Brexit deal in real world = No FTA’s

If the Government’s objective is to set the UK free to trade on terms to be agreed with the rest of the world (including those states with whom the EU has agreed free trade agreements which will no longer apply to the UK when the UK ceases to be a member of the EU), then the Brexit deal it is self-defeating, because throughout the duration of the transition period and operation of the back-stop, the UK is constrained both legally, and practically, from concluding FTA’s with non-EU states. On its face, it therefore represents a complete failure of economic diplomacy by the UK.

On 6 February 2018 Rob Merrick, Deputy Political Editor of the Independent reported, ‘Giving evidence to the Commons Foreign Affairs Committee, [Sir Simon Fraser – Former head of the UK Diplomatic Service] warned: “Our leverage in international institutions is going to be weaker once we are outside the European Union.” Other countries believe Britain has “lost the plot” by pursuing Brexit because it will reduce the country’s “international influence”. Sir Simon Fraser also accused Theresa May of “mushy thinking” over her promise to achieve a new “Global Britain” outside the EU – branding it just a “slogan”. Calling Brexit a “strategic error”, Sir Simon ridiculed No 10’s vow that leaving the EU would see Britain “strike out in the world”, telling a Parliamentary inquiry: “I don’t know what that means.”
And he warned: “To be frank with you, a lot of countries think, for the time being, that we have slightly lost the plot in terms of where we intend to go.”
The European Commission Press Release states,
‘The EU and the UK negotiators have agreed on how to avoid a hard border between Ireland and Northern Ireland. Both will use their best endeavours to have – by 1 July 2020 – a future agreement concluded before the end of the transition period. Should this not be the case, the EU and the UK could jointly extend the transition period. Alternatively, as of January 2021, the backstop solution for Ireland and Northern Ireland would apply, subject to a joint review mechanism.
That backstop solution means that a single EU-UK customs territory will be established, which will apply from the end of the transition period until such a time as a subsequent agreement becomes applicable. Northern Ireland will therefore remain part of the same customs territory as the rest of the UK. The single customs territory covers all goods with the exception of fishery and aquaculture products.
The creation of the single customs territory includes the corresponding level playing field commitments and appropriate enforcement mechanisms to ensure fair competition between the EU27 and the UK.
The outline of the political declaration published today records the progress in reaching an overall understanding on the framework for the future EU-UK relationship. The EU and UK negotiators will continue their work based on the outline. [I.e it is an ‘outline’ road-map].
Nothing is agreed until everything is agreed. The present Withdrawal Agreement – including the transition period – must take into account the framework of the future relationship. The political declaration must therefore be further developed and agreed in its final form…
The EU and UK negotiators will continue their work on the political declaration on the framework for the future relationship based on the outline published today. It is up to the President of the European Council to decide whether and when to convene a meeting of the 27 Heads of State or Government. It will be up to the European Council (Article 50) to endorse the Withdrawal Agreement and the joint political declaration on the framework of the future relationship.
Once the Withdrawal Agreement is endorsed by the European Council (Article 50), and before it can enter into force, it needs to be ratified by the EU and the UK. For the EU, the Council of the European Union must authorise the signature of the Withdrawal Agreement, before sending it to the European Parliament for its consent. The United Kingdom must ratify the agreement according to its own constitutional arrangements.
Prime Minister Theresa May triggered Article 50 of the Treaty on European Union on 29 March 2017… Her letter to Donald Tusk, the President of the European Council, formally began the process of UK’s withdrawal from the EU. Negotiations on the terms of the UK’s withdrawal formally began on 19 June 2017, following the UK’s general election. On 8 December 2017, the EU and the UK published a Joint Report, setting out the areas of agreement between both sides on withdrawal issues. This was accompanied by a Communication by the European Commission. In March 2018, the European Commission and the United Kingdom published a draft Withdrawal Agreement. This document highlighted areas of agreement and disagreement using a green, yellow and white colour-coding. The future relationship between the EU and the UK will be outlined in a political declaration and will only be negotiated once the UK becomes a third country, i.e. outside of the EU, after 29 March 2019.’
In project management terms, the text agreed at negotiator level is therefore a level 1 ‘framework’ agreement and not a fully worked out and worked through, level 5 ‘detailed’ agreement that is capable of practical implementation because it does not fully define the extent to which the UK remains integrated within and aligned with the EU and ‘Union Law’ (as defined), which is uncertain and a moving target. Because the Brexit deal commits the UK to enter into a parallel EU universe where international trade vis-à-vis the EU is governed by Union Law, it curtails the ability of the UK to enter into more preferential trading arrangements (through the agreement of FTA’s) with non-EU states. Because ‘Nothing is agreed until everything is agreed’ business cannot actually know the extent of the UK’s legal obligations to comply with Union Law until it ceases to apply. As for the exit mechanism, see the commentary on the applicable provisions of the Vienna Convention below, and for more detail please visit www.diplomaticlawguide.com. Whoever authorised this agreement was clearly not an international lawyer and appears to have had no grasp of the default provisions which apply that are far from satisfactory.
What does the text of the agreement state?
Article 184 (Negotiations on the future relationship) states,
‘The Union and the United Kingdom shall use their best endeavours, in good faith and in full respect of their respective legal orders, to take the necessary steps to negotiate expeditiously the agreements governing their future relationship referred to in the political declaration of [DD/MM/2018] and to conduct the relevant procedures for the ratification or conclusion of those agreements, with a view to ensuring that those agreements apply, to the extent possible, as from the end of the transition period.’
Article 2 (Definitions) states,
‘For the purposes of this Agreement, the following definitions shall apply:
(a) “Union law” means:
(i) the Treaty on European Union (“TEU”), the Treaty on the Functioning of the European Union (“TFEU”) and the Treaty establishing the European Atomic Energy Community (“Euratom Treaty”), as amended or supplemented, as well as the Treaties of Accession and the Charter of Fundamental Rights of the European Union, together referred to as “the Treaties”;
(ii) the general principles of the Union’s law;
(iii) the acts adopted by the institutions, bodies, offices or agencies of the Union;
(iv) the international agreements to which the Union is party and the international agreements concluded by the Member States acting on behalf of the Union;
(v) the agreements between Member States entered into in their capacity as Member States of the Union;
(vi) acts of the Representatives of the Governments of the Member States meeting within the European Council or the Council of the European Union (“Council”);
(vii) the declarations made in the context of intergovernmental conferences which adopted the Treaties;’
Article 6 (References to Union law) states,
‘1. With the exception of Parts Four and Five, unless otherwise provided in this Agreement all references in this Agreement to Union law shall be understood as references to Union law, including as amended or replaced, as applicable on the last day of the transition period.
2. Where in this Agreement reference is made to Union acts or provisions thereof, such reference shall, where relevant, be understood to include a reference to Union law or provisions thereof that, although replaced or superseded by the act referred to, continue to apply in accordance with that act.
3. For the purposes of this Agreement, references to provisions of Union law made applicable by this Agreement shall be understood to include references to the relevant Union acts supplementing or implementing those provisions.’
Article 6 of the Protocol (Single customs territory, movement of goods) provides,
‘1. Until the future relationship becomes applicable, a single customs territory between the Union and the United Kingdom shall be established (“the single customs territory”). Accordingly, Northern Ireland is in the same customs territory as Great Britain.
The single customs territory shall comprise:
(a) the customs territory of the Union defined in Article 4 of Regulation (EU) No 952/2013; and
(b) the customs territory of the United Kingdom.
The rules set out in Annex 2 to this Protocol shall apply in respect of all trade in goods between the territories referred to in the second subparagraph, as well as, where so provided, between the single customs territory and third countries. With a view to ensuring the maintenance of the level playing field conditions required for the proper functioning of this paragraph, the provisions set out in Annex 4 to this Protocol shall apply. Where appropriate, the Joint Committee may modify Annex 4 in order to lay down higher standards for these level playing field conditions.
The Joint Committee shall adopt before 1 July 2020 the detailed rules relating to trade in goods between the two parts of the single customs territory for the implementation of this paragraph. In the absence of such a decision adopted before 1 July 2020, Annex 3 shall apply.’
Article 3 (Territorial scope) provides,
‘1. Unless otherwise provided in this Agreement or in Union law made applicable by this Agreement, any reference in this Agreement to the United Kingdom or its territory shall be understood as referring to:
(a) the United Kingdom;
(b) Gibraltar, to the extent that Union law was applicable to it before the date of entry into force of this Agreement;
(c) the Channel Islands and the Isle of Man, to the extent that Union law was applicable to them before the date of entry into force of this Agreement;
(d) the Sovereign Base Areas of Akrotiri and Dhekelia in Cyprus, to the extent necessary to ensure the implementation of the arrangements set out in the Protocol on the Sovereign Base Areas of the United Kingdom of Great Britain and Northern Ireland in Cyprus annexed to the Act concerning the conditions of accession of the Czech Republic, the Republic of Estonia, the Republic of Cyprus, the Republic of Latvia, the Republic of Lithuania, the Republic of Hungary, the Republic of Malta, the Republic of Poland, the Republic of Slovenia and the Slovak Republic to the European Union;
(e) the overseas countries and territories listed in Annex II to the TFEU [the Treaty on the Functioning of the European Union] having special relations with the United Kingdom1, where the provisions of this Agreement relate to the special arrangements for the association of the overseas countries and territories with the Union.[I.E. Anguilla, Bermuda, British Antarctic Territory, British Indian Ocean Territory, British Virgin Islands, Cayman Islands, Falkland Islands, Montserrat, Pitcairn, Saint Helena, Ascension and Tristan da Cunha, South Georgia and the South Sandwich Islands, and Turks and Caicos Islands].’
Article 1 of Annex 2 provides,
‘Scope
1. Subject to the conditions laid down in Article 6(1) of the Protocol, this Annex shall apply to all goods:
(a) produced in the customs territory of the Union or the United Kingdom customs territory, including those wholly or partially obtained or produced from products coming from third countries which are in free circulation in the customs territory of the Union or the United Kingdom customs territory; or
(b) coming from third countries and in free circulation in the customs territory of the Union or the United Kingdom customs territory;
(c) obtained or produced in the customs territory of the Union or the United Kingdom customs territory, in the manufacture of which products coming from third countries and not in free circulation either in the customs territory of the Union or the United Kingdom customs territory were used, under the condition that the import formalities have been complied with and any customs duties or charges having an equivalent effect which are payable on those goods or on the third-country products used in their manufacture have been levied in the exporting part of the single customs territory.
The term “wholly obtained” in point (a) shall have the same meaning in the United Kingdom customs territory as it does in the customs territory of the Union.
2. Goods from third countries shall be considered to be in free circulation in the customs territory of the Union or the United Kingdom customs territory if the import formalities have been complied with and any customs duties or charges having equivalent effect which are payable have been levied by the Union or by the United Kingdom in their respective part of the single customs territory, and if they have not benefitted from a total or partial reimbursement of such duties or charges.
3. As regards goods obtained or produced in the customs territory of the Union or the United Kingdom customs territory, in the manufacture of which products coming from third countries and not in free circulation either in the customs territory of the Union or the United Kingdom customs territory were used, but which are not covered by point (c) of paragraph 1, the importing part of the single customs territory shall apply the customs legislation applying to goods from third countries.’
Article 3 (Customs Tariff applicable to trade with third countries) states,
‘1. The United Kingdom shall align the tariffs and rules applicable in its customs territory with:
(a) the Union’s Common Customs Tariff, as set out in Article 56(2) of Regulation (EU) 952/2013;
(b) the Union’s rules on the origin of goods, as set out in Chapter 2 of Title II of Regulation (EU) 952/2013; and
(c) the Union’s rules on the value of goods for customs purposes, as set out in Chapter 3 of Title II of Regulation (EU) 952/2013.
2. Under no circumstances may the United Kingdom:
(a) apply to its customs territory a customs tariff which is lower than the Common Customs Tariff for any good or import from any third country; or
(b) apply or grant in its customs territory tariff preferences to any good on the basis of rules of origin that are different from those governing the granting of such preferences to the same good by the Union in its customs territory.
3. The United Kingdom may not, without prior agreement in the Joint Committee, apply or grant in its customs territory any quotas, tariff-rate quotas or duty suspensions.
4. The United Kingdom shall be informed of any decision taken by the Union to amend the Common Customs Tariff, to suspend or reintroduce duties and any decision concerning quotas, tariff-rate quotas or duty suspensions in sufficient time for it to align itself with that decision. If necessary, consultations may be held in the Joint Committee.’
Article 4 (Commercial policy) states,
‘1. The single customs territory shall comply with the relevant provisions of Article XXIV of the GATT 1994. To this end, the United Kingdom shall harmonise the commercial policy applicable to its customs territory with the common commercial policy of the Union to the extent necessary to give effect to Article 6(1) of the Protocol and Article 3 of this Annex, and by applying regulations of commerce other than duties, in particular measures falling under Article XI:1 of the GATT 1994, which are substantially the same as those of the Union.
2. The United Kingdom shall ensure that, for the products covered by Article 6(1) of the Protocol, its Schedules of Concessions referred to in Article II of the GATT 1994 are fully aligned with those of the Union, and commitments on tariff-rate quotas are compatible with those of the Union and comply with the provisions of Article 3 of this Annex. The Union and the United Kingdom agree to cooperate on WTO matters on the apportionment of WTO tariff-rate quotas and to the extent necessary for the functioning of the single customs territory.
3. The Union’s trade defence regime, as well as the Union’s Generalised Scheme of Preferences (“GSP”), shall cover both parts of the single customs territory. The Union shall consult the United Kingdom on any trade defence measures or actions under the GSP regime which it considers taking. At least 6 months before the end of the transition period, the Joint Committee shall set up the procedures for the application of this paragraph.’
Article 174 (Disputes raising questions of Union Law) states,
‘1. Where a dispute submitted to arbitration in accordance with this Title raises a question of interpretation of a concept of Union law, a question of interpretation of a provision of Union law referred to in this Agreement or a question of whether the United Kingdom has complied with its obligations under Article 89(2), the arbitration panel shall not decide on any such question. In such case, it shall request the Court of Justice of the European Union to give a ruling on the question. The Court of Justice of the European Union shall have jurisdiction to give such a ruling which shall be binding on the arbitration panel.’
Article 160 (Jurisdiction of the Court of the European Union concerning certain provisions of Part Five) states,
‘Without prejudice to Article 87 of this Agreement, Articles 258, 260, and 267 TFEU shall apply in respect of the interpretation and application of applicable Union law referred to in Article 136 and Article 138(1) or (2) of this Agreement. To this effect, any reference made in Articles 258, 260, and 267 TFEU to a Member State shall be understood as including the United Kingdom.’
In the event of no deal the UK has no FTA with any other state and loses access to those agreed by the EU on behalf of member states with non-EU countries. The UK’s WTO scheduled commitments also need to be regularised (by approval) with the membership of WTO. It only takes 1 out of 148 to block. This could take years. I am not sure that MP’s have fully grasped the time-line (see the commentary about the WTO below). The Civil Service has, and many senior official are members of my LinkedIn network, as well as representatives of various countries at the WTO, and senior trade officials in Canada, the US, Australia and New Zealand, as are many international trade law and economic diplomacy academics around the world. Nothing in this post is intended in any way to be a criticism of their skill expertise and professionalism. It is their political masters I blame.
‘In the event of a ‘no deal’, EU trade agreements will cease to apply to the UK when we leave the EU. Our intention is that the effects of new bilateral agreements will be identical to, or substantially the same as, the EU agreements they replace. However, users of current EU free trade agreements should be aware that, in contrast to the current situation and during any Implementation Period, there may be practical changes to how they make use of preferences under these new agreements. For example, UK and EU content will be considered distinct, and each new agreement will individually specify what origin designations may be used to qualify for preferences. We will aim to limit these changes as far as possible, but the final form of new agreements and any resulting changes will depend on ongoing discussions with our trading partners. The Trade Bill contains a reporting requirement stating that the government will publish a report before these new free trade agreements are ratified on any significant changes to the new trade-related provisions. Where arrangements to maintain particular preferences in a no-deal scenario are not in place by exit day, trade would take place on WTO terms. Under such terms, traders would pay the applied MFN tariff. This is the tariff applied equally to all countries in the absence of preferential arrangements. In the event of no-deal, the government will determine and publish a new UK MFN tariff schedule before we leave the EU. Information on the current tariff rates are freely available to view in the UK’s applied goods schedule and can be found on the UK Government’s Tariff Look Up tool. Further practical information on arrangements for the border and relevant contact information for guidance can be found in:
· Classifying your goods in the UK Trade Tariff if there’s no Brexit deal
· Trading with the EU if there’s no Brexit deal
The specific commitments for services trade that WTO members apply to trading partners, independently of any preferential arrangements, are set out in each Member’s schedule of commitments under the General Agreement on Trade in Services. Some countries have liberalised beyond these specific commitments.
For more information on the WTO, visit the WTO website.
This notice is meant for guidance only. You should consider whether you need separate professional advice before making specific preparations.
It is part of the government’s ongoing programme of planning for all possible outcomes. We expect to negotiate a successful deal with the EU.
Norway, Iceland and Liechtenstein are party to the Agreement on the European Economic Area and participate in other EU arrangements. As such, in many areas, these countries adopt EU rules. Where this is the case, these technical notices may also apply to them, and EEA businesses and citizens should consider whether they need to take any steps to prepare for a ‘no deal’ scenario.’ UK Government Guidance (12 October 2018): https://www.gov.uk/government/publications/existing-free-trade-agreements-if-theres-no-brexit-deal/existing-free-trade-agreements-if-theres-no-brexit-deal
I have not heard a single MP mention that on 29 March, even if there is a deal, the UK will have tied its hands in concluding an FTA with any non-EU state until possibly 2030 (see below) because:
(i) the UK does not have an FTA with any other state (except through membership of the EU); and
(iii) with the exception of any state whose executive decisions are made by a dictator, in the real world no state will constrain its options by doing a deal with the UK until it has received comprehensive legal advice about the extent to which the UK remains integrated and aligned with the EU.
In other words, countries with whom the EU does not have a FTA like the US, New Zealand and China will simply not want to negotiate an FTA with the UK until they know what Britain’s relationship with the EU actually is. Which bits of the single market, if any, is the UK in? Which parts of EU competition law apply to the UK? Once Britain has left the EU’s customs union, what ‘rules of origin’ will Brussels apply, so that other countries cannot use the UK as a way of circumventing EU restrictions on their exports? Does regulatory harmonisation between the EU and the UK make convergence between the UK and their country impractical or a legal impossibility?
The practical binary choice the Brexit deal offers is, ‘trade with us [i.e. the EU] and benefit from a level playing field, or go off on your own and trade with the rest of the world on terms to be agreed – if there is no practical solution to the Irish border issue by the end of the extended transition period, you remain aligned – possibly indefinitely (see the exit mechanism below).’
Because an FTA with the EU may take between 4-7 years to agree, the transition period may not end until 2025.
If at the end of that period the technology does not exist to avoid a hard border on the island of Ireland , then the UK will remain substantially, if not 100% aligned with the EU for international trade.
Therefore our hands are tied in negotiating more preferential terms with non-EU states.
Meanwhile the EU is currently negotiating trade agreements with over 72 other countries. Post-Brexit, the UK will therefore need to re-negotiate or start new bilateral negotiations on over 125 trade agreements, i.e. to replace the agreements that have already been negotiated by the EU that will no longer apply to the UK when Britain leaves the EU, and to keep pace with the EU on the world stage.
Until a bespoke trade agreement has been concluded between the UK and the EU, no state with whom the UK wishes to negotiate a FTA can properly formulate a position upon the scope and terms of a future bilateral agreement, because the extent of the UK’s freedom to agree the scope and terms of a FTA will be curtailed by the terms of a bespoke UK-EU trade agreement. In other words, the UK’s negotiating counter-parties cannot know the extent to which the UK’s hands will be tied by the EU when the UK is free, post Brexit, to enter into a legally binding FTA. Therefore the practical result of the Brexit deal is that until a comprehensive FTA has been agreed with the EU no state worth its salt with conclude a binding FTA with the UK.
How long will it then take to conclude an FTA with a non-EU state?
The Peterson Institute for International Economics who analysed how long it took the US to agree 20 bilateral trade deals concluded: (i) one and a half years, on average, and (ii) more than three and a half years to get to the implementation stage. https://www.weforum.org/agenda/2016/07/how-long-do-trade-deals-take-after-brexit/
= 5 years.
It is therefore not inconceivable that the first trade agreement with a non-EU state will not be concluded and implemented until 2030.
What is the status quo in relation to regularisation of the UK’s schedules of tariffs with the WTO?
‘Resistance to a joint UK-EU proposal to the World Trade Organization on trade after Brexit – which was once celebrated by the trade secretary, Liam Fox, as “real progress” – has triggered a break down in unity, with London and Brussels divided on a way forward.
Fox had described the plan on how much meat, butter and wheat the rest of the world could export to the UK and the 27 member states on low or zero tariffs as a sign of the country “forging ahead”, and boasted: “It’s a sign we can make progress when both sides choose to do so.”
Yet, in recent months the united EU and UK front has splintered in the face of a strident rejection of their proposals from the US, Australia and New Zealand, among others, the Guardian understands.
Brussels has proposed another way forward. But London has yet to agree and has left open the prospect that the UK could go its own way in talks with the world’s biggest trading powers.
To add to the tensions, the UK is also seeking to speak during the 21-month transition period after Brexit with an independent voice at the WTO, where large multilateral trade deals are negotiated, something the European commission is resisting.
Until Brexit, the EU has a schedule spelling out how much of each agricultural product from each country that can be imported into the bloc without attracting high tariffs.
After Brexit, the plan had been for the UK and EU, as independent WTO members, to divide the current quotas between the two according to historical flows of trade in each product. This plan was described as a “technical rectification”.
However, EU sources said an initial objection from the US, Argentina, Brazil and New Zealand over the joint plan, hammered home in a fiery letter last October, had not gone away, proving Brussels’ initial belief that the plan would “not fly”.
Brussels is now pushing for a new tactic under which they would go through the more arduous procedure of a full renegotiation with WTO members over key agriculture products, offering compensation where necessary, via what is called an article 28 procedure.
The UK is insisting that the EU sticks with the original plan. British negotiators working in the WTO in Geneva believe that for 95% of the schedules there is no need for negotiation.
The UK also insists it could unilaterally liberalise its tariff regime from Australia and elsewhere, in a move that could be damaging to EU trade flows, but would receive immediate agreement from those countries resisting the original joint plan.
The EU’s chief negotiator, Michel Barnier, is understood to have told MEPs during a recent private meeting that “unsurprisingly a number of [WTO] members do not agree” with the plan, adding: “They are reluctant to discuss and are reserving their position in Geneva.”
A senior EU official told the Guardian: “We think we will we have to go through a more difficult procedure. The UK wants to go for the simplest way we are saying we are not against it but politically it will not fly at all and we will have to do it the other way and even then it will be contested.
“I think some have a case. With New Zealand and their lamb, they might say that we send our meat via Rotterdam or elsewhere to Britain, and you are making our trade arrangements more rigid.
“For the first plan to work, the changes have to be perceived as technical adjustments for which there are no political issues. The other is a real correction, a real adjustment when you go through an approval process. And they take their time.”
Alan Matthews, a professor of agricultural policy at Trinity College Dublin, said: “Rectification was always a crazy idea which would never be accepted as clearly what the UK and EU propose goes way behind what is covered by rectification.”
The Department for International Trade, which Fox heads, said: “As we leave the EU we need to create a new UK goods schedule at the WTO, covering tariffs on our imports from other WTO members. We have engaged all 164 WTO members, and they understand our intention to establish our goods schedule by rectification.
“As a part of the process, we also agreed an approach with the EU to apportion tariff rate quotas covering certain imported goods, based on historic trade flows, and wrote to WTO members on this last year. We are continuing to speak to them about next steps to secure an outcome with is fair and avoids disruption to existing trade.”’ Resistance to joint proposal to WTO leaves UK and EU divided
Show of unity breaks down after US, Australia and others reject post-Brexit trade plans by Daniel Boffey, the Guardian, 25 April 2018.
It only tales 1 member out of 164 in the WTO to block any attempt by Britain to regularise its schedules.
The economic diplomacy underlying this dance will make Brexit look like a children’s parlour game, and has not even begun.
How do we get out of this political mess?
What is the treaty exit mechanism?
Part V of the Vienna Convention on the Law of Treaties (the ‘Convention’) sets out the various circumstances in which a treaty can be denounced, terminated or its operation suspended, other than on grounds of invalidity.
‘Denunciation and withdrawal are used interchangeably to refer to a unilateral act by which a nation that is currently a party to a treaty ends its membership in that treaty. In the case of multilateral agreements, denunciation or withdrawal generally does not affect the treaty’s continuation in force for the remaining parties. For bilateral agreements, in contrast, denunciation or withdrawal by either party results in termination of the treaty for both parties. The termination of a multilateral agreement occurs when the treaty ceases to exist for all States parties.’ (Hollis), page 635.
‘To be effective, denunciation, termination or suspension may take place only as a result of the application of the provisions of the treaty itself or Article 42(2) [of the Convention]. These days, most treaties contain provisions on duration and termination, often in the same article. But when there are none, one must consider not only the relevant article in Part V [of the Convention], but other articles in that Part which govern the conditions for applying the article, such as Articles 65-68 concerning the procedure to be followed. Certain other articles of the Convention may also be relevant…’ (Aust), page 245.
Article 42(2) provides, ‘The termination of a treaty, its denunciation or the withdrawal of a party, may take place only as a result of the application of the provisions of the treaty or of the present Convention. The same rule applies to suspension of the operation of a treaty.’
The design and operation of treaty exit clauses is governed by the foundational principle of State consent.
Article 54 of the Convention provides,
‘The termination of a treaty or the withdrawal of a party may take place:
(a) In conformity with the provisions of the treaty; or
(b) At any time by consent of all the parties after consultation with the other contracting States’.
‘At the negotiation stage, State representatives have free rein to choose the substantive and procedural rules that will govern the future cessation of their relationship. Once those rules have been adopted as part of a final text, however, a State that ratifies or accedes to the treaty also accepts any conditions or restrictions on termination, withdrawal or denunciation that the treaty contains. Unilateral exit attempts that do not comply with these conditions or restrictions are ineffective. A state that ceases performance after such an attempt remains a party to the treaty, albeit one that may be in breach of its obligations. However, the treaty parties may waive these conditions or restrictions and permit unilateral withdrawal, or terminate the treaty, “at any time by consent of all the parties after consultation with the other contracting states.”… States are the undisputed masters of treaty exit rules… But what if a treaty omits such clauses entirely? In such a situation the VCLT provides default rules to govern the end of the parties’ relationship.’ (Hollis), page 636.
Article 56 provides,
‘1. A treaty which contains no provision regarding its termination and which does not provide for denunciation or withdrawal is not subject to denunciation or withdrawal unless:
(a) it is established that the parties intended to admit the possibility of denunciation or withdrawal; or
(b) a right of denunciation or withdrawal may be implied by the nature of the treaty.
2. A party shall give not less than twelve months’ notice of its intention to denounce or withdraw from a treaty under paragraph 1.’
Whilst the commercial character of a treaty is not determinative, in principle, a trade agreement is likely to fall within the Article 56(1)(b) exception.
Article 70 further provides,
‘1. Unless the treaty otherwise provides or the parties otherwise agree, the termination of a treaty under its provisions or in accordance with the present Convention:
(a) releases the parties from any obligation further to perform the treaty;
(b) does not affect any right, obligation or legal situation of the parties created through the execution of the treaty prior to its termination.
2. If a State denounces or withdraws from a multilateral treaty, paragraph 1 applies in the relations between that State and each of the other parties to the treaty from the date when such denunciation or withdrawal takes effect.’
‘Taken together, these provisions restrict States from using exit to avoid accountability for past violations of international law. They also discourage the precipitous and opportunistic withdrawals in which a State seeks to exit and then immediately violate a rule that it previously accepted as binding.’ (Hollis), page 641.
Article 43 also provides, ‘The invalidity, termination or denunciation of a treaty, the withdrawal of a party from it, or the suspension of its operation, as a result of the application of the present Convention or of the provisions of the treaty, shall not in any way impair the duty of any State to fulfil any obligation embodied in the treaty to which it would be subject under international law independently of the treaty.’
Treaty exit clauses operate in tandem with other flexibility devices including: reservations; amendment rules; escape clauses; and renegotiation provisions, that treaty makers use to manage risk.
Please see, the ‘Brexit’ and ‘Bilateral and Regional Trade Agreements’ pages at www.diplomaticlawguide.com

