by a mature legal system’.61 Of the 11 incidents which Honoré cites,62 it is the right to possession, the right to have exclusive physical control of a thing, or to have such control as the nature of the thing permits, which is ‘the foundation on which the whole superstructure of ownership rests’.63 It is clear that Honoré, himself, does not see his work as belonging to the bundle of rights school from his observation that, had he adopted the ‘fashion’64 of treating ownership in that way, at least two of his 11 incidents would have had to be dropped.65 Later, he criticises as ‘facile’66 the conclusion reached by some writers that obligatio has swallowed up res. Clearest of all is his conclusion that ownership ‘is not just a bundle of rights, and it is no help towards understanding our society to speak as if it were’.67 More recently, in The Idea of Property in Law, Penner defends the view that ‘property is what the average citizen, free of the entanglements of legal philosophy, thinks it is: the right to a thing’.68 He purposely seeks to preserve an identity for the notion of property which the bundle of rights view discards.69 In Property and Justice, while accepting that there ‘is no uniquely correct meaning of the word “property”’,70 Harris offers a definition which ‘roughly tracks a wide range of conventional property talk’.71 In Entitlement,72 while Singer argues that an alternative is needed to the bundle of rights and the conventional models, his principal concern is that the core concept of property must not ignore the reality that owners have obligations and not just rights.73 His alternative, while proposing additions, may be seen as leaving largely intact the ‘property as thing’ model.74

61 62 63 64 65 66 67 68 69

70 71 72 73 74

Honoré, ‘Ownership’ reprinted in Honoré, Making Law Bind (Oxford: OUP, 1987) 161. These are: the right to possess; the right to use; the right to manage; the right to income; the right to capital; the right to security; the rights or incidents of transmissibility and absence of term; the duty to prevent harm; liability to execution; and the incident of residuarity. See ibid, 165. Ibid, 166. Ibid, 165. Ibid, 166. Ibid, 169. Ibid, 184. Penner, 2. Ibid. Later Penner proposes the following definition of property: ‘the right to determine the use or disposition of a separable thing (ie, a thing whose contingent association with any particular person is essentially impersonal and so imports nothing of normative consequence), in so far as that can be achieved or aided by others excluding themselves from it, and includes the rights to abandon it, to share it, to license it to others (either exclusively or not), and to give it to others in its entirety’ (ibid, 52). Harris, 139. Ibid. Singer, Entitlement the Paradoxes of Property (New Haven:Yale University Press, 2000). See ibid, 13–18. See also Birks, ‘Five keys’.

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…but thriving Once the factors outlined above are borne in mind, it is clear that the concept of property is not only alive,75 but thriving. Take intellectual property as an example. The decision of the House of Lords in the Designers Guild case76 calls into question the continuing validity of the principle that copyright extends to ‘expressions and not to ideas’.77 The case concerned infringement of copyright in the claimant’s fabric designs. The Court of Appeal concluded that the defendant’s design had not involved the copying of a substantial part of the claimants design as the two designs did not look sufficiently similar. The House of Lords allowed the claimant’s appeal. Lord Hoffmann observed that ‘copyright may be infringed by a work which does not reproduce a single sentence of the original. If one asks what is being protected in such a case, it is difficult to give any answer except that it is an idea expressed in the copyright work’.78 The Appellate Committee’s decision may be seen as according greater weight to the view that copyright represents a right to possession of an idea rather than to the more orthodox line that copyright is a monopoly right over an activity. Similar signs of development are evident in the law of trade marks. Section 1 of the Trade Marks Act 1994 enables a smell to be registered as a mark. Further, it may be that the European Court of Justice is prepared to countenance a broadening of the scope of trade mark protection in order to recognise commercial realities. Previously, it has shown ‘little inclination to accept invitations to view the trade mark right as a radically revised form of protection for any value which can be associated with the investment in the mark’.79 The recent opinion of the Advocate-General in the case of Arsenal Football Club plc v Reed80 shows signs of a possible shift in thinking: ‘[t]he trade mark acquires a life of its own, making a statement, as I have suggested, about quality, reputation and even, in certain cases, a way of seeing life…When I regard the current functioning of the market and the behaviour of the average consumer, I see no reason whatever not to protect those other functions of the trade mark and to safeguard only the function of indicating the trade origin of the goods and services.’81 The internet provides an obvious testing ground for the development of ideas of property. One case of note is that of eBay Inc v Bidder’s Edge Inc.82 Bidder’s Edge provided information, via its website, on items being auctioned on different online auction sites, including that of eBay. A California district court granted a preliminary injunction preventing Bidder’s Edge from obtaining

75 76 77

78 79 80

81 82

See, eg, the decision in Foskett v McKeown [2001] 1 AC 102, 109 where the House of Lords, said Lord Browne-Wilkinson, was ‘not dealing with a claim in unjust enrichment’ but ‘a case of hard-nosed property rights’. Designers Guild v Russell Williams (Textiles) Ltd [2000] 1 WLR 2416. See Article 9.2 of the TRIPS agreement, to which the UK is a signatory. Cf ‘[copyright is a right] against copying, not against independent creation, and it concerns the way in which ideas are expressed in a work, rather than the idea or concept which lies behind it’, Cornish, ‘Intellectual property’ in English Private Law, Vol 1, 483. [2000] 1 WLR 2416, 2422. Cornish, ‘Intellectual property’ in English Private Law, Vol 1, 506. Opinion of Advocate General Ruiz-Jarabo Colomer, 13 June 2002. In its judgment the court confirmed that the club’s trade marks had been infringed. The judgment may mark something of a retreat from the Advocate General’s opinion (see, eg, Financial Times 13 November 2002, p 6). See also the subsequent judgment of Laddie J, Arsenal Football Club plc v Reed EWHC 2695 Ch 12 December 2002. Case C-206/01, paras 46–47 (footnotes omitted). 100 F Supp 2d 1058 (ND Cal 2000). For a commentary see O’Rourke, ‘Property rights and competition on the internet: In search of an appropriate analogy’, 16 Berkeley Tech LJ, 561.

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data from the eBay site without eBay’s consent. One argument put forward by eBay83 was that Bidder’s Edge had committed trespass against eBay’s personal property, by accessing without consent. The court accepted eBay’s argument that the unauthorised automated access to its computer systems obtained by Bidder’s Edge constituted trespass.84 Another area of development arises from the proposal by the UK Human Genetics Commission for legislation to make the obtaining, without consent, of a person’s DNA to carry out genetic tests a criminal offence. The proposal follows a high-profile US case in which it was alleged that private detectives had removed used dental floss from an individual’s household rubbish for use in a paternity test. As Bridge notes, the ‘likely future is one of increasing incremental acceptance, by statute or at common law, of the idea that corpses, body parts, and tissue are property: “the common law does not stand still”’.85 Finally, mention may be made of a ‘type of property which is essentially the exclusive right to profit from one’s celebrity’.86 This comes from increasing awareness of the commercial value realisable from the exploitation of so-called image rights. While English law ‘does not make it easy for a celebrity to turn his or her personality into property’,87 Lawson and Rudden cite, as a possible pointer, the Personal Rights Protection Act 1984, enacted in the state of Tennessee. This provides that a person has a property right in the use of his name, photo, or likeness in any medium in any manner.88

Conclusion The demise of property can be seen as a simplistic slogan.89 The concept of property is highly complex and dynamic; as forms of wealth change, so will property. While ideas of property may evolve, it does not follow that the concept thereby loses its coherence. Properly understood,

83 84

See ibid, 579. Cf the following extract from an order in Ticketmoster Corp v Tickets.com Inc (No CV 99–7654, 2000 US Dist LEXIS 12987 dt (CD Cal 27 March 2000), 15–16): The computer is a piece of tangible personal property. It is operated by mysterious electronic impulses which did not exist when the law of trespass to chattels was developed, but the principles should not be too different. If the electronic impulses can do damage to the computer or to its function in a comparable way to taking a hammer to a piece of machinery, then it is no stretch to recognise that damage as trespass to chattels and provide a legal remedy for it. (Cited ibid, 580.)

85 86 87

88 89

Bridge, Personal Property Law, 3rd edn (Oxford: OUP, 2002) 4, citing Rose LJ in R v Kelly [1998] 3 All ER 741, 750. Lawson and Rudden, The Law of Property, 3rd edn (Oxford: OUP, 2002) (hereafter Lawson and Rudden) 42. Ibid. Cf ‘[I]t is quite easy to conceive arrangements under which a person could, for instance, lease his reputation or skill for a period of years, so that the lessee could sue for infringement of the lessor’s good name or for the fruits of his work.’ Honoré, 180. Somewhat paradoxically, the development of image rights as property may be facilitated by the developing right to privacy; see eg Douglas v Hello! Ltd [2001] QB 967, 1001 per Sedley LJ. See also Irvine v Talksport [2002] EWHC 367, Ch; [2002] 1 WLR 2355; [2003] EWCA Civ 423. Lawson and Rudden, 42. ‘“ Property is a bundle of rights” is little more than a slogan’: Penner, ‘The “bundle of rights” picture of property’ (1996) 43 UCLA L Rev 711, 714.

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property comprises ‘a normative set of relationships which might be attached to whatever subjectmatter society deems it necessary or beneficial to make the subject of property’.90 It is this aspect, that evolution does not equal dissolution, which, it is submitted, the demise of property argument fails adequately to recognise. Moreover, there is no indication that the key characteristics of property rights, their capacity to bind unwitting third parties, their amenability to specific relief, and their immunity to the consequences of insolvency, are threatened.

CONTRACTUAL RIGHTS Is there a duty to perform a contract? The key characteristics of property rights listed immediately above enable such rights to qualify as ‘strong’ legal rights. To what extent are contractual rights ‘strong’ rights? In considering this it may be helpful to divide contractual rights into primary and secondary rights. The primary right may be described as the right to receive the actual performance promised by the other party; the secondary, the right to receive compensation when the primary right is breached. When describing property rights as strong rights what is meant is that the primary proprietary right is strong. For example, it is the primary right which is vindicated by the remedy of specific relief. Taking this distinction into account, the previous question becomes, to what extent is the primary right in contract a strong right? One way in which the strength of the primary right in contract may be tested is to examine the extent to which a promisor is under a duty to render the performance actually promised or whether, in practice, the only obligation is to pay compensation in the event of failure to perform.91 Llewellyn, for one, believed that court decisions and legal writing have repeatedly been shaped by those who see primary rights ‘almost as things’.92 To these figures, the rights are almost real. Certainly there is authority to support the idea of a substantive duty to perform. In Cooper v Jarmon93 Lord Romilly MR thought that it could not be good law that an administrator be bound to break a contract merely to increase the size of the estate: The administrator has, in my opinion, a clear duty to perform. The moral duty is distinct. It is to perform the contract entered into by his intestate. The legal duty, in this instance, as I believe it is in all cases where it is fully understood and examined, is identical with the moral duty.94

Further support for the substantive nature of the primary norm can be drawn from the law of tort, in particular from cases concerning wrongful interference with a party’s pre-existing contractual

90 91 92 93 94

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Kohler, 243. Essentially, this inquiry seeks to determine the extent to which the primary right in contract is amenable to specific relief. Llewellyn, The Bramble Bush (New York: Oceana Publications, 1969) (hereafter Llewellyn) 83. (1866–67) 3 LR Eq 98. Similar authority can be found in the context of promises to marry. In Frost v Knight (1872) LR 7 Ex 111 in which the defendant retracted a promise to marry, Cockburn CJ stated that the ‘promisee has an inchoate right to the performance of the bargain, which becomes complete when the time for performance has arrived. In the meantime, he has a right to have the contract kept open as a subsisting and effective contract’. [1969] 2 Ch 106.

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rights. Torquay Hotel v Cousins95 established that the interference does not necessarily have to lead to a breach of contract. In that case the defendant union disrupted fuel supplies to the hotel with which the defendant’s members were in dispute. The contract between the hotel and the supplier contained a force majeure clause, meaning that the failure of supply did not amount to a breach of contract.96 The Court of Appeal granted the hotel an injunction prohibiting the union from interfering with performance of the contract. Lord Denning MR held that the interference did not have to amount to a contractual breach. Rather, the principle was applicable ‘where a third person prevents or hinders one party from performing his contract, even though it be not a breach’.97 The significance of the absence of a breach lies in the fact that the contractual rights which the court was protecting were necessarily primary rights. The Court of Appeal upheld the plaintiff’s primary right to receive performance and so the case stands as authority for the principle of a duty to perform a contract. While the decision of the Court of Appeal has been criticised,98 it was confirmed by the House of Lords in Merkur Island Shipping Corp v Laughton.99

The duty to perform—the Holmesian approach Llewellyn himself was more sceptical. To him, primary rights are not ‘things, not even shadowy things’: they are purposes the legal officials have set themselves.100 His approach echoes that of Oliver Wendell Holmes. It was the thrice-wounded civil war veteran and Supreme Court Justice who famously argued that the notion of a primary duty arises from a tendency to confuse legal and moral ideas, ‘to get the cart before the horse, and to consider the right or duty as something existing apart from and independent of the consequences of its breach, to which certain sanctions are added afterwards’.101 This confusion between legal and moral ideas is

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‘It is true that no breach by Alternative Fuels Ltd of any contract between that company and the company owning the Imperial Hotel in fact occurred.’ [1969] 2 Ch 106, 146 per Winn LJ. 97 Ibid, 138. 98 See, eg, Law Debenture Corp v Ural Caspian Ltd [1993] 1 WLR 138, 151, where Hoffmann LJ referred to this principle in Torquay as a ‘debatable extension’ of existing authority. 99 [1983] 2 AC 570. Another feature which would indicate that the primary norm is substantive in nature is the degree to which it is protected by injunctive relief and/or criminal sanctions. Hermann Loog v Bean (1884) 26 Ch D 306 and Puddephatt v Leith [1916] 1 Ch 200 are instances of the courts enforcing agreements by the granting of mandatory injunctions. As for criminal liability, a breach of contract can, albeit exceptionally, amount to a criminal offence. Treitel cites the cutting off of a tenant’s gas supply and an employer’s failure to pay his employee at a rate at least equivalent to that of the national minimum wage (see Treitel, The Law of Contract, 10th edn (London: Sweet & Maxwell, 1999) 864). A relevant statutory example is provided by s 49 of the Sale of Goods Act 1979. This applies where, in a contract for the sale of goods, property in the goods has passed to the buyer but the buyer refuses to pay the price. The section provides that the seller ‘may maintain an action against [the buyer] for the price of the goods’. What is significant about this section is that it entitles the seller to enforce his primary right to the price rather than his secondary right to damages. Thus the seller is able to realise his primary right, even though the right relates to a payment of a sum of money rather than the transfer of a piece of land. 100 Llewellyn, 84. 101 Holmes, ‘The path of the law’ (1897) 10 Harv LR 457 (hereafter Holmes) 458. 102 Ibid, 462.

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nowhere ‘more manifest than in the law of contract’. Among other things, Holmes wrote, ‘the so-called primary rights and duties are invested with a mystic significance beyond what can be assigned and explained’.102 Holmes believed that the ‘only universal consequence of a legally binding promise is, that the law makes the promisor pay damages if the promised event does not come to pass. In every case it leaves him free from interference until the time for fulfilment has gone by, and therefore free to break his contract if he chooses’.103 All that the duty to keep a contract at common law amounts to is a ‘prediction that you must pay damages if you do not keep it—and nothing else’.104 For Holmes this view is not merely academic theory, rather it represents the ‘common law point of view from the beginning’.105 He cites the decision of Lord Coke in Bromage v Genning.106 Here the covenantee brought an action in respect of the covenantor’s failure to grant a lease of certain land in accordance with their prior agreement. Lord Coke ruled that it would subvert the intention of the covenantor for the court to order specific performance of the covenant to grant the lease, for the covenantor intended to reserve the right to ‘perder les damages ou a faire le lease’.107 Holmes’s assertion that the decision merely reflected existing law is given some support by the confession of the covenantee’s counsel that he moved the matter ‘encontre son conscience’.108

The duty to perform—academic approaches Holmes’s views have been nearly universally rejected, ‘regarded by virtually all as a brilliant but wholly unsound paradox’.109 Despite this, it is submitted that Holmes provides a broadly accurate account of the primary right in contract. Not only are his views consistent with much of modern contract theory, they are also in line with the leading authorities. Turning to academic writing the

103 Holmes, The Common Law (ed Howe) (Cambridge, MA: Belknap Press, 1963) 236. Cf Holmes’s subsequent admission: ‘I agree that in one sense it is not desirable to express the position of a contractor as I expressed it. Of course it is not the theory of the common law that he has an option. I dare say that it even might be proper to describe a breach as illegal…’ (Cited in Howe, Justice Oliver Wendell Holmes: the Proving Years (Cambridge, MA: Belknap Press, 1963) (hereafter Howe) 237.) 104 Holmes, 462. Similarly sceptical are the Scandinavian realists. For example, Lundstedt reduces the right to perform to the principle that the defendant ‘is legally coerced to pay a certain sum of money, if the agreement is not fully completed and if [the claimant] thereby suffers any so-called loss or damage’ (Lundstedt, Legal Thinking Revised (Stockholm: Almquist &Wiksell, 1956) (hereafter Lundstedt) 115). 105 Holmes, 462. 106 1 Rolle Rep 368. 107 Ibid. 108 Ibid. It is worth noting that the first-instance decision in Bromage v Genning involved a court in the Welsh marches—a court of equity. That court’s jurisdiction came under sustained attack from Coke, beginning with his appointment as Chief justice of the Common Pleas in 1606, through to his dismissal from judicial office late in 1616. Hence Coke’s comment in the case that the equity court ought not to grant specific performance, ‘for then to what purpose is the action on the case and covenant?’ should perhaps be seen as part of a wider struggle. 109 Atiyah, Essays on Contract (Oxford: OUP, 1986) 59. 110 Covering economic analysis and reliance, promise, and transfer-based theories. The review is not intended to be comprehensive. Important accounts not considered include that of Gordley (see generally, The Philosophical Foundations of Modern Contract Doctrine (Oxford: OUP, 1991) and ‘Contract in the Aristotelian tradition’ in Benson (ed), The Theory of Contract Law (Cambridge: CUP, 2001) (hereafter Benson, Contract) 265).

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following, necessarily brief, examination of four leading schools of contractual thought110 suggests that there is little support for the idea of a ‘strong’ duty to perform. A good starting point is with economic analysis of contract, the ‘dominant paradigm in contemporary contracts scholarship’.111 Economists adopting a market-based approach recognise that ‘enforcing a promise would not necessarily lead to actual performance, for the promisor could always choose to breach and pay damages’.112 Enforcement in this sense would, so the argument goes, ensure an efficient outcome since it gives the promisor the right incentive to choose whether to perform or breach. As Craswell recognises,113 the form of contractual liability established by these writers, representing an ‘intermediate level of moral force, in which a promisor can choose not to perform but cannot escape her liability for damages’, is precisely that identified by Holmes.’114 Another approach to contract is that provided by reliance theorists. Jaffey has identified three versions of reliance theory.115 None of them, it is suggested, offers a strong conception of the primary right. The first version views liability for breach of contract as a species of tortious liability.116 Atiyah argues that contractual liability is, or ought to be, based on notions of benefit and reliance rather than expectation, and that the expectation measure corresponds to a right to profit rather than a right to performance.117 Atiyah concludes that it is ‘largely true’ that the duty to perform a contract ‘is a fiction with little meaning unless and until actionable damage occurs’.118 Again, we are back to Holmes.119 According to the second version of reliance theory, a ‘contract is understood to give rise to moral obligations to perform, but these are recognised and enforced in law only if and to the extent that there has been reliance’.120 In their famous article121 Fuller and Perdue suggest that the most convincing explanation for the availability of expectation damages is a juristic one: the courts protect the expectation interest ‘as a cure for, and prophylaxis against,

111 112 113 114

115 116

117 118 119 120 121 122 123 124

Kraus, ‘Philosophy of contract law’ in Coleman and Shapiro (eds), The Oxford Handbook of Jurisprudence and Philosophy of Law (Oxford: OUP, 2002) 687. Craswell, ‘Two economic theories of enforcing promises’, in Benson, Contract, 26. Ibid, 27. The attitude of writers adopting an alternative economic approach, one based on transaction cost theory, to the primary right is more difficult to assess. Transaction cost writers would seem to view the traditional legal concept of a primary right to performance as too simplistic as such a concept ignores contract’s social setting and the role of factors such as trust and co-operation. Jaffey, ‘A new version of the reliance theory’ (1998) 49 NILQ 107 (hereafter Jaffey), 133. Eg, Gilmore writes: ‘We may take the fact that damages in contract have become indistinguishable from damages in tort as obscurely reflecting an instinctive, almost unconscious realization that the two fields, which had been artificially set apart, are gradually merging and becoming one.’ Gilmore, The Death of Contract (Columbus: Ohio State University Press, 1995) 96. Thus, ‘the reality is that the bindingness of executory contracts protects not the expectation of performance, but the expectation of profit’ (Atiyah, The Rise and Fall of Freedom of Contract (Oxford: OUP, 1979) (hereafter Atiyah), 430). Ibid. Indeed, Atiyah notes the ‘similar idea’ of Holmes that a contract ‘was merely a conditional obligation, either to perform or to pay damages’ (ibid, 430). Jaffey, 133. Fuller and Perdue, ‘The reliance interest in contract damages’ (1936) 46 Yale LJ 52 and 373. Ibid, 60. Ibid. The authors add that were it not for the ‘need for curing and preventing the harms occasioned by reliance, and…for facilitating reliance on business agreements’ the rationale for speaking of a right to performance would fall wholly away (ibid, 62).

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[out of pocket] losses’.122 Since the expectation interest is, they say, more easily measurable than the reliance interest, expectation damages offer a more effective means ‘of promoting and facilitating reliance on business agreements’.123 Thus, the duty to perform is only justifiable on this very narrow basis.124 According to the third version of reliance theory, that put forward by Jaffey himself: ‘the parties do not say, as the classical theory envisages: “I promise to do this, and you promise to do that”, but: “We will proceed on the assumption that I am to do this and you are to do that, and, although I do not promise that I will do this, I accept responsibility for your reliance on the assumption that I will, and you will accept responsibility for my reliance in the same way.”’125 The consequence is that the party comes under ‘a contingent liability to satisfy the reliance interest…but not a duty to carry out the performance specified in the contract’.126 Fried provides a more orthodox account of the nature of the primary duty than that provided by reliance theorists127 and argues that it is the promise principle which underlies contract law. His suggested basis for contractual obligation is simple: ‘since a contract is first of all a promise, the contract must be kept because a promise must be kept.’128 One criticism that has been made of Fried’s approach129 is that if we reject the moral bindingness of promises generally as a proper basis for the legal enforcement of a contractual promise, what is left? As Smith puts it, ‘something else besides the enforcement of promises must be going on’.130 But Fried appears to offer nothing else: he passes from moral obligation to legal obligation in a single step.131 Once the moral imperative is discounted as the device underlying contractual liability, there is nothing else to satisfy the deontic theorist. The fourth and final account of contractual obligation to be considered132 appears to offer a stronger conception of the primary right in contract and, indeed, provides an explicit link to the primary right in property. Transfer theory has at its heart the claim that the contract itself effects

125 Jaffey, 108. 126 Ibid. Consistent with this idea that neither party assumes a duty to perform is Jaffey’s preference for the idea of a contractual ‘liability’ rather than a contractual ‘obligation’ since ‘an obligation denotes what ought to be done and a liability (in this context) represents a sum owing and can be distinguished from the obligation to pay it’ (ibid). 127 See in particular his Contract as Promise (Cambridge, MA: Harvard University Press, 1981). 128 Ibid, 17. 129 See, eg, Smith, ‘Towards a theory of contract’ in Horder (ed), Oxford Essays in Jurisprudence (4th series) (Oxford: OUP, 2000) (hereafter Smith) 109. 130 Ibid. 131 ‘Promissory theories of contract appear to involve a magical sleight of hand, whereby something is created out of nothing’: Smith, 121. 132 Subsequent discussion is, for reasons of space, limited to consideration of Smith’s account of the nature of contractual obligation. Important alternatives to Smith’s version of transfer theory are put forward by Benson (see Benson, Contract; and Benson, ‘The unity of contract law’ in The Theory of Contract Law (ed Benson) (Cambridge: CUP, 2001) (hereafter Benson, Theory)) and Barnett (see Barnett, ‘A consent theory of contract’, (1986) 86 Col L Rev 269 (hereafter Barnett). 133 See, eg, Benson, Contract, 24. While transfer theory can be viewed as a relatively recent development in contract analysis, Benson notes that conceiving of contract as a transfer of rights has a ‘long and philosophical history’ and dates back at least as far as Aquinas and Duns Scotus (see ibid, 41–42). See also Simpson, A History of the Common Law of Contract (Oxford: OUP, 1975) (hereafter Simpson, Contract) 190, where the author argues that 15th and 16th century lawyers saw contract as ‘a transaction which passed an immediate interest in a thing to the other contracting party; a covenant on the other hand was a transaction which bound the covenantor to performance in the future, but did not pass any immediate interest to the covenantee’. 134 See, eg, Smith, 118.

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a transfer of rights or entitlements.133 This approach, whose ‘central tenets are not yet part of the common knowledge of contract lawyers’, 134 posits that contract comprises the transfer of performance rights. Transfer theory has both positive and deontological aspects. The deontological part of transfer theory lies in its attempts to establish the basis on which an enforceable right to performance arises. Transfer theory, in contrast to other approaches, emphasises the making of the promise rather than its eventual performance. It is when the promise or contract is made that the legal right, that is the right to receive performance, is transferred to the promisee. Performance ‘merely determines the way in which the promisee gains physical possession of the thing or service’ contracted for, something which the promisee already owns.135 According to transfer theory the contract effects an immediate transfer of the performance right into the hands of the promisee. It is this fact that underpins the expectation principle which is central to contract.136 It is also this feature which leads to Smith’s claim that ‘contract is like property’.137 Like property, he argues, contract should be considered as containing rules for the creation of rights: Contract and property are similar, in that each provides rules specifying both what acts are required in order to create a particular sort of right and what is the content of the right thus created. The difference between contract and property lies in the nature of the acts and the nature of the rights thus created. In property, the relevant acts are, broadly speaking, acts indicating an intention to take control or possession of some thing. In contract, the relevant acts are acts indicating an intention to undertake an obligation. In each case, the relevant acts create ownership over some thing, broadly defined. In property, the thing typically is land or a material object. In contract, the ‘thing’ is the performance of an act. On the right-creation view of contract, a contract creates what is in effect a property right in the promisee, albeit a property right in the performance of an act.138

Does transfer theory provide a coherent basis for a coming together of property and contract at the level of primary rights? It is submitted that it does not.139 First, Smith himself appears to acknowledge that his account does not pretend to extend to primary rights in contract those features which render property rights strong rights. His conception of the contractual right is, in fact, a familiarly weak one, acknowledging the ‘proper limits of law’: There are some wrongs that law cannot undo and some aspects of life into which law should not intrude. The bond-destruction that results from breach of contract is a wrong that law cannot cure and the bond-creation that results from the completion of a contract is an area of life into which the law should not intrude.140

Indeed, according to Smith, specific performance is not necessarily a desirable remedy. ‘Forcing performance, whether through specific performance or by punishing breach, is self-defeating

135 Benson, Theory, 118, 136. 136 As Smith points out, though, the right which, according to transfer theory, is transferred by the contract does not exist prior to the contract. For the way in which he resolves this problem see Smith, 127. 137 Ibid, 107. 138 Ibid, 127. 139 Cf ‘one of the major trends in modern contract law is the strengthening of the protection accorded to the performance interest’: see Friedmann, ‘The performance interest in contract damages’ (1995) 111 LQR 628, 648. 140 Smith, ‘Performance, punishment and the nature of contractual obligation’ (1997) 60 MLR 360, 377.

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because the bonds that voluntary undertakings create can only be realised by unforced performance.’141 Second, it is suggested that what impels transfer theory is a desire not so much to construct a stronger conception of the primary right, but rather to offer a substantive defence of the expectation principle underlying the secondary right to damages.

The duty to perform—the courts’ approach: Co-op v Argyll Despite its apparent rejection by the courts,142 it is submitted that Holmes’s account of the primary right in contract is consistent with English law. The argument that the duty to perform does not exist in the way in which it is conventionally understood is vindicated by the approach of the House of Lords to specific performance in Co-operative Insurance Society Ltd v Argyll Stores (Holdings) Ltd.143 The case concerned a covenant in a lease whereby the tenant undertook to keep the demised premises open for business as a supermarket for the duration of the term.144 The House of Lords refused to grant an order requiring the tenant to perform the covenant. It may be said that there is nothing especially striking about a court declining to enforce a positive leasehold covenant, particularly where there exists a settled expectation at the time the lease was entered into that specific relief would not be forthcoming in the event of breach. But Argyll should not be so lightly dismissed, for it runs the proverbial coach and horses through the idea of a general duty to render the actual performance promised. Argyll establishes that where a large sophisticated entity, which has had the benefit of legal advice, undertakes at first hand145 to perform an act, which at all material times remains capable of performance, and for the breach of which the claimant is unlikely to be adequately compensated in damages, there is no legal duty to perform that act, save where the act falls within a tightly defined category146 or, perhaps, where the non-performance involves a gross breach of personal faith or blackmail.

141 Ibid. 142 Oliver LJ in George Mitchell v Finney Lock (Seeds) Ltd [1983] 1 QB 284, 304 stated that ‘the purpose of contract is performance and not the grant of an option to pay damages’. In Ruxley Electronics v Forsyth [1996] 1 AC 344, 360 Lord Mustill thought that ‘[h]aving taken on the job the contractor is morally as well as legally obliged to give the employer what he stipulated to obtain…’ and in Beswick v Beswick [1968] AC 58, 91 Lord Pearce approved Windeyer J’s statement in Coulls v Bagot’s Executor and Trustee Co Ltd (1967) 40 AJLR 471, 487 that it is ‘a faulty analysis of legal obligations to say that the law treats the promisor as having a right to elect either to perform his promise or to pay damages’. 143 [1998] AC 1. Cf Highland and Universal Properties Ltd v Safeway Properties Ltd 2000 SLT 414. 144 Briefly the facts were as follows: the plaintiff landlord had granted a 35-year lease to the defendant of premises in a shopping centre in Sheffield. Under the terms of the lease, the defendant covenanted to keep the premises open as a supermarket for the duration of the term. At the beginning of April 1995, having incurred significant losses in the previous year, and as part of a national rationalisation, the defendant announced that the supermarket would close on 6 May. While perhaps conceding the inevitability of future events, the claimants wrote to Mr Jeffries of the defendant inviting the defendant to continue trading while a suitable assignee could be found and offering the prospect of a reduced rent in the meantime. But there was no response from the defendant, perhaps due in part to the fact that Mr Jeffries himself had fallen victim to the defendant’s rationalisation process. Instead the store was closed as announced on 6 May and the store’s fittings were removed within a fortnight. On 22 May the claimant issued proceedings, seeking a decree of specific performance. 145 le, as opposed to inheriting the burden of the obligation through an assignment of the lease. 146 Promises to transfer title to land or to deliver unique chattels are two examples.

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Lord Hoffmann, with whose speech the other law lords agreed, appears to accept as his starting point the fact that the breach of the primary obligation is irreversible, that what is dead is dead.147 The court’s task was merely to determine the content of the secondary duty. While ‘any breach of covenant is regrettable’, Lord Hoffmann conceded, the starting point for the court is ‘the fact that the covenant has been broken’.148 Specific performance is relevant in Argyll, so the House of Lords appears to reason, not because of the principle that promises ought to be performed, nor because primary duties are binding, but because the court must consider how the claimant is to be compensated for loss caused by the non-performance of the primary obligation. Picking up the pieces does not necessarily entail putting them back together again. Lord Hoffmann’s rejection of specific performance or a mandatory injunction as the appropriate relief rests on three main arguments: that it would require constant supervision by the court;149 that it might ‘cause injustice by allowing the plaintiff to enrich himself at the defendant’s expense’;150 and that it would undermine settled commercial expectations.151 The present concern is not with the correctness of Lord Hoffmann’s approach. Rather the point is that his approach wholly undermines the proposition that as a general rule primary obligations are legally binding duties in themselves. Argyll, it may be argued, demonstrates that lawyers would generally be right to advise their clients that they are not under any legal duty to perform what they are promising to perform.152 What drives Lord Hoffmann’s approach is not the idea that promises should be kept, that primary obligations are enforceable according to their terms, but the idea that, in commercial transactions at least, the court should respect the judgment of the defendant as to whether it is more economically efficient for it to perform or not perform. This commercial pragmatism is clearly evident in his speech. There appears no reproach in his observation that ‘Argyll had decided that, from its point of view, the most efficient thing to do was to close the business altogether and concentrate its resources on achieving better returns elsewhere’.153 In the circumstances such a

147 Cf Johnson v Agnew [1980] AC 367, 398 per Lord Wilberforce. 148 [1998] AC 1, 18. 149 Ibid, 12. Lord Hoffmann takes great pains to establish clearly the substance of this objection. Constant supervision refers not so much to ‘the court having to send its officers to supervise the performance of the order’ but rather to ‘the possibility of the court having to give an indefinite series of…rulings in order to ensure the execution of the order’. That possibility is an unwelcome one on at least two grounds. First, the heavy-handed enforcement mechanism for orders of specific performance or injunctions; the ‘quasicriminal procedure of punishment for contempt’ means the defendant having to take decisions as to how to comply with the order ‘under a sword of Damocles’. Second, the litigation surrounding this process is likely to be ‘heavy and expensive’. 150 Ibid, 15. The risk here is that the loss which the defendant may suffer through the cost of either complying with the order or bargaining a release from the plaintiff may be ‘far greater’ than the loss which the plaintiff would suffer from the contract being broken. 151 Ibid, 16. Lord Hoffmann quotes the statement of Slade J that ‘[w]hether or not this may be properly described as a rule of law, I do not doubt that for many years practitioners have advised their clients that it is the settled and invariable practice of this court never to grant mandatory injunctions requiring persons to carry on business.’ Lord Hoffmann appears reluctant to undermine such expectations. ‘In my view, if the law or practice on a point is settled, it should be assumed that persons entering into legal transactions will have been advised accordingly’ (ibid). 152 Cf Atiyah’s discussion of the situation of a lawyer advising his client about the client’s liability under an executory contract, where the market price has remained constant, and there is adequate supply and demand on both sides. The lawyer may insist that he is legally “bound” and morally ought to perform; but the pragmatic client will understand the reality’ (Atiyah, 430–31).

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decision should, he intimates, be respected.154 After all, both parties were ‘large sophisticated commercial organisations’. Lord Hoffmann’s wider philosophy is captured in his conclusion that ‘the interests of both [parties] were purely financial’, in this respect, it seems none realistic to speak of the promisee assuming the risk of non-performance, than the promisor assuming a duty to perform,155 ruling out the idea of any interest in having the defendant perform its promise because it was under a legal duty to do so. In this respect it seems more realistic to speak of the promisee assuming the risk of non-performance tan the promisor assuming a duty to perform. And that of course brings us back to Holmes. The House of Lords in Argyll reversed the decision of the majority in the Court of Appeal. The difference in approach of the two courts is readily apparent. While, as we have seen, the House of Lords focuses very much on the impact on the defendant of the remedy sought, the Court of Appeal appears to take more of an interest in the defendant’s behaviour in the period preceding and following the breach.156 While Lord Hoffmann focuses almost exclusively on the remedy, Leggatt and Roch LJJ, in the majority, attach greater significance to the notion that primary obligations are supposed to be binding. Given that the defendant, a substantial company, had made ‘an unambiguous promise’, Leggatt LJ saw ‘no reason why they should not be held to their bargain’.157 He concluded that this was ‘not a court of morals, but there is no reason why its willingness to grant specific performance should not be affected by a sense of fair dealing’.158 Roch LJ adopts a similar position. He alludes to the ‘unedifying spectacle of a large commercial company seeking to rely on its own wanton and quite unreasonable conduct as one argument against the making of an order for specific performance’.159 While acknowledging that the ‘basic issue’ in the case was as to the adequacy of damages as a remedy,160 Roch LJ found no help in asking whether the covenant sounds solely in damages. ‘Nor is it consistent with respect for the law’, he went on, ‘to say that a clear undertaking freely entered into can be disregarded when that suits the covenantor on the payment of money.161

153 [1998] AC 1, 17. 154 But it is implicit that Lord Hoffmann accepts that the defendant’s judgment of where its own commercial interests lie will be respected even when such judgment wrongfully causes a loss to the claimant which damages cannot adequately compensate. See Lord Hoffmann’s comment that ‘the reasons which underlie the established practice may justify a refusal of specific performance even when damages are not an adequate remedy’ (ibid, 12). 155 Ibid, 18 (emphasis added). 156 [1996] Ch 286. ‘The defendants’, states Roch LJ bluntly at the beginning of his judgment, ‘have behaved very badly’ (ibid, 295). Leggatt LJ talks of their ‘gross commercial cynicism’ (ibid). And Millett LJ, who dissented from the conclusion of his brethren, noted that as ‘the defendants themselves acknowledged, they had no defence. In my opinion they had no merits either’ (ibid, 301). 157 Ibid, 294–95. If ‘the parties want to contract that a failure to keep open will sound only in damages, they are quite at liberty to do so’ per Leggatt LJ (ibid, 294). 158 Ibid, 295. Any oppressive consequences of specific relief were likely to be tempered by the fact that the parties expected that an assignment of the lease by the defendant would be completed within three weeks of the Court of Appeal’s judgment. The assignment had been duly completed by the time of the hearing before the House of Lords. 159 [1996] Ch 286, 296. 160 Although see fn 154 supra. 161 [1996] Ch 286, 296.

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The duty to perform—the courts’ approach: the demise of nominal damages The traditional idea of a legal duty to perform one’s contract is further undermined by developments in the supposed availability of damages, albeit nominal, as of right on the occurrence of a breach.162 An award of nominal damages is a symbol of the occurrence of a legal wrong—that wrong being the failure to perform what was actually promised rather than any failure to provide compensation. Yet a recent case suggests that such an event no longer merits even this token recognition. In Ibewke v TGWU163 Peter Gibson LJ stated that, given the court’s discretion under the Civil Procedure Rules, and taking account of the overriding objective, it might be proper ‘to stop a case when it becomes clear that the claimants, if succeeding on liability could only recover nominal damages. The court must avoid incurring unnecessary costs and taking up a disproportionate amount of the court time’. On this basis, a claimant who appears unlikely to recover substantial damages for a breach of contract faces having his claim thrown out at an interlocutory stage. A claim for breach of contract sounding only in nominal damages will, in practice, not constitute a recognised cause of action. The prospect of an award of nominal damages provides little incentive for a wavering promisor to perform. Of greater practical significance is the question of costs. The court might express its disapproval of the defendant’s failure to perform his primary obligations by making an award of costs against him. But it appears that it is the conduct of the claimant which is being called into question. Thus, the claimant in Mappouras, having been awarded £ 15 in nominal damages, was ordered to pay the defendant’s trial and appeal costs, the latter alone being assessed at £3,000. And in Excelsior Commercial & Industrial Holdings Ltd v Salisbury Hamer Aspden and Johnson,164 the Court of Appeal upheld the decision of the trial judge who, having awarded the claimant nominal damages of £2, ordered the claimant to pay the defendant’s costs on the indemnity basis.

Conclusion It is submitted that the sceptical approach adopted by Holmes does provide a generally accurate account of English law’s attitude to the primary right in contract. The apparent demise, heralded in Ibewke, of nominal damages as a remedy as of right brings the duty to perform a contract closer to the duty of care in negligence: a useful fiction. Before leaving the primary right, it is worth making a brief return to Hagerstrom’s account of proprietary and personal rights referred to at p 88. Hagerstrom distinguished a personal right on the basis that it comprised a right against a person. Inherent in this right was a corresponding obligation on the part of the person against whom the right availed. But it appears that this obligation was not conceived in early Roman law as arising out of any duty on the part of the debtor, but out of the potential dominion over him.

162 ‘Normally the damages that a person receives are to compensate him for the loss he has suffered, which has been caused by the [defendant’s breach of contract. In these circumstances, there were no such losses caused by the breach of contract…Accordingly the court fixes a small sum, not intended to compensate for anything at all, in order to mark the fact that there has been a breach of contract, but not in any way to compensate the [claimant].’ Mappouras v Waldrons [2002] EWCA Civ 842, para 15 (unreported) per Kay LJ. 163 [2001] EWCA Civ 432 para 26 (unreported). 164 [2002] EWCA Civ 879; The Independent, 18 June 2002.

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While the debtor was considered to be under a potential liability, that is, subjection to legal process, there was no sense of his being under any duty to perform the relevant act: ‘there does not, or does not essentially, occur in obligation any element of duty or command…The accomplishment is never characterised as obedience to a demand but as the liberation from or loosening of a bond …’165 Such an account of the primary obligation as being devoid of any duty of performance is not a million miles away from that given here.166

WHERE ARE WE? Property, contract, and primary rights At the heart of the discussion above is the idea that while property rights constitute strong legal rights, in terms of their capacity to bind third parties, their amenability to specific relief, and their immunity to the consequences of insolvency, contractual rights remain as weak as ever. That there is no sign of this chasm being bridged, of contractual rights assuming these characteristics, is supported by the House of Lords case of Hunter v Canary Wharf Ltd.167 It was argued there that English law ought not to confine a right of action in private nuisance to those with a proprietary interest in the affected land, but extend the right to those with a substantial link to the land, such as, for example, contractual licensees. The House of Lords rejected the argument. Lord Goff commented: For private nuisances of this kind, the primary remedy is in most cases an injunction, which is sought to bring the nuisance to an end, and in most cases should swiftly achieve that objective. The right to bring such proceedings is, as the law stands, ordinarily vested in the person who has exclusive possession of the land. He or she is the person who will sue, if it is necessary to do so…any…departure from the established law on this subject, such as that adopted by the Court of Appeal in the present case, faces the problem of defining the category of persons who would have the right to sue…168

It is clear from this extract that the right to sue in private nuisance, enforcing, as it generally does, the claimant’s primary proprietary rights is not suited to be annexed to the much weaker

165 Ross, 219. 166 Hagerstrom’s account is consistent with Zimmermann’s views on the Roman concept: ‘the essential content of an obligation was thus that it entitled the creditor to bring an action’ (see Zimmermann, The Law of Obligations (Oxford: OUP, 1996) 28). The nature of this liability is also closely reflected in the conditional bond, the most commonly used contractual institution in medieval times; see, eg, Simpson, Contract, 90–98. 167 [1997] AC 655. It is, however, readily conceded that the property-contract border is not immutable. The history of English law reveals a number of rights, once conceived of as personal, becoming proprietary. Examples include restrictive covenants in freehold land, leasehold covenants, estate contracts, the equity of redemption, and most recently, although to a more limited extent, the contractual licence. See, eg, Gray & Gray, Elements of Land Law, 3rd edn (London: Butterworths, 2001) 612–20, 1318–19, 563–70, 1365–67, and 170–84 respectively. This migration has not been all one way. Simpson observes that rights which in medieval times might have been considered proprietary would today be contractual: ‘today if a farmer wishes to pasture his animals upon another man’s land he will make a contract with him; in the 12th century such a transaction would more probably have been effected by the grant of a profit of pasturage’: Simpson, Land Law, 105. 168 [1997] AC 655, 692–93.

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contractual right to occupy land. Lord Goff was not prepared to extend to the primary right in contract the ability to bind third parties.

Assimilation at the secondary level Despite this refusal to extend one of the key features of proprietary rights to contractual rights, it is nevertheless submitted that recent cases suggest that a more extensive but subtle process of assimilation of private law rights is under way. That is, the courts appear prepared to countenance a limited process of coalescence at the level of secondary rights. The driving force behind this convergence is the recognition that it is the remedy that is sovereign, that the overriding principle for the courts is to ensure the grant of the appropriate remedy. In their attempt to achieve ‘practical justice’, to arrive at the ‘just solution’, the courts are becoming less concerned with the classification of the underlying right, and focusing more on the content of the secondary or remedial right. How does assimilation at the secondary level differ from that at the primary? It is suggested that the key fact about the assimilation of secondary rights as regards property and contract is that the process does not involve the extension of any of the key features of proprietary primary rights to contractual primary rights. Thus, a claimant must still demonstrate that, according to ordinary principles, his primary right avails against the defendant. Where that primary right is a contractual right, that is, one not conferring any proprietary interest, then, at common law, it is only the other party to the contract who can be made defendant. Hunter v Canary Wharf Ltd demonstrates this. Similarly, the assimilation process described here will not make it any easier for a claimant to obtain specific performance of a primary contractual right: amenability to specific relief remains a feature of property rights. Co-op v Argyll demonstrates this. But where a claimant can show that the defendant has breached a primary duty owed to him, the content of the claimant’s secondary right, as determined by the court, will not be restricted merely because that right is remedying interference with a personal, and not a proprietary, right. The approach is neatly exemplified by the statement of Lord Nicholls in Attorney-General v Blake: Property rights are superior to contractual rights in that, unlike contractual rights, property rights may survive against an indefinite class of persons. However, it is not easy to see why, as between the parties to a contract, a violation of a party’s contractual rights should attract a lesser degree of remedy than a violation of his property rights…it is not clear why it should be any more permissible to expropriate personal rights than it is permissible to expropriate property rights.169

Personal rights merit equal protection to property rights. In this we are seeing a retreat from the centrality previously accorded to property rights. Writing a quarter of a century ago, Macpherson observed: ‘we have made property so central to our society that any thing and any rights that are not property are very apt to take second place.’170 This newer approach is consistent with Gray’s conclusion that this ‘is an age when major categories of private law seem to be tending towards coalescence—contract with tort, tort with trust, trust with contract…The time may also have come

169 [2001] 1 AC 268, 283. 170 ‘Human rights as property rights’ (1977) 24 Dissent 72, 77, quoted in Gray, ‘Equitable property’ (1994) 47 CLP 157, 210. 171 Ibid.

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for a recognition that the “property” notion should be read down and assimilated within a more general heading of civil remedy’.171

Property-type solutions for breach of contract In each of the following cases the remedy awarded might be viewed as more characteristic of interference with proprietary, and not contractual, rights. In Attorney-General v Blake,172 the House of Lords granted the remedy of an account of profits for a breach of contract. Previously, such a remedy had been thought of as available only where the breach related to a property right or a fiduciary obligation.173 Lord Nicholls, with whom Lords Goff, Browne-Wilkinson, and Steyn agreed, concluded that there was no reason in principle why an account of profits should not be awarded for a breach of contract. He observed: Remedies are the law’s response to a wrong (or, more precisely, to a cause of action). When, exceptionally, a just response to a breach of contract so requires, the court should be able to grant the discretionary remedy of requiring a defendant to account to the plaintiff for the benefits he has received from his breach of contract.174

An observation later in the same speech provides a useful illustration of the broader claim as to a coalescence of remedies: Even when awarding damages, the law does not adhere slavishly to the concept of compensation for financially measurable loss. When the circumstances require, damages are measured by the benefit obtained by the wrongdoer. This applies to interference with property rights. Recently, the like approach has been adopted to breach of contract.175

Ruxley Electronics v Forsyth176 is generally considered as one of those cases where the claimant was held entitled to the recovery of compensatory damages for breach of contract in respect of nonpecuniary loss—the so-called ‘consumer surplus’ or loss of amenity. However, the case is relevant for the alternative approach outlined in his speech by Lord Lloyd. Having expressed agreement with the trial judge’s award of damages for loss of amenity, Lord Lloyd observed that ‘in most cases such an approach would not be available’.177 He went on to articulate an alternative basis of

172 [2001] 1 AC 268. 173 See, eg, Whitwham v Westminster Brimbo Coal Co [1892] 2 Ch 538 and Reading v Attorney-General [1951] AC 507. 174 [2001] 1 AC 268, 284–85. 175 Ibid, 285. 176 [1996] 1 AC 344. 177 Ibid, 374. 178 Ibid. Lord Lloyd’s approach is consistent with the opinion expressed by Lord Mustill, who stated that: ‘Having taken on the job the contractor is morally as well as legally obliged to give the employer what he stipulated to obtain, and this obligation ought not to be devalued… Neither the contractor nor the court has the right to substitute for the employer’s individual expectation of performance a criterion derived from what ordinary people would regard as sensible…[I]t would be…unreasonable to deny all recovery for such a loss’ (ibid, 360).

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recovery to loss of amenity, an award based on ‘disappointed expectations’. He gave as an example a contract for the construction of a house, where the breach caused no diminution in value and where the cost of cure would have been prohibitive. ‘Is there any reason’, he asked: …why the court should not award by way of damages for breach of contract some modest sum, not based on difference in value, but solely to compensate the buyer for his disappointed expectations? Is the law of damages so inflexible…that it cannot find some middle ground in such a case?178

Lord Lloyd’s approach was followed by Lord Scott in Farley v Skinner,179 a case involving a negligently-performed survey of a residential property. According to Lord Scott, Ruxley establishes that ‘if a party’s contractual performance has failed to provide to the other contracting party something to which that other was, under the contract, entitled, and which, if provided, would have been of value to that party, then if there is no other way of compensating the injured party, the injured party should be compensated in damages to the extent of that value’.180 While Mr Ruxley had been deprived of a valuable contractual benefit, Lord Scott continued, ‘the breach of contract had not caused any consequential loss …He had simply been deprived of the benefit of a pool built to the depth specified in the contract. It was not a case where the recovery of damages for consequential loss consisting of vexation, anxiety or other species of mental distress had to be considered.’181 Lord Scott concluded that the Ruxley principle ‘should be used to provide damages for deprivation of a contractual benefit where it is apparent that the injured party has been deprived of something of value but the ordinary means of measuring the recoverable damages are inapplicable’.182 In the immediate case, Lord Scott thought it ‘open to the court to adopt a [Ruxley] approach and place a value on the contractual benefit of which Mr Farley has been deprived’.183 Although breach of contract claims generally tend to be thought of as rights-based actions, it is probably better to conceive of them as wrong-based. The claimant generally seeks to enforce the defendant’s secondary duty to compensate, which arises from the wrong of breach of contract. A rights-based claim would be one where the claimant sought to enforce his primary right, such as to the transfer of a piece of land or an action for the price of goods. In Farley, the award upheld by the House of Lords was one of unliquidated damages, albeit for normal, as opposed to consequential, loss. As such the claim was ultimately one vindicating the secondary duty to compensate. But by treating the award as representing the value to Mr Farley of his right to a competently-performed survey, the deprivation of benefit approach demonstrates a willingness to

179 180 181 182

[2001] UKHL 49, [2002] 2 AC 732. See Pearce, ‘Farley v Skinner right or wrong?’ [2002] CLJ 24. Ibid, para 79. Ibid, para 80. Ibid, para 86. A similar approach is evident in Lord Hutton’s criticism of the Court of Appeal’s decision in Knott v Bolton (1995) 11 Const LJ 375. The court there ‘was led into error by concentrating too much on the concept of the provision of pleasure—the correct approach would have been…to have held that the plaintiffs were entitled to recover some reasonable damages because they were entitled to say that they chose to obtain from the architect a promise to produce a particular design in order to make the house conform to their own particular tastes and wishes’ (ibid, para 52). 183 Ibid, para 107.

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give greater substance to the idea that primary contractual rights are enforceable rights in themselves, albeit only enforceable as monetary awards.184 In Manchester Airport Pic v Dutton185 the airport company had been granted a licence by the National Trust to occupy certain land in order to carry out work connected with the construction of a new runway. However, shortly before the licence was granted, protesters entered the land unlawfully with a view to obstructing the carrying out of the work. The judge granted the airport company an order for possession but the defendants appealed on the basis that the claimant did not have sufficient interest in the land to obtain such a remedy. The Court of Appeal, by a majority,186 dismissed the defendants’ appeal. Laws LJ, with whose reasons Kennedy LJ agreed, described the defendants’ objection to the relief granted by the judge as being that the granting of such relief ‘would amount to an ejectment, and ejectment is a remedy available only to a party with title to or estate in the land; which as a mere licensee the airport company plainly lacks’.187 Laws LJ said that the old law of ejectment ‘was simply not concerned with the potential rights of a licensee: a legal creature who, probably, rarely engaged the attention of the courts before 1852188 or for some time thereafter’.189 Laws LJ went on to hold that the court had ‘ample power to grant a remedy to a licensee which will protect but not exceed his legal rights granted by the licence. If, as here, that requires an order for possession, the spectre of history (which, in the true tradition of the common law, ought to be a friendly ghost) does not stand in the way.’190 The true principle, he said, was that a licensee was entitled to an order for possession if that was a ‘necessary remedy to vindicate’ his contractual rights. There was, Laws LJ said, no distinction ‘in law or logic’ between the right of such a licensee and that of one in possession.191 This was the crux of the case. It was

184 Similar approaches may be seen to have been adopted by Scott J in Anchor Brewhouse Developments v Berkley House (1987) 38 Building LR 82 and by the Court of Appeal in Sealace Shipping Co Ltd v Oceanvoice Ltd [1991] Lloyd’s Rep 120. Reference may also be made to the approach of the minority of the House of Lords in Alfred McAlpine v Panatown [2001] 1 AC 518. The majority approached the case on the basis that the loss suffered as a result of the defective construction of a building was that of the third party company, not that of the claimant. Lord Goff, by contrast, favoured ‘full recognition of the importance of the performance interest’, that is, the ‘interest of a contracting party (A) in the performance by the other party (B) of his contractual obligations to (A)’. Lord Goff noted (at 546) that two of the leading textbook writers placed the protection of the performance interest ‘at the forefront of their treatment of damages’. Similarly, Lord Millett thought that the time had come for the House of Lords to recognise the principle of ‘defeated expectation’ and to endorse the idea of ‘substantial damages being awarded for the loss of the performance interest’ (at 590). In the Panatown scenario the court is faced with either a claim for an incurred loss, for example, where the claimant has already paid a third party to remedy the original breach, or a claim where, although no such payment has yet been incurred, that type of future expenditure constitutes the ‘loss’. By contrast, with the deprivation of benefit approach, the award does not appear to be directly linked to any additional expenditure on the part of the claimant. Mr Farley was not making a claim to offset expenditure that the breach had caused or would cause him to incur. So in Mr Farley’s case the award can be viewed as representing more closely the value of primary right itself. 185 [2000] 1 QB 133. 186 Laws and Kennedy LJJ, Chadwick LJ, dissenting, thought that by failing to confer any right to exclusive possession, the licence had not granted the plaintiff ‘rights to bring an action in rem for possession of the land to which it relates’ (ibid, 143). 187 [2000] 1 QB 133, 147. 188 le, the date of the Common Law Procedure Act. 189 [2000] 1 QB 133, 149. 190 Ibid. 191 Ibid, 150.

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clear that had the claimant been in possession of the land it would have been entitled to a remedy, by means of an action in trespass, notwithstanding that its interest was personal and not proprietary. It follows that the claimant’s entitlement to a remedy did not turn on whether its primary right was proprietary or contractual. This fact enabled the majority, in effect, to adopt the broader approach to remedial rights inherent in the assimilation process. Laws LJ concluded: In this whole debate, as regards the law of remedies in the end I see no significance as a matter of principle in any distinction drawn between a plaintiff whose right to occupy the land in question arises from title and one whose right arises only from contract. In every case the question must be, what is the reach of the right, and whether it is shown that the defendant’s acts violate its enjoyment. If they do, and (as here) an order for possession is the only practical remedy, the remedy should be granted. Otherwise the law is powerless to correct a proved or admitted wrongdoing; and that would be unjust and disreputable. The underlying principle is in the Latin maxim (for which I make no apology), ‘ubi jus, ibi sit remedium’.192

In Bruton v London & Quadrant Housing Trust193 a housing trust was granted a licence by the local authority to use various properties as temporary accommodation for homeless people. The trust granted a licence of certain premises to the claimant. The claimant subsequently claimed that he was a tenant of the premises and sought to enforce an implied repairing covenant on the part of the trust. The House of Lords held that the agreement between the trust and the claimant had all the characteristics of a tenancy and that there were no special circumstances enabling the agreement to be construed as a licence. Of immediate relevance is the principle, cited in the court below,194 that an agreement cannot be a lease unless it creates a legal estate in the land. It would not have been possible for the trust to grant such an estate to the claimant, so the argument went, as it itself only held the property under a licence. Lord Hoffmann, with whose reasons a majority of the other Lords agreed, rejected this principle. He stated: ‘the term “lease” or “tenancy” describes a relationship between two parties who are designated landlord and tenant. It is not concerned with the question of whether the agreement creates an estate or other proprietary interest which may be binding upon third parties.’195 As Bright observes, if it is possible to create a lease by contract without granting a proprietary interest, various issues as to the status of the ‘contractual’ lease fall to be considered.196 Of relevance for present purposes is her suggestion that, while contractual leases are unlikely to be assignable, ‘some form of in rem remedies will be available’.197 While the case raises fundamental questions as to the nature of proprietary rights, its immediate relevance lies in the way the House of Lords treated the nature of the primary right as almost a side issue.198

192 193 194 195 196 197 198

Ibid. [1999] 3 WLR 150. [1998] QB 834. [1999] 3 WLR 150, 156. See Bright, ‘Leases, exclusive possession, and estates’ (2000) 116 LQR 7. Bright cites the right to recover possession against trespassers, as in Dutton, as an example (ibid, 10). See, eg, Lord Hobhouse’s description of the case: ‘[t]he claim made in the action seeks to enforce a contractual cause of action’ (158).

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Contractual solutions for interference with property rights The next two cases demonstrate that the assimilation process may involve the courts according primacy to the contractual, and not the proprietary, nature of the claimant’s rights, so as to justify a ‘contractual’ remedy. In National Carriers Ltd v Panalpina (Northern) Ltd199 the doctrine of frustration200 was held, in principle, to be applicable to a lease. In this case, the plaintiffs had let a warehouse to the defendants for a period of 10 years. The only vehicular access to the premises was by a street which the local authority closed half-way through the leasehold term. The period of the closure was expected to be about 20 months. During that time, the premises were rendered useless for the defendant’s purposes. In an action by the landlord for unpaid rent, the defendant argued that the lease had been frustrated. The judge held himself bound by the authority of Leighton’s Investment Trust201 to the effect that a lease could not be the subject of frustration. By a four to one majority the House of Lords held that the doctrine of frustration was in principle applicable to leases.202 Agreeing with the majority view, Lord Wilberforce found the experience of the North American jurisdictions to be ‘instructive’203 and rejected the decision of the Court of Appeal in the Leighton’s Investment case. First, that decision was ‘summary, unargued, and based upon previous cases which will not bear the weight of a generalisation’.204 Second, and more generally, Lord Wilberforce believed that ‘the movement of the law of contract is away from a rigid theory of autonomy towards the discovery—I do not hesitate to say imposition—by the courts of just solutions, which can be ascribed to reasonable men in the position of the parties’.205 Lord Simon also followed the majority view that ‘a lease is not inherently unsusceptible to the application of the doctrine of frustration’.206 Lord Simon quoted the words of Lord Wright in the Leighton’s Investment case, ‘the doctrine of frustration is modern and flexible and is not subject to being constricted by an arbitrary formula’.207 Further, Lord Simon said that ‘the law should if possible be founded on comprehensive principles: compartmentalism, particularly if producing anomaly, leads to the injustice of different results in fundamentally analogous circumstances’.208 In Hussein v Mehlman209 Stephen Sedley QC held that a tenant could treat a consistent failure by his landlord to comply with his repairing obligations as a repudiatory breach, enabling the tenant

199 [1981] AC 675, 694. 200 A doctrine which can ‘be stated generally as part of the law of contract’ per Lord Wilberforce, National Carriers Ltd v Panalpina (Northern) Ltd [1981] AC 675, 694. 201 In Leighton’s Investment Trust Ltd v Cricklewood Property and Investment Trust Ltd [1943] KB 493, the Court of Appeal held that as a matter of law, the doctrine of frustration could not apply to a lease. An appeal was made to the House of Lords but the House was evenly divided on the issue with the fifth member of the Committee expressing no opinion. 202 Although in the immediate appeal the House held there was no frustration on the facts. 203 [1981] AC 675, 695. Lord Wilberforce quoted Corbin: ‘In modern cases, there has been a tendency to treat the lease as a contract instead of a conveyance, although in fact it is both at once…’ Corbin, Contracts.Vol 6 (1951), s 1356, p 388. 204 [1981] AC 675, 696. 205 Ibid, 696. 206 Ibid, 701. 207 [1945] AC 221, 241. 208 [1981] AC 675, 701. 209 [1992] 32 EG 59; [1993] Conv 71 (Bright).

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to treat the lease as at an end and to claim damages. Acknowledging the growing contractualisation of leases, in particular that brought about by the decision in Panalpina, Sedley felt able to disregard the dictum of Lord Denning MR in Total Oil v Thompson Garages210 to the effect that a lease could not be repudiated. Bright concludes her consideration of the case with the prediction that ‘the tide has turned: leases will be assimilated with contracts unless the particular proprietary features of the facts and the issue demand a different result’.211 It might be thought that Hussein demonstrates the demise of the property concept as described by Cotterrell. However, it is suggested that a more accurate assessment rests on recognition that the key issue related not to the nature of the primary right but to the fact that specific enforcement of that right would not have provided the claimant with an adequate remedy. By recognising that breach of the primary right might give rise to a secondary right and an election to treat the lease as terminated, an adequate remedy was possible. What Hussein demonstrates is that where necessary to provide an adequate remedy, the courts are increasingly willing to recognise that a proprietary primary right, like a personal primary right, is susceptible to enforcement at the secondary level.

Conclusion Property and contract: where are we? One characteristic feature of a property right is its amenability to specific relief, whether by specific performance proper or by relief analogous to specific performance, such as a mandatory injunction. The primary right in property generally enjoys the privilege of direct enforcement by the courts. With contract, however, the primary right is rarely vindicated. With contract what counts is the secondary right—the right to compensation. When a proprietary primary right is broken the court is likely to respond: ‘must do better’. When a contractual primary right is broken the court is likely to respond: ‘never mind, these things happen; you’d better pay up instead’. One of the aims of this chapter has been to demonstrate that at the primary level the gulf between rights in property and contract is as wide as ever. Another has been to suggest and support the idea that at the level of secondary rights a process of assimilation is underway. This coalescence, occurring across the spectrum of private law rights,212 has as its driving force the notion that what counts is the availability of an adequate remedy. In this respect, applying the term ‘secondary’ to the remedial right is somewhat misleading, in that it is to this right that the court attaches primacy. This discussion has shown that once a claimant has demonstrated that his primary right avails against the defendant, that he is prima facie entitled to a remedy, the courts are increasingly willing to look beyond the taxonomical status of the right, in order to ensure practical

210 ‘A lease is a demise. It conveys an interest in land. It does not come to an end like an ordinary contract on repudiation and acceptance.’ [1972] 1 QB 318, 324. 211 [1993] Conv 71, 77. Sparkes applauds the ‘brilliant reasoning’ in Hussein and concludes that the case ‘represents a further step towards recognition of a contractual basis to leasehold law and is now fully accepted’: Sparkes, A New Landlord and Tenant (Oxford: Hart, 2001) 258 (footnotes omitted). See also Bright and Gilbert, Landlord and Tenant Law (Oxford: OUP, 1995) 86–90 for a discussion of the ramifications of the case for the relationship between contract and property remedies. 212 For an example of assimilation between secondary rights in contract and tort, see Clef Aquitaine SARL v Laporte Materials (Barrow) Ltd [2001] QB 488.

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justice at the remedial level. The courts are showing an increasing willingness to deploy the ‘full armoury of remedies’213 to redress infringement of the claimant’s rights, be they proprietary or contractual. Latin maxims, we are told, have no role in today’s law. Pacta sunt servanda may properly be consigned to the dustheap, but ubi ius, ibi sit remedium seems set to continue to rule us from its grave.214

213 ‘It is…untenable to persist in denying resort to the full armoury of remedies ordinarily available to redress repudiation of covenants, merely because the covenants may be associated with an estate in land’ per Laskin J in Highway Properties Ltd v Kelly, Douglas & Co (1971) 17 DLR (3d) 710, 721. 214 With apologies to Maitland.

Chapter 5 The Land Registration Act 2002 and the nature of ownership Elizabeth Cooke This chapter looks at the way in which a number of factors combine to have an effect upon the nature of ownership of land in a given jurisdiction. Prominent among those factors is the jurisdiction’s land registration system; the enactment of the Land Registration Act 2002 therefore presents a good opportunity to examine how those factors are interacting in our own legal system. By ‘the nature of ownership’ I mean not merely the factual content of ownership—the nature of the rights in the bundle—but rather the extent to which ownership of land in a given legal system is either unitary and monolithic in character so that the owner of land is clearly demarcated from holders of lesser rights, or a more diverse and fragmented institution, so that different people may have different sorts of ownership rights in the same land.

A STARTING POINT: SYSTEMS OF TITLE AND THE CONCEPT OF OWNERSHIP I begin with two closely-linked factors: the system of title in a jurisdiction, and the concept of ownership that goes with it. In his famous essay ‘Ownership’ in the 1961 Oxford Essays in Jurisprudence,1 Tony Honoré classified legal systems as ‘multititular’ or ‘unititular’ according to the number of independent titles they permit, where ‘independent’ means ‘not derived from a common source’.Thus, he explained, Roman law is unititular, in the sense that ‘if the title to a thing is in A, no title to it can be acquired (independently) by B, except by a process which divests A’. The common law is of course multititular; the possibility of acquisition of title by possession means that more than one person may hold a fee simple in the land at one time, without any one having derived title from another. Honoré added that a system in either form may be ‘active’, if it facilitates acquisition of title without the consent of a previous owner, or ‘conservative’ if acquisition without such consent is made difficult. Thus Roman law under Justinian was both conservative and unititular, whereas the common law can be seen as an active multititular system. In 1974, John Henry Merryman wrote: The basic difference between Romanic ownership and the Anglo-American ‘estate’ or ‘interest’ in land can be illustrated by a simple metaphor. Romanic ownership can be thought of as a box, with the word ‘ownership’ written on it. Whoever has the box is the ‘owner’. In the case of complete, unencumbered ownership, the box contains certain rights, including that of use and occupancy, that to the fruits of income, and the power of alienation. The owner can, however, open the box and remove one or more such rights and transfer them to others. But, as long as he keeps the box, he still has the ownership, even if the box is empty. The contrast with the Anglo-American law of property is simple. There is no box. There are merely various sets of

1

AG Guest (ed) (Clarendon Press, 1961), 107 at 136–41.

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Honoré and Merryman would say, I think, that they are talking about two different things. Honoré takes pains to stress that he is talking about title rather than ownership. We often use the two terms interchangeably, but what is meant here is that Honoré, in contrasting multititular and unititular systems, is discussing requirements for proof of ownership. In particular, the point is whether, in establishing such proof, one has to trace one’s claim to ownership, one’s entitlement, back to a (historical, or procedurally constructed) ‘true owner’, or whether one can set up an independent entitlement such as possession. He explains: The difference between these two ways of regulating title has often been construed as a difference between two conceptions of ownership. This, I suggest, is a mistake. The only difference between the place of ownership in the two schemes is procedural: what has to be proved in an action. But whether a plaintiff must prove that he is the owner, and what is to be understood by ownership, are entirely distinct questions.3

Merryman, by contrast, was trying to demonstrate the link between these two distinct questions. His point is that in a Roman law, unititular system,4 the concept of ownership is more unitary than that found in the common law systems, and that, consequently, the common law systems have found it much easier to fragment ownership by splitting its constituent parts between numerous different claimants. His metaphor of the ‘black box’ of ownership conveys the idea that in a Roman law system, in answer to the question ‘who owns Blackacre?’ it is supposed to be possible to point to one individual who is, unambiguously, the owner, no matter how many of the rights that make up ownership have been subtracted from him and transferred to others. He alone is the owner, while others have rights of a different kind. He offers no metaphor for common law ownership, where there is no black box.5 The idea is that it is possible in such systems not merely for the owner to assign or share some of his rights with non-owners, but for ownership itself to be fragmented, so that in answer to the question ‘who owns Blackacre?’ we might have to point to two or more individuals, each with different interests.6 Candidates for a suitable metaphor, in contrast to the black box, might be a pack of cards which has been dealt among a number of players. For that to work the pack has to contain an infinite number of cards;7 better perhaps would be a strudel or other flaky pastry construct, where the texture is visibly complex, the substance splittable and sharable, and the layers genuinely uncountable.

2 3 4 5

6 7

JH Merryman, ‘Ownership and estate’ (1974) 48 Tulane L Rev 916, at 927; cited in S Panesar, General Principles of Property Law (Longman, 2001), at 113. Op cit n 1 above, at 141. He does not use the terms ‘multititular’ and ‘unitititular’. Indeed, the common law does not include ownership as part of its terminology. It is now seen as rather silly to assert that there is no such thing as ownership of land in English law, because of course in practical terms there is (see, eg, JW Harris, ‘Ownership of land in English law’, in N MacCormick and P Birks (eds), The Legal Mind (Clarendon Press, 1986); JW Harris, Property and justice (Clarendon Press, 1996), esp at 68 ff). The point is that ownership may be fragmented rather than located squarely with one person. le, not merely sharing the same interest. Because the bundle of rights that makes up ownership is uncountable.

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Merryman illustrated his point with reference to the Italian system, which he demonstrated to be (at least in 1974) far less flexible than the Anglo-American one of his and our own experience. But the simplest and most general illustration of his point is the fact that the trust in its English form, based upon a split of legal and equitable ownership, has remained utterly foreign for so long to the European civil law systems. Change is in the air, of course,8 but this distinction alone justifies the metaphors of the black box and the apple strudel. Along with the unititular system of title goes a concept of ownership that is fundamentally more unitary than the readily fragmentable common law concept. It is not suggested that the practical fragmentation of ownership rights is not possible in a Roman law system. A system whose conceptual basis dictates that there is just one dominus may nevertheless, in practice though not in theory, be fragmenting ownership; it is probably fair to say that fragmentation happens in different ways and to varied extents in all systems. Merryman’s point was simply that it is easier in some than in others, because the system of title has knock-on effects upon the concept of ownership and therefore upon the ease of fragmentation.

FRAGMENTATION AS A STRATEGY There are more than concepts at work, though. Fragmentation of ownership is one of the principal ways in which a system of property ownership can change itself when patterns of ownership are out of step with social need, without recourse to the far less acceptable alternative of expropriation. So a further factor to feed into the nature of land ownership in a legal system is the practical process of fragmentation being carried out deliberately at any given period. Land law in England has seen a persistent and very creative process of fragmentation over the last 150 years or so. Thus the equitable devices of estoppel and constructive trust have made landowners of those who had no rights;9 beneficiaries of trusts have been confirmed as the holders of rights in land rather than just in sale proceeds;10 the ‘settlements’ of property achieved by the Matrimonial Causes Act 1973 and by Schedule 1 to the Children Act 1989 enable ownership to be spun out along an additional dimension,11 whereby the beneficial ownership is unchanged,12 but the

8

9

10 11

Eg, Italy, the very country that Merryman chose to illustrate his point, ratified the Hague Trusts Convention in 1989, and there have now been a number of cases where the Italian courts have recognised the creation of trusts; see P Matthews, ‘Un trust per l’Italiano’ [1998] 2 Trust Law International 104. On the Hague Trusts Convention see M Lupoi, ‘Effects of the Hague Convention in a civil law country’, in The Reform of Property Law, P Jackson and D Wilde (eds) (Dartmouth, 1997), 222. More generally, see DJ Hayton, SCJJ Kortmann and HLE Verhayen, Principles of European Trust Law (Kluwer Law International, 1999). We see this on an individual level in cases where these devices have recognised a non-monetary contribution by one who would otherwise be left behind by formal property law (Greasley v Cooke [1980] 1 WLR 1306, Wayling v Jones (1993) 69 P & CR 170) or a legitimate expectation (Crabb v Arun DC [1976] Ch 179). Illustrative of a wider social purpose are the tenants at will in Ramsden v Dyson (1866) LR 1 HL 129 who became secure leaseholders. Williams & Glyn’s Bank Ltd v Boland [1981] AC 487; Trusts of Land and Appointment of Trustees Act 1996, s 3. Typically in the Mesher order, from the case Mesher v Mesher and Hall (1973) [1980] 1 All ER 126n, whereby the matrimonial home remains unsold until the children of the family finish full-time education.

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property remains, despite those rights, the family home for those who have no, or insufficient, property rights. Even within that period we have seen trends changing. The contractual licence has been, and has ceased to be, an ownership right.13 The deserted wife’s equity came and went.14 Perhaps the most significant process of fragmentation was seen in the operation of the Rent Acts, whereby residential occupiers were given security. A sitting tenant could rightly say ‘this is my house’, even though the freeholder would say that too. But residential security of tenure has now largely disappeared (save for Rent Act survivors) as a result of societal, political and economic change; it remains a splendid example of the process of fragmentation used for a social purpose, and of course the security of commercial tenants remains as a significant tool for the sharing of ownership of such property.15 Note that there are two agents of fragmentation: the courts and Parliament. Fragmentation of ownership is facilitated, in a common law system, not only by the very concept of the ownership, but also by the ability of the courts to make law. Much of what has been achieved in this jurisdiction over the past 150 years or so has been achieved by the courts. The activities of the courts introduce further complexity to the picture. Decisions of the courts occur in individual cases; they may be responses to social trends—hence much of the development of proprietary estoppel and the constructive trust, and hence many of Lord Denning’s activities—or they may be knee-jerk reactions to hard cases.16 Judge-made law may or may not accord with the will of Parliament, and we can see that Parliament and the courts interact in varied ways. The courts created the deserted wife’s equity, the highest court squashed it, and Parliament took up the problem so as to provide a different solution in the form of a hybrid real/personal right.17 The history of the contractual licence has been entirely in the hands of the courts. The sitting tenant was legislated into and out of existence. The doctrine of part performance was eliminated by s 2 of the Law of Property (Miscellaneous Provisions) Act 1989; but the courts remain unsure of their ability, if any, to afford ownership rights to those who have missed the contractual boat.18 Fragmentation thus remains an important tool and a continuing, fluctuating trend.

THE LAND REGISTRATION ACT 2002 Another factor that affects the nature of ownership in an individual jurisdiction is the system, if any, of land registration. Land registration is, generally, inimical to fragmentation. That is not to say that it prevents it—neither this nor any of the factors is allowed to shape ownership by itself. But the

12 13 14 15 16 17 18

The precise position is unclear: see E Cooke, ‘Children and real property—trusts, interests and considerations’ [1998] Fam Law 349 at 351. Ashburn Anstalt v Arnold [1989] Ch 1. National Provincial Bank Ltd v Ainsworth [1965] AC 1175. Landlord and Tenant Act 1954 Part II; note that while agricultural tenancies granted under the Agricultural Holdings Act 1986 have full security, farm business tenancies granted after 1 September 1995 have greatly reduced protection. Perhaps the most alarming recent example is Bruton v London & Quadrant Housing Trust [2000] AC 406. The Matrimonial Homes Acts 1967 and 1983 and now s 30 of the Family Law Act 1996. Yaxley v Gotts [2000] 1 All ER 711.

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existence of a system of land registration (whether of deeds or of title) tends to make fragmentation less easy. Registration is, ideally, supposed to be the mirror of ownership. The mirror principle—or, rather, aspiration—is hostile to interests that do not appear on the registered title. Like many systems registration has its own momentum; there is a persistent urge towards tidiness and completeness, and there is constant pressure in an established registration system to eliminate, as far as possible, interests that a purchaser cannot discover from the register. One of the aims of registration is to make title secure; it may therefore marginalize unregistered ownership rights. Registration seems to imply a unitary form of ownership, in much the same way that registration of ownership of shares, cars, ships or dogs is supposed to enable you to point to the owner.19 The Land Registration Act 2002 may be a particularly dramatic example of the tendency of a registration system to work against fragmentation. I would like to suggest that, while the common law at present is an active, multititular system, the Land Registration Act 2002 makes it a conservative, unititular one. The explicit aim of the Law Commission in preparing the legislation was to produce a system of title by registration rather than of registration of title.20 The most striking change brought about by the Act is to make it impossible to acquire title to land by possession alone;21 at best, the adverse possessor has locus standi to apply for registration after 10 years, but he will fail if the registered proprietor objects to his claim unless he can bring himself within one of the three exceptions in para 5 of Schedule 6.22 Otherwise, the adverse possessor has a temporary status, defeasible at the will of the registered proprietor. Gone is s 75 of the Land Registration Act 1925 and the spectre of the registered proprietor holding on trust for the squatter. Gone too is the possibility of one or more adverse possessors holding an undiscoverable fee simple after they have abandoned the land; they will simply be eliminated the next time the land is sold because their interest is not overriding.23 Moreover, the squatter who dispossesses a tenant, even if successful, will take the tenant’s own title, not an independent fee simple; thus the possibility of concurrent registered fees simple24 is eliminated. Indeed, the statute speaks of adverse possession of an estate, not of land.25 The registration system is unititular in Honoré’s sense, because we can say that where A has a registered title to land, no other registered title to that land can come into existence except by derivation from and

19 20 21 22 23 24 25

The simplifying force of registration is thoroughly demonstrated in Alain Pottage’s work: see ‘The originality of registration’ [1995] 15 OJLS 371, and ‘Evidencing ownership’ in S Bright and J Dewar (eds), Land Law, Themes and Perspectives (OUP, 1998) 129. ‘Land registration for the twenty-first century: a consultative document’ Law Com No 254, para 10.43. Land Registration Act 2002, s 95 and Schedule 6. As Martin Dixon has pointed out in Chapter 6 of this collection, this change in the law of adverse possession is not necessitated by a system of registration of title: Dixon, this collection, at p 144ff. That is, unless he can show that he is entitled to the land by virtue of an estoppel, or for some other reason (eg, under a will), or unless he can show a reasonable misapprehension about a boundary. Schedules 1 and 3 to the Land Registration Act 2002 ensure that the squatter has an overriding interest only when he is in actual occupation. Acceptable hitherto at least by some District Land Registries and achieved by giving such a squatter a qualified fee simple, subject to the landlord’s right to possession at the end of the lease: AJ Pain, Adverse Possession (Fourmat Publishing, 1992). Schedule 6, para 11.

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divesting of A: he has sold it, or leased it, and thereby subtracted from his own bundle of rights, or a squatter has acquired title and thereby divested A. An objection to this analysis may be that, outside the registration system, the squatter still acquires his own independent fee simple by virtue of his adverse possession.26 He must therefore retain the right to take action in nuisance and in trespass against all but the owner of a better title. His position at common law remains as it always was, until he meets with the registration system. We might say that the common law remains multititular, with the unititular registration system imposed on top of it and operating concurrently with it. Nevertheless, in a context where all land is supposed to be coming on to the register within the next few years,27 I suggest that our view of the squatter’s fee simple will change. Instead of being seen as an independent property right and a form of ownership, growing stronger year by year until it blossoms into something indefeasible, it will take on a quite different and much less significant character. The squatter’s unregistered possessory title will cease to be marketable at all; it can never turn into a registered title absolute, though it may (in very limited circumstances) enable the squatter to take over the registered proprietor’s title. It will be seen as something more like what used to be called ‘a mere spes’, a hope of ownership rather than the real thing. Turning to its practical effects, the Land Registration Act 2002 is also, I suggest, moving us slightly but significantly towards a system where fragmentation of ownership is less easy. This is deliberate; the idea is that registered title should become more attractive because it is more secure. The change in the status of squatters is not merely a change in the mechanics of proof of title; it makes the registered proprietor less vulnerable. His title is made virtually squatter-proof; his ownership is a more solid affair. The Act contains at least two other symptoms of this trend. First, there are fewer overriding interests (as we shall no doubt still call them). Some have simply been eliminated; thus equitable easements have gone, along with some of the other obscure items in s 70(1)(a) of the Land Registration Act 1925.28 Others are being phased out;29 they are obscure, feudal and often undiscoverable, so we shed no tears for them, and their absence makes the registered proprietor’s ownership more secure, more unitary, less liable to fragmentation. Second, we find a couple of equity’s flimsier children, the estoppel equity and the ‘mere equity’,30 given a more solid status by being confirmed as interests that may appear on the register protected by a notice.31 But note that this actually makes them more vulnerable, because it means that unless they are protected by notice or by actual occupation they will vanish (as claims against the land) when the property is sold. These are small things. But when they are placed side by side with the disappearance of residential security of tenure, mentioned above, it is perhaps not too far-fetched to regard them as part of a trend. We certainly do not have a black box; ownership is still readily fragmentable. But we have a rather stodgier strudel, whose layers are not so easy to separate. That trend is a good one for the registered proprietor, for his purchaser, and for his mortgagee; but we might sound a

26 27 28 29 30 31

Schedule 6, para 9(1). Land Registration for the Twenty-f irst Century:A Conveyancing Revolution, Law Com No 271, para 2.13: with the exception of very short leases and PPP leases. For the latter, see s 90. Although paras 4 and 5 of Schedules 1 and 3 preserve customary and public rights. Paras 10 to 14 of Schedules 1 and 3; see s 117. The most obvious example is the right to rectification. S 116.

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warning note in the interests of the traditional beneficiaries of fragmentation, the disadvantaged and weaker members of society.

TRENDS IN TENSION Let us put together the general points made so far. First is the contrast between the unititular, Roman-type system and the multititular common law system. This is a matter of the mechanics of title; but Merryman observes that the distinction between systems of title goes alongside different conceptions of ownership, so that the common law is much more amenable to fragmentation of ownership than, say, European systems. Second, we have observed that fragmentation of ownership is a practical legal response to individual need and to societal trends. It is a judicial tool for problem solving; it is also a legislative instrument of social change. Third, we have seen that registration of title is inimical to fragmentation. It certainly does not prevent it; but registration and fragmentation are opposing trends. Putting these points together, I suggest that a legal system may either use and exploit, or reject and modify, its inherited concepts in order to meet its current needs, so that in any legal system the nature of ownership (how fragmented it is, how easy or difficult it is to point to a single dominus of a piece of land, where ownership stands on the scale from black box to apple strudel) will depend upon a complex of the following factors: (a) Its system of title and concept of ownership. These may tend towards a unitary concept of ownership, or towards a multititular system where ownership is more readily fragmentable. (b) The deliberate use of fragmentation as a problem-solving tool in that particular society. This may be a more or less active process depending upon social, political and economic factors. It may be a complex process in a system where both Parliament and courts are able to make law and to change the nature of ownership. (c) Its system of registration of title, which tends to be inimical to fragmentation of ownership. Let us look at two other jurisdictions by way of example, before reflecting further on the implications of this for our own system and its future.

EXAMPLES: SCOTLAND AND SOUTH AFRICA As is well known, Scotland has a civil law system, and its property law is thoroughly Roman. The property law of Scotland is entirely civil in character. The distinction between real rights and personal rights is strictly observed. There is a numerus clausus of real rights. The real right of ownership is indivisible. And there is no place for the distinction of English law between law and equity, and between legal ownership and equitable ownership.32

32

KGC Reid, ‘National report for Scotland’, in Hayton et al, supra n 8 at p 67. The report explains that the Scots trust depends upon a separation of patrimonies, and is a matter of obligations; it does not involve any beneficial ownership for the beneficiary.

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The recent abolition of the feudal system can only strengthen this feature of Scots law. Against this background the case of Sharp v Thomson33 provides a fascinating illustration of the interaction of inherited concepts, the courts, Parliament and the land registration system. The facts, very briefly, were as follows. Albyn Construction Ltd had granted a floating charge over its assets. The company contracted to sell a flat to Mr and Miss Thomson (they were brother and sister), the price was paid, and the purchasers moved in in June 1989. Unaccountably, no deed of conveyance was delivered, so that the Thomsons could not register their purchase immediately; their solicitor’s failure to insist on a disposition and to register it was inexplicable, because legal title does not pass until registration.34 Unfortunately, the floating charge crystallised before the purchase was, eventually, registered in August 1990. Was the flat, therefore, the property of the chargee, or did it belong to the Thomsons? At first instance and in the Court of Session the buyers lost. The House of Lords held in their favour on the basis that the beneficial interest in the flat had passed to the Thomsons on payment of the purchase price. The House of Lords’ solution can be seen as a narrow point of interpretation of the meaning of the word ‘property’ in this context;35 but a reading of Lord Jauncey’s speech points irresistibly to the conclusion that an English solution is being imposed upon Scots property law, in which the idea of a beneficial interest of this kind is completely unknown.36 This is judicial fragmentation of ownership at its most creative and, perhaps, its most unwelcome; the reaction of Scots lawyers has been one of outrage,37 intensified when a subsequent decision followed Sharp and confirmed their worst fears.38 The sequel to the case was a reference by the Scottish Parliament to the Scottish Law Commission, which has published a discussion paper39 recommending that the decision be overturned by legislation, and the general issue, such as it was, solved by the institution of a search with a priority period to protect purchasers against crystallisation of a floating charge.40 Assuming that the recommended legislation will be passed, the tale of Sharp v Thomson shows a legal system standing by its own system of title and its own concept of ownership, in the face of a bold attempt at fragmentation, where the judicial response to a crisis was out of step with political will and social need.

33 34 35 36 37

38 39 40

1997 SC (HL) 66; 1997 SLT 636. Registration, that is, in the Land Register of Scotland. ‘Mere delivery of the disposition is ineffective to transfer ownership of land’, in R Paisley, Land Law (W Green, 2000), at 98. le a finding that ‘property’ in s 462 of the Companies Act 1985 excludes property in respect of which a disposition had been delivered; see KGC Reid, ‘Jam today; Sharp in the House of Lords’ 1997 10 SLT 79. See n 32 above. It was scarcely necessary to do anything so drastic, either for the Thomsons or for purchasers in general. The Thomsons had a remedy against their solicitors, who should have obtained a certificate of noncrystallisation to protect their clients and then registered the purchase swiftly. The literature in Scots publications is vast; for a list see para 1.8 of ‘Discussion Paper on Sharp v Thomson’ Scots Law Com No 114, 2001. S Styles, ‘Sharp pains for Scots property law: the case of Burnett’s Trustee v Grainger’ 2000 38 SLT 305; the case is reported at 2000 SLT (Sh Ct) 116. Scots Law Com No 114, 2001. For the details, see Parts 3 and 4 of Scots Law Com No 114, 2001. It now appears that legislation may not be necessary; in Burnett’s Trustee v Grainger 2002 SLT 699 the Court of Session adopted a very limited interpretation of the decision in Sharp; the situation is on hold pending an appeal to the House of Lords. Cf Hiram and Mair, ‘A leonine partnership’, in Hudson (ed) New Perspectives on Property Law, Human Rights and the Home, Cavendish Publishing, 2003, 99, 109.

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There is something of a tradition of looking at South Africa alongside Scotland.41 In South Africa the legal system is Roman-Dutch, and so unititular: Two characteristics dominated the Roman-Dutch view of property as it was established in South African law by the early decades of the twentieth century: ownership was regarded as an absolute right in the sense that it was the pinnacle of a hierarchy of rights in property, and in the sense that it was a fundamentally exclusive individual right.42

There is an excellent deeds registration system, recognised as being largely accurate and forming the basis of marketability; as in Scotland, ownership passes only on registration.43 The policy of the Apartheid regime was to confine the non-white population not only to small and, in some cases, undesirable areas of land, but also to inferior, insecure and unregistered property rights: [Under Apartheid] Black South Africans were precluded from obtaining and holding rights in land… Instead, a host of legislative and administrative measures forced blacks to resort to forms of land control that were not recognised or effectively protected. These included tribal rights and statutory land rights based on a variety of permits… In effect, these so-called ‘black’ land rights were ostracised from the markets and invisible within the economic infrastructure. The Deeds Registries Act’s support of the supremacy of ownership within a system of land rights (wittingly or unwittingly) perpetuated the differentiation between ‘black’ and ‘white’ land control mechanisms.44

The challenge for the democratic regime is to reverse the injustices of the past, to give rights in the land to a greater spectrum of people, and to ensure that everyone has a home.45 The Constitution gives the government the ability to expropriate land,46 but there is an understandable reluctance to do this. In 1992, Andre van der Walt argued that the way forward was to step away from the traditional, hierarchical structure of land ownership and to use a policy of fragmentation, diversifying ownership by the strengthening of lesser rights and the introduction of new rights.47 The last decade has seen a truly bewildering array of new legislation in South Africa, as the government moves towards its objectives of restitution, redistribution and tenure reform.48 Much remains to be done, but there has been progress down this route, both in legislation and in case law. Some of the statutory reforms have transformed certain insecure rights into ownership or leasehold; others have opted for a fragmentation and diversification of ownership by creating new rights. Van der Walt points to the Communal Properties Associations Act 1996, the Extension of Security of Tenure Act 1997, and other statutes making black land holdings less vulnerable to

41 42 43 44

45 46 47 48

See, eg, DL Carey Miller, ‘Scots and South African property: problem transplants’, in E Cooke (ed), Modern Studies in Property Law Vol I (Hart Publishing, 2001), 295. AJ van der Walt, ‘Dancing with codes’ (2001) SAJHR 118. Deeds Registries Act 1937, s 16. N Mostert, The diversification of land rights and its implications for a new land law in South Africa’, conference paper given in Reading in March 2002, and to be published in E Cooke (ed), Modern Studies in Property Law Vol II (Hart Publishing, 2003). See also CG van der Merwe and JM Pienaar, ‘Land reform in South Africa’, in The Reform of Property Law, op cit n 8 above, 114. Constitution, s 26. S 25. ‘The fragmentation of land rights’ (1992) SAJHR 431. See Mostert, and van der Merwe and Pienaar, n 44 above.

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eviction, and to a clear change in the courts’ approach to possession actions.49 Mostert argues that while some of the land law reforms work from within the existing, hierarchical ownership framework, others represent a departure from traditional land law. Of the Interim Protection of Informal Land Rights Act 1996, for example, she says: ‘This depletes the absolute enforceability of land ownership, while strengthening “lesser” rights.’ Moreover, Mostert demonstrates that the registration system is being adapted and harnessed to assist in this process; the Development Facilitation Act 1995 creates and enables the registration of ‘initial ownership’, a new property right created for the purpose of land reform. She argues that this process must be extended: At present, a large part of the population is excluded from the deeds registry system either because the land in respect of which they hold rights has not been surveyed, or because individualisation of the land-use rights in communal property is still impossible. In order for registration to be of continued significance in the emerging land law landscape, the protection under the publicity principle should be extended to other forms of land use and control.50

This is a very difficult task, in view of the tendency of a registration system to reinforce the rights and security of the owner rather than to facilitate fragmentation of ownership.51 In South Africa the inherited system of title and concept of ownership, and the well-established registration system, all tend towards a unitary form of ownership; it is referred to as hierarchical because it sets the landowner apart from and above the holders of lesser, non-ownership rights. Nevertheless the government is working against the tendency of the system and taking significant steps towards fragmentation and a much more diverse range of ownership rights; indeed, we can say that the creation of new forms of property rights such as ‘initial ownership’ marks a move from a unititular to a multititular system.52 Contrast what we have just seen of Scotland. It too has an excellent registration system. And it has nowhere near such serious social difficulties and deprivations to contend with as those found in South Africa, so that there is no such need for a modification of the legal system. And so we find the Scots legal system resisting the ad hoc fragmentation carried out by the House of Lords in Sharp v Thomson.53 We find the legislature removing the feudal system and the compromise that has subsisted for so many centuries between feudalism and the Roman concept of unitary ownership, and overtly confirming the unititular, Roman system. Where the South African system is manipulating and changing its inherited legal structures, the Scots system is reinforcing them.

BACK HOME AGAIN: CURRENT TRENDS IN ENGLAND AND WALES As has been seen, our own legal system exemplifies this pattern of factors combining to produce the current form of ownership. We have inherited a multititular system; we have grafted onto it a registration system which, until now, has sought (not entirely successfully) to reflect that system of

49 50 51 52 53

Van der Walt, op cit n 42 above, at 289 ff. Mostert, op cit n 44 above. A more in-depth examination of this point might consider whether a deeds registration system is less restrictive than a title registration system. Van der Walt alludes briefly to Honoré’s terms, op cit n 47 above, p 446. 1997 SLT 636.

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title; and we have a strong judicial tradition of creative fragmentation, developing in the warm shadow of a political will to diversify and fragment ownership for social purposes. Look ahead 10 years: we shall have pretty well universal registration, which will have made our legal system for all practical purposes unititular. That registration system will have made ownership more secure and more unitary. The political trend towards fragmentation of ownership, seen particularly clearly in the operation of the Rent Acts and their successors, had already, before the turn of the century, given way to a policy of reinforcing individual ownership and bolstering the security of purchasers and mortgagees. Fragmentation has passed its high point and is no longer good political currency. A tide has turned. It has not gone all the way, but the movement is discernible and significant; it may become inexorable. But what about the judicial tendency to use fragmentation of ownership as a problem-solving tool in individual hard cases? We are definitely in a post-Denning era, and judicial creativity is probably rather more principled than it was, but it is still there, and a force to be reckoned with. It may become more in demand. I have not mentioned, so far, the further development of the Land Registration Act 2002, and one of its principal goals: electronic conveyancing. The effect of that will be draconian in its bolstering of the paper title and its prevention of the informal creation of rights. Once s 93 of the Act is in force, even land contracts will be ineffective unless effected electronically.54 The calls on judicial creativity, the need for equity’s mothering of frail, non-legal entities, will be greater than ever before. The courts will need to respond in a principled way to difficult cases. An answer will have to be found, for example, to the problem of the agreement to sell and purchase land that is almost, but not quite, a contract.55 The challenge for the courts is going to be to achieve justice without working such damage as to provoke a legislative sledgehammer response such as that recommended by the Scots Law Commission in response to Sharp.

CONCLUSION This chapter has sought to point out the links between systems of title and ownership, systems of registration, and the tendency (on the part of legislatures and judges) to fragment and diversify ownership of land. I have suggested that these three things work in tension with each other, and that the tension is seen to be resolved in different ways in different legal systems. And whilst it may be helpful to see this point as an explanation of what is happening, there is a practical message too. A move to a more unitary concept of ownership has its victims.56 They are not dramatic, but they are significant, and there are always more than we see. The challenge for the courts is to decide how to respond within the new system.

54 55 56

S 93(2). See n 18 above; and see M Dixon, ‘Proprietary estoppel and formalities in land law and the Land Registration Act 2002: a theory of unconscionability’, in E Cooke (ed), Modern Studies in Property Law Vol II (Hart Publishing, 2003), p 165. Contrast the South African move towards a multititular system in the interests of redressing the wrongs of the victims of the Apartheid regime.