Mediation in the Court of Protection

I have been invited to write an article for publication in the Autumn edition of the Expert Witness Journal (ahead of the Bond Solon annual international Expert Witness Conference in London on 9 November 2018), entitled, ‘The Advocate and the Expert in the Court of Protection’. The article is being co-authored with Dr Hugh Series who is a consultant in old age psychiatry at the Oxford Health NHS Foundation Trust, a member of the Faculty of Law at the University of Oxford, and a medical member of the Mental Health Tribunal (first tier). In this post, extracting text from the draft article, I introduce, a new technique called ‘BME Mediation’ that I have pioneered for the mediation of appropriate estate and trust disputes worldwide. This technique was derived from the technique of ‘Guided Settlement’ that I pioneered and outlined in my previous book the ‘Contentious Probate Handbook’ published by the Law Society, and will be more fully outlined in my new book the ‘Contentious Trusts Handbook’, that I am currently writing. What I conclude is that in Court of Protection proceedings, BME Mediationcan result in an all-round ‘win/win’ outcome for all parties, with P‘s best interests being placed front and centre – particularly where related Care Act issues are engaged and need to be resolved to enable a plan to be put in place and implemented in P‘s best interests. As far as I am aware this is the first time such a method of ADR has been suggested, and is timely in light of the progress of the Mental Capacity (Amendment) Bill [HL] 2017-19. I would therefore welcome any comments and criticism.

An application to the COP can include a request for an order that the parties attend mediation. In furtherance on the overriding objective (Rule 1.1), the court is expected to encourage the parties to use an alternative dispute resolution procedure where appropriate, and once proceedings are issued, the court can consider whether all or any of the issues subject to application are suitable to be referred to mediation. When is mediation appropriate? ‘The issues covered in case studies mediated ranged from residence (most frequently cited, with 59% of cases involving residence) to medical treatment and statutory wills (each raised in 7.4% of cases). Almost one-third of cases involved finance and property. Other issues in the cases mediated included Power of Attorney, Deputyship, holidays, and Deprivation of Liberty … The success rate in the reported cases was high, with 78% of reported cases reaching an agreement either during or following mediation. Written agreement was reached in 52% of cases, with a further 19% achieving written agreement following the mediation. Oral rather than written agreement was reached in 7% of cases. In 22% of cases there was no agreement. In most of those where an agreement was reached (59%), the terms of agreement were incorporated into a court order. Reasons for lack of agreement being reached included entrenched positions, too many parties and too little time, and the existence of allegations of financial abuse and fraud. Examples given of approximate cost savings were between £6,000 and £30,000 – the exact savings depended on length of case and when in the proceedings the mediation took place, as well as estimates of savings of judicial and court staff time, and time of counsel and local authority professionals.’  ‘Mediating Court of Protection cases – Summary of research’ by Charlotte May: https://ukaji.org/2017/05/03/mediating-court-of-protection-cases-summary-of-research/

‘For those who have proposed mediation or responded to a suggestion by the court or another party, it is essential to consider what to expect from the mediation. Advisers will need to have a clear grasp of the strengths and weaknesses of the client’s case. Perhaps for this reason, many Court of Protection mediations take place after the receipt of experts’ reports … This is an ideal time to take stock of the evidence as it now stands, in as objective a way as possible … In anticipation of the mediation the following issues should be considered:

·         Assuming that new evidence (especially in the form of expert reports) has been received, what if any impact has this evidence had on the views and positions of the parties?

·         Advisers should explore with their clients as neutrally as possible whether there are any concessions which the client feels they could offer which might promote an agreement. These might include matters that could not be achieved through litigation alone …

·         It is important to evaluate in the light of the evidence what the client can realistically achieve in the litigation. If mediation fails what is the likely outcome of a contested hearing?

·         Is there any reason (on an objective evaluation) to believe that any of the other parties have not agreed to mediate in good faith?

·         The potential benefits of mediation should be weighed , even if it is unlikely to deliver a full resolution: might it narrow the issues or at least improve the parties’ ability to communicate?

·         With this point in mind advisers are encouraged to manage their client’s expectations …

Court of Protection cases pose particular challenges. P’s interests need to remain central to the process. If P is a party, he or she is likely to have a litigation friend who is likely to be present (or be represented) at the mediation. The litigation friend should make every attempt to ascertain P’s wishes and feelings on the issues which are being mediated. By definition, P is unlikely to be able to take part in the process of compromise and give-and-take that may be involved in mediation. It is the mediator’s role to ensure that P remains the focus of the mediation and to reduce the time spent disproportionately on satellite issues which may be considered important by the other parties. The second difficulty is that Court of Protection cases will frequently involve an imbalance of power between the parties, as they may typically involve a dispute between a statutory body and one or more individuals. It is suggested that this requires the mediator to satisfy him or herself that even though one party may be in a much stronger position, that party remains willing genuinely to consider an element of compromise.’ Court of Protection Handbook, paragraphs 19.33 to 19.41. In for example a residence dispute governed by the Care Act 2014, that is inextricably linked with COP proceedings, the mediator could be a leading specialist QC, who could be both facilitative and evaluative.

I have developed a new technique, called ‘BME Mediation’, for the amicable resolution of trust and estate disputes (which will be fully outlined in my new book for the Law Society, the ‘Contentious Trusts Handbook’https://newsite.carlislam.co.uk/contentious-trusts).

BME’ stands for ‘beginning’‘middle’, and ‘end’. The steps in the procedure are:

1.          Beginning:

1.1    Commercial analysis – joint evaluation of:

–           estate/trust assets;

–           ownership;

–           claims;

–           value;

–           opportunities (i.e. commercial exploitation of hidden value, e.g. IPR rights in relation to a work of art);

–           risks (e.g. the IHT/CGT consequences of a DOV executed after the s.142 IHTA 1984 window has closed, or the actual impact of BREXIT on the property market, e.g. if in the surrounding locality for valuation, a business fails or moves abroad, resulting in: (i) unemployment; (ii) a surge in mortgage default; and (iii) an increase in the volume of comparable properties being sold ‘cheap’ at auction, placing downward pressure on the market);

1.2      Legal risk analysis – separate evaluation of the:

–          facts (i.e. a chronology);

–        issues;

–          law;

–          evidence;

–          remedies & procedure; and

–          costs.

2.            Middle – exploration/mapping of:

2.1     needs/preferences e.g. retention of land to run a farm as a viable going concern versus assets available for sale to generate liquidity (and their saleability / current market value based upon condition/status quo);

2.2     opportunities e.g. planning permission to release/exploit hidden or trapped value or tax e.g. the RNRB for deaths after 6 April 2017;

2.3     choices – if e.g. party ‘A’ is willing to settle for asset ‘X’ and party ‘B’ for asset ‘Y’, evaluating the difference in value arising from the asymmetry between:

–          the value of each party’s respective claims on the estate/trust assets as a whole i.e. XY); and

–          the individual market values of ‘X ‘and ‘Y’; and

–          the cost of extracting value from ‘X’ and ‘Y’, e.g. if a property requires renovation before it can be sold, which when calculated may illustrate that the difference between the value at which ‘A’ and ‘B’ will settle (the ‘Zone of Difference’) is in fact less than 5%. In other words, that a symmetrical BATNA would = settlement at the mid-point of 2.5% (if actually doable, i.e. practicable);

2.4    adjustments to be factored into the settlement equation, i.e. which can reduce the Zone of Difference (‘Z’) to zero; and

2.5    arithmetical comparison of (as a crunched number) with the potential costs of litigation (‘C’) on:

–        the standard basis if a party wins i.e. because that party would usually fail to recover around 1/3 of their actual costs (which e.g. in a trial costing around £150K each = a loss of £50K; and

–          liability for own costs and other party’s costs (on standard basis if a party loses) (e.g. £250-£300K),

and chances of success (which at the early stage of any proceedings, i.e. before disclosure has taken place and witness statements have been exchanged is difficult to forecast with any accuracy, hence a conservative estimate is unlikely to be greater than 60/70% on either side = a difference of 30:35.

2.     End – Agreeing a fair and sensible split of estate/trust assets (i.e. X + Y) that avoids the ongoing and increasingly large risk of C either: (i) exhausting the available value (including hidden value) of X and Y, or (ii) the risk of either or both and B, ending up in negative equity. This requires pragmatism because in the long term ‘less can mean more’ if litigation is avoided/discontinued.

In relation to COP proceedings:

·         Y = P;

·         the value of P = costs of implementing a ‘best interests’ decision (‘BID’);

·         based upon expert evidence about P’s capacity; assessments and reports provided by a local authority about P’s needs and the available options, and resulting costs (‘RC’), the COP can endorse a BID agreed in mediation between e.g. two warring local authorities (‘LA’s’) about how RC is to be funded (‘F’);

·         in agreeing F, the LA’s can address adjustments e.g. to take account of voluntary payments already made by one LA (‘LA1’) toward P’s residential care costs following a move by to the administrative area of the other LA (‘LA2’), which LA2 can compare to the future costs of litigation (including possibly a referral to the Secretary of State and where a convention right is engaged and the claim qualifies, proceedings in the ECHR).

The point being that in mediation:

·         LA1 and LA2 can at the beginning agree upon what is in P’s best interests based upon expert evidence;

·         in the middle they can then work collaboratively to identify the practical options available and costs involved; and

·         at the end can jointly develop a plan (including transition), to implement a BID for P that can be approved by the COP judge.

That should result in a win/win outcome all round because:

·         P’s best interests will have been met;

·         LA1 and LA2 will have spent their precious resources on developing a plan for implementation, instead of on legal fees;

·         the plan can be implemented by the COP (who do not have jurisdiction to decide public law issues and therefore cannot order a LA to pay for P’s ongoing/future care); and

·         LA1 will exit on terms that are satisfactory to LA2.

The acme of the advocate and the expert in the COP is therefore to work collaboratively inP’s best interests with the aim of the parties agreeing a BID for approval by the court that is possibly better for both P and each LA, instead of going to court. That is why from the outset of a mediation the mediation advocate should say to the other counsel,

‘Thank you for meeting with us today.

I will be corrected if I am wrong, but what I think you say about the facts and the law is …

It is not my job to persuade you that your arguments will not succeed at trial.

As you know we say that we will succeed.

I am not interested in having an argument with you about whose view is right.

I suggest that litigation is not going to be a great outcome for either you or my client. The risks are…

I am here because I believe that we can reach a principled and fair deal that is not only good for my client but also better for you.

I hope that you will work with me to achieve this today’.

Each issue in dispute can then be approached constructively:

(i)             from the point of view of needs, interests (with P’s ‘best interests’ taking priority), and options, rather than fault and blame; and

(ii)           by focussing on the best possible outcome for all of the parties.

Both sides can then work to maintain an open and reasonable atmosphere, with the mediation advocates emphasising objectivity, resulting in a potential settlement being judged against agreed criteria to test fairness.

Because the beginning requires preliminary groundwork by each party, in preparing: (i) a commercial analysis; and (ii) a legal risk analysis, to be provided privately to the mediator ahead of the mediation, i.e. as a road-map to educate him about the issues, facts, law, and dynamics underlying resolution of the claim, there is no need for a plenary session, other than to discuss ‘house-keeping’ matters. In other words, instead of exchanging partisan position papers, and wasting precious daylight engaged in posturing and positional argument about who is ‘right’ and who is ‘wrong’, resulting in tempers being inflamed, and the further entrenchment of positions, resulting in ‘road-blocks’ that prevent the making of a deal before 5pm, the parties can set the mediator free to work his magic from the outset, and get on with the business of ‘doing a deal’. They can then start to engage constructively with each other in a joint-problem solving exercise, conducted by ‘proxy’, through the mediator.

Breach of Fiduciary Duty

This year I have been involved in 3 cases involving allegations of breach of fiduciary duty (including self-dealing by executors and fraudulent calumny by a fiduciary who remained silent), and this subject features in my forthcoming book the ‘Contentious Trusts Handbook’ which I am writing for the Law Society.

 

I am also giving a talk about ‘Breach of fiduciary duties by trustees’ at Barlow Robbins Solicitors in Guildford on Tuesday 13 November 2018, and will address the recent judgment by Mr Justice Nugee in  Glenn v Watson & Ors [2018] EWHC 2016 (Ch) (31 July 2018), in which the Judge observed,

 

‘I was referred by both [Counsel] to a number of authorities on the question whether a fiduciary duty is owed by one person to another.  For the most part I did not detect any significant difference between them as to the law; the authorities referred to were rather put forward as illustrations, thought to be helpful to one side or the other, of the principles.  In those circumstances, I do not intend to discuss the authorities at length, but will try and summarise what I understand the principles to be.

Those are I think as follows:

(1)                   There are a number of settled categories of fiduciary relationship.  The paradigm example is that of trustee and beneficiary; other well-settled examples are solicitor and client, agent and principal, director and company (subject to the impact of the Companies Act 2006), and the relationship between partners: Snell’s Equity (33rd edn, 2015) at §7‑004.

(2)                   Outside these settled categories, fiduciary duties may be held to arise if the particular facts warrant it.  Identifying the circumstances that justify the imposition of fiduciary duties has been said to be difficult because the courts have consistently declined to provide a definition, or even a uniform description, of a fiduciary relationship: ibid at §7‑005.

(3)                …

(4)                …

(5)                …

(6)                   What then are the particular factual circumstances that will lead to the Court finding that fiduciary duties are owed?  This can best be elucidated by a number of citations:

(a)        In his well-known classic judgment in Bristol & West Building Society v Mothew [1998] Ch 1 (“Mothew”) at 18A, Millett LJ said:

“A fiduciary is someone who has undertaken to act for or on behalf of another in a particular matter in circumstances which give rise to a relationship of trust and confidence.”

(b)        In Arklow Investments Ltd v Maclean [2000] 1 WLR 594 at 598G, Henry J, giving the judgment of the Privy Council, said:

“the concept encaptures a situation where one person is in a relationship with another which gives rise to a legitimate expectation, which equity will recognise, that the fiduciary will not utilise his or her position in such a way which is adverse to the interests of the principal.”

(c)        In F&C Alternative Investments (Holdings) Ltd v Barthelemy (No 2) [2011] EWHC 1731 (Ch) at [225], Sales J said:

“Fiduciary duties are obligations imposed by law as a reaction to particular circumstances of responsibility assumed by one person in respect of the conduct of the affairs of another.”

(d)       In another case involving Ross River Ltd, Ross River Ltd v Cambridge City Football Club [2007] EWHC 2115 (Ch) (cited by Lloyd LJ in Ross River at [56]-[58]), Briggs J referred at [198] to:

“well known badges or hallmarks of a fiduciary relationship, such as … [if] the plaintiff entrusts to the defendant a job to be performed, for instance, the negotiation of a contract on his behalf or for his benefit.”

(e)        In Ross River at [51]-[52] Lloyd LJ cited with approval a passage from Bean, Fiduciary Obligations and Joint Ventures (1995) (itself referring to Finn, Fiduciary Obligations (1977)), which is too long to set out in full but the essence of which is as follows:

“[Fiduciary] office holders are entrusted with power to act for the benefit of another, but are not under the immediate control and supervision of the beneficiary…

Finn’s rationale is that the fiduciary who has freedom to determine how the interests of the beneficiary are to be served requires the supervision of equity. Indeed, it is the fiduciary’s autonomy in decision-making that requires equity’s supervision and this is required whether or not the autonomy is created under a contract between the parties or is inherent in the office.”

(7)                   Without in any way attempting to define the circumstances in which fiduciary duties arise (something the courts have avoided doing), it seems to me that what all these citations have in common is the idea that A will be held to owe fiduciary duties to B if B is reliant or dependent on A to exercise rights or powers, or otherwise act, for the benefit of B in circumstances where B can reasonably expect A to put B’s interests first.  That may be because (as in the case of solicitor and client, or principal and agent) B has himself put his affairs in the hands of A; or it may be because (as in the case of trustee and beneficiary, or receivers, administrators and the like) A has agreed, and/or been appointed, to act for B’s benefit.  In each case however the nature of the relationship is such that B can expect A in colloquial language to be on his side.  That is why the distinguishing obligation of a fiduciary is the obligation of loyalty, the principal being entitled to “the single-minded loyalty of his fiduciary” (Mothew at 18A): someone who has agreed to act in the interests of another has to put the interests of that other first.  That means he must not make use of his position to benefit himself, or anyone else, without B’s informed consent.

(8)                   …

(9)                  …

(10)               Even if a party is held to have owed a fiduciary duty to another party, the nature of the fiduciary obligations owed is itself a fact-sensitive enquiry, to be determined by considering the particular relationship between the parties: Ross River at [64].  Thus for example in John v James the defendants were not disposed to dispute that the publisher owed a fiduciary obligation to account for royalties received, but it was disputed, and had to be decided, whether it owed a fiduciary obligation in respect of exploitation of the copyrights; in Ross River Morgan J had found that the defendants owed fiduciary duties in certain respects but not others, and the Court of Appeal found that the duties were more extensive.

  1. Mr McCaughran had a further submission on this point, which is that a distinction can be seen in the authorities between cases in which the Court has held that a fiduciary duty arises out of an existing contractual relationship as an incident of the contract between the parties, and cases in which a party is held to owe a fiduciary duty to the other party in the negotiation of the contract.  He relied on what Lord Walker had said in Cobbe v Yeoman’s Row Management Ltd [2008] UKHL 55 at [81] where he referred to:

“the general principle that the court should be very slow to introduce uncertainty into commercial transactions by over-ready use of equitable concepts such as fiduciary obligations and equitable estoppel.  That applies to commercial negotiations whether or not they are expressly stated to be subject to contract.”

That was not in fact a case about fiduciary duties but about promissory estoppel, but I do not think that detracts from the force of what Lord Walker says, or from its good sense.  Parties negotiating for a contract are normally entitled to act in their own interests and are not obliged to have regard to the interests of the other party, and it takes particular circumstances before fiduciary duties are to be imposed on them.  Mr McCaughran said that in the case of negotiations for a joint venture such cases were very rare, the only example he had found being Murad.  In Murad the claimants were two sisters who lived abroad and looked to the defendant, a Mr Al-Saraj, to make appropriate recommendations and assist them in connection with investments in England; they had no relevant experience, had no knowledge of the arrangements made by the defendant with third parties, and entrusted him with extensive discretion to act in matters affecting their interests.  They were, in the words of Etherton J “wholly dependent” on him for his advice and recommendation, the negotiations with the vendors, and the instruction of professionals on their behalf, including in relation to the structure of the transaction and documentation; see at [328], [332].

I will add one further point here.  The reference in the cases (such as John v James, Mothew and Longstaff v Birtles) to a relationship of “trust and confidence” does not mean that every relationship in which one party trusts the other is a fiduciary relationship.  Contracting parties usually do trust each other – indeed they would be unlikely to do business with each other if they did not – but this does not mean that they owe each other the duties which are peculiar to fiduciaries.  What I think is meant by a relationship of trust and confidence in this context is where one party places himself, or is placed, in the position where he trusts and confides that the other party will act exclusively in the first party’s interests.  If the concept of trust and confidence is not confined in this way, it seems to me to cease to be of any utility in determining whether a fiduciary duty is owed: cf the recent decision of Leggatt LJ (at first instance) in Sheikh Al Nehayan v Kent [2018] EWHC 333 (Comm) (“Al Nehayan”) at [164]-[165]. This judgment, which contains a valuable analysis of the whole question of fiduciary duties (see at [153ff]), was not available at the time of the hearing, but it contains nothing with which I disagree, and on this particular point seems to me plainly right, and I have not thought it necessary to ask for the parties’ further submissions on it.’

In Sheikh Al Nehayan v Kent [2018] Lord Justice Leggatt stated,

‘As Lord Browne-Wilkinson cautioned in Henderson v Merrett Syndicates Ltd [1995] 2 AC 145 at 206:

“The phrase ‘fiduciary duties’ is a dangerous one, giving rise to a mistaken assumption that all fiduciaries owe the same duties in all circumstances.  That is not the case.” … I bear in mind that it is exceptional for fiduciary duties to arise other than in certain settled categories of relationship.  The paradigm case of a fiduciary relationship is of course that between a trustee and the beneficiary of a trust.  Other settled categories of fiduciary include partners, company directors, solicitors and agents.  Those categories do not include shareholders, either in relation to the company in which they own shares or to each other.   While it is clear that fiduciary duties may exist outside such established categories, the task of determining when they do is not straightforward, as there is no generally accepted definition of a fiduciary.  Indeed, it has been said that a fiduciary “is not subject to fiduciary obligations because he is a fiduciary; it is because he is subject to them that he is a fiduciary”: see Finn, Fiduciary Obligations (1977), p2, cited with approval by Millett LJ in Bristol and West Building Society v Mothew [1998] Ch 1, 18.  If this is right, it simply begs the question of how to determine when a person is subject to fiduciary obligations if not by analysing the nature of their relationship with the person to whom the obligations are owed.

Despite saying in the Mothew case that a fiduciary is defined by the obligations to which he is subject and not the other way round, Millett LJ did give a general description of a fiduciary as “someone who has undertaken to act for or on behalf of another in a particular matter in circumstances which give rise to a relationship of trust and confidence”: see [1998] Ch 1, 18.  This description has often since been cited with approval, including by the Supreme Court in FHR European Ventures LLP v Cedar Capital Partners LLC [2014] UKSC 45[2015] AC 250, para 5.  To similar effect, in another much quoted statement, Mason J in the High Court of Australia in Hospital Products Ltd v United States Surgical Corp (1984) 156 CLR 41, 96-97, said:

“The critical feature of these relationships is that the fiduciary undertakes or agrees to act for or on behalf of or in the interests of another person in the exercise of a power or discretion which will affect the interests of that other person in a legal or practical sense. The relationship between the parties is therefore one which gives the fiduciary a special opportunity to exercise the power or discretion to the detriment of that other person who is accordingly vulnerable to abuse by the fiduciary of his position.”

Thus, fiduciary duties typically arise where one person undertakes and is entrusted with authority to manage the property or affairs of another and to make discretionary decisions on behalf of that person.  (Such duties may also arise where the responsibility undertaken does not directly involve making decisions but involves the giving of advice in a context, for example that of solicitor and client, where the adviser has a substantial degree of power over the other party’s decision-making: see Lionel Smith, “Fiduciary relationships: ensuring the loyal exercise of judgement on behalf of another” (2014) 130 LQR 608.)  The essential idea is that a person in such a position is not permitted to use their position for their own private advantage but is required to act unselfishly in what they perceive to be the best interests of their principal.  This is the core of the obligation of loyalty which Millett LJ in the Mothew case [1998] Ch 1 at 18, described as the “distinguishing obligation of a fiduciary”.  Loyalty in this context means being guided solely by the interests of the principal and not by any consideration of the fiduciary’s own interests.  To promote such decision-making, fiduciaries are required to act openly and honestly and must not (without the informed consent of their principal) place themselves in a position where their own interests or their duty to another party may conflict with their duty to pursue the interests of their principal.  They are also liable to account for any profit obtained for themselves as a result of their position …

But the existence of trust and confidence is not sufficient by itself to give rise to fiduciary obligations.  In the first place, the question whether one party did in fact subjectively place trust in the other is not the test.  As Dawson J said in the Hospital Products case (1984) 156 CLR 41 at 71:

“A fiduciary relationship does not arise where, because one of the parties to a relationship has wrongly assessed the trustworthiness of another, he has reposed confidence in him which he would not have done had he known the true intentions of that other.  In ordinary business affairs persons who have dealings with one another frequently have confidence in each other and sometimes that confidence is misplaced.  That does not make the relationship a fiduciary one.  A fiduciary relationship exists where one party is in a position of reliance upon the other because of the nature of the relationship and not because of a wrong assessment of character or reliability.”

The inquiry, in other words, is an objective one involving the normative question whether the nature of the relationship is such that one party is entitled to repose trust and confidence in the other.

It is also necessary to identify more precisely the nature of the trust and confidence which is a feature of a fiduciary relationship.  There plainly are many situations in which a party to a commercial transaction may legitimately repose trust and confidence in another without the other party owing any fiduciary duties.  Thus, in Re Goldcorp Exchange Ltd (In Receivership) [1995] 1 AC 74, the Privy Council rejected an argument that a company was a fiduciary because it had agreed to keep gold bullion in safe custody for customers in circumstances where the customers were totally dependent on the company and trusted the company to do what it had promised without in practice there being any means of verification.  Lord Mustill said (at 98):

“Many commercial relationships involve just such a reliance by one party on the other, and to introduce the whole new dimension into such relationships which would flow from giving them a fiduciary character would (as it seems to their Lordships) have adverse consequences …. It is possible without misuse of language to say that the customers put faith in the company, and that their trust has not been repaid. But the vocabulary is misleading; high expectations do not necessarily lead to equitable remedies.”

Mutual trust and confidence between parties dealing with one another can be of different kinds.  At a basic level any contracting party is entitled to rely on the other party to perform its contractual obligations without having to monitor performance or even if (as in Re Goldcorp Exchange Ltd) it is unable to monitor performance.  The kind of trust and confidence characteristic of a fiduciary relationship is different.  As discussed above, it is founded on the acceptance by one party of a role which requires exercising judgment and making discretionary decisions on behalf of another and constitutes trust and confidence in the loyalty of the decision-maker to put aside his or her own interests and act solely in the interests of the principal.’

 

 

 

 

 

 

 

Six Minutes in November 2018?

‘The Clerk at the table turned over the sandglass to time six minutes to the division. The Bar Doorkeeper opened the Chamber’s inner doors and shouted “Division!” to alert the principal doorkeeper, who activated the bell by a lever in the arm of his chair. Bells rang throughout the Commons, and the cry of “Division!” was taken by police officers and other staff. The bells rang for fifty-five seconds. During this time each side of the argument provided Tellers for the Division. After two minutes, the speaker again put the question, and announced the names of the Tellers … Members had four minutes to get into one division Lobby or the other … It is hard to say at what point the government grasped the nature of this maelstrom. Earlier in the afternoon, Ministers had felt that the Labour decision to divide the House was a mistake and had freely predicted that no more than a dozen Conservatives would defy their Whips. David Margesson [the chief government whip] claimed that it dawned on him only in the winding-up speeches that the large government majority was likely to collapse. Out of the blue, a routine adjournment motion for the Whitsun holiday, which the government had expected comfortably to win, had been hijacked, using a procedural vote to expose the fragility of the Chamberlain administration. As the division bell sounded with the piercing shrill of a fire alarm, panic spread along the front bench … There was no indication of how the vote would go as Members began to move into the division lobbies … Active until the sixth minute when the Doorkeepers turned their keys in the locks, government Whips and Ministers were still putting pressure on the dissidents … Almost the last group to make up their minds were the Conservative dissidents … Quintin Hogg [who later became Lord Chancellor] still standing [exclaimed] ‘What should I do?” He agonized. “Vote for the Government as the majority would do? Abstain as many subsequently did? Vote against and perhaps bring my country as well as the Government down?” … On the Clerk’s table, the grey sand in the Victorian glass trickled to a halt. The Speaker rose a second time, and called out: “Lock the doors” … Mind made up, Hogg rushed past the Doorkeeper – in one version forcing him aside – and got into the No lobby “as the door closed behind.” Dingle Foot described the scene in the No lobby as unique, a fitting culmination to what had been “unquestionably the most important debate in Parliamentary history”. Clement Attlee saw – much to his “pleasure and surprise” – something that he had long hoped for, but never expected to witness: Conservative MP after Conservative MP … crowded with Labour and Liberal MP’s into the same lobby. In Ronald Blythe’s phrase: “Shifty eyes and blushes met the Labour and Liberal grins.”’ Six Minutes in May– How Churchill Unexpectedly Became Prime Minister, by Nicholas Shakespeare (2017).

If the UK remains on course for a ‘no deal Brexit’ could history repeat itself in November 2018?

If you ask an adult to make a rational choice between:

(i)            saving around £300 per year in household bills (the theoretical free-trade benefit of Brexit articulated today on the BBC Sunday Politics programme by Owen Paterson MP); and

(ii)           loss of access to an essential public service (the ‘price’ of Brexit), e.g. medical care for the treatment of cancer, which could easily exceed multiple thousands of pounds in the same period for an individual (compounded by the cost of paying for private medical care if affordable unless they have insurance),

then, unless that person is a rabid ideologue, the rational answer is obvious, in which case why not ask the people ‘now that you know what the actual cost/benefit is likely to be, are you sure that you want to jump over the Brexit cliff?’ because there is no parachute or safety-net below – only sharks and rocks.

If tribalism is the disease is globalisation the cure?

‘In Defence of Globalization’https://www.chathamhouse.org/event/defence-globalization

John C Whitehead lecture delivered by Tony Blair at Chatham House, London, 27 June 2018.

Mr Blair’s thesis appears to be that there is no ‘co-ordination equilibrium’. Therefore, if the UK is not part of a tectonic ‘trading’ block, that like a small island caught somewhere between two mighty continents, we will end up being crushed between ‘giants’ when they collide.

Is it that simple?

The international monetary and financial system plays a central role in the global political economy.

Economists have pointed out that national governments face an inevitable trade-off between the three policy goals of: (i) exchange rate stability; (ii) national monetary policy autonomy; and (iii) capital mobility.

In theory, it is only ever possible for governments to realize two of these goals at the same time.

Judge for yourself whether in the following analysis Mr Blair provides the answer to the impossible trinity of open macroeconomics?

In other words if tribalism is the disease, is globalisation the cure?

To view the lecture please visit the World Order page of the Diplomatic Law Guide (www.diplomaticlawguide.com)

Text of the lecture

‘John C Whitehead was a great man, a brilliant entrepreneur, a true public servant and dedicated advocate for Western values and the Transatlantic Alliance. It is an honour to give this lecture in his name.

Globalisation and its advocates are on the back foot. Populism of left and right meet at a certain point in denunciation of free trade arrangements, migration and international alliances. All are portrayed as contrary to putting individual national interest first.

The populist wave upending Western politics shows no sign of abating. Italy proves that. It is difficult to predict whether we are at the crest of the wave which will soon subside, or whether it is still building its momentum. But I fear it is the latter.

Much will depend on the state of the global economy and here, reasonable people differ. Some think it is growing strongly and interest rates should rise in acknowledgement. Others think fundamental weaknesses remain and the world could tip back into recession. 

Immigration is the most obvious political game-changer, certainly in Europe. Stagnant incomes for a significant part of the population reinforce the sense of political alienation. Technology has suddenly become perceived as a threat as much as a benefit. We live in a world of accelerating change where people feel their lives are being changed by forces and interests beyond their control. The politics of pessimism are the fashion.

Tony Blair “Those in the centre ground of politics must become again the change-makers, not the managers of the status quo.” Click to Tweet

Once it is clear the populism isn’t working because, ultimately, it offers only expressions of anger and not effective answers, the populists may double down, alleging that failure is the result of half-heartedness and that only more of the same will work. Who knows where the dynamic of that scenario takes us. Then the comparisons with the 1930s no longer seem so far-fetched.

This is a moment in time when we must re-make the case for reason based politics, with a correct analysis of why the world is changing and how we can navigate our way through the change to the advancement of our people and the reignition of the politics of optimism.

Things we take for granted must be re-argued from first principles – why protectionism is bad, why properly managed migration is good, why the technological revolution can bring enormous gains and its displacement impact surmounted, why the Transatlantic Alliance is as relevant today as ever, and why globalisation is a force driven primarily not by Governments but by people and resisting it is dangerous.

But this must be accompanied by a stark commitment to deal effectively with the grievances driving the discontent.

There is an absurd parody – both far left and right – that globalisation is a project of the political elite. Dictionary definitions of globalisation are strangely unsatisfactory but in a colloquial sense it stands for the coming down of barriers of nation, race, trade and culture, a world coming together, mixing more, integrating more in experience and lifestyle.

The forces driving this process are cheap travel, interconnectedness through technology which allows us to see how others are living and thinking, which in turn makes migration attractive, and the desire on the part of people for quality but inexpensive consumer goods.

Government can in varying degrees enable or hinder this process but the idea Government created it or can stop it, is fantasy.

Moreover, there is no doubt what decades of ‘opening up’ have done for the world. The world has become more prosperous. You don’t have to agree with all the commentary in the books by Rosling and Pinker to accept that the facts are clear.

Another parody is that those who believe Governments should enable and not hinder this process of globalisation, somehow also believe that globalisation should not only be unhindered but unmanaged. This is to confuse globalisation with laissez-faire. It is a charge often repeated about my Government. The unprecedented investment we made in public services and the poorest communities – all whilst keeping borrowing levels below that of the previous Conservative Government, the Minimum Wage, and a host of other Labour rights, major reforms in the tax and benefit system, and the development of the University sector as critical to future industrial policy bear ample testament to how fatuous this is. And if in Government today, and post the financial crisis, I would be doing much more and doing it differently in areas like infrastructure, education and skills, welfare and preparation for our future particularly in respect of technology.

The inter-dependence of the world is not a policy. It is reality. But it has consequences which need to be managed not by market forces but a by a reformed Government structure which is strategic and empowering.

Tony Blair “The people must make the final decision because only they have the right to decide what version of Brexit they want or whether in the light of all they now know they prefer to remain.” Click to Tweet

Even regarding the financial crisis, I would urge caution in learning the right lessons not the wrong ones. This was a failure of understanding about the modern global economy and its new financial instruments, combined with an irresponsibility on the part of some of the players in it. So, we learn and adjust the regulatory framework accordingly. But it neither invalidates the overall importance of markets, nor free flowing global finance as a necessary part of them.

Likewise, there is little doubt that protectionism harms prosperity. That is the one unequivocal lesson of the 1930s. The tariff measures of the USA aimed at China have an origin which is understandable. It is true China needs to open its markets and abide by the rules on technology transfer. There may well be reforms of NAFTA, and issues to do with USA/Europe trade which are legitimate.

However, the manner, in which these concerns are pursued, affect crucially the climate for international trade. Pursued as part of a dialogue about how the international trading system can be reformed, they can lead to trade which is fairer and still free. Pursued unilaterally as a straightforward assertion of national interest, they can trigger a chain reaction which can do profound harm to the international order of trade.

This is where the Transatlantic Alliance has never been more needed. The uni-polar world of the late 20th C is giving way to a multi-polar one. The emergence of China is the new geo-political fact, the ramifications of which we are only beginning to comprehend. Russia’s economy may be 60% the size of the UK, but it has shown remarkable resilience in reinventing its military and security capability. All around the world, there is a new model of Government competing with our notion of Western Democracy. This ‘Strongman’ model claims to be more effective, more productive, less decadent, less paralysed than ours. And it has its admirers and imitators in the West.

It treats democracy not as a cause but as a game where the smart people flout the rules rather than play by them.

America is described traditionally as the ‘Leader of the Free World’, Europe its partner. This is an alliance different from any other because it is explicitly an alliance of values, as well as in our own self-interest. It has created the societies we now live in, which for all their faults are still those most people round the world aspire to. It is a great test of any country: are people trying to get into it or out of it? We know the answer in our own case.

Rule of Law, free speech, an independent media, the right to elect those who govern you, basic elements of social solidarity and decency and a rules-based international order: we don’t always fulfil these goals, but we have always accepted we should try to.

These are contested positions in the multi-polar world.

The Transatlantic Alliance is the bedrock of our values system and way of life. Yet the right wing relegation of it as secondary to national interest rather than part of it and the kneejerk left wing reaction against anything American led, is leaving this Alliance in danger of fracture.

This will damage both of us.

Of course, there can be disputes whether over trade, commitment to NATO spending, how to tackle the Middle East or Climate Change. Friends can disagree.

But we need to know from the current American Administration and its President that our Alliance matters, that it is regarded, historically and contemporaneously, as a vital American strategic interest; and the leading European Governments, given that visible and clear re-assurance, need to respond in kind.

We need Leaders both sides of the water explaining its importance and seeking ways of strengthening it.

Inevitably we then come to Brexit. I am afraid I get bored with people telling me they’re bored of it. If it is by consensus the most important decision we have taken as a country since World War 2, then our preoccupation with it must continue until one way or another it is finally decided. 

The debate on Brexit has naturally focused on the economic fall-out. But the political effect of Britain leaving the European Union may be worse. At a stroke, Britain loses its position in the world’s largest commercial market and biggest political union. America loses its foremost ally which has often been a bridge between the two sides of the Alliance.

Of course, the Brexiteers will argue that Britain can still be the USA’s greatest ally outside the EU. But examine the reality. Since the referendum, is Britain closer to the USA? Is the relationship stronger? On a global issue, who is the American President calling first on the continent of Europe – the British Prime Minister?

As for the USA, the reason why any American President should be strongly supporting the EU is absolutely topical, the here and now, not old fashioned sentiment. In a world where population and GDP and therefore global power become re-aligned, where by the middle of the 21stC, India’s economy, never mind China’s, will be several times the size of Germany’s, America needs Europe united and standing with it, not isolated as individual nations, able to be picked off one by one by the emergent new powers.

The only people who gain from a fracturing of the Transatlantic Alliance are America’s rivals or adversaries. I do not believe this is the desire of the present Administration but too many Europeans do. This feeling needs to be countered with vigour and urgency. 

Some in America think Brexit will boost the American alliance.

This exposes the contradiction at the core of the Brexit coalition which is the reason for the mess we find ourselves in and its important our allies understand it.

The intellectual driving force behind Brexit is a mix of nationalism and ultra-liberalism. These are people on the right of politics who think Thatcherism is incomplete. They want out of Europe because they think it bureaucratic and overly regulated. They want a Brexit where we sell ourselves to the world as ‘not Europe’, changing our economy so that it becomes attractive for investment despite our exit from our main market – with economic re-structuring, de-regulation, lower tax and therefore lower spending and probably deep reform of public services including the NHS.

Geo-politically, they want an even tighter alliance with the USA.

However, the foot-soldiers of the Brexit campaign, those in Labour areas in the North of England critical to the Brexit vote, do not share the liberal part of this vision; on the contrary they were persuaded by promises of a crackdown on immigration and more money for the NHS.

Neither are they big supporters of even closer ties to America. The Official Opposition is opposed even to the American President visiting Britain.

The risk for Britain is that we leave Europe with a deep unresolved disagreement about what our future, political or economic, should be.

‘Clean Break’ Brexit is a 10-15 years project. Short and medium term, the pain will be significant. Presently, we have two service sectors – financial services and technology – where Britain is predominant in Europe. Exclusion from the Single Market will hit both. In time, maybe we can re-build by making ourselves super-attractive. But this will take years.

The statements from the car, pharma and aerospace industries, similarly are not threats; they’re warnings.

The essential disingenuousness of the Brexiteers is to pretend Leaving is an act of will. The comparison Boris Johnson gave of the Brexit negotiation to that of President Trump with Kim Jong-Un betrays a truly shocking misunderstanding of the relative bargaining power of the EU to Britain with the greatest world power and North Korea. 

What we have learnt since 23rd June 2016, if we have learnt anything, is that after 45 years of intimate trading links with Europe, the disentanglement is complex, intricate and replete with hard choices.

The trouble is, the compromise position favoured by the Cabinet ‘moderates’ and Labour is also unsatisfactory. Suppose we stay in a Customs Union; or in the Single Market; or some version of them.

Suppose as apparently is one proposal, we end up in the Single Market for goods. Then we will have to abide by Europe’s rules adjudicated by the ECJ for the sector where we have a huge deficit for the EU but remain shut out of the services sector where we have a massive surplus. 

This so-called, soft Brexit will leave us half in and half out, with no great increase in flexibility and without a say, a curious way of ‘taking back control’.

It is of course preferable to a Hard Brexit, but does it genuinely honour the Brexit mandate?

This disagreement is fundamental. It is why the Cabinet have not yet reached a negotiating position. Up to now, the negotiation with Europe has been conducted by civil servants in a state of despair overseen by politicians in a state of denial.

We cannot go on like this. I have never been more worried about the future of our country than now, with competing emotions of anxiety and rage. We have a Government whose every move is a calculation not about the interests of the nation, but the internal balance of advantage between the factions of the Conservative Party, with the Prime Minister more a hostage than a Leader. Meanwhile the Leader of the Labour Party neglects to lead the fight here at home over an issue which literally determines the future of Britain and where he could play a decisive role.

Parliament must assert itself because neither Government nor Opposition can or will.

Then the people must make the final decision because only they have the right to decide what version of Brexit they want or whether in the light of all they now know they prefer to remain.

The present impasse is imperilling our economy, our international standing and our alliances.

Crashing out with no agreement would deal Britain a devastating blow.

We should plan now for the possibility we need to extend the March 2019 deadline.

Presently, we are drifting towards March 2019 with no clear negotiating position, no resolution of the Northern Ireland question, still vaguely hoping Europe will allow us access to the Single Market without abiding by its rules which it will never do, and with senior Cabinet members openly debating the merits of a negotiating position which ‘threatens’ Europe with a no deal Brexit which is the equivalent of holding a negotiation on the top floor of a high rise building and ‘threatening’ to jump out of the window if our demands are not met.

The whole thing has become so protracted that it has numbed our outrage.

And because of the distractive impact of Brexit the challenges facing the country from the violence on our streets to the decline of the NHS receive not a fraction of the attention they need.

But the risk for our allies is also grave.

A weaker Britain means a weaker Europe which means a weaker Alliance with America and therefore a world in which the cause of Western Democracy is itself weakened.

Brexit has become a metaphor for the debate around globalisation. The only way out of the cul-de-sac of populism is to understand that the case for globalisation will not succeed unless we deal with the underlying grievances of that part of the population for whom globalisation holds more fear than hope.

Europe and Britain could strike a bargain which would see Europe reforming, which the European people plainly by their votes are demanding, and Britain staying in such a Europe.

For Europe as well as for Britain this means dealing with the issue of immigration decisively.

For all nations, it will require more active Government intervention helping people and communities ‘left behind’.

Those in the centre ground of politics must become again the change-makers, not the managers of the status quo.

But this challenge is urgent. We are losing sight of the values which brought the West together, saw it through the menace of fascism and communism and, for all the justifiable grievances, has wrought immense progress.

We are in danger of spoiling the gains of a world ‘opening up’ through globalisation and putting at risk our Democratic mission. 

The fightback will require self-criticism, new thinking and muscularity in defence of reason.

But it better begin soon.’

Self-dealing by intermeddling

Thesis
The thesis of this post is that the equitable doctrine of self-dealing applies to ‘intermeddling’.

Intermeddling
A person who intrudes upon the affairs of a deceased testator, before obtaining a grant of probate, may be treated as having assumed the executorship.

Such an ‘intermeddler’ is called a tort executor or an ‘executor de son tort’ (i.e. of his own wrong). The concept is derived from the principle that a person who has assumed authority where he has none, is accountable as if he had that authority, Pollard v Jackson [1993]. Depending upon the circumstances, such a person may also become a constructive trustee for those entitled to the assets. The fact a person intermeddles without any grant may be a reason why such a person is not merely an executor de son tort but is also a constructive trustee, James v Williams [2000].

Scope of the self-dealing rule
‘A purchase of trust, or other self-dealing transaction by a trustee, may be impugned under … the self-dealing rule … [which broadly speaking is] based on the conflict rule that a trustee must not put himself in a position where there is a conflict between his interest and duty, and has the effect of rendering the transaction voidable.’ [Lewin on Trusts, 18th ed (‘Lewin’), paragraph 20-58].

I submit that the rule applies in its strict form to a trustee (including a trustee under a constructive trust); an executor; and an executor de son tort.

‘[The] rule applies in its strict form not only to trustees strictly so called; it applies also to all who, though differing in name, are invested with the like fiduciary character, such as an … executor … an executor de son tort’ [Lewin paragraph 20-84, citing Mulvany v Dillon [1810]].

The ‘… constructive trustee, although not expressly appointed as a trustee, has assumed the duties of a trustee before the events which are alleged to constitute the breach of trust’ and is therefore a true trustee (Blackstone’s Civil Practice 2018, paragraph 10.38, which also states, ‘When considering the boundary between cases where the defendant is a true trustee under an express or constructive trust, sand those where he is not, the key factor is whether there is trust property (Clarke v Marlborough Fine Art (London) Ltd [(2001).’)

I further submit that the ‘… rule applies to self-dealing transactions other than purchases of trust property by a trustee … [whilst noting that] the presence of a conflict of interest, or a conflict of duties in different fiduciary capacities, does not in the case of all transactions concerning the trust property involve the application of the self-dealing rule in its full severity. Sometimes the conflict operates merely to impose a burden on the trustee to prove that the transaction in question was fair and reasonable and that he took no advantage of his position as trustee.’ [Lewin, paragraph 20-64].

If therefore the trustee fails to discharge the burden of proof, then the self-dealing transaction is voidable ex debito justitiae (i.e. ‘as of right’) at the suit of e.g. a residuary beneficiary [‘B’] because ‘the self-dealing rule is an application of the wider principle that a man must not put himself in a position where duty and interest conflict’, Re Thompson’s Settlement [1986] 1 Ch.99, 115.

Where the rule applies B may prevent an intended sale by injunction and if the sale has already taken place, the range of possible orders against a purchaser for value without notice include:
– a reconveyance of the property to the trust;
– an order for an account of profits (where the trustee has sold at a profit); and
– equitable compensation (where the trustee has sold at a loss).