Chapter 6 The reform of property law and the Land Registration Act 2002: a risk assessment Martin Dixon1 INTRODUCTION The Land Registration Act 2002 has been received with much critical acclaim, and rightly so. It is a work of monumental importance and monumental effort. Law Commission Report No 2712 was itself the last in a long series of Reports discussing, proposing, rejecting and recommending changes to the fundamentals of the land registration system established by the Land Registration Act 1925.3 As is well known, the Act of 2002, which is now set for entry into force on 13 October 2003,4 is designed to revolutionise conveyancing in England and Wales and to bring the land registration system established by the 1925 Land Registration Act into the modern age.5 Indeed, in terms of its underlying rationale, the Act of 2002 shares much with its 1925 counterpart. Both were born of the recognition that the systems they were designed to replace were (and are) no longer suitable for the social and economic conditions of the time. The 1925 Act is still seen by some as an interloper, polluting the purity of the historic principles of ancient property law, and the 2002 Act arouses suspicion and trepidation in similar measure for those who are now comfortable with the amended provisions of the 1925 legislation. Both reflect the new ‘technology’ of their age (the introduction of the widespread use of registers and e-commerce respectively) and it was just as uncertain whether the system of the 1925 Act would work as it is now uncertain whether electronic conveyancing will actually deliver all the anticipated benefits.6

1 2 3

4

5

6

This paper was given in this long form at the WG Hart Symposium, University of London, 2002. A shorter version was published first in The Conveyancer and Property Lawyer, 2003. I am grateful to the Editor of The Conveyancer and Sweet & Maxwell Ltd for permission to reproduce material in the current volume. Land Registration for the Twenty-first Century: A Conveyancing Revolution (2001). Two earlier Reports (Law Commission Reports No 158 (1987) and 173 (1988)) were produced on the Commission’s own initiative. Law Commission Report No 235 (1995), leading to the Land Registration Act 1997, was the first written jointly with the Land Registry. The second joint Report, Land Registration for the Twenty-first Century (No 254, 1998) formed the basis of much of the third joint Report, No 271, which contains final proposals and the draft of what is now the LRA 2002. See the Land Registration Act 2002 website at http://legislation.landreg.gov.uk. This date was chosen as giving the Land Registry the maximum amount of preparation time without affecting the entry into force of the Commonhold and Leasehold Reform Act 2002 which will also have a major impact on the Land Registry and is due for entry into force in January 2004. It is anticipated that fully functional electronic conveyancing will be rolled out on a voluntary basis in 2007, following a (hopefully) successful pilot in 2005, see Lord Chancellor’s consultation document, econveyancing, A Land Registration Consultation, May 2002. See also Lord Chancellor’s Department Consultation Paper: A Draft Order under section 8 of the Electronic Communications Act 2000, March 2001 and the Consultation Response, December 2001, regarding the formalities for the completion of electronic contracts. There is robust criticism of the 1925 legislation in Report No 271. However, there is no doubt that in essentials it has met its goals, albeit by means of inventive judicial application.

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Fundamentally, both Acts are directed principally to simplifying the processes by which land transactions are carried out, and any substantive changes found in the two pieces of legislation can be regarded as ancillary to, and supportive of, this primary purpose. Lest we think this is too high a claim for the 2002 Act, Law Commission Report No 271 makes it clear in its opening paragraph that ‘[t]he purpose of the Bill [sic] is a bold and striking one. It is to create the necessary legal framework in which registered conveyancing can be conducted electronically’.7 Of course, the Land Registration Act 1925 had partner legislation in the Law of Property Act 1925, the Settled Land Act 1925, the Trustee Act 1925 and the Administration of Estates Act 1925, and so itself is not so directly concerned with substantive matters. Thus, while the Act of 2002 is very clearly ‘transaction driven’, with all reform being bent deliberately and methodically towards the goal of econveyancing, it also indulges in wide-ranging substantive law reform in support of this goal. There is, to use the words of the Law Commission, a very considerable ‘legal framework’ put in place. As one would expect, this reform of the substantive law is well referenced to the primary goal of econveyancing and, for the most part, the reasons for the changes to the substantive law are persuasive assuming e-conveyancing is in place.8 But that system is not yet with us. It is not the purpose of this analysis to challenge the assumption that all efforts must be bent towards establishing a system of e-conveyancing or to embark on a detailed assessment of those provisions of the Act directly concerned with that task.9 Nor does the author underestimate the complexities of the legal, financial and administrative framework that must be put in place before the new system can come into operation.10 However, while much attention is rightly given to the fundamental purpose of the 2002 Act, it is important to assess the considerable impact of the Act on those ‘everyday’ principles of land registration that currently regulate over £2,000 billion worth of property.11 As has been said already, many—perhaps most12—of these consequential substantive changes13 are designed to facilitate and encourage the new conveyancing processes and to make a reality of the desire to move from registration of title to title by registration where it ‘will be the fact of registration and registration alone that confers title’.14 Yet, given that these substantive changes are certain to come into force before the e-conveyancing provisions, even though they are

7 8

9

10

11 12 13 14

Report, op at n 2 at para 1.1. The current author has reservations about the need for wholesale reform of the law of adverse possession as a logical consequence of e-conveyancing, see below text at n 82. Of course, there may well be other social and legal imperatives demanding such reform: see, eg, the remarks of Lord BrowneWilkinson in Pye Developments v Graham [2002] 3 All ER 865. In fact, apart from a heavy emphasis on the policy reasons driving the change, Report No 271 and hence the Act itself says relatively little about the mechanics of e-conveyancing. Nor should we be surprised, for the devil will be in the detail and will be provided by the relevant Land Registration Rules after extensive consultation. See generally D Capps, ‘Conveyancing in the twenty-first century: an outline of electronic conveyancing and electronic signatures’ [2002] Conv 443. The May 2002 consultation document on e-conveyancing conveys this admirably, noting that it will be the first in a series of consultation exercises. Not least, it is now clear that the new Land Registration Rules will come in two stages: the standard rules (my description) which will be approved in spring 2003, and the e-conveyancing rules at a later date. Chief Land Registrar’s estimate of the value of titles guaranteed under the 1925 legislation as at May 2002: see above n 4. The Report, op cit n 2 at para 1.6 argues that ‘virtually all the changes that the Bill [sic] makes to the present law flow directly from it’. ‘Consequential’ in the sense that they are not central provisions concerning e-conveyancing. Of course, they are not inconsequential in terms of their effect on the law of land registration. Report, op cit n 2 para 1.10.

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to a large extent parasitic on those provisions, what will be their impact in an e-conveyancing-free climate? More importantly, is there a possibility that the substantive law reforms will produce unwelcome or unexpected effects because they are not located in an e-conveyancing system? Is it possible that the effect of the substantive reforms will be different before and after the introduction of e-conveyancing and, most of all, is there an opportunity for the courts to exploit any uncertainties in the legislation to undo or undermine the system of e-conveyancing before it becomes operative? In order to address these questions, this chapter examines a number of the ‘parasitic’ changes to substantive law, both in their relation to the central goal of e-conveyancing and in their own right as amendments to the law of land registration. Of course, it must be accepted at the outset that these changes were not designed to stand alone, even if they could in fact be justified without the conveyancing imperative, and thus any adverse comment on the relevant provisions of the Act is itself open to criticism. However, it bears repetition that many of the changes actually will stand alone for a period of time—perhaps a considerable period of time—and they will come into effect without the protective cloak of e-conveyancing. They will change the face of land of registered title before the first byte of e-conveyancing.

THE TRANSFORMATION OF OVERRIDING INTERESTS INTO INTERESTS THAT OVERRIDE There is, perhaps, no other creation of the Land Registration Act 1925 that has aroused as much fierce comment as the infamous s 70(1) and its list of overriding interests. The very fact that there is a category of property right that can bind a purchaser of a registered title without either that interest appearing on the register or necessarily being discoverable is thought by many to be an anathema to the very idea of a registration system. After all, why have a system of title registration if the registered entry is not conclusive as to important adverse interests? To others, among which the present author can be counted, there is nothing inherently wrong with a category of nonregistrable binding right, even in a system of land registration. After all, pre-1926 property law coped with the concept of legal rights ipso facto binding transferees and there was no certainty that all such rights were discoverable by inspection of the title documents or the land itself. Again, although the analogy is not perfect, a person would not usually buy a car by sight only of the registration document, so we might think that a prudent purchaser might wish to inspect the property (and hence discover much about it) irrespective of the state of the register.15 So also, policy might dictate that there should be a class of right that binds a registered title despite the fact of its non-registration. Obligations of general public utility, such as the burden of maintaining sea walls and public rights of way, are an obvious example. But ‘policy’ can mean more than this and it could be thought socially and economically politic to ensure that the property rights of those who

15 16

Such inspection, as with a car, is not only to see if the property is suitable for the needs of the purchaser but also, in simple terms, to see if there is anything wrong with it. Lest it be thought that the system of land charge registration was happy to countenance the destruction of the proprietary rights of persons in occupation where those rights were not protected as land charges (there being no equivalent of s 70(1)(g) LRA 1925), see C Harpum [1990] CLJ 277 at 316 who argues persuasively that such protection was intended, but mistakenly omitted from the LCA 1925. See also Megarry & Wade, 6th edn (2000), paras 5–121.

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do not have the protection of a formal acknowledgement of their rights, but who nevertheless occupy land as their home, should be protected without the need to register.16 For, theory aside, the act of registration ‘against’ another’s land, especially the land of one’s emotional partner (as would be required without the protective cloak of s 70(1)(g) LRA 1925), is readily seen as a hostile act. It seems to scream ‘I don’t trust you!’ Of course, we no longer live in 1925 and legislation drafted in the early part of the last century is unlikely to be suited to the needs of the early part of the present one. More importantly, it is unarguable that changes in the substance of land law and in the way in which land is now used have turned s 70(1) LRA 1925 into a different creature from that envisaged by the drafters of 1925 Act. The development of principles permitting (some might say encouraging) the informal acquisition of interests in land—such as resulting and constructive trusts and proprietary estoppel—have dramatically increased both the chance that an adverse right might exist and that it might be undiscoverable, being neither materially recorded nor necessarily obvious to our prudent purchaser. Likewise, the rise to prominence of a different kind of ‘purchaser’, the institutional mortgagee, and the importance of such lending to the domestic economy17 has both exposed the latent power of s 70(1) and released a tidal wave of litigation that may still not have abated.18 So, despite the fact that the case against overriding interests is not watertight, there are powerful arguments in favour of reform irrespective of the imperative of e-conveyancing, although whether such reform would ever have reached the statute book without the e-conveyancing dimension is open to question. Perhaps the ‘defects’ would not have been thought defective enough to warrant root and branch reform. However, when the objective is to wholly reshape the way land is transferred and to make the register both the evidence and the origin of the legal validity of a person’s title, achieved on-line with the absolute minimum of additional enquiries, then any diminution in the integrity of the register has to be minimised. Indeed, we should remember that although there is much talk of the ‘simultaneous’ transfer and registration of titles and of thirdparty rights in land, this is inaccurate. It is not so much that the act of transfer/creation must occur

17 18

19

See the discussion in Royal Bank of Scotland v Etridge [2001] 3 WLR 1021. The trail of litigation starts with Pettitt v Pettitt and the acceptance that, in the right case, a cohabitee may acquire a beneficial interest in property held of legal title by another. It leads next to William & Glyn’s Bank v Boland and the recognition of binding rights under s 70 (1)(g) LRA 1925. Then come the counter punches of Paddington BS v Mendelson (deeming consent), City of London BS v Flegg (paramountcy of overreaching), Abbey National BS v Cann (closing the registration gap and the scintilla of time) and Equity & Law Home Loans v Prestige (implying consent on re-mortgage). In response to this, there is the now discredited Woolwich BS v Dickman (consents must be registered to be effective), but the altogether more effective Barclays Bank v O’Brien (undue influence and misrepresentation). This led to Bank of Ireland v Bell (applying for sale despite a binding overriding interest), Alliance & Leicester v Slayford (mortgagee using alternative remedies) and finally Royal Bank of Scotland v Etridge (limiting undue influence). Is the next stop further litigation against allegedly negligent advising solicitors? See s 93 LRA 2002 and the power to require such registration for matters specified in the Rules. It provides that a disposition or a contract to make a disposition of a registered estate or charge, or a third party right subject to the entry of a notice on the register ‘only has effect if it is made by means of a document in electronic form and if, when the document purports to take effect…it is electronically communicated to the registrar and the relevant registration requirements are met’. Thus, dispositions purported to be made in material form (or communicated to the registrar in material form) will create or transfer nothing at all. This goes much further than the existing principles of registration where failure to create or register properly may result in the transferee obtaining an equitable interest in property. See below text accompanying n 99.

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at the same time as the act of registration; it is rather that the act of registration is the act of transfer/creation. Not only that, the act of registration (creation/transfer) must in due course be done electronically and not otherwise.19 Clearly, the current large category of overriding interests cannot survive this—or rather, if they do, then the dream of econveyancing and title by registration cannot survive in the form found in the LRA 2002. Thus, it is with some justification that the Law Commission sees the existence of overriding interests as a ‘major obstacle’ to its goal20 and although there was a brief flirtation with the idea of abolishing the concept altogether, in the result the 2002 Act lays the axe to the tree with some vigour both by minimising the occasions on which an ‘interest that overrides’ can affect a registered title and by encouraging the registration of interests that might otherwise take effect as such. Apart from the change of name,21 the first significant matter of note is that the Act now recognises that the effect of an interest that overrides depends on whether it is challenging a first registration of title or a disposition of a title that is already registered. Thus, interests overriding a first registration are dealt with in Schedule 1 (and made effective by ss 11 (4)(b) and 12(4)(c) of the Act) and those overriding a registered disposition are dealt with in Schedule 3 (and made effective by ss 29(2)(a)(ii) and 30(2)(a)(ii) of the Act) and the simple effect of the distinction is that more interests will override a first registration and in a wider range of circumstances than will override a disposition of an already registered title. Schedule 1 is wider than Schedule 3. There is a double rationale for this. First, that the act of first registration itself (being in this sense purely administrative) should neither enhance nor diminish the effect of a proprietary right over land. That which did not bind before should not bind after registration and vice versa. Of this principle surely there can be little complaint. For example, equitable easements over land of unregistered title qualify as Class D(iii) land charges under s 2(5)(iii) LCA 1972 and so must be registered to bind a purchaser of a legal estate in the land. It would be destructive of the parties’ pre-existing legal relationship and of the policy of the LCA 1925 if by the mere act of first registration, an unregistered Class D(iii) equitable easement could become an interest that overrides. Hence equitable easements are excluded from Schedule 1.22 Similarly, although para 2 of Schedule 1 confers overriding status on an ‘interest belonging to a person in actual occupation, so far as relating to land of which he is in actual occupation, except for an interest under a settlement under the Settled Land Act 1925’, this can refer only to those rights which, at the time of first registration, are already binding on the applicant for first registration.23 Such rights would be binding prior to first registration primarily because the applicant had notice of the rights (the rights not being registrable as land charges),24 or when the application for first registration is voluntary (that is, not

20 21 22 23 24 25

Report No 271 at para 8.1. Perhaps the intention is to signal the downgrading of the importance of these rights or to indicate that pre2002 Act interpretations of the meaning and scope of ‘overriding interests’ should not necessarily carry over? Para 3, Schedule 1. The exclusion also operates in respect of Schedule 3 rights (see below) and thus changes the position in respect of certain equitable easements under the LRA 1925, s 70 (1)(a) as interpreted by Celsteel Ltd v Alton House Holdings Ltd [1985] 1 WLR 204. Report No 271, para 8.1. Eg, a beneficial interest behind a trust of land where there is only one trustee. Registered land charges would of course be automatically entered against the title. A knowledgeable estate owner of unregistered title might, therefore, sell the land in order to defeat unregistered (but registrable) land charges, rather than apply for first registration. Indeed, perhaps such an owner could sell to his wife: Midland Bank v Green [1981] 2 WLR 28.

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triggered by a dealing with the unregistered land), where the applicant is bound inter partes by the right. In neither case should the newly registered proprietor be able to escape the right by an act of first registration even if it would have become void against a purchaser had he sold the land.25 The second rationale is that, given that a major aim of the new legislation is to ensure that the register provides as accurate a picture as possible of the legal state of the land, the interval between a first registration and a first registered disposition is seen as an opportunity to ensure that more rights come onto the register (even if they could override) and to deny overriding status thereafter to those that contradict the paramount policies of the Act. There is in consequence a duty under s 71(b) of the Act on a person applying for registration of a disposition to disclose information about rights which may fall within Schedule 326 and, as noted above, the scope of rights within Schedule 3 is narrower than those of Schedule 1.27 Two further points may be made here. First, it remains to be seen whether the combination of an efficient e-conveyancing system, the s 71 duty or the penalty of voidness (where it operates) really does encourage registration of rights in the interval between first registration and the first registered disposition. This rather suggests a degree of knowledge and understanding on the part of right holders (and their advisers) that might not exist. Secondly, given that the legislation denies continuing overriding status to certain property rights on the occasion of a registered disposition irrespective of the circumstances surrounding that disposition and despite the fact that they were effective at first registration, this might be thought to amount to a deprivation of property contrary to Article 1 of Protocol 1 to the European Convention on Human Rights etc under the Human Rights Act 1998.28 If so, this would trigger an investigation into the public utility of the legislation to assess its compatibility with human rights law. However, we must exercise caution here, because it remains to be seen whether many rights will in practice cease to be overriding on a registered disposition where they were overriding on a first registration because of the LRA 2002 such as to trigger a human rights challenge. For example, many rights may be effective at first registration against the applicant simply because the applicant created the right in the first place and their subsequent voidness against a purchaser under a registrable disposition will be nothing more than a repeat of the rule we have now as to transactions concerning third parties. Thus, where A grants an option to purchase unregistered land to X which is not then registered as a land charge under LCA 1972, this remains effective against A after A applies for voluntary first registration because A granted it If A then sells under registered disposition to B, the option is not an interest that overrides under Schedule 3 (absent patent actual occupation) and so is voided. But it is voided not because of a difference between Schedule 1 and Schedule 3, but because of an application of normal principles. So, for a human

26

27 28

Rule 55 of the draft rules. The duty also extends to applicants for first registration concerning Schedule 1 rights, s 71 (a) and draft rule 27. The penalty for failure to provide the relevant information is not made clear. Note also that under s 37 LRA 2002, ‘if it appears to the registrar that a registered estate is subject to an unregistered interest’ he may enter a notice in respect of Schedule 1 rights (with some exceptions: see s 33 LRA 2002), thus removing their overriding status and putting them on the register. The prime examples are legal easements and the rights of persons in actual occupation, being more narrowly drawn under Schedule 3 than under Schedule 1. The Law Commission discusses the impact of human rights law on overriding interests that are phased out over a period of time (Report No 271 para 8.89), but not in respect of rights lost because of the differences between Schedules 1 and 3 and caused by successive sales of the land. Of course, the fact that only a small number of persons may be affected by this problem does not mean that the provisions will be human rights compatible.

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rights challenge to arise, we would be looking for a right binding at first registration because of Schedule 1, but ceasing to bind on a registrable disposition because of Schedule 3. This could be rare in practice. A possible example is where A conveys an unregistered title to B subject to X’s legal easement which binds B as a legal right effective against the whole world. B applies for first registration of title and the legal easement becomes an interest that overrides under para 1 Schedule 1 LRA 2002. However, should B then convey to C by registered disposition, X’s right would not be an interest that overrides C’s estate under Schedule 3 if the legal easement was not within the actual knowledge of C, not registered under the Commons Registration Act 1965, had not been exercised within one year of the disposition and was not obvious on a reasonably careful inspection of the land. The effect of Schedule 3 in these circumstances would be to deny effectiveness to a right guaranteed under Schedule 1 without any ‘fault’ on the part of X, the owner of the easement. Indeed, although B may well have been under a duty because of s 71 to provide information that would have ensured that the legal easement could have been entered on the register, B’s failure in this regard presumably cannot affect the innocent and unknowing owner of the legal easement. The result is that X is deprived of his right against the land because he now falls under Schedule 3, not Schedule 1. Admittedly, such cases may be rare, but much will turn on how courts interpret Schedule 3 rights, particularly the provisions concerning the discoverability of legal easements and the meaning of ‘patent’ actual occupation that are not applicable under Schedule 1. An interpretation that shrinks the category of Schedule 3 rights by taking a narrow view of these provisions, despite the fact that the same rights in unchanged circumstances would have been binding under Schedule 1, could be a recipe for litigation and uncertainty. In addition to this reclassification of ‘interests that override’ according to the type of transaction they are to affect, the Act also radically alters the type of right that can have overriding status in the first place. The result is a considerably slimmer set of rights under both Schedules than those that take effect under s 70(1) LRA 1925. As a very general guide, the 2002 Act provides that the following rights may override a first registration or a registered disposition, as the case may be. First, legal leases of seven years or less, with certain exceptions some of which are specific only to Schedule 3;29 secondly, interests of persons in actual occupation, but where the category is significantly limited in comparison with s 70(1)(g) LRA 1925, particularly in relation to Schedule 3 rights;30 thirdly, legal easements and profits, but once again restricted under Schedule 3;31 fourthly, customary, public and mineral rights and local land charges;32 fifthly, a miscellany of rights such as franchises and manors, some feudal in origin;33 and finally, although not listed in either Schedule, a Public Private Partnership (PPP) lease also enjoys the status of a right that overrides.34

29 30 31 32 33 34

The exceptions must therefore be registered to be effective against a third party even though they are of seven years’ duration or less. See paras 1 of both Schedules. Paras 2 of both Schedules. Paras 3 of both Schedules. Paras 4, 5, 7–9 and 6 respectively of both Schedules and in identical terms. Paras 10–14 of both Schedules and in identical terms. S 90 LRA 2002, where PPP leases for the purpose of this Act are defined as ‘leases created for publicprivate partnerships relating to transport in London’ (s 90(6)). These are special statutory creations relating to the transport system in London and are included only because of their special character and with some reluctance on the part of the Law Commission. See Report No 271, para 8.11 et seq.

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Rights recognised as within s 70(1) LRA 1925 but now omitted from Schedules 1 and 3 LRA 2002 Under the new scheme, there are a number of deliberate omissions from both Schedules 1 and 3 (when compared to s 70(1) LRA 1925) though that is not to say that the substantive rights apparently omitted may not find some protection elsewhere in the Schedules or be otherwise protected by the legislation. There are a number of examples. First, equitable easements are deliberately omitted from the Schedules, despite being recognised as overriding interests within s 70(1)(a) LRA 1925 as a result of the decision in Celsteel v Alton. The rationale for their exclusion from Schedule 1 has been noted above and their removal from Schedule 3 further advances the aim of ensuring that the register provides a near accurate picture of the legal state of the land. Interestingly, however, Law Commission Report No 254 originally proposed that expressly granted easements should lose overriding status (because being expressly created they should be registered), but that all impliedly granted easements should continue to be overriding.35 In other words, the original proposal was to trigger overriding status by reference to the method of creation (express or implied) rather than the effect of creation (legal or equitable). The 2002 Act, however, uses the legal/equitable distinction as the touchstone for inclusion within Schedules 1 and 3. In consequence, this means that impliedly granted equitable easements do not enjoy overriding status, even though they are by definition not expressly mentioned in a contract or other written instrument and so may easily be overlooked for registration.36 This could have an adverse impact in two circumstances. First, impliedly created equitable easements of necessity, common intention or under the rule in Wheeldon v Burrows37 no longer carry overriding status. Of course, given that most express contracts concerning land exclude the creation of such easements, this may not turn out to be a significant problem, but there is further potential here for litigation and uncertainty.38 In this regard, we should note the recent obiter dicta in K Sultana Saeed v Plustrade,39 which suggests that certain types of easement can qualify as an overriding interest under s 70(1)(g) LRA 1925 because the claimant was in actual occupation of the portion of land subject to the easement: in this case, by using the parking space that was the subject matter of the easement. While there may well be doubts about whether the ‘actual occupation’ provisions of s 70(1)(g) LRA (and hence of Schedules 1 and 3 of LRA 2002) support this type of ‘occupation’, it is easy to see how certain types of equitable easement may nevertheless squeeze into the new categories of ‘interests that override’ through a flexible interpretation of their provisions. Secondly, easements generated by proprietary estoppel are necessarily equitable and there is no written instrument at all by which their existence may be discovered or which may propel a right holder to register. Moreover, even

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37 38 39

Law Commission Report No 254, para 5.24. Note, under the transitional provisions, any easement or profit which is an overriding interest at the time the Act comes into force, but would cease to be under Schedule 3, will retain its overriding status, Schedule 12, para 9. This necessarily includes equitable easements currently classed as overriding interests because of Celsteel v Alton. [1879] 12 Ch D 31. In the case of easements impliedly granted as part of an equitable lease, it is arguable that the equitable easement will partake of the overriding status of the equitable lease (if any). (2002) 25 EG 154. But see Epps v Esso Petroleum [1973] 1 WLR 1071.

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though the inchoate equity of estoppel is now to be regarded as proprietary in nature (see s 116 LRA 2002), the right (inchoate or crystallised) must still fall within the protective ambit of the legislation and this might be difficult for easements.40 In other words, making the overriding status of easements dependent on their legal or equitable character, rather than the manner in which they arose (expressly or impliedly) will remove a large category of right from the Schedules, but it does not sit well with the policy behind the rules on implied creation. Why insist that a person may not derogate from their grant or indulge in unconscionable conduct (and thus generate a right) only to see the right destroyed on a sale of the land? A reluctance to allow this could force strained interpretations of the 2002 Act in the same way that Celsteel v Alton and now K Sultana Saeed v Plustrade have done with the 1925 registration statute. A second major change is that the Schedules make no mention of the rights of persons acquiring or having acquired rights under the Limitation Acts. The rights of adverse possessors per se will no longer be overriding. In fact, however, this is not as drastic a change as might first appear. Law Commission Report No 271 makes it clear that the rights of adverse possessors will override a first registration or a registered disposition if the adverse possessor is in actual occupation of the land according to the terms of the respective Schedules. In other words, an absent adverse possessor has no protection. On balance, this seems a fair compromise between the rights of the purchasing third party and the adverse possessor and it was well supported by the consultation process.41 Of course, there may be difficulties over the meaning of ‘actual occupation’ especially in the light of the provisions of Schedule 3 as they apply to semi-derelict land where the initial acts of adverse possession may be slight and the evidence of ‘patent’ actual occupation very slim. However, it may well be that cases of adverse possessors in the process of acquiring rights but who are not in actual occupation will be rare in practice, and for adverse possessors who have acquired rights, the legislation already provides mechanisms by which the adverse possession can claim the registered title, with provisions of like intent found in LRA 2002.42 Importantly, the rights of persons who have acquired the right to be registered as proprietor (that is, those who have completed the relevant period of adverse possession) but who have left the land without such registration will cease to be overriding, unless the issue is one of first registration where the applicant will be bound by the rights of adverse possessors of which he had notice, irrespective of actual occupation (ss 11(4)(c) and 14(4)(d) LRA 2002). Although this may well be perceived as an attack on the very notion of adverse possession, it does in fact serve two policy masters: it further protects a purchaser from undiscoverable and unregistered but binding rights and, perhaps unintentionally, it can be seen as supporting one of the justifications for adverse possession by disapplying the claim to title of one who is not utilising the land economically or socially. In fact, the change away from automatic protection of the rights of adverse possessors also encapsulates one of the major philosophical pillars of the new Act: that in a registration system, possession alone should not generate title. This change in the manner of the protection given to adverse possessors is thus a counterpart to the emasculation of the concept of adverse possession in registered land.43

40 41 42

It seems that only the actual occupation provisions of the Schedules will offer this protection, but that may well not suffice for estoppel easements, K Sultana aside. Report No 271 para 8.78, noting an approval of over 80% of those who commented. By applying for registration of title after 12 years’ adverse possession under the current law, or under the right to apply for registration after 10 years under the LRA 2002.

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Thirdly, overriding status is no longer accorded to the rights of persons in receipt of rents and profits of the land. Formerly, as is well known, this sat somewhat uncomfortably within s 70(1)(g) LRA 1925 and it finds no counterpart in Schedules 1 and 3, either on its own account or as part of the ‘actual occupation’ provisions. It is clear from Law Commission Report No 254 that the proposal to remove the overriding status of the rights of such persons was controversial,44 especially as it might cause substantial loss to intermediate landlords holding leases of over 21 years who had failed to register their titles. The Commission was clearly sympathetic to this view and resisted the temptation to say that such landlords should have registered their titles, or at least should have employed competent lawyers. In the result, the overriding status of such persons is removed, with the Commission rightly noting that the risk of ‘hard cases’ will be much reduced when full e-conveyancing takes hold. At that time it will not be possible to create long leasehold interests without electronic registration so the problem of the valid but unregistered and nonoverriding long lease will disappear. There will be no lease to protect. Of course, there may be other cases where the removal of overriding status causes hardship—for example a landlord of an intermediate equitable lease of seven years or less who has further sub-let45—but on balance this seems again to be a fair compromise between the need to produce an accurate register and the claims of those with adverse rights over the land.46 Fourthly and finally, there are other miscellaneous rights omitted from Schedules 1 and 3 that currently have a home in s 70(1) LRA 1925. Chancel repair liabilities (see s 70(1)(c) LRA 1925) are not found in either Schedule because they are no longer enforceable following the Court of Appeal’s decision in Aston Cantlow etc PCC v Wallbank47 that such liabilities (being in the nature of a public tax on private land) are not compatible with human rights obligations.48 In addition, rights guaranteed under s 70(1)(h) LRA 1925, being rights in respect of possessor, qualified or good leasehold title that are excepted from the effect of registration are no longer overriding interests. This is simply because the type of rights that could bind the registered proprietor of such a ‘limited’ estate as overriding interests are in any event binding elsewhere under the legislation.49 In essence, this tidies up an anomaly under the 1925 legislation the reason for which was not apparent.50

43

44 45 46 47 48 49 50

See below. Note that under the transitional provisions, an adverse possessor who has already satisfied the limitation period has three years from the entry into force of the Act to apply for registration as proprietor against either the person applying for first registration or the person seeking registration of a registered disposition (as the case may be), irrespective of whether he was in actual occupation at the relevant time, Schedule 12, para 7 and para 11. Report No 254 at paras 5.64–5.68. This person is not in actual occupation and has no title to register. Their lease would not be overriding under Schedule 1 or 3. Under the transitional provisions, any person holding an overriding interest by virtue of receipt of rent and profits will continue to do so under Schedule 3 until they cease to receive such rent and profits: Schedule 12, para 8 LRA 2002. [2001] 3 WLR 1323. It seems that an appeal to the House of Lords is underway (leave given [2002] 1 WLR 713) and it may be that the Law Commission’s pragmatic decision not to deal with such liabilities will be regretted. Under ss 20(2), (3) and 23(2)(3)(4) LRA 1925 and see s 12(6)(7)(8) LRA 2002. Report No 271, para 2.103 et seq and Report No 254, para 5.79.

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Short legal leases Paras 1 of Schedules 1 and 3 of the 2002 Act respectively provide that legal leases not exceeding seven years from the date of the grant shall override a first registration or a registered disposition. Although there are some exceptions where overriding status is denied even for these short leases (the more so for Schedule 3), this is the obvious counterpart to s 70(1)(k) LRA 1925, save that the qualifying period is reduced from the 21 years of the earlier statute.51 The rationale is both practical and designed to support the e-conveyancing revolution. It seems that the average length of a business lease is now some 10 years and it is undesirable that this most common of legal estates should escape substantive registration. Likewise, not only does the existence of large numbers of binding longer leases impair the integrity of the register, the advent of e-conveyancing, with its ‘simultaneous’ registration/creation provisions will provide a simple and relatively inexpensive way of bringing these rights on to the register. Consequently, under the LRA 2002, the leasehold estate that may be registered with its own title is pitched at leases of over seven years.52 Indeed, as is also well known, the Law Commission hopes that it will be possible to reduce both qualifying periods still further so that eventually there will be complete symmetry between the rules governing the formal creation of legal leases and their registration. Hence, in due course, it is anticipated that only legal leases for three years or less will qualify as overriding interests (this being the period for which no formality is required to create a legal estate). All other legal leases will be electronically registrable as a condition of their existence. Without doubt, this change will go a long way to achieving the aims of the 2002 Act and the introduction of e-conveyancing should itself ensure that the Registry is not drowned in the flood of new registrable titles. For sure, the simple volume of such titles is going to increase, with consequential increased burdens on the resources of the Registry, but the burden will become unmanageable only if this provision is brought into effect significantly before the introduction of e-conveyancing. As to the exceptions where overriding status is denied to short leases, these are specific rather than indicative of some general policy. They are fully explained in Law Comm Report No 271 and the Explanatory Notes to the Act. Thus, as against first registration (Schedule 1), a reversionary legal lease taking effect in possession more than three months after the date of grant, a legal lease granted under the right to buy provisions out of an unregistered legal estate and a legal lease granted to a former secure tenant under a preserved right to buy out of an unregistered legal estate must all be completed by registration.53 The last two already are excluded from the category of overriding interests54 and the exclusion of reversionary leases is because many are hard to discover and the 2002 Act vigorously pursues a policy of denying overriding status to undiscoverable rights. The three exceptions also

51

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Under the transitional provisions, legal leases between seven and 21 years will remain as overriding interests, Schedule 12, para 12 LRA 2002, but an assignment of such a lease with more than seven years left to run will indeed trigger its registration: see s 4(2)(b) which identifies such leases as qualifying estates for the purposes of the registration requirement of s 4(1)(a) LRA 2002. An amendment to the Bill pitching the qualifying period at 14 years was defeated in Parliament. With respect to its proposers, there seemed little to justify this save only an unquantified fear about ‘the costs’ and a luddite fear of the dangers of e-conveyancing. S 4(1)(b)(d)(e) LRA 2002. See Housing Act 1985. Such reversionary leases cannot be overriding interests under the actual occupation provisions of Schedule 3, being expressly excluded, Schedule 3, para 2(d).

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apply to Schedule 3 rights,55 together with such short leases (those not exceeding seven years) as amount to a registrable disposition and so require registration for completion.56 In essence, these additional exceptions for which overriding status is denied are the registered land version of the previous three exceptions (in that they apply where the relevant grant is out of a registered estate) plus a ‘discontinuous lease’, otherwise known as a time share legal lease where possession is exclusive for set periods, but where those periods are not continuous57 and a legal lease of a franchise or manor (where this is the relevant registered estate).58

Actual occupation under the LRA 2002 The provisions concerning the overriding status of the rights of persons in ‘actual occupation’ are central to the attempt in the 2002 Act to diminishing the range and scope of unregistered interests that might bind a purchaser of land. Not only are these rights common, and under current law act as a positive disincentive to registration,59 they would seriously jeopardise the effectiveness of econveyancing. Their very existence requires a physical inspection of the land in order to discover the occupation. Consequently, while the Law Commission was clear that, as a category, they should remain a feature of the 2002 Act,60 the pressure for reform was considerable. In particular, it was believed imperative to ensure that unregistered and undiscoverable overriding interests should not affect a purchaser.61 As to specifics, mention has been made already of the removal of the ‘rents and profits’ limb of s 70(1)(g) for both Schedule 1 and Schedule 3 rights.62 Also excluded from both Schedules are rights arising under the Settled Land Act 1925, mirroring the position under the current law63 and, in any event, such rights will become rarer under the terms of the Trusts of Land etc Act 1996. Similarly applicable to both Schedules, and representing a change in the law, is the proviso that rights of persons in actual occupation are overriding only in so far as they relate to the land occupied by the claimant: in other words, the legal extent of the interest that overrides under paras 2 of Schedules 1 and 3 is to be coterminous with the extent of the actual occupation. This is a deliberate reversal of Ferrishurst Ltd v Wallcite Ltd64 and is the clearest possible indication that the role of ‘actual occupation’ now is to serve as a warning to a prospective purchaser of the existence of adverse rights. Thus, the policy is that only those rights fortified by discoverable and relevant actual occupation should be overriding. As the Law Commission suggests, this may have been the law prior to Ferrishurst65 and given the lack of cases raising the issue, it is unlikely to cause much

56 57 58 59 60 61 62 63 64 65

Schedule 3, para 1 (b), referring to ‘registrable disposition’ under s 27(2) LRA 2002. S 27(2)(b)(iii) LRA 2002. S 27(2)(c) LRA 2002. Unregistered minor interests may still gain protection through s 70(1)(g) LRA 1925. Report No 271, para 8.53. Considered below. See also the same imperative in the rules concerning legal easements and reversionary leases excluded from overriding status. Supra. S 86(2) LRA 1925. [1999] Ch 355. The claimant enjoyed a right extending to the entirety of the premises but was in actual occupation of only part. The Court of Appeal held that the right in its entirety was enforceable as an overriding interest. Report No 271 at para 8.56, citing Ashburn Anstalt v Arnold [1989] Ch 1 at 28 per Fox LJ.

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hardship to disappointed claimants. It is not demeaning the reform to say it is in the ‘tidying up’ category rather than representing a major policy shift. The same cannot be said of the redefinition of ‘actual occupation’ under Schedule 3 of the Act. Although applicable only to Schedule 3 rights this is a major policy shift. Under the current s 70(1)(g) LRA 1925, the rights of persons in actual occupation are overriding interests whether or not they are discoverable by a purchaser. Hence, the undiscoverable right can bind a purchaser and the purchaser is denied the opportunity of walking away from the purchase or taking steps to avoid the overriding interest.66 Under Schedule 3, rights of persons in actual occupation are nevertheless excluded from overriding status in two cases: first, where enquiries were made of the right holder and he failed to disclose the right in circumstances where he could reasonably be expected to do so; and secondly, where the right holder’s actual occupation would not have been obvious on a reasonably careful inspection of the land and the person who might be bound did not have ‘actual knowledge’ of the interest at the time of the disposition. The first of these is a reformulation of s 70(1)(g), but it is not so absolute in its penalty for failure to disclose.67 Thus, the right holder loses overriding status (after failure to disclose) only if disclosure could reasonably be expected to be made. So, for example, where the right holder did not know, and could not reasonably be expected to know that they actually had a right (for example, in cases of uncrystallised estoppel perhaps?), failure to disclose when asked does not result in loss of overriding status. While this is a welcome reform—and to some extent the counterpart of making inchoate estoppels proprietary67a—it may well lead to a certain amount of litigation. For example, is it ‘reasonable’ to expect disclosure when the right holder knows that the consequences of disclosure will be the loss of the family home because the purchaser will take steps to acquire the property free from the right? Presumably it is, because otherwise it will always be permitted to withhold disclosure if that would result in the loss of a property right and that would defeat the point of the provision. However, the circumstances in which a person may be asked about their rights are many and varied, and the introduction of a reasonableness criterion must introduce an element of uncertainty.68 The second limitation on ‘actual occupation’ rights under Schedule 3 is more controversial. It is designed, of course, to prevent the overriding status of undiscoverable rights: hence the actual occupation (not the right) must be ‘obvious’ on a reasonably careful inspection of the land and the interest must not be within the ‘actual knowledge’ of the person affected. There are two broad points of interest here. First, how valid is the principle behind Schedule 3 that it is desirable to avoid the bindingness of undiscoverable rights, and secondly, is para 2 of Schedule 3 likely to be effective in practice? As to the first issue, there is something in the psyche of property lawyers that rebels against a purchaser being bound by rights whose existence they could not possibly discover—even though

66 67

Eg, by overreaching where applicable or by seeking the consent of the right holder. The qualification does not limit Schedule 1 rights because the act of first registration should not change the extent to which the applicant for first registration is bound by pre-existing rights. Hence, disclosure is irrelevant in respect of rights that then exist and even if the applicant does not know of them. 67a S 116 LRA 2002. 68 Eg, is it reasonable to expect disclosure if the right holder has been misled by the vendor of land about the true nature and extent of their rights, or (estoppel aside) has been misled by the purchaser about the effect of a proper disclosure?

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this could have been true of ‘legal rights’ in unregistered land.69 We must be careful, however, to distinguish undiscoverable rights from undiscovered ones. There are legions of cases under the LRA 1925 where a purchaser failed to discover an overriding interest—often through simple incompetence. The early mortgage cases are good examples where sloppy lending practices or the desire to offer mortgages as quickly as possible without regard to the consequences resulted in a plethora of Boland type cases. Indeed, it is not stretching a point to say that these discoverable, but undiscovered, interests led to a litigation industry in the law of consent and undue influence when the lenders did become wise to the problem. By way of contrast, there are relatively few cases turning on the truly undiscoverable overriding interest: that is, cases where any reasonably prudent purchaser simply could not have discovered the existence of an adverse right and so never had the opportunity to take avoiding action. We might include in the list Ferrishurst v Wallcite (now dealt with as above), Chokkar v Chokkar70 (the hidden wife in hospital), Kling v Keston71 (the apparently unoccupied garage) and more recently Malory v Cheshire Homes72 (actual occupation through the erection of a fence by the claimant on land believed to belong to the vendor). Others are harder to come by: indeed, so hard that the various Law Commission Reports offer little evidence from the case law that there is a problem (as opposed to expressing their and others’ inherent dislike of such hidden rights).73 Moreover, it is not the case that the e-conveyancing imperative necessarily requires the hard stance of Schedule 3. It is the existence of all types of interest that override that affect e-conveyancing so dramatically, and the relative scarcity of truly undiscoverable interests is hardly likely to have a significant impact. In other words, perhaps this is a reform born of reaction rather than analysis. Even then, assuming we accept that it is desirable to prevent a purchaser being bound by an undiscoverable right (even though it happens rarely), it is arguable that Schedule 3 should have included some reference to the reasons why the right (or the actual occupation which protects it) is undiscoverable. If the undiscoverability is because of the nature of the right (for example Ferrishurst) or blameless chance (Kling), the balance may be thought to lie with the purchaser for this supports the free alienability of land. Where, however, it is because of some devious act of the vendor (as in Chokkar), the absolute rule in Schedule 3 serves only to punish the innocent. In short, given that it was thought necessary to remove overriding status from the undiscoverable right, we should recognise that this embodies a policy choice in favour of the purchaser. Given that it does, there are other policy factors that, in some cases, might redress the balance in favour of the undiscoverable occupier. These are now excluded by the firm rule in Schedule 3, and the Act may well be the poorer for it. Secondly, even if we accept that change was necessary, is the form of Schedule 3 the best that could be achieved? It may be, but perhaps the jury is still out. As noted, it is the actual occupation (not the right) that must be ‘obvious’ on a ‘reasonably careful inspection’ of the land. This, then, is not intended to be a reincarnation of the doctrine of notice, and we can but hope that Her Majesty’s judges do not interpret it this way.74 These judges will, of course, have to determine what

69 70 71 72 73

Of course, the assumption is that because legal rights are generally created formally, their existence will be made clear by the act of formality, usually the deed of grant. [194] FLR 313. (1983) 49 P & CR 212. [2002] 1 WLR 3016. Leave to appeal to the House of Lords has been granted. See Law Comm No 271 at para 8.62 and Law Comm No 254, referring to the obligations to disclose latent defects of title.

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‘obvious’ means, along with what amounts to a ‘reasonably careful’ inspection, and as each case must be determined by its own facts, this Schedule may well turn out to be a litigation generator. This will be bad enough, but the impulse to litigate is likely to come from purchasers, especially institutional lenders, who will argue that the actual occupation was not patent and that they should escape being affected by the right. Moreover, if courts take a narrow view of the paragraph, there may well be an erosion of the current law and perhaps even the undiscovered (but discoverable) occupation may not be thought sufficient to generate an interest that overrides. This will not be consistent with the purpose behind the Schedule, but it is a fair bet that many of the Boland type cases would have been decided in favour of the lender (simply because the lender did not discover the occupation) had Schedule 3 been the operative provision instead of s 70(1)(g).75 The author does, of course, accept that many of these fears may prove unfounded. However, it is submitted that this change to the ‘actual occupation’ provisions is driven more by a desire to protect purchasers from anticipated fears than by any overbearing practical considerations. It seems the right thing to have done. Let us hope that it turns out to be so.

Legal easements Another change to the scope of overriding interests currently found in the LRA 1925 concerns legal easements. We have noted above that all equitable easements as a class are now excluded from the Schedules and in fact even the provisions concerning legal easements are limited in scope. As regards Schedule 1 interests, all legal easements are included, once again following the policy that an act of first registration should neither enhance nor restrict the bindingness of a proprietary right. Legal easements would have bound in the law of unregistered title, hence they must bind at first registration. However, by way of contrast, Schedule 3 is more narrowly drawn than Schedule 1 and not all legal easements will override a registered disposition of a registrable estate.76 Once again, this change is driven by the policy of ensuring that only discoverable rights may be overriding or, in the case of easements, also because they are used relatively frequently.77 Consequently, legal easements will override a registered disposition under Schedule 3 if, but only if, the easement is registered under the Commons Registration Act 1965, or it is actually known of by the purchaser, or it is obvious on a reasonably careful inspection of the land, or it has been exercised within one year prior to the relevant disposition.78 These are alternatives so, for example, an undiscoverable

74 75 76

77 78

Given that principles of unregistered land still are infiltrated into the registered land system, to unpredictable effect (see most recently Malory v Cheshire Homes), we should not be too sanguine. Providing, of course, that the lender does not have ‘actual knowledge’ of the right under para 2(c) (ii) of Schedule 3. This is, indeed a version of notice, but a fair counterweight to the other provisions of para 2 of the Schedule. Under the transitional provisions, any easement that is overriding at the time the Act comes into force will retain that status and all legal easements will be overriding for three years after the Act is brought into force, so providing a period of three years’ grace for those that would be disqualified under Schedule 3, see Schedule 12, para 10 LRA 2002. Note, there is no similar safety net for frequently used rights in the actual occupation provisions of the Schedules. In that case, the right must be discoverable and is not saved if it is frequently used. Perhaps, however, in actual occupation cases, it is impossible to have a non-discoverable but frequently used right? Schedule 3, para 3.

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but used easement (possibly underground television cables) will be protected. In truth, the list of qualifying legal easements is comprehensive and it may well be that few are denied overriding status in practice by these provisions. Of course, there may be some interpretative difficulties (as before) over the notion that an easement be ‘obvious on a reasonably careful inspection’, especially in relation to long-disused land where the ‘one year use’ proviso may not apply. All in all, however, when taken against the policy aims of the legislation and the dictates of e-conveyancing, of itself this again represents a fair compromise between purchasers and users of land.79 Indeed, we should also note that in time the category of ‘legal’ easements that are unregistered but overriding will shrink. Under the e-conveyancing provisions and the formality provisions of the LRA 2002,80 no expressly created legal easement will be able to exist at all unless it is created electronically and entered on the register. They will not override because they will not exist. Thus, the category will be limited to impliedly created legal easements and even then the standard conveyancing practice of excluding the creation of implied easements on the sale or lease of land means that the category will be small.

Time restricted rights Finally in this analysis of interests that override under the LRA 2002, we should note that the status of a group of rights as overriding a first registration or a registered disposition is time limited. Under s 117 of the Act, five types of right will cease to have overriding status under both Schedule 1 and Schedule 3 10 years after the Act is brought into force. These are a miscellaneous category of rights, some feudal, some historic, and include franchises, a manorial right, a crown rent, a non-statutory right in respect of a sea wall or river embankment and a corn rent.81 They are to be phased out on the ground that most can no longer be created and that those persons with the benefit of them should be aware of their existence and of the need to enter them on the register. The last point is, of course, debatable, but the Law Commission believes that the removal of the status of such rights is justified as matter of land registration policy and will not contravene human rights provisions.82 Once again, while the consultation process revealed this to be a supportable hope, only time will tell whether the relevant provisions will be free from human rights attack.

THE EMASCULATION OF ADVERSE POSSESSION IN RELATION TO REGISTERED LAND Part 9 of the 2002 Act contains provisions relating to the operation of principles of adverse possession in relation to land of registered title. As is now well known, the essential feature of this new system is that no period of adverse possession will of itself give a title to the possessor and in this sense, there is no period of limitation in respect of claims to recover possession of

79 80 81 82

Note once again the potential for litigation because of the different provisions in Schedules 1 and 3. le, for the creation of proprietary rights, see below, 147. Identified in paras 10–14 of Schedules 1 and 3 LRA 2002. Report No 271, paras 8.88 et seq.

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registered land.83 In its place, an adverse possessor is given the right to apply to be registered as proprietor after a minimum period of 10 years’ adverse possession, itself to be calculated according to the current principles.84 This application requires the Registrar to notify the registered proprietor (and certain other persons)85 of the application. The persons notified then have a further period to be determined by Rules86 to serve a counter-notice. The effect of the adverse possessor’s application is then decided. So, if the persons notified do not serve a counternotice claiming the benefit of the Act, the applicant ‘is entitled’ to be registered as proprietor of the estate in respect of which he applied.87 If an appropriate counter-notice is served, then subject to three exceptions, the application to register must be rejected and the registered proprietor is given two years to take possession proceedings against the adverse possessor. Failure to take such proceedings entitles the adverse possessor to apply for, and be given, registration at the expiry of the two-year period.88 This simple scheme does, of course, mean the end of adverse possession as a threat to the security of registered title, save in cases where the registered proprietor genuinely has no use for the land (and does not wish to keep it) or if one of the exceptions applies. Adverse possession for any length of time (for example, 50 years) will not of itself confer title (there is no limitation period) and the registered proprietor will always be warned before the possibility of losing their estate arises.89 Even then, in most cases a further two-year period of grace will exist. A direct and intended consequence will be the voluntary registration of large areas of unregistered land, especially in those cases where the estate owner has difficulty keeping track of the state of their land and wishes to utilise the warnings given by the registrar.90 Once again, this radical reform is justified by the paramount policy of bringing maximum security to registered titles so that they may be dealt with efficiently under e-conveyancing. It is also a reflection of a political philosophy that adverse possession is ‘land theft’ and that it is inherently inconsistent with a registration system. Of course, there is merit in both these views: modern expositions of the law on adverse possession appear to have favoured the rights of possessors over the rights of paper owners (making successful claims all the more likely)91 and the existence of an

83

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85 86 87 88 89 90

S 96(1) and (2) LRA 2002 disapplies the limitation periods in respect of estates in registered land (except that of a chargee) and s 96(3) provides the coup de grace that ‘section 17 of that Act (extinction of title on expiry of time limit) does not operate to extinguish the title of any person where, by virtue of this section, a period of limitation does not run against him’. Note, however, that although the applicant may lodge an application as being the successor to a prior adverse possessor (with 10 years’ adverse possession in total), an applicant may not apply if they have dispossessed a former adverse possessor. In that case, they must accrue 10 years in their own right, see Schedule 6, para 11 LRA 2002. Certain persons of limited capacity may not make an application, see Schedule 6, para 8. Schedule 6, para 2(1). But expected to be three months, see Report No 271, para 14.32. Schedule 6, para 4 LRA 2002. Or such time as the possession proceedings end if commenced within the two-year period, Schedule 6, para 6(2) and para 7 LRA 2002. As Professor David Clarke noted (WG Hart Symposium, London University 2002), much also depends on the simple fact of being able to locate the person to whom notices should be sent. Eg, land owned by local authorities as with the Barking and Dagenham Holdings now registered through the Stevenage District Land Registry (always fertile ground for claims of adverse possession: see Lambeth BC v Ellis and the consequential flood of claims) and large agricultural holdings (eg, Pye v Graham).

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off-register mechanism for destroying titles seems to make a mockery of the state guarantee of title in registered land.92 On the other hand, the social and economic justifications for principles of adverse possession have been well documented93 and instead of ‘land theft’, adverse possession can be seen as encouraging ‘productive land use’. Again, there is nothing inherently contradictory in having principles of adverse possession operate in registered land, at least if those principles are seen positively as a method of transferring title from one person to another94 instead of a method of unfairly snatching it from them. It is a matter of perception, not of incontrovertible logic. Consequently, given that the Act has chosen to emasculate adverse possession—and so favours one policy perspective—we must be alive to the possibility that there will be some creative interpretation of the relevant provisions by a differently minded judiciary. It is submitted that this battle will be fought around the interpretation of the three exceptions referred to above: that is, those cases where despite the registered proprietor serving a counter notice, the applicant may be registered as proprietor without waiting for a further two years to see if the paper owner commences possession proceedings. The three situations are: first, that it would be unconscionable because of estoppel for the registered proprietor to dispossess the applicant and the applicant should in all the circumstances be registered;95 secondly, where the applicant is for some other reason entitled to be registered as proprietor;96 and thirdly, where there is a boundary dispute concerning adjoining land, the applicant believing for at least 10 years that the relevant land was his and where the estate to which the application relates has been registered for at least one year.97 The third of these is relatively straightforward and admits of little doubt. It does provide comfort to those who argue that adverse possession plays a vital role in the settlement of minor boundary disputes. It does, and will continue to do so under the provisions of the 2002 Act. However, the first two exceptions are of a different order. The first is the most open-ended and may well prove to be the opening through which determined judges drive the horse and cart. In principle, it concerns cases of estoppel arising from unfairness or injustice, and Law Commission Report No 271 gives various examples.98 In practice, however, not only is the very scope of estoppel at best fluid and at worse entirely discretionary, the words of para 5(2) of Schedule 6 admit of a wide variety of interpretations. It is even possible that the courts might develop a de facto limitation period where (say) 20 years’ adverse possession raises a presumption that an estoppel exists so that it would be proper (absent special circumstances) to grant an application for registration by an adverse possessor even if the paper owner did serve a counter-notice. This is not

91

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See, eg, Buckinghamshire CC v Moran, Hounslow LBC v Minchinton, Lambeth BC v Ellis and Blackburn v Lambeth BC. The House of Lords decision in Pye Developments v Graham [2002] 3 All ER 865 confirms this trend, albeit that the judgment is not political but declaratory of the law on adverse possession as it is properly to be understood. See M Thompson, ‘Adverse possession: the abolition of heresies’ [2002] Conv 480. It is also inconsistent with moves to establish a national land catalogue under the auspices of the NILS. See, eg, Dockray [1985] Conv 272. This is the philosophy behind Central London Commercial Estates v Kato Kagaku Ltd [1998] 4 All ER 948 and s 75 LRA 1925. Schedule 6 para 5(2) LRA 2002. Schedule 6 para 5(3) LRA 2002. Schedule 6 para 5(4) LRA 2002. Report No 271 para 14.42, including building on another’s land and informal sales for valuable consideration of part of land.

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far fetched, as the history of the LRA 1925 is littered with imaginative interpretations of apparently clear statute in order to achieve what the court thinks is a desirable social goal. Even the second exception—that the applicant is for some other reason entitled to the land—which the Law Commission regards as ‘more straightforward’99 is not limited by the legislation to the examples provided by the Law Commission in its Report. What is meant is that if the adverse possessor has some other right to the land irrespective of their adverse possession—such as under a will or constructive trust—then registration as proprietor may be given on first application despite opposition from the paper owner. Note, however, that not all these ‘other rights’ are as concrete and as certain as a right under a testamentary disposition. It takes no imagination at all to foresee a decision where first the adverse possessor is said to be the beneficiary under some kind of constructive trust (the ‘other right’) and the reasons for the imposition of the trust in the first place are then used a second time to justify registration as proprietor under the statutory exception. Perhaps this is what is intended, but the provision is opaque. Once again, the point here is not that the provisions of the LRA 2002 are fatally flawed or misguided. As regards adverse possession they reflect a powerfully supported policy position and, while not everyone may agree with it, that policy cannot be dismissed lightly. It can, of course, be challenged, and some might argue that the provisions on adverse possession in the Act were not actually necessary for an effective reform of the land registration system, even when considering the imperatives of e-conveyancing. The point is rather that if these doubts are shared by those responsible for implementing and interpreting the LRA 2002, especially in cases of apparent hardship and unfairness, then we may see the re-emergence through imaginative interpretation of the legislation of a de facto limitation period in registered land.

FORMALITIES FOR THE CREATION OF RIGHTS: NEW PROCEDURES AND ESTOPPEL The final issue covered in this chapter concerns the requirements introduced by LRA 2002 for the creation and transfer of proprietary rights and their relation—if any—to proprietary estoppel. In turn, this is related directly to the provisions concerning e-conveyancing and in this regard much remains as yet uncertain. Detailed provision will be made by the Rules, and the consultation exercise for the first set of Rules started in the summer of 2002. Perforce we must deal at this stage with the principles established by the Act in the knowledge that they may be tempered or strengthened by the anticipated land registration rules. The LRA 2002 is explicit that e-conveyancing means much more than using electronic media to communicate with the Land Registry. Schemes of that ilk exist already. The scheme of econveyancing proposed by the Act is far more radical and will result in dramatic changes to the way property rights are created and transferred. In time, it will render the distinction between ‘legal’ and ‘equitable’ property rights largely irrelevant in land of registered title. The first step will be the implementation of legislation permitting the conclusion of valid contracts and deeds in electronic form. For contracts, this will occur through an Order made under s 8 Electronic Communications Act 2000, inserting a new clause 2A into the Law of Property (Miscellaneous Provisions) Act 1989

99

Report No 271, para 14.43.

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authorising the conclusion of contracts by electronic media. For deeds, the Order may insert a new s 144A into the Land Registration Act 1925 effectively permitting the electronic creation of documents that are to have the effect of a deed, although this will not be needed if s 91 LRA 2002 is brought into force as this has the same effect. In other words, the effect of these changes will be that it will be possible to create or transfer proprietary rights either by material (written) contract or deed or by electronic media having the same effect. At first, these material and non-material contracts/deeds will exist side by side and the registration of the contract/deed (however brought into existence) will be required in the same circumstances and for the same reasons as under the current law.100 In short, there will simply be another way of executing a valid contract or deed.101 However, in due course, this dual scheme will be superseded by a more radical system. When s 93 LRA enters into force, it will be possible to specify that certain dispositions ‘only have effect’ if they are created electronically and are electronically registered. This is critical and lies at the heart of the e-conveyancing system. It means that it will not be possible to create certain types of proprietary right unless this is done electronically and providing they are simultaneously electronically registered. In effect, the act of electronic registration will be the act of creation. The rights subject to these provisions could in due course encompass all registered dispositions and all third party rights capable of protection by the entry of a notice on the register. Clearly, this represents a profound change in the way we perceive and create proprietary rights and obligations. At present, failure to register a properly created right that requires such registration to exist as a legal interest renders that interest purely equitable. Likewise, failure to use the proper form for the creation of a legal right may nevertheless create an equitable one.102 Indeed, despite being purely equitable, these transactions do create obligations between the original parties and can in some circumstances bind third parties.103 Under the fully operative provisions of the LRA 2002, this will not be the case. The attempted creation/transfer of a property right without using the electronic formalities will be without effect. It will not create a legal right (even if a paper deed is used) and it will not create an equitable right. Failure to use the formalities required by s 93 renders the transaction without legal effect, and there is no fall-back position. Consequently, there is little relevance in the distinction between legal and equitable rights. Instead, such rights either exist—having been created electronically—or they do not. Of course, if e-conveyancing is to become both a reality and the norm, there is little choice but to adopt such a robust attitude. There can be no half-way house.104 No doubt, however, there will be many occasions after the entry into force of s 93 LRA 2002 where private individuals use a

100 Hence, for a while, failure to register an electronic deed will render the interest purely equitable, but see immediately below. 101 Technically, this is an electronic instrument having the effect of a deed, rather than actually being a deed: see s 91 LRA 2002 and the Draft Order inserting s 144A into LRA 1925. 102 Eg, Walsh v Lonsdale. 103 Eg, a ‘legal’ lease over 21 years that is not registered with its own title exists only in equity. As an equitable lease it binds the original landlord and the tenant and may be protected against future dealings with the reversion through the actual occupation provisions of s 70(1)(g) LRA 1925. 104 An express provision specifying that non-electronically registered deeds/contracts created purely equitable interests—perhaps the obvious half-way house—would undermine significantly the goal of a comprehensive register. Whether a plethora of equitable rights will arise by other means is discussed immediately below.

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paper deed or a written contract fully believing that they are creating something binding between themselves and perhaps for the future. It may even be that property professionals are slow to appreciate this dramatic change. Furthermore, the position is not made any easier by the fact that access to the electronic system—and hence the ability to create property rights—will be restricted to those with Network Access Agreements. Thus, not only are private individuals denied a simple method of creating or transferring rights in their own property (they cannot use paper), they cannot even use the electronic method without either engaging a property professional or going direct to the Land Registry. In such a climate, it is likely that a way will be found to give limited effect to the actions of parties genuinely attempting to create property rights, albeit that they failed miserably. The present author has argued elsewhere that proprietary estoppel provides the perfect vehicle for this, being the traditional antidote to lack of formality in dealings with land.105 Without rehearsing those arguments in full, it seems likely that proprietary estoppel will be used both to cure defects in the creation of rights where the relevant electronic formalities have not been observed and, more importantly, to ensure that equitable versions of rights do exist when the dictates of s 93 are not observed. Thus, written agreements (be they in the form of a ‘contract’ or a ‘deed’) may well be ineffective under s 93 LRA 2002, but may be reborn under the rubric of proprietary estoppel. Perhaps, indeed, this is foreseen by the legislation itself. As we know, s 116 LRA 2002 now makes it clear that rights created by estoppel are inherently proprietary, even before they are made concrete by order of the court. Consequently, these inchoate but proprietary equities can bind purchasers of land through Schedules 1 and 3, almost certainly under the actual occupation provisions. This has already been accepted in relation to s 70(1)(g) LRA 1925—see Lloyd v Dugdale106—and looks set fair to replicate itself under the LRA 2002.

CONCLUDING REMARKS There is a great deal more to the Land Registration Act 2002 than considered in this chapter. The provisions on alteration of the register (formerly rectification), the entry of notices and restrictions (formerly minor interests), the powers of registered proprietors, issues of priority, charges and matters relating to the Crown occupy large portions of the Act. As with the provisions analysed above, they are fully argued in Law Commission Reports No 254 and 271 and, at least to this author, appear to be well thought out and overwhelmingly sensible. As ever, they are bent towards the goal of an effective and complete register that can support an advanced system of econveyancing. It would, however, be surprising if such a mammoth undertaking as the LRA 2002 did not generate critical comment and the argument above has attempted to highlight areas of current or possible future concern, particularity with regard to the Act’s reforms of substantive principles of land law. The history of the 1925 legislation teaches us that a system so overly structured to support the free and uncomplicated alienability of land can be tempered—sometimes in the teeth of clear statutory words—in favour of occupiers of land and other third parties who appear to ‘deserve’ protection whatever the statute might say. There is no doubt in the mind of the present

105 ‘Proprietary estoppel and formalities in land law and the Land Registration Act 2002: a theory of unconscionability’, in Modern Studies in Property Law Vol II, E Cooke (ed), Hart Publishing, 2003. 106 (2001) 48 EG 129 (CS) and [2002] Conv 584.

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author that the same will happen again with the LRA 2002. Whether that will occur in respect of the provisions discussed above is an open question. However, given that so much of the Act is designed to support e-conveyancing, but given also that the substantive changes to property law necessary to support it will (indeed must) occur before that system becomes a reality, there will be a period of time during which the substantive law has changed but the system it is designed to support is not in place. That may well be the time of most risk, or most opportunity, depending on one’s point of view. How the substantive reforming provisions of the LRA 2002 will be interpreted without the protective cloak of e-conveyancing is one of the most intriguing questions facing land registration in the 21st century. Will they be interpreted and applied in support of econveyancing or will they, by design or accident, be interpreted in a way that reduces its effect?

FOUNDATIONAL QUESTIONS IN THE DOCTRINE OF RESTITUTION OF UNJUST ENRICHMENT

Chapter 7 The taxonomic approach to restitution Steve Hedley INTRODUCTION Throughout legal history, enthusiasm for unjust enrichment has tended to come in waves. The same pattern has occurred several times. The idea is picked up and popularised; the more analytically-minded step in to make it precise; briefly it is fashionable; and then, as the implications of the analysis sink in, it falls from favour into a marsh of technicality. The transient dawn of enthusiasm is followed not by glorious day, but by the long night of gloomy technicality.1 Dawson’s survey of ‘unjust enrichment’, composed in the 1950s, identified three major outbreaks of the notion in the history of the West. We are now living through a fourth, on much the same pattern. There was the initial wild enthusiasm in the 1960s and 1970s, as ‘unjust enrichment’ seemed to its supporters to provide the explanation for a wide range of doctrines. Then in the 1980s the analytical lawyers stepped in, squeezing the slippery notion of unjust enrichment into a fairly precise mould, the famous or infamous ‘taxonomic model’ of the subject. Inevitably, the decline began in the 1990s, and still continues. Dawson’s moral is still true: once you remove the flexibility of ‘unjust enrichment’, you also remove the main emotional and moral reasons for supporting it. For the last decade, the subject has become more and more technical; the theory once thought to explain so much is acknowledged to explain less and less. The impenetrability of the debate to outsiders is a commonplace of the conference circuit. And even those academics who devote themselves to the subject full time complain about how hard it is to keep up with all the new writing. There is more and more schematising and theorising, to less and less effect.2 Living through this rising tide of incomprehensibility, it is vital to remember essentials. The taxonomic model of unjust enrichment is supposed to be a set of concepts explaining and rationalising certain areas of that law. If it fails to do that, then it has no place in the law. If most of the intellectual effort in the area goes into a—not conspicuously successful—attempt to reconcile the theory with judicial holdings, then it is time to call it a day. If, by contrast, the taxonomic approach gives great insights into the law, that would be a reason not only for retaining it, but for extending its use. And if the increasingly complicated academic theory represents a deeper and more sophisticated knowledge of the law, then undoubtedly this is a gain. The question is: which are we dealing with here?

Enter the grid Hence my attention to the famous grid (reproduced on the next page). To those who use it, it appears to be a straightforward map of the law of obligations, perfect for orienting yourself. The scholars of unjust enrichment can look at it, and in their mind’s eye they see the clear legend ‘You Are Here’ pointing to box 11. In their view, the grid-boundary lines are clear, and grounded in

1 2

JP Dawson, Unjust Enrichment—A Comparative Analysis (Little Brown & Company, 1951) 108. See S Hedley, Restitution: Its Division and Ordering (Sweet & Maxwell, 2001) Ch 8.

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apparently rational arguments. It is intellectual rigour in its purest form. There is admittedly the occasional doubt or lack of clarity, such as whether some of the boxes in fact have any content. But all in all, what it seems to be is a rigorous statement of a rigorous theory. My thesis here is that these claims are wrong in every important respect. The grid itself, and the taxonomy it portrays, are not examples of cool logic, but together constitute a piece of unargued rhetoric—at best misleading and at worst intimidatory—boldly making claims that cannot be supported. Rights by goal (down), and by causative events (across)

Consent

Wrongs

Unjust enrichment

Other events

Restitution

1

Compensation

2

6

11

16

7

12

Punishment

13

3

8

13

17

Perfection

4

9

14

19

Other goals

5

10

15

20

The grid, late 1990s version (from ‘The law of restitution at the end of an epoch’ (1999) 28 WALR 13, 17).

There is some doubt over the solidity of the classification. Its author has never claimed that it is immutable, and indeed has stated it slightly differently each time he has given an account of it (no-one else dares to tamper, of course). This certainly complicates matters for those who wish to put this very approach under the spotlight, asking not merely whether the grid can be improved but whether it is not entirely misconceived. Moreover, while the grid supposedly covers the whole of the law, in fact only those who write principally about restitution employ it. Indeed, you could read quite deeply in other areas of obligations without once suspecting its existence. Perhaps as a result, other areas of law are treated in a manner which their specialists can only see as cavalier. The grid assumes that the structure of obligations thought satisfactory a century and a half ago is largely satisfactory still. I hesitate, however, to describe this position as ‘conservative’, because it does not so much side with the conservatives in debates over the modern law of obligations, as wholly ignore those debates. By returning to an essentially Roman structure, it pretends that modern problems are not there. Whether the work of the jurist can be said to be well done when it ignores today’s issues, as opposed to trying to solve them, is perhaps at the root of my disagreement here.

THE TAXONOMY IN PRINCIPLE Arguments in favour of the use of the grid take various forms. It is not always easy to discern which of the arguments are meant seriously, and which are mere window-dressing; nor are we told directly what a plain and straightforward justification of the grid would look like.

Science and purity of method Much of the support for the grid takes the form of praise for scientific learning, with the implication that other approaches are unscientific and therefore bad. So:

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And it is an unrelenting question whether, through time, but allowing for the changes of perception which come with the passage of time, the courts are or are not, can or cannot be, true to the aspiration impartially to treat like cases alike. The undefended premise of this lecture is that the law cannot hope to sustain this compound burden of stability, flexibility, and transparency unless it pays scrupulous attention to its own taxonomy. From Aristotle to Linnaeus to Darwin, and through to the transformations of knowledge initiated in our own time by Crick and Watson, the understanding of the natural world has depended on patient, self-critical classification. Lawyers deceive themselves if they think they are exempt from the same elementary intellectual burden…If justice is to be done, and must be seen to be done, the law must be perceived to be thinking in a style compatible with ordinary rationality.3

Passages like this show an extraordinary confusion of ideas. They leap from the idea of treating like cases alike—a legal and political notion—through ideas of plant taxonomy, evolution by natural selection, and the structure of DNA, then back to law, then on to ‘ordinary rationality’ (not further defined). Not much intellectual rigour there! Are we supposed to believe that law, biology, politics and biochemistry are all basically the same subject? Or that true scientific knowledge can only be gained in one way, to which all plant biologists are privy, but lawyers who do not believe in ‘unjust enrichment’ are not? And if the sort of rationality we are concerned with is really so ‘ordinary’, how does it happen that the grid’s opponents do not have it? Evidently, it is possible to hold down a university law teaching position without it. How ‘ordinary’ is it, then? Of course, the passage is framed in a high rhetorical tone, designed to intimidate more than to inform. This aspect is a mere irritation. The serious question is, if we attempt to translate it into more emotionally neutral language, what sensible claim can the passage reasonably be interpreted as making? Stripped of the rhetoric, what does it actually mean? Does it really mean that there is only one scientific method, to which all true knowledge must conform? If so, that is a rather surprising claim, which certainly requires more than mere assertion to sustain it. This recalls the correspondence in which Albert Einstein was asked to categorise the physicist’s approach to epistemology. Which approach did he support? How did he see himself: as a philosophical realist? As an idealist? As a positivist? A Platonist? Well, not really any of these, said Einstein. If forced to place himself in a methodological category, he would have to say that he, like his colleagues, was ‘a type of unscrupulous opportunist’. He used whatever worked, and if what worked does not fit easily into the philosophers’ classifications, that was their problem not his.4 And certainly he was not in the least concerned if other sciences, concerned with different questions, used very different methods. The disparate questions asked by distinct fields of enquiry do not encourage the notion that they have very much in common. Modern science is so vast that examples may be found to sustain every possible prejudice. Whether rhetoricians focus on the apparent order of animal taxonomy, or the apparent anarchy implicit in the uncertainty principle or chaos theory, is up to them; but we should not mistake colourful metaphors for solid arguments. And while justice and honest scientific

3 4

P Birks, ‘Rights, wrongs and remedies’ (2000) 20 OJLS 1, 3. The relevant passage is in A Einstein, Autobiographical Notes (1949; PA Schilpp (trans and ed), 1979) 683– 84. The passage is quoted and discussed in Howard, ‘Astride the divided line’ at http://sun.soci.niu.edu/ ~phildept/speakers/Howard_OnEinstein.html.

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enquiry are both good things, they are not the some thing. This is none the less so because both may be described by (different senses of) the same word, ‘rationality’.

Precision and rationality Sometimes the rather less extreme argument is made in favour of the grid, that it, or something like it, is required by precision and clarity of thought. In practice, however, this keenness to root out uncertainty is applied by the unjust enrichment theorists to everyone except themselves. Yet every charge of obscurity they make against their opponents can be thrown directly back at them. They say that they are against old obscure terminology, such as ‘implied contract’ and ‘fiduciary obligations’. They mean that they want to replace it with new, equally obscure terminology, such as ‘disenrichment’. ‘the availability of counter-restitution’ and ‘interceptive subtraction’. They say they are against the use of Latin expressions, such as indebitatus assumpsit. They mean that they prefer to replace these Latin expressions with others, such as the vindicatio and the condictiones. They say they want to cleanse the law of medieval technicalities. They mean that they want to replace them with technicalities from an earlier, and even deader, era. They accuse their opponents of wishing ‘to stick with the language of the club, nonsensical to outsiders’.5 They themselves use a terminology which might almost have been designed to discombobulate and alienate their listeners. There is at present no need to refute these claims that unjust enrichment theory is more precise than the theories to which it is being opposed. These claims have yet to be adequately documented, or any honest comparison with rival theories made; my criticisms can wait until this gap in the literature is made up. I do feel, however, that those who make these arguments should reflect on the caution required by those who live in glass houses. They should also remember that precision in law is at best a tool, not a goal in itself. If the only thing to be said in favour of the grid were that it is precise, that would be no compliment; and it is not the areas of law which enjoy the greatest precision where disputes are resolved the most efficiently. A theory must do much more before it is useful, and they would do well to ask how their theory addresses the real needs of today’s society, rather than how well it provides a pleasant diversion from real work. A related charge is that common law ways of thought are hopelessly irrational. So for example we are told that: …a rational science of the law has not been tried and found wanting but has merely been found difficult and left untried. A sound taxonomy, together with a keen sense of its importance, constant suspicion of its possible inaccuracy and vigorous debate on its improvement, is an essential precondition of rationality. All these are wanting in common law systems.6

If this is meant seriously—and it is hard to read it any other way—it puts paid to any idea that its author is engaged in a collaborative enterprise with his fellow common lawyers, to restate the common law in more rational terms. For him, to rationalise the common law is to kill it: it suffers

5 6

A Burrows, Understanding the Law of Obligations (Butterworths, 1998) 102. P Birks, ‘Equity in the modern law: an exercise in taxonomy’ (1996) 26 WALR 1, 4.

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from ‘incoherence and contradiction’,7 which ‘causes chaos and injustice’,8 none of which can be cured without eliminating those features which distinguish it from the civil law. His position is unenviable; it must be terrible to be living among such savages as us, or to spend each day marching as part of the great army of common lawyers, in the awful knowledge that everyone else is marching out of step. Yet I suppose this forlorn enterprise must be his destiny. In every age there is a chosen one. He alone will stand against the irrational, the confused, those afflicted by woeful imprecision, the wretched common lawyers and—worst of all—the vile equity lawyers. For it is equity that has earned the special ire of the unjust enrichment theorists.

The distinction between equity and National Socialism—‘only a matter of degree’? Indeed, a noticeable recent tendency has been to accuse equity lawyers of being no better than Nazis. This (slightly surprising) argument relies on the point that, like one famous Nazi, they sometimes appeal to conscience. It appears that Reinhard Heydrich, chief of the Gestapo and director of the ‘final solution’, once justified his conduct by reference to his conscience. ‘For the fulfilment of my task I do fundamentally that for which I can answer to my conscience…I am completely indifferent whether others gabble about breaking the law.’9 This is, apparently, too uncomfortably close to the reasoning employed by others who do not subscribe to the grid. The accusation was initially made against ‘beginners’ and ‘the young’,10 though it was soon made also against law teachers generally, or at least those of them who are ‘realists or post-realists’.11 Opposition to the grid is thought to risk ‘persecutions and pogroms every time the community’s conscience is set on fire by some passing demagogue’.12 So, it seems, what equity lawyers spend their time doing is the same sort of thing, roughly speaking, as those who ran the concentration camps. For: If unrestrained conscience could be mistaken in that degree [that is, in the way the Nazi conscience was], it can much more easily make every lesser error. It is only a matter of degree. If your intuition tells you that you are right, you will not be able to see that you may be wrong or, in a plural society, that others may think you wrong.13

I think this is rather a good example of what passes for argument from the unjust enrichment camp. As soon as you try to restate the claim in calm and rational terms, it falls to pieces. So: the crimes of the Nazis came about because they listened too much to what their consciences told them, rather than too little. (Many will find this counter-intuitive.) And we know this (rather surprising) fact because one Nazi, on a single occasion, told us so. (Hmm…) And we should take

7 8 9 10 11 12 13

P Birks, ‘Definition and division: a meditation on Institutes 3.13’, in P Birks (ed), The Classification of Obligations (Oxford University Press, 1997) 1. Ibid, 23. Quoted in AH Campbell, ‘Fascism and legality’ (1946) 62 LQR 141, 147. P Birks, ‘Trusts raised to reverse unjust enrichment: the Westdeutsche case’ [1996] RLR 3, 20–21. P Birks, ‘Equity in the modern law: an exercise in taxonomy’ (1996) 26 WALR 1, 98. Ibid. P Birks, ‘Equity, conscience and unjust enrichment’ (1999) 23 MULR 1, 22.

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his statement at face value because…? Because we have been told to, it seems. What if other Nazis justified their crimes on the ground that good order and rationality required them—as no doubt some did? Would the same writer then speak out against order and rationality? I doubt it. The essence of the argument, that because one prominent Nazi on a single occasion in a particular context said , therefore all reasonable people in all contexts should believe not-, scrapes the bottom of the barrel. Of course, the writer in question doesn’t really believe his opponents are Nazis. As he knows, Heydrich’s contributions to equity were extremely limited; and if the famed precision of German analytical jurisprudence was not enough to stop the rise of Adolf Hitler, it is unclear why an injection of civilian ideas into the common law would immunise it from similar future happenings. Neither, I imagine, does he seriously suggest that the infamous Nazi attacks on professors of civil law constitute an argument in support of a civilian approach. But that is precisely why the argument is so disingenuous. It diverts attention from more sensible arguments. The repetition of this fatuous charge gets everyone in a lather over the author’s bad taste in mentioning the war—rather than dealing with his baseless claim that his theory has the edge when it comes to precision. So to indict him merely for bad taste, as some have done, lets him off the hook much too easily. Rather, he should consider whether arguments of the sort he raises reflect well on the civilian tradition, or whether he is in fact doing that tradition more harm than good by promoting it on such frivolous grounds.

THE TAXONOMY IN PRACTICE To certain legal minds, there is a powerful attraction in being promised a key to existing legal knowledge, which will allow them to see the law at a deeper level than ordinary mortals do. Indeed, were such a promise to be kept, it would indeed be a wonderful thing. The prospect entrances many. Others are more sceptical, and rightly so. It is so much easier to make such claims than to substantiate them. And those who say they love certainty are often prepared to sacrifice a great deal that is valuable to obtain it. Claims to see below the surface of things are obviously attractive, but they deserve tough scrutiny. In this spirit, let us look at the classification itself. A 5×6 grid, purporting to describe the whole of the law of obligations. It gives huge importance to unjust enrichment, which is on a par with contract and tort. It gives an impressive appearance of solidity: the contents of the boxes may be strange, or unknown, but the lines dividing them seem reassuringly stable. The grid-lines are the structure of the subject, what is within them a detail only. The grid, then, gives the general outline of the law of obligations, leaving only the (demanding, but secondary) task of filling in the boxes. So the diagram implicitly makes a number of claims about the law of obligations: it makes them not with words, but with a picture. Let us try to state these claims in formal legal language, and see how they fare.

The importance of unjust enrichment Firstly, note the importance it gives to unjust enrichment. It gives unjust enrichment the same space, and the same importance, as contract and tort each has. Has this claim ever been made explicitly? Interestingly, that very claim has been made in words, albeit very briefly, last century. In

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the wake of the Lipkin Gorman14 case, where a majority in the House of Lords accepted that restitution was based on unjust enrichment, there were triumphant academic declarations of the importance of unjust enrichment. Said one writer, ‘It cannot now seriously be denied that the subject is as important and central as, say, contract and tort’15 Then as now, the claim is blown away by asking simply, important in what sense? Central to what? To law teaching? To legal practice? To law reformers? To the economy? The answer, in each case, is rather obviously ‘No, of course not’. Restitution is a relatively obscure area of commercial law, which most lawyers have not heard of, and rather few of whom could tell you anything about. No doubt the few who specialise in the subject think it tremendously significant, but then specialists always do. These specialists also assume that theoretical rigour and importance go hand in hand, whereas in practice the opposite is true. If there is a lot going on in a subject, it is unlikely that all of those things fit neatly into the same framework; an entirely precise legal theory is a dead legal theory. Ships can only be tidy and beautiful if they are in bottles; real ships rock, collect barnacles, and let in water unless regularly maintained. We need only contrast the lofty, refined, cryptic technicalities of restitution with the homely jumble that is the law of negligence. Which is more important, in any dispassionate account of the legal system—from any point of view? Since Lipkin Gorman, of course, everything has calmed down a little. I have not seen that statement about the supposed importance of the subject repeated, nor should it be. And we have learned to be less enthusiastic about judicial pronouncements. Each new case before the House of Lords is played up before the event as an opportunity to answer key theoretical squabbles—leading to guaranteed disappointment when their Lordships manage to resolve the dispute before them without contributing much to the theory. Yet still the classification remains, mutely making the ludicrous claim that the academics no longer dare to make out loud: that unjust enrichment deserves a status akin to contract and tort.

The rationale of the grid Secondly, how solid is the grid’s rationale, and the theory behind it? I don’t know. No version has ever been published with a clear statement of the theory behind it, or answering the more obvious objections to it. The rationale of its individual elements is rarely explained; matters on which radically different views are held are treated as if they were uncontroversial. The object is clear, but the motive is obscure; the ‘what’ is clear enough, but the ‘why’ is barely mentioned. The lights are all on, but we can only guess who, if anyone, is at home. The most that can be said is that what you see is what you get—though even that is perhaps overstating it, as whatever we see is subject to change at the author’s pleasure. For example, do boxes 12 to 15 actually have anything in them? It is not hard to think of examples which might fit; after all, ‘all awards of damages punish’,16 and indeed they do other things as well. In 1985, it was explained to us that these boxes have no content, though that this was

14 15 16

Lipkin German (A Firm) v Karpnale Ltd [1991] 2 AC 548. A Burrows, The Law of Restitution, 1st edn (Butterworths, 1993) vii. P Birks, ‘Civil wrongs—a new world’, in P Birks, Butterworths Lectures 1990–91 (Butterworths, 1992) 55, 86.

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‘by chance’ and ‘no more than a fortunate accident’.17 Yet by 1999 we were being told that these squares ‘cannot have content’, and that ‘the exclusion of content from these squares is dictated by logic, not policy’.18 What happened to the ‘fortunate accident’, and where did the ‘logic’ come from? We are not told. We are not even told what sort of logic; the seductive logic of wishfulfilment, perhaps. Of course, as ‘unjust enrichment’ in the current theoretical sense is essentially the author’s own creation, he is free to define it and its application as he wishes. But it is disingenuous to ‘discover’ that it does not apply more generally, in the same felicitous manner as a magician ‘discovers’ a rabbit in his top hat. Yet the lack of an open debate over the nature and justification of the grid precludes rational discussion. How solid are the (vertical) boundary lines between the various legal disciplines? Apparently, not very. As to the contract/tort borderline (or, as the grid has it, the ‘consent’/‘wrongs’ borderline) the scheme’s author has explicitly stated that, for most purposes, the line may as well not be there. The line tries to draw a distinction between remedies deriving from wrongs, on the one hand, and remedies deriving from consent on the other. The difficulty is that actions for breach of contract are both—obviously in one sense they derive from the ‘consent’ which gives rise to the contract, but in another they derive from the ‘wrong’ of breaking it. So: …the correct conclusion must be that for most purposes the common law approaches contract through the wrong of breach of contract. In effect it adds breach of contractual duty to the list of torts.19

Misleadingly, however, the line between the ‘consent’ and ‘wrongs’ columns is drawn in ink as dark as all the others. It is presented as absolutely solid, even though its author refuses to justify it. As to the wrong/unjust enrichment line, a firmer stance has been taken, but for rather slight reason. It is admitted that the standard case of restitution—restitution of money mistakenly paid— could be treated as a case of a wrong if we wanted to. There is, after all, nothing obviously illogical in saying that the recipient of a mistaken payment commits a wrong if s/he doesn’t return it.20 The author gives two reasons why he prefers not to do this. The first is that there is ‘no point’ in so doing, as the liability can readily be explained through unjust enrichment.21 He knows, after all, that the real explanation is unjust enrichment; why, then, should he bother to postulate an additional reason? But of course precisely the converse argument can be made. We all know that there is a category of wrongs; why, then, not invoke that, rather than the rather dubious and uncertain idea of ‘unjust enrichment’? As he notes, correctly, we don’t need both explanations (though to conclude that therefore one of them must be wrong begs a number of questions as to the nature of the grid). But he assumes that that point favours unjust enrichment, whereas in fact it cuts both ways. His second reason is more interesting. He says that if it were a wrong to fail to return a mistaken payment, then surely an action for damages would lie for failure to do so, rather than an

17 18 19 20 21

P Birks, An Introduction to the Law of Restitution (Oxford University Press, 1985) 18. P Birks, ‘The law of restitution at the end of an epoch’ (1999) 28 WALR 13, 18. P Birks, ‘The concept of a civil wrong’, in D Owen (ed), Philosophical Foundations of Tort Law (Oxford University Press, 1995) 31, 51. Ibid, 48. Ibid, 48.

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action for restitution.22 Now, this raises serious questions of principle. Which money actions are for ‘damages’, and which are for liquidated sums, is a matter heavily influenced by legal history; the case law still carries many oddities which have their origins in disputes over whether a civil jury was to be involved in the case. But where does this leave us today? In principle, there should be no problem. The obvious measure of damages for failure to return £X is, of course, simply £X. In other words, in most cases there should be nothing in the distinction between compensation and restitution. (And indeed the point can be made more generally: in the standard cases of ‘subtractive unjust enrichment’, there is very little practical difference between compensation and restitution.) Of course, there are a few, rather rare, situations where the two diverge. The question is, therefore, whether the supposedly fundamental division between wrongs and unjust enrichment is to be dictated by these rather minor differences. Is there really something fundamental about such minor points? If so, what? Or is not the truth that the grid rests on a historical distinction which should rightly be discarded? More open debate of these matters is needed. The relative unimportance of ‘contract’ and ‘tort’ as formal concepts is a continual, almost hackneyed, theme of scholarships in the last half century. There is much further to go in discussing the continued relevance of this historic classification in the new century. But to assume, without supporting discussion, that the division is fundamental, does not convince. To repeat a point made earlier, the grid adopts an extremely conservative position without making the necessary supporting argument—giving the impression that the position is adopted for convenience rather than out of conviction. This cannot be the stuff from which uncontroversial, bedrock classifications are made. If there are some who wish to argue for positions currently thought conservative, let them do so— universities are not worth much if they cannot accommodate views challenging existing wisdom. But let there be no pretence that such views are merely the distillation of common sense or ‘rationality’, or that the debates which have weakened the conservative position occurred on a different planet. The air of neutrality claimed for the grid is quite false; solid argument is needed to support it.

Classification by interest? The third point to note about the grid is about what is not there. How does the grid suggest that we identify the area of law relevant to a particular real-world problem? How do you know what sort of case you have—which chapters of which books will guide you to a solution? Well, you have to know roughly whether you are dealing with contract, tort, or restitution, and you have to know what you are trying to do with the remedy—to seek compensation, to punish the other party, to regain your property, or whatever. But obviously enough there is something else you need to know before you can even begin to say what law is applicable: you have to know which of the claimant’s legal interests is in issue. Is the claimant complaining of physical injury, or injury to their property, or to their reputation, or saying they are owed money, or what? This question is demoted by the grid to a matter of lesser importance, but actually it is quite fundamental.

22

Ibid, 49.

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Take tort cases. How far can you get in tort by saying ‘The defendant did me wrong, and I want compensation’? The answer is of course that you can get nowhere at all, until you specify the interest affected. If he ‘did you wrong’ by taking your personal property, then we’re talking about conversion or trespass to goods. If he ‘did you wrong’ by ruining your enjoyment of your land, we’re talking nuisance. If he hit you, we’re talking about battery. If he called you a Nazi for no very good reason, we are talking about defamation. But until we know which protected interest he is supposed to have infringed, we have absolutely no idea which body of law to apply. The language used by the grid is insufficient in itself to identify particular bodies of law. Either each square of the grid contains some rather heterogeneous material, or it must extend into a third dimension. The same point is good in relation to contract law, though we need to be a little more precise in stating it. If all that someone tells you is that the other person made a promise to you and then broke it, there’s very little you can say. I know that contract law courses try to give the reverse impression: that there’s a general law which relates to all contracts. But noone comes out of a general contract law course being able to advise anyone about any particular situation. Contract law differs wildly with the subject-matter. The law on the sale of goods is quite different from the law on the sale of land, and each is quite different again from the law on sales of securities. Loans of money have quite different rules from loans of ships. Licences to use land are quite different from licences to use software. Insurance and performance guarantees occupy worlds of their own. And so on, and so on. I know we talk of the ‘general law of contract’, and what is taught under that heading is a useful preliminary to learning about real types of contract. But contracts differ very greatly in the legal regimes applicable to them, and until we know the subject-matter of the transaction we can’t know what law to apply. So the grid implicitly makes a third claim: that the interest protected is relatively unimportant. Yet this claim is quite untrue as to contract and tort. Why make it, then? Presumably, because it is a claim that unjust enrichment theorists have a huge amount of intellectual capital invested in. The theory of unjust enrichment depends implicitly on the assumption that there is a single concept of ‘enrichment’, and that pretty much the same rules apply to all its forms. And indeed if this assumption is questioned, the whole enterprise begins to fall apart. Birks has seen this quite clearly: for if the current model of unjust enrichment is right, as he says: If it is once determined that the defendant has been enriched at the plaintiff’s expense, the same unjust factors—the same reasons why he should make restitution—should operate whatever the form in which that enrichment has been received.23

Yet as he admits in the passage following, the law does not in fact operate in that way at all. There is a long-standing tension between what the theory demands and what the law actually says. Nor is this some fringe or marginal phenomenon: critics have been pointing it out for some years now.24 I have seen nothing in the literature that can plausibly be regarded as even an attempt to answer the point. The point for now is the inexorable nature of the logic. If the theory of unjust enrichment in its current form is right, then the law should treat all types of enrichment the same.

23 24

P Birks, ‘Restitution: dynamics of the modern law’ [1993] CLP 157, 171. P Watts, ‘Restitution—a property principle and a services principle’ [1995] RLR 49; S Hedley, ‘Unjust enrichment’ [1995] CLJ 578, 580–85; J Dietrich, Restitution—A New Perspective (Federation Press, 1998) 55 ff.

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The law, however, clearly does not treat all types of enrichment the same. So either the theory has to go, or the law has to go.25 I think it is the theory that should go. Presumably, users of the grid disagree; indeed, some have come close to saying so expressly, citing the failure of the law to treat different sorts of enrichment alike as a defect in the law which should be eliminated.26 Yet we hear nothing about why this uniform law would be more just than the current arrangement; and presumably they are not so shameless as to argue for it merely because their research careers have to date relied on this assumption. What is their justification? They have yet to tell us.

THE GAP BETWEEN ASPIRATION AND ACHIEVEMENT No doubt those who fashion and develop the theory of unjust enrichment want a precise and coherent theory of law. But wanting is very different from getting, and the current state of unjust enrichment is no marvel of precision. When the unjust enrichment theorists criticise other writers for lack of clarity, the appropriate response is that they have unrealistic ideas about how precise it is possible to be. After all, no extant legal subject meets their standards. Most are merely ‘contextual’ and so cannot be expected to reach them.27 Tort does not, being ‘in a mess’ and ‘beset with crisscrossing categories’.28 And while it would be possible to take such a theoretically pure approach to contract, one writer at least admits that any such writing would ‘endanger its own utility and risk absurdity’.29 Quite so. Does this not suggest that the standards have been set too high? In fact, unjust enrichment theory is in pretty much the same hole as it has been in since the mid1980s. Its proponents are caught between the need to state their theory accurately, and the need to fit in with the actual cases. Of course, each individual writer will tell you that their personal theory strikes the right balance, that they alone have managed to frame a theory which captures the essence of the current law. The difficulty comes when you ask how much support each theory has—the answer in most cases being that each theory has precisely one supporter. And if any one of these theoretical accounts is correct, then of course all of the others are wrong! For example: how many unjust factors are there, and what do they consist of? Well, who can say. At one extreme, we have the rather elaborate division, sub-division and sub-subdivision of unjust factors in the Restitution Research Resource 1997, which comprises 43 distinct categories of unjust factor. At the other, we have Sonja Meier’s version of the theory,

25

26 27 28 29

McKendrick seems to agree with the logic, though he evidently hopes that a solution can be found within existing unjust enrichment concepts: Taxonomy: does it matter?’, in D Johnston and R Zimmermann (eds), Unjustified Enrichment—Key Issues in Comparative Perspective (Cambridge University Press, 2002) 627, 652. Ibid, 627, 636. P Birks, An Introduction to the Law of Restitution (Oxford University Press, 1985) 73–74. P Birks, ‘Definition and division: a meditation on Institutes 3.13’, in P Birks (ed), The Classif ication of Obligations (1997) 1, 23. Ibid, 1, 34.

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which claims that the theory of unjust enrichment is best stated using 0 unjust factors.30 In between these extremes, so far as I can see no two texts based on unjust enrichment agree on the list of unjust factors. Worse, there is no agreed criterion on what would constitute an unjust factor—anyone can propose anything they like, constrained only by their imagination and their sanity. The participants in the argument have become exhausted. No one list of factors is demonstrably superior to the others; no-one can defeat their opponents, but no-one will admit that their version is wrong. What we have today is merely a tacit agreement to disagree. Or again, take enrichment. After the great theoretical wrangles over enrichment in the late 1980s and early 1990s—required reading for those now learning the subject—we have a variety of different versions of what may constitute an enrichment for the purposes of the theory of unjust enrichment. Enrichment may consist of money, or property, or services, or perhaps other things like paying off someone’s debt. It may (according to some) consist of a valuable end-product, or (according to others) it may not. Sometimes it is valued ‘objectively’, but sometimes the recipient can insist on a ‘subjective’ valuation, devaluation or revaluation. Sometimes, by contrast, it is ‘incontrovertible’—though nobody seems to know quite when. (It has always struck me as amusing that an enrichment is only described as ‘incontrovertible’ when its presence seems hard to substantiate.) And sometimes, while there is plainly no enrichment at all, nonetheless the defendant is estopped from denying its existence. This is all well and good, but how do we know which definition to apply in which circumstances? Here, I would say that most textbooks do not even get to the stage of disagreeing with one another. Most of them simply give no clear lead on when to apply each of these various concepts. They trot out the various ways in which enrichment may be defined, but make no comment on when each is to be used—almost as if it wasn’t their place to do so. The theory of unjust enrichment has become too elaborate to be applied even by the text writers who are urging it on the rest of us. My suggestion, which may prove mildly controversial, is that there should be some sort of setaside scheme here. Each law faculty could receive government grants in return for not producing any more accounts of the law of unjust enrichment, or at least not without first securing the recantation of some of the earlier ones. I can foresee a number of objections to this proposal; I can only say that the scheme seems most attractive when we consider the alternative. Enough, as they say, is enough.