Exceptions to the rule

Section 41 of the Administration of Estates Act 1925 which confers wide powers of appropriation on a ‘personal representative’ provides:

‘(1) The personal representative may appropriate any part of the real or personal estate, including things in action, of the deceased in the actual condition or state of investment thereof at the time of appropriation in or towards satisfaction of any legacy bequeathed by the deceased, or of any other interest or share in his property, whether settled or not, as to the personal representative may seem just and reasonable, according to the respective rights of the persons interested in the property of the deceased:

Provided that—
an appropriation shall not be made under this section so as to affect prejudicially any specific devise or bequest;
(ii) an appropriation of property, whether or not being an investment authorised by law or by the will, if any, of the deceased for the investment of money subject to the trust, shall not (save as hereinafter mentioned) be made under this section except with the following consents:—
(a) when made for the benefit of a person absolutely and beneficially entitled in possession, the consent of that person;
(b) when made in respect of any settled legacy share or interest, the consent of either the trustee thereof, if any (not being also the personal representative), or the person who may for the time being be entitled to the income:
If the person whose consent is so required as aforesaid is an infant or lacks capacity (within the meaning of the Mental Capacity Act 2005) to give the consent, it shall be given on his behalf by his parents or parent, testamentary or other guardian, . . or a person appointed as deputy for him by the Court of Protection, or if, in the case of an infant, there is no such parent or guardian, by the court on the application of his next friend;

no consent (save of such trustee as aforesaid) shall be required on behalf of a person who may come into existence after the time of appropriation, or who cannot be found or ascertained at that time;

(iv) if no deputy is appointed for a person who lacks capacity to consent, then, if the appropriation is of an investment authorised by law or by the will, if any, of the deceased for the investment of money subject to the trust, no consent shall be required on behalf of the said person;

(v) if, independently of the personal representative, there is no trustee of a settled legacy share or interest, and no person of full age and capacity entitled to the income thereof, no consent shall be required to an appropriation in respect of such legacy share or interest, provided that the appropriation is of an investment authorised as aforesaid.

(1A) The county court has jurisdiction under proviso (ii) to subsection (1) of this section where the estate in respect of which the application is made does not exceed in amount or value the county court limit.
(2) Any property duly appropriated under the powers conferred by this section shall thereafter be treated as an authorised investment, and may be retained or dealt with accordingly.
(3) For the purposes of such appropriation, the personal representative may ascertain and fix the value of the respective parts of the real and personal estate and the liabilities of the deceased as he may think fit, and shall for that purpose employ a duly qualified valuer in any case where such employment may be necessary; and may make any conveyance (including an assent) which may be requisite for giving effect to the appropriation.
(4) An appropriation made pursuant to this section shall bind all persons interested in the property of the deceased whose consent is not hereby made requisite.
(5) The personal representative shall, in making the appropriation, have regard to the rights of any person who may thereafter come into existence, or who cannot be found or ascertained at the time of appropriation, and of any other person whose consent is not required by this section.
(6) This section does not prejudice any other power of appropriation conferred by law or by the will (if any) of the deceased, and takes effect with any extended powers conferred by the will (if any) of the deceased, and where an appropriation is made under this section, in respect of a settled legacy, share or interest, the property appropriated shall remain subject to all trusts and powers of leasing, disposition, and management or varying investments which would have been applicable thereto or to the legacy, share or interest in respect of which the appropriation is made, if no such appropriation had been made.
(7) If after any real estate has been appropriated in purported exercise of the powers conferred by this section, the person to whom it was conveyed disposes of it or any interest therein, then, in favour of a purchaser, the appropriation shall be deemed to have been made in accordance with the requirements of this section and after all requisite consents, if any, had been given.
(8) In this section, a settled legacy, share or interest includes any legacy, share or interest to which a person is not absolutely entitled in possession at the date of the appropriation, also an annuity, and “purchaser” means a purchaser for money or money’s worth.
(9) This section applies whether the deceased died intestate or not, and whether before or after the commencement of this Act, and extends to property over which a testator exercises a general power of appointment, including the statutory power to dispose of entailed interests, and authorises the setting apart of a fund to answer an annuity by means of the income of that fund or otherwise.’

However,
‘Where assets are being appropriated by a personal representative in satisfaction of his own interest as a beneficiary in the estate, self-dealing questions arise (Kane v Radley-Kane [1999] 1 Ch 274). If the personal representative wishes to take the asset himself, agreement to the act of appropriation and to the valuation used, with all the interests affected by the appropriation, will be necessary. This is because the transaction places the personal representative in a position of conflict between his personal interests and his duty toward the other beneficiaries of the estate. Without the agreement of those also interested, the personal representative must satisfy his beneficial interest by the appropriation of cash or assets which have an open and independently verifiable value such as quoted stocks and shares.’ (‘A Practitioner’s Guide To Legacies’, by Martyn Frost, Paul Saunders, Arabella Saker, Geoffrey Shindler, Tim Stone, Richard Wilson’ (2003) Lexi Nexis Tolley, paragraph 12.3).

As James Kessler QC and Charlotte Ford state in paragraph 21.50 and footnote 105 of ‘Drafting Trusts and Will Trusts’ (13 ed),

In the absence of an express power of appropriation under the terms of a will, ‘[the] powers conferred by the general law are inadequate … (1) Section 41 AEA 1925 confers the power on personal representatives, but not on trustees, (2) Section 7 TOLATA 1996 confers a power of appropriation in relation to land in England and Wales. (3) Section 15(b) TA 1925 confers power to sever and apportion “blended trust funds or property”. It is considered that this gives trustees power to appropriate whenever trustees hold trust property in undivided shares – so the power overlaps with (1) and (2) above. This is significant since this power (unlike the above) does not require any beneficiary to consent. (4) The extent to which the common law allows appropriation is unclear. The old cases are discussed in Kane v Radley-Kane [1999] Ch 274.’

It is also worth noting that:
An appropriation cannot take place if the value of the asset exceeds the entitlement of the beneficiary (although the beneficiary could purchase the asset from the personal representatives).

Had there been a purchase by a person connected with the trustee, then ‘in practice it is prudent for trustees to consider seeking the consent of the beneficiaries or the directions and if necessary sanction of the court before selling trust property to their spouses (or civil partners).’ [Lewin, paragraph 20-77] – where the trustees include a professional trustee (such as a solicitor) a trustee resolution or minute should therefore have been drafted to record the seeking of consent/directions in default of which the evidential presumption is that no such consent or directions were in fact sought.
‘The traditional way of dealing with residuary gifts is to vest the residue in the trustees on trust for sale with power to postpone the sale. Where there is an outright gift of residue and no continuing trust will come into being, it may be better to vest the residue in trustees but to rely upon the powers of executors to give effect to the terms of the will. Where the residuary estate will or may be subject to a trust, it is suggested that it is vested in the trustees on an express trust for sale with power to postpone the sale. In the case of land, a power to postpone the sale is implied by Trusts of Land and Appointment of Trustees Act 1996, s4 but it may be desirable to include an express power to postpone for the personalty which, invariably, will form part of the residuary estate … It is in many cases not necessary to include an express trust for sale but many practitioners continue to do so and lay executors often appreciate an express statement of their powers …

[For example, Precedent Form 11.1 (Creation of trust for sale with debts, inheritance tax etc to be paid out of proceeds) provides],
“My Trustees shall hold [the rest of] my estate on trust for sale [with power to postpone sale] to pay executorship expenses and debts … and any inheritance tax in respect of property passing under this will”.’ Parker’s Modern Will Precedents 7th Ed (2011) by Michael Waterworth.

As Professor Lesley King [‘King’] states in paragraph 8.9.2 of the ‘Probate Practitioners Handbook’ published by the Law Society (April 2018), whilst, ‘Every trust for sale of land created by a disposition on or after 1 January 1997 has an implied power for the trustees to postpone sale. Property of an intestate is no longer held on a trust for sale. Before [TLATA came into force on 1 January 1997] it was standard practice to include an express trust for sale (with power to postpone sale) to avoid the complication of the Settled Land Act 1925. It is no longer necessary to include a trust for sale for this reason. Trustees of a ‘trust of land’ as defined by TLATA 1996 have all the powers of an absolute owner, including sale. [However, there is] some point to including an express trust for sale to deal with the possibility of a continuing trust of personalty … Where a will creates a continuing trust, s.11 [TLATA] imposes an obligation on trustees of land to consult beneficiaries of full age with an interest in possession when exercising any function in respect of land’.

‘Once the PR has ascertained the amount of residue available to the residuary beneficiary and, if appropriate, obtained approval of the estate accounts it is likely that the PR then holds the remaining assets as trustee. If, however, other assets or liabilities were discovered, the PR would have to deal with these assets or liabilities as PR since that office is never lost.’ [King, paragraph 8.10.1].

Equitable remedies update (March 2018)

  • Equitable compensation
  • Proprietary claims to derived assets based on unjust enrichment
  • AIB Group (UK) Plc v Mark Redler & Co Solicitors [2014] UKSC 58
  • Lowick Rose LLP v Swynson Ltd & Anor [2017] UKSC 32

Equitable compensation

 ‘Although the normal remedy for equitable wrongdoing is restitutionary … the notion of equitable compensation is recognised by English law. Although this remedy has sometimes been called restitutionary, since the effect of it is to restore the claimant to the position which he or she occupied had the wrong not been committed, the remedy has nothing to do with the law of restitution as such simply because it is not assessed by reference to the gain made by the defendant but is instead assessed by reference to the loss suffered by the claimant… It is still unclear, however, to what extent the prevalence of restitutionary remedies for equitable wrongdoing will be affected by the growing recognition of equitable compensation.’ The Principles of the Law of Restitution by Graham Virgo.

‘Equitable compensation is not compensation for loss, it is restitution of the trust fund. If the defaulting trustee cannot restore the assets to the trust fund, then he must pay money into the trust instead. How much has to be paid into the trust fund is assessed by looking at the matter with hindsight to see what would be comprised in the trust fund but for the breach. Issues of remoteness, causation and mitigation have no place in the assessment of equitable compensation as they do with damages.’ Equitable Compensation: The Traditional View by Penelope Reed QC, presented to the Chancery Bar Association 5 May 2017.

Whilst the remedy is not limited by foreseeability, remoteness, and other considerations which affect the recovery of common law damages, there must be a causal link between the breach and the loss to the trust fund. It is important to work out the nature of the breach, as a  breach by a fiduciary which is not a breach of fiduciary duty but breach of his duty of care, will be treated like a claim for damages.

In AIB Group (UK) Plc v Mark Redler & Co Solicitors [2014] Lord Toulson, affirming the approach in Target Holdings stated (see below),

‘Monetary compensation, whether classified as restitutive or reparative, is intended to make good a loss. The basic equitable principle applicable to breach of trust, as Lord Browne-Wilkinson stated, is that the beneficiary is entitled to be compensated for any loss he would not have suffered but for the breach. Equitable compensation and common law damages are remedies based on separate legal obligations. What has to be identified in each case is the content of any relevant obligation and the consequences of its breach.’

Lord Reed further stated,

‘The measure of compensation should therefore normally be assessed at the date of trial, with the benefit of hindsight. The foreseeability of loss is generally irrelevant, but the loss must be caused by the breach of trust, in the sense that it must flow directly from it. Losses resulting from unreasonable behaviour on the part of the claimant will be adjudged to flow from that behaviour, and not from the breach. The requirement that the loss should flow directly from the breach is also the key to determining whether causation has been interrupted by the acts of third parties.’

Proprietary claims to derived assets based on unjust enrichment

When establishing an unjust enrichment claim, the claimant must show that the defendant is enriched at the claimant’s expense. To assert a proprietary claim, it is generally thought necessary to establish a proprietary base, which is done by way of a following or tracing exercise. In the case of disposition, the claimant (A) is deprived of the proprietary interest in the asset if the defendant (B) disposes of the property in the asset to a third party, say by selling it to C, who raises an ‘exception’ to nemo dat quod non habet [i.e. the rule that the purchase of a possession from someone who has no ownership right to it denies the purchaser any ownership title], and B is vested with the proceeds of the disposition, as C pays the price under the contract of sale to C. Although B has not obtained A’s asset it can be said that B obtained the value of A’s asset for the purposes of a claim in unjust enrichment. In order to establish a proprietary base, it can be said that B has obtained proceeds of realization, effecting A’s loss of the proprietary interest, that is, changing the legal position of A insofar as his proprietary rights are concerned. If B were simply to destroy A’s asset, the proceeds of realization would be zero. When considering the notion of enrichment in Lowick  Rose LLP v Swynson Ltd [2017] Lord Sumption emphasised that the repayment of the debt is said to be a matter of ‘reality rather than the formal shape of a transaction, or of a co-ordinated series of transactions’. See below and paragraphs 6.35, 6.37, and 6.40 of ‘The Law of Tracing in Commercial Transactions’ by Magda Raczynkska, OUP (2018).

AIB Group (UK) Plc v Mark Redler & Co Solicitors [2014] UKSC 58

In AIB Group (UK) Plc v Mark Redler & Co Solicitors [2014] UKSC 58, which was a unanimous decision, in the leading judgment Lord Toulson stated,

‘The bank alleged that the solicitors acted in breach of trust, breach of fiduciary duty, breach of contract and negligence. It claimed relief in the forms of (i) reconstitution of the fund paid away in breach of trust and in breach of fiduciary duty, (ii) equitable compensation for breach of trust and breach of fiduciary duty, and (iii) damages for breach of contract and negligence, in each case with interest. The solicitors admitted that they acted negligently and in breach of contract but denied the other allegations and they claimed relief under section 61 of the Trustee Act 1925 if found to have acted in breach of trust …

The debate which has followed Target Holdings is part of a wider debate, or series of debates, about equitable doctrines and remedies and their inter-relationship with common law principles and remedies, particularly in a commercial context. The parties have provided the court with nearly 900 pages of academic writing. Much of it has been helpful, but to attempt even to summarise the many threads of argument which run through it, acknowledging the individual authors, would be a lengthy task and, more importantly, would not improve the clarity of the judgment. Nor is it necessary to set out a full historical account of all the case law cited in the literature reaching back to Caffrey v Darby (1801) 6 Ves Jun 488 …

The determination of this appeal involves two essential questions. The more important question in the appeal is whether Lord Browne-Wilkinson’s statement in Target Holdings of the fundamental principles which guided him in that case should be affirmed, qualified or (as the bank would put it) reinterpreted. Depending on the answer to that question, the second is whether the Court of Appeal properly applied the correct principles to the facts of the case.

Two main criticisms have been made of Lord Browne-Wilkinson’s approach. They have been made by a number of scholars, most recently by Professor Charles Mitchell in a lecture on “Stewardship of Property and Liability to Account” delivered to the Chancery Bar Association on 17 January 2014, in which he described the Court of Appeal’s reasoning in this case as incoherent. He expressed the hope that “if the case reaches the Supreme Court their Lordships will recognise that Lord Browne-Wilkinson took a false step in Target when he introduced an inapt causation requirement into the law governing … substitutive performance claims.” He added that if it is thought too harsh to fix the solicitors in this case with liability to restore the full amount of the loan (subject only to a deduction for the amount received by the sale of the property), the best way to achieve this is “not to bend the rules governing substitutive performance claims out of shape”, but to use the Trustee Act 1925, section 61, to relieve them from some or all of their liability.

The primary criticism is that Lord Browne-Wilkinson failed to recognise the proper distinctions between different obligations owed by a trustee and the remedies available in respect of them. The range of duties owed by a trustee include:

(1)     a custodial stewardship duty, that is, a duty to preserve the assets of the trust except insofar as the terms of the trust permit the trustee to do otherwise;

(2)     a management stewardship duty, that is, a duty to manage the trust property with proper care;

(3)     a duty of undivided loyalty, which prohibits the trustee from taking any advantage from his position without the fully informed consent of the beneficiary or beneficiaries.

Historically the remedies took the form of orders made after a process of accounting. The basis of the accounting would reflect the nature of the obligation. The operation of the process involved the court having a power, where appropriate, to “falsify” and to “surcharge”.

According to legal scholars whose scholarship I have no reason to doubt, in the case of a breach of the custodial stewardship duty, through the process of an account of administration in common form, the court would disallow (or falsify) the unauthorised disposal and either require the trust fund to be reconstituted in specie or order the trustee to make good the loss in monetary terms. The term “substitutive compensation” has come to be used by some to refer to a claim for the value of a trust asset dissipated without authority. (See the erudite judgment in Agricultural Land Management Ltd v Jackson (No 2) [2014] WASC 102 of Edelman J, who attributes authorship of the term to Dr Steven Elliott.)

In a case of breach of a trustee’s management stewardship duty, through the process of an action on the basis of wilful default, a court could similarly falsify or surcharge so as to require the trustee to make good the loss resulting from the breach. The phrase “wilful default” is misleading because, as Brightman LJ explained in Bartlett v Barclays Bank Trust Co Ltd (Nos 1 and 2) [1980] Ch 515, 546, conscious wrongdoing is not required. In this type of case the order for payment by the trustee of the amount of loss is referred to by some as “reparative compensation”, to differentiate it from “substitutive compensation”, although in a practical sense both are reparative compensation.

In a case of breach of the duty of undivided loyalty, there are possible alternative remedies. If the trustee has benefited from it, the court will order him to account for it on the application of the beneficiary. In Bristol and West Building Society v Mothew [1998] Ch 1 Millett LJ described such relief as “primarily restitutionary or restorative rather than compensatory”. Alternatively, the beneficiary may seek compensation in respect of his loss.

The history of the account of profits is more complex than this summary might suggest, and the whole concept of equitable compensation has developed and become far more prominent in the law since Nocton v Lord Ashburton. However, what I have said is sufficient to identify the main criticism advanced against Lord Browne-Wilkinson’s approach in Target Holdings. It is said that he treated equitable compensation in too broad-brush a fashion, muddling claims for restitutive compensation with claims for reparative compensation.

The relevant principle, it is suggested, in a case of unauthorised dissipation of trust funds is that “the amount of the award is measured by the objective value of the property lost, determined at the date when the account is taken and with the benefit of hindsight”, per Millett NPJ in Libertarian Investments Ltd v Hall [2014] 1 HKC 368, para 168. In determining the value of what has been lost, the court must take into account any offsetting benefits received, but it is not relevant to consider what the trustee ought to have done. The court is concerned only with the net value of the lost asset.

This argument has the approval of Edelman J in Agricultural Land Management Ltd v Jackson (No2), and there are statements in the authorities cited by him which support that approach, for example, by Lord Halsbury LC in Magnus v Queensland National Bank (1888) 37 Ch D, at paras 466, 472, although the issue in that case was different. The defendant advanced an argument which Bowen LJ, at para 480, likened to a case where “A man knocks me down in Pall Mall, and when I complain that my purse has been taken, the man says, ‘Oh, but if I had handed it back again, you would have been robbed over again by somebody else in the adjoining street.'” It is good sense and good law that if a trustee makes an unauthorised disbursement of trust funds, it is no defence to a claim by the beneficiary for the trustee to say that if he had not misapplied the funds they would have been stolen by a stranger. In such a case the actual loss has been caused by the trustee. The hypothetical loss which would have otherwise have occurred through the stranger’s intervention would have been a differently caused loss, for which that other person would have been liable. Bowen LJ’s example is far removed in terms of causation of loss from the present case, where the loan agreement involved the bank taking the risk of the borrowers defaulting, and the fault of the solicitors lay in releasing the funds without ensuring that the bank received the full security which it required, with the consequence that the amount of the bank’s exposure was greater than it should have been.

In Bank of New Zealand v New Zealand Guardian Trust Co Ltd [1999] 1 NZLR 664 Tipping J rightly observed that while historically the law has tended to place emphasis on the legal characterisation of the relationship between the parties in delineating the remedies available for breach of an obligation, the nature of the duty which has been breached can often be more important, when considering issues of causation and remoteness, than the classification or historical source of the obligation.

Tipping J identified three broad categories of breach by a trustee. First, there are breaches of duty leading directly to damage or to loss of trust property. Secondly, there are breaches involving an element of infidelity. Thirdly, there are breaches involving a lack of appropriate skill and care. He continued at para 687:

“In the first kind of case the allegation is that a breach of duty by a trustee has directly caused loss of or damage to the trust property. The relief sought by the beneficiary is usually in such circumstances of a restitutionary kind. The trustee is asked to restore the trust estate, either in specie or by value. The policy of the law in these circumstances is generally to hold the trustee responsible if, but for the breach, the loss or damage would not have occurred. This approach is designed to encourage trustees to observe to the full their duties in relation to trust property by imposing on them a stringent concept of causation [ie a test by which a “but for” connection is sufficient]. Questions of foreseeability and remoteness do not come into such an assessment.”

According to the bank’s argument, the responsibility of the solicitors is still more stringent. It seeks to hold them responsible for loss which it would have suffered on the judge’s findings if they had done what they were instructed to do. This involves effectively treating the unauthorised application of trust funds as creating an immediate debt between the trustee and the beneficiary, rather than conduct meriting equitable compensation for any loss thereby caused. I recognise that there are statements in the authorities which use that language to describe the trustee’s liability. For example, in Ex p Adamson; In re Collie (1878) 8 Ch D 807 , at paras 807, 819, James and Baggallay LJJ said that the Court of Chancery never entertained a suit for damages occasioned by fraudulent conduct or for breach of trust, and that the suit was always for “an equitable debt, or liability in the nature of a debt“. This was long before the expression “equitable compensation” entered the vocabulary. Equitable monetary compensation for what in that case was straightforward fraud was clothed by the court in the literary costume of equitable debt, the debt being for the amount of the loss caused by the fraud. Whatever label is used, the question of substance is what gives rise to or is the measure of the “equitable debt or liability in the nature of a debt”, or entitlement to monetary compensation, and what kind of “but for” test is involved. It is one thing to speak of an “equitable debt or liability in the nature of a debt” in a case where a breach of trust has caused a loss; it is another thing for equity to impose or recognise an equitable debt in circumstances where the financial position of the beneficiaries, actual or potential, would have been the same if the trustee had properly performed its duties …

There are arguments to be made both ways, as the continuing debate among scholars has shown, but absent fraud, which might give rise to other public policy considerations that are not present in this case, it would not in my opinion be right to impose or maintain a rule that gives redress to a beneficiary for loss which would have been suffered if the trustee had properly performed its duties.

The same view was expressed by Professor Andrew Burrows in Burrows and Peel (eds.), Commercial Remedies, 2003, pp 46-47, where he applauded Target Holdings for impliedly rejecting older cases that may have supported the view that the accounting remedy can operate differently from the remedy of equitable compensation. Despite the powerful arguments advanced by Lord Millett and others, I consider that it would be a backward step for this court to depart from Lord Browne-Wilkinson’s fundamental analysis in Target Holdings or to “re-interpret” the decision in the manner for which the bank contends.

All agree that the basic right of a beneficiary is to have the trust duly administered in accordance with the provisions of the trust instrument, if any, and the general law. Where there has been a breach of that duty, the basic purpose of any remedy will be either to put the beneficiary in the same position as if the breach had not occurred or to vest in the beneficiary any profit which the trustee may have made by reason of the breach (and which ought therefore properly to be held on behalf of the beneficiary). Placing the beneficiary in the same position as he would have been in but for the breach may involve restoring the value of something lost by the breach or making good financial damage caused by the breach. But a monetary award which reflected neither loss caused nor profit gained by the wrongdoer would be penal.

The purpose of a restitutionary order is to replace a loss to the trust fund which the trustee has brought about. To say that there has been a loss to the trust fund in the present case of £2.5m by reason of the solicitors’ conduct, when most of that sum would have been lost if the solicitors had applied the trust fund in the way that the bank had instructed them to do, is to adopt an artificial and unrealistic view of the facts.

I would reiterate Lord Browne-Wilkinson’s statement, echoing McLachlin J’s judgment in Canson, about the object of an equitable monetary remedy for breach of trust, whether it be sub-classified as substitutive or reparative. As the beneficiary is entitled to have the trust properly administered, so he is entitled to have made good any loss suffered by reason of a breach of the duty.

A traditional trust will typically govern the ownership-management of property for a group of potential beneficiaries over a lengthy number of years. If the trustee makes an unauthorised disposal of the trust property, the obvious remedy is to require him to restore the assets or their monetary value. It is likely to be the only way to put the beneficiaries in the same position as if the breach had not occurred. It is a real loss which is being made good. By contrast, in Target Holdings the finance company was seeking to be put in a better position on the facts (as agreed or assumed for the purposes of the summary judgment claim) than if the solicitors had done as they ought to have done.

Other considerations reinforce my view that the House of Lords did not take a wrong step in Target Holdings.

Most critics accept that on the assumed facts of Target Holdings the solicitors should have escaped liability. But if causation of loss was not required for them to be liable, some other way had to be found for exonerating them from liability (unless the court was to use section 61 of the 1925 Act as a deus ex machina). The solution suggested by the bank is that the solicitors in Target Holdings should be treated as if the moneys which had been wrongly paid out had remained in or been restored to the solicitors’ client account and had then been properly applied after the solicitors had obtained the necessary paperwork. There is something wrong with a state of the law which makes it necessary to create fairy tales.

As to the criticism of the passage in Target Holdings where Lord Browne-Wilkinson said that it would be “wrong to lift wholesale the detailed rules developed in the context of traditional trusts” and apply them to a bare trust which was “but one incident of a wider commercial transaction involving agency”, it is a fact that a commercial trust differs from a typical traditional trust in that it arises out of a contract rather than the transfer of property by way of gift. The contract defines the parameters of the trust. Trusts are now commonly part of the machinery used in many commercial transactions, for example across the spectrum of wholesale financial markets, where they serve a useful bridging role between the parties involved. Commercial trusts may differ widely in their purpose and content, but they have in common that the trustee’s duties are likely to be closely defined and may be of limited duration. Lord Browne-Wilkinson did not suggest that the principles of equity differ according to the nature of the trust, but rather that the scope and purpose of the trust may vary, and this may have a bearing on the appropriate relief in the event of a breach. Specifically, Lord Browne-Wilkinson stated that he did not cast doubt on the fact that monies held by solicitors on client account are trust monies, or that basic equitable principles apply to any breach of such trust by solicitors. What he did was to identify the basic equitable principles. In their application, the terms of the contract may be highly relevant to the question of fact whether there has been a loss applying a “but for” test, that is, by reference to what the solicitors were instructed to do. If the answer is negative, the solicitors should not be required to pay restitutive monetary compensation when there has in fact been no loss resulting from their breach. That is not because special rules apply to solicitors, but because proper performance of the trustee’s obligations to the beneficiary would have produced the same end result.

I agree with the view of Professor David Hayton, in his chapter “Unique Rules for the Unique Institution, the Trust” in Degeling & Edelman (eds), Equity in Commercial Law (2005), pp 279-308, that in circumstances such as those in Target Holdings the extent of equitable compensation should be the same as if damages for breach of contract were sought at common law. That is not because there should be a departure in such a case from the basic equitable principles applicable to a breach of trust, whether by a solicitor or anyone else. (If there were a conflict between the rules of equity and the rules of the common law, the rules of equity would prevail by reason of section 49(1) of the Senior Courts Act 1981, derived from the provisions of the Judicature Act 1875.) Rather, the fact that the trust was part of the machinery for the performance of a contract is relevant as a fact in looking at what loss the bank suffered by reason of the breach of trust, because it would be artificial and unreal to look at the trust in isolation from the obligations for which it was brought into being. I do not believe that this requires any departure from proper principles.

There remains the question whether the Court of Appeal properly applied the reasoning in Target Holdings to the facts of the present case. It was argued on behalf of the bank that this case falls within Lord Browne-Wilkinson’s statement that “[u]ntil the underlying commercial transaction has been completed, the solicitor can be required to restore to the client account monies wrongly paid away.”

This argument constricts too narrowly Lord Browne-Wilkinson’s essential reasoning. Monetary compensation, whether classified as restitutive or reparative, is intended to make good a loss. The basic equitable principle applicable to breach of trust, as Lord Browne-Wilkinson stated, is that the beneficiary is entitled to be compensated for any loss he would not have suffered but for the breach. In this case, proper performance of the obligations of which the trust formed part would have resulted in the solicitors paying to Barclays the full amount required to redeem the Barclays mortgage, and, as Patten LJ said, the bank would have had security for an extra £300,000 or thereabouts of its loan.

When Lord Browne-Wilkinson spoke of completion he was talking about a commercial transaction. The solicitors did not “complete” the transaction in compliance with the requirements of the CML Handbook. But as a commercial matter the transaction was executed or “completed” when the loan monies were released to the borrowers. At that moment the relationship between the borrowers and the bank became one of contractual borrower and lender, and that was a fait accompli. The Court of Appeal was right in the present case to understand and apply the reasoning in Target Holdings as it did.

The further argument advanced on behalf of the bank in this court about the Solicitors’ Accounts Rules takes matters no further, for the reasons which Mr McPherson gave in his response to it. The solicitors were at fault in not reporting to the bank what they had done and in failing at that stage to remedy their breach of trust by ensuring that the shortfall was paid to Barclays. Their failure to do so was a breach of the rules, which could have disciplinary consequences but it does not affect the outcome in the present appeal. There is, as Mr McPherson submitted, no satisfactory logical reason why the question of the solicitors’ liability to provide redress to the bank for a loss which it would have suffered in any event should turn on their compliance or non-compliance with their obligations under rule 7.

My analysis accords with the reasoning of Lord Reed and with his general conclusions at paragraphs 133 to 138. Equitable compensation and common law damages are remedies based on separate legal obligations. What has to be identified in each case is the content of any relevant obligation and the consequences of its breach. On the facts of the present case, the cost of restoring what the bank lost as a result of the solicitors’ breach of trust comes to the same as the loss caused by the solicitors’ breach of contract and negligence.’

Lord Reed also stated,

‘Notwithstanding some differences, there appears to be a broad measure of consensus across a number of common law jurisdictions that the correct general approach to the assessment of equitable compensation for breach of trust is that described by McLachlin J in Canson Enterprises and endorsed by Lord Browne-Wilkinson in Target Holdings. In Canada itself, McLachin J’s approach appears to have gained greater acceptance in the more recent case law, and it is common ground that equitable compensation and damages for tort or breach of contract may differ where different policy objectives are applicable.

Following that approach, which I have discussed more fully at paras 90-94, the model of equitable compensation, where trust property has been misapplied, is to require the trustee to restore the trust fund to the position it would have been in if the trustee had performed his obligation. If the trust has come to an end, the trustee can be ordered to compensate the beneficiary directly. In that situation the compensation is assessed on the same basis, since it is equivalent in substance to a distribution of the trust fund. If the trust fund has been diminished as a result of some other breach of trust, the same approach ordinarily applies, mutatis mutandis.

The measure of compensation should therefore normally be assessed at the date of trial, with the benefit of hindsight. The foreseeability of loss is generally irrelevant, but the loss must be caused by the breach of trust, in the sense that it must flow directly from it. Losses resulting from unreasonable behaviour on the part of the claimant will be adjudged to flow from that behaviour, and not from the breach. The requirement that the loss should flow directly from the breach is also the key to determining whether causation has been interrupted by the acts of third parties. The point is illustrated by the contrast between Caffrey v Darby, where the trustee’s neglect enabled a third party to default on payments due to the trust, and Canson Enterprises, where the wrongful conduct by the third parties occurred after the plaintiff had taken control of the property, and was unrelated to the defendants’ earlier breach of fiduciary duty.

It follows that the liability of a trustee for breach of trust, even where the trust arises in the context of a commercial transaction which is otherwise regulated by contract, is not generally the same as a liability in damages for tort or breach of contract. Of course, the aim of equitable compensation is to compensate: that is to say, to provide a monetary equivalent of what has been lost as a result of a breach of duty. At that level of generality, it has the same aim as most awards of damages for tort or breach of contract. Equally, since the concept of loss necessarily involves the concept of causation, and that concept in turn inevitably involves a consideration of the necessary connection between the breach of duty and a postulated consequence (and therefore of such questions as whether a consequence flows “directly” from the breach of duty, and whether loss should be attributed to the conduct of third parties, or to the conduct of the person to whom the duty was owed), there are some structural similarities between the assessment of equitable compensation and the assessment of common law damages.

Those structural similarities do not however entail that the relevant rules are identical: as in mathematics, isomorphism is not the same as equality. As courts around the world have accepted, a trust imposes different obligations from a contractual or tortious relationship, in the setting of a different kind of relationship. The law responds to those differences by allowing a measure of compensation for breach of trust causing loss to the trust fund which reflects the nature of the obligation breached and the relationship between the parties. In particular, as Lord Toulson explains at para 71, where a trust is part of the machinery for the performance of a contract, that fact will be relevant in considering what loss has been suffered by reason of a breach of the trust.

This does not mean that the law is clinging atavistically to differences which are explicable only in terms of the historical origin of the relevant rules. The classification of claims as arising in equity or at common law generally reflects the nature of the relationship between the parties and their respective rights and obligations, and is therefore of more than merely historical significance. As the case law on equitable compensation develops, however, the reasoning supporting the assessment of compensation can be seen more clearly to reflect an analysis of the characteristics of the particular obligation breached. This increase in transparency permits greater scope for developing rules which are coherent with those adopted in the common law. To the extent that the same underlying principles apply, the rules should be consistent. To the extent that the underlying principles are different, the rules should be understandably different.’

Lowick Rose LLP v Swynson Ltd & Anor [2017] UKSC 32

In Lowick Rose LLP v Swynson Ltd & Anor [2017] UKSC 32 Lord Sumption (with whom Lord Neuberger, Lord Clarke and Lord Hodge agreed) stated,

Transferred loss

The principle of transferred loss is a limited exception to the general rule that a claimant can recover only loss which he has himself suffered. It applies where the known object of a transaction is to benefit a third party or a class of persons to which a third party belongs, and the anticipated effect of a breach of duty will be to cause loss to that third party. It has hitherto been recognised only in cases where the third party suffers loss as the intended transferee of the property affected by the breach. The paradigm case is the rule which has applied in the law of carriage of goods by sea ever since the decision of the House of Lords in Dunlop v Lambert (1839) 2 Cl & F 626, that the shipper may sue the shipowner for loss of or damage to the cargo notwithstanding that the loss has been suffered by the consignee to whom property and risk (but not the rights under the contract of carriage) have passed. In Albacruz (Cargo Owners) v Albazero (Owners) [1977] AC 774, 847 Lord Diplock, with whom the rest of the Appellate Committee agreed, expressed the rationale of the carriage of goods rule as being that:

“in a commercial contract concerning goods where it is in the contemplation of the parties that the proprietary interests in the goods may be transferred from one owner to another after the contract has been entered into and before the breach which causes loss or damage to the goods, an original party to the contract, if such be the intention of them both, is to be treated in law as having entered into the contract for the benefit of all persons who have or may acquire an interest in the goods before they are lost or damaged, and is entitled to recover by way of damages for breach of contract the actual loss sustained by those for whose benefit the contract is entered into.”

The party recovering is accountable to the third party for any damages recovered: ibid, p 844.

In Linden Gardens Trust v Lenesta Sludge Disposals Ltd [1994] 1 AC 85, this rationale was extended to contracts generally. A contractor had done defective work in breach of a building contract with the developer but the loss was suffered by a third party who had by then purchased the development. The developer recovered the loss suffered by the purchaser. Lord Griffiths, however, suggested (at p 97) that the result could be justified on what has become known as the “broader ground”. This is that the developer had himself suffered the loss because he had his own interest in being able to give the third party the benefit that the third party was intended to have. He could recover the cost of rectifying the defects because it represented what the developer would have to spend to give the third party that benefit, even though he had no legal liability to spend it. On the broader ground, the principle would not be limited to cases where the loss related to transferred property.

It is, however, important to remember that the principle of transferred loss, whether in its broader or narrower form, is an exception to a fundamental principle of the law of obligations and not an alternative to that principle. All of the modern case law on the subject emphasises that it is driven by legal necessity. It is therefore an essential feature of the principle that the recognition of a right in the contracting party to recover the third party’s loss should be necessary to give effect to the object of the transaction and to avoid a “legal black hole”, in which in the anticipated course of events the only party entitled to recover would be different from the only party which could be treated as suffering loss: see Alfred McAlpine Construction Ltd v Panatown Ltd [2001] 1 AC 518, 547-548 (Lord Goff), 568 (Lord Jauncey), 577-578 (Lord Browne-Wilkinson), 582-583 (Lord Millett). That is why, as the House of Lords held in this last case, it is not available if the third party has a direct right of action for the same loss, on whatever basis …

Equitable subrogation as a remedy for unjust enrichment

Equitable subrogation is a remedy available to give effect to a proprietary right or in some cases to a cause of action. This is not a case where subrogation is invoked to give effect to a proprietary right. It belongs to an established category of cases in which the claimant discharges the defendant’s debt on the basis of some agreement or expectation of benefit which fails. The rule was stated by Walton J stated in Burston Finance Ltd v Speirway Ltd (in liquidation) [1974] 1 WLR 1648, 1652 as follows:

“[W]here A’s money is used to pay off the claim of B, who is a secured creditor, A is entitled to be regarded in equity as having had an assignment to him of B’s rights as a secured creditor … It finds one of its chief uses in the situation where one person advances money on the understanding that he is to have certain security for the money he has advanced, and for one reason or another, he does not receive the promised security. In such a case he is nevertheless to be subrogated to the rights of any other person who at the relevant time had any security over the same property and whose debts have been discharged in whole or in part by the money so provided by him.”

Most of the cases are indeed about subrogation to securities, but the principle applies equally to allow subrogation to personal rights: Cheltenham & Gloucester Plc v Appleyard [2004] EWCA Civ 291, at para 36; Commissioners for HM Revenue and Customs v Investment Trust Companies (In Liquidation) [2017] UKSC 29.

In Banque Financière de la Cité v Parc (Battersea) Ltd [1999] 1 AC 221 the House of Lords reinterpreted the existing authorities so as to recognise that, subject to special defences, equitable subrogation served to prevent or reverse the unjust enrichment of the defendant at the plaintiff’s expense …

As with any novel application of the relevant principles, it is necessary to remind oneself at the outset that the law of unjust enrichment is part of the law of obligations. It is not a matter of judicial discretion. As Lord Reed points out in Investment Trust Companies (para 39) it

“does not create a judicial licence to meet the perceived requirements of fairness on a case-by-case basis: legal rights arising from unjust enrichment should be determined by rules of law which are ascertainable and consistently applied.”

English law does not have a universal theory to explain all the cases in which restitution is available. It recognises a number of discrete factual situations in which enrichment is treated as vitiated by some unjust factor. These factual situations are not, however, random illustrations of the Court’s indulgence to litigants. They have the common feature that some legal norm or some legally recognised expectation of the claimant falling short of a legal right has been disrupted or disappointed. Leaving aside cases of illegality, legal compulsion or necessity, which give rise to special considerations irrelevant to the present case, the defendant’s enrichment at the claimant’s expense is unjust because, in the words of Professor Burrows’ Restatement (2012) at Section 3(2)(a), “the claimant’s consent to the defendant’s enrichment was impaired, qualified or absent.” As Lord Reed puts it in Investment Trust Companies (para 42), the purpose of the law of unjust enrichment is to

“correct normatively defective transfers of value by restoring the parties to their pre-transfer positions. It reflects an Aristotelian conception of justice as the restoration of a balance or equilibrium which has been disrupted.”

In Banque Financière de la Cité v Parc (Battersea) Ltd [1999] 1 AC 221, Parc had borrowed money from R on the security of a first legal charge over property, and from an associated company, OOL, on the security of a second legal charge. The plaintiff bank partially refinanced the borrowing from R. For regulatory reasons the refinancing was structured as a loan to the general manager of the group holding company, who in turn lent it to Parc who used it to pay off part of the loan from R. The plaintiff’s loan was made on the strength of an undertaking by the general manager that intra-group loans to Parc would be postponed to the plaintiff’s loan. The undertaking was intended to bind all the companies of the group, but in fact bound only the holding company because it was given without the subsidiaries’ knowledge or authority. OOL accordingly sought to enforce its second charge ahead of the plaintiff. The plaintiff sought to defeat this attempt by claiming to be subrogated to R’s first charge. This depended on the contention that OOL would otherwise be unjustly enriched by the indirect use of the plaintiff’s money to discharge indebtedness which ranked ahead of theirs. The House of Lords accepted that contention, holding that the plaintiffs were subrogated to R’s first charge, but only as against intra-group creditors who would have been postponed had the general manager’s undertaking been binding on them.

Lord Hoffmann, with whom the rest of the Appellate Committee agreed, distinguished, at p 231H-G, between contractual subrogation (as in the case of indemnity insurance or guarantee) and equitable subrogation, which was

“an equitable remedy to reverse or prevent unjust enrichment which is not based upon any agreement or common intention of the party enriched and the party deprived.”

He identified as the unjust factor in OOL’s enrichment the defeat of the plaintiff’s expectation of priority over intra-group loans which was the basis on which it had advanced the money. This was so, notwithstanding that that expectation was not shared by OOL who had nothing to do with the transaction and was unaware of it.

Lord Hoffmann cited in support of this proposition a number of earlier cases in which a right of subrogation had been held to arise when the expectations of the person paying the money (whether or not shared by the party enriched) were defeated because something went wrong with the transaction. Thus in Chetwynd v Allen [1899] 1 Ch 353 and Butler v Rice [1910] 2 Ch 277, the plaintiff lent money to pay off a prior loan secured by a mortgage on property. The plaintiff’s expectation that he would obtain a charge to secure his own loan was based on an agreement with the debtor, but was defeated because unbeknown to him the property in question belonged to the debtor’s wife. The plaintiff was subrogated to the prior mortgage because otherwise the wife would have been unjustly enriched by the discharge of the debt which it secured. In Ghana Commercial Bank v Chandiram [1960] AC 732, the plaintiff bank lent money to the debtor to pay off an existing loan from another bank secured by an equitable mortgage on property. It did this on the footing that it would obtain a legal mortgage over the property. That expectation was defeated because although the legal mortgage was executed it was invalidated by a prior attachment of the property in favour of a judgment creditor. The plaintiff bank was subrogated to the judgment creditor’s attachment because otherwise the judgment creditor would have been unjustly enriched by the discharge of the debt which the equitable mortgage secured. In Boscawen v Bajwa [1996] 1 WLR 328, the plaintiff Building Society agreed to lend money on mortgage for the purchase of a property. It paid the loan moneys to the solicitors acting for them and the purchaser, to be held on its behalf until paid over against a first legal charge on the property. The solicitors paid it over to the vendor’s solicitors to be held to their order pending completion. The plaintiff’s expectations were defeated because the vendor’s solicitors used it without authority to pay off the vendor’s mortgage before completion and the purchase subsequently fell through so that completion never occurred. The plaintiff was subrogated to the vendor’s mortgage because otherwise the vendor would have been unjustly enriched by the discharge of the debt which it secured. Likewise, in Banque Financière itself, the plaintiff’s expectation of priority over intra-group loans was defeated by the general manager’s absence of authority to bind the subsidiaries. In the absence of subrogation, OOL would have been unjustly enriched because Parc’s debt to R, which would otherwise have ranked ahead of its debt to OOL, was discharged at the plaintiff’s expense without the plaintiff’s effective consent. As Lord Hoffman observed, at p 235A-B, the plaintiff “failed to obtain that priority over intra-group indebtedness which was an essential part of the transaction under which it paid the money.”

Where the basic conditions for equitable subrogation apply, the fact that the legal right to which the Claimant is subrogated has been discharged is irrelevant. This is because, as Lord Hoffmann explained at p 236, subrogation operates on a fictionalised basis:

“In a case in which the whole of the secured debt is repaid, the charge is not kept alive at all. It is discharged and ceases to exist … It is important to remember that … subrogation is not a right or a cause of action but an equitable remedy against a party who would otherwise be unjustly enriched. It is a means by which the court regulates the legal relationships between a plaintiff and a defendant or defendants in order to prevent unjust enrichment. When judges say that the charge is ‘kept alive’ for the benefit of the plaintiff, what they mean is that his legal relations with a defendant who would otherwise be unjustly enriched are regulated as if the benefit of the charge had been assigned to him. It does not by any means follow that the plaintiff must for all purposes be treated as an actual assignee of the benefit of the charge and, in particular, that he would be so treated in relation to someone who would not be unjustly enriched.

In Cheltenham & Gloucester Plc v Appleyard [2004] EWCA Civ 291, the Plaintiff Building Society lent money to Mr and Mrs Appleyard to refinance debts owed to the Bradford & Bingley Building Society secured by a first charge on their home, and to BCCI secured by a second charge. The plaintiff put its solicitors in funds and the solicitors paid the outstanding balance of both debts to the respective creditors. The Appleyards executed a legal charge over the property in favour of the plaintiff. But the charge could not be registered as a legal charge at HM Land Registry because BCCI (which was in liquidation) refused to recognise that it had received the money or to consent to the discharge of its own security, and the terms of that security prohibited any charge subsequent to its own. The plaintiffs were held entitled to be subrogated to the legal charge of Bradford & Bingley to the extent of the value of the Bradford & Bingley mortgage at the time it was paid off. This was because otherwise the Appleyards would be unjustly enriched to the extent that their property was burdened with a lesser security.

In Banque Financière and the earlier cases cited by Lord Hoffmann the defendants did not share the expectation of the claimant, whereas in Cheltenham & Gloucester they did. But in either case the intentions of the defendants were beside the point. The reason was that the claimant had bargained for the benefit which failed, whereas from the defendant’s point of view the discharge of the prior indebtedness was a windfall for which they had not bargained. If they had given consideration for it the result would have been different.

This point may be illustrated by the other leading modern case, Bank of Cyprus UK Ltd v Menelaou [2016] AC 176. The decision is authority for the proposition that a third party who pays the purchase price of property may be subrogated to the vendor’s lien for the purchase price, if the purchaser would otherwise have been unjustly enriched. The Menelaou parents proposed to sell the family home to release capital to be spent on (among other things) buying a house for their daughter. To enable this to happen, the claimant bank, to whom the family home was mortgaged, agreed to release its charges on condition that it would receive a charge over the house to be acquired for the daughter. This expectation was defeated because she was unaware of the arrangement and the signature on the charge was not hers. The daughter was enriched, not by the mere fact of acquiring a house, which she owed to the benevolence of her parents, but by the fact that she acquired it free of the charge which the bank expected to have and without which the transaction should not have proceeded. The main issue on the appeal was whether that enrichment occurred at the bank’s expense, given that the money to pay the purchase price had come from her parents out of the proceeds of sale of the family home, and not directly from the bank. Once that question was answered in the bank’s favour, it was held that the enrichment was unjust. This was because the bank’s consent to the use of the proceeds of the family home to buy the daughter a house had been conditional on it obtaining a charge. That condition had failed and the daughter had consequently been enriched. To reverse the enrichment, the bank was subrogated to the vendor’s lien, on the footing that the purchase price secured by that lien had in substance been paid with the bank’s money. The daughter’s intentions were irrelevant because the absence of a valid charge had been a windfall for her. As Lord Neuberger pointed out (para 70), this was because she did not pay for it. If she had been a bona fide purchaser for full value it might well have been impossible to characterise any enrichment arising from the absence of the intended charge as unjust.

The cases on the use of equitable subrogation to prevent or reverse unjust enrichment are all cases of defective transactions. They were defective in the sense that the claimant paid money on the basis of an expectation which failed. Many of them may broadly be said to arise from a mistake on the part of the claimant. For example, he may wrongly have assumed that the benefit in question was available or enforceable or that his stipulation was valid, when it was not. However, it would be unwise to draw too close an analogy with the role of mistake in other legal contexts or to try to fit the subrogation cases into any broader category of unjust enrichment. It is in many ways sui generis. In the first place, except in the case of voluntary dispositions, the law does not normally attach legal consequences to a unilateral mistake unless it is known to or was induced by the other party. But it does so in the subrogation cases. This is, as I have explained, because the windfall character of the benefit conferred on the defendant means that it is not unjust to give effect to the unilateral expectation of the claimant. Secondly, where money is paid under a contract, restitution is normally available only if the contract can be and is rescinded or is otherwise at an end without performance (eg by frustration). This is because the law of unjust enrichment is generally concerned to restore the parties to a normatively defective transfer to their pre-transfer position. Subrogation, however, does not restore the parties to their pre-transfer position. It effectively operates to specifically enforce a defeated expectation. Thirdly, as Lord Clarke suggested in Menelaou (para 21), the rule may be equally capable of analysis in terms of failure of basis for the transfer. Restitution on that ground ordinarily requires that the expectation should be mutual, whereas this is not a requirement for equitable subrogation. But some cases, such as Boscawen v Bajwa and Cheltenham & Gloucester v Appleyard, cannot without artifice be analysed in any other way, since the payer does not seem to have been mistaken about anything. His expectation was simply defeated by some subsequent external event. What this suggests is that the real basis of the rule is the defeat of an expectation of benefit which was the basis of the payer’s consent to the payment of the money for the relevant purpose. Mistake is not the critical element. It is only one, admittedly common, explanation of how that expectation came to be disappointed.