CONCLUSION My conclusion is, then, that the supposedly solid roots of restitutionary theory are in fact distinctly shaky. What is presented as clear in principle actually rests on no more than repeated assertion. Like the famous emperor of legend, its claim to be adequately protected from the elements relies overmuch on the deference it expects from onlookers, and cannot survive impartial observation and honest critique. It is not a reasoned argument, but a rhetorical attempt at intellectual intimidation.

30

S Meier and R Zimmermann, ‘Judicial development of the law, error iuris, and the law of unjustified enrichment—a view from Germany’ (1999) 115 LQR 556.

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Of course, the general weakness of the scheme does not in itself disprove the claims it makes. The fact that it is working out as a job creation scheme for legal academics, rather than as a sensible project for understanding the law, does not disprove it either. It may be that there are, in fact, incredibly good and intellectually rigorous reasons for supporting the grid, which however haven’t been discovered yet. Equally, it may be that all the people who have reported seeing Elvis in various locations are stating no less than the truth. It is not impossible; absence of evidence is not always evidence of absence. However, I propose that there are arguments suggesting otherwise, which are not unworthy of consideration. It is certainly possible to expound the law of restitution without the use of ‘unjust enrichment’ or associated concepts;31 if such an exposition is in any way inferior or unsatisfactory, this has yet to be demonstrated. If it is said that my argument here pays too much attention to rhetoric and too little to substance, my reply is that the two have become hopelessly intertwined: let those who believe that the two are separable put their conference papers where their mouths are. If it is said that I have concentrated too much on the writings of one particular man, my reply is that too many others have relied uncritically on that one man’s work. Recall that in the fable of the emperor’s new clothes, it is not the emperor who is the villain of the piece. Rather, it was those who uncritically encouraged him, flattered him and failed to mention objections that any unbiased observer could see the force of. If there are those who wish to argue publicly that the emperor is in fact dressed in fabulous raiment, let them do so. Of course, there are serious questions to be asked about the level of conceptual clarity necessary for a coherent legal system in the 21 st century. However, it is surprising that the answer is sought by going back 19 centuries or more in legal history. And when the main argument urged in support is that there would be chaos if we did not, there must certainly be a feeling that the question is not being taken seriously. At any one time, all those involved in legal debate will have a great deal of mental furniture in common. Whether that furniture adds up to a ‘taxonomy’, in the sense that the ‘unjust enrichment’ theorists mean, I rather doubt. With Matthews, I incline to the view that this is not a time to tie ourselves down to rigid formulations, and the legal systems which will survive this century are those which are prepared continually to reinvent themselves.32

31 32

S Hedley, A Critical Introduction to Restitution (Butterworths, 2001). P Matthews, review of P Birks (ed), English Private Law (Oxford University Press, 2000) (2002) 6 Jersey Law Review 115.

Chapter 8 The theory of unjust enrichment Peter Jaffey 1

UNJUST ENRICHMENT AND RESTITUTION The principle of unjust enrichment as an underlying principle There are many situations in which a claim arises from the receipt of a benefit—for example, a claim to reverse a mistaken or unauthorised transfer of money or property, or a claim for payment for services conferred by mistake or in an emergency, or a claim for the surrender up of wrongfully acquired benefits, or a claim for payment for the unauthorised use of property.2 Some such claims historically formed a miscellaneous body of claims lying outside the recognised categories of the common law—contract and tort—and were thought not to be capable of explanation in terms of these categories. According to the theory of unjust enrichment,3 these various claims are based on the principle of unjust enrichment.4 This is understood to be a principle equivalent to those that underlie the traditional categories of law, for example the contractual principle that agreements should be enforced, or the tortious principle that there is a duty to take reasonable precautions to avoid causing harm to others.5 These underlying principles provide a guide to the development of the law in a way that makes it more coherent, bringing together ostensibly different claims that should be treated in the same way because they are based on the same principle, and eliminating anomalies and unnecessary obscurity and complexity. The principle of unjust enrichment, it is thought, promotes the development of a systematic and coherent body of rules analogous to those of contract and tort, governing claims that arise from the receipt of a benefit.6 It is conceded that the nature of the principle of unjust enrichment may be controversial and its scope imprecise. But in this, it is argued, it is no different from the principles underlying contract or tort. These are by no means uncontroversial, and sometimes controversy is reflected in arguments over the scope and content of the law, but there is nevertheless sufficient clarity and consensus to provide a workable principle and a recognised category.

1 2 3

4 5 6

[email protected]. I am grateful to the directors of and participants in the 2002 WG Hart Workshop. The way these claims are described is not neutral but reflects the approach taken below, but this does not prejudice the analysis. I take the theory as formulated to reflect the position of leading commentators, eg, R Goff and G Jones, The Law of Restitution (Sweet & Maxwell, 6th edn, 2002); A Burrows, The Law of Restitution (Butterworths, 2nd edn, 2002); G Virgo, The Principles of the Law of Restitution (OUP, 1999). P Birks, An Introduction to the Law of Restitution (Clarendon Press, rev edn, 1989), 16–25, expressed doubt about a principle of unjust enrichment, but this appears to be not because he doubts that there is such a general principle, but because he thinks that the principle must be subject to conditions and qualifications rather than applied directly. His general approach seems to reflect the acceptance of the theory as stated. The approach taken in this chapter reflects P Jaffey, The Nature and Scope of Restitution (Hart Publishing, 2000), and a number of the points made here are developed there. Some commentators would say that most but not all of these claims are based on a principle of unjust enrichment. This point is addressed below. The formulation might be tendentious, but this is not the issue here. See, eg, Goff and Jones, above n 3, 15. Virgo, above n 3, 49–57; A Burrows, Understanding the Law of Obligations (Hart Publishing, 1998), Ch 5.

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But the ‘principle of unjust enrichment’ is not equivalent to the contractual and tortious principles. The latter principles provide a reason—that is, a justification—for a claim. This is how they function as underlying and guiding principles. The problem with the ‘principle of unjust enrichment’ is that, certainly on its face, it does not provide, or even purport to provide, any justification for a claim. To say that a benefit received is an unjust enrichment is merely to say that a claim should arise from the enrichment: there should be a remedy that removes it. This is simply an assertion that a claim should arise; it does not offer any justification for it, or even any indication of what type of argument justifies the claim. A principle is invoked and named, but it is not elucidated: what is the principle? If a court is faced with a new type of case where it is argued that a claim should arise from the receipt of a benefit, the ‘principle of unjust enrichment’ does not provide any basis for determining whether a claim arises or should arise; and if a claim is allowed, all the supposed principle does is to supply a description or rationalisation for it.7 Thus the ‘principle of unjust enrichment’ cannot serve the function that an underlying principle is meant to have and that the principles underlying contract and tort do have—to provide a justification for a body of law, and guidance in its development.8 Of course, it is right to search for an underlying principle for claims based on the receipt of a benefit for which no plausible basis appears to be available. Confronted with a body of claims without any obvious foundation, but having in common that they arise from the receipt of a benefit, one might reasonably adopt a working hypothesis that they are based on an as yet unelucidated underlying ‘principle of unjust enrichment’. This can certainly be no worse than continuing with the old theory of implied contract, which was the ostensible basis for some of the claims now said to be governed by the principle of unjust enrichment,9 and was in some cases an obvious fiction; although, of course, it is not a strong factor in favour of a theory that it is an improvement on an obviously false theory. But the literature on the theory of unjust enrichment has not offered any convincing elucidation of the principle. It has merely assumed that there is such a principle, and that it serves the function of justification and guidance. Birks’s influential framework for the law of unjust enrichment postulates a number of ‘unjust factors’, signifying different forms of unjust enrichment.10 The implication is that there is a single principle of unjust enrichment that operates in different contexts through different unjust factors. But in fact the terminology of unjust factors allows claims that are really based on distinct principles to be presented as being applications of a single underlying principle, and in my view it is clear from the case law and literature that the analysis of cases concerned with different unjust factors does not involve the interpretation or elucidation of a single principle of unjust enrichment. These

7

8 9 10

This is stated explicitly by Birks, above n 3, 19, who notes that instead of using the tag ‘unjust’ for a benefit the receipt of which gives rise to a claim, one could equally use ‘reversible’. See also the editors’ introductory chapter in D Johnston and R Zimmerman (eds), Unjustif ied Enrichment (CUP, 2002), 3. These commentators do not make the argument in the text that follows from this point. There are many works critical of the theory of unjust enrichment, although the preferred approaches tend to vary. Recent examples, in addition to Jaffey, above n 3, include J Dietrich, Restitution: A New Perspective (Federation Press, 1998), S Hedley, Restitution (Sweet & Maxwell, 2001) and I Jackman, The Varieties of Restitution (Federation Press, 1998). Of course often resort to such guidance is precluded by binding authority. The issue arises where there is a lack of binding authority or where it is possible to overrule (or distinguish). See, eg, Burrows, above n 3, 7–9. As to this framework, see P Birks and R Chambers, The Restitution Research Resource (Mansfield Press, 1997).

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different types of case are approached in quite different ways, but prefaced by the ritual incantation of a principle of unjust enrichment. The theory of unjust enrichment is mistaken in holding that there is a single monolithic principle underlying claims arising from the receipt of a benefit. There is no a priori reason to assume that this is the case, and, as discussed below, there are actually a number of distinct principles by virtue of which a claim can arise from the receipt of a benefit, and these are not specific versions or manifestations of a more general principle. Furthermore, the theory of unjust enrichment implies that the principles underlying other categories of law, like contract law or ownership in property law, cannot account for claims arising from the receipt of a benefit. But, to the contrary, as discussed below, the contractual principle that agreements should be observed in some circumstances justifies a claim that depends on benefit received. And it is a necessary principle of property law that ownership of wealth or property is lost only by the valid exercise of a power of disposal, so that in the event of an invalid transfer this right of ownership gives rise to a claim to reverse the transfer. These and other principles governing claims arising from the receipt of a benefit are discussed below.

Restitution, unjust enrichment, and quadration There has been controversy over the relation between restitution and unjust enrichment. Where a claim arises from the receipt of a benefit, according to the theory of unjust enrichment the claim is based on the principle of unjust enrichment. The remedy, it seems, must be the removal of the benefit from the defendant and its transfer to the claimant, and this is what restitution is understood to be. Thus all claims arising from the receipt of a benefit (1) are based on the principle of unjust enrichment and (2) give rise to a claim for restitution (and neither unjust enrichment nor restitution is relevant to any other claims). All claims based on the principle of unjust enrichment are claims for restitution and all claims for restitution are based on the principle of unjust enrichment. This is the principle of quadration, as it was described by Birks.11 There has been some debate over the principle of quadration, but its significance for the theory of unjust enrichment seems not to have been fully appreciated. Because the theory of unjust enrichment has not managed to identify a genuine underlying principle, claims said to be based on the principle of unjust enrichment cannot be identified by determining whether the conditions for the application of the principle are satisfied. By contrast, a contract claim can be identified from the nature of the underlying principle, by determining whether the claim arose from the fact that there was an agreement and that it was not performed. A claim based on the principle of unjust enrichment is identifiable as such only from the fact that a claim is known to arise from the receipt of a benefit (whatever the basis might be), and therefore that the claim is for restitution. In practice a claim known to exist is first identified as restitutionary and then inferred to be based on a principle of unjust enrichment. Thus the principle of quadration is necessary in order to be able to identify claims based on the principle of unjust enrichment.12

11 12

Birks, above n 3, 17. Traditionally such cases are liable to be designated and classified in terms of the nature of the remedy, because of the traditional remedial orientation of English law (and also because of ignorance of the underlying principle).

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Some commentators, whilst still assuming that there is a principle of unjust enrichment underlying some claims, have recognised that a claim can arise from the receipt of a benefit by virtue of quite distinct principles. In particular, it has been pointed out that a claim to reverse a transfer can arise from a right of ownership rather than the supposed principle of unjust enrichment.13 (This and other such principles are discussed below.) But where does this leave the theory of unjust enrichment? A claim based on the principle of unjust enrichment can no longer be identified as a claim arising from the receipt of a benefit. One can say only that a claim arising from the receipt of a benefit is based on the principle of unjust enrichment so long as some other principle has not been identified as the true underlying principle; and the principle of unjust enrichment will give way to any principle that has real justificatory and guiding force. As the discussion below shows, the claims said to fall within the field of unjust enrichment can all be shown to rest on such distinct principles. Furthermore, just as there are different principles by virtue of which a claim can arise from the receipt of a benefit, so also can the claims take different forms. They are not all claims for the removal of a benefit; some are claims for payment for the benefit. Also, some claims for the removal of a benefit are claims to reverse a transfer, and sometimes it is important to distinguish this type of case. The theory of unjust enrichment has led commentators to adopt a usage of ‘restitution’ that blurs these important distinctions.14

The principle of unjust enrichment as a ‘descriptive’ or ‘supplementary’ principle It is sometimes said that, although the principle of unjust enrichment may not be a normative principle, which provides a justification for decisions and guidance in developing the law, like the principles underlying contract or tort, it is nevertheless a useful descriptive principle, which allows claims to be conveniently classified or organised, but without providing any justification or guidance.15 This may be true; in trying to establish whether a claim is available in particular circumstances, it may be helpful to begin from the fact that if there is a claim it must have arisen from the receipt of a benefit, and so for some purposes it may be convenient to gather such claims together. But the concept of unjust enrichment in this sense is not of great significance, and this is not how the theory of unjust enrichment has been presented. On this approach, it would make no sense to argue that a claim is based on unjust enrichment rather than, say, contract or ownership, or to argue that the principle of unjust enrichment supports the recognition of a claim in particular circumstances; and yet these are the precisely the types of argument that are associated with the theory of unjust enrichment.

13

14 15

The debate about quadration seems to have been confined to this basis for a claim. See G Virgo, ‘What is the law of restitution about?’, in WR Cornish et al (eds), Restitution: Past, Present and Future (Hart, 1998); P Birks, ‘Misnomer’, in Cornish et al, ibid. One might argue that this is not a true case of restitution, because it is not based on unjust enrichment. This would preserve the principle of quadration, but at the expense of complete circularity in the definitions of unjust enrichment and restitution. See further the discussion below of claims for payment for services, the use claim, and disgorgement. Eg, K Barker and LD Smith, ‘Unjust enrichment’, in DJ Hayton, Law’s Future(s) (Hart Publishing, 2000), 412.

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It is also sometimes said that, even if there is no distinct field of law defined in terms of an underlying principle of unjust enrichment, nevertheless the principle is a useful supplementary principle that plays a supporting role in determining whether a claim will arise in, say, contract, or in determining the measure of such a claim.16 But where the receipt of a benefit is relevant, this is not by virtue of a single principle of unjust enrichment that is imported into different areas as a sort of ancillary principle. As discussed below, it is the application of the principle behind the relevant claim that itself responds to the presence of a benefit and determines the relevance of the benefit. The benefit is relevant to the claim in different ways in different contexts.

Classification, academic debate and judicial recognition It is helpful to make a distinction between nominal classification and principled classification.17 An argument that, properly understood, the law of contract includes the law of estoppel and secret trusts, or that contract is reducible to tort, or that liability in Hedley Byrne18 was really contractual not tortious, is concerned with principled classification. Principled classification is an inherently controversial matter of principled or theoretical argument. On the other hand, nominal classification is a matter of convenience, for the purposes of locating a rule in a textbook or academic or practising speciality. It is a matter of convention, based on custom and practice. As a matter of nominal classification, contract law is what is conventionally taught in contract courses and found in the student and practitioner contract textbooks. A nominal classification will not be invoked for the purpose of an argument based on an underlying principle, and the soundness of a supposed underlying principle is not in issue. Indeed there will be no real point in arguing about what the nominal classification is. The prevailing nominal classification reflects the accidents of history and the influence of past theoretical argument (whether valid or not). One can say that, as a matter of nominal classification, there was once a law of quasi-contract in English law based on the theory of implied contract, but that this is no longer the case. In the same way it may be that, as a matter of nominal classification, the law of unjust enrichment or restitution now forms a recognised category of English law, although until relatively recently there was no such category. But it does not follow from this that the theory of unjust enrichment is sound any more than it must be conceded that theory of implied contract was ever sound. One might argue that the principle of unjust enrichment has been recognised in authoritative decisions of the courts;19 but it is doubtful whether this type of theoretical issue can be conclusively settled as a matter of precedent,20 because although an accepted theory may provide the framework under which an issue is addressed, it cannot really be said to be a necessary part of the rule that decides the case. In the academic literature, the soundness of the theory of unjust enrichment has often been displaced by a different issue: whether argument over the classification of the law is of any

16 17 18 19 20

For a recent example, see SM Waddams, ‘The relation of unjust enrichment to other concepts’, in EJH Schrage (ed), Unjust Enrichment and the Law of Contract (Kluwer, 2001). See M Moore, Placing Blame (Clarendon Press, 1997), 18–23, distinguishing between ‘nominal’ and ‘functional’ forms of classification. Hedley Byrne v Heller [1964] AC 465. Eg, Banque Financière de la Cité v Parc (Battersea) Ltd [1998] 2 WLR 475, 479 per Lord Steyn. Although the extent to which a theory accounts for the case law is an important criterion in evaluating it.

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consequence. In opposition to arguments for the recognition of a law of restitution or unjust enrichment, it was sometimes said or implied that it was pointless to argue over the issue, since such a classification was just a matter of convenience and did not affect legal argument This seems to reflect a concern with nominal classification and a scepticism about the value of principled classification and theoretical argument. In response, the argument in favour of the recognition of the principle of unjust enrichment took the form of defending principled classification and theoretical argument against this scepticism.21 But this argument does not address the real issue, which is whether, accepting the importance of theoretical argument, the theory of unjust enrichment is sound.

FORMS OF UNJUST ENRICHMENT Claims arising from the ownership of wealth and property The claim to reverse a transfer of property or money arising from a defect in the transfer has traditionally taken various forms, including the equitable proprietary claim or claim under a constructive trust arising from a transfer by a trustee or fiduciary in breach of trust,22 and the claim for money had and received arising from a mistaken payment. Some such claims are said to be based on unjust enrichment, and certainly one can say that to allow the recipient to keep the money or property would be unjust. But the obvious place to look for the basis of the claim is the claimant’s ownership of the money or property.23 The law of property necessarily includes rules determining how a valid transfer of property can be made, and a putative transfer that does not meet the requirements for a valid transfer will be invalid. The owner’s exclusive right to his property must entail that the recipient of an invalid transfer incur a liability to return the property, or at least to pay an equivalent value. Although the law of property is often taken to be concerned with the ownership of tangible things, one can equally be said to be the owner of one’s wealth, meaning all forms of transferable value, including money at the bank and investments as well as tangible things. Just as with tangible property, the law of ownership of wealth must entail rules determining how the wealth may be transferred, and an invalid transfer must give rise to a claim against the recipient for the return of the wealth invalidly transferred. Ownership of wealth includes beneficial ownership, where the beneficial owner’s wealth is held and controlled by a trustee or fiduciary. Any claim to reverse an invalid transfer of property or wealth is ‘proprietary’ in the sense that it arises from a right of ownership of property or wealth.24 It is this right that generates the claim to reverse the invalid transfer, whatever the traditional form of the claim.

21 22 23 24

Burrows, above n 3, 14; P Birks, ‘Unjust enrichment—a reply to Mr Hedley’ [1985] LS 67, 70. Some would add the claim for knowing receipt, as to which see P Jaffey, ‘The nature of knowing receipt’ [2001] TLI 151. The argument in this section is set out more fully in P Jaffey, ‘In rem claims to wealth and surviving value’ (2002) 55 CLP 263. The expression ‘proprietary’ is commonly used in contradistinction to ‘personal’ to refer to a claim consisting of the assertion of ownership of an asset. This is a distinct sense from that in the text, although the two senses are unfortunately not systematically distinguished in the literature. A claim that is supposed by some commentators to be based on unjust enrichment and so is not proprietary in the sense of arising from pre-existing ownership may still be proprietary in the sense that it takes the form of an assertion of ownership of an asset, and conversely a claim that is thought to be proprietary in this sense rather than being based on the principle of unjust enrichment can be a personal claim. See further Jaffey, ibid.

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It is true that traditionally the law was not consistently understood in this way. There was no well-recognised law of property or ownership, from which a claim to reverse an invalid transfer was understood to arise. Instead, such a claim was traditionally expressed in terms of the form of remedy—constructive trust, or money had and received. This left room for the development of a law of unjust enrichment as the basis of the claim, rather than the law of property or ownership. The theory of unjust enrichment as stated above holds that all claims arising from receipt are unjust enrichment claims. Some commentators have indeed held that any claim arising from the invalid transfer of property or wealth is an unjust enrichment claim.25 But most commentators have recognised that the ownership of property or wealth itself provides a basis for reversing an invalid transfer, and that this basis is distinct from any supposed basis in unjust enrichment. However, generally they have held that in some circumstances a claim arises to reverse an invalid transfer of property or wealth that is not proprietary in this sense—that is, it does not arise from the original right of ownership, but instead arises from the principle of unjust enrichment. There has been no consensus on how to draw the distinction between the two types of claim, and it is difficult to see how this position can even be coherent. It is true that a claim to reverse an invalid transfer can be said to reverse or, it might be better to say, pre-empt unjust enrichment. But this is just an aspect or implication of the claim arising from the original right of ownership. The argument does not identify a distinct principle or justification for a claim to reverse the invalid transfer, or provide a distinct ground for a claim. The insistence that there is a claim based on unjust enrichment distinct from the claim based on the right of ownership comes from the assumption that there is a principle of unjust enrichment that provides a ground for a claim, along with a reluctance to relinquish to the law of property what amounts to a very substantial part of the area of law supposed to be governed by the principle of unjust enrichment. It is sometimes said that, where a transfer is invalid, title to the property is retained and this is why the claim is proprietary, whereas sometimes the transfer is valid and title passes but the transfer is nevertheless vitiated, and this means that the claim cannot be a proprietary claim based on the original right of ownership, but must be based on unjust enrichment.26 But, first, what can be meant by a ‘vitiated transfer’ if not that it is a transfer that was not duly made by or on behalf of the owner in accordance with the owner’s power of disposal?27 And, secondly, where a claim to reverse a transfer of wealth or property is conceived of as being based on unjust enrichment, it is understood that it is a prerequisite of the claim that the wealth or property received came from the claimant, in that it is derived from wealth or property originally owned by him—otherwise it would not be unjust enrichment ‘at the expense’ of the claimant or ‘by subtraction from’ him, as the customary formulation of the unjust enrichment claim requires. In what sense, then, is the

25 26 27

Eg, Burrows, above n 3, Ch 13 of the first edition, 1993. Burrows’s view has changed: see A Burrows, Understanding the Law of Obligations (Hart Publishing, 1998), 115. There appears to be some support in the case law for such a distinction, but this counts for little if an adequate justification for such a distinction cannot be supplied. The most important vitiating factor for present purposes is ‘lack of authority’ or ‘lack of power’ where the wealth or property is taken by a stranger or transferred without authority by an agent or trustee. In the case of a transfer in breach of trust, although the claim might appear to arise from the trustee’s wrong rather than a vitiating factor, strictly speaking it is the lack of power or authority to make the transfer that is relevant as between the claimant beneficiary and the defendant recipient, although a trustee who makes such a transfer will generally also be acting wrongfully.

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claim to reverse the transfer not based on the protection of the claimant’s original ownership? Sometimes the claim takes the form of the assertion of continuing ownership over the original property transferred,28 or over substitute property, or over a proportion of a mixture; and sometimes the claim is a personal claim, for example for the value transferred. But whatever the form of the claim,29 it is surely clear that it arises out of and to protect the original right of ownership of the money or property invalidly transferred.30 It is sometimes argued that there must be a genuine distinction between an ownership-based or proprietary claim to reverse a transfer and a claim based on unjust enrichment, because a claim based on the principle of unjust enrichment can also arise in some circumstances from the provision of services, and the provision of services is not a transfer of wealth or property and so cannot be equated with a proprietary claim.31 But this simply begs the question whether there is indeed a single principle of unjust enrichment that lies behind both a (sub-category) of claim to reverse a transfer of wealth or property and also some form of claim for payment for services.

Non-contractual claims for payment for services Usually a claim for payment for services rendered arises in contract, but it is possible for such a claim to arise in the absence of a contract, for example in the case of services provided in an emergency or by mistake.32 According to the theory of unjust enrichment, it is the principle of unjust enrichment that governs such claims and determines when they are available. It is taken to be a matter for the principle of unjust enrichment because, if the recipient does not have to pay for it, the benefit received leaves him unjustly enriched. This type of claim is assimilated with the claim to reverse an invalid transfer, the claim for payment for services being presented as a claim to reverse the transfer of services. The difference between the two types of claim based on unjust enrichment is said to be simply the factual or evidential matter of valuing the transfer, which is more difficult in the case of services than for property or wealth.33 But in fact, although the expression ‘unjust enrichment’ might plausibly be applied to both types of case, they are not based on the same principle.34

28 29 30 31 32 33

34

le, ‘proprietary’ in the usual sense in which it is contrasted with ‘personal’. As to what form the claim should take, see Jaffey, above n 23. There may also be a claim in respect of the use of the money by the defendant (a use claim) or a claim for a profit wrongly made from it (disgorgement). See, eg, LD Smith, ‘Unjust enrichment, property, and the structure of trusts’ (2000) 116 LQR 412, 419; Burrows, above n 3, 9. The standard example of a claim arising from services provided in an emergency is the maritime salvage claim. The availability of a claim for mistakenly conferred benefits, eg, mistaken improvements to land, is controversial: see Burrows, above n 3, 162–68. See, eg, Birks, above n 3, 7, 109 ff; K Barker, ‘Unjust enrichment: containing the beast’ [1995] OJLS 457, 458. Services are said to be affected by ‘subjective devaluation’ which refers to the fact that the services may be worth less than the market value. The idea is misleading because it presupposes that the services have a prima facie objective or uniform value. As a number of other commentators have argued: eg, S Stoljar, The Law of Quasi-Contract (Law Book Co, 2nd edn, 1989); S Hedley, ‘Unjust enrichment as the basis of restitution—an overworked concept’ [1985] LS 56.

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Property or wealth has an existence independent of the individual who owns it. This is why it can be transferred from the claimant to the defendant, and why an invalid transfer can be unproblematically reversed, thereby restoring the claimant’s loss without prejudice to the defendant. The claim protects the claimant’s ownership, and the issue is whether the transfer was properly made, in accordance with the owner’s power of disposition. By contrast, services do not have any such independent existence and cannot be transferred or returned. Except in some figurative sense, one does not own one’s services or labour. However, the ability to provide services, based on one’s knowledge, skill and resources, is of course a potential source of income, because services can be provided in exchange for payment to mutual advantage when the services are worth more to the recipient than the cost to the provider.35 Because services can have a different value to different people, depending on their wealth and taste, the well-established rule is that one cannot simply perform services for someone and become entitled to payment without first making an agreement governing the provision of the services and payment for them.36 The function of the agreement is to ensure that, on the agreed terms, the exchange is mutually beneficial.37 Thus the interest in earning through one’s ability to supply services is (in general) protected by the power to contract, which also protects (from the standpoint of the other party) the interest in determining, in the light of one’s own wealth and tastes, which benefits to spend one’s wealth on. The rationale for the usual rule whereby claims for payment are dependent on an agreement suggests that a claim for payment may be justified in the absence of an agreement if two conditions are satisfied. First, the claimant must not have chosen to avoid contracting, thereby subverting the optimal mechanism for determining whether the exchange was mutually beneficial and on what terms, and undermining the defendant’s interest in determining how to apply his income. This is how the traditional rule that the claimant should not have acted ‘officiously’ should be understood.38 Secondly, the benefit conferred must be such that it is reasonably possible to determine a measure of payment that is less than the value of the services to the defendant, so as, in effect, to complete a mutually beneficial exchange (as would normally have been achieved if an agreement had been made). With respect to the first requirement, one can distinguish between two types of case. There is the case where the reason why the claimant was not officious is that he was acting under a mistake or some other vitiating factor; and there is the case where the reason why he was not officious is that, although he set out deliberately to instigate an exchange of services for payment with the defendant, he did so in circumstances where there was no time to contract before the services had to be performed, and it was quite clear that the defendant

35 36 37 38

The cost may not be clear-cut—it may include, eg, opportunity cost, some part of the cost of investment etc. Falcke v Scottish Insurance Co (1886) 34 Ch D 234. As judged at the time of the agreement—thus the agreement necessarily entails an allocation of risk relating to matters affecting the cost and value of performance. le, this is my interpretation of the traditional rule that officiousness precludes a claim.

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would have contracted if it had been possible to do so: this is the case of necessitous or emergency intervention.39 Thus, whereas the recovery of wealth or property invalidly transferred is a matter of the law of ownership, payment for services rendered is generally a matter of contract. In the exceptional cases where a claim for payment is allowed outside contract, it is clearly a different type of claim from the claim to recover property or wealth, raising different issues. Even if the approach to noncontractual claims for payment suggested above is rejected, it remains clear that the claim does not arise from a right of ownership. In fact, the issues identified by the approach suggested above do tend to be addressed in some form under the rubric of unjust enrichment.40 But the supposed principle of unjust enrichment adds nothing to the analysis, and the issues are obscured and distorted. For example, the approach under the theory of unjust enrichment implies that the claim must be for the removal of the benefit received by the defendant through the services, which is often equated with the reversal of a transfer to the defendant. But in reality if a claim for payment is allowed, the effect is to complete an exchange, not to reverse a transfer. If the exchange is to be mutually beneficial, the measure of payment should fall between the cost of providing the services and the value to the recipient of the services, as in the case of an agreed exchange. The unjust enrichment approach tends to obscure the distinctions between the cost of providing the services, the value of the services to the recipient, and the appropriate measure of payment. These (particularly the latter two) are conflated in the discussion of the ‘benefit test’.41 The theory of unjust enrichment equates vitiated transfers of wealth or property with the vitiated provision of services, but the relevance of the vitiating factor is quite different in the two cases.42 In the case of services, the vitiating factor does not serve to invalidate the exercise of a power of disposition, as in the case of a transfer of wealth or property; it is relevant because it means that the claimant did not set out to avoid contracting and so frustrate the defendant’s interest in determining the use of his own resources. Thus a claim can also arise where there is no vitiating factor at all, where services are provided in an emergency. Whereas it is understandable that services might be conferred deliberately with a view to instigating an exchange, in the case of wealth there is no reason why a transfer should be made that is not vitiated but is not intended as a gift either.

39

40 41 42

I have described the non-contractual claim for payment for services based on the two conditions as an ‘imputed contract’ claim: Jaffey, above n 3, Ch 3. It has been suggested that this resurrects the old fiction of implied contract: see, eg, K Barker, Review article [2001] RLR 232, 236. The same objection was made at the Hart Workshop. The expression ‘imputed contract’ is chosen because contract generally governs exchange, and where there is no contract the nature of the two conditions that determine liability follow from the function of the contract in governing exchange in the usual case. It is surely clear that the argument does not rely on a fiction of actual agreement: the conditions for the claim are specified, and do not include agreement. Similarly J Edelman, Gain-Based Damages (Hart Publishing, 2002), 41 appears to equate ‘inferred contract’ with ‘imputed contract’. To say that an agreement is inferred where there is clearly no agreement is to use a fiction, but to approach a case by analogy with agreement in the absence of an agreement by way of ‘imputed contract’ does not involve a fiction. There is a difference between fiction and analogy. le, the ‘unjust factor’ of necessity or moral compulsion and the ‘benefit test’: see, eg, Burrows, above n 3, 16–25, 314–21. Ibid, 16–25. Barker equates the two cases, criticising the suggested approach: Barker, above, n 39, 236. Cf G Samuel, Review (2001) 12 KCLJ 273, 276–77.

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Most importantly, the approach suggested here makes clear that the non-contractual (or ‘unjust enrichment’) claim for payment and the contractual claim are mutually exclusive. The noncontractual claim is an alternative mechanism for exchange where contract does not operate, and there can be no question of the non-contractual claim for payment arising where there is actually a contract governing the claim.43 By contrast if the claim is thought to be based on a principle of unjust enrichment, there appears to be no necessary reason why a claim cannot arise where there is also a contract, and indeed this is the generally accepted position amongst proponents of the theory of unjust enrichment, as considered in the next section. Unfortunately this position is quite inimical to and subversive of contract law.

Claims arising from an agreement The principle of unjust enrichment is also supposed to be behind certain claims arising on the termination of a valid contract. One is the claim to recover a contractual prepayment. The traditional rule is that this claim arises only when the defendant has performed no part of his side of the contract, which is described as a ‘total failure of consideration’.This claim might appear analogous to the claim to reverse an invalid transfer, considered above. It is also understandable why it might be thought not to be contractual. The legal relation created by the contract is understood to consist of the duties of the two parties, and so it would appear that a contractual claim must arise from and serve to rectify the defendant’s breach of duty and so should be a claim to compel him to perform his duty or to pay over the amount that actual performance of the duty would have been worth to the claimant—that is, specific performance or expectation damages. But the return of a prepayment is not a substitute for performance; furthermore, the claim to recover a prepayment can arise whether or not the defendant has committed a breach of duty—for example, it could arise on the frustration of a contract. However, the claim is necessarily contractual, because it arises from the agreement and in response to its non-performance. More precisely, it can be explained as a contractual reliance claim. If a party to a contract is owed a duty of performance, he must surely be entitled to rely, at the risk of the other party, on the assumption that the duty will be performed: in other words, he must (prima facie) have a claim to recover for loss incurred through his performance of the contract.44 This surely follows from the principle that an agreement should be observed, and is a contractual claim, notwithstanding that it is not a claim to rectify a breach of a contractual duty to

43 44 45

Or where the parties are in a position to make a contract and do not do so under the contractual formation rules: as to ‘pre-contractual’ liability, see further below, text at n 58 and n 95. The ‘imputed contract’ terminology (see n 39 above) is helpful in emphasising this point. Cf ‘reliance damages’ in respect of expenditure incurred in reliance on the contract: Anglia TV v Reed [1972] 1 QB 60. One can distinguish between two positions: (1) that contract law (inter alia) protects reliance, and (2) that contract law only protects reliance. The latter position is the reliance theory of contract (which thus treats expectation damages as a proxy for reliance loss). Elsewhere I have adopted (2), but it is not necessary to press for (2) over (1) for the purposes of the argument in the text (although it is necessary, in my view, in order to explain disgorgement for breach of contract and fiduciary relationships, which are not discussed here): see Jaffey above n 3, 33. Barker, above n 39, 234, says that my position is unclear as between the two positions, although in my view it would be fairer to say that I do not insist on (2) where (1) is sufficient to explain the position.

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perform.45 If the claimant paid the defendant in advance in reliance on the defendant’s contractual duty of performance, then the claim to recover the prepayment, if the defendant does not subsequently perform, is simply and easily explained as a claim in respect of the claimant’s contractual reliance loss. Also, the explanation applies where there was no breach of duty by the defendant, as where the contract was frustrated. Another type of claim considered to be based on unjust enrichment is the quantum meruit. Where a claimant has done work under a contract for which he has not been paid, he will usually claim for an amount owing if payment has accrued due or for damages if he has been unable to complete because of a breach by the defendant. But there are occasions when he is allowed a quantum meruit, a claim for a reasonable measure of payment for his work—for example on frustration. Again this is easy to explain as a contractual reliance claim: the contractual protection for reliance generates a claim for reasonable payment for work done pursuant to the contract. Here the reliance claim is not simple compensation for reliance loss; the claim satisfies the interest in a return for work done as well as compensation for loss incurred, for example through expenditure.46 Under the reliance analysis of the claim to recover a prepayment and the claim for a quantum meruit, the rationale for the claim is not to remove a benefit, but the analysis shows how benefit to the defendant is relevant. A contract is a reciprocal relationship, involving mutual reliance. Where the contract has not been completed, the claimant has incurred reliance for which the expected reciprocation has not been provided; but at the same time the defendant may have received a benefit that exceeds what is necessary to protect him in respect of his reliance on the contract, effectively leaving him in surplus with respect to his reliance on the contract.47 For example, in the case of a claim to recover a payment, as a result of the payment the defendant will be in surplus in the measure of the payment if he has not begun work on the contract. Thus the reversal of the payment will not leave the defendant with any net reliance loss from the contract, and so will not be unfair to him. If the defendant has begun performing, as the law stands there will be no claim, because there is no total failure of consideration, but there is really no reason why the claim should not be allowed,48 subject to a reduction measured as a quantum meruit in respect of the defendant’s work done in reliance. In the case where the claimant seeks a quantum meruit, the defendant may not have received any significant benefit through the work done so far. If he has to pay for the claimant’s work, he may end up worse off overall as a result of the contract, that is to say through his own contractual reliance. To be fair with respect to both parties’ reliance, the aggregate measure necessary to satisfy the parties’ reliance interests should be allocated between them by way of a balancing or ‘accounting’ exercise, taking into account the benefit received.49 Thus benefit received under the contract is relevant to the claim, but the basis of the claim is the protection of reliance. Not only are these two claims explicable in contractual terms, there are obvious difficulties with any explanation based on a principle of unjust enrichment. First, it seems that a claim can be available where the claimant has done work under the contract but no benefit has been conferred

46 47 48 49

See further Jaffey, above n 3, 30. The discussion leaves aside the issue of the wrongfulness of breach and its consequences. As also generally argued by proponents of the unjust enrichment approach. Cf Cargill International v Bangladesh Sugar & Food Industries [1996] 4 All ER 563.

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on the defendant.50 This is consistent with the reliance approach, but not, one would think, with an unjust enrichment approach. It has led some commentators to argue that work done under a contract should be deemed to benefit the other party for the purposes of a claim based on unjust enrichment.51 But this simply shows that forcing a claim to fit an analysis based on unjust enrichment is liable to lead to the use of fictions. Secondly, why is it that the enrichment is unjust, independently of the contract? If the contract is simply ignored in the analysis, it seems that there has been a voluntary, unvitiated payment or provision of services by the claimant, and it is not clear why any claim should arise from this. Of course this is an entirely artificial way of describing the situation, because the reason why the payment was made or the services provided by the claimant is the contract and his expectation of reciprocal performance.52 The ground for the claim—the ‘unjust factor’—is usually said to be the failure of the condition or basis on which the payment was made or the work performed; this is the interpretation placed on the expression ‘failure of consideration’.53 The idea is that the payment (to take the case of a claim to recover a payment) was made subject to the condition that the reciprocal performance under the contract would be supplied. If the contract has not been completed as envisaged, the condition fails, and so the claimant is entitled to have the prepayment reversed. But this analysis is quite untenable. First, the question arises whether the condition binds the defendant because it was a term of the contract, express or implied. If so, the claim must be contractual: the defendant has agreed to repay the money in the circumstances that have come to pass. This cannot be the explanation of a claim based on a distinct non-contractual principle of unjust enrichment. It seems that, although the condition is understood to have been imposed by way of the contract, and concerns contractual performance, it is thought to operate quite separately from the contract for the purposes of the claim based on unjust enrichment. But if a payment is made under a contract, it must be made in accordance with the terms of the contract, express or implied. The defendant cannot be subject to some extraneous condition binding the payment.54 Furthermore, a contractual payment is in any case not necessarily or usually made subject to any such condition. It is made in the expectation of reciprocal performance, which is not the same thing at all.55 The idea that non-performance constitutes the failure of a condition is simply a fiction that has seemed necessary to provide a basis for the claim to reverse the prepayment, because of the failure to recognise the true ground, namely the protection of

50 51 52 53 54 55

Eg, Planché v Colburn (1831) 8 Bing 14. In the discussion of Planché v Colburn: eg, Birks, above n 3, 126–27. Furthermore, in the case of services, there is the problem of determining appropriate payment without relying on the contract. This is the interpretation placed on ‘failure of consideration’: see, eg, Birks, above n 3, 224; Virgo, above n 3, 323. It is invariably argued that conflict with the contract is avoided because the claim based on unjust enrichment does not arise unless the contract has been terminated. This cannot be correct: see below, text at n 86. Recently in Roxborough v Rothmans [2001] HCA 68, the High Court of Australia said that on the facts in issue the payment was not made subject to any contractual condition, although it then held, surely quite inconsistently, that there was a non-contractual claim to reverse the payment based on failure of condition: see further P Jaffey, ‘Failure of consideration’ (2003) 66 MLR 284.

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reliance.56 Moreover, a claim based on this concept of failure of condition would have nothing in common with the other supposed unjust enrichment claims discussed above, and could not be understood to arise from a different version or manifestation of the same underlying principle.57 There are occasional cases where a claim has been allowed for payment for work done in the course of contractual negotiations, notwithstanding that there is said to be no contract between the parties.58 Some commentators consider such claims to be unjust enrichment claims based on the unjust factor of failure of condition (described as failure of consideration), the condition being that the work was not done gratuitously but with a view to payment59 It is recognised, however, that it would be unfair to the defendant if a claim arose from the mere fact that the claimant privately intended to be paid.60 Thus it is emphasised that the condition must have been accepted by the defendant for a claim to arise, and the condition and its acceptance are found from the fact that during the negotiations the contracting parties had reached some form of arrangement or understanding governing the work done. The arrangement or understanding is said to be too uncertain to be recognised as an enforceable contract; but in reality if the claim is based on the acceptance of a condition by way of the arrangement or understanding it is surely by nature contractual, and the rule against enforcing an uncertain or incomplete agreement has in reality been qualified (rightly or wrongly, and whether or not acknowledged) by the recognition of such a claim.

Disgorgement Disgorgement is the removal of the profit of a wrong for the purpose of preventing the defendant retaining the benefits of wrongdoing.61 Some of the cases that are said to fall under the principle of unjust enrichment are examples of disgorgement. Equity has shown no reluctance to use the account of profits or a constructive trust as an instrument of disgorgement, for example as a

56 57

58 59 60 61

With respect to the quantum meruit, to which the same analysis is applied, there is the further objection that services cannot be provided conditionally, in the sense that they revert to the service provider if the condition fails, because the provision of services cannot be reversed. It is thought that failure of condition is also the ‘unjust factor’ in the case of payments under a void contract: see, eg, P Birks, ‘No consideration: restitution after void contracts’ (1993) 23 UWALR 195; G Virgo, ‘Failure of consideration: myth and meaning in the English law of restitution’, in Johnston and Zimmerman, above n 7. But it is perverse to say that it is the non-performance of a void contract that is the ground for recovering a payment under the void contract, as if the voidness itself were irrelevant to the claim. And it is generally thought that acceptance of the condition by the defendant is necessary, and it is difficult to understand how one can argue that by contracting the defendant has accepted the condition even though the contract is void. The point was in issue in Westdeutsche Landesbank Grozentrale v Islington BC [1996] AC 669 and the failure of condition approach was not adopted. Eg, William Lacey (Hounslow) Ltd v Davis [1957] 1 All ER 932, British Steel Corporation v Cleveland Bridge [1984] 1 All ER 504. See, eg, Virgo, above n 3, 360. It would be contrary to the officiousness condition discussed above which protects each person’s right to determine the value of services and how to apply his wealth. A claim for compensation or for the reversal of an invalid transfer may sometimes serve incidentally to remove the benefit of a wrong, but this is not the rationale of the claim. The expression ‘disgorgement’ is not found in the case law. It is preferable to the alternatives: as discussed below, ‘restitutionary damages’ and ‘restitution for wrongs’ have been used for other claims as well as disgorgement. The same is true of the traditional expressions ‘account of profits’ and ‘constructive trust’.

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response to a breach of fiduciary duty or a breach of confidence or an infringement of an intellectual property right,62 but the common law has not traditionally effected disgorgement, except through punitive damages, which are available only in limited circumstances.63 As discussed below, however, certain other types of common law claim have been confused with disgorgement The profit of wrongdoing is aptly described as an unjust enrichment; indeed, it is sometimes thought of as the archetypal example of unjust enrichment. But the principle against allowing the profit of a wrong to be retained is again quite distinct from any of the principles discussed above. Furthermore, it is a principle of a quite different type from any of the others considered. An ordinary principle of private law provides the ground for a duty owed by the defendant to the claimant, breach of which generates the claim.64 Different principles lie behind a contractual duty, a tortious duty, etc. But the principle against profiting from a wrong does not provide the ground for a particular duty of this sort. It provides a ground for removing the benefit made through the breach of any type of duty. Furthermore, disgorgement is not a remedy for the breach of duty, in the strict sense of remedying its effects on the claimant Insofar as the breach of duty can be remedied by a pecuniary payment, this is (by definition) effected by compensation. If the claimant receives any more than this, ex hypothesi he receives more than is necessary to remedy the breach of duty. By removing the profit of wrongdoing, disgorgement promotes the public interest in the performance of the duty in question and legal duties in general, rather than the private interest of the claimant in remedying the wrong. In this it is like punishment. Indeed, given that punishment should in principle include the removal of any pecuniary profit of wrongdoing, it would appear that disgorgement is best understood as a component of punishment65 The principle behind disgorgement is not a principle of private law in the ordinary sense that it underlies a certain area of law and accounts for a certain type of claim, and if there is a principle of unjust enrichment in this sense then the principle behind disgorgement cannot be a particular version or manifestation of it The customary expression for disgorgement in the restitution textbooks is ‘restitution for wrongs’.66 This is an inapt usage because disgorgement is not designed to restore a transfer to the claimant or to restore the claimant to his original position. As discussed below, the category of ‘restitution for wrongs’ also conflates disgorgement with what is described below as the ‘use claim’.

The claim to reverse a wrongfully-procured transfer Sometimes the defendant wrongfully procures a transfer to him from the claimant. For example, the defendant may have taken money from the claimant without permission, or deceived the

62 63 64 65 66

Eg, Attorney-General for Hong Kong v Reid [1994] 1 AC 324, Attorney-General v Guardian Newspapers (No 2) [1990] 1 AC 109, and now Attorney-General v Blake [2001] 1 AC 268 for breach of a contractual duty. The common law’s reluctance to recognise disgorgement appears to be based on the argument that, like full-blown punishment, disgorgement is inappropriate in civil proceedings for procedural reasons: see Cassell v Broome [1972] 1 All ER 801. See also Jaffey, above n 3, 374–83. In many cases a claim arises from an event that is not a breach of duty, but such cases are not relevant to disgorgement. See further Jaffey, above n 3, 375. Due to Birks, above n 3, 313.

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claimant into paying him money, or used a threat to compel the claimant to make the payment. The claim to reverse the transfer can be described as ‘restitutionary’ in a plain or purely remedial sense, in that it carries no implication about the ground for the claim. There are three quite distinct grounds for such a claim. First, a transfer wrongfully caused will generally also be an invalid transfer in the sense discussed above.67 Where the money is taken without permission the vitiating factor is lack of authority; where there is deception, the vitiating factor is mistake; and where there is a threat, the vitiating factor is duress. The claimant has a claim based on the invalidity of the transfer, arising from the vitiating factor. This ground for the claim is quite distinct from the wrong as a basis of the claim. Secondly, if disgorgement is available,68 this will also have the effect of reversing the transfer to the claimant. A claim for disgorgement would of course depend on showing that the defendant acted wrongfully. Thirdly, relying on the wrong, the claimant can make a claim for compensation. Clearly a claim for compensation would be a claim in the measure of the transfer, and so again the claim has the effect of reversing the transfer. A claim for compensation does not of course depend on the defendant’s having received anything, but this does not mean that a claim for compensation does not fully account for a claim to reverse a transfer in a case where a transfer to the defendant does result from the wrong. Furthermore, even if the remedy is specific—the defendant has to return a specific item of property transferred—there is no reason why it cannot be explained as a compensatory claim. Where the claimant has lost an item having a special value to him, such as to justify a specific remedy, compensation is most effectively achieved in this way, because the valuation difficulty is avoided.69 The ancient doctrine of ‘waiver of tort’ illustrates the distinction between the invalidity-based claim and the claim for compensation for the wrong. Where the defendant wrongfully procured an invalid transfer, the claimant could secure the reversal of the transfer either by way of a compensation claim in tort or by relying on the invalidity of the transfer (by way of a claim for money had and received). By waiving the tort, the claimant disclaimed his right to recover the transfer by way of compensation for the wrong, in order to pursue his right based on the invalidity of the transfer. It seems that because the two claims were at that time pursued through different sets of proceedings, the waiver was necessary to ensure that the claimant could not recover twice for the loss incurred through the transfer.70 Confusion between the invalidity-based claim and the compensation claim based on the wrong has arisen from the notion of a ‘defendant-sided’ unjust factor consisting in wrongdoing by the defendant.71 Take the case where the claimant has made a payment to the defendant in circumstances amounting to undue influence, so that the claimant has a claim to reverse the

67 68 69 70

71

The wrong, expressed in a generic form, is the wrong of procuring or exploiting a vitiating factor. As noted above, the availability of disgorgement is controversial. The availability of this third claim to reverse a transfer does not imply that the transfer is invalid or that the claimant has retained ownership or that the claim will survive intact in the defendant’s insolvency. See United Australia Ltd v Barclays Bank [1941] AC 1; Jaffey, above n 3, 368. According to the standard analysis of waiver of tort found in the restitution textbooks, a claimant who waives a tort gives up his claim for compensation in favour of a claim for disgorgement, so waiver of tort illustrates the distinction between the second and third claims in the text, not the first and third: see, eg, Burrows, above n 3, 381. This analysis is implausible: it makes no sense of the concept of ‘waiving’ the tort, since disgorgement is a response to the tort, or of the fact that waiver is possible only for a limited range of torts (ie, torts that cause an invalid transfer); and there is no reference in the waiver cases to the principle against allowing a wrongdoer to profit through his wrongdoing. See, eg, P Birks and NY Chin, ‘On the nature of undue influence’, in J Beatson and D Friedmann (eds), Good Forth and Fault in Contract Law (Clarendon Press, Oxford, 1995), 57; Virgo, above n 3, 121.

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payment. There has been some controversy over whether the unjust factor generating the restitutionary claim (taken to be based on unjust enrichment) is the defendant’s wrongful behaviour in exploiting the claimant’s susceptibility.72 But in reality there is a claim based on the vitiation of the claimant’s decision to make the payment (which does not depend on the defendant’s having acted wrongfully) and also a claim based on the defendant’s wrong (which does not depend on establishing a vitiating factor, except insofar as this is part of establishing the wrong).73 The idea that the wrong is an unjust factor, and that in this guise it provides a ground for a claim to reverse the transfer distinct from the claim for compensation (or disgorgement) based on the wrong as such, appears to come from the assumption that a claim for restitution, meaning any claim to reverse a transfer, must be based on the principle of unjust enrichment.74

The use claim Where the defendant has used the claimant’s property without permission, the claimant has a claim for payment, measured as a reasonable licence fee.75 The claim is not compensatory, because the claimant has not necessarily suffered any loss—the unauthorised use may not have adversely affected the claimant at all—and if he has suffered a loss it is not necessarily in the measure of a reasonable licence fee. Thus it is often referred to as a claim for ‘restitutionary damages’, and is supposed to be based on the unjust enrichment of the defendant, in the form of the benefit made through the unauthorised use. A more neutral expression is the claim ‘under the user principle’76 or the ‘use claim’. The best understanding of the use claim is simply that, in relation to certain types of property, it is an element of the right of ownership that the owner is entitled to the whole use-value of the property, that is, the value of the property through use. The use-value of the property (in relation to a particular use) can be taken to be a reasonable fee for the use, which will be some proportion of the value of the use to the user. Thus if the property is used without permission, the owner should be entitled to a reasonable payment from the unauthorised user, assessed on the basis of what might reasonably have been agreed.77 The use claim is not a claim for disgorgement; however, because an unauthorised use is generally wrongful, it is often confused with disgorgement under the supposed category of ‘restitution for wrongs’ or ‘restitutionary damages’.78 Unlike disgorgement the use claim is not a

72 73 74

75 76 77 78

See, eg, Birks and Chin, ibid. The wrong consists in procuring or exploiting a vitiating factor, and so establishing the vitiating factor will be relevant to establishing the wrong. Some commentators thus also consider that the defendants unconscientious or improper conduct can be an unjust factor generating a claim for restitution, even though it falls short of being wrongful and so does not give rise to a claim based on a wrong as such. But either the conduct is wrongful—ie, a breach of duty to the claimant—or it is not, and it is inconsistent to say that there is no wrong but that the basis for the claim is some form of unconscientiousness or impropriety, which is simply a wrong by another name. The supposed doctrine of ‘free acceptance’ is sometimes understood to be based on unconscientious receipt: Birks, above n 3, 104. Eg, Strand Electric & Engineering v Brisford [1952] 2 QB 246; Ministry of Defence v Ashman [1993] 2 EGLR 102. Used by Nicholls LJ in Stoke City Council v Wass [1988] 3 All ER 394, 402. Hence, as for non-contractual claims for services, it is apt to refer to the use claim as arising under an imputed contract. See, eg, Burrows, above n 3, 468–72.

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response to wrongdoing; it arises to protect the claimant’s right to the use-value of his property, which is (where the claim arises) an element of his right of ownership, and it is possible for a use claim to arise from an unauthorised use that is not wrongful.79 Also, disgorgement strips the wrongdoer of the whole benefit received, whereas the measure of the use claim will generally be just a proportion of the benefit of the unauthorised use, constituting reasonable payment for it.80 The use claim is also quite distinct from a claim to reverse a transfer from the claimant to the defendant, although it is sometimes so understood.81 The use of the claimant’s property does not constitute a transfer from the claimant, just as the provision of services is not a transfer. The use claim is again distinct from the other claims discussed above.

ERROR AND CONFUSION The various principles of unjust enrichment The discussion above shows that there are a number of distinct bases for claims arising from the receipt of a benefit. These include the right of ownership, by virtue of which an owner has a claim against the recipient of property or wealth invalidly transferred; the right (in certain circumstances) to be paid for work done for the benefit of someone else; the right to protection for reliance on a contract (to which the benefit received by the defendant can be relevant); the right to the reversal of a transfer as the remedy for a wrong; the right to the use-value of one’s property; and the principle that a wrongdoer should not be permitted to retain the profits of his wrongdoing. It may be convenient to refer to a benefit as an ‘unjust enrichment’ in connection with a claim arising on any of these bases, but the theory of unjust enrichment is mistaken in supposing that they are all derivatives of a single overarching principle of unjust enrichment. The uniform treatment of claims arising under these various bases, as if they were governed by a single principle, is the cause of various forms of error and confusion, some of which are identified below.82 Similarly, restitution is said to be the remedy for claims based on unjust enrichment, but this obscures important differences between different cases (reflecting the different types of unjust enrichment), in particular the difference between a claim to remove a benefit or reverse a transfer and a claim for payment for a benefit (for example from services performed or through the use of property).

79

80

81 82

Eg if the defendant used the claimant’s property in an emergency, it could be that he had not acted wrongfully but was nevertheless liable to pay for the unauthorised use: cf Vincent v Lake Erie 124 NW 221 (1910) (US); Jaffey, above n 3, 137–38. And see the reference to German law in Johnston and Zimmerman, above n 7, 12. In Attorney-General v Blake [2001] 1 AC 268, where disgorgement was in issue, Lord Nicholls distinguished between what he considered were two lines of authority providing for two possible measures of recovery. But really one line (at common law) was concerned with the use claim and the other (in equity) with disgorgement. Eg, Edelman, above n 39, 66–67. The error and confusion is of just the sort that the theory of unjust enrichment was supposed to eliminate from the law: see, eg, Birks, above n 3, 19.

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Illusory justification Sometimes where a claim is said to be based on unjust enrichment the true basis is apparent from the nature of the ‘unjust factor’ cited. For example, as argued above, a claim arising from the vitiation of a transfer of wealth or property is a claim protecting pre-existing ownership; and a claim based on the unjust factor of ‘failure of consideration’ arising from the termination of a valid contract is a contractual reliance claim.83 In such cases the reference to unjust enrichment is redundant. In other cases, ‘unjust enrichment’ may be given as the basis for the claim without any indication of the actual basis.84 This is the direct consequence of the misapprehension that there is a principle of unjust enrichment that operates as a justificatory and guiding principle. Such reasoning fails to satisfy the requirement to give a ground for the decision. It falls foul of the ancient objection to a claim based on unjust enrichment, that it is based on an unarticulated sense of injustice.

False assimilation The theory of unjust enrichment leads to ‘false assimilation’, meaning the treatment of what are actually quite distinct claims in the same way, as if they were forms of the same claim. This tends to obscure the true issues at stake. For example, claims to reverse invalid transfers are assimilated with non-contractual claims for payment for services. As discussed above, these are really different types of claim, based on different principles and raising different issues, and the conditions for the claims should be different. Similarly, the disgorgement claim to remove the benefits of wrongdoing has been falsely assimilated with the use claim for payment for the unauthorised use of property, under the head of ‘restitution for wrongs’. Again, as discussed above, the rationale for the two is quite different, as is the measure of the claim, and the conditions for the two claims should be quite different. Often the concept of the ‘unjust factor’ provides the sleight of hand that disguises the false assimilation of different claims under the single principle of unjust enrichment.

False differentiation The theory of unjust enrichment also leads to ‘false differentiation’. This is where materially identical situations are treated differently for arbitrary reasons.85 For example, as discussed above, the theory of unjust enrichment has led to the recognition of an arbitrary distinction between two supposed categories of claim to reverse an invalid transfer of wealth or property, one supposedly governed by the law of property and designed to protect ownership, and the other governed by

83 84 85

The ground is different in the case of a claim to reverse a transfer under a void contract: above n 57. See, eg, the recent decision of Jacob J in Vedatech Corporation v Crystal Decisions [2002] EWHC 818 concerning a ‘pre-contractual’ claim apparently based simply on unjust enrichment. The most common cause of false differentiation in English law is the different treatment of the same type of case in law and equity.

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differences in treatment of claims by reference to this supposed distinction; and where claimslaw of unjust enrichment. Unfairness results from are actually treated in the same way despite being classified differently, the distinction is merely obfuscatory. Similarly, as discussed above, the theory of unjust enrichment has led to the treatment of what are really contractual reliance claims as non-contractual claims based on a non-contractual principle of unjust enrichment. This is liable to subvert the contract and the law that governs it, in particular by upsetting the implicit allocation of risk under the contract. It is always said that there is no question of conflict with the law of contract because the unjust enrichment claim can arise only after the contract has terminated,86 but this makes no sense: although termination brings the primary contractual relation between the parties to an end, it does not end the remedial contractual relation, and the recognition of an inconsistent non-contractual claim subverts the remedial relation, which reflects the terms of the contract, including the risk allocation.87 And again, disgorgement, properly understood, is really a component of punishment,88 and, although there are grounds for treating disgorgement separately for certain purposes, its treatment under the principle of unjust enrichment dissociates it entirely from punishment and characterises a claim for disgorgement as an ordinary civil claim, like the use claim with which it is mistakenly assimilated under the head of ‘restitution for wrongs’. This can lead to the imposition of disgorgement without appropriate procedural safeguards for the defendant.89

Fictions The theory of unjust enrichment can lead to fictions. For example, the assimilation of a claim to reverse an invalid transfer with a claim for payment for services under the principle of unjust enrichment, implying that the remedy is the removal of the benefit received, leads to the fiction that, where the defendant has had the benefit of services for which he is liable to pay, the measure of payment is the same as the measure of the benefit.90 A considerable literature has developed around this fiction.91 The same fiction is involved in the analysis of the use claim for payment for the unauthorised use of property as a claim to reverse a transfer. Another example comes from the analysis of what are really contractual reliance claims as non-contractual claims based on a failure of condition. It is said that the defendant accepts a condition that the payment (or other performance) will be returned (paid for?) in the event that the contract is not completed. But there is no reason to think that there is any such condition in the contract, and in reality the condition is entirely fictional.92 In the same context, the treatment of the quantum meruit for work done 86 87

88 89 90 91 92

For a recent instance of this often-repeated argument, see Virgo, above n 3, 109. Eg, the contractual risk allocation accounts for the capping of reliance damages to the expectation measure. By contrast if the contract is void or rescinded (as opposed to terminated), the remedy may justifiably overturn the contractual risk allocation. The unjust enrichment approach subverts the now wellestablished distinction between termination of a valid contract and rescission of a voidable contract: cf Johnston and Zimmerman, above n 7, 15–16. Above n 65. See further Jaffey, above n 3, 374–80. See, eg, Virgo, above n 3, 96; Burrows, above n 3, 16–17. This is the literature on the ‘benefit test’, above n 41. Ironically, any attempt to explain such a claim in terms of contract is met with the objection that this resurrects the old ‘implied contract’ fiction, but there is no fiction involved in the contractual reliance approach.

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under a contract as being based on unjust enrichment leads to the fiction that work done under a contract ipso facto benefits the other party.93

Subversion False differentiation—the different treatment of equivalent cases—can lead to the subversion of wellestablished rules without proper consideration, by subterfuge as it were. For example, as mentioned above, the treatment of contractual reliance claims as non-contractual claims is liable to subvert the contractual allocation of risk and therefore contradict the basic rule of contract law that (subject to limited exceptions) the contract should be binding as agreed. The formulation of the claim as a non-contractual claim allows the traditional contract rule to be undermined without being explicitly addressed. Similarly, the supposed distinction, relating to claims to reverse invalid transfers, between claims based on pre-existing ownership and claims based on unjust enrichment is liable to lead to different treatment, for example in terms of the availability of the change of position defence.94 Also, in relation to ‘pre-contractual’ claims for payment for work done in the course of contractual negotiations, as discussed above it may be that the traditional rule, which denied any claim because the understanding between the parties was not sufficiently complete or certain to be recognised as a contract, is too strict, and should be modified to give protection to a party who has acted on the basis of a vague and incomplete agreement still subject to negotiation; but it is mere subversion of the law to say that the traditional rule still holds but that a separate unjust enrichment claim is available based on the acceptance of a condition by the defendant, apparently by virtue of the incomplete agreement.95

CONCLUSION It may be convenient to refer to a benefit as an ‘unjust enrichment’ in relation to any of the various types of claim that arise from the receipt of a benefit. But generally the theory of unjust enrichment is understood to hold that there is a single monolithic principle of unjust enrichment that underlies such claims (or most of them). This theory seems to have been influential, amongst judges as well as academics, but as demonstrated above the theory is misguided. It is best understood as a working hypothesis that, it turns out, does not work. It has caused error and confusion, and it has hindered the rational development and analysis of contract and property and other parts of the law.

93 94 95

See above n 51. The conventional position seems to be that change of position is a defence to a claim based on unjust enrichment and not a proprietary claim, but there is no consensus on this. See above, text at n 58. For an analogous point concerning the ‘subversion’ of contract by tort, see AJE Jaffey, ‘Contract in tort’s clothing’ (1985) 5 LS 77.

Chapter 9 Property and unjust enrichment: a misunderstood relationship Craig Rotherham INTRODUCTION Given that so much of the work on proprietary claims and remedies in recent years has been undertaken by restitution scholars, it is hardly surprising that much interest has focused upon the relationship of unjust enrichment and property. The issue has divided scholars. Some have argued that at least some proprietary claims and remedies are recognised in order to reverse unjust enrichment. However, others reason that, because such claims and remedies are part of the law of property, they have nothing to do with unjust enrichment. This debate came to the fore recently in Foskett v McKeown,1 where the majority of the House of Lords reasoned that, because tracing was part of the law of property, considerations of unjust enrichment were irrelevant in determining the extent of the plaintiffs’ rights. Moreover, Lord Millett suggested that it followed that the change of position defence would not be available in the context of proprietary claims made in respect of traceable proceeds. The theme of this chapter is that scholarly and judicial accounts of the relationship of property and unjust enrichment are conceptually flawed. The view that norms of property and unjust enrichment are mutually exclusive is unsustainable. The mere fact that a given doctrine can be situated within the law of property does not mean, for example, that defences based on considerations of unjust enrichment should not be available. This misunderstanding reflects a fundamental misconception about the nature of legal concepts such as property and unjust enrichment. There is a failure to appreciate that these are analytical tools that help us to order legal norms rather than prescriptive concepts that can guide decision making in hard cases. This misunderstanding is particularly apparent in the assumption that certain consequences follow a priori from the very notion of property. Our law of property is too richly textured to allow for sweeping generalisations as to what follows from a doctrine being part of that body of the norms—particularly when, as was the case in Foskett v McKeown, the doctrine in question is one as contested as tracing.

THE ANALYTICAL RELATIONSHIP OF PROPERTY AND UNJUST ENRICHMENT: THE FALLACY OF TREATING THESE CONCEPTS AS MUTUALLY EXCLUSIVE The debate on the nature of the relationship of unjust enrichment and property has produced three contrasting views. At one end of the spectrum, Graham Virgo takes the position that unjust enrichment has no role in proprietary claims and remedies, regardless of how the property rights in question came into existence.2 In stark contrast, Birks asserts, first, that property has no causative role in generating remedies because it is a response rather than a cause and, secondly,

1 2

[2001] 1 AC 102. Virgo, Principles of the Law of Restitution (Oxford: Clarendon Press, 1999). Cf Virgo, this collection, 203.

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that unjust enrichment is very often the causative event to which property rights respond.3 Somewhere in between, we have Ross Grantham and Charles Rickett, who are prepared to recognise that unjust enrichment might play some role in the recognition of new property rights, but apparently take the view that it has little to do with the enforcement of existing property rights.4 In taking these different positions, these commentators assume that a single legal ‘event’ must be assigned an exclusive role as the cause of a proprietary response. This section argues that this assumption is misconceived.

Virgo’s view: the creation of proprietary rights by operation of law has nothing to do with unjust enrichment The denial of a role for unjust enrichment in the creation of property rights It is sometimes suggested that remedies that vindicate existing property rights by providing specific recovery of the assets in question reverse unjust enrichment5 This is difficult to sustain as a matter of principle or authority. A defendant is never legally enriched by taking possession of an asset belonging to the plaintiff in circumstances in which specific remedies are available to provide for its recovery; for, such remedies reflect a determination that the asset in question never forms part of the defendant’s wealth.6 Thus, in Macmillan Inc v Bishopsgate Investment Trust plc (No 3),7 the Court of Appeal concluded that a claim to recover shares did not involve the reversal of unjust enrichment and that the lexus situs was determined by the proprietary and not the restitutionary choice of law rules.8 A different view is that, while proprietary claims are often or even always restitutionary, they do not involve the reversal of unjust enrichment. This perspective is reflected by the assertion in Macmillan Inc v Bishopsgate Investment Trust plc (No 3) that, while the issue was proprietary, the action might be characterised as restitutionary.9 It is not surprising to suggest that a claim to enforce property rights that pre-existed the events that gave rise to the plaintiff’s claim does not involve the reversal of unjust enrichment. What is surprising is to see the view expressed that property rights arising by operation of law out of the events that give rise to the plaintiff’s claim necessarily have nothing to do with the law of unjust enrichment. Nonetheless, this is the position taken by Graham Virgo, who argues that:

3 4 5

6 7 8 9

Birks, ‘Property and unjust enrichment: categorical truths’ [1997] NZLR 623. Grantham and Rickett, ‘Property and unjust enrichment: categorical truths or unnecessary complexity?’ [1999] NZLR 668. Birks has been an influential proponent of the view that ‘factual’ enrichment is sufficient to bring the matter within the law of unjust enrichment: see Birks, ‘Property and unjust enrichment: categorical truths’ [1997] NZLR 623 at 654. While Andrew Burrows had earlier advocated a similar position (see The Law of Restitution (London: Butterworths, 1993) at 370), he has since revised his view. See Burrows, ‘Quadrating restitution and unjust enrichment: a matter of principle?’ [2000] RLR 257 at 259. Swadling, ‘A claim in restitution?’ [1996] LMCLQ 63; Grantham and Rickett, supra n 4 at 682. [1996] 1 All ER 585. Ibid at 6l5 per Aldous LJ. It might be argued that the term ‘restitution’ might usefully be confined to a more restricted meaning in legal analysis. See, eg, Burrows, supra n 5. Nonetheless, the term has an ordinary meaning that is wide enough to apply to cases involving the enforcement of property rights. See Birks, ‘Misnomer’, in Cornish, Nolan, Sullivan and Virgo (eds), Restitution: Past, Present and Future: Essays in Honour of Gareth Jones (Oxford: Hart Publishing, 1998) 1.

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…the law of unjust enrichment and the law of property…are totally distinct.This is because the recognition and creation of property rights is a matter for the law of property and has nothing to do with the unjust enrichment principle.10

The House of Lords’ endorsement of this view in Foskett v McKeown Virgo’s view received judicial support in Foskett v McKeown, where their Lordships assumed that it followed from the fact that tracing is part of the law of property that it can have nothing to do with unjust enrichment.11 The case concerned the misappropriation of trust funds, some of which the trustee used to pay premiums of a life insurance policy, the benefit of which he had settled upon his wife and children. The trustee committed suicide after his fraud was discovered, and the policy yielded a death benefit of just over £ 1,000,000.12 The question to be resolved was whether the use of the trust money to pay some of the premiums gave the beneficiaries of the fund any interest in the death benefit. Matters were considerably complicated by the fact that the policy in question was not a standard life cover policy. Premiums contributed to a notional savings element and, after the first year, life cover was maintained by cancelling units previously allocated to the investment component of the policy to fund ‘internal premiums’. Moreover, if premiums went unpaid, the policy would be treated as a ‘paid up’ policy, and life cover would be maintained so long as there were sufficient units previously allocated to the investment element of the policy that could be cancelled to fund the internal premiums. On the facts of the case, even if the premiums paid for with trust money had not been met, the death benefit payable would have been unaffected. Lords Steyn and Hope thought that the lack of causation between the contributions and the sum that was actually payable on the death of the assured indicated that those entitled to the benefit of the policy could not be said to have been unjustly enriched and that this was fatal to the claim.13 They argued that, instead, the plaintiffs should be limited to a lien to secure their claim to the trust money used to pay the premiums. This was hardly convincing. The logic of their analysis suggests that, in the absence of any causal link between the premiums in question and the sum payable on the assured’s death, the plaintiffs should not have enjoyed any proprietary interest in the death benefit. A majority of the House of Lords held that the plaintiffs could trace from the £20,000 of trust money used to pay insurance premiums to a share of the proceeds of the policy amounting to around £400,000. Those in the majority dismissed as irrelevant the fact that, as events had actually transpired, the premiums in question had no effect on the level of death benefit payable. This view was justified, in part, on the plausible stance that the attribution of property rights should not be discretionary. However, their Lordships’ reasoning was also bolstered by formalistic arguments that

10 11 12

13 14

Virgo, supra n 2 at 596. See infra text accompanying nn 15–16. Whether the contract of insurance was actually enforceable in these circumstances is unclear. In Beresford v Royal Insurance Co Ltd [1938] AC 586, the House of Lords considered such a term to be illegal. However, a different view might be taken today since suicide is no longer a crime. Whatever the strict legalities of the matter, insurance companies routinely honour such arrangements. [2001] 1 AC 102 at 112 per Lord Steyn and 124 per Lord Hope. Thus, their Lordships placed some emphasis on the notion that the rights that the plaintiffs were asserting in respect of the death benefit were necessarily precisely the same rights that they enjoyed in respect of the misappropriated trust money. At best this is a mere assertion that requires justification; after all, the extent of the plaintiff’s rights is the very matter at issue. Moreover, it is clear that the assertion is unsustainable. For an analysis of this issue, see Rotherham, Proprietary Remedies in Context A Study in the Judicial Redistribution of Property Rights (Oxford, Hart 2002) at 96–98.

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do not stand up to close analysis.14 In particular, all those in the majority supported their conclusion in no small part by a mantra to the effect that ‘the transmission of a claimant’s property rights from one asset to its traceable proceeds is part of our law of property, not of the law of unjust enrichment’.15 What is more, Lord Millett argued that it followed from this premise that the change of position defence is not available for proprietary claims contingent upon tracing.16

Distinguishing between the enforcement of existing property rights and rights arising by operation of law The assertion that a doctrine is part of the law of property and, therefore, has nothing to do with unjust enrichment could make sense only if it were impossible to envisage property rights that have the effect of reversing unjust enrichment. It is hardly difficult to imagine that proprietary remedies that arise by operation of law, such as rights conferred in respect of traceable proceeds, might have this effect. Goff and Jones took this view in providing a useful tripartite classification of proprietary rights in the third edition of their treatise on the law of restitution. They noted that in many situations ‘the plaintiff asserts that the property which he has identified in the defendant’s hands belongs, and has always belonged, to him’.17 Such claims they characterised as ‘pure proprietary claims’. They contrasted such actions with those that result in remedies that are ‘granted in order to revest title in the plaintiff’, citing rescission as an example. Finally they noted that there were remedies that ‘create de novo an equitable interest’.18 In their view, ‘pure proprietary’ claims are part of the law of property, and ‘the law of property forms no part of the law of restitution’.19 In contrast, they argued that the other types of remedy are restitutionary. We might think it a little strong to make such a sharp distinction between the law of property and the law of restitution.20 It is a little difficult to see how, by definition, proprietary remedies cannot be part of the law of property. In addition, we should not assume that all property rights that arise de novo necessarily have the effect of reversing unjust enrichment.21 Nonetheless, the division between those remedies that create an interest de novo and those that enforce an existing proprietary interest identifies an analytical distinction within the law of property that is potentially of considerable importance.

Diff iculties with Virgo’s position The first difficulty with Virgo’s position is the irrelevance of vindication. Virgo argues that: Unjust enrichment is completely irrelevant in this context because…[o]nce it has been shown that the defendant has received or has retained property in which the plaintiff has a

15 16 17 18 19 20 21

Ibid at 127 per Lord Millett. For similar reasoning by the other members of the majority, see also ibid at 108 and 110 per Lord Browne-Wilkinson and 115 per Lord Hoffmann. Ibid at 129. Goff and Jones, The Law of Restitution, 3rd edn (London: Sweet & Maxwell, 1986) at 55. Ibid. Ibid at 56. Moreover, the better distinction would have been between property and unjust enrichment rather than restitution. For the term ‘restitution’ is wide enough to be used to refer even to those proprietary remedies that provide for the specific recovery of a plaintiff’s property. See supra n 9. Consider proprietary remedies granted on the breakdown of intimate relationships in Australia, Canada and New Zealand, where the quantum of relief is based upon the parties’ relative contributions to the relationship and not on unjust enrichment. See Rotherham, supra n 14 at 205 and 209.

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proprietary interest then nothing else needs to be proved to establish the plaintiff’s cause of action.22

Certainly Virgo is right to suggest that once the plaintiff has demonstrated that he or she has a proprietary interest in assets the defendant has received, the vindication of those rights has nothing to do with unjust enrichment. However, this is beside the point. It is the creation, rather than vindication, of rights arising by operation of law that is the crucial event that raises interesting questions. Consider, for example, subrogation, which is, as the House of Lords indicated in Bonque Financière de la Cité v Parc (Battersea) Ltd,23 a remedy that reverses unjust enrichment.24 Thus, a plaintiff’s acquisition of a mortgagee’s rights by subrogation prevents any enrichment that the creditors of the mortgagor would have otherwise enjoyed at the plaintiff’s expense. The subsequent vindication of these rights is another and altogether less interesting matter. Restitution scholars have never been very interested in the vindication of property rights. On the other hand, the creation of rights de novo by operation of law might well have something to do with the reversal of unjust enrichment and, as a result, has long attracted the attention of those interested in the subject. The second difficulty is Virgo’s reliance on the state of the judicial analysis of the area. Virgo surmounts the objection that proprietary rights arising by operation of law might be recognised in order to reverse unjust enrichment by claiming that the courts have never identified unjust enrichment as the basis for such remedies. In his view, ‘[it] is sufficient that the plaintiff’s case falls within one of the recognised categories of case by virtue of which property rights arise and none of these cases requires the plaintiff to establish specifically that the defendant has been unjustly enriched at the expense of the plaintiff’.25 This is a thoroughly unconvincing position. For one thing, the empirical premise is wrong. As mentioned, the courts have recently analysed the acquisition of proprietary rights by subrogation in terms of unjust enrichment.26 In addition, where proprietary remedies are provided in the context of events that are recognised as giving rise to unjust enrichment, it is difficult to see what the rationale for these remedies is, if not the reversal of unjust enrichment. Thus, where proprietary relief was awarded in the context of mistake in Chase Manhattan Bank NA v Israel-British Bank (London),27 Goulding J required the plaintiff to establish nothing beyond the facts that give rise to a personal claim that we would now describe as based on unjust enrichment. An even more fundamental difficulty with Virgo’s approach is that it appears to endorse a remarkably constrained vision of academic inquiry. His suggestion is that we can be content with the

22 23 24 25 26 27

Virgo, supra n 2 at 12. [1991] AC 221. Ibid at 226–28 per Lord Steyn and 236 per Lord Hoffmann. Virgo, supra n 2 at 16. Banque Financière de la Cité v Parc (Battersea) Ltd, [1991] AC 221 (see supra text accompanying n 24). See also Halifax Mortgage Services Ltd v Muirhead (1998) P & CR 418 at 426 per Evans LJ; Boscawen v Bajwa [1996] 1 WLR 328 at 335 per Millett LJ. [1981] Ch 105. It was argued that in New York the constructive trust was a remedy and therefore formed part of its procedural rather than substantive law—a distinction that would have had jurisdictional consequences.

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characterisation of the matter adopted in judicial analysis without attempting to demonstrate that the rights that arise by operation of law that other commentators argue reverse unjust enrichment are, in fact, recognised for other reasons. This is a strange position to take, given that English courts have until very recently been slow to analyse any type of action in terms of unjust enrichment.28 Thus, the logic of Virgo’s argument could have been applied until recently to personal restitutionary personal claims that are now regarded as reversing unjust enrichment. Had they embraced this perspective, neither Seavey and Scott in the United States nor Goff and Jones on this side of the Atlantic would have undertaken their pioneering work on restitution. For the triumph of these scholars was to persuade their respective legal communities that actions that were generally analysed in other terms were best understood as concerned with unjust enrichment. Just as we had to strive to move beyond reasoning that explained the provision of personal claims in terms of implied contracts, scholars face the task of transcending the unhelpful language of constructive trusts, tracing and subrogation and the fictions of intent that have been employed to justify the provision of proprietary remedies. Finally, it might be observed that Virgo’s reasoning is difficult to reconcile with his analysis of the law of restitution as a whole. For he is quite content to analyse personal claims such as contribution in terms of unjust enrichment,29 despite the fact that the judiciary has never felt the need to conceptualise them in this way.

Grantham and Rickett’s position: remedies for breaches of existing property rights are not concerned with unjust enrichment The interrelationship of property and obligations As Grantham and Rickett suggest, remedies awarded in response to a breach of a subsisting property right might be said to arise ‘out of the plaintiff’s pre-existing rights in rem in the asset’.30 However, this does not tell us much analytically or normatively. First, the fact that the remedy might be characterised analytically as a response to a breach of a plaintiff’s property rights does not necessarily mean that it could not at the same time be devised to reverse or prevent unjust enrichment. Secondly, the characterisation of the remedy as a response to a breach of property rights tells us very little about the normative rationale for this legal response. We tend to think of the law of property and obligations as radically distinct. In principle, we might be able to draw a strict distinction as to which rights will bind third parties (thereby defining the objects of property) and which rights will not.31 And we might be able to determine clearly the impact that the former class of rights will have (defining the content of property rights). However, in the process of deciding these questions we have no choice but to rely on the same normative tools that we use for determining rights in the law of obligations. Whether we choose to provide a particular remedy against a class of third parties in respect of interferences with an asset that belongs or belonged to the plaintiff depends on whether we think it is appropriate to impose such

28 29 30 31

See Birks, supra n 9 at 1; Birks, ‘Property, unjust enrichment and tracing’ (2001) 54 CLP 231 at 242. Virgo, supra n 2 at 239. Grantham and Rickett, ‘Tracing and property rights: the categorical truth’ [2000] 63 MLR 905 at 909. Although, instead of approaching the matter in terms of a firm distinction between those relationships that are proprietary and those that are not, it might be more realistic to analyse the matter in terms of a continuum. See Gray, ‘Equitable property’ (1994) 47 CLP 157 at 161.

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an obligation on members of this class. We make that decision largely by having regard to the same considerations of fault and unjust enrichment that inform our law of obligations. As a result, there is no reason to assume that the law of property and the law of unjust enrichment should be mutually exclusive.

Identifying the basis of knowing receipt The folly of treating property and obligations as mutually exclusive causative factors can be illustrated by examining the personal remedies offered in equity for receipt of another’s property. In a recent decision, Grupo Torras SA v Al-Sabah,32 the Court of Appeal observed that knowing receipt of trust property was: …a receipt-based liability which may on examination prove to be either a vindication of persistent property rights or a personal restitutionary claim based on unjust enrichment by subtraction…33

This observation reflects the assumption that the claim must be either a matter of property or unjust enrichment. Commentators have shared this assumption. Thus, Birks denies that property rights can be said to dictate remedial responses.34 Grantham and Rickett, in contrast, suggest that remedial responses to actions based on the receipt of the plaintiff’s property are triggered by property rights, with notions of wrongs or unjust enrichment merely playing a role as ‘mediating’ concepts (a notion that is not really explained).35 In reality, property is linked in a reciprocal relationship with either wrongs or unjust enrichment and one cannot be ignored or treated as less significant than the other. Property is given content by our judicial decisions to characterise particular events as wrongful interferences with owners’ rights or as unjustly enriching defendants. At present, liability for receipt of trust property is not strict, but instead requires that defendants must have been unconscionable in dealing with the property.36 Some argue that personal liability for the receipt of trust property should be treated as based less on fault and more on unjust enrichment37 According to this analysis, all recipients should be liable unless they are bona fide purchasers or have changed their position in reliance on their receipt of the property in question.38 Obiter and extra-curial remarks by leading judges suggest that there is every chance that

32 33 34 35 36 37

38

[2001] CLC 221. Ibid at 255 per Robert Walker, Tuckey LJJ and Sir Murray Stuart-Smith. Birks, supra n 3 at 659. See infra text accompanying nn 46–53. Grantham and Rickett, ‘On the subsidiarity of unjust enrichment’ (2001) 117 LQR 273 at 295. BCCI v Akindele [2001] Ch 437. See, eg, Birks, ‘Misdirected funds: restitution from the recipient’ [1989] LMCLQ 296; Harpum, ‘The basis of equitable liability’, in Birks (ed), The Frontiers of Liability, Vol 1 (Oxford: OUP, 1994) 9. For an argument in favour of the existing fault-based approach, see Gardner, ‘Knowing assistance and knowing receipt: taking stock’ (1996) 112 LQR 56. We could say that property is the causative event and that the limitations on its recognition are merely defences. However, the dichotomy between rights and defences is valid only up to a point. While the distinction is useful for indicating which party bears the onus of proof for establishing particular questions, defences to claims obviously reflect limitations on the rights in question. Nowhere is this better illustrated than by the fact that we often define equitable property rights in terms of the principal defences that may be raised in actions seeking to vindicate these rights. Thus, we say that the equitable owner is protected against the world, except a bona f ide purchaser for value without notice.

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the law will move in this direction.39 On this view, the law should limit the extent to which it vindicates a plaintiff’s equitable property rights largely by reference to notions of unjust enrichment. However, this would not alter the fact that the ability to recover from enriched recipients could be regarded as part of an equitable owner’s pre-existing rights. Thus, as the enrichment in question was gained as a result of receiving another’s property, the causative event leading to personal liability for receipt of trust property could be viewed as involving both property and unjust enrichment. On the other hand, considerations of fault would not be eliminated entirely. Only those purchasers who were bona fide would have a defence. Similarly, defendants could avail themselves of the change of position defence only where they had altered their circumstances in good faith. Thus, in equity, notions of fault and unjust enrichment compete for recognition as factors that might justify limiting the protection afforded to existing property rights. It follows that, even for claims based on property rights that pre-existed the event giving rise to the cause of action, the concept of property cannot be separated from concepts of wrongfulness and unjust enrichment. If we want to find an indication of what is wrong with Lord Millett’s suggestion in Foskett v McKeown that property and unjust enrichment are mutually exclusive categories, we need look no further than the analysis of knowing receipt that he recently offered in Twinsectra v Yardley.40 There he favoured the view that liability for the receipt of another’s property should be strict subject to the defences of bona f ide purchase and change of position.41 However, in concluding that the latter defence should be made available, he did not for a moment pause to ask whether the action in question is part of the law of property or part of the law of unjust enrichment. Nor would it have made sense for him to have done so. Insofar as it provides for remedies for dealing with another’s property, knowing receipt is part of the law of property; and whether the action is properly characterised as restitutionary depends largely on what defences are made available to defeat the claim. We cannot determine whether the change of position defence should be available by asking whether an action is concerned with the reversal of unjust enrichment; for it is the provision of the defence that will largely determine whether this could be said to be the case.

A mistake about mistake The error involved in allocating a primary causal role to property in the recognition of personal rights is nowhere more apparent than in the analysis of mistake. At law, because title generally passes to a defendant at the time of transactions vitiated by mistake, plaintiffs have a personal claim at most.42 It is presently unclear if and when a victim of a mistaken transfer obtains any equitable

39 40 41 42

See Twinsectra v Yardley [2002] 2 AC 164 at 194 per Lord Millett. See also Lord Nicholls, ‘Knowing receipt—the need for a new landmark’, in Cornish, Nolan, O’Sullivan and Virgo (eds), supra n 9 at 231. [2002] 2 AC 164 per Lord Millett. Ibid at 194. There are, of course, exceptions. Thus, for example, any law student will encounter the proposition that title will not pass where the transferor makes a material mistake of identity, as illustrated by Cundy v Lindsay (1878) 3 App Cas 459. Other examples might include mistakes about the nature or quantity of the subject matter of a transfer. See David Fox, ‘The transfer of legal title to money’ [1996] RLR 60. However, there seems little reason to draw distinctions between mistakes on any of these bases. See Samuel Stoljar, Mistake and Misrepresentation: A Study in Contractual Principles (London: Sweet & Maxwell, 1968) 69 and 72–73; Menacham Mautner, ‘“The eternal triangles of law”: toward a theory of priorities in conflicts involving remote parties’ [1991] 90 Mich L Rev 95.

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interest in the subject matter of the transfer.43 Nonetheless, some commentators argue that the provision of relief for mistake is explained not by unjust enrichment but by notions of property.44 This conclusion is based on the premise that personal actions for mistake are concerned with the protection of the same interest as are promoted in proprietary claims.45 This is half true at best. Both types of claim reflect a concern for the autonomy of owners. However, this ‘interest’ amounts to no more than a vague normative concern. Moreover, in providing relief for mistake, the law takes into account additional normative considerations that are not given the same weight in proprietary claims. The judiciary has thought that the best balance in protecting the autonomy of owners while safeguarding the interests of third parties is to be reached by providing that title passes and limiting the transferor to a personal right to relief. This ensures that, while the immediate transferee is not unjustly enriched, third parties who might deal with the transferee are not liable to the original transferor. Similarly, while a transferor who can bring an action based on title to the assets in question is vulnerable only to the bona f ide purchase defence, in most mistake cases the plaintiff’s claim will also be subject to the change of position defence.

Birks’ position: property rights as inert Peter Birks has argued that attributing a causative role to property involves a ‘categorical error’.46 In his view, the key causative events are consent, wrongs and unjust enrichment, and property is a legal response to such events. It is obviously true that property, as a bundle of rights, cannot amount to a causative event in itself.47 However, that is not to say that property does not play a causal role in generating legal responses. Where a remedy follows a breach of a property right, analytically, the right must entail any remedy that follows from its breach. Thus, while property may not be a causative event, it is a cause.48 Birks disagrees, downplaying property’s causal role by suggesting that plaintiffs’ rights arise quite independently from any proprietary interest they might enjoy.49 For one thing, Birks is strangely unwilling to concede that property has any causative role in determining responses to wrongs. In

43

44

45 46 47 48 49

In Chase Manhattan NA v Israel-British Bank (London) [1980] Ch 105 Goulding J suggested that the recipient of a mistaken payment would hold the money on constructive trust. Subsequently, in Westdeutsche Landesbank Girozentrale v Islington London Borough Council [1996] 1 AC 669, Lord Browne-Wilkinson argued that a trust would only arise if and when the recipient had knowledge of the error. Lord Millett, in contrast, has argued extra-judicially that no equitable proprietary rights arise in the context of a mistaken payment. See Sir Peter Millett, ‘Restitution and constructive trusts’ (1998) 114 LQR 399 at 402 and 413. At one time the principal defender of this view was of course Samuel Stoljar: see Stoljar, The Law of Quasi Contract, 2nd edn (Sydney: Law Book Co, 1989). After apparently falling into obsolescence, it has found favour again in recent years. See, eg, Jaffey, The Nature and Scope of Restitution (Oxford: Hart, 1997) 276, and Joachim Dietrich, Restitution: A New Perspective (Sydney: Federation Press, 1998) 209. See Jaffey ibid; and Dietrich ibid. Birks, supra n 34. Grantham and Rickett’s conclusion that property can be a causative event in itself (see Grantham and Rickett, supra n 4 at 675) is the most unconvincing aspect of their analysis. Grantham and Rickett, supra n 4 at 680 and Virgo supra n 2 at 15. See Grantham and Rickett, Enrichment and Restitution in New Zealand (Oxford: Hart, 2000) 24–30.

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part, he bases this conclusion on his view that the personal remedies that the common law provides cannot be said to vindicate property rights in any real sense.50 Yet, there is no reason why we need to say that only those doctrines that provide for specific relief can be characterised as protecting property rights. For example, it is difficult to object to Lord Mansfield’s characterisation of conversion, a response to an interference with the plaintiff’s right to immediate possession of a chattel, as ‘founded upon property’.51 The availability of a remedy indicates the existence of a right, and if the right that is breached is a right of property, that right can be said to trigger the legal response in question. Moreover, given that the content of a right is defined by the remedies made available to enforce it, the remedies granted for a breach of a property right must by definition vindicate that right. Even more fundamentally, Birks has argued that, even where the law provides for the specific recovery of assets as a means of vindicating a continuing property right, this response cannot be attributed to the plaintiff’s proprietary rights. Instead, he characterises the legal response in question as arising from an obligation to make restitution that is separate from the plaintiff’s property rights. This reflects Birks’ view that a proprietary interest is ‘inert’.52 This analysis cannot be correct. A proprietary interest is a bundle of rights, and rights have no existence apart from the remedies that are awarded for their breach. The notion of an ‘inert’ proprietary interest—an interest that entails no rights or remedies—is incomprehensible. More recently, Birks has stated that a right to specific recovery of an asset reflects a restitutionary obligation that arises as a result of the defendant ‘coming into possession of the thing subject to an adverse property interest’.53 Insofar as a property interest that is adverse to the defendant’s possession can hardly be regarded as ‘inert’, this would seem to represent a refutation of his earlier analysis.

NOTIONS OF PROPERTY AND THE LIMITS OF CONCEPTUAL ANALYSIS The majority in Foskett v McKeown reasoned that, because tracing is part of the law of property, certain consequences followed. Another way of understanding why this reasoning is misconceived lies in appreciating that the concept of property plays an analytical rather than normative role in legal reasoning.

Property rights and the concept of property The analytical relationship of property rights and remedies A distinction needs to be drawn between particular property rights recognised by positive law and the concept of property—an altogether more abstract notion. Property rights might be attributed a causative role in triggering legal responses in that they are necessarily linked to particular

50 51 52 53

Birks, supra n 28 at 250. Hambly v Trott (1776) as I Cowp 371 at 374. See Baker, An Introduction to English Legal History, 3rd edn (London: Butterworths, 2002) 399. Birks, supra n 3 at 659. Birks, supra n 28 at 251.

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remedies. A property right, once recognised, will entail a remedial response; indeed, the right will come into being only through the initial decision that a remedy should be made available in the circumstances in question. In many ways, the fact that a remedy might be said to be a response to a breach of a property right is not particularly profound. To say that remedies that vindicate property rights must be related to breaches of property rights is to state an analytic truth, a tautology. No legal system will let what it characterises as a breach of property rights go unpunished, just as it will not permit someone to be enriched at the expense of another in circumstances that it characterises as unjust. This follows as a matter of definition: the only means by which the courts have to designate an act as a wrong or an enrichment as unjust is to make a remedy available. However, the fact that the courts in a particular jurisdiction make use of the concept of property does not tell us which acts they will characterise as a breach of property, nor does it dictate the precise remedy that will be made available to provide redress.

The limited role of legal concepts It is intuitively tempting to say that a particular legal response follows from the fact that prior to the event in question the resource at issue belonged to the plaintiff. Such a tendency might be criticised on the basis that there is no unitary, objective and immutable concept of property that automatically determines a defined set of remedies. Property has no natural content from which concrete determinations can be deduced. Rather it is an ‘essentially contested’ concept,54 the contours of which are always liable to be a matter of controversy. To a large extent, notions of property, wrongs and unjust enrichment are ‘conceptual place-holders’.55 They are legal categories that we use for organising legal determinations after the event. It would be possible for a legal system to determine entitlement to resources without reference to any notion of property.56 Property rights would then simply refer to the rules of entitlement that have emerged out of discrete ad hoc decisions about resource allocation. Particular property rights are generated by the initial decision to make a remedy available in those circumstances. Of course, reasons will be offered for the decision to recognise a right in a particular type of circumstance, and these reasons might quite validly be identified as ‘causing’ the legal rights and remedies in question in some deeper sense. However, these reasons will reflect deeper normative concerns that cannot be reduced to legal concepts such as ‘property’. The incremental development of equitable obligations in the context of the trust illustrates this point.57 Initially, beneficiaries’ rights were not conceptualised as proprietary. However, beneficiaries were gradually given remedies against more and more classes of third party until such a point that it became possible to describe the complex of rights that they enjoyed as proprietary.58 It was not

54 55 56 57

Gallie, ‘Essentially contested concepts’ (1955–56) 56 Proceedings of the Aristotelian Society 167; Waldron, infra n 56 at 51. Jules Coleman and Jody Kraus, ‘Rethinking the theory of legal rights’ (1986) 95 Yale LJ 1335 at 1340. For an argument that English law operates in this way, see Jeremy Waldron, The Right to Private Property (Oxford: Clarendon Press, 1988) 52. For the view that reference to notions of property or ownership are unhelpful in legal argument, see Ross, ‘Tû-Tû’ 70 Harv L Rev 812 (1957). See supra p 188.

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that beneficiaries were protected against third parties because the trust relationship was proprietary; rather the trust relationship became proprietary because it was protected against third parties.59 Any legal culture is liable to make use of concepts such as property if it is to have a coherent system of private law. However, to the extent that these concepts are given a stable and coherent content in a particular legal system, this is done by drawing on deeper considerations of morality and efficiency. Such considerations are needed to enable a decision maker to determine, for example, whether a particular interference with an asset should attract a remedy. It is at this deeper normative level that the most interesting questions regarding the private law lie.