Two things, however, are clear. The first is that the role of the law of unjust enrichment in such cases is to characterise the resultant enrichment of the defendant as unjust, because the absence of the stipulated benefit disrupted a relevant expectation about the transaction under which the money was paid. The second is that the role of equitable subrogation is to replicate as far as possible that element of the transaction whose absence made it defective. This is why subrogation cannot be allowed to confer a greater benefit on the claimants than he has bargained for: see Paul v Speirway Ltd [1976] Ch 220, 232 (Oliver J), Banque Financière, at pp 236-237 (Lord Hoffmann), and Cheltenham & Gloucester v Appleyard, at paras 38, 41-42 (Neuberger LJ). It can be seen that the fact that all the cases relate to defective transactions is not just an adventitious feature of the disputes that happen to have come before the courts. It is fundamental to the principle on which they were decided.

The present case is entirely different from the kind of case with which equitable subrogation is properly concerned. The December 2008 refinancing was not a defective transaction. Mr Hunt intended to discharge EMSL’s debt to Swynson. Otherwise he would not have achieved his objective of cleaning up Swynson’s balance sheet and reducing its liability to tax. He received the whole of the benefit from the transaction for which he had stipulated: the covenant to repay, the security over EMSL’s assets, the tax advantage and the presentational advantage of removing a large non-performing debt from Swynson’s books. It is of course true that he did not receive repayment of his loan, because EMSL was (or became) insolvent and its assets were worth much less than the debt. But that was a commercial risk that he took with his eyes open, and it was not what enriched HMT. In these circumstances, subrogation is not being invoked for its proper purpose, namely to replicate some element of the transaction which was expected but failed. It is being invoked so as to enable Mr Hunt to exercise for his own benefit the claims of Swynson in respect of an unconnected breach of duty under a different transaction between different parties more than two years earlier.

Mr Hunt’s alleged mistake contributes nothing to this analysis. I need not enter into the long-standing controversy about whether a transaction may be set aside on account of a mistake relating to the consequences or advantages of a transaction as opposed to its terms or character, or whether any causative mistake of sufficient importance will do. That issue is discussed by Lord Walker in Pitt v Holt [2013] 2 AC 108 at paras 114-123 and by the editors of Goff & Jones, The Law of Unjust Enrichment, 9th ed (2016), paras 9-135 – 9-142. But it does not arise here. Mr Hunt is not seeking to set aside the December 2008 refinancing and would not be entitled to do so. He is trying to invoke a remedy which the law provides for a specific purpose, and to deploy it for a different one. When Mr Hunt entered into the December 2008 refinancing, he did not in any sense bargain for a right to recover substantial damages from HMT. Nor was he mistaken about what he was going to get out of the refinancing. At best, he was mistaken about the effect that the discharge of EMSL’s debt to Swynson would have on the latter’s claims under the very different transaction which it had entered into in 2006 when it engaged HMT to carry out the due diligence. In fact, however, his evidence does not even go that far. What it shows is that he wrongly believed that he had already bargained for a right to substantial damages from HMT back in 2006. This was because he considered that as the owner of Swynson he was as much entitled under Swynson’s contract with HMT as Swynson was. “As between me and Swynson,” he wrote in the passage from his witness statement cited by the judge, “the consideration of who technically would be entitled to recover the money from HMT did not matter as I was the owner of Swynson.” As a result, he did not think that by discharging EMSL’s debt to Swynson two years later he would diminish his own entitlement. As between Swynson and himself, it was “implicitly understood” that whichever of them made the recovery it would be shared between them pro-rata according to the unpaid lending advanced.

This was an error, but it does not follow that its consequences constitute an injustice which falls to be corrected by the law of equitable subrogation. Unless the claimant has been defeated in his expectation of some feature of the transaction for which he may be said to have bargained, he does not suffer an injustice recognised by law simply because in law he has no right. Failure to recognise these limitations would transform the law of equitable subrogation into a general escape route from any principle of law which the claimant overlooked or misunderstood when he arranged his affairs as he did.

The consequence of a rule as broad as that can be seen by supposing that after Mr Hunt has recovered damages from HMT by way of subrogation, the fortunes of Evo turn and EMSL is in a position to repay the December 2008 loan. It does not matter for present purposes whether or not this was a realistic prospect in December 2008, although the judge’s findings on mitigation suggest that it was not unrealistic. If Mr Hunt’s argument is correct, the transfer which enriched HMT at his expense was the payment of the loan moneys to EMSL and which EMSL then paid to Swynson. His right of subrogation is said to have arisen from the discharge of the debt which EMSL owed to Swynson. It did not depend on whether or not he was able to recover the money he lent to EMSL. If EMSL were restored to financial health, there would be nothing to stop him from obtaining repayment of EMSL’s debt under the December 2008 loan agreement. Subrogation on these facts would then have served to give Mr Hunt an additional right on top of everything the he bargained for in December 2008. This result would hardly do credit to the law. But it is the natural consequence of allowing subrogation to rights arising under a different transaction from the one which gave rise to the enrichment, instead of confining it to cases where it serves to replicate a missing element of the same transaction.’

Lord Mance further stated,

Mitigation and res inter alios acta?

HMT’s submission failed at first instance before Rose J and in the Court of Appeal before Longmore and Sales LJJ, with Davis LJ dissenting. Rose J and the majority in the Court of Appeal held that the transaction effected on 31 December 2008 fell to be regarded as res inter alios acta, as between Swynson and HMT. They considered, clearly correctly, that the transaction did not constitute mitigation by Swynson of its damage, since Swynson was in no position to, and did not effect, the transaction itself. But they regarded the transaction as in fact avoiding loss in a way which should only be brought into account, if it arose out of HMT’s breach of duty and in the ordinary course of business. They cited in this connection from Viscount Haldane LC’s speech in British Westinghouse Co Ltd v Underground Electric Railways Co Ltd [1912] AC 673, 690.

It can readily be accepted that there was a causal link between Mr Hunt’s action in funding EMSL to repay Swynson and HMT’s negligence, and also that Mr Hunt was not acting in the ordinary course of business, but in the grip of a continuing and somewhat disastrous course of events brought about by that negligence. But, as has been held, Mr Hunt himself has no claim against HMT for negligence, and his action brought about the repayment of the loan granted to Swynson independently of any action by Swynson itself. In the passages cited, Viscount Haldane LC was speaking of loss mitigated by the claimant him- or itself in circumstances where there was no obligation to mitigate loss. Here, the payment off of the indebtedness was not undertaken by or at the request of Swynson. It was initiated by Mr Hunt in his personal capacity deciding that it would suit Swynson’s and his own interests to procure repayment by EMSL of its indebtedness to Swynson. Swynson and Mr Hunt are distinct legal personalities, and Mr Hunt’s conduct cannot be attributed to Swynson.

Transferred loss

Recovery for transferred loss can, in my view, be addressed quite briefly. The normal principle is that a claimant in action for breach of contract cannot recover damages in respect of loss caused by the breach to some third person not party to the contract: see The Albazero [1977] AC 774, 846 B-C per Lord Diplock. But there are, as Lord Diplock went on to say, exceptions. One exception, recognised and applied in Linden Gardens Trust Ltd v Lenesta Sludge Disposals Ltd and St Martins Property Corp Ltd v Sir Robert McAlpine Ltd (“St Martins”) [1994] 1 AC 45 exists where it was in the contemplation of the parties when the contract was made that the property, the subject of the contract and the breach, would be transferred to or occupied by a third party, who would in consequence suffer the loss arising from its breach: see Darlington Borough Council v Wiltshier Northern Ltd [1985] 1 WLR 68 and the narrow ground of decision expressed by Lord Browne-Wilkinson at p 114G-H in St Martins, in which all members of the House joined. In such a situation, the claimant is seen as suing on behalf of and for the benefit of the injured third party and is bound to account accordingly: see St Martins, per Lord Browne-Wilkinson at p 115A-B and McAlpine Construction Ltd v Panatown Ltd (“Panatown”) [2001] 1 AC 518, per Lord Clyde, at pp 530E-F and 532D-E.

Another broader principle was suggested by Lord Griffiths in St Martins, at p 96F-97D and reviewed inconclusively by Lord Browne-Wilkinson at pp 111F-112F as well as by the members of the House in Panatown. This is that a contracting party might itself have an interest in performance enabling it to claim damages without proving actual loss. In both cases the principle was being suggested in the context of contracts for supply, whether of goods or services. In St Martins the suggestion was made in circumstances where the claimant had actually incurred costs of repair, but was entitled to recover them from the associated company to which the building had been transferred before the breach. In Panatown the property was from the outset owned by an associated company of the company which contracted for its construction, and the construction defects which emerged did not lead to the latter company incurring any outlay. The reason why, in the majority view, the latter company was not entitled to recover damages was not that it had incurred no outlay, but was that there existed a deed of care deed entitling the owning company to make a direct claim against the contractors. Potential difficulties about the theory of performance interest are that it cannot prima facie embrace consequential losses suffered by the company actually (as opposed to contractually) interested in the quality of the property or services and that it is not clear whether or on what basis the company contractually entitled may be liable to account to the company actually interested: see on this latter point per Lord Clyde in Panatown at pp 532E-F, 534B-C and 535F.

Neither the narrow or the broad version of the transferred loss principle is in my view of assistance to Swynson. As to the narrow principle, it is clear that Swynson did not contract with HMT on behalf of or for the benefit of Mr Hunt. As to the broad principle, even if accepted, I do not see how it can apply in circumstances where Swynson itself suffered loss through being induced to support the management buyout by lending to EMSL, but the loan was ultimately repaid by EMSL. This is not a case where Swynson had any performance interest other than being indemnified in respect of the loss which it incurred in lending moneys to support the management buyout. That performance interest has been satisfied. The fact that it was satisfied by Mr Hunt making moneys available to EMSL to repay Swynson does not bear on or expand Swynson’s performance interest.

Unjust enrichment

I turn then to unjust enrichment. Swynson’s and Mr Hunt’s submission is that relief by way of unjust enrichment is available to preserve Swynson’s otherwise discharged claim against HMT for the benefit of Mr Hunt to the extent necessary to meet what are, it is submitted, the imperatives of the circumstances in which Mr Hunt effectively enriched HMT by arranging the repayment of the sums outstanding under the first two loans made by Swynson to EMSL, by reference to which sums HMT’s liability would, otherwise, have fallen to be measured. Longmore and Davis LJJ were not prepared to accept this as a potential basis of recovery for two reasons. The first was difficulty in seeing how subrogation could arise in favour of Mr Hunt in respect of a claim by Swynson which had been discharged, “unless”, Longmore LJ relevantly added, “the theory of fictionalised assignment expounded by Lord Hoffmann in Banque Financiere (see para 20 below) at p 236E solves this particular problem”. The second was doubt whether any mistake had been sufficiently demonstrated. Both Longmore and Davis LJ saw the case as involving causative ignorance, rather than any incorrect conscious belief or incorrect tacit assumption, referring for this distinction to Pitt v Hunt [2013] 2 AC 108. Sales LJ took a different view and would, if necessary, have recognised Mr Hunt as enjoying a right of subrogation to Swynson’s discharged claim against HMT.

The basic questions in a claim in unjust enrichment were summarised by Lord Steyn in Banque Financière de la Cité v Parc (Battersea) Ltd [1999] 1 AC 221, 227A-C in terms recently adopted by the Supreme Court in the judgment delivered by Lord Reed in Commissioners for Her Majesty’s Revenue and Customs v The Investment Trust Companies (In Liquidation) (“ITC”) [2017] UKSC 29. The four questions are: (1) Has the defendant benefited or been enriched? (2) Was the enrichment at the expense of the claimant? (3) Was the enrichment unjust? (4) Are there any defences? More detailed examination and application of these questions in particular cases has proved controversial: see in particular Menelaou v Bank of Cyprus [2014] 1 WLR 854 and its academic aftermath. However, the comprehensive review of their significance in Lord Reed’s judgment in ITC now provides the essential basis for further consideration and application of the questions.

As to the first, there is, in the light of my conclusions on the issue of res inter alios acta, no doubt that HMT were, indirectly, enriched by the discharge by EMSL of the loan due to Swynson. The discharge had the immediate effect of reducing (in this case to nil) the damages in respect of the 2006 and 2007 loans which (subject to the overall £15m cap) Swynson could otherwise have recovered from HMT on account of HMT’s negligence. A relevant benefit for the purposes of unjust enrichment can consist in the discharge of a debt or (as in Banque Financière) of the promotion of a second charge due to the discharge of part of a prior secured debt. In principle, it seems to me that it can consist in the reduction of a loss, which would otherwise be recoverable by way of a claim for damages for breach of contract and/or duty.

The second question raises the issue what counts as enrichment “at the expense” of the claimant. That this issue can prove less straightforward is evident from the examination of its conceptual base in paras 37 to 63 in ITC. Usually, as Lord Reed points out (paras 46-50) the parties will have dealt directly with one another, but there are situations which are legally equivalent to direct provision and there may be other apparent exceptions or possible approaches, which it is not intended to rule out. The claimant must incur a loss by conferring a benefit on the defendant, but “economic reality” is not the test (paras 59-60). However, the reality, rather than the formal shape, of a transaction, or of a co-ordinated series of transactions, can show that the claimant has conferred a benefit on the defendant, despite the absence of a direct relationship between them.

Thus, in Banque Financière itself, the transaction was structured so that Banque Financière (“BFC”) advanced the relevant moneys to Mr Herzig who on-lent on different terms to Parc; the purpose was to reduce Parc’s borrowing from Royal Trust Bank (Switzerland) (“RTB”), which had a first charge over Parc’s assets; the moneys was actually remitted directly by BFC to RTB; and BFC believed, on the basis of a postponement letter written by Mr Herzig, that there had been agreement by all relevant companies in the Parc group that the advance made to Parc would have priority over other inter-group lending to Parc, including by OOL. In fact Mr Herzig had no authority to write the letter and so there had been no such agreement. The unintended effect of the advances paying off RTB was therefore to promote OOL’s second charge on Parc’s assets pro tanto. In these circumstances, BFC was treated, as against OOL, as subrogated to RTB’s (otherwise discharged) secured debt to the extent necessary to cover the advance which it had made. BFC’s failure to take proper precautions to ensure that Mr Herzig had authority to write the postponement letter was no ground for holding that the enrichment was not unjust: see per Lord Hoffmann at p 235F-G.

In reaching this conclusion, all five members of the House held that, despite Mr Herzig’s interposition, OOL was enriched at the expense of BFC. Lord Steyn (p 227B-E), Lord Clyde (p 238B-C) and Lord Hutton (p 239E-G) each referred to this as the “reality”. Lord Hoffmann (p 235C-E) with whose reasons Lord Steyn (p 228F), Lord Griffiths (p 228F-G) and Lord Clyde (p 238D-E) also agreed, gave as the reason that there was

“no difficulty in tracing BFC’s money into the discharge of the debt due to RTB; the payment to RTB was direct. In this respect, the case is stronger than in Boscawen v Bajwa [1996] 1 WLR 328.”

In Boscawen v Bajwa, money was advanced by a building society for the purchase of a property and were to be secured by a first charge. The purchaser’s solicitors passed the money on to the vendor’s solicitors, who, in circumstances not involving any want of probity but to some extent contributed to by the purchaser’s solicitors’ issue of a dishonoured cheque, used it to discharge a mortgage on the property without any transfer of the property to the intended purchaser ever occurring. The building society was held entitled to be subrogated to the discharged mortgage to the extent of its outlay, on the basis that the moneys were traceable into the discharged mortgage debt. Where claimant’s property is traceable into a receipt or property held by the defendant, there is the equivalent of a direct transfer.

In the present case, there is also no difficulty in tracing the advance made by Mr Hunt to EMSL into the discharge of Swynson’s borrowing from EMSL. It was a term of Mr Hunt’s loan to EMSL that it should be used for such discharge: para 7 above. Without more, this discharge would have been a benefit to Swynson alone, and that was no doubt how Mr Hunt saw it at the time. In fact, as I have held, the discharge of EMSL’s indebtedness to Swynson had the unforeseen consequence of eliminating any loss which Swynson would be able to show in respect of the 2006 and 2007 loans if it pursued a claim for damages against HMT, and did so moreover in circumstances in which Mr Hunt himself might (as proved to be the case) have no personal claim himself against HMT. But the transfers which Mr Hunt arranged cannot be regarded as received by HMT, or as traceable into any sort of discharge of HMT’s liability to Swynson.

It can however be argued that, even in Banque Financière, the transfers made by Banque Financière were not actually received, or converted into property held, by OOL. OOL was simply enriched by the promotion of its charge, which occurred due to BFC’s payment off of RTB’s loan. So here, it may be argued, HMT was enriched at Mr Hunt’s expense by the payment off through EMSL of Swynson’s loan. This is however to over-simplify and there are a number of potentially significant points that need to be considered. First and most importantly, in Banque Financière BFC bargained for, and mistakenly believed it was obtaining, priority over other group claims when it provided the moneys to discharge RTB’s loan. In the present case, Mr Hunt was not dealing with HMT, or addressing or discharging, or bargaining either to preserve or to step into the shoes of Swynson for the purposes of, any contractual or tortious claim which Swynson had against HMT.

Second, HMT submits that there can be no relevant benefit if all that can be shown is that the defendant “is not liable because a fundamental component of the cause of action against him (namely loss) is missing”. But subrogation by virtue of unjust enrichment is an equitable remedy which operates by adjusting relationships on a fictionalised basis. Thus, in Banque Financière, part of RTB’s secured claim was treated as alive, as against OOL only, as if it had not been discharged by payment by BFC, but had been assigned to BFC (see per Lord Hoffmann, p 236E-F). So, here, it seems to me that it could be possible, if the other ingredients of subrogation were all present, to treat Swynson’s claim against HMT as alive as if Swynson’s loss had not been discharged by the payment arranged by Mr Hunt through EMSL, and as if Swynson’s claim had been assigned to Mr Hunt. Longmore LJ’s qualification recognising the potential relevance of this fictionalised basis of subrogation was to that extent well-founded.

Third, Mr Hunt, when advancing to EMSL the money necessary to repay the first and second loans made by Swynson, acquired a countervailing right in law to repayment of those loans by EMSL. The value of that right depended on Evo and its future performance. The December 2008 refinancing was made on the basis that the EMSL loan was “impaired” (see per Rose J, paras 47-48 and Longmore LJ, para 7). Mr Hunt’s letter of claim of 24 August 2010 stated that Evo had long been in desperate straits and that it had never in Mr Hunt’s view been more than a “pig in a poke”. But the management accounts, summarised in the expert report of Ian Robinson produced at the request of Swynson and Mr Hunt for use before Rose J, indicate that there still existed hope that Evo might return to profitable trading in and after 2010. Mr Robinson’s opinion was also that as at December 2008 Evo had a net asset value in the order of USD 8m or a value on an earnings basis in the order of USD 4 to 5m. Evo did ultimately yield some realisations (para 42 above), though this fell far short of covering Mr Hunt’s loan and the interest under on it. In summary, it would seem unrealistic to regard Mr Hunt as suffering no loss at all in December 2008, as a result of advancing the money he did to EMSL to pay off Swynson. With the benefit of hindsight, it seems clear that his loss increased thereafter, as Evo’s position continued, despite his efforts, to deteriorate. However, this analysis highlights a feature of Mr Hunt’s claim that HMT has been unjustly enriched at his expense. The existence and extent of any enrichment could not be determined by simple reference to the amount that Mr Hunt lent to EMSL in December 2008. They would depend on Evo’s and EMSL’s subsequent fortunes.

A fourth point, arising from some observations of the Supreme Court in ITC, concerns the significance of the limited “benefits” intended and obtained from the repayment of the first and second loans made by Swynson to EMSL. These consisted in a tax saving (para 43 above) and the removal of the perceived disadvantage to Swynson of having an impaired debt on its books: see Rose J’s judgment, para 47. In different ways, the existence of a tax liability without receipt of any corresponding income and the impaired debt were both disadvantages resulting from the original management buyout on the basis of HMT’s original negligent advice. Their elimination was a step taken by Mr Hunt in the course of dealing with that disastrous investment. But it was a step taken by him personally, albeit in order to benefit his company Swynson. The difficulties on this appeal arise because (a) the step he took had the unforeseen, consequential effect of depriving Swynson of any claim against HMT and (b) the highest that Mr Hunt can put the matter is to say that he himself thereby suffered loss in his capacity as owner of Swynson, in circumstances where, as has been held, he himself had no direct right of action against HMT.

A fifth point, which I mention in passing, is that, had Swynson’s loan to EMSL been good, the same tax liability would have been incurred but in respect of moneys actually received, while the impairment would have been avoided. Apart from the repayment of the EMSL loan procured by Mr Hunt on 31 December 2008, Swynson’s damages claim against HMT could have included the full amount of the interest which EMSL had failed to pay to Swynson (which would no doubt have been taxable in Swynson’s hands as a business receipt, even if EMSL had paid it). Swynson having in fact been repaid by EMSL, Mr Hunt, if he were to have any subrogation claim against HMT, would probably have to give credit, against his gross loss for the purposes of that claim, for the amount of the tax on interest in respect of which he in effect indemnified Swynson (any subrogation recovery by him from HMT in respect of such interest not presumably being taxable). I understood Mr Sims QC for Mr Hunt to accept as much (transcript, 22 November 2016, p 125 ll.22-23.) But, in any event, as Mr Sims went on to point out, this would be likely to be irrelevant, as any such reduction in Mr Hunt’s gross claim for subrogation purposes would not reduce it below HMT’s maximum liability of £15m as at 31 December 2008, plus interest since then.

Turning to the significance of these points for Mr Hunt’s claim to be subrogated to Swynson’s claim against HMT, in ITC, paras 52 to 58, Lord Reed noted that, where the provision of a benefit to a third party is incidental to work done or expenditure incurred in pursuit of a person’s own interests, any enrichment may either not be regarded as being at the expense of the person doing the work or incurring the expenditure or may not be regarded as unjust. “One man heats his house, and his neighbour gets a great deal of benefit” – the classic example given by Lord President Dunedin in Edinburgh and District Tramways Co Ltd v Courtenay 1909 SC 99, , 105 – clearly involves circumstances in which it would be “absurd”, as the Lord President said, to suppose that the former could claim a contribution from the latter. The case of TFL Mangement Services v Lloyds Bank plc [2013] EWCA Civ 1415 was wrongly decided for this reason, as the Court held in ITC and as the Scottish jurisprudence cited by Lord Reed at para 55 in ITC presciently suggested nearly two centuries ago.

In such situations, the questions whether a benefit was obtained “at the expense of” the claimant and whether it would be “unjust” for the defendant to retain it are likely to be difficult to separate. If a person with a view to obtaining a small benefit for himself at the same time unintentionally and by mistake incurs a much larger loss in conferring a much larger benefit on a third party, the picture changes, and one is again potentially in the field of unjust enrichment. The particular features of the present appeal, on which attention must necessarily focus, are that it concerns deliberately structured transfers (by Mr Hunt to EMSL and EMSL to Swynson) which had unforeseen, consequential effects on Swynson’s separate relationship with a third party, HMT, and/or on Mr Hunt, as noted, particularly, in paras 62 and 65 above.

In these circumstances, I turn to consider whether there is here an “unjust” factor, which may make it appropriate to recognise the benefit conferred on HMT by the repayment of the first and second Swynson loans as giving rise to a claim by Mr Hunt. The primary case now sought to be advanced is that Mr Hunt was labouring under a mistake when he advanced the money to EMSL to pay off the loans. In the alternative, it is submitted that the unjust factor can be found in the failure of the “basis” on which Mr Hunt made such advance, or, in the further alternative, upon a more general policy-based approach recognising the suggested unfairness of what has happened. I do not see these two alternative submissions as adding in the present case to the primary submission or offering any real prospect of success if it fails. In the present case, the basis of the advance could hardly be said to fail, if there was no relevant mistake. Likewise, it is difficult to see any reason why Mr Hunt should have a remedy in respect of an advance if he made it without any mistake, particularly when it offered his company, Swynson, some advantage.

Having said that, there are cases which can be analysed as accepting such a subrogation claim simply in order to redress the defeat by unforeseen events of an expectation of benefit on the basis of which the claimant made a payment: see eg Banque Finanière and Cheltenham & Gloucester plc v Appleyard [2004] EWCA Civ 291. The underlying rationale of subrogation to redress unjust enrichment may well be to redress the defeat of such an expectation, mistake being only one context in which this can occur. But in each case, the nature of the expectation or mistake is also critical in determining whether there exists a subrogation claim to redress any enrichment. This brings one back to its closeness of its relationship with the right to which the subrogation claim relates.

The first problem which arises on this appeal regarding mistake is that it was not explicitly pleaded, leading to a submission by HMT that it would be unfair to treat it as a basis on which this appeal could or should be decided against them. This makes it necessary to examine the way in which the case was put and has developed. The first relevant reference in the pleadings is in the reply dated 14 June 2013, where in para 35d the defence plea that HMT owed no separate duty to Mr Hunt was addressed, and Swynson advanced three heads of positive case: in summary, res inter alios acta, equitable subrogation and transferred loss. The second was put simply on the basis that “Swynson suffered the losses claimed herein before any refinancing and is entitled to recover the same for itself and Mr Hunt on the basis that Mr Hunt should be treated in equity, by way of equitable subrogation or otherwise, as entitled to his pro rata share”.

Then, in its skeleton argument dated 8 May 2014 for the trial which began on 14 and continued to 23 May 2014, Swynson gave notice that it relied in support of its claim of subrogation on both Banque Financière and Menelaou. At trial, Mr Hunt gave apparently uncontradicted evidence, which Rose J in any event expressly accepted to the following effect:

“It should be obvious from what I have said … that there was no intention on my part or Swynson’s part to relieve HMT from any liability due to the refinancing exercise. As far as I was concerned the claim against HMT remained unaffected by this refinancing and was of no concern of theirs. As between me and Swynson the consideration of who technically would be entitled to recover the money from HMT did not matter as I was the owner of Swynson, but it was implicitly understood that the recovery would be held pro-rata according to the unpaid lending advanced.”

In written closing submissions dated 21 May 2014, Swynson submitted (para 27) that:

“Mr Hunt should be entitled to a subrogation remedy, having regard to the implied common intention of Hunt & Swynson [viz that after what was called the “refinancing” any recoveries would be shared as them in accordance with their outstanding and unpaid lending], on the principles analogous to the insurance cases, or to the remedy on the equitable principles of unjust enrichment as set out in Banque Financière [1999] AC 221; see as to the former at 231E, and as to the latter 234G-H, 227B-C &228D-E. As for the latter basis for the remedy, Mr Hunt’s decision to step in and take over some of the lending to EMSL was not intended to give HMT (or more substantially its insurer) a windfall. No-one could possibly suggest there was any discussion, intention or agreement that HMT would benefit by reason of Mr Hunt’s desire to give Evo an interest free loan and save Swynson from paying deemed interest. In these circumstances HMT would be unjustly enriched at his expense if it was held that any claim against it should be reduced by the extent to which he took over the lending previously owed to Swynson.”

Rose J recited the three heads of case which were advanced, decided the case on the basis of res inter alios acta, and did not need to consider the other two heads: see paras 49 and 55 of her judgment.

In the Court of Appeal the matter was put squarely on the basis that it had been “a mistake to make the 2008 Partial Refinance in order to relieve HMT of liability” (skeleton dated 11 May 2015, para 29) and that “Mr Hunt made a mistake in the way he structured this back in 2008” (transcript of opening, p 55B-C). In response on this head of claim, counsel for HMT submitted that there had been no pleading of mistake and that Mr Hunt’s evidence, accepted by the judge (para 68 above), did not establish a mistake. Asked directly by Sales LJ at this point whether she was saying that the argument was not available, counsel replied that HMT did “not have to put it that high, but yes” (transcript, p 67D-F). So HMT were, if necessary, taking a point on admissibility. In further submissions about the case of subrogation based on unjust enrichment, which it was accepted was before the judge, counsel submitted that there was lacking that “missing right which required subrogation in order to fix the gap”. When Sales LJ put that

“the missing right is Mr Hunt thought that he was going to make this loan but there would still be the benefit of the cause of action against HMT,”

the reply was that that was

“not enough for subrogation. For subrogation, there needs to have been a right bargained for and not achieved.

The Court of Appeal did not deal formally with the admissibility of the case based on mistake. But, having heard these submissions, it gave a judgment on 25 June 2015 in which all three members of the Court dealt on the merits with the issue of unjust enrichment based on the case of mistake which Swynson had advanced before it. Longmore and Davis LJJ rejected that case on its merits, for reasons summarised in para 55 above, while Sales LJ would have accepted it.

In these circumstances, I conclude that the Court of Appeal determined that the case based on mistake was fairly open to Swynson, and should be addressed on its merits, although the majority concluded that it should fail on the evidence. I see no basis on which to reach a different conclusion on the question whether the case was and is open. Indeed, I would myself have reached the same conclusion. The case on mistake needs to be addressed on its merits accordingly.

In my opinion it is clear that Mr Hunt was labouring under a form of mistake when he was advised to and did arrange to fund EMSL to pay off Swynson’s first and second loans. Not only did he have no intention thereby to relieve HMT of any liability, he gave positive evidence which Rose J accepted that “As far as I was concerned the claim against HMT remained unaffected by this refinancing and [the refinancing] was of no concern of theirs” (para 72 above). The fact that he did not think it important whether the claim against HMT was Swynson’s or his does not seem to me to matter in assessing whether he was acting under a mistake. It clearly belonged to one or other. What matters is that he mistook the significance of payment off of the Swynson loans.

In Pitt v Holt [2013] 2 AC 108, Lord Walker, in a judgment with which all members of the Supreme Court agreed, addressed suggestions in prior caselaw that a line fell to be drawn between mere causative forgetfulness or ignorance and a mistaken conscious belief or mistaken tacit assumption, concluding as follows in para 108:

“I would hold that mere ignorance, even if causative, is insufficient, but that the court, in carrying out its task of finding the facts, should not shrink from drawing the inference of conscious belief or tacit assumption when there is evidence to support such an inference.”

In the present case, I consider that, contrary to the view taken by the majority of the Court of Appeal, the accepted evidence, recited in paras 71 and 78 above, is of a conscious belief on Mr Hunt’s part that funding the repayment of the Swynson loans would have no effect on any claim against HMT. At the very least, however, it establishes a tacit assumption. This belief (or assumption) has been shown to be mistaken (a) as regards a negligence claim by Mr Hunt personally against HMT, by Rose J’s judgment and (b) as regards a claim by Swynson against HMT, by the Supreme Court’s present judgment. As to (a), if he had had a claim in his own name, then he would have been able to recover in full from HMT. His repayment of the Swynson loans would in this context have constituted a step taken in continuing mitigation of the effects of HMT’s breach of duty towards him. As to (b), if Swynson had retained a claim against HMT, Mr Hunt would, as Swynson’s owner, have been covered indirectly in respect of any loss arising to him from the December 2008 arrangements.

How far Mr Hunt was acting under advice in the arrangements he made is not known. It is certainly possible to suggest that it was in a general sense careless to make them without considering their implications. At least in so far as his mistake was to think that Swynson would, if necessary, retain its claim against HMT despite the December 2008 arrangements, it could be said in response that the mistake was understandable, since the Supreme Court has concluded that it was shared by both courts below. But, even if it were right to conclude that any mistake by Mr Hunt involved carelessness, that by itself is no bar to equitable relief, unless the circumstances show that Mr Hunt deliberately ran, or must be taken to have run, the risk of being wrong: see Banque Financière, 235E-G per Lord Hoffmann (cited in para 58 above) and Pitt v Holt [2013] 2 AC 108, 114, per Lord Walker. It seems clear that Mr Hunt did not intend to run or believe that he was running any such risk. Nonetheless, the arrangements he in fact made did involve the risk that he might himself have no direct claim, while paying off EMSL’s debt to Swynson meant that Swynson could no longer claim to have suffered loss recoverable from HMT, with the result that there was no basis on which either Swynson or Mr Hunt could claim any substantial damages from HMT.

Was any mistake causative? Like Sales LJ (para 59), I do not think that there is any chance that Mr Hunt would have made the payments in the way he did had he thought that they might have the effect of eliminating the liability of HMT in respect of the 2006 and 2007 loans. The advantages for Swynson in terms of tax and standing (para 43 above) would have been dwarfed by the loss of a claim for £15m (plus interest) against HMT. He could not conceivably have allowed any claim by Swynson to be fatally undermined in this way.

Was Mr Hunt’s mistake one in respect of which equity should grant relief, by way of subrogation keeping alive for that purpose Swynson’s claim against HMT to the extent that it was discharged by the payment off of the two Swynson loans? It is necessary to consider, first, in respect of what type of mistake such relief may be available. In this connection, Lord Walker in Pitt v Holt, paras 114-145, addressed a distinction suggested in prior authority between a mistake about the nature or characteristics of a transaction and the consequences or advantages to be gained by entering into it. After close analysis of authority, he concluded (para 122):

“I can see no reason why a mistake of law which is basic to the transaction (but is not a mistake as to the transaction’s legal character or nature) should not also be included, even though such cases would probably be rare. … I would provisionally conclude that the true requirement is simply for there to be a causative mistake of sufficient gravity; and, as additional guidance to judges in finding and evaluating the facts of any particular case, that the test will normally be satisfied only when there is a mistake either as to the legal character or nature of a transaction, or as to some matter of fact or law which is basic to the transaction.”

Lord Walker was speaking in the particular context of the equitable jurisdiction to set aside a transfer for mistake. Mr Hunt has no possible claim to set aside the transfers which he arranged. If one takes Lord Walker’s approach, admittedly out of context, and applies it to the present context, it highlights a difficulty which Mr Hunt faces in showing any sufficient connection between the transfers to which he directed his attention and the relationship between Swynson and HMT under which HMT benefitted as a result of those transfers.

That brings one back to the submission on which HMT focused in the Court of Appeal (para 75 above), that a mistake relating to the effect on third party rights (Swynson’s against HMT) is not enough, because “For subrogation, there needs to have been a right bargained for and not achieved”. Before the Court of Appeal, this was developed more specifically as follows (transcript, p 70G-H):

“… this is critical … a lender cannot claim subrogation if he obtains all security which he bargains for or where he has specifically bargained on the basis that he would receive no security. Now, the bargain that Mr Hunt made in this case was a bargain with EMSL that he would make them a loan and EMSL would repay it. He did not make a bargain with Swynson to take an assignment of Swynson’s rights. He did not make a bargain with HMT. There was not even any clause in his bargain with EMSL that asked EMSL to acquire an assignment of Swynson’s rights against HMT. There was nothing missing. There is nothing in the contract between Mr Hunt and EMSL, which gives rise to the whole base of this claim. There is nothing missing that he bargained for and did not get.”

Reference was made in this context before the Court of Appeal to Banque Finanière and Cheltenham & Gloucester plc v Appleyard [2004] EWCA Civ 29. In neither case, was there of course a “bargain” in the sense of any enforceable right or binding obligation. Otherwise, cadit quaestio. But in Banque Financière, BFC thought, however carelessly, that it had arranged priority for its loan. And in Appleyard, the lender, C & G, obtained what it thought and intended should be a first charge, but one of two prior chargees did not accept that it had been repaid and C & G’s charge was as a result purely equitable and was recorded as such at the Land Registry (see para 7 in the judgment). In giving the judgment of the court in Appleyard, Neuberger LJ identified 13 propositions of law, of which the tenth, relied on by HMT in the present case in the Court of Appeal, read:

“Tenthly, subrogation cannot be invoked so as to put the lender in a better position than that in which [he] would have been if he had obtained all the rights for which he bargained: see Banque Financière at 235D and 236G-273B per Lord Hoffmann. This point was also made by Lindley MR in Wrexham [re Wrexham Mold and Connah’s Quay Railway Co [1899] 1 Ch 440] at 447.”

The message here, and in the passages cited, is that subrogation cannot improve a lender’s position, by giving him more than he expected to get. The lender need not actually to have “contracted for” or “agreed” some benefit which he did not obtain. Thus, it was enough in Banque Financière that BFC thought, however carelessly, that it had obtained such a benefit by virtue of the postponement letter. But any transfer of value must have been on the mistaken basis that it would yield a benefit which did not materialise. Subrogation can redress the position where a claimant has bargained for a benefit which does not materialise, by putting the claimant in the position which he expected. Here, Mr Hunt bargained for nothing in relation to Swynson’s claim against HMT. The most that he can say is that there was an indirect transfer of value by him to HMT, as the unforeseen and indirect result of the directly intended effects of the actual arrangements he made on a separate relationship pre-dating those arrangements by over two years.

That is in my opinion the crux of this appeal. Mr Hunt’s loan to EMSL and EMSL’s consequent discharge of Swynson’s loan were exactly as Mr Hunt specified and intended. They had indirect consequences, evidently overlooked by Mr Hunt or his advisers, for Swynson, for Swynson’s separate relationship with HMT, and so indirectly for both Swynson and Mr Hunt: see, in particular, paras 62, 65 and 68 above. These circumstances do not establish any normative or basic defect in the arrangements which Mr Hunt made.

In so far as Mr Hunt thought that he might, as owner of Swynson, himself have a claim for breach of contract and/or duty against HMT, he was not mistaken in any way which concerned the relationship between Swynson and HMT or which could give him any arguable claim to be subrogated to a claim by Swynson against HMT. In law, however, the only person with a claim against HMT was Swynson, as Rose J held. Again, the arrangements he made for EMSL to pay off Swynson did not address or concern the relationship between Swynson and HMT, or the consequences of such arrangements for any claim which Swynson might have against HMT. Again, Mr Hunt never envisaged obtaining any sort of direct interest in any such claim. Further (although I should not be taken as suggesting this is critical to the outcome of the issue of unjust enrichment), the arrangements which Mr Hunt made were not by way of gift, but by way of a loan to EMSL, which in December 2008 had at least some prospect, however remote, of being repaid. What matters is that any transfer of value by Mr Hunt to HMT was not just unintended, it was incidental and indirect and arose from the consequences of Mr Hunt’s deliberately structured arrangements on a relationship quite separate from that which the arrangements addressed in exactly their intended way.

In these circumstances, I do not consider that Mr Hunt can establish a basis for being subrogated to any claim which Swynson would have had against HMT, had its loss in respect of the 2006 and 2007 loans not been reduced to nil. In a very general sense, I can understand it being said that it is an injustice to Swynson or Mr Hunt and a pure windfall for HMT, if HMT benefits by avoiding paying damages. This is particularly so, when (as I believe to be the case) Mr Hunt made a mistake which was causative in the “but for” sense, that, apart from the mistake, he would not have structured the arrangements in the way he did. But mere “but for” causation is not sufficient: see ITC, para 52. Any benefit which HMT has from Mr Hunt’s mistake is no more than an indirect and incidental consequence of those arrangements on Swynson’s separate and pre-existing relationship with HMT. This is too remote to be the basis for a claim that HMT has been unjustly enriched at Mr Hunt’s expense, or for reversal of the consequences of Mr Hunt’s arrangements by treating him as having a (fictionalised) interest which he never expected, in respect of a claim by Swynson to recover from HMT a loss otherwise reduced to nil by the arrangements he made. This conclusion can be explained under the scheme indicated in Banque Financière either on the basis that there was no sufficiently direct transfer of value from Mr Hunt to HMT, or on the basis that there is no relevant unjust factor, or both. More generally, this conclusion underlines the fact that it is not the role of the law of unjust enrichment to provide persons finding to their cost that they have made a mistake with recourse by way of subrogation against those who may indirectly have benefitted by such a mistake under separate relationships which those making the mistake were not addressing.

For these reasons, I have, not without some sympathy for Mr Hunt’s position, come to the conclusion that Mr Hunt has no right by way of unjust enrichment as against HMT or by way of subrogation in respect of any claim for damages that Swynson would have had against HMT apart from EMSL’s discharge of its indebtedness to Swynson.’

Impact of BREXIT on the Art Market

·      Introduction

·      Economic analysis

·      What impact will BREXIT have on art transactions?

·      Revisiting the Artist’s Resale Right Regulations 2006 through reform or abolition

·      Artist’s Resale Right (‘ARR’)

Introduction

It is an economic fallacy to suppose that by freeing the UK art market from the shackles of ARR through post-BREXIT reform, that the overall volume of art transactions in the UK will increase, thereby swelling the coffers of the treasury to fund public services.

Based upon the expert sectoral market analysis referred to below, it is evident that the opposite is likely to result, because BREXIT will result in an increased regulatory burden and higher transaction costs.

In any event transformation cannot occur during a transition period, and politically ARR is unlikely to be high on the political agenda of whichever party or coalition is in power when BREXIT is implemented.

Liberalisation of Britain’s international trade in art also overlooks the policy rationale underlying the Artist’s Resale Right Regulations 2006 (the ‘Regulations’) (outlined toward the end of the post), which is to give artists an on-going royalty stream from their work – in the same way as authors, musicians and film directors receive royalties from their work – and to enable artists to benefit from the resale of their artworks in the secondary market.

Paragraph 7.1 of the Explanatory Memorandum to the Regulations states, ‘The purpose of the Directive is to reduce distortions in competition resulting from the fact that resale right presently exists in only some Member States (and exists in different forms), while enabling artists to share in the economic success of their works.’

Therefore if ARR is abolished in the UK, art markets elsewhere in the EU will suffer a competitive disadvantage relative to London, because what will emerge will be an unequal playing field for the sale of art in Europe.

Economic analysis

‘In order for the UK to maintain its status in the global art market it must attract the highest priced art available for sale worldwide by providing the most favourable and most competitive conditions. Fine art (paintings, drawings, prints and sculpture) dominates the art market, accounting for 64% of all sales by value in the UK in 2016. The analysis of fine art sales at auction … demonstrates the significance of high value art sales to the British art market … In the UK, although 89% of the volume of all transactions in the market was accounted for by works priced at less than $50,000, they made up just 10% of the value of all sales. 90% of the overall value of the market was accounted for by individual sales of over $50,000. Works priced at over $1 million represented a 57% share, despite accounting for just under 1% of the number of individual transactions. In the market for works priced below $50,000, the US, UK and China accounted for a 67% share by value and 51% of all individual transactions. However in the market priced over $1 million, their combined share rose to 94% (by value) and 92% (by volume).For individual sales over $1 million, the UK accounted for a 22% share by value and 21% by volume of the world market. Within the EU as a whole, 81% of the number of transactions at this level in 2016 were in the UK and an 87% share by value. For individual works sold for over $10 million, the UK accounted for a 24% share by value and volume in 2016. Only 2% of the total value of auction sales over $10 million took place outside the top three markets, and just 3% of all individual transactions. Within the EU as whole, the UK accounted for 91% by value and 89% of all individual transactions above $10 million. Although HMRC’s official figures suggest that the bulk of the trade both in and out of the UK by value is with countries outside the EU, with just 16% of imports into the UK coming from within the EU, and just under 3% of exports destined to countries within the Single Market, this picture is incomplete. HMRC statistics understate the extent of intra-EU trade, because many EU sales under the VAT margin scheme are not necessarily recorded. Additional research carried out in the auction sector in 2016 showed that while the US was the most important trading partner by value, for some of the major auction houses, consignments from EU member states accounted for up to 25% of their UK sales on average, while up to 20% of their exports were destined to EU buyers. In the dealer sector also, the main dealer associations reported that on average between 10% and 22% of dealers’ purchases for subsequent sale were made in the EU, and EU purchasers accounted for 15% – 20% of all their sales. The art market contributes to the UK economy through taxes and levies paid to the Exchequer on sales, trade, incomes and profits. These amounted to an estimated £1.46 billion in 2016. It is worth noting that the fiscal contribution of the art trade has grown at more than double the rate of underlying sales since 2013: sales in the art market increased in value by 15% between 2013 and 2016, whereas the contribution made through taxation increased by 22%.

Sales in the art market are divided into those related to Fine art, which includes paintings, sculptures and works on paper (including watercolours, prints, drawings and photographs); and Decorative art, which includes furniture and decorations (in glass, wood, stone, ceramic, metal or other material), couture, jewellery, ephemera and textiles. The fine art sector dominates in terms of values and accounted for close to 64% of all sales by value in the UK in 2016. Given the significance of the fine art sector, the analysis in this section looks at the sectors that comprise the fine art market. While both dealer and auction data is used to research trends within the market and estimate total sales, precise analyses of prices and individual sales within sectors of the art market relies primarily on auction data, which provides the only large scale, global and publicly available information on individual transactions. The sectoral analysis that follows is based only on auction results In the UK fine art auction sector, Modern and Post War & Contemporary art accounted for a 75% share of sales by value in 2016, a percentage which reflects the global market as a whole. Considering both dealers and auctions, these two sectors represented just over half of the value of the UK art market in 2016. While Post War & Contemporary art remained the largest sector of the fine art market in the UK (with a share of 45%), after two years of growth from 2013 to 2015, sales declined significantly in 2016 (by 32%) to $976 million. Worldwide, sales in this sector also fell in 2016 by 18%. Sales in this sector in the UK are now 37% lower than their peak in 2008 of $1.6 billion. The UK’s share of global sales in the Post War & Contemporary sector fell 3% in 2016 to 14%, and has declined ten percentage points since its high point in 2008 of 24%. However, the UK is by far the largest Post War and Contemporary market in the EU, accounting for 65% of the value of sales and 24% of all transactions in 2016. Within the Post War & Contemporary art sector, sales of work of living artists at auction accounted for 20% of total sales in UK fine art auctions in 2016 (or 44% of the Post War and Contemporary sector by value). Sales in this sub-sector reached $434 million in 2016, a decline of 41% year-on-year (against a global decline of just 7%). The UK accounted for 19% global share of the value of living artists sales at auction in 2016, down from 30% in 2015. Within the EU, the UK accounted for the largest share of sales, with 72% by value and 30% by volume in 2016. European Old Masters dominate the Old Master sector in the UK, accounting for 94% of the value of Old Master sales in 2016, with only 6% of sales accounted for by non-European artists. The UK was the largest sales centre for European Old Master works at auction in 2016 with a share of 43% (up 4% year-on-year). Sales of European Old Masters increased in the UK by 16% in value in 2016, by far the best performing of the fine art sectors. The UK also has the highest share of sales in Europe in the sector, accounting for 71% of the value of EU sales of European Old Master works and 40% of number of lots sold.’

The British Art Market 2017 – An Economic Survey prepared for The British Art Market Federation by Arts Economics.

What impact will BREXIT have on art transactions?

In ‘Brexit: opportunity or threat for the Art industry?’ Macfarlanes LLP conclude: https://www.lexology.com/library/detail.aspx?g=8aec652d-d856-4708-abc1-ec73a6e9882b

‘It is likely that Brexit will make the movement of art between the UK and EU more burdensome and costly, but there are also certain opportunities for the UK art market to benefit from Brexit. However, such changes are unlikely to take effect for some time, particularly as the government has announced its proposal for a transitional / implementation period of “around two years” (which may ultimately be considerably longer than that). If that position can be agreed with the EU, the UK would, during such transitional period, continue to be bound by the existing structure of EU rules and regulations, which would include continued membership of the Customs Union and the Single Market.

This transitional / implementation period would be welcome in providing more much needed time to agree and implement a new trade agreement between the UK and the EU as well as to consider necessary amendments to domestic UK law and the UK’s future relations with other countries. We have in this note considered just a few potential impacts Brexit will have on the art market, but there are many others, including restitution claims for cultural property illegally removed between EU member states and the anti-money laundering regime, which will need to be considered once the position is clearer.’

Revisiting the Artist’s Resale Right Regulations 2006 through reform or abolition

A key opportunity is that Brexit gives the UK Government the opportunity to revisit the Artist’s Resale Right Regulations 2006, either through reform or abolition. The results of a survey of the PAIAM members on ARR are set out before the Appendix to the PAIAM note ‘What impact might Brexit have on the Artist’s Resale Right?’

The artists’ resale right (ARR) gives creators of original works of art (including paintings, engravings, sculpture and ceramics) a right to receive a royalty each time one of their artworks is sold on the secondary market in the UK by an art market professional (e.g. an auction house, gallery or dealer) for more than €1,000. There is an exception: no ARR is due if the seller acting in the course of business acquired the artwork directly from the artist less than 3 years before the sale and the sale price does not exceed €10,000.

ARR affects two major areas of the UK art market – Modern art and Post War & Contemporary.

However as the PAIAM Note states,

‘Despite fears that the introduction of ARR would negatively impact the UK art market and divert sales to non-ARR markets, there has been no evidence to date to support this. In 2006 when ARR came into play in the UK, The European Fine Art Federation (TEFAF) published a report that valued the UK art market at over £8.5 billion.61 Although the global art market felt the impact of the recession – contracting 41% in 2009 from its peak in 2007, by 2010 the global art market was in recovery and rose by 51% to €43 billion.

In 2011, the European Commission’s report on ARR concluded that “no clear patterns can be established to link the loss of the EU’s share in the global market for Modern and Contemporary art with the harmonisation of provisions relating to the application of the resale right in the EU on 1 January 2006.”

Looking at the recent figures in TEFAF’s latest report, the global art market in 2014 has reached its highest ever-recorded level – a total value of €51 billion worldwide and a 7% year-on-year increase from the 2007 pre-recession level.

This growth trend was also evident in the UK which grew 17% in 2014, increased its own market share by 2% and was valued at €11.4 billion (approximately £9 billion and higher than its value in 2006 when ARR was introduced). In context, the ARR royalties distributed by DACS represent just 0.1% of the total market value in 2014. Auction sales are also on the rise. According to the report, public auction sales accounted for 48% of the overall market in 2014 with total sales exceeding the peak in the market in 2007 and have recovered value by 88% since their low point in 2009.