Arguing from a particular conception of property Reasoning from an absolutist conception of property Where a claim for entitlement to resources is resolved by reference to notions of property, what is at work is a particular conception of property that reflects historically contingent understandings about law and social order.60 On the other hand, we might accept this point and respond that no one really believes that legal concepts are natural categories rather than social constructs. Thus, we might be content to say that, historically contingent or not, if our legal culture favours a particular conception of property, this can be said to generate particular legal responses, regardless of any deeper causes underpinning such a conception.61 An absolutist perspective of property might encourage us to conclude that certain remedial responses necessarily follow from an interference with a resource owned by a particular plaintiff. This perspective is apparent in Grantham and Rickett’s analysis of Foskett v McKeown. They argue that: Property rights…represent one of the fundamental building blocks of the Anglo-American legal tradition. Although sometimes hidden by the peculiarities of history, property rights have a powerful normative force that borders on the absolute.62

It is not uncommon to find absolutist notions of property espoused to justify a particular result.63 However, a closer inspection of legal norms makes it difficult to take such justifications very seriously.

58 59 60

61 62 63

See Rotherham, supra n 14 at 7–10. Cf Millett LJ’s remark that someone ‘is not subject to fiduciary obligations because he is a fiduciary; it is because he is subject to them that he is a fiduciary’: Bristol & West Building Society v Mothew [1996] 4 All ER 698 at 712. Rotherham, ‘Property and justice’, in Kramer (ed), Rights, Wrongs and Responsibilities (London: Macmillan, 2001) 148; Hanoch Dagan, Unjust Enrichment (Cambridge: Cambridge University Press, 1997) 18; and ‘The distributive foundation of corrective justice’ (1999) 98 Michigan L Rev 138 at 148–49. Cf Ernest Weinrib, ‘Restitutionary damages as corrective justice’ (2000) Theoretical Inquiries in Law 1. For the distinction between the concept of property and particular conceptions of property, see Waldron, The Right to Private Property (Oxford: Clarendon Press, 1988) 52 and 432. Grantham and Rickett, supra n 30 at 911. Rotherham, ‘Conceptions of property in common law discourse’ [1998] LS 41 at 51–53.

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The judicial approach to the expropriation of owners’ rights through the denial of injunctions The implausibility of deducing legal norms from absolutist conceptions of property is illustrated by the rhetoric surrounding the question of whether it would be appropriate to limit a plaintiff to compensation instead of ordering an injunction to prevent a continuing interference with the plaintiff’s property rights. In Shelfer v City of London Electric Lighting Co,64 the English Court of Appeal refused to grant damages in lieu of an injunction to allow the defendant to continue an electricity generating operation that was creating an actionable nuisance. Lindley LJ justified the decision on the grounds that ‘expropriation, even for a money consideration, is only justified where Parliament has sanctioned it’.65 Nonetheless, the courts have at other times been prepared to grant damages in lieu of an injunction in situations in which a defendant has interfered with a plaintiff’s property rights. In particular, the courts have allowed themselves a broad discretion to refuse applications for mandatory injunctions.66 Thus, in Wrotham Park Estate Co Ltd v Parkside Homes Ltd67 damages were awarded in lieu of a mandatory injunction after a defendant, who was far more blameworthy than that in Shelfer, had built housing in breach of a restrictive covenant. While the courts have tended to award prohibitory injunctions as a matter of right, they will on occasion refuse this form of relief. Thus, in Bracewell v Appleby,68 damages were awarded in lieu of a prohibitory injunction that would have had the effect of denying the defendant access to a residential property that he had built in disregard of the plaintiffs’ insistence that he had no right to do so. The effect of the award was to grant a trespasser a perpetual easement over the plaintiffs’ land.69 Thus, it can be seen that, despite the rhetoric used by Lindley LJ, the judiciary will limit a plaintiff’s property rights where considerations of utility demand it. Interestingly, in Jaggard v Sawyer,70 a case in which the Court of Appeal approved an award of damages in lieu of a mandatory injunction, Millett LJ remarked that he thought that ‘references to the “expropriation” of the plaintiff’s property are somewhat overdone’.71 It is strange, therefore, that in Foskett v McKeown, we should find the same judge suggesting that it followed simply from the fact that tracing was part of the law of property that the change of position defence would not be available for proprietary claims brought in respect of traceable proceeds. Such a conclusion cannot legitimately be deduced from some unstated conception of property. Rather, it requires a judicial determination that there are good reasons of policy why the defence should not be available in that context. It is the decision as to whether the defence should be available that will determine the extent of the plaintiff’s property rights and not vice versa.

64 65 66 67 68 69

70 71

(1895) 1 Ch 287. Ibid at 316. See Isenberg v East India House Estate Co Ltd (1863) 3 De G J & S 263. [1974] 1 WLR 798. See also Jaggard v Sawyer [1995] 1 WLR 269. [1975] Ch 408. See Jaggard v Sawyer [1995] 1 WLR 269 at 280–81 per Sir Thomas Bingham MR. In Anchor Brewhouse Developments Ltd v Berkley House (Docklands Developments) Ltd (1987) 38 BLR 87, Scott J doubted whether the court really had the jurisdiction to make an award with this effect. However, this view makes sense only if one assumes that an owner’s property rights are absolute. [1995] 1 WLR 269. Ibid at 287.

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Absolutist notions of property and proprietary remedies Our law of proprietary remedies provides further illustrations of the folly of reasoning from absolutist notions of property. In Lister & Co v Stubbs,72 the Court of Appeal asked who owned the proceeds of a secret commission that an employee received for giving a supplier a contract with his employee. In his judgment, Lindley LJ concluded that to have held that the defendant was a constructive trustee would have involved ‘confounding ownership with obligation’.73 The Court of Appeal accepted Stirling J’s conclusion in the court below that the principal would have been entitled to a constructive trust only if it had owned the asset in question before any wrongful act was committed by its fiduciary.74 On this view, in the absence of a pre-existing title, the plaintiff’s claim had to be one for personal relief, based on principles of obligation. This may be contrasted with the decision of the Privy Council in AG for Hong Kong v Reid,75 which concerned an employee who had accepted a bribe. The judicial committee concluded that the employee held the money in question on constructive trust for his employer from the moment it was received. A counterfactual evidential presumption was combined with a legal fiction to obscure the redistributive effect of this ruling.76 Nonetheless, Reid makes it clear that, for all suggestion of an absolute distinction between ownership and obligation in Lister & Co v Stubbs, the courts can redistribute property where they see fit.77 If the dynamic field of proprietary remedies demonstrates anything, it underlines that there is no conception of property in English law that is so stable that any particular legal response can readily be deduced from it. In fact, we often sanction interference with property rights; and, indeed, the judiciary has developed doctrines that redistribute these rights.78 Once doctrines such as tracing and subrogation are divested of the rhetoric that obscures their redistributive character, it becomes clear that our practices are too variegated to permit the identification of a monolithic conception of property. Instead, what we find is a diverse collection of norms underlain by a complex set of normative concerns.

The notion that rights to proceeds derive from our conception of property Grantham and Rickett suggest that the result in Foskett v McKeown was almost preordained by our conception of property. In their view: One’s right to do as one pleases on or with one’s property is constrained only at the margins and protection from interference is available against even the most innocent. From such a perspective, the idea that a plaintiff’s property rights should be extinguished, to be replaced by rights born out of unjust enrichment, merely because the subject matter of the right has changed form, would be a contraction quite out of keeping with the otherwise generous protection afforded to rights to property.79

72 73 74 75 76 77 78 79

(1890) 1 Ch 1. Ibid at 15. Ibid at 9–11. [1994] 1 AC 324. Rotherham, supra n 14 at 188 See, eg, Lord Napier and Ettrick v Hunter [1993] 1 AC 713. See generally, Rotherham, supra n 14. Supra n 30 at 11.

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Thus, Grantham and Rickett conclude that it would be surprising if full-blown property rights were not afforded in respect of the exchange product of an owner’s assets. However, it would be too simplistic to say that our conception of property demands rights to substitutes. It should be remembered that, in civilian law, such generous rights to proceeds are not thought to follow from the notion of property.80 In some ways, given that it makes defendants’ rights to assets transferred to them by their former owner defeasible, tracing is in tension with an absolutist conception of property. Even Andrew Burrows, who has criticised the assertion of the majority in Foskett v McKeown that rights to substitutes are not a response to unjust enrichment, assumes that certain implications follow naturally from the designation of someone as the owner of an asset. Thus, he comments that the error in Foskett v McKeown was in making a tenuous analogy between claims which involve the protection of rights to assets directly produced by one’s property and claims to the product of an exchange involving one’s asset. In his view, to assert that ‘a person’s ownership of a pig carries with it the ownership of her piglets… rests on a self-explanatory and true notion of “property”’.81 In contrast, in his view, the assertion ‘that a person’s ownership of a pig carries with it ownership of the horse which a defendant has traceably substituted for the pig…rests on a fictional use of “property”’.82 Such essentialist talk is best avoided. There is no ‘self-explanatory and true’ notion of property. A decision that rights to any asset should carry with them rights to anything else requires explanation, just as the scope of rights enjoyed in the original assets needs to be justified.83 Property has no natural content from which concrete determinations can be deduced: its contours are always liable to be a matter of controversy. Perhaps what Burrows is attempting to evoke is some core set of entitlements that any legal system is likely to confer upon owners of resources. Honoré captured this idea in his writing on property, whereby he suggested that we can usefully conceive of ownership in terms of a series of concentric circles with the most common and fundamental incidents at the centre and less basic rights at the periphery.84 In these terms, the protection of our existing relationships with particular resources by some degree of freedom from expropriation can be seen as central to any conception of property. In contrast, the recognition of rights to the product of exchanges of our assets conducted without our consent is liable to be seen as less fundamental and is unlikely to be recognised as an incident of ownership in all legal systems. Our reasons for recognising rights to substitutes have little do with the normative concerns that explain the rights that we accord to on-going relationships with particular assets. We do not afford rights to substitutes because of a wish to protect what Grantham and Rickett refer to as ‘one’s right to do as one pleases on or with one’s property’.85 Far from flowing naturally from some conception of property that lies at the heart of our private law, the conferral of rights to proceeds

80 81 82 83

84 85

Gambaro, ‘Property’, in Candian, Gambaro and Pozzo, Property, Propriété, Eigentum (Padova: Cedam, 1992) 1 at 7–9. Burrows, ‘Proprietary restitution: unmasking unjust enrichment’ (2001) 117 LQR 412 at 429. Ibid. What if the sow in question had conceived only after its owner had carried it by stealth onto another’s property and attracted the attentions of his neighbour’s prize breeding pig? It is easy enough to imagine that different legal systems might offer diverse answers to the question as to who enjoyed ownership of the resulting litter. Honoré, ‘Ownership’, in Guest (ed), Oxford Essays in Jurisprudence (Oxford: OUP, 1961) 107. Grantham and Rickett, supra n 30 at 11.

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represents an exceptional remedy. The existence of these rights can be understood only against the background of our system of distributing assets upon insolvency. What is more, when it is understood what objectives might legitimately be promoted by the recognition of these rights, it is easy to see the plausibility of the argument that considerations of unjust enrichment should be central to the determination of the extent of these rights. What we require is a more nuanced approach to property that recognises that it serves different functions and that its benefits do not necessarily need to come together as a ‘package deal’. Thus, the fact that we wish to confer priority in bankruptcy with regard to substitutes does not necessarily mean that we also need to deny the defences that we have withheld from actions to enforce pre-existing property rights. There is no a priori reason why these rights should not be more limited than the rights that owners initially enjoyed in respect of their original assets.

CONCLUSION The analysis of the relationship of property and unjust enrichment has been marred by some fundamental misconceptions. The first is the error of some jurists to suggest that property and unjust enrichment are mutually exclusive categories. In Foskett v McKeown, this beguiling notion led the House of Lords to explain their decision on the basis of a non sequitur: that tracing is part of the law of property and therefore has nothing to do with unjust enrichment. More generally, the analysis of the relationship of property and unjust enrichment has been undermined by a misunderstanding about the nature and role of such concepts. In hard cases, legal concepts can at best provide analytical tools that can assist us in identifying the difficult normative issues that have to be addressed. The resolution of any contested issue of resource entitlement that is not governed by precedent requires difficult choices that have to be made on the basis of substantive policy considerations. It will be such choices that determine precisely how a particular doctrine is to be classified for the purposes of legal analysis. To purport to resolve such normative issues by characterising the doctrine in question as felling within one legal category rather than another involves not only a logical error but also a dereliction of judicial responsibility. The pervasive tendency to attribute normative significance to legal concepts is encouraged in this context by a largely unstated reliance on an absolutist conception of property that is unsupportable on a closer inspection of the judicial approach to the determination of entitlement to resources. A better understanding of property and unjust enrichment requires an appreciation not only of the logical relationship of these categories but also of the limits of conceptual analysis.

Chapter 10 Vindicating vindication: Foskett v McKeown reviewed Graham Virgo INTRODUCTION Probably the most controversial question facing the modern law of restitution relates to its application to proprietary claims, especially claims to substitute property. There are as many different views about this as there are commentators on the subject, but essentially the debate can be distilled into two distinct camps. On one side there are those who consider that a proprietary claim to substitute property depends on the application of the unjust enrichment principle.1 On the other side there are those who reject the unjust enrichment principle, either completely, or in its application to proprietary claims, and who assert that proprietary restitutionary claims fall within the law of property and are triggered by a different principle, such as vindication of property rights.2 In England this dispute has clearly been resolved by the decision of the House of Lords in Foskett v McKeown,3 where the majority recognised a fundamental distinction between the law of unjust enrichment and the law of property, and held that a claim to recover substitute property in which the claimant asserted an equitable proprietary interest depended on the vindication of property rights and not unjust enrichment. This decision has been subject to rigorous criticism, so it is important to consider whether the result and the analyses of the judges can be justified. The reasons for doing so need to be clear at the outset. The proper analysis of restitutionary claims to substitute property matters for practical reasons, such as whether the defence of change of position should apply, what the elements of the respective causes of action might be and which remedies are potentially applicable. It also matters for intellectual reasons, since Foskett provides a useful study by reference to which the appropriate classification of obligations can be assessed, and raises acutely the vital dichotomy between rulebased and discretionary-based approaches to the law of property and obligations.

WHAT DID FOSKETT v MCKEOWN DECIDE? Foskett v McKeown4 concerned a claim brought by the beneficiaries of a trust to recover part of the proceeds of a life insurance policy. One of the trustees had misappropriated money from the trust fund to pay at least the fourth and fifth annual premium of a unit-linked life assurance policy, with earlier premiums being paid from his own money.5 After five premiums had been paid the trustee

1 2 3 4 5

See especially Birks [2002] CLP 231, Burrows, (2001) 117 LQR 412 and Smith, The Law of Tracing (OUP, 1997), p 300. See Virgo, The Principles of the Law of Restitution (OUP, 1999), pp 11–16. See also Grantham and Rickett [1997] NZLR 623 and Hedley, Restitution: Its Division and Ordering (Sweet & Maxwell, 2001), p 150. [2001] 1 AC 102. Ibid. It was unclear whether the third premium was paid from the trustee’s own money or from the trust fund.

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committed suicide and his children were entitled to receive a payment of just over £1 million. The beneficiaries of the trust claimed a proportionate share of this sum, amounting to £400,000, on the basis that trust money had been used to pay two of the premiums which contributed to the receipt of the death benefit by the children. The Court of Appeal6 had confined the beneficiaries to a lien on the proceeds of the policy for the amount which had been misappropriated from the trust, amounting to £20,440. The House of Lords held by a bare majority that the beneficiaries’ claim for a proportionate share should succeed. There are a number of distinct elements in the reasoning of the majority, although they tend not to be identified clearly; a recurrent weakness in many of the cases and in the writings of commentators in this field. Further, the judgments of all five Law Lords display marked variations of approach to proprietary restitutionary claims, which makes it difficult to identify a coherent explanation for the result. It should be unnecessary to spend time unpacking the elements of the decision, but unfortunately this is essential before its implications can be properly discerned.

Recognition of vindication of proprietary rights At the heart of Foskett v McKeown is the recognition that the restitutionary claim of the beneficiaries fell within the law of property and was concerned with the vindication of property rights rather than with whether the defendant was unjustly enriched at the expense of the claimant.7 The validity of this approach will be considered later.

Rejection of the role of discretion Almost as important was the clear rejection by most of the judges of a normative approach to proprietary restitutionary claims, by virtue of which the identification and vindication of proprietary rights would depend on the discretion of the court. This rejection was forcefully expressed by Lord Millett:8 Property rights are determined by fixed rules and settled principles. They are not discretionary. They do not depend upon ideas of what is ‘fair, just and reasonable’. Such concepts, which in reality mask decisions of legal policy, have no place in the law of property.9

Lord Browne-Wilkinson also recognised that proprietary claims do not depend on any discretion vested in the court, that it was ‘a case of hard-nosed property rights’,10 but he did accept that a proprietary

6 7 8 9 10

[1998] Ch 265. [2001] 1 AC 102, 109 (Lord Browne-Wilkinson), 115 (Lord Hoffmann), 118 (Lord Hope) and 129 (Lord Millett). Lord Steyn concluded that the children were not unjustly enriched because the payment of the premiums did not constitute an enrichment: ibid, 112. Ibid, 127. Cf Lord Hope who said, ibid at 120, that, since there was no principle or authority to assist with the division of the mixed substitution in this case, it should be divided in such proportions as were equitable, having regard to the terms of the life insurance policy and the equities affecting each party. Ibid, 109.

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interest might not be recognised if such recognition would be ‘unfair’.11 Although this notion of the relevance of fairness is sometimes encountered in the context of the tracing rules,12 it clearly contradicts the fundamental principle that the recognition of proprietary rights is rule-based and principled. It would be better to rationalise the decision not to recognise a proprietary interest by reference to principled defences rather than rely on the uncertainty of concepts such as fairness and equity.

Initial proprietary interest For a claimant to bring a proprietary restitutionary claim he or she must first establish a proprietary interest, either at law or in equity. In some circumstances in equity this can prove to be especially difficult since it may require consideration of the law on resulting and constructive trusts. No such difficulty arose in this case, since the claimant’s initial equitable proprietary interest arose under an express trust.13 Consequently, the claimants clearly had an equitable proprietary interest in the money which was taken from the trust fund.

Tracing Although some of the judges used the case as an opportunity to call for the unification of the common law and equitable tracing rules,14 this was clearly obiter, since the basic requirements for tracing in equity were clearly established, especially that the trust money had passed through the hands of a fiduciary,15 here the trustee. But it was still necessary to establish, by reference to the equitable tracing rules, that the money from the trust fund could be traced from that fund, through various bank accounts, into the fourth and fifth premiums which were paid to the insurance company and from there into the payment of the death benefit following the suicide of the trustee. The first part of the tracing exercise was straightforward. The fact that money has been mixed in bank accounts is no objection to tracing in equity. But the difficulty concerned tracing from the premiums into the death benefit, via the insurance policy, and this turned on the proper analysis of the payment of the premiums in the light of the unusual nature of the insurance policy. This was a unit-linked life policy under which the payment of premiums was used to pay for the cost of life cover through the allocation of units. The policy would only lapse once the allocated units had been exhausted. Most importantly, had the fourth and fifth premiums not been paid at all, the children would still have received the death benefit because the earlier premiums were still operating to ensure that the policy did not lapse at the time when the trustee committed suicide. So what was the effect of the fourth and fifth premiums? For Lord Steyn, who dissented,16 the fact that the policy would not have lapsed even if the fourth and fifth premiums had not been paid proved decisive to his conclusion, that the claimants could not

11 12 13 14 15 16

Ibid. Re Diplock [1948] Ch 465, 548. [2001] 1 AC 102, 126 (Lord Millett). Ibid, 113 (Lord Steyn) and 128–29 (Lord Millett). Lord Browne-Wilkinson expressly did not consider this: 109. Re Diplock [1948] Ch 465. [2001] 1 AC 102, 113.

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obtain a proportionate share of the death benefit because there was no link between the premiums and the death benefit. Although the majority accepted that, in the events which happened, the premiums paid from the trust were not required to keep the policy on foot, they also recognised that this need not have been the case.17 There might have been circumstances where those premiums would have kept the policy alive, for example if the trustee had lived longer. Consequently Lord Browne-Wilkinson recognised that ‘the beneficial ownership of the policy, and therefore the policy moneys, cannot depend on how events turn out. The rights of the parties in the policy, one way or another, were fixed when the relevant premiums were paid when the future was unknown’.18 It followed that it was possible to trace into the policy and from that to the death benefit. But this raises a critically important issue about the function of the tracing rules. Are these rules dependent on notions of causation, in the sense that it is only possible to trace into a substitute asset if, but for the receipt of the original asset,19 the substitute would not have been obtained? If that is the function of the rules then it is clear that the claimants should not have been able to trace into the death benefit, because the fourth and fifth premiums did not result in the benefit being obtained. But the decision of the majority that it was possible to trace into the proceeds must mean that tracing cannot be dependent on causation, at least in the sense of a ‘but for’ cause. Instead, reliance was placed on the notion of attribution.20 It was sufficient that the death benefit could be attributed to the fourth and fifth premiums, and this could be shown because the death benefit was to be paid, according to the insurance policy, in consideration for all of the premiums.21 This shift away from causation to attribution is an important one, especially when it is coupled with a second key conclusion about the nature of tracing. All the judges recognised that tracing was not concerned with the identification of property as such, but rather with the identification of value within property. It is this value which is the essence of the proprietary right and it is this value which is traced. This was expressly recognised by Lord Millett: Where one asset is exchanged for another, a claimant can elect whether to follow the original asset into the hands of the new owner or to trace its value into the new asset in the hands of the same owner… What [the claimant] traces…is not the physical asset itself but the value inherent in it.22

The effect of this shift23 from causation to attribution and from identifying assets to identifying value is important since it means that the application of the tracing rules themselves will be easier. Tracing does not depend on causation in any meaningful sense. We are concerned only with logical

17 18 19 20 21 22 23

Ibid, 111 (Lord Browne-Wilkinson), 138 (Lord Millett). Ibid. Or an earlier substitute where there is a chain of substitutions. [2001] 1 AC 102, 137 (Lord Millett). Cf Lord Hope who expressly stated that the death benefit was not attributable to the payment of the premiums: ibid, 122. [2001] 1 AC 102, 116 (Lord Hoffmann), 119 (Lord Hope), 133 (Lord Millett). Ibid, 127–28. See also 110 (Lord Browne-Wilkinson), 115 (Lord Hoffmann) and 119 (Lord Hope). Lord Steyn also referred to the notion of value, albeit that he concluded that the fourth and fifth premiums added nothing of value to the policy: ibid, 112. Whether this is a shift or a mere endorsement of existing law is a moot point. For example, although academic commentators have been more likely to analyse the tracing rules by reference to the identification of value (see especially Smith, The Law of Tracing (OUP, 1997), pp 15 and 119 and Jaffey, The Nature and Scope of Restitution (Hart Publishing, 2000), p 297) it appears that practitioners may have been more likely to treat them as existing to identify physical assets.

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progression, with identification of value in various locations without regard to the effect of that value on the asset. So the value could be traced from the trust fund, through bank accounts into a premium, into the policy itself and finally into the proceeds of that policy.24 In a telling phrase Lord Millett talked of establishing ‘transactional links’;25 that is now the essential feature of tracing.

Distinguishing between tracing and claiming The decision in Foskett is also important because of the clear distinction that was drawn between tracing and claiming.26 The purpose of tracing is to see whether a link can be established between the original asset and the substitute property. As Lord Steyn said, it is ‘a process of identifying assets: it belongs to the law of evidence. It tells us nothing about legal or equitable rights to the assets traced.’27 So, in Foskett the function of the tracing rules was only to identify a link to the death benefit, so that the claimant had a proprietary interest in it. It was then necessary to determine how this interest could be vindicated. This is the claiming exercise and it was this which proved to be the key issue in the case, namely whether a lien or a proportionate share was the most appropriate remedy for vindicating the claimant’s proprietary interest. Just because the claimant has an equitable proprietary interest in a substitute asset, it does not follow that the claimant has a proportionate share in the asset. It may be more appropriate to confine the claimant to a lien. In many cases the appropriate remedy will be a matter for the claimant to choose,28 but this will depend on both remedies being available to the claimant as a matter of law. Whereas the Court of Appeal29 had concluded that a lien was the appropriate remedy by analogy with cases where trust money has been used to improve or maintain an asset, the majority in the House of Lords preferred the analogy with a trustee who has mixed trust money with his or her own money in a bank account.30 In such cases awarding a proportionate share remedy is appropriate,31 and so that remedy was awarded in this case. A consequence of this distinction between tracing and claiming is that many of the so called tracing cases are not about tracing at all, but are about the nature of the claim and the identification of the remedy to vindicate that claim. So, for example, Re Tilley’s Will Trusts32 holds that a beneficiary has a right to participate in any profit obtained by a trustee who has mixed trust money with his or her own money and then used the mixture to purchase other property. To the extent that this case recognises that the beneficiary has an interest in the new asset, it is about tracing, but as regards the decision to

24 25 26

27 28 29 30 31 32

[2001] 1 AC 102, 126 (Lord Millett). Ibid, 128 See Lord Steyn, ibid at 113, citing Birks. ‘The necessity of a unitary law of tracing’, in Cranston (ed) Making Commercial Law, Essays in Honour of Roy Goode (OUP, 1997), pp 239–58. See also [2001] 1 AC 102, 128 and 139 (Lord Millett). Confusingly, despite earlier recognising the distinction between tracing and claiming, Lord Millett considered the question of claiming under the heading of ‘The tracing rules’: ibid, 129–33. Ibid, 113. See also 128 (Lord Millett). Ibid, 130 (Lord Millett). [1998] Ch 265. [2001] 1 AC 102, 110 (Lord Browne-Wilkinson), 115 (Lord Hoffmann). Lord Steyn did not consider this to be a useful analogy: ibid, 114. See Re Tilley’s Will Trusts [1967] Ch 1179. Ibid.

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allow the claimant to obtain part of the profit, it is about the nature of the claim. Although the distinction between tracing and claiming may have no substantive effect on the eventual decision made, it is only by distinguishing between these two concepts that the true nature of the appropriate analysis can be identified. It was, for example, by virtue of the failure to distinguish between these two concepts that a majority in the Court of Appeal and Lord Steyn in the House of Lords decided that a lien was an appropriate remedy even though they also concluded that it was not possible to trace into the proceeds of the insurance policy. But if tracing was not possible, then this should have automatically barred the awarding of any proprietary restitutionary remedy.

Valuing the remedy Although the valuation of the restitutionary proprietary remedy will usually be straightforward, in Foskett there was disagreement amongst the majority as to the appropriate method of valuation. For Lord Millett, because the premiums were invested in unit trusts, it was not sufficient to have regard only to the cost of each premium, it was important to consider also the value of each contribution by reference to the value of each unit purchased over time.33 However, Lords Browne-Wilkinson and Hoffmann considered this to be too complex and concluded that it was sufficient to determine the proportionate share with reference to the amount contributed. Since the claimants had contributed two of the five premiums they were entitled to receive two-fifths of the death benefit. This is the preferable view. Lord Millett’s approach is too complicated and, as Sir Robert Walker has recognised, is inconsistent with Lord Millett’s own characterisation of the insurance policy as ‘a single chose in which beneficial ownership from time to time had to be ascertainable, and could not be in limbo’.34

Defences Although the issue did not arise in Foskett itself, it is important to recognise that a further distinct element of the analysis of restitutionary proprietary claims is whether the defendant can plead any defences. Following Foskett it appears that the defence of change of position is not available to such claims,35 so the defence which is likely to be most relevant36 is that of bona f ide purchase for value,37 the effect of which is to extinguish the claimant’s proprietary interest and so defeat the proprietary restitutionary claim completely.

An alternative claim If the claimants had not been able to trace into the proceeds of the insurance policy but had only been able to trace into the payment of the fourth and fifth premiums which were paid to the

33 34 35 36 37

[2001] 1 AC 102, 141. [2000] RLR 573, 578. [2001] 1 AC 102, 129 (Lord Millett). See p 216, below. Other than defences of limitation or laches. Ratcliffe v Barrod (1871) LR 6 Ch App 652.

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insurance company, what claim would have been available to them? Since no link could be made to the proceeds of the policy, any proprietary claim to them would necessarily fail,38 so the claimants could not have brought a restitutionary claim against the children.39 Instead, a claim might be contemplated against the insurance company which received the premiums which had been misappropriated from the trust fund. But if this claim was one founded on the vindication of proprietary rights, it would have failed, because the insurance company would have been able to rely on the defence of bona f ide purchase for value, the value provided being the obligation to pay the death benefit under the policy.40

CRITICISMS OF THE DECISION The decision of the House of Lords in Foskett has been subjected to rigorous criticism from a number of commentators. The nature of the criticism falls into three distinct categories.

The result The awarding of a proportionate share to the claimants has been criticised, by Berg especially,41 not because the remedy was regarded as excessive but because it did not go far enough. Berg thinks that the claimants should have received the whole of the death benefit, by virtue of the policy that there should not be any incentive for trustees wrongfully to mix trust funds with their own. So a trustee, or anybody who claims through a trustee such as the children in this case, should be required to disgorge the whole of the benefit which they have wrongfully obtained. But this argument fails to distinguish between claims grounded on the commission of wrongs, where disgorgement of all profits is the norm subject to the award of equitable allowances,42 and claims grounded on the vindication of property rights, where the law is essentially concerned only with identifying value in property, and any other policies have no part to play. Hard-nosed property rights do not always work solely for the benefit of the claimant.

38 39 40

41 42

[2001] 1 AC 102, 140 (Lord Millett). Cf ibid, 113 (Lord Steyn). A claim in unjust enrichment would not have been available since the children had not been enriched at the claimants’ expense. See p 213, below. Whether an unjust enrichment claim could have been brought against the insurance company would turn on the proper interpretation of Lipkin German v Karpnale Ltd [1991] 2 AC 548, the facts of which were broadly similar to those of Foskett, involving misappropriation of assets the value of which were eventually received by the defendant. The House of Lords in Lipkin German characterised the restitutionary claim as founded on unjust enrichment, but it is better analysed as founded on the vindication of property rights, because the claim lay against an indirect recipient and no ground of restitution was identified. Similarly, the better view is that in Foskett an unjust enrichment claim could not have been established against the insurance company. (2001) 117 LQR 366. The preparedness of equity to award such allowances shows that, even as regards restitution for equitable wrongs, the defendant is able to retain some benefit to the extent that it represents his or her own contribution. See Boardman v Phipps [1967] 2 AC 46.

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Theoretical inquiries The failure to apply the unjust enrichment principle in Foskett has met with particular concern, most notably from Birks.43 Essentially Birks’s criticism focuses on the fact that the beneficiaries were claiming restitution of a substitute for their property. To claim that substitute it is necessary to show that the claimant has a right to it and, Birks asserts, the beneficiaries could only establish that by means of the unjust enrichment principle and not simply by the assertion of property rights. At the heart of Birks’s argument is the fundamental distinction, drawn in a number of his recent writings,44 between events and responses. According to Birks, in the law of civil obligations it is necessary to identify an event before the appropriate response can be considered. The law, he asserts, recognises four events, namely consent, wrongs, unjust enrichment and other events. Where the event of unjust enrichment can be established the only response is restitution. Vindication of property rights is not an event and so, he concludes, restitution cannot respond to it. As he says: The key point is that the law of property is not formed in answer to a question about causative events: ‘How do rights arise?’ It is formed in response to the quite different question: ‘Against whom are rights exigible?’45

He concludes that: …it is an error of logic to force a choice between the law of property and the law of unjust enrichment.

This identifies the crux of the debate: to what extent do the laws of property and unjust enrichment operate independently? Burrows’s unhappiness with Foskett has been more specific. He is concerned with the explanation as to how a proprietary claim can be made to substitute property when the claimant never had an interest in that property originally. For him it is not sufficient to say that the substitute represents the original property. Rather, he depends on the unjust enrichment principle to explain how and when the claimant can assert title to the substitute property.46

Principle versus discretion The third criticism concerns the emphasis on principle rather than discretion, something which is considered to be incompatible with equity.47 This rule/principle versus discretion/normative approach is proving to be especially controversial within property law and requires especially careful consideration, because the implications of adopting a much more discretionary approach are enormous.48

43 44 45 46 47 48

[2002] CLP 231. See especially (1996) 26 UWALR 1, 8–10; [2002] CLP 231. [2002] CLP 231, 241. (2001) 117 LQR 412. In Kuwait Airways Corpn v Iraqi Airways Co (Nos 4 and 5) [2002] 2 WLR 1353, 1375 Lord Nicholls of Birkenhead, in the context of the tort of conversion, characterised the vindication of the claimant’s property rights as involving unjust enrichment. See especially Sir Robert Walker [2000] RLR 573, 575. See p 214, below.

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DEFENDING VINDICATION Much of the recent debate about the legitimacy of the principle of vindication of property rights has got stuck on the question of language. Birks is obviously right to state that Vindication of property rights’ is not an ‘event’.49 It is a principle which is simply not framed in those terms. But the language could be changed to convert it into an event. For example, the event could be that the defendant has interfered with the claimant’s property rights in some way. There are a number of responses to that event, including compensation, but the most important involves the award of restitutionary remedies, either personal or proprietary. This semantic debate about the nature of events is not unimportant, but of more interest and practical significance is the question whether there are any substantive consequences of rejecting the notion of vindicating property rights and emphasising instead that the triggering ‘event’ is unjust enrichment, as Birks and Burrows in particular have advocated. This requires consideration of a number of separate issues. At the outset there is another semantic point which needs to be considered. It might be possible to describe all cases of proprietary restitutionary claims as involving unjust enrichment, in that, in any case where the defendant is required to make restitution, he or she will have received a benefit and it is not just that the benefit should be retained. But this is to use ‘unjust enrichment’ in a trivial, descriptive sense.50 We are instead concerned with the identification of appropriate causes of action where vague notions of injustice have no part to play. The choice is between the unjust enrichment principle, as a well-defined principle, and the principle of vindicating property rights.

Can property rights in substitute property derive from unjust enrichment? Birks has sought to identify empirical evidence to show that property rights can derive from the defendant’s unjust enrichment.51 But there is no case which explicitly recognises this. Birks52 considers that Foskett was such a case, even though the majority judgments clearly contradict this, and that there are other cases which are consistent with this approach, including Sinclair v Brougham,53 but this has been overruled,54 and Chase Manhattan Bank v Israel-British Bank,55 but this case has been reinterpreted by the House of Lords.56 Further, neither of these cases explicitly recognises that property rights can derive from unjust enrichment. There is simply no empirical evidence to support the assertion that property rights can derive from the defendant’s unjust

49 50 51 52 53 54 55 56

[2002] CLP 231, 239. Cf Rickett and Grantham who unconvincingly assert that a property right is an event: (2000) 63 MLR 905, 908. Foskett v McKeown [2001] 1 AC 102, 115 (Lord Hoffmann). [2002] CLP 231, 247–49. Ibid, 248. See also Grantham and Rickett (2000) 63 MLR 905, 908 who acknowledge that property rights can arise from unjust enrichment. [1914] AC 398. Westdeutsche Landesbank Grozentrale v Islington LBC [1996] AC 669. [1981] Ch 105. Westdeutsche Landesbank Grozentrale v Islington LBC [1996] AC 669. In Chase Manhattan the trial judge was in fact purporting to apply New York law.

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enrichment and so the recognition of such a principle would be despite, rather than because of, the case law.57

Should rights in substitute property derive from unjust enrichment? Although there is no empirical evidence to support the theory that restitution of substitute property depends on the defendant’s unjust enrichment, it is still necessary to determine whether this would be appropriate as a matter of principle and policy. There are in fact four objections to such an approach.

Carving up proprietary restitutionary claims Birks and others wish to draw a distinction between so called ‘real property rights’ and rights in substitute property.58 The effect of this distinction is that, if the claimant wishes to recover the property in which he or she has a subsisting proprietary interest, then restitution is a matter for the law of property, whereas if the claimant wishes to recover substitute property, this will depend on the claimant establishing that the defendant has been unjustly enriched. But why should the law of proprietary restitutionary claims be carved up in this way? If the claimant has a property right, the restitutionary claim should be based on that right regardless of the property which is being claimed.

Diff iculties in establishing unjust enrichment Unjust enrichment analysis does not fit easily with the nature of the restitutionary claim to substitute property. Typically such a claim would arise where a trustee has misappropriated property from a trust and used this to obtain an asset which is given to the defendant, as occurred in Foskett itself. To establish an unjust enrichment claim in such circumstances, the claimant will need to show that the defendant has been enriched. Whether this can be established will depend on how enrichment is determined, especially as to whether a factual or a legal definition is adopted. If enrichment is defined factually it should generally be easy to establish in a proprietary context, because the receipt of property will usually be an enrichment, but this will not always be the case. There might be circumstances where the defendant has given full value for the property which he or she has received, and so will not have been enriched by the receipt of that property.59 But, in such circumstances, the defendant may still be required to make restitution to the claimant by virtue of the vindication of proprietary rights principle, if he or she had notice of the claimant’s beneficial interest, so that he or

57

58 59

Burrows (2001) 117 LQR 412, 423–24 refers in addition to the following being examples of proprietary responses to unjust enrichment: equitable liens over mistakenly improved land; rescission of an executed contract for misrepresentation, duress or undue influence; the trust imposed where property has been obtained by fraudulent misrepresentation; the proprietary remedy following tracing; proprietary subrogation and the constructive trust following the commission of an equitable wrong. But, whilst these situations all involve proprietary restitutionary responses, there is nothing in the cases which he cites to suggest that these are examples of responses to unjust enrichment. For subrogation see now Halifax plc v Omar [2002] EWCA Civ 121. See Fox [2000] RLR 465; Burrows (2001) 117 LQR 412, 417. See Foskett v McKeown [2001] 1 AC 102, 129 (Lord Millett). Lord Steyn considered that the children had not been enriched by the payment of the fourth and fifth premiums because those premiums conferred no additional benefit on them: ibid, 112. See also Lord Hope: ibid, 126.

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she would be unable to rely on the defence of bona fide purchase. Alternatively, if a legal, more technical, definition of enrichment is adopted, it might be very difficult to show that the defendant has been enriched in the context of a proprietary restitutionary claim. A legal definition of enrichment would focus not on the fact of receipt of a benefit but on the nature of the defendant’s rights to the property. If the claimant had retained proprietary rights in the property which was received by the defendant it could certainly be asserted that the defendant had not been enriched.60 The factual definition of enrichment is preferable, being more consistent with the orthodox interpretation of enrichment within the law of unjust enrichment, but the possibility of a legal definition being adopted indicates that establishing a proprietary restitutionary claim grounded on unjust enrichment might fall at the first fence. Secondly, this enrichment must be at the claimant’s expense. The claimant would seek to rely on the tracing rules to establish this,61 but the preferable view is that this requirement of ‘at the claimant’s expense’ refers to the receipt of direct rather than indirect benefits.62 Thirdly, the claimant would need to establish a ground of restitution. Presumably the existing grounds of restitution will be applicable. So, if the claimant transferred property to the defendant by mistake, then the ground of restitution will be satisfied. But does it follow that proprietary relief is available in all cases of mistake? If it does, then proprietary relief will tend to give the claimant excessive protection, because the consequences of such relief include giving the claimant priority over the defendant’s other creditors and enabling the claimant to claim increases in value. Why should a claimant who made a mistake be allowed such proprietary protection? A reason would need to be identified to distinguish between different types of mistake, to determine the particular circumstances in which mistakes will trigger proprietary relief, and it is surely far better to do this explicitly within the established principles of the law of property.63 But in many cases where a beneficiary wishes to recover substitute property, the established grounds of restitution will not be applicable. Where, for example, property has been misappropriated from a trust fund, it will not have been transferred as the result of a mistake, duress or exploitation, because the beneficiary will be unaware of the misappropriation. So what ground of restitution would be applicable? Birks has suggested that absence of consent should be the ground64 and Burrows talks about powerlessness or ignorance,65 but no case has recognised such grounds of restitution. This absence of recognition of grounds of restitution relevant to restitutionary proprietary claims is not surprising, because it is not necessary to rely on the unjust enrichment principle at all.66 It is sufficient that the defendant has received property in which the claimant has an equitable proprietary interest at the time of its receipt, where the claimant seeks a personal restitutionary remedy, or continues to have a

60 61 62

63 64 65

See Swadling [1996] LMCLQ 63, 65. See Burrows (2001) 117 LQR 412, 415. See also Burrows, ‘Fusing common law and equity: Remedies, restitution and reform’, in Hochelaga Lectures (Sweet and Maxwell Asia, 2002), pp 30–32. See Virgo, The Principles of the Law of Restitution, p 106. See also The Colonial Bank v The Exchange Bank of Yarmouth, Nova Scotia (1885) 11 App Cas 84, 85 (Lord Haldane); Re Byfield [1982] 1 All ER 249, 256 (Goulding J); Kleinwort Benson Ltd v Birmingham CC [1994] 4 All ER 733, 749 (Morritt LJ). This principle is subject to exceptions. Cf Birks, Unjustified Enrichment Key Issues in Comparative Perspective, Johnston and Zimmermann (ed) (Cambridge University Press, 2002), p 493 et seq, who argues that the exceptions are stronger than the rule. Similarly, why should the grounds of restitution founded on the principle of failure of consideration not ground proprietary restitutionary relief when they are sufficient to establish an unjust enrichment claim? [2002] CLP 231, 246. (2001) 117 LQR 4l2, 4l8. See also p 423.

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proprietary interest in it, where the claimant seeks a proprietary restitutionary remedy. The tracing rules are relevant to establish this, since they enable the courts to identify proprietary rights in mixtures and substitutions.67 Once the proprietary right in the substitute can be identified the claimant can then ‘vindicate’ it either by personal or proprietary restitutionary remedies. Burrows has argued68 that the so called ‘quadration theory’ is important since without it the judges will not continue to recognise the law of restitution. This is unconvincing. The judiciary are much more likely to react against the efficacy of restitution if restitution scholars peddle half-truths, such as a vague notion of ‘unjust enrichment’ which purports to explain all cases where restitutionary relief is awarded. It is far better to identify a distinct principle, which operates clearly and consistently, to explain when restitutionary relief will be awarded, and the vindication of property rights principle serves those purposes well.

Encouraging the exercise of discretion A further unfortunate consequence of reliance on the unjust enrichment principle might be the conclusion that the recognition of proprietary rights lies in the discretion of the court whenever the defendant’s receipt can be considered to be unjust. There is a tendency in some of the literature to assume that the recognition of proprietary rights should be a matter of discretion, sometimes characterised as the exercise of policy involving a normative discourse,69 and the reliance on the unjust enrichment principle may encourage such a view.70 This is similar to the notion which is sometimes still expressed that the action for money had and received turns on the unconscionability of the defendant’s conduct, with reference to justice and the equity of the case.71 This discretionary approach is especially unacceptable as regards the recognition of proprietary rights, since the consequence of recognising such rights is so important, particularly since it gives the claimant priority over the defendant’s creditors. The essential uncertainty of a discretionary approach would discourage settlement out of court. Therefore, any resort to vague discretion to create proprietary rights should be rejected. This view was strongly expressed by Lord BrowneWilkinson in Foskett v McKeown:72 The rules establishing equitable proprietary interests and their enforceability against certain parties have been developed over the centuries and are an integral part of the property law of

66 67 68 69

70 71 72

Foskett v McKeown [2001] 1 AC 102, 127 (Lord Millett). See Boscawen v Bajwa [1996] 1 WLR 328, 334 (Lord Millett). Especially in [2000] RLR 257. See Burrows (2001) 117 LQR 412, 423–28. Such views are expressed in various of the papers in Restitution and Insolvency, Rose (ed) (Mansfield Press, 2000), such as Finch and Worthington, pp 1–20, Rotherham, pp 113–33, Wright, pp 206–19 and McCormack, pp 261–75. See also Rotherham, Proprietary Remedies in Context (Hart Publishing, 2002), especially pp 343–47; Wright, The Remedial Constructive Trust (Butterworths, 2000). This is not to deny the importance of normative analysis as a critical device, but such analysis should not be converted into the principle for determining whether property rights will be recognised. Birks does not support such an approach: (2000) 29 UWALR 1. See most recently Vedatech v Crystal Decisions [2002] EWHC 818 (Jacobs J). [2002] 1 AC 102, 109. See also Lord Millett, ibid, 127.

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England. It is a fundamental error to think that, because certain property rights are equitable rather than legal, such rights are in some way discretionary.

The inadequacy of this overtly discretionary approach can be tested with reference to Foskett v McKeown itself. What was the just result in that case, where both claimants and defendants were innocent of any wrongdoing? The judges themselves expressed clearly divergent views as to where the justice of the case lay on the facts.73 It is certainly fair that the beneficiaries should recover the amount which had been misappropriated from the trust and which was used to pay at least two of the instalments.74 But should they get more than this? The beneficiaries had been the victims of a criminal misappropriation of trust property which had been used to make an involuntary contribution to the insurance policy. The children had made no such contribution and it was their father who committed the crime,75 but should the sins of the father be visited upon the children? Is it of any use even to consider such matters? The introduction of a vague discretion which is not ‘directed by principled analysis of the facts’ is simply unworkable.76 Burrows has argued in favour of a more discretionary, but purportedly principled, approach to the recognition of rights in substitute property by reference to a number of factors.77 For example, he suggests that the award of proprietary rights should be determined by the consequences of awarding the right, especially whether the claimant should be entitled to priority over creditors and whether he or she has taken the risk of the defendant’s insolvency.78 Although Burrows considers this approach to be principled, the sophisticated nature of his scheme, involving a wide variety of factors to consider, is too complex to provide certainty and predictability. It could only collapse into uncertainty and discretion. Similarly, Lord Hope in Foskett v McKeown79 had regard to the terms of the insurance policy, the conduct of the parties and the consequences to them of allowing and rejecting the claim, in order to determine whether it was fair, just and reasonable for the claimant to be awarded a proportionate interest in the proceeds of the insurance policy. But how are such factors to be weighed against each other? If such an approach had been adopted by all of the judges in the case it is not clear what the decision would have been. This is no way to determine how property rights should be recognised and vindicated. Sir Robert Walker has criticised the emphasis on principles and rules, saying:80 ‘Lord BrowneWilkinson’s insistence on “hard-nosed property rights” (to the exclusion of any consideration of what is conscionable or unconscionable) seems, with great respect, so general as to be a bit of a bed of Procrustes, like parts of his speech in Tinsley v Milligan.’ But this is a rather unfair criticism. As Sir Robert Walker himself acknowledged, Foskett v McKeown was a case where the equitable proprietary interest arose from an express trust, so there was no need to consider explicitly questions of unconscionability to identify the trust. Further, the notion of ‘unconscionability’ is not necessarily incompatible with hard-nosed property rights.81 There is a long-standing confusion as to

73 74 75 76 77 78 79 80

Sir Robert Walker [2000] RLR 573, 575. Compare [2001] 1 AC 102, 115 (Lord Steyn) with [1998] Ch 265, 303 (Morritt LJ) and [2001] 1 AC 102, 140 (Lord Millett). [2001] 1 AC 102, 119 (Lord Hope). Ibid, 112 (Lord Steyn). See Sir Robert Walker [2000] RLR 573, 575. See also [2001] 1 AC 102, 115 (Lord Steyn). (2001) 117 LQR 412. Ibid, 424 et seq. [2001] 1 AC 102, 120. [2000] RLR 573, 575.

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the function of unconscionability in equity, and it is vital for the future development of restitution and equity that this confusion is removed. There is an assumption that the common law is rulebased and that equity imports an overtly discretionary approach. But equity does not operate in that way.82 This is made clear by the approach of the majority in Foskett. Although the phrase ‘hard-nosed property rights’ might be unusual, it imports principle within the law of property, especially in equity. Consistent with this assertion of principle and rejection of the discretionary approach is the fact that the remedial constructive trust, namely a trust which arises through the exercise of discretion rather than principle, does not and should never form part of English law.83 It is alien to the equitable way of doing things.84

Application of the defence of change of position The significance of the debate as regards the proper characterisation of proprietary restitutionary claims and remedies is especially relevant to the application of the defence of change of position.85 Although that defence has been recognised for over a decade, we still know very little about it. In Lipkin Gorman v Karpnale Ltd86 the House of Lords recognised change of position as a defence to claims founded on unjust enrichment. This was at a time when the prevalent view about the law of restitution was that restitution and unjust enrichment ‘quadrated’ and so were interchangeable. It followed that the defence was available to all restitutionary claims, although Lord Goff did indicate that it might not be available to a claim founded on wrongdoing because the defence should not be available to a wrongdoer or somebody who had acted in bad faith.87 However, the ‘quadration’ of unjust enrichment and restitution no longer represents English law following Foskett v McKeown.88 Lord Millett recognised that this had a knock-on effect for the application of the defence of change of position. He assumed, following the dictum of Lord Goff in Lipkin Gorman, that the defence was only available to unjust enrichment claims so it did not apply to claims founded on the vindication of property rights. Consequently, a defendant who has received property in which the claimant has a proprietary interest and who, in reliance on that receipt, incurs expense which would not have been incurred but for the receipt of the property, must still make restitution to the claimant. This may seem harsh, since the defendant’s change of position will have been innocent,89 but it is presumably a logical consequence of characterising the

81 82 83 84 85

86 87 88

See p 220, below. See p 220, below. It was rejected in Re Polly Peck International plc (No 2) [1998] 3 All ER 812. See also Fortex Group Ltd v MacIntosh [1998] 3 NZLR 171. Cf Westdeutsche Landesbank Girozentrale v Islington LBC [1996] AC 669, 716 (Lord Browne-Wilkinson). See also Pettit v Pettit [1970] AC 777; Gissing v Gissing [1971] AC 886, 898 (Lord Morris of Borth-y-Gest), Cowcher v Cowcher [1972] 1 WLR 425, 430 (Bagnall J); Re Goldcorp Exchange Ltd [1995] 1 AC 74, 99 (Lord Mustill). The characterisation may also be significant in respect of private international law, in determining which court has jurisdiction and what the choice of law rule might be. See Virgo, ‘What is the law of restitution about?’ in Restitution: Past, Present and Future, Cornish, Nolan, O’Sullivan and Virgo (eds) (Hart Publishing, 1998), p 231 et seq. [1991] 2 AC 548. Ibid, 580. [2001] 1 AC 102.

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claim as being founded on ‘hard-nosed property rights’. This is because property rights should be treated as secure rights which should not be defeated by innocent changes in the defendant’s circumstances.90 The application of the defence of change of position may, however, be more complicated than Lord Millett suggested. Where the claimant seeks a personal restitutionary remedy to vindicate a property right,91 then the reliance on the property right is weaker and a defence of change of position might be applicable. This is because the claimant is not seeking to recover the property in which he or she has a proprietary interest, but simply relies on the fact that the defendant has received such property to ground the claim. Once the claim has been established the claimant only then seeks to recover the value of the benefit received by the defendant. Since this is value in which the claimant does not have a proprietary interest, a stronger case can be made that the claimant’s right to it should compete with the defendant’s, so that the defendant should be able to plead his or her change of position in reliance on the validity of the receipt. Where, however, the claimant seeks to recover specific property, the defendant’s change of position should not be relevant. Such a claim should only be defeated if the defendant is a bona fide purchaser for value of the property, since such a defence operates to defeat the claimant’s proprietary interest so that the basis for the proprietary claim fails.92 This application of the change of position defence follows logically from distinguishing between unjust enrichment and vindication of property rights claims. If proprietary claims to substitute property did depend on the defendant’s unjust enrichment, it would follow logically that the defence of change of position should be available, which would unacceptably weaken claims to recover substitute property.

CLASSIFICATION OF CLAIMS The prime reason for Birks’s criticism of the vindication of proprietary rights theory is that it is inconsistent with his classification of events into the categories of consent, wrongs, unjust enrichment and other events. Foskett v McKeown implicitly challenges the validity of this model of classification. It follows that the Birks model of classification requires careful reconsideration to determine whether it is both valid and desirable. The usefulness of the event/response method of classification can be tested by considering how equitable property rights arise. There is an immediate inconsistency between Birks’s classification and equity since proprietary rights are not created, and should not be created, as a response to unjust enrichment.93 It is clear, however, that such rights can arise as a response to consent, as exemplified by the express trust. Equally, such rights can arise as a response to equitable

89 90 91 92 93

If the defendant suspected that somebody had a proprietary interest in the property which he or she had received, then the defendant would have been acting in bad faith and so the defence would not be available anyway. See Fox [2000] RLR 465, 488. This being the preferable explanation of Lipkin Gorman v Karpnale Ltd [1991] 2 AC 548. See Virgo, op cit, n 2, pp 14–15. See Ministry of Health v Simpson [1951] 2 AC 251 and Re J Leslie Engineers Co Ltd [1976] 1 WLR 292, 299 (Oliver J). See p 211 et seq, above.

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wrongdoing, at least where there is a breach of fiduciary duty, as exemplified by Attorney-General for Hong Kong v Reid.94 But there are two other situations where equitable property rights are created which do not fall within any of these categories, and so must fall within the category of ‘other events’. These other two situations are substitution and unconscionability. ‘Other events’ is therefore a very large category. So large in fact that it undermines the usefulness of this mode of categorisation, at least as regards the recognition of property rights.

By substitution The most controversial aspect of the debate concerning proprietary restitutionary claims relates to claims to substitute property.95 For example, where a trustee has misappropriated property from a trust and used this to purchase an asset which is given to the defendant, we know that, subject to the rules on tracing, the beneficiary of the trust should be able to seek restitution of the asset from the defendant. But the beneficiary never had an equitable proprietary interest in this substitute asset, so how can he or she claim to recover it? In other words, how can we conclude that the new asset represents the property which was subject to a trust? For Birks,96 and others,97 the explanation is unjust enrichment. Lord Browne-Wilkinson in Foskett v McKeown98 disagreed. He asserted that the original property right can be transferred to the new asset without needing to identify any new event.99 But since the claimant has never had a proprietary interest in the asset before, how can the claimant assert title to that substitute asset? Implicit in Lord Browne-Wilkinson’s analysis is the notion that the fact of substitution creates a proprietary interest in the new asset by operation of law because the substitute represents the original asset.100 This is consistent with the leading cases on tracing.101 One of the reasons for Birks’s conclusion that a causative event is needed to explain how the claimant can recover substitute property is that ‘the right brought down on the substitute is often different in content from the right in the original’.102 For example, the claimant may originally have an equitable proprietary interest in an asset, but only a lien over the substitute. But this analysis confuses the distinct processes of tracing value and then determining the appropriate method of vindicating property rights by claiming. First we are concerned with the identification of a right in the substitute property by virtue of the tracing rules. Only once that right has been identified is it

94

[1994] 1 AC 324. See also Keech v Sandford (1726) Sel Ch Cas 61; Cook v Deeks [1916] 1 AC 554; Williams v Barton [1927] 2 Ch 9 and Boardman v Phipps [1967] AC 46. 95 Swadling, English Private Law, Birks (ed) (OUP, 2000), pp 354–56. Substitution is also significant as regards proprietary claims at law, as a mechanism for recognising legal title in substitute assets. 96 [2002] CLP 231. But compare p 245 where he asserts that substitution is ‘an independent constitutive event’, although he goes on to assert that it is a species of unjust enrichment. If he did not add that qualification there would be no difference between us. 97 See especially Burrows (2001) 117 LQR 412 and Smith, The Law of Tracing (OUP, 1997), pp 300–01. 98 [2001] 1 AC 102. 99 Ibid, 109. 100 See also Swadling, English Private Law, Birks (ed), p 354 and Rickett and Grantham (2000) MLR 905. 101 Such as Taylor v Plumer (1815) 3 M & S 562, 757 (Lord Ellenborough CJ). 102 [2002] CLP 131, 244.

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appropriate to determine, by reference to recognised principles and the nature of the pleaded claim, the most appropriate way of vindicating it. For example, is personal or proprietary relief appropriate, and if it is proprietary, is it merely a security interest or an equitable proprietary interest, and if it is a property interest is it sole or joint? Also, as recognised by Lord Millett in Foskett v McKeown, it is not possible to claim an interest which is more extensive than that which the claimant first had.103 So, if the claimant originally had a lien it is not possible to claim a proportionate share. Once it is accepted that the claimant’s interest in the substitute property arises by virtue of the law of property rather than unjust enrichment, it is still necessary to explain how this proprietary right arises. Is it automatic or must the claimant exercise a power? The law on this point is confused. There is authority which suggests that the claimant obtains an immediate interest in the substitute asset104 and Lord Millett in Foskett did adopt such an approach.105 Alternatively, there is authority which suggests that the claimant only has a power to crystallise his or her proprietary interest. This power analysis has been recognised by Lord Goff as regards common law proprietary claims.106 Foskett v McKeown provides some support for this power analysis. Lord Millett did recognise that the claimant has a power,107 but this relates to the choice to pursue a claim either against the original asset or its substitute, as long as both can still be identified. The preferable view is that, once the original asset cannot be identified, the interest which was in that asset is extinguished and is automatically replaced by a proprietary interest in the substitute. Where, however, the original asset and the substitute can both be identified then the claimant can elect either to claim the original asset or its substitute. If he or she chooses to pursue the substitute this should operate as a mechanism to extinguish the proprietary interest in the original asset and to transfer it to the substitute, unless that substitute has been obtained by a bona f ide purchaser for value. But it must not be forgotten that such a choice is only available once the elements of the substantive claim can be identified, namely that the claimant had a prior proprietary interest which can be traced into the substitute asset. The process of identifying a proprietary interest in the substitute asset by operation of law is made much easier by the recognition in Foskett that the function of the tracing rules is to identify value rather than property.108 The value in the original asset is transferred into the substitute and it is this value which the claimant claims. This tracing of value from one asset to another enables the claimant to assert proprietary rights in the substitute, and this answers the question raised by Birks: ‘What reason can be given why the law should give substitution any proprietary effect?’109 If one asset represents another in which the claimant had a proprietary right then the claimant can elect to bring a proprietary claim against the substitute without any need to rely on unjust enrichment.

103 [2001] 1 AC 102, 128. 104 Cave v Cave (1880) 15 Ch D 639 (Fry J). See also Re Diplock [1948] Ch 465; Smith, The Law of Tracing (OUP, 1997), pp 356–61. 105 [2001] 1 AC 102, 134. 106 Lipkin Gorman v Karpnale Ltd [1991] 2 AC 548, 573. See also Re French’s Estate (1887) 21 LR Ir 283. 107 [2001] 1 AC 102, 127. 108 See p 206, above. 109 [2002] CLP 231, 247. See also Burrows (2001) 117 LQR 412, 418.

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Unconscionability There are certain situations which equity recognises are sufficient to create an equitable proprietary interest where the defendant’s conduct can be characterised as unconscionable. This is an equitable notion which, although it implies elements of wrongdoing, is properly treated as a distinct event. Probably the most important modern statement of the significance of conscience is a dictum of Lord Browne-Wilkinson in Westdeutsche Landesbank Girozentrale v Islington LBC:110 Equity operates on the conscience of the owner of the legal interest. In the case of a trust, the conscience of the legal owner requires him to carry out the purposes for which the property was vested in him (express or implied trust) or which the law imposes on him by reason of his unconscionable conduct (constructive trust).

But the reliance on conscience by itself is not a trigger for the recognition of a trust, of whatever kind. Rather, it is a foundation upon which principles can be built.111

Resulting trust Although the resulting trust might be considered to fall within the category of consent, since it is sometimes categorised as depending on the common intention of the parties,112 the preferable view is that it arises by operation of law,113 and so within the category of unconscionability, regardless of the debate as to whether this type of trust is triggered by a positive intent of the transferor or the absence of the transferor’s intent to pass a beneficial interest to the recipient.114

Constructive trust The fact that unconscionability operates as a unifying principle rather than as a trigger for the application of vague discretion is particularly well illustrated by the law on constructive trusts. Although the defendant’s unconscionable conduct is the foundation for the recognition of such trusts, it is not enough for a claimant simply to assert that the defendant has acted unconscionably. This is too vague to operate as a unifying principle for constructive trusts. Instead, the courts must determine whether the defendant’s conduct falls within recognised categories. For example, it has been used to enforce mutual wills,115 to ensure that an executor de son tort does not benefit from abuse of position116 and, where a defendant has denied property or a share in property, to a claimant where there was a common understanding of shared ownership.117 Recently a new category has been identified, which is consistent with the established categories, but which

110 [1996] AC 609, 705. See also T Choithram International SA v Pagarani [2001] 1 WLR 1, 12 (Lord BrowneWilkinson); Gillett v Holt [2001] Ch 210, 225 (Robert Walker LJ). 111 Like notions of ‘reasonableness’ in tort and ‘proportionality’ for cases concerning the application of the European Convention on Human Rights. Cf Hudson, this collection, 366. 112 Westdeutsche Landesbank Girozentrale v Islington LBC [1996] AC 669, 708 (Lord Browne-Wilkinson). 113 Air Jamaica v Charlton [1999] 1 WLR 1399, 1412 (Lord Millett). 114 See Maudsley and Burn’s Trusts and Trustees: Cases and Materials (Butterworths, 6th edn, 2002), pp 180–90. 115 Re Cleaver [1981] 1 WLR 939. 116 James v Williams [2000] Ch 1. 117 Lloyds Bank plc v Rosset [1991] 1 AC 107; Yaxley v Gotts [2000] Ch 162; Banner Homes Group plc v Luff Developments Ltd [2000] Ch 372.

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threatens to swamp them. This has simply been called ‘unconscionable conduct’. Although unconscionability is at the heart of this category it remains distinct because the courts have sought to identify the nature of unconscionability with a degree of precision by focusing on the fault of the defendant. It is this form of constructive trust which was explicitly recognised by Lord BrowneWilkinson in Westdeutsche Landesbank Girozentrale v Islington LBC,118 when examining the earlier decision of Chase Manhattan Bank v Israel-British Bank (London) Ltd.119 In that case the plaintiff had mistakenly paid the defendant the same amount of money twice. Goulding J held that the plaintiff had an equitable proprietary interest in the money because ‘a person who pays money to another under a factual mistake retains an equitable property in it and the conscience of the other is subjected to a fiduciary duty to respect his proprietary rights’.120 The result, but not the reasoning, was endorsed by Lord Browne-Wilkinson in Westdeutsche. He suggested that the plaintiff may have had an equitable proprietary interest in the money because the defendant knew that the plaintiff had paid the money to him by mistake within two days of the defendant having received the money. As Lord Browne-Wilkinson said: Although the mere receipt of the moneys, in ignorance of the mistake, gives rise to no trust, the retention of the moneys after the recipient bank learned of the mistake may well have given rise to a constructive trust.121

Although the emphasis on the knowledge of the defendant means that this category of constructive trust purports to be principled and predictable, there remains an inherent uncertainty within it. For example, what degree of fault is sufficient for the defendant’s conscience to be affected so that he or she holds the property on trust? Also, at what point must the defendant’s conscience be affected?122 It would be preferable to assert that the unconscionability should be tested at the time of receipt.123 Although this category of constructive trust requires clarification, it does at least purport to be principled, and so is consistent with the general trend of restitutionary relief within equity. All the categories of constructive trust are linked by the defendant’s unconscionability New categories of constructive trusts can be recognised, but only by reference to the established categories and the general notion of unconscionability.

Summary Birks has acknowledged that, although his classification of events is derived from Roman law, the Roman classification was confined to personal rights and did not encompass proprietary rights.124 Whilst that classification may indeed be appropriate for the English law of personal obligations, it is plainly inappropriate for the determination and vindication of rights within the law of property. 125

118 119 120 121 122 123 124

[1996] AC 669. [1981] Ch 105. Ibid, p 119. [1996] AC 669, 715. See Virgo, op cit, n 2, pp 633–34. Birks and Mitchell, English Private Law, OUP, Birks (ed), p 597. (1996) 26 UWALR 1, 9.

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There is neither empirical evidence nor convincing justification for recognising proprietary interests as a result of the defendant’s unjust enrichment.126 Whilst consent and wrongdoing can explain the recognition of proprietary interests, it is in fact the miscellaneous category of ‘other events’ which is most significant. The conclusion is clear: the law of property is different from the law of obligations. Different policies and principles apply within property and it is simply not possible to fit the square head of property within the round hole of obligations.

CONCLUSIONS Although there is much to be learnt from Foskett v McKeown regarding the detailed application of the law of property, especially to proprietary restitutionary claims to substitute property, there are three lessons of profound importance to our understanding of the relationship between the law of property and obligations. First, although Birks’s classification of events may be an appropriate way of organising the law of civil obligations, it should have no application to the law of property where things are done differently. Secondly, when considering the operation of property law, principle must prevail over the application of vague discretion. Finally, although the law of unjust enrichment has a vital organising role within the law of obligations, it has no role within property law. Vindication has been vindicated.

125 The difficulty which may be faced in distinguishing cleanly between property and obligations claims may weaken the usefulness of Birks’s scheme of classification for the latter type of claims as well. 126 See p 211 et seq, above.

Chapter 11 Restitution of property you do not own anyway Andrew Tettenborn INTRODUCTION If I receive an asset to which you have a better claim than I do, obviously I must give it up to you. But is this because I have been unjustly enriched at your expense, or for some other reason? As will appear, this point may seem a mere taxonomical argument: but—unlike many others of this sort—it actually matters quite a lot. Take half a dozen ‘typical’ restitutionary situations, all pretty standard stuff in books on the subject: • X steals P’s car and sells it to D1, who uses it for a few months and then re-sells it to D2. • D1 filches £1,000,000 from his employer P by forging cheques against P’s account. He uses £500,000 to buy a house from D2, who has reason to know what is going on, gambles £300,000 away with D3, and keeps the rest. The house has since, as is the way with houses, doubled in value. • P, a mortgage lender, pays purchase monies to D to keep as stakeholder, not to be released unless certain conditions are satisfied. D nevertheless improperly releases them to the borrower. • P pays £1,000,000 to D to be invested on his behalf and kept separately from D’s own funds in the meantime. D fails to invest it, and P wants it back. • D defrauds P of £1,000,000. • D, while acting as P’s agent, takes a bribe of shares worth £ 1,000,000 from X as an inducement to conduct P’s business in a particular way. The shares have now doubled in value. These cases, for all their disparities, have two important features in common. First, in all of them D’s enrichment consists in the direct receipt of money or some other asset—shares, cars, land, or whatever—either from P or from some third party. Secondly, and more importantly, in every one of them the essence of P’s claim against D is that the asset D got is one to which P has a better right than D. To put the point more precisely, P’s case is that, either at the time D received the asset or at some later stage, P had (or has) a proprietary interest in it which prevailed (or prevails) over D’s own interest. Yet again, to turn the argument the other way round, all these scenarios involve supposedly ‘restitutionary’ claims based on D having in his hands, or having had under his control, some asset to which he had no right. Cases like this obviously raise a number of issues of interest to restitution lawyers, such as whether P ought to have a proprietary claim against the defendant D, with the consequences that brings— notably, preference in D’s insolvency and the ability to get at any appreciation in the property concerned while in D’s hands—or how far P ought to be able to lay claim in specie to the proceeds of wrongdoing in the hands of third parties by using the processes of following and tracing. But in this chapter I want to take a step further back and ask how far, if at all, they raise issues of restitution (in the sense of unjust enrichment) at all. The topic is not, of course, a new one. Any standard restitution book will have an introductory section on the boundary between unjust enrichment and the law of property (though just where they put it is another matter). What I want

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to do here is to suggest a new approach to it. Briefly, my thesis is that if we want to prevent the law of unjust enrichment over-extending itself, and find a convincing place to draw the line where unjust enrichment ends and the law of property begins, we have to begin by asking just what we mean by ‘enrichment’ in the context of the law of restitution.

THE RELEVANCE OF ‘ENRICHMENT The reason why enrichment is relevant to cases of the kind outlined above is straightforward. Before any complaint of unjust enrichment can get off the ground, it is elementary law that P has to show that D is, or has been, enriched in some way. But if we apply this to the six situations above, then a further awkward question immediately arises. If all P can point to in seeking relief is the fact that D has received, or is now in control of, an asset to which he is not entitled but P is, how can he then argue that D has been enriched at all? The point arose very nicely in Portman Building Society v Hamlyn Taylor Neck,1 a case which can act as a very effective starting point to the argument here. Mortgage lenders transferred mortgage monies to solicitors on the basis that they were to be released to the borrowers if, and only if, certain conditions were fulfilled: notably, that as far as the solicitors had reason to know the borrowers intended to use the property as their own residence. In fact the premises were to be run as a guest house, as the solicitors probably ought to have realised. Nevertheless the monies were released to the borrowers and subsequently lost irretrievably. By the time the lenders sued, any claims against the solicitors for damages for breach of duty were statute-barred. To get round the obstacle, the lenders attempted to reformulate their claim as one for restitution, where arguably different principles of limitation applied. But they were roundly rebuffed by Millett LJ in the Court of Appeal. Before any such claim could lie, he pointed out, the defendant had to have been unjustly enriched: and here, the solicitors had not been enriched at all. The monies were trust monies, which had been properly paid into the relevant trust account. The firm had never made any claim to them, and indeed had acknowledged the lenders’ title to them all along.2 One might have thought that this decision, which was met with some cautious approval3 despite not being unanimously welcomed,4 had cleared the air somewhat on the issue of whether receipt of property to which one is not entitled counted as ‘enrichment’ for restitution purposes. If the fact that the monies received were trust monies at the time of transfer automatically cuts out any claim that the person doing the receiving has been enriched, cannot similar reasoning be applied to any case where what the defendant has received does not belong to him? In fact, as will appear below, matters are by no means as simple as this, and the question it raises, of which side of the property/unjust enrichment boundary cases of this sort fall, remains highly live. Nor, perhaps surprisingly, is it extensively dealt with by restitution theorists. Discussions of the nature of enrichment tend to turn very much on different and more esoteric issues, such as whether ‘pure’

1 2 3 4

[1998] 4 All ER 202. At p 206 ff. Eg, Grantham and Rickett [1998] LM & CLQ 524; Grantham and Rickett, Enrichment and Restitution in NZ, Hart, 2000, p 138 ff; Virgo, The Principles of the Law of Restitution, OUP, 1999, pp 28–29. Eg, Fox [2000] RLR 465, 484. The decision also, of course, goes against Birks’ long-standing views as to the nature of enrichment, on which see below.

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services can be enriching, or whether a plea of subjective devaluation is available in a given case. Where the books do refer to enrichment by receipt of saleable property or cash, as often as not this is simply to make the point that such receipt is normally sufficient of itself to enrich the defendant5—reasoning that is all very well where the defendant actually becomes owner of the property or cash he receives, but that leaves untouched the point of how far the mere control or enjoyment of property, unaccompanied by ownership or other right, can benefit anyone. The idea that in at least some cases of this sort unjust enrichment is not in issue at all may disconcert restitution lawyers. Many of them will no doubt disagree with it for a number of reasons (of which more below). But the arguments in favour of it are formidable.

PAST HANDLING OF THE CLAIMANT’S PROPERTY Let us begin with a particularly controversial case. Suppose that monies or assets are filched from employers P by a rogue employee X and then pass, or are laundered, through the hands of a third party D such as an accountant or stockbroker.6 At present we all know that D’s liability to P depends on the equitable principles of ‘knowing receipt’: that is, something that requires at least some degree of dishonesty, or malpractice, or at least knowledge, on D’s part.7 We all know as well, however, that many commentators say that this is wrong. They contend that situations of this sort should be regarded as involving unjust enrichment.8 D, they argue, is enriched by the value of what he got; and from this it follows that his liability to P to refund that sum should be strict (since you must always return unjust enrichment whether or not you acted wrongfully in gaining it), subject to the established unjust enrichment defences such as change of position.9 In support of this, indeed, it can be pointed out that in one case such an analysis is indeed applied, namely the Ministry of Health v Simpson10 situation, where estate assets are transferred to someone not entitled to them.11 Now, grant ‘unjust’ for the sake of argument: and assume further, to simplify matters, that we can discount defences like bona f ide purchase or change of position. For example, imagine that D is a donee, or that he had some idea of what was, or might be, going on. Having thus cleared the

5 6

7 8 9

10 11

Eg, Burrows, Law of Restitution, 2nd edn, Butterworths, 2002, p 16 et seq; Virgo, The Principles of the Law of Restitution, Ch 4. The cases are legion. Agip (Africa) Ltd v Jackson [1991] Ch 547 is as good an example as any. Another, less often discussed in the restitution context because of the difficulties of the law of conversion, is where a stolen chattel, such as a car, is bought and sold on by a dealer. But, as pointed out below, it raises exactly the same issues. Eg, Underhill and Hayton, Law of Trusts & Trustees, 15th edn, Butterworths, 1995, p 409 et seq. Though there is some argument, if this is right, as to what the ‘unjust factor’ is. See, eg, Swadling in Birks (ed), Frontiers of Liability, Vol 1, OUP, p 41; Swadling [1996] LM & CLQ 63; Grantham and Rickett [1996] LM & CLQ 463. But that is beyond the purview of this chapter. See in particular Birks [1989] LM & CLQ 296; Birks in McKendrick (ed), Commercial Aspects of Trusts and Fiduciary Obligations, OUP, 1992, Ch 8 at p 159; Millett (1985) 107 LQR 71; Underhill & Hayton, Trusts & Trustees, 15th edn, p 415 et seq. See too Cornish et al (eds), Restitution: Past, Present and Future, Hart Publishing, 1998, Ch 15 (Lord Nicholls); Nourse LJ in BCCI (Overseas) Ltd v Akindele [2001] Ch 437, 455– 56. [1951] AC 251. Eg, Birks [1989] LM & CLQ 296.

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decks, the awkward question remains. Why differentiate this case—or for that matter the Ministry of Health v Simpson scenario—from the situation in the Portman case? In just what sense has D been enriched by the value of the funds he handled? Ex hypothesi he never owned them, at least in the eyes of equity. On any normal reckoning the balance of his assets and liabilities did not increase by a penny piece when he got them:12 and by parity of reasoning his financial position was similarly unaffected when he later alienated them. Admittedly, he might have misguidedly thought that he was entitled to deal with them as owner while he had them. He might even have behaved as though he had that right. But this cannot affect the point. Enrichment is an objective concept. You either are enriched or you are not: your opinion as to your rights to the alleged enrichment changes nothing. If this argument is correct, we obviously have to look elsewhere for D’s elusive enrichment. But where? Logically, we must say one of two things. The first possibility is to argue that that there is some enrichment separate from, or consequential on, the use or receipt of the funds concerned (since their receipt on its own is wealth-neutral). Alternatively, we could presumably talk about some kind of ‘deemed’ or ‘constructive’ enrichment. Of these, the second idea is so obviously question-begging that we need not waste time on it. So what about the first? Now, it is certainly true that D may have been ultimately enriched by some means other than the mere receipt of the assets. If the assets are in cash form, he may have used them to pay off existing debts, or to cover general living expenses that otherwise would have swelled his overdraft. If he did, there is little difficulty in saying that the resulting saving in expense should count as an enrichment, as it does elsewhere in the law of restitution. Similarly, too, with non-cash assets. These often do have a use value quite separate from any capital value: witness the flourishing business of car hire, or the repo market in the case of intangibles. If D has used P’s assets to make further gains, then few would argue with the proposition that there has been an enrichment to that extent. But possibilities of enrichment of this sort do not, it is suggested, save the ‘unjust enrichment— strict liability’ theory. This is for two reasons: (a) enrichment of this sort is not always present, and (b) even where it is, its measure is entirely contingent, and not in any way tied to the capital value of the assets. To demonstrate (a), suppose the assets in question, owned at law or in equity by P, are at all material times worth £10,000. D buys them at that price; shortly afterwards, he negligently loses them. There is no way in which, at any point in this transaction, D can be said to have been enriched by £10,000 or any sum whatever. All he has done is pay good money for a bad asset (that is, one to which he has no right) and then lose that asset. By no stretch of the imagination can either transaction be said to have made him richer. The same argument, it is suggested, also applies a fortiori where D both received and disposed of the property gratis. If you add zero to your net wealth, and then take it away again, you end up where you started. Nothing— or at least nothing of interest to your accountant—has happened. Illustrating proposition (b) is even more straightforward. Imagine D buys P’s asset for £10,000 and sells it for £12,000. He has undoubtedly profited. But, it is suggested, to anyone other than a dyed-in-the-wool restitution lawyer the measure of his gain is £2,000, not £20,000. Admittedly, we might just choose to disregard the £10,000 paid by P (for example, on the basis that he ought to

12

Indeed, in many cases it is rather more plausible to say that it reduced them. If you pay good money for a bad title, you lose the price and gain nothing in return.

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have known what was going on and therefore cannot invoke change of position, bona f ide purchase or any like defence). We might then argue that he is therefore enriched by the full £12,000 (the good money he got for an asset he did not own). But even this does not really get the ‘unjust enrichment—strict liability’ theorist out of his bind, since the amount of any enrichment depends, not on the value of the asset, but on how much the defendant got for it. Change the facts and suppose D sold the asset, not for its market value, but for something less, say £6,000. If so, this and not the market value is presumably the amount by which he is enriched. The ‘knowing receipt’ case is one example of the difficulties of inferring ‘enrichment’ from a past act of temporary control. It is, of course, not the only one. Exactly the same issues arise with stolen property, for instance where P’s car is stolen by X and then bought and later sold by D. Oddly enough, English law does make D strictly liable here for the full value of the car. This, however, is not through any theory of unjust enrichment, or any idea that D is somehow richer when in possession of a stolen car than when out of it.13 It is simply a question of the peculiarities of the tort of conversion—peculiarities which, incidentally, are not beyond controversy and which legal systems outside the common law world have tended to eschew.14 Again, there is old authority that where P’s cash finds its way into D’s hands—for instance, where X finds it and gives it to D— P can sue D for money had and received, even though he has not been divested of his title to the money.15 But in this case too, it is difficult to see any plausible case for saying that D has been enriched. True, in Lipkin German v Karpnale Ltd,16 where stolen money found its way into the hands of a recipient who could not claim the protection of a bona fide purchaser, it was apparently assumed that this was an action in unjust enrichment: but, as has been pointed out,17 this seems a questionable assumption if in fact title to the money remained throughout in the plaintiffs.

PRESENT CONTROL OF THE CLAIMANTS PROPERTY So far I have dealt with the case of the defendant who was once, but is no longer, in control of an asset to which the claimant has a better right than he does. I have suggested that he is never enriched by its mere receipt, even though he may be incidentally enriched in varying amounts by other means—for example, when he sells or disposes of it, or possibly when he uses it. I now turn to a second situation: the defendant who, at the time of the action, does remain in control of something in which the claimant claims an interest. For an uncontroversial instance, take a Quistclose trust.18 A lender, P, provides funds to D for a particular project. If the project is aborted for any reason, we know that P has a right to get his money back in specie, even if D is insolvent.

13 14 15 16 17

One could, of course, say that the use of the car had some value to D: for example, if he hired it out, or for that matter used it to drive his children to school, thus saving wear and tear on his own vehicle. But this yields an enrichment of the use value, not the value of the car itself: see above. Cf generally Palmer and McKendrick (eds), Interests in Goods, 2nd edn, LLP, Ch 32. Holiday v Sigil (1826) 2 C & P 176. See too Clarke v Shee (1777) 1 Cowp 197; Calland v Lloyd (1840) 6 M & W 26. Voidable transfers have been analysed in the same way, with avoidance creating a liability in money had and received: eg, Reid v Rigby [1894] 2 QB 40. [1991] 2 AC 458. Eg, in Goff & Jones, Law of Restitution, 5th edn, Sweet & Maxwell, 1998, p 77 et seq.

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Here there is, at least, some case for regarding P’s right as restitutionary. D received P’s money on the understanding that it was to be used in a particular way. If it cannot (or will not) be so employed, then it can be argued that D would be unjustly enriched if he were allowed to keep it. At the very least the law could be acting prophylactically, to prevent an unjust enrichment arising, even if it is not intervening to correct one that has already happened. But, it is submitted, the difficulty referred to above still arises. Since the House of Lords decided Twinsectra,19 it is now clear that, in the Quistclose situation, the funds belong in equity to the lender from the moment the borrower receives them, unless and until they are applied to the stipulated purpose.20 And, if this is right, it is hard to see that the borrower is any richer after receiving the funds than before. In so far as the lender does have a right arising out of the receipt of the funds, it is not a right to reverse the borrower’s unjust enrichment. It is merely a right to enforce a trust:21 to get back what was his in equity all along. How might a restitution lawyer answer this? One possible way is to argue, with Professor Birks, that ‘restitution’, being a mere response to a legal situation, encompasses more than unjust enrichment, and is perfectly apt to cover the situation where the defendant is in possession of something he is not entitled to.22 But this argument, beguiling as it is, rather sidesteps the question, which is concerned with the boundaries of unjust enrichment as such, rather than those of ‘restitution’ in any wider sense. A second, braver, argument involves taking the bull by the horns, and saying that even though receipt of another’s asset may not enrich the receiver, retention of it does give rise to an unjust enrichment. As Professor Burrows pithily put it, ‘the defendants gain, by retention of the property, is the plaintiff’s loss of that property’.23 Professor Birks is even more uncompromising: ‘if I receive money from you but the money remains yours, technically I am no better off, but factually and realistically I am now in control of the buying power represented by that money’.24 On this argument, forcing D to pay its value to the claimant, or at least to respect the claimant’s rights in it, has the effect of reversing an unjust enrichment (or possibly preventing it arising in the first place). But even this, it is submitted, still faces serious difficulties, once we ask in precisely what sense the wrongful possessor or controller of someone else’s property is enriched. My wealth, it is suggested, is what I rightfully have. If I insist on remaining in possession of your car or money when I should not be, or if I hold shares on trust for you but refuse to

18 19 20

21 22 23 24

See Quistclose Investments Ltd v Rolls Razor Ltd [1970] AC 567. Twinsectra Ltd v Yardley [2002] 2 AC 164. ‘Like all resulting trusts, the [Quistclose] trust in favour of the lender arises when the lender parts with the money on terms which do not exhaust the beneficial interest. It is not a contingent reversionary or future interest. It does not suddenly come into being like an 18th century use only when the stated purpose fails. It is a default trust which fills the gap when some part of the beneficial interest is undisposed of and prevents it from being “in suspense”.’ Lord Millett in Twinsectra at [2002] 2 AC 164, 193. True it is that a Quistclose trust is orthodoxly categorised as a resulting trust rather than as an express one. But there is no reason why this should make any difference. Cf Rose (ed), Restitution and Insolvency, Mansfield, 2000, p 167. See Cornish et al (eds), Restitution: Past, Present and Future, Ch 1. Burrows, Law of Restitution, Butterworths, 1993, p 362. See Birks (1997) 11 Trust Law Int’l 2, 7–8: cf Birks [1997] NZLR 623. Compare Macmillan Inc v Bishopsgate Investment Trust plc (No 3) [1996] 1 WLR 387, where Staughton and Aldous LJJ apparently accepted that an action to recover stolen stock in specie was restitutionary for the purposes of the conflict of laws (see pp 397, 417). Auld LJ was less sure: p 409. See, on this, Swadling [1996] LM & CLQ 63.

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acknowledge your rights in them, it is submitted that no sensible accountant would include the car or the shares on my balance sheet.

OTHER PROPRIETARY CLAIMS So far, the tenor of this chapter has been to give support to those who would narrow the compass of unjust enrichment: in particular, those who wish to exclude from it claims merely to get back what never belonged to the defendant in the first place. As a corollary of this, I have suggested that claims against stakeholders and Quistclose borrowers, not to mention claims based on the mere handling of P’s property by D, sit rather ill in books on unjust enrichment. If anything, therefore, it is the principle in Ministry of Health v Simpson25 which is unorthodox and difficult to defend.26 But at this point a problem arises. If my argument thus far is right, does it not logically exclude all proprietary claims from the law of restitution, not to mention in addition any claim based on the process of tracing? After all, the plaintiffs in cases like Chase Manhattan,27 Reid28 and Foskett29 were similarly saying to their respective defendants: ‘I have a better right in that asset than you do: I want it.’ And, if they were right in that claim, where was the defendant’s enrichment in the first place? It is undeniable that if all these characters indeed fall to be summarily ejected from the unjust enrichment books, I might with some reason be accused of throwing out the baby with the bathwater. In fact, it is suggested that there is a difference between particular kinds of proprietary claims, and that while some do not belong in the law of restitution, a great many others—including the trio just mentioned—do. The distinction, it is suggested, lies not so much in the proprietary nature of the claim as in its basis. In the case of misapplied assets and the Quistclose trust, P’s (proprietary) claim against D arises because of P’s original rights in the asset concerned and for no other reason. But for the fact that P was, and at all relevant times had been, the owner of the assets received by D, he would have had no independent cause of action at all. By contrast, in many of the other situations involving proprietary restitutionary claims, there is an independent basis for P’s rights. Take payment by mistake under Chase Manhattan,30 assuming for these purposes that the payer does have a proprietary right to the monies transferred while they are in D’s hands.31 There is no doubt that such payments do cause an unjust enrichment; indeed, P has the benefit of an attendant personal claim quite separately from any right in the actual funds transferred. Here the proprietary claim strengthens and, as it were, rides on the back of that claim and the (unjust) enrichment which underlies it. P is not enforcing proprietary rights that existed all along: instead, he is being given a new proprietary right to help him vindicate a discrete claim. And exactly similar reasoning can be

25 26 27 28 29 30 31

[1951] AC 251. As sagely hinted in Jaffey, The Nature and Scope of Restitution, Hart Publishing, pp 333–34. Chase Manhattan Bank NA v Israel-British Bank (London) Ltd [1981] Ch 105. Attorney-General for Hong Kong v Reid [1994] 1 AC 324. Foskett v McKeown [2001] 1 AC 102. [1981] Ch 105. Which may be open to some doubt since Westdeutsche Landesbank Girozentrale v Islington BC [1996] AC 669: see particularly Lord Browne-Wilkinson’s comments at pp 702–03. But these doubts do not affect the point in the text.

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applied to the agent taking a bribe or making a secret profit. P gets proprietary rights in that profit because its receipt in any case unjustly enriches D. Put another way, it is the act of D in receiving the bribe or secret profit that engenders P’s claim, and not the fact that P has any original or continuing right in those assets. Once again, therefore, it is submitted that this is a case of property rights (or remedies) piggy-backing on orthodox unjust enrichment, rather than P claiming what would be his anyway simply by relying on his continuing title to it. Claims to substitute property based on a tracing process, like that in Foskett,32 at first sight look more awkward in this connection, and a little less easy to fit into the scheme just suggested. Unlike claims against mistaken payees and peculating fiduciaries, these are pure proprietary claims. They are a type of claim that lies, as Professor Birks felicitously puts it, only for ‘value surviving’:33 that is, they are available against the defendant only if, and in so far as, the latter still has the replacement property in issue. There is no separate, personal, claim against someone merely because he has received my asset and then exchanged it for something else. But even here, I suggest that my argument holds good. Take the facts of Foskett’s case, stripped down to the essentials. D receives P’s money and wrongfully uses it to pay for a life assurance policy, the cash proceeds of which P then lays claim to. We know his claim is good: but why? The answer, surely, is that someone who receives wealth for his own account in exchange for my property is unjustly enriched, and independently so: witness, to take just one example, the action for money had and received against someone who converts my car and sells it. It is not that P has some original, independent, title to the insurance policy. If he did, we would in certain tracing situations be faced with the uncomfortable situation where P had concurrent title both to his original money34 and to its proceeds as well, which cannot be right. Rather, it is suggested that the analysis is this: to reverse D’s unjust enrichment, P is given the right to elect to pursue a proprietary remedy against the debentures concerned.35 The law, in other words, gives him a new, proprietary, right in the proceeds in order to vindicate his right to have the defendant’s unjust enrichment reversed.36 In short, the fact that here there is no separate personal claim is simply beside the point: tracing claims such as this can be regarded as unjust enrichment claims on orthodox principles.

CONCLUSION The suggestions I have made in this chapter may seem simplistic, or even a nit-picking exercise in taxonomical tidiness. Nevertheless, classification matters, and there may be considerable practical consequences in where we draw the line between property and unjust enrichment. Two examples have already been given: the case of knowing receipt, and the problem of the stakeholder in the Portman case. Others will no doubt occur to the reader.

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[2001] 1 AC 102. Birks, Introduction to the Law of Restitution, OUP, 1985, Ch XI. Assuming that for some reason the insurance company could not claim to be a bona f ide purchaser, for example because it knew the source of the funds. As Lord Millett made clear in Foskett v McKeown: see [2001] 1 AC 102 at p 127. Cf Smith, The Law of Tracing, OUP, 1997, p 293 et seq.

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Moreover, in these days when major English judicial decisions can seem almost incomplete without a glance at civil law systems elsewhere in Europe, it is also interesting to note that the questions I have been asking are such as would be unlikely to trouble anyone other than a common lawyer. They only arise because of the common law’s refusal to draw a clear line between the law of property and the law of obligations, and its consequent unwillingness to commit itself as to where unjust enrichment ought to be pigeonholed. Elsewhere the difficulties are simply unlikely to arise at all. For German and Dutch jurists, for example, the civil code provides the answer in a simple and logical way. The basic provisions on unjust enrichment are firmly anchored in the law of obligations, not property:37 the owner’s right to get back his own property appears in a completely different part. Now, it is obviously open to argument whether this is a good or a bad thing: but it is obviously an issue of some importance. Something which is regarded by European lawyers as so axiomatic and beyond argument surely deserves some sort of extended discussion in the English context too.

37

See BGB, § 812 and BW, § 6.203, under the parts labelled Recht der Schuldverhältnisse and Algemeen gedeelte van het verbintenissenrecht respectively.

Chapter 12 The policy against accumulation and three party cases: Roxborough v Rothmans of Pall Mall Australia Simone Degeling INTRODUCTION The law of unjust enrichment discloses a novel policy-motivated unjust factor called the policy against accumulation. The policy applies whenever a claimant (R) receives a benefit, or has the right to recover a debt or damages from another party (Y) and receives, or has the right to receive, in respect of the same debt or damage from a third party (X). The general policy of the law in such circumstances is that the claimant (R) is rarely, if ever, permitted to accumulate by receiving from both X and Y. If R does in fact receive from both X and Y, she must reverse one transfer. The claimant’s obligation to reverse one transfer is given to reverse the unjust enrichment which would otherwise remain. The unjust factor underlying this claim is the policy against accumulation. By definition, the policy against accumulation is most relevant in three party cases. This chapter explores the role of the policy against accumulation in understanding the particular three party configuration revealed by Roxborough v Rothmans of Pall Mall Australia Ltd.1 As such, this chapter does not make the case for the existence of this unjust factor. That task has been the subject of previous work.2 Rather, this chapter assumes the existence of the novel unjust factor and is rather concerned to investigate its possible use. The clearest applications of the policy against accumulation are in configurations in which the obligation of the other party (Y) is to compensate the claimant (R) for loss.3 If, in addition, R receives from a third party (X) in respect of the same loss, R may be obligated to return value to one party. For example, a victim of tort (R) is entitled to claim from the wrongdoer (Y) an amount calculated by reference to the value of gratuitous care provided by her carer (X). On recovery of damages, the victim is obligated to share these damages with the carer.4 There is strong evidence that the victim’s obligation to share damages is given in recognition of the unjust factor called the policy against accumulation. Similarly, an insured (R) may be indemnified by her insurer (X) and also be entitled from the wrongdoer (Y) to compensation for her loss. On recovering damages or settlement moneys, an indemnity insurer is entitled to recoup the value of any indemnity provided.5 The right of an indemnity insurer to participate in

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Roxborough v Rothmans of Pall Mall Australia Ltd [2001] HCA 68, 185 ALR 335. Degeling, S, ‘The policy against accumulation as an unjust factor’, in Schrage, E (ed), Unjust Enrichment and the Law of Contract (Kluwer, 2001), 167–92; Degeling, S, Restitutionary Rights to Share in Damages: Carer’s Claims (Cambridge University Press, expected in press September 2003), Ch 8. Degeling, S, ‘A new reason for restitution: the policy against accumulation’ (2002) 22 Oxford Journal of Legal Studies 435. Hunt v Severs [1994] 2 AC 350.

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damages won by the insured is arguably given to reverse the 5 Lord Napier and Ettrick v Hunter [1993] AC 713. insured’s enrichment which would otherwise remain. It is the author’s view that in both cases, the claimant’s (R’s) enrichment is rendered unjust by the policy against accumulation.6 The above examples are three party situations in which a claimant (R) has suffered loss for which she is entitled to compensation from the wrongdoer (Y) and also receives value from a third party (X). The policy against accumulation, when operating as an unjust factor, arguably explains why in such cases R is obligated to share damages with X. However, these configurations do not tell us the extent to which the policy operates as an unjust factor in other, non-loss-based, examples. The recent decision of the High Court of Australia in Roxborough v Rothmans of Pall Mall Australia7 is important because, as will be shown, it also attracts the operation of the policy against accumulation. However, unlike Hunt v Severs or Lord Napier and Ettrick v Hunter, the facts of Roxborough do not revolve around an obligation to compensate the claimant’s loss. In Roxborough, tobacco wholesalers and retailers in New South Wales were obligated to pay a periodic licence fee to the New South Wales government for the right to sell tobacco. Roxborough was a retailer which had purchased tobacco from the wholesaler Rothmans. Part of the purchase price paid by Roxborough reflected the tobacco licence fee. Roxborough thus put Rothmans in funds to pay this fee to the Revenue and recouped this amount from tobacco consumers in the form of higher tobacco prices. The problem was that the High Court of Australia in Ha v State of New South Wales8 had declared the New South Wales licensing legislation9 to be unconstitutional. The retailer Roxborough sought restitution of the amount it had paid to the wholesaler Rothmans on account of the tobacco licence fee. The claim succeeded. As is explored below, the facts of Roxborough display the pattern attracting the policy against accumulation. The retailer Roxborough (R) paid to the wholesaler Rothmans (Y) an amount on account of the licence fee it would recoup from consumers (X). Due to the impact of constitutional invalidity, Roxborough (R) was entitled to recover the payment from the wholesaler Rothmans (Y). However, Roxborough had already passed the burden of this payment onto tobacco consumers (X) in the form of higher tobacco prices. By virtue of its decision to allow the retailer Roxborough (R) to succeed, when in fact the burden of the licence fee had been borne by consumers (X), the High Court of Australia thus created the risk that R would accumulate in respect of the transfers of value from X and Y. The purpose of this chapter is therefore to illustrate by reference to Roxborough the role of the policy against accumulation as an unjust factor. In addition to allowing a better understanding of this decision, we are able more precisely to define those configurations attracting the policy against accumulation. As has been said, thus far the unjust factor has been most prominent in three party examples which revolve around an obligation to compensate loss. Roxborough is important because it provides an unequivocal example of a different three party configuration to which the policy against accumulation also applies. This discussion will proceed in three parts. First, a brief account

6 7 8 9

Degeling, S, Restitutionary Rights to Share fn Damages: Carer’s Claims (Cambridge University Press, expected in press September 2003), Ch 8; Degeling, S, ‘A new reason for restitution: the policy against accumulation’ (2002) 22 Oxford Journal of Legal Studies 435. Roxborough v Rothmans of Pall Mall Australia Ltd [2001] HCA 68, 185 ALR 335. Ha v State of New South Wales (1997) 189 CLR 465. Business Franchise Licences (Tobacco) Act 1987.

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of the facts and decision in Roxborough. The second part will outline the unjust factor labelled the policy against accumulation and the third part will then apply this analysis to Roxborough. ROXBOROUGH v ROTHMANS OF PALL MALL AUSTRALIA

Facts Rothmans was a tobacco wholesaler which had entered into supply arrangements with Roxborough, a tobacco retailer. The New South Wales Government imposed via the Business Franchise Licences (Tobacco) Act 1987 a licence fee. This statute prohibited the sale of cigarettes except for those holding either a tobacco wholesaler’s or retailer’s licence. The legislation contemplated that the licence would be renewed on a two-monthly cycle, the licensing period being defined to be ‘the month commencing two months before the commencement of the month in which the licence expires’.10 In relation to each licensing period, the fee was payable prospectively. Thus, the fee in dispute in Roxborough had been paid in July 1997 for a licence expected to commence on 28 August 1997. The fee for each licence was calculated according to the formula set out in s 41 of the legislation. This provided that a fixed amount of $100 was due in addition to an amount calculated by reference to the value of product sold. Double counting was

10

Business Franchise Licences (Tobacco) Act 1987 s 3(1).

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avoided by the fact that, if a fee was paid by a wholesaler in respect of tobacco, then no fee would be payable by a retailer in respect of that tobacco. Thus, a licence was only required to be purchased either by the wholesaler or the retailer. On the facts of Roxborough it was Rothmans who would remit funds to the Revenue on account of the licence fee, after having received this amount from Roxborough. Rothmans and Roxborough entered into a contract whereby Rothmans agreed to supply cigarettes to the retailer Roxborough. The price to be paid included two distinct components. The first was the price of the tobacco, the second an amount referable to the licence fee. In return for the payment of money, Roxborough therefore expected both the supply of cigarettes and also that Rothmans would pay the relevant licence fee to the Revenue. It was industry practice to pass the cost of this licence fee onto consumers of tobacco products. Thus, the burden of the licence was initially borne by Roxborough which put Rothmans in funds to pay the Revenue. However, Roxborough recouped the fee, in the form of higher cigarette prices, from its customers, consumers of cigarettes. Difficulty arose when, in Ha v State of New South Wales,11 the High Court of Australia declared unconstitutional the statute imposing the licence fee, the Business Franchise Licences (Tobacco) Act 1987. The basis of this ruling was a finding that the New South Wales licence fee was in reality an excise tax. According to s 90 of the Australian Constitution, the right to impose an excise is held exclusively by the Commonwealth. As the tobacco licence fee was imposed by the New South Wales Parliament, the statute was therefore declared to be unconstitutional as being beyond the competence of a state legislature. At the time of the High Courts decision in Ha, Roxborough had paid money to Rothmans on account of the licence fee, it being intended that these funds would be paid to the Revenue by Rothmans in order to obtain a wholesaler’s licence for the period commencing 28 August 1997. However, no licence was required and the retailer Roxborough therefore commenced proceedings against Rothmans seeking restitution of the amounts it had paid on account of the licence fee. As is discussed below, the claim succeeded.

The decision Roxborough brought a claim for money had and received to recover the payments on account of the tobacco licence fee. It relied on failure of basis or failure of consideration as the unjust factor.12 Failure of basis belongs to that family of unjust factors which gives relief because the claimant’s transfer of wealth was non-voluntary.13 The non-voluntariness arises because the intention of the

11 12

13

See above, n 8. One disturbing aspect of the decision, not addressed by this article, is the juridical basis of the claim. Roxborough based its case, in part, on money had and received by the defendant to the use of the plaintiff. Implicit in the decision of Gleeson CJ, Gaudron and Hayne JJ (paras 15, 21 and 24–29) is that the claim is for restitution of unjust enrichment. This is the case also with Callinan J at paras 197–99. In his dissenting judgment, Kirby J also reasons on the basis that the claim for restitution of unjust enrichment (paras 122, 137–43, 165–73). However, Gummow J takes a completely different approach, asking in para 104 if it is ‘…unconscionable for Rothmans to enjoy the payments in respect of the tobacco licence fee’. This reliance on unconscionability is repeated in paras 90–100. Birks, P and Mitchell, C, ‘Unjust enrichment’ in Birks, P (ed), English Private Law Volume II (Oxford, OUP, 2000) at 543; Birks, P, The Foundations of Unjust Enrichment (Wellington, Victoria University Press, 2002) at 75.

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claimant to benefit the recipient is qualified.14 The claimant may transfer wealth on the basis either of some expected counter performance or the existence of some other condition or state of affairs, where such condition has been communicated to the recipient. To the extent that this performance, condition or state of affairs fails, the basis of the transfer has failed and any enrichment of the recipient will be unjust. As a result of the contractual arrangement between the parties, Roxborough had paid Rothmans for a licence which, after the Court’s decision in Ha, was no longer required. Therefore, a majority of the High Court allowed Roxborough’s restitutionary claim, reasoning that there had been a ‘…failure of a distinct and severable part of the consideration for the net total payments made’.15 As was stated by Justice Gummow: ‘[h]ere, “failure of consideration” identifies the failure to sustain itself of the state of affairs contemplated as a basis for the payments the appellants seek to recover.’16 Two aspects of the Court’s reasoning merit brief mention.17 The first is the rule that the contract must usually be terminated prior to bringing a restitutionary claim. The second is the requirement that the failure of basis be total. Dealing first with the rule that the contract must be terminated, for example discharged by breach or by frustration, prior to a claim for restitution: this requirement is said to protect the position of contract and any contractual allocation of risk. Otherwise, it is feared, it will always be possible to subvert this allocation by recourse to a claim for restitution. As stated by Burrows: ‘[i]t is by this principle that an undermining of contract by restitution is avoided and restitution is made subservient to contract. It is only when the parties’ own allocation of risk is ineffective that the imposed standards set by the law of restitution can step in.’18 This issue is highlighted by Justice Kirby in his dissenting judgment. He observes that ‘[t]he law of restitution only rarely operates in the context of an effective contract’.19 On the facts of Roxborough, he was of the view that the contract had not been terminated and this was one reason why he denied Roxborough’s claim. Of those Justices who allowed the claim, only Justice Callinan referred to the need to terminate the contract prior to pursuing a restitutionary remedy. Justice Callinan adopted the reasoning of the trial judge who decided that the contract had effectively been terminated by the bringing of proceedings to recover the payment:20

14 15

16 17

18 19 20

Fibrosa Spolka Akcjna v Fairbairn Lawson Combe Barbour Ltd [1943] AC 32; Baltic Shipping v Dillon (1993) 176 CLR 344; Stocznia Gdanska SA v Latvian Shipping Co [1998] 1 WLR 574. See above, n 7 at para 24, p 342 per Gleeson CJ, Gaudron and Hayne JJ; paras 101–10, pp 364–67 per Gummow J; para 199, p 391 per Callinan J. The only member of the Court to deny relief was Justice Kirby who refused the claim at paras 165–67, p 382, in part because in his view there had been no total failure of basis. See above, n 7 at para 104, p 365 per Gummow J. More detailed commentary is provided by Beatson, J and Virgo, G, ‘Contract, unjust enrichment and unconscionability’ (2002) 118 Law Quarterly Review 352; Birks, P, ‘Failure of consideration and its place on the map’ (2002) 2 Oxford University Commonwealth Law Journal 1; Grantham, R, ‘Restitutionary recovery ex aequo et bono’ [2002] Singapore Journal of Legal Studies 388; Kremer, B, ‘Recovering money paid under void contracts: “absence of consideration” and failure of consideration’ (2001) 17 Journal of Contract Law 37. See also the following commentary on the Federal Court phase of the case reported at (1999) 95 FCR 185: Bryan, M, ‘Where the constitutional basis for the payment has failed’ [2000] Restitution Law Review 218; Bryan, M and Ellinghaus, MP, ‘Fault lines in the law of obligations: Roxborough v Rothmans of Pall Mall Australia Ltd’ (2000) 22 Sydney Law Review 636. Burrows, A, The Law of Restitution (London, Butterworths, 1993) p 251. See also Baltic Shipping Co v Dillon (1993) 176 CLR 344 at 355–56 per Mason CJ. See above, n 7 at para 166, p 382 per Kirby J. See above, n 7 at para 197, pp 390–91 per Callinan J, quoting the decision of the trial judge Gyles J.

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New perspectives on property law, obligations and restitution The contract [here] has been executed in all respects save for payment of the licence fee by the respondent. The licence fee is no longer payable. It cannot and will not be paid by the respondent. That is the end of the matter. Performance is no longer possible. If formal termination by the appellants is necessary, then bringing these proceedings is sufficient.

The apparent failure of all but Justices Kirby and Callinan to address this issue is difficult. Although, as Beatson and Virgo point out, there may be exceptional cases in which the contractual allocation of risk is not undermined by a claim for restitution even when the contract remains on foot, such a situation must be proven. There is no evidence that the claimant was required to address this issue.21 However, to the extent that the licence fee was externally imposed, and does not seem to have been the subject of real bargaining between the parties, it seems that the danger to the contractual allocation of risk was minimal. So far as Roxborough and Rothmans were concerned, all that mattered was that the licence was paid and the cost passed on to consumers. This point was made by Justices Gleeson, Gaudron and Hayne, in their joint judgment:22 …the tax component of the net total wholesale cost was treated as a distinct and separate element by the parties. It was externally imposed. It was not agreed by negotiation…To permit recovery of the tax component would not result in confusion between rights of compensation and restitution, or between enforcing a contract and claiming a right by reason of events which have occurred in relation to a contract.

The other aspect of the case which deserves mention is the Court’s treatment of the requirement that the failure of consideration be a total failure. This is usually determined by asking whether the claimant received any part of what it had bargained for.23 The answer to this question logically asks us to identify what in fact the claimant did bargain for, before determining whether any part of this was in fact received. The facts of the case are rather murky on this issue. Justice Kirby, in his dissenting judgment, stated clearly that there was no failure because, although it was possible to separate the price into parts referable to the licence fee and other costs of supply, such as transport costs, the only obligation on Rothmans was to supply cigarettes, which in fact did occur.24 However, a majority of the Court clearly found a failure of basis or consideration sufficient to establish liability to return the payment. The contract between Rothmans and Roxborough contemplated that Rothmans would pay the funds to obtain a wholesalers licence. The performance expected of Rothmans extended beyond the mere supply of tobacco and encompassed some obligation to pay the funds to the Revenue to obtain a tobacco licence. Reasoning that this part of the contract was severable, a majority of the High Court25 held that, in respect of this part of their bargain, the basis of Rothmans’ payment had failed. Therefore, recovery was permitted:26

21 22 23 24 25

Beatson, J and Virgo, G, ‘Contract, unjust enrichment and unconscionability’ (2002) 118 Law Quarterly Review 352 at 356. See above, n 7 at para 21, p 342 per Gleeson, Gaudron and Hayne, JJ. Stocznia Gdanska SA v Latvian Shipping Co [1998] 1 WLR 574 at 588 per Lord Goff. See also Baltic Shipping Co v Dillon (1993) 176 CLR 344 at 350 per Mason CJ who asks whether the claimant has received and retained ‘…any substantial part of the benefit expected under the contract’. See above, n 7 at paras 165–66, p 382 per Kirby J. See above, n 7 at para 24, p 342 per Gleeson, Gaudron and Hayne JJ; paras 104 and 109, pp 365–66 per Gummow J and para 199, p 391 per Callinan J. This approach accords with the frequently used tactic of manipulating the notion of failure of consideration or basis. Rover International Ltd v Canon Film Sales Ltd (No 3) [1989] 1 WLR 912; Goss v Chilcott [1996] AC 788; David Securities Pty Ltd v Commonwealth Bank of Australia (1992) 175 CLR 353.

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The parties contracted not only for the supply of the tobacco products, but also, in the light of the provisions of s 41 of the Act, with respect to the renewal of the wholesaler’s licence and the funding for that to take place. While that is understood, the very form of the transactions indicates that the payments made by the appellants can be ‘broken up’.

The risk of accumulation—the windfall Leaving aside these issues, for the purpose of this chapter, the point is to observe that the High Court of Australia allowed Roxborough to recover against Rothmans. In doing so, the Court’s decision created the risk that Roxborough would accumulate. The retailer Roxborough (R) recovered an amount from the wholesaler Rothmans (Y) in respect of which it also received from tobacco consumers (X). The effect of the Court’s decision was therefore to permit R to accumulate. There is clear evidence that the High Court of Australia was uneasy about the risk of Roxborough’s (R’s) accumulation. Although ultimately allowing the retailer’s claim, the majority was content to let the windfall lie in the hands of the retailer. In relation to the risk of accumulation, Gleeson CJ, Gaudron and Hayne, JJ stated:27 In all probability, whoever succeeds in these proceedings will have made a windfall gain. In the absence of some legislative intervention, the appellants [R], if they succeed, are unlikely to be obliged to pass on the fruits of their success to the smokers [X] who bore the financial burden of the invalid tax.

Kirby J also identified the windfall to R, but in contrast to the majority position, denied the retailer’s claim.28 Rather, he called for legislation which might be enacted to strip tobacco wholesalers of their gain and return this value to tobacco consumers:29 The attempt of the retailers to recover a share of the wholesaler’s windfall was not a selfless one, ventured on behalf of their customers. Neither before the proceedings reached this Court, nor in answer to repeated questions asked of their counsel, did the retailers indicate the slightest interest in recovering the whole, or any part, of the windfall for the benefit of the consumers.They wanted the windfall for themselves… Must part of the windfall to the wholesaler, who is undeserving, be passed to the retailers, equally undeserving, without any provision, sought or offered, to recompense the consumers, who are deserving because they ultimately paid amounts towards the unrecovered licence fees?

The difficulties of analysis faced by the court might have been avoided had the policy against accumulation been realised in its role as an unjust factor. As shown by the following paragraphs, the

26

27 28 29

See above, n 7 at para 109, p 366 per Gummow J. The Federal Court in Roxborough v Rothmans of Pall Mall Australia Ltd (1999) 95 FCR 185 at 200–01 per Hill and Lehane JJ suggested that the content of this obligation was perhaps that ‘…Rothmans undertook to pay to the government so much as might be required of, but no more than, the sums for “licence fee” received from retailers in order to entitle it to continue to trade, or, alternatively, to relieve its retailers of a liability to pay tax should they wish to continue to trade’. This point is discussed by Kremer, B, ‘Recovering money paid under void contracts: “absence of consideration” and failure of consideration’ (2001) 17 Journal of Contract Law 37 at 65–66. See above, n 7 at para 5, pp 337–38. See above, n 7 at paras 174 and 175, p 384. See above, n 7 at paras 1 14 and 115, pp 367–68.

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policy against accumulation provides the foundation for a restitutionary claim against Roxborough (R) by tobacco consumers (X). In doing so, this novel unjust factor reverses the retailer’s enrichment which was, by the result in Roxborough, allowed to remain. It is therefore to this unjust factor that we now turn.

OUTLINE OF THE POLICY AGAINST ACCUMULATION The policy against accumulation is a novel policy-motivated unjust factor. There are said to be two categories of unjust factor.30 The first category gives relief because the claimant’s transfer of wealth is non-voluntary. In particular, the claimant may have held a vitiated or qualified intention to benefit the recipient. Restitution is given because, according to this qualified or vitiated intention, the claimant did not in the final analysis intend to benefit the recipient. The second category of unjust factor comprises the policy-motivated unjust factors. These are reasons for restitution which are recognised by law in order to promote a particular policy objective. This chapter assumes that the law holds a policy against accumulation by a claimant in respect of the same debt or damage, this position being reflected in the existence of a correlative unjust factor. The emphasis of the discussion is to illustrate the use of this unjust factor as an analytical tool in solving a particular three party situation. The evidence in support of the existence of this unjust factor will therefore not be discussed.31 The policy against accumulation applies where a claimant (R) receives a benefit, or has the right to recover a debt or damages from another party (Y), and receives, or has the right to receive value in respect of the same debt or damage from a third party (X). In this situation, the claimant (R) is rarely permitted to receive from both X and Y. If in fact R has received from both of these parties, she will not usually be permitted to accumulate and must reverse one transfer. The reason for this transfer is the law’s policy against accumulation. In applying the policy as an unjust factor, two threshold questions must be addressed. First, whether or not R is permitted to accumulate. In other words, is the relationship between R, X and Y one to which the policy against accumulation applies? The second question logically follows from the first. Having determined that R is not permitted to accumulate, it is necessary to determine whether it is the transfer from X or Y which must be reversed. For example, as shown by Hunt v Severs,32 the law of tort mandates that a victim of tort (R) is entitled to claim from the wrongdoer (Y) the value of necessary gratuitous assistance provided by a carer (X). The contributions of the carer are not for the benefit of the wrongdoer, and the liability of the wrongdoer to compensate the victim therefore remains undischarged by this intervention. The victim usually holds damages recovered by reference to the carer’s intervention in trust for the carer. The facts of Hunt v Severs were unique, in that the tortfeasor was the partner of the victim, and in this capacity also cared for the victim. On the basis that it would be nonsensical for the tortfeasor to pay a sum, which would then be received back by the tortfeasor in his capacity as carer, the House did not allow recovery

30 31 32

Birks, P and Mitchell, C, ‘Unjust enrichment’ in Birks, P (ed), English Private Law Volume II (Oxford, OUP, 2000) at 543–44 and n 89, p 548; Birks, P, The Foundations of Unjust Enrichment (Wellington, Victoria University Press, 2002) at 75. See above, n 2. Hunt v Severs [1994] 2 AC 350.

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on account of the carer’s services.33 However, the House confirmed that, in the case where identity of the carer and tortfeasor are different, the victim will recover damages subject to a trust in favour of the carer.34 Leaving aside the proprietary aspect of this case, the point is to observe that the carer (X) was permitted to share in the fund of damages recovered by the victim (R). R was not permitted to accumulate and, the carer (X) being preferred to the tortfeasor (Y), the transfer from X was reversed.35 Of course, it is also possible to identify cases in which R is permitted to accumulate such that the policy against accumulation clearly does not apply. For example, the relationship between the parties may be such that the risk of R’s accumulation is accepted. This is shown by the phenomenon of contingency insurers. A contingency insurer (X) undertakes to pay to the insured (R) an amount stipulated by their contract. The event triggering this payment is usually some incident such as death or injury. The basis of X’s obligation is therefore not the existence and value of R’s loss, but rather whether the conditions triggering liability to make the contractual payment have been satisfied. It is possible that the insured (R) will take out another policy of contingency insurance with a different insurer (Y). In general, R is entitled to be paid by both insurers X and Y. In other words, she is permitted to accumulate. This position contrasts to the position of indemnity insurers, where the doctrine of contribution operates to allocate R’s loss between the two insurers X and Y so that R is entitled to be paid only once.36 In this latter case, R cannot accumulate. Therefore, in applying the policy against accumulation as an unjust factor, it is necessary to determine whether the relationship between the parties is one in which the risk of accumulation has been accepted. If not, it is then necessary to determine whether it is the transfer of value from X or Y which must be reversed. Of course, given that we are speaking about the operation of an unjust factor, the other elements of a claim in unjust enrichment must also be satisfied. The next section applies the foregoing analysis to the facts of Roxborough v Rothmans of Pall Mall Australia.

APPLICATION TO ROXBOROUGH v ROTHMANS OF PALL MALL AUSTRALIA In deciding the case, various members of the Court were concerned about the windfall to Roxborough which would result in the event that Roxborough was successful in its claim. This was because Roxborough had in fact passed the financial burden of the licence fee onto tobacco consumers. The intuitive response is that, to the extent that Roxborough recovers, a matching amount should be refunded to the consumers who had paid inflated cigarette prices on account of the licence fee. However, as emphasised by Justice Kirby (speaking of Roxborough’s claim against Rothmans), ‘…rights…are not decided by intuition’.37 What is needed is a principled basis on which

33 34 35 36

Ibid at 363 per Lord Bridge. Ibid. Degeling, S, ‘A new reason for restitution: the policy against accumulation’ (2002) 22 Oxford Journal of Legal Studies 435 at 439–49. Legal and General Assurance Society Ltd v Drake Insurance Co Ltd [1992] QB 887; North British and Mercantile Insurance Company v London, Liverpool and Globe Insurance Company (1876) 5 Ch D 569; Eagle Star Insurance Co Ltd v Provincial Insurance plc [1993] 3 All ER 1.

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to solve the consumers’ entitlement. The High Court identified no framework to determine this issue. The majority was content to allow the windfall to lie where it fell, noting that if successful, Roxborough was ‘…unlikely to be obliged to pass on the fruits of their success to the smokers who bore the burden of the invalid tax’.38 The dissenting judge, Justice Kirby, took a different approach. Although he denied recovery to Roxborough, he called for ‘…legislative measures (if any) for disgorgement to the benefit of users of tobacco products, or otherwise, as the Federal Parliament may enact’.39 This section of the discussion explores the possible unjust enrichment claim which is available to consumers against Roxborough, assuming that, as was the result in the case, Roxborough succeeds in its claim against Rothmans. As the paragraphs below will demonstrate, the policy against accumulation is the unjust factor best suited to this claim. It is possible to place on a principled and rational basis the consumers’ entitlement.

Does the policy against accumulation apply? It is relatively easy to demonstrate that Roxborough has accumulated. The retailer Roxborough (R) paid to the wholesaler Rothmans (Y) an amount on account of the licence fee it would recoup from consumers (X). Due to the impact of constitutional invalidity, Roxborough (R) was entitled to recover the payment from the wholesaler Rothmans (Y). However, Roxborough had already passed the burden of this payment onto tobacco consumers (X) in the form of higher tobacco prices. By virtue of its decision to allow the retailer Roxborough (R) to succeed, when in fact the burden of the licence fee had been borne by consumers, the High Court of Australia thus created the conditions by which R accumulated in respect of the transfers of value from X and Y. However, as has been said, it is not always the case that the law will intervene against R’s accumulation. There are circumstances, such as the case of contingency insurers, in which R is permitted to accumulate. Prior to considering any unjust enrichment claim against R, it is therefore necessary to answer two preliminary questions. First, to determine whether the relationship in question is one to which the policy against accumulation applies. Secondly, assuming the policy against accumulation applies, to ask whether it is the value transferred by X or Y which must be returned. Turning first to the question whether the relationship between Roxborough (R), Rothmans (Y) and tobacco consumers (X) is one to which the policy applies. Did tobacco consumers (X) or Rothmans (Y) accept the risk that the retailer Roxborough (R) would accumulate? As shown by the following extract from the judgment of Justice Kirby, the answer to this question is no. Tobacco consumers were probably never aware of the pricing structure and thus never accepted this risk of R’s accumulation. Similarly, Rothmans paid Roxborough by the order of a court and cannot therefore be said to have accepted the risk of accumulation. Funds collected by Roxborough were intended to be paid to Rothmans for the purpose of obtaining a licence. In connection with the factual transfer of liability to pay the licence fee, the relationship between X, Y and R attracts the policy against accumulation:40

37 38 39

See above, n 7 para 119, p 369 per Kirby J. See above, n 7 at para 5, pp 337–38 per Gleeson, CJ, Gaudron and Hayne JJ. See above, n 7 at para 174, p 384 per Kirby J.

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The attempt of the retailers to recover a share of the wholesaler’s windfall was not a selfless one, ventured on behalf of their customers. Neither before the proceedings reached this Court, nor in answer to repeated questions asked of their counsel, did the retailers indicate the slightest interest in recovering the whole, or any part, of the windfall for the benefit of the consumers. They wanted the windfall for themselves… Must part of the windfall to the wholesaler, who is undeserving, be passed to the retailers, equally undeserving, without any provision, sought or offered, to recompense the consumers, who are deserving because they ultimately paid amounts towards the unrecovered licence fees?

Assuming this is a relationship to which the policy against accumulation applies, it is necessary to determine whether it is the transfer of value to Roxborough (R) by Rothmans (Y) or consumers (X) which must be returned. Justice Kirby also confirms that it is the value from X which must be returned, since in his view both Rothmans and the retailer Roxborough are equally undeserving:41 Must part of the windfall to the wholesaler [Y], who is undeserving, be passed to the retailers [R], equally undeserving, without any provision, sought or offered, to recompense the consumers [X], who are deserving because they ultimately paid…

Given that the decision in Roxborough reveals a situation which does appear to attract the operation of the policy against accumulation, it is necessary to address the elements of the consumers’ (X’s) claim against Roxborough (R) in unjust enrichment.

Enrichment This element of the claim is uncontroversial. The retailer Roxborough (R) received from tobacco consumers (X) value on account of the licence fee. X paid money to R. It is relatively easy to demonstrate this payment is enriching because money is always enriching, as it is the very measure of value. As stated by Robert Goff J: ‘…[m]oney has the peculiar character of a universal medium of exchange. By its receipt, the recipient is inevitably benefited…’42

At the expense of Particular care must be taken when considering ‘at the expense of in an unjust enrichment claim founded on the policy against accumulation. As the discussion above demonstrates, it is necessary to have decided whether the policy against accumulation applies to the facts under consideration and then whether it is the transfer from X or Y which is vulnerable to return. Implicit in recognising that the policy against accumulation is relevant is a choice as to which transfer will be reversed. This choice between X and Y is a policy decision which must be resolved prior to any claim against R. Let us take the case, as is revealed by the facts of Roxborough, where it is the value transferred by X which is vulnerable. In considering whether R is enriched at the expense of the claimant (X), the

40 41 42

See above, n 7 at para 114, p 367 per Kirby J. See above, n 7 at para 115, p 368 per Kirby J. BP Exploration Co (Libya) v Hunt (No 2) [1979] 1 WLR 783 at 789 per Robert Goff J.

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court is therefore simply asking whether, as a matter of direction, the value did come to R from X. On the facts of Roxborough it is therefore relatively easy to satisfy the at the expense of element of the claim. R is enriched at the expense of X since it is this value which must be returned.There is no doubt that, as a matter of direction, the payment on account of the licence travelled from consumers (X) to the retailer Roxborough (R).

Unjust factor Finally, we come to the relevant unjust factor. It must be remembered that the unjust factor under investigation is that underlying the consumers’ (X’s) claim against Roxborough (R). The question of R’s accumulation only arises because, by the High Court’s decision, Roxborough (R) was permitted to recover from Rothmans (Y) value on account of the unconstitutional licence fee, having already been paid this amount by purchasers of tobacco products (X). The unjust factor surrounding this separate claim is not the focus of this discussion.43 Of interest is X’s claim against R. This brings us to the question: on what ground could the transfer from X to R be characterised as unjust?

Established unjust factors It will be difficult for the consumers (X) to demonstrate injustice according to one of the well established unjust factors. Two obvious possibilities are failure of basis and mistake but, as is shown below, neither much assists X’s claim. Turning first to failure of basis: in relation to the terms of sale, it is likely that X’s intention to transfer value was qualified only to the extent that X agreed to pay the price demanded on the basis that the retailer (R) would supply the product. It is highly unlikely that specific reference was made to that proportion of the price paid which was in fact referable to the licence fee or indeed the need to fund purchase of a tobacco licence. So far as the consumer was concerned, it is probable that nothing beyond contractual reciprocation, in the form of cigarettes supplied in exchange for payment, formed the qualification to X’s transfer. It was never suggested that the retailer (R) had failed to perform its obligations under the contract or that the consumers (X) shared an assumption with R as to the existence of a requirement for a tobacco licence. The basis of X’s transfer did not fail. An alternative argument might be that consumers had paid under the force of a mistake. On the facts of Roxborough, it is very difficult to identify a mistake capable of operating on the mind of the consumer in relation to the decision to transfer the price of a packet of cigarettes. A determined claimant might point to the fact that part of the purchase price was referable to a licence fee, in circumstances where a licence was in fact not required. Arguably, the payments had been made pursuant to a mistake of law. X may seek to draw an analogy with Kleinwort Benson v Lincoln CC.44 In that case, payments had been made under a swap contract, it being commonly assumed that such agreements were within the power of local authorities. A later judicial decision45

43 44 45

Discussed above, p 235 ff. Kleinwort Benson v Lincoln CC [1999] 2 AC 349. Hazell v Hammersmith & Fulham LBC [1992] 2 AC 1.

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revealed this to be a false assumption, and confirmed rather that such transactions were ultra vires local authorities, including Lincoln CC. The effect of this incapacity was to render void the contract under which the payments had been made. The claimant successfully demonstrated that payments had been made under a mistake of law. This aspect of Kleinwort Benson v Lincoln CC turns out to be fatal to X’s argument. For a mistake to give relief, it must cause the payment.46 On the facts of Kleinwort Benson v Lincoln CC it was clear that a mistaken belief in the accuracy of the position commonly assumed, that it was within the power of the local authority to enter the contract, had caused the payment. However, on the facts of Roxborough this is not the case. There is no evidence that consumers paid for any reason other than that they were contractually obliged to do so. Crucially, the Court’s decision in Roxborough has no impact on the validity of the individual contracts of sale for cigarettes. Unlike the position in Kleinwort Benson v Lincoln CC, in which the effect of the later decision was to render the contract void, X paid pursuant to an effective contract. It is extremely difficult to see how X’s transfer of value to R was caused by a mistake.

The policy against accumulation The policy against accumulation is uniquely able to supply the foundation for X’s unjust enrichment claim against R. R accumulates because it has, in respect of the same debt or damage, received value from both X and R. In order to reverse this accumulation, R must therefore return to X amounts paid on account of the licence fee. The policy-motivated unjust factor mandates this response. It is important to realise that the unjust factor labelled the ‘policy against accumulation’ is very different from established unjust factors such as mistake or failure of basis. These latter unjust factors are to an extent quarantined by the boundaries of the relationship between X and R. For example, we ask was X mistaken when transferring wealth to R, or whether the basis of X’s transfer to R has failed. Although it might be possible to construct a failure of basis argument which depends on the input of an outside factor, such as the success of R’s claim against Y, this will not always be the case. By contrast, the policy against accumulation as an unjust factor is by definition a function of the retailer Roxborough’s (R’s) claim against the wholesaler Rothmans (Y). The policy against accumulation does not take life until R has a claim against Y in circumstances where R has already received from X. In theory, it is possible to identify R’s accumulation at two moments in time. The first is when R actually recovers in her suit against Y. In Roxborough, this is the moment when Roxborough (R) succeeded in its claim against Rothmans (Y) for return of the licence fee. The second is at the earlier moment when R is entitled to sue Y. It seems this may have been at the time of the High Court of Australia’s earlier decision in Ha v State of New South Wales,47 the effect of which was to remove the need for a tobacco licence. For the purpose of identifying X’s entitlement against R, it is not necessary to pursue these two different models. It is sufficient to observe that, on the success of Roxborough’s (R’s) claim against Rothmans (Y), R having already been paid by consumers (X), R accumulated in respect of the same debt or damage.

46 47

Barclays Bank v WJ Simms (Southern) Ltd [1980] QB 677; David Securities Pty Ltd v Commonwealth Bank of Australia (1992) 175 CLR 353; Kleinwort Benson v Lincoln CC [1999] 2 AC 349. See above, n 8.

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It must be conceded that on the particular facts of Roxborough there are certain evidential and practical difficulties associated with X’s claim against R. This is because the class of claimants, tobacco consumers who had paid the higher tobacco price, is very large. However, through the mechanisms of class or representative actions the law has in the past overcome these obstacles. Even if on the facts of Roxborough such difficulties prove insoluble, the unassailable fact remains that, in a configuration where X is not represented by such a large number of claimants, the policy against accumulation should operate as an unjust factor. In this way, the concerns of the High Court of Australia in Roxborough that to allow R’s claim would create a windfall are overcome. It is true that without the policy against accumulation the result in the case is to entrench R’s ability to accumulate at the expense of X. It is therefore vital to recognise the role of the policy as an unjust factor.

CONCLUSION In his judgment, Justice Kirby poses a question. Speaking of the possibility that Rothmans would be obligated to make restitution to Roxborough (a possibility he alone refuses), the judge asks, in the absence of an undertaking by Roxborough to distribute its winnings to the persons from whom the value was in the first place collected (that is, the consumers): ‘… why should the law intervene at all? Why should it do so, given that the “transfer [of] an unjust enrichment from defendant to plaintiff” would necessarily consume scarce judicial resources towards achieving an outcome that was equally meritless?’48 The utility of the policy against accumulation is that it gives an answer to Justice Kirby’s question. This unjust factor provides a principled basis on which to complete the untangling of the payment structure created in response to the imposition of a tobacco licence fee. The High Court of Australia’s decision in Roxborough is only a part solution. Although it does strip Rothmans of an unjust enrichment, in result (as feared by Kirby J), it entrenches the unjust enrichment of Roxborough. The importance of this discovery extends beyond a better understanding of Roxborough. If correct, the analysis in this chapter confirms that the unjust factor called the policy against accumulation has a role to play beyond loss-based configurations. Rather, it is also relevant in other three party configurations where R accumulates, perhaps as a result of a separate unjust enrichment action.49

48 49

See above, n 7 at para 118, p 369 per Kirby J. See the discussion of Dimond v Lovell [2000] 2 WLR 1121 in Degeling, S, ‘A new reason for restitution: the policy against accumulation’ (2002) 22 Oxford Journal of Legal Studies 435 at 453–54.

PROPERTY AND OBLIGATIONS IN COMMERCIAL TRANSACTIONS

Chapter 13 On the redundancy of the concept of bailment Gerard McMeel

INTRODUCTION Some academic legal writers subscribe to the view that the concept of bailment contributes to the intelligibility or rationality of English personal property law. Bailment is said to straddle the domains of obligations and property. The purpose of this chapter is to enquire whether English law does in fact benefit from having an overarching concept of bailment as a tool for regulating diverse fact situations occupying a broad spectrum, embracing at one extreme the honest finder of goods, to multi-million pound aircraft finance leases at the other. The argument is that the alleged concept of bailment does more harm than good, stultifying the development of a rational law of personal property. The supposed concept of bailment is too elusive or too over-inclusive in its scope to be of any normative significance. Indeed, where legal conclusions have been derived from the deployment of the concept they usually turn out to be unsound. Furthermore, sometimes the label of bailment acts as an unnecessary straitjacket, confining principles of potentially broad application to the particular context of chattels. Another insidious tendency of the current attachment to bailment reasoning is to downplay the deliberate contractual structuring of relationships between commercial parties. Overall it will be argued that the category of bailment has no autonomous legal content which cannot be better attributed to concepts of consent, wrongdoing, unjust enrichment or property.

FOUNDATIONS The map of the law1 English law has enjoyed a wealth of treatise-writing on the topic of sale of goods. In contrast, the myriad other transactions in tangible personal property are comparatively neglected. English law

1

The following abbreviations are used for the principal works cited: • A Bell, ‘The place of bailment in the modern law of obligations’, Ch 19 in N Palmer and E McKendrick, Interest in Goods (2nd edn, LIP, 1998), 461–89 (‘Bell’). • Sir William Jones, An Essay on the Law of Bailments (1781) (‘Jones’). • E McKendrick, ‘Bailment’, Ch 33 in H Beale (ed), Chitty on Contracts (28th edn, Sweet & Maxwell, 1999),Vol II, 97–167 (‘Chitty’). • N Palmer, Bailment (2nd edn, Law Book Co, 1991) (‘Palmer’). • N Palmer, ‘Bailment’, Ch 13 in P Birks (ed), English Private Law (OUP, 2000), 357–406 (’EPL’). • W Swadling, ‘The proprietary effect of a hire of goods’, Ch 20 in N Palmer and E McKendrick, Interest in Goods (2nd edn, LLP, 1998), 491–526 (‘Swadling’).

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tends to treat all dealings in chattels falling short of outright sale as a unitary category. Accordingly Tony Weir has written of ‘all those relationships so usefully called ‘bailments’ in the common law’.2 The purpose of this chapter is to enquire whether English law does in fact benefit from having an overarching concept of bailment. Professor Palmer gives the following overview of the place of bailment in English law: ‘[Bailment] stands at the point at which contract, property and tort converge.’3 This apparently busy intersection should immediately set alarm bells ringing about the coherence of the idea. It demonstrates the conceptual confusion caused by the relic of bailment in 21 st century English law. Andrew Bell has noted the paradox of complex commercial problems handled by reference to bailment in obvious contrast to its ‘antique flavour’. He accepts that ‘it can easily appear to be a superfluous anachronism’.4 The map of the law is our first concern. There is no better starting point for such cartography than the schemes of the Roman institutional writers.5 Private law concerns persons, things and actions. We are concerned with things, which can be further sub-divided. A foundational distinction for private law is that between obligation and ownership.6 An obligation or a right in personam is a claim against a person. In contrast, a claim to ownership or a right in rem is a claim to an interest in a thing, which depends upon the continued existence of that thing. Property law supplies the stable element of a legal system: defining and constituting the interests which persons can have in things. It supplies the benchmark of what constitutes wealth in a society. Property must be distinguished from obligation. The duties owed by citizens to each other (and the correlative rights) are the concern of the law of obligations. The category of obligations can in turn be further subdivided. First, the law of wrongs draws upon the community’s standards to identify a person’s core minimum of legally protected interests: in bodily integrity, in earning capacity, in reputation, in property and in other economic interests. Torts and equitable wrongs provide remedies for interference with, and wrongfully caused harm to, such interests. Remedies for wrongdoing promote stability, or at least aim to restore the equilibrium. Secondly, in contrast, the institution of contract (or more generally, consensual transactions) provides the dynamic component: persons contract out their labour by hand or by brain, in order to obtain the wealth to acquire the essential and non-essential goods and services they desire. More recently, English law has recognised a role for a third category of obligations. Just as the law gives effect to consensual dispositions of value, so too it must reverse what can broadly be described as non-consensual transfers of wealth. As Lord Steyn has recently observed: ‘unjust enrichment ranks next to contract and tort as part of the law of obligations. It is an independent source of rights and obligations.’7 The publication in 2000 of English Private Law, edited by Professor Peter Birks, represents the culmination of a major project. It aims to state the core principles of English law on persons, obligations, property and procedural issues (analogous to the Roman concept of actions). In addition to chapters on contract,8 tort,9 unjust enrichment10 and ‘property in general’,11 the two

2 3 4 5 6 7

T Weir, A Casebook on Tort (6th edn, Sweet & Maxwell, 1996), 492. Palmer, I, also quoted in Chitty, para 33.001. Bell, 461. See, eg, P Birks and G Macleod, Justinian’s Institutes (Duckworth, 1987), 13–15. R Goode, ‘Ownership and obligation in commercial transactions’ (1987) 103 LQR 433, 433–45, 447–51. Banque Financière de la Cité v Parc (Battersea) Ltd [1999] 1 AC 221, 227.

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volumes also include chapters on sale of goods12 and on bailment.13 The latter is edited by Professor Palmer. The former topic is a particularly well-developed species of the genus contract, albeit with obvious proprietary consequences.14 The question arises whether the inclusion of the latter title is justified, or whether it undermines the coherence of the conceptual structure employed in the rest of the work. My thesis is that all the alleged distinctive hallmarks of bailment are better explained in terms of general principles of contract, tort, unjust enrichment or property. There is no place for an independent concept of bailment, whether within the law of obligations, the law of property, or straddling the two. This view might be seen as heresy. It can be readily contrasted with the view of Professor Palmer which is that: ‘Bailment is a legal relationship distinct from both contract and tort.’15 Similarly, examining the topic from the perspective of the modern law of obligations, Andrew Bell has concluded that ‘while the practical implications may be modest, bailment has to be recognised as a sui generis source of obligations’.16 Both these views articulate a conception of bailment as neither contract nor tort, neither fish nor fowl. Viewed from the property dimension, the incidents of the recognition of bailment have proved controversial. Swadling has forcefully argued that a pre-eminent example of bailment, the hire of goods, confers no proprietary interest in the goods upon the hirer.17 These views will be addressed below.

Historical foundations18 Professor Zimmerman has correctly identified the ‘lump concept’ thinking19 implicit in the bailment category as having deep roots in English legal history:

8 9 10 11 12 13 14 15

16 17 18

19

EPL, Ch 8. EPL, Ch 4. EPL, Ch 15. EPL, Ch 4. EPL, Ch 10. EPL, Ch 13. In addition there are chapters on employment (Ch 12) and carriage of goods by sea (Ch 11). Again these are well-developed species of the genus ‘contract’. EPL, para 13.01. Citing dicta in Building and Civil Engineering Holidays Scheme Management Ltd v Post Office [1966] 1 QB 247, 261 (Lord Denning MR) (a statutory claim); The Pioneer Container [1994] 2 AC 324, 341– 42 (PC: Lord Goff); Sutcliffe v Chief Constable of West Yorkshire [1996] RTR 86, 90 (Otton LJ) (a factual dispute as to whether a bailee was in breach of a duty to take reasonable care). Bell, 461. Bell sees The Pioneer Container [1994] 2 AC 324 as shifting the topic from its traditional conception as having strong affinities with contract, towards a model of responsibility closer to tort Swadling, 492, 524. P Winfield, The Province of the Law of Tort (Cambridge University Press, 1931) esp Ch V, 523–26; R Zimmermann, The Law of Obligations—Roman Foundations of the Civilian Tradition (OUP, 1990), 188–229); JH Baker, An Introduction to English Legal History (3rd edn, Sweet & Maxwell, 1990), 439–52; D Ibbetson, A Historical Introduction to the Law of Obligations (OUP, 1999), 33–35, 164–68; D Ibbetson, ‘“The law of business Rome”: foundations of the Anglo-American law of negligence’ [1999] CLP 74, 80–84. The rebuke that English law displays a tendency to ‘lump concept’ thinking was famously made by Karl Llewellyn, the father of the American Uniform Commercial Code, in respect of the role of property in English sales law: see, eg, ‘Through title to contract and a bit beyond’ (1938) 15 NYULQR 159. See W Twining, Karl Llewellyn and the Realist Movement (Butterworths, 1973, reprinted 1985), 136–37, 331–33.

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New perspectives on property law, obligations and restitution In medieval English law—which had ‘but a meagre stock of words that can be used to describe dealings with moveable goods’—a host of legal relationships were lumped together under the title of bailment… To this day bailment is a somewhat labyrinthine concept.20

There are two key landmarks in the early modern history of bailment, coming at opposite ends of the 18th century. First, in 1703 the great case of Coggs v Bernard21 considered the appropriate standard of liability for a person who had agreed to move some casks of brandy for the plaintiff. Tragically one of the casks was broken, and the brandy was spilt. It was held that the person agreeing to undertake the task was liable for default, even though no sum was paid in respect of the work done. The case is especially famous for Holt CJ’s taxonomy of the species of bailment, drawing upon Roman law ideas. Chief Justice Holt is widely acknowledged as one of the founding fathers of English commercial law. The spilling of several gallons of brandy by Bernard was thought to be ‘a case of great consequence’ and was accordingly argued before the whole court of King’s Bench. On the facts there was an express undertaking to move the several hogshead of brandy. However, it was neither alleged that the defendant was a common porter, nor was it averred that he was paid anything for his trouble. Accordingly it was crucial that on the pleaded case there was no contractual regime governing the relationship between plaintiff and defendant. Despite this, Holt CJ and the rest of the court thought the action would lie. The Chief Justice identified six types of bailment. First, deposition: that is, the deposit of goods to be looked after for the benefit of the bailor for no reward. Secondly, commodatum, being a gratuitous loan of a chattel to a person to be used by him, which benefits the bailee, such as the loan of a book to a friend. Thirdly, locatio et conductio. This is a hire of goods for reward between a lender (locator) and borrower (conductor). Fourthly, vadium, being a pawn or pledge of chattels delivered as security for a loan of money from the bailee. Fifthly, the delivery of goods to a person to be carried or for some other valuable service to be done to them for reward. Sixthly, the delivery of goods to a person to be carried or for some other valuable service to be rendered, but not for reward. The case of the spilt brandy fell into this last category. For the most part, the remainder of Holt CJ’s judgment is an elaboration of the appropriate standard of liability of the bailee in each of these species of bailment. A fourfold hierarchy of standards of liability was assumed. First, and most stringently, strict liability, subject to the common law exceptions of Act of God and actions of the King’s enemies. Secondly, liability for slight negligence. Thirdly, ordinary negligence. Fourthly, liability only for gross negligence. Broadly, where the bailment was for the benefit principally of the bailor, only gross negligence would suffice to render the bailee liable. In contrast, if the bailment primarily benefited the bailee a higher standard of care would be imposed. Accordingly in the first category the bailee would only be liable for gross negligence. In contrast, in the second category the bailee is required to exercise the ‘strictest care and diligence’.22 Similarly, in the third category the bailee was required to take the ‘utmost care’. As Professor Bridge explains, the fact that in these latter two categories the bailment was primarily for the benefit of the bailee meant that he would be liable only for slight negligence.23 In the fourth category the pledgee is required to use ‘true diligence’,24 which appears to equate to

20 21 22

R Zimmermann, The Law of Obligations—Roman Foundations of the Civilian Tradition (OUP, 1990), 188–229. (1703) 2 Ld Raym 909; 92 ER 107. (1703) Ld Raym 909, 915.

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ordinary negligence. Even greater differentiation is required for the fifth category which needs to be subdivided between those persons who exercised common callings and those who did not. A common carrier or master of a ship was strictly liable for the goods bailed, subject to the exceptions of Acts of God and the actions of the King’s enemies. In contrast, ordinary bailees and factors were liable to do the best they could, which appears to equate to ordinary negligence liability. All of the foregoing were supported by prior authority. Only the sixth category was not clearly governed by case law. The Court of King’s Bench ruled that because of the express undertaking to accept responsibility for carriage of the goods, even in the absence of reward, the bailee should be responsible if he was ordinarily negligent.25 If no undertaking had been given the bailee would have been liable only for gross negligence, as the bailment benefited the bailor. Coggs v Bernard is a seminal authority for commercial law. Though three centuries old it reminds us of the need for appropriate differentiation in dealing with the broad category of transactions in relation to tangible personal property. Whilst we may now have rejected the need for some of the more elaborate refinements in relation to the question of the standard of care imposed upon a bailee irrespective of contract, we can still learn from its insistence on the need to further subdivide the broad category of bailment. The presence or absence of reward is a significant factor in the taxonomy of Holt CJ. The presence or absence of a contractual regime remains crucial today. Coggs v Bernard is clearly a case concerned with the obligations dimension of the bailment relationship. There is only one obvious reference to the proprietary consequence of a bailment. In the fourth category of pledge or pawn it is explicitly stated that the bailee has a ‘special property’ in the goods.26 Otherwise Coggs v Bernard is silent on the proprietary consequences of the other species of bailment. Secondly, the other 18th century highlight was a publication in 1781 of An Essay on the Law of Bailments by William Jones.27 First, note the plural form used to describe these phenomena. Jones’s text is almost exclusively concerned with the appropriate standard of liability of persons in possession of tangible personal property. Little consideration is given to the contractual or proprietary dimensions of the relationship, despite utilising a definition of bailment as being based upon ‘contract expressed or implied’.28 Accordingly we would now view Jones’s essay as being exclusively concerned with the question of what is the appropriate standard of liability, in the absence of agreement, in a particular factual context. Such a discussion would now find its home in the chapter on standard of care in a tort textbook. Furthermore, there is nothing in the Essay to suggest that the factual scenario of a person taking possession of another’s goods provides

23 24 25 26 27

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Bridge, Personal Property Law (3rd edn, Clarendon Press, 2002), 37. (1703) Ld Raym 909, 917. (1703) Ld Raym 909, 919. See Bridge, Personal Property Law, 36–38. See further the views of P Atiyah, The Rise and Fall of Freedom of Contract (OUP, 1979), 177, 186–87. (1703) 2 Ld Raym 909, 916. Jones’s Essay was published in 1781 in London. It is currently out of print in the UK. I had access to a 1978 American reprint by Garland Publishing Inc (New York and London) in the University of South Carolina law library. This is a facsimile based upon a copy in the Yale School of Law. Sir William Jones lived between 1746 and 1794. By way of an aside Sir William Jones’s contribution to the history of ideas was probably greater outside the legal context. Whilst a British Judge serving in India his studies in Sanskrit led him to the discovery of what we now term Proto-Indo-European, the original common ancestor language which lies at the heart of all the European and Asiatic languages. See S Pinker, The Language Instinct (Penguin, 1997), 251 (‘one of the most extraordinary discoveries in all scholarship’). Jones, 117.

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anything other than a common example of situations in which the law imposes duties upon an individual, irrespective of his consent. Sir William Jones’s intention was to restate the principles governing the contract, as he saw it, of bailment in English law. He was clearly influenced by the commercial importance of such transactions, stating that it was ‘astonishing that so important a branch of jurisprudence should have been so long and so strangely unsettled in a great commercial country’.29 His starting point is a modest chiding of Sir William Blackstone for compressing the subject into three paragraphs in his Commentaries.30 The principal theory in Sir William Jones’s essay is that a bailee should only be obliged to exercise a ‘degree of care proportioned to the nature of the bailment’.31 In Jones’s view there are ‘infinite shades of default or neglect’.32 In particular, the question is whether the transaction is mutually beneficial for bailor or bailee or if it only unilaterally benefits one party. If there is mutual benefit ordinary diligence should be required. However, as a matter of principle if only the bailor benefits the bailee should be answerable only for gross neglect. In contrast, if the bailee alone benefits he should be more than ordinarily careful, and should be liable even for slight negligence.33 Having set out this position as a matter of principle the essay proceeds to justify this account by reference to an impressively broad range of authority including ancient Mosaic law, Roman law, the ancient laws of the Hindus, Athenian law, St German’s Doctor and Student, more recent civilian writers including Pothier, and English law, principally the judgment of Sir John Holt in Coggs v Bernard.34 Sir William Jones respectfully prefers a fivefold taxonomy of bailment. First, depositum. Secondly, mandatum or commission. This is where the bailee undertakes to carry out some valuable service in respect of the goods, without reward. Thirdly, commodatum or loan for use. Fourthly, pignori acceptum, or pledge. Fifthly, locatum, or hire. On the contractual dimension of bailment, it is a running theme of Sir William Jones’s Essay that the general obligations described therein can always be varied by special agreement. On the proprietary dimension there is little separate discussion of these issues. However, the common assertion that a pledgee has a special property in the pawned goods is treated as only being part of a wider proposition that a ‘general bailee has unquestionably a limited property in the goods entrusted to his care’.35 This appears to be an early recognition that there is some proprietary consequence of a bailment which is not just limited to the special category of pledge or pawn. In respect of locatio or hiring Jones asserts that the ‘hirer gains a transient qualified property in the thing hired’,36 However, it must be recalled that these references to proprietary interests arise in a context of establishing the appropriate standard of liability of the bailee for care of the goods. The 18th century theorizing of Coggs v Bernard and Sir William Jones’s Essay represent a now discarded form of reasoning as to the appropriate standard of care to be imposed upon persons

29 30 31 32 33 34 35 36

Jones, 2. Sir William Blackstone, Commentaries on the Laws of England (1765–69, University of Chicago Press facsimile reprint edition, 1979) Vol II, 452–54. See Jones at 3. Jones, 5. Jones, 7. Jones, 10. Jones, 11–36. See perhaps too scathingly, Professor Ibbetson: ‘Jones was undoubtedly a man of very considerable learning, which he took no pains to conceal.’ D Ibbetson, ‘The law of business Rome: foundations of the Anglo-American tort of negligence’ [1999] CLP 74, 81. Jones, 80. Jones, 85.

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undertaking certain tasks. Each presupposes a spectrum of standards of default from gross negligence through to ordinary negligence and on to slight negligence. The philosophy behind these statements is that one of these grades of negligence is most apt for a particular factual scenario. However, differentiated standards of care had fallen into disfavour by the 20th century. This distrust goes back to the memorable mid-19th century observation of Rolfe B (later Lord Cranworth LC) that he ‘could see no difference between negligence and gross negligence—that it was the same thing, with the addition of a vituperative epithet’.37 Accordingly in Houghland v RR Low (Luxury Coaches) Ltd,38 where a carrier by road lost a passenger’s luggage, the Court of Appeal rejected differentiated standards of care. Rather ordinary negligence was the appropriate touchstone of responsibility with the particular standard of care required to be determined by the facts and circumstances of the case.

Theoretical foundations The map which we drew above of substantive English private law (as opposed to adjectival or procedural law) is a pre-eminently conceptual account. Its unspoken premise is the desirability, indeed necessity, of an appropriate conceptual scheme for dividing and analysing the problems encountered in private law disputes. A critical distinction needs to be drawn between ‘conceptual’ and ‘contextual’ categories of law.39 A conceptual category is organised around an idea of some degree of generality about rights or the generic types of events which give rise to rights. In contrast, a contextual category covers all the law relevant to a particular field of human activity. On this view the law of contract or the law of property are examples of the former category. In contrast, ‘family’ law, ‘employment’ law, ‘shipping’ law and ‘banking’ law are examples of the latter category; that is, all the laws and regulations relating to families, employment, ships and banks respectively. A legal education should equip a person to understand the core principles of the main conceptual categories. For example, in private law: contract, tort, fiduciary obligation and property. More advanced study, and most practice, deploys these foundational ideas in particular contexts. There is remarkable agreement across the major western legal systems as to the appropriate general conceptual categories. The insights of the Roman lawyers retain a powerful hold over the legal imagination. Crucial is the distinction between property and obligation. Furthermore, the subdivision of property into those which are immovable or movable, which usually entails a distinction between interests in land and interests in other assets, is widespread. The common law conception of real property is similar to this, though with some domestic peculiarities.40 In addition, the subdivision of obligations into contract, wrongs and those arising out of unjust enrichment, is

37 38 39 40

Wilson v Brett (1843) 11 M &W 113, 115–16. [1962] 1 QB 694. The test was applied in Sutcliffe v Chief Constable of West Yorkshire [1996] RTR 86, 94 (Nourse LJ). A similar approach has been adopted, for cases of gratuitous agency: Chaudry v Prabhakar [1989] 1 WLR 29. P Birks. An Introduction to the Law of Restitution (OUP, 1989), 73–74. See for a fuller account P Birks, ‘Restitution and the freedom of contract’ [1983] CLP 141, 146–47. It should be noted that the English conflict of law rules adopt the civilian distinction between immoveable and moveable property.

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widely accepted. Accordingly, we should be suspicious of domestic voices insisting on the necessity of recognising a category of bailment which straddles the important divide between obligations and property. We should question the supposed utility of the category. The error committed by those who advocate a distinct category of bailment is to seek to align it with conceptual categories such as property or obligation. There are two broad ways of defining what counts as a bailment. First, the modern orthodoxy advocated by Professor Palmer, which received judicial acceptance in The Pioneer Container,41 is that it unites all those instances where a person voluntarily assumes responsibility for the goods of another. Even more broadly English lawyers tend to deploy the label bailment wherever there is a transfer of possession of tangible personal property felling short of an outright and immediate sale.42 With this in mind the supposed category of bailment can be better seen for what it truly is. It is a broad contextual category linking together diverse dealings in tangible personal property ranging from the finding of goods to elaborate finance leases intended to last for the entire working life of a chattel. Accordingly in Birks’s English Private Law the two chapters on sale of goods and bailment aim to cover respectively all dealings in tangible personal property. In contrast, it is remarkable that there is no self-standing treatment of intangible personal property. The recognition that bailment is merely a contextual category, albeit an over-general one, should have a liberating approach upon English law. The intellectual error committed by those who at least implicitly insist that it is a conceptual category can then be more easily countered. Even in the great case of Coggs v Bernard in 1703 was it recognised that the category was too unwieldy to be of any practical utility, and required further sub-dividing for the purposes of appropriate legal discussion. Bailment’s contextual nature explains why it apparently straddles the conceptual categories of contract, tort and property. It can then be recognised that the obligations and incidents supposedly arising because of the bailment, more properly belong to the categories of contract, tort, unjust enrichment or property. All the alleged candidates for the status of rules peculiar to bailment must be tested to see whether they can be better explained in terms of one of the more widely accepted conceptual categories. What remains forms the irreducible core of bailment. Such fragments may best be seen as a mere archaic rump of less developed legal thinking. Indeed we shall see that the alleged obligations and incidents which are peculiar to the law of bailment are very few in number and that even the advocates of the subject are unsure whether they are special to the particular context of dealings in tangible personal property. As Robert Goff LJ so wisely observed in Clough Mill v Martin:43 ‘In performing this task, concepts such as bailment and fiduciary obligation must not be allowed to be our masters, but must rather be regarded as the tools of our trade.’ Indeed, it is argued here that bailment is not properly seen as a conceptual category at all in English law, but merely a body of rules derived from general conceptual categories deployed in a particular contextual scene. Furthermore, in order to prepare intelligible and sufficiently detailed legal texts (and for pedagogical purposes) the alleged category is too broad and needs to be further broken down to reflect the wide spectrum of dealings in goods short of outright sale.

41 42

43

[1994] 1 AC 324 (PC). Eg, even in the well-developed transaction of the supply of goods on a ‘sale or return’ basis (the principal rule is codified in the Sale of Goods Act 1979, s 18 r 4) the Court of Appeal recently insisted on identifying a ‘contractual bailment’ pending perfection of the transaction or return of the goods: Atari Corp (UK) Ltd v Electronics Boutiques Ltd [1998] QB 539, 549. [1985] 1 WLR 111, 116.

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THE OBLIGATIONS DIMENSION The primacy of contract The most pernicious effect of the continued reference to the archaic category of bailment in modern commercial law is the tendency to undermine the importance of private ordering, and in particular the deliberate contractual structuring of many relationships which involve a transfer of possession in tangible personal property. Over the last decade it has become clear in seminal decisions of the higher courts that a degree of primacy should be attached to contractual undertakings in the private law arena. This means that those obligations which arise as a matter of law should show deference to the contractual arrangements of the parties. With respect to the tort of negligence Henderson v Merrett Syndicates Ltd44 is a highly significant authority. It confirmed the rehabilitation of ‘assumption of responsibility’ touchstone of liability first recognised in Hedley Byrne & Co Ltd v Heller & Partners Ltd.45 The case recognised that investors or ‘names’ on the Lloyd’s of London insurance market could rely upon causes of action in tort based on assumption of responsibility against their agents, whether or not they were in a direct contractual relationship with those agents. It is wrong to see the recognition of concurrent liability in cases where there is a direct contractual relationship as pointing towards the primacy of tort. Lord Goff did say that ‘the law of tort is the general law, out of which the parties can, if they wish, contract’.46 However, this must be read as stating that the law of tort provides the basic duties where one party assumes responsibility over the property or affairs of another. It is clear that where a direct contractual relationship exists between the parties those tortious obligations can be limited or excluded by contract, both explicitly and implicitly. As Lord Goff observed in Henderson v Merrett: …in many cases in which a contractual chain comparable to that in the present case is constructed it may well prove to be inconsistent with an assumption of responsibility which has the effect of, so to speak, short-circuiting the contractual structure so put in place by the parties.47

Indeed, the primacy of contract has been further advanced in the case of disappointed beneficiaries where a will has not been prepared by a dilatory solicitor, or has been negligently prepared. In White v Jones48 a solicitor’s duty to take care in preparing a will was held to involve an assumption of responsibility extending to the intended beneficiary who would suffer harm if the solicitor’s negligence prevented the transmission of family wealth upon death. Lord Goff, giving the principal speech on behalf of the majority, recognised that the contract between the solicitor and the client could affect the tortious entitlements of the intended beneficiary:

44 45 46 47 48

[1995] 2 AC 145. The rehabilitation had begun with Spring v Guardian Assurance plc [1995] 2 AC 296 in the speech of Lord Goff. Note that Spring was decided before Henderson, despite the sequence in the official Law Reports. [1964] AC 465. [1995] 2 AC 145, 193. Ibid, 195. [1995] 2 AC 207.

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New perspectives on property law, obligations and restitution Such assumption of responsibility will of course be subject to any term of the contract between the solicitor and the testator which may exclude or restrict the solicitor’s liability to the testator under the principle in Hedley Byrne.49

We shall see that the rehabilitation of the assumption of responsibility test provides a link between these cases of professional negligence and modern authorities on bailment. However, for now our concern is with the primacy of contract. Another species of obligation which is subject to the primacy of contract are the duties of fiduciaries. It is recognised that contract is often the source for fiduciary duties, and may circumscribe or exclude what would otherwise be their operation. An important authority is Kelly v Cooper,50 a decision of the Privy Council on the duties of estate agents who act for multiple vendors. Similarly the speech of Lord Browne-Wilkinson in Henderson v Merrett Syndicates51 is significant. He rejected the alternative plea of breach of fiduciary duty brought by the Lloyd’s names. The equitable duty to take care imposed on fiduciaries was merely an example of the general requirement that those who assume responsibility for the property or affairs of another must take reasonable care.52 Lord Browne-Wilkinson stated: The liability of a fiduciary for the negligent transaction of his duties is not a separate head of liability but the paradigm of the general duty to act with care imposed by law on those who take it upon themselves to act for or advise others. Although the historical development of the rules of law and equity have, in the past, caused different labels to be stuck on different manifestations of the duty, in truth the duty of care imposed on bailees, carriers, trustees, directors, agents and others is the same duty: it arises from the circumstances in which the defendants were acting, not from their status or description. It is the fact they have all assumed responsibility for the property or affairs of another which renders them liable for the careless performance of what they have undertaken to do, not the description of the trade or position which they hold.53

Furthermore, Lord Browne-Wilkinson made it clear that a relevant contract could modify or exclude the fiduciary duties which otherwise would have obtained: Moreover, and more relevantly, the extent and nature of the fiduciary duties owed in any particular case fall to be determined by reference to any underlying contractual relationship between the parties… The existence of a contract does not exclude the co-existence of concurrent fiduciary duties (indeed, the contract may well be their source); but the contract can and does modify the extent and nature of the general duty that would otherwise arise.54

The recent recognition of the independence or autonomy of the law of unjust enrichment has not undermined the traditional view that a binding contract excludes recourse to restitutionary remedies. Traditionally it was said that the existence of an express contract would exclude recourse to an implied contract.55 The modern expression of this principle is that where there is a subsisting

49 50 51 52 53 54 55

[1995] 2 AC 207, 268. See also the fascinating earlier judgment of Robert Goff LJ in The Aliakmon [1985] QB 350, 397; not followed in the House of Lords: [1986] AC 785. [1993] AC 205. [1995] 2 AC 145. See also the important judgment of Millett LJ in Bristol & West Building Society v Mothew [1998] Ch 1. [1995] 2 AC 145, 205. Ibid, 206. Weston v Downes (1778) 1 Dougl 24, 99 ER 19; Toussaint v Martinnant (1787) 2TR 100, 100 ER 55; Gompertz v Denton (1832) 1 C & M 207, 149 ER 376.

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contract between the parties which, by its express or implied terms, regulates the transfer of the disputed benefit, there can be no recourse to restitutionary claims unless and until the contract is avoided or discharged in accordance with the rules of contract law. In Dimskal Shipping Co SA v International Transport Workers Federation, The Evia Luck (No 2)56 Lord Goff stated: …before the [plaintiff] could establish any right to recover the money, they had first to avoid the relevant contract. Until this was done, the money in question was paid under a binding contract and so was irrecoverable in restitution.57

Accordingly, where the contract remains binding, its provisions remain operative in respect of the return or retention of benefits and the parties are confined to any remedies for breach of contract they may have.58 Furthermore, even where a contract is terminated for breach or pursuant to an express termination clause its provisions may, as a matter of construction, still govern the question of whether there was a conditional or unconditional transfer of benefits.59 This recognition of the primacy of contract over tortious obligations, fiduciary duties and claims in unjust enrichment signals that in the modern law relationships traditionally described as ones of bailment must also yield to deliberate contractual structuring. Indeed, in the principal modern contexts that we shall consider later bailment operates in a setting where there is at least one contract, if not a chain of contracts. However, rather than according primacy to contractual reasoning much of the literature on bailment, whether recent or not, tends to treat the contractual regime as an afterthought to bailment situations.

The general law: tort So far it has been suggested that much traditional discussion of bailment has focused upon the topic which we would nowadays regard as being about the standard of care in negligence. We also recorded the observation of Lord Browne-Wilkinson in Henderson v Merrett Syndicates Ltd that the duty to take care of the bailee was merely one species of the general duty to take care recognised in numerous diverse relationships. This amounts to a tortious recharacterisation of bailment. This is not to neglect the traditional emphasis upon agreement (whether supported by consideration or not) which forms the foundation of most duties traditionally ascribed to bailment. Even Hedley Byrne has a strongly consensual flavour, with Lord Devlin’s famous recognition that the problem was caused by the doctrine of consideration, and that the situation was ‘equivalent to contract’.60 The view taken here is that many of the obligations in what are traditionally described as bailment cases can be explained by reference to the contracts between the parties. Where there is no contractual relationship the majority of the obligations recognised must be classified as tortious, although as we shall see there is some room for remedies aimed at reversing unjust enrichment.

56 57 58 59 60

[1992] 2 AC 152. Ibid, 165. Pan Ocean Shipping Co Ltd v Creditcorp Ltd, The Trident Beauty [1994] 1 WLR 161. Stocznia Gdanska SA v Latvian Shipping Co [1998] 1 WLR 574. See also Portman Building Society v Hamlyn Taylor Neck [1998] 4 All ER 202, 208 (Millett LJ). [1964] AC 465, 528.

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The alleged content of the category of bailment can be seen most clearly in a recent summary by Professor Palmer: Bailment imposes certain basic obligations on every bailee. The bailee must take reasonable care of the goods and abstain from converting them. He must not deviate from the terms of the bailment and becomes an insurer of the goods if he does so. In most cases he must also refrain from denying the bailor’s title. These obligations can normally be varied by special agreement, and in some cases they are superseded by statute. Where goods are lost or damaged while in the bailee’s possession the bailee is liable unless he can show that misadventure occurred independently of his fault. In this and other respects bailment is an independent legal relation having qualities not complemented by the normal law of contract or tort.61

Let us now examine the supposed principles common to all bailments. First, the bailee’s estoppel. It is stated that at common law a bailee was estopped from denying his bailor’s title.62 This is said to be subject to a number of exceptions including ‘those purporting to confer either an ultimate title, or the present use and enjoyment of goods on the bailee; for example, hire-purchase and the delivery of goods under a conditional sale’.63 However, there is a more important exception which has the effect of abrogating the supposed common law rule. The common law estoppel and the cognate rule of jus tertii, which precluded a defendant from arguing that someone other than the claimant has a better right to the goods, were both abolished by the Torts (Interference with Goods) Act 1977, s 8(1). This provides for procedural rules to be made entitling the defendant in a claim for wrongful interference with goods to raise the competing entitlement of another party.64 Accordingly for a quarter of a century one of the supposedly distinguishing incidents of bailment has been abolished in England and Wales.65 Professor Palmer’s second attribute of all bailments is the rule that possession of goods counts as title against a wrongdoer. What this entails in practice is that a bailee, in addition to a bailor, has standing to bring proceedings for wrongful interference with goods or negligence against a wrongdoer. Furthermore, there is long-standing authority that the bailee can recover for the full value of the goods, and has an obligation to account to the bailor in respect of the latter’s share of the proceeds of the suit. This is a fascinating chapter in the history of the common law which I have explored elsewhere at some length.66 There I argued that the bailee’s entitlement to sue and recover the full value of the goods has in fact been followed in other areas of the law which are not all necessarily connected with bailment. First, a natural extension of the principle was the position of the insured bailee who may recover in full upon an appropriately worded policy of insurance.

61 62 63 64 65

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EPL, para 13.02. EPL, para 13.21, and see the authorities cited at EPL, n 158. EPL, para 13.22. This is because security of title or possession is provided for by statute: Supply of Goods and Services Act 1982, s 7 (hire of goods); Supply of Goods (Implied Terms) Act 1973, s 8(1)(a), as amended (hire-purchase). Formerly RSC Ord 15, r 10A. See now Civil Procedure Rules 1998, r 19.5A. Professor Palmer’s suggestions for circumventing s 8(1) of the 1977 Act by pleading the case in ‘bailment’ or contract rather than wrongful interference with goods is formalistic and highly doubtful. It does not appear to be supported by Sutcliffe v Chief Constable of West Yorkshire [1996] RTR 86, 90, which he relies on in EPL, n 177. G McMeel, ‘Complex entitlements: the Albazero principle and restitution’ [1999] Restitution Law Review 22.

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Secondly, the right of a consignor of goods to recover in full in certain exceptional cases as recognised in The Albazero67 similarly has roots in bailment type reasoning. Thirdly, the maritime rule has been extended by analogy culminating in two recent House of Lords authorities on the construction industry. These cases cannot be explained by reference to bailment at all.68 Accordingly the principles said to derive from the concept of possession as title are not confined to the supposed bailment context. Indeed the other examples all involve contractual relationships, where a contracting party recovers in excess of his own loss and is then under a duty to account to a third party in respect of their portion of that loss. Accordingly there is nothing peculiar to the law of bailment about these cases. The fact that a bailee has title to sue appears to be a sensible rule, deriving no particular significance from the context of the transfer of tangible personal property. Indeed, a controversial recent decision that a licensee of land can maintain an action in trespass suggests there is nothing special about chattels in this context.69 Professor Palmer’s third incident of bailment is the insurable interest that a bailee has in the goods to their full value. Again, I have dealt with this before, and there is nothing peculiar to chattels about the principles being developed here.70 Indeed the fact that wider principles are at play is demonstrated by recent cases concerning insurable interests in the context of contractors’ all-risk insurance in the construction industry. The case of Petrofina (UK) Ltd v Magnaload Ltd71 demonstrates that modern insurance law is developing a more sophisticated approach to situations where there are co-interested parties in the subject-matter of an insurance policy. The pressing practical issue is potential recourse to the right of subrogation. It is clear that subrogation rights may be contracted out of. In the emerging field of composite or co-insurance Petrof ina held that a sub-sub-contractor was one of the insured parties under a contractor’s all-risks policy. The insurer could not pursue a claim by way of subrogation in respect of the sub-sub-contractor’s alleged negligence because it was one of the insured parties and not a third party. Similarly, fire insurance entered into by a landlord over real property was construed as extending its scope of protection to the tenant who had negligently caused the fire in Mark Rowlands Ltd v Berni; Inns Ltd.72 There is nothing peculiar to chattels about these developments. Two other features of Professor Palmer’s statement on the obligations common to all bailments are the reversed burden of proof and liability for what is described as deviation. It is submitted that the obligation of the bailee to take reasonable care of the goods is simply an example of general principle and that the obligation not to convert the goods is not dissimilar to position of the world at large. We shall return to the question of the reversed burden of proof and deviation below. Andrew Bell’s account of the distinctive contribution of bailment to the law of obligations is not dissimilar to Professor Palmer’s. He lists the following alleged distinctive features of the common obligations of the bailee. First, the extent of the duty of care. Secondly, the standard of care

67 68 69 70 71 72

[1977] AC 774. Linden Garden Trusts v Lenesta Sludge Disposals Ltd; St Martin’s Property v McAlpine [1994] 1 AC 180; Alfred McAlpine Construction Ltd v Panatown Ltd [2001] 1 AC 518. Manchester Airport plc v Dutton [2000] 1 QB 133. See W Swadling (2000) 1 16 LQR 354. G McMeel [1999] Restitution Law Review 22, 26–35. [1984] 1 QB 127. [1986] QB 211. See also: Stone Vickers Ltd v Appledore Ferguson Shipbuilders Ltd [1991] 2 Lloyd’s Rep 288, reversed on other grounds [1992] 2 Lloyd’s Rep 578; National Oilwell Ltd v Davy Offshore Ltd [1993] 2 Lloyd’s Rep 582 and Netherlands v Youell [1997] CLC 738.

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required. Thirdly, the non-delegable nature of the bailee’s obligation. Fourthly, the incidence of the burden of proof. Fifthly, the role played by exemption clauses. And sixthly, the appropriate measure of damages and application of the principle of remoteness. However, Bell is not convinced that all of these distinctive features are exclusive to bailment.73 Instead Bell lists only two distinctive obligations of the bailee. First, enhancement of the basic duty of care. Secondly, deviation. Let us consider Mr Bell’s analysis further. First, his discussion of the distinctive features is concerned with those obligations which are common to contract, tort and bailment but where it is alleged that there are distinctive features in the bailment context. He demonstrates that to a large extent alternative analyses are possible for the supposedly distinctive features, usually arising from the touchstone of liability of ‘assumption of responsibility’. The first of these is that a bailee’s duty of care is said to extend beyond simply damaging the goods, but extends to taking care to protect them from third parties who might steal or damage them. It can be noted in passing that it may be preferable to describe this question as one going to the appropriate standard of care, rather than the extent of the duty of care. A similar criticism may be made of the leading House of Lords case which undermines the argument that there is anything distinctive about chattels in this context: Smith v Littlewoods Organisation Ltd.74 It seems the modern view would be that the extent of a person’s responsibility for taking care of the property of another depends upon what level of responsibility was assumed and the factual circumstances more generally. The second of the obligations common to contract, tort and bailment is the appropriate standard of care. However even here modern developments, particularly in the shape of Houghland v RR Low (Luxury Coaches) Ltd,75 have undermined the supposed traditional distinctiveness of bailment-type relationships, and have contributed to assimilating the principles to the general law of negligence.76 The third feature of the common obligations considered by Bell is the non-delegable nature of the bailee’s obligation. This is well-established in relation to contractual bailment (in accordance with ordinary principles), but is more controversial in respect of non-contractual bailments.77 Again it is far from clear that there is anything particularly special about bailment in this context. The fourth feature is the incidence of the burden of proof, which is shifted to a defendant bailee to show that reasonable care has been taken once a bailor has established loss or damage to the goods. This adjectival matter may provide the best example of a distinctive hallmark of bailment. The best explanation of it may be historical.78 However, even Bell explains it in terms of policy. The person best equipped to explain to the court what has happened is required to discharge the onus of proof. It is simply a pragmatic judgment responding to the factual situation, which gives rise to this useful rule.79 Whilst this is clearly a distinguishing characteristic of bailment, there is nothing to suggest the courts could not devise similar reversals of the burden of proof in other contractual or tortious situations. A statutory example is the reversal of the burden of proof with respect to negligent representations in the contractual context in s 2(1) of the Misrepresentation Act 1967. A person

73 74 75 76 77 78 79

Bell, 474–84. [1987] AC 241. [1962] 1 QB 694. Bell, 475–77. See the analysis of the differing views of the Court of Appeal in Morris v CW Martin & Sons Ltd [1966] 1 QB 716 by Bell 477–78. Milsom, Historical Foundations of the Common Law (2nd edn, Butterworths, 1981), 266–69. Bell, 478–80.

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who utters a misstatement in contractual negotiations is liable in damages unless he can show that he exercised reasonable skill and care. Nobody suggests that this subsection is inexplicable in terms of contract or tort reasoning as a result of this shift in the onus of proof. Similarly, there is a judgemade rule that if a representee can prove a misrepresentation was material, then the burden shifts to the representor to prove that the particular representee did not in fact rely on it.80 The fifth example is the efficacy of exemption clauses in sub-bailment situations. This will be explored in more detail below, although it suffices to say for now that once again valuable principles have developed in the context of bailment which may be extended beyond those particular confines.81 The sixth incident of common obligations is the allegedly sui generis measure of damages and principles of remoteness. However, the only authority for this is the judgment of Lord Denning MR in Building and Civil Engineering Holidays Scheme Management Ltd v Post Office.82 Bell finds it hard to draw any firm conclusions from this thin stream of authority.83 Turning now to Mr Bell’s two distinctive obligations of the bailee, these hint rather at the archaic nature of many of the authorities rather than identifying autonomous features of bailment as far as the modern law is concerned. First, there is a possibility of an enhanced standard of liability on a bailee, even in the absence of consideration. However, Bell accepts that the cases are ‘elderly’ and is unclear how far they would be followed today. Furthermore, it seems practically very unlikely that such a standard of liability would be assumed in practice by any person in the absence of payment in the modern world.84 Furthermore, if contract governed, that would inevitably define or circumscribe the standard of liability. The second distinctive feature of bailment is the doctrine of deviation. This has its origins in the carriage of goods by sea in contracts such as charterparties or bills of lading. Bell states: A carrier of goods is under a duty not to deviate from the route by which it has been agreed that the goods are to be taken. By extension, bailees generally are said to be guilty of deviation (or sometimes ‘quasi-deviation’) if they hold the bailed goods in a different place from that which has been agreed, if they entrust them to an unauthorised sub-contractor, if they use them for unauthorised purposes or if they keep the goods beyond the agreed time.85

It must be admitted that it is difficult to rationalise this old stream of authority in terms of modern contractual or tortious reasoning. However, that does not leave much to suggest that bailment must forever remain an independent source of obligations so removed from contractual or tortious thinking as to be kept in a box of its own.86 All the cases bar Mitchell v Ealing London Borough Council,87 relied upon by Bell, are over 50 years old. If the depressing facts, mechanical reasoning

80 81 82 83 84 85 86 87

Redgrave v Hurd (1881) 20 Ch D 1, 21; Smith v Chadwick (1884) 9 App Cas 187, 196. See Bell, 480–82. [1966] 1 QB 247, 261–62. See for comparison Lord Denning’s attempt to amalgamate contractual and tortious remedial reasoning in H Parsons (Livestock) Ltd v Uttley Ingham Co Ltd [1978] QB 791, 801–02. Compare Brown v KMR Services Ltd [1995] 4 All ER 598. Bell, 483–84. Bell, 484. Bell, 484–85. See F Reynolds in EPL, paras 11.44–48. [1979] QB 1.

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and unjust result of Mitchell are indicative of the consequences of ‘bailment’ inspired reasoning the subject should be allowed to wither away.

The significance of unjust enrichment The modern law of contract and tort can explain most of the supposedly distinctive features of the category of bailment. The recent recognition of unjust enrichment as a third pillar of the English law of obligations has led to the reinterpretation of earlier authorities. There is an important pocket of case law often discussed in terms of either agency of necessity or bailment which repays closer examination. The principles of agency of necessity originate in the law merchant in two particular situations. First, the power of the master of a vessel in an emergency to dispose of the cargo and perform other necessary actions. Secondly, the right of reimbursement of the acceptor of a bill of exchange for the honour of the drawer. There is respectable authority that the principle is confined to such exceptional cases.88 In contrast, in cases where there is a pre-existing relationship between the parties, such as a bailment, there has been some judicial support for an expansion of the doctrine. In Prager v Blatspiel, Stamp and Heacock Ltd,89 McCardie J stated that agency of necessity, and consequently a right to reimbursement, would arise if three conditions were satisfied. First, the agent must be unable to communicate with his principal in order to obtain instructions as to what to do to safeguard the latter’s interests. Secondly, some action must be necessary to preserve the principal’s interests. Thirdly the agent must act bona f ide and in the best interests of the principal.90 It is controversial whether there is anything particularly agencyorientated about such cases. It is necessary to distinguish two distinct situations. In China Pacific SA v Food Corporation of India, The Winson91 Lord Diplock stated: Whether one person is entitled to act as agent of necessity for another person is relevant to the question of whether circumstances exist which in law have the effect of conferring on him authority to create contractual rights and obligations between that other person and a third party that are directly enforceable by each against the other. It would, I think, be an aid to a clarity of legal thinking if the use of the expression ‘agent of necessity’ were confined to contexts in which this was the question to be determined and not extended, as it often is, to cases where the only relevant question is whether a person who without obtaining instructions from the owner of goods incurs expense in taking steps that are reasonably necessary for their preservation is in law entitled to recover from the owner of the goods the reasonable expenses incurred by him in taking those steps.92

Only the former, triangular configuration raises agency issues. The latter, linear configuration raises no issues of legal representation, only of a direct right to restitution. The facts of The Winson involved a linear claim. Salvors off-loaded wheat from a stranded vessel and arranged and paid for

88 89 90 91 92

Hawtayne v Bourne (1841) 7 M & W 595, 599, 151 ER 905 (Parke B); Gwilliam v Twist [1895] 2 QB 84, 87 (Lord Esher MR); Jebara v Ottoman Bank [1927] 2 KB 254, 270–71 (Scrutton LJ). [1924] 1 KB 566. See also In Re F (Mental Patient Sterilisation) [1990] 2 AC 1, 74–76 where Lord Goff suggested that the intervener must also act prudently, and must not be acting officiously. [1982] AC 939. At 958.

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its storage pending collection by the cargo-owner. The salvors were held entitled to reimbursement of the expenses incurred. Lord Diplock stated that, as regards two-party cases, impossibility of communication with the owner was not a condition precedent to the claim. The owner’s failure to give instructions when apprised of the situation sufficed. This linear restitutionary claim traditionally discussed in terms of agency of necessity, most commonly involves a pre-existing bailment. An early authority awarding restitution in such a case is Great Northern Railway Co v Swaffield.93 The railway company carried a horse on behalf of the defendant to a station, but there was no one there to collect the horse from the station. The company accordingly arranged for the horse to be looked after by stables. The defendant refused to pay for the charges incurred. Therefore the plaintiffs met the sums themselves, delivered the horse and made a personal claim for the stabling charges. The Court of Exchequer held that they were entitled to reimbursement. Pollock B stressed that the railway company as a carrier had a duty to take reasonable care of the horse such as a man would take reasonable care of his own goods. By analogy with maritime authority,94 it was held that there was a correlative right for reimbursement for necessary expenses incurred. More recently, in The Winson the House of Lords stressed that the relationship between the salvors and the cargo-owners gave rise to a direct relationship of bailment. The salvage services required the off-loading of the cargo and its conveyance to a place of safety. Thereafter, according to Lord Diplock: …the bailment which up to the conclusion of salvage services had been a bailment for valuable consideration became a gratuitous bailment; and so long as that relationship of bailor and bailee continued to subsist the salvors, under the ordinary principles of the law of bailment too wellknown and too well-established to call for any citation of authority, owed a duty of care to the cargo owner to take such measures to preserve the salved wheat from deterioration by exposure to the elements as a man of ordinary prudence would take for the preservation of his own property. For any breach of such duty the bailee is liable to his bailor in damages for any diminution of the value of the goods consequent upon his failure to take such measures; and if he fulfils that duty he has, in my view, a correlative right to charge the owner of the goods with the expenses reasonably incurred in doing so.

Such cases are now generally explained in terms of a right to restitution or reimbursement of expenses incurred in necessitous intervention on behalf of another. Currently there is a patchwork of such responsibility in English law, but leading authors plead for a greater generalisation of such a right. Again, the so called bailment cases are simply an example of what is said to be a more general principle not confined to the context of chattels.96

THE PROPERTY DIMENSION As young law students we were all told that interests in land were different. First, we were indoctrinated that no person other than the Queen owned land in England. The most one could

93 94 95 96

(1874) LR 9 Ex 132. Notara v Henderson; Gaudet v Brown (1873) LR 5 PC 134. [1982] AC 939, 960. R Goff and G Jones, The Law of Restitution (5th edn, Sweet & Maxwell, 1998) 461–82; G McMeel, The Modern Law of Restitution (Blackstone Press, 2000), 114–20; F Rose, ‘Restitution for the rescuer’ (1989) 9 OJLS 167.

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acquire was an estate in the land. Curiously no similar suggestion was made in the case of chattels. We were not instructed that the Queen was the ultimate owner of our compact disc collections, and that we merely enjoyed an estate in our compact discs with Her Majesty as ultimate feudal landlord. Nevertheless the doctrine of estates in respect of real property was said to be a crucial and distinct feature of that species of property. It enabled lawyers to divide the estate in the land not only spatially (Blackacre from Whiteacre) but also temporally (whether for a six-month assured shorthold tenancy or a 999 year lease). We were led to believe there was a significant practical consequence of this fanciful superstructure. There could only be leases of interests in land, not over chattels. This is unfortunate because in my experience in commercial terms there are three principal types of interest which business people wish to acquire in assets. First, ultimate control or ownership. Secondly, a more limited right to use an asset for an agreed period, in other words, lease-type interests. Thirdly, a right to have recourse against an asset to reinforce an obligation, usually sounding in debt, of the owner. That is, a security interest. The doctrine of estates, and its confinement to interests in real property, is used to suggest there could accordingly be no entitlement to a leasehold interest in goods. Such arguments were often reinforced by reference to the numerus clausus principle. This entails that only a fixed list of off-the-peg arrangements can exist in relation to an item of wealth. In respect of land the list is longish, and may indeed be too elaborate with regard to servitudes. In contra-distinction in respect of chattels it is frequently asserted that there are only two types of interest capable of subsisting in goods, namely ownership and possession. Indeed, ownership of chattels is often said to be simply the best possessory title available. Accordingly, so far as chattels were concerned, possession really was nine-tenths of the law. Despite this, business people have devised means of transferring possession without transferring outright ownership. Hire-purchase was the principal means of obtaining consumer durables for most of the 20th century. It remains probably the principal method of acquiring an interest in a motorcar. It is universally accepted that where goods are deposited as security for an obligation the pledgee has a proprietary interest arising from his possession, usually termed a special property.97 There has been more controversy about whether a hirer of chattels has a similar proprietary interest. It is submitted that there is no relevant distinction between the hirer and the pledgee, and that both can be said to have a special property in the goods. This conclusion has been doubted by at least one writer. English law recognises a finite number of species of property interest which can be created or recognised at law. This is clearly desirable from the point of view of society in general in ensuring that interests in things are limited to certain off-the-peg arrangements, rather than yielding a potentially infinite number of bespoke arrangements.98 This is the numerus clausus principle.99 In the view of Swadling, the chattel lease has not yet been admitted to the closed list of the numerus clausus.100 Others take a different view including Lawson and Rudden,101 Hill102 and Furey.103 The

97 98 99

The terminology of ‘general property’ and ‘special property’ also appears in the Sale of Goods Act 1979, eg, s 61(1). Keppell v Bailey (1834) 2 My & K 517, 535–36, 39 ER 1042 (Lord Brougham LC). For discussion see B Rudden, ‘Economic theory v property law: the numerus clausus problem’, Essay 11 in J Eekelaar and J Bell (eds), Oxford Essays in jurisprudence—Third Series (OUP, 1987), 239–63.

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defining characteristics of a property interest, or the incidents of property which should be recorded in a valid description, have proved controversial.104 Popular candidates for inclusion are: the right to exclude others from an asset,105 a right of enforceability against third parties, and a degree of durability of persistence of rights against third parties. The essential question for the proprietary dimension of so called bailments in this discussion is whether rights in rem are recognised so as to bind third parties. Sir William Blackstone was of the opinion that there was a transfer of a proprietary interest under a lease of chattels.106 As we have seen, Sir William Jones agreed with him on this. In the 20th century, Professor Sir William Holdsworth asserted that a chattel lease had proprietary consequences.107 More recently Professors Lawson and Rudden in their seminal treatise on the Law of Property108 have supported the proprietary consequences of the lease of goods, relying explicitly on the analogy with the lease of land. Despite this academic certitude it is difficult to point to any clear authority explicitly recognising the proprietary consequence of the chattel lease. The general tenor of modern developments, though, suggests that the courts will recognise a chattel lease as a property interest when the question arises. Despite this Mr Swadling has provocatively argued that English law does not recognise the proprietary effect of the hire of goods. His essay is explicitly descriptive, rather than prescriptive. Indeed, the prescriptive question is dodged and the conclusions are presented as merely descriptive.109 His argument is possible because there are only two somewhat inconclusive streams of caselaw upon which to draw. However neither of those streams of caselaw is really directly on point and attention should be better focused elsewhere. Furthermore, a recent case on chattel leases concerned principally with the availability of relief against forfeiture provides appellate judicial recognition of the modern phenomena of chattel leases, and their proprietary consequences, albeit sotto voce. The first stream of authority, which we may call the ‘charterparty’ cases or the De Mottos v Gibson100 stream has attracted much academic attention.111 De Mattos v Gibson is an arguably seminal 19th century case, although it has become an academic commonplace to say that its subsequent reception has met with ups and downs. Its facts are well known, but one crucial matter often gets

100 Swadling, 492, 524–26. 101 F Lawson and B Rudden, The Law of Property (2nd edn, Clarendon Press, 1982), 95–97, 147–58. 102 J Hill, ‘The proprietary character of possession’, in E Cooke (ed), Modern Studies in Property Law Volume I—Property 2000 (Oxford, Hart Publishing, 2000), 23, 35–39. 103 N Furey, ‘Goods leasing and insolvency’, in N Palmer and E McKendrick, Interest in Goods (2nd edn, LLP, 1998), 787, 788. 104 A Honoré, ‘Ownership’, in A Guest (ed), Oxford Essays in jurisprudence—First Series (OUP, 1959), ch 5. 105 K Gray, ‘Property in thin air’ [1991] CLJ 252. 106 Sir William Blackstone, Commentaries on the Laws of England (1765–69, University of Chicago Press facsimile reprint edition, 1979) Vol II, 454. 107 (1933) 49 LQR 576–80. Cf ECS Wade (1926) 42 LQR 139, 140. 108 (2nd edn, Clarendon Press, 1982), 147–58 and (3rd edn, Clarendon Press, 2002), 81, 115–17. 109 Swadling, 491, 526. 110 (1859) 4 De G & J 276. 111 See S Gardner, ‘The proprietary effects of contractual obligations under Tulk v Moxhay and De Mattos v Gibson’ (1952) 98 LQR 279; A Tettenborn, ‘Covenants, privity of contract and the purchaser of personal property’ [1982] CLJ 58; N Cohen-Grabelsky, ‘Interference with contractual relations and equitable doctrines’ (1982) 45 MLR 241; A Clarke. ‘De Mattos v Gibson again’ [1992] LMCLQ 448; Swadling, 491, 495–504.

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mentioned only in passing. The case concerned a charterparty, which was accepted not to amount to a demise of the ship. Broadly speaking there are three principal species of charterparty. First, a voyage charterparty which entitles the charterer to give orders to the ship (via its master) in respect of a particular voyage. Secondly, a time charterparty which permits the charterer to give orders in respect of the ship for a fixed period of time. Thirdly, a demise or bareboat charterparty which has traditionally been held to amount to a lease or demise of the ship. In contra-distinction to this last category both voyage and time charterparties are said to be merely contracts for services.112 Appropriate differentiation is required. It is not uncommon for a demise charter to be combined with voyage and time charterparties, with a number of sub-charters taking place. What seems to be crucial is that the time or voyage charterer is not entitled to possession of the ship, but merely the services rendered by the ship and its crew. In the case of a demise or bareboat charterparty the charterer installs his own master and crew in the vessel. In contrast, under a voyage or a time charterparty the owner of the ship (or possibly the bareboat charterer) employs both master and crew. Accordingly, to draw any conclusions from De Mattos v Gibson and subsequent cases involving voyage or time charterparties as to the proprietary consequences of a chattel lease rests upon a misunderstanding of the different species of charterparty. In De Mattos v Gibson itself the contract appeared to be a voyage charterparty for the carriage of coal from Newcastle to Suez. The ship had been mortgaged to Gibson to secure a loan owed by Curry, the ship’s owner. Gibson was aware of the charter to De Mattos, and it seems the freight paid by De Mattos was directed to the mortgagee. On the voyage the ship required repairs at Penzance, which the owner could not afford. Gibson paid off the repairer, and threatened to take possession of the ship under the mortgage and direct its return to Newcastle for sale. De Mattos claimed specific performance of the charterparty as against Curry and an injunction preventing Gibson from ordering the return of the vessel to Newcastle. At an interlocutory stage the Court of Appeal in Chancery granted injunctions against both Curry and Gibson. Famously Knight Bruce LJ said with respect to the mortgagee: Reason and justice seem to prescribe that, at least as a general rule, where a man, by gift or purchase, acquires property from another with knowledge of a previous contract, lawfully and for valuable consideration made by him with a third person, to use and employ the property for a particular purpose in a specified manner, the acquirer shall not, to the material damage of the third person, in opposition to the contract and inconsistently with it, use and employ the property in a manner not allowable to the giver or seller. This rule, applicable alike in general as I conceive it to movable and immovable property, and recognised and adopted, as I apprehend, by the English law may, like other general rules be liable to exceptions arising in special circumstances; but I see at present no room for any exception in the instance before us.113

Turner LJ thought the case was an appropriate one for an interlocutory injunction. Subsequently at trial, the request for specific performance was refused by Lord Chelmsford LC, on the grounds of constant supervision and uncertainty of the terms of the charterparty, which rendered it difficult to enforce. Nevertheless, the Lord Chancellor would have issued an injunction against the

112 The Scaptrade [1983] 2 AC 684; F Reynolds, ‘Carriage of goods by sea’, in EPL, paras 11.16, 11.20 and 11.22–33. 113 (1859) 4 De G & J 276, 282.