Post War and Contemporary art sales at auctions, which make up 48% of all global fine art sales followed by modern art at 28%, have grown to record levels as well. In 2014 Post War and Contemporary sales saw an all-time high of €5.9 billion globally, which has sharply risen since its post-crash low of €1.42 billion in 2009. These two sectors are predominately responsible for ARR royalties with modern art covering artists born between 1875 and 1910 and Post War and Contemporary for artists born after 1910. In the UK Post War and Contemporary art sales represent €1.1 billion and modern art sales €753 million – both increasing on the previous year’s figures.

Compared to ARR royalties DACS collected in 2014, this represents just 0.64% of the Post War and Contemporary and Modern art sales in the UK. The royalties collected and distributed for ARR are only a minor fraction of a strong Contemporary and Modern art market. Furthermore, a survey of art dealers at the London Art Fair revealed that their biggest concerns are business rates and rents; nonetheless, 85% of those surveyed believed that the British Modern and Contemporary art market in 2016 would remain strong or fare better.

Lastly, visual arts as part of the wider UK creative industries is immensely valuable to the UK economy. For every £1 of Gross Value Added (GVA) by the arts and culture industry, an additional £1.43 of GVA is generated in the wider UK economy. Overall, visual arts contribute US $3 billion GVA to the UK economy each year and employs more than 37,000 people.’

Artist’s Resale Right (‘ARR’)

In the UK, the Regulations created an intellectual property right (“resale right”) which was previously unknown to United Kingdom law.

The Regulations implemented Directive 2001/84/EC of the European Parliament and of the Council on the resale right for the benefit of the author of an original work of art (‘the Directive’).

The Directive entered into force on 13 October 2001 and required transposition into national law by 1 January 2006.

The Directive was an internal market measure adopted under Article 95 of the EC Treaty which required Member States to introduce a harmonized right for authors of an original work of art, and their successors in title, to benefit from a share of the proceeds when the artists’ works are resold on the art market.

The Regulations introduce a new right which has not previously existed in the UK, although it has existed in several other EU Member States. The Directive has also been extended to the European Economic Area.’

Article 3 of the Regulations states,

‘3.

(1) The author of a work in which copyright subsists shall, in accordance with these Regulations, have a right (“resale right”) to a royalty on any sale of the work which is a resale subsequent to the first transfer of ownership by the author (“resale royalty”).

(2) Resale right in a work shall continue to subsist so long as copyright subsists in the work.

(3) The royalty shall be an amount based on the sale price which is calculated in accordance with Schedule 1.

(4) The sale price is the price obtained for the sale, net of the tax payable on the sale, and converted into euro at the European Central Bank reference rate prevailing at the contract date.

(5) For the purposes of paragraph (1), “transfer of ownership by the author” includes in particular—

(a)      transmission of the work from the author by testamentary disposition, or in accordance with the rules of intestate succession;

(b)      disposal of the work by the author’s personal representatives for the purposes of the administration of his estate; and

 

(c)       disposal of the work by an official receiver (or, in Northern Ireland, the Official Receiver for Northern Ireland) or a trustee in bankruptcy, for the purposes of the realisation of the author’s estate.

Regulation 9(1) further provides ‘Subject to regulation 10(2), resale right in respect of a work is transmissible as personal or moveable property by testamentary disposition or in accordance with the rules of intestate succession; and it may be further so transmitted by any person into whose hands it passes.’

Resale right may be transmitted to:

1.      a natural person (and where it is transmitted to more than one person, it shall belong to them as owners in common); or

2.      a qualifying body.

Regulation 11 further provides that nothing in Regulation 9 prevents a resale right from being held, and exercised in respect of a sale, by any person acting as trustee for the person who would otherwise be entitled to exercise the right (“the beneficiary”), or from being transferred to such a trustee, or from the trustee to the beneficiary.

ARR entitles visual artists or their heirs to receive a royalty payment each time their work is sold on the secondary market in the UK through an auction house, gallery or dealer. The royalty is calculated as a percentage of the sale price, on a sliding scale ranging from 0.25 per cent to 4 per cent, subject to exemptions and a cap of €12,500 – see Schedule 1 of the Regulations.

The right lasts for as long as the copyright in the work subsists, which is normally for 70 years after the death of the artist. It may accordingly be

inherited by the artist’s successors. Two points arise from the fact that resale right was previously unknown to United Kingdom law. The first is that, where an artist dies before the Regulations come into force, there will at that time have been no resale right to pass to a successor. In regulation 16, the Regulations accordingly make provision for which of the artist’s successors is to be regarded as holding resale right in such circumstances. The second point is that the Article 8(2) of the Directive provides a special derogation which is limited to those Member States which did not previously have resale right in their national law. Such a State may prevent the successors of a deceased artist from exercising their resale right until 1st January 2010. Regulation 17 takes advantage of that derogation.

Resale right is declared by the Directive to be inalienable, and accordingly may neither be assigned nor waived. This principle is implemented in regulations 7 and 8. The limited exceptions provided by regulation 7(3) (transfer between charities) and regulation 11 (transfers of legal title to trustees) are not in reality a derogation from that principle, as the beneficial ownership of resale right is not thereby affected.

The Regulations also impose certain nationality requirements on the enjoyment of resale right (see regulation 10) . Only an EEA national, or a national of a country specified in Schedule 2, may benefit from resale right. This reflects the fact that (leaving aside EEA nationals, who must be treated equally with United Kingdom nationals) resale right is a right enjoyed on the basis of reciprocity. Thus only the nationals of countries which make resale right available to EEA nationals may benefit from the rights given under the Directive. That principle is also applied to charitable bodies, which may benefit from resale right only where they are based in such a country.

Inquisitorial jurisdiction of Court of Protection

I have been invited to write an article for publication in the Autumn edition of the Expert Witness Journal, ahead of the Bond Solon annual international Expert Witness Conference in London on 9 November 2018, entitled, ‘The Advocate and the Expert in the Court of Protection’. The following is an extract from the first draft which was submitted to the publisher 13.02.2018, and the final draft which will take into account all cases decided in the Court of Protection up to July 2018, is scheduled for submission on 30 August.

For more information about Mental Capacity Law and Practice please visit the Court of Protection and Judicial Review Proceedings page at www.carlislam.co.uk

Inquisitorial method

In contrast to the adversarial method, which aims to get at the truth by two competing parties arguing their case and the judge deciding whose case is the strongest, the COP operates an ‘inquisitorial’ method, the aim of which is to get at the truth through extensive investigation and examination of all of the evidence. The opinions of professionals will be admitted as ‘expert’ evidence but considered alongside factual evidence from those who know the individual and will only be persuasive if the experts have been given all relevant information and applied the appropriate legal test. The starting point for assessing someone’s capacity to make a particular decision is always the assumption that the individual does have capacity.

What you are asking the judge to decide

[All] Courts make decisions on the evidence that is presented [and] to that extent, the Court is the servant of the evidence that is provided by the parties … [Whilst] the Court has an overall directing role in identifying the type and nature of evidence that it requires to make decisions, [because] ultimately those decisions must be faithful to the evidence that is capable of being accepted … It would … be illogical for the Court to arrive at a different position from that which is jointly argued for on the basis of evidence which is jointly accepted as valid.’ (Her Honour Judge Parry in MB v Surrey County Council [2017] EWCOP B27 (16 October 2017). While it is difficult for a court to take a different approach to that of the parties, the court’s jurisdiction is ultimately an inquisitorial one, and ultimately capacity is a question of fact for the court to decide itself, on the balance of probabilities, taking into account the asymmetry introduced by the presumption of capacity. An adult is presumed to have the mental capacity to make a particular decision, until the contrary is proved, Mental Capacity Act 2005 (‘MCA 2005’), Section 1(2) (the ‘Statutory Presumption’). The burden of proof rests on those asserting that the individual does not have the capacity to take the particular decision in question. In deciding whether or not someone has capacity to enter into a particular transaction or make a particular decision, the standard of proof is the civil standard, the balance of probabilities, MCA 2005, Section 2(4). In other words having decided what the facts are, and having applied the law to those facts, the judge must decide whether on balance the individual is more likely to have capacity, or more likely to lack capacity to do something.

As observed by District Judge Glentworth in SL, Re [2017] EWCOP 5 (31 March 2017):

‘In CC v. KK and STCC [2012] EWHC 2136 (COP) Mr Justice Baker set out what is required of the court when assessing capacity at paragraph 24 as follows, “… when assessing the ability of P to (a) understand the information relevant to the decision (b) retain that information, and (c) use or weigh that information as part of the process of making the decision, the court must consider all the evidence, not merely the views of the independent expert. In many cases, perhaps most cases, the opinion of the expert will be confirmed by the other evidence, but inevitably there will be cases where the court reaches a different conclusion.’

… Bailey v. Warren [2006] EWCA Civ 51 also makes it clear that the judge is best placed to consider how the nature of the particular proceedings impacts on the issue of capacity as well as the type of decisions which are likely to arise as part of the proceedings. Reference is made to the Civil Procedure Rules 1998 (CPR) and specifically to rule 21 which has now been amended to take account of the provisions of the MCA. Rule 21.2 CPR provides that a protected party must have a litigation friend to conduct proceedings on her behalf. A protected party is defined at rule 21.1 as, ‘a party or an intended party who lacks capacity to conduct the proceedings’. Rule 21.1(c) provides that the phrase ‘lacks capacity’ means lacks capacity within the MCA.’

Where having regained capacity to make decisions about his care P, refuses care resulting in loss of capacity to make decisions about care, the court has the power to make ‘contingent’ declarations and decisions in order to put in place a safety net regime.

Best interests decision-making

The defining characteristic of proceedings in the Court of Protection (‘COP’) is ‘best interests’ decision making, which requires that P’s interests are paramount. The legal framework was recently stated by Mr Justice Hayden in Abertawe Bro Morgannwg University Local Health Board v RY & Anor (Rev 1) [2017] EWCOP 2 (08 February 2017) as follows:

‘The starting point for consideration of “best interests” is s4 Mental Capacity Act 2005. In this case a number of the s4 provisions require to be highlighted:

(6)     He must consider, so far as is reasonably ascertainable—

(a)     the person’s past and present wishes and feelings (and, in particular, any relevant written statement made by him when he had capacity)

(b)     the beliefs and values that would be likely to influence his decision if he had capacity, and

(c)     the other factors that he would be likely to consider if he were able to do so.

(7)     He must take into account, if it is practicable and appropriate to consult them, the views of—

(a)     anyone named by the person as someone to be consulted on the matter in question or on matters of that kind

(b)     anyone engaged in caring for the person or interested in his welfare,

(c)     any donee of a lasting power of attorney granted by the person, and

(d)     any deputy appointed for the person by the court,

The Code of Practice to the Mental Capacity Act also require careful consideration

I note that in Wye Valley NHS Trust v B [2015] ECOP 60 Peter Jackson J was also able to identify what he termed P’s “intrinsic nature” and “core qualities” which weighed heavily in the balance when evaluating ‘best interests’.

In London Borough of Brent v NB [2017] EWCOP 34 (25 October 2017), Her Honour Judge Hilder summarised the law as follows:

Fundamental to the Court’s consideration of DY’s [the case manager] proposal is the principle set out at section 1(5) of the Mental Capacity Act 2005: an act done, or decision made, under this Act for or on behalf of a person who lacks capacity must be done or made, in his best interests.

Section 4 of the Act provides that

(1)     In determining for the purposes of this Act what is in a person’s best interests, the person making the determination must not make it merely on the basis of –

(a)     The person’s age of appearance, or

(b)     A condition of his, or an aspect of his behaviour, which might lead others to make unjustified assumptions about what might be in his best interests.

(2)     The person making the determination must consider all the relevant circumstances and, in particular, take the following steps.

(3)     He must consider –

(a)     whether it is likely that the person will at some time have capacity in relation to the matter in question, and

(b)     if it appears likely that he will, when that is likely to be.

(4)     He must, so far as is reasonably practicable, permit and encourage the person to participate, or improved his ability to participate, as fully as possible in any act done for him and any decision affecting him.

(5)     Where the determination relates to life-sustaining treatment he must not, in considering whether the treatment is in the best interests of the person concerned, be motivated by a desire to bring about his death.

(6)     He must consider, as far as is reasonably ascertainable –

(a)     the person’s past and present wishes and feelings (and, in particular, any relevant written statement made by him when he had capacity),

(b)     the beliefs and values that would be likely to influence hid decision if he had capacity, and

(c)     the other factors that he would be likely to consider if he were able to do so.

(7)     He must take into account, if it is practicable and appropriate to consult them, the views of –

(a)     anyone named by the person as someone to be consulted on the matter in question or on matters of that kind,

(b)     Anyone engaged in caring for tha person or interested in his welfare,

(c )    Any done of a lasting power of attorney granted by the person, and

(d )    Any deputy appointed for the person by the court,

as to what would be in the person’s best interests and, in particular, as to the matters mentioned in subsection (6).

In seeking to apply the provisions of section 1 and section 4 of the Act, I derive some assistance from the judgment of Munby J (as he then was) in the matter of ITW v. Z, M & Ors [2009] EWHC 2525 at paragraphs 32 – 36:

“[32] i)….the statute lays down no hierarchy as between the various factors which have to be borne in mind, beyond the overarching principle that what is determinative is the judicial evaluation of what is in P’s “best interests”.

ii)…the weight to be attached to the various factors will, inevitably, differ depending upon the individual circumstances of the particular case. A feature of factor which in one case may carry great, possibly even preponderant, weight may in another, superficially similar, case carry much less, or even very little, weight.

iii)….there may, in the particular case, be one or more features of factors which….are of “magnetic importance” in influencing or even determining the outcome….

[35] i).. P’s wishes and feelings will always be a significant factor to which the court must pay close regard:

  1. ii) …the weight to be attached to P’s wishes and feelings will always be case-specific and fact-specific… One cannot, as it were, attribute any particular a piori weight or importance to P’s wishes and feelings: it all depends, it must depend, upon the individual circumstances of the particular case. And even if one is dealing with a particular individual, the weight to be attached to their wishes and feelings must depend upon the particular context; in relation to one topic P’s wishes and feelings may carry great weight whilst at the same time carrying much less weight in relation to another topic.

iii)…in considering the weight and importance to be attached to P’s wishes and feelings the court must of course, and as required by section 4(2) of the 2005 Act, have regard to all the relevant circumstances. In this context the relevant circumstances will include, though I emphasis that they are by no means limited to, such matters as:

  1. a) The degree of P’s incapacity, for the nearer to the borderline the more weight must in principle be attached to P’s wishes and feelings…
  2. b) The strength and consistency of the views being expressed by P;
  3. c) The possible impact on P of knowledge that her wishes and feelings are not being given effect to…
  4. d) The extent to which P’s wishes and feelings are, or are not, rational, sensible, responsible and pragmatically capable of sensible implementation in the particular circumstances; and
  5. e) Crucially, the extent to which P’s wishes and feelings, if given effect to, can properly be accommodated within the court’s overall assessment of what is in her best interests.

I also have regard to the decision of the Supreme Court in Aintree University Hospitals NHS Foundation Trust v. James [2013] UKSC 67. Baroness Hale noted that the Act gives limited guidance about best interests. At [39] she said:

“The most that can be said, therefore, is that in considering the best interests of this particular patient at this particular time, decision-makers must look at his welfare in the widest sense, not just medical but social and psychological; they must consider the nature of the medical treatment in question, what it involves and its prospects of success; they must consider what the outcome of that treatment for the patient is likely to be; they must try and put themselves in the place of the individual patient and ask what his attitude to the treatment is or would be likely to be; and they must consult others who are looking after him or interested in his welfare, in particular for their view of what his attitude would be.”

As she went on [44 – 45], the purpose then of the best interests test is “to consider matters from the patient’s point of view.”

Where the protected person is able to express wishes and feelings about the decision in issue, the Court must decide what weight to give them. I have regard to the decision of Jackson J in X NHS Trust v. B (by his Litigation Friend, the Official Solicitor [2005] EWCOP 60. He concluded that Mr. B lacked capacity to make a decision concerning surgery, and went on to consider the weight to be given to his expressed wishes, in particular at paragraph 10:

“…there is no theoretical limit to the weight or lack of weight that should be given to the person’s wishes and feelings, beliefs and values. In some cases, the conclusion will be that little weight or no weight can be given; in others, very significant weight will be due.

This is not an academic issue, but a necessary protection for the rights of people with disabilities. As the Act and the European Convention make clear, a conclusion that a person lacks decision-making capacity is not an ‘off-switch’ for his rights and freedoms. To state the obvious, the wishes and feelings, beliefs and values of people with a mental disability are as important to them as they are to anyone else, and may even be more important…. For people with disabilities, the removal of such freedom of action as they have to control their own lives may be experienced as an even greater affront than it would be to others who are more fortunate.”

I have considered also the decision of the Court of Appeal in K v. A Local Authority [2012] EWCA Civ 79. The circumstances of that case included a concern that P was in an environment in which he could not articulate his own wishes, as opposed to what he believed to be the wishes of his father; and the proposal in issue was a move to supported living on a trial basis. The first instance judge had cited with approval the following passage from another case:

…it is very much the approach when dealing with incapacitated adults that the medical, educational and social authorities do their very best to nurture and facilitate any skills which the incapacitated adult may have to help them in moving, where possible, towards a greater degree of independence in the way they live their lives. Thus whilst in many cases the family may be the providers of care and nurture for such adults, there seems to me to be a philosophical and practical shift towards ensuring as great a degree of independence in living arrangements as is possible.”

In the Court of Appeal, Thorpe LJ said at paragraphs 30 and 35:

“In my judgment it is unnecessary to enter any investigation of social care policy or whether have been philosophical and practical shifts. …. The safe approach of the trial judge in Mental Capacity Act cases is to ascertain the best interests of the incapacitated adult on the application of the s 4 checklist. The judge should then ask whether the resulting conclusion amounts to a violation of art 8 rights and whether that violation is nevertheless necessary and proportionate.”’

In DM v Y City Council [2017] EWCOP 13 (15 June 2017), commenting upon the weight to be attached to P’s wishes and feelings The Honourable Mr Justice Bodey remarked:

‘A major consideration under S4 of the Act is the individual’s past and present wishes and feelings and the beliefs, values and other factors which the individual would be likely to consider if he had the capacity to do so.  Plainly the weight to be attached to those wishes and feelings is case specific and fact specific.  Everything depends on the individual circumstances of the particular person concerned and the particular case.  I have to bear in mind how near to the borderline of capacity [P] is; the nearer the line the more weight may be attached to his wishes and feelings.  I must also pay regard to the strength and consistency of the views which he has expressed about being able to drink, together with the possible adverse impact on him (anger, disappointment, frustration etc) of knowing that his wishes and feelings have not been allowed to prevail.

The purpose of the ‘best interests test’ is to look at matters from the incapacitated person’s point of view (Aintree University Hospitals NHS Foundation Trust -v- James [2013] UKSC 76).  As Munby J, as he then was, said in Local Authority X -v- MM & Another [2007] EWHC 2003 at paragraph 120: “Physical health and safety can sometimes be bought at too high a price in happiness and emotional welfare.  The emphasis must be on sensible risk appraisal, not striving to avoid all risk whatever the price, but instead seeking a proper balance and being willing to tolerate manageable or acceptable risks as the price appropriately to be paid in order to achieve some other good – in particular to achieve the vital good of the elderly or vulnerable person’s happiness.  What good is making someone safer if it merely makes them miserable?”’

Judicial review after BREXIT

  • Judicial review
  • The impact of BREXIT on the bringing of judicial review proceedings in the Administrative Court
  • Human rights law after BREXIT

Judicial Review

Judicial review is a procedure by which the High Court reviews the lawfulness of decisions made by public bodies, such as the departments of state, local authorities, and NHS bodies.

For more information please visit the Court of Protection and Judicial Review Proceedings page at www.ihtbar.com: http://newsite.carlislam.co.uk/mental-capacity-law-practice#Judicialreview

Although the three classic grounds for judicial review are:

(i)      illegality;

(ii)     irrationality (Wednesbury unreasonableness); and

(iii)    procedural impropriety,

the underlying principles are complex, multi-faceted, and continually being refined and developed by the judiciary, and include the setting aside of decisions which were ‘manifestly unjust, partial, made in bad faith or so gratuitous or oppressive that no reasonable person could think them justified.’ Kruse v Johnson [1898] 2 QB 91.

Judicial review involves scrutiny by the court of the decision-making process underlying a decision made by a public body which may be unlawful by reason of:

(i)     a breach of statutory duty;

(ii)    failure to consider relevant factors;

(iii)   consideration of irrelevant factors;

(iv)   an irrational act (i.e. the making of a decision which is absurd); and

(v)    fettering of discretion (i.e. the application of a policy so rigidly as to preclude the making of exceptions).

Permission is required from a judge to bring a judicial review case.

The impact of BREXIT on the bringing of judicial review proceedings in the Administrative Court

‘The Government has estimated that between 800 and 1000 secondary legislative measures will be required to implement the objectives of the Bill, and this figure is subject to change depending on the outcome of withdrawal negotiations and policy changes. 

… conventional challenges may be envisaged as arising from the vast mass of secondary legislation which will be needed to tear the patchwork fabric of EU law apart from our domestic law, and stitch it back as part of the domestic cloth. Quite how and where these issues will arise cannot sensibly be predicted at a stage when the final form of the necessary primary legislation has not yet emerged, and is being vigorously debated. Self-evidently, still less do we know what the mass of secondary legislation will look like. It currently remains to be seen what, if any, trade agreement will be negotiated; how the problem of the Irish border will be addressed; and how the devolution issues raised by Brexit will be accommodated. 

[It is clear that]:

  • First, there will be a vast mass of secondary legislation associated with our withdrawal from the EU.
  • Secondly, the opportunity for scrutiny of such delegated legislation will be extremely limited, both as a result of its sheer volume, and also because in practice (even in the best of times) such regulations receive relatively little parliamentary scrutiny, whether subject to affirmative or negative parliamentary approval.
  • Thirdly, at least a proportion of this legislation will involve potentially controversial policy issues, not simply mechanistic or anodyne amendments.
  • Fourthly, there will be real issues in determining the status and interpretation of an entirely novel category of law: retained EU law.
  • And finally, much of the legislation will be made pursuant to Henry VIII clauses which courts have been inclined to interpret strictly.

A wave of post-Brexit legislation may therefore readily be predicted. Legal uncertainty is a fertile breeding ground for litigation, and on any view the legal landscape after Brexit is an uncertain one… 

The impending surge in demands upon the court system in general, and the Administrative Court in particular, raises serious questions as to the capacity of the courts to cope. The system is already under severe strain.  On 2 November 2017 the Law Society suggested that a ‘no deal’ Brexit “could create a wave of litigation causing gridlock to UK courts”. But that spectre is plainly not limited to the ‘no deal’ situation, and is liable to arise in any event. This arises against the backdrop of the problem with recruitment to the judiciary in recent years, particularly acutely to the High Court Bench, to which no effective solution has yet been advanced. Already the Administrative Court is heavily dependent upon input from deputies, as review of the court list for any day will confirm. The Ministry of Justice is continuing to be subject to the most severe cuts: on 20 November 2017, justice minister Dominic Raab confirmed that the MoJ will have suffered a cumulative 40% cut in real terms in the fiscal decade ending in 2020. There is no sign of any plans being made to enable the judiciary and the Courts system to deal with the eminently predictable Brexit-related demands that will be placed upon them. It is hard to imagine even Sir Humphrey chuckling now.’ The EU Withdrawal Bill and Judicial Review: Are we ready? by Angus McCullough, Barrister, 1 Crown Office Row.

Human rights law after BREXIT

This begs a further question, namely, whether a remedy is available in judicial review proceedings when following BREXIT a decision potentially engages consideration of whether interference with a fundamental human right is justifiable?

In other words, after BREXIT, what human rights will be recognised and upheld by the courts as being sovereign under English law?

The practical consequences for business are potentially decades of ongoing uncertainty whilst industry bodies which have locus standii and deep pockets, bring JR proceeding, with leave, and within the limitation period, to test and determine the precise meaning and scope of any item of post-BREXIT legislation which affects the conduct of business and trade by its members. The actual legal consequences are unknown, and probably cannot be evaluated unless and until an impact assessment has been carried out in relation to each item of new legislation, which as part of the parliamentary process should be preceded by consultation and debate in both Houses of Parliament. Given the scale of the legislative exercise it is possible that this period of uncertainty could exceed 50 years. Is this understood by MP’s and voters?

 

 

 

 

Skip to toolbar