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mortgagee restraining him from employing the vessel in a manner inconsistent with the charterparty.114 Subsequently, in Lord Strathcona Steamship Co Ltd v Dominion Cod Co Ltd115 a ship was built to the specifications of the plaintiff charterer and let on a time charterparty for ten seasons. The ship was sold a number of times, eventually to the defendant owner. The contract of sale stated explicitly: The steamer is chartered to the Dominion Coal Co…which charter the buyers undertake to perform and accept all responsibilities to thereunder as from the date of delivery in consideration of which the buyers shall receive from the date of delivery all benefits arising from the said charter…

When the buyers refused to perform the charterparty an injunction was granted restraining their using the ship inconsistently with the charterparty. The Privy Council agreed. Lord Shaw expressly rested the decision on the well known dictum of Knight Bruce LJ, stating that it was of ‘outstanding authority’.116 Furthermore, Lord Shaw stated that: ‘equity would grant an injunction to compel one who obtained a conveyance or grant sub conditione from violating the condition of his purchase to the prejudice of the original contractor.’117 Given the knowledge of the charterparty, and the acceptance of the conditions, it was stated that the owner was a constructive trustee and therefore amenable to the jurisdiction of equity. The fact that the charterparty was a time charterparty, and not a demise charterparty, was brushed aside by stating that the charterer had a ‘plain interest’ in the vessel.118 This latter observation has been subject to criticism because of its vagueness. However, this discussion makes clear that there would be no such difficulties had the case been one of a charterparty by demise. The availability of injunctive relief against the acquirer of property subject to a demise charterparty seems to be unanswerable, and clearly a fortiori from the reasoning deployed in these cases. The well known doubts of Diplock J in Port Line v Ben Line Steamers119 simply arose from the fact that the earlier cases concern time or voyage charterparties, rather than charterparties by demise. For example, Diplock J crucially observed: The plaintiffs’ charterparty with Silver Line was a gross time charter, not one by demise. It gave the plaintiffs no right of property in or to possession of the vessel.120

It was merely an obligation to render services by the master and crew. Accordingly the formidable authority of Lord Diplock can be lined up behind the proprietary character of a bareboat charter, though he was more dubious about other species of charter. To sum up, it seems that there needs to be appropriate differentiation of the different types of rights to use a chattel, such as a ship, which are created by the appropriate contractual regime. This is recognised in the well developed field of charterparties where it is only demise or bareboat charters which confer a proprietary or possessory interest upon the charterer. A time or voyage

114 115 116 117 118 119 120

Ibid, 299. [1926] AC 108. Ibid, 118. Ibid, 120. Ibid, 123. [1958] 2 KB 146. Ibid, 163. See also at 166.

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charterparty is merely an entitlement to the services of the ship, together with the master and crew. It is not understood in the maritime law context to confer any proprietary or possessory interest upon the charterers. Accordingly it seems to be accepted by all the judges in the De Mattos v Gibson stream of authority that had there been a demise or bareboat charterparty the issues would have been relatively straightforward. Instead, the cases concerned the limits of privity of contract. When is it possible for a person to be under a burden arising from a contract to which they were not directly a party? This is the position of the subsequent acquirer of property subject to a pre-existing contract. The answer of course is that the subsequent acquirer of property is generally not subject to the burdens in that contract, on ordinary principles. This is untouched by the Contract (Rights of Third Parties) Act 1999, which is concerned solely with benefits conferred on third parties.121 The De Mattos v Gibson stream of authority does not even concern bailment, because no possessory interest arises under these contracts for services. However, together with Knight Bruce LJ, those who have given serious thought to the question think there is much in terms of reason and justice to require the new owner of property who has actual knowledge of the previous contract to respect it. Various explanations have been put forward, of which the most popular has been that the cause of action is identical or related to the economic tort of interference with contractual relations. Accordingly any injunctive relief such as has been granted in the cases is an equitable supplement to that common law tort. These principles are still in the course of development.122 These outer limits of the doctrine of interference of contractual relations are not our present concern. However, they do show that privity, even in the context of burdens upon third parties, is not without exception.123 However, these are focused upon the obligations of the parties, and not in any proprietary or possessory interest. Accordingly, the discussions in the charterparty cases are irrelevant, save that they appear to assume that the problem would not arise in the case of a demise or bareboat charterparty. The second stream of authority, albeit similarly inconclusive, are those arising from the statutory insolvency regime and its impact upon chattel leases. The questions arose in the context of administration orders in relation to companies which had dealings in chattel leases. The leading discussion is in Bristol Airport plc v Powdrill.124 There an insolvent charter airline was placed under an administration order pursuant to s 8 of the Insolvency Act 1986. Its creditors included Birmingham and Bristol airports. Bristol Airport applied for ex parte leave to detain two of the airline’s aircraft under s 88 of the Civil Aviation Act 1982, a statutory remedy with some affinities to the artificer’s lien. More robustly, Birmingham Airport parked a lorry loaded with concrete in front of one of the insolvent company’s aircraft, and subsequently sought a court order authorising

121 See Law Com No 242, ‘Privity of contract: contracts for the benefit of third parties’ (1996), paras 2.1, 10.24–32. 122 For a recent sensitive consideration of these questions see Law Debenture Trust Corporation v Ural Caspian Oil Corporation Ltd [1993] 1 WLR 138; Mac-Jordan Construction Ltd v Brookmount Erostin Ltd (in Receivership) [1992] BCLC 350; both discussed in A Clarke [1992] LMCLQ 448. 123 See Pyrene Co Ltd v Scindia Navigation Co Ltd [1954] 2 QB 407 for a still puzzling instance of a fob seller being burdened by the restrictions of a carriage contract (the Hague Rules) which was made by the buyer. See also White v Jones [1995] 2 AC 207, 268 per Lord Goff, for the suggestion that the intended but disappointed beneficiaries of a will would be bound by an exclusion clause in the contractual retainer between testator and solicitor. 124 [1990] Ch 744. See also Re Atlantic Computers Systems plc (No 1) [1992] Ch 565 and Re David Meek Plant Ltd [1994] 1 BCLC 680.

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the statutory remedy. The question arose whether the aircraft, which were held under leases by the insolvent airline, were ‘property’ within s 436 of the Insolvency Act 1986. Part II of the Insolvency Act 1986 created the administration order regime, intended to improve the prospects of corporate rescue in the UK. It contained two sections designed to protect the property of a company in administration from adverse claims. First, s 10 covered the period between the presentation of the petition and the making of the order. Section 11 covered the period after the making of the order. It provided: (3) During the period for which an administration order is in force…(c) no other steps may be taken to enforce any security over the company’s property, or to repossess goods in the company’s possession under any hire purchase agreement, except with the consent of the administrator or the leave of the Court…

Under s 10(4), reference to hire purchase agreements under ss 10 and 11 was expressly stated to include conditional sale agreements, chattel leasing agreements and retention of title agreements. Furthermore property was defined by s 436 as follows: ‘Property’ includes money, goods, things in action, land and every description of property wherever situated and also obligations and every description of interest, whether present or future or vested or contingent, arising out of, or incidental to, property.

Sir Nicolas Browne-Wilkinson V-C stated that it was ‘hard to think of a wider definition of property’.125 It is useful to divide his remarks into two sections: [1] In my judgment, the interests of Paramount under a lease of the aircraft is plainly property within that definition. It is true that, to date, concepts of concurrent interests in personal property have not been developed in the same way as they have over the centuries in relation to real property. But modern commercial methods have introduced chattel-leasing. The Act of 1986 refers expressly to such leases: see s 10(4). Although a chattel-lease is a contract, it does not follow that no property interest is created in the chattel. [2] The basic equitable principle is that if, under a contract, A has certain rights over property as against the legal owner, which rights are specifically enforceable in equity, A has an equitable interest in such property. I have no doubt that a court would order specific enforcement of a contract to lease an aircraft, since each aircraft has unique features peculiar to itself. Accordingly in my judgment the ‘lessee’ has at least an equitable right of some kind in that aircraft which falls within the statutory definition as being some ‘description of interest’…‘arising out of, or incidental to’ that aircraft.126

First, it can be argued that the judge was merely construing the insolvency legislation and that therefore these remarks are of no use to the broader question of whether the common law recognises a proprietary interest in a chattel lease. However, there are indications that a broader approach was intended. Secondly, had Sir Nicolas Browne-Wilkinson VC stopped at the end of the first part of that paragraph the matter would be straightforward. The need to recognise a chattel lease was driven by commercial reality. Accordingly the law should recognise that chattel leases did involve some kind of proprietary interest, as seen to be acknowledged by the partial statutory recognition of the device. Thirdly, however, the Vice-Chancellor made speculative statements about equitable property. His Lordship’s comments are easy to criticise and indeed are

125 [1990] Ch 744, 759. 126 [1990] Ch 744, 759

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convincingly criticised by Swadling.127 Given the above, and the insolvency context, the case is inconclusive, although the recognition of the commercial existence of such devices is welcome and should help to propel the recognition that common law does indeed recognise a proprietary interest arising out of a chattel lease. We shall see in the next section that it may be the case that steps have already been taken.

THREE COMMERCIAL CONTEXTS Chattel leases and finance leases Contracts affording the use of a particular chattel to a non-owner for a fixed period of time are nowadays of immense commercial significance. Every office in the country contains at least one photocopier. Its entitlement to possession of that item always depends on a contractual document termed a lease or a hire. Crucial, given the tendency of such machines to break down and jam, are the ancillary services provided in terms of repairs and sometimes replacement in the event of defects developing. Consider also the financially very significant business of leasing and chartering passenger aircraft. Lastly, consider the invention of the finance lease which now provides what may be the most common method of obtaining the use of chattels. Various types of hire or leases of chattel have sprung up. In legal terms hire and lease appear to be used interchangeably. The owner, or at least the bailor, of the chattel is described as the lessor. The person acquiring useful possession of the chattel is described as the lessee or hirer. In contrast to a sale of goods the consideration for a hire of goods does not need to be limited to money.128 As far as the obligations of the lessor or bailor are concerned, these have been codified by the Supply of Goods and Services Act 1982 Part 1 with the result that the obligations of the bailor resemble very closely the obligations of the seller under a sale of goods, with necessary modifications. First, there is an implied condition that the bailor has the right to hire out the goods129 and that the bailee or hirer is entitled to an implied warranty that he will enjoy quiet possession of them.130 Furthermore, there is an implied condition that the goods must correspond with any description.131 In addition, the goods must be of satisfactory quality.132 This mini-statutory code concentrates on the obligations dimension of the relationship between the person bailing the goods and the person hiring them. Nevertheless, some conclusions about the proprietary consequence of the ‘hire of chattels’ (as the statute describes it) can be drawn from this minicodification. First, the two parties are explicitly described as bailor and bailee, suggesting that the legislature recognised that a transfer of possession to the bailee was a necessary incident of the relationship of hire. Secondly, this right to possession is reinforced by implied warranty that the

127 Swadling, 491, 505–08. 128 S 6 of the Supply of Goods and Services Act 1982. All sections described as amended by the Sale and Supply of Goods Act 1994. 129 S 7 (1) of the Supply of Goods and Services Act 1982. 130 S 7 (2) of the Supply of Goods and Services Act 1982; cf s 12 of the Sale of Goods Act 1979. 131 S 8 of the Supply of Goods and Services Act 1982; cf s 13 of the Sale of Goods Act 1979. 132 See s 9 of the Supply of Goods and Services Act 1982; cf s 14 of the Sale of Goods Act 1979.

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bailee would enjoy quiet possession during the term of the hire. Accordingly statute recognises the interest of the bailee as one arising by way of possession. It appears to be accepted that one of the two types of proprietary interest recognised in chattels of common law is a right to possession. Despite this clear, if somewhat basic, structure there have at times been doubts about the proprietary consequence of a hire of goods. The chattel lease is now an everyday modern commercial transaction. In particular many businesses utilise the finance lease as a tax-efficient tool for an enterprise to acquire the use of profit-earning chattels and other valuable personal property.133 It is clear that there is a wide spectrum of possible ‘leases’ (at least in layman’s terms) which exist. It may be that the better legal analysis of certain transactions—such as the hire of a car for a weekend—is that they are a contract of services (perhaps analogous to time and voyage charterparties). In contrast, it is clear that in many commercial transactions there is intended to be a transfer of possession of the goods which form the subject matter of the contract. The main source for the rights and obligations of the parties inter se in most commercial leases are the express terms of the contract. Most disputes which arise tend to be about those terms. In default of express terms we have the mini-code in the Supply of Goods and Services Act 1982.134 Furthermore it is clear that such contracts are bailments in the traditional sense that possession of the goods is transferred. Accordingly the lessee has standing to bring tortious claims against any third party interfering with the goods under the Tort (Interference with Goods) Act 1977. Furthermore, it is clear that with the abolition of the so called bailee’s estoppel by s 8 of the 1977 Act the bailee can use these rights against the chattel lessor. It is through the tortious remedies for interference with goods that proprietary rights are recognised and enforced under English law. Accordingly, it is submitted that the bailee has a proprietary interest. All the legal issues arising out of the supposed bailment under the chattel lease can be explained in terms of contract, tort and property. Recently there has been confirmation that the Swadling heresy will be repudiated by the judiciary. In On Demand Information plc v Michael Gerson (Finance) plc135 a claimant had entered into four finance leases in respect of equipment for making and editing videos in 1994 and 1995. Under such agreements a substantial rent is paid for the initial period (in this case 36 months), during which the capital cost of the equipment is amortised by the party providing finance. Such transactions are tax efficient for both lessor and lessee. The agreement provided that the lessee was appointed as an agent of the owner to negotiate a sale of the goods at the end of the primary period. In those circumstances a lessee would be entitled to 95% of the sale proceeds. The agreement also provided that the appointment of a receiver of the lessee’s business constituted a repudiatory breach. In 1998 the claimant went into administrative receivership. The receiver was keen to sell the business as a going concern, which required the video equipment to be sold as part of the business. A court order was obtained from Harman J on 5 March 1998 allowing the equipment to be sold free of any claim by the defendants, providing the proceeds were held in an escrow account. Subsequently the claimant sought relief against forfeiture in respect of the finance leases. At first instance the judge held there was no jurisdiction to grant relief. The claimant appealed to the Court of Appeal which dismissed the appeal. The Court of Appeal unanimously

133 R Goode, Commercial Law (2nd edn, Harmondsworth: Penguin, 1995), 776–92. 134 Ss 6–11. 135 [2001] 1 WLR 155 (CA); [2002] UKHL 13, [2002] 2WLR 919 (HL).

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stated that as a matter of principle, a finance lease is capable of attracting the jurisdiction for relief against forfeiture provided the provision in question satisfies one or other of the two conditions of providing security for the payment of money or security for obtaining a specific and attainable result.136 However a majority held that the court could not grant relief against forfeiture after the equipment which formed the subject matter of the finance lease had been sold. Whilst the jurisdiction to effect relief from forfeiture was wide, and extended to tangible personal property, the sale effected under the court order in this case precluded the court’s power to grant relief, which had to be in respect of a subsisting proprietary or possessory interest. The majority of the Court of Appeal insisted that the decisions of the House of Lords on the jurisdiction clearly insisted that the equitable jurisdiction is to relieve against the forfeiture of property, not to rewrite commercial bargains.137 Before the Court of Appeal, Professor Sir Roy Goode QC had submitted that the rights under the finance leases were ‘purely contractual’ and therefore outside the scope of relief from forfeiture which is concerned with proprietary rights.138 There is clear House of Lords authority, principally The Scaptrade,139 that the jurisdiction to relieve from forfeiture was not available in respect of the time charterparty. In the view of the Court of Appeal it was critically important in that case that the hiring was by time charter and not by a demise charter or lease.140 In the view of the Court of Appeal there was no difficulty about the property in question being chattels as opposed to real property. The Court of Appeal was unanimous that the jurisdiction prima facie did exist in respect of a finance lease. Accordingly we can conclude that they were unanimous that there was a proprietary or possessory interest under the finance lease. Nevertheless the majority held that the sale of the goods pursuant to the court order deprived the court of jurisdiction on the particular facts of the case. There was an appeal to the House of Lords which reversed the technical and unsatisfactory conclusion of the majority of the Court of Appeal. What matters for present purposes is the emphatic unanimity with which the House of Lords decided that the jurisdiction to grant relief against forfeiture was available in this case. It was no longer disputed before the House of Lords that possession was transferred under the leases, and accordingly the jurisdiction to relieve was available. As far as the House of Lords was concerned the only question which arose was the character of an order made pendente lite. What was the effect of the order for sale on the lessee’s claim for relief against forfeiture? Under old RSC Ord 44 (now CPR r 25.1 (c)(v)) the Court had power to order the sale of property which was perishable or where a sale forthwith was otherwise desirable, and in the meantime to hold the ring between competing parties. It was for the court to devise an order which had the same effect as relief from forfeiture at the time of the court-ordered sale. Such an order would not be difficult to devise. The whole purpose of such an order pendente

136 Applying Shiloh Spinners Ltd v Harding [1973] AC 691. 137 The Court of Appeal found the modern law as to non-statutory relief from forfeiture in three principal decisions of the House of Lords: Shiloh Spinners Ltd v Harding [1973] AC 691, Scandinavian Trading Tanker Co AD v Flota Petrolera Equatoriana, The Scaptrade [1983] 2 AC 694 and Sport Internationaal Bussum BV v Inter-Footwear Ltd [1984] 1 WLR 776; together with the decision of the Court of Appeal in BICC plc v Burndy Corp [1984] Ch 232. 138 [2001] 1 WLR 155, 164. 139 [1983] 2 AC 694. 140 [2001] 1 WLR 155, 165–66 citing the arguments of the shipowners’ counsel at [1983] 2 AC 694, and 698 and the speech of Lord Diplock at 700–02 and 704. The argument of counsel for the charterer, Johan Steyn QC (as he then was), for a wider jurisdiction to relieve against forfeiture repays close study.

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lite was to preserve the parties’ pre-existing rights. It was agreed that the best possible price for the equipment was some £250,000. The order should reflect the entitlement which would have resulted had the relief still been possible: of the sum in the escrow account the lessor was entitled to only 5% and the lessee to the balance of 95%. For our purposes the crucial question is the availability of the jurisdiction. In the principal speech of Lord Millett, with which four other Law Lords agreed, the decision of the Court of Appeal is divided up into two holdings. The first ground is summarised as follows: The court unanimously upheld the Deputy Judge’s ruling that the criteria for the exercise of the equitable jurisdiction were present at the date of the application. They rejected the lessor’s objection that the leases were purely contractual in nature, and that the jurisdiction to grant relief from forfeiture was restricted to cases where the forfeiture of proprietary rights strictly so-called was in question. As Robert Walker LJ put it, contractual rights which entitle the hirer to indefinite possession of chattels so long as the hire payments are duly made, and would qualify and limit the owner’s general property of the chattels, cannot aptly described as purely contractual rights. For my own part, I regard this conclusion as in accordance with principle; any other would restrict the exercise of a beneficent jurisdiction without any rational justification.141

In my opinion, this affirmation of the jurisdiction to grant relief against forfeiture in respect of a chattel lease kills off the Swadling heresy which had sought to deny that a chattel lease creates a proprietary interest.142 The House of Lords only varied the second holding of the majority of the Court of Appeal that the jurisdiction to be exercised in the particular facts of this case. Indeed Lord Millett pointed out that there was no cross-appeal from the first ground of the Court of Appeal’s judgment. It was therefore settled that the court did have jurisdiction to grant relief against forfeiture. The only way to render the On Demand case in the House of Lords consistent with The Scaptrade is that we now have clear House of Lords authority that a chattel lessee has a proprietary interest in the goods. The word ‘bailment’ does not surface in any of the judgments on this question.

Cargo claims It has been suggested by my colleague, Simon Baughen, that bailment has a continuing role to play in claims arising out of goods carried by sea.143 Baughen characterises a claim in bailment as tortious.144 Nevertheless later he accepts that it has a ‘strong contractual flavour’.145 The principal difference identified between a claim in bailment and a claim in negligence in respect to damage to cargo is the reversal of burden of proof. Subsequently, Baughen identifies an apparent disadvantage of the law of bailment, namely the doctrine of attornment.146 Attornment may have the best claim

141 Para 29. 142 This conclusion is also reached by Professor Bridge: Personal Property Law (3rd edn, Clarendon Press, 2002), 26–28. 143 S Baughen, ‘Bailment’s continuing role in cargo-claims’ [1999] LMCLQ 393. 144 Ibid, 394. 145 Ibid, 395.

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to be a peculiar doctrine of bailment. To the extent that it is a rule concerning the delivery of chattels, or more precisely the right to constructive possession of chattels, it is a principle of obvious commercial commonsense. It states that where goods are deposited by A with a warehouseman, or other bailee, and then subsequently A sells the goods to B, there is no transfer of constructive possession from A to B, unless and until the warehouseman acknowledges that he now holds the goods on behalf of B. The rule works to protect the bailee from potentially competing claims. To this extent the rule is codified by s 29(4) of the Sale of Goods Act 1979 (albeit without mention of the word ‘attornment’): Where the goods at the time of sale are in the possession of a third person, there is no delivery by seller to buyer unless or until the third person acknowledges to the buyer that he holds the goods on his behalf; but nothing in the section affects the operation of the issue or transfer of any document of title to goods.

Attornment is therefore only necessary in land-based transactions. To the extent that goods are in the hands of a carrier by sea and a bill of lading has been issued in respect of them, (the bill being the only document of title recognised in common law),147 the transfer of the bill dispenses with the need for attornment. Despite this, the more recent mercantile authorities referred to by Baughen seem to insist upon an attornment for the purpose of establishing title to sue in bailment. Despite these authorities there must be considerable doubt about whether a rational distinction can be made between the transfer of constructive possession (which can be done by mere delivery of the bill of lading) and the right to bring a claim in bailment. The better view appears to be that there is no cause of action in bailment, and that the claim is one arising in contract or tort.148 The right to bring a claim in tort must depend upon ownership or constructive possession. To the extent that these recent maritime authorities suggest the contrary they are introducing unnecessary refinements and are unsound. The context in which bailment reasoning has been most prominent in cargo claims has been in the field of ‘bailment on terms’ or more commonly ‘sub-bailment on terms’. This appears to date back to the Elder Dempster & Co v Patterson Zochonis & Co149 case in which the question arose whether a cargo owner who was party to a time-charterer’s bill of lading which purported to exempt both the charterers and the shipowners from liability for bad stowage, could circumvent the restrictions by suing the shipowner directly. That case has, of course, proved controversial for a number of reasons but is significant here for the dictum of Lord Sumner that there was a bailment between cargo owner and shipowner ‘on terms which include the exceptions and limitations of liability stipulated in the known and contemplated form of bill of lading’.150 Note that in this case the shipowner was principal bailee, as the time charterers had never taken possession of the goods. There was no sub-bailment in this case. There was an unsuccessful attempt to resuscitate this

146 Ibid, 396. Reliance is placed upon The Aliakmon [1986] 1 AC 785, 815; The Gudermes [1983] 1 Lloyd’s Rep 31 1; The Future Express [1993] 2 Lloyd’s Rep 542; and The Captain Gregos (No 2) [1990] 2 Lloyd’s Rep 385, 405–06. 147 Official Assignee of Madras v Mercantile Bank of India Ltd [1935] AC 53 (PC). 148 M Bridge, Personal Property Law (3rd edn, Clarendon Press, 2002), 34. 149 [1924] AC 522. 150 Ibid, 564.

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reasoning by Lord Denning in his famous dissenting speech in Scrutton Ltd v Midlands Silicone Ltd151 in which stevedores dropped a drum of chemicals and attempted to avail themselves of the limitation clauses, either in the bill of lading (to which they were not directly parties) or in their own agreement with the shipowners. Much ink has been spilt on the former question which will now usually be resolved under the Contract (Rights of Third Parties) Act 1999, and in particular s 1 (6). On the latter question Lord Denning would have held that the cargo owner was subject to the terms of the stevedoring contract between the stevedore and the shipowner because the carrier as bailee of the goods was able to bind the cargo owner as bailor to such sub-contracts as the cargo owner ‘expressly or impliedly authorised, that is to say, consented to be made’.152 Subsequently Lord Denning MR developed the modern doctrine of sub-bailment on terms along similar lines in dicta in Morris v CW Martin Ltd.153 This principle eventually migrated from dissenting judgment through dicta to form the ratio of the leading modern case in the Privy Council, The Pioneer Container. 154 These issues have been thoroughly debated elsewhere, including by Bell and Professor Treitel, and I do not intend to add to that discussion.155 However, I would record my agreement with Bell that it would be unfortunate if the principles which have developed in the context of chattels were confined to that particular problem. There are clearly the seeds of a more general principle that privity of contract should be disapplied where a main contract permits (by its express or implied terms) the main contractor to engage sub-contractors and gives liberty to sub-contract on terms which may affect the legal position of the employer. Even in the absence of privity of contract, if an employer has expressly or impliedly consented to a subcontract being made he should be bound by those terms.156 If these principles are to remain confined to the areas of chattels it would be an unfortunate example of the stifling effect of archaic bailment reasoning. Finally, the puzzling tendency of continued reference to bailment and attornment concepts is demonstrated by the confusing dicta of Lord Hobhouse of Woodborough in The Berge Sisar.157 This largely historical discussion, which is rendered practically irrelevant by the Carriage of Goods by Sea Act 1992, has caused Professor Treitel rigorously to examine what role bailment and attornment have to play where bills of lading are transferred.158 The better view has to be that there is no need for an attornment where goods are carried under a bill of lading which is a document of title, especially in the light of s 29(4) of the Sale of Goods Act 1979.

151 152 153 154 155

[1962] AC 446. Ibid, 491. [1966] 1 QB 716. [1994] 2 AC 324. A Bell, ‘Sub-bailment on terms’, Ch 6 in N Palmer and E McKendrick, Interests in Goods (2nd edn, LLP, 1998), 159; and see G Treitel, Some Landmarks of Twentieth Century Contract Law (OUP, 2002), 75–82. 156 Bell, 183–84 (discussing authorities from the construction industry context). 157 Borealias AB v Stargas Ltd [2001] UKHL 17; [2002] 2 AC 205. 158 [2001] LMCLQ 344, 352–55.

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Retention of title I have recently discussed the topic of retention of title at some length, and I do not intend to repeat that discussion.159 What I attempted to do there was to restate the legitimate role for retention of title in commercial sales in the light of recent developments in private law. Accordingly I examined the approach of construing commercial contracts, the law on termination for breach, increasing certainty as to the appropriate province of the law of restitution and important new judgments on fiduciary obligations.160 When undertaking that exercise I had envisaged spending time examining the role played by bailment in the retention of title cases. However, I soon discovered that there was little to say. The lowest common denominator for the conventional usage of bailment by English lawyers is that it entails a transfer of possession of tangible personal property short of outright sale. Accordingly where goods are transferred from a seller to a buyer on retention of title terms it is axiomatic that the interest of the buyer before an ultimate conveyance takes place is that of a bailee. The question is what follows from this premise. As is well known in the ground-breaking Romalpa case161 it was conceded that the recipient of goods on retention of title terms was a bailee.162 The problem with the Court of Appeal in Romalpa was that it assumed that because the relationship was one of bailor and bailee (and also one equally akin to principal and agent) it was bound to apply the principles in Re Hallett’s Estate163 to those facts. Accordingly it allowed the retention of title supplier to trace and claim the resale proceeds of the goods supplied. As Professor McCormack has noted in the more recent retention of title authorities there has been a shift in concern from bailment to consideration of whether a fiduciary relationship has been created.164 As Robert Goff LJ said in Clough Mill v Martin165 there is nothing inappropriate about the characterisation of the recipient of goods pro tem as a bailee, as long as it is recognised that he may not be necessarily a fiduciary bailee.166 In the light of recent authorities on fiduciary obligation it is highly unlikely that the courts will readily classify the relationship between two commercial parties in an arms-length supply of goods situation as being a fiduciary one. Accordingly the characterisation of the relationship in the meantime between retention of title supplier and buyer as one of bailment should have no normative consequences. The only time it was assumed to have such consequences was in the Court of Appeal in Romalpa where it is generally accepted that inappropriate conclusions were drawn. This is an example of bailment doing more harm than good. The crucial thing in most retention of title cases is the proper interpretation of the rights and obligations of the parties inter se and the appropriate characterisation of their resulting relationship. Does it amount to a true retention of title or does it create a new security interest?

159 See G McMeel, ‘Retention of title: the interface of contract, unjust enrichment and insolvency’, in FD Rose (ed), Restitution and Insolvency (LLP: Mansfield Press, 2000), 134–55. 160 Eg, Kelly v Cooper [1993] AC 205; Clark Boyce v Mouat [1994] 1 AC 428; Bristol & West Building Society v Mothew [1998] Ch 1. 161 Aluminium Industrie Vaassen BV v Romalpa Aluminium Ltd [1976] 1 WLR 676. 162 [1976] 1 WLR 676, 680, see 688 per Roskill LJ. See subsequently: Re Bond Worth Ltd [1980] Ch 228, 263; Borden (UK) Ltd v Scottish Timber Products [1981] Ch 25, 38; Re Peachdart Ltd [1984] Ch 131, 142; Hendy Lennox (Industrial Engineers) Ltd v Graham Puttick Ltd [1984] I WLR 485, 498. 163 (1880) 13 Ch D 696. 164 G McCormack, Reservation of Title (2nd edn, Sweet & Maxwell, 1995), 45–47. 165 [1985] 1 WLR 111. 166 [1985] 1 WLR 111, 116.

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The language of bailment provides no help with this question. Perhaps the only significance of the bailment is the fact that the retention of title buyer has in the meantime sufficient possessory interest to sue third parties who wrongfully deprive him of the goods, or indeed he may sue the retention of title supplier who prematurely attempts to reclaim the goods.167 Accordingly my conclusion was that the retention of title cases demonstrated the growing redundancy of the concept of bailment as a category of any utility in the modern law of personal property. Either the concept is too over-inclusive to provide any guidance to the resolution dispute, or, alternatively, it is misused and unfortunate normative implications are derived from it. For example, in the Romalpa case itself it was assumed that every bailee owed a fiduciary duty to account. That latter tendency has been corrected by subsequent authority.

CONCLUSIONS I have sought to argue that bailment is a redundant concept in English personal property law; alternatively, it is suggested that what remains of it is so vestigial as to be easily jettisoned when a suitable occasion arises. Bailment at best is useful shorthand for all those situations where there is a transfer of possession of tangible personal property short of outright sale. In the commercial context there is almost invariably a contractual regime spelling out in detail the rights and obligations of the parties Inter se. Outside the commercial context the law of tort supplies the default rules which apply where there is such a transfer, which is occasionally reinforced by reference to unjust enrichment, for example where a bailee recovers in respect not just of his own interest but also in respect of his bailor’s interest. There is nothing distinctive about dealings in chattels per se; it is just that they have provided the contextual opportunity for the development of principles which can now be properly classified as contractual, tortious, restitutionary or proprietary, and which may have wider implications for our commercial law. Bailment does not give any extra analytical dimension which we do not have by reference to generic legal concepts like consent, wrongdoing, unjust enrichment, fiduciary obligation and property. It does not shed any further illumination on our problems.168

167 Indian Herbs (UK) Ltd v Hadley and Ottoway Ltd (21 January 1999) unreported, Court of Appeal. 168 Contrast Professor Sir Guenter Treitel QC’s recent Hamlyn Lectures: Some Landmarks of Twentieth Century Contract Law (OUP, 2002), especially Ch 2: ‘The battle over privity’. See in particular at p 75 (adapting Alexander Pope): ‘God said, let bailment be! and all was light’. By way of further contrast, Professor Reynolds is sceptical about the insights supplied by bailment: FMB Reynolds, ‘The influence of maritime law on English contract law’ [2002] LMCLQ 182.

Chapter 14 Whose molecule is it anyway? Private and social perspectives on intellectual property Sol Picciotto and David Campbell INTRODUCTION The contradictions at the heart of the concept of intellectual property (IP)—of property which is intangible, private ownership which requires radical state intervention, and markets which are based on monopolies—never fail to fascinate. In this chapter1 we will argue that their further exploration can still yield interesting insights if it is recognised that the basic contradiction really inheres in the concept of ‘private’ property generally. This basic contradiction is that between the commonplace, naturalistic understanding of private property as an owner’s inherent exclusive rights over a thing, and the justification of property rights as social institutions determining the relative rights of persons towards things. The former does not stand up to close scrutiny; the latter helpfully points to the necessity of publicly designing economic institutions so as to produce welfare optimising outcomes. The general idea of an intellectual property right (IPR) is, we will claim, one of the most blatant examples of a property right which, because it is commonly based on the naturalistic understanding, does not produce welfare enhancing outcomes; indeed it constantly needs to be hedged about with limits, exceptions and sui generis variants to be workable at all. IP certainly offers the most bizarre examples of economic actors’ alienated perceptions of the nature of their activities. IPRs of course confer exclusive rights protected by the state, subject to certain limits and conditions the scope and function of which are debated and contested. However, since these rights are ‘property’ rights, economic actors not infrequently consider themselves to be owners not merely of a bundle of rights but of an asset, often conceived of as a functional physical object, subject only to externally-imposed restrictions. In today’s ‘knowledge economy’, debates and decisions about the scope of IP protection seem dominated by a combination of the ideological power of this fetishized conception of property and the direct economic power of corporations seeking to extend their monopolies over cultural and information products. This was starkly brought home to us when, in the course of a recent debate on patents and biotechnology, an IP lawyer who had worked for a corporation engaged in genetic patenting said: Pharmaceutical companies do indeed wish to retain patent protection because of the control that it gives them. It is their molecule and they have the right to that control.’2 (Our emphasis.) Property rights of all sorts are social relationships underwritten by the state rather than ‘relationships’ between persons and things. Typically, private property rights have their liberal

1 2

Earlier versions of this paper have been presented at the joint annual meeting of the Law and Society Association and the Canadian Law and Society Association, Vancouver, May 2002 and at the WG Hart Workshop, Institute of Advanced Legal Studies, London, July 2002. Private e-mail to Sol Picciotto by a participant in a discussion list organised by the Commission on Intellectual Property Rights set up by the UK’s Department for International Development, in response to an e-mail making the point that IPRs confer control over access to and the dissemination of knowledgebased products.

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political justification (to the extent they are justified) in their contribution to the creation of ‘the system of natural property’ in which economic goods, which the limits to the munificence of nature make scarce, are allocated through exchange between private owners; and it is this system that we will describe as ‘the market’. IP, however, entails the creation of scarcity artificially by radical state intervention. The fetishization of IP as ‘property’ means that for public debate over the desirability and scope of state action is substituted a quite unjustified private property claim, albeit subject to some necessary limitations and conditions. Since the law embodies confusion twice confused, it virtually negates rational debate about the welfare outcomes of protecting IPRs. Furthermore, the effect of this fetishism is that normative concerns about what should be produced, and how, are concealed by the apparently overriding need to guarantee private ownership rights in order to maintain what is claimed to be the optimal level of innovation. Stripped of its obfuscations, current IP law emerges as a buttress for purportedly ‘technical’ corporate monopolistic practices, the ‘technique’ actually representing the privileging and subsidising of certain forms of corporate profit maximization through state regulation.

RATIONING: PRIVATE PROPERTY AS THE CREATION OF SCARCITY The IP lawyer who argued that biotech firms might ‘own’ a molecule would also doubtless subscribe to the traditional view that this private right of ownership should be balanced by limitations and exceptions established in the public interest. We will argue that this consequentialist ‘balancing’ of private rights against public welfare is the wrong starting point for explaining and justifying property rights. Property should be thought of in the f irst instance as social, as the public regulation of the relations between persons in relation to assets. From this perspective, the granting and protection of exclusive rights of ‘private’ property to one person is essentially a form of rationing. As long ago as 1933, Sir Arnold Plant considered the implications for IP of Hume’s argument that the point of private property is to ensure that goods are put to their best use by providing owners with an incentive to seek the optimal revenue to be derived from them.3 Hume’s justification of private property was based on its general social utility,4 and he had in mind tangible goods, and in particular natural products, which are scarce in relation to humanity’s apparently infinite power and appetite to consume them. In this essentially static view of economic activity, physical goods are rivalrous in consumption, because one person’s enjoyment of a scarce good automatically excludes others. For manufactured goods, however, scarcity is a matter of balancing supply and demand, and if one considers economic activity as a dynamic process, the scarcity argument takes the form of the need for an incentive to produce and/or manage assets efficiently. This argument can more

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A Plant, ‘The economic theory concerning patents for inventions’, in A Plant, Selected Economic Essays and Addresses (London, Routledge and Kegan Paul, 1974) 35, p 35. See further D Hume, Enquiries (3rd edn, Oxford, OUP, 1975) sec 156: ‘Who sees not…that whatever is produced by a man’s art or industry ought, for ever, to be secured to him, in order to give encouragement to such useful habits and accomplishments?… What other reason, indeed, could writers give why this must be mine and that yours, since uninstructed nature surely never made any such distinction? The objects which receive those appellations are, of themselves, foreign to us; they are totally disjointed and separated from us; and nothing but the general interests of society can form the connection.’ Ibid: ‘in order to establish laws for the regulation of property, we must be acquainted with the nature and situation of man…and must search for those rules, which are, on the whole, most useful and benef icial!

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easily be used to justify exclusive private property rights in IP ‘intangibles’, which are generally accepted to be essentially non-rivalrous in consumption: any number of people can enjoy a song or benefit from an innovation. However, it is argued that scarcity must be artificially created in order to provide the necessary incentive for the initial creation of the work or product. Thus, the very fact that IP intangibles do not diminish when consumed is argued to be a disincentive to their initial creation, whereas for tangible goods, consumption, by using up the good, generates demand for further production. These really quite different arguments are commonly elided in the concept of intellectual property as, precisely, ‘property’, since it is normally assumed, first, that private property in tangibles is a ‘natural’ feature, and, secondly, that IP intangibles are unique or exceptional in being nonrival in consumption. Neither of these views can stand up to close scrutiny. We take as an excellent example of the dominant thinking the argument in Torremans’ standard work: The essential characteristic of property rights is that they are exclusionary rights through which third parties are prohibited from the use and exploitation of the subject produced by these rights… If we take a bicycle as an example of an item of tangible property, it becomes clear that the owner of the bicycle has the exclusive right to use the bicycle and such a monopolistic right in real and personal property is conceded almost naturally. Property rights in items such as our bicycle developed because nobody would be prepared to invest time, material and skills in designing and producing bicycles if he or she would have no right in the result of the process that would enable them to benefit from their work. The most obvious way to do so is to sell the bicycle, but again there would be no interest in the bicycle, this time in acquiring it, should the buyer be unable to get the exclusive right to use the bicycle. The nature of the object gives this right a monopolistic character. If someone uses the bicycle, no-one else can use it. The physical nature of the unique embodiment of certain limited resources in the bicycle automatically leads to a particular, competitive, exclusionary effect… In this respect intellectual property rights are fundamentally different. The nature of the property which is the subject of the right and which is protected does not necessarily lead to competitive exclusionary effects. Concurrent use of inventions by a number of manufacturers, including the patentee, or simultaneous performances of a musical, are possible. The invention and the musical will not perish, nor will any use or performance lessen their value. The subject matter of intellectual property rights, eg inventions or creations…is not by its nature individually appropriable. In many cases imitation is even cheaper than invention or creation. The competitive exclusion only arises artificially with the creation of a legally binding intellectual ‘property’ right. This gives the inventor, owner of the intangible property right, the exclusive use of the invention or the creation.5

Torremans’ view is a perfectly competent expression of the consequentialist argument for protecting IP6 Because IP is intangible, investment in it confronts what is often called a ‘free rider’ problem, a ‘market failure’ which handicaps or prevents investment. Though the initial development of an IP good is costly, its reproduction may well be very much cheaper. A market incentive to undertake the investment will be undermined if the good, once put on the market, may be imitated rather than bought from the innovator, for the innovator cannot charge the freeriding imitators; and hence the revenues from the good, and therefore the incentive to develop it,

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P Torremans, Holyoak and Torremans Intellectual Property Law (3rd edn, Sevenoaks, Butterworths, 2001) pp 13–14. The locii classicus of Torremans’ argument in the economic literature is K Shell, ‘A model of inventive activity and capital accumulation’, in K Shell (ed), Essays on the Theory of Optimal Economic Growth (Cambridge, USA, MIT Press, 1967) 67.

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are reduced. Although there is some real substance to the argument, its starting point in a naturalistic view of property results in an unduly abrupt distinction between tangible and intangible property. Torremans’ claim that the desirable exclusionary effect is produced ‘automatically’ by the ‘physical nature’ of a tangible good must, with respect, be misleading. It calls to mind Marx’s response to Samuel Bailey’s belief that commodities have a value as a natural property: ‘[s]o far no chemist has ever discovered exchange value either in a pearl or a diamond.’7 The natural qualities of the ‘property’ in no way determines that it should be dealt with in terms of ‘excludability’, indeed that it be ‘property’ at all; this is a matter of the organisation of economic activity though a market based on private property. In the first instance, excludability is a matter of social organisation, not at all a matter of physical nature. Torremans’ example of the bicycle is, in fact, a bad one. Throughout the world there are ‘red’ and ‘yellow bicycle’ schemes in which bicycles are left for general use, though the difficulties encountered by these schemes make one see why private ownership of bicycles is more common—the 200 yellow bicycles put on the streets of Joensuu, Finland, as a means of transport in 1989 all went missing within a few months. Nevertheless, there is no connection traceable to physical nature that makes an object private property. The tangible good is no more naturally private property than the intangible good, or, if we turn this the other way around, on a first analysis the intangible good (an invention, or an artistic creation) is no less private property than the tangible: the question for both is whether and how we wish to treat goods as private property so as to organise economic activity as a market. As Coase has pointed out in relation to all goods, but especially with tangible goods in mind: ‘what are traded on the markets are not, as is often supposed by economists, physical entities but the rights to perform certain actions, and the rights which individuals possess are established by the legal system.’8 The significance of this for our purposes is that we are now able to place at the centre of our analysis of IP a point which the distinction between tangible and intangible property muddles: economic exchange always involves the creation of an exchangeable good by establishing ownership; what Musgrave has called ‘the exclusion principle’: Exchange in the market depends on the existence of property titles to the things that are to be exchanged. If a consumer wishes to satisfy his desire for any particular commodity, he must meet the terms of exchange set by those who happen to possess this particular commodity, and vice versa. That is to say, he is excluded from the enjoyment of any particular commodity or service unless he is willing to pay the stipulated price to the owner. This may be referred to as the exclusion principle. Where it applies, the consumer must bid for the commodities he wants. His offer reveals the value he assigns to them and tells the entrepreneur what to produce under given cost conditions.9

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K Marx, Capital, Vol I, in K Marx and F Engels, Collected Works, Vol 35 (London, Lawrence and Wishart, 1996) p 94. Hume, above n 3, sec 159 makes the same point, though, of course, he puts forward an immeasurably inferior dialectic (in Kant’s sense) of the naturalistic error: ‘if a man expose…what we call property to the…scrutiny of sense or science he will not, by the most acute enquiry, find any foundation for the difference made by moral sentiment. I may lawfully nourish myself from this tree; but the fruit of another, ten paces off, it is criminal for me to touch …nor is it possible, in the one case more than in the other, to point out, in the object, that precise quality or circumstance which is the foundation of the sentiment.’ RH Coase, ‘The institutional structure of production’, in RH Coase, Essays on Economics and Economists (Chicago, USA, University of Chicago Press, 1994) 3, p 11. RA Musgrave, The Theory of Public Finance (Princeton, USA, Princeton University Press, 1959) p 9.

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Thus, the choice between individual ownership of bicycles or communal bicycle schemes will depend on where, in the circumstances, it is more efficient to place the costs of looking after bicycles and allocating their use. The fate of the Joensuu bicycles shows that private property is very often the most plausible method of economic organisation; but not only does this not mean that private property is always the best method of organisation, it also does not mean that private property is inherent in the physical object. Though Torremans would hardly deny, were the point pressed, that his bicycle and its alienability requires the social structure of ownership and sale, he nevertheless believes that treating the bicycle as private property may be ‘conceded almost naturally’; but surely this is to underestimate what is involved. As a social structure which must be produced to allow economic exchange to work, exclusion involves a social effort which entails, from an economic viewpoint, significant transaction costs.10 Once looked at in this way, ownership takes on a much more contested form, in regard of both tangible and intangible goods.11 The excludability of the tangible good is hardly something to be ‘conceded almost naturally’; it is an immensely valuable institutional accomplishment, one of the social structures claimed to be the basis of rational capitalism12 and hence of the superior economic performance of the West.The feature of the bicycle that tends to escape Torremans’ analysis is that bicycles are moveable, and ownership is not ‘conceded almost naturally’ by those who wish to acquire the bicycle without going through the costly business of exchange. We seek to deter those who might steal a bicycle by a system of criminal law, but not only is it impossible that such a deterrent be absolute, we do not try to make it absolute. The police will commit only limited resources to clearing up a bicycle theft, and this is not in general regarded as a dereliction on their part but a necessary accommodation of, first, the finitude of police resources, and second, the fact that a world in which the police had such power that they were able to catch all bicycle thieves would be a worse world than one in which some bicycle theft took place. In recognition of this, a great deal of the work involved in securing the excludability of the bicycle falls on the owner, who must ensure it is securely locked when not in use; and such work a fortiori falls, for example, on bicycle retailers, the excludability of whose stock is in large part a cost which they must bear in the forms of the costs of prevention of and insurance against theft.

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KJ Arrow, ‘The organisation of economic activity’, in KJ Arrow, Collected Papers, Vol 2 (Cambridge, USA, Belknap Press, 1983) 133, p 149: ‘two sources of transaction costs [are]: (1) exclusion costs and (2) costs of communication and information, including both the supplying and the learning of the terms on which transactions can be carried out.’ Torremans is hardly alone in downplaying the absolutely crucial importance of what Ian Macneil, the contract scholar who has paid the most fruitful attention to this, calls the ‘[s]overeign imposition of norms’ by the ‘external god’ Leviathan (IR Macneil, ‘Values in contract: Internal and external’ (1983) 78 Northwestern University Law Review 340, 370); that is to say, the vital matter of confining utilitymaximisation within a normative framework which channels it into the form of rational economic action: ‘[C]ontract between totally isolated, utility-maximising individuals is not contract, but war…contractual solidarity—the social solidarity making exchange work…at a minimum holds the parties together so that they will not kill and steal in preference to exchanging …[This is a matter of the] external god providing social stability, enforcement of promises, and other basic requirements. Within these rigid confines, the parties are free to maximise their individual utilities to their hearts’ content.’ (IR Macneil, The New Social Contract (New Haven, USA, Yale University Press, 1980) pp 1, 14). The law of contract obviously exists within such externally imposed confines, residing within a space provided by the criminal law’s prohibition of, say, robbery. CB Macpherson, ‘A political theory of property’, in CB Macpherson, Democratic Theory (Oxford, OUP, 1973) 120, pp 123–31.

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Though we do not wish to dwell on this, it is clear that there may be a market failure of excludability even in respect of tangible goods such that the good cannot be produced. This very fear now haunts the mobile phone industry, for as these devices are made smaller and more valuable, they create severe excludability problems which the state is seeking to minimise, for example by organising the development of co-ordinated anti-theft technology and by giving convicted mobile phone thieves exemplary sentences. Leaving aside the policy issues this woeful example creates, the general theoretical point is that the excludability even of tangible goods is not absolute, and it would not necessarily be a good policy to try to make it absolute. It requires a decision whether it is welfare optimising to produce goods in certain ways at all and, if they are to be produced, on the balance to be struck between the roles of the state and the economic actor in guaranteeing excludability. From an economic viewpoint, then, the question always should be whether it is welfare optimising to create private property and a market in relation to a good, whether it be a bicycle or an industrial process or a song. The point here is that the notion of ‘private’ property is in a very important sense misleading: ‘private’ property is a social relationship (which, as Hume insists, must be justified in terms of its general social value): The point is…that the private interest is itself already a socially determined interest, which can be achieved only within the conditions of society and with the means provided by society… It is the interest of private persons; but its content, as well as the form and means of its realisation, is given by social conditions independent of all.13

When creating private property of any sort, we have to ask whether the social investment in the costs of excludability is justified. And here a very strong distinction does emerge between IPRs and commercial property of the more ordinary sort. This distinction, to which we now turn, is that between monopoly and competition, which has welfare implications far greater than the distinction between tangible and intangible property.

REGULATION: MONOPOLY AND COMPETITION IN THE EXPLOITATION OF INNOVATION This argument about the need to create excludability even for tangible goods can also be made the other way around, as it recently has been by Boldrin and Levine.14 If the amount of work involved in creating excludability in tangible goods has been basically ignored in the IP literature, the difficulties of creating excludability in intangible goods have been enormously over-estimated. Considerable refinement of the standard arguments are needed here to get to the requisite level of precision. The problem posed by the intangibility of IP turns on the technological issue of rival and nonrival consumption. It is technologically more difficult to create excludability in a good that

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K Marx, Grundrisse, in K Marx and F Engels, Collected Works, Vol 28 (London, Lawrence and Wishart, 1986), p 156. M Boldrin and DK Levine, ‘The case against intellectual property’ (2002) 92 American Economic Review (Papers and Proceedings) 209. This paper rather too briefly states an argument set out at greater length in earlier working papers: M Boldrin and DK Levine, ‘Growth under perfect competition’ (UCLA and Universidad Carlos III de Madrid, 1997) and M Boldrin and DK Levine, ‘Perfectly competitive innovation’ (Federal Reserve Bank of Minnesota Research Department Staff Report 303, 2002).

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does not diminish in supply by virtue of being consumed. Excludability is easier for a tangible good because the good is rival in that consumption diminishes supply. The example usually given is of food because the fit seems so graphic—a specific portion of food is literally consumed. It also applies to a bicycle, since a bicycle being ridden in one direction by one person cannot simultaneously be ridden in another direction by another, though it is clear from the careful precision needed to give this example that the rivalrousness of the bicycle is limited, and a moment’s thought will reveal that this is true for the vast majority of tangible goods.15 The claim is that for the IP good, consumption is not rivalrous. Everyone can use, to give a commonly used example, the fundamental theorem of calculus without its being in any way rendered less available for other users. But this is still not sufficiently precise. The fact that a good is or is not rival does not itself matter: the real issue is the costs of imitation for the purpose of commercial exploitation. These costs obviously will tend to go up if consumption reduces supply, but the relationship is by no means linear. The calculus theorem is, in an important sense, a misleading example, since the, as it were, purity of its use, which is the point of the example, is not the real issue in discussions of IP, which turn on profane commercial purposes. An inventor of a process for making steel would not care if the idea were copied for the purpose of pure scientific experiment, but would care very much if a rival made steel using the process in such a way as to reduce the inventor’s revenues from making steel, which of course entails costs. Thus, the type of use of an idea that IP protection is meant to regulate—rival commercial exploitation—is never one of costless imitation. These costs are always positive, though the technology of imitation will influence those costs, and the fact that a good is not consumed by use will tend to lower the costs of imitation. But when the costs of imitation really are zero (or a fortiori where the cost of consumption plus imitation is less than the cost of consumption), all this discussion of IP will be otiose; for this is the state of bliss in which rational economic analysis of any sort is unnecessary. The technology so far produced which most nearly approaches this limiting case, Napster and similar devices, will be further discussed below. For the present it is enough to note that even Napster requires investment in the relevant copying technology and media and an expenditure of time and effort by end users, and that some of the intermediary costs of making the copying possible (reliably identifying the product, putting it on the web, etc) are sometimes subsidised by parties with an ideological commitment to sharing who make little or no charge for their efforts. Napster is not an ethereal spirit but a corporeal technological innovation and its use has costs. However, let us allow that those costs are relatively small and that, without IP protection, use of Napster means that certain products (for example, some mass marketed pop songs) would not be produced. But even were this to be the case, it would not be because Napster is costless, it would be because competitive use of Napster reduces the original producer’s revenues below the point

15

Though we do not wish to dwell on the matter, for a full discussion involves very complex issues about the specification of a ‘good’ for the purposes of general equilibrium theory, even the food example is more complex than it appears. A bag of chips can be shared if there are enough chips in relation to the number of eaters, although no doubt chip shop owners would prefer to be able to sell the chips in lots which prevent sharing; indeed, only relatively recently have bags of chips come to be sold in different sizes, something unheard of previously when sharing was an accepted part of the seller’s and buyer’s specification of the good. Can it be doubted that, again were it possible, fish and chip shop owners would sell chips to buyers under terms which compelled them to throw away any they did not eat rather than share them?

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where he wishes to continue production, and this is an issue susceptible of rational economic analysis in a way that blissful costless imitation is not. The giant entertainment corporations may have their revenues reduced, even drastically reduced, but there is no absolute reason to say this should not happen16 unless one has decided in advance that the mass marketed pop song or whatever must be produced, from which starting point Napster might well appear apocalyptically threatening. When we focus not on some abstract issue of imitation but on imitation in order to create a rival product which might cut into the inventor’s revenues, it is always the case that, absent the IPR monopoly, there would be competition between the inventor and the imitator. In fact, there is no strict distinction between rival and nonrival goods; rather there is a spectrum of rival and nonrival goods.17 There is no good that is purely rival, and very arguably none that is purely nonrival—the fundamental theorem of calculus is as good a candidate for the latter pole as we can imagine, and it is not really to the point. Once it is recognised that there is indeed such a spectrum, the concept of ‘market failure’ must also be seen as not an either/or matter: we would suggest thinking of it in terms of a rheostat rather than a switch. As the commercial issue raised by IP is exploitation of an innovation, this is never ethereal (as the pure use of calculus is) but always a costly process which is subject to a degree of competition. As regards, for example, the use of a new process to make steel, the innovator as the first-mover inevitably has advantages which should allow the innovator successfully to compete in the market for steel. The value of these advantages undoubtedly will be less if there is no legally protected IP monopoly, but we normally recognise this as an immensely valuable feature of competition. The idea that the first manufacturer of steel could enter into anticompetitive arrangements (other than IPRs) to secure a monopoly is usually abhorrent. Once the misleading idea that there simply cannot be a market in IP goods is abandoned, the question arises: why is it that in the case of IPRs we seek to allow the innovator to claim a greater proportion of the revenues traceable to the innovation18 than competition would allow? This question can best be approached by first answering another. As there is no abrupt cut-off point between goods which naturally can have a market and those which require IP monopoly rights, what determines where a market failure, in the sense of there being no market, occurs? This is not determined by the fact that excludability is not total, for were this the case, then there would be no markets in any goods because excludability is never total. Market failure is in a sense ubiquitous. The existence of positive transaction costs means that all markets are in some sense imperfect; a point which is well enough recognised in respect of costs of communication and information, and should be recognised in respect of the costs of excludability. Market failure in the sense of there being no market occurs when we do not invest sufficiently to create excludability. Ceteris paribus, nonrival goods will require a larger investment to create excludability, but as the existence of IPRs constantly testifies, if we are prepared to incur sufficient transaction costs to create excludability, we can create it. There is no difference in kind between tangible and intangible

16 17 18

P Romer, ‘When should we use intellectual property rights?’ (2002) 92 American Economic Review (Papers and Proceedings) 213, 214: ‘Even if file-sharing will reduce revenue for the music industry and thereby reduce the variety of musical recordings, this need not cause a net reduction in consumer welfare.’ Cf the treatment of degrees of ‘interdependence’ in AA Schmid, Property, Power and Public Choice (2nd edn, New York, USA, Praeger, 1987) Ch 3. We are, of course, being too generous to the innovator in the way we put this question. If the innovator is able to claim an IPR, independent innovation, and therefore exploitation not traceable to the innovation protected by the IPR, is also prevented.

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goods in this respect. There is a difference of degree between goods in respect of how difficult it is to make them exclusive, and this is in one dimension set by the technological condition of nonrival consumption. But there is another dimension to this. Providing excludability always involves transaction costs. Market failure in the sense of there being no market occurs at the point where the transaction costs of ensuring excludability exceed the benefit obtained thereby. In respect of our concerns here, market failure is determined by the extent to which we are prepared to invest in excludability as well as the technological difficulty of excludability posed by nonrival consumption: [M]arket failure is not absolute; it is better to consider a broader category, that of transaction costs, which in general impede and in particular cases completely block the formation of markets… Market failure is the particular case where transaction costs are so high that the existence of the market is no longer worthwhile.19 (Our emphasis.)

Policy towards IP should be based on awareness of the social basis of all private property, including IP, but the fetishized conception of the IPR as ‘private property’ leads to two serious mistakes constantly being made. First, this fetishization results in the IPR being conceptualised in terms of the owner’s absolute right of dominion, although subject to conditions and perhaps limited rights for others imposed in the public interest. Thus, the owner’s right appears to be inherent and natural, whereas any limitations and conditions seem to be the result of an ‘external’ intervention by the state. This makes it hard to get the correct balance between innovator and imitator, for the private property right of the owner is always given special weight when it is, ex post, balanced against the right of the user. IP needs to be justified in terms of the balance between the rights of appropriation and the obligations of diffusion, but this ex post balancing inevitably prioritises the former. Were the balance struck ex ante, as it should be, when the decision is taken to create the private property right, this balance would be more likely to be optimising. The fetishized conception of private property is strongest in those modern systems of IP most firmly rooted in the natural rights perspectives originating in the Enlightenment, especially the authors’ rights traditions in the continental European systems of copyright. However, even in the more pragmatic common law systems and in industrial property, the owner’s right is that of dominion, and the rights of others are regarded as an intrusion. The second mistake is that, if the simple assertion that IP is property is deepened into a consequentialist argument, the justification of IP then given borrows from the ‘market’ justification of private property when, really, it cannot do so at all. We have seen Sir Arnold Plant refer to Hume’s justification of private property, and this, of course, is part of the erection of the system of natural liberty that is the best justification of the market economy. We have also seen that for Hume private property is justified as the best way to encourage the optimal utilisation of goods. However, nature is not frugal in this way with ideas, and IP is, in fact, one of the clearest examples of the artificial creation of a scarcity (monopoly) by the state. As Plant has brilliantly pointed out: It is a peculiarity of property rights in patents (and copyrights) that they do not arise out of the scarcity of the objects which become appropriated. They are not a consequence of scarcity. They are the deliberate creation of statute law; and whereas in general the institution of private property makes for the preservation of scarce goods, tending (as we might loosely say) to lead us ‘to make the most of them’, property rights in patents and copyright make possible the

19

Arrow, ‘The organisation of economic activity’, above n 10, pp 134, 139.

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New perspectives on property law, obligations and restitution creation of scarcity of the products appropriated which could not otherwise be maintained. Whereas we might expect that public action concerning private property would normally be directed at the prevention of the raising of prices, in these cases the object of the legislation is to confer the power of raising prices by enabling the creation of scarcity. The beneficiary is made the owner of the entire supply of a product for which there may be no easily obtainable substitute. It is the intention of the legislators that he shall be placed in a position to secure an income from the monopoly conferred upon him by restricting the supply in order to raise the price.20

The IPR cannot be justified by reference to the market, for it is a monopolistic intervention which seeks to oust the market, often being justified in terms of the need to give a greater stimulus to production than that which the market would provide. We by no means wish to argue that IP monopolies (or other monopolies) may never be justified; even Adam Smith occasionally allowed this.21 We want rather to insist that the justification of IPRs be considered against a far more sophisticated notion of market failure, one which does not simply believe markets are impossible in certain goods but which recognises that the question is whether the social expenditure on the transaction costs of creating (excludability and therefore) a market is worthwhile. The issue is one of comparison of alternative governance structures and, as has so often been the case with regard to public goods,22 state intervention in the form of IP monopolies has been based on the belief that markets are impossible when the case for this simply has not been properly made out. Each case must be considered on its merits and not subsumed under a general notion of IP. Once this is done, we strongly suspect that a sensible business model incorporating markets and competition may be devised for almost all IP goods. Such a model may very well not yield the revenues to the IPR holder that an absolute IPR monopoly would; but since such a monopoly would inevitably alter the rate at which certain innovations are developed, prima facie it is right that this should be the case. Rational pricing of the exploitation of the innovation is determined by market competition even when (as always) the market is imperfect; and it should take a very strong argument indeed to show that the distortion of pricing through the granting of monopoly rights will produce a superior outcome. Even if exploitation is slowed or prevented by competition, that is by no means itself sufficient to demonstrate the need for monopoly rights. As Plant has pointed out, the substitution of a rate of innovation determined by monopolistic intervention for the rate determined by competition is, in general terms, impossible to justify.23 There may, of course, as we have acknowledged, be specific cases when the argument for monopoly as opposed to a competitive market may be sustainable. Each case should, we repeat, be considered on its merits. Three points of general application should be considered whenever weighing up whether the (imperfect) market or the grant of a monopoly will produce a superior outcome: 1 By granting the monopoly, one is forfeiting the power of competition to determine the rate of

20 21 22 23

Plant, above n 3, p 36. A Smith, The Wealth of Nations (Oxford, OUP, 1976) 754. See further n 69 to this passage supplied by the editors of the Glasgow Edition. RH Coase, ‘The lighthouse in economics’, in RH Coase, The Firm, the Market and the Law (Chicago, USA, University of Chicago Press, 1986) 187. Plant, above n 3, p 47.

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investment in innovation and substituting for it a planned determination (by the monopolist and the state). As we believe there is no sensible way to determine an optimal rate of investment in innovation, for the problem is simply too difficult, we conclude that the overwhelming majority of claims to do so are typical examples of welfare economics’ absurd scientistic confidence in quite arbitrary numbers. Plant’s observation, made as long ago as 1933, remains true, that ‘the science of economics as it stands today furnishes no basis of justification for this enormous experiment in the encouragement of a particular activity by enabling monopolistic price control’.24 But if this is so, then recognising IPRs can represent a serious mistake. By giving some corporations extreme encouragement for investment in some types of innovation, IPRs would mean that the rate of such investment is too high. The exploitation is subsidised by the state underwriting extreme excludability, providing revenues to corporations far greater than they could obtain by competitive pursuit of excludability (by developing a good reputation or highly valued products), while saving them most of the costs of establishing the necessary excludability. Current concerns over the rate of development in gene technology are a perfect example of the sort of issue raised by this interference in competition.25 (On the other hand, IPRs do create a more limited possibility of slowing down or closing off some innovation, and this raises the obverse of this argument, though we will not discuss this here). 2 In order to enforce the monopoly, the state grants potentially draconian remedies to private corporations. These remedies are not curtailed by being framed in terms of expectation as are normal commercial remedies, but, precisely because IPRs are not market based, expectation remedies are considered to be inadequate and the use of criminal sanctions, private injunctions, and swingeing damages ‘calculated’ on disgorgement or outright punitive bases are required. These enormous concessions of power (and indeed public subsidy as parties bear so little of the court costs) to private corporations are reminiscent of mercantilism rather than modern commercial life and represent a major cost in themselves, the cost of the undermining of legitimacy in the operation of the legal system as IPRs effectively grant a terror weapon to corporations prepared to wield it. 3 The availability of the monopoly rights will, of course, alter the behaviour of those who might take advantage of them. That a (potential) monopoly has no welfare enhancing basis can hardly be expected to prevent rent-seeking behaviour, and the extraordinary post-war growth of IP law in general and copyright in particular is a product of the revenues to be obtained from legal exploitation of the willingness to grant such monopolies.26 There is, we submit, no sensible way in which to assess whether this sort of behaviour is of value on a cost-benefit basis; the only way

24 25

26

Ibid, p 55. The state, of course, subsidises the development of gene technology in many ways in addition to granting IP monopolies, but this is generally very poorly understood. When this paper was presented to the WG Hart Workshop, a distinguished participant registered concern that our suggestions would interfere with the market in gene technology represented by the success of Wellcome! This is to say, ‘represented’ by a charity working intimately with a huge state subsidised research and development apparatus, including more or less completely nationalised health care and teaching and research hospital systems. Support of gene research by Wellcome may be a good policy, but to believe that such a policy would be support of a market is hopelessly confused. Mr Justice Laddie, ‘Copyright: over-strength, over-regulated, over-rated’ (1996) 5 European Intellectual Property Review 253.

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to do this is normally to replace the monopoly with competition, and it should be recognised that whenever we create the monopoly, we are incurring the cost of (potential) regulatory capture and the diversion of corporate effort into rent-seeking behaviour. It is clear that much investment that now takes place under IP protection would not take place under competition, but unless one is fixated with the growth of output as a good in itself, as the governments of the advanced capitalist societies manifestly are, one might prefer less investment of this kind. For example, the level of investment in the mass marketing of pop groups is a phenomenon incomprehensible without IP for, especially as the music is so formulaic or even simply manufactured by the corporation, competition would certainly curtail this investment. In our opinion, which we believe is widely shared, much of this music has little value and the overwhelming part of the mass marketing of it is pernicious. Of course, one should not prevent this music being made or (perhaps with reservations on the way it is marketed to children) sold in this way; but, equally, on what possible ground are we extending extraordinary monopoly protection to allow such banal cultural products to establish an appalling hegemony which rightly would be deprecated were a similar propaganda effort made by an authoritarian regime? Public regulation of this sort simply has lost any grasp of its public function, and is being hijacked for the purposes of private accumulation without any public justification. It is most eloquent testimony to the private property fetish at the heart of our understanding of IP that a truly enormous investment of public resources takes place without question in order to allow the most banal pop performer (and his backing corporation) to exact monopoly revenues. That the performer might be restricted by competition to reduced revenues or even that the world might be spared the Spice Girls or the like not by censorship but by removal of enormous public subsidy is not even raised as an issue. Our argument so far has been that both tangible and intangible goods raise the problem of the transaction costs of creating excludability, but that the general conception of IP as property makes proper apprehension of this problem very difficult indeed. Creation of excludability in IP requires the special step of creating a monopoly, but whether this very costly step is worthwhile typically is not asked. The naturalistic view simply closes off all argument as a consequence of regarding IP as property. A somewhat stronger consequentialist argument may be made that the monopoly is necessary to allow IP goods to be produced, but the typical way this argument is constructed is itself quite wrong. An idea of clear-cut market failure leads to the claim that the monopoly is needed to allow IP goods to be produced at all. However, the abrupt distinction between tangible and intangible goods on which this claimed market failure rests is never appropriate to the analysis of competitive commercial exploitation. We can see no general reason why a workable competitive model for innovation in most goods could not be produced. We entirely allow that a convincing welfare argument for monopoly might be made in the case of certain specific goods for which a competitive model cannot be produced. On the other hand, there are many goods (such as mass marketed pop) in respect of which we see no reason to dispute the verdict of the market that, as these are goods the value of which cannot offset the costs of their competitive production, they should not be produced. As a convincing welfare argument for intervention in respect of these goods cannot be made, no monopolistic encouragement should be given to their production. Unlimited IPRs would be so draconian that the consequentialist argument recognises that there are no grounds on which their grant can be unlimited, and there are very many derogations from the various monopolies.27 However, this way of tailoring the IPR, as a public interest derogation from what in its basic concept is regarded as an absolute private property right, makes it difficult to establish a workable rule for the welfare optimising use of the IPR.

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REVENUES: ELASTIC PROPERTY RIGHTS OR REASONABLE REMUNERATION? In this section we will analyze the difficulties caused by the private property paradigm of IP especially in managing the increasingly complex processes of innovation and creation inherent in the ‘knowledge economy’.28 We do not argue that the general concept of IPRs is unsuited to new technologies, far from it. The elasticity of the private property concept allows it only too easily to expand to provide protection for anything from computer software to DMA fragments. There is generally sufficient flexibility in the concepts defining the existing categories of IPRs to allow one or other, or even more than one, to cover any new technology: hence, computer programs have been protected both by copyright and patents, even though neither form is truly appropriate.29 In other cases, legislatures have been lobbied to create sui generis private property rights, as with plant varieties, computer chip designs, and databases. In either case, it is normally assumed that some form of exclusive private property right is essential to stimulate and protect the investment needed to generate innovation. To be sure, it is usually recognised that the extension of such rights can seriously restrict the diffusion of innovation. Hence, a consequentialist balancing of private rights of appropriation against the public interest in diffusion which is supposed to be safeguarded by limits and exceptions to those rights is central to modern IP The fantastic irony is that it is the restrictions that are deemed to be impediments to the market, whereas of course it is the initial creation by the state of monopoly rights that distorts competition. In many ways, the balance of initial private rights and subsequent public interest exceptions makes it hard to design an effective property regime, which should be based on the appropriate specification of the initial rights. Such is the power of the private property paradigm that there has been only some hesitant discussion of a possible alternative approach towards what may be termed a competition-oriented system for remunerating innovation.30

The expansion of private rights and restriction of exceptions The frequent response to arguments that IPRs are inappropriate for today’s knowledge economy is that the problems posed are not new. Certainly, the contemporary debates in many ways reflect those that accompanied the birth of IPRs in their modern form, notably the argument that private property in intellectual products is incompatible with the necessarily interdependent and interactive nature of creative and intellectual work.31 However, the earlier debates took place in a context

27 28 29 30

W Nordhaus, Invention, Growth and Welfare (Cambridge, USA, MIT Press, 1969). D Quah, ‘Matching demand and supply in a weightless economy: market-driven creativity with and without IPRs’ (LSE Economics Department, 2002). P Samuelson et al, ‘A manifesto concerning the legal protection of computer programs’ (1994) 94 Columbia Law Review 2308. The term ‘market-friendly’ is also appropriate although, unfortunately, it is likely to stimulate opposition from those on the political left who do not understand that markets are merely social institutions of distribution, and from those on the right who assume that a market necessarily requires strong private property rights.

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where technological and social change had broken apart the pre-existing forms of property. The patent originated as a means of circumventing guild control of innovation; while copyright was a form of state control of printing by licensing publishers, until reborn as an automatic right for authors to the fruits of their labour.32 At the time of the birth of the modern system of IPRs, as part of the transition to industrial capitalism in the late 18th and first part of the 19th century, the new private property paradigm was a struggling infant.33 Now it is a lusty giant, blocking the pathways of development of today s technologies. Historical and contemporary evidence confirms that IPRs are important not to stimulate invention and creativity, as often claimed, but to mediate their social diffusion through commercialization. Even Britain, the cradle of the industrial revolution, had no effective modern patent system until the mid-19th century, after the main phase of scientific advance. 34 Contemporaneously, the enormous strides made in biotechnology, including the international effort to decode the human genome, have been to a great extent publicly funded—only subsequently have patent claims been made for commercial applications. 35 The economic justification for patent protection, on careful analysis, is limited at most to the need to reinforce the normal lead-time gained by an inventor, by obviating the need for secrecy, to enable optimal pricing for the commercial prospect offered by the invention.36 Empirical evaluation of the effects of the complex processes of protection is even more damning: Nonsensical as it may sound, the patent system is essentially anti-innovative. This is not just because it assists a very specialised sort of innovation and discourages other sorts. Much more important is that the patent system satisfies the requirements of those who need to feel that innovation is controlled and contained, that innovation is in its place, part of process. Most innovation is not like this at all.37

31

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34 35 36

37

Pointed out most cogently in B Sherman and L Bently, The Making of Modern Intellectual Property Law: The British Experience, 1760–1911 (Cambridge, Cambridge University Press, 1999), eg, p 38. While Sherman and Bently are undoubtedly correct to point out that the contemporary confrontations of IP law with cyberspace and biotechnology do not necessarily herald its death-throes, but can be seen as a continuation of a long history (ibid, pp 1–2), this is not in itself an adequate justification for the solutions offered by IP law, either now or in the past. FD Prager, ‘A history of intellectual property from 1545 to 1787’ (1944) 26 Journal of the Patent Office Society 711. Thus, the House of Lords in Donaldson v Becket ((1774) 1 ER 837) rejected perpetual common law copyright, confining the booksellers to their more limited protection of 14 years (renewable once for a living author) under the Statute of Anne; whereas now the internationally-fixed minimum is the life of the author plus 50 years (TRIPS agreement art 12), extended to 70 in major jurisdictions such as the EU and the US. HI Dutton, The Patent System and Inventive Activity During the Industrial Revolution 1750–1852 (Manchester, Manchester University Press, 1984). GA Evans, ‘The human genome project and public policy’ (1999) 8 Public Understanding of Science 161. EW Kitch, ‘The nature and function of the patent system’ (1977) 20 Journal of Law and Economics 265. Applied research has focused on the role of patents in managing commercial interactions between innovators, starting from a neo-Schumpeterian view of the dynamics of competition based on innovation, and exploring the difficulty of exploiting scientific innovation if the only alternatives are secrecy or openness: MD McKelvey, Evolutionary Innovation: The Business of Biotechnology (Oxford, OUP, 1996). S McDonald, ‘Exploring the hidden costs of patents’, in P Drahos and R Mayne (eds), Global Intellectual Property Rights: Knowledge, Access and Development (New York, USA, Palgrave Macmillan-Oxfam, 2002) 13, p 34.

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Nor has the creation of literary and musical works ever required the protection of copyright, although the heroic figure of the author has been enlisted (not least by 19th century authors such as Charles Dickens and Victor Hugo) to press for steadily more extensive protection, essentially to ensure their very large remuneration through the sale of products resulting from that creativity. Thus, the key question is whether, and to what extent, an exclusive private property right is necessary to secure adequate remuneration. Exclusivity has come to be defined differently in the two main pillars of IP which emerged historically.38 For industrially useful technologies, patents (and related rights) provide a relatively short period of protection39 under conditions which can be stringent (the product or process must entail a significant technological advance as well as industrial utility); but the protection against imitation, for example by reverse engineering, is absolute. A later-in-time independent inventor obtains no rights, unless the invention is clearly a distinct one. For creative works, copyright has given increasingly extensive terms of protection,40 and the requirement of originality which establishes the threshold of protection is generally set very low, but protection is only against copying, so emulation by independent means is permitted in principle. In practice, however, the presumption is against it, and infringement may also extend to non-literal copying, which makes reverse engineering hazardous, requiring specific provisions if decompilation is to be permitted.41 Copyright has also been greatly widened by its extension during the 20th century, firstly to socalled derivative works, which gave its protection to such essentially industrial products as sound recordings, cine films, sound and television broadcasts, and then to computer programs, which are essentially functional products rather than creative works. On the other hand, performers, to whom it may seem hard to deny the status of creative artist, have experienced greater difficulty in obtaining a property right.42 Finally, when reproductive technologies (audio and video recorders and photocopiers) became widely available, copyright was extended to give an owner the exclusive right to control reproduction ‘In any manner or form’.43 Thus, there has been a steady expansion of the scope of rights protected, and of what is meant by ‘copying’, to include the control of all

38 39 40

41 42

JH Reichman, ‘Legal hybrids between the patent and copyright paradigms’, in WF Korthals et al (eds), Information Law Towards the 21st Century (Deventer, Netherlands, Kluwer, 1992) 325, 329. Now extended to 20 years from date of filing by art 33 of the TRIPS agreement. The internationally agreed standard is now generally the life of the author plus 50 years, although for collective works such as cine films it is normally 50 years from publication (Berne Convention, art 7; TRIPS, art 12). However, it was extended to life of the author plus 70 years in the EU from 1995, and in the US by the Sonny Bono Copyright Term Extension Act 1998. For details of the progressive extensions of the copyright term in the US see Briefs for the Petitioners in Eldred v Ashcroft (currently pending a decision by the Supreme Court) and other material available from www.eldred.com. Art 6 of the Council Directive on Legal Protection of Computer Programs, 91/250/EEC, enacted in the UK by a Regulation introducing a new s 50(B) into the Copyright Designs and Patents Act 1988. Thus, while authors have long been granted the exclusive right to authorise public performances of literary, dramatic and musical works, the extension of the Berne Convention to performers was resisted on the grounds that their less creative role should not be allowed to reduce the remuneration for authors (S Ricketson, The Berne Convention for the Protection of Literary and Artistic Works (Deventer, Netherlands, Kluwer and Centre for Commercial Law Studies, Queen Mary College, 1987) Ch 15). Only under the Rome Convention of 1961 were performers given the more limited right to control fixation of their performances, although this has now been extended to a property right to control dissemination of those fixations as part of a general extension of rights over recordings (WIPO Performances and Phonograms Treaty 1996; Council Directive 2001/29/EEC, art 3).

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kinds of ancillary acts, including adaptation, public performance, broadcasting, and most recently distribution and rental. Despite the fiction that copyright is necessary to reward and encourage creativity, the truth is that an enormous number of creative works are disseminated freely by their authors, while the remainder are mostly owned contractually by firms. Thus, the commercial exploitation of IPRs in practice is done not by the inventor or creator, but by a commercial developer or intermediary such as a publisher. Far from copyright facilitating the growth of the information economy, one leading copyright specialist and judge has gone so far as to say that: …the fact that our system of communication, teaching and entertainment does not grind to a standstill is in large part due to the fact that in most cases infringement of copyright has, historically, been ignored.44

Determining remuneration From the economic perspective, a key question for IPRs is whether they should take the form of exclusive private property rights, or non-exclusive rights to appropriate remuneration. In practice, the commercialization of IPRs takes place through various forms of licensing, while their ultimate valorization comes from the sales of products usually embodying multiple IPRs. The development of commercial cultural or information products increasingly requires a combination of inputs often involving a large number of IPRs with many different owners. Thus, a multi-media product such as a DVD will involve many providers of content, both creative (music, lyrics, visuals) and technical (software). Similarly, bio-engineering products often depend on a variety of ‘building blocks’ or research tools, which their ‘owners’ may only be willing to license on condition of an ownership share of the final product.45 If the owner of each input has an exclusive private property right, the transaction costs of bargaining to obtain the bundle of rights at an optimal price may pose an insuperable obstacle. An alternative approach to the private property paradigm is suggested by recent scholarship on the economics of IP which points out that a right to remuneration, based on a liability rule, can be in many ways superior to a private property right in creating the best conditions for bargaining to determine commercial value. This line of analysis originated with Calabresi and Melamed, whose famous rationalisation of the protection of some kinds of proprietary interests, most importantly against a pollution nuisance, by means of damages rather than injunction turned on the claim that denying the owner a ‘blocking’ right against the industrial development causing the pollution was

43

44 45

Art 9 of the Berne Convention, introduced in the 1967 revision, though this still leaves open the question of what constitutes reproduction (and Berne does not explicitly require it to be in a ‘material’ form, as does, eg, the UK legislation, Copyright Designs and Patents Act 1988, s 17(2)); however, the examples in the article made it clear that the right to authorise reproduction includes recording but not performance (Ricketson, above n 42, sec 8.6). Also, Berne applies only to literary and artistic works (but including cinematographic works, and adaptations or translations). Laddie, above n 26, 257. RS Eisenberg, ‘Bargaining over the transfer of proprietary research tools: is this market failing or emerging?’, in RC Dreyfuss et al (eds), Expanding the Boundaries of Intellectual Property: Innovation Policy for the Information Society (Oxford, OUP, 2001) 223.

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welfare enhancing.46 More recently, Kaplow and Shavell’s comprehensive review47 suggested that the preference for a property remedy to protect an individual’s ownership of things is most appropriate for personal possessions, since they are likely to have a unique value to an owner, which would not be adequately reflected in a damages award. This would suggest that for nonrival goods such as IPRs, a liability rule would be adequate. However, these authors suggest that there may be an economic justification for property protection of IP, since if owners consider that the compensation they might receive would be too low, they would have too little incentive to develop and commercialize the asset. Others have suggested that in some circumstances exclusive property rights can block effective economic use of assets. Thus Michael Heller has pointed to the ‘tragedy of the anticommons’, in situations where multiple overlapping private property rights prevent the efficient combination of assets.48 Countering this, Robert Merges suggests that court-determined compensation is not the only means of obtaining collective valuation of assets, and he provides examples of how owners of property rights ‘contract in’ to collective valuation arrangements, such as patent pools and collective copyright licensing organisations.49 Merges argues for ‘voluntary’ collective compensation processes, largely because IPRs are difficult to value, which is rather a circular argument. Indeed, the emergence of private organizations to manage licensing seems to indicate the failure of the private property paradigm rather than its success. In fact, this entire line of analysis strongly emphasises the importance of the initial definition of the entitlement, or the ‘boundary’ of the right, in establishing the basis for the pricing negotiations.50 This can be clearly seen in the history of the various forms of collective licensing which have been the main means for securing remuneration from the commercialization of cultural products via ‘secondary’ rights in the audio-visual industries which dominated the 20th century. The creation of a collective rights organization (CRO) has generally accompanied the legal recognition or protection of such a right, ever since the origins of CROs in France.51 The legal framework for

46 47 48

49 50

51

G Calabresi and AD Melamed, ‘Property rules, liability rules and inalienability: one view of the cathedral’ (1972) 85 Harvard Law Review 1089. L Kaplow and S Shavell, ‘Property rules versus liability rules: an economic analysis’ (1996) 109 Harvard Law Review 713. MA Heller, ‘The tragedy of the anticommons: property in the transition from Marx to markets’ (1998) 111 Harvard Law Review 621, and MA Heller and RS Eisenberg, ‘Can patents deter innovation? The anticommons in biomedical research’ (1998) 280 Science 698. See also 1 Ayres and E Talley, ‘Solomonic bargaining: dividing a legal entitlement to facilitate Coasean trade’ (1995) 104 Yale Law Journal 1027. RP Merges, ‘Contracting into liability rules: intellectual property rights and collective rights organizations’ (1996) 84 California Law Review 1293, and RP Merges, ‘Institutions for intellectual property transactions: the case of patent pools’, in Dreyfuss et al (eds), above n 45, 123. For an economic analysis which demonstrates the superiority of a reward system over a private property right of innovation see S Shavell and T van Ypersele, ‘Rewards versus intellectual property rights’ (2001) 44 Journal of Law and Economics 525, who argue that the appropriate level of reward could be based on sales data, and if done continuously would be based on superior information than that available to an innovator who typically has to estimate ex ante. The creation of a right for authors over dramatic performances in France in 1791 resulted from pressures by an informal association instigated by Beaumarchais, which was formalised in 1829 as the SACD (Société des auteurs et compositeurs dramatiques); and the legal support for a right of composers over performances of their music in the famous legal action in 1847 against the café-concert Les Ambassadeurs resulted in the creation in 1851 of SACEM (Société des auteurs, compositeurs et éditeurs de musique): see A Schmidt, Les Sociétés d’Auteurs SACEM-SACD: Contrats de Représentation (Paris, France, Pichon and Durand-Audias, 1971).

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CROs has varied both between and within different jurisdictions, often depending on the relative economic, political, and cultural pressures generated by the creators and users of the works in question. Thus in the US the power of the recording industry ensured that music ‘mechanical’ (recording) rights were subject to a statutory licence, under which the royalty remained legislatively fixed at 2 cents from 1909 to 1978.52 In contrast, music performances have been licensed by privately-formed organizations, beginning with the establishment of ASCAP in 1914. However, it is seriously misleading to characterise these as ‘voluntary’ bodies, and even Merges concedes that acceptance by users entirely depended on their coercion by litigation, and hence on the willingness of the courts to support property rights.53 In fact, decades of legal battles entailed payment of enormous lawyers’ fees which have rivalled the income generated for composers.54 Resort by users to the antitrust laws resulted in consent decrees, which made the performing rights organizations in effect regulated bodies.55 From the private property perspective, licensing schemes merely offer a solution to the collective-action and transaction-costs problems for individual owners to control the use made of their property. From this angle, any element of compulsion to license is considered an intrusion on the private property right, since it means that ‘the exclusive right to authorise has been degraded to a mere right to remuneration’.56 However, this assumes that the specification of the property right adequately and clearly reflects the incentives/access balance. Typically, however, new technologies create new forms of diffusion which require that balance to be reformulated:57 a composer could hardly have expected to obtain the same royalty for airplays on the new-fangled wireless as might have been appropriate from music-hall performances. In practice, the levels of remuneration have been set by licensing schemes, which experience shows entail some compulsion on both sides, if only to set the parameters for negotiation. Thus, with the advent of photocopying in the 1970s, publishers revived the familiar refrain of ‘piracy’, although the real issue was the appropriate return (if any) that print publishers should obtain from the secondary market created by this new technology, and the legal battles focused on the extent of the ‘fair dealing’ exception.58 Hence, the regimes of collective administration of rights are increasingly a focus of conflict. On the one hand, private property idealists see them as at best a necessary evil, and deplore the

52

53 54 55 56 57 58

Although this has been criticized as rigid by Merges, ‘Contracting into liability rules: Intellectual property rights and collective rights organizations’, above n 49, 1313–14, it certainly succeeded in stimulating the massive growth of a recorded music industry, without noticeably diminishing the enthusiasm of composers to write songs. Under the 1976 Copyright Act, this became assimilated to a compulsory licensing regime, supervised by a Copyright Royalty Tribunal, established for cable, jukebox and public broadcasting performances. ASCAP was effectively empowered by the Supreme Court decision in Herbert v Shanley (242 US 591 (1917)) which narrowly defined the ‘for profit’ limitation of the music performance right, to cover music played to entertain diners in a restaurant. JM Kernochan, ‘Music performance rights organizations in the United States of America: special characteristics, restraints, and public attitudes’ (1985) 21 Copyright 389, 398. The broadcasters also formed their own rival body to compete with ASCAP, the BMI, which accepted a consent decree shortly before ASCAP did: Kernochan, ibid, 395–99. HC Jehoram. ‘The future of copyright collecting societies’ (2001) 23 European Intellectual Property Review 134, 136. T Gallagher, ‘Copyright, compulsory licensing and incentives’ (Oxford Intellectual Property Research Centre Working Paper Series No 2, 2001). S Picciotto, ‘Copyright licensing: the case of higher education photocopying in the UK’ (2002) 9 European Intellectual Property Review 438.

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notion that licensing should be compulsory, ignoring the reality that compulsion results from the definition of the property right. Others see them as powerful yet increasingly fragile, precisely due to the vain attempts to force them into a private property paradigm, and argue for their reconceptualization as forms of regulation.59 In fact, despite the wide variety of types of organization for collective administration of rights, all involve regulation through collective contracts, generally overlaid to varying extents by competition or antitrust laws and/or specific statutory schemes.60 Regrettably, however, the extension of private rights over ‘secondary’ uses balanced only by limited exceptions in the public interest has now been established as an international requirement, in the Berne and TRIPS agreements, as a result of intense lobbying (amounting to ‘regulatory capture’) of international organizations by sectional corporate interests.61 These agreements now require states to grant complete rights to control reproduction in all forms, subject only to ‘limited exceptions in the public interest’ and provided that such reproduction does not ‘conflict with a normal exploitation of the work and does not unreasonably prejudice the legitimate interests’ of the author or rights-holder: now described as the three-step test.62 In practice, the test entails an evaluation of the availability of licensing and of the remuneration it produces. Thus, in the first complaint under these provisions, a WTO Panel decided that whether there is a conflict with ‘normal exploitation’ depends on whether licensing is available or could be introduced, and for the ‘legitimate interests’ requirement whether the exception might ’cause an unreasonable loss of income to the copyright owner’.63

Digital diffusion These tensions are becoming even more acute with the advent of the new communications technologies. As the conflict over Napster starkly dramatized, literary or musical works can now be made available for download over the internet, dramatically reducing the marginal cost of access to information or cultural products (and shifting much of it to the consumer). From a business or

59 60

61 62

63

For the former view, see Jehoram, above n 56; for the latter, M Kretschmer, ‘The failure of property rules in collective administration: rethinking copyright societies as regulatory instruments’ (2002) 24 European Intellectual Property Review 126. A relatively comprehensive survey is provided by D Sinacore-Guinn, Collective Administration of Copyrights and Neighbouring Rights: International Practices, Procedures and Organizations (Boston, USA, Little Brown, 1993), who nevertheless tries to maintain that the ‘golden rule’ is that ‘Collective administration must be designed and operated in a manner supportive of the private rights nature of creative rights’ (ibid, 815). For a detailed analysis of the important role of regulatory contracts in France see Schmidt, above n 51. MP Ryan, Knowledge Diplomacy: Global Competition and the Politics of Intellectual Property, (Washington DC, USA, Brookings Institution Press, 1998) and P Drahos and J Braithwaite, Information Feudalism: Who Owns the Knowledge Economy? (London, Earthscan, 2002) Chs 4–9. This wording from art 9 of the 1967 Stockholm revision of the Berne Convention has been transposed into art 13 of TRIPS, but with the significant replacement of ‘author’ by ‘rights holder’. For a more general critique of the way in which the TRIPS agreement prioritises private rights over public interests, see S Picciotto, ‘Defending the public interest in TRIPS and the WTO’, in Drahos and Mayne (eds), above n 37, 224. Report of the Panel, World Trade Organisation, ‘United States—Section 110(5) of the US Copyright Act’ (Document WT/DS/160/R, 15 June 2000) para 6.229.

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economic viewpoint, this is a form of ‘disintermediation’, since the traditional role of the publisher is radically challenged if an author can now very easily offer direct access to a new work to anyone in the world with access to a networked computer. However, organizations which set themselves up as ‘content providers’ may succeed in establishing toll-booths on the information superhighway, either by providing value-added factors (for example, convenience, or certification of reliability or quality), or by acquiring property rights from the authors and establishing monopolies. Furthermore, they may claim their own right to this assembly, either by analogy with encyclopaedias and compilations which have separate copyright protection,64 or as a database.65 However, the shift to digital ‘virtual’ diffusion necessarily brings into question the very nature of the author’s right to control reproduction. Simply accessing a work over the internet entails making a copy of it, and such copies can of course be freely replicated for other consumers. Equally, a product purchased in print, vinyl or disc format can readily be digitised, and hence shared by any number of consumers. This potentially creates vast new audiences for cultural and informational products, although these potential markets pose major challenges for valorization of the initial investments, given the extremely low marginal costs of access. Perhaps unsurprisingly, therefore, the new communications technologies are perceived mainly as threats by the vested interests which have come to dominate the diffusion of commodified knowledge and culture. Hence the campaigns against ‘piracy’ waged by organizations such as the International Federation of the Phonographic Industry (IFPI), which blames the internet for the threat to its hitherto secure, monopoly-protected markets.66 At the same time, however, digital technologies and the internet potentially offer a new solution: the power to control (and therefore charge) for access, or pay-per-view. Whether this can become established and accepted will depend on a wide variety of interrelated factors, involving social and cultural practices as well as political and economic decisions, embodied in legal regulation. Most importantly, it requires the creation of excludability, which entails strong state measures of intervention and investment of legitimacy. The new measures to ensure excludability

64

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‘Collections of literary and artistic works such as encyclopaedias and anthologies which, by reason of the selection and arrangement of their contents, constitute intellectual creations shall be protected as such, without prejudice to the copyright in each of the works forming part of such collections’: Berne Convention, art 9(5). The European Council Database Directive (96/9/EEC of 11 March 1996, implemented from 1998) requires full copyright protection for ‘databases which, by reason of the selection or arrangement of their contents, constitute the author’s own intellectual creation’ (art 3); but also creates a new right for the maker of a database ‘which shows that there has been qualitatively and/or quantitatively a substantial investment in either the obtaining, verification or presentation of their contents to prevent extraction and/or utilization of the whole or of a substantial part…’ (art 7). The term of protection is 15 years from the ‘date of completion’, but since of course most such databases are continually extended, the term may also extend indefinitely. The owner is protected (against both lawful and unlawful users) from ‘The repeated and systematic extraction and/or re-utilization of insubstantial [sic] parts of the contents of the database implying acts which conflict with a normal exploitation of that database or which unreasonably prejudice the legitimate interests of the maker’ (art 7.5); although ‘extraction’ and ‘re-utilization’ are defined more restrictively, applying only to all or a substantial part of the database, and requiring transfer to another medium (extraction) or making available to the public (re-utilization). Exceptions may allow lawful users rights of extraction for the purposes of illustration for teaching or scientific research (art 9.b). S Sanghera, ‘Executives worry about piracy, but their preoccupation with marketing and inability to develop enduringly successful bands may pose a bigger threat’ (2002) Financial Times, 15 November.

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are necessary because in the knowledge economy it is increasingly difficult to maintain a strict line between consumption and (re)production, on which commodification based on private property rights depends.67 Unsurprisingly, the large media conglomerates have made substantial investments in systems such as digital watermarks, encryption and content-management. These are euphemistically described as ‘self-help systems’ by enthusiasts such as Kenneth Dam, who inevitably analogises technological protection with the locking up of private property.68 However, since any such technological fix can also be counteracted technologically, the self-help enthusiasts are ultimately very desirous of state protection. This entails a very significant state investment to attempt to reinforce excludability by criminalizing anti-circumvention technology. A requirement to do so has now been internationally agreed,69 and is being vigorously implemented in Europe and the USA.70 Even more important than the potential resources involved in attempting to enforce these prohibitions, however, is the investment of legitimacy. There is undoubtedly a very powerful popular ideology which considers the internet as a realm of freedom which should facilitate global human interaction, as far as possible without state or corporate control. This is accompanied by a great reluctance to pay toll-charges. Although decried as unrealistic by corporate interests, it can be seen as rooted in an instinctual understanding of the basic economics of digital communication; especially the very small marginal costs of access (most of which are borne by the consumer). The strong state backing to reinforce excludability of digital products via technical protection systems has given rise to concern from commentators about the reduction of public interest exceptions and limitations on copyright,71 and even the intrusion on the privacy of consumers.72 Indeed, one critic has gone so far as to say that: ‘The ultimate outcome of technological control and other attempts to reprivatize copyright…is a dramatic reduction in the utility of communication networks like the internet. This privatization trend is transforming the internet from a two-way medium of active cultural participation among citizens into a one-way medium for content distribution to passive consumers.’73 However, the viability of exclusive private rights is not simply a matter either of technology or of state sanctions. In effect, rights-management is becoming a specialised function, drawing to itself potentially enormous revenues, while also consuming very significant social resources. Far from

67 68

69 70 71

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C May, A Global Political Economy of Intellectual Property Rights: The New Enclosures? (London, Routledge, 2000). KW Dam, ‘Self-help in the digital jungle’, in Dreyfuss et al (eds), above n 45, 103. Dam also freely accepts that although the contents that may be protected in such ways do not necessarily ‘belong’ to the protector, and the Digital Millennium Copyright Act is aimed at circumvention only of copyright-protected works, the prohibition of anti-circumvention technology would also create excludability for any works. WIPO Copyright Treaty of 1996, art 12. The US Digital Millennium Copyright Act of 1998 (now US Code annotated Title 17, Ch 12 on Copyright Protection and Management Systems) and Council Directive 2001/29/EEC, arts 6 and 7. JR Therien, ‘Exorcising the specter of a “pay-per-use” society: toward preserving fair use and the public domain in the digital age’ (2001) 16 Berkeley Technology Law Journal 979; D Nimmer. ‘A riff on fair use in the Digital Millennium Copyright Act’ (2000) 148 University of Pennsylvania Law Review 673; J Sheets, ‘Copyright misused: the impact of the DMCA anti-circumvention measures on fair and innovative markets’ (2000) 22 Hastings Communications and Entertainment Law Journal 1. LA Bygrave, ‘The technologization of copyright: implications for privacy and related interests’ (2002) 24 European Intellectual Property Review 51. M Jackson, ‘Using technology to circumvent the law: the DMCA’s push to privatize copyright’ (2001) 23 Hastings Communications and Entertainment Law Journal 607, 608.

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being simple items of private property, the multi-media products the commercialization of which is being so heavily protected are themselves complex bundles of rights. These include not only rights in the ‘creative’ works involved (lyrics, music, text, graphics, performances) but also in the technological processes (software) involved, including the technical protection systems themselves.74 Software providers do not sell a physical product but grant a licence to use their technology, which may assert rights over derivative works resulting from its use, creating complex problems of joint ownership.75 In these circumstances, to treat copyright as an exclusive right rather than a right to reasonable remuneration is clearly inappropriate and unworkable.

The extension of patentability For a variety of reasons the extent of private property rights has been far less in the case of industrial property, especially patents, and their limitation in the public interest greater, than in the case of copyright; although we suspect that this is due far more to the stronger commercial counter-pressures from users of technological innovations than to a rational consequentialist ‘balancing’. Even here, however, the private property perspective has produced significant distortions. The contemporary debate about patenting of biotechnology is an example of this. Although it is widely considered that the patenting of the products of gene technology has gone too far, there seems to be no easy way to redress the balance within the current patent principles and practices. Considerable public concern and debate has been aroused by reports that extensive claims have been made for the patenting of gene sequences.76 Yet, the patenting of genetic engineering products has been presented as a natural and logical application of the basic principles of patentability, simply extended to this new technology.77 Certainly, patents have long been granted in the field of biotechnology, including living organisms. The fact that Louis Pasteur had been granted patents in 1873 for yeast used in fermenting beer helped the US Supreme Court accept that there could be no particular impediment to the patenting of living matter isolated by the new techniques of bioengineering in its famous decision in Diamond v Chakrabarty (1980). However, Pasteur’s patents were for a production process,78 not for the micro-organism itself. In fact, for

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P Brown, ‘Digital rights management technologies’ [2002] Practising Law Institute (Patents) 691. C Field, ‘Copyright co-ownership in cyberspace: the digital merger of content and technology in digital rights management and e-commerce’ (2001) 19 Entertainment and Sports Lawyer 3. A US Patent Office official has been cited as stating that by September 1998 as many as 500,000 claims had been filed for patents on gene sequences: Crucible Group, Seeding Solutions (Ottawa, Canada, International Development Research Centre, 2000) n 120. Thus Philip Grubb states ‘there is no reason why the basic requirements for patentability should not apply in the field of biotechnology as in any other’, although he concedes that ‘the inherent complexity of living systems is such that it becomes more difficult to ensure that these requirements are met where living organisms are involved’: PW Grubb, Patents for Chemicals, Pharmaceutical and Biotechnology: Fundamentals of Global Law, Practice and Strategy (Oxford, OUP, 1999) p 226. The Letters Patent granted in the UK on 24 August 1871 (No 2225) were for ‘improvements in brewing’; those in France (Brevet no 98476 dated 13 March 1873) for procedures of manufacturing and conserving beer, and the US patents 135,245 (28 January 1873) and 141,072 (22 July 1873) were for ‘Brewing beer and ale and manufacture of beer and yeast’. We are grateful to Louise Davies for unearthing these patents.

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much of the 20th century patents were not generally available for chemical compounds, and were not usually claimed even for pharmaceutical drugs until the 1950s.79 With the development of the new ‘wonder drugs’ (antibiotics, steroids, birth-control pills), patent offices began to accept the patentability of substances that occurred in nature but had been purified or isolated, and shown to have useful properties, by an ‘inventor’. Thus, as Drahos and Braithwaite have convincingly argued: The patenting of genes, which through the 1990s increasingly drew more public attention, was the culmination of a business approach that had been evolving in the chemical, agricultural, seed and pharmaceutical sectors for all of the 20th century.80

Lobbying by these industrial sectors (allied to that by media industries for copyright) resulted in the embodiment in the TRIPS agreement’s art 27 of the sweeping requirement that: patents shall be available for any inventions, whether products or processes, in all fields of technology, provided that they are new, involve an inventive step, and are capable of industrial application.

However, the Agreement provides no definition of these basic patentability criteria of novelty, inventive step (non-obviousness), and industrial applicability (utility), although their application to bio-engineering products is far from easy. Thus, the position exemplified by the statement ‘It is their molecule’ tends to be substituted for adequate policy discussion. In fact, the evidence has grown that the patentability criteria have been relaxed to allow the protection of routine (computer-generated) discoveries/inventions.81 In this context, again, it has been suggested (notably by Jerome Reichman) that the appropriate alternative would be a compensatory liability regime.82 In Reichman’s version, this would be limited to low-level or routine inventions, although this raises the question of where the line should be drawn between innovations that have full property protection and the lesser ‘incremental’ ones. If one can cast off the mystique of the private property ideology, the simple solution would be to recast IPRs as rights to compensation rather than rights to exclude. This would mean essentially that users would have an automatic licence, although the innovator would be entitled to appropriate compensation, rather than a right to exclude backed by the potential of injunctions and swingeing damages. Automatic licensing would certainly alter the balance of power between users and originators, but as experience with copyright licensing shows, it would result in licensing schemes of various kinds, and hence produce reliable revenues and greater stability and certainty for all. It would also make it easier to define with much greater subtlety the relative rights of different kinds of user, as well as calibrating rewards according to the importance of the innovation,

79 80 81 82

Grubb, above n 77, p 66; Drahos and Braithwaite, above n 61, pp 152–53; and P Temin, ‘Technology, regulation and market structure in the modern pharmaceutical industry’ (1979) 10 Bell journal of Economics 429. Drahos and Braithwaite, above n 61, p 158. Nuffield Council on Bioethics, The Ethics of Patenting DNA (London, Nuffield Council on Bioethics, 2002). JH Reichman, ‘Of green tulips and legal kudzu: repackaging rights in subpatentable innovation’, in Dreyfuss et al (eds), above n 45, 23. Reichman also argues for a compensation regime for ‘hybrids’: JH Reichman, ‘Legal hybrids between the patent and copyright paradigms’ (1994) 94 Columbia Law Review 2432 (part of a Symposium: Towards a third intellectual property right paradigm).

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as Reichman suggests. Originators will always have the option of keeping their innovations or works private, unless users are willing to offer reasonable levels of reward via licensing. Although this solution is conceptually simple, and practically would be easier to implement than the increasing variety and complexity of IPRs, it faces the daunting obstacle of the treaties, culminating in TRIPS, which have erected international IP rules which in many ways embody the private property paradigm. At the same time, this process has now focused unprecedented public attention on the suitability of existing IP regimes for economic development, especially of poorer countries. Combined with the growing concerns in the advanced countries as to the effects of strong IP rights in restricting the diffusion of innovation and distorting culture, there may be a basis for a radical rethinking.

CONCLUSION As we hope this brief account has shown, the elasticity of the private property conception of IP has greatly facilitated the continual extension of IPRs to the products of new technologies during the 20th century. This process is not new,83 but it has culminated in the establishment of unprecedently high levels of protection as an international obligation under TRIPS. At every step of this process, when the extent of desirable IPRs has been debated, economic analysis has shown that the justification for such protection is at best limited. That they have nevertheless been continuously further extended is a tribute not only to the lobbying power of certain firms and industries but more, we suggest, to the ideological power of the private property paradigm. The ideological argument for IP has two stages: tangible goods are considered to be natural property (due to scarcity) so are given (as close as possible to) absolute excludability; intangible goods, which are also argued to require an incentive to be produced, are also treated as ‘property’ which should be given sufficient legal protection to give them similar excludability. Both stages of this argument contain numerous fallacies which conceal the necessity of social investment in excludability for all goods, and thus make very difficult the proper evaluation of whether such an investment is worthwhile. This question is particularly acute in relation to IP goods, not only because excludability is more difficult, but above all because it involves the creation and protection of monopolies. Even asking this question is anathema. Once IP is considered to be property, it is able to borrow the legitimacy of the market in tangible goods, even though IP rests on the ousting of that market by state intervention to create monopoly. Marx often used the metaphor of inversion to describe ideological perceptions of the world,84 and surely this is what has happened in IP. In the world of corporate capitalism, state intervention to create monopolies (often for reasons for which there can be no publicly convincing welfare justification) can be perceived to be the extension of the market and the protection of purely private interests. The formulation of policy towards the creation of IP on the basis of this bewildered perception is bound to be extremely poor, and indeed it is. Our analysis has also suggested what we believe is a significant way in which IPRs can be reconceptualised to begin to reduce the power of the private property paradigm. This

83 84

See DF Noble, America by Design (New York, USA, Knopf, 1977) and Drahos and Braithwaite, above n 61, Ch 3. Marx, above n 7, p 19.

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reconceptualisation turns on the reintroduction of competition into the determination of the optimal level of investment in IP goods. This is possible in a far wider range of cases than is now admitted, and that it may mean some IP goods currently no longer produced will cease to be produced (for example, mass marketing of pop songs) is not an argument against but an argument for the reintroduction of competition. However, all this is not an argument for deregulation. As we have previously argued elsewhere,85 no welfare enhancing market can be created without extensive state involvement. But that involvement does not have to take the form of monopolistic intervention, and though we acknowledge that there may be instances where the case for this can be made out, it has not been made out in the case of a great many existing IP rights. The main point we hope we have made is that the monopoly entailed in exclusive private property rights is not the appropriate starting point for determining the appropriate remuneration for either technological innovations or cultural products.

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D Campbell and S Picciotto, ‘Exploring the interaction between law and economics: the limits of formalism’ (1998) 18 Legal Studies 249.

Chapter 15 Simplifying copyright law Jonathan Griff iths

INTRODUCTION Over the last 300 years, the ‘model’ of copyright law in the United Kingdom—that is, the orthodox conception of the nature of the property interest and obligations lying at its core—has evolved in a manner that could be characterised as a form of ‘simplification’. This description seems appropriate for two reasons. First, over this period, a generally accepted understanding of the nature of the intangible property right protected by copyright has developed. Secondly, an illdefined obligation taking account of the ‘fairness’ or ‘reasonableness’ of parties’ conduct has been replaced with a simpler trespass-like model. In this chapter, I seek to outline the process described above and to argue that, recently, courts have demonstrated a greatly increased determination to ensure that all aspects of copyright law are interpreted consistently with a ‘simplified’ model. I also aim to indicate certain features of copyright law which do not fit easily within that model and which, accordingly, seem likely to be subject to revision in future. The chapter concludes with some more general reflections on the process of simplification. In this respect, it is important to bear in mind that simplification is unlikely to be universally beneficial. Recent developments in intellectual property law have resulted in the commodification of a wide range of different forms of information. This process has most frequently been observed in legislative expansion of the scope of intellectual property rights. Nevertheless, the judiciary has also played a significant role.1

THE SIMPLIFIED MODEL OF COPYRIGHT LAW The process of simplification noted above has at least two aspects—clarification of the nature of the copyright interest and evolution of a trespass-type obligation. In the following section, these aspects are separately traced.

Towards a consistent understanding of the nature of the copyright interest In the early years of copyright law in this jurisdiction, protection was closely related to the tangible form of particular works. Thus, for example, under the Literary Copyright Act 1842, copyright was granted to ‘books’ and provided protection only against those printing or dealing in printed copies of those books.2 However, the right granted under copyright law has come to be expressed in

1 2

See R Burrell, ‘Reining in copyright law’ [2001] IPQ 361. 5 & 6 Vict c 45.

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progressively more abstract terms. It now protects intangible ‘works’ of various kinds.3 In fact, copyright has evolved a peculiarly transcendental quality. In the United Kingdom, a copyright interest must first be ‘fixed’ in a particular tangible form.4 Nevertheless, it is impossible to identify the scope of any particular interest by studying its first tangible manifestation. In some cases, an artefact may encompass a number of different ‘works’. Consider the following example. X writes a short story in Swedish. Y translates the story into English. Z makes a dramatic version of Y’s translation. An edition of Z’s drama may encompass, or embody, different copyright interests relating to the work of X, Y and Z. It would not be possible to prise apart and identify these different interests by studying the edition of Z’s drama. Even in the case of less complex works, the scope of a copyright interest will not be determinable in advance. Consider the example of a photograph taken by A. As copyright interest relating to that photograph will not only entitle her to prevent B from photocopying the photograph but may also enable her to prevent C from making a sculpture inspired by the photograph. It is not possible, in advance of the resolution of a claim for infringement, to say how far the claimant’s interest can be ‘carried through’ into nonliteral versions of a particular work.5 Faced with such an ill-defined subject of protection, courts and legislators have sought to contain its transcendental ‘essence’ within a workable and consistent right. In the case of works requiring ‘originality’,6 this ‘essence’ is said to subsist in the ‘labour and skill’ first invested in a recognised tangible form. Thus, in the example discussed above, the edition of Z’s dramatisation could contain entwined interests attributable to X, Y and Z. Whether X and Y’s contribution will be recognised under copyright law will depend upon the extent to which their respective ‘inputs’ of recognised labour and skill are ‘carried through’ into the edition of Z’s drama. This is the ‘work’—the ‘essence’ upon which the property interest attaches in copyright law. The idea that copyright protects intangible ‘labour and skill’ has, of course, developed over a considerable period. Recently, however, courts appear to have striven self-consciously, and vigorously, to ensure that it functions as a consistent organising principle—in deciding whether copyright subsists in a particular work;7 in identifying the authors of a work;8 and in assessing

3

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‘1(1) Copyright is a property right which subsists in…the following descriptions of work—original literary, dramatic, musical or artistic works, sound recordings, films, broadcasts or cable programmes, and the typographical arrangement of published editions.’ Copyright Designs and Patents Act 1988 (‘CDPA 1988’). CDPA 1988, s 3(2). Sherman and Bently have located the origin of copyright’s ‘transcendental’ quality in the 18th century. In The Making of Modern Intellectual Property Law, they write: ‘The ambiguous and somewhat enigmatic nature of intangible property was compounded by the law’s willingness to accept that the subject matter of intellectual property law could be infringed beyond the immediate form in which it was expressed. As we saw earlier, with the formation of pre-modern intellectual property law it became clear that for intangible property to have any real value it was not enough for the owner only to be protected against identical copies. Rather, what was needed was that protection also be given over non-identical copies, to copies that were in some sense similar. As soon as it was accepted that…the scope of literary property extended beyond the right to print and re-print to include such things as abridgments, compilations and translations…the nature of intellectual property law changed fundamentally. This was because by admitting that copying need not imply that the works be identical, the law necessarily moved from the concrete to the abstract, from the relative security of the text…to the shadowy ephemeral world of the essence of creation.’ B Sherman and L Bently, The Making of Modern Intellectual Property Law, (CUP, 1999), pp 55– 56 (footnotes omitted). le, those works listed in CDPA 1988, s 1(1)(a). It is with those works that this chapter is mainly concerned.

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whether an infringement has occurred. In considering this last issue, courts currently seek to identify the quantity of a claimant’s relevant ‘input’ and then attempt to measure whether a defendant has copied a ‘substantial part’9 of that input.10 For example, in Cantor Fitzgerald International v Tradition (UK) Ltd, Pumfrey J noted that: In my judgment, so far as English law is concerned the correct approach to substantiality is straightforward. It is the function of copyright to protect the relevant skill and labour expended by the author on the work… It follows that a copyist infringes if he appropriates a part of the work upon which a substantial part of the author’s skill and labour were expended.11

In that case, the judge identified the protected elements of the computer programs at the heart of the dispute as the ‘labour and skill’ of their authors in ‘design and coding’. Accordingly, in assessing infringement, he investigated whether the defendants had reproduced a ‘substantial part’ of that relevant ‘input’—whether it had been ‘carried through’ into the defendant’s program. Such selfconscious attempts to present the court’s role in objective (almost scientific) terms are now a regular aspect of the rhetoric of copyright judgments.12

Towards a trespass-type obligation In addition to the evolution of a consistent intangible model of the interest protected under copyright law, the process of simplification is also apparent in the development of a simple trespasslike model of infringement. In early copyright cases in this jurisdiction, the obligation imposed by copyright law was relatively ill-defined. It had many of the features of an action for unfair competition. Courts sometimes refused to find an infringement where a defendant could be regarded as having acted reasonably; for example, by adding his own creative work to a plaintiff’s work.13 Prior to the Copyright Act 1911, the judge-made concept of ‘fair use’ allowed ‘fair’ uses of copyright works to escape penalty.14 Factors such as a defendant’s competitive position15 or animus

7 8

9 10 11 12

Antiquesportfolio.com v Fitch [2001] FSR 345. ‘In relation to authorship, it seems to me that two matters have to be addressed. First, it is necessary to determine whether the putative author has contributed the right kind of skill and labour. If he has, then it is necessary to decide whether his contribution was big enough. The latter issue in particular is a matter of fact and degree. The passages in Ibcos cited above indicate a similar approach in relation to the issue of infringement.’ Fylde Microsystems v Key Radio Systems [1998] FSR 449 at 454. See also Hadley v Kemp [1999] EMLR 589. ‘References in this Part to the doing of an act restricted by the copyright in a work are to the doing of it…in relation to the work as a whole or to any substantial part of it…’: CDPA 1988, s 16(3). It is possible to infringe copyright in a number of different ways (see CDPA 1988, s 16). In this chapter, however, it is sufficient to consider ‘copying’ (s 17) as a representative form of infringement. [2000] RPC 95 at 131. See, eg: ‘I do not consider that it can seriously be contended that these logos represented an infringement of the copyright in the photographs in the Encyclopaedia. The simple photograph of an object, however carefully lit and angled or focused the photograph may be, and however skilful and careful the photographer may have been, is not really carried through, to any significant extent whatever, into these logos…’ (Antiquesportfolio.com plc v Rodney Fitch & Co Ltd [2001] FSR 23). See also, eg, Cantor Fitzgerald International v Tradition (UK) Ltd [2000] RPC 95 at 131; Ibcos Computers v Barclays Mercantile Highland Finance [1994] FSR 275; Jones v Tower Hamlets LBC [2001] RPC 23.

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furandi16 were also often considered to be relevant in assessing whether an infringement had taken place. However, such attempts to adjudicate by reference to ideas of ‘fairness’ have now largely been abandoned in copyright disputes. Copyright law has become a more trespass-like tort. Liability is strict and infringement is actionable per se. The idea that a defendant can escape liability for infringement by adding further useful material to a work no longer forms a part of modern copyright law.17 The concept of ‘fair use’ has been replaced with strictly defined statutory defences.18 Other circumstances which have in the past been considered relevant in assessing infringement have also been re-defined as defences.19 A defendant’s competitive position or animus furandi rarely influence decisions today and the explicitly fairness-based notion that ‘what is worth copying is worth protecting’ has been subjected to sustained criticism.20

RECENT PERFECTING OF THE MODEL Thus, the orthodox model is an ostensibly simple and consistent one, under which courts selfconsciously identify the relevant intangible ‘labour and skill’ within a particular work and claim to assess whether a substantial part of that ‘input’ has been extracted by a defendant. It can be argued that, in a number of recent cases, an urgent judicial desire to complete this model—to press for ‘normative closure’—has been apparent. These cases are discussed below.

Designers Guild v Russell Williams (Textiles) Ltd—the irrelevance of visual comparison The decision of the House of Lords in Designers Guild Ltd v Russell Williams (Textiles) Ltd21 reasserts and reinforces the ‘simplified’ model of copyright law. The case concerned a design for fabric (‘Ixia’) which the claimant considered to be infringed by the defendant’s fabric design (‘Marguerite’). Both designs consisted of a mixture of flowers and stripes. The defendants argued, first, that they had not copied the claimant’s design and could not, therefore, be liable for infringement and, secondly, that ‘Marguerite’ (which was not identical to ‘Ixia’) did not reproduce a ‘substantial part’ of the claimant’s copyright work. At first instance, Lawrence Collins QC found that the defendants had copied ‘Ixia’ and that a substantial part of the design had been reproduced. The defendants appealed against the latter finding. The Court of Appeal allowed this appeal.22 Its decision is particularly interesting because it

13 14 15 16 17 18 19 20 21

See, eg, Wilkins v Aiken (1810) 17 Vesey 422; Spiers v Brown (1858) 6 WR 352. Cary v Kearsley (1802) 4 Esp 168. Weatherby & Sons v International Horse Agency and Exchange [1910] 2 Ch 297. Cary v Kearsley (1802) 4 Esp 168. See Designers Guild v Russell Williams (Textiles) Ltd [2001] All ER 700, discussed below at C 1. CDPA 1988, ss 29–30. See, for example, CDPA 1988, s 64. See Autospin (Oil Seals) Ltd v Beehive Spinning [1995] RPC 683; Cantor Fitzgerald International v Tradition (UK) Ltd [2000] RPC 95. [2001] 1 All ER 700.

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contains a number of elements that are inconsistent with the simplified model of copyright law outlined above. Morritt LJ, in giving the leading judgment, referred approvingly to Professor Cornish’s view that the ‘answer in any particular case [of copyright infringement] can only lie in the tribunal’s innate sense of fairness’.23 He also stated: I have examined both the painting of Ixia and the fabrics produced from it in each of the three colourways subsequently adopted. I have compared them with the fabrics made to the Marguerite design in each of the four colourways used to produce that fabric… I am bound to say that when I first saw Ixia and Marguerite I did not consider that the latter involved the copying of a substantial part of the former and the cogent arguments of counsel for the Designers Guild Ltd have not caused me to change my mind. On the broadest level, they just do not look sufficiently similar…24

Following this passage, he went on to concede that it would not be appropriate to ‘reach a concluded view on so subjective and unanalytical approach alone’ and, therefore, proceeded to calculate (in accordance with current orthodoxy) the relationship between the claimant’s input and the extent of the defendant’s taking. Nevertheless, it is difficult to escape the conclusion that the Court of Appeal considered the defendant’s design to be ‘fair’ because it was sufficiently unlike the claimant’s.25 An explicit concern to ensure a fair solution is apparent in the following passage: …[T]here is an obvious danger that if the net of copyright protection is cast too wide it will serve to create monopolies in ideas. In that event, the more limited purpose of the law of copyright, namely to protect the product of the skill and labour of the designer, would be exceeded. In seeking to apply the ‘innate sense of fairness’ to which Professor Cornish referred, in my view, this case falls on the monopolistic side of the line.26

On the claimant’s appeal against this decision, the House of Lords unanimously restored the decision of the judge. The ratio of the House’s decision is not easy to discern. Lord Bingham’s speech27 is particularly terse and Lords Bingham, Hoffmann, Millett and Scott appear to have reached the same conclusion by different routes.28 However, overall, the speeches reinforce the quasi-scientific, trespass-type model of infringement discussed above. Of particular interest are the speeches of Lords Hoffmann and Millett, which are uncompromising in their conviction that the Court of Appeal had erred in taking account of the fact that ‘Marguerite’ did not look sufficiently similar to ‘lxia’. Lord Hoffmann stated: The similarities between Ixia and Marguerite were of course highly relevant to the question of whether there had been copying and, if so, what features had been copied. They were the foundation upon which the judge constructed his conclusion that the features that I have enumerated had been copied. But once those features have been identified, the question of whether they formed a substantial part of the plaintiff’s design cannot be decided by revisiting the question of whether it looks like the defendant’s…29

22 23 24 25 26 27 28

[2000] FSR 121. Ibid at 130. Ibid at 133. See also the short concurring judgment of Clarke LJ at 135. [2000] FSR 121 at 135. With which Lords Hoffmann and Hope agreed. Particularly Lord Scott.

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In contrasting the action for copyright infringement with the common law action for passing off, Lord Millett also stated that: An action for infringement of artistic copyright…is not concerned with the appearance of the defendant’s work but with its derivation. The copyright owner does not complain that the defendant’s work resembles his. His complaint is that the defendant has copied all or a substantial part of the copyright work. The reproduction may be exact or it may introduce deliberate variations—involving altered copying or colourable imitation as it is sometimes called. Even where the copying is exact, the defendant may incorporate the copied features into a larger work much and perhaps most of which is original or derived from other sources. But while the copied features must be a substantial part of the copyright work, they need not form a substantial part of the defendant’s work: see Warwick Film Productions Ltd v Eisinger [1969] Ch 509. Thus, the overall appearance of the defendant’s work may be very different from the copyright work. But it does not follow that the defendant’s work does not infringe the plaintiff’s copyright.30

In assessing whether a copied element of a work forms a ‘substantial part’ of the claimant’s work, it is only necessary to consider the copied element and the ‘labour and skill’ of the claimant. The court’s role is limited to calculating whether a ‘substantial part’ of the protected element of the claimant’s work has been copied. This element can be disguised and can be reproduced in a number of different forms. The appearance of the defendant’s work is irrelevant. This approach is very different from that adopted in the Court of Appeal, which, as we have seen, appears to have been premised upon the view that it would be unfair for copyright law to penalise a work which could be clearly be distinguished from that of the claimant.

Newspaper Licensing A gency Ltd v Marks & Spencer plc in the Court of Appeal—repeated reproduction of insubstantial parts The desire to ensure a consistent approach to the action for copyright infringement—based upon the model of copyright outlined above—is also apparent in the decision of the Court of Appeal in Newspaper Licensing Agency Ltd v Marks & Spencer plc.31 In that case, the claimant was the owner of copyright interests in the typographical arrangement of newspapers. It complained that the defendant’s practice of reproducing newspaper articles in its internal press cuttings service infringed those interests. The Court of Appeal rejected the claim on the ground that the reproduced articles did not constitute a ‘substantial part’ of the relevant published editions.32 However, for the purpose of this chapter, the most interesting aspect of the Court of Appeal’s decision is its dismissal of the argument that, even if the copying of individual articles by the defendants did not reproduce a substantial part of any of the claimant’s works, the repeated taking of insubstantial parts nevertheless constituted an infringement. In advancing this argument, the claimants relied on two 19th century cases, Trade Auxiliary Company v Middlesborough and District Tradesmen’s Protection Association33 and Cote v Devon & Exeter

29 30 31 32

[2001] 1 All ER 700 at 704. Ibid at 708. [2001] Ch 257. See below at p 312.

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Constitutional Newspaper Company,34 In those cases, the plaintiffs claimed to own the copyright in regularly published lists of bills of sale and deeds of arrangement. The defendants repeatedly reproduced small parts of different published lists. In upholding the plaintiff’s claim for copyright infringement in Trade Auxiliary Company, Chitty J held that: The Defendants…take all that part which is material to them, and they take it for the same purpose, viz for giving information to tradesmen in the district. Then as regards the quantity that is in any particular number, it cannot be great, because the district is not very large; but it is not the case of a single taking. It is obviously, on the evidence, a case of taking week by week. Then it is a taking for the same purpose, and I think the first point must be decided in favour of the Plaintiffs—that the piracy is of that character that an injunction ought to go against the repetition of it…35

Similarly, in finding for the plaintiff in Cate, North J held that: In one paper I think out of three weeks’ papers which were put in evidence there was only one entry taken, in another there were, I think, four; in the third only a small number; but in considering these it must be borne in mind that all that is material for the Defendants for the purpose of their newspaper has been taken, and that it is taken entirely—copied exactly from the paper—taken regularly, systematically, every week, and published for the purpose of giving information to the very persons to whom the Plaintiffs intend their publications to give that information; and, what is more important still, the Defendants now claim to do it as of right; and that of itself is quite sufficient to put them in the wrong in the action and get over any question as to the amount of matter actually taken from the particular publication which is in evidence. It seems to me, therefore, that the Defendants have been wrong throughout: they had no right to take this matter in which the Plaintiffs had copyright, and the action is well founded.36

The significance placed by the court upon the ‘circumstances’ in which the defendant’s actions took place is apparent. In both Trade Auxiliary Company and Cate, the fact that the defendant took the information for a competitive purpose was considered relevant. In addition, in the latter case, the court took account of the fact that the defendants had denied the rights of the plaintiffs. These circumstances suggested that the defendants’ activities had been unfair. Such an approach is of course entirely inconsistent with the model of copyright infringement prevailing today. Thus, it was not surprising that, in Newspaper Licensing Agency Ltd, the Court of Appeal rejected the claimant’s argument based on the repeated taking of individually insubstantial parts. Peter Gibson LJ stated: I do not understand how in logic what is an insubstantial part of a work can when aggregated to another insubstantial part of another work become a substantial part of the combined work.37

No matter how parasitical the activities of the defendant, the logic of the current model required the rejection of the claimant’s argument in this instance. The potential scope of a court’s enquiry

33 34 35 36

(1889) 40 Ch Div425. (1889) 40 Ch Div 500. (1889) 40 Ch Div 425. This finding was not disturbed on an appeal concerning Chitty J’s decision on ownership of the copyright interests. (1889) 40 Ch Div 500 at 507.

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is more limited today than it was at the time that Trade Auxiliary Company and Cate were decided. The only question of relevance now is whether a defendant has trespassed upon a substantial part of the relevant labour and skill embodied in a claimant’s work.

Newspaper Licensing A gency Ltd v Marks & Spencer plc in the House of Lords—application of the model to entrepreneurial works The claimant appealed against the decision of the Court of Appeal discussed above. It argued that the court had been wrong to find that copyright in a ‘published edition’ subsisted only in the whole edition of a particular newspaper and that it was possible for a typographical arrangement copyright to subsist in individual articles. The House of Lords refused to accept this argument, finding that the statutory history of the protection offered to typographical arrangements supported the Court of Appeal’s conclusion.38 Lord Hoffmann approached this issue in a manner which was consistent with the model of copyright law suggested in this chapter. First, he located the protected, intangible element within the claimant’s works, and then considered whether a substantial part of that element had been taken. What is particularly interesting about his speech, however, is that the dominant model was applied to a copyright interest for which the ‘input’ of labour and skill is not a prerequisite. Generally, in considering whether the entrepreneurial copyrights (that is, those subsisting in sound recordings, films, broadcasts, cable programmes and the typographical arrangements of published editions) have been infringed, courts have in the past considered only whether the tangible form in which they are first embodied has been reproduced.39 ‘Labour and skill’ are irrelevant. However, in this case, Lord Hoffmann sought to identify an equivalent quality forming the intangible essence of the claimant’s property interest and, in doing so, adopted an approach which was very similar to that applied to works requiring originality outlined above: … The House of Lords decided in Ladbroke (Football) Ltd v William Hill (Football) UK Ltd…that the question of substantiality is a matter of quality rather than quantity…But what quality is one looking for? That question, as it seems to me, must be answered by reference to the reason why the work is given copyright protection. In literary copyright, for example, copyright is conferred (irrespective of literary merit) upon an original literary work. It follows that the quality relevant for the purpose of substantiality is the literary originality of that which has been copied. In the case of an artistic work, it is the artistic originality of what has been copied. So, in the recent case of Designers Guild Ltd…the House decided that although not the smallest part of a fabric design had been reproduced with anything approaching photographic fidelity, the copying of certain of the ideas expressed in that design which, in their conjoined expression, had involved original artistic skill and labour, constituted the substantial part of the artistic work.40

37 38 39

[2001] Ch 257 at 269. See also Electronic Techniques (Anglia) Ltd v Critchley Components Ltd [1997] FSR 401. Newspaper Licensing Agency Ltd v Marks & Spencer plc [2001] 3 All ER 290. The only speech was given by Lord Hoffmann. See, eg, Norowzian v Arks [1998] FSR 394.

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In the case of a typographical arrangement, the copyright-protected essence was to be found in the ‘overall design’ of a published edition.41 Such an analysis, relying upon Parliament’s supposed intention, is different from that conducted in the case of ‘original works’, under which the court seeks to identify relevant ‘labour and skill’. However, such is the power of the simplified model that it is readily transplanted into new ground. Having identified the protected essence of the works in question, Lord Hoffmann (as required under the model) considered whether the taking of individual articles from published editions could be regarded as reproduction of a substantial part of the overall design and concluded that it could not.

Ashdown v Telegraph Group Ltd—influence of the model on fair dealing under s 30 CDPA 1988 A final recent example of judicial concern to ensure compliance with a consistent and simplified form is provided by the decision of the Court of Appeal in Ashdown v Telegraph Group Ltd.42 This case was brought by the former leader of the Liberal Democratic Party, who sought damages for a Sunday newspaper’s unauthorised publication of a written minute of a controversial private political meeting. When sued for infringement of copyright, the newspaper argued, inter alia, that its actions were permitted under s 30, which allows ‘fair dealing’ for the purposes of ‘criticism or review’ or ‘reporting current events’. Historically, in considering this provision (and its statutory predecessors), courts have been reluctant to find ‘dealings’ with unpublished works to be fair.43 In this case, the defendants argued that this presumption should not apply because the politician had himself revealed the contents of the discussions at the meeting in a radio interview. The Court of Appeal did not accept this argument. It distinguished between publication of simple information about the meeting (‘facts’, ‘events’ or ‘subject-matter’) and publication of the claimant’s ‘work’ (that is, publication of the protected ‘labour and skill’ itself). In order to ensure consistency with the central organising model of copyright law, the presumption against fairness applied whenever the claimant’s ‘labour and skill’ had, as here, not previously been disclosed to the world. Publication of ideas and facts, falling outside the essence of the right, was irrelevant.

REMAINING INCONSISTENCIES IN COPYRIGHT LAW It has been argued above that copyright courts in this jurisdiction are currently striving to reflect an image of copyright that is consistent and simple—protecting the relevant intangible ‘input’ of the author in a trespass-like manner. However, there remain several aspects of copyright law which do not conform to that norm. These would seem to be vulnerable to reconsideration. A number of such aspects are considered below.

40 41 42 43

[2001] 3 All ER 977 at 983. Ibid at 984. [2001] EMLR 363. See, eg, British Oxygen v Liquid Air [1925] 1 Ch 383.

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The qualitative identification of a ‘substantial part’ It is often said that, in assessing whether or not an infringement has taken place, courts must consider the ‘quality’ of the work taken by a defendant and not its ‘quantity’.44 This is, of course, uncontroversial if it simply reminds decision-makers that ‘labour and skill’ can reside in ‘subterranean’ elements of a work, such as plot, characterisation or overall design. Consider the example of a painter who, in making a non-literal reproduction of a photograph, reproduces the positioning of the photograph’s subject. Quantitatively, that element may not amount to a great deal. However, qualitatively, it could represent the entirety of the relevant input of the photographer and would therefore be likely to constitute a substantial part of the work.45 In this sense, the idea that ‘substantiality’ should be considered qualitatively is consistent with the model of copyright law outlined in this chapter. However, the idea does not always seem to be applied in this sense. Sometimes, when courts find that a particular part of a work is qualitatively significant, they appear to mean that that part has some heightened individual value. The part is not substantial in the sense that considerable labour and skill have been lavished upon it, but because it is ‘vital’ or ‘significant’.46 Thus, for example, it is sometimes suggested that the most recognisable refrain in a piece of music is a qualitatively significant part of that musical work.47 Often, of course, such ‘high spots’ within a work will result from the ‘input’ of substantial ‘labour and skill’. But this need not always be the case. Consider for example, a three-note sequence in a lengthy piece of music. The sequence may have been composed effortlessly and in an instant. Through repeated exposure (perhaps, for example, as the theme tune for a television programme), the brief note sequence has become instantly recognisable. If that sequence were reproduced without permission, would it constitute a substantial part of the musical work? If we ask whether the part is ‘vital’ or ‘significant’, we may consider that it would. However, if we consider the quantity of ‘labour and skill’ that has been taken, we may not think that a substantial part as been reproduced. If the simplified model is to be completed, ambiguities concerning the ‘qualitative’ assessment of substantiality must be resolved in favour of an interpretation which ties ‘quality’ to the input of the creator and not to the distinctiveness or fame of the part taken.

Derogatory treatment of a work Further potential inconsistencies may arise when the concept of the ‘work’ in copyright law is not applied exclusively to the intangible ‘labour and skill’ of a creator. For example, commentators have suggested that the right to object to derogatory treatment of a work under s 80 CDPA 1988 applies only to treatments that ‘interfere with the internal structure of the work’48 not, for example, to the placing of a copyright work in a derogatory context. This interpretation arises as a result of the wording of s 80, which states that:

44 45 46 47

Ladbroke v William Hill [1964] 1 WLR 273. See, eg, Bauman v Fussell [1978] RPC 485. See Laddie, Prescott and Vitoria, The Modern Law of Copyright and Designs, 3rd edn (Butterworths, 2000) at 3.131. See Hawkes & Son Ltd v Paramount Film Service Ltd [1934] Ch 593, CA.

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The author of a copyright literary, dramatic, musical or artistic work, and the director of a copyright film, has the right in the circumstances mentioned in this section not to have his work subjected to derogatory treatment. For the purposes of this section— (a) treatment of a work means any addition to, deletion from or alteration to or adaptation of the work… (b) the treatment of a work is derogatory if it amounts to distortion or mutilation of the work or is otherwise prejudicial to the honour or reputation of the author or director…

The orthodox view on the scope of this provision is clearly stated by Laddie, Prescott and Vitoria: Note that derogatory treatment is so defined as to cover only modifications of a work and not the prejudicial treatment of the work itself. Thus the exhibition of an artistic work under incompatible circumstances probably does not amount to derogatory treatment, because there is no addition to or deletion from the work and thus no ‘treatment’ of it.

It may well be, however, that such an interpretation focuses unduly on ‘additions to’ or ‘deletions from’ a tangible embodiment of an author’s ‘work’. If we view the ‘work’ solely as the intangible ‘labour and skill’ of its author, it is perhaps easier to see how it could be regarded as altered, or added to, when it is placed in a new and unintended context.

Criticism and review of a work A further example of a situation in which the copyright ‘work’ has been interpreted otherwise than by reference to ‘labour and skill’ is provided by certain cases considering s 30(1) CDPA 1988 and its statutory predecessors. Section 30(1) provides that: Fair dealing with a work for the purpose of criticism or review, of that or another work or of a performance of a work, does not infringe any copyright in the work provided that it is accompanied by a sufficient acknowledgement.

Courts have sometimes interpreted ‘criticism or review of a work’ liberally in this context to encompass criticism or review of matters extending beyond any ‘labour and skill’ embodied within a work. For example, in Time Warner Entertainments Co LP v Channel 4 Television plc,50 the Court of Appeal accepted that s 30(1) covered the activities of a television company which had produced a programme criticising a copyright owner’s decision to withdraw a work from public circulation in the United Kingdom. In Distillers Corporation (Biochemicals) v Times Newspapers,51 it was considered that the provision covered use of a work in the course of criticism of the activities of a copyright owner. Such decisions sit uneasily within a model under which protected ‘works’ are identified in

48 49 50 51

Bently and Sherman, Intellectual Property Law (OUP, 2001) at 245. Laddie, Prescott and Vitoria, The Modern Law of Copyright and Designs, 3rd edn (Butterworths, 2000) at 13.18. [1994] EMLR 1. [1975] QB 613.

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terms of relevant labour and skill—a model reinforced in this context by the recent decision of the Court of Appeal in Ashdown.52

Remaining departures from strict liability In addition to these situations in which the protected element of copyright seems to be interpreted otherwise than in accordance with the simplified model, there are a number of instances in which commentators or judges appear to depart from a trespass-type model of copyright infringement. Our leading texts on copyright law faithfully set out the orthodox approach to copyright infringement (that a court is required to establish whether or not a defendant has abstracted a substantial part of the relevant input of the claimant). However, at times, they also refer to the potential relevance of a range of other ‘factors’ or ‘circumstances’, such as commercial competition and the defendant’s intention, to an assessment of whether or not an infringement has taken placed53 Laddie et al go so far as to suggest that that the non-statutory concept of ‘fair use’ may be of continued relevance in infringement cases.54 Cornish writes that: The 1988 Act requires that a substantial part must have been copied. This test is a major tool for giving expression to the court’s sense of fair play.55

However, the suggestion that these factors have continued relevance is hardly consistent with the model upon which copyright law has increasingly come to be based. Indeed, the ascendancy of the simplified model would seem to require us to acknowledge that such ‘circumstances’ have no further relevance. It would also appear to be necessary to abandon reference to the maxim ‘what is worth copying is worth protecting’ entirely and to reconsider the suggestion made in Ravenscroft v Herbert that greater leeway should be granted to defendants in their use of works having an informational purpose.56 Laddie, Prescott and Vitoria’s belief that the concept of ‘fair use’ may have continued life must also now surely be regarded as unfounded.

CONCLUSION In this chapter, change in United Kingdom copyright law has been described as a process of ‘simplification’. The emergence of this model could easily be presented as the culmination of a process of evolution in which error and imperfection have been left behind. The truth, however, is rather different. Normative developments respond to a wide range of material and cultural pressures. The major political and economic causes of the commodification of information that has

52 53 54 55 56

[2001] EMLR 363, see text to n 43 above. See, eg, Bently and Sherman, Intellectual Property Law (OUP, 2001) at 156–57; Cornish, Intellectual Property, 4th edn (Sweet & Maxwell, 1999) at 418–23. Laddie, Prescott and Vitoria, The Modern Law of Copyright and Designs, 3rd edn (Butterworths, 2000) at 3.134. Cornish, Intellectual Property, 4th edn (Sweet & Maxwell, 1999) at 416. [1980] RPC 193.

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been apparent in recent changes to intellectual property law are not too difficult to identify. However, it is important to note that the process sketched in this chapter does not generally result from legislative intervention. Judges are not as directly influenced by the lobbying of interested parties or by the need to make political compromises. It can perhaps tentatively be suggested that the judicial desire to reiterate and refine the basis of our copyright law evidenced in the examples discussed above derives from the heightened scrutiny under which copyright laws have generally come during the last few years. The domestic process of norm-refinement parallels the search for a harmonised form of copyright law at international level.57 The rhetorical reinforcement of a simple and strong model of infringement may also reflect a general anxiety about the vulnerability of copyright law as a means of securing rewards and incentives for creators in a digital world. In fact, the process outlined in this chapter ought to be viewed with considerable scepticism. The rhetoric of precisely calibrated assessments of ‘labour and skill’ cannot disguise the extent to which decisions on infringement, for example, rely on subjective assessments. The distinction between the approaches adopted by the Court of Appeal and the House of Lords in Designers Guild may lie simply in a disagreement about whether the works in question looked too similar to one another. In focusing upon the reinforcement of legal ‘principle’, a simplified trespass-like enquiry can obscure the difficult questions of morality and policy arising in copyright disputes. For example, the approach adopted by the Court of Appeal in Designers Guild, and the idea that more extensive copying ought to be permitted in the case of works having an informational purpose,58 do not comply with the orthodox approach to infringement sketched in this chapter. They may, however, accurately reflect our complex ethical assessments of the extent to which the re-use of creative works ought to be allowed.

57 58

Cf Sherman and Bently, The Making of Modern Intellectual Property Law, (CUP, 1999), at 115. See n 56 above.

Chapter 16 Property rights, international trade and human rights Janet Dine PROPERTY IN INTERNATIONAL HUMAN RIGHTS LAW Articles 1 (2) of the International Covenants on Civil and Political Rights and Economic Social and Cultural Rights (ICCPR and ICESCR respectively hereafter) read: All peoples may, for their own ends, freely dispose of their natural wealth and resources without prejudice to any obligations arising out of international economic co-operation, based upon the principle of mutual benefit, and international law. In no case may a people be deprived of its own means of subsistence.

This paragraph sets out the right to own and dispose of property, but also sets limits to the use of that property. No property right is absolute,1 as Parkinson points out: Ownership rights are not absolute (ownership of a knife does not entitle the owner to stab people with it). That shareholders might own companies does not mean that they may insist that directors attempt to maximise profits in any way at all.2

The analogy with companies is an apt one in this context as we are concerned with the property rights of large organisations, in this case nation states, and the way in which that property is used on the international stage, in particular the restraints to which that usage is subject because of obligations to render international assistance, in particular those set out in the ICESCR: ‘obligations arising out of international economic co-operation, based on the principle of mutual benefit, and international law. In no case may a people be deprived of its own means of subsistence.’3 As with corporate property, the rules are created and followed by representatives of individuals. Onora O’Neill points out that the allocation of obligations by human rights instruments, and in particular the Universal Declaration of Human Rights, is less than perfect: ‘The Declaration approaches justice by proclaiming rights. It proclaims what is to be received, what entitlements everyone is to have; but it says very little about which agents and agencies must do what if these rights are to be secured.’4 In the case of traditional liberty rights, O’Neill points out, this is not a problem; they ‘have to be matched and secured by universal obligations to respect those rights (if any agent or agency is exempt from that obligation, the right is compromised), other universal rights cannot be secured by assigning identical obligations to all agents and agencies. Universal rights to goods and services, to status and participation cannot be delivered by universal action. For

1 2 3 4 5

For a detailed analysis refuting the justifications for unlimited property rights, see J Harris, Property and justice, Clarendon, Oxford, 1996. J Parkinson, ‘The socially responsible company’, in M Addo (ed), Human Rights Standards and the Responsibility of Transnational Corporations, Kluwer,The Hague, 1999. Article 2. Onora O’Neill, ‘Agents of justice’, in T Pogge (ed), Global Justice, Blackwell, Oxford, 2001. Ibid, pp 191–92.

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these rights the allocation of obligations matters, and some means of designing and enforcing effective allocations is required, if any ascription of rights is to have practical import.’5 The limitations on the property rights of nations are defined by their other international obligations. The task is to clearly define those limitations and identify which agencies are responsible for delivering the international economic co-operation which the Covenants define as the boundary to the right to enjoy natural property rights. As O’Neill has noted, the identification of obligation holders in the Universal Declaration is rather scattergun: ‘Every individual and every organ of society, shall strive by teaching and education to promote respect for these rights and freedoms and by progressive measures, national and international, to secure their universal and effective recognition and observance.’ Further, on the subject of international co-operation, the two Covenants diverge. The International Covenant on Civil and Political Rights clearly identifies the obligation holders which are the ‘primary agents of justice’6 and the recipients of the rights in that document: ‘Each State Party to the present Covenant undertakes to respect and to ensure to all individuals within its territory the rights recognised in the present Covenant.’7 However, the preamble also places duties on individuals: ‘Realising that the individual, having duties to other individuals and to the community to which he belongs, is under a responsibility to strive for the promotion and observance of the rights recognised in the present Covenant.’ That preamble is repeated in the Covenant on Economic Social and Cultural Rights and the primary obligation holder is similarly defined but the duty is very different: Each State Party to the present Covenant undertakes to take steps, individually and through international assistance and co-operation, especially economic and technical, to the maximum of its available resources, with a view to achieving progressively the full realisation of the rights recognised in the present Covenant by all appropriate means, including the adoption of legislative measures.

The possible conflict between this duty and the right to utilise property is clear.8 It might well be argued that rich nations thereby have duties towards the poor in foreign lands to assist in achieving their economic, social and cultural rights. And such duties might well extend to the transfer of property. Further, Article 11(2) of the ICESCR reads: The States Parties to the present Covenant, recognising the fundamental right of everyone to be free from hunger, shall take, individually and through international co-operation, the measures, including specific programmes which are needed:…(b) taking account the problems of both food exporting and food importing countries, to ensure an equitable distribution of world food supplies in relation to need.

Does this impose a duty on resource-rich states to provide assistance? The questions are: to what extent does the duty of international co-operation limit the right of States to enjoy their natural property? Is there a duty to provide aid or technical assistance or are the ‘weasel-words’ available resources always there to provide a get-out? Can rich states argue that there can never be resources available to foreigners while they have poverty within their own borders, regardless of how rich some other inhabitants are? Judith Bueno de Mesquita argues that, in accordance with Articles 1 (b) and 29 of the Vienna

6 7 8

Ibid, p 189. Article 2. See S Skogly, The Human Rights Obligations of the IMF and World Bank, Cavendish Publishing, London, 2001, p 128.

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Convention on the Law of Treaties, States that have ratified the Covenant are bound to give effect to its provisions at international level,9 that while treaties traditionally have been considered to exert obligations in relation to the territory of a State Party this is only the case unless ‘a different intention appears from the treaty or is otherwise established’.10 As Mesquita points out, the text of Article 2(1) clearly implies that extraterritorial obligations are required to realise the rights in the Convention. Alston and Quinn have argued that although particular obligations have not yet been identified, ‘it would be unjustified to go further and suggest that the relevant commitment is meaningless. It may, according to the circumstances, be possible to identify obligations to cooperate internationally that would appear to be mandatory on the basis of the undertaking contained in Article 2(1) of the Covenant’.11 In particular in relation to the rights to food and to development, the obligation of international co-operation is becoming clearer. Thus, the Committee on ESCR adopted a general comment on the right to food which invoked the international obligation ‘to refrain at all times from food embargoes or similar measures which endanger conditions for food production and access to food in other countries’.12 While the General Comments are not legally binding they have ‘considerable legal weight’ in providing ‘jurisprudential insights’.13 Similarly, from By-Article 3 of the Declaration of the Right to Development: States have the primary responsibility for the creation of national and international conditions favourable to the realization of the right to development’ and ‘States have the duty to cooperate with each other in ensuring development and eliminating obstacles to development. States should realize their rights and fulfil their obligations in such a manner as to promote a new international economic order based on sovereign equality, interdependence, mutual interest and co-operation among all States as well as to encourage the observation and realization of human rights.14

It may seem strange to use analysis of some of the foundations of US views in this context since the US has not even ratified the ICESCR but the purpose is to understand how obstacles to fulfilling that obligation may arise in any context. Hutton has analysed very different attitudes to property rights which may be discerned in the USA and Europe.15 His thesis is that the attitude to the ownership of property in the USA has been informed by a number of factors. One of these is the existence of the experience of the settlers who arrived at ‘a wilderness pregnant with riches’, had ‘risked all crossing the Atlantic and who, as fervent Protestants, believed they had a direct relationship with God’. They believed that they were

9 10 11 12 13

14 15 16

Judith Bueno de Mesquita (Senior researcher, Human Rights Centre, Essex University), ‘International Covenant on Economic, Social and Cultural Rights: international co-operation and assistance’, forthcoming publication. Vienna Convention on the Law of Treaties, entry into force 27 January 1980, Article 29. P Alston and G Quinn, ‘The nature and scope of States Parties’ obligations under the International Covenant on Economic, Social and Cultural Rights’ 9 HRQ 1987, p 192, cited by Mesquita. E/C 12 1999/5, General Comment No 12, 12 May 1999, para 37. M Craven, The International Covenant of Economic, Social and Cultural Rights: A Perspective on its Development, OUP, New York, 1995, p 91; P Alston, ‘The Committee on Economic, Social and Cultural Rights’ in P Alston (ed), The United Nations and Human Rights: A Critical Appraisal, Clarendon, Oxford, 1992, p 494, both cited by Mesquita. E/C N4 Sub 2/1999/12. W Hutton, The World We’re In, Little Brown, London, 2002. Ibid, pp 52–53.

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serving God’s purpose by taking possession of the land and using it for their own individual purpose.16 Hutton shows how the writings of John Locke encouraged the view that property both claimed by and created from the land belonged ‘exclusively and completely’ to the settler and, moreover, that the ‘purpose of society and Government’ was to ‘further the enjoyment of property, and political power was only legitimate if it served this end’.17 Two passages cited by Hutton seem particularly apt: ‘The only way whereby any one divests himself of his Natural Liberty and puts on the bonds of Civil Society is by agreeing with other Men to join and unite into a Community, for their comfortable, safe and peaceable living one amongst another, in a secure Enjoyment of their Properties, and a greater Security against any that are not of it’;18 and ‘Every man has a property in his own person. There is no body has any right to it but himself. The labour of his body, and the work of his hands we may say are properly his. Whatsoever then he removes out of the state that nature has provided, and left it in, he hath mixed his labour with and joined to it something that is his own, and thereby makes his property.’19 The war of independence and the writing of the constitution did nothing to dispel this mindset, the justification for revolution being the interference by King George III with the settlers’ rights to enjoy their property freely:20 ‘Any notion that property rights were a concession granted by the state in the name of the common interest—the European tradition…had been dispelled by the revolution.’21 The understanding of the nature of property rights then is founded in nature and religion, giving at once a mystical and religious significance to ownership. If a settler prospered it was evidence of a healthy relationship with God. The availability of vast stretches of land made any egalitarian notions realisable without the concept of redistribution becoming a problem, so that redistribution of property became contrary both to nature and religion. The role of the central government was thus reduced to protection of individual property. The constitution prevented states from doing anything that might impair obligations embodied in contracts. Once the right to own property and to contract had been granted to corporations as well as individuals,22 and companies holding shares in other companies were equated with individual shareholders, the stage was set for the giant groups of companies that we see today.23 Further, the resistance to redistribution enshrined in the Fifth Amendment is a fertile ground for those seeking to resist regulation on the basis that it is a ‘confiscation of property’. The Fifth Amendment prevents the government from depriving an individual of ‘life, liberty and property without due process; nor shall property be taken for public use without just compensation’. Thus, although there was a long period between the 1930s and 1970s when property rights were regulated, the fundamental understanding of individual liberty as inextricably intertwined with ownership of property made it very much easier for the ultra-conservatives to build their anti-regulatory policies and have them widely accepted: ‘For the constitution remains explicit. Without powerful popular support and a clear sense of national crisis—as over slavery in the 1860s or unemployment in the 1930s—the American constitutional conception is that government at federal and state level is the

17 18 19 20 21 22 23

Ibid J Locke, Two Treatises of Government, P Laslett (ed), CUP, Cambridge, 1988, p 331. Ibid, p 288. Hutton, p 56. Ibid, pp 58–59. Dartmouth College v Woodward (1819) 17 US 518. J Dine, The Governance of Corporate Groups, CUP, Cambridge, 2000.

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custodian of private property rights; and the Supreme Court sees its task as policing that injunction.’24 The old settler cast of mind provided fertile ground for Nozick’s arguments that taxation to finance any minimum income for the poor is a form of forced labour and all forms of redistributive justice are coercive.25 It also provided fertile soil for the concept that corporations are nothing but a ‘nexus of contracts’26 with the obvious result that government should not interfere in that ‘contract’. All these influences can be seen at work in the anti-environmentalist movements chronicled by Rowell27 with the use of dominion theology28 (God gave man ‘dominion’ over the earth) to justify exploitation of natural resources; ‘you can’t really hurt the planet because God wouldn’t allow that. God wouldn’t have given man chainsaws if he didn’t think they were benign’,29 coupled with allegations that environmental regulation destroys jobs and interferes with private property rights. One of the aims of Alliance for America is ‘to restore and protect constitutional private property rights’. As part of the ‘Wise Use’ movement, Alliance for America assisted in constructing Gingrich’s now notorious ‘contract with America’ which, the National Resources Defence Council explained, ‘threatens to undermine virtually every federal environmental law on the books, meaning dirtier air, dirtier water and more species pushed to the brink’.30 No wonder, then, that the Government, in international trade negotiations, regards itself as acting to protect private property, in this case the interests of corporate America: ‘One USTR [Office of the US Trade Representative] was remarkably frank in saying that the US has no intellectual plan about the long-term national interest, no consistent commitment to any principle. Rather the “client state” is the model of the USTR: “It’s too socialist to plan…the businessman is the man who knows. So you respond to him.”’31 Given the underlying understanding of the moral value attached to property ownership coupled with the conceptualisation of corporations as individual property owners, there would seem no reason for the trade official not to be frank. He has every reason to be happy in his job of increasing the property ownership of US constituents. What, then, of the ‘European’ conception of property ownership? Of course, it is not possible to reflect subtle and complex differences between the understanding of property across the whole of Europe. However, it may be possible to detect a general convergence of views. Hutton cites Article 13 of the post-war German constitution as capturing some of the flavour of the difference between European and American conceptualisation: property is not seen in Europe as an absolute right, as it is by US conservatives. Rather, it is a privilege that confers reciprocal obligations—a notion captured by Article 13 of the post-war

24 25 26

27 28

29 30 31

Hutton, p 60. R Nozic, Anarchy, State and Utopia, HUP, Cambridge, Mass, 1973; Hutton, p 68. R Posner, Economic Analysis of Law, 4th edn, Little Brown, Boston, 1992; F Easterbrook and D Fischel, The Economic Structure of Corporate Law, HUP, Cambridge, Mass, 1991; B Cheffins, Company Law, Theory, Structure and Operation, Clarendon, Oxford, 1997; J Dine, The Governance of Corporate Groups, CUP, Cambridge, 2000. A Rowell, Green Backlash, Routledge, London, 1996. ‘So God created man in his own image, in the image of God created he him; male and female created he them. And God blessed them, and God said to them, Be fruitful and multiply, and replenish the earth, and subdue it: and have dominion over the fish of the sea, and over the fowl of the air, and over every living thing that moveth on the earth.’ Genesis 2:27–28. Rowell, p 9, citing speech by Chip Berlet. National Resources Defence Council, Breach of Faith, 1995, cited Rowell, p 32. P Drahos and J Braithwaite, Global Business Regulotion, CUP, Cambridge, 2000.

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New perspectives on property law, obligations and restitution German constitution, which specifies that ‘property imposes duties. Its use should also serve the public weal’. Those who own and hold property are members of society, and society has a public dimension to which necessarily they must contribute as the quid pro quo for the privilege of exercising property rights.32

This conception of property ownership is coupled with a ‘profound commitment to the notion that all citizens should have an equal right to participate in economic and social life, and that the state is more than a safety net of last resort: it is the fundamental vehicle for the delivery of this equality’.33 To some extent, this attitude was driven by the different experiences vis à vis land ownership when notions of equality became important. In Europe, any attempt at equality meant redistribution; in the US, ‘when John Adams argued in 1776 that the acquisition of land should be made easy for every member of society in order to achieve equality and liberty, he could disregard European concerns with how the state had to intervene to construct a just society: a continent lay before him waiting to be claimed’.34 The European state thus had a real and vital role to play in constructing a fair society, a far cry from a minimalist role in protecting individual property rights. Now, of course, these positions are unsubtle caricatures35 but they are also of real underlying significance and must be taken account of in determining the extent of the rights protected by Articles 1 (2) of the two Covenants and whether, and to what extent, such rights might be limited by a duty of international co-operation. In particular, the more absolutist view of property rights leads to an understanding of the state’s obligations on the international stage which would militate against a duty of co-operation; that is, the notion that a state should promote its own self-interest36 and thus the interests of its citizens. Shue calls this the Trustee/Adversary’ theory of government.37 This is that ‘the proper role of every national government is primarily or exclusively to represent and advance the interests of its own nation’.38 Clearly, this notion is wholly accepted by the US Trade Representatives’ alignment of the interests of corporate America with the interests of the state and their wholehearted commitment to deliver whatever property owners desire. Indeed, as Shue acknowledges: ‘This view is so widely assumed that it is ordinarily taken to be obviously correct.’39 This notion may be based on a taxation argument: ‘The government is spending our money so the government ought to be serving our interests. This appeals to a principle that he who pays the piper is morally entitled to call the tune.’40 Alternatively the argument might be that the government is representative of those who elect it, so that failure to secure the best deal for them

32 33 34 35

36 37 38 39 40

Hutton, pp 50–51. Hutton, p 51. Hutton, p 61. Eg, they do not include consideration of Ra\wls’ views on the American side of the equation. See J Rawls, A Theory of Justice, OUP, Oxford, 1973, and ‘The law of peoples’, in On Human Rights, S Shute and S Hurley (eds), Basic Books, New York, 1996; also extensively considered in Global Justice, T Pogge (ed), Blackwell, Oxford, 2001; for a discussion of these ideas in relation to neo-classicist economics see M Salter, ‘Hegel and the social dynamics of property law’, in Property Problems, J Harris (ed), Kluwer, London, 1997. K Arambulo, Economic, Social and Cultural Rights: Strengthening the Supervision of the International Covenant, on Economic Social and Cultural Rights, Antwerp, 1999, p 66. H Shue, Basic Rights, Princeton University Press, New Jersey, 1980, p 139 et seq. Shue, Basic Rights, p 139. Shue, Basic Rights, p 140. Shue, Basic Rights, p 140.

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is a breach of trust.41 Faithful representation of these interests at an international level, where there is conflict with the interests of others, will require an adversarial role. Shue identifies two significant failures of this simplistic view of a government’s role: one is that in representing their population, one ‘interest that… citizens [might] wish to have served may be their interest in seeing their transnational duties to aid fulfilled’.42 Thus, the pursuit of the protection of property rights is limited by an individual’s duty under the Universal Declaration of Human Rights and the obligations placed on states by the ICESCR. Shue identifies as the second weakness in the theory the disparity between the structures of national and international bargaining: Within individual nations a great deal is determined simply by the competition of adversaries representing conflicting interests, but not everything is. Institutions also exist to care for those unable to compete or unsuccessful in the competition, to provide for goods that cannot derive from competition, to regulate competition within generally beneficial rules… These national institutions are in various cases defective in certain respects, but at international level comparable institutions are virtually non-existent.43

This insight is supported by the rhetoric of the enthusiasts for an open, global market. They emphasise that the bargaining arena is the world. In so far as restraining institutions have not appeared, the duties on states must be developed in order to fill this vacuum.

PROPERTY AND POWER This development is imperative because there is a further factor to add to the concept of property rights. That is, that problems are often caused not by the concept of property ownership itself but the potential which property ownership has to create unequal power relations. Thus, ‘to concede a property relationship between one person and a thing, at any point along the property spectrum, is to negate the liberty of the rest of mankind to use the thing without the licence of the “owner”’.44 Inevitably, this effect is exacerbated where there is huge inequality of property ownership: ‘Theorists who deplore great inequality in wealth-holdings and recommend measures to alleviate it often have in mind, not the social-psychological argument against wealth disparities…but rather inequality’s resultant domination-potential. It is not disparity in bank balances that matters. It is the influence over the lives of others which large property-holdings afford.’45 So property ownership brings with it power, and the greater the inequality of property ownership the greater the domination-potential. So the right to own and use property may be limited in two, quite different and important ways. First, it might be limited by an egalitarian desire to even out inequality in ownership, based on social or theological notions of morality.46 Peter Singer famously argued that assisting those without

41 42 43 44 45 46

Ibid. Shue, Basic Rights, p 141. Ibid. J Harris, Property and justice, Clarendon, Oxford, 1996, p 264. Ibid, p 265. See G Cohen, If You’re an Egalitarian, How Come You’re so Rich?, HUP, Cambridge, Mass, 2000.

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enough food is morally required; failure to contribute at least 10% of our incomes to the hungry is morally wrong.47 This argument is supported by Shue’s perspective on human rights. He argues that subsistence rights, including the right to food, are ‘basic rights’, that is, rights on which the exercise of all other rights and freedoms depend. Shue suggests that all basic rights give rise to three types of duty: (1) Duties to avoid depriving; (2) Duties to protect from deprivation; (3) Duties to aid the deprived.48 Translated onto an international stage, Shue argues that the duty of international co-operation requires the transfer of assets, at least as far as food aid is concerned.49 However, the duty to transfer assets may be seen as one end of a spectrum of what is meant by the duty of international co-operation. At this early stage of conceptualising the duty of international co-operation much more work is needed to flesh it out, not least by understanding what might be meant by the ‘maximum available resources’ which are to be applied in the fulfilment of this duty. This is not to say that such a clarification is unimportant, but to propose a less radical starting point. The duty of international co-operation contains the well known spectrum of obligations; to ‘Respect, Protect and Fulfil’.50 In ascending order this requires refraining from violating rights, preventing others from violating rights, and taking steps to fulfil those rights.51 Shue’s arguments require the imposition of an international duty to fulfil rights but it is possible to achieve much by arguing for the less radical duty to respect rights. Skogly has argued that the international cooperation duty of states requires them to use their votes within the International Monetary Fund (IMF) and World Bank (WB) in a way that ensures the rights of people in other nations are not infringed.52 The Committee on Economic, Social and Cultural Rights (CESCR) of the UN asks all nations about the way in which states use their voting rights in these two institutions. There is no reason why this argument does not apply equally to the way in which International Trade agreements are arrived at, and to domestic policies which affect International Trade. Indeed the CESCR requires that ‘States Parties should, in international agreements whenever relevant, ensure that the right to adequate food is given due attention and consider the development of further international legal instruments to that end’.53 However, in international trade negotiations presided over by the World Trade Organisation, as in the operation of policies of the IMF and World Bank, there is a great deal of evidence that a narrowly defined Trustee/Adversary position has been adopted by powerful states in simple

47 48 49 50 51 52 53

P Singer, ‘Reconsidering the famine relief argument’, in Food Policy: The Responsibility of the United States in the Life and Death Choices, P Brown and H Shue (eds), Free Press, New York, 1977. See also the contributions of P Brown, S Gorovitz and H Shue in the same volume. Shue, Basic Rights. Shue, Basic Rights, Ch 7. P Hunt, Reclaiming Social Rights, Dartmouth, Aldershot, 1996, p 31. Hunt, ibid; see also K Arambulo, Economic, Social and Cultural Rights: Strengthening the Supervision of the International Covenant, p 73. Skogly, The Human Rights Obligations of the IMF and World Bank. General Comment 12, paras 36–37.

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pursuit of the property interests of their national interests, using not their right to own and ‘freely dispose of property’ as such but the naked power that the ability to do so brings.54 Drahos and Braithwaite show that in numerous cases the rules of the international trading system have been arrived at by ‘economic coercion’, often by the powerful ‘Quad’ combination of trading blocks, Canada, Japan, the US and EU.55 In particular, in a system supposedly dedicated to international freedom of markets, agricultural subsidies paid by industrialised countries to their farmers ‘amount to more than $ 1 billion a day’, preventing developing countries from any possibility of competing.56 Failure to address this issue and provision of apparently favourable terms of trade (generalised system of preferences), hedged round with conditions which make the possibility of take-up very low,57 are estimated to cost developing countries in the region of $100 billion per annum.58 In the light of the jurisprudence on the right to food and the right to development, use of power to achieve this result cannot be justified as a use of property simpliciter and must surely be a breach of the duty of international co-operation. It is suggested here that reconciliation between the right to own property and the duty of international co-operation requires, at a minimal level, the regulation of the use of this power. The curbing of a hitherto unrestrained use of power does not impose a duty to aid or directly redistribute wealth and property, merely to establish a trading system untainted by abuse of power. Thus it cannot fall foul of the argument that money sent to the developing world may be misused by dictators and corrupt officials. Wrongs committed by the rich world cannot be excused by faults elsewhere.59 I make no suggestions here as to an institutional framework for providing these restraints, but hope to provide a conceptual framework drawn from twin disciplines which have at their heart the regulation of power: human rights law and competition law. It is axiomatic that human rights law was intended to regulate power. Central to the Universal Declaration is the acknowledgment that ‘disregard for human rights has resulted in barbarous acts which have outraged the conscience of mankind’. That disregard manifested itself as much on the international as the national stage. However, trade concerns have been considered to be in the realm of economic, social and cultural rights which have been indisputably the ‘junior branch’ of human rights law.60 The disparity was made clear by the UN Committee on Economic, Social and Cultural Rights in its statement to the Vienna World Conference of 1993: The shocking reality…is that states and the international community as a whole continue to tolerate all too often breaches of economic, social and cultural rights which, if they occurred in relation to civil and political rights, would provoke expressions of horror and outrage and would lead to concerted calls for immediate remedial action. In effect, despite the rhetoric, violations of civil and political rights continue to be treated as though they were far more serious, and

54 55 56 57 58 59 60

P Drahos and J Braithwaite, Global Business Regulation, CUP, Cambridge, 2000; W Hutton, The World We’re In, Little Brown, London, 2002; Oxfam Report ‘Rigged rules and double standards’, Oxfam, 2002; D Korten, When Corporations Rule the World, Kumarian Press, Connecticut, 1998. P Drahos and J Braithwaite, Global Business Regulation. ‘Rigged rules and double standards’, Oxfam Report, p 11. ‘The Least Developed Countries Report 2002’, UN Conference on Trade and Development. Ibid. I am grateful to Professor Sir Roy Goode at the WG Hart workshop for this point. See Eide, Krause and Rosas (eds), Economic Social and Cultural Rights, Martinus Nijhoff, 2001, p 15; P Hunt, Reclaiming Social Rights; K Arambulo, The Covenant on ESCR, Hart, Oxford, 1999; J Dine, The Governance of Corporate Groups op cit, fn 23.

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New perspectives on property law, obligations and restitution more patently intolerable, than massive and direct denials of economic, social and cultural rights.61

This well documented neglect requires the development of conceptual tools to enhance the understanding of the parameters of rights and duties which principally concern economic relations. It is suggested here that the content of the duty may take some elements from a body of law which also seeks to limit and regulate power, with the added advantage that one of its particular concerns is the limitation of power which occurs as a result of the accumulation of great wealth. This instructive viewpoint comes from competition law, which for many years has been struggling to identify the boundary between enjoyment of a right to property and an abusive use of the power that the right to property brings with it. In order to see a way to develop a conceptual framework it is useful to ‘de-bundle’ property rights: ‘Property is more than merely a right of exclusive possession against all the world. It is a bundle of nested rights, that is, rights building upon each other, which include (1) possession of the physical thing owned; (2) rights to exploit, change, re-order, and manage; (3) rights to the flow of income from rights 1 and 2; (4) rights to transfer, exchange and destroy rights 1, 2 and 3; and (5) rights to transfer right 4.’62 A distinction is thus made between the ‘dephysicalised expectation of income’63 attached to the possession of the ‘thing’ and the ‘thing’ itself. Each of these different aspects of property rights may require a distinct legal approach to their regulation, both at national and international level. Crucially, these regulations will concern the impact of property owners on each other; the ‘right of property is diminished primarily by the prospect of competitive injury to physical control and income flow caused by the actions of rival property holders in exploiting their holdings…It can be difficult for the law to discriminate between legitimate price competition and coercive interference with assets…there is a complex relationship between the “right” to private property and the legitimacy of injurious competition’.64 It is precisely this difficulty which competition law and policy seeks to address. Peritz writes: On the one hand, competition policy has prohibited corporate mergers that result in firms whose market power might allow them to dominate their rivals. On the other, enjoining owners from selling their business impinges upon a fundamental right to sell or exchange property.65

Drahos and Braithwaite argue for an extension of competition policy to the world stage in order to prevent the accumulation of vast power by multinational corporations.66 This discussion seeks to take a particular aspect of competition law and explore its implications in the light of the obligations of states regarding international co-operation, and in particular how that can be seen as limiting the dephysicalised components of their property rights, the rights to exploit their possessions.

61 62 63 64 65 66

E/C 12/1992/2, 82. See D Beetham ‘What future for economic and social rights?’ (1995) Political Studies Association 43. J Getzler, ‘Theories of property and economic development’, in J Harris (ed), Property Problems, Kluwer, London, 1997, p 203. Ibid. Ibid, p 204. R Peritz, Competition Policy in America: History, Rhetoric, Law, OUP, Oxford, 2000. P Drahos and J Braithwaite, Global Business Regulation.

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Competition policy in the EU has developed ‘fairness’ tests in order to limit unfair exploitation of the power that property ownership brings, thus providing a conceptual structure that can be used to give content to the duty of international co-operation. One way in which EU competition law limits exploitation of property rights is by the concept of ‘abuse of a dominant position’. Article 82 reads: ‘Any abuse by one or more undertakings of a dominant position within the common market or in a substantial part of it shall be prohibited as incompatible with the common market…’67 Examples given of when such abuse may be detected at first sight ‘suggest a concern to place limits on the capacity of a dominant firm to exploit its customers or consumers by extracting monopoly rents from them by such practices as excessive pricing, limiting markets, tie-ins etc’.68 However, as Anderman points out, Article 86 (now 82) has been interpreted to apply more widely than merely prohibiting exploitative abuses; it is also ‘aimed at “structural” or “anti-competitive” abuses directed against competitors’.69 The concept of ‘abuse’ thus relates to unfair behaviour which is possible because of the power accumulated by dominance in a particular market. The World Trade Organisation administers a global market, and rules are made for specific markets within that umbrella. Thus while the geographic market administered is global, the specific markets will be defined by identifying the relevant product although ‘the Commission’s choice of relevant product market has on occasion been heavily influenced by the type of abuse that is alleged to have occurred’.70 In ‘Soda Ash’ the Commission stated that in determining ‘the area of business in which conditions of competition and market power of the allegedly dominant undertaking fell to be assessed…account has to be taken of the nature of the abuse being alleged and of the particular manner in which competition is impaired in the case in question.’71 In other words, the precise definition of the product market in question can be adjusted to reach a finding of dominance, and subsequently an abuse of that dominance where the nature of the behaviour is seen as unfair. It is not a scientific determination but depends on the underlying understanding of what level of exploitation of property rights is to be tolerated. As Peritz has shown, this may change radically over the years according to the dominant economic philosophy, to the extent that he sees competition policy in the recent years as an ‘inverted’ version of its previous role: ‘There is little concern about market power and none about corporate size…the Reagan-Bush years produced an antitrust inversion. Consistent with the conservative Republicans’ deregulatory ideology of freeing commercial enterprise from government restraints, antitrust doctrine emerged as a weapon for privately owned businesses to attack the power of political subdivisions.’72 Care must therefore be taken to select an underlying understanding of ‘fairness’ and its opposing concept ‘abuse’ in balancing the unconstrained use of power and enjoyment of property rights. However, at the level of international markets there is a growing realisation that the system that has been created by using the Trustee/Adversary justification for self-interested negotiation, backed by economic coercion, has created an unfair and unsustainable position in which powerful

67 68 69 70 71 72

Article 82 EC Treaty. S Anderman, EC Competition Law and Intellectual Property Rights, Clarendon, Oxford, 1998, p 181. Ibid. Ibid p 161. ICI v Solvay OJ L 152/21 [1991], para 42, cited in Anderman, EC Competition Law and Intellectual Property Rights, p 161. Peritz, Competition Policy in America, p 273.

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nations have abused their dominant position in the international markets at the expense of the poorest. ‘Over one quarter of the children are undernourished in 33 out of 43 Least Developed Countries (LDCs) for which data are available. Nineteen out of 33 African LDCs have maternal mortality rates above 1 per 100 live births. The chance of a child dying under the age of five is more than 1 in 10 in 38 out of 49 LDCs. On average, under 50% of the adult female population is literate in LDCs.’73 If this can even partially be caused by ‘Rigged rules and double standards’74 operating on a grand scale, then the concept of abuse may be helpful in limiting the unconstrained use of property power by states in constructing and operating a trading system that delivers such appalling outcomes.

73 74

‘The Least Developed Countries Report 2002’, UN Conference on Trade and Development, p 21. ‘Rigged rules and double standards’, Oxfam Report.

Chapter 17 The company: property, power and responsibility Lisa Whitehouse 1 ABSTRACT This chapter examines the concept of ‘responsibility’ and its application within the corporate context. The potential for large corporations to exercise significant powers that impact adversely upon the welfare of individual citizens and communities as a whole has been recognised within both political and academic debate since the 1930s.2 It has also become apparent that these powers are exercised often without the mitigating effect of responsibility. This situation is antithetical to a liberal democracy and in particular the Labour Government’s ‘third way’ mantra of ‘no rights without responsibilities’.3 In response, academics and politicians have created the concept of ‘corporate social responsibility’ with the specific intention of holding companies accountable for the harm that they cause. Although content to explore the question as to why corporations should be made responsible, much of this literature fails to deal adequately with the question as to whether companies, as fictional entities, can be attributed with responsibility. This chapter seeks to answer that question.

INTRODUCTION It is increasingly apparent, and recognised within debates over corporate social responsibility, that large corporations have the potential to impact significantly upon the welfare of individual citizens and communities generally. This power is enjoyed, in part, as a result of the unique position held by the company within the property relationship. In operating as both the object and the subject of that relationship, the company receives protection on two levels. The first concerns the protection afforded to the entrenched private property rights of shareholders, synonymous with the goal of ‘profit maximisation’.4 The view that the maximisation of aggregate wealth is best achieved through the pursuit, by companies, of the goal of profit maximisation has led to a reluctance on the part of the state, particularly within the UK, to interfere in its operation. The second level of protection concerns the company’s ability to own and enjoy the objects of property on its own account. If, as Gray and Gray suggest, we should view ‘property’ as ‘particular

1 2 3 4

The author would like to thank the British Academy, the Economic and Social Research Council, the Nuffield Foundation, the Socio-Legal Studies Association and the University of Hull for financing this research. See A Berle, ‘Corporate powers as powers in trust’ (1931) 44 Harvard Law Review 1049; EM Dodd. ‘For whom are corporate managers trustees?’ (1932) 45 Harvard Law Review 1145. A Giddens, The Third Way (Polity Press: Cambridge, 1998) at p 65. See JE Parkinson, Corporate Power and Responsibility (Clarendon Press: Oxford, 1996); L Roach, ‘The paradox of the traditional justifications for exclusive shareholder governance protection: expanding the pluralist approach’ (2001) 22 The Company Lawyer 9; Lord Wedderburn, ‘The legal development of corporate responsibility; for whom will corporate managers be trustees?’, in KJ Hopt and G Teubner (eds), Corporate Governance and Directors’ liabilities (Walter De Gruyter: Berlin, 1985).

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concentrations of power over things and resources’5 (one might also add ‘over other individuals’) then large corporations exercise significant power. As Parkinson notes, the world’s 10 largest companies control assets ‘equivalent to the GNP of Canada’ and employ a total of 4.3 million employees.6 To view these organisations, as the law does, as individuals is therefore to underestimate their position within the global economy. As Dahl suggests, ‘[e]very large corporation should be thought of as a political system, that is, an entity whose leaders exercise great power, influence, and control over other human beings’.7 This ability on the part of large corporations to exercise what Parkinson describes as ‘social decision-making power’8 raises concerns for the reason that it is being exercised without recourse to the constraining influence of accountability, regulation or responsibility. Support for this contention is offered by a series of corporate ‘disasters’ such as the Exxon Valdez, the Herald of Free Enterprise, Bhopal and Enron.9 Despite the obvious harm caused by these incidents, neither the corporations concerned nor their officials were held to account; as Lord comments, ‘[a] sin was committed but there are no sinners’.10 This is a position that is antithetical to a liberal democracy: as Stokes indicates, ‘liberalism is hostile to the existence of centres of unbridled power, believing that power unless limited and controlled may threaten the liberty and the equality of the individual’.11 In an attempt to constrain the worst excesses of corporate behaviour, academics, politicians and company managers alike have sought to develop the concept of ‘corporate social responsibility’. Although its definition varies, the concept aims to make legitimate the exercise of social power by private corporations. However, despite 70 years of discussion, and measures introduced recently by the United Nations,12 the Commission of the European Communities13 and the Department for Trade and Industry,14 corporate social responsibility has failed to achieve systematic and meaningful reform of corporate activity, as Sarre et al claim: …new corporate governance regimes are ensuring the development of policies to ensure adherence to the law, transparency, dialogue, observation and correction. The numbers of corporate disasters, however, clearly illustrate that the practice fails to match the rhetoric, even when regulatory structures are mandated by law and enforced by criminal penalties.15

5 6 7 8 9 10 11 12 13 14 15

K Gray and SF Gray, ‘The idea of property in land’, in S Bright and J Dewar (eds), Land Law:Themes and Perspectives (Oxford University Press: Oxford, 1998) at p 15. Parkinson, op cit, n 4, p 5. RA Dahl, ‘A prelude to corporate reform’ (Spring 1972) 1 Business and Society Review 17 at p 17. Parkinson, op cit, n 4, p 22. See N Klein, No Logo: Taking Aim at the Brand Bullies (Picador: New York, 2000); R Sarre, M Doig and B Fiedler, ‘Reducing the risk of corporate irresponsibility: the trend to corporate social responsibility’ (2001) 25 Accounting Forum 300. MW Lord, ‘Corporate irresponsibility: the sin with no sinners’ (1986) 9 Hamline Law Review 53 at p 56. M Stokes, ‘Company law and legal theory’, in W Twining (ed), Legal Theory and the Common Law (Oxford University Press: Oxford, 1986) at p 156. Global Compact Office, The Global Compact—Corporate Leadership in the World Economy (United Nations: New York, 2001). Commission of the European Communities, Promoting a European Framework for Corporate Social Responsibility, Green Paper COM 366 (Commission of the European Communities: Brussels, 2001). Department of Trade and Industry, Business and Society: Corporate Social Responsibility Report 2002 (DTI: London, 2002). Sarre et al, op cit, n 9, pp 301–02.

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This failure on the part of corporate social responsibility to fulfill its potential is due, in part, to the confusion that surrounds its meaning and implications. As Hester writes: ‘[u]nfortunately, there has been no general agreement as to the meaning of corporate social responsibility or how it should be implemented, despite the fact that many businessmen enthusiastically have adopted the concept during the past decade.’16 It is also clear that further confusion has arisen regarding the meaning to be attributed to ‘responsibility’ within the context of corporate social responsibility. While much of the literature rarely addresses the term, it is clear that many authors adopt implicitly different meanings of responsibility. Those, for example, who equate corporate social responsibility with corporate philanthropy17 or ‘corporate citizenship’18 are using responsibility in the sense of ‘personal responsibility’; corporations are, or should be, responsible citizens. Others, who seek to compel corporations to behave according to established norms,19 imply that responsibility is equivalent to enforced obligation, the breach of which will encounter either moral or legal censure. There are also those who argue that corporations can never be held responsible for their activities or the harm that they cause,20 thereby negating the potential for corporate social responsibility to achieve meaningful reform. This is contested by, among others,Takala and Pallab who suggest that ‘[a]ny claim that a firm can be construed as being above all demands of responsibility, as it is an “abstract entity” that is the target of intangible processes like market forces, is not accepted’.21 If this is the case, is it possible to attribute responsibility to a fictional entity? If not, should individual members of the company be held responsible for the outcome of corporate activity and, if so, how does one avoid the evidential difficulties encountered in identifying those responsible? As Werhane suggests, ‘[s]omehow we need to determine who is responsible for business practices, both commendable and questionable ones’.22 In seeking to answer these questions, and with the objective of clarifying much of the confusion that has arisen within the corporate social responsibility literature, this chapter identifies the various meanings attributed to ‘responsibility’ and questions the extent to which it is possible for a company, as opposed to its members, to exercise responsibility. It contends that companies are susceptible to two forms of responsibility, classified as legal and causal. The potential for these forms of responsibility to regulate the affairs of companies is evidenced by the Law Commission’s proposals regarding the offence of ‘corporate killing’.23 Although unlikely ever to reach the statute books, this proposal accepts that companies, despite their fictional nature, can be held

16 17 18 19 20 21 22

JM Hester, ‘Social responsibility of organisations in a free society’, in R Nader and MJ Green (eds), Corporate Power in America (Grossman: New York, 1973) at p 25. See, eg, JF Henning, ‘Corporate social responsibility: shell game for the seventies?’, in Nader and Green, ibid; S Sheikh, Corporate Social Responsibilities: Law and Practice (Cavendish Publishing: London, 1996). See, eg, J Andriof and M McIntosh, ‘Introduction’, in J Andriof and M McIntosh (eds), Perspectives on Corporate Citizenship (Greenleaf Publishing: Sheffield, 2001) at pp 13–24. See, eg, DJ Wood, ‘Corporate social performance revisited’ (1991) 16(4) Academy of Management Review 691; DJ Wood and JM Logsdon, ‘Theorising business citizenship’, in Andriof and McIntosh, ibid at pp 83–103. See, eg, JE Garrett, ‘Unredistributable corporate moral responsibility’ (1989) 8(7) Journal of Business Ethics 535; MG Velasquez, Business Ethics: Concepts and Cases (Prentice Hall: New Jersey, 1988). T Takala and P Pallab, ‘Individual, collective and social responsibility of the firm’ (2000) 9(2) Business Ethics: A European Review 109 at p 112. PH Werhane, ‘Corporate and individual moral responsibility: a reply to Jan Garrett’ (1989) 8(10) Journal of Business Ethics 821 at p 821.

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‘responsible’ for deaths caused by ‘management failures’. This is a radical step forward within UK company law and should encourage those who support claims for increased corporate accountability. It is clear, however, that if a general regime of corporate social responsibility is to prove achievable, the first step must be to determine what it means to be ‘responsible’: as Stone suggests, ‘[o]nly after we have considered what being responsible calls for in general does it make sense to develop the notion of a corporation being responsible’.24

RESPONSIBILITY Responsibility is a concept that defies concise definition. The term can be used to express various notions including service, duty, accountability, integrity and liability. In an attempt to make possible the identification and definition of these ‘different senses’25 of the term, academics have sought to put into practice Hart’s claim that ‘[t]his welter of distinguishable senses of the word “responsibility” and its grammatical cognates can, I think, be profitably reduced by division and classification’.26 The titles given to each of the classes and sub-divisions may differ depending upon the author (Hart for example uses four classifications, role-responsibility, causal responsibility, liability responsibility and capacity responsibility) but the spirit and content of each remains relatively consistent. A reading of the relevant literature reveals that the various meanings attributed to responsibility can be classified under three headings, namely personal, obligatory and causal. These three classifications can be further sub-divided by reference to their derivation from either law or morality and, further, by reference to their subject which can be either an individual or a collective. The following sections of this chapter examine each class and division in turn, the objective being to identify the extent to which responsibility, in all of its forms, is applicable to the corporation.

Personal responsibility The first classification of responsibility, described by Helkarna as ‘personality disposition’,27 denotes the degree to which an individual is perceived by others to be ‘trustworthy’ or ‘dependable’.28 According to Goodpaster, a ‘responsible person’ will exercise a degree of rationality and respect when making decisions and undertaking actions: Rationality involves the pursuit of one’s projects and purposes with careful attention to ends and means, alternatives and consequences, risks and opportunities. Respect

23 24 25 26 27 28

Home Office, Reforming the Law on Involuntary Manslaughter: The Government’s Proposals (Home Office: London, 2000). CD Stone, Where the Law Ends: The Social Control of Corporate Behaviour (Harper & Row: New York, 1975) at p 111. HLA Hart, Punishment and Responsibility (Clarendon Press: Oxford, 1963) at p 211. Ibid. K Helkarna, ‘Toward a cognitive-developmental theory of attribution of responsibility—a critical review of empirical research and some preliminary data’, quoted in Takala and Pallab, op cit, n 21. Velasquez, op cit, n 20 at p 112.

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involves consideration of the perspectives of other persons in the pursuit of one’s rational projects and purposes.29 The implementation of rationality and respect within decision-making is viewed as commendable but remains a matter of choice for the individual. As Donaldson notes, both individuals and companies will accord varying degrees of importance to their perception as responsible actors: ‘Corporations, like people, exhibit a variety of moral profiles. Some reject moral deliberation as the sworn enemy of good business while others endorse it as a needed friend.’30 An example of this type of responsibility, within the corporate context, is offered by the emerging notion of ‘corporate citizenship’. Developed during the 1990s by academics and company managers, corporate citizenship encourages companies to exceed their minimum legal obligations by undertaking, voluntarily, activity that benefits the local community or society generally, as Andriof and McIntosh explain: ‘[g]ood corporate citizenship…can be defined as understanding and managing a company’s wider influences on society for the benefit of the company and society as a whole.’31 To this extent therefore, corporate citizenship advocates the implementation of rationality and respect in the decision-making processes operated by companies, the ultimate aim being to ensure that those companies who choose to implement such activities are viewed as good corporate citizens. It is also apparent, upon a reading of the corporate social responsibility literature, that many authors adopt either explicitly or implicitly this particular meaning of responsibility. Significant support, for example, is given to the claim that corporate social responsibility is equivalent to the implementation by companies of philanthropic ventures such as charitable donations: ‘[s]imply defined, social responsibility is the obligation of both business and society (stakeholders) to take proper legal, moral-ethical, and philanthropic actions that will protect and improve the welfare of both society and business as a whole.’32 The motives underlying such activity may range from a desire on the part of corporations to be perceived as socially responsible to the pursuit of ‘enlightened self-interest’33 for, as Minow suggests, philanthropy has advantages for both the company and the community: ‘[t]he shareholders benefit…where a company with strong ties to the local community makes a contribution of great interest to that community, it also provides an incentive to increase sales and strengthen consumer loyalty.’34 This particular view of corporate social responsibility is also evident in a number of initiatives implemented recently by the United Nations,35 the Commission of the European Communities36 and the Department for Trade and Industry37 Although different in scope and content, these initiatives promote a conception of corporate social responsibility as personal responsibility. As the

29 30 31 32 33 34 35 36 37

KE Goodpaster, ‘The concept of corporate responsibility’ (1983) 2 Journal of Business Ethics 1 at p 7. T Donaldson, Corporations and Morality (Prentice Hall: New Jersey, 1982) at p 10. Andriof and McIntosh, op cit, n 18 at p 14. JW Anderson, Corporate Social Responsibility: Guidelines for Top Management (Quorum Books: New York, 1989) at p 9. See, eg, Sheikh, op cit, n 17; HW Smith, ‘If not corporate philanthropy, then what?’ (1997) 41 (3) New York Law School Law Review 757. N Minow, ‘Corporate charity: an oxymoron?’ (1999) 54(3) The Business Lawyer 997 at p 998. The Global Compact; see the Global Compact Office, op cit, n 12. Commission of the European Communities, op cit, n 13. Department for Trade and Industry, op cit, n 14.

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Commission of the European Communities’ Green Paper Promoting a European Framework for Corporate Social Responsibility suggests, ‘corporate social responsibility is essentially a concept whereby companies decide voluntarily to contribute to a better society and a cleaner environment’.38

Responsibility as obligation In contrast to the voluntary nature of personal responsibility, the second classification of responsibility implies a degree of compulsion imposed upon an individual or group to behave in a particular manner. Responsibility as ‘obligation’39 involves the acceptance or imposition of a duty by moral or legal rules and owed by one individual or group to another. This particular meaning is illustrated by the phrase ‘parents are responsible for the care of their children’. As Hart explains, these duties may also arise as the result of the acceptance or imposition of a particular role within society: …whenever a person occupies a distinctive place or office in a social organization, to which specific duties are attached to provide for the welfare of others or to advance in some specific way the aims or purposes of the organization, he is properly said to be responsible for the performance of these duties, or for doing what is necessary to fulfill them.40

Unlike personal responsibility, failure to fulfil ‘obligatory responsibility’ may involve the individual being ‘held to account before a forum’41 and the imposition of a penalty which may include moral censure or punishment imposed by law. The extent to which ‘obligatory responsibility’ informs the corporate social responsibility debate is evidenced by those who advocate the imposition upon companies of non-excludable duties owed to those affected by corporate activity. Wood, for example, rejects the view of corporate social responsibility as voluntary or personal responsibility: ‘[t]he principle of public responsibility does not permit a company’s social responsibility to be defined by the whims, preferences, or social connections of the firm’s top executives.’42 He identifies instead the view of corporate social responsibility as obligation: ‘corporate social responsibility considers the moral and legal obligations of business to have precedence over self-interest…a company that cannot operate responsibly should not be in business.’43

Causal responsibility The third and final classification of responsibility as ‘causal’ denotes the identification of an individual as having caused (having been responsible for) a particular outcome or event. This is a

38 39 40 41 42 43

Commission of the European Communities, op cit, n 13 at para 8. Takala and Pallab, op cit, n 21. Hart, op cit, n 25 at p 212. M Bovens, The Quest for Responsibility: Accountability and Citizenship in Complex Organisations (Cambridge University Press: Cambridge, 1998) at p 24. Wood, op cit, n 19 at p 698. Wood and Logsdon, op cit, n 19 at p 86.

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fact-finding exercise that apportions no moral or legal blame to the individual concerned. Hart, in his exposition of responsibility, highlights the non-judgemental qualities of causal responsibility: ‘Disraeli was responsible for the defeat of the Government’ need not carry even an implication that he was deserving of censure or praise; it may be purely a statement concerned with the contribution made by one human being to an outcome of importance, and be entirely neutral as to its moral or other merits.44

The importance of this type of responsibility becomes apparent upon an examination of the further division of responsibility as either moral or legal.

Moral v legal responsibility Having identified the different meanings that arise upon the use of the term ‘responsibility’, the question remains as to how and when personal, obligatory and causal responsibility will become attributable to an individual or group. In order to answer that question it is necessary to look to the moral and legal rules that guide behaviour within any given society. In the following discussion, ‘responsibility’ is used to denote all of its three meanings for, as Hart indicates, the meaning of responsibility does not change dependent upon its classification as either moral or legal, but rather: …the striking differences between legal and moral responsibility are due to substantive differences between the content of legal and moral rules and principles rather than to any variation in meaning of responsibility when conjoined with the word ‘moral’ rather than ‘legal’.45

Taking moral responsibility first, Mellema, in offering an admittedly unsophisticated account of what it means to be ‘morally responsible’, states that: A person is morally responsible for a given harm or character defect if the person’s conduct played a significant causal role in that harm or defect, the person’s conduct was blameworthy or it was morally faulty in some other way, and the aspect of the act that was faulty was also one of the aspects in virtue of which it was a cause of the harm.46

The importance of attributing moral responsibility to individuals for the outcome of their decisions or actions is examined by Surber, who suggests: ‘[i]t is a central feature of our moral discourse that we hold individuals morally responsible for those actions and only for those actions for which (1) they were causally (that is non-morally) responsible, and (2) which they intended to perform.’47 It is this latter element which, it would seem, excludes companies from exercising moral responsibility. As a legal fiction, it seems reasonable to assume that a company cannot be attributed with the capacity to form an intention.48 French, however, argues that ‘some associations of human beings should be treated as metaphysical persons capable on his [Rawls’] account of becoming

44 45 46 47 48

Hart, op cit, n 25 at p 25. Hart, op cit, n 25 at pp 225–26. GF Mellema, Collective Responsibility (Rodopi: Georgia, 1997) at p 7. J Surber, ‘Individual and corporate responsibility: two alternative approaches’ (1983) 2(4) Business and Professional Ethics Journal 67 at p 68. Velasquez, op cit, n 20 at p 113.

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moral persons, in and of themselves’.49 His justification for this claim is that the decision-making structure apparent within large firms can be equated with an individual’s ability to form an intention to act: ‘[w]hen operative and properly activated, the CID (Corporation’s Internal Decision) structure accomplishes a subordination and synthesis of the intentions and acts of various biological persons into a corporate decision.’50 French’s claim that corporations can be viewed as moral agents has been criticised by Velasquez on the basis that ‘corporate acts do not originate in the corporation but in the corporation’s members’.51 Garrett also rejects French’s claims, indicating that only individuals can be held morally responsible and that to view corporations as moral agents alters fundamentally the nature of moral responsibility: French’s view that corporations are persons in the same sense as human beings would seem to require that we sometimes rightfully attribute moral responsibility to a person’s code of conduct, rather than (as we actually do) holding the person responsible for action on the basis of his or her code of conduct.52

The requirement that moral responsibility can only be applied to an individual or group capable of undertaking intentional and morally blameworthy behaviour presents a significant hurdle in any attempt to impose moral rules upon a fictional entity. In contrast, however, legal responsibility may be owed in cases where there is no intention to cause harm, as in cases of negligence or strict liability offences, and the act undertaken did not fall below any particular moral standard. The imposition of legal responsibility upon a company is further assisted by the fact that causal responsibility is not always a prerequisite of legal responsibility. Although both legal and moral responsibility are usually only attributed to those who are causally responsible for the outcome in question, either by act or omission, it is possible to impose legal responsibility upon an individual even where they were not directly responsible for the harm, that is to say vicariously liable.53 To this extent, therefore, corporations may be more susceptible to legal rather than moral responsibility. The capacity for corporations, rather than their individual members, to be held legally responsible for certain acts or outcomes is evidenced by the current regulatory framework in the UK. Although significant difficulties are encountered in imposing liability,54 it is possible to find a corporation guilty of manslaughter55 or vicariously liable in tort. It remains necessary, however, in relation to both criminal and tortious liability to identify an individual or individuals within the company who have the necessary mens rea or causal responsibility (the ‘identification’ or ‘controlling mind’ doctrine). The evidential difficulties encountered in identifying such individuals and holding them to account, however, have become the focus of attention and criticism following several well publicised disasters, including the King’s Cross fire in November 1987 and the Southall rail crash in September 1997.

49 50 51 52 53 54 55

PA French, ‘The corporation as a moral person’, in L May and S Hoffman (eds), Collective Responsibility: Five Decades of Debate in Theoretical and Applied Ethics (Rowman & Littlefield: Maryland, 1991) at p 135. Ibid, at p 143. Velasquez, op cit, n 20 at p 117. Garrett, op cit, n 20 at p 540. See Hart, op cit, n 25 at p 221. See, eg, R v P&O European Ferries (Dover) Ltd (1990) 93 Cr App R 72 and Adomako [1994] 3 All ER 79. See R v OLL Ltd and Kite Central Criminal Court, December 1994.

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The ex post facto nature of the current legal approach has also been criticised by Sarre et al, who refer to the Herald of Free Enterprise disaster in March 1987 as an example of the ‘weaknesses of the criminal legal sanction, an action that occurs after the event, as a mechanism for ensuring corporate accountability’.56 In June 1989, seven individuals associated with P&O European Ferries were charged with manslaughter and the company with corporate manslaughter. The case was dismissed after only 27 days when it became clear that no individual company member, official or employee who represented the ‘controlling mind’ of the company was also guilty of the offence: ‘[g]iven that “controlling mind” is such an amorphous term in common parlance, the chance of a corporate conviction in this case was always going to be slight.’57 The difficulties associated in holding companies both morally and legally responsible for the outcome of their activities derives from the fictional nature of the firm. It must be the case, however, that an individual or group of individuals within the firm initiated the activity undertaken by the company which led to the harm. To what extent, therefore, is it possible to hold those individuals or groups causally responsible for the outcome of the decision, liable to account for the harm and potentially open to punishment for the decision? In answering this question, it is possible to point to a further sub-division of responsibility that concerns those capable of exercising responsibility.

Individual v collective responsibility The concern of many advocates of corporate social responsibility to hold companies to account for the harm that they cause is criticised by Garrett on the basis that moral blame and legal liability should rest with those who caused the harm: The reluctance of Werhane and French to blame individual managers whose attitudes and conduct were in some cases no worse than the average is understandable. But such managers are as blameworthy as any akratic when their moral imperfections produce harm.58

Where members of a company undertake morally indefensible or illegal actions on behalf of the company, then blame and admonishment become justified. Difficulties arise, however, in identifying those individuals responsible for such decisions or actions. The complex hierarchical decision-making structures apparent within large firms and the maintenance of certain policies over many years59 create evidential difficulties in the search for those directly responsible for a particular decision, as Bovens suggests: ‘[w]ith respect to complex organizations, the problem of many hands often turns the quest for responsibility into a quest for the Holy Grail.’60 The imposition of individual moral or legal responsibility upon individual company members is, therefore, difficult to achieve. In response to these difficulties, an alternative interpretation of responsibility has been offered which seeks middle ground between those who argue that corporations can bear moral and legal

56 57 58 59 60

Sarre et al, op cit, n 9 at p 303. Ibid. Garrett, op cit, n 20 at p 543. See Sarre et al, op cit, n 9 at p 306; Werhane, op cit, n 22 at p 821. Bovens, op cit, n 41 at p 40.

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responsibility and those who argue that only individuals can. This middle ground is known as ‘collective responsibility’, which Mellema defines as ‘a group of people within a corporation, who are not responsible as individuals, [but] are nevertheless collectively responsible for what happens’.61 Collective responsibility could, therefore, be applied to distinct groups within the corporation, such as directors or shareholders, thereby avoiding the evidential problems associated with individual responsibility and the practical difficulties encountered in holding the company responsible. The application of causal responsibility to a collective may seem uncontroversial, as Surber makes clear: ‘[a]scribing merely non-moral or causal responsibility to a collective is unobjectionable and entirely compatible with separate judgements of moral responsibility of each individual member.’62 Attribution of obligatory responsibility and its potential consequences, with the capacity for some individuals to be ‘punished’ for a decision which they did not take, however, contravenes the concept of moral responsibility and is therefore compromised.63 There is also a concern that imposing responsibility upon those not causally responsible for the outcome in question may lead to some individuals within the company being used as scapegoats.64 As Garrett suggests: If a CEO is held morally accountable for a subordinate’s actions or omissions in cases where no reasonable person would attribute to the CEO the power to have prevented those actions or omissions, one might justifiably accuse of scapegoating those compiling the moral account.65

The difficulties identified in attributing both moral and legal responsibility to companies and their members raise serious concerns; as Donaldson notes, corporations are ‘taller and richer than most of us. These characteristics enhance their capacity for effecting both human good and harm and, in turn, make their moral analysis a matter of direct and pressing concern.’66 In light of this, it is perhaps disturbing to note that the ability of the company and its members to avoid both moral and legal responsibility to some extent enhances the potential for morally and legally reprehensible behaviour to be undertaken. The ability of individuals to hide behind the cloak of corporate personality may encourage behaviour which falls below normal moral or legal standards even though those individuals would not normally behave in such a manner. Lord highlights the capacity for individuals to act differently when part of a group: The fact that a corporation has no conscience, the fact that group action allows individuals to sublimate their individual responsibility to the mob psychology, and the fact that some individuals in lesser positions must accommodate the management’s wishes, all contribute to acts of wrongdoing that no individual would do personally.67

It is essential, therefore, if such behaviour is to be constrained, that corporations and their members become susceptible to responsibility. As the above discussion has indicated, legal

61 62 63 64 65 66 67

Mellema, op cit, n 46 at p 140. Surber, op cit, n 47 at p 69. See Velasquez, op cit, n 20 at pp 124–26. See Sarre et al, op cit, n 9 at p 306. Garrett, op cit, n 20 at p 541. Donaldson, op cit, n 30 at p 16. Lord, op cit, n 10 at p 54.

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responsibility offers perhaps the most viable source of constraining corporate activity. The potential for corporations, rather than their members, to be held legally responsible for the harm that they cause has been enhanced by the Law Commission’s proposals in respect of the offence of ‘corporate killing’. Although these proposals are unlikely to be implemented, they offer a unique and innovative model of ‘corporate responsibility’ that could serve as the basis for future reform.

‘CORPORATE KILLING’ In an attempt to improve the current position in respect of corporate liability for involuntary manslaughter, the Home Office has produced a consultation paper highlighting the Law Commission’s proposal for a new offence of ‘corporate killing’.68 The offence would correspond with the proposed offence of ‘killing by gross carelessness’ but, in relation to corporate killing, it would not require that the risk be obvious or that the defendant be capable of appreciating the risk. Provided, therefore, that the company’s conduct causes the death of another and that conduct falls below what can reasonably be expected in the circumstances, the company may be guilty of the offence. The Commission has attempted to offer guidance on the issue of the ‘company’s conduct’, suggesting that the death must be caused by a ‘management failure’, that is ‘the way in which its activities are managed or organised fails to ensure the health and safety of persons employed in or affected by its activities’.69 Reference to the issue of ‘health and safety’ is intended to bring the new offence into line with the criteria applied by health and safety authorities under the Health and Safety at Work Act 1974. Although no more successful at bringing prosecutions for involuntary manslaughter, prosecutions under the 1974 Act were possible in some of the disasters mentioned above; Great Western Trains, for example, was fined £ 1.5 million for its part in the Southall rail crash. It is also the intention of the government to make use of the experience and expertise of local government inspectors and the Health and Safety Executive in investigating incidents of corporate killing. In focusing upon the practices adopted by the management of a corporation as opposed to the decisions, acts or intentions of individual members, this new offence is designed to deal specifically with the fictional nature of the corporate form, and with the evidential difficulties associated with complex management structures. It is also designed to avoid entirely the need to identify individuals within the firm. Unlike moral responsibility, therefore, this new legal responsibility is concerned with providing a remedy for the harm caused by corporate behaviour rather than identifying those who are to blame. As Ripstein suggests: There are cases in which legal responsibility is appropriate even though blame is not. In this way, legal responsibility is related to moral responsibility, but distinct from it. The role of law and of a conception of fairness are, as Kant put it, to make freedom possible, rather than to make morality actual. Their primary concern is not with the quality of a person’s will or character, but with the external aspects of action.70

68 69 70

Home Office, op cit, n 23. Home Office, op cit, n 23 at p 12. A Ripstein, Equality, Responsibility and the Law (Cambridge University Press: Cambridge, 1999) at p 4.

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By taking as the starting point the harm or outcome caused by the activities of corporations, the question becomes one of who is best able to shoulder the burden of that harm. In most cases, particularly where compensation is the only effective remedy, the answer will be the company.

CORPORATE RESPONSIBILITY? A review of the concept of responsibility (albeit a superficial one) in respect of its application within the corporate context indicates the adoption of a number of different interpretations by those who advocate corporate social responsibility. Votaw offers a lengthy but accurate account of the confusion that currently surrounds the concept of corporate social responsibility: …it means something, but not always the same thing to everybody. To some it conveys the idea of legal responsibility or liability; to others, it means socially responsible behaviour in an ethical sense; to still others, the meaning transmitted is that of ‘responsible for’, in a causal mode; many simply equate it with a charitable donation; some take it to mean socially conscious; many of those who embrace it most fervently see it as a mere synonym for ‘legitimacy’, in the context of ‘belonging’ or being proper or valid; a few see it as a sort of fiduciary duty imposing higher standards of behaviour on businessmen than on citizens at large.71

There is, in particular, a clear demarcation between those who view corporate social responsibility as voluntary, and equivalent to corporate philanthropy, and those who view it as obligatory. The divisive effect of these differing views of responsibility is evidenced by Stone’s contention that ‘responsibility should not be confused with altruism’72 and Smith’s view that ‘the term “corporate philanthropy” is really a kind of oxymoron’.73 Unless and until consensus is achieved among those promoting corporate social responsibility, the concept will prove difficult to implement, and open to misinterpretation by those who seek to oppose it. Claims made by Friedman74 and Levitt,75 for example, that the concept is fundamentally subversive and ‘would destroy a free society’76 are difficult to defend when one is not entirely sure of its meaning or implications. In an attempt to move the debate forward, this chapter has sought to challenge the view that corporations cannot be subject to responsibility, and to identify the type of responsibility that will prove most effective in regulating corporate behaviour. To this extent, it seems clear that moral responsibility will prove ineffective in achieving this task. The fictional nature of the firm coupled with the ability of its members to hide behind the cloak of corporate personality make moral censure ineffective in the regulation of corporate social power. It would seem possible, however, to impose both causal and legal responsibility in respect of activity undertaken by corporations that

71 72 73 74 75 76

D Votaw, ‘Genius becomes rare’, in D Votaw and SP Sethi (eds), The Corporate Dilemma: Traditional Values and Contemporary Problems (Prentice Hall: New Jersey, 1973) at p 12. Stone, op cit, n 24 at p 111. Smith, op cit, n 33 at p 762. M Friedman, Capitalism and Freedom (University of Chicago Press: Chicago, 1969). T Levitt, ‘The dangers of social responsibility’ (1958) Harvard Business Review 41. Friedman, op cit, n 74 at p 120.

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causes harm to others, a contention supported by the Law Commission’s proposals in respect of the offence of corporate killing. These considerations leave open a number of questions; not least, whether the introduction of a new legal duty in respect of corporations is justified, and whether there is sufficient political will to implement such a change. These questions have been the subject of vociferous debate for the last 70 years, and it is not the intention of this chapter to repeat the well-rehearsed claims both in favour of and against corporate social responsibility. It is clear, however, that if progress is to be made towards the implementation of a practical model of corporate social responsibility, consensus must first be reached in respect of the meaning to be attributed to responsibility. It is hoped that this chapter has taken at least a tentative step in that direction.

Chapter 18 Mutuals and co-operatives: property, obligations, business and dedicated assets Ian Snaith THE NATURE OF CO-OPERATIVES AND MUTUALS The word ‘mutual’ is used with a range of meanings. Strictly, it suggests that an organisation trades only with its own members. In a wider sense, it is now commonly used as a term to encompass those businesses which are controlled by their members on a basis other than the typical investorcontrolled company model which usually confers control in proportion to the shares held by the investor members. This usage generally means that the members have one vote each, regardless of their capital stake, and that their ownership relationship with the business is based on their use of its services or provision of services to it. The major examples in the UK are building societies registered under the Building Societies Act 1986, friendly societies registered under the Friendly Societies Acts 1974 and 1992, and both co-operatives and benefit of the community societies registered under the Industrial and Provident Societies Acts (IPSA) 1965 to 2002. It also extends to, for example, mutual insurance companies, such as Equitable Life, registered under the Companies Acts 1985 or with their own tailor-made structure as statutory or Chartered Corporations. The mutual insurance companies, building societies and friendly societies are usually ‘mutual’ in the strict sense of trading only with their members. Co-operatives may or may not also meet that stricter definition. Benefit of the community societies will never meet that definition as it is a condition of their registration under the Industrial and Provident Societies Acts that they serve people other than their own members. In principle, the legal structure used is not conclusive on the question of whether an organisation is a mutual or a co-operative. Company or partnership structures can be used to achieve mutuality or a co-operative structure. On the other hand, mutuality in some form within the wider definition given above is a requirement of registration under the special legislative regimes for industrial and provident societies and building societies mentioned above. This chapter will focus on the legal structure of the industrial and provident society, which is designed for cooperatives and benefit of the community organisations, as illustrating some of the legal issues and problems relevant to the Workshop. In short, if a group of founders establish a co-operative or a community benefit society or, indeed, a building society, should later members have the right to change the organisation into an investor-owned company? Does this, with the possibility of a ‘windfall’ gain for the members if the conversion takes place, amount to current members cashing in for their own benefit assets built up over decades or centuries by previous generations of members on the basis that the organisation would remain a co-operative or mutual? Conversely, does the possibility of conversion into a cooperative or mutual from a company allow the effective expropriation of the property rights of a minority who oppose that decision? Is the possibility of conversion from or to a mutual or cooperative necessary to remedy a possible business failure within the existing structure? How far

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does the question of the right later members should enjoy to convert the society into a company depend on the ‘legitimate expectations’ of the founders? Does the choice of a legal structure which from the beginning had the possibility of conversion built in undermine the argument that there was a legitimate expectation that conversion would be impossible? If an alternative structure, involving, for example, corporate vehicles and shares held subject to trusts (such as the John Lewis Partnership) would have achieved the objective, can one argue that the choice of a structure allowing conversion was deliberate? If members are to be allowed to convert should there be special majorities or procedures to deal with that decision? How should minorities be dealt with? Finally, if it is strange to make the current position depend on a historical founder’s intention, what should the law lay down for new organisations choosing their structures now? The industrial and provident society example is interesting as it involves a regulator with the remit of ensuring that only organisations meeting co-operative or community benefit criteria are allowed to register and remain registered. This chapter begins with an outline of the industrial and provident society regime. It then takes up the issue of conversion, examines recent law reform proposals in the area and concludes with a suggested way forward.

INDUSTRIAL AND PROVIDENT SOCIETIES: KEY FEATURES1 Section 1 of the IPSA 1965 permits the registration of a society if it meets certain requirements. Of these, the two central criteria are that: (a) (b)

It is ‘a society for carrying on any industry, business or trade (including dealings of any description with land), whether wholesale or retail’, and Either: (i) (ii)

it is a bona f ide co-operative society, or in view of the fact that its business is being or is intended to be conducted for the benefit of the community, there are special reasons why it should be registered as a society rather than as a company under the Companies Act 1985.2

In addition, its registered office must be in Great Britain or the Channel Islands, its rules must deal with all the matters listed in Sched 1 of the IPSA 1965 and it must have at least three members (or two if they are both registered societies). A society with withdrawable share capital cannot be registered with the object of carrying on the business of banking.3 The requirement of an object of carrying on any ‘industry, business or trade’ is sufficiently wide to impose few restrictions on the societies which may be registered. However, s 1 (3) of the Act provides that a society carrying on business with a view to making profits mainly for the payment

1

2 3

See 1 Snaith, The Law of Co-operatives, Waterlow, London, 1984, Ch 1; 1 Snaith, Handbook to Industrial and Provident Society Law, Holyoake Books, Manchester, 1993–2002, Ch 2; and 1 Snaith, ‘Regulating industrial and provident societies: co-operation and community benef it’, in D Milman (ed), Regulating Enterprise: Law and Business Organisations in the United Kingdom, Hart Publishing, Oxford, 1999 (on which this section is based). Ss 1(1)(a)-2 and 1 Snaith, ‘What is an industrial and provident society?’ (2001) 34 Journal of Cooperative Studies pp 37–42. Ss 1(1), 2(1)–(2) and 7(1),and the Deregulation (Industrial and Provident Societies) Order 1996 (SI 1996/1738), arts 3 and 4. Credit unions must meet different registration requirements under the Credit Unions Act 1979.

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of interest, dividends or bonuses on money invested with, lent to or deposited with the society or anyone else will not be regarded as a co-operative society. This makes the criteria of being a bona fide co-operative or conducting business for the benefit of the community the central registration requirements.

The nature of a co-operative The IPSA 1965 does not define a ‘bona f ide co-operative’ or, apart from the restriction in s 1(3), give any guidance to the interpretation of the phrase. That matter is left to the administrative discretion of the registrar. The Financial Services Authority Mutual Societies Registration Section (FSA) has published guidelines on its criteria. It requires the co-operative’s business to be conducted for the mutual benefit of the members with the benefits they receive deriving mainly from their participation in the business.4 The more detailed guidelines are based on what are now the first three of the seven Co-operative Principles agreed by the International Co-operative Alliance (ICA).5 These Principles have been developed from the practices of the ‘Rochdale Pioneers’ from whose consumer co-operative, established in 1844, the modern co-operative movement usually dates its origins.6 The First Principle requires that membership, on a voluntary basis and without discrimination on gender, social, racial, political or religious grounds, be open to anyone able to use the cooperative’s services and willing to accept the responsibilities of membership. This applies to people within the group whose needs the co-operative is established to serve: consumers for consumer cooperatives, employees for workers’ co-operatives, or tenants for housing co-operatives. This principle is intended to ensure that a group of existing members cannot exclude new members in order to increase their own claim on the assets and profits of the society. The Second Principle provides that co-operatives are to be democratic organisations controlled by their members, with elected representatives being accountable to the membership. In ‘primary’ co-operatives this is to take the form of ‘one member one vote’ while in secondary (or federal) cooperative organisations a more flexible concept of democratic organisation is required. This would permit voting by reference, for example, to purchases by retail society members from a ‘secondary’ wholesale society. The key concern of this principle is that, in a primary co-operative, voting control is in the hands of members as such and is not related to their capital contribution as would usually be the case in a registered company limited by shares. The Third Principle relates to the society’s capital structure and the economic participation of its members. It emphasises the democratic control by members of the co-operative’s capital and that limited compensation, if any, is to be paid on capital subscribed as a condition of membership.

4 5 6

FSA Information Note ‘Information on the registration of bona f ide co-operative societies under the Industrial and Provident Societies Act 1965’, 2001, pp 5–6. See 1 Snaith, Handbook to Industrial and Provident Society Law, Holyoake Books, Manchester, 1993–2002, section 3.3. See WP Watkins, Co-operative Principles Today and Tomorrow, Holyoake Books, Manchester, 1986, Ch 1; DJ Thompson, Weavers of Dreams, Davis, University of California, Center for Co-operatives, 1994; and J Birchall, ‘Co-operative values and principles: a commentary’ (1997) 30 Journal of Co-operative Studies 42.

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Any surplus not used as reserves, for the development of the co-operative, or for supporting other activities approved by the membership, is to benefit members in proportion to their transactions with the co-operative. Thus any dividend distributed to members must be related to their transactions with the organisation and not to the scale of their capital stake. In a consumer cooperative this would relate to members’ purchases from the society, for a workers’ co-operative to their work contribution, or in a marketing co-operative to their sales to the society. This is linked to the concept that the members control the society by voting rights unrelated to their capital stake, and emphasises the primacy of a membership benefiting from the co-operative’s activities over suppliers of capital gaining a financial reward. The remaining four ICA Principles are of less importance in determining the legal structure of co-operative organisations. The Fourth underlines the autonomy of co-operatives both from Government and from external suppliers of capital. Co-operatives are to remain ‘autonomous selfhelp organisations controlled by their members’ and the terms of agreements with other bodies should reflect this. The importance of education and training for co-operative members, elected member representatives and employees, and of informing the general public about the nature of co-operatives, is acknowledged in the Fifth Principle. The Sixth Principle emphasises the value of co-operation among co-operatives through local, national, regional and international structures, and the Seventh notes their commitment to ‘the sustainable development of their communities’. These matters must be permitted and facilitated by the legal structure but do not otherwise determine its form. The FSA’s predecessor, the Registry of Friendly Societies, stated that the requirement that a society be a bona f ide co-operative applies not only on first registration of the society (or on the registration of rule amendments, or on an amalgamation of societies) but also throughout the society’s existence. The issue is not only whether the society’s rules reflect the requirement but whether its business is run in accordance with co-operative principles or community benefit objectives. There may be some doubt as to how far the FSA is in practice able to police this operational requirement, but the policy clearly contemplates such an approach, and in 1990 two societies were investigated on this basis.7 It is clear that the FSA would consider complaints by members that a society was no longer a ‘bona fide co-operative’ and it has the power under ss 16 and 17 of the IPSA 1965 to suspend or cancel a society’s registration on the ground that it appears to the FSA that the society is not a bona f ide co-operative or a community benefit society.

What is community benefit? The focus of this requirement is on the benefit the society provides to people other than its own members, and on the fact that its business will be in the interests of the community. It would also be expected to have rules prohibiting distribution of its assets among members on dissolution and

7

I Snaith, Handbook to Industrial and Provident Society Law, Holyoake Books, Manchester, 1993–2002, section 3.3; ‘Report of the Chief Registrar of Friendly Societies 1989–90’, Registry of Friendly Societies, London, 1990, para 4.9; and see FSA Information Note ‘Information on the registration of bona f ide cooperative societies under the Industrial and Provident Societies Act 1965’, 2001, pp 5–6.

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of profits to members while its business continues. In addition, the co-operative requirements of member control and limited return on capital are usually applied.8 A key element in the statutory definition of societies to be permitted to register on this basis is that there should be ‘special reasons’ for registration under the IPSA rather than the Companies Act (CA) 1985. This is linked to the community benefit requirement as it is ‘in view’ of the conduct in the business to that end that the special reasons will be found. One could interpret this provision as a statement of fact, that in view of the community benefit purpose there are ‘special reasons’ for registration under the IPSA rather than the CA 1985. This would mean that once ‘community benefit’ was established the special reason was also made out. However, the FSA requires some additional special reason beyond the fact of community benefit, arguing that a company limited by guarantee can be used to achieve many of the features of a ‘non-profit’ organisation which benefits persons other than its own members and prevents asset distribution to members. The exemption from the need to register an industrial and provident society with the Charity Commissioners, and the power to pay interest gross without deduction of tax, are among possible reasons.9 It is submitted that the powers of the FSA to terminate the registration of a society not fulfilling the statutory requirements, as against the need for members of a company to seek court assistance to prevent inappropriate constitutional amendments, might also amount to a ‘special reason’. The inclusion of requirements about the substantive structure and objectives of a society as a condition of registration distinguishes industrial and provident societies from registered companies. It permits and, indeed, requires the FSA to satisfy itself that those conditions are satisfied at the point of registration. It also empowers the FSA to terminate registration if it takes the view that the relevant requirement is not satisfied. The policy justification for this approach is that the IPSA regime provides certain benefits not available to companies. Members of an industrial and provident society can be given the right to hold withdrawable share capital in a business organisation and to pass their shares and loan stock on death by nomination outside the general rules of testate and intestate succession. Societies can reorganise themselves and/or change the ownership of assets by conversion, amalgamation or transfer of engagements by special resolution, or end their existence by instrument of dissolution signed by a proportion of the membership without either court order or a formal winding up process.10 The regime provides a form of registration intended to ensure that the co-operative or community benefit nature of the registered society is preserved, and to permit aggrieved members to look to the regulator for assistance if that status is threatened. This would not be possible in the case of a registered company if a sufficient majority chose to alter the nature of the organisation in a formally correct manner. Only the minority shareholder protection rights conferred by ss 459– 61 of the Companies Act 1985 and the possibility of a just and equitable winding up under s 122(1)(g) of the Insolvency Act 1986 would be available to members with such concerns. Both of these remedies require court intervention. Since a minority of members of an industrial and provident society are unlikely to have a significant financial interest in litigating to protect the cooperative or community benefit nature of the society, the legislature has provided a regime

8 9 10

FSA Information Note ‘Information on the registration of benefit of the community societies under the Industrial and Provident Societies Act 1965’, 2001, pp 5–6. Ibid. IPSA 1965, ss 50–54 and 58.

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whereby those values can be protected by the regulator so long as the society does not convert itself into a company.11 However, the last qualification is vital. So long as that route is open to the members, there is a loophole in the regime. This brings us to the issue of conversion and demutualisation.

CONVERSION AND DEMUTUALISATION Perhaps the central question about the effectiveness of a special regime for societies is the issue of demutualisation. If a group of founder members establish an organisation with a constitution which operates in a particular way and on a particular basis, how far should the law permit them to tie the hands of their successors who may wish to alter the nature of the organisation—possibly for personal gain? The conversion of a significant number of the larger UK building societies from the special mutual structure with which they were established to banks in the form of PLCs with listed shares has raised this issue acutely. On such a conversion the members would typically receive a substantial amount in the form of a ‘windfall’ of shares in the PLC while retaining their status as depositors with the organisation. Before September 2002, when the Industrial and Provident Societies Act 2002 came into force, industrial and provident societies could be converted into companies by a majority of 75% of those voting on a resolution to achieve this.12 From 8 September 2002, in cases in which a resolution involves a transfer of engagements to, amalgamation with, or conversion into, a company, a 50% turnout threshold must also be met at the meeting at which the resolution is passed. This brings the law applicable to societies into line with the rules governing building societies, and was the immediate achievement of the Industrial and Provident Societies Act 2002. However, the legislation still lays down no provision as to the constitution of the company into which the society converts itself or to which it transfers its engagements. On the face of it, this means that 37.5% of the total membership could change a bona fide co-operative or a community benefit society into a registered company with equity shares and under the control of investor members with votes related to their level of shareholding. The procedures followed as to notice of meetings, method of voting and the information provided to members are all left to the rules of the society in question under IPSA 1965—even when a major transformation of the society is proposed. Under the legislation governing building societies and friendly societies such matters are supervised by the regulator. As a matter of policy the process for the conversion of industrial and provident societies is questionable even where the original members leave the matter to the general law of which they can be presumed to be aware. However, as a mandatory provision of the Act, which overrides any contrary provision of the rules of the society, it amounts to a rather odd charter for demutualisation. A society set up long ago to operate as a co-operative or community benefit organisation may have accumulated substantial assets by the efforts of its members and others. It can then apparently be converted into a company operating on a profit-making basis with listed

11 12

IPSA 1965, s 52 permitted this transformation or the amalgamation of a society with (or a transfer of its engagements to) a company: in each case by a 75% majority of those voting. IPSA 1965, s 52.

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shares and a substantial windfall to current members by means of a vote meeting a special majority requirement with an element requiring the turnout to reach a particular level, as is required in the case of a building society.13 Even after the 2002 reform, the ease with which conversion is possible leads to the risk of ill-considered demutualisation by the vote of a minority of the total membership of a society. This lacuna appears to be particularly irrational when, as the case law suggests, the courts may restrain a rule amendment if it can be shown that this would violate the intention of the founders of the society.14 In the House of Lords case of Hole v Garnsey it was accepted that certain changes to the rules of a registered society would not be permissible as being against the wishes of the founders. This view was not applied, but was accepted in the 1990 unreported case of Datchet Copartnership Housing and Allotment Society Ltd v Official Solicitor. In the latter case a rule change about the destination of the assets on a solvent dissolution was accepted as the rules themselves specifically permitted this with a special majority, which was obtained in the Datchet case. However, the principle stands on the current state of the authorities. It must be accepted that a modern House of Lords might not accept this limitation on the basis that Hole v Garnsey was decided at a time when court leave was required to amend the objects clause of a company and the example given by the House was just such an amendment of a society’s rules. However, the case did decide that an amendment to require members to contribute further capital could not bind them. This limitation on the amendment of rules is particularly appropriate in the case of a benefit of the community society to prevent a change to turn it into a co-operative or a non-charitable/nonaltruistic company so that the assets can benefit the members—the very opposite of the defining feature on which basis the society was registered. A provision to prevent such a change in the case of benefit of the community societies was included in the Industrial and Provident Societies Bill 2002 but was withdrawn due to Government opposition during the passage of the Bill.15 It is right that the legislation now, as a minimum, requires a proportion of the total membership to participate in fundamental decisions, as the legislation governing building societies does.16 One might argue, particularly in the case of community benefit societies, that such a conversion—or indeed a de facto ‘conversion’ by rule amendments from a community benefit society into a bona fide co-operative—should either be prohibited or subjected to some scrutiny by the regulator. The present law makes clear the inadequacy of the industrial and provident society as a means of protecting particular objectives as compared with a charitable trust. (Since this paper was

13 14

15

16

The Co-operative Union (known from 3 February 2003 as Co-operative UK), in its 11th Edn Model Rules for consumer co-operative societies, attempts to achieve this by applying a high quorum provision and threshold for calling meetings where such a conversion is proposed. Hole v Garnsey [1930] AC 472 and Datchet Co-partnership Housing and Allotment Society Ltd v Off icial Solicitor, Court of Appeal (Civil Division) (Transcript Association) 19 May 1990 LEXIS and the discussion in I Snaith, Handbook to Industrial and Provident Society Law, Holyoake Books, Manchester, 1993–2002, sections 4.5.1 (ii) and 12.7. See Hansard, House of Commons Debates 2001–02, Vol 383, Col 813–52. A further Private Member’s Bill, The Co-operatives and Community Benefit Societies Bill, was published on 11 December 2002 and had its second reading on 31 January 2003. It deals with this issue after the publication in September 2002 of the Cabinet Office Strategy Unit Report ‘Private action, public benefit’ which recommended just such a change as part of a wider review of charity law and the legal structures available to ‘the wider not-forprofit sector’. Building Societies Act 1986, s 97 and Sched 2, para 30.

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presented, this issue has been addressed by the Cabinet Office Strategy Unit Report ‘Private Action, Public Benefit’17 which is briefly discussed in the final section of this published version of the paper. The Report indicates that this issue is now being seriously addressed by Government as part of the wider review of the position of charities and the wider ‘not-for-profit’ sector—including social enterprises.) It is worth briefly addressing the question of the conversion of a company into a co-operative or a community benefit society. Amendments to the company’s own constitution would be subject to the applicable company law rules—a vote in good faith in what the majority perceived to be the company’s best interests.18 More realistically a minority could bring to the court, under ss 459–61 or as a petition for a members’ voluntary winding up on the just and equitable ground, a case based on the concept that a change to the constitution—for example from one share one vote to one person one vote, or from a standard commercially orientated objects clause to a benefit of the community or charitable one—was unfairly prejudicial to the minority shareholder or warranted a ‘just and equitable winding up’ of the company. Those mechanisms might well be used to prevent a violation of the property rights of the minority if it went against the agreement on which the foundation of the company was based. This might also apply to a formal attempt under s 53 of the IPSA 1965 to convert the company into a society, as the resolution required is a Companies Act 1985 special resolution which could be subject to minority objection in the same way as an amendment to the company’s own constitution. The IPSA 1965 has no equivalent to ss 459–61 of the CA 1985. More fundamentally, by the very nature of the co-operative or community benefit society, there will be little financial incentive for minority members to object to a change which will improve their financial position. When conversion is mooted in the other direction, such an incentive clearly exists. This is a justification for regulatory protection of the co-operative or mutual status of the organisation.

LAW REFORM: PROPOSED AND POTENTIAL CHANGE The need for reform The analysis presented in this chapter so far illustrates that there may be a case for reform of the law on industrial and provident societies. In recent years a number of developments have indicated that such measures might be in prospect. The most recent, the Industrial and Provident Societies Bill 2002, succeeded in addressing the turnout threshold issue but failed in its attempt to deal with the ‘lock in’ of community benefit status. The Co-operative and Community Benefit Societies Bill 2003 makes a further attempt to deal with the issue in the wake of the publication of the Cabinet Office Strategy Unit Report.19 As long ago as 1995, the United Kingdom Co-operative Council (UKCC), an umbrella

17 18

Cabinet Office Strategy Unit Report, ‘Private action, public benefit: a review of charities and the wider not-for-profit sector’, September 2002, available from www.strategy-unit.gov.uk/2001/charity/ main.shtml. Allen v Gold Reef [1900] 1 Ch 656.

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organisation for all co-operative sectors established in 1991 as a voluntary successor to the former statutory Co-operative Development Agency, published a proposal for a new Co-operatives Act for the United Kingdom.20 This proposal advocated a new framework Act for co-operatives, which would, subject to limited exceptions, limit the use of the word ‘co-operative’ in the name of an organisation to those registered under the new Act. The proposal also intended to remove the main discrepancies between company law and co-operative law on matters such as insolvency, corporate capacity, capital maintenance, accounting requirements and so on. The proposed legislation would have established a Co-operatives Commissioner with specific responsibility for cooperatives and power to regulate their operation.

The 1998 Consultation Document The UKCC Proposal and a draft Bill to implement it were the subject of discussions between the Treasury Ministers, Registry of Friendly Societies (RFS) and the UKCC in 1997 and 1998.21 This led to the publication in May 1998 of an RFS Consultation Paper on proposals for a new Industrial and Provident Societies Act. This put out for consultation proposals for the reform of the existing legislation applicable to all societies, whether co-operatives or community benefit societies. It took up many of the UKCC suggestions and added others which concerned the RFS. Comments were invited from all interested parties on the basis that the present legislation was being reviewed ‘with a view to updating it should a legislative slot become available’.22 The tenor of the Consultation Document indicated that any law reform in this field proposed by Government would be likely to be applied to the whole range of industrial and provident societies, rather than to particular types of society such as co-operatives, and that it might take the form of amending legislation—perhaps with enabling powers to permit the application by Statutory Instrument of current and future provisions of company law to societies (the approach adopted in the Industrial and Provident Societies Act 2002). Greater speed and economy in the registration process by the use of statutory declarations is envisaged in the document, with greater powers being conferred on the FSA to deal with violations uncovered at a later stage. Such reform would retain the special nature of these societies.

The Industrial and Provident Societies Act 2002 Since the 1998 Consultative Document, Government legislative time has still not been found for substantial reforming legislation. However, Gareth R Thomas, MP for Harrow West, brought forward a Private Member’s Bill in July 2001 which passed to Royal Assent in July 2002 and so

19 20 21 22

See above, fn 17. United Kingdom Co-operative Council, A Proposal for a Co-operatives Act for the United Kingdom, UKCC, Manchester, 1995. See Registrar’s 1997 Report, p 8. HM Treasury and the Registry of Friendly Societies, Proposals for a New Industrial and Provident Societies Act, RFS, London, 1998, para 1.

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became law. The Bill was supported by the Co-operative Movement and by a wide range of other organisations using the industrial and provident society structure—from the Women’s Institute Markets through Allotment Societies to workingmen’s clubs and other social clubs. However, for the purpose of this chapter it is interesting to note that the main attempt of the Bill to protect the altruistic nature of certain industrial and provident societies did not survive the Parliamentary process. The Bill originally had three clauses: (1) A provision that co-operatives could only to be converted into companies on a 75% majority vote plus a 50% turnout (parity with building societies). (2) Powers for ministers to use statutory instruments to assimilate industrial and provident society law and company law in areas where variations were not central to the nature of societies, for example accounting rules, ultra vires, insolvency, and formalities in executing documents. (3) Benefit of the community societies were to be allowed to include within their rules a provision prohibiting their conversion into any body other than either a society or company to benefit a community, or a charity. In other words they could not be changed so that their members benefited from their assets and activities. The first two provisions remained in the Bill and became law, albeit with the proviso that the power to amend by statutory instrument could only be used after changes to company law. The third one had to be dropped, as the Government did not support it and preferred to wait for the Strategy Unit Report on social enterprise and the wider not-for-profit sector, due later that year, which was to deal with the issue of protecting non-commercial objectives. Why did the 2002 Bill seek to deal with the ‘entrenchment’ issue in the way that it did? The logic was that since co-operatives are member-controlled organisations, it is not unreasonable for the members to be able to convert them into a different structure if they choose. It also has to be confessed that it was felt to be politically ‘realistic’ to seek parity with building societies—a mutual ‘cousin’. Even with co-operatives, there is an argument about the founders’ intent to keep the organisation always in its original structure, and in some societies’ rules this is spelt out and an attempt is made to give it legal effect. However, whatever the case for co-operatives, there is clearly a stronger argument for the full legal entrenchment (or ‘asset lock’) in the case of benefit of the community societies. They are set up to serve people other than their members and should remain dedicated to that. The regulatory system achieves that, with the major loophole that conversion into a company is probably always possible, although attempts are often made to use (for example) quorum requirements to make it difficult. The practical reason for wishing to achieve this in 2002–03 was to facilitate the development of new ‘mutual’ models for some functions leaving full public sector control, such as ‘foundation hospitals’ and residential care homes, and for others departing from the private sector such as certain utilities and the replacement for Railtrack. The model is already in use for football supporters’ clubs, which use the benefit of the community industrial and provident society structure with a multi-stakeholder board. If these structures are to be available more widely as a model for a form of social enterprise, the loophole needs to be plugged. While housing associations currently use the model extensively, the role of the Housing Corporation in providing finance, and their regulatory powers in the sector, prevent demutualisation or privatisation in that sector. Statutory protection is needed if the structure is to be used in other sectors. If it is not

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available, one is left with the company limited by guarantee (CLG) which suffers from the absence of a regulator to prevent a change in the structure for non-charitable organisations; the Charity Commissioners do this only for registered charities in the CLG form. One argument against the ‘asset lock’ was the risk of business failure and the resulting inability to rescue the entity by conversion. This appears to be based on a misunderstanding. The ‘lock’ applies to the value in the organisation, which can only be distributed or used on a co-operative or community benefit basis, as the case may be. It does not prevent the sale of part or all of the assets as a going concern or otherwise in return for any consideration including shares in a private sector investor-controlled company. It only requires that whatever remains in the entity registered as an industrial and provident society must not be distributed to members other than (in the case of a co-operative) on the basis of patronage. Therefore rescue is not made more difficult. More fundamentally, there is an argument about whether existing members should, other than unanimously, be able to impose a legally binding rule preventing conversion. It can be argued that this presents a minority protection issue and that the absence of a s 459 of the CA 1985 equivalent in the IPSA prevents it from being addressed. However, in the case of a benefit of the community society this argument assumes that the members understood the possibility of conversion out of the altruistic form as a possibility when they joined or formed the society. If one assumes, as is likely to be the case in reality, that they assumed it was impossible to convert out of the ‘altruistic’ form then that argument disappears.

CONCLUSIONS The Industrial and Provident Societies Act 2002 has achieved a certain amount. The 50% turnout threshold for co-operatives, which was proposed on the basis that benefit of the community societies had an even higher level of protection (if they chose to use the power they were given under one of the Bill’s other clauses) has become the only anti-demutualisation provision. It is welcome but it leaves the anomaly that benefit of the community societies are less well protected in reality than co-operatives. For the future, there would seem to be no argument against permitting people who establish either co-operatives or benefit of the community societies to provide that the status is unchangeable, as long as they understand the effect of this. The existence of the FSA as a regulator creates the possibility of warning people establishing a society of this and, on that basis, it is hard to see any objection to permitting such asset protection. Founders’ intentions and legitimate expectations would then be protected after an assurance that the founders knew what they were doing. In the case of benefit of the community societies, this provision should perhaps be mandatory in all cases. For co-operatives it would ideally be an option. The role of the FSA allows for the ‘altruistic’ intentions or, alternatively, ‘trust’ or ‘charitable’ style objectives to be protected without the need for resort to the courts in these enterprises. While the definition of charitable objects remains so narrow and the use of a non-charitable ‘purpose’ trust without a corporate structure is not possible, an effective and legally protected use of the industrial and provident society structure for these purposes is vital. The Report of the Strategy Unit of the Cabinet Office23 on these matters was published with background papers in September 2002. Its recommendations tackle the issues raised in this chapter directly and in the context both of charities and of the wider ‘not-for-profit’ sector. It recommends

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the extension of the existing list of charitable objects to 10, with a ‘sweeping up’ objective of ‘other purposes beneficial to the community’, but would make this subject to a requirement that all charitable organisations provide a benefit to the public. It also suggests modest but useful changes to the regulatory system applicable to charities and addresses the problem of legal structure. It recommends the creation of two new legal structures: the ‘Community Interest Company’ (CIC) and the ‘Charitable Incorporated Organisation’ (CIO) as well as the reform of industrial and provident society law which would become ‘co-operative and community benefit society’ law. The CIC would be a company limited either by shares or by guarantee, and subject to a special registration process akin to that applied to industrial and provident societies to ensure that on registration, and when any amendments to its constitution are made, it retains its ‘public and community interest’ objects.24 The CIO would be a new incorporated legal form solely for charities, conferring limited liability on members but having either a member-based or a foundation format, with a regulatory role for the Charity Commissioners, and model constitutions appropriate for particular sectors.25 The reform of industrial and provident society law would retain the division between co-operatives and benefit of the community societies, provide a statutory definition of a co-operative along the lines of the ICA Statement on the Co-operative Identity, and rename them co-operative and community benefit societies while removing the expression ‘industrial and provident society’ from the statute book. The proposals for new structures deal with the problems raised in this chapter by providing that the assets of a CIC would be protected against distribution to members or shareholders and that a CIO would be prohibited from changing its constitution to allow use of assets for any purpose other than the purely charitable.26 In the case of the new co-operatives and community benefit societies, the provisions of the Industrial and Provident Societies Act 2002, raising the turnout threshold for conversion and demutualisation for co-operatives, would be applied to all these societies: community benefit societies would, in addition, be permitted to ‘lock’ their assets by preventing distribution or the transfer of such assets to a non-community benefit organisation.27 In addition there would be appropriate assimilation of parts of company law—presumably using the powers granted by the Industrial and Provident Societies Act 2002 and s 255 of the Enterprise Act 2002 in respect of insolvency rescue procedures. The Cabinet Office Strategy Unit proposals have been the subject of consultation in 2002 and will be subject to further technical consultation. In the meantime, the Co-operative and Community Benefit Societies Bill 2003 seeks to speed up the process of reform of industrial and provident society law.

23 24 25 26 27

Cabinet Office Strategy Unit Report ‘Private action, public benefit: a review of charities and the wider not-for-profit sector’, September 2002, available from www.strategy-unit.gov.uk/2001/charity/ main.shtml. Ibid, paras 5.19–32 and Box 5.2. Ibid, paras 5.43–46 and Box 5.3. Ibid, para 5.22 and Box 5.2, and Report from the Advisory Group to the Charity Commission ‘Charitable Incorporated Organisations (Version—Spring 2001)’ para 2.2, available from http://www.charitycommission.gov.uk/enhancingcharities/incorporg.asp. Cabinet Office Strategy Unit Report ‘Private action, public benefit: a review of charities and the wider not-for-profit sector’, September 2002, paras 5.36–37, available from www.strategy-unit.gov.uk/2001/ charity/main.shtml.

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The Cabinet Office proposals would seem to allow for a proliferation of structures and of regulators. The FSA would presumably retain its role in respect of co-operatives and community benefit societies. Would it be the Registrar of Companies or the FSA which performs the same role for CICs? CIOs would be policed by the Charity Commission. In the case of the benefit of the community society, asset locking would be optional for the CIO, and for the CIC it would be mandatory. How can this be justified? However, the resulting situation would be a great improvement on the present position for non-charitable not-for-profit organisations and social enterprises. Legitimate expectations will be protected in more cases than at present, and the ‘brand’ of both the co-operative and the community benefit society will be much better protected. This is progress.

Chapter 19 Rapporteur’s overview: between morality and formalism in property, obligations and restitution Alastair Hudson THE CENTRAL CONCEPTUAL QUESTION Rival starting points As considered in the introduction to this book, the principal focus of the contributors has been as to the manner in which proprietary and personal remedies are awarded and how their awards are justified or explained. In particular those contributions concerned with restitution have focused on technical, doctrinal and taxonomic matters rather than on any concern as to the justifications for property law itself.1 Within the essays in this collection is a straightforward division in opinion as to whether or not it is possible to achieve a taxonomy which will deal effectively with the range of property-based claims considered here.2 So Jaffey3 presents an account of the lack of a viable principle of unjust enrichment together with a model to occupy the void, whereas Hedley4 questions the basis of the current unjust enrichment taxonomy and Rotherham5 has encourages us to believe that we should think about the law as being more open-textured than such a rigid taxonomy would allow. Much of the debate has centred around the division between property, obligations and unjust enrichment.6 Or should that be between property, contract, tort and unjust enrichment? Or should we be most concerned with whether or not unjust enrichment and restitution are necessarily to be linked together under the quadration thesis?7 What of the trust: ought it to be put in the box marked ‘property’ or that marked ‘obligation’?8 It could be said that these rival starting points coalesce around a more profound issue: whether a rigid structure is necessary for there to be something which we can rationally describe as coherent private law;9 or whether it is enough that we identify a range of general principles in response to which rights, duties and goods are dispensed by the courts within a more general discourse as to the nature of those rights? The former approach is concerned, inter alia, with the legitimacy and effectiveness of private law if its principles are not ordered and clear. Little is said in such taxonomies about the reasons why one view is better than another: clarity is itself considered

1 2 3 4 5 6 7 8 9

Jaffey, this collection, 165. Cf Lametti, this collection, 39; Pearce, this collection, 87. More papers in this line were delivered at the symposium itself. Jaffey, this collection, 165; Virgo, this collection, 214. Hedley, this collection, 151. Rotherham, this collection, 187. Virgo, this collection, 203; Rotherham, this collection, 187. See, eg, Jaffey, this collection, 165. Hudson, Equity & Trusts, 3rd edn, London: Cavendish Publishing, 2003. See, eg, Birks (ed), Private Law, Oxford: Oxford University Press, 2000.

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to be an intrinsic good. The latter, flexible approach has a less intuitive appeal for lawyers, in part because it appears to be disordered and in part because it appears to leave judges too much discretion.10 Alternatively what it might offer is a means of applying public policy in a way that is sensitive to context and reactive to change. The ideal system, however, would appear to respond slavishly to neither pole but rather to reside somewhere in between. That, it is suggested, is the heart of the problem: even if the principal virtue of any legal system is the development of certainty,11 the principal feature of human societies is their proclivity to generate change and thus uncertainty. As Steve Hedley points out, exercises in taxonomy like those propounded in this book occur periodically.12 They are to be expected particularly in times of great social change such as those we are currently experiencing, as discussed in my own contribution,13 when there appears to be only confusion otherwise. Therefore, those of a positivistic mindset will seek certainty and order, whereas those of a more open-textured turn of mind may prefer the general deployment of multi-layered, foundational principles.

Dividing between positivism and morality It is possible, therefore, to identify one dividing line between these contributions from the outset: that is, the line between positivist and moralist approaches to property law. The doctrinal concerns of restitution lawyers are principally concerned with doctrine and the internal organisation of legal and equitable claims. The central goal is ‘coherence’14 among claims. Consequently, much restitutionary thought not collected here has advocated unification of claims, such as common law tracing and equitable tracing into a unitary law of tracing,15 or novel divisions within long-established remedies to advance the simplicity of their organisation, such as the division of the law of subrogation between simple subrogation and reviving subrogation.16 There is an assumption in this theory that the law is the law because it is properly established through the courts and that the task of rendering the law coherent can equally well be undertaken by judges empowered to change the direction of the law. That is, the law of restitution is a primary rule established by the secondary process of its judicial acceptance. The restitution lawyers are keen to identify their concept of unjust enrichment as being a purely technical concept which does not carry any conceptual baggage as to the notion of ‘justice’ which it might otherwise suggest;17 although other restitution writers accept that there is a place for recognising the basis on which the law of restitution is founded. Indeed it is this reluctance to debate the content of that complex word ‘unjust’ which is, it is suggested, the element of

10 11 12 13 14 15 16 17

Hudson, this collection, 27. Oakley, Constructive Trusts, London: Sweet & Maxwell, 1997, 1. Hedley, this collection, 151. Hudson, this collection, 4. Burrows, The Law of Restitution, London: Butterworths, 2002. Birks,’Overview: tracing, claiming and defences’ in Laundering and Tracing, Birks (ed), Oxford: Clarendon Press, 1995, 289; Smith, The Law of Tracing, Oxford: Clarendon Press, 1997. Mitchell, The Law of Subrogation, Oxford: Clarendon Press, 1995. Birks (ed), Lessons of the Swaps Cases, London: Mansfield Press, 2000.

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restitution thinking which is most likely to restrict it to commercial cases. Compared with the Canadian concept of unjust enrichment, used to allocate rights in the home on grounds of nonfinancial contribution to family life,18 the English model appears to be very limited. Indeed without developing a meaningful concept of ‘injustice’ it would be impossible for English restitution to grow beyond its commercial roots. Compared also with the constructive trust, which restitution enthusiasts typically denigrate for acting as a mere response without defining sufficiently clearly its causative event,19 the model of English unjust enrichment offers no means for judges to respond in general terms to behaviour which they consider to be unjust in the broadest possible terms. By contrast, those who consider that the trust operates on the basis of an intellectually sound and historically demonstrable notion of conscience are able to retreat to a central principle by reference to which we can justify the imposition of all constructive and other trusts.20 The viability of conscience thinking is considered below; first, the interaction between restitution-thinking and property law.

Restitution based on commercial contract law, not property law In truth, the law of restitution is based on commercial contract law because it is in that context that it makes most sense. My suggestion is that even at this root the law of restitution operates only adjectivally and not at all prescriptively. By that I mean that restitution-thinking, through its tendentious promulgation of a notion of unjust enrichment, achieves nothing other than the collection together of previously-existing legal and equitable doctrines which respond at least superficially to the general notion of achieving restitution of unjust enrichment. The notion of unjust enrichment itself does not actually change those doctrines. Rather, the term ‘restitution’ has slipped into the judicial vocabulary for the most part without effecting any noticeable alteration to the underlying structure of those doctrines (such that, for example, equitable tracing has continued to be a part of property law in its old form) or alternatively the language of restitution has been applied incorrectly with the effect that the intentions of its authors have been frustrated—for example Mitchell’s explanation of the doctrine of subrogation has been accepted by the House of Lords as operating in response to restitution21 whereas Charles Mitchell always argued that the remedy of subrogation was itself restitutionary.22 That is not to suggest that the work of restitution lawyers in particular areas has not been very valuable indeed in raising problems or unearthing historical roots long forgotten;23 rather, it is to suggest that the concept of unjust enrichment itself is not the coherent marshalling point it was once considered to be. Indeed, the proliferation of restitution scholarship has merely served to

18 19 20 21 22 23

Peter v Beblow [1993] 101 DLR (4th) 621. Birks, Introduction to the Law of Restitution, Oxford: Clarendon Press, 1989. Eg, Hudson, Equity & Trusts, 3rd edn, Cavendish Publishing, 2003, Ch 12. Bonque Financière de la Cité v Parc (Battersea) Ltd [1998] 2 WLR 475. Mitchell, op cit, n 16. Eg, Smith, op cit, n 15.

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underline the fact that whatever is meant by ‘restitution’ is open to many interpretations, as amply demonstrated by the contributions to this volume. In consequence, the doctrine of restitution has splintered into incoherence whereas, ironically, it was always intended as a means of achieving coherence.24

What does restitution mean? The word ‘restitution’ operates in different senses. To a property lawyer the term ‘restitution’ suggests ‘restoration’ of property in the sense of returning to the original owner of property possession of a tangible movable or possession of the rights of ownership in other property.25 For property lawyers this is a very antique usage of the term restitution which arises, for example, where a trustee is made liable to restore to the trust fund the very items of property which were transferred away in breach of trust.26 By contrast the composite expression ‘to make restitution’ suggests a broader notion of compensation or recompense which suggests a fault in the defendant which is somehow made right. This sense of the term does not simply require restoration but rather something broader. Clearly, restitution lawyers intend something broader than simply returning the original property taken by the defendant. So it is that restitution lawyers come to the idea of ‘restitution of an unjust enrichment’. That is, the obligation to make restitution arises where the defendant has been unjustly enriched, which in itself begs the question, considered next, as to what is meant by ‘unjust enrichment’. At this stage we have identified, however, a line between simple ownership of property and more complex obligations to account in some way to the claimant because of the unjust enrichment. This second category is more easily conceived of as a species of obligation than as a convincing means of conducting property law. It is this ‘ease of fit’ which, it is suggested, lies at the heart of the House of Lords’ decision to distinguish between property law and the law of unjust enrichment in Foskett v McKeown,27 which in turn causes Craig Rotherham so much perturbation.28 The restitutionary response is satisfied either by personal claims or by property claims: but in either case in response to the unjust enrichment. This is more akin to a remedy under the law of obligations than to the formalistic logic of property law. Hence the division over Foskett in which Graham Virgo sees his theory of vindication played out successfully,29 but which Birks considers heretical within the restitution canon for operating otherwise than on the basis of a causative event,30 and which Rotherham resists for its understanding of property law.31

24 25 26 27 28 29 30 31

Burrows, op cit, n 14. Swindle v Harrison [1997] 4 All ER 705. Ibid. [2001] 1 AC 102. Rotherham, this collection, 188. Virgo, this collection, 204. Birks, op cit, n 19. Rotherham, this collection, 195.

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Talking the language of justice Throughout the development of the unjust enrichment principle the term ‘unjust’ itself has remained a purely technical device expressing the ‘unjust factors’ which give rise to restitution.32 Alternatively, the doctrine is said to be one of ‘unjustified enrichment’ which offers the possibility of a much broader theatre of conflict to any situation in which the defendant must justify the enrichment realised.33 This heightens the problem of what is just and unjust, justified and unjustified. The spectre of the unspoken value judgments bound up in those terms stalks the otherwise productive valley of the restitution lawyers as their word processors sleep at night. Little mention is ever made of the Canadian usage of unjustified enrichment in relation to rights in the home, where the entire doctrine is driven by explicit value judgments such as the value to be accepted to the work contributed to the home by a wife and mother.34 These are sociologically loaded concerns which would make an English property or restitution lawyer blush. Importantly, they are meat and drink to family and welfare lawyers.35 This volume thus reads in stark contrast to its sibling New Perspectives on Property Law, Human Rights and the Home36 in which the analysis of such value judgments is the stock-in-trade of almost all the contributions. In essence, then, I suggest that restitution theory needs to tidy up its own room before tackling the rest of the house. I would suggest furthermore that the question remains at large: what is the justification for permitting proprietary remedies and what does such a justification have to say about the nature of property in law?

BOUNDARIES BETWEEN PROPERTY LAW, OBLIGATIONS AND UNJUST ENRICHMENT Proprietary rights are made and not simply recognised Craig Rotherham suggests persuasively in Proprietary Rights in Context37 that as a question merely of observation judges create new property rights regularly. That is, judges do not always require that there be some pre-existing property right which they will recognise. Rather, there are many instances in which a proprietary remedy will be made available when the property in question was not ‘owned’, in the broadest sense of that awkward term,38 such as the constructive trust in

32 33 34 35 36 37 38 39 40

Birks op cit, n 19, Burrows op cit, n 14. Eg, Birks, ‘Misnomer’, in Cornish et al (eds), Restitution and Banking Law, Oxford: Mansfield, 1998, 198. Peter v Beblow, op cit, n 18. A constituency amply represented in the sibling volume New Perspectives on Property Law, Human Rights and the Home. Unwittingly, the success of these conference papers has necessitated their publication in two volumes, rather than one, and so perpetuated the intellectual apartheid I identify here. New Perspectives on Property Law, Human Rights and the Home, Hudson (ed), London: Cavendish Publishing, 2003. Rotherham, Proprietary Rights in Context, Oxford: Hart Publishing, 2002. See Cooke, this collection, 117. [1994] 1 AC 324. Virgo, this collection, 217.

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Attorney-General for Hong Kong v Reid39 and more generally tracing into assets substituted for the claimant’s original property. As Graham Virgo recognises,40 the property claim at issue in these cases has ceased to be ownership of any particular item of property and has translated instead into the value constituted by the claimant’s original ownership and its manifestation in any substitute property. What is most galling for the restitution lawyers is that the remedy does not necessarily follow the claimed right in the cases. Birks would much prefer a world in which the recognition of a right connoted an automatic response, an automatic imposition of the remedy which is bound up with that right. So, for example, a breach of contract claim necessarily carries with it a right to damages, it is said. This is true of many contractual claims in which damages follow the cause or in which specific performance or rescission are made available in clearly delimited circumstances. If one were feeling argumentative one might point out at that stage that there remains the possibility for the claimant seeking either damages, rescission, or specific performance of the contract. Furthermore, the judge would have it in her power to award or not to award specific performance or rescission, dependent on the facts of the case,41 and so qualify even further the suggestion that a right necessarily carries with it its own remedy. However, such a position could not be supported in relation to property law precisely because, as I seek to demonstrate in my own contribution to this volume,42 the nature of the property at issue in many of these cases (for the most part money held in electronic bank accounts) does not conform to the traditional understanding of property as something which is even transferable, let alone capable of easy segregation.43 Compounding the difficulty of seeking to develop coherent law in relation to incoherent forms of property is the need to recognise that a specific remedy will not always follow an identified right, personified in doctrines such as election between remedy,44 the existence of which necessarily assumes the possibility of selecting one’s remedy once the case has been made out. It is true that the choice of remedy is à la carte: there is no possibility of going into the kitchen and asking for any response you like. Nevertheless, the doctrine of injunction in equity suggests that while the name given to the remedy might be clear, the precise form which that remedy will take is a matter for the court acting in its general discretion.45 Therefore, there are circumstances in which there is more than one remedy available in theory, circumstances in which the nature of the property at issue means that the award of remedy will necessarily be complex, and circumstances in which the remedy may be known but the detail of its award may remain a matter for judicial discretion.

41 42 43 44 45

That is, in relation to specific performance for example, the judge has it within her power to decide that damages would be a sufficient remedy or that the contract was, for example, one for personal services and so inappropriate for specific enforcement. Hudson, this collection, 4ff. Don King v Warren [2000] Ch 291; cf Penner, The Idea of Property in Law 1997, Oxford: OUP, Eg, Tang v Capacious Investments [1996] 1 All ER 193. The question as to whether judges tend in truth to consider themselves to be blessed with a strong or merely a weak discretion is another issue, I would suggest. In truth, of course, English judges will only accept that they have a weak discretion even when acting under statutory powers which empower them to act as they consider equitable and reasonable: Jaggard v Sawyer [1995] 1 WLR 269. It is suggested that such judicial coyness would please Prof Dworkin and satisfy his nervousness of strong judicial discretion: Dworkin, Taking Rights Seriously, London: Duckworth, 1978.

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If remedies do not always arise coherently and predictably, is it always possible to know whether or not doctrines and remedies draw on property law or the law of obligations?

Back to basics: morality and formalism There is one central cleavage between the essays in the first two parts of this book, as outlined at the start of this chapter: namely, the formalists seeking new taxonomies and those concerned with moral bases in the law.46 The doctrinal discussion of property and of property law frequently overlooks the fact that there is little coherence within property law itself.47 Necessarily, doctrinal decisions clash with moral decisions; the clearest discussion of this phenomenon being Grantham’s dissection48 of the formalistic tendency in Re Goldcorp49 and of the moralistic tendency in AttorneyGeneral for Hong Kong v Reid,50 where the former is predicated on the need to identify property with certainty and the latter on the unconscionability of permitting the defendant to retain property realised from the profits of bribery. The point that I made in my own contribution to this collection 51 is that our social understandings of property are not coherent.52 For some, property is only ever an asset to be turned to account and therefore exhibits a lightness; for others, property imposes burdens of maintenance and worries about its financing and security, thus demonstrating great weight. Consequently, the different contexts in which property law operates will mean that there are different perceptions of the lightness and weight of property law norms there too. Then moving away from commercial and domestic perceptions in the world generally, and into the citadel of legal ideas, it is possible to see that the legal perception of property has also changed markedly over time. Whereas property law perhaps began in its earliest anthropological forms with the segregation of sacred sites,53 agricultural land and ownership of livestock away from general use, it has transformed over time into personal property law, intellectual property law and even into forms of property which are made up solely of electronic records of intangible assets or which are contractual obligations which are not even transferable.54 David Pearce focuses in detail on the Romanic and earlier anthropological roots of property law. He identifies Hohfeld’s complaint that too much property law seeks to treat as simple that which is complex.55 It is important to take stock of these transformations in the business of property law. It is important once again to examine our public policy priorities in relation to that primal essence: property.

46 47 48 49 50 51 52 53 54 55

Lametti, this collection, 39. Hudson, this collection, 36. Grantham, ‘Doctrinal bases for the recognition of proprietary rights’ (1996) OJLS 561. [1995] 1 AC 74. [1994] 1 AC 324. Hudson, this collection, 36. See also Picciotto and Campbell, this collection, 305. Cotterrell, Emile Durkheim—Law in a Moral Domain, Edinburgh: Edinburgh University Press, 1999; Mauss, A General Theory of Magic, trans Brain, London: Routledge, 1972; cf Pearce, this collection, 89. Don King v Warren [2000] Ch 291. Pearce, this collection, 89.

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TWO CHEERS FOR CONSCIENCE That equity acts in personam against the defendant’s conscience What has received only limited attention in this volume, thus far, is any detailed discussion of the conscience which is at the heart of equity.56 William Swadling has expressed his concern with this notion in other places57 and a similar taxonomy of trusts presented at the symposium suggests that his affection has not grown. Equity operates ostensibly through judicial discretion against the conscience of the individual defendant and yet it is based on formally-generated, juristic principles. Thus equity is at one and the same time a means of ensuring justice in individual cases, perhaps personifying a recognition within the legal schema of the fragility of the human condition, whilst also constituting a code of abstract, technical rules which are applied by judges carefully in accordance with case law precedent Consequently, equity is free and yet constrained. The solution to this apparent conundrum, it is suggested, lies in a fuller understanding of the nature of ‘conscience’ in this context and in understanding that equity is, in truth, a mosaic of doctrines, principles and patterns of justice provision. The trust, used here as an example of an equitable device, is responsive to the conscience of the legal owner of property. That is the sense in which equity acts in personam, not in the sense that it somehow only gives personal awards: rather, in that equity is a moral jurisdiction which comments on the rights and wrongs of the behaviour of an individual defendant.58 Equity acts against the person and so acts in personam. It judges the individual’s conscience. This may manifest itself by means of express trusts through the action for breach of trust which compels the trustee to permit no conflict of interest, no loss to the beneficiaries nor any deviation from the terms of her trusteeship;59 or it may manifest itself by means of trusts implied by law which seek to prevent the legal owner of property or some other person from taking a benefit unconscionably from that property.60 Another example of an equitable device is the interlocutory (or interim) injunction which permits the court to use its discretion in accordance with principle to decide whether or not a prima facie case has been sufficiently well established to justify the imposition of such an injunction restraining disposal of property, removal of assets from the jurisdiction or the continuation of otherwise lawful activities.61

Conscience as an objective phenomenon outside the subject Nevertheless, this troublesome term ‘conscience’ remains. If equity were said to act on the basis of ‘a public morality expressed through the courts’ then that would not lead to the uncomfortable muddle which is generated by the modern usage which suggests that equity is concerned with the individual defendant’s conscience rather than with the embodiment of the sovereign’s conscience through the actions of her officials and delegates. The earliest manifestations of this conscience are

56 57 58 59 60 61

Virgo, this collection, 220. Swadling, (1998) Trusts Law International 228; see also Parkinson, ‘Reconceptualising the express trust’ (2002) 61(3) CLJ 657. Cf Virgo, this collection, 219. Hudson, Equity & Trusts, 3rd edn, London: Cavendish Publishing, 2003, 1. Target Holdings v Redferns [1996] 1 AC 421. Westdeutsche Landesbank v Islington [1996] AC 669. Jaggard v Sawyer [1995] 1 WLR 269.

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found in the ecclestiastical Lords Chancellor and their role as Keeper of the Monarch’s conscience. This early usage of the term ‘conscience’ has been transformed into the confused notion we know today. The term conscience suggests a subjectivity at first blush. However, matters are perhaps not so easy. To suggest that conscience is something entirely within the individual and is something other than a public ethic expressed, for example, through legal principle, is to suggest that the individual conscience, and the consciousness to which it is both etymologically and spiritually connected, is not socially constructed at some level. This notion is beautifully expressed by the playwright Luigi Pirandello in his play Each in His Own Way when the character Diego challenges the other characters who are talking about giving confession (itself that classical objectification of the conscience) and claiming that their self-contained consciences are clear: But what is conscience? It is the voice of others inside you.62

His outburst expresses the tension between finding morals within and imposing them from without. The parallel distinction between subject and object is, of course, problematic. It is something which has tied the House of Lords in knots when trying to describe that form of dishonesty necessary for founding an action for assistance in a breach of trust.63 To talk of the subject meaningfully, one must mean an individual and particular person. As soon as discussion becomes discussion of similarities between subjects or of an idealised subject then one immediately begins to objectify that subject.64 So, the conscience is most easily recognised as that small, still voice within us individually which speaks to us only of shame.65 For equity to seek to judge the conscience in accordance with decided principle is necessarily to seek to objectify that conscience. To judge the conscience even on the basis of total judicial discretion is to objectify it, to take it outside the subject and to use it as a lens through which to view those acts or omissions for which the defendant is on trial. This perception of the vernacular sense of conscience is still troublesome. Is it correct to think of the conscience as a stiff, small voice; or, alternatively, is the conscience something which moves, which grows and which develops? Further, is the conscience a still, small voice? Elias suggests that individuals are necessarily socially constructed from infancy by their parents through to adulthood through their schooling and so on.66 If the individual is formed socially, at least in part, then the conscience is potentially a particularised rendering of a massive, public morality which is produced within the individual as an amalgam of socially-broadcast messages about right and wrong, of the products of interactions with other individuals (from immediate family, to workmates, to school friends), and of more subtle phenomena like law, environment and so forth which shape expectations and attitudes more subliminally still. Therefore, the internal world of even the particular individual must be considered to be objectified at some level.

62

63 64 65 66

Pirandello, Each in His Own Way, spoken by Diego in Act 1: Pirandello—Collected Plays, Firth (trans), Vol 3, Calder, London, 1992, 71. Also rendered in other versions as ‘Don’t you see that blessed conscience of yours is nothing but other people inside you!’, for example, in Williams, The Wimbledon Poisoner, Faber & Faber, London, 1988 Twinsectra v Yardley [2002] 2 All ER 377. Adorno, ‘Subject and object’, in The Frankfurt School Reader, Arato and Gebhardt (ed), New York: Continuum, 1998. Freud, Civilisation and its Discontents in Vol 12, Penguin Freud Library, Harmondsworth: Penguin, 1985. Elias, The Society of Individuals, New York: Continuum, 2001.

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At a further level, Levinas locates the essence of morality in a respect for the Other.67 In this sense, equity might sensibly be said to operate on the externally-exhibited morality of the individual rather than on the internally-situated morality of that same person. Equity is responsive to the external manifestation and not inquisitive as to the contents of the internal morality. This is always assuming that the individual is conscious of her own internal morality until external factors challenge that individual, causing her conscience to speak for the first time ‘out loud’ even to herself about her own attitudes to particular ethical challenges. At this level, therefore, it is possible that the conscience—even at the level of the individual’s private mythology and concealed world-view which remains unexplored in many of us (our true feelings about strawberry yoghurt, an aversion to blue food dye, a thrill at the smell of warm road tar, a suspicion of sewing needles, a fear of accidentally chewing the tin foil wrapper on a Kit-Kat68)—remains dormant until something in the outside world calls it unexpectedly to our conscious perception. Conscience, that automatic censor, is therefore not only externally created in part, but the process of its generation in terms of our realisation of what our conscience likes and dislikes is frequently dependent on external stimuli. All that can be said is that the conscience is privately situated. This suggests that the individual hosts her conscience. What remains at large are both the contents of that conscience and the process by which the conscience is formed. The contents of that conscience are prey to constant change and adaptation. Furthermore, the contents of that conscience at any particular time will be objective material, even if passed through ostensibly subjective filters. In conclusion, it is suggested that the conscience on which equity purports to act is necessarily a partly objective phenomenon in any event. Indeed, the most striking example of the action of public morality on the privately-situated conscience would be a judgment from a Court of Equity that a particular action breaches that equitable code. Law exists to measure the behaviour of individuals up against the objective conscience of society as expressed through law—therefore, equity is simply expressing that general prescription. More generally, this expresses my own determination that there is an intellectual content to the notion of conscience which is sufficient to support its development as a means of informing legal principle in the 21st century. That is a debate which goes beyond the study of equity’s historical manifestation through the jurisdiction of the Lords Chancellor through the ages.69

THE SIGNIFICANT CONTEXTUAL QUESTIONS Contextual areas demonstrate that legal concepts are not immutable What is suggested by the involvement of contextual subjects in this collection is that the application of central, conceptual modes of thought, such as property and obligations, is not immutable. Rather, contextual legal areas will adapt and toy with those central concepts.

67 68 69

Levinas, Entre Nous, trans Smith and Harshar, London: Athlone Press, 1998. Another brand name which is automatically familiar to my spell-checker. I have omitted here the further dimension of discussion relating to those situations in which one should refer to the jurisdiction of ‘Equity’ as opposed to a more generally social-scientific notion of ‘equity’ used by philosophers, political theorists and economists. That debate I begin in Equity & Trusts, 3rd edn, London: Cavendish Publishing, 2003, Ch 36.

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Restitution in company law and family law The law of restitution is still an emergent doctrine which is likely to realise that its rapid advance through private law has left its forces spread too thinly and its intellectual supply lines too weak to cope with the pace of that advance on such a broad front. The matrix of restitution of unjust enrichment, in whichever form that is taken, is too weak as presently organised to penetrate effectively into some of the core practical areas of company law, for example, without more word processor hours being spent in restitution valley. I shall take two examples: first, the doctrine of secret profits, which might correspond to restitution thinking; and secondly, the notion of lifting the corporate veil as a means of avoiding liability for unjust enrichment. The doctrine of constructive trusts imposed over unauthorised, secret profits made by directors70 has been explained as operating on the basis that the director is subject to fiduciary duties (the precise nature of which are defined and limited by her contract of employment) and that to profit from any opportunity which ought to have been exploited for the benefit of the company would be to earn an unjust enrichment. What restitution fails to add here is any novel explanation as to the reason why the director ought to be subjected to a proprietary remedy. The restitutionary explanation is that the enrichment is unjust, whereas the traditional equitable explanation is that it is unconscionable for the fiduciary to take any unauthorised benefit. It is suggested that there is little to choose between these two explanations and the response, in the form of a trust implied by operation of law, is the same whichever theoretical framework is applied.71 Where unjust enrichment thinking is more awkward is in relation to the doctrine of distinct corporate personality. This example is intended to show the limits of the notion of enrichment as the event which gives rise to the claim. Where a group of companies is organised such that A Ltd procures a transaction involving a material mistake on the part of the counterparty but such that the benefit of the transaction flows to B Ltd, then the claim for restitution measured by reference to the benefit received by the defendant would require a claim against B Ltd, although the contract was created with A Ltd.72 In the absence of fraud, company law has developed a principle of extreme reluctance to lift the veil of incorporation and impose liability on a company other than the contracting entity.73 Such washing of liabilities within groups of companies is a commonplace, particularly of tax avoidance strategies. Therefore, even in corporate contexts the reliance on the enrichment as the causative event before action fails to identify a suitable means of imposing liability on companies. The language more usually used by company law is to talk of the ‘equity’ involved, usually an antique shorthand for justifying the penetration of the corporate veil where there has been some unconscionability.74 Again, restitution appears here to be too brittle a remedy whose determination to find coherence may leave insufficient conceptual space for a court to identify the ‘right answer’. This, it is suggested, is the result of living in a fundamentally chaotic world in which it will always be necessary for a court to be able to retreat behind doctrine into

70 71 72 73 74

Regal v Gulliver [1942] 1 All ER 378; cf Boardman v Phipps [1967] 2 AC 46. Hudson, op cit, n 69. Cf Tettenborn, this collection, 293. Saloman v Saloman [1987] AC 22; Adams v Cape Industries [1990] BCC 786. Jones v Lipman [1962] 1 WLR 832.

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some general notion of right and wrong to ensure that the cunning and the well-advised are not able to abuse formalistic legal rules. Two conclusions flow from this. First, restitution is not the most effective doctrine in this context. Second, there are in any event legal contexts within private law in relation to which restitution thinking has nothing significant to say. Therefore, the project which seeks to define all private law as being to do with consent, wrongs and unjust enrichment is necessarily restricted: there will remain company law, intellectual property law, banking law and so forth operating outside the remit of these concepts. The assertion of an overarching model for the whole of private law is a chimera.75 It is in relation to family law that there is no room for restitution. The difficulty here is that there is no ‘enrichment’ currently understood by English restitution thinking which would explain why any particular order would be made by a court in relation to family property. Divorce proceedings, inheritance proceedings or child welfare proceedings are decided in accordance with a logic outwith the reach of ‘enrichment’. Rather, family law decides such questions by reference not only to financial justice but also by reference to the welfare of any children caught up in the litigation and so on. The notion of enrichment is currently predicated on demonstrating and quantifying the cash amount by which one person has benef ited. To go beyond such straightforward examples of enrichment calls on more complex issues which were addressed above by Andrew Tettenborn.76 Questions of welfare and access to a home are questions which cannot be quantified entirely in financial terms. Children tend not to own real property, and consequently no order in relation to occupation of the family home can be decided on the basis of pre-existing property rights or enrichments as opposed to needs. The register in which lawyers speak in this area, consciously or unconsciously, is the register used by philosophers like Miller talking of social justice.77 Miller distinguishes between rights, deserts and needs as different means of identifying entitlements in a system of justice.78 So it is that much property law revolves around rights deriving from prior ownership; that much of estoppel recognises desert flowing from detrimental reliance; and that child law and welfare law revolve around the needs of the extended family. These simple examples demonstrate that unjust enrichment will not extend to cover this aspect of private law. Rather, any application of property law or of equity in this context will draw on the moral base identified by Lametti in this volume,79 the political basis identified by Picciotto and Campbell,80 or by me in its sibling volume.81

75 76 77 78 79 80 81

Cf Swadling, op cit, n 57. Tettenborn, op cit, n 72. Miller, Social Justice, 1976, OUP. Hudson, ‘Equity, individualisation and social justice’, in Hudson (ed), New Perspectives on Property Law, Human Rights and the Home, London: Cavendish Publishing 2003, 30. Lametti, this collection, 39. Picciotto and Campbell, this collection, 279. Hudson, op cit, n 78.

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LAW’S COMMUNITIES Perhaps the broadest difference then between the bulk of the contributions to this collection and to New Perspectives on Property Law, Human Rights and the Home is that many of the contributors to that collection are sufficiently confident to suggest that it is possible to outline a taxonomy of the topic, whereas the theorists find the categories themselves problematic. For the commercial and restitution lawyers the principal problem is the expression of the law and the lack of neatness in its organisation; whereas for the others the main difficulty is of identifying the norms appropriate to deal with socially-located problems. The question is one of location. The questions addressed by commercial lawyers are concerned with the closed world of commercial transactions. Commerce is closed in two senses. The first sense is bound up with the very nature of the contract itself. Commercial contracts—as opposed to those forms of contract which establish co-operatives—necessarily separate particular assets, labour and resources from all other assets, pools of labour and resources. Therefore, the questions of restitution on grounds of unjust enrichment or wrongdoing are closed within the confines of the contract created between the participating parties.82 The questions are informed and limited by the nature, terms and scope of the transaction at issue. This contrasts sharply with the questions addressed by the family lawyers, the housing lawyers and the welfare lawyers, each of whom is dealing with questions which arise occasionally between parties and occasionally between the individual and the state. In such situations, the legal issues and their solutions are not closed off by means of a contract, but rather conceive of the individual litigant as just another human being bringing just another claim. They are open-textured. The second sense in which commercial contracts are closed off grows from this notion. Commercial activity takes place at a remove from the lives of most ordinary people. A Marxist analysis of this phenomenon would refer to commerce as being concerned with activities conducted among the owners of the means of production and not the proletariat. Global financial marketplaces and commercial marketplaces operate on the basis of standard form contracts, trade associations and standard commercial methodologies which mark them off from other human endeavour. The dole office is potentially open to us all, whereas the chairman’s office is open only to a very few. That commercial activity is closed off from other activities means that its norms are different from other norms of activity. What is acceptable on the trading floor may not be acceptable elsewhere. For an individual to lose many thousands of pounds in a day would be catastrophic, but for a large commercial entity to do the same may not be considered to be out of the ordinary. Therefore, it should be of no surprise if this different commercial arena develops legal norms—or at least a vocabulary amongst the legal practitioners who service it—which are different from those used in relation to non-commercial disputes. It is when the different norms draw ostensibly on the same root concepts of property and obligations that both the desirability of such differentiation and the form of such differentiation become so problematic. Many areas of private law are reactive to context, for example in relation to family law. In other areas of the law, those who use the law wish it to be prescriptive. So, for example, in contract law

82

It is suggested that the Contract (Rights of Third Parties) Act 1999 does not remove this closure, it merely widens the envelope slightly.

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there is a need for the norms governing the creation and performance of contracts to be clear. What is also hoped in contract law is that the resolution of disputes will be similarly predictable. In many circumstances English law uses discretionary equitable remedies to resolve such disputes, as opposed to the comparative certainties of common law damages. Therefore, it is in relation to the application of equitable doctrine to such commercial contexts that there has been growing pressure to use the superficially simple notion of restitution of unjust enrichment to resolve disputes, because that is expected to render prescriptive a means of awarding remedies which otherwise appears to some to be too reactive. This is the formalism which much private law theory advocates. What is lost in formalism, however, is the ability to permit law to exercise its regulatory function over private activity. Private law rules divide between formalities to do with the creation of contracts, express trusts and so on, and rules to do with the resolution of disputes by the allocation of goods and value between the parties (whether in the form of, for example, payments of damages, rescission, or specific performance). It is the rules governing the resolution of disputes in which law does something akin to regulation. Quite literally it passes judgment and so brings moral commentary to bear on the activities of individuals. Many areas of commercial activity seek to develop autopoietic closure from other norms. So, in the local authority swaps cases it was evident that those lawyers who advised investment and commercial banks as to their derivatives businesses had formed a view of the manner in which their marketplace functioned which was sealed off from other legal and commercial norms. In derivatives business, for example, standard form contracts and a quasi-legal jargon have formed, both of which have allowed a common view to crystallise in the marketplace as to the legality and enforceability of aspects of its ordinary business which might otherwise have been avoided on grounds that they were wagering contracts, unauthorised insurance business or ultra vires.83 In such circumstances there is potentially a crisis in the ability of law to regulate such activities precisely because they are closed off from ordinary legal discourse through arbitration, through the privacy accorded to private contracts and so forth. Thus, formalism can lead to closure and to a restriction in the inputs and outputs between the legal system and society more broadly. To allow restitution to grow amidst this formalism would be to close off a number of equitable doctrines from the norms used to decide cases in other contexts: for example, the norms governing the implication of trusts over funds of electronic money84 are already becoming distanced from the norms used to imply trusts over the family home.85 The result is a radically different treatment of some areas of human activity from other areas. As mentioned above, it may well be the case that commercial and non-commercial activity will require different treatment from time to time. Nevertheless, to sever some aspects of property law and the law of obligations from other contexts—as required by the logic of this creeping commercial closure—is to dilute fundamental legal concepts into mere contexts such that the true underpinnings of our legal culture are changed forever. The unconscious shift from concept to context is too radical a change to be allowed to take place by osmosis rather than by analysis.

83 84 85

Hudson, The Law on Financial Derivatives, 3rd edn, Sweet & Maxwell, 2002, 227, 235. Westdeutsche Landesbank v Islington [1996] AC 669. Lloyds Bank v Rosset [1991] AC 1.

Index Accumulation, policy against 233–46 outline of 240–41 Roxborough v Rothmans of Pall Mall Australia 233–6 application 241–46 application of policy 242–43 ‘at the expense of’ 243–44 decision 236–39 enrichment 243 established unjust factors 244–45 facts 235–36 risk of accumulation 239–40 unjust factor 244–46 windfall 239–40 three party cases, and 233–46 Attornment bailment, and 274–75 Bailment 247–77 attornment, and 274–75 cargo claims 273–75 chattel leases 270–73 Coggs v Bernard 250–51 finance leases 270–73 foundations 247–54 historical foundations 249–53 Jones on 251–53 map of law 247–49 obligations dimension 255–63 bailee’s estoppel 258 distinctive obligations of bailee 261 general law: tort 257–62 insurable interest of bailee 259 possession, and 258–59 primacy of contract 255–57 significance of unjust enrichment 262–63 property dimension 263–70 ‘charterparty’ cases 265–67 estates, doctrine of 264 lease of chattels 265, 268–69 redundancy of concept 247–77 retention of title, and 276–77 theoretical foundations 253–54 three commercial contexts 270–77 Capitalism 2–4 late business of 3–4 franchising to freedom, from 2–3 lightness of 2–3 value of nothing 3–4 nature of 2–4

Certainty of subject matter context, question of 27 Choses in action quasi-property, as 23–25 Co-operatives 33–35, 345–57 See also Mutuals business 345–57 community benefit 348–50 dedicated assets 345–57 nature of 345–46, 347–48 obligations 345–57 property 345–57 Companies 331–43 corporate responsibility 342–43 protection of 331–32 responsibility, and 331–43 causal 336–37 collective 339–41 ‘corporate citizenship’ 335 corporate killing 341–42 current regulatory framework in UK 338–39 individual 339–41 legal 337–39 liberal democracy, and 332–33 meanings of 333–34, 334–41 middle ground 339–40 moral 337–39 obligation, as 336 personal 334–36 Takala and Pallab on 333 Conditions precedent to vesting of rights 25–26 Conflicting forms and uses of property 11–22 Contracts investment trust as See Investment trust property, and See Property and contract trust contract tax avoidance, and 14–15 trusts, as 14–15 Copyright law 305–17 consistent understanding of nature of copyright interest 305–07 nature of copyright interest 305–07 remaining inconsistencies in 313–16 criticism of work 315–16 derogatory treatment of work 314–15 qualitative identification of ‘substantial part’ 314 review of work 315–16

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strict liability, departures from 316 simplified model 305–08 application of model to entrepreneurial works 312–13 Ashdown v Telegraph Group Ltd 313 consistent approach to action for infringement 310–11 Designers Guild v Russell Williams (Textiles) Ltd 308–10 influence on fair dealing 313 irrelevance of visual comparison 308–10 Newspaper Licensing Agency Ltd v Marks and Spencer plc 310–13 simplifying 305–17 trespass-type obligation, and 307–08 Corporate killing 341–42 health and safety, and 341–42 Corporate responsibility See Companies Credit unions 33–35 Democracy property right, as 31–32 Deon-telos of private property 43, 44–56 allocation of property resources, and 47 argumentative position 48 characterising property norm 57–61 complexity of moral space 49–50 continental philosophy, and 46 Dworkin, and 51–53, 54–55 exclusion thesis 56–57 Honoré’s intuition 61–62 identifying property norm 57–61 implications on conceptual structure of private property 56–62 implications on normality of private property 62–66 Penner, and 63–64 justification, and 64–65 moral source of property’s normativity, and 65–66 morality of private property, and 64–66 non-rights-based aspects 53 over-emphasis of property rights 47–48 Penner’s norms in rem 57–61 private property as social institution 48–49 Rawls, and 45–46 Raz, and 55–56 traditional deontological/ teleological divide 45 traditional vocabulary, use of 50 Ethics of private property 39–67

‘bundle of rights’ metaphor 40–42 personal autonomy, and 43 re-examination of relationship to resources and rights, and 67 Health and safety corporate killing, and 341–42 Human rights 319–30 property in international human rights law 319–25 dominion theology 323 duty of international co-operation, and 324 duty on resource-rich states 320–21 European conception of property ownership 323–24 giant group of companies 322 obligations 319–20 USA, and 321–22, 323 property and power 325–30 abuse, concept of 329–30 competition policy, and 328–29 inequality in ownership, and 325–26 institutional framework for restraints 327–28 international trade negotiations, and 326–27 property rights, and 319–30 Industrial and provident societies key features 346–50 Intellectual property 279–303 alienated perceptions of economic actors’ activities 279 contradictions 279 cost-benefit basis 289–90 investment, and 288–89 remedies 289 determining remuneration 294–97 collective administration of rights 296–97 collective licensing 295–96 ‘virtual’ 298 digital diffusion 297–300 rights-management 299–300 ‘self-help systems’ 299 imitation 286 monopoly 284–91 transaction costs, and 290 monopoly and competition in the exploitation of innovation 284–91 Napster 285, 297–98 patentability, extension of 300–02 gene sequences 300–01 rights to compensation, and 301–02

Index Plant on 287–88 policy towards 287 private perspectives 279–303 private property as creation of scarcity 280–84 rationing, and 280–84 revenues 291–302 copyright, and 293–94 exclusivity, and 293 expansion of private rights 291–94 restriction of exceptions 291–94 social perspectives 279–303 Torremans on 281–84 Investment trust contract, as 15–19 scheme manager as trustee 18–19 unit trust 16–19 Land Registration Act 2002 117–27, 129–50 actual occupation under 140–43 meaning 141 ‘reasonably careful inspection’ 142 aim 129–30 emasculation of adverse possession 144–47 e-conveyancing, and 145–46 exceptions 146 estoppel, and 147–49 formalities for creation of rights 147–49 legal easements 143–44 nature of ownership, and 117–27 new procedures 147–49 overriding interests 131–44 change of name 133 e-conveyancing, and 132–33 impliedly created equitable easements 136 interval between first registration and first registered disposition 134–35 legal leases 139–40 Limitation Acts, and 137 reclassification 134–35 registration of title, and 133 rights of persons in receipt of rents and profits of land 138 reform of property law, and 129–50 rights omitted 136–38 risk assessment 129–50 short legal leases 139–40 time restricted rights 144 transformation of overriding interests into interests that override 133–44 Lightness weight, and 7

Middle class compulsory membership 35 Morality and formalism in property, obligations and restitution 359–72 boundaries between property law, obligations and unjust enrichment 363–65 central conceptual question 359–63 company law, restitution in 369–70 conscience, and 366–68 conscience as objective phenomenon outside subject 366–68 contextual areas demonstrate that legal concepts are not immutable 368 dividing between positivism and morality 360–61 equity acting in personam against defendant’s conscience 366 family law, restitution in 369–70 justice, language of 363 law’s communities 371–72 morality and formalism 365 proprietary rights made and not simply recognised 363–64 restitution based on commercial contract law, not property law 361–62 restitution, meaning 362 rival starting points 359–60 significant contextual questions 368–70 Mortgage 20–22 defeasibility of contract 20–21 possession and sale, rights of 21–22 weight of 20–22 Mutuals 345–57 See also Co-operatives business 345–57 Cabinet Office Strategy Unit Report 356–57 Charitable Incorporated Organisation 356–57 community benefit 348–50 Community Interest Company 356 Consultation Document 1998 353 conversion 350–52 dedicated assets 345–57 demutualisation 350–52 Financial Services Authority, and 355 Industrial and Provident Societies Act 2002 353–55 law reform 352–55 nature of 345–46 obligations 345–57 potential change 352–55

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property 345–57 proposed change 352–55 reform, need for 352–53 Nature of ownership 117–27 current trends in England and Wales 126–27 fragmentation as strategy 119–20 Honoré on 117–18 Land Registration Act 2002, and 117–27 adverse possession, and 121–22 fragmentation, and 121 Law Commission, aim of 121 Merryman on 117–19 Roman law 118–19 Scotland 123–24 South Africa 125–26 new legislation 125–26 title, systems of 117–19 trades in tension 123 Paradigms in property law 27–28 control as property right 30–31 democracy as property right 31–32 morality 27–28 property rights as ‘rights’ 29–30 property which cannot be owned 30–31 transferable personal claims 30 Postmodernism 4–7 Bauman, and 5–6, 7 property, and 4–7 Property community, and 32–33 compulsory obsolescence 7–8 conflicting forms and uses 11–22 consumption by non-entrepreneurs 7–8 democracy, and 32–33 disposable does not mean transferable 12–14 Don King case 12 five alternative senses 11 organic solidarity, and 32–33 perception, and 36–37 perception of lightness 37–38 relativity, and 36–37 rights over intangible property constitute value, not assets 14 tangible property theory See Tangible property theory value, as 14 weight of 1–38 Property and contract 87–116 assimilation at secondary level 109 personal rights, and 109 contractual rights 98–108

academic approaches 100–04 demise of nominal damages 107 duty to perform 104–07 duty to perform— Holmesian approach 99–100 economic analysis 101 leasehold covenant 104–06 Llewellyn on 98–99 Lord Hoffmann on 105–06 promise principle 102 reliance theory 101–02 specific performance 103 transfer theory 103 contractual solutions for interference with property rights 114–15 American jurisdictions, and 114–15 primary rights, and 108 property rights 88–98 academic output, level of 95 bundles of personal rights 89–91 context within English law 93 feudal law, and 93–94 Grey on 91 Hohfeld on 89–90 image rights 97 incoherent concept 91–92 intellectual property 96 Internet 96–97 prevalence of paradigm 90–91 private rights, and 94 property is not dying 92–95 property solutions 90 ‘property as thing’ 95 Roman law 88–89 state, role of 91–92 thriving concept 96–97 trade marks 96 property-type solutions for breach of contract 110–13 ‘consumer surplus’ 110 licensee 112–13 loss of amenity 110 wrong-based actions 111 Property law relationship with tort law See Relationship between property law and tort law Property rights human rights, and 319–30 Property and unjust enrichment 187–202 absolutist notions of property and proprietary remedies 200 analytical relationship 187–96 analytical relationship of

Index property rights and remedies 196–97 arguing from particular concept of property 198–200 Birks on 195–96 concept of property 196–98 denial of role for unjust enrichment in creation of property rights 188–90 difficulties with Virgo’s position 190–92 distinguishing between enforcement of existing property rights and rights arising by operation of law 190 fallacy of treating concepts as mutually exclusive 187–96 Grantham and Rickett’s position 192–95 identifying basis of knowing receipt 193–94 interrelationship of property and obligations 192–93 judicial approach to expropriation of owner’s rights through denial of injunctions 199 limited role of legal concepts 197–98 limits of conceptual analysis 196–202 mistake about mistake 194–95 misunderstood relationship 187–202 notion that rights to proceeds derive from conception of property 200–02 notions of property 196–202 property rights 196–98 property rights as inert 195–96 reasoning from absolutist conception of property 198 remedies for breaches of existing property rights not concerned with unjust enrichment 192–95 Virgo’s view on relationship 188–90 Quasi-property 23–25 choses in action as 23–25 phenomenon of 23 problems of 23–25 Relationship between property law and tort law 69–86 current approach: Hunter v Canary Wharf 73–76 fault, influence of 72 historical background 70–72 Human Rights Act 1998, and 81–85 Article 8 81–82 Article 1, Protocol 1 81–82

common law developments 83 horizontal effect 84–85 Hunter in the European Commission of Human Rights 83–84 human rights dimension 76–81 Marcic 77–79 McKenna 79–81 facts 79–80 impact 80–81 Marcic 77–79 facts 77 Human Rights Act 1998, 78–79 impact 79 negligence 73–76 nuisance 70 private nuisance 73–76 historical accuracy 75 Rylands v Fletcher 71 private nuisance distinguished 76 trespass 70 Restitution 151–63, 165–85 See also Unjust enrichment taxonomic approach 151–63 classification by interest 159–61 distinction between Equity and National Socialism 155–56 gap between aspiration and achievement 161–62 grid 151–52 importance of unjust enrichment 156–57 practice 156–61 precision, and 154–55 principle 152–56 purity of method, and 152–54 rationale of grid 157–59 rationality, and 154–55 science, and 152–54 ‘unjust enrichment’ 151 Restitution of property not owned 223–31 enrichment, relevance of 224–25 other proprietary claims, and 229–30 past handling of claimant’s property 225–27 present control of claimant’s property 227–29 Scotland nature of ownership, and 123–24 Sennett, Richard property, on 1–2 South Africa

377

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nature of ownership, and 125–26 Tangible property theory 9–11 English law’s desire for tangible 9 money as value 10–11 right to trace, loss of 10 tangible money 10–11 transfer of property under void transactions, problem of 9–10 Tort law relationship with property law See Relationship between property law and tort law Trusts contracts, as 14–15 mooted enforcer financial regulation, and 19–20 trust contract tax avoidance, and 14–15 unit trust, and 16–19 Unit trust trust, whether 16–19 Unjust enhancement See Restitution Unjust enrichment 165–85 See also Restitution academic debate 169–70 Birks, and 166 claim to reverse wrongfullyprocured transfer 179–81 claims arising from agreement 175–78 claims arising from ownership of wealth and property 170–72 classification 169–70 ‘descriptive’ principle, as 168–69 disgorgement 178–79 error and confusion 182–85 false assimilation 183 false differentiation 183–84 fictions 184–85 forms 170–82 illusory justification 183 judicial recognition 169–70 non-contractual claims for payment for services 172–75 property, and 187–202 See also Property and unjust enrichment quadration, and 167–68

restitution, and 165–70 subversion 185 ‘supplementary’ principle, as 168–69 theory 165–85 underlying principle, as 165–67 use claim 181–82 various principles 182 vindication of property rights, and See Vindication of property rights Vesting of rights conditions precedent to 25–26 Vindication of property rights 203–22 application of defence of change of position 216–17 carving up proprietary restitutionary claims 212 classification of claims 217–22 substitution, by 218–19 defending 211–17 difficulties in establishing unjust enrichment 212–14 encouraging exercise of discretion 214–16 Foskett v McKeown 203–22 alternative claim 208–09 criticisms of decision 209–10 decision in 203–09 defences 208 distinguishing between tracing and claiming 207–08 initial proprietary interest 205 principle versus discretion 210 recognition of vindication of proprietary rights 204 rejection of role of discretion 204–05 result of decision 209 theoretical inquiries 210 tracing 205–07 valuing remedy 208 property rights in substitute property, and 211–12 rights in substitute property deriving from unjust enrichment 212–17 unconscionability 220–21 constructive trust 220–21 resulting trust 